As filed with the Securities and Exchange Commission on March 31, 2000
Registration No. 333-95787
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM N-14
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
-------------------------
[x] Pre-Effective Amendment No. 1
[ ] Post-Effective Amendment No.
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COUNTRYWIDE STRATEGIC TRUST
[Exact Name of Registrant as specified in Charter]
(513-629-2000)
[Area Code and Telephone Number]
312 WALNUT STREET, 21ST FLOOR
CINCINNATI, OHIO 45202
[Address of principal executive offices]
TINA D. HOSKING, ESQ.
COUNTRYWIDE INVESTMENTS, INC.
312 WALNUT STREET, 21ST FLOOR
CINCINNATI, OHIO 45202
[Name and address of agent for service]
-------------------------
Copy to:
KAREN M. MCLAUGHLIN, ESQ.
FROST & JACOBS LLP
2500 PNC CENTER
201 EAST FIFTH STREET
CINCINNATI, OHIO 45202
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Approximate date of proposed public offering: As soon as possible after the
effective date of this Registration Statement.
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Title of securities being registered: Shares of beneficial interest of Emerging
Growth Fund, International Equity Fund and Value Plus Fund, each a series of the
Registrant.
Calculation of Registration Fee: The Registrant has registered an indefinite
amount of securities under the Securities Act of 1933 pursuant to Section 24(f)
under the Investment Company Act of 1940; accordingly, no fee is payable with
this Registration Statement on Form N-14. Pursuant to Rule 429, this
Registration Statement relates to shares previously registered on Form N-1A.
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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CONTENTS OF REGISTRATION STATEMENT
This Registration Statement contains the following pages and documents:
Facing Page
Contents of Registration Statement
Cross Reference Sheet
Notice of Special Meeting
Proxy Cards
Part A--Proxy Statement /Prospectus
Part B--Statement of Additional Information
Part C--Other Information
Signature Page
Exhibits
COUNTRYWIDE STRATEGIC TRUST
FORM N-14 CROSS
REFERENCE SHEET Pursuant to Rule
481(a) Under the Securities Act of 1933
Part A Item No. and Caption Proxy Statement/Prospectus Caption
--------------------------- ----------------------------------
Item 1. Beginning of Registration Statement and Cross Reference Sheet; Front Cover
Outside Front Cover of Page or Prospectus
Item 2. Beginning and Outside Back Cover Page Back Cover
of Prospectus
Item 3. Fee Table, Synopsis and Risk Factors Expense Information; Introduction;
Summary
Item 4. Information About the Transaction The Proposed Reorganization; Description
of Shares of New Funds; Tax
Considerations; Comparison of
Shareholder Rights; Capitalization;
Appendix A
Item 5. Information About the Registrant Prospectus of Countrywide Strategic Trust
(Equity Fund and Utility Fund) dated
August 1, 1999; Expense Information;
Summary; Annual Report of Countrywide
Strategic Trust--March 31, 1999;
Description of Shares of New Funds;
Additional Information
Item 6. Information About the Company Being Prospectus of Touchstone Series Trust
Acquired (Touchstone Family of Funds) dated
May 1, 1999; Expense Information;
Summary; Annual Report of Touchstone
Series Trust--December 31, 1999;
Additional Information
Item 7. Voting Information Voting Information
Item 8. Interest of Certain Persons Not Applicable
Item 9. Additional Infomration Required For Not Applicable
Reoffering by Persons Deemed to be
Underwriters
Part B Item No. and Caption Statement of Addition Information Caption
--------------------------- -----------------------------------------
Item 10. Cover Page Cover Page
Item 11. Table of Contents Cover Page
Item 12. Additional Information About the Cover Page; Statement of Additional
Registrant Information of Countrywide Strategic
Trust dated August 1, 1999
Item 13. Additional Information About the Not Applicable
Company Being Acquired
Item 14. Financial Statements Annual Report of Countrywide Strategic
Trust--March 31, 1999; Semi-Annual
Report of Countrywide Strategic Trust--
September 30, 1999; Annual Report of
Touchstone Series Trust--December 31,
1999; Pro forma Financial Statements
Part C Item No. and Caption Other Information Caption
--------------------------- -------------------------
Item 15. Indemnification Indemnification
Item 16. Exhibits Exhibits
Item 17. Undertakings Undertakings
TOUCHSTONE SERIES TRUST
Touchstone Emerging Growth Fund
Touchstone International Equity Fund
Touchstone Value Plus Fund
Touchstone Growth & Income Fund
311 Pike Street
Cincinnati OH 45202
800-669-2796
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
We are sending you this notice about a special meeting of shareholders of
each of the following Touchstone Funds:
Touchstone Emerging Growth Fund
Touchstone International Equity Fund
Touchstone Value Plus Fund
Touchstone Growth & Income Fund
Each fund is a series of Touchstone Series Trust, a Massachusetts business
trust.
The special meeting will be held on April 19, 2000, at 10:30 a.m., Eastern
Time, at 312 Walnut Street, Cincinnati, OH 45202. At the meeting, shareholders
will be asked to consider and vote upon the following proposals:
SHAREHOLDERS OF TOUCHSTONE EMERGING GROWTH FUND
To approve an Agreement and Plan of Reorganization and the transactions
contemplated by the reorganization plan, including (1) the transfer of
substantially all of the assets and liabilities of Touchstone Emerging
Growth Fund to a new series of Countrywide Strategic Trust in exchange for
shares of the new series and (2) the distribution of these shares to the
shareholders of Touchstone Emerging Growth Fund.
SHAREHOLDERS OF TOUCHSTONE INTERNATIONAL EQUITY FUND
To approve an Agreement and Plan of Reorganization and the transactions
contemplated by the reorganization plan, including (1) the transfer of
substantially all of the assets and liabilities of Touchstone International
Equity Fund to a new series of Countrywide Strategic Trust in exchange for
shares of the new series and (2) the distribution of these shares to the
shareholders of Touchstone International Equity Fund.
Continued on next page
Continuation of Notice
SHAREHOLDERS OF TOUCHSTONE VALUE PLUS FUND
To approve an Agreement and Plan of Reorganization and the transactions
contemplated by the reorganization plan, including (1) the transfer of
substantially all of the assets and liabilities of Touchstone Value Plus
Fund to a new series of Countrywide Strategic Trust in exchange for shares
of the new series and (2) the distribution of these shares to the
shareholders of Touchstone Value Plus Fund.
SHAREHOLDERS OF TOUCHSTONE GROWTH & INCOME FUND
To approve an Agreement and Plan of Reorganization and the transactions
contemplated by the reorganization plan, including (1) the transfer of
substantially all of the assets and liabilities of Touchstone Growth &
Income Fund to a new series of Countrywide Strategic Trust in exchange for
shares of the new series and (2) the distribution of these shares to the
shareholders of Touchstone Growth & Income Fund.
It is proposed that the assets of TOUCHSTONE VALUE PLUS FUND and the assets
of TOUCHSTONE GROWTH & INCOME FUND be transferred to the same new series of
Countrywide Strategic Trust, which would effectively merge these two Touchstone
Funds.
Shareholders of record at the close of business on February 28, 2000, are
entitled to notice of, and to vote at, the special meeting. You should read the
accompanying Proxy Statement. PLEASE COMPLETE, SIGN AND RETURN PROMPTLY THE
ENCLOSED PROXY CARD(S) SO THAT YOUR SHARES MAY BE VOTED IN ACCORDANCE WITH YOUR
INSTRUCTIONS.
By order of the Board of Trustees of
Touchstone Series Trust
Cynthia Surprise, Secretary
Cincinnati, Ohio
April 3, 2000
[Front of Card]
TOUCHSTONE FUND NAME PRINTS HERE PROXY
(a series of Touchstone Series Trust)
The undersigned appoints Jill T. McGruder and David E. Dennison and each of
them, with full power of substitution, as attorneys and proxies of the
undersigned, and does thereby request that the votes attributable to the
undersigned be cast at the Meeting of the Shareholders of the Fund, a separate
series of the Trust, to be held at 10:30 a.m. on April 19, 2000 at the offices
of the Trust, 312 Walnut Street, Cincinnati, Ohio, and at any adjournment
thereof.
PLEASE VOTE, DATE AND SIGN EXACTLY AS YOUR NAME APPEARS BELOW, AND RETURN THIS
FORM IN THE ENCLOSED SELF-ADDRESSED ENVELOPE.
Note: The undersigned hereby acknowledges
receipt of the notice of meeting and proxy
statement and revokes any proxy heretofore
given with respect to the votes covered by
this proxy.
Dated: ___________________, 2000
---------------------------------
Signature (s) (If Held Jointly)
- --------------------------------------------------------------------------------
[Back of Card]
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF THE TRUST. THE
SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED BELOW, OR IF NO
DIRECTION IS INDICATED, WILL BE VOTED FOR THE PROPOSAL BELOW. AS TO ANY OTHER
MATTER, ALL PROXIES WILL BE VOTED IN THE DISCRETION OF THE PROXY HOLDERS.
THE BOARD OF TRUSTEES OF THE TRUST RECOMMENDS A VOTE FOR THE PROPOSAL.
Please vote by filling in the boxes below.
1. To approve an Agreement and Plan of FOR AGAINST ABSTAIN
Reorganization and the transactions
contemplated by the reorganization
plan, including (1) the transfer of
substantially all of the assets and
liabilities of the Fund to a new
series of Countrywide Strategic Trust
in exchange for shares of the new
series and (2) the distribution of
these shares to the shareholders of
the Fund.
2. To transact any other business as may FOR AGAINST ABSTAIN
properly come before the special meeting.
TOUCHSTONE SERIES TRUST COUNTRYWIDE STRATEGIC TRUST
Touchstone Emerging Growth Fund New Emerging Growth Fund
Touchstone International Equity Fund New International Equity Fund
Touchstone Value Plus Fund New Value Plus Fund
Touchstone Growth & Income Fund
311 Pike Street 312 Walnut Street
Cincinnati OH 45202 Cincinnati OH 45202
800-669-2796 800-543-0407
PROXY STATEMENT PROSPECTUS
This Proxy Statement/Prospectus contains information about a proposed
reorganization that a shareholder should know before voting and a prospective
investor ought to know before investing. You should read it carefully and keep
it for future reference. We are sending it to shareholders of each of the
following funds: Touchstone Emerging Growth Fund, Touchstone International
Equity Fund, Touchstone Value Plus Fund and Touchstone Growth & Income Fund.
Each Touchstone Fund is a series of Touchstone Series Trust, a Massachusetts
business trust.
The proposed reorganization includes the merger of each Touchstone Fund
with a new series of Countrywide Strategic Trust, a Massachusetts business
trust. If the shareholders of each Touchstone Fund approve the reorganization,
we will implement the reorganization of each Touchstone Fund as described on the
next page. As a result of the reorganization, the shareholders of each
Touchstone Fund will become shareholders of a new series of Countrywide
Strategic Trust.
Additional information about Touchstone Series Trust and Countrywide
Strategic Trust has been filed with the Securities and Exchange Commission and
is available upon oral or written request and without charge. A Statement of
Additional Information dated April 3, 2000, is also available upon oral or
written request and without charge. It is incorporated by reference in this
Proxy Statement/Prospectus. You can request these documents by contacting us at
the addresses or telephone numbers listed above.
This Proxy Statement/Prospectus is first being mailed to shareholders on or
about April 3, 2000. The date of this Proxy Statement/Prospectus is April 3,
2000.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED ANY SHARES OF COUNTRYWIDE STRATEGIC TRUST OR DETERMINED
WHETHER THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANYONE WHO TELLS YOU OTHERWISE
IS COMMITTING A CRIME.
THE SHARES OF COUNTRYWIDE STRATEGIC TRUST ARE NOT DEPOSITS OR OBLIGATIONS
OF, OR GUARANTEED OR ENDORSED BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE NATIONAL CREDIT UNION
SHARE INSURANCE FUND, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. MUTUAL
FUNDS INVOLVE INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
Continued on next page
Continuation of Cover Page
TOUCHSTONE EMERGING GROWTH FUND
Touchstone Series Trust will transfer all of the assets of Touchstone
Emerging Growth Fund, subject to its liabilities, to a new series of Countrywide
Strategic Trust in exchange for shares of the new series ("New Emerging Growth
Fund"). Class A shares of New Emerging Growth Fund that Touchstone Series Trust
receives in the exchange will be distributed pro rata to Class A shareholders of
Touchstone Emerging Growth Fund. Class C shares of New Emerging Growth Fund that
Touchstone Series Trust receives in the exchange will be distributed pro rata to
Class C shareholders of Touchstone Emerging Growth Fund. After the exchange,
Touchstone Emerging Growth Fund will be dissolved. As a result of the
reorganization, each shareholder of Touchstone Emerging Growth Fund will own
shares of the corresponding class of New Emerging Growth Fund equal in value to
the shares of Touchstone Emerging Growth Fund that he owns immediately before
the reorganization.
New Emerging Growth Fund will seek to increase the value of its shares as a
primary goal and to earn income as a secondary goal. It will invest primarily in
the common stocks of smaller, rapidly growing companies. Its investment goals
and principal investment strategies are identical to those of Touchstone
Emerging Growth Fund. The current sub-advisors of Touchstone Emerging Growth
Fund will become the sub-advisors and manage the portfolio of New Emerging
Growth Fund.
TOUCHSTONE INTERNATIONAL EQUITY FUND
Touchstone Series Trust will transfer all of the assets of Touchstone
International Equity Fund, subject to its liabilities, to a new series of
Countrywide Strategic Trust in exchange for shares of the new series ("New
International Equity Fund"). Class A shares of New International Equity Fund
that Touchstone Series Trust receives in the exchange will be distributed pro
rata to Class A shareholders of Touchstone International Equity Fund. Class C
shares of New International Equity Fund that Touchstone Series Trust receives in
the exchange will be distributed pro rata to Class C shareholders of Touchstone
International Equity Fund. After the exchange, Touchstone International Equity
Fund will be dissolved. As a result of the reorganization, each shareholder of
Touchstone International Equity Fund will own shares of the corresponding class
of New International Equity Fund equal in value to the shares of Touchstone
International Equity Fund that she owns immediately before the reorganization.
New International Equity Fund will seek to increase the value of its shares
over the long-term. It will invest primarily in equity securities of foreign
companies and will invest in at least 3 countries outside the United States. Its
investment goal and principal investment strategies are identical to those of
Touchstone International Equity Fund. The current sub-advisor of Touchstone
International Equity Fund will become the sub-advisor and manage the portfolio
of New International Equity Fund.
TOUCHSTONE VALUE PLUS FUND AND TOUCHSTONE GROWTH & INCOME FUND
Touchstone Series Trust will transfer all of the assets of Touchstone Value
Plus Fund and all of the assets of Touchstone Growth & Income Fund, subject to
their liabilities, to a new series
Continued on next page
Continuation of Cover Page
of Countrywide Strategic Trust in exchange for shares of the new series ("New
Value Plus Fund"). Class A shares of New Value Plus Fund that Touchstone Series
Trust receives in the exchange will be distributed pro rata to Class A
shareholders of Touchstone Value Plus Fund and Class A shareholders of
Touchstone Growth & Income Fund. Class C shares of New Value Plus Fund that
Touchstone Series Trust receives in the exchange will be distributed pro rata to
Class C shareholders of Touchstone Value Plus Fund and Class C shareholders of
Touchstone Growth & Income Fund. After the exchange, Touchstone Value Plus Fund
and Touchstone Growth & Income Fund will be dissolved.
As a result of the reorganization, each shareholder of Touchstone Value
Plus Fund will own shares of the corresponding class of New Value Plus Fund
equal in value to the shares of Touchstone Value Plus Fund that he owns
immediately before the reorganization. As a result of the reorganization, each
shareholder of Touchstone Growth & Income Fund will own shares of the
corresponding class of New Value Plus Fund equal in value to the shares of
Touchstone Growth & Income Fund that she owns immediately before the
reorganization.
New Value Plus Fund will seek to increase the value of its shares over the
long-term. It will invest primarily in common stock of larger companies that the
portfolio manager believes are undervalued. Its investment goal and principal
investment strategies are identical to those of Touchstone Value Plus Fund and
are similar to those of Touchstone Growth & Income Fund. A more complete
comparison of the investment goals and strategies of these 3 funds is included
in the sections of the Proxy Statement/Prospectus called "Comparison of
Touchstone Value Plus Fund to New Value Plus Fund" and "Comparison of Touchstone
Growth & Income Fund to New Value Plus Fund." The current sub-advisor of
Touchstone Value Plus Fund will become the sub-advisor and manage the portfolio
of New Value Plus Fund.
TOUCHSTONE SERIES TRUST COUNTRYWIDE STRATEGIC TRUST
Touchstone Emerging Growth Fund New Emerging Growth Fund
Touchstone International Equity Fund New International Equity Fund
Touchstone Value Plus Fund New Value Plus Fund
Touchstone Growth & Income Fund
PROXY STATEMENT PROSPECTUS
INTRODUCTION
The proposed reorganization is part of a series of transactions designed to
consolidate the Touchstone and Countrywide mutual fund complexes. Currently, the
Touchstone mutual fund complex includes 8 funds, each a series of one investment
company, Touchstone Series Trust. The Countrywide mutual fund complex includes
18 funds in three investment companies, Countrywide Strategic Trust, Countrywide
Investment Trust and Countrywide Tax-Free Trust.
Touchstone Advisors, Inc. serves as the investment advisor to each fund in
Touchstone Series Trust. Touchstone Advisors is a wholly-owned subsidiary of
Western-Southern Life Assurance Company, which is a wholly-owned subsidiary of
The Western and Southern Life Insurance Company.
On October 29, 1999, Fort Washington Investment Advisors, Inc., another
wholly-owned subsidiary of The Western and Southern Life Insurance Company,
acquired all of the outstanding stock of Countrywide Financial Services, Inc.
Countrywide Financial Services is the parent of Countrywide Investments, Inc.,
which serves as the investment advisor to each fund in Countrywide Strategic
Trust, Countrywide Investment Trust and Countrywide Tax-Free Trust.
FUND MERGERS
The consolidation of the mutual fund complexes includes the merger of
certain funds in Touchstone Series Trust and Countrywide Strategic Trust.
Touchstone Emerging Growth Fund, Touchstone International Equity Fund,
Touchstone Value Plus Fund and Touchstone Growth & Income Fund (the "Touchstone
Funds") will be merged with newly-established series (the "New Funds") in the
Countrywide Strategic Trust. Touchstone Emerging Growth Fund and Touchstone
International Equity Fund will be merged into separate series of Countrywide
Strategic Trust. Both Touchstone Value Plus Fund and Touchstone Growth & Income
Fund will be merged into one series of Countrywide Strategic Trust because these
Touchstone Funds have similar investment goals and strategies and portfolio
holdings.
Touchstone Advisors will serve as the investment advisor to each New Fund.
Touchstone Advisors will, in turn, engage sub-advisors to manage the portfolios
of the New Funds.
o The current sub-advisors of Touchstone Emerging Growth Fund (David L.
Babson & Company, Inc. and Westfield Capital Management Company, Inc.)
will serve as the sub-advisors to the New Emerging Growth Fund.
o The current sub-advisor of Touchstone International Equity Fund
(Credit Suisse) will serve as the sub-advisor to the New International
Equity Fund.
o The current sub-advisor of Touchstone Value Plus Fund (Fort Washington
Investment Advisors) will serve as the sub-advisor to the New Value
Plus Fund. The current sub-advisor of Touchstone Growth & Income Fund
(Scudder Kemper Investments, Inc.) will not provide any services to
the New Value Plus Fund.
RECOMMENDATION OF THE BOARD OF TRUSTEES
The Board of Trustees of Touchstone Series Trust recommends that the
shareholders of each Touchstone Fund vote for the approval of the reorganization
plan related to that Touchstone Fund. In making this recommendation, the
Touchstone Board believes that it is acting in the best interests of the
shareholders of each Touchstone Fund and has determined that the interests of
the existing shareholders of each Touchstone Fund will not be diluted as a
result of the proposed reorganization.
2
EXPENSE INFORMATION
FEES AND EXPENSES
The following tables provide a comparison of the fees and expenses of each
Touchstone Fund and the corresponding New Fund including:
o A summary of the fees and expenses that you may pay if you buy and
hold shares of a Touchstone Fund
o A summary of the pro forma fees and expenses of each corresponding New
Fund, after giving effect to the reorganization
Touchstone New Touchstone New
Emerging Emerging Emerging Emerging
Growth Fund Growth Fund GrowthFund Growth Fund
----------- ----------- ---------- -----------
Class A Class A Class C Class C
------- ------- ------- -------
Shareholder Transaction Expenses
(fees paid directly from your investment)
- -----------------------------------------
Maximum Sales Charge............................. 5.75% 5.75% 1.00% 2.25%
Sales Charge (1)................................. 5.75% 5.75% None 1.25%
Deferred Sales Charge (2)........................ 0.00% 0.00% 1.00% 1.00%
Annual Fund Operating Expenses (3)
(expenses that are deducted from Fund assets)
- ---------------------------------------------
Advisory Fee..................................... 0.80% 0.80% 0.80% 0.80%
Rule 12b-1 Fees.................................. 0.25% 0.25% 1.00% 1.00%
Other Expenses................................... 2.24% 2.24% 2.24% 2.24%
----- ----- ----- -----
Total Operating Expenses
(before waiver or reimbursement)................. 3.29% 3.29% 4.04% 4.04%
Fee Waiver and/or
Expense Reimbursement (4) ....................... 1.79% 1.79% 1.79% 1.79%
----- ----- ----- -----
Net Expenses..................................... 1.50% 1.50% 2.25% 2.25%
===== ===== ===== =====
3
Touchstone New Touchstone New
International International International International
Equity Fund Equity Fund Equity Fund Equity Fund
----------- ----------- ----------- -----------
Class A Class A Class C Class C
------- ------- ------- -------
Shareholder Transaction Expenses
(fees paid directly from your investment)
- -----------------------------------------
Maximum Sales Charge............................. 5.75% 5.75% 1.00% 2.25%
Sales Charge (1)................................. 5.75% 5.75% None 1.25%
Deferred Sales Charge (2)........................ 0.00% 0.00% 1.00% 1.00%
Annual Fund Operating Expenses (3)
(expenses that are deducted from Fund assets)
- ---------------------------------------------
Advisory Fee..................................... 0.95% 0.95% 0.95% 0.95%
Rule 12b-1 Fees.................................. 0.25% 0.25% 1.00% 1.00%
Other Expenses................................... 2.91% 2.91% 2.91% 2.91%
----- ----- ----- -----
Total Operating Expenses
(before waiver or reimbursement)................. 4.11% 4.11% 4.86% 4.86%
Fee Waiver and/or
Expense Reimbursement (4) ....................... 2.51% 2.51% 2.51% 2.51%
----- ----- ----- -----
Net Expenses..................................... 1.60% 1.60% 2.35% 2.35%
===== ===== ===== =====
Touchstone Touchstone
Value New Value Value New Value
Shareholder Transaction Expenses Plus Fund Plus Fund Plus Fund Plus Fund
- -------------------------------- --------- --------- --------- ---------
Class A Class A Class C Class C
------- ------- ------- -------
Shareholder Transaction Expenses
(fees paid directly from your investment)
- -----------------------------------------
Maximum Sales Charge............................. 5.75% 5.75% 1.00% 2.25%
Sales Charge (1)................................. 5.75% 5.75% None 1.25%
Deferred Sales Charge (2)........................ 0.00% 0.00% 1.00% 1.00%
Annual Fund Operating Expenses (3)
(expenses that are deducted from Fund assets)
- ---------------------------------------------
Advisory Fee..................................... 0.75% 0.75% 0.75% 0.75%
Rule 12b-1 Fees.................................. 0.25% 0.25% 1.00% 1.00%
Other Expenses................................... 1.02% 0.82% 1.02% 0.82%
----- ----- ----- -----
Total Operating Expenses
(before waiver or reimbursement)................. 2.02% 1.82% 2.77% 2.57%
Fee Waiver and/or
Expense Reimbursement (4) ....................... 0.72% 0.52% 0.72% 0.52%
----- ----- ----- -----
Net Expenses..................................... 1.30% 1.30% 2.05% 2.05%
===== ===== ===== =====
4
Touchstone Touchstone
Growth & New Value Growth & New Value
Shareholder Transaction Expenses Income Fund Plus Fund Income Fund Plus Fund
- -------------------------------- ----------- --------- ----------- ---------
Class A Class A Class C Class C
------- ------- ------- -------
Shareholder Transaction Expenses
(fees paid directly from your investment)
- -----------------------------------------
Maximum Sales Charge (1)......................... 5.75% 5.75% 1.00% 2.25%
Sales Charge..................................... 5.75% 5.75% None 1.25%
Deferred Sales Charge (2)........................ 0.00% 0.00% 1.00% 1.00%
Annual Fund Operating Expenses (3)
(expenses that are deducted from Fund assets)
- ---------------------------------------------
Advisory Fee..................................... 0.80% 0.75% 0.80% 0.75%
Rule 12b-1 Fees.................................. 0.25% 0.25% 1.00% 1.00%
Other Expenses................................... 1.08% 0.82% 1.08% 0.82%
----- ----- ----- -----
Total Operating Expenses
(before waiver or reimbursement)................. 2.13% 1.82% 2.88% 2.57%
Fee Waiver and/or
Expense Reimbursement (4) ....................... 0.83% 0.52% 0.83% 0.52%
----- ----- ----- -----
Net Expenses..................................... 1.30% 1.30% 2.05% 2.05%
===== ===== ===== =====
NOTES TO FEE AND EXPENSE TABLES
(1) TOUCHSTONE FUNDS: The sales load is a percentage of the offering price. You
may pay a reduced sales charge on very large purchases. There is no sales
charge at the time of purchase for purchases of $1 million or more but a
sales charge of 1.00% will be assessed on the shares if you redeem them
within one year of purchase. There is also no initial sales charge on
certain purchases in a Roth IRA, a Roth Conversion IRA or a qualified
retirement plan.
NEW FUNDS: The sales load is a percentage of the offering price. You may
pay a reduced sales charge on very large purchases. There is no sales
charge at the time of purchase for purchases of $1 million or more but a
sales charge of 1.00% will be assessed on the shares if you redeem them
within one year of purchase.
(2) TOUCHSTONE FUNDS: The deferred sales load is a percentage of the amount
redeemed. The 1.00% charge is waived for benefits paid to you through a
qualified pension plan.
NEW FUNDS: The deferred sales load is a percentage of the offering price.
An $8 fee will be charged for each wire redemption. This fee is subject to
change
(3) TOUCHSTONE AND NEW FUNDS: Amounts shown under Annual Fund Operating
Expenses are shown as a percentage of average net assets.
(4) TOUCHSTONE FUNDS: Touchstone Advisors has agreed to waive or reimburse
certain of the Annual Fund Operating Expenses of each class of each
Touchstone Fund through December 31, 2000.
NEW FUNDS: Touchstone Advisors has agreed to waive or reimburse certain of
5
the Annual Fund Operating Expenses of each class of each New Fund through
December 31, 2000, so that net expenses, on an annual basis, are not
greater than the percentage listed above for each class of each New Fund.
EXAMPLES--COST OF A $10,000 INVESTMENT
The following tables provide a comparison of the cost of investing in each
Touchstone Fund and the corresponding New Fund including:
o An example illustrating the cost of investing $10,000 in each
Touchstone Fund
o The pro forma cost of investing $10,000 in the corresponding New Fund,
after giving effect to the reorganization
The purpose of the examples is to assist you in understanding and comparing
the costs of investing in a Touchstone Fund and the corresponding New Fund. The
examples assume that you invest $10,000 in the applicable Touchstone or New Fund
for the time period indicated. It also assumes that your investment has a 5%
return each year and the operating expenses of the applicable Touchstone or New
Fund remain the same. Although your actual costs may be higher or lower, based
on these assumptions, your costs would be the amounts shown below.
You would pay the following expenses if you redeemed your shares at the end of
the indicated period:
Touchstone New Touchstone New
Emerging Emerging Emerging Emerging
Time Period Growth Fund Growth Fund Growth Fund Growth Fund
- ----------- ----------- ----------- ----------- -----------
Class A Class A Class C Class C
------- ------- ------- -------
1 Year ................. $ 719 $ 719 $ 228 $ 350
3 Years ................ $1,372 $1,372 $1,066 $1,178
5 Years ................ $2,047 $2,047 $1,921 $2,022
10 Years ............... $3,839 $3,839 $4,129 $4,203
Touchstone New Touchstone New
International International International International
Time Period Equity Fund Equity Fund Equity Fund Equity Fund
- ----------- ----------- ----------- ----------- -----------
Class A Class A Class C Class C
------- ------- ------- -------
1 Year ................. $ 728 $ 728 $ 238 $ 360
3 Years ................ $1,537 $1,537 $1,237 $1,347
5 Years ................ $2,359 $2,359 $2,239 $2,336
10 Years ............... $4,481 $4,481 $4,756 $4,822
6
Touchstone Touchstone
Value New Value Value New Value
Time Period Plus Fund Plus Fund Plus Fund Plus Fund
- ----------- --------- --------- --------- ---------
Class A Class A Class C Class C
------- ------- ------- -------
1 Year ................. $ 700 $ 700 $ 208 $ 330
3 Years ................ $1,107 $1,067 $ 791 $ 866
5 Years ................ $1,538 $1,458 $1,401 $1,427
10 Years ............... $2,734 $2,549 $3,047 $2,955
Touchstone Touchstone
Growth & New Value Growth & New Value
Time Period Income Fund Plus Fund Income Fund Plus Fund
- ----------- ----------- --------- ----------- ---------
Class A Class A Class C Class C
------- ------- ------- -------
1 Year ................. $ 700 $ 700 $ 208 $ 330
3 Years ................ $1,134 $1,067 $ 814 $ 866
5 Years ................ $1,593 $1,458 $1,445 $1,427
10 Years ............... $2,861 $2,549 $3,145 $2,955
The examples should not be considered to be a representation of past or
future expenses. Actual expenses may be higher or lower than those shown.
Moreover, the examples assume a 5% annual return. The performance of a mutual
fund will vary and may result in an actual return higher or lower than 5%.
The examples for one year are calculated using Net Expenses after fee
waiver and/or reimbursement. The examples for 3 years, 5 years and 10 years are
calculated using Total Operating Expenses before waiver or reimbursement.
SUMMARY
This section of the Proxy Statement/Prospectus discusses the key features
of the proposed reorganization of the Touchstone Funds, compares each Touchstone
Fund to the corresponding New Fund, discusses the tax consequences of the
reorganization, and discusses the risks of investing in each New Fund. The
information is a summary of certain information contained elsewhere in this
Proxy Statement/Prospectus, the Agreement and Plan of Reorganization, the
prospectus of Touchstone Series Trust dated May 1, 1999, and the prospectus of
Countrywide Strategic Trust dated August 1, 1999, each of which is incorporated
by reference into this Proxy Statement/Prospectus.
8
PROPOSED REORGANIZATION OF TOUCHSTONE FUNDS
The proposed reorganization of the Touchstone Funds includes the following
mergers:
ACQUIRED FUND ACQUIRING FUND
------------- --------------
Touchstone Emerging Growth Fund New Emerging Growth Fund
Touchstone International Equity Fund New International Equity Fund
Touchstone Value Plus Fund New Value Plus Fund
Touchstone Growth & Income Fund New Value Plus Fund
Each Touchstone Fund is a series of Touchstone Series Trust. Touchstone
Series Trust is a registered open-end investment company. It is organized as a
Massachusetts business trust.
Each New Fund will be a series of Countrywide Strategic Trust. Countrywide
Strategic Trust is a registered open-end investment company. It is organized as
a Massachusetts business trust.
In the reorganization, Touchstone Series Trust will transfer all of the
assets of each acquired Touchstone Fund, subject to its liabilities, to the
corresponding acquiring New Fund. Class A shares of the acquiring New Fund that
Touchstone Series Trust receives in the exchange will be distributed pro rata to
Class A shareholders of the acquired Touchstone Fund. Class C shares of the
acquiring New Fund that Touchstone Series Trust receives in the exchange will be
distributed pro rata to Class C shareholders of the acquired Touchstone Fund.
After the exchange, each acquired Touchstone Fund will be dissolved. As a result
of the reorganization, each shareholder of the acquired Touchstone Fund will own
shares of the corresponding class of the acquiring New Fund equal in value to
the shares of the acquired Touchstone Fund that he owns immediately before the
reorganization.
COMPARISON OF TOUCHSTONE EMERGING GROWTH FUND TO NEW EMERGING GROWTH FUND
Investment Objective and Principal Investment Strategies. The investment
objective and principal investment strategies of the New Emerging Growth Fund
will be identical to those of the Touchstone Emerging Growth Fund. The
investment objective of the New Emerging Growth Fund will be to seek to increase
the value of shares as a primary goal and to earn income as a secondary goal.
The New Emerging Growth Fund will invest primarily (at least 65% of total
assets) in the common stocks of smaller, rapidly growing (emerging growth)
companies. In selecting its investments, the portfolio managers will focus on
those companies they believe will grow faster than the U.S. economy in general.
The portfolio managers also choose companies they believe are priced lower in
the market than their true value.
9
When the portfolio managers believe the following securities offer a good
potential for capital growth or income, up to 35% of the fund's assets may be
invested in:
o Larger company stocks;
o Preferred stocks;
o Convertible bonds; and
o Other debt securities, including: collateralized mortgage obligations
(CMOs), stripped U.S. government securities (Strips) and
mortgage-related securities, all of which will be rated investment
grade.
The New Emerging Growth Fund may also invest in:
o Securities of foreign companies traded mainly outside the U.S. (up to
20%);
o American Depositary Receipts (ADRs) (up to 20%); and
o Emerging market securities (up to 10%).
Risk Factors. An investment in the New Emerging Growth Fund will involve
certain risks, which are the same risks associated with an investment in the
Touchstone Emerging Growth Fund. The share price of the New Emerging Growth Fund
will fluctuate, and an investor could lose money on an investment in the New
Emerging Growth Fund. An investment in the New Emerging Growth Fund could return
less than other investments:
o If the stock market as a whole goes down
o Because securities of small cap companies may be more thinly traded
and may have more frequent and larger price changes than securities of
larger cap companies
o If the market continually values the stocks in the New Emerging Growth
Fund's portfolio lower than the portfolio managers believe they should
be valued
o If the stocks in the New Emerging Growth Fund's portfolio are not
undervalued as expected
o If the companies in which the New Emerging Growth Fund invests do not
grow as rapidly as expected
o If interest rates go up, causing the value of any debt securities held
by the New Emerging Growth Fund to decline
o Because CMOs, Strips and mortgage-related securities may lose more
value due to changes in interest rates than other debt securities and
are subject to prepayment
o Because investments in foreign securities may have more frequent and
larger price changes than U.S. securities and may lose value due to
changes in currency and exchange rates and other factors
o Because emerging market securities involve unique risks, such as
exposure to economies less diverse and mature than that of the U.S.
and economic or political changes may cause larger price changes in
emerging market securities than other foreign securities
Investment Management. Touchstone Advisors, the investment advisor of the
Touchstone Emerging Growth Fund, will be the investment advisor of the New
Emerging Growth Fund. The
10
terms of the investment advisory agreement for the New Emerging Growth Fund will
be identical to the terms of the current investment advisory agreement for the
Touchstone Emerging Growth Fund except for the effective and termination dates.
David L. Babson & Company, Inc. and Westfield Capital Management Company,
Inc., the sub-advisors of the Touchstone Emerging Growth Fund, will be the
sub-advisors of the New Emerging Growth Fund. The terms of the sub-advisory
agreements for the New Emerging Growth Fund will be identical to the terms of
the current sub-advisory agreements for the Touchstone Emerging Growth Fund
except for the effective and termination dates.
Administrative Services. Investors Bank & Trust Company serves as
custodian, administrator and fund accounting agent for the Touchstone Emerging
Growth Fund and will provide these services to New Emerging Growth Fund. State
Street Bank and Trust Company serves as transfer agent and dividend paying agent
for the Touchstone Emerging Growth Fund. It is anticipated that, following the
reorganization, Countrywide Fund Services, Inc. will act as transfer agent and
dividend paying agent to the New Emerging Growth Fund for an annual fee less
than that currently paid by the Touchstone Emerging Growth Fund. Countrywide
Fund Services is an affiliate of Touchstone Advisors.
Sales Charges. The maximum sales charge (5.75% of the offering price) for
Class A shares of the New Emerging Growth Fund will be the same as the maximum
sales charge for Class A shares of the Touchstone Emerging Growth Fund. Both
Funds reduce the rate of the sales charge for purchases of $50,000 or more,
offer reduced sales loads for certain purchase programs, permit purchases at net
asset value for certain persons and impose a 1.00% contingent deferred sales
load on certain redemptions.
The maximum sales charge for Class C shares of the New Emerging Growth Fund
will be 1.25% of the offering price. There is no sales charge for Class C shares
of the Touchstone Emerging Growth Fund. Both New Emerging Growth Fund and
Touchstone Emerging Growth Fund generally impose a contingent deferred sales
charge of 1.00% on Class C shares redeemed within one year of purchase.
No sales charge will be applicable to the merger transactions. In addition,
the 1.25% sales load will be waived on future purchases by current shareholders
of Class C shares of Touchstone Emerging Growth Fund. Therefore, if you are a
Class C shareholder of the Touchstone Emerging Growth Fund and the merger with
the New Emerging Growth Fund is completed, you will not pay the 1.25% sales
charge when you purchase additional Class C shares of the New Emerging Growth
Fund.
See Appendix B to this Proxy Statement/Prospectus for a more complete
description of the sales charges that will be applicable to Class A and Class C
shares of the New Emerging Growth Fund.
Rule 12b-1 Fees. The distribution fees to be paid by Class A shares of the
New Emerging Growth Fund pursuant to its Rule 12b-1 Plan will be no greater than
0.25% of the average daily net assets attributable to Class A shares. This
maximum equals the maximum rate of 12b-1 fees
11
payable by Class A shares of the Touchstone Emerging Growth Fund. The maximum
rate of 12b-1 fees payable by Class C shares of the New Emerging Growth Fund and
the Touchstone Emerging Growth Fund is the same (1.00% of average daily net
assets attributable to Class C shares).
COMPARISON OF TOUCHSTONE INTERNATIONAL EQUITY FUND TO NEW INTERNATIONAL EQUITY
FUND
Investment Objective and Principal Investment Strategies. The investment
objective and principal investment strategies of the New International Equity
Fund will be identical to those of the Touchstone International Equity Fund. The
investment objective of the New International Equity Fund will be to seek to
increase the value of shares of the New International Equity Fund over the long
term.
The New International Equity Fund will invest primarily (at least 80% of
total assets) in equity securities of foreign companies and will invest in at
least three countries outside the United States. A large portion of those
non-U.S. equity securities may be issued by companies active in emerging market
countries (up to 40% of total assets).
The New International Equity Fund may also invest in certain debt
securities issued by U.S. and non-U.S. entities (up to 20%), including
non-investment grade debt securities rated as low as B.
The portfolio manager will use a growth-oriented style to choose
investments for the New International Equity Fund. This will include the use of
both qualitative and quantitative analysis to identify markets and companies
that offer solid growth prospects at reasonable prices. The portfolio manager's
investment process will seek to add value by making good regional and country
allocations as well as by selecting individual stocks within a region.
Risk Factors. An investment in the New International Equity Fund will
involve certain risks, which are the same risks associated with an investment in
the Touchstone International Equity Fund. The share price of the New
International Equity Fund will fluctuate, and an investor could lose money on an
investment in the New International Equity Fund. An investment in the New
International Equity Fund could also return less than other investments:
o If the stock market as a whole goes down
o Because investments in foreign securities may have more frequent and
larger price changes than U.S. securities and may lose value due to
changes in the currency exchange rates and other factors
o Because emerging market securities involve unique risks, such as
exposure to economies less diverse and mature than that of the U.S.
and economic or political changes may cause larger price changes in
emerging market securities than other foreign securities
o If the stocks in the portfolio of the New International Equity Fund do
not grow over the long term as expected
o If interest rates go up, causing the value of any debt securities held
by the New International Equity Fund to decline
12
o Because issuers of non-investment grade securities held by the New
International Equity Fund are more likely to be unable to make timely
payments of interest or principal.
Investment Management. Touchstone Advisors, the investment advisor of the
Touchstone International Equity Fund, will be the investment advisor of the New
International Equity Fund. The terms of the investment advisory agreement for
the New International Equity Fund will be identical to the terms of the current
investment advisory agreement for the Touchstone International Equity Fund
except for the effective and termination dates.
Credit Suisse, the sub-advisor of the Touchstone International Equity Fund,
will be the sub-advisor of the New International Equity Fund. The terms of the
sub-advisory agreement for the New International Equity Fund will be identical
to the terms of the current sub-advisory agreement for the Touchstone
International Equity Fund except for the effective and termination dates.
Administrative Services. Investors Bank & Trust Company serves as
custodian, administrator and fund accounting agent for the Touchstone
International Equity Fund and will provide these services to the New
International Equity Fund. State Street Bank and Trust Company serves as
transfer agent and dividend paying agent for the Touchstone International Equity
Fund. It is anticipated that, following the reorganization, Countrywide Fund
Services, Inc. will serve as transfer agent and dividend paying agent to the New
International Equity Fund for an annual fee less than that currently paid by the
Touchstone International Equity Fund. Countrywide Fund Services is an affiliate
of Touchstone Advisors.
Sales Charges. The maximum sales charge (5.75% of the offering price) for
Class A shares of the New International Equity Fund will be the same as the
maximum sales charge for Class A shares of the Touchstone International Equity
Fund. Both Funds reduce the rate of the sales charge for purchases of $50,000 or
more, offer reduced sales loads for certain purchase programs, permit purchases
at net asset value for certain persons and impose a 1.00% contingent deferred
sales load on certain redemptions.
The maximum sales charge for Class C shares of the New International Equity
Fund will be 1.25% of the offering price. There is no sales charge for Class C
shares of the Touchstone International Equity Fund. Both New International
Equity Fund and Touchstone International Equity Fund generally impose a
contingent deferred sales charge of 1.00% on Class C shares redeemed within one
year of purchase.
No sales charge will be applicable to the merger transactions. In addition,
the 1.25% sales load will be waived on future purchases by current shareholders
of Class C shares of Touchstone International Equity Fund. Therefore, if you are
a Class C shareholder of the Touchstone International Equity Fund and the merger
with the New International Equity Fund is completed, you will not pay the 1.25%
sales charge when you purchase additional Class C shares of the New
International Equity Fund.
13
See Appendix B to this Proxy Statement/Prospectus for a more complete
description of the sales charges that will be applicable to Class A and Class C
shares of the New International Equity Fund.
Rule 12b-1 Fees. The distribution fees to be paid by Class A shares of the
New International Equity Fund pursuant to its Rule 12b-1 Plan will be no greater
than 0.25% of the average daily net assets attributable to Class A shares. This
maximum equals the maximum rate of 12b-1 fees payable by Class A shares of the
Touchstone International Equity Fund. The maximum rate of 12b-1 fees payable by
Class C shares of the New International Equity Fund and the Touchstone
International Equity Fund is the same (1.00% of average daily net assets
attributable to Class C shares).
COMPARISON OF TOUCHSTONE VALUE PLUS FUND TO NEW VALUE PLUS FUND
Investment Objective and Principal Investment Strategies. The investment
objective and principal investment strategies of the New Value Plus Fund will be
identical to those of the Touchstone Value Plus Fund. The investment objective
of the New Value Plus Fund will be to seek to increase the value of shares of
the New Value Plus Fund over the long term.
The New Value Plus Fund will invest primarily (at least 65% of total
assets) in common stock of larger companies that the portfolio manager believes
are undervalued. In choosing undervalued stocks, the portfolio manager looks for
companies that have proven management and unique features or advantages but are
believed to be priced lower than their true value. These companies may not pay
dividends. The New Value Plus Fund may also invest in common stocks of rapidly
growing companies to enhance the Fund's return and vary its investments to avoid
having too much of the assets of the New Value Plus Fund subject to risks
specific to undervalued stocks.
Approximately 70% of total assets will generally be invested in large cap
companies and approximately 30% will generally be invested in mid cap companies.
The New Value Plus Fund will be permitted to invest in:
o Preferred stocks;
o Investment grade debt securities; and
o Convertible securities.
In addition, the New Value Plus Fund may invest in (up to 10%):
o Cash equivalent instruments; and
o Short-term debt securities.
Risk Factors. An investment in the New Value Plus Fund will involve certain
risks, which are the same risks associated with an investment in the Touchstone
Value Plus Fund. The share price of the New Value Plus Fund will fluctuate, and
an investor could lose money on an investment in this fund. The New Value Plus
Fund could also return less than other investments:
14
o If the stock market as a whole goes down
o If the market continually values the stocks in the portfolio of the
New Value Plus Fund lower than the portfolio manager believes they
should be valued
o If the stocks in the portfolio of the New Value Plus Fund are not
undervalued as expected
o If interest rates go up, causing the value of any debt securities held
by the New Value Plus Fund to decline
Investment Management. Touchstone Advisors, the investment advisor of the
Touchstone Value Plus Fund, will be the investment advisor of the New Value Plus
Fund. The terms of the investment advisory agreement for the New Value Plus Fund
will be identical to the terms of the current investment advisory agreement for
the Touchstone Value Plus Fund except for the effective and termination dates.
Fort Washington Investment Advisors, Inc., the sub-advisor of the
Touchstone Value Plus Fund, will be the sub-advisor of the New Value Plus Fund.
The terms of the sub-advisory agreement for the New Value Plus Fund will be
identical to the terms of the current sub-advisory agreement for the Touchstone
Value Plus Fund except for the effective and termination dates.
Administrative Services. Investors Bank & Trust Company serves as
custodian, administrator and fund accounting agent for the Touchstone Value Plus
Fund and will provide these services to the New Value Plus Fund. State Street
Bank and Trust Company serves as transfer agent and dividend paying agent for
the Touchstone Value Plus Fund. It is anticipated that, following the
reorganization, Countrywide Fund Services, Inc. will serve as transfer agent and
dividend paying agent to the New Value Plus Fund for an annual fee less than
that currently paid by the Touchstone Value Plus Fund. Countrywide Fund Services
is an affiliate of Touchstone Advisors.
Sales Charges. The maximum sales charge (5.75% of the offering price) for
Class A shares of the New Value Plus Fund will be the same as the maximum sales
charge for Class A shares of the Touchstone Value Plus Fund. Both Funds reduce
the rate of the sales charge for purchases of $50,000 or more, offer reduced
sales loads for certain purchase programs, permit purchases at net asset value
for certain persons and impose a 1.00% contingent deferred sales load on certain
redemptions.
The maximum sales charge for Class C shares of the New Value Plus Fund will
be 1.25% of the offering price. There is no sales charge for Class C shares of
the Touchstone Value Plus Fund. Both New Value Plus Fund and Touchstone Value
Plus Fund generally impose a contingent deferred sales charge of 1.00% on Class
C shares redeemed within one year of purchase.
No sales charge will be applicable to the merger transactions. In addition,
the 1.25% sales load will be waived on future purchases by current shareholders
of Class C shares of Touchstone Value Plus Fund. Therefore, if you are a Class C
shareholder of the Touchstone Value Plus Fund
15
and the merger with the New Value Plus Fund is completed, you will not pay the
1.25% sales charge when you purchase additional Class C shares of the New Value
Plus Fund.
See Appendix B to this Proxy Statement/Prospectus for a more complete
description of the sales charges that will be applicable to Class A and Class C
shares of the New Value Plus Fund.
Rule 12b-1 Fees. The distribution fees to be paid by Class A shares of the
New Value Plus Fund pursuant to its Rule 12b-1 Plan will be no greater than
0.25% of the average daily net assets attributable to Class A shares. This
maximum equals the maximum rate of 12b-1 fees payable by Class A shares of the
Touchstone Value Plus Fund. The maximum rate of 12b-1 fees payable by Class C
shares of the New Value Plus Fund and the Touchstone Value Plus Fund is the same
(1.00% of average daily net assets attributable to Class C shares).
COMPARISON OF TOUCHSTONE GROWTH & INCOME FUND TO NEW VALUE PLUS FUND
Investment Objective and Principal Investment Strategies. The investment
objective and principal investment strategies of the New Value Plus Fund will be
similar to those of the Touchstone Growth & Income Fund.
o The investment objective of the New Value Plus Fund will be to seek to
increase the value of its shares over the long-term. Unlike the
Touchstone Growth & Income Fund, the New Value Plus Fund will not seek
to obtain dividend income and therefore, it will not invest primarily
in dividend-paying securities. It will invest primarily in common
stock of larger companies that the portfolio manager believes are
undervalued and may invest in companies that do not pay dividends.
o Although the portfolio managers of both funds follow a value-oriented
style, the New Value Plus Fund may invest in common stocks of rapidly
growing companies to enhance its return and vary its investments to
avoid having too much of the Fund's assets subject to risks specific
to undervalued stocks.
o Approximately 70% of total assets of the New Value Plus Fund's
portfolio will generally be invested in large cap companies and
approximately 30% will generally be invested in mid cap companies. As
a result, its portfolio may contain more large cap companies than the
Touchstone Growth & Income Fund's portfolio.
o Both funds may invest in preferred stocks, convertible securities and
debt securities. Unlike the Touchstone Growth & Income Fund, the New
Value Plus Fund will not invest in non-investment grade debt
securities
o The New Value Plus Fund may invest up to 10% of its total assets in
short-term debt securities and cash equivalent investments. It will
not invest in securities of foreign companies or real estate
investment trusts, which are permissible investments for the
Touchstone Growth & Income Fund.
16
This comparison of the New Value Plus Fund and the Growth & Income Fund is
intended to be a brief summary of the differences in the investment objective
and principal investment strategies of those two funds. A more complete
description of the investment objective and principal investment strategies of
each fund is set forth in the Touchstone Series Trust prospectus that
accompanies this Proxy Statement/Prospectus.
Risk Factors. An investment in the New Value Plus Fund will involve certain
risks, which are the same risks associated with an investment in the Touchstone
Value Plus Fund. A description of the various risks associated with an
investment in the Touchstone Value Plus Fund is set forth in previous section of
this Proxy Statement/Prospectus.
The New Value Plus Fund, like the Touchstone Growth & Income Fund, is
subject to market risk when it invests in common stocks and to interest rate and
credit risk when it invests in debt securities. Unlike the Touchstone Growth &
Income Fund, the New Value Plus Fund will not be subject to the risks related to
investments in non-investment grade securities or foreign stocks. Since the New
Value Plus Fund will not invest to receive dividend income, it will not be
concerned about whether earnings are achieved and income is available for
dividend payments.
Investment Management. Touchstone Advisors, the investment advisor of the
Touchstone Growth & Income Fund, will be the investment advisor of the New Value
Plus Fund. The terms of the investment advisory agreement for the New Value Plus
Fund will be identical to the terms of the current investment advisory agreement
for the Touchstone Growth & Income Fund except for the name of the fund, the
rate of the advisory fee and the effective and termination dates. The rate of
the advisory fee to be paid by the New Value Plus Fund will be 0.75% of its
average daily net assets, which is 0.05% less than the rate of the advisory fee
paid by the Touchstone Growth & Income Fund.
Fort Washington Investment Advisors, Inc., the sub-advisor of the
Touchstone Value Plus Fund, will be the sub-advisor of the New Value Plus Fund.
Scudder Kemper Investments, Inc. is the sub-advisor of the Touchstone Growth &
Income Fund. The terms of the sub-advisory agreement for the New Value Plus Fund
will be identical to the terms of the current sub-advisory agreement for the
Touchstone Growth & Income Fund except for the rate of the sub-advisory fees,
the name of the sub-advisor and the effective and termination dates.
The rate of the sub-advisory fee to be paid by the New Value Plus Fund to
Fort Washington will be 0.45% of its average daily net assets. The rate of the
sub-advisory fee paid by the Touchstone Growth & Income Fund to Scudder Kemper
Investments is 0.50% of the first $150 million of the average daily net assets
of the Touchstone Growth & Income Fund and a similar fund of Touchstone Variable
Series Trust and 0.45% of the average daily net assets of these 2 funds in
excess of $150 million. Because the average daily net assets of these 2 funds is
currently less than $150 million, the rate of the sub-advisory to be paid by the
New Value Plus Fund will be 0.05% less than the rate of the sub-advisory fee
paid by the Touchstone Growth & Income Fund.
Administrative Services. Investors Bank & Trust Company serves as
custodian, administrator and fund accounting agent for the Touchstone Growth &
Income Fund and will
17
provide these services to the New Value Plus Fund. State Street Bank and Trust
Company serves as transfer agent and dividend paying agent for the Touchstone
Growth & Income Fund. It is anticipated that, following the reorganization,
Countrywide Fund Services, Inc. will serve as transfer agent and dividend paying
agent to the New Value Plus Fund at an annual fee less than that currently paid
by the Touchstone Growth & Income Fund. Countrywide Fund Services is an
affiliate of Touchstone Advisors.
Sales Charges. The maximum sales charge (5.75% of the offering price) for
Class A shares of the New Value Plus Fund will be the same as the maximum sales
charge for Class A shares of Touchstone Growth & Income Fund. Both Funds reduce
the rate of the sales charge for purchases of $50,000 or more, offer reduced
sales loads for certain purchase programs, permit purchases at net asset value
for certain persons and impose a 1.00% contingent deferred sales load on certain
redemptions.
The maximum sales charge for Class C shares of the New Value Plus Fund will
be 1.25% of the offering price. There is no sales charge for Class C shares of
Touchstone Growth & Income Fund. Both New Value Plus Fund and Touchstone Growth
& Income Fund generally impose a contingent deferred sales charge of 1.00% on
Class C shares redeemed within one year of purchase.
No sales charge will be applicable to the merger transactions. In addition,
the 1.25% sales load will be waived on future purchases by current shareholders
of Class C shares of Touchstone Growth & Income Fund. Therefore, if you are a
Class C shareholder of the Touchstone Growth & Income Fund and the merger with
the New Value Plus Fund is completed, you will not pay the 1.25% sales charge
when you purchase additional Class C shares of the New Value Plus Fund.
See Appendix B to this Proxy Statement/Prospectus for a more complete
description of the sales charges that will be applicable to Class A and Class C
shares of New Value Plus Fund.
Rule 12b-1 Fees. The distribution fees to be paid by the Class A shares of
the New Value Plus Fund pursuant to its Rule 12b-1 Plan will be no greater than
0.25% of the average daily net assets attributable to Class A shares. This
maximum equals the maximum rate of 12b-1 fees payable by Class A shares of
Touchstone Growth & Income Fund. The maximum rate of 12b-1 fees payable by Class
C shares of New Value Plus Fund and Touchstone Growth & Income Fund is the same
(1.00% of average daily net assets attributable to Class C shares).
COMPARISON OF PURCHASE, REDEMPTION AND EXCHANGE PROCEDURES
The procedures for purchasing, redeeming and exchanging shares of the New
Funds will be substantially similar to those of the Touchstone Funds. A more
complete description of the applicable purchase, redemption and exchange
procedures is set forth in Appendix B to this Proxy Statement/Prospectus.
The following list highlights the most significant differences in the
purchase, redemption and exchange procedures of the Touchstone Funds and the New
Funds.
18
o Under some circumstances, the minimum investment amount required for
an initial investment in a New Fund will be greater than the minimum
investment amount required in a Touchstone Fund.
o Under some circumstances, no minimum investment amount will be
required for an additional investment in a New Fund.
o The purchase of Class C shares in a New Fund generally will be subject
to a 1.25% front-end sales charge.
o A potential investor in a New Fund will not be able to open an account
with a wire transfer.
o A shareholder in a New Fund cannot sell shares over the telephone if
the amount of the sale is more than $25,000 or the account is an IRA.
o A wire charge fee of $8.00 will be charged to selling shareholders who
direct the proceeds of the sale to be wired into a bank account.
o A signature guarantee is required when the proceeds from the sale of
your shares exceeds $25,000.
TAX CONSEQUENCES
Touchstone Series Trust and Countrywide Strategic Trust have received an
opinion of counsel that the reorganization will not result in any gain or loss
for federal income tax purposes to any Touchstone Fund or its shareholders or
any new Fund or its shareholders. See "The Proposed Reorganization--Tax
Considerations."
19
PRINCIPAL RISKS OF INVESTING IN NEW FUNDS
The following table shows some of the main risks to which each New Fund is
subject. Each risk is described in detail below. The applicable risks are also
discussed in prior sections of this Proxy Statement/Prospectus that compare the
Touchstone Funds to each Corresponding New Fund. An investment in any of the New
Funds is not a bank deposit and is not insured or guaranteed by the FDIC or any
other government entity.
New Emerging New International New Value
Principal Risks Growth Fund Equity Fund Plus Fund
- --------------------------------------------------------------------------------
Market Risk x x x
................................................................................
Emerging Growth Companies x
................................................................................
Interest Rate Risk x x x
................................................................................
Mortgage-Related Securities x
................................................................................
Credit Risk x x x
................................................................................
Non-Investment Grade Securities x
................................................................................
Foreign Investing Risk x x
................................................................................
Emerging Market Risk x x
................................................................................
Political Risk x
................................................................................
MARKET RISK. A New Fund that invests in common stocks is subject to stock
market risk. Stock prices in general may decline over short or even extended
periods, regardless of the success or failure of a particular company's
operations. Stock markets tend to run in cycles, with periods when stock prices
generally go up and periods when they generally go down. Common stock prices
tend to go up and down more than those of bonds.
o Emerging Growth Companies. Investment in Emerging Growth companies is
subject to enhanced risks because such companies generally have
limited product lines, markets or financial resources and often
exhibit a lack of management depth. The securities of such companies
can be difficult to sell and are usually more volatile than securities
of larger, more established companies.
INTEREST RATE RISK. A New Fund that invests in debt securities is subject
to the risk that the market value of the debt securities will decline because of
rising interest rates. The prices of debt securities are generally linked to the
prevailing market interest rates. In general, when interest rates rise, the
prices of debt securities fall, and when interest rates fall, the prices of debt
securities rise. The price volatility of a debt security also depends on its
maturity. Generally, the longer the maturity of a debt security, the greater its
sensitivity to changes in interest rates. To compensate investors for this
higher risk, debt securities with longer maturities generally offer higher
yields than debt securities with shorter maturities.
o Mortgage-related securities. Payments from the pool of loans
underlying a mortgage-related security may not be enough to meet the
monthly payments of the mortgage-related security. If this occurs, the
mortgage-related security will lose value. Also,
20
prepayments of mortgages or mortgage foreclosures will shorten the
life of the pool of mortgages underlying a mortgage-related security
and will affect the average life of the mortgage-related securities
held by a New Fund. Mortgage prepayments vary based on several factors
including the level of interest rates, general economic conditions,
the location and age of the mortgage and other demographic conditions.
In periods of falling interest rates, there are usually more
prepayments. The reinvestment of cash received from prepayments will,
therefore, usually be at lower interest rate than the original
investment, lowering the New Fund's yield. Mortgage-related securities
may be less likely to increase in value during periods of falling
interest rates than other debt securities.
CREDIT RISK. The debt securities in a New Fund's portfolio are subject to
credit risk. Credit risk is the possibility that an issuer will fail to make
timely payments of interest or principal. Securities rated in the lowest
category of investment grade securities have some risky characteristics and
changes in economic conditions are more likely to cause issuers of these
securities to be unable to make payments.
o Non-Investment Grade Securities. Non-investment grade securities are
sometimes referred to as "junk bonds" and are very risky with respect
to their issuers' ability to make payments of interest and principal.
There is a high risk that a New Fund could suffer a loss from
investments in non-investment grade securities caused by the default
of an issuer of such securities. Part of the reason for this high risk
is that, in the event of a default or bankruptcy, holders of
non-investment grade securities generally will not receive payments
until the holders of all other debt have been paid. In addition, the
market for non-investment grade securities has, in the past, had more
frequent and larger price changes than the markets for other
securities. Non-investment grade securities can also be more difficult
to sell for good value.
FOREIGN INVESTING. Investing in foreign securities poses unique risks such
as fluctuation in currency exchange rates, market illiquidity, price volatility,
high trading costs, difficulties in settlement, regulations on stock exchanges,
limits on foreign ownership, less stringent accounting, reporting and disclosure
requirements, and other considerations. In the past, equity and debt instruments
of foreign markets have had more frequent and larger price changes than those of
U.S. markets.
o Emerging Markets Risk. Investments in a country that is still
relatively underdeveloped involves exposure to economic structures
that are generally less diverse and mature than in the U.S. and to
political and legal systems which may be less stable. In the past,
markets of developing countries have had more frequent and larger
price changes than those of developed countries.
o Political Risk. Political risk includes a greater potential for
revolts, and the taking of assets by governments. For example, a New
Fund may invest in Eastern Europe and former states of the Soviet
Union. These countries were under communist systems that took control
of private industry. This could occur again in this region or others
in
21
which a New Fund may invest, in which case the New Fund may lose all
of part of its investment in that country's issuers.
THE PROSPOSED REORGANIZATION
CONSIDERATION OF THE PROPOSED REORGANIZATION BY THE TOUCHSTONE BOARD
The Board of Trustees of Touchstone Series Trust, including a majority of
the Trustees who are not interested persons of Touchstone Series Trust,
Countrywide Strategic Trust, Touchstone Advisors, Fort Washington Investment
Advisors, Countrywide Investments or any affiliated person of these entities,
has unanimously approved the Plan and determined that the reorganization is in
the best interests of each Touchstone Fund and the interests of the existing
shareholders of each Touchstone Fund will not be diluted as a result of the
reorganization. The Board of Trustees of Touchstone Series Trust considered the
following factors in its review of the reorganization:
o The investment objectives and principal investment strategies of the
acquiring New Fund will be identical or substantially similar to those
of the acquired Touchstone Fund.
o The projected expense ratio of the acquiring New Fund will be the same
as or lower than the expense ratio of the acquired Touchstone Fund.
o The investment advisory agreement and sub-advisory agreement of the
acquiring New Fund will be substantially similar to those of the
acquired Touchstone Fund.
o The reorganization will not result in any tax consequences to the
existing shareholders of the Touchstone Funds.
o The costs of the reorganization will be paid by Touchstone Advisors or
its affiliates.
The Board also considered that the current sub-advisors for the Touchstone
Emerging Growth Fund, the Touchstone International Equity Fund and the
Touchstone Value Plus Fund will serve as the sub-advisors to the New Emerging
Growth Fund, the New International Equity Fund and the New Value Plus Fund.
In addition, the Board considered the representation made by
representatives of Touchstone Advisors and Countrywide Investments that the
consolidation of the Touchstone and Countrywide complexes may result in
operating efficiencies and permit a more focused marketing strategy resulting in
the greater likelihood of asset growth. Management representatives explained to
the Board members that there are certain duplicate costs associated with
maintaining 4 separate investment companies and similar funds, including
separate audit fees and state filing fees. Combining the Touchstone and the
Countrywide complexes and eliminating similar funds should eliminate these
duplicate costs.
The combination will also permit each remaining investment company to focus
on a specific market (equity funds, taxable fixed income funds and tax-free
fixed income funds). This focus and broader selection of funds in the combined
complex may increase the opportunity for
22
future asset growth. Merging duplicate funds will avoid confusion among current
and potential shareholders and could result in a fund with more assets. Asset
growth could enable a fund to obtain economies of scale by spreading certain
expenses over a larger asset base and by reaching asset breakpoints in the rate
of certain fees, which may result in an overall lower expense ratio for the
fund. There can be no assurance, however, that asset growth, economies of scale
or lower expense ratios will be achieved.
The Board of Trustees also considered alternatives to the reorganization,
including maintaining the current structure. In addition, the Board of Trustees
considered the proposed reorganization of the Touchstone Funds in the context of
management's stated goal of consolidating and simplifying the Touchstone and
Countrywide mutual fund complexes. The Board recognized that, although the
reorganization of the Touchstone Funds potentially could benefit Touchstone
Advisors and its affiliates, it should also benefit shareholders by facilitating
increased operational efficiencies and more focused marketing strategies.
AGREEMENT AND PLAN OF REORGANIZATION
The terms and conditions under which the proposed reorganization will be
completed are set forth in the Agreement and Plan of Reorganization. Significant
provisions of the Plan are summarized below. This summary is qualified in its
entirety by reference to the Plan, a copy of which is attached as Appendix A to
the Proxy Statement/Prospectus. Unless defined in this Proxy
Statement/Prospectus, a defined term used in this section has the same meaning
as when it is used in the Plan.
Before the Effective Time of the reorganization, Countrywide Strategic
Trust will establish the New Funds by amending its Declaration of Trust and
adding 3 new series of shares. As of the Effective Time of the reorganization,
each Touchstone Fund will transfer all of its assets, subject to liabilities, to
the applicable New Fund in exchange solely for shares of the New Fund. The
shares of the New Fund will be deemed to be distributed immediately on a pro
rata basis to the shareholders of the applicable Touchstone Fund.
It is anticipated that the Effective Time of the reorganization will be
immediately after the close of business on April 28, 2000 (the last business day
of the month), if all conditions of the Plan are fulfilled or waived. The date
of the Effective Time may be extended to a later date by the Board of Trustees
of Touchstone Series Trust and the Board of Trustees of Countrywide Strategic
Trust.
The assets of each Touchstone Fund to be acquired in the reorganization
will include all property, including without limitation, all cash, cash
equivalents, securities, commodities and futures interests, receivables
(including interest or dividends receivable), any claims or rights of action or
rights to register shares under applicable securities laws, and other property
owned by the Touchstone Fund and any deferred or prepaid expenses shown as an
asset on the books of the Touchstone Fund at the Effective Time, all of which
are consistent with the investment limitations of the acquiring New Fund. Each
acquiring New Fund will assume from the acquired Touchstone Fund or Touchstone
Funds all liabilities, expenses, costs, charges and reserves of the acquired
Touchstone Fund or Touchstone Funds of whatever kind or nature, provided that
each
23
acquired Touchstone Fund utilized its best efforts to discharge all of its known
debts, liabilities, obligations and duties before the Effective Time. In
exchange for all of the assets and liabilities of the acquired Touchstone Fund
or Touchstone Funds, the acquiring New Fund will deliver shares of the acquiring
New Fund to the acquired Touchstone Fund or Touchstone Funds. The acquired
Touchstone Fund will deliver the shares of the acquiring New Fund to the
shareholders of the acquired Touchstone Fund in exchange for their shares of the
acquired Touchstone Fund.
The value of the assets and liabilities of each acquired Touchstone Fund
will be determined as of the Effective Time in accordance with the policies and
procedures set forth in the prospectus of Touchstone Series Trust. The value of
the shares of the acquiring New Fund to be issued in exchange for the net assets
of the acquired Touchstone Fund will be equal to the value of the shares of the
acquired Touchstone Fund outstanding as of the Effective Time.
As soon as practicable after the Closing Date, each Touchstone Fund will
liquidate and distribute pro rata to its shareholders of record the shares of
the corresponding New Fund received by the Touchstone Fund. The liquidation and
distribution will be accomplished by opening accounts on the books of
Countrywide Strategic Trust in the names of shareholders of each Touchstone Fund
and by transferring the shares of each New Fund credited to the account of each
Touchstone Fund on the books of Countrywide Strategic Trust. The value of the
shares transferred to each shareholder's account will be equal to the value of
the shares of each Touchstone Fund held by the shareholder as of the Effective
Time. Fractional shares of each New Fund will be rounded to the nearest
thousandth of a share.
Any transfer of taxes payable upon issuance of the shares of each New Fund
in a name other than the name of the registered holder of the shares on the
books of each Touchstone Fund as of that time must be paid by the person to whom
such shares are to be issued as a condition of the transfer. Any reporting
responsibility of Touchstone Series Trust with respect to each Touchstone Fund
will continue to be the responsibility of Touchstone Series Trust up to and
including the Effective Time and such later date on which each Touchstone Fund
is liquidated and Touchstone Series Trust is dissolved.
Conditions of the closing of the reorganization include a condition that
each of Touchstone Series Trust and Countrywide Strategic Trust must receive an
opinion from Frost & Jacobs LLP regarding certain tax aspects of the
reorganization (see "Tax Considerations") and an order from the Commission to
permit them to implement the proposed reorganization (see "The Proposed
Reorganization--Section 17(b) Exemptive Order").
The Plan may be terminated and the reorganization abandoned at any time,
before or after approval by the shareholders of the Touchstone Funds, prior to
the Closing Date. In addition, the Plan may be amended in any mutually agreeable
manner, except that no amendment may be made subsequent to the special meeting
which will detrimentally affect the value of the shares of each New Fund to be
distributed.
Touchstone Advisors and/or its affiliates will pay the costs of the
reorganization, including legal, accounting and other professional fees and the
cost of soliciting proxies for the
24
special meeting (consisting principally of printing and mailing expenses). The
total estimated costs for the proposed reorganization are approximately
$375,000.
SECTION 17(b) EXEMPTIVE ORDER
Touchstone Series Trust, Countrywide Strategic Trust and Touchstone
Advisors (the "Applicants") have submitted an application to the Securities and
Exchange Commission for an order, pursuant to Section 17(b) of the Investment
Company Act of 1940, exempting the Applicants from the provisions of Section
17(a) of the Investment Company Act of 1940 to permit them to implement the
proposed reorganization. Section 17(a) generally prohibits any affiliated
person, or any affiliated person of an affiliated person, of a registered
investment company, acting as principal, from knowingly purchasing any security
from, or selling any security to, the investment company. The proposed transfer
of assets from a Touchstone Fund to a New Fund in exchange for shares of the New
Fund may be deemed to be a sale of the Touchstone Fund's portfolio securities to
the New Fund. Due to certain affiliations among the Applicants, Section 17(a)
may be applicable to the proposed reorganization and may prohibit the Applicants
from implementing the proposed reorganization unless the Applicants obtain the
requested order. Section 17(b) permits the Commission to issue an order of
exemption if the applicable statutory standards are met. In the application, the
Applicants have asserted that they meet the applicable statutory standards
because (1) the terms of the proposed reorganization are reasonable and fair and
do not involve overreaching on the part of any person concerned and (2) the
proposed reorganization will be consistent with the policies of Touchstone
Series Trust and the policies of Countrywide Strategic Trust.
If the Commission does not issue the requested order, the Boards of
Trustees of Touchstone Series Trust and Countrywide Strategic Trust will take
such actions as they deem appropriate and in the best interests of the
shareholders of the relevant trust. These actions will include the consideration
of other options, such as restructuring the proposed reorganization,
implementing other strategies to consolidate the Touchstone and Countrywide
mutual fund complexes, or maintaining the current structure. The reorganization
as proposed will not be implemented if the Commission does not issue the
requested order.
DIVIDENDS AND OTHER DISTRIBUTIONS
Each Touchstone Fund distributes substantially all of its net investment
income and capital gains to shareholders each year. On or before the Closing
Date, each Touchstone Fund may declare additional dividends or other
distributions in order to distribute substantially all of its investment company
taxable income and net realized capital gain.
TAX CONSIDERATIONS
It is a condition to the consummation of the reorganization that each of
Touchstone Series Trust and Countrywide Strategic Trust must receive an opinion
from Frost & Jacobs LLP, counsel to Touchstone Series Trust and Countrywide
Strategic Trust, to the effect that, with respect to the reorganization as it
affects each Touchstone Fund or each New Fund, as the case may be:
25
o the reorganization will constitute a reorganization within the meaning
of Section 368(a)(1)(C) of the Code
o no gain or loss will be recognized by any of the Touchstone Funds or
New Funds upon the transfer of assets of each Touchstone Fund in
exchange for shares of the acquiring New Fund
o no gain or loss will be recognized by shareholders of any Touchstone
Fund upon liquidation of the Touchstone Fund and the distribution of
shares of the acquiring New Fund constructively in exchange for shares
of the acquired Touchstone Fund
o each New Fund's basis in the assets of the acquired Touchstone Fund
received pursuant to the reorganization will be the same as the basis
of those assets in the hands of the Touchstone Fund immediately prior
to the exchange, and the holding period of those assets in the hands
of the New Fund will include the holding period of the Touchstone Fund
o the basis of shares of a New Fund received by each shareholder of the
acquired Touchstone Fund pursuant to the reorganization will be the
same as the shareholder's basis in shares of the Touchstone Fund held
by the shareholder immediately prior to the exchange
o the holding period of shares of each New Fund received by each
shareholder of the acquired Touchstone Fund pursuant to the
reorganization will include the shareholder's holding period of shares
of the Touchstone Fund held immediately prior to the exchange,
provided that the shares of the Touchstone Fund were held as capital
assets on the date of the reorganization.
Touchstone Series Trust and Countrywide Strategic Trust are not seeking a
tax ruling from the Internal Revenue Service but are acting in reliance upon the
opinion of counsel discussed above. That opinion is not binding on the IRS and
does not preclude the IRS from adopting a contrary position. This discussion
relates only to the federal income tax consequences of the reorganization.
Shareholders should consult their tax advisors about any state and local tax
consequences of the reorganization.
CAPITALIZATION
The following tables show the capitalization of each Touchstone Fund as of
December 31, 1999, and the pro forma capitalization of each New Fund as of that
date, giving effect to the reorganization.
------------------------------ ------------------------------
Class A Class C
------------------------------ ------------------------------
Touchstone New Touchstone New
Emerging Emerging Emerging Emerging
Growth Fund Growth Fund Growth Fund Growth Fund
----------- ----------- ----------- -----------
Net Assets (in thousands)................. $10,743 $10,743 $3,964 $3,964
Net Asset Value per Share................. $16.96 $16.96 $16.29 $16.29
Shares Outstanding (in thousands)......... 634 634 243 243
26
------------------------------ ------------------------------
Class A Class C
------------------------------ ------------------------------
Touchstone New Touchstone New
International International International International
Equity Fund Equity Fund Equity Fund Equity Fund
----------- ----------- ----------- -----------
Net Assets (in thousands)................. $9,043 $9,043 $6,475 $6,475
Net Asset Value per Share................. $16.52 $16.52 $15.92 $15.92
Shares Outstanding (in thousands)......... 547 547 407 407
---------------------------------------------------
Class A
---------------------------------------------------
Touchstone Touchstone New
Value Growth & Value
Plus Fund Income Fund Plus Fund
--------- ----------- ---------
Net Assets (in thousands)................. $31,808 $12,574 $65,830*
Net Asset Value per Share................. $11.77 $14.44 $11.77
Shares Outstanding (in thousands)......... 2,703 871 5,593
---------------------------------------------------
Class C
---------------------------------------------------
Touchstone Touchstone New
Value Growth & Value
Plus Fund Income Fund Plus Fund
--------- ----------- ---------
Net Assets (in thousands)................. $548 $2,109 $2,657
Net Asset Value per Share................. $11.48 $13.25 $11.48
Shares Outstanding (in thousands)......... 48 159 231
* The pro forma capitalization reflects the anticipated investment of
approximately $21,448,253 by an affiliated person of Touchstone Advisors
prior to the reorganization.
On December 31, 1999, there were 1,074,730 Class Y shares of Touchstone
Growth & Income Fund issued and outstanding with a net asset value per share of
$19.96 and net assets of $21,448,253. The Class Y shares will be redeemed prior
to the reorganization, so New Value Plus Fund will issue no Class Y shares.
DESCRIPTION OF SHARES OF NEW FUNDS
Each share of a New Fund represents an equal proportionate interest in the
assets and liabilities belonging to the New Fund with each other share of the
New Fund. Each share of a new Fund is entitled to the dividends and
distributions belonging to the Fund as are declared by the Trustees of
Countrywide Strategic Trust.
The Trustees have the authority from time to time to divide or combine the
shares of any New Fund into a greater or lesser number of shares of the New Fund
so long as the proportionate beneficial interest in the assets belonging to the
New Fund and the rights of shares of any other fund of the Trust are in no way
affected. The Board of Trustees may classify or reclassify the shares of a New
Fund into additional classes of shares at a future date.
27
The shares of the New Funds do not have cumulative voting rights or any
preemptive or conversion rights.
Shares of each Fund of Countrywide Strategic Trust have equal voting
rights. Each Fund votes separately on matters submitted to a vote of the
shareholders except in matters where a vote of all Funds of the Trust in the
aggregate is required by the Investment Company Act of 1940 or otherwise. Each
class of shares of a Fund of Countrywide Strategic Trust votes separately on
matters relating to its plan of distribution pursuant to Rule 12b-1. When
matters are submitted to shareholders for a vote, each shareholder is entitled
to one vote for each full share owned and fractional votes for fractional shares
owned.
Any general expenses of Countrywide Strategic Trust not readily
identifiable as belonging to a particular fund are allocated by or under the
direction of the Trustees in the manner determined by the Trustees to be fair
and equitable. Generally, the Trustees allocate these expenses on the basis of
relative net assets or number of shareholders.
No shareholder of a New Fund is liable to further calls or to assessment by
Countrywide Strategic Trust without his express consent. Under Massachusetts
law, under certain circumstances, shareholders of a Massachusetts business trust
could be deemed to have the same type of personal liability for the obligations
of the Trust as does a partner of a partnership. However, numerous investment
companies registered under the Investment Company Act of 1940 have been formed
as Massachusetts business trusts and management is not aware of an instance
where this result has occurred.
In addition, the Declaration of Trust of Countrywide Strategic Trust
disclaims shareholder liability for its acts or obligations and requires that
notice of this disclaimer be given in each agreement, obligation or instrument
entered into or executed by the Trust or its Trustees. The Declaration of Trust
also provides for the indemnification out of the Trust's property for all losses
and expenses of any shareholder held personally liable for the Trust's
obligations. Moreover, the Declaration of Trust provides that the Trust will,
upon request, assume the defense of any claim made against any shareholder for
any act or obligation of the Trust and satisfy any judgment against the
shareholder.
As a result, and particularly as the assets of Countrywide Strategic Trust
are readily marketable and ordinarily substantially exceed liabilities,
management believes that the risk of shareholder liability is slight and limited
to circumstances in which the Trust itself will be unable to meet its
obligations. Management believes that, in view of the factors discussed above,
the risk of personal liability is remote.
Additional information about shares of the New Funds is contained in the
following section of this Proxy Statement/Prospectus.
28
COMPARISON OF SHAREHOLDER RIGHTS
General
Each of the Touchstone Funds is a series of Touchstone Series Trust, which
is a Massachusetts business trust, formed on February 7, 1994. Each New Fund
will be a series of Countrywide Strategic Trust, also a Massachusetts business
trust, which was formed November 18, 1982. Each of Touchstone Series Trust and
Countrywide Strategic Trust is registered under the Investment Company Act of
1940 as an open-end management company and is a series investment company as
defined by Rule 18f-2 under the Act. Each of Touchstone Series Trust and
Countrywide Strategic Trust is governed by its Declaration of Trust, By-laws and
Board of Trustees, as well as by applicable state and federal law.
The Board of Trustees for each of Touchstone Series Trust and Countrywide
Strategic Trust has authorized the issuance of several series and has the
authority under its respective Declaration of Trust to issue additional series
in the future. The Board of Trustees of Touchstone Series Trust has authorized
the issuance of 8 series, each representing shares in one of 8 separate
portfolios. The Board of Trustees of Countrywide Strategic Trust has authorized
the issuance of the 3 New Funds and 4 other series of shares, each representing
shares in one of 7 separate portfolios.
The assets of each portfolio are segregated and separately managed and the
interest of a shareholder is in the assets of the portfolio in which he or she
holds shares. In both the Touchstone Funds and the New Funds, Class A shares and
Class C shares represent interests in the assets of the applicable Fund and have
identical voting, dividend, liquidation, and other rights on the same terms and
conditions except that (1) expenses related to the distribution of each class of
shares are borne solely by that class and (2) each class of shares has exclusive
voting rights with respect to provisions of the Rule 12b-1 distribution plan
pertaining to that class.
TRUSTEES
The By-laws of Touchstone Series Trust and the Bylaws of Countrywide
Strategic Trust provide that the term of office of each Trustee shall be from
the time of his or her election until his or her successor is elected and
qualified or until his or her earlier resignation or removal. Trustees of both
Countrywide Strategic Trust and Touchstone Series Trust may be removed with or
without cause at any meeting of shareholders by the affirmative vote of at least
two thirds of the shares outstanding. A meeting for the removal of a Trustee of
Countrywide Strategic Trust will be held upon the request of the holders of at
least 10% of the voting power of that trust.
Vacancies on the Board of either Touchstone Series Trust or Countrywide
Strategic Trust may be filled by the Trustees remaining in office; provided,
however, a meeting of shareholders will be required for the purpose of electing
additional Trustees whenever fewer than a majority of the Trustees then in
office were elected by shareholders.
29
VOTING RIGHTS
Neither Countrywide Strategic Trust nor Touchstone Series Trust holds a
meeting of shareholders annually. Neither trust typically holds a meeting of
shareholders for the purpose of electing Trustees.
Countrywide Strategic Trust will hold a meeting to elect Trustees when (a)
less than a majority of the Trustees holding office in Countrywide Strategic
Trust have been elected by shareholders or (b) upon a written request by
shareholders of Countrywide Strategic Trust holding not less than 10% of the
shares outstanding. A meeting of shareholders of Countrywide Strategic Trust,
for any purpose, may be called upon the written request of shareholders holding
at least 25% of the outstanding shares entitled to vote at such meeting or by
the Board of Trustees.
Special meetings of shareholders of Touchstone Series Trust, for any
purpose, may be called upon the request of holders of at least 10% of the shares
or by the Board of Trustees.
On each matter submitted to a vote of the shareholders of either
Countrywide Strategic Trust or Touchstone Series Trust, each shareholder is
entitled to one vote for each whole share owned and a proportionate, fractional
vote for each fractional share owned.
With respect to Countrywide Strategic Trust, the affirmative vote of the
majority of votes validly cast in person or by proxy at a shareholder meeting at
which a quorum is present decides any questions except when a different vote is
required or permitted by any provision of the Investment Company Act of 1940 or
other applicable law or as may otherwise be set forth in the applicable
organizational documents. With respect to Touchstone Series Trust, the required
shareholder vote, provided that a quorum is present, varies depending on the
provision as set forth in the organizational documents, subject to specific
requirements under any provision of the Act or other applicable law. Under
either trust's Declaration of Trust, a shareholder vote may be submitted to the
holders of one or more but not all portfolios or classes.
LIQUIDATION OR DISSOLUTION
In the event of the liquidation or dissolution of any of the New Funds or
the Touchstone Funds, the shareholders of the fund are entitled to receive when,
and as declared by the Trustees, the excess of the assets belonging to the fund
over the fund's liabilities. In either case, the assets distributed to
shareholders of the fund will be distributed among the shareholders in
proportion to the number of shares of the fund held by them and recorded on the
fund's books.
INDEMNIFICATION OF TRUSTEES AND OFFICERS
The Declaration of Trust of Countrywide Strategic Trust provides that each
individual who is a present or former Trustee or officer of Countrywide
Strategic Trust who, by reason of his or her position was, is, or is threatened
to be made a party to any threatened, pending or completed action shall be
indemnified against all liabilities in addition to and not exclusive of the
other rights applicable to such an individual. This indemnification provision
does not protect any
30
person from any liability arising out of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his or
her office. In addition, the Declaration of Trust of Countrywide Strategic Trust
expressly provides for the advancement of expenses upon the undertaking by or on
behalf of the individual seeking indemnification to repay the advance unless it
is ultimately determined that the individual is entitled to indemnification.
The Declaration of Trust of the Touchstone Series Trust provides that each
Trustee and officer shall be indemnified against liabilities and expenses
incurred in connection with litigation in which they may be involved because of
their positions with the Touchstone Series Trust, to the fullest extent
permitted by law and the Investment Company Act of 1940, except for such
person's willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office.
SHAREHOLDER LIABILITY
Under each trust's Declaration of Trust, the shareholders of the
Countrywide Strategic Trust and Touchstone Series Trust do not have personal
liability for the acts and obligations of any of the New Funds or the Touchstone
Funds, respectively.
Shares of each of the New Funds issued to the shareholders of the
Touchstone Funds in the reorganization will be fully paid and nonassessable when
issued, transferable without restrictions and will have no preemptive rights.
RIGHTS OF INSPECTION
The By-laws of the Touchstone Series Trust and the Declaration of Trust of
the Countrywide Strategic Trust afford shareholders the same inspection rights
as provided under the Massachusetts Business Corporate Law. Massachusetts law
permits any shareholder of a corporation or any agent of the shareholder to
inspect and copy, during the corporation's usual business hours, the
corporation's By-laws, minutes of shareholder proceedings, annual statements of
the corporation's affairs and voting trust agreements on file at its principal
office.
The discussion in "Description of Shares of New Funds" and "Comparison of
Shareholder Rights" is only a summary of certain information with respect to the
New Funds and the Touchstone Funds. It is not a complete description of the
documents cited. Shareholders should refer to the provisions of the governing
documents of each trust and Massachusetts law for a more thorough description.
VOTING INFORMATION
SOLICITATION OF PROXIES
We are furnishing this Proxy Statement/Prospectus to the shareholders of
each Touchstone Fund in connection with the solicitation of proxies by the Board
of Trustees of Touchstone Series Trust. The proxies will be used at a special
meeting of shareholders to be held
31
on Wednesday, April 19, 2000, at 10:30 a.m. Eastern time, at 312 Walnut Street,
Cincinnati, Ohio 45202.
QUORUM
The presence at the special meeting, in person or by proxy, of shareholders
representing a majority of all shares of a Touchstone Fund entitled to vote on a
proposal constitutes a quorum for the transaction of business by the Touchstone
Fund.
VOTING PROCEDURES
VOTING OF PROXIES. Shares represented by properly executed proxies received
by Touchstone Series Trust will be voted at the special meeting and any
adjournment of the meeting in accordance with the voting instructions provided
in the proxies for each applicable proposal. If no instructions are specified on
a signed proxy received from a shareholder, the shares represented by the proxy
will be voted for each applicable proposal.
BROKER NON-VOTES. Broker non-votes are proxies from brokers or other
nominee owners indicating that the brokers or nominee owners have not received
instructions from the beneficial owners or other persons entitled to vote the
shares as to a matter with respect to which the brokers or other nominee owners
do not have discretionary power to vote. In tabulating votes on any matter,
broker non-votes will be counted as represented for purposes of determining the
presence or absence of a quorum. Therefore, broker non-votes will have the
effect of a vote against the applicable proposal.
ABSTENTIONS. Abstentions will also be counted as represented for purposes
of determining the presence or absence of a quorum. Therefore, abstentions will
have the effect of a negative vote.
REVOCATION OF YOUR PROXY. You may revoke a proxy that you have delivered to
Touchstone Series Trust at any time before the voting of the proxy. You may
revoke that proxy by filing a written notice of revocation with the Secretary of
Touchstone Series Trust or by delivering a duly executed proxy dated after the
proxy you previously delivered.
SHAREHOLDERS OF RECORD. Shareholders of record at the close of business on
February 28, 2000 will be entitled to vote on each applicable proposal. Each
full share of a Touchstone Fund is entitled to one vote, with proportional
voting for fractional shares. The number of shares of each Touchstone Fund
outstanding on February 28, 2000 is set forth below.
- --------------------------------------------------------------------------------
Number of Shares Outstanding
--------------------------------------
Touchstone Fund Class A Class C Class Y
- --------------------------------------------------------------------------------
Touchstone Emerging Growth Fund.......... 624,759 239,673 N/A
Touchstone International Equity Fund..... 561,179 405,682 N/A
Touchstone Value Plus Fund............... 2,707,815 48,578 N/A
Touchstone Growth & Income Fund.......... 746,012 153,551 1,074,730
32
VOTE REQUIRED FOR APPROVAL OF REORGANIZATION PLAN. The Agreement and Plan
of Reorganization and the transactions contemplated by the Agreement will be
implemented with respect to a Touchstone Fund only if "a majority of the
outstanding voting securities" of the Touchstone Fund approve the Agreement. A
"majority of the outstanding voting securities" means the lesser of (1) 67% or
more of shares of a Touchstone Fund present at a meeting, if shareholders who
are the owners of more than 50% of the Touchstone Fund's shares then outstanding
are present in person or by proxy, or (2) more than 50% of the outstanding
shares of a Touchstone Fund.
The merger of Touchstone Value Plus Fund into New Value Plus Fund and the
merger of Touchstone Growth & Income Fund into New Value Plus Fund are linked.
The merger of Touchstone Value Plus Fund into New Value Plus Fund will be
completed only if the merger of Touchstone Growth & Income Fund into New Value
Plus Fund can also be completed. Likewise, the merger of Touchstone Growth &
Income Fund into New Value Plus Fund will be completed only if the merger of
Touchstone Value Plus Fund into New Value Plus Fund can also be completed.
The merger involving Touchstone Emerging Growth Fund and the merger
involving Touchstone International Equity Fund are not linked to the merger of
any other Touchstone Fund.
ADJOURNMENT OF THE SPECIAL MEETING. If sufficient votes in favor of a
proposal are not received by the time scheduled for the special meeting, the
persons named as proxies may propose one or more adjournments of the special
meeting to permit additional solicitation of proxies with respect to the
proposal. The special meeting may also be adjourned if certain issues under the
Investment Company Act of 1940 have not been resolved to the mutual satisfaction
of Touchstone Series Trust and Countrywide Strategic Trust by the scheduled time
of the special meeting.
Any adjournment will require the affirmative vote of a majority of the
votes cast on the question in person or by proxy at the session of the special
meeting to be adjourned. The persons named as proxies will vote proxies that
they are entitled to vote in favor of the proposal in favor of the adjournment.
The persons named as proxies will vote proxies that they are entitled to vote
against the proposal against the adjournment.
SHARE OWNERSHIP
AFFILIATED SHAREHOLDERS AND 5% SHAREHOLDERS
The following table provides information about the share ownership of
certain affiliated shareholders of each Touchstone Fund as of February 28, 2000,
and pro forma information about the share ownership of these shareholders, after
giving effect to the reorganization. The table shows:
33
o the number of shares of each Touchstone Fund owned of record on
February 28, 2000 by Western-Southern Life Assurance Company ("WSLAC")
and The Western and Southern Life Insurance Company ("WSLIC"), each of
which is an affiliate of Touchstone Advisors, Fort Washington
Investment Advisors and Countrywide Investments
o the names and addresses of other persons ("5% Shareholders") who owned
of record 5% or more of the outstanding shares of a Touchstone Fund on
February 28, 2000
o the pro forma ownership of WSLAC, WSLIC and the 5% Shareholders as of
February 28, 2000, after giving effect to the mergers
The percentages in the table are based on the number of shares outstanding
in each class of each Touchstone Fund as of February 28, 2000.
Touchstone Funds New Funds**
-----------------------------------------------------------------------
Name and Address* Shares % Shares %
- -----------------------------------------------------------------------------------------------------
Touchstone Emerging Growth Class A New Emerging Growth Class A
-----------------------------------------------------------------------
WSLAC 159,734.05 25.57% 159,734.05 25.57%
WSLIC 106,683.66 17.08% 106,683.66 17.08%
Highlands Company of 68,563.02 10.97% 68,563.02 10.97%
Delaware
c/o Karen L. Clark
Smith Fought Bunker & Hume
PC
2301 Mitchell Park Drive
Petoskey, MI 49770-9600
Fifth Third Bank 34,170.04 5.47% 34,170.04 5.47%
Agent for the Columbus Life
Insurance Agents
P.O. Box 630074
Cincinnati, OH 45263-0001
Touchstone Emerging Growth Class C New Emerging Growth Class C
-----------------------------------------------------------------------
WSLAC 158,155.02 65.99% 158,155.02 65.99%
Touchstone International Equity Class A New International Equity Class A
----------------------------------------------------------------------------
WSLAC 311,523.96 55.51% 311,523.96 55.51%
Fifth Third Bank 30,930.49 5.51% 30,930.49 5.51%
Agent for the Columbus Life
Insurance Agents
P.O. Box 630074
Cincinnati, OH 45263-0001
WSLIC 27,239.92 4.85% 27,239.92 4.85%
Touchstone International Equity Class C New International Equity Class C
----------------------------------------------------------------------------
WSLAC 310,306.94 76.49% 310,306.94 76.49%
34
Touchstone Value Plus Class A New Value Plus Class A
-----------------------------------------------------------------------
WSLIC 2,600,598.42 96.04% 2,600,598.42 75.30%
Touchstone Value Plus Class C New Value Plus Class C
-----------------------------------------------------------------------
WSLIC 25,525.07 52.54% 25,525.07 12.63%
NFSC FEBO # 12,230.69 25.18% 12,230.69 6.05%
NFSC/FMTC IRA Rollover
FBO Richard Gum
210 Gull Road
Ocean City, NJ 08226-4529
Touchstone Growth & Income Class A New Value Plus Class A
-----------------------------------------------------------------------
WSLIC 427,307.37 57.28% 427,307.37 12.37%
WSLAC 14,933.40 2.00% 14,933.40 0.43%
Touchstone Growth & Income Class C New Value Plus Class C
-----------------------------------------------------------------------
WSLAC 15,549.14 10.13% 15,549.14 7.69%
Sparrow Construction Co. Inc. 10,217.02 6.65% 10,217.02 5.05%
PO Box 33609
3815 Hillsborough Street
Raleigh, NC 27607-5236
Touchstone Growth & Income Class Y New Value Plus Class Y
-----------------------------------------------------------------------
WSLIC Separate Account A++ 1,074,730 100% Not Applicable
*The address of WSLAC and WSLIC is 400 Broadway, Cincinnati, OH 45202. Each of
WSLAC and WSLIC is organized under the laws of the State of Ohio.
**Touchstone Advisors or one of its affiliates will be the initial shareholder
of each New Fund and will own 100% of the outstanding shares of each New Fund
immediately before the reorganization is effected.
++ The Western and Southern Life Insurance Company Separate Account A is the
only shareholder of Class Y shares of Touchstone Growth & Income Fund. This
shareholder has informed Touchstone Advisors that it intends to redeem its
shares of the Touchstone Growth & Income Fund before the completion of the
reorganization. Therefore, no Class Y shares of the New Value Plus Fund will be
issued in the reorganization.
SHARE OWNERSHIP OF TRUSTEES AND OFFICERS
The following table shows information about the record ownership of shares
of the Touchstone Funds by the Trustees and officers of Touchstone Series Trust
and the Trustees and officers of Countrywide Strategic Trust as a group on
February 28, 2000.
35
Class A Class C
--------------------------------------------
Fund Shares % Shares %
- --------------------------------------------------------------------------------
Touchstone Emerging 60,540.28 9.69% 245.46 0.10%
Growth Fund
Touchstone 40,930.24 7.29% 254.68 0.06%
International Equity
Fund
Touchstone Value Plus 38,304.80 1.41% 31.15 0.06%
Fund
Touchstone Growth & 200,961.21 26.94% 507.81 0.33%
Income Fund
VOTING BY AFFILIATED PERSONS
Western-Southern Life Assurance Company or The Western and Southern Life
Insurance Company, each an affiliate of Touchstone Advisors, Fort Washington
Investment Advisors and Countrywide Investments, owns more than 5% of the
outstanding shares of each Touchstone Fund. Therefore, Western-Southern Life
Assurance Company or The Western and Southern Life Insurance Company arguably
could have the ability to influence the proposed reorganization based on its
ownership of shares of the Touchstone Funds.
To address the policy concerns underlying Section 17(a) of the Investment
Company Act of 1940 and Rule 17a-8 promulgated under the Act with respect to the
influence of persons that are affiliated persons of an investment company due to
share ownership and are also affiliated persons of the investment advisor to the
investment company, each of Western-Southern Life Assurance Company and The
Western and Southern Life Insurance Company has agreed to vote the shares of
each Touchstone Fund that it owns in the same proportion as the vote of all
other shareholders of the relevant Touchstone Fund. This method of voting will
effectively allow the shareholders, other than Western-Southern Life Assurance
Company and The Western and Southern Life Insurance Company, to approve or
disapprove the proposed reorganization and ensures that neither Western-Southern
Life Assurance Company nor The Western and Southern Life Insurance Company
improperly influences Touchstone Series Trust, any Touchstone Fund or the terms
of the proposed reorganization.
PROXY SOLICITATION
Touchstone Series Trust has retained Management Information Services Corp.
("MIS") in connection with the entire reorganization, which includes the
proposed mergers set forth in this Proxy Statement/Prospectus. MIS is
responsible for printing proxy cards, mailing proxy material to shareholders,
soliciting brokers, custodians, nominees and fiduciaries, tabulating the
returned proxies and performing other proxy solicitation services. The
anticipated cost of these services for the entire reorganization is
approximately $85,000, which includes costs related to this Proxy Statement/
Prospectus, and will be paid by Touchstone Advisors or an affiliate thereof.
In connection with the entire reorganization, Touchstone Advisors, as
necessary, will engage D.F. King & Co., Inc. to assist with proxy solicitation
at a projected total fee of $65,000 plus reasonable expenses, which fee includes
the costs incurred in connection with this Proxy Statement/Prospectus. The cost
of these services will be paid by Touchstone Advisors or an affiliate thereof.
36
Touchstone Advisors or its affiliates will pay the cost of the proxy
solicitation, the special meeting, the reorganization of the Touchstone Funds
and the consolidation of the Touchstone and Countrywide complexes. Touchstone
Advisors or its affiliates will also reimburse brokerage firms and others for
their reasonable expenses in forwarding solicitation material to the beneficial
owners of shares of the Touchstone Funds.
In addition to this solicitation of proxies by use of the mails, employees
of Touchstone Advisors or its affiliates may solicit proxies personally or by
telephone.
ADDITIONAL INFORMATION
SHAREHOLDER INQUIRIES
If you have questions about the proposed reorganization or would like to
request a copy of any prospectus, statement of additional information, annual
report, semi-annual report or other document mentioned in this Proxy
Statement/Prospectus, please contact us at 311 Pike Street, Cincinnati, OH 45202
or call 800-669-2796 to talk to a shareholder service representative.
ADDITIONAL INFORMATION ABOUT NEW FUNDS
Each New Fund will be a "duplicate" of a Touchstone Fund that is described
in more detail in the prospectus of Touchstone Series Trust dated May 1, 1999
(the "Touchstone Prospectus) that accompanies this Proxy Statement/Prospectus.
The Touchstone Prospectus contains information about the following topics for
each Touchstone Fund in the location indicated. Except as modified in this Proxy
Statement/Prospectus, the information in the Touchstone Prospectus about the
Touchstone Fund will apply to the corresponding New Fund because each New Fund
will be managed in the same manner as the applicable Touchstone Fund.
Topic Location in Touchstone Prospectus
- --------------------------------------------------------------------------------
Investment objectives, principal Touchstone Emerging Growth Fund
investment strategiesand related risks Touchstone International Equity Fund
Touchstone Value Plus Fund
................................................................................
Risk return chart Touchstone Emerging Growth Fund
Touchstone International Equity Fund
Touchstone Value Plus Fund
................................................................................
Investment adviser The Fund's Management
................................................................................
Portfolio manager The Fund's Management
................................................................................
Dividends and distributions Distributions and Taxes
................................................................................
Tax consequences Distributions and Taxes
................................................................................
Financial highlights Financial Highlights
................................................................................
37
Management's discussion of each Touchstone Fund's performance is contained
in the 1999 Annual Report to Shareholders of Touchstone Series Trust that
accompanies this Proxy Statement/Prospectus.
ADDITIONAL INFORMATION ABOUT COUNTRYWIDE STRATEGIC TRUST, TOUCHSTONE FUNDS AND
TOUCHSTONE SERIES TRUST
Additional information about Countrywide Strategic Trust is contained in
the Countrywide Prospectus, which accompanies this Proxy Statement/Prospectus,
and a Statement of Additional Information dated August 1, 1999.
Additional information about the Touchstone Funds and Touchstone Series
Trust is contained in the Touchstone Prospectus, which accompanies this Proxy
Statement/Prospectus, and a Statement of Additional Information dated May 1,
1999.
ACCOMPANYING DOCUMENTS
This Proxy Statement/Prospectus is accompanied by the following documents:
o Prospectus of Touchstone Series Trust (Touchstone Family of Funds)
dated May 1, 1999, as supplemented on July 19, 1999 and March 10, 2000
o Annual Report of Touchstone Series Trust--December 31, 1999
o Prospectus of Countrywide Strategic Trust (Equity Fund and Utility
Fund) dated August 1, 1999, as supplemented on December 1, 1999
o Annual Report of Countrywide Strategic Trust--March 31, 1999
INFORMATION AVAILABLE FROM THE SECURITIES AND EXCHANGE COMMISSION
COUNTRYWIDE STRATEGIC TRUST. Countrywide Strategic Trust has filed with the
Securities and Exchange Commission ("Commission") a Registration Statement on
Form N-14 under the Securities Act of 1933, as amended, with respect to the
shares of New Emerging Growth Fund, New International Equity Fund and New Value
Plus Fund offered by this Prospectus. As permitted by the rules and regulations
of the Commission, this Proxy Statement/Prospectus and the accompanying
Statement of Additional Information omit certain information, exhibits and
undertakings contained in the Registration Statement.
TOUCHSTONE SERIES TRUST AND COUNTRYWIDE STRATEGIC TRUST. Touchstone Series
Trust and Countrywide Strategic Trust are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended and the
Investment Company Act of 1940, as amended, and file reports and other
information with the Commission.
HOW TO OBTAIN INFORMATION FROM THE COMMISSION. You can inspect and copy
reports, proxy statements and other information filed with the Commission at the
Public Reference Facilities of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, as well as the following regional offices: Seven World
Trade Center, 13th Floor, New York, New York 10048; and CitiCorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. You can
38
obtain copies of this material at prescribed rates from the Public Reference
Branch, Office of Consumer Affairs and Information of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
A Statement of Additional Information, dated April 3, 2000, relating to the
proposed reorganization described in this Proxy Statement/Prospectus has been
filed with the Commission and is incorporated by reference herein. You can
obtain a copy of this SAI without charge by writing to Countrywide Strategic
Trust at 312 Walnut Street, Cincinnati OH 45202 or by calling 800-543-0407.
Touchstone Series Trust's current Prospectus and Statement of Additional
Information, both dated May 1, 1999, as supplemented to date, have been filed
with the Commission as part of Post-Effective Amendment No. 11 to its
Registration Statement on Form N-1A (1933 Act File No. 033-75764 and 1940 Act
File No. 811-08380) and are incorporated by reference herein. Any information in
the Post-Effective Amendment that is modified or superseded by information in
this Proxy Statement/Prospectus shall not be deemed to be incorporated by
reference in this Proxy Statement/Prospectus or to be part of this Proxy
Statement/Prospectus.
Countrywide Strategic Trust's current Prospectus and Statement of
Additional Information, both dated August 1, 1999, as supplemented to date, have
been filed with the Commission as part of Post-Effective Amendment No. 38 to its
Registration Statement on Form N-1A (1933 Act File No. 002-80859 and 1940 Act
File No. 811-03651) and are incorporated by reference herein. Any information in
the Post-Effective Amendment that is modified or superseded by information in
this Proxy Statement/Prospectus shall not be deemed to be incorporated by
reference in this Proxy Statement/Prospectus or to be part of this Proxy
Statement/Prospectus.
-------------------------------------------------
All information contained in this Proxy Statement/Prospectus relating to
Touchstone Series Trust and/or the Touchstone Funds has been supplied by
Touchstone Series Trust, and all information relating to Countrywide Strategic
Trust and/or the New Funds has been supplied by Countrywide Strategic Trust.
No person has been authorized to give any information or to make any
representations other than those contained in this Proxy Statement/Prospectus in
connection with the offer contained in this Proxy Statement/Prospectus. You
should not rely on any information or representations other than those contained
in this Proxy Statement/Prospectus or in other filings made by Touchstone Series
Trust or Countrywide Strategic Trust with the Commission. This Proxy
Statement/Prospectus does not constitute an offer to sell securities in any
state or other jurisdiction to any person to whom it would be unlawful to make
an offer.
39
Table of Contents
INTRODUCTION...................................................................1
Fund Mergers...............................................................1
RECOMMENDATION OF THE BOARD OF TRUSTEES........................................2
EXPENSE INFORMATION............................................................3
Fees and Expenses..........................................................3
Notes to Fee and Expense Tables............................................5
Examples--Cost of a $10,000 Investment.....................................6
SUMMARY........................................................................8
Proposed Reorganization of Touchstone Funds................................9
Comparison of Touchstone Emerging Growth Fund to New Emerging Growth
Fund.......................................................................9
Comparison of Touchstone International Equity Fund to New International
Equity Fund...............................................................12
Comparison of Touchstone Value Plus Fund to New Value Plus Fund...........14
Comparison of Touchstone Growth & Income Fund to New Value Plus Fund......16
Comparison of Purchase, Redemption and Exchange Procedures................18
Tax Consequences..........................................................19
Principal Risks of Investing in New Funds.................................20
THE PROSPOSED REORGANIZATION..................................................22
Consideration of the Proposed Reorganization by the Touchstone Board......22
Agreement and Plan of Reorganization......................................23
Section 17(b) Exemptive Order.............................................25
Dividends and Other Distributions.........................................25
TAX CONSIDERATIONS............................................................25
CAPITALIZATION................................................................26
DESCRIPTION OF SHARES OF NEW FUNDS............................................27
COMPARISON OF SHAREHOLDER RIGHTS..............................................29
General...................................................................29
Trustees..................................................................29
Voting Rights.............................................................30
Liquidation or Dissolution................................................30
Indemnification of Trustees and Officers..................................30
Shareholder Liability.....................................................31
Rights of Inspection......................................................31
VOTING INFORMATION............................................................31
Solicitation of Proxies...................................................31
Quorum....................................................................32
Voting Procedures.........................................................32
SHARE OWNERSHIP...............................................................33
Affiliated Shareholders and 5% Shareholders...............................33
Share Ownership of Trustees and Officers..................................35
Voting by Affiliated Persons..............................................36
Proxy Solicitation........................................................36
ADDITIONAL INFORMATION........................................................37
Shareholder Inquiries.....................................................37
Additional Information about New Funds....................................37
Additional Information about Countrywide Strategic Trust, Touchstone
Funds and Touchstone Series Trust.........................................38
Accompanying Documents....................................................38
Information Available from the Securities and Exchange Commission.........38
Incorporation of Certain Documents by Reference...........................39
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "Plan") is made as of this
15th day of February, 2000 by and between Countrywide Strategic Trust
("Strategic Trust") for itself and on behalf of its series which are the subject
of this Plan and are set forth below (hereinafter, collectively the "Acquiring
Funds" or individually an "Acquiring Fund"), and Touchstone Series Trust
("Touchstone Trust ") for itself and on behalf of its series which are the
subject of this Plan and are set forth below (hereinafter, collectively the
"Acquired Funds" or individually an "Acquired Fund").
This Plan governs the proposed issuance of shares of each Acquiring Fund in
exchange for all of the assets and liabilities of the specific Acquired Fund set
forth opposite the name of that Acquiring Fund in the table below.
Acquiring Funds Acquired Funds
--------------- --------------
Countrywide Emerging Growth Fund Touchstone Emerging Growth Fund
Countrywide International Equity Fund Touchstone International Equity Fund
Countrywide Value Plus Fund Touchstone Value Plus Fund
Countrywide Value Plus Fund Touchstone Growth & Income Fund
This Plan is intended to be and is adopted as a plan of reorganization and
liquidation within the meaning of Section 368(a)(1)(C) of the Internal Revenue
Code of 1986, as amended (the "Code"). A reorganization (each a
"Reorganization") will comprise the transfer of all of the assets of an Acquired
Fund to the corresponding Acquiring Fund in exchange solely for such
corresponding Acquiring Fund's shares and the assumption by the Acquiring Fund
of certain liabilities of the corresponding Acquired Fund, and the constructive
distribution after the Closing Date (as hereinafter defined) of such shares to
the shareholders of the corresponding Acquired
Fund in liquidation of the Acquired Fund, all upon the terms and conditions
hereinafter set forth in this Plan.
WHEREAS, Strategic Trust and Touchstone Trust are each (a) a Massachusetts
business trust duly organized, validly existing and in good standing under the
laws of the Commonwealth of Massachusetts, and (b) registered as an open-end
series investment company under the Investment Company Act of 1940, as amended(
the "1940 Act"); and each Acquired Fund owns securities which generally are
assets of the character in which the corresponding Acquiring Fund is permitted
to invest; and
WHEREAS, effective as of the Closing Date, the shares of beneficial
interest of each Acquiring Fund will consist of two separate classes, designated
as Class A shares of beneficial interest ("Class A") and Class C shares of
beneficial interest ("Class C"). The shares of each class of each Acquiring Fund
(the "Acquiring Class") that the Acquiring Fund will issue to the shareholders
of the corresponding Acquired Fund class (the "Corresponding Acquired Class")
are set forth in the Corresponding Classes Table in Schedule A; and
WHEREAS the Board of Trustees of Touchstone Trust has determined that an
exchange of all of the assets of each Acquired Fund for shares of the
corresponding Acquiring Fund and the assumption of the liabilities of such
Acquired Fund by the corresponding Acquiring Fund is in the best interests of
each Acquired Fund's Shareholders (as defined below) and that the interests of
the existing shareholders of each Acquired Fund will not be diluted as a result
of this transaction; and
WHEREAS, the execution, delivery and performance of this Plan will have
been duly authorized prior to the Closing Date by all necessary action on the
part of Strategic Trust and Touchstone Trust, respectively, and this Plan
constitutes a valid and binding obligation of each
2
of the parties hereto enforceable in accordance with its terms, subject to the
requisite approval of the shareholders of each Acquired Fund.
NOW, THEREFORE, in consideration of the premises and of the covenants and
agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
1. Transfer of Assets and Liabilities of Each Acquired Fund to the
Corresponding Acquiring Fund in Exchange for Such Corresponding
Acquiring Fund's Shares; Liquidation of the Acquired Funds.
1.1 Transfer and Exchange of Assets for Shares. Subject to the
requisite approval of the shareholders of each Acquired Fund and to the other
terms and conditions set forth herein and on the basis of the representations
and warranties contained herein, each of the Touchstone Emerging Growth Fund,
Touchstone International Equity Fund, Touchstone Value Plus Fund and Touchstone
Growth & Income Fund series of Touchstone Trust shall transfer to each of
Countrywide Emerging Growth Fund, Countrywide International Equity Fund,
Countrywide Value Plus Fund and Countrywide Value Plus Fund series of Strategic
Trust, respectively, and each of Countrywide Emerging Growth Fund, Countrywide
International Equity Fund, Countrywide Value Plus Fund and Countrywide Value
Plus Fund series of Strategic Trust shall acquire from each of Touchstone
Emerging Growth Fund, Touchstone International Equity Fund, Touchstone Value
Plus Fund and Touchstone Growth & Income Fund series of Touchstone Trust,
respectively, as of the Closing Date, all of the Assets (as hereinafter defined)
(a) of the Touchstone Emerging Growth Fund in exchange for that number of
Acquiring Class shares of Countrywide Emerging Growth Fund determined in
accordance with Section 2.2 hereof and the assumption by Countrywide Emerging
Growth Fund of the Liabilities (as hereinafter defined) of the Touchstone
Emerging Growth Fund, (b) of the Touchstone International Equity Fund in
exchange for that number of Acquiring Class shares of the
3
Countrywide International Equity Fund determined in accordance with Section 2.2
hereof, and the assumption by the Countrywide International Equity Fund of the
Liabilities of the Touchstone International Equity Fund, (c) of the Touchstone
Value Plus Fund in exchange for that number of Acquiring Class shares of the
Countrywide Value Plus Fund determined in accordance with Section 2.2 hereof,
and the assumption by Countrywide Value Plus Fund of the Liabilities of the
Touchstone Value Plus Fund, and (d) of the Touchstone Growth & Income Fund in
exchange for that number of Acquiring Class shares of the Countrywide Value Plus
Fund determined in accordance with Section 2.2 hereof, and the assumption by the
Countrywide Value Plus Fund of the Liabilities of the Touchstone Growth & Income
Fund. Such transactions shall take place at the closing provided for in Article
3 of this Plan (the "Closing").
Touchstone Trust will (a) pay or cause to be paid to Strategic Trust
any interest received on or after the Closing Date with respect to the Assets of
each Acquired Fund and (b) transfer to Strategic Trust any distributions,
rights, stock dividends or other property received by Touchstone Trust after the
Closing Date as distributions on or with respect to the Assets of each Acquired
Fund. Any such interest, distributions, rights, stock dividends or other
property so paid or transferred or received directly by Strategic Trust shall be
allocated by Strategic Trust to the account of the Acquiring Fund and the
Acquiring Class that acquired the Assets to which such property relates.
1.2 Description of Assets to be Acquired. The assets of each Acquired
Fund to be acquired by each Acquiring Fund shall consist of all property,
including without limitation, all cash, cash equivalents, securities,
commodities and future interests, receivables (including interest or dividends
receivable), any claims or rights of action or rights to register shares under
applicable securities laws, and other property owned by each Acquired Fund and
any deferred or
4
prepaid expenses shown as an asset on the books of each Acquired Fund at the
Effective Time (the "Assets").
1.3 Liabilities to be Assumed. Each Acquiring Fund shall assume from
the corresponding Acquired Fund all liabilities, expenses, costs, charges and
reserves of such Acquired Fund of whatever kind or nature, whether absolute,
accrued, contingent or otherwise, whether or not arising in the ordinary course
of business, whether or not determinable as of the Effective Time and whether or
not specifically referred to in this Plan; provided, however, that it is
understood and agreed by the parties hereto that each Acquired Fund will utilize
its best efforts to discharge all of its known debts, liabilities, obligations
and duties (the "Liabilities") prior to the Effective Time.
1.4 Liquidation of Each Acquired Fund. As provided in Section 3.3 of
this Plan, as soon after the Closing Date as is conveniently practicable (the
"Liquidation Date"), Touchstone Trust will effect the termination and
liquidation of each Acquired Fund in the manner provided in its Declaration of
Trust and in accordance with applicable law. On the Closing Date, each Acquired
Fund will distribute pro rata to its shareholders of record, determined as of
the close of business on the Valuation Date (the "Acquired Fund's
Shareholders"), Acquiring Class shares received by such Acquired Fund pursuant
to Section 1.1 in exchange for each such shareholder's interest in each
Corresponding Acquired Class evidenced by such shareholder's shares of
beneficial interest in each Acquired Fund. Such liquidation and distribution
will be accomplished by opening accounts on the books of each Acquiring Fund in
the names of each Acquired Fund's Shareholders and transferring the shares
credited to the account of each Acquired Fund on the books of the corresponding
Acquiring Fund. Each account opened shall represent the respective pro rata
number of Acquiring Class
5
shares due each Acquired Fund Shareholder. Fractional shares of each Acquiring
Class shall be rounded to the nearest thousandth of one share. All issued and
outstanding shares of each Acquired Fund shall simultaneously be cancelled on
the books of the Acquired Fund.
1.5 No Issuance of Certificates. None of the Acquiring Funds will
issue certificates representing its Acquiring Class shares issued in connection
with the exchange described in Section 1.1 hereof.
1.6 Transfer Agent's Records. Ownership of Acquiring Class shares will
be shown on the books of Strategic Trust's transfer agent. Acquiring Class
shares will be issued in the manner described in the then-effective Prospectus
and Statement of Additional Information of Strategic Trust relating to Acquiring
Class shares.
1.7 Transfer Taxes. Any transfer taxes payable upon the issuance of
Acquiring Class shares in a name other than the registered holder of the shares
on the books of each Acquired Fund as of the time of issuance shall be paid by
the person to whom such shares are to be issued as a condition of such transfer.
1.8 Reporting Responsibilities of each Acquired Fund. Any reporting
obligations relating to an Acquired Fund are and shall remain the responsibility
of Touchstone Trust up to and including the Closing Date and such later date on
which each Acquired Fund is terminated.
1.9 Operating Plan. From and after the Closing Date, the rights and
privileges of the Class A and Class C shares of each Acquiring Fund shall be
determined under the provisions of Massachusetts law, Strategic Trust's
Declaration of Trust, as amended from time to time, Strategic Trust's Bylaws and
the operating plan adopted by Strategic Trust's Board of Trustees which
establishes policies and procedures for allocating income and expenses between
6
each Acquiring Fund's Class A shares and Class C shares which further defines
the relative voting rights of the Class A and Class C shares and which otherwise
delineates the relative rights, privileges and liabilities of the Class A and
Class C shares.
1.10 On or before the Closing Date, the Acquired Funds may declare
additional dividends or other distributions in order to distribute substantially
all of their investment company taxable income and net realized capital gain.
Any such distribution is intended to preserve the Acquired Funds' status as
regulated investment companies pursuant to Sections 851-855 of the Code.
2. Valuation.
2.1 Net Asset Value of each Acquired Fund. The value of the net assets
to be acquired by each Acquiring Fund hereunder shall be the value of the Assets
of the corresponding Acquired Fund, less the Liabilities of such Acquired Fund,
and shall be computed at the time and in the manner set forth in Strategic
Trust's then-current Prospectus and Statement of Additional Information on the
business day immediately preceding the Closing Date or such other date as the
parties may agree in writing (such time and date being hereinafter called the
"Valuation Date").
2.2 Exchange Ratio. The number of Acquiring Class shares to be issued
(including fractional shares, if any) in exchange for the Assets of each
Acquired Fund and the assumption of its Liabilities shall be such number of
shares of the corresponding Acquiring Class so that shareholders of each
Corresponding Acquired Class will own shares of the corresponding Acquiring
Class equal in aggregate net asset value to the shares of the Corresponding
Acquired Class at the Closing Date.
7
2.3 Documentation. All computations of value shall be made by
[Countrywide] in accordance with its regular practice as pricing agent for
Strategic Trust. In addition, Touchstone Trust shall furnish to Strategic Trust
within 60 days of the Closing Date a statement of each Acquired Fund's assets
and liabilities as of the Effective Time, which statement shall be prepared in
accordance with generally accepted accounting principles consistently applied
and shall be certified by the Treasurer of Touchstone Trust. In addition,
Touchstone Trust shall supply to Strategic Trust in such form as is reasonably
satisfactory to Strategic Trust, a statement of earnings and profits of each
Acquired Fund for federal income tax purposes which may be carried over to the
shares of each Acquiring Class as a result of Section 381 of the Code. This
statement shall be provided within 180 days of the Closing Date.
3. Closing and Closing Date.
3.1 Establishment of Closing Dates; Description of Closing. The
"Closing Date" shall be the next full business day following the Valuation Date
or such later date as the parties may agree in writing. All acts taking place at
the Closing shall be deemed to take place simultaneously as of the close of
business on the last business day immediately preceding the Closing Date (the
"Effective Time"), unless otherwise provided. The Closing shall be held on the
Closing Date at 9:00 a.m. at the principal offices of Frost & Jacobs LLP, or
such other time and/or place as the parties may agree.
3.2 Deliveries by Transfer Agent. Investors Bank & Trust Company, as
custodian for Touchstone Trust shall deliver at the Closing a certificate of an
authorized officer stating that: (a) each Acquired Fund's portfolio securities,
cash and any other assets shall have been delivered in proper form to Strategic
Trust on the Closing Date; and (b) all necessary taxes, including all applicable
federal and state stock transfer stamps, if any, shall have been paid, or
8
provision for payment shall have been made in connection with the delivery of
portfolio securities.
3.3 Closing of New York Stock Exchange. In the event that on the
Valuation Date: (a) the New York Stock Exchange is closed to trading or trading
thereon is restricted; or (b) trading or the reporting of trading on said
Exchange or elsewhere is disrupted so that accurate appraisal of the value of
the total net assets of each Acquired Fund is impracticable, then the Closing
Date shall be postponed until the first business day after the day when trading
shall have been fully resumed and reporting shall have been restored.
3.4 List of each Acquired Fund's Shareholders. Touchstone Trust shall
deliver at the Closing a list of names and addresses of the shareholders of each
Acquired Fund and the class, number and percentage ownership of outstanding
shares owned by each such shareholder, all as of the Effective Time, certified
by the Secretary or Assistant Secretary of Touchstone Trust. Strategic Trust
shall issue and deliver to said Secretary or Assistant Secretary of Touchstone
Trust a confirmation evidencing Acquiring Class shares to be credited to the
corresponding Acquired Fund as soon as practicable after the Closing, or provide
other evidence satisfactory to Touchstone Trust that such Acquiring Class shares
have been credited to the account of the corresponding Acquired Fund on the
records of Strategic Trust's transfer agent maintained with respect to the
Acquiring Class shares. At the Closing, each party shall deliver to the other
such bills of sale, checks, assignments, share certificates, receipts or other
transfer documents as such other party may reasonably request.
4. Representations and Warranties.
4.1 Touchstone Trust, on behalf of each Acquired Fund, represents and
warrants to Strategic Trust, on behalf of each Acquiring Fund, as follows:
9
(a) Touchstone Trust is a voluntary association with transferable
shares of the type commonly referred to as a Massachusetts business trust, duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Massachusetts;
(b) Touchstone Trust is registered as an investment company
classified as a management company of the open-end type and its registration
with the Securities and Exchange Commission (the "Commission") as an investment
company under the 1940 Act is in full force and effect;
(c) The current prospectus and statement of additional
information of Touchstone Trust relating to the Acquired Funds conform in all
material respects to the applicable requirements of the Securities Act of 1933,
as amended (the "1933 Act"), and the 1940 Act and the rules and regulations of
the Commission thereunder and do not include any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading;
(d) Touchstone Trust is not, and the execution, delivery and
performance of this Agreement will not result, in a material violation of its
Declaration of Trust or By-Laws, as each may have been amended to the date
hereof, or of any agreement, indenture, instrument, contract, lease or other
undertaking to which Touchstone Trust is a party or by which it is bound;
(e) Touchstone Trust has no material contracts or other
commitments (other than this Agreement) which, if terminated prior to the
Closing Date, would result in an additional liability of any of the Acquired
Funds;
10
(f) No litigation or administrative proceedings or investigation
of or before any court or governmental body is presently pending or to its
knowledge threatened against Touchstone Trust or any Acquired Fund or any of
their respective properties or assets which, if adversely determined, would
materially and adversely affect their financial condition or the conduct of
their business. Touchstone Trust knows of no facts which might form the basis
for the institution of such proceedings and is not a party to or subject to the
provisions of any order, decree or judgment of any court or governmental body
which materially or adversely affects its business or its ability to consummate
the transactions herein contemplated.
(g) At the Closing Date, all federal and other tax returns and
reports of the Acquired Funds required by law to have been filed by such date
shall have been filed, and all federal and other taxes shall have been paid so
far as due, or provisions shall have been made for the payment thereof and, to
the best of Touchstone Trust's knowledge, no such return is currently under
audit and no assessment has been asserted with respect to such returns;
(h) The Touchstone Trust's Financial Statements, copies of which
have been previously delivered to Strategic Trust, fairly present the financial
positions of each Acquired Fund as of the Fund's most recent fiscal year-end and
the results of the Fund's operations and changes in the Fund's net Assets for
the periods indicated. The Touchstone Trust's Financial Statements are in
accordance with generally accepted accounting principals consistently applied.
For purposes of this Agreement, the Financial Statements include the audited
financial statements of each Acquired Fund for its most recently completed
fiscal year and, if applicable, the un-audited financial statements of each
Acquired Fund for its most recently completed semi-annual period.
11
(i) For each fiscal year of its operation each of the Acquired
Funds has (i) met the requirements of Subchapter M of the Code for qualification
and treatment as a regulated investment company and (ii) been treated as a
separate corporation for federal income tax purposes pursuant to Section 851(g)
of the Code, and (iii) each of the Acquired Funds intends to be so treated as a
separate corporation and meet such qualification requirements for its current
taxable year;
(j) All issued and outstanding shares of each Acquired Fund are,
and at the Closing Date will be, duly and validly issued and outstanding, fully
paid and non-assessable with no personal liability attaching to the ownership
thereof (recognizing that, under Massachusetts law, each Acquired Fund's
Shareholders could, under certain circumstances, be held personally liable for
obligations of the respective Acquired Fund);
(k) At the Closing Date, Touchstone Trust, on behalf of the
Acquired Funds, will have good and marketable title to the Assets to be
transferred to the Acquiring Funds pursuant hereto and full right, power and
authority to sell, assign, transfer and deliver such Assets hereunder and, upon
delivery and payment for such Assets, the Acquiring Funds will acquire good and
marketable title thereto, subject to no restrictions on the full transfer
thereof, including such restrictions as might arise under the 1933 Act, other
than as disclosed to the Acquiring Funds.
(l) The execution, delivery and performance of this Agreement
have been duly authorized as of the date hereof by all necessary action on the
part of Touchstone Trust's Board of Trustees, and on the date hereof and on the
Closing Date this Agreement will constitute a valid and binding obligation of
Touchstone Trust on behalf of each respective Acquired Fund enforceable against
Touchstone Trust in accordance with its terms, subject as to
12
enforcement to bankruptcy, insolvency, reorganization, moratorium, and other
laws relating to or affecting creditors' rights and to general principles of
equity;
(m) On the Closing Date, the performance of this Agreement shall
have been duly authorized by all necessary action by the shareholders of each
Acquired Fund.
(n) Since the date of the Touchstone Trust's Financial
Statements, there has been no material adverse change in the financial
condition, result of operations, business, properties or Assets of any Acquired
Fund.
4.2 Strategic Trust, on behalf of each Acquiring Fund, represents and
warrants to Touchstone Trust on behalf of each Acquired Fund as follows:
(a) Strategic Trust is a voluntary association with transferable
shares of the type commonly referred to as a Massachusetts business trust, duly
organized, validly existing in good standing under the laws of the Commonwealth
of Massachusetts;
(b) Strategic Trust is registered as an investment company
classified as a management company of the open-end type and its registration
with the Commission as an investment company under the 1940 Act, is in full
force and effect;
(c) The current prospectus and statement of additional
information of Strategic Trust relating to the Acquiring Funds conform in all
material respects to the applicable requirements of the 1933 Act and the 1940
Act and the rules and regulations of the Commission thereunder and do not
include any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading;
(d) Strategic Trust is not, and the execution, delivery and
performance of this Agreement will not result, in a material violation of its
Declaration of Trust or By-Laws,
13
as each may have been amended to the date hereof, or of any agreement,
indenture, instrument, contract, lease or other undertaking to which Strategic
Trust is a party or by which it is bound;
(e) Strategic Trust has no material contracts or other
commitments (other than by this Agreement) which, if terminated prior to the
Closing Date, would result in an additional liability of any of the Acquiring
Funds;
(f) No litigation or administrative proceeding or investigation
of or before any court or governmental body is presently pending or to its
knowledge threatened against Strategic Trust or any Acquiring Fund or any of
their respective properties or assets which, if adversely determined, would
materially and adversely affect their financial condition or the conduct of
their business. Strategic Trust knows of no facts which might form the basis for
the institution of such proceedings and is not a party to or subject to the
provisions of any order, decree or judgment of any court or governmental body
which materially or adversely affects its business or its ability to consummate
the transactions herein contemplated;
(g) At the Closing Date, all federal and other tax returns and
reports of the Acquiring Funds required by law to have been filed by such date
shall have been filed, and all federal and other taxes shall have been paid so
far as due, or provision shall have been made for the payment thereof and, to
the best of Strategic Trust's knowledge, no such return is currently under audit
and no assessment has been asserted with respect to such returns;
(h) For each fiscal year of its operation, each of the Acquiring
Funds has (i) met the requirements of Subchapter M of the Code for qualification
and treatment as a regulated investment company and (ii) been treated as a
separate corporation for federal income tax purposes pursuant to Section 851(g)
of the Code, and each of the Acquiring Funds intends to
14
be so treated as a separate corporation and meet such qualification requirements
for its current taxable year;
(i) All issued and outstanding shares of each Acquiring Fund are,
and at the Closing Date will be, duly and validly issued and outstanding, fully
paid and non-assessable with no personal liability attaching to the ownership
thereof (recognizing that, under Massachusetts law, each Acquiring Fund's
Shareholders could, under certain circumstances, be held personally liable for
obligations of the respective Acquiring Fund);
(j) The execution, delivery and performance of this Agreement
have been duly authorized as of the date hereof by all necessary action on the
part of the Strategic Trust's Board of Trustees, and on the date hereof and on
the Closing Date this Agreement will constitute a valid and binding obligation
of Strategic Trust on behalf of each respective Acquiring Fund enforceable
against Strategic Trust in accordance with its terms, subject as to enforcement
to bankruptcy, insolvency, reorganization, moratorium and other laws relating to
or affecting creditors' rights and to general principles of equity.
(k) Since its most recent fiscal year-end, there has been no
material adverse change in the financial condition, business, properties or
Assets of any Acquiring Fund.
5. Conditions Precedent to Obligations of the Parties.
5.1 Representations and Warranties. All representations and warranties
of each of Strategic Trust and Touchstone Trust set forth herein shall be true
and correct in all material respects as of the date hereof and, except as may be
affected by the transactions contemplated by this Plan, as of the Effective Time
with the same force and effect as if made on and as of the Effective Time.
15
5.2 Approval of Plan by Shareholders of Each Acquired Fund. This Plan
and the transactions contemplated hereby shall have been approved by the
requisite vote of the holders of the outstanding shares of each Acquired Fund in
accordance with the provisions of the law of business trusts of the Commonwealth
of Massachusetts, the provisions of the 1940 Act and the provisions of
Touchstone Trust's Declaration of Trust and By-laws;
5.3 No Adverse Actions. On the Closing Date, no action, suit or other
proceeding shall be pending before any court or governmental agency in which it
is sought to restrain or prohibit or obtain damages or other relief in
connection with this Plan or the transactions contemplated hereby;
5.4 Consents and Approvals.
(a) All consents of other parties and all other consents, orders
and permits of federal, state and local regulatory authorities (including those
of the Commission and of state securities authorities, including "no-action"
positions of such federal or state authorities) deemed necessary by Strategic
Trust or Touchstone Trust to permit consummation, in all material respects, of
the transactions contemplated hereby, shall have been obtained, except where
failure to obtain any such consent, order or permit would not involve a risk of
a material adverse effect on the assets or properties of any Acquired Fund or
any Acquiring Fund, provided that either party hereby may for itself waive any
such conditions; and
(b) The Board of Trustees of Strategic Trust and Touchstone Trust
shall have approved the terms of the Reorganization and this Plan and shall have
determined that (i) participation by the Acquiring Funds and the Acquired Funds,
respectively, in the Reorganization is in the best interests of such Funds, (ii)
the interests of existing shareholders of each of the Acquiring Funds and the
Acquired Funds, respectively, will not be diluted as a result
16
of the Reorganization, (iii) the terms of the Reorganization, including the
consideration to be paid or received, are reasonable and fair and do not involve
overreaching on the part of any person, and (iv) the Reorganization is
consistent with the policies of Strategic Trust and Touchstone Trust,
respectively, as recited in its respective registration statement and reports
filed under the 1940 Act.
5.5 Effectiveness of Registration Statement on Form N-14; Exemptive
Order. A Registration Statement on Form N-14 relating to each Acquiring Class
shares issuable hereunder, including the combined Proxy Statement of each
Acquired Fund and the Prospectus of Strategic Trust (relating to the Acquiring
Class shares issuable pursuant to the terms of this Plan) constituting a part
thereof, shall have become effective under the 1933 Act and no stop order
suspending the effectiveness thereof shall have been issued and, to the best
knowledge of the parties hereto, no investigation or proceeding for that purpose
shall have been instituted or be pending, threatened or contemplated under the
1933 Act. Additionally, in response to an application for exemption to be
submitted by Strategic Trust, Touchstone Trust and certain affiliated persons,
the Commission shall have issued an order exempting Strategic Trust, Touchstone
Trust and the other applicants from certain provisions of the 1940 Act or the
issues raised in the application shall have otherwise been resolved to the
mutual satisfaction of the parties.
5.6 Tax Opinions. Each of Strategic Trust and Touchstone Trust shall
have obtained an opinion of Frost & Jacobs LLP, legal counsel to Strategic Trust
and Touchstone Trust, in form and substance reasonably satisfactory to their
respective Boards, to the effect that:
(a) The transfer of all of an Acquired Fund's Assets solely in
exchange for the corresponding Acquiring Class shares and the assumption by the
Acquiring
17
Fund of the Liabilities of the Acquired Fund, and the distribution of such
Acquiring Class shares to the shareholders of the Acquired Fund, will constitute
a "reorganization" within the meaning of Section 368 (a)(1)(C) of the Code and
the Acquiring Fund and the Acquired Fund are each a "party to a reorganization"
within the meaning of Section 368(b) of the Code;
(b) No gain or loss will be recognized by an Acquired Fund upon
the transfer of the Acquired Fund's Assets to the corresponding Acquiring Fund
in exchange for the Acquiring Class shares and the assumption by the Acquiring
Fund of the Liabilities of the Acquired Fund or upon the distribution (whether
actual or constructive) of the Acquiring Class shares to the Acquired Fund's
Shareholders in exchange for their shares of the Acquired Fund;
(c) The tax basis of each Acquired Fund's Assets acquired by an
Acquiring Fund will be the same to the Acquiring Fund as the tax basis of such
Assets to the Acquired Fund immediately prior to the Reorganization, and the
holding period of the Assets of each Acquired Fund in the hands of the
corresponding Acquiring Fund will include the period during which those assets
were held by the Acquired Fund;
(d) No gain or loss will be recognized by an Acquiring Fund upon
the receipt of the Assets of an Acquired Fund solely in exchange for the
Acquiring Class shares and the assumption by the Acquiring Fund of the
Liabilities of the Acquired Fund;
(e) No gain or loss will be recognized by shareholders of any
Acquired Fund upon the distribution of the Acquiring Class shares to such
shareholders, provided such shareholders receive solely such Acquiring Class
shares (including fractional shares) in exchange for their Corresponding
Acquired Class shares; and
(f) The aggregate tax basis for the Acquiring Class shares,
including any fractional shares, received by each shareholder of each Acquired
Fund pursuant to the
18
Reorganization will be the same as the aggregate tax basis of the Corresponding
Acquired Class shares held by such shareholder immediately prior to the
Reorganization, and the holding period of the Acquiring Class shares, including
any fractional shares, to be received by each shareholder of the Acquired Fund
will include the period during which the Corresponding Acquired Class shares
exchanged therefor were held by such shareholder (provided that the
Corresponding Acquired Class shares were held as a capital asset on the date of
the Reorganization).
6. Expenses.
The expenses incurred in connection with the entering into and
carrying out the provisions of this Plan will be borne and paid by Touchstone
Advisors, Inc., and not by each Acquiring Fund or each Acquired Fund.
7. Termination.
7.1 Mutual Agreement. This Plan may be terminated by the mutual
agreement of Strategic Trust and Touchstone Trust.
7.2 Material Breach. In addition, either Strategic Trust or Touchstone
Trust may, at its option, terminate this Plan at or prior to the Closing Date on
account of a material breach by the other of any agreement contained herein to
be performed by such other party at or prior to the Closing Date.
7.3 Failure of Condition Precedent. In addition, either Strategic
Trust or Touchstone Trust may, at its option, terminate this Plan at or prior to
the Closing Date on account of a condition herein expressed to be precedent to
the obligation of such party which has not been met and which appears cannot
reasonably, or will not, be met.
19
7.4 Effects of Termination. In the event of any such termination,
there shall be no liability for damage on the part of Strategic Trust or
Touchstone Trust or their respective Trustees or officers.
8. Limitation on Liabilities. The obligations of Strategic Trust,
Touchstone Trust and each Fund shall not bind any of the trustees, shareholders,
nominees, officers, agents, or employees of Strategic Trust or Touchstone Trust
personally, but shall bind only the Assets and property of the Acquiring Funds
and the Acquired Funds. The execution and delivery of this Plan by the parties'
officers shall not be deemed to have been made by any of them individually or to
impose any liability on any of them personally, but shall bind only the Assets
and the property of the Acquiring Funds or the Acquired Funds, as appropriate.
9. Amendment.
This Plan may be amended, modified or supplemented in such manner as
may be mutually agreed upon in writing by the parties hereto; provided, however,
that following the meeting of the shareholders of each Acquired Fund described
in Section 5.2 of this Plan, no such amendment may have the effect of changing
the provisions for determining the number of shares of each corresponding
Acquiring Class shares to be issued to an Acquired Fund's Shareholders under
this Plan to the detriment of such shareholders without their further approval.
10. Miscellaneous.
10.1 Headings. The section headings contained in this Plan will have
reference purposes only and shall not affect in any way the meaning or
interpretation of this Plan.
10.2 Governing Law. This Plan shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts.
20
IN WITNESS WHEREOF, each of the parties hereto has caused this Plan to be
executed on its behalf by its duly authorized officer as of the day and year
first written above.
TOUCHSTONE SERIES TRUST
By:/s/ Jill T. McGruder
---------------------------------
Jill T. McGruder, President
COUNTRYWIDE STRATEGIC TRUST
By:/s/ Robert H. Leshner
---------------------------------
Robert H. Leshner, President
TOUCHSTONE ADVISORS, INC.
(SOLELY TO EVIDENCE ITS CONCURRENCE
WITH SECTION 6 HEREOF)
By:/s/ Jill T. McGruder
---------------------------------
Jill T. McGruder, President
21
SCHEDULE A
I. CORRESPONDING CLASSES TABLE
Acquiring Fund Classes Corresponding Acquired Fund Classes
---------------------- -----------------------------------
Emerging Growth Fund Emerging Growth Fund
A Shares A Shares
C Shares C Shares
International Equity Fund International Equity Fund
A Shares A Shares
C Shares C Shares
Value Plus Fund Value Plus Fund
A Shares A Shares
C Shares C Shares
Value Plus Fund Growth & Income Fund
A Shares A Shares
C Shares C Shares
22
APPENDIX B
INVESTING WITH COUNTRYWIDE
- --------------------------
CHOOSING THE APPROPRIATE INVESTMENTS TO MATCH YOUR GOALS. Investing well
requires a plan. We recommend that you meet with your financial advisor to plan
a strategy that will best meet your financial goals.
OPENING AN ACCOUNT
You can contact your financial advisor to purchase shares of the Funds. You may
also purchase shares of any Fund directly from Touchstone Securities, Inc. (the
"Distributor"). In any event, you must complete the Investment Application
included in this Prospectus. You may also obtain an Investment Application from
the Distributor or your financial advisor.
o Investor Alert: The Distributor may choose to refuse any purchase
order.
You should read this Prospectus carefully and then determine how much you want
to invest. Check below to find the minimum investment amount required to
purchase shares as well as to learn about the various ways you can purchase your
shares
Initial Additional
Investments Investment
----------- ----------
Regular Account $1,000 None
---------------
Accounts for Countrywide Affiliates $ 50 None
-----------------------------------
Retirement Plan Account or Custodial account under $ 250 None
a Uniform Gifts/Transfers to Minors Act ("UGTMA)"
- --------------------------------------------------
Investments through the Automatic Investment Plan $ 50 $ 50
-------------------------------------------------
o Investor Alert: The Distributor could change these initial and
additional investment minimums at any time.
PRICING OF FUND SHARES
Each Fund's share price, also called net asset value (NAV), is determined as of
the close of trading (normally 4:00 p.m. Eastern time) every day the New York
Stock Exchange (NYSE) is open. Each Fund calculates its NAV per share, generally
using market prices, by dividing the total value of its net assets by the number
of shares outstanding. Shares are purchased at the next offering price
determined after your purchase or sale order is received in proper form by
Countrywide Fund Services, Inc. (the "Transfer Agent"). The offering price is
the NAV plus a sales charge, if applicable.
The Funds' investments are valued based on market value or, if no market value
is available, based on fair value as determined by the Board of Trustees (or
under their direction). All assets
and liabilities initially expressed in foreign currency values will be converted
into U.S. dollar values. Some specific pricing strategies follow:
o All short-term dollar-denominated investments that mature in 60 days
or less are valued on the basis of amortized cost which the Board of
Trustees has determined represents fair value.
o Securities mainly traded on a U.S. exchange are valued at the last
sale price on that exchange or, if no sales occurred during the day,
at the current quoted bid price.
o Securities mainly traded on a non-U.S. exchange are generally valued
according to the preceding closing values on that exchange. However,
if an event which may change the value of a security occurs after the
time that the closing value on the non-U.S. exchange was determined,
the Board of Trustees might decide to value the security based on fair
value. This may cause the value of the security on the books of the
Fund to be significantly different from the closing value on the
non-U.S. exchange and may affect the calculation of the NAV.
o Because portfolio securities that are primarily listed on a non-U.S.
exchange may trade on weekends or other days when a Fund does not
price its shares, a Fund's NAV may change on days when shareholders
will not be able to buy or sell shares.
CHOOSING A CLASS OF SHARES
Each of the Funds offers Class A shares and Class C shares, except the
Aggressive Growth Fund which offers only Class A shares. Each class of shares
has different sales charges and distribution fees. The amount of sales charges
and distribution fees you pay will depend on which class of shares you decide to
purchase.
CLASS A SHARES
The offering price of Class A shares of each Fund is equal to its NAV plus a
front-end sales charge that you pay when you buy your shares. The front-end
sales charge is generally deducted from the amount of your investment.
The following table shows the amount of front-end sales charge you will pay on
purchases of Class A shares of each Fund as a percentage of (1) offering price
and (2) the net amount invested after the charge has been subtracted. Note that
the front-end sales charge gets lower as your investment amount gets larger.
Sales Charge Sales Charge
as % of as % of
Amount of Your Investment Offering Price Net Amount Invested
- ------------------------- -------------- -------------------
Under $50,000 5.75% 6.10%
$50,000 but less than $100,000 4.50% 4.71%
$100,000 but less than $250,000 3.50% 3.63%
$250,000 but less than $500,000 2.95% 3.04%
$500,000 but less than $1 million 2.25% 2.30%
$1 million or more 0.00% 0.00%
There is no front-end sales charge if you invest $1 million or more in a Fund.
This includes large total purchases made through programs such as Aggregation,
Concurrent Purchases, Letters of Intent and Rights of Accumulation. These
programs are described more fully in the Statement of Additional Information
("SAI"). In addition, there is no front-end sales charge on purchases by certain
persons related to the Funds or its service providers and certain other persons
listed in the SAI.
If you redeem shares that you purchased as part of the $1 million purchase
within one year, you will pay a contingent deferred sales charge (a sales charge
you pay when you redeem your shares) of 1% on the shares redeemed.
Each Fund has adopted a distribution plan under Rule 12b-1 of the Investment
Company Act of 1940, as amended (the "1940 Act") for its Class A shares. This
plan allows each Fund to pay distribution fees for the sale and distribution of
its Class A shares. Under the plan, each Fund pays an annual fee of up to 0.25%
of its average daily net assets that are attributable to Class A shares. Because
these fees are paid out of a Fund's assets on an ongoing basis, these fees will
increase the cost of your investment.
CLASS C SHARES
The offering price of Class C shares of the Funds is equal to its NAV plus a
1.25% front-end sales charge that you pay when you buy your shares. The
front-end sales charge is generally deducted from the amount of your investment.
A contingent deferred sales charge of 1% of the offering price will be charged
on Class C shares redeemed within one year after you purchased them.
No contingent deferred sales charge is applied if:
o The shares which you redeem were acquired through the reinvestment of
dividends or capital gains distributions
o The amount redeemed resulted from increases in the value of the
account above the amount of the total purchase payments
When we determine whether a contingent deferred sales charge is payable on a
redemption, we assume that:
o The redemption is made first from amounts free of any contingent
deferred sales charge; then
o From the earliest purchase payment(s) that remain invested in the Fund
When we determine if amounts are available for redemption free of any contingent
deferred sales charge, we:
o Add together all of your original purchase payments
o Subtract any amounts previously withdrawn
o Check if there is any remaining amount free of any contingent deferred
sales charge that can be applied to the total of the current value of
the shares you have asked to redeem
The Fund has adopted a distribution plan under Rule 12b-1 of the 1940 Act for
its Class C shares. This plan allows each Fund to pay distribution and other
fees for the sale and distribution of its Class C shares and for services
provided to holders of Class C shares. Under the plan, each Fund pays an annual
fee of up to 1.00% of its average daily net assets that are attributable to
Class C shares. Because these fees are paid out of the Funds' assets on an
ongoing basis, these fees will increase the cost of your investment and over
time may cost you more than paying other types of sales charges.
PURCHASING YOUR SHARES
For information about how to purchase shares, telephone the Transfer Agent
(Nationwide call toll-free 800-543-0407; in Cincinnati call 629-2050).
You can invest in the Funds in the following ways:
OPENING AN ACCOUNT
o Please make your check (in U.S. dollars) payable to the
Fund.
o Send your check with the completed account application
to Countrywide Fund Services, Inc., P.O. Box 5354,
Cincinnati, Ohio 45201-5354 Your application will be
processed subject to your check clearing.
o You may also open an account through your financial
advisor. We price direct purchases based upon the next
determined public offering price (NAV plus any
applicable sales load) after your order is received.
Direct purchase orders received by the Transfer Agent
by 4:00 p.m., Eastern time, are processed at that day's
public offering price. Direct investments received by
the Transfer Agent after 4:00 p.m., Eastern time, are
processed at the public offering price next determined
on the following business day. Purchase orders received
from financial advisors before 4:00 p.m., Eastern time,
and transmitted to the Distributor by 5:00 p.m.,
Eastern time, are processed at that day's public
offering price. Purchase orders received from financial
advisors after 5:00 p.m., Eastern time, are processed
at the public offering price next determined on the
following business day.
BY MAIL OR
THROUGH YOUR
FINANCIAL ADVISOR
- --------------------------------------------------------------------------------
o You may exchange shares of the Funds for shares of the
same class of another Countrywide Fund at NAV. You may
also exchange shares of the Funds for shares of any
money market fund.
o You do not have to pay any exchange fee for these
exchanges.
o You should review the disclosure provided in the
Prospectus relating to the exchanged-for shares
carefully before making an exchange of your Fund
shares.
BY EXCHANGE
- --------------------------------------------------------------------------------
o You may invest in the Funds through various retirement
plans. The Funds' shares are designed for use with
certain types of tax qualified retirement plans
including defined benefit and defined contribution
plans
THROUGH o For further information about any of the plans,
RETIREMENT agreements, applications and annual fees, contact the
PLANS Transfer Agent or your financial advisor
- --------------------------------------------------------------------------------
ADDING TO YOUR ACCOUNT
o Complete the investment form provided at the bottom of
a recent account statement.
o Make your check payable to the applicable Fund.
o Write your account number and asset allocation model
number, if applicable, on the check.
o Either: (1) Mail the check with the investment form in
the envelope provided with your account statement; or
(2) Mail your check directly to your financial advisor
at the address printed on your account statement. Your
financial advisor is responsible for forwarding payment
promptly to the Distributor.
BY CHECK
- --------------------------------------------------------------------------------
o Specify your name and account number. If the Transfer
Agent receives a properly executed wire by 4:00 p.m.
Eastern time on a day when the NYSE is open for regular
trading, your order will be processed at that day's
public offering price.
BY WIRE
- --------------------------------------------------------------------------------
o You may exchange your shares by calling the Transfer
Agent.
o You do not have to pay any exchange fee for these
exchanges.
o You should review the disclosure provided in the
Prospectus relating to the exchanged-for shares
carefully before making an exchange of your Fund
shares.
BY EXCHANGE
- --------------------------------------------------------------------------------
o You may add to your account in the funds through
THROUGH various retirement plans. For further information,
RETIREMENT contact the Transfer Agent or your financial advisor.
PLANS
- --------------------------------------------------------------------------------
INFORMATION ABOUT WIRE TRANSFERS.
You may make additional purchases in the Funds directly by wire transfers.
Contact your bank and ask it to wire federal funds to the Transfer Agent. Banks
may charge a fee for handling wire transfers. You should contact the Transfer
Agent or your financial advisor for further instructions.
ooo Special Tax Consideration
- --------------------------------------------------------------------------------
For federal income tax purposes, an exchange of shares is treated as a sale of
the shares and a purchase of the shares you receive in exchange. Therefore, you
may incur a taxable gain or loss in connection with the exchange.
ooo Special Tax Consideration
- --------------------------------------------------------------------------------
To determine which type of retirement plan is appropriate for you, please
contact your tax advisor.
MORE INFORMATION ABOUT RETIREMENT PLANS.
Retirement Plans may include the following:
INDIVIDUAL RETIREMENT PLANS
o Traditional Individual Retirement Accounts (IRAs)
o Savings Incentive Match Plan for Employees (SIMPLE) IRAs
o Spousal IRAs
o Roth Individual Retirement Accounts (Roth IRAs)
o Education Individual Retirement Accounts (Education IRAs)
o Simplified Employee Pension Plans (SEP IRAs)
o 403(b) Tax Sheltered Accounts that employ as custodian a bank
acceptable to the Distributor
EMPLOYER SPONSORED RETIREMENT PLANS
o Defined benefit plans
o Defined contribution plans (including 401K plans, profit sharing plans
and money purchase plans)
o 457 plans
AUTOMATIC INVESTMENT OPTIONS
The various ways that you can invest in the Funds are outlined below. The
Transfer Agent does not charge any fees for these services.
AUTOMATIC INVESTMENT PLAN. You can pre-authorize monthly investments of $50 or
more in each Fund to be processed electronically from a checking or savings
account. You will need to complete the appropriate section in the Investment
Application to do this. For further details about this service call the Transfer
Agent at 1-800-543-0407; in Cincinnati, 629-2050.
REINVESTMENT/CROSS REINVESTMENT. Dividends and capital gains can be
automatically reinvested in the Fund that pays them or in another Fund within
the same class of shares without a fee or sales charge. Dividends and capital
gains will be reinvested in the Fund that pays them, unless you indicate
otherwise on your account application. You may also choose to have your
dividends or capital gains paid to you in cash.
DIRECT DEPOSIT PURCHASE PLAN. You may automatically invest Social Security
checks, private payroll checks, pension pay outs or any other pre-authorized
government or private recurring payments in our Funds. This occurs on a monthly
basis and the minimum investment is $50.
DOLLAR COST AVERAGING. Our Dollar Cost Averaging program allows you to diversify
your investments by investing the same amount on a regular basis. You can set up
periodic automatic transfers of at least $50 from one Countrywide Fund to any
other. The applicable sales charge, if any, will be assessed.
PROCESSING ORGANIZATIONS. You may also purchase shares of the Funds through a
"processing organization", (e.g. a mutual fund supermarket) which is a
broker-dealer, bank or other financial institution that purchases shares for its
customers. Some of the Funds have authorized certain processing organizations to
receive purchase and sales orders on their behalf. Before investing in the Funds
through a processing organization, you should read any materials provided by the
processing organization in conjunction with this Prospectus.
When shares are purchased this way, there may be various differences. The
processing organization may:
o Charge a fee for its services
o Act as the shareholder of record of the shares
o Set different minimum initial and additional investment requirements
o Impose other charges and restrictions
o Designate intermediaries to accept purchase and sales orders on the
Funds' behalf
The Transfer Agent considers a purchase or sales order as received when an
authorized processing organization, or its authorized designee, receives the
order in proper form. These orders will be priced based on the Fund's NAV next
computed after such order is received in proper form.
Shares held through a processing organization may be transferred into your name
following procedures established by your processing organization and the
Transfer Agent. Certain processing organizations may receive compensation from
the Funds, the Distributor, the Advisor or their affiliates.
SELLING YOUR SHARES
You may sell some or all of your Fund shares on any day that the Fund calculates
its NAV. If your request is received in proper form before the close of regular
trading on the NYSE, you will receive a price based on that day's NAV for the
shares you sell. Otherwise, the price you receive will be based on the NAV that
is next calculated.
THROUGH o You can sell or exchange your shares over the
RETIREMENT telephone, unless you have specifically declined this
PLANS option. If you do not wish to have this ability, you
must mark the appropriate section of the Investment
Application. You may only sell shares over the
telephone if the amount is less than $25,000.
o To sell your Fund shares by telephone, call the
Transfer Agent, Nationwide at 800-543-0407; in
Cincinnati, 629-2050.
o IRA accounts cannot be sold by telephone
BY TELEPHONE
- --------------------------------------------------------------------------------
o Write to the Transfer Agent.
o Indicate the number of shares or dollar amount to be
sold.
o Include your name and account number.
o Sign your request exactly as your name appears on your
Investment Application
BY MAIL
- --------------------------------------------------------------------------------
o Complete the appropriate information on the Investment
Application.
o If your proceeds are $1,000 or more, you may request
that the Transfer Agent wire them to your bank account.
o You will be charged a fee of $8.00.
o Redemption proceeds will only be wired to a commercial
bank or brokerage firm in the United States.
o Your redemption proceeds may be deposited without a
charge directly into your bank account through an ACH
transaction. Contact the Transfer Agent for more
information.
BY WIRE
- --------------------------------------------------------------------------------
o You may also sell shares by contacting your financial
advisor, who may charge you a fee for this service.
Shares held in street name must be sold through your
financial advisor or, if applicable, the processing
organization.
o Your financial advisor is responsible for making sure
that sale requests are transmitted to the Transfer
Agent in proper form in a timely manner.
THROUGH
YOUR FINANCIAL
ADVISOR
- --------------------------------------------------------------------------------
ooo Special Tax Consideration
- --------------------------------------------------------------------------------
Selling your shares may cause you to incur a taxable gain or loss.
o Investor Alert: Unless otherwise specified, proceeds will be sent to
the record owner at the address shown on the Transfer Agent's records.
SIGNATURE GUARANTEES. Some circumstances require that the request for the sale
of shares have a signature guarantee. A signature guarantee helps protect you
against fraud. You can obtain one from most banks or securities dealers, but not
from a notary public. Some circumstances requiring a signature guarantee
include:
o Proceeds from the sale of shares that exceed $25,000
o Proceeds to be paid when the name or the address on the account has
been changed within 30 days of your sale request.
TELEPHONE SALES. If we receive your share sale request before 4:00 p.m., Eastern
time on a day when the NYSE is open for regular trading, the sale of your shares
will be processed at the next determined NAV on that day. Otherwise it will
occur on the next business day.
Interruptions in telephone service could prevent you from selling your shares in
this manner when you want to. When you have difficulty making telephone sales,
you should mail (or send by overnight delivery) a written request for sale of
your shares to the Transfer Agent.
In order to protect your investment assets, the Transfer Agent will only follow
instructions received by telephone that it reasonably believes to be genuine.
However, there is no guarantee that the instructions relied upon will always be
genuine and the Trust will not be liable, in those cases. The Trust has certain
procedures to confirm that telephone instructions are genuine. If it does not
follow such procedures in a particular case it may be liable for any losses due
to unauthorized or fraudulent instructions. Some of these procedures include:
o Requiring personal identification
o Making checks payable only to the owner(s) of the account shown on the
Trust's records
o Mailing checks only to the account address shown on the Trust's
records
o Directing wires only to the bank account shown on the Trust's records
o Providing written confirmation for transactions requested by telephone
o Tape recording instructions received by telephone
SYSTEMATIC WITHDRAWAL PLAN. You may elect to receive or send to a third party
monthly or quarterly withdrawals of $50 or more if your account value is at
least $5,000. There is no special fee for this service and no minimum amount is
required for retirement plans.
ooo Special Tax Consideration
- --------------------------------------------------------------------------------
If you exercise the Reinstatement Privilege, you should contact your tax
advisor.
ooo Special Tax Consideration
- --------------------------------------------------------------------------------
Involuntary sales may result in the sale of your Fund shares at a loss or may
result in taxable investment gains.
REINSTATEMENT PRIVILEGE. You may reinvest proceeds from a sale of Fund shares or
a dividend or capital gain distribution on Fund shares without a sales charge in
any of the Countrywide Funds. You may do so by sending a written request and a
check to the Transfer Agent within 90 days after the date of the sale, dividend
or distribution. Reinvestment will be at the next NAV calculated after the
Transfer Agent receives your request.
LOW ACCOUNT BALANCES
The Transfer Agent may sell your Fund shares if your balance falls below the
minimum amount required for your account as a result of redemptions that you
have made (as opposed to a reduction from market changes). This involuntary sale
does not apply to retirement accounts or custodian accounts under the Uniform
Gift to Minors Act (UGTMA). The Transfer Agent will let you know that your
shares are about to be sold and you will have 30 days to increase your account
balance to the minimum amount.
RECEIVING SALE PROCEEDS
The Transfer Agent will forward the proceeds of your sale to you (or to your
financial advisor) within 7 business days (normally within 3 business days) from
the date of a proper request.
PROCEEDS SENT TO FINANCIAL ADVISORS
Proceeds which are sent to your financial advisor will not usually be
re-invested for you unless you provide specific instructions to do so.
Therefore, the financial advisor may benefit from the use of your money.
FUND SHARES PURCHASED BY CHECK
If you purchase Fund shares by personal check, the proceeds of a sale of those
shares will not be sent to you until the check has cleared, which may take up to
15 days. If you may need your money more quickly, you should purchase shares by
federal funds, bank wire, or with a certified or cashier's check.
It is possible that the payments of your sale proceeds could be postponed or
your right to sell your shares could be suspended during certain circumstances.
These circumstances can occur:
o When the NYSE is closed for other than customary weekends and holidays
o When trading on the NYSE is restricted
o When an emergency situation causes a Fund Sub-Advisor to not be
reasonably able to dispose of certain securities or to fairly
determine the value of its net assets
o During any other time when the SEC, by order, permits.
Touchstone Family Of Funds
PROSPECTUS
May 1, 1999
o Touchstone Emerging Growth Fund
o Touchstone International Equity Fund
o Touchstone Income Opportunity Fund
o Touchstone Value Plus Fund
o Touchstone Growth & Income Fund
o Touchstone Balanced Fund
o Touchstone Bond Fund
o Touchstone Standby Income Fund
Neither the Securities and Exchange Commission nor any state securities
commission has approved any Fund's shares as an investment or determined whether
this prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
2
Touchstone Family of Funds
The Touchstone Family of Funds is a group of mutual funds. Each Fund has a
different investment goal and risk level and is a part of the Touchstone Series
Trust (the Trust).
3
Table Of Contents
Table Of Contents
Page
Touchstone Emerging Growth Fund......................... 4
Touchstone International Equity Fund.................... 9
Touchstone Income Opportunity Fund...................... 13
Touchstone Value Plus Fund.............................. 17
Touchstone Growth & Income Fund......................... 20
Touchstone Balanced Fund................................ 24
Touchstone Bond Fund.................................... 28
Touchstone Standby Income Fund.......................... 32
Investment Strategies And Risks......................... 36
The Funds' Management................................... 42
Investing With Touchstone............................... 46
Distributions And Taxes................................. 58
Financial Highlights.................................... 59
For More Information.................................... 64
[ICON] Touchstone Family of Funds
4
Touchstone Emerging Growth Fund
Touchstone Emerging Growth Fund
- --------------------------------------------------------------------------------
The Fund's Investment Goal
The Emerging Growth Fund seeks to increase the value of Fund shares as a primary
goal and to earn income as a secondary goal.
As with any mutual fund, there is no guarantee that the Fund will achieve its
goal.
- --------------------------------------------------------------------------------
Its Principal Investment Strategies
The Fund invests primarily (at least 65% of total assets) in the common stocks
of smaller, rapidly growing (emerging growth) companies. In selecting its
investments, the portfolio managers focus on those companies they believe will
grow faster than the U.S. economy in general. They also choose companies they
believe are priced lower in the market than their true value.
When the portfolio managers believe the following securities offer a good
potential for capital growth or income, up to 35% of the Fund's assets may be
invested in:
o Larger company stocks
o Preferred stocks
o Convertible bonds
o Other debt securities, including:
collateralized mortgage obligations (CMOs), stripped U.S.
government securities (Strips) and mortgage-related securities,
all of which will be rated investment grade
The Fund may also invest in:
o Securities of foreign companies traded mainly outside the U.S.
(up to 20%)
o American Depositary Receipts (ADRs) (up to 20%)
o Emerging market securities (up to 10%)
The Key Risks
The Fund's share price will fluctuate and you could lose money on your
investment in the Fund. The Fund could also return less than other investments:
o If the stock market as a whole goes down
o Because securities of small cap companies may be more thinly
traded and may have more frequent and larger price changes than
securities of larger cap companies
o If the market continually values the stocks in the Fund's
portfolio lower than the portfolio managers believe they should
be valued
[ICON] Touchstone Family of Funds
5
Touchstone Emerging Growth Fund
o If the stocks in the Fund's portfolio are not undervalued as
expected
o If the companies in which the Fund invests do not grow as
rapidly as expected
o If interest rates go up, causing the value of any debt securities
held by the Fund to decline
o Because CMOs, Strips and mortgage-related securities may lose
more value due to changes in interest rates than other debt
securities and are subject to prepayment
o Because investments in foreign securities may have more frequent
and larger price changes than U.S. securities and may lose value
due to changes in currency exchange rates and other factors
o Because emerging market securities involve unique risks, such as
exposure to economies less diverse and mature than that of the
U.S. and economic or political changes may cause larger price
changes in emerging market securities than other foreign
securities
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government entity.
You can find more information about certain securities in which the Fund may
invest and a more detailed description of risks under the heading Investment
Strategies And Risks later in this Prospectus.
Who May Want to Invest
This Fund is most appropriate for you if you are an aggressive investor and are
willing to assume a relatively high amount of risk. You should be comfortable
with extreme levels of volatility, and safety of principal in the short term
should not be a high priority for you. This Fund's approach may be appropriate
for you if you are many years from retirement and are comfortable with wide
market fluctuations.
The Fund's Performance
The following bar chart indicates the risks of investing in the Emerging Growth
Fund. It shows changes in the performance of the Fund's Class A shares from year
to year since the Fund started. The chart does not reflect any sales charges.
Sales charges will reduce return.
The Fund's past performance does not necessarily indicate how it will perform in
the future.
The return for other classes of shares offered by the Fund will differ from the
Class A returns shown in the bar chart, depending on the expenses of that class.
[ICON] Touchstone Family of Funds
6
Touchstone Emerging Growth Fund
EMERGING GROWTH FUND -- CLASS A PERFORMANCE
YEARS TOTAL RETURN
1995 22.56%
1996 10.56%
1997 32.20%
1998 2.57%
During the period shown in the bar chart, the highest quarterly return was
20.90% (for the quarter ended December 31, 1998) and the lowest quarterly
return was -19.30% (for the quarter ended September 30, 1998).
The following table shows how the Fund's average annual returns for the periods
shown compare to those of the Russell 2000 Index and to the Wiesenberger Small
Cap -- MF. The Russell 2000 Index is a widely recognized unmanaged index of
small cap stock performance. The Wiesenberger Small Cap -- MF is a composite
index of the annual returns of mutual funds that have an investment style
similar to that of the Emerging Growth Fund. The table shows the effect of the
Class A sales charge.
For the periods ended December 31, 1998
- --------------------------------------------------------------------------------
Past 12 Since
Months Fund Started
Emerging Growth Fund -- Class A -3.3% 14.5%
Emerging Growth Fund -- Class C 2.0% 15.1%
Russell 2000 Index -2.5% 14.1%
Wiesenberger Small Cap -- MF -0.4% 16.4%
[ICON] Touchstone Family of Funds
7
Touchstone Emerging Growth Fund
The Fund's Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund:
Shareholder Fees (fees paid
directly from your investment)
Class A Shares Class C Shares
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of offering price) 5.75%1 None
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load)
(as a percentage of amount redeemed) None 1.00%2
- --------------------------------------------------------------------------------
Annual Fund Operating
Expenses (expenses that are
deducted from Fund assets)
Management Fees 0.80% 0.80%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fees 0.25% 1.00%
- --------------------------------------------------------------------------------
Other Expenses 3.15% 3.15%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 4.20% 4.95%
- --------------------------------------------------------------------------------
Fee Waiver and/or Expense Reimbursement(3) 2.70% 2.70%
- --------------------------------------------------------------------------------
Net Expenses 1.50% 2.25%
- --------------------------------------------------------------------------------
1 You may pay a reduced sales charge on very large purchases. There is
no sales charge at the time of purchase for purchases of $1 million or
more but a sales charge of 1.00% will be assessed on shares redeemed
within one year of purchase. There is also no initial sales charge on
certain purchases in a Roth IRA, a Roth Conversion IRA or a qualified
retirement plan.
2 The 1.00% is waived for benefits paid to you through a qualified
pension plan.
3 Touchstone Advisors has contractually agreed to waive or reimburse
certain of the Total Annual Fund Operating Expenses of each Class of
the Fund (the "Sponsor Agreement"). The Sponsor Agreement will remain
in place until at least December 31, 1999.
The following example should help you compare the cost of investing in the
Emerging Growth Fund with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same.
[ICON] Touchstone Family of Funds
8
Touchstone Emerging Growth Fund
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
Class A Shares Class C Shares
1 Year $ 719 $ 228
- --------------------------------------------------------------------------------
3 Years $1,545 $1,246
- --------------------------------------------------------------------------------
5 Years $2,384 $2,265
- --------------------------------------------------------------------------------
10 Years $4,542 $4,816
- --------------------------------------------------------------------------------
o The example for the 3, 5 and 10-year periods is calculated using
the Total Fund Operating Expenses before the limits agreed to
under the Sponsor Agreement for periods after year 1.
[ICON] Touchstone Family of Funds
9
Touchstone International Equity Fund
Touchstone International Equity Fund
- --------------------------------------------------------------------------------
The Fund's Investment Goal
The International Equity Fund seeks to increase the value of Fund shares over
the long-term.
As with any mutual fund, there is no guarantee that the Fund will achieve its
goal.
- --------------------------------------------------------------------------------
Its Principal Investment Strategies
The Fund invests primarily (at least 80% of total assets) in equity securities
of foreign companies and will invest in at least three countries outside the
United States. A large portion of those non-U.S. equity securities may be issued
by companies active in emerging market countries (up to 40% of total assets).
The Fund may also invest in certain debt securities issued by U.S. and non-U.S.
entities (up to 20%), including non-investment grade debt securities rated as
low as B.
The portfolio manager uses a growth-oriented style to choose investments for the
Fund. This includes the use of both qualitative and quantitative analysis to
identify markets and companies that offer solid growth prospects at reasonable
prices. The portfolio manager's investment process seeks to add value by making
good regional and country allocations as well as by selecting individual stocks
within a region.
The Key Risks
The Fund's share price will fluctuate and you could lose money on your
investment in the Fund. The Fund could also return less than other investments:
o If the stock market as a whole goes down
o Because investments in foreign securities may have more frequent
and larger price changes than U.S. securities and may lose value
due to changes in currency exchange rates and other factors
o Because emerging market securities involve unique risks, such as
exposure to economies less diverse and mature than that of the
U.S. and economic or political changes may cause larger price
changes in emerging market securities than other foreign
securities
o If the stocks in the Fund's portfolio do not grow over the long
term as expected
o If interest rates go up, causing the value of any debt securities
held by the Fund to decline
o Because issuers of non-investment grade securities held by the
Fund are more likely to be unable to make timely payments of
interest or principal
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government entity.
You can find more information about certain securities in which the Fund may
invest and a more detailed description of risks under the heading Investment
Strategies And Risks later in this Prospectus.
[ICON] Touchstone Family of Funds
10
Touchstone International Equity Fund
Who May Want to Invest
This Fund is most appropriate for you if you are an aggressive investor and are
willing to assume a relatively high amount of risk. You should be comfortable
with extreme levels of volatility, and safety of principal in the short term
should not be a high priority for you. This Fund's approach may be appropriate
for you if you are many years from retirement and are comfortable with wide
market fluctuations.
The Fund's Performance
The bar chart shown below indicates the risks of investing in the International
Equity Fund. It shows changes in the performance of the Fund's Class A shares
from year to year since the Fund started. The chart does not reflect any sales
charges. Sales charges will reduce return.
The Fund's past performance does not necessarily indicate how it will perform in
the future.
The return for other classes of shares offered by the Fund will differ from the
Class A returns shown in the bar chart, depending on the expenses of that class.
INTERNATIONAL EQUITY FUND --
CLASS A PERFORMANCE
BAR CHART
YEARS TOTAL RETURN
1995 5.29%
1996 11.61%
1997 15.57%
1998 19.94%
During the period shown in the bar chart, the highest quarterly return
was 16.83% (for the quarter ended March 31, 1998) and the lowest
quarterly return was -13.67 (for the quarter ended September 30, 1998).
[ICON] Touchstone Family of Funds
11
Touchstone International Equity Fund
The table below shows how the Fund's average annual returns for the periods
shown compare to those of the MSCI EAFE Index and the Wiesenberger Non-US Equity
- -- MF index. The MSCI EAFE Index is a Morgan Stanley index that includes stocks
traded on 16 exchanges in Europe, Australia and the Far East. The Wiesenberger
Non-US Equity -- MF is a composite index of the annual returns of mutual funds
that have an investment style similar to that of the International Equity Fund.
The table shows the effect of the Class A sales charge.
For the periods ended December 31, 1998
Past 12 Since
Months Fund Started
International Equity Fund -- Class A 13.0% 8.3%
- --------------------------------------------------------------------------------
International Equity Fund -- Class C 19.0% 9.0%
- --------------------------------------------------------------------------------
MSCI EAFE Index 20.3% 9.0%
- --------------------------------------------------------------------------------
Wiesenberger Non-US Equity -- MF 6.1% 3.9%
- --------------------------------------------------------------------------------
The Fund's Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund:
Shareholder Fees (fees paid
directly from your investment)
Class A Shares Class C Shares
Maximum Sales Charge (load) Imposed on
Purchases (as a percentage of offering price) 5.75%1 None
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load)
(as a percentage of amount redeemed) None 1.00%2
- --------------------------------------------------------------------------------
Annual Fund Operating
Expenses (expenses that are
deducted from Fund assets)
Management Fees 0.95% 0.95%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fees 0.25% 1.00%
- --------------------------------------------------------------------------------
Other Expenses 2.63% 2.63%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 3.83% 4.58%
- --------------------------------------------------------------------------------
Fee Waiver and/or Expense Reimbursement3 2.23% 2.23%
- --------------------------------------------------------------------------------
Net Expenses 1.60% 2.35%
- --------------------------------------------------------------------------------
1 You may pay a reduced sales charge on very large purchases. There is
no sales charge at the time of purchase for purchases of $1 million or
more but a sales charge of 1.00% will be assessed on shares redeemed
within one year of purchase. There is also no initial sales charge on
certain purchases in a Roth IRA, a Roth Conversion IRA or a qualified
retirement plan.
2 The 1.00% is waived for benefits paid to you through a qualified
pension plan.
3 Touchstone Advisors has contractually agreed to waive or reimburse
certain of the Total Annual Fund Operating Expenses of each Class of
the Fund (the "Sponsor Agreement"). The Sponsor Agreement will remain
in place until at least December 31, 1999.
[ICON] Touchstone Family of Funds
12
Touchstone International Equity Fund
The following example should help you compare the cost of investing in the
International Equity Fund with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
Class A Shares Class C Shares
1 Year $ 728 $ 238
- --------------------------------------------------------------------------------
3 Years $1,484 $1,182
- --------------------------------------------------------------------------------
5 Years $2,257 $2,135
- --------------------------------------------------------------------------------
10 Years $4,270 $4,550
- --------------------------------------------------------------------------------
o The example for the 3, 5 and 10-year periods is calculated using the
Total Fund Operating Expenses before the limits agreed to under the
Sponsor Agreement for periods after year 1.
[ICON] Touchstone Family of Funds
13
Touchstone Income Opportunity Fund
Touchstone Income Opportunity Fund
- --------------------------------------------------------------------------------
The Fund's Investment Goal
The Income Opportunity Fund seeks to achieve a high level of current income as
its main goal. The Fund may also seek to increase the value of Fund shares, if
consistent with its main goal.
As with any mutual fund, there is no guarantee that the Fund will achieve its
goal.
- --------------------------------------------------------------------------------
Its Principal Investment Strategies
The Fund invests primarily in debt securities. These debt securities will
generally be more risky non-investment grade corporate and government
securities (up to 100% of total assets). Non-investment grade debt securities
are often referred to as "junk bonds" and are considered speculative.
The Fund's investments may include:
o Securities of foreign companies (up to 100%), but only up to 30%
of its assets in securities of foreign companies that are
denominated in a currency other than the U.S. dollar
o Debt securities that are emerging market securities (up to 65%)
o Mortgage-related securities, loans and loan participations
o Currency futures and option contracts
The Key Risks
The Fund's share price will fluctuate and you could lose money on your
investment in the Fund. The Fund could also return less than other investments:
o If interest rates go up, causing the value of any debt securities
held by the Fund to decline
o Because issuers of non-investment grade securities held by the
Fund are more likely to be unable to make timely payments of
interest or principal
o Because investments in foreign securities may have more frequent
and larger price changes than U.S. securities and may lose value
due to changes in currency exchange rates and other factors
o Because emerging market securities involve unique risks, such as
exposure to economies less diverse and mature than that of the
U.S. and economic or political changes may cause larger price
changes in emerging market securities than other foreign
securities
o Because mortgage-related securities may lose more value due to
changes in interest rates than other debt securities and are
subject to prepayments
o Because loans and loan participations may be more difficult to
sell than other investments and subject to the risk of borrower
default
o If the stock market as a whole goes down
[ICON] Touchstone Family of Funds
14
Touchstone Income Opportunity Fund
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government entity.
You can find more information about certain securities in which the Fund may
invest and a more detailed description of risks under the heading Investment
Strategies And Risks later in this Prospectus.
Who May Want to Invest
This Fund is most appropriate for you if you are an aggressive investor and are
willing to assume a relatively high amount of risk. You should be comfortable
with extreme levels of volatility, and safety of principal in the short term
should not be a high priority for you. This Fund's approach may be appropriate
for you if you are many years from retirement and are comfortable with wide
market fluctuations.
The Fund's Performance
The following bar chart indicates the risks of investing in the Income
Opportunity Fund. It shows changes in the performance of the Fund's Class A
shares from year to year since the Fund started. The chart does not reflect any
sales charges. Sales charges will reduce return.
The Fund's past performance does not necessarily indicate how it will perform in
the future.
The return for other classes of shares offered by the Fund will differ from the
Class A returns shown in the bar chart, depending on the expenses of that class.
[ICON] Touchstone Family of Funds
15
Touchstone Income Opportunity Fund
INCOME OPPORTUNITY FUND --
CLASS A PERFORMANCE
BAR CHART
YEARS TOTAL RETURN
1995 23.19%
1996 26.66%
1997 9.49%
1998 -13.77%
During the period shown in the bar chart, the highest quarterly return was
16.15% (for the quarter ended June 30, 1995) and the lowest quarterly
return was -16.50% (for the quarter ended September 30, 1998).
The table below shows how the Fund's average annual returns for the periods
shown compare to those of the Lehman Brothers Corporate Bond Index, the
Wiesenberger Corp -- High Yield -- MF, the Wiesenberger Global Income -- MF and
the Wiesenberger Emerging Market Income -- MF. The Lehman Brothers Corporate
Bond Index is based on all publicly issued intermediate fixed-rate,
non-convertible investment grade domestic corporate debt. The Wiesenberger Corp
- - -- High Yield -- MF index, the Wiesenberger Global Income -- MF index and the
Wiesenberger Emerging Market Income -- MF index are composite indexes of the
annual returns of mutual funds that have an investment style similar to the
Income Opportunity Fund. The table shows the effect of the Class A sales charge.
For the periods ended December 31, 1998
Past 12 Since
Months Fund Started
Income Opportunity Fund-- Class A -17.8% 6.4%
- --------------------------------------------------------------------------------
Income Opportunity Fund-- Class C -14.5% 6.8%
- --------------------------------------------------------------------------------
Lehman Brothers Corporate Bond Index 8.5% 10.3%
- --------------------------------------------------------------------------------
Wiesenberger Corp-- High Yield-- MF -0.7% 9.3%
- --------------------------------------------------------------------------------
Wiesenberger Global Income-- MF 4.8% 7.5%
- --------------------------------------------------------------------------------
Wiesenberger Emerging Market Income-- MF -22.8% 5.8%
- --------------------------------------------------------------------------------
[ICON] Touchstone Family of Funds
16
Touchstone Income Opportunity Fund
The Fund's Fees and Expenses
These tables describe the fees and expenses that you may pay if you buy and hold
shares of the Fund:
Shareholder Fees (fees paid
directly from your investment)
Class A Shares Class C Shares
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of offering price) 4.75%1 None
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load)
(as a percentage of amount redeemed) None 1.00%2
- --------------------------------------------------------------------------------
Annual Fund Operating
Expenses (expenses that are
deducted from Fund assets)
Management Fees 0.65% 0.65%
Distribution (12b-1) Fees 0.25% 1.00%
- --------------------------------------------------------------------------------
Other Expenses 2.43% 2.43%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 3.33% 4.08%
- --------------------------------------------------------------------------------
Fee Waiver And/or Expense Reimbursement3 2.13% 2.13%
- --------------------------------------------------------------------------------
Net Expenses 1.20% 1.95%
- --------------------------------------------------------------------------------
1 You may pay a reduced sales charge on very large purchases. There is
no sales charge at the time of purchase for purchases of $1 million or
more but a sales charge of 1.00% will be assessed on shares redeemed
within one year of purchase. There is also no initial sales charge on
certain purchases in a Roth IRA, a Roth Conversion IRA or a qualified
retirement plan.
2 The 1.00% is waived for benefits paid to you through a qualified
pension plan.
3 Touchstone Advisors has contractually agreed to waive or reimburse
certain of the Total Annual Fund Operating Expenses of each Class of
the Fund (the "Sponsor Agreement"). The Sponsor Agreement will remain
in place until at least December 31, 1999.
The following example should help you compare the cost of investing in the
Income Opportunity Fund with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
Class A Shares Class C Shares
1 Year $ 591 $ 198
- --------------------------------------------------------------------------------
3 Years $1,261 $1,047
- --------------------------------------------------------------------------------
5 Years $1,953 $1,911
- --------------------------------------------------------------------------------
10 Years $3,787 $4,142
- --------------------------------------------------------------------------------
o The example for the 3, 5 and 10-year periods is calculated using the
Total Fund Operating Expenses before the limits agreed to under the
Sponsor Agreement for periods after year 1.
[ICON] Touchstone Family of Funds
17
Touchstone Value Plus Fund
Touchstone Value Plus Fund
The Fund's Investment Goal
The Value Plus Fund seeks to increase the value of Fund shares over the
long-term.
As with any mutual fund, there is no guarantee that it will achieve its goal.
- --------------------------------------------------------------------------------
Its Principal Investment Strategies
The Fund invests primarily (at least 65% of total assets) in common stock of
larger companies that the portfolio manager believes are undervalued. In
choosing undervalued stocks, the portfolio manager looks for companies that have
proven management and unique features or advantages but are believed to be
priced lower than their true value. These companies may not pay dividends. The
Fund may also invest in common stocks of rapidly growing companies to enhance
the Fund's return and vary its investments to avoid having too much of the
Fund's assets subject to risks specific to undervalued stocks.
Approximately 70% of total assets will generally be invested in large cap
companies and approximately 30% will generally be invested in mid cap companies.
The Fund may invest in:
o Preferred stocks
o Investment grade debt securities
o Convertible securities
In addition, the Fund may invest in (up to 10%):
o Cash equivalent investments
o Short-term debt securities
The Key Risks
The Fund's share price will fluctuate and you could lose money on your
investment in the Fund. The Fund could also return less than other investments:
o If the stock market as a whole goes down
o If the market continually values the stocks in the Fund's
portfolio lower than the portfolio manager believes they should
be valued
o If the stocks in the Fund's portfolio are not undervalued as
expected
o If interest rates go up, causing the value of any debt securities
held by the Fund to decline
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government entity.
You can find more information about certain securities in which the Fund may
invest and a more detailed description of risks under the heading Investment
Strategies And Risks later in this Prospectus.
[ICON] Touchstone Family of Funds
18
Touchstone Value Plus Fund
Who May Want to Invest
This Fund will be most appealing to you if you are a moderate or risk tolerant
investor. You should be comfortable with a fair degree of volatility. Capital
appreciation may be important to you, but you may not want to take extreme risks
in order to achieve it. This Fund's approach may be most appropriate for you if
you are many years from retirement and are comfortable with a moderate level of
risk.
Performance Note
Performance information is only shown for those Funds which have had a full
calendar year of operations. Since the Value Plus Fund started on May 1, 1998,
there is no performance information included in this Prospectus.
The Fund's Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund:
Shareholder Fees (fees paid
directly from your investment)
Class A Shares Class C Shares
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of offering price) 5.75%1 None
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load)
(as a percentage of amount redeemed) None 1.00%2
- --------------------------------------------------------------------------------
Annual Fund Operating
Expenses (expenses that are
deducted from Fund assets)
Management Fees 0.75% 0.75%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fees 0.25% 1.00%
- --------------------------------------------------------------------------------
Other Expenses 1.14% 1.14%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.14% 2.89%
- --------------------------------------------------------------------------------
Fee Waiver and/or Expense Reimbursement(3) 0.84% 0.84%
- --------------------------------------------------------------------------------
Net Expenses 1.30% 2.05%
- --------------------------------------------------------------------------------
1 You may pay a reduced sales charge on very large purchases. There is
no sales charge at the time of purchase for purchases of $1 million or
more but a sales charge of 1.00% will be assessed on shares redeemed
within one year of purchase. There is also no initial sales charge on
certain purchases in a Roth IRA, a Roth Conversion IRA or a qualified
retirement plan.
2 The 1.00% is waived for benefits paid to you through a qualified
pension plan.
3 Touchstone Advisors has contractually agreed to waive or reimburse
certain of the Total Annual Fund Operating Expenses of each Class of
the Fund (the "Sponsor Agreement"). The Sponsor Agreement will remain
in place until at least December 31, 1999.
[ICON] Touchstone Family of Funds
19
Touchstone Value Plus Fund
The following examples should help you compare the cost of investing in the
Value Plus Fund with the cost of investing in other mutual funds. The example
assumes that you invest $10,000 in the Fund for the time periods indicated and
then sell all of your shares at the end of those periods. The example also
assumes that your investment has a 5% return each year and that the Fund's
operating expenses remain the same. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
Class A Shares Class C Shares
1 Year $ 700 $ 208
- --------------------------------------------------------------------------------
3 Years $1,130 $ 816
- --------------------------------------------------------------------------------
5 Years $1,585 $1,449
- --------------------------------------------------------------------------------
10 Years $2,843 $3,154
- --------------------------------------------------------------------------------
o The example for the 3, 5 and 10-year period is calculated using the
Total Fund Operating Expenses before the limits agreed to under the
Sponsor Agreement for periods after year 1.
[ICON] Touchstone Family of Funds
20
Touchstone Growth & Income Fund
Touchstone Growth & Income Fund
- --------------------------------------------------------------------------------
The Fund's Investment Goal
The Growth & Income Fund seeks to increase the value of Fund shares over the
long-term, while receiving dividend income.
As with any mutual fund, there is no guarantee that the Fund will achieve its
goal.
- --------------------------------------------------------------------------------
Its Principal Investment Strategies
The Fund invests primarily (at least 65% of total assets) in dividend-paying
common stocks, preferred stocks and convertible securities in a variety of
industries. The portfolio manager may choose to purchase securities which do not
pay dividends (up to 35%) but which are expected to increase in value or produce
high income payments in the future.
In choosing securities for the Fund, the portfolio manager will follow a value-
oriented style, generally buying securities with yields that are at least 20%
higher than the average yield of companies in the S&P 500. The portfolio manager
focuses on investing in companies that have a market capitalization of at least
$1 billion, but may invest in companies of any size.
The Fund may also invest up to 20% of its total assets in debt securities -- and
within this 20% limitation, the Fund may invest the full 20% in investment grade
non-convertible debt securities, the full 20% in convertible debt securities
rated as low as the highest level of non-investment grade or up to 5% in
non-convertible non-investment grade debt securities.
The Fund may also invest in:
o Securities of foreign companies including American Depository
Receipts (ADRs) (up to 20%)
o Real estate investment trusts (REITs) (up to 10%)
The Key Risks
The Fund's share price will fluctuate and you could lose money on your
investment in the Fund. The Fund could also return less than other investments:
o If the stock market as a whole goes down
o If any of the stocks in the Fund's portfolio do not increase in
value as expected
o If earnings of companies the Fund invests in are not achieved and
income available for interest or dividend payments is reduced
o If interest rates go up, causing the value of any debt securities
held by the Fund to decline
o Because investments in foreign securities may have more frequent
and larger price changes than U.S. securities and may lose value
due to changes in currency exchange rates and other factors
o Because investments in REITs are more sensitive to changes in
interest rates and other factors that affect real estate values
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government entity.
[ICON] Touchstone Family of Funds
21
Touchstone Growth & Income Fund
You can find more information about certain securities in which the Fund may
invest and a more detailed description of risks under the heading Investment
Strategies And Risks later in this Prospectus.
Who May Want to Invest
This Fund will be most appealing to you if you are a moderate or risk tolerant
investor. You should be comfortable with a fair degree of volatility. Capital
appreciation of your investment capital may be important to you, however, you
may be uncomfortable taking extreme risk in order to achieve it. This Fund's
approach may be most appropriate for you if you are many years from retirement
and are comfortable with a moderate level of risk.
The Fund's Performance
The bar chart shown below indicates the risks of investing in the Growth &
Income Fund. It shows changes in the performance of the Fund's Class A shares
from year to year since the Fund started. The chart does not reflect any sales
charges. Sales charges will reduce return.
The Fund's past performance does not necessarily indicate how it will perform in
the future.
The return for other classes of shares offered by the Fund will differ from the
Class A returns shown in the bar chart, depending on the expenses of that class.
GROWTH & INCOME FUND -- CLASS A PERFORMANCE
YEARS TOTAL RETURN
1995 35.14%
1996 16.95%
1997 20.70%
1998 6.87%
During the period shown in the bar chart, the highest quarterly return was
12.42% (for the quarter ended March 31, 1998) and the lowest quarterly
return was -12.72% (for the quarter ended September 30, 1998).
[ICON] Touchstone Family of Funds
22
Touchstone Growth & Income Fund
The table below shows how the Fund's average annual returns for the periods
shown compare to those of the Standard & Poor's Composite Index of 500 Stocks
(S&P500) and the Wiesenberger Growth & Income -- MF Index. The S&P 500 Index is
a widely recognized unmanaged index of stock performance. The Wiesenberger
Growth & Income -- MF Index is a composite index of the annual returns of mutual
funds that have an investment style similar to the Growth & Income Fund. The
table shows the effect of the Class A sales charge.
For the periods ended December 31, 1998
Past 12 Since
Months Fund Started
Growth & Income Fund -- Class A 0.7% 16.7%
- --------------------------------------------------------------------------------
Growth & Income Fund -- Class C 6.0% 17.5%
- --------------------------------------------------------------------------------
S&P 500 Index 28.6% 28.5%
- --------------------------------------------------------------------------------
Wiesenberger Growth & Income -- MF 15.3% 21.0%
- --------------------------------------------------------------------------------
The Fund's Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund:
Shareholder Fees (fees paid
directly from your investment)
Class A Shares Class C Shares
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of offering price) 5.75%1 None
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load)
(as a percentage of amount redeemed) None 1.00%2
- --------------------------------------------------------------------------------
Annual Fund Operating
Expenses (expenses that are
deducted from Fund assets)
Management Fees 0.80% 0.80%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fees 0.25% 1.00%
- --------------------------------------------------------------------------------
Other Expenses 1.40% 1.40%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.45% 3.20%
- --------------------------------------------------------------------------------
Fee Waiver and/or Expense Reimbursement(3) 1.15% 1.15%
- --------------------------------------------------------------------------------
Net Expenses 1.30% 2.05%
1 You may pay a reduced sales charge on very large purchases. There is
no sales charge at the time of purchase for purchases of $1 million or
more but a sales charge of 1.00% will be assessed on shares redeemed
within one year of purchase. There is also no initial sales charge on
certain purchases in a Roth IRA, a Roth Conversion IRA or a qualified
retirement plan.
2 The 1.00% is waived for benefits paid to you through a qualified
pension plan.
3 Touchstone Advisors has contractually agreed to waive or reimburse
certain of the Total Annual Fund Operating Expenses of each Class of
the Fund (the "Sponsor Agreement"). The Sponsor Agreement will remain
in place until at least December 31, 1999.
[ICON] Touchstone Family of Funds
23
Touchstone Growth & Income Fund
The following example should help you compare the cost of investing in the
Growth & Income Fund with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
Class A Shares Class C Shares
1 Year $ 700 $ 228
- --------------------------------------------------------------------------------
3 Years $1,191 $ 879
- --------------------------------------------------------------------------------
5 Years $1,708 $1,574
- --------------------------------------------------------------------------------
10 Years $3,119 $3,424
- --------------------------------------------------------------------------------
o The example for the 3, 5 and 10-year periods is calculated using the
Total Fund Operating Expenses before the limits agreed to under the
Sponsor Agreement for periods after year 1.
[ICON] Touchstone Family of Funds
24
Touchstone Balanced Fund
Touchstone Balanced Fund
- --------------------------------------------------------------------------------
The Fund's Investment Goal
The Balanced Fund seeks to achieve both an increase in the value of Fund shares
and current income.
As with any mutual fund, there is no guarantee that the Fund will achieve its
goal.
- --------------------------------------------------------------------------------
Its Principal Investment Strategies
The Fund invests in both equity securities (generally about 60% of total assets)
and debt securities (generally about 40%, but at least 25%, of total assets).
The debt securities will be rated investment grade or at the two highest levels
of non-investment grade.
The Fund may invest in:
o Warrants
o Preferred stocks
o Convertible securities
The Fund may also invest up to one-third of its assets in securities of foreign
companies, and up to 15% in emerging market securities.
In choosing equity securities for the Fund, the portfolio manager will seek out
companies that are in a strong position within their industry, are owned in part
by management and are selling at a price lower than the company's intrinsic
value. Debt securities are also chosen using a value style. The portfolio
manager will focus on higher yielding securities, but will also consider
expected movements in interest rates and industry position.
The Key Risks
The Fund's share price will fluctuate and you could lose money on your
investment in the Fund. The Fund could also return less than other investments:
o If the stock market as a whole goes down
o If the stocks in the Fund's portfolio do not increase in value as
expected
o If earnings of companies the Fund invests in are not achieved and
income available for interest or dividend payments is reduced sIf
interest rates go up, causing the value of any debt securities
held by the Fund to decline
o Because investments in foreign securities may have more frequent
and larger price changes than U.S. securities and may lose value
due to changes in currency exchange rates and other factors
o Because emerging market securities involve unique risks, such as
exposure to economies less diverse and mature than that of the
U.S. and economic or political changes may cause larger price
changes in emerging market securities than other foreign
securities
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government entity.
[ICON] Touchstone Family of Funds
25
Touchstone Balanced Fund
You can find more information about certain securities in which the Fund may
invest and a more detailed description of risks under the heading Investment
Strategies And Risks later in this Prospectus.
Who May Want to Invest
This Fund is most appropriate for you if you are a risk neutral or moderately
conservative investor. You may typically take a relatively low risk approach to
investing and may be comfortable with a low level of volatility in your
investments. While safety may be important to you, you may also value
appreciation of your investments. If you invest in this Fund, you should be
willing to accept some risk. This Fund's approach may be appropriate for you if
you are several years from retirement.
The Fund's Performance
The following bar chart indicates the risks of investing in the Balanced Fund.
It shows changes in the performance of the Fund's Class A shares from year to
year since the Fund started. The chart does not reflect any sales charges. Sales
charges will reduce return.
The Fund's past performance does not necessarily indicate how it will perform in
the future.
The return for other classes of shares offered by the Fund will differ from the
Class A returns shown in the bar chart, depending on the expenses of that class.
BALANCED FUND -- CLASS A PERFORMANCE
BAR CHART
YEARS TOTAL RETURN
1995 23.24%
1996 16.86%
1997 19.25%
1998 3.98%
During the period shown in the bar chart, the highest quarterly return was
10.71% (for the quarter ended June 30, 1997) and the lowest quarterly
return was -10.39% (for the quarter ended September 30, 1998).
[ICON] Touchstone Family of Funds
26
Touchstone Balanced Fund
The table which follows shows how the Fund's average annual returns for the
periods shown compare to those of the Standard & Poor's Composite Index
of 500 Stocks (S&P 500), the Lehman Brothers Aggregate Index, a blend made
up of 60% S&P 500 and 40% LB Aggregate and to the Wiesenberger Balanced Domestic
- - -- MF index. The Lehman Brothers Aggregate Index is composed of 5,400 publicly
issued corporate and U.S. government debt rated Baa or better with at least one
year to maturity and at least $25 million par outstanding. The Wiesenberger
Balanced Domestic -- MF index is a composite index of the annual returns of
mutual funds that have an investment style similar to the Balanced Fund. The
table shows the effect of the Class A sales charge.
For the periods ended December 31, 1998
Past 12 Since
Months Fund Started
Balanced Fund -- Class A -2.0% 13.1%
- --------------------------------------------------------------------------------
Balanced Fund -- Class C 3.3% 13.9%
- --------------------------------------------------------------------------------
S&P 500 Index 28.6% 28.5%
- --------------------------------------------------------------------------------
Lehman Brothers Aggregate Index 8.7% 9.5%
- --------------------------------------------------------------------------------
Blend -- 60% S&P 500, 40% LB Aggregate 21.0% 20.8%
- --------------------------------------------------------------------------------
Wiesenberger Balanced Domestic -- MF 12.9% 15.9%
- --------------------------------------------------------------------------------
[ICON] Touchstone Family of Funds
27
Touchstone Balanced Fund
The Fund's Fees and Expenses
The following tables describe the fees and expenses that you may pay if you buy
and hold shares of a Fund:
Shareholder Fees (fees paid
directly from your investment)
Class A Shares Class C Shares
Maximum Sales Charge (Load) Imposed On
Purchases (as a percentage of offering price) 5.75%1 None
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load)
(as a percentage of amount redeemed) None 1.00%2
- --------------------------------------------------------------------------------
Annual Fund Operating
Expenses (expenses that are
deducted from Fund assets)
Management Fees 0.80% 0.80%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fees 0.25% 1.00%
- --------------------------------------------------------------------------------
Other Expenses 3.62% 3.62%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 4.67% 5.42%
- --------------------------------------------------------------------------------
Fee Waiver and/or Expense Reimbursement(3) 3.32% 3.32%
- --------------------------------------------------------------------------------
Net Expenses 1.35% 2.10%
- --------------------------------------------------------------------------------
1 You may pay a reduced sales charge on very large purchases. There is
no sales charge at the time of purchase for purchases of $1 million or
more but a sales charge of 1.00% will be assessed on shares redeemed
within one year of purchase. There is also no initial sales charge on
certain purchases in a Roth IRA, a Roth Conversion IRA or a qualified
retirement plan.
2 The 1.00% is waived for benefits paid to you through a qualified
pension plan.
3 Touchstone Advisors has contractually agreed to waive or reimburse
certain of the Total Annual Fund Operating Expenses of each Class of
the Fund (the "Sponsor Agreement"). The Sponsor Agreement will remain
in place until at least December 31, 1999.
The following example should help you compare the cost of investing in the
Balanced Fund with the cost of investing in other mutual funds. The example
assumes that you invest $10,000 in the Fund for the time periods indicated and
then sell all of your shares at the end of those periods. The example also
assumes that your investment has a 5% return each year and that the Fund's
operating expenses remain the same. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
Class A Shares Class C Shares
1 Year $ 705 $ 213
- --------------------------------------------------------------------------------
3 Years $1,620 $1,324
- --------------------------------------------------------------------------------
5 Years $2,541 $2,425
- --------------------------------------------------------------------------------
10 Years $4,872 $5,139
- --------------------------------------------------------------------------------
o The example for the 3, 5 and 10-year periods is calculated using the Total
Fund Operating Expenses before the limits agreed to under the Sponsor
Agreement for periods after year 1.
[ICON] Touchstone Family of Funds
28
Touchstone Bond Fund
Touchstone Bond Fund
- --------------------------------------------------------------------------------
The Fund's Investment Goal
The Bond Fund seeks to provide a high level of current income.
As with any mutual fund, there is no guarantee that the Fund will achieve its
goal.
- --------------------------------------------------------------------------------
Its Principal Investment Strategies
The Fund invests primarily in higher quality investment grade debt securities
(at least 65% of total assets). The Fund's investment in debt securities may be
determined by the direction in which interest rates are expected to move because
the value of these securities generally moves in the opposite direction from
interest rates. The Fund expects to have an average maturity between five and
fifteen years.
The Fund invests in:
o Mortgage-related securities (up to 60%)
o Asset-backed securities
o Preferred stocks
The Fund also invests in non-investment grade U.S. or foreign debt securities
and preferred stock which are rated as low as B (up to 35%).
In addition, the Fund may invest in:
o Debt securities denominated in foreign currencies (20% or less)
The Key Risks
The Fund's share price will fluctuate and you could lose money on your
investment in the Fund. The Fund could also return less than other investments:
o If interest rates go up, causing the value of any debt securities
held by the Fund to decline
o Because investments in foreign securities may have more frequent
and larger price changes than U.S. securities and may lose value
due to changes in currency exchange rates and other factors
o Because issuers of non-investment grade securities held by the
Fund are more likely to be unable to make timely payments of
interest or principal
o Because mortgage-related securities and asset-backed securities
may lose more value due to changes in interest rates than other
debt securities and are subject to prepayment
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government entity.
You can find more information about certain securities in which the Fund may
invest and a more detailed description of risks under the heading Investment
Strategies And Risks later in this Prospectus.
[ICON] Touchstone Family of Funds
29
Touchstone Bond Fund
Who May Want to Invest
This Fund is most appropriate for you if you prefer to take a relatively low
risk approach to investing. Safety of your investment may be the most important
factor to you. You may be willing to accept potentially lower returns in order
to maintain a lower, more tolerable level of risk. This Fund's approach may be
most appropriate for you if you are nearing retirement.
The Fund's Performance
The following bar chart indicates the risks of investing in the Bond Fund. It
shows changes in the performance of the Fund's Class A shares from year to year
since the Fund's inception. The chart does not reflect any sales charges. Sales
charges will reduce return.
The Fund's past performance does not necessarily indicate how it will perform in
the future.
The return for other classes of shares offered by the Fund will differ from the
Class A returns shown in the bar chart, depending on the expenses of that class.
BOND FUND -- CLASS A PERFORMANCE
YEARS TOTAL RETURN
1995 16.95%
1996 2.85%
1997 7.30%
1998 8.56%
During the period shown in the bar chart, the highest quarterly return was
5.21% (for the quarter ended December 31, 1997) and the lowest quarterly
return was -2.10% (for the quarter ended March 31, 1997).
[ICON] Touchstone Family of Funds
30
Touchstone Bond Fund
The table below shows how the Fund's average annual returns for the periods
shown compare to those of the Lehman Brothers Aggregate Index and to the
Wiesenberger Corp -- Investment Grade -- MF index. The Lehman Brothers Aggregate
Index is comprised of approximately 6000 publicly traded bonds with an average
maturity of about 10 years. The Wiesenberger Corp -- Investment Grade -- MF
index is a composite index of the annual returns of mutual funds that have an
investment style similar to the Bond Fund. The table shows the effect of the
Class A sales charge.
For the periods ended December 31, 1998
Past 12 Since
Months Fund Started
Bond Fund -- Class A 3.4% 7.1%
- --------------------------------------------------------------------------------
Bond Fund -- Class C 6.9% 7.3%
- --------------------------------------------------------------------------------
Lehman Brothers Aggregate Index 8.7% 9.5%
- --------------------------------------------------------------------------------
Wiesenberger Corp -- Investment Grade -- MF 7.2% 8.7%
- --------------------------------------------------------------------------------
The Fund's Fees and Expenses
These tables describe the fees and expenses that you may pay if you buy and hold
shares of the Fund:
Shareholder Fees (fees paid
directly from your investment)
Class A Shares Class C Shares
Maximum Sales Charge (Load) Imposed On
Purchases (as a percentage of offering price) 4.75%1 None
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load)
(as a percentage of amount redeemed) None 1.00%2
- --------------------------------------------------------------------------------
Annual Fund Operating
Expenses (expenses that are
deducted from Fund assets)
Management Fees 0.55% 0.55%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fees 0.25% 1.00%
- --------------------------------------------------------------------------------
Other Expenses 1.49% 1.49%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 2.29% 3.04%
- --------------------------------------------------------------------------------
Fee Waiver and/or Expense Reimbursement3 1.39% 1.39%
- --------------------------------------------------------------------------------
Net Expenses 0.90% 1.65%
- --------------------------------------------------------------------------------
1 You may pay a reduced sales charge on very large purchases. There is
no sales charge at the time of purchase for purchases of $1 million or
more but a sales charge of 1.00% will be assessed on shares redeemed
within one year of purchase. There is also no initial sales charge on
certain purchases in a Roth IRA, a Roth Conversion IRA or a qualified
retirement plan.
2 The 1.00% is waived for benefits paid to you through a qualified
pension plan.
3 Touchstone Advisors has contractually agreed to waive or reimburse
certain of the Total Annual Fund Operating Expenses of each Class of
the Fund (the "Sponsor Agreement"). The Sponsor Agreement will remain
in place until at least December 31, 1999.
[ICON] Touchstone Family of Funds
31
Touchstone Bond Fund
The following example should help you compare the cost of investing in the Bond
Fund with the cost of investing in other mutual funds. The example assumes that
you invest $10,000 in the Fund for the time periods indicated and then sell all
of your shares at the end of those periods. The example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
Class A Shares Class C Shares
1 Year $ 562 $ 168
- --------------------------------------------------------------------------------
3 Years $1,029 $ 809
- --------------------------------------------------------------------------------
5 Years $1,521 $1,475
- --------------------------------------------------------------------------------
10 Years $2,873 $3,258
- --------------------------------------------------------------------------------
o The example for the 3, 5 and 10-year periods is calculated using the
Total Fund Operating Expenses before the limits agreed to under the
Sponsor Agreement for periods after year 1.
[ICON] Touchstone Family of Funds
32
Touchstone Standby Income Fund
Touchstone Standby Income Fund
- --------------------------------------------------------------------------------
The Fund's Investment Goal
The Standby Income Fund seeks to provide a higher level of current income than a
money market fund, while also seeking to prevent large fluctuations in the value
of your initial investment. The Fund does not try to keep a constant $1.00 per
share net asset value.
As with any mutual fund, there is no guarantee that the Fund will achieve its
goal.
- --------------------------------------------------------------------------------
Its Principal Investment Strategies
The Fund invests mostly in various types of money market instruments. All
investments will be rated at least investment grade. On average, the securities
held by the Fund will mature in less than one year.
The Fund's investments may include:
o Short-term government securities
o Mortgage-related securities
o Asset-backed securities
o Repurchase agreements
The Fund may invest up to 50% of total assets in:
o Securities denominated in U.S. dollars and issued in the U.S. by
foreign issuers (known as Yankee bonds)
o Eurodollar Certificates of Deposit
In addition, the Fund may invest in:
o Debt securities denominated in foreign currencies (up to 20%)
o Corporate bonds, commercial paper, certificates of deposit, and
bankers' acceptances
The Key Risks
The Fund's share price will fluctuate and you could lose money on your
investment in the Fund. The Fund could also return less than other investments:
o If interest rates go up, causing the value of any debt securities
to decline
o Because mortgage-related securities and asset-backed securities
may lose more value due to changes in interest rates than other
debt securities and are subject to prepayment
o Because investments in foreign securities may have more frequent
and larger price changes than U.S. securities and may lose value
due to changes in currency exchange rates and other factors
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government entity.
You can find more information about certain securities in which the Fund may
invest and a more detailed description of risks under the heading Investment
Strategies And Risks later in this Prospectus.
[ICON] Touchstone Family of Funds
33
Touchstone Standby Income Fund
Who May Want to Invest
This Fund is most appropriate for you if you take a relatively low risk approach
to investing. Safety of your investment is of key importance to you.
Additionally, you are willing to accept potentially lower returns in order to
maintain a lower, more tolerable level of risk. This Fund's approach may be most
appropriate for you if you are nearing retirement, or if you have a longer time
horizon, but nevertheless, have a lower risk tolerance. This Fund is also
appropriate for you if you want the added convenience of writing checks directly
from your account.
The Fund's Performance
The bar chart shown below indicates the risks of investing in the Standby Income
Fund. It shows changes in the performance of the Fund's shares from year to year
since the Fund's inception.
The Fund's past performance does not necessarily indicate how it will perform in
the future.
STANDBY INCOME FUND PERFORMANCE
YEARS TOTAL RETURN
1995 5.71%
1996 4.80%
1997 5.21%
1998 5.49%
During the period shown in the bar chart, the highest quarterly return was
1.57% (for the quarter ended December 31, 1995) and the lowest quarterly
return was 1.07% (for the quarter ended March 31, 1996).
[ICON] Touchstone Family of Funds
34
Touchstone Standby Income Fund
The table below shows how the Fund's average annual returns for the periods
shown compare to those of the Merrill Lynch 91-Day Treasury Index, to the 30-Day
Money Market Yield Index and to the Smith Barney 3-Month Treasury Bill Index.
The Merrill Lynch 91-Day Treasury Index consists of short-term U.S. Treasury
securities, maturing in 91 days. The 30-Day Money Market Yield Index is an index
of money market funds based on 30-day yields. The Smith Barney 3-Month Treasury
Bill Index consists of short-term U.S. Treasury securities, maturing in 90 days.
For the periods ended December 31, 1998
Past 12 Since
Months Fund Started
Standby Income Fund 5.5% 5.3%
- --------------------------------------------------------------------------------
Merrill Lynch 91-day Treasury Index 5.2% 5.5%
- --------------------------------------------------------------------------------
30-day Money Market Yield Index 5.0% 5.1%
- --------------------------------------------------------------------------------
Smith Barney 3-Month Treasury Bill Index 5.1% 5.5%
- --------------------------------------------------------------------------------
The Fund's Fees and Expenses
These tables describe the fees and expenses that you may pay if you buy and hold
shares of the Fund:
Shareholder Fees (fees paid
directly from your investment)
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of offering price) None
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load)
(as a percentage of amount redeemed) None
- --------------------------------------------------------------------------------
Annual Fund Operating
Expenses (expenses that are
deducted from Fund assets)
Management Fees 0.25%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fees None
- --------------------------------------------------------------------------------
Other Expenses 3.26%
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 3.51%
- --------------------------------------------------------------------------------
Fee Waiver And/or Expense Reimbursement(1) 2.76%
- --------------------------------------------------------------------------------
Net Expenses 0.75%
- --------------------------------------------------------------------------------
1 Touchstone Advisors has contractually agreed to waive or reimburse
certain of the Total Annual Fund Operating Expenses of the Fund (the
"Sponsor Agreement"). The Sponsor Agreement will remain in place until
at least December 31, 1999.
[ICON] Touchstone Family of Funds
35
Touchstone Standby Income Fund
The following example should help you compare the cost of investing in the
Standby Income Fund with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 Year $ 77
- --------------------------------------------------------------------------------
3 Years $ 819
- --------------------------------------------------------------------------------
5 Years $1,584
- --------------------------------------------------------------------------------
10 Years $3,599
- --------------------------------------------------------------------------------
o The example for the 3, 5 and 10-year periods is calculated using the
Total Fund Operating Expenses before the limits agreed to under the
Sponsor Agreement for periods after year 1.
[ICON] Touchstone Family of Funds
36
Investment Strategies And Risks
Investment Strategies And Risks
Can a Fund Depart From its Normal Strategies?
Each Fund may depart from its investment strategies by taking temporary
defensive positions in response to adverse market, economic or political
conditions. During these times, a Fund may not achieve its investment goals.
Do the Funds Engage in Active Trading of Securities?
The International Equity Fund, Income Opportunity Fund and Bond Fund may engage
in active trading to achieve their investment goals. This may cause the Fund to
realize higher capital gains which would be passed on to you. Higher capital
gains could increase your tax liability. Frequent trading also increases
transaction costs, which would lower the Fund's performance.
Can a Fund Change its Investment Goal?
A Fund's investment goal(s) may be changed by a vote of the Board of Trustees
without shareholder approval. You would be notified at least 30 days before any
such change took effect.
Year 2000 Risk
Touchstone has implemented steps intended to assure that its major computer
systems and processes are capable of Year 2000 processing. We are also examining
the third parties with whom we work to assess their readiness and are developing
contingency plans to assure that any problems in their systems will not
materially affect Touchstone's operations.
Companies or governmental entities in which Touchstone Funds invest could also
be affected by the Year 2000 issue, but at this time the Funds cannot predict
the degree of impact.
Computer systems failure of Touchstone, a Fund Sub-Advisor or that of any Fund
service provider could impair Fund services and have a negative impact on a
Fund's operations and returns.
The Funds at a Glance
The following two tables can give you a quick basic understanding of the types
of securities a Fund tends to invest in and some of the risks associated with a
Fund's investments. You should read all of the information about a Fund and its
risks before deciding to invest.
[ICON] Touchstone Family of Funds
37
Investment Strategies And Risks
How Can I Tell, at a Glance, Which Types of Securities a Fund Might Invest in?
The following table shows the main types of securities in which each Fund
generally will invest. Some of the Funds' investments are described in detail
below:
EmergingInternational Income Value Growth Standby
Growth Equity Opportunity Plus & Income Balanced Bond Income
Fund Fund Fund Fund Fund Fund Fund Fund
Financial Instruments
- -----------------------------------------------------------------------------------------------------------------------------
Invests in U.S. stocks o o o o o
- -----------------------------------------------------------------------------------------------------------------------------
Invests in foreign stocks o o o o
Invests in investment grade
debt securities o o o o o o o o
Invests in non-investment
grade debt securities o o o o o
- -----------------------------------------------------------------------------------------------------------------------------
Invests in foreign debt securities o o o o o o
- -----------------------------------------------------------------------------------------------------------------------------
Invests in futures contracts o
- -----------------------------------------------------------------------------------------------------------------------------
Invests in forward currency
contracts o
- -----------------------------------------------------------------------------------------------------------------------------
Invests in asset-backed securities o o
- -----------------------------------------------------------------------------------------------------------------------------
Invests in mortgage-related
securities o o o o
- -----------------------------------------------------------------------------------------------------------------------------
Invests in real estate
investment trusts (REITs) o
- -----------------------------------------------------------------------------------------------------------------------------
Investment Techniques
- -----------------------------------------------------------------------------------------------------------------------------
Emphasizes securities of
small cap companies o
- -----------------------------------------------------------------------------------------------------------------------------
Emphasizes securities of mid cap
companies o
- -----------------------------------------------------------------------------------------------------------------------------
Emphasizes securities of
large cap companies o o o
- -----------------------------------------------------------------------------------------------------------------------------
Emphasizes undervalued stocks o o o
- -----------------------------------------------------------------------------------------------------------------------------
Invests in securities of
emerging markets countries o o o o o
- -----------------------------------------------------------------------------------------------------------------------------
Emphasizes dividend-paying
common stocks o
- -----------------------------------------------------------------------------------------------------------------------------
Invests in short-term
debt securities o o
- -----------------------------------------------------------------------------------------------------------------------------
Additional Information About Fund Investments
Foreign Companies. A foreign company is organized under the laws of a foreign
country and:
o Has the principal trading market for its stock in a foreign
country
o Derives at least 50% of its revenues or profits from operations
in foreign countries or has at least 50% of its assets located in
foreign countries
American Depository Receipts. American Depository Receipts (ADRs) are securities
that represent an ownership interest in a foreign security. They are generally
issued by a U.S. bank to U.S. buyers as a substitute for direct ownership of the
foreign security and are traded on U.S. exchanges.
Investment Grade Securities. Investment grade securities are generally rated BBB
or better by Standard & Poor's Rating Service (S&P) or Baa or better by Moody's
Investor Service, Inc. (Moody's).
[ICON] Touchstone Family of Funds
38
Investment Strategies And Risks
Non-investment Grade Securities. Non-investment grade securities are higher
risk, lower quality securities, often referred to as "junk bonds", and are
considered speculative. They are rated by S&P as less than BBB or by Moody's as
less than Baa.
Asset-backed Securities. Asset-backed securities represent groups of other
assets, for example credit card receivables, that are combined or pooled for
sale to investors.
Mortgage-related Securities. Mortgage-related securities represent groups of
mortgage loans that are combined for sale to investors. The loans may be grouped
together by:
o The Government National Mortgage Association (GNMA)
o The Federal National Mortgage Association (FNMA)
o The Federal Home Loan Mortgage Corporation (FHLMC)
o Commercial banks
o Savings and loan institutions
o Mortgage bankers
o Private mortgage insurance companies
Real Estate Investment Trusts. Real estate investment trusts (REITs) pool
investors' money to invest primarily in income-producing real estate or real
estate-related loans or interests.
"Large cap" and "Mid cap" Companies. A large cap company has a market
capitalization of more than $5 billion. A mid cap company has a market
capitalization of between $1 billion and $5 billion.
Emerging Growth Companies. Emerging Growth companies are companies that have:
o A total market capitalization less than that of the average of
the companies in the Standard & Poor's Composite Index of 500
Stocks (S&P 500)
o Earnings that the portfolio managers believe may grow faster than
the U.S. economy in general due to new products, management
changes at the company or economic shocks such as high inflation
or sudden increases or decreases in interest rates
Emerging Market Securities. Emerging Market Securities are issued by a company
that:
o Is organized under the laws of an emerging market country (any
country other than Australia, Austria, Belgium, Canada, Denmark,
Finland, France, Germany, Holland, Italy, Japan, Luxembourg, New
Zealand, Norway, Spain, Sweden, Switzerland, the United Kingdom
and the United States)
o Has its principal trading market for its stock in an emerging
market country
o Derives at least 50% of its revenues or profits from operations
within emerging market countries or has at least 50% of its
assets located in emerging market countries
[ICON] Touchstone Family of Funds
39
Investment Strategies And Risks
Undervalued Stocks. A stock is considered undervalued if the portfolio manager
believes it should be trading at a higher price than it is at the time of
purchase. Factors considered are:
o Price relative to earnings
o Price relative to cash flow
o Price relative to financial strength
Repurchase Agreements. Repurchase Agreements are collateralized by obligations
issued or guaranteed as to both principal and interest by the U.S. Government,
its agencies, and instrumentalities. A repurchase agreement is a transaction in
which a security is purchased with a simultaneous commitment to sell it back to
the seller (a commercial bank or recognized securities dealer) at an agreed upon
price on an agreed upon date. This date is usually not more than seven days from
the date of purchase. The resale price reflects the purchase price plus an
agreed upon market rate of interest, which is unrelated to the coupon rate or
maturity of the purchased security.
How Can I Tell, at a Glance, a Fund's Key Risks?
The following table shows some of the main risks to which each Fund is subject.
Each risk is described in detail below:
EmergingInternational Income Growth Standby
Growth Equity Opportunity Value Plus & Income Balanced Bond Income
Fund Fund Fund Fund Fund Fund Fund Fund
Market Risk o o o o o
- -----------------------------------------------------------------------------------------------------------------------
Emerging Growth Companies o
- -----------------------------------------------------------------------------------------------------------------------
Real Estate Investment Trusts o
- -----------------------------------------------------------------------------------------------------------------------
Interest Rate Risk o o o o o o o o
- -----------------------------------------------------------------------------------------------------------------------
Mortgage-Related Securities o o o o
- -----------------------------------------------------------------------------------------------------------------------
Credit Risk o o o o o o o o
- -----------------------------------------------------------------------------------------------------------------------
Non-Investment Grade Securities o o o o o
- -----------------------------------------------------------------------------------------------------------------------
Foreign Investing Risk o o o o o o o
- -----------------------------------------------------------------------------------------------------------------------
Emerging Market Risk o o o o o
- -----------------------------------------------------------------------------------------------------------------------
Political Risk o o
- -----------------------------------------------------------------------------------------------------------------------
[ICON] Touchstone Family of Funds
40
Investment Strategies And Risks
Risks of Investing in the Funds
Market Risk. A Fund that invests in common stocks is subject to stock market
risk. Stock prices in general may decline over short or even extended periods,
regardless of the success or failure of a particular company's operations. Stock
markets tend to run in cycles, with periods when stock prices generally go up
and periods when they generally go down. Common stock prices tend to go up and
down more than those of bonds.
o Emerging Growth Companies. Investment in Emerging Growth
companies is subject to enhanced risks because such companies
generally have limited product lines, markets or financial
resources and often exhibit a lack of management depth. The
securities of such companies can be difficult to sell and are
usually more volatile than securities of larger, more established
companies.
o Real Estate Investment Trusts (REITs). Investment in REITs is
subject to risks similar to those associated with the direct
ownership of real estate (in addition to securities markets
risks). REITs are sensitive to factors such as changes in real
estate values and property taxes, interest rates, cash flow of
underlying real estate assets, supply and demand, and the
management skill and creditworthiness of the issuer. REITs may
also lose value due to changes in tax or other regulatory
requirements.
Interest Rat Risk. A Fund that invests in debt securities is subject to the
risk that the market value of the debt securities will decline because of rising
interest rates. The prices of debt securities are generally linked to the
prevailing market interest rates. In general, when interest rates rise, the
prices of debt securities fall, and when interest rates fall, the prices of debt
securities rise. The price volatility of a debt security also depends on its
maturity. Generally, the longer the maturity of a debt security, the greater its
sensitivity to changes in interest rates. To compensate investors for this
higher risk, debt securities with longer maturities generally offer higher
yields than debt securities with shorter maturities.
o Mortgage-Related Securities. Payments from the pool of loans
underlying a mortgage-related security may not be enough to meet
the monthly payments of the mortgage-related security. If this
occurs, the mortgage-related security will lose value. Also,
prepayments of mortgages or mortgage foreclosures will shorten
the life of the pool of mortgages underlying a mortgage-related
security and will affect the average life of the mortgage-related
securities held by a Fund. Mortgage prepayments vary based on
several factors including the level of interest rates, general
economic conditions, the location and age of the mortgage and
other demographic conditions. In periods of falling interest
rates, there are usually more prepayments. The reinvestment of
cash received from prepayments will, therefore, usually be at a
lower interest rate than the original investment, lowering a
Fund's yield. Mortgage-related securities may be less likely to
increase in value during periods of falling interest rates than
other debt securities.
[ICON] Touchstone Family of Funds
41
Investment Strategies And Risks
Credit Risk. The debt securities in a Fund's portfolio are subject to credit
risk. Credit risk is the possibility that an issuer will fail to make timely
payments of interest or principal. Securities rated in the lowest category of
investment grade securities have some risky characteristics and changes in
economic conditions are more likely to cause issuers of these securities to be
unable to make payments.
o Non-Investment Grade Securities. Non-investment grade securities
are sometimes referred to as "junk bonds" and are very risky with
respect to their issuers' ability to make payments of interest
and principal. There is a high risk that a Fund which invests in
non-investment grade securities could suffer a loss caused by the
default of an issuer of such securities. Part of the reason for
this high risk is that, in the event of a default or bankruptcy,
holders of non-investment grade securities generally will not
receive payments until the holders of all other debt have been
paid. In addition, the market for non-investment grade securities
has, in the past, had more frequent and larger price changes than
the markets for other securities. Non-investment grade securities
can also be more difficult to sell for good value.
Foreign Investing. Investing in foreign securities poses unique risks such as
fluctuation in currency exchange rates, market illiquidity, price volatility,
high trading costs, difficulties in settlement, regulations on stock exchanges,
limits on foreign ownership, less stringent accounting, reporting and disclosure
requirements, and other considerations. In the past, equity and debt instruments
of foreign markets have had more frequent and larger price changes than those of
U.S. markets.
o Emerging Markets Risk. Investments in a country that is still
relatively underdeveloped involves exposure to economic
structures that are generally less diverse and mature than in the
U.S. and to political and legal systems which may be less stable.
In the past, markets of developing countries have had more
frequent and larger price changes than those of developed
countries.
o Political Risk. Political risk includes a greater potential for
revolts, and the taking of assets by governments. For example, a
Fund may invest in Eastern Europe and former states of the Soviet
Union. These countries were under communist systems that took
control of private industry. This could occur again in this
region or others in which a Fund may invest, in which case the
Fund may lose all or part of its investment in that country's
issuers.
[ICON] Touchstone Family of Funds
42
The Funds' Management
The Funds' Management
Investment Advisor
Touchstone Advisors, Inc., (the Advisor or Touchstone Advisors) located at 311
Pike Street, Cincinnati, Ohio 45202, is the investment advisor of the Funds.
Touchstone Advisors has been registered as an investment advisor under the
Investment Advisers Act of 1940, as amended (the Advisers Act) since 1994. As of
December 31, 1998, Touchstone Advisors had approximately $422 million in assets
under management.
Touchstone Advisors is responsible for selecting Fund Sub-Advisors who have
shown good investment performance in their areas of expertise. The Board of
Trustees of the Trust reviews and must approve the Advisor's selections.
Touchstone considers various factors in evaluating Fund Sub-Advisors, including:
o Level of knowledge and skill
o Performance as compared to its peers or benchmark
o Consistency of performance over five years or more
o Level of compliance with investment rules and strategies
o Employees, facilities and financial strength
o Quality of service
Touchstone will also continually monitor each Fund Sub-Advisor's performance
through various analyses and through in-person, telephone and written
consultations with the Fund Sub-Advisors.
Touchstone discusses its expectations for performance with each Fund
Sub-Advisor. Touchstone provides written evaluations and recommendations to the
Board of Trustees, including whether or not each Fund Sub-Advisor's contract
should be renewed, modified or terminated.
Touchstone is also responsible for running all of the operations of the Funds,
except for those that are subcontracted to the Fund Sub-Advisors, custodian,
transfer agent and administrator.
Two or more Fund Sub-Advisors may manage a Fund, with each managing a portion of
the Fund's assets. If a Fund has more than one Fund Sub-Advisor, Touchstone
allocates how much of a Fund's assets are managed by each Sub-Advisor.
Touchstone may change these allocations from time to time, often based upon the
results of the evaluations of the Fund Sub-Advisors.
Each Fund pays Touchstone a fee for its services. Out of this fee Touchstone
pays each Fund Sub-Advisor a fee for its services.
[ICON] Touchstone Family of Funds
43
The Funds' Management
The fee paid to Touchstone by each Fund is shown in the table below:
Fee to Touchstone
(as % of average
daily net assets)
Emerging Growth Fund 0.80%
- --------------------------------------------------------------------------------
International Equity Fund 0.95%
- --------------------------------------------------------------------------------
Income Opportunity Fund 0.65%
- --------------------------------------------------------------------------------
Value Plus Fund 0.75%
- --------------------------------------------------------------------------------
Growth & Income Fund 0.80%
- --------------------------------------------------------------------------------
Balanced Fund 0.80%
- --------------------------------------------------------------------------------
Bond Fund 0.55%
- --------------------------------------------------------------------------------
Standby Income Fund 0.25%
- --------------------------------------------------------------------------------
Fund Sub-Advisors
The Fund Sub-Advisors make the day-to-day decisions regarding buying and selling
specific securities for a Fund. Each Fund Sub-Advisor manages the investments
held by the Fund it serves according to the applicable investment goals and
strategies.
Fund Sub-Advisors to the Emerging Growth Fund
David L. Babson & Company, Inc. (Babson)
One Memorial Drive, Cambridge, MA 02142-1300
Babson has been registered as an investment advisor under the Advisers Act since
1940. Babson provides investment advisory services to individual and
institutional clients. As of December 31, 1998, Babson and affiliates had assets
under management of $19.9 billion. Babson has been managing the Emerging Growth
Fund since the Fund's inception.
Dennis J. Scannell and Lance F. James have primary responsibility for the
day-to-day management of the Fund. Mr. Scannell has been with the firm since
1993, and Mr. James has been with the firm since 1986.
Westfield Capital Management Company, Inc. (Westfield)
One Financial Center, Boston, MA 02111
Westfield has been registered as an investment advisor under the Advisers Act
since 1989. Westfield provides investment advisory services to individual and
institutional clients. As of December 31, 1998, Westfield had assets under
management of $1.4 billion. Westfield has been managing the Emerging Growth Fund
since the Fund's inception.
William A. Muggia has managed the portion of the Emerging Growth Fund's assets
allocated to Westfield by the Advisor since April 1999. Mr. Muggia has been with
Westfield since 1994.
[ICON] Touchstone Family of Funds
44
The Funds' Management
Fund Sub-Advisor to the International Equity Fund
Credit Suisse Asset Management (Credit Suisse)
One Citicorp Center, 153 East 53rd Street, New York, NY 10022
Credit Suisse has been registered as an investment advisor under the Advisers
Act since 1968. Credit Suisse provides investment advisory services to
individual and institutional clients. As of December 31, 1998, Credit Suisse had
assets under management of $154.2 billion. Credit Suisse has been managing the
International Equity Fund since the Fund's inception.
The Fund is managed by the Credit Suisse International Equity Management Team.
The team consists of William Sterling, Richard Watt, Steven D. Bleiberg, Susan
Boland, Emily Alejos and Robert B. Hrabchak.
Fund Sub-Advisor to the Income Opportunity Fund
Alliance Capital Management L.P. (Alliance)
1345 Avenue of the Americas, New York, NY 10105
Alliance has been registered as an investment advisor under the Advisers Act
since 1971. Alliance provides investment advisory services to individual and
institutional clients. As of December 31, 1998, Alliance had assets under
management of $286.7 billion. Alliance has been managing the Income Opportunity
Fund since the Fund's inception.
Wayne Lyski and Vicki Fuller have primary responsibility for the day-to-day
management of the Fund. Mr. Lyski has been with Alliance since 1983. Ms. Fuller
(CPA) has been with Alliance, and its predecessors, since 1985.
Fund Sub-Advisor to the Value Plus Fund, Bond Fund,
and Standby Income Fund
Fort Washington Investment Advisors, Inc. (Fort Washington)
420 East Fourth Street, Cincinnati, OH 45202
Fort Washington has been registered as an investment advisor under the Advisers
Act since 1990. Fort Washington provides investment advisory services to
individual and institutional clients. As of December 31, 1998, Fort Washington
had assets under management of $6.3 billion. Fort Washington has been managing
the Value Plus Fund, the Bond Fund and the Standby Income Fund since each Fund's
inception.
Value Plus Fund: John C. Holden has managed the Value Plus Fund since May, 1998.
Mr. Holden (CFA) joined Fort Washington in 1997 and is Vice President and Senior
Portfolio Manager. Mr. Holden previously served as senior portfolio manager with
Mellon Private Asset Management in Pittsburgh, senior portfolio manager and
investment analyst for Star Bank's Stellar Performance Group in Cincinnati, and
senior employee benefit portfolio manager for First Kentucky Trust Company in
Louisville.
Bond Fund: Roger Lanham and Brendan White have managed the Bond Fund since 1994.
Mr. Lanham is a CFA and has been with Fort Washington since 1980. Mr. White is a
CFA and has been with Fort Washington since 1993.
[ICON] Touchstone Family of Funds
45
The Funds' Management
Standby Income Fund: Christopher J. Mahony has managed the Standby Income Fund
since 1994. Mr. Mahony joined Fort Washington in 1994 after eight years of
investment experience with Neuberger & Berman.
Fort Washington is an affiliate of Touchstone. Therefore, Touchstone may have a
conflict of interest when making decisions to keep Fort Washington as a Fund
Sub-Advisor. The Board of Trustees reviews all of Touchstone's decisions to
reduce the possibility of a conflict of interest situation.
Fund Sub-Advisor to the Growth & Income Fund
Scudder Kemper Investments, Inc. (Scudder Kemper)
345 Park Avenue, New York, NY 10154
Scudder Kemper and its predecessors have provided investment advisory services
to mutual fund investors, retirement and pension plans, institutional and
corporate clients, insurance companies, and private family and individual
accounts since 1943. As of December 31, 1998, Scudder Kemper had assets under
management of $280 billion. Scudder Kemper has been managing the Growth & Income
Fund since June 1997.
Robert T. Hoffman, Lori Ensinger, Benjamin W. Thorndike and Kathleen T. Millard
have primary responsibility for the day-to-day management of the Fund. Mr.
Hoffman, Lead Product Manager, joined Scudder in 1990. He has 13 years of
experience in the investment industry, including several years of pension fund
management experience. Lori Ensinger, Lead Portfolio Manager, focuses on stock
selection and investment strategy. She has been a portfolio manager since 1983
and joined Scudder in 1993. Benjamin W. Thorndike, Portfolio Manager, is the
Fund's chief analyst and strategist for convertible securities. Mr. Thorndike,
who has 18 years of investment experience, joined Scudder in 1983. Kathleen T.
Millard, Portfolio Manager, has worked as a portfolio manager since 1986. Ms.
Millard, who joined Scudder in 1991, focuses on strategy and stock selection.
Fund Sub-Advisor to the Balanced Fund
OpCap Advisors (OpCap)
Oppenheimer Tower, One World Financial Center, New York, NY 10281
OpCap is a subsidiary of Oppenheimer Capital. Oppenheimer Capital has been
registered as an investment advisor under the Advisers Act since 1968 and its
employees perform all investment advisory services provided to the Fund. As of
December 31, 1998, Oppenheimer Capital and its subsidiaries had assets under
management of $63 billion. OpCap has been managing the Balanced Fund
since May of 1997.
Louis Goldstein has managed the equity portion of the Balanced Fund since April
1999. Robert J. Bluestone and Matthew Greenwald have managed the fixed-income
portion of the Balanced Fund since 1997. Mr. Goldstein joined Oppenheimer
Capital in 1991 and is an equity analyst and portfolio manager. Mr. Bluestone
joined Oppenheimer Capital in 1986 and is Managing Director. Mr. Greenwald
joined Oppenheimer Capital in 1989 and is Vice President.
[ICON] Touchstone Family of Funds
46
Investing With Touchstone
Investing With Touchstone
Opening An Account
Choosing the Appropriate Funds to Match Your Goals. Investing well requires a
plan. We recommend that you meet with your financial advisor to plan a strategy
that will best meet your financial goals.
You should read this Prospectus carefully and then determine how much you want
to invest. Check below to find the minimum investment amount required for each
class of shares as well as to learn about the various ways you can purchase your
shares:
Class A Class C
Initial Additional Initial Additional
Investment Investment Investment Investment
Regular Account $500 $50 $1,000 $50
- ------------------------------------------------------------------------------------------------------------
Retirement Plan account or Custodial account under
a Uniform Gifts/Transfers to Minors Act ("UGTMA") $250 $50 $ 250 $50
- ------------------------------------------------------------------------------------------------------------
Investments through the Automatic Investment
Plan or through the Direct Deposit Plan $ 50 $50 $ 50 $50
- ------------------------------------------------------------------------------------------------------------
o Investor Alert: Touchstone could change these initial and
additional investment minimums at any time.
Investing in the Funds
You can contact your financial advisor to purchase shares of the Funds.
You may also purchase shares of any Fund directly from Touchstone. In any event,
you must complete an Investment Application. You may obtain account applications
from Touchstone or your financial advisor.
o Investor Alert: Touchstone may choose to refuse any purchase
order.
Pricing of Fund Shares
Each Fund's share price, also called net asset value (NAV), is determined as of
the close of trading (normally 4:00 p.m. Eastern time) every day the New York
Stock Exchange (NYSE) is open. The fund calculates the NAV per share, generally
using market prices, by dividing the total value of each class' net assets by
the number of the class shares outstanding. Shares are purchased at the next
offering price determined after your purchase or sale order is received in
proper form by Touchstone. The offering price is the NAV plus a sales charge, if
applicable.
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47
Investing With Touchstone
The Fund's investments are valued based on market value or, if no market value
is available, based on fair value as determined by the Board of Trustees (or
under their direction). All assets and liabilities initially expressed in
foreign currency values will be converted into U.S. dollar values. Some specific
pricing strategies follow:
o All short-term dollar-denominated investments that mature in 60
days or less are valued on the basis of amortized cost which the
Board of Trustees has determined represents fair value.
o Securities mainly traded on a U.S. exchange are valued at the
last sale price on that exchange or, if no sales occurred during
the day, at the current quoted bid price.
o Securities mainly traded on a non-U.S. exchange are generally
valued according to the preceding closing values on that
exchange. However, if an event which may change the value of a
security occurs after the time that the closing value on the
non-U.S. exchange was determined, the Board of Trustees might
decide to value the security based on fair value. This may cause
the value of the security on the books of the fund to be
significantly different from the closing value on the non-U.S.
exchange and may affect the calculation of the NAV.
o Because portfolio securities that are primarily listed on a
non-U.S. exchange may trade on weekends or other days when a Fund
does not price its shares, a Fund's NAV may change on days when
shareholders will not be able to buy or sell shares.
Choosing a Class of Shares
Each of the Funds (other than the Standby Income Fund) offers Class A shares and
Class C shares. Each class of shares charges different sales charges and
distribution or service fees. The amount of sales charges and other fees you pay
will depend on which class of shares you decide to purchase.
Each Fund also offers Class Y shares. Class Y shares are only available for
purchase by pension plans.
The Standby Income Fund does not have share classes and it does not charge sales
charges, distribution fees or service fees. The Standby Income Fund may be
purchased by all investors.
Class A Shares
The offering price of each Class A share of a Fund is equal to its NAV plus a
front-end sales charge that you pay when you buy your shares. The front-end
sales charge is generally deducted from the amount of your investment.
The following tables show the amounts of the front-end sales charge you will pay
on purchases of Class A shares of each Fund as a percentage of (1) offering
price and (2) the net amount invested after the charge has been subtracted. Note
that the front-end sales charge gets lower as your investment amount gets
larger.
[ICON] Touchstone Family of Funds
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Investing With Touchstone
For Emerging Growth Fund, International Equity Fund, Value Plus Fund, Growth &
Income Fund and Balanced Fund
Sales Charge As % of Sales Charge As % of
Amount of Your Investment Offering Price Net Amount Invested
Under $50,000 5.75% 6.10%
- ------------------------------------------------------------------------
$50,000 but less than $100,000 4.50% 4.71%
- ------------------------------------------------------------------------
$100,000 but less than $250,000 3.50% 3.63%
- ------------------------------------------------------------------------
$250,000 but less than $500,000 2.50% 2.56%
- ------------------------------------------------------------------------
$500,000 but less than $1 million 2.00% 2.04%
- ------------------------------------------------------------------------
$1 million or more 0.00% 0.00%
- ------------------------------------------------------------------------
For Income Opportunity Fund and Bond Fund
Sales Charge As % of Sales Charge As % of
Amount of Your Investment Offering Price Net Amount Invested
Under $25,000 4.75% 4.99%
- --------------------------------------------------------------------------------
$25,000 but less than $50,000 4.50% 4.71%
- --------------------------------------------------------------------------------
$50,000 but less than $100,000 4.00% 4.17%
- --------------------------------------------------------------------------------
$100,000 but less than $250,000 3.50% 3.63%
- --------------------------------------------------------------------------------
$250,000 but less than $500,000 2.50% 2.56%
- --------------------------------------------------------------------------------
$500,000 but less than $1 million 2.00% 2.04%
- --------------------------------------------------------------------------------
$1 million or more 0.00% 0.00%
- --------------------------------------------------------------------------------
There is no front-end sales charge if you invest $1 million or more in the
Funds. This includes large total purchases made through programs such as
Aggregation, Concurrent Purchases, Letters of Intent and Rights of Accumulation.
These programs are described more fully in the Statement of Additional
Information (SAI). In addition, there is no front-end sales charge on purchases
by certain persons related to the Fund or its service providers and certain
other persons listed in the Statement of Additional Information.
If you redeem shares that you purchased as part of the $1 million purchase
within one year, you will pay a contingent deferred sales charge (a sales charge
you pay when you redeem your shares) of 1% on the shares redeemed.
Each Fund (other than the Standby Income Fund) has adopted a distribution and
service plan under Rule 12b-1 of the Investment Company Act of 1940, as amended
(the 1940 Act) for its Class A shares. This plan allows each Fund to pay
distribution and other fees for the sale and distribution of its Class A shares
and for services provided to holders of Class A shares.
[ICON] Touchstone Family of Funds
49
Investing With Touchstone
Under the plan, each Fund pays an annual fee of up to 0.25% of the average daily
net assets of the Fund that are attributable to Class A shares. Because these
fees are paid out of the Fund's assets on an ongoing basis, these fees will
increase the cost of your investment.
Class C Shares
The offering price of each Class C share is equal to its NAV. No front-end sales
charge is applied at the time of purchase. All of your investment money goes to
work for you immediately. However, a contingent deferred sales charge of 1% of
the offering price will be charged on shares redeemed within one year after you
purchased them.
No contingent deferred sales charge is applied if:
o The shares which you redeem were acquired through the
reinvestment of dividends or capital gains distributions
o The amount redeemed resulted from increases in the value of the
account above the amount of the total purchase payments
When we determine whether a contingent deferred sales charge is payable on a
redemption, we assume that:
o The redemption is made first from amounts free of any contingent
deferred sales charge; then
o From the earliest purchase payments(s) that remain invested in
the Funds
When we determine if amounts are available for redemption free of any contingent
deferred sales charge, we:
o Add together all of your original purchase payments
o Subtract any amounts previously withdrawn
o Check if there is any remaining amount free of any contingent
deferred sales charge that can be applied to the total of the
current value of the shares you have asked to redeem
There is no contingent deferred sales charge on purchases by certain persons
related to the Fund or its service providers and certain other parties.
Each Fund (other than the Standby Income Fund) has adopted a distribution and
service plan under Rule 12b-1 of the 1940 Act for its Class C shares. This plan
allows each Fund to pay distribution and other fees for the sale and
distribution of its Class C shares and for services provided to holders of Class
C shares.
Under the plan, each Fund pays an annual fee of up to 1.00% of the average daily
net assets of the Fund that are attributable to Class C shares. Because these
fees are paid out of the Fund's assets on an ongoing basis, these fees will
increase the cost of your investment and over time may cost you more than paying
other types of sales charges.
[ICON] Touchstone Family of Funds
50
Investing With Touchstone
Purchasing Your Shares
You can invest in the Fund shares in the following ways:
Opening an account
o Please make your check (in U.S. dollars) payable to the
Touchstone Family of Funds.
o Send your check with the completed account application to the
address shown on the application or to your financial advisor.
Your application will be processed subject to your check
BY CHECK clearing.
- --------------------------------------------------------------------------------
o First, telephone Touchstone at 800.669.2796 (press 1) between the
hours of 8:00 a.m. and 4:00 p.m. Eastern time on a day when the
NYSE is open for regular trading. When you call, you will receive
an account number.
o Instruct your bank to transfer funds by wire to Touchstone at the
following address: Touchstone Family of Funds, c/o State Street
Bank and Trust Company, P.O. Box 8518, Boston, Massachusetts
02266-8518, ABA Number 011000028, DDA Number 9905-036-1,
Attention: Mutual Funds Division.
o Specify in the wire: (1) the name of the Fund, (2) the account
number which Touchstone assigned to you, and (3) your name. If
Touchstone receives the federal funds before the close of regular
trading of the NYSE on a day the NYSE is open for regular
BY WIRE trading, you may purchase Fund shares as of that day.
- --------------------------------------------------------------------------------
o First, you should follow the procedures under "By Check" or "By
Wire" in order to get an account number for Fund(s) which you do
not currently own shares of, but which you desire to exchange
shares into.
o You may exchange your Fund shares for shares of the same Class of
another Fund (or of the Standby Income Fund) described in this
Prospectus at their respective NAVs.
o You do not have to pay any exchange fee for these exchanges.
o You should review the disclosure provided in this Prospectus
relating to the exchanged-for shares carefully before making an
BY EXCHANGE exchange of your Fund shares.
- --------------------------------------------------------------------------------
o You can begin the process of purchasing shares by wire or arrange
for an exchange of shares by calling Touchstone In-Touch,
Touchstone's automated response system, at 800.669.2796 and
speaking to a customer service representative (press 1,1,3).
o Touchstone In-Touch can also provide you with other information
BY TELEPHONE about the Funds such as daily share prices.
- --------------------------------------------------------------------------------
o You may invest in each Fund through various retirement plans. The
Funds' shares are designed for use with certain types of tax
qualified retirement plans including defined benefit and defined
contribution plans.
THROUGH o For further information about any of the plans, agreements,
RETIREMENT applications and annual fees, contact Touchstone or your
PLANS financial advisor.
- --------------------------------------------------------------------------------
[ICON] Touchstone Family of Funds
51
Investing With Touchstone
Adding to your account
o Complete the investment form provided at the bottom of a recent
account statement.
o Make your check payable to the Touchstone Family of Funds.
o Write your account number and asset allocation model number, if
applicable, on the check.
o Either: (1) Mail the check with the investment form in the
envelope provided with your account statement; or (2) Mail your
check directly to your financial advisor at the address printed
on your account statement. Your financial advisor is responsible
BY CHECK for forwarding payment promptly to Touchstone.
- --------------------------------------------------------------------------------
o Refer to wire instructions for opening an account.
o Specify in the wire: (1) the name of the Fund, (2) the account
number which Touchstone assigned to you, and (3) your name. If
Touchstone receives the federal funds before the close of regular
trading of the New York Stock Exchange (NYSE) on a day the NYSE
is open for regular trading, you may purchase Fund shares as of
BY WIRE that day.
- --------------------------------------------------------------------------------
o You may exchange your Fund shares for shares of the same Class of
another Fund (or of the Standby Income Fund) described in this
Prospectus at their respective NAVs.
o You do not have to pay any exchange fee for these exchanges.
o You should review the disclosure provided in this Prospectus
relating to the exchanged-for shares carefully before making an
BY EXCHANGE exchange of your Fund shares.
- --------------------------------------------------------------------------------
o You can arrange for an exchange of shares by calling Touchstone
In-Touch, Touchstone's automated response system, at 800.669.2796
and speaking to a customer service representative (press 1,1,3).
Touchstone In-Touch can also provide you with other information
BY TELEPHONE about the Funds such as daily share prices.
- --------------------------------------------------------------------------------
THROUGH o You may add to your account in each Fund through various
RETIREMENT retirement plans. For further information, contact Touchstone or
PLANS your financial advisor.
- --------------------------------------------------------------------------------
More Information About Wire Transfers.
You may invest in the Funds directly by wire transfers. Contact your bank and
request it to wire federal funds to Touchstone. Banks may charge a fee for
handling wire transfers. You should contact Touchstone or your financial advisor
for further instructions.
[ICON] Touchstone Family of Funds
52
Investing With Touchstone
ooo Special Tax
Consideration
- --------------------------------------------------------------------------------
For federal income tax purposes, an exchange of shares is treated as a sale of
the shares and a purchase of the shares you receive in exchange. Therefore, you
may incur a taxable gain or loss in connection with the exchange.
ooo Special Tax
Consideration
- --------------------------------------------------------------------------------
To determine which type of retirement plan is appropriate for you, please
contact your tax advisor.
More Information About Exchanges.
For exchanges from the Standby Income Fund, which has no sales charge associated
with it, the applicable sales charges on the Fund being purchased will apply.
The exception would be if those Standby Income Fund shares were acquired by an
exchange from a Fund which does have a sales charge or by reinvestment or
cross-reinvestment of dividends or capital gains distributions.
More Information About Retirement Plans.
Retirement Plans may include the following:
Individual Retirement Plans
o Traditional Individual Retirement Accounts (IRAs)
o Savings Incentive Match Plan for Employees (SIMPLE) IRAs
o Roth Individual Retirement Accounts (Roth IRAs)
o Education Individual Retirement Accounts (Education IRAs)
o Simplified Employee Pension Plans (SEP IRAs)
o 403(b) Tax Sheltered Accounts that employ as custodian a bank
acceptable to the Distributor
Employer Sponsored Retirement Plans
o Defined benefit plans
o Defined contribution plans (including 401K plans, profit sharing
plans and money purchase plans)
o 457 plans
Automatic Investment Options
The various ways that you can invest in the Funds are outlined below. Touchstone
does not charge any fees for these services.
Automatic Investment Plan. You can pre-authorize monthly or quarterly
investments of $50 or more in each Fund to be processed electronically from a
checking or savings account. You will need to complete the appropriate forms to
do this. See the account application for further details about this service or
call Touchstone at 800.669.2796 (press 1).
Reinvestment/Cross Reinvestment. Dividends and capital gains can be
automatically reinvested in the Fund that pays them or another Fund within the
same class of shares without a fee or sales charge. Dividends and capital gains
will be reinvested in the Fund that pays them, unless you indicate otherwise on
your account application. You may also choose to have your dividends or capital
gains paid to you in cash.
[ICON] Touchstone Family of Funds
53
Investing With Touchstone
Direct Deposit Purchase Plan. You may automatically invest Social Security
checks, private payroll checks, pension payouts or any other pre-authorized
government or private recurring payments in our Funds. This occurs on a monthly
basis and the minimum investment is $50.
Dollar Cost Averaging. Touchstone's Dollar Cost Averaging program allows you to
diversify your investments by investing the same amount on a regular basis. You
can set up periodic automatic transfers of at least $50 from one Touchstone Fund
to any other. The applicable sales charge, if any, will be assessed.
Processing Organizations. You may also purchase shares of the Funds through a
"processing organization", (e.g. a mutual fund supermarket) which is a
broker-dealer, bank or other financial institution that purchases shares for its
customers. Some of the Funds have authorized certain processing organizations to
receive purchase and sales orders on their behalf. Before investing in the Funds
through a processing organization, you should read any materials provided by the
processing organization in conjunction with this Prospectus.
When shares are purchased this way, there may be various differences. The
processing organization may:
o Charge a fee for its services
o Act as the shareholder of record of the shares
o Set different minimum initial and additional investment
requirements
o Impose other charges and restrictions
o Designate intermediaries to accept purchase and sales orders on
the Funds' behalf
Touchstone considers a purchase or sales order as received when an authorized
processing organization, or its authorized designee, receives the order in
proper form. These orders will be priced based on the Fund's NAV next computed
after such order is received in proper form.
Shares held through a processing organization may be transferred into your name
following procedures established by your processing organization and Touchstone.
Certain processing organizations may receive compensation from the Funds,
Touchstone, the Advisor or their affiliates.
[ICON] Touchstone Family of Funds
54
Investing With Touchstone
Selling Your Shares
You may sell some or all of your Fund shares on any day that the Fund calculates
its NAV. If your request is received in proper form before the close of regular
trading on the NYSE, you will receive a price based on that day's NAV for the
shares you sell. Otherwise, the price you receive will be based on the NAV that
is next calculated.
o You can sell or exchange your shares over the telephone, unless
you have specifically declined this option. If you do not wish to
have this ability, you must mark the appropriate section of the
Investment Application.
o To sell your Fund shares by telephone, call Touchstone at
800.669.2796 (press 1) or, from outside the United States,
617.483.5000 ext. 6518. You can also send a fax to us at
617.483.2354 between the hours of 8:00 a.m. and 4:00 p.m. Eastern
BY TELEPHONE time on a day when the NYSE is open for regular trading.
- --------------------------------------------------------------------------------
o Write to Touchstone.
o Specify the name of the Fund.
o Indicate the number of shares or dollar amount to be sold.
BY MAIL o Include your name and account number.
- --------------------------------------------------------------------------------
o Complete the appropriate information on the Investment
Application or fill out a Touchstone Wire Transfer Form.
o If your proceeds are $1,000 or more, you may request that the
Transfer Agent wire them to your bank account.
o You may also request wire transfer of your proceeds in writing.
Written requests should include the name, location and ABA or
bank routing number (if known) of your designated bank and your
BY WIRE account number.
- --------------------------------------------------------------------------------
o If a corporation, partnership, trust or fiduciary requests the
BY A sale of shares, Touchstone will require proof of their authority
THIRD PARTY before shares are sold.
- --------------------------------------------------------------------------------
THROUGH o You may also sell shares by contacting your financial advisor,
YOUR who may charge you a fee for this service. Shares held in street
FINANCIAL name must be sold through your financial advisor or, if
ADVISOR applicable, the processing organization.
- --------------------------------------------------------------------------------
[ICON] Touchstone Family of Funds
55
Investing With Touchstone
ooo Special Tax
Consideration
- --------------------------------------------------------------------------------
Selling your shares may cause you to incur a taxable gain or loss.
o Investor Alert: Unless otherwise specified, proceeds will be sent
to the record owner at the address shown on Touchstone's records.
Signature Guarantees. Some circumstances require that the request for the sale
of shares have a signature guarantee. A signature guarantee helps protect you
against fraud. You can obtain one from most banks or securities dealers, but not
from a notary public. Some circumstances requiring a signature guarantee
include:
o Proceeds from the sale of shares that exceed $50,000
o Proceeds to be paid to a person other than the record owner
o Proceeds to be sent to an address other than the address on the
Transfer Agent's records
o Proceeds to be paid to a corporation, partnership, trust or
fiduciary
Telephone Sales. If we receive your share sale request before 4:00 p.m. Eastern
time on a day when the NYSE is open for regular trading, the sale of your shares
will be processed that day. Otherwise it will occur on the next business day.
Interruptions in telephone service could prevent you from selling your shares in
this manner when you want to. When you have difficulty making telephone sales,
you should mail (or send by overnight delivery) a written request for sale of
your shares to Touchstone.
In order to protect your investment assets, Touchstone intends to only follow
instructions received by telephone that it reasonably believes to be genuine.
However, there is no guarantee that the instructions relied upon will always be
genuine and the Trust will not be liable for those cases. The Trust has certain
procedures to confirm that telephone instructions are genuine. If it does not
follow such procedures in a particular case it may be liable for any losses due
to unauthorized or fraudulent instructions. Some of these procedures include:
o Requiring personal identification
o Making checks payable only to the owner(s) of the account shown
on the Trust's records
o Mailing checks only to the account address shown on the Trust's
records
o Directing wires only to the bank account shown on the Trust's
records
o Providing written confirmation for transactions requested by
telephone
o Tape recording instructions received by telephone
Systematic Withdrawal Plan. You may elect to receive or send to a third party
monthly, quarterly or annual withdrawals of $50 or more if your account value is
at least $5,000. There is no special fee for this service and no minimum value
is required for retirement plans.
[ICON] Touchstone Family of Funds
56
Investing With Touchstone
ooo Special Tax
Consideration
- --------------------------------------------------------------------------------
If you exercise the Reinstatement Privilege, you should contact your tax
advisor.
ooo Special Tax
Consideration
- --------------------------------------------------------------------------------
Involuntary sales may result in the sale of your Fund shares at a loss or may
result in taxable investment gains.
Reinstatement Privilege. You may reinvest proceeds from a sale of Fund shares or
a dividend or capital gain distribution on Fund shares without a sales charge in
any of the Funds. You may do so by sending a written request and a check to
Touchstone within 90 days after the date of the sale, dividend or distribution.
Reinvestment will be at the next NAV calculated after Touchstone receives your
request.
Low Account Balances
Touchstone may sell your Fund shares if your account balance falls below $500 as
a result of redemptions that you have made (as opposed to a reduction from
market changes). This involuntary sale does not apply to retirement accounts or
custodian accounts under the Uniform Gift to Minors Act (UGTMA). Touchstone will
let you know that your shares are about to be sold and you will have 30 days to
increase your account balance to more than $500.
Receiving Sale Proceeds
Touchstone will forward the proceeds of your sale to you (or to your financial
advisor) within seven days.
Proceeds Sent to Financial Advisors
Proceeds which are sent to your financial advisor will not usually be
re-invested for you unless you provide specific instructions to do so.
Therefore, the financial advisor may benefit from the use of your money.
Fund Shares Purchased by Check
If you purchase Fund shares by personal check, the proceeds of a sale of those
shares will not be sent to you until the check has cleared, which may take up to
15 days. If you may need your money more quickly, you should purchase shares by
federal funds, bank wire, or with a certified or cashier's check.
It is possible that the payments of your sale proceeds could be postponed or
your right to sell your shares could be suspended during certain circumstances.
These circumstances can occur:
o When the NYSE is closed for other than customary weekends and
holidays
o When trading on the NYSE is restricted
o When an emergency situation causes a Fund Sub-Advisor to not be
reasonably able to dispose of certain securities or to fairly
determine the value of its net assets
o During any other time when the SEC, by order, permits.
[ICON] Touchstone Family of Funds
57
Investing With Touchstone
Check-Writing -- Standby Income Fund Only
You may establish check-writing privileges from your investment in the Standby
Income Fund. To do so, complete the check-writing authorization section of the
Investment Application and pay the $5 fee per checkbook. You will then receive
checks that you may use to draw against your account. You will be charged $1 for
each check presented for payment.
Checks may be payable to anyone you designate in the amount of $500 or more.
Checks must be signed as indicated on your check-writing signature card
contained in the account application. You cannot write a check for an amount
larger than the value of your account (at the time the check is written), or
your check will be returned. You will continue to earn monthly dividends on the
funds until the check is presented for payment.
Checks cannot be presented in person to Touchstone. When a check is presented
for payment, Touchstone will sell a sufficient number of shares in your account
to cover the amount of the check. The check-writing option can provide you with
easy access to your money, but it is not meant to be used as a regular checking
account.
o Special Tax Consideration: Since the share price of the Standby
Income Fund may fluctuate daily, use of the check-writing
privilege can result in the sale of your shares at a profit or a
loss from the time of your purchase. These sales of your Fund
share may be considered a taxable event.
o Investor Alert: You should use the telephone or mail redemption
procedures, rather than a check, to close your account.
o Investor Alert: The check-writing privilege may be modified or
terminated at any time by the Trust or Transfer Agent upon notice
to shareholders.
[ICON] Touchstone Family of Funds
58
Distributions And Taxes
ooo Special Tax
Consideration
- --------------------------------------------------------------------------------
You should consult with your tax advisor to address your own tax situation.
Distributions And Taxes
Each Touchstone Fund intends to distribute to its shareholders substantially all
of its income and capital gains. The table below outlines when dividends are
declared and paid for each Fund:
Dividends Declared Dividends Paid
Standby Income Fund Daily Monthly
- --------------------------------------------------------------------------------
Income Opportunity Fund
and Bond Fund Monthly Monthly
- --------------------------------------------------------------------------------
Growth & Income Fund,
Value Plus Fund
and Balanced Fund Quarterly Quarterly
- --------------------------------------------------------------------------------
Emerging Growth Fund
and International Equity Fund Annually Annually
- --------------------------------------------------------------------------------
Distributions of any capital gains earned by a Fund will be made at least
annually.
Tax Information
Distributions. Each Fund will make distributions that may be taxed as ordinary
income or capital gains (which may be taxed at different rates depending on the
length of time a Fund holds its assets). Each Fund's distributions may be
subject to federal income tax whether you reinvest such dividends in additional
shares of a Fund or choose to receive cash.
Ordinary Income. Income and short-term capital gains that are distributed to you
are taxable as ordinary income for federal income tax purposes regardless of how
long you have held your Fund shares.
Long-Term Capital Gains. Long-term capital gains distributed to you are taxable
as long-term capital gains for federal income tax purposes regardless of how
long you have held your Fund shares.
Statements and Notices. You will receive an annual statement outlining the tax
status of your distributions. You will also receive written notices of certain
foreign taxes paid by the Funds and certain distributions paid by the Funds
during the prior taxable year.
[ICON] Touchstone Family of Funds
59
Financial Highlights
Financial Highlights
These financial highlights tables are intended to help you understand the Funds'
financial performance for the past 5 years or, if shorter, the period of a
Fund's operations. Certain information reflects financial results for a single
Fund share. The total returns in the table represent the rate that an investor
would have earned or lost on an investment in the Fund (assuming reinvestment of
all dividends and distributions). This information has been audited by
PricewaterhouseCoopers LLP, whose report, along with the Fund's financial
statements, are incorporated by reference in the Statement of Additional
Information, which is available upon request.
- --------------------------------------------------------------------------------
The Emerging Growth Fund -- Class A
- --------------------------------------------------------------------------------
Period Ended 12/31/94(a) 12/31/95 12/31/96 12/31/97 12/31/98
Per Share Operating Performance
Net Asset Value, Beginning of Period $10.00 $10.11 $11.52 $11.55 $13.85
- ------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Investment Operations:
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 0.16 (0.01) 0.01 (0.03) (0.04)
- ------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain
(Loss) on Investments 0.11 2.29 1.20 3.71 0.37
- ------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 0.27 2.28 1.21 3.68 0.33
- ------------------------------------------------------------------------------------------------------------------------
Less: Dividends and Distributions to Shareholders from:
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (0.15) (0.03) (0.01) -- --
- ------------------------------------------------------------------------------------------------------------------------
Realized Capital Gains (0.01) (0.84) (1.17) (1.38) (0.78)
- ------------------------------------------------------------------------------------------------------------------------
Return of Capital -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Total Dividends and Distributions (0.16) (0.87) (1.18) (1.38) (0.78)
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.11 $11.52 $11.55 $13.85 $13.40
- ------------------------------------------------------------------------------------------------------------------------
Total Return (c) 2.72% 22.56% 10.56% 32.20% 2.57%
- ------------------------------------------------------------------------------------------------------------------------
Ratios and Supplemental Data:
- ------------------------------------------------------------------------------------------------------------------------
Net Assets at End of Period (000's) $1,038 $2,520 $2,873 $4,949 $8,335
- ------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets (d):
Expenses 1.75%(f) 1.50% 1.50% 1.50% 1.50%
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 6.10%(f) (0.05%) (0.12%) (0.30%) (0.41%)
- ------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 150% 109% 117% 101% 78%
- ------------------------------------------------------------------------------------------------------------------------
[ICON] Touchstone Family of Funds
60
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The International Equity Fund -- Class A
- --------------------------------------------------------------------------------
Period Ended 12/31/94(a) 12/31/95 12/31/96 12/31/97 12/31/98
Per Share Operating Performance
Net Asset Value, Beginning of Period $10.00 $ 9.12 $ 9.58 $10.63 $11.41
- ------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Investment Operations:
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) -- 0.21 0.05 0.02 0.00(g)
- ------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain
(Loss) on Investments (0.88) 0.47 1.06 1.64 2.27
- ------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations (0.88) 0.68 1.11 1.66 2.27
- ------------------------------------------------------------------------------------------------------------------------
Less: Dividends and Distributions to Shareholders from:
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income -- (0.22) (0.06) (0.02) (0.05)
- ------------------------------------------------------------------------------------------------------------------------
Realized Capital Gains -- -- -- (0.86) (0.74)
- ------------------------------------------------------------------------------------------------------------------------
Return of Capital -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Total Dividends and Distributions -- (0.22) (0.06) (0.88) (0.79)
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 9.12 $ 9.58 $10.63 $11.41 $12.89
- ------------------------------------------------------------------------------------------------------------------------
Total Return (c) (8.80%) 5.29% 11.61% 15.57% 19.94%
- ------------------------------------------------------------------------------------------------------------------------
Ratios and Supplemental Data:
- ------------------------------------------------------------------------------------------------------------------------
Net Assets at End of Period (000's) $2,282 $2,617 $3,449 $4,761 $6,876
- ------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets (d):
- ------------------------------------------------------------------------------------------------------------------------
Expenses 1.85%(f) 1.60% 1.60% 1.60% 1.60%
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) (0.36%)(f) 0.11% 0.42% 0.17% (0.03)%
- ------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 7% 90% 86% 151% 138%
- ------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Income Opportunity Fund -- Class A
- --------------------------------------------------------------------------------
Period Ended 12/31/94(a) 12/31/95 12/31/96 12/31/97 12/31/98
Per Share Operating Performance
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $10.00 $ 9.08 $ 9.83 $10.90 $ 9.89
- ------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Investment Operations:
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 0.22 1.19 1.12 1.24 0.90
- ------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain
(Loss) on Investments (0.94) 0.77 1.38 (0.23) (2.18)
- ------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations (0.72) 1.96 2.50 1.01 (1.28)
- ------------------------------------------------------------------------------------------------------------------------
Less: Dividends and Distributions to Shareholders from:
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (0.20) (1.21) (1.12) (1.22) (0.91)
- ------------------------------------------------------------------------------------------------------------------------
Realized Capital Gains -- -- (0.31) (0.80) --
- ------------------------------------------------------------------------------------------------------------------------
Return of Capital -- -- -- -- (0.07)
- ------------------------------------------------------------------------------------------------------------------------
Total Dividends and Distributions (0.20) (1.21) (1.43) (2.02) (0.98)
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 9.08 $ 9.83 $10.90 $ 9.89 $ 7.63
- ------------------------------------------------------------------------------------------------------------------------
Total Return (c) (7.20%) 23.19% 26.66% 9.49% (13.77)%
- ------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
- ------------------------------------------------------------------------------------------------------------------------
Net Assets at End of Period (000's) $ 926 $1,369 $4,579 $7,009 $6,658
- ------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets (d):
- ------------------------------------------------------------------------------------------------------------------------
Expenses 1.45%(f) 1.20% 1.20% 1.20% 1.20%
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 8.60%(f) 12.42% 11.29% 11.19% 10.02%
- ------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 144% 120% 222% 270% 283%
- ------------------------------------------------------------------------------------------------------------------------
[ICON] Touchstone Family of Funds
61
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Value Plus Fund -- Class A
- --------------------------------------------------------------------------------
Period Ended 12/31/98(b)
Per Share Operating Performance
Net Asset Value, Beginning of Period $ 10.00
- ------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Investment Operations:
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 0.02
- ------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain
(Loss) on Investments 0.41
- ------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 0.43
- ------------------------------------------------------------------------------------------------------------------------
Less: Dividends and Distributions to Shareholders from:
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (0.02)
- ------------------------------------------------------------------------------------------------------------------------
Realized Capital Gains --
- ------------------------------------------------------------------------------------------------------------------------
Return of Capital (0.00)(g)
- ------------------------------------------------------------------------------------------------------------------------
Total Dividends and Distributions (0.02)
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 10.41
- ------------------------------------------------------------------------------------------------------------------------
Total Return (c) 4.29%
- ------------------------------------------------------------------------------------------------------------------------
Ratios and Supplemental Data:
- ------------------------------------------------------------------------------------------------------------------------
Net Assets at End of Period (000's) $27,068
- ------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets (d):
- ------------------------------------------------------------------------------------------------------------------------
Expenses 1.30%(f)
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 0.25%(f)
- ------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 34%
- ------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Growth & Income Fund -- Class A
- --------------------------------------------------------------------------------
Period Ended 12/31/94(a) 12/31/95 12/31/96 12/31/97 12/31/98
Per Share Operating Performance
Net Asset Value, Beginning of Period $10.00 $10.02 $13.14 $14.03 $15.06
- ------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Investment Operations:
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 0.86 0.05 0.12 0.09 0.19
- ------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain
(Loss) on Investments (0.84) 3.46 2.12 2.78 0.84(h)
- ------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 0.02 3.51 2.24 2.87 1.03
- ------------------------------------------------------------------------------------------------------------------------
Less: Dividends and Distributions to Shareholders from:
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income -- (0.16) (0.12) (0.11) (0.20)
- ------------------------------------------------------------------------------------------------------------------------
Realized Capital Gains -- (0.23) (1.23) (1.73) (0.40)
- ------------------------------------------------------------------------------------------------------------------------
Return of Capital -- -- -- -- (0.02)
- ------------------------------------------------------------------------------------------------------------------------
Total Dividends and Distributions -- (0.39) (1.35) (1.84) (0.62)
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.02 $13.14 $14.03 $15.06 $15.47
- ------------------------------------------------------------------------------------------------------------------------
Total Return (c) 0.20% 35.14% 16.95% 20.70% 6.87%
- ------------------------------------------------------------------------------------------------------------------------
Ratios and Supplemental Data:
- ------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $ 20 $1,500 $3,659 $5,980 $15,261
- ------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets (d):
- ------------------------------------------------------------------------------------------------------------------------
Expenses 1.55%(f) 1.30% 1.30% 1.30% 1.30%
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 0.56%(f) 0.56% 0.55% 0.67% 1.50%
- ------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 10% 102% 92% 170% 64%
- ------------------------------------------------------------------------------------------------------------------------
[ICON] Touchstone Family of Funds
62
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Balanced Fund -- Class A
- --------------------------------------------------------------------------------
Period Ended 12/31/94(a) 12/31/95 12/31/96 12/31/97 12/31/98
Per Share Operating Performance
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $10.00 $ 9.97 $11.34 $12.48 $12.42
- ------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Investment Operations:
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 0.08 0.31 0.30 0.27 0.25
- ------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain
(Loss) on Investments (0.05) 1.99 1.59 2.09 0.23
- ------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 0.03 2.30 1.89 2.36 0.48
- ------------------------------------------------------------------------------------------------------------------------
Less: Dividends and Distributions to Shareholders from:
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (0.06) (0.33) (0.30) (0.30) (0.30)
- ------------------------------------------------------------------------------------------------------------------------
Realized Capital Gains -- (0.60) (0.45) (2.12) (0.51)
- ------------------------------------------------------------------------------------------------------------------------
Return of Capital -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Total Dividends and Distributions (0.06) (0.93) (0.75) (2.42) (0.81)
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 9.97 $11.34 $12.48 $12.42 $12.09
- ------------------------------------------------------------------------------------------------------------------------
Total Return (c) (0.30%) 23.24% 16.86% 19.25% 3.98%
- ------------------------------------------------------------------------------------------------------------------------
Ratios and Supplemental Data:
- ------------------------------------------------------------------------------------------------------------------------
Net Assets at End of Period (000's) $1,001 $1,502 $2,085 $3,316 $4,636
- ------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets (d):
- ------------------------------------------------------------------------------------------------------------------------
Expenses 1.60%(f) 1.35% 1.35% 1.35% 1.35%
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 2.75%(f) 2.39% 2.19% 2.07% 2.11%
- ------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 7% 121% 88% 120% 59%
- ------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE BOND FUND -- CLASS A
- --------------------------------------------------------------------------------
Period Ended 12/31/94(a) 12/31/95 12/31/96 12/31/97 12/31/98
Per Share Operating Performance
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $10.00 $ 9.88 $10.61 $10.17 $10.22
- ------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Investment Operations:
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 1.15 0.56 0.71 0.61 0.55
- ------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain
(Loss) on Investments (1.12) 1.07 (0.43) 0.11 0.30
- ------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 0.03 1.63 0.28 0.72 0.85
- ------------------------------------------------------------------------------------------------------------------------
Less: Dividends and Distributions to Shareholders from:
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (0.15) (0.86) (0.70) (0.66) (0.57)
- ------------------------------------------------------------------------------------------------------------------------
Realized Capital Gains -- (0.04) (0.02) (0.01) (0.11)
- ------------------------------------------------------------------------------------------------------------------------
Return of Capital -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Total Dividends and Distributions (0.15) (0.90) (0.72) (0.67) (0.68)
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 9.88 $10.61 $10.17 $10.22 $10.39
- ------------------------------------------------------------------------------------------------------------------------
Total Return (c) 0.28% 16.95% 2.85% 7.30% 8.56%
- ------------------------------------------------------------------------------------------------------------------------
Ratios and Supplemental Data:
- ------------------------------------------------------------------------------------------------------------------------
Net Assets at End of Period (000's) $ 16 $ 523 $ 821 $1,685 $4,924
- ------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets (d):
- ------------------------------------------------------------------------------------------------------------------------
Expenses 1.15%(f) 0.90% 0.90% 0.90% 0.90%
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 5.58%(f) 6.21% 6.01% 6.08% 5.68%
- ------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 11% 78% 64% 88% 170%
- ------------------------------------------------------------------------------------------------------------------------
[ICON] Touchstone Family of Funds
63
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Standby Income Fund
- --------------------------------------------------------------------------------
Period Ended 12/31/94(a) 12/31/95 12/31/96 12/31/97 12/31/98
Per Share Operating Performance
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $10.00 $10.03 $10.01 $ 9.98 $ 9.97
- ------------------------------------------------------------------------------------------------------------------------
Income from Investment Operations:
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 0.11 0.55 0.46 0.51 0.52
- ------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain
(Loss on Investments) 0.03 (0.02) 0.01 -- 0.01
- ------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 0.14 0.53 0.47 0.51 0.53
- ------------------------------------------------------------------------------------------------------------------------
Less: Dividends and Distributions to Shareholders from:
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income (0.11) (0.55) (0.50) (0.52) (0.52)
- ------------------------------------------------------------------------------------------------------------------------
Net Realized Gain -- -- -- -- (0.00)(g)
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.03 $10.01 $ 9.98 $ 9.97 $ 9.98
- ------------------------------------------------------------------------------------------------------------------------
Total Return (i) 1.40% 5.71% 4.80% 5.21% 5.49%
- ------------------------------------------------------------------------------------------------------------------------
Ratios and Supplemental Data:
- ------------------------------------------------------------------------------------------------------------------------
Net Assets at End of Period (000's) $5,048 $5,910 $6,456 $8,603 $11,257
- ------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- ------------------------------------------------------------------------------------------------------------------------
Expenses (j) 1.00%(f) 0.75% 0.75% 0.75% 0.75%
- ------------------------------------------------------------------------------------------------------------------------
Net Investment Income 4.54%(f) 5.32% 4.88% 5.14% 5.17%
- ------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover 0% 142% 20% 285% 683%
- ------------------------------------------------------------------------------------------------------------------------
* The outstanding shares of each series of Touchstone Series Trust
(formerly named Select Advisors Trust A), other than the Standby
Income Fund, were redesignated as Class A shares effective after the
close of business on December 31, 1998.
(a) The Fund commenced operations on October 3, 1994.
(b) The Fund commenced operations on May 1, 1998.
(c) Total return is calculated without the effects of a sales charge.
Total returns would have been lower had certain expenses not been
reimbursed or waived during the periods shown.
(d) Includes the Fund's proportionate share of the corresponding
Portfolio's expenses. If the waiver and reimbursement had not been in
place for the periods listed, the ratios of expenses to average net
assets would have been higher.
(e) Per share amounts have been calculated using the average share method.
(f) Ratios are annualized.
(g) Amount rounds to less than $0.01.
(h) The amount shown for a share outstanding does not correspond with the
aggregate net loss on investments for the period due to the timing of
sales and repurchases of Fund shares in relation to fluctuating market
values of the investments of the Fund.
(i) Total returns would have been lower had certain expenses not been
reimbursed or waived during the periods shown.
(j) If the waiver and reimbursement had not been in place for the periods
listed, the ratios of expenses to average net assets would have been
higher.
[ICON] Touchstone Family of Funds
64
For More Information
For More Information
For investors who want more information about the Funds, the following documents
are available free upon request:
Statement of Additional Information (SAI): The SAI provides more detailed
information about the Funds and is legally a part of this prospectus.
Annual/Semi-Annual Reports: The Funds' annual and semi-annual reports provide
additional information about the Funds' investments. 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.
You can get free copies of the SAI, the reports, other information and answers
to your questions about the Funds by contacting your financial advisor, or the
Funds at:
Touchstone Family of Funds
311 Pike Street
Cincinnati, Ohio 45202
800.669.2796 (Press 3)
http://www.touchstonefunds.com
You can view the Funds' SAI and the reports at the Public Reference Room of the
Securities and Exchange Commission.
For a fee, you can get text-only copies by writing to the Public Reference Room
of the SEC, 450 Fifth Street N.W., Washington, D.C. 20549-6009. You can also
call 800.SEC.0330.
You can also view the SAI and the reports free from the SEC's Internet website
at http://www.sec.gov.
Investment Company Act file no. 811-8380
Touchstone Family of Funds
o Touchstone Emerging
Growth Fund
o Touchstone International
Equity Fund
o Touchstone Income
Opportunity Fund
o Touchstone Value Plus Fund
o Touchstone Growth &
Income Fund
o Touchstone Balanced Fund
o Touchstone Bond Fund
o Touchstone Standby
Income Fund
Class A and Class C
Shares are Offered by
this Prospectus
SUPPLEMENT TO PROSPECTUS
OF
TOUCHSTONE SERIES TRUST (THE "TRUST")
IN CONNECTION WITH
TOUCHSTONE INTERNATIONAL EQUITY FUND
THIS SUPPLEMENT IS DATED AS OF JULY 19, 1999
The following information replaces certain information contained in the
Prospectus of the Trust, dated May 1, 1999, and should be read in conjunction
with that Prospectus.
CHANGE IN PORTFOLIO MANAGEMENT TEAM
The second paragraph of the section entitled "Fund Sub-Advisor to the
International Equity Fund" located on page 44 of the Prospectus is hereby
replaced with the following:
The Fund is managed by the Credit Suisse International Equity Management Team.
The team consists of Larry Smith, Steven D. Bleiberg, Richard Watt, Alan
Zlater, Emily Alejos and Robert B. Hrabchak.
SUPPLEMENT TO MAY 1, 1999, PROSPECTUS
OF
TOUCHSTONE SERIES TRUST (THE "TRUST")
DATED MARCH 10, 2000
The following information supplements certain information contained in the
Prospectus of the Trust, dated May 1, 1999, and should be read in conjunction
with that Prospectus.
As of March 15, 2000, Touchstone Balanced Fund, Touchstone Income Opportunity
Fund and Touchstone Standby Income Fund (the "Funds") are closed to new accounts
and are not available for purchase by shareholders who had not established an
account with Touchstone Series Trust on or before March 15, 2000. Shareholders
who are currently invested in any of the series of Touchstone Series Trust may
make additional investments in the Funds and make exchanges to the Funds.
Annual Report
December 31, 1999
o Emerging Growth
o International Equity
o Income Opportunity
o Value Plus
o Growth & Income
o Balanced
o Bond
o Standby Income
[TOUCHSTONE LOGO HERE]
Touchstone
Family of Funds
[PHOTO OF BUSINESS MEETING]
LETTER FROM THE PRESIDENT
Dear Fellow Touchstone Shareholder:
Thank you for owning a Touchstone fund. We are pleased to provide you with this
update of the investment activity and performance of the Touchstone Series Trust
for the year ended December 31, 1999.
LOOKING BACK
Shrugging off three interest rate increases implemented by the Federal Reserve
Board, all major U.S. equity markets indices finished 1999 in record territory.
However, drilling down into the indices reveals widely mixed results. Among
large companies, robust advances in a relatively narrow band of
technology-related sectors overwhelmed middling returns elsewhere. Mid cap and
small cap issues led by technology shares rebounded strongly from the previous
year. The leading international equity market index, the MSCI EAFE Index,
performed better than the S&P 500 Index for the first time in five years. Fixed
income markets meanwhile experienced flat or falling returns. The U.S. fixed
income market, in particular, endured one of the worst years in its history.
Movements in the various financial markets came against an extremely positive
domestic backdrop of continued high employment, modest inflation, fiscal and
monetary restraint and enhanced productivity boosted by advancing technology. As
the current economic expansion neared record length, real economic growth
remained strong and corporate earnings gains impressive.
THE VALUE OF DIVERSIFICATION
Performance disparities among asset classes, industry sectors and types of
stocks are hardly new. Nonetheless, they seldom have been as pronounced as in
recent years. Stocks have outperformed bonds dramatically. Technology stocks
have outdistanced the rest of the market - even those of new companies with
uncertain prospects and no earnings. Large stocks have outperformed small stocks
and growth stocks have outperformed value stocks over the past several years.
Despite this recent experience, historical trends show that performance of
investment sectors and styles runs in cycles. Traditionally, diversification
among asset classes possessing complementary returns has been shown to reduce a
portfolio's overall volatility. If market returns eventually revert to their
mean, as efficient market theory implies they will, then asset classes and
styles that have lagged may be poised to rebound. Now may be an opportune time
to review your asset allocation mix in light of the benefits of diversification.
As you pursue your wealth-building goals in today's investment world,
professional advice is more important than ever. The registered representative
who assisted you in the purchase of your Touchstone mutual fund can help you
assess your situation and options.
LOOKING AHEAD
Consumer confidence is high entering the new year as the U.S. economy continues
to demonstrate vigor. The impact of influences such as widely anticipated
interest rate hikes, rising energy prices and a widening U.S. trade deficit
remains to be determined in the months ahead. Other factors at work will include
a presidential election campaign domestically and generally improving economic
conditions abroad.
Regardless of what the future holds, companies that can perform on their own
merits will most likely be the ones offering the best opportunities. As they
assess the forces that drive the financial markets, our managers will remain
steadfastly focused on identifying the opportunities and the companies capable
of succeeding in any economic environment. Their overriding goal, as well as
ours, is to deliver superior long-term performance across all of our investment
options.
Thank you again for the opportunity to work on your behalf. We appreciate your
continued confidence in Touchstone and, as always, pledge every effort to
continue to merit your trust.
Sincerely,
/s/ Jill T. McGruder
Jill T. McGruder
President and Chief Executive Officer
Touchstone Family of Funds and Variable Annuities
P.S. Please check out our new look and enhanced presence on the web at
WWW.TOUCHSTONEFUNDS.COM. We value your comments.
- ------------------------
THE TOUCHSTONE FAMILY OF FUNDS IS DISTRIBUTED BY TOUCHSTONE SECURITIES, INC.*
FOR A PROSPECTUS CONTAINING MORE INFORMATION, INCLUDING ALL FEES AND EXPENSES,
CALL 800.669.2796. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE INVESTING OR
SENDING MONEY.
*MEMBER NASD/SIPC
3
MANAGEMENT DISCUSSION & ANALYSIS (MD&A)
TOUCHSTONE EMERGING GROWTH FUND
During the annual period ended December 31, 1999, several factors affected the
Touchstone Emerging Growth Fund. After experiencing a difficult period during
the third quarter of 1999, the equity markets surged in the fourth quarter to
finish the year very strongly. In fact, small cap stocks led the surge,
increasing their value by 18% (as measured by the Russell 2000 Index) during the
fourth quarter, eclipsing the performance of large cap stocks (as measured by
the S&P 500 Index) which were up 15%. Indeed, 1999 marked the first full
calendar year that the Russell 2000, the benchmark of the Emerging Growth Fund,
outperformed the S&P 500 since 1993, albeit by a very narrow margin (21.3% for
the Russell 2000 versus 21.0% for the S&P 500). The Emerging Growth Fund had a
37.5% return in 1999.
As the growth-style manager of the Touchstone Emerging Growth Fund, Westfield
Capital Management found that good stock selection and an overweight position in
technology, telecommunications and select health care stocks drove performance
in 1999. The growth-style portion of the portfolio was underweight in the
consumer and financial sectors as many companies in those sectors did not meet
the Westfield's minimum earnings growth criteria.
Though the strict valuation discipline eliminated the traditional internet and
dot.com companies, the portfolio invested heavily in internet infrastructure
stocks. Westfield views business-to-business e-commerce as an attractive sector
with outstanding growth prospects. Traditional businesses are developing
e-business models and Westfield invested in chip, software, telecommunication
and wireless stocks to take advantage of this major shift. In health care,
Westfield focused on a select group of outstanding companies in medical devices,
biotechnology and genomics.
The value-style manager of the Fund, David L. Babson & Company, reported that
1999 was a very difficult year for those small cap managers with a value
discipline. For all of 1999, the Russell 2000 Growth Index was up a very
impressive 43%, while the Russell 2000 Value Index was down nearly 2% -- the
widest differential in performance ever.
The Value portion of the Touchstone Emerging Growth Fund was hurt by increased
weightings in the Materials & Processing and Financial Services sectors - two of
the worst performing sectors in the Russell 2000, due to investors' concerns of
rising interest rates.
Nevertheless, the Fund did benefit from several investments that delivered
strong performance during the year. CommScope, the global leader in
manufacturing coaxial cable, saw its stock increase 150% during 1999, and nearly
four-fold from our original investment a couple of years ago due to excitement
surrounding increased spending by AT&T and other cable companies to upgrade
their cable services. Nabors Industries, the leading operator of oil rigs in
North America, saw its stock increase 129% during the year due to increased
drilling activity by its customers seeking to capitalize on the recent
improvements in oil prices. Finally, Scitex, a leading maker of printing
equipment, saw its stock increase 43% during the second half of 1999 (+24% for
the full year), as the gradual global economic recovery is encouraging the
company's overseas customers to begin ordering new equipment again.
While 1999 was a challenging year for the value side of the small cap market,
the Touchstone Emerging Growth Fund delivered superior results, demonstrating
once again the benefits of having both a value and growth discipline in one
fund. Babson and Westfield look forward to continuing to deliver strong
performance.
4
EMERGING GROWTH FUND
GROWTH OF A $10,000 INVESTMENT - Class A Shares
Touchstone
Emerging Russell 2000
Growth Index CDA/Wiesenberger
Fund A (Major Index) Small Cap - MF
- --------------------------------------------------------------------------------
9/94 9425 10000 10000
12/94 9681 9813 9950
3/95 10093 10265 10512
6/95 10735 11227 11450
9/95 11733 12336 12785
12/95 11865 12603 13072
3/96 12391 13246 13917
6/96 12947 13909 15025
9/96 12599 13956 15319
12/96 13119 14682 15758
3/97 12585 13923 14745
6/97 14811 16180 17262
9/97 17253 18588 20184
12/97 17343 17965 19162
3/98 18946 19772 21254
6/98 18232 18850 20421
9/98 14714 15053 16072
12/98 17803 17508 19081
3/99 17285 16558 17905
6/99 20485 19132 20706
9/99 20471 17923 20121
12/99 25966 21172 24981
Average Annual Total Return
One Year Five Years Since
Ended Ended Inception
12/31/99 12/31/99 10/3/94
37.5% 20.4% 20.0%
Cumulative Total Return
Since Inception
10/3/94
159.7%
Total returns adjusted for maximum applicable sales charge.
Past performance is not indicative of future performance.
GROWTH OF A $10,000 INVESTMENT - Class C Shares
Touchstone
Emerging Russell 2000
Growth Index CDA/Wiesenberger
Fund C (Major Index) Small Cap - MF
- --------------------------------------------------------------------------------
1/99 10000 10000 10000
3/99 9701 9457 9384
6/99 11472 10928 10852
9/99 11442 10237 10545
12/99 14486 12093 13092
Average Annual Total Return
One Year Since
Ended Inception
12/31/99 1/1/99
44.9% 44.9%
Cumulative Total Return
Since Inception
1/1/99
44.9%
Total returns adjusted for maximum applicable sales charge.
Past performance is not indicative of future performance.
5
EMERGING GROWTH FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
Value
Shares (Note 1)
COMMON STOCKS - 97.2%
AUTOMOTIVE - 0.5%
9,700 Exide $ 80,631
- --------------------------------------------------------
BANKING - 1.3%
6,000 Dime Bancorp 90,750
6,200 Golden State Bancorp* 106,950
- --------------------------------------------------------
197,700
- --------------------------------------------------------
BEVERAGES, FOOD & TOBACCO - 1.5%
14,400 DiMon 46,800
5,200 Ralcorp Holdings* 103,675
12,100 Vlasic Foods International* 68,819
- --------------------------------------------------------
219,294
- --------------------------------------------------------
BUILDING MATERIALS - 1.6%
12,100 Dal-Tile International* 122,513
2,600 Martin Marietta Materials 106,600
- --------------------------------------------------------
229,113
- --------------------------------------------------------
COMMERCIAL SERVICES - 18.1%
9,700 Administaff * 293,425
10,800 Applied Analytical Industries* 98,550
4,700 A.C. Nielson* 115,738
6,000 Career Education* 230,250
3,900 CDI* 94,088
8,000 DeVry* 149,000
8,850 Diamond Technology Partners* 760,541
4,500 Forrester Research* 309,938
2,400 PerkinElmer 100,050
9,700 Safety-Kleen* 109,731
12,000 Stericycle* 225,750
8,100 Unova* 105,300
5,400 Wallace Computer Services 89,775
- --------------------------------------------------------
2,682,136
- --------------------------------------------------------
COMMUNICATIONS - 12.2%
11,600 Advanced Fibre Communications* 518,375
8,000 AudioCodes* 736,000
3,200 Ditech Communications* 299,200
4,000 Powerwave Technologies* 233,500
- --------------------------------------------------------
1,787,075
- --------------------------------------------------------
COMPUTER SOFTWARE & PROCESSING - 11.7%
8,500 CBT Group, ADR* 284,750
11,200 Mail.com* 210,000
12,600 Natural MicroSystems* 589,838
10,300 Perot Systems, Class A* 195,700
4,300 Policy Management System* 109,919
9,000 Scientific Learning* 328,500
- --------------------------------------------------------
1,718,707
- --------------------------------------------------------
COMPUTERS & INFORMATION - 1.4%
5,400 Gerber Scientific 118,463
5,600 Scitex* 81,550
- --------------------------------------------------------
200,013
- --------------------------------------------------------
ELECTRICAL EQUIPMENT - 1.0%
9,100 Magnetek* 69,956
4,000 Ucar International* 71,250
- --------------------------------------------------------
141,206
- --------------------------------------------------------
Value
Shares (Note 1)
ELECTRONICS - 1.1%
4,100 Dionex* $ 168,869
- --------------------------------------------------------
ENTERTAINMENT & LEISURE - 2.2%
7,000 Cinar, Class B* 171,500
4,350 SFX Entertainment, Class A* 157,416
- --------------------------------------------------------
328,916
- --------------------------------------------------------
FINANCIAL SERVICES - 1.2%
10,200 First Sierra Financial* 174,675
- --------------------------------------------------------
FOOD RETAILERS - 0.7%
7,000 Pantry (The)* 98,875
- --------------------------------------------------------
HEALTH CARE PROVIDERS - 1.4%
5,000 Syncor International* 145,625
9,800 Total Renal Care Holdings* 65,538
- --------------------------------------------------------
211,163
- --------------------------------------------------------
HEAVY CONSTRUCTION - 0.6%
9,300 Foster Wheeler 82,538
- --------------------------------------------------------
HEAVY MACHINERY - 2.7%
8,900 Helix Technology 398,831
- --------------------------------------------------------
HOME CONSTRUCTION, FURNISHINGS & APPLIANCES - 0.2%
2,000 LA-Z-Boy Chair 33,625
- --------------------------------------------------------
HOUSEHOLD PRODUCTS - 0.6%
3,300 Snap-on 87,656
- --------------------------------------------------------
INSURANCE - 1.6%
8,800 HCC Insurance Holdings 116,050
3,400 HSB Group 114,963
- --------------------------------------------------------
231,013
- --------------------------------------------------------
MEDIA - BROADCASTING & PUBLISHING - 6.6%
8,000 American Tower Systems, Class A* 244,500
2,800 Central Newspapers, Class A 110,250
8,400 Hollinger International 108,675
13,500 Information Holdings* 392,344
3,600 Lee Enterprises 114,975
- --------------------------------------------------------
970,744
- --------------------------------------------------------
MEDICAL SUPPLIES - 4.2%
3,200 Arthocare* 195,200
5,500 Novoste* 90,750
3,000 Roper Industries 113,438
9,600 Varian* 216,000
- --------------------------------------------------------
615,388
- --------------------------------------------------------
METALS - 2.0%
4,100 Belden 86,100
3,400 Harsco 107,950
5,500 Ryerson Tull 106,906
- --------------------------------------------------------
300,956
- --------------------------------------------------------
OIL & GAS - 7.0%
2,700 Equitable Resources 90,113
3,306 Friede Goldman Halter* 22,935
6,900 Hanover Compressor* 260,475
7,100 Helmerich & Payne 154,869
3,700 Nabors Industries* 114,469
15,400 Santa Fe Snyder* 123,200
9,500 Stolt Comex Seaway* 105,094
22,400 Energy Services* 151,200
- --------------------------------------------------------
1,022,355
- --------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
6
EMERGING GROWTH FUND
SCHEDULE OF INVESTMENTS CONTINUED
Value
Shares (Note 1)
COMMON STOCKS - CONTINUED
PHARMACEUTICALS - 9.1%
6,200 Albany Molecular Research* $ 189,100
10,200 ILEX Oncology* 246,075
4,000 Millennium Pharmaceuticals* 488,000
11,200 Taro Pharmaceutical Industries* 162,400
13,300 Titan Pharmaceuticals* 252,700
- --------------------------------------------------------
1,338,275
- --------------------------------------------------------
REAL ESTATE - 0.6%
4,000 Prentiss Properties Trust, REIT 84,000
- --------------------------------------------------------
RETAILERS - 3.0%
7,300 Enesco Group 80,756
10,000 Tweeter Home Entertainment Group* 355,000
- --------------------------------------------------------
435,756
- --------------------------------------------------------
TEXTILES, CLOTHING & FABRICS - 1.7%
5,439 Albany International 84,299
10,000 Stride Rite 65,000
8,200 Unifi* 100,963
- --------------------------------------------------------
250,262
- --------------------------------------------------------
TRANSPORTATION - 1.4%
9,400 Fritz Companies* 98,700
6,400 Yellow* 107,600
- --------------------------------------------------------
206,300
- --------------------------------------------------------
TOTAL COMMON STOCKS
(COST $10,753,698) $14,296,072
- --------------------------------------------------------
Value
Shares (Note 1)
WARRANTS - 0.0%
BANKING - 0.0%
2,200 Golden State Bancorp* $ 1,925
- --------------------------------------------------------
TOTAL WARRANTS
(COST $9,438) $ 1,925
- --------------------------------------------------------
TOTAL INVESTMENTS AT VALUE - 97.2%
(COST $10,763,136) (A) $14,297,997
CASH AND OTHER ASSETS
NET OF LIABILITIES - 2.8% 409,704
- --------------------------------------------------------
NET ASSETS - 100.0% $14,707,701
- --------------------------------------------------------
Notes to the Schedule of Investments:
* Non-income producing security.
(a) The aggregate identified cost for federal income tax purposes is
$10,764,988 resulting in gross unrealized appreciation and depreciation of
$4,889,804 and $1,356,795, respectively, and net unrealized appreciation of
$3,533,009.
ADR - American Depositary Receipt
REIT - Real Estate Investment Trust
The accompanying notes are an integral part of the financial statements.
7
INTERNATIONAL EQUITY FUND
MANAGEMENT DISCUSSION & ANALYSIS (MD&A)
TOUCHSTONE INTERNATIONAL EQUITY FUND
The Touchstone International Equity Fund portfolio finished the year well ahead
of its benchmark, the MSCI EAFE Index. While the MSCI EAFE Index ended 1999 with
a 27.3% return, the International Equity Fund had a 31.4% return. According to
the manager of the Touchstone International Equity Fund, Credit Suisse Asset
Management, performance lagged in the first quarter because the Fund was
underweight in Japan and the manager was too defensive in investing in European
and Japanese stocks. Performance was strong in the second half of the year due
to the positive impact of regional allocations and stock selections.
In Japan, the economic recovery appeared to gather momentum in the second half
of 1999 and corporate restructuring activity remained strong. During this
period, Credit Suisse moved from a benchmark neutral weight to overweight. The
most prominent Japanese sector overweights were in consumer finance and
telecommunications as well as an exposure to smaller companies in consumer and
technology related businesses. These decisions helped performance.
In Continental Europe, Credit Suisse moved from a slight underweight to an over
weight position during the fourth quarter in the midst of a favorable economic
environment, strong mergers and acquisition activity and a benign inflation
outlook. The Fund's overweights in Finland and France proved especially
beneficial due to large holdings in technology/telecommunications names like
Nokia and ST Microelectronics.
Elsewhere, regional allocations and stock selection also boosted performance.
The Fund was underweight in the U.K. because Credit Suisse believed there was a
likelihood of further rate increases by the Bank of England. This underweight
had a positive impact on performance as did stock selection in the U.K. which
emphasized companies such as GEC Marconi, an old defense company in the process
of reinventing itself as a telecommunications equipment manufacturer, and BP
Amoco, the global oil and gas giant.
Finally, the Fund's modest allocation to the Emerging Markets also had a
positive impact on performance; particularly in Brazil, Mexico, Korea, and
Taiwan -- those countries poised to benefit most from a pick-up in global growth
and rebound in commodity prices.
8
INTERNATIONAL EQUITY FUND
GROWTH OF A $10,000 INVESTMENT - Class A Shares
Touchstone MSCI CDA/Wiesenberger
International EAFE Non-US
Equity Fund A Index Equity - MF
- --------------------------------------------------------------------------------
9/94 9425 10000 10000
12/94 8596 9905 9452
3/95 8256 10097 9153
6/95 8615 10178 9585
9/95 9001 10611 10007
12/95 9050 11049 10114
3/96 9598 11377 10648
6/96 9806 11565 11047
9/96 9731 11559 10952
12/96 10101 11752 11317
3/97 10253 11576 11455
6/97 11479 13087 12691
9/97 12011 13003 12549
12/97 11674 11994 11089
3/98 13638 13767 12443
6/98 14375 13923 11847
9/98 12411 11952 10061
12/98 14002 14432 11763
3/99 13763 14643 12085
6/99 14241 15025 13358
9/99 15088 15695 13705
12/99 19532 18372 17396
Average Annual Total Return
One Year Five Years Since
Ended Ended Inception
12/31/99 12/31/99 10/3/94
31.4% 16.4% 13.6%
Cumulative Total Return
Since Inception
10/3/94
95.3%
Total returns adjusted for maximum applicable sales charge.
Past performance is not indicative of future performance.
GROWTH OF A $10,000 INVESTMENT - Class C Shares
Touchstone MSCI CDA/Wiesenberger
International EAFE Non-US
Equity Fund A Index Equity - MF
- ------------------------------------------------------------------------------
1/99 10000 10000 10000
3/99 9808 10146 10273
6/99 10136 10411 11355
9/99 10711 10875 11651
12/99 13844 12730 14788
Average Annual Total Return
One Year Since
Ended Inception
12/31/99 1/1/99
38.4% 38.4%
Cumulative Total Return
Since Inception
1/1/99
38.4%
Total returns adjusted for maximum applicable sales charge.
Past performance is not indicative of future performance.
9
INTERNATIONAL EQUITY FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
Value
Shares (Note 1)
COMMON STOCKS - 98.2%
AUSTRALIA - 0.0%
60 Southcorp $ 211
- -------------------------------------------------------
BRAZIL - 1.6%
1,700 Petroleo Brasileiro, ADR 43,602
1,584 Telecomunicacoes Brasileiras
(Telebras), ADR 203,544
- -------------------------------------------------------
247,146
- -------------------------------------------------------
CHINA - 0.3%
525 China Steel, 144A, ADR 7,770
4,400 China Telecom* 27,509
100 China Telecom, ADR* 12,856
- -------------------------------------------------------
48,135
- -------------------------------------------------------
FINLAND - 3.8%
2,545 Nokia Oyj 461,834
3,113 UPM-Kymmene 125,535
- -------------------------------------------------------
587,369
- -------------------------------------------------------
FRANCE - 13.4%
1,037 Alcatel Alsthom 238,363
2,439 Alstom 81,389
5 Aventis 291
1,216 AXA 169,666
2,412 Banque Nationale de Paris 222,740
1,089 Carrefour Supermarche 201,021
3,651 Credit Lyonnais* 167,106
573 Groupe Danone 135,175
661 Pinault-Printemps-Redoute 174,593
2,458 Renault 118,599
1,800 Scor 79,483
2,202 Total Fina, Class B 294,143
2,125 Vivendi 192,059
- -------------------------------------------------------
2,074,628
- -------------------------------------------------------
GERMANY - 11.1%
504 Allianz Holdings 169,454
2,244 BASF 115,377
3,611 Deutsche Bank 305,250
1,667 Dresdner Bank 90,500
1,767 Mannesmann 426,646
569 Muenchener
Rueckversicherungs-Gasellschaft 144,442
2,364 Preussag 131,795
213 SAP 104,147
1,154 Siemens 146,938
1,791 Veba 87,120
- -------------------------------------------------------
1,721,669
- -------------------------------------------------------
GREAT BRITAIN - 9.5%
22,984 BP Amoco 231,661
4,566 British Aerospace 30,014
5,990 British Telecommunications 143,351
5,113 Glaxo Wellcome 145,011
11,460 J Sainsbury 65,707
17,600 Legal & General Group 47,936
8,880 Lloyds TSB Group 110,291
10,650 Marconi 188,942
4,330 Peninsular and Oriental
Steam Navigation 72,206
4,020 Reuters Group 55,837
Value
Shares (Note 1)
GREAT BRITAIN - CONTINUED
7,100 Shell Transport & Trading $ 59,200
11,013 SmithKline Beecham 140,340
2,238 South African Breweries 22,780
1 Unilever 7
33,740 Vodafone Group 166,222
- -------------------------------------------------------
1,479,505
- -------------------------------------------------------
GREECE - 0.2%
141 Alpha Credit Bank 11,050
140 Intracom 6,414
600 National Bank of Greece, GDR 8,438
- -------------------------------------------------------
25,902
- -------------------------------------------------------
HONG KONG - 0.0%
53 Hang Seng Bank 605
- -------------------------------------------------------
INDIA - 0.4%
700 Larsen & Toubro, GDR 23,275
1,400 State Bank of India, GDR 14,461
1,000 Videsh Sanchar Nigam, GDR 20,785
- -------------------------------------------------------
58,521
- -------------------------------------------------------
ITALY - 4.0%
4,233 Assicurazione Generali 140,571
7,610 Concessioni e Costruzioni
Autostrade* 51,801
21,403 ENI 117,446
7,503 Istituto Bancario
San Paolo di Torino 101,768
23,500 Istituto Nazionale
delle Assicurazioni 62,593
39,197 Tecnost* 147,871
- -------------------------------------------------------
622,050
- -------------------------------------------------------
JAPAN - 34.1%
300 Advantest 79,233
2,000 Alps Electric 30,500
6,600 Bank of Tokyo 91,934
1,000 Bridgestone 22,009
1,000 Canon 39,714
4,000 Daikin Industries 54,387
6,000 Daiwa Securities 93,847
200 Don Quijote 31,302
1,200 Fanuc 152,714
10,000 Fuji Bank Limited (The) 97,134
620 Fuji Soft ABC 48,518
4 Fuji Television Network 54,778
1,000 Fujisawa Pharmaceutical 24,259
2,000 Fujitsu 91,167
4,000 Fukuyama Transporting 28,759
3,600 Hitachi Credit 73,071
1,000 Hitachi Maxell 29,443
3,000 House Foods 45,486
3,000 Industrial Bank of Japan 28,905
1,400 ITO Yokado 152,010
3,000 Kaneka 38,355
2,000 Kao 57,028
1,000 Kirin Brewery 10,516
20,000 Kubota 76,494
1,600 Kyocera 414,751
3,000 Matsushita Electric 83,048
3,000 Minebea 51,443
The accompanying notes are an integral part of the financial statements.
10
INTERNATIONAL EQUITY FUND
SCHEDULE OF INVESTMENTS CONTINUED
Value
Shares (Note 1)
COMMON STOCKS - CONTINUED
JAPAN - CONTINUED
7,000 Mitsubishi $ 54,025
8,900 Mitsui Chemicals 71,649
1,000 Mitsumi Electric 31,302
2,000 Mori Seiki 26,802
3,000 NEC 71,457
100 NIDEC 29,248
3,000 Nikko Securities Co. (The) 37,944
500 Nintendo 82,314
3,000 Nippon Meat Packers 38,883
17 Nippon Telegraph & Telephone 291,010
3,000 Nomura Securities 54,143
4 NTT Data 91,950
2 NTT Mobile Communication
Network 76,885
700 Orix 157,625
300 Rohm Company 123,251
17,000 Sakura Bank 98,445
5,000 Sanwa Bank (The) 60,794
1,000 Secom 110,046
4,000 Sekisui House 35,410
1,000 Seven-Eleven Japan 158,466
2,000 Sharp 51,159
2,000 Shin-Etsu Chemical 86,080
73 Softbank 69,837
875 Sony 259,342
3,000 Sumitomo Bank 41,054
8,000 Sumitomo Chemical 37,562
4,000 Sumitomo Marine & Fire
Insurance Co. (The) 24,650
7,000 Sumitomo Realty & Development 23,281
10,000 Sumitomo Trust & Banking 67,495
1,000 Taisho Pharmaceutical 29,346
1,000 Taiyo Yuden 59,278
1,000 Takeda Chemical Industries 49,398
500 TDK 69,011
4,000 Tokyo Broadcasting System 135,381
1,000 Tokyo Electron 136,946
2,000 Tostem 35,899
5,000 Toyota Motor 242,101
500 WORLD 61,137
1,000 Yamanouchi Pharmaceutical 34,921
2,000 Yamato Transport 77,472
- -------------------------------------------------------
5,293,804
- -------------------------------------------------------
MEXICO - 0.9%
830 Cemex SA de CV, ADR* 23,136
400 Grupo Televisa, GDR* 27,300
850 Telefonos de Mexico, Class L, ADR 95,625
- -------------------------------------------------------
146,061
- -------------------------------------------------------
NETHERLANDS - 7.3%
1,821 Akzo Nobel 91,425
1,402 Equant* 159,293
2,595 Fortis 93,527
2,950 ING Groep 178,264
Value
Shares (Note 1)
NETHERLANDS - CONTINUED
1,684 Koninklijke (Royal)
Philips Electronics $ 229,193
1,928 STMicroelectronics 296,999
1,580 Verenigde Nederlandse 83,116
- -------------------------------------------------------
1,131,817
- -------------------------------------------------------
PORTUGAL - 1.2%
16,560 Portugal Telecom 181,808
134 PT Multimedia - Servicos de
Telecomunicaceous e Multimedia
SGPS* 7,629
- -------------------------------------------------------
189,437
- -------------------------------------------------------
SOUTH AFRICA - 0.1%
4,200 Standard Bank Investment Corp. 17,449
- -------------------------------------------------------
SOUTH KOREA - 0.8%
2,100 Korea Electric Power, ADR 35,175
700 Korea Telecom, ADR 52,325
657 Pohang Iron & Steel 22,995
74 Samsung Electronics, 144A, GDR 9,047
- -------------------------------------------------------
119,542
- -------------------------------------------------------
SPAIN - 3.2%
11,070 Banco Santander Central Hispano 125,441
14,554 Telefonica 363,881
- -------------------------------------------------------
489,322
- -------------------------------------------------------
SWEDEN - 1.4%
2,486 Ericsson 160,113
2,048 Skandia Forsakrings 61,973
- -------------------------------------------------------
222,086
- -------------------------------------------------------
SWITZERLAND - 4.3%
873 ABB 106,828
88 Novartis 129,277
14 Roche Holding 166,258
518 Union Bank of Switzerland 139,956
223 Zurich Allied 127,228
- -------------------------------------------------------
669,547
- -------------------------------------------------------
TAIWAN - 0.6%
2,164 Taiwan Semiconductor
Manufacturing, ADR 97,380
- -------------------------------------------------------
TOTAL COMMON STOCKS
(COST $11,645,725) $15,242,186
- -------------------------------------------------------
INVESTMENT TRUST - 0.2%
TAIWAN - 0.2%
190 Morgan Stanley Taiwan OPALS,
Series B, 144A (b) 27,509
- -------------------------------------------------------
TOTAL INVESTMENT TRUST
(COST $23,708) $ 27,509
- -------------------------------------------------------
PREFERRED STOCKS - 0.8%
GERMANY - 0.8%
202 SAP 121,780
- -------------------------------------------------------
TOTAL PREFERRED STOCKS
(COST $84,148) $ 121,780
- -------------------------------------------------------
WARRANTS - 0.0%
FRANCE - 0.0%
390 Banque Nationale de Paris 1,801
- -------------------------------------------------------
TOTAL WARRANTS (COST $0) $ 1,801
- -------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
11
INTERNATIONAL EQUITY FUND
SCHEDULE OF INVESTMENTS CONTINUED
Principal Interest Maturity Value
Amount Rate Date (Note 1)
CORPORATE BONDS - 0.0%
GREAT BRITAIN - 0.0%
$ 1,442 British Aerospace 7.45% 11/30/03 $ 23
- -------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $32) $ 23
- -------------------------------------------------------
TOTAL INVESTMENTS AT VALUE - 99.2%
(COST $11,753,613) (A) $15,393,299
CASH AND OTHER ASSETS
NET OF LIABILITIES - 0.8% 124,868
- -------------------------------------------------------
NET ASSETS - 100.0% $15,518,167
- -------------------------------------------------------
Notes to the Schedule of Investments:
* Non-income producing security.
(a) The aggregate identified cost for federal income tax purposes is
$11,837,296, resulting in gross unrealized appreciation and depreciation of
$3,925,294 and $369,291, respectively, and net unrealized appreciation of
$3,556,003.
(b) Board valued security
144A - Security exempt from registration under Rule 144A of Securities Act of
1933. This security may be sold in transactions exempt from registration,
normally to qualified institutional buyers. At December 31, 1999, these
securities were valued at $44,326, or 0.3% of net assets.
ADR - American Depositary Receipt
GDR - Global Depositary Receipt
OPALS - Optimised Portfolios As Listed Securities
Industry sector diversification of the International Equity Fund's investments
as a percentage of net assets as of December 31, 1999 was as follows:
Industry Percentage
Sector Net Assets
Banking 12.77%
Communications 9.60%
Electronics 8.58%
Telephone Systems 8.31%
Electrical Equipment 7.88%
Insurance 5.41%
Heavy Machinery 5.14%
Oil & Gas 4.81%
Pharmaceuticals 4.63%
Retailers 4.62%
Commercial Services 4.45%
Financial Services 3.60%
Chemicals 3.35%
Computer Software & Processing 2.46%
Transportation 2.33%
Automotive 2.32%
Media - Broadcasting & Publishing 1.94%
Beverages, Food & Tobacco 1.63%
Multiple Utilities 1.47%
Forest Products & Paper 0.81%
Entertainment & Leisure 0.53%
Metals 0.43%
Food Retailers 0.42%
Textiles, Clothing & Fabrics 0.39%
Construction 0.23%
Electric Utilities 0.23%
Aerospace & Defense 0.19%
Computers & Information 0.19%
Miscellaneous 0.18%
Real Estate 0.15%
Building Materials 0.15%
Containers & Packaging 0.00%
Other assets in excess of liabilities 0.80%
- -----------------------------------------------------------
100.00%
- -----------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
12
INCOME OPPORTUNITY FUND
MANAGEMENT DISCUSSION & ANALYSIS (MD&A)
TOUCHSTONE INCOME OPPORTUNITY FUND
For the twelve months ended December 31, 1999, the Touchstone Income Opportunity
Fund underperformed the index. The Fund's benchmark was the Lehman Brothers
Corporate Bond Index, which produced a return of (2.1%). The Income Opportunity
Fund had a (3.6%) return in 1999.
Emerging assets, however, closed the year on a very strong note with the JP
Morgan Emerging Market Bond Plus Mutual Fund Index returning 5.41% in December,
bringing the year-to-date gain to 25.97%. At the end of the year, the emerging
market percentage was 40% of the Fund. The manager of the Touchstone Income
Opportunity Fund, Alliance Capital Management, moved the emphasis of the
portfolio in 1999 from corporate assets to sovereign debt because they believe
that sovereign debt will outperform corporate debt due to its greater liquidity.
During the second half of the year, Alliance increased the weighting in Russia
by about 1.25%, which proved to be positive for the Fund. Russian debt was the
outperforming asset for both the month of December and the year, returning
14.84% and 165.70% respectively. The Income Opportunity Fund also continued to
hold a large position in Mexico, which was upgraded this year by Moody's to Ba1,
one notch below investment grade, and performed well, returning 15.30% for the
year.
Alliance reduced the position in emerging market corporates from about 10% to
roughly 5.7%. Two defaulted positions, FSW International and NTS Steel, were
sold. During the second half of the year, Alliance also elected to sell the
position in Paging Network Brazil. The company, located in Brazil, had been
negatively impacted by the devaluation of the Brazilian currency and the
decreasing demand for paging services due to the popularity of cellular phones.
The high yield market is completing its second straight year of low single-digit
returns. The Merrill Lynch High Yield Index returned 1.573% for the year. This
is the first occurrence in the history of the high yield market of sub-coupon
returns in a non-recessionary economic environment. Alliance believes this poor
performance is a function of significant spread widening brought about by
reduced liquidity following the global dislocation of 1998 (i.e., Asia, Russia,
Brazil) and a persistently rising high yield default rate. According to Moody's,
defaults are currently averaging about 6%. During the second half of the year,
Alliance began to actively reduce exposure to possible problem/restructuring
scenarios when credit fundamentals suggested that it was warranted and market
prices repre sented fair value. Alliance elected to sell several assets
including Aqua Chem, Eagle Geophysical, Orion Network and TVN Entertainment.
These securities were sold due to credit concerns and Alliance's belief that the
money could be invested in better performing assets. During the month of
December, two other assets posted large price declines due to poor operating
performance. These securities include Pen Tab and Republic Technologies. Pen Tab
was downgraded in early December to Caa2 by Moody's due to their weaker than
expected operating performance and heightened liquidity concerns. There has been
little support from the underwriter and the bonds moved down in price from the
mid 80s to $25.00.
Another security in the portfolio which posted a price decline was Republic
Technologies. The company missed earnings expectations and the bonds rapidly
declined in price from the low 90s to its year end price of $65.00.
Alliance has been in contact with both the company and sponsor, and continues to
hold the security, believing it will improve.
13
INCOME OPPORTUNITY FUND
In general for the high yield market, primary activity slowed during 1999 from
1998 levels, although $94.7 billion in new issues came to market. Media and
telecommunications continued to be the dominant suppliers of new issuance,
accounting for 69.6% ($12.1 billion of $17.4 billion issued) of the supply in
the fourth quarter. One big change in the high yield market this year was the
lack of demand from mutual funds, which saw redemptions for most of the year.
This has left structured products, insurance, pension, and crossover accounts as
the major participants in the market, which has in turn led to lower trading
volumes and reduced demand for new issuance.
Touchstone Lehman Brothers
Income Corporate CDA/Wiesenberger CDA/Wiesenberger
Opportunity Bond Index International Corporate High Yield
Fund A (Major Index) Bond Average - MF Average - MF
- ---------------------------------------------------------------------------------------------------------------------------
9/94 9525 10000 10000 10000
12/94 8838 10043 9881 9155
3/95 8357 10638 10316 7945
6/95 9708 11429 10650 9305
9/95 10334 11699 11180 9834
12/95 10888 12277 11515 10643
3/96 11474 11960 11811 11072
6/96 12149 12014 12036 12215
9/96 13125 12254 12582 13736
12/96 13791 12681 13030 14770
3/97 14037 12553 13103 15060
6/97 14953 13070 13764 16479
9/97 15718 13582 14483 17368
12/97 15100 13978 14674 16421
3/98 15843 14193 15263 17217
6/98 15149 14548 15304 15861
9/98 12650 15077 14209 11357
12/98 13089 15168 14567 12685
3/99 13126 15028 14926 13268
6/99 13116 14790 14992 14032
9/99 12915 14846 14753 14069
12/99 13240 14843 15085 15789
Average Annual Total Return
One Year Five Years Since
Ended Ended Inception
12/31/99 12/31/99 10/3/94
(3.6%) 7.4% 5.5%
Cumulative Total Return
Since Inception
10/3/94
32.4%
Total returns adjusted for maximum applicable sales charge.
Past performance is not indicative of future performance.
14
INCOME OPPORTUNITY FUND
GROWTH OF A $10,000 INVESTMENT - Class C Shares
Touchstone Lehman Brothers
Income Corporate CDA/Wiesenberger CDA/Wiesenberger
Opportunity Bond Index International Corporate High Yield
Fund A (Major Index) Bond Average - MF Average - MF
- ---------------------------------------------------------------------------------------------------------------------------
1/99 10000 10000 10000 10000
3/99 10022 9951 10246 10460
6/99 9993 9794 10292 11062
9/99 9829 9831 10128 11091
12/99 10049 9829 10356 12447
Average Annual Total Return
One Year Since
Ended Inception
12/31/99 1/1/99
0.5% 0.5%
Cumulative Total Return
Since Inception
1/1/99
0.5%
Total returns adjusted for maximum applicable sales charge.
Past performance is not indicative of future performance.
15
INCOME OPPORTUNITY FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
Principal Interest Maturity Value
Amount Rate Date (Note 1)
CORPORATE BONDS - 60.4%
AUTOMOTIVE - 5.9%
$250,000 Sonic Automotive,
Series B 11.00% 08/01/08 $ 247,500
250,000 Tenneco
Automotive,
144A 11.625% 10/15/09 255,000
- -------------------------------------------------------
502,500
- -------------------------------------------------------
COMMERCIAL SERVICES - 4.0%
250,000 Building One
Services 10.50% 05/01/09 240,000
200,000 Dialog, Series A,
Yankee Dollar 11.00% 11/15/07 96,000
- -------------------------------------------------------
336,000
- -------------------------------------------------------
COMMUNICATIONS - 14.7%
250,000 Netia Holdings,
Series B, 144A 13.125% 06/15/09 257,500
250,000 Nextel
Communications,
144A 9.375% 11/15/09 245,000
250,000 Northeast Optic
Network 12.75% 08/15/08 267,500
200,000 Turkcell, 144A 12.75% 08/01/05 207,250
United Pan-Europe
Communications,
144A 11.25% 11/01/09 256,563
- -------------------------------------------------------
1,233,813
- -------------------------------------------------------
ENTERTAINMENT & LEISURE - 3.0%
250,000 Bell Sports,
Series B 11.00% 08/15/08 250,000
- -------------------------------------------------------
HEALTH CARE PROVIDERS - 3.1%
250,000 LifePoint Hospitals
Holdings,
Series B 10.75% 05/15/09 258,750
- -------------------------------------------------------
HEAVY MACHINERY - 5.7%
250,000 Generac Portable
Products 11.25% 07/01/06 255,000
250,000 Pentacon,
Series B 12.25% 04/01/09 225,000
- -------------------------------------------------------
480,000
- -------------------------------------------------------
INDUSTRIAL - DIVERSIFIED - 0.7%
250,000 Pen-Tab Industries,
Series B 10.875% 02/01/07 62,500
- -------------------------------------------------------
MEDICAL SUPPLIES - 3.7%
300,000 Kelso & Company,
144A 12.75% 10/01/09 310,500
- -------------------------------------------------------
METALS - 2.0%
250,000 Republic Technologies
International,
144A 13.75% 07/15/09 165,000
- -------------------------------------------------------
Principal Interest Maturity Value
Amount Rate Date (Note 1)
OIL & GAS - 6.1%
$250,000 EOTT Energy
Partners 11.00% 10/01/09 $ 258,750
250,000 Western Gas
Resources 10.00% 06/15/09 256,250
- -------------------------------------------------------
515,000
- -------------------------------------------------------
TELEPHONE SYSTEMS - 11.5%
250,000 Exodus
Communications,
144A 10.75% 12/15/09 254,375
200,000 Global Crossing
Holdings, 144A 9.125% 11/15/06 197,750
250,000 Metromedia
Fiber Network 10.00% 12/15/09 256,250
250,000 Worldwide
Fiber, 144A 12.00% 08/01/09 257,500
- -------------------------------------------------------
965,875
- -------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $5,351,893) $5,079,938
- -------------------------------------------------------
SOVEREIGN GOVERNMENT OBLIGATIONS - 34.9%
ARGENTINA - 1.9%
176,000 Republic of
Argentina,
Brady Bond (b) 6.813% 03/31/05 $ 159,157
- -------------------------------------------------------
BRAZIL - 5.8%
300,000 Republic
of Brazil 11.625% 04/15/04 300,000
250,000 Republic of Brazil,
Brady Bond (b) 6.938% 04/15/24 189,688
- -------------------------------------------------------
489,688
- -------------------------------------------------------
BULGARIA - 3.3%
350,000 Government
of Bulgaria,
Brady Bond,
IAB, PDI (b) 6.50% 07/28/11 276,063
- -------------------------------------------------------
COLOMBIA - 2.8%
250,000 Republic of
Colombia 9.75% 04/23/09 232,500
- -------------------------------------------------------
MEXICO - 6.2%
500,000 United Mexican
States 10.375% 02/17/09 532,498
- -------------------------------------------------------
MOROCCO - 2.7%
250,000 Kingdom of
Morocco,
Series A (b) 6.844% 01/01/09 225,625
- -------------------------------------------------------
PERU - 1.8%
250,000 Republic of Peru,
Brady Bond,
FLIRB (b) 3.75% 03/07/17 154,688
- -------------------------------------------------------
PHILIPPINE ISLANDS - 2.4%
200,000 Republic of
Philippines 9.875% 01/15/19 197,750
- -------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
16
INCOME OPPORTUNITY FUND
SCHEDULE OF INVESTMENTS CONTINUED
Principal Interest Maturity Value
Amount Rate Date (Note 1)
SOVEREIGN GOVERNMENT OBLIGATIONS - CONTINUED
RUSSIA - 2.8%
$400,000 Russian Federation,
Euro-Dollar 8.75% 07/24/05 $ 237,000
- -------------------------------------------------------
TURKEY - 3.2%
250,000 Republic of
Turkey 12.375% 06/15/09 268,125
- -------------------------------------------------------
VENEZUELA - 2.0%
250,000 Venezuela 9.25% 09/15/27 165,000
- -------------------------------------------------------
TOTAL SOVEREIGN GOVERNMENT OBLIGATIONS
(COST $2,711,508) $2,938,094
- -------------------------------------------------------
Value
Units (Notes 1)
WARRANTS - 0.1%
COMMUNICATIONS - 0.0%
400 Paging do Brazil,
Class B, 144A* $ 0
- -------------------------------------------------------
NIGERIA - 0.0%
250 Central Bank of Nigeria* 0
- -------------------------------------------------------
TELEPHONE SYSTEMS - 0.1%
3,375 Conecel Holdings* 0
200 Primus Telecommunications* 5,000
- -------------------------------------------------------
5,000
- -------------------------------------------------------
TOTAL WARRANTS
(COST $0) $ 5,000
- -------------------------------------------------------
TOTAL INVESTMENTS AT VALUE - 95.4%
(COST $8,063,401) (A) $8,023,032
CASH AND OTHER ASSETS
NET OF LIABILITIES - 4.6% 383,116
- -------------------------------------------------------
NET ASSETS - 100.0% $8,406,148
- -------------------------------------------------------
Notes to the Schedule of Investments:
* Non-income producing security.
(a) The aggregate identified cost for federal income tax purposes is
$8,072,399, resulting in gross unrealized appreciation and depreciation of
$355,986 and $405,353 respectively, and net unrealized depreciation of
$49,367.
(b) Interest rate shown reflects current rate on instrument with variable or
floating rates.
144A - Security exempt from registration under Rule 144A of Securities Act of
1933. This security may be sold in transactions exempt from registration,
normally to qualified institutional buyers. At December 31, 1999, these
securities were valued at $2,406,438, or 28.6% of net assets.
Brady Bond - U.S. dollar denominated bonds of developing countries that
were exchanged, in a restructuring, for commercial bank loans in
default. The bonds are collateralized by U.S. Treasury zero-coupon
bonds to ensure principal.
Euro-Dollar - Bonds issued offshore that pay interest and principal in U.S.
dollars.
FLIRB - Front-Load Interest Reduction Bonds
IAB - Interest Arrears Bonds
PDI - Past Due Interest Bonds
Yankee Dollar - U.S. dollar denominated bonds issued by non-U.S. companies in
the U.S.
The accompanying notes are an integral part of the financial statements.
17
VALUE PLUS FUND
MANAGEMENT DISCUSSION & ANALYSIS (MD&A)
TOUCHSTONE VALUE PLUS FUND
Fort Washington Investment Advisors, the manager of the Touchstone Value Plus
Fund, and a disciplined value manager, uses the S&P/Barra Value Index as their
style benchmark. The S&P Barra Value Index had a 12.0% return in 1999, compared
to 8.8% for the Value Plus Fund. Fort Washington states that they were in the
top-performing quartile of large value equity managers for 1999.
The U.S. stock market finished 1999 with a flourish to record another big year.
Despite the protestations of countless naysayers, stocks recorded their fifth
straight year of twenty plus percent returns, as measured by the S&P 500 Index.
Yet once again this performance was concentrated in a relative handful of large
capitalization, mostly technology stocks. The market's "underbelly" is very
soft; since April 1998, 70% of the roughly 6,000 U.S. common stocks are down in
price. In fact, over one half of the stocks in the S&P 500 Index had a negative
absolute return for 1999.
As most of the biggest gains in last year's stock market were in technology
stocks, the Touchstone Value Plus Fund, due to its diversification, had returns
less than those of the S&P 500 Index. Less than a quarter of the portfolio was
invested in computer-related and electronics stocks, so the Fund wasn't as
strongly impacted by the tremendous increase in technology stocks.
The best performing sectors in the portfolio for the last quarter were Consumer
Staples and Communication Services. Leading the performance in these sectors
were Sysco and Frontier Corp (now Global Crossings). Other notable performers in
the quarter were Nortel Networks and Amgen. Consumer Cyclicals was the worst
performing sector with Stewart Enterprises showing the worst underperformance.
GROWTH OF A $10,000 INVESTMENT - Class A Shares
Touchstone S&P 500 S&P/Barra Wilshire Large
Value Plus Index Value Index Cap Value
Fund A (Major Index) (Minor Index) (Minor Index)
- ---------------------------------------------------------------------------------------------------------------------
5/98 9525 10000 10000 10000
6/98 9303 10227 9934 9968
9/98 8134 9210 8651 8853
12/98 9829 11171 10159 10075
3/99 10208 11571 10449 10073
6/99 11001 12347 11577 10862
9/99 10046 11538 10509 9771
12/99 11354 13216 11379 10433
Average Annual Total Return
One Year Since
Ended Inception
12/31/99 5/1/98
8.8% 7.9%
Cumulative Total Return
Since Inception
5/1/98
13.5%
Total returns adjusted for maximum applicable sales charge.
Past performance is not indicative of future performance.
18
VALUE PLUS FUND
GROWTH OF A $10,000 INVESTMENT - Class C Shares
Touchstone S&P 500 S&P/Barra Wilshire Large
Value Plus Index Value Index Cap Value
Fund C (Major Index) (Minor Index) (Minor Index)
- ---------------------------------------------------------------------------------------------------------------------
1/99 10000 10000 10000 10000
3/99 10331 10500 10282 9998
6/99 11111 11240 11395 10781
9/99 10127 10537 10344 9698
12/99 11424 12105 11201 10355
Average Annual Total Return
One Year Since
Ended Inception
12/31/99 1/1/99
14.2% 14.2%
Cumulative Total Return
Since Inception
1/1/99
14.2%
Total returns adjusted for maximum applicable sales charge.
Past performance is not indicative of future performance.
19
VALUE PLUS FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
Value
Shares (Note 1)
COMMON STOCKS - 96.7%
ADVERTISING - 2.2%
12,100 Interpublic Group of
Companies (The) $ 698,019
- -------------------------------------------------------
AEROSPACE & DEFENSE - 2.1%
11,800 Honeywell International 680,713
- -------------------------------------------------------
AUTOMOTIVE - 1.7%
13,000 Magna International, Class A 550,875
- -------------------------------------------------------
BANKING - 3.2%
13,706 Bank One 439,449
4,000 Chase Manhattan 310,750
16,500 North Fork Bancorporation 288,750
- -------------------------------------------------------
1,038,949
- -------------------------------------------------------
BEVERAGES, FOOD & TOBACCO - 3.8%
15,800 McCormick & Company 470,050
21,200 Pepsico 747,300
- -------------------------------------------------------
1,217,350
- -------------------------------------------------------
COMMUNICATIONS - 3.5%
11,200 Nortel Networks 1,131,200
- -------------------------------------------------------
COMPUTER SOFTWARE & PROCESSING - 8.5%
29,500 Ceridian* 636,094
9,400 Computer Associates
International 657,413
32,100 Compuware* 1,195,716
5,400 First Data 266,288
- -------------------------------------------------------
2,755,511
- -------------------------------------------------------
COMPUTERS & INFORMATION - 9.2%
6,400 Hewlett-Packard 729,200
6,700 International Business Machines 723,600
10,200 Lexmark International Group,
Class A* 923,100
8,200 Sun Microsystems* 634,988
- -------------------------------------------------------
3,010,888
- -------------------------------------------------------
ELECTRIC UTILITIES - 1.6%
16,600 CMS Energy 517,713
- -------------------------------------------------------
ELECTRICAL EQUIPMENT - 0.7%
6,600 Thomas & Betts 210,375
- -------------------------------------------------------
ELECTRONICS - 2.1%
8,200 Intel 674,963
- -------------------------------------------------------
FINANCIAL SERVICES - 7.1%
14,550 Citigroup 808,434
5,600 Federal Home Loan Mortgage
Corporation 263,550
11,600 Federal National Mortgage
Association 724,275
11,500 SLM Holding 485,875
- -------------------------------------------------------
2,282,134
- -------------------------------------------------------
FOOD RETAILERS - 1.4%
13,860 Albertson's 446,985
- -------------------------------------------------------
Value
Shares (Note 1)
FOREST PRODUCTS & PAPER - 5.4%
16,400 Kimberly-Clark $ 1,070,100
15,700 Mead 681,969
- -------------------------------------------------------
1,752,069
- -------------------------------------------------------
HEALTH CARE PROVIDERS - 1.3%
26,400 Manor Care* 422,400
- -------------------------------------------------------
HEAVY MACHINERY - 2.9%
3,300 Applied Materials* 418,069
9,400 Ingersoll-Rand 517,588
- -------------------------------------------------------
935,657
- -------------------------------------------------------
HOME CONSTRUCTION, FURNISHINGS & APPLIANCES - 2.0%
4,200 General Electric 649,950
- -------------------------------------------------------
INSURANCE - 4.6%
5,000 Aetna 279,063
18,600 AXA Financial 630,075
14,800 Reliastar Financial 579,975
- -------------------------------------------------------
1,489,113
- -------------------------------------------------------
MEDICAL SUPPLIES - 2.2%
4,500 Baxter International 282,656
16,300 Becton Dickinson & Company 436,025
- -------------------------------------------------------
718,681
- -------------------------------------------------------
METALS - 1.9%
24,000 Masco 609,000
- -------------------------------------------------------
OIL & GAS - 7.8%
22,800 Conoco, Class A 564,300
7,857 Exxon Mobil 632,980
7,900 Schlumberger 444,375
17,300 Tosco 470,344
1,529 Transocean Sedco Forex 51,523
11,500 Williams Companies (The) 351,469
- -------------------------------------------------------
2,514,991
- -------------------------------------------------------
PHARMACEUTICALS - 7.1%
14,600 Abbott Laboratories 530,163
10,600 Amgen* 636,663
11,900 Cardinal Health 569,713
8,200 Merck 549,913
- -------------------------------------------------------
2,286,452
- -------------------------------------------------------
RETAILERS - 3.1%
8,500 Federated Department Stores* 429,781
51,000 Office Depot* 557,813
- -------------------------------------------------------
987,594
- -------------------------------------------------------
TELEPHONE SYSTEMS - 10.2%
9,600 Alltel 793,800
9,100 Bell Atlantic 560,219
13,810 Global Crossing* 690,500
10,800 MCI WorldCom* 573,075
14,900 SBC Communications 726,375
- -------------------------------------------------------
3,343,969
- -------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
20
VALUE PLUS FUND
SCHEDULE OF INVESTMENTS CONTINUED
Value
Shares (Note 1)
COMMON STOCKS - CONTINUED
TRANSPORTATION - 1.1%
3,700 US Freightways $ 177,138
13,700 Wisconsin Central Transport* 184,094
- -------------------------------------------------------
361,232
- -------------------------------------------------------
TOTAL COMMON STOCKS
(COST $27,959,720) $31,286,783
- -------------------------------------------------------
Value
(Note 1)
TOTAL INVESTMENTS AT VALUE - 96.7%
(COST $27,959,720) (A) $31,286,783
CASH AND OTHER ASSETS
NET OF LIABILITIES - 3.3% 1,069,218
- -------------------------------------------------------
NET ASSETS - 100.0% $32,356,001
- -------------------------------------------------------
Notes to the Schedule of Investments:
* Non-income producing security.
(a) The aggregate identified cost for federal income tax purposes is
$27,966,854 resulting in gross unrealized appreciation and depreciation of
$6,266,546 and $2,946,617, respectively, and net unrealized appreciation of
$3,319,929.
The accompanying notes are an integral part of the financial statements.
21
GROWTH & INCOME FUND
MANAGEMENT DISCUSSION & ANALYSIS (MD&A)
TOUCHSTONE GROWTH & INCOME FUND
The S&P 500 Index, the benchmark for the Growth & Income Fund, posted an
unprecedented fifth consecutive year of 20+% returns in 1999 to end a phenomenal
decade of U.S. equity market performance. 1999 was similar to 1998 in that the
overall market exceeded even the most optimistic predictions, a narrow group
of technology and growth stocks dominated market index returns, and the
dispersion of returns between growth and value styles has never been greater.
The Growth & Income Fund posted a (3.3)% return for 1999, compared to 21.1% for
the S&P 500 Index.
Despite three interest rate hikes by the Federal Reserve and record valuations
among technology stocks, the broad market posted solid returns in the first half
of the year, declined sharply in the third quarter and fully recovered by year
end to reach new highs. However, only a narrow group of stocks in the broad
market index participated in this record setting performance.
For the second consecutive year, growth managers fully participated in this
narrow market, while value managers generally remained on the sidelines. The
dominance of technology and the underperformance of the finance sector led to
the largest ever performance dispersion between the large cap style indices as
measured by the Russell 1000 Value Index (+7.4%) and the Russell 1000 Growth
Index (+33.2%). For the year, only 31% of the stocks in the S&P 500 outperformed
the index and 50% of the stocks had negative returns. The Russell 1000 Value
Index had similarly poor breadth, with only 35% of its stocks outperforming the
index, and 50% of its stocks declining. The majority of active large cap value
managers underperformed the value benchmark.
The manager of the Touchstone Growth & Income Fund, Scudder Kemper Investments,
observed that the Fund's performance relative to the benchmark and their peer
group suffered in the second half of the year. A number of portfolio holdings
declined sharply after posting negative revenue or earnings surprises. The
market, which typically is more forgiving of disappointments among low
price/earnings stocks, punished these underperformers nonetheless. A handful of
stocks including Xerox, Lockheed Martin, American Home Products, and First Union
were the most significant detractors from performance for the fourth quarter
and full year.
The most significant positive contributors to fourth quarter performance were
telecommunications and telecommunications equipment holdings, led by Corning
(the portfolio's largest position), which rallied 80% on continuing positive
news coming out of its fiber and photonics businesses. Global Crossing rose 83%
following its successful closure of the Frontier acquisition. Sprint received a
takeover bid from Worldcom and leapt 27% in the quarter. In the cyclical arena,
the portfolio benefited from its holdings in Georgia Pacific and Weyerhaeuser,
which both rallied 23% on news of a tight supply/demand balance in pulp and
container board. American Airlines (+21%) was the best performing of the major
airlines during the quarter, announcing the spin-off of Sabre Group earlier than
expected. In the technology sector, Philips Electronics posted a 30% gain, as it
benefited from the tight capacity in semiconductor contract manufacturing
(through its ownership of Taiwan Semiconductor). In the financial sector, the
Fund was rewarded by evidence of the turn in the property and casualty insurance
cycle, as Marsh & McLennan (+38%) and St. Paul (+22%) contributed most
significantly. Morgan Stanley Dean Witter (+58%) and Lehman Brothers (+45%) also
added value, as they both posted positive surprises on the heels of strong
investment banking results.
22
GROWTH & INCOME FUND
As a disciplined value investor, Scudder will adhere to the value process that
they have historically followed. They believe that the portfolio is positioned
to ensure participation when the style shift occurs.
GROWTH OF A $10,000 INVESTMENT - Class A Shares
Touchstone
Growth & S&P 500 CDA/Wiesenberger
Income Index Growth &
Fund A (Major Index) Income - MF
- --------------------------------------------------------------------------------------------------------------
9/94 9425 10000 10000
12/94 9444 9998 9837
3/95 10406 10972 10594
6/95 11160 12019 11428
9/95 12049 12974 12248
12/95 12763 13756 12823
3/96 13676 14494 13525
6/96 14114 15144 13969
9/96 14419 15612 14370
12/96 14927 16914 15415
3/97 14278 17367 15583
6/97 15959 20399 17768
9/97 17460 21927 19305
12/97 18016 22557 19484
3/98 20253 25703 21658
6/98 19780 26552 21739
9/98 17264 23911 19232
12/98 19253 29002 22466
3/99 19355 30452 22839
6/99 21497 32598 24815
9/99 19011 30561 22992
12/99 19740 35108 25305
Average Annual Total Return
One Year Five Years Since
Ended Ended Inception
12/31/99 12/31/99 10/3/94
(3.3%) 14.5% 13.8%
Cumulative Total Return
Since Inception
10/3/94
97.4%
Total returns adjusted for maximum applicable sales charge.
Past performance is not indicative of future performance.
23
GROWTH & INCOME FUND
GROWTH OF A $10,000 INVESTMENT - Class C Shares
Touchstone
Growth & S&P 500 CDA/Wiesenberger
Income Index Growth &
Fund C (Major Index) Income - MF
- ------------------------------------------------------------------------------
1/99 10000 10000 10000
3/99 10038 10500 10166
6/99 11134 11240 11045
9/99 9820 10537 10234
12/99 10180 12105 11264
Average Annual Total Return
One Year Since
Ended Inception
12/31/99 1/1/99
1.8% 1.8%
Cumulative Total Return
Since Inception
1/1/99
1.8%
Total returns adjusted for maximum applicable sales charge.
Past performance is not indicative of future performance.
GROWTH OF A $10,000 INVESTMENT - Class Y Shares
Touchstone
Growth & S&P 500 CDA/Wiesenberger
Income Index Growth &
Fund Y (Major Index) Income - MF
- -------------------------------------------------------------------------------
1/99 10000 10000 10000
3/99 10058 10500 10166
6/99 11185 11240 11045
9/99 9892 10537 10234
12/99 10271 12105 11264
Average Annual Total Return
One Year Since
Ended Inception
12/31/99 1/1/99
2.7% 2.7%
Cumulative Total Return
Since Inception
1/1/99
2.7%
Total returns adjusted for maximum applicable sales charge.
Past performance is not indicative of future performance.
24
GROWTH & INCOME FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
Value
Shares (Note 1)
COMMON STOCKS - 98.0%
AEROSPACE & DEFENSE - 2.8%
17,600 Lockheed Martin $ 385,000
5,500 Northrop Grumman 297,344
7,200 Rockwell International 344,700
- -------------------------------------------------------
1,027,044
- -------------------------------------------------------
AIRLINES - 0.6%
3,400 AMR* 227,800
- -------------------------------------------------------
AUTOMOTIVE - 1.9%
7,200 Ford Motor 384,750
8,500 Meritor Automotive 164,688
3,500 Paccar 155,094
- -------------------------------------------------------
704,532
- -------------------------------------------------------
BANKING - 8.7%
12,000 Bank of America 602,250
9,500 Chase Manhattan 738,031
8,962 First Union 294,066
14,700 FleetBoston Financial 511,744
13,500 PNC Bank 600,750
17,300 US Bancorp 411,956
- -------------------------------------------------------
3,158,797
- -------------------------------------------------------
BEVERAGES, FOOD & TOBACCO - 3.5%
8,500 Heinz (H. J.) 338,406
19,500 Pepsico 687,375
10,500 Philip Morris 243,469
- -------------------------------------------------------
1,269,250
- -------------------------------------------------------
CHEMICALS - 1.3%
5,900 Air Products & Chemicals 198,019
1 Du Pont (E.I.) De Nemours 66
21,500 Lyondell Petro Chemical 274,125
- -------------------------------------------------------
472,210
- -------------------------------------------------------
COMPUTER SOFTWARE & PROCESSING - 3.4%
8,900 Cadence Design Systems* 213,600
14,600 Computer Associates
International 1,021,088
- -------------------------------------------------------
1,234,688
- -------------------------------------------------------
COSMETICS & PERSONAL CARE - 1.2%
6,400 Colgate-Palmolive 416,000
- -------------------------------------------------------
ELECTRIC UTILITIES - 2.8%
5,600 Cinergy 135,100
10,672 ScottishPower, ADR 298,816
17,000 Unicom 569,500
- -------------------------------------------------------
1,003,416
- -------------------------------------------------------
ELECTRICAL EQUIPMENT - 0.9%
5,700 Emerson Electric 327,038
- -------------------------------------------------------
ELECTRONICS - 2.5%
6,700 Koninklijke (Royal) Philips
Electronics (NY Reg.) 904,500
- -------------------------------------------------------
FINANCIAL SERVICES - 9.6%
17,600 Citigroup 977,900
10,400 Federal National Mortgage
Association 649,350
3,000 J.P. Morgan 379,875
6,100 Lehman Brothers Holdings 516,594
4,000 Morgan Stanley Dean Witter 571,000
8,500 SLM Holding 359,125
- -------------------------------------------------------
3,453,844
- -------------------------------------------------------
Value
Shares (Note 1)
FOOD RETAILERS - 0.7%
7,963 Albertson's $ 256,807
- -------------------------------------------------------
FOREST PRODUCTS & PAPER - 2.1%
4,900 Georgia-Pacific 248,675
7,100 Weyerhaeuser 509,869
- -------------------------------------------------------
758,544
- -------------------------------------------------------
HEAVY MACHINERY - 1.7%
11,700 Parker Hannifin 600,356
- -------------------------------------------------------
HOME CONSTRUCTION, FURNISHINGS & APPLIANCES - 1.7%
3,900 General Electric 603,525
- -------------------------------------------------------
HOUSEHOLD PRODUCTS - 5.5%
15,300 Corning 1,972,744
- -------------------------------------------------------
INSURANCE - 7.9%
19,800 Allstate Corporation (The) 475,200
18,200 Lincoln National 728,000
5,800 Marsh & McLennan Companies 554,988
15,600 St. Paul Companies (The) 525,525
10,870 XL Capital, Class A 563,881
- -------------------------------------------------------
2,847,594
- -------------------------------------------------------
MEDIA - BROADCASTING & PUBLISHING - 1.6%
9,500 McGraw-Hill Companies (The) 585,438
- -------------------------------------------------------
METALS - 0.8%
9,050 Allegheny Technologies 203,059
10,200 Oregon Steel Mills 80,963
- -------------------------------------------------------
284,022
- -------------------------------------------------------
OIL & GAS - 11.4%
9,700 Burlington Resources 320,706
12,300 Conoco, Class A 304,425
11,546 Conoco, Class B 287,207
18,240 Exxon Mobil 1,469,453
7,000 Royal Dutch Petroleum 423,063
9,600 Texaco 521,400
8,233 Total Fina S.A., ADR 570,135
7,600 Williams Companies (The) 232,275
- -------------------------------------------------------
4,128,664
- -------------------------------------------------------
PHARMACEUTICALS - 3.8%
17,400 American Home Products 686,213
5,300 Bristol-Myers Squibb 340,194
6,400 Glaxo Wellcome, ADR 357,600
- -------------------------------------------------------
1,384,007
- -------------------------------------------------------
RETAILERS - 1.2%
6,000 Dayton Hudson 440,625
- -------------------------------------------------------
TELEPHONE SYSTEMS - 17.6%
8,100 Alltel 669,769
16,300 AT&T 827,225
20,900 Bell Atlantic 1,286,656
22,600 BellSouth 1,057,963
6,540 Global Crossing* 327,000
7,600 GTE 536,275
21,332 SBC Communications 1,039,935
8,700 Sprint 585,619
- -------------------------------------------------------
6,330,442
- -------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
25
GROWTH & INCOME FUND
SCHEDULE OF INVESTMENTS CONTINUED
Value
Shares (Note 1)
COMMON STOCKS - CONTINUED
TRANSPORTATION - 2.8%
11,200 Canadian National Railway $ 294,700
16,500 CSX 517,688
9,000 Norfolk Southern 184,500
- -------------------------------------------------------
996,888
- -------------------------------------------------------
TOTAL COMMON STOCKS
(COST $35,518,105) $35,388,775
- -------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS - 0.5%
CHEMICALS - 0.5%
5,900 Monsanto, ACES $ 195,438
- -------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(COST $266,258) $ 195,438
- -------------------------------------------------------
Value
(Note 1)
TOTAL INVESTMENTS AT VALUE - 98.5%
(COST $35,784,363) (A) $35,584,213
CASH AND OTHER ASSETS
NET OF LIABILITIES - 1.5% 546,605
- -------------------------------------------------------
NET ASSETS - 100.0% $36,130,818
- -------------------------------------------------------
Notes to the Schedule of Investments:
* Non-income producing security.
(a) The aggregate identified cost for federal income tax purposes is
$35,785,695 resulting in gross unrealized appreciation and depreciation of
$4,489,147 and $4,690,629, respectively, and net unrealized depreciation of
$201,482.
ACES - Adjustable Conversion-Rate Equity Security
ADR - American Depository Receipt
The accompanying notes are an integral part of the financial statements.
26
BALANCED FUND
MANAGEMENT DISCUSSION & ANALYSIS (MD&A)
TOUCHSTONE BALANCED FUND
The U.S. stock market continued its strong performance in 1999, completing five
consecutive years of sharply rising prices. Meanwhile, it was a rough year for
bonds and, by some measures, it was the worst year ever. At year end, bonds and
fixed income securities represented 40% of the Balanced Fund's assets. The
Touchstone Balanced Fund had a return of 3.3% for 1999. Its benchmark, the
Lehman Brothers Aggregate Index, had a return of (0.8)%.
The U.S. economy remains strong and there are indications of excessive optimism
in the stock market. The three rate increases implemented by the Federal Reserve
since June of 1999 have been taken in stride, and even welcomed, by the stock
market. The stock market was characterized throughout 1999 -- and especially in
the fourth quarter -- by two extremely contradictory trends: the rapid
escalation of many technology stocks and only modest gains or even price
declines for stocks across most other industry sectors. Many technology stocks
did not generate any earnings, yet increased dramatically, driven by the
prospect of continued rapid growth for e-commerce and the Internet. On the other
hand, many "bricks and mortar" stocks with solid earnings and favorable business
prospects declined in price.
The manager of the Touchstone Balanced Fund, OpCap Advisors, observed that as
technology stocks soared, many non-tech issues were left behind. A full
one-third of NYSE stocks declined 20% or more in 1999. Even stocks of
traditional companies with excellent competitive positions and strong earnings
growth tended to fare poorly in this technology-focused market environment.
Performance disparities among industry sectors and types of stocks are hardly
new. Nonetheless, few such disparities have been as dramatic as that which
occurred during 1999 between the technology stocks and the rest of the market.
OpCap remained focused on generating excellent long-term results with
below-market risk by investing in companies with superior fundamentals and
inexpensive valuations.
Among the Fund's equity holdings, Oak Industries, a leading manufacturer of
cable TV and telecommunications infrastructure products, was a top contributor
to performance. In November, Corning agreed to acquire Oak for approximately
$75 per share, a 51% premium to market, confirming OpCap's assessment of the
inherent worth of Oak's valuable franchises. Another major contributor to
performance was Molex, the second largest electronics connector manufacturer in
the world. The company's stock appreciated significantly during the last few
months of the year, reflecting the recovery of Asian markets and the company's
strong position in cell phone components. Emmis, a major broadcasting company
focused on large media markets, continues to be rewarded by the market for
strong performance in radio and television.
The five largest equity holdings at December 31, 1999 were AMFM, a broadcasting
company, representing 2.9% of the Fund's net assets; Computer Associates, a
developer of software products, 2.0%; Federal Home Loan Mortgage Corp., 1.7% of
the Fund's net assets; Minnesota Mining & Manufacturing (3M), a diversified
manufacturer, 1.5% of net assets and Citigroup, a diversified financial services
company, 1.4% of net assets.
In addition to its holdings of common stocks, bonds and fixed income securities,
the Fund was invested in cash and cash equivalents. The fixed income portion of
the portfolio lagged along with the bond market at large.
27
BALANCED FUND
GROWTH OF A $10,000 INVESTMENT - Class A Shares
Lehman Blend 60% CDA/Wiesenberger
Touchstone S&P Brothers S&P 500, 40% Balanced
Balanced 500 Aggregate Index Lehman Brothers Domestic
Fund A Index (Major Index) Aggregate Average - MF
- -----------------------------------------------------------------------------------------------------------------------
9/94 9425 10000 10000 10000 10000
12/94 9453 9998 10038 9973 9893
3/95 9965 10972 10544 10713 10501
6/95 10922 12019 11187 11539 11245
9/95 11582 12974 11406 12113 11849
12/95 11654 13756 11892 12734 12337
3/96 12065 14494 11681 13006 12656
6/96 12209 15144 11748 13339 12954
9/96 12606 15612 11965 13644 13300
12/96 13618 16914 12324 14446 13973
3/97 13575 17367 12256 14611 13964
6/97 15028 20399 12707 16290 15380
9/97 15929 21927 13131 17203 16397
12/97 16240 22557 13514 17666 16572
3/98 17364 25703 13723 19198 17828
6/98 17443 26552 14045 19717 18014
9/98 15631 23911 14638 18852 16835
12/98 16885 29002 14687 21182 18708
3/99 16968 30452 14613 21729 18858
6/99 18090 32598 14484 22525 19704
9/99 17225 30561 14583 21693 18840
12/99 18508 35108 14565 23543 20267
Average Annual Total Return
One Year Five Years Since
Ended Ended Inception
12/31/99 12/31/99 10/3/94
3.3% 13.0% 12.5%
Cumulative Total Return
Since Inception
10/3/94
85.1%
Total returns adjusted for maximum applicable sales charge.
Past performance is not indicative of future performance.
GROWTH OF A $10,000 INVESTMENT - Class C Shares
Lehman Blend 60% CDA/Wiesenberger
Touchstone S&P Brothers S&P 500, 40% Balanced
Balanced 500 Aggregate Index Lehman Brothers Domestic
Fund C Index (Major Index) Aggregate Average - MF
- -----------------------------------------------------------------------------------------------------------------------
1/99 10000 10000 10000 10000 10000
3/99 10032 10500 9949 10258 10081
6/99 10673 11240 9861 10634 10533
9/99 10145 10537 9929 10241 10071
12/99 10878 12105 9917 11115 10834
Average Annual Total Return
One Year Since
Ended Inception
12/31/99 1/1/99
8.8% 8.8%
Cumulative Total Return
Since Inception
1/1/99
8.8%
Total returns adjusted for maximum applicable sales charge.
Past performance is not indicative of future performance.
28
BALANCED FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
Value
Shares (Note 1)
COMMON STOCKS - 54.1%
ADVERTISING - 2.2%
700 Lamar Advertising* $ 42,394
900 WPP Group 74,813
600 Young & Rubicam 42,450
- -------------------------------------------------------
159,657
- -------------------------------------------------------
AEROSPACE & DEFENSE - 0.9%
1,500 Boeing 62,344
- -------------------------------------------------------
AIRLINES - 1.2%
1,300 AMR* 87,100
- -------------------------------------------------------
BANKING - 4.0%
600 Chase Manhattan 46,613
2,221 FleetBoston Financial 77,319
1,800 Household International 67,050
2,500 Wells Fargo 101,094
- -------------------------------------------------------
292,076
- -------------------------------------------------------
BEVERAGES, FOOD & TOBACCO - 2.2%
2,255 Diageo, ADR 72,160
2,200 McDonald's 88,688
- -------------------------------------------------------
160,848
- -------------------------------------------------------
BUILDING MATERIALS - 0.1%
1,422 Huttig Building Products* 7,022
- -------------------------------------------------------
CHEMICALS - 2.0%
1,500 Du Pont (E.I.) De Nemours 98,813
1,200 Monsanto 42,750
- -------------------------------------------------------
141,563
- -------------------------------------------------------
COMMERCIAL SERVICES - 1.6%
1,450 PerkinElmer 60,447
3,300 Waste Management 56,719
- -------------------------------------------------------
117,166
- -------------------------------------------------------
COMPUTER SOFTWARE & PROCESSING - 2.0%
2,050 Computer Associates International 143,372
- -------------------------------------------------------
COMPUTERS & INFORMATION - 0.9%
2,400 Compaq Computer 64,950
- -------------------------------------------------------
CONTAINERS & PACKAGING - 0.4%
2,000 American National Can Group 26,000
- -------------------------------------------------------
COSMETICS & PERSONAL CARE - 0.7%
1,600 Avon Products 52,800
- -------------------------------------------------------
ELECTRICAL EQUIPMENT - 1.2%
1,500 Emerson Electric 86,063
- -------------------------------------------------------
ELECTRONICS - 2.2%
2,000 Arrow Electronics* 50,750
900 Avnet 54,450
900 Molex 51,019
- -------------------------------------------------------
156,219
- -------------------------------------------------------
FINANCIAL SERVICES - 3.5%
1,875 Citigroup 104,180
1,100 Countrywide Credit 27,775
2,600 Federal Home Loan
Mortgage Corporation 122,363
- -------------------------------------------------------
254,318
- -------------------------------------------------------
FOOD RETAILERS - 1.2%
4,700 Kroger Company (The)* 88,713
- -------------------------------------------------------
Value
Shares (Note 1)
HEAVY MACHINERY - 4.5%
1,800 Applied Power, Class A $ 66,150
1,750 Caterpillar 82,359
1,500 Dover 68,063
1,600 Parker Hannifin 82,100
600 W.W. Grainger 28,688
- -------------------------------------------------------
327,360
- -------------------------------------------------------
INDUSTRIAL - DIVERSIFIED - 2.4%
1,900 Carlisle Companies 68,400
1,100 Minnesota Mining &
Manufacturing (3M) 107,663
- -------------------------------------------------------
176,063
- -------------------------------------------------------
INSURANCE - 3.7%
1,200 AFLAC 56,625
1,557 Conseco 27,831
1,800 Everest Reinsurance Holdings 40,163
1,000 PartnerRe 32,438
1,500 Protective Life 47,719
1,200 XL Capital, Class A 62,250
- -------------------------------------------------------
267,026
- -------------------------------------------------------
LODGING - 1.0%
35,400 Homestead Village* 75,217
- -------------------------------------------------------
MEDIA - BROADCASTING & PUBLISHING - 4.0%
2,700 AMFM* 211,275
600 Emmis Communications, Class A* 74,784
- -------------------------------------------------------
286,059
- -------------------------------------------------------
METALS - 1.8%
800 Alcoa 66,400
3,200 Crane 63,600
- -------------------------------------------------------
130,000
- -------------------------------------------------------
OIL & GAS - 0.8%
1,700 Anadarko Petroleum 58,013
- -------------------------------------------------------
PHARMACEUTICALS - 2.2%
1,700 American Home Products 67,044
1,250 Teva Pharmaceutical Industries, ADR 89,609
- -------------------------------------------------------
156,653
- -------------------------------------------------------
REAL ESTATE - 1.0%
3,600 Prologis Trust, REIT 69,300
- -------------------------------------------------------
RESTAURANTS - 0.4%
2,000 Bob Evans Farms 30,875
- -------------------------------------------------------
RETAILERS - 1.1%
1,100 CVS 43,931
1,100 May Department Stores 35,475
- -------------------------------------------------------
79,406
- -------------------------------------------------------
TELEPHONE SYSTEMS - 3.0%
800 Bell Atlantic 49,250
1,425 MCI WorldCom* 75,614
1,350 Sprint 90,872
- -------------------------------------------------------
215,736
- -------------------------------------------------------
TRANSPORTATION - 1.9%
2,200 Air Express International 71,088
1,250 Sabre Group Holdings* 64,063
- -------------------------------------------------------
135,151
- -------------------------------------------------------
TOTAL COMMON STOCKS
(COST $3,808,179) $ 3,907,070
- -------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
29
BALANCED FUND
SCHEDULE OF INVESTMENTS CONTINUED
Value
Shares (Note 1)
PREFERRED STOCKS - 0.9%
ENTERTAINMENT & LEISURE - 0.9%
2,000 News Corporation Limited
(The), ADR $ 66,875
- -------------------------------------------------------
TOTAL PREFERRED STOCKS
(COST $50,643) $ 66,875
- -------------------------------------------------------
Principal Interest Maturity Value
Amount Rate Date (Note 1)
ASSET-BACKED SECURITIES - 0.1%
FINANCIAL SERVICES - 0.1%
$ 4,111 Merrill Lynch
Mortgage Investors,
Series 1991-I,
Class A 7.65% 01/15/12 $ 4,113
- -------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES
(COST $4,211) $ 4,113
- -------------------------------------------------------
CORPORATE BONDS - 20.4%
BANKING - 4.7%
150,000 Associates
Corporation of
North America 5.75% 11/01/03 142,819
100,000 BB&T 7.25% 06/15/07 96,789
100,000 Chase Manhattan 7.25% 06/01/07 98,043
308 Nykredit 6.00% 10/01/26 39
- -------------------------------------------------------
337,690
- -------------------------------------------------------
BEVERAGES, FOOD & TOBACCO - 0.8%
60,000 Coca-Cola Femsa 8.95% 11/01/06 60,150
- -------------------------------------------------------
COMPUTER SOFTWARE & PROCESSING - 1.3%
100,000 Computer Associates
International 6.375% 04/15/05 93,036
- -------------------------------------------------------
ELECTRIC UTILITIES - 5.8%
95,000 Financiera
Energy 9.375% 06/15/06 80,257
200,000 Tennessee Valley
Authority 5.00% 12/18/03 187,556
150,000 Wisconsin Electric
Power 6.625% 12/01/02 148,686
- -------------------------------------------------------
416,499
- -------------------------------------------------------
FINANCIAL SERVICES - 4.4%
150,000 AT&T Capital 7.50% 11/15/00 150,734
100,000 GMAC 7.125% 05/01/01 100,177
69,000 Paine Webber
Group 7.00% 03/01/00 69,049
- -------------------------------------------------------
319,960
- -------------------------------------------------------
MEDIA - BROADCASTING & PUBLISHING - 1.3%
100,000 CSC Holdings 7.625% 07/15/18 93,000
- -------------------------------------------------------
METALS - 1.4%
100,000 AK Steel 9.125% 12/15/06 101,750
- -------------------------------------------------------
OIL & GAS - 0.7%
50,000 Petroleos
Mexicanos 8.85% 09/15/07 47,875
- -------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $1,540,369) $ 1,469,960
- -------------------------------------------------------
Principal Interest Maturity Value
Amount Rate Date (Note 1)
MORTGAGE-BACKED SECURITIES - 9.1%
$ 20,000 Federal Home
Loan Mortgage
Corporation 6.00% 03/15/08 $ 19,668
45,000 Federal National
Mortgage
Association 6.15% 10/25/07 44,375
150,000 Federal National
Mortgage
Association 6.00% 05/15/08 140,193
100,000 Federal National
Mortgage
Association 6.50% 04/29/09 93,694
139,159 Federal National
Mortgage
Association 6.00% 01/01/14 132,099
75,277 Federal National
Mortgage
Association 6.50% 07/18/28 70,016
40,000 General Electric
Capital Mortgage
Services, Series
1993-14, Class A7 6.50% 11/25/23 34,928
44,500 General Electric
Capital Mortgage
Services, Series
1994-10,
Class A10 6.50% 03/25/24 42,329
40,000 Merrill Lynch
Mortgage Investors,
Series 1995-C3,
Class A3 7.089% 12/26/25 39,333
50,000 Prudential Home
Mortgage Securities,
Series 1994-17,
Class A6 6.25% 04/25/24 41,609
- -------------------------------------------------------
TOTAL MORTGAGE-BACKED SECURITIES
(COST $697,092) $ 658,244
- -------------------------------------------------------
MUNICIPAL BONDS - 1.9%
HOUSING - 1.4%
40,000 Baltimore Community
Development
Financing 8.20% 08/15/07 $ 41,504
4,092 Denver Colorado
City & County
Single Family 7.25% 12/01/10 3,949
30,000 New York State
Housing Finance
Agency Service 7.50% 09/15/03 30,197
25,000 Ohio Housing
Financial Agency 7.90% 10/01/14 25,526
- -------------------------------------------------------
101,176
- -------------------------------------------------------
TRANSPORTATION - 0.5%
30,000 Oklahoma City
Airport 9.40% 11/01/10 32,908
- -------------------------------------------------------
TOTAL MUNICIPAL BONDS
(COST $130,110) $ 134,084
- -------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
30
BALANCED FUND
SCHEDULE OF INVESTMENTS CONTINUED
Principal Interest Maturity Value
Amount Rate Date (Note 1)
SOVEREIGN GOVERNMENT OBLIGATIONS - 2.8%
SOUTH AFRICA - 1.7%
ZAR 774,000 Republic
of South
Africa 13.00% 08/31/10 $ 120,954
- -------------------------------------------------------
UNITED KINGDOM - 1.1%
GBP 37,000 United
Kingdom
Treasury 8.00% 12/07/15 79,789
- -------------------------------------------------------
TOTAL SOVEREIGN GOVERNMENT
OBLIGATIONS (COST $220,336) $ 200,743
- -------------------------------------------------------
U.S. TREASURY OBLIGATIONS - 4.1%
180,000 U.S. Treasury
Note 5.875% 02/15/04 $ 177,019
65,000 U.S. Treasury
Bond 6.25% 04/30/01 65,061
50,000 U.S. Treasury
Bond 7.25% 08/15/22 52,719
- -------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $303,273) $ 294,799
- -------------------------------------------------------
Value
(Note 1)
TOTAL INVESTMENTS AT VALUE - 93.4%
(COST $6,754,213) (A) $ 6,735,888
CASH AND OTHER ASSETS
NET OF LIABILITIES - 6.6% 473,725
- -------------------------------------------------------
NET ASSETS - 100.0% $ 7,209,613
- -------------------------------------------------------
Notes to the Schedule of Investments:
* Non-income producing security.
(a) The aggregate identified cost for federal income tax purposes is $6,757,066
resulting in gross unrealized appreciation and depreciation of $679,190 and
$700,368, respectively, and net unrealized depreciation of $21,178.
ADR - American Depository Receipt
REIT - Real Estate Investment Trust
GBP - Great Britain Pound
ZAR - South African Rand
The accompanying notes are an integral part of the financial statements.
31
BOND FUND
MANAGEMENT DISCUSSION & ANALYSIS (MD&A)
TOUCHSTONE BOND FUND
The bond market ended its final quarter of the century on a down note,
generating a negative return in December and locking in an equally poor return
for the quarter. The Federal Reserve induced sell-off continued and produced
only the second negative total return for bonds in a year since 1975. There are
few places to hide in the fixed income market when the Federal Reserve begins to
tighten the money supply. The benchmark for the Bond Fund, the Lehman Brothers
Aggregate Index, had a (0.8%) return in 1999. The Bond Fund return for the same
period was (6.4%).
This environment wasn't conducive to an outstanding bond portfolio performance.
While the Touchstone Bond Fund is structured to produce above market income as a
defensive measure, lower prices have offset this tactic causing returns to
closely track the index. Performance for the Fund gross of fees for the fourth
quarter and the year were -0.21% and -0.97% versus -0.12% and -0.83% for the
Lehman Brothers Aggregate Index.
Fixed income has not been the investment asset of choice for the past several
years when compared to the stellar returns in the equity market. The manager of
the Touchstone Bond Fund, Fort Washington Investment Advisors, believes that
there could continue to be rough sledding in the bond market.
GROWTH OF A $10,000 INVESTMENT - Class A Shares
Touchstone Lehman Brothers CDA/Wiesenberger
Bond Aggregate Index Corporate-Investment
Fund A (Major Index) Grade - MF
- -------------------------------------------------------------------------------
9/94 9525 10000 10000
12/94 9551 10038 9985
3/95 10046 10544 10418
6/95 10571 11187 11104
9/95 10742 11406 11331
12/95 11172 11892 11867
3/96 10937 11681 11588
6/96 10982 11748 11629
9/96 11175 11965 11842
12/96 11490 12324 12223
3/97 11450 12256 12134
6/97 11818 12707 12571
9/97 12197 13131 12999
12/97 12329 13514 13302
3/98 12583 13723 13491
6/98 12853 14045 13788
9/98 13202 14638 14188
12/98 13384 14687 14257
3/99 13287 14613 14171
6/99 13162 14484 13976
9/99 13203 14583 14040
12/99 13160 14565 14015
Average Annual Total Return
One Year Five Years Since
Ended Ended Inception
12/31/99 12/31/99 10/3/94
(6.4%) 5.6% 5.4%
Cumulative Total Return
Since Inception
10/3/94
31.6%
Total returns adjusted for maximum applicable sales charge.
Past performance is not indicative of future performance.
32
BOND FUND
GROWTH OF A $10,000 INVESTMENT - Class C Shares
Touchstone Lehman Brothers CDA/Wiesenberger
Bond Aggregate Index Corporate-Investment
Fund C (Major Index) Grade - MF
- --------------------------------------------------------------------------------
1/99 10000 10000 10000
3/99 9910 9949 9940
6/99 9799 9861 9803
9/99 9810 9929 9847
12/99 9759 9917 9830
Average Annual Total Return
One Year Since
Ended Inception
12/31/99 1/1/99
(2.4%) (2.4%)
Cumulative Total Return
Since Inception
1/1/99
(2.4%)
Total returns adjusted for maximum applicable sales charge.
Past performance is not indicative of future performance.
GROWTH OF A $10,000 INVESTMENT - Class Y Shares
Touchstone Lehman Brothers CDA/Wiesenberger
Bond Aggregate Index Corporate-Investment
Fund Y (Major Index) Grade - MF
- --------------------------------------------------------------------------------
1/99 10000 10000 10000
3/99 9935 9949 9940
6/99 9848 9861 9803
9/99 9889 9929 9847
12/99 9856 9917 9830
Average Annual Total Return
One Year Since
Ended Inception
12/31/99 1/1/99
(1.4%) (1.4%)
Cumulative Total Return
Since Inception
1/1/99
(1.4%)
Total returns adjusted for maximum applicable sales charge.
Past performance is not indicative of future performance.
33
BOND FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
Principal Interest Maturity Value
Amount Rate Date (Note 1)
AGENCY FOR INTERNATIONAL DEVELOPMENT BONDS - 3.4%
CENTRAL AMERICA - 2.1%
$ 120,000 Central America
International
Development,
Series F+ 10.00% 12/01/11 $ 132,586
120,000 Central America
International
Development,
Series G+ 10.00% 12/01/11 132,586
120,000 Central America
International
Development,
Series H+ 10.00% 12/01/11 132,586
- -------------------------------------------------------
397,758
- -------------------------------------------------------
HONDURAS - 1.3%
100,000 Republic of Honduras
International
Development,
Series C+ 13.00% 06/01/06 118,494
100,000 Republic of Honduras
International
Development,
Series D+ 13.00% 06/01/11 133,383
- -------------------------------------------------------
251,877
- -------------------------------------------------------
TOTAL AGENCY FOR INTERNATIONAL
DEVELOPMENT BONDS (COST $681,852) $ 649,635
- -------------------------------------------------------
ASSET-BACKED SECURITIES - 6.8%
FINANCIAL SERVICES - 6.8%
28,690 Chase Manhattan
Grantor Trust,
Series 1996-A,
Class A 5.20% 02/15/02 $ 28,595
750,000 Chemical Credit
Card Master Trust,
Series 1996-2,
Class A 5.98% 09/15/08 712,838
72,833 Navistar Financial
Corp. Owner Trust,
Series 1996-A,
Class A2 6.35% 11/15/02 72,795
492,133 World Omni Auto
Lease, Series
1997-B, Class A3 6.18% 11/25/03 492,015
- -------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES
(COST $1,345,825) $1,306,243
- -------------------------------------------------------
CORPORATE BONDS - 40.0%
BANKING - 3.1%
225,000 Credit Suisse First
Boston - London 7.90% 05/01/07 $ 214,078
350,000 First Union 6.55% 10/15/35 332,532
49,276 Mercantile Safe
Deposit+ 12.125% 01/02/01 49,399
- -------------------------------------------------------
596,009
- -------------------------------------------------------
Principal Interest Maturity Value
Amount Rate Date (Note 1)
BEVERAGES, FOOD & TOBACCO - 2.3%
$ 500,000 Pepsi Bottling,
144A 5.625% 02/17/09 $ 441,478
- -------------------------------------------------------
CHEMICALS - 4.5%
900,000 Du Pont (E.I.)
De Nemours 6.875% 10/15/09 870,483
- -------------------------------------------------------
COMMUNICATIONS - 2.6%
500,000 Harris Corporation
6.65% 08/01/06 497,730
- -------------------------------------------------------
ELECTRIC UTILITIES - 2.4%
500,000 Consumers Energy,
Series B 6.50% 06/15/18 465,235
- -------------------------------------------------------
ELECTRONICS - 4.9%
1,000,000 Raytheon 5.70% 11/01/03 938,371
- -------------------------------------------------------
FINANCIAL SERVICES - 3.4%
750,000 Safeco Capital 8.072% 07/15/37 659,612
- -------------------------------------------------------
FOREST PRODUCTS & PAPER - 1.4%
250,000 Georgia-Pacific 9.50% 05/15/22 264,531
- -------------------------------------------------------
HEALTH CARE PROVIDERS - 3.1%
650,000 Columbia/HCA
Health 6.73% 07/15/45 604,937
- -------------------------------------------------------
HOUSEHOLD PRODUCTS - 3.6%
750,000 Owens-Illinois 7.15% 05/15/05 696,290
- -------------------------------------------------------
MEDIA - BROADCASTING & PUBLISHING - 1.4%
250,000 News America
Holdings 10.125% 10/15/12 275,052
- -------------------------------------------------------
OIL & GAS - 1.3%
250,000 Husky Oil 8.90% 08/15/28 249,649
- -------------------------------------------------------
TELEPHONE SYSTEMS - 2.2%
400,000 MCI WorldCom 8.875% 01/15/06 417,948
- -------------------------------------------------------
TRANSPORTATION - 3.8%
750,000 Norfolk Southern 7.35% 05/15/07 733,254
- -------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $8,170,971) $7,710,579
- -------------------------------------------------------
MORTGAGE-BACKED SECURITIES - 28.8%
119,271 Federal Home
Loan Mortgage
Corporation 6.00% 05/01/09 $ 114,965
419,767 Federal Home
Loan Mortgage
Corporation 6.00% 08/01/10 403,376
35,889 Federal Home
Loan Mortgage
Corporation 6.00% 10/01/10 34,488
1,000,000 Federal National
Mortgage
Association 5.75% 04/15/03 970,904
1,223,815 Federal National
Mortgage
Association 6.50% 07/01/28 1,153,521
983,939 Federal National
Mortgage
Association 7.00% 08/01/29 951,614
The accompanying notes are an integral part of the financial statements.
34
BOND FUND
SCHEDULE OF INVESTMENTS CONTINUED
Principal Interest Maturity Value
Amount Rate Date (Note 1)
MORTGAGE-BACKED SECURITIES - CONTINUED
$ 342,954 Government
National Mortgage
Association 7.00% 06/15/09 $ 341,999
227,027 Government
National Mortgage
Association 9.00% 08/15/19 238,338
279,577 Government
National Mortgage
Association 6.50% 01/15/24 265,224
72,037 Government
National Mortgage
Association 7.50% 12/15/27 71,287
803,018 Government
National Mortgage
Association 7.00% 05/15/28 775,999
242,869 Government
National Mortgage
Association 6.50% 09/15/28 228,145
- -------------------------------------------------------
TOTAL-MORTGAGE BACKED
SECURITIES (COST $5,805,865) $5,549,860
- -------------------------------------------------------
SOVEREIGN GOVERNMENT OBLIGATIONS - 5.2%
CANADA - 5.2%
1,000,000 Province of
Ontario 7.375% 01/27/03 $1,010,650
- -------------------------------------------------------
TOTAL SOVEREIGN GOVERNMENT
OBLIGATIONS (COST $1,081,178) $1,010,650
- -------------------------------------------------------
U.S. TREASURY OBLIGATIONS - 5.2%
1,000,000 U.S. Treasury
Note 5.875% 10/31/01 $ 993,438
- -------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $994,547) $ 993,438
- -------------------------------------------------------
Shares Value
(Note 1)
PREFERRED STOCKS - 4.5%
ELECTRIC UTILITIES - 2.1%
9,600 Appalachian Power,
8.25% Cumulative $ 213,600
8,700 Ohio Power, Series A,
8.16% Cumulative 193,575
- -------------------------------------------------------
407,175
- -------------------------------------------------------
OIL & GAS - 2.4%
20,000 Transcanada Pipelines,
8.75% Cumulative 451,250
- -------------------------------------------------------
TOTAL PREFERRED STOCKS
(COST $989,416) $ 858,425
- -------------------------------------------------------
TOTAL INVESTMENTS AT VALUE - 93.9%
(COST $19,069,654) (A) $18,078,830
CASH AND OTHER ASSETS
NET OF LIABILITIES - 6.1% 1,177,309
- -------------------------------------------------------
NET ASSETS - 100.0% $19,256,139
- -------------------------------------------------------
Notes to the Schedule of Investments:
+ Restricted and Board valued security (Note 5).
(a) The aggregate identified cost for federal income tax purposes is
$19,069,654, resulting in gross unrealized appreciation and depreciation of
$8,172 and $998,996, respectively, and net unrealized depreciation of
$990,824.
144A - Security exempt from registration under Rule 144A of Securities Act of
1933. This security may be sold in transactions exempt from registration,
normally to qualified institutional buyers. At December 31, 1999, these
securities were valued at $441,478, or 2.3% of net assets.
The accompanying notes are an integral part of the financial statements.
35
STANDBY INCOME FUND
MANAGEMENT DISCUSSION & ANALYSIS (MD&A)
TOUCHSTONE STANDBY INCOME FUND
The Touchstone Standby Income Fund continued to achieve success in 1999. Fort
Washington Investment Advisors, the manager of the Touchstone Standby Income
Fund, attributed this to their investment philosophy of sector rotation and
trend analysis. The Fund's benchmark, the Merrill Lynch 91-Day Treasury Index,
posted a 4.8% return for 1999. The Standby Income Fund achieved a 4.6% return
for the year.
Fort Washington began 1999 with a near balanced allocation to the Commercial
Paper, corporate bond and ABS markets and an index matched average maturity. As
the year concluded, the Fund had a significantly higher Commercial Paper
allocation, effectively unwinding the position that had helped them to achieve
success in 1998. ABS and corporate spreads, which had reached historically wide
levels in 1998, began to tighten adding to the Fund's total return. This,
coupled with the increasing likelihood that the Federal Reserve was becoming
more hostile to the bond market, caused Fort Washington to shorten duration and
seek the liquidity provided by the Commercial Paper market.
Fort Washington's defensive posture allowed the success to continue into 1999,
even as the bond market experienced its second worst year ever. The Fund's 4.6%
return again placed the Touchstone Standby Income Fund in the top quartile of
the Morningstar Ultra Short Index.
GROWTH OF A $10,000 INVESTMENT
Merrill Lynch 30-Day
Touchstone 91-Day Money Market Smith Barney
Standby Income Treasury Index Yield Index 3-Month
Fund* (Major Index) (Minor Index) Treasury Bill
- ------------------------------------------------------------------------------------------------------------------------
9/94 10000 10000 10000 10000
12/94 10115 10133 10117 10130
3/95 10248 10285 10254 10272
6/95 10400 10439 10396 10422
9/95 10527 10588 10535 10569
12/95 10692 10744 10673 10713
3/96 10804 10876 10805 10851
6/96 10937 11016 10934 10988
9/96 11078 11168 11066 11132
12/96 11206 11314 11201 11276
3/97 11346 11458 11336 11419
6/97 11492 11614 11478 11566
9/97 11646 11769 11623 11716
12/97 11792 11917 11770 11868
3/98 11950 12072 11914 12021
6/98 12103 12227 12064 12173
9/98 12273 12401 12216 12327
12/98 12440 12540 12358 12468
3/99 12579 12673 12494 12485
6/99 12708 12822 12629 12622
9/99 12845 12984 12773 12766
12/99 13007 13146 12930 12926
Average Annual Total Return
One Year Five Years Since
Ended Ended Inception
12/31/99 12/31/99 10/3/94
4.6% 5.2% 5.1%
Cumulative Total Return
Since Inception
10/3/94
30.1%
Total returns adjusted for maximum applicable sales charge.
Past performance is not indicative of future performance.
36
STANDBY INCOME FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
Principal Interest Maturity Value
Amount Rate Date (Note 1)
ASSET-BACKED SECURITIES - 12.9%
$ 252,317 Auto Finance Group
Receivables Trust,
Series 1997-A,
Class A 6.35% 10/15/02 $ 251,540
325,681 Auto Finance Group
Receivables Trust,
Series 1997-B,
Class A 6.20% 02/15/03 323,782
247,281 Capital Asset
Research Funding,
Series 1998-A,
Class A, 144A 5.905% 12/15/05 247,976
500,000 Chase Credit Card
Master Trust,
Series 1998-6,
Class B (a) 6.973% 09/15/04 501,175
540,000 Citibank Credit Card
Master Trust,
Series 1997-3,
Class A 6.839% 02/10/04 539,341
410,756 Mellon Auto
Grantor Trust,
Series 1999-1,
Class B 5.76% 10/17/05 405,527
18,832 Newcourt Equipment
Trust Securities,
Series 1998-1,
Class A2 5.17% 09/20/00 18,832
406,539 Onyx Acceptance
Auto Trust, Series
1998-1, Class A 5.95% 07/15/04 402,941
172,246 Summit Acceptance
Auto Trust,
Series 1996-A,
Class A1, 144A 7.01% 07/15/02 172,784
255,840 UCFC Home
Equity Loan,
Series 1998-D,
Class AF1 6.105% 04/15/13 254,878
- -------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES
(COST $3,134,708) $3,118,776
- -------------------------------------------------------
COMMERCIAL PAPER - 63.3%
1,000,000 Centennial Energy
Holdings,
Sec. 4(2) 7.20% 01/21/00 $ 995,000
1,000,000 Consolidated
Natural Gas 7.05% 01/21/00 995,104
520,000 Consolidation
Coal 6.43% 01/21/00 515,170
7,550,000 Inter-American
Development
Bank 5.78% 7,530,603
1,000,000 Merrill Lynch 6.37% 01/31/00 993,807
1,000,000 PHH 7.15% 01/21/00 995,035
Principal Interest Maturity Value
Amount Rate Date (Note 1)
COMMERCIAL PAPER - CONTINUED
$ 570,000 Popular North
America 6.30% 01/24/00 $ 564,713
565,000 South Carolina
Electric & Gas 6.60% 02/01/00 560,857
600,000 Tandy 6.45% 02/08/00 595,378
1,000,000 Toyota Credit
(Puerto Rico) 6.55% 01/20/00 995,633
570,000 UOP, Sec. 4(2) 6.75% 01/28/00 564,443
- -------------------------------------------------------
TOTAL COMMERCIAL PAPER
(COST $15,305,743) $15,305,743
- -------------------------------------------------------
CORPORATE BONDS - 14.8%
BANKING - 4.6%
570,000 MBNA, MTN (a) 6.58% 07/07/03 $ 564,784
540,000 Popular, Series 3,
MTN 6.40% 08/25/00 538,560
- -------------------------------------------------------
1,103,344
- -------------------------------------------------------
ELECTRIC UTILITIES - 2.1%
500,000 SCANA,
MTN (a) 6.813% 07/14/00 499,863
- -------------------------------------------------------
FINANCIAL SERVICES - 2.1%
500,000 Potomac Capital
Investment,
144A 7.55% 11/19/01 501,257
- -------------------------------------------------------
MEDIA - BROADCASTING & PUBLISHING - 0.6%
150,000 Cox
Communications 6.375% 06/15/00 150,148
- -------------------------------------------------------
REAL ESTATE - 2.1%
500,000 Federal Realty
Investment Trust,
REIT 8.875% 01/15/00 500,253
- -------------------------------------------------------
RESTAURANTS - 1.0%
239,000 ARA Services 10.625% 08/01/00 242,061
- -------------------------------------------------------
RETAILERS - 2.3%
550,000 Dayton Hudson 10.00% 12/01/00 565,089
- -------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $3,592,162) $ 3,562,015
- -------------------------------------------------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS - 4.5%
600,000 Federal Home
Loan Bank 5.73% 01/14/00 $ 597,326
500,000 Federal Home
Loan Mortgage
Corportation,
Series UB 6.00% 11/15/08 493,195
- -------------------------------------------------------
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS (COST $1,100,764) $ 1,090,521
- -------------------------------------------------------
TOTAL INVESTMENTS AT VALUE - 95.5%
(COST $23,133,377) (B) $23,077,055
CASH AND OTHER ASSETS
NET OF LIABILITIES - 4.5% 1,084,721
- -------------------------------------------------------
NET ASSETS - 100.0% $24,161,776
- -------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
37
STANDBY INCOME FUND
SCHEDULE OF INVESTMENTS CONTINUED
Notes to the Schedule of Investments:
(a) Interest rate shown reflects current rate on instrument with variable rate.
(b) The aggregate identified cost for federal income tax purposes is
$23,133,377, resulting in gross unrealized appreciation and depreciation of
$3,650 and $59,972, respectively, and net unrealized depreciation of
$56,322.
144A - Security exempt from registration under Rule 144A of Securities Act of
1933. This security may be sold in transactions exempt from registration,
normally to qualified institutional buyers. At December 31, 1999, these
securities were valued at $922,017, or 3.8% of net assets.
Sec. 4(2) - Securities offered pursuant to Section 4(2) of the Securities Act of
1933, as amended. These securities have been determined to be liquid
under guidelines established by the Board of Directors. At December
31, 1999, these securities were valued at $1,559,443, or 6.5% of net
assets.
MTN - Medium Term Note
REIT - Real Estate Investment Trust
The accompanying notes are an integral part of the financial statements.
38
TOUCHSTONE SERIES TRUST
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
TOUCHSTONE TOUCHSTONE TOUCHSTONE TOUCHSTONE TOUCHSTONE TOUCHSTONE
EMERGING INTERNATIONAL INCOME VALUE GROWTH & TOUCHSTONE TOUCHSTONE STANDBY
GROWTH EQUITY OPPORTUNITY PLUS INCOME BALANCED BOND INCOME
FUND FUND FUND FUND FUND FUND FUND FUND(E)
ASSETS:
Investments, at value
(Note1)(a) $14,297,997 $15,393,299 $8,023,032 $31,286,783 $35,584,213 $6,735,888 $18,078,830 $23,077,055
Cash 332,115 -- 39,203 1,142,975 684,758 320,743 880,807 903,916
Foreign currency (b) -- -- -- -- -- 2,391 -- --
Receivables for:
Investments sold 22,738 142,567 -- -- -- -- -- --
Fund shares sold 1,416 2,455 324 43 780 624 6 --
Dividends 6,882 4,672 -- 33,720 63,622 1,625 17,590 --
Foreign tax reclaims -- 9,390 -- 367 3,455 -- 1,094 --
Interest 2,556 1,017 230,899 5,983 3,475 35,096 247,247 100,729
Unrealized appreciation
on foreign forward
currency contracts -- -- -- -- -- 326 -- --
Receivable from
Investment
Advisor (Note 6) 94,851 168,044 164,514 -- -- 152,264 120,542 111,499
- ------------------------------------------------------------------------------------------------------------------------------
Total assets 14,758,555 15,721,444 8,457,972 32,469,871 36,340,303 7,248,957 19,346,116 24,193,199
- ------------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for:
Investments
purchased 1,730 142,185 -- -- -- -- -- --
Fund shares
redeemed 6,947 1,005 8,471 -- 2,342 2,185 500 2,059
Unrealized depreciation
on foreign forward
currency contracts -- 1,049 -- -- -- -- -- --
Payable to Investment
Advisor (Note 6) -- -- -- 68,346 96,816 -- -- --
Other accrued expenses 42,177 59,038 43,353 45,524 110,327 37,159 89,477 29,364
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 50,854 203,277 51,824 113,870 209,485 39,344 89,977 31,423
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSETS(C) $14,707,701 $15,518,167 $8,406,148 $32,356,001 $36,130,818 $7,209,613 $19,256,139 $24,161,776
- ------------------------------------------------------------------------------------------------------------------------------
COMPUTATION OF NET ASSET VALUE, REDEMPTION VALUE AND OFFERING PRICE PER SHARE:
Net assets
- Class A $10,743,308 $ 9,043,060 $5,329,689 $31,807,545 $12,573,988 $4,248,477 $ 4,309,853 $24,161,776
Shares outstanding
- Class A 633,546 547,386 778,365 2,702,538 871,043 356,241 455,338 2,445,173
Net asset value and
redemption price per
share -
Class A $ 16.96 $ 16.52 $ 6.85 $ 11.77 $ 14.44 $ 11.93 $ 9.47 $ 9.88
Offering price per share
- Class A (d) $ 17.99 $ 17.53 $ 7.19 $ 12.49 $ 15.32 $ 12.66 $ 9.94 $ 9.88
Net assets
- Class C $ 3,964,393 $6,475,107 $3,076,459 $ 548,456 $ 2,108,577 $2,961,136 $ 997,953 $ --
Shares outstanding
- Class C 243,392 406,736 463,383 47,763 159,131 257,042 109,081 --
Net asset value, offering
price and redemption
price per share
- Class C $ 16.29 $ 15.92 $ 6.64 $ 11.48 $ 13.25 $ 11.52 $ 9.15 $ --
Net assets
- Class Y $ -- $ -- $ -- $ -- $21,448,253 $ -- $13,948,333 $ --
Shares outstanding
- Class Y -- -- -- -- 1,074,730 -- 1,067,830 --
Net asset value, offering
price and redemption
price per share
- Class Y $ -- $ -- $ -- $ -- $ 19.96 $ -- $ 13.06 $ --
- ------------------------------------------------------------------------------------------------------------------------------
(a) Cost of
investments
of: $10,763,136 $11,753,613 $8,063,401 $27,959,720 $35,784,363 $6,754,213 $19,069,654 $23,133,377
(b) Cost of foreign
currency of: $ -- $ -- $ -- $ -- $ -- $ 2,367 $ -- $ --
(c) See the Statement of Changes in Net Assets for components of net assets.
(d) The offering price per share is calculated as follows: Net Asset Value Per Share/(1-maximum sales load).
(e) The Fund does not offer classes of shares. All Fund information is shown in the spaces corresponding to Class A.
The accompanying notes are an integral part of the financial statements.
39
TOUCHSTONE SERIES TRUST
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
TOUCHSTONE TOUCHSTONE TOUCHSTONE TOUCHSTONE TOUCHSTONE TOUCHSTONE
EMERGING INTERNATIONAL INCOME VALUE GROWTH & TOUCHSTONE TOUCHSTONE STANDBY
GROWTH EQUITY OPPORTUNITY PLUS INCOME BALANCED BOND INCOME
FUND FUND FUND FUND FUND FUND FUND FUND
INVESTMENT INCOME
(NOTE 1):
Interest income $ 29,477 $ 12,301 $1,108,296 $ 55,207 $ 25,966 $ 204,810 $1,261,883 $ 709,187
Dividend income(a) 70,954 175,337 -- 359,297 866,148 49,724 86,248 --
- ------------------------------------------------------------------------------------------------------------------------------
Total investment
income 100,431 187,638 1,108,296 414,504 892,114 254,534 1,348,131 709,187
- ------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory
fees (Note 3) 96,269 117,039 59,613 224,988 305,915 59,339 108,553 28,605
Sponsor fees (Note 3) 24,067 24,640 18,342 59,997 76,479 14,835 39,474 22,884
Custody, administration
and fund accounting
fees 87,024 168,151 88,315 89,091 122,537 83,985 104,707 69,820
Transfer agent fees 95,027 92,283 94,610 58,906 103,972 88,008 75,287 65,195
Registration fees 16,660 23,623 22,123 25,029 22,299 22,965 20,949 14,511
Professional fees 11,638 11,406 12,608 19,383 22,951 9,891 15,018 10,203
Printing fees 24,855 28,768 23,797 48,287 51,569 19,285 22,974 24,749
Trustee fees 978 956 1,259 1,938 3,077 890 1,635 1,170
Distribution fees
- Class A 21,608 17,648 14,568 73,078 34,869 10,887 11,783 --
Distribution fees
- Class C 32,920 51,644 32,752 5,161 24,394 30,290 10,142 --
Amortization of
organization costs 7,393 7,393 7,393 -- 7,393 7,393 7,393 9,789
Miscellaneous 1,698 1,773 1,536 4,004 2,641 1,169 887 1,631
- ------------------------------------------------------------------------------------------------------------------------------
Total expenses 420,137 545,324 376,916 609,862 778,096 348,937 418,802 248,557
Reimbursement
or waiver from
Investment
Advisor
(Note 6) (215,188) (309,722) (242,471) (216,639) (317,320) (226,438) (268,587) (162,742)
- -------------------------------------------------------------------------------------------------------------------------------
Net expenses 204,949 235,602 134,445 393,223 460,776 122,499 150,215 85,815
- -------------------------------------------------------------------------------------------------------------------------------
Net investment
income (loss) (104,518) (47,964) 973,851 21,281 431,338 132,035 1,197,916 623,372
- -------------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments 2,394,962 2,822,986 (3,040,680) 2,709,639 128,669 637,223 (347,955) (46,908)
Foreign currency
transactions -- (58,523) -- -- -- (7,726) -- --
- -------------------------------------------------------------------------------------------------------------------------------
2,394,962 2,764,463 (3,040,680) 2,709,639 128,669 629,497 (347,955) (46,908)
- -------------------------------------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on:
Investments 2,521,564 1,714,220 2,175,422 1,607,624 524,230 (106,165) (1,153,862) (58,658)
Foreign currency
translations -- (1,369) -- -- -- 563 -- --
- -------------------------------------------------------------------------------------------------------------------------------
2,521,564 1,712,851 2,175,422 1,607,624 524,230 (105,602) (1,153,862) (58,658)
- -------------------------------------------------------------------------------------------------------------------------------
NET REALIZED AND
UNREALIZED
GAIN (LOSS): 4,916,526 4,477,314 (865,258) 4,317,263 652,899 523,895 (1,501,817) (105,566)
- -------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE)
IN NET ASSETS
RESULTING FROM
OPERATIONS $4,812,008 $4,429,350 $ 108,593 $4,338,544 $1,084,237 $ 655,930 $ (303,901) $ 517,806
- -------------------------------------------------------------------------------------------------------------------------------
(a) Net of foreign tax
withholding of: $ -- $ 17,180 $ -- $ 1,830 $ 2,936 $ 368 $ -- $ --
The accompanying notes are an integral part of the financial statements.
40
TOUCHSTONE SERIES TRUST
STATEMENTS OF CHANGES IN NET ASSETS
TOUCHSTONE EMERGING TOUCHSTONE INTERNATIONAL TOUCHSTONE INCOME
GROWTH FUND EQUITY FUND OPPORTUNITY FUND
--------------------------------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998 1999 1998
OPERATIONS:
Net investment income (loss) $ (104,518) $ (27,765) $ (47,964) $ (1,691) $ 973,851 $ 714,488
Net realized gain (loss) 2,394,962 363,157 2,764,463 345,939 (3,040,680) (670,556)
Net change in unrealized appreciation
(depreciation) 2,521,564 (340,021) 1,712,851 643,481 2,175,422 (1,110,683)
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 4,812,008 (4,629) 4,429,350 987,729 108,593 (1,066,751)
- -------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A -- -- (16,101) (6,819) (634,236) (727,740)
Class C -- -- -- -- (341,850) --
Class Y -- -- -- -- -- --
Realized capital gains
Class A (1,429,950) (407,884) (690,064) (373,319) -- --
Class C (532,042) -- (511,346) -- -- --
Class Y -- -- -- -- -- --
Distributions in excess of net investment income
Class A -- -- (14,483) (20,277) (81,498) --
Class C -- -- -- -- (45,806) --
Class Y -- -- -- -- -- --
Distributions in excess of realized capital gains
Class A -- (50,275) -- -- -- --
Class C -- -- -- -- -- --
Class Y -- -- -- -- -- --
Return of capital distributions
Class A -- -- -- -- -- (56,290)
Class C -- -- -- -- -- --
Class Y -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (1,961,992) (458,159) (1,231,994) (400,415) (1,103,390) (784,030)
- -------------------------------------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS
Capital Contribution - Class C (Note 7) 3,284,020 -- 5,226,105 -- 3,798,163 --
Capital Contribution - Class Y (Note 7) -- -- -- -- -- --
Proceeds from shares sold 1,738,718 5,012,537 1,242,946 1,630,252 1,334,627 3,476,133
Reinvestment of dividends and distributions 1,716,110 418,391 1,227,418 398,640 942,415 623,322
Cost of shares redeemed (3,216,309) (1,581,667) (2,251,174) (501,457) (3,332,584) (2,599,216)
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) from share
transactions 3,522,539 3,849,261 5,445,295 1,527,435 2,742,621 1,500,239
- -------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets 6,372,555 3,386,473 8,642,651 2,114,749 1,747,824 (350,542)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Beginning of period 8,335,146 4,948,673 6,875,516 4,760,767 6,658,324 7,008,866
- -------------------------------------------------------------------------------------------------------------------------------
End of period $14,707,701 $8,335,146 $15,518,167 $6,875,516 $ 8,406,148 $6,658,324
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Paid-in capital $10,901,854 $7,715,214 $10,442,829 $5,804,081 $13,013,011 $8,978,000
Undistributed (distributions in excess of)
net investment income -- -- 35,589 (32,893) (117,424) --
Accumulated net realized gain (loss) 270,986 (47,580) 1,400,906 27,664 (4,449,070) (909,681)
Net unrealized appreciation (depreciation) 3,534,861 667,512 3,638,843 1,076,664 (40,369) (1,409,995)
- -------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to shares outstanding $14,707,701 $8,335,146 $15,518,167 $6,875,516 $ 8,406,148 $6,658,324
- -------------------------------------------------------------------------------------------------------------------------------
(a) Commencement of operations: The Fund commenced operations on May 1, 1998.
(b) The Fund does not offer classes of shares. All Fund information is shown in the spaces corresponding to Class A.
The accompanying notes are an integral part of the financial statements.
41
TOUCHSTONE SERIES TRUST
TOUCHSTONE VALUE TOUCHSTONE GROWTH TOUCHSTONE
PLUS FUND & INCOME FUND BALANCED FUND
-----------------------------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED PERIOD ENDED(A) YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER
1999 1998 1999 1998 1999 31, 1998
OPERATIONS:
Net investment income (loss) $ 21,281 $ 40,182 $ 431,338 $ 181,174 $ 132,035 $ 88,739
Net realized gain (loss) 2,709,639 (608,840) 128,669 220,365 629,497 225,430
Net change in unrealized appreciation
(depreciation) 1,607,624 1,699,825 524,230 (338,911) (105,602) (183,060)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 4,338,544 1,131,167 1,084,237 62,628 655,930 131,109
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A (33,255) (40,182) (165,297) (183,340) (105,330) (93,863)
Class C -- -- (7,313) -- (36,471) --
Class Y -- -- (261,137) -- -- --
Realized capital gains
Class A (638,617) -- (24,828) (304,181) (324,326) (185,895)
Class C (11,183) -- (4,407) -- (232,046) --
Class Y -- -- (30,551) -- -- --
Distributions in excess of net investment income
Class A -- -- (2,012) (6,836) -- (11,391)
Class C -- -- (89) -- -- --
Class Y -- -- (3,179) -- -- --
Distributions in excess of realized capital gains
Class A -- -- -- (70,773) -- --
Class C -- -- -- -- -- --
Class Y -- -- -- -- -- --
Return of capital distributions
Class A -- (3,702) (969,080) (13,429) -- --
Class C -- -- (171,468) -- -- --
Class Y -- -- (1,193,905) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (683,055) (43,884) (2,833,266) (578,559) (698,173) (291,149)
- ------------------------------------------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS
Capital Contribution - Class C (Note 7) 318,185 -- 2,753,186 -- 3,339,459 --
Capital Contribution - Class Y (Note 7) -- -- 20,868,632 -- -- --
Proceeds from shares sold 1,447,308 25,939,165 1,928,120 13,903,526 765,540 2,065,886
Reinvestment of dividends and distributions 674,160 43,452 2,824,251 569,460 695,607 286,919
Cost of shares redeemed (806,675) (2,366) (5,755,291) (4,676,332) (2,184,837) (872,443)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) from share transactions 1,632,978 25,980,251 22,618,898 9,796,654 2,615,769 1,480,362
- ------------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets 5,288,467 27,067,534 20,869,869 9,280,723 2,573,526 1,320,322
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Beginning of period $27,067,534 $ -- $15,260,949 $ 5,980,226 $4,636,087 $3,315,765
- ------------------------------------------------------------------------------------------------------------------------------------
End of period $32,356,001 $27,067,534 $36,130,818 $15,260,949 $7,209,613 $4,636,087
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF: $27,595,607 $25,976,551 $36,332,300 $15,278,502 $7,083,151 $4,521,372
Paid-in capital
Undistributed (distributions in excess of)
net investment income -- -- 1,598 -- (3,313) 1,963
Accumulated net realized gain (loss) 1,433,331 (608,842) (2,930) (66,551) 149,136 74,357
Net unrealized appreciation (depreciation) 3,327,063 1,699,825 (200,150) 48,998 (19,361) 38,395
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to shares outstanding $32,356,001 $27,067,534 $36,130,818 $15,260,949 $7,209,613 $4,636,087
TOUCHSTONE TOUCHSTONE STANDBY
BOND FUND INCOME FUND(B)
----------------------------------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
OPERATIONS:
Net investment income (loss) $ 1,197,916 $ 218,403 $ 623,372 $ 536,968
Net realized gain (loss) (347,955) 66,845 (46,908) 15,437
Net change in unrealized appreciation
(depreciation) (1,153,862) 37,207 (58,658) 2,467
- ------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations (303,901) 322,455 517,806 554,872
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A (314,128) (219,500) (626,405) (541,711)
Class C (63,775) -- -- --
Class Y (832,231) -- -- --
Realized capital gains
Class A (31) (53,127) -- (2,087)
Class C (7) -- -- --
Class Y (73) -- -- --
Distributions in excess of net investment income
Class A (1,716) (4,091) -- --
Class C (348) -- -- --
Class Y (4,547) -- -- --
Distributions in excess of realized capital gain
Class A -- -- -- --
Class C -- -- -- --
Class Y -- -- -- --
Return of capital distributions
Class A (33,705) -- -- --
Class C (8,180) -- -- --
Class Y (78,615) -- -- --
- ----------------------------------------------------------------------------------------------------
Total dividends and distributions (1,337,356) (276,718) (626,405) (543,798)
- ----------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS
Capital Contribution - Class C (Note 7) 1,139,586 -- -- --
Capital Contribution - Class Y (Note 7) 14,150,014 -- -- --
Proceeds from shares sold 1,713,920 4,527,950 15,760,941 8,443,462
Reinvestment of dividends and distributions 1,327,271 271,637 623,651 543,405
Cost of shares redeemed (2,356,902) (1,606,439) (3,371,225) (6,343,864)
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) from share transactions 15,973,889 3,193,148 13,013,367 2,643,003
- ----------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets 14,332,632 3,238,885 12,904,768 2,654,077
- ----------------------------------------------------------------------------------------------------
NET ASSETS:
Beginning of period $ 4,923,507 $1,684,622 $11,257,008 $ 8,602,931
- ----------------------------------------------------------------------------------------------------
End of period $19,256,139 $4,923,507 $24,161,776 $11,257,008
- ----------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF: $20,599,903 $4,840,284 $24,249,371 $11,238,577
Paid-in capital
Undistributed (distributions in excess of)
net investment income -- 3,657 16,536 7,490
Accumulated net realized gain (loss) (352,940) 10,547 (47,809) 8,605
Net unrealized appreciation (depreciation) (990,824) 69,019 (56,322) 2,336
- ----------------------------------------------------------------------------------------------------
Net assets applicable to shares outstanding $19,256,139 $4,923,507 $24,161,776 $11,257,008
42
FINANCIAL HIGHLIGHTS
TOUCHSTONE SERIES TRUST
CLASS A
SELECTED DATA FOR A SHARE OUTSTANDING:
TOUCHSTONE EMERGING GROWTH FUND
-------------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED YEAR ENDED
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
Net asset value, beginning of period $ 13.40 $13.85 $11.55 $11.52 $10.11
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss) (0.09) (0.04) (0.03) 0.01 (0.01)
Net realized and unrealized gain (loss) on investments 6.18 0.37 3.71 1.20 2.29
- ----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 6.09 0.33 3.68 1.21 2.28
- ----------------------------------------------------------------------------------------------------------------------------------
LESS DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- -- -- (0.01) (0.03)
Realized capital gains (2.53) (0.78) (1.38) (1.17) (0.84)
Return of capital -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (2.53) (0.78) (1.38) (1.18) (0.87)
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 16.96 $13.40 $13.85 $11.55 $11.52
- ----------------------------------------------------------------------------------------------------------------------------------
Total return(a) 45.85% 2.57% 32.20% 10.56% 22.56%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (000s) $ 10,743 $8,335 $4,949 $2,873 $2,520
Ratios to average net assets:
Expenses (b) 1.50% 1.50% 1.50% 1.50% 1.50%
Net investment income (loss) (0.66)% (0.41)% (0.30)% (0.12)% (0.05)%
Portfolio turnover 97% 78% 101% 117% 109%
- ----------------------------------------------------------------------------------------------------------------------------------
(a) The return is calculated without the effects of a sales charge. Total returns would have been lower had certain expenses not
been reimbursed or waived during the period shown. (Note 6)
(b) If the waiver and reimbursement had not been in place for the periods listed, the ratios of expenses to average net assets
would have been as follows:
3.29% 4.11% 5.94% 6.58% 7.09%
(c) Amount rounds to less than $0.01.
The accompanying notes are an integral part of the financial statements.
43
TOUCHSTONE SERIES TRUST
TOUCHSTONE INTERNATIONAL EQUITY FUND
-------------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED YEAR ENDED
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
Net asset value, beginning of period $12.89 $11.41 $10.63 $ 9.58 $ 9.12
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.00(c) 0.00(c) 0.02 0.05 0.21
Net realized and unrealized gain (loss) on investments 5.06 2.27 1.64 1.06 0.47
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 5.06 2.27 1.66 1.11 0.68
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.06) (0.05) (0.02) (0.06) (0.22)
Realized capital gains (1.37) (0.74) (0.86) -- --
Return of capital -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (1.43) (0.79) (0.88) (0.06) (0.22)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $16.52 $12.89 $11.41 $10.63 $ 9.58
- ------------------------------------------------------------------------------------------------------------------------------------
Total return(a) 39.50% 19.94% 15.57% 11.61% 5.29%
RATIOS AND SUPPLEMENTAL DATA: -------------------------------------------------------------
Net assets at end of period (000s) $9,043 $6,876 $4,761 $3,449 $ 2,617
Ratios to average net assets:
Expenses (b) 1.60% 1.60% 1.60% 1.60% 1.60%
Net investment income (loss) (0.08)% (0.03)% 0.17% 0.42% 0.11%
Portfolio turnover 155% 138% 151% 86% 90%
- ------------------------------------------------------------------------------------------------------------------------------------
(a) The return is calculated without the effects of a sales charge. Total returns would have been lower had certain expenses not
been reimbursed or waived during the period shown. (Note 6)
(b) If the waiver and reimbursement had not been in place for the periods listed, the ratios of expenses to average net assets
assets would have been as follows:
4.11% 5.18% 7.07% 6.63% 7.30%
(c) Amount rounds to less than $0.01.
TOUCHSTONE INCOME OPPORTUNITY FUND
----------------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED YEAR ENDED
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
Net asset value, beginning of period $ 7.63 $ 9.89 $10.90 $ 9.83 $ 9.08
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.80 0.90 1.24 1.12 1.19
Net realized and unrealized gain (loss) on investments (0.68) (2.18) (0.23) 1.38 0.77
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.12 (1.28) 1.01 2.50 1.96
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.90) (0.91) (1.22) (1.12) (1.21)
Realized capital gains -- -- (0.80) (0.31) --
Return of capital -- (0.07) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (0.90) (0.98) (2.02) (1.43) (1.21)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 6.85 $ 7.63 $ 9.89 $10.90 $ 9.83
- ------------------------------------------------------------------------------------------------------------------------------------
Total return(a) 1.16% (13.77)% 9.49% 26.66% 23.19%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (000s) $5,330 $6,658 $7,009 $4,579 $1,369
Ratios to average net assets:
Expenses (b) 1.20% 1.20% 1.20% 1.20% 1.20%
Net investment income (loss) 10.90% 10.02% 11.19% 11.29% 12.42%
Portfolio turnover 227% 283% 270% 222% 120%
- ------------------------------------------------------------------------------------------------------------------------------------
(a) The return is calculated without the effects of a sales charge. Total returns would have been lower had certain expenses not
been reimbursed or waived during the period shown. (Note 6)
(b) If the waiver and reimbursement had not been in place for the periods listed, the ratios of expenses to average net assets
assets would have been as follows:
3.84% 3.77% 4.07% 6.74% 11.03%
(c) Amount rounds to less than $0.01.
44
TOUCHSTONE SERIES TRUST
FINANCIAL HIGHLIGHTS
CLASS A - CONTINUED
SELECTED DATA FOR A SHARE OUTSTANDING:
TOUCHSTONE VALUE PLUS FUND(A)
----------------------------
FOR THE FOR THE
YEAR ENDED PERIOD ENDED
12/31/99 12/31/98
Net asset value, beginning of period $ 10.41 $ 10.00
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.01 0.02
Net realized and unrealized gain (loss) on investments 1.60 0.41
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.61 0.43
- ---------------------------------------------------------------------------------------------------------------------------------
LESS DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.01) (0.02)
Realized capital gains (0.24) --
Return of capital -- 0.00(e)
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (0.25) (0.02)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 11.77 $ 10.41
- ---------------------------------------------------------------------------------------------------------------------------------
Total return(b) 15.51% 4.29%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (000s) $31,808 $27,068
Ratios to average net assets:
Expenses(c) 1.30% 1.30%(d)
Net investment income (loss) 0.08% 0.25%(d)
Portfolio turnover 60% 34%
- ---------------------------------------------------------------------------------------------------------------------------------
(a) The Fund commenced operations on May 1, 1998.
(b) The return is calculated without the effects of a sales charge. Total
returns would have been lower had certain expenses not been reimbursed or
waived during the period shown. (Note 6)
(c) If the waiver and reimbursement had not been in place for the periods
listed, the ratios of expenses to average net assets would have been as
follows:
2.02% 2.25%(d)
(d) Ratios are annualized.
(e) Amount rounds to less than $0.01.
(f) The amount shown for a share outstanding does not correspond with the
aggregate net loss on investments for the period due to the timing of sales
and repurchases of Fund shares in relation to fluctuating market values of
the investments of the Fund.
The accompanying notes are an integral part of the financial statements.
45
TOUCHSTONE SERIES TRUST
TOUCHSTONE GROWTH & INCOME FUND
----------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
Net asset value, beginning of period $ 15.47 $ 15.06 $14.03 $13.14 $10.02
- --------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.17 0.19 0.09 0.12 0.05
Net realized and unrealized gain (loss) on investments 0.21 0.84(f) 2.78 2.12 3.46
- --------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.38 1.03 2.87 2.24 3.51
- --------------------------------------------------------------------------------------------------------------------------
LESS DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.20) (0.20) (0.11) (0.12) (0.16)
Realized capital gains (0.03) (0.40) (1.73) (1.23) (0.23)
Return of capital (1.18) (0.02) -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (1.41) (0.62) (1.84) (1.35) (0.39)
- --------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 14.44 $ 15.47 $15.06 $14.03 $13.14
- --------------------------------------------------------------------------------------------------------------------------
Total return(b) 2.53% 6.87% 20.70% 16.95% 35.14%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (000s) $12,574 $15,261 $5,980 $3,659 $1,500
Ratios to average net assets:
Expenses(c) 1.30% 1.30% 1.30% 1.30% 1.30%
Net investment income (loss) 1.04% 1.50% 0.67% 0.55% 0.56%
Portfolio turnover 66% 64% 170% 92% 102%
- --------------------------------------------------------------------------------------------------------------------------
(a) The Fund commenced operations on May 1, 1998.
(b) The return is calculated without the effects of a sales charge. Total
returns would have been lower had certain expenses not been reimbursed or
waived during the period shown. (Note 6)
(c) If the waiver and reimbursement had not been in place for the periods
listed, the ratios of expenses to average net assets would have been as
follows:
2.13% 2.70% 4.34% 5.31% 16.35%
(d) Ratios are annualized.
(e) Amount rounds to less than $0.01.
(f) The amount shown for a share outstanding does not correspond with the
aggregate net loss on investments for the period due to the timing of sales
and repurchases of Fund shares in relation to fluctuating market values of
the investments of the Fund.
TOUCHSTONE BALANCED FUND
------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
Net asset value, beginning of period $12.09 $12.42 $12.48 $11.34 $ 9.97
- ------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.27 0.25 0.27 0.30 0.31
Net realized and unrealized gain (loss) on investments 0.76 0.23 2.09 1.59 1.99
- ------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.03 0.48 2.36 1.89 2.30
- ------------------------------------------------------------------------------------------------------------------
LESS DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.31) (0.30) (0.30) (0.30) (0.33)
Realized capital gains (0.88) (0.51) (2.12) (0.45) (0.60)
Return of capital -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (1.19) (0.81) (2.42) (0.75) (0.93)
- ------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $11.93 $12.09 $12.42 $12.48 $11.34
- ------------------------------------------------------------------------------------------------------------------
Total return(b) 9.61% 3.98% 19.25% 16.86% 23.24%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (000s) $4,248 $4,636 $3,316 $2,085 $1,502
Ratios to average net assets:
Expenses(c) 1.35% 1.35% 1.35% 1.35% 1.35%
Net investment income (loss) 2.09% 2.11% 2.07% 2.19% 2.39%
Portfolio turnover 70% 59% 120% 88% 121%
- ------------------------------------------------------------------------------------------------------------------
(a) The Fund commenced operations on May 1, 1998.
(b) The return is calculated without the effects of a sales charge. Total
returns would have been lower had certain expenses not been reimbursed or
waived during the period shown. (Note 6)
(c) If the waiver and reimbursement had not been in place for the periods
listed, the ratios of expenses to average net assets would have been as
follows:
4.40% 4.93% 7.53% 8.52% 9.83%
(d) Ratios are annualized.
(e) Amount rounds to less than $0.01.
(f) The amount shown for a share outstanding does not correspond with the
aggregate net loss on investments for the period due to the timing of sales
and repurchases of Fund shares in relation to fluctuating market values of
the investments of the Fund.
46
TOUCHSTONE SERIES TRUST
FINANCIAL HIGHLIGHTS
CLASS A - CONTINUED
SELECTED DATA FOR A SHARE OUTSTANDING:
TOUCHSTONE BOND FUND
------------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
Net asset value, beginning of period $10.39 $10.22 $10.17 $10.61 $ 9.88
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.59 0.55 0.61 0.71 0.56
Net realized and unrealized gain (loss) on investments (0.76) 0.30 0.11 (0.43) 1.07
- ----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations (0.17) 0.85 0.72 0.28 1.63
- ----------------------------------------------------------------------------------------------------------------------------------
LESS DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.68) (0.57) (0.66) (0.70) (0.86)
Realized capital gains -- (0.11) (0.01) (0.02) (0.04)
Return of capital (0.07) -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (0.75) (0.68) (0.67) (0.72) (0.90)
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 9.47 $10.39 $10.22 $10.17 $10.61
- ----------------------------------------------------------------------------------------------------------------------------------
Total return(a) (1.68)% 8.56% 7.30% 2.85% 16.95%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (000s) $4,310 $4,924 $1,685 $ 821 $ 523
Ratios to average net assets:
Expenses(b) 0.90% 0.90% 0.90% 0.90% 0.90%
Net investment income (loss) 5.92% 5.68% 6.08% 6.01% 6.21%
Portfolio turnover 57% 170% 88% 64% 78%
- ----------------------------------------------------------------------------------------------------------------------------------
(a) The return is calculated without the effects of a sales charge. Total
returns would have been lower had certain expenses not been reimbursed or
waived during the period shown. (Note 6)
(b) If the waiver and reimbursement had not been in place for the periods
listed, the ratios of expenses to average net assets would have been as
follows:
2.26% 4.13% 7.13% 13.61% 29.29%
(c) Amount rounds to less than $0.01.
The accompanying notes are an integral part of the financial statements.
47
TOUCHSTONE SERIES TRUST
TOUCHSTONE STANDBY INCOME FUND
-----------------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
Net asset value, beginning of period $ 9.98 $ 9.97 $ 9.98 $10.01 $10.03
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.54 0.52 0.51 0.46 0.55
Net realized and unrealized gain (loss) on investments (0.10) 0.01 -- 0.01 (0.02)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.44 0.53 0.51 0.47 0.53
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.54) (0.52) (0.52) (0.50) (0.55)
Realized capital gains -- (0.00)(c) -- -- --
Return of capital -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (0.54) (0.52) (0.52) (0.50) (0.55)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 9.88 $ 9.98 $ 9.97 $ 9.98 $10.01
- ------------------------------------------------------------------------------------------------------------------------------------
Total return(a) 4.56% 5.49% 5.21% 4.80% 5.71%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (000s) $24,162 $11,257 $8,603 $6,456 $5,910
Ratios to average net assets:
Expenses(b) 0.75% 0.75% 0.75% 0.75% 0.75%
Net investment income (loss) 5.46% 5.17% 5.14% 4.88% 5.32%
Portfolio turnover 65% 683% 285% 20% 142%
- ------------------------------------------------------------------------------------------------------------------------------------
(a) The return is calculated without the effects of a sales charge. Total
returns would have been lower had certain expenses not been reimbursed or
waived during the period shown. (Note 6)
(b) If the waiver and reimbursement had not been in place for the periods
listed, the ratios of expenses to average net assets would have been as
follows:
2.17% 2.37% 3.51% 2.80% 2.80%
(c) Amount rounds to less than $0.01.
48
TOUCHSTONE SERIES TRUST
FINANCIAL HIGHLIGHTS
FOR THE YEAR ENDED DECEMBER 31, 1999
CLASS C (A)
SELECTED DATA FOR A SHARE OUTSTANDING:
TOUCHSTONE TOUCHSTONE
EMERGING TOUCHSTONE INCOME TOUCHSTONE TOUCHSTONE TOUCHSTONE
GROWTH INTERNATIONAL OPPORTUNITY VALUE PLUS GROWTH & BALANCE TOUCHSTONE
FUND EQUITY FUND FUND FUND INCOME FUND FUND BOND FUND
--------------------------------------------------------------------------------------
Net asset value, beginning
of period $13.04 $12.51 $ 7.42 $10.26 $14.26 $11.65 $10.08
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income (loss) (0.19) (0.11) 0.72 (0.07) 0.04 0.17 0.51
Net realized and unrealized
gain (loss) on investments 5.97 4.89 (0.66) 1.53 0.21 0.73 (0.75)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 5.78 4.78 0.06 1.46 0.25 0.90 (0.24)
- ---------------------------------------------------------------------------------------------------------------------------------
LESS DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS FROM:
Net investment income -- -- (0.84) -- (0.05) (0.15) (0.62)
Realized capital gains (2.53) (1.37) -- (0.24) (0.03) (0.88) --
Return of capital -- -- -- -- (1.18) -- (0.07)
- ---------------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (2.53) (1.37) (0.84) (0.24) (1.26) (1.03) (0.69)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $16.29 $15.92 $ 6.64 $11.48 $13.25 $11.52 $ 9.15
- ---------------------------------------------------------------------------------------------------------------------------------
Total return(b) 44.86% 38.44% 0.49% 14.24% 1.80% 8.78% (2.41)%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (000s) $3,964 $6,475 $3,076 $ 548 $2,109 $2,961 $ 998
Ratios to average net assets(c)
Expenses 2.25% 2.35% 1.95% 2.05% 2.05% 2.10% 1.65%
Net investment income (loss) (1.41)% (0.81)% 10.14% (0.65) % 0.30% 1.33% 5.18%
Portfolio turnover 97% 155% 227% 60% 99% 70% 120%
- ---------------------------------------------------------------------------------------------------------------------------------
(a) The Class commenced operations on January 1, 1999.
(b) The return is calculated without the effects of a sales charge. Total
returns would have been lower had certain expenses not been reimbursed or
waived during the period shown. (Note 6)
(c) If the waiver and reimbursement had not been in place for the periods
listed, the ratios of expenses to average net assets would have been as
follows:
4.03% 4.86% 4.59% 2.76% 2.87% 5.15% 3.01%
The accompanying notes are an integral part of the financial statements.
49
TOUCHSTONE SERIES TRUST
FINANCIAL HIGHLIGHTS
FOR THE YEAR ENDED DECEMBER 31, 1999
CLASS Y (A)
SELECTED DATA FOR A SHARE OUTSTANDING:
TOUCHSTONE GROWTH TOUCHSTONE
& INCOME FUND BOND FUND
-------------------- --------------------
Net asset value, beginning of period $ 20.87 $ 14.15
- ------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.23 0.64
Net realized and unrealized gain (loss) on investments 0.34 (0.84)
- ------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.57 (0.20)
- ------------------------------------------------------------------------------------------------------------------------
LESS DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.26) (0.82)
Realized capital gains (0.03) --
Return of capital (1.19) (0.07)
- ------------------------------------------------------------------------------------------------------------------------
Total dividends and distributions (1.48) (0.89)
- ------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 19.96 $ 13.06
- ------------------------------------------------------------------------------------------------------------------------
Total return (b) 2.71% (1.44)%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period (000s) $ 21,448 $ 13,948
Ratios to average net assets (c)
Expenses 1.05% 0.65%
Net investment income (loss) 1.28% 6.18%
Portfolio turnover 99% 120%
- ------------------------------------------------------------------------------------------------------------------------
(a) The Class commenced operations on January 1, 1999.
(b) The return is calculated without the effects of a sales charge. Total
returns would have been lower had certain expenses not been reimbursed or
waived during the period shown. (Note 6)
(c) If the waiver and reimbursement had not been in place for the periods
listed, the ratios of expenses to average net assets would have been as
follows:
1.88% 2.01%
The accompanying notes are an integral part of the financial statements.
50
TOUCHSTONE SERIES TRUST
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Touchstone Series Trust (the "Trust"), formerly Select Advisors Trust A, was
organized as a Massachusetts business trust on February 7, 1994 and is
registered under the Investment Company Act of 1940, as amended ("the Act"), as
an open-end management investment company. The Trust consists of eight Funds,
each having distinct investment objectives and policies: Touchstone Emerging
Growth Fund ("Emerging Growth Fund"), Touchstone International Equity Fund
("International Equity Fund"), Touchstone Income Opportunity Fund ("Income
Opportunity Fund"), Touchstone Value Plus Fund ("Value Plus Fund"), Touchstone
Growth & Income Fund ("Growth & Income Fund"), Touchstone Balanced Fund
("Balanced Fund"), Touchstone Bond Fund ("Bond Fund") and Touchstone Standby
Income Fund ("Standby Income Fund") (each a "Fund" and collectively, the
"Funds").
Each Fund, other than the Growth & Income Fund, Bond Fund and Standby Income
Fund, is divided into two classes of shares: class A shares ("Class A Shares")
and class C shares ("Class C Shares"). Each class of shares charges different
sales charges and distribution or service fees. The amount of sales charges and
other fees you pay will depend on which class of shares you own. The Growth &
Income Fund and the Bond Fund also offer class Y shares ("Class Y Shares"),
which are not available for sale to the public. The Standby Income Fund does not
offer classes of shares and it does not charge sales charges, distribution fees
or service fees.
As of December 31, 1999, Touchstone Advisors, Inc., an indirect subsidiary of
the Western-Southern Life Assurance Company ("Western-Southern"), and
Western-Southern together owned 20.6%, 4.8%, 6.8%, 1.5%, 48.6%, 7.0% and 40.6%
of the outstanding Class A Shares and 0.1%, 0.1%, 0.1%, 0%, 0.2%, 0%, and 0% of
the outstanding Class C Shares of the Emerging Growth Fund, the International
Equity Fund, the Income Opportunity Fund, the Value Plus Fund, the Growth &
Income Fund, the Balanced Fund, and the Bond Fund, respectively. Touchstone
Advisors, Inc. and Western-Southern owned 6.3% of the outstanding shares of the
Standby Income Fund as of December 31, 1999.
The accounting policies are in conformity with generally accepted accounting
principles ("GAAP") for investment companies. The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the related amounts and disclosures in the financial
statements. Actual results could differ from these estimates.
The following is a summary of the significant accounting policies of the Funds.
INVESTMENT VALUATION. Securities for which market quotations are readily
available are valued at the last sale price on a national securities exchange,
or, in the absence of recorded sales, at the readily available closing bid price
in the over-the-counter market. Securities quoted in foreign currencies are
translated into U.S. dollars at the current exchange rate. Debt securities are
valued by a pricing service which determines valuations based upon market
transactions for normal, institutional-size trading units of similar securities.
Securities or other assets for which market quotations are not readily available
are valued at fair value in good faith under consistently applied procedures in
accordance with procedures established by the Trustees of the Trust. Such
procedures include the use of independent pricing services, which use prices
based upon yields or prices of securities of comparable quality, coupon,
maturity and type; indications as to values from dealers; and general market
conditions. All portfolio securities with a remaining maturity of less than 60
days are valued at amortized cost, which approximates market.
51
TOUCHSTONE SERIES TRUST
FOREIGN CURRENCY VALUE TRANSLATION. The accounting records of the Funds are
maintained in U.S. dollars. The market value of investment securities, other
assets and liabilities and forward contracts denominated in foreign currencies
are translated into U.S. dollars at the prevailing exchange rates at the end of
the period. Purchases and sales of securities, income receipts, and expense
payments are translated at the exchange rate prevailing on the respective dates
of such transactions. Reported net realized gains and losses on foreign currency
transactions represent net gains and losses from sales and maturities of forward
currency contracts, disposition of foreign currencies, currency gains and losses
realized between the trade and settlement dates on securities transactions and
the difference between the amount of net investment income accrued and the U.S.
dollar amount actually received.
The effects of changes in foreign currency exchange rates on investments in
securities are not segregated in the Statement of Operations from the effects of
changes in market prices of these securities, but are included with net realized
and unrealized gain or loss on investments.
INVESTMENT INCOME. Dividend income is recorded on the ex-dividend date except
that certain dividends from foreign securities where the ex-dividend date has
passed are recorded as soon as the Trust is informed of the ex-dividend date.
Interest income, which includes the amortization of premium and accretion of
discount, if any, is recorded on an accrual basis. Dividend and interest income
is recorded net of foreign taxes where recovery of such taxes is not assured.
DIVIDENDS AND DISTRIBUTIONS. Substantially all of the net investment income of
the Income Opportunity Fund and the Bond Fund is declared as dividends and paid
monthly. Substantially all of the net investment income of the Value Plus Fund
and the Balanced Fund is declared as dividends and paid quarterly. Substantially
all of the net investment income of the Growth & Income Fund is currently
declared as dividends and paid quarterly. For the months of January 1999 through
March 1999, the Growth & Income Fund declared and paid dividends monthly.
Substantially all of the net investment income of the Emerging Growth Fund and
the International Equity Fund is declared as dividends and paid annually. It is
the policy of the Standby Income Fund to record income dividends daily and
distribute them monthly. Distributions to shareholders of net realized capital
gains, if any, are declared and paid annually. Dividends and distributions are
recorded on the ex-dividend date and are reinvested at net asset value.
Income and realized capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences, which may result in distribution
reclassifications, are primarily due to non-deductible organization costs,
passive foreign investment companies, foreign currency transactions, losses
deferred due to wash sales, and excise tax regulations.
Permanent book and tax basis differences relating to shareholder distributions
will result in reclassifications to paid-in capital. Undistributed net
investment income and accumulated net realized gain or loss from the Funds may
include temporary book and tax basis differences which will reverse in a
subsequent period. Any taxable income or gain remaining at fiscal year end is
distributed in the following year.
ORGANIZATION EXPENSE. Organization expenses attributable to the Funds were
deferred and are being amortized by each Fund on a straight-line basis over a
five-year period from commencement of operations. The amount paid by the Trust
on any redemption by Touchstone Advisors, Inc. or any other then-current holder
52
TOUCHSTONE SERIES TRUST
NOTES TO FINANCIAL STATEMENTS CONTINUED
of the organizational seed capital shares ("Initial Shares") of the Fund will be
reduced by a portion of any unamortized organization expenses of the Fund,
determined by the proportion of the number of the Initial Shares of the Fund
redeemed to the number of the Initial Shares of the Fund then outstanding after
taking into account any prior redemptions of the Initial Shares of the Fund. The
amount of such reduction in excess of the unamortized organization expenses of
the Fund, if any, shall be contributed by the Fund.
FEDERAL TAXES. Each Fund of the Trust is treated as a separate entity for
federal income tax purposes. Each Fund's policy is to comply with the provisions
of the Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and to distribute substantially all of its income, and net
realized capital gains, if any, within the prescribed time periods. Therefore,
no provision has been made for federal income taxes. It is intended that each
Fund's assets will be managed in such a way that an investor in the Fund will be
able to satisfy the requirements of Subchapter M of the Internal Revenue Code of
1986, as amended.
WRITTEN OPTIONS. Each Fund may enter into written option agreements. The premium
received for a written option is recorded as an asset with an equivalent
liability. The liability is marked-to-market based on the option's quoted daily
settlement price. When an option expires or the Fund enters into a closing
purchase transaction, the Fund realizes a gain (or loss if the cost of the
closing purchase transaction exceeds the premium received when the option was
sold) without regard to any unrealized gain or loss on the underlying security
and the liability related to such option is eliminated. When a written call
option is exercised, the Fund realizes a gain or loss from the sale of the
underlying security and the proceeds from such sale are increased by the premium
originally received. If a written put option is exercised, the amount of the
premium originally received will reduce the cost of the security which the Fund
purchased.
FORWARD FOREIGN CURRENCY AND SPOT CONTRACTS. Each Fund may enter into forward
foreign currency and spot contracts to protect securities and related
receivables and payables against fluctuations in foreign currency rates. A
forward contract is an agreement to buy or sell currencies of different
countries on a specified future date at a specified rate.
Risks associated with such contracts include the movement in the value of the
foreign currency relative to the U.S. dollar and the ability of the counterparty
to perform. The market value of the contract will fluctuate with changes in
currency exchange rates. Contracts are valued daily based on procedures
established by and under the general supervision of the Trustees of the Trust
and the change in the market value is recorded by the Funds as unrealized
appreciation and depreciation of forward foreign currency contracts. As of
December 31, 1999, the following Funds had the following open forward foreign
currency and spot contracts:
Unrealized
Contracts to Appreciation/
Portfolio Name Maturity Date Deliver/Receive In Exchange For Value (Depreciation)
Balanced Fund:
Sales 02/01/2000 GBP 41,520 $ 68,124 $ 67,069 $ 1,055
03/13/2000 ZAR 565,000 91,141 91,870 (729)
- -----------------------------------------------------------------------------------------------------------------
$ 326
- -----------------------------------------------------------------------------------------------------------------
GBP Great Britain Pound
ZAR South African Rand
53
TOUCHSTONE SERIES TRUST
Unrealized
Contracts to Appreciation/
Portfolio Name Maturity Date Deliver/Receive In Exchange For Value (Depreciation)
International Equity Fund:
Sales 01/04/2000 EUR 141,036 $143,222 $142,229 $ (993)
01/04/2000 GBP 88,271 142,514 142,570 (56)
01/04/2000 ZAR 893 145 145 --
- -----------------------------------------------------------------------------------------------------------------
$(1,049)
- -----------------------------------------------------------------------------------------------------------------
EUR European Monetary Unit (Euro)
GBP Great Britain Pound
ZAR South African Rand
REPURCHASE AGREEMENTS. Each Fund may invest in repurchase agreements, which are
agreements pursuant to which securities are acquired by the Fund from a third
party with the commitment that they will be repurchased by the seller at a fixed
price on an agreed upon date. Each Fund may enter into repurchase agreements
with banks or lenders meeting the creditworthiness standards established by the
Trustees of the Fund Trust. The Fund, through its custodian, receives as
collateral, delivery of the underlying securities, whose market value is
required to be at least 100% of the resale price at the time of purchase. The
resale price reflects the purchase price plus an agreed upon rate of interest.
In the event of counterparty default, the Fund has the right to use the
collateral to offset losses incurred.
SECURITY TRANSACTIONS. Securities transactions are recorded on a trade date
basis. For financial and tax reporting purposes, realized gains and losses are
determined on the basis of specific lot identification.
EXPENSES. Expenses incurred by the Trust with respect to any two or more Funds
in the Trust are prorated to each Fund in the Trust, except where allocations of
direct expenses to each Fund can otherwise be made fairly. Expenses directly
attributable to a Fund are charged to that Fund. Expenses directly attributable
to a class are charged to that class. Other expenses of each Fund are further
allocated to each class of shares based on their relative net asset values.
2. RISKS ASSOCIATED WITH FOREIGN INVESTMENTS
Some of the Funds may invest in securities of foreign issuers. Investing in
securities issued by companies whose principal business activities are outside
the United States may involve significant risks not present in domestic
investments. For example, there is generally less publicly available information
about foreign companies, particularly those not subject to the disclosure and
reporting requirements of the U.S. securities laws. Foreign issuers are
generally not bound by uniform accounting, auditing, and financial reporting
requirements and standards of practice comparable to those applicable to
domestic issuers. Investments in foreign securities also involve the risk of
possible adverse changes in investment or exchange control regulations,
expropriation or confiscatory taxation, limitation on the removal of funds or
other assets of the Fund, political or financial instability or diplomatic and
other developments which could affect such investments. Foreign stock markets,
while growing in volume and sophistication, are generally not as developed as
those in the United States, and securities of some foreign issuers (particularly
those located in developing countries) may be less liquid and more volatile than
securities of comparable U.S. companies. In general, there is less overall
governmental supervision and regulation of foreign securities markets,
broker-dealers, and issuers than in the U.S.
54
TOUCHSTONE SERIES TRUST
NOTES TO FINANCIAL STATEMENTS CONTINUED
3. TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISOR. The Trust has an investment advisory agreement with
Touchstone Advisors, Inc. (the "Advisor"), an indirect subsidiary of
Western-Southern Life Assurance Company ("Western-Southern"). Under the terms of
the investment advisory agreement, each Fund pays an investment advisory fee
that is computed daily and paid monthly. For the year ended December 31, 1999,
each Fund incurred the following investment advisory fees equal on an annual
basis to the following percentages of the average daily net assets of the Fund.
Emerging International Income Value Growth & Standby
Growth Equity Opportunity Plus Income Balanced Bond Income
Fund Fund Fund Fund Fund Fund Fund Fund
Rate 0.80% 0.95% 0.65% 0.75% 0.80% 0.80% 0.55% 0.25%
- -------------------------------------------------------------------------------------------------------
Subject to review and approval by the Board of Trustees, the Advisor has entered
into certain sub-advisory agreements for the investment advisory services in
connection with the management of each of the Funds. The Advisor pays each
sub-advisor a fee for services provided using an annual rate, as specified
below, that is computed daily and paid monthly based on average daily net
assets. As of December 31, 1999, the following sub-advisory agreements were in
place:
EMERGING GROWTH FUND
David L. Babson & Company, Inc. 0.50%
Westfield Capital Management Company, Inc. 0.45% on the first $10 million
0.40% on the next $40 million
0.35% thereafter
INTERNATIONAL EQUITY FUND
Credit Suisse Asset Management 0.85% on the first $30 million
0.80% on the next $20 million
0.70% on the next $20 million
0.60% thereafter
INCOME OPPORTUNITY FUND
Alliance Capital Management L.P. 0.40% on the first $50 million
0.35% on the next $20 million
0.30% on the next $20 million
0.25% thereafter
VALUE PLUS FUND
Fort Washington Investment Advisors, Inc. 0.45%
GROWTH & INCOME FUND
Scudder Kemper Investments, Inc. 0.50% on the first $150 million
0.45% thereafter
BALANCED FUND
OpCap Advisors, Inc. 0.60% on the first $20 million*
0.50% on the next $30 million*
0.40% thereafter*
BOND FUND
Fort Washington Investment Advisors, Inc. 0.30%
STANDBY INCOME FUND
Fort Washington Investment Advisors, Inc. 0.15%
* Includes assets of the Balanced Fund of the Trust and the Balanced Fund of
the Touchstone Variable Series Trust (for which OpCap Advisors, Inc. also
acts in a sub-advisory capacity).
Fort Washington Investment Advisors, Inc., is an affiliate of the Advisor.
55
TOUCHSTONE SERIES TRUST
DISTRIBUTION AND SERVICE PLAN. Under the Trust's Distribution and Service Plan
in accordance with Rule 12b-1 under the Act, the Trust retains Touchstone
Securities, Inc. ("Distributor"), an indirect subsidiary of Western-Southern, as
a service agent of the Trust and as the principal underwriter of the shares of
each Fund. Under the Distribution Plan, Class C Shares of each Fund pay a fee to
the Distributor in an amount computed at an annual rate of 0.75% of the average
daily net assets of the Fund to finance activity that is principally intended to
result in the sale of Class C Shares of the Fund. Under the Service Plan, Class
A Shares and Class C Shares of each Fund pay a fee to the Distributor in an
amount computed at an annual rate of 0.25% of the average daily net assets of
the Fund for the provision of certain services to the holders of Class A Shares
and Class C Shares.
SPONSOR. The Trust, on behalf of each Fund, has entered into a Sponsor Agreement
with the Advisor. The Advisor provides oversight of the various service
providers to the Trust, including the Trust's administrator, custodian and
transfer agent. The Advisor receives a fee from each Fund equal on an annual
basis to 0.20% of the average daily net assets of that Fund. The Advisor waived
all fees under the Sponsor Agreement through December 31, 1999. In the last
amendment to the Sponsor Agreement, the Advisor also agreed to continue to waive
all fees until April 30, 2000. The Sponsor Agreement may be terminated by the
Sponsor or by the Trust on not less than 30 days prior written notice.
TRUSTEES. Each Trustee who is not an "interested person" (as defined in the Act)
of the Trust receives an aggregate of $5,000 annually plus $1,000 per meeting
attended, as well as reimbursement for reasonable out-of-pocket expenses from
the Trust and from Touchstone Variable Series Trust which is included in a
separate annual report. For the year ended December 31, 1999 the Trust incurred
$11,903 in Trustee fees which was prorated to each Fund.
4. PURCHASES AND SALES OF INVESTMENT SECURITIES
Investment transactions (excluding purchases and sales of U.S. government agency
obligations and excluding short-term investments) for the year ended December
31, 1999 were as follows:
Cost of Purchases Proceeds from Sales
Emerging Growth Fund $10,881,802 $12,034,258
International Equity Fund 18,436,152 18,763,995
Income Opportunity Fund 19,695,435 21,307,289
Value Plus Fund 17,640,821 17,077,526
Growth & Income Fund 24,461,076 28,062,562
Balanced Fund 4,405,934 5,713,658
Bond Fund 4,177,018 3,033,546
Standby Income Fund 9,405,343 4,215,180
The following Funds had transactions in U.S. government and U.S. government
agency obligations:
Cost of Purchases Proceeds from Sales
Growth & Income Fund $ 520,576 $ 384,660
Balanced Fund 536,732 445,979
Bond Fund 6,855,778 7,675,939
Standby Income Fund 1,117,792 1,165,442
56
TOUCHSTONE SERIES TRUST
NOTES TO FINANCIAL STATEMENTS CONTINUED
5. RESTRICTED SECURITIES
Restricted securities may be difficult to dispose of and involve time-consuming
negotiation and expense. Prompt sale of these securities may involve the seller
taking a discount to the security's stated market value. As of December 31,
1999, the Bond Fund held restricted securities valued by the trustees of the
Trust at $699,034, representing 3.63% of net assets. Acquisition date and cost
of each are as follows:
Acquisition Date Cost
Mercantile Safe Deposit 3/28/85 $ 49,459
Central America, Series F 8/1/86 139,864
Central America, Series G 8/1/86 139,864
Central America, Series H 8/1/86 139,864
Republic of Honduras, Series C 5/1/88 122,571
Republic of Honduras, Series D 5/1/88 139,689
The Bond Fund received these securities from The Western & Southern Life
Insurance Company Separate Account A on October 4, 1994, in exchange for a
proportionate interest in the Bond Portfolio. As part of a subsequent
reorganization, these securities were redeemed in kind and acquired by the Bond
Fund. (Note 7)
6. EXPENSE REIMBURSEMENTS
The Sponsor has agreed to reimburse each Fund so that, following such
reimbursement, the aggregate total operating expenses (excluding interest,
taxes, brokerage commissions and extraordinary expenses) of each Fund are not
greater, on an annual basis, than the percentage of average daily net assets of
the Fund listed below for the year ended December 31, 2000.
Emerging International Income Value Growth & Standby
Growth Equity Opportunity Plus Income Balanced Bond Income
Fund Fund Fund Fund Fund Fund Fund Fund
Voluntary Expense Limit -
Class A 1.50% 1.60% 1.20% 1.30% 1.30% 1.35% 0.90% 0.75%
Voluntary Expense Limit -
Class C 2.25% 2.35% 1.95% 2.05% 2.05% 2.10% 1.65% --
Voluntary Expense Limit -
Class Y -- -- -- -- 1.05% -- 0.65% --
Aggregate Amount of
Reimbursement to Fund $215,188 $309,722 $242,471 $216,639 $317,320 $226,438 $268,587 $162,742
- -----------------------------------------------------------------------------------------------------------------
7. CAPITAL CONTRIBUTION
Effective immediately after the close of business on December 31, 1998, each
series of Select Advisors Trust C and each series of Select Advisors Trust A
withdrew its assets (net of liabilities) from the corresponding series of Select
Advisors Portfolios. Each Select Advisors Trust A Fund then acquired all of the
assets (net of the liabilities) of the corresponding Select Advisors Trust C
Fund in a tax-free exchange for Class C shares of such Select Advisors Trust A
Fund. In addition, where applicable, The Western & Southern Life Insurance
Company Separate Account A, in a taxable exchange, withdrew its assets from each
Portfolio of Select Advisors Portfolios in which it invested and reinvested such
assets in Class Y shares of the corresponding Select Advisors Trust A Fund.
Select Advisors Trust A was renamed Touchstone Series Trust at the time of these
transactions. Thus, an initial capital contribution to each Fund of Touchstone
Series Trust equal to the amount of the respective Select Advisors Trust C
Fundand The Western & Southern Life Insurance Company Separate Account A's net
assets was made at that time.
57
TOUCHSTONE SERIES TRUST
The following is a summary by Fund of unrealized appreciation (depreciation)
acquired from each series of Select Advisors Trust C as of the acquisition date,
as well as the number of shares issued from each class from the transaction:
Touchstone Unrealized Class C Class Y
Series Trust Fund Appreciation/ Shares Shares
(Survivor Fund) (Depreciation) Issued Issued
- -------------- ------------ ------------ -------------
Emerging Growth $345,785 $251,885
International Equity 849,328 417,774 --
Income Opportunity (805,796) 511,577 --
Value Plus 19,614 31,018 --
Growth & Income 91,423 193,065 1,000,000
Balanced 47,846 286,552 --
Bond 20,632 113,070 1,000,000
As of January 1, 1999, the Income Opportunity Fund had a capital loss carryover
of $495,541. There is an annual limitation of $178,514 on this capital loss
carry-forward.
8. CAPITAL SHARE TRANSACTIONS
Transactions in capital stock were as follows for the following periods and
classes of each Fund:
TOUCHSTONE EMERGING GROWTH FUND
Year Ended Year Ended
December 31, 1999 December 31, 1998
Shares Amount Shares Amount
Shares Outstanding (Class A):
Shares sold 97,013 $ 1,411,794 343,695 $5,012,537
Reinvestment of dividends and
distributions 71,583 1,184,076 32,355 418,391
- -------------------------------------------------------------------------------------------------------
168,596 2,595,870 376,050 5,430,928
Shares redeemed (157,019) (2,291,937) (111,410) (1,581,667)
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) 11,577 $ 303,933 264,640 $3,849,261
- -------------------------------------------------------------------------------------------------------
Shares Outstanding (Class C):
Shares sold 23,001 $ 326,924 -- $ --
Reinvestment of dividends and
distributions 33,503 532,034 -- --
- -------------------------------------------------------------------------------------------------------
56,504 858,958 -- --
Shares redeemed (64,997) (924,372) -- --
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) (8,493) $ (65,414) -- $ --
- -------------------------------------------------------------------------------------------------------
TOUCHSTONE INTERNATIONAL EQUITY FUND
Year Ended Year Ended
December 31, 1999 December 31, 1998
Shares Amount Shares Amount
Shares Outstanding (Class A):
Shares sold 70,684 $ 940,653 123,496 $1,630,252
Reinvestment of dividends and
distributions 44,305 716,077 30,828 398,640
- -------------------------------------------------------------------------------------------------------
114,989 1,656,730 154,324 2,028,892
Shares redeemed (100,888) (1,381,046) (38,129) (501,457)
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) 14,101 $ 275,684 116,195 $1,527,435
- -------------------------------------------------------------------------------------------------------
Shares Outstanding (Class C):
Shares sold 23,528 $ 302,293 -- $ --
Reinvestment of dividends and
distributions 32,842 511,341 -- --
- -------------------------------------------------------------------------------------------------------
56,370 813,634 -- --
Shares redeemed (67,408) (870,128) -- --
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) (11,038) $ (56,494) -- $ --
- -------------------------------------------------------------------------------------------------------
58
TOUCHSTONE SERIES TRUST
NOTES TO FINANCIAL STATEMENTS CONTINUED
TOUCHSTONE INCOME OPPORTUNITY FUND
Year Ended Year Ended
December 31, 1999 December 31, 1998
Shares Amount Shares Amount
Shares Outstanding (Class A):
Shares sold 134,505 $ 986,761 374,781 $ 3,476,133
Reinvestment of dividends and
distributions 86,330 618,750 71,619 623,322
- -------------------------------------------------------------------------------------------------------
220,835 1,605,511 446,400 4,099,455
Shares redeemed (314,603) (2,302,822) (283,285) (2,599,216)
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) (93,768) $ (697,311) 163,115 $ 1,500,239
- -------------------------------------------------------------------------------------------------------
Shares Outstanding (Class C):
Shares sold 48,569 $ 347,865 -- $ --
Reinvestment of dividends and
distributions 46,506 323,665 -- --
- -------------------------------------------------------------------------------------------------------
95,075 671,530 -- --
Shares redeemed (143,269) (1,029,761) -- --
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) (48,194) $ (358,231) -- $ --
- -------------------------------------------------------------------------------------------------------
TOUCHSTONE VALUE PLUS FUND
Year Ended Period Ended
December 31, 1999 December 31, 1998
Shares Amount Shares Amount
Shares Outstanding (Class A):
Shares sold 88,299 $ 988,307 2,605,472 $25,939,165
Reinvestment of dividends and
distributions 56,984 663,608 4,677 43,452
- -------------------------------------------------------------------------------------------------------
145,283 1,651,915 2,610,149 25,982,617
Shares redeemed (43,587) (508,020) (9,307) (2,366)
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) 101,696 $ 1,143,895 2,600,842 $25,980,251
- -------------------------------------------------------------------------------------------------------
Shares Outstanding (Class C):
Shares sold 43,709 $ 459,000 -- $ --
Reinvestment of dividends and
distributions 928 10,553 -- --
- -------------------------------------------------------------------------------------------------------
44,637 469,553 -- --
Shares redeemed (27,892) (298,655) -- --
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) 16,745 $ 170,898 -- $ --
- -------------------------------------------------------------------------------------------------------
TOUCHSTONE GROWTH & INCOME FUND
Year Ended Year Ended
December 31, 1999 December 31, 1998
Shares Amount Shares Amount
Shares Outstanding (Class A):
Shares sold 86,582 $ 1,384,357 840,694 $13,903,526
Reinvestment of dividends and
distributions 80,184 1,155,576 36,887 569,460
- -------------------------------------------------------------------------------------------------------
166,766 2,539,933 877,581 14,472,986
Shares redeemed (282,426) (4,495,609) (287,905) (4,676,332)
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) (115,660) $(1,955,676) 589,676 $ 9,796,654
- -------------------------------------------------------------------------------------------------------
Shares Outstanding (Class C):
Shares sold 36,922 $ 543,763 -- $ --
Reinvestment of dividends and
distributions 13,727 179,904 -- --
- -------------------------------------------------------------------------------------------------------
50,649 723,667 -- --
Shares redeemed (84,583) (1,259,682) -- --
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) (33,934) $ (536,015) -- $ --
- -------------------------------------------------------------------------------------------------------
Shares Outstanding (Class Y):
Shares sold -- $ -- -- $ --
Reinvestment of dividends and
distributions 74,730 1,488,771 -- --
- -------------------------------------------------------------------------------------------------------
74,730 1,488,771 -- --
Shares redeemed -- -- -- --
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) 74,730 $ 1,488,771 -- $ --
- -------------------------------------------------------------------------------------------------------
59
TOUCHSTONE SERIES TRUST
TOUCHSTONE BALANCED FUND
Year Ended Year Ended
December 31, 1999 December 31, 1998
Shares Amount Shares Amount
Shares Outstanding (Class A):
Shares sold 41,173 $ 513,685 161,051 $2,065,886
Reinvestment of dividends and
distributions 35,999 427,794 23,854 286,919
- -------------------------------------------------------------------------------------------------------
77,172 941,479 184,905 2,352,805
Shares redeemed (104,320) (1,306,240) (68,591) (872,443)
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) (27,148) $ (364,761) 116,314 $1,480,362
- -------------------------------------------------------------------------------------------------------
Shares Outstanding (Class C):
Shares sold 20,873 $ 251,855 -- $
distributions 23,421 267,813 -- --
- -------------------------------------------------------------------------------------------------------
44,294 519,668 -- --
Shares redeemed (73,804) (878,597) -- --
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) (29,510) $ (358,929) -- $ --
- -------------------------------------------------------------------------------------------------------
TOUCHSTONE BOND FUND
Year Ended Year Ended
December 31, 1999 December 31, 1998
Shares Amount Shares Amount
Shares Outstanding (Class A):
Shares sold 137,197 $ 1,368,199 436,841 $4,527,950
Reinvestment of dividends and
distributions 34,756 341,765 26,120 271,637
- -------------------------------------------------------------------------------------------------------
171,953 1,709,964 462,961 4,799,587
Shares redeemed (190,712) (1,898,035) (153,703) (1,606,439)
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) (18,759) $ (188,071) 309,258 $3,193,148
- -------------------------------------------------------------------------------------------------------
Shares Outstanding (Class C):
Shares sold 35,660 $ 345,721 -- $ --
Reinvestment of dividends and
distributions 7,353 70,040 -- --
- -------------------------------------------------------------------------------------------------------
43,013 415,761 -- --
Shares redeemed (47,002) (458,867) -- --
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) (3,989) $ (43,106) -- $ --
- -------------------------------------------------------------------------------------------------------
Shares Outstanding (Class Y):
Shares sold -- $ -- -- $ --
Reinvestment of dividends and
distributions 67,830 915,466 -- --
- -------------------------------------------------------------------------------------------------------
67,830 -- --
Shares redeemed -- -- -- --
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) 67,830 915,466 -- $ --
- -------------------------------------------------------------------------------------------------------
TOUCHSTONE STANDBY INCOME FUND
Year Ended Year Ended
December 31, 1999 December 31, 1998
Shares Amount Shares Amount
Shares Outstanding:
Shares sold 1,593,735 $15,760,608 846,688 $8,443,462
Reinvestment of dividends and
distributions 62,866 623,984 54,478 543,405
- -------------------------------------------------------------------------------------------------------
1,656,601 16,384,592 901,166 8,986,867
Shares redeemed (339,513) (3,371,225) (635,946) (6,343,864)
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) 1,317,088 $13,013,367 265,220 $2,643,003
- -------------------------------------------------------------------------------------------------------
60
TOUCHSTONE SERIES TRUST
NOTES TO FINANCIAL STATEMENTS CONTINUED
9. SUBSEQUENT EVENT
On February 15, 2000, the Board of Trustees of Touchstone Series Trust (the
"Trust") approved an Agreement and Plan of Reorganization (the "CST Agreement")
between the Trust and Countrywide Strategic Trust (the "Strategic Trust").
Pursuant to the CST Agreement, Touchstone Emerging Growth Fund and Touchstone
International Equity Fund will be merged into separate new series of Strategic
Trust. In addition, Touchstone Value Plus Fund and Touchstone Growth & Income
Fund will be merged into one new series of Strategic Trust. On the same date,
the Trust's Board of Trustees approved an Agreement and Plan of Reorganization
(the "CIT Agreement") between the Trust and Countrywide Investment Trust
("Investment Trust"). Pursuant to the CIT Agreement, Touchstone Bond Fund will
be merged into Intermediate Bond Fund of Investment Trust. Each merger is
subject to approval by the shareholders of the relevant Touchstone Fund.
As of the effective time of the reorganization, each of the Touchstone Funds
that has received shareholder approval (each an "Acquired Fund") will transfer
all of its assets, subject to liabilities, to the corresponding Countrywide Fund
(each an "Acquiring Fund") in exchange solely for shares of the Acquiring Fund.
As soon as practicable after the Closing Date, each Acquired Fund will
distribute pro rata to its shareholders of record the shares of the Acquiring
Fund received in the exchange. After the reorganization, a shareholder of an
Acquired Fund will own shares of the corresponding class of the Acquiring Fund
equal in value to the shares of the Acquired Fund owned by the shareholder
before the reorganization.
The mergers are part of the consolidation of the Touchstone and Countrywide
mutual fund complexes resulting from the acquisition by Fort Washington
Investment Advisors, Inc., an affiliate of the Advisor, of all of the
outstanding stock of the parent of Countrywide Investments, Inc. which serves as
the investment advisor to each fund in the Countrywide Strategic Trust,
Countrywide Investment Trust and Countrywide Tax-Free Trust. In connection with
this consolidation, it is anticipated that the following Touchstone Funds will
be terminated: Touchstone Income Opportunity Fund, Touchstone Balanced Fund and
Touchstone Standby Income Fund. When the consolidation is completed and all
assets of the Trust have been transferred in a merger or distributed to
shareholders, the Trust will be terminated.
FEDERAL TAX INFORMATION (UNAUDITED)
At December 31, 1999, the following Funds had available, for Federal income tax
purposes, unused capital losses which may be applied against any realized net
taxable gains of each succeeding year until fully utilized or until the
expiration date noted:
Amount Expiration Date
-------- --------------
Income Opportunity Fund $1,324,985* 12/31/2006
2,842,233 12/31/2007
Bond Fund 286,914 12/31/2007
Standby Income Fund 45,214 12/31/2007
* $495,541 of which the Fund is limited to using no more than $178,514 per year.
61
TOUCHSTONE SERIES TRUST
From November 1, 1999 to December 31, 1999, the following Funds incurred the
following net realized losses. The Funds intend to elect to defer these losses
and treat them arising on January 1, 2000:
Amount
--------
International Equity Fund $ 13,062
Income Opportunity Fund 272,855
Balanced Fund 2,301
Bond Fund 66,026
Standby Income Fund 2,595
For corporate shareholders, a portion of the ordinary dividends paid during the
Funds' year ended December 31, 1999 qualified for the dividends received
deduction, as follows:
Amount
--------
Value Plus Fund 100%
Growth & Income Fund 100%
Pursuant to Section 852 of the Internal Revenue Code, the Funds designate the
following as capital gain dividends for the year ended December 31, 1999, of
which 100% represents 20% rate gains:
Capital Gains Dividend
----------------------
Emerging Growth Fund $287,366
International Equity Fund 747,674
Value Plus Fund 515,377
Growth & Income Fund 59,785
Balanced Fund 518,705
Bond Fund 111
The Touchstone International Equity Fund paid foreign taxes of $17,180, or $0.02
per share, and the Fund recognized $189,795, or $0.20 per share, of foreign
source income during the year ended December 31, 1999.
62
TOUCHSTONE SERIES TRUST
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF TRUSTEES AND SHAREHOLDERS TOUCHSTONE SERIES TRUST
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments of the Touchstone Series Trust (comprised of
Emerging Growth Fund, International Equity Fund, Income Opportunity Fund, Value
Plus Fund, Growth & Income Fund, Balanced Fund, Bond Fund, and Standby Income
Fund) (the Funds) as of December 31, 1999, and the related statements of
operations, the statements of changes in net assets, and the financial
highlights presented herein for the year ended December 31, 1999. These
financial statements and financial highlights are the responsibility of the
Funds' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits. The
statements of changes in net assets presented herein for the years or periods
ended December 31, 1998 and the financial highlights presented herein for each
of the respective years or periods ended December 31, 1998 were audited by other
auditors whose report dated February 18, 1999 expressed an unqualified opinion.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of December 31, 1999, by correspondence with the custodian and brokers.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective Funds constituting the Touchstone Series Trust as of December
31, 1999, the results of their operations, the changes in their net assets and
financial highlights for the year then ended, in conformity with accounting
principles generally accepted in the United States.
Ernst & Young LLP
Cincinnati, Ohio
February 16, 2000
63
TOUCHSTONE SERIES TRUST
- --------------------------------------------------------------------------------
SUPPLEMENTARY DATA
A special meeting of the shareholders of Touchstone Growth & Income Fund (the
"Fund") of Touchstone Series Trust was held on January 28, 1999. At the meeting,
the shareholders of the Fund voted on a proposal to approve a new sub-advisory
agreement between Touchstone Advisors, Inc., the investment advisor to the Fund
(the "Advisor"), and Scudder Kemper Investments, Inc. ("Scudder Kemper"),
pursuant to which Scudder Kemper would act as sub-advisor with respect to the
assets of the Fund. The result of the votes taken among shareholders on the
proposal is listed below:
695,166.656 shares were represented in person or by proxy, or 62.06% of the
outstanding shares of the Fund.
# of Shares Voted % of Shares Voted
Affirmative 691,843.016 99.52%
Against 614.369 0.09%
Abstain 2,709.271 0.39%
TOTAL 695,166.656 100.00%
The new agreement replaced the portfolio advisory agreement dated September 7,
1998 and is identical in all substantive respects to that portfolio advisory
agreement, except for different effective and termination dates.
NOTES
Distributor
- -----------
Touchstone Securities, Inc.
311 Pike Street
Cincinnati, Ohio 45202
800.638.8194 Broker-Dealers
800.285.2858 Financial Institutions
Investment Advisor of each Portfolio
- ------------------------------------
Touchstone Advisors, Inc.
311 Pike Street
Cincinnati, Ohio 45202
Transfer Agent
- --------------
State Street Bank and Trust Company
P.O. Box 8518
Boston, Massachusetts 02266-8518
Administrator, Custodian & Fund Accounting Agent
- ------------------------------------------------
Investors Bank & Trust Company
200 Clarendon Street
Boston, Massachusetts 02116-9130
Independent Accountants
- -----------------------
Ernst & Young LLP
1300 Chiquita Center
250 East Fifth Street
Cincinnati, Ohio 45202
Legal Counsel
- -------------
Frost & Jacobs LLP
2500 PNC Center
201 East Fifth Street
Cincinnati, Ohio 45202
[TOUCHSTONE LOGO HERE]
Touchstone
The Mark of Excellence in Investment ManagementSM
-------- Income
-------- Countrywide Investments Capital Appreciation
--------
--------
--------
Prospectus
Equity Fund
Utility Fund
August 1, 1999
Countrywide
[logo] Investments
These securities have not been
approved or disapproved by the
Securities and Exchange Commission
nor has the Securities and Exchange
Commission passed upon the accuracy
or adequacy of this Prospectus. Any
representation to the contrary is a
criminal offense.
This Prospectus has information you
should know before you invest.
Please read it carefully and keep it
with your investment records.
PROSPECTUS
August 1, 1999
COUNTRYWIDE STRATEGIC TRUST
312 Walnut Street, 21st Floor
Cincinnati, Ohio 45202
800-543-0407
EQUITY FUND
UTILITY FUND
TABLE OF CONTENTS
RISK/RETURN SUMMARY ........................................................
RISK/RETURN SUMMARY: FEE TABLE..............................................
INVESTMENT OBJECTIVES, INVESTMENT STRATEGIES AND RELATED RISKS...............
HOW TO PURCHASE SHARES......................................................
HOW TO REDEEM SHARES...................................................... ..
HOW TO EXCHANGE SHARES......................................................
DIVIDENDS AND DISTRIBUTIONS..................................................
TAXES...................................................... .................
OPERATION OF THE FUNDS......................................................
DISTRIBUTION PLANS ..........................................................
CALCULATION OF SHARE PRICE AND PUBLIC OFFERING PRICE.........................
FINANCIAL HIGHLIGHTS...................................................... ..
For further information or assistance in opening an account, please contact your
broker or call us at the above number.
RISK/RETURN SUMMARY
- -------------------
WHAT ARE THE FUNDS' INVESTMENT OBJECTIVES?
The Equity Fund seeks long-term growth of capital, current income and growth of
income by investing primarily in dividend-paying common stocks.
The Utility Fund seeks current income and capital appreciation by investing
primarily in stocks of public utilities.
WHAT ARE THE FUNDS' PRINCIPAL INVESTMENT STRATEGIES?
The Funds invest primarily in stocks that have attractive opportunities for
growth of principal and dividends, yet sell at reasonable valuations compared to
the Adviser's expected growth rates of revenues, cash flows and earnings.
The EQUITY FUND will invest in a diversified portfolio of dividend-paying common
stocks of mid and large capitalization domestic companies having at least three
years operating history. Under normal conditions, at least 65% of the Fund's
total assets will be invested in common stocks.
The UTILITY FUND will invest in a diversified portfolio of common, preferred and
convertible preferred stocks of domestic public utilities that currently pay
dividends and which have been operating for at least 3 years. Under normal
conditions, at least 65% of the Fund's total assets will be invested in the
securities of public utilities, which are those companies that are involved in
the production, supply or distribution of electricity, natural gas,
telecommunications and water.
WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN THE FUNDS?
INVESTMENT RISKS COMMON TO BOTH FUNDS. The return on and value of an investment
in the Funds will fluctuate in response to stock market movements. Stocks and
other equity securities are subject to market risks and fluctuations in value
due to earnings, economic conditions and other factors beyond the control of the
Adviser. As a result, there is a risk that you could lose money by investing in
the Funds.
An investment in the Funds is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
governmental agency.
SPECIAL RISKS OF INVESTING IN THE UTILITY FUND. The risks associated with an
investment in the Utility Fund include the risks associated with investments in
the public utility industry, such as rate regulation by government agencies,
fuel shortages and restrictions on operations due to licensing and environmental
considerations.
- 2 -
PERFORMANCE SUMMARY
The bar charts and performance tables shown below provide an indication of the
risks of investing in the Funds by showing the changes in the performance of the
Funds from year to year during the Funds' operations and by showing how the
average annual returns of the Funds compare to those of a broad-based securities
market index. The Funds' past performance is not necessarily an indication of
their future performance.
EQUITY FUND - CLASS C [bar chart]
- - -2.43% 31.03% 13.42% 28.37% 20.70%
1994 1995 1996 1997 1998
The total returns shown above do not reflect the sales load on Class C shares
and, if included, returns would be less than those shown.
During the period shown in the bar chart, the highest return for a quarter was
19.92% during the quarter ended December 31, 1998 and the lowest return for a
quarter was -10.57% during the quarter ended September 30, 1998.
The year-to-date return of the Fund's Class C shares as of June 30, 1999 is
8.09%.
UTILITY FUND - CLASS A [bar chart]
2.34% 22.70% 7.66% 8.03% -2.02% 26.46% 5.77% 27.90% 17.64%
1990 1991 1992 1993 1994 1995 1996 1997 1998
The total returns shown above do not reflect the sales load on Class A shares
and, if included, returns would be less than those shown.
During the period shown in the bar chart, the highest return for a quarter was
16.83% during the quarter ended December 31, 1997 and the lowest return for a
quarter was - 5.32% during the quarter ended June 30, 1998.
The year-to-date return of the Fund's Class A shares as of June 30, 1999 is
1.96%.
AVERAGE ANNUAL TOTAL RETURNS
FOR PERIODS ENDED DECEMBER 31, 1998
One Year Five Years Since Inception(1)
-------- ---------- ------------------
Equity Fund Class A 17.03% 17.57% 16.13%
Standard & Poor's 500 Index(2) 28.58% 24.06% 23.10%
Equity Fund Class C 20.70% 17.57% 15.65%
Standard & Poor's 500 Index(2) 28.58% 24.06% 22.59%
- 3 -
Utility Fund Class A 12.94% 13.62% 12.32%
Standard & Poor's Utility Index(3) 14.77% 14.02% 12.48%
Utility Fund Class C 16.41% 13.64% 12.15%
Standard & Poor's Utility Index(3) 14.77% 14.02% 12.55%
(1) Inception date for Equity Fund Class A and Utility Fund Class C was August
2, 1993; inception date for Equity Fund Class C was June 7, 1993; inception date
for Utility Fund Class A was August 15, 1989.
(2) The Standard & Poor's 500 Index is a widely recognized, unmanaged index of
common stock prices.
(3) The Standard & Poor's Utility Index is a widely recognized, unmanaged index
consisting of electric power, natural gas and telephone companies.
- 4 -
RISK/RETURN SUMMARY: FEE TABLE
- ------------------------------
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU WILL PAY IF YOU BUY AND HOLD
SHARES OF THE FUNDS.
SHAREHOLDER FEES (fees paid directly from your investment)
Class A Class C
Shares Shares
------ ------
Maximum Sales Load . . . . . . . . . . . . . . . . 5.75% 2.25%
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price). . . . . . . . 5.75% 1.25%
Maximum Deferred Sales Load
(as a percentage of original purchase price) . . . None* 1%
Sales Load Imposed on Reinvested Dividends . . . . None None
Redemption Fee . . . . . . . . . . . . . . . . . . None** None**
Exchange Fee . . . . . . . . . . . . . . . . . . . None None
* If you purchase $1 million or more shares and do not pay a front-end sales
load, you may be subject to a deferred sales load of 1% if the shares are
redeemed within one year of their purchase and a dealer's commission was
paid on the shares.
** You will be charged $8 for each wire redemption. This fee is subject to
change.
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets)
Equity Fund Utility Fund
Class A Class C Class A Class C
Shares Shares Shares Shares
------ ------ ------ ------
Management Fees .75% .75% .75% .75%
Distribution (12b-1) Fees .25% 1.00% .23% .92%
Other Expenses .31% .66% .35% .83%
----- ----- ----- -----
Total Annual Fund Operating Expenses 1.31% 2.41% 1.33% 2.50%
===== ===== ===== =====
EXAMPLE
This Example is intended to help you compare the cost of investing in the Funds
with the cost of investing in other mutual funds. It assumes that you invest
$10,000 in a Fund for the time periods indicated and then redeem all of your
shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that a Fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
Equity Fund Utility Fund
Class A Class C Class A Class C
Shares Shares Shares Shares
------ ------ ------ ------
1 Year $ 701 $ 466 $ 703 $ 475
3 Years 966 867 972 894
5 Years 1,252 1,394 1,262 1,439
10 Years 2,063 2,837 2,084 2,925
- 5 -
INVESTMENT OBJECTIVES, INVESTMENT STRATEGIES AND RELATED RISKS
- --------------------------------------------------------------
INVESTMENT OBJECTIVE
Each Fund has its own investment objectives. Each Fund's investment objective
may be changed by the Board of Trustees without the approval of shareholders.
You will be notified if there is a change in a Fund's investment objective and
you should then consider whether the Fund will continue to be an appropriate
investment under your circumstances.
The EQUITY FUND seeks long-term growth of capital, current income and
growth of income by investing primarily in dividend-paying common stocks.
The UTILITY FUND seeks current income and capital appreciation by investing
primarily in common stocks of public utilities.
INVESTMENT STRATEGIES
EQUITY FUND. Under normal conditions, the Equity Fund will invest at least
65% of its assets in common stocks. The Fund will invest in a diversified
portfolio of mid and large capitalization domestic common stocks of companies
which have been operating for at least 3 years.
UTILITY FUND. Under normal conditions, at least 65% of the Utility Fund's
assets will be invested in the securities of public utilities. The Utility Fund
will invest in a diversified portfolio of common, preferred and convertible
preferred stocks of public utilities that currently pay dividends and which have
been operating for at least 3 years. The public utilities industry includes
companies involved in the production, supply or distribution of electricity,
natural gas, telecommunications (but not radio or television broadcasters) and
water. The Fund may invest in any combination of public utility companies.
In selecting investments for the Utility Fund, the Adviser will consider
the effects of regulation within the industry. Although the utility industry is
undergoing deregulation, most states still influence pricing and profitability
of certain utilities. The Adviser analyzes local regulation and its influence on
pricing. The Adviser generally prefers those companies that provide services in
a geographic area where the regulatory environment is favorable. The Adviser
will also look for companies with a diversified customer base. The Adviser
favors investments in those companies that do not overly depend on one certain
customer segment (retail, industrial, commercial residential) for a vast
majority of their revenue.
- 6 -
The Adviser expects to hold the Utility Fund's securities for the
long-term, but will sell a security when a serious deterioration in the
fundamental competitive position of the company occurs or when there is a change
in the company's management which the Adviser believes is not in the best
interests of shareholders.
INVESTMENT STRATEGIES COMMON TO BOTH FUNDS. In selecting equity investments
for the Funds, the Adviser looks for stocks which have attractive opportunities
for growth of principal and dividends, yet sell at reasonable valuations
compared to the Adviser's expected growth rates of revenues, cash flows and
earnings. The Adviser screens securities from the Standard & Poor's Compustat
database and then performs a detailed fundamental analysis on the companies
which pass the initial screening. The intent of this analysis is to:
o Gain a thorough understanding of the company's products and/or services and
its position within the industry. This is accomplished primarily through
discussions with the company and street analysts and by analyzing news and
company reports.
o Assess the strength of competing products and services by researching
competitors, analyzing pricing and margin trends, technology and new
product introductions.
o Determine the actual financial condition of the company by thoroughly
reviewing its financial statements.
o Assess management's talent, succession plans and strategies. The Adviser
believes that the ability of management to successfully implement well
thought-out strategic plans is crucial to the success of any company.
o Determine competitive strengths and weaknesses, opportunities and threats
to both the company and the industry. The Adviser searches for companies
that have a unique product or niche within an industry which may give them
an advantage over their competitors.
For defensive purposes, each Fund may temporarily hold all or part of its
assets in short-term obligations such as bank debt instruments (certificates of
deposit, bankers' acceptances and time deposits), commercial paper, U.S.
Government obligations having a maturity of less than one year or repurchase
agreements collateralized by U.S. Government obligations. The Equity Fund may
also temporarily invest all or a portion of its assets in long-term U.S.
Treasury obligations. When taking such a temporary defensive position, a Fund
may not achieve its investment objective.
- 7 -
RISK CONSIDERATIONS
EQUITY FUND. The Equity Fund is designed for investors who are investing for the
long term and is not intended for investors seeking assured income or
preservation of capital. Changes in market prices can occur at any time.
Accordingly, there is no assurance that the Fund will achieve its investment
objective. When you redeem your shares, they may be worth more or less than what
you paid for them.
Because the Equity Fund normally invests most, or a substantial portion, of
its assets in stocks, the value of the Fund's portfolio will be affected by
changes in the stock markets. Stock markets and stock prices can be volatile.
Market action will affect the Fund's net asset value per share, which fluctuates
as the values of the Fund's portfolio securities change. Not all stock prices
change uniformly or at the same time and not all stock markets move in the same
direction at the same time. Various factors can affect a stock's price (for
example, poor earnings reports by an issuer, loss of major customers, major
litigation against an issuer, or changes in general economic conditions or in
government regulations affecting an industry). Not all of these factors can be
predicted.
UTILITY FUND. Because the Utility Fund normally invests a substantial portion of
its assets in the securities of public utilities, the value of the Fund's
portfolio will be affected by changes in the public utility market. Stocks of
public utilities may be more sensitive to changes in interest rates than other
types of equity investments. Changes in market prices of public utilities can
occur at any time. Market action will affect the Fund's net asset value per
share, which fluctuates as the values of the Fund's portfolio securities change.
Accordingly, there is no assurance that the Fund will achieve its investment
objective. When you redeem your shares, they may be worth more or less than what
you paid for them.
Investments in securities in the public utility industry are subject to
special risks. These include the possibility of rate regulation by government
agencies, which may make it difficult to obtain an adequate return on invested
capital, pass on cost increases and finance large construction projects. There
are additional risks associated with public utilities which provide power or
other energy related services such as, difficulties in obtaining fuel at
reasonable prices, shortages of fuel, energy conservation measures, restrictions
on operations and increased costs and delays from licensing and environmental
considerations and the special risks of constructing and operating nuclear power
generating facilities or other specialized types of facilities.
- 8 -
HOW TO PURCHASE SHARES
- ----------------------
You may open an account with the Funds by investing the minimum amount required
for the type of account you open. You may invest additional amounts in an
existing account at any time. For more information about how to purchase shares,
call Countrywide Fund Services, Inc. (the "Transfer Agent") (Nationwide
call toll-free 800-543-0407; in Cincinnati call 629-2050). The different account
options and minimum investment requirements are listed below.
ACCOUNT OPTIONS
Regular Accounts
- ----------------
Accounts for Countrywide Affiliates
- -----------------------------------
If you (or anyone in your immediate family) are an employee, shareholder or
customer of Countrywide Credit Industries, Inc. or any of its affiliated
companies, you may open an account for less than the minimum amount required for
regular accounts.
Tax-Deferred Retirement Plans
- -----------------------------
INDIVIDUAL RETIREMENT ACCOUNTS ("IRAS"). An IRA is a special type of account
that offers tax advantages. You should consult your financial professional to
help decide which type of IRA is right for you.
Traditional IRA - Assets grow tax-deferred and contributions may be
deductible. Distributions are taxable in the year made.
Spousal IRA - An IRA in the name of a non-working spouse by a working
spouse.
Roth IRA - An IRA with tax-free growth of assets and tax-free
distributions, if certain conditions are met. Contributions are not deductible.
Education IRA - An IRA with tax-free growth of assets and tax-free
withdrawals for qualified higher education expenses. Contributions are not
deductible.
KEOGH PLANS. A tax-deferred plan for self-employed individuals.
QUALIFIED PENSION AND PROFIT-SHARING PLANS FOR EMPLOYEES. These include
profit-sharing plans with a 401(k) provision.
403(B)(7) CUSTODIAL ACCOUNTS. A tax-deferred account for employees of public
school systems, hospitals, colleges and other non-profit organizations meeting
certain requirements of the Internal Revenue Code.
- 9 -
Automatic Investment Plan
- -------------------------
The automatic investment plan allows you to make automatic monthly investments
in either Fund from your bank, savings and loan or other depository institution
account. The minimum initial and subsequent investments must be $50 under the
plan. The Transfer Agent pays the costs of your transfers, but reserves the
right, upon 30 days' written notice, to make reasonable charges for this
service.
MINIMUM INVESTMENT REQUIREMENTS
Initial Additional
------- ----------
Regular Accounts $1,000 None
Accounts for Countrywide Affiliates $ 50 None
Tax-Deferred Retirement Plans $ 250 None
Automatic Investment Plans $ 50 $ 50
Direct Deposit Plans
- --------------------
Your employer may offer a direct deposit plan which will allow you to have all
or a portion of your paycheck transferred automatically to purchase shares of a
Fund. Social security recipients may have all or a portion of their social
security check transferred automatically to purchase shares of a Fund.
InvestPlus Plan
- ---------------
The InvestPlus Plan provides an easy way for Countrywide mortgage holders to
invest in the Funds by including their investment with their mortgage payment.
If you are a Countrywide mortgage holder, you may write one check for the total
amount.
OPENING A NEW ACCOUNT. You may open an account directly with a Fund or through
your broker-dealer.
To open an account directly with a Fund, please follow the steps outlined below.
1. Complete the Account Application included in this Prospectus. Be sure to
indicate the type of account you wish to open, the amount of money you wish
to invest and which class of shares you want to purchase. If you do not
indicate which class you want to purchase, we will invest your purchase in
Class A shares.
2. Write a check for your initial investment to either the "Equity Fund" or
the "Utility Fund." Mail your completed Account Application and your check
to the following address:
COUNTRYWIDE FUND SERVICES, INC.
P.O. BOX 5354
CINCINNATI, OHIO 45201-5354
- 10 -
You may also open an account through your broker-dealer. It is the
responsibility of broker-dealers to send properly completed orders. If you open
an account through your broker-dealer, you may be charged a fee by your
broker-dealer.
ADDING TO YOUR ACCOUNT. You may make additional purchases to your account at any
time. Additional purchases may be made by mail to the address listed above, by
wire or through your broker-dealer. For more information about purchases by
wire, please telephone the Transfer Agent (Nationwide call toll-free 800-543-
0407; in Cincinnati call 629-2050). Your bank may charge a fee for sending your
wire. Each additional purchase must contain the account name and number in order
to properly credit your account.
MISCELLANEOUS. In connection with all purchases of Fund shares,
we observe the following policies and procedures:
o We price direct purchases based upon the next public offering price
(net asset value plus any applicable sales load) after your order is
received. Direct purchase orders received by the Transfer Agent by
4:00 p.m., Eastern time, are processed at that day's public offering
price. Direct investments received by the Transfer Agent after 4:00
p.m., Eastern time, are processed at the public offering price next
determined on the following business day. Purchase orders received by
broker-dealers before 4:00 p.m., Eastern time, and transmitted to the
Adviser by 5:00 p.m., Eastern time, are processed at that day's public
offering price. Purchase orders received from broker-dealers after
5:00 p.m., Eastern time, are processed at the public offering price
next determined on the following business day.
o We mail you confirmations of all purchases or redemptions of Fund
shares.
o Certificates for shares are no longer issued.
o We reserve the right to limit the amount of investments and to refuse
to sell to any person.
o If an order to purchase shares is canceled because your check does not
clear, you will be responsible for any resulting losses or fees
incurred by the Fund or the Transfer Agent in the transaction.
o We may open accounts for less than the minimum investment or change
minimum investment requirements at any time.
o There is no fee for purchases made by wire, but we may charge you for
this service upon thirty days' prior notice.
- 11 -
The Funds' account application contains provisions in favor of the Funds,
the Transfer Agent and certain of their affiliates, excluding such entities from
certain liabilities (including, among others, losses resulting from unauthorized
shareholder transactions) relating to the various services (for example,
telephone redemptions and exchanges) made available to investors.
Choosing a Share Class
----------------------
Each Fund offers Class A and Class C shares. Each class represents an
interest in the same portfolio of investments and has the same rights, but
differs primarily in sales loads and distribution expense amounts. Shares of the
Utility Fund purchased before August 1, 1993 are Class A shares. Shares of the
Equity Fund purchased before August 1, 1993 are Class C shares. Before choosing
a class, you should consider the following factors, as well as any other
relevant facts and circumstances:
The decision as to which class of shares is more beneficial to you depends
on the amount of your investment, the intended length of your investment and the
quality and scope of the value-added services provided by financial advisers who
may work with a particular sales load structure as compensation for their
services. If you qualify for reduced sales loads or, in the case of purchases of
$1 million or more, no initial sales load, you may find Class A shares
attractive because similar sales load reductions are not available for Class C
shares. Moreover, Class A shares are subject to lower ongoing expenses than
Class C shares over the term of the investment. As an alternative, Class C
shares are sold with a lower initial sales load so more of the purchase price is
immediately invested in the Fund. If you do not plan to hold your shares in a
Fund for a long time (less than five years), it may be better to purchase Class
C shares so that more of your purchase is invested directly in the Fund,
although you will pay higher distribution fees. If you plan to hold your shares
in a Fund for more than five years, it may be better to purchase Class A shares,
since after five years your accumulated distribution fees may be more than the
sales load paid on your purchase.
When determining which class of shares to purchase, you may want to
consider the services provided by your financial adviser and the compensation
provided to these financial advisers under each share class. Countrywide
Investments works with many experienced and very qualified financial advisers
throughout the country that may provide valuable assistance to you through
ongoing education, asset allocation programs, personalized financial planning
reviews or other services vital to your long-term success. Countrywide
Investments believes that these value-
- 12 -
added services can greatly benefit you through market cycles and Countrywide
will work diligently with your chosen financial adviser. Countrywide Investments
has a financial adviser referral service available, at no cost, to help you
choose a financial adviser in your area, if you do not have one.
Set forth below is a chart comparing the sales loads and 12b-1 fees
applicable to each class of shares:
CLASS SALES LOAD 12b-1 FEE
- --------------------------------------------------------------------------------
A Maximum of 5.75% initial 0.25%
sales load reduced for purchases
of $50,000 and over; shares sold
without an initial sales load may
be subject to a 1.00% contingent
deferred sales load during first
year if a commission was paid to
a dealer
C 1.25% initial sales load; 1.00% 1.00%
contingent deferred sales load
during first year
- --------------------------------------------------------------------------------
If you are investing $1 million or more, it is generally more beneficial
for you to buy Class A shares because there is no front-end sales load and the
annual expenses are lower.
Class A Shares
--------------
Class A shares are sold at net asset value ("NAV") plus an initial sales
load. In some cases, reduced initial sales loads for the purchase of Class A
shares may be available, as described below. Investments of $1 million or more
are not subject to a sales load at the time of purchase but may be subject to a
contingent deferred sales load of 1.00% on redemptions made within one year
after purchase if a commission was paid by the Adviser to a participating
unaffiliated dealer. Class A shares are also subject to an annual 12b-1
distribution fee of up to .25% of a Fund's average daily assets allocable to
Class A shares.
The following table illustrates the initial sales load breakpoints for the
purchase of Class A shares for accounts opened after July 31, 1999:
- 13 -
Which Dealer
Percentage Equals this Reallowance
Deducted Percentage as Percentage
for Sales of Your Net of Offering
Amount of Investment Load Investment Price
- -------------------- ---- ---------- -----
Less than $50,000 5.75% 6.10% 5.00%
$50,000 but less than $100,000 4.50 4.71 3.75
$100,000 but less than $250,000 3.50 3.63 2.75
$250,000 but less than $500,000 2.95 3.04 2.25
$500,000 but less than $1,000,000 2.25 2.30 1.75
$1,000,000 or more None None
The following table illustrates the initial sales load breakpoints for the
purchase of Class A shares for accounts opened before August 1, 1999:
Which Dealer
Percentage Equals this Reallowance
Deducted Percentage as Percentage
for Sales of Your Net of Offering
Amount of Investment Load Investment Price
- -------------------- ---- ---------- -----
Less than $100,000 4.00% 4.17% 3.60%
$100,000 but less than $250,000 3.50 3.63 3.30
$250,000 but less than $500,000 2.50 2.56 2.30
$500,000 but less than $1,000,000 2.00 2.04 1.80
$1,000,000 or more None None
Under certain circumstances, the Adviser may increase or decrease the
reallowance to selected dealers. In addition to the compensation otherwise paid
to securities dealers, the Adviser may from time to time pay from its own
resources additional cash bonuses or other incentives to selected dealers in
connection with the sale of shares of the Funds. On some occasions, such bonuses
or incentives may be conditioned upon the sale of a specified minimum dollar
amount of the shares of a Fund and/or other funds in the Countrywide Family of
Funds during a specific period of time. Such bonuses or incentives may include
financial assistance to dealers in connection with conferences, sales or
training programs for their employees, seminars for the public, advertising,
sales campaigns and other dealer-sponsored programs or events.
For initial purchases of Class A shares of $1 million or more made after
October 1, 1995 and subsequent purchases further increasing the size of the
account, participating unaffiliated dealers will receive first year compensation
of up to 1.00% of such purchases from the Adviser. In determining a dealer's
eligibility for such commission, purchases of Class A shares of
- 14 -
the Funds may be aggregated with concurrent purchases of Class A shares of other
funds in the Countrywide Family of Funds. Dealers should contact the Adviser for
more information on the calculation of the dealer's commission in the case of
combined purchases.
An exchange from other Countrywide Funds will not qualify for payment of
the dealer's commission unless the exchange is from a Countrywide Fund with
assets as to which a dealer's commission or similar payment has not been
previously paid. No commission will be paid if the purchase represents the
reinvestment of a redemption from a Fund made during the previous twelve months.
Redemptions of Class A shares may result in the imposition of a contingent
deferred sales load if the dealer's commission described in this paragraph was
paid in connection with the purchase of such shares. See "Contingent Deferred
Sales Load for Certain Purchases of Class A Shares" below.
REDUCED SALES LOAD. You may use the Right of Accumulation to combine the
cost or current NAV (whichever is higher) of your existing Class A shares of any
Countrywide Fund sold with a sales load with the amount of any current purchases
in order to take advantage of the reduced sales loads set forth in the tables
above. Purchases made in any Countrywide load fund under a Letter of Intent may
also be eligible for the reduced sales loads. The minimum initial investment
under a Letter of Intent is $10,000. The Countrywide Funds which are sold with a
sales load are listed in the Exchange Privilege section of this Prospectus. You
should contact the Transfer Agent for information about the Right of
Accumulation and Letter of Intent.
PURCHASES AT NET ASSET VALUE. Class A shares of the Funds may be purchased
at NAV by pension and profit-sharing plans, pension funds and other
company-sponsored benefit plans that (1) have plan assets of $500,000 or more,
or (2) have, at the time of purchase, 100 or more eligible participants, or (3)
certify that they project to have annual plan purchases of $200,000 or more, or
(4) are provided administrative services by certain third-party administrators
that have entered into a special service arrangement with the Adviser relating
to such plan.
Banks, bank trust departments and savings and loan associations, in their
fiduciary capacity or for their own accounts, may purchase Class A shares of the
Funds at NAV. To the extent permitted by regulatory authorities, a bank trust
department may charge fees to clients for whose account it purchases shares at
NAV. Federal and state credit unions may also purchase shares at NAV.
- 15 -
In addition, Class A shares of the Funds may be purchased at NAV by
broker-dealers who have a sales agreement with the Adviser and their registered
personnel and employees, including members of the immediate families of such
registered personnel and employees.
Clients of investment advisers may also purchase Class A shares of the
Funds at NAV if their investment adviser or broker-dealer has made arrangements
to permit them to do so with the Trust. The investment adviser must notify the
Transfer Agent that an investment qualifies as a purchase at NAV.
Associations and affinity groups and their members may purchase Class A
shares of the Funds at NAV provided that management of these groups or their
financial adviser has made arrangements with the Trust to permit them to do so.
Investors or their financial adviser must notify the Transfer Agent that an
investment qualifies as a purchase at NAV.
Employees, shareholders and customers of Countrywide Credit Industries,
Inc. or any affiliated company, including members of the immediate families of
such individuals and employee benefit plans established by such entities, may
also purchase Class A shares of the Funds at NAV.
CONTINGENT DEFERRED SALES LOAD FOR CERTAIN PURCHASES OF CLASS A SHARES. A
contingent deferred sales load is imposed upon certain redemptions of Class A
shares of the Funds (or shares into which such Class A shares were exchanged)
purchased at NAV in amounts totaling $1 million or more, if the dealer's
commission described above was paid by the Adviser and the shares are redeemed
within one year from the date of purchase. The contingent deferred sales load
will be paid to the Adviser and will be equal to the commission percentage paid
at the time of purchase as applied to the lesser of (1) the NAV at the time of
purchase of the Class A shares being redeemed, or (2) the NAV of such Class A
shares at the time of redemption. If a purchase of Class A shares is subject to
the contingent deferred sales load, you will be notified on the confirmation you
receive for your purchase. Redemptions of such Class A shares of the Funds held
for at least one year will not be subject to the contingent deferred sales load.
Class C Shares
--------------
Class C shares are sold with an initial sales load of 1.25% and are subject
to a contingent deferred sales load of 1.00% on redemptions of Class C shares
made within one year of their purchase. The contingent deferred sales load will
be a percentage of the dollar amount of shares redeemed and will be assessed on
an amount equal to the lesser of (1) the NAV at the time of purchase of the
Class C shares being redeemed, or (2) the
- 16 -
NAV of such Class C shares being redeemed. A contingent deferred sales load will
not be imposed upon redemptions of Class C shares held for at least one year.
Class C shares are subject to an annual 12b-1 fee of up to 1.00% of a Fund's
average daily net assets allocable to Class C shares. The Adviser intends to pay
a commission of 2.00% of the purchase amount to your broker at the time you
purchase Class C shares.
Additional Information on the Contingent Deferred Sales Load
------------------------------------------------------------
The contingent deferred sales load is waived for any partial or complete
redemption following death or disability (as defined in the Internal Revenue
Code) of a shareholder (including one who owns the shares with his or her spouse
as a joint tenant with rights of survivorship) from an account in which the
deceased or disabled is named. The Adviser may require documentation prior to
waiver of the load, including death certificates, physicians' certificates, etc.
All sales loads imposed on redemptions are paid to the Adviser. In
determining whether the contingent deferred sales load is payable, it is assumed
that shares not subject to the contingent deferred sales load are the first
redeemed followed by other shares held for the longest period of time. The
contingent deferred sales load will not be imposed upon shares representing
reinvested dividends or capital gains distributions, or upon amounts
representing share appreciation.
The following example will illustrate the operation of the contingent
deferred sales load. Assume that you open an account and purchase 1,000 shares
at $10 per share and that six months later the NAV per share is $12 and, during
such time, you have acquired 50 additional shares through reinvestment of
distributions. If at such time you should redeem 450 shares (proceeds of
$5,400), 50 shares will not be subject to the load because of dividend
reinvestment. With respect to the remaining 400 shares, the load is applied only
to the original cost of $10 per share and not to the increase in net asset value
of $2 per share. Therefore, $4,000 of the $5,400 redemption proceeds will be
charged the load. At the rate of 1.00%, the contingent deferred sales load would
be $40. In determining whether an amount is available for redemption without
incurring a deferred sales load, the purchase payments made for all Class C
shares in your account are aggregated.
HOW TO REDEEM SHARES
- --------------------
BY WRITTEN REQUEST. You may send a written request to the Transfer Agent with
your name, your account number and the amount to be redeemed. You must sign your
request exactly as your name appears on the Trust's account records. Mail your
written request to:
- 17 -
COUNTRYWIDE FUND SERVICES, INC.
P.O. BOX 5354
CINCINNATI, OHIO 45201-5354
BY TELEPHONE. If the amount of your redemption is less than $25,000, you may
redeem your shares by telephone. To redeem shares by telephone, call the
Transfer Agent (Nationwide call toll-free 800-543-0407; in Cincinnati call
629-2050). Your redemption proceeds may be mailed to the address stated on your
Account Application, wired to your bank or brokerage account as stated on your
Account Application or deposited via an Automated Clearing House (ACH)
transaction. The telephone redemption privilege is automatically available to
you, unless you specifically notify the Transfer Agent not to honor telephone
redemptions for your account. IRA accounts may not be redeemed by telephone.
THROUGH YOUR BROKER-DEALER. You may also redeem shares by placing a wire
redemption request through your broker-dealer. Your broker-dealer is responsible
for ensuring that redemption requests are transmitted to us in proper form in a
timely manner.
PROCESSING OF REDEMPTIONS. If you request a redemption by wire, you will be
charged an $8 processing fee. We reserve the right to change the processing fee,
upon 30 days' notice. All charges will be deducted from your account by
redeeming shares in your account. Your bank or brokerage firm may also charge
you for processing the wire. Redemption proceeds will only be wired to a
commercial bank or brokerage firm in the United States. If it is impossible or
impractical to wire funds, the redemption proceeds will be sent by mail to the
designated account.
If you would like your redemption proceeds deposited free of charge
directly into your account with a commercial bank or other depository
institution via an ACH transaction, contact the Transfer Agent for more
information.
We redeem shares based on the current NAV on the day we receive a proper
request for redemption, less any contingent deferred sales load on the redeemed
shares. Be sure to review "How to Purchase Shares" above to determine whether
your redemption is subject to a contingent deferred sales load.
A SIGNATURE GUARANTEE helps protect against fraud. You can obtain one from
most banks or securities dealers, but not from a notary public. For joint
accounts, each signature must be guaranteed. Please call us to ensure that your
signature guarantee will be submitted correctly.
- 18 -
A SIGNATURE GUARANTEE is required for (1) any redemption which is $25,000
or more (2) any redemption when the name(s) or the address on the account has
been changed within 30 days of your redemption request.
ADDITIONAL INFORMATION ABOUT ACCOUNTS AND REDEMPTIONS
SMALL ACCOUNTS. Due to the high costs of maintaining small accounts, we may ask
that you increase your account balance if your account falls below the minimum
amount required for your account. If the account balance remains below our
minimum requirements for 30 days after we notify you, we may close your account
and send you the proceeds, less any applicable contingent deferred sales load.
AUTOMATIC WITHDRAWAL PLAN. If the shares in your account have a value of at
least $5,000, you (or another person you have designated) may receive monthly or
quarterly payments in a specified amount of not less than $50 each. There is no
charge for this service. Purchases of additional shares of the Funds while the
plan is in effect are generally undesirable because an initial sales load is
incurred whenever purchases are made.
REINVESTMENT PRIVILEGE. If you have redeemed shares of either Fund, you may
reinvest all or part of the proceeds without paying a sales load. You must make
your reinvestment within 90 days of your redemption and you may only use this
privilege once a year.
MISCELLANEOUS. In connection with all redemptions of Fund shares, we observe the
following policies and procedures:
o We may refuse any redemption request involving recently purchased
shares until your check for the recently purchased shares has cleared.
To eliminate this delay, you may purchase shares of the Funds by
certified check or wire.
o We may refuse any telephone redemption request if the name(s) or the
address on the account has been changed within 30 days of your
redemption request.
o We may delay mailing redemption proceeds for up to 7 days (redemption
proceeds are normally mailed within 3 days after receipt of a proper
request).
o We will consider all written and verbal instructions as authentic and
will not be responsible for processing instructions received by
telephone which are reasonably believed to be genuine or for
processing redemption proceeds by wire. We will use reasonable
procedures to determine that telephone instructions are genuine, such
as requiring forms of personal identification before acting upon
telephone instructions, providing written
- 19 -
confirmation of the transactions and/or tape recording telephone
instructions. If we do not use such procedures, we may be liable for
losses due to unauthorized or fraudulent instructions.
HOW TO EXCHANGE SHARES
- ----------------------
Shares of either Fund and of any other fund in the Countrywide Family of
Funds may be exchanged for each other.
Class A shares of the Funds which do not have a contingent deferred sales
load may be exchanged for Class A shares of any other fund and for shares of a
fund which offers only one class of shares (provided these shares do not have a
contingent deferred sales load). If you paid a sales load on the shares being
exchanged, this amount will be credited towards the sales load (if any) on the
shares being acquired.
Class C shares of the Funds and Class A shares of the Funds which have a
contingent deferred sales load, may be exchanged, based on their per share NAV,
for shares of any other fund which has a contingent deferred sales load and for
shares of any fund which is a money market fund. You will receive credit for the
period of time you held the shares being exchanged when determining whether a
contingent deferred sales load will apply, unless your shares were held in a
money market fund.
The Countrywide Family of Funds consists of the following funds. Funds
which may have a front-end or a contingent deferred sales load are marked with
an asterisk.
GROWTH FUNDS GROWTH & INCOME FUNDS
- ------------ ---------------------
*Growth/Value Fund *Equity Fund
*Aggressive Growth Fund *Utility Fund
TAXABLE BOND FUNDS TAX-FREE BOND FUNDS
- ------------------ -------------------
Adjustable Rate U.S. Government *Tax-Free Intermediate Term
Securities Fund Fund
*Intermediate Bond Fund *Ohio Insured Tax-Free Fund
*Intermediate Term Government
Income Fund
TAXABLE MONEY MARKET FUNDS TAX-FREE MONEY MARKET FUNDS
- -------------------------- ---------------------------
Short Term Government Income Fund Tax-Free Money Fund
Institutional Government Income Fund Ohio Tax-Free Money Fund
Money Market Fund California Tax-Free Money
Fund
Florida Tax-Free Money
Fund
- 20 -
You may exchange shares by written request or by telephone. You must sign
your written request exactly as your name appears on the Trust's account
records. If you are unable to exchange shares by telephone due to such
circumstances as unusually heavy market activity, you can exchange shares by
mail or in person. Your exchange will be processed at the next determined NAV
(or offering price, if there is a sales load) after the Transfer Agent receives
your request.
You may only exchange shares into a fund which is authorized for sale in
your state of residence and you must meet that fund's minimum initial investment
requirements. The Board of Trustees may change or discontinue the exchange
privilege after giving shareholders 60 days' prior notice. Any gain or loss on
an exchange of shares is a taxable event. Before making an exchange, contact the
Transfer Agent to request information about the other funds in the Countrywide
Family of Funds.
DIVIDENDS AND DISTRIBUTIONS
- ---------------------------
Each Fund expects to distribute substantially all of its net investment
income quarterly and any net realized long-term capital gains at least annually.
Management will determine when to distribute any net realized short-term capital
gains.
Your distributions will be paid under one of the following options:
Share Option - all distributions are reinvested in additional shares.
Income Option - income and short-term capital gains are paid in cash;
long-term capital gains are reinvested in additional
shares.
Cash Option - all distributions are paid in cash.
Please mark on your Account Application the option you have selected. If
you do not select an option, you will receive the Share Option. If you select
the Income Option or the Cash Option and the post office cannot deliver your
checks or if you do not cash your checks within six months, your dividends may
be reinvested in your account at the then-current NAV and your account will be
converted to the Share Option. You will not receive interest on the amount of
your uncashed checks until the checks have been reinvested in your account.
Distributions will be based on a Fund's NAV on the payable date. If you
have received a cash distribution from either Fund, you may reinvest it at NAV
(without paying a sales load) at the
- 21 -
next determined NAV on the date of your reinvestment. You must make your
reinvestment within 30 days of the distribution date and you must notify the
Transfer Agent that your distribution is being reinvested under this provision.
TAXES
- -----
Each Fund is treated as a separate entity for federal income tax purposes.
Each Fund intends to qualify as a regulated investment company by satisfying the
requirements under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), including requirements with respect to diversification of assets,
distribution of income and sources of income. Each Fund intends to distribute to
its shareholders substantially all of its investment income (net of expenses)
and any capital gains (net of capital losses) in accordance with the timing
requirements imposed by the Code, so that each Fund will satisfy the
distribution requirement of Subchapter M and will not be subject to federal
income tax or the 4% excise tax.
If a Fund fails to satisfy any of the Code requirements for qualification
as a regulated investment company, it will be taxed at regular corporate tax
rates on all its taxable income (including capital gains) without any deduction
for distributions to shareholders, and distributions to shareholders will be
taxable as ordinary dividends (even if derived from the Fund's net long-term
capital gains) to the extent of the Fund's current and accumulated earnings and
profits.
Distributions by a Fund of its taxable net investment income and the
excess, if any, of its net short-term capital gain over its net long-term
capital loss are taxable to shareholders as ordinary income. Such distributions
are treated as dividends for federal income tax purposes but generally are
expected to qualify for the 70% dividends-received deduction for corporate
shareholders. Distributions by a Fund of the excess, if any, of its net
long-term capital gain over its net short-term capital loss are designated as
capital gains dividends and are taxable to shareholders as long-term capital
gains, regardless of the length of time shareholders have held their shares.
Distributions to shareholders will be treated in the same manner for
federal income tax purposes whether received in cash or reinvested in additional
shares of a Fund. In general, distributions by a Fund are taken into account by
the shareholders in the year in which they are made. However, certain
distributions made during January will be treated as having been paid by a Fund
and received by the shareholders on December 31 of the preceding year.
- 22 -
A shareholder will recognize gain or loss upon the sale or redemption of
shares of a Fund in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
Any loss realized upon a taxable disposition of shares within 6 months from the
date of their purchase will be treated as a long-term capital loss to the extent
of any capital gain dividends received on such shares. All or a portion of any
loss realized upon a taxable disposition of shares of a Fund may be disallowed
if other shares of the Fund are purchased within 30 days before or after such
disposition. Any gain or loss on an exchange of shares is a taxable event.
If a shareholder is a non-resident alien or foreign entity shareholder,
ordinary income dividends paid to such shareholder generally will be subject to
United States withholding tax at a rate of 30% (or lower applicable treaty
rate). Non-United States shareholders are urged to consult their own tax adviser
concerning the applicability of the United States withholding tax.
Under the backup withholding rules of the Code, certain shareholders may be
subject to 31% withholding of federal income tax on ordinary income dividends
paid by a Fund. In order to avoid this backup withholding, a shareholder must
provide the Fund with a correct taxpayer identification number (which for most
individuals is his or her Social Security number) or certify that it is a
corporation or otherwise exempt from or not subject to backup withholding.
The foregoing discussion of federal income tax consequences is based on tax
laws and regulations in effect on the date of this Prospectus, and is subject to
change by legislative, judicial or administrative action. As the foregoing
discussion is for general information only, a prospective shareholder should
also review the more detailed discussion of federal income tax considerations
relevant to the Funds that is contained in the Statement of Additional
Information. In addition, each prospective shareholder should consult with his
own tax adviser as to the tax consequences of investments in the Funds,
including the application of state and local taxes which may differ from the
federal income tax consequences described above.
OPERATION OF THE FUNDS
- ----------------------
The Funds are diversified series of Countrywide Strategic Trust, an
open-end management investment company organized as a Massachusetts business
trust. Like other mutual funds, the Trust retains various organizations to
perform specialized services for the Funds.
- 23 -
The Trust retains Countrywide Investments, Inc. (the "Adviser"), 312 Walnut
Street, Cincinnati, Ohio 45202 to manage the Funds' investments and their
business affairs. The Adviser was organized in 1974 and is also the investment
adviser to twelve other funds in the Countrywide Family of Funds. The Adviser is
an indirect wholly-owned subsidiary of Countrywide Credit Industries, Inc., a
New York Stock Exchange listed company principally engaged in the business of
residential mortgage lending. Each Fund pays the Adviser a fee at the annual
rate of .75% of its average daily net assets up to $200 million;.7% of such
assets from $200 million to $500 million; and .5% of such assets in excess of
$500 million.
Susan Flischel, First Vice President and Chief Investment Officer -
Equities of the Adviser, is primarily responsible for managing the portfolio of
each Fund. Ms. Flischel has been employed by the Adviser and affiliated
companies in various capacities since 1986. She has been the portfolio manager
of the Utility Fund since July 1993 and the portfolio manager of the Equity Fund
since March 1995.
The Adviser is the principal underwriter for the Funds and the exclusive
agent for the distribution of shares of the Funds. The Adviser receives the
entire sales load on all direct initial investments in shares of the Funds and
on all investments which are not made through a broker.
YEAR 2000 READINESS. Computer users around the world are faced with the dilemma
of the Year 2000 issue, which stems from the use of two digits in most computer
systems to designate the year. When the year advances from 1999 to 2000, many
computers will not recognize "00" as the Year 2000. This issue could potentially
affect every aspect of computer-related activity, on an individual and corporate
level. The Funds could be adversely impacted if the computer systems used by the
Adviser and other service providers have not been converted to meet the
requirements of the new century. The Adviser has evaluated its internal systems
and expects them to handle the change of millennium. The Adviser is monitoring
on an ongoing basis the progress of the Funds' service providers to convert
their systems to comply with the requirements of the Year 2000. The Adviser
currently has no reason to believe that these service providers will not be
fully and timely compliant. However, you should be aware that there can be no
assurance that all systems will be successfully converted prior to January 1,
2000, in which case it would become necessary for the Funds to enter into
agreements with new service providers or to make other arrangements. In
addition, although the Adviser considers an issuer's Year 2000 compliance status
in the investment decision making process, companies in which the Funds invest
may experience Year 2000 difficulties and the Funds are unable to predict to
what extent the Year 2000 issue will impact the value of those securities.
- 24 -
DISTRIBUTION PLANS
- ------------------
Pursuant to Rule 12b-1 under the 1940 Act, the Funds have adopted two
separate plans of distribution under which each Fund's two classes of shares may
directly incur or reimburse the Adviser for certain expenses related to the
distribution of its shares, including payments to securities dealers and other
persons, including the Adviser and its affiliates, who are engaged in the sale
of shares of a Fund and who may be advising investors regarding the purchase,
sale or retention of Fund shares; expenses of maintaining personnel who engage
in or support distribution of shares or who render shareholder support services
not otherwise provided by the Transfer Agent or the Trust; expenses of
formulating and implementing marketing and promotional activities, including
direct mail promotions and mass media advertising; expenses of preparing,
printing and distributing sales literature and prospectuses and statements of
additional information and reports for recipients other than existing
shareholders of a Fund; expenses of obtaining such information, analyses and
reports with respect to marketing and promotional activities as the Trust may,
from time to time, deem advisable; and any other expenses related to the
distribution of each class of shares.
The annual limitation for payment of expenses pursuant to the Class A Plan
is .25% of each Fund's average daily net assets allocable to Class A shares. The
annual limitation for payment of expenses pursuant to the Class C Plan is 1.00%
of each Fund's average daily net assets allocable to Class C shares. The
payments permitted by the Class C Plan fall into two categories. First, the
Class C shares may directly incur or reimburse the Adviser in an amount not to
exceed .75% per year of each Fund's average daily net assets allocable to Class
C shares for certain distribution-related expenses as described above. The Class
C Plan also provides for the payment of an account maintenance fee of up to .25%
per year of each Fund's average daily net assets allocable to Class C shares,
which may be paid to dealers based on the average value of Fund shares owned by
clients of such dealers. Because these fees are paid out of the Funds' assets on
an on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales loads. In the
event a Plan is terminated by the Trust in accordance with its terms, a Fund
will not be required to make any payments for expenses incurred after the date
the Plan terminates. The Adviser may make payments to dealers and other persons
in an amount up to .75% per annum of the average value of Class C shares owned
by their clients, in addition to the .25% account maintenance fee described
above.
- 25 -
CALCULATION OF SHARE PRICE AND PUBLIC OFFERING PRICE
- ----------------------------------------------------
On each day that the Trust is open for business, the public offering price
(NAV plus applicable sales load) of the shares of each Fund is determined as of
the close of the regular session of trading on the New York Stock Exchange
(normally 4:00 p.m., Eastern time). The Trust is open for business on each day
the New York Stock Exchange is open for business and on any other day when there
is sufficient trading in a Fund's investments that its NAV might be materially
affected. The NAV per share of a Fund is calculated by dividing the sum of the
value of the securities held by the Fund plus cash or other assets minus all
liabilities (including estimated accrued expenses) by the total number of shares
outstanding of the Fund, rounded to the nearest cent. The price at which a
purchase or redemption of Fund shares is effected is based on the next
calculation of NAV after the order is placed. Each Fund's NAV will fluctuate
with the value of the securities it holds.
The value of the securities held by a Fund is determined as follows: (1)
Securities traded on a stock exchange are priced at their last sale price after
trading on the New York Stock Exchange has closed. If the securities were not
traded on the exchange that day, they are valued at their last bid price; (2)
Securities traded in the over-the counter market are priced at their last sale
price after trading on the New York Stock Exchange has closed. If the last sale
price is not available, the security is valued at the last bid price quoted by
brokers that make markets in that security; (3) Securities that do not have
available market prices are priced at their fair value using consistent
procedures established in good faith by the Board of Trustees.
- 26 -
FINANCIAL HIGHLIGHTS
- --------------------
The financial highlights table is intended to help you understand the Funds'
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned or lost on an investment
in the Funds (assuming reinvestment of all dividends and distributions). This
information has been audited by Arthur Andersen LLP, whose report, along with
the Funds' financial statements, is included in the Statement of Additional
Information, which is available upon request.
EQUITY FUND - CLASS A
Per Share Data for a Share Outstanding Throughout Each Year
==================================================================================================================
Years Ended March 31,
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of year............ $ 19.38 $ 13.76 $ 12.45 $ 9.84 $ 9.26
---------- --------- ---------- --------- ----------
Income from investment operations:
Net investment income........................ 0.04 0.09 0.12 0.13 0.15
Net realized and unrealized gains
on investments............................. 2.73 5.76 1.35 2.60 0.59
---------- --------- ---------- --------- ----------
Total from investment operations................ 2.77 5.85 1.47 2.73 0.74
---------- --------- ---------- --------- ----------
Less distributions:
Dividends from net investment income......... (0.03) (0.08) (0.12) (0.12) (0.16)
Distributions from net realized gains........ -- (0.15) (0.04) -- --
---------- --------- ---------- --------- ----------
Total distributions............................. (0.03) (0.23) (0.16) (0.12) (0.16)
---------- --------- ---------- --------- ----------
Net asset value at end of year.................. $ 22.12 $ 19.38 $ 13.76 $ 12.45 $ 9.84
========== ========= ========== ========= ==========
Total return(A) ................................ 14.30% 42.74% 11.82% 27.90% 8.07%
========== ========= ========== ========= ==========
Net assets at end of year (000's)............... $ 55,561 $ 38,336 $ 14,983 $ 8,502 $ 4,300
========== ========= ========== ========= ==========
Ratio of net expenses to average net
assets(B).................................... 1.31% 1.25% 1.25% 1.25% 1.25%
Ratio of net investment income to average
net asset.................................... 0.18% 0.53% 0.91% 1.06% 1.57%
Portfolio turnover rate......................... 10% 7% 38% 38% 159%
- --------------------------------------------------------------------------------------------------------------------
(A) Total returns shown exclude the effect of applicable sales loads.
(B) Absent fee waivers and/or expense reimbursements by the Adviser, the ratios of expenses to average net assets would
have been 1.43%, 2.02% and 1.94% for the years ended March 31, 1997, 1996 and 1995, respectively.
EQUITY FUND - CLASS C
Per Share Data for a Share Outstanding Throughout Each Year
======================================================================================================================
Years Ended March 31,
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of year............ $ 19.34 $ 13.77 $ 12.46 $ 9.86 $ 9.26
---------- --------- ---------- --------- ----------
Income from investment operations:
Net investment income (loss)................. (0.19) (0.03) 0.02 0.05 0.10
Net realized and unrealized gains
on investments............................ 2.71 5.75 1.35 2.60 0.57
---------- --------- ---------- --------- ----------
Total from investment operations................ 2.52 5.72 1.37 2.65 0.67
---------- --------- ---------- --------- ----------
Less distributions:
Dividends from net investment income......... -- -- (0.02) (0.05) (0.07)
Distributions from net realized gains........ -- (0.15) (0.04) -- --
---------- --------- ---------- --------- ----------
Total distributions............................. -- (0.15) (0.06) (0.05) (0.07)
---------- --------- ---------- --------- ----------
Net asset value at end of year.................. $ 21.86 $ 19.34 $ 13.77 $ 12.46 $ 9.86
========== ========= ========== ========= ==========
Total return(A) ................................ 13.03% 41.63% 11.01% 26.90% 7.32%
========== ========= ========== ========= ==========
Net assets at end of year (000's)............... $ 3,146 $ 3,862 $ 2,770 $ 2,436 $ 1,995
========== ========= ========== ========= ==========
Ratio of net expenses to average net
assets(B).................................... 2.41% 2.00% 2.00% 2.00% 2.00%
Ratio of net investment income (loss) to
average net assets........................... (0.92)% (0.18)% 0.15% 0.38% 0.68%
Portfolio turnover rate......................... 10% 7% 38% 38% 159%
- ---------------------------------------------------------------------------------------------------------------------
(A) Total returns shown exclude the effect of applicable sales loads.
(B) Absent fee waivers and/or expense reimbursements by the Adviser, the ratios of expenses to average net assets
would have been 2.14%, 2.70% and 2.50% for the years ended March 31, 1997, 1996 and 1995, respectively.
UTILITY FUND - CLASS A
Per Share Data for a Share Outstanding Throughout Each Year
===============================================================================================================
Years Ended March 31,
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
Net asset value at beginning of year............ $ 16.76 $ 12.44 $ 12.24 $ 10.47 $ 10.52
---------- --------- ---------- --------- ----------
Income (loss) from investment operations:
Net investment income........................ 0.38 0.43 0.46 0.47 0.43
Net realized and unrealized gains (losses)
on investments............................ (1.16) 4.56 0.22 1.77 (0.05)
---------- --------- ---------- --------- ----------
Total from investment operations................ (0.78) 4.99 0.68 2.24 0.38
---------- --------- ---------- --------- ----------
Less distributions:
Dividends from net investment income......... (0.38) (0.43) (0.46) (0.47) (0.43)
Distributions from net realized gains........ (0.18) (0.24) (0.02) -- --
---------- --------- ---------- --------- ----------
Total distributions............................. (0.56) (0.67) (0.48) (0.47) (0.43)
---------- --------- ---------- --------- ----------
Net asset value at end of year.................. $ 15.42 $ 16.76 $ 12.44 $ 12.24 $ 10.47
========== ========= ========== ========= ==========
Total return(A) ................................ (4.79) % 40.92% 5.61% 21.65% 3.68%
========== ========= ========== ========= ==========
Net assets at end of year (000's)............... $ 38,391 $ 42,463 $ 36,087 $ 40,424 $40,012
========== ========= ========== ========= ==========
Ratio of expenses to average net assets......... 1.33% 1.25% 1.25% 1.25% 1.25%
Ratio of net investment income to average
net assets.................................. 2.30% 3.03% 3.65% 3.97% 4.06%
Portfolio turnover rate ........................ 4% 0% 3% 11% 17%
- --------------------------------------------------------------------------------------------------------------------
(A) Total returns shown exclude the effect of applicable sales loads.
13
UTILITY FUND - CLASS C
Per Share Data for a Share Outstanding Throughout Each Year
=================================================================================================================
Years Ended March 31,
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
Net asset value at beginning of year............ $ 16.74 $ 12.43 $ 12.23 $ 10.46 $ 10.51
---------- --------- ---------- --------- ----------
Income (loss) from investment operations:
Net investment income........................ 0.18 0.31 0.35 0.37 0.35
Net realized and unrealized gains (losses)
on investments............................. (1.16) 4.57 0.24 1.78 (0.04)
---------- --------- ---------- --------- ----------
Total from investment operations................ (0.98) 4.88 0.59 2.15 0.31
---------- --------- ---------- --------- ----------
Less distributions:
Dividends from net investment income......... (0.18) (0.33) (0.37) (0.38) (0.36)
Distributions from net realized gains........ (0.18) (0.24) (0.02) -- --
---------- --------- ---------- --------- ----------
Total distributions............................. (0.36) (0.57) (0.39) (0.38) (0.36)
---------- --------- ---------- --------- ----------
Net asset value at end of year.................. $ 15.40 $ 16.74 $ 12.43 $ 12.23 $ 10.46
========== ========= ========== ========= ==========
Total return(A) ................................ (5.92)% 39.91% 4.82% 20.78% 3.00%
---------- --------- ---------- --------- ----------
Net assets at end of year (000's)............... $ 3,215 $ 3,597 $ 3,099 $ 3,686 $ 3,599
========== ========= ========== ========= ==========
Ratio of expenses to average net assets ........ 2.50% 2.00% 2.00% 2.00% 2.00%
Ratio of net investment income to average
net assets.................................. 1.13% 2.28% 2.89% 3.19% 3.41%
Portfolio turnover rate......................... 4% 0% 3% 11% 17%
- ------------------------------------------------------------------------------------------------------------------
(A) Total returns shown exclude the effect of applicable sales loads.
ACCOUNT NO. ____________________
Account Application (Check appropriate Fund) (For Fund Use Only)
[] Equity Fund Class A Shares (29) $_________________ FOR BROKER/DEALER USE ONLY
[] Equity Fund Class C Shares (28) Firm Name: ____________________________
[] Utility Fund Class A Shares (25) $_________________ Home Office Address: ___________________
[] Utility Fund Class C Shares (20) Branch Address: ________________________
Rep Name & No.: ________________________
Please mail account application to: Rep Signature: _________________________
Countrywide Fund Services, Inc.
P.O. Box 5354
Cincinnati, Ohio 45201-5354
___________________________________________________________________________________________________________________
Initial Investment of $_____________
[ ] Check or draft enclosed payable to the Fund(s) designated above.
[ ] Bank Wire From: _________________________________________________________________________________________________
[ ] Exchange From: _________________________________________________________________________________________________
(Fund Name) (Fund Account Number)
Account Name S.S. #/Tax I.D.#
_________________________________________________________________ _________________________________________________
Name of Individual, Corporation, Organization, or Minor, etc. (In case of custodial account
please list minor's S.S.#)
_________________________________________________________________ Citizenship: [ ] U.S.
Name of Joint Tenant, Partner, Custodian [ ] Other ______________________
Address Phone
_________________________________________________________________ (_____)__________________________________________
Street or P.O. Box Business Phone
_________________________________________________________________ (_____)__________________________________________
City State Zip Home Phone
Check Appropriate Box: [ ] Individual [ ] Joint Tenant (Right of survivorship presumed) [ ] Partnership
[ ] Corporation [ ] Trust [ ] Custodial [ ] Non-Profit [ ] Other
Occupation and Employer Name/Address __________________________________________________________________________________
Are you an associated person of an NASD member? [ ] Yes [ ] No
___________________________________________________________________________________________________________________
DISTRIBUTIONS (If no election is checked the SHARE OPTION will be assigned.)
[ ] Share Option _ Income distributions and capital gains distributions automatically reinvested in additional shares.
[ ] Income Option _ Income distributions and short term capital gains distributions paid in cash, long term capital gains
distributions reinvested in additional shares.
[ ] Cash Option _ Income distributions and capital gains distributions paid in cash
[ ] By Check [ ] By ACH to my bank checking or savings account. Please attach a voided check.
- --------------------------------------------------------------------------------------------------------------------------------
REDUCED SALES CHARGES (CLASS A SHARES ONLY)
Right of Accumulation: I apply for Right of Accumulation subject to the Agent's confirmation of the following holdings of eligible
load funds of Countrywide Investments.
Account Number/Name Account Number/Name
___________________________________________________________- ________________________________________________________
___________________________________________________________- ________________________________________________________
Letter of Intent: (Complete the Right of Accumulation section if related accounts are being applied to your
Letter of Intent.)
[ ] I agree to the Letter of Intent in the current Prospectus of Countrywide Strategic Trust. Although I am not obligated to
purchase, and the Trust is not obligated to sell, I intend to invest over a 13 month period beginning ______________________
19 _______ (Purchase Date of not more than 90 days prior to this Letter) an aggregate amount in the load funds of
Countrywide Investments at least equal to (check appropriate box):
[ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $500,000 [ ] $1,000,000
- -----------------------------------------------------------------------------------------------------------------------------------
ACCOUNT SECURITY
For increased security, Countrywide Fund Services, Inc. requires that you establish a Personal Identification Number [ ][ ][ ][ ]
(PIN). You will need to use this PIN when requesting account information and placing transactions. For institutional
accounts, please use a four digit number. For retail accounts, please use the first four letters of your mother's
maiden name.
- ------------------------------------------------------------------------------------------------------------------------------------
SIGNATURE AND TIN CERTIFICATION
I certify that I have full right and power, and legal capacity to purchase shares of the Funds and affirm that I have received a
current prospectus and understand the investment objectives and policies stated therein. The investor hereby ratifies any
instructions given pursuant to this Application and for himself and his successors and assigns does hereby release Countrywide
Fund Services, Inc., Countrywide Strategic Trust, Countrywide Investments, Inc., and their respective officers, employees, agents
and affiliates from any and all liability in the performance of the acts instructed herein. Neither the Trust, Countrywide Fund
Services, Inc., nor their respective affiliates will be liable for complying with telephone instructions they reasonably believe
to be genuine or for any loss, damage, cost or expense in acting on such telephone instructions. The investor(s) will bear the
risk of any such loss. The Trust or Countrywide Fund Services, Inc., or both, will employ reasonable procedures to determine
that telephone instructions are genuine. If the Trust and/or Countrywide Fund Services, Inc. do not employ such procedures,
they may be liable for losses due to unauthorized or fraudulent instructions. These procedures may include, among others,
requiring forms of personal identification prior to acting upon telephone instructions, providing written confirmation of the
transactions and/or tape recording telephone instructions. I certify under the penalities of perjury that (1) the Social
Security Number or Tax Identification Number shown is correct and (2) I am not subject to backup withholding. The certifications
in this paragraph are required from all non-exempt persons to prevent backup withholding of 31% of all taxable distributions and
gross redemption proceeds under the federal income tax law. The Internal Revenue Service does not require my consent to any
provision of this document other than the certifications required to avoid backup withholding. (Check here if you are subject to
backup withholding). [ ]
___________________________________ __________________________________
Applicant Date Joint Applicant Date
___________________________________ ___________________________________
Other Authorized Signatory Date Other Authorized Signatory Date
NOTE: Corporations, trusts and other organizations must provide a copy of the resolution form on the reverse side.
Unless otherwise specified, each joint owner shall have full authority to act on behalf of the account.
- ------------------------------------------------------------------------------------------------------------------------------------
SIGNATURE AUTHORIZATION - FOR USE BY CORPORATIONS, TRUSTS, PARTNERSHIPS AND OTHER INSTITUTIONS
Please retain a copy of this document for your files. Any modification of the information contained in this section will
require an Amendment to this Application Form.
[ ] New Application [ ] Amendment to previous Application dated ________ Account No. _______________
Name of Registered Owner ________________________________________________________________________________
The following named person(s) are currently authorized signatories of the Registered Owner. Any ____ of them is/are authorized
under the applicable governing document to act with full power to sell, assign or transfer securities of Countrywide Strategic
Trust for the Registered Owner and to execute and deliver any instrument necessary to effectuate the authority hereby conferred:
Name Title Signature
___________________ ____________________ ___________________
___________________ ____________________ ___________________
___________________ ____________________ ___________________
COUNTRYWIDE STRATEGIC TRUST, or any agent of the Trust may, without inquiry, rely upon the instruction of any person(s)
purporting to be an authorized person named above, or in any Amendment received by the Trust or its agent. The Trust
and its Agent shall not be liable for any claims, expenses or losses resulting from having acted upon any instruction reasonably
believed to be genuine.
- --------------------------------------------------------------------------------------------------------------------------------
SPECIAL INSTRUCTIONS
REDEMPTION INSTRUCTIONS
I understand that the telephone redemption privilege is automatically available to me unless I indicate otherwise below.
(See the prospectus for limitations on this option.)
[ ] I do not wish to have the telephone redemption privilege on my account.
REDEMPTION OPTIONS
[ ] Please mail redemption proceeds to the name and address of record.
[ ] Please wire redemptions to the commercial bank account indicated below (subject to a minimum wire transfer of $1,000 and an
$8.00 fee. For wire redemptions please attach a voided check from the account below).
[ ] Checkwriting - Call 1-800-543-0407 for checkwriting application and signature card.
AUTOMATIC INVESTMENT (For Automatic Investment please attach a voided check from the account below.)
Please purchase shares of the Fund by withdrawing from the commercial bank account below, per the instructions below:
Amount $_________(minimum $50)
______________________________ is hereby authorized to charge to my account the bank draft amount here indicated. I
understand the payment of this draft is subject to all provisions of the contract as stated on my
bank account signature card.
Please make my automatice investment on:
[ ] the last business day of each month [ ] the 15th day of each month [ ] both the 15th and last business day
_________________________________________________________________
(Signature as your name appears on the bank account to be drafted)
Name as it appears on the account __________________________________________________
Commerical bank account #___________________________________________________________
ABA Routing #_______________________________________________________________________
City, State and Zip in which bank is located _______________________________________
Indemnification to Depositor's Bank
In consideration of your participation in a plan which Countrywide Fund Services, Inc. ("CFS") has put into effect, by which
amounts, determined by your depositor, payable to the Fund, for purchase of shares of the Fund, are collected by CFS, CFS hereby
agrees:
CFS will indemnify and hold you harmless from any liability to any person or persons whatsoever arising out of the payment by
you of any amount drawn by the Fund to its own order on the account of your depositor or from any liability to any person
whatsoever arising out of the dishonor by you whether with or without cause or intentionally or inadvertently, of any such
checks. CFS will defend, at its own cost and expense, any action which might be brought against you by any person or persons
whatsoever because of your actions taken pursuant to the foregoing request or in any manner arising by reason of your
participation in this arrangement. CFS will refund to you any amount erroneously paid by you to the Fund on any such check if
the claim for the amount of such erroneous payment is made by you within six (6) months from the date of such erroneous payment;
your participation in this arrangement and that of the Fund may be terminated by thirty (30) days written notice from either
party to the other.
- ---------------------------------------------------------------------------------------------------------------------------------
AUTOMATIC WITHDRAWAL PLAN (Complete for Withdrawals from the Fund(s))
This is an authorization for you to withdraw $_________________ from my mutual fund account beginning the last business day of the
month of _____________________.
Please Indicate Withdrawal Schedule (Check One): Please indicate which Fund: [ ] Utility Fund
[ ] Equity Fund
[ ] Monthly - Withdrawals will be made on the last business day of each month.
[ ] Quarterly - Withdrawals will be made on or about 3/31, 6/30, 9/30 and 12/31.
[ ] Annually - Please make withdrawals on the last business day of the month of:____________________
Please Select Payment Method (Check One):
[ ] Exchange: Please exchange the withdrawal proceeds into another Countrywide account number: ___ ___ _ ___ ___ ___ ___
[ ] Check: Please mail a check for my withdrawal proceeds to the mailing address on this account.
[ ] ACH Transfer: Please send my withdrawal proceeds via ACH transfer to my bank checking or savings account as indicated below.
I understand that the transfer will be completed in two to three business days and that there is no charge.
[ ] Bank Wire: Please send my withdrawal proceeds via bank wire, to the account indicated below. I understand that the wire
will be completed in one business day and that there is an $8.00 fee.
Please attach a voided _______________________________________________________________________________________
check for ACH or bank wire Bank Name Bank Address
_______________________________________________________________________________________
Bank ABA# Account # Account Name
[ ] Send to special payee (other than applicant): Please mail a check for my withdrawal proceeds to the mailing
address below:
Name of payee_____________________________________________________________________________________________________________
Please send to: __________________________________________________________________________________________________________
Street address City State Zip
____________________________________________________________________________________________________________________________
Countrywide Family of Funds
- ---------------------------
312 Walnut Street, 21st Floor
Cincinnati, Ohio 45202-4094
Nationwide (Toll-Free) 800-543-8721
Cincinnati 513-629-2000
www.countrywideinvestments.com
Board of Trustees
- -----------------
Donald L. Bogdon, M.D.
H. Jerome Lerner
Robert H. Leshner
Howard J. Levine
Angelo R. Mozilo
Fred A. Rappoport
Oscar P. Robertson
John F. Seymour, Jr.
Sebastiano Sterpa
Investment Adviser
- ------------------
Countrywide Investments, Inc.
312 Walnut Street, 21st Floor
Cincinnati, Ohio 45202-4094
Transfer Agent
- --------------
Countrywide Fund Services, Inc.
P.O. Box 5354
Cincinnati, Ohio 45201-5354
Shareholder Service
- -------------------
Nationwide: (Toll-Free) 800-543-0407
Cincinnati: 513-629-2050
Additional information about the Funds is included in the Statement of
Additional Information ("SAI") which is incorporated by reference in its
entirety. Additional information about the Funds' investments is available in
the Funds' annual and semiannual reports to shareholders. In the Funds' annual
report you will find a discussion of the market conditions and investment
strategies that significantly affected the Funds' performance during their last
fiscal year.
To obtain a free copy of the SAI, the annual and semiannual reports or other
information about the Funds, or to make inquiries about the Funds, please call
1-800-543-0407 (Nationwide) or 629-2050 (in Cincinnati).
- 31 -
Information about the Funds (including the SAI) can be reviewed and copied at
the Securities and Exchange Commission's public reference room in Washington,
D.C. Information about the operation of the public reference room can be
obtained by calling the Commission at 1-800-SEC-0330. Reports and other
information about the Funds are available on the Commission's Internet site at
http://www.sec.gov. Copies of information on the Commission's Internet site can
be obtained for a fee by writing to: Securities and Exchange Commission, Public
Reference Section, Washington, D.C. 20549-6009.
File No. 811-3651
Countrywide - 32 -
[logo] Investments
December 1, 1999
COUNTRYWIDE STRATEGIC TRUST
EQUITY FUND
UTILITY FUND
SUPPLEMENT TO PROSPECTUS DATED AUGUST 1, 1999
THE FOLLOWING SHOULD BE READ IN CONJUNCTION WITH THE SECTION ENTITLED "OPERATION
OF THE FUNDS":
Charles E. Stutenroth IV, Vice President and Senior Portfolio Manager of the
Adviser, and Charles A. Ulbricht, Portfolio Manager of the Adviser, are
primarily responsible for managing the portfolio of the Equity Fund and have
been managing the Fund since November 30, 1999. Mr. Stutenroth has served as
Vice President and Senior Portfolio Manager of Fort Washington Investment
Advisors, Inc. since 1999. From 1996 until 1999, he was Senior Vice President
and Portfolio Manager of Bank of America Investment Management, prior to which
he served as Vice President and Portfolio Manager of National City Investment
Management & Trust. Mr. Ulbricht has served as a Senior Research Manager of Fort
Washington Investment Advisors, Inc. since 1995. From 1984 until 1995, he was
Vice President-Research of Cowgill-Haberer Investment Counselors.
John C. Holden, Vice President and Senior Portfolio Manager of the Adviser, and
William H. Bunn, Assistant Vice President of the Adviser, are primarily
responsible for managing the portfolio of the Utility Fund and have been
managing the Fund since November 30, 1999. Mr. Holden has served as Vice
President and Senior Portfolio Manager of Fort Washington Investment Advisors,
Inc. since 1997. From 1993 until 1997, he was Vice President and Senior
Portfolio Manager of Mellon Private Asset Management. Mr. Bunn has been employed
by Fort Washington Investment Advisors, Inc. since 1994 as a securities analyst
for the telecommunications and utilities industries.
On October 29, 1999, Fort Washington Investment Advisors, Inc., a wholly-owned
subsidiary of The Western-Southern Life Insurance Company ("Western-Southern")
acquired all of the outstanding stock of Countrywide Financial Services, Inc.
(the "Acquisition"). Countrywide Investments, Inc. (the "Adviser"), which
provides investment advisory and distribution services to the Trust, and
Countrywide Fund Services, Inc. (the "Transfer Agent"), which provides transfer
agency, accounting and administrative services to the Trust, are wholly-owned
subsidiaries of Countrywide Financial Services, Inc. As a result of the
Acquisition, the Adviser and the Transfer Agent are each an indirect
wholly-owned subsidiary of Western-Southern. Western-Southern provides life and
health insurance, annuities, mutual funds, business planning insurance, asset
management and other related financial services.
On October 27, 1999, a Special Meeting of Shareholders of the Trust was held in
order for shareholders to vote on certain matters relating to the Acquisition.
Shareholders of the Funds voted to approve new investment advisory agreements
with the Adviser containing substantially identical terms and conditions, in all
material respects, as the advisory agreements in effect prior to the
Acquisition. Shareholders of the Funds also voted to approve new sub-advisory
agreements with Mastrapasqua & Associates, Inc. containing substantially
identical terms, in all material respects, as the sub-advisory agreements in
effect prior to the Acquisition. Shareholders also elected the following
individuals to serve on the Board of Trustees of the Trust effective upon the
closing of the Acquisition: William O. Coleman, Phillip R. Cox, H. Jerome
Lerner, Robert H. Leshner, Jill T. McGruder, Oscar P. Robertson, Nelson Schwab,
Jr., Robert E. Stautberg and Joseph S. Stern, Jr.
The investment objectives and policies of the Funds have not been affected by
the Acquisition.
THE FOLLOWING SHOULD BE READ IN CONJUNCTION WITH THE SECTION ENTITLED "HOW TO
PURCHASE SHARES":
As a result of the Acquisition, the InvestPlus Plan will no longer be offered.
Therefore, Countrywide Home Loans mortgage holders may no longer write one check
for their mortgage payment and their investment in a Fund. The paragraph
describing the InvestPlus Plan should be disregarded and is no longer
applicable.
Capital Appreciation
Income
ANNUAL REPORT
MARCH 31, 1999
--------------
UTILITY
FUND
--------
EQUITY
FUND
-------
GROWTH/VALUE
FUND
-------------
AGGRESSIVE GROWTH
FUND
.
.
.
.
.
.
Countrywide
-----------
Investments
LETTER FROM THE CHAIRMAN
================================================================================
Photo of: Angelo R. Mozilo
Dear Shareholders:
Thirty years ago, David Loeb and I had an ambitious vision for a new mortgage
lending company. As we pondered a name for the company, we thought big:
Worldwide. But even the two of us, as ambitious as we were, could not conceive
of a global reach for the company. After rejecting Nationwide, we settled on
Countrywide and the rest is history. Now it seems our dreams were too modest. On
February 17, Countrywide signed a letter of intent to form a European mortgage
banking joint venture with Woolwich, plc, one of the five largest mortgage
originators and servicers in the United Kingdom. The initial purpose of the
joint venture is to provide fee-based mortgage services for Woolwich, which has
a mortgage servicing portfolio equivalent to $40 billion, annual fundings
equivalent to $10 billion and mortgage operations in France and Italy. The joint
venture will also market its services to other lenders throughout the European
Union.
Growth and change are crucial to our success at Countrywide. New ideas and the
latest technology -- as well as huge ambition and passion to be the best -- made
us the nation's largest independent residential mortgage lender and servicer.
This philosophy also applies to the many Countrywide subsidiaries, including
Countrywide Investments. We are committed to creating value for our shareholders
by offering a variety of investment opportunities. There are currently 17 funds
offered through Countrywide Investments, each designed to fulfill specific
financial needs. As the merger and acquisition team adds new funds, shareholders
will enjoy an even broader range of investment choices. Just as Countrywide Home
Loans delivers the American dream of homeownership, Countrywide Investments
brings financial dreams within the reach of every investor. Whether planning for
a family, college education or retirement, Countrywide Investments makes saving
and investing money easy and convenient.
Thank you for choosing Countrywide Investments for your financial planning
needs. We hope our services will bring you the financial rewards of careful
planning and big dreams.
Sincerely,
/s/Angelo R. Mozilo
Angelo R. Mozilo
Chairman
1
LETTER FROM THE PRESIDENT
================================================================================
Photo of: Robert H. Leshner
Dear Fellow Shareholders:
We are pleased to present Countrywide Strategic Trust's annual report for the
fiscal year ended March 31, 1999. This report provides financial data and
performance information for the Utility Fund, Equity Fund, Growth/Value Fund and
Aggressive Growth Fund. These Funds represent the four equity products currently
offered among the 17 mutual funds which comprise the Countrywide Family of
Funds.
For the ninth consecutive year, the U.S. economy continued its longest peacetime
expansion on record and the second longest this century. The Dow Jones
Industrial Average reached a milestone when it closed above 10,000. A more
significant figure was the U.S. unemployment rate, which dropped to a 29-year
low. Other indicators of a strong economy included: inflation below 2%, low
interest rates, rising consumer confidence, strong consumer spending, strong
U.S. dollar and rebounding corporate profits.
For the most part, investors ignored valuation and focused on companies with
rapid earnings and revenue growth. High-flying technology and Internet stocks
performed particularly well. A flurry of merger and acquisition activity, in
addition to a number of IPOs, helped to spark Internet fever. The performance
gap between large and small-cap stocks was enormous during the first quarter of
1999. The S&P 500 Index outperformed the Russell 2000 Index by 10.4%. Growth
stocks also continued to outperform value stocks significantly, continuing a
five-year trend.
We expect continued strong earnings growth for the second quarter in the
technology, consumer cyclicals and financial sectors. Internet stocks may
continue to receive tremendous investor attention, but we believe the prudent
approach is to invest in companies that are major providers of the Internet's
infrastructure, as they can be less volatile than startups. We believe utility
stocks to be oversold and valuations among the cheapest in the market;
therefore, we feel there are some compelling buys in this sector.
Countrywide Investments remains committed to providing products and services
that help investors meet their financial goals. Our success has been built on
the confidence investors have extended to us. We thank you for your support and
look forward to continued service to you in the future.
Sincerely,
/s/Robert H. Leshner
Robert H. Leshner
President
2
UTILITY FUND
MANAGEMENT DISCUSSION AND ANALYSIS
================================================================================
The Utility Fund seeks a high level of total return by investing primarily
in securities of public utilities. Capital appreciation is a secondary
objective. The Fund's total returns for the fiscal year ended March 31, 1999
(excluding the impact of applicable sales loads) were -4.79% and -5.92% for
Class A and Class C shares, respectively.
During fiscal 1999, the markets again enjoyed strong domestic growth with
minimal inflationary threats. Record low unemployment, high consumer confidence
and gains in real wages contributed to higher levels of consumer spending,
providing a boost to Gross Domestic Product (GDP). Despite the favorable
domestic economic conditions, stock market gains were very narrow, with
investors preferring higher growth industries such as technology,
pharmaceuticals and communications. The movement toward higher growth names came
largely at the expense of the utility, basic materials and energy sectors, which
are deemed to be more value-oriented areas. The rotation from value to growth
was magnified by rising interest rates during the second half of the fiscal
year. After bottoming out at 4.71% in early October, the yield on the 30-year
U.S. Treasury bond rose to 5.60% at the end of March. Since many investors
consider utility stocks to be an alternative to bonds, utilities fell along with
the bond market. As a result, the S&P Utility Index returned -1.51% for the
fiscal year, compared to the 13.19% return of the Dow Jones Industrial Average
and the 18.47% return of the S&P 500 Index.
Once again, the best performing sector within the Fund was telecommunications.
Our holdings in Bell Atlantic, AT&T and Lucent Technologies performed very well
as the power of data and Internet communications became available to a record
number of individuals and businesses. Almost all of the traditional electric
utilities in the Fund performed below expectations due to the overall industry
sell-off. As has been the case over the last few years, utility funds again did
not participate in the record amounts of new money flowing into the equity
markets. As a result, very few new names were added to the portfolio and
portfolio turnover again was minimal.
Our outlook for the utility sector remains optimistic. We expect the backup in
interest rates to be temporary, thus providing a more positive environment for
utility stocks. Deregulation and consolidation should continue to be positive
for the industry. The demand for telecommunications should continue to boom as
the Internet grows and high speed access to the world wide web becomes more
commonplace and affordable. The Fund will continue to concentrate on owning
those companies that can provide attractive total returns, and are well
positioned to increase their revenues and earnings in the upcoming period of
deregulation.
Chart:
Comparison of the Change in Value of a $10,000 Investment in the
Utility Fund - Class A* and the Standard & Poor's Utility Index
Utility Fund
Average Annual Total Returns
1 Year 5 Years Since Inception*
Class A (8.60%) 11.40% 10.47%
Class C (5.92%) 11.41% 8.98%
Standard & Poor's Utility Index Utility Fund - Class A
10000 9600
10243 9671
11412 10320
3/90 10562 10115
10618 10144
10140 9854
11120 10562
3/91 11367 11049
10889 11115
11749 12144
12746 12960
3/92 11556 12356
12457 12905
13438 13398
13777 13953
3/93 15264 14906
15548 15130
16589 15556
15634 15073
3/94 14305 14591
14304 14469
14369 14660
14355 14769
3/95 15349 15128
16491 15890
18350 16986
20409 18677
3/96 19434 18404
20408 19283
19732 18651
21038 19755
3/97 20326 19437
21524 20784
22573 21626
26248 25266
3/98 27729 27390
28066 25933
29371 26862
30128 29724
3/99 27297 26079
Past performance is not predictive of future performance.
*The chart above represents performance of Class A shares only, which will
vary from the performance of Class C shares based on the difference in loads and
fees paid by shareholders in the different classes. The initial public offering
of Class A shares commenced on August 15, 1989, and the initial public offering
of Class C shares commenced on August 2, 1993.
3
EQUITY FUND
MANAGEMENT DISCUSSION AND ANALYSIS
================================================================================
The Equity Fund seeks long-term capital appreciation by investing primarily in
common stocks of companies that offer attractive total returns through potential
growth of both share price and dividends. The Fund's total returns for the
fiscal year ended March 31, 1999 (excluding the impact of applicable sales
loads) were 14.30% and 13.03% for Class A and Class C shares, respectively.
During the fiscal year, the continued strength in the U.S. economy combined with
low inflation to push the major large-cap stock indices to new highs. Record low
unemployment, high consumer confidence and gains in real wages contributed to
higher levels of consumer spending, providing a larger than expected boost to
Gross Domestic Product (GDP). Stability in much of Asia toward the end of the
fiscal year allowed corporate profits to post their largest gains in almost two
years.
Market gains were very narrow in the latest fiscal year, with investors
preferring to own those very few large-cap growth-oriented names that were
responsible for most of the gains in the market. Toward the end of the fiscal
year, value and cyclical stocks began to rally on the expectations of continued
strong U.S. economic growth, low inflation and recoveries in the economies of
many emerging markets. Although returns were down from the unsustainable levels
seen in fiscal year 1998, most indices still managed to post double-digit
increases as evidenced by the 18.47% return of the S&P 500 Index, the 13.19%
gain in the Dow Jones Industrial Average and the 34.09% rise in the NASDAQ
Composite Index. Mid-cap stocks managed to post a gain of only 0.46% and
small-cap stocks lost 17.28% during the same time period.
The Fund remained well-diversified throughout the fiscal year. Holdings in the
technology, healthcare and communications sectors enjoyed very strong
performance. Technology stocks benefited from the growth of the Internet, the
demand for personal computers and the continued move to networking of computer
systems. Healthcare stocks enjoyed the positive fundamentals brought on by an
aging population, advances in drug therapies and the introduction of new
treatments that showed success in battling some of the most widespread diseases.
Communications stocks were the beneficiaries of increased need for high speed
Internet access and the boom in data communications.
Management continues to focus on those companies that are leaders in their
industries and can offer growth in revenues, cash flows and earnings. We remain
optimistic on the longer term fundamentals facing the market -- low inflation,
an expectation for lower interest rates and continued economic growth. We will
continue to seek to own companies that have a competitive advantage and have the
capability to expand their profit margins.
Chart:
Comparison of the Change in Value of a $10,000 Investment in the
Equity Fund - Class C* and the Standard & Poor's 500 Index
Equity Fund
Average Annual Total Returns
1 Year 5 Years Since Inception*
Class A 9.73% 19.34% 16.36%
Class C 13.03% 19.34% 15.83%
Standard & Poor's 500 Index Equity Fund - Class C
10000 10000
10078 10010
10338 10130
10578 9994
3/94 10177 9709
10220 9317
10718 9787
10716 9751
3/95 11760 10419
12883 11095
13907 11893
14744 12776
3/96 15535 13222
16232 13797
16734 14105
18129 14491
3/97 18615 14678
21865 16746
23503 17801
24178 18603
3/98 27550 20788
28460 20938
25629 18724
31087 22454
3/99 32636 23497
Past performance is not predictive of future performance.
*The chart above represents performance of Class C shares only, which will
vary from the performance of Class A shares based on the differences in loads
and fees paid by shareholders in the different classes. The initial public
offering of Class C shares commenced on June 7, 1993, and the initial public
offering of Class A shares commenced on August 2, 1993.
4
GROWTH/VALUE FUND
AGGRESSIVE GROWTH FUND
MANAGEMENT DISCUSSION AND ANALYSIS
================================================================================
The Growth/Value Fund seeks long-term capital appreciation primarily through
equity investments in companies whose valuations may not yet reflect the
prospects for accelerated earnings/cash flow growth. For the fiscal year ended
March 31, 1999, the Fund's total return (excluding the impact of applicable
sales loads) was 29.89%, as compared to 18.47% for the S&P 500 Index.
The Aggressive Growth Fund seeks long-term capital appreciation primarily
through equity investments in companies of various sizes. For the fiscal year
ended March 31, 1999, the Fund's total return (excluding the impact of
applicable sales loads) was 15.46%, as compared to the 34.09% return for the
NASDAQ Composite Index.
Volatility has once again intensified within the equity market over the past
year. Growth stocks, after having dominated the bull market since the October
lows of last year, have recently retreated somewhat as lagging cyclical sectors
regained some investor interest. Although a "corrective phase" can be
unsettling, as evidenced most vividly in the Internet stocks, the broadening of
market participation is a positive development for the longevity of the bull
market.
Maintaining a focus on long-term secular developments that are impacting the
investment landscape should provide investor comfort that an exciting period of
innovation, technological creativity and revolutionary healthcare products and
therapies lie before us.
Despite Wall Street's preoccupation with short-term trading strategies, sector
rotation and rearview analysis, strong secular dynamics are still unfolding that
should provide a thrust to equity prices for some time. For example,
preoccupation with Y2K's potential short-term effect on PC demand can cause
investors to lose sight of the explosive demand for productivity enhancing
software and hardware in the year 2000 as new technologies enter the scene.
As corporate earnings of the market leading technology stocks are reported, the
robust condition of their industry and the overall economy have significantly
increased investor comfort with the earnings prospects of these companies.
Corporate earnings growth has not been limited to the technology sector. Based
on the companies in the S&P 500 Index that have reported earnings for the
quarter ended March 31, 1999, operating earnings per share are up substantially
versus last year's decline of 1.6% and are above most analysts' expectations.
The fundamentals of the U.S. economy continue to support a positive
long-term outlook for the equity market and continue to benefit from low
inflation, low unemployment and a favorable interest rate environment. As a
result, U.S. consumers, the main drivers behind the demand for U.S. goods and
services, are participating in the rewards of a healthy and growing U.S.
economy. Going on the ninth consecutive year of an economic expansion, we remain
positive on 1999 Gross Domestic Product (GDP) growth.
In addition to the continuing strong domestic consumer spending trends, the
international economy appears to be improving. Based on many U.S. companies'
observations, demand is increasing in Asia for U.S. goods and services. This
incremental factor, which is helping to drive the U.S. economy, has eased
investor fears of moderating U.S. GDP growth. The recent recovery of cyclical
stocks is evidence of the improving outlook for international economies,
especially in Asia. In addition to creating an impetus for higher demand and
profitability for the large U.S. multinational conglomerates, it should also
lead to additional cash flow available for technology spending.
With early signs of recovery emerging in Asia and a need to encourage growth in
Europe, the balance of economic policy worldwide cannot risk undoing the
delicate recovery underway. Consequently, we remain encouraged that the policy
background should be supportive to growth and liquidity, the foundation of
higher market valuations.
Our concentrated sectors each have distinct characteristics supporting long-term
growth. Health care is bolstered by the aging population and productivity gains
stemming from enlightened government reforms. Technology continues to alter
fundamental production and service delivery systems that increase productivity
significantly.
5
GROWTH/VALUE FUND
AGGRESSIVE GROWTH FUND
MANAGEMENT DISCUSSION AND ANALYSIS (CONTINUED)
================================================================================
We attempt to position the Growth/Value Fund to participate in bull markets and
simultaneously limit the risk profile in such a way as to minimize relative
market losses during downturns. The Aggressive Growth Fund also emphasizes
buying growth at value, but the average capitalization size is much smaller than
that of the Growth/Value Fund. The smaller, and usually younger, aggressive
growth companies add somewhat to the risk/return profile of the Aggressive
Growth Fund.
Chart:
Comparison of the Change in Value of a $10,000 Investment in the
Growth/Value Fund and the Standard & Poor's 500 Index
Growth/Value Fund
Average Annual Total Returns
1 Year Since Inception*
24.69% 25.02%
Standard & Poor's 500 Index Growth/Value Fund
10000 9600
10576 10099
3/96 11143 10992
11643 11098
12003 11290
13004 12185
3/97 13352 12291
15684 14437
16858 16335
17342 15083
3/98 19762 16805
20414 17104
18383 15650
22299 20975
3/99 23410 21828
Past performance is not predictive of future performance.
*Fund inception was September 29, 1995.
Comparison of the Change in Value of a $10,000 Investment in the
Aggressive Growth Fund and the NASDAQ Composite Index*
Aggressive Growth Fund
Average Annual Total Returns
1 Year Since Inception*
10.85% 17.48%
NASDAQ Composite Index Aggressive Growth Fund
10000 9600
10064 9552
3/96 10545 10406
11353 10762
11761 10982
12382 11853
3/97 11723 11391
13860 13440
16216 16740
15125 13873
3/98 17700 15210
18287 14373
16365 12911
21206 17375
3/99 23823 17562
Past performance is not predictive of future performance.
Fund inception was September 29, 1995.
6
STATEMENTS OF ASSETS AND LIABILITIES
March 31, 1999
=============================================================================================================
Utility Equity
Fund Fund
- -------------------------------------------------------------------------------------------------------------
ASSETS
Investment securities:
At acquisition cost................................................... $ 27,869,108 $ 34,520,209
============== ===============
At amortized cost..................................................... $ 27,852,815 $ 34,520,209
============== ===============
At market value (Note 2).............................................. $ 41,623,274 $ 53,815,963
Repurchase agreements (Note 2)........................................... -- 5,420,000
Cash..................................................................... 2,991 78
Dividends and interest receivable........................................ 122,963 27,875
Receivable for capital shares sold ...................................... 17,314 39,210
Other assets............................................................. 13,098 27,036
-------------- ---------------
TOTAL ASSETS.......................................................... 41,779,640 59,330,162
-------------- ---------------
LIABILITIES
Dividends payable........................................................ 24,844 --
Payable for capital shares redeemed...................................... 87,747 533,072
Payable to affiliates (Note 4)........................................... 34,333 57,193
Other accrued expenses and liabilities .................................. 26,890 33,658
-------------- ---------------
TOTAL LIABILITIES..................................................... 173,814 623,923
-------------- ---------------
NET ASSETS .............................................................. $ 41,605,826 $ 58,706,239
-------------- ---------------
Net assets consist of:
Paid-in capital.......................................................... $ 26,304,587 $ 39,337,704
Accumulated net realized gains from security transactions................ 1,530,780 72,781
Net unrealized appreciation on investments .............................. 13,770,459 19,295,754
-------------- ---------------
Net assets .............................................................. $ 41,605,826 $ 58,706,239
============== ===============
PRICING OF CLASS A SHARES
Net assets attributable to Class A shares ............................... $ 38,390,936 $ 55,560,703
============== ===============
Shares of beneficial interest outstanding (unlimited number
of shares authorized, no par value) (Note 5).......................... 2,488,896 2,511,439
============== ===============
Net asset value and redemption price per share (Note 2).................. $ 15.42 $ 22.12
============== ===============
Maximum offering price per share (Note 2)................................ $ 16.06 $ 23.04
============== ===============
PRICING OF CLASS C SHARES
Net assets attributable to Class C shares ............................... $ 3,214,890 $ 3,145,536
============== ===============
Shares of beneficial interest outstanding (unlimited number
of shares authorized, no par value) (Note 5).......................... 208,694 143,890
============== ===============
Net asset value, offering price and redemption price per share (Note 2).. $ 15.40 $ 21.86
============== ===============
See accompanying notes to financial statements.
7
STATEMENTS OF ASSETS AND LIABILITIES
March 31, 1999
=============================================================================================================
Growth/ Aggressive
Value Growth
Fund Fund
- -------------------------------------------------------------------------------------------------------------
ASSETS
Investment securities:
At acquisition cost................................................... $ 15,111,560 $ 8,087,571
============== ===============
At amortized cost..................................................... $ 15,111,808 $ 8,087,609
============== ===============
At market value (Note 2).............................................. $ 24,662,044 $ 11,406,341
Cash..................................................................... 20,191 6,509
Dividends receivable..................................................... 6,641 800
Receivable for capital shares sold....................................... 9,087 6,708
Organization costs, net (Note 2)......................................... 9,521 9,521
Other assets............................................................. 9,571 8,361
-------------- ---------------
TOTAL ASSETS.......................................................... 24,717,055 11,438,240
-------------- --------------
LIABILITIES
Payable for capital shares redeemed...................................... 5,564 14,166
Payable to affiliates (Note 4)........................................... 29,120 8,470
Other accrued expenses and liabilities................................... 18,644 13,494
-------------- ---------------
TOTAL LIABILITIES..................................................... 53,328 36,130
-------------- ---------------
NET ASSETS .............................................................. $ 24,663,727 $ 11,402,110
============== ===============
Net assets consist of:
Paid-in capital.......................................................... $ 15,113,491 $ 8,083,378
Net unrealized appreciation on investments............................... 9,550,236 3,318,732
-------------- ---------------
Net assets............................................................... $ 24,663,727 $ 11,402,110
============== ===============
Shares of beneficial interest outstanding (unlimited number
of shares authorized, no par value) (Note 5).......................... 1,409,641 724,665
============== ===============
Net asset value and redemption price per share (Note 2).................. $ 17.50 $ 15.73
============== ===============
Maximum offering price per share (Note 2)................................ $ 18.23 $ 16.39
============== ===============
See accompanying notes to financial statements.
8
STATEMENTS OF OPERATIONS
For the Year Ended March 31, 1999
=============================================================================================================
Utility Equity
Fund Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends ............................................................ $ 1,364,429 $ 455,841
Interest ............................................................. 215,761 290,044
-------------- ---------------
TOTAL INVESTMENT INCOME ............................................ 1,580,190 745,885
-------------- ---------------
EXPENSES
Investment advisory fees (Note 4) .................................... 326,576 375,212
Distribution expenses, Class A (Note 4)............................... 92,716 117,348
Distribution expenses, Class C (Note 4) .............................. 31,159 30,890
Transfer agent fees, Class A (Note 4)................................. 33,695 24,679
Transfer agent fees, Class C (Note 4)................................. 12,000 12,000
Accounting services fees (Note 4) .................................... 36,000 39,000
Postage and supplies.................................................. 24,800 20,140
Professional fees .................................................... 17,721 22,721
Registration fees, Common ............................................ 2,174 2,064
Registration fees, Class A ........................................... 6,023 6,213
Registration fees, Class C ........................................... 5,611 5,336
Trustees' fees and expenses .......................................... 10,309 10,309
Custodian fees ....................................................... 6,671 7,679
Reports to shareholders .............................................. 5,253 4,159
Insurance expense .................................................... 3,995 3,295
Other expenses ....................................................... 3,945 8,244
-------------- ---------------
TOTAL EXPENSES ..................................................... 618,648 689,289
-------------- ---------------
NET INVESTMENT INCOME ................................................... 961,542 56,596
-------------- ---------------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS
Net realized gains from security transactions ........................ 2,008,632 72,685
Net change in unrealized appreciation/depreciation on investments..... (5,229,709) 6,891,335
-------------- ---------------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS ............... (3,221,077) 6,964,020
-------------- ---------------
NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS .................. $ (2,259,535) $ 7,020,616
============== ===============
See accompanying notes to financial statements.
9
STATEMENTS OF OPERATIONS
For the Year Ended March 31, 1999
=============================================================================================================
Growth/ Aggressive
Value Growth
Fund Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends............................................................. $ 163,717 $ 41,149
Interest.............................................................. 23,256 13,153
-------------- ---------------
TOTAL INVESTMENT INCOME............................................. 186,973 54,302
-------------- ---------------
EXPENSES
Investment advisory fees (Note 4)..................................... 254,571 125,575
Distribution expenses (Note 4)........................................ 57,474 19,824
Accounting services fees (Note 4)..................................... 24,000 24,000
Professional fees..................................................... 16,540 12,940
Transfer agent fees (Note 4).......................................... 12,491 12,250
Trustees' fees and expenses........................................... 11,241 11,241
Postage and supplies.................................................. 11,098 10,405
Registration fees..................................................... 8,889 8,678
Custodian fees........................................................ 8,923 5,926
Amortization of organization costs (Note 2)........................... 6,355 6,355
Insurance expense..................................................... 3,135 2,085
Reports to shareholders............................................... 2,347 2,293
Other expenses........................................................ 5,674 9,769
-------------- ---------------
TOTAL EXPENSES...................................................... 422,738 251,341
Expenses reimbursed by the Adviser (Note 6)........................... -- (6,473)
-------------- ---------------
NET EXPENSES ....................................................... 422,738 244,868
-------------- ---------------
NET INVESTMENT LOSS ..................................................... (235,765) (190,566)
-------------- ---------------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS
Net realized gains from security transactions ........................ 3,987,680 1,735,380
Net change in unrealized appreciation/depreciation on investments .... 1,438,007 (936,684)
-------------- ---------------
NET REALIZED AND UNREALIZED GAINS ON INVESTMENTS ........................ 5,425,687 798,696
-------------- ---------------
NET INCREASE IN NET ASSETS FROM OPERATIONS ............................. $ 5,189,922 $ 608,130
-------------- ---------------
See accompanying notes to financial statements.
10
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended March 31, 1999 and 1998
=============================================================================================================
Utility Equity
Fund Fund
Year Year Year Year
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------
FROM OPERATIONS:
Net investment income....................... $ 961,542 $ 1,203,757 $ 56,596 $ 134,298
Net realized gains from
security transactions..................... 2,008,632 396,431 72,685 131,522
Net change in unrealized appreciation/depreciation
on investments............................ (5,229,709) 12,365,467 6,891,335 9,717,678
------------ -------------- ------------- -------------
Net increase (decrease) in net
assets from operations...................... (2,259,535) 13,965,655 7,020,616 9,983,498
------------ -------------- ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income, Class A......... (923,626) (1,131,462) (56,596) (134,305)
From net investment income, Class C......... (37,916) (72,537) -- --
Return of capital, Class A.................. -- -- (7,701) --
From net realized gains on security
transactions, Class A..................... (441,346) (598,344) -- (266,654)
From net realized gains on security
transactions, Class C..................... (36,559) (49,575) -- (29,203)
------------ -------------- ------------- -------------
Decrease in net assets from distributions
to shareholders............................. (1,439,447) (1,851,918) (64,297) (430,162)
------------ -------------- ------------- -------------
FROM CAPITAL SHARE TRANSACTIONS (NOTE 5):
CLASS A
Proceeds from shares sold................... 4,525,134 6,395,680 16,146,962 27,157,778
Net asset value of shares issued in
reinvestment of distributions
to shareholders........................... 1,225,189 1,560,076 63,426 393,608
Payments for shares redeemed................ (6,425,371) (12,764,160) (5,648,244) (12,645,062)
------------ -------------- ------------- -------------
Net increase (decrease) in net assets from
Class A share transactions.................. (675,048) (4,808,404) 10,562,144 14,906,324
------------ -------------- ------------- -------------
CLASS C
Proceeds from shares sold................... 424,245 343,251 566,536 386,194
Net asset value of shares issued in
reinvestment of distributions
to shareholders........................... 69,533 112,220 -- 29,105
Payments for shares redeemed................ (573,313) (887,840) (1,576,756) (429,754)
------------ -------------- ------------- -------------
Net decrease in net assets from Class C
share transactions.......................... (79,535) (432,369) (1,010,220) (14,455)
------------ -------------- ------------- -------------
Net increase (decrease) in net assets from
capital share transaction................... (754,583) (5,240,773) 9,551,924 14,891,869
------------ -------------- ------------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS ....... (4,453,565) 6,872,964 16,508,243 24,445,205
NET ASSETS:
Beginning of year........................... 46,059,391 39,186,427 42,197,996 17,752,791
------------ -------------- ------------- -------------
End of year................................. $ 41,605,826 $ 46,059,391 $58,706,239 $42,197,996
============ ============== ============= =============
See accompanying notes to financial statements.
11
STATEMENTS OF CHANGES IN NET ASSETS
For the Periods Ended March 31,1999 and 1998
and August 31, 1997
====================================================================================================================
Growth/Value Fund Aggressive Growth Fund
Year Seven Months Year Year Seven Months Year
Ended Ended Ended Ended Ended Ended
March 31, March 31, August 31, March 31, March 31, August 31,
1999 1998(A) 1997 1999 1998(A) 1997
- --------------------------------------------------------------------------------------------------------------------
FROM OPERATIONS:
Net investment loss..................... $(235,765) $(146,022) $(214,624) $(190,566) $(142,331) $(148,879)
Net realized gains (losses) from
security transactions................. 3,987,680 1,566,803 894,909 1,735,380 241,580 (356,478)
Net change in unrealized
appreciation/depreciation
on investments........................ 1,438,007 437,753 7,431,395 (936,684) (458,321) 4,653,168
---------- ---------- --------- --------- --------- ---------
Net increase (decrease) in net assets
from operations.......................... 5,189,922 1,858,534 8,111,680 608,130 (359,072) 4,147,811
---------- ---------- --------- --------- --------- ---------
DISTRIBUTIONS TO SHAREHOLDERS:
From net realized gains on
security transactions................ (4,390,836) (1,021,333) (888,542) (1,620,482) -- (16,180)
---------- ---------- --------- --------- --------- ---------
FROM CAPITAL SHARE TRANSACTIONS (Note 5):
Proceeds from shares sold .............. 4,555,639 6,013,814 9,367,824 3,396,790 4,724,918 5,211,479
Net asset value of shares issued in
reinvestment of distributions to
shareholders.......................... 2,552,347 348,462 260,810 978,542 -- 4,532
Payments for shares redeemed............ (11,892,598) (5,328,293) (5,181,368) (7,456,234) (2,854,217) (1,913,821)
---------- ---------- --------- --------- --------- ---------
Net increase (decrease) in net assets from
capital share transactions.............. (4,784,612) 1,033,983 4,447,266 (3,080,902) 1,870,701 3,302,190
---------- ---------- --------- --------- --------- ---------
TOTAL INCREASE (DECREASE) IN NET ASSETS .. (3,985,526) 1,871,184 11,670,404 (4,093,254) 1,511,629 7,433,821
NET ASSETS:
Beginning of period..................... 28,649,253 26,778,069 15,107,665 15,495,364 13,983,735 6,549,914
---------- ---------- --------- --------- --------- ---------
End of period........................... $24,663,727 $28,649,253 $26,778,069 $11,402,110 $15,495,364 $13,983,735
=========== =========== =========== =========== =========== ===========
(A) Effective as of the close of business on August 29, 1997, the Growth/Value Fund and Aggressive Growth Fund were
reorganized and the fiscal year-end of each Fund, subsequent to August 31, 1997, was changed to March 31 (Note 6).
See accompanying notes to financial statements.
12
UTILITY FUND
FINANCIAL HIGHLIGHTS - CLASS A
===============================================================================================================
Per Share Data for a Share Outstanding Throughout Each Year
===============================================================================================================
Years Ended March 31,
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
Net asset value at beginning of year............ $ 16.76 $ 12.44 $ 12.24 $ 10.47 $ 10.52
---------- --------- ---------- --------- ----------
Income (loss) from investment operations:
Net investment income........................ 0.38 0.43 0.46 0.47 0.43
Net realized and unrealized gains (losses)
on investments............................ (1.16) 4.56 0.22 1.77 (0.05)
---------- --------- ---------- --------- ----------
Total from investment operations................ (0.78) 4.99 0.68 2.24 0.38
---------- --------- ---------- --------- ----------
Less distributions:
Dividends from net investment income......... (0.38) (0.43) (0.46) (0.47) (0.43)
Distributions from net realized gains........ (0.18) (0.24) (0.02) -- --
---------- --------- ---------- --------- ----------
Total distributions............................. (0.56) (0.67) (0.48) (0.47) (0.43)
---------- --------- ---------- --------- ----------
Net asset value at end of year.................. $ 15.42 $ 16.76 $ 12.44 $ 12.24 $ 10.47
========== ========= ========== ========= ==========
Total return(A) ................................ (4.79) % 40.92% 5.61% 21.65% 3.68%
========== ========= ========== ========= ==========
Net assets at end of year (000's)............... $ 38,391 $ 42,463 $ 36,087 $ 40,424 $40,012
========== ========= ========== ========= ==========
Ratio of expenses to average net assets......... 1.33% 1.25% 1.25% 1.25% 1.25%
Ratio of net investment income to average
net assets.................................. 2.30% 3.03% 3.65% 3.97% 4.06%
Portfolio turnover rate ........................ 4% 0% 3% 11% 17%
- --------------------------------------------------------------------------------------------------------------------
(A) Total returns shown exclude the effect of applicable sales loads.
See accompanying notes to financial statements.
13
UTILITY FUND
FINANCIAL HIGHLIGHTS - CLASS C
=================================================================================================================
Per Share Data for a Share Outstanding Throughout Each Year
=================================================================================================================
Years Ended March 31,
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
Net asset value at beginning of year............ $ 16.74 $ 12.43 $ 12.23 $ 10.46 $ 10.51
---------- --------- ---------- --------- ----------
Income (loss) from investment operations:
Net investment income........................ 0.18 0.31 0.35 0.37 0.35
Net realized and unrealized gains (losses)
on investments............................. (1.16) 4.57 0.24 1.78 (0.04)
---------- --------- ---------- --------- ----------
Total from investment operations................ (0.98) 4.88 0.59 2.15 0.31
---------- --------- ---------- --------- ----------
Less distributions:
Dividends from net investment income......... (0.18) (0.33) (0.37) (0.38) (0.36)
Distributions from net realized gains........ (0.18) (0.24) (0.02) -- --
---------- --------- ---------- --------- ----------
Total distributions............................. (0.36) (0.57) (0.39) (0.38) (0.36)
---------- --------- ---------- --------- ----------
Net asset value at end of year.................. $ 15.40 $ 16.74 $ 12.43 $ 12.23 $ 10.46
========== ========= ========== ========= ==========
Total return(A) ................................ (5.92)% 39.91% 4.82% 20.78% 3.00%
---------- --------- ---------- --------- ----------
Net assets at end of year (000's)............... $ 3,215 $ 3,597 $ 3,099 $ 3,686 $ 3,599
========== ========= ========== ========= ==========
Ratio of expenses to average net assets ........ 2.50% 2.00% 2.00% 2.00% 2.00%
Ratio of net investment income to average
net assets.................................. 1.13% 2.28% 2.89% 3.19% 3.41%
Portfolio turnover rate......................... 4% 0% 3% 11% 17%
- ------------------------------------------------------------------------------------------------------------------
(A) Total returns shown exclude the effect of applicable sales loads.
See accompanying notes to financial statements.
14
EQUITY FUND
FINANCIAL HIGHLIGHTS - CLASS A
==================================================================================================================
Per Share Data for a Share Outstanding Throughout Each Year
==================================================================================================================
Years Ended March 31,
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of year............ $ 19.38 $ 13.76 $ 12.45 $ 9.84 $ 9.26
---------- --------- ---------- --------- ----------
Income from investment operations:
Net investment income........................ 0.04 0.09 0.12 0.13 0.15
Net realized and unrealized gains
on investments............................. 2.73 5.76 1.35 2.60 0.59
---------- --------- ---------- --------- ----------
Total from investment operations................ 2.77 5.85 1.47 2.73 0.74
---------- --------- ---------- --------- ----------
Less distributions:
Dividends from net investment income......... (0.03) (0.08) (0.12) (0.12) (0.16)
Distributions from net realized gains........ -- (0.15) (0.04) -- --
---------- --------- ---------- --------- ----------
Total distributions............................. (0.03) (0.23) (0.16) (0.12) (0.16)
---------- --------- ---------- --------- ----------
Net asset value at end of year.................. $ 22.12 $ 19.38 $ 13.76 $ 12.45 $ 9.84
========== ========= ========== ========= ==========
Total return(A) ................................ 14.30% 42.74% 11.82% 27.90% 8.07%
========== ========= ========== ========= ==========
Net assets at end of year (000's)............... $ 55,561 $ 38,336 $ 14,983 $ 8,502 $ 4,300
========== ========= ========== ========= ==========
Ratio of net expenses to average net
assets(B).................................... 1.31% 1.25% 1.25% 1.25% 1.25%
Ratio of net investment income to average
net asset.................................... 0.18% 0.53% 0.91% 1.06% 1.57%
Portfolio turnover rate......................... 10% 7% 38% 38% 159%
- --------------------------------------------------------------------------------------------------------------------
(A) Total returns shown exclude the effect of applicable sales loads.
(B) Absent fee waivers and/or expense reimbursements by the Adviser, the ratios of expenses to average net assets
would have been 1.43%, 2.02% and 1.94% for the years ended March 31, 1997, 1996 and 1995, respectively.
See accompanying notes to financial statements.
15
EQUITY FUND
FINANCIAL HIGHLIGHTS - CLASS C
======================================================================================================================
Per Share Data for a Share Outstanding Throughout Each Year
======================================================================================================================
Years Ended March 31,
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of year............ $ 19.34 $ 13.77 $ 12.46 $ 9.86 $ 9.26
---------- --------- ---------- --------- ----------
Income from investment operations:
Net investment income (loss)................. (0.19) (0.03) 0.02 0.05 0.10
Net realized and unrealized gains
on investments............................ 2.71 5.75 1.35 2.60 0.57
---------- --------- ---------- --------- ----------
Total from investment operations................ 2.52 5.72 1.37 2.65 0.67
---------- --------- ---------- --------- ----------
Less distributions:
Dividends from net investment income......... -- -- (0.02) (0.05) (0.07)
Distributions from net realized gains........ -- (0.15) (0.04) -- --
---------- --------- ---------- --------- ----------
Total distributions............................. -- (0.15) (0.06) (0.05) (0.07)
---------- --------- ---------- --------- ----------
Net asset value at end of year.................. $ 21.86 $ 19.34 $ 13.77 $ 12.46 $ 9.86
========== ========= ========== ========= ==========
Total return(A) ................................ 13.03% 41.63% 11.01% 26.90% 7.32%
========== ========= ========== ========= ==========
Net assets at end of year (000's)............... $ 3,146 $ 3,862 $ 2,770 $ 2,436 $ 1,995
========== ========= ========== ========= ==========
Ratio of net expenses to average net
assets(B).................................... 2.41% 2.00% 2.00% 2.00% 2.00%
Ratio of net investment income (loss) to
average net assets........................... (0.92)% (0.18)% 0.15% 0.38% 0.68%
Portfolio turnover rate......................... 10% 7% 38% 38% 159%
- ---------------------------------------------------------------------------------------------------------------------
(A) Total returns shown exclude the effect of applicable sales loads.
(B) Absent fee waivers and/or expense reimbursements by the Adviser, the ratios of expenses to average net assets
would have been 2.14%, 2.70% and 2.50% for the years ended March 31, 1997, 1996 and 1995, respectively.
See accompanying notes to financial statements.
16
GROWTH/VALUE FUND
FINANCIAL HIGHLIGHTS
======================================================================================================================
Per Share Data for a Share Outstanding Throughout Each Period
======================================================================================================================
Year Seven Months Year Period
Ended Ended Ended Ended
March 31, March 31, August 31, August 31,
1999 1998(A) 1997 1996(B)
- ----------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period......... $ 16.30 $ 15.90 $ 11.18 $ 10.00
------------ -------------- ------------- -------------
Income from investment operations:
Net investment loss......................... (0.17) (0.08) (0.13) (0.06)(C)
Net realized and unrealized gains
on investments............................ 4.84 1.05 5.39 1.24
------------ -------------- ------------- -------------
Total from investment operations............... 4.67 0.97 5.26 1.18
------------ -------------- ------------- -------------
Less distributions:
Distributions from net realized gains....... (3.47) (0.57) (0.54) --
------------ -------------- ------------- -------------
Net asset value at end of period............... $ 17.50 $ 16.30 $ 15.90 $ 11.18
============ ============== ============= =============
Total return(D) ............................... 29.89% 6.43% 47.11% 11.80%
============ ============== ============= =============
Net assets at end of period (000's)............ $ 24,664 $ 28,649 $ 26,778 $ 15,108
============ ============== ============= =============
Ratio of net expenses to average net
assets(E)................................... 1.66% 1.66%(F) 1.95% 1.95%(F)
Ratio of net investment loss to average
net assets(F)............................... (0.93)% (0.91)%(F) (1.03)% (0.62)%
Portfolio turnover rate........................ 59% 62%(F) 52% 21%
- ---------------------------------------------------------------------------------------------------------------------
(A) Effective as of the close of business on August 29, 1997, the Fund was reorganized and its fiscal year-end,
subsequent to August 31, 1997, was changed to March 31 (Note 7).
(B) Represents the period from the commencement of operations (September 29, 1995) through August 31, 1996.
(C) Calculated using weighted average shares outstanding during the period.
(D) Total returns shown exclude the effect of applicable sales loads.
(E) Absent fee waivers and/or expense reimbursements, the ratio of expenses to average net assets would have been
2.83%(F) for the period ended August 31, 1996.
(F) Annualized.
See accompanying notes to financial statements.
17
AGGRESSIVE GROWTH FUND
FINANCIAL HIGHLIGHTS
=====================================================================================================================
Per Share Data for a Share Outstanding Throughout Each Period
=====================================================================================================================
Year Seven Months Year Period
Ended Ended Ended Ended
March 31, March 31, August 31, August 31,
1999 1998(A) 1997 1996(B)
- ---------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period......... $ 15.81 $ 16.29 $ 10.95 $ 10.00
------------ -------------- ------------- -------------
Income (loss) from investment operations:
Net investment loss......................... (0.27) (0.15) (0.17) (0.11)(C)
Net realized and unrealized gains (losses)
on investments................................ 2.67 (0.33) 5.54 1.06
------------ -------------- ------------- -------------
Total from investment operations............... 2.40 (0.48) 5.37 0.95
------------ -------------- ------------- -------------
Less distributions:
Distributions from net realized gains....... (2.48) -- (0.03) --
------------ -------------- ------------- -------------
Net asset value at end of period............... $ 15.73 $ 15.81 $ 16.29 $ 10.95
============ ============== ============= =============
Total return(D) ............................... 15.46% (2.95)% 49.09% 9.50%
============ ============== ============= =============
Net assets at end of period (000's)............ $ 11,402 $ 15,495 $ 13,984 $ 6,550
============ ============== ============= =============
Ratio of net expenses to average net
assets(E)................................... 1.95% 1.95%(F) 1.94% 1.95%(F)
Ratio of net investment loss to average
net assets(F)............................... (1.52)% (1.66)%(F) (1.57)% (1.26)%
Portfolio turnover rate........................ 93% 40%(F) 51% 16%
Amount of debt outstanding at end of period.... $ -- n/a n/a n/a
Average daily amount of debt outstanding during
the period (000's).......................... $ 80 n/a n/a n/a
Average daily number of capital shares outstanding
during the period (000's)................... 818 n/a n/a n/a
Average amount of debt per share during
the period.................................. $ 0.10 n/a n/a n/a
- -----------------------------------------------------------------------------------------------------------------
(A) Effective as of the close of business on August 29, 1997, the Fund was reorganized and its fiscal year-end,
subsequent to August 31, 1997, was changed to March 31 (Note 7).
(B) Represents the period from the commencement of operations (September 29, 1995) through August 31, 1996.
(C) Calculated using weighted average shares outstanding during the period.
(D) Total returns shown exclude the effect of applicable sales loads.
(E) Absent fee waivers and/or expense reimbursements, the ratios of expenses to average net assets would have
been 2.00%, 2.62% and 5.05%(F) for the periods ended March 31, 1999, August 31, 1997 and August 31, 1996,
respectively (Note 6).
(F) Annualized.
See accompanying notes to financial statements.
18
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
================================================================================
1. ORGANIZATION
The Utility Fund, Equity Fund, Growth/Value Fund and Aggressive Growth Fund
(collectively, the Funds) are each a series of Countrywide Strategic Trust (the
Trust). The Trust is registered under the Investment Company Act of 1940 as an
open-end management investment company. The Trust was established as a
Massachusetts business trust under a Declaration of Trust dated November 18,
1982. The Declaration of Trust, as amended, permits the Trustees to issue an
unlimited number of shares of each Fund. The Growth/Value Fund and Aggressive
Growth Fund were originally organized as series of Trans Adviser Funds, Inc.
(Note 7).
The Utility Fund seeks a high level of current income. Capital appreciation is a
secondary objective. The Fund invests primarily in common, preferred and
convertible preferred stocks of public utilities that currently pay dividends.
The Fund also invests in investment grade bonds of public utilities. The public
utilities industry includes companies that produce or supply electric power,
natural gas, water, sanitary services, telecommunications and other
communications services (but not radio or television broadcasters) for public
use or consumption.
The Equity Fund seeks long-term growth of capital, current income and growth of
income by investing primarily in dividend-paying common stocks. The Fund's
investment adviser, in selecting securities for purchase, employs a quantitative
screening strategy, searching for securities believed to offer above market
growth at below market pricing.
The Growth/Value Fund seeks long-term capital appreciation primarily through
equity investments in companies whose valuations may not reflect the prospect
for accelerating earnings/cash flow growth. The Fund seeks to achieve its
objective by investing primarily in common stocks but also in preferred stocks,
convertible bonds and warrants of companies which, in the opinion of the Fund's
investment adviser, are expected to achieve growth of investment principal over
time. Investments are largely made in companies of greater than $750 million
capitalization.
The Aggressive Growth Fund seeks long-term capital appreciation primarily
through equity investments. The Fund seeks growth opportunities among companies
of various sizes. The Fund seeks to achieve its objective by investing primarily
in common stocks, but also in preferred stocks, convertible bonds, options and
warrants of companies which, in the opinion of the Fund's investment adviser,
are expected to achieve growth of investment principal over time. Many of these
companies are in the small to medium-sized category (companies with market
capitalizations of less than $750 million at the time of purchase).
The Utility Fund and Equity Fund each offer two classes of shares: Class A
shares (sold subject to a maximum front-end sales load of 4% and a distribution
fee of up to 0.25% of average daily net assets) and Class C shares (sold subject
to a maximum contingent deferred sales load of 1% if redeemed within a one-year
period from purchase and a distribution fee of up to 1% of average daily net
assets). Each Class A and Class C share of a Fund represents identical interests
in the investment portfolio of such Fund and has the same rights, except that
(i) Class C shares bear the expenses of higher distribution fees, which is
expected to cause Class C shares to have a higher expense ratio and to pay lower
dividends than Class A shares; (ii) certain other class specific expenses will
be borne solely by the class to which such expenses are attributable; and (iii)
each class has exclusive voting rights with respect to matters relating to its
own distribution arrangements.
19
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the Funds' significant accounting policies:
Security valuation -- The Funds' portfolio securities are valued as of the close
of the regular session of trading on the New York Stock Exchange (currently 4:00
p.m., Eastern time). Portfolio securities traded on stock exchanges and
securities traded in the over-the-counter market are valued at their last sales
price as of the close of the regular session of trading on the day the
securities are being valued. Securities not traded on a particular day, or for
which the last sale price is not readily available, are valued at their last
broker-quoted bid prices as obtained from one or more of the major market makers
for such securities by an independent pricing service. Securities for which
market quotations are not readily available are valued at their fair value as
determined in good faith in accordance with consistently applied procedures
established by and under the general supervision of the Board of Trustees.
Repurchase agreements -- Repurchase agreements, which are collateralized by U.S.
Government obligations, are valued at cost which, together with accrued
interest, approximates market. Collateral for repurchase agreements is held in
safekeeping in the customer-only account of the Funds' custodian, at the Federal
Reserve Bank of Cleveland. At the time each Fund enters into a repurchase
agreement, the seller agrees that the value of the underlying securities,
including accrued interest, will at all times be equal to or exceed the face
amount of the repurchase agreement.
Share valuation -- The net asset value per share of each class of shares of the
Utility Fund and Equity Fund is calculated daily by dividing the total value of
the Fund's assets attributable to that class, less liabilities attributable to
that class, by the number of shares of that class outstanding. The maximum
offering price per share of Class A shares of each Fund is equal to the net
asset value per share plus a sales load equal to 4.17% of the net asset value
(or 4% of the offering price). The offering price of Class C shares of each Fund
is equal to the net asset value per share. The net asset value per share of the
Growth/Value Fund and Aggressive Growth Fund is calculated daily by dividing the
total value of each Fund's assets, less liabilities, by the number of shares
outstanding. The maximum offering price per share of the Growth/Value Fund and
Aggressive Growth Fund is equal to the net asset value per share plus a sales
load equal to 4.17% of the net asset value (or 4% of the offering price).
The redemption price per share of each Fund, including each class of shares with
respect to the Utility Fund and Equity Fund, is equal to the net asset value per
share. However, Class C shares of the Utility Fund and Equity Fund are subject
to a contingent deferred sales load of 1% of the original purchase price if
redeemed within a one-year period from the date of purchase.
Investment income -- Interest income is accrued as earned. Dividend income is
recorded on the ex-dividend date. Discounts and premiums on securities purchased
are amortized in accordance with income tax regulations which approximate
generally accepted accounting principles.
Distributions to shareholders -- Dividends arising from net investment income,
if any, are declared and paid quarterly to shareholders of the Utility Fund and
Equity Fund and annually to shareholders of the Growth/Value Fund and Aggressive
Growth Fund. With respect to each Fund, net realized short-term capital gains,
if any, may be distributed throughout the year and net realized long-term
capital gains, if any, are distributed at least once each year. Income dividends
and capital gain distributions are determined in accordance with income tax
regulations.
Allocations between classes -- Investment income earned, realized capital gains
and losses, and unrealized appreciation and depreciation for the Utility Fund
and Equity Fund are allocated daily to each class of shares based upon its
proportionate share of total net assets of the Fund. Class specific expenses are
charged directly to the class incurring the expense. Common expenses which are
not attributable to a specific class are allocated daily to each class of shares
based upon its proportionate share of total net assets of the Fund.
20
Security transactions -- Security transactions are accounted for on the trade
date. Securities sold are valued on a specific identification basis.
Organization costs -- Costs incurred by the Growth/Value Fund and
Aggressive
Growth Fund in connection with their organization and registration of shares,
net of certain expenses, have been capitalized and are being amortized on a
straight-line basis over a five year period beginning with each Fund's
commencement of operations.
Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could differ from those
estimates.
Federal income tax -- It is each Fund's policy to comply with the special
provisions of the Internal Revenue Code applicable to regulated investment
companies. As provided therein, in any fiscal year in which a Fund so qualifies
and distributes at least 90% of its taxable net income, the Fund (but not the
shareholders) will be relieved of federal income tax on the income distributed.
Accordingly, no provision for income taxes has been made.
In order to avoid imposition of the excise tax applicable to regulated
investment companies, it is also each Fund's intention to declare as dividends
in each calendar year at least 98% of its net investment income (earned during
the calendar year) and 98% of its net realized capital gains (earned during the
twelve months ending October 31) plus undistributed amounts from prior years.
The following information is based upon the federal income tax cost of portfolio
investments (excluding repurchase agreements) as of March 31, 1999:
- -----------------------------------------------------------------------------------------------------------------
Growth/ Aggressive
Utility Equity Value Growth
Fund Fund Fund Fund
- -----------------------------------------------------------------------------------------------------------------
Gross unrealized appreciation.................. $ 14,044,227 $ 21,522,301 $ 9,754,046 $ 3,705,151
Gross unrealized depreciation.................. (273,768) (2,226,547) (203,810) (386,419)
------------ -------------- ------------- -------------
Net unrealized appreciation.................... $ 13,770,459 $ 19,295,754 $ 9,550,236 $ 3,318,732
------------ -------------- ------------- -------------
Federal income tax cost........................ $ 27,852,815 $ 34,520,209 $15,111,808 $ 8,087,608
------------ -------------- ------------- -------------
- -----------------------------------------------------------------------------------------------------------------
Reclassification of capital accounts -- For the year ended March 31, 1999, the
Growth/Value Fund and Aggressive Growth Fund reclassified net investment losses
of $235,765 and $190,566, respectively, against paid-in capital on the
Statements of Assets and Liabilities. The Equity Fund reclassified $7,701 of
overdistributed net investment income against paid-in capital. Such
reclassifications, the result of permanent differences between financial
statement and income tax reporting requirements, have no effect on each Fund's
net assets or net asset value per share.
3. INVESTMENT TRANSACTIONS
Investment transactions (excluding short-term investments) were as follows for
the year ended March 31, 1999:
- ------------------------------------------------------------------------------------------------------------------
Growth/ Aggressive
Utility Equity Value Growth
Fund Fund Fund Fund
- ------------------------------------------------------------------------------------------------------------------
Purchases of investment securities............. $ 1,721,320 $ 14,471,647 $14,983,235 $11,641,423
============ ============== ============= =============
Proceeds from sales and maturities of
investment securities....................... $ 3,409,806 $ 4,355,481 $26,159,764 $16,642,244
============ ============== ============= =============
- ------------------------------------------------------------------------------------------------------------------
21
4. TRANSACTIONS WITH AFFILIATES
The Chairman, President and certain other officers of the Trust are also
officers of Countrywide Financial Services, Inc., or its subsidiaries which
include Countrywide Investments, Inc. (the Adviser), the Trust's investment
adviser and principal underwriter, and Countrywide Fund Services, Inc. (CFS),
the Trust's transfer agent, shareholder service agent and accounting services
agent. Countrywide Financial Services, Inc. is a wholly-owned subsidiary of
Countrywide Credit Industries, Inc., a New York Stock Exchange listed company
principally engaged in the business of residential mortgage lending.
MANAGEMENT AGREEMENTS
Each Fund's investments are managed by the Adviser under the terms of a
Management Agreement. Under the Management Agreement, the Utility Fund and
Equity Fund each pay the Adviser a fee, which is computed and accrued daily and
paid monthly, at an annual rate of 0.75% of its respective average daily net
assets up to $200 million; 0.70% of such net assets from $200 million to $500
million; and 0.50% of such net assets in excess of $500 million. The
Growth/Value Fund and Aggressive Growth Fund each pay the Adviser a fee, which
is computed and accrued daily and paid monthly, at an annual rate of 1.00% of
its respective average daily net assets up to $50 million; 0.90% of such net
assets from $50 million to $100 million; 0.80% of such net assets from $100
million to $200 million; and 0.75% of such net assets in excess of $200 million.
Mastrapasqua and Associates, Inc. (Mastrapasqua) has been retained by the
Adviser to manage the investments of the Growth/Value Fund and Aggressive Growth
Fund. The Adviser (not the Funds) pays Mastrapasqua a fee, which is computed and
accrued daily and paid monthly, at an annual rate of 0.60% of each Fund's
respective average daily net assets up to $50 million; 0.50% of such net assets
from $50 million to $100 million; 0.40% of such net assets from $100 million to
$200 million; and 0.35% of such net assets in excess of $200 million.
The Adviser has agreed, until at least August 31, 1999, to waive fees and
reimburse expenses to the extent necessary to limit total operating expenses of
the Growth/Value Fund and Aggressive Growth Fund to 1.95% of each Fund's average
daily net assets.
TRANSFER AGENT AND SHAREHOLDER SERVICE AGREEMENT
Under the terms of the Transfer, Dividend Disbursing, Shareholder Service and
Plan Agency Agreement between the Trust and CFS, CFS maintains the records of
each shareholder's account, answers shareholders' inquiries concerning their
accounts, processes purchases and redemptions of each Fund's shares, acts as
dividend and distribution disbursing agent and performs other shareholder
service functions. For these services, CFS receives a monthly fee at an annual
rate of $17 per shareholder account from each Fund, subject to a $1,000 minimum
monthly fee for each Fund, or for each class of shares of a Fund, as applicable.
In addition, each Fund pays CFS out-of-pocket expenses including, but not
limited to, postage and supplies.
ACCOUNTING SERVICES AGREEMENT
Under the terms of the Accounting Services Agreement between the Trust and CFS,
CFS calculates the daily net asset value per share and maintains the financial
books and records of each Fund. For these services, CFS receives a monthly fee,
based on current asset levels, of $3,000 from each of the Utility Fund and
Equity Fund and $2,000 from each of the Growth/Value Fund and Aggressive Growth
Fund. In addition, each Fund pays certain out-of-pocket expenses incurred by CFS
in obtaining valuations of such Fund's portfolio securities.
UNDERWRITING AGREEMENT
The Adviser is the Funds' principal underwriter and, as such, acts as the
exclusive agent for distribution of the Funds' shares. Under the terms of the
Underwriting Agreement between the Trust and the Adviser, the Adviser earned
$5,789, $4,158, $3,390 and $7,588 from underwriting and broker commissions on
the sale of shares of the Utility Fund, Equity Fund, Growth/Value Fund and
Aggressive Growth Fund, respectively, for the year ended March 31, 1999. In
addition, the Adviser collected $457 and $693 of contingent deferred sales loads
on the redemption of Class C shares of the Utility Fund and Equity Fund,
respectively.
22
PLANS OF DISTRIBUTION
The Trust has a Plan of Distribution (Class A Plan) under which shares of each
Fund having one class of shares and Class A shares of each Fund having two
classes of shares may directly incur or reimburse the Adviser for expenses
related to the distribution and promotion of shares. The annual limitation for
payment of such expenses under the Class A Plan is 0.25% of average daily net
assets attributable to such shares.
The Trust also has a Plan of Distribution (Class C Plan) under which Class C
shares of each Fund having two classes of shares may directly incur or reimburse
the Adviser for expenses related to the distribution and promotion of shares.
The annual limitation for payment of such expenses under the Class C Plan is 1%
of average daily net assets attributable to Class C shares.
CUSTODIAN AGREEMENTS
Firstar Bank, N.A., which serves as the custodian for the Growth/Value Fund and
Aggressive Growth Fund, was a significant shareholder of record of each Fund as
of March 31, 1999. Under the terms of its Custodian Agreements, Firstar Bank
receives from each Fund an asset-based fee plus certain transaction charges.
5. Capital Share Transactions
Proceeds and payments on capital shares as shown in the Statements of Changes in
Net Assets are the result of the following capital share transactions for the
periods shown:
- ----------------------------------------------------------------------------------------------------------------
Utility Equity
Fund Fund
Year Year Year Year
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------
CLASS A
Shares sold.................................... 275,492 441,718 818,011 1,675,833
Shares issued in reinvestment of distributions
to shareholders............................. 75,229 105,777 3,351 22,496
Shares redeemed................................ (395,304) (914,263) (287,992) (808,858)
------------ -------------- ------------- -------------
Net increase (decrease) in shares outstanding.. (44,583) (366,768) 533,370 889,471
Shares outstanding, beginning of year.......... 2,533,479 2,900,247 1,978,069 1,088,598
------------ -------------- ------------- -------------
Shares outstanding, end of year................ 2,488,896 2,533,479 2,511,439 1,978,069
============ ============== ============= =============
CLASS C
Shares sold.................................... 25,825 23,316 28,644 23,254
Shares issued in reinvestment of distributions
to shareholders............................. 4,271 7,595 -- 1,642
Shares redeemed................................ (36,290) (65,381) (84,439) (26,402)
------------ -------------- ------------- -------------
Net decrease in shares outstanding............. (6,194) (34,470) (55,795) (1,506)
Shares outstanding, beginning of year.......... 214,888 249,358 199,685 201,191
------------ -------------- ------------- -------------
Shares outstanding, end of year................ 208,694 214,888 143,890 199,685
============ ============== ============= =============
- ----------------------------------------------------------------------------------------------------------------
23
- ----------------------------------------------------------------------------------------------------------------
Growth/Value Aggressive Growth
Fund Fund
Year Seven Months Year Year Seven Months Year
Ended Ended Ended Ended Ended Ended
March 31, March 31, Aug. 31, March 31, March 31, Aug. 31,
1999 1998 1997 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
Shares sold................................ 263,603 392,494 751,684 216,290 304,821 418,585
Shares issued in reinvestment of distributions
to shareholders......................... 150,161 23,529 16,584 63,418 -- 376
Shares redeemed............................ (761,516) (343,315) (434,401) (535,148) (183,404) (158,580)
---------- ---------- --------- --------- --------- ---------
Net increase (decrease) in shares
outstanding............................. (347,752) 72,708 333,867 (255,440) 121,417 260,381
Shares outstanding, beginning of period.... 1,757,393 1,684,685 1,350,818 980,105 858,688 598,307
---------- ---------- --------- --------- --------- ---------
Shares outstanding, end of period.......... 1,409,641 1,757,393 1,684,685 724,665 980,105 858,688
---------- ---------- --------- --------- --------- ---------
- -----------------------------------------------------------------------------------------------------------------
6. BORROWINGS
The Growth/Value Fund and Aggressive Growth Fund each have a Loan Agreement with
Firstar Bank, N.A., to be used for temporary or emergency purposes, including
the financing of capital share redemption requests that might otherwise require
the untimely disposition of securities. The Loan Agreements permit borrowings up
to a maximum principal amount outstanding not to exceed the lesser of $1,500,000
for the Growth/Value Fund and $3,000,000 for the Aggressive Growth Fund or
certain other amounts which are calculated based upon the amounts and
composition of assets in each Fund as defined in the Loan Agreement. Each Fund
agrees to pay interest on any unpaid principal balance at prevailing market
rates as defined in the Loan Agreement.
As of March 31, 1999, neither Fund had outstanding borrowings under the Loan
Agreement. The maximum amount outstanding during the year for the Aggressive
Growth Fund was $1,400,000 at a weighted average interest rate of 7.75%. For the
year ended March 31, 1999, the Aggressive Growth Fund incurred, and the Adviser
reimbursed, $6,473 of interest expense on such borrowings.
7. AGREEMENT AND PLAN OF REORGANIZATION
The Growth/Value Fund and Aggressive Growth Fund were originally organized as
series of Trans Adviser Funds, Inc. (Trans Adviser), an open-end management
investment company incorporated under the laws of the State of Maryland.
Pursuant to an Agreement and Plan of Reorganization dated May 31, 1997, each
Fund, on August 29, 1997, succeeded to the assets and liabilities of a series of
Trans Adviser with the same name (the Predecessor Fund). The investment
objective, policies and restrictions of each Fund and its Predecessor Fund are
substantially identical.
For federal income tax purposes, the reorganization of the Growth/Value Fund and
Aggressive Growth Fund qualified as a tax-free reorganization with no tax
consequences to either Fund, its Predecessor Fund or their shareholders. In
connection with the reorganization, the fiscal year-end of each Fund, subsequent
to August 31, 1997, has been changed from August 31 to March 31.
8. FEDERAL TAX INFORMATION (UNAUDITED)
In accordance with federal tax requirements, the following provides shareholders
with information concerning distributions from net realized gains, if any, made
by the Funds during the year ended March 31, 1999. On October 30, 1998, the
Utility Fund declared and paid a long-term capital gain distribution of $0.1820
per share. On November 16, 1998 and March 19, 1999, the Growth/Value Fund
declared and paid long-term capital gain distributions of $0.5450 and $2.9234
per share, respectively. On March 19, 1999, the Aggressive Growth Fund declared
and paid a long-term capital gain distribution of $2.4768 per share. As required
by federal regulations, shareholders will receive notification of their portion
of a Fund's taxable capital gain distribution, if any, paid during the 1999
calendar year early in 2000.
24
UTILITY FUND
PORTFOLIO OF INVESTMENTS
March 31, 1999
============================================================================================================
Market
COMMON STOCKS -- 91.2% Shares Value
- ------------------------------------------------------------------------------------------------------------
ELECTRIC UTILITIES -- 42.0%
AES Corp.*............................................................... 45,000 $ 1,676,250
Baltimore Gas & Electric Co.............................................. 50,050 1,270,019
Cinergy Corp............................................................. 50,000 1,375,000
Cleco Corp............................................................... 30,000 885,000
CMS Energy Corp.......................................................... 60,000 2,403,750
DPL, Inc................................................................. 75,000 1,237,500
Duke Power Co............................................................ 42,000 2,294,250
FPL Group, Inc........................................................... 45,000 2,396,250
Kansas City Power & Light Co............................................. 50,000 1,231,250
Northern States Power Co................................................. 60,000 1,391,250
Scana Corp............................................................... 60,000 1,301,250
---------------
$ 17,461,769
---------------
TELECOMMUNICATIONS -- 37.7%
Ameritech Corp........................................................... 50,000 $ 2,893,750
AT&T Corp................................................................ 30,000 2,394,375
Bell Atlantic Corp....................................................... 50,000 2,584,375
BellSouth Corp........................................................... 75,000 3,004,687
GTE Corp................................................................. 45,000 2,722,500
Lucent Technologies, Inc................................................. 19,444 2,095,091
---------------
$ 15,694,778
---------------
GAS COMPANIES -- 6.6%
MCN Corp................................................................. 70,000 $ 1,124,375
Oneok, Inc............................................................... 25,000 618,750
Wicor, Inc............................................................... 50,000 1,012,500
---------------
$ 2,755,625
---------------
WATER COMPANIES -- 4.9%
American Water Works, Inc................................................ 70,000 $ 2,034,375
---------------
TOTAL COMMON STOCKS (Cost $24,267,526)................................... $ 37,946,547
---------------
=============================================================================================================
Par Market
CORPORATE BONDS -- 5.2% Value Value
- -------------------------------------------------------------------------------------------------------------
Dayton Power & Light Co., 8.40%, 12/01/22................................ $ 1,000,000 $ 1,056,165
New York Telephone Co., 9.375%, 7/15/31.................................. 1,000,000 1,120,562
-------------- ---------------
TOTAL CORPORATE BONDS (Amortized Cost $2,085,289)........................ $ 2,000,000 $ 2,176,727
============== ---------------
25
UTILITY FUND
PORTFOLIO OF INVESTMENTS
March 31, 1999 (continued)
=============================================================================================================
Par Market
COMMERCIAL PAPER -- 3.6% Value Value
- -------------------------------------------------------------------------------------------------------------
BP America, 4/01/99 (Amortized Cost $1,500,000).......................... $ 1,500,000 $ 1,500,000
============== ---------------
TOTAL INVESTMENT SECURITIES-- 100.0% (Amortized Cost $27,852,815)........ $ 41,623,274
LIABILITIES IN EXCESS OF OTHER ASSETS-- 0.0% ............................ (17,448)
---------------
NET ASSETS-- 100.0% ..................................................... $ 41,605,826
===============
* Non-income producing security.
See accompanying notes to financial statements.
26
EQUITY FUND
PORTFOLIO OF INVESTMENTS
March 31, 1999
=============================================================================================================
Market
COMMON STOCKS -- 91.7% Shares Value
- -------------------------------------------------------------------------------------------------------------
CONSUMER, NON-CYCLICAL -- 28.5%
Abbott Laboratories...................................................... 30,000 $ 1,404,375
Albertson's, Inc......................................................... 15,000 814,687
American Home Products Corp.............................................. 20,000 1,305,000
Johnson & Johnson........................................................ 22,000 2,061,125
Merck & Co., Inc......................................................... 20,000 1,603,750
Newell Rubbermaid, Inc................................................... 30,000 1,425,000
PepsiCo, Inc............................................................. 35,000 1,371,563
Pfizer, Inc.............................................................. 20,000 2,775,000
Procter & Gamble Co...................................................... 25,000 2,448,438
Sara Lee Corp............................................................ 34,000 841,500
Schering-Plough Corp..................................................... 12,000 663,750
---------------
$ 16,714,188
---------------
TECHNOLOGY -- 20.3%
Compaq Computer Corp. ................................................... 40,000 $ 1,267,500
Hewlett-Packard Co....................................................... 17,500 1,186,719
Intel Corp............................................................... 20,000 2,382,500
Lucent Technologies, Inc................................................. 3,888 418,932
MCI Worldcom*............................................................ 22,000 1,948,375
Motorola, Inc............................................................ 9,000 659,250
Northern Telecom Limited................................................. 15,000 931,875
Sun Microsystems, Inc.*.................................................. 25,000 3,123,437
---------------
$ 11,918,588
---------------
FINANCIAL SERVICES -- 17.1%
AFLAC, Inc............................................................... 40,000 $ 2,177,500
American International Group............................................. 16,500 1,990,312
Bank of New York Co., Inc................................................ 60,000 2,156,250
Freddie Mac.............................................................. 30,000 1,713,750
Horace Mann Educators Corp............................................... 40,000 927,500
Wells Fargo Co........................................................... 30,000 1,051,875
---------------
$ 10,017,187
---------------
CONSUMER, CYCLICAL -- 13.1%
Gap, Inc................................................................. 45,000 $ 3,029,063
Mattel, Inc.............................................................. 55,000 1,368,125
McDonald's Corp.......................................................... 46,000 2,084,375
The Walt Disney Co....................................................... 39,000 1,213,875
---------------
$ 7,695,438
---------------
ENERGY -- 4.3%
Apache Corp.............................................................. 35,000 $ 912,187
Enron Corp............................................................... 25,000 1,606,250
---------------
$ 2,518,437
---------------
CONGLOMERATES -- 3.2%
General Electric Co...................................................... 17,000 $ 1,880,625
---------------
INDUSTRIAL -- 2.7%
Diebold, Inc............................................................. 30,000 $ 720,000
Emerson Electric Co...................................................... 17,000 899,937
---------------
$ 1,619,937
---------------
27
EQUITY FUND
PORTFOLIO OF INVESTMENTS
March 31, 1999 (continued)
================================================================================================================
Market
COMMON STOCKS -- 91.7% Shares Value
- ----------------------------------------------------------------------------------------------------------------
BASIC MATERIALS -- 2.5%
duPont (E.I.) de Nemours & Co............................................ 25,000 $ 1,451,563
---------------
TOTAL COMMON STOCKS (Cost $34,520,209)................................... $ 53,815,963
---------------
================================================================================================================
Face Market
REPURCHASE AGREEMENTS (1)-- 9.2% Value Value
- ----------------------------------------------------------------------------------------------------------------
Bank One, N.A., 4.95%, dated 3/31/99, due 4/01/99,
repurchase proceeds $5,420,745......................................... $ 5,420,000 $ 5,420,000
-------------- ---------------
TOTAL COMMON STOCKS AND REPURCHASE AGREEMENTS-- 100.9% .................. $ 59,235,963
LIABILITIES IN EXCESS OF OTHER ASSETS-- (0.9%) ......................... (529,724)
---------------
NET ASSETS-- 100.0% ..................................................... $ 58,706,239
===============
* Non-income producing security.
(1)Repurchase agreements are fully collateralized by U.S. Government obligations.
See accompanying notes to financial statements.
28
GROWTH/VALUE FUND
PORTFOLIO OF INVESTMENTS
March 31, 1999
================================================================================================================
Market
COMMON STOCKS -- 92.4% Shares Value
- ----------------------------------------------------------------------------------------------------------------
TECHNOLOGY -- 52.9%
Applied Materials, Inc.*................................................. 21,000 $ 1,295,438
Compuware Corp.*......................................................... 20,000 477,500
EMC Corp.*............................................................... 11,000 1,405,250
Intel Corp............................................................... 11,000 1,310,375
International Business Machines Corp..................................... 7,000 1,240,750
Lexmark International Group, Inc. - Class A*............................. 9,500 1,061,625
Novell, Inc.*............................................................ 89,000 2,241,688
Oracle Corp.*............................................................ 57,750 1,523,156
Sun Microsystems, Inc.*.................................................. 20,000 2,498,750
---------------
$ 13,054,532
---------------
HEALTH CARE -- 20.2%
Amgen, Inc.*............................................................. 10,000 $ 748,750
Baxter International, Inc................................................ 11,000 726,000
Becton, Dickinson and Co................................................. 10,000 383,125
Bristol-Myers Squibb Co.................................................. 16,000 1,029,000
Pharmacia & Upjohn, Inc.................................................. 16,000 998,000
Schering-Plough Corp..................................................... 20,000 1,106,250
---------------
$ 4,991,125
---------------
ENTERTAINMENT -- 6.3%
Carnival Corp. - Class A................................................. 25,000 $ 1,214,062
Marriott International, Inc. - Class A................................... 10,000 336,250
---------------
$ 1,550,312
---------------
RETAIL -- 4.0%
CVS Corp................................................................. 15,000 $ 712,500
Walgreen Co.............................................................. 9,200 259,900
---------------
$ 972,400
---------------
FINANCIAL SERVICES -- 3.3%
Concord EFS, Inc.*....................................................... 29,700 $ 818,606
---------------
AEROSPACE/DEFENSE -- 2.9%
General Dynamics Corp.................................................... 11,200 $ 719,600
---------------
TRANSPORTATION -- 2.8%
AMR Corp.*............................................................... 7,500 $ 439,219
MotivePower Industries, Inc.*............................................ 10,000 251,250
---------------
$ 690,469
---------------
TOTAL COMMON STOCKS (Cost $13,246,808)................................... $ 22,797,044
---------------
29
GROWTH/VALUE FUND
PORTFOLIO OF INVESTMENTS
March 31, 1999 (continued)
===================================================================================================================
Par Market
U. S. GOVERNMENT AGENCY ISSUES-- 7.6% Value Value
- -------------------------------------------------------------------------------------------------------------------
Federal Agricultural Mortgage Corp. Discount Note, 4/01/99
(Amortized Cost $1,865,000)........................................... $ 1,865,000 $ 1,865,000
-------------- ---------------
TOTAL INVESTMENT SECURITIES-- 100.0% (Amortized Cost $15,111,808) ....... $ 24,662,044
OTHER ASSETS IN EXCESS OF LIABILITIES-- 0.0% ............................ 1,683
---------------
NET ASSETS-- 100.0% ..................................................... $ 24,663,727
---------------
* Non-income producing security.
See accompanying notes to financial statements.
30
AGGRESSIVE GROWTH FUND
PORTFOLIO OF INVESTMENTS
March 31, 1999
================================================================================================================
Market
COMMON STOCKS -- 97.6% Shares Value
- ----------------------------------------------------------------------------------------------------------------
TECHNOLOGY -- 52.3%
Compuware Corp.*......................................................... 25,000 $ 596,875
EMC Corp.*............................................................... 5,000 638,750
Intel Corp............................................................... 4,500 536,063
Lexmark International Group, Inc. - Class A*............................. 4,500 502,875
Novell, Inc.*............................................................ 50,000 1,259,375
Oracle Corp.*............................................................ 16,875 445,078
Seagate Technology, Inc.*................................................ 18,000 532,125
SMART Modular Technologies, Inc.*........................................ 30,000 448,125
Sun Microsystems, Inc.*.................................................. 5,000 624,688
Teradyne, Inc.*.......................................................... 7,000 381,937
---------------
$ 5,965,891
---------------
HEALTH CARE -- 24.0%
Alternative Living Services, Inc.*....................................... 10,000 $ 200,000
Amgen, Inc.*............................................................. 6,000 449,250
Biogen, Inc.*............................................................ 4,000 457,250
Capital Senior Living Corp.*............................................. 14,800 104,525
Chiron Corp.*............................................................ 13,000 285,188
Elan Corp. plc - ADR*.................................................... 3,000 209,250
Pharmacia & Upjohn, Inc.................................................. 9,000 561,375
Sunrise Assisted Living, Inc.*........................................... 6,000 273,375
Watson Pharmaceuticals, Inc.*............................................ 4,400 194,150
---------------
$ 2,734,363
---------------
RETAIL -- 8.2%
CVS Corp................................................................. 5,500 $ 261,250
Shop At Home, Inc.*...................................................... 20,000 251,250
Walgreen Co.............................................................. 14,800 418,100
---------------
$ 930,600
---------------
ENTERTAINMENT -- 4.3%
Carnival Corp. - Class A................................................. 10,000 $ 485,625
---------------
TRANSPORTATION -- 3.5%
MotivePower Industries, Inc.*............................................ 5,000 $ 125,625
Southwest Airlines Co.................................................... 9,000 272,250
---------------
$ 397,875
---------------
TELECOMMUNICATIONS -- 2.9%
Uniphase Corp.*.......................................................... 2,900 $ 333,862
---------------
FINANCIAL SERVICES -- 2.4%
Viad Corp................................................................ 10,000 $ 278,125
---------------
TOTAL COMMON STOCKS (Cost $7,807,609) ................................... $ 11,126,341
---------------
31
AGGRESSIVE GROWTH FUND
PORTFOLIO OF INVESTMENTS
March 31, 1999 (continued)
================================================================================================================
Par Market
U.S. GOVERNMENT AGENCY ISSUES-- 2.4% Value Value
- ----------------------------------------------------------------------------------------------------------------
Federal Agricultural Mortgage Corp. Discount Note, 4/01/99
(Amortized Cost $280,000)............................................. $ 280,000 $ 280,000
-------------- ---------------
TOTAL INVESTMENT SECURITIES-- 100.0% (Amortized Cost $8,087,609) ........ $ 11,406,341
LIABILITIES IN EXCESS OF OTHER ASSETS-- (0.0%) .......................... (4,231)
---------------
NET ASSETS-- 100.0% ..................................................... $ 11,402,110
---------------
* Non-income producing security.
ADR - American depositary receipt.
See accompanying notes to financial statements.
32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
================================================================================
Logo ARTHUR ANDERSEN LLP
To the Shareholders and Board of Trustees of Countrywide Strategic Trust:
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments of Countrywide Strategic Trust (comprising,
respectively, the Utility Fund, Equity Fund, Growth/Value Fund and Aggressive
Growth Fund) as of March 31, 1999, and (i) for the Utility Fund and Equity Fund
the related statements of operations, statements of changes in net assets and
the financial highlights for the periods indicated thereon and (ii) for the
Growth/Value Fund and Aggressive Growth Fund the related statements of
operations, statements of changes in net assets and the financial highlights for
the year ended March 31, 1999, the seven-month period ended March 31, 1998 and
the year ended August 31, 1997. These financial statements and financial
highlights are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits. The financial highlights of the Growth/Value Fund and
Aggressive Growth Fund for the period ended August 31, 1996 were audited by
other auditors whose report dated October 18, 1996, expressed an unqualified
opinion on those financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of March
31, 1999, by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights audited by us
and referred to above present fairly, in all material respects, the financial
position of each of the respective portfolios constituting Countrywide Strategic
Trust as of March 31, 1999, the results of their operations for the year then
ended, the changes in their net assets, and their financial highlights for the
periods referred to above, in conformity with generally accepted accounting
principles.
/s/ARTHUR ANDERSEN LLP
Cincinnati, Ohio,
April 30, 1999
33
Countrywide Investments
- ------------------------
COUNTRYWIDE STRATEGIC TRUST
312 Walnut St., 21st Floor
Cincinnati, Ohio 45202-4094
Nationwide: (Toll Free) 800-543-8721
Cincinnati: 629-2000
Rate Line: 579-0999
SHAREHOLDER SERVICES
Nationwide: (Toll Free) 800-543-0407
Cincinnati: 629-2050
BOARD OF TRUSTEES
Angelo R. Mozilo, Chairman
Robert H. Leshner, President
Donald L. Bogdon, M.D.
H. Jerome Lerner
Howard J. Levine
Fred A. Rappoport
Oscar P. Robertson
John F. Seymour, Jr.
Sebastiano Sterpa
INVESTMENT ADVISER
Countrywide Investments, Inc.
312 Walnut St., 21st Floor
Cincinnati, Ohio 45202-4094
TRANSFER AGENT
Countrywide Fund Services, Inc.
P.O. Box 5354
Cincinnati, Ohio 45201-5354
This report is authorized for distribution only when it is accompanied or
preceded by a current prospectus of Countrywide Strategic Trust.
COUNTRYWIDE STRATEGIC TRUST
312 Walnut Street
Cincinnati, Ohio 45202
800-543-0407
STATEMENT OF ADDITIONAL INFORMATION
APRIL 3, 2000
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Proxy Statement/Prospectus dated April 3, 2000. You
can obtain a copy of the Proxy Statement/Prospectus by contacting us at the
above address or telephone number.
TABLE OF CONTENTS
Statement of Additional Information of Countrywide Strategic Trust--August
1, 1999
Statement of Additional Information of Touchstone Series Trust--May 1, 1999
Annual Report of Countrywide Strategic Trust--March 31, 1999, which is
filed herewith in Part A of this Form N-14
Semi-Annual Report of Countrywide Strategic Trust--September 30, 1999
Annual Report of Touchstone Series Trust--December 31, 1999, which is filed
herewith in Part A of this Form N-14
Pro Forma Financial Information as of December 31, 1999
----------------------------------------------------------------------
Each of the documents listed in the Table of Contents is incorporated by
reference into this Statement of Additional Information.
Financial Statements for the Emerging Growth Fund, International Equity
Fund and Value Plus Fund of Countrywide Strategic Trust are not included because
they have not yet commenced operations.
Pro Forma Financial Information related to the merger of Emerging Growth
Fund of Touchstone Series Trust and Emerging Growth Fund of Countrywide
Strategic Trust is not included because Emerging Growth Fund of Countrywide
Strategic Trust has not yet commenced operations.
Pro Forma Financial Information related to the merger of International
Equity Fund of Touchstone Series Trust and International Equity Fund of
Countrywide Strategic Trust is not included because International Equity Fund of
Countrywide Strategic Trust has not yet commenced operations.
COUNTRYWIDE STRATEGIC TRUST
---------------------------
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------
August 1, 1999
Utility Fund
Equity Fund
Growth/Value Fund
Aggressive Growth Fund
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Prospectus of the applicable Fund of Countrywide
Strategic Trust dated August 1, 1999. A copy of a Fund's Prospectus can be
obtained by writing the Trust at 312 Walnut Street, 21st Floor, Cincinnati, Ohio
45202-4094, or by calling the Trust nationwide toll-free 800-543-0407, or in
Cincinnati 629-2050.
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------
Countrywide Strategic Trust
312 Walnut Street, 21st Floor
Cincinnati, Ohio 45202-4094
TABLE OF CONTENTS
-----------------
PAGE
----
THE TRUST......................................................................3
DEFINITIONS, POLICIES AND RISK CONSIDERATIONS..................................5
QUALITY RATINGS OF FIXED-INCOME OBLIGATIONS...................................22
INVESTMENT LIMITATIONS........................................................25
TRUSTEES AND OFFICERS.........................................................31
THE INVESTMENT ADVISER AND UNDERWRITER........................................34
MASTRAPASQUA AND ASSOCIATES...................................................37
DISTRIBUTION PLANS............................................................37
SECURITIES TRANSACTIONS.......................................................40
PORTFOLIO TURNOVER............................................................42
CALCULATION OF SHARE PRICE AND PUBLIC OFFERING PRICE..........................43
OTHER PURCHASE INFORMATION....................................................43
TAXES.........................................................................45
REDEMPTION IN KIND............................................................54
HISTORICAL PERFORMANCE INFORMATION............................................54
PRINCIPAL SECURITY HOLDERS....................................................58
CUSTODIAN.....................................................................59
AUDITORS......................................................................60
TRANSFER AGENT................................................................60
ANNUAL REPORT.................................................................61
- 2 -
THE TRUST
- ---------
Countrywide Strategic Trust (the "Trust"), formerly Midwest Strategic
Trust, an open-end, diversified management investment company, was organized as
a Massachusetts business trust on November 18, 1982. The Trust currently offers
four series of shares to investors: the Utility Fund, the Equity Fund, the
Growth/Value Fund and the Aggressive Growth Fund (referred to individually as a
"Fund" and collectively as the "Funds"). Each Fund has its own investment
objective(s) and policies.
Pursuant to an Agreement and Plan of Reorganization dated May 31, 1997, the
Growth/Value Fund and the Aggressive Growth Fund, on August 29, 1997, succeeded
to the assets and liabilities of another mutual fund of the same name (the
"Predecessor Fund"), which was an investment series of Trans Adviser Funds, Inc.
The investment objective, policies and restrictions of each Fund and its
Predecessor Fund are substantially identical and the financial data and
information in this Statement of Additional Information with respect to the
Growth/Value Fund and the Aggressive Growth Fund for periods ended prior to
September 1, 1997 relate to the Predecessor Funds.
Shares of each Fund have equal voting rights and liquidation rights. Each
Fund shall vote separately on matters submitted to a vote of the shareholders
except in matters where a vote of all series of the Trust in the aggregate is
required by the Investment Company Act of 1940 or otherwise. When matters are
submitted to shareholders for a vote, each shareholder is entitled to one vote
for each full share owned and fractional votes for fractional shares owned. The
Trust does not normally hold annual meetings of shareholders. The Trustees shall
promptly call and give notice of a meeting of shareholders for the purpose of
voting upon the removal of any Trustee when requested to do so in writing by
shareholders holding 10% or more of the Trust's outstanding shares. The Trust
will comply with the provisions of Section 16(c) of the Investment Company Act
of 1940 in order to facilitate communications among shareholders.
Each share of a Fund represents an equal proportionate interest in the
assets and liabilities belonging to that Fund with each other share of that Fund
and is entitled to such dividends and distributions out of the income belonging
to the Fund as are declared by the Trustees. The shares do not have cumulative
voting rights or any preemptive or conversion rights, and the Trustees have the
authority from time to time to divide or combine the shares of any Fund into a
greater or lesser number of shares of that Fund so long as the proportionate
beneficial interest in the assets belonging to that Fund and the rights of
shares of any other Fund are in no way affected. In case of any liquidation of a
Fund, the holders of shares of the Fund being
- 3 -
liquidated will be entitled to receive as a class a distribution out of the
assets, net of the liabilities, belonging to that Fund. Expenses attributable to
any Fund are borne by that Fund. Any general expenses of the Trust not readily
identifiable as belonging to a particular Fund are allocated by or under the
direction of the Trustees in such manner as the Trustees determine to be fair
and equitable. Generally, the Trustees allocate such expenses on the basis of
relative net assets or number of shareholders. No shareholder is liable to
further calls or to assessment by the Trust without his express consent.
Both Class A shares and Class C shares of the Utility Fund, the Equity Fund
and the Growth/Value Fund represent an interest in the same assets of such Fund,
have the same rights and are identical in all material respects except that (i)
Class C shares bear the expenses of higher distribution fees; (ii) certain other
class specific expenses will be borne solely by the class to which such expenses
are attributable, including transfer agent fees attributable to a specific class
of shares, printing and postage expenses related to preparing and distributing
materials to current shareholders of a specific class, registration fees
incurred by a specific class of shares, the expenses of administrative personnel
and services required to support the shareholders of a specific class,
litigation or other legal expenses relating to a class of shares, Trustees' fees
or expenses incurred as a result of issues relating to a specific class of
shares and accounting fees and expenses relating to a specific class of shares;
and (iii) each class has exclusive voting rights with respect to matters
relating to its own distribution arrangements. The Board of Trustees may
classify and reclassify the shares of a Fund into additional classes of shares
at a future date.
Under Massachusetts law, under certain circumstances, shareholders of a
Massachusetts business trust could be deemed to have the same type of personal
liability for the obligations of the Trust as does a partner of a partnership.
However, numerous investment companies registered under the Investment Company
Act of 1940 have been formed as Massachusetts business trusts and the Trust is
not aware of an instance where such result has occurred. In addition, the Trust
Agreement disclaims shareholder liability for acts or obligations of the Trust
and requires that notice of such disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Trust or the Trustees.
The Trust Agreement also provides for the indemnification out of the Trust
property for all losses and expenses of any shareholder held personally liable
for the obligations of the Trust. Moreover, it provides that the Trust will,
upon request, assume the defense of any claim made against any shareholder for
any act or obligation of the Trust and satisfy any judgment thereon. As a
result, and particularly because the Trust assets are readily
- 4 -
marketable and ordinarily substantially exceed liabilities, management believes
that the risk of shareholder liability is slight and limited to circumstances in
which the Trust itself would be unable to meet its obligations. Management
believes that, in view of the above, the risk of personal liability is remote.
DEFINITIONS, POLICIES AND RISK CONSIDERATIONS
- ---------------------------------------------
Each Fund has its own investment objective, strategies and related risks.
There can be no assurance that the investment objective of a Fund will be met.
The investment objectives of the Utility Fund and the Equity Fund may be changed
by the Board of Trustees without shareholder approval, but only after
notification has been given to shareholders and a Fund's Prospectus has been
revised accordingly. The investment objectives of the Growth/Value Fund and the
Aggressive Growth Fund are fundamental and can only be changed by vote of the
majority of the outstanding shares of the applicable Fund. If there is a change
in a Fund's investment objective, shareholders should consider whether the Fund
remains an appropriate investment in light of their then current financial
position and needs. The investment practices and limitations of the Funds are
nonfundamental policies which may be changed by the Board of Trustees without
shareholder approval, except in those instances where shareholder approval is
expressly required.
A more detailed discussion of some of the terms used and investment
policies described in the Prospectuses (see "Investment Objectives, Investment
Strategies and Related Risks") appears below:
WHEN-ISSUED SECURITIES AND SECURITIES PURCHASED ON A TO-BE-ANNOUNCED BASIS.
The Funds will only make commitments to purchase securities on a when-issued or
to-be-announced ("TBA") basis with the intention of actually acquiring the
securities. In addition, the Funds may purchase securities on a when-issued or
TBA basis only if delivery and payment for the securities takes place within 120
days after the date of the transaction. In connection with these investments,
each Fund will direct the Custodian to place cash or liquid securities in a
segregated account in an amount sufficient to make payment for the securities to
be purchased. When a segregated account is maintained because a Fund purchases
securities on a when-issued or TBA basis, the assets deposited in the segregated
account will be valued daily at market for the purpose of determining the
adequacy of the securities in the account. If the market value of such
securities declines, additional cash or securities will be placed in the account
on a daily basis so that the market value of the account will equal the amount
of a Fund's commitments to purchase securities on a when-issued or TBA basis.
- 5 -
To the extent funds are in a segregated account, they will not be available for
new investment or to meet redemptions. Securities purchased on a when-issued or
TBA basis and the securities held in a Fund's portfolio are subject to changes
in market value based upon changes in the level of interest rates (which will
generally result in all of those securities changing in value in the same way,
i.e., all those securities experiencing appreciation when interest rates decline
and depreciation when interest rates rise). Therefore, if in order to achieve
higher returns, a Fund remains substantially fully invested at the same time
that it has purchased securities on a when-issued or TBA basis, there will be a
possibility that the market value of the Fund's assets will have greater
fluctuation. The purchase of securities on a when-issued or TBA basis may
involve a risk of loss if the broker-dealer selling the securities fails to
deliver after the value of the securities has risen.
When the time comes for a Fund to make payment for securities purchased on
a when-issued or TBA basis, the Fund will do so by using then available cash
flow, by sale of the securities held in the segregated account, by sale of other
securities or, although it would not normally expect to do so, by directing the
sale of the securities purchased on a when-issued or TBA basis themselves (which
may have a market value greater or less than the Fund's payment obligation).
Although a Fund will only make commitments to purchase securities on a
when-issued or TBA basis with the intention of actually acquiring the
securities, the Funds may sell these securities before the settlement date if it
is deemed advisable by the Adviser as a matter of investment strategy.
RECEIPTS. The Growth/Value Fund may purchase separately traded interest and
principal component parts of such obligations that are transferable through the
federal book entry system, known as Separately Traded Registered Interest and
Principal Securities ("STRIPS") and Coupon Under Book Entry Safekeeping
("CUBES"). These instruments are issued by banks and brokerage firms and are
created by depositing Treasury notes and Treasury bonds into a special account
at a custodian bank. The Custodian holds the interest and principal payments for
the benefit of the registered owner of the certificates or receipts. The
Custodian arranges for the issuance of the certificates or receipts evidencing
ownership and maintains the register. Receipts include Treasury Receipts
("TRs"), Treasury Investment Growth Receipts ("TIGRs") and Certificates of
Accrual on Treasury Securities ("CATS").
STRIPS, CUBES, TRs, TIGRs and CATS are sold as zero coupon securities,
which means that they are sold at a substantial discount and redeemed at face
value at their maturity date without interim cash payments of interest or
principal. This
- 6 -
discount is amortized over the life of the security, and such amortization will
constitute the income earned on the security for both accounting and tax
purposes. Because of these features, these securities may be subject to greater
interest rate volatility than interest-paying U.S. Treasury obligations. The
Growth/Value Fund will limit its investment in such instruments to 20% of its
total assets.
LOANS OF PORTFOLIO SECURITIES. Each Fund may lend its portfolio securities
to banks, broker-dealers or institutional borrowers of securities. Under
applicable regulatory requirements (which are subject to change), the loan
collateral must, on each business day, at least equal the value of the loaned
securities. To be acceptable as collateral, letters of credit must obligate a
bank to pay amounts demanded by a Fund if the demand meets the terms of the
letter. Such terms and the issuing bank must be satisfactory to the Fund. The
Funds receive amounts equal to the dividends or interest on loaned securities
and also receive one or more of (a) negotiated loan fees, (b) interest on
securities used as collateral, or (c) interest on short-term debt securities
purchased with such collateral; either type of interest may be shared with the
borrower. The Funds may also pay fees to placing brokers as well as custodian
and administrative fees in connection with loans. Fees may only be paid to a
placing broker provided that the Trustees determine that the fee paid to the
placing broker is reasonable and based solely upon services rendered, that the
Trustees separately consider the propriety of any fee shared by the placing
broker with the borrower, and that the fees are not used to compensate the
Fund's investment adviser (or manager) or any affiliated person of the Trust or
an affiliated person of the adviser or manager or other affiliated person. The
terms of the Funds' loans must meet applicable tests under the Internal Revenue
Code and permit the Funds to reacquire loaned securities on five days' notice or
in time to vote on any important matter. It is the present intention of the
Equity Fund and the Utility Fund to limit the amount of loans of portfolio
securities to no more than 25% of a Fund's net assets.
BORROWING. The Funds may borrow money from banks (including their custodian
bank) or from other lenders to the extent permitted under applicable law, for
temporary or emergency purposes and to meet redemptions and may pledge their
assets to secure such borrowings. The Investment Company Act of 1940 requires
the Funds to maintain asset coverage of at least 300% for all such borrowings,
and should such asset coverage at any time fall below 300%, the Funds would be
required to reduce their borrowings within three days to the extent necessary to
meet the requirements of the 1940 Act. To reduce their borrowings, the Funds
might be required to sell securities at a time when it would be disadvantageous
to do so. In addition, because interest
- 7 -
on money borrowed is a Fund expense that it would not otherwise incur, the Funds
may have less net investment income during periods when its borrowings are
substantial. The interest paid by the Funds on borrowings may be more or less
than the yield on the securities purchased with borrowed funds, depending on
prevailing market conditions.
The Utility Fund may borrow money from banks (provided there is 300% asset
coverage) or from banks or other persons for temporary purposes (in an amount
not exceeding 5% of its total assets). The Fund will not make any borrowing
which would cause its outstanding borrowings to exceed one-third of the value of
its total assets. The Fund may pledge assets in connection with borrowings but
will not pledge more than one-third of its total assets. The Fund will not make
any additional purchases of portfolio securities if outstanding borrowings
exceed 5% of the value of its total assets.
The Equity Fund may borrow money in an amount not exceeding 10% of its
total assets as a temporary measure for extraordinary or emergency purposes and
may pledge assets in connection with borrowings, but will not pledge more than
10% of its total assets. The Fund will not make any additional purchases of
portfolio securities if outstanding borrowings exceed 5% of the value of its
total assets.
The Growth/Value Fund may borrow money from banks (provided there is 300%
asset coverage) or from banks or other persons for temporary purposes (in an
amount not exceeding 5% of its total assets). The Fund will not make any
borrowing which would cause its outstanding borrowings to exceed one-third of
the value of its total assets.
The Aggressive Growth Fund may borrow for purposes of leveraging. Borrowing
for investment increases both investment opportunity and investment risk. Such
borrowings in no way affect the federal tax status of the Fund or its dividends.
If the investment income on securities purchased with borrowed money exceeds the
interest paid on the borrowing, the net asset value of the Aggressive Growth
Fund's shares will rise faster than would otherwise be the case. On the other
hand, if the investment income fails to cover the Aggressive Growth Fund's
costs, including the interest on borrowings or if there are losses, the net
asset value of such Fund's shares will decrease faster than would otherwise be
the case. This is the speculative factor known as leverage.
FOREIGN SECURITIES. Each Fund may invest in the securities (payable in U.S.
dollars) of foreign issuers. The Utility Fund may also invest in non-U.S.
dollar-denominated securities principally traded in financial markets outside
the United States. Because the Funds may invest in foreign securities, an
investment in the Funds involves risks that are different in some
- 8 -
respects from an investment in a fund which invests only in securities of U.S.
domestic issuers. Foreign investments may be affected favorably or unfavorably
by changes in currency rates and exchange control regulations. There may be less
publicly available information about a foreign company than about a U.S.
company, and foreign companies may not be subject to accounting, auditing and
financial reporting standards and requirements comparable to those applicable to
U.S. companies. There may be less governmental supervision of securities
markets, brokers and issuers of securities. Securities of some foreign companies
are less liquid or more volatile than securities of U.S. companies, and foreign
brokerage commissions and custodian fees are generally higher than in the United
States. Settlement practices may include delays and may differ from those
customary in United States markets. Investments in foreign securities may also
be subject to other risks different from those 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. Each of the Utility Fund, the Growth/Value Fund and the Aggressive
Growth Fund may invest up to 10% of its total assets at the time of purchase in
securities of foreign issuers.
TRANSACTIONS IN OPTIONS AND FUTURES. The Trustees have approved the use of
the options and futures strategies for the Utility Fund and the Aggressive
Growth Fund described below.
1. FUTURES CONTRACTS AND RELATED OPTIONS: The Aggressive Growth Fund may
enter into contracts for the future delivery of securities commonly referred to
as "futures contracts." A futures contract is a contract by the Fund to buy or
sell securities at a specified date and price. No payment is made for securities
when the Fund buys a futures contract and no securities are delivered when the
Fund sells a futures contract. Instead, the Fund makes a deposit called an
"initial margin" equal to a percentage of the contract's value. Payment or
delivery is made when the contract expires. Futures contracts will be used only
as a hedge against anticipated interest rate changes and for other transactions
permitted to entities exempt from the definition of the term commodity pool
operator. The Fund will not enter into a futures contract if immediately
thereafter the sum of the then aggregate futures market prices of financial or
other instruments required to be delivered under open futures contract sales and
the aggregate futures market prices of financial instruments required to be
delivered under open futures contract purchases would exceed one-third of the
value of its total assets. The Fund will not enter into a futures contract if
immediately thereafter more than 5% of its net assets would be committed to
initial margins.
- 9 -
Options on futures contracts are similar to options on stocks except that
an option on a future gives 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 a security, at a specified exercise price at any time during the period
of the option. As with options on stocks, the holder of an option on a futures
contract may terminate his position by selling an option of the same series.
There is no guarantee that such closing transactions can be effected. In
addition to the risks which apply to all options transactions, there are several
special risks relating to options on futures contracts. The ability to establish
and close out positions on such options is subject to the maintenance of a
liquid secondary market. Compared to the use of futures contracts, the purchase
of options on futures involves less potential risk to the Fund because the
maximum amount at risk is the premium paid for the options, plus transaction
costs.
2. WRITING COVERED CALL OPTIONS ON EQUITY SECURITIES. The Utility Fund and
the Aggressive Growth Fund may write covered call options on equity securities
to earn premium income, to assure a definite price for a security it has
considered selling, or to close out options previously purchased. A call option
gives the holder (buyer) the right to purchase a security at a specified price
(the exercise price) at any time until a certain date (the expiration date). A
call option is "covered" if the Fund owns the underlying security subject to the
call option at all times during the option period. A covered call writer is
required to deposit in escrow the underlying security in accordance with the
rules of the exchanges on which the option is traded and the appropriate
clearing agency.
The writing of covered call options is a conservative investment technique
which is believed to involve relatively little risk. However, there is no
assurance that a closing transaction can be effected at a favorable price.
During the option period, the covered call writer has, in return for the premium
received, given up the opportunity for capital appreciation above the exercise
price should the market price of the underlying security increase, but has
retained the risk of loss should the price of the underlying security decline.
The Utility Fund may write covered call options if, immediately thereafter,
not more than 30% of its net assets would be committed to such transactions. The
Aggressive Growth Fund may write covered call options if, immediately
thereafter, not more than 25% of its net assets would be committed to such
transactions. As long as the Securities and Exchange Commission continues to
take the position that unlisted options are illiquid securities, the Utility
Fund will not commit more than 10% of its net assets and the Aggressive Growth
Fund will not commit more than 15% of its net assets to unlisted covered call
transactions and other illiquid securities.
- 10 -
3. WRITING COVERED PUT OPTIONS ON EQUITY SECURITIES: The Aggressive Growth
Fund may write covered put options on securities and on futures contracts to
assure a definite price for a security if it is considering acquiring the
security at a lower price than the current market price or to close out options
previously purchased. A put option gives the holder of the option the right to
sell, and the writer has the obligation to buy, the underlying security at the
exercise price at any time during the option period. The operation of put
options in other respects is substantially identical to that of call options.
When the Fund writes a covered put option, it maintains in a segregated account
with its Custodian cash or liquid securities in an amount not less than the
exercise price at all times while the put option is outstanding.
The risks involved in writing put options include the risk that a closing
transaction cannot be effected at a favorable price and the possibility that the
price of the underlying security may fall below the exercise price, in which
case the Fund may be required to purchase the underlying security at a higher
price than the market price of the security at the time the option is exercised.
The Fund may not write a put option if, immediately thereafter, more than 25% of
its net assets would be committed to such transactions.
4. PURCHASING OPTIONS ON U.S. GOVERNMENT SECURITIES. The Utility Fund may
purchase put options on U.S. Government securities to protect against a risk
that an anticipated rise in interest rates would result in a decline in the
value of the Fund's portfolio securities. The Fund may purchase call options on
U.S. Government securities as a means of obtaining temporary exposure to market
appreciation when the Fund is not fully invested.
A put option is a short-term contract (having a duration of nine months or
less) which gives the purchaser of the option, in return for a premium, the
right to sell the underlying security at a specified price during the term of
the option. A call option is a short-term contract which gives the purchaser of
the call option, in return for a premium, the right to buy the underlying
security at a specified price during the term of the option. The purchase of put
and call options on U.S. Government securities is analogous to the purchase of
puts and calls on stocks. The Fund will purchase options on U.S. Treasury Bonds,
Notes and Bills only.
There are special considerations applicable to options on U.S. Treasury
Bonds and Notes. Because trading interest in options written on U.S. Treasury
Bonds and Notes tends to center on the most recently auctioned issues, the
Exchanges will not continue indefinitely to introduce options with new
expirations
- 11 -
to replace expiring options on particular issues. Instead, the expirations
introduced at the commencement of options trading on a particular issue will be
allowed to run their course with the possible addition of a limited number of
new expirations as the original ones expire. Options trading on each issue of
U.S. Treasury Bonds and Notes will thus be phased out as new options are listed
on more recent issues, and options representing a full range of expirations will
not ordinarily be available for every issue on which options are traded.
To terminate its rights with respect to put and call options which it has
purchased, the Fund may sell an option of the same series in a "closing sale
transaction." A profit or loss will be realized depending on whether the sale
price of the option plus transaction costs is more or less than the cost to the
Fund of establishing the position. If an option purchased by the Fund is not
exercised or sold, it will become worthless after its expiration date and the
Fund will experience a loss in the form of the premium and transaction costs
paid in establishing the option position.
The option positions may be closed out only on an exchange which provides a
secondary market for options of the same series, and there is no assurance that
a liquid secondary market will exist for any particular option. The option
activities of the Fund may affect its turnover rate and the amount of brokerage
commissions paid by the Fund. The Fund pays a brokerage commission each time it
buys or sells a security in connection with the exercise of an option. Such
commissions may be higher than those which would apply to direct purchases or
sales of portfolio securities.
5. PURCHASING OPTIONS ON INTEREST RATE FUTURES CONTRACTS. The Utility Fund
may purchase put and call options on interest rate futures contracts. The
purchase of put options on interest rate futures contracts hedges the Fund's
portfolio against the risk of rising interest rates. The purchase of call
options on futures contracts is a means of obtaining temporary exposure to
market appreciation at limited risk and is a hedge against a market advance when
the Fund is not fully invested. Assuming that any decline in the securities
being hedged is accompanied by a rise in interest rates, the purchase of options
on the futures contracts may generate gains which can partially offset any
decline in the value of the Fund's portfolio securities which have been hedged.
However, if after the Fund purchases an option on a futures contract, the value
of the securities being hedged moves in the opposite direction from that
contemplated, the Fund will tend to experience losses in the form of premiums on
such options which would partially offset gains the Fund would have.
- 12 -
An interest rate futures contract is a contract to buy or sell specified
debt securities at a future time for a fixed price. The Fund may purchase put
and call options on interest rate futures which are traded on a national
exchange or board of trade and sell such options to terminate an existing
position. The Fund may not enter into interest rate futures contracts. Options
on interest rate futures are similar to options on stocks except that an option
on an interest rate future gives the purchaser the right, in return for the
premium paid, to assume a position in an interest rate 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 stock, at a specified exercise price at any time
during the period of the option.
As with options on stocks, the holder of an option on an interest rate
futures contract may terminate his position by selling an option of the same
series. There is no guarantee that such closing transactions can be effected. In
addition to the risks which apply to all options transactions, there are several
special risks relating to options on interest rate futures contracts. The
ability to establish and close out positions on such options is subject to the
maintenance of a liquid secondary market. Compared to the use of interest rate
futures, the purchase of options on interest rate futures involves less
potential risk to the Fund because the maximum amount at risk is the premium
paid for the options, plus transaction costs.
6. OPTIONS TRANSACTIONS GENERALLY. Option transactions in which the Utility
Fund and the Aggressive Growth Fund may engage involve the specific risks
described above as well as the following risks: the writer of an option may be
assigned an exercise at any time during the option period; disruptions in the
markets for underlying instruments could result in losses for options investors;
imperfect or no correlation between the option and the securities being hedged;
the insolvency of a broker could present risks for the broker's customers; and
market imposed restrictions may prohibit the exercise of certain options. In
addition, the option activities of a Fund may affect its portfolio turnover rate
and the amount of brokerage commissions paid by a Fund. The success of a Fund in
using the option strategies described above depends, among other things, on the
investment adviser's ability to predict the direction and volatility of price
movements in the options, futures contracts and securities markets and its
ability to select the proper time, type and duration of the options.
WARRANTS AND RIGHTS. Warrants are options to purchase equity securities at
a specified price and are valid for a specific time period. Rights are similar
to warrants, but normally have a short duration and are distributed by the
issuer to its shareholders. Each Fund may purchase warrants and rights,
- 13 -
provided that no Fund presently intends to invest more than 5% of its net assets
at the time of purchase in warrants and rights other than those that have been
acquired in units or attached to other securities.
REPURCHASE AGREEMENTS. Each Fund may invest all or a portion of its assets
in repurchase agreements for temporary defensive purposes. Repurchase agreements
are transactions by which a Fund purchases a security and simultaneously commits
to resell that security to the seller at an agreed upon time and price, thereby
determining the yield during the term of the agreement. In the event of a
bankruptcy or other default of the seller of a repurchase agreement, a Fund
could experience both delays in liquidating the underlying security and losses.
To minimize these possibilities, each Fund intends to enter into repurchase
agreements only with its Custodian, with banks having assets in excess of $10
billion and with broker-dealers who are recognized as primary dealers in U.S.
Government obligations by the Federal Reserve Bank of New York. Collateral for
repurchase agreements is held in safekeeping in the customer-only account of the
Funds' Custodian at the Federal Reserve Bank. A Fund will not enter into a
repurchase agreement not terminable within seven days if, as a result thereof,
more than 10% (with respect to the Utility Fund) or 15% (with respect to the
Equity Fund, the Growth/Value Fund and the Aggressive Growth Fund) of the value
of its net assets would be invested in such securities and other illiquid
securities.
Although the securities subject to a repurchase agreement might bear
maturities exceeding one year, settlement for the repurchase would never be more
than one year after the Fund's acquisition of the securities and normally would
be within a shorter period of time. The resale price will be in excess of the
purchase price, reflecting an agreed upon market rate effective for the period
of time the Fund's money will be invested in the securities, and will not be
related to the coupon rate of the purchased security. At the time a Fund enters
into a repurchase agreement, the value of the underlying security, including
accrued interest, will equal or exceed the value of the repurchase agreement,
and in the case of a repurchase agreement exceeding one day, the seller will
agree that the value of the underlying security, including accrued interest,
will at all times equal or exceed the value of the repurchase agreement. The
collateral securing the seller's obligation must be of a credit quality at least
equal to a Fund's investment criteria for portfolio securities and will be held
by the Custodian or in the Federal Reserve Book Entry System.
For purposes of the Investment Company Act of 1940, a repurchase agreement
is deemed to be a loan from a Fund to the seller subject to the repurchase
agreement and is therefore
- 14 -
subject to that Fund's investment restriction applicable to loans. It is not
clear whether a court would consider the securities purchased by a Fund subject
to a repurchase agreement as being owned by that Fund or as being collateral for
a loan by the Fund to the seller. In the event of the commencement of bankruptcy
or insolvency proceedings with respect to the seller of the securities before
repurchase of the security under a repurchase agreement, a Fund may encounter
delay and incur costs before being able to sell the security. Delays may involve
loss of interest or decline in price of the security. If a court characterized
the transaction as a loan and a Fund has not perfected a security interest in
the security, that Fund may be required to return the security to the seller's
estate and be treated as an unsecured creditor of the seller. As an unsecured
creditor, a Fund would be at the risk of losing some or all of the principal and
income involved in the transaction. As with any unsecured debt obligation
purchased for a Fund, the Fund's investment adviser seeks to minimize the risk
of loss through repurchase agreements by analyzing the creditworthiness of the
obligor, in this case, the seller. Apart from the risk of bankruptcy or
insolvency proceedings, there is also the risk that the seller may fail to
repurchase the security, in which case a Fund may incur a loss if the proceeds
to that Fund of the sale of the security to a third party are less than the
repurchase price. However, if the market value of the securities subject to the
repurchase agreement becomes less than the repurchase price (including
interest), the Fund involved will direct the seller of the security to deliver
additional securities so that the market value of all securities subject to the
repurchase agreement will equal or exceed the repurchase price. It is possible
that a Fund will be unsuccessful in seeking to enforce the seller's contractual
obligation to deliver additional securities.
BANK DEBT INSTRUMENTS. Each Fund may invest all or a portion of its assets
in bank debt instruments for temporary defensive purposes. Bank debt instruments
in which the Funds may invest consist of certificates of deposit, bankers'
acceptances and time deposits issued by national banks and state banks, trust
companies and mutual savings banks, or of banks or institutions the accounts of
which are insured by the Federal Deposit Insurance Corporation or the Federal
Savings and Loan Insurance Corporation. Certificates of deposit are negotiable
certificates evidencing the indebtedness of a commercial bank to repay funds
deposited with it for a definite period of time (usually from fourteen days to
one year) at a stated or variable interest rate. Bankers' acceptances are credit
instruments evidencing the obligation of a bank to pay a draft which has been
drawn on it by a customer, which instruments reflect the obligation both of the
bank and of the drawer to pay the face amount of the instrument upon maturity.
Time deposits are non-negotiable deposits maintained in a banking institution
for a specified period of time at a stated interest rate. Investments in time
deposits
- 15 -
maturing in more than seven days will be subject to each Fund's restrictions on
illiquid investments (see "Investment Limitations").
The Growth/Value Fund and the Aggressive Growth Fund may also invest in
certificates of deposit, bankers' acceptances and time deposits issued by
foreign branches of national banks. Eurodollar certificates of deposit are
negotiable U.S. dollar denominated certificates of deposit issued by foreign
branches of major U.S. commercial banks. Eurodollar bankers' acceptances are
U.S. dollar denominated bankers' acceptances "accepted" by foreign branches of
major U.S. commercial banks. Investments in the obligations of foreign branches
of U.S. commercial banks may be subject to special risks, including future
political and economic developments, imposition of withholding taxes on income,
establishment of exchange controls or other restrictions, less governmental
supervision and the lack of uniform accounting, auditing and financial reporting
standards that might affect an investment adversely.
COMMERCIAL PAPER. Each Fund may invest all or a portion of its assets in
commercial paper for temporary defensive purposes. Commercial paper consists of
short-term (usually from one to two hundred seventy days) unsecured promissory
notes issued by corporations in order to finance their current operations.
Certain notes may have floating or variable rates. Variable and floating rate
notes with a demand notice period exceeding seven days will be subject to each
Fund's restrictions on illiquid investments (see "Investment Limitations")
unless, in the judgment of the investment adviser, subject to the direction of
the Board of Trustees, such note is liquid.
The rating of Prime-1 is the highest commercial paper rating assigned by
Moody's Investors Service, Inc. Among the factors considered by Moody's in
assigning ratings are the following: valuation of the management of the issuer;
economic evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; evaluation of the
issuer's products in relation to competition and customer acceptance; liquidity;
amount and quality of long-term debt; trend of earnings over a period of 10
years; financial strength of the parent company and the relationships which
exist with the issuer; and recognition by the management of obligations which
may be present or may arise as a result of public interest questions and
preparations to meet such obligations. These factors are all considered in
determining whether the commercial paper is rated Prime-1. Commercial paper
rated A (highest quality) by Standard & Poor's Ratings Group has the following
characteristics: liquidity ratios are adequate to meet cash requirements;
long-term senior debt is rated "A" or better, although in some cases "BBB"
credits may be allowed; the issuer
- 16 -
has access to at least two additional channels of borrowing; basic earnings and
cash flow have an upward trend with allowance made for unusual circumstances;
typically, the issuer's industry is well established and the issuer has a strong
position within the industry; and the reliability and quality of management are
unquestioned. The relative strength or weakness of the above factors determines
whether the issuer's commercial paper is rated A-1.
U.S. GOVERNMENT OBLIGATIONS. Each Fund may invest all or a portion of its
assets in U.S. Government obligations for temporary defensive purposes. "U.S.
Government obligations" include securities which are issued or guaranteed by the
United States Treasury, by various agencies of the United States Government, and
by various instrumentalities which have been established or sponsored by the
United States Government. U.S. Treasury obligations are backed by the "full
faith and credit" of the United States Government. U.S. Treasury obligations
include Treasury bills, Treasury notes, and Treasury bonds. U.S. Treasury
obligations also include the separate principal and interest components of U.S.
Treasury obligations which are traded under the Separate Trading of Registered
Interest and Principal of Securities ("STRIPS") program. Agencies or
instrumentalities established by the United States Government include the
Federal Home Loan Banks, the Federal Land Bank, the Government National Mortgage
Association, the Federal National Mortgage Association, the Federal Home Loan
Mortgage Corporation, the Student Loan Marketing Association, the Small Business
Administration, the Bank for Cooperatives, the Federal Intermediate Credit Bank,
the Federal Financing Bank, the Federal Farm Credit Banks, the Federal
Agricultural Mortgage Corporation, the Resolution Funding Corporation, the
Financing Corporation of America and the Tennessee Valley Authority. Some of
these securities are supported by the full faith and credit of the United States
Government while others are supported only by the credit of the agency or
instrumentality, which may include the right of the issuer to borrow from the
United States Treasury. In the case of securities not backed by the full faith
and credit of the United States, the investor must look principally to the
agency issuing or guaranteeing the obligation for ultimate repayment, and may
not be able to assert a claim against the United States in the event the agency
or instrumentality does not meet its commitments. Shares of the Funds are not
guaranteed or backed by the United States Government.
SHORT-TERM TRADING. The Aggressive Growth Fund may engage in the technique
of short-term trading. Such trading involves the selling of securities held for
a short time, ranging from several months to less than a day. The object of such
short-term trading is to increase the potential for capital appreciation and/or
income of the Aggressive Growth Fund in order to take
- 17 -
advantage of what the Adviser believes are changes in market, industry or
individual company conditions or outlook. Any such trading would increase the
turnover rate of the Aggressive Growth Fund and its transaction costs.
VARIABLE AND FLOATING RATE SECURITIES. The Growth/Value Fund and the
Aggressive Growth Fund may acquire variable and floating rate securities,
subject to each Fund's investment objective, policies and restrictions. A
variable rate security is one whose terms provide for the readjustment of its
interest rate on set dates and which, upon such readjustment, can reasonably be
expected to have a market value that approximates its par value. A floating rate
security is one whose terms provide for the readjustment of its interest rate
whenever a specified interest rate changes and which, at any time, can
reasonably be expected to have a market value that approximates its par value.
REVERSE REPURCHASE AGREEMENTS. The Aggressive Growth Fund may borrow funds
for temporary purposes by entering into reverse repurchase agreements. Pursuant
to such agreements, the Fund sells portfolio securities to financial
institutions such as banks and broker-dealers, and agrees to repurchase them at
a mutually agreed upon date and price. At the time the Fund enters into a
reverse repurchase agreement, it must place in a segregated custodial account
cash or liquid portfolio securities having a value equal to the repurchase price
(including accrued interest); the collateral will be marked-to-market on a daily
basis, and will be continuously monitored to ensure that such equivalent value
is maintained. Reverse repurchase agreements involve the risk that the market
value of the securities sold by the Fund may decline below the price at which
the Fund is obligated to repurchase the securities. Reverse repurchase
agreements are considered to be borrowings under the Investment Company Act of
1940.
CONVERTIBLE SECURITIES. The Growth/Value Fund and the Aggressive Growth
Fund may invest in all types of common stocks and equivalents (such as
convertible debt securities and warrants) and preferred stocks. The Funds may
invest in convertible securities which may offer higher income than the common
stocks into which they are convertible. The convertible securities in which the
Funds may invest consist of bonds, notes, debentures and preferred stocks which
may be converted or exchanged at a stated or determinable exchange ratio into
underlying shares of common stock. The Funds may be required to permit the
issuer of a convertible security to redeem the security, convert it into the
underlying common stock or sell it to a third party. Thus, the Funds may not be
able to control whether the issuer of a convertible security chooses to convert
that security. If the issuer chooses to do so, this action could have an adverse
effect on a Fund's ability to achieve its investment objective.
- 18 -
Convertible securities are bonds, debentures, notes, preferred stock or
other securities which may be converted or exchanged by the holder into shares
of the underlying common stock at a stated exchange ratio. A convertible
security may also be subject to redemption by the issuer, but only after a date
and under certain circumstances (including a specified price) established on
issue. Adjustable rate preferred stocks are preferred stocks which adjust their
dividend rates quarterly based on specified relationships to certain indices of
U.S. Treasury securities. A Fund may continue to hold securities obtained as a
result of the conversion of convertible securities held by the Fund when the
investment adviser believes retaining such securities is consistent with the
Fund's investment objective.
LOWER-RATED SECURITIES. The Aggressive Growth Fund may invest up to 20% of
its assets, and the Growth/Value Fund may invest up to 10% of its assets in
higher yielding (and, therefore, higher risk), lower rated fixed-income
securities, including debt securities, convertible securities and preferred
stocks and unrated fixed-income securities. Lower rated fixed-income securities,
commonly referred to as "junk bonds," are considered speculative and involve
greater risk of default or price changes due to changes in the issuer's
creditworthiness than higher rated fixed-income securities. There is no minimum
rating standard for a Fund's investments in the high yield market; therefore, a
Fund may at times invest in fixed-income securities not currently paying
interest or in default. The Funds will invest in such fixed-income securities
where the Adviser perceives a substantial opportunity to realize a Fund's
objective based on its analysis of the underlying financial condition of the
issuer. It is not, however, the current intention of either Fund to make such
investments.
Differing yields on fixed-income securities of the same maturity are a
function of several factors, including the relative financial strength of the
issuers. Higher yields are generally available from securities in the lower
categories of recognized rating agencies, i.e., Ba or lower by Moody's or BB or
lower by S&P. The Funds may invest in any security which is rated by Moody's or
by S&P, or in any unrated security which the investment adviser determines is of
suitable quality. Securities in the rating categories below Baa as determined by
Moody's and BBB as determined by S&P are considered to be of poor standing and
predominantly speculative. The rating services descriptions of these rating
categories, including the speculative characteristics of the lower categories,
are set forth in the section "Quality Ratings of Fixed-Income Obligations."
Lower rated fixed-income securities are typically traded among a smaller
number of broker-dealers rather than in a broad secondary market. Purchasers of
lower rated fixed-income
- 19 -
securities tend to be institutions, rather than individuals, a factor that
further limits the secondary market. To the extent that no established retail
secondary market exists, many lower rated fixed-income securities may not be as
liquid as Treasury and investment grade bonds. The ability of a Fund to sell
lower rated fixed-income securities will be adversely affected to the extent
that such securities are thinly traded or illiquid. Moreover, the ability of a
Fund to value lower rated fixed-income securities becomes more difficult, and
judgment plays a greater role in valuation, as there is less reliable, objective
data available with respect to such securities that are thinly traded or
illiquid.
Securities ratings are based largely on the issuer's historical financial
information and the rating agencies' investment analysis at the time of rating.
Consequently, the rating assigned to any particular security is not necessarily
a reflection of the issuer's current financial condition, which may be better or
worse than the rating would indicate. Although the investment adviser will
consider security ratings when making investment decisions in the high yield
market, it will perform its own investment analysis and will not rely
principally on the ratings assigned by the rating services. The investment
adviser's analysis generally may include, among other things, consideration of
the issuer's experience and managerial strength, changing financial conditions,
borrowing requirements or debt maturity schedules, and its responsiveness to
changes in business conditions and interest rates. It also considers relative
values based on anticipated cash flow, interest or dividend coverage, asset
coverage and earnings prospects.
ZERO COUPON BONDS. The Growth/Value Fund is permitted to purchase zero
coupon securities ("zero coupon bonds"). Zero coupon bonds are purchased at a
discount from the face amount because the buyer receives only the right to
receive a fixed payment on a certain date in the future and does not receive any
periodic interest payments. The effect of owning instruments which do not make
current interest payments is that a fixed yield is earned not only on the
original investment but also, in effect, on all discount accretion during the
life of the obligations. This implicit reinvestment of earnings at the same rate
eliminates the risk of being unable to reinvest distributions at a rate as high
as the implicit yields on the zero coupon bond, but at the same time eliminates
the holder's ability to reinvest at higher rates in the future. For this reason,
zero coupon bonds are subject to substantially greater price fluctuations during
periods of changing market interest rates than are comparable securities which
pay interest currently, which fluctuation increases the longer the period to
maturity. Although zero coupon bonds do not pay interest to holders prior to
maturity, federal income tax law requires the Fund to recognize as interest
income a portion of the bond's
- 20 -
discount each year and this income must then be distributed to shareholders
along with other income earned by the Fund. To the extent that any shareholders
in the Fund elect to receive their dividends in cash rather than reinvest such
dividends in additional shares, cash to make these distributions will have to be
provided from the assets of the Fund or other sources such as proceeds of sales
of Fund shares and/or sales of portfolio securities. In such cases, the Fund
will not be able to purchase additional income-producing securities with cash
used to make such distributions and its current income may ultimately be reduced
as a result.
PRIVATE PLACEMENT INVESTMENTS. The Aggressive Growth Fund may invest in
commercial paper issued in reliance on the exemption from registration afforded
by Section 4(2) of the Securities Act of 1933. Section 4(2) commercial paper is
restricted as to disposition under federal securities laws and is generally sold
to institutional investors who agree that they are purchasing the paper for
investment purposes and not with a view to public distribution. Any resale by
the purchaser must be in an exempt transaction. Section 4(2) commercial paper is
normally resold to other institutional investors through or with the assistance
of the issuer or investment dealers who make a market in Section 4(2) commercial
paper, thus providing liquidity. The investment adviser believes that Section
4(2) commercial paper and possibly certain other restricted securities which
meet the criteria for liquidity established by the Trustees are quite liquid.
The Fund intends therefore, to treat the restricted securities which meet the
criteria for liquidity established by the Trustees, including Section 4(2)
commercial paper, as determined by the investment adviser, as liquid and not
subject to the investment limitation applicable to illiquid securities. In
addition, because Section 4(2) commercial paper is liquid, the Fund does not
intend to subject such paper to the limitation applicable to restricted
securities.
The ability of the Board of Trustees to determine the liquidity of certain
restricted securities is permitted under a position of the staff of the
Securities and Exchange Commission set forth in the adopting release for Rule
144A under the Securities Act of 1933 (the "Rule"). The Rule is a nonexclusive
safe-harbor for certain secondary market transactions involving securities
subject to restrictions on resale under federal securities laws. The Rule
provides an exemption from registration for resales of otherwise restricted
securities to qualified institutional buyers. The Rule was expected to further
enhance the liquidity of the secondary market for securities eligible for resale
under the Rule. The staff of the Securities and Exchange Commission has left the
question of determining the liquidity of all restricted securities to the
Trustees. The Trustees consider the following criteria in determining the
- 21 -
liquidity of certain restricted securities (including Section 4(2) commercial
paper): the frequency of trades and quotes for the security; the number of
dealers willing to purchase or sell the security and the number of other
potential buyers; dealer undertakings to make a market in the security; and the
nature of the security and the nature of the marketplace trades. The Trustees
have delegated to the investment adviser the daily function of determining and
monitoring the liquidity of restricted securities pursuant to the above criteria
and guidelines adopted by the Board of Trustees. The Trustees will continue to
monitor and periodically review the investment adviser's selection of Rule 144A
and Section 4(2) commercial paper as well as any determinations as to their
liquidity.
MAJORITY. As used in the Prospectuses and this Statement of Additional
Information, the term "majority" of the outstanding shares of the Trust (or of
any Fund) means the lesser of (1) 67% or more of the outstanding shares of the
Trust (or the applicable Fund) present at a meeting, if the holders of more than
50% of the outstanding shares of the Trust (or the applicable Fund) are present
or represented at such meeting or (2) more than 50% of the outstanding shares of
the Trust (or the applicable Fund).
QUALITY RATINGS OF FIXED-INCOME OBLIGATIONS
- -------------------------------------------
Moody's Investors Service, Inc. provides the following descriptions of its
- --------------------------------------------------------------------------------
corporate bond ratings:
- -----------------------
Aaa - "Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
'gilt edge.' Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues."
Aa - "Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities."
A - "Bonds which are rated A possess many favorable investment attributes
and are considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future."
- 22 -
Baa - "Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well."
Ba - "Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterize bonds in this class."
B - "Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small."
Caa - "Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest."
Ca - "Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings."
C - "Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing."
Standard & Poor's Ratings Group provides the following descriptions of its
- --------------------------------------------------------------------------------
corporate bond ratings:
- -----------------------
AAA - "Debt rated AAA has the highest rating assigned by Standard & Poor's
to a debt obligation. Capacity to pay interest and repay principal is extremely
strong."
AA - "Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree."
A - "Debt rated A has strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories."
- 23 -
BBB - "Debt rated BBB is regarded as having adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories."
BB - "Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating."
B - "Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating."
CCC - "Debt rated CCC has a currently identifiable vulnerability to default
and is dependent upon favorable business, financial or economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest or repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating."
CC - "The rating CC is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating."
C - "The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy has been filed but debt service
payments are continued."
CI - "The rating CI is reserved for income bonds on which no interest is
being paid."
D - "Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition and debt service payments are jeopardized."
- 24 -
INVESTMENT LIMITATIONS
- ----------------------
The Trust has adopted certain fundamental investment limitations designed
to reduce the risk of an investment in the Funds. These limitations may not be
changed with respect to any Fund without the affirmative vote of a majority of
the outstanding shares of that Fund.
THE LIMITATIONS APPLICABLE TO THE UTILITY FUND ARE:
1. BORROWING MONEY. The Fund will not borrow money, except (a) from a bank,
provided that immediately after such borrowing there is asset coverage of 300%
for all borrowings of the Fund; or (b) from a bank or other persons for
temporary purposes only, provided that, when made, such temporary borrowings are
in an amount not exceeding 5% of the Fund's total assets. The Fund also will not
make any borrowing which would cause its outstanding borrowings to exceed
one-third of the value of its total assets.
2. PLEDGING. The Fund will not mortgage, pledge, hypothecate or in any
manner transfer, as security for indebtedness, any security owned or held by the
Fund except as may be necessary in connection with borrowings described in
limitation (1) above. The Fund will not mortgage, pledge or hypothecate more
than one-third of its assets in connection with borrowings.
3. MARGIN PURCHASES. The Fund will not purchase any securities on "margin"
(except such short-term credits as are necessary for the clearance of
transactions or to the extent necessary to engage in transactions described in
the Statement of Additional Information which involve margin purchases).
4. SHORT SALES. The Fund will not make short sales of securities.
5. OPTIONS. The Fund will not purchase or sell puts, calls, options,
straddles, commodities or commodities futures except as described in the
Statement of Additional Information.
6. MINERAL LEASES. The Fund will not purchase oil, gas or other mineral
leases, rights or royalty contracts.
7. UNDERWRITING. The Fund will not act as underwriter of securities issued
by other persons. This limitation is not applicable to the extent that, in
connection with the disposition of portfolio securities, a Fund may be deemed an
underwriter under certain federal securities laws.
- 25 -
8. ILLIQUID INVESTMENTS. The Fund will not purchase securities which cannot
be readily resold to the public because of legal or contractual restrictions on
resale or for which no readily available market exists or engage in a repurchase
agreement maturing in more than seven days if, as a result thereof, more than
10% of the value of the net assets of the Fund would be invested in such
securities.
9. REAL ESTATE. The Fund will not purchase, hold or deal in real estate or
real estate mortgage loans, except that the Fund may purchase (a) securities of
companies (other than limited partnerships) which deal in real estate or (b)
securities which are secured by interests in real estate or by interests in
mortgage loans including securities secured by mortgage-backed securities.
10. LOANS. The Fund will not make loans to other persons, except (a) by
loaning portfolio securities, or (b) by engaging in repurchase agreements. For
purposes of this limitation, the term "loans" shall not include the purchase of
marketable bonds, debentures, commercial paper or corporate notes, and similar
marketable evidences of indebtedness which are part of an issue for the public.
11. INVESTING FOR CONTROL. The Fund will not invest in companies for the
purpose of exercising control.
12. OTHER INVESTMENT COMPANIES. The Fund will not invest more than 10% of
its total assets in securities of other investment companies. The Fund will not
invest more than 5% of its total assets in the securities of any single
investment company.
13. AMOUNT INVESTED IN ONE ISSUER. The Fund will not invest more than 5% of
its total assets in the securities of any issuer; provided, however, that there
is no limitation with respect to investments and obligations issued or
guaranteed by the United States Government or its agencies or instrumentalities
or repurchase agreements with respect thereto.
14. VOTING SECURITIES OF ANY ISSUER. The Fund will not purchase 5% or more
of the outstanding voting securities of any electric or gas utility company (as
defined in the Public Utility Holding Company Act of 1935), or purchase more
than 10% of the outstanding voting securities of any other issuer.
15. SECURITIES OWNED BY AFFILIATES. The Fund will not purchase or retain
the securities of any issuers if those officers and Trustees of the Trust or
officers, directors, or partners of its Adviser, owning individually more than
one-half of 1% of the securities of such issuer, own in the aggregate more than
5% of the securities of such issuer.
- 26 -
16. INDUSTRY CONCENTRATION. Under normal market conditions, the Fund will
invest more than 25% of its total assets in the public utilities industry. The
Fund will not invest more than 25% of its total assets in any particular
industry except the public utilities industry. For purposes of this limitation,
the public utilities industry includes companies that produce or supply electric
power, natural gas, water, sanitary services, telecommunications and other
communications services (but not radio or television broadcasters) for public
use or consumption.
17. SENIOR SECURITIES. The Fund will not issue or sell any senior security
as defined by the Investment Company Act of 1940 except insofar as any borrowing
that the Fund may engage in may be deemed to be an issuance of a senior
security.
THE LIMITATIONS APPLICABLE TO THE EQUITY FUND ARE:
1. BORROWING MONEY. The Fund will not borrow money, except (a) as a
temporary measure for extraordinary or emergency purposes and then only in
amounts not in excess of 10% of the value of its total assets. While the Fund's
borrowings are in excess of 5% of its total assets, the Fund will not purchase
any additional portfolio securities. The Fund will not pledge, mortgage or
hypothecate its assets except in connection with borrowings described in this
investment limitation.
2. MARGIN PURCHASES. The Fund will not purchase any securities on "margin"
(except such short-term credit as are necessary for the clearance of
transactions).
3. SHORT SALES. The Fund will not make short sales of securities.
4. OPTIONS. The Fund will not purchase or sell puts, calls, options,
straddles, commodities or commodities futures.
5. MINERAL LEASES. The Fund will not purchase oil, gas or other mineral
leases or exploration or development programs.
6. UNDERWRITING. The Fund will not act as underwriter of securities issued
by other persons, either directly or through a majority owned subsidiary. This
limitation is not applicable to the extent that, in connection with the
disposition of its portfolio securities (including restricted securities), the
Fund may be deemed an underwriter under certain federal securities laws.
7. ILLIQUID INVESTMENTS. The Fund will not purchase securities which cannot
be readily resold to the public because of legal or contractual restrictions on
resale or for which no
- 27 -
readily available market exists or engage in a repurchase agreement maturing in
more than seven days if, as a result thereof, more than 15% of the value of the
Fund's net assets would be invested in such securities.
8. CONCENTRATION. The Fund will not invest more than 25% of its total
assets in the securities of issuers in any particular industry; provided,
however, that there is no limitation with respect to investments in obligations
issued or guaranteed by the United States Government or its agencies or
instrumentalities or repurchase agreements with respect thereto.
9. REAL ESTATE. The Fund will not purchase, hold or deal in real estate,
including real estate limited partnerships.
10. LOANS. The Fund will not make loans to other persons, except (a) by
loaning portfolio securities if the borrower agrees to maintain collateral
marked to market daily in an amount at least equal to the market value of the
loaned securities, or (b) by engaging in repurchase agreements. For purposes of
this limitation, the term "loans" shall not include the purchase of marketable
bonds, debentures, commercial paper or corporate notes, and similar marketable
evidences of indebtedness which are part of an issue for the public.
11. INVESTING FOR CONTROL. The Fund will not invest in companies for the
purpose of exercising control.
12. OTHER INVESTMENT COMPANIES. The Fund will not invest more than 10% of
its total assets in securities of other investment companies. The Fund will not
invest more than 5% of its total assets in the securities of any single
investment company.
13. SECURITIES OF ONE ISSUER. The Fund will not purchase the securities of
any issuer if such purchase at the time thereof would cause more than 5% of the
value of its total assets to be invested in the securities of such issuer (the
foregoing limitation does not apply to investments in government securities as
defined in the Investment Company Act of 1940).
14. SECURITIES OF ONE CLASS. The Fund will not purchase the securities of
any issuer if such purchase at the time thereof would cause 10% of any class of
securities of such issuer to be held by the Fund, or acquire more than 10% of
the outstanding voting securities of such issuer. (All outstanding bonds and
other evidences of indebtedness shall be deemed to be a single class of
securities of the issuer).
- 28 -
15. SECURITIES OWNED BY AFFILIATES. The Fund will not purchase or retain
the securities of any issuers if those officers and Trustees of the Trust or
officers, directors, or partners of its Adviser, owning individually more than
one-half of 1% of the securities of such issuer, own in the aggregate more than
5% of the securities of such issuer.
16. SENIOR SECURITIES. The Fund will not issue or sell any senior security.
This limitation is not applicable to short-term credit obtained by the Fund for
the clearance of purchases and sales or redemptions of securities, or to
arrangements with respect to transactions involving forward foreign currency
exchange contracts, options, futures contracts, short sales and other similar
permitted investments and techniques.
THE LIMITATIONS APPLICABLE TO THE GROWTH/VALUE FUND AND THE AGGRESSIVE
GROWTH FUND ARE:
1. BORROWING MONEY. Each Fund will not borrow money, except (a) from a
bank, provided that immediately after such borrowing there is asset coverage of
300% for all borrowings of a Fund; or (b) from a bank or other persons for
temporary purposes only, provided that, when made, such temporary borrowings are
in an amount not exceeding 5% of the Growth/Value Fund's total assets. Each Fund
also will not make any borrowing which would cause outstanding borrowings to
exceed one-third of the value of its total assets.
2. PLEDGING. Each Fund will not mortgage, pledge, hypothecate or in any
manner transfer, as security for indebtedness, any security owned or held by the
Fund except as may be necessary in connection with borrowings described in
limitation (1) above. Each Fund will not mortgage, pledge or hypothecate more
than one-third of its assets in connection with borrowings.
3. OPTIONS. Each Fund will not purchase or sell puts, calls, options,
straddles, commodities or commodities futures except as described in this
Statement of Additional Information.
4. MINERAL LEASES. Each Fund will not purchase oil, gas or other mineral
leases, rights or royalty contracts.
5. UNDERWRITING. Each Fund will not act as underwriters of securities
issued by other persons. This limitation is not applicable to the extent that,
in connection with the disposition of its portfolio securities, a Fund may be
deemed an underwriter under certain federal securities laws.
- 29 -
6. CONCENTRATION. Each Fund will not invest more than 25% of its total
assets in the securities of issuers in any particular industry; provided,
however, that there is no limitation with respect to investments in obligations
issued or guaranteed by the United States Government or its agencies or
instrumentalities or repurchase agreements with respect thereto.
7. COMMODITIES. Each Fund will not purchase, hold or deal in commodities
and will not invest in oil, gas or other mineral explorative or development
programs.
8. REAL ESTATE. Each Fund will not purchase, hold or deal in real estate or
real estate mortgage loans, except it may purchase (a) U.S. Government
obligations, (b) securities of companies which deal in real estate, or (c)
securities which are secured by interests in real estate or by interests in
mortgage loans including securities secured by mortgage-backed securities.
9. LOANS. Each Fund will not make loans to other persons if, as a result,
more than one-third of the value of its total assets would be subject to such
loans. This limitation does not apply to (a) the purchase of marketable bonds,
debentures, commercial paper or corporate notes, and similar marketable
evidences of indebtedness which are part of an issue for the public or (b) entry
into repurchase agreements.
10. INVESTING FOR CONTROL. Each Fund will not invest in companies for the
purpose of exercising control.
11. SENIOR SECURITIES. Each Fund will not issue or sell any senior
security. This limitation is not applicable to short-term credit obtained by a
Fund for the clearance of purchases and sales or redemptions of securities, or
to arrangements with respect to transactions involving options, futures
contracts and other similar permitted investments and techniques.
THE FOLLOWING INVESTMENT LIMITATIONS FOR THE GROWTH/VALUE FUND AND THE
AGGRESSIVE GROWTH FUND ARE NONFUNDAMENTAL AND MAY BE CHANGED WITHOUT SHAREHOLDER
APPROVAL:
1. ILLIQUID INVESTMENTS. Each Fund will not purchase securities for which
there are legal or contractual restrictions on resale or for which no readily
available market exists (or engage in a repurchase agreement maturing in more
than seven days) if, as a result thereof, more than 15% of the value of a Fund's
net assets would be invested in such securities.
2. MARGIN PURCHASES. Each Fund will not purchase securities or evidences of
interest thereon on "margin." This limitation is not applicable to short-term
credit obtained by a Fund for the clearance of purchases and sales or redemption
of securities or to the extent necessary to engage in transactions described in
the Prospectus and Statement of Additional Information which involve margin
purchases.
- 30 -
3. SHORT SALES. Each Fund will not make short sales of securities.
4. OTHER INVESTMENT COMPANIES. Each Fund will not invest more than 5% of
its total assets in the securities of any investment company and will not invest
more than 10% of the value of its total assets in securities of other investment
companies.
With respect to the percentages adopted by the Trust as maximum limitations
on the Funds' investment policies and restrictions, an excess above the fixed
percentage (except for the percentage limitations relative to the borrowing of
money or investing in illiquid securities) will not be a violation of the policy
or restriction unless the excess results immediately and directly from the
acquisition of any security or the action taken.
The Utility Fund will limit its investments so that it will not be a public
utility holding company or acquire public utility company securities in
violation of the Public Utility Holding Company Act of 1935.
TRUSTEES AND OFFICERS
- ---------------------
The following is a list of the Trustees and executive officers of the
Trust, their compensation from the Trust and their aggregate compensation from
the Countrywide complex of mutual funds (consisting of the Trust, Countrywide
Tax-Free Trust and Countrywide Investment Trust) for the fiscal year ended March
31, 1999. Each Trustee who is an "interested person" of the Trust, as defined by
the Investment Company Act of 1940, is indicated by an asterisk. Each Trustee is
also a Trustee of Countrywide Tax-Free Trust and Countrywide Investment Trust.
AGGREGATE
COMPENSATION
COMPENSATION FROM
POSITION FROM COUNTRYWIDE
NAME AGE HELD TRUST COMPLEX
- ---- --- ---- ----- -------
Donald L. Bodgon, MD 68 Trustee $4,000 $12,000
+H. Jerome Lerner 60 Trustee 4,000 12,000
*Robert H. Leshner 59 President/Trustee 0 0
Howard J. Levine 63 Trustee 3,000 9,000
*Angelo R. Mozilo 60 Chairman/Trustee 0 0
Fred A. Rappoport 52 Trustee 4,000 12,000
+Oscar P. Robertson 60 Trustee 4,000 12,000
John F. Seymour, Jr. 61 Trustee 4,000 12,000
+Sebastiano Sterpa 70 Trustee 4,000 12,000
Maryellen Peretzky 46 Vice President 0 0
William E. Hortz 41 Vice President 0 0
Tina D. Hosking 30 Secretary 0 0
Theresa M. Samocki 29 Treasurer 0 0
- 31 -
* Mr. Leshner and Mr. Mozilo, as officers and directors of Countrywide
Investments, Inc., are each an "interested person" of the Trust within the
meaning of Section 2(a)(19) of the Investment Company Act of 1940.
+ Member of Audit Committee.
The principal occupations of the Trustees and executive officers of the
Trust during the past five years are set forth below:
DONALD L. BOGDON, M.D., 1551 Hillcrest Avenue, Glendale, California is a
physician with Hematology Oncology Consultants and a Director of Verdugo VNA (a
hospice facility). Until 1996 he was President of Western Hematology/Oncology.
H. JEROME LERNER, 7149 Knoll Road, Cincinnati, Ohio is a principal of HJL
Enterprises and is Chairman of Crane Electronics, Inc., a manufacturer of
electronic connectors. He is also a director of Slush Puppy Inc., a manufacturer
of frozen beverages, and Peerless Manufacturing, a manufacturer of bakery
equipment.
ROBERT H. LESHNER, 312 Walnut Street, Cincinnati, Ohio is President and a
director of Countrywide Investments, Inc. (the investment adviser and principal
underwriter of the Trust), Countrywide Financial Services, Inc. (a financial
services company and parent of Countrywide Investments, Inc., Countrywide Fund
Services, Inc. and CW Fund Distributors, Inc.), Countrywide Fund Services, Inc.
(a registered transfer agent) and CW Fund Distributors, Inc. (a registered
broker-dealer). He is also President and a Trustee of Countrywide Tax-Free Trust
and Countrywide Investment Trust, registered investment companies.
HOWARD J. LEVINE, 26901 Agoura Road, Calabasas Hills, California is
President of ARCS Commercial Mortgage Co., L.P.
ANGELO R. MOZILO, 4500 Park Granada Boulevard, Calabasas, California is
Chairman, Director and Chief Executive Officer of Countrywide Credit Industries,
Inc. (a holding company). He is Chairman and a director of Countrywide Home
Loans, Inc. (a residential mortgage lender), Countrywide Financial Services,
Inc., Countrywide Investments, Inc., Countrywide Fund Services, Inc., CW Fund
Distributors, Inc., Countrywide Servicing Exchange (a loan servicing broker),
Countrywide Lending Corporation and Countrywide Capital Markets, Inc. (parent
company). He is also a director of CCM Municipal Services, Inc. (a tax lien
purchaser), CTC Real Estate Services Corporation (a foreclosure trustee),
LandSafe, Inc. (parent company) and various LandSafe, Inc. subsidiaries which
provide property appraisals, credit reporting services, home inspection
services, flood zone determination services, title insurance and/or closing
services for residential mortgages.
- 32 -
FRED A. RAPPOPORT, 830 Birchwood Drive, Los Angeles, California is Chairman
of The Fred Rappoport Company, a broadcasting and entertainment company.
OSCAR P. ROBERTSON, 4293 Muhlhauser Road, Fairfield, Ohio is President of
Orchem Corp., a chemical specialties distributor, and Orpack Stone Corporation,
a corrugated box manufacturer.
JOHN F. SEYMOUR, JR., 46-393 Blackhawk Drive, Indian Wells, California is
Chief Executive Officer of the Southern California Housing Development
Corporation (a non-profit affordable housing company). He is a director and a
consultant for Orange Coast Title Insurance Co. and is also a director of Irvine
Apartment Communities (a REIT) and Inco Homes (a home builder). Until January 1,
1995, he was the Executive Director of the California Housing Finance Agency. He
is a former U.S. Senator, State Senator, California State Legislator and Mayor
of Anaheim, California.
SEBASTIANO STERPA, 200 West Glenoaks Boulevard, Glendale, California is
Chairman of Sterpa Realty, Inc. and Chairman and a director of the California
Housing Finance Agency. He is also a director of Real Estate Business Services
and a director of the SunAmerica Mutual Funds.
MARYELLEN PERETZKY, 312 Walnut Street, Cincinnati, Ohio is Senior Vice
President, Chief Operating Officer and Secretary of Countrywide Investments,
Inc. and Senior Vice President and Secretary of Countrywide Financial Services,
Inc., Countrywide Fund Services, Inc. and CW Fund Distributors, Inc. She is also
Vice President of Countrywide Investment Trust and Countrywide Tax-Free Trust.
WILLIAM E. HORTZ, 312 Walnut Street, Cincinnati, Ohio is Executive Vice
President and Director of Sales of Countrywide Investments, Inc. and Countrywide
Financial Services, Inc. He is also Vice President of Countrywide Investment
Trust and Countrywide Tax-Free Trust. From 1996 until 1998, he was President of
Peregrine Asset Management (an investment adviser). From 1991 until 1996, he was
Regional Director of Neuberger & Berman Management (an investment adviser).
TINA D. HOSKING, 312 Walnut Street, Cincinnati, Ohio is Associate
General Counsel and Assistant Vice President of Countrywide Fund Services, Inc.
and CW Fund Distributors, Inc. She is also Secretary of Countrywide Investment
Trust and Countrywide Tax-Free Trust.
- 33 -
THERESA M. SAMOCKI, 312 Walnut Street, Cincinnati, Ohio is Assistant Vice
President - Fund Accounting Manager of Countrywide Fund Services, Inc. and CW
Fund Distributors, Inc. She is also Treasurer of Countrywide Investment Trust
and Countrywide Tax-Free Trust.
Each Trustee, except for Messrs. Leshner and Mozilo, receives a quarterly
retainer of $1,500 and a fee of $1,500 for each Board meeting attended. Such
fees are split equally among the Trust, Countrywide Tax-Free Trust and
Countrywide Investment Trust.
THE INVESTMENT ADVISER AND UNDERWRITER
- --------------------------------------
Countrywide Investments, Inc. (the "Adviser"), is the Funds' investment
manager. The Adviser is a subsidiary of Countrywide Financial Services, Inc.,
which is a wholly-owned subsidiary of Countrywide Credit Industries, Inc., a New
York Stock Exchange listed company principally engaged in the business of
residential mortgage lending. Messrs. Mozilo and Leshner may be deemed to be
affiliates of the Adviser by reason of their position as Chairman and President,
respectively, of the Adviser. Messrs. Mozilo and Leshner, by reason of such
affiliation, may directly or indirectly receive benefits from the advisory fees
paid to the Adviser.
Under the terms of the investment advisory agreements between the Trust and
the Adviser, the Adviser manages the Funds' investments. The Equity Fund and the
Utility Fund each pay the Adviser a fee computed and accrued daily and paid
monthly at an annual rate of .75% of its average daily net assets up to
$200,000,000, .70% of such assets from $200,000,000 to $500,000,000 and .50% of
such assets in excess of $500,000,000. The Growth/Value Fund and the Aggressive
Growth Fund each pay the Adviser a fee computed and accrued daily and paid
monthly at an annual rate of 1.00% of its average daily net assets up to
$50,000,000, .90% of such assets from $50,000,000 to $100,000,000, .80% of such
assets from $100,000,000 to $200,000,000 and .75% of such assets in excess of
$200,000,000. The total fees paid by a Fund during the first and second halves
of each fiscal year of the Trust may not exceed the semiannual total of the
daily fee accruals requested by the Adviser during the applicable six month
period.
- 34 -
For the fiscal years ended March 31, 1999, 1998 and 1997, the Utility Fund
paid advisory fees of $326,576, $303,151 and $319,201, respectively. For the
fiscal years ended March 31, 1999, 1998 and 1997, the Equity Fund paid advisory
fees of $375,212, $221,798 and $91,182 (net of voluntary fee waivers of
$21,000), respectively; however, in order to further reduce the operating
expenses of the Equity Fund, the Adviser voluntarily reimbursed the Fund for
$5,834 of Class A expenses during the fiscal year ended March 31, 1997. For the
fiscal periods ended March 31, 1999 and 1998, the Growth/Value Fund paid
advisory fees of $254,571 and $160,090, respectively. For the fiscal periods
ended March 31, 1999 and 1998, the Aggressive Growth Fund paid advisory fees of
$125,575 (net of voluntary fee waivers of $6,473) and $85,703, respectively.
Prior to August 29, 1997, the investment manager of the Predecessor Funds was
Trans Financial Bank, N.A. (the "Predecessor Manager"). For the fiscal year
ended August 31, 1997, the Predecessor Growth/Value Fund paid advisory fees of
$206,612 and the Predecessor Aggressive Growth Fund paid advisory fees of
$30,082 (net of voluntary fee waivers of $64,077).
The Adviser has agreed that, until at least August 31, 1999, it will waive
fees and reimburse expenses in order to limit the total operating expenses of
the Growth/Value Fund and the Aggressive Growth Fund to 1.95% of each Fund's
average daily net assets.
The Funds are responsible for the payment of all expenses incurred in
connection with the organization, registration of shares and operations of the
Funds, including such extraordinary or non-recurring expenses as may arise, such
as litigation to which the Trust may be a party. The Funds may have an
obligation to indemnify the Trust's officers and Trustees with respect to such
litigation, except in instances of willful misfeasance, bad faith, gross
negligence or reckless disregard by such officers and Trustees in the
performance of their duties. The Adviser bears promotional expenses in
connection with the distribution of the Funds' shares to the extent that such
expenses are not assumed by the Funds under their plans of distribution (see
below). The compensation and expenses of any officer, Trustee or employee of the
Trust who is an officer, director, employee or stockholder of the Adviser are
paid by the Adviser.
By their terms, the Funds' investment advisory agreements will remain in
force until February 28, 2000 and from year to year thereafter, subject to
annual approval by (a) the Board of Trustees or (b) a vote of the majority of a
Fund's outstanding voting securities; provided that in either event continuance
is also approved by a majority of the Trustees who are not interested persons of
the Trust, by a vote cast in person at a meeting called for the purpose of
voting such approval. The
- 35 -
Funds' investment advisory agreements may be terminated at any time, on sixty
days' written notice, without the payment of any penalty, by the Board of
Trustees, by a vote of the majority of a Fund's outstanding voting securities,
or by the Adviser. The investment advisory agreements automatically terminate in
the event of their assignment, as defined by the Investment Company Act of 1940
and the rules thereunder.
The Adviser is also the principal underwriter of the Funds and, as such,
the exclusive agent for distribution of shares of the Funds. The Adviser is
obligated to sell the shares on a best efforts basis only against purchase
orders for the shares. Shares of each Fund are offered to the public on a
continuous basis.
The Adviser currently allows concessions to dealers who sell shares of the
Funds. The Adviser receives that portion of the sales load which is not
reallowed to the dealers who sell shares of the Funds. The Adviser retains the
entire sales load on all direct initial investments in the Funds and on all
investments in accounts with no designated dealer of record. For the fiscal year
ended March 31, 1999, the aggregate underwriting commissions on sales of the
Trust's shares were $90,474 of which the Adviser paid $69,549 to unaffiliated
broker-dealers in the selling network, earned $12,602 as a broker-dealer in the
selling network and retained $8,323 in underwriting commissions. For the fiscal
year ended March 31, 1998, the aggregate underwriting commissions on sales of
the Trust's shares were $70,717 of which the Adviser paid $51,599 to
unaffiliated broker-dealers in the selling network, earned $12,478 as a
broker-dealer in the selling network and retained $6,640 in underwriting
commissions. For the fiscal year ended March 31, 1997, the aggregate
underwriting commissions on sales of the Trust's shares were $70,478 of which
the Adviser paid $60,141 to unaffiliated broker-dealers in the selling network,
earned $3,617 as a broker-dealer in the selling network and retained $6,720 in
underwriting commissions.
The Adviser retains the contingent deferred sales load on redemptions of
shares of the Utility Fund and the Equity Fund which are subject to a contingent
deferred sales load. For the fiscal year ended March 31, 1999, the Adviser
collected $457 and $693 of contingent deferred sales loads on redemptions of
Class C shares of the Utility Fund and the Equity Fund, respectively. For the
fiscal year ended March 31, 1998, the Adviser collected $1,756 and $957 of
contingent deferred sales loads on redemptions of Class C shares of the Utility
Fund and the Equity Fund, respectively. For the fiscal year ended March 31,
1997, the Adviser collected $1,141 and $505 of contingent deferred sales loads
on redemptions of Class C shares of the Utility Fund and the Equity Fund,
respectively.
- 36 -
The Funds may compensate dealers, including the Adviser and its affiliates,
based on the average balance of all accounts in the Funds for which the dealer
is designated as the party responsible for the account. See "Distribution Plans"
below.
MASTRAPASQUA & ASSOCIATES
- -------------------------
Mastrapasqua & Associates, Inc. ("Mastrapasqua") has been retained by the
Adviser to serve as the discretionary portfolio manager of the Growth/Value Fund
and the Aggressive Growth Fund. Mastrapasqua also served as investment adviser
to the Predecessor Funds. Mastrapasqua selects the portfolio securities for
investment by the Funds, purchases and sells securities of the Funds and places
orders for the execution of such portfolio transactions, subject to the general
supervision of the Board of Trustees and the Adviser. Mastrapasqua receives a
fee equal to the annual rate of .60% of each Fund's average daily net assets up
to $50,000,000, .50% of such assets from $50,000,000 to $100,000,000, .40% of
such assets from $100,000,000 to $200,000,000 and .35% of such assets in excess
of $200,000,000. The services provided by Mastrapasqua are paid for wholly by
the Adviser. The compensation of any officer, director or employee of
Mastrapasqua who is rendering services to the Fund is paid by Mastrapasqua. For
the fiscal year ended March 31, 1999, the Adviser paid fees of $232,545 to
Mastrapasqua for serving as discretionary portfolio manager to the Growth/Value
Fund and the Aggressive Growth Fund.
The employment of Mastrapasqua will remain in force until February 28, 2000
and from year to year thereafter, subject to annual approval by (a) the Board of
Trustees or (b) a vote of the majority of a Fund's outstanding voting
securities; provided that in either event continuance is also approved by a
majority of the Trustees who are not interested persons of the Trust, by a vote
cast in person at a meeting called for the purpose of voting such approval. The
employment of Mastrapasqua may be terminated at any time, on sixty days' written
notice, without the payment of any penalty, by the Board of Trustees, by a vote
of a majority of a Fund's outstanding voting securities, by the Adviser, or by
Mastrapasqua. The agreement with Mastrapasqua automatically terminates in the
event of its assignment, as defined by the Investment Company Act of 1940 and
the rules thereunder.
DISTRIBUTION PLANS
- ------------------
CLASS A SHARES -- As stated in the Prospectus, the Funds have adopted a
plan of distribution (the "Class A Plan") pursuant to Rule 12b-1 under the
Investment Company Act of 1940 which permits each Fund to pay for expenses
incurred in the distribution and promotion of the Funds' shares, including but
not limited to, the printing of prospectuses, statements of
- 37 -
additional information and reports used for sales purposes, advertisements,
expenses of preparation and printing of sales literature, promotion, marketing
and sales expenses, and other distribution-related expenses, including any
distribution fees paid to securities dealers or other firms who have executed a
distribution or service agreement with the Adviser. The Class A Plan expressly
limits payment of the distribution expenses listed above in any fiscal year to a
maximum of .25% of the average daily net assets of Class A shares of the Utility
Fund and the Equity Fund and .25% of the average daily net assets of the
Growth/Value Fund and the Aggressive Growth Fund. Unreimbursed expenses will not
be carried over from year to year.
For the fiscal year ended March 31, 1999, the aggregate
distribution-related expenditures of the Utility Fund, the Equity Fund, the
Growth/Value Fund and the Aggressive Growth Fund under the Class A Plan were
$92,716, $117,348, $57,474 and $19,824, respectively. Amounts were spent as
follows:
Growth/ Aggressive
Utility Equity Value Growth
Fund Fund Fund Fund
------- -------- ------- -------
Printing and mailing of
prospectuses and reports
to prospective shareholders.. $ 5,546 $ 6,175 $ 5,719 $ 2,878
Payments to broker-dealers
and others for the sale or
retention of assets........ 87,170 111,173 51,755 16,946
------- -------- ------- -------
$92,716 $117,348 $57,474 $19,824
======= ======== ======= =======
CLASS C SHARES (UTILITY FUND, EQUITY FUND AND GROWTH/VALUE FUND) -- The
Utility Fund, the Equity Fund and the Growth/Value Fund have also adopted a plan
of distribution (the "Class C Plan") with respect to the Class C shares of such
Funds. The Class C Plan provides for two categories of payments. First, the
Class C Plan provides for the payment to the Adviser of an account maintenance
fee, in an amount equal to an annual rate of .25% of the average daily net
assets of the Class C shares, which may be paid to other dealers based on the
average value of Class C shares owned by clients of such dealers. In addition, a
Fund may pay up to an additional .75% per annum of the daily net assets of the
Class C shares for expenses incurred in the distribution and promotion of the
shares, including prospectus costs for prospective shareholders, costs of
responding to prospective shareholder inquiries, payments to brokers and dealers
for selling and assisting in the distribution of Class C shares, costs of
advertising and promotion and any other expenses related to the distribution of
the Class C shares. Unreimbursed expenditures will not be carried over from year
to year. The Funds may make payments to dealers and other persons in an amount
up to .75% per annum of the average value of Class C shares owned by their
clients, in addition to the .25% account maintenance fee described above.
- 38 -
For the fiscal year ended March 31, 1999, the aggregate distribution-
related expenditures of the Utility Fund and the Equity Fund under the Class C
Plan were $31,159 and $30,890, respectively. Of these amounts, the Utility Fund
spent $30,870 on payments to broker-dealers and $289 on printing and mailing of
prospectuses and reports to prospective shareholders; and the Equity Fund spent
$30,606 on payments to broker-dealers and $284 on printing and mailing of
prospectuses and reports to prospective shareholders.
GENERAL INFORMATION -- Agreements implementing the Plans (the
"Implementation Agreements"), including agreements with dealers wherein such
dealers agree for a fee to act as agents for the sale of the Funds' shares, are
in writing and have been approved by the Board of Trustees. All payments made
pursuant to the Plans are made in accordance with written agreements.
The continuance of the Plans and the Implementation Agreements must be
specifically approved at least annually by a vote of the Trust's Board of
Trustees and by a vote of the Trustees who are not interested persons of the
Trust and have no direct or indirect financial interest in the Plans or any
Implementation Agreement (the "Independent Trustees") at a meeting called for
the purpose of voting on such continuance. A Plan may be terminated at any time
by a vote of a majority of the Independent Trustees or by a vote of the holders
of a majority of the outstanding shares of a Fund or the applicable class of a
Fund. In the event a Plan is terminated in accordance with its terms, the
affected Fund (or class) will not be required to make any payments for expenses
incurred by the Adviser after the termination date. Each Implementation
Agreement terminates automatically in the event of its assignment and may be
terminated at any time by a vote of a majority of the Independent Trustees or by
a vote of the holders of a majority of the outstanding shares of a Fund (or the
applicable class) on not more than 60 days' written notice to any other party to
the Implementation Agreement. The Plans may not be amended to increase
materially the amount to be spent for distribution without shareholder approval.
All material amendments to the Plans must be approved by a vote of the Trust's
Board of Trustees and by a vote of the Independent Trustees.
In approving the Plans, the Trustees determined, in the exercise of their
business judgment and in light of their fiduciary duties as Trustees, that there
is a reasonable likelihood that the Plans will benefit the Funds and their
shareholders. The Board of Trustees believes that expenditure of the Funds'
assets for distribution expenses under the Plans should assist in the growth of
the Funds which will benefit the Funds and their shareholders through increased
economies of scale, greater investment flexibility, greater portfolio
- 39 -
diversification and less chance of disruption of planned investment strategies.
The Plans will be renewed only if the Trustees make a similar determination for
each subsequent year of the Plans. There can be no assurance that the benefits
anticipated from the expenditure of the Funds' assets for distribution will be
realized. While the Plans are in effect, all amounts spent by the Funds pursuant
to the Plans and the purposes for which such expenditures were made must be
reported quarterly to the Board of Trustees for its review. Distribution
expenses attributable to the sale of more than one class of shares of a Fund
will be allocated at least annually to each class of shares based upon the ratio
in which the sales of each class of shares bears to the sales of all the shares
of such Fund. In addition, the selection and nomination of those Trustees who
are not interested persons of the Trust are committed to the discretion of the
Independent Trustees during such period.
Angelo R. Mozilo and Robert H. Leshner, as interested persons of the Trust,
may be deemed to have a financial interest in the operation of the Plans and the
Implementation Agreements.
SECURITIES TRANSACTIONS
- -----------------------
Decisions to buy and sell securities for the Funds and the placing of the
Funds' securities transactions and negotiation of commission rates where
applicable are made by the Adviser (or Mastrapasqua, with respect to the
Growth/Value Fund and the Aggressive Growth Fund) and are subject to review by
the Board of Trustees of the Trust. In the purchase and sale of portfolio
securities, the Adviser (or Mastrapasqua, with respect to the Growth/Value Fund
and the Aggressive Growth Fund) seeks best execution for the Funds, taking into
account such factors as price (including the applicable brokerage commission or
dealer spread), the execution capability, financial responsibility and
responsiveness of the broker or dealer and the brokerage and research services
provided by the broker or dealer. The Adviser (or Mastrapasqua) generally seeks
favorable prices and commission rates that are reasonable in relation to the
benefits received. For the fiscal years ended March 31, 1999, 1998 and 1997, the
Utility Fund paid brokerage commissions of $10,031, $10,445 and $25,345,
respectively. For the fiscal years ended March 31, 1999, 1998 and 1997, the
Equity Fund paid brokerage commissions of $34,209, $36,486 and $34,257,
respectively. For the fiscal periods ended March 31, 1999 and 1998, the
Growth/Value Fund paid brokerage commissions of $51,665 and $20,459,
respectively. For the fiscal periods ended March 31, 1999 and 1998, the
Aggressive Growth Fund paid brokerage commissions of $36,619 and $8,388,
respectively. The higher commissions paid by the Aggressive Growth Fund during
the fiscal year ended March 31, 1999 are due to the Fund's higher portfolio
turnover rate.
- 40 -
The Adviser (or Mastrapasqua, with respect to the Growth/Value Fund and the
Aggressive Growth Fund) is specifically authorized to select brokers who also
provide brokerage and research services to the Funds and/or other accounts over
which the Adviser (or Mastrapasqua) exercises investment discretion and to pay
such brokers a commission in excess of the commission another broker would
charge if the Adviser (or Mastrapasqua) determines in good faith that the
commission is reasonable in relation to the value of the brokerage and research
services provided. The determination may be viewed in terms of a particular
transaction or the Adviser's (or Mastrapasqua's) overall responsibilities with
respect to the Funds and to accounts over which it exercises investment
discretion. During the fiscal year ended March 31, 1999, the amount of brokerage
transactions and related commissions for the Utility Fund directed to brokers
due to research services provided were $5,133,620 and $10,031, respectively.
During the fiscal year ended March 31, 1999, the amount of brokerage
transactions and related commissions for the Equity Fund directed to brokers due
to research services provided were $17,970,437 and $34,209, respectively. During
the fiscal year ended March 31, 1999, the amount of brokerage transactions and
related commissions for the Growth/Value Fund directed to brokers due to
research services provided were $19,690,373 and $30,666, respectively. During
the fiscal year ended March 31, 1999, the amount of brokerage transactions and
related commissions for the Aggressive Growth Fund directed to brokers due to
research services provided were $15,052,360 and $25,294, respectively.
Research services include securities and economic analyses, reports on
issuers' financial conditions and future business prospects, newsletters and
opinions relating to interest trends, general advice on the relative merits of
possible investment securities for the Funds and statistical services and
information with respect to the availability of securities or purchasers or
sellers of securities. Although this information is useful to the Funds, the
Adviser and Mastrapasqua, it is not possible to place a dollar value on it.
Research services furnished by brokers through whom the Funds effect securities
transactions may be used by the Adviser and Mastrapasqua in servicing all of its
accounts and not all such services may be used by the Adviser and Mastrapasqua
in connection with the Funds.
The Funds have no obligation to deal with any broker or dealer in the
execution of securities transactions. However, the Adviser and other affiliates
of the Trust, the Adviser or Mastrapasqua may effect securities transactions
which are executed on a national securities exchange or transactions in the
over-the-counter market conducted on an agency basis. No Fund will effect any
brokerage transactions in its portfolio securities with the Adviser if such
transactions would be unfair or unreasonable to its shareholders.
Over-the-counter
- 41 -
transactions will be placed either directly with principal market makers or with
broker-dealers. Although the Funds do not anticipate any ongoing arrangements
with other brokerage firms, brokerage business may be transacted from time to
time with other firms. Neither the Adviser nor affiliates of the Trust, the
Adviser or Mastrapasqua will receive reciprocal brokerage business as a result
of the brokerage business transacted by the Funds with other brokers.
During the fiscal year ended March 31, 1999, the Funds entered into
repurchase transactions with the following of the Trust's regular broker-dealers
as defined under the Investment Company Act of 1940: Banc One Capital Markets,
Inc., Bankers Trust Company, Fifth Third Securities, Inc., Goldman, Sachs & Co.,
Lehman Brothers Inc., Morgan Stanley Dean Witter, Inc. and Nesbitt-Burns
Securities, Inc.
CODE OF ETHICS. The Trust, the Adviser and Mastrapasqua have each adopted a Code
of Ethics under Rule 17j-1 of the Investment Company Act of 1940. The Code
significantly restricts the personal investing activities of all employees of
the Adviser and Mastrapasqua and, as described below, imposes additional, more
onerous, restrictions on investment personnel of the Adviser and Mastrapasqua.
The Code requires that all employees of the Adviser and Mastrapasqua preclear
any personal securities investment (with limited exceptions, such as U.S.
Government obligations). The preclearance requirement and associated procedures
are designed to identify any substantive prohibition or limitation applicable to
the proposed investment. In addition, no employee may purchase or sell any
security which at the time is being purchased or sold (as the case may be), or
to the knowledge of the employee is being considered for purchase or sale, by
any Fund. The substantive restrictions applicable to investment personnel of the
Adviser and Mastrapasqua include a ban on acquiring any securities in an initial
public offering. Furthermore, the Code provides for trading "blackout periods"
which prohibit trading by investment personnel of the Adviser and Mastrapasqua
within periods of trading by the Funds in the same (or equivalent) security.
PORTFOLIO TURNOVER
- ------------------
A Fund's portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the fiscal year by the monthly
average of the value of the portfolio securities owned by the Fund during the
fiscal year. High portfolio turnover involves correspondingly greater brokerage
commissions and other transaction costs, which will be borne directly by the
Funds. A 100% turnover rate would occur if all of a Fund's portfolio securities
were replaced once within a one year period.
- 42 -
Generally the Utility Fund and the Equity Fund intend to invest for
long-term purposes. However, the rate of portfolio turnover will depend upon
market and other conditions, and it will not be a limiting factor when the
Adviser believes that portfolio changes are appropriate. For the fiscal years
ended March 31, 1999, 1998 and 1997, the Utility Fund experienced portfolio
turnover of 4%, 0% and 3%, respectively. For the fiscal years ended March 31,
1999, 1998 and 1997, the Equity Fund experienced portfolio turnover of 10%, 7%
and 38%, respectively.
The Growth/Value Fund expects that the average holding period of its equity
securities will be between eighteen and thirty-six months. Because the Fund is
actively managed in light of Mastrapasqua's investment outlook for common
stocks, there may be a very substantial turnover of the Fund's portfolio. For
the fiscal periods ended March 31, 1999, 1998 and August 31, 1997, the
Growth/Value Fund experienced annualized portfolio turnover of 59%, 62% and 52%,
respectively.
If warranted by market conditions, the Aggressive Growth Fund may engage in
short-term trading if Mastrapasqua believes the transactions, net of costs, will
result in improving the income or the appreciation potential of the Fund's
portfolio. Because of the possibility of short-term trading, there may be a very
substantial turnover of the Fund's portfolio. For the fiscal periods ended March
31, 1999, 1998 and August 31, 1997, the Aggressive Growth Fund experienced
annualized portfolio turnover of 93%, 40% and 51%, respectively.
CALCULATION OF SHARE PRICE AND PUBLIC OFFERING PRICE
- ----------------------------------------------------
The share price (net asset value) and the public offering price (net asset
value plus applicable sales load) of the shares of each Fund are determined as
of the close of the regular session of trading on the New York Stock Exchange
(currently 4:00 p.m., Eastern time), on each day the Trust is open for business.
The Trust is open for business on every day except Saturdays, Sundays and 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. The Trust may also be open for business on other days in which there
is sufficient trading in a Fund's portfolio securities that its net asset value
might be materially affected. For a description of the methods used to determine
the share price and the public offering price, see "Calculation of Share Price
and Public Offering Price" in the Prospectus.
OTHER PURCHASE INFORMATION
- --------------------------
The Prospectus describes generally how to purchase shares of the Funds.
Additional information with respect to certain types of purchases of Class A
shares of the Utility Fund, the Equity Fund and the Growth/Value Fund and shares
of the Aggressive Growth Fund is set forth below.
- 43 -
RIGHT OF ACCUMULATION. A "purchaser" (as defined below) of shares of a Fund
has the right to combine the cost or current net asset value (whichever is
higher) of his existing shares of the load funds distributed by the Adviser with
the amount of his current purchases in order to take advantage of the reduced
sales loads set forth in the tables in the Prospectus. The purchaser or his
dealer must notify the Transfer Agent that an investment qualifies for a reduced
sales load. The reduced load will be granted upon confirmation of the
purchaser's holdings by the Transfer Agent.
LETTER OF INTENT. The reduced sales loads set forth in the tables in the
Prospectus may also be available to any "purchaser" (as defined below) of shares
of a Fund who submits a Letter of Intent to the Transfer Agent. The Letter must
state an intention to invest within a thirteen month period in any load fund
distributed by the Adviser a specified amount which, if made at one time, would
qualify for a reduced sales load. A Letter of Intent may be submitted with a
purchase at the beginning of the thirteen month period or within ninety days of
the first purchase under the Letter of Intent. Upon acceptance of this Letter,
the purchaser becomes eligible for the reduced sales load applicable to the
level of investment covered by such Letter of Intent as if the entire amount
were invested in a single transaction.
The Letter of Intent is not a binding obligation on the purchaser to
purchase, or the Trust to sell, the full amount indicated. During the term of a
Letter of Intent, shares representing 5% of the intended purchase will be held
in escrow. These shares will be released upon the completion of the intended
investment. If the Letter of Intent is not completed during the thirteen month
period, the applicable sales load will be adjusted by the redemption of
sufficient shares held in escrow, depending upon the amount actually purchased
during the period. The minimum initial investment under a Letter of Intent is
$10,000.
A ninety-day backdating period can be used to include earlier purchases at
the purchaser's cost (without a retroactive downward adjustment of the sales
charge). The thirteen month period would then begin on the date of the first
purchase during the ninety-day period. No retroactive adjustment will be made if
purchases exceed the amount indicated in the Letter of Intent. The purchaser or
his dealer must notify the Transfer Agent that an investment is being made
pursuant to an executed Letter of Intent.
PURCHASER. A purchaser includes an individual, his spouse and their
children under the age of 21, purchasing shares for his or their own account; or
a trustee or other fiduciary purchasing shares for a single fiduciary account
although more than one beneficiary is involved; or employees of a common
employer,
- 44 -
provided that economies of scale are realized through remittances from a single
source and quarterly confirmation of such purchases; or an organized group,
provided that the purchases are made through a central administration, or a
single dealer, or by other means which result in economy of sales effort or
expense.
OTHER INFORMATION. The Trust does not impose a front-end sales load or
imposes a reduced sales load in connection with purchases of shares of a Fund
made under the reinvestment privilege or the purchases described in the "Reduced
Sales Load," "Purchases at Net Asset Value" or "How to Exchange Shares" sections
in the Prospectus because such purchases require minimal sales effort by the
Adviser. Purchases described in the "Purchases at Net Asset Value" section may
be made for investment only, and the shares may not be resold except through
redemption by or on behalf of the Trust.
TAXES
- -----
Information set forth in the Prospectuses and this Statement of Additional
Information is only a summary of certain key tax considerations generally
affecting purchasers of shares of the Funds. The following is only a summary of
certain additional tax considerations generally affecting each Fund and its
shareholders that are not described in the Prospectuses. No attempt has been
made to present a complete explanation of the federal, state and local tax
treatment of the Funds or the implications to shareholders, and the discussions
here and in the Funds' Prospectuses are not intended as substitutes for careful
tax planning. Accordingly, potential purchasers of shares of the Funds are urged
to consult their tax advisers with specific reference to their own tax
circumstances. In addition, the tax discussion in the Prospectuses and this
Statement of Additional Information is based on tax law in effect on the date of
the Prospectuses and this Statement of Additional Information; such laws and
regulations may be changed by legislative, judicial or administrative action,
sometimes with retroactive effect.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY. Each Fund has elected to be
taxed as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). As a regulated investment
company, a Fund is not subject to federal income tax on the portion of its net
investment income (i.e., taxable interest, dividends, and other taxable ordinary
income, net of expenses) and capital gain net income (i.e., the excess of
capital gains over capital losses) that it distributes to shareholders, provided
that it distributes at least 90% of its investment company taxable income (i.e.,
net investment income and the excess of net short-term capital gain over net
long-term capital loss) for the taxable year (the "Distribution Requirement"),
and satisfies certain other
- 45 -
requirements of the Code that are described below. Distributions by a Fund made
during the taxable year or, under specified circumstances, within twelve months
after the close of the taxable year, will be considered distributions of income
and gains for the taxable year and will therefore count toward satisfaction of
the Distribution Requirement.
In addition to satisfying the Distribution Requirement, a regulated
investment company must derive at least 90% of its gross income from dividends,
interest, certain payments with respect to securities loans, gains from the sale
or other disposition of stock or securities or foreign currencies (to the extent
such currency gains are directly related to the regulated investment company's
principal business of investing in stock or securities) and other income
(including but not limited to gains from options, futures, or forward contracts)
derived with respect to its business of investing in such stock, securities, or
currencies (the "Income Requirement").
In general, gain or loss recognized by a Fund on the disposition of an
asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation purchased by a Fund at a market discount
(generally, at a price less than its principal amount) will be treated as
ordinary income to the extent of the portion of the market discount which
accrued while the Fund held the debt obligation. In addition, under the rules of
Code Section 988, gain or loss recognized on the disposition of a debt
obligation denominated in a foreign currency or an option with respect thereto
(but only to the extent attributable to changes in foreign currency exchange
rates), and gain or loss recognized on the disposition of a foreign currency
forward contract, futures contract, option or similar financial instrument, or
of foreign currency itself, except for regulated futures contracts or non-equity
options subject to Code Section 1256 (unless a Fund elects otherwise), generally
will be treated as ordinary income or loss.
Further, the Code also treats as ordinary income a portion of the capital
gain attributable to a transaction where substantially all of the return
realized is attributable to the time value of a Fund's net investment in the
transaction and: (1) the transaction consists of the acquisition of property by
the Fund and a contemporaneous contract to sell substantially identical property
in the future; (2) the transaction is a straddle within the meaning of Section
1092 of the Code; (3) the transaction is one that was marketed or sold to the
Fund on the basis that it would have the economic characteristics of a loan but
the interest-like return would be taxed as capital gain; or (4) the transaction
is described as a conversion transaction in the Treasury Regulations. The amount
of such gain that is treated as ordinary income generally will not exceed the
amount
- 46 -
of the interest that would have accrued on the net investment for the relevant
period at a yield equal to 120% of the applicable federal rate, reduced by the
sum of: (1) prior inclusions of ordinary income items from the conversion
transaction and (2) the capitalized interest on acquisition indebtedness under
Code Section 263(g). However, if a Fund has a built-in loss with respect to a
position that becomes a part of a conversion transaction, the character of such
loss will be preserved upon a subsequent disposition or termination of the
position. No authority exists that indicates that the character of the income
treated as ordinary under this rule will not pass through to the Funds'
shareholders.
In general, for purposes of determining whether capital gain or loss
recognized by a Fund on the disposition of an asset is long-term or short-term,
the holding period of the asset may be affected (as applicable, depending on the
type of the Fund involved) if (1) the asset is used to close a "short sale"
(which includes for certain purposes the acquisition of a put option) or is
substantially identical to another asset so used, (2) the asset is otherwise
held by the Fund as part of a "straddle" (which term generally excludes a
situation where the asset is stock and the Fund grants a qualified covered call
option (which, among other things, must not be deep-in-the money) with respect
thereto), or (3) the asset is stock and the Fund grants an in-the-money
qualified covered call option with respect thereto. In addition, a Fund may be
required to defer the recognition of a loss on the disposition of an asset held
as part of a straddle to the extent of any unrecognized gain on the offsetting
position.
Any gain recognized by a Fund on the lapse of, or any gain or loss
recognized by a Fund from a closing transaction with respect to, an option
written by the Fund will be treated as a short-term capital gain or loss.
Transactions that may be engaged in by a Fund (such as regulated futures
contracts, certain foreign currency contracts, and options on stock indexes and
futures contracts) will be subject to special tax treatment as "Section 1256
Contracts." Section 1256 Contracts are treated as if they are sold for their
fair market value on the last business day of the taxable year, even though a
taxpayer's obligations (or rights) under Section 1256 Contracts have not
terminated (by delivery, exercise, entering into a closing transaction, or
otherwise) as of such date. Any gain or loss recognized as a consequence of the
year-end deemed disposition of Section 1256 Contracts is taken into account for
the taxable year together with any other gain or loss that was recognized
previously upon the termination of Section 1256 Contracts during that taxable
year. Any capital gain or loss for the taxable year with respect to Section 1256
Contracts (including any capital gain or loss arising as a consequence of
- 47 -
the year-end deemed sale of such Section 1256 Contracts) generally is treated as
60% long-term capital gain or loss and 40% short-term capital gain or loss. A
Fund, however, may elect not to have this special tax treatment apply to Section
1256 Contracts that are part of a "mixed straddle" with other investments of the
Fund that are not Section 1256 Contracts.
Treasury Regulations permit a regulated investment company, in determining
its investment company taxable income and net capital gain (i.e., the excess of
net long-term capital gain over net short-term capital loss) for any taxable
year, to elect (unless it has made a taxable year election for excise tax
purposes as discussed below) to treat all or any part of any net capital loss,
any net long-term capital loss or any net foreign currency loss incurred after
October 31 as if it had been incurred in the succeeding year.
In addition to satisfying the requirements described above, a Fund must
satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of a Fund's
taxable year, at least 50% of the value of the Fund's assets must consist of
cash and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (provided that, with
respect to each issuer, the Fund has not invested more than 5% of the value of
the Fund's total assets in securities of each such issuer and the Fund does not
hold more than 10% of the outstanding voting securities of each such issuer),
and no more than 25% of the value of its total assets may be invested in the
securities of any one issuer (other than U.S. Government securities and
securities of other regulated investment companies), or in two or more issuers
which the Fund controls and which are engaged in the same or similar trades or
businesses. Generally, an option (call or put) with respect to a security is
treated as issued by the issuer of the security, not the issuer of the option.
If for any taxable year a Fund does not qualify as a regulated investment
company, all of its taxable income (including its net capital gain) will be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits. Such distributions may be eligible for the
dividends-received deduction in the case of corporate shareholders.
EXCISE TAX ON REGULATED INVESTMENT COMPANIES. A 4% non-deductible excise tax is
imposed on a regulated investment company that fails to distribute in each
calendar year an amount equal to 98% of its ordinary taxable income for the
calendar year
- 48 -
and 98% of its capital gain net income for the one-year period ended on October
31 of such calendar year (or, at the election of a regulated investment company
having a taxable year ending November 30 or December 31, for its taxable year (a
"taxable year election")). The balance of such income must be distributed during
the next calendar year. For the foregoing purposes, a regulated investment
company is treated as having distributed any amount on which it is subject to
income tax for any taxable year ending in such calendar year.
For purposes of calculating the excise tax, a regulated investment company:
(1) reduces its capital gain net income (but not below its net capital gain) by
the amount of any net ordinary loss for the calendar year and (2) excludes
foreign currency gains and losses incurred after October 31 of any year (or
after the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the current calendar year
(and, instead, include such gains and losses in determining the company's
ordinary taxable income for the succeeding calendar year).
Each Fund intends to make sufficient distributions or deemed distributions
of its ordinary taxable income and capital gain net income prior to the end of
each calendar year to avoid liability for the excise tax. However, investors
should note that a Fund may in certain circumstances be required to liquidate
portfolio investments to make sufficient distributions to avoid excise tax
liability.
FUND DISTRIBUTIONS. Each Fund anticipates distributing substantially all of its
investment company taxable income for each taxable year. Such distributions will
be taxable to shareholders as ordinary income and treated as dividends for
federal income tax purposes. Ordinary income dividends paid by a Fund with
respect to a taxable year will qualify for the 70% dividends-received deduction
generally available to corporations (other than corporations such as S
corporations, which are not eligible for the deduction because of their special
characteristics, and other than for purposes of special taxes such as the
accumulated earnings tax and the personal holding company tax) to the extent of
the amount of qualifying dividends received by the Fund from domestic
corporations for the taxable year. A dividend received by a Fund will not be
treated as a qualifying dividend (1) if it has been received with respect to any
share of stock that the Fund has held for less than 46 days (91 days in the case
of certain preferred stock), excluding for this purpose under the rules of Code
Section 246(c)(3) and (4); (i) any day more than 45 days (or 90 days in the case
of certain preferred stock) after the date on which the stock becomes
ex-dividend and (ii) any period during which the Fund has an option to sell, is
under a contractual obligation to sell, has made and
- 49 -
not closed a short sale of, is the grantor of a deep-in-the-money or otherwise
nonqualified option to buy, or has otherwise diminished its risk of loss by
holding other positions with respect to, such (or substantially identical)
stock; (2) to the extent that the Fund is under an obligation (pursuant to a
short sale or otherwise) to make related payments with respect to positions in
substantially similar or related property; or (3) to the extent the stock on
which the dividend is paid is treated as debt-financed under the rules of Code
Section 246A. Moreover, the dividends-received deduction for a corporate
shareholder may be disallowed or reduced (1) if the corporate shareholder fails
to satisfy the foregoing requirements with respect to its shares of the Fund or
(2) by application of Code Section 246(b) which in general limits the
dividends-received deduction to 70% of the shareholder's taxable income
(determined without regard to the dividends-received deduction and certain other
items).
A Fund may either retain or distribute to shareholders its net capital gain
for each taxable year. Each Fund currently intends to distribute any such
amounts. If net capital gain is distributed and designated as a capital gain
dividend, it will be taxable to shareholders as long-term capital gain,
regardless of the length of time the shareholder has held his or her shares or
whether such gain was recognized by the Fund prior to the date on which the
shareholder acquired his shares. The Code provides, however, that under certain
conditions only 50% of the capital gain recognized upon a Fund's disposition of
domestic qualified "small business" stock will be subject to tax.
Conversely, if a Fund elects to retain its net capital gain, the Fund will
be subject to tax thereon (except to the extent of any available capital loss
carryovers) at the 35% corporate tax rate. If a Fund elects to retain its net
capital gain, it is expected that the Fund also will elect to have shareholders
of record on the last day of its taxable year treated as if each received a
distribution of his pro rata share of such gain, with the result that each
shareholder will be required to report his pro rata share of such gain on his
tax return as long-term capital gain, will receive a refundable tax credit for
his pro rata share of tax paid by the Fund on the gain, and will increase the
tax basis for his shares by an amount equal to the deemed distribution less the
tax credit.
Alternative Minimum Tax ("AMT") is imposed in addition to, but only to the
extent it exceeds, the regular tax and is computed at a maximum marginal rate of
28% for non-corporate taxpayers and 20% for corporate taxpayers on the excess of
the taxpayer's alternative minimum taxable income ("AMTI") over an exemption
amount. For purposes of the corporate AMT, the corporate dividends-received
deduction is not itself an item of tax preference that must be added back to
taxable income or is
- 50 -
otherwise disallowed in determining a corporation's AMTI. However, corporate
shareholders generally will be required to take the full amount of any dividend
received from a Fund into account (without a dividends-received deduction) in
determining their adjusted current earnings.
Investment income that may be received by a Fund from sources within
foreign countries may be subject to foreign taxes withheld at the source. The
United States has entered into tax treaties with many foreign countries which
entitle a Fund to a reduced rate of, or exemption from, taxes on such income. It
is impossible to determine the effective rate of foreign tax in advance since
the amount of a Fund's assets to be invested in various countries is not known.
Distributions by a Fund that do not constitute ordinary income dividends or
capital gain dividends will be treated as a return of capital to the extent of
(and in reduction of) the shareholder's tax basis in his shares; any excess will
be treated as gain from the sale of his shares, as discussed below.
Distributions by a Fund will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the Fund (or of another Fund). Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder purchases shares of a Fund reflects undistributed net
investment income, recognized net capital gain, or unrealized appreciation in
the value of the assets of the Fund, distributions of such amounts will be
taxable to the shareholder in the manner described above, although such
distributions economically constitute a return of capital to the shareholder.
Ordinarily, shareholders are required to take distributions by a Fund into
account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by a Fund) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
Each Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of ordinary income dividends and capital gain dividends, and
the proceeds of redemption of shares, paid to any shareholder (1) who has failed
to provide a correct
- 51 -
taxpayer identification number, (2) who is subject to backup withholding for
failure to report the receipt of interest or dividend income properly, or (3)
who has failed to certify to the Fund that it is not subject to backup
withholding or is an "exempt recipient" (such as a corporation).
SALE OR REDEMPTION OF SHARES. A shareholder will recognize gain or loss on the
sale or redemption of shares of a Fund in an amount equal to the difference
between the proceeds of the sale or redemption and the shareholder's adjusted
tax basis in the shares. All or a portion of any loss so recognized may be
disallowed if the shareholder purchases other shares of a Fund within 30 days
before or after the sale or redemption. In general, any gain or loss arising
from (or treated as arising from) the sale or redemption of shares of a Fund
will be considered capital gain or loss and will be long-term capital gain or
loss if the shares were held for longer than one year. However, any capital loss
arising from the sale or redemption of shares held for six months or less will
be disallowed to the extent of the amount of exempt-interest dividends received
on such shares and (to the extent not disallowed) will be treated as a long-term
capital loss to the extent of the amount of capital gain dividends received on
such shares. For this purpose, the special holding period rules of Code Section
246(c)(3) and (4) (discussed above in connection with the dividends-received
deduction for corporations) generally will apply in determining the holding
period of shares. Capital losses in any year are deductible only to the extent
of capital gains plus, in the case of a noncorporate taxpayer, $3,000 of
ordinary income.
If a shareholder (1) incurs a sales load in acquiring shares of a Fund, (2)
disposes of such shares less than 91 days after they are acquired and (3)
subsequently acquires shares of the Fund or another fund at a reduced sales load
pursuant to a right acquired in connection with the acquisition of the shares
disposed of, then the sales load on the shares disposed of (to the extent of the
reduction in the sales load on the shares subsequently acquired) shall not be
taken into account in determining gain or loss on such shares but shall be
treated as incurred on the acquisition of the subsequently acquired shares.
FOREIGN SHAREHOLDERS. Taxation of a shareholder who, as to the United States, is
a nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income from
a Fund is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from a Fund is not effectively connected with a U.S. trade or
business carried on by a foreign shareholder, ordinary income dividends paid to
such foreign shareholder will
- 52 -
be subject to U.S. withholding tax at the rate of 30% (or lower applicable
treaty rate) upon the gross amount of the dividend. Furthermore, such a foreign
shareholder may be subject to U.S. withholding tax at the rate of 30% (or lower
applicable treaty rate) on the gross income resulting from the Fund's election
to treat any foreign taxes paid by it as paid by its shareholders, but may not
be allowed a deduction against such gross income or a credit against the U.S.
withholding tax for the foreign shareholder's pro rata share of such foreign
taxes which it is treated as having paid. Such a foreign shareholder would
generally be exempt from U.S. federal income tax on gains realized on the sale
of shares of a Fund, capital gain dividends and exempt-interest dividends, and
amounts retained by the Fund that are designated as undistributed capital gains.
If the income from a Fund is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends, and any gains realized upon the sale of shares of the
Fund will be subject to U.S. federal income tax at the rates applicable to U.S.
citizens or domestic corporations.
In the case of foreign noncorporate shareholders, a Fund may be required to
withhold U.S. federal income tax at a rate of 31% on distributions that are
otherwise exempt from withholding tax (or taxable at a reduced treaty rate)
unless such shareholders furnish the Fund with proper notification of their
foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in a Fund,
including the applicability of foreign taxes.
EFFECT OF FUTURE LEGISLATION, LOCAL TAX CONSIDERATIONS. The foregoing general
discussion of U.S. federal income tax consequences is based on the Code and
Treasury Regulations issued thereunder as in effect on the date of this
Statement of Additional Information. Future legislative or administrative
changes or court decisions may significantly change the conclusions expressed
herein, and any such changes or decisions may have a retroactive effect.
Rules of state and local taxation of ordinary income dividends and capital
gain dividends from regulated investment companies may differ from the rules for
U.S. federal income taxation described above. Shareholders are urged to consult
their tax advisers as to the consequences of these and other state and local tax
rules affecting investment in a Fund.
- 53 -
REDEMPTION IN KIND
- ------------------
Under unusual circumstances, when the Board of Trustees deems it in the
best interests of a Fund's shareholders, the Fund may make payment for shares
repurchased or redeemed in whole or in part in securities of the Fund taken at
current value. Should payment be made in securities, the redeeming shareholder
will generally incur brokerage costs in converting such securities to cash.
Portfolio securities which are issued in an in-kind redemption will be readily
marketable. The Trust has filed an irrevocable election with the Securities and
Exchange Commission under Rule 18f-1 of the Investment Company Act of 1940
wherein the Funds are committed to pay redemptions in cash, rather than in kind,
to any shareholder of record of a Fund who redeems during any ninety day period,
the lesser of $250,000 or 1% of a Fund's net assets at the beginning of such
period.
HISTORICAL PERFORMANCE INFORMATION
- ----------------------------------
From time to time, each Fund may advertise average annual total return.
Average annual total return quotations will be computed by finding the average
annual compounded rates of return over 1, 5 and 10 year periods that would
equate the initial amount invested to the ending redeemable value, according to
the following formula:
n
P (1 + T) = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the 1, 5 and 10 year periods at the end of the 1, 5 or 10
year periods (or fractional portion thereof)
The calculation of average annual total return assumes the reinvestment of all
dividends and distributions and the deduction of the current maximum sales load
from the initial $1,000 payment. If a Fund has been in existence less than one,
five or ten years, the time period since the date of the initial public offering
of shares will be substituted for the periods stated. The average annual total
returns of the Funds for the periods ended March 31, 1999 are as follows:
Utility Fund (Class A)
- ----------------------
1 Year -8.60%
5 Years 11.40%
Since inception (August 15, 1989) 10.46%
- 54 -
Utility Fund (Class C)
- ----------------------
1 Year -5.92%
5 Years 11.41%
Since inception (August 2, 1993) 8.98%
Equity Fund (Class A)
- ---------------------
1 Year 9.73%
5 Years 19.34%
Since inception (August 2, 1993) 16.35%
Equity Fund (Class C)
- ---------------------
1 Year 13.03%
5 Years 19.34%
Since inception (June 7, 1993) 15.82%
Growth/Value Fund (Class A)
- ---------------------------
1 Year 24.69%
Since inception (September 29, 1995) 25.00%
Aggressive Growth Fund
- ----------------------
1 Year 10.85%
Since inception (September 29, 1995) 17.46%
Each Fund may also advertise total return (a "nonstandardized
quotation") which is calculated differently from average annual total return. A
nonstandardized quotation of total return may be a cumulative return which
measures the percentage change in the value of an account between the beginning
and end of a period, assuming no activity in the account other than reinvestment
of dividends and capital gains distributions. This computation does not include
the effect of the applicable sales load which, if included, would reduce total
return. The total returns of the Funds as calculated in this manner for each of
the last ten fiscal years (or since inception) are as follows:
Growth/
Utility Utility Equity Equity Value Aggressive
Fund Fund Fund Fund Fund Growth
Class A Class C Class A Class C Class A Fund
------- ------- ------- ------- ------- ----------
Period Ended
- ------------
March 31, 1990 + 5.37%(1)
March 31, 1991 + 9.23%
March 31, 1992 +11.84%
March 31, 1993 +20.64%
March 31, 1994 - 2.11% - 5.21%(2) - 2.63%(2) - 2.91%(3)
March 31, 1995 + 3.68% + 3.00% + 8.07% + 7.32%
March 31, 1996 +21.65% +20.78% +27.90% +26.90% +14.50%(4) + 8.40%(4)
March 31, 1997 + 5.61% + 4.82% +11.82% +11.01% +12.77% + 9.46%
March 31, 1998 +40.92% +39.91% +42.74% +41.63% +36.73% +33.53%
March 31, 1999 -4.79% -5.92% +14.30% +13.03% +29.89% +15.46%
- 55 -
(1)From date of initial public offering on August 15, 1989
(2)From date of initial public offering on August 2, 1993
(3)From date of initial public offering on June 7, 1993
(4)From date of initial public offering on September 29, 1995
A nonstandardized quotation may also indicate average annual compounded rates of
return without including the effect of the applicable sales load or over periods
other than those specified for average annual total return. The average annual
compounded rates of return for the Funds (excluding sales loads) for the periods
ended March 31, 1999 are as follows:
Utility Fund (Class A)
- ----------------------
1 Year -4.79%
3 Years +12.32%
5 Years +12.32%
Since inception (August 15, 1989) +10.93%
Utility Fund (Class C)
- ----------------------
1 Year -5.92%
3 Years +11.33%
5 Years +11.41%
Since inception (August 2, 1993) +8.98%
Equity Fund (Class A)
- ---------------------
1 Year +14.30%
3 Years +22.19%
5 Years +20.32%
Since inception (August 2, 1993) +17.19%
Equity Fund (Class C)
- ---------------------
1 Year +13.03%
3 Years +21.13%
5 Years +19.34%
Since inception (June 7, 1993) +15.82%
Growth/Value Fund (Class A)
- ---------------------------
1 Year +29.89%
3 Years +25.69%
Since inception (September 29, 1995) +26.46%
Aggressive Growth Fund
- ----------------------
1 Year +15.46%
3 Years +19.06%
Since inception (September 29, 1995) +18.84%
A nonstandardized quotation of total return will always be accompanied by the
Fund's average annual total return as described above.
- 56 -
From time to time, each Fund may advertise its yield. A yield quotation is
based on a 30-day (or one month) period and is computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the period, according to the following
formula:
6
Yield = 2[(a-b/cd +1) -1]
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
Solely for the purpose of computing yield, dividend income is recognized by
accruing 1/360 of the stated dividend rate of the security each day that a Fund
owns the security. Generally, interest earned (for the purpose of "a" above) on
debt obligations is computed by reference to the yield to maturity of each
obligation held based on the market value of the obligation (including actual
accrued interest) at the close of business on the last business day prior to the
start of the 30-day (or one month) period for which yield is being calculated,
or, with respect to obligations purchased during the month, the purchase price
(plus actual accrued interest). With respect to the treatment of discount and
premium on mortgage or other receivables-backed obligations which are expected
to be subject to monthly paydowns of principal and interest, gain or loss
attributable to actual monthly paydowns is accounted for as an increase or
decrease to interest income during the period and discount or premium on the
remaining security is not amortized.
The performance quotations described above are based on historical earnings
and are not intended to indicate future performance. Average annual total return
and yield are computed separately for Class A and Class C shares of the Utility
Fund, the Equity Fund and the Growth/Value Fund. The yield of Class A shares is
expected to be higher than the yield of Class C shares due to the higher
distribution fees imposed on Class C shares.
To help investors better evaluate how an investment in a Fund might satisfy
their investment objective, advertisements regarding each Fund may discuss
various measures of Fund performance, including current performance ratings
and/or rankings appearing in financial magazines, newspapers and publications
which track mutual fund performance. Advertisements may also compare Fund
performance to performance as reported by other investments, indices and
averages. When advertising current ratings or rankings, the Funds may use the
following publications or indices to discuss or compare Fund performance:
- 57 -
Lipper Mutual Fund Performance Analysis measures total return and average
current yield for the mutual fund industry and ranks individual mutual fund
performance over specified time periods assuming reinvestment of all
distributions, exclusive of sales loads. The Utility Funds may provide
comparative performance information appearing in the Utility Funds category and
the Equity Fund may provide comparative performance information appearing in the
Growth & Income Funds category. The Growth/Value Fund may provide comparative
performance information appearing in the Growth Funds category and the
Aggressive Growth Fund may provide comparative performance information appearing
in the Capital Appreciation Funds category. In addition, the Funds may also use
comparative performance information of relevant indices, including the
following:
S&P 500 Index is an unmanaged index of 500 stocks, the purpose of which is
to portray the pattern of common stock price movement.
Dow Jones Industrial Average is a measurement of general market price
movement for 30 widely held stocks listed on the New York Stock Exchange.
S&P Utility Index is an unmanaged index consisting of three utility groups
totaling 40 companies -- 21 electric power companies, 11 natural gas
distributors and pipelines and 8 telephone companies.
NASDAQ Composite Index is an unmanaged index of common stocks of companies
traded over-the-counter and offered through the National Association of
Securities Dealers Automated Quotations ("NASDAQ") system.
In assessing such comparisons of performance an investor should keep in
mind that the composition of the investments in the reported indices and
averages is not identical to the Funds' portfolios, that the averages are
generally unmanaged and that the items included in the calculations of such
averages may not be identical to the formula used by the Funds to calculate
their performance. In addition, there can be no assurance that the Funds will
continue this performance as compared to such other averages.
PRINCIPAL SECURITY HOLDERS
- --------------------------
As of July 9, 1999, Citizens Business Bank, Trustee FBO Countrywide Credit
Industries, Inc., P.O. Box 671, Pasadena, California owned of record 25.3% of
the outstanding Class A shares of the Equity Fund. Citizens Business Bank,
Trustee FBO Countrywide Credit Industries, Inc. may be deemed to control the
Class A shares of the Equity Fund by virtue of the fact that it
- 58 -
owned of record more than 25% of the outstanding shares of the class as of such
date. As of July 9, 1999, Charles Schwab & Co., Inc. Mutual Funds Special
Custody Account for the Exclusive Benefit of Its Customers, 101 Montgomery
Street, San Francisco, California owned of record 41.3% of the outstanding
shares of the Growth/Value Fund and 36.6% of the outstanding shares of the
Aggressive Growth Fund. Charles Schwab & Co., Inc. may be deemed to control the
Growth/Value Fund and the Aggressive Growth Fund by virtue of the fact that it
owned of record more than 25% of the outstanding shares of each Fund as of such
date.
As of July 9, 1999, FirstCinco, Attn: Trust Department, 425 Walnut Street,
Cincinnati, Ohio owned of record 24.9% of the outstanding shares of the
Growth/Value Fund and 15.9% of the outstanding shares of the Aggressive Growth
Fund; Scudder Trust Company FBO Countrywide Credit Industries, Inc. Tax Deferred
Savings and Supplemental Investment Plan-Attention Asset Reconciliation, P.O.
Box 910208, San Diego, California owned of record 7.4% of the outstanding shares
of the Growth/Value Fund and 16.8% of the outstanding shares of the Aggressive
Growth Fund; Merrill Lynch, Pierce, Fenner & Smith Incorporated, For the Sole
Benefit of its Customers, 4800 Deer Lake Drive East, Jacksonville, Florida owned
of record 20.9% of the outstanding Class C shares of the Utility Fund; Martin S.
Goldfarb, M.D., 919 N. Crescent, Beverly Hills, California owned of record 9.3%
of the outstanding Class A shares of the Equity Fund; and Clifford G. Neill
Trust/Clifford G. Neill, DDS P.C. Profit Sharing Plan, 307 S. University,
Carbondale, Illinois owned of record 9.7 of the outstanding Class C shares of
the Equity Fund.
As of July 9, 1999, the Trustees and officers of the Trust as a group owned
of record or beneficially 2.2% of the outstanding Class A shares of the Equity
Fund and less than 1% of the outstanding shares of the Trust and of each other
Fund (or class thereof).
CUSTODIAN
- ---------
The Fifth Third Bank, 38 Fountain Square Plaza, Cincinnati, Ohio, is the
Custodian for the Utility Fund and the Equity Fund and Firstar Bank, N.A., 425
Walnut Street, Cincinnati, Ohio is the Custodian for the Growth/Value and the
Aggressive Growth Fund. The Custodians act as the Funds' depository, safekeep
their portfolio securities, collect all income and other payments with respect
thereto, disburse funds as instructed and maintain records in connection with
their duties. As compensation, each Custodian receives from a Fund a base fee
equal to a percentage of that Fund's net assets plus a charge for each security
transaction, subject to a minimum annual fee.
- 59 -
AUDITORS
- --------
The firm of Arthur Andersen LLP has been selected as independent auditors
for the Trust for the fiscal year ending March 31, 2000. Arthur Andersen LLP,
425 Walnut Street, Cincinnati, Ohio, performs an annual audit of the Trust's
financial statements and advises the Trust as to certain accounting matters.
TRANSFER AGENT
- --------------
The Trust's transfer agent, Countrywide Fund Services, Inc. ("CFS"),
maintains the records of each shareholder's account, answers shareholders'
inquiries concerning their accounts, processes purchases and redemptions of the
Funds' shares, acts as dividend and distribution disbursing agent and performs
other shareholder service functions. CFS is an affiliate of the Adviser by
reason of common ownership. CFS receives a fee for its services as transfer
agent payable monthly at an annual rate of $17 per account from each of the
Funds; provided, however, that the minimum fee is $1,000 per month for each
class of shares of a Fund. In addition, the Funds pay out-of-pocket expenses,
including but not limited to, postage, envelopes, checks, drafts, forms,
reports, record storage and communication lines.
CFS also provides accounting and pricing services to the Funds. For
calculating daily net asset value per share and maintaining such books and
records as are necessary to enable CFS to perform its duties, the Utility Fund,
the Equity Fund and the Growth/Value Fund each pay CFS a fee in accordance with
the following schedule:
Asset Size of Fund Monthly Fee
------------------ -----------
$ 0 - $ 50,000,000 $3,000
50,000,000 - 100,000,000 3,500
100,000,000 - 200,000,000 4,000
200,000,000 - 300,000,000 4,500
Over 300,000,000 5,500*
- 60 -
The Aggressive Growth Fund pays CFS a fee in accordance with the following
schedule:
Asset Size of Fund Monthly Fee
------------------ -----------
$ 0 - $ 50,000,000 $2,000
50,000,000 - 100,000,000 2,500
100,000,000 - 200,000,000 3,000
200,000,000 - 300,000,000 3,500
Over 300,000,000 4,500*
*Subject to an additional fee of .001% of average daily net assets in
excess of $300 million.
In addition, each Fund pays all costs of external pricing services.
CFS is retained by the Adviser to assist the Adviser in providing
administrative services to the Funds. In this capacity, CFS supplies
non-investment related statistical and research data, internal regulatory
compliance services and executive and administrative services. CFS supervises
the preparation of tax returns, reports to shareholders of the Funds, reports to
and filings with the Securities and Exchange Commission and state securities
commissions, and materials for meetings of the Board of Trustees. For the
performance of these administrative services, CFS receives a fee from the
Adviser. The Adviser is solely responsible for the payment of these
administrative fees to CFS, and CFS has agreed to seek payment of such fees
solely from the Adviser.
ANNUAL REPORT
- -------------
The Funds' financial statements as of March 31, 1999 appear in the Trust's
annual report which is attached to this Statement of Additional Information.
- 61 -
ANNUAL REPORT
MARCH 31, 1999
UTILITY
FUND
EQUITY
FUND
GROWTH/VALUE
FUND
AGGRESSIVE GROWTH
FUND
UTILITY FUND
MANAGEMENT DISCUSSION AND ANALYSIS
================================================================================
The Utility Fund seeks a high level of total return by investing primarily
in securities of public utilities. Capital appreciation is a secondary
objective. The Fund's total returns for the fiscal year ended March 31, 1999
(excluding the impact of applicable sales loads) were -4.79% and -5.92% for
Class A and Class C shares, respectively.
During fiscal 1999, the markets again enjoyed strong domestic growth with
minimal inflationary threats. Record low unemployment, high consumer confidence
and gains in real wages contributed to higher levels of consumer spending,
providing a boost to Gross Domestic Product (GDP). Despite the favorable
domestic economic conditions, stock market gains were very narrow, with
investors preferring higher growth industries such as technology,
pharmaceuticals and communications. The movement toward higher growth names came
largely at the expense of the utility, basic materials and energy sectors, which
are deemed to be more value-oriented areas. The rotation from value to growth
was magnified by rising interest rates during the second half of the fiscal
year. After bottoming out at 4.71% in early October, the yield on the 30-year
U.S. Treasury bond rose to 5.60% at the end of March. Since many investors
consider utility stocks to be an alternative to bonds, utilities fell along with
the bond market. As a result, the S&P Utility Index returned -1.51% for the
fiscal year, compared to the 13.19% return of the Dow Jones Industrial Average
and the 18.47% return of the S&P 500 Index.
Once again, the best performing sector within the Fund was telecommunications.
Our holdings in Bell Atlantic, AT&T and Lucent Technologies performed very well
as the power of data and Internet communications became available to a record
number of individuals and businesses. Almost all of the traditional electric
utilities in the Fund performed below expectations due to the overall industry
sell-off. As has been the case over the last few years, utility funds again did
not participate in the record amounts of new money flowing into the equity
markets. As a result, very few new names were added to the portfolio and
portfolio turnover again was minimal.
Our outlook for the utility sector remains optimistic. We expect the backup in
interest rates to be temporary, thus providing a more positive environment for
utility stocks. Deregulation and consolidation should continue to be positive
for the industry. The demand for telecommunications should continue to boom as
the Internet grows and high speed access to the world wide web becomes more
commonplace and affordable. The Fund will continue to concentrate on owning
those companies that can provide attractive total returns, and are well
positioned to increase their revenues and earnings in the upcoming period of
deregulation.
Chart:
Comparison of the Change in Value of a $10,000 Investment in the
Utility Fund - Class A* and the Standard & Poor's Utility Index
Utility Fund
Average Annual Total Returns
1 Year 5 Years Since Inception*
Class A (8.60%) 11.40% 10.47%
Class C (5.92%) 11.41% 8.98%
Standard & Poor's Utility Index Utility Fund - Class A
10000 9600
10243 9671
11412 10320
3/90 10562 10115
10618 10144
10140 9854
11120 10562
3/91 11367 11049
10889 11115
11749 12144
12746 12960
3/92 11556 12356
12457 12905
13438 13398
13777 13953
3/93 15264 14906
15548 15130
16589 15556
15634 15073
3/94 14305 14591
14304 14469
14369 14660
14355 14769
3/95 15349 15128
16491 15890
18350 16986
20409 18677
3/96 19434 18404
20408 19283
19732 18651
21038 19755
3/97 20326 19437
21524 20784
22573 21626
26248 25266
3/98 27729 27390
28066 25933
29371 26862
30128 29724
3/99 27297 26079
Past performance is not predictive of future performance.
*The chart above represents performance of Class A shares only, which will
vary from the performance of Class C shares based on the difference in loads and
fees paid by shareholders in the different classes. The initial public offering
of Class A shares commenced on August 15, 1989, and the initial public offering
of Class C shares commenced on August 2, 1993.
3
EQUITY FUND
MANAGEMENT DISCUSSION AND ANALYSIS
================================================================================
The Equity Fund seeks long-term capital appreciation by investing primarily in
common stocks of companies that offer attractive total returns through potential
growth of both share price and dividends. The Fund's total returns for the
fiscal year ended March 31, 1999 (excluding the impact of applicable sales
loads) were 14.30% and 13.03% for Class A and Class C shares, respectively.
During the fiscal year, the continued strength in the U.S. economy combined with
low inflation to push the major large-cap stock indices to new highs. Record low
unemployment, high consumer confidence and gains in real wages contributed to
higher levels of consumer spending, providing a larger than expected boost to
Gross Domestic Product (GDP). Stability in much of Asia toward the end of the
fiscal year allowed corporate profits to post their largest gains in almost two
years.
Market gains were very narrow in the latest fiscal year, with investors
preferring to own those very few large-cap growth-oriented names that were
responsible for most of the gains in the market. Toward the end of the fiscal
year, value and cyclical stocks began to rally on the expectations of continued
strong U.S. economic growth, low inflation and recoveries in the economies of
many emerging markets. Although returns were down from the unsustainable levels
seen in fiscal year 1998, most indices still managed to post double-digit
increases as evidenced by the 18.47% return of the S&P 500 Index, the 13.19%
gain in the Dow Jones Industrial Average and the 34.09% rise in the NASDAQ
Composite Index. Mid-cap stocks managed to post a gain of only 0.46% and
small-cap stocks lost 17.28% during the same time period.
The Fund remained well-diversified throughout the fiscal year. Holdings in the
technology, healthcare and communications sectors enjoyed very strong
performance. Technology stocks benefited from the growth of the Internet, the
demand for personal computers and the continued move to networking of computer
systems. Healthcare stocks enjoyed the positive fundamentals brought on by an
aging population, advances in drug therapies and the introduction of new
treatments that showed success in battling some of the most widespread diseases.
Communications stocks were the beneficiaries of increased need for high speed
Internet access and the boom in data communications.
Management continues to focus on those companies that are leaders in their
industries and can offer growth in revenues, cash flows and earnings. We remain
optimistic on the longer term fundamentals facing the market -- low inflation,
an expectation for lower interest rates and continued economic growth. We will
continue to seek to own companies that have a competitive advantage and have the
capability to expand their profit margins.
Chart:
Comparison of the Change in Value of a $10,000 Investment in the
Equity Fund - Class C* and the Standard & Poor's 500 Index
Equity Fund
Average Annual Total Returns
1 Year 5 Years Since Inception*
Class A 9.73% 19.34% 16.36%
Class C 13.03% 19.34% 15.83%
Standard & Poor's 500 Index Equity Fund - Class C
10000 10000
10078 10010
10338 10130
10578 9994
3/94 10177 9709
10220 9317
10718 9787
10716 9751
3/95 11760 10419
12883 11095
13907 11893
14744 12776
3/96 15535 13222
16232 13797
16734 14105
18129 14491
3/97 18615 14678
21865 16746
23503 17801
24178 18603
3/98 27550 20788
28460 20938
25629 18724
31087 22454
3/99 32636 23497
Past performance is not predictive of future performance.
*The chart above represents performance of Class C shares only, which will
vary from the performance of Class A shares based on the differences in loads
and fees paid by shareholders in the different classes. The initial public
offering of Class C shares commenced on June 7, 1993, and the initial public
offering of Class A shares commenced on August 2, 1993.
4
GROWTH/VALUE FUND
AGGRESSIVE GROWTH FUND
MANAGEMENT DISCUSSION AND ANALYSIS
================================================================================
The Growth/Value Fund seeks long-term capital appreciation primarily through
equity investments in companies whose valuations may not yet reflect the
prospects for accelerated earnings/cash flow growth. For the fiscal year ended
March 31, 1999, the Fund's total return (excluding the impact of applicable
sales loads) was 29.89%, as compared to 18.47% for the S&P 500 Index.
The Aggressive Growth Fund seeks long-term capital appreciation primarily
through equity investments in companies of various sizes. For the fiscal year
ended March 31, 1999, the Fund's total return (excluding the impact of
applicable sales loads) was 15.46%, as compared to the 34.09% return for the
NASDAQ Composite Index.
Volatility has once again intensified within the equity market over the past
year. Growth stocks, after having dominated the bull market since the October
lows of last year, have recently retreated somewhat as lagging cyclical sectors
regained some investor interest. Although a "corrective phase" can be
unsettling, as evidenced most vividly in the Internet stocks, the broadening of
market participation is a positive development for the longevity of the bull
market.
Maintaining a focus on long-term secular developments that are impacting the
investment landscape should provide investor comfort that an exciting period of
innovation, technological creativity and revolutionary healthcare products and
therapies lie before us.
Despite Wall Street's preoccupation with short-term trading strategies, sector
rotation and rearview analysis, strong secular dynamics are still unfolding that
should provide a thrust to equity prices for some time. For example,
preoccupation with Y2K's potential short-term effect on PC demand can cause
investors to lose sight of the explosive demand for productivity enhancing
software and hardware in the year 2000 as new technologies enter the scene.
As corporate earnings of the market leading technology stocks are reported, the
robust condition of their industry and the overall economy have significantly
increased investor comfort with the earnings prospects of these companies.
Corporate earnings growth has not been limited to the technology sector. Based
on the companies in the S&P 500 Index that have reported earnings for the
quarter ended March 31, 1999, operating earnings per share are up substantially
versus last year's decline of 1.6% and are above most analysts' expectations.
The fundamentals of the U.S. economy continue to support a positive
long-term outlook for the equity market and continue to benefit from low
inflation, low unemployment and a favorable interest rate environment. As a
result, U.S. consumers, the main drivers behind the demand for U.S. goods and
services, are participating in the rewards of a healthy and growing U.S.
economy. Going on the ninth consecutive year of an economic expansion, we remain
positive on 1999 Gross Domestic Product (GDP) growth.
In addition to the continuing strong domestic consumer spending trends, the
international economy appears to be improving. Based on many U.S. companies'
observations, demand is increasing in Asia for U.S. goods and services. This
incremental factor, which is helping to drive the U.S. economy, has eased
investor fears of moderating U.S. GDP growth. The recent recovery of cyclical
stocks is evidence of the improving outlook for international economies,
especially in Asia. In addition to creating an impetus for higher demand and
profitability for the large U.S. multinational conglomerates, it should also
lead to additional cash flow available for technology spending.
With early signs of recovery emerging in Asia and a need to encourage growth in
Europe, the balance of economic policy worldwide cannot risk undoing the
delicate recovery underway. Consequently, we remain encouraged that the policy
background should be supportive to growth and liquidity, the foundation of
higher market valuations.
Our concentrated sectors each have distinct characteristics supporting long-term
growth. Health care is bolstered by the aging population and productivity gains
stemming from enlightened government reforms. Technology continues to alter
fundamental production and service delivery systems that increase productivity
significantly.
5
GROWTH/VALUE FUND
AGGRESSIVE GROWTH FUND
MANAGEMENT DISCUSSION AND ANALYSIS (CONTINUED)
================================================================================
We attempt to position the Growth/Value Fund to participate in bull markets and
simultaneously limit the risk profile in such a way as to minimize relative
market losses during downturns. The Aggressive Growth Fund also emphasizes
buying growth at value, but the average capitalization size is much smaller than
that of the Growth/Value Fund. The smaller, and usually younger, aggressive
growth companies add somewhat to the risk/return profile of the Aggressive
Growth Fund.
Chart:
Comparison of the Change in Value of a $10,000 Investment in the
Growth/Value Fund and the Standard & Poor's 500 Index
Growth/Value Fund
Average Annual Total Returns
1 Year Since Inception*
24.69% 25.02%
Standard & Poor's 500 Index Growth/Value Fund
10000 9600
10576 10099
3/96 11143 10992
11643 11098
12003 11290
13004 12185
3/97 13352 12291
15684 14437
16858 16335
17342 15083
3/98 19762 16805
20414 17104
18383 15650
22299 20975
3/99 23410 21828
Past performance is not predictive of future performance.
*Fund inception was September 29, 1995.
Comparison of the Change in Value of a $10,000 Investment in the
Aggressive Growth Fund and the NASDAQ Composite Index*
Aggressive Growth Fund
Average Annual Total Returns
1 Year Since Inception*
10.85% 17.48%
NASDAQ Composite Index Aggressive Growth Fund
10000 9600
10064 9552
3/96 10545 10406
11353 10762
11761 10982
12382 11853
3/97 11723 11391
13860 13440
16216 16740
15125 13873
3/98 17700 15210
18287 14373
16365 12911
21206 17375
3/99 23823 17562
Past performance is not predictive of future performance.
Fund inception was September 29, 1995.
6
STATEMENTS OF ASSETS AND LIABILITIES
March 31, 1999
=============================================================================================================
Utility Equity
Fund Fund
- -------------------------------------------------------------------------------------------------------------
ASSETS
Investment securities:
At acquisition cost................................................... $ 27,869,108 $ 34,520,209
============== ===============
At amortized cost..................................................... $ 27,852,815 $ 34,520,209
============== ===============
At market value (Note 2).............................................. $ 41,623,274 $ 53,815,963
Repurchase agreements (Note 2)........................................... -- 5,420,000
Cash..................................................................... 2,991 78
Dividends and interest receivable........................................ 122,963 27,875
Receivable for capital shares sold ...................................... 17,314 39,210
Other assets............................................................. 13,098 27,036
-------------- ---------------
TOTAL ASSETS.......................................................... 41,779,640 59,330,162
-------------- ---------------
LIABILITIES
Dividends payable........................................................ 24,844 --
Payable for capital shares redeemed...................................... 87,747 533,072
Payable to affiliates (Note 4)........................................... 34,333 57,193
Other accrued expenses and liabilities .................................. 26,890 33,658
-------------- ---------------
TOTAL LIABILITIES..................................................... 173,814 623,923
-------------- ---------------
NET ASSETS .............................................................. $ 41,605,826 $ 58,706,239
-------------- ---------------
Net assets consist of:
Paid-in capital.......................................................... $ 26,304,587 $ 39,337,704
Accumulated net realized gains from security transactions................ 1,530,780 72,781
Net unrealized appreciation on investments .............................. 13,770,459 19,295,754
-------------- ---------------
Net assets .............................................................. $ 41,605,826 $ 58,706,239
============== ===============
PRICING OF CLASS A SHARES
Net assets attributable to Class A shares ............................... $ 38,390,936 $ 55,560,703
============== ===============
Shares of beneficial interest outstanding (unlimited number
of shares authorized, no par value) (Note 5).......................... 2,488,896 2,511,439
============== ===============
Net asset value and redemption price per share (Note 2).................. $ 15.42 $ 22.12
============== ===============
Maximum offering price per share (Note 2)................................ $ 16.06 $ 23.04
============== ===============
PRICING OF CLASS C SHARES
Net assets attributable to Class C shares ............................... $ 3,214,890 $ 3,145,536
============== ===============
Shares of beneficial interest outstanding (unlimited number
of shares authorized, no par value) (Note 5).......................... 208,694 143,890
============== ===============
Net asset value, offering price and redemption price per share (Note 2).. $ 15.40 $ 21.86
============== ===============
See accompanying notes to financial statements.
7
STATEMENTS OF ASSETS AND LIABILITIES
March 31, 1999
=============================================================================================================
Growth/ Aggressive
Value Growth
Fund Fund
- -------------------------------------------------------------------------------------------------------------
ASSETS
Investment securities:
At acquisition cost................................................... $ 15,111,560 $ 8,087,571
============== ===============
At amortized cost..................................................... $ 15,111,808 $ 8,087,609
============== ===============
At market value (Note 2).............................................. $ 24,662,044 $ 11,406,341
Cash..................................................................... 20,191 6,509
Dividends receivable..................................................... 6,641 800
Receivable for capital shares sold....................................... 9,087 6,708
Organization costs, net (Note 2)......................................... 9,521 9,521
Other assets............................................................. 9,571 8,361
-------------- ---------------
TOTAL ASSETS.......................................................... 24,717,055 11,438,240
-------------- --------------
LIABILITIES
Payable for capital shares redeemed...................................... 5,564 14,166
Payable to affiliates (Note 4)........................................... 29,120 8,470
Other accrued expenses and liabilities................................... 18,644 13,494
-------------- ---------------
TOTAL LIABILITIES..................................................... 53,328 36,130
-------------- ---------------
NET ASSETS .............................................................. $ 24,663,727 $ 11,402,110
============== ===============
Net assets consist of:
Paid-in capital.......................................................... $ 15,113,491 $ 8,083,378
Net unrealized appreciation on investments............................... 9,550,236 3,318,732
-------------- ---------------
Net assets............................................................... $ 24,663,727 $ 11,402,110
============== ===============
Shares of beneficial interest outstanding (unlimited number
of shares authorized, no par value) (Note 5).......................... 1,409,641 724,665
============== ===============
Net asset value and redemption price per share (Note 2).................. $ 17.50 $ 15.73
============== ===============
Maximum offering price per share (Note 2)................................ $ 18.23 $ 16.39
============== ===============
See accompanying notes to financial statements.
8
STATEMENTS OF OPERATIONS
For the Year Ended March 31, 1999
=============================================================================================================
Utility Equity
Fund Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends ............................................................ $ 1,364,429 $ 455,841
Interest ............................................................. 215,761 290,044
-------------- ---------------
TOTAL INVESTMENT INCOME ............................................ 1,580,190 745,885
-------------- ---------------
EXPENSES
Investment advisory fees (Note 4) .................................... 326,576 375,212
Distribution expenses, Class A (Note 4)............................... 92,716 117,348
Distribution expenses, Class C (Note 4) .............................. 31,159 30,890
Transfer agent fees, Class A (Note 4)................................. 33,695 24,679
Transfer agent fees, Class C (Note 4)................................. 12,000 12,000
Accounting services fees (Note 4) .................................... 36,000 39,000
Postage and supplies.................................................. 24,800 20,140
Professional fees .................................................... 17,721 22,721
Registration fees, Common ............................................ 2,174 2,064
Registration fees, Class A ........................................... 6,023 6,213
Registration fees, Class C ........................................... 5,611 5,336
Trustees' fees and expenses .......................................... 10,309 10,309
Custodian fees ....................................................... 6,671 7,679
Reports to shareholders .............................................. 5,253 4,159
Insurance expense .................................................... 3,995 3,295
Other expenses ....................................................... 3,945 8,244
-------------- ---------------
TOTAL EXPENSES ..................................................... 618,648 689,289
-------------- ---------------
NET INVESTMENT INCOME ................................................... 961,542 56,596
-------------- ---------------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS
Net realized gains from security transactions ........................ 2,008,632 72,685
Net change in unrealized appreciation/depreciation on investments..... (5,229,709) 6,891,335
-------------- ---------------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS ............... (3,221,077) 6,964,020
-------------- ---------------
NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS .................. $ (2,259,535) $ 7,020,616
============== ===============
See accompanying notes to financial statements.
9
STATEMENTS OF OPERATIONS
For the Year Ended March 31, 1999
=============================================================================================================
Growth/ Aggressive
Value Growth
Fund Fund
- -------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends............................................................. $ 163,717 $ 41,149
Interest.............................................................. 23,256 13,153
-------------- ---------------
TOTAL INVESTMENT INCOME............................................. 186,973 54,302
-------------- ---------------
EXPENSES
Investment advisory fees (Note 4)..................................... 254,571 125,575
Distribution expenses (Note 4)........................................ 57,474 19,824
Accounting services fees (Note 4)..................................... 24,000 24,000
Professional fees..................................................... 16,540 12,940
Transfer agent fees (Note 4).......................................... 12,491 12,250
Trustees' fees and expenses........................................... 11,241 11,241
Postage and supplies.................................................. 11,098 10,405
Registration fees..................................................... 8,889 8,678
Custodian fees........................................................ 8,923 5,926
Amortization of organization costs (Note 2)........................... 6,355 6,355
Insurance expense..................................................... 3,135 2,085
Reports to shareholders............................................... 2,347 2,293
Other expenses........................................................ 5,674 9,769
-------------- ---------------
TOTAL EXPENSES...................................................... 422,738 251,341
Expenses reimbursed by the Adviser (Note 6)........................... -- (6,473)
-------------- ---------------
NET EXPENSES ....................................................... 422,738 244,868
-------------- ---------------
NET INVESTMENT LOSS ..................................................... (235,765) (190,566)
-------------- ---------------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS
Net realized gains from security transactions ........................ 3,987,680 1,735,380
Net change in unrealized appreciation/depreciation on investments .... 1,438,007 (936,684)
-------------- ---------------
NET REALIZED AND UNREALIZED GAINS ON INVESTMENTS ........................ 5,425,687 798,696
-------------- ---------------
NET INCREASE IN NET ASSETS FROM OPERATIONS ............................. $ 5,189,922 $ 608,130
-------------- ---------------
See accompanying notes to financial statements.
10
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended March 31, 1999 and 1998
=============================================================================================================
Utility Equity
Fund Fund
Year Year Year Year
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------
FROM OPERATIONS:
Net investment income....................... $ 961,542 $ 1,203,757 $ 56,596 $ 134,298
Net realized gains from
security transactions..................... 2,008,632 396,431 72,685 131,522
Net change in unrealized appreciation/depreciation
on investments............................ (5,229,709) 12,365,467 6,891,335 9,717,678
------------ -------------- ------------- -------------
Net increase (decrease) in net
assets from operations...................... (2,259,535) 13,965,655 7,020,616 9,983,498
------------ -------------- ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income, Class A......... (923,626) (1,131,462) (56,596) (134,305)
From net investment income, Class C......... (37,916) (72,537) -- --
Return of capital, Class A.................. -- -- (7,701) --
From net realized gains on security
transactions, Class A..................... (441,346) (598,344) -- (266,654)
From net realized gains on security
transactions, Class C..................... (36,559) (49,575) -- (29,203)
------------ -------------- ------------- -------------
Decrease in net assets from distributions
to shareholders............................. (1,439,447) (1,851,918) (64,297) (430,162)
------------ -------------- ------------- -------------
FROM CAPITAL SHARE TRANSACTIONS (NOTE 5):
CLASS A
Proceeds from shares sold................... 4,525,134 6,395,680 16,146,962 27,157,778
Net asset value of shares issued in
reinvestment of distributions
to shareholders........................... 1,225,189 1,560,076 63,426 393,608
Payments for shares redeemed................ (6,425,371) (12,764,160) (5,648,244) (12,645,062)
------------ -------------- ------------- -------------
Net increase (decrease) in net assets from
Class A share transactions.................. (675,048) (4,808,404) 10,562,144 14,906,324
------------ -------------- ------------- -------------
CLASS C
Proceeds from shares sold................... 424,245 343,251 566,536 386,194
Net asset value of shares issued in
reinvestment of distributions
to shareholders........................... 69,533 112,220 -- 29,105
Payments for shares redeemed................ (573,313) (887,840) (1,576,756) (429,754)
------------ -------------- ------------- -------------
Net decrease in net assets from Class C
share transactions.......................... (79,535) (432,369) (1,010,220) (14,455)
------------ -------------- ------------- -------------
Net increase (decrease) in net assets from
capital share transaction................... (754,583) (5,240,773) 9,551,924 14,891,869
------------ -------------- ------------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS ....... (4,453,565) 6,872,964 16,508,243 24,445,205
NET ASSETS:
Beginning of year........................... 46,059,391 39,186,427 42,197,996 17,752,791
------------ -------------- ------------- -------------
End of year................................. $ 41,605,826 $ 46,059,391 $58,706,239 $42,197,996
============ ============== ============= =============
See accompanying notes to financial statements.
11
STATEMENTS OF CHANGES IN NET ASSETS
For the Periods Ended March 31,1999 and 1998
and August 31, 1997
====================================================================================================================
Growth/Value Fund Aggressive Growth Fund
Year Seven Months Year Year Seven Months Year
Ended Ended Ended Ended Ended Ended
March 31, March 31, August 31, March 31, March 31, August 31,
1999 1998(A) 1997 1999 1998(A) 1997
- --------------------------------------------------------------------------------------------------------------------
FROM OPERATIONS:
Net investment loss..................... $(235,765) $(146,022) $(214,624) $(190,566) $(142,331) $(148,879)
Net realized gains (losses) from
security transactions................. 3,987,680 1,566,803 894,909 1,735,380 241,580 (356,478)
Net change in unrealized
appreciation/depreciation
on investments........................ 1,438,007 437,753 7,431,395 (936,684) (458,321) 4,653,168
---------- ---------- --------- --------- --------- ---------
Net increase (decrease) in net assets
from operations.......................... 5,189,922 1,858,534 8,111,680 608,130 (359,072) 4,147,811
---------- ---------- --------- --------- --------- ---------
DISTRIBUTIONS TO SHAREHOLDERS:
From net realized gains on
security transactions................ (4,390,836) (1,021,333) (888,542) (1,620,482) -- (16,180)
---------- ---------- --------- --------- --------- ---------
FROM CAPITAL SHARE TRANSACTIONS (Note 5):
Proceeds from shares sold .............. 4,555,639 6,013,814 9,367,824 3,396,790 4,724,918 5,211,479
Net asset value of shares issued in
reinvestment of distributions to
shareholders.......................... 2,552,347 348,462 260,810 978,542 -- 4,532
Payments for shares redeemed............ (11,892,598) (5,328,293) (5,181,368) (7,456,234) (2,854,217) (1,913,821)
---------- ---------- --------- --------- --------- ---------
Net increase (decrease) in net assets from
capital share transactions.............. (4,784,612) 1,033,983 4,447,266 (3,080,902) 1,870,701 3,302,190
---------- ---------- --------- --------- --------- ---------
TOTAL INCREASE (DECREASE) IN NET ASSETS .. (3,985,526) 1,871,184 11,670,404 (4,093,254) 1,511,629 7,433,821
NET ASSETS:
Beginning of period..................... 28,649,253 26,778,069 15,107,665 15,495,364 13,983,735 6,549,914
---------- ---------- --------- --------- --------- ---------
End of period........................... $24,663,727 $28,649,253 $26,778,069 $11,402,110 $15,495,364 $13,983,735
=========== =========== =========== =========== =========== ===========
(A) Effective as of the close of business on August 29, 1997, the Growth/Value Fund and Aggressive Growth Fund were
reorganized and the fiscal year-end of each Fund, subsequent to August 31, 1997, was changed to March 31 (Note 6).
See accompanying notes to financial statements.
12
UTILITY FUND
FINANCIAL HIGHLIGHTS - CLASS A
===============================================================================================================
Per Share Data for a Share Outstanding Throughout Each Year
===============================================================================================================
Years Ended March 31,
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
Net asset value at beginning of year............ $ 16.76 $ 12.44 $ 12.24 $ 10.47 $ 10.52
---------- --------- ---------- --------- ----------
Income (loss) from investment operations:
Net investment income........................ 0.38 0.43 0.46 0.47 0.43
Net realized and unrealized gains (losses)
on investments............................ (1.16) 4.56 0.22 1.77 (0.05)
---------- --------- ---------- --------- ----------
Total from investment operations................ (0.78) 4.99 0.68 2.24 0.38
---------- --------- ---------- --------- ----------
Less distributions:
Dividends from net investment income......... (0.38) (0.43) (0.46) (0.47) (0.43)
Distributions from net realized gains........ (0.18) (0.24) (0.02) -- --
---------- --------- ---------- --------- ----------
Total distributions............................. (0.56) (0.67) (0.48) (0.47) (0.43)
---------- --------- ---------- --------- ----------
Net asset value at end of year.................. $ 15.42 $ 16.76 $ 12.44 $ 12.24 $ 10.47
========== ========= ========== ========= ==========
Total return(A) ................................ (4.79) % 40.92% 5.61% 21.65% 3.68%
========== ========= ========== ========= ==========
Net assets at end of year (000's)............... $ 38,391 $ 42,463 $ 36,087 $ 40,424 $40,012
========== ========= ========== ========= ==========
Ratio of expenses to average net assets......... 1.33% 1.25% 1.25% 1.25% 1.25%
Ratio of net investment income to average
net assets.................................. 2.30% 3.03% 3.65% 3.97% 4.06%
Portfolio turnover rate ........................ 4% 0% 3% 11% 17%
- --------------------------------------------------------------------------------------------------------------------
(A) Total returns shown exclude the effect of applicable sales loads.
See accompanying notes to financial statements.
13
UTILITY FUND
FINANCIAL HIGHLIGHTS - CLASS C
=================================================================================================================
Per Share Data for a Share Outstanding Throughout Each Year
=================================================================================================================
Years Ended March 31,
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
Net asset value at beginning of year............ $ 16.74 $ 12.43 $ 12.23 $ 10.46 $ 10.51
---------- --------- ---------- --------- ----------
Income (loss) from investment operations:
Net investment income........................ 0.18 0.31 0.35 0.37 0.35
Net realized and unrealized gains (losses)
on investments............................. (1.16) 4.57 0.24 1.78 (0.04)
---------- --------- ---------- --------- ----------
Total from investment operations................ (0.98) 4.88 0.59 2.15 0.31
---------- --------- ---------- --------- ----------
Less distributions:
Dividends from net investment income......... (0.18) (0.33) (0.37) (0.38) (0.36)
Distributions from net realized gains........ (0.18) (0.24) (0.02) -- --
---------- --------- ---------- --------- ----------
Total distributions............................. (0.36) (0.57) (0.39) (0.38) (0.36)
---------- --------- ---------- --------- ----------
Net asset value at end of year.................. $ 15.40 $ 16.74 $ 12.43 $ 12.23 $ 10.46
========== ========= ========== ========= ==========
Total return(A) ................................ (5.92)% 39.91% 4.82% 20.78% 3.00%
---------- --------- ---------- --------- ----------
Net assets at end of year (000's)............... $ 3,215 $ 3,597 $ 3,099 $ 3,686 $ 3,599
========== ========= ========== ========= ==========
Ratio of expenses to average net assets ........ 2.50% 2.00% 2.00% 2.00% 2.00%
Ratio of net investment income to average
net assets.................................. 1.13% 2.28% 2.89% 3.19% 3.41%
Portfolio turnover rate......................... 4% 0% 3% 11% 17%
- ------------------------------------------------------------------------------------------------------------------
(A) Total returns shown exclude the effect of applicable sales loads.
See accompanying notes to financial statements.
14
EQUITY FUND
FINANCIAL HIGHLIGHTS - CLASS A
==================================================================================================================
Per Share Data for a Share Outstanding Throughout Each Year
==================================================================================================================
Years Ended March 31,
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of year............ $ 19.38 $ 13.76 $ 12.45 $ 9.84 $ 9.26
---------- --------- ---------- --------- ----------
Income from investment operations:
Net investment income........................ 0.04 0.09 0.12 0.13 0.15
Net realized and unrealized gains
on investments............................. 2.73 5.76 1.35 2.60 0.59
---------- --------- ---------- --------- ----------
Total from investment operations................ 2.77 5.85 1.47 2.73 0.74
---------- --------- ---------- --------- ----------
Less distributions:
Dividends from net investment income......... (0.03) (0.08) (0.12) (0.12) (0.16)
Distributions from net realized gains........ -- (0.15) (0.04) -- --
---------- --------- ---------- --------- ----------
Total distributions............................. (0.03) (0.23) (0.16) (0.12) (0.16)
---------- --------- ---------- --------- ----------
Net asset value at end of year.................. $ 22.12 $ 19.38 $ 13.76 $ 12.45 $ 9.84
========== ========= ========== ========= ==========
Total return(A) ................................ 14.30% 42.74% 11.82% 27.90% 8.07%
========== ========= ========== ========= ==========
Net assets at end of year (000's)............... $ 55,561 $ 38,336 $ 14,983 $ 8,502 $ 4,300
========== ========= ========== ========= ==========
Ratio of net expenses to average net
assets(B).................................... 1.31% 1.25% 1.25% 1.25% 1.25%
Ratio of net investment income to average
net asset.................................... 0.18% 0.53% 0.91% 1.06% 1.57%
Portfolio turnover rate......................... 10% 7% 38% 38% 159%
- --------------------------------------------------------------------------------------------------------------------
(A) Total returns shown exclude the effect of applicable sales loads.
(B) Absent fee waivers and/or expense reimbursements by the Adviser, the ratios of expenses to average net assets
would have been 1.43%, 2.02% and 1.94% for the years ended March 31, 1997, 1996 and 1995, respectively.
See accompanying notes to financial statements.
15
EQUITY FUND
FINANCIAL HIGHLIGHTS - CLASS C
======================================================================================================================
Per Share Data for a Share Outstanding Throughout Each Year
======================================================================================================================
Years Ended March 31,
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of year............ $ 19.34 $ 13.77 $ 12.46 $ 9.86 $ 9.26
---------- --------- ---------- --------- ----------
Income from investment operations:
Net investment income (loss)................. (0.19) (0.03) 0.02 0.05 0.10
Net realized and unrealized gains
on investments............................ 2.71 5.75 1.35 2.60 0.57
---------- --------- ---------- --------- ----------
Total from investment operations................ 2.52 5.72 1.37 2.65 0.67
---------- --------- ---------- --------- ----------
Less distributions:
Dividends from net investment income......... -- -- (0.02) (0.05) (0.07)
Distributions from net realized gains........ -- (0.15) (0.04) -- --
---------- --------- ---------- --------- ----------
Total distributions............................. -- (0.15) (0.06) (0.05) (0.07)
---------- --------- ---------- --------- ----------
Net asset value at end of year.................. $ 21.86 $ 19.34 $ 13.77 $ 12.46 $ 9.86
========== ========= ========== ========= ==========
Total return(A) ................................ 13.03% 41.63% 11.01% 26.90% 7.32%
========== ========= ========== ========= ==========
Net assets at end of year (000's)............... $ 3,146 $ 3,862 $ 2,770 $ 2,436 $ 1,995
========== ========= ========== ========= ==========
Ratio of net expenses to average net
assets(B).................................... 2.41% 2.00% 2.00% 2.00% 2.00%
Ratio of net investment income (loss) to
average net assets........................... (0.92)% (0.18)% 0.15% 0.38% 0.68%
Portfolio turnover rate......................... 10% 7% 38% 38% 159%
- ---------------------------------------------------------------------------------------------------------------------
(A) Total returns shown exclude the effect of applicable sales loads.
(B) Absent fee waivers and/or expense reimbursements by the Adviser, the ratios of expenses to average net assets
would have been 2.14%, 2.70% and 2.50% for the years ended March 31, 1997, 1996 and 1995, respectively.
See accompanying notes to financial statements.
16
GROWTH/VALUE FUND
FINANCIAL HIGHLIGHTS
======================================================================================================================
Per Share Data for a Share Outstanding Throughout Each Period
======================================================================================================================
Year Seven Months Year Period
Ended Ended Ended Ended
March 31, March 31, August 31, August 31,
1999 1998(A) 1997 1996(B)
- ----------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period......... $ 16.30 $ 15.90 $ 11.18 $ 10.00
------------ -------------- ------------- -------------
Income from investment operations:
Net investment loss......................... (0.17) (0.08) (0.13) (0.06)(C)
Net realized and unrealized gains
on investments............................ 4.84 1.05 5.39 1.24
------------ -------------- ------------- -------------
Total from investment operations............... 4.67 0.97 5.26 1.18
------------ -------------- ------------- -------------
Less distributions:
Distributions from net realized gains....... (3.47) (0.57) (0.54) --
------------ -------------- ------------- -------------
Net asset value at end of period............... $ 17.50 $ 16.30 $ 15.90 $ 11.18
============ ============== ============= =============
Total return(D) ............................... 29.89% 6.43% 47.11% 11.80%
============ ============== ============= =============
Net assets at end of period (000's)............ $ 24,664 $ 28,649 $ 26,778 $ 15,108
============ ============== ============= =============
Ratio of net expenses to average net
assets(E)................................... 1.66% 1.66%(F) 1.95% 1.95%(F)
Ratio of net investment loss to average
net assets(F)............................... (0.93)% (0.91)%(F) (1.03)% (0.62)%
Portfolio turnover rate........................ 59% 62%(F) 52% 21%
- ---------------------------------------------------------------------------------------------------------------------
(A) Effective as of the close of business on August 29, 1997, the Fund was reorganized and its fiscal year-end,
subsequent to August 31, 1997, was changed to March 31 (Note 7).
(B) Represents the period from the commencement of operations (September 29, 1995) through August 31, 1996.
(C) Calculated using weighted average shares outstanding during the period.
(D) Total returns shown exclude the effect of applicable sales loads.
(E) Absent fee waivers and/or expense reimbursements, the ratio of expenses to average net assets would have been
2.83%(F) for the period ended August 31, 1996.
(F) Annualized.
See accompanying notes to financial statements.
17
AGGRESSIVE GROWTH FUND
FINANCIAL HIGHLIGHTS
=====================================================================================================================
Per Share Data for a Share Outstanding Throughout Each Period
=====================================================================================================================
Year Seven Months Year Period
Ended Ended Ended Ended
March 31, March 31, August 31, August 31,
1999 1998(A) 1997 1996(B)
- ---------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period......... $ 15.81 $ 16.29 $ 10.95 $ 10.00
------------ -------------- ------------- -------------
Income (loss) from investment operations:
Net investment loss......................... (0.27) (0.15) (0.17) (0.11)(C)
Net realized and unrealized gains (losses)
on investments................................ 2.67 (0.33) 5.54 1.06
------------ -------------- ------------- -------------
Total from investment operations............... 2.40 (0.48) 5.37 0.95
------------ -------------- ------------- -------------
Less distributions:
Distributions from net realized gains....... (2.48) -- (0.03) --
------------ -------------- ------------- -------------
Net asset value at end of period............... $ 15.73 $ 15.81 $ 16.29 $ 10.95
============ ============== ============= =============
Total return(D) ............................... 15.46% (2.95)% 49.09% 9.50%
============ ============== ============= =============
Net assets at end of period (000's)............ $ 11,402 $ 15,495 $ 13,984 $ 6,550
============ ============== ============= =============
Ratio of net expenses to average net
assets(E)................................... 1.95% 1.95%(F) 1.94% 1.95%(F)
Ratio of net investment loss to average
net assets(F)............................... (1.52)% (1.66)%(F) (1.57)% (1.26)%
Portfolio turnover rate........................ 93% 40%(F) 51% 16%
Amount of debt outstanding at end of period.... $ -- n/a n/a n/a
Average daily amount of debt outstanding during
the period (000's).......................... $ 80 n/a n/a n/a
Average daily number of capital shares outstanding
during the period (000's)................... 818 n/a n/a n/a
Average amount of debt per share during
the period.................................. $ 0.10 n/a n/a n/a
- -----------------------------------------------------------------------------------------------------------------
(A) Effective as of the close of business on August 29, 1997, the Fund was reorganized and its fiscal year-end,
subsequent to August 31, 1997, was changed to March 31 (Note 7).
(B) Represents the period from the commencement of operations (September 29, 1995) through August 31, 1996.
(C) Calculated using weighted average shares outstanding during the period.
(D) Total returns shown exclude the effect of applicable sales loads.
(E) Absent fee waivers and/or expense reimbursements, the ratios of expenses to average net assets would have
been 2.00%, 2.62% and 5.05%(F) for the periods ended March 31, 1999, August 31, 1997 and August 31, 1996,
respectively (Note 6).
(F) Annualized.
See accompanying notes to financial statements.
18
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
================================================================================
1. ORGANIZATION
The Utility Fund, Equity Fund, Growth/Value Fund and Aggressive Growth Fund
(collectively, the Funds) are each a series of Countrywide Strategic Trust (the
Trust). The Trust is registered under the Investment Company Act of 1940 as an
open-end management investment company. The Trust was established as a
Massachusetts business trust under a Declaration of Trust dated November 18,
1982. The Declaration of Trust, as amended, permits the Trustees to issue an
unlimited number of shares of each Fund. The Growth/Value Fund and Aggressive
Growth Fund were originally organized as series of Trans Adviser Funds, Inc.
(Note 7).
The Utility Fund seeks a high level of current income. Capital appreciation is a
secondary objective. The Fund invests primarily in common, preferred and
convertible preferred stocks of public utilities that currently pay dividends.
The Fund also invests in investment grade bonds of public utilities. The public
utilities industry includes companies that produce or supply electric power,
natural gas, water, sanitary services, telecommunications and other
communications services (but not radio or television broadcasters) for public
use or consumption.
The Equity Fund seeks long-term growth of capital, current income and growth of
income by investing primarily in dividend-paying common stocks. The Fund's
investment adviser, in selecting securities for purchase, employs a quantitative
screening strategy, searching for securities believed to offer above market
growth at below market pricing.
The Growth/Value Fund seeks long-term capital appreciation primarily through
equity investments in companies whose valuations may not reflect the prospect
for accelerating earnings/cash flow growth. The Fund seeks to achieve its
objective by investing primarily in common stocks but also in preferred stocks,
convertible bonds and warrants of companies which, in the opinion of the Fund's
investment adviser, are expected to achieve growth of investment principal over
time. Investments are largely made in companies of greater than $750 million
capitalization.
The Aggressive Growth Fund seeks long-term capital appreciation primarily
through equity investments. The Fund seeks growth opportunities among companies
of various sizes. The Fund seeks to achieve its objective by investing primarily
in common stocks, but also in preferred stocks, convertible bonds, options and
warrants of companies which, in the opinion of the Fund's investment adviser,
are expected to achieve growth of investment principal over time. Many of these
companies are in the small to medium-sized category (companies with market
capitalizations of less than $750 million at the time of purchase).
The Utility Fund and Equity Fund each offer two classes of shares: Class A
shares (sold subject to a maximum front-end sales load of 4% and a distribution
fee of up to 0.25% of average daily net assets) and Class C shares (sold subject
to a maximum contingent deferred sales load of 1% if redeemed within a one-year
period from purchase and a distribution fee of up to 1% of average daily net
assets). Each Class A and Class C share of a Fund represents identical interests
in the investment portfolio of such Fund and has the same rights, except that
(i) Class C shares bear the expenses of higher distribution fees, which is
expected to cause Class C shares to have a higher expense ratio and to pay lower
dividends than Class A shares; (ii) certain other class specific expenses will
be borne solely by the class to which such expenses are attributable; and (iii)
each class has exclusive voting rights with respect to matters relating to its
own distribution arrangements.
19
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the Funds' significant accounting policies:
Security valuation -- The Funds' portfolio securities are valued as of the close
of the regular session of trading on the New York Stock Exchange (currently 4:00
p.m., Eastern time). Portfolio securities traded on stock exchanges and
securities traded in the over-the-counter market are valued at their last sales
price as of the close of the regular session of trading on the day the
securities are being valued. Securities not traded on a particular day, or for
which the last sale price is not readily available, are valued at their last
broker-quoted bid prices as obtained from one or more of the major market makers
for such securities by an independent pricing service. Securities for which
market quotations are not readily available are valued at their fair value as
determined in good faith in accordance with consistently applied procedures
established by and under the general supervision of the Board of Trustees.
Repurchase agreements -- Repurchase agreements, which are collateralized by U.S.
Government obligations, are valued at cost which, together with accrued
interest, approximates market. Collateral for repurchase agreements is held in
safekeeping in the customer-only account of the Funds' custodian, at the Federal
Reserve Bank of Cleveland. At the time each Fund enters into a repurchase
agreement, the seller agrees that the value of the underlying securities,
including accrued interest, will at all times be equal to or exceed the face
amount of the repurchase agreement.
Share valuation -- The net asset value per share of each class of shares of the
Utility Fund and Equity Fund is calculated daily by dividing the total value of
the Fund's assets attributable to that class, less liabilities attributable to
that class, by the number of shares of that class outstanding. The maximum
offering price per share of Class A shares of each Fund is equal to the net
asset value per share plus a sales load equal to 4.17% of the net asset value
(or 4% of the offering price). The offering price of Class C shares of each Fund
is equal to the net asset value per share. The net asset value per share of the
Growth/Value Fund and Aggressive Growth Fund is calculated daily by dividing the
total value of each Fund's assets, less liabilities, by the number of shares
outstanding. The maximum offering price per share of the Growth/Value Fund and
Aggressive Growth Fund is equal to the net asset value per share plus a sales
load equal to 4.17% of the net asset value (or 4% of the offering price).
The redemption price per share of each Fund, including each class of shares with
respect to the Utility Fund and Equity Fund, is equal to the net asset value per
share. However, Class C shares of the Utility Fund and Equity Fund are subject
to a contingent deferred sales load of 1% of the original purchase price if
redeemed within a one-year period from the date of purchase.
Investment income -- Interest income is accrued as earned. Dividend income is
recorded on the ex-dividend date. Discounts and premiums on securities purchased
are amortized in accordance with income tax regulations which approximate
generally accepted accounting principles.
Distributions to shareholders -- Dividends arising from net investment income,
if any, are declared and paid quarterly to shareholders of the Utility Fund and
Equity Fund and annually to shareholders of the Growth/Value Fund and Aggressive
Growth Fund. With respect to each Fund, net realized short-term capital gains,
if any, may be distributed throughout the year and net realized long-term
capital gains, if any, are distributed at least once each year. Income dividends
and capital gain distributions are determined in accordance with income tax
regulations.
Allocations between classes -- Investment income earned, realized capital gains
and losses, and unrealized appreciation and depreciation for the Utility Fund
and Equity Fund are allocated daily to each class of shares based upon its
proportionate share of total net assets of the Fund. Class specific expenses are
charged directly to the class incurring the expense. Common expenses which are
not attributable to a specific class are allocated daily to each class of shares
based upon its proportionate share of total net assets of the Fund.
20
Security transactions -- Security transactions are accounted for on the trade
date. Securities sold are valued on a specific identification basis.
Organization costs -- Costs incurred by the Growth/Value Fund and Aggressive
Growth Fund in connection with their organization and registration of shares,
net of certain expenses, have been capitalized and are being amortized on a
straight-line basis over a five year period beginning with each Fund's
commencement of operations.
Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could differ from those
estimates.
Federal income tax -- It is each Fund's policy to comply with the special
provisions of the Internal Revenue Code applicable to regulated investment
companies. As provided therein, in any fiscal year in which a Fund so qualifies
and distributes at least 90% of its taxable net income, the Fund (but not the
shareholders) will be relieved of federal income tax on the income distributed.
Accordingly, no provision for income taxes has been made.
In order to avoid imposition of the excise tax applicable to regulated
investment companies, it is also each Fund's intention to declare as dividends
in each calendar year at least 98% of its net investment income (earned during
the calendar year) and 98% of its net realized capital gains (earned during the
twelve months ending October 31) plus undistributed amounts from prior years.
The following information is based upon the federal income tax cost of portfolio
investments (excluding repurchase agreements) as of March 31, 1999:
- -----------------------------------------------------------------------------------------------------------------
Growth/ Aggressive
Utility Equity Value Growth
Fund Fund Fund Fund
- -----------------------------------------------------------------------------------------------------------------
Gross unrealized appreciation.................. $ 14,044,227 $ 21,522,301 $ 9,754,046 $ 3,705,151
Gross unrealized depreciation.................. (273,768) (2,226,547) (203,810) (386,419)
------------ -------------- ------------- -------------
Net unrealized appreciation.................... $ 13,770,459 $ 19,295,754 $ 9,550,236 $ 3,318,732
------------ -------------- ------------- -------------
Federal income tax cost........................ $ 27,852,815 $ 34,520,209 $15,111,808 $ 8,087,608
------------ -------------- ------------- -------------
- -----------------------------------------------------------------------------------------------------------------
Reclassification of capital accounts -- For the year ended March 31, 1999, the
Growth/Value Fund and Aggressive Growth Fund reclassified net investment losses
of $235,765 and $190,566, respectively, against paid-in capital on the
Statements of Assets and Liabilities. The Equity Fund reclassified $7,701 of
overdistributed net investment income against paid-in capital. Such
reclassifications, the result of permanent differences between financial
statement and income tax reporting requirements, have no effect on each Fund's
net assets or net asset value per share.
3. INVESTMENT TRANSACTIONS
Investment transactions (excluding short-term investments) were as follows for
the year ended March 31, 1999:
- ------------------------------------------------------------------------------------------------------------------
Growth/ Aggressive
Utility Equity Value Growth
Fund Fund Fund Fund
- ------------------------------------------------------------------------------------------------------------------
Purchases of investment securities............. $ 1,721,320 $ 14,471,647 $14,983,235 $11,641,423
============ ============== ============= =============
Proceeds from sales and maturities of
investment securities....................... $ 3,409,806 $ 4,355,481 $26,159,764 $16,642,244
============ ============== ============= =============
- ------------------------------------------------------------------------------------------------------------------
21
4. TRANSACTIONS WITH AFFILIATES
The Chairman, President and certain other officers of the Trust are also
officers of Countrywide Financial Services, Inc., or its subsidiaries which
include Countrywide Investments, Inc. (the Adviser), the Trust's investment
adviser and principal underwriter, and Countrywide Fund Services, Inc. (CFS),
the Trust's transfer agent, shareholder service agent and accounting services
agent. Countrywide Financial Services, Inc. is a wholly-owned subsidiary of
Countrywide Credit Industries, Inc., a New York Stock Exchange listed company
principally engaged in the business of residential mortgage lending.
MANAGEMENT AGREEMENTS
Each Fund's investments are managed by the Adviser under the terms of a
Management Agreement. Under the Management Agreement, the Utility Fund and
Equity Fund each pay the Adviser a fee, which is computed and accrued daily and
paid monthly, at an annual rate of 0.75% of its respective average daily net
assets up to $200 million; 0.70% of such net assets from $200 million to $500
million; and 0.50% of such net assets in excess of $500 million. The
Growth/Value Fund and Aggressive Growth Fund each pay the Adviser a fee, which
is computed and accrued daily and paid monthly, at an annual rate of 1.00% of
its respective average daily net assets up to $50 million; 0.90% of such net
assets from $50 million to $100 million; 0.80% of such net assets from $100
million to $200 million; and 0.75% of such net assets in excess of $200 million.
Mastrapasqua and Associates, Inc. (Mastrapasqua) has been retained by the
Adviser to manage the investments of the Growth/Value Fund and Aggressive Growth
Fund. The Adviser (not the Funds) pays Mastrapasqua a fee, which is computed and
accrued daily and paid monthly, at an annual rate of 0.60% of each Fund's
respective average daily net assets up to $50 million; 0.50% of such net assets
from $50 million to $100 million; 0.40% of such net assets from $100 million to
$200 million; and 0.35% of such net assets in excess of $200 million.
The Adviser has agreed, until at least August 31, 1999, to waive fees and
reimburse expenses to the extent necessary to limit total operating expenses of
the Growth/Value Fund and Aggressive Growth Fund to 1.95% of each Fund's average
daily net assets.
TRANSFER AGENT AND SHAREHOLDER SERVICE AGREEMENT
Under the terms of the Transfer, Dividend Disbursing, Shareholder Service and
Plan Agency Agreement between the Trust and CFS, CFS maintains the records of
each shareholder's account, answers shareholders' inquiries concerning their
accounts, processes purchases and redemptions of each Fund's shares, acts as
dividend and distribution disbursing agent and performs other shareholder
service functions. For these services, CFS receives a monthly fee at an annual
rate of $17 per shareholder account from each Fund, subject to a $1,000 minimum
monthly fee for each Fund, or for each class of shares of a Fund, as applicable.
In addition, each Fund pays CFS out-of-pocket expenses including, but not
limited to, postage and supplies.
ACCOUNTING SERVICES AGREEMENT
Under the terms of the Accounting Services Agreement between the Trust and CFS,
CFS calculates the daily net asset value per share and maintains the financial
books and records of each Fund. For these services, CFS receives a monthly fee,
based on current asset levels, of $3,000 from each of the Utility Fund and
Equity Fund and $2,000 from each of the Growth/Value Fund and Aggressive Growth
Fund. In addition, each Fund pays certain out-of-pocket expenses incurred by CFS
in obtaining valuations of such Fund's portfolio securities.
UNDERWRITING AGREEMENT
The Adviser is the Funds' principal underwriter and, as such, acts as the
exclusive agent for distribution of the Funds' shares. Under the terms of the
Underwriting Agreement between the Trust and the Adviser, the Adviser earned
$5,789, $4,158, $3,390 and $7,588 from underwriting and broker commissions on
the sale of shares of the Utility Fund, Equity Fund, Growth/Value Fund and
Aggressive Growth Fund, respectively, for the year ended March 31, 1999. In
addition, the Adviser collected $457 and $693 of contingent deferred sales loads
on the redemption of Class C shares of the Utility Fund and Equity Fund,
respectively.
22
PLANS OF DISTRIBUTION
The Trust has a Plan of Distribution (Class A Plan) under which shares of each
Fund having one class of shares and Class A shares of each Fund having two
classes of shares may directly incur or reimburse the Adviser for expenses
related to the distribution and promotion of shares. The annual limitation for
payment of such expenses under the Class A Plan is 0.25% of average daily net
assets attributable to such shares.
The Trust also has a Plan of Distribution (Class C Plan) under which Class C
shares of each Fund having two classes of shares may directly incur or reimburse
the Adviser for expenses related to the distribution and promotion of shares.
The annual limitation for payment of such expenses under the Class C Plan is 1%
of average daily net assets attributable to Class C shares.
CUSTODIAN AGREEMENTS
Firstar Bank, N.A., which serves as the custodian for the Growth/Value Fund and
Aggressive Growth Fund, was a significant shareholder of record of each Fund as
of March 31, 1999. Under the terms of its Custodian Agreements, Firstar Bank
receives from each Fund an asset-based fee plus certain transaction charges.
5. Capital Share Transactions
Proceeds and payments on capital shares as shown in the Statements of Changes in
Net Assets are the result of the following capital share transactions for the
periods shown:
- ----------------------------------------------------------------------------------------------------------------
Utility Equity
Fund Fund
Year Year Year Year
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------
CLASS A
Shares sold.................................... 275,492 441,718 818,011 1,675,833
Shares issued in reinvestment of distributions
to shareholders............................. 75,229 105,777 3,351 22,496
Shares redeemed................................ (395,304) (914,263) (287,992) (808,858)
------------ -------------- ------------- -------------
Net increase (decrease) in shares outstanding.. (44,583) (366,768) 533,370 889,471
Shares outstanding, beginning of year.......... 2,533,479 2,900,247 1,978,069 1,088,598
------------ -------------- ------------- -------------
Shares outstanding, end of year................ 2,488,896 2,533,479 2,511,439 1,978,069
============ ============== ============= =============
CLASS C
Shares sold.................................... 25,825 23,316 28,644 23,254
Shares issued in reinvestment of distributions
to shareholders............................. 4,271 7,595 -- 1,642
Shares redeemed................................ (36,290) (65,381) (84,439) (26,402)
------------ -------------- ------------- -------------
Net decrease in shares outstanding............. (6,194) (34,470) (55,795) (1,506)
Shares outstanding, beginning of year.......... 214,888 249,358 199,685 201,191
------------ -------------- ------------- -------------
Shares outstanding, end of year................ 208,694 214,888 143,890 199,685
============ ============== ============= =============
- ----------------------------------------------------------------------------------------------------------------
23
- ----------------------------------------------------------------------------------------------------------------
Growth/Value Aggressive Growth
Fund Fund
Year Seven Months Year Year Seven Months Year
Ended Ended Ended Ended Ended Ended
March 31, March 31, Aug. 31, March 31, March 31, Aug. 31,
1999 1998 1997 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
Shares sold................................ 263,603 392,494 751,684 216,290 304,821 418,585
Shares issued in reinvestment of distributions
to shareholders......................... 150,161 23,529 16,584 63,418 -- 376
Shares redeemed............................ (761,516) (343,315) (434,401) (535,148) (183,404) (158,580)
---------- ---------- --------- --------- --------- ---------
Net increase (decrease) in shares
outstanding............................. (347,752) 72,708 333,867 (255,440) 121,417 260,381
Shares outstanding, beginning of period.... 1,757,393 1,684,685 1,350,818 980,105 858,688 598,307
---------- ---------- --------- --------- --------- ---------
Shares outstanding, end of period.......... 1,409,641 1,757,393 1,684,685 724,665 980,105 858,688
---------- ---------- --------- --------- --------- ---------
- -----------------------------------------------------------------------------------------------------------------
6. BORROWINGS
The Growth/Value Fund and Aggressive Growth Fund each have a Loan Agreement with
Firstar Bank, N.A., to be used for temporary or emergency purposes, including
the financing of capital share redemption requests that might otherwise require
the untimely disposition of securities. The Loan Agreements permit borrowings up
to a maximum principal amount outstanding not to exceed the lesser of $1,500,000
for the Growth/Value Fund and $3,000,000 for the Aggressive Growth Fund or
certain other amounts which are calculated based upon the amounts and
composition of assets in each Fund as defined in the Loan Agreement. Each Fund
agrees to pay interest on any unpaid principal balance at prevailing market
rates as defined in the Loan Agreement.
As of March 31, 1999, neither Fund had outstanding borrowings under the Loan
Agreement. The maximum amount outstanding during the year for the Aggressive
Growth Fund was $1,400,000 at a weighted average interest rate of 7.75%. For the
year ended March 31, 1999, the Aggressive Growth Fund incurred, and the Adviser
reimbursed, $6,473 of interest expense on such borrowings.
7. AGREEMENT AND PLAN OF REORGANIZATION
The Growth/Value Fund and Aggressive Growth Fund were originally organized as
series of Trans Adviser Funds, Inc. (Trans Adviser), an open-end management
investment company incorporated under the laws of the State of Maryland.
Pursuant to an Agreement and Plan of Reorganization dated May 31, 1997, each
Fund, on August 29, 1997, succeeded to the assets and liabilities of a series of
Trans Adviser with the same name (the Predecessor Fund). The investment
objective, policies and restrictions of each Fund and its Predecessor Fund are
substantially identical.
For federal income tax purposes, the reorganization of the Growth/Value Fund and
Aggressive Growth Fund qualified as a tax-free reorganization with no tax
consequences to either Fund, its Predecessor Fund or their shareholders. In
connection with the reorganization, the fiscal year-end of each Fund, subsequent
to August 31, 1997, has been changed from August 31 to March 31.
8. FEDERAL TAX INFORMATION (UNAUDITED)
In accordance with federal tax requirements, the following provides shareholders
with information concerning distributions from net realized gains, if any, made
by the Funds during the year ended March 31, 1999. On October 30, 1998, the
Utility Fund declared and paid a long-term capital gain distribution of $0.1820
per share. On November 16, 1998 and March 19, 1999, the Growth/Value Fund
declared and paid long-term capital gain distributions of $0.5450 and $2.9234
per share, respectively. On March 19, 1999, the Aggressive Growth Fund declared
and paid a long-term capital gain distribution of $2.4768 per share. As required
by federal regulations, shareholders will receive notification of their portion
of a Fund's taxable capital gain distribution, if any, paid during the 1999
calendar year early in 2000.
24
UTILITY FUND
PORTFOLIO OF INVESTMENTS
March 31, 1999
============================================================================================================
Market
COMMON STOCKS -- 91.2% Shares Value
- ------------------------------------------------------------------------------------------------------------
ELECTRIC UTILITIES -- 42.0%
AES Corp.*............................................................... 45,000 $ 1,676,250
Baltimore Gas & Electric Co.............................................. 50,050 1,270,019
Cinergy Corp............................................................. 50,000 1,375,000
Cleco Corp............................................................... 30,000 885,000
CMS Energy Corp.......................................................... 60,000 2,403,750
DPL, Inc................................................................. 75,000 1,237,500
Duke Power Co............................................................ 42,000 2,294,250
FPL Group, Inc........................................................... 45,000 2,396,250
Kansas City Power & Light Co............................................. 50,000 1,231,250
Northern States Power Co................................................. 60,000 1,391,250
Scana Corp............................................................... 60,000 1,301,250
---------------
$ 17,461,769
---------------
TELECOMMUNICATIONS -- 37.7%
Ameritech Corp........................................................... 50,000 $ 2,893,750
AT&T Corp................................................................ 30,000 2,394,375
Bell Atlantic Corp....................................................... 50,000 2,584,375
BellSouth Corp........................................................... 75,000 3,004,687
GTE Corp................................................................. 45,000 2,722,500
Lucent Technologies, Inc................................................. 19,444 2,095,091
---------------
$ 15,694,778
---------------
GAS COMPANIES -- 6.6%
MCN Corp................................................................. 70,000 $ 1,124,375
Oneok, Inc............................................................... 25,000 618,750
Wicor, Inc............................................................... 50,000 1,012,500
---------------
$ 2,755,625
---------------
WATER COMPANIES -- 4.9%
American Water Works, Inc................................................ 70,000 $ 2,034,375
---------------
TOTAL COMMON STOCKS (Cost $24,267,526)................................... $ 37,946,547
---------------
=============================================================================================================
Par Market
CORPORATE BONDS -- 5.2% Value Value
- -------------------------------------------------------------------------------------------------------------
Dayton Power & Light Co., 8.40%, 12/01/22................................ $ 1,000,000 $ 1,056,165
New York Telephone Co., 9.375%, 7/15/31.................................. 1,000,000 1,120,562
-------------- ---------------
TOTAL CORPORATE BONDS (Amortized Cost $2,085,289)........................ $ 2,000,000 $ 2,176,727
============== ---------------
25
UTILITY FUND
PORTFOLIO OF INVESTMENTS
March 31, 1999 (continued)
=============================================================================================================
Par Market
COMMERCIAL PAPER -- 3.6% Value Value
- -------------------------------------------------------------------------------------------------------------
BP America, 4/01/99 (Amortized Cost $1,500,000).......................... $ 1,500,000 $ 1,500,000
============== ---------------
TOTAL INVESTMENT SECURITIES-- 100.0% (Amortized Cost $27,852,815)........ $ 41,623,274
LIABILITIES IN EXCESS OF OTHER ASSETS-- 0.0% ............................ (17,448)
---------------
NET ASSETS-- 100.0% ..................................................... $ 41,605,826
===============
* Non-income producing security.
See accompanying notes to financial statements.
26
EQUITY FUND
PORTFOLIO OF INVESTMENTS
March 31, 1999
=============================================================================================================
Market
COMMON STOCKS -- 91.7% Shares Value
- -------------------------------------------------------------------------------------------------------------
CONSUMER, NON-CYCLICAL -- 28.5%
Abbott Laboratories...................................................... 30,000 $ 1,404,375
Albertson's, Inc......................................................... 15,000 814,687
American Home Products Corp.............................................. 20,000 1,305,000
Johnson & Johnson........................................................ 22,000 2,061,125
Merck & Co., Inc......................................................... 20,000 1,603,750
Newell Rubbermaid, Inc................................................... 30,000 1,425,000
PepsiCo, Inc............................................................. 35,000 1,371,563
Pfizer, Inc.............................................................. 20,000 2,775,000
Procter & Gamble Co...................................................... 25,000 2,448,438
Sara Lee Corp............................................................ 34,000 841,500
Schering-Plough Corp..................................................... 12,000 663,750
---------------
$ 16,714,188
---------------
TECHNOLOGY -- 20.3%
Compaq Computer Corp. ................................................... 40,000 $ 1,267,500
Hewlett-Packard Co....................................................... 17,500 1,186,719
Intel Corp............................................................... 20,000 2,382,500
Lucent Technologies, Inc................................................. 3,888 418,932
MCI Worldcom*............................................................ 22,000 1,948,375
Motorola, Inc............................................................ 9,000 659,250
Northern Telecom Limited................................................. 15,000 931,875
Sun Microsystems, Inc.*.................................................. 25,000 3,123,437
---------------
$ 11,918,588
---------------
FINANCIAL SERVICES -- 17.1%
AFLAC, Inc............................................................... 40,000 $ 2,177,500
American International Group............................................. 16,500 1,990,312
Bank of New York Co., Inc................................................ 60,000 2,156,250
Freddie Mac.............................................................. 30,000 1,713,750
Horace Mann Educators Corp............................................... 40,000 927,500
Wells Fargo Co........................................................... 30,000 1,051,875
---------------
$ 10,017,187
---------------
CONSUMER, CYCLICAL -- 13.1%
Gap, Inc................................................................. 45,000 $ 3,029,063
Mattel, Inc.............................................................. 55,000 1,368,125
McDonald's Corp.......................................................... 46,000 2,084,375
The Walt Disney Co....................................................... 39,000 1,213,875
---------------
$ 7,695,438
---------------
ENERGY -- 4.3%
Apache Corp.............................................................. 35,000 $ 912,187
Enron Corp............................................................... 25,000 1,606,250
---------------
$ 2,518,437
---------------
CONGLOMERATES -- 3.2%
General Electric Co...................................................... 17,000 $ 1,880,625
---------------
INDUSTRIAL -- 2.7%
Diebold, Inc............................................................. 30,000 $ 720,000
Emerson Electric Co...................................................... 17,000 899,937
---------------
$ 1,619,937
---------------
27
EQUITY FUND
PORTFOLIO OF INVESTMENTS
March 31, 1999 (continued)
================================================================================================================
Market
COMMON STOCKS -- 91.7% Shares Value
- ----------------------------------------------------------------------------------------------------------------
BASIC MATERIALS -- 2.5%
duPont (E.I.) de Nemours & Co............................................ 25,000 $ 1,451,563
---------------
TOTAL COMMON STOCKS (Cost $34,520,209)................................... $ 53,815,963
---------------
================================================================================================================
Face Market
REPURCHASE AGREEMENTS (1)-- 9.2% Value Value
- ----------------------------------------------------------------------------------------------------------------
Bank One, N.A., 4.95%, dated 3/31/99, due 4/01/99,
repurchase proceeds $5,420,745......................................... $ 5,420,000 $ 5,420,000
-------------- ---------------
TOTAL COMMON STOCKS AND REPURCHASE AGREEMENTS-- 100.9% .................. $ 59,235,963
LIABILITIES IN EXCESS OF OTHER ASSETS-- (0.9%) ......................... (529,724)
---------------
NET ASSETS-- 100.0% ..................................................... $ 58,706,239
===============
* Non-income producing security.
(1)Repurchase agreements are fully collateralized by U.S. Government obligations.
See accompanying notes to financial statements.
28
GROWTH/VALUE FUND
PORTFOLIO OF INVESTMENTS
March 31, 1999
================================================================================================================
Market
COMMON STOCKS -- 92.4% Shares Value
- ----------------------------------------------------------------------------------------------------------------
TECHNOLOGY -- 52.9%
Applied Materials, Inc.*................................................. 21,000 $ 1,295,438
Compuware Corp.*......................................................... 20,000 477,500
EMC Corp.*............................................................... 11,000 1,405,250
Intel Corp............................................................... 11,000 1,310,375
International Business Machines Corp..................................... 7,000 1,240,750
Lexmark International Group, Inc. - Class A*............................. 9,500 1,061,625
Novell, Inc.*............................................................ 89,000 2,241,688
Oracle Corp.*............................................................ 57,750 1,523,156
Sun Microsystems, Inc.*.................................................. 20,000 2,498,750
---------------
$ 13,054,532
---------------
HEALTH CARE -- 20.2%
Amgen, Inc.*............................................................. 10,000 $ 748,750
Baxter International, Inc................................................ 11,000 726,000
Becton, Dickinson and Co................................................. 10,000 383,125
Bristol-Myers Squibb Co.................................................. 16,000 1,029,000
Pharmacia & Upjohn, Inc.................................................. 16,000 998,000
Schering-Plough Corp..................................................... 20,000 1,106,250
---------------
$ 4,991,125
---------------
ENTERTAINMENT -- 6.3%
Carnival Corp. - Class A................................................. 25,000 $ 1,214,062
Marriott International, Inc. - Class A................................... 10,000 336,250
---------------
$ 1,550,312
---------------
RETAIL -- 4.0%
CVS Corp................................................................. 15,000 $ 712,500
Walgreen Co.............................................................. 9,200 259,900
---------------
$ 972,400
---------------
FINANCIAL SERVICES -- 3.3%
Concord EFS, Inc.*....................................................... 29,700 $ 818,606
---------------
AEROSPACE/DEFENSE -- 2.9%
General Dynamics Corp.................................................... 11,200 $ 719,600
---------------
TRANSPORTATION -- 2.8%
AMR Corp.*............................................................... 7,500 $ 439,219
MotivePower Industries, Inc.*............................................ 10,000 251,250
---------------
$ 690,469
---------------
TOTAL COMMON STOCKS (Cost $13,246,808)................................... $ 22,797,044
---------------
29
GROWTH/VALUE FUND
PORTFOLIO OF INVESTMENTS
March 31, 1999 (continued)
===================================================================================================================
Par Market
U. S. GOVERNMENT AGENCY ISSUES-- 7.6% Value Value
- -------------------------------------------------------------------------------------------------------------------
Federal Agricultural Mortgage Corp. Discount Note, 4/01/99
(Amortized Cost $1,865,000)........................................... $ 1,865,000 $ 1,865,000
-------------- ---------------
TOTAL INVESTMENT SECURITIES-- 100.0% (Amortized Cost $15,111,808) ....... $ 24,662,044
OTHER ASSETS IN EXCESS OF LIABILITIES-- 0.0% ............................ 1,683
---------------
NET ASSETS-- 100.0% ..................................................... $ 24,663,727
---------------
* Non-income producing security.
See accompanying notes to financial statements.
30
AGGRESSIVE GROWTH FUND
PORTFOLIO OF INVESTMENTS
March 31, 1999
================================================================================================================
Market
COMMON STOCKS -- 97.6% Shares Value
- ----------------------------------------------------------------------------------------------------------------
TECHNOLOGY -- 52.3%
Compuware Corp.*......................................................... 25,000 $ 596,875
EMC Corp.*............................................................... 5,000 638,750
Intel Corp............................................................... 4,500 536,063
Lexmark International Group, Inc. - Class A*............................. 4,500 502,875
Novell, Inc.*............................................................ 50,000 1,259,375
Oracle Corp.*............................................................ 16,875 445,078
Seagate Technology, Inc.*................................................ 18,000 532,125
SMART Modular Technologies, Inc.*........................................ 30,000 448,125
Sun Microsystems, Inc.*.................................................. 5,000 624,688
Teradyne, Inc.*.......................................................... 7,000 381,937
---------------
$ 5,965,891
---------------
HEALTH CARE -- 24.0%
Alternative Living Services, Inc.*....................................... 10,000 $ 200,000
Amgen, Inc.*............................................................. 6,000 449,250
Biogen, Inc.*............................................................ 4,000 457,250
Capital Senior Living Corp.*............................................. 14,800 104,525
Chiron Corp.*............................................................ 13,000 285,188
Elan Corp. plc - ADR*.................................................... 3,000 209,250
Pharmacia & Upjohn, Inc.................................................. 9,000 561,375
Sunrise Assisted Living, Inc.*........................................... 6,000 273,375
Watson Pharmaceuticals, Inc.*............................................ 4,400 194,150
---------------
$ 2,734,363
---------------
RETAIL -- 8.2%
CVS Corp................................................................. 5,500 $ 261,250
Shop At Home, Inc.*...................................................... 20,000 251,250
Walgreen Co.............................................................. 14,800 418,100
---------------
$ 930,600
---------------
ENTERTAINMENT -- 4.3%
Carnival Corp. - Class A................................................. 10,000 $ 485,625
---------------
TRANSPORTATION -- 3.5%
MotivePower Industries, Inc.*............................................ 5,000 $ 125,625
Southwest Airlines Co.................................................... 9,000 272,250
---------------
$ 397,875
---------------
TELECOMMUNICATIONS -- 2.9%
Uniphase Corp.*.......................................................... 2,900 $ 333,862
---------------
FINANCIAL SERVICES -- 2.4%
Viad Corp................................................................ 10,000 $ 278,125
---------------
TOTAL COMMON STOCKS (Cost $7,807,609) ................................... $ 11,126,341
---------------
31
AGGRESSIVE GROWTH FUND
PORTFOLIO OF INVESTMENTS
March 31, 1999 (continued)
================================================================================================================
Par Market
U.S. GOVERNMENT AGENCY ISSUES-- 2.4% Value Value
- ----------------------------------------------------------------------------------------------------------------
Federal Agricultural Mortgage Corp. Discount Note, 4/01/99
(Amortized Cost $280,000)............................................. $ 280,000 $ 280,000
-------------- ---------------
TOTAL INVESTMENT SECURITIES-- 100.0% (Amortized Cost $8,087,609) ........ $ 11,406,341
LIABILITIES IN EXCESS OF OTHER ASSETS-- (0.0%) .......................... (4,231)
---------------
NET ASSETS-- 100.0% ..................................................... $ 11,402,110
---------------
* Non-income producing security.
ADR - American depositary receipt.
See accompanying notes to financial statements.
32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
================================================================================
Logo ARTHUR ANDERSEN LLP
To the Shareholders and Board of Trustees of Countrywide Strategic Trust:
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments of Countrywide Strategic Trust (comprising,
respectively, the Utility Fund, Equity Fund, Growth/Value Fund and Aggressive
Growth Fund) as of March 31, 1999, and (i) for the Utility Fund and Equity Fund
the related statements of operations, statements of changes in net assets and
the financial highlights for the periods indicated thereon and (ii) for the
Growth/Value Fund and Aggressive Growth Fund the related statements of
operations, statements of changes in net assets and the financial highlights for
the year ended March 31, 1999, the seven-month period ended March 31, 1998 and
the year ended August 31, 1997. These financial statements and financial
highlights are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits. The financial highlights of the Growth/Value Fund and
Aggressive Growth Fund for the period ended August 31, 1996 were audited by
other auditors whose report dated October 18, 1996, expressed an unqualified
opinion on those financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of March
31, 1999, by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights audited by us
and referred to above present fairly, in all material respects, the financial
position of each of the respective portfolios constituting Countrywide Strategic
Trust as of March 31, 1999, the results of their operations for the year then
ended, the changes in their net assets, and their financial highlights for the
periods referred to above, in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
Cincinnati, Ohio,
April 30, 1999
The Touchstone Funds
Touchstone Series Trust
(formerly Select Advisors Trust A)
Class A, Class C and Class Y shares
Touchstone Emerging Growth Fund
Touchstone International Equity Fund
Touchstone Income Opportunity Fund
Touchstone Value Plus Fund
Touchstone Growth & Income Fund
Touchstone Balanced Fund
Touchstone Bond Fund
Touchstone Standby Income Fund
Statement of Additional Information
May 1, 1999
This Statement of Additional Information is not a Prospectus, but it relates to
the Prospectuses of Touchstone Series Trust dated May 1, 1999.
Financial statements are incorporated by reference into this Statement of
Additional Information from the Funds' most recent annual and semi-annual
reports.
You can get a free copy of the Prospectuses of Touchstone Series Trust or the
Funds' most recent annual and semi-annual reports, request other information and
discuss your questions about the Funds by contacting your financial advisor or
Touchstone at: Touchstone Family of Funds 311 Pike Street Cincinnati, Ohio 45202
(800) 669-2796 http://www.touchstonefunds.com
You can view the Funds' Prospectuses as well as other reports at the Public
Reference Room of the Securities and Exchange Commission.
You can get text-only copies:
For a fee by writing to or calling the Public Reference Room of the Commission,
Washington, D.C. 20549-6009. Telephone: 1-800-SEC-0330.
Free from the Commission's Internet website at http://www.sec.gov.
Table of Contents
PAGE
The Trust and the
Funds........................................................... 3
Description of the Funds and Their Investments and Risks........ 4
Fund
Policies........................................................ 23
Management of the
Trust........................................................... 26
Investment Advisory and Other Services.......................... 29
Brokerage Allocation and Other Practices........................ 34
Capital Stock and Other Securities.............................. 36
Purchase, Redemption and Pricing of Shares...................... 38
Taxation of the
Funds........................................................... 42
Performance
Information..................................................... 44
Financial
Statements...................................................... 47
Appendix
................................................................ A-1
The Trust and the Funds
Touchstone Series Trust (the "Trust") is composed of eight funds:
Touchstone Emerging Growth Fund, Touchstone International Equity Fund,
Touchstone Income Opportunity Fund, Touchstone Value Plus Fund, Touchstone
Growth & Income Fund, Touchstone Balanced Fund, Touchstone Bond Fund and
Touchstone Standby Income Fund (the "Standby Income Fund") (each, a "Fund" and
collectively, the "Funds").
Each Fund, other than the Standby Income Fund, is divided into three
classes of shares: class A shares ("Class A Shares"), class C shares ("Class C
Shares"), and class Y shares ("Class Y Shares"). Throughout this Statement of
Additional Information (the "SAI"), unless otherwise specified, the term Fund or
Funds refers to all applicable classes of such Fund or Funds.
Each Fund is an open-end management investment company. The Trust was
formed as a Massachusetts business trust on November 9, 1994.
Shares of the Funds are sold by Touchstone Securities, Inc.
("Touchstone Securities" or the "Distributor"), the Trust's distributor.
Touchstone Advisors, Inc. ("Touchstone" or the "Advisor") is the investment
advisor of each Fund and the Standby Income Fund. The specific investments of
each Fund are managed on a day-to-day basis by their respective sub-advisors
(collectively, the "Fund Sub-Advisors"). Investors Bank & Trust Company
("Investors Bank" or the "Administrator") serves as administrator, custodian and
fund accounting agent to each Fund.
The Prospectuses, dated May 1, 1999, provide the basic information
investors should know before investing, and may be obtained without charge by
calling the Trust at the telephone number listed on the cover. This Statement of
Additional Information, which is not a prospectus, is intended to provide
additional information regarding the activities and operations of the Trust and
should be read in conjunction with the Prospectuses. This Statement of
Additional Information is not an offer of any Fund for which an investor has not
received a Prospectus.
3
Description of the Funds and Their Investments and Risks
Investment Goals
The investment goal(s) of each Fund is described in the Prospectuses.
There can be no assurance that any Fund will achieve its investment goal(s).
Investment Strategies and Risks
The following provides additional information about the investment
policies and types of securities which may be invested in by one or more Funds.
Fixed-Income and Other Debt Instrument Securities
Fixed-income and other debt instrument securities include all bonds,
high yield or "junk" bonds, municipal bonds, debentures, U.S. Government
securities, mortgage-related securities including government stripped
mortgage-related securities, zero coupon securities and custodial receipts. The
market value of fixed-income obligations of the Funds will be affected by
general changes in interest rates which will result in increases or decreases in
the value of the obligations held by the Funds. The market value of the
obligations held by a Fund can be expected to vary inversely to changes in
prevailing interest rates. As a result, shareholders should anticipate that the
market value of the obligations held by the Fund generally will increase when
prevailing interest rates are declining and generally will decrease when
prevailing interest rates are rising. Shareholders also should recognize that,
in periods of declining interest rates, a Fund's yield will tend to be somewhat
higher than prevailing market rates and, in periods of rising interest rates, a
Fund's yield will tend to be somewhat lower. Also, when interest rates are
falling, the inflow of net new money to a Fund from the continuous sale of its
shares will tend to be invested in instruments producing lower yields than the
balance of its portfolio, thereby reducing the Fund's current yield. In periods
of rising interest rates, the opposite can be expected to occur. In addition,
securities in which a Fund may invest may not yield as high a level of current
income as might be achieved by investing in securities with less liquidity, less
creditworthiness or longer maturities.
Ratings made available by Standard & Poor's Rating Service ("S&P") and
Moody's Investor Service, Inc. ("Moody's") are relative and subjective and are
not absolute standards of quality. Although these ratings are initial criteria
for selection of portfolio investments, a Fund Sub-Advisor also will make its
own evaluation of these securities. Among the factors that will be considered
are the long term ability of the issuers to pay principal and interest and
general economic trends.
Fixed-income securities may be purchased on a when-issued or
delayed-delivery basis. See "Additional Risks and Investment Techniques --
When-Issued and Delayed-Delivery Securities" below.
Commercial Paper
Commercial paper consists of short-term (usually from 1 to 270 days)
unsecured promissory notes issued by corporations in order to finance their
current operations. A variable amount master demand note (which is a type of
commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts.
For a description of commercial paper ratings, see the Appendix.
4
Medium and Lower Rated and Unrated Securities
Securities rated in the fourth highest category by S&P or Moody's, BBB
and Baa, respectively, although considered investment grade, may possess
speculative characteristics, and changes in economic or other conditions are
more likely to impair the ability of issuers of these securities to make
interest and principal payments than is the case with respect to issuers of
higher grade bonds.
Generally, medium or lower-rated securities and unrated securities of
comparable quality, sometimes referred to as "junk bonds," offer a higher
current yield than is offered by higher rated securities, but also (i) will
likely have some quality and protective characteristics that, in the judgment of
the rating organizations, are outweighed by large uncertainties or major risk
exposures to adverse conditions and (ii) are predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. The yield of junk bonds will
fluctuate over time.
The market values of certain of these securities also tend to be more
sensitive to individual corporate developments and changes in economic
conditions than higher quality bonds. In addition, medium and lower rated
securities and comparable unrated securities generally present a higher degree
of credit risk. The risk of loss due to default by these issuers is
significantly greater because medium and lower-rated securities and unrated
securities of comparable quality generally are unsecured and frequently are
subordinated to the prior payment of senior indebtedness. Since the risk of
default is higher for lower rated debt securities, the Fund Sub-Advisor's
research and credit analysis are an especially important part of managing
securities of this type held by a Fund. In light of these risks, the Board of
Trustees of the Trust has instructed the Fund Sub-Advisor, in evaluating the
creditworthiness of an issue, whether rated or unrated, to take various factors
into consideration, which may include, as applicable, the issuer's financial
resources, its sensitivity to economic conditions and trends, the operating
history of and the community support for the facility financed by the issue, the
ability of the issuer's management and regulatory matters.
In addition, the market value of securities in lower-rated categories
is more volatile than that of higher quality securities, and the markets in
which medium and lower-rated or unrated securities are traded are more limited
than those in which higher rated securities are traded. The existence of limited
markets may make it more difficult for the Funds to obtain accurate market
quotations for purposes of valuing their respective portfolios and calculating
their respective net asset values. Moreover, the lack of a liquid trading market
may restrict the availability of securities for the Funds to purchase and may
also have the effect of limiting the ability of a Fund to sell securities at
their fair value either to meet redemption requests or to respond to changes in
the economy or the financial markets.
Lower-rated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, a Fund may have
to replace the security with a lower yielding security, resulting in a decreased
return for shareholders. Also, as the principal value of bonds moves inversely
with movements in interest rates, in the event of rising interest rates the
value of the securities held by a Fund may decline relatively proportionately
more than a portfolio consisting of higher rated securities. If a Fund
experiences unexpected net redemptions, it may be forced to sell its higher
rated bonds, resulting in a decline in the overall credit quality of the
securities held by the Fund and increasing the exposure of the Fund to the risks
of lower rated securities. Investments in zero coupon bonds may be more
speculative and subject to greater fluctuations in value due to changes in
interest rates than bonds that pay interest currently.
Subsequent to its purchase by a Fund, an issue of securities may cease
to be rated or its rating may be reduced below the minimum required for purchase
by the Fund. Neither event will require sale of these securities by the Fund,
but the Fund Sub-Advisor will consider this event in its determination of
whether the Fund should continue to hold the securities.
5
Lower-Rated Debt Securities
While the market for high yield corporate debt securities has been in
existence for many years and has weathered previous economic downturns, the
1980's brought a dramatic increase in the use of such securities to fund highly
leveraged corporate acquisitions and restructuring. Past experience may not
provide an accurate indication of future performance of the high yield bond
market, especially during periods of economic recession. In fact, from 1989 to
1991, the percentage of lower-rated debt securities that defaulted rose
significantly above prior levels.
The market for lower-rated debt securities may be thinner and less
active than that for higher rated debt securities, which can adversely affect
the prices at which the former are sold. If market quotations are not available,
lower-rated debt securities will be valued in accordance with procedures
established by the Board of Trustees, including the use of outside pricing
services. Judgment plays a greater role in valuing high yield corporate debt
securities than is the case for securities for which more external sources for
quotations and last sale information is available. Adverse publicity and
changing investor perception may affect the ability of outside pricing services
to value lower-rated debt securities and the ability to dispose of these
securities.
In considering investments for the Fund, the Fund Sub-Advisor will
attempt to identify those issuers of high yielding debt securities whose
financial condition is adequate to meet future obligations, has improved or is
expected to improve in the future. The Fund Sub-Advisor's analysis focuses on
relative values based on such factors as interest or dividend coverage, asset
coverage, earnings prospects and the experience and managerial strength of the
issuer.
A Fund may choose, at its expense or in conjunction with others, to
pursue litigation or otherwise exercise its rights as a security holder to seek
to protect the interest of security holders if it determines this to be in the
best interest of the Fund.
Illiquid Securities
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "1933 Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the 1933 Act are referred to as "private placements" or
"restricted securities" and are purchased directly from the issuer or in the
secondary market. Investment companies do not typically hold a significant
amount of these restricted securities or other illiquid securities because of
the potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and an investment company might be unable to dispose of restricted or other
illiquid securities promptly or at reasonable prices and might thereby
experience difficulty satisfying redemptions within seven days. An investment
company might also have to register such restricted securities in order to
dispose of them resulting in additional expense and delay. Adverse market
conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the 1933 Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale of such investments to the
general public or to certain institutions may not be indicative of their
liquidity.
6
The Securities and Exchange Commission (the "SEC") has adopted Rule
144A, which allows a broader institutional trading market for securities
otherwise subject to restriction on their resale to the general public. Rule
144A establishes a "safe harbor" from the registration requirements of the 1933
Act on resales of certain securities to qualified institutional buyers. The
Advisor anticipates that the market for certain restricted securities such as
institutional commercial paper will expand further as a result of this
regulation and the development of automated systems for the trading, clearance
and settlement of unregistered securities of domestic and foreign issuers, such
as the PORTAL System sponsored by the National Association of Securities
Dealers, Inc.
Each Fund Sub-Advisor will monitor the liquidity of Rule 144A
securities in each Fund's portfolio under the supervision of the Board of
Trustees. In reaching liquidity decisions, the Fund Sub-Advisor will consider,
among other things, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers and other potential
purchasers wishing to purchase or sell the security; (3) dealer undertakings to
make a market in the security and (4) the nature of the security and of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of the transfer).
Related Investment Policies
No Fund may invest more than 15% of its net assets in securities which
are illiquid or otherwise not readily marketable. The Trustees of the Trust have
adopted a policy that the International Equity Fund may not invest in illiquid
securities other than Rule 144A securities. If a security becomes illiquid after
purchase by the Fund, the Fund will normally sell the security unless to do so
would not be in the best interests of shareholders.
Each Fund may purchase securities in the United States that are not
registered for sale under federal securities laws but which can be resold to
institutions under SEC Rule 144A or under an exemption from such laws. Provided
that a dealer or institutional trading market in such securities exists, these
restricted securities or Rule 144A securities are treated as exempt from the
Fund's 15% limit on illiquid securities. The Board of Trustees of the Trust,
with advice and information from the respective Fund Sub-Advisor, will determine
the liquidity of restricted securities or Rule 144A securities by looking at
factors such as trading activity and the availability of reliable price
information and, through reports from such Fund Sub-Advisor, the Board of
Trustees of the Trust will monitor trading activity in restricted securities. If
institutional trading in restricted securities or Rule 144A securities were to
decline, a Fund's illiquidity could be increased and the Fund could be adversely
affected.
No Fund will invest more than 10% of its total assets in restricted
securities (excluding Rule 144A securities).
Foreign Securities
Investing in securities issued by foreign companies and governments
involves considerations and potential risks not typically associated with
investing in obligations issued by the U.S. government and domestic
corporations. Less information may be available about foreign companies than
about domestic companies and foreign companies generally are not subject to
uniform accounting, auditing and financial reporting standards or to other
regulatory practices and requirements comparable to those applicable to domestic
companies. The values of foreign investments are affected by changes in currency
rates or exchange control regulations, restrictions or prohibitions on the
repatriation of foreign currencies, application of foreign tax laws, including
withholding taxes, changes in governmental administration or economic or
monetary policy (in the United States or abroad) or changed circumstances in
dealings between nations. Costs are also incurred in connection with conversions
between various currencies. In addition, foreign brokerage commissions and
custody fees are generally higher than those charged in the United States, and
7
foreign securities markets may be less liquid, more volatile and less subject to
governmental supervision than in the United States. Investments in foreign
countries could be affected by other factors not present in the United States,
including expropriation, confiscatory taxation, lack of uniform accounting and
auditing standards and potential difficulties in enforcing contractual
obligations and could be subject to extended clearance and settlement periods.
Emerging Market Securities
Emerging Market Securities are securities that are issued by a company
that (i) is organized under the laws of an emerging market country (any country
other than Australia, Austria, Belgium, Canada, Denmark, Finland, France,
Germany, Holland, Italy, Japan, Luxembourg, New Zealand, Norway, Spain, Sweden,
Switzerland, the United Kingdom and the United States), (ii) has its principal
trading market for its stock in an emerging market country, or (iii) derives at
least 50% of its revenues or profits from corporations within emerging market
countries or has at least 50% of its assets located in emerging market
countries.
The following Funds may invest in Emerging Market Securities:
Emerging Growth Fund - up to 10% of total assets,
International Equity Fund - up to 40% of total assets,
Income Opportunity Fund - up to 65% of total assets,
Growth & Income Fund - up to 5% of total assets, and Balanced
Fund - up to 15% of total assets.
Investments in securities of issuers based in underdeveloped countries
entail all of the risks of investing in foreign issuers outlined in this section
to a heightened degree. These heightened risks include: (i) expropriation,
confiscatory taxation, nationalization, and less social, political and economic
stability; (ii) the smaller size of the market for such securities and a low or
nonexistent volume of trading, resulting in a lack of liquidity and in price
volatility; (iii) certain national policies which may restrict a Fund's
investment opportunities including restrictions on investing in issuers in
industries deemed sensitive to relevant national interests; and (iv) in the case
of Eastern Europe, the absence of developed capital markets and legal structures
governing private or foreign investment and private property and the possibility
that recent favorable economic and political developments could be slowed or
reversed by unanticipated events.
Special Considerations Concerning Eastern Europe
Investments in companies domiciled in Eastern European countries may be
subject to potentially greater risks than those of other foreign issuers. These
risks include: (i) potentially less social, political and economic stability;
(ii) the small current size of the markets for such securities and the low
volume of trading, which result in less liquidity and in greater price
volatility; (iii) certain national policies which may restrict the Funds'
investment opportunities, including restrictions on investment in issuers or
industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed legal structures governing private or foreign
investment or allowing for judicial redress for injury to private property; (vi)
the absence, until recently in certain Eastern European countries, of a capital
market structure or market-oriented economy; and (vii) the possibility that
recent favorable economic developments in Eastern Europe may be slowed or
reversed by unanticipated political or social events in such countries, or in
the Commonwealth of Independent States (formerly the Union of Soviet Socialist
Republics).
So long as the Communist Party continues to exercise a significant or,
in some cases, dominant role in Eastern European countries, investments in such
countries will involve risks of nationalization, expropriation and confiscatory
8
taxation. The Communist governments of a number of Eastern European countries
expropriated large amounts of private property in the past, in many cases
without adequate compensation, and there may be no assurance that such
expropriation will not occur in the future. In the event of such expropriation,
a Fund could lose a substantial portion of any investments it has made in the
affected countries. Further, no accounting standards exist in Eastern European
countries. Finally, even though certain Eastern European currencies may be
convertible into U.S. dollars, the conversion rates may be artificial in
relation to the actual market values and may be adverse to the interests of a
Fund's shareholders.
Currency Exchange Rates
A Fund's share value may change significantly when the currencies,
other than the U.S. dollar, in which the Fund's investments are denominated
strengthen or weaken against the U.S. dollar. Currency exchange rates generally
are determined by the forces of supply and demand in the foreign exchange
markets and the relative merits of investments in different countries as seen
from an international perspective. Currency exchange rates can also be affected
unpredictably by intervention by U.S. or foreign governments or central banks or
by currency controls or political developments in the United States or abroad.
Options
Options on Securities
The respective Funds may write (sell), to a limited extent, only
covered call and put options ("covered options") in an attempt to increase
income. However, the Fund may forgo the benefits of appreciation on securities
sold or may pay more than the market price on securities acquired pursuant to
call and put options written by the Fund.
When a Fund writes a covered call option, it gives the purchaser of the
option the right to buy the underlying security at the price specified in the
option (the "exercise price") by exercising the option at any time during the
option period. If the option expires unexercised, the Fund will realize income
in an amount equal to the premium received for writing the option. If the option
is exercised, a decision over which the Fund has no control, the Fund must sell
the underlying security to the option holder at the exercise price. By writing a
covered call option, the Fund forgoes, in exchange for the premium less the
commission ("net premium"), the opportunity to profit during the option period
from an increase in the market value of the underlying security above the
exercise price.
When a Fund writes a covered put option, it gives the purchaser of the
option the right to sell the underlying security to the Fund at the specified
exercise price at any time during the option period. If the option expires
unexercised, the Fund will realize income in the amount of the premium received
for writing the option. If the put option is exercised, a decision over which
the Fund has no control, the Fund must purchase the underlying security from the
option holder at the exercise price. By writing a covered put option, the Fund,
in exchange for the net premium received, accepts the risk of a decline in the
market value of the underlying security below the exercise price.
A Fund may terminate its obligation as the writer of a call or put
option by purchasing an option with the same exercise price and expiration date
as the option previously written. This transaction is called a "closing purchase
transaction." Where the Fund cannot effect a closing purchase transaction, it
may be forced to incur brokerage commissions or dealer spreads in selling
securities it receives or it may be forced to hold underlying securities until
an option is exercised or expires.
9
When a Fund writes an option, an amount equal to the net premium
received by the Fund is included in the liability section of the Fund's
Statement of Assets and Liabilities as a deferred credit. The amount of the
deferred credit will be subsequently marked to market to reflect the current
market value of the option written. The current market value of a traded option
is the last sale price or, in the absence of a sale, the mean between the
closing bid and asked price. If an option expires on its stipulated expiration
date or if the Fund enters into a closing purchase transaction, the Fund will
realize a gain (or loss if the cost of a closing purchase transaction exceeds
the premium received when the option was sold), and the deferred credit related
to such option will be eliminated. If a call option is exercised, the Fund will
realize a gain or loss from the sale of the underlying security and the proceeds
of the sale will be increased by the premium originally received. The writing of
covered call options may be deemed to involve the pledge of the securities
against which the option is being written.
When a Fund writes a call option, it will "cover" its obligation by
segregating the underlying security on the books of the Fund's custodian or by
placing liquid securities in a segregated account at the Fund's custodian. When
a Fund writes a put option, it will "cover" its obligation by placing liquid
securities in a segregated account at the Fund's custodian.
A Fund may purchase call and put options on any securities in which it
may invest. The Fund would normally purchase a call option in anticipation of an
increase in the market value of such securities. The purchase of a call option
would entitle the Fund, in exchange for the premium paid, to purchase a security
at a specified price during the option period. The Fund would ordinarily have a
gain if the value of the securities increased above the exercise price
sufficiently to cover the premium and would have a loss if the value of the
securities remained at or below the exercise price during the option period.
A Fund would normally purchase put options in anticipation of a decline
in the market value of securities in its portfolio ("protective puts") or
securities of the type in which it is permitted to invest. The purchase of a put
option would entitle the Fund, in exchange for the premium paid, to sell a
security, which may or may not be held in the Fund's portfolio, at a specified
price during the option period. The purchase of protective puts is designed
merely to offset or hedge against a decline in the market value of the Fund's
portfolio securities. Put options also may be purchased by the Fund for the
purpose of affirmatively benefiting from a decline in the price of securities
which the Fund does not own. The Fund would ordinarily recognize a gain if the
value of the securities decreased below the exercise price sufficiently to cover
the premium and would recognize a loss if the value of the securities remained
at or above the exercise price. Gains and losses on the purchase of protective
put options would tend to be offset by countervailing changes in the value of
underlying portfolio securities.
Each Fund has adopted certain other nonfundamental policies concerning
option transactions which are discussed below. The Fund's activities in options
may also be restricted by the requirements of the Internal Revenue Code of 1986,
as amended (the "Code"), for qualification as a regulated investment company.
The hours of trading for options on securities may not conform to the
hours during which the underlying securities are traded. To the extent that the
option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying securities
markets that cannot be reflected in the option markets. It is impossible to
predict the volume of trading that may exist in such options, and there can be
no assurance that viable exchange markets will develop or continue.
A Fund may engage in over-the-counter options transactions with
broker-dealers who make markets in these options. At present, approximately ten
broker-dealers, including several of the largest primary dealers in U.S.
Government securities, make these markets. The ability to terminate
10
over-the-counter option positions is more limited than with exchange-traded
option positions because the predominant market is the issuing broker rather
than an exchange, and may involve the risk that broker-dealers participating in
such transactions will not fulfill their obligations. To reduce this risk, the
Fund will purchase such options only from broker-dealers who are primary
government securities dealers recognized by the Federal Reserve Bank of New York
and who agree to (and are expected to be capable of) entering into closing
transactions, although there can be no guarantee that any such option will be
liquidated at a favorable price prior to expiration. The Fund Sub-Advisor will
monitor the creditworthiness of dealers with whom a Fund enters into such
options transactions under the general supervision of the Board of Trustees.
Related Investment Policies
Each Fund which invests in equity securities may write or purchase
options on stocks. A call option gives the purchaser of the option the right to
buy, and obligates the writer to sell, the underlying stock at the exercise
price at any time during the option period. Similarly, a put option gives the
purchaser of the option the right to sell, and obligates the writer to buy the
underlying stock at the exercise price at any time during the option period. A
covered call option with respect to which a Fund owns the underlying stock sold
by the Fund exposes the Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying stock
or to possible continued holding of a stock which might otherwise have been sold
to protect against depreciation in the market price of the stock. A covered put
option sold by a Fund exposes the Fund during the term of the option to a
decline in price of the underlying stock.
To close out a position when writing covered options, a Fund may make a
"closing purchase transaction" which involves purchasing an option on the same
stock with the same exercise price and expiration date as the option which it
has previously written on the stock. The Fund will realize a profit or loss for
a closing purchase transaction if the amount paid to purchase an option is less
or more, as the case may be, than the amount received from the sale thereof. To
close out a position as a purchaser of an option, the Fund may make a "closing
sale transaction" which involves liquidating the Fund's position by selling the
option previously purchased.
Options on Securities Indexes
Such options give the holder the right to receive a cash settlement
during the term of the option based upon the difference between the exercise
price and the value of the index. Such options will be used for the purposes
described above under "Options on Securities" or, to the extent allowed by law,
as a substitute for investment in individual securities.
Options on securities indexes entail risks in addition to the risks of
options on securities. The absence of a liquid secondary market to close out
options positions on securities indexes is more likely to occur, although the
Fund generally will only purchase or write such an option if the Fund
Sub-Advisor believes the option can be closed out.
Use of options on securities indexes also entails the risk that trading
in such options may be interrupted if trading in certain securities included in
the index is interrupted. The Fund will not purchase such options unless the
Advisor and the respective Fund Sub-Advisor each believes the market is
sufficiently developed such that the risk of trading in such options is no
greater than the risk of trading in options on securities.
Price movements in a Fund's portfolio may not correlate precisely with
movements in the level of an index and, therefore, the use of options on indexes
11
cannot serve as a complete hedge. Because options on securities indexes require
settlement in cash, the Fund Sub-Advisor may be forced to liquidate portfolio
securities to meet settlement obligations.
When a Fund writes a put or call option on a securities index it will
cover the position by placing liquid securities in a segregated asset account
with the Fund's custodian.
Options on securities indexes are generally similar to options on stock
except that the delivery requirements are different. Instead of giving the right
to take or make delivery of stock at a specified price, an option on a security
index gives the holders the right to receive a cash "exercise settlement amount"
equal to (a) the amount, if any, by which the fixed exercise price of the option
exceeds (in the case of a put) or is less than (in the case of a call) the
closing value of the underlying index on the date of the exercise, multiplied by
(b) a fixed "index multiplier." Receipt of this cash amount will depend upon the
closing level of the index upon which the option is based being greater than, in
the case of a call, or less than, in the case of a put, the exercise price of
the option. The amount of cash received will be equal to such difference between
the closing price of the index and the exercise price of the option expressed in
dollars or a foreign currency, as the case may be, times a specified multiple.
The writer of the option is obligated, in return for the premium received, to
make delivery of this amount. The writer may offset its position in securities
index options prior to expiration by entering into a closing transaction on an
exchange or the option may expire unexercised.
Because the value of an index option depends upon movements in the
level of the index rather than the price of a particular security, whether the
Fund will realize a gain or loss from the purchase or writing of options on an
index depends upon movements in the level of securities prices in the market
generally or, in the case of certain indexes, in an industry or market segment,
rather than movements in price of a particular security. Accordingly, successful
use by a Fund of options on security indexes will be subject to the Fund
Sub-Advisor's ability to predict correctly movement in the direction of that
securities market generally or of a particular industry. This requires different
skills and techniques than predicting changes in the price of individual
securities.
Related Investment Policies
Each Fund may purchase and write put and call options on securities
indexes listed on domestic and, in the case of those Funds which may invest in
foreign securities, on foreign exchanges. A securities index fluctuates with
changes in the market values of the securities included in the index.
To the extent permitted by U.S. federal or state securities laws, the
International Equity Fund may invest in options on foreign stock indexes in lieu
of direct investment in foreign securities. The Fund may also use foreign stock
index options for hedging purposes.
Options on Foreign Currencies
Options on foreign currencies are used for hedging purposes in a manner
similar to that in which futures contracts on foreign currencies, or forward
contracts, are utilized. For example, a decline in the dollar value of a foreign
currency in which portfolio securities are denominated will reduce the dollar
value of such securities, even if their value in the foreign currency remains
constant. In order to protect against such diminutions in the value of portfolio
securities, the Fund may purchase put options on the foreign currency. If the
value of the currency does decline, a Fund will have the right to sell such
currency for a fixed amount in dollars and will thereby offset, in whole or in
part, the adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, the Fund may purchase call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other types of options,
12
however, the benefit to the Fund derived from purchases of foreign currency
options will be reduced by the amount of the premium and related transaction
costs. In addition, where currency exchange rates do not move in the direction
or to the extent anticipated, the Fund could sustain losses on transactions in
foreign currency options which would require it to forego a portion or all of
the benefits of advantageous changes in such rates.
Options on foreign currencies may be written for the same types of
hedging purposes. For example, where a Fund anticipates a decline in the dollar
value of foreign currency denominated securities due to adverse fluctuations in
exchange rates, it could, instead of purchasing a put option, write a call
option on the relevant currency. If the expected decline occurs, the options
will most likely not be exercised, and the diminution in value of portfolio
securities will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the Fund
could write a put option on the relevant currency which, if rates move in the
manner projected, will expire unexercised and allow the Fund to hedge such
increased cost up to the amount of the premium. As in the case of other types of
options, however, the writing of a foreign currency option will constitute only
a partial hedge up to the amount of the premium, and only if rates move in the
expected direction. If this does not occur, the option may be exercised and the
Fund would be required to purchase or sell the underlying currency at a loss
which may not be offset by the amount of the premium. Through the writing of
options on foreign currencies, the Fund also may be required to forego all or a
portion of the benefits which might otherwise have been obtained from favorable
movements in exchange rates.
Certain Funds intend to write covered call options on foreign
currencies. A call option written on a foreign currency by a Fund is "covered"
if the Fund owns the underlying foreign currency covered by the call or has an
absolute and immediate right to acquire that foreign currency without additional
cash consideration (or for additional cash consideration held in a segregated
account by its custodian) upon conversion or exchange of other foreign currency
held in its portfolio. A call option is also covered if the Fund has a call on
the same foreign currency and in the same principal amount as the call written
where the exercise price of the call held (a) is equal to or less than the
exercise price of the call written or (b) is greater than the exercise price of
the call written if the difference is maintained by the Fund in cash and liquid
securities in a segregated account with its custodian.
Certain Funds also intend to write call options on foreign currencies
that are not covered for cross-hedging purposes. A call option on a foreign
currency is for cross-hedging purposes if it is not covered, but is designed to
provide a hedge against a decline in the U.S. dollar value of a security which
the Fund owns or has the right to acquire and which is denominated in the
currency underlying the option due to an adverse change in the exchange rate. In
such circumstances, the Fund collateralizes the option by maintaining in a
segregated account with its custodian, cash or liquid securities in an amount
not less than the value of the underlying foreign currency in U.S. dollars
marked to market daily.
Related Investment Policies
Each Fund that may invest in foreign securities may write covered put
and call options and purchase put and call options on foreign currencies for the
purpose of protecting against declines in the dollar value of portfolio
securities and against increases in the dollar cost of securities to be
acquired. The Fund may use options on currency to cross-hedge, which involves
writing or purchasing options on one currency to hedge against changes in
exchange rates for a different, but related currency. As with other types of
options, however, the writing of an option on foreign currency will constitute
only a partial hedge up to the amount of the premium received, and the Fund
could be required to purchase or sell foreign currencies at disadvantageous
exchange rates, thereby incurring losses. The purchase of an option on foreign
13
currency may be used to hedge against fluctuations in exchange rates although,
in the event of exchange rate movements adverse to the Fund's position, it may
not forfeit the entire amount of the premium plus related transaction costs. In
addition, the Fund may purchase call options on currency when the Fund
Sub-Advisor anticipates that the currency will appreciate in value.
There is no assurance that a liquid secondary market on an options
exchange will exist for any particular option, or at any particular time. If the
Fund is unable to effect a closing purchase transaction with respect to covered
options it has written, the Fund will not be able to sell the underlying
currency or dispose of assets held in a segregated account until the options
expire. Similarly, if the Fund is unable to effect a closing sale transaction
with respect to options it has purchased, it would have to exercise the options
in order to realize any profit and will incur transaction costs upon the
purchase or sale of underlying currency. The Fund pays brokerage commissions or
spreads in connection with its options transactions.
As in the case of forward contracts, certain options on foreign
currencies are traded over-the-counter and involve liquidity and credit risks
which may not be present in the case of exchange-traded currency options. The
Fund's ability to terminate over-the-counter options ("OTC Options") will be
more limited than the exchange-traded options. It is also possible that
broker-dealers participating in OTC Options transactions will not fulfill their
obligations. Until such time as the staff of the SEC changes its position, the
Fund will treat purchased OTC Options and assets used to cover written OTC
Options as illiquid securities. With respect to options written with primary
dealers in U.S. Government securities pursuant to an agreement requiring a
closing purchase transaction at a formula price, the amount of illiquid
securities may be calculated with reference to the repurchase formula.
Forward Currency Contracts
Because, when investing in foreign securities, a Fund buys and sells
securities denominated in currencies other than the U.S. dollar and receives
interest, dividends and sale proceeds in currencies other than the U.S. dollar,
such Funds from time to time may enter into forward currency transactions to
convert to and from different foreign currencies and to convert foreign
currencies to and from the U.S. dollar. A Fund either enters into these
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market or uses forward currency contracts to purchase
or sell foreign currencies.
A forward currency contract is an obligation by a Fund 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. Forward currency contracts establish an exchange
rate at a future date. These contracts are transferable in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. A forward currency contract generally has no deposit
requirement and is traded at a net price without commission. Each Fund maintains
with its custodian a segregated account of liquid securities in an amount at
least equal to its obligations under each forward currency contract. Neither
spot transactions nor forward currency contracts eliminate fluctuations in the
prices of the Fund's securities or in foreign exchange rates, or prevent loss if
the prices of these securities should decline.
A Fund may enter into foreign currency hedging transactions in an
attempt to protect against changes in foreign currency exchange rates between
the trade and settlement dates of specific securities transactions or changes in
foreign currency exchange rates that would adversely affect a portfolio position
or an anticipated investment position. Since consideration of the prospect for
currency parities will be incorporated into a Fund Sub-Advisor's long-term
investment decisions, a Fund will not routinely enter into foreign currency
hedging transactions with respect to security transactions; however, the Fund
Sub-Advisors believe that it is important to have the flexibility to enter into
foreign currency hedging transactions when it determines that the transactions
would be in a Fund's best interest. Although these transactions tend to minimize
14
the risk of loss due to a decline in the value of the hedged currency, at the
same time they tend to limit any potential gain that might be realized should
the value of the hedged currency increase. The precise matching of the forward
currency contract amounts and the value of the securities involved will not
generally be possible because the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of such
securities between the date the forward currency contract is entered into and
the date it matures. The projection of currency market movements is extremely
difficult, and the successful execution of a hedging strategy is highly
uncertain.
While these contracts are not presently regulated by the CFTC, the CFTC
may in the future assert authority to regulate forward currency contracts. In
such event the Fund's ability to utilize forward currency contracts in the
manner set forth in the Prospectuses may be restricted. Forward currency
contracts may reduce the potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies. Unanticipated
changes in currency prices may result in poorer overall performance for the Fund
than if it had not entered into such contracts. The use of forward currency
contracts may not eliminate fluctuations in the underlying U.S. dollar
equivalent value of the prices of or rates of return on a Fund's foreign
currency denominated portfolio securities and the use of such techniques will
subject a Fund to certain risks.
The matching of the increase in value of a forward currency contract
and the decline in the U.S. dollar equivalent value of the foreign currency
denominated asset that is the subject of the hedge generally will not be
precise. In addition, a Fund may not always be able to enter into forward
currency contracts at attractive prices and this will limit the Fund's ability
to use such contract to hedge or cross-hedge its assets. Also, with regard to a
Fund's use of cross-hedges, there can be no assurance that historical
correlations between the movement of certain foreign currencies relative to the
U.S. dollar will continue. Thus, at any time poor correlation may exist between
movements in the exchange rates of the foreign currencies underlying a Fund's
cross-hedges and the movements in the exchange rates of the foreign currencies
in which the Fund's assets that are the subject of such cross-hedges are
denominated.
15
Futures Contracts and Options on Futures Contracts
The successful use of such instruments draws upon the Fund
Sub-Advisor's skill and experience with respect to such instruments and usually
depends on the Fund Sub-Advisor's ability to forecast interest rate and currency
exchange rate movements correctly. Should interest or exchange rates move in an
unexpected manner, a Fund may not achieve the anticipated benefits of futures
contracts or options on futures contracts or may realize losses and thus will be
in a worse position than if such strategies had not been used. In addition, the
correlation between movements in the price of futures contracts or options on
futures contracts and movements in the price of the securities and currencies
hedged or used for cover will not be perfect and could produce unanticipated
losses.
Futures Contracts
A Fund may enter into contracts for the purchase or sale for future
delivery of fixed-income securities or foreign currencies, or contracts based on
financial indexes including any index of U.S. Government securities, foreign
government securities or corporate debt securities. U.S. futures contracts have
been designed by exchanges which have been designated "contracts markets" by the
Commodity Futures Trading Commission ("CFTC"), and must be executed through a
futures commission merchant, or brokerage firm, which is a member of the
relevant contract market. Futures contracts trade on a number of exchange
markets, and, through their clearing corporations, the exchanges guarantee
performance of the contracts as between the clearing members of the exchange. A
Fund may enter into futures contracts which are based on debt securities that
are backed by the full faith and credit of the U.S. Government, such as
long-term U.S. Treasury Bonds, Treasury Notes, Government National Mortgage
Association ("GNMA") modified pass-through mortgage-backed securities and
three-month U.S. Treasury Bills. A Fund may also enter into futures contracts
which are based on bonds issued by entities other than the U.S. Government.
At the same time a futures contract is purchased or sold, the Fund must
allocate cash or securities as a deposit payment ("initial deposit"). It is
expected that the initial deposit would be approximately 1 1/2% to 5% of a
contract's face value. Daily thereafter, the futures contract is valued and the
payment of "variation margin" may be required, since each day the Fund would
provide or receive cash that reflects any decline or increase in the contract's
value.
At the time of delivery of securities pursuant to such a contract,
adjustments are made to recognize differences in value arising from the delivery
of securities with a different interest rate from that specified in the
contract. In some (but not many) cases, securities called for by a futures
contract may not have been issued when the contract was written.
Although futures contracts by their terms call for the actual delivery
or acquisition of securities, in most cases the contractual obligation is
fulfilled before the date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled through a
clearinghouse associated with the exchange on which the contracts are traded,
the Fund will incur brokerage fees when it purchases or sells futures contracts.
The purpose of the acquisition or sale of a futures contract, in the
case of a Fund which holds or intends to acquire fixed-income securities, is to
attempt to protect the Fund from fluctuations in interest or foreign exchange
rates without actually buying or selling fixed-income securities or foreign
currencies. For example, if interest rates were expected to increase, the Fund
might enter into futures contracts for the sale of debt securities. Such a sale
would have much the same effect as selling an equivalent value of the debt
16
securities owned by the Fund. If interest rates did increase, the value of the
debt security in the Fund would decline, but the value of the futures contracts
to the Fund would increase at approximately the same rate, thereby keeping the
net asset value of the Fund from declining as much as it otherwise would have.
The Fund could accomplish similar results by selling debt securities and
investing in bonds with short maturities when interest rates are expected to
increase. However, since the futures market is more liquid than the cash market,
the use of futures contracts as an investment technique allows the Fund to
maintain a defensive position without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, futures
contracts may be purchased to attempt to hedge against anticipated purchases of
debt securities at higher prices. Since the fluctuations in the value of futures
contracts should be similar to those of debt securities, a Fund could take
advantage of the anticipated rise in the value of debt securities without
actually buying them until the market had stabilized. At that time, the futures
contracts could be liquidated and the Fund could then buy debt securities on the
cash market.
When a Fund enters into a futures contract for any purpose, the Fund
will establish a segregated account with the Fund's custodian to collateralize
or "cover" the Fund's obligation consisting of cash or liquid securities from
its portfolio in an amount equal to the difference between the fluctuating
market value of such futures contracts and the aggregate value of the initial
and variation margin payments made by the Fund with respect to such futures
contracts.
The ordinary spreads between prices in the cash and futures market, due
to differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the Fund Sub-Advisor may
still not result in a successful transaction.
In addition, futures contracts entail risks. Although each applicable
Fund Sub-Advisor believes that use of such contracts will benefit the respective
Fund, if the Fund Sub-Advisor's investment judgment about the general direction
of interest rates is incorrect, a Fund's overall performance would be poorer
than if it had not entered into any such contract. For example, if a Fund has
hedged against the possibility of an increase in interest rates which would
adversely affect the price of debt securities held in its portfolio and interest
rates decrease instead, the Fund will lose part or all of the benefit of the
increased value of its debt securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
a Fund has insufficient cash, it may have to sell debt securities from its
portfolio to meet daily variation margin requirements. Such sales of bonds may
be, but will not necessarily be, at increased prices which reflect the rising
market. A Fund may have to sell securities at a time when it may be
disadvantageous to do so.
Options on Futures Contracts
Each Fund may purchase and write options on futures contracts for
hedging purposes. The purchase of a call option on a futures contract is similar
in some respects to the purchase of a call option on an individual security.
Depending on the pricing of the option compared to either the price of the
futures contract upon which it is based or the price of the underlying debt
securities, it may or may not be less risky than ownership of the futures
17
contract or underlying debt securities. As with the purchase of futures
contracts, when a Fund is not fully invested it may purchase a call option on a
futures contract to hedge against a market advance due to declining interest
rates.
The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the security or foreign currency which
is deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is below the exercise price, a Fund will retain the
full amount of the option premium which provides a partial hedge against any
decline that may have occurred in the Fund's portfolio holdings. The writing of
a put option on a futures contract constitutes a partial hedge against
increasing prices of the security or foreign currency which is deliverable upon
exercise of the futures contract. If the futures price at expiration of the
option is higher than the exercise price, the Fund will retain the full amount
of the option premium which provides a partial hedge against any increase in the
price of securities which the Fund intends to purchase. If a put or call option
the Fund has written is exercised, the Fund will incur a loss which will be
reduced by the amount of the premium it receives. Depending on the degree of
correlation between changes in the value of its portfolio securities and changes
in the value of its futures positions, the Fund's losses from existing options
on futures may to some extent be reduced or increased by changes in the value of
portfolio securities.
The purchase of a put option on a futures contract is similar in some
respects to the purchase of protective put options on portfolio securities. For
example, a Fund may purchase a put option on a futures contract to hedge its
portfolio against the risk of rising interest rates.
The amount of risk a Fund assumes when it purchases an option on a
futures contract is the premium paid for the option plus related transaction
costs. In addition to the correlation risks discussed above, the purchase of an
option also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option purchased.
The Fund will not enter into any futures contracts or options on
futures contracts if immediately thereafter the amount of margin deposits on all
the futures contracts of the Fund and premiums paid on outstanding options on
futures contracts owned by the Fund would exceed 5% of the market value of the
total assets of the Fund.
Additional Risks of Options on Futures Contracts,
Forward Contracts and Options on Foreign Currencies
Unlike transactions entered into by a Fund in futures contracts,
options on foreign currencies and forward contracts are not traded on contract
markets regulated by the CFTC or (with the exception of certain foreign currency
options) by the SEC. To the contrary, such instruments are traded through
financial institutions acting as market-makers, although foreign currency
options are also traded on certain national securities exchanges, such as the
Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject to
SEC regulation. Similarly, options on currencies may be traded over-the-counter.
In an over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost. Moreover, the option writer and a
trader of forward contracts could lose amounts substantially in excess of their
initial investments, due to the margin and collateral requirements associated
with such positions.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
18
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the Options Clearing Corporation ("OCC"),
thereby reducing the risk of counterparty default. Further, a liquid secondary
market in options traded on a national securities exchange may be more readily
available than in the over-the-counter market, potentially permitting a Fund to
liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on exercise
and settlement, such as technical changes in the mechanics of delivery of
currency, the fixing of dollar settlement prices or prohibitions on exercise.
As in the case of forward contracts, certain options on foreign
currencies are traded over-the-counter and involve liquidity and credit risks
which may not be present in the case of exchange-traded currency options. A
Fund's ability to terminate over-the-counter options will be more limited than
with exchange-traded options. It is also possible that broker-dealers
participating in over-the-counter options transactions will not fulfill their
obligations. Until such time as the staff of the SEC changes its position, each
Fund will treat purchased over-the-counter options and assets used to cover
written over-the-counter options as illiquid securities. With respect to options
written with primary dealers in U.S. Government securities pursuant to an
agreement requiring a closing purchase transaction at a formula price, the
amount of illiquid securities may be calculated with reference to the repurchase
formula.
In addition, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign exchanges.
Such transactions are subject to the risk of governmental actions affecting
trading in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by: (i) other complex foreign
political and economic factors; (ii) lesser availability than in the United
States of data on which to make trading decisions; (iii) delays in the Fund's
ability to act upon economic events occurring in foreign markets during
nonbusiness hours in the United States; (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States; and (v) lesser trading volume.
Futures Contracts and Related Options
Each Fund may enter into futures contracts and purchase and write
(sell) options on these contracts, including but not limited to interest rate,
securities index and foreign currency futures contracts and put and call options
on these futures contracts. These contracts will be entered into only upon the
agreement of the Fund Sub-Advisor that such contracts are necessary or
appropriate in the management of the Fund's assets. These contracts will be
entered into on exchanges designated by the Commodity Futures Trading Commission
("CFTC") or, consistent with CFTC regulations, on foreign exchanges. These
transactions may be entered into for bona fide hedging and other permissible
risk management purposes including protecting against anticipated changes in the
value of securities a Fund intends to purchase.
19
No Fund will hedge more than 25% of its total assets by selling
futures, buying puts, and writing calls under normal conditions. In addition, no
Fund will buy futures or write puts whose underlying value exceeds 25% of its
total assets, and no Fund will buy calls with a value exceeding 5% of its total
assets.
A Fund will not enter into futures contracts and related options for
which the aggregate initial margin and premiums exceed 5% of the fair market
value of the Fund's assets after taking into account unrealized profits and
unrealized losses on any contracts it has entered into.
A Fund may lose the expected benefit of these futures or options
transactions and may incur losses if the prices of the underlying commodities
move in an unanticipated manner. In addition, changes in the value of the Fund's
futures and options positions may not prove to be perfectly or even highly
correlated with changes in the value of its portfolio securities. Successful use
of futures and related options is subject to a Fund Sub-Advisor's ability to
predict correctly movements in the direction of the securities markets
generally, which ability may require different skills and techniques than
predicting changes in the prices of individual securities. Moreover, futures and
options contracts may only be closed out by entering into offsetting
transactions on the exchange where the position was entered into (or a linked
exchange), and as a result of daily price fluctuation limits there can be no
assurance that an offsetting transaction could be entered into at an
advantageous price at any particular time. Consequently, a Fund may realize a
loss on a futures contract or option that is not offset by an increase in the
value of its portfolio securities that are being hedged or a Fund may not be
able to close a futures or options position without incurring a loss in the
event of adverse price movements.
Certificates of Deposit and Bankers' Acceptances
Certificates of deposit are receipts issued by a depository institution
in exchange for the deposit of funds. The issuer agrees to pay the amount
deposited plus interest to the bearer of the receipt on the date specified on
the certificate. The certificate usually can be traded in the secondary market
prior to maturity. Bankers' acceptances typically arise from short-term credit
arrangements designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
Lending of Fund Securities
By lending its securities, a Fund can increase its income by continuing
to receive interest on the loaned securities as well as by either investing the
cash collateral in short-term securities or obtaining yield in the form of
interest paid by the borrower when U.S. Government obligations are used as
collateral. There may be risks of delay in receiving additional collateral or
risks of delay in recovery of the securities or even loss of rights in the
collateral should the borrower of the securities fail financially. Each Fund
will adhere to the following conditions whenever its securities are loaned: (i)
the Fund must receive at least 100 percent cash collateral or equivalent
securities from the borrower; (ii) the borrower must increase this collateral
whenever the market value of the securities including accrued interest rises
above the level of the collateral; (iii) the Fund must be able to terminate the
loan at any time; (iv) the Fund must receive reasonable interest on the loan, as
well as any dividends, interest or other distributions on the loaned securities,
and any increase in market value; (v) the Fund may pay only reasonable custodian
fees in connection with the loan; and (vi) voting rights on the loaned
securities may pass to the borrower; provided, however, that if a material event
adversely affecting the investment occurs, the Board of Trustees must terminate
the loan and regain the right to vote the securities.
20
Derivatives
The Funds may invest in various instruments that are commonly known as
derivatives. Generally, a derivative is a financial arrangement, the value of
which is based on, or "derived" from, a traditional security, asset, or market
index. Some "derivatives" such as certain mortgage-related and other
asset-backed securities are in many respects like any other investment, although
they may be more volatile or less liquid than more traditional debt securities.
There are, in fact, many different types of derivatives and many different ways
to use them. There is a range of risks associated with those uses. Futures and
options are commonly used for traditional hedging purposes to attempt to protect
a fund from exposure to changing interest rates, securities prices, or currency
exchange rates and as a low cost method of gaining exposure to a particular
securities market without investing directly in those securities. However, some
derivatives are used for leverage, which tends to magnify the effects of an
instrument's price changes as market conditions change. Leverage involves the
use of a small amount of money to control a large amount of financial assets,
and can in some circumstances, lead to significant losses. A Fund Sub-Advisor
will use derivatives only in circumstances where the Fund Sub-Advisor believes
they offer the most economic means of improving the risk/reward profile of the
Fund. Derivatives will not be used to increase portfolio risk above the level
that could be achieved using only traditional investment securities or to
acquire exposure to changes in the value of assets or indexes that by themselves
would not be purchased for the Fund. The use of derivatives for non-hedging
purposes may be considered speculative. A description of the derivatives that
the Funds may use and some of their associated risks is found below.
ADRs, EDRs and CDRs
ADRs are U.S. dollar-denominated receipts typically issued by domestic
banks or trust companies that represent the deposit with those entities of
securities of a foreign issuer. ADRs are publicly traded on exchanges or
over-the-counter in the United States. European Depositary Receipts ("EDRs"),
which are sometimes referred to as Continental Depositary Receipts ("CDRs"), may
also be purchased by the Funds. EDRs and CDRs are generally issued by foreign
banks and evidence ownership of either foreign or domestic securities. Certain
institutions issuing ADRs or EDRs may not be sponsored by the issuer of the
underlying foreign securities. A non-sponsored depository may not provide the
same shareholder information that a sponsored depository is required to provide
under its contractual arrangements with the issuer of the underlying foreign
securities.
U.S. Government Securities
Each Fund may invest in U.S. Government securities, which are
obligations issued or guaranteed by the U.S. Government, its agencies,
authorities or instrumentalities. Some U.S. Government securities, such as U.S.
Treasury bills, Treasury notes and Treasury bonds, which differ only in their
interest rates, maturities and times of issuance, are supported by the full
faith and credit of the United States. Others are supported by: (i) the right of
the issuer to borrow from the U.S. Treasury, such as securities of the Federal
Home Loan Banks; (ii) the discretionary authority of the U.S. government to
purchase the agency's obligations, such as securities of the FNMA; or (iii) only
the credit of the issuer, such as securities of the Student Loan Marketing
Association. No assurance can be given that the U.S. Government will provide
financial support in the future to U.S. Government agencies, authorities or
instrumentalities that are not supported by the full faith and credit of the
United States.
Securities guaranteed as to principal and interest by the U.S.
Government, its agencies, authorities or instrumentalities include: (i)
securities for which the payment of principal and interest is backed by an
irrevocable letter of credit issued by the U.S. Government or any of its
agencies, authorities or instrumentalities; and (ii) participation interests in
loans made to foreign governments or other entities that are so guaranteed. The
secondary market for certain of these participation interests is limited and,
therefore, may be regarded as illiquid.
21
Mortgage-Related Securities
Each Fund may invest in mortgage-related securities. There are several
risks associated with mortgage-related securities generally. One is that the
monthly cash inflow from the underlying loans may not be sufficient to meet the
monthly payment requirements of the mortgage-related security.
Prepayment of principal by mortgagors or mortgage foreclosures will
shorten the term of the underlying mortgage pool for a mortgage-related
security. Early returns of principal will affect the average life of the
mortgage-related securities remaining in a Fund. The occurrence of mortgage
prepayments is affected by factors including the level of interest rates,
general economic conditions, the location and age of the mortgage and other
social and demographic conditions. In periods of rising interest rates, the rate
of prepayment tends to decrease, thereby lengthening the average life of a pool
of mortgage-related securities. Conversely, in periods of falling interest rates
the rate of prepayment tends to increase, thereby shortening the average life of
a pool. Reinvestment of prepayments may occur at higher or lower interest rates
than the original investment, thus affecting the yield of a Fund. Because
prepayments of principal generally occur when interest rates are declining, it
is likely that a Fund will have to reinvest the proceeds of prepayments at lower
interest rates than those at which the assets were previously invested. If this
occurs, a Fund's yield will correspondingly decline. Thus, mortgage-related
securities may have less potential for capital appreciation in periods of
falling interest rates than other fixed-income securities of comparable
maturity, although these securities may have a comparable risk of decline in
market value in periods of rising interest rates. To the extent that a Fund
purchases mortgage-related securities at a premium, unscheduled prepayments,
which are made at par, will result in a loss equal to any unamortized premium.
CMOs are obligations fully collateralized by a portfolio of mortgages
or mortgage-related securities. Payments of principal and interest on the
mortgages are passed through to the holders of the CMOs on the same schedule as
they are received, although certain classes of CMOs have priority over others
with respect to the receipt of prepayments on the mortgages. Therefore,
depending on the type of CMOs in which a Fund invests, the investment may be
subject to a greater or lesser risk of prepayment than other types of
mortgage-related securities.
Mortgage-related securities may not be readily marketable. To the
extent any of these securities are not readily marketable in the judgment of the
Fund Sub-Advisor, the investment restriction limiting a Fund's investment in
illiquid instruments to not more than 15% of the value of its net assets will
apply.
Stripped Mortgage-Related Securities
These securities are either issued and guaranteed, or privately-issued
but collateralized by securities issued, by GNMA, FNMA or FHLMC. These
securities represent beneficial ownership interests in either periodic principal
distributions ("principal-only") or interest distributions ("interest-only") on
mortgage-related certificates issued by GNMA, FNMA or FHLMC, as the case may be.
The certificates underlying the stripped mortgage-related securities represent
all or part of the beneficial interest in pools of mortgage loans. The Fund will
invest in stripped mortgage-related securities in order to enhance yield or to
benefit from anticipated appreciation in value of the securities at times when
its Fund Sub-Advisor believes that interest rates will remain stable or
increase. In periods of rising interest rates, the expected increase in the
value of stripped mortgage-related securities may offset all or a portion of any
decline in value of the securities held by the Fund.
22
Investing in stripped mortgage-related securities involves the risks
normally associated with investing in mortgage-related securities. See
"Mortgage-Related Securities" above. In addition, the yields on stripped
mortgage- related securities are extremely sensitive to the prepayment
experience on the mortgage loans underlying the certificates collateralizing the
securities. If a decline in the level of prevailing interest rates results in a
rate of principal prepayments higher than anticipated, distributions of
principal will be accelerated, thereby reducing the yield to maturity on
interest-only stripped mortgage-related securities and increasing the yield to
maturity on principal-only stripped mortgage-related securities. Sufficiently
high prepayment rates could result in a Fund not fully recovering its initial
investment in an interest-only stripped mortgage-related security. Under current
market conditions, the Fund expects that investments in stripped
mortgage-related securities will consist primarily of interest-only securities.
Stripped mortgage-related securities are currently traded in an over-the-counter
market maintained by several large investment banking firms. There can be no
assurance that the Fund will be able to effect a trade of a stripped
mortgage-related security at a time when it wishes to do so. The Fund will
acquire stripped mortgage-related securities only if a secondary market for the
securities exists at the time of acquisition. Except for stripped mortgage-
related securities based on fixed rate FNMA and FHLMC mortgage certificates that
meet certain liquidity criteria established by the Board of Trustees, the Funds
will treat government stripped mortgage-related securities and privately-issued
mortgage-related securities as illiquid and will limit its investments in these
securities, together with other illiquid investments, to not more than 15% of
net assets.
Zero Coupon Securities
Zero coupon U.S. Government securities are debt obligations that are
issued or purchased at a significant discount from face value. The discount
approximates the total amount of interest the security will accrue and compound
over the period until maturity or the particular interest payment date at a rate
of interest reflecting the market rate of the security at the time of issuance.
Zero coupon securities do not require the periodic payment of interest. These
investments benefit the issuer by mitigating its need for cash to meet debt
service, but also require a higher rate of return to attract investors who are
willing to defer receipt of cash. These investments may experience greater
volatility in market value than U.S. Government securities that make regular
payments of interest. A Fund accrues income on these investments for tax and
accounting purposes, which is distributable to shareholders and which, because
no cash is received at the time of accrual, may require the liquidation of other
portfolio securities to satisfy the Fund's distribution obligations, in which
case the Fund will forego the purchase of additional income producing assets
with these funds. Zero coupon securities include STRIPS, that is, securities
underwritten by securities dealers or banks that evidence ownership of future
interest payments, principal payments or both on certain notes or bonds issued
by the U.S. government, its agencies, authorities or instrumentalities. They
also include Coupons Under Book Entry System ("CUBES"), which are component
parts of U.S. Treasury bonds and represent scheduled interest and principal
payments on the bonds.
Loans and Other Direct Debt Instruments
These are instruments in amounts owed by a corporate, governmental or
other borrower to another party. They may represent amounts owed to lenders or
lending syndicates (loans and loan participations), to suppliers of goods or
services (trade claims or other receivables) or to other parties. Direct debt
instruments purchased by a Fund may have a maturity of any number of days or
years, may be secured or unsecured, and may be of any credit quality. Direct
debt instruments involve the risk of loss in the case of default or insolvency
of the borrower. Direct debt instruments may offer less legal protection to a
Fund in the event of fraud or misrepresentation. In addition, loan
participations involve a risk of insolvency of the lending bank or other
financial intermediary. Direct debt instruments also may include standby
financing commitments that obligate a Fund to supply additional cash to the
23
borrower on demand at the time when a Fund would not have otherwise done so,
even if the borrower's condition makes it unlikely that the amount will ever be
repaid.
These instruments will be considered illiquid securities and so will be
limited, along with a Fund's other illiquid securities, to not more than 15% of
the Fund's net assets.
Swap Agreements
To help enhance the value of its portfolio or manage its exposure to
different types of investments, the Funds may enter into interest rate, currency
and mortgage swap agreements and may purchase and sell interest rate "caps,"
"floors" and "collars."
In a typical interest rate swap agreement, one party agrees to make
regular payments equal to a floating interest rate on a specified amount (the
"notional principal amount") in return for payments equal to a fixed interest
rate on the same amount for a specified period. If a swap agreement provides for
payment in different currencies, the parties may also agree to exchange the
notional principal amount. Mortgage swap agreements are similar to interest rate
swap agreements, except that notional principal amount is tied to a reference
pool of mortgages.
In a cap or floor, one party agrees, usually in return for a fee, to
make payments under particular circumstances. For example, the purchaser of an
interest rate cap has the right to receive payments to the extent a specified
interest rate exceeds an agreed level; the purchaser of an interest rate floor
has the right to receive payments to the extent a specified interest rate falls
below an agreed level. A collar entitles the purchaser to receive payments to
the extent a specified interest rate falls outside an agreed range.
Swap agreements may involve leverage and may be highly volatile;
depending on how they are used, they may have a considerable impact on a Fund's
performance. Swap agreements involve risks depending upon the other party's
creditworthiness and ability to perform, as judged by the Fund Sub-Advisor, as
well as the Fund's ability to terminate its swap agreements or reduce its
exposure through offsetting transactions.
All swap agreements are considered as illiquid securities and,
therefore, will be limited, along with all of a Fund's other illiquid
securities, to 15% of that Fund's net assets.
Custodial Receipts
Custodial receipts or certificates, such as Certificates of Accrual on
Treasury Securities ("CATS"), Treasury Investors Growth Receipts ("TIGRs") and
Financial Corporation certificates ("FICO Strips"), are securities underwritten
by securities dealers or banks that evidence ownership of future interest
payments, principal payments or both on certain notes or bonds issued by the
U.S. Government, its agencies, authorities or instrumentalities. The
underwriters of these certificates or receipts purchase a U.S. Government
security and deposit the security in an irrevocable trust or custodial account
with a custodian bank, which then issues receipts or certificates that evidence
ownership of the periodic unmatured coupon payments and the final principal
payment on the U.S. Government security. Custodial receipts evidencing specific
coupon or principal payments have the same general attributes as zero coupon
U.S. Government securities, described above. Although typically under the terms
of a custodial receipt a Fund is authorized to assert its rights directly
against the issuer of the underlying obligation, the Fund may be required to
assert through the custodian bank such rights as may exist against the
underlying issuer. Thus, if the underlying issuer fails to pay principal and/or
interest when due, a Fund may be subject to delays, expenses and risks that are
greater than those that would have been involved if the Fund had purchased a
direct obligation of the issuer. In addition, if the trust or custodial account
in which the underlying security has been deposited is determined to be an
24
association taxable as a corporation, instead of a non-taxable entity, the yield
on the underlying security would be reduced in respect of any taxes paid.
When-Issued and Delayed-Delivery Securities
To secure prices deemed advantageous at a particular time, each Fund
may purchase securities on a when-issued or delayed-delivery basis, in which
case delivery of the securities occurs beyond the normal settlement period;
payment for or delivery of the securities would be made prior to the reciprocal
delivery or payment by the other party to the transaction. A Fund will enter
into when-issued or delayed-delivery transactions for the purpose of acquiring
securities and not for the purpose of leverage. When-issued securities purchased
by the Fund may include securities purchased on a "when, as and if issued" basis
under which the issuance of the securities depends on the occurrence of a
subsequent event, such as approval of a merger, corporate reorganization or debt
restructuring.
Securities purchased on a when-issued or delayed-delivery basis may
expose a Fund to risk because the securities may experience fluctuations in
value prior to their actual delivery. The Fund does not accrue income with
respect to a when-issued or delayed-delivery security prior to its stated
delivery date. Purchasing securities on a when-issued or delayed-delivery basis
can involve the additional risk that the yield available in the market when the
delivery takes place may be higher than that obtained in the transaction itself.
Repurchase Agreements
Each of the Funds may engage in repurchase agreement transactions.
Under the terms of a typical repurchase agreement, a Fund would acquire an
underlying debt obligation for a relatively short period (usually not more than
one week) subject to an obligation of the seller to repurchase, and the Fund to
resell, the obligation at an agreed-upon price and time, thereby determining the
yield during the Fund's holding period. This arrangement results in a fixed rate
of return that is not subject to market fluctuations during the Fund's holding
period. A Fund may enter into repurchase agreements with respect to U.S.
Government securities with member banks of the Federal Reserve System and
certain non-bank dealers approved by the Board of Trustees. Under each
repurchase agreement, the selling institution is required to maintain the value
of the securities subject to the repurchase agreement at not less than their
repurchase price. The Fund Sub-Advisor, acting under the supervision of the
Advisor and the Board of Trustees, reviews on an ongoing basis the value of the
collateral and the creditworthiness of those non-bank dealers with whom the Fund
enters into repurchase agreements. In entering into a repurchase agreement, a
Fund bears a risk of loss in the event that the other party to the transaction
defaults on its obligations and the Fund is delayed or prevented from exercising
its rights to dispose of the underlying securities, including the risk of a
possible decline in the value of the underlying securities during the period in
which the Fund seeks to assert its rights to them, the risk of incurring
expenses associated with asserting those rights and the risk of losing all or a
part of the income from the agreement. Repurchase agreements are considered to
be collateralized loans under the Investment Company Act of 1940, as amended
(the "1940 Act").
Reverse Repurchase Agreements and Forward Roll Transactions
The Funds may enter into reverse repurchase agreements and forward roll
transactions. In a reverse repurchase agreement the Fund agrees to sell
portfolio securities to financial institutions such as banks and broker-dealers
and to repurchase them at a mutually agreed date and price. Forward roll
transactions are equivalent to reverse repurchase agreements but involve
mortgage-backed securities and involve a repurchase of a substantially similar
security. At the time the Fund enters into a reverse repurchase agreement or
forward roll transaction it will place in a segregated custodial account cash or
liquid securities having a value equal to the repurchase price, including
accrued interest. Reverse repurchase agreements and forward roll transactions
25
involve the risk that the market value of the securities sold by the Fund may
decline below the repurchase price of the securities. Reverse repurchase
agreements and forward roll transactions are considered to be borrowings by a
Fund for purposes of the limitations described in "Fund Policies" below.
Temporary Investments
For temporary defensive purposes during periods when the Fund
Sub-Advisor of a Fund believes, in consultation with the Advisor, that pursuing
the Fund's basic investment strategy may be inconsistent with the best interests
of its shareholders, the Fund may invest its assets without limit in the
following money market instruments: securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities (including those purchased in
the form of custodial receipts), repurchase agreements, certificates of deposit,
master notes, time deposits and bankers' acceptances issued by banks or savings
and loan associations having assets of at least $500 million as of the end of
their most recent fiscal year and high quality commercial paper.
In addition, for the same purposes the Fund Sub-Advisor of the
International Equity Fund may invest without limit in obligations issued or
guaranteed by foreign governments or by any of their political subdivisions,
authorities, agencies or instrumentalities that are rated at least AA by S&P or
Aa by Moody's or, if unrated, are determined by the Fund Sub-Advisor to be of
equivalent quality. Each Fund also may hold a portion of its assets in money
market instruments or cash in amounts designed to pay expenses, to meet
anticipated redemptions or pending investments in accordance with its objectives
and policies. Any temporary investments may be purchased on a when-issued basis.
Convertible Securities
Convertible securities may offer higher income than the common stocks
into which they are convertible and include fixed-income or zero coupon debt
securities, which may be converted or exchanged at a stated or determinable
exchange ratio into underlying shares of common stock. Prior to their
conversion, convertible securities may have characteristics similar to both
non-convertible debt securities and equity securities.
While convertible securities generally offer lower yields than
non-convertible debt securities of similar quality, their prices may reflect
changes in the value of the underlying common stock. Convertible securities
entail less credit risk than the issuer's common stock.
Real Estate Investment Trusts
The Growth & Income Fund may invest in REITs, which can generally be
classified as equity REITs, mortgage REITs and hybrid REITs. Equity REITs, which
invest the majority of their assets directly in real property, derive their
income primarily from rents. Equity REITs can also realize capital gains by
selling properties that have appreciated in value. Mortgage REITs, which invest
the majority of their assets in real estate mortgages, derive their income
primarily from interest payments on real estate mortgages in which they are
invested. Hybrid REITs combine the characteristics of both equity REITs and
mortgage REITs.
Investment in REITs is subject to risks similar to those associated
with the direct ownership of real estate (in addition to securities markets
risks). REITs are sensitive to factors such as changes in real estate values and
property taxes, interest rates, cash flow of underlying real estate assets,
supply and demand, and the management skill and creditworthiness of the issuer.
REITs may also be affected by tax and regulatory requirements.
Standard & Poor's Depositary Receipts ("SPDRs")
The Growth & Income Fund may invest up to 5% of its total assets in
SPDRs. SPDRs typically trade like a share of common stock and provide investment
results that generally correspond to the price and yield performance of the
26
component common stocks of the S&P 500 Index. There can be no assurance that
this can be accomplished as it may not be possible for the portfolio to
replicate and maintain exactly the composition and relative weightings of the
S&P 500 Index securities. SPDRs are subject to the risks of an investment in a
broadly based portfolio of common stocks, including the risk that the general
level of stock prices may decline, thereby adversely affecting the value of such
investment.
Asset Coverage
To assure that a Fund's use of futures and related options, as well as
when-issued and delayed-delivery transactions, forward currency contracts and
swap transactions, are not used to achieve investment leverage, the Fund will
cover such transactions, as required under applicable SEC interpretations,
either by owning the underlying securities or by establishing a segregated
account with the Trust's custodian containing liquid securities in an amount at
all times equal to or exceeding the Fund's commitment with respect to these
instruments or contracts.
Rating Services
The ratings of nationally recognized statistical rating organizations
represent their opinions as to the quality of the securities that they undertake
to rate. It should be emphasized, however, that ratings are relative and
subjective and are not absolute standards of quality. Although these ratings are
an initial criterion for selection of portfolio investments, each Fund
Sub-Advisor also makes its own evaluation of these securities, subject to review
by the Board of Trustees of the Trust. After purchase by a Fund, an obligation
may cease to be rated or its rating may be reduced below the minimum required
for purchase by the Fund. Neither event would require a Fund to eliminate the
obligation from its portfolio, but a Fund Sub-Advisor will consider such an
event in its determination of whether a Fund should continue to hold the
obligation. A description of the ratings used herein and in the Funds'
Prospectuses is set forth in the Appendix to the Prospectuses.
Fund Policies
The following investment restrictions are "fundamental policies" of
each Fund and may not be changed with respect to a Fund without the approval of
a "majority of the outstanding voting securities" of the Fund. "Majority of the
outstanding voting securities" under the Investment Company Act of 1940, as
amended (the "1940 Act"), and as used in this Statement of Additional
Information and the Prospectuses, means, the lesser of (i) 67% or more of the
outstanding voting securities of the Fund present at a meeting if the holders of
more than 50% of the outstanding voting securities of the Fund are present or
represented by proxy or (ii) more than 50% of the outstanding voting securities
of the Fund.
As a matter of fundamental policy, no Fund may (except that no
investment restriction of a Fund shall prevent a Fund from investing all of its
Assets in an open-end investment company with substantially the same investment
objectives):
(1) borrow money or mortgage or hypothecate assets of the Fund ,
except that in an amount not to exceed 1/3 of the current value
of the Fund's net assets, it may borrow money (including through
reverse repurchase agreements, forward roll transactions
involving mortgage-backed securities or other investment
techniques entered into for the purpose of leverage), and except
that it may pledge, mortgage or hypothecate not more than 1/3 of
such assets to secure such borrowings, provided that collateral
arrangements with respect to options and futures, including
deposits of initial deposit and variation margin, are not
considered a pledge of assets for purposes of this restriction
and except that assets may be pledged to secure letters of credit
solely for the purpose of participating in a captive insurance
company sponsored by the Investment Company Institute; for
additional related restrictions, see clause (i) under the caption
"Additional Restrictions" below;
(2) underwrite securities issued by other persons except insofar as
the Funds may technically be deemed an underwriter under the 1933
Act in selling a portfolio security;
(3) make loans to other persons except: (a) through the lending of
the Fund's portfolio securities and provided that any such loans
not exceed 30% of the Fund's total assets (taken at market
value); (b) through the use of repurchase agreements or the
purchase of short-term obligations; or (c) by purchasing a
portion of an issue of debt securities of types distributed
publicly or privately;
28
(4)(a)(all Funds except the Growth & Income Fund) purchase or sell
real estate (including limited partnership interests but
excluding securities secured by real estate or interests
therein), interests in oil, gas or mineral leases, commodities or
commodity contracts (except futures and option contracts) in the
ordinary course of business (except that the Fund may hold and
sell, for the Fund's portfolio, real estate acquired as a result
of the Fund's ownership of securities);
(4)(b)(Growth & Income Fund only)
(i) purchase or sell real estate (except that (a) the Fund may
invest in (i) securities of entities that invest or deal in
real estate, mortgages, or interests therein and (ii)
securities secured by real estate or interests therein and
(b) the Fund may hold and sell real estate acquired as a
result of the Fund's ownership of securities;
(ii) purchase or sell interests in oil, gas or mineral leases,
commodities or commodity contracts (except futures and
options contracts) in the ordinary course or business.
(5) concentrate its investments in any particular industry (excluding
U.S. Government securities), but if it is deemed appropriate for
the achievement of a Fund's investment objective(s), up to 25% of
its total assets may be invested in any one industry;
(6) issue any senior security (as that term is defined in the 1940
Act) if such issuance is specifically prohibited by the 1940 Act
or the rules and regulations promulgated thereunder, provided
that collateral arrangements with respect to options and futures,
including deposits of initial deposit and variation margin, are
not considered to be the issuance of a senior security for
purposes of this restriction; and
(7) with respect to 75% of its total assets taken at market value,
invest in assets other than cash and cash items (including
receivables), U.S. Government securities, securities of other
investment companies and other securities for purposes of this
calculation limited in respect of any one issuer to an amount not
greater in value than 5% of the value of the total assets of the
Fund and to not more than 10% of the outstanding voting
securities of such issuer.
Additional Restrictions
Each Fund (or the Trust, on behalf of each Fund) will not, as a matter
of "operating policy" (changeable by the Board of Trustees without a shareholder
vote) (except that no operating policy shall prevent a Fund from investing all
of its Assets in an open-end investment company with substantially the same
investment objectives):
(i) borrow money (including through reverse repurchase
agreements or forward roll transactions involving
mortgage-backed securities or similar investment techniques
entered into for leveraging purposes), except that the Fund
may borrow for temporary or emergency purposes up to 10% of
its total assets; provided, however, that no Fund may
purchase any security while outstanding borrowings exceed
5%;
(ii) pledge, mortgage or hypothecate for any purpose in excess of
10% of the Fund's total assets (taken at market value),
provided that collateral arrangements with respect to
options and futures, including deposits of initial deposit
and variation margin, and reverse repurchase agreements are
not considered a pledge of assets for purposes of this
restriction;
(iii) purchase any security or evidence of interest therein on
margin, except that such short-term credit as may be
necessary for the clearance of purchases and sales of
securities may be obtained and except that deposits of
initial deposit and variation margin may be made in
connection with the purchase, ownership, holding or sale of
futures;
29
(iv) sell any security which it does not own unless by virtue of
its ownership of other securities it has at the time of sale
a right to obtain securities, without payment of further
consideration, equivalent in kind and amount to the
securities sold and provided that if such right is
conditional the sale is made upon the same conditions;
(v) invest for the purpose of exercising control or management;
(vi) purchase securities issued by any investment company except
by purchase in the open market where no commission or profit
to a sponsor or dealer results from such purchase other than
the customary broker's commission, or except when such
purchase, though not made in the open market, is part of a
plan of merger or consolidation; provided, however, that
securities of any investment company will not be purchased
for the Fund if such purchase at the time thereof would
cause: (a) more than 10% of the Fund's total assets (taken
at the greater of cost or market value) to be invested in
the securities of such issuers; (b) more than 5% of the
Fund's total assets (taken at the greater of cost or market
value) to be invested in any one investment company; or (c)
more than 3% of the outstanding voting securities of any
such issuer to be held for the Fund; provided further that,
except in the case of a merger or consolidation, the Fund
shall not purchase any securities of any open-end investment
company unless the Fund (1) waives the investment advisory
fee, with respect to assets invested in other open-end
investment companies and (2) incurs no sales charge in
connection with the investment;
(vii) invest more than 15% of the Fund's net assets (taken at the
greater of cost or market value) in securities that are
illiquid or not readily marketable (defined as a security
that cannot be sold in the ordinary course of business
within seven days at approximately the value at which the
Fund has valued the security) not including (a) Rule 144A
securities that have been determined to be liquid by the
Board of Trustees; and (b) commercial paper that is sold
under section 4(2) of the 1933 Act which is not traded flat
or in default as to interest or principal and either (i) is
rated in one of the two highest categories by at least two
nationally recognized statistical rating organizations and
the Fund's Board of Trustees have determined the commercial
paper to be liquid; or (ii) is rated in one of the two
highest categories by one nationally recognized statistical
rating agency and the Fund's Board of Trustees have
determined that the commercial paper is equivalent quality
and is liquid;
(viii) invest more than 10% of the Fund's total assets in
securities that are restricted from being sold to the public
without registration under the 1933 Act (other than Rule
144A Securities deemed liquid by the Fund's Board of
Trustees);
(ix) purchase securities of any issuer if such purchase at the
time thereof would cause the Fund to hold more than 10% of
any class of securities of such issuer, for which purposes
all indebtedness of an issuer shall be deemed a single class
and all preferred stock of an issuer shall be deemed a
single class, except that futures or option contracts shall
not be subject to this restriction;
(x) make short sales of securities or maintain a short position,
unless at all times when a short position is open it owns an
equal amount of such securities or securities convertible
into or exchangeable, without payment of any further
consideration, for securities of the same issue and equal in
amount to, the securities sold short, and unless not more
than 10% of the Fund's net assets (taken at market value) is
represented by such securities, or securities convertible
into or exchangeable for such securities, at any one time
(the Funds have no current intention to engage in short
selling);
(xi) purchase puts, calls, straddles, spreads and any combination
thereof if by reason thereof the value of the Fund's
aggregate investment in such classes of securities will
exceed 5% of its total assets;
(xii) write puts and calls on securities unless each of the
following conditions are met: (a) the security underlying
the put or call is within the investment policies of the
Fund and the option is issued by the OCC, except for put and
call options issued by non-U.S. entities or listed on
non-U.S. securities or commodities exchanges; (b) the
aggregate value of the obligations underlying the puts
determined as of the date the options are sold shall not
exceed 50% of the Fund's net assets; (c) the securities
subject to the exercise of the call written by the Fund must
be owned by the Fund at the time the call is sold and must
continue to be owned by the Fund until the call has been
exercised, has lapsed, or the Fund has purchased a closing
call, and such purchase has been confirmed, thereby
extinguishing the Fund's obligation to deliver securities
pursuant to the call it has sold; and (d) at the time a put
is written, the Fund establishes a segregated account with
its custodian consisting of cash or liquid securities equal
in value to the amount the Fund will be obligated to pay
upon exercise of the put (this account must be maintained
until the put is exercised, has expired, or the Fund has
purchased a closing put, which is a put of the same series
as the one previously written); and
29
(xiii) buy and sell puts and calls on securities, stock index
futures or options on stock index futures, or financial
futures or options on financial futures unless such options
are written by other persons and: (a) the options or futures
are offered through the facilities of a national securities
association or are listed on a national securities or
commodities exchange, except for put and call options issued
by non-U.S. entities or listed on non-U.S. securities or
commodities exchanges; (b) the aggregate premiums paid on
all such options which are held at any time do not exceed
20% of the Fund's total net assets; and (c) the aggregate
margin deposits required on all such futures or options
thereon held at any time do not exceed 5% of the Fund's
total assets.
Management of the Trust
Board of Trustees
Overall responsibility for management and supervision of the Trust
rests with the Board of Trustees. The Trustees approve all significant
agreements between the Trust and the persons and companies that furnish services
to the Trust.
The Trustees and officers of the Trust and their principal occupations
during the past five years are set forth below. Their titles may have varied
during that period. Asterisks indicate those Trustees who are "interested
persons" (as defined in the 1940 Act) of the Trust. Unless otherwise indicated,
the address of each Trustee and officer is 311 Pike Street, Cincinnati, Ohio
45202. The Trustees and officers of the Trust also serve in the same positions
with the Touchstone Variable Series Trust (formerly named the Select Advisors
Variable Insurance Trust).
Trustees of the Trust
*JILL T. MCGRUDER (Born: 7/9/55) - Chairman of the Board of Trustees,
President and chief Executive Officer; Director, President and Chief Executive
Officer, Touchstone Advisors, Inc. and Touchstone Securities, Inc. (since
February, 1999); Senior Vice President, Western-Southern Life Insurance Company
(since December, 1996); National Marketing Director, Metropolitan Life Insurance
Co. (February, 1996 - December, 1996); Executive Vice President, Touchstone
Advisors, Inc. and Touchstone Securities, Inc. (1991 - 1996).
*WILLIAM J. WILLIAMS (Born: 12/19/15) - Trustee; Chairman of the Board
of Directors, The Western and Southern Life Insurance Company (since March,
1984); Chief Executive Officer, The Western and Southern Life Insurance Company
(from March, 1984 to March, 1994). His address is 400 Broadway, Cincinnati, OH
45202.
JOSEPH S. STERN, JR. (Born: 3/31/18) - Trustee; Retired Professor
Emeritus, College of Business, University of Cincinnati. His address is 3
Grandin Place, Cincinnati, OH 45208.
PHILLIP R. COX (Born: 11/24/47) - Trustee; President and Chief
Executive Officer, Cox Financial Corp. (since 1972); Director, Federal Reserve
Bank of Cleveland; Director, Cincinnati Bell, Inc.; Director, PNC Bank;
Director, Cinergy Corporation. His address is 105 East Fourth Street,
Cincinnati, OH 45202.
ROBERT E. STAUTBERG (Born: 9/6/34) - Trustee; Retired Partner and
Director, KPMG Peat Marwick; Chairman of the Board of Trustees, Good Samaritan
Hospital. His address is 4815 Drake Road, Cincinnati, OH 45243.
Officers of the Trust
Unless otherwise specified, each officer listed below holds the same
position with the Trust and each Fund.
JAMES J. VANCE (Born: 7/12/61) - Treasurer; Treasurer Western-Southern
Life Insurance Company (since January, 1994). His address is 400 Broadway,
Cincinnati, OH 45202.
30
EDWARD S. HEENAN (Born: 12/18/43) - Controller; Vice President and
Controller, Touchstone Advisors, Inc. (since December, 1993); Director,
Controller, Touchstone Securities, Inc. (since October, 1991); Vice President
and Comptroller, The Western and Southern Life Insurance Company (since 1987).
His address is 400 Broadway, Cincinnati, OH 45202.
DAVID DENNISON (Born: 2/20/62) - Assistant Treasurer; Vice President of
Administration, IFS Financial Services and Touchstone Securities, Inc. (since
August, 1994); Director of Strategic Marketing, Providian Capital Management
(January, 1993 to July, 1994)
ANDREW S. JOSEF (Born: 2/25/64) - Secretary; Director, Legal
Administration, Investors Bank & Trust Company ("Investors Bank") (since May,
1997); Senior Associate, Sullivan & Worcester LLP (November, 1995 to May, 1997);
Associate, Goodwin, Proctor & Hoar (January, 1993 to November, 1995); Associate,
Simpson Thacher & Bartlett (prior to 1993). His address is 200 Clarendon Street,
Boston, Massachusetts 02116.
SUSAN C. MOSHER (Born: 1/29/55) - Assistant Secretary; Director, Legal
Administration, Investors Bank (since August, 1995); Associate Counsel, 440
Financial Group of Worcester, Inc. (January, 1993 to August, 1995). Her address
is 200 Clarendon Street, Boston, Massachusetts 02116.
TIMOTHY F. OSBORNE (Born: 12/3/66) - Assistant Treasurer; Director,
Mutual Fund Administration, Investors Bank (since May, 1995); Account
Supervisor, Mutual Fund Administration, Chase Global Funds Services Company
(prior to May, 1995).
Ms. Mosher and Messrs. Josef and Osborne also hold similar positions
for Touchstone Variable Series Trust and certain unaffiliated investment
companies for which Investors Bank serves as administrator.
No director, officer or employee of the Advisor, the Fund Sub-Advisors,
the Distributor, the Administrator or any of their affiliates will receive any
compensation from the Trust for serving as an officer or Trustee of the Trust.
The Trust and Touchstone Variable Series Trust (together, the "Fund Complex")
pay in the aggregate, to each Trustee who is not a director, officer or employee
of the Advisor, the Fund Sub-Advisors, the Distributor, the Administrator or any
of their affiliates, an annual fee of $5,000, respectively, plus $1,000,
respectively, per meeting attended and reimburses them for travel and
out-of-pocket expenses. The following table reflects Trustee fees paid for the
year ended December 31, 1998.
31
Trustee Compensation Table
- --------------------------------- ------------------------------ ------------------------------- ------------------------------
Name of Person and Position Aggregate Compensation from Aggregate Compensation from Total Compensation from
the Trust with respect to the Trust with respect to Trust and Fund Complex Paid
Class A Shares of the Funds Class C Shares of the Funds to Trustees
- --------------------------------- ------------------------------ ------------------------------- ------------------------------
Joseph S. Stern, Jr. $ 1,166.43 $ 365.49 $ 8,000.00
Trustee of Trust
- --------------------------------- ------------------------------ ------------------------------- ------------------------------
Phillip R. Cox $ 1,451.17 $ 459.27 $10,000.00
Trustee of Trust
- --------------------------------- ------------------------------ ------------------------------- ------------------------------
Robert E. Stautberg $ 1,451.17 $ 459.27 $10,000.00
Trustee of Trust
- --------------------------------- ------------------------------ ------------------------------- ------------------------------
David Pollak $ 1,451.17 $ 459.27 $10,000.00
Trustee of Trust
- --------------------------------- ------------------------------ ------------------------------- ------------------------------
Control Persons and Principal Holders of Securities: Class A Shares of the Funds
As of April 2, 1999, Trustees and officers of the Trust owned in the
aggregate less than 1% of the Class A Shares of any Fund or the Trust (all
series taken together).
As of April 2, 1999,
(i) Western-Southern Life Assurance Company ("Western-
Southern"), 400 Broadway, Cincinnati, Ohio 45202, which was
organized under the laws of the State of Ohio and which is a
wholly owned subsidiary of The Western and Southern Life
Insurance Company ("Western and Southern"), 400 Broadway,
Cincinnati, Ohio 45202, which was organized under the laws
of the State of Ohio, was the record owner of 54.47% and
22.29% of the outstanding shares of the International Equity
Fund - Class A and Income Opportunity Fund Class A,
respectively;
(ii) Western-Southern, Highlands Company of Delaware, c/o Karen
Clark, Smith Fought Bunker & Hume PC, 2301 Mitchell Park
Drive, Petoskey, MI 49770-9600, and Western Southern
Deferred Compensation, FBO 1, 85B&86-89 Attn: M Scott, 400
Broadway, Cincinnati, OH 45202-3341 ("FBO 1"), were the
record owners of 23.26%, 8.37% and 7.56%, respectively, of
the Emerging Growth Fund - Class A;
(iii) FBO 1, Western Southern Deferred Compensation, FBO 6,
82-88, Attn: M Scott, 400 Broadway, Cincinnati, OH 45202,
Western and Southern were the record owners of 12.88%,
11.22% and 11.20%, respectively, of the outstanding shares
of the Growth & Income Fund - Class A;
(iv) Western and Southern; Western Southern Deferred
Compensation, FBO 2, Lump Sum, Attn: M Scott, 400 Broadway,
Cincinnati, OH 45202; Western Southern Deferred
Compensation, FBO 2, 94, Attn: M Scott, 400 Broadway,
Cincinnati, OH 45202; and Richard J. Mullenax, Mildred
Mullenax JT WROS, Rt 3 Box 225, Bridgeport, WV 26330-9430
were the record owners of 9.78%, 6.54%, 6.26% and 5.75%,
respectively, of the outstanding shares of the Bond Fund -
Class A;
(v) Western-Southern, and NFSC FEBO #EBN-543152, Charles R.
Hosche TTEE, The Hosch Grit II Tr, FBO Charles R. Hosche,
P.O. Box 7569, Marietta, GA 30065-1569, were the record
owners of 39.19%, and 8.03%, respectively, of the
outstanding shares of the Balanced Fund Class A; and
(vi) Western and Southern was the record owner of 95.77% of the
outstanding shares of the Value Plus Fund - Class A.
Each of the above-named entities owning over 50% of the outstanding
shares of any of the above-named Funds may take actions requiring a majority
vote without the approval of any other investor in such Fund.
32
Control Persons and Principal Holders of Securities: Class C Shares of
the Funds
As of April 2, 1999, the Trustees and officers of the Trust owned in
the aggregate less than 1% of the Class C shares of any Fund or the Trust (all
series taken together).
As of April 2, 1999,
(i) Western-Southern was the record owner of 56.19%, 69.58%,
56.57%, 37.80%, 7.87% and 13.06% of the outstanding shares
of the Emerging Growth Fund - Class C, International Equity
Fund - Class C, Balanced Fund - Class C, Income Opportunity
Fund - Class C, Growth & Income Fund - Class C and Bond Fund
- Class C, respectively; and
(ii) Western and Southern and NFSC FZEBO # TRG-011630, NFSC/FMTC
IRA Rollover, FBO Richard Gum, 210 Gull Road, Ocean City, NJ
08226-4529 were the record owners of 59.69% and 23.35%, of
the outstanding shares of the Value Plus Fund - Class C,
respectively.
Because Western-Southern owns more than 50% of the outstanding shares
of certain of the above-named Funds, it may take actions requiring a majority
vote without the approval of any other investor in such Fund.
Control Persons and Principal Holders of Securities: Class Y Shares of
the Funds
As of April 2, 1999, Trustees and officers of the Trust owned in the
aggregate less than 1% of the Class Y Shares of the Growth & Inocme Fund or the
Bond Fund or the Trust (all series taken together).
As of April 2, 1999, The Western and Southern Life Insurance Company
("Western and Southern"), was the record owner of 100% of the outstanding shares
of each of the Growth & Inocme Fund and the Bond Fund.
Control Persons and Principal Holders of Securities: Standby Income Fund
As of April 2, 1999, Western-Southern; Western and Southern; and Leslie
V. Craig, 9904 Misty Morn Lane, Cincinnati, Ohio 45242 were the record owners of
28.64%, 28.64% and 5.09%, respectively, of the outstanding shares of the Standby
Income Fund.
Investment Advisory and Other Services
Advisor
Touchstone Advisors provides service to each Fund pursuant to
Investment Advisory Agreements with the Trust (the "Advisory Agreements"). The
services provided by the Advisor consist of directing and supervising each Fund
Sub-Advisor, reviewing and evaluating the performance of each Fund Sub-Advisor
and determining whether or not any Fund Sub-Advisor should be replaced. The
Advisor furnishes at its own expense all facilities and personnel necessary in
connection with providing these services. Each respective Advisory Agreement
will continue in effect if such continuance is specifically approved at least
annually by the respective Board of Trustees and by a majority of the respective
Trustees who are not parties to the Advisory Agreement or interested persons of
any such party, at a meeting called for the purpose of voting on the Advisory
Agreement.
Each Advisory Agreement is terminable, with respect to a Fund or
Standby Income Fund, without penalty on not more than 60 days' nor less than 30
days' written notice by (1) the Trust, when authorized either by (a) in the case
of a Fund or the Standby Income Fund, a majority vote of the shareholders of the
Fund (with the vote of each shareholder being in proportion to the amount of
their investment), or (b) a vote of a majority of the respective Board of
Trustees or (2) the Advisor. Each Advisory Agreement will automatically
terminate in the event of its assignment. Each Advisory Agreement provides that
neither the Advisor nor its personnel shall be liable for any error of judgment
or mistake of law or for any loss arising out of any investment or for any act
or omission in its services to the Funds, except for willful misfeasance, bad
faith or gross negligence or reckless disregard of its or their obligations and
duties under the Advisory Agreement.
33
The Trust's Prospectuses contain a description of fees payable to the
Advisor for services under the Advisory Agreements.
For the periods indicated, the Portfolio of Select Advisors Portfolios
in which each Fund (other than the Standby Income Fund) invested all of its
assets and the Standby Income Fund incurred the following investment advisory
fees equal on an annual basis to the following percentages of the average daily
net assets of the Portfolio and the Standby Income Fund, respectively.
Emerging International Income Value Plus Growth & Balanced Bond Standby
Growth Fund Equity Fund Opportunity Fund Income Fund Fund Fund Income Fund
Fund
Rate 0.80% 0.95% 0.65% 0.75% 0.80%+ 0.80%* 0.55% 0.25%
5/1/98** to
12/31/98 N/A N/A N/A $123,531 N/A N/A N/A N/A
For the Year
Ended 12/31/98
$76,428 $100,226 $71,387 N/A $278,037 $56,349 $100,011 $25,969
For the Year
Ended 12/31/97
For the Year $48,463 $73,217 $66,313 N/A $181,803 $38,823 $82,976 $18,755
Ended 12/31/96
$35,755 $55,448 $28,495 N/A $138,167 $24,065 $70,808 $15,675
+ Prior to September, 1997 the rate was 0.75%.
* Prior to May, 1997, the rate was 0.70%.
** Commencement of operations.
The Advisor has contractually agreed to reimburse each Fund for certain
of its fees and expenses as described in the Prospectuses. For the periods
indicated, the Advisor reimbursed the Portfolios and the Standby Income Fund the
following amounts:
Emerging International Income Value Plus Growth & Balanced Bond Standby
Growth Fund Equity Fund Opportunity Fund Income Fund Fund Fund Income Fund
Fund
5/1/98** to
12/31/98 N/A N/A N/A $48,591 N/A N/A N/A N/A
For the Year
Ended 12/31/98
$43,744 $126,131 $57,832 N/A $5,311 $68,910 $50,678 $147,725
For the Year
Ended 12/31/97
For the Year $84,098 $200,506 $62,571 N/A $39,190 $82,721 $96,974 $192,319
Ended 12/31/96
$59,720 $84,640 $62,865 N/A $62,911 $64,645 $60,817 $114,416
** Commencement of operations.
34
Fund Sub-Advisors
The Advisor has, in turn, entered into a portfolio advisory agreement
(each a "Fund Agreement") with each Fund Sub-Advisor selected by the Advisor for
a Fund or Standby Income Fund. Under the direction of the Advisor and,
ultimately, of the Board of Trustees of the Trust, each Fund Sub-Advisor is
responsible for making all of the day-to-day investment decisions for the
respective Fund (or portion of a Fund).
Each Fund Sub-Advisor furnishes at its own expense all facilities and
personnel necessary in connection with providing these services. Each Fund
Agreement contains provisions similar to those described above with respect to
the Advisory Agreements.
The Advisor pays each Fund Sub-Advisor a fee for its services provided
to the Fund that is computed daily and paid monthly at an annual rate equal to
the percentage specified below of the value of the average daily net assets of
the Fund:
- -------------------------------------------------------- -----------------------------------
Emerging Growth Fund
- -------------------------------------------------------- -----------------------------------
David L. Babson & Company, Inc. 0.50%
- -------------------------------------------------------- -----------------------------------
Westfield Capital Management 0.45% on the first $10 million
Company, Inc. 0.40% on the next $40 million
0.35% thereafter
- -------------------------------------------------------- -----------------------------------
International Equity Fund
- -------------------------------------------------------- -----------------------------------
BEA Associates 0.85% on the first $30 million
0.80% on the next $20 million
0.70% on the next $20 million
0.60% thereafter
- -------------------------------------------------------- -----------------------------------
Income Opportunity Fund
- -------------------------------------------------------- -----------------------------------
Alliance Capital Management, L.P. 0.40% on the first $50 million
0.35% on the next $20 million
0.30% on the next $20 million
0.25% thereafter
- -------------------------------------------------------- -----------------------------------
Value Plus Fund
- -------------------------------------------------------- -----------------------------------
Fort Washington Investment Advisors, Inc. 0.45%
- -------------------------------------------------------- -----------------------------------
Growth & Income Fund
- -------------------------------------------------------- -----------------------------------
Scudder Kemper Investments, Inc. 0.50% on the first $150 million
0.45% thereafter
- -------------------------------------------------------- -----------------------------------
Balanced Fund
- -------------------------------------------------------- -----------------------------------
OpCap Advisors 0.60% on the first $20 million
0.50% on the next $30 million
0.40% thereafter
- -------------------------------------------------------- -----------------------------------
Bond Fund
- -------------------------------------------------------- -----------------------------------
Fort Washington Investment Advisors, Inc. 0.30%
- -------------------------------------------------------- -----------------------------------
Standby Income Fund
- -------------------------------------------------------- -----------------------------------
Fort Washington Investment Advisors, Inc. 0.15%
- -------------------------------------------------------- -----------------------------------
35
Administrator, Custodian and Transfer Agent
Pursuant to Administration and Fund Accounting Agreements, Investors
Bank supervises the overall administration of the Trust, including but not
limited to, accounting, clerical and bookkeeping services; daily calculation of
net asset values; preparation and filing of all documents required for
compliance by the Trust with applicable laws and regulations. Investors Bank
also provides persons to serve as officers of the Trust. As custodian, Investors
Bank holds cash, securities and other assets of the Trust.
The Trust's Prospectuses contain a description of fees payable to
Investors Bank for its services as administrator, fund accounting agent and
custodian.
Prior to December 1, 1996, Signature Financial Services, Inc.
("Signature") served as administrator and fund accounting agent to the Trust.
The Class A Shares of the Funds and the Standby Income Fund incurred
the following administration and fund accounting fees for the periods indicated:
Emerging International Income Value Plus Growth & Balanced Fund Bond Fund Standby
Growth Equity Fund Opportunity Fund - Income Fund - Class A - Class A Income Fund
Fund - - Class A Fund - Class A Class A - Class A
Class A
5/1/98* to
12/31/99 N/A N/A N/A $16,667 N/A N/A N/A N/A
For the Year
Ended 12/31/98
$24,725 $30,559 $26,001 N/A $30,475 $20,146 $30,475 $82,695
For the Year
Ended 12/31/97
For the Year $15,324 $16,990 $15,399 N/A $16,552 $15,324 $16,836 $68,412
Ended
12/31/96**
$61,789 $64,008 $61,674 N/A $61,966 $64,985 $61,716 $24,289
- -----------
* Commencement of operations.
** Amounts represent fees paid by the master portfolio in which all of the
Class A assets were invested at the time. Includes administrative and fund
accounting fees paid to Signature Financial Services, Inc. and Investors Bank
& Trust Company.
Each of the Administration, Fund Accounting and Custodian Agreements
(collectively, the "Agreements") provide that neither Investors Bank nor its
personnel shall be liable for any error of judgment or mistake of law or for any
act or omission, except for willful misfeasance, bad faith or negligence (gross
negligence in respect of the Custodian Agreement) in the performance of its or
their duties or by reason of disregard (reckless disregard in respect of the
Custodian Agreement) of its or their obligations and duties under the
Agreements.
Each Agreement may not be assigned without the consent of the
non-assigning party, and may be terminated after its Initial Term, with respect
to a Fund, without penalty by majority vote of the shareholders of the Fund or
by either party on not more than 60 days' written notice.
State Street Bank and Trust Company ("State Street") serves as transfer
agent of the Trust pursuant to a transfer agency agreement. Under its transfer
agency agreement with the Trust, State Street maintains the shareholder account
records for each Fund, handles certain communications between shareholders and
the Trust and causes to be distributed any dividends and distributions payable
by the Trust. State Street may be reimbursed by the Trust for its out-of-pocket
expenses.
36
Distributor
The Trustees of the Trust have adopted a Distribution and Services Plan
(the "Distribution Plan") with respect to Class A and Class C shares of each
Fund (except the Standby Income Fund) after having concluded that there was a
reasonable likelihood that the Distribution Plan would benefit each Class of
each such Fund and its shareholders. The Distribution Plan is designed to
promote sales, thereby increasing the net assets of the Fund. Such an increase
may reduce the expense ratio to the extent the Fund's fixed costs are spread
over a larger net asset base. In addition, an increase in net assets may lessen
the adverse effects that could result were the Fund required to liquidate
portfolio securities to meet redemptions. Of course, there is no assurance that
the net assets of the Fund will increase or that the other benefits referred to
above will be realized.
The Class A Distribution Plan provides that the Trust may pay the
Distributor a fee not to exceed 0.25% per annum of each Fund's average daily net
assets attributable to its class A shares in anticipation of, or as
reimbursement for, expenses incurred in connection with the sale of shares of
the Trust, such as payments to broker-dealers who advise shareholders regarding
the purchase, sale or retention of shares of the Trust, payments to employees of
the Distributor, advertising expenses and the expenses of printing and
distributing prospectuses and reports used for sales purposes, expenses of
preparing and printing sales literature and other distribution-related expenses.
The Class C Distribution Plan provides that the Trust may pay the
Distributor a fee not to exceed 0.75% per annum of each Fund's average daily net
assets attributable to its class C shares in anticipation of, or as
reimbursement for, expenses incurred in connection with the sale of shares of
the Trust, such as payments to broker-dealers who advise shareholders regarding
the purchase, sale or retention of shares of the Trust, payments to employees of
the Distributor, advertising expenses and the expenses of printing and
distributing prospectuses and reports used for sales purposes, expenses of
preparing and printing sales literature and other distribution-related expenses.
No Fund is obligated under a Distribution Plan to pay any distribution
or shareholder service expense in excess of the fees described above. Expenses
incurred by the Distributor in one fiscal year in excess of the fees received
from a Fund in that fiscal year do not give rise to any obligation on the part
of a Fund to the Distributor with respect to any future fiscal year. Thus, if a
Distribution Plan were terminated or not continued, no amounts (other than
current amounts accrued but not yet paid) would be owed by a Fund to the
Distributor. Under arrangements with Dealers and others, the Distributor may pay
compensation upon the sale of Fund shares. To finance such payments, the
Distributor may utilize funds obtained from the Advisor which, in turn, may
borrow funds from affiliated or unaffiliated parties. Such borrowings may be
repaid or secured by an assignment of fees payable pursuant to the Distribution
Plan.
Each Distribution Plan will continue in effect indefinitely if such
continuance is specifically approved at least annually by a vote of both a
majority of the Trust's Trustees and a majority of the Trust's Trustees who are
not "interested persons of the Trust" and who have no direct or indirect
financial interest in the operation of the Distribution Plan or in any agreement
related to such Plan ("Qualified Trustees"). The Distributor will provide to the
Trustees of the Trust a quarterly written report of amounts expended by it under
each Distribution Plan and the purposes for which such expenditures were made.
The Distribution Plans further provide that the selection and nomination of the
Trust's disinterested Trustees shall be committed to the discretion of the
disinterested Trustees of the Trust. A Distribution Plan may be terminated at
any time by a vote of a majority of the Trust's Qualified Trustees or by a vote
of the shareholders of the Class. The Distribution Plan may not be amended to
increase materially the amount of permitted expenses thereunder without the
approval of shareholders and may not be materially amended in any case without a
vote of the majority of both the Trust's Trustees and the Trust's Qualified
Trustees. No disinterested Trustee has any financial interest in the
Distribution Plan or in any related agreement. The Distributor will preserve
copies of any plan, agreement or report made pursuant to the Distribution Plans
for a period of not less than six years from the date of the Distribution Plan,
and for the first two years the Distributor will preserve such copies in an
easily accessible place.
The Trust paid the following fees pursuant to the Class A Distribution
Plan for the periods indicated with respect to Class A Shares of each Fund:
37
Distribution Emerging International Income Value Plus Growth & Balanced Bond Fund
Fee Growth Equity Fund Opportunity Fund - Income Fund Fund - - Class A
Fund - - Fund - Class A Class A - Class A Class A
Class A Class A
5/1/98**
to 12/31/99 N/A N/A N/A $40,779 N/A N/A N/A
For the Year Ended
12/31/98 $17,105 $15,073 $17,824 N/A $30,065 $10,468 $9,589
For the Year Ended
12/31/97 $9,801 $10,363 $17,453 N/A $11,516 $6,637 $4,764
For the Year Ended
12/31/96 $7,651 $7,551 $5,849 N/A $6,288 $4,477 $3,038
** Commencement of operations.
The Trust has entered into a Distribution Agreement with the
Distributor. Under the Distribution Agreement, the Distributor acts as the agent
of the Trust in connection with the offering of shares of the Trust.
The following table shows commissions and other compensation received
by the Distributor, which is an affiliated person of the Funds, for the fiscal
year ended December 31, 1998:
Net Underwriting Compensation on
---------------- ---------------
Touchstone Discounts and Redemptions and Brokerage Other Compensation
---------- ------------- --------------- --------- ------------------
Fund Commissions* Repurchases** Commissions
---- ------------ ------------- -----------
Bond $ 8,272.99 $1,106.41 $0 $0
Balanced $ 5,088.21 $ 159.46 $0 $0
Growth & Income $ 8,915.69 $ 545.14 $0 $0
Income Opportunity $13,304.06 $4,436.96 $0 $0
Emerging Growth $ 5,770.41 $ 479.65 $0 $0
International Equity $ 5,165.31 $ 474.10 $0 $0
Value Plus $ 57.36 $ 156.74 $0 $0
* Amounts retained by the distributor upon sale of shares currently
designated Class A shares.
** Amounts retained by the distributor upon redemption (within one year of
purchase) of shares currently designated Class C shares.
In addition, the Distributor, as a dealer, received $17,885.01 for the sale of
shares of the Funds for the fiscal year ended December 31, 1998.
The Distributor may pay additional cash amounts to dealers in
connection with the sale of shares of the Funds.
Counsel and Independent Accountants
Frost & Jacobs LLP, 2500 PNC Center, 201 East 5th Street, Cincinnati,
Ohio 45201-5715, serves as counsel to the Trust and each Fund.
PricewaterhouseCoopers LLP, One Post Office Square, Boston, Massachusetts 02109,
acts as independent accountants of the Funds, providing audit services, tax
return review and assistance and consultation in connection with the review of
filings with the SEC.
Brokerage Allocation and Other Practices
Brokerage Transactions
The Fund Sub-Advisors are responsible for decisions to buy and sell
securities, futures contracts and options on such securities and futures for
each Fund, the selection of brokers, dealers and futures commission merchants to
effect transactions and the negotiation of brokerage commissions, if any.
Broker-dealers may receive brokerage commissions on portfolio transactions,
including options, futures and options on futures transactions and the purchase
and sale of underlying securities upon the exercise of options. Orders may be
directed to any broker-dealer or futures commission merchant, including to the
extent and in the manner permitted by applicable law, the Advisor, the Fund
Sub-Advisors or their subsidiaries or affiliates. Purchases and sales of certain
portfolio securities on behalf of a Fund are frequently placed by the Fund
Sub-Advisor with the issuer or a primary or secondary market-maker for these
securities on a net basis, without any brokerage commission being paid by the
Fund. Trading does, however, involve transaction costs. Transactions with
dealers serving as market-makers reflect the spread between the bid and asked
prices. Purchases of underwritten issues may be made which will include an
underwriting fee paid to the underwriter.
The Fund Sub-Advisors seek to evaluate the overall reasonableness of
the brokerage commissions paid through familiarity with commissions charged on
comparable transactions, as well as by comparing commissions paid by the Fund to
reported commissions paid by others. In placing orders for the purchase and sale
of securities for a Fund, the Fund Sub-Advisors take into account such factors
as price, commission (if any, negotiable in the case of national securities
exchange transactions), size of order, difficulty of execution and skill
required of the executing broker-dealer. The Fund Sub-Advisors review on a
routine basis commission rates, execution and settlement services performed,
making internal and external comparisons.
The Fund Sub-Advisors are authorized, consistent with Section 28(e) of
the Securities Exchange Act of 1934, as amended, when placing portfolio
transactions for a Fund with a broker to pay a brokerage commission (to the
extent applicable) in excess of that which another broker might have charged for
effecting the same transaction on account of the receipt of research, market or
statistical information. The term "research, market or statistical information"
includes advice as to the value of securities; the advisability of investing in,
purchasing or selling securities; the availability of securities or purchasers
or sellers of securities; and furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts. A Fund Sub-Advisor may use this research
information in managing a Fund's assets, as well as the assets of other clients.
38
Consistent with the policy stated above, the Rules of Fair Practice of
the National Association of Securities Dealers, Inc. and such other policies as
the Board of Trustees may determine, the Fund Sub-Advisors may consider sales of
shares of the Trust as a factor in the selection of broker-dealers to execute
portfolio transactions. The Fund Sub-Advisor will make such allocations if
commissions are comparable to those charged by nonaffiliated, qualified
broker-dealers for similar services.
Except for implementing the policies stated above, there is no
intention to place portfolio transactions with particular brokers or dealers or
groups thereof. In effecting transactions in over-the-counter securities, orders
are placed with the principal market-makers for the security being traded
unless, after exercising care, it appears that more favorable results are
available otherwise.
Although certain research, market and statistical information from
brokers and dealers can be useful to a Fund and to the corresponding Fund
Sub-Advisor, it is the opinion of the management of the Funds that such
information is only supplementary to the Fund Sub-Advisor's own research effort,
since the information must still be analyzed, weighed and reviewed by the Fund
Sub-Advisor's staff. Such information may be useful to the Fund Sub-Advisor in
providing services to clients other than the Funds, and not all such information
is used by the Fund Sub-Advisor in connection with the Funds. Conversely, such
information provided to the Fund Sub-Advisor by brokers and dealers through whom
other clients of the Fund Sub-Advisor effect securities transactions may be
useful to the Fund Sub-Advisor in providing services to the Funds.
In certain instances there may be securities which are suitable for a
Fund as well as for one or more of the respective Fund Sub-Advisor's other
clients. Investment decisions for a Fund and for the Fund Sub-Advisor's other
clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for only
one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment advisor, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed to be equitable to
each. It is recognized that in some cases this system could have a detrimental
effect on the price or volume of the security as far as a Fund is concerned.
However, it is believed that the ability of a Fund to participate in volume
transactions will produce better executions for the Fund.
39
Commissions
The Portfolios of Select Advisors Portfolios in which each Fund (other
than Standby Income Fund) invested and Standby Income Fund paid the following
brokerage commissions for the periods indicated:
Emerging International Income Value Growth & Balanced Bond Fund Standby
Aggregate Growth Equity Fund Opportunity Plus Income Fund Fund - - Class A Income
Commission Fund - - Fund - Class A Fund - Class A Class A Fund
Class A Class A
5/1/98*
to 12/31/99 N/A N/A N/A $44,920 N/A N/A N/A
For the Year
Ended 12/31/98 $21,590 $64,980 $0 N/A $45,667 $9,730 $60 $0
For the Year
Ended 12/31/97 $13,110 $57,618 $0 N/A $94,360 $12,476 $0 $0
For the Year
Ended 12/31/96 $11,550 $27,326 $0 N/A $45,100 $4,379 $0 $0
* Commencement of operations.
Capital Stock and Other Securities
Capital Stock
The Trust's Amended Declaration of Trust permits the Trustees to issue
an unlimited number of full and fractional shares of beneficial interest (par
value $0.00001 per share). The Trust currently consists of eight series (each a
"Fund" and collectively, the "Funds") of shares. The shares of each series
participate equally in the earnings, dividends and assets of the particular
series. The Trust may create and issue additional series of shares. The Trust's
Declaration of Trust permits the Trustees to divide or combine the shares into a
greater or lesser number of shares without thereby changing the proportionate
beneficial interests in a series. Each share represents an equal proportionate
interest in a series with each other share. Shares have no pre-emptive or
conversion rights. Shares when issued are fully paid and non-assessable, except
as set forth below. Shareholders are entitled to one vote for each share held.
Each Fund, other than the Standby Income Fund, is divided into three
classes of shares: Class A Shares, Class C Shares and Class Y Shares. The
following discussion applies to all classes of shares.
The Trust is not required to hold annual meetings of shareholders but
the Trust will hold special meetings of shareholders when in the judgment of the
Trustees it is necessary or desirable to submit matters for a shareholder vote.
Shareholders have, under certain circumstances, the right to communicate with
other shareholders for the purpose of removing one or more Trustees. Upon
liquidation of a Fund, shareholders of that Fund would be entitled to share pro
rata in the net assets of the Fund available for distribution to shareholders.
The Trust was organized on February 7, 1994 as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a business trust
may, under certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the Trust itself was unable to meet its
obligations. However, the Trust's Declaration of Trust disclaims shareholder
liability for acts or obligations of the Trust and requires that notice of this
disclaimer be given in each agreement, obligation or instrument entered into or
executed by the Trust or a Trustee. The Declaration of Trust provides for
indemnification from the Trust's property for all losses and expenses of any
shareholder held personally liable for the obligations of the Trust. Thus, the
risk of a shareholder's incurring financial loss on account of shareholder
liability is limited to circumstances in which the Trust itself would be unable
to meet its obligations, a possibility that the Trust believes is remote. Upon
payment of any liability incurred by the Trust, the shareholder paying the
liability will be entitled to reimbursement from the general assets of the
Trust. The Trustees intend to conduct the operations of the Trust in a manner so
as to avoid, as far as possible, ultimate liability of the shareholders for
liabilities of the Trust.
40
Each investor in a Fund may add to or reduce its investment in the Fund
on each day the Fund determines its net asset value. At the close of each such
business day, the value of each investor's beneficial interest in the Fund will
be determined by multiplying the net asset value of the Fund by the percentage,
effective for that day, which represents that investor's share of the aggregate
beneficial interests in the Fund. Any additions or withdrawals which are to be
effected as of the close of business on that day, will then be effected. The
investor's percentage of the aggregate beneficial interests in the Fund will
then be re-computed as the percentage equal to the fraction (i) the numerator of
which is the value of such investor's investment in the Fund as of the close of
business on such day plus or minus, as the case may be, the amount of any
additions to or withdrawals from the investor's investment in the Fund effected
as of the close of business on such day, and (ii) the denominator of which is
the aggregate net asset value of the Fund as of the close of business on such
day plus or minus, as the case may be, the amount of the net additions to or
withdrawals from the aggregate investments in the Fund by all investors in the
Fund. The percentage so determined will then be applied to determine the value
of the investor's interest in the Fund as of the close of business on the
following business day.
When matters are submitted for shareholder vote or when shareholders
are asked to provide voting instructions, shareholders of each Fund will have
one vote for each full share held and a proportionate, fractional vote for
fractional shares held. The separate vote of a Fund is required on any matter
affecting the Fund unless the interests of each Fund in the matter are identical
or the matter does not affect any interest of the Fund. Shareholders of a Fund
are not entitled to vote or to provide voting instructions on matters that do
not affect the Fund and do not require a separate vote of the Fund. Shareholders
of all Funds will vote together to elect trustees and for certain other matters.
Under certain circumstances the shareholders of one or more Funds could control
the outcome of these votes.
There normally will be no meeting of shareholders for the purpose of
electing Trustees of the Trust unless and until such time as less than a
majority of the Trust's Trustees holding office have been elected by
shareholders, at which time the Trust's Trustees then in office will call a
shareholders meeting for the election of Trustees. Any Trustee of the Trust may
be removed from office upon the vote of shareholders holding at least two-thirds
of the Trust's outstanding shares at a meeting called for that purpose. The
Trustees are required to call such a meeting upon the written request of
shareholders holding at least 10% of the Trust's outstanding shares. The Trust
will also assist shareholders in communicating with one another as provided for
in the 1940 Act.
The Trust sends to each shareholder a semi-annual report and an audited
annual report, each of which includes a list of the investment securities held
by the Funds.
Shares of the Trust do not have cumulative voting rights, which means
that holders of more than 50% of the shares voting for the election of Trustees
can elect all Trustees. Shares are transferable but have no preemptive,
conversion or subscription rights. Shareholders generally vote by Fund, except
with respect to the election of Trustees and the ratification of the selection
of independent accountants.
41
Purchase, Redemption and Pricing of Shares
Offering Price
Shares of the Funds are offered at NAV (as defined in the
Prospectuses), plus any applicable sales charges.
Valuation of Securities
The value of each security for which readily available market
quotations exists is based on a decision as to the broadest and most
representative market for such security. The value of such security is based
either on the last sale price on a national securities exchange, or, in the
absence of recorded sales, at the readily available closing bid price on such
exchanges, or at the quoted bid price in the over-the-counter market. Securities
listed on a foreign exchange are valued at the last quoted sale price available
before the time net assets are valued. Unlisted securities are valued at the
average of the quoted bid and asked prices in the over-the-counter market. Debt
securities are valued by a pricing service which determines valuations based
upon market transactions for normal, institutional-size trading units of similar
securities. Securities or other assets for which market quotations are not
readily available are valued at fair value in accordance with procedures
established by the Trust. Such procedures include the use of independent pricing
services, which use prices based upon yields or prices of securities of
comparable quality, coupon, maturity and type; indications as to values from
dealers; and general market conditions. All portfolio securities with a
remaining maturity of less than 60 days are valued at amortized cost, which
approximates market.
The accounting records of the Funds are maintained in U.S. dollars. The
market value of investment securities, other assets and liabilities and forward
contracts denominated in foreign currencies are translated into U.S. dollars at
the prevailing exchange rates at the end of the period. Purchases and sales of
securities, income receipts, and expense payments are translated at the exchange
rate prevailing on the respective dates of such transactions. Reported net
realized gains and losses on foreign currency transactions represent net gains
and losses from sales and maturities of forward currency contracts, disposition
of foreign currencies, currency gains and losses realized between the trade and
settlement dates on securities transactions and the difference between the
amount of net investment income accrued and the U.S. dollar amount actually
received.
The problems inherent in making a good faith determination of the value
of restricted securities are recognized in the codification effected by SEC
Financial Reporting Release No. 1 ("FRR 1" (formerly Accounting Series Release
No. 113)) which concludes that there is "no automatic formula" for calculating
the value of restricted securities. It recommends that the best method simply is
to consider all relevant factors before making any calculation. According to FRR
1 such factors would include consideration of the:
type of security involved, financial statements, cost at date
of purchase, size of holding, discount from market value of
unrestricted securities of the same class at the time of
purchase, special reports prepared by analysts, information as
to any transactions or offers with respect to the security,
existence of merger proposals or tender offers affecting the
security, price and extent of public trading in similar
securities of the issuer or comparable companies, and other
relevant matters.
To the extent that the Fund purchases securities which are restricted
as to resale or for which current market quotations are not available, the Fund
Sub-Advisor will value such securities based upon all relevant factors as
outlined in FRR 1.
Redemption in Kind
Each Fund reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption or repurchase order by
making payment in whole or in part in readily marketable securities chosen by
the Trust, or the Fund, as the case may be, and valued as they are for purposes
of computing the Fund's net asset value, as the case may be (a redemption in
kind). If payment is made in securities, an investor, including the Fund, may
incur transaction expenses in converting these securities into cash. The Trust,
on behalf of each Fund, has elected, however, to be governed by Rule 18f-1 under
the 1940 Act as a result of which each Fund is obligated to redeem shares or
beneficial interests, as the case may be, with respect to any one investor
during any 90-day period, solely in cash up to the lesser of $250,000 or 1% of
the net asset value of the Fund at the beginning of the period.
42
Class A Sales Charges
Shares are sold at the public offering price next determined after a
purchase order is received as discussed above. Each Fund, except the Standby
Income Fund, imposes a sales charge in accordance with the following schedules:
Value Plus Fund, Emerging Growth Fund, International Equity Fund,
Growth & Income Fund and Balanced Fund
Amount of Investment Sales Charge as % Sales Charge as Dealer Distributor
of Offering Price % of Net Asset Concession Retention
Value
Under $50,000........................................ 5.75% 6.10% 5.00% 0.75%
$50,000 but less than $100,000....................... 4.50% 4.71% 3.75% 0.75%
$100,000 but less than $250,000...................... 3.50% 3.63% 2.75% 0.75%
$250,000 but less than $500,000...................... 2.50% 2.56% 2.00% 0.50%
$500,000 but less than $1 million.................... 2.00% 2.04% 1.60% 0.40%
$1 million or more*.................................. 0.00% 0.00% 0.00% 0.00%
Income Opportunity Fund and Bond Fund
Amount of Investment Sales Charge as % Sales Charge as Dealer Distributor
of Offering Price % of Net Asset Concession Retention
Value
Under $25,000........................................ 4.75% 4.99% 4.00% 0.75%
$25,000 but less than $50,000........................ 4.50% 4.71% 3.75% 0.75%
$50,000 but less than $100,000....................... 4.00% 4.17% 3.25% 0.75%
$100,000 but less than $250,000...................... 3.50% 3.63% 2.75% 0.75%
$250,000 but less than $500,000...................... 2.50% 2.56% 2.00% 0.50%
$500,000 but less than $1 million.................... 2.00% 2.04% 1.60% 0.40%
$1 million or more*.................................. 0.00% 0.00% 0.00 % 0.00%
----------
* There is no initial sales charge on purchases of $1 million or more,
including purchases involving a Letter of Intent, Right of
Accumulation, Aggregation or Concurrent Purchases (as described below).
However, a contingent deferred sales charge ("CDSC") of 1% is imposed
on such purchases if liquidated within the first year after purchase,
except for exchanges or certain qualified retirement plans. See
"Reduced Sales Charges" for information as to ways in which initial
sales charges may be reduced.
On sales at net asset value, Dealers may be paid referral fees by the
Distributor directly; such fees will not be borne by the investor.
From time to time, the Distributor may reallow to Dealers the full
amount of the sales charge.
Class C Contingent Deferred Sales Charge ("CDSC")
Class C Shares of any Fund may be purchased without an initial sales
charge. However, (with the exception of Standby Income Fund) you will bear your
proportionate share of payments made pursuant to the Trust's distribution and
service plan described hereunder under the caption "Distribution and Service
Plan." Such payments will affect the net asset value of shares in each Fund. In
addition, with the exception of Standby Income Fund, a CDSC of 1.0% applies to
redemptions of shares made within one year after the date of their purchase. No
such charge is imposed if the shares redeemed have been acquired through the
reinvestment of dividends or capital gains distributions or if the amount
redeemed is derived from increases in the value of the account above the amount
of the purchase payments. In determining whether a CDSC is payable, it is
assumed that the redemption is made from the earliest purchase payments(s) that
remain invested in the Funds. To determine if amounts are available for
redemption free of any CDSC, all of your purchase payments (reduced by any
amounts previously withdrawn) are aggregated, and the current value of all
shares to be redeemed is aggregated. All CDSC's are paid to the Distributor.
43
The CDSC is waived for redemptions of shares by: (1) current or retired
directors, trustees, partners, officers and employees of a Trust, the Portfolio
Trust, the Distributor, the Advisor or any Portfolio Advisor, certain family
members of the above persons, and trusts or plans primarily for such persons;
(2) trustees or other fiduciaries purchasing shares for certain retirement plans
and (3) participants in certain pension, profit-sharing or employee benefit
plans that are sponsored by the Distributor and its affiliates.
The CDSC is also waived for exchanges of shares (except if shares
acquired by exchange are then redeemed within 12 months of the initial
purchase); for redemptions in connection with mergers, acquisitions and exchange
offers; for distributions from qualified retirement plans and other employee
benefit plans; for distributions from custodial accounts under Section 403(b)(7)
of the Internal Revenue Code of 1986, as amended (the "Code"), or IRAs due to
death, disability or attainment of age 591/2; for tax-free returns of excess
contributions to IRAs; and for any partial or complete redemptions following the
death or disability of a shareholder, provided the redemption is made within one
year of death or initial determination of disability.
Reduced Initial Sales Charges For Class A Shares
Aggregation
Sales charge discounts are available for certain aggregated
investments. Investments which may be aggregated include those made by you, your
spouse and your children under the age of 21, if all parties are purchasing
shares for their own accounts, which may include purchases through employee
benefit plans such as an IRA, individual-type 403(b) plan or single-participant
Keogh-type plan or by a business solely controlled by these individuals (for
example, the individuals own the entire business) or by a trust (or other
fiduciary arrangement) solely for the benefit of these individuals. Individual
purchases by trustees or other fiduciaries may also be aggregated if the
investments are: (1) for a single trust estate or fiduciary account, including
an employee benefit plan other than those described above; (2) made for two or
more employee benefit plans of a single employer or of affiliated employers as
defined in the 1940 Act, other than employee benefit plans described above; or
(3) for a common trust fund or other pooled account not specifically formed for
the purpose of accumulating Fund shares. Purchases made for nominee or street
name accounts (securities held in the name of a Dealer or another nominee such
as a bank trust department instead of the customer) may not be aggregated with
those made for other accounts and may not be aggregated with other nominee or
street name accounts unless otherwise qualified as described above.
Concurrent Purchases
To qualify for a reduced sales charge, you may combine concurrent
purchases of shares of two or more Funds (other than the Standby Income Fund).
For example, if you concurrently invest $25,000 in one Fund and $25,000 in
another Fund, the sales charge would be reduced to reflect a $50,000 purchase.
Right of Accumulation
Reduced sales charges are applicable through a right of accumulation
under which eligible investors are permitted to purchase shares of a Fund at the
offering price applicable to the total of (a) the dollar amount then being
purchased plus (b) an amount equal to the then current net asset value of the
purchaser's combined holdings. For any such right of accumulation to be made
available, the Transfer Agent must be provided at the time of purchase, by the
purchaser or the purchaser's securities dealer, with sufficient information to
permit confirmation of qualification. Acceptance of the purchase order is
subject to such confirmation. The right of accumulation may be amended or
terminated at any time.
44
Letter of Intent
Reduced sales charges are applicable to purchases aggregating a minimum
of $25,000 for the Income Opportunity Fund, the Bond Fund, and the Standby
Income Fund and $50,000 for each other Touchstone Fund, of the shares of the
Fund made within a 24 month period starting with the first purchase pursuant to
a Letter of Intent. The Letter of Intent is not a binding obligation to purchase
any amount of shares; however, its execution will result in the purchaser paying
a lower sales charge at the appropriate quantity purchase level. A purchase not
originally made pursuant to a Letter of Intent may be included under a
subsequent Letter of Intent executed within 90 days of such purchase if the
Distributor is informed in writing of this intent within such 90-day period. The
value of shares of the Fund presently held on the date of the first purchase
under the Letter of Intent, may be included as a credit toward the completion of
such Letter, but the reduced sales charge applicable to the amount covered by
such Letter will be applied only to new purchases. If the total amount of shares
does not equal the amount stated in the Letter of Intent, the investor will be
notified and must pay, within 20 days of the expiration of such Letter, the
difference between the sales charge on the shares purchased at the reduced rate
and the sales charge applicable to the shares actually purchased through the
Letter. Shares equal to 5% of the intended amount will be held in escrow during
the 24 month period (while remaining registered in the name of the purchaser)
for this purpose. The first purchase under the Letter of Intent must be 5% of
the dollar amount of such Letter. If, during the term of such Letter, a purchase
brings the total amount invested to an amount equal to or in excess of the
amount indicated in the Letter, the purchaser will be entitled on that purchase
and subsequent purchases to the reduced percentage sales charge which would be
applicable to a single purchase equal to the total dollar value of the shares
then being purchased under such Letter, but there will not be a retroactive
reduction of the sales charges on any previous purchase. The value of any shares
redeemed or otherwise disposed of by the purchaser prior to termination or
completion of the Letter of Intent will be deducted from the total purchases
made under such Letter.
You must advise your financial advisor if you qualify for a reduction
in sales charge using one or any combination of the methods described above.
Waiver of Sales Charge
Sales charges do not apply to shares of the Funds purchased: (1) by
registered representatives or other employees (and their immediate family
members) of broker/dealers, banks or other financial institutions having
agreements with the Distributor; (2) by any director, officer or other employee
(and their immediate family members) of (A) The Western and Southern Life
Insurance Company or any of its affiliates, (B) any Portfolio Advisor; (C)
RogersCasey; (D) Investors Bank & Trust Company; (E) the Transfer Agent; and (F)
those firms that provide legal, accounting, public relations or other services
to the Distributor or Advisor; (3) by clients of any Portfolio Advisor or of
RogersCasey who are referred to the Distributor by a Portfolio Advisor or
RogersCasey; (4) in accounts as to which a broker-dealer charges an asset
management fee, provided the broker-dealer has an agreement with the
Distributor; (5) as part of an employee benefit plan having more than 25
eligible employees or a minimum of $250,000 invested in the Fund; (6) as part of
certain promotional programs established by the Fund and/or Distributor; (7) by
one or more members of a group of persons engaged in a common business,
profession, civic or charitable endeavor or other activity and retirees and
immediate family members of such persons pursuant to a marketing program between
the Distributor and such group; (8) by bank trust departments; and (9) through
Processing Organizations described in the Prospectuses.
There is no initial sales charge on your purchase of shares in a Roth
IRA or Roth Conversion IRA if (1) you purchase the shares with the proceeds of a
redemption made within the previous 180 days from another mutual fund complex
and (2) you paid an initial sales charge or a contingent deferred sales charge
on your investment in the other mutual fund complex.
Immediate family members are defined as the spouse, parents, siblings,
natural or adopted children, mother-in-law, father-in-law, brother-in-law and
sister-in-law of a director, officer or employee. The term "employee" is deemed
to include current and retired employees.
Exemptions must be qualified in advance by the Distributor. Your
financial advisor should call the Distributor for more information.
45
Taxation of the Funds
The Trust intends to qualify annually and to elect each Fund to be
treated as a regulated investment company under the Code.
To qualify as a regulated investment company, each Fund must, among
other things: (a) derive in each taxable year at least 90% of its gross income
from dividends, interest, payments with respect to securities loans and gains
from the sale or other disposition of stock, securities or foreign currencies or
other income derived with respect to its business of investing in such stock,
securities or currencies; (b) diversify its holdings so that, at the end of each
quarter of the taxable year, (i) at least 50% of the market value of the Fund's
assets is represented by cash and cash items (including receivables), U.S.
Government securities, the securities of other regulated investment companies
and other securities, with such other securities of any one issuer limited for
the purposes of this calculation to an amount not greater than 5% of the value
of the Fund's total assets and not greater than 10% of the outstanding voting
securities of such issuer and (ii) not more than 25% of the value of its total
assets is invested in the securities of any one issuer (other than U.S.
Government securities or the securities of other regulated investment
companies); and (c) distribute at least 90% of its investment company taxable
income (which includes, among other items, dividends, interest and net
short-term capital gains in excess of net long-term capital losses) and its net
tax-exempt interest income, if any, each taxable year.
As a regulated investment company, each Fund will not be subject to
U.S. federal income tax on its investment company taxable income and net capital
gains (the excess of net long-term capital gains over net short-term capital
losses), if any, that it distributes to shareholders. The Fund intends to
distribute to its shareholders, at least annually, substantially all of its
investment company taxable income and net capital gains. Amounts not distributed
on a timely basis in accordance with a calendar year distribution requirement
are subject to a nondeductible 4% excise tax. To prevent imposition of the
excise tax, the Fund must distribute during each calendar year an amount equal
to the sum of: (1) at least 98% of its ordinary income (not taking into account
any capital gains or losses) for the calendar year; (2) at least 98% of its
capital gains in excess of its capital losses (adjusted for certain ordinary
losses, as prescribed by the Code) for the one-year period ending on October 31
of the calendar year; and (3) any ordinary income and capital gains for previous
years that was not distributed during those years. A distribution will be
treated as paid on December 31 of the current calendar year if it is declared by
the Fund in October, November or December with a record date in such a month and
paid by the Fund during January of the following calendar year. Such
distributions will be taxable to shareholders in the calendar year in which the
distributions are declared, rather than the calendar year in which the
distributions are received. To prevent application of the excise tax, the Fund
intends to make its distributions in accordance with the calendar year
distribution requirement.
Each Fund shareholder will receive, if appropriate, various written
notices after the close of the Fund's prior taxable year as to the federal
income status of his dividends and distributions which were received from the
Fund during the Fund's prior taxable year. Shareholders should consult their tax
advisors as to any state and local taxes that may apply to these dividends and
distributions. The dollar amount of dividends excluded from federal income
taxation and the dollar amount subject to such income taxation, if any, will
vary for each shareholder depending upon the size and duration of each
shareholder's investment in the Fund. To the extent that the Fund earns taxable
net investment income, the Fund intends to designate as taxable dividends the
same percentage of each dividend as its taxable net investment income bears to
its total net investment income earned. Therefore, the percentage of each
dividend designated as taxable, if any, may vary.
Foreign Taxes
Tax conventions between certain countries and the United States may
reduce or eliminate such taxes. It is impossible to determine the effective rate
of foreign tax in advance since the amount of each applicable Fund's assets to
be invested in various countries will vary.
If the Fund is liable for foreign taxes, and if more than 50% of the
value of the Fund's total assets at the close of its taxable year consists of
stocks or securities of foreign corporations, it may make an election pursuant
to which certain foreign taxes paid by it would be treated as having been paid
directly by shareholders of the entities, such as the corresponding Fund, which
have invested in the Fund. Pursuant to such election, the amount of foreign
taxes paid will be included in the income of the corresponding Fund's
46
shareholders, and such Fund shareholders (except tax-exempt shareholders) may,
subject to certain limitations, claim either a credit or deduction for the
taxes. Each such Fund shareholder will be notified after the close of the Fund's
taxable year whether the foreign taxes paid will "pass through" for that year
and, if so, such notification will designate (a) the shareholder's portion of
the foreign taxes paid to each such country and (b) the portion which represents
income derived from sources within each such country.
The amount of foreign taxes for which a shareholder may claim a credit
in any year will generally be subject to a separate limitation for "passive
income," which includes, among other items of income, dividends, interest and
certain foreign currency gains. Because capital gains realized by the Fund on
the sale of foreign securities will be treated as U.S.-source income, the
available credit of foreign taxes paid with respect to such gains may be
restricted by this limitation.
Distributions
Dividends paid out of the Fund's investment company taxable income will
be taxable to a U.S. shareholder as ordinary income. Distributions of net
capital gains, if any, designated as capital gain dividends are taxable as
long-term capital gains, regardless of how long the shareholder has held the
Fund's shares, and are not eligible for the dividends-received deduction.
Shareholders receiving distributions in the form of additional shares, rather
than cash, generally will have a cost basis in each such share equal to the net
asset value of a share of the Fund on the reinvestment date. Shareholders will
be notified annually as to the U.S. federal tax status of distributions.
Sale of Shares
Any gain or loss realized by a shareholder upon the sale or other
disposition of any Class of shares of a Fund, or upon receipt of a distribution
in complete liquidation of a Fund, generally will be a capital gain or loss
which will be long-term or short-term, generally depending upon the
shareholder's holding period for the shares. Any loss realized on a sale or
exchange will be disallowed to the extent the shares disposed of are replaced
(including shares acquired pursuant to a dividend reinvestment plan) within a
period of 61 days beginning 30 days before and ending 30 days after disposition
of the shares. In such a case, the basis of the shares acquired will be adjusted
to reflect the disallowed loss. Any loss realized by a shareholder on a
disposition of Fund shares held by the shareholder for six months or less will
be treated as a long-term capital loss to the extent of any distributions of net
capital gains received by the shareholder with respect to such shares.
Foreign Withholding Taxes
Income received by a Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries.
Backup Withholding
A Fund may be required to withhold U.S. federal income tax at the rate
of 31% of all taxable distributions payable to shareholders who fail to provide
the Fund with their correct taxpayer identification number or to make required
certifications, or who have been notified by the Internal Revenue Service that
they are subject to backup withholding. Corporate shareholders and certain other
shareholders specified in the Code generally are exempt from such backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
may be credited against the shareholder's U.S. federal income tax liability.
Foreign Shareholders
The tax consequences to a foreign shareholder of an investment in a
Fund may be different from those described herein. Foreign shareholders are
advised to consult their own tax advisors with respect to the particular tax
consequences to them of an investment in a Fund.
47
Other Taxation
The Trust is organized as a Massachusetts business trust and, under
current law, neither the Trust nor any Fund is liable for any income or
franchise tax in the Commonwealth of Massachusetts, provided that the Fund
continues to qualify as a regulated investment company under Subchapter M of the
Code.
Fund shareholders may be subject to state and local taxes on their Fund
distributions. Shareholders are advised to consult their own tax advisors with
respect to the particular tax consequences to them of an investment in a Fund.
Performance Information
From time to time, quotations of a Fund's performance may be included
in advertisements, sales literature or shareholder reports. These performance
figures are calculated in the following manner:
Yield:
Yields for a Fund used in advertising are computed by dividing the
Fund's interest and dividend income for a given 30-day or one-month period, net
of expenses, by the average number of shares entitled to receive distributions
during the period, dividing this figure by the Fund's net asset value per share
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 purpose 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 purposes 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 of 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
December 31, 1998, the Funds' yields were as follows:
Balanced Bond
Fund - Class A Balanced Income Opportunity Income Fund - Class A Bond Fund - Standby
Fund - Fund - Class A Opportunity Class C Income
Class C Fund - Class C Fund
2.31% 1.66% 17.45% 17.21% 5.41% 4.30% 5.04%
For the 7-day period ended December 31, 1998, the Standby Income Fund's
yield was 5.07%.
Total return - Class A Shares
A Fund's standardized average annual total return is calculated for
certain periods by determining the average annual compounded rates of return
over those periods that would cause an investment of $1,000 (with all
distributions reinvested) to reach the value of that investment at the end of
the periods. A Fund may also calculate non-standardized total return figures
which represent aggregate (not annualized) performance over any period or
year-by-year performance, such as the following.
48
Average Annual Emerging International Income Value Plus Growth & Balanced Bond Standby
Total Return Growth Equity Fund Opportunity Fund - Income Fund - Fund - Fund - Income
(Including Sales Fund - Fund - Class A Class A Class A Class A Fund**
Charge) - Class Class A Class A
A
For the Period
5/1/98* to 12/31/98 N/A N/A N/A -1.71% N/A N/A N/A N/A
For the Year Ended
12/31/98 -3.29% 13.01% -17.84% N/A .71% -2.02 3.40% 5.49%
For the Period
10/3/94* to 12/31/98
14.53% 8.25% 6.41% N/A 16.68% 13.13% 7.11% 5.28%
Average Annual
Total Return
(Without Sales
Charge)
For the Period
5/1/98* to 12/31/98 N/A N/A N/A 4.29% N/A N/A N/A N/A
For the Year Ended
12/31/98 2.57% 19.94% -13.77% N/A 6.87% 3.98% 8.56% 5.49
For the Period
10/3/94 * to 16.14% 9.77% 7.64% N/A 18.32% 14.72% 8.34% 5.28%
12/31/98
Aggregate
Total Return
(Including Sales
Charge)
For the Period
5/1/98* to 12/31/98 N/A N/A N/A -1.71% N/A N/A N/A N/A
For the Year Ended -3.29% 13.01% -17.84% N/A .71% -2.02% 3.40% 5.49%
12/31/98
For the Period
10/3/94 * to 77.90% 40.02% 30.21% N/A 92.53% 68.85% 33.84% 24.40%
12/31/98
Aggregate
Total Return
(Without Sales
Charge)
For the Period
5/1/98* to 12/31/98 N/A N/A N/A 4.29% N/A N/A N/A N/A
For the Year Ended 2.57% 19.94% -13.77% N/A 6.87% 3.98% 8.56% 5.49%
12/31/98
For the Period
10/3/94 * to 88.89% 48.56% 36.72% N/A 104.28% 79.15% 40.54% 24.40%
12/31/98
- ------------
* Commencement of operations
**Standby Income Fund may be purchased and redeemed at net asset value.
49
Total return - Class C Shares
A Fund's standardized average annual total return is calculated for
certain periods by determining the average annual compounded rates of return
over those periods that would cause an investment of $1,000 (with all
distributions reinvested) to reach the value of that investment at the end of
the periods. A Fund may also calculate non-standardized total return figures
which represent aggregate (not annualized) performance over any period or
year-by-year performance, such as the following
Average Emerging International Income Value Plus Growth & Balanced Bond
Annual Total Return Growth Equity Fund - Opportunity Fund - Income Fund - Fund - Fund -
Fund - Class C Fund - Class C Class C Class C Class C Class C
Class C
For Period 5/1/98*
to 12/31/98 N/A N/A N/A 2.60% N/A N/A N/A
For the Year Ended
12/31/98 1.95% 18.99% -14.52% N/A 5.97% 3.31% 6.90%
For the Period
10/3/94* to
12/31/98 15.07% 8.95% 6.80% N/A 17.50% 13.88% 7.34%
Aggregate
Total Return
For Period 5/1/98*
to 12/31/98 N/A N/A N/A 2.60% N/A N/A N/A
For the Year Ended
12/31/98 1.95% 18.99% -14.52% N/A 5.97% 3.31% 6.90%
For the Period
10/3/94* to
12/31/98 81.48% 43.89% 32.21% N/A 98.33% 73.67% 35.10%
- ------------------------
* Commencement of operations
Any total return quotation provided for a Fund should not be considered
as representative of the performance of the Fund in the future since the net
asset value and public offering price of shares of the Fund will vary based not
only on the type, quality and maturities of the securities held in the
corresponding Fund, but also on changes in the current value of such securities
and on changes in the expenses of the Fund and the corresponding Fund. These
factors and possible differences in the methods used to calculate total return
should be considered when comparing the total return of a Fund to total returns
published for other investment companies or other investment vehicles. Total
return reflects the performance of both principal and income.
In connection with communicating its performance to current or
prospective shareholders, a Fund also may compare these figures to the
performance of other mutual funds tracked by mutual fund rating services, to the
performance of various indices and investments for which reliable performance
data is available. The performance figures of unmanaged indices may assume
reinvestment of dividends but generally do not reflect deductions for
administrative and management costs. The performance of the Funds may also be
compared to averages, performance ratings, or other information prepared by
recognized mutual fund statistical services. Evaluations of a Fund's performance
made by independent sources may also be used in advertisements concerning the
Fund. Sources for a Fund's performance information could include Asian Wall
Street Journal, Barron's, Business Week, Changing Times, The Kiplinger Magazine,
Consumer Digest, Financial Times, Financial World, Forbes, Fortune, Global
Investor, Investor's Daily, Lipper Analytical Services, Inc.'s Mutual Fund
Performance Analysis, Money, The New York Times, Personal Investing News,
Personal Investor, Success, U.S. News and World Report, The Wall Street Journal
and CDA/Weisenberger Investment Companies Services.
50
Financial Statements
The following financial statements for the Trust and the Standby Income
Fund at and for the fiscal periods indicated are incorporated herein by
reference from their current reports to shareholders filed with the SEC pursuant
to Section 30(b) of the 1940 Act and Rule 30b2-1 thereunder. A copy of each such
report will be provided, without charge, to each person receiving this Statement
of Additional Information.
TOUCHSTONE SERIES TRUST - Class A* (other than the Standby Income Fund)
Schedule of Investments, December 31, 1998 Statement of Assets and
Liabilities, December 31, 1998 Statement of Operations, for the year
ended December 31, 1998
Statement of Changes in Net Assets for the years ended December 31,
1998 and December 31, 1997
Financial Highlights
Notes to Financial Statements
Report of Independent Accountants
STANDBY INCOME FUND
Schedule of Investments, December 31, 1998 Statement of Assets and
Liabilities, December 31, 1998 Statement of Operations, for the year
ended December 31, 1998
Statement of Changes in Net Assets for the years ended December 31,
1998 and December 31, 1997
Financial Highlights
Notes to Financial Statements
Report of Independent Accountants
* The outstanding shares of each series of Touchstone Series Trust (formerly
Select Advisors Trust A), other than the Standby Income Fund, were redesignated
as Class A shares, effective after the close of business on December 31, 1998.
51
A-1
Appendix
Bond and Commercial Paper Ratings
Set forth below are descriptions of the ratings of Moody's and S&P,
which represent their opinions as to the quality of the securities which they
undertake to rate. It should be emphasized, however, that ratings are relative
and subjective and are not absolute standards of quality.
Moody's Bond Ratings
Aaa. Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edged." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuations of protective elements may be of greater
amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
A. Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa. Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B. Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of
time may be small.
Caa. Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca. Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
C. Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Unrated. Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not
rated as a matter of policy.
A-1
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effect of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols Aa-1, A-1, Baa-1, Ba-1 and B-1.
S&P's Bond Ratings
AAA. Bonds rated AAA have the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA. Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from higher rated issues only in a small degree.
A. Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds
in the highest rated categories.
BBB. Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than in higher
rated categories.
BB, B, CCC, CC and C. Bonds rated BB, B, CCC, CC, and C are regarded,
on balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of this obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties of major risk
exposures to adverse conditions.
C1. The rating C1 is reserved for income bonds on which no interest is
being paid.
D. Bonds rated D are in default, and payment of interest and/or repayment
of principal is in arrears.
Plus (+) or Minus (-). The ratings from "AA" to "CCC" may be modified
by the addition of a plus or minus sign to show relative standing within the
major rating categories.
NR. Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does
not rate a particular type of obligation as a matter of policy.
S&P's Commercial Paper Ratings
A is the highest commercial paper rating category utilized by S&P,
which uses the numbers 1+, 1, 2 and 3 to denote relative strength within its A
classification. Commercial paper issues rated A by S&P have the following
characteristics: Liquidity ratios are better than industry average. Long-term
debt rating is A or better. The issuer has access to at least two additional
channels of borrowing. Basic earnings and cash flow are in an upward trend.
Typically, the issuer is a strong company in a well-established industry and has
superior management.
A-2
Moody's Commercial Paper Ratings
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structures with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; well-established access to
a range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
A-3
Distributor
Touchstone Securities, Inc. Touchstone Series Trust
311 Pike Street
Cincinnati, Ohio 45202 Touchstone Emerging Growth Fund
Touchstone International Equity Fund
Touchstone Income Opportunity Fund
Touchstone Value Plus Fund
Touchstone Growth & Income Fund
Investment Advisor of each Fund Touchstone Balanced Fund
Touchstone Bond Fund A
Touchstone Advisors, Inc. Touchstone Bond Fund
311 Pike Street Touchstone Standby Income Fund
Cincinnati, Ohio 45202
Class A, Class C and Class Y Shares
Transfer Agent
State Street Bank and Trust Company
P.O. Box 8518
Boston, Massachusetts 02266-8518
Administrator, Custodian and
Fund Accounting Agent
Investors Bank & Trust Company Statement of Additional Information
200 Clarendon Street May 1, 1999
Boston, Massachusetts 02116
Independent Accountants
PricewaterhouseCoopers LLP
One Post Office Square
Boston, Massachusetts 02109
Legal Counsel
Frost & Jacobs LLP
2500 PNC Center
201 East Fifth Street
Cincinnati, Ohio 45202
CAPITAL APPRECIATION Countrywide Investments
INCOME
SEMI-ANNUAL
REPORT
September 30, 1999
(Unaudited)
Utility Fund
Equity Fund
Growth/Value Fund
Aggressive Growth Fund
LOGO: COUNTRYWIDE INVESTMENTS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Letter from the President......................................................3
Statements of Assets and Liabilities.........................................4-5
Statements of Operations.....................................................6-7
Statements of Changes in Net Assets..........................................8-9
Financial Highlights.......................................................10-16
Notes to Financial Statements..............................................17-22
Portfolios of Investments:
Utility Fund..........................................................23-24
Equity Fund...........................................................25-26
Growth/Value Fund.....................................................27-28
Aggressive Growth Fund...................................................29
Results of Special Meeting of Shareholders....................................30
2 - Countrywide Investments
LETTER FROM THE PRESIDENT
- --------------------------------------------------------------------------------
photo: Robert H. Leshner
Dear Fellow Shareholders:
We are pleased to present Countrywide Strategic Trust's Semi-Annual Report for
the six months ended September 30, 1999. This report provides financial data and
performance information for the Utility Fund, Equity Fund, Growth/Value Fund and
Aggressive Growth Fund. These Funds represent the four equity products currently
offered among the 16 mutual funds which comprise the Countrywide Family of
Funds.
We are pleased to announce that on October 29, 1999, Fort Washington Investment
Advisors, Inc., a registered investment advisory firm and part of the
Western-Southern Enterprise, completed the acquisition of Countrywide Financial
Services, Inc. The Western-Southern Enterprise, a dynamic financial services
group, includes The Western and Southern Life Insurance Company,
Western-Southern Life Assurance Company, Columbus Life Insurance Company,
Touchstone Advisors, Capital Analysts and Eagle Realty Group. With this
acquisition, Western-Southern Enterprise assets owned or under management have
passed the $20 billion mark. In cooperation with Fort Washington Investment
Advisors, we look forward to offering shareholders enhanced flexibility,
responsiveness and product diversity.
The U.S. economy remains remarkably strong. We attribute this to increased
activity in the manufacturing sector, low unemployment, healthy sales in the
housing market, strong GDP growth, negligible inflation and unwavering consumer
confidence. Markets suffered losses during the quarter ended September 30, 1999,
but this was indicative of a market correction rather than a persistent trend.
In spite of this volatility, the Countrywide Growth/Value Fund received national
recognition for its overall performance as of September 30, 1999.
Recent interest rate increases put downward price pressure on bonds.
Consequently, the bond market endured its worst year since 1994 and the second
worst year on record. Nevertheless, attractive opportunities exist, especially
in the corporate, mortgage-backed and government agency sectors of the market.
Historically, higher interest rates have been negative for both stocks and
bonds. Although this was the case during the calendar third quarter, we are
positive for the U.S. stock market going forward. Recovery in Asian economies
will continue to create additional demand for U.S. products, and the expected
build-up in inventories will be a positive for manufacturing. In addition, the
U.S. is better prepared than other countries to deal with Y2K issues. As a
result, we feel that there will be a strong demand for dollar denominated
investments as investors, concerned about an international lack of Y2K
preparedness, search for a safe haven.
Countrywide Investments remains committed to providing products and services
that help investors meet their financial goals. Our success has been built on
the confidence investors have extended to us. We thank you for your support and
look forward to offering continued service to you in the future.
Sincerely,
/s/ Robert H. Leshner
Robert H. Leshner
President
Countrywide Investments - 3
STATEMENTS OF ASSETS AND LIABILITIES
September 30, 1999 (Unaudited)
- ------------------------------------------------------------------------------------
UTILITY EQUITY
(000's) FUND FUND
- ------------------------------------------------------------------------------------
ASSETS
Investment securities:
At acquisition cost $ 27,337 $ 40,058
=============================
At amortized cost $ 27,318 $ 40,058
=============================
At market value (Note 2) $ 44,887 $ 57,358
Repurchase agreements (Note 2) -- 6,410
Cash 1 4
Dividends and interest receivable 123 29
Receivable for capital shares sold 13 14
Other assets 13 27
-----------------------------
TOTAL ASSETS 45,037 63,842
-----------------------------
LIABILITIES
Dividends payable 26 --
Payable for capital shares redeemed 97 6
Payable to affiliates (Note 4) 35 57
Other accrued expenses and liabilities 12 18
-----------------------------
TOTAL LIABILITIES 170 81
-----------------------------
NET ASSETS $ 44,867 $ 63,761
=============================
NET ASSETS CONSIST OF:
Paid-in capital $ 25,153 $ 45,949
Accumulated net investment loss -- (64)
Accumulated net realized gains
from security transactions 2,145 576
Net unrealized appreciation on investments 17,569 17,300
-----------------------------
NET ASSETS $ 44,867 $ 63,761
=============================
PRICING OF CLASS A SHARES
Net assets attributable to Class A shares $ 41,519 $ 60,517
=============================
Shares of beneficial interest outstanding (unlimited
number of shares authorized, no par value)
(Note 5) 2,437 2,803
=============================
Net asset value and redemption
price per share (Note 2) $ 17.03 $ 21.59
=============================
Maximum offering price per share (Note 2) $ 18.07 $ 22.91
=============================
PRICING OF CLASS C SHARES
Net assets attributable to Class C shares $ 3,348 $ 3,244
=============================
Shares of beneficial interest outstanding
(unlimited number of shares authorized,
no par value) (Note 5) 197 153
=============================
Net asset value and redemption
price per share (Note 2) $ 17.02 $ 21.21
=============================
Maximum offering price per share (Note 2) $ 17.24 $ 21.48
=============================
See accompanying notes to financial statements.
4 - Countrywide Investments
STATEMENTS OF ASSETS AND LIABILITIES
September 30, 1999 (Unaudited)
- -------------------------------------------------------------------------------------
GROWTH/ AGGRESSIVE
VALUE GROWTH
(000's) FUND FUND
- -------------------------------------------------------------------------------------
ASSETS
Investment securities:
At acquisition cost $ 14,742 $ 6,108
=============================
At amortized cost $ 14,742 $ 6,108
=============================
At market value (Note 2) $ 25,241 $ 10,793
Dividends receivable 4 --
Receivable for capital shares sold 129 9
Organization costs, net (Note 2) 6 6
Other assets 8 8
-----------------------------
TOTAL ASSETS 25,388 10,816
-----------------------------
LIABILITIES
Bank overdraft 212 108
Payable for capital shares redeemed 12 --
Payable to affiliates (Note 4) 17 6
Other accrued expenses and liabilities 12 10
-----------------------------
TOTAL LIABILITIES 253 124
-----------------------------
NET ASSETS $ 25,135 $ 10,692
=============================
NET ASSETS CONSIST OF:
Paid-in capital $ 13,504 $ 6,029
Accumulated net investment loss (129) (91)
Accumulated net realized gains from
security transactions 1,261 69
Net unrealized appreciation on investments 10,499 4,685
-----------------------------
NET ASSETS $ 25,135 $ 10,692
=============================
PRICING OF CLASS A SHARES
Net assets attributable to Class A shares $ 24,692 $ 10,692
=============================
Shares of beneficial interest outstanding
(unlimited number of shares authorized,
no par value) (Note 5) 1,291 593
=============================
Net asset value and redemption
price per share (Note 2) $ 19.12 $ 18.02
=============================
Maximum offering price per share (Note 2) $ 20.29 $ 19.12
=============================
PRICING OF CLASS C SHARES
Net assets attributable to Class C shares $ 443
============
Shares of beneficial interest outstanding
(unlimited number of shares authorized,
no par value) (Note 5) 23
============
Net asset value and redemption
price per share (Note 2) $ 19.11
============
Maximum offering price per share (Note 2) $ 19.35
============
See accompanying notes to financial statements.
Countrywide Investments - 5
STATEMENTS OF OPERATIONS
For the Six Months Ended September 30, 1999 (Unaudited)
- ------------------------------------------------------------------------------------
UTILITY EQUITY
(000's) FUND FUND
- ------------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends $ 709 $ 264
Interest 81 89
-----------------------------
TOTAL INVESTMENT INCOME 790 353
-----------------------------
EXPENSES
Investment advisory fees (Note 4) 172 231
Distribution expenses, Class A (Note 4) 47 73
Distribution expenses, Class C (Note 4) 15 16
Transfer agent fees, Class A (Note 4) 18 16
Transfer agent fees, Class C (Note 4) 6 6
Accounting services fees (Note 4) 18 21
Professional fees 11 14
Registration fees, Common 2 2
Registration fees, Class A 5 5
Registration fees, Class C 5 5
Custodian fees 7 8
Postage and supplies 7 7
Trustees' fees and expenses 6 6
Reports to shareholders 4 4
Other expenses 3 3
-----------------------------
TOTAL EXPENSES 326 417
-----------------------------
NET INVESTMENT INCOME (LOSS) 464
( 64)
-----------------------------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS
Net realized gains from security transactions 614 504
Net change in unrealized appreciation/
depreciation on investments 3,799 (1,996)
-----------------------------
NET REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS 4,413 (1,492)
-----------------------------
NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ 4,877 $ (1,556)
=============================
See accompanying notes to financial statements.
6 - Countrywide Investments
STATEMENTS OF OPERATIONS
For the Six Months Ended September 30, 1999 (Unaudited)
- ------------------------------------------------------------------------------------
GROWTH/ AGGRESSIVE
VALUE GROWTH
(000's) FUND FUND
- ------------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends $ 43 $ 3
Interest 20 1
-----------------------------
TOTAL INVESTMENT INCOME 63 4
-----------------------------
EXPENSES
Investment advisory fees (Note 4) 115 48
Custodian fees 10 18
Accounting services fees (Note 4) 14 12
Interest expense (Note 6) -- 20
Professional fees 10 8
Registration fees, Common 9 8
Transfer agent fees, Class A (Note 4) 9 6
Transfer agent fees, Class C (Note 4) 2 --
Trustees' fees and expenses 6 6
Postage and supplies 5 4
Distribution expenses, Class A (Note 4) 4 2
Amortization of organization costs (Note 2) 3 3
Reports to shareholders 2 2
Other expenses 3 2
-----------------------------
TOTAL EXPENSES 192 139
Fees waived and expenses reimbursed
by the Adviser (Notes 4, 6) -- (44)
-----------------------------
NET EXPENSES 192 95
-----------------------------
NET INVESTMENT LOSS (129) (91)
-----------------------------
REALIZED AND UNREALIZED GAINS ON INVESTMENTS
Net realized gains from security transactions 1,261 69
Net change in unrealized appreciation/
depreciation on investments 949 1,366
-----------------------------
NET REALIZED AND UNREALIZED GAINS ON INVESTMENTS 2,210 1,435
-----------------------------
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 2,081 $ 1,344
=============================
See accompanying notes to financial statements.
Countrywide Investments - 7
STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------------
UTILITY FUND EQUITY FUND
- -------------------------------------------------------------------------------------
SIX MONTHS SIX MONTHS
ENDED YEAR ENDED YEAR
SEPT. 30, ENDED SEPT. 30, ENDED
1999 MARCH 31, 1999 MARCH 31,
(000's) (UNAUDITED) 1999 (UNAUDITED) 1999
- -------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income (loss) $ 464 $ 961 $ (64) $ 57
Net realized gains from
security transactions 614 2,009 504 73
Net change in unrealized appreciation/
depreciation on investments 3,799 (5,230) (1,996) 6,891
---------------------------------------------------
NET INCREASE (DECREASE)
IN NET ASSETS FROM OPERATIONS 4,877 (2,260) (1,556) 7,021
---------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
>From net investment income, Class A (449) (923) -- (57)
>From net investment income, Class C (15) (38) -- --
Return of capital, Class A -- -- -- (8)
>From net realized gains on security
transactions, Class A -- (441) -- --
>From net realized gains on security
transactions, Class C -- (37) -- --
---------------------------------------------------
DECREASE IN NET ASSETS FROM
DISTRIBUTIONS TO SHAREHOLDERS (464) (1,439) -- (65)
---------------------------------------------------
FROM CAPITAL SHARE
TRANSACTIONS (NOTE 5)
CLASS A
Proceeds from shares sold 2,483 4,525 9,089 16,147
Reinvested distributions 398 1,225 -- 63
Payments for shares redeemed (3,808) (6,425) (2,679) (5,648)
---------------------------------------------------
NET INCREASE (DECREASE) IN
NET ASSETS FROM CLASS A SHARE
TRANSACTIONS (927) (675) 6,410 10,562
---------------------------------------------------
CLASS C
Proceeds from shares sold 250 424 305 567
Reinvested distributions 14 70 -- --
Payments for shares redeemed (489) (573) (104) (1,577)
---------------------------------------------------
NET INCREASE (DECREASE) IN
NET ASSETS FROM CLASS C SHARE
TRANSACTIONS (225) (79) 201 (1,010)
---------------------------------------------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS 3,261 (4,453) 5,055 16,508
---------------------------------------------------
NET ASSETS
Beginning of period 41,606 46,059 58,706 42,198
---------------------------------------------------
End of period $ 44,867 $ 41,606 $ 63,761 $ 58,706
===================================================
See accompanying notes to financial statements.
8 - Countrywide Investments
STATEMENTS OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------------
GROWTH/VALUE FUND AGGRESSIVE GROWTH FUND
- ------------------------------------------------------------------------------------
SIX MONTHS SIX MONTHS
ENDED YEAR ENDED YEAR
SEPT. 30, ENDED SEPT. 30, ENDED
1999 MARCH 31, 1999 MARCH 31,
(000's) (UNAUDITED) 1999 (UNAUDITED) 1999
- ------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment loss $ (129) $ (236) $ (91) $ (190)
Net realized gains from
security transactions 1,261 3,988 69 1,735
Net change in unrealized appreciation/
depreciation on investments 949 1,438 1,366 ( 937)
---------------------------------------------------
NET INCREASE IN NET ASSETS
FROM OPERATIONS 2,081 5,190 1,344 608
---------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
>From net realized gains on security
transactions, Class A -- (4,391) -- (1,620)
---------------------------------------------------
FROM CAPITAL SHARE
TRANSACTIONS (NOTE 5)
CLASS A
Proceeds from shares sold 5,456 4,556 1,826 3,397
Reinvested distributions -- 2,552 -- 978
Payments for shares redeemed (7,517) (11,892) (3,880) (7,456)
---------------------------------------------------
NET DECREASE IN NET ASSETS FROM
CLASS A SHARE TRANSACTIONS (2,061) (4,784) (2,054) (3,081)
---------------------------------------------------
CLASS C
Proceeds from shares sold 460 --
Reinvested distributions -- --
Payments for shares redeemed (9) --
-----------------------
NET INCREASE IN NET ASSETS FROM
CLASS C SHARE TRANSACTIONS 451 --
-----------------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS 471 (3,985) (710) (4,093)
---------------------------------------------------
NET ASSETS
Beginning of period 24,664 28,649 11,402 15,495
---------------------------------------------------
End of period $ 25,135 $ 24,664 $ 10,692 $ 11,402
===================================================
See accompanying notes to financial statements.
Countrywide Investments - 9
UTILITY FUND
FINANCIAL HIGHLIGHTS - CLASS A
- --------------------------------------------------------------------------------
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
- --------------------------------------------------------------------------------
SIX MONTHS
ENDED
SEPT. 30, YEARS ENDED MARCH 31,
1999 -------------------------------------------------------------------------
(UNAUDITED) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period $ 15.42 $ 16.76 $ 12.44 $ 12.24 $ 10.47 $ 10.52
-------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.18 0.38 0.43 0.46 0.47 0.43
Net realized and unrealized gains
(losses) on investments 1.61 (1.16) 4.56 0.22 1.77 (0.05)
-------------------------------------------------------------------------------------------
Total from investment operations 1.79 (0.78) 4.99 0.68 2.24 0.38
-------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment
income (0.18) (0.38) (0.43) (0.46) (0.47) (0.43)
Distributions from net realized gains -- (0.18) (0.24) (0.02) -- --
-------------------------------------------------------------------------------------------
Total distributions (0.18) (0.56) (0.67) (0.48) (0.47) (0.43)
-------------------------------------------------------------------------------------------
Net asset value at end of period $ 17.03 $ 15.42 $ 16.76 $ 12.44 $ 12.24 $ 10.47
===========================================================================================
Total return(A) 11.61% (4.79%) 40.92% 5.61% 21.65% 3.68%
===========================================================================================
Net assets at end of period (000's) $ 41,519 $ 38,391 $ 42,463 $ 36,087 $ 40,424 $ 40,012
===========================================================================================
Ratio of net expenses
to average net assets 1.33%(B) 1.33% 1.25% 1.25% 1.25% 1.25%
Ratio of net investment income
to average net assets 2.11%(B) 2.30% 3.03% 3.65% 3.97% 4.06%
Portfolio turnover rate 5%(B) 4% 0% 3% 11% 17%
(A) Total returns shown exclude the effect of applicable sales loads.
(B) Annualized.
See accompanying notes to financial statements.
10 - Countrywide Investments
UTILITY FUND
FINANCIAL HIGHLIGHTS - CLASS C
- --------------------------------------------------------------------------------
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
- --------------------------------------------------------------------------------
SIX MONTHS
ENDED
SEPT. 30, YEARS ENDED MARCH 31,
1999 -------------------------------------------------------------------------
(UNAUDITED) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period $ 15.40 $ 16.74 $ 12.43 $ 12.23 $ 10.46 $ 10.51
-------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.08 0.18 0.31 0.35 0.37 0.35
Net realized and unrealized gains
(losses) on investments 1.62 (1.16) 4.57 0.24 1.78 (0.04)
-------------------------------------------------------------------------------------------
Total from investment operations 1.70 (0.98) 4.88 0.59 2.15 0.31
-------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment
income (0.08) (0.18) (0.33) (0.37) (0.38) (0.36)
Distributions from net realized gains -- (0.18) (0.24) (0.02) -- --
-------------------------------------------------------------------------------------------
Total distributions (0.08) (0.36) (0.57) (0.39) (0.38) (0.36)
-------------------------------------------------------------------------------------------
Net asset value at end of period $ 17.02 $ 15.40 $ 16.74 $ 12.43 $ 12.23 $ 10.46
===========================================================================================
Total return(A) 11.01% (5.92%) 39.91% 4.82% 20.78% 3.00%
===========================================================================================
Net assets at end of period (000's) $ 3,348 $ 3,215 $ 3,597 $ 3,099 $ 3,686 $ 3,599
===========================================================================================
Ratio of net expenses
to average net assets 2.50%(B) 2.50% 2.00% 2.00% 2.00% 2.00%
Ratio of net investment income
to average net assets 0.94%(B) 1.13% 2.28% 2.89% 3.19% 3.41%
Portfolio turnover rate 5%(B) 4% 0% 3% 11% 17%
(A) Total returns shown exclude the effect of applicable sales loads.
(B) Annualized.
See accompanying notes to financial statements.
Countrywide Investments - 11
EQUITY FUND
FINANCIAL HIGHLIGHTS - CLASS A
- --------------------------------------------------------------------------------
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
- --------------------------------------------------------------------------------
SIX MONTHS
ENDED
SEPT. 30, YEARS ENDED MARCH 31,
1999 -------------------------------------------------------------------------
(UNAUDITED) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period $ 22.12 $ 19.38 $ 13.76 $ 12.45 $ 9.84 $ 9.26
-------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income (loss) (0.02) 0.04 0.09 0.12 0.13 0.15
Net realized and unrealized gains
(losses) on investments (0.51) 2.73 5.76 1.35 2.60 0.59
-------------------------------------------------------------------------------------------
Total from investment operations (0.53) 2.77 5.85 1.47 2.73 0.74
-------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment
income -- (0.03) (0.08) (0.12) (0.12) (0.16)
Distributions from net realized gains -- -- (0.15) (0.04) -- --
-------------------------------------------------------------------------------------------
Total distributions -- (0.03) (0.23) (0.16) (0.12) (0.16)
-------------------------------------------------------------------------------------------
Net asset value at end of period $ 21.59 $ 22.12 $ 19.38 $ 13.76 $ 12.45 $ 9.84
===========================================================================================
Total return(A) (2.40%) 14.30% 42.74% 11.82% 27.90% 8.07%
===========================================================================================
Net assets at end of period (000's) $ 60,517 $ 55,561 $ 38,336 $ 14,983 $ 8,502 $ 4,300
===========================================================================================
Ratio of net expenses
to average net assets(B) 1.29%(C) 1.31% 1.25% 1.25% 1.25% 1.25%
Ratio of net investment income (loss)
to average net assets (0.15%)(C) 0.18% 0.53% 0.91% 1.06% 1.57%
Portfolio turnover rate 2%(C) 10% 7% 38% 38% 159%
(A) Total returns shown exclude the effect of applicable sales loads.
(B) Absent fee waivers and/or expense reimbursements by the Adviser, the ratios
of expenses to average net assets would have been 1.43%, 2.02% and 1.94%
for the years ended March 31, 1997, 1996 and 1995, respectively.
(C) Annualized.
See accompanying notes to financial statements.
12 - Countrywide Investments
EQUITY FUND
FINANCIAL HIGHLIGHTS - CLASS C
- --------------------------------------------------------------------------------
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
- --------------------------------------------------------------------------------
SIX MONTHS
ENDED
SEPT. 30, YEARS ENDED MARCH 31,
1999 -------------------------------------------------------------------------
(UNAUDITED) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period $ 21.86 $ 19.34 $ 13.77 $ 12.46 $ 9.86 $ 9.26
-------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income (loss) (0.14) (0.19) (0.03) 0.02 0.05 0.10
Net realized and unrealized gains
(losses) on investments (0.51) 2.71 5.75 1.35 2.60 0.57
-------------------------------------------------------------------------------------------
Total from investment operations (0.65) 2.52 5.72 1.37 2.65 0.67
-------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment
income -- -- -- (0.02) (0.05) (0.07)
Distributions from net realized gains -- -- (0.15) (0.04) -- --
-------------------------------------------------------------------------------------------
Total distributions -- -- (0.15) (0.06) (0.05) (0.07)
-------------------------------------------------------------------------------------------
Net asset value at end of period $ 21.21 $ 21.86 $ 19.34 $ 13.77 $ 12.46 $ 9.86
===========================================================================================
Total return(A) (2.97%) 13.03% 41.63% 11.01% 26.90% 7.32%
===========================================================================================
Net assets at end of period (000's) $ 3,244 $ 3,146 $ 3,862 $ 2,770 $ 2,436 $ 1,995
===========================================================================================
Ratio of net expenses
to average net assets(B) 2.39%(C) 2.41% 2.00% 2.00% 2.00% 2.00%
Ratio of net investment income (loss)
to average net assets (1.25%)(C) (0.92%) (0.18%) 0.15% 0.38% 0.68%
Portfolio turnover rate 2%(C) 10% 7% 38% 38% 159%
(A) Total returns shown exclude the effect of applicable sales loads.
(B) Absent fee waivers and/or expense reimbursements by the Adviser, the ratios
of expenses to average net assets would have been 2.14%, 2.70% and 2.50%
for the years ended March 31, 1997, 1996 and 1995, respectively.
(C) Annualized.
See accompanying notes to financial statements.
Countrywide Investments - 13
GROWTH/VALUE FUND
FINANCIAL HIGHLIGHTS - CLASS A
- --------------------------------------------------------------------------------
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
- --------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR SEVEN MONTHS YEAR PERIOD
SEPT. 30, ENDED ENDED ENDED ENDED
1999 MARCH 31, MARCH 31, AUGUST 31, AUGUST 31,
(UNAUDITED) 1999 1998(A) 1997 1996(B)
- -------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period $ 17.50 $ 16.30 $ 15.90 $ 11.18 $ 10.00
--------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.10) (0.17) (0.08) (0.13) (0.06)(C)
Net realized and unrealized
gains on investments 1.72 4.84 1.05 5.39 1.24
--------------------------------------------------------------------------------
Total from investment operations 1.62 4.67 0.97 5.26 1.18
--------------------------------------------------------------------------------
Distributions from net realized gains -- (3.47) (0.57) (0.54) --
--------------------------------------------------------------------------------
Net asset value at end of period $ 19.12 $ 17.50 $ 16.30 $ 15.90 $ 11.18
================================================================================
Total return(D) 9.26% 29.89% 6.43% 47.11% 11.80%
================================================================================
Net assets at end of period (000's) $ 24,692 $ 24,664 $ 28,649 $ 26,778 $ 15,108
================================================================================
Ratio of net expenses
to average net assets(E) 1.66%(F) 1.66% 1.66%(F) 1.95% 1.95%(F)
Ratio of net investment loss
to average net assets (1.11%)(F) (0.93%) (0.91%)(F) (1.03%) (0.62%)(F)
Portfolio turnover rate 36%(F) 59% 62%(F) 52% 21%
(A) Effective as of the close of business on August 29, 1997, the Fund was
reorganized and its fiscal year-end, subsequent to August 31, 1997, was
changed to March 31.
(B) Represents the period from the commencement of operations (September 29,
1995) through August 31, 1996.
(C) Calculated using weighted average shares outstanding during the period.
(D) Total returns shown exclude the effect of applicable sales loads.
(E) Absent fee waivers and/or expense reimbursements, the ratio of expenses to
average net assets would have been 2.83%(F) for the period ended August 31,
1996.
(F) Annualized.
See accompanying notes to financial statements.
14 - Countrywide Investments
GROWTH/VALUE FUND
FINANCIAL HIGHLIGHTS - CLASS C
- --------------------------------------------------------------------------------
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
- --------------------------------------------------------------------------------
PERIOD
ENDED
SEPT. 30,
1999(A)
(UNAUDITED)
- --------------------------------------------------------------------------------
Net asset value at beginning of period $ 18.65
----------
Income from investment operations:
Net investment loss (0.03)
Net realized and unrealized gains on investments 0.49
----------
Total from investment operations 0.46
----------
Net asset value at end of period $ 19.11
==========
Total return(B) 2.47%
==========
Net assets at end of period (000's) $ 443
==========
Ratio of net expenses to average net assets 2.41%(C)
Ratio of net investment loss to average net assets (2.03%)(C)
Portfolio turnover rate 36%(C)
(A) Represents the period from the initial public offering of Class C shares
(August 2, 1999) through September 30, 1999.
(B) Total return shown excludes the effect of applicable sales loads.
(C) Annualized.
See accompanying notes to financial statements.
Countrywide Investments - 15
AGGRESSIVE GROWTH FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
- --------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR SEVEN MONTHS YEAR PERIOD
SEPT. 30, ENDED ENDED ENDED ENDED
1999 MARCH 31, MARCH 31, AUGUST 31, AUGUST 31,
(UNAUDITED) 1999 1998(A) 1997 1996(B)
- -------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period $ 15.73 $ 15.81 $ 16.29 $ 10.95 $ 10.00
--------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment loss (0.14) (0.27) (0.15) (0.17) (0.11)(C)
Net realized and unrealized gains
(losses) on investments 2.43 2.67 (0.33) 5.54 1.06
--------------------------------------------------------------------------------
Total from investment operations 2.29 2.40 (0.48) 5.37 0.95
--------------------------------------------------------------------------------
Distributions from net realized gains -- (2.48) -- (0.03) --
--------------------------------------------------------------------------------
Net asset value at end of period $ 18.02 $ 15.73 $ 15.81 $ 16.29 $ 10.95
================================================================================
Total return(D) 14.56% 15.46% (2.95%) 49.09% 9.50%
================================================================================
Net assets at end of period (000's) $ 10,692 $ 11,402 $ 15,495 $ 13,984 $ 6,550
================================================================================
Ratio of net expenses
to average net assets(E) 1.95%(F) 1.95% 1.95%(F) 1.94% 1.95%(F)
Ratio of net investment loss
to average net assets (1.74%)(F) (1.52%) (1.66%)(F) (1.57%) (1.26%)(F)
Portfolio turnover rate 17%(F) 93% 40%(F) 51% 16%
Amount of debt outstanding at
end of period $ -- $ -- n/a n/a n/a
Average daily amount of debt
outstanding during the
period (000's) $ 550 $ 80 n/a n/a n/a
Average daily number of capital shares
outstanding during the
period (000's) 593 818 n/a n/a n/a
Average amount of debt per share
during the period $ 0.93 $ 0.10 n/a n/a n/a
(A) Effective as of the close of business on August 29, 1997, the Fund was
reorganized and its fiscal year-end, subsequent to August 31, 1997, was
changed to March 31.
(B) Represents the period from the commencement of operations (September 29,
1995) through August 31, 1996.
(C) Calculated using weighted average shares outstanding during the period.
(D) Total returns shown exclude the effect of applicable sales loads.
(E) Absent fee waivers and/or expense reimbursements, the ratios of expenses to
average net assets would have been 2.86%(F), 2.00%, 2.62% and 5.05%(F) for
the periods ended September 30, 1999, March 31, 1999, August 31, 1997 and
August 31, 1996, respectively (Note 6).
(F) Annualized.
See accompanying notes to financial statements.
16 - Countrywide Investments
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
1. ORGANIZATION
The Utility Fund, Equity Fund, Growth/Value Fund and Aggressive Growth Fund
(individually, a Fund, and collectively, the Funds) are each a series of
Countrywide Strategic Trust (the Trust). The Trust is registered under the
Investment Company Act of 1940 as an open-end management investment company. The
Trust was established as a Massachusetts business trust under a Declaration of
Trust dated November 18, 1982. The Declaration of Trust, as amended, permits the
Trustees to issue an unlimited number of shares of each Fund.
The Utility Fund seeks current income and capital appreciation by investing
primarily in common stocks of public utilities. The Fund invests in a
diversified portfolio of common, preferred and convertible preferred stocks of
domestic public utilities that currently pay dividends and which have been
operating for at least three years. Public utilities are those companies that
are involved in the production, supply or distribution of electricity, natural
gas, telecommunications and water.
The Equity Fund seeks long-term growth of capital, current income and growth of
income by investing primarily in dividend-paying common stocks. The Fund invests
in a diversified portfolio of dividend-paying common stocks of mid and large
capitalization domestic companies having at least three years operating history.
The Growth/Value Fund seeks long-term capital appreciation primarily through
equity investments in companies whose valuations may not yet reflect the
prospects for accelerated earnings/cash flow growth. The Fund invests primarily
in domestic stocks of large-cap growth companies which are believed to have a
demonstrated record of achievement with excellent prospects for earnings and/or
cash flow growth over a three to five year period.
The Aggressive Growth Fund seeks long-term capital appreciation primarily
through equity investments. The Fund seeks growth opportunities among companies
of various sizes whose valuation may not yet reflect the prospects for
accelerated earnings/cash flow growth. The Fund invests primarily in common
stocks of domestic companies which are likely to benefit from new or innovative
products, services or processes.
The Utility Fund, Equity Fund and, effective August 1, 1999, Growth/Value Fund
each offer two classes of shares: Class A shares (currently sold subject to a
maximum front-end sales load of 5.75% and a distribution fee of up to 0.25% of
average daily net assets) and Class C shares (currently sold subject to a 1.25%
front-end sales load, a 1% contingent deferred sales load for a one-year period
and a distribution fee of up to 1% of average daily net assets). Each Class A
and Class C share of a Fund represents identical interests in the investment
portfolio of such Fund and has the same rights, except that (i) Class C shares
bear the expenses of higher distribution fees, which is expected to cause Class
C shares to have a higher expense ratio and to pay lower dividends than Class A
shares; (ii) certain other class specific expenses will be borne solely by the
class to which such expenses are attributable; and (iii) each class has
exclusive voting rights with respect to matters relating to its own distribution
arrangements.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the Funds' significant accounting policies:
Security valuation -- The Funds' portfolio securities are valued as of the close
of the regular session of trading on the New York Stock Exchange (currently 4:00
p.m., Eastern time). Portfolio securities traded on stock exchanges and
securities traded in the over-the-counter market are valued at their last sales
price as of the close of the regular session of trading on the day the
securities are being valued. Securities not traded on a particular day, or for
which the last sale price is not readily available, are valued at their last
broker-quoted bid prices as obtained from one or more of the major market makers
for such securities by an independent pricing service. Securities for which
market quotations are not readily available are valued at their fair value as
determined in good faith in accordance with consistently applied procedures
established by and under the general supervision of the Board of Trustees.
Countrywide Investments - 17
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Repurchase agreements -- Repurchase agreements, which are collateralized by U.S.
Government obligations, are valued at cost which, together with accrued
interest, approximates market. Collateral for repurchase agreements is held in
safekeeping in the customer-only account of the Funds' custodian, at the Federal
Reserve Bank of Cleveland. At the time each Fund enters into a repurchase
agreement, the seller agrees that the value of the underlying securities,
including accrued interest, will at all times be equal to or exceed the face
amount of the repurchase agreement.
Share valuation -- The net asset value per share of each class of shares of the
Utility Fund, Equity Fund and Growth/Value Fund is calculated daily by dividing
the total value of a Fund's assets attributable to that class, less liabilities
attributable to that class, by the number of shares of that class outstanding.
The net asset value per share of the Aggressive Growth Fund is calculated daily
by dividing the total value of the Fund's assets, less liabilities, by the
number of shares outstanding.
Effective August 1, 1999, the maximum offering price per share of Class A shares
of the Utility Fund, Equity Fund and Growth/Value Fund and shares of the
Aggressive Growth Fund is equal to the net asset value per share plus a sales
load equal to 6.10% of the net asset value (or 5.75% of the offering price). The
maximum offering price per share of Class C shares of the Utility Fund, Equity
Fund and Growth/Value Fund is equal to the net asset value per share plus a
sales load equal to 1.27% of the net asset value (or 1.25% of the offering
price).
Prior to August 1, 1999, the maximum offering price per share of Class A shares
of the Utility Fund and Equity Fund and shares of the Growth/Value Fund and
Aggressive Growth Fund was equal to the net asset value per share plus a sales
load equal to 4.17% of the net asset value (or 4% of the offering price). The
offering price of Class C shares of the Utility Fund and Equity Fund was equal
to the net asset value per share.
The redemption price per share of a Fund, or of each class of shares of a Fund,
is equal to the net asset value per share. However, Class C shares of the
Utility Fund, Equity Fund and Growth/Value Fund are subject to a contingent
deferred sales load of 1% of the original purchase price if redeemed within a
one-year period from the date of purchase.
Investment income -- Interest income is accrued as earned. Dividend income is
recorded on the ex-dividend date. Discounts and premiums on securities purchased
are amortized in accordance with income tax regulations which approximate
generally accepted accounting principles.
Distributions to shareholders -- Dividends arising from net investment income,
if any, are declared and paid to shareholders quarterly for the Utility Fund and
Equity Fund and annually for the Growth/Value Fund and Aggressive Growth Fund.
With respect to each Fund, net realized short-term capital gains, if any, may be
distributed throughout the year and net realized long-term capital gains, if
any, are distributed at least once each year. Income dividends and capital gain
distributions are determined in accordance with income tax regulations.
Allocations between classes -- Investment income earned, realized capital gains
and losses, and unrealized appreciation and depreciation for the Utility Fund,
Equity Fund and Growth/Value Fund are allocated daily to each class of shares
based upon its proportionate share of total net assets of the Fund. Class
specific expenses are charged directly to the class incurring the expense.
Common expenses which are not attributable to a specific class are allocated
daily to each class of shares based upon its proportionate share of total net
assets of the Fund.
Security transactions -- Security transactions are accounted for on the trade
date. Securities sold are determined on a specific identification basis.
Organization costs -- Costs incurred by the Growth/Value Fund and Aggressive
Growth Fund in connection with their organization and registration of shares,
net of certain expenses, have been capitalized and are being amortized on a
straight-line basis over a five year period beginning with each Fund's
commencement of operations.
Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could differ from those
estimates.
18 - Countrywide Investments
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Federal income tax -- It is each Fund's policy to comply with the special
provisions of the Internal Revenue Code applicable to regulated investment
companies. As provided therein, in any fiscal year in which a Fund so qualifies
and distributes at least 90% of its taxable net income, the Fund (but not the
shareholders) will be relieved of federal income tax on the income distributed.
Accordingly, no provision for income taxes has been made.
In order to avoid imposition of the excise tax applicable to regulated
investment companies, it is also each Fund's intention to declare as dividends
in each calendar year at least 98% of its net investment income (earned during
the calendar year) and 98% of its net realized capital gains (earned during the
twelve months ending October 31) plus undistributed amounts from prior years.
The following information is based upon the federal income tax cost of portfolio
investments (excluding repurchase agreements) as of September 30, 1999:
- -------------------------------------------------------------------------------------
GROWTH/ AGGRESSIVE
UTILITY EQUITY VALUE GROWTH
FUND FUND FUND FUND
- -------------------------------------------------------------------------------------
Gross unrealized appreciation $ 17,684 $ 20,760 $ 10,931 $ 4,908
Gross unrealized depreciation (115) (3,460) (432) (223)
---------------------------------------------------
Net unrealized appreciation $ 17,569 $ 17,300 $ 10,499 $ 4,685
===================================================
Federal income tax cost $ 27,318 $ 40,058 $ 14,742 $ 6,108
===================================================
- -------------------------------------------------------------------------------------
3. INVESTMENT TRANSACTIONS
Investment transactions (excluding short-term investments) were as follows for
the six months ended September 30, 1999:
- -------------------------------------------------------------------------------------
GROWTH/ AGGRESSIVE
UTILITY EQUITY VALUE GROWTH
FUND FUND FUND FUND
- -------------------------------------------------------------------------------------
Purchases of investment
securities $ 1,017 $ 5,638 $ 3,982 $ 822
===================================================
Proceeds from sales and
maturities of investment
securities $ 1,775 $ 603 $ 4,408 $ 2,592
===================================================
- -------------------------------------------------------------------------------------
4. TRANSACTIONS WITH AFFILIATES
The President and certain other officers of the Trust are also officers of
Countrywide Financial Services, Inc., or its subsidiaries which include
Countrywide Investments, Inc. (CII), the Trust's investment adviser or manager
and principal underwriter, and Countrywide Fund Services, Inc. (CFS), the
Trust's administrator, transfer agent and accounting services agent. Countrywide
Financial Services, Inc. is a wholly-owned subsidiary of Fort Washington
Investment Advisors, Inc., which is a wholly-owned subsidiary of The Western and
Southern Life Insurance Company.
MANAGEMENT AGREEMENTS
CII manages the investments of the Utility Fund and Equity Fund and provides
general investment supervisory services for the Growth/Value Fund and Aggressive
Growth Fund under the terms of separate Management Agreements. Under the
Management Agreements, the Utility Fund and Equity Fund each pay CII a fee,
which is computed and accrued daily and paid monthly, at an annual rate of 0.75%
of its respective average daily net assets up to $200 million; 0.70% of such net
assets from $200 million to $500 million; and 0.50% of such net assets in excess
of $500 million. The Growth/Value Fund and Aggressive Growth Fund each pay CII a
fee, which is computed and accrued daily and paid monthly, at an annual rate of
1.00% of its respective average daily net assets up to $50 million; 0.90% of
such net assets from $50 million to $100 million; 0.80% of such net assets from
$100 million to $200 million; and 0.75% of such net assets in excess of $200
million.
Countrywide Investments - 19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Mastrapasqua and Associates, Inc. (Mastrapasqua) has been retained by CII to
manage the investments of the Growth/Value Fund and Aggressive Growth Fund. CII
(not the Funds) pays Mastrapasqua a fee for these services.
In order to voluntarily reduce operating expenses of the Aggressive Growth Fund,
CII waived $24,155 of its investment advisory fees during the six months ended
September 30, 1999.
TRANSFER AGENT AND SHAREHOLDER SERVICE AGREEMENT
Under the terms of the Transfer, Dividend Disbursing, Shareholder Service and
Plan Agency Agreement between the Trust and CFS, CFS maintains the records of
each shareholder's account, answers shareholders' inquiries concerning their
accounts, processes purchases and redemptions of each Fund's shares, acts as
dividend and distribution disbursing agent and performs other shareholder
service functions. For these services, CFS receives a monthly fee at an annual
rate of $17 per shareholder account from each Fund, subject to a $1,000 minimum
monthly fee for each Fund, or for each class of shares of a Fund, as applicable.
In addition, each Fund pays CFS out-of-pocket expenses including, but not
limited to, postage and supplies.
ACCOUNTING SERVICES AGREEMENT
Under the terms of the Accounting Services Agreement between the Trust and CFS,
CFS calculates the daily net asset value per share and maintains the financial
books and records of each Fund. For these services, CFS receives a monthly fee,
based on current net asset levels, of $3,000 from each of the Utility Fund and
Growth/Value Fund, $3,500 from the Equity Fund and $2,000 from the Aggressive
Growth Fund. In addition, each Fund pays CFS certain out-of-pocket expenses
incurred by CFS in obtaining valuations of such Fund's portfolio securities.
UNDERWRITING AGREEMENT
CII is the Funds' principal underwriter and, as such, acts as the exclusive
agent for distribution of the Funds' shares. Under the terms of the Underwriting
Agreement between the Trust and CII, CII earned $4,721, $2,640, $3,654 and $581
from underwriting and broker commissions on the sale of shares of the Utility
Fund, Equity Fund, Growth/Value Fund and Aggressive Growth Fund, respectively,
during the six months ended September 30, 1999. In addition, CII collected $159
and $150 of contingent deferred sales loads on the redemption of Class C shares
of the Utility Fund and Equity Fund, respectively.
PLANS OF DISTRIBUTION
The Trust has a Plan of Distribution (Class A Plan) under which shares of each
Fund having one class of shares and Class A shares of each Fund having two
classes of shares may directly incur or reimburse CII for expenses related to
the distribution and promotion of shares. The annual limitation for payment of
such expenses under the Class A Plan is 0.25% of average daily net assets
attributable to such shares.
The Trust also has a Plan of Distribution (Class C Plan) under which Class C
shares of each Fund having two classes of shares may directly incur or reimburse
CII for expenses related to the distribution and promotion of shares. The annual
limitation for payment of such expenses under the Class C Plan is 1% of average
daily net assets attributable to Class C shares.
CUSTODIAN AGREEMENTS
Firstar Bank, N.A., which serves as the custodian for the Growth/Value Fund and
Aggressive Growth Fund, was a significant shareholder of record of each Fund as
of September 30, 1999. Under the terms of its Custodian Agreements, Firstar Bank
receives from each Fund an asset-based fee plus certain transaction charges.
20 - Countrywide Investments
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
5. CAPITAL SHARE TRANSACTIONS
Proceeds and payments on capital shares as shown in the Statements of Changes in
Net Assets are the result of the following capital share transactions for the
periods shown:
- --------------------------------------------------------------------------------------
UTILITY FUND EQUITY FUND
- --------------------------------------------------------------------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
SEPT. 30, MARCH 31, SEPT. 30, MARCH 31,
1999 1999 1999 1999
- --------------------------------------------------------------------------------------
CLASS A
Shares sold 144 276 411 818
Shares reinvested 23 75 -- 3
Shares redeemed (219) (395) (119) (288)
---------------------------------------------------
Net increase (decrease) in shares
outstanding (52) (44) 292 533
Shares outstanding, beginning
of period 2,489 2,533 2,511 1,978
===================================================
Shares outstanding, end
of period 2,437 2,489 2,803 2,511
===================================================
CLASS C
Shares sold 15 26 14 29
Shares reinvested 1 4 -- --
Shares redeemed (28) (36) (5) (85)
---------------------------------------------------
Net increase (decrease) in shares
outstanding (12) (6) 9 (56)
Shares outstanding, beginning
of period 209 215 144 200
---------------------------------------------------
Shares outstanding, end of period 197 209 153 144
===================================================
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
GROWTH/VALUE FUND AGGRESSIVE GROWTH FUND
- --------------------------------------------------------------------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
SEPT. 30, MARCH 31, SEPT. 30, MARCH 31,
1999 1999 1999 1999
- --------------------------------------------------------------------------------------
CLASS A
Shares sold 296 264 112 216
Shares reinvested -- 150 -- 64
Shares redeemed (415) (761) (244) (535)
---------------------------------------------------
Net decrease in shares
outstanding (119) (347) (132) (255)
Shares outstanding, beginning
of period 1,410 1,757 725 980
---------------------------------------------------
Shares outstanding, end of period 1,291 1,410 593 725
===================================================
CLASS C
Shares sold 24 --
Shares reinvested -- --
Shares redeemed (1) --
------------------------
Net increase in shares outstanding 23 --
Shares outstanding, beginning
of period -- --
------------------------
Shares outstanding, end of period 23 --
========================
- ------------------------------------------------------------------------------------
Countrywide Investments - 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
6. BORROWINGS
The Growth/Value Fund and Aggressive Growth Fund each have a Loan Agreement with
Firstar Bank, N.A., to be used for temporary or emergency purposes, including
the financing of capital share redemption requests that might otherwise require
the untimely disposition of securities. The Loan Agreements permit borrowings up
to a maximum principal amount outstanding not to exceed the lesser of $1,500,000
for the Growth/Value Fund and $3,000,000 for the Aggressive Growth Fund or
certain other amounts which are calculated based upon the amounts and
composition of assets in each Fund as defined in the Loan Agreement. Each Fund
agrees to pay interest on any unpaid principal balance at prevailing market
rates as defined in the Loan Agreement.
As of September 30, 1999, neither Fund had outstanding borrowings under the Loan
Agreement. The maximum amount outstanding during the six months ended September
30, 1999 for the Aggressive Growth Fund was $1,400,000 at a weighted average
interest rate of 7.82%. For the six months ended September 30, 1999, the
Aggressive Growth Fund incurred, and CII reimbursed, $19,835 of interest expense
on such borrowings.
22 - Countrywide Investments
UTILITY FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1999 (UNAUDITED)
- ---------------------------------------------------------------------------------------
MARKET
VALUE
COMMON STOCKS -- 95.1% SHARES (000's)
- ---------------------------------------------------------------------------------------
TELECOMMUNICATIONS -- 42.1%
Ameritech Corp. 40,000 $ 2,687
AT&T Corp. 45,000 1,958
Bell Atlantic Corp. 50,000 3,366
BellSouth Corp. 75,000 3,375
GTE Corp. 45,000 3,459
Lucent Technologies, Inc. 38,888 2,523
Nortel Networks Corp. 30,000 1,530
----------
$ 18,898
----------
ELECTRIC UTILITIES -- 40.9%
AES Corp.* 45,000 $ 2,655
Cinergy Corp. 50,000 1,416
Cleco Corp. 30,000 973
CMS Energy Corp. 60,000 2,036
Constellation Energy Group 50,050 1,408
DPL, Inc. 75,000 1,322
Duke Power Co. 42,000 2,315
FPL Group, Inc. 45,000 2,267
Kansas City Power & Light Co. 50,000 1,209
Northern States Power Co. 60,000 1,294
Scana Corp. 60,000 1,451
----------
$ 18,346
----------
GAS COMPANIES -- 7.6%
MCN Corp. 70,000 $ 1,203
Oneok, Inc. 25,000 758
Wicor, Inc. 50,000 1,453
----------
$ 3,414
----------
WATER COMPANIES -- 4.5%
American Water Works, Inc. 70,000 $ 2,025
----------
Total Common Stocks (Cost $25,121) $ 42,683
----------
- ---------------------------------------------------------------------------------------
PAR MARKET
VALUE VALUE
CORPORATE BONDS -- 2.4% (000's) (000's)
- ---------------------------------------------------------------------------------------
New York Telephone Co., 9.375%, 7/15/31
(Amortized Cost $1,087) $ 1,000 $ 1,094
========== ----------
Countrywide Investments - 23
UTILITY FUND (CONTINUED)
- ---------------------------------------------------------------------------------------
PAR MARKET
VALUE VALUE
COMMERCIAL PAPER -- 2.5% (000's) (000's)
- ---------------------------------------------------------------------------------------
BP America, 10/01/99 (Amortized Cost $1,110) $ 1,110 $ 1,110
========== ----------
TOTAL INVESTMENT SECURITIES-- 100.0% (Amortized Cost $27,318) $ 44,887
LIABILITIES IN EXCESS OF OTHER ASSETS-- (0.0%) (20)
----------
NET ASSETS-- 100.0% $ 44,867
==========
* Non-income producing security.
See accompanying notes to financial statements.
24 - Countrywide Investments
EQUITY FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1999 (UNAUDITED)
- ---------------------------------------------------------------------------------------
MARKET
VALUE
COMMON STOCKS -- 89.9% SHARES (000's)
- ---------------------------------------------------------------------------------------
CONSUMER, NON-CYCLICAL -- 25.6%
Abbott Laboratories 45,000 $ 1,654
Albertson's, Inc. 30,000 1,187
American Home Products Corp. 20,000 830
Johnson & Johnson 22,000 2,021
Medtronic, Inc. 60,000 2,130
Merck & Co., Inc. 20,000 1,296
Newell Rubbermaid, Inc. 30,000 857
PepsiCo, Inc. 35,000 1,059
Pfizer, Inc. 60,000 2,156
Procter & Gamble Co. 25,000 2,344
Sara Lee Corp. 34,000 797
----------
$ 16,331
----------
TECHNOLOGY -- 24.4%
Compaq Computer Corp. 40,000 $ 918
Hewlett-Packard Co. 17,500 1,610
Intel Corp. 40,000 2,973
Lucent Technologies, Inc. 7,776 504
MCI WorldCom, Inc.* 22,000 1,581
Motorola, Inc. 9,000 792
Nortel Networks Corp. 50,000 2,550
Sun Microsystems, Inc.* 50,000 4,650
----------
$ 15,578
----------
FINANCIAL SERVICES -- 14.5%
AFLAC, Inc. 40,000 $ 1,675
American International Group 20,625 1,793
Bank of New York Co., Inc. 60,000 2,006
Freddie Mac 30,000 1,560
Horace Mann Educators Corp. 40,000 1,032
Wells Fargo Co. 30,000 1,189
----------
$ 9,255
----------
CONSUMER, CYCLICAL -- 11.5%
Gap, Inc. 67,500 $ 2,160
Mattel, Inc. 55,000 1,045
McDonald's Corp. 46,000 1,978
The TJX Companies, Inc. 40,000 1,123
The Walt Disney Co. 39,000 1,009
----------
$ 7,315
----------
ENERGY -- 5.6%
Apache Corp. 35,000 $ 1,512
Enron Corp. 50,000 2,062
----------
$ 3,574
----------
CONGLOMERATES -- 3.1%
General Electric Co. 17,000 $ 2,015
----------
Countrywide Investments - 25
EQUITY FUND (CONTINUED)
- ---------------------------------------------------------------------------------------
MARKET
VALUE
COMMON STOCKS -- 89.9% (CONTINUED) SHARES (000's)
- ---------------------------------------------------------------------------------------
INDUSTRIAL -- 2.8%
Diebold, Inc. 30,000 $ 694
Emerson Electric Co. 17,000 1,074
----------
$ 1,768
----------
BASIC MATERIALS -- 2.4%
duPont (E.I.) de Nemours & Co. 25,000 $ 1,522
----------
TOTAL COMMON STOCKS (Cost $40,058) $ 57,358
----------
- ---------------------------------------------------------------------------------------
FACE MARKET
VALUE VALUE
REPURCHASE AGREEMENTS(1) -- 10.1% (000's) (000's)
- ---------------------------------------------------------------------------------------
Nesbitt Burns Securities, Inc., 5.05%, dated 9/30/99,
due 10/01/99, repurchase proceeds $6,411 (Cost $6,410) $ 6,410 $ 6,410
========== ----------
TOTAL COMMON STOCKS AND REPURCHASE AGREEMENTS-- 100.0% $ 63,768
LIABILITIES IN EXCESS OF OTHER ASSETS-- (0.0%) (7)
----------
NET ASSETS-- 100.0% $ 63,761
==========
* Non-income producing security.
(1) Repurchase agreements are fully collateralized by U.S. Government
obligations.
See accompanying notes to financial statements.
26 - Countrywide Investments
GROWTH/VALUE FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1999 (UNAUDITED)
- ---------------------------------------------------------------------------------------
MARKET
VALUE
COMMON STOCKS -- 97.8% SHARES (000's)
- ---------------------------------------------------------------------------------------
TECHNOLOGY -- 57.9%
Applied Materials, Inc.* 21,000 $ 1,635
Compuware Corp.* 20,000 521
EMC Corp.* 22,000 1,572
Intel Corp. 12,000 892
International Business Machines Corp. (IBM) 7,000 850
Novell, Inc.* 89,000 1,841
Oracle Corp.* 57,750 2,628
Sun Microsystems, Inc.* 40,000 3,720
Teradyne, Inc.* 11,600 409
Texas Instruments, Inc. 6,000 494
----------
$ 14,562
----------
HEALTH CARE -- 20.6%
Amgen, Inc.* 10,000 $ 815
Bristol-Myers Squibb Co. 16,000 1,080
IDEC Pharmaceuticals Corp.* 4,700 442
Merck & Co., Inc. 7,000 454
PE Corp. - PE Biosystems Group 10,000 722
Pharmacia & Upjohn, Inc. 16,000 794
Schering-Plough Corp. 20,000 873
----------
$ 5,180
----------
AEROSPACE/DEFENSE -- 4.8%
General Dynamics Corp. 11,200 $ 699
Northrop Grumman Corp. 8,000 509
----------
$ 1,208
----------
ENTERTAINMENT -- 4.3%
Carnival Corp. - Class A 25,000 $ 1,087
----------
FINANCIAL SERVICES -- 3.7%
Concord EFS, Inc.* 44,550 $ 919
----------
RETAIL -- 2.4%
CVS Corp. 15,000 $ 612
----------
UTILITIES -- 1.8%
Montana Power Co. 15,000 $ 456
----------
TELECOMMUNICATIONS -- 1.6%
Broadcom Corp. - Class A* 3,600 $ 392
----------
TRANSPORTATION -- 0.7%
MotivePower Industries, Inc.* 15,000 $ 165
----------
TOTAL COMMON STOCKS (Cost $14,082) $ 24,581
----------
Countrywide Investments - 27
GROWTH/VALUE FUND (CONTINUED)
- ---------------------------------------------------------------------------------------
PAR MARKET
VALUE VALUE
U. S. GOVERNMENT AGENCY ISSUES-- 2.6% (000's) (000's)
- ---------------------------------------------------------------------------------------
FNMA Discount Note, 10/01/99 (Amortized Cost $660) $ 660 $ 660
========== ----------
TOTAL INVESTMENT SECURITIES-- 100.4% (Amortized Cost $14,742) $ 25,241
LIABILITIES IN EXCESS OF OTHER ASSETS-- (0.4%) (106)
----------
NET ASSETS-- 100.0% $ 25,135
==========
* Non-income producing security.
See accompanying notes to financial statements.
28 - Countrywide Investments
AGGRESSIVE GROWTH FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1999 (UNAUDITED)
- ---------------------------------------------------------------------------------------
MARKET
VALUE
COMMON STOCKS -- 100.9% SHARES (000's)
- ---------------------------------------------------------------------------------------
TECHNOLOGY -- 58.7%
Compuware Corp.* 25,000 $ 652
EMC Corp.* 10,000 714
Intel Corp. 9,000 669
Novell, Inc.* 50,000 1,034
Oracle Corp.* 16,875 768
SMART Modular Technologies, Inc.* 30,000 1,022
Sun Microsystems, Inc.* 10,000 930
Teradyne, Inc.* 14,000 493
----------
$ 6,282
----------
HEALTH CARE -- 25.5%
Amgen, Inc.* 6,000 $ 489
Biogen, Inc.* 8,000 631
Elan Corp. plc - ADR* 6,000 201
Genentech, Inc.* 3,500 512
IDEC Pharmaceuticals Corp.* 1,800 169
PE Corp. - PE Biosystems Group 3,800 275
Pharmacia & Upjohn, Inc. 9,000 447
----------
$ 2,724
----------
TELECOMMUNICATIONS -- 6.2%
JDS Uniphase Corp.* 5,800 $ 660
----------
ENTERTAINMENT -- 4.0%
Carnival Corp. - Class A 10,000 $ 435
----------
RETAIL -- 3.8%
CVS Corp. 5,500 $ 224
Shop at Home, Inc.* 20,000 180
----------
$ 404
----------
TRANSPORTATION -- 2.7%
MotivePower Industries, Inc.* 7,500 $ 83
Southwest Airlines Co. 13,500 205
----------
$ 288
----------
TOTAL COMMON STOCKS-- 100.9% (COST $6,108) $ 10,793
LIABILITIES IN EXCESS OF OTHER ASSETS-- (0.9%) (101)
----------
NET ASSETS-- 100.0% $ 10,692
==========
* Non-income producing security.
ADR - American depository receipt.
See accompanying notes to financial statements.
Countrywide Investments - 29
RESULTS OF SPECIAL MEETING OF SHAREHOLDERS
OCTOBER 27, 1999
- --------------------------------------------------------------------------------
On October 27, 1999, a Special Meeting of Shareholders of Countrywide Strategic
Trust (the Trust) was held (1) to approve or disapprove new investment advisory
agreements with Countrywide Investments, Inc., (2) to approve or disapprove new
subadvisory agreements with Mastrapasqua & Associates, Inc. with respect to the
Growth/Value Fund and Aggressive Growth Fund, (3) to elect nine trustees and (4)
to ratify or reject the selection of Arthur Andersen LLP as the Trust's
independent public accountants for the fiscal year ending March 31, 2000. The
total number of shares of the Trust present by proxy represented 68.0% of the
shares entitled to vote at the meeting. Each of the matters submitted to
shareholders was approved.
The results of the voting for or against the approval of the new investment
advisory agreements by each Fund was as follows:
- ------------------------------------------------------------------------------------
NUMBER OF SHARES
---------------------------------------------------
FOR AGAINST ABSTAIN
- ------------------------------------------------------------------------------------
Utility Fund 1,419,359.227 10,442.268 31,261.879
Equity Fund 2,024,821.656 2,420.277 27,228.625
Growth/Value Fund 974,237.511 1,312.205 6,067.362
Aggressive Growth Fund 459,393.774 599.476 335.120
- ------------------------------------------------------------------------------------
The results of the voting for or against the approval of the new subadvisory
agreements by the Growth/Value Fund and Aggressive Growth Fund was as follows:
- ------------------------------------------------------------------------------------
NUMBER OF SHARES
---------------------------------------------------
FOR AGAINST ABSTAIN
- ------------------------------------------------------------------------------------
Growth/Value Fund 973,087.560 2,386.459 6,143.059
Aggressive Growth Fund 459,313.695 599.476 415.199
- ------------------------------------------------------------------------------------
The results of the voting for the election of trustees was as follows:
- ------------------------------------------------------------------------------------
WITHHOLD
NOMINEES FOR ELECTION AUTHORITY STATUS
- ------------------------------------------------------------------------------------
William O. Coleman 4,916,862.312 40,617.068 New Trustee
Phillip R. Cox 4,916,658.805 40,820.575 New Trustee
H. Jerome Lerner 4,916,063.001 41,416.379 Incumbent
Robert H. Leshner 4,916,862.312 40,617.068 Incumbent
Jill T. McGruder 4,916,648.817 40,830.563 New Trustee
Oscar P. Robertson 4,907,373.918 50,105.462 Incumbent
Nelson Schwab, Jr. 4,915,206.854 42,272.526 New Trustee
Robert E. Stautberg 4,916,862.312 40,617.068 New Trustee
Joseph S. Stern, Jr. 4,907,945.634 49,533.746 New Trustee
- ------------------------------------------------------------------------------------
The results of the voting for or against the ratification of Arthur Andersen LLP
as independent public accountants by each Fund was as follows:
- ------------------------------------------------------------------------------------
NUMBER OF SHARES
FOR AGAINST ABSTAIN
- ------------------------------------------------------------------------------------
Utility Fund 1,430,679.854 2,814.237 27,569.283
Equity Fund 2,029,342.815 1,044.546 24,083.197
Growth/Value Fund 975,459.363 3,725.603 2,432.112
Aggressive Growth Fund 457,754.758 2,176.928 396.684
- ------------------------------------------------------------------------------------
30 - Countrywide Investments
This Page Intentionally Left Blank.
Countrywide Investments - 31
COUNTRYWIDE STRATEGIC TRUST
- --------------------------------------------------------------------------------
312 Walnut St., 21st Floor
Cincinnati, Ohio 45202-4094
www.countrywideinvestments.com
Nationwide: (Toll Free) 800-543-8721
Cincinnati: 629-2000
Rate Line: 579-0999
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
Nationwide: (Toll Free) 800-543-0407
Cincinnati: 629-2050
BOARD OF TRUSTEES
- --------------------------------------------------------------------------------
William O. Coleman
Phillip R. Cox
H. Jerome Lerner
Robert H. Leshner
Jill T. McGruder
Oscar P. Robertson
Nelson Schwab, Jr.
Robert E. Stautberg
Joseph S. Stern, Jr.
INVESTNEMT ADVISER/MANAGER
- --------------------------------------------------------------------------------
Countrywide Investments, Inc.
312 Walnut St., 21st Floor
Cincinnati, Ohio 45202-4094
TRANSFER AGENT
- --------------------------------------------------------------------------------
Countrywide Fund Services, Inc.
P.O. Box 5354
Cincinnati, Ohio 45201-5354
This report is authorized for distribution only when it is accompanied or
preceded by a current prospectus of Countrywide Strategic Trust.
Pro Forma Unaudited Financial Statements
INTRODUCTORY PARAGRAPH
The proposed reorganization of the Touchstone Funds includes the merger of
Touchstone Value Plus Fund and Touchstone Growth & Income Fund into a new series
of Countrywide Strategic Trust ("New Value Plus Fund"). Touchstone Value Plus
Fund and Touchstone Growth & Income Fund are series of Touchstone Series Trust.
Touchstone Series Trust is a registered open-end investment company. It is
organized as a Massachusetts business trust. The New Value Plus Fund is a series
of Countrywide Strategic Trust. Countrywide Strategic Trust is a registered
open-end investment company. It is organized as a Massachusetts business trust.
In the reorganization, Touchstone Series Trust will transfer all of the assets
of Touchstone Value Plus Fund, subject to its liabilities, to New Value Plus
Fund and all of the assets of Touchstone Growth & Income Fund, subject to its
liabilities, to New Value Plus Fund. Class A shares of New Value Plus Fund that
Touchstone Series Trust receives in the exchange will be distributed pro rata to
Class A shareholders of Touchstone Value Plus Fund and Class A shareholders of
Touchstone Growth & Income Fund. Class C shares of New Value Plus Fund that
Touchstone Series Trust receives in the exchange will be distributed pro rata to
Class C shareholders of Touchstone Value Plus Fund and Class C shareholders of
Touchstone Growth & Income Fund. After the exchange, Touchstone Value Plus Fund
and Touchstone Growth & Income Fund will be dissolved. As a result of the
reorganization, each shareholder of Class A or Class C shares of Touchstone
Value Plus Fund and each shareholder of Class A or Class C shares of Touchstone
Growth & Income Fund will own shares of the corresponding class of New Value
Plus Fund equal in value to the shares of the applicable Touchstone Fund that he
owns immediately before the reorganization.
The Western and Southern Life Insurance Company Separate Account A is the only
shareholder of Class Y shares of Touchstone Growth & Income Fund. This
shareholder has informed Touchstone Advisors that it intends to redeem its
shares of the Touchstone Growth & Income Fund before the completion of the
reorganization. Therefore, no Class Y shares of the New Value Plus Fund will be
issued in the reorganization.
The pro forma unaudited combining statements of assets and liabilities reflect
the financial position of the merged funds as though the reorganization occurred
on December 31, 1999. The pro forma unaudited statement of operations reflects
the results of operations of the merged fund as though the Reorganization
occurred at the beginning of the period presented. The pro forma unaudited
Schedule of Investments is presented as though the reorganization occurred on
December 31, 1999.
GROWTH & INCOME FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
VALUE
SHARES (NOTE 1)
- ------- ------------
COMMON STOCKS - 98.0%
AEROSPACE & DEFENSE - 2.8%
17,600 Lockheed Martin ............................. $ 385,000
5,500 Northrop Grumman ............................ 297,344
7,200 Rockwell International ...................... 344,700
------------
1,027,044
------------
AIRLINES - 0.6%
3,400 AMR* ........................................ 227,800
------------
AUTOMOTIVE - 1.9%
7,200 Ford Motor .................................. 384,750
8,500 Meritor Automotive .......................... 164,688
3,500 Paccar ...................................... 155,094
------------
704,532
------------
BANKING - 8.7%
12,000 Bank of America ............................. 602,250
9,500 Chase Manhattan ............................. 738,031
8,962 First Union ................................. 294,066
14,700 FleetBoston Financial ....................... 511,744
13,500 PNC Bank .................................... 600,750
17,300 US Bancorp .................................. 411,956
------------
3,158,797
------------
BEVERAGES, FOOD & TOBACCO - 3.5%
8,500 Heinz (H. J.) ............................... 338,406
19,500 Pepsico ..................................... 687,375
10,500 Philip Morris ............................... 243,469
------------
1,269,250
------------
CHEMICALS - 1.3%
5,900 Air Products & Chemicals .................... 198,019
1 Du Pont (E.I.) De Nemours ................... 66
21,500 Lyondell Petro Chemical ..................... 274,125
------------
472,210
------------
COMPUTER SOFTWARE & PROCESSING - 3.4%
8,900 Cadence Design Systems* ..................... 213,600
14,600 Computer Associates International ........... 1,021,088
------------
1,234,688
------------
The accompanying notes are an integral part of the financial statements.
GROWTH & INCOME FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
VALUE
SHARES (NOTE 1)
- ------- ------------
COSMETICS & PERSONAL CARE - 1.2%
6,400 Colgate-Palmolive ........................... 416,000
------------
ELECTRIC UTILITIES - 2.8%
5,600 Cinergy ..................................... 135,100
10,672 ScottishPower, ADR .......................... 298,816
17,000 Unicom ...................................... 569,500
------------
1,003,416
------------
ELECTRICAL EQUIPMENT - 0.9%
5,700 Emerson Electric ............................ 327,038
------------
ELECTRONICS - 2.5%
6,700 Koninklijke (Royal) Philips Electronics (NY Reg.) 904,500
------------
FINANCIAL SERVICES - 9.6%
17,600 Citigroup ................................... 977,900
10,400 Federal National Mortgage Association ....... 649,350
3,000 J.P. Morgan ................................. 379,875
6,100 Lehman Brothers Holdings .................... 516,594
4,000 Morgan Stanley Dean Witter .................. 571,000
8,500 SLM Holding ................................. 359,125
------------
3,453,844
------------
FOOD RETAILERS - 0.7%
7,963 Albertson's ................................. 256,807
------------
FOREST PRODUCTS & PAPER - 2.1%
4,900 Georgia-Pacific ............................. 248,675
7,100 Weyerhauser ................................. 509,869
------------
758,544
------------
HEAVY MACHINERY - 1.7%
11,700 Parker Hannifin ............................. 600,356
------------
HOME CONSTRUCTION, FURNISHINGS & APPLIANCES - 1.7%
3,900 General Electric ............................ 603,525
------------
HOUSEHOLD PRODUCTS - 5.5%
15,300 Corning ..................................... 1,972,744
------------
The accompanying notes are an integral part of the financial statements.
GROWTH & INCOME FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
VALUE
SHARES (NOTE 1)
- ------- ------------
INSURANCE - 7.9%
19,800 Allstate Corporation (The) .................. 475,200
18,200 Lincoln National ............................ 728,000
5,800 Marsh & McLennan Companies .................. 554,988
15,600 St. Paul Companies (The) .................... 525,525
10,870 XL Capital, Class A ......................... 563,881
------------
2,847,594
------------
MEDIA - BROADCASTING & PUBLISHING - 1.6%
9,500 McGraw-Hill Companies (The) ................. 585,438
------------
METALS - 0.8%
9,050 Allegheny Technologies ...................... 203,059
10,200 Oregon Steel Mills .......................... 80,963
------------
284,022
------------
OIL & GAS - 11.4%
9,700 Burlington Resources ........................ 320,706
12,300 Conoco, Class A ............................. 304,425
11,546 Conoco, Class B ............................. 287,207
18,240 Exxon Mobil ................................. 1,469,453
7,000 Royal Dutch Petroleum ....................... 423,063
9,600 Texaco ...................................... 521,400
8,233 Total Fina S.A., ADR ........................ 570,135
7,600 Williams Companies (The) .................... 232,275
------------
4,128,664
------------
PHARMACEUTICALS - 3.8%
17,400 American Home Products ...................... 686,213
5,300 Bristol-Myers Squibb ........................ 340,194
6,400 Glaxo Wellcome, ADR ......................... 357,600
------------
1,384,007
------------
RETAILERS - 1.2%
6,000 Dayton Hudson ............................... 440,625
------------
TELEPHONE SYSTEMS - 17.6%
8,100 Alltel ...................................... 669,769
16,300 AT&T ........................................ 827,225
20,900 Bell Atlantic ............................... 1,286,656
22,600 BellSouth ................................... 1,057,963
6,540 Global Crossing* ............................ 327,000
7,600 GTE ......................................... 536,275
21,332 SBC Communications .......................... 1,039,935
8,700 Sprint ...................................... 585,619
------------
6,330,442
------------
The accompanying notes are an integral part of the financial statements.
GROWTH & INCOME FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
VALUE
SHARES (NOTE 1)
- ------- ------------
TRANSPORTATION - 2.8%
11,200 Canadian National Railway ................... 294,700
16,500 CSX ......................................... 517,688
9,000 Norfolk Southern ............................ 184,500
------------
996,888
------------
TOTAL COMMON STOCKS (COST $34,115,658) 35,388,775
------------
CONVERTIBLE PREFERRED STOCKS - 0.5%
CHEMICALS - 0.5%
5,900 Monsanto, ACES .............................. 195,438
------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $266,258) 195,438
------------
TOTAL INVESTMENTS AT VALUE - 98.5%
(COST $34,381,916) (a) 35,584,213
CASH AND OTHER ASSETS NET OF LIABILITIES - 1.5% 546,605
------------
NET ASSETS - 100.0% $ 36,130,818
============
- -----------------------------------
NOTES TO THE SCHEDULE OF INVESTMENTS:
* Non-income producing security.
(a) The aggregate identified cost for federal income tax purposes is $xxx
resulting in gross unrealized appreciation and depreciation of $xxx and
$xxx, respectively, and net unrealized depreciation of $xxx.
ACES - Adjustable Conversion-Rate Equity Security
ADR - American Depository Receipt
The accompanying notes are an integral part of the financial statements.
Before Merger
VALUE PLUS FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
SHARES VALUE
COMMON STOCKS - 96.7%
ADVERTISING - 2.2%
12,100 Interpublic Group of Companies (The) ........... $ 698,019
------------
AEROSPACE & DEFENSE - 2.1%
11,800 Honeywell International ........................ 680,713
------------
AUTOMOTIVE - 1.7%
13,000 Magna International, Class A ................... 550,875
------------
BANKING - 3.2%
13,706 Bank One ....................................... 439,449
4,000 Chase Manhattan ................................ 310,750
16,500 North Fork Bancorporation ...................... 288,750
------------
1,038,949
------------
BEVERAGES, FOOD & TOBACCO - 3.8%
15,800 McCormick & Company ............................ 470,050
21,200 Pepsico ........................................ 747,300
------------
1,217,350
------------
COMMUNICATIONS - 3.5%
11,200 Nortel Networks ................................ 1,131,200
------------
COMPUTER SOFTWARE & PROCESSING - 8.5%
29,500 Ceridian* ...................................... 636,094
9,400 Computer Associates International .............. 657,413
32,100 Compuware* ..................................... 1,195,716
5,400 First Data ..................................... 266,288
------------
2,755,511
------------
COMPUTERS & INFORMATION - 9.2%
6,400 Hewlett-Packard ................................ 729,200
6,700 International Business Machines ................ 723,600
10,200 Lexmark International Group, Class A* .......... 923,100
8,200 Sun Microsystems* .............................. 634,988
------------
3,010,888
------------
ELECTRIC UTILITIES - 1.6%
16,600 CMS Energy ..................................... 517,713
------------
The accompanying notes are an integral part of the financial statements.
VALUE PLUS FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
SHARES VALUE
ELECTRICAL EQUIPMENT - 0.7%
6,600 Thomas & Betts ................................. 210,375
------------
ELECTRONICS - 2.1%
8,200 Intel .......................................... 674,963
------------
FINANCIAL SERVICES - 7.1%
14,550 Citigroup ...................................... 808,434
5,600 Federal Home Loan Mortgage Corporation ......... 263,550
11,600 Federal National Mortgage Association .......... 724,275
11,500 SLM Holding .................................... 485,875
------------
2,282,134
------------
FOOD RETAILERS - 1.4%
13,860 Albertson's .................................... 446,985
------------
FOREST PRODUCTS & PAPER - 5.4%
16,400 Kimberly-Clark ................................. 1,070,100
15,700 Mead ........................................... 681,969
------------
1,752,069
------------
HEALTH CARE PROVIDERS - 1.3%
26,400 Manor Care* .................................... 422,400
------------
HEAVY MACHINERY - 2.9%
3,300 Applied Materials* ............................. 418,069
9,400 Ingersoll-Rand ................................. 517,588
------------
935,657
------------
HOME CONSTRUCTION, FURNISHINGS & APPLIANCES - 2.0%
4,200 General Electric ............................... 649,950
------------
INSURANCE - 4.6%
5,000 Aetna .......................................... 279,063
18,600 AXA Financial .................................. 630,075
14,800 Reliastar Financial ............................ 579,975
------------
1,489,113
------------
MEDICAL SUPPLIES - 2.2%
4,500 Baxter International ........................... 282,656
16,300 Becton Dickinson & Company ..................... 436,025
The accompanying notes are an integral part of the financial statements.
VALUE PLUS FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
SHARES VALUE
------------
718,681
------------
METALS - 1.9%
24,000 Masco .......................................... 609,000
------------
OIL & GAS - 7.8%
22,800 Conoco, Class A ................................ 564,300
7,857 Exxon Mobil .................................... 632,980
7,900 Schlumberger ................................... 444,375
17,300 Tosco .......................................... 470,344
1,529 Transocean Sedco Forex ......................... 51,523
11,500 Williams Companies (The) ....................... 351,469
------------
2,514,991
------------
PHARMACEUTICALS - 7.1%
14,600 Abbott Laboratories ............................ 530,163
10,600 Amgen* ......................................... 636,663
11,900 Cardinal Health ................................ 569,713
8,200 Merck .......................................... 549,913
------------
2,286,452
------------
RETAILERS - 3.1%
8,500 Federated Department Stores* ................... 429,781
51,000 Office Depot* .................................. 557,813
------------
987,594
------------
TELEPHONE SYSTEMS - 10.2%
9,600 Alltel ......................................... 793,800
9,100 Bell Atlantic .................................. 560,219
13,810 Global Crossing* ............................... 690,500
10,800 MCI WorldCom* .................................. 573,075
14,900 SBC Communications ............................. 726,375
------------
3,343,969
------------
TRANSPORTATION - 1.1%
3,700 US Freightways ................................. 177,138
13,700 Wisconsin Central Transport* ................... 184,094
------------
361,232
------------
TOTAL COMMON STOCKS (COST $27,959,720) 31,286,783
------------
TOTAL INVESTMENTS AT VALUE - 96.7%
The accompanying notes are an integral part of the financial statements.
VALUE PLUS FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
SHARES VALUE
(COST $27,959,720) 31,286,783
CASH AND OTHER ASSETS NET OF LIABILITIES - 3.3% 1,069,218
------------
NET ASSETS - 100.0% $ 32,356,001
============
- ------------------------------------------
Notes to the Schedule of Investments:
* Non-income producing security.
The accompanying notes are an integral part of the financial statements.
NEW VALUE PLUS FUND
COMBINED SCHEDULE OF INVESTMENTS (UNAUDITED)
DECEMBER 31, 1999
SHARES VALUE
COMMON STOCKS - 97.3%
ADVERTISING - 1.0%
Interpublic Group of Companies (The) ............. 12,100 $ 698,019
- --------------------------------------------------------------------------------
AEROSPACE & DEFENSE - 2.5%
Honeywell International .......................... 11,800 680,713
Lockheed Martin .................................. 17,600 385,000
Northrop Grumman ................................. 5,500 297,344
Rockwell International ........................... 7,200 344,700
- --------------------------------------------------------------------------------
1,707,757
- --------------------------------------------------------------------------------
AIRLINES - 0.3%
AMR * ............................................ 3,400 227,800
- --------------------------------------------------------------------------------
AUTOMOTIVE - 1.8%
Ford Motor ....................................... 7,200 384,750
Magna International, Class A ..................... 13,000 550,875
Meritor Automotive ............................... 8,500 164,688
Paccar ........................................... 3,500 155,094
- --------------------------------------------------------------------------------
1,255,407
- --------------------------------------------------------------------------------
BANKING - 8.7%
Bank of America .................................. 12,000 602,250
Bank One ......................................... 13,706 439,449
Chase Manhattan .................................. 13,500 1,048,781
Citigroup ........................................ 32,150 1,786,334
First Union ...................................... 8,962 294,066
FleetBoston Financial ............................ 14,700 511,744
North Fork Bancorporation ........................ 16,500 288,750
PNC Bank ......................................... 13,500 600,750
US Bancorp ....................................... 17,300 411,956
- --------------------------------------------------------------------------------
5,984,080
- --------------------------------------------------------------------------------
BEVERAGES, FOOD & TOBACCO - 3.6%
Heinz (H. J.) .................................... 8,500 338,406
McCormick & Company .............................. 15,800 470,050
Pepsico .......................................... 40,700 1,434,675
Philip Morris .................................... 10,500 243,469
- --------------------------------------------------------------------------------
2,486,600
- --------------------------------------------------------------------------------
CHEMICALS - 0.7%
Air Products & Chemicals ......................... 5,900 198,019
Du Pont (E.I.) De Nemours ........................ 1 66
Lyondell Petro Chemical .......................... 21,500 274,125
- --------------------------------------------------------------------------------
472,210
- --------------------------------------------------------------------------------
COMMERCIAL SERVICES - 0.8%
Unicom ........................................... 17,000 569,500
- --------------------------------------------------------------------------------
COMMUNICATIONS - 7.5%
Nortel Networks .................................. 11,200 1,131,200
Cadence Design Systems* .......................... 8,900 213,600
Ceridian * ....................................... 29,500 636,094
Computer Associates International ................ 24,000 1,678,501
Compuware * ...................................... 32,100 1,195,716
First Data ....................................... 5,400 266,288
- --------------------------------------------------------------------------------
5,121,399
- --------------------------------------------------------------------------------
COMPUTERS & INFORMATION - 4.4%
Hewlett-Packard .................................. 6,400 729,200
International Business Machines .................. 6,700 723,600
Lexmark International Group, Class A* ............ 10,200 923,100
Sun Microsystems* ................................ 8,200 634,988
- --------------------------------------------------------------------------------
3,010,888
- --------------------------------------------------------------------------------
COSMETICS & PERSONAL CARE - 0.6%
Colgate-Palmolive ................................ 6,400 416,000
- --------------------------------------------------------------------------------
ELECTRIC UTILITIES - 1.4%
Cinergy .......................................... 5,600 135,100
CMS Energy ....................................... 16,600 517,713
ScottishPower, ADR ............................... 10,672 298,816
- --------------------------------------------------------------------------------
951,629
- --------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT - 0.8%
Emerson Electric ................................. 5,700 327,038
Thomas & Betts ................................... 6,600 210,375
- --------------------------------------------------------------------------------
537,413
- --------------------------------------------------------------------------------
ELECTRONICS - 2.3%
Intel ............................................ 8,200 674,963
Koninklijke (Royal) Philips Electronics (NY Reg.) 6,700 904,500
- --------------------------------------------------------------------------------
1,579,463
- --------------------------------------------------------------------------------
FINANCIAL SERVICES - 5.8%
Federal Home Loan Mortgage Corporation ........... 5,600 263,550
Federal National Mortgage Association ............ 22,000 1,373,625
J.P. Morgan ...................................... 3,000 379,875
Lehman Brothers Holdings ......................... 6,100 516,594
Morgan Stanley Dean Witter ....................... 4,000 571,000
SLM Holding ...................................... 20,000 845,000
- --------------------------------------------------------------------------------
3,949,644
- --------------------------------------------------------------------------------
FOOD RETAILERS - 1.0%
Albertson's ...................................... 21,823 703,792
- --------------------------------------------------------------------------------
FOREST PRODUCTS & PAPER - 3.7%
Georgia-Pacific .................................. 4,900 248,675
Kimberly-Clark ................................... 16,400 1,070,100
Mead ............................................. 15,700 681,969
Weyerhauser ...................................... 7,100 509,869
- --------------------------------------------------------------------------------
2,510,613
- --------------------------------------------------------------------------------
HEALTH CARE PROVIDERS - 0.6%
Manor Care* ...................................... 26,400 422,400
- --------------------------------------------------------------------------------
HEAVY MACHINERY - 2.2%
Applied Materials* ............................... 3,300 418,069
Ingersoll-Rand ................................... 9,400 517,588
Parker Hannifin .................................. 11,700 600,356
- --------------------------------------------------------------------------------
1,536,013
- --------------------------------------------------------------------------------
HOME CONSTRUCTION, FURNISHINGS & APPLIANCES - 1.8%
General Electric ................................. 8,100 1,253,475
- --------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS - 2.9%
Corning .......................................... 15,300 1,972,744
- --------------------------------------------------------------------------------
INSURANCE - 6.3%
Aetna ............................................ 5,000 279,063
Allstate Corporation (The) ....................... 19,800 475,200
AXA Financial .................................... 18,600 630,075
Lincoln National ................................. 18,200 728,000
Marsh & McLennan Companies ....................... 5,800 554,988
Reliastar Financial .............................. 14,800 579,975
St. Paul Companies (The) ......................... 15,600 525,525
XL Capital, Class A .............................. 10,870 563,881
- --------------------------------------------------------------------------------
4,336,707
- --------------------------------------------------------------------------------
MEDIA - BROADCASTING & PUBLISHING - 0.9%
McGraw-Hill Companies (The) ...................... 9,500 585,438
- --------------------------------------------------------------------------------
MEDICAL SUPPLIES - 1.0%
Baxter International ............................. 4,500 282,656
Becton Dickinson & Company ....................... 16,300 436,025
- --------------------------------------------------------------------------------
718,681
- --------------------------------------------------------------------------------
METALS - 1.3%
Allegheny Technologies ........................... 9,050 203,059
Masco ............................................ 24,000 609,000
Oregon Steel Mills ............................... 10,200 80,963
- --------------------------------------------------------------------------------
893,022
- --------------------------------------------------------------------------------
OIL & GAS - 9.8%
Burlington Resources ............................. 9,700 320,706
Conoco, Class A .................................. 35,100 868,725
Conoco, Class B .................................. 11,546 287,207
Exxon Mobil ...................................... 26,097 2,102,433
Royal Dutch Petroleum ............................ 7,000 423,063
Schlumberger ..................................... 7,900 444,375
Texaco ........................................... 9,600 521,400
Tosco ............................................ 17,300 470,344
Total S.A., ADR .................................. 8,233 570,135
Transocean Sedco Forex ........................... 1,529 51,523
Williams Companies (The) ......................... 19,100 583,744
- --------------------------------------------------------------------------------
6,643,655
- --------------------------------------------------------------------------------
PHARMACEUTICALS - 5.4%
Abbott Laboratories .............................. 14,600 530,163
American Home Products ........................... 17,400 686,213
Amgen* ........................................... 10,600 636,663
Bristol-Myers Squibb ............................. 5,300 340,194
Cardinal Health .................................. 11,900 569,713
Glaxo Wellcome, ADR .............................. 6,400 357,600
Merck ............................................ 8,200 549,913
- --------------------------------------------------------------------------------
3,670,459
- --------------------------------------------------------------------------------
RETAILERS - 2.1%
Dayton Hudson .................................... 6,000 440,625
Federated Department Stores* ..................... 8,500 429,781
Office Depot* .................................... 51,000 557,813
- --------------------------------------------------------------------------------
1,428,219
- --------------------------------------------------------------------------------
TELEPHONE SYSTEMS - 14.1%
Alltel ........................................... 17,700 1,463,569
AT&T ............................................. 16,300 827,225
Bell Atlantic .................................... 30,000 1,846,875
Bellsouth ........................................ 22,600 1,057,963
Global Crossing* ................................. 20,350 1,017,500
GTE .............................................. 7,600 536,275
MCI WorldCom* .................................... 10,800 573,075
SBC Communications ............................... 36,232 1,766,310
Sprint ........................................... 8,700 585,619
- --------------------------------------------------------------------------------
9,674,411
- --------------------------------------------------------------------------------
TRANSPORTATION - 2.0%
Canadian National Railway ........................ 11,200 294,700
CSX .............................................. 16,500 517,688
Norfolk Southern Corp. ........................... 9,000 184,500
US Freightways ................................... 3,700 177,138
Wisconsin Central Transport* ..................... 13,700 184,094
- --------------------------------------------------------------------------------
1,358,120
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $63,477,825) $ 66,675,558
- --------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS 0.3%
CHEMICALS 0.3%
Monsanto (ACES) .................................. 5,900 195,438
- --------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(COST $266,258) $ 195,438
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS AT VALUE -
(COST $63,744,083) 97.6% $ 66,870,996
CASH AND OTHER ASSETS
NET OF LIABILITIES - 2.4% 1,615,823
- --------------------------------------------------------------------------------
NET ASSETS - 100.0% $ 68,486,819
- --------------------------------------------------------------------------------
Notes to the Schedule of Investments:
* Non-income producing security
ACES - Adjustable Conversion-Rate Equity Security
ADR - American Depository Receipt
TOUCHSTONE GROWTH & INCOME FUND
TOUCHSTONE VALUE PLUS FUND
PRO FORMA COMBINED FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES (UNAUDITED)
DECEMBER 31, 1999
TOUCHSTONE TOUCHSTONE ADJUSTMENTS COMBINED
VALUE GROWTH & (REFERENCES ARE TOUCHSTONE
PLUS INCOME TO PRO FORMA VALUE PLUS
FUND FUND FOOTNOTES) FUND
------------- ------------ ------------ ------------
ASSETS:
Investments, at value (a) $ 31,286,783 $ 35,584,213 $ 66,870,996
Cash 1,142,975 684,758 1,827,733
Receivables for: --
Fund shares sold 43 780 823
Dividends 33,720 63,622 97,342
Foreign tax reclaims 367 3,455 3,822
Interest 5,983 3,475 9,458
- -------------------------------------------------------------------------------------- ------------
Total assets 32,469,871 36,340,303 68,810,174
- -------------------------------------------------------------------------------------- ------------
LIABILITIES:
Payable for Fund shares redeemed -- 2,342 2,342
Payable to Investment Advisor 68,346 96,816 165,162
Other accrued expenses 45,524 110,327 155,851
- -------------------------------------------------------------------------------------- ------------
Total liabilities 113,870 209,485 323,355
- -------------------------------------------------------------------------------------- ------------
NET ASSETS $ 32,356,001 $ 36,130,818 $ 68,486,819
====================================================================================== ============
NET ASSETS CONSIST OF:
Paid-in capital $ 27,595,607 $ 36,332,300 $ 63,927,907
Undistributed (distributions in excess of) net
investment income -- 1,598 1,598
Accumulated net realized gain (loss) 1,433,331 (2,930) 1,430,401
Net unrealized appreciation (depreciation) 3,327,063 (200,150) 3,126,913
- -------------------------------------------------------------------------------------- ------------
Net assets applicable to shares outstanding $ 32,356,001 $ 36,130,818 $ 68,486,819
====================================================================================== ============
COMPUTATION OF NET ASSET VALUE, REDEMPTION VALUE AND
OFFERING PRICE PER SHARE:
Net assets - Class A $ 31,807,545 $ 12,573,988 $ 21,448,253 C $ 65,829,786
Shares outstanding - Class A 2,702,538 871,043 2,019,546 A & C 5,593,127
Net asset value and redemption price per share - Class A $ 11.77 $ 14.44 $ 11.77
Offering price per share - Class A (b) $ 12.49 $ 15.32 $ 12.49
Net assets - Class C $ 548,456 $ 2,108,577 $ 2,657,033
Shares outstanding - Class C 47,763 159,131 24,543 B 231,437
Net asset value, offering price and redemption price
per share - Class C $ 11.48 $ 13.25 $ 11.48
Net assets - Class Y -- $ 21,448,253 $(21,448,253)C --
Shares outstanding - Class Y -- 1,074,730 (1,074,730)C --
Net asset value, offering price and redemption price
per share - Class Y -- $ 19.96 --
(a) Cost of investments of: $ 27,959,720 $ 35,784,363 $ 63,744,083
(b) The offering price per share is calculated as follows: Net Asset Value Per Share/(1-maximum sales load).
The accompanying notes are an integral part of the financial statements.
TOUCHSTONE GROWTH & INCOME FUND
TOUCHSTONE VALUE PLUS FUND
PRO FORMA COMBINED FINANCIAL STATEMENTS
STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1999
TOUCHSTONE TOUCHSTONE ADJUSTMENTS COMBINED
VALUE GROWTH & (REFERENCES ARE TOUCHSTONE
PLUS INCOME TO PRO FORMA VALUE PLUS
FUND FUND FOOTNOTES) FUND
----------------------------------------- -----------
INVESTMENT INCOME:
Interest income $ 55,207 $ 25,966 $ 81,173
Dividend income 359,297 866,148 1,225,445
- ---------------------------------------------------------------------------------- -----------
Total investment income 414,504 892,114 1,306,618
- ---------------------------------------------------------------------------------- -----------
EXPENSES:
Investment advisory fees 224,988 305,915 $ (19,120)D 511,783
Sponsor fees 59,997 76,479 136,476
Custody, administration and fund accounting fees 89,091 122,537 (82,404)E 129,224
Transfer agent fees 58,906 103,972 (48,000)F 114,878
Registration fees 25,029 22,299 (22,229)G 25,099
Professional fees 19,383 22,951 (10,000)H 32,334
Printing fees 48,287 51,569 99,856
Trustee fees 1,938 3,077 5,015
Distribution fees - Class A 73,078 34,869 55,204 I 163,151
Distribution fees - Class C 5,161 24,394 29,555
Amortization of organization costs -- 7,393 7,393
Miscellaneous 4,004 2,641 6,645
- ---------------------------------------------------------------------------------- -----------
Total expenses 609,862 778,096 1,261,409
Reimbursement or waiver from Investment Advisor (216,639) (317,320) 182,014 J (351,945)
- ---------------------------------------------------------------------------------- -----------
Net expenses 393,223 460,776 909,464
- ---------------------------------------------------------------------------------- -----------
Net investment income (loss) 21,281 431,338 397,154
- ---------------------------------------------------------------------------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain on Investments 2,709,639 128,669 2,838,308
Net change in unrealized appreciation on Investments: 1,607,624 524,230 2,131,854
- ---------------------------------------------------------------------------------- -----------
NET REALIZED AND UNREALIZED GAIN (LOSS): 4,317,263 652,899 4,970,162
- ---------------------------------------------------------------------------------- -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $ 4,338,544 $ 1,084,237 $ 5,367,316
- ---------------------------------------------------------------------------------- -----------
(a) Net of foreign tax withholding of: $ 1,830 $ 2,936 $ 4,766
The accompanying notes are an integral part of the financial statements.
Notes to the Pro Forma Combining Financial Statements (unaudited)
The reorganization, if approved, results in the transfer of substantially all of
the assets and liabilities of Touchstone Value Plus Fund and Touchstone Growth &
Income Fund to a new series of Countrywide Strategic Trust ("New Value Plus
Fund") in exchange for shares of New Value Plus Fund and distribution of these
shares to the shareholders of Touchstone Value Plus Fund and Touchstone Growth &
Income Fund.
Touchstone Series Trust will transfer all of the assets of Touchstone Value Plus
Fund and all of the assets of Touchstone Growth & Income Fund, subject to their
liabilities, to a New Value Plus Fund. Class A shares of New Value Plus Fund
that Touchstone Series Trust receives in the exchange will be distributed pro
rata to Class A shareholders of Touchstone Value Plus Fund and Class A
shareholders of Touchstone Growth & Income Fund. Class C shares of New Value
Plus Fund that Touchstone Series Trust receives in the exchange will be
distributed pro rata to Class C shareholders of Touchstone Value Plus Fund and
Class C shareholders of Touchstone Growth & Income Fund. After the exchange,
Touchstone Value Plus Fund and Touchstone Growth & Income Fund will be
dissolved. As a result of the reorganization, each shareholder of Class A or
Class C shares of Touchstone Value Plus Fund and each shareholder of Class A or
Class C shares of Touchstone Growth & Income Fund will own shares of the
corresponding class of New Value Plus Fund equal in value to the shares of the
applicable Touchstone Fund that he owns immediately before the reorganization.
The investment goal, strategies and policies of the New Value Plus Fund are
identical to those of Touchstone Value Plus Fund and are similar to those of
Touchstone Growth & Income Fund. A more complete comparison of the investment
goals and strategies of these 3 funds is included in the sections of the Proxy
Statement/Prospectus called "Comparison of Touchstone Value Plus Fund to New
Value Plus Fund" and "Comparison of Touchstone Growth & Income Fund to New Value
Plus Fund" as well as the prospectus for Touchstone Series Trust.
Touchstone Advisors, the advisor for Touchstone Value Plus Fund and Touchstone
Growth & Income Fund, and Fort Washington Investment Advisors, the sub-advisor
for Touchstone Value Plus Fund, will serve as the advisor and sub-advisor of New
Value Plus Fund.
All expenses associated with the reorganization (which are estimated at
$375,000) will be paid by Touchstone Advisors or one of its affiliates.
Note A
Reflects the redemption of Touchstone Growth & Income Fund Class Y shares by The
Western and Southern Life Insurance Company Separate Account A, the anticipated
purchase of Touchstone Growth & Income Fund Class A shares by Western and
Southern or one of its affiliates and the conversion of Touchstone Growth &
Income Fund Class A shares and Touchstone Value Plus Fund Class A shares into
Class A shares of the New Value Plus Fund. The redemption and purchase price and
the conversion ratios have been estimated based on the net asset value per share
of Touchstone Growth & Income Fund Class A and Class Y shares and the net asset
value per share of Touchstone Value Plus Fund Class A shares, each on December
31, 1999.
Note B
Reflects the conversion of Touchstone Value Plus Fund Class C shares and
Touchstone Growth & Income Fund Class C shares into Class C shares of the New
Value Plus Fund. The conversion ratios have been estimated based on the net
asset value per share of Touchstone Value Plus Fund Class C shares and the net
asset value per share of Touchstone Growth & Income Fund Class C shares, each on
December 31, 1999.
Note C
Reflects the redemption of Touchstone Growth & Income Fund Class Y shares by The
Western and Southern Life Insurance Company Separate Account A, the anticipated
purchase of Touchstone Growth & Income Fund Class A shares by Western and
Southern or one of its affiliates and the conversion of
Touchstone Growth & Income Fund Class A shares and Touchstone Value Plus Fund
Class A shares into New Value Plus Class A Fund shares.
Note D
Estimated reduction in advisory fees due to the New Value Plus Fund's lower
advisory fee rate of 0.75% being applied to Touchstone Growth & Income Fund's
assets.
Note E
Estimated reduction in custody, administration and fund accounting fees due to
the elimination of the fees related to the Touchstone Growth & Income Fund.
Note F
Estimated reduction in transfer agent fees related to the elimination of
duplicate fixed fund minimum charges.
Note G
Estimated reduction in registration fees related to the elimination of duplicate
Blue Sky filing fees.
Note H
Estimated reduction in professional fees due to the elimination of duplicate
audit fees.
Note I
Estimated increase in Rule 12b-1 fees due to the redemption of the existing
Touchstone Growth & Income Class Y shares, which do not pay a Rule 12b-1 fee,
and the purchase of Touchstone Growth & Income Class A shares.
Note J
Estimated reduction in reimbursement due from Touchstone Advisors resulting from
the expected reductions in capped expenses identified above.
PART C--OTHER INFORMATION
ITEM 15. INDEMNIFICATION
The information required by this Item 15 is hereby incorporated by
reference from Item 25 in Post-Effective Amendment No. 38 to
Registrant's Registration Statement filed with the Commission on July
30, 1999 (File Nos. 002-80859 and 811-03651).
ITEM 16. EXHIBITS
(1) Charter
Registrant's Restated Agreement and Declaration of Trust with
Amendment No. 1, dated May 24, 1994, Amendment No. 2, dated
February 28, 1997 and Amendment No. 3, dated August 11, 1997,
which were filed as Exhibits to Registrant's Post-Effective
Amendment No. 36, are hereby incorporated by reference.
(2) BYLAWS
Registrant's Bylaws with Amendments adopted July 17, 1984 and
April 5, 1989, which were filed as Exhibits to Registrant's
Post-Effective Amendment No. 36, are hereby incorporated by
reference.
(3) VOTING TRUST AGREEMENTS
Not Applicable.
(4) AGREEMENT OF REORGANIZATION
Agreement and Plan of Reorganization between Registrant and
Touchstone Series Trust is filed herewith in Part A of this
Registration Statement on Form N-14.
(5) INSTRUMENTS DEFINING SHAREHOLDER RIGHTS
The information required by this Item 16(5) is hereby
incorporated by reference from Item 23(c) in Post-Effective
Amendment No. 38 to Registrant's Registration Statement filed
with the Commission on July 30, 1999 (File Nos. 002-80859 and
811-03651).
(6) INVESTMENT ADVISORY CONTRACTS
(a) Form of Investment Advisory Agreement with Touchstone
Advisors, Inc., which was filed as an exhibit to
Registrant's Proxy Statement filed March 15, 2000, is hereby
incorporated by reference.
1
(b) Form of Sub-Advisory Agreement between Touchstone Advisors,
Inc. and Fort Washington Investment Advisors, Inc. for the
Utility Fund and Equity Fund, which was filed as an exhibit
to Registrant's Proxy Statement filed March 15, 2000, is
hereby incorporated by reference.
(c) Form of Sub-Advisory Agreement between Touchstone Advisors,
Inc. and Fort Washington Investment Advisors, Inc. for the
Value Plus Fund, which was filed as an exhibit to
Registrant's Post-Effective Amendment No. 39, is hereby
incorporated by reference.
(d) Form of Sub-Advisory Agreement between Touchstone Advisors,
Inc. and David L. Babson & Company, Inc. for the Emerging
Growth Fund, which was filed as an exhibit to Post-Effective
Amendment No. 11 to Touchstone Series Trust's Registration
Statement, is hereby incorporated by reference.
(e) Form of Sub-Advisory Agreement between Touchstone Advisors,
Inc. and Westfield Capital Management, Inc. for the Emerging
Growth Fund, which was filed as an exhibit to Post-Effective
Amendment No. 11 to Touchstone Series Trust's Registration
Statement, is hereby incorporated by reference.
(f) Form of Sub-Advisory Agreement between Touchstone Advisors,
Inc. and Credit Suisse for the International Equity Fun,
which was filed as an exhibit to Post-Effective Amendment
No. 11 to Touchstone Series Trust's Registration Statement,
is hereby incorporated by reference.
(g) Form of Sub-Advisory Agreement between Touchstone Advisors,
Inc and Mastrapasqua & Associates, Inc. for the Growth/Value
Fund, which was filed as an exhibit to Registrant's Proxy
Statement filed March 15, 2000, is hereby incorporated by
reference.
(h) Form of Sub-Advisory Agreement between Touchstone Advisors,
Inc and Mastrapasqua & Associates, Inc. for the Aggressive
Growth Fund, which was filed as an exhibit to Registrant's
Proxy Statement filed March 15, 2000, is hereby incorporated
by reference.
(7) UNDERWRITING CONTRACTS
(a) Form of Registrant's Underwriting Agreement with Touchstone
Securities, Inc., which was filed as an exhibit to
Registrant's Post-Effective Amendment No. 39, is hereby
incorporated by reference.
(b) Form of Underwriter's Dealer Agreement is to be filed by
Amendment.
2
(8) BONUS OR PROFIT SHARING CONTRACTS
None.
(9) CUSTODIAN AGREEMENTS
(a) Custody Agreement with The Fifth Third Bank, the Custodian
for the Utility Fund and the Equity Fund, which was filed as
an Exhibit to Registrant's Post-Effective Amendment No. 31,
is hereby incorporated by reference.
(b) Custody Agreement with Firstar Bank (formerly Star Bank),
the Custodian for the Growth/Value Fund and the Aggressive
Growth Fund, which was filed as an Exhibit to Registrant's
Post-Effective Amendment No. 35, is hereby incorporated by
reference.
(c) Registrant's Custody Agreement with Investors Bank & Trust
Company, the Custodian for Emerging Growth Fund,
International Equity Fund and Value Plus Fund, which was
filed as an exhibit to Post-Effective Amendment No. 11 to
Touchstone Series Trust's Registration Statement, is hereby
incorporated by reference.
(10) RULE 12b-1 PLANS AND RULE 18f-3 PLANS
(a) Registrant's Plans of Distribution Pursuant to Rule 12b-1,
which were filed as Exhibits to Registrant's Post-Effective
Amendment No. 32, are hereby incorporated by reference.
(b) Form of Administration Agreement, which was filed as an
Exhibit to Registrant's Post-Effective Amendment No. 35, is
hereby incorporated by reference.
(c) Amended Rule 18f-3 Plan Adopted with Respect to the Multiple
Class Distribution System, which was filed as an Exhibit to
Registrant's Post-Effective Amendment No. 33, is hereby
incorporated by reference.
(11) LEGAL OPINION
Opinion and consent of counsel as to the legality of the
securities being registered is filed herewith.
(12) TAX OPINION
Opinion and consent of counsel supporting the tax matters and
consequences to shareholders is filed herewith.
3
(13) OTHER MATERIAL CONTRACTS
None.
(14) OTHER OPINIONS
(a) Consent of Ernst & Young LLP is filed herewith.
(b) Consent of Arthur Andersen LLP is filed herewith
(15) OMITTED FINANCIAL STATEMENTS
None.
(16) POWERS OF ATTORNEY
Powers of Attorney are incorporated by reference from
Registrant's Registration Statement on Form N-14.
(17) ADDITIONAL EXHIBITS
None.
ITEM 17. UNDERTAKINGS
(1) Not Applicable.
(2) Not Applicable.
4
SIGNATURES
As required by the Securities Act of 1933, this registration statement on Form
N-14 has been signed on behalf of the registrant, in the City of Cincinnati and
State of Ohio, on the 15th day of March, 2000.
COUNTRYWIDE STRATEGIC TRUST
By: /s/ Robert H. Leshner
Robert H. Leshner, President
As required by the Securities Act of 1933, this registration statement on Form
N-14 has been signed by the following persons in the capacities and on the dates
indicated.
SIGNATURE TITLE
/s/ Robert H. Leshner March 15, 2000
Robert H. Leshner President and Trustee
/s/ Theresa M. Samocki March 15, 2000
Theresa M. Samocki Treasurer
William O. Coleman* Trustee
Phillip R. Cox* Trustee
H. Jerome Lerner* Trustee
/s/ Jill T. McGruder March 15, 2000
Jill T. McGruder Trustee
Oscar P. Robertson* Trustee
Nelson Schwab, Jr.* Trustee
Robert E. Stautberg* Trustee
Joseph S. Stern, Jr.* Trustee
*By: /s/ Jill T. McGruder March 15, 2000
Jill T. McGruder
As attorney in fact for each Trustee
EXHIBIT INDEX
Page
Legal Opinion
Tax Opinion
Consent of Ernst & Young LLP
Consent of Arthur Andersen LLP