As Filed With The Securities And Exchange Commission On August 19, 2003
File No. 811-3651
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. _1_
Post-Effective Amendment No. __
TOUCHSTONE STRATEGIC TRUST
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(Exact Name of Registrant as Specified in Charter)
221 East Fourth Street, Suite 300, Cincinnati, Ohio 45202
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(Address of Principal Executive Offices) (Zip Code)
(800) 543-0407
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(Registrant's Telephone Number, Including Area Code)
Patrick T. Bannigan
221 East Fourth Street, Suite 300
Cincinnati, Ohio 45202
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(Name and Address of Agent for Service of Process)
Copies to:
Tina Hosking Bloom
221 East Fourth Street, Suite 300
Cincinnati, Ohio 45202
Samuel Kornhauser, Esq.
155 Jackson Street, Suite 1807
San Francisco, California 94111
Approximate Date of Proposed Public Offering is as soon as practicable after
this Registration Statement becomes effective.
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 herewith. The Registrant has
undertaken to file on or before June 30, 2004, a Rule 24f-2 Notice for its most
recent fiscal year ended March 31, 2004.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the 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, as amended or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
TOUCHSTONE STRATEGIC TRUST
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement contains the following
pages and documents:
Front Cover
Contents Page
Letter to Shareholders
Notice of Special Meeting
PART A
Combined Prospectus/Proxy Statement
PART B
Statement of Additional Information
PART C
Other Information
Signatures
Exhibits
THE NAVELLIER MILLENIUM FUNDS
ONE EAST LIBERTY STREET, THIRD FLOOR
RENO, NEVADA 89501
1-800-887-8671
August 19, 2003
TO THE SHAREHOLDERS OF
THE NAVELLIER LARGE CAP GROWTH PORTFOLIO
Dear Shareholder:
A special meeting of the shareholders of The Navellier Large Cap Growth
Portfolio (the " Millennium Portfolio"), a series of The Navellier Millennium
Funds will be held at 10:00 A.M., Pacific Standard Time, on September 19, 2003,
or a date shortly thereafter, at the offices of The Navellier Millennium Funds,
One East Liberty Street Third Floor, Reno, Nevada 89501 (the "Meeting"). The
shareholders of the Millennium Portfolio (the "Shareholders") will vote on a
proposed Agreement and Plan of Reorganization (the "Plan"). Under the Plan, the
Navellier Large Cap Growth Portfolio ("Millennium Portfolio")of The Navellier
Millennium Funds and The Navellier Large Cap Growth Portfolio (the "Portfolio")
of The Navellier Performance Funds will merge into the Touchstone Large Cap
Growth Fund (the "Acquiring Fund"), a separate portfolio of the Touchstone
Strategic Trust (the "Reorganization"). Upon completion of the proposed
Reorganization, the investment strategies of the Touchstone Large Cap Growth
Fund will be changed to those of Navellier Large Cap Growth Portfolios.
Touchstone Large Cap Growth's investment objective is identical to the
investment objective of Navellier Millennium Large Cap Growth and Touchstone
Large Cap Growth's investment policies will be substantially identical to those
of the Millennium Portfolio. In addition, the investment manager of Touchstone
Large Cap Growth will change the investment sub-advisor of Touchstone Large Cap
Growth to the manager of the Navellier Large Cap Growth and of the Millennium
Portfolio, Navellier Management, Inc.
If you own class 'A', 'B', or 'C' shares of the Navellier Millenium Large Cap
Growth Portfolio you will receive Class 'A', 'B', or 'C' shares of The
Touchstone Large Cap Growth Fund, respectively. Although the number of shares
you hold may change, the total value of your investment will not change as a
result of the Reorganization. You will not incur any sales loads or similar
transaction charges as a result of the Reorganization.
The Acquiring Fund has three classes of shares. The Class 'A' shares charge an
initial sales charge of 5.75%, the Class 'B' shares charge a contingent deferred
sales charge which is incrementally reduced over time from 5% on redemptions
within a year of purchase down to 0% on redemptions after six years. The Class
'C' shares charge a 1% contingent deferred sales charge on redemptions within
one year of purchase. Like the Millennium Portfolio, the Class 'A' Shares of the
Acquiring Fund are charged an annual 12b-1 fee of 0.25%, and Class 'B' and 'C'
shares of the Acquiring Fund are charged an annual 12b-1 fee of 1.00%.
The Acquiring Fund charges an annual management fee of 0.75% of assets
under management which is less than the annual 1.00% you are charged now.
If the Plan is approved and implemented by the Millennium Portfolio, the
Shareholders of the Millennium Portfolio will become shareholders of the
Acquiring Fund and will receive shares of the Acquiring Fund having an aggregate
value equal to the aggregate value of his or her investment in the Millennium
Portfolio. No sales charge will be imposed as a result of the Reorganization.
Prior to completion of the Reorganization, the Acquiring Fund and the Millennium
Portfolio will have received an opinion of counsel indicating that the
Reorganization will qualify as a tax-free reorganization for Federal income tax
purposes.
I and the Trustees of the Millennium Portfolio by a unanimous vote have
voted in FAVOR of the proposed merger and are urging you and the other
Millennium Portfolio shareholders to vote FOR a merger of the Millennium
Portfolio into the Acquiring Fund. I and the other Millennium Portfolio Trustees
("Management") are soliciting your proxy (vote) because we believe that the
proposed merger should benefit Shareholders by reducing portfolio operating
costs.
We believe that this Reorganization is in the best interest of the
Millennium Portfolio and the Shareholders and, therefore, recommend that the
Shareholders vote FOR approving the Plan.
WE STRONGLY URGE YOU TO REVIEW, COMPLETE, AND RETURN YOUR WHITE PROXY CARD
AS SOON AS POSSIBLE. YOUR VOTE IS IMPORTANT NO MATTER HOW MANY SHARES YOU OWN.
VOTING YOUR SHARES EARLY WILL HELP TO AVOID COSTLY FOLLOW-UP MAIL AND TELEPHONE
SOLICITATION. LOUIS NAVELLIER AND NAVELLIER MANAGEMENT, INC. ARE PAYING FOR THIS
PROXY SOLICITATION AND WILL NOT SEEK REIMBURSEMENT FROM THE MILLENNIUM PORTFOLIO
OR YOU. AFTER REVIEWING THE ENCLOSED MATERIALS, PLEASE EXERCISE YOUR RIGHT TO
VOTE TODAY AND VOTE FOR THE MERGER BY COMPLETING, DATING, AND SIGNING EACH PROXY
CARD YOU RECEIVE AND MAILING THE PROXY IN THE SELF-ADDRESSED, POSTAGE-PAID
ENVELOPE TO PROXY TABULATOR, P.O. BOX 9122, HINGHAM, MASSACHUSETTS 02043-9717.
IT IS VERY IMPORTANT THAT YOU VOTE AND THAT YOUR VOTING INSTRUCTIONS BE RECEIVED
NO LATER THAN SEPTEMBER 15, 2003 OR A DATE SHORTLY THEREAFTER.
Please note that you may receive more than one proxy package if you hold
shares of the Millennium Portfolio in more than one account. You should return
separate proxy cards for each such account. If you have any questions, please
call Navellier Management, Inc. at 1-800-887-8671.
Sincerely,
Louis G. Navellier
/s/ Louis G. Navellier
Trustee of The Navellier Large
Cap Growth Portfolio of The
Navellier Millennium Funds
THE TRUSTEES OF
THE NAVELLIER MILLENNIUM FUNDS
ONE EAST LIBERTY STREET, THIRD FLOOR
RENO, NEVADA 89501
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THE NAVELLIER LARGE CAP GROWTH PORTFOLIO
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD SEPTEMBER 19, 2003 OR A DATE SHORTLY THEREAFTER
To: The Shareholders of the Navellier Large Cap Growth Portfolio of The
Navellier Millennium Funds
You are hereby notified that a Special Meeting of the Shareholders of The
Navellier Large Cap Growth Portfolio of The Navellier Millennium Funds will be
held at the offices of The Navellier Millennium Funds, One East Liberty Street,
Third Floor, Reno, Nevada 89501 on September 19, 2003 or a date shortly
thereafter at 10:00 a.m. (Pacific Standard Time), for the purpose of considering
and voting upon the following matter:
PROPOSAL 1.
To approve a proposed Agreement and Plan of Reorganization (the
"Plan"), whereby The Navellier Large Cap Growth Portfolio ("Millennium
Portfolio") would transfer all of its assets to the Large Cap Growth
Fund, a portfolio of the Touchstone Strategic Trust (the "Acquiring
Fund") in a tax-free exchange for shares of beneficial interest in the
Acquiring Fund that would be distributed to the shareholders of the
Millennium Portfolio. Also, as part of the Plan, the Acquiring Fund
would assume all valid liabilities of the Millennium Portfolio. Also,
as part of the Plan, the Acquiring Fund would acquire all of the
assets and liabilities of the Navellier Large Cap Growth Portfolio of
the Navellier Performance Funds.
The transactions contemplated by the proposed Plan and related matters are
described in the attached Combined Prospectus/Proxy Statement. A copy of the
proposed Plan is attached as Appendix A thereto. A copy of the Investment
Advisory Agreement between the Acquiring Fund and Touchstone Advisors, Inc. and
a copy of the form of sub-advisory agreement between Touchstone Advisors, Inc.
and Navellier Management, Inc., reducing the total annual management fee that
will be charged to you after the merger to 0.75% of the Acquiring Fund's net
asset value per annum are attached thereto as Appendix B and Appendix C
respectively. A copy of the Acquiring Fund's 12b-1 Plan is attached thereto as
Appendix D.
You are entitled to vote at the Meeting, and any adjournment(s) thereof, if
you owned shares of the Millennium Portfolio at the close of business on July
31, 2003. If you attend the Meeting, you may vote your shares in
person. If you do not expect to attend the meeting, please complete, date, sign,
and return the enclosed proxy card marked FOR in the enclosed self-addressed,
postage-paid return envelope.
Louis G. Navellier
--------------------------------------
Trustee of The Navellier Large
Cap Growth Portfolio of The
Navellier Millennium Funds
August 19, 2003
YOUR VOTE IS IMPORTANT
NO MATTER HOW MANY SHARES YOU OWN
PLEASE VOTE "FOR" PROPOSAL 1 ON THE ENCLOSED WHITE PROXY CARD, THEN PLEASE
DATE AND SIGN THE CARD AND RETURN THE PROXY CARD IN THE ENVELOPE PROVIDED. IF
YOU SIGN, DATE AND RETURN THE PROXY CARD BUT GIVE NO VOTING INSTRUCTIONS, YOUR
SHARES WILL BE VOTED "FOR" THE PROPOSAL NOTICED ABOVE. IN ORDER TO AVOID THE
ADDITIONAL EXPENSE AND DELAY OF FURTHER SOLICITATION, WE ASK YOUR COOPERATION IN
MAILING IN YOUR WHITE PROXY CARD PROMPTLY SO THAT A QUORUM MAY BE ENSURED. A
VOTE OF 67% OF THE SHARES OF THE MILLENNIUM PORTFOLIO WHICH ARE PRESENT IN
PERSON OR BY PROXY AND ENTITLED TO VOTE (IF MORE THAN 50% OF THE OUTSTANDING
SHARES OF RECORD ARE PRESENT IN PERSON OR BY PROXY) OR MORE THAN 50% OF THE
OUTSTANDING SHARES ENTITLED TO VOTE, WHICHEVER IS LESS, IS REQUIRED TO PASS ANY
PROPOSAL, SO RETURN OF YOUR PROXY IS IMPORTANT. UNLESS PROXY CARDS SUBMITTED BY
CORPORATIONS AND PARTNERSHIPS ARE SIGNED BY THE APPROPRIATE PERSONS AS INDICATED
IN THE VOTING INSTRUCTIONS ON THE PROXY CARD, SUCH PROXY CARDS CANNOT BE VOTED.
Louis G. Navellier
--------------------------------------
Trustee of The Navellier Large
Cap Growth Portfolio of The
Navellier Millennium Funds
PROXY SOLICITATION
BY
THE TRUSTEES OF
THE NAVELLIER LARGE CAP GROWTH PORTFOLIO OF
THE NAVELLIER MILLENNIUM FUNDS
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ONE EAST LIBERTY STREET, THIRD FLOOR
RENO, NEVADA 89501
1-800-887-8671
COMBINED PROSPECTUS/PROXY STATEMENT
This combined prospectus/proxy statement is being furnished in connection
with the solicitation of proxies by the Trustees of The Navellier Large Cap
Growth Portfolio ("Millennium Portfolio") of The Navellier Millennium Funds
("Fund"), for use at a special meeting of shareholders ("Shareholders") of the
"Portfolio" to be held at 10:00 a.m., Pacific Standard Time, on September 19,
2003, at the offices of The Navellier Millennium Funds, One East Liberty Street,
Third Floor, Reno, Nevada 89501, and at any adjournment(s) thereof (the
"Meeting"). The Meeting is being held so that shareholders can vote on the
following proposal made by the Trustees of the Millennium Portfolio:
PROPOSAL 1.
To approve a proposed Agreement and Plan of Reorganization (the
"Plan"), whereby the Millennium Portfolio would transfer all of its
assets to the Large Cap Growth Fund, a portfolio of the Touchstone
Strategic Trust (the "Acquiring Fund"), in a tax-free exchange for
shares of beneficial interest in the Acquiring Fund that would be
distributed to the shareholders of the Millennium Portfolio. Also, as
part of the Plan, the Acquiring Fund would assume all valid
liabilities of the Millennium Portfolio. Also, as part of the Plan,
the Navellier Large Cap growth Portfolio of the Navellier Performance
Funds (the "Portfolio") would transfer all of its assets and valid
liabilities to the Acquiring Fund.
The Millennium Portfolio is a series investment company organized by Louis
Navellier as a Business Trust in the State of Delaware with three classes of
common stock outstanding, with each such class representing an interest in a
separate series of the Fund. Only shareholders of the Millennium Portfolio are
being solicited in connection with the Meeting.
The purpose of the Meeting is to consider a proposed Plan of Reorganization
(the "Plan"), which would effect a merger of the Millennium Portfolio and also
the merger of the Portfolio into the Acquiring Fund, and the transactions
contemplated thereby, as described below (collectively, the "Reorganization").
The Acquiring Fund is a series open-end investment company which seeks long-term
growth of capital by investing in large cap growth securities. The Plan has been
approved unanimously by the Board of Trustees of the Portfolio, by the Board of
Trustees of the Millennium Portfolio and by the Board of Trustees of the
Acquiring Fund. Pursuant to the proposed Plan, all of the assets of the
Portfolio and all of the assets of the Millennium Portfolio would be acquired by
the Acquiring Fund (which, if the Reorganization is approved, will have
investment policies the same as those of the Millennium Portfolio), in a
tax-free exchange for shares of beneficial interest in the Acquiring Fund
("Acquiring Fund Shares") and the assumption by the Acquiring Fund of all valid
liabilities of the Portfolio and of the Millennium Portfolio. Specifically, it
is proposed that the assets of the Portfolio and the assets of the Millennium
Portfolio be transferred to the Acquiring Fund in a tax-free exchange for
Acquiring Fund Shares of value equal to the assets transferred from the
Portfolio and from the Millennium Portfolio. Following such transfer, the
Acquiring Fund Shares received by the Millennium Portfolio would then be
distributed pro rata to the shareholders of the Millennium Portfolio, and then
the Millennium Portfolio would be liquidated. As a result of the proposed
transactions, each shareholder of the Millennium Portfolio would receive a
number of full and fractional Acquiring Fund Shares having a total net asset
value equal, on the effective date of the Reorganization, to the net asset value
of the Shareholder's shares of beneficial interest in the Millennium Portfolio.
In order to have a merger, the Trustees of the Portfolio and the Trustees of the
Millennium Portfolio and the Trustees of the Acquiring Fund must approve the
proposed merger. The Trustees of the Portfolio and of the Millennium Portfolio
and the Trustees of the Acquiring Fund have already approved the proposed
merger.
This combined prospectus/proxy statement, which should be retained for
future reference, sets forth concisely the information about the Millennium
Portfolio and the Acquiring Fund, and the transactions contemplated by the
proposed Reorganization, that an investor should know before voting on the
proposed Reorganization. A copy of the Annual Report of the Touchstone Strategic
Trust relating to the Acquiring Fund for the year ended March 31, 2003 and a
copy of the current Prospectus of the Acquiring Fund dated August 1, 2003 is
included with this combined prospectus/proxy statement and is incorporated by
reference herein.
A Statement of Additional Information regarding Touchstone Strategic Trust
dated August 1, 2003 has been filed with the Securities and Exchange Commission
(the "Commission") and is incorporated by reference herein. Copies of such
Statement of Additional Information also may be obtained without charge by
contacting Touchstone Investments at 221 East Fourth Street, Suite 300,
Cincinnati, Ohio 45202, or by telephoning toll-free at 1-800-543-0407 or at
http://www.touchstoneinvestments.com.
A Prospectus and a Statement of Additional Information regarding the
Millennium Portfolio each dated May 1, 2003 and the Annual Report of the
Navellier Millenium Funds for the year ended December 31, 2002 also have been
filed with the Commission and each is incorporated by reference herein.
Copies of these Millennium Portfolio documents also may be obtained without
charge by contacting Navellier Management, Inc., at One East Liberty Street,
Third Floor, Reno, Nevada 89501, or by telephoning Navellier Management, Inc.,
toll-free at 1-800-887-8671.
A Statement of Additional Information dated August 19, 2003, relating to
the proposed transactions described in this combined prospectus/proxy statement,
including historical financial statements, has been filed with the Commission
and is incorporated by reference herein. Copies of this Statement of Additional
Information may be obtained without charge by contacting Navellier Management,
Inc., at One East Liberty Street, Third Floor, Reno, Nevada 89501, or by
telephoning Navellier Management, Inc., toll-free at 1-800-887-8671.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Combined Prospectus/Proxy Statement is August 19, 2003.
COMBINED PROSPECTUS/PROXY STATEMENT
TABLE OF CONTENTS
---------
Introduction and Voting Information
Special Meeting
Synopsis
The Proposed Reorganization
Investment Objectives and Policies
Operations of the Touchstone Strategic Trust and the Acquiring Fund following
the Reorganization
Management Fees, Administrative Fees, and Other Operating Expenses
Purchases and Exchanges
Redemption Procedures and Fees
Dividends and Distributions; Automatic Reinvestment
Federal Tax Consequences of the Proposed Reorganization
Costs and Expenses of the Reorganization
Continuation of Shareholder Accounts; Share Certificates
Form of Organization of the Touchstone Strategic Trust
Comparison of Investment Objectives and Policies
Investment Objectives and Policies
Investment Objective of the Acquiring Fund
Investment Objective of the Millennium Portfolio
Certain Investment Restrictions and Limitations
Principal Risk Factors
The Proposed Transactions
Proposed Agreement and Plan of Reorganization
Reasons for the Proposed Transactions
Description of Securities to Be Issued
Federal Income Tax Consequences
Pro Forma Capitalization and Ratios
Dissolution of the Portfolios
Navellier Group Recommendation
Required Vote
Additional Information About the Acquiring Fund and the Acquiring Fund Shares
Additional Information About the Millennium Portfolio and the Millennium
Portfolio Shares
Miscellaneous
Available Information
Legal Matters
Financial Statements and Experts
Proxy Solicitation
Revocation of Proxies
No Dissenters' Rights of Appraisal
Additional Voting Information; Voting of Proxies;
Adjournment
Other Business
Appendix A: Agreement and Plan of Reorganization
Appendix B: Investment Advisory Agreement Between Acquiring Fund and Touchstone
Advisors, Inc.
Appendix C: Form of Sub-advisory Agreement between Touchstone Advisors, Inc. and
Navellier Management, Inc.
Appendix D: Acquiring Fund Plan of Distribution
PART A
SOLICITATION BY THE TRUSTEES OF
THE NAVELLIER MILLENNIUM FUNDS
ONE EAST LIBERTY STREET, THIRD FLOOR
RENO, NEVADA 89501
1-800-887-8671
------------------------
THE NAVELLIER MILLENNIUM FUNDS
(THE NAVELLIER LARGE CAP GROWTH PORTFOLIO)
------------------------
COMBINED PROSPECTUS/PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON
September 19, 2003 OR A DATE SHORTLY THEREAFTER
------------------------
INTRODUCTION AND VOTING INFORMATION
SPECIAL MEETING; VOTING OF PROXIES; ADJOURNMENT
This combined prospectus/proxy statement is being furnished to the
shareholders of The Navellier Millennium Funds' Navellier Large Cap Growth
Portfolio (the "Millennium Portfolio") in connection with the solicitation by
the Trustees of the Millennium Portfolio, (collectively "your Trustees") of
proxies to be used at a special meeting of the shareholders of this Millennium
Portfolio to be held on September 19, 2003 or a date shortly thereafter at 10:00
a.m. Pacific Standard Time at the offices of The Navellier Millennium Funds, One
East Liberty Street, Third Floor, Reno, Nevada 89501 and at any adjournment(s)
thereof (the "Meeting"). The purpose of the Meeting is to vote on the proposed
tax-free Reorganization (the "Plan") to merge the Millennium Portfolio into the
Large Cap Growth Fund (the "Acquiring Fund"), which is a series of the
Touchstone Strategic Trust, pursuant to the terms and conditions of the Plan, as
described below in greater detail. A vote on the approval or disapproval of the
Plan will be conducted at the Meeting by the shareholders of the Millennium
Portfolio.
WHITEWHITE
SYNOPSIS
The following is a summary of certain information contained elsewhere in
this combined prospectus/ proxy statement, including the prospectuses of the
Millennium Portfolio and the Acquiring Fund and the proposed Agreement and Plan
of Reorganization. Shareholders should read this entire combined prospectus/
proxy statement carefully.
THE PROPOSED REORGANIZATION
Shareholders of the Millennium Portfolio will be asked at the Meeting to
vote upon and approve the proposed Plan, which provides for the Reorganization
of the Millennium Portfolio. A copy of the Plan is set forth in Appendix A to
this combined prospectus/proxy statement. Pursuant to the Plan, the Millennium
Portfolio, which is a series of The Navellier Millennium Funds, a
non-diversified, open-end management investment company organized as a business
trust under the laws of the State of Delaware, would be merged tax-free into the
Acquiring Fund of the Touchstone Strategic Trust (the "Trust"). Touchstone Large
Cap Growth is currently a separate diversified series of the Trust, a
Massachusetts business trust, which as also an open-end management investment
company registered under the 1940 Act. However, if the shareholders of the
Touchstone Large Cap Growth approve a proposal in a proxy statement to be filed
with the Securities and Exchange Commission ('SEC') and scheduled for a vote of
such shareholders in a special meeting on August 22, 2003, upon completion of
the Reorganization Touchstone Large Cap Growth will change to a non-diversified
series of the Trust. A non-diversified fund may invest up to 25% of its total
assets in the securities of a single company and 50% of its total assets could
consist of the securities of only two issuers. With respect to the remainder of
the Fund's assets, no more than 5% could be invested in any one security, and
the Fund may not own more than 10% of the outstanding voting securities of any
issuer. In addition, approval by the shareholders of Touchstone Large Cap Growth
Fund of the change from a diversified to a non-diversified series of the Trust
is a condition of the Reorganization. The Portfolio would also be merged into
the Acquiring Fund. Approval by the shareholders of the Performance Portfolio of
the merger into the Acquiring Fund is also a condition of the Reorganization.
The proposed transaction will not occur unless shareholders approve these
changes. The Acquiring Fund is a loaded series of the TOUCHSTONE STRATEGIC
TRUST, an open-end management investment company organized under the laws of the
State of Massachusetts as a business trust. The Plan sets forth the terms and
conditions under which the proposed Reorganization may be consummated. Approval
by the present Trustees of the Millennium Portfolio is required in order to
merge the Millennium Portfolio into the Acquiring Fund. The present Trustees of
the Millennium Portfolio have approved the proposed merger.
If the Reorganization is completed, the investment objective and investment
strategies of Touchstone Large Cap Growth will be changed to those of the
Millennium Portfolio (subject to the approval of the shareholders of Touchstone
Large Cap Growth to change that Fund to a non-diversified fund upon completion
of the Reorganization), and the investment manager of the Touchstone Large Cap
Growth will change the investment sub-advisor of the Touchstone Large Cap Growth
to the investment manager of the Millennium Portfolio, Navellier Management,
Inc. This Prospectus/Proxy statement has been prepared assuming that such
changes will take place.
For the reasons set forth below under "The Proposed Transactions--Reasons
for the Proposed Transactions", the Trustees of the Millennium Portfolio, have
unanimously concluded that the Reorganization would be in the best interests of
the Millennium Portfolio and its shareholders and that the interests of existing
shareholders will not be diluted as a result of the transactions contemplated by
the Reorganization. The Millennium Portfolio Trustees, therefore, have submitted
the proposed Plan effecting the proposed Reorganization for approval by the
shareholders of the Millennium Portfolio at the Meeting and recommend a vote FOR
the proposed Plan.
INVESTMENT OBJECTIVES AND POLICIES
Below is a comparison of the key features of the Portfolio and the
Acquiring Fund.
INVESTMENT OBJECTIVE. The investment objective of the Acquiring Fund and
the Portfolio is long-term growth of capital.
The investment objective of the Millennium Portfolio is a fundamental
policy which may not be changed without the approval of a vote of at least a
"majority" (as that term is defined in the 1940 Act) of the outstanding shares,
respectively, of the Millennium Portfolio or the Acquiring Fund. All other
investment policies of the Millennium Portfolio that are not specified as
fundamental are not fundamental policies and may be changed by the Acquiring
Fund Board of Trustees and the Millennium Portfolio Board of Trustees,
respectively, without shareholder approval. The investment objective of the
Acquiring Fund is non-fundamental, which means that it may be changed by vote of
the Trustees without shareholder approval.
INVESTMENT POLICIES. The Portfolio invests primarily in investments in
securities of large cap companies (companies with market capitalization of more
than $5 billion) with appreciation potential by employing a modern portfolio
theory to select securities. Navellier Management, Inc., the investment adviser
to the Millennium Portfolio and sub-advisor in charge of managing the day to day
investments of the Acquiring Fund will use the same modern portfolio theory
style of stock selection for the Acquiring Fund that is used in the Millennium
Portfolio.
The Portfolio is designed to achieve the highest possible returns while
minimizing risk. The selection process focuses on fast growing companies that
offer innovative products, services, or technologies to a rapidly expanding
marketplace. Navellier Management, Inc. uses an objective, "bottom-up,"
quantitative screening process designed to identify and select inefficiently
priced growth stocks with superior returns compared to their risk
characteristics.
The Millennium Portfolio mainly buys stocks of companies which we believe
are poised to rise in price. The investment process focuses on "growth"
variables including, but not limited to, earnings growth, reinvestment rate, and
operating margin expansion.
Navellier Management, Inc. attempts to uncover stocks with strong return
potential and acceptable risk characteristics. To do this, a proprietary
computer model is used to calculate and analyze a "reward/risk ratio." The
reward/ risk ratio is designed to identify stocks with above average market
returns and risk levels which are reasonable for higher return rates.
Navellier Management, Inc.'s research team then applies two or more sets of
criteria to identify the most attractive stocks. Examples of these criteria
include earnings growth, profit margins, reasonable price/earnings ratios based
on expected future earnings, and various other fundamental criteria. Stocks
with the best combination of growth ratios are blended into a non-diversified
portfolio.
The Acquiring Fund will have after the merger the same investment
sub-advisor (Navellier Management, Inc.) managing the day to day investments
which the Millennium Portfolio has and will employ the same modern portfolio
investment style which is used by the Millennium Portfolio.
For further discussion of the comparisons in the investment policies of the
Acquiring Fund and of the Millennium Portfolio, see "Comparison of Investment
Objectives and Policies" in this combined prospectus/proxy statement.
OPERATIONS OF TOUCHSTONE STRATEGIC TRUST AND THE ACQUIRING FUND FOLLOWING THE
REORGANIZATION
Touchstone Strategic Trust and the Acquiring Fund will continue to operate
in substantially the same way as each did prior to the Reorganization. The
responsibilities, powers and fiduciary duties of the Trustees of the Acquiring
Fund are essentially the same as those of the Trustees of the Millennium
Portfolio. Subject to the provisions of the Touchstone Strategic Trust
Declaration of Trust, dated November 18, 1982 (the "Trust Declaration"), the
business of Touchstone Strategic Trust and the Acquiring Fund is managed by the
Touchstone Strategic Trust Board of Trustees (the "Board"), which has all powers
necessary and appropriate to carry out that business responsibility. The Board
supervises the business affairs and investments of the Acquiring Fund. The
Acquiring Fund receives investment advisory services from Touchstone Advisors,
Inc. and will receive upon consummation of the Reorganization sub-advisory
investment services from Navellier Management, Inc. The Acquiring Fund receives
distribution, marketing and customer services from Touchstones Securities, Inc.
pursuant to a Distribution Agreement.
MANAGEMENT, FEES, ADMINISTRATIVE FEES, AND OTHER OPERATING EXPENSES
MANAGEMENT AND FEES. Navellier Management, Inc. is the investment advisor
to the Millennium Portfolio pursuant to an investment management agreement
between the Millennium Portfolio and Navellier Management, Inc. (the "Millennium
Portfolio Management Contract"). Touchstone Advisors, Inc. (the 'Manager') is
the investment manager for the Touchstone Large Cap Growth. The Manager selects
and pays the fees of the sub-advisor and monitors the sub-advisor's program.
Navellier Management, Inc. will manage the investment and reinvestment of the
assets of the Acquiring Fund, as sub-advisor after the Reorganization, subject
to the supervision of Touchstone Advisors, Inc. and of the officers and Trustees
of the Acquiring Fund. The Millennium Portfolio pays Navellier Management, Inc.
an investment advisory fee at an annual rate of 1.00% of the aggregate average
daily net asset value of the Millennium Portfolio. The Acquiring Fund will pay
to Touchstone Advisors, Inc. an investment advisory fee at an annual rate of
0.75% of the aggregate average daily net asset value of the Acquiring Fund.
Under the terms of the Sub-Advisory Agreement, Navellier Management, Inc. will
be paid a fee of 0.45% of average daily net assets by the Manager, Touchstone
Advisors, Inc. The Acquiring Fund does not pay a fee to the sub-advisor.
The Trust and the Manager have received an order from the SEC whereby under
certain circumstances, the Manager may select or change sub-advisors, enter into
new-sub-advisory agreements or amend existing sub-advisory agreements without
first obtaining shareholder approval. Pursuant to this order, upon completion of
the Reorganization, the Manager will change the sub-advisor of the Touchstone
Large Cap Growth to the Advisor of the Millennium Portfolio.
ADMINISTRATIVE FEES AND OTHER OPERATING EXPENSES. The Millennium Portfolio
pays its own operating costs. Pursuant to an Administrative Services Agreement,
the Millennium Portfolio pays Navellier Management, Inc. an annual fee, pro rata
monthly, of 0.25% of the aggregate average daily net asset value of the
Millennium Portfolio to provide administrative services including shareholder
servicing services to the Millennium Portfolio. After waivers, its net operating
expenses in 2002 were 1.50% for Class A shares, 2.25% for Class B shares and
2.25% for Class C shares. The Acquiring Fund pays its own operating expenses.
Its net operating expenses for the period ending December 31, 2002 were 1.37%
for Class 'A' shares, 2.43% for Class 'B' shares, and 2.54% for Class 'C'
shares, after waivers.
12b-1 PLAN FEES. The Millennium Portfolio is allowed to pay fees to the
Distributor and others for promoting, selling, distributing, and/or servicing
its shares. These are commonly called '12b-1 fees.' Payments are made monthly
and can be up to 0.25% annually of the Portfolio's average daily net assets for
Class A shares and up to 1.00% annually of the Portfolio's average daily net
assets for Class B and Class C shares.
The Acquiring Fund has a Plan of Distribution under which Class A, B, and C
shares may directly incur or reimburse the Advisor for expenses related to the
distribution and promotion of shares. The annual limitation for payment of such
expenses under the Plan is 0.25%, 1.00%, and 1.00% for Class A, B, and C shares,
respectively, of average daily net assets attributable to Class A, B, and C
shares.
SALES LOADS. Class A Shareholders of the Acquiring Fund currently pay a
maximum sales charge ("load") of 5.75% on all purchases of the Fund. Upon
completion of the Reorganization Class A shareholders of the Millennium
Portfolio will be charged the same sales load as Class A shares of the Acquiring
Fund. The following tables set forth the fees and other expenses paid by Class
A, B and C shareholders of the Acquiring Fund and the Millennium Portfolio.
Touchstone Large Cap Growth Fund
Class A Class B Class C
Maximum Sales Charge (Load) Imposed on
Purchases 5.75% None None
Maximum Deferred Sales Charge (Load)(as a % of
redemption proceeds) 0.00%(1) 5.00%(2) 1.00%(3)
Redemption Fee(4) None None None
(1) There is no sales charge at the time of purchase for purchases of $1
million or more, but a contingent deferred sales load ("CDSC") of 1.00% may
be charged on shares redeemed within 1 year of purchase.
(2) Class B shareholders of the Acquiring Fund will pay a 5.00% CDSC if shares
are redeemed within 1 year of purchase. The CDSC will be incrementally
reduced over time. After the 6th year, there is no CDSC.
(3) The 1.00% CDSC charged to Class C shares of the Acquiring Fund is waived if
shares are held for 1 year or longer.
(4) Class A, B and C shareholders of the Acquiring Fund may be charged up to
$15 for wire redemptions. This fee is subject to change.
Millennium Portfolio
Class A Class B Class C
Maximum Sales Charge (Load) Imposed on
Purchases 4.95% None None
Maximum Deferred Sales Charge (Load)(as a % of
redemption proceeds) 0.00%(1) 5.00% 1.00%
Redemption Fee None None None
(1) There is no CDSC for Class A shares of the Millennium Portfolio. However,
there is a 1% CDSC on purchases over $1 million if you redeem within 18
months of purchase.
The following sets forth the fund operating expenses for Class A, B, and C
shares(as a percentage of the average daily net assets of each respective class)
for the Millennium Portfolio for the twelve-month period ended December 31,
2002. Adjacent to the column for Millennium Portfolio expenses is presented the
expected fund operating expenses for Class A, B and C shares (as a percentage of
the average daily net assets of each respective class) of the Acquiring Fund
into which the Millennium Portfolio would merge under the Plan.
CLASS A SHARES
Navellier Touchstone
Touchstone Millennium Large Combined
Large Cap Growth Cap Growth Pro Forma (1)
Expense
- ----------------------------- ---------------- ---------------- -------------
Management Fees 0.75% 1.00% 0.75%
Distribution 0.25% 0.25% 0.25%
Other Expenses 0.40% 14.15% 0.50%
----- ------ -----
Total Fund Expense 1.40% 15.40% 1.50%
Waiver - -13.90% -0.20%
----- ------ -----
Net Expense - 1.50% 1.30%
===== ====== =====
CLASS B SHARES
Navellier Touchstone
Touchstone Millennium Large Combined
Large Cap Growth Cap Growth Pro Forma (2)
Expense
- ----------------------------- ---------------- ---------------- ---------------
Management Fees 0.75% 1.00% 0.75%
Distribution 1.00% 1.00% 1.00%
Other Expenses 56.91% 14.15% 4.98%
------ ------ -----
Total Fund Expense 58.66% 16.15% 6.73%
Waiver - -13.90% -4.48%
------ ------ -----
Net Expense - 2.25% 2.25%
====== ====== =====
CLASS C SHARES
Navellier Touchstone
Touchstone Millennium Large Combined
Large Cap Growth Cap Growth Pro Forma (2)
Expense
- ----------------------------- ---------------- ---------------- -------------
Management Fees 0.75% 1.00% 0.75%
Distribution 1.00% 1.00% 1.00%
Other Expenses 1.98% 14.15% 2.18%
----- ------ -----
Total Fund Expense 3.73% 16.15% 3.93%
Waiver - -13.90% -1.68%
----- ------ -----
Net Expense - 2.25% 2.25%
===== ====== =====
(1) Touchstone Advisors, Inc. and the Trust have entered into an Expense
Limitation Agreement whereby the Total Annual Portfolio Operating Expenses
of the Touchstone Large Cap Growth for the Class A shares will not exceed
1.30%, Class B will not exceed 2.43%, and Class C shares will not exceed
2.51% for the period ending upon consummation of the Reorganization and
will not exceed 1.30%, 2.25%, and 2.25% for Class A, B, and C shares,
respectively, for a two year period after consummation of the
Reorganization. After reimbursements, the Total Annual Fund Operating
Expenses of Touchstone Large Cap Growth for the period ended December 31,
2002 were 1.37% for Class A shares, 2.43% for Class B shares, and 2.54% for
C shares. The Proforma expenses shown above assume the consummation of the
Reorganization, including the merger of the Navellier Performance Large Cap
Portfolio into the Acquiring Fund.
As reflected above, it is expected that Class A shares of the Acquiring
Fund will have lower total operating expenses than those historically incurred
by the Millennium Portfolio Class A shares. It is expected that Class B and C
shares of the Acquiring Fund will have the same total operating expenses of
those historically incurred by the Millennium Portfolio. Due to small relative
size of assets in the Class B and C shares of Millennium Portfolio significant
waivers and subsidies have been historically required to limit total net
operating expenses. Mr. Navellier believes that the lower management fee charged
to the Acquiring Fund and avoiding or reducing costs by merging the Millennium
Portfolio into the Acquiring Fund will save the Millennium Portfolio in excess
of $50,000 per year by reducing the fees paid to trustees, outside counsel to
the independent trustees, reducing printing and mailing and reduced management
fees, and that the Reorganization would be advantageous to and in the best
interests of the Shareholders. See "The Proposed Transactions--Reasons for the
Proposed Transactions".
FEE EXAMPLE
The tables below show examples of the total expenses you would pay on a
$10,000 investment over one-, three-, five- and ten-year periods. The examples
are intended to help you compare the cost of investing in the Millennium
Portfolio versus Touchstone Large Cap Growth and Touchstone Large Cap Growth
(Pro Forma), assuming the Reorganization takes place. The examples assume a 5%
average annual return, that you redeem all of your shares at the end of each
time period and that you reinvest all of your dividends. The following tables
also assume that total annual operating expenses remain the same throughout all
periods, and for the Touchstone Large Cap Growth Combined Pro Forma, are limited
for the first two years following consummation of the Reorganization and
thereafter, are not limited. The examples are for illustration only, and your
actual costs may be higher or lower.
CLASS A SHARES 1 Year 3 Years 5 Years 10 Years
- -------------- -------- -------- -------- --------
Touchstone Large Cap Growth Fund $719 $1,021 $1,345 $2,260
Millennium Large Cap Growth
Portfolio $640 $1,099 $1,583 $2,915
Pro Forma Combined $700 $984 $1,309 $2,227
CLASS B SHARES 1 Year 3 Years 5 Years 10 Years
- -------------- ------ ------- ------- --------
Touchstone Large Cap Growth Fund $1,067 $2,167 $3,323 $6,176
Millennium Large Cap Growth
Portfolio $728 $1,261 $1,719 $3,024
Pro Forma Combined $645 $1,399 $2,667 $5,785
CLASS C SHARES 1 Year 3 Years 5 Years 10 Years
- -------------- -------- -------- -------- --------
Touchstone Large Cap Growth Fund $395 $1,197 $2,017 $4,145
Millennium Large Cap Growth
Portfolio $328 $861 $1,519 $3,282
Pro Forma Combined $245 $912 $1,757 $3,948
PERFORMANCE
The following charts show how the shares of the Millennium Portfolio and
the shares of Touchstone Large Cap Growth have performed in the past. Past
performance is not an indication of future results.
YEAR-BY-YEAR TOTAL RETURN
The charts below show the percentage gain or loss for the shares of the
Millennium Portfolio and Touchstone Large Cap Growth in each full calendar year
since the inception of each Portfolio on September 5, 2000 and August 2, 1993,
respectively. The charts should give you a general idea of the risks of
investing in the Portfolios by showing how a portfolio's return has varied from
year-to-year. The charts include the effects of Portfolio expenses. Total return
amounts are based on the inception date of the Portfolio which may have occurred
before your investment began; accordingly, your investment results may differ.
The Portfolios can also experience short-term performance swings as indicated in
the high and low quarter information at the bottom of each chart. The
information provided for the Millennium Portfolio is for the initial Class
(Class A shares) and does not reflect sales charges which reduce returns.
Navellier Millennium Large Cap Growth
2001 2002
-26.16% -25.44%
Highest Quarter: 4th Quarter 2001, up 10.70%
Lowest Quarter: 1st Quarter 2001, down 24.38%
The year-to-date return for the Navellier Millennium Large Cap Growth Fund's
Class A shares as of June 30, 2003 is 9.03%.
The information provided for the Acquiring Fund is for Class A shares. The chart
does not reflect any sales charges. Sales charges will reduce return.
Touchstone Large Cap Growth
1994 1995 1996 1997 1998 1999 2000 2001 2002
- -1.67% 32.07% 14.26% 29.34% 21.90% 18.53% -19.50% -23.20% -36.16%
Highest Quarter: 4th Quarter 1998, up 20.28%
Lowest Quarter: 1st Quarter 2001, down 22.72%
The year-to-date return for the Touchstone Large Cap Growth Fund's Class A
shares as of June 30, 2003 is 10.68%.
The following table shows the after-tax returns calculated using the highest
historical individual federal marginal income tax rates and do not reflect the
impact of state and local taxes. Actual after-tax returns depend on an
investor's tax situation and may differ from those shown. The loss (if any) in
the "Return after taxes on distributions and sale of fund shares" column above
may be less than that shown in the "Return after taxes on distributions only"
column because it is assumed that the shareholder is subject to the highest
federal marginal tax rates. The after-tax returns shown are not relevant to
investors who hold their fund shares through tax-deferred arrangements such as
401(k) plans or individual retirement accounts. The index's returns reflect no
deduction for fees, expenses, or taxes. The Fund's past performance, before and
after taxes, is not necessarily an indication of how the Fund will perform in
the future.
The information provided for the Millennium Portfolio is for the initial Class
(Class A shares). The information provided for the Acquiring Fund is for Class A
shares.
Return after taxes
Return after taxes on distributions
Return on distributions and sale of fund Russell 1000
Before taxes only shares Growth Index
- --------------------------------------- -------------------- -------------------- --------------------- ----------------
Millennium Large Cap Growth
Portfolio A Shares
One Year -29.10% -29.10% -17.60% -27.89%
Since Inception -33.18% 33.18% -24.95% *-31.50%
Touchstone Large Cap Growth
Class A Shares
One Year -36.16% -39.84% -24.46% -27.89%
Five Year -10.63% -12.39% - 8.11% - 3.84%
Since Inception 0.97% - 0.50% 0.57% **7.62%
* Date of Index performance is from 09/05/2000.
** Date of Index performance is from 08/01/1993.
The next table lists the average annual total return of Class A, B, and C
shares of the Millennium Portfolio for the past one year and since inception
(through December 31, 2002) and of Touchstone Large Cap Growth for the past one
year for Class A, B, and C shares and five years for Class A and C shares, and
since inception for all Classes (through December 31, 2002). This table includes
the effects of Portfolio expenses and is intended to provide you with some
indication of the risks of investing in each Portfolio by comparing its
performance with an appropriate widely recognized index of securities, a
description of which can be found following the tables. An index does not
reflect fees or expenses. It is not possible to invest directly in an index.
Average Annual Total Return (for the period ended 12/31/2002)(1)
CLASS A SHARES
1 Year Ended 5 Years Ended From Inception Inception
Class A Shares 12/31/02 12/31/02 to 12/31/02 Date
------------------------------- ------------------ ------------------ ----------------- ------------------
Navellier Millennium Large -25.44% - -33.18% 09/5/2000
Cap Growth
Touchstone Large -36.16% -10.63% 0.97% 08/02/1993
Cap Growth
S&P 500 Index -22.10% - 0.59% *-19.70%
**9.38%
Russell 1000 Growth Index -27.89% - 3.84% *-31.84%
**7.62%
* Date of Index performance is from 09/01/2000.
** Date of Index performance is from 08/01/1993.
CLASS B SHARES
1 Year Ended From Inception Inception
Class B Shares 12/31/02 to 12/31/02 Date
------------------------------- ------------------ ---------------- -------------------
Navellier Millennium Large -26.21% -30.60% 10/03/2000
Cap Growth
Touchstone Large -36.76% -29.33% 05/01/2001
Cap Growth
S&P 500 Index -22.10% *-19.70%
**-17.67%
Russell 1000 Growth Index -27.89% *-31.84%
**-23.15%
* Date of Index performance is from 09/01/2000.
** Date of Index performance is from 05/01/2001.
CLASS C SHARES
1 Year Ended 5 Years Ended From Inception Inception
Class C Shares 12/31/02 12/31/02 to 12/31/02 Date
------------------------------- ------------------ ------------------ ----------------- ------------------
Navellier Millennium Large -26.02% - -31.78% 09/26/2000
Cap Growth
Touchstone Large -36.86% -11.59% 0.05% 08/07/1993
Cap Growth
S&P 500 Index -22.10% - 0.59% *-19.70%
**9.38%
Russell 1000 Growth Index -27.89% - 3.84% *-31.84%
**7.62%
* Date of Index performance is from 09/01/2000.
** Date of Index performance is from 08/01/1993.
(1) Reflects waiver of advisory fees and reimbursements and/or waivers of
expenses for certain periods. Without such reimbursements and/or waivers, the
average annual total returns during the periods would have been lower.
----------------------------
The S&P 500 Index is a widely recognized unmanaged index that measures the
stock performance of 500 large- and medium-sized companies and is often used to
indicate the performance of the overall stock market.
The Russell 1000 Growth Index is a widely recognized unmanaged index that
measures the stock performance of the Russell 1000 companies with higher
price-to-book ratios and higher forecasted growth values.
For a detailed discussion of the manner of calculating total return, please
see the Portfolios' Statements of Additional Information. Generally, the
calculations of total return assume the reinvestment of all dividends and
capital gain distributions on the reinvestment date and the deduction of all
recurring expenses that were charged to shareholders' accounts.
Important information about Touchstone Large Cap Growth is also contained
in management's discussion of Touchstone Large Cap Growth's performance. This
information also appears in the most recent Annual Report of the Trust relating
to Touchstone Large Cap Growth.
Upon consummation of the Reorganization, the Class A shares of Touchstone
Large Cap Growth will assume and publish the performance history of Navellier
Performance Large Cap Growth. The Class B and Class C shares of Touchstone Large
Cap Growth will commence operations on September 22, 2003 and will not assume
and publish any performance history.
PURCHASES AND EXCHANGES
Acquiring Fund Shares are sold in a continuous offering and are offered to
the public, and may be purchased through securities dealers or directly from the
Acquiring Fund's underwriter, Touchstone Securities, Inc.
In the proposed Reorganization, Millennium Portfolio shareholders will
receive shares of the Acquiring Fund having the same class designation and the
same arrangements with respect to the imposition of Rule 12b-1 distribution and
service fees as the shares they currently hold. Because the Reorganization will
be effected at net asset value without the imposition of a sales charge,
Millennium Portfolio shareholders will receive the Acquiring Fund shares without
paying any front-end sales charge or CDSC as a result of the Reorganization.
Acquiring Fund Class B and Class C shares received by Millennium Portfolio
shareholders as a result of the Reorganization will continue to be subject to a
CDSC upon subsequent redemption, but the CDSC will be based on the date of the
original purchase of Millennium Portfolio shares and will be subject to the CDSC
schedule applicable to Millennium Portfolio Fund shares on the date of the
original purchase of such shares.
The following is a summary description of charges and fees for the Class A,
Class B, and Class C shares of the Acquiring Fund which will be received by
Millennium Portfolio shareholders in the Reorganization. More detailed
descriptions of the distribution arrangements applicable to the classes of
shares are contained in each Fund's prospectus(es) and statement of additional
information.
Class A Shares. Class A shares are sold at net asset value plus a front-end
initial sales charge of up to 5.75% of the offering price and, as indicated
below, are subject to distribution-related fees. For a description of the
front-end sales charge applicable to the purchase of Class A shares see
"Choosing a Class of Shares" in the prospectus of the Acquiring Fund. No
front-end sales charge will be imposed on Class A shares of The Acquiring Fund
received by Millennium Portfolio shareholders as a result of the Reorganization.
Class B Shares. Class B shares are sold without a front-end sales charge
but are subject to a CDSC, which ranges from 5.00% to 1.00% if shares are
redeemed during the first six years after purchase. In addition, Class B shares
are subject to distribution-related fees and shareholder servicing-related fees
described below. Class B shares convert to Class A shares after eight years
following purchase. For purposes of determining when Class B shares issued in
the Reorganization to shareholders of Millennium Portfolio will convert to Class
A shares, such shares will be deemed to have been purchased as of the date the
Class B shares of Millennium Portfolio were originally purchased.
Class B shares are subject to higher distribution-related and shareholder
servicing-related fees than the corresponding Class A shares on which a
front-end sales charge is imposed (until they convert to Class A shares). The
higher fees mean a higher expense ratio, so Class B shares pay correspondingly
lower dividends and may have a lower net asset value than Class A shares of the
Fund.
Class C Shares. Class C shares are sold at net asset value without a
front-end sales charge, and, as indicated below, are subject to
distribution-related and shareholder servicing-related fees. Class C shares are
subject to a 1.00% CDSC if such shares are redeemed within one year after
purchase. Class C shares issued to shareholders of Millennium Portfolio in
connection with the Reorganization will continue to be subject to the CDSC
schedule in place at the time of their original purchase. Class C shares incur
higher distribution-related and shareholder servicing-related fees than Class A
shares, but unlike Class B shares, do not convert to any other class of shares.
The Acquiring Fund currently offers an exchange privilege, including
telephone exchange privileges, which, subject to certain restrictions, permit
shares of any of the other portfolios of the Touchstone Strategic Trust to be
exchanged for shares of the Acquiring Fund. These exchanges are based upon each
portfolio's net asset value per share next computed following receipt of a
properly-executed exchange request without any sales charge. These exchanges
also may be made only between identically-registered accounts, and these
exchange privileges also are available only in states where the shares to be
acquired may be legally sold. If the proposed merger does not occur, Millennium
Portfolio shareholders will not be able to exchange their Millennium Portfolio
shares for shares of any series of the Touchstone Strategic Trust. Except for
the foregoing, there would be no material differences between the exchange
privileges which shareholders of the Millennium Portfolio currently have and the
exchange privileges which such shareholders will have as shareholders of the
Acquiring Fund upon effectiveness of the Reorganization.
The Acquiring Fund has reserved the right to reject or refuse, at Acquiring
Fund's discretion, any order for the purchase of its shares in whole or in part.
REDEMPTION PROCEDURES AND FEES
Acquiring Fund Shares may be redeemed at a redemption price equal to the
net asset value of the shares as next computed following the receipt of a
request for redemption in proper form. Payment of redemption proceeds for
redeemed Acquiring Fund Shares ordinarily are made within seven days after
receipt of a redemption request in proper form and documentation. Shares of the
Acquiring Fund may be redeemed without charge.
DIVIDENDS AND DISTRIBUTIONS; AUTOMATIC REINVESTMENT
The Acquiring Fund and the Millennium Portfolio each declares and pays
dividends from the net investment income and short-term capital gains, if any,
to shareholders. The Millennium Portfolio pays dividends annually during
December of each year and distributes long-term capital gains, if any, to
shareholders on an annual basis in December. The Acquiring Fund pays dividends
quarterly and pays capital gains, if any, at least annually.
The income dividends and capital gains distributions for investors in the
Acquiring Fund and in the Millennium Portfolio are each automatically
reinvested, without sales charge, in additional shares of the Acquiring Fund and
of the Millennium Portfolio respectively at the applicable net asset value of
such shares calculated on the ex-dividend date unless such an investor has
requested otherwise in writing.
FEDERAL TAX CONSEQUENCES OF THE PROPOSED REORGANIZATION
The Acquiring Fund and the Millennium Portfolio have received, as a
condition to the Reorganization, opinion of legal counsel, to the effect, for
Federal income tax purposes, that the proposed Reorganization will constitute a
tax-free reorganization within the meaning of Section 368(a)(1)(C) of the U.S.
Internal Revenue Code of 1986, as amended (the "Code"). Accordingly, it is
believed that no gain or loss generally will be recognized by Touchstone
Strategic Trust or by the Acquiring Fund, by the Navellier Millennium Funds or
by the Millennium Portfolio, or by their respective shareholders (see "The
Proposed Transactions--Federal Income Tax Consequences").
COSTS AND EXPENSES OF THE REORGANIZATION
Navellier Management, Inc. will pay the costs, expenses, and professional
fees incurred in the preparation and mailing of this notice and this combined
prospectus/proxy statement and the proxy, and in the solicitation of proxies,
which may include reimbursement to broker-dealers and others who forward proxy
materials to their clients and the costs of a professional solicitation firm.
See "Introduction and Voting Information--Proxy Solicitation".
CONTINUATION OF SHAREHOLDER ACCOUNTS; SHARE CERTIFICATES
As a result of the proposed transactions contemplated by the Reorganization
of the Millennium Portfolio into the Acquiring Fund, Shareholders would cease to
be shareholders of the Millennium Portfolio and would receive on the books of
the Acquiring Fund, that number of full and fractional Acquiring Fund Shares
having an aggregate net asset value equal to the aggregate net asset value of
his or her Millennium Portfolio Shares as of the close of business on the
Closing Date.
The Acquiring Fund will establish accounts on the Closing Date for
Shareholders which will contain the appropriate number of Acquiring Fund Shares.
Acceptance of Acquiring Fund Shares by a Shareholder will be deemed to be
authorization of the Acquiring Fund and its agents to establish, with respect to
the Acquiring Fund, all of the account options, including telephone redemptions,
if any, and dividend and distribution options, as have been established for the
Shareholder's Portfolio account. Shareholders who are receiving payments under
an Automatic Investment Plan, with respect to Millennium Portfolio Shares, will
retain the same rights and privileges as to Acquiring Fund Shares under such an
Automatic Investment Plan after the Reorganization. Similarly, no further action
will be necessary in order to continue, with respect to Acquiring Fund Shares,
any retirement plan currently maintained by a Shareholder with respect to
Millennium Portfolio Shares.
As a series of a Massachusetts business trust, the Acquiring Fund will not
issue certificates evidencing ownership of the Acquiring Fund Shares.
Shareholders of the Millennium Portfolio will have their beneficial interests in
the Millennium Portfolio cancelled on the books of the Millennium Portfolio in
order to receive the Acquiring Fund Shares on the books of Acquiring Fund as a
result of the Reorganization.
No sales or other charges will be imposed in connection with the issuance
of Acquiring Fund Shares to Millennium Portfolio Shareholders pursuant to the
Reorganization.
FORM OF ORGANIZATION OF TOUCHSTONE STRATEGIC TRUST
Touchstone Strategic Trust is an unincorporated voluntary association
organized under the laws of the State of Massachusetts as a business trust
pursuant to the Declaration of Trust. The operations of Touchstone Strategic
Trust and the Acquiring Fund (a Portfolio of Touchstone Strategic Trust) are
governed by this Declaration of Trust, by Touchstone Strategic Trust's By-Laws,
and by Massachusetts Law, as applicable. The Navellier Millennium Funds is an
unincorporated voluntary association organized under the laws of the State of
Delaware as a business trust. The operations of The Navellier Millennium Funds
and the Millennium Portfolio are governed by The Navellier Millennium Funds'
Declaration of Trust dated September 9, 1998, and by Delaware law, as
applicable. Both Touchstone Strategic Trust and The Navellier Millennium Funds,
as well as their series investment portfolios, are subject to the provisions of
the 1940 Act and to the rules and regulations of the Commission thereunder.
Touchstone Strategic Trust is authorized to issue an unlimited number of shares
of beneficial interest in one or more series investment portfolios or funds.
Currently, Touchstone Strategic Trust is composed of six (6) separate investment
portfolios: the Emerging Growth Fund, the Growth Opportunities Fund, the Large
Cap Growth Fund, the Enhanced 30 Fund, the Value Plus Fund, and the Small Cap
Growth Fund ("the Portfolios"). See "The Proposed Transactions--Description of
Securities to Be Issued".
PRINCIPAL RISK FACTORS
The principal risks associated with an investment in the the Acquiring Fund
after the consummation of the Reorganziation are discussed below. These risks
are identical to the risks of investing in the Millennium Portfolio.
An investment in shares of the Acquiring Fund involves certain speculative
considerations. There can be no assurance that any of the Acquiring Fund's
objectives will be achieved or that the value of the investment will increase.
An investment in shares of the Millennium Portfolio also involves the same
risks.
MARKET RISK
A fund's share price can fall because of weakness in the broad market, a
particular industry, or specific holdings. The market as a whole can decline for
many reasons, including disappointing corporate earnings, adverse political or
economic developments here or abroad, changes in investor psychology, or heavy
institutional selling. The prospects for an industry or a company may
deteriorate. In addition, an assessment by a fund's investment adviser of
particular companies may prove incorrect, resulting in losses or poor
performance by those holdings, even in a rising market. The Acquiring Fund could
miss attractive investment opportunities if its investment adviser underweights
fixed income markets or industries where there are significant returns, and
could lose value if the investment adviser overweights fixed income markets or
industries where there are significant declines.
MARKET CAPITALIZATION RISK
Stocks fall into three broad market capitalization categories--large,
medium and small. Investing primarily in one category carries the risk that due
to current market conditions that category may be out of favor. If valuations of
large capitalization companies appear to be greatly out of proportion to the
valuations of small or medium capitalization companies, investors may migrate to
the stocks of small and mid-sized companies causing a fund that invests in these
companies to increase in value more rapidly than a fund that invests in larger,
fully-valued companies. Larger, more established companies may also be unable to
respond quickly to new competitive challenges such as changes in technology and
consumer tastes. Many larger companies also may not be able to attain the high
growth rate of successful smaller companies, especially during extended periods
of economic expansion.
INVESTING IN SECURITIES OF FOREIGN ISSUERS
Investments in foreign securities, particularly those of non-governmental
issuers, involve considerations which are not ordinarily associated with
investing in domestic issuers. These considerations include, among others,
changes in currency rates, currency exchange control regulations, the
possibility of expropriation, the unavailability of financial information, the
difficulty of interpreting financial information prepared under laws applicable
to foreign securities markets, the impact of political, social, or diplomatic
developments, difficulties in invoking legal process abroad, and the difficulty
of assessing economic trends in foreign countries. Navellier Management, Inc.
will use the same basic selection criteria for investing in foreign securities
as it uses in selecting domestic securities.
While, to some extent, the risks to the Acquiring Fund of investing in
foreign securities may be limited, since it may not invest more than 25% of its
net asset value in such securities and since it may only invest in foreign
securities which are traded in the United States securities markets, the risks
nonetheless exist. The same risks apply to the Millennium Portfolio's
investments in foreign securities.
PORTFOLIO TURNOVER
While the future annual rate of portfolio turnover is unknown, Navellier
Management, Inc. estimates but cannot guarantee that the annual portfolio
turnover rate will not exceed 200%. Navellier Management, Inc., which is also
the investment advisor to the Millennium Portfolio, will employ the same
investment style for the Acquiring Fund as it employed in managing the
Millennium Portfolio, which had an annual portfolio turnover rate in 2002 of
116%. However, these are NOT restrictions on Navellier Management, Inc. and if,
in Navellier Management Inc.'s judgment, a higher annual portfolio turnover rate
is required in order to attempt to achieve a higher overall performance, then
Navellier Management, Inc. is permitted to do so. However, high portfolio
turnover (100% or more) will result in increased brokerage commissions, dealer
mark-ups, and other transaction costs on the sale of securities and on
reinvestment in other securities and could therefore adversely affect
performance.
NON-DIVERSIFICATION RISK
The Acquiring Fund is a non-diversified investment company (assuming the
approval of the shareholders of Touchstone Large Cap Growth to change the Fund
to a non-diversified fund upon completion of the Reorganization) and as such,
may invest up to 25% of its assets in a single issuer and up to 50% of its
assets may consist of securities of only two issuers. A higher percentage of
investments among fewer issuers may result in greater fluctuation in the total
market value of the Fund's investments than in the investments of a Fund which
invests in numerous issuers.
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
As discussed below, the investment objective and policies of the Acquiring
Fund and the Millennium Portfolio will be the same (subject to the approval of
the shareholders of Touchstone Large Cap Growth to change the Fund to a
non-diversified fund upon completion of the Reorganization). The Comparison of
Investment Objectives and Policies has been prepared assuming such change takes
place.
INVESTMENT OBJECTIVE AND POLICIES
GENERAL. The Acquiring Fund and the Millennium Portfolio each invest in the
common stocks of large cap companies (companies with market capitalization of
more than $5 Billion).
INVESTMENT OBJECTIVE OF THE ACQUIRING FUND
The Investment Objective of the Acquiring Fund is and will be to achieve
long-term growth of capital. The Acquiring Fund invests in securities traded in
the United States securities markets of domestic issuers and of foreign issuers.
After the Reorganization, the sole objective of the Acquiring Fund is to seek to
achieve long term growth of capital primarily through investments in securities
of large cap companies (companies with market capitalization of more than $5
Billion) with appreciation potential by applying the proprietary modern
portfolio theory techniques of Navellier Management, Inc. There can be no
assurance that the Acquiring Fund will achieve its investment objectives. The
Acquiring Fund's investment objectives may be changed without shareholder
approval subject to 60 days notice to shareholders. The Acquiring Fund should
not be considered suitable for investors seeking current income.
INVESTMENT OBJECTIVE OF THE MILLENNIUM PORTFOLIO
The investment objective of the Millennium Portfolio is the same as the
investment objective of the Acquiring Fund. The Millennium Portfolio's
investment objective is to achieve long-term growth of capital primarily through
investment in large cap companies with appreciation potential. The Millennium
Portfolio invests in securities traded in the United States securities markets
of domestic issuers and of foreign issuers. The sole objective of the Millennium
Portfolio is to seek to achieve long term growth of capital primarily through
investments in securities of large cap companies (companies with market
capitalization of more than $5 Billion) with appreciation potential. There can
be no assurance that the Millennium Portfolio will achieve its investment
objectives. The Millennium Portfolio's investment objectives may not be changed
without shareholder approval. The Millennium Portfolio should not be considered
suitable for investors seeking current income.
OTHER INVESTMENTS. Both the Acquiring Fund and the Millennium Portfolio
may, for temporary defensive purposes or to maintain cash or cash equivalents to
meet anticipated redemptions, also invest in debt securities and money market
funds if, in the opinion of the investment advisor, such investment will further
their cash needs or temporary defensive needs. In addition, when the investment
advisor feels that market or other conditions warrant it, for temporary
defensive purposes, both the Acquiring Fund and the Millennium Portfolio may
retain cash or invest all or any portion of their assets in cash equivalents,
including money market mutual funds. Under normal conditions, both the Acquiring
Fund's and Millennium Portfolio's holdings in such non-equity securities should
not exceed 20% of the total assets of such fund.
CERTAIN INVESTMENT RESTRICTIONS AND LIMITATIONS
The investment restrictions and limitations of the Acquiring Fund and those
of the Millennium Portfolio are substantially the same (subject to the approval
of the shareholders of Touchstone Large Cap Growth to change that Fund to a
non-diversified fund upon completion of the Reorganization). Unless otherwise
specified, the investment restrictions and limitations are considered to be
"fundamental" policies, and, as such, may not be changed without approval of the
holders of a "majority" (as that term is defined in the 1940 Act) of the
Acquiring Fund's or Millennium Portfolio's respective outstanding shares.
The Millennium Portfolio may not:
1. Purchase securities of any issuer, other than obligations
issued or guaranteed as to principal and interest by the United States
government or its agencies or instrumentalities, if immediately
thereafter (i) more than 5% of the Portfolio's total assets (taken at
market value) would be invested in the securities of such issuer, or
(ii) more than 10% of the voting securities of any class of such
issuer would be held by the Portfolio.
2. Concentrate the Millennium Portfolio investments in any one
industry. To comply with this restriction, no security may be
purchased for the Millennium Portfolio if such purchase would cause
the value of the aggregate investment of the Millennium Portfolio in
any one industry to be 25% or more of the Millennium Portfolio's total
assets (taken at market value).
3. Purchase any securities or other property on margin, or engage
in short sales of securities (unless it owns, or by virtue of its
ownership of other securities has the right to obtain without payment
of any additional consideration securities equivalent in kind and
amount to the securities sold); PROVIDED, HOWEVER, that the Millennium
Portfolio may obtain short-term credit as may be necessary for the
clearance of purchases and sales of securities.
4. Make cash loans, except that the Millennium Portfolio may
purchase bonds, notes, debentures, or similar obligations which are
customarily purchased by institutional investors whether publicly
distributed or not.
5. Make securities loans, except that the Millennium Portfolio
may make loans of the securities of the Millennium Portfolio, provided
that the market value of the securities subject to any such loans does
not exceed 33 1/3% of the value of the total assets (taken at market
value) of the Millennium Portfolio.
6. Make investments in real estate or commodities or commodity
contracts, including futures contracts, although the Millennium
Portfolio may purchase securities of issuers which deal in real estate
or commodities even though this is not a primary objective of the
Millennium Portfolio but only if such securities are large cap equity
securities or constitute less than 20% of the Millennium Portfolio's
total assets.
7. Invest in oil, gas, or other mineral exploration or
development programs, although the Millennium Portfolio may purchase
securities of issuers which engage in whole or in part of such
activities, but only if such securities are large cap equity
securities or constitute less than 20% of the Millennium Portfolio's
total assets.
8. Invest in or sell puts, calls, straddles, and any combination
thereof.
9. Purchase securities of companies for the purpose of exercising
management or control.
10. Participate in a joint or joint and several trading account
in securities.
11. Purchase the securities of (i) other open-end investment
companies, or (ii) closed-end investment companies.
12. Issue senior securities or borrow money, except that
Acquiring Fund and Millennium Portfolio may (i) borrow money only from
banks for temporary or emergency (not leveraging) purposes, including
the meeting of redemption requests, that might otherwise require the
untimely disposition of securities, provided that any such borrowing
does not exceed 10% of the value of the total assets (taken at market
value) of the Millennium Portfolio, and (ii) borrow money only from
banks for investment purposes, provided that (a) after each such
borrowing, when added to any borrowing described in clause (i) of this
paragraph, there is an asset coverage of at least 300% as defined in
the Investment Company Act of 1940, and (b) is subject to an agreement
by the lender that any recourse is limited to the assets of the
Millennium Portfolio with respect to which the borrowing has been
made. The Millennium Portfolio may not invest in securities while the
amount of its borrowing exceeds 5% of its total assets.
13. Pledge, mortgage, or hypothecate its assets to an extent
greater than 10% of its total assets to secure borrowings made
pursuant to the provisions of Item 12 above.
The following investment restrictions are "fundamental policies" of the
Acquiring Fund and may not be changed with respect to the Acquiring Fund without
the approval of a "majority of the outstanding voting securities" of the
Acquiring Fund. "Majority of the outstanding voting securities" under the 1940
Act, and as used in the Statement of Additional Information and the Prospectus,
means, the lesser of (i) 67% or more of the outstanding voting securities of a
Fund present at a meeting if the holders of more than 50% of the outstanding
voting securities of a Fund are present or represented by proxy or (ii) more
than 50% of the outstanding voting securities of the Acquiring Fund.
THE FUNDAMENTAL LIMITATIONS APPLICABLE TO THE ACQUIRING FUND ARE:
1. BORROWING MONEY. The Acquiring Fund may not engage in borrowing
except as permitted by the Investment Company Act of 1940, any rule,
regulation or order under the 1940 Act or any SEC staff interpretation
of the 1940 Act.
2. UNDERWRITING. The Acquiring Fund may not underwrite securities
issued by other persons, except to the extent that, in connection with
the sale or disposition of portfolio securities, the Acquiring Fund
may be deemed to be an underwriter under certain federal securities
laws or in connection with investments in other investment companies.
3. LOANS. The Acquiring Fund may not make loans to other persons
except that the Acquiring Fund may (1) engage in repurchase
agreements, (2) lend portfolio securities, (3) purchase debt
securities, (4) purchase commercial paper, and (5) enter into any
other lending arrangement permitted by the Investment Company Act of
1940, any rule, regulation or order under the Act or any SEC staff
interpretation of the Act.
4. REAL ESTATE. The Acquiring Fund may not purchase or sell real
estate except that the Acquiring Fund may (1) hold and sell real
estate acquired as a result of the Acquiring Fund's ownership of
securities or other instruments (2) purchase or sell securities or
other instruments backed by real estate or interests in real estate
and (3) purchase or sell securities or entities or investment
vehicles, including real estate investment trusts that invest, deal or
otherwise engage in transactions in real estate or interests in real
estate.
5. COMMODITIES. The Acquiring Fund will not purchase or sell physical
commodities except that the Acquiring Fund may (1) hold and sell
physical commodities acquired as a result of the Acquiring Fund's
ownership of securities or other instruments, (2) purchase or sell
securities or other instruments backed by physical commodities, (3)
purchase or sell options, and (4) purchase or sell futures contracts.
6. CONCENTRATION OF INVESTMENTS. The Acquiring Fund may not purchase
the securities of an issuer (other than securities issued or
guaranteed by the United States Government, its agencies or its
instrumentalities) if, as a result, more than 25% of the Acquiring
Fund's total assets would be invested in the securities of companies
whose principal business activities are in the same industry.
7. SENIOR SECURITIES. The Acquiring Fund my not issue senior
securities except as permitted by the Investment Company Act of 1940,
any rule, regulation or order under the Act or any SEC staff
interpretation of the Act.
THE PROPOSED TRANSACTIONS
PROPOSED AGREEMENT AND PLAN OF REORGANIZATION
The terms and conditions of the proposed merger, as contemplated by the
Reorganization, are set forth in the Plan. Significant provisions of the Plan,
with respect to the proposed Reorganization of the Millennium Portfolio into the
Acquiring Fund, are summarized immediately below. This summary, however, is
qualified in its entirety by reference to the Plan, which is attached to this
combined prospectus/ proxy statement as Appendix A.
With respect to the proposed Reorganization, the Plan contemplates (i) the
Acquiring Fund, on the closing date of the Reorganization, acquiring all of the
assets of the Portfolio and all the assets of the Millennium Portfolio in
exchange for Acquiring Fund Shares and the assumption by the Acquiring Fund of
all valid liabilities of the Portfolio and of the Millennium Portfolio and (ii)
the constructive distribution of Acquiring Fund Shares to the Shareholders of
the Portfolio and to the shareholders of the Millennium Portfolio in exchange
for the corresponding class of shares of Portfolio Shares and the Millennium
Portfolio Shares, all as provided for by the Plan.
The assets of the Portfolio and the assets of the Millennium Portfolio to
be acquired by the Acquiring Fund include all property, including without
limitation, all cash, securities, commodities and futures interests and
dividends or interest receivables which are owned by the Portfolio and those
owned by the Millennium Portfolio and any deferred or prepaid expenses shown as
an asset on the books of the Portfolio and on the books of the Millennium
Portfolio on the closing date of the Reorganization. The Acquiring Fund will
assume from the Portfolio and from the Millennium Portfolio all valid
liabilities, expenses, costs, charges and reserves reflected on unaudited
statements of assets and liabilities of the Portfolio and of the Millennium
Portfolio.
The Acquiring Fund also will deliver Acquiring Fund Shares to the Portfolio
and to the Millennium Portfolio, which Acquiring Fund Shares the Portfolio and
the Millennium Portfolio shall then distribute to their respective Shareholders
in exchange for such Shareholders' Portfolio Shares or Millennium Portfolio
Shares. The number of full and fractional shares of each class of the Acquiring
Fund to be received by the shareholders of the Millennium Portfolio will be
determined by multiplying the number of full and fractional shares of the
corresponding class of the Millennium Portfolio by a factor which shall be
computed by dividing the net asset value per share of the respective class of
shares of the Millennium Portfolio by the net asset value per share of the Class
A shares of Navellier Performance Large Cap Growth Portfolio. Such computations
will take place as of the Valuation Time. The net asset value per share of each
class will be determined by dividing assets, less liabilities, in each case
attributable to the respective class, by the total number of outstanding shares.
The exchange of the Portfolio's assets and the Millennium Portfolio's assets for
the Acquiring Fund Shares is anticipated to occur on September 19, 2003, or such
later date as the parties may agree upon (the "Closing Date").
The value of the Portfolio's assets and the Millennium Portfolio's assets
to be acquired by the Acquiring Fund and the value of the Portfolio's valid
liabilities and the Millennium Portfolio's valid liabilities to be assumed by
the Acquiring Fund and the net asset value of a share of the Acquiring Fund will
be determined as of immediately after the close of regular trading on the NYSE
on the Closing Date, using the valuation procedures set forth in the Acquiring
Fund's then-current Prospectus and Statement of Additional Information.
Upon the Closing Date, the Portfolio and the Millennium Portfolio will
liquidate and distribute pro rata to their Shareholders of record (as evidenced
by such Shareholders' Portfolio and Millennium Portfolio Shares) the Acquiring
Fund Shares received by the Portfolio and the Millennium Portfolio in exchange
for such Shareholders' interests in the Portfolio and the Millennium Portfolio.
These liquidations and distributions will be accomplished by opening accounts on
the books of the Acquiring Fund in the name of each shareholder of record in the
Portfolio and in the Millennium Portfolio and by crediting thereon the shares
previously credited to the Portfolio and to the Millennium Portfolio account of
the shareholder on those books, as described above (see "Synopsis--Continuation
of Shareholder Accounts; Share Certificates"). Each such Acquiring Fund
shareholder account shall represent the respective pro-rata number of the
Acquiring Fund Shares due to such Shareholder.
Accordingly, every Shareholder will own Acquiring Fund Shares immediately
after the Reorganization, the total value of which Acquiring Fund Shares will be
equal to the total value of his or her Portfolio Shares or Millennium Portfolio
Shares immediately prior to the Reorganization. Moreover, because the Acquiring
Fund Shares will be issued at net asset value in exchange for the net assets
transferred from the Portfolio or from the Millennium Portfolio, the total net
asset value of the Acquiring Fund Shares received by Portfolio Shareholders or
Millennium Portfolio Shareholders after the transfer of assets will be equal to
the net asset value of the Portfolio Shares or Millennium Portfolio Shares at
the Closing Date. Thus, the Reorganization will not result in a dilution in
value of any Shareholder account.
The consummation of the proposed transaction contemplated by the
Reorganization is subject to a number of conditions set forth in the Plan, some
of which conditions may be waived by the Touchstone Strategic Trust Board or by
the Millennium Funds Board, or by an authorized officer of the Touchstone
Strategic Trust or The Navellier Millennium Funds, as appropriate. Among the
significant conditions (which may not be waived) for the Reorganization are: (i)
the receipt by the Portfolio and by the Millennium Portfolio and by the
Acquiring Fund of an opinion of counsel as to certain Federal income tax aspects
of the Reorganization (see "The Proposed Transactions--Federal Income Tax
Consequences") (which opinion of counsel has already been received); (ii) the
approval of the Plan by the affirmative vote of the holders of at least 67% of
the Portfolio shares and of the Millennium Portfolio Shares present in person or
by proxy entitled to vote at the Portfolio shareholders' meeting and at the
Millennium Portfolio Shareholder's meeting if a quorum is present or a majority
of the Portfolio's and of the Millennium Portfolio's outstanding voting shares,
whichever percentage is less and (iii) approval of the Plan by the Portfolio's
Board of Trustees and by the Millennium Portfolio's Board of Trustees (which
approvals have also already been obtained). The Plan may be terminated and the
Reorganization abandoned at any time, before or after approval by the
Shareholders, prior to the applicable Closing Date or by mutual consent of the
Portfolio or the Millennium Portfolio and the Acquiring Fund. In addition, the
Plan may be amended in any mutually-agreeable manner, except that no amendment
may be made to the Plan subsequent to the Meeting that would be materially
detrimental to the Shareholders.
In addition, approval by the shareholders of the Acquiring Fund of the
change of that Fund from a diversified to a non-diversifed series of the Trust
is a condition of the Reorganization. The proposed transaction will not occur
unless shareholders approve this change.
The Investment Sub-Advisor to the Acquiring Fund (Navellier Management,
Inc.) contemplates that the Portfolio's and the Millennium Portfolio's assets at
the date of the transactions of the Reorganization will be invested in a manner
consistent with the investment objectives and policies of both the Portfolio and
the Millennium Portfolio and the Acquiring Fund.
REASONS FOR THE PROPOSED TRANSACTIONS
As described below in greater detail, the Portfolio's Trustees and the
Millennium Portfolio's Trustees believe the Reorganization would benefit
Shareholders of the Portfolio and of the Millennium Portfolio by substantially
reducing existing operating costs and expenses of the Portfolio and of the
Millennium Portfolio by an estimated $50,000 per year or more thereby promoting
more efficient operations. It is estimated that a proposed merger of the
Portfolio and of the Millennium Portfolio into the Acquiring Fund would
substantially reduce the annual operating expenses of the Portfolio and of the
Millennium Portfolio by reducing the Portfolio's and the Millennium Portfolio's
annual Independent Trustee's fees, expenses, independent counsel's fees and; by
reducing liability insurance, costs of printing separate prospectuses, annual
and semi-annual shareholder reports, quarterly reports and mailings for the
Portfolio and for the Millennium Portfolio; by reducing the management fee
charged by the Investment Advisor; and that a proposed merger would generally
increase the efficiency of operations and would not result in any change in the
way the assets were managed, since the Investment Sub-Advisor, Navellier
Management, Inc., would remain the same and would operate pursuant to the same
investment objectives and restrictions. For these reasons, the Trustees believe
that the Reorganization of the Portfolio and of the Millennium Portfolio into
the Acquiring Fund is in the best interests of the Shareholders of the Portfolio
and of the Millennium Portfolio and that the interests of the Shareholders of
the Portfolio and of the Millennium Portfolio would not be diluted by the
Reorganization.
The Portfolio Trustees and the Millennium Portfolio Trustees recommend that
the Shareholders of the Portfolio and of the Millennium Portfolio vote FOR
Proposal 1 (the Reorganization) based on a number of factors, first and foremost
of which is that the Reorganization should result in substantial savings. The
Portfolio Trustees and the Millennium Portfolio Trustees also believe that the
Reorganization, if effected, would enable the resulting larger fund complex,
with its larger asset base, to achieve enhanced distribution capability. It is
also believed that the anticipated reduction in costs should increase the
performance of the Portfolio and of the Millennium Portfolio.
It is estimated that the proposed merger should permit the reduction or
elimination of certain costs and expenses presently incurred for services that
are separately performed for the Portfolio, the Millennium Portfolio and the
Acquiring Fund. For example, the projected Independent Trustees fees and
expenses expected to be paid to the Independent Trustees of the Portfolio and of
the Millennium Portfolio would be reduced, as would the liability insurance and
the attorney's fees and costs of outside counsel for the Independent Trustees.
These costs should be eliminated or greatly reduced. Printing and mailing costs
should be reduced as a result of a single prospectus, annual report, and
semi-annual report. As a general rule, economies can be expected to be realized
primarily with respect to fixed expenses, such as costs of printing and fees for
professional services. Expenses that are based on the value of assets or the
number of shareholder accounts, such as custody and transfer agent fees,
however, would be largely unaffected by the Reorganization. Achievement of these
goals, of course, cannot be assured.
The Portfolio Trustees and the Millennium Portfolio Trustees recommend the
proposed Reorganization, and the transactions contemplated thereby, to the
Shareholders for the reasons set forth above as well as on a number of other
factors, including the following:
1. the terms and conditions of the Reorganization and the fact that the
Reorganization would not result in dilution of Shareholder interests;
2. the fact that the investment objectives, policies, Navellier investment
style and restrictions of the Portfolio, the Millennium Portfolio and the
Acquiring Fund would remain essentially the same;
3. similar service features available to shareholders in the Portfolio, the
Millennium Portfolio and the Acquiring Fund;
4. the anticipated benefits to the Shareholders of the Portfolio and of the
Millennium Portfolio by being part of the Touchstone Investments;
5. the tax-free nature and consequences of the Reorganization;
6. the expense ratios, fees, and expenses of Touchstone Large Cap Growth
including the fact that the investment advisory fee rate paid by Touchstone
Large Cap Growth is lower than that paid by Millennium Portfolio;
7. the fact that the Manager has contractually agreed to limit the total
annual operating of the Acquiring Fund for at least two years and that such
expenses for Class A shareholders would be lower than the current operating
expenses for the Millennium Portfolio Class A shareholders, and that the
Manager has contractually agreed to limit the total annual operating of the
Class B and C shares of the Acquiring Fund for at least two years such that
expenses for Class B and C shareholders would be the same as the current
operating expenses of the Millennium Portfolio Class B and C shares;
8. the fact that Navellier Management, Inc. and Touchstone Advisors, Inc. will
bear the expenses incurred by the Millennium Portfolio and the Acquiring
Fund in connection with the Reorganization;
The Trustees of the Trust have also approved the Plan on behalf of Touchstone
Large Cap Growth.
YOUR TRUSTEES BELIEVE THE PROPOSED REORGANIZATION PLAN SHOULD BE APPROVED. The
consummation of the proposed transactions contemplated by the Reorganization is
subject to a number of conditions set forth in the Plan, some of which
conditions may be waived by the Trustees. See "The Proposed
Transactions--Agreement and proposed Plan of Reorganization." Among the
significant conditions (which may not be waived) for the Reorganization are (i)
the receipt by each of the Funds of an opinion of counsel (or a revenue ruling
of the U.S. Internal Revenue Service) as to certain Federal income tax aspects
of the Reorganization (see "The Proposed Transactions--Federal Income Tax
Consequences") (that opinion of counsel has been received) and (ii) the approval
of the Plan by the affirmative vote of at least 67% of the Portfolio Shares and
at least 67% of the Millennium Portfolio Shares present in person or by proxy if
a quorum of shareholders is present or the holders of at least a majority of the
outstanding voting Shares of the Portfolio and of the Shares of the Millennium
Portfolio, whichever amount is less and (iii) approval of the proposed merger by
the
Trustees of the Portfolio and of the Trustees of the Millennium Portfolio (these
conditions have also been satisfied). The Plan provides, with respect to the
Reorganization, for the acquisition of all the assets of the Portfolio and all
the assets of the Millennium Portfolio by the Acquiring Fund in exchange for
Acquiring Fund Shares and the assumption by the Acquiring Fund of all valid
liabilities of the Portfolio and of the Millennium Portfolio. The Acquiring Fund
Shares received by the Portfolio and the Acquiring Fund shares received by the
Millennium Portfolio then would be distributed pro rata to the Shareholders of
the Portfolio and to the Shareholders of the Millennium Portfolio respectively.
The outstanding Shares of the Portfolio would be cancelled and the Portfolio
would be liquidated. The outstanding Shares of the Millennium Portfolio would be
cancelled and the Millennium Portfolio would be liquidated. The Reorganization
is anticipated to occur on September 19, 2003, or such later date as the parties
may agree upon (the "Closing Date"). As a result of the proposed transactions
contemplated by the Reorganization, each portfolio shareholder would receive a
number of full and fractional Class A, Class B or Class C shares of the
corresponding Acquiring Fund having a total net asset value equal in value to
the net asset value of his or her Shares in the Portfolio and/or the Millennium
Portfolio as of the Closing Date of the Reorganization.
DESCRIPTION OF SECURITIES TO BE ISSUED
GENERAL. The Acquiring Fund Shares to be issued pursuant to the proposed
Reorganization represent shares of beneficial interest in the Large Cap Growth
Fund of the Touchstone Strategic Trust, which is a diversified, open-end
management investment company. Touchstone Strategic Trust is an unincorporated
voluntary association organized under the laws of the State of Massachusetts as
a business trust, pursuant to Touchstone Strategic Trust's Declaration of Trust,
dated November 18, 1982 (the "Declaration of Trust"). The Declaration of Trust
authorizes Touchstone Strategic Trust to issue an unlimited number of shares of
beneficial interest in one or more series. Currently, Touchstone Strategic Trust
has authorized six series: the Emerging Growth Fund, the Growth Opportunities
Fund, the Large Cap Growth Fund, the Enhanced 30 Fund, the Value Plus Fund and
the Small Cap Growth Fund. Other series in the Touchstone Strategic Trust,
however, may be added in the future. Each Acquiring Fund Share represents an
equal proportionate interest with each other Acquiring Fund Share and each such
Acquiring Fund Share is entitled to equal voting, dividend, liquidation and
redemption rights. Acquiring Fund Shares entitle their holders to one vote per
full share held and to fractional votes for fractional shares held. The
Acquiring Fund Shares do not have cumulative voting rights, preemptive rights or
subscription rights and are fully paid, nonassessable, redeemable and freely
transferable.
Currently, each shareholder of the Acquiring Fund is permitted to inspect
the records, accounts and books of the Touchstone Strategic Trust for any
legitimate business purpose.
MEETINGS. As a Massachusetts business trust, Touchstone Strategic Trust is
not required to hold an annual shareholders' meeting if the 1940 Act does not
require such a meeting. The Declaration of Trust provides that a special meeting
of Touchstone Strategic Trust shareholders of any series of Touchstone Strategic
Trust may be called by the Trustees of Touchstone Strategic Trust and shall be
called by the Trustees upon the written request of shareholders owning at least
10% of the outstanding shares of a series of the Touchstone Strategic Trust
entitled to vote. Touchstone Strategic Trust will hold special shareholder
meetings as required or deemed desirable by the Board for such purposes as
electing Trustees, changing fundamental policies or approving an investment
advisory or shareholder services agreement. Any Trustee may be removed from
office with or without cause at any time either by written instrument, signed by
at least two-thirds (2/3) of the number of Trustees prior to such removal,
specifying the date upon which such removal shall become effective, or by a vote
of Touchstone Strategic Trust shareholders owning at least two-thirds (2/3) of
the outstanding shares of a series of the Touchstone Strategic Trust. If
requested by shareholders of at least 10% of the outstanding shares of a series
of the Touchstone Strategic Trust, Touchstone Strategic Trust will call a
shareholder meeting for the purpose of voting upon the question of the removal
of a Trustee and will assist in communications with other Touchstone Strategic
Trust shareholders as required by Section 16(c) of the 1940 Act.
SHAREHOLDER LIABILITY. Beneficial owners of a Massachusetts business trust,
such as Touchstone Strategic Trust, may under some circumstances may be liable
for obligations of the Fund. Touchstone Strategic Trust's governing instrument,
the Trust Declaration, however, specifically disclaims shareholder liability for
acts or obligations of Touchstone Strategic Trust and provides that Touchstone
Strategic Trust's shareholders shall not be subject to any personal liability
for the acts or obligations of Touchstone Strategic Trust. The Trust Declaration
further provides for indemnification, out of the property of the series of
Touchstone Strategic Trust with respect to which such shareholder's shares are
issued, for all losses and expenses of any shareholder held personally liable
solely by reason of his or her being or having been a shareholder of such series
and not because of his or her acts or omissions or for some other reason. Thus,
the risk of a shareholder of Touchstone Strategic Trust incurring financial loss
on account of shareholder liability is considered remote since such liability is
limited to circumstances in which a disclaimer is inoperative and Touchstone
Strategic Trust would be unable to meet its obligations.
LIABILITY OF TRUSTEES. Under the Declaration of Trust, a Trustee will be
held personally liable only for the Trustee's own willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of the office of a Trustee. Under said Declaration of Trust and separate
indemnity agreements, Trustees and officers of Touchstone Strategic Trust
("Trust Officers") will be indemnified for the expenses of litigation against
them unless it is determined that the person did not act in good faith in the
reasonable belief that the person's action was in or not opposed to the best
interest of Touchstone Strategic Trust or if the person's conduct is determined
to constitute willful misfeasance, bad faith, gross negligence or reckless
disregard of that person's duties. Touchstone Strategic Trust also may advance
money for these expenses provided that the Trustee or the Trust Officer
undertakes to repay Touchstone Strategic Trust if that person's conduct later is
determined to preclude indemnification. The Navellier Performance Funds'
Declaration of Trust and separate indemnity agreements currently set forth
comparable provisions.
The foregoing is only a summary of certain characteristics of (i) the
shares of beneficial interest of Touchstone Strategic Trust to be issued
pursuant to the proposed Reorganization, (ii) the operations of Touchstone
Strategic Trust's Declaration of Trust and By-Laws, and (iii) Massachusetts law.
The foregoing is not a complete description of the shares of beneficial interest
of Touchstone Strategic Trust nor of the documents or laws cited. Shareholders
should refer to the provisions of Massachusetts's law directly for a more
thorough description.
FEDERAL INCOME TAX CONSEQUENCES
Touchstone Strategic Trust and The Navellier Millennium Funds have
received, as a condition to the Reorganization, an opinion from Sullivan &
Worcester LLP to the effect, for Federal income tax purposes and with respect to
the Reorganization, that:
1. the proposed Reorganization and the transactions contemplated thereby, as
described herein, will constitute a tax-free "reorganization" within the
meaning of Section 368(a)(1)(C) of the Internal Revenue Code (the "Code");
2. no gain or loss generally will be recognized to the Millennium Portfolio
upon the transfer of all of the Millennium Portfolio's assets to the
Acquiring Fund in exchange solely for Acquiring Fund Shares and the
assumption by the Acquiring Fund of all valid liabilities of the Millennium
Portfolio and the subsequent distribution of those Acquiring Fund Shares to
the Millennium Portfolio's Shareholders of record in liquidation thereof;
3. no gain or loss will be recognized to the Acquiring Fund upon the receipt
of those Millennium Portfolio assets in exchange solely for Acquiring Fund
Shares and the assumption by the Acquiring Fund of those valid Millennium
Portfolio liabilities;
4. the Acquiring Fund's basis for those Millennium Portfolio assets
transferred by the Millennium Portfolio to the Acquiring Fund will be the
same as the basis thereof in the Millennium Portfolio's hands immediately
before the Reorganization and the Acquiring Fund's holding period for those
assets will include the Millennium Portfolio's holding periods therefore;
5. each Shareholder of record will recognize no gain or loss upon the
constructive exchange of all of his or her Millennium Portfolio Shares
solely for Acquiring Fund Shares pursuant to the Reorganization;
6. each Shareholder's basis for the Acquiring Fund Shares to be received by
the Shareholder pursuant to the Reorganization will be the same as the
Shareholder's basis in the Millennium Portfolio Shares to be constructively
surrendered in exchange therefore; and
7. each such Shareholder's holding period for those Acquiring Fund Shares will
include the period during which the Millennium Portfolio Shares to be
constructively surrendered in exchange for Acquiring Fund Shares were held,
provided the Millennium Portfolio Shares were held as capital assets by
that Shareholder on the date of the Reorganization.
A revenue ruling of the Internal Revenue Service as to the Reorganization
is not expected to be obtained.
THE FOREGOING IS INTENDED TO BE ONLY A SUMMARY OF THE PRINCIPAL FEDERAL
INCOME TAX CONSEQUENCES OF THE REORGANIZATION AND SHOULD NOT BE CONSIDERED TO BE
TAX ADVICE. THERE CAN BE NO ASSURANCE THAT THE INTERNAL REVENUE SERVICE WILL
CONCUR ON ALL OR ANY OF THE ISSUES DISCUSSED ABOVE. SHAREHOLDERS OF THE
MILLENNIUM PORTFOLIO ARE URGED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE
FEDERAL, STATE AND LOCAL TAX CONSEQUENCES WITH RESPECT TO THE FOREGOING MATTERS
AND ANY OTHER CONSIDERATIONS WHICH MAY BE APPLICABLE TO THE SHAREHOLDERS.
PRO FORMA CAPITALIZATION AND RATIOS
The following table shows the capitalization of the Portfolio, the
Millennium Portfolio, and the Acquiring Fund shares as of December 31, 2002, and
combined in the aggregate on a pro forma basis, as of December 31, 2002 giving
effect to the Reorganization:
Touchstone Large Cap Navellier Millennium Navellier Performance Touchstone Large Cap
Class A Information Growth Large Cap Growth Large Cap Growth Growth Combined Pro Forma
- ------------------------- -------------------------- -------------------------- -------------------------- -------------------------
Net Assets
Class A $33,843,198 $355,316 $13,831,464 48,029,978
Class B 54,017 423,950 477,967
Class C 1,092,490 215,949 1,308,439
Total Net Assets 34,989,705 995,215 13,831,464 49,816,384
Net Asset Value Per Share
Class A
Class B $8.05 $4.63 $12.19 $12.19
Class C 7.62 4.56 12.19
7.59 4.55 12.19
Shares Outstanding
Class A
Class B 4,202,127 76,781 1,134,468 3,939,924
Class C 7,090 92,912 39,210
Total Shares Outstanding 143,907 47,449 107,337
4,353,124 217,142 1,134,468 4,086,471
DISSOLUTION OF THE PORTFOLIOS
If the Plan is approved by the Shareholders of the Portfolio and of the
Millennium Portfolio and the Reorganization is completed, the Portfolio and the
Millennium Portfolio will be dissolved as soon as practicable in accordance with
the provisions of Delaware law and the Plan. See "The Proposed
Transactions--Agreement and Proposed Plan of Reorganization".
NAVELLIER GROUP RECOMMENDATION
The Portfolio Trustees and Millennium Portfolio Trustees have solicited
this shareholder vote to approve the Reorganization and recommend that the
Portfolio Shareholders and Millennium Portfolio Shareholders vote FOR the
Reorganization on the enclosed WHITE proxy card. The Portfolio Trustees and
Millennium Portfolio Trustees, for the reasons mentioned herein (See "Reasons
For Proposed Transactions"), believe the Reorganization of the Portfolio and
Millennium Portfolio into the Acquiring Fund would result in cost savings, would
be in the best interests of the Portfolio Shareholders and Millennium Portfolio
Shareholders and that their interests would not be diluted.
The Portfolio Trustees and Millennium Portfolio Trustees therefore
recommend that the Shareholders of the Millennium Portfolio vote FOR Proposal
No. 1 (the proposal to merge the Portfolio and Millennium Portfolio into the
Acquiring Fund and the transactions contemplated thereby).
ADDITIONAL INFORMATION ABOUT
THE ACQUIRING FUND AND THE ACQUIRING FUND SHARES
Additional information about the Acquiring Fund is included in the current
Prospectus of the Touchstone Strategic Trust, dated August 1, 2003. A copy of
that prospectus has been filed with the Commission and is incorporated by
reference herein. A Shareholder of the Portfolio or the Millennium Portfolio
will receive with this combined prospectus/proxy statement, a copy of the
prospectus for Touchstone Strategic Trust. Further information about the
Acquiring Fund is included in the Statement of Additional Information for
Touchstone Strategic Trust, dated August 1, 2003. The Statement of Additional
Information has been filed with the Commission and is incorporated by reference
herein. Copies of that Statement of Additional Information for Touchstone
Strategic Trust may be obtained without charge by contacting Touchstone
Investments toll-free at 1-800-543-0407.
ADDITIONAL INFORMATION ABOUT
THE PORTFOLIO AND THE PORTFOLIO SHARES
Additional information about the Portfolio is included in the current
Prospectus of the Navellier Performance Funds, dated May 1, 2003. A copy of that
prospectus has been filed with the Commission and is incorporated by reference
herein. Further information about the Portfolio is included in the Statement of
Additional Information for The Navellier Performance Funds, dated May 1, 2003,
which also has been filed with the Commission and is incorporated by reference
herein. A copy of the Statement of Additional Information for The Navellier
Performance Funds may be obtained without charge by contacting Navellier
Management, Inc. at One East Liberty Street, Third Floor, Reno, Nevada 89501, or
by telephoning Navellier Management, Inc. toll-free at 1-800-887-8671.
ADDITIONAL INFORMATION ABOUT THE MILLENNIUM PORTFOLIO AND THE
MILLENNIUM PORTFOLIO SHARES
Additional information about the Millennium Portfolio is included in the
current Prospectus of the Navellier Millennium Funds, dated May 1, 2003. A copy
of that prospectus has been filed with the Commission and is incorporated by
reference herein. Further information about the Millennium Portfolio is included
in the Statement of Additional Information for The Navellier Millennium Funds,
dated May 1, 2003, which also has been filed with the Commission and is
incorporated by reference herein. A copy of the Statement of Additional
Information for The Navellier Millennium Funds may be obtained without charge by
contacting Navellier Management, Inc. at One East Liberty Street, Third Floor,
Reno, Nevada 89501, or by telephoning Navellier Management, Inc. toll-free at
1-800-887-8671.
MISCELLANEOUS
AVAILABLE INFORMATION
Touchstone Strategic Trust is registered under the 1940 Act and is subject
to the informational requirements of the Securities Exchange Act of 1934, as
amended, and the 1940 Act and, in accordance therewith, files reports, proxy
materials and other information with the Commission. The Navellier Performance
Funds and the Navellier Millennium Funds are registered under the 1940 Act and
are required to file reports under the 1940 Act. Such reports, proxy materials
and other information can be inspected at the Securities and Exchange Commission
at 450 Fifth Street, N.W., Washington, DC 20549. Copies of such material can
also be obtained from the Public Reference Branch, Office of Consumer Affairs
and Information Services, Securities and Exchange Commission, 450 Fifth Street,
N.W., Washington, DC 20539, at prescribed rates.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the Acquiring Fund
Shares will be passed upon by Sullivan & Worcester LLP.
FINANCIAL STATEMENTS AND EXPERTS
The financial statements of the Touchstone Large Cap Growth Fund at March 31,
2003, and for the periods indicated therein, included in the Company's Annual
Report and incorporated by reference herein and in the Registration Statement,
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report appearing therein, and are incorporated herein by reference in
reliance upon such report given on the authority of such firm as experts in
accounting and auditing. The financial statements of Navellier Large Cap
Portfolio, a series of Navellier Performance Funds, and Navellier Large Cap
Portfolio, a series of Navellier Millennium Funds at December 31, 2002, and for
the periods indicated therein, included in the (Trusts') Annual Report and
incorporated by reference herein and in the Registration Statement, have been
audited by Tait, Weller & Baker, independent auditors, as set forth in their
report appearing therein, and are incorporated herein by reference in reliance
upon such report given on the authority of such firm as experts in accounting
and auditing. Copies of these financial statements, as included in the SAI, may
be obtained without charge by contacting Touchstone Securities, Inc. at 221 East
Fourth Street, Suite 300,
Cincinnati, Ohio 45202, or by telephoning toll-free at 1-800-543-0407, for the
Touchstone audited financial statements and by contacting Navellier Management,
Inc., at One East Liberty Street, Third Floor, Reno, Nevada 89501, or by
telephoning Navellier Management, Inc. toll-free at 1-800-887-8671, for the
Portfolio and or Millennium Portfolio financial statements.
PROXY SOLICITATION
Proxies will be solicited by mail and, if necessary to obtain the requisite
representation of Shareholders, your Trustees also may solicit proxies by
telephone, telegraph, facsimile and/or personal interview by representatives of
the Millennium Portfolio, Mr. Navellier, Navellier Management, Inc., employees
of Navellier Management, Inc., or their affiliates, and by representatives of
any independent proxy solicitation service retained for the Meeting. Louis
Navellier and Navellier Management, Inc., whose principal location is One East
Liberty Street, Third Floor, Reno, Nevada 89501, will bear the costs of its
solicitation, including the costs such as the preparation and mailing of the
notice, the combined prospectus/proxy statement, and the proxy, and the
solicitation of proxies, including reimbursement to persons who forward proxy
materials to their clients, and the expenses connected with the solicitation of
these proxies in person, by telephone, or by telegraph. Banks, brokers, and
other persons holding Millennium Portfolio Shares registered in their names or
in the names of their nominees will be reimbursed for their expenses incurred in
sending proxy materials to and obtaining proxies from the beneficial owners of
such Millennium Portfolio Shares.
Mr. Navellier, as sole owner of Navellier Management, Inc., has a financial
interest in the outcome of the vote because Navellier Management, Inc. would be
investment sub-advisor to the merged Millennium Portfolio, for which it would
receive investment advisory fees.
REVOCATION OF PROXIES
You may revoke your proxy: (i) at any time prior to the proxy's exercise by
written notice to The Navellier Millennium Funds, One East Liberty Street, Third
Floor, Reno, Nevada 89501 prior to the Meeting; (ii) by the subsequent execution
and return of another proxy prior to the Meeting; or (iii) by being present and
voting in person at the Meeting and giving oral notice of revocation to the
Chairman of the Meeting.
NO DISSENTERS' RIGHTS OF APPRAISAL
The purpose of the Meeting is to vote on the proposed tax-free
Reorganization of the Millennium Portfolio into the Acquiring Fund. The
Millennium Portfolio is a separate series of the Navellier Millennium Funds. The
Declaration of Trust of the Navellier Millennium Funds (the "Declaration of
Trust") does not entitle shareholders to appraisal rights (i.e., to demand the
fair value of their shares) in the event of a reorganization or proposed merger.
Consequently, the shareholders will be bound by the terms of the Plan, if the
Plan is approved at the Meeting. Any Shareholder, however, may redeem his or her
Millennium Portfolio Shares at net asset value prior to the closing date of the
proposed Reorganization.
ADDITIONAL VOTING INFORMATION
Shareholders of record of the Millennium Portfolio at the close of business
on July 31, 2003 (the "Record Date") will be entitled to vote at the Meeting.
Such holders of shares of beneficial interest in the Millennium Portfolio (the
"Millennium Portfolio Shares") are entitled to one vote for each Millennium
Portfolio Share held and to fractional votes for fractional Millennium Portfolio
Shares held. A quorum for the Millennium Portfolio must be present in person or
represented by Proxy for the transaction of business at the Meeting. The holders
of record of one-third of the Millennium Portfolio Shares outstanding at the
close of business on that Record Date present in person or represented by proxy
will constitute a quorum for the Meeting of the Shareholders of the Millennium
Portfolio. A quorum being present, the approval at the Meeting by the
shareholders of the Millennium Portfolio for the proposed Reorganization
requires the affirmative vote of at least 67% of the outstanding shares of the
Millennium Portfolio present in person or represented by proxy at the Meeting if
more than 50% of the outstanding shares of the Millennium Portfolio are present
in person or represented by proxy or more than 50% of the outstanding shares
entitled to vote, whichever is less.
If either (i) a quorum is not present at the Meeting or (ii) a quorum is
present but sufficient votes in favor of a matter proposed at the Meeting (a
"Proposal"), as set forth in the Notice of this Meeting, are not received by
September 19, 2003, or a date shortly thereafter, then the persons named as
attorneys and proxies in the enclosed proxy ("Proxies") may propose one or more
adjournments of the Meeting to permit further solicitation of proxies. Any such
adjournment will require the affirmative vote of at least one-third of the
shares present in person or by proxy. The persons named as Proxies will vote
those proxies that such persons are required to vote FOR such Proposal in favor
of such an adjournment and will vote those proxies required to be voted AGAINST
such Proposal against such an adjournment. A Shareholder vote may be taken on a
Proposal in this combined prospectus/proxy statement prior to any such
adjournment if sufficient votes have been received and it is otherwise
appropriate.
The individuals named as Proxies on the enclosed WHITE proxy card will vote
in accordance with your direction, as indicated thereon, if your proxy card is
received and is properly executed. If you properly execute your WHITE proxy and
give no voting instructions with respect to a Proposal, your shares will be
voted in favor of the Proposal. The duly-appointed Proxies, in their discretion,
may vote upon such other matters as may properly come before the Meeting. Your
Trustees are not aware of any other matters to come before the Meeting.
Shares of beneficial interest in the Portfolio held by brokerage firms in
"street name" for the benefit of a beneficial owner may be voted by the
brokerage firms rather than by the beneficial owner unless the beneficial owner
directs the brokerage firm in writing to vote the shares in a specified manner
or executes a written proxy. Shares of beneficial ownership held by brokerage
firms in "street name" for which the brokerage firm executes and returns proxies
will be counted as present for purposes of determining whether a quorum is
present. If the brokerage firm returns the proxy but does not give directions on
how to vote, its shares will be counted as present for purposes of determining
the number present for a quorum and will be counted as votes for the proposal.
If the brokerage firms votes its beneficial shares to abstain, its beneficial
shares will be counted as present for purposes of determining a quorum but will
not be counted for purposes of a vote for or against the Proposal.
If a beneficial owner executes and returns a proxy with no instructions as
to how to vote, those shares of beneficial interest will count as present for
purposes of determining whether a quorum is present and will be counted as votes
for the proposal. If the beneficial owner returns the proxy and marks "abstain",
his/her beneficial shares will be counted as present for purposes of determining
a quorum but will not be counted as for or against the Proposal and will have no
effect on the vote regarding the Proposal.
If a broker returns a "non-vote" proxy, indicating a lack of authority to
vote on the Plan, then the Portfolio Shares covered by such broker non-vote
shall be deemed present at the Meeting for the purposes of determining a quorum,
but shall not be deemed to be represented at the Meeting for the purposes of
calculating the number of Portfolio Shares present in person or represented by
proxy at the Meeting with respect to the Plan or any other Proposal and will
have no effect on the vote regarding the Proposal.
As of the Record Date, there were outstanding and entitled to be voted
211,422.436 Millennium Portfolio Shares. As of the Record Date, no shareholder
held for the benefit of others more than 5% of the Millennium Portfolio.
Trustees and officers of The Navellier Millennium Funds own in the aggregate
less than 1% of the shares of the Millennium Portfolio.
As more fully described in this combined prospectus/proxy statement, the
Meeting has been called for the following purpose:
PROPOSAL 1.
To approve a proposed Agreement and proposed Plan of Reorganization
(the "Plan"), whereby the Millennium Portfolio would transfer all of
its assets to the Large Cap Growth Fund (the "Acquiring Fund") of the
Touchstone Strategic Trust in a tax-free exchange for shares of
beneficial interest in the Acquiring Fund that would then be
distributed to the shareholders of the Millennium Portfolio. Also, as
part of the Plan, the Navellier Large Cap Growth Portfolio of The
Navellier Performance Funds (the "Portfolio") would transfer all of
its assets to the Acquiring Fund in a tax-free exchange for shares of
beneficial interest in the Acquiring Fund that would then be
distributed to the Shareholders of the Portfolio. Also, as part of the
Plan, the Acquiring Fund would assume all valid liabilities of the
Portfolio and of the Millennium Portfolio.
If holders of more than 50% of the outstanding shares of record are present
in person or by proxy, the approval by the Millennium Portfolio of Proposal 1 at
the Meeting requires the affirmative vote of at least 67% of the Millennium
Portfolio Shares present in person or represented by proxy at the Meeting or the
vote of more than 50% of the outstanding shares entitled to vote, whichever is
less.
MR. NAVELLIER AND THE OTHER TRUSTEES OF THE MILLENNIUM PORTFOLIO
UNANIMOUSLY RECOMMEND THAT THE PROPOSED REORGANIZATION DESCRIBED HEREIN BE
"APPROVED."
OTHER BUSINESS
The Millennium Portfolio Trustees know of no business to be brought before
the Meeting other than the matters set forth in this combined prospectus/proxy
statement. Should any other matter requiring a vote of Shareholders arise,
however, the Proxies will vote thereon according to their best judgment in the
interests of the Millennium Portfolio and of the Shareholders.
By Louis G. Navellier
----------------------------------
Trustee, The Navellier
Millennium Funds
One East Liberty Street, Third Floor
Reno, Nevada 89501
August 19, 2003
APPENDIX A:
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of
this 30th day of June, 2003, by and between THE NAVELLIER MILLENNIUM FUNDS (the
"Millennium Fund"), a Delaware business trust with its principal place of
business at One East Liberty Street, Third Floor, Reno, Nevada 89501, THE
NAVELLIER PERFORMANCE FUNDS (the "Performance Funds"), a Delaware business trust
with its principal place of business at One East Liberty Street, Third Floor,
Reno, Nevada 89501 and TOUCHSTONE STRATEGIC TRUST, a Massachusetts business
trust with its principal place of business at 221 East Fourth Street, Suite 300,
Cincinnati, Ohio 45202.
This Agreement is intended to be and is adopted as a plan of reorganization
and liquidation within the meaning of Section 368(a) of the United States
Internal Revenue Code of 1986, as amended (the "Code"), with respect to the
proposed reorganizations of the NAVELLIER LARGE CAP GROWTH PORTFOLIO (the
"Portfolio"), which portfolio is a series of the Navellier Performance Funds and
the NAVELLIER LARGE CAP GROWTH PORTFOLIO (the "Millennium Portfolio") which
portfolio is a series of the Navellier Millennium Funds), pursuant to which the
Portfolio and the Millennium Portfolio will be merged into and become part of
the Large Cap Growth Fund (the "Acquiring Fund") of the Touchstone Strategic
Trust (the "Reorganization"). Specifically, this Agreement is intended to be and
is adopted for the purpose of providing for the Reorganization of the Portfolio
and the Millennium Portfolio into the Acquiring Fund. The Reorganization will
consist of the transfer of all of the assets of the Portfolio and the Millennium
Portfolio to the Acquiring Fund in exchange solely for (i) shares of beneficial
interest in the Acquiring Fund (the "Acquiring Fund Shares") and (ii) the
assumption by the Acquiring Fund of all valid liabilities of the Portfolio and
of the Millennium Portfolio and the distribution of the Acquiring Fund Shares to
the Shareholders of the Portfolio and the of Millennium Portfolio in complete
liquidation of the Portfolio and the Millennium Portfolio, as provided herein,
all upon the terms and conditions hereinafter set forth in this Agreement.
WHEREAS, the Performance Funds and the Millennium Funds and the Touchstone
Strategic Trust are each open-end, registered investment companies of the
management type and the Portfolio and the Millennium Portfolio own securities
which are assets of the character in which the Acquiring Fund is permitted to
invest;
WHEREAS, the Trustees of the Portfolio and the Trustees of the Millennium
Portfolio have each determined, with respect to such Reorganization, that the
exchange of all of the assets of the Portfolio and all the assets of the
Millennium Portfolio for Acquiring Fund shares and the assumption of all valid
liabilities of the Portfolio and of the Millennium Portfolio by the Acquiring
Fund is in the best interests of the Portfolio and the Millennium Portfolio and
their Shareholders and that the interests of the existing Shareholders of the
Portfolio and the Millennium Portfolio would not be diluted as a result of this
transaction; and
WHEREAS, the purpose of the Reorganization is to combine the assets of the
Acquiring Fund with those of the Portfolio and the Millennium Portfolio in an
attempt to achieve greater operating economies and to retain Navellier
Management, Inc. as the investment sub-advisor to manage the assets of the
Acquiring Fund after the Reorganization;
NOW, THEREFORE, in consideration of the premises and of the covenants and
agreements hereinafter set forth, the parties hereto covenant and agree, with
respect to the Reorganization, as follows:
1. THE TRANSFER OF THE ASSETS OF THE PORTFOLIO AND THE ASSETS OF THE
MILLENNIUM PORTFOLIO TO THE ACQUIRING FUND IN EXCHANGE FOR ACQUIRING FUND
SHARES, THE ASSUMPTION OF ALL VALID LIABILITIES OF THE PORTFOLIO AND OF THE
MILLENNIUM PORTFOLIO BY THE ACQUIRING FUND AND THE LIQUIDATION OF THE
PORTFOLIO AND THE MILLENNIUM PORTFOLIO
1.1 For the Reorganization, the closing shall take place as
provided for in paragraph 3.1 ("Closing") and the provisions of
paragraphs 1 through 8 of this Agreement shall apply. At the Closing,
the Portfolio and the Millennium Portfolio agree to transfer all of
their assets, as set forth in paragraph 1.2, to the Acquiring Fund,
and the Acquiring Fund agrees in exchange therefore: (1) to deliver to
the Portfolio and to the Millennium Portfolio the number of Acquiring
Fund Shares, including fractional Acquiring Fund Shares, determined by
dividing the value of each Class of share of the Millennium
Portfolio's net assets and each Class of corresponding share of the
Acquiring Fund's net assets as of the time set forth in paragraph 2.1
by the net asset value of one Performance Large Cap Growth Portfolio
share computed in the manner and as of the time and date set forth in
paragraph 2.2; and (ii) to assume all valid liabilities of the
Portfolio and of the Millennium Portfolio, as set forth in paragraph
1.3.
1.2 The assets of the Portfolio and the assets of the Millennium
Portfolio to be acquired by the Acquiring Fund shall consist of all
property, including, without limitation, all cash, securities,
interests, and dividends or interest receivable which are owned by the
Portfolio and owned by the Millennium Portfolio and any deferred or
prepaid expenses shown as assets on the books of the Portfolio or on
the books of the Millennium Portfolio on the closing date provided in
paragraph 3.1 (the "Closing Date").
1.3 The Portfolio and the Millennium Portfolio will each endeavor
to discharge all of their known valid liabilities and obligations
prior to the Closing Date. The Acquiring Fund shall assume all valid
liabilities, expenses, costs, charges and reserves reflected on
unaudited statements of assets and liabilities of the Portfolio and of
the Millennium Portfolio prepared by the administrators of the
Acquiring Fund and the Portfolio and the Millennium Portfolio, as of
the Valuation Date (as defined in paragraph 2.1), in accordance with
generally accepted accounting principles consistently applied from the
prior audited period.
1.4 Immediately after the transfer of assets provided for in
paragraph 1.1, the Portfolio and the Millennium Portfolio will each
distribute pro rata to their Shareholders of record, determined as of
immediately after the close of business on the Closing Date (the
"Portfolio Shareholders") and (the "Millennium Shareholders"), the
Acquiring Fund Shares received by the Portfolio and by the Millennium
Portfolio pursuant to paragraph 1.1 and will each completely
liquidate. Such distributions and liquidations will be accomplished by
the transfer of the Acquiring Fund Shares then credited to the account
of the Portfolio and to the account of the Millennium Portfolio on the
books of the Acquiring Fund to the share records of the Acquiring Fund
in the names of the Portfolio Shareholders and in the names of the
Millennium Portfolio Shareholders and representing the respective pro
rata number of the Acquiring Fund Shares due such Shareholders. All
issued and outstanding shares of the Portfolio and of the Millennium
Portfolio will simultaneously be canceled on the books of the
Portfolio and of the Millennium Portfolio. The Acquiring Fund shall
not issue certificates representing the Acquiring Fund Shares in
connection with such exchange. Ownership of Acquiring Fund Shares will
be shown on the books of the Acquiring Fund's transfer agent.
2. VALUATION
2.1 The value of the Portfolio's assets and the value of the
Millennium Portfolio's assets to be acquired by the Acquiring Fund
hereunder shall be the net asset value of such assets computed as of
immediately after the close of business of the New York Stock Exchange
on the Closing Date (such time and date being hereinafter called the
"Valuation Date"), using the valuation procedures for computing net
asset value set forth in the Portfolio's and in the Millennium
Portfolio's then-current prospectus or statement of additional
information.
2.2 The net asset value of an Acquiring Fund Share shall be the
net asset value per share computed as of immediately after the close
of business of the New York Stock Exchange on the Valuation Date,
using the valuation procedures for computing net asset value set forth
in the Touchstone Strategic Trust's then-current prospectus or
statement of additional information.
2.3 The number of full and fractional shares of each class of the
Acquiring Fund to be received by the shareholders of the Millennium
Portfolio will be determined by multiplying the number of full and
fractional shares of the corresponding class of the Millennium
Portfolio by a factor which shall be computed by dividing the net
asset value per share of the respective class of shares of the
Millennium Portfolio by the net asset value per share of the Class A
shares of Navellier Performance Large Cap Growth Portfolio. Such
computations will take place as of the Valuation Time. The net asset
value per share of each class will be determined by dividing assets,
less liabilities, in each case attributable to the respective class,
by the total number of outstanding shares. The number of the Acquiring
Fund Shares to be issued (including fractional shares, if any) in
exchange for the Portfolio's assets and the Millennium Portfolio's
assets shall be determined using the same valuation procedures
referred to in paragraph 2.1 by the net asset value of Performance
Large Cap Growth determined in accordance with paragraph 2.2.
2.4 All computations of value for the Acquiring Fund shall be
made by Integrated Fund Services, Inc.; all computations of value for
the Portfolio and for the Millennium Portfolio shall be made by FBR
National Bank & Trust.
3. CLOSING AND CLOSING DATE
3.1 The Closing for the Reorganization shall be September 22,
2003 or such other date as the parties may agree to in writing. All
acts taking place at the Closing shall be deemed to take place
simultaneously as of immediately after the close of business on the
Closing Date unless otherwise agreed to by the parties. The close of
business on the Closing Date shall be as of 4:00 p.m., New York Time.
The Closing shall be held at the offices of the Acquiring Fund, 221
East Fourth Street, Suite 300, Cincinnati, Ohio 45202, or at such
other time and/or place as the parties may agree.
3.2 FBR National Bank & Trust, Bethesda, Maryland, as custodian
for the Portfolio and for the Millennium Portfolio (the "Custodian"),
shall deliver at the Closing a certificate of an authorized officer
stating that each of: (i) the Portfolio's and the Millennium
Portfolio's portfolio securities, cash, and any other assets shall
have been delivered in proper form to the Acquiring Fund within two
business days prior to or on the Closing Date; and (ii) all necessary
taxes, including all applicable Federal and state stock transfer
stamps, if any, shall have been paid, or provision for payment shall
have been made, in conjunction with the delivery of the Portfolio's
and the Millennium Portfolio's portfolio securities.
3.3 FBR National Bank & Trust, (the "Transfer Agent"), on behalf
of the Portfolio and on behalf of the Millennium Portfolio, shall
deliver at the Closing a certificate of an authorized officer stating
that their records contain the names and addresses of the Portfolio
Shareholders and of the Millennium Portfolio Shareholders and the
number and percentage ownership of outstanding shares owned by each
such shareholder immediately prior to the Closing. The Acquiring Fund
by an authorized officer of Integrated Fund Services, Inc. shall issue
and deliver a confirmation evidencing the Acquiring Fund Shares to be
credited on the Closing Date to the Secretary of the Portfolio and to
the Secretary of the Millennium Portfolio or provide evidence
satisfactory to the Portfolio and to the Millennium Portfolio that
such Acquiring Fund Shares have been credited to the Portfolio's
account and to the Millennium Portfolio's account on the books of the
Acquiring Fund. At the Closing, each party shall deliver to the other
such bills of sales, checks, assignments, share certificates, if any,
receipts or other documents as such other party or its counsel may
reasonably request.
4. REPRESENTATIONS AND WARRANTIES
4.1 The Performance Funds, on its own and on behalf of the
Portfolio, and the Millennium Funds on its own and on behalf of the
Millennium Portfolio each represents and warrants to the Touchstone
Strategic Trust and the Acquiring Fund as follows:
(a) The Performance Funds and the Millennium Funds are each a
business trust duly organized, validly existing, and in good standing
under the laws of the State of Delaware;
(b) The Performance Funds and the Millennium Funds are each a
registered investment company classified as a management company of
the open-end type, and their registrations with the Securities and
Exchange Commission (the "Commission"), as an investment company under
the Investment Company Act of 1940, as amended (the "1940 Act"), and
the registration of their shares, under the Securities Act of 1933, as
amended (the "1933 Act") are in full force and effect;
(c) Neither the Performance Funds nor the Portfolio nor the
Millennium Funds nor the Millennium Portfolio is in, and the
execution, delivery and performance of this Agreement will not result
in, a material violation of the Performance Funds' or the Millennium
Funds' Declarations of Trust or By-Laws or of any agreement,
indenture, instrument, contract, lease or other undertaking to which
the Performance Funds or the Portfolio or the Millennium Funds or the
Millennium Portfolio is a party or by which any of them are bound;
(d) Neither the Performance Funds nor the Portfolio nor the
Millennium Funds nor the Millennium Portfolio has any material
contracts or other commitments (other than this Agreement) which will
be terminated with liability to them prior to the Closing Date;
(e) Except as otherwise disclosed in writing to and accepted by
the Touchstone Strategic Trust or the Acquiring Fund, no material
litigation or administrative proceeding or investigation of or before
any court or governmental body is presently pending or to their
knowledge threatened against the Performance Funds or the Portfolio or
the Millennium Funds or the Millennium Portfolio or any of their
properties or assets which, if adversely determined, would materially
and adversely affect their financial condition or the conduct of their
business. Neither the Portfolio or the Millennium Portfolio knows of
any facts which might form the basis for the institution of such
proceedings and neither the Portfolio nor the Millennium Portfolio is
a party to or subject to the provisions of any order, decree or
judgment of any court or governmental body which materially and
adversely affects the business or the ability of the Portfolio or the
Millennium Portfolio to consummate the transactions herein
contemplated;
(f) The Statement of Assets and Liabilities of the Portfolio and
the Statement of Assets and Liabilities of the Millennium Portfolio
each at December 31, 2002 have been audited by Tait, Weller & Baker,
independent accountants, and are in accordance with generally accepted
accounting principles consistently applied, and such statements
(copies of which have been furnished to the Acquiring Fund) fairly
reflect the financial conditions of the Portfolio and of the
Millennium Portfolio as of such date, and there are no contingent
liabilities of the Portfolio or of the Millennium Portfolio as of such
date not disclosed therein;
(g) Since December 31, 2002, there have not been any material
adverse changes in the Portfolio's or in the Millennium Portfolio's
financial condition, assets, liabilities or business other than
changes occurring in the ordinary course of business, or any
incurrence by the Portfolio or by the Millennium Portfolio of
indebtedness maturing more than one year from the date such
indebtedness was incurred, except as otherwise disclosed to and
accepted by the Acquiring Fund. For the purposes of this subparagraph
(g), a decline in net asset value per share of the Portfolio or of the
Millennium Portfolio, the discharge of Portfolio or of the Millennium
Portfolio liabilities, or the redemption of Portfolio or Millennium
Portfolio shares by Portfolio or Millennium Portfolio Shareholders
shall not constitute a material adverse change;
(h) At the Closing Date, all material Federal and other tax
returns and reports of the Millennium Portfolio and the Portfolio
required by law to have been filed by such date or due after request
for extension, if any, shall have been filed and are or will be
correct, and all Federal and other taxes shown as due or required to
be shown as due on said returns and reports shall have been paid or
provision shall have been made for the payment thereof, and to the
best knowledge of the Millennium Portfolio and the Portfolio, no such
return is currently under audit and no assessment has been asserted
with respect to such returns;
(i) For each taxable year of its operation, the Portfolio and the
Millennium Portfolio has met the requirements of Subchapter M of the
Code for qualification as a regulated investment company and each has
elected to be treated as such;
(j) All issued and outstanding shares of the Portfolio and of the
Millennium Portfolio are, and at the Closing Date will be, duly and
validly issued and outstanding, fully paid and non-assessable by the
Portfolio and by the Millennium Portfolio. All of the issued and
outstanding shares of the Portfolio and of the Millennium Portfolio
will, at the time of Closing, be held by the persons and in the
amounts set forth in the records of the Transfer Agent, on behalf of
the Portfolio and on behalf of the Millennium Portfolio as provided in
paragraph 3.3. Neither the Portfolio nor the Millennium Portfolio have
outstanding any options, warrants or other rights to subscribe for or
to purchase any of their shares, nor is there outstanding any security
convertible into any of their shares;
(k) At the Closing Date, both the Portfolio and the Millennium
Portfolio will each have good and marketable title to their assets to
be transferred to the Acquiring Fund pursuant to paragraph 1.2 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 Fund will acquire good and marketable title thereto,
subject to any restrictions as might arise under the 1933 Act, other
than as disclosed to the Acquiring Fund;
(l) The execution, delivery and performance of this Agreement
will have been duly authorized prior to the Closing Date by all
necessary action on the part of the Performance Funds' and the
Millennium Funds' Trustees and, subject to the approval of the
Portfolio's Shareholders and of the Millennium Portfolio's
Shareholders, this Agreement will constitute a valid and binding
obligation of the Performance Funds and of the Portfolio and of the
Millennium Funds and of the Millennium Portfolio, enforceable 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 equity principles;
(m) The information to be furnished by the Performance Funds and
the Portfolio and by the Millennium Funds and the Millennium Portfolio
for use in registration statements, proxy materials and other
documents which may be necessary in connection with the
transactions contemplated hereby shall be accurate and complete in all
material respects and shall comply in all material respects with
Federal securities and other laws and regulations thereunder
applicable thereto; and
(n) The proxy statements of the Performance Funds and of the
Millennium Funds (the "Proxy Statement") to be included in the
Registration Statement referred to in paragraph 5.6 (other than
information therein that relates to the Touchstone Strategic Trust and
the Acquiring Fund) will, on the effective date of the Registration
Statement and on the Closing Date, not contain any untrue statement of
a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which such statements were made, not materially
misleading.
4.2 Touchstone Strategic Trust, on its own behalf and on behalf
of the Acquiring Fund, represents and warrants to the Performance
Funds and the Portfolio and to the Millennium Funds and the Millennium
Portfolio as follows:
(a) Touchstone Strategic Trust is a business trust duly
organized, validly existing and in good standing under the laws of the
State of Massachusetts;
(b) Touchstone Strategic Trust is a registered 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, and the registration of its shares, under the 1933 Act, are
in full force and effect;
(c) The current prospectus and statement of additional
information of Touchstone Strategic Trust 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 materially misleading;
(d) At the Closing Date, the Acquiring Fund will have good and
marketable title to the Acquiring Fund's assets;
(e) Neither Touchstone Strategic Trust nor the Acquiring Fund is
in, and the execution, delivery and performance of this Agreement will
not result in, a material violation of Touchstone Strategic Trust's
Declaration of Trust or By-Laws or of any agreement, indenture,
instrument, contract, lease or other undertaking to which Touchstone
Strategic Trust or the Acquiring Fund is a party or by which
Touchstone Strategic Trust or the Acquiring Fund are bound;
(f) No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently
pending or threatened against Touchstone Strategic Trust or the
Acquiring Fund or any of their properties or assets, except as
previously disclosed in writing to the Portfolio or the Millennium
Portfolio. Neither Touchstone Strategic Trust nor the Acquiring Fund
knows of any facts which might form the basis for the institution of
such proceedings and neither Touchstone Strategic Trust nor the
Acquiring Fund is a party to or subject to the provisions of any
order, decree or judgment of any court or governmental body which
materially and adversely affects the business or the ability of
Touchstone Strategic Trust or the Acquiring Fund to consummate the
transactions contemplated herein;
(g) The Statement of Assets and Liabilities of the Acquiring Fund
at March 31, 2003, audited by Ernst & Young LLP, independent auditors,
and a copy of which has been furnished to the Portfolio and to the
Millennium Portfolio, fairly and accurately reflects the financial
condition of the Acquiring Fund as of such date in accordance with
generally accepted accounting principles consistently applied;
(h) Since March 31, 2003, there has not been any material adverse
change in the Acquiring Fund's financial condition, assets,
liabilities or business other than changes occurring in the ordinary
course of business, or any incurrence by the Acquiring Fund of
indebtedness maturing more than one year from the date such
indebtedness was incurred. For the purposes of this subparagraph (h),
a decline in net asset value per share of the Acquiring Fund shares,
the discharge of Acquiring Fund liabilities or the redemption of
Acquiring Fund shares by Acquiring Fund Shareholders, shall not
constitute a material adverse change;
(i) At the Closing Date all material Federal and other tax
returns and reports of Touchstone Strategic Trust and the Acquiring
Fund required by law to have been filed by such date or due after
request for extension, if any, shall have been filed and are or will
be correct, and all Federal and other taxes shown as due or required
to be shown as due on said returns and reports shall have been paid or
provision shall have been made for the payment thereof, and, to the
best knowledge of Touchstone Strategic Trust and the Acquiring Fund,
no such return is currently under audit and no assessment has been
asserted with respect to such returns;
(j) For each taxable year of its operation, the Acquiring Fund
has met the requirements of Subchapter M of the Code for qualification
as a regulated investment company and has elected to be treated as
such;
(k) All issued and outstanding Acquiring Fund Shares are, and at
the Closing Date will be, duly and validly issued and outstanding,
fully paid and non-assessable by the Acquiring Fund. The Acquiring
Fund does not have outstanding any options, warrants or other rights
to subscribe for or to purchase any Acquiring Fund Shares, nor is
there outstanding any security convertible into any Acquiring Fund
Shares;
(l) The execution, delivery and performance of this Agreement
will have been fully authorized prior to the Closing Date by all
necessary action, if any, on the part of the Trustees of Touchstone
Strategic Trust and this Agreement will constitute a valid and binding
obligation of the Acquiring Fund enforceable 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 equity principles;
(m) The Acquiring Fund Shares to be issued and delivered
(transferred on the Acquiring Fund's books) to the Portfolio and to
the Millennium Portfolio for the accounts of the Portfolio
Shareholders and for the accounts of the Millennium Portfolio
Shareholders, pursuant to the terms of this Agreement, will, at the
Closing Date, have been duly authorized and, when so issued and
delivered, will be duly and validly issued Acquiring Fund Shares, and
will be fully paid and non-assessable by the Acquiring Fund;
(n) The information to be furnished by the Acquiring Fund for use
in registration statements, proxy materials and other documents which
may be necessary in connection with the transactions contemplated
hereby shall be accurate and complete in all material respects and
shall comply in all material respects with Federal securities and
other laws and regulations applicable thereto;
(o) The Proxy Statement to be included in the Registration
Statement (only insofar as it relates to Touchstone Strategic Trust
and the Acquiring Fund) will, on the effective date of the
Registration Statement and on the Closing Date, not contain any untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statement therein, in
light of the circumstances under which such statements were made, not
materially misleading; and
(p) Touchstone Strategic Trust and the Acquiring Fund each agrees
to use all reasonable efforts to obtain the approvals and
authorizations required by the 1933 Act, the 1940 Act and such of the
state blue sky or securities laws as may be necessary in order to
continue their operations after the Closing Date.
5. COVENANTS OF THE ACQUIRING FUND, THE PORTFOLIO AND THE MILLENNIUM PORTFOLIO
The following covenants of the Acquiring Fund and of the Portfolio and of
the Millennium Portfolio, as applicable, are made respectively by Touchstone
Strategic Trust and by the Performance Funds and by the Millennium Funds:
5.1 The Acquiring Fund and the Portfolio and the Millennium
Portfolio each will operate its business in the ordinary course
between the date hereof and the Closing Date, it being understood that
such ordinary course of business will include the declaration and
payment of customary dividends and distributions and any other
distribution that may be advisable.
5.2 The Portfolio and the Millennium Portfolio will each call a
meeting of their Shareholders to consider and act upon this Agreement
and to take all other action necessary to obtain approval of the
transactions contemplated herein.
5.3 The Portfolio and the Millennium Portfolio each covenant that
the Acquiring Fund Shares to be issued hereunder are not being
acquired for the purpose of making any distribution thereof other than
in accordance with the terms of this Agreement.
5.4 The Portfolio and the Millennium Portfolio will each assist
the Acquiring Fund in obtaining such information as the Acquiring Fund
reasonably requests concerning the beneficial ownership of the shares
of the Portfolio and of the Millennium Portfolio.
5.5 Subject to the provisions of this Agreement, the Acquiring
Fund and the Portfolio and the Millennium Portfolio will each take, or
cause to be taken, all actions and do, or cause to be done, all things
reasonably necessary, proper or advisable to consummate and make
effective the transactions contemplated by this Agreement.
5.6 The Portfolio and the Millennium Portfolio will each provide
the Acquiring Fund with information reasonably necessary for the
preparation of a prospectus (the "Prospectus") which will include the
Proxy Statement referred to in paragraph 4.1(n), all to be included in
a Registration Statement on Form N-14 of the Touchstone Strategic
Trust (the "Registration Statement"), in compliance with the 1933 Act,
the Securities Exchange Act of 1934, as amended (the "1934 Act"), and
the 1940 Act, in connection with the meetings of the Portfolio
Shareholders and the Millennium Portfolio Shareholders to consider
approval of this Agreement and the transactions contemplated herein
(the "Meeting").
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE PERFORMANCE FUNDS AND THE
PORTFOLIO AND THE MILLENNIUM FUNDS AND THE MILLENNIUM PORTFOLIO
The obligations of the Performance Funds and the Portfolio and the
Millennium Funds and the Millennium Portfolio to consummate the transactions
provided for herein shall be subject, at their election, to the performance by
Touchstone Strategic Trust and the Acquiring Fund of all the obligations to be
performed by Touchstone Strategic Trust and the Acquiring Fund hereunder on or
before the Closing Date and, in addition thereto, to the following further
conditions:
6.1 All representations and warranties of Touchstone Strategic
Trust and the Acquiring Fund contained in this Agreement shall be true
and correct in all material respects as of the date hereof and, except
as they may be affected by the transactions contemplated by this
Agreement, as of the Closing Date with the same force and effect as if
made on and as of the Closing Date; and
6.2 Touchstone Strategic Trust shall have delivered to the
Performance Funds and to the Millennium Funds, on the Closing Date, a
certificate executed in the name of Touchstone Strategic Trust by
Touchstone Strategic Trust's President and Treasurer, in a form
reasonably satisfactory to the Performance Funds and to the Millennium
Funds and dated as of the Closing Date, to the effect that the
representations and warranties of the Touchstone Strategic Trust and
the Acquiring Fund made in this Agreement are true and correct at and
as of the Closing Date, except as these representations and warranties
may be affected by the transactions contemplated by this Agreement and
as to such other matters as Touchstone Strategic Trust shall
reasonably request.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF TOUCHSTONE STRATEGIC TRUST AND THE
ACQUIRING FUND
The obligations of Touchstone Strategic Trust and the Acquiring Fund to
complete the transactions provided for herein shall be subject, at their
election, to the performance by the Performance Funds and the Millennium Funds
and the Portfolio and the Millennium Portfolio of all of the obligations to be
performed by them hereunder on or before the Closing Date and, in addition
thereto, to the following conditions:
7.1 All representations and warranties of the Performance Funds
and the Millennium Funds and the Portfolio and the Millennium
Portfolio contained in this Agreement shall be true and correct in all
material respects as of the date hereof and, except as these
representations and warranties may be affected by the transactions
contemplated by this Agreement, as of the Closing Date, with the same
force and effect as if made on and as of the Closing Date;
7.2 The Performance Funds and the Millennium Funds shall each
have delivered to Touchstone Strategic Trust statements of the
Portfolio's and of the Millennium Portfolio's assets and liabilities,
as of the Closing Date, each certified by the Treasurer of the
Performance Funds and the Millennium Funds; and
7.3 The Performance Funds and the Millennium Funds shall each
have delivered to Touchstone Strategic Trust, on the Closing Date,
certificates executed in their respective names and in the Portfolio's
and Millennium Portfolio's names by the Performance Funds' President
and Treasurer and by the Millennium Funds' President and Treasurer, in
form and substance satisfactory to Touchstone Strategic Trust and
dated as of the Closing Date, to the effect that the representations
and warranties of the Performance Funds and the Millennium Funds and
the Portfolio and the Millennium Portfolio, with respect to the
Performance Funds and the Millennium Funds and the Portfolio and the
Millennium Portfolio made in this Agreement are true are correct at
and as of the Closing Date, except as these representations and
warranties may be affected by the transactions contemplated by this
Agreement.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND AND THE
PORTFOLIO AND THE MILLENNIUM PORTFOLIO
If any of the conditions set forth below do not exist on or before the
Closing Date, with respect to the Portfolio or the Millennium Portfolio or the
Acquiring Fund, then the other party to this Agreement shall, at its option, not
be required to consummate the transactions contemplated by this Agreement:
8.1 The Agreement and the transactions contemplated herein shall
have been approved by the requisite vote of the holders of the
outstanding shares of beneficial interest of the Portfolio and of the
Millennium Portfolio in accordance with the provisions of each of the
Performance Funds' and the Millennium Funds' Declaration of Trust and
By-Laws and copies of the resolutions evidencing such approvals shall
have been delivered to the Acquiring Fund. Notwithstanding anything
herein to the contrary, neither Touchstone Strategic Trust nor the
Acquiring Fund nor the Performance Funds nor the Portfolio nor the
Millennium Funds nor the Millennium Portfolio may waive the conditions
set forth in this paragraph 8.1;
8.2 All consents of other parties and all other consents, orders
and permits of Federal, state and local regulatory authorities deemed
necessary by Touchstone Strategic Trust or the Performance Funds or
the Millennium Funds 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 the Touchstone Strategic Trust or the Acquiring Fund or
the Performance Funds or the Millennium Funds or the Portfolio or the
Millennium Portfolio, provided that any party hereto may, for itself,
waive any of such conditions;
8.3 The Registration Statement shall have become effective under
the 1933 Act and no stop orders suspending the effectiveness thereof
shall have been issued; and
8.4 The Selling Fund shall have declared a dividend or dividends
which, together with all previous such dividends shall have the effect
of distributing to the Selling Fund Shareholders all of the Selling
Fund's investment company taxable income for all taxable periods
ending on the Closing Date (computed without regard to any deduction
for dividends paid) and all of the net capital gains realized in all
taxable periods ending on the Closing Date (after reduction for any
capital loss carryforward).
8.5 The Company and the Trust shall have received a favorable
opinion of Sullivan & Worcester LLP substantially to the effect that,
for federal income tax purposes:
(a) The transfer of all of the Selling Fund assets in exchange
solely for the Acquiring Fund Shares and the assumption by the
Acquiring Fund of the liabilities of the Selling Fund followed by the
distribution of the Acquiring Fund Shares to the Selling Fund
Shareholders in dissolution and liquidation of the Selling Fund will
constitute a "reorganization" within the meaning of Section
368(a)(1)(D) of the Code, and the Acquiring Fund and the Selling Fund
will each be a "party to a reorganization" within the meaning of
Section 368(b) of the Code.
(b) No gain or loss will be recognized by the Acquiring Fund upon
the receipt of the assets of the Selling Fund solely in exchange for
the Acquiring Fund Shares and the assumption by the Acquiring Fund of
the liabilities of the Selling Fund.
(c) No gain or loss will be recognized by the Selling Fund upon
the transfer of the Selling Fund assets to the Acquiring Fund in
exchange for the Acquiring Fund Shares and the assumption by the
Acquiring Fund of the liabilities of the Selling Fund or upon the
distribution (whether actual or constructive) of the Acquiring Fund
Shares to Selling Fund Shareholders in exchange for their shares of
the Selling Fund.
(d) No gain or loss will be recognized by the Selling Fund
Shareholders upon the exchange of their Selling Fund shares for the
Acquiring Fund Shares in liquidation of the Selling Fund.
(e) The aggregate tax basis of the Acquiring Fund Shares received
by each Selling Fund Shareholder pursuant to the Reorganization will
be the same as the aggregate tax basis of the Selling Fund shares held
by such Selling Fund Shareholder immediately prior to the Closing, and
the holding period of the Acquiring Fund Shares received by each
Selling Fund Shareholder will include the period during which the
Selling Fund shares exchanged therefor were held by such Selling Fund
Shareholder (provided the Selling Fund shares were held as capital
assets on the date of the Closing).
(f) The tax basis of the Selling Fund assets acquired by the
Acquiring Fund will be the same as the tax basis of such assets to the
Selling Fund immediately prior to the Closing, and the holding period
of the assets of the Selling Fund in the hands of the Acquiring Fund
will include the period during which those assets were held by the
Selling Fund.
8.6 The Acquiring Fund shall have received from Ernst & Young LLP
a letter addressed to the Acquiring Fund, in form and substance
satisfactory to the Acquiring Fund, to the effect that:
(a) they are independent auditors with respect to the Selling
Fund within the meaning of the 1933 Act and the applicable published
rules and regulations thereunder;
(b) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the
Capitalization Table appearing in the Registration Statement and
Prospectus/Proxy Statement has been obtained from and is consistent
with the accounting records of the Selling Fund;
(c) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the pro forma
financial statements that are included in the Registration Statement
and Prospectus/Proxy Statement agree to the underlying accounting
records of the Acquiring Fund and the Selling Fund or with written
estimates provided by each Fund's management, and were found to be
mathematically correct; and
(d) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the data
utilized in the calculations of the pro forma expense ratios appearing
in the Registration Statement and Prospectus/Proxy Statement agree
with underlying accounting records of the Selling Fund or with written
estimates by the Selling Fund's management and were found to be
mathematically correct.
In addition, unless waived by the Acquiring Fund, the Acquiring Fund
shall have received from Ernst & Young LLP a letter addressed to the
Acquiring Fund dated on the Closing Date, in form and substance
satisfactory to the Acquiring Fund, to the effect that on the basis of
limited procedures agreed upon by the Acquiring Fund (but not an
examination in accordance with generally accepted auditing standards),
the net asset value per share of the Selling Fund as of the Valuation
Date was computed and the valuation of the portfolio was consistent in
the valuation practices of the Acquiring Fund.
8.7 The Selling Fund shall have received from Tait Weller & Baker
LLP a letter addressed to the Selling Fund, in form and substance
satisfactory to the Selling Fund, to the effect that:
(a) they are independent auditors with respect to the Acquiring
Fund within the meaning of the 1933 Act and the applicable published
rules and regulations thereunder;
(b) they had performed limited procedures agreed upon by the
Selling Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards) which consisted
of a reading of any unaudited pro forma financial statements included
in the Registration Statement and Prospectus/Proxy Statement, and
making inquiries of appropriate officials of the Trust responsible for
financial and accounting matters whether such unaudited pro forma
financial statements comply as to form in all material respects with
the applicable accounting requirements of the 1933 Act and the
published rules and regulations thereunder;
(c) on the basis of limited procedures agreed upon by the Selling
Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the
Capitalization Table appearing in the Registration Statement and
Prospectus/Proxy Statement has been obtained from and is consistent
with the accounting records of the Acquiring Fund; and
(d) on the basis of limited procedures agreed upon by the Selling
Fund (but not an examination in accordance with generally accepted
auditing standards), the data utilized in the calculations of the pro
forma expense ratios appearing in the Registration Statement and
Prospectus/Proxy Statement agree with underlying accounting records of
the Acquiring Fund or with written estimates by the Acquiring Fund's
management and were found to be mathematically correct.
8.8 The change of the Acquiring Fund from a diversified series of
the Trust to a non-diversified series of the Trust upon completion of
the Reorganization shall have been approved by the requisite vote of
the holders of the outstanding shares of the Acquiring Fund in
accordance with the provisions of the Trust's Agreement and
Declaration of Trust and Bylaws.
9. BROKERAGE FEES AND EXPENSES
9.1 Touchstone Strategic Trust and the Performance Funds and the
Millennium Funds each represents and warrants to the others that there
are no brokers or finders entitled to receive any payments in
connection with the transactions provided for herein.
9.2 Navellier Management Inc. will bear the aggregate expenses
and costs of its solicitation of this Proxy Solicitation regarding the
Reorganization.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 Touchstone Strategic Trust and the Performance Funds and the
Millennium Funds agree that no party to this Agreement has made any
representation, warranty or covenant not set forth herein and that
this Agreement constitutes the entire agreement between the parties.
10.2 The representations, warranties and covenants contained in
this Agreement, or in any document delivered pursuant hereto or in
connection herewith, shall survive the consummation of the
transactions contemplated hereunder.
11. TERMINATION
This Agreement and the transactions contemplated hereby may be terminated
and abandoned by any party by resolution of the party's Board of Trustees or
Board of Trustees and resolution passed by the requisite number of Shareholders
of that party at any time prior to the Closing Date if circumstances should
develop that make proceeding with the Agreement inadvisable.
12. WAIVER
Touchstone Strategic Trust and the Performance Funds and the Millennium
Funds, by mutual consent of their respective Boards of Trustees, may waive in
writing any condition to their respective obligations hereunder, except as
provided herein.
13. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner as
may be mutually agreed upon in writing by the authorized officers of Touchstone
Strategic Trust and the Performance Funds and the Millennium Funds; provided,
however, that following the meetings of the Portfolio Shareholders and of the
Millennium Portfolio Shareholders called pursuant to paragraph 5.2 of this
Agreement, no such amendment may have the effect of changing the provisions for
determining the number of Acquiring Fund Shares to be issued to the Portfolio
Shareholders or to the Millennium Portfolio Shareholders under this Agreement to
the detriment of such Shareholders without their further approval.
14. NOTICES
Any notice, report, statement or demand required or permitted by any
provisions of this Agreement shall be in writing and shall be given by prepaid
telegraph, telecopy or certified mail addressed to Touchstone Strategic Trust at
221 East Fourth Street, Suite 300, Cincinnati, Ohio 45202, or to the Performance
Funds or the Millennium Funds at One East Liberty Street, Third Floor, Reno,
Nevada 89501.
15. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT; LIMITATION OF LIABILITY
15.1 The Article and paragraph headings contained in this
Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement.
15.2 This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original.
15.3 This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts.
15.4 This Agreement shall bind and inure to the benefit of the
parties hereto and their respective successors and assigns, but no
assignment or transfer hereof or of any rights or obligations
hereunder shall be made by any party without the written consent of
the other party. Nothing herein expressed or implied is intended or
shall be construed to confer upon or to give any person, firm or
corporation, other than the parties hereto and their respective
successors and assigns, any rights or remedies under or by reason of
this Agreement.
15.5 It is expressly agreed that the obligations of the
Performance Funds and of the Millennium Funds and of the Portfolio and
of the Millennium Portfolio hereunder shall not be binding upon any of
the Trustees, Shareholders, nominees, officers, agents or employees of
the Performance Funds and of the Millennium Funds personally, but
shall bind only the Trust property of the Performance Funds and the
Millennium Funds and the Portfolio and the Millennium Portfolio, as
provided in the Declarations of Trust of the Performance Funds and of
the Millennium Funds. The execution and delivery by such officers of
the Performance Funds and of the Millennium Funds 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 trust
property of the Performance Funds and of the Millennium Funds and the
Portfolio and the Millennium Portfolio as provided in the Declarations
of Trust of the Performance Funds and of the Millennium Funds.
15.6 It is expressly agreed that the obligations of the
Touchstone Strategic Trust and the Acquiring Fund hereunder shall not
be binding upon any of the Trustees, Shareholders, nominees, officers,
agents or employees of Touchstone Strategic Trust personally, but
shall bind only the trust property of the Touchstone Strategic Trust
and the Acquiring Fund, as provided in Touchstone Strategic Trust's
Declaration of Trust. The execution and delivery by such officers of
Touchstone Strategic Trust 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 trust property of the Touchstone
Strategic Trust and the Acquiring Fund, as provided in the Touchstone
Strategic Trust's Declaration of Trust.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
executed by its President and attested by its Secretary.
Attest: TOUCHSTONE STRATEGIC TRUST
By: /s/ Tina Hosking Bloom By: /s/ Patrick T. Bannigan
------------------------- -------------------------
Secretary President
Attest: THE NAVELLIER MILLENNIUM FUNDS
By: /s/ Arjen Kuyper By: /s/ Louis Navellier
------------------------- -------------------------
Treasurer President
Attest: THE NAVELLIER PERFORMANCE FUNDS
By: /s/ Arjen Kuyper By: /s/ Louis Navellier
------------------------- -------------------------
Treasurer President
APPENDIX B
INVESTMENT ADVISORY AGREEMENT
TOUCHSTONE STRATEGIC TRUST
INVESTMENT ADVISORY AGREEMENT, dated as of May 1, 2000, amended December
31, 2002, by and between TOUCHSTONE ADVISORS, INC., an Ohio corporation (the
"Advisor"), and TOUCHSTONE STRATEGIC TRUST, a Massachusetts business trust
created pursuant to an Agreement and Declaration of Trust dated November 18,
1982, as amended from time to time (the "Trust").
WHEREAS, the Trust is an open-end diversified management investment company
registered under the Investment Company Act of 1940, as amended, (the "1940
Act"); and
WHEREAS, shares of beneficial interest in the Trust are divided into
separate series (each, along with any series which may in the future be
established, a "Fund"); and
WHEREAS, the Trust desires to avail itself of the services, information,
advice, assistance and facilities of an investment advisor and to have an
investment advisor perform for it various investment advisory and research
services and other management services; and
WHEREAS, the Advisor is an investment advisor registered under the
Investment Advisers Act of 1940, as amended, and desires to provide investment
advisory services to the Trust;
NOW THEREFORE, in consideration of the terms and conditions hereinafter set
forth, it is agreed as follows:
1. EMPLOYMENT OF THE ADVISOR. The Trust hereby employs the Advisor to
manage the investment and reinvestment of the assets of each Fund subject to the
control and direction of the Trust's Board of Trustees, for the period on the
terms hereinafter set forth. The Advisor hereby accepts such employment and
agrees during such period to render the services and to assume the obligations
herein set forth for the compensation herein provided. The Advisor shall for all
purposes herein be deemed to be independent contractor and shall, except as
expressly provided or authorized (whether herein or otherwise), have no
authority to act for or represent the Trust in any way or otherwise be deemed an
agent of the Trust.
2. OBLIGATIONS OF AND SERVICES TO BE PROVIDED BY THE ADVISOR. In providing
the services and assuming the obligations set forth herein, the Advisor may, at
its expense, employ one or more sub-advisors for any Fund. Any agreement between
the Advisor and a sub-advisor shall be subject to the renewal, termination and
amendment provisions of paragraph 10 hereof. The Advisor undertakes to provide
the following services and to assume the following obligations:
a) The Advisor will manage the investment and reinvestment of the
assets of each Fund, subject to and in accordance with the
respective investment objectives and policies of each Fund and
any directions which the Trust's Board of Trustees may issue from
time to time. In pursuance of the foregoing, the Advisor may
engage separate investment
advisors ("Sub-Advisor(s)") to make all determinations with
respect to the investment of the assets of each Fund, to effect
the purchase and sale of portfolio securities and to take such
steps as may be necessary to implement the same. Such
determination and services by each Sub-Advisor shall also include
determining the manner in which voting rights, rights to consent
to corporate action and any other rights pertaining to the
portfolio securities shall be exercised. The Advisor shall, and
shall cause each Sub-Advisor to, render regular reports to the
Trust's Board of Trustees concerning the Trust's and each Fund's
investment activities.
b) The Advisor shall, or shall cause the respective Sub-Advisor(s)
to place orders for the execution of all portfolio transactions,
in the name of the respective Fund and in accordance with the
policies with respect thereto set forth in the Trust's
registration statements under the 1940 Act and the Securities Act
of 1933, as such registration statements may be amended from time
to time. In connection with the placement of orders for the
execution of portfolio transactions, the Advisor shall create and
maintain (or cause the Sub-Advisors to create and maintain) all
necessary brokerage records for each Fund, which records shall
comply with all applicable laws, rules and regulations, including
but not limited to records required by Section 31(a) of the 1940
Act. All records shall be the property of the Trust and shall be
available for inspection and use by the Securities and Exchange
Commission (the "SEC"), the Trust or any person retained by the
Trust. Where applicable, such records shall be maintained by the
Advisor (or Sub-Advisor) for the periods and in the places
required by Rule 31a-2 under the 1940 Act.
c) In the event of any reorganization or other change in the
Advisor, its investment principals, supervisors or members of its
investment (or comparable) committee, the Advisor shall give the
Trust's Board of Trustees written notice of such reorganization
or change within a reasonable time (but not later than 30 days)
after such reorganization or change.
d) The Advisor shall bear its expenses of providing services to the
Trust pursuant to this Agreement except such expenses as are
undertaken by the Trust. In addition, the Advisor shall pay the
salaries and fees, if any, of all Trustees, officers and
employees of the Trust who are affiliated persons, as defined in
Section 2(a)(3) of the 1940 Act, of the Advisor.
e) The Advisor will manage, or will cause the Sub-Advisors to
manage, the Fund assets and the investment and reinvestment of
such assets so as to comply with the provisions of the 1940 Act
and with Subchapter M of the Internal Revenue Code of 1986, as
amended.
3. EXPENSES. The Trust shall pay the expenses of its operation, including
but not limited to (i) charges and expenses for Trust accounting, pricing and
appraisal services and related overhead, (ii) the charges and expenses of the
Trust's auditors; (iii) the charges and expenses of any custodian, transfer
agent, plan agent, dividend disbursing agent and registrar appointed by the
Trust with respect to the Funds; (iv) brokers' commissions, and issue and
transfer taxes, chargeable to the Trust in connection with securities
transactions to which the Trust is a party; (v) insurance premiums, interest
charges, dues and fees for Trust membership in trade associations and all taxes
and fees payable by the Trust to federal, state or other governmental agencies;
(vi) fees and expenses involved in registering and maintaining registrations of
the Trust and/or shares of the Trust with the SEC, state or blue sky securities
agencies and foreign countries, including the preparation of Prospectuses and
Statements of Additional Information for filing with the SEC; (vii) all expenses
of meetings of Trustees and of shareholders of the Trust and of preparing,
printing and distributing prospectuses, notices, proxy statements and all
reports to shareholders and to governmental agencies; (viii) charges and
expenses of legal counsel to the Trust; (ix) compensation of Trustees of the
Trust; and (x) interest on borrowed money, if any.
4. COMPENSATION OF THE ADVISOR.
a) As compensation for the services rendered and obligations assumed
hereunder by the Advisor, the Trust shall pay to the Advisor
monthly a fee that is equal on an annual basis to that percentage
of the average daily net assets of each Fund set forth on
Schedule 1 attached hereto (and with respect to any future Fund,
such percentage as the Trust and the Advisor may agree to from
time to time). Such fee shall be computed and accrued daily. If
the Advisor serves as investment advisor for less than the whole
of any period specified in this Section 4a, the compensation to
the Advisor shall be prorated. For purposes of calculating the
Advisor's fee, the daily value of each Fund's net assets shall be
computed by the same method as the Trust uses to compute the net
asset value of that Fund.
b) The Advisor will pay all fees owing to each Sub-Advisor, and the
Trust shall not be obligated to the Sub-Advisors in any manner
with respect to the compensation of such Sub-Advisors.
c) The Advisor reserves the right to waive all or a part of its fee.
5. ACTIVITIES OF THE ADVISOR. The services of the Advisor to the Trust
hereunder are not to be deemed exclusive, and the Advisor shall be free to
render similar services to others. It is understood that the Trustees and
officers of the Trust are or may become interested in the Advisor as
stockholders, officers or otherwise, and that stockholders and officers of the
Advisor are or may become similarly interested in the Trust, and that the
Advisor may become interested in the Trust as a shareholder or otherwise.
6. USE OF NAMES. The Trust will not use the name of the Advisor in any
prospectus, sales literature or other material relating to the Trust in any
manner not approved prior thereto by the Advisor; except that the Trust may use
such name in any document which merely refers in accurate terms to its
appointment hereunder or in any situation which is required by the SEC or a
state securities commission; and provided further, that in no event shall such
approval be unreasonably withheld. The Advisor will not use the name of the
Trust in any material relating to the Advisor in any manner not approved prior
thereto by the Trust; except that the Advisor may use such name in any document
which merely refers in accurate terms to the appointment of the Advisor
hereunder or in any situation which is required by the SEC or a state securities
commission. In all other cases, the parties may use such names to the extent
that the use is approved by the party named, it being agreed that in no event
shall such approval be unreasonably withheld.
The Trustees of the Trust acknowledge that the Advisor has reserved for
itself the rights to the name "Touchstone Strategic Trust" (or any similar
names) and that use by the Trust of such name shall continue only with the
continuing consent of the Advisor, which consent may be withdrawn at any time,
effective immediately, upon written notice thereof to the Trust.
7. LIMITATION OF LIABILITY OF THE ADVISOR.
a) Absent willful misfeasance, bad faith, gross negligence, or
reckless disregard of obligations or duties hereunder on the part
of the Advisor, the Advisor shall not be subject to liability to
the Trust or to any shareholder in any Fund for any act or
omission in the course of, or connected with, rendering services
hereunder or for any losses that may be sustained in the
purchase, holding or sale of any security. As used in this
Section 7, the term "Advisor" shall include Touchstone Advisors,
Inc. and/or any of its affiliates and the directors, officers and
employees of Touchstone Advisors, Inc. and/or any of its
affiliates.
b) The Trust will indemnify the Advisor against, and hold it
harmless from, any and all losses, claims, damages, liabilities
or expenses (including reasonable counsel fees and expenses)
resulting from acts or omissions of the Trust. Indemnification
shall be made only after: (i) a final decision on the merits by a
court or other body before whom the proceeding was brought that
the Trust was liable for the damages claimed or (ii) in the
absence of such a decision, a reasonable determination based upon
a review of the facts, that the Trust was liable for the damages
claimed, which determination shall be made by either (a) the vote
of a majority of a quorum of Trustees of the Trust who are
neither "interested persons" of the Trust nor parties to the
proceeding ("disinterested non-party Trustees") or (b) an
independent legal counsel satisfactory to the parties hereto,
whose determination shall be set forth in a written opinion. The
Advisor shall be entitled to advances from the Trust for payment
of the reasonable expenses incurred by it in connection with the
matter as to which it is seeking indemnification in the manner
and to the fullest extent that would be permissible under the
applicable provisions of the General Corporation Law of Ohio. The
Advisor shall provide to the Trust a written affirmation of its
good faith belief that the standard of conduct necessary for
indemnification under
such law has been met and a written undertaking to repay any such
advance if it should ultimately be determined that the standard
of conduct has not been met. In addition, at least one of the
following additional conditions shall be met: (i) the Advisor
shall provide security in form and amount acceptable to the Trust
for its undertaking; (ii) the Trust is insured against losses
arising by reason of the advance; or (iii) a majority of a quorum
of the Trustees of the Trust, the members of which majority are
disinterested non-party Trustees, or independent legal counsel in
a written opinion, shall have determined, based on a review of
facts readily available to the Trust at the time the advance is
proposed to be made, that there is reason to believe that the
Advisor will ultimately be found to be entitled to
indemnification.
8. LIMITATION OF TRUST'S LIABILITY. The Advisor acknowledges that it has
received notice of and accepts the limitations upon the Trust's liability set
forth in its Declaration of Trust. The Advisor agrees that the Trust's
obligations hereunder in any case shall be limited to the Trust and to its
assets and that the Advisor shall not seek satisfaction of any such obligation
from the holders of the shares of any Fund nor from any Trustee, officer,
employee or agent of the Trust.
9. FORCE MAJEURE. The Advisor shall not be liable for delays or errors
occurring by reason of circumstances beyond its control, including but not
limited to acts of civil or military authority, national emergencies, work
stoppages, fire, flood, catastrophe, acts of God, insurrection, war, riot, or
failure of communication or power supply. In the event of equipment breakdowns
beyond its control, the Advisor shall take reasonable steps to minimize service
interruptions but shall have no liability with respect thereto.
10. RENEWAL, TERMINATION AND AMENDMENT.
a) This Agreement shall continue in effect, unless sooner terminated
as hereinafter provided, for a period of one year from the date
hereof and it shall continue indefinitely thereafter as to each
Fund, provided that such continuance is specifically approved by
the parties hereto and, in addition, at least annually by (i) the
vote of holders of a majority of the outstanding voting
securities of the affected Fund or by vote of a majority of the
Trust's Board of Trustees and (ii) by the vote of a majority of
the Trustees who are not parties to this Agreement or interested
persons of the Advisor, cast in person at a meeting called for
the purpose of voting on such approval.
b) This Agreement may be terminated at any time, with respect to any
Fund(s), without payment of any penalty, by the Trust's Board of
Trustees or by a vote of the majority of the outstanding voting
securities of the affected Fund(s) upon 60 days' prior written
notice to the Advisor and by the Advisor upon 60 days' prior
written notice to the Trust.
c) This Agreement may be amended at any time by the parties hereto,
subject to approval by the Trust's Board of Trustees and, if
required by applicable SEC rules and regulations, a vote of the
majority of the outstanding voting securities of any Fund
affected by such change. This Agreement shall terminate
automatically in the event of its assignment.
d) The terms "assignment," "interested persons" and "majority of the
outstanding voting securities" shall have the meaning set forth
for such terms in the 1940 Act.
11. SEVERABILITY. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby.
12. MISCELLANEOUS. Each party agrees to perform such further actions and
execute such further documents as are necessary to effectuate the purposes
hereof. This Agreement shall be construed and enforced in accordance with and
governed by the laws of the State of Ohio. The captions in this Agreement are
included for convenience only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written.
Pursuant to the Trust's Agreement and Declaration of Trust, dated as of November
18, 1982, the obligations of this Agreement are not binding upon any of the
Trustees or shareholders of the Trust individually, but bind only the Trust
estate.
TOUCHSTONE STRATEGIC TRUST
By: /s/ Patrick T. Bannigan
-----------------------
Patrick T. Bannigan
President
TOUCHSTONE ADVISORS, INC.
By: /s/ Michael S. Spangler
-----------------------
Michael S. Spangler
Vice President
SCHEDULE 1
LARGE CAP GROWTH FUND
The Fund pays the Advisor a fee equal to the annual rate of 0.75% on the first
$200 million of average daily net assets; 0.70% of the next $300 million of
average daily net assets; and 0.50% of such assets in excess of $500 million.
GROWTH OPPORTUNITIES FUND
The Fund pays the Advisor a fee equal to the annual rate of 1.00% on the first
$50 million of average daily net assets; 0.90% of the next $50 million of
average daily net assets; 0.80% of the next $100 million of average daily net
assets; and 0.75% of such assets in excess of $200 million.
International Equity Fund
The Fund pays the Advisor a fee equal to the annual rate of 0.95% on the first
$100 million of average daily net assets; 0.90% of the next $100 million of
average daily net assets; 0.85% of the next $100 million of average daily net
assets; and 0.80% of such assets in excess of $300 million.
Emerging Growth Fund
The Fund pays the Advisor a fee equal to the annual rate of 0.80% of average
daily net assets.
Enhanced 30 Fund
The Fund pays the Advisor a fee equal to the annual rate of 0.65% on the first
$100 million of average daily net assets; 0.60% of the next $100 million of
average daily net assets; 0.55% of the next $100 million of average daily net
assets; and 0.50% of such assets in excess of $300 million.
Value Plus Fund
The Fund pays the Advisor a fee equal to the annual rate of 0.75% on the first
$100 million of average daily net assets; 0.70% of the next $100 million of
average daily net assets; 0.65% of the next $100 million of average daily net
assets; and 0.60% of such assets in excess of $300 million.
Small Cap Growth Fund
The Fund pays the Advisor a fee equal to the annual rate of 1.25% of average
daily net assets.
APPENDIX C
FORM OF
SUB-ADVISORY AGREEMENT
LARGE CAP GROWTH FUND
TOUCHSTONE STRATEGIC TRUST
This SUB-ADVISORY AGREEMENT is made as of ___________, 2003 by and between
TOUCHSTONE ADVISORS, INC., an Ohio corporation (the "Advisor"), and NAVELLIER
MANAGEMENT, INC., a Delaware corporation (the "Sub-Advisor").
WHEREAS, the Advisor is an investment advisor registered under the
Investment Advisers Act of 1940, as amended, and has been retained by Touchstone
Strategic Trust (the "Trust"), a Massachusetts business trust organized pursuant
to an Agreement and Declaration of Trust dated November 18, 1982 and registered
as an open-end diversified management investment company under the Investment
Company Act of 1940 (the "1940 Act"), to provide investment advisory services to
the Growth Fund (the "Fund"); and
WHEREAS, the Sub-Advisor also is an investment advisor registered under the
Investment Advisers Act of 1940, as amended; and
WHEREAS, the Advisor desires to retain the Sub-Advisor to furnish it with
portfolio management services in connection with the Advisor's investment
advisory activities on behalf of the Fund, and the Sub-Advisor is willing to
furnish such services to the Advisor and the Fund;
NOW THEREFORE, in consideration of the terms and conditions hereinafter set
forth, it is agreed as follows:
1. EMPLOYMENT OF THE SUB-ADVISOR. In accordance with and subject to the
Investment Advisory Agreement between the Trust and the Advisor, attached hereto
as Exhibit A (the "Advisory Agreement"), the Advisor hereby appoints the
Sub-Advisor to manage the investment and reinvestment of those assets of the
Fund allocated to the Sub-Advisor by the Advisor (the "Fund Assets"), subject to
the control and direction of the Advisor and the Trust's Board of Trustees, for
the period and on the terms hereinafter set forth. The Sub-Advisor hereby
accepts such employment and agrees during such period to render the services and
to perform the duties called for by this Agreement for the compensation herein
provided. The Sub-Advisor shall at all times maintain its registration as an
investment advisor under the Investment Advisers Act of 1940 and shall otherwise
comply in all material respects with all applicable laws and regulations, both
state and federal. The Sub-Advisor shall for all purposes herein be deemed an
independent contractor and shall, except as expressly provided or authorized
(whether herein or otherwise), have no authority to act for or represent the
Trust in any way or otherwise be deemed an agent of the Trust or the Fund.
2. DUTIES OF THE SUB-ADVISOR. The Sub-Advisor will provide the following
services and undertake the following duties:
a. The Sub-Advisor will manage the investment and reinvestment of the
assets of the Fund, subject to and in accordance with the investment
objectives, policies and restrictions of the Fund and any directions which
the Advisor or the Trust's Board of Trustees may give from time to time
with respect to the Fund. In furtherance of the
foregoing, the Sub-Advisor will make all determinations with respect to the
investment of the assets of the Fund and the purchase and sale of portfolio
securities and shall take such steps as may be necessary or advisable to
implement the same. The Sub-Advisor also will determine the manner in which
voting rights, rights to consent to corporate action and any other rights
pertaining to the portfolio securities will be exercised. The Sub-Advisor
will render regular reports to the Trust's Board of Trustees and to the
Advisor (or such other advisor or advisors as the Advisor shall engage to
assist it in the evaluation of the performance and activities of the
Sub-Advisor). Such reports shall be made in such form and manner and with
respect to such matters regarding the Fund and the Sub-Advisor as the Trust
or the Advisor shall from time to time request.
b. The Sub-Advisor shall provide support to the Advisor with respect
to the marketing of the Fund, including but not limited to: (i) permission
to use the Sub-Advisor's name as provided in Section 5, (ii) permission to
use the past performance and investment history of the Sub-Advisor as the
same is applicable to the Fund, (iii) access to the individual(s)
responsible for day-to-day management of the Fund for marketing
conferences, teleconferences and other activities involving the promotion
of the Fund, subject to the reasonable request of the Advisor, (iv)
permission to use biographical and historical data of the Sub-Advisor and
individual manager(s), and (v) permission to use the names of clients to
which the Sub-Advisor provides investment management services, subject to
any restrictions imposed by clients on the use of such names.
c. The Sub-Advisor will, in the name of the Fund, place orders for the
execution of all portfolio transactions in accordance with the policies
with respect thereto set forth in the Trust's registration statements under
the 1940 Act and the Securities Act of 1933, as such registration
statements may be in effect from time to time. In connection with the
placement of orders for the execution of portfolio transactions, the
Sub-Advisor will create and maintain all necessary brokerage records of the
Fund in accordance with all applicable laws, rules and regulations,
including but not limited to records required by Section 31(a) of the 1940
Act. All records shall be the property of the Trust and shall be available
for inspection and use by the Securities and Exchange Commission (the
"SEC"), the Trust or any person retained by the Trust. Where applicable,
such records shall be maintained by the Advisor for the periods and in the
places required by Rule 31a-2 under the 1940 Act. When placing orders with
brokers and dealers, the Sub-Advisor's primary objective shall be to obtain
the most favorable price and execution available for the Fund, and in
placing such orders the Sub-Advisor may consider a number of factors,
including, without limitation, the overall direct net economic result to
the Fund (including commissions, which may not be the lowest available but
ordinarily should not be higher than the generally prevailing competitive
range), the financial strength and stability of the broker, the efficiency
with which the transaction will be effected, the ability to effect the
transaction at all where a large block is involved and the availability of
the broker or dealer to stand ready to execute possibly difficult
transactions in the future. Consistent with the Conduct Rules of the
National Association of Securities Dealers, Inc., and subject to seeking
the most favorable price and execution, the Sub-Advisor may give
consideration to sales of shares of the Fund as a
factor in the selection of brokers and dealers to execute portfolio
transactions of the Fund. The Sub-Advisor is specifically authorized, to
the extent authorized by law (including, without limitation, Section 28(e)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act")),
to pay a broker or dealer who provides research services to the Sub-Advisor
an amount of commission for effecting a portfolio transaction in excess of
the amount of commission another broker or dealer would have charged for
effecting such transaction, in recognition of such additional research
services rendered by the broker or dealer, but only if the Sub-Advisor
determines in good faith that the excess commission is reasonable in
relation to the value of the brokerage and research services provided by
such broker or dealer viewed in terms of the particular transaction or the
Sub-Advisor's overall responsibilities with respect to discretionary
accounts that it manages, and that the Fund derives or will derive a
reasonably significant benefit from such research services. The Sub-Advisor
will present a written report to the Board of Trustees of the Trust, at
least quarterly, indicating total brokerage expenses, actual or imputed, as
well as the services obtained in consideration for such expenses, broken
down by broker-dealer and containing such information as the Board of
Trustees reasonably shall request.
d. In the event of any reorganization or other change in the
Sub-Advisor, its investment principals, supervisors or members of its
investment (or comparable) committee, the Sub-Advisor shall give the
Advisor and the Trust's Board of Trustees written notice of such
reorganization or change within a reasonable time (but not later than 30
days) after such reorganization or change.
e. The Sub-Advisor will bear its expenses of providing services to the
Fund pursuant to this Agreement except such expenses as are undertaken by
the Advisor or the Trust.
f. The Sub-Advisor will manage the Fund assets and the investment and
reinvestment of such assets so as to comply with the provisions of the 1940
Act and with Subchapter M of the Internal Revenue Code of 1986, as amended.
3. COMPENSATION OF THE SUB-ADVISOR.
a. As compensation for the services to be rendered and duties
undertaken hereunder by the Sub-Advisor, the Advisor will pay to the
Sub-Advisor a monthly fee equal on an annual basis to 0.45% of the average
daily net assets of the Fund. Such fee shall be computed and accrued daily.
If the Sub-Advisor serves in such capacity for less than the whole of any
period specified in this Section 3a, the compensation to the Sub-Advisor
shall be prorated. For purposes of calculating the Sub-Advisor's fee, the
daily value of the Fund's net assets shall be computed by the same method
as the Trust uses to compute the net asset value of the Fund for purposes
of purchases and redemptions of shares thereof.
b. The Sub-Advisor reserves the right to waive all or a part of its
fees hereunder.
4. ACTIVITIES OF THE SUB-ADVISOR. It is understood that the Sub-Advisor may
perform investment advisory services for various other clients, including other
investment companies. The Sub-Advisor will report to the Board of Trustees of
the Trust (at regular quarterly meetings and at such other times as such Board
of Trustees reasonably shall request) (i) the financial condition and prospects
of the Sub-Advisor, (ii) the nature and amount of transactions affecting the
Fund that involve the Sub-Advisor and affiliates of the Sub-Advisor, (iii)
information regarding any potential conflicts of interest arising by reason of
its continuing provision of advisory services to the Fund and to its other
accounts, and (iv) such other information as the Board of Trustees shall
reasonably request regarding the Fund, the Fund's performance, the services
provided by the Sub-Advisor to the Fund as compared to its other accounts and
the plans of, and the capability of, the Sub-Advisor with respect to providing
future services to the Fund and its other accounts. At least annually, the
Sub-Advisor shall report to the Trustees the total number and type of such other
accounts and the approximate total asset value thereof (but not the identities
of the beneficial owners of such accounts). The Sub-Advisor agrees to submit to
the Trust a statement defining its policies with respect to the allocation of
business among the Fund and its other clients.
It is understood that the Sub-Advisor may become interested in the Trust as
a shareholder or otherwise.
The Sub-Advisor has supplied to the Advisor and the Trust copies of its
Form ADV with all exhibits and attachments thereto (including the Sub-Advisor's
statement of financial condition) and will hereafter supply to the Advisor,
promptly upon the preparation thereof, copies of all amendments or restatements
of such document.
5. USE OF NAMES. Neither the Advisor nor the Trust shall use the name of
the Sub-Advisor in any prospectus, sales literature or other material relating
to the Advisor or the Trust in any manner not approved in advance by the
Sub-Advisor; provided, however, that the Sub-Advisor will approve all uses of
its name which merely refer in accurate terms to its appointment hereunder or
which are required by the SEC or a state securities commission; and provided
further, that in no event shall such approval be unreasonably withheld. The
Sub-Advisor shall not use the name of the Advisor or the Trust in any material
relating to the Sub-Advisor in any manner not approved in advance by the Advisor
or the Trust, as the case may be; provided, however, that the Advisor and the
Trust shall each approve all uses of their respective names which merely refer
in accurate terms to the appointment of the Sub-Advisor hereunder or which are
required by the SEC or a state securities commission; and, provided further,
that in no event shall such approval be unreasonably withheld.
6. LIMITATION OF LIABILITY OF THE SUB-ADVISOR. Absent willful misfeasance,
bad faith, gross negligence, or reckless disregard of obligations or duties
hereunder on the part of the Sub-Advisor, the Sub-Advisor shall not be subject
to liability to the Advisor, the Trust or to any shareholder in the Fund for any
act or omission in the course of, or connected with, rendering services
hereunder or for any losses that may be sustained in the purchase, holding or
sale of any security. As used in this Section 6, the term "Sub-Advisor" shall
include the Sub-Advisor and/or any of its affiliates and the directors, officers
and employees of the Sub-Advisor and/or any of its affiliates.
7. LIMITATION OF TRUST'S LIABILITY. The Sub-Advisor acknowledges that it
has received notice of and accepts the limitations upon the Trust's liability
set forth in its Declaration of Trust. The Sub-Advisor agrees that (i) the
Trust's obligations to the Sub-Advisor under this Agreement (or indirectly under
the Advisory Agreement) shall be limited in any event to the assets of the Fund
and
(ii) the Sub-Advisor shall not seek satisfaction of any such obligation from the
holders of shares of the Fund nor from any Trustee, officer, employee or agent
of the Trust.
8. FORCE MAJEURE. The Sub-Advisor shall not be liable for delays or errors
occurring by reason of circumstances beyond its control, including but not
limited to acts of civil or military authority, national emergencies, work
stoppages, fire, flood, catastrophe, acts of God, insurrection, war, riot, or
failure of communication or power supply. In the event of equipment breakdowns
beyond its control, the Sub-Advisor shall take reasonable steps to minimize
service interruptions but shall have no liability with respect thereto.
9. RENEWAL, TERMINATION AND AMENDMENT.
a. This Agreement shall continue in effect, unless sooner terminated
as hereinafter provided for a period of two years from the date hereof and
it shall continue thereafter provided that such continuance is specifically
approved by the parties and, in addition, at least annually by (i) the vote
of the holders of a majority of the outstanding voting securities (as
herein defined) of the Fund or by vote of a majority of the Trust's Board
of Trustees and (ii) by the vote of a majority of the Trustees who are not
parties to this Agreement or interested persons of either the Advisor or
the Sub-Advisor, cast in person at a meeting called for the purpose of
voting on such approval.
b. This Agreement may be terminated at any time, without payment of
any penalty, (i) by the Advisor, by the Trust's Board of Trustees or by a
vote of the majority of the outstanding voting securities of the Fund, in
any such case upon not less than 60 days' prior written notice to the
Sub-Advisor and (ii) by the Sub-Advisor upon not less than 60 days' prior
written notice to the Advisor and the Trust. This Agreement shall terminate
automatically in the event of its assignment.
c. This Agreement may be amended at any time by the parties hereto,
subject to approval by the Trust's Board of Trustees and, if required by
applicable SEC rules and regulations, a vote of the majority of the
outstanding voting securities of the Fund affected by such change.
d. The terms "assignment," "interested persons" and "majority of the
outstanding voting securities" shall have the meaning set forth for such
terms in the 1940 Act.
10. SEVERABILITY. If any provision of this Agreement shall become or shall
be found to be invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby.
11. NOTICE. Any notices under this Agreement shall be in writing addressed
and delivered personally (or by telecopy) or mailed postage-paid, to the other
party at such address as such other party may designate in accordance with this
paragraph for the receipt of such notice. Until further notice to the other
party, it is agreed that the address of the Trust and that of the Advisor for
this purpose shall be 221 East Fourth Street, Suite 300, Cincinnati, Ohio 45202
and that the address of the Sub-Advisor shall be One East Liberty, Third Floor,
Reno, Nevada 89501.
12. MISCELLANEOUS. Each party agrees to perform such further actions and
execute such further documents as are necessary to effectuate the purposes
hereof. This Agreement shall be construed and enforced in accordance with and
governed by the laws of the State of Ohio. The captions in this Agreement are
included for convenience only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written.
TOUCHSTONE ADVISORS, INC.
By:
------------------------------------
Name: Patrick Bannigan
Title: President
NAVELLIER MANAGEMENT, INC.
By:
------------------------------------
Name: Louis G. Navellier
Title: President
APPENDIX D
PLAN OF DISTRIBUTION
PURSUANT TO RULE 12b-1 FOR
CLASS A SHARES OF MULTIPLE CLASS SERIES
AND FOR SINGLE CLASS SERIES OF
COUNTRYWIDE STRATEGIC TRUST
WHEREAS, Countrywide Strategic Trust (the "Trust"), an unincorporated
business trust organized under the laws of The Commonwealth of Massachusetts, is
an open-end management investment company and is registered as such under the
Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Trust is authorized to issue an unlimited number of shares of
beneficial interest without par value (the "Shares"), which are divided into
separate Series of Shares; and
WHEREAS, the Trust issues shares of certain Series in Sub-Series (one of
which may be designated as Class A Shares), whereas other Series will operate
with a single class of Shares, which Shares will be considered for purposes of
this Plan as Class A Shares; and
WHEREAS, the Trustees of the Trust as a whole, and the Trustees who are not
interested persons of the Trust (as defined in the 1940 Act) and who have no
direct or indirect financial interest in the operation of this Plan or in any
agreement relating hereto (the "Rule 12b-1 Trustees"), having determined, in the
exercise of reasonable business judgment and in light of their fiduciary duties
under state law and under Section 36(a) and (b) of the 1940 Act, that there is a
reasonable likelihood that this Plan will benefit each Series and the holders of
its Class A Shares, have approved this Plan by votes cast in person at a meeting
called for the purpose of voting hereon and on any agreements related hereto;
NOW, THEREFORE, the current Rule 12b-1 distribution plan of each Series is
hereby amended as it pertains to the Class A Shares of each Series in accordance
with Rule 12b-1 under the 1940 Act, on the following terms and conditions:
1. Distribution Activities. Subject to the supervision of the Trustees of
the Trust, the Trust may, directly or indirectly, engage in any activities
related to the distribution of Class A Shares, which activities may include, but
are not limited to, the following: (a) maintenance fees or other payments to the
Trust's principal underwriter and to securities dealers and others who are
engaged in the sale of Class A Shares and who may be advising shareholders of
the Trust regarding the purchase, sale or retention of Class A Shares; (b)
expenses of maintaining personnel (including personnel of organizations with
which the Trust has entered into agreements related to this Plan) who engage in
or support distribution of Class A Shares or who render shareholder support
services not otherwise provided by the
Trust's transfer agent, including, but not limited to, office space and
equipment, telephone facilities and expenses, answering routine inquiries
regarding the Trust, processing shareholder transactions, and providing such
other shareholder services as the Trust may reasonably request; (c) formulating
and implementing of marketing and promotional activities, including, but not
limited to, direct mail promotions and television, radio, newspaper, magazine
and other mass media advertising; (d) preparing, printing and distributing sales
literature; (e) preparing, printing and distributing prospectuses and statements
of additional information and reports of the Trust for recipients other than
existing shareholders of the Trust; and (f) obtaining such information, analyses
and reports with respect to marketing and promotional activities as the Trust
may, from time to time, deem advisable. The Trust is authorized to engage in the
activities listed above, and in any other activities related to the distribution
of Class A Shares, either directly or through other persons with which the Trust
has entered into agreements related to this Plan.
2. Maximum Expenditures. The expenditures to be made pursuant to this Plan
and the basis upon which payment of such expenditures will be made shall be
determined by the Trustees of the Trust, but in no event may such expenditures
exceed in any fiscal year an amount calculated at the rate of .25% of the
average daily net asset value of the Class A Shares of any Series of the Trust.
Such payments for distribution activities may be made directly by the Class A
Shares or the Trust's investment adviser or principal underwriter may incur such
expenses and obtain reimbursement from the Class A Shares.
3. Term and Termination. This Plan shall become effective on the date
hereof. Unless terminated as herein provided, this Plan shall continue in effect
for one year from the date hereof and shall continue in effect for successive
periods of one year thereafter, but only so long as each such continuance is
specifically approved by votes of a majority of both (i) the Trustees of the
Trust and (ii) the Rule 12b-1 Trustees, cast in person at a meeting called for
the purpose of voting on such approval. This Plan may be terminated with respect
to any Series at any time by vote of a majority of the Rule 12b-1 Trustees or by
vote of a majority (as defined in the 1940 Act) of the outstanding Class A
Shares of such Series of the Trust. In the event this Plan is terminated by any
Series in accordance with its terms, the obligations of the Class A Shares of
such Series to make payments to the Trust's principal underwriter pursuant to
this Plan will cease and such Series will not be required to make any payments
for expenses incurred after the date of termination.
4. Amendments. This Plan may not be amended with respect to any Series to
increase materially the amount of expenditures provided for in Section 2 hereof
unless such amendment is approved by a vote of the majority (as defined in the
1940 Act) of the outstanding Class A Shares of such Series, and no material
amendment to this Plan shall be made unless approved in the manner provided for
annual renewal of this Plan in Section 3 hereof.
5. Selection and Nomination of Trustees. While this Plan is in effect, the
selection and nomination of Trustees who are not interested persons (as defined
in the 1940 Act) of the Trust shall be committed to the discretion of the
Trustees who are not interested persons of the Trust.
6. Quarterly Reports. The Treasurer of the Trust and the principal
underwriter shall provide to the Trustees and the Trustees shall review, at
least quarterly, a written report of the amounts expended pursuant to this Plan
and any related agreement, the purposes for which such expenditures were made
and the allocation of such expenditures as provided for in Section 7.
7. Allocating Expenditures Between Classes. Only distribution expenditures
properly attributable to the sale of a particular class of Shares may be used to
support the distribution fee charged to shareholders of such class of Shares.
Distribution expenses attributable to the sale of more than one class of Shares
of a Series 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 Series. For this purpose, Shares issued upon reinvestment
of dividends or distributions will not be considered sales.
8. Recordkeeping. The Trust shall preserve copies of this Plan and any
related agreement and all reports made pursuant to Section 6 hereof, for a
period of not less than six years from the date of this Plan, the agreements or
such reports, as the case may be, the first two years in an easily accessible
place.
9. Limitation of Liability. A copy of the Agreement and Declaration of
Trust of the Trust is on file with the Secretary of The Commonwealth of
Massachusetts and notice is hereby given that this Plan is executed on behalf of
the Trustees of the Trust as trustees and not individually and that the
obligations of this instrument are not binding upon the Trustees or shareholders
of the Trust individually but are binding only upon the assets and property of
the Trust.
IN WITNESS WHEREOF, the Trust has caused this Plan to be executed as of the date
set forth below.
Dated: October 29, 1999
Attest:
/s/ Tina D. Hosking By: /s/ Robert H. Leshner
- ------------------- --------------------------
Secretary President
PLAN OF DISTRIBUTION
PURSUANT TO RULE 12b-1 FOR
CLASS B SHARES OF TOUCHSTONE STRATEGIC TRUST
WHEREAS, Touchstone Strategic Trust (the "Trust"), an unincorporated
business trust organized under the laws of The Commonwealth of Massachusetts, is
an open-end management investment company and is registered as such under the
Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Trust is authorized to issue an unlimited number of shares of
beneficial interest without par value (the "Shares"), which are divided into
separate Series of Shares; and
WHEREAS, the Trust issues shares of certain Series in Sub-Series (one of
which may be designated as Class B Shares); and
WHEREAS, the Trustees of the Trust as a whole, and the Trustees who are not
interested persons of the Trust (as defined in the 1940 Act) and who have no
direct or indirect financial interest in the operation of this Plan or in any
agreement relating hereto (the "Rule 12b-1 Trustees"), having determined, in the
exercise of reasonable business judgment and in light of their fiduciary duties
under state law and under Section 36(a) and (b) of the 1940 Act, that there is a
reasonable likelihood that this Plan will benefit each Series and the holders of
its Class B Shares, have approved this Plan by votes cast in person at a meeting
called for the purpose of voting hereon and on any agreements related hereto;
NOW, THEREFORE, the current Rule 12b-1 distribution plan of each Series is
hereby amended as it pertains to the Class B Shares of each Series in accordance
with Rule 12b-1 under the 1940 Act, on the following terms and conditions:
1. Distribution Activities. Subject to the supervision of the Trustees of
the Trust, the Trust may, directly or indirectly, engage in any activities
related to the distribution of Class B Shares, which activities may include, but
are not limited to, the following: (a) maintenance fees or other payments to the
Trust's principal underwriter and to securities dealers and others who are
engaged in the sale of Class B Shares and who may be advising shareholders of
the Trust regarding the purchase, sale or retention of Class B Shares; (b)
expenses of maintaining personnel (including personnel of organizations with
which the Trust has entered into agreements related to this Plan) who engage in
or support distribution of Class B Shares or who render shareholder support
services not otherwise provided by the Trust's transfer agent, including, but
not limited to, office space and equipment, telephone facilities and expenses,
answering routine inquiries regarding the Trust, processing shareholder
transactions, and providing such other shareholder services as the Trust may
reasonably request; (c) formulating and implementing of marketing and
promotional activities, including, but not limited to, direct mail promotions
and television, radio, newspaper, magazine and other mass media advertising; (d)
preparing, printing and distributing sales literature; (e) preparing, printing
and distributing prospectuses and statements of additional information and
reports of the Trust for recipients other than existing shareholders of the
Trust; and (f) obtaining such information, analyses and reports with respect to
marketing and promotional activities as the Trust may, from time to time, deem
advisable. The Trust is authorized to engage in the activities listed above, and
in any other activities related to the distribution of Class B Shares, either
directly or through other persons with which the Trust has entered into
agreements related to this Plan.
2. Maximum Expenditures. The expenditures to be made pursuant to Section 1
and the basis upon which payment of such expenditures will be made shall be
determined by the Trustees of the Trust, but in no event may such expenditures
exceed in any fiscal year an amount calculated at the rate of .75% of the
average daily net asset value of the Class B Shares of any Series of the Trust.
Such payments for distribution activities may be made directly by the Class B
Shares or the Trust's investment adviser or principal underwriter may incur such
expenses and obtain reimbursement from the Class B Shares.
3. Maintenance Fee. In addition to the payments of compensation provided
for in Section 2 and in order to further enhance the distribution of its Class B
Shares, the Trust shall pay the principal underwriter a maintenance fee, accrued
daily and paid monthly, in an amount equal to an annual rate of .25% of the
daily net assets of the Class B Shares of the Trust. When requested by and at
the direction of the principal underwriter, the Trust shall pay a maintenance
fee to dealers based on the amount of Class B Shares sold by such dealers and
remaining outstanding for specified periods of time, if any, determined by the
principal underwriter, in amounts up to .25% per annum of the average daily net
assets of the Class B Shares of the Trust. Any maintenance fees paid to dealers
shall reduce the maintenance fees otherwise payable to the principal
underwriter.
4. Term and Termination. This Plan shall become effective on the date
hereof. Unless terminated as herein provided, this Plan shall continue in effect
for one year from the date hereof and shall continue in effect for successive
periods of one year thereafter, but only so long as each such continuance is
specifically approved by votes of a majority of both (i) the Trustees of the
Trust and (ii) the Rule 12b-1 Trustees, cast in person at a meeting called for
the purpose of voting on such approval. This Plan may be terminated with respect
to any Series at any time by vote of a majority of the Rule 12b-1 Trustees or by
vote of a majority (as defined in the 1940 Act) of the outstanding Class B
Shares of such Series of the Trust. In the event this Plan is terminated by any
Series in accordance with its terms, the obligations of the Class B Shares of
such Series to make payments to the Trust's principal underwriter pursuant to
this Plan will cease and such Series will not be required to make any payments
for expenses incurred after the date of termination.
5. Amendments. This Plan may not be amended with respect to any Series to
increase materially the amount of expenditures provided for in Sections 2 and 3
hereof unless such amendment is approved by a vote of the majority (as defined
in the 1940 Act) of the outstanding Class B Shares of such Series, and no
material amendment to this Plan shall be made unless approved in the manner
provided for annual renewal of this Plan in Section 4 hereof.
6. Selection and Nomination of Trustees. While this Plan is in effect, the
selection and nomination of Trustees who are not interested persons (as defined
in the 1940 Act) of the Trust shall be committed to the discretion of the
Trustees who are not interested persons of the Trust.
7. Quarterly Reports. The principal underwriter and the Treasurer of the
Trust shall provide to the Trustees and the Trustees shall review, at least
quarterly, a written report of the amounts expended pursuant to this Plan and
any related agreement, the purposes for which such expenditures were made and
the allocation of such expenditures as provided for in Section 8.
8. Allocating Expenditures Between Classes. Only distribution expenditures
properly attributable to the sale of a particular class of Shares may be used to
support the distribution fee charged to shareholders of such class of Shares.
Distribution expenses attributable to the sale of more than one class of Shares
of a Series 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 Series. For this purpose, Shares issued upon reinvestment
of dividends or distributions will not be considered sales.
9. Recordkeeping. The Trust shall preserve copies of this Plan and any
related agreement and all reports made pursuant to Section 7 hereof, for a
period of not less than six years from the date of this Plan, the agreements or
such reports, as the case may be, the first two years in an easily accessible
place.
10. Limitation of Liability. A copy of the Agreement and Declaration of
Trust of the Trust is on file with the Secretary of The Commonwealth of
Massachusetts and notice is hereby given that this Plan is executed on behalf of
the Trustees of the Trust as trustees and not individually and that the
obligations of this instrument are not binding upon the Trustees or shareholders
of the Trust individually but are binding only upon the assets and property of
the Trust.
IN WITNESS WHEREOF, the Trust has caused this Plan to be executed as of the
date set forth below.
Dated: May 1, 2001
Attest:
/s/ Tina D. Hosking By: /s/ Jill McGruder
- ------------------- -----------------
Secretary President
PLAN OF DISTRIBUTION
PURSUANT TO RULE 12b-1 FOR
CLASS C SHARES OF COUNTRYWIDE STRATEGIC TRUST
WHEREAS, Countrywide Strategic Trust (the "Trust"), an unincorporated
business trust organized under the laws of The Commonwealth of Massachusetts, is
an open-end management investment company and is registered as such under the
Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Trust is authorized to issue an unlimited number of shares of
beneficial interest without par value (the "Shares"), which are divided into
separate Series of Shares; and
WHEREAS, the Trust issues shares of certain Series in Sub-Series (one of
which may be designated as Class C Shares); and
WHEREAS, the Trustees of the Trust as a whole, and the Trustees who are not
interested persons of the Trust (as defined in the 1940 Act) and who have no
direct or indirect financial interest in the operation of this Plan or in any
agreement relating hereto (the "Rule 12b-1 Trustees"), having determined, in the
exercise of reasonable business judgment and in light of their fiduciary duties
under state law and under Section 36(a) and (b) of the 1940 Act, that there is a
reasonable likelihood that this Plan will benefit each Series and the holders of
its Class C Shares, have approved this Plan by votes cast in person at a meeting
called for the purpose of voting hereon and on any agreements related hereto;
NOW, THEREFORE, the current Rule 12b-1 distribution plan of each Series is
hereby amended as it pertains to the Class C Shares of each Series in accordance
with Rule 12b-1 under the 1940 Act, on the following terms and conditions:
1. Distribution Activities. Subject to the supervision of the Trustees of
the Trust, the Trust may, directly or indirectly, engage in any activities
related to the distribution of Class C Shares, which activities may include, but
are not limited to, the following: (a) maintenance fees or other payments to the
Trust's principal underwriter and to securities dealers and others who are
engaged in the sale of Class C Shares and who may be advising shareholders of
the Trust regarding the purchase, sale or retention of Class C Shares; (b)
expenses of maintaining personnel (including personnel of organizations with
which the Trust has entered into agreements related to this Plan) who engage in
or support distribution of Class C Shares or who render shareholder support
services not otherwise provided by the Trust's transfer agent, including, but
not limited to, office space and equipment, telephone facilities and expenses,
answering routine inquiries regarding the Trust, processing shareholder
transactions, and providing such other shareholder services as the Trust may
reasonably request; (c) formulating and implementing of marketing and
promotional activities, including, but not limited to, direct mail promotions
and television, radio, newspaper, magazine and other mass media advertising; (d)
preparing, printing and distributing sales literature; (e) preparing, printing
and distributing prospectuses and statements of additional information and
reports of the Trust for recipients other than existing shareholders of the
Trust; and (f) obtaining such information, analyses and reports with respect to
marketing and promotional activities as the Trust may, from time to time, deem
advisable. The Trust is authorized to engage in the activities listed above, and
in any other activities related to the distribution of Class C Shares, either
directly or through other persons with which the Trust has entered into
agreements related to this Plan.
2. Maximum Expenditures. The expenditures to be made pursuant to Section 1
and the basis upon which payment of such expenditures will be made shall be
determined by the Trustees of the Trust, but in no event may such expenditures
exceed in any fiscal year an amount calculated at the rate of .75% of the
average daily net asset value of the Class C Shares of any Series of the Trust.
Such payments for distribution activities may be made directly by the Class C
Shares or the Trust's investment adviser or principal underwriter may incur such
expenses and obtain reimbursement from the Class C Shares.
3. Maintenance Fee. In addition to the payments of compensation provided
for in Section 2 and in order to further enhance the distribution of its Class C
Shares, the Trust shall pay the principal underwriter a maintenance fee, accrued
daily and paid monthly, in an amount equal to an annual rate of .25% of the
daily net assets of the Class C Shares of the Trust. When requested by and at
the direction of the principal underwriter, the Trust shall pay a maintenance
fee to dealers based on the amount of Class C Shares sold by such dealers and
remaining outstanding for specified periods of time, if any, determined by the
principal underwriter, in amounts up to .25% per annum of the average daily net
assets of the Class C Shares of the Trust. Any maintenance fees paid to dealers
shall reduce the maintenance fees otherwise payable to the principal
underwriter.
4. Term and Termination. This Plan shall become effective on the date
hereof. Unless terminated as herein provided, this Plan shall continue in effect
for one year from the date hereof and shall continue in effect for successive
periods of one year thereafter, but only so long as each such continuance is
specifically approved by votes of a majority of both (i) the Trustees of the
Trust and (ii) the Rule 12b-1 Trustees, cast in person at a meeting called for
the purpose of voting on such approval. This Plan may be terminated with respect
to any Series at any time by vote of a majority of the Rule 12b-1 Trustees or by
vote of a majority (as defined in the 1940 Act) of the outstanding Class C
Shares of such Series of the Trust. In the event this Plan is terminated by any
Series in accordance with its terms, the obligations of the Class C Shares of
such Series to make payments to the Trust's principal underwriter pursuant to
this Plan will cease and such Series will not be required to make any payments
for expenses incurred after the date of termination.
5. Amendments. This Plan may not be amended with respect to any Series to
increase materially the amount of expenditures provided for in Sections 2 and 3
hereof unless such amendment is approved by a vote of the majority (as defined
in the 1940 Act) of the outstanding Class C Shares of such Series, and no
material amendment to this Plan shall be made unless approved in the manner
provided for annual renewal of this Plan in Section 4 hereof.
6. Selection and Nomination of Trustees. While this Plan is in effect, the
selection and nomination of Trustees who are not interested persons (as defined
in the 1940 Act) of the Trust shall be committed to the discretion of the
Trustees who are not interested persons of the Trust.
7. Quarterly Reports. The principal underwriter and the Treasurer of the
Trust shall provide to the Trustees and the Trustees shall review, at least
quarterly, a written report of the amounts expended pursuant to this Plan and
any related agreement, the purposes for which such expenditures were made and
the allocation of such expenditures as provided for in Section 8.
8. Allocating Expenditures Between Classes. Only distribution expenditures
properly attributable to the sale of a particular class of Shares may be used to
support the distribution fee charged to shareholders of such class of Shares.
Distribution expenses attributable to the sale of more than one class of Shares
of a Series 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 Series. For this purpose, Shares issued upon reinvestment
of dividends or distributions will not be considered sales.
9. Recordkeeping. The Trust shall preserve copies of this Plan and any
related agreement and all reports made pursuant to Section 7 hereof, for a
period of not less than six years from the date of this Plan, the agreements or
such reports, as the case may be, the first two years in an easily accessible
place.
10. Limitation of Liability. A copy of the Agreement and Declaration of
Trust of the Trust is on file with the Secretary of The Commonwealth of
Massachusetts and notice is hereby given that this Plan is executed on behalf of
the Trustees of the Trust as trustees and not individually and that the
obligations of this instrument are not binding upon the Trustees or shareholders
of the Trust individually but are binding only upon the assets and property of
the Trust.
IN WITNESS WHEREOF, the Trust has caused this Plan to be executed as of the
date set forth below.
Dated: October 29, 1999
Attest:
/s/ Tina D. Hosking By: /s/ Robert H. Leshner
- ------------------- ---------------------
Secretary President
PROXY
THE NAVELLIER LARGE CAP GROWTH PORTFOLIO
OF
THE NAVELLIER MILLENNIUM FUNDS
One East Liberty Street, Third Floor
Reno, Nevada 89501
--------------------
PROXY FOR A SPECIAL MEETING OF SHAREHOLDERS
September 19, 2003
THIS PROXY IS SOLICITED BY THE TRUSTEES OF THE NAVELLIER MILLENNIUM FUNDS,
for use at a special meeting of the shareholders of The Navellier Large Cap
Growth Portfolio (the "Millennium Portfolio"), an investment portfolio offered
by The Navellier Millennium Funds (the " Millennium Funds") which meeting will
be held at 10:00 a.m., Pacific Standard Time, on September 19, 2003, at the
offices of The Navellier Millennium Funds, One East Liberty Street, Third Floor,
Reno, Nevada 89501 (the "Meeting").
The undersigned shareholder of the Millennium Portfolio, revoking any and
all previous proxies heretofore given for shares of the Millennium Portfolio
held by the undersigned("Shares"), does hereby appoint Louis Navellier and
Samuel Kornhauser, and each and any of them, with full power of substitution to
each to be the attorneys and proxies of the undersigned (the "Proxies"), to
attend the Meeting of the shareholders of the Millennium Portfolio, and to
represent and direct the voting interests represented by the undersigned as of
the record date for said Meeting for the Proposal specified below.
This proxy, if properly executed, will be voted in the manner as directed
herein by the undersigned shareholder. Unless otherwise specified below in the
squares provided, the undersigned's vote will be cast "FOR" the Proposal. If no
direction is made for the Proposal, this proxy will be voted "FOR" the Proposal.
In their discretion, the Proxies are authorized to transact and vote upon such
other matters and business as may come before the Meeting or any adjournments
thereof.
Please mark | |
your votes as | X |
indicated in | |
this example
Proposal 1 To approve a proposed Agreement and Plan of Reorganization (the
"Plan"), whereby the Navellier Large Cap Growth Portfolio of the
Navellier Millennium Funds (the " Millennium Portfolio") and the
Navellier Large Cap Growth Portfolio of The Navellier Performance
Funds (the "Portfolio") would transfer all of their assets to the
Large Cap Growth Fund, a portfolio of the Touchstone Strategic
Trust (the "Acquiring Fund") in exchange for shares of beneficial
interest in the Acquiring Fund that would then be distributed to
the shareholders of the Portfolio and to the Shareholders of the
Millennium
Portfolio pro rata. Also, as part of the Plan, the Acquiring Fund
would assume all valid liabilities of the Portfolio and of the
Millennium Portfolio.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
To avoid the expense of adjourning the Meeting to a subsequent date, please
return this proxy in the enclosed self-addressed, postage-paid envelope. THIS
PROXY IS SOLICITED ON BEHALF OF THE TRUSTEES OF THE NAVELLIER PERFORMANCE FUNDS
WHICH RECOMMEND A VOTE FOR PROPOSAL 1.
Dated _______________, 2003
------------------------ ----------------
Signature of Shareholder Number of shares
------------------------ ----------------
Signature of Shareholder Number of shares
This proxy may be revoked by the shareholder(s) at any time
prior to the special meeting.
NOTE: Please sign exactly as your name appears hereon. If shares are registered
in more than one name, all registered shareholders should sign this proxy; but
if one shareholder signs, that signature binds the other shareholder. When
signing as an attorney, executor, administrator, agent, trustee, or guardian, or
custodian for a minor, please give full title as such. If a corporation, please
sign in full corporate name by an authorized person. If a partnership, please
sign in partnership name by an authorized person.
PART B
TOUCHSTONE STRATEGIC TRUST
(THE LARGE CAP GROWTH FUND)
STATEMENT OF ADDITIONAL INFORMATION
DATED AUGUST 19, 2003
This Statement of Additional Information, which is not a prospectus, should
be read in conjunction with the Combined Prospectus/Proxy Statement of
Touchstone Strategic Trust (the "Fund"), dated August 19, 2003 for the special
meeting (the "Millennium Meeting") of the Shareholders of the Navellier Large
Cap Growth Portfolio (the "Millennium Portfolio") of the Navellier Millennium
Funds, a copy of which Prospectus/ Proxy Statement may be obtained, without
charge, by contacting the Millennium Portfolio, c/o Navellier Securities Corp.
at One East Liberty, Third Floor, Reno, Nevada 89501; Tel: 1-800-887-8671. This
Statement of Additional Information contains additional and more detailed
information about the operations and activities of the Large Cap Growth Fund, a
portfolio of the Touchstone Strategic Trust (the "Acquiring Fund") and the
operations and activities of the Millennium Portfolio.
The combined Prospectus/Proxy Statement describes certain transactions
contemplated by the proposed merger of the Portfolio and of the Millennium
Portfolio into the Acquiring Fund (the "Reorganization") whereby the Acquiring
Fund would acquire all of the assets of the Portfolio and of the Millennium
Portfolio in exchange solely for shares of beneficial interest in the Acquiring
Fund and the assumption by the Acquiring Fund of all of the valid liabilities of
the Portfolio and of the Millennium Portfolio.
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
STATEMENT OF ADDITIONAL INFORMATION FOR TOUCHSTONE STRATEGIC
TRUST DATED AUGUST 1, 2003 (incorporated herein by reference)........
STATEMENT OF ADDITIONAL INFORMATION FOR THE NAVELLIER MILLENNIUM
FUNDS DATED MAY 1, 2003 (incorporated herein by reference)............
CURRENT AUDITED ANNUAL REPORT OF THE NAVELLIER MILLENNIUM FUNDS
AS OF DECEMBER 31, 2002 (incorporated herein by reference)............
Pro Forma Financial
Statements (incorporated herein by reference).........................
TOUCHSTONE STRATEGIC TRUST
STATEMENT OF ADDITIONAL INFORMATION
August 1, 2003
Emerging Growth Fund
Value Plus Fund
Enhanced 30 Fund
Large Cap Growth Fund
Growth Opportunities Fund
Small Cap Growth Fund
This Statement of Additional Information is not a prospectus. It should be read
together with the Funds' Prospectuses dated August 1, 2003. The Funds' financial
statements are contained in the Annual Report, which is incorporated by
reference into this Statement of Additional Information. You may receive a copy
of a Fund's Prospectus or most recent Annual and Semiannual Report by writing
the Trust at 221 East Fourth Street, Suite 300, Cincinnati, Ohio 45202-4133, or
by calling the Trust nationwide toll-free 800-543-0407, in Cincinnati 362-4921.
1
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------
TOUCHSTONE STRATEGIC TRUST
221 EAST FOURTH STREET, SUITE 300
CINCINNATI, OHIO 45202-4133
TABLE OF CONTENTS
PAGE
THE TRUST......................................................................3
DEFINITIONS, POLICIES AND RISK CONSIDERATIONS..................................4
INVESTMENT RESTRICTIONS.......................................................27
TRUSTEES AND OFFICERS.........................................................31
THE INVESTMENT ADVISOR AND SUB-ADVISORS.......................................37
PROXY VOTING PROCEDURES.......................................................42
THE DISTRIBUTOR...............................................................44
DISTRIBUTION PLANS............................................................46
SECURITIES TRANSACTIONS.......................................................48
CODE OF ETHICS................................................................51
PORTFOLIO TURNOVER............................................................51
CALCULATION OF SHARE PRICE AND PUBLIC OFFERING PRICE..........................51
CHOOSING A SHARE CLASS........................................................52
OTHER PURCHASE INFORMATION....................................................57
TAXES.........................................................................60
REDEMPTION IN KIND............................................................63
HISTORICAL PERFORMANCE INFORMATION............................................63
PRINCIPAL SECURITY HOLDERS....................................................74
CUSTODIAN.....................................................................78
AUDITORS......................................................................78
TRANSFER, ACCOUNTING AND ADMINISTRATIVE AGENT.................................79
ANNUAL REPORT.................................................................80
APPENDIX......................................................................81
2
THE TRUST
- ---------
Touchstone Strategic Trust (the "Trust"), formerly Countrywide Strategic Trust,
an open-end, diversified management investment company, was organized as a
Massachusetts business trust on November 18, 1982. The Trust currently offers
six series of shares to investors: the Large Cap Growth Fund (formerly the
Equity Fund), the Growth Opportunities Fund (formerly the Growth/Value Fund),
the Emerging Growth Fund, the Value Plus Fund, the Enhanced 30 Fund and the
Small Cap Growth Fund (referred to individually as a "Fund" and collectively as
the "Funds"). Each Fund has its own investment goal and policies.
Pursuant to an Agreement and Plan of Reorganization, on May 1, 2000, each of the
Emerging Growth Fund and the Value Plus Fund succeeded to the assets and
liabilities of another mutual fund of the same name that was an investment
series of Touchstone Series Trust. The investment goals, strategies, policies
and restrictions of each Fund and its predecessor fund are substantially
identical. The financial data and information in this Statement of Additional
Information with respect to the Emerging Growth Fund and the Value Plus Fund for
periods ended prior to May 1, 2000 are for 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, as amended (the "1940 Act") 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 1940 Act 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 Trust. 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 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.
3
Class A shares, Class B shares and Class C shares of the Funds represent an
interest in the same assets of such Fund, have the same rights and are identical
in all material respects except that (i) each class of shares may bear different
distribution fees; (ii) each class of shares is subject to different sales
charges; (iii) 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 (iv) 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 1940 Act 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 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 goal, strategies and related risks. There can
be no assurance that a Fund's investment goal will be met. The investment goal
and practices of each Fund (except the Growth Opportunities Fund) are
nonfundamental policies that may be changed by the Board of Trustees without
shareholder approval, except in those instances where shareholder approval is
expressly required. If there is a change in a Fund's investment goal,
shareholders should consider whether the Fund remains an appropriate investment
in light of their current financial position and needs. The investment
restrictions of the Funds are fundamental and can only be changed by vote of a
majority of the outstanding shares of the applicable Fund.
A more detailed discussion of some of the terms used and investment policies
described in the Prospectuses (see "Investment Strategies and Risks") appears
below:
4
FIXED-INCOME AND OTHER DEBT 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 would 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"), Moody's
Investors Service, Inc. ("Moody's") and Fitch Ratings 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 "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.
MEDIUM AND LOWER RATED AND UNRATED SECURITIES. Securities rated in the fourth
highest category by a rating organization 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.
5
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.
6
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.
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 a 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.
CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS. 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,
un-conditionally 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. 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
maturing in more than seven
7
days will be subject to the SEC's restrictions that limit investments in
illiquid securities to no more than 15% of the value of a Fund's net assets.
The Growth Opportunities 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.
U.S. GOVERNMENT SECURITIES. U.S. Government securities 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.
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.
8
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 Funds' restrictions on investments in illiquid instruments 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. A 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.
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 affect a trade of a stripped
mortgage-related security at a time when it wishes to do so. The Fund will
acquire
9
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, a Fund 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.
The Growth Opportunities Fund may also purchase Coupons Under Book Entry
Safekeeping ("CUBES"), 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
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 Opportunities Fund will limit its investment in such instruments to 20%
of its total assets. STRIPS are Separately Traded Registered Interest and
Principal Securities.
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 CUBES, which are component
parts of U.S. Treasury bonds and represent scheduled interest and principal
payments on the bonds.
CUSTODIAL RECEIPTS. Custodial receipts or certificates, such as CATS, 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
10
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 were determined to be an
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.
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 borrower on demand at a 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
in accordance with the Funds' restrictions on illiquid securities.
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 that are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities that 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, which would result in additional expense and delay. Adverse
market conditions could impede such a public offering of securities. Each Fund
may not invest more than 15% of its net assets in securities that are illiquid
or otherwise not readily marketable.
11
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.
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.
A 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).
A 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 Funds' 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 increase and the Fund could be adversely affected.
A Fund may invest in commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the 1933 Act. 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 Fund Sub-Advisor
believes that Section 4(2) commercial
12
paper and possibly certain other restricted securities that 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 Sub-Advisor, 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.
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 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.
The Growth Opportunities Fund may invest up to 10% of its total assets at the
time of purchase in the securities of foreign issuers. The Emerging Growth Fund
may invest up to 20% of its total assets in securities of foreign issuers.
EMERGING MARKET COUNTRIES. Emerging market countries are countries other than
Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece,
Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway,
Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the
United States. When a Fund invests in securities of a company in an emerging
market country, it invests in securities issued by a company that (i) has its
principal trading market for its stock in an emerging market country, or (ii)
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 Emerging Growth Fund may invest up to 10% of its total
assets in emerging market countries.
13
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) 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.
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 are generally 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.
ADRS, ADSS, EDRS AND CDRS. American Depository Receipts ("ADRs") and American
Depository Shares ("ADSs") 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. They 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, ADSs 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.
OPTIONS
A Fund 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
14
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.
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.
15
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.
The Funds have adopted certain other nonfundamental policies concerning option
transactions that are discussed below. A 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.
OPTIONS ON STOCKS. A Fund 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.
16
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
respective Fund Sub-Advisor 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 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
17
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. A 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.
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, 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 that 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 that 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
18
portion of the benefits that might otherwise have been obtained from favorable
movements in exchange rates.
The Funds may 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.
The Funds may also 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
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.
19
As in the case of forward contracts, certain options on foreign currencies are
traded over-the-counter and involve liquidity and credit risks that may not be
present in the case of exchange-traded currency options. A 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 they determine that the transactions
would be in a Fund's best interest. Although these transactions tend to minimize
the risk of loss due to a decline in the value of the hedged currency, at the
same time they tend to limit any potential gain 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
20
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 Commodity Futures
Trading Commission (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 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
movements 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.
BORROWING AND LENDING
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 1940 Act 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 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.
A Fund will not make any borrowing that would cause its outstanding borrowings
to exceed one-third of the value of its total assets. As a matter of current
operating policy, the Emerging Growth Fund, the Enhanced 30 Fund, the Value Plus
Fund, the Large Cap Growth Fund and the Small Cap Growth Fund each intend to
borrow money only as a temporary measure for
21
extraordinary or emergency purposes. This policy is not fundamental and may be
changed by the Board of Trustees without shareholder approval.
LENDING. 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.
As a matter of current operating policy, the Large Cap Growth Fund intends to
limit the amount of loans of portfolio securities to no more than 25% of its net
assets. This policy may be changed by the Board of Trustees without shareholder
approval.
OTHER INVESTMENT POLICIES
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. Swap agreements
may have a considerable impact on a Fund's performance, depending on how they
are used. Swap agreements involve risks depending upon the other party's
creditworthiness and ability to
22
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.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. To secure prices deemed
advantageous at a particular time, a 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 a 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. 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. The Funds will enter into repurchase agreements that
are collateralized by U.S. Government obligations. Collateral for repurchase
agreements is held in safekeeping in the customer-only account of the Funds'
Custodian at the Federal Reserve Bank. At the time a Fund enters into a
repurchase agreement, the value of the collateral, 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 agrees to maintain sufficient
collateral so that the value of the underlying collateral, including accrued
interest, will at all times equal or exceed the value of the repurchase
agreement.
REVERSE REPURCHASE AGREEMENTS AND FORWARD ROLL TRANSACTIONS. In a reverse
repurchase agreement a 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 involve the risk that the market value of the
securities sold by the Fund may decline below the repurchase price
23
of the securities. Reverse repurchase agreements and forward roll transactions
are considered to be borrowings by a Fund.
TEMPORARY INVESTMENTS. For temporary defensive purposes during periods when the
Fund Sub-Advisor believes, in consultation with the Advisor, that pursuing the
Fund's basic investment strategy may be inconsistent with the best interests of
its shareholders, a 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.
A 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.
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 its 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.
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. A Fund may purchase warrants and rights, 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.
SHORT-TERM TRADING. Short-term 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 Fund in order to take advantage of what the Sub-Advisor
believes are changes in market, industry or individual
24
company conditions or outlook. Any such trading would increase the turnover rate
of a Fund and its transaction costs.
VARIABLE AND FLOATING RATE SECURITIES. The Growth Opportunities Fund may acquire
variable and floating rate securities, subject to the 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.
DERIVATIVES. A Fund 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.
INITIAL PUBLIC OFFERINGS ("IPOS"). The Emerging Growth Fund and the Small Cap
Growth Fund may invest in IPOs. An IPO presents the risk that the market value
of IPO shares will fluctuate considerably due to factors such as the absence of
a prior public market, unseasoned trading, the small number of shares available
for trading and limited information about the issuer. The purchase of IPO shares
may involve high transactions costs. IPO shares are subject to market risk and
liquidity risk. When a Fund's asset base is small, a significant portion of the
Fund's performance could be attributable to investments in IPOs, because such
investments would have a magnified impact on the Fund. As the Fund's asset grow,
the effect of the Fund's investments in IPOs on the Fund's performance probably
will decline, which could reduce the Fund's performance. Because of the price
volatility of IPO shares, a Fund may choose to hold IPO shares for a very short
period of time. This may increase the turnover of a Fund and may lead to
increased expenses to the Fund, such as commissions and transaction costs. By
selling IPO shares, the Fund may realize taxable gains it will subsequently
distribute to shareholders. In addition, the market for IPO shares can be
speculative and/or inactive for extended periods of time. There is no assurance
that the Fund will be able to obtain allocable portions of IPO shares.
25
The limited number of shares available for trading in some IPOs may make it more
difficult for the Fund to buy or sell significant amounts of shares without an
unfavorable impact on prevailing prices. Investors in IPO shares can be affected
by substantial dilution in the value of their shares, by sales of additional
shares and by concentration of control in existing management and principal
shareholders.
The Fund's investments in IPO shares may include the securities of "unseasoned"
companies (companies with less than three years of continuous operations), which
present risks considerably greater than common stocks of more established
companies. These companies may have limited operating histories and their
prospects for profitability may be uncertain. These companies may be involved in
new and evolving businesses and may be vulnerable to competition and changes in
technology, markets and economic conditions. They may be more dependent on key
managers and third parties and may have limited products.
SENIOR SECURITIES. As a matter of current operating policy, the following
activities will not be considered to be issuing senior securities with respect
to the Funds:
1. Collateral arrangements in connection with any type of option, futures
contract, forward contract or swap.
2. Collateral arrangements in connection with initial and variation
margin.
3. A pledge, mortgage or hypothecation of a Fund's assets to secure its
borrowings.
4. A pledge of a Fund's assets to secure letters of credit solely for the
purpose of participating in a captive insurance company sponsored by
the Investment Company Institute.
MAJORITY. As used in 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).
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' Prospectus is set forth
in the Appendix to this Statement of Additional Information.
26
INVESTMENT RESTRICTIONS
- -----------------------
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 note of a majority of
the outstanding shares of that Fund.
THE FUNDAMENTAL LIMITATIONS APPLICABLE TO THE FUNDS ARE:
1. BORROWING MONEY. The Funds may not engage in borrowing except as
permitted by the Investment Company Act of 1940, any rule, regulation
or order under the Act or any SEC staff interpretation of the Act.
2. UNDERWRITING. (VALUE PLUS FUND, ENHANCED 30 FUND, LARGE CAP GROWTH
FUND, GROWTH OPPORTUNITIES FUND AND SMALL CAP GROWTH FUND). The Funds
may not underwrite securities issued by other persons, except to the
extent that, in connection with the sale or disposition of portfolio
securities, a Fund may be deemed to be an underwriter under certain
federal securities laws or in connection with investments in other
investment companies.
(EMERGING GROWTH FUND). The Fund may not underwrite securities issued
by other persons, except to the extent that, in connection with the
sale or disposition of portfolio securities, the Fund may be deemed to
be an underwriter under certain federal securities laws.
3. LOANS. The Funds may not make loans to other persons except that a
Fund may (1) engage in repurchase agreements, (2) lend portfolio
securities, (3) purchase debt securities, (4) purchase commercial
paper, and (5) enter into any other lending arrangement permitted by
the Investment Company Act of 1940, any rule, regulation or order
under the Act or any SEC staff interpretation of the Act.
4. REAL ESTATE. The Funds may not purchase or sell real estate except
that a Fund may (1) hold and sell real estate acquired as a result of
the Fund's ownership of securities or other instruments (2) purchase
or sell securities or other instruments backed by real estate or
interests in real estate and (3) purchase or sell securities of
entities or investment vehicles, including real estate investment
trusts that invest, deal or otherwise engage in transactions in real
estate or interests in real estate.
5. COMMODITIES. The Funds may not purchase or sell physical commodities
except that a Fund may (1) hold and sell physical commodities acquired
as a result of the Fund's ownership of securities or other
instruments, (2) purchase or sell securities or other instruments
backed by physical commodities, (3) purchase or sell options, and (4)
purchase or sell futures contracts.
27
6. CONCENTRATION OF INVESTMENTS. The Funds may not purchase the
securities of an issuer (other than securities issued or guaranteed by
the United States Government, its agencies or its instrumentalities)
if, as a result, more than 25% of the Fund's total assets would be
invested in the securities of companies whose principal business
activities are in the same industry.
7. SENIOR SECURITIES. The Funds may not issue senior securities except as
permitted by the Investment Company Act of 1940, any rule, regulation
or order under the Act or any SEC staff interpretation of the Act.
ADDITIONAL RESTRICTIONS. The Trust, on behalf of each Fund, has adopted the
following additional restrictions as a matter of "operating policy." These
restrictions are changeable by the Board of Trustees without shareholder vote.
THE FOLLOWING INVESTMENT LIMITATIONS FOR THE VALUE PLUS FUND AND THE ENHANCED 30
FUND ARE NONFUNDAMENTAL AND MAY BE CHANGED WITHOUT SHAREHOLDER APPROVAL:
1. BORROWING MONEY. A Fund will not 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%;
2. PLEDGING. A Fund will not 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;
3. MARGIN PURCHASES. A Fund will not 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;
4. SELLING SECURITIES. A Fund will not 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;
5. INVESTING FOR CONTROL. A Fund will not invest for the purpose of
exercising control or management;
28
6. ILLIQUID SECURITIES. A Fund will not invest more than 15% of its 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 has 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
has determined that the commercial paper is equivalent quality and is
liquid;
7. RESTRICTED SECURITIES. A Fund will not invest more than 10% of its
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);
8. SECURITIES OF ONE ISSUER. A Fund will not 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;
9. SHORT SALES. A Fund will not 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);
10. PURCHASE OF PUTS AND CALLS. A Fund will not 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;
11.WRITING OF PUTS AND CALLS. A Fund will not 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
29
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).
12. PUTS AND CALLS ON FUTURES. A Fund will not 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.
THE FOLLOWING INVESTMENT LIMITATIONS FOR THE LARGE CAP GROWTH FUND AND THE SMALL
CAP GROWTH FUND ARE NONFUNDAMENTAL AND MAY BE CHANGED WITHOUT SHAREHOLDER
APPROVAL:
1. LARGE CAP GROWTH FUND 80% INVESTMENT POLICY. Under normal
circumstances, the Fund will invest at least 80% of its assets
(defined as net assets plus the amount of any borrowing for investment
purposes) in a diversified portfolio of common stocks of large cap
companies.
2. SMALL CAP GROWTH FUND 80% INVESTMENT POLICY. Under normal
circumstances, the Fund will invest at least 80% of its assets
(defined as net assets plus the amount of any borrowing for investment
purposes) in equity securities of small cap companies.
Shareholders of the applicable Fund will be provided with at least 60 days'
prior notice of any change to either of these policies. The notice will be
provided in a separate written document containing the following, or similar,
statement, in boldface type: "Important Notice Regarding Change in Investment
Policy." The statement will also appear on the envelope in which the notice is
delivered, unless the notice is delivered separately from other communications
to the shareholder.
THE FOLLOWING INVESTMENT LIMITATION FOR THE EMERGING GROWTH FUND IS
NONFUNDAMENTAL AND MAY BE CHANGED WITHOUT SHAREHOLDER APPROVAL:
1. BORROWING MONEY. The Emerging Growth Fund intends to borrow money
only as a temporary measure for extraordinary or emergency purposes. In
addition, the Fund may engage in reverse repurchase agreements, forward
roll transactions involving mortgage-
30
backed securities or other investment techniques entered into for the
purpose of leverage.
THE FOLLOWING INVESTMENT LIMITATIONS FOR THE GROWTH OPPORTUNITIES FUND ARE
NONFUNDAMENTAL AND MAY BE CHANGED WITHOUT SHAREHOLDER APPROVAL:
1. ILLIQUID INVESTMENTS. The 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 its net assets would be invested in such
securities.
2. MARGIN PURCHASES. The Fund will not purchase securities or
evidences of interest thereon on "margin." This limitation is not
applicable to short-term credit obtained by the 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 involving margin purchases.
3. SHORT SALES. The Fund will not make short sales of securities.
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.
TRUSTEES AND OFFICERS
- ---------------------
The following is a list of the Trustees and executive officers of the Trust, the
length of time served, principal occupations for the past 5 years, number of
funds overseen in the Touchstone Funds and other directorships held.
31
- --------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES1:
- --------------------------------------------------------------------------------------------------------------------------------
TERM OF NUMBER OF
OFFICE2 FUNDS
AND OVERSEEN
NAME POSITION(S) LENGTH IN THE OTHER
ADDRESS HELD WITH OF TIME PRINCIPAL OCCUPATION(S) DURING PAST 5 TOUCHSTONE DIRECTORSHIPS
AGE TRUST SERVED YEARS FUNDS3 HELD4
- --------------------------------------------------------------------------------------------------------------------------------
Jill T. McGruder Trustee Until President and a director of IFS 29 Director of
Touchstone retirement Financial Services, Inc. (a holding LaRosa's (a
Advisors, Inc. at age 75 company), Touchstone Advisors, Inc. (the restaurant chain).
221 East Fourth Street or until Trust's investment advisor) and
Cincinnati, OH she resigns Touchstone Securities, Inc. (the Trust's
Age: 47 or is distributor). She is Senior Vice
removed President of The Western and Southern
Life Insurance Company and a director of
Trustee Capital Analysts Incorporated (a
since 1999 registered investment advisor and
broker-dealer), Integrated Fund
Services, Inc. (the Trust's
administrator and transfer agent) and
IFS Fund Distributors, Inc. (a
registered broker-dealer). She is also
President and a director of IFS Agency
Services, Inc. (an insurance agency),
IFS Insurance Agency, Inc. and Fort
Washington Brokerage Services, Inc. (a
registered broker-dealer). She was
President of Touchstone Tax-Free Trust,
Touchstone Investment Trust, Touchstone
Variable Series Trust and Touchstone
Strategic Trust until 2002.
- --------------------------------------------------------------------------------------------------------------------------------
John F. Barrett Trustee Until Chairman of the Board, President and 29 Director of The
The Western and retirement Chief Executive Officer of The Western Andersons Inc. (an
Southern Life at age 75 and Southern Life Insurance Company and agribusiness and
Insurance Company or until Western-Southern Life Assurance retailing
400 Broadway he resigns Company; Director and Vice Chairman of company),
Cincinnati, OH or is Columbus Life Insurance Company; Convergys
Age: 53 removed Director of Eagle Realty Group, Inc., Corporation (a
and Chairman of Fort Washington provider of
Trustee Investment Advisors, Inc. integrated billing
since 2002 solutions,
customer care
services and
employee care
services) and
Fifth Third
Bancorp.
- --------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT
TRUSTEES:
- --------------------------------------------------------------------------------------------------------------------------------
J. Leland Brewster II Trustee Until Retired Senior Partner of Frost Brown 29 Director of
5155 Ivyfarm Road retirement Todd LLC (a law firm). Consolidated
Cincinnati, OH in 2005 or Health Services,
Age: 74 until he Inc.
resigns or
is removed
Trustee
since 2000
- --------------------------------------------------------------------------------------------------------------------------------
William O. Coleman Trustee Until Retired Vice President of The Procter & 29 Director of
c/o Touchstone retirement Gamble Company. A Trustee of The LCA-Vision (a
Advisors, Inc. at age 75 Procter & Gamble Profit Sharing Plan and laser vision
221 East Fourth Street or until The Procter & Gamble Employee Stock correction
Cincinnati, OH he resigns Ownership Plan. company) and
Age: 73 or is Millennium
removed Bancorp.
Trustee
since 1999
- --------------------------------------------------------------------------------------------------------------------------------
32
- --------------------------------------------------------------------------------------------------------------------------------
Phillip R. Cox Trustee Until President and Chief Executive Officer of 29 Director of the
105 East Fourth Street retirement Cox Financial Corp. (a financial Federal Reserve
Cincinnati, OH at age 75 services company). Bank of Cleveland;
Age: 55 or until Broadwing, Inc. (a
he resigns communications
or is company); and
removed Cinergy
Corporation (a
Trustee utility company).
since 1999
- --------------------------------------------------------------------------------------------------------------------------------
H. Jerome Lerner Trustee Until Principal of HJL Enterprises (a 29 None
4700 Smith Road retirement privately held investment company);
Cincinnati, OH at age 75 Chairman of Crane Electronics, Inc. (a
Age: 64 or until manufacturer of electronic connectors).
he resigns
or is
removed
Trustee
since 1989
- --------------------------------------------------------------------------------------------------------------------------------
Oscar P. Robertson Trustee Until President of Orchem, Inc. (a chemical 29 Director of
621 Tusculum Avenue retirement specialties distributor), Orpack Stone Countrywide Credit
Cincinnati, OH at age 75 Corporation (a corrugated box Industries, Inc.
Age: 64 or until manufacturer) and ORDMS (a solution
he resigns planning firm).
or is
removed
Trustee
since 1995
- --------------------------------------------------------------------------------------------------------------------------------
Robert E. Trustee Until Retired Partner of KPMG LLP (a certified 29 Trustee of Good
Stautberg retirement public accounting firm). He is Vice Samaritan
4815 Drake Road at age 75 President of St. Xavier High School. Hospital, Bethesda
Cincinnati, OH or until Hospital and
Age: 68 he resigns Tri-Health, Inc.
or is
removed
Trustee
since 1999
- --------------------------------------------------------------------------------------------------------------------------------
John P. Zanotti Trustee Until CEO and Chairman of Avaton, Inc. (a 29 None
5400 Waring Drive retirement wireless entertainment company). CEO
Cincinnati, OH at age 75 and Chairman of Astrum Digital
Age: 54 or until Information (an information monitoring
he resigns company) from 2000 until 2001; President
or is of Great American Life Insurance Company
removed from 1999 until 2000; A Director of
Chiquita Brands International, Inc.
Trustee until2000; Senior Executive of American
since 2002 Financial Group, Inc. (a financial
services company) from 1996 until 1999.
- --------------------------------------------------------------------------------------------------------------------------------
1 Ms. McGruder, as President and a director of Touchstone Advisors, Inc., the
Trust's investment advisor, and Touchstone Securities, Inc., the Trust's
distributor, is an "interested person" of the Trust within the meaning of
Section 2(a)(19) of the 1940 Act. Mr. Barrett, as President and Chairman of
The Western and Southern Life Insurance Company and Western-Southern Life
Assurance Company, parent companies of Touchstone Advisors, Inc. and
Touchstone Securities, Inc., and Chairman of Fort Washington Investment
Advisors, Inc., a Trust sub-advisor, is an "interested person" of the Trust
within the meaning of Section 2(a)(19) of the 1940 Act.
2 Each Trustee is elected to serve until the age of 75 or after five years of
service, whichever is greater, or until he sooner dies, resigns or is
removed.
3 The Touchstone Funds consist of six series of the Trust, six series of
Touchstone Tax-Free Trust, six series of Touchstone Investment Trust and
eleven variable annuity series of Touchstone Variable Series Trust.
4 Each Trustee is also a Trustee of Touchstone Tax-Free Trust, Touchstone
Investment Trust and Touchstone Variable Series Trust.
33
- --------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
OFFICERS:
- --------------------------------------------------------------------------------------------------------------------------------
TERM OF NUMBER OF
OFFICE FUNDS
AND OVERSEEN
NAME POSITION LENGTH OF IN THE OTHER
ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) DURING PAST 5 TOUCHSTONE DIRECTORSHIPS
AGE TRUST1 SERVED YEARS FUNDS2 HELD
- --------------------------------------------------------------------------------------------------------------------------------
Patrick T. Bannigan President Until he Senior Vice President of Touchstone 29 None
Touchstone sooner dies, Advisors, Inc. and Touchstone
Advisors, Inc. resigns, is Securities, Inc.; Senior Vice President
221 East Fourth removed or of Evergreen Investment Services until
Street becomes March 2002.
Cincinnati, OH disqualified
Age: 37
President
since 2002
- --------------------------------------------------------------------------------------------------------------------------------
Michael S. Spangler Vice Until he Vice President of Touchstone Advisors, 29 None
Touchstone President sooner dies, Inc. and Touchstone Securities, Inc.;
Advisors, Inc. resigns, is Vice President of Evergreen Investment
221 East Fourth removed or Services until July 2002.
Street becomes
Cincinnati, OH disqualified
Age: 36
Vice
President
since 2002
- --------------------------------------------------------------------------------------------------------------------------------
Brian E. Hirsch Vice Until he Director of Compliance of Fort 29 None
Touchstone President sooner dies, Washington Brokerage Services, Inc.
Advisors, Inc. resigns, is Chief Compliance Officer of Puglisi &
221 East Fourth removed or Co. from May 2001 until August 2002;
Street becomes Vice President - Compliance of Palisade
Cincinnati, OH disqualified Capital Management from June 1997 until
Age: 46 January 2000.
Vice
President
since 2003
- --------------------------------------------------------------------------------------------------------------------------------
Terrie A. Controller Until she Senior Vice President, Chief Financial 29 None
Wiedenheft sooner dies, Officer and Treasurer of Integrated
Touchstone resigns, is Fund Services, Inc., IFS Fund
Advisors, Inc. removed or Distributors, Inc. and Fort Washington
221 East Fourth becomes Brokerage Services, Inc. She is Chief
Street disqualified Financial Officer of IFS Financial
Cincinnati, OH Services, Inc., Touchstone Advisors,
Age: 40 Controller Inc. and Touchstone Securities, Inc.
since 2000 and Assistant Treasurer of Fort
Washington Investment Advisors, Inc.
- --------------------------------------------------------------------------------------------------------------------------------
Scott A. Englehart Treasurer Until he President of Integrated Fund Services, 29 None
Integrated Fund sooner dies, Inc. and IFS Fund Distributors, Inc.
Services, Inc. resigns, is From 1998 until 2000, he was a
221 East Fourth removed or Director, Transfer Agency and Mutual
Street becomes Fund Distribution for Nationwide
Cincinnati, OH disqualified Advisory Services, Inc.
Age: 40
Treasurer
since 2000
- --------------------------------------------------------------------------------------------------------------------------------
34
- --------------------------------------------------------------------------------------------------------------------------------
Tina H. Bloom Secretary Until she Vice President - Managing Attorney of 29 None
Integrated Fund sooner dies, Integrated Fund Services, Inc. and IFS
Services, Inc. resigns, is Fund Distributors, Inc.
221 East Fourth removed or
Street becomes
Cincinnati, OH disqualified
Age: 34
Secretary
since 1999
- --------------------------------------------------------------------------------------------------------------------------------
1 Each officer also holds the same office with Touchstone Investment Trust,
Touchstone Tax-Free Trust and Touchstone Variable Series Trust.
2 The Touchstone Funds consist of six series of the Trust, six series of
Touchstone Tax-Free Trust, six series of Touchstone Investment Trust and
eleven variable annuity series of Touchstone Variable Series Trust.
TRUSTEE OWNERSHIP IN THE TOUCHSTONE FUNDS
The following table reflects the Trustees' beneficial ownership in the Trust and
the Touchstone Funds as of December 31, 2002:
AGGREGATE DOLLAR
DOLLAR RANGE OF RANGE OF EQUITY
EQUITY SECURITIES IN SECURITIES IN
TRUST THE TOUCHSTONE
FUNDS 1
John F. Barrett $1 - $10,000 $1 - $10,000
J. Leland Brewster II $10,001 - $50,000 $10,001 - $50,000
William O. Coleman $10,001 - $50,000 $10,001 - $50,000
Phillip R. Cox None None
H. Jerome Lerner None Over $100,000
Jill T. McGruder $10,001 - $50,000 $50,001 - $100,000
Oscar P. Robertson Over $100,000 Over $100,000
Robert E. Stautberg $10,001 - $50,000 $10,001 - $50,000
John P. Zanotti $ 1 - $10,000 $1 - $10,000
1 The Touchstone Funds consists of six series of the Trust, six series of
Touchstone Tax-Free Trust, six series of Touchstone Investment Trust and
eleven variable annuity series of Touchstone Variable Series Trust.
TRUSTEE COMPENSATION
The following table shows the compensation paid to the Trustees by the Trust
and the aggregate compensation paid by the Touchstone Funds during the fiscal
year ended March 31, 2003.
35
DEFERRED AGGREGATE
COMPENSATION COMPENSATION COMPENSATION FROM
FROM ACCRUED THE TOUCHSTONE
NAME TRUST FROM TRUST 1 FUNDS 2
- ---- ----- ------------ -------
John F. Barrett $ 0 $ 0 $ 0
J. Leland Brewster II $1,726 $3,462 $20,300
William O. Coleman $5,687 $ 0 $22,300
Philip R. Cox $5,687 $ 0 $22,300
H. Jerome Lerner $5,562 $ 0 $21,800
Jill T. McGruder $ 0 $ 0 $ 0
Oscar P. Robertson $1,700 $2,612 $17,250
Robert E. Stautberg $1,869 $3,818 $22,300
John P. Zanotti $ 494 $1,381 $ 7,800
1 Effective January 1, 2001, the Trustees who are not "interested persons" of
the Trust, as defined in the 1940 Act (the "Independent Trustees"), are
eligible to participate in the Touchstone Trustee Deferred Compensation
Plan that allows the Independent Trustees to defer payment of a specific
amount of their Trustee compensation, subject to a minimum quarterly
reduction of $1,000. The total amount of deferred compensation accrued by
the Independent Trustees from the Touchstone Family of Funds during the
fiscal year ended March 31, 2003 is as follows: J. Leland Brewster II -
$13,848, Oscar P. Robertson - $10,448, Robert E. Stautberg - $15,271 and
John P. Zanotti - $5,525.
2 The Touchstone Funds consist of six series of the Trust, six series of
Touchstone Tax-Free Trust, six series of Touchstone Investment Trust and
eleven variable annuity series of Touchstone Variable Series Trust.
Effective January 1, 2003, each Independent Trustee receives a quarterly
retainer of $3,000 and a fee of $3,000 for each Board meeting attended in person
and $300 for attendance by telephone. Each Committee member receives a fee of
$1,000 for each committee meeting attended in person and $300 for attendance by
telephone. The lead Trustee and Committee Chairmen receive an additional $500
quarterly retainer. All fees are split equally among the Trust, Touchstone
Tax-Free Trust, Touchstone Investment Trust and Touchstone Variable Series
Trust.
STANDING COMMITTEES OF THE BOARD
The Board of Trustees is responsible for overseeing the operations of the Trust
in accordance with the provisions of the 1940 Act and other applicable laws and
the Trust's Declaration of Trust. The Board has established the following
committees to assist in its oversight functions. Each Committee is composed
entirely of Independent Trustees.
AUDIT COMMITTEE. Messrs. Brewster, Lerner and Stautberg are members of the Audit
Committee. The Audit Committee is responsible for overseeing the Trust's
accounting and financial reporting policies, practices and internal controls.
During the fiscal year ended March 31, 2003, the Audit Committee held four
meetings.
36
VALUATION COMMITTEE. Messrs. Coleman, Cox and Robertson are members of the
Valuation Committee. The Valuation Committee is responsible for overseeing
procedures for valuing securities held by the Trust and responding to any
pricing issues that may arise. During the fiscal year ended March 31, 2003, the
Valuation Committee held four meetings.
NOMINATING COMMITTEE. Messrs. Brewster, Coleman, Cox and Stautberg are members
of the Nominating Committee. The Nominating Committee is responsible for
selecting candidates to serve on the Board and its operating committees. During
the fiscal year ended March 31, 2003, the Nominating Committee held one meeting.
The Nominating Committee does not consider nominees recommended by shareholders.
THE INVESTMENT ADVISOR AND SUB-ADVISORS
- ---------------------------------------
THE INVESTMENT ADVISOR. Touchstone Advisors, Inc. (the "Advisor"), is the Funds'
investment manager. The Advisor is a wholly owned subsidiary of IFS Financial
Services, Inc., which is a wholly owned subsidiary of Western-Southern Life
Assurance Company. Western-Southern Life Assurance Company is a wholly owned
subsidiary of The Western and Southern Life Insurance Company. Ms. McGruder may
be deemed to be an affiliate of the Advisor because of her position as President
and Director of the Advisor. Mr. Barrett may be deemed to be an affiliate of the
Advisor because of his position as President and Chairman of The Western and
Southern Life Insurance Company and Western-Southern Life Assurance Company,
parent companies of the Advisor. Ms. McGruder and Mr. Barrett, by reason of such
affiliations, may directly or indirectly receive benefits from the advisory fees
paid to the Advisor.
Under the terms of the investment advisory agreement between the Trust and the
Advisor, the Advisor appoints and supervises each Fund Sub-Advisor, reviews and
evaluates the performance of the Fund Sub-Advisors and determines whether or not
a Fund's Sub-Advisor should be replaced. The Advisor furnishes at its own
expense all facilities and personnel necessary in connection with providing
these services. Each Fund pays the Advisor a fee computed and accrued daily and
paid monthly at an annual rate as shown below:
Emerging Growth Fund 0.80% of average daily net assets
Value Plus Fund 0.75% on the first $100 million of average daily net assets
0.70% from $100 million to $200 million of average daily net assets
0.65% from $200 million to $300 million of average daily net assets
0.60% thereafter
Enhanced 30 Fund 0.65% on the first $100 million of average daily net assets
0.60% from $100 million to $200 million of average daily net assets
0.55% from $200 million to $300 million of average daily net assets
0.50% thereafter
Large Cap Growth Fund 0.75% on the first $200 million of average daily net assets
0.70% from $200 million to $500 million of average daily net assets
0.50% thereafter
37
Growth Opportunities Fund 1.00% on the first $50 million of average daily net assets
.90% from $50 million to $100 million of average daily net assets
.80% from $100 million to $200 million of average daily net assets
.75% thereafter
Small Cap Growth Fund 1.25% of average daily net assets
Set forth below are the advisory fees incurred by the Funds during the last
three fiscal periods. The Advisor has contractually agreed to waive fees and
reimburse certain expenses, as set forth in the footnotes below:
FISCAL PERIOD ENDED
3-31 3-31 3-31 12-31
2003 2002 2001 2000
---- ---- ---- -----
Emerging Growth Fund(1) $2,176,150 $ 848,897 $ 46,242* $ 135,631
Value Plus Fund(2) 480,547 598,523 95,925* 324,524
Large Cap Growth Fund(3) 329,499 513,141 445,595
Growth Opportunities Fund 1,104,328 1,365,095 1,349,398
Enhanced 30 Fund(4) 54,485 48,307 45,042
Small Cap Growth Fund(5) 86,494
* Represents period from January 1, 2001 until March 31, 2001.
(1) Pursuant to a Sponsor Agreement between the Advisor and the Trust, the
Advisor waived fees and/or reimbursed the Fund $697,087, $212,462, $23,370
and $113,774 for the fiscal periods ended March 31, 2003, March 31, 2002,
March 31, 2001 and December 31, 2000, respectively.
(2) Pursuant to a Sponsor Agreement between the Advisor and the Trust, the
Advisor waived fees and/or reimbursed the Fund $226,146, $199,296, $36,416
and $92,399 for the fiscal periods ended March 31, 2003, March 31, 2002,
March 31, 2001 and December 31, 2000, respectively.
(3) Pursuant to a written contract between the Advisor and the Trust, the
Advisor waived fees and/or reimbursed the Fund $68,675 and $37,249 for the
fiscal years ended March 31, 2003 and 2002, respectively.
(4) Pursuant to a Sponsor Agreement between the Advisor and the Trust, the
Advisor waived fees and/or reimbursed the Fund $281,855, $171,790 and
$75,716 for the fiscal periods ended March 31, 2003, 2002 and 2001,
respectively.
(5) Pursuant to a Sponsor Agreement between the Advisor and the Trust, the
Advisor waived fees and/or reimbursed the Fund $97,022 for the fiscal
period ended March 31, 2003.
Pursuant to a written contract between the Advisor and the Trust, the Advisor
has agreed to waive advisory fees and reimburse expenses in order to maintain
expense limitations of the Large Cap Growth Fund as follows: 1.30% for Class A
shares, 2.43% for Class B shares and 2.51% for Class C shares. These expense
limitations will remain in effect until at least March 31, 2004.
Pursuant to a Sponsor Agreement between the Advisor and the Trust, the Advisor
has been retained to provide certain management and supervisory services to the
Emerging Growth Fund,
38
the Value Plus Fund, the Enhanced 30 Fund and the Small Cap Growth Fund in
exchange for the payment of a sponsor fee by the Funds equal to an annual rate
of 0.20% of a Fund's average daily net assets. The Advisor has agreed to waive
its fees and reimburse expenses in order to limit each Fund's annual expenses as
follows: Emerging Growth Fund - 1.50% for Class A shares, 2.25% for Class B and
Class C shares; Value Plus Fund - 1.30% for Class A shares, 2.05% for Class B
and Class C shares; Enhanced 30 Fund - 1.00% for Class A shares, 1.75% for Class
B and Class C shares; Small Cap Growth Fund - 1.95% for Class A shares, 2.70%
for Class B and Class C shares. The fee waivers and expense limitations will
remain in effect until at least March 31, 2004.
The Funds shall pay the expenses of their operation, including but not limited
to (i) charges and expenses for accounting, pricing and appraisal services and
related overhead, (ii) the charges and expenses of auditors; (iii) the charges
and expenses of any custodian, transfer agent, plan agent, dividend disbursing
agent, registrar and administrative agent appointed by the Trust with respect to
the Funds; (iv) brokers' commissions, and issue and transfer taxes chargeable to
the Funds in connection with securities transactions to which a Fund is a party;
(v) insurance premiums, interest charges, dues and fees for membership in trade
associations and all taxes and fees payable to federal, state or other
governmental agencies; (vi) fees and expenses involved in registering and
maintaining registrations of the Funds with the SEC, state or blue sky
securities agencies and foreign countries, including the preparation of
Prospectuses and Statements of Additional Information for filing with the SEC;
(vii) all expenses of meetings of Trustees and of shareholders of the Trust and
of preparing, printing and distributing prospectuses, notices, proxy statements
and all reports to shareholders and to governmental agencies; (viii) charges and
expenses of legal counsel to the Trust; (ix) compensation of Trustees of the
Trust; and (x) interest on borrowed money, if any. The compensation and expenses
of any officer, Trustee or employee of the Trust who is an affiliated person of
the Advisor is paid by the Advisor.
By its terms, the Funds' investment advisory agreement will remain in force for
an initial period of two years 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 Independent Trustees, by a vote cast in
person at a meeting called for the purpose of voting such approval.
In determining whether to approve the continuation of the investment advisory
agreement for the Emerging Growth Fund, Value Plus Fund, Large Cap Growth Fund,
Enhanced 30 Fund and Growth Opportunities Fund, the Board of Trustees requested,
and the Advisor furnished, information necessary for a majority of the
Independent Trustees to make the determination that the continuance of the
advisory agreement is in the best interests of the Funds and their shareholders.
Specifically, the Board was provided (1) industry data comparing advisory fees
and expense ratios of comparable investment companies, (2) comparative
performance information and (3) the Advisor's revenues and costs of providing
services to the Funds. The Board compared the advisory fees and total expense
ratios for the Funds with the industry median advisory fees and expense ratios
in their respective investment categories and found the advisory fees paid by
the Funds were reasonable and appropriate under all facts and circumstances. The
Board noted the Funds' performance results during the twelve months ended
September 30, 2002. The Board also considered the effect of each Fund's growth
and size on its
39
performance and expenses. The Board further noted that the Advisor has
consistently waived advisory fees and reimbursed expenses for various Funds as
necessary to reduce their operating expenses to targeted levels. The Board also
took into consideration the financial condition and profitability of the Advisor
and the direct and indirect benefits derived by the Advisor from its
relationship with the Funds. The Board also considered the level and depth of
knowledge of the Advisor. It discussed the Advisor's effectiveness in monitoring
the performance of the Sub-Advisors and its timeliness in responding to
performance issues.
In determining to approve the Small Cap Growth Fund's advisory agreement with
the Advisor, the Board of Trustees was provided information comparing the Fund's
advisory fees and total expense ratio with the ratios of other small growth
funds. The Board found the advisory fees proposed for the Fund were reasonable
and appropriate under all facts and circumstances. The Board also noted that it
had previously been provided financial information on the Advisor and took into
consideration the financial condition and profitability of the Advisor. The
Board considered the direct and indirect benefits expected to be derived by the
Advisor from its relationship with the Fund. The Board also considered the level
and depth of knowledge of the Advisor and the Advisor's effectiveness in
monitoring the performance of its sub-advisors and its timeliness in responding
to performance issues.
The Funds' investment advisory agreement 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 Advisor. The investment advisory agreement automatically terminates in
the event of its assignment, as defined by the 1940 Act and the rules
thereunder.
THE SUB-ADVISORS. The Advisor has retained one or more sub-advisors (the
"Sub-Advisor") to serve as the discretionary portfolio manager of each Fund. The
Sub-Advisor selects the portfolio securities for investment by a Fund, purchases
and sells securities of a Fund and places orders for the execution of such
portfolio transactions, subject to the general supervision of the Board of
Trustees and the Advisor. The Sub-Advisor receives a fee from the Advisor that
is paid monthly at an annual rate of a Fund's average daily net assets as set
forth below.
EMERGING GROWTH FUND
TCW Investment Management Company 0.50% of average daily net assets
Westfield Capital Management Company, LLC 0.50% on the first $50 million of average net assets
0.45% on the next $100 million of net assets
0.40% thereafter
VALUE PLUS FUND
Fort Washington Investment Advisors, Inc. 0.45% on the first $100 million of average net assets
0.40% on the next $100 million of net assets
0.35% on the next $100 million of net assets
0.30% thereafter
40
LARGE CAP GROWTH FUND
Fort Washington Investment Advisors, Inc. 0.45% on the first $200 million of average net assets
0.40% on the next $300 million of net assets
0.20% thereafter
ENHANCED 30 FUND*
Todd Investment Advisors, Inc. 0.40% on the first $100 million of average net assets
0.35% on the next $100 million of net assets
0.30% on the next $100 million of net assets
0.25% thereafter
* Effective September 1, 2002, Todd Investment Advisors, Inc. has voluntarily
agreed to waive a portion of its sub-advisory fee and will receive a
sub-advisory fee of .25% of average daily net assets.
GROWTH OPPORTUNITIES FUND
Mastrapasqua Asset Management, Inc. 0.60% on the first $50 million of average net assets
0.50% on the next $50 million of net assets
0.40% on the next $100 million of net assets
0.35% thereafter
SMALL CAP GROWTH FUND**
Bjurman, Barry & Associates 0.90% of average daily net assets
Longwood Investment Advisors, Inc. 0.85% of average daily net assets
** The Advisor has allocated to Longwood Investment Advisors, Inc.
responsibility for managing approximately 70% of the Small Cap Growth Fund's
assets and has allocated to Bjurman, Barry & Associates responsibility for
managing approximately 30% of the Fund's assets. These allocations may be larger
or smaller at various times, but the Advisor will not reallocate the Fund's
assets between Sub-Advisors to reduce these differences in size until the assets
vary from the percentages above by approximately 10% or more of the Fund's
average daily net assets for a period of 3 consecutive months. In such event,
the Advisor may, but is not obligated to, reallocate assets among the
Sub-Advisors to provide for a more equal distribution of the Fund's assets.
The services provided by the Sub-Advisors are paid for wholly by the Advisor.
The compensation of any officer, director or employee of the Sub-Advisor who is
rendering services to a Fund is paid by the Sub-Advisor.
The employment of each Sub-Advisor will remain in force for an initial two year
period 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 Independent Trustees, by a vote cast in person at a meeting
called for the purpose of voting such approval. The employment of the
Sub-Advisor 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 Advisor, or by the
Sub-Advisor. Each Sub-Advisory Agreement will
41
automatically terminate in the event of its assignment, as defined by the 1940
Act and the rules thereunder. In determining whether to approve the continuation
of the Funds' sub-advisory agreements, the Board compared the Funds'
sub-advisory fees with the industry median sub-advisory fees in their respective
investment categories and found the sub-advisory fees were reasonable and
appropriate. The Board also considered the Funds' performance during the twelve
months ended September 30, 2002 and noted that it reviews on a quarterly basis
detailed information about the Funds' performance results, portfolio composition
and investment strategies. The Board considered the Sub-Advisors' level of
knowledge, investment style and level of compliance.
In determining to approve the sub-advisory agreements with Bjurman, Barry &
Associates and Longwood Investment Advisors, Inc. for the Small Cap Growth Fund,
the Board of Trustees considered detailed information presented by the Advisor
regarding its sub-advisor selection process, including the criteria used by the
Advisor to select a sub-advisor. The Board was provided information on each
Sub-Advisor's performance, as compared to the performance of the Russell 2000
Index and the Russell 2000 Growth Index. The Board was also provided information
about each Sub-Advisor's level of knowledge, investment style, level of
compliance and operations. The Board also considered the amount of sub-advisory
fees to be paid to each Sub-Advisor. After considering the information provided
about the Sub-Advisors and relying on the expertise of the Advisor in selecting
sub-advisors, the Board of Trustees determined that the appointment of the
Sub-Advisors is in the best interests of the Small Cap Growth Fund and its
shareholders.
The SEC has granted an exemptive order that permits the Trust or the Advisor,
under certain circumstances, to select or change Sub-Advisors, enter into new
sub-advisory agreements or amend existing sub-advisory agreements without first
obtaining shareholder approval. Shareholders of a Fund will be notified of any
changes in its Fund Sub-Advisor.
PROXY VOTING PROCEDURES
- -----------------------
Each Sub-Advisor has adopted policies and procedures for voting proxies relating
to portfolio securities held by the Funds, including procedures used when a vote
presents a conflict between the interests of a Fund's shareholders and those of
the Sub-Advisor or its affiliates. Listed below is a summary of the Sub-Advisor
proxy voting procedures:
TCW INVESTMENT MANAGEMENT COMPANY, INC. TCW has adopted proxy voting guidelines
on issues involving board of directors, proxy contests, auditors, miscellaneous
governance provisions, capital structure, mergers and corporate restructuring,
mutual fund proxies and social and environmental issues. When voting proxies,
TCW's foremost concern is that all decisions be made solely in the interests of
the client and with the goal of maximizing the value of the client's
investments. The voting guidelines identify certain voting matters that will be
decided on a case-by-case basis. Proposals that are to be decided on a case-by-
case basis are typically referred to the portfolio managers, who will exercise
their best judgment to vote proxies in a manner that will enhance the economic
value of a client's assets, keeping in mind the best interest of the beneficial
owners. The portfolio managers may, in their discretion, take into account the
recommendations of TCW management, the Proxy Committee and/or outside services.
The following are examples of TCW's voting position on certain matters:
<page>
o Votes on director nominees are made on a case-by-case basis, examining factors
such as composition of the board and key board committees, attendance at board
meetings, corporate goverance provisions and takeover activity, long-term
company performance relative to a market index, directors' investment in the
company, whether the chariman is also serving as CEO and whether a retired CEO
sits on the board.
o TCW will vote against proposals that provide that directors may be removed
only for cause
o TCW will vote against proposals to eliminate cumulative voting
o TCW will vote for shareholder proposals that ask a company to submit its
poison pill for shareholder ratification
o TCW will review proposals to increase tha number of authorized shares of
common stock on a case-by-case basis.
o Votes with respect to executive and director compensation plans are determined
on a case-by-case basis
o Votes on mergers and acquisitions are considered on a case-by-case basis,
taking into account anticipated financial and operating benefits, offer price,
prospectus of the combined companies, how the deal was negotiated, changes in
corporate goverance and impact on shareholder rights.
If a potential conflict of interest arises, the primary means by which TCW will
avoid a conflict is by casting such votes solely in the interests of its clients
and in the interests of
42
maximizing the value of their portfolio holdings. If a conflict of interest
arises and the proxy vote is predetermined, TCW will vote accordingly. If a
conflict of interest arises and there is no predetermined vote, TCW will refer
the vote to an outside service for its consideration in the event the client's
relationship is determined to be material to TCW. If TCW identifies a conflict
of interest between a portfolio manager and an issuer soliciting proxy votes
from TCW clients, the Proxy Committee will cast the vote.
WESTFIELD CAPITAL MANAGEMENT COMPANY, INC. Westfield's policy is to vote all
proxies in the best interest of its clients as investors in accordance with its
fiduciary obligations and applicable law. Westfield has a proxy voting
committee composed of individuals from the investment committee, operations
staff and compliance department. The proxy committee is responsible for setting
general policy as to porxies. Westfield maintains written voting
guidelines setting forth the voting positions determined by its Proxy Committee
on those issues believed most likely to arise day to day. These issues include
board-approved proposals (election of directors, executive compensation,
capitalization, acquisitions, mergers, reorganizations and anti-takeover
measures) and shareholder proposals. Westfield will vote proxies in accordance
with these guidelines, subject to two exceptions: 1) if the portfolio manager
believes that following the guidelines would not be in the clients' best
interests and 2) for clients with plan assets subject to ERISA, Westfield may
accept instructions to vote proxies in accordance with AFL-CIO proxy voting
guidelines except when voting in accordance with AFL-CIO guidelines would be
inconsistent with ERISA. The following are examples of Westfield's voting
position on specific matters:
<page>
o Westfield will withhold votes for the entire board of directors if the board
does not have a majority of independent directors or the board does not have
a nominating, audit and compensation committee composed solely of independent
directors.
o Westfield will vote on a case-by-case basis board approved proposals relating
to executive compensation. Westfield may vote against executive compensation
proposals where compensation is excessive by reasonable corporate standards
or where a company fails to provide transparent disclosure of executive
compensation.
o Westfield will vote against board proposals to adopt anti-takeover measures
such as a shareholder rights plan, supermajority voting provisions, adoption
of fair price provisions, issuance of blank check preferred stock and the
creation of a separate class of stock with disparate voting rights, except
Westfield will vote on a case-by-case basis poison pill proposals and
proposals to adopt fair price provisions.
If a conflict of interest should arise when voting proxies of an issuer
that has a significant business relationship with Westfield, Westfield
will vote proxies based solely on the investment merits of the proposal.
FORT WASHINGTON INVESTMENT ADVISORS, INC. Fort Washington's policy to to vote
proxies in the best interests of its clients at all times. Fort Washington has
adopted procedures that it believes are reasonably designed to ensure that
proxies are voted in the best interests of clients in accordance with its
fiduciary duties and SEC rules governing investment advisers.
Reflecting a basic investment philospohy that good management is shareholder
focused, proxy votes will generally be cast in support of management on routine
corporate matters and in support of any management proposal that is plainly in
the interest of all shareholders. Specifically, proxy votes generally will be
cast in favor of proposals that:
o maintain or strengthen the shared interests of stockholders and management;
o increase shareholder value; and
o maintain or increase shareholder rights generally.
Proxy votes will generally be cast against proposals having the opposite efffect
of the above. Where Fort Washington perceives that a management proposal, if
approved, would tend to limit or reduce the market value of the company's
securities, it will generally vote against it. Fort Washington generally
supports shareholder rights and recapitalization measures undertaken
unilaterally by boards of directors properly exercising their responsibilities
and authority, unless such measures could have the effect of reducing
shareholder rights or potential shareholder value. In cases where shareholder
proposals challenge such actions, Fort Washington's voting position will
generally favor not interfering with the directors' proper function in the
interest of all shareholders.
<page>
Fort Washington may delegate its responsibilities under its proxy voting
procedures to a third party, provided that Fort Washington retains final
authority and fiduciary responsibility for proxy voting.
Fort Washington will review each proxy to assess the extent, if any, to which
there may be a material conflict between it and the interests of its clients. If
Fort Washington determines that a potential conflict may exist, it will be
reported to the Proxy Voting Committee. The Proxy Voting Committee is authorized
to resolve any conflict in a manner that is in the collective best interests of
its clients(excluding any clients that may have a potential conflict). The Proxy
Voting Committee may resolve a potential conflict in any of the following
manners:
o If the proposal is specifically addressed in the proxy voting procedures,
Fort Washington may vote the proxy in accordance with these policies,
provided that such pre-determined policy involves little discretion on
Fort Washington's part;
o Fort Washington may disclose the potential conflict to its clients and
obtain a consent of a majority in interest of its clients before voting in
the manner approved by a majority in interest of its clients;
o Fort Washington may engage an independent third-party to determine how the
proxy should be voted; or
o Fort Washington may establish an ethical wall or other informational
barriers between the person involved in the potential conflict and the
persons making the voting decision in order to insulate the potential
conflict from the decision maker.
TODD INVESTMENT ADVISORS, INC. Todd will vote proxies solely in the best
long-term interests of a client. Todd has adopted guidelines on key issues such
as election of directors, stock incentive plans, expensing of options, severance
agreements, takeover provisions, and social and environmental issues. Todd
employs Institutional Shareholder Services ("ISS") to help it analyze particular
issues. The following are examples of Todd's position on specific matters:
o Todd will generally vote for proposals seeking to end the staggered election
of directors and prefers that all directors be elected annually.
o Todd will generally support proposals requiring a majority of independent
directors on the board.
o Todd prefers to see the separation of Chairman and CEO positions
o Todd prefers that all incumbent directors own company stock
<page>
o Todd prefers that all stock incentive plans be limited to restricted stock or
other truly long-term incentive plans, but recognizes that short-term
incentive plans do have a place in providing key executives with a balanced
compensation program
o Todd supports proposals requiring the expensing of options
If a conflict of interest should arise, Todd will inform its Executive Committee
of the conflict and notify the shareholder why Todd's vote may differ from the
shareholder's request. Todd will consider a shareholder's request but will vote
only for what it believes will best advance the long-term interests of
shareholders.
43
MASTRAPASQUA ASSET MANAGEMENT, INC. Mastrapasqua's proxy voting decisions will
be made solely in the best interests of the client. In voting proxies,
Mastrapasqua is required to consider those factors that may affect the value of
the client's investment and may not subordinate the interest of the client to
unrelated objectives. Mastrapasqua has adopted guidelines for voting proxies
with respect to routine issues, such as board of directors, proxy contest
defenses, auditors, acquisitions and mergers, shareholder rights, capital
structure, executive and director compensation and social and environmental
issues, and its compliance officer will vote routine issues according to these
guidelines. Non-routine issues will be voted according to recommendations
received from the research department. The following are examples of
Mastrapasqua's policies on specific matters:
o Mastrapasqua will evaluate directors fairly and objectively, rewarding them
for significant contributions and holding them ultimately accountable to
shareholders for corporate performance. Mastrapasqua will vote for directors
on a case-by-case basis.
o Mastrapasqua will vote against proposals to eliminate cumulative voting
o Mastrapasqua will vote for shareholder proposals that ask a company to submit
its poison pill for shareholder ratification
o Mastrapasqua will vote against proposals that provide that directors may be
removed only for cause and for proposals that permit shareholders to elect
directors to fill vacancies
o Votes on mergers and acquisitions are considered on a case-by-case basis,
taking into account the impact of the merger on shareholder value, the
anticipated financial and operating benefits, the offering price, the
financial viability of the combined companies as a single entity, whether the
deal was made in good faith, the changes in corporate goverance and their
impact on shareholder rights and the impact on community stakeholders and
employees in both workforces.
If a material conflict should arise between Mastrapasqua's interest
and that of its clients, Mastrapasqua will vote the proxies in accordance with
the recommendation of the research analyst and portfolio manager. A written
record will be maintained describing the conflict of interest, the resolution of
the conflict and an explanation of how the vote taken was in the client's best
interest.
<page>
BJURMAN, BARRY & ASSOCIATES. Bjurman uses a third party service provider, ISS,
to vote all client proxies. The proxy voting guidelines adopted by Bjurman are
provided by ISS. The voting process involves an assessment which results in
voting in agreement with company management and/or varying ISS recommendations.
Management and ISS recommendations may be identical. In the event Bjurman votes
against ISS recommendations, documentation must be prepared to describe the
basis for such a decision. Bjurman has adopted proxy voting recommendations on
issues involving board of directors, proxy contest defenses, auditors, tender
offer defenses, miscellaneous governance provisions, capital structure,
executive and director compensation, mergers and corporate restructuring, mutual
fund proxies and social and environmental issues. The following are examples
of Bjurman's policies on specific matters:
o Votes on director nominations will be made on a case-by-case basis examining
factors such as long-term corporate performance relative to a market index,
composition of board and keyboard committees, nominee's attendance at
meetings, nominee's investment in the company, whether a retired CEO sits on
the board and whether the chairman is also serving as CEO.
o Bjurman will vote against proposals that provide that directors may be removed
only for cause and for proposals giving shareholder's the ability to remove
directors with or without cause.
o Bjurman will vote for shareholder proposals that ask a company to submit its
poison pills for shareholder ratification
o Bjurman will vote on a case-by-case basis proposals to increase the number of
shares of common stock authorized for issue and will vote against proposed
common stock authorizations that increase the existing authorization by more
than 100% unless a clear need for the excess shares is presented by the
company.
Bjurman's proxy voting policy does not demonstrate a conflict of interest
regarding clients' best interests since votes are in accordance with a
pre-determined policy based upon the recommendations of ISS. The proxy
voting guidelines are not exhaustive and do not include all potential voting
issues. Because proxy issues and the circumstances of individual companies are
so varied, there may be instances when Bjurman may not vote in strict adherence
to these guidelines.
LONGWOOD INVESTMENT ADVISORS, INC. Longwood's proxy voting policy and procedures
are designed to ensure that Longwood votes proxies in the best interest of its
clients and to prevent and detect fraudulent, deceptive or manipulative acts by
Longwood and its advisory affiliates. Longwood's policy is to vote client
proxies in the interest of maximizing shareholder value. To that end,
Longwood will vote in a way that it believes, consistent with its fiduciary
duty, will cause the value of the issue to increase the most or decline the
least. Longwood has contracted with The Investor Responsibility Research Center
("IRRC") to assist it in the proxy voting process. Accordingly, IRRC shall be a
source of proxy voting research and also maintain the documentation to
substantiate the manner in which Longwood votes proxies. In general, Longwood
will support management if management's position appears reasonable, is not
detrimental to the long-term equity ownership of the corporation and reflects
consideration of the impact of societal values and attitudes on the long-term
viability of the corporation. The position of management on any resolution will
typically not be supported if it:
o Would enrich management excessively.
o Would entrench incumbent officers or members of the board of directors.
<page>
o Would not reflect consideration of short and long-term costs and gains,
including effects on the basic human rights of its employees and goodwill both
in the U.S. and foreign countries in which the company operates.
o Would result in unreasonable costs.
o Would disadvantage the corporation relative to other corporations.
o Would oppose a proposal to have the shareholders approve the selection of an
independent auditor.
o Would not support equal and fair employment practices for all employees.
If Longwood detects a conflict of interest with respect to voting of client
proxies, such conflict will be addressed by The Investor Responsibility
Research Center (IRRC), or another independent third party, to vote proxies
that involve such conflict. Any vote cast by IRRC is binding and may not be
overridden by Longwood.
THE DISTRIBUTOR
- ---------------
Touchstone Securities, Inc. ("Touchstone"), 221 East Fourth Street, Cincinnati,
Ohio 45202, is the principal distributor of the Trust and, as such, the
exclusive agent for distribution of shares of the Funds. Touchstone is an
affiliate of the Advisor by reason of common ownership. Touchstone is obligated
to sell the shares on a best efforts basis only against purchase orders for the
shares. Shares of the Funds are offered to the public on a continuous basis.
Touchstone currently allows concessions to dealers who sell shares of the Funds.
Touchstone receives that portion of the sales charge that is not reallowed to
the dealers who sell shares of a Fund. Touchstone retains the entire sales
charge on all direct initial investments in a Fund and on all investments in
accounts with no designated dealer of record.
44
For the fiscal year ended March 31, 2003, the aggregate underwriting commissions
on sales of the Trust's shares were $1,501,520 of which Touchstone paid
$1,200,478 to unaffiliated broker-dealers in the selling network, earned $89,601
as a broker-dealer in the selling network and retained $211,441 in underwriting
commissions.
For the fiscal year ended March 31, 2002, the aggregate underwriting commissions
on sales of the Trust's shares were $1,989,963 of which Touchstone paid
$1,589,175 to unaffiliated broker-dealers in the selling network, earned
$113,826 as a broker-dealer in the selling network and retained $286,962 in
underwriting commissions.
For the fiscal year ended March 31, 2001, the aggregate underwriting commissions
on sales of the Trust's shares were $981,892 of which Touchstone paid $862,036
to unaffiliated broker-dealers in the selling network, earned $36,113 as a
broker-dealer in the selling network and retained $83,743 in underwriting
commissions.
Touchstone retains the contingent deferred sales charge on redemptions of shares
of the Funds that are subject to a contingent deferred sales charge. For the
fiscal period ended March 31, 2003, Touchstone collected $113,872, $8,535,
$21,126, $307, $1,268 and $1,009 of contingent deferred sales charges on
redemptions of Class B and Class C shares of the Emerging Growth Fund, the
Enhanced 30 Fund, the Growth Opportunities Fund, the Large Cap Growth Fund, the
Small Cap Growth Fund and the Value Plus Fund, respectively.
For the fiscal year ended March 31, 2002, Touchstone collected $8,376, $17,296,
$91, $541 and $246 of contingent deferred sales charges on redemptions of Class
B and Class C shares of the Emerging Growth Fund, the Growth Opportunities Fund,
the Large Cap Growth Fund, the Enhanced 30 Fund and the Value Plus Fund,
respectively.
For the fiscal period ended March 31, 2001, Touchstone collected $49,040,
$16,103, $141 and $1,744 of contingent deferred sales charges on redemptions of
Class C shares of the Emerging Growth Fund, the Growth Opportunities Fund, the
Large Cap Growth Fund and the Value Plus Fund, respectively.
Ms. McGruder may be deemed to be an affiliate of Touchstone because of her
position as President and Director of Touchstone. Mr. Barrett may be deemed to
be an affiliate of Touchstone because of his position as President and Chairman
of The Western and Southern Life Insurance Company and Western-Southern Life
Assurance Company, parent companies of Touchstone. Ms. McGruder and Mr. Barrett,
by reason of such affiliations, may directly or indirectly receive benefits from
the underwriting fees paid to Touchstone.
The Funds may compensate dealers, including Touchstone 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.
45
DISTRIBUTION PLANS
- ------------------
CLASS A SHARES. The Funds have adopted a plan of distribution (the "Class A
Plan") pursuant to Rule 12b-1 under the 1940 Act which permits a Fund to pay for
expenses incurred in the distribution and promotion of its shares, including but
not limited to, the printing of prospectuses, statements of 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 Touchstone. 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 a Fund. Unreimbursed
expenses will not be carried over from year to year.
For the fiscal period ended March 31, 2003, the aggregate distribution-related
expenditures of the Large Cap Growth Fund, the Growth Opportunities Fund, the
Emerging Growth Fund, the Value Plus Fund, the Enhanced 30 Fund and the Small
Cap Growth Fund under the Class A Plan were $106,686, $224,636, $402,099,
$154,689, $17,934 and $14,237, respectively. All payments were to broker-dealers
and others for the sale or retention of assets.
CLASS B SHARES. The Funds have also adopted a plan of distribution (the "Class B
Plan") with respect to the Class B shares of a Fund. The Class B Plan provides
for two categories of payments. First, the Class B Plan provides for the payment
to Touchstone of an account maintenance fee, in an amount equal to an annual
rate of .25% of the average daily net assets of the Class B shares, which may be
paid to other dealers based on the average value of Class B 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 B 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 B shares, costs of advertising and promotion and any other
expenses related to the distribution of the Class B 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 B shares owned by their clients, in addition to the .25%
account maintenance fee described above.
For the fiscal period ended March 31, 2003, the aggregate distribution-related
expenditures of the Large Cap Growth Fund, the Growth Opportunities Fund, the
Emerging Growth Fund, the Value Plus Fund, the Enhanced 30 Fund and the Small
Cap Growth Fund under the Class B Plan were $498, $26,878, $225,930, $3,053,
$8,939 and $3,602, respectively. All payments were to broker-dealers and others
for the sale and retention of assets.
CLASS C SHARES. The Funds have also adopted a plan of distribution (the "Class C
Plan") with respect to the Class C shares of a Fund. The Class C Plan provides
for two categories of payments. First, the Class C Plan provides for the payment
to Touchstone 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%
46
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.
For the fiscal period ended March 31, 2003, the aggregate distribution-related
expenditures of the Large Cap Growth Fund, the Growth Opportunities Fund, the
Emerging Growth Fund, the Value Plus Fund, the Enhanced 30 Fund and the Small
Cap Growth Fund under the Class C Plan were $12,090, $268,187, $885,859,
$18,920, $9,130 and $8,646, respectively. All payments were to broker-dealers
and others for the sale and retention of assets.
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 Independent Trustees who have no direct or
indirect financial interest in the Plans or any Implementation Agreement 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 Touchstone after the termination date. The
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 each Fund and its shareholders through increased
economies of scale, greater investment flexibility, greater portfolio
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
47
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 the 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.
Jill T. McGruder and John F. Barrett, 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 Sub-Advisors and are subject to review by the Advisor and the Board
of Trustees. In the purchase and sale of portfolio securities, the Sub-Advisor's
primary objective will be to obtain the most favorable price and execution for a
Fund, taking into account such factors as the overall direct net economic result
to the Fund (including commissions, which may not be the lowest available but
ordinarily should not be higher than the generally prevailing competitive
range), the financial strength and stability of the broker, the efficiency with
which the transaction will be effected, the ability to effect the transaction at
all where a large block is involved and the availability of the broker or dealer
to stand ready to execute possibly difficult transactions in the future.
Set forth below are the brokerage commissions paid by the Funds during their
three most recent fiscal periods:
- --------------------------------------------------------------------------------
NAME OF FUND PERIOD AMOUNT OF
ENDED COMMISSIONS
- --------------------------------------------------------------------------------
Large Cap Growth Fund 3-31-03 $ 138,228
- --------------------------------------------------------------------------------
Large Cap Growth Fund 3-31-02 170,679
- --------------------------------------------------------------------------------
Large Cap Growth Fund 3-31-01 98,179
- --------------------------------------------------------------------------------
Growth Opportunities Fund 3-31-03 177,061
- --------------------------------------------------------------------------------
Growth Opportunities Fund 3-31-02 229,827
- --------------------------------------------------------------------------------
Growth Opportunities Fund 3-31-01 147,414
- --------------------------------------------------------------------------------
Enhanced 30 Fund 3-31-03 12,631
- --------------------------------------------------------------------------------
Enhanced 30 Fund 3-31-02 6,342
- --------------------------------------------------------------------------------
Enhanced 30 Fund 3-31-01 6,967
- --------------------------------------------------------------------------------
Emerging Growth Fund 3-31-03 1,154,702
- --------------------------------------------------------------------------------
Emerging Growth Fund 3-31-02 484,748
- --------------------------------------------------------------------------------
Emerging Growth Fund 3-31-01 13,443
- --------------------------------------------------------------------------------
Value Plus Fund 3-31-03 164,914
- --------------------------------------------------------------------------------
Value Plus Fund 3-31-02 166,029
- --------------------------------------------------------------------------------
Value Plus Fund 3-31-01 26,341
- --------------------------------------------------------------------------------
Small Cap Growth Fund 3-31-03 112,858
- --------------------------------------------------------------------------------
48
The higher commissions paid by the Enhanced 30 Fund during the fiscal year ended
March 31, 2003 are due to higher turnover rates.
Each Sub-Advisor is specifically authorized to pay a broker who provides
research services to the Sub-Advisor an amount of commission for effecting a
portfolio transaction in excess of the amount of commission another broker would
have charged for effecting such transaction, in recognition of such additional
research services rendered by the broker or dealer, but only if the Sub-Advisor
determines in good faith that the excess commission is reasonable in relation to
the value of the brokerage and research services provided by such broker or
dealer viewed in terms of the particular transaction or the Sub-Advisor's
overall responsibilities with respect to discretionary accounts that it manages,
and that the Fund derives or will derive a reasonably significant benefit from
such research services.
During the fiscal period ended March 31, 2003, the amount of brokerage
transactions and related commissions for the Funds directed to brokers due to
research services provided were as follows:
BROKERAGE BROKERAGE
TRANSACTIONS COMMISSIONS
DIRECTED TO FROM
RESEARCH RESEARCH
-------- --------
Large Cap Growth Fund $18,500,178 $ 27,454
Growth Opportunities Fund $58,820,196 $126,504
Emerging Growth Fund $18,992,740 $ 46,845
Value Plus Fund $30,272,299 $ 49,144
Small Cap Growth Fund $ 3,625,704 $ 10,886
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 and the
Sub-Advisors, it is not possible to place a dollar value on it. Research
services furnished by brokers through whom a Fund effects securities
transactions may be used by the Sub-Advisor in servicing all of its accounts and
not all such services may be used by the Sub-Advisor in connection with a Fund.
In order to reduce total operating expenses, the Funds may apply a portion of
their brokerage commission dollars to offset custody expenses through a
Commission Share Program offered by Brown Brothers Harriman & Co., the Trust's
Custodian. The Funds have no obligation to deal with any broker or dealer in the
execution of securities transactions. However, the Funds may effect securities
transactions that are executed on a national securities exchange or transactions
in the over-the-counter market conducted on an agency basis. A Fund will not
effect any brokerage transactions in its portfolio securities with an affiliated
broker if such transactions would be unfair or unreasonable to its shareholders.
Over-the-counter transactions will be
49
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. Affiliated broker-dealers of the Trust will not receive reciprocal
brokerage business as a result of the brokerage business transacted by the Funds
with other brokers.
Deutsche Bank may be deemed to be an affiliate of the Trust because it is an
affiliate of Deutsche Investment Management Americas Inc., a sub-advisor for
Touchstone Variable Series Trust. Listed below is information about the
brokerage commissions paid to Deutsche Bank during the fiscal period ended March
31, 2003.
Percentage
Amount Percentage of Aggregate
of of Aggregate Transactions
Commissions Commissions Paid Effected
----------- ---------------- --------
Emerging Growth Fund $ 992 .09% .06%
Growth Opportunities Fund $13,210 7.5% 10%
Small Cap Growth Fund $ 2,786 2.5% 2.8%
Consistent with the conduct rules 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-Advisors will make such allocations if commissions are comparable to those
charged by nonaffiliated, qualified broker-dealers for similar services.
In certain instances there may be securities that 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.
During the fiscal period ended March 31, 2003, the Funds acquired common stock
of the Trust's regular broker-dealers as follows:
50
- --------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES MARKET VALUE
FUND BROKER-DEALER AT 3-31-03 AT 3-31-03
- --------------------------------------------------------------------------------------------------------------
Growth Opportunities Fund Merrill Lynch & Co. Inc. 74,000 $2,619,600
Growth Opportunities Fund Wells Fargo & Co. 60,000 $2,699,400
Enhanced 30 Fund Citigroup, Inc. (Salomon, Smith Barney) 7,516 $ 258,926
Value Plus Fund Lehman Brothers Holdings 17,185 $ 992,434
Value Plus Fund Citigroup, Inc. (Salomon, Smith Barney) 22,912 $ 789,318
Small Cap Growth Fund Raymond James Financial, Inc. 21,750 $ 562,673
- --------------------------------------------------------------------------------------------------------------
CODE OF ETHICS
- --------------
The Trust, the Advisor, the Sub-Advisors and Touchstone have each adopted a Code
of Ethics under Rule 17j-1 of the 1940 Act that permits Fund personnel to invest
in securities for their own accounts. The Code of Ethics adopted by each of the
Trust, Advisor, the Sub-Advisor and Touchstone is on public file with, and is
available from, the SEC.
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
Fund. High turnover may result in a Fund recognizing greater amounts of income
and capital gains, which would increase the amount of commissions. A 100%
turnover rate would occur if all of the Fund's portfolio securities were
replaced once within a one-year period. The rate of portfolio turnover will
depend upon market and other conditions, and will not be a limiting factor when
the Sub-Advisor believes that portfolio changes are appropriate. A Fund may
engage in active trading to achieve its investment goals and, as a result, may
have substantial portfolio turnover.
CALCULATION OF SHARE PRICE AND PUBLIC OFFERING PRICE
- ----------------------------------------------------
The share price or net asset value ("NAV") and the public offering price (NAV
plus applicable sales load) of shares of the Funds 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 NAV might be
materially affected. Securities held by a Fund may be primarily listed on
foreign exchanges or traded in foreign markets that are open on days (such as
Saturdays and U.S. holidays) when the New York Stock Exchange is not open for
business. As a result the NAV of a Fund may be significantly affected by trading
on days when the Trust is not open for business. For a description of the
methods used to determine the share price and the public offering price, see
"Pricing of Fund Shares" in the Prospectuses.
51
CHOOSING A SHARE CLASS
- ----------------------
Each Fund offers three classes of shares: Class A, Class B 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. 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 advisors who
may work with a particular sales load structure as compensation for their
services. If you qualify for reduced front-end sales charges or, in the case of
purchases of $1 million or more, no initial sales charge, you may find Class A
shares attractive. Moreover, Class A shares are subject to lower ongoing
expenses than Class B or Class C shares over the term of the investment. As an
alternative, Class B and Class C shares are sold without an initial sales charge
so the entire purchase price is immediately invested in a Fund. Any investment
return on these investments may be partially or wholly offset by the higher
annual expenses. However, because a Fund's future returns cannot be predicted,
there can be no assurance that this would be the case.
When determining which class of shares to purchase, you may want to consider the
services provided by your financial advisor and the compensation provided to
these financial advisors under each share class. Touchstone works with many
experienced and qualified financial advisors 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. Touchstone believes that these value-added services can
greatly benefit you through market cycles and will work with your chosen
financial advisor.
Finally, you should consider the effect of the contingent deferred sales charge
("CDSC") and any conversion rights of each class in the context of your
investment timeline. For example, Class C shares are generally subject to a
significantly lower CDSC upon redemption than Class B shares, however, unlike
Class B shares, they do not convert to Class A shares after a stated period of
time. Class C shares, therefore, are subject to a 1.00% annual 12b-1 fee for an
indefinite period of time, while Class B shares will convert to Class A shares
after approximately eight years and will be subject to only a .25% annual 12b-1
fee. Thus, Class B shares may be more attractive than Class C shares if you have
a longer-term investment outlook. On the other hand, if you are unsure of the
length of time you intend to invest or the conversion feature is not attractive
to you, you may wish to elect Class C shares.
Below is a chart comparing the sales charges and 12b-1 fees applicable to each
class of shares:
52
CLASS SALES CHARGE 12B-1 FEE CONVERSION FEATURE
- -----------------------------------------------------------------------------------------
A Maximum of 5.75% initial sales charge 0.25% None
reduced for purchases of $50,000 and
over; shares sold without an initial sales
charge may be subject to a 1.00% CDSC
during 1st year if a commission was paid
to a dealer
B Maximum 5.00% CDSC during 1st 1.00% Class B Shares
year, which decreases incrementally automatically convert
and is 0 after 6 years to Class A shares after
approximately 8 years
C 1.00% CDSC during 1st year 1.00% None
- -----------------------------------------------------------------------------------------
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 charge and the annual
expenses are lower.
CLASS A SHARES
Class A shares are sold at NAV plus an initial sales charge. In some cases,
reduced initial sales charges 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 charge at the time of purchase but may be subject to a CDSC of 1.00%
on redemptions made within 1 year after purchase if a commission was paid by
Touchstone 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 net assets allocable to Class A shares.
The following table illustrates the current initial sales charge breakpoints for
the purchase of Class A shares:
Sales Sales Dealer
Charge as Charge as % Reallowance
% of Offering of Net Amount as % of Net
Price Invested Amount Invested
------------- ------------- ---------------
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 shows the initial sales charge breakpoints for the purchase
of Class A shares of the Large Cap Growth Fund and the Growth Opportunities Fund
for accounts opened before August 1, 1999:
53
Sales Sales Dealer
Charge as Charge as % Reallowance
% of Offering of Net Amount as % of Net
Price Amount Invested Amount Invested
------------- --------------- ---------------
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
The following table shows the initial sales charge breakpoints for the purchase
of Class A shares of the Emerging Growth Fund and the Value Plus Fund for
accounts opened before May 1, 2000:
Sales Sales Dealer
Charge as Charge as % Reallowance
% of Offering of Net Amount as % of Net
Price Amount Invested Amount Invested
------------- --------------- ---------------
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 2.50 2.56 2.00
$500,000 but less than $1,000,000 2.00 2.04 1.60
$1,000,000 or more None None
Under certain circumstances, Touchstone may increase or decrease the reallowance
to selected dealers. In addition to the compensation otherwise paid to
securities dealers, Touchstone 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 Touchstone 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 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 Touchstone. In determining a dealer's eligibility for such commission,
purchases of Class A shares of the Funds may be aggregated with concurrent
purchases of Class A shares of other funds in the Touchstone Family of Funds.
Dealers should contact Touchstone for more information on the calculation of the
dealer's commission in the case of combined purchases.
An exchange from other Touchstone Funds will not qualify for payment of the
dealer's commission unless the exchange is from a Touchstone 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 CDSC if the dealer's commission
described in this paragraph was paid in connection with the purchase of such
shares. See "CDSC for Certain Purchases of Class A Shares" below.
54
REDUCED SALES CHARGE. 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
Touchstone Fund sold with a sales charge with the amount of any current
purchases of Class A shares in order to take advantage of the reduced sales
charges set forth in the tables above. Purchases of Class A shares of any
Touchstone load fund under a Letter of Intent may also be eligible for the
reduced sales charges. The minimum initial investment under a Letter of Intent
is $10,000. You should contact the transfer agent for information about the
Right of Accumulation and Letter of Intent.
CDSC FOR CERTAIN PURCHASES OF CLASS A SHARES. A CDSC 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 Touchstone and the shares
are redeemed within one year from the date of purchase. The CDSC will be paid to
Touchstone 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 CDSC, 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 CDSC.
CLASS B SHARES
Class B shares of the Funds are sold at NAV without an initial sales charge.
Class B shares are subject to a CDSC if you redeem Class B shares within 6 years
of their purchase. The CDSC 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 B shares being redeemed, or (2) the NAV of
such Class B shares being redeemed. A CDSC will not be imposed upon redemptions
of Class B shares held for at least six years. The amount of sales charge will
depend on how long you have held your shares, as set forth in the following
table:
YEAR SINCE CDSC AS A
PURCHASE % OF AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
- ----------------------------------------------------------
First 5.00%
Second 4.00%
Third 3.00%
Fourth 2.00%
Fifth 1.00%
Sixth 1.00%
Seventh and thereafter* None
* Class B shares will automatically convert to Class A shares after they have
been held for approximately 8 years.
Class B shares are subject to an annual 12b-1 fee of up to 1.00% of a Fund's
average daily net
55
assets allocable to Class B shares. Touchstone intends to pay a commission of
4.00% of the purchase amount to your broker at the time you purchase Class B
shares.
CLASS C SHARES
Class C shares are sold at NAV, without an initial sales charge and are subject
to a CDSC of 1.00% on redemptions of Class C shares made within one year of
their purchase. The CDSC 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 NAV of
such Class C shares being redeemed. A CDSC 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. Touchstone intends to pay a commission of 1.00% of the
purchase amount to your broker at the time you purchase Class C shares.
ADDITIONAL INFORMATION ON THE CDSC
The CDSC is waived under the following circumstances:
o 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.
Touchstone may require documentation prior to waiver of the charge,
including death certificates, physicians' certificates, etc.
o Redemptions from a systematic withdrawal plan. If the systematic withdrawal
plan is based on a fixed dollar amount or number of shares, systematic
withdrawal redemptions are limited to no more than 10% of your account
value or number of shares per year, as of the date the transfer agent
receives your request. If the systematic withdrawal plan is based on a
fixed percentage of your account value, each redemption is limited to an
amount that would not exceed 10% of your annual account value at the time
of withdrawal.
o Redemptions from retirement plans qualified under Section 401 of the
Internal Revenue Code. The CDSC will be waived for benefit payments made by
Touchstone directly to plan participants. Benefit payments will include,
but are not limited to, payments resulting from death, disability,
retirement, separation from service, required minimum distributions (as
described under IRC Section 401(a)(9)), in-service distributions,
hardships, loans and qualified domestic relations orders. The CDSC waiver
will not apply in the event of termination of the plan or transfer of the
plan to another financial institution.
All sales charges imposed on redemptions are paid to Touchstone. In determining
whether the CDSC is payable, it is assumed that shares not subject to the CDSC
are the first redeemed followed by other shares held for the longest period of
time. The CDSC will not be imposed upon shares representing reinvested dividends
or capital gains distributions, or upon amounts representing share appreciation.
56
The following example will illustrate the operation of the CDSC. 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 charge because of dividend reinvestment. With respect to the remaining 400
shares, the charge is applied only to the original cost of $10 per share and not
to the increase in NAV of $2 per share. Therefore, $4,000 of the $5,400
redemption proceeds will pay the charge. At the rate of 5.00%, the CDSC would be
$200 for redemptions of Class B shares. At the rate of 1.00%, the CDSC would be
$40 for redemptions of Class C shares. In determining whether an amount is
available for redemption without incurring a deferred sales charge, the purchase
payments made for all shares in your account are aggregated.
The following example will illustrate the operation of the CDSC for Class B
shares. Assume that you open an account and purchase 1,000 shares at $10 per
share and that twenty-eight months later the NAV per share is $14 and, during
such time, you have acquired (a) 150 additional shares through reinvestment of
distributions and (b) 500 shares through purchases at $11 per share during the
second year. If at such time you should redeem 1,450 shares (proceeds of
$20,300), 150 shares will not be subject to the charge because of dividend
reinvestment. With respect to the remaining 1,300 shares, the charge is applied
only to the (a) original cost of $10 per share for the first 1,000 shares and
not to the increase in NAV of $4 per share and (b) to the original cost of $11
per share for the next 300 shares and not to the increase in NAV of $3 per
share. Therefore, $18,200 of the $20,300 redemption proceeds will pay the
charge. The redemption of the first 1,000 shares is in the third year of the
CDSC schedule and will be charged at the rate of 3.00%, or $300. The redemption
of the next 300 shares is in the second year of the CDSC schedule and will be
charged at the rate of 4.00%, or $132. After this transaction is completed, the
account has 200 shares remaining with an initial purchase value of $11 per share
and these shares are in the second year of the CDSC schedule.
OTHER PURCHASE INFORMATION
- --------------------------
Additional information with respect to certain types of purchases of Class A
shares of the Funds is set forth below.
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
57
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 Class A shares of two or more Touchstone funds (other
than a money market fund). For example, if you concurrently invest $25,000 in
Class A shares of one Fund and $25,000 in Class A shares of another Fund, the
sales charge would be reduced to reflect a $50,000 purchase.
RIGHT OF ACCUMULATION. A purchaser of Class A shares of a Fund has the right to
combine the cost or current NAV (whichever is higher) of his existing Class A
shares of the load funds distributed by Touchstone with the amount of his
current purchases in order to take advantage of the reduced sales charges set
forth in the table in the Prospectuses. The purchaser or his dealer must notify
the transfer agent that an investment qualifies for a reduced sales charge. The
reduced charge will be granted upon confirmation of the purchaser's holdings by
the transfer agent.
A purchaser includes an individual and his immediate family members, 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, 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 (the "Purchaser").
LETTER OF INTENT. The reduced sales charges set forth in the tables in the
Prospectus may also be available to any Purchaser of Class A 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 Class A shares of any load
fund distributed by Touchstone a specified amount, which, if made at one time,
would qualify for a reduced sales charge. 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 charge 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 charge 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
58
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.
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 Touchstone.
2. By any director, officer or other employee (and their immediate family
members) of The Western and Southern Life Insurance Company or any of its
affiliates or any portfolio advisor or service provider to the Trust.
3. By clients of any investment advisor or financial planner who has made
appropriate arrangements with the Trust or Touchstone.
4. In accounts as to which a broker-dealer charges an asset management fee,
provided the broker-dealer has an agreement with Touchstone.
5. As part of certain promotional programs established by the Fund and/or
Touchstone.
6. 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 Touchstone and such group.
7. By banks, bank trust departments, savings and loan associations and federal
and state credit unions.
8. Through Processing Organizations described in the Prospectus.
9. As part of an employee benefit plan having more than 25 eligible employees
or a minimum of $250,000 invested in the Funds.
10. As part of an employee benefit plan that is provided administrative
services by a third-party administrator that has entered into a special
service arrangement with Touchstone.
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 Touchstone. Your financial advisor
should call Touchstone for more information.
WAIVER OF MINIMUM INVESTMENT REQUIREMENTS. The minimum and subsequent investment
requirements for purchases in the Funds may not apply to:
1. Any director, officer or other employee (and their immediate family
members) of The Western and Southern Life Insurance Company or any of its
affiliates or any portfolio advisor or service provider to the Trust.
2. Any employee benefit plan that is provided administrative services by a
third-party administrator that has entered into a special service
arrangement with Touchstone.
EXCHANGES. Exchanges may be subject to certain limitations and are subject to
the Touchstone Funds' policies concerning excessive trading practices, which are
policies designed to protect Funds and their shareholders from the harmful
effect of frequent exchanges.
59
The Funds may restrict or refuse purchases or exchanges by market timers and may
restrict or refuse purchases or exchanges by a shareholder who fails to comply
with the restrictions set forth below. You may be considered a market timer if
you have (i) requested an exchange or redemption out of any of the Touchstone
Funds within two weeks of an earlier purchase or exchange request out of any
Fund, or (ii) made more than two exchanges within a rolling 90 day period.
Upon the Fund's restriction or refusal of a purchase or exchange as a result of
excessive exchanging or market timing, written notification of the Fund's
policies on these issues will be sent to the shareholder's agent and/or to the
broker-dealer firm of record for any account deemed to be market timing by the
Funds. If an account has no such agent or broker-dealer, written notification
will be sent directly to the shareholder.
OTHER INFORMATION. The Trust does not impose a front-end sales charge or imposes
a reduced sales charge in connection with purchases of shares of a Fund made
under the reinvestment privilege, purchases through exchanges and other
purchases which qualify for a reduced sales load as described herein because
such purchases require minimal sales effort by Touchstone. Purchases made at NAV
may be made for investment only, and the shares may not be resold except through
redemption by or on behalf of the Trust.
TAXES
- -----
The Trust intends to qualify annually and to elect that each Fund 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
60
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.
A Fund's net realized capital gains from securities transactions will be
distributed only after reducing such gains by the amount of any available
capital loss carryforwards. Capital losses may be carried forward to offset any
capital gains for eight years, after which any undeducted capital loss remaining
is lost as a deduction. As of March 31, 2003, the Funds had the following
capital loss carryforwards for federal income tax purposes:
AMOUNT EXPIRATION DATE
- --------------------------------------------------------------------------------
Emerging Growth Fund $24,155,186 March 31, 2011
Growth Opportunities Fund 2,005,441 March 31, 2009
22,448,509 March 31, 2010
21,975,058 March 31, 2011
Large Cap Growth Fund 12,172,049 March 31, 2010
19,119,045 March 31, 2011
Enhanced 30 Fund 99,480 March 31, 2009
24,780 March 31, 2010
414,728 March 31, 2011
Value Plus Fund 209,088 March 31, 2009
5,826,294 March 31, 2011
Small Cap Growth Fund 41,322 March 31, 2011
- --------------------------------------------------------------------------------
Each Fund shareholder will receive, if appropriate, various written notices at
the end of the calendar year as to the federal income status of his dividends
and distributions that were received from the Fund during the year. Shareholders
should consult their tax advisors as to any state and local taxes that may apply
to these dividends and distributions.
61
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 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 U.S. shareholders, other than corporations, at the
qualified dividend income rate of 15%, or 5% for lower income levels and may
qualify for the corporate dividends-received deduction, to the extent derived
from qualified dividend 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 NAV 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 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.
TIMING OF INVESTMENT. At the time of a shareholder's purchase of a Fund's
shares, a portion of the purchase price may be attributable to realized or
unrealized appreciation in the Fund's
62
portfolio or undistributed taxable income of the Fund. Consequently, subsequent
distributions by the Fund with respect to these shares from such appreciation or
income may be taxable to such shareholder even if the NAV of the shareholder's
shares is, as a result of the distributions, reduced below the shareholder's
cost for such shares and the distributions economically represent a return of a
portion of the investment.
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
on 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. The current backup-withholding rate is
28%. 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.
OTHER TAXATION. 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.
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 that are issued in an in-kind redemption will be readily
marketable. The Trust has filed an irrevocable election with the SEC under Rule
18f-1 of the 1940 Act 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 NAV at
the beginning of such period.
HISTORICAL PERFORMANCE INFORMATION
- ----------------------------------
From time to time, the Funds 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:
63
P(1 + T)^n = 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
charge 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,
2003 ARE AS FOLLOWS:
Large Cap Growth Fund (Class A)
- -------------------------------
1 Year -37.51%
5 Years -13.68%
Since inception (8-2-93) 0.30%
Large Cap Growth Fund (Class B)
- -------------------------------
1 Year -37.25%
Since inception (5-1-01) -28.01%
Large Cap Growth Fund (Class C)
- -------------------------------
1 Year -34.26%
5 Years -13.60%
Since inception (6-7-93) 0.01%
Growth Opportunities Fund (Class A)
- -----------------------------------
1 Year -34.16%
5 Years -1.96%
Since inception (9-29-95) 6.34%
Growth Opportunities Fund (Class B)
- -----------------------------------
1 Year -34.51%
Since inception (5-1-01) -29.49%
Growth Opportunities Fund (Class C)
- -----------------------------------
1 Year -31.55%
Since inception (8-2-99) -10.54%
64
Enhanced 30 Fund (Class A)
- --------------------------
1 Year -30.43%
Since inception (5-1-00) -14.51%
Enhanced 30 Fund (Class B)
- --------------------------
1 Year -29.63%
Since inception (5-1-01) -18.34%
Enhanced 30 Fund (Class C)
- --------------------------
1 Year -26.32%
Since inception (5-16-00) -13.22%
Emerging Growth Fund (Class A)
- ------------------------------
1 Year -32.04%
5 Years 5.08%
Since inception (10-3-94) 11.79%
Emerging Growth Fund (Class B)
- ------------------------------
1 Year -33.09%
Since inception (5-1-01) -14.24%
Emerging Growth Fund (Class C)
- ------------------------------
1 Year -30.27%
5 Years 5.05%
Since inception (10-3-94)* 11.29%
Value Plus Fund (Class A)
- -------------------------
1 Year -32.69%
Since inception (5-1-98) -4.21%
Value Plus Fund (Class B)
- -------------------------
1 Year -31.87%
Since inception (5-1-01) -20.33%
Value Plus Fund (Class C)
- -------------------------
1 Year -29.08%
Since inception (5-1-98)* - 3.93%
* Date reflects inception of the predecessor. The predecessor was a series of
Select Advisors Trust C that was reorganized into Touchstone Series Trust,
the Funds' previous Trust, on December 31, 1998.
Each Fund may also advertise total return (a "nonstandardized quotation") that
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
65
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 charge, which, if included,
would reduce total return.
The total returns of the Large Cap Growth Fund, the Growth Opportunities Fund
and the Enhanced 30 Fund as calculated in this manner for each of the last ten
fiscal periods (or since inception) are as follows:
LARGE CAP GROWTH ENHANCED
GROWTH FUND OPPORTUNITIES FUND 30 FUND
Class A Class B Class C Class A Class B Class C Class A Class B Class C
------------------------------------------------------------------------------------------------------------------
Period Ended
- ------------
March 31, 1994 - 2.63%(1) -2.91%(2)
March 31, 1995 + 8.07% +7.32%
March 31, 1996 +27.90% +26.90% +14.50%(3)
March 31, 1997 +11.82% +11.01% +12.77%
March 31, 1998 +42.74% +41.63% +36.73%
March 31, 1999 +14.30% +13.03% +29.89%
March 31, 2000 +20.60% +19.24% +88.88% +76.52%(4)
March 31, 2001 -41.73% -42.39% -38.42% -38.89% -10.57%(5) -11.12%(6)
March 31, 2002 -4.57% -15.07%(7) -5.66% -8.96% -21.81%(7) -9.93% 3.86% -3.60%(7) 3.00%
March 31, 2003 -33.69% -34.63% -34.26% -30.14% -31.78% -31.55% -26.19% -26.70% -26.32%
(1) From date of initial public offering on August 2, 1993
(2) From date of initial public offering on June 7, 1993
(3) From date of initial public offering on September 29, 1995
(4) From date of initial public offering on August 1, 1999
(5) From date of initial public offering on May 1, 2000
(6) From date of initial public offering on May 16, 2000
(7) From date of initial public offering on May 1, 2001
The total returns of the Emerging Growth Fund and the Value Plus Fund as
calculated in this manner for each of the last ten fiscal periods (or since
inception) are as follows:
EMERGING GROWTH FUND VALUE PLUS FUND
Class A(1) Class B(3) Class C(1) Class A(2) Class B(3) Class C(2)
---------------------------------------------------------------------------
Period Ended
- ------------
December 31, 1994 2.72% 2.52%
December 31, 1995 22.56% 21.15%
December 31, 1996 10.56% 9.67%
December 31, 1997 32.20% 30.67%
December 31, 1998 2.57% 1.95% 4.29% 2.60%
December 31, 1999 45.85% 44.86% 15.51% 14.24%
December 31, 2000 25.92% 24.58% 1.91% 1.87%
March 31, 2001 -4.95% -5.91% -0.74% -0.89%
March 31, 2002 22.72% 11.35% 22.09% 2.34% -5.01% 1.60%
March 31, 2003 -27.90% -30.34% -30.27% 28.59% -29.05% -29.08%
(1) From date of initial public offering on October 3, 1994
(2) From date of initial public offering on May 1, 1998
66
(3) From date of initial public offering on May 1, 2001
A nonstandardized quotation may also indicate average annual compounded rates of
return without including the effect of the applicable sales charge or over
periods other than those specified for average annual total return.
THE AVERAGE ANNUAL COMPOUNDED RATES OF RETURN FOR THE FUNDS (EXCLUDING SALES
CHARGES) FOR THE PERIODS ENDED MARCH 31, 2003 ARE AS FOLLOWS:
Large Cap Growth Fund (Class A)
- -------------------------------
1 Year -33.69%
3 Years -28.29%
5 Years -12.66%
Since inception (8-2-93) 0.91%
Large Cap Growth Fund (Class B)
- -------------------------------
1 Year -34.63%
Since inception (5-1-01) -26.46%
Large Cap Growth Fund (Class C)
- -------------------------------
1 Year -34.26%
3 Years -29.04%
5 Years -13.60%
Since inception (6-7-93) 0.01%
Growth Opportunities Fund (Class A)
- -----------------------------------
1 Year -30.14%
3 Years -26.84%
5 Years -0.80%
Since inception (9-29-95) 7.18%
Growth Opportunities Fund (Class B)
- -----------------------------------
1 Year -31.78%
Since inception (5-1-01) -27.98%
Growth Opportunities Fund (Class C)
- -----------------------------------
1 Year -31.55%
3 Years -27.77%
Since inception (8-1-99) -10.54%
Enhanced 30 Fund (Class A)
- --------------------------
1 Year -26.19%
Since inception (5-1-00) -12.73%
Enhanced 30 Fund (Class B)
- --------------------------
1 Year -26.70%
Since inception (5-1-01) -16.59%
67
Enhanced 30 Fund (Class C)
- --------------------------
1 Year -26.32%
Since inception (5-16-00) -13.22%
Emerging Growth Fund (Class A)
- ------------------------------
1 Year -27.90%
3 Years -5.61%
5 Years 6.33%
Since inception (10-3-94) 12.57%
Emerging Growth Fund (Class B)
- ------------------------------
1 Year -30.34%
Since inception (5-1-01) -12.43%
Emerging Growth Fund (Class C)
- ------------------------------
1 Year -30.27%
3 Years -7.13%
5 Years 5.05%
Since inception (10-3-94)* 11.29%
Value Plus Fund (Class A)
- -------------------------
1 Year -28.59%
3 Years -10.15%
Since inception (5-1-98) -3.05%
Value Plus Fund (Class B)
- -------------------------
1 Year -29.05%
Since inception (5-1-01) -18.62%
Value Plus Fund (Class C)
- -------------------------
1 Year -29.08%
3 Years -10.62%
Since inception (5-1-98)* -3.93%
* Date reflects inception of the predecessor.
A nonstandardized quotation of total return will always be accompanied by the
Fund's average annual total return as described above.
68
The Funds may advertise average annual total return after taxes on
distributions. Average annual total return after taxes on distributions 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
value, according to the following formula:
P(1+T)^n=ATV
D
Where:
P = a hypothetical initial payment of $1,000.
T = average annual total return (after taxes on distributions).
n = number of years.
ATV = ending value of a hypothetical $1,000 payment made at the beginning of
D the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year
periods (or fractional portion), after taxes on fund distributions but
not after taxes on redemption.
The calculation of average annual total return after taxes on distributions
assumes the reinvestment of all dividends and distributions, less the taxes due
on such distributions. The calculation also assumes the deduction of the current
maximum sales charge from the initial $1,000 payment. If a Fund (or class) 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 RETURNS OF THE FUNDS AFTER TAXES ON DISTRIBUTIONS FOR THE
PERIODS ENDED MARCH 31, 2003 ARE AS FOLLOWS:
Large Cap Growth Fund (Class A)
- -------------------------------
1 Year -37.51%
5 Years -14.36%
Since inception (8-2-93) -0.52%
Large Cap Growth Fund (Class B)
- -------------------------------
1 Year -37.25%
Since inception (5-1-01) -28.01%
Large Cap Growth Fund (Class C)
- -------------------------------
1 Year -34.26%
5 Years -14.28%
Since inception (6-7-93) -0.66%
Growth Opportunities Fund (Class A)
- -----------------------------------
1 Year -34.16%
5 Years -2.83%
Since inception (9-29-95) 5.46%
69
Growth Opportunities Fund (Class B)
- -----------------------------------
1 Year -34.51%
Since inception (5-1-01) -29.49%
Growth Opportunities Fund (Class C)
- -----------------------------------
1 Year -31.55%
Since inception (8-2-99) -10.68%
Enhanced 30 Fund (Class A)
- --------------------------
1 Year -30.72%
Since inception (5-1-00) -14.76%
Enhanced 30 Fund (Class B)
- --------------------------
1 Year -29.64%
Since inception (5-1-01) -18.40%
Enhanced 30 Fund (Class C)
- --------------------------
1 Year -26.35%
Since inception (5-16-00) -13.27%
Emerging Growth Fund (Class A)
- ------------------------------
1 Year -32.37%
5 Years 2.55%
Since inception (10-3-94) 8.98%
Emerging Growth Fund (Class B)
- ------------------------------
1 Year -33.46%
Since inception (5-1-01) -14.52%
Emerging Growth Fund (Class C)
- ------------------------------
1 Year -30.64%
5 Years 2.26%
Since inception (10-3-94)* 8.56%
Value Plus Fund (Class A)
- -------------------------
1 Year -32.84%
Since inception (5-1-98) -4.89%
Value Plus Fund (Class B)
- -------------------------
1 Year -32.03%
Since inception (5-1-01) -20.43%
Value Plus Fund (Class C)
- -------------------------
1 Year -29.08%
Since inception (5-1-98)* -4.50%
* Date reflects inception of the predecessor.
70
The Funds may advertise average annual total return after taxes on distributions
and redemption. Average annual total return after taxes on distributions and
redemption 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 value, according to the following formula:
P(1+T)^n=ATV
DR
Where:
P = a hypothetical initial payment of $1,000.
T = average annual total return (after taxes on distributions and
redemption).
n = number of years.
ATV = ending value of a hypothetical $1,000 payment made at the beginning of
DR the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year
periods (or fractional portion), after taxes on fund distributions and
redemption.
The calculation of average annual total return after taxes on distributions and
redemption assumes the reinvestment of all dividends and distributions, less the
taxes due on such distributions. The calculation also assumes the deduction of
the current maximum sales charge from the initial $1,000 payment. If the Fund
(or class) 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 RETURN FOR THE FUNDS AFTER TAXES ON DISTRIBUTIONS AND
REDEMPTION FOR THE PERIODS ENDED MARCH 31, 2003 ARE AS FOLLOWS:
Large Cap Growth Fund (Class A)
- -------------------------------
1 Year -23.03%
5 Years -9.53%
Since inception (8-2-93) 0.53%
Large Cap Growth Fund (Class B)
- -------------------------------
1 Year -22.87%
Since inception (5-1-01) -21.67%
Large Cap Growth Fund (Class C)
- -------------------------------
1 Year -21.04%
5 Years -9.42%
Since inception (6-7-93) 0.40%
Growth Opportunities Fund (Class A)
- -----------------------------------
1 Year -20.98%
5 Years -1.45%
Since inception (9-29-95) 5.27%
71
Growth Opportunities Fund (Class B)
- -----------------------------------
1 Year -21.19%
Since inception (5-1-01) -22.77%
Growth Opportunities Fund (Class C)
- -----------------------------------
1 Year -19.37%
Since inception (8-2-99) -8.16%
Enhanced 30 Fund (Class A)
- --------------------------
1 Year -18.67%
Since inception (5-1-00) -11.34%
Enhanced 30 Fund (Class B)
- --------------------------
1 Year -18.19%
Since inception (5-1-01) -14.41%
Enhanced 30 Fund (Class C)
- --------------------------
1 Year -16.16%
Since inception (5-16-00) -10.30%
Emerging Growth Fund (Class A)
- ------------------------------
1 Year -19.64%
5 Years 3.17%
Since inception (10-3-94) 8.64%
Emerging Growth Fund (Class B)
- ------------------------------
1 Year -20.28%
Since inception (5-1-01) -11.32%
Emerging Growth Fund (Class C)
- ------------------------------
1 Year -18.55%
5 Years 3.12%
Since inception (10-3-94)* 8.36%
Value Plus Fund (Class A)
- -------------------------
1 Year -20.07%
Since inception (5-1-98) -3.30%
Value Plus Fund (Class B)
- -------------------------
1 Year -19.56%
Since inception (5-1-01) -15.95%
Value Plus Fund (Class C)
- -------------------------
1 Year -17.85%
Since inception (5-1-98)* -3.02%
72
* Date reflects inception of the predecessor.
From time to time, the Funds may advertise their 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:
Yield = 2[(a-b/cd +1)^6 -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).
Performance quotations 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, Class B and Class C shares of the Funds. The yield of
Class A shares is expected to be higher than the yield of Class B and Class C
shares due to the higher distribution fees imposed on Class B and Class C
shares.
To help investors better evaluate how an investment in a Fund might satisfy
their investment objective, advertisements regarding a 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 to discuss or compare Fund performance:
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 charges.
73
Morningstar, Inc., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars and ratings are effective for two
weeks.
In addition, a Fund may also use comparative performance information of relevant
indices, including the following:
The Dow Jones Industrial Average is a measurement of general market price
movement for 30 widely held stocks.
The S&P 500 Index is a widely recognized unmanaged index that measures the stock
performance of 500 large and medium sized companies and is often used to
indicate the performance of the overall stock market.
The S&P Barra Value Index is a capitalization-weighted index comprised of stocks
of the S&P 500 with low price-to-book ratios relative to the S&P 500 as a whole.
Each company of the S&P 500 is assigned to either the S&P 500 Value Index or the
S&P 500 Growth Index so that the sum of the indices reflects the total S&P 500.
The Russell 1000 Growth Index measures the performance of those Russell 1000
companies with higher price-to-book ratios and higher forecasted growth values.
The Russell 1000 Value Index measures the performance of those Russell 1000
companies with lower price-to-book ratios and lower forecasted growth values.
The Russell 2000 Index is an unmanaged index of small cap performance.
The Russell 2000 Growth Index measures the performance of those Russell 2000
companies with higher price-to-book ratios and higher forecasted growth values.
The Russell 2500 Index measures the performance of the 2,500 smallest companies
in the Russell 3000 Index, which represents approximately 17% of the total
market capitalization of the Russell 3000 Index.
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 a Fund's portfolio, 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 a Fund will continue this performance
as compared to such other averages.
PRINCIPAL SECURITY HOLDERS
- --------------------------
As of July 3, 2003, the following shareholders held over 5% of the outstanding
shares of a Fund (or class):
74
- -----------------------------------------------------------------------------------------------
FUND SHAREHOLDER % OF CLASS
- -----------------------------------------------------------------------------------------------
Large Cap Growth Fund - Fifth Third Bank - RPS 46.31%
Class A MD 1090BB
Cincinnati, OH
- -----------------------------------------------------------------------------------------------
Large Cap Growth Fund - Western and Southern Life Insurance Company 15.78%
Class A 400 Broadway
Cincinnati, OH
- -----------------------------------------------------------------------------------------------
Large Cap Growth Fund - Western-Southern Life Assurance 10.02%
Class A Company
400 Broadway
Cincinnati, OH
- -----------------------------------------------------------------------------------------------
Large Cap Growth Fund - Western and Southern Life Insurance 9.81%
Class A Company
400 Broadway
Cincinnati, OH
- -----------------------------------------------------------------------------------------------
Large Cap Growth Fund - A.G. Edwards & Sons Inc. Custodian 10.20%
Class B FBO A Customer's Account
23133 Brookdale Street
St. Clair Shores, MI
- -----------------------------------------------------------------------------------------------
Large Cap Growth Fund - A.G. Edwards & Sons Inc. Custodian 10.20%
Class B FBO A Customer's Account
23133 Brookdale Street
St. Clair Shores, MI
- -----------------------------------------------------------------------------------------------
Large Cap Growth Fund - Donaldson Lufkin & Jenrette 8.50%
Class B FBO A Customer's Account
P.O. Box 2052
Jersey City, NJ
- -----------------------------------------------------------------------------------------------
Large Cap Growth Fund - Glen M. Hanson 6.64%
Class B 6 Keating Drive
Cold Spring, KY
- -----------------------------------------------------------------------------------------------
Large Cap Growth Fund - Charles J. Summerville 8.93%
Class B 2052 Clarence Avenue
Lakewood, OH
- -----------------------------------------------------------------------------------------------
Large Cap Growth Fund - Pershing LLC* 28.10%
Class B P.O. Box 2052
Jersey City, NJ
- -----------------------------------------------------------------------------------------------
Large Cap Growth Fund - Wells Fargo Investments LLC 6.66%
Class B 608 Second Avenue South
Minneapolis, MN
- -----------------------------------------------------------------------------------------------
Large Cap Growth Fund - Donaldson Lufkin & Jenrette 12.37%
Class C P.O. Box 2052
Jersey City, NJ
- -----------------------------------------------------------------------------------------------
Large Cap Growth Fund - Brian G. McElheny 5.75%
Class C 207 W. Jackson
Carbondale, IL
- -----------------------------------------------------------------------------------------------
Large Cap Growth Fund - Haley Stone Supply Inc. 5.81%
Class C 1085 Collins Court
Oakland, MI
- -----------------------------------------------------------------------------------------------
Growth Opportunities Fund - Fidelity Investments Institutional 18.79%
Class A 100 Magellan Way KW1C
Covington, KY
- -----------------------------------------------------------------------------------------------
75
- -----------------------------------------------------------------------------------------------
Growth Opportunities Fund - Fifth Third Bank - RPS 5.05%
Class A MD 1090BB
Cincinnati, OH
- -----------------------------------------------------------------------------------------------
Growth Opportunities Fund - National Financial Services Corp. 5.20%
Class A For Benefit of a Customer's Account
P.O. Box 370
New York, NY
- -----------------------------------------------------------------------------------------------
Growth Opportunities Fund - National Financial Services Corp. 6.21%
Class A For Benefit of a Customer's Account
1 Wall Street
New York, NY
- -----------------------------------------------------------------------------------------------
Emerging Growth Fund-Class A Merrill Lynch, Pierce Fenner & Smith 17.62%
Incorporated
For the Sole Benefit of its Customers
4800 Deer Lake Drive East
Jacksonville, FL
- -----------------------------------------------------------------------------------------------
Emerging Growth Fund-Class A Fifth Third Bank - RPS 6.16%
MD 1090BB
Cincinnati, OH
- -----------------------------------------------------------------------------------------------
Emerging Growth Fund-Class B Merrill Lynch, Pierce Fenner & Smith 15.21%
Incorporated
For the Sole Benefit of its Customers
4800 Deer Lake Drive East
Jacksonville, FL
- -----------------------------------------------------------------------------------------------
Emerging Growth Fund-Class C Merrill Lynch, Pierce Fenner & Smith 38.50%
Incorporated
For the Sole Benefit of its Customers
4800 Deer Lake Drive East
Jacksonville, FL
- -----------------------------------------------------------------------------------------------
Enhanced 30 Fund-Class A The Western & Southern Life Insurance Company 19.84%
400 Broadway
Cincinnati, OH
- -----------------------------------------------------------------------------------------------
Enhanced 30 Fund-Class A The Western & Southern Life Insurance 54.68%
Company*
400 Broadway
Cincinnati, OH
- -----------------------------------------------------------------------------------------------
Enhanced 30 Fund-Class B Merrill Lynch, Pierce Fenner & Smith 16.06%
Incorporated
For the Sole Benefit of its Customers
4800 Deer Lake Drive East
Jacksonville, FL
- -----------------------------------------------------------------------------------------------
Enhanced 30 Fund-Class C Brenda L. Andreas 5.41%
406 Red Barn Road
Willow Grove, PA
- -----------------------------------------------------------------------------------------------
Enhanced 30 Fund-Class C Merrill Lynch, Pierce Fenner & Smith 20.21%
Incorporated
For the Sole Benefit of its Customers
4800 Deer Lake Drive East
Jacksonville, FL
- -----------------------------------------------------------------------------------------------
Enhanced 30 Fund-Class C Stifel Nicolaus & Co. Inc. 7.05%
501 North Broadway
St. Louis, MO
- -----------------------------------------------------------------------------------------------
76
- -----------------------------------------------------------------------------------------------
Value Plus Fund-Class A Columbus Life Insurance Company 22.42%
400 Broadway
Cincinnati, OH
- -----------------------------------------------------------------------------------------------
Value Plus Fund-Class A Fifth Third Bank - RPS 21.93%
MD 1090BB
Cincinnati, OH
- -----------------------------------------------------------------------------------------------
Value Plus Fund-Class A NFSC FEBO 5.27%
P.O. Box 370
New York, NY
- -----------------------------------------------------------------------------------------------
Value Plus Fund-Class A NFSC FEBO 7.27%
1 Wall Street
New York, NY
- -----------------------------------------------------------------------------------------------
Value Plus Fund-Class A The Western & Southern Life Insurance Co. 19.85%
400 Broadway
Cincinnati, OH
- -----------------------------------------------------------------------------------------------
Value Plus Fund-Class B Donald P. Morgan 5.73%
3716 S Three Mile Road
Bay City, MI
- -----------------------------------------------------------------------------------------------
Value Plus Fund-Class B Mikey N. Goolsby 5.77%
266 County Road 461A
Brazoria, TX
- -----------------------------------------------------------------------------------------------
Value Plus Fund-Class B Scott & Stringfellow Inc. 5.09%
909 East Main Street
Richmond, VA
- -----------------------------------------------------------------------------------------------
Value Plus Fund-Class B Francis H. Ehlmann 6.09%
3221 Bowman Ridge
Saint Charles, MO
- -----------------------------------------------------------------------------------------------
Value Plus Fund-Class B Donaldson, Lufkin & Jenrette 5.68%
FBO A Customer's Account
P.O. Box 2052
Jersey City, NJ
- -----------------------------------------------------------------------------------------------
Value Plus Fund-Class B Donaldson, Lufkin & 8.29%
Jenrette FBO A
Customer's Account
P.O. Box 2052
Jersey City, NJ
- -----------------------------------------------------------------------------------------------
Value Plus Fund-Class B PaineWebber 6.37%
For the Benefit of its Customers
P.O. Box 3321
Weehawken, NJ
- -----------------------------------------------------------------------------------------------
Value Plus Fund-Class C The Western & Southern Life Insurance Company 13.52%
400 Broadway
Cincinnati, OH
- -----------------------------------------------------------------------------------------------
Value Plus Fund-Class C Western-Southern Life Insurance 9.52%
Company
400 Broadway
Cincinnati, OH
- -----------------------------------------------------------------------------------------------
77
- -----------------------------------------------------------------------------------------------
Small Cap Growth Fund-Class A Merrill Lynch, Pierce Fenner & Smith 5.99%
Incorporated
For the Sole Benefit of its Customers
4800 Deer Lake Drive East
Jacksonville, FL
- -----------------------------------------------------------------------------------------------
Small Cap Growth Fund-Class A SEI Private Trust Company 9.56%
c/o Irwin Union
One Freedom Valley Drive
Oaks, PA
- -----------------------------------------------------------------------------------------------
Small Cap Growth Fund-Class A Western & Southern Life* 25.75%
400 Broadway MS 80
Cincinnati, OH
- -----------------------------------------------------------------------------------------------
Small Cap Growth Fund-Class A The Western & Southern Life Insurance Co. 20.03%
400 Broadway
Cincinnati, OH
- -----------------------------------------------------------------------------------------------
Small Cap Growth Fund-Class A The Western & Southern Life Assurance Co. 11.45%
400 Broadway
Cincinnati, OH
- -----------------------------------------------------------------------------------------------
Small Cap Growth Fund-Class B First Southwest Company FBO 5.93%
325 N St Paul, Suite 800
Dallas, TX
- -----------------------------------------------------------------------------------------------
Small Cap Growth Fund-Class B Merrill Lynch, Pierce Fenner & Smith 17.11%
Incorporated
For the Sole Benefit of its Customers
4800 Deer Lake Drive East
Jacksonville, FL
- -----------------------------------------------------------------------------------------------
Small Cap Growth Fund-Class C Merrill Lynch, Pierce Fenner & Smith 56.16%
Incorporated
For the Sole Benefit of its Customers
4800 Deer Lake Drive East
Jacksonville, FL
- -----------------------------------------------------------------------------------------------
*May be deemed to control a Fund (or class) by virtue of the fact that it owned
of record more than 25% of the outstanding shares as of July 3, 2003.
As of July 3, 2003, the Trustees and officers of the Trust as a group owned of
record or beneficially less than 1% of the outstanding shares of the Trust and
of each Fund (or class thereof).
CUSTODIAN
- ---------
Brown Brothers Harriman & Co., 140 Broadway, New York, New York 10005, serves as
the Trust's custodian. Brown Brothers Harriman acts as the Trust's depository,
safe keeps its portfolio securities, collects all income and other payments with
respect thereto, disburses funds as instructed and maintains records in
connection with its duties.
AUDITORS
- --------
The firm of Ernst & Young LLP, 250 East Fifth Street, Cincinnati, Ohio, has been
selected as independent auditors for the Trust for fiscal year ending March 31,
2004. Ernst & Young LLP will perform an audit of the Trust's financial
statements for its fiscal year end and advise the Trust as to certain accounting
matters.
78
TRANSFER, ACCOUNTING AND ADMINISTRATIVE AGENT
- ---------------------------------------------
TRANSFER AGENT. The Trust's transfer agent, Integrated Fund Services, Inc.
("Integrated"), 221 East Fourth Street, Cincinnati, Ohio 45202, 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. For providing transfer agent and shareholder
services to the Trust, Integrated receives a monthly per account fee from each
Fund, plus out of-pocket expenses. Integrated is an affiliate of the Advisor by
reason of common ownership.
ACCOUNTING AND PRICING AGENT. Integrated provides accounting and pricing
services to the Trust. For calculating daily NAV per share and maintaining all
necessary books and records to enable Integrated to perform its duties, each
Fund pays Integrated a fee based on the asset size of the Fund, plus
out-of-pocket expenses. The Funds also pay the costs of outside pricing
services.
Prior to March 17, 2002, Investors Bank & Trust Company provided accounting and
pricing and administrative services to the Emerging Growth Fund and the Value
Plus Fund. Set forth below are the accounting and pricing fees paid by the Funds
during the stated fiscal periods:
3-31-03 3-31-02 12-31-00
------- ------- --------
Emerging Growth Fund $ 66,234 $196,006* $ 83,161*
Value Plus Fund 52,782 147,233* 98,093*
3-31-03 3-31-02 3-31-01
------- ------- -------
Enhanced 30 Fund $ 45,750 $ 47,000 $ 32,000
Large Cap Growth 47,250 52,000 41,000
Growth Opportunities Fund 56,750 59,000 46,000
Small Cap Growth Fund 19,169
* Represents a unified fee that includes accounting, administration and
custody fees.
ADMINISTRATIVE AGENT. Integrated also provides administrative services to the
Funds. These administrative services include supplying non-investment related
statistical and research data, internal regulatory compliance services,
executive and administrative services, supervising the preparation of tax
returns, reports to shareholders of the Funds, reports to and filings with the
SEC and state securities commissions, and materials for meetings of the Board of
Trustees. For the performance of these administrative services, Integrated
receives a monthly fee from each Fund based on its average daily net assets,
plus out-of-pocket expenses. The fees paid for administrative services by the
Funds for the fiscal year ended March 31, 2003 are set forth below. The
administrative fees paid by the Emerging Growth Fund and Value Plus Fund during
prior fiscal years are reflected in the accounting and pricing fee chart above.
The Enhanced 30 Fund, the Large Cap Growth Fund and the Growth Opportunities
Fund did not began paying administrative fees until August 1, 2002.
79
3-31-03
-------
Emerging Growth Fund $151,466
Value Plus Fund 37,217
Enhanced 30 Fund 3,025
Large Cap Growth Fund 13,745
Growth Opportunities Fund 41,073
Small Cap Growth Fund 3,806
ANNUAL REPORT
- -------------
The Trust's financial statements as of March 31, 2003 appear in the Trust's
annual report, which is incorporated by reference herein. The financial
statements were audited by Ernst & Young LLP.
80
APPENDIX
BOND AND COMMERCIAL PAPER RATINGS
Set forth below are descriptions of the ratings of Moody's, S&P and Fitch,
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 that 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 that 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 that 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 that 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 that 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 that 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.
81
Caa. Bonds that 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 that are rated Ca represent obligations that are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C. Bonds that 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.
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.
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. Not rated.
82
FITCH RATINGS:
AAA - "AAA ratings denote the lowest expectation of credit risk. They are
assigned only in cases of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to be adversely affected
by foreseeable events."
AA - "AA ratings denote a very low expectation of credit risk. They
indicate strong capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable events."
A - "A ratings denote a low expectation of credit risk. The capacity for
timely payment of financial commitments is considered strong. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings."
BBB - "BBB ratings indicate that there is currently a low expectation of
credit risk. Capacity for timely payment of financial commitments is considered
adequate, but adverse changes in circumstances and in economic conditions are
more likely to impair this capacity. This is the lowest investment grade
category."
BB - "BB ratings indicate that there is a possibility of credit risk
developing, particularly as the result of adverse economic change over time;
however, business or financial alternatives may be available to allow financial
commitments to be met. Securities rated in this category are not investment
grade."
B - "B ratings indicate that significant credit risk is present, but a
limited margin of safety remains. Financial commitments are currently being met;
however, capacity for continued payment is contingent upon a sustained,
favorable business and economic environment."
CCC, CC, C - "Default is a real possibility. Capacity for meeting financial
commitments is solely reliant upon sustained, favorable business or economic
developments. A 'CC' rating indicates that default of some kind appears
probable. 'C' ratings signal imminent default."
DDD, DD and D - "Securities are not meeting current obligations and are
extremely speculative. 'DDD' designates the highest potential for recovery of
amounts outstanding on any securities involved. For U.S. corporates, for
example, 'DD' indicates expected recovery of 50%-90% of such outstanding, and
'D' the lowest recovery potential, i.e. below 50%."
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.
83
2. The issue or issuer belongs to a group of securities that are not
rated as a matter of policy.
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 COMMERCIAL PAPER RATINGS
A. S& P's commercial paper rating is a current opinion of the likelihood of
timely payment of debt having an original maturity of no more than 365
days. Ratings are graded into several categories, ranging from "A" for the
highest-quality obligations to "D" for the lowest. These categories are as
follows:
A-1 This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated "A-1."
A-3 Issues carrying this designation have an adequate capacity for timely
payment. The are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
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 such payments will be made during such grace period.
84
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.
MOODY'S CORPORATE NOTE RATINGS
MIG-1 "Notes which are rated MIG-1 are judged to be of the best quality.
There is present strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing."
MIG-2 "Notes which are rated MIG-2 are judged to be of high quality. Margins
of protection are ample although not so large as in the preceding
group."
S&P'S CORPORATE NOTE RATINGS
SP-1 "Debt rated SP-1 has very strong or strong capacity to pay principal
and interest. Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation."
SP-2 "Debt rated SP-2 has satisfactory capacity to pay principal and
interest."
SP-3 "Debt rated SP-3 has speculative capacity to pay principal and
interest."
85
THE NAVELLIER MILLENNIUM FUNDS
STATEMENT OF ADDITIONAL INFORMATION
DATED MAY 1, 2003
This Statement of Additional Information, which is not a prospectus, should
be read in conjunction with the Prospectus of The Navellier Millennium Funds
(the "Fund"), dated May 1, 2003, a copy of which Prospectus may be obtained,
without charge, by contacting the Fund, at its mailing address c/o Navellier
Securities, Corp., One East Liberty, Third Floor, Reno, Nevada 89501; Tel:
1-800-887-8670.
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY................................................. 1
INVESTMENT OBJECTIVES AND POLICIES.............................................. 1
TRUSTEES AND OFFICERS OF THE FUND............................................... 7
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES............................. 9
THE INVESTMENT ADVISER, DISTRIBUTOR, CUSTODIAN AND TRANSFER AGENT............... 9
BROKERAGE ALLOCATION AND OTHER PRACTICES........................................ 13
CAPITAL STOCK AND OTHER SECURITIES.............................................. 15
PURCHASE, REDEMPTION, AND PRICING OF SHARES..................................... 16
TAXES........................................................................... 19
UNDERWRITERS.................................................................... 22
CALCULATION OF PERFORMANCE DATA................................................. 23
FINANCIAL STATEMENTS............................................................ 24
APPENDIX........................................................................
2
GENERAL INFORMATION AND HISTORY
The Fund is a business trust company organized under the laws of the State
of Delaware on September 4, 1998.
INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVE AND POLICIES OF THE NAVELLIER TOP 20 PORTFOLIO
The investment objectives and policies of the Portfolio are described in the
Prospectus. The general policies, discussed below, supplement the information
contained in the Prospectus.
INVESTMENT OBJECTIVE AND POLICIES OF THE NAVELLIER INTERNATIONAL GROWTH
PORTFOLIO
The investment objectives and policies of the Portfolio are described in the
Prospectus. The general policies, discussed below, supplement the information
contained in the Prospectus.
INVESTMENT OBJECTIVE AND POLICIES OF THE NAVELLIER LARGE CAP PORTFOLIO
The investment objectives and policies of the Portfolio are described in the
Prospectus. The general policies, discussed below, supplement the information
contained in the Prospectus.
INVESTMENT OBJECTIVE AND POLICIES OF THE NAVELLIER ALL CAP GROWTH PORTFOLIO
The investment objectives and policies of the Portfolio are described in the
Prospectus. The general policies, discussed below, supplement the information
contained in the Prospectus.
INVESTMENT OBJECTIVE AND POLICIES OF THE NAVELLIER MID CAP GROWTH PORTFOLIO
The investment objectives and policies of the Portfolio are described in the
Prospectus. The general policies, discussed below, supplement the information
contained in the Prospectus.
INVESTMENT OBJECTIVE AND POLICIES OF THE NAVELLIER MONEY MARKET PORTFOLIO
The investment objectives and policies of the Portfolio are described in the
Prospectus. The general policies, discussed below, supplement the information
contained in the Prospectus.
OTHER INVESTMENTS
While under normal circumstances each Equity Portfolio will invest at least
80% of its total assets in equity securities, each Equity Portfolio may, for
temporary defensive purposes or to maintain cash or cash equivalents to meet
anticipated redemptions, also invest in debt securities and money market funds
if, in the opinion of the Investment Adviser, such investment will further the
cash needs or temporary defensive needs of each Equity Portfolio. In addition,
when the Investment Adviser feels that market or other conditions warrant it,
for temporary defensive purposes, each Equity Portfolio may retain cash or
invest all or any portion of its assets in cash equivalents, including money
market mutual funds. Under normal conditions, each Equity Portfolio's holdings
in such non-equity securities should not exceed 20% of the total assets of the
Portfolio. If an Equity Portfolio's assets, or a portion thereof, are retained
in cash or money market funds, such cash will, in all probability, be deposited
in interest-bearing or money market accounts or money market mutual funds such
as the Fund for Government Investors. FBR National Bank & Trust is the Fund's
Transfer Agent and Custodian. Cash deposits by the Fund in interest bearing
instruments administered by FBR National Bank & Trust ("Transfer Agent") will
only be deposited with the Transfer Agent if its interest rates, terms, and
security are equal to or better than could be received by depositing such cash
with another savings institution. Money market mutual fund investments have no
FDIC protection and deposits in FBR National Bank & Trust interest bearing
accounts have only $100,000 protection. Non-deposit investment products are not
insured by the FDIC. They are not deposits or other obligations of or guaranteed
by any bank or bank affiliate, and involve investment risks, including possible
loss of the principal amount invested.
3
It is anticipated that all of the Equity Portfolios' investments in
corporate debt securities (other than commercial paper) and preferred stocks
will be represented by debt securities and preferred stocks which have, at the
time of purchase, a rating within the four highest grades as determined by
Moody's Investors Service, Inc. (Aaa, Aa, A, Baa) or by Standard & Poor's
Corporation (AAA, AA, A, BBB; securities which are rated BBB/Baa have
speculative characteristics). Although investment-quality securities are subject
to market fluctuations, the risk of loss of income and principal is generally
expected to be less than with lower quality securities. In the event the rating
of a debt security or preferred stock in which an Equity Portfolio has invested
drops below investment grade, the Portfolio will promptly dispose of such
investment. When interest rates go up, the market value of debt securities
generally goes down and long-term debt securities tend to be more volatile than
short term debt securities.
In determining the types of companies which will be suitable for investment
by The Navellier Top 20 Portfolio, the Investment Adviser screens over 9,000
stocks, taking into account various fundamental characteristics and basing its
stock selection on proprietary analysis using its own concept of modern
portfolio theory to select the twenty stocks with the highest ranking. The
current Equity Portfolios invest primarily in what the Investment Adviser
believes are undervalued common stocks believed to have long-term appreciation
potential. Stocks are selected on the basis of an evaluation of factors such as
earnings growth, expanding profit margins, market dominance and/or factors that
create the potential for market dominance, sales growth, and other factors that
indicate a company's potential for growth or increased value. There are no
limitations on the Navellier Top 20 Portfolio as to the type, operating history,
or dividend paying record of companies or industries in which this Portfolio may
invest; the principal criteria for investment is that the securities provide
opportunities for capital growth and that they rank in the Investment Adviser's
Top 20 highest rated investment opportunities at the time the Investment Adviser
makes its analysis.
The Navellier International Growth Portfolio will invest in foreign stocks
and ADRs. There is no restriction on their market capitalization
The Navellier Large Cap Growth Portfolio will invest primarily in stocks of
fast growing companies that offer innovative products, services or technologies.
The Navellier All Cap Growth Portfolio will invest in inefficiently priced
growth and value stocks with superior returns compared to risks. Our Investment
Adviser will analyze the stocks of each Portfolio at least monthly.
The Navellier Mid Cap Growth Portfolio will invest in stocks of
mid-capitalization companies with a potential for long-term capital growth. The
Navellier Money Market Portfolio will invest in short-term debt instruments
issued by United States Government, corporations, financial institutions, and
other entities. The Money Market Portfolio shall be diversified. It will not
invest more than five percent (5%) of its total assets in securities issued by
the issuer of security. However, the Portfolio may invest up to 25% of its total
assets in the First Tier Securities of a single issuer for a period of up to
three (3) business days after acquisition thereof and will not so invest in more
than one issuer. The Money Market Portfolio will not invest more than one
percent (1%) of its total assets or one million dollars (whichever is less) in
securities of an issuer of Second Tier Securities issued by that issuer. The
Money Market Portfolio shall also be diversified with respect to Demand Features
and Guarantees acquired by the Portfolio. Thus, immediately after the
acquisition by the Portfolio of any Demand Feature or Guarantee or of any
security subject to a Demand Feature or Guarantee with respect to 75% of its
total assets, the Portfolio shall not have invested more than 10% of its total
assets in securities issued by or subject to Demand Features or Guarantees from
the institution that issued them. The Portfolio shall not acquire more than 5%
of its total assets in Demand Features or Guarantees or securities subject to
Demand Features or Guarantees of Second Tier Securities. The Portfolio will not
acquire Demand Features or Guarantees issued by non-controlled persons that
would comprise more than 10% of the Portfolio's total assets.
Each Equity Portfolio will invest up to 100% of its capital in equity
securities selected for their growth or value potential. The Investment Adviser
will typically (but not always) purchase common stocks of issuers which have
records of profitability and strong earnings momentum.
LACK OF OPERATING HISTORY AND EXPERIENCE
The Navellier Top 20 Portfolio became effective September 30, 1998. The
Navellier International Growth Portfolio, the Navellier Large Cap Growth
Portfolio and the Navellier All Cap Growth Portfolio were organized June 30,
2000. The Navellier Mid Cap Growth Portfolio and the Navellier Money Market
Portfolio were organized on May 1, 2002. The Investment Adviser was organized on
May 28, 1993. Although the Investment Adviser sub-contracts a substantial
portion of its responsibilities for administrative services of the Fund's
operations to various agents, including the Transfer Agent and the Custodian,
the Investment Adviser still has overall responsibility for the administration
of each of the Portfolios and oversees the administrative services performed by
others as
4
well as servicing customer's needs and, along with each Portfolio's Trustees, is
responsible for the selection of such agents and their oversight. The Investment
Adviser also has overall responsibility for the selection of securities for
investment for each of the Portfolios except the Money Market Portfolio which is
managed on a day to day basis by Sub Adviser which in turn is overseen by the
Investment Adviser.
Louis Navellier, the owner of the Investment Adviser, is also the owner of
another investment advisory firm, Navellier & Associates Inc., which presently
manages approximately $3.0 billion in investor funds. Louis Navellier, the owner
of the Investment Adviser, is also the owner of another investment advisory
firm, Navellier Fund Management, Inc., and owns other investment advisory
entities which manage assets and/or act as sub-advisers, all of which firms
employ the same basic modern portfolio theories and select many of the same
over-the-counter stocks and other securities which the Investment Adviser
intends to employ and invest in while managing the Portfolios of the Fund.
Because many of the over-the-counter and other securities which the Investment
Adviser intends to, or may, invest in have a smaller number of shares available
to trade than more conventional companies, lack of shares available at any given
time may result in one or more of the Portfolios of the Fund not being able to
purchase or sell all shares which the Investment Adviser desires to trade at a
given time or period of time, thereby creating a potential liquidity problem
which could adversely affect the performance of the Fund Portfolios. Since the
Investment Adviser will be trading on behalf of the various Portfolios of the
Fund in some or all of the same securities at the same time that Navellier &
Associates Inc., Navellier Fund Management, Inc. and other Navellier controlled
investment entities are trading, the potential liquidity problem could be
exacerbated. In the event the number of shares available for purchase or sale in
a security or securities is limited and therefore the trade order cannot be
fully executed at the time it is placed, i.e., where the full trade orders of
Navellier & Associates Inc., Navellier Fund Management, Inc., and other
Navellier controlled investment entities and the Fund cannot be completed at the
time the order is made, Navellier & Associates, Inc., and the other Navellier
controlled investment entities and the Investment Adviser will allocate their
purchase or sale orders in proportion to the dollar value of the order made by
the other Navellier entities, and the dollar value of the order made by the
Fund. For example, if Navellier & Associates Inc., and Navellier Fund
Management, Inc., each place a $25,000 purchase order and Investment Adviser on
behalf of the Fund places a $50,000 purchase order for the same stock and only
$50,000 worth of stock is available for purchase, the order would be allocated
$12,500 each of the stock to Navellier & Associates Inc., and Navellier Fund
Management, Inc., and $25,000 of the stock to the Fund. As the assets of each
Portfolio of the Fund increase the potential for shortages of buyers or sellers
increases, which could adversely affect the performance of the various
Portfolios. While the Investment Adviser generally does not anticipate liquidity
problems (i.e., the possibility that the Portfolio cannot sell shares of a
company and therefore the value of those shares drops) unless the Fund has
assets in excess of two billion dollars (although liquidity problems could still
occur when the Fund has assets of substantially less than two billion dollars),
each investor is being made aware of this potential risk in liquidity and should
not invest in the Fund if he, she, or it is not willing to accept this
potentially adverse risk, and by investing, acknowledges that he, she or it is
aware of the risks.
An investment in shares of a portfolio involves certain speculative
considerations. There can be no assurance that the Portfolio's objective will be
achieved or that the value of the investment will increase. Each Portfolio
intends to comply with the diversification and other requirements applicable to
regulated investment companies under the Internal Revenue Code.
INVESTMENT POLICIES. The following general policies supplement the
information contained in the Prospectus. Also following are other types of
investments in which each Portfolio may invest.
CERTIFICATES OF DEPOSIT. Certificates of deposit are generally short-term,
interest-bearing, negotiable certificates issued by banks or savings and loan
associations against funds deposited in the issuing institution.
TIME DEPOSITS. Time deposits are deposits in a bank or other financial
institution for a specified period of time at a fixed interest rate for which a
negotiable certificate is not received.
BANKER'S ACCEPTANCES. A banker's acceptance is a time draft drawn on a
commercial bank by a borrower usually in connection with an international
commercial transaction (to finance the import, export, transfer, or storage of
goods). The borrower, as well as the bank, is liable for payment, and the bank
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Most acceptances have maturities of six months or less and are traded in
secondary markets prior to maturity.
COMMERCIAL PAPER. Commercial paper refers to short-term, unsecured
promissory notes issued by corporations to finance short-term credit needs.
Commercial paper is usually sold on a discount basis and has a maturity at the
time of issuance not exceeding nine months.
5
CORPORATE DEBT SECURITIES. Corporate debt securities with a remaining
maturity of less than one year tend to become liquid and can sometimes be traded
as money market securities.
UNITED STATES GOVERNMENT OBLIGATIONS. Securities issued or guaranteed as to
principal and interest by the United States government include a variety of
Treasury securities, which differ only in their interest rates, maturities, and
times of issuance. Treasury bills have a maturity of one year or less. Treasury
notes have maturities of one to seven years, and Treasury bonds generally have a
maturity of greater than five years.
Agencies of the United States government which issue or guarantee
obligations include, among others, export-import banks of the United States,
Farmers' Home Administration, Federal Housing Administration, Government
National Mortgage Association, Maritime Administration, Small Business
Administration, the Defense Security Assistance Agency of the Department of
Defense, and the Tennessee Valley Authority. Obligations of instrumentalities of
the United States government include securities issued or guaranteed by, among
others, the Federal National Mortgage Associates, Federal Intermediate Credit
Banks, Banks for Cooperatives, and the United States Postal Service. Some of the
securities are supported by the full faith and credit of the United States
government; others are supported by the right of the issuer to borrow from the
Treasury, while still others are supported only by the credit of the
instrumentality.
STOCK INDEX FUTURES. A stock index futures contract (an "Index Future") is a
contract to buy an integral number of units of the relevant index at a specified
future date at a price agreed upon when the contract is made. A unit is the
value at a given time of the relevant index.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend its portfolio securities to broker-dealers. Securities
loans are made to broker-dealers pursuant to agreements requiring that loans be
continuously secured by collateral in cash or U.S. Government securities at
least equal at all times to the market value of the securities lent. The
borrower pays to the Fund an amount equal to any dividends or interest received
on the securities lent. When the collateral is cash, the Fund may invest the
cash collateral in interest-bearing, short-term securities. When the collateral
is U.S. Government securities, the Fund usually receives a fee from the
borrower. Although voting rights or rights to consent with respect to the loaned
securities passed to the borrower, the Fund retains the right to call the loans
at any time on reasonable notice, and it will do so in order that securities may
be voted by the Fund if the holders of such securities are asked to vote upon or
consent to matters materially affecting the investment. The Fund may also call
such loans in order to sell the securities involved. The risks in lending
portfolio securities, as with other extensions of credit, include possible delay
in recovery of the securities or possible loss of rights in the collateral
should the borrower fail financially. However, such loans will be made only to
broker-dealers that are believed by the Investment Adviser to be of relatively
high credit standing.
INVESTING IN SECURITIES OF FOREIGN ISSUERS
Investments in foreign securities (those which are traded principally in
markets outside of the United States), particularly those of non-governmental
issuers, involve considerations which are not ordinarily associated with
investing in domestic issuers. These considerations include, among others,
changes in currency rates, currency exchange control regulations, the
possibility of expropriation, the unavailability of financial information, the
difficulty of interpreting financial information prepared under laws applicable
to foreign securities markets, the impact of political, social, or diplomatic
developments, difficulties in invoking legal process abroad, and the difficulty
of assessing economic trends in foreign countries. Furthermore, issuers of
foreign securities are subject to different, and often less comprehensive,
accounting, reporting and disclosure requirements than domestic issuers. The
laws of some foreign countries may limit the Portfolio's ability to invest in
securities of certain issuers located in those countries. The securities of some
foreign issuers and securities traded principally in foreign securities markets
are less liquid and at times more volatile than securities of comparable U.S.
issuers and securities traded principally in U.S. securities markets. Foreign
brokerage commissions and other fees are also generally higher than those
charged in the United States. There are also special tax considerations which
apply to securities of foreign issuers and securities traded principally in
foreign securities markets.
The risks of investing in foreign securities may be intensified in the case
of investments in emerging markets or countries with limited or developing
capital markets. Prices of securities of companies in emerging markets can be
significantly more volatile than prices of securities of companies in the more
developed nations of the world, reflecting the greater uncertainties of
investing in less developed markets and economies. In particular, countries with
emerging markets may have relatively unstable governments, present the risk of
nationalization of businesses, restrictions on foreign ownership, or
prohibitions of repatriation of assets, and may have less protection of property
rights than more developed countries. The economies of countries with emerging
markets may be
6
predominantly based on only a few industries or dependent on revenues from
particular commodities or on international aid or development assistance, may be
highly vulnerable to changes in local or global trade conditions, and may suffer
from extreme and volatile debt burdens or inflation rates. Local securities
markets may trade a small number of securities and may be unable to respond
effectively to increases in trading volume, potentially making prompt
liquidation of substantial holdings difficult or impossible at times.
Consequently, securities of issuers located in countries with emerging markets
may have limited marketability and may be subject to more abrupt or erratic
price movements. Also, such local markets typically offer less regulatory
protections for investors.
While to some extent the risks to the Equity Portfolios of investing in
foreign securities may be limited, since the Equity Portfolios (except The
Navellier International Growth Portfolio, which may invest up to 100% of its net
asset value in foreign securities) may not invest more than 15% of its net asset
value in such securities and the Equity Portfolios (except The Navellier
International Growth Portfolio) may only invest in foreign securities which are
traded in the United States securities markets, the risks nonetheless exist.
The Investment Adviser will use the same basic selection criteria for
investing in foreign securities as it uses in selecting domestic securities as
described in the Prospectus.
INVESTMENT RESTRICTIONS. The Fund's fundamental policies as they affect a
portfolio cannot be changed without the approval of a vote of a majority of the
outstanding securities of such Portfolio. A proposed change in fundamental
policy or investment objective will be deemed to have been effectively acted
upon with respect to any Portfolio if a majority of the outstanding voting
securities of that Portfolio votes for the matter. Such a majority is defined as
the lesser of (a) 67% or more of the voting shares of the Fund present at a
meeting of shareholders of the Portfolio, if the holders of more than 50% of the
outstanding shares of the Portfolio are present or represented by proxy or (b)
more than 50% of the outstanding shares of the Portfolio. For purposes of the
following restrictions (except the percentage restrictions on borrowing and
illiquid securities -- which percentage must be complied with) and those
contained in the Prospectus: (i) all percentage limitations apply immediately
after a purchase or initial investment; and (ii) any subsequent change in any
applicable percentage resulting from market fluctuations or other changes in the
amount of total assets does not require elimination of any security from the
Portfolio.
The following investment restrictions are fundamental policies of the Fund
with respect to each Portfolio and may not be changed except as described above.
Each Portfolio may not:
1. Purchase any securities or other property on margin; PROVIDED, HOWEVER,
that each Portfolio may obtain short-term credit as may be necessary for the
clearance of purchases and sales of securities.
2. Make cash loans, except that each Portfolio may purchase bonds, notes,
debentures, or similar obligations which are customarily purchased by
institutional investors whether publicly distributed or not.
3. Make securities loans, except that each Portfolio may make loans of the
portfolio securities of the Portfolio, provided that the market value of the
securities subject to any such loans does not exceed 33-1/3% of the value of the
total assets (taken at market value) of the Portfolio.
4. Make investments in real estate or commodities or commodity contracts,
including futures contracts, although each Portfolio may purchase securities of
issuers which deal in real estate or commodities although this is not a primary
objective of the Portfolio.
5. Invest in oil, gas, or other mineral exploration or development programs,
although each Portfolio may purchase securities of issuers which engage in whole
or in part in such activities.
6. Purchase securities of companies for the purpose of exercising management
or control.
7. Participate in a joint or joint and several trading account in
securities.
7
8. Issue senior securities or borrow money, except that each Portfolio may
(i) borrow money only from banks for the Portfolio for temporary or emergency
(not leveraging) purposes, including the meeting of redemption requests, that
might otherwise require the untimely disposition of securities, provided that
any such borrowing does not exceed 10% of the value of the total assets (taken
at market value) of the Portfolio, and (ii) borrow money only from banks for the
Portfolio for investment purposes, provided that (a) after each such borrowing,
when added to any borrowing described in clause (i) of this paragraph, there is
an asset coverage of at least 300% as defined in the Investment Company Act of
1940, and (b) is subject to an agreement by the lender that any recourse is
limited to the assets of the Portfolio. As an operating policy, the Portfolio
may not invest in portfolio securities while the amount of borrowing of the
Portfolio exceeds 5% of the total assets of the Portfolio.
9. Pledge, mortgage, or hypothecate the assets of the Portfolio to an extent
greater than 10% of the total assets of the Portfolio to secure borrowings made
pursuant to the provisions of Item 8 above.
10. Purchase for each Portfolio "restricted securities" (as defined in Rule
144(a)(3) of the Securities Act of 1933), if, as a result of such purchase, more
than 10% of the net assets (taken at market value) of the Portfolio would then
be invested in such securities nor will any Portfolio invest in illiquid or
unseasoned securities if as a result of such purchase more than 5% of the net
assets of the Portfolio would be invested in either illiquid or unseasoned
securities.
11. Invest more than 10% of each Portfolio's assets in the securities of any
single company or 25% or more of such Portfolio's total assets in a single
industry.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values of portfolio securities or amount of net assets shall not be
considered a violation of the restrictions, except as to the 5%, 10% and 300%
percentage restrictions on borrowing specified in Restriction Number 8 above.
PORTFOLIO TURNOVER. Each Portfolio has an expected annual rate of portfolio
turnover which is calculated by dividing the lesser of purchases or sales of
portfolio securities during the fiscal year by the monthly average of the value
of the Portfolio's securities (excluding from the computation all securities,
including options, with maturities at the time of acquisition of one year or
less). A high rate of portfolio turnover generally involves correspondingly
greater expenses to the Portfolio, including brokerage commission expenses,
dealer mark-ups, and other transaction costs on the sale of securities, which
must be borne directly by the Portfolio. Turnover rates may vary greatly from
year to year as well as within a particular year and may also be affected by
cash requirements for redemptions of such Portfolio's shares and by requirements
which enable the Fund to receive certain favorable tax treatment. The Navellier
Top 20 Portfolio's actual turnover rate for 2002 was 207%. The Navellier
International Growth Portfolio's actual turnover rate for 2002 was 85%. The
Navellier Large Cap Growth Portfolio's actual turnover rate for 2002 was 116%.
The Navellier All Cap Growth Portfolio's actual turnover rate for 2002 was 367%.
The Navellier Mid Cap Growth Portfolio's turnover rate since the commencement of
operations was 78% (May 1, 2002 to December 31, 2002). The Fund will attempt to
limit the annual portfolio turnover rate of each Portfolio to 300% or less,
however, this rate may be exceeded if in the Investment Adviser's discretion
securities are or should be sold or purchased in order to attempt to increase
the Portfolio's performance. In Wisconsin an annual portfolio turnover rate of
300% or more is considered a speculative activity and under Wisconsin statutes
could involve relatively greater risks or costs to the Fund.
TRUSTEES AND OFFICERS OF THE FUND
POSITION(S) HELD WITH PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS REGISTRANT AND ITS AFFILIATES DURING PAST FIVE YEARS
- --------------------------- ----------------------------------- -------------------------------------
Louis Navellier(1) Trustee and President of the Mr. Navellier is and has been the CEO
One East Liberty Navellier Millennium Funds. Trustee and President of Navellier &
Third Floor and President of The Navellier Associates Inc., an investment
Reno, NV 89501 Performance Funds. Mr. Navellier is management company since 1988; CEO and
Age: 45 also the CEO, President, Secretary, President of Navellier Management,
and Treasurer of Navellier Inc., an investment management company
Management, Inc., a Delaware since May 10, 1993; CEO and President of
corporation which is the Investment Navellier Securities Corp., the
Adviser to the Fund. distributor of the Fund. He is also
a Trustee of The Navellier Performance
Funds,
Mr. Navellier is also CEO, an investment management company,
President, Secretary, and Treasurer since May 10, of Navellier Securities
of Navellier Securities Corp., the Corp. since May 10, 1993; CEO and
8
POSITION(S) HELD WITH PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS REGISTRANT AND ITS AFFILIATES DURING PAST FIVE YEARS
- --------------------------- ----------------------------------- ---------------------------------------
principal underwriter of the Fund's President of Navellier Fund
shares. 1993; CEO and President Management, Inc., an investment
management company, since November 30,
1995; and has been editor of MPT Review
from August 1987 to the present and was
publisher and editor of the predecessor
investment advisory newsletter OTC
Insight, which he began in 1980 and
wrote through July 1987.
Barry Sander Trustee of the Navellier Millennium Currently retired as of December 1,
1835 Ashland Mine Road Funds. He is also a Trustee of the 1998, formerly he was the President
Ashland, OR 97520 Navellier Performance Funds and CEO of Ursa Major Inc., a stencil
Age: 54 manufacturing firm and had been for
the past nine years.
Joel Rossman Trustee of the Navellier Millennium Currently owns a photo framing
2921 California Funds. He is also a Trustee of the manufacturing company.
San Francisco, CA 94115 Navellier Performance Funds Formerly he was President and CEO of
Age: 53 Personal Stamp Exchange, Inc., a
manufacturer, designer and distributor
of rubber stamp products. He had been
President and CEO of Personal Stamp
Exchange for the preceding 10 years.
Jacques Delacroix Trustee of the Navellier Millennium Professor of Business Administration,
519 Chestnut Street Funds. He is also a Trustee of the Leavy School of Business, Santa Clara
Santa Cruz, CA 95060 Navellier Performance Funds University (1983-present)
Age: 60
Arjen Kuyper(1) Trustee and Treasurer of the Mr. Kuyper is COO of Navellier &
One East Liberty Navellier Millennium Funds. He is Associates, Inc. and has been since
Third Floor also Treasurer of the Navellier September 1, 1998. Prior to that he was
Reno, NV 89501 Performance Funds operations manager for Navellier &
Age: 46 Associates, Inc. since 1992 and
operations manager for Navellier
Management, Inc. and for Navellier
Securities Corp., since 1993.
- ----------
(1) This person is an interested person affiliated with the Investment Adviser.
OFFICERS
The officers of the Fund are affiliated with the Investment Adviser and
receive no salary or fee from the Fund. The Fund's three (3) disinterested
Trustees are each compensated by the Fund with an annual fee, payable quarterly
(calculated at an annualized rate), of $12,000. Each disinterested Trustee also
receives $500 per meeting. The Trustees' fees may be adjusted according to
increased responsibilities if the Fund's assets exceed two hundred million
dollars. In addition, each disinterested Trustee receives reimbursement for
actual expenses of attendance at Board of Trustees meetings.
The Fund does not expect, in its current fiscal year, to pay aggregate
remuneration in excess of $60,000 for services in all capacities to any (a)
Trustee, (b) officer, (c) affiliated person of the Fund (other than the
Investment Adviser), (d) affiliated person of an affiliate or principal
underwriter of the Fund, or (e) all Trustees and officers of the Fund as a
group.
The Board of Trustees is permitted by the Fund's By-Laws to appoint an
advisory committee which shall be composed of persons who do not serve the Fund
in any other capacity and which shall have no power to dictate corporate
operations or to determine the investments of the Fund. The Fund currently has
no advisory committee.
9
REMUNERATION TABLE
AGGREGATE
REMUNERATION
FROM
REGISTRANT AND
FUND COMPLEX
FOR THE FISCAL
YEAR ENDED
CAPACITY IN WHICH DECEMBER 31,
NAME REMUNERATION RECEIVED 2002
Louis G. Navellier Trustee, President, $ 0.00
Chief Executive Officer,
and Treasurer
Barry Sander Trustee $ 12,000.00
Joel Rossman Trustee $ 12,000.00
Jacques Delacroix Trustee $ 12027.89
--------------
Arjen Kuyper Trustee $ 0.00
OFFICERS' AND DIRECTORS' OWNERSHIP OF FUND SHARES
As of December 31, 2002 the dollar range of equity securities owned by each
Director in the Fund and the fund complex was as follows:
<Table>
<Caption>
DOLLAR RANGE OF AGGREGATE DOLLAR RANGE OF EQUITY SECURITIES IN ALL
EQUITY SECURITIES REGISTERED INVESTMENT COMPANIES OVERSEEN BY
IN THE FUND DIRECTOR IN FAMILY OF INVESTMENT COMPANIES*
Louis G. Navellier Over $100,000 Over $100,000
Barry Sander None None
Joel Rossman None None
Jacques Delacroix None $10,001-$50,000
Arjen Kuyper None $10,001-$50,000
</Table>
* "Family of Investment Companies" consists of all mutual funds advised by
Navellier Management Inc.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
On September 3, 1998, in order to fulfill the requirements of Section 14(a)
(1) of the Investment Company Act of 1940, one hundred percent (100%) of the
issued and outstanding shares of the then only existing Portfolio of the Fund
was purchased by Louis Navellier under a subscription agreement dated September
3, 1998. Such subscription for acquisition was made for an aggregate of $100,000
allocated 100% for the Navellier Top 20 Portfolio (to purchase 10,000 shares).
Mr. Navellier is no longer a control person.
10
THE INVESTMENT ADVISER, DISTRIBUTOR,
CUSTODIAN AND TRANSFER AGENT
THE INVESTMENT ADVISER
Navellier Management, Inc. acts as the Investment Adviser to each Portfolio
of the Fund. The Investment Adviser is registered as an investment adviser under
the Investment Advisers Act of 1940. The Investment Adviser is responsible for
selecting the securities which will constitute the pool of securities which will
be selected for investment for the Portfolio. Pursuant to a separate
Administrative Services Agreement, the Investment Adviser provides each
Portfolio of the Fund with certain administrative services, including accounting
and bookkeeping services and supervising the Custodian's and Transfer Agent's
activities and each Portfolio's compliance with its reporting obligations. The
Investment Adviser may contract (and pay for out of its own resources including
the administrative fee it receives) for the performance of such services to the
Custodian, Transfer Agent, or others, and may retain all of its 0.25%
administrative services fee or may share some or all of its fee with such other
person(s). The Investment Adviser also provides each Portfolio of the Fund with
a continuous investment program based on its investment research and management
with respect to all securities and investments. The Investment Adviser will
determine from time to time what securities and other investments will be
selected to be purchased, retained, or sold by the various portfolios of the
Fund.
The Investment Adviser is owned and controlled by its sole shareholder,
Louis G. Navellier (a 100% stockholder). Louis G. Navellier is an affiliated
person of the Fund and is also the sole owner of the Distributor, Navellier
Securities Corp. Louis Navellier is also the principal shareholder of Navellier
& Associates Inc. Navellier & Associates, Inc. is registered as an investment
adviser with the Securities and Exchange Commission. Louis Navellier is, and has
been, in the business of rendering investment advisory services to significant
pools of capital since 1987.
For information regarding the Fund's expenses and the fees paid to the
Investment Adviser see "Fees and Expenses of the Portfolio" in the Prospectus.
(a) THE INVESTMENT ADVISER
The offices of the Investment Adviser (Navellier Management, Inc.) are
located at One East Liberty, Third Floor, Reno, Nevada 89501. The Investment
Adviser began operation in May 1993 and advises this Fund and The Navellier
Performance Funds.
(i) The following individuals own the enumerated shares of outstanding
stock of the Investment Adviser and, as a result, maintain control
over the Investment Adviser:
SHARES OF OUTSTANDING STOCK PERCENTAGE OF
NAME OF THE INVESTMENT ADVISER OUTSTANDING SHARES
- -------------------------- --------------------------------- ----------------------
Louis G. Navellier 1,000 100%
(ii) The following individuals are affiliated with the Fund, the
Investment Adviser, and the Distributor in the following
capacities:
NAME POSITION
- ------------------------ ------------------------------------------
Louis G. Navellier Trustee and one of the Portfolio Managers
of the Fund; Director, CEO, President,
Secretary, and Treasurer of Navellier
Management, Inc.,; Director, President,
CEO, Secretary, and Treasurer of Navellier
Securities Corp.; Trustee and one of the
Portfolio Managers of The Navellier
Performance Funds.
Alan Alpers One of the Portfolio Managers of
The Navellier Performance Funds.
Arjen Kuyper Trustee and Treasurer of the Fund; Treasurer
of The Navellier Performance Funds; Chief
Operating Officer for Navellier Management,
Inc.
(iii) The annual management fees payable to the Investment Adviser under
the terms of the Investment Advisory Agreement (the "Advisory
Agreement") between the Investment Adviser and the Fund are
payable monthly and are based upon
11
1.00% of the average daily net assets of each of the Portfolios of
the Fund except the Money Market Portfolio which pays the
Investment Adviser an annual fee of 0.50% of the average daily net
assets of the Portfolio. The Investment Adviser has a Sub-Advisory
Agreement with Money Management Advisers, Inc. ("Sub-Adviser")
which pays Sub-Adviser an annual fee of 0.50% of the average daily
net assets of the Portfolio on the first $50 million of net assets
and 0.25% of the net assets over $50 million. The Investment
Adviser has the right, but not the obligation, to waive any
portion or all of its management fee, from time to time and has
agreed to do so.
Navellier Management, Inc. was paid investment advisory fees for each of the
Portfolios except the Money Market Portfolio which are newly organized
portfolios in the following amounts for the period ended December 31, 2002:
2002 Navellier Top 20 Portfolio $ 224694.67
Navellier International Growth Portfolio $ 11671.87
Navellier Large Cap Growth Portfolio $ 7883.40
Navellier All Cap Growth Portfolio $ 53592.93
Navellier Mid Cap Growth Portfolio $ 7221.51
The investment Adviser has agreed for the following years to waive
reimbursement of all or a portion of the expenses advanced by it on behalf of
each Portfolio as necessary so that the total operating expenses of each
respective portfolio do not exceed the following "Expense Discount" amounts:
PORTFOLIO EXPENSE DISCOUNT YEAR(S)
Navellier Top 20
(Class A Shares) 1.50% 2003
(Class B Shares) 2.25% 2003
(Class C Shares) 2.25% 2003
Navellier International Growth
(Class A Shares) 1.50% 2003
(Class B Shares) 2.25% 2003
(Class C Shares) 2.25% 2003
Navellier Large Cap Growth
(Class A Shares) 1.50% 2003
(Class B Shares) 2.25% 2003
(Class C Shares) 2.25% 2003
Navellier All Cap Growth
(Class A Shares) 1.50% 2003
(Class B Shares) 2.25% 2003
(Class C Shares) 2.25% 2003
Navellier Mid Cap Growth
(Class A Shares) 1.50% 2003
(Class B Shares) 2.25% 2003
(Class C Shares) 2.25% 2003
Navellier Money Market
(Class A Shares) 1.50% 2003
(Class B Shares) 2.25% 2003
(Class C Shares) 2.25% 2003
During the period ended December 31, 2002, the Investment Adviser paid
operating expenses of $228653 for the Navellier Top 20 Portfolio, $112059 for
the Navellier International Growth Portfolio, $111663 for the Navellier Large
Cap Growth Portfolio and $140944 for the Navellier All Cap Growth Portfolio. The
Investment Adviser may seek future reimbursement of all unreimbursed past
expense incurred on behalf of the Fund. Under the operating expense agreement,
the Adviser requested, and the Navellier Top 20 Portfolio reimbursed $56173, the
Navellier International Growth Portfolio reimbursed $2917, the Navellier Large
Cap Growth Portfolio reimbursed $1971 and the Navellier All Cap Growth Portfolio
reimbursed $13398 of such expenses.
12
Expenses not expressly assumed by the Investment Adviser under the Advisory
Agreement are paid by the Fund. The Advisory Agreement lists examples of
expenses paid by the Fund for the account of the applicable Portfolio, the major
categories of which relate to taxes, fees to Trustees, legal, accounting, and
audit expenses, custodian and transfer agent expenses, certain printing and
registration costs, and non-recurring expenses, including litigation.
The Advisory Agreement provides that the Investment Adviser shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Fund or its investors except for losses (i) resulting from the willful
misfeasance, bad faith, or gross negligence on its part, (ii) resulting from
reckless disregard by it of its obligations and duties under the Advisory
Agreement, or (iii) a loss for which the Investment Adviser would not be
permitted to be indemnified under the Federal Securities laws.
(iv) Pursuant to an Administrative Services Agreement, the Investment
Adviser receives an annual fee of 0.25% of the value of the assets under
management and provides or is responsible for the provision of certain
administrative services to the Fund, including, among others, the
preparation and maintenance of certain books and records required to be
maintained by the Fund under the Investment Company Act of 1940. The
Administrative Services Agreement permits the Investment Adviser to contract
out for all of its duties thereunder; however, in the event of such
contracting, the Investment Adviser remains responsible for the performance
of its obligations under the Administrative Services Agreement. The
Investment Adviser has entered into an agreement with FBR National Bank &
Trust, to perform, in addition to custodian and transfer agent services,
some or all administrative services and may contract in the future with
other persons or entities to perform some or all of its administrative
services. All of these contracted services are and will be paid for by the
Investment Adviser out of its fees or assets.
In exchange for its services under the Administrative Services Agreement,
the Fund reimburses the Investment Adviser for certain expenses incurred by the
Investment Adviser in connection therewith but does not reimburse Investment
Adviser (over the amount of 0.25% annual Administrative Services Fee) to
reimburse it for fees Investment Adviser pays to others for administrative
services. The agreement also allows Investment Adviser to pay to its delegate
part or all of such fees and reimbursable expense payments incurred by it or its
delegate.
The Investment Advisory Agreement permits the Investment Adviser to act as
investment adviser for any other person, firm, or corporation, and designates
the Investment Adviser as the owner of the name "Navellier" or any use or
derivation of the word Navellier. If the Investment Adviser shall no longer act
as investment adviser to the Fund, the right of the Fund to use the name
"Navellier" as part of its title may, solely at the Investment Adviser's option,
be withdrawn.
The Investment Adviser advanced the Fund's organizational expenses but
agreed not to seek reimbursement of those expenses. The Fund has agreed to
reimburse the Investment Adviser for other expenses (but not organizational
expenses) it advances, without interest, by the end of the applicable Fund year,
however the Investment Adviser can elect by the end of the applicable Fund year
to waive reimbursement of some or all of such advances. No Portfolio shall be
responsible for the reimbursement of more than its proportionate share of
expenses.
The Fund and its investment adviser and principal underwriter have adopted
codes of ethics which prohibit Fund personnel from investing in securities that
may be purchased or held by the Fund.
Information about the Fund (including the SAI and codes of ethics) can be
reviewed and copied at the Commission's Public Reference Room in Washington,
D.C. Information on the operation of the Public Reference Room may be obtained
by calling the Commission at 1-202-942-8090. Reports and other information about
the Fund including information about the codes of ethics are available on the
EDGAR Database on the Commission's Internet site at http://www.sec.gov. Copies
of this information may be obtained, after paying a duplicating fee, by
electronic request at the following E-mail address: publicinfo@sec.gov, or by
writing the Commission's Public Reference Section, Washington, D.C. 20549-0102.
(b) The SUB-ADVISER
MONEY MANAGEMENT ADVISERS, INC., 1001 Nineteenth Street North,
Arlington, Virginia 22209, serves as the investment sub-adviser to the Navellier
Money Market Portfolio. Money Management Advisers, Inc. ("MMA") was established
in 1974 and is registered with the Securities and Exchange Commission as an
investment adviser and has served as the adviser to the Fund for Government
Investors since the Fund commenced operations on February 14, 1975. The Fund for
Government Investors is a similar portfolio to the Navellier Money Market
Portfolio, with the same investment style and portfolio security selection.
13
Subject to the general supervision of the Investment Adviser and the Fund's
Board of Trustees, the Sub-Adviser manages the day to day investment and
reinvestment of the assets of the Portfolio. An Adviser Group makes investment
decisions, and therefore no one person is primarily responsible for making such
decisions.
Money Management Advisers, Inc. is a wholly-owned subsidiary of FBR National
Bank & Trust (both of which are wholly-owned subsidiaries of Friedman, Billings,
Ramsey Group, Inc.). MMA manages five other no-load mutual funds. MMA and its
asset management affiliates, manages approximately $8.1 billion of gross assets
(including leverage) for numerous clients including individuals, banks and
thrift institutions, investment companies, pension and profit sharing plans and
trusts, estates and charitable organizations, and private partnerships.
Under an agreement between the Sub-Adviser and the Investment Adviser, the
Sub-Adviser receives a fee at an annual rate based on the following schedule:
0.50% of the first $50 million of the Portfolio's net assets; plus
0.25% of the net assets over $50 million
SUBADVISORY AGREEMENT
Pursuant to a Subadvisory Agreement between the Investment Adviser and MMA, MMA
is responsible for making day to day investment decisions and placing orders for
the purchase and sale of the Fund's investments directly with the issuers or
with brokers or dealers selected by it in its discretion. Consistent with the
requirements of applicable law, the Subadvisory Agreement provides that NMA
generally is not liable to the Investment Adviser, the Fund, or to any
shareholder of the Fund for any error in judgment or mistake of law or for any
act or omission in the course of, or connected with, rendering services under
the Subadvisory Agreement, or otherwise, except by reason of willful
misfeasance, bad faith or negligence, or reckless disregard of its obligations
and duties under the Subadvisory Agreement. The Subadvisory Agreement may be
terminated by the Investment Adviser or NMA, without penalty, upon 30 days'
prior written notice. In addition, the Subadvisory Agreement may be terminated
by the Board or by a majority vote of the Portfolio's shareholders, without
penalty, upon 30 days' prior written notice. The Subadvisory Agreement
terminates automatically in the event of its assignment, as defined in the 1940
Act. The Subadvisory Agreement will remain in effect for two years from its
effective date, and, unless earlier terminated, will continue from year-to-year
thereafter, provided that each such continuance is approved annually (i) by the
Board or by the vote of a majority of the outstanding voting securities of the
Portfolio and, in either case, (ii) by a majority of the Independent Trustees.
(b) THE DISTRIBUTOR
The Fund's Distributor is Navellier Securities Corp., a Delaware Corporation
organized and incorporated on May 10, 1993. Navellier Securities Corp. is
registered as a broker-dealer with the Securities Exchange Commission and
National Association of Securities Dealers and the various states in which this
Fund's securities will be offered for sale by Distributor and will be registered
with such agencies and governments before any Fund shares are sold by it. The
Fund's shares will be continuously distributed by Navellier Securities Corp.
(the "Distributor") located at One East Liberty, Third Floor, Reno, Nevada
89501, pursuant to each Portfolio's Distribution Agreement. The Distribution
Agreements obligate the Distributor to pay certain expenses in connection with
the offering of the shares of the Fund. The Distributor is responsible for any
payments made to its registered representatives as well as the cost (in excess
of the 12b-1 fee) of printing and mailing Prospectuses to potential investors
and of any advertising incurred by it in connection with the distribution of
shares of the Fund.
DISTRIBUTION PLAN
THE DISTRIBUTION PLANS
Each Portfolio has adopted Plans pursuant to Rule 12b-1 under the 1940 Act
(the "Plan"), whereby such Portfolio compensates Distributor or others in the
amount of 0.25% per annum of the average daily net assets of such Portfolio for
the Class A shares and in the amount of 1.00% per annum of the average daily net
assets for the Class B and Class C shares for expenses incurred and services
rendered for the promotion and distribution of the shares of such Portfolio of
the Fund, including, but not limited to, the printing of prospectuses,
statements of additional information and reports used for sales purposes,
expenses (including personnel of Distributor)
14
of preparation of sales literature and related expenses, advertisements and
other distribution-related expenses, including a prorated portion of
Distributor's overhead expenses attributable to the distribution of such
Portfolio's Fund shares. Such payments are made monthly. The 12b-1 fee includes,
in addition to promotional activities, amounts that such Portfolio pays to
Distributor or others as a service fee to compensate such parties for personal
services provided to shareholders of such Portfolio and/or the maintenance of
shareholder accounts. The Distributor can keep all of said 12b-1 fees it
receives to the extent it is not required to pay others for such services. Such
Rule 12b-1 fees are paid pursuant to the distribution plan and distribution
agreements entered into between such service providers and Distributor or the
Portfolio directly. The 12b-1 Plans for such Portfolio also covers payments by
the Distributor and Investment Adviser to the extent such payments are deemed to
be for the financing of any activity primarily intended to result in the sale of
shares issued by such Portfolio within the context of Rule 12b-1. The payments
under such 12b-1 Plans for such Portfolio are included in the maximum operating
expenses which may be borne by such Portfolio. Payments under such 12b-1 Plans
for such Portfolio may exceed actual expenses incurred by the Distributor,
Investment Adviser or others.
In addition to 12b-1 fees, investors may also be charged a transaction fee
if they effect transactions in fund shares through a broker or agent.
(c) THE CUSTODIAN AND TRANSFER AGENT
FBR National Bank & Trust, 4922 Fairmont Avenue, Bethesda, Maryland 20814,
serves as the custodian of the Fund's portfolio securities and as the Fund's
transfer agent and, in those capacities, maintains certain accounting and other
records of the Fund and processes requests for the purchase or the redemption of
shares, maintains records of ownership for shareholders, and performs certain
other shareholder and administrative services on behalf of the Fund.
The Fund has entered into an agreement with FBR National Bank & Trust, to
perform, in addition to custodian and transfer agent services, some or all
administrative services and may contract in the future with other persons or
entities to perform some or all of its administrative services. All of these
contracted services are and will be paid for by the Fund out of its assets.
(d) LEGAL COUNSEL
The Law Offices of Samuel Kornhauser, 155 Jackson Street, Suite 1807, San
Francisco, California 94111 is legal counsel to the Fund, to the Investment
Adviser and to the Distributor.
BROKERAGE ALLOCATION AND OTHER PRACTICES
In effecting portfolio transactions for the Fund, the Investment Adviser
adheres to the Fund's policy of seeking best execution and price, determined as
described below, except to the extent it is permitted to pay higher brokerage
commissions for "brokerage and research services," as defined herein. The
Investment Adviser may cause the Fund to pay a broker or dealer an amount of
commission for effecting a securities transaction in excess of the amount of
commission which another broker or dealer would have charged for effecting the
transaction if the Investment Adviser determines in good faith that such amount
of commission is reasonable in relation to the value of the brokerage and
research services provided by such broker or dealer or that any offset of direct
expenses of a portfolio yields the best net price. As provided in Section 28(e)
of the Securities Exchange Act of 1934, "brokerage and research services"
include giving advice as to the value of securities, the advisability of
investing in, purchasing, or selling securities, and the availability of
securities; furnishing analysis and reports concerning issuers, industries,
economic facts and trends, portfolio strategy and the performance of accounts;
and effecting securities transactions and performing functions incidental
thereto (such as clearance and settlement). Brokerage and research services
provided by brokers to the Fund or to the Investment Adviser are considered to
be in addition to and not in lieu of services required to be performed by the
Investment Adviser under its contract with the Fund and may benefit both the
Fund and other clients of the Investment Adviser or customers of or affiliates
of the Investment Adviser. Conversely, brokerage and research services provided
by brokers to other clients of the Investment Adviser or its affiliates may
benefit the Fund.
If the securities in which a particular Portfolio of the Fund invests are
traded primarily in the over-the-counter market, where possible, the Fund will
deal directly with the dealers who make a market in the securities involved
unless better prices and execution are available elsewhere. Such dealers usually
act as principals for their own account. On occasion, securities may be
purchased directly from the issuer. Bonds and money market instruments are
generally traded on a net basis and do not normally involve either brokerage
commissions or transfer taxes.
The determination of what may constitute best execution and price in the
execution of a securities transaction by a broker involves a number of
considerations including, without limitation, the overall direct net economic
result to the Fund (involving both price paid
15
or received and any net commissions and other costs paid), the efficiency with
which the transaction is effected, the ability to effect the transaction at all
where a large block is involved, the availability of the broker to stand ready
to execute possibly difficult transactions in the future, and the financial
strength and stability of the broker. Such considerations are judgmental and are
weighed by the Investment Adviser in determining the overall reasonableness of
brokerage commissions paid by the Fund. Some portfolio transactions are subject
to the Rules of Fair Practice of the National Association of Securities Dealers,
Inc., and subject to obtaining best prices and executions, effected through
dealers who sell shares of the Fund.
The Board of Trustees of the Fund will periodically review the performance
of the Investment Adviser of its respective responsibilities in connection with
the placement of portfolio transactions on behalf of the Fund and review the
commissions paid by the Fund over representative periods of time to determine if
they are reasonable in relation to the benefits to the Fund.
The Board of Trustees will periodically review whether the recapture for the
benefit of the Fund of some portion of the brokerage commissions or similar fees
paid by the Fund on portfolio transactions is legally permissible and advisable.
At present, no recapture arrangements are in effect. The Board of Trustees will
review whether recapture opportunities are available and are legally
permissible, and, if so, will determine, in the exercise of their business
judgment, whether it would be advisable for the Fund to seek such recapture.
EXPENSES OF THE FUND
GENERAL
Each Portfolio is responsible for the payment of its own expenses. These
expenses are deducted from that Portfolio's investment income before dividends
are paid. These expenses include, but are not limited to: fees paid to the
Investment Adviser, the Custodian and the Transfer Agent; Trustees' fees; taxes;
interest; brokerage commissions; organization expenses; securities registration
("blue sky") fees; legal fees; auditing fees; printing and other expenses which
are not directly assumed by the Investment Adviser under its investment advisory
or expense reimbursement agreements with the Fund. General expenses which are
not associated directly with a specific Portfolio (including fidelity bond and
other insurance) are allocated to each Portfolio based upon their relative net
assets. The Investment Adviser may, but is not obligated to, from time to time
advance funds, or directly pay, for expenses of the Fund and may seek
reimbursement of or waive reimbursement of those advanced expenses.
COMPENSATION OF THE INVESTMENT ADVISER
The Investment Adviser presently receives an annual 1.00% fee for investment
management of each Portfolio except the Money Market Portfolio for which the
annual investment management fee is 0.50%. The fee is payable monthly, based
upon the Portfolio's average daily net assets. The Investment Adviser also
receives a 0.25% annual fee for rendering administrative services to the Fund
pursuant to an Administrative Services Agreement and is entitled to
reimbursement for operating expenses it advances for the Fund.
BROKERAGE COMMISSIONS
The Investment Adviser may select selected broker-dealers to execute
portfolio transactions for the Portfolios of the Fund, provided that the
commissions, fees, or other remuneration received by such party in exchange for
executing such transactions are reasonable and fair compared to those paid to
other brokers in connection with comparable transactions. In addition, when
selecting broker-dealers for Fund portfolio transactions, the Investment Adviser
may consider the record of such broker-dealers with respect to the sale of
shares of the Fund.
HOW DEALERS ARE COMPENSATED
Dealers are paid in two ways for selling shares of the Navellier Millennium
Funds:
THEY RECEIVE A COMMISSION WHEN YOU BUY SHARES
The amount of commission depends on the amount you invest and the share class
you buy. Sales commissions are detailed in the chart below.
* Class A investments (% of offering price)
16
COMMISSION AMOUNT
RECEIVED BY DEALERS OUT PAID BY THE
OF SALES CHARGES YOU PAY DISTRIBUTOR
------------------------ -----------
Less than $50,000...................... 4.95% --
$50,000 or more but less than $100,000 4.50% --
$100,000 or more but less than $250,000 3.50% --
$250,000 or more but less than $500,000 3.00% --
$500,000 or more but less than $1
million.............................. 2.00% --
$1,000,000 and above................... -- 1.00%
* Class B investments
Receive 4% of the sale price from the Distributor at the time of the sale
consisting of 3.75% from the initial sales charge and 0.25% as an advance
payment of the first year's 12b-1 fee allocable to shareholder services. In the
second year and each year thereafter that the shares are held, the dealer
receives an annual 12b-1 fee of 0.25% payable periodically commencing on the
first day of the 2nd month of the year.
* Class C investments
In the first year, the dealers receive 1% of the sale price from the Distributor
consisting of a sales commission of 0.75% of the purchase price of the Class C
shares sold plus a 0.25% advance of the first year's 12b-1 fee. In the second
year and annually thereafter, the dealers receive only the 12b-1 fee.
THEY ARE PAID A FEE BY THE DISTRIBUTOR FOR SERVICING YOUR ACCOUNT
They receive a service fee depending on the average net asset value of the class
of shares their clients hold in Navellier funds. These fees are paid from the
12b-1 fee deducted from each fund class. In addition to covering the cost of
commissions and service fees, the 12b-1 fee is used to pay for other expenses
such as sales literature, prospectus printing and distribution and compensation
to the distributor and its wholesalers. The 12b-1 fee charged may exceed the
actual cost of distribution and or service.
CAPITAL STOCK AND OTHER SECURITIES
The rights and preferences attached to the shares of each Portfolio are
described in the Prospectus. (See "Description of Shares".) The Investment
Company Act of 1940 requires that where more than one class or series of shares
exists, each class or series must be preferred over all other classes or series
in respect of assets specifically allocated to such class or series. Rule 18f-2
under the Act provides that any matter required to be submitted by the
provisions of the Investment Company Act or applicable state law, or otherwise,
to the holders of the outstanding voting securities of an investment company
such as the Fund shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each series
affected by such matter. Rule 18f-2 further provides that a series shall be
deemed to be affected by a matter unless the interests of each series in the
matter are substantially identical or that the matter does not affect any
interest of such series. However, the Rule exempts the selection of independent
public accountants, the approval of principal distribution contracts, and the
election of Trustees from the separate voting requirements of the Rule.
Class A, Class B and Class C shares are available for purchase. These
classes, as described in the Prospectus, vary with respect to the type and
amount of sales charges associated with each class.
DESCRIPTION OF SHARES
The Fund is a Delaware business trust organized on September 4, 1998. The
Declaration of Trust permits the Trustees to issue an unlimited number of shares
of beneficial interest. The Board of Trustees has the power to designate one or
more classes ("Portfolios") of shares of beneficial interest and to classify or
reclassify any unissued shares with respect to such classes. Presently the Fund
is offering shares of six (6) Portfolios, the Navellier Top 20 Portfolio, The
Navellier International Growth Portfolio, The Navellier Large Cap Growth
Portfolio, The Navellier All Cap Growth Portfolio, The Navellier Mid Cap Growth
Portfolio and The Navellier Money Market Portfolio which are described herein.
The shares of each Portfolio, when issued, are fully paid and
non-assessable, are redeemable at the option of the holder, are fully
transferable, and have no conversion or preemptive rights. Shares are also
redeemable at the option of each Portfolio of the Fund when
17
a shareholder's investment, as a result of redemptions in the Fund, falls below
the minimum investment required by the Fund (see "Redemption of Shares"). Each
share of a portfolio is equal as to earnings, expenses, and assets of the
Portfolio and, in the event of liquidation of the Portfolio, is entitled to an
equal portion of all of the Portfolio's net assets. Shareholders of each
Portfolio of the Fund are entitled to one vote for each full share held and
fractional votes for fractional shares held, and will vote in the aggregate and
not by Portfolio except as otherwise required by law or when the Board of
Trustees determines that a matter to be voted upon affects only the interest of
the shareholders of a particular Portfolio. Voting rights are not cumulative, so
that the holders of more than 50% of the shares voting in any election of
Trustees can, if they so choose, elect all of the Trustees. While the Fund is
not required, and does not intend, to hold annual meetings of shareholders, such
meetings may be called by the Trustees at their discretion, or upon demand by
the holders of 10% or more of the outstanding shares of any Portfolio for the
purpose of electing or removing Trustees.
All shares (including reinvested dividends and capital gain distributions)
are issued or redeemed in full or fractional shares rounded to the third decimal
place. No share certificates will be issued. Instead, an account will be
established for each shareholder and all shares purchased will be held in
book-entry form by the Fund.
PURCHASE, REDEMPTION, AND PRICING OF SHARES
Shares of each Portfolio are sold on a continuous basis through the
Distributor, the Transfer Agent and the Distributor's network of broker-dealers.
PURCHASE BY MAIL
Investments in each Portfolio can be made directly to the Distributor or
through the transfer agent--FBR National Bank & Trust--or through selected
securities dealers who have the responsibility to transmit orders promptly and
who may charge a processing fee.
TO INVEST BY MAIL: Fill out an application and make a check payable to "The
Navellier Millennium Funds." Mail the check along with the application to:
The Navellier Millennium Funds c/o FBR National Bank & Trust 4922 Fairmont
Avenue Bethesda, MD 20814
Purchases by check will be credited to an account as of the date the
Portfolio's net asset value is next determined after receipt of payment and a
properly completed account application. Foreign checks will not be accepted.
Purchase orders which do not specify the Portfolio and class of shares in
which an investment is to be made will be returned. (See "Purchase and Pricing
of Shares--General Purchasing Information".) Net asset value per share is
calculated once daily as of 4 p.m. E.S.T. on each business day. (See "Purchase
and Pricing of Shares--Valuation of Shares".)
THE PORTFOLIOS
The shares of each Portfolio are sold at their net asset value per share
next determined after an order in proper form (i.e., a completely filled out
application form) is received by the Transfer Agent.
If an order for shares of the Portfolio is received by the Transfer Agent
before 4:00 p.m. New York Time on any business day, such shares will be
purchased at the net asset value determined as of 4:00 p.m. New York Time on
that day. Otherwise, such shares will be purchased at the net asset value
determined as of 4:00 p.m New York Time on the next business day. However,
orders received by the Transfer Agent from the Distributor or from dealers or
brokers after the net asset value is determined that day will receive such net
asset value price if the orders were received by the Distributor or broker or
dealer from its customer prior to such determination and were transmitted to and
received by the Transfer Agent prior to its close of business on that day
(normally 4:00 p.m. New York Time). Shares are entitled to receive any declared
dividends on the day following the date of purchase.
PURCHASES THROUGH SELECTED DEALERS
Shares purchased through Selected Dealers will be effected at the net asset
value next determined after the Selected Dealer receives the purchase order,
provided that the Selected Dealer transmits the order to the Transfer Agent and
the Transfer Agent accepts the order before 4:00 p.m. New York Time on the day
of determination. See "Valuation of Shares". If an investor's order is not
transmitted and accepted before 4:00 p.m. New York Time, the investor must
settle his or her entitlement to that day's net asset value with the Selected
Dealer. Investors may also purchase shares of the Portfolio by telephone through
a Selected Dealer by having the
18
Selected Dealer telephone the Transfer Agent with the purchase order. Investors
may be charged a transaction fee if they effect transactions in Fund shares
through a broker or agent. However, shares of the Fund purchased directly from
the Fund will be free of any transaction charges.
Certain selected Dealers may effect transactions in shares of the Portfolio
through the National Securities Clearing Corporation's Fund/SERV system.
Purchases of shares through Selected Dealers not utilizing the National
Securities Clearing Corporation's Fund/SERV system will be effected when
received in proper form by the Transfer Agent, as described above, in the same
manner and subject to the same terms and conditions as are applicable to shares
purchased directly through the Transfer Agent.
Shareholders who wish to transfer Fund shares from one broker-dealer to
another should contact the Fund at (800) 622-1386, or their broker dealer.
REDEMPTION OF SHARES. The Prospectus, under "Redemption of Shares" describes
the requirements and methods available for effecting redemption. The Fund may
suspend the right of redemption or delay payment more than seven days (a) during
any period when the New York Stock Exchange or any other applicable exchange, is
closed (other than a customary weekend and holiday closing), (b) when trading on
the New York Stock Exchange, or any other applicable exchange, is restricted, or
an emergency exists as determined by the Securities and Exchange Commission
("SEC") or the Fund so that disposal of the Fund's investments or a fair
determination of the net asset values of the Portfolios is not reasonably
practicable, or (c) for such other periods as the SEC by order may permit for
protection of the Portfolio's shareholders.
The Fund normally redeems shares for cash. However, the Board of Trustees
can determine that conditions exist making cash payments undesirable. If they
should so determine (and if a proper election pursuant to Rule 18f-1 of the
Investment Company Act has been made by the Fund), redemption payments could be
made in securities valued at the value used in determining net asset value.
There generally will be brokerage and other costs incurred by the redeeming
shareholder in selling such securities.
REDEMPTIONS BY TELEPHONE
You automatically receive telephone redemption and exchange privileges when
you invest in the Fund. Telephone redemption is not available for shares held in
IRAs. Furthermore, you must wait 30 days after notifying FBR National Bank &
Trust before selling your shares by telephone. Each Portfolio may change,
modify, or terminate its telephone redemption services at any time upon 30 days'
notice.
FURTHER REDEMPTION INFORMATION
Additional documentation regarding a redemption by any means may be required
when deemed appropriate by the Fund and / or the Transfer Agent, and the request
for such redemption will not be considered to have been received in proper form
until such additional documentation has been received. An investor should
contact the Fund or the Transfer Agent to inquire what, if any, additional
documentation may be required.
The Fund reserves the right to modify any of the methods of redemption upon
30 days' written notice to shareholders.
Under certain circumstances, the right of redemption may be suspended or the
redemption may be satisfied by distribution of portfolio securities rather than
cash if a proper election pursuant to Rule 18f-1 of the Investment Company Act
has been made by the Fund. Information as to those matters is set forth herein.
Investors may redeem their shares and instruct the Fund or Transfer Agent,
in writing or by telephone, to either deposit the redemption proceeds in the
Fund for Government Investors, a regulated investment company administered by
FBR National Bank & Trust, pending further instructions as to the investor's
desire to subsequently reinvest in the Fund or the investor may direct some
other disposition of said redemption proceeds.
DETERMINATION OF NET ASSET VALUE. As described in the Prospectus, the net
asset value of shares of each Portfolio of the Fund is determined once daily as
of 4 p.m. New York time on each day during which the New York Stock Exchange, or
other applicable exchange, is open for trading. The New York Stock Exchange is
scheduled to be closed for trading on the following days: New Year's Day, Martin
Luther King Jr. Day, President's Day, Good Friday, Memorial Day,
19
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. The Board of
Trustees of the Exchange reserves the right to change this schedule. In the
event that the New York Stock Exchange or the national securities exchanges on
which small cap equities are traded adopt different trading hours on either a
permanent or temporary basis, the Board of Trustees of the Fund will reconsider
the time at which net asset value is to be computed.
VALUATION OF ASSETS. In determining the value of the assets of any Portfolio
of the Fund, the securities for which market quotations are readily available
are valued at market value, which is currently determined using the last
reported sale price, or, if no sales are reported - as is the case with many
securities traded over-the-counter - the last reported bid price. Debt
securities (other than short-term obligations, i.e., obligations which have 60
days or less left to maturity, which are valued on the basis of amortized cost)
are normally valued on the basis of valuations provided by a pricing service
when such prices are believed to reflect the fair value of such securities.
Prices provided by a pricing service may be determined without exclusive
reliance on quoted prices and take into account appropriate factors such as
institution-size trading in similar groups of securities, yield, quality of
issue, trading characteristics, and other market data. All other securities and
assets are valued at their fair value as determined in good faith by the Board
of Trustees, although the actual calculations may be made by persons acting
pursuant to the direction of the Board of Trustees.
TAXES
In the case of a "series fund" (that is, a regulated investment company
having more than one segregated portfolio of investments the beneficial
interests in which are owned by the holders of a separate series of stock), each
investment portfolio is treated as a separate corporation for federal income tax
purposes. The Fund will be deemed a series fund for this purpose and, thus, each
Portfolio will be deemed a separate corporation for such purpose.
Each Portfolio of the Fund intends to qualify as a regulated investment
company for federal income tax purposes. Such qualification requires, among
other things, that each Portfolio (a) make a timely election to be a regulated
investment company, (b) derive 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 or securities (including options and futures) or
foreign currencies, and (c) diversify its holdings so that at the end of each
fiscal quarter (i) 50% of the market value of its assets is represented by cash,
government securities, securities of other regulated investment companies, and
securities of one or more other issuers (to the extent the value of the
securities of any one such issuer owned by the Portfolio does not exceed 5% of
the value of its total assets and 10% of the outstanding voting securities of
such issuer) and (ii) not more than 25% of the value of its assets is invested
in the securities (other than government securities and securities of other
regulated investment companies) of any one industry. These requirements may
limit the ability of the Portfolios to engage in transactions involving options
and futures contracts.
If each Portfolio qualifies as a regulated investment company, it will not
be subject to federal income tax on its "investment company taxable income"
(calculated by excluding the amount of its net capital gain, if any, and by
excluding the dividends-received and net operating loss deductions) or "net
capital gain" (the excess of its long-term capital gain over its net short-term
capital loss) which is distributed to shareholders. In determining taxable
income, however, a regulated investment company holding stock on the record date
for a dividend is required to include the dividend in income on the later of the
ex-dividend date or the date of acquisition.
DIVIDENDS AND DISTRIBUTIONS
All dividends and distributions with respect to the shares of any Portfolio
will be payable in shares at net asset value or, at the option of the
shareholder, in cash. Any shareholder who purchases shares of the Portfolio
prior to the close of business on the record date for a dividend or distribution
will be entitled to receive such dividend or distribution. Dividends and
distributions (whether received in shares or in cash) are treated either as
return of capital, ordinary income or long-term capital gain for federal income
tax purposes. Between the record date and the cash payment date, each Portfolio
retains the use and benefits of such monies as would be paid as cash dividends.
Each Portfolio will distribute all of its net investment income and net
realized capital gains, if any, annually in December.
If a cash payment is requested with respect to the Portfolio, a check will
be mailed to the shareholder. Unless otherwise instructed, the Transfer Agent
will mail checks or confirmations to the shareholder's address of record.
The federal income tax laws impose a four percent (4%) nondeductible excise
tax on each regulated investment company with respect to the amount, if any, by
which such company does not meet distribution requirements specified in the
federal income tax laws. Each Portfolio intends to comply with the distribution
requirements and thus does not expect to incur the four percent (4%)
20
nondeductible excise tax, although the imposition of such excise tax may
possibly occur.
Shareholders will have their dividends and/or capital gain distributions
reinvested in additional shares of the applicable Portfolio(s) unless they elect
in writing to receive such distributions in cash. Shareholders whose shares are
held in the name of a broker or nominee should contact such broker or nominee to
determine whether they want dividends reinvested or distributed.
The automatic reinvestment of dividends and distributions will not relieve
participants of any income taxes that may be payable (or required to be
withheld) on dividends and distributions. (See "Taxes" following.)
In the case of foreign participants whose dividends are subject to U.S.
income tax withholding and in the case of any participants subject to 31%
federal backup withholding, the Transfer Agent will reinvest dividends after
deduction of the amount required to be withheld.
Experience may indicate that changes in the automatic reinvestment of
dividends are desirable. Accordingly, the Fund reserves the right to amend or
terminate this provision as applied to any dividend or distribution paid
subsequent to written notice of the change sent to shareholders at least 90 days
before the record date for such dividend or distribution.
Dividends paid out of net investment income and net short-term capital gains
of a portfolio will be taxable to shareholders as ordinary income regardless of
whether such distributions are reinvested in additional shares or paid in cash.
If a portion of a portfolio's net investment income is derived from dividends
from domestic corporations, a corresponding portion of the dividends paid out of
such income may be eligible for the dividends-received deduction. Corporate
shareholders will be informed as to the portion, if any, of dividends received
by them which will qualify for the dividends-received deduction.
Dividends paid out of the net capital gain of a portfolio that are
designated as capital gain dividends by the Fund will be taxable to shareholders
as long-term capital gains regardless of how long the shareholders have held
their shares. Such dividends will not be eligible for the dividends-received
deduction. If shares of the Fund to which such capital gains dividends are
attributable are held by a shareholder for less than 31 days and there is a loss
on the sale or exchange of such shares, then the loss, to the extent of the
capital gain dividend or undistributed capital gain, is treated as a long-term
capital loss.
All distributions, whether received in shares or cash, must be reported by
each shareholder on his federal income tax return. Taxable 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 paid by the Fund
and received by such shareholders on December 31 of the year if such dividend is
actually paid by the Fund during January of the following year.
Any dividends paid shortly after a purchase by an investor may have the
effect of reducing the per share net asset value of the investor's shares by the
per share amount of the dividends. Furthermore, such dividends, although in
effect a return of capital, are subject to federal income taxes. Therefore,
prior to purchasing shares of the Fund, the investor should carefully consider
the impact of dividends, including capital gains distributions, which are
expected to be or have been announced.
The redemption of all or part of the shares of a series held by any
shareholder will generally be treated as a sale or exchange unless the
redemption fails to substantially reduce the shareholder's percentage ownership
interest in the related Portfolio (determined for this purpose using certain
specific rules of constructive ownership). Any redemption that does not
substantially reduce a shareholder's percentage ownership interest in a
portfolio may be treated as a dividend.
If a redemption is treated as a sale or exchange, the shareholder will
generally recognize gain or loss measured by the difference between the
redemption price and the basis of the shares. This gain will generally be
treated as capital gain (long-term or short-term, depending upon the
shareholder's holding period for the redeemed shares).
The exchange of the shares in one Portfolio for shares in another Portfolio
will be treated as a taxable exchange for federal income tax purposes. If the
exchange occurs within 90 days of the acquisition of the original shares,
however, the shareholder's basis in the original shares will not include the
sales charge, if any, to the extent such charge does not exceed the amount that
would have been charged on the acquisition of the second-acquired shares if such
shares were acquired directly. To the extent that the sales charge, if any, paid
upon acquisition of the original shares is not taken into account in determining
the shareholder's gain or loss from the disposition of the original shares, it
is added to the basis of the newly acquired shares.
On or before January 31 of each year, the Fund will issue to each person who
was a shareholder at any time in the prior year a
21
statement of the federal income tax status of all distributions made to such
shareholder.
Shareholders who fail to provide correct taxpayer identification numbers or
fail to certify as to no loss of exemption from backup withholding or otherwise
fail to comply with applicable requirements of the law relating to backup
withholding will be subject to backup withholding with respect to dividends at
the rate of 31% unless they are corporations or come within other exempt
categories. Any amounts paid as backup withholding will be creditable against
the federal income tax liabilities of the affected shareholders. All
shareholders should consult their own tax advisers with regard to the tax
consequences applicable to their respective investments in the Fund.
The foregoing discussion relates solely to United States federal income tax
laws as applicable to United States persons (that is, citizens and residents of
the United States and domestic corporations, partnerships, trusts, and estates).
Each shareholder who is not a United States person should consult his tax
adviser regarding the United States and non-United States tax consequences of
ownership of shares, including the possibility that distributions by the Fund
may be subject to a United States withholding tax at the rate of 31% (or at a
lower rate under an applicable United States income tax treaty).
Each Portfolio will be subject to a nondeductible excise tax for any year
equal to 4% of the "required distribution" for the year over the "distributed
amount" for the year. For this purpose, the term "required distribution" means,
with respect to any year, the sum of (a) 98% of the Portfolio's "ordinary
income" (that is, its taxable income determined by excluding its net capital
gain, if any, by disallowing the dividends-received and net operating loss
deductions, and by not taking into account any capital gain or loss), (b) 98% of
its net capital gain income (that is, the excess of capital gains over capital
losses) for the one-year period ending on December 31 of the year, and (c) the
"prior year shortfall" (that is, the excess, if any, of the "grossed-up required
distribution" for the prior year over the "distributed amount" for such year).
For this purpose, the term "grossed-up required distribution" means, with
respect to any year, the required distribution for the year (determined by
including 100% of the Portfolio's ordinary income and capital gain net income)
and the term "distributed amount" means, with respect to any year, the sum of
(a) the amount of dividends-paid or deemed paid during the year, (b) any amount
on which the Portfolio is required to pay corporate tax for the year, and (c)
the excess, if any, of the distributed amount for the prior year over the
required distribution for such year.
The individual Portfolios will not be subject to tax in Delaware for any
year in which they each qualify as a regulated investment company. They may,
however, be subject to such tax for any year in which they do not so qualify and
may be subject to tax in certain other states where they are deemed to be doing
business. Moreover, distributions may be subject to state and local taxes. In
those states which have income tax laws, the tax treatment of such Portfolios
and the tax treatment of shareholders with respect to distributions may be
different from the federal income tax treatment of such persons.
The foregoing is a general summary of the federal income tax consequences of
investing in the Fund to shareholders who are U.S. citizens or U.S.
corporations. Shareholders should consult their own tax advisers about the tax
consequences of an investment in the Fund in light of each shareholder's
particular tax situation. Shareholders should also consult their own tax
advisers about consequences under foreign, state, local or other applicable tax
laws.
UNDERWRITERS
The Fund's shares will be continuously distributed through Navellier
Securities Corp. (the "Distributor") located at One East Liberty, Third Floor,
Reno, Nevada 89501, pursuant to distribution agreements as amended, beginning
August 26, 1999.
The Distributor has been selling the Fund's Navellier Top 20 Portfolio shares
since August 26, 1999, The Navellier International Portfolio since September 5,
2000, The Navellier Large Cap Growth Portfolio since September 5, 2000, The
Navellier All Cap Growth Portfolio since September 5, 2000, The Navellier Mid
Cap Growth Portfolio since May 1, 2002 and the Navellier Money Market Portfolio
since May 1, 2002.
Prior to that date, shares had been distributed through GSG Securities, Inc.
The Distributor acts as the sole principal underwriter of the Fund's shares.
Through a network established by the Distributor, the Fund's shares may also be
sold through selected investment brokers and dealers. For a description of the
Distributor's obligations to distribute the Fund's securities, see "The
Investment Adviser, Distributor, Custodian and Transfer Agent."
22
The following table sets forth the remuneration received by the Distributor
and prior distributor for the periods ended December 31, 2000, December 31, 2001
and December 31, 2002.
UNDERWRITING
DISCOUNTS AND COMPENSATION BROKERAGE OTHER
YEAR PORTFOLIO COMMISSIONS ON REDEMPTIONS COMMISSIONS COMPENSATION*
- -------- ------------- --------------- --------------- ----------- -------------
2000 Top 20 $ 0 $ 3,707 $ 0 $ 123,254
2000 All Cap
Growth $ 0 $ 0 $ 0 $ 2,394
2000 International
Growth $ 0 $ 0 $ 0 $ 152
2000 Large Cap
Growth $ 0 $ 0 $ 0 $ 772
2001 Top 20 $ 0 $ 28,473 $ 2,375 $ 106,441
2001 All Cap
Growth $ 0 $ 11,434 $ 458 $ 26,765
2001 International
Growth $ 0 $ 54 $ 99 $ 1,172
2001 Large Cap
Growth $ 0 $ 240 $ 0 $ 2,961
2002 Top 20 $ 0 $ 17,479 $ 129 $ 72,693
All Cap Growth $ 0 $ 4,784 $ 178 $ 18,829
International
Growth $ 0 $ 94 $ 46 $ 3,155
Large Cap
Growth $ 0 $ 1,574 $ 0 $ 3,033
Mid Cap Growth $ 0 $ 619 $ 0 $ 2,068
Money Market $ 0 $ 972 $ 0 $ 726
CALCULATION OF PERFORMANCE DATA
Performance information for each Portfolio may appear in advertisements,
sales literature, or reports to shareholders or prospective shareholders.
Performance information in advertisements and sales literature may be expressed
as total return on the applicable Portfolio.
The average annual total return on such Portfolios represents an
annualization of each Portfolio's total return ("T" in the formula below) over a
particular period and is computed by finding the current percentage rate which
will result in the ending redeemable value ("ERV" in the formula below) of a
$1,000 payment* ("P" in the formula below) made at the beginning of a one-,
five-, or ten-year period, or for the period from the date of commencement of
the Portfolio's operation, if shorter ("n" in the formula below). The following
formula will be used to compute the average annual total return for the
Portfolio:
P (1 + T)(n) = ERV
In addition to the foregoing, each Portfolio may advertise its total return
over different periods of time by means of aggregate, average, year-by-year, or
other types of total return figures.
The Navellier Top 20 Portfolio (Class A shares) had a total return of -34.13%
for the year ended December 31, 2002; -34.62% for the Class B shares and -34.65%
for Class C shares. The Navellier International Growth Portfolio (Class A
shares) had a total return of -11.22% for the year ended December 31, 2002;
- -11.58% for the Class B shares; and -11.91% for Class C shares. The total return
for the Navellier Large Cap Growth Portfolio (Class A shares) had a total return
of -25.44%; -26.21% for the Class B shares and -26.02% for C shares. The total
return for the Navellier All Cap Growth Portfolio (Class A shares) had a total
return of -34.80% for the year ended December 31, 2002; -35.22% for Class B
shares and -35.33% for Class C shares. The Navellier Mid Cap Growth Portfolio
and the Navellier Money Market Portfolio are newly organized portfolios and
therefore do not have, as yet, full-year operating histories.
Performance information for the Portfolios shall reflect only the
performance of a hypothetical investment in the Portfolios during the particular
time period on which the calculations are based. Performance information should
be considered in light of the investment objectives and policies,
characteristics and quality of the particular Portfolio, and the market
conditions during the given time period, and should not be considered as a
representation of what may be achieved in the future.
23
Each Portfolio may, from time to time, include in advertisements containing
total return the ranking of those performance figures relative to such figures
for groups of mutual funds categorized by Lipper Analytical Services, or other
services, as having the same investment objectives. The total return may also be
used to compare the performance of the Portfolio against certain widely
acknowledged outside standards or indices for stock and bond market performance.
The Standard & Poor's Composite Index of 500 stocks ("S&P 500") is a market
value-weighted and unmanaged index showing the changes in the aggregate market
value of 500 stocks relative to the base period 1941-43. The S&P 500 is composed
almost entirely of common stocks of companies listed on the New York Stock
Exchange, although the common stocks of a few companies listed on the American
Stock Exchange or traded over-the-counter are included. The Russell 3000 Index
measures the performance of the 3,000 largest U.S. companies based on total
market capitalization. Those companies represent approximately 98% of the
investable U.S. equity market.
As summarized in the Prospectus, the total return of each Portfolio may be
quoted in advertisements and sales literature.
The Fund hereby incorporates by this reference the Fund's Annual Report for
the period ended December 31, 2002.
FINANCIAL STATEMENTS*
December 31, 2002 Audited Financial Statement
NAVELLIER MILLENNIUM FUNDS
Annual Report
December 31, 2002
Top 20 Portfolio [NAVELLIER LOGO]
All Cap Growth Portfolio
International Growth Portfolio
Large Cap Growth Portfolio
Mid Cap Growth Portfolio
Money Market Portfolio
ANNUAL REPORT, December 31, 2002
NAVELLIER MILLENNIUM FUNDS
One East Liberty, Third Floor
Reno, NV 89501
(800) 887-8670
- --------------------------------------------------------------------------------
January 30, 2003
Dear Shareholder,
The U.S. equity markets experienced another difficult year in 2002. In
fact, we believe that 2002 was the worst year of the three straight losing years
the U.S. markets have had. The declines in equity prices were very broad-based.
All sectors of the market were hit hard in 2002. Likewise, small, mid and large
capitalization stocks all posted double-digit declines. Also experiencing
double-digit losses were both growth and value sectors. Unfortunately, all major
indices posted these large losses. The good news is that while the last three
years have been difficult, we believe that the worst is behind us.
The Navellier Funds held up fairly well in the decline (second and third
quarters) with holdings generally concentrated in more defensive growth sectors.
Where the Funds performed poorly was in the 4th quarter rebound, as they did not
up-tick with the market in October and November. We believe that this rally was
mainly led by short-covering and will be short-lived at best. Those stocks that
performed the best during this rally were those that had performed the worst on
the way down. It reminds us a great deal of 4th quarter 2001.
[LINE GRAPH -- TOP 20 PORTFOLIO - CLASS A SHARES]
<Table>
<Caption>
TOP 20 PORTFOLIO TOP 20 PORTFOLIO** RUSSELL 3000 GROWTH RUSSELL 3000
---------------- ------------------ ------------------- ------------
9/30/98 10000 10000 10000 10000
10310 9800 10782 10759
11110 10560 11603 11417
12/31/98 12550 11929 12649 12143
14310 13602 13379 12555
13290 12632 12723 12111
3/31/99 14570 13849 13378 12555
15280 14524 13475 13122
14470 13754 13093 12872
6/30/99 16960 16120 13993 13523
16710 15883 13549 13113
17390 16529 13718 12964
9/30/99 16560 15740 13467 12632
17530 16662 14437 13425
18490 17575 15265 13800
12/31/99 22077 20984 16928 14681
22266 21164 16180 14105
31082 29543 17191 14236
3/31/00 26690 25369 18163 15351
24910 23677 17229 14810
21108 20063 16317 14394
6/30/00 25679 24408 17612 14821
23140 21995 16824 14559
28070 26680 18363 15638
9/30/00 27838 26460 16681 14930
24046 22856 15852 14718
18843 17910 13479 13361
12/31/00 20300 19295 13133 13586
19090 18145 14052 14050
16741 15912 11698 12767
3/31/01 16491 15675 10441 11934
18698 17773 11758 12892
18947 18010 11618 12995
6/30/01 17547 16679 11394 12755
16729 15901 11061 12545
15851 15066 10171 11805
9/30/01 13941 13251 9113 10763
14688 13961 9616 11014
15341 14581 10532 11862
12/31/01 16058 15264 10556 12029
15808 15025 10356 11878
15414 14651 9911 11635
3/31/02 15557 14787 10287 12146
15736 14957 9490 11508
15318 14560 9237 11375
6/30/02 14650 13925 8387 10556
12727 12099 7869 9717
12823 12189 7891 9763
9/30/02 12035 11440 7088 8737
11545 10975 7720 9433
11211 10657 8160 10003
12/31/02 10578 10056 7597 9438
</Table>
TOP 20 PORTFOLIO -- CLASS A
<Table>
<Caption>
TOTAL RETURNS FOR RUSSELL
PERIODS ENDED 3000 RUSSELL
DECEMBER 31, 2002* PORTFOLIO PORTFOLIO** GROWTH 3000
---------------------- --------- ----------- -------- --------
One Year (34.13)% (37.39)% (28.03)% (21.54)%
Annualized Since
Inception+ 1.33% 0.13% (6.26)% (1.35)%
Value of a $10,000
investment over Life
of Fund+ $10,579 $10,056 $7,597 $9,438
* The total returns shown do not reflect the deduction of taxes that
a shareholder would pay on fund distributions or the redemption of
fund shares.
**Adjusted for maximum load of 4.95%
+ Inception September 30, 1998
</Table>
[LINE GRAPH -- ALL CAP GROWTH PORTFOLIO - CLASS A SHARES]
<Table>
<Caption>
ALL CAP PORTFOLIO ALL CAP PORTFOLIO** RUSSELL 3000 GROWTH RUSSELL 3000
----------------- ------------------- ------------------- ------------
9/5/00 10000 10000 10000 10000
9/30/00 9378 8914 9227 9610
8667 8238 8768 9473
6577 6251 7456 8600
12/31/00 7360 6996 7264 8744
7468 7099 7772 9043
6306 5994 6471 8217
3/31/01 5820 5532 5775 7681
6532 6208 6503 8297
6387 6071 6426 8364
6/30/01 5883 5592 6302 8210
5721 5438 6118 8075
5315 5052 5625 7598
9/30/01 4721 4487 5041 6928
4838 4598 5319 7089
5117 4864 5825 7635
12/31/01 5306 5044 5839 7742
5000 4753 5728 7645
4523 4299 5482 7489
3/31/02 4676 4444 5690 7817
4649 4419 5249 7407
4514 4290 5109 7321
6/30/02 4387 4170 4639 6794
3892 3699 4353 6254
3874 3682 4365 6284
9/30/02 3820 3630 3920 5623
3748 3562 4270 6071
3748 3562 4513 6439
12/31/02 3459 3288 4202 6075
</Table>
ALL CAP GROWTH PORTFOLIO -- CLASS A
<Table>
<Caption>
TOTAL RETURNS FOR RUSSELL
PERIODS ENDED 3000 RUSSELL
DECEMBER 31, 2002* PORTFOLIO PORTFOLIO** GROWTH 3000
---------------------- --------- ----------- -------- --------
One Year (34.80)% (38.06)% (28.03)% (21.54)%
Annualized Since
Inception+ (36.71)% (38.08)% (31.18)% (19.33)%
Value of a $10,000
investment over Life
of Fund+ $3,459 $3,288 $4,202 $6,075
* The total returns shown do not reflect the deduction of taxes that
a shareholder would pay on fund distributions or the redemption of
fund shares.
**Adjusted for maximum load of 4.95%
+ Inception September 5, 2000
</Table>
The year 2002 was a volatile and difficult environment for stocks. The
economy continued to be extremely sluggish and no sector leadership ever emerged
in the equity markets. Our outlook for 2003 is a positive one. We believe that
the economy is showing signs of life and the current administration seems to
realize the importance of moving economic policy in the right direction. We
expect some type of tax legislation (dividend tax relief, capital gains tax cuts
or the income tax cuts becoming permanent) to emerge sometime in the 1st quarter
of 2003. This would give a significant boost to the stock market.
INVESTMENT STRATEGY & OUTLOOK
The stock market is beginning the New Year more uncertain than ever. The
worst holiday shopping season in over 30 years is a clear signal that consumer
spending will likely remain soft. Orders for durable goods declined in November,
which is further evidence that the U.S. economy is sputtering. The impending
invasion of Iraq is also creating even more uncertainty. Investors are looking
to the Bush Administration and the new Congress to pass various tax incentives
to spur investment, stimulate the U.S. economy and help the stock market. In the
interim, we remain very cautious and especially selective on the stocks that we
are adding to our portfolios. There are two possible scenarios that we foresee
for the stock market.
[LINE GRAPH -- INTERNATIONAL GROWTH PORTFOLIO - CLASS A SHARES]
<Table>
<Caption>
INTERNATIONAL INTERNATIONAL
GROWTH PORTFOLIO GROWTH PORTFOLIO** EAFE INDEX EAFE GROWTH INDEX
---------------- ------------------ ---------- -----------------
9/5/00 10000.00 10000.00 10000.00 10000.00
9/30/00 9158.00 8705.00 9408.00 9339.00
8419.00 8002.00 9187.00 8909.00
7628.00 7251.00 8845.00 8499.00
12/31/00 7310.00 6948.00 9161.00 8659.00
7741.00 7358.00 9157.00 8635.00
7074.00 6724.00 8471.00 7759.00
3/31/01 6766.00 6431.00 7910.00 7226.00
6828.00 6490.00 8465.00 7725.00
6766.00 6431.00 8173.00 7417.00
6/30/01 6612.00 6285.00 7842.00 7058.00
6407.00 6089.00 7700.00 6887.00
6366.00 6050.00 7506.00 6573.00
9/30/01 5462.00 5192.00 6748.00 5953.00
5565.00 5289.00 6920.00 6190.00
5760.00 5475.00 7176.00 6508.00
12/31/01 5893.00 5602.00 7219.00 6546.00
5955.00 5660.00 6836.00 6193.00
6129.00 5826.00 6884.00 6277.00
3/31/02 6458.00 6138.00 7260.00 6519.00
6376.00 6060.00 7312.00 6557.00
6458.00 6138.00 7411.00 6576.00
6/30/02 6283.00 5972.00 7119.00 6408.00
5688.00 5405.00 6417.00 5725.00
5678.00 5395.00 6404.00 5682.00
9/30/02 5277.00 5015.00 5718.00 5188.00
5298.00 5034.00 6025.00 5482.00
5431.00 5161.00 6300.00 5644.00
12/31/02 5232.00 4972.00 6088.00 5514.00
</Table>
INTERNATIONAL GROWTH PORTFOLIO -- CLASS A
<Table>
<Caption>
TOTAL RETURNS FOR EAFE
PERIODS ENDED EAFE GROWTH
DECEMBER 31, 2002* PORTFOLIO PORTFOLIO** INDEX INDEX
-------------------------- --------- ----------- -------- --------
One Year (11.22)% (15.63)% (15.66)% (15.76)%
Annualized Since
Inception+ (24.36)% (26.00)% (19.25)% (22.63)%
Value of a $10,000
investment over Life of
Fund+ $5,232 $4,972 $6,088 $5,514
* The total returns shown do not reflect the deduction of taxes that a
shareholder would pay on fund distributions or the redemption of fund
shares.
**Adjusted for maximum load of 4.95%
+ Inception September 5, 2000
</Table>
[LINE GRAPH -- LARGE CAP GROWTH PORTFOLIO - CLASS A SHARES]
<Table>
<Caption>
LARGE CAP GROWTH LARGE CAP GROWTH
PORTFOLIO PORTFOLIO** RUSSELL 1000 GROWTH S&P 500
---------------- ---------------- ------------------- -------
9/5/00 10000.00 10000.00 10000.00 10000.00
9/30/00 9563.00 9090.00 9208.00 9538.00
8663.00 8234.00 8772.00 9498.00
7041.00 6692.00 7479.00 8749.00
12/31/00 7496.00 7125.00 7243.00 8792.00
7460.00 7091.00 7743.00 9104.00
6176.00 5871.00 6428.00 8274.00
3/31/01 5668.00 5388.00 5729.00 7750.00
6007.00 5710.00 6453.00 8352.00
5980.00 5684.00 6358.00 8408.00
6/30/01 5633.00 5354.00 6211.00 8204.00
5633.00 5354.00 6056.00 8124.00
5401.00 5134.00 5561.00 7616.00
9/30/01 5000.00 4753.00 5006.00 7001.00
5107.00 4854.00 5268.00 7134.00
5446.00 5176.00 5774.00 7680.00
12/31/01 5535.00 5261.00 5763.00 7748.00
5401.00 5134.00 5662.00 7634.00
5134.00 4880.00 5427.00 7487.00
3/31/02 5339.00 5074.00 5614.00 7769.00
5258.00 4998.00 5156.00 7298.00
5196.00 4939.00 5031.00 7244.00
6/30/02 4920.00 4676.00 4566.00 6728.00
4563.00 4339.00 4315.00 6204.00
4599.00 4373.00 4328.00 6245.00
9/30/02 4332.00 4119.00 3879.00 5566.00
4447.00 4229.00 4235.00 6056.00
4430.00 4212.00 4465.00 6413.00
12/31/02 4127.00 3924.00 4156.00 6036.00
</Table>
LARGE CAP GROWTH PORTFOLIO -- CLASS A
<Table>
<Caption>
TOTAL RETURNS FOR RUSSELL
PERIODS ENDED 1000 S&P
DECEMBER 31, 2002* PORTFOLIO PORTFOLIO** GROWTH 500
-------------------------- --------- ----------- -------- --------
One Year (25.44)% (29.10)% (27.88)% (22.09)%
Annualized Since
Inception+ (31.71)% (33.18)% (31.50)% (19.55)%
Value of a $10,000
investment over Life of
Fund+ $4,127 $3,924 $4,156 $6,036
* The total returns shown do not reflect the deduction of taxes that a
shareholder would pay on fund distributions or the redemption of fund
shares.
**Adjusted for maximum load of 4.95%
+ Inception September 5, 2000
</Table>
SCENARIO ONE: THE STOCK MARKET SURGES AFTER DIVIDEND TAX RELIEF IS PASSED
A potential event that could have a significant bullish impact on the
stock market is the Bush Administration's plan to provide dividend tax relief.
Ideally, the double taxation of dividends would be eliminated on either the
corporate or individual level. This would allow dividend proceeds to flow
directly to investors without being taxed twice. The bigger the dividend tax
cut, the more money that it will trigger to pour into the stock market.
2
SCENARIO TWO: THE STOCK MARKET CONTINUES TO OSCILLATE IN A WILD & VOLATILE
MANNER
During the past two years, the stock market has had some wild
oscillations. There have been massive short-covering rallies in many technology
stocks during October 2001, March 2002, and during the recent
telecommunication-led rally in October and November 2002. During the past three
quarters, the stock market has been led by consumer-oriented companies (second
quarter), healthcare companies (third quarter) and telecommunication companies
(fourth quarter). Currently, telecommunication companies are rolling over and
giving back many of their recent gains and new leadership is trying to emerge.
[NMLAX LINE GRAPH -- MID CAP GROWTH PORTFOLIO - CLASS A SHARES]
<Table>
<Caption>
MID CAP GROWTH MID CAP GROWTH RUSSELL MIDCAP
PORTFOLIO PORTFOLIO** GROWTH RUSSELL 2000 GROWTH
-------------- -------------- -------------- -------------------
5/1/02 10000 10000 10000 10000
5/31/02 9740 9259 9676 9435
6/30/02 9090 8641 8608 8635
7/31/02 8280 7871 7771 7308
8/31/02 8330 7918 7744 7304
9/30/02 8000 7605 7129 6777
10/31/02 8410 7994 7681 7119
11/30/02 8720 8289 8283 7825
12/31/02 7980 7586 7782 7286
</Table>
MID CAP GROWTH PORTFOLIO -- CLASS A
<Table>
<Caption>
RUSSELL RUSSELL
TOTAL RETURNS FOR PERIOD ENDED MIDCAP 2000
DECEMBER 31, 2002* PORTFOLIO PORTFOLIO** GROWTH GROWTH
------------------------------------------------------------ --------- ----------- -------- --------
Since Inception+ (20.20)% (24.14)% (22.18)% (27.14)%
Value of a $10,000 investment over Life of Fund+ $7,980 $7,586 $7,782 $7,286
* The total returns shown do not reflect the deduction of taxes that a shareholder would pay on fund
distributions or the redemption of fund shares.
**Adjusted for maximum load of 4.95%
+ Inception May 1, 2002. Return is calculated on a non-annualized basis due to the fund being open for less
than one year.
</Table>
[BAR CHART -- MONEY MARKET PORTFOLIO - CLASS A SHARES]
<Table>
<Caption>
CLASS A CLASS B CLASS C
------- ------- -------
7 Day Yields 1% 0.25% 0.24%
</Table>
Weighted Average Maturity
All Classes -- 11 Days
This roller coaster environment is not a healthy environment for long-term
investors. The stock market has been in an environment that ignores fundamentals
and is better suited to active traders. It is not healthy for the stock market
to allow money losing or bankrupt stocks like Lucent and WorldCom to lead the
stock market, which is exactly what happened in the past few months.
Unfortunately, the market oscillated in a wild manner for eight years
after the 1973 and 1974 stock market collapse. Although the stock market slowly
trended higher in those subsequent years, the volatility was unnerving for many
investors. Apparently, the same phenomenon may be occurring again. This is not a
healthy environment for investors because the stock market's volatility
undermines investor confidence.
Fortunately, while the stock market was going through its wild gyrations
between 1975 and 1982, there was a select group of stocks that was oblivious to
the stock market's wild swings and instead slowly trended higher. Back then,
about 15% of the stock market represented an oasis amidst the chaos. These oasis
stocks are what we like to refer to as high Alpha stocks, because they tend to
be less correlated to the overall stock market and are less vulnerable during
the downdrafts.
3
Traditionally, small capitalization stocks with lower price-to-earnings
ratios have been the least correlated to the overall stock market. Small
capitalization stocks may represent the best oasis in the upcoming months,
especially since many thinly traded small capitalization stocks are poised to
surge on any significant increase in trading volume. Fundamentally, small
capitalization stocks have weathered the economic downturn better than many
large capitalization stocks but due to persistent stock market outflows, they
have performed poorly due to liquidity concerns.
EVENTS THAT COULD STIMULATE THE STOCK MARKET
Overall, we believe that investors should prepare for the worst possible
environment (wild oscillations) and hope for the best (the elimination of the
double taxation on dividends). We would not be surprised if we get a mix of the
two possible stock market scenarios outlined above. The biggest problem is that
the stock market has erratic flow of funds. After several months of persistent
and record outflows, the stock market finally had positive mutual fund inflows
in November. We are now at the seasonally strong time of year when new pension
contributions will likely result in steady inflows through mid-April. However,
what the stock market really needs is a watershed event that will cause money to
pour in and propel stocks higher for several months.
In our opinion, the most likely watershed event that will propel the stock
market higher will be the dividend tax relief that the new Congress may pass in
the upcoming months. Currently, the S&P 500 is approximately 40% undervalued
relative to Treasury securities according to most dividend discount models. If
there is 50% dividend tax relief for individual investors, the S&P 500 will then
be approximately 60% undervalued relative to Treasury securities when federal
taxes are taken into consideration. As a result, we can easily envision wave
after wave of bond investors jumping back into the stock market seeking out
strong cash flow companies with predictable high dividend yields.
Another possible watershed event would be military action against Iraq,
which would remove much of the uncertainty that has been plaguing the overall
market. After the Gulf War commenced twelve years ago, growth stocks surged
dramatically in just three months. The same thing could easily happen again,
because the U.S. dollar would likely surge (out of respect for U.S. military
technology) and foreign investors would likely return to the U.S. seeking the
appreciation of the U.S. dollar.
There are some other factors that could stimulate the stock market other
than dividend tax relief and military action against Iraq. Corporate earnings
are expected to continue to improve during the next two quarters due to
favorable year over year comparisons. Bond yields could spike higher like they
did on October 9th, which would cause panicked bond investors to return to the
stock market. Finally, there could be clear evidence that the U.S. economy has
turned the corner for good and will be growing for the foreseeable future.
It will also be interesting to see if the Federal Reserve Board will be
able to stimulate the U.S. economy any further. The Adjusted Monetary Base, the
most predictable money supply indicator, continues to grow steadily. In essence,
the Adjusted Monetary Base is indicating that the Federal Reserve Board has been
successful in pumping money into the U.S. economy through lower interest rates,
home refinancing activity, etc. The problem is that the "velocity of money",
which measures how fast money changes hands, has decelerated as the average
consumer has become increasingly cautious in the past few months.
The obvious answer is that it is time for the Bush Administration and the
new Congress to stimulate the U.S. economy. It is scary to count on politicians
to fix the U.S. economy and the stock market, but that is the exact predicament
that we are in at the present time. Fortunately, the Bush Administration appears
to be just as focused on fixing the U.S. economy as they have been focused on
disarming Iraq. We are confident that both the Bush Administration and the new
Congress will act swiftly in the upcoming months.
We believe that 2003 should end up as one of the strongest years ever for
the fundamentally superior stocks that we favor.
4
Always feel free to contact us if you have any questions or if we can help
you in any way. You may call us at 1.800.887.8670 or visit our web site at
www.navellier.com, where we invite you to take advantage of our complimentary
weekly market commentary service, Marketmail*.
Sincerely,
/s/ Louis G. Navellier
Louis Navellier
*There is no guarantee that the opinions expressed in this newsletter will come
to pass.
This material has been preceded by a Navellier Millennium Funds prospectus.
The preceding charts and performance numbers assume reinvestment of all
distributions.
Please be aware that past performance is no indication of future performance.
The investment return and principal value of an investment will fluctuate so
that an investor's shares, when redeemed, may be worth more or less than their
original cost.
Indices:
The Russell 1000 Index consists of the 1,000 largest securities in the Russell
3000 Index. It is considered to be representative of the large cap market in
general.
The Russell 1000 Growth Index measures the performance of those Russell 1000
companies with higher price-to-book ratios and higher forecasted growth values.
The Russell 2000 Index is an unmanaged index consisting of the smallest 2,000
stocks in the Russell 3000 Index. It is considered representative of the small
cap market in general.
The Russell 2000 Growth Index contains those Russell 2000 securities with a
greater-than-average growth orientation.
The Russell 3000 Index measures the performance of the 3,000 largest U.S.
companies based on total market capitalization, which represents approximately
98% of the investable U.S. equity market.
The Russell 3000 Growth Index measures the performance of those Russell 3000
Index companies with higher price-to-book ratios and higher forecasted growth
values.
The Russell Midcap Index measures the performance of the 800 smallest companies
in the Russell 1000 Index, which represent approximately 26% of the total market
capitalization of the Russell 1000 Index.
The Russell Midcap Growth Index measures the performance of those Russell Midcap
companies with higher price-to-book ratios and higher forecasted growth values.
The stocks are also members of the Russell 1000 Growth Index.
The S&P 500 is an unmanaged index consisting of 500 large cap stocks. It is
considered representative of the stock market as a whole.
The MSCI EAFE Index is an unmanaged index, designed by Morgan Stanley, of
equities in Africa, Asia, and Europe. It is considered representative of the
international stock market in general.
The MSCI EAFE Growth Index is a market capitalization weighted index
representing all 20 developed markets that make up the EAFE Index. All
securities are classified as either growth or value based on price-to-book value
ratios by each MSCI country index. The country growth indices are aggregated
into regional growth indices.
These indices are considered representative of pertinent market sectors in
general. None are investment products available for sale.
5
NAVELLIER MILLENNIUM FUNDS
- --------------------------------------------------------------------------------
STATEMENTS OF NET ASSETS
December 31, 2002
<Table>
<Caption>
TOP 20 PORTFOLIO
- ---------------------------------------------------------
Market Value
Shares (Note 1)
- ---------------------------------------------------------
COMMON STOCKS -- 98.7%
AUTOMOTIVE -- 4.9%
61,000 TBC Corp.* $ 732,610
--------------
BANKING -- 10.3%
29,000 Compass Bancshares, Inc. 906,830
30,000 Flagstar Bancorp, Inc. 648,000
--------------
1,554,830
--------------
CHEMICALS -- 5.2%
27,500 Albemarle Corp. 782,375
--------------
COMPUTER EQUIPMENT -- 9.0%
91,000 Foundry Networks, Inc.* 640,640
12,500 Zebra Technologies Corp.* 716,250
--------------
1,356,890
--------------
COMPUTER SOFTWARE AND SERVICES -- 14.2%
55,000 Citrix Systems, Inc.* 677,600
10,600 Cognizant Technology
Solutions Corp.* 765,638
13,400 Microsoft Corp.* 692,780
--------------
2,136,018
--------------
FOOD, BEVERAGE AND TOBACCO -- 11.3%
21,500 Anheuser-Busch Companies,
Inc. 1,040,600
35,000 Fresh Del Monte Produce,
Inc. 661,850
--------------
1,702,450
--------------
INSTRUMENTS -- 4.9%
25,000 Dionex Corp.* 742,750
--------------
INSURANCE -- 4.8%
14,600 The Progressive Corp. 724,598
--------------
MEDICAL EQUIPMENT AND SUPPLIES -- 14.2%
17,000 Boston Scientific Corp.* 722,840
62,000 Hanger Orthopedic Group,
Inc.* 815,300
30,000 Merit Medical Systems, Inc.* 597,600
--------------
2,135,740
--------------
PHARMACEUTICALS -- 5.7%
42,000 Chattem, Inc.* 863,100
--------------
REAL ESTATE INVESTMENT TRUST -- 6.9%
55,000 Annaly Mortgage Management,
Inc. 1,034,000
--------------
RETAIL -- 3.4%
30,000 PETsMART, Inc.* 513,900
--------------
SEMICONDUCTORS AND RELATED -- 3.9%
32,000 Integrated Circuit Systems,
Inc.* 584,000
--------------
TOTAL COMMON STOCKS
(COST $16,020,451) 14,863,261
--------------
</Table>
<Table>
<Caption>
- ---------------------------------------------------------
Shares/ Market Value
Par Value (Note 1)
- ---------------------------------------------------------
- ---------------------------------------------------------
SHORT-TERM INVESTMENTS -- 1.7%
MONEY MARKET FUNDS -- N.M.
675 FBR Fund for Government
Investors $ 675
--------------
GOVERNMENT AGENCY
OBLIGATIONS -- 1.7%
$262,000 FNMA Discount Notes 1.25%
due 1/2/03 261,982
--------------
TOTAL SHORT-TERM INVESTMENTS
(COST $262,657) 262,657
--------------
TOTAL INVESTMENTS -- 100.4%
(COST $16,283,108) 15,125,918
Liabilities in Excess of Other
Assets -- (0.4%) (53,012)
--------------
NET ASSETS -- 100.0% $ 15,072,906
==============
NET ASSETS CONSIST OF:
Paid-in Capital applicable to:
Class A Shares $ 20,710,497
Class B Shares 7,232,133
Class C Shares 4,594,557
Accumulated Net Realized Loss on
Investments (16,307,091)
Net Unrealized Depreciation of
Investments (1,157,190)
--------------
NET ASSETS $ 15,072,906
==============
CLASS A $ 10,513,271
==============
CLASS B $ 2,794,887
==============
CLASS C $ 1,764,748
==============
NET ASSET VALUE PER SHARE:
CLASS A SHARES
(Based on 1,186,687 Shares
Outstanding) $8.86
==============
CLASS A OFFERING PRICE PER SHARE
(100/95.05 of $8.86) $9.32
==============
CLASS B SHARES
(Based on 324,699 Shares Outstanding) $8.61
==============
CLASS C SHARES
(Based on 204,647 Shares Outstanding) $8.62
==============
</Table>
6
NAVELLIER MILLENNIUM FUNDS
- --------------------------------------------------------------------------------
STATEMENTS OF NET ASSETS
December 31, 2002 (continued)
<Table>
<Caption>
ALL CAP GROWTH PORTFOLIO
- ---------------------------------------------------------
Market Value
Shares (Note 1)
- ---------------------------------------------------------
COMMON STOCKS -- 95.3%
APPAREL -- 4.1%
4,880 Coach, Inc.* $ 160,650
-----------
COMPUTER EQUIPMENT -- 11.2%
3,357 Avid Technology, Inc. 77,043
2,300 Black Box Corp. 103,040
4,850 Dell Computer Corp.* 129,689
2,467 Pixar, Inc. 130,726
-----------
440,498
-----------
COMPUTER SOFTWARE AND SERVICES -- 16.0%
5,606 BMC Software, Inc. 95,919
1,590 Cognizant Technology Solutions
Corp.* 114,846
1,400 Electronic Arts, Inc.* 69,678
1,750 Intuit, Inc.* 82,110
2,014 PEC Solutions, Inc.* 60,219
3,615 Take-Two Interactive Software,
Inc.* 84,916
3,185 WebEx Communications, Inc. 47,775
4,600 Yahoo!, Inc. 75,210
-----------
630,673
-----------
CONSUMER PRODUCTS AND SERVICES -- 12.6%
2,820 Apollo Group, Inc.* 124,080
2,310 Corinthian Colleges, Inc.* 87,457
1,650 eBay, Inc.* 111,903
4,250 Fossil, Inc.* 86,445
3,500 Jarden Corp.* 83,545
-----------
493,430
-----------
ELECTRONICS -- 7.8%
5,247 American Power Conversion Corp. 79,492
2,600 Cree, Inc. 42,510
6,669 Energizer Holdings, Inc. 186,065
-----------
308,067
-----------
ENTERTAINMENT -- 2.8%
4,300 Fox Entertainment Group, Inc.* 111,499
-----------
FINANCIAL SERVICES -- 2.2%
1,700 Countrywide Financial Corp. 87,805
-----------
FOOD, BEVERAGE AND TOBACCO -- 2.5%
4,431 Coca-Cola Enterprises, Inc. 96,241
-----------
MEDICAL EQUIPMENT AND SUPPLIES -- 6.8%
4,385 Immucor, Inc.* 88,796
2,697 Techne Corp.* 77,048
2,050 Varian Medical Systems, Inc.* 101,680
-----------
267,524
-----------
</Table>
<Table>
<Caption>
- ---------------------------------------------------------
Shares/ Market Value
Par Value (Note 1)
- ---------------------------------------------------------
- ---------------------------------------------------------
OFFICE EQUIPMENT AND SUPPLIES -- 2.7%
1,700 Avery Dennison Corp. $ 103,836
-----------
OIL AND GAS SERVICES -- 2.4%
5,090 Halliburton Co. 95,234
-----------
PHARMACEUTICALS -- 7.4%
6,960 Amylin Pharmaceuticals, Inc.* 112,334
1,705 Merck & Co., Inc. 96,520
2,460 Scios, Inc.* 80,147
-----------
289,001
-----------
RETAIL -- 9.8%
4,700 Amazon.com, Inc.* 88,783
4,540 Chico's FAS, Inc.* 85,851
3,790 Claire's Stores, Inc. 83,645
7,450 PETsMART, Inc.* 127,619
-----------
385,898
-----------
TELECOMMUNICATIONS EQUIPMENT AND
SERVICES -- 7.0%
5,761 InterDigital Communications
Corp*. 83,880
2,490 j2 Global Communications, Inc.* 47,410
8,150 Nextel Communications, Inc.* 94,132
9,379 TiVo, Inc.* 49,052
-----------
274,474
-----------
TOTAL COMMON STOCKS
(COST $3,683,608) 3,744,830
-----------
SHORT-TERM INVESTMENTS -- 5.4%
MONEY MARKET FUNDS -- N.M.
895 FBR Fund for Government
Investors 895
-----------
GOVERNMENT AGENCY OBLIGATIONS -- 5.4%
$212,000 FNMA Discount Notes 1.25% due
1/2/03 211,985
-----------
TOTAL SHORT-TERM INVESTMENTS
(COST $212,880) 212,880
-----------
TOTAL INVESTMENTS -- 100.7%
(COST $3,896,488) 3,957,710
Liabilities In Excess of Other
Assets -- (0.7)% (28,048)
-----------
NET ASSETS -- 100.0% $ 3,929,662
===========
</Table>
7
NAVELLIER MILLENNIUM FUNDS
- --------------------------------------------------------------------------------
STATEMENTS OF NET ASSETS
December 31, 2002 (continued)
<Table>
<Caption>
ALL CAP GROWTH PORTFOLIO
- ---------------------------------------------------------
- ---------------------------------------------------------
NET ASSETS CONSIST OF:
Paid-in Capital applicable to:
Class A Shares $ 5,188,983
Class B Shares 2,001,685
Class C Shares 1,534,417
Accumulated Net Realized Loss on
Investments (4,856,645)
Net Unrealized Appreciation of
Investments 61,222
-----------
NET ASSETS $ 3,929,662
===========
CLASS A $ 2,383,754
===========
CLASS B $ 979,682
===========
CLASS C $ 566,226
===========
</Table>
<Table>
<Caption>
- --------------------------------------------------------
- --------------------------------------------------------
- ---------------------------------------------------------
NET ASSET VALUE PER SHARE:
CLASS A SHARES
(Based on 620,084 Shares Outstanding)
$3.84
===========
CLASS A OFFERING PRICE PER SHARE
(100/95.05 of $3.84) $4.04
===========
CLASS B SHARES
(Based on 259,802 Shares Outstanding)
$3.77
===========
CLASS C SHARES
(Based on 150,006 Shares Outstanding)
$3.77
===========
</Table>
8
NAVELLIER MILLENNIUM FUNDS
- --------------------------------------------------------------------------------
STATEMENTS OF NET ASSETS
December 31, 2002 (continued)
<Table>
<Caption>
INTERNATIONAL GROWTH PORTFOLIO
- -------------------------------------------------------
Market Value
Shares (Note 1)
- -------------------------------------------------------
COMMON STOCKS -- 96.5%
AUTOMOTIVE -- 4.9%
1,730 Honda Motor Co., Ltd. ADR
(Japan) $ 31,244
2,060 Nissan Motor Co., Ltd. ADR
(Japan) 31,683
-----------
62,927
-----------
BANKING -- 3.4%
900 UBS AG ADR* (Switzerland) 43,308
-----------
BUILDING AND CONSTRUCTION -- 5.4%
1,150 Chicago Bridge & Iron Co. NV
ADR (Netherlands) 34,730
2,020 Masonite International Corp.
ADR* (Canada) 34,118
-----------
68,848
-----------
CHEMICALS -- 4.4%
4,870 Syngenta AG ADR*
(Switzerland) 56,102
-----------
COMPUTER EQUIPMENT -- 3.4%
1,440 Logitech International S.A.
ADR* (Switzerland) 43,934
-----------
CONSUMER PRODUCTS AND SERVICES -- 4.4%
1,770 Electrolux AB ADR (Sweden) 56,038
-----------
ELECTRONICS -- 2.6%
790 Siemens AG ADR* (Germany) 33,283
-----------
FINANCIAL SERVICES -- 7.4%
2,020 Allied Irish Banks PLC ADR
(Ireland) 54,298
570 Bank of Ireland ADR (Ireland) 23,279
715 Barclays PLC ADR (United
Kingdom) 17,661
-----------
95,238
-----------
FOOD, BEVERAGE AND TOBACCO -- 15.9%
710 Diageo PLC ADR (United
Kingdom) 31,098
2,340 Group Danone ADR (France) 62,478
475 Swedish Match AB ADR (Sweden) 36,703
1,920 Unilever PLC ADR (United
Kingdom) 73,440
-----------
203,719
-----------
INDUSTRIAL SERVICES -- 3.8%
1,110 Norsk Hydro ASA ADR (Norway) 49,295
-----------
</Table>
<Table>
<Caption>
- -------------------------------------------------------
Market Value
Shares (Note 1)
- -------------------------------------------------------
- -------------------------------------------------------
INSURANCE -- 4.5%
2,075 ING Groep NV ADR
(Netherlands) $ 34,943
660 Millea Holdings ADR* (Japan) 23,232
-----------
58,175
-----------
MANUFACTURING -- 7.5%
2,020 SKF AB ADR (Sweden) 51,328
3,670 Tomkins PLC ADR (United
Kingdom) 44,847
-----------
96,175
-----------
OIL AND GAS SERVICES -- 6.4%
315 ENI-Ente Nazionale
Idrocarburi SpA ADR (Italy) 24,724
1,050 PetroChina Co. Ltd., ADR
(China) 21,074
4,400 Statoil ASA ADR* (Norway) 36,388
-----------
82,186
-----------
PAPER AND PACKAGING -- 6.4%
1,560 Rexam PLC ADR (United
Kingdom) 51,090
2,310 Sappi, Ltd. ADR (South
Africa) 30,538
-----------
81,628
-----------
PHARMACEUTICALS -- 5.3%
850 GlaxoSmithKline PLC ADR
(United Kingdom) 31,841
840 Schering AG ADR (Germany) 36,036
-----------
67,877
-----------
SEMICONDUCTORS AND RELATED -- 0.8%
4,040 ARM Holdings PLC ADR* (United
Kingdom) 10,221
-----------
TELECOMMUNICATIONS EQUIPMENT AND
SERVICES -- 5.9%
2,300 Nokia Oyj ADR (Finland) 35,650
2,240 Vodafone Group PLC ADR
(United Kingdom) 40,589
-----------
76,239
-----------
UTILITIES -- 4.1%
1,290 E.ON AG ADR (Germany) 52,774
-----------
TOTAL COMMON STOCKS
(COST $1,317,450) 1,237,967
-----------
</Table>
9
NAVELLIER MILLENNIUM FUNDS
- --------------------------------------------------------------------------------
STATEMENTS OF NET ASSETS
December 31, 2002 (continued)
<Table>
<Caption>
INTERNATIONAL GROWTH PORTFOLIO
- -------------------------------------------------------
Market Value
Shares (Note 1)
- -------------------------------------------------------
SHORT-TERM INVESTMENTS -- N.M.
MONEY MARKET FUNDS -- N.M.
52 FBR Fund for Government
Investors $ 52
-----------
TOTAL SHORT-TERM INVESTMENTS
(COST $52) 52
-----------
TOTAL INVESTMENTS -- 96.5%
(COST $1,317,502) 1,238,019
Other Assets Less Liabilities -- 3.5% 45,225
-----------
NET ASSETS -- 100.0% $ 1,283,244
===========
NET ASSETS CONSIST OF:
Paid-in Capital applicable to:
Class A Shares $ 1,454,256
Class B Shares 147,303
Class C Shares 42,808
Undistributed Net Investment Income 3
Accumulated Net Realized Loss on
Investments (281,643)
Net Unrealized Depreciation of
Investments (79,483)
-----------
NET ASSETS $ 1,283,244
===========
CLASS A $ 1,111,265
===========
CLASS B $ 135,459
===========
CLASS C $ 36,520
===========
</Table>
<Table>
<Caption>
- ------------------------------------------------------
- ------------------------------------------------------
Market Value
Shares (Note 1)
- -------------------------------------------------------
NET ASSET VALUE PER SHARE:
CLASS A SHARES
(Based on 218,550 Shares Outstanding) $5.08
===========
CLASS A OFFERING PRICE PER SHARE
(100/95.05 of $5.08) $5.34
===========
CLASS B SHARES
(Based on 26,873 Shares Outstanding) $5.04
===========
CLASS C SHARES
(Based on 7,260 Shares Outstanding) $5.03
===========
</Table>
10
NAVELLIER MILLENNIUM FUNDS
- --------------------------------------------------------------------------------
STATEMENTS OF NET ASSETS
December 31, 2002 (continued)
<Table>
<Caption>
LARGE CAP GROWTH PORTFOLIO
- -------------------------------------------------------
Market Value
Shares (Note 1)
- -------------------------------------------------------
COMMON STOCKS -- 89.5%
APPAREL -- 0.8%
170 Nike, Inc. Class B $ 7,560
------------
AUTOMOTIVE -- 2.8%
1,770 Nissan Motor Co. Ltd. ADR 27,223
------------
COMPUTER EQUIPMENT -- 15.5%
1,800 Cisco Systems, Inc.* 23,580
1,690 Dell Computer Corp.* 45,191
900 Emulex Corp.* 16,695
1,375 Hewlett-Packard Co. 23,870
575 International Business
Machines Corp. 44,563
------------
153,899
------------
COMPUTER SOFTWARE AND SERVICES -- 11.8%
820 First Data Corp. 29,036
810 Intuit, Inc* 38,005
520 Microsoft Corp* 26,884
1,450 Yahoo! Inc.* 23,707
------------
117,632
------------
CONSUMER PRODUCTS AND SERVICES -- 7.4%
735 Clorox Co. 30,319
640 eBay, Inc.* 43,405
------------
73,724
------------
ENTERTAINMENT -- 2.9%
1,120 Fox Entertainment Group,
Inc.* 29,042
------------
FINANCIAL SERVICES -- 4.9%
470 SLM Corp. 48,814
------------
FOOD, BEVERAGE AND TOBACCO -- 3.8%
590 Sysco Corp. 17,576
360 Wm. Wrigley Jr. Co. 19,757
------------
37,333
------------
HEALTHCARE PRODUCTS AND
SERVICES -- 2.2%
415 Johnson & Johnson 22,290
------------
INSURANCE -- 5.1%
660 The Allstate Corp. 24,413
525 The Progressive Corp. 26,056
------------
50,469
------------
</Table>
<Table>
<Caption>
- -------------------------------------------------------
Shares/ Market Value
Par Value (Note 1)
- -------------------------------------------------------
- -------------------------------------------------------
MEDICAL EQUIPMENT AND
SUPPLIES -- 6.7%
365 Forest Laboratories, Inc.* $ 35,850
460 Stryker Corp. 30,875
------------
66,725
------------
RECREATIONAL PRODUCTS -- 2.7%
585 Harley-Davidson, Inc. 27,027
------------
RETAIL -- 11.3%
510 Bed Bath & Beyond, Inc.* 17,610
310 Kohl's Corp.* 17,345
500 Lowe's Companies, Inc. 18,750
1,580 The TJX Companies, Inc. 30,842
555 Wal-Mart Stores, Inc. 28,032
------------
112,579
------------
SEMICONDUCTORS AND RELATED -- 3.7%
2,830 Applied Materials, Inc.* 36,874
------------
TELECOMMUNICATIONS EQUIPMENT AND SERVICES -- 7.9%
3,150 Nextel Communications, Inc.
Class A* 36,383
1,170 Qualcomm, Inc.* 42,576
------------
78,959
------------
TOTAL COMMON STOCKS
(COST $947,950) 890,150
------------
SHORT-TERM INVESTMENTS -- 10.5%
MONEY MARKET FUNDS -- 0.1%
887 FBR Fund for Government
Investors 887
------------
GOVERNMENT AGENCY OBLIGATIONS -- 10.4%
$104,000 FNMA Discount Notes 1.25% due
1/2/03 103,993
------------
TOTAL SHORT-TERM INVESTMENTS
(COST $104,880) 104,880
------------
TOTAL INVESTMENTS -- 100.0%
(COST $1,052,830) 995,030
Other Assets Less Liabilities -- N.M. 185
------------
NET ASSETS -- 100.0% $ 995,215
============
</Table>
11
NAVELLIER MILLENNIUM FUNDS
- --------------------------------------------------------------------------------
STATEMENTS OF NET ASSETS
December 31, 2002 (continued)
<Table>
<Caption>
LARGE CAP GROWTH PORTFOLIO
- -------------------------------------------------------
- -------------------------------------------------------
NET ASSETS CONSIST OF:
Paid-in Capital applicable to:
Class A Shares $ 543,048
Class B Shares 575,306
Class C Shares 353,214
Accumulated Net Realized Loss on
Investments (418,553)
Net Unrealized Depreciation of
Investments (57,800)
------------
NET ASSETS $ 995,215
============
CLASS A $ 355,316
============
CLASS B $ 423,950
============
CLASS C $ 215,949
============
</Table>
<Table>
<Caption>
- -------------------------------------------------------
- -------------------------------------------------------
- -------------------------------------------------------
NET ASSET VALUE PER SHARE:
CLASS A SHARES
(Based on 76,781 Shares Outstanding) $4.63
============
CLASS A OFFERING PRICE PER SHARE
(100/95.05 of $4.63) $4.87
============
CLASS B SHARES
(Based on 92,912 Shares Outstanding) $4.56
============
CLASS C SHARES
(Based on 47,449 Shares Outstanding) $4.55
============
</Table>
12
NAVELLIER MILLENNIUM FUNDS
- --------------------------------------------------------------------------------
STATEMENTS OF NET ASSETS
December 31, 2002 (continued)
<Table>
<Caption>
MID CAP GROWTH PORTFOLIO
- -------------------------------------------------------
Market Value
Shares (Note 1)
- -------------------------------------------------------
COMMON STOCKS -- 97.9%
APPAREL -- 2.4%
1,075 Coach, Inc.* $ 35,389
------------
AUTOMOTIVE -- 3.0%
615 Autozone, Inc.* 43,450
------------
BANKING -- 6.2%
3,175 Hudson City Bancorp, Inc 59,150
965 North Fork Bancorporation,
Inc. 32,559
------------
91,709
------------
COMPUTER EQUIPMENT -- 5.5%
775 CDW Computer Centers, Inc.* 33,984
775 Lexmark International, Inc.* 46,888
------------
80,872
------------
COMPUTER SOFTWARE AND SERVICES -- 23.1%
1,800 Adobe Systems, Inc. 44,838
2,925 Cognos, Inc.* 68,591
925 Electronic Arts, Inc.* 46,037
800 Intuit, Inc.* 37,536
900 Mercury Interactive Corp.* 26,685
1,100 Pixar, Inc.* 58,289
1,400 Symantec Corp.* 56,630
------------
338,606
------------
CONSUMER PRODUCTS AND
SERVICES -- 11.8%
1,350 Apollo Group, Inc. Class A* 59,400
610 Expedia, Inc.* 40,827
850 Hotels.com, Inc.* 46,436
725 Westwood One, Inc.* 27,086
------------
173,749
------------
ELECTRONICS -- 5.8%
2,900 American Power Conversion,
Inc.* 43,935
1,500 Energizer Holdings, Inc.* 41,850
------------
85,785
------------
FINANCIAL SERVICES -- 3.1%
1,100 Moody's Corp. 45,419
------------
HEALTHCARE PRODUCTS AND SERVICES -- 2.2%
950 Gilead Sciences, Inc.* 32,300
------------
MANUFACTURING -- 1.6%
395 ITT Industries, Inc. 23,973
------------
MEDICAL EQUIPMENT AND
SUPPLIES -- 11.1%
1,035 Dentsply International, Inc. 38,542
1,000 Lincare Holdings, Inc.* 31,620
955 Oxford Health Plans, Inc.* 34,810
750 Patterson Dental Co.* 32,805
500 Varian Medical Systems, Inc.* 24,800
------------
162,577
------------
</Table>
<Table>
<Caption>
- -------------------------------------------------------
Shares/ Market Value
Par Value (Note 1)
- -------------------------------------------------------
- -------------------------------------------------------
OIL AND GAS SERVICES -- 3.4%
475 Apache Corp. $ 27,070
500 Devon Energy Corp. 22,950
------------
50,020
------------
RETAIL -- 11.3%
1,675 Amazon.com, Inc.* 31,641
850 Michaels Stores, Inc.* 26,605
2,150 PETsMART, Inc.* 36,830
470 Ross Stores, Inc. 19,923
1,875 Williams-Sonoma, Inc.* 50,906
------------
165,905
------------
SEMICONDUCTORS AND RELATED -- 5.2%
3,000 Nvidia Corp.* 34,530
1,200 QLogic Corp.* 41,412
------------
75,942
------------
TELECOMMUNICATIONS EQUIPMENT AND SERVICES -- 2.2%
720 L-3 Communications Holdings,
Inc.* 32,334
------------
TOTAL COMMON STOCKS (COST $1,470,862)
1,438,030
------------
SHORT-TERM INVESTMENTS -- 1.0%
MONEY MARKET FUNDS -- 0.1%
930 FBR Fund for Government
Investors 930
------------
GOVERNMENT AGENCY
OBLIGATIONS -- 0.9%
$13,000 FNMA Discount Notes 1.25% due
1/2/03 12,999
------------
TOTAL SHORT-TERM INVESTMENTS
(COST $13,929) 13,929
------------
TOTAL INVESTMENTS -- 98.9% (COST
$1,484,791) 1,451,959
Other Assets Less Liabilities -- 1.1% 15,778
------------
NET ASSETS -- 100.0% $ 1,467,737
============
NET ASSETS CONSIST OF:
Paid-in Capital applicable to:
Class A Shares $ 1,088,502
Class B Shares 297,554
Class C Shares 269,063
Accumulated Net Realized Loss on
Investments (154,550)
Net Unrealized Depreciation of
Investments (32,832)
------------
NET ASSETS $ 1,467,737
============
CLASS A $ 953,902
============
CLASS B $ 257,996
============
CLASS C $ 255,839
============
</Table>
13
NAVELLIER MILLENNIUM FUNDS
- --------------------------------------------------------------------------------
STATEMENTS OF NET ASSETS
December 31, 2002 (continued)
<Table>
<Caption>
MID CAP GROWTH PORTFOLIO
- -------------------------------------------------------
- -------------------------------------------------------
NET ASSET VALUE PER SHARE:
CLASS A SHARES
(Based on 119,518 Shares Outstanding) $7.98
============
CLASS A OFFERING PRICE PER SHARE
(100/95.05 of $7.98) $8.40
============
CLASS B SHARES
(Based on 32,493 Shares Outstanding) $7.94
============
CLASS C SHARES
(Based on 32,174 Shares Outstanding) $7.95
============
</Table>
14
NAVELLIER MILLENNIUM FUNDS
- --------------------------------------------------------------------------------
STATEMENTS OF NET ASSETS
December 31, 2002 (continued)
<Table>
<Caption>
MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------
Shares/ Maturity Market Value
Par Value Date Rate (Note 1)
- --------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 98.0%
FEDERAL HOME LOAN BANK DISCOUNT
NOTES -- 43.9%
$300,000 January 17, 2003 1.28% $ 299,829
------------
TOTAL FEDERAL HOME LOAN BANK DISCOUNT NOTES (COST $299,829) 299,829
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
DISCOUNT NOTES -- 54.0%
69,000 January 2, 2003 1.25 68,995
300,000 January 6, 2003 1.25 299,948
------------
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION
DISCOUNT NOTES (COST $368,943) 368,943
------------
</Table>
<Table>
MONEY MARKET FUNDS -- 0.1%
905 FBR Fund for Government Investors $ 905
------------
TOTAL MONEY MARKET
(COST $905) 905
------------
TOTAL INVESTMENTS -- 98.0%
(COST $669,677+) 669,677
Other Assets Less Liabilities -- 2.0% 13,444
------------
NET ASSETS -- 100.0% $ 683,121
============
NET ASSETS CONSIST OF:
Paid-in Capital applicable to:
Class A Shares $ 508,817
Class B Shares 141,938
Class C Shares 32,366
------------
NET ASSETS $ 683,121
============
CLASS A SHARES $ 508,817
============
CLASS B SHARES $ 141,938
============
CLASS C SHARES $ 32,366
============
NET ASSET VALUE PER SHARE:
CLASS A SHARES
(Based on 508,817 Shares Outstanding) $1.00
============
CLASS A OFFERING PRICE PER SHARE
(100/95.05 of $1.00) $1.05
============
CLASS B SHARES
(Based on 141,938 Shares Outstanding) $1.00
============
CLASS C SHARES
(Based on 32,366 Shares Outstanding) $1.00
============
</Table>
- ------------------------------
* Non-income producing
N.M. Not Meaningful
ADR American Depository Receipts
+ Same cost is used for Federal income tax purposes.
See Notes to Financial Statements.
15
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 2002
<Table>
<Caption>
ALL CAP INTERNATIONAL
TOP 20 GROWTH GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO
INVESTMENT INCOME
Interest (Note 1)....................................... $ 8,077 $ 4,428 $ 969
Dividends (Note 1)...................................... 244,185 21,044 20,682
----------- ----------- ---------
Total Investment Income............................... 252,262 25,472 21,651
----------- ----------- ---------
EXPENSES
Investment Advisory Fee (Note 2)........................ 224,695 53,593 11,672
Distribution Plan Fee (Note 4)
Class A Shares........................................ 40,275 8,169 2,712
Class B Shares........................................ 38,911 12,150 434
Class C Shares........................................ 24,685 8,768 391
Transfer Agent and Custodian Fee (Note 3)............... 93,525 65,982 61,118
Printing Expense........................................ 61,265 14,130 955
Registration Fees....................................... 35,175 32,921 32,734
Insurance Expense....................................... 14,636 3,120 250
Audit Fees.............................................. 10,200 12,000 4,000
Trustees' Fees.......................................... 6,750 6,750 6,750
Legal Expense........................................... 4,964 4,964 5,358
Other Expenses.......................................... 2,138 1,077 894
----------- ----------- ---------
Total Expenses........................................ 557,219 223,624 127,268
Less Expenses Reimbursed by Investment Adviser (Note
2).................................................. (172,480) (127,546) (109,142)
----------- ----------- ---------
Net Expenses........................................ 384,739 96,078 18,126
----------- ----------- ---------
NET INVESTMENT INCOME (LOSS).............................. (132,477) (70,606) 3,525
----------- ----------- ---------
Net Realized Loss on Investments.......................... (4,518,363) (1,659,556) (104,333)
Change in Net Unrealized Appreciation/Depreciation of
Investments............................................. (4,154,340) (688,720) (115,650)
----------- ----------- ---------
NET LOSS ON INVESTMENTS................................... (8,672,703) (2,348,276) (219,983)
----------- ----------- ---------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS...... $(8,805,180) $(2,418,882) $(216,458)
=========== =========== =========
</Table>
See Notes to Financial Statements.
16
NAVELLIER MILLENNIUM FUNDS
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 2002
<Table>
<Caption>
LARGE CAP MID CAP MONEY
GROWTH GROWTH MARKET
PORTFOLIO PORTFOLIO* PORTFOLIO*
INVESTMENT INCOME
Interest (Note 1)......................................... $ 1,574 $ 1,265 $ 4,920
Dividends (Note 1)........................................ 4,529 2,415 --
--------- --------- --------
Total Investment Income................................. 6,103 3,680 4,920
--------- --------- --------
EXPENSES
Investment Advisory Fee ( Note 2)......................... 7,883 7,222 828
Distribution Plan Fee (Note 4)
Class A Shares.......................................... 789 1,239 558
Class B Shares.......................................... 2,941 1,443 790
Class C Shares.......................................... 1,788 823 84
Transfer Agent and Custodian Fee (Note 3)................. 60,789 19,865 14,619
Registration Fees......................................... 32,275 43,644 43,644
Trustees' Fees............................................ 6,750 4,500 4,500
Legal Expense............................................. 4,964 3,125 3,520
Audit Fees................................................ 4,000 -- --
Printing Expense.......................................... 1,729 454 142
Insurance Expense......................................... 289 21 4
Other Expenses............................................ 867 559 757
--------- --------- --------
Total Expenses.......................................... 125,064 82,895 69,446
Less Expenses Reimbursed by Investment Adviser (Note
2).................................................... (109,692) (70,363) (66,883)
--------- --------- --------
Net Expenses.......................................... 15,372 12,532 2,563
--------- --------- --------
NET INVESTMENT INCOME (LOSS)................................ (9,269) (8,852) 2,357
--------- --------- --------
Net Realized Loss on Investments............................ (126,421) (154,550) --
Change in Net Unrealized Appreciation/Depreciation of
Investments............................................... (100,611) (32,832) --
--------- --------- --------
NET LOSS ON INVESTMENTS..................................... (227,032) (187,382) --
--------- --------- --------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS................................................ $(236,301) $(196,234) $ 2,357
========= ========= ========
------------------------------------------------------------
</Table>
* From Commencement of Operations May 1, 2002.
See Notes to Financial Statements.
17
NAVELLIER MILLENNIUM FUNDS
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
TOP 20 ALL CAP GROWTH
PORTFOLIO PORTFOLIO
FOR THE YEARS ENDED FOR THE YEARS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------- -------------------------
2002 2001 2002 2001
------------ ------------ ----------- -----------
FROM INVESTMENT ACTIVITIES
Net Investment Loss.......................... $ (132,477) $ (398,723) $ (70,606) $ (80,712)
Net Realized Loss on Investment
Transactions............................... (4,518,363) (10,178,373) (1,659,556) (3,073,373)
Change in Net Unrealized Appreciation/
Depreciation of Investments................ (4,154,340) 2,422,927 (688,720) 907,415
------------ ------------ ----------- -----------
Net Decrease in Net Assets Resulting from
Operations............................... (8,805,180) (8,154,169) (2,418,882) (2,246,670)
------------ ------------ ----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS
From Net Realized Gains:
Class A Shares........................... -- (125,496) -- --
Class B Shares........................... -- (29,080) -- --
Class C Shares........................... -- (18,267) -- --
------------ ------------ ----------- -----------
Total Distributions to Shareholders.......... -- (172,843) -- --
------------ ------------ ----------- -----------
FROM SHARE TRANSACTIONS
Net Proceeds from Sales of Shares:
Class A Shares........................... 1,733,139 5,156,018 1,026,671 4,385,663
Class B Shares........................... 427,950 1,881,731 199,411 1,307,652
Class C Shares........................... 418,809 1,450,935 177,681 1,311,660
Reinvestment of Distributions:
Class A Shares........................... -- 137,302 -- --
Class B Shares........................... -- 27,417 -- --
Class C Shares........................... -- 18,500 -- --
Cost of Shares Redeemed:
Class A Shares........................... (5,784,302) (6,926,841) (1,484,669) (949,016)
Class B Shares (Note 2).................. (872,141) (790,337) (194,684) (300,826)
Class C Shares (Note 2).................. (683,974) (677,849) (589,953) (467,464)
------------ ------------ ----------- -----------
Net Increase (Decrease) in Net Assets
Resulting from Share Transactions........ (4,760,519) 276,876 (865,543) 5,287,669
------------ ------------ ----------- -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS.... (13,565,699) (8,050,136) (3,284,425) 3,040,999
NET ASSETS -- Beginning of Year................ 28,638,605 36,688,741 7,214,087 4,173,088
------------ ------------ ----------- -----------
NET ASSETS -- End of Year...................... $15,072,906 $ 28,638,605 $ 3,929,662 $ 7,214,087
============ ============ =========== ===========
SHARES
Sold:
Class A Shares........................... 140,048 354,006 208,386 619,055
Class B Shares........................... 38,642 132,328 40,611 189,112
Class C Shares........................... 35,861 102,398 39,487 184,007
Issued in Reinvestment of Distributions:
Class A Shares........................... -- 10,452 -- --
Class B Shares........................... -- 2,222 -- --
Class C Shares........................... -- 1,479 -- --
Redeemed:
Class A Shares........................... (498,629) (499,293) (317,430) (155,789)
Class B Shares........................... (80,090) (59,033) (40,058) (48,682)
Class C Shares........................... (61,080) (52,739) (131,801) (68,259)
------------ ------------ ----------- -----------
Net Increase (Decrease) in Shares.......... (425,248) (8,180) (200,805) 719,444
============ ============ =========== ===========
</Table>
See Notes to Financial Statements.
18
NAVELLIER MILLENNIUM FUNDS
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
INTERNATIONAL GROWTH LARGE CAP GROWTH
PORTFOLIO PORTFOLIO
FOR THE YEARS ENDED FOR THE YEARS ENDED
DECEMBER 31, DECEMBER 31,
------------------------- ---------------------------
2002 2001 2002 2001
------------ ---------- ------------ ------------
FROM INVESTMENT ACTIVITIES
Net Investment Gain (Loss)................... $ 3,525 $ (70) $ (9,269) $ (3,405)
Net Realized Loss on Investment
Transactions............................... (104,333) (168,318) (126,421) (268,021)
Change in Net Unrealized Appreciation/
Depreciation of Investments................ (115,650) 62,986 (100,611) 98,670
---------- ---------- --------- ---------
Net Decrease in Net Assets Resulting from
Operations............................... (216,458) (105,402) (236,301) (172,756)
---------- ---------- --------- ---------
DISTRIBUTIONS TO SHAREHOLDERS
From Net Investment Income
Class A Shares........................... (3,522) -- -- --
---------- ---------- --------- ---------
FROM SHARE TRANSACTIONS
Net Proceeds from Sales of Shares:
Class A Shares........................... 905,112 1,653,937 268,821 217,052
Class B Shares........................... 122,275 5,169 361,178 105,032
Class C Shares........................... 20,749 36,850 145,969 32,598
Reinvestment of Distributions:
Class A Shares........................... 3,522 -- -- --
Cost of Shares Redeemed:
Class A Shares........................... (393,232) (836,830) (156,522) (64,771)
Class B Shares (Note 2).................. -- -- (42,414) (8,512)
Class C Shares (Note 2).................. (9,367) (5,361) (21,807) (50,282)
---------- ---------- --------- ---------
Net Increase in Net Assets Resulting from
Share Transactions....................... 649,059 853,765 555,225 231,117
---------- ---------- --------- ---------
TOTAL INCREASE IN NET ASSETS............... 429,079 748,363 318,924 58,361
NET ASSETS -- Beginning of Year................ 854,165 105,802 676,291 617,930
---------- ---------- --------- ---------
NET ASSETS -- End of Year...................... $1,283,244 $ 854,165 $ 995,215 $ 676,291
========== ========== ========= =========
SHARES
Sold:
Class A Shares........................... 148,024 260,952 52,015 34,497
Class B Shares........................... 23,656 810 69,324 16,742
Class C Shares........................... 3,486 6,318 28,295 5,383
Issued in Reinvestment of Distributions:
Class A Shares........................... 695 -- -- --
Redeemed:
Class A Shares........................... (70,418) (133,148) (29,378) (11,044)
Class B Shares........................... -- -- (8,023) (1,516)
Class C Shares........................... (1,623) (921) (4,413) (8,270)
---------- ---------- --------- ---------
Net Increase in Shares..................... 103,820 134,011 107,820 35,792
========== ========== ========= =========
</Table>
See Notes to Financial Statements.
19
NAVELLIER MILLENNIUM FUNDS
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
MID CAP GROWTH MONEY MARKET
PORTFOLIO PORTFOLIO
FOR THE PERIOD FOR THE PERIOD
ENDED ENDED
DECEMBER 31, 2002* DECEMBER 31, 2002*
------------------ ------------------
FROM INVESTMENT ACTIVITIES
Net Investment Gain (Loss).............................. $ (8,852) $ 2,357
Net Realized Loss on Investment Transactions............ (154,550) --
Change in Net Unrealized Depreciation of Investments.... (32,832) --
---------- ---------
Net Increase (Decrease) in Net Assets Resulting from
Operations.......................................... (196,234) 2,357
---------- ---------
DISTRIBUTIONS TO SHAREHOLDERS
From Net Investment Income
Class A Shares...................................... -- (2,156)
Class B Shares...................................... -- (181)
Class C Shares...................................... -- (20)
---------- ---------
Total Distributions to Shareholders..................... -- (2,357)
---------- ---------
FROM SHARE TRANSACTIONS
Net Proceeds from Sales of Shares:
Class A Shares...................................... 1,485,153 529,809
Class B Shares...................................... 373,176 308,078
Class C Shares...................................... 272,530 32,346
Reinvestment of Distributions:
Class A Shares...................................... -- 2,156
Class B Shares...................................... -- 181
Class C Shares...................................... -- 20
Cost of Shares Redeemed:
Class A Shares...................................... (391,785) (23,148)
Class B Shares (Note 2)............................. (73,137) (166,321)
Class C Shares (Note 2)............................. (1,966) --
---------- ---------
Net Increase in Net Assets Resulting from Share
Transactions........................................ 1,663,971 683,121
---------- ---------
TOTAL INCREASE IN NET ASSETS.......................... 1,467,737 683,121
NET ASSETS -- Beginning of Period......................... -- --
---------- ---------
NET ASSETS -- End of Period............................... $1,467,737 $ 683,121
========== =========
SHARES
Sold:
Class A Shares...................................... 165,054 529,809
Class B Shares...................................... 41,403 308,078
Class C Shares...................................... 32,432 32,346
Issued in Reinvestment of Distributions:
Class A Shares...................................... -- 2,156
Class B Shares...................................... -- 181
Class C Shares...................................... -- 20
Redeemed:
Class A Shares...................................... (45,536) (23,148)
Class B Shares...................................... (8,910) (166,321)
Class C Shares...................................... (258) --
---------- ---------
Net Increase in Shares................................ 184,185 683,121
========== =========
</Table>
- ------------------------------
*From Commencement of Operations May 1, 2002.
See Notes to Financial Statements.
20
(This page has been left blank intentionally.)
21
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
DISTRIBUTIONS TO
NET ASSET NET NET REALIZED SHAREHOLDERS DISTRIBUTIONS TO
VALUE -- INVESTMENT AND FROM NET SHAREHOLDERS
BEGINNING INCOME UNREALIZED INVESTMENT FROM NET
OF PERIOD (LOSS) GAIN (LOSS) INCOME REALIZED GAINS
--------- ---------- ------------ ---------------- ----------------
TOP 20 PORTFOLIO CLASS A SHARES
For the fiscal year ended December 31, 2002........ $13.45 $(0.05) $(4.54) $ -- $ --
For the fiscal year ended December 31, 2001........ 17.10 (0.17) (3.40) -- (0.08)
For the fiscal year ended December 31, 2000........ 20.96 (0.20) (1.44) -- (2.22)
For the fiscal year ended December 31, 1999........ 12.55 (0.18) 9.68 -- (1.09)
For the period September 30, 1998* through December
31,1998.......................................... 10.00 (0.01) 2.56 -- --
TOP 20 PORTFOLIO CLASS B SHARES
For the fiscal year ended December 31, 2002........ 13.17 (0.13) (4.43) -- --
For the fiscal year ended December 31, 2001........ 16.94 (0.23) (3.46) -- (0.08)
For the period March 28, 2000* through December 31,
2000............................................. 27.85 (0.13) (8.56) -- (2.22)
TOP 20 PORTFOLIO CLASS C SHARES
For the fiscal year ended December 31, 2002........ 13.19 (0.13) (4.44) -- --
For the fiscal year ended December 31, 2001........ 16.95 (0.25) (3.43) -- (0.08)
For the period April 18, 2000* through December 31,
2000............................................. 21.54 (0.11) (2.26) -- (2.22)
ALL CAP GROWTH PORTFOLIO CLASS A SHARES
For the fiscal year ended December 31, 2002........ 5.89 (0.05) (2.00) -- --
For the fiscal year ended December 31, 2001........ 8.18 (0.05) (2.24) -- --
For the period September 5, 2000* through December
31, 2000......................................... 11.10 -- (2.92) -- --
ALL CAP GROWTH PORTFOLIO CLASS B SHARES
For the fiscal year ended December 31, 2002........ 5.82 (0.08) (1.97) -- --
For the fiscal year ended December 31, 2001........ 8.14 (0.09) (2.23) -- --
For the period September 24, 2000* through December
31, 2000......................................... 10.51 (0.01) (2.36) -- --
ALL CAP GROWTH PORTFOLIO CLASS C SHARES
For the fiscal year ended December 31, 2002........ 5.83 (0.10) (1.96) -- --
For the fiscal year ended December 31, 2001........ 8.16 (0.09) (2.24) -- --
For the period September 26, 2000* through December
31, 2000......................................... 10.43 (0.01) (2.26) -- --
INTERNATIONAL GROWTH PORTFOLIO CLASS A SHARES
For the fiscal year ended December 31, 2002........ 5.74 0.02 (0.66) (0.02) --
For the fiscal year ended December 31, 2001........ 7.12 -- (1.38) -- --
For the period September 5, 2000* through December
31, 2000......................................... 9.74 (0.02) (2.60) -- --
- -----------------------------------------------------
</Table>
* Commencement of Operations
+ Total return represents aggregate total return for the period indicated and
does not reflect any applicable sales charge.
(A) Total returns for periods of less than one year are not annualized.
(B) Annualized
See Notes to Financial Statements.
22
NAVELLIER MILLENNIUM FUNDS
<Table>
<Caption>
RATIOS TO AVERAGE NET ASSETS
----------------------------------------------------------------
NET INVESTMENT
NET INCREASE EXPENSES INCOME (LOSS) NET INVESTMENT
(DECREASE) NET ASSET TOTAL EXPENSES AFTER BEFORE AFTER LOSS BEFORE
IN NET VALUE - END INVESTMENT REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT
ASSET VALUE OF PERIOD RETURN+ (NOTE 2) (NOTE 2) (NOTE 2) (NOTE 2)
------------ ----------- ---------- -------------- ------------- -------------- --------------
$ (4.59) $ 8.86 (34.13)% 1.50% 2.27% (0.39)% (1.16)%
(3.65) 13.45 (20.89) 1.50 2.15 (1.10) (1.75)
(3.86) 17.10 (8.05) 1.40 1.89 (1.11) (1.59)
8.41 20.96 75.91 1.50 2.34 (1.34) (2.19)
2.55 12.55 25.50(A) 1.50(B) 7.90(B) (0.64)(B) (7.04)(B)
(4.56) 8.61 (34.62) 2.25 3.02 (1.11) (1.88)
(3.77) 13.17 (21.75) 2.25 2.90 (1.84) (2.49)
(10.91) 16.94 (31.41)(A) 2.25(B) 2.74(B) (1.84)(B) (2.33)(B)
(4.57) 8.62 (34.65) 2.25 3.02 (1.11) (1.88)
(3.76) 13.19 (21.68) 2.25 2.90 (1.84) (2.49)
(4.59) 16.95 (11.27)(A) 2.25(B) 2.74(B) (1.83)(B) (2.31)(B)
(2.05) 3.84 (34.80) 1.50 3.89 (1.02) (3.41)
(2.29) 5.89 (28.00) 1.50 3.37 (0.93) (2.80)
(2.92) 8.18 (26.31)(A) 1.45(B) 14.71(B) (0.40)(B) (13.66)(B)
(2.05) 3.77 (35.22) 2.25 4.64 (1.78) (4.17)
(2.32) 5.82 (28.50) 2.25 4.12 (1.68) (3.55)
(2.37) 8.14 (22.55)(A) 2.20(B) 15.46(B) (1.06)(B) (14.32)(B)
(2.06) 3.77 (35.33) 2.25 4.64 (1.76) (4.15)
(2.33) 5.83 (28.55) 2.25 4.12 (1.68) (3.55)
(2.27) 8.16 (21.76)(A) 2.20(B) 15.46(B) (1.05)(B) (14.31)(B)
(0.66) 5.08 (11.22) 1.49 10.80 0.36 (8.95)
(1.38) 5.74 (19.38) 1.49 22.97 0.03 (21.45)
(2.62) 7.12 (26.90)(A) 1.49(B) 120.64(B) (0.54)(B) (119.69)(B)
<Caption>
SUPPLEMENTARY DATA
------------------------------------
NUMBER OF
SHARES
NET INCREASE NET ASSETS OUTSTANDING
(DECREASE) AT END OF AT END OF
IN NET PORTFOLIO PERIOD PERIOD
ASSET VALUE TURNOVER (000'S) (000'S)
------------ --------- ---------- -----------
$ (4.59) 207% $10,513 1,187
(3.65) 185 20,784 1,545
(3.86) 118 28,737 1,680
8.41 235 23,433 1,118
2.55 82 7,202 574
(4.56) 207 2,795 325
(3.77) 185 4,823 366
(10.91) 118 4,922 290
(4.57) 207 1,765 205
(3.76) 185 3,032 230
(4.59) 118 3,030 179
(2.05) 367 2,384 620
(2.29) 182 4,293 729
(2.92) 40 2,174 266
(2.05) 367 980 260
(2.32) 182 1,509 259
(2.37) 40 967 119
(2.06) 367 566 150
(2.33) 182 1,412 242
(2.27) 40 1,032 126
(0.66) 85 1,111 219
(1.38) 241 805 140
(2.62) 42 89 13
</Table>
23
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
DISTRIBUTIONS TO
NET ASSET NET NET REALIZED SHAREHOLDERS
VALUE -- INVESTMENT AND FROM NET NET DECREASE
BEGINNING INCOME UNREALIZED INVESTMENT IN NET
OF PERIOD (LOSS) LOSS INCOME ASSET VALUE
--------- ---------- ------------ ---------------- ------------
INTERNATIONAL GROWTH PORTFOLIO CLASS B SHARES
For the fiscal year ended December 31, 2002........ $ 5.70 $(0.01) $(0.65) $ -- $(0.66)
For the fiscal year ended December 31, 2001........ 7.12 (0.04) (1.38) -- (1.42)
For the period November 2, 2000* through
December 31, 2000................................ 8.31 (0.01) (1.18) -- (1.19)
INTERNATIONAL GROWTH PORTFOLIO CLASS C SHARES
For the fiscal year ended December 31, 2002........ 5.71 -- (0.68) -- (0.68)
For the period January 12, 2001* through
December 31, 2001................................ 7.12 (0.01) (1.40) -- (1.41)
LARGE CAP GROWTH PORTFOLIO CLASS A SHARES
For the fiscal year ended December 31, 2002........ 6.21 (0.03) (1.55) -- (1.58)
For the fiscal year ended December 31, 2001........ 8.41 (0.01) (2.19) -- (2.20)
For the period September 5, 2000* through
December 31, 2000................................ 11.22 (0.01) (2.80) -- (2.81)
LARGE CAP GROWTH PORTFOLIO CLASS B SHARES
For the fiscal year ended December 31, 2002........ 6.18 (0.05) (1.57) -- (1.62)
For the fiscal year ended December 31, 2001........ 8.40 (0.04) (2.18) -- (2.22)
For the period October 3, 2000* through
December 31, 2000................................ 10.35 (0.01) (1.94) -- (1.95)
LARGE CAP GROWTH PORTFOLIO CLASS C SHARES
For the fiscal year ended December 31, 2002........ 6.15 (0.06) (1.54) -- (1.60)
For the fiscal year ended December 31, 2001........ 8.39 (0.07) (2.17) -- (2.24)
For the period September 26, 2000* through December
31, 2000......................................... 10.81 (0.01) (2.41) -- (2.42)
MID CAPGROWTH PORTFOLIO CLASS A SHARES
For the period May 1, 2002* through December 31,
2002............................................. 10.00 (0.04) (1.98) -- (2.02)
MID CAPGROWTH PORTFOLIO CLASS B SHARES
For the period May 1, 2002* through December 31,
2002............................................. 10.00 (0.08) (1.98) -- (2.06)
MID CAPGROWTH PORTFOLIO CLASS C SHARES
For the period May 1, 2002* through December 31,
2002............................................. 10.00 (0.05) (2.00) -- (2.05)
MONEY MARKET PORTFOLIO CLASS A SHARES
For the period May 1, 2002* through December 31,
2002............................................. 1.00 0.01 -- (0.01) --
MONEY MARKET PORTFOLIO CLASS B SHARES
For the period July 3, 2002* through December 31,
2002............................................. 1.00 0.01 -- (0.01) --
MONEY MARKET PORTFOLIO CLASS C SHARES
For the period August 7, 2002* through December 31,
2002............................................. 1.00 0.00(C) -- (0.00)(C) --
- -----------------------------------------------------
</Table>
* Commencement of Operations
+ Total return represents aggregate total return for the period indicated and
does not reflect any applicable sales charge.
(A) Total returns for periods of less than one year are not annualized.
(B) Annualized
(C) The per share data provided is less than $0.01.
See Notes to Financial Statements.
24
NAVELLIER MILLENNIUM FUNDS
<Table>
<Caption>
RATIOS TO AVERAGE NET ASSETS
----------------------------------------------------------------
NET INVESTMENT
EXPENSES INCOME (LOSS) NET INVESTMENT
NET ASSET TOTAL EXPENSES AFTER BEFORE AFTER LOSS BEFORE
VALUE - END INVESTMENT REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT
OF PERIOD RETURN+ (NOTE 1) (NOTE 2) (NOTE 2) (NOTE 2)
----------- ---------- -------------- ------------- -------------- --------------
$5.04 (11.58)% 2.21% 11.52% 0.74% (10.04)%
5.70 (19.94) 2.25 23.73 (0.65) (22.13)
7.12 (14.32)(A) 2.24(B) 121.39(B) (0.83)(B) (119.99)(B)
5.03 (11.91) 2.25 11.56 (0.10) (9.41)
5.71 (19.80)(A) 2.21(B) 23.69(B) (0.74)(B) (22.22)(B)
4.63 (25.44) 1.50 15.40 (0.73) (14.63)
6.21 (26.16) 1.50 18.11 (0.19) (16.80)
8.41 (25.04)(A) 1.47(B) 48.33(B) (0.30)(B) (47.16)(B)
4.56 (26.21) 2.25 16.15 (1.47) (15.37)
6.18 (26.43) 2.25 18.86 (0.95) (17.56)
8.40 (18.92)(A) 2.22(B) 49.08(B) (0.72)(B) (47.58)(B)
4.55 (26.02) 2.25 16.15 (1.47) (15.37)
6.15 (26.70) 2.25 18.87 (0.92) (17.54)
8.39 (22.39)(A) 2.22(B) 49.08(B) (0.54)(B) (47.40)(B)
7.98 (20.20)(A) 1.48(B) 11.11(B) (0.97)(B) (10.60)(B)
7.94 (20.60)(A) 2.24(B) 11.87(B) (1.71)(B) (11.34)(B)
7.95 (20.50)(A) 2.23(B) 11.86(B) (1.80)(B) (11.43)(B)
1.00 0.63(A) 0.61(B) 22.00(B) 0.96(B) (20.43)(B)
1.00 0.12(A) 1.37(B) 22.76(B) 0.23(B) (21.16)(B)
1.00 0.10(A) 1.23(B) 22.62(B) 0.23(B) (21.16)(B)
<Caption>
SUPPLEMENTARY DATA
------------------------------------
NUMBER OF
SHARES
NET ASSETS OUTSTANDING
NET ASSET AT END OF AT END OF
VALUE - END PORTFOLIO PERIOD PERIOD
OF PERIOD TURNOVER (000'S) (000'S)
----------- --------- ---------- -----------
$5.04 85% $135 27
5.70 241 18 3
7.12 42 17 2
5.03 85 37 7
5.71 241 31 5
4.63 116 355 77
6.21 127 336 54
8.41 26 258 31
4.56 116 424 93
6.18 127 195 32
8.40 26 138 16
4.55 116 216 47
6.15 127 145 24
8.39 26 222 27
7.98 78 954 120
7.94 78 258 32
7.95 78 256 32
1.00 N/A 509 509
1.00 N/A 142 142
1.00 N/A 32 32
</Table>
25
NAVELLIER MILLENNIUM FUNDS
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 2002
1. Significant Accounting Policies
The Navellier Millennium Funds (the "Fund"), formerly known as the American
Tiger Funds, are registered under the Investment Company Act of 1940, as
amended, (the "Act") as an open-end management investment company and are
authorized to issue shares of beneficial interests. The Fund currently consists
of six Portfolios: the Top 20 Portfolio, a non-diversified open-end management
investment company, the All Cap Growth Portfolio, a diversified open-end
management investment company, International Growth Portfolio, a non-diversified
open-end management investment company, the Large Cap Growth Portfolio, a
non-diversified open-end management company, the Mid Cap Growth Portfolio, a
non-diversified open-end management company, and the Money Market Portfolio. The
Fund was established as a Delaware Business Trust organized on September 4,
1998. The Fund is authorized to issue an unlimited number of shares of
beneficial interest. The Fund consists of three classes of shares. Class A
shares have been offered since September 30, 1998 for the Top 20 Portfolio,
September 5, 2000 for the All Cap Growth, International Growth, and Large Cap
Growth Portfolios, and May 1, 2002 for the Mid Cap Growth and Money Market
Portfolios. Class B and Class C shares have been offered since March 2, 2000 for
the Top 20 Portfolio, September 5, 2000 for the All Cap Growth, International
Growth, and Large Cap Growth Portfolios, and May 1, 2002 for the Mid Cap Growth
and Money Market Portfolios. Class A shares are purchased at the public offering
price which includes a maximum sales charge of up to 4.95% depending on the size
of the purchase. Class B and C shares are offered at net asset value without an
initial sales charge and may be subject to a contingent deferred sales charge.
Income and expenses of the Fund are allocated proportionately to the three
classes of shares based on daily net assets, except for Rule 12b-1 distribution
fees (Note 4). The following is a summary of significant accounting policies
which the Fund follows:
(a) Listed securities are valued at the last sales price of the New York
Stock Exchange and other major exchanges. Over-the-Counter securities are
valued at the last sales price. If market quotations are not readily
available, the Board of Trustees will value the Fund's securities in good
faith. The Trustees will periodically review this method of valuation and
recommend changes which may be necessary to assure that the Fund's
instruments are valued at fair value. Debt securities with maturities of 60
days or less and short-term notes are valued at amortized cost, which
approximates fair value.
(b) Security transactions are recorded on the trade date (the date the
order to buy or sell is executed). Interest income is accrued on a daily
basis. Dividend income is recorded on the ex-dividend date. Realized gain
and loss on securities transactions are computed on an identified cost
basis.
(c) Dividends from net investment income are declared and paid annually,
except for the Money Market Portfolio, which are declared daily and paid
monthly. Dividends are reinvested in additional shares unless shareholders
request payment in cash. Net capital gains, if any, are distributed
annually.
(d) The Fund intends to comply with the provisions of the Internal
Revenue Code applicable to regulated investment companies and will
distribute all net investment income and capital gains to its shareholders.
Therefore, no Federal income tax provision is required.
(e) The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of increases and decreases in net assets from operations during the
reporting period. Actual results could differ from those estimates.
2. Investment Advisory Fees and Other Transactions with Affiliates
Investment advisory services are provided by Navellier Management, Inc.
(the "Adviser"). Under an agreement with the Adviser, the Fund pays a fee at the
annual rate of 1.00% of the daily net assets of each Portfolio except for the
Money Market Portfolio which pays a fee of 0.50%. An officer and trustee of the
Fund is also an officer and director of the Adviser.
Money Management Advisers, Inc. ("MMA") serves as Investment sub-adviser to
the Money Market Portfolio. The Adviser pays MMA a fee for its services at an
annual rate equal to 100% of the fee actually paid to the Adviser by the Fund
(net of any waivers).
26
NAVELLIER MILLENNIUM FUNDS
- --------------------------------------------------------------------------------
The Adviser has agreed to limit the total normal expenses of each
Portfolio's Class A to 1.50% and Class B and Class C to 2.25% of average annual
net assets with the exception of the Money Market Portfolio which is limited to
1.00% for Class A and 1.75% for Class B and Class C of average daily net assets.
In order to maintain the expense limitation, the Adviser paid certain operating
expenses on a net basis of the Top 20 Portfolio, the All Cap Growth Portfolio,
the International Growth Portfolio, the Large Cap Growth Portfolio, the Mid Cap
Growth Portfolio, and the Money Market Portfolio totaling $172,480, $127,546,
$109,142, $109,692, $70,363 and $66,883 respectively.
At December 31, 2002, the statement of net assets includes the following
amounts payable to the Adviser and Distributor:
<Table>
<Caption>
ALL CAP INTERNATIONAL LARGE CAP MID CAP MONEY
TOP 20 GROWTH GROWTH GROWTH GROWTH MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- ------------- --------- --------- ---------
Adviser....................... $13,339 $3,486 $1,143 $870 $1,309 $136
======= ====== ====== ==== ====== ====
Distributor................... $ 198 $ 59 $ 12 $ 20 $ 21 $ 8
======= ====== ====== ==== ====== ====
</Table>
Navellier Securities, Inc. (the "Distributor") acts as the Fund's
Distributor and is registered as a broker-dealer under the Securities and
Exchange Act of 1934. The distributor, which is the principal underwriter of the
Fund's shares, renders its service to the Fund pursuant to a distribution
agreement. An officer and trustee of the Fund is also an officer and director of
the Distributor.
For the year ended December 31, 2002, the Fund was advised that the
Distributor received $129, $178, and $46 from sales loads earned on sales of the
Top 20 Portfolio's, All Cap Growth Portfolio's and International Growth
Portfolio's capital stock, respectively.
The cost of shares redeemed is net of the 1% redemption fee on fund shares
which have been held 90 days or less. For the periods listed below, these fees
were as follows:
<Table>
<Caption>
CLASS B SHARES CLASS C SHARES
-------------- --------------
Top 20 Portfolio
For the year ended December 31, 2002...................... $16,275 $1,204
For the year ended December 31, 2001...................... 25,678 2,795
All Cap Growth Portfolio
For the year ended December 31, 2002...................... 4,636 148
For the year ended December 31, 2001...................... 7,822 3,612
International Growth Portfolio
For the year ended December 31, 2002...................... -- 94
For the year ended December 31, 2001...................... -- 54
Large Cap Growth Portfolio
For the year ended December 31, 2002...................... 1,574 --
For the year ended December 31, 2001...................... 240 --
Mid Cap Growth Portfolio
For the period May 1, 2002* through December 31, 2002..... 600 19
Money Market Portfolio
For the period July 3, 2002* through December 31, 2002.... 972 --
</Table>
- ------------------------------------------------------
* Commencement of Operations
The Fund pays each of its Trustees not affiliated with the Adviser $12,000
annually. For the year ended December 31, 2002, Trustees' fees totaled $36,000.
27
NAVELLIER MILLENNIUM FUNDS
- --------------------------------------------------------------------------------
3. Transfer Agent and Custodian
FBR National Bank & Trust provides transfer agency, dividend disbursing and
other shareholder services to the Fund. In addition, FBR National Bank & Trust
serves as custodian of the Fund's assets. Fees paid to FBR National Bank & Trust
are based upon a fee schedule approved by the Board of Trustees.
4. Distribution Plan
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule
12b-1 under the Act, whereby it reimburses the Distributor or others in an
amount not to exceed 0.25%, 1.00% and 1.00% per annum of the average daily net
assets of Class A, Class B and Class C, respectively, for expenses incurred in
the promotion and distribution of shares of the portfolio. These expenses
include, but are not limited to, the printing of prospectuses, statements of
additional information, and reports used for sales purposes, expenses of
preparation of sales literature and related expenses (including Distributor
personnel), advertisements and other distribution-related expenses, including a
prorated portion of the Distributor's overhead expenses attributable to the
distribution of shares. Such payments are made monthly. The 12b-1 fee includes,
in addition to promotional activities, the amount the Fund may pay to the
Distributor or others as a service fee to reimburse such parties for personal
services provided to shareholders of the Fund and/or the maintenance of
shareholder accounts. Such Rule 12b-1 fees are made pursuant to the Plan and
distribution agreements entered into between such service providers and the
Distributor or the Fund directly.
5. Securities Transactions
For the year ended December 31, 2002, purchases and sales of securities
(excluding short-term securities) were as follows:
<Table>
<Caption>
ALL CAP INTERNATIONAL LARGE CAP MID CAP
TOP 20 GROWTH GROWTH GROWTH GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- ------------- ---------- ----------
Purchases........................ $45,718,362 $18,834,578 $1,559,296 $1,298,234 $2,454,200
=========== =========== ========== ========== ==========
Sales............................ $50,593,635 $19,225,789 $ 931,423 $ 794,980 $ 828,787
=========== =========== ========== ========== ==========
</Table>
6. Unrealized Appreciation and Depreciation of Investments
Unrealized appreciation and depreciation as of December 31, 2002, based on
the cost for Federal income tax purposes are as follows:
<Table>
<Caption>
ALL CAP INTERNATIONAL LARGE CAP MID CAP
TOP 20 GROWTH GROWTH GROWTH GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------- ---------- ------------- ---------- ----------
Gross Unrealized Appreciation..... $ 252,561 $ 253,950 $ 49,131 $ 17,051 $ 57,697
Gross Unrealized Depreciation..... (1,409,751) (192,906) (133,573) (74,851) (90,529)
----------- ---------- ---------- ---------- ----------
Net Unrealized Appreciation
(Depreciation).................. $(1,157,190) $ 61,044 $ (84,442) $ (57,800) $ (32,832)
=========== ========== ========== ========== ==========
Cost of Investments for Federal
Income Tax Purposes............. $16,283,108 $3,896,666 $1,322,461 $1,052,830 $1,484,791
=========== ========== ========== ========== ==========
</Table>
The difference between book basis and tax basis unrealized appreciation
(depreciation) is attributable primarily to the tax deferral of losses on wash
sales.
28
NAVELLIER MILLENNIUM FUNDS
- --------------------------------------------------------------------------------
7. Federal Income Tax
At December 31, 2002, for Federal income tax purposes, the following Funds
had capital loss carryovers which may be applied against future net taxable
realized gains of each succeeding year until the earlier of its utilization or
its expiration:
<Table>
<Caption>
ALL CAP INTERNATIONAL LARGE CAP
TOP 20 GROWTH GROWTH GROWTH MID CAP
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO GROWTH
EXPIRES DECEMBER 31, PORTFOLIO
-------------------- ----------- ---------- ------------- --------- ---------
2008................................... $ -- $ 15,019 $ 4,532 $ 1,955 $ --
2009................................... 11,569,611 2,754,393 133,011 245,519 --
2010................................... 3,626,476 1,851,305 85,587 149,632 115,685
----------- ---------- -------- -------- --------
$15,196,087 $4,620,717 $223,130 $397,106 $115,685
=========== ========== ======== ======== ========
</Table>
Permanent differences between tax and financial reporting of net investment
income are reclassified. As of December 31, 2002, net investment losses were
reclassified to paid-in capital for Top 20 Portfolio, All Cap Growth Portfolio,
Large Cap Growth Portfolio, and Mid Cap Growth Portfolio in the amount of
$132,477, $70,606, $9,269, and $8,852, respectively. Net assets of the Funds
were not affected by these reclassifications.
On December 30, 2002, the International Growth Portfolio, Class A Shares
paid ordinary income distributions of $0.016166 per share to shareholders as of
record on December 27, 2002. Throughout the year, the Money Market Portfolio had
daily ordinary income distributions that were paid on the first business day of
every month for a total of $0.006287, $0.001228, and $0.000957 per share for
Class A Shares, Class B Shares, and Class C Shares, respectively.
The tax character of distributions paid during 2002 was as follows:
<Table>
<Caption>
INTERNATIONAL
GROWTH MONEY MARKET MONEY MARKET MONEY MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
CLASS A SHARES CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- -------------- --------------
Distributions paid from:
Ordinary income..................... $3,522 $2,156 $181 $20
</Table>
The tax character of distributions paid during 2001 was as follows:
<Table>
<Caption>
TOP 20 TOP 20 TOP 20
PORTFOLIO PORTFOLIO PORTFOLIO
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
Distributions paid from:
Long-term capital gains............................ $125,496 $29,080 $18,267
</Table>
As of December 31, 2002, the components of distributable earnings on a tax
basis were as follows:
<Table>
<Caption>
ALL CAP
GROWTH
PORTFOLIO
---------
Unrealized Appreciation..................................... $61,222
</Table>
8. Borrowing Agreement
The Funds have a short-term borrowing agreement with Custodial Trust
Company which may be drawn upon for temporary purposes. For each short-term
borrowing, the Funds pledge collateral. At December 31, 2002, the International
Growth Portfolio had an outstanding loan of $40,136 at an annualized interest
rate of 2.38%.
29
NAVELLIER MILLENNIUM FUNDS
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES
THE NAVELLIER MILLENNIUM FUNDS
RENO, NEVADA
We have audited the accompanying statement of net assets of Navellier Top
20 Portfolio, Navellier All Cap Growth Portfolio, Navellier International Growth
Portfolio, Navellier Large Cap Growth Portfolio, Navellier Mid Cap Growth
Portfolio and Navellier Money Market Portfolio, each a series of shares of The
Navellier Millennium Funds as of December 31, 2002, and the related statements
of operations for the period then ended and the statements of changes in net
assets and financial highlights for the periods indicated thereon. These
financial statements 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.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, 2002, 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 referred
to above present fairly, in all material respects, the financial position of
Navellier Top 20 Portfolio, Navellier All Cap Growth Portfolio, Navellier
International Growth Portfolio, Navellier Large Cap Growth Portfolio, Navellier
Mid Cap Growth Portfolio and Navellier Money Market Portfolio as of December 31,
2002, the results of their operations for the period then ended and the changes
in their net assets and financial highlights for the periods indicated thereon,
in conformity with accounting principles generally accepted in the United States
of America.
/s/ TAIT, WELLER & BAKER
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
February 12, 2003
30
NAVELLIER MILLENNIUM FUNDS
- --------------------------------------------------------------------------------
SUPPLEMENTAL INFORMATION
(UNAUDITED)
Information pertaining to the Trustees and Officers of the Trust is set forth
below. The statement of additional information (SAI) includes additional
information about the Trustees and is available without charge, upon request by
calling (800) 887-8670.
<Table>
<Caption>
- -------------------------------------------------------------------------------------------------------------------
NAME NO. OF OTHER
AGE TERM OF FUNDS IN TRUSTEESHIPS/
ADDRESS OFFICE AND COMPLEX DIRECTORSHIPS
POSITION WITH TRUST TENURE OVERSEEN PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS BY TRUSTEE
- -------------------------------------------------------------------------------------------------------------------
Louis Navellier* Trustee and 14 Mr. Navellier is and has been the CEO and None
45 President President of Navellier & Associates Inc., an
One East Liberty since investment management company since 1988; CEO
Third Floor September 30, and President of Navellier Management, Inc., an
Reno, NV 89501 1998 investment management company since May 10,
1993; CEO and President of Navellier
Trustee and President International Management, Inc., an investment
management company, since May 10, 1993; CEO and
President of Navellier Securities Corp. since
May 10, 1993; CEO and President of Navellier
Fund Management, Inc., an investment management
company, since November 30, 1995; and has been
editor of MPT Review from August 1987 to the
present and was publisher and editor of the
predecessor investment advisory newsletter OTC
Insight, which he began in 1980 and wrote
through July 1987.
- -------------------------------------------------------------------------------------------------------------------
Barry Sander Trustee since 13 Currently retired as of December 1, 1998, None
54 September 30, formerly he was the President and CEO of Ursa
1835 Ashland Mine Rd. 1998 Major Inc., a stencil manufacturing firm, and
Ashland, OR 97520 had been for the past nine years.
Trustee
- -------------------------------------------------------------------------------------------------------------------
Joel Rossman Trustee since 13 Currently retired as of March 15, 1998. None
53 September 30, Formerly he was President and CEO of Personal
2921 California 1998 Stamp Exchange, Inc., a manufacturer, designer
San Francisco, CA 94115 and distributor of rubber stamp products. He
had been President and CEO of Personal Stamp
Trustee Exchange for the preceding 10 years.
- -------------------------------------------------------------------------------------------------------------------
Jacques Delacroix Trustee since 13 Professor of Business Administration, Leavy None
60 September 30, School of Business, Santa Clara University
519 Chestnut Street 1998 (1983- present).
Santa Cruz, CA 95060
Trustee
- -------------------------------------------------------------------------------------------------------------------
Arjen Kuyper* Trustee and 14 Mr. Kuyper is COO of Navellier & Associates, None
46 Treasurer Inc. and has been since September 1, 1998.
One East Liberty since Prior to that he was operations manager for
Third Floor September 30, Navellier & Associates, Inc. since 1992 and
Reno, NV 89501 1998 operations manager for Navellier Management,
Inc. and for Navellier Securities Corp., since
Trustee and Treasurer 1993.
- -------------------------------------------------------------------------------------------------------------------
</Table>
*Interested Trustee
Each Trustee will hold office until the Trust's next special meeting of
shareholders and until their successors have been duly elected and qualified or
until their earlier resignation or removal.
31
(This page has been left blank intentionally.)
CUSTODIAN & TRANSFER AGENT NAVELLIER OFFICES
FBR National Bank & Trust c/o Navellier Securities Corp.
4922 Fairmont Avenue One East Liberty, Third Floor
Bethesda, MD 20814 Reno, Nevada 89501
800-622-1386 E.S.T. 800-887-8670 P.S.T.
NAVELLIER PERFORMANCE FUNDS' LARGE CAP GROWTH PORTFOLIO
AND
NAVELLIER MILLENNIUM FUNDS' LARGE CAP GROWTH PORTFOLIO
AND
TOUCHSTONE STRATEGIC TRUST'S LARGE CAP GROWTH FUND
PRO FORMA COMBINED SCHEDULE OF INVESTMENTS
December 31, 2002
NAVELLIER PERFORMANCE LARGE CAP GROWTH PORTFOLIO
PRO FORMA COMBINING
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 2002
(UNAUDITED)
NAVELLIER MILLENNIUM NAVELLIER PERFORMANCE
TST LARGE CAP VALUE LARGE CAP GROWTH
LARGE CAP GROWTH FUND PORTFOLIO PORTFOLIO
------------------------ ----------------------- -----------------------
SHARES/ MARKET SHARES/ MARKET SHARES/ MARKET
PAR VALUE PAR VALUE PAR VALUE
------- ----------- ---------- ---------- ---------- ---------
COMMON STOCKS AND EQUITY INTERESTS
BASIC MATERIALS
Semiconductors and Related
Applied Materials, Inc. - - 2,830 36,874 37,700 491,231
--------- --------- ---------
ENERGY
Oilfield Equipment
BJ Services Co. 27,100 875,601 - - - -
Weatherford Intl Ltd 10,600 423,258 - - - -
--------- --------- ---------
1,298,859 - -
INDUSTRIAL
Industrial Diversified
3M Co. 4,650 573,345 - - - -
--------- --------- ---------
CONSUMER, CYCLICAL
Automotive
Nissan Motor Co. Ltd. - - 1,770 27,223 24,800 381,424
--------- --------- ---------
Entertainment
Fox Entertainment Group, Inc. - - 1,120 29,042 17,125 444,051
--------- --------- ---------
Media Publishing
Viacom Inc. - Class A 22,250 908,023 - - - -
--------- --------- ---------
Other Recreation
Harley-Davidson, Inc. 19,200 887,040 585 27,027 8,500 392,700
--------- --------- ---------
Restaurants
Darden Restaurants Inc. 22,450 459,102 - - - -
--------- --------- ---------
Retailers, Apparel
Nike - - 170 7,560 9,800 137,857
--------- --------- ---------
Retailers, Broadline
Kohls Corp 15,850 886,807 310 17,345 4,050 226,598
Walgreen Co. 20,000 583,800 - - - -
The TJX Companies, Inc. - - 1,580 30,842 19,000 370,880
Wal-Mart Stores, Inc. 22,750 1,149,103 555 28,092 9,500 479,845
--------- --------- ---------
2,619,710 76,219 1,077,323
Retailers, Specialty
Bed Bath & Beyond Inc. 28,050 968,567 510 17,610 7,975 275,377
Lowe's Companies, Inc. 25,000 937,600 500 18,750 6,700 251,250
Staples, Inc. 27,200 497,760 - - - -
--------- --------- ---------
2,403,827 36,360 526,627
CONSUMER, NON-CYCLICAL
Food, Beverage and Tobacco
Sysco Corp. - - 590 17,576 8,775 261,407
Wm. Wrigley Jr. Co. - - 360 19,757 6,600 301,840
Anheuser-Busch Co., Inc. 8,000 387,200 - - - -
Pepsico, Inc. 14,300 603,746 - - - -
--------- --------- ---------
990,946 37,333 563,247
Consumer Products and Services
The Clorox Co. - - 735 30,319 10,000 412,500
eBay, Inc. - - 640 43,405 8,550 579,861
Apollo Group Inc. 13,850 609,400 - - - -
--------- --------- ---------
609,400 73,724 992,361
Food Retailers
Whole Foods Market Inc. 8,000 421,840 - - - -
--------- --------- ---------
PRO FORMA TST
ADJUSTMENTS LARGE CAP GROWTH FUND(A)
--------------------- ------------------------
SHARES/ MARKET SHARES/ MARKET
PAR VALUE PAR VALUE
-------- ------- --------- ------------
COMMON STOCKS AND EQUITY INTERESTS
BASIC MATERIALS
Semiconductors and Related
Applied Materials, Inc. - - 40,530 528,105
-----------
ENERGY
Oilfield Equipment
BJ Services Co. - - 27,100 875,601
Weatherford Intl Ltd - - 10,600 423,258
-----------
- - 1,298,859
INDUSTRIAL
Industrial Diversified
3M Co. - - 4,650 573,345
-----------
CONSUMER, CYCLICAL
Automotive
Nissan Motor Co. Ltd. - - 26,570 408,647
-----------
Entertainment
Fox Entertainment Group, Inc. - - 18,245 473,093
-----------
Media Publishing
Viacom Inc. - Class A - - 22,250 908,023
-----------
Other Recreation
Harley-Davidson, Inc. - - 28,285 1,306,767
-----------
Restaurants
Darden Restaurants Inc. - - 22,450 459,102
-----------
Retailers, Apparel
Nike - - 9,970 145,417
-----------
Retailers, Broadline
Kohls Corp - - 20,210 1,130,750
Walgreen Co. - - 20,000 583,800
The TJX Companies, Inc. - - 20,580 401,722
Wal-Mart Stores, Inc. - - 32,805 1,656,980
-----------
- - 3,773,252
Retailers, Specialty
Bed Bath & Beyond Inc. - - 36,535 1,261,554
Lowe's Companies, Inc. - - 32,200 1,207,500
Staples, Inc. - - 27,200 497,760
-----------
- - 2,966,814
CONSUMER, NON-CYCLICAL
Food, Beverage and Tobacco
Sysco Corp. - - 9,365 278,983
Wm. Wrigley Jr. Co. - - 5,860 321,597
Anheuser-Busch Co., Inc. - - 8,000 387,200
Pepsico, Inc. - - 14,300 603,746
-----------
1,691,628
Consumer Products and Services
The Clorox Co. - - 10,735 442,819
eBay, Inc. - - 9,190 623,266
Apollo Group Inc. - - 13,850 609,400
-----------
1,675,485
Food Retailers
Whole Foods Market Inc. - - 8,000 421,840
-----------
NAVELLIER PERFORMANCE LARGE CAP GROWTH PORTFOLIO
PRO FORMA COMBINING
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 2002
(UNAUDITED)
TST NAVELLIER MILLENNIUM NAVELLIER PERFORMANCE
LARGE CAP GROWTH FUND LARGE CAP VALUE PORTFOLIO LARGE CAP GROWTH PORTFOLIO
---------------------- ------------------------- --------------------------
SHARES/ MARKET SHARES/ MARKET SHARES/ MARKET
PAR VALUE PAR VALUE PAR VALUE
-------- ---------- -------- ----------- ---------- ------------
Health Care Providers
Tenet Healthcare Corp. 25,800 423,120 - - - -
---------- --------- ---------
Healthcare Products and Services
Forest Laboratories, Inc. - - 365 35,850 4,825 473,912
Johnson & Johnson - - 415 22,290 7,200 386,712
---------- --------- ---------
- 58,140 860,624
Household Products (Non-Durable)
Colgate-Palmolive Co. 18,700 980,441 - - - -
Procter & Gamble Company 6,850 588,689 - - - -
---------- --------- ---------
1,569,130 - -
Medical Supplies
Stryker Corp. 460 30,875 4,550 305,396
Cardinal Health Inc. 18,300 1,083,177 - - - -
Medtronic Inc. 28,800 1,313,280 - - - -
---------- --------- ---------
2,396,457 30,875 305,396
Pharmaceuticals
Amgen, Inc. 25,000 1,208,500 - - - -
Caremark Rx Inc. 43,500 706,875 - - - -
Johnson & Johnson 21,250 1,141,337 - - - -
Lilly (Eli) & Co. 8,800 558,800 - - - -
Pfizer, Inc. 40,800 1,247,256 - - - -
---------- --------- ---------
4,862,768 - -
TECHNOLOGY
Computer Equipment
Cisco Systems, Inc. - - 1,800 23,580 23,875 312,762
Dell Computer Corp. - - 1,690 45,191 28,500 762,090
Emulex Corp. - - 900 16,695 15,100 280,105
Hewlett-Packard Co. - - 1,375 23,870 18,375 318,990
International Business Machines
Corp. - - 575 44,563 7,500 581,250
---------- --------- ---------
- 153,899 2,255,197
Computers & Information
Dell Computer Corp 29,900 799,526 - - - -
SEI Investments 30,400 826,272 - - - -
The Bisys Group, Inc. 32,150 511,185 - - - -
---------- --------- ---------
2,136,983 - -
Semiconductor & Related
Intel Corp. 31,100 484,227 - - - -
Qlogic Corporation 18,000 621,180 - - - -
---------- --------- ---------
1,105,407 - -
PRO FORMA TST
ADJUSTMENTS LARGE CAP GROWTH FUND(A)
------------------ -----------------------
SHARES/ MARKET SHARES/ MARKET
PAR VALUE PAR VALUE
------- ------ -------- ---------
Health Care Providers
Tenet Healthcare Corp. - - 25,800 $ 423,120
---------
Healthcare Products and Services
Forest Laboratories, Inc. - - 5,190 509,762
Johnson & Johnson - - 7,615 409,002
---------
- - 918,764
Household Products (Non-Durable)
Colgate-Palmolive Co. - - 18,700 980,441
Procter & Gamble Company - - 6,850 588,689
---------
- - 1,569,130
Medical Supplies
Stryker Corp. - - 5,010 336,271
Cardinal Health Inc. - - 18,300 1,083,177
Medtronic Inc. - - 28,800 1,313,280
---------
- - 2,732,728
Pharmaceuticals
Amgen, Inc. - - 25,000 1,208,500
Caremark Rx Inc. - - 43,500 706,875
Johnson & Johnson - - 21,250 1,141,337
Lilly (Eli) & Co. - - 8,800 558,800
Pfizer, Inc. - - 40,800 1,247,256
---------
- - 4,862,768
TECHNOLOGY
Computer Equipment
Cisco Systems, Inc. - - 25,675 336,342
Dell Computer Corp. - - 30,190 807,281
Emulex Corp. - - 16,000 296,800
Hewlett-Packard Co. - - 19,750 342,860
International Business Machines
Corp. - - 8,075 625,813
---------
- - 2,409,096
Computers & Information
Dell Computer Corp - - 29,900 799,526
SEI Investments - - 30,400 826,272
The Bisys Group, Inc. - - 32,150 511,185
---------
- - 2,136,983
Semiconductor & Related
Intel Corp. - - 31,100 484,227
Qlogic Corporation - - 18,000 621,180
---------
- - 1,105,407
NAVELLIER PERFORMANCE LARGE CAP GROWTH PORTFOLIO
PRO FORMA COMBINING
PORTFOLIO OF INVESTMENTS(A)
DECEMBER 31, 2002
(UNAUDITED)
TST NAVELLIER MILLENNIUM NAVELLIER PERFORMANCE
LARGE CAP GROWTH FUND LARGE CAP VALUE PORTFOLIO LARGE CAP GROWTH PORTFOLIO
--------------------- ------------------------- --------------------------
SHARES/ MARKET SHARES/ MARKET SHARES/ MARKET
PAR VALUE PAR VALUE PAR VALUE
------- ---------- ---------- ------------- ----------- ------------
Yahoo! Inc. - 1,450 23,707 19,325 315,964
Affiliated Computer Svcs. 21,100 1,110,915 - - - -
Cisco Systems, Inc. 95,900 1,256,290 - - - -
First Data Corp. 15,000 531,150 820 29,036 12,275 434,658
Intuit Inc. 11,000 516,120 810 38,005 10,875 510,255
Microsoft Corp. 29,350 1,517,395 520 26,884 8,350 431,695
Sungard Data Systems 44,450 1,047,242 - - - -
Veritas Software Corp. 30,250 472,505 - - - -
---------- -------- -----------
6,451,617 117,632 1,692,572
Telecommunications Equipment and Services
Nextel Communications, Inc. - - 3,150 36,383 42,275 488,276
QUALCOMM, Inc. - - 1,170 42,576 15,900 578,601
---------- -------- -----------
- 78,959 1,066,877
FINANCIAL SERVICES
Banking, Major
Bank of New York Co., Inc. 29,900 716,404 - - - -
---------- -------- -----------
716,404 - -
Financial Services, Diversified
Freddie Mac 22,500 1,328,625 - - - -
SLM Corp. 12,150 1,261,899 470 48,814 6,900 716,634
---------- -------- -----------
2,590,524 48,814 716,634
Insurance
The Allstate Corp. - - - - 10,550 390,244
AFLAC, Inc. - - 660 24,413 - -
The Progressive Corp. - - 525 26,056 8,700 431,781
---------- -------- -----------
- 50,469 822,025
Regional Banks
Fifth Third Bancorp 15,300 895,815 - - - -
---------- -------- -----------
895,815 - -
CONGLOMERATES
Conglomerates
General Electric Co. 37,450 911,908 - - -
---------- -------- -----------
TOTAL COMMON STOCKS AND EQUITY INTERESTS 35,232,225 890,150 12,726,146
---------- -------- -----------
GOVERNMENT AGENCY OBLIGATIONS
FNMA Discount Notes, 1.25%, due 1/2/03 - - 104,000 103,993 - -
---------- -------- -----------
CASH EQUIVALENTS
Money Market Fund
FBR Fund for Government Investors - - 887 887 1,189,273 1,189,273
---------- -------- -----------
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS AT MARKET 35,232,225 995,030 13,915,419
---------- --------- -----------
TOTAL INVESTMENTS AT COST 42,106,795 1,052,830 14,796,893
---------- --------- -----------
(A) Neither the Navallier Performance Large Cap Growth Fund or the Navallier
Millennium Large Cap Growth Fund will be Required to sell current holdings
to cause the consummation of the Reorganization.
PRO FORMA TST
ADJUSTMENTS LARGE CAP GROWTH FUND(A)
------------------ ------------------------
SHARES/ MARKET SHARES/ MARKET
PAR VALUE PAR VALUE
-------- -------- --------- -----------
Software & Processing
Yahoo! Inc. - - 20,775 $ 339,671
Affiliated Computer Svcs. - - 21,100 1,110,915
Cisco Systems, Inc. - - 95,900 1,256,290
First Data Corp. - - 28,095 994,844
Intuit Inc. - - 22,685 1,064,380
Microsoft Corp. - - 38,220 1,975,974
Sungard Data Systems - - 44,450 1,047,242
Veritas Software Corp. - - 30,250 472,505
-----------
- - 8,261,821
Telecommunications Equipment and Services
Nextel Communications, Inc. - - 45,425 524,659
QUALCOMM, Inc. - - 17,070 621,177
-----------
- - 1,145,836
FINANCIAL SERVICES
Banking, Major
Bank of New York Co., Inc. - - 29,900 716,404
-----------
- - 716,404
Financial Services, Diversified
Freddie Mac - - 22,500 1,328,625
SLM Corp. - - 19,520 2,027,347
-----------
- - 3,355,972
Insurance
The Allstate Corp. - - 10,550 390,244
AFLAC, Inc. - - 660 24,413
The Progressive Corp. - - 9,225 457,837
-----------
- - 872,494
Regional Banks
Fifth Third Bancorp - - 15,300 895,815
-----------
- - 895,815
CONGLOMERATES
Conglomerates
General Electric Co. - - 37,450 911,908
-----------
TOTAL COMMON STOCKS AND EQUITY INTERESTS 48,848,521
-----------
GOVERNMENT AGENCY OBLIGATIONS
FNMA Discount Notes, 1.25%, due 1/2/03 - - 104,000 103,993
-----------
CASH EQUIVALENTS
Money Market Fund
FBR Fund for Government Investors - - 1,190,160 1,190,160
-----------
- -----------------------------------------------------------------------------------------------
TOTAL INVESTMENTS AT MARKET - $50,142,674
-----------
TOTAL INVESTMENTS AT COST - $57,956,518
-----------
- ---------------------------------
(A) Navellier Performance Large Cap Growth Portfolio is the accounting survivor,
however the surviving Fund name is TST Large Cap Growth Fund.
NAVELLIER PERFORMANCE LARGE CAP GROWTH PORTFOLIO
PRO FORMA COMBINING PRO FORMA FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2002
(UNAUDITED)
Navellier Navellier
TST Millennium Performance TST
Large Cap Large Cap Large Cap Pro Forma Large Cap
Growth Fund Growth Portfolio Growth Portfolio Adjustments Growth Fund (A)
----------- ---------------- ---------------- ------------ ---------------
ASSETS
Investments, at cost $ 42,106,795 $ 1,052,830 $ 14,796,893 $ - $ 57,956,518
============= ============= ============= ============= =============
Investments, at market value $ 35,232,225 $ 995,030 $ 13,915,419 $ - $ 50,142,674
Receivable for securities sold 329,163 873 - - 330,036
Dividend and interest receivable 19,244 455 7,123 - 26,822
Other Assets 23,575 - 592 - 24,167
------------- ------------- ------------- ------------- -------------
Total Assets 35,604,206 996,358 13,923,134 - 50,523,698
------------- ------------- ------------- ------------- -------------
LIABILITIES
Payable for securities purchased 147,320 - - - 147,320
Bank overdraft 322,221 - - - 322,221
Payable for Fund shares repurchased 44,506 20 76,662 - 121,188
Advisory and distribution fees payable - 870 10,102 - 10,972
Accrued expenses and other liabilities 100,455 253 4,906 - 105,614
------------- ------------- ------------- ------------- -------------
Total Liabilities 614,501 1,143 91,670 - 707,314
------------- ------------- ------------- ------------- -------------
Net Assets $ 34,989,705 $ 995,215 $ 13,831,464 $ - $ 49,816,384
============= ============= ============= ============= =============
ANALYSIS OF NET ASSETS
Accumulated paid in capital $ 75,392,621 $ 1,471,568 $ 35,591,483 $ - $ 112,455,672
Distributions in excess of net investment income (321,214) - - - (321,214)
Accumulated net realized loss on investments (33,207,132) (418,553) (20,878,545) - (54,504,230)
Unrealized depreciation of investments (6,874,570) (57,800) (881,474) - (7,813,844)
------------- ------------- ------------- ------------- -------------
Net Assets $ 34,989,705 $ 995,215 $ 13,891,464 $ - $ 49,816,384
============= ============= ============= ============= =============
BY CLASS:
NET ASSETS:
CLASS A $ 33,843,198 $ 355,316 $ 13,831,464 $ - $ 48,029,978
CLASS B 54,017 423,950 - - 477,967
CLASS C 1,092,490 215,949 - - 1,308,439
------------- ------------- ------------- ------------- -------------
$ 34,989,705 $ 995,215 $ 13,831,464 $ - $ 49,816,384
============= ============= ============= ============= =============
OUTSTANDING SHARES:
CLASS A 4,202,127 76,781 1,134,468 (1,473,452) 3,939,924
CLASS B 7,090 92,912 - (60,792) 39,210
CLASS C 143,907 47,449 - (84,019) 107,337
------------- ------------- ------------- ------------- -------------
4,353,124 217,142 1,134,468 (1,618,263) 4,086,471
============= ============= ============= ============= =============
NET ASSET VALUE PER SHARE:
CLASS A $ 8.05 $ 4.63 $ 12.19 $ 12.19
------------- ------------- ============= -------------
CLASS B $ 7.62 $ 4.56 $ 12.19
------------- ------------- -------------
CLASS C $ 7.59 $ 4.55 $ 12.19
------------- ------------- -------------
(A) The Navellier Performance Large Cap Growth Portfolio is the accounting
survivor, however the surviving Fund name and legal survivor is TST Large Cap
Growth.
NAVELLIER PERFORMANCE LARGE CAP GROWTH PORTFOLIO
PRO FORMA COMBINING
STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2002
(UNAUDITED)
Navellier Navellier
TST Millennium Performance TST (Basis Points)
Large Cap Large Cap Large Cap Large Cap Pro Forma
Growth Fund Value Fund Growth Portfolio Adjustments Growth Fund (F) Combined
------------ ------------ ---------------- ------------ --------------- --------------
INVESTMENT INCOME
Dividend Income $ 238,986 $ 4,529 $ 103,515 $ - $ 347,030
Interest Income 20,792 1,574 5,063 - 27,429
------------ ------------ ------------ ------------ ------------
Total Income 259,778 6,103 108,578 - 374,459
------------ ------------ ------------ ------------ ------------
EXPENSES
Management fee 398,485 7,883 135,879 (168,624)(A) 373,623 0.7500%
Distribution Fees - Class A 129,171 789 40,440 (50,325)(A) 120,075 0.2410%
Distribution Fees - Class B 414 2,941 - 1,424 (A) 4,779 0.0096%
Distribution Fees - Class C 14,215 1,788 - (2,919)(A) 13,084 0.0263%
Administration fees 9,073 - 40,440 (22,114)(A) 27,399 0.0550%
Accounting fees 51,492 - - (27,492)(A) 24,000 0.0482%
Audit and legal fees 23,362 8,964 16,054 (18,380)(B) 30,000 0.0602%
Custodian fee 12,213 60,789(E) 58,163(E) (113,165)(B) 18,000 0.0361%
Directors/ Trustees fees 6,054 6,750 7,143 (13,893)(C) 6,054 0.0122%
Registration fees - 32,275 16,410 (48,685)(B) - 0.0000%
Registration fees - Class A 7,890 - - - 7,890 0.0158%
Registration fees - Class B 11,404 - - - 11,404 0.0229%
Registration fees - Class C 11,611 - - - 11,611 0.0233%
Report Printing 29,175 1,729 15,569 (11,473)(B) 35,000 0.0703%
Transfer Agent Fees - Class A 32,639 - - 13,361 (A) 46,000 0.0923%
Transfer Agent Fees - Class B 12,049 - - (49)(A) 12,000 0.0241%
Transfer Agent Fees - Class C 11,983 - - 17 (A) 12,000 0.0241%
Other expense 35,462 1,156 24,692 (11,310)(D) 50,000 0.1004%
------------ ------------ ------------ ------------ ------------ -------
796,692 125,064 354,790 (473,627) 802,919 1.6118%
Fees waived (Class A) (10,683) (43,852) (113,766) 73,346 (A) (94,955) -0.1906%
Fees waived (Class B) (23,324) (40,973) - 42,881 (A) (21,416) -0.0430%
Fees waived (Class C) (16,837) (24,868) - 19,751 (A) (21,954) -0.0441%
------------ ------------ ------------ ------------ ------------
Total expenses, net of fees waived 745,848 15,371 241,024 (337,649) 664,594 1.3341%
------------ ------------ ------------ ------------ ------------ -------
NET INVESTMENT INCOME (486,070) (9,268) (132,446) 337,649 (290,135)
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Realized gain (loss) on investments $(17,874,899) $ (126,421) $ (2,363,379) $ - $(20,364,699)
Change in unrealized appreciation
(depreciation) (6,475,548) (100,611) (2,449,986) - (9,026,145)
of investments - - - - -
------------ ------------ ------------ ------------ ------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS (24,350,447) (227,032) (4,813,365) - (29,390,844)
------------ ------------ ------------ ------------ ------------
CHANGE IN NET ASSETS RESULTING
FROM OPERATIONS $(24,836,518) $ (236,300) $ (4,945,811) $ 337,649 $(29,680,980)
============ ============ ============ ============ ============
(A) Based on contract in effect for the legal surviving fund. Management Fee is
.75%. Distribution Fee is Class A .25%, Class B 1.00%, Class C 1.00%.
(B) Decrease due to the elimination of duplicative expenses achieved by merging
the funds.
(C) Based on director compensation plan for the legal surviving fund.
(D) Includes pricing, Insurance expense and T/A out-of-pocket fees.
(E) For Navellier funds includes Accounting, Custody and Transfer Agent fees.
(F) Navellier Performance Large Cap Growth Portfolio is the accounting
survivor, however the surviving Fund name is TST Large Cap Growth.
NAVELLIER PERFORMANCE FUNDS
LARGE CAP GROWTH PORTFOLIO
PRO FORMA NOTES TO COMBINING FINANCIAL STATEMENTS
DECEMBER 31, 2002
(UNAUDITED)
DESCRIPTION OF THE FUND
The Acquiring Fund, Navellier Performance Funds Large Cap Growth Portfolio,
is registered under the Investment Company Act of 1940, as amended, as an
open-end, non-diversified management company portfolio consisting of Class A
shares. The Target Funds, Navellier Millennium Large Cap Growth Portfolio and
Touchstone Strategic Trust Large Cap Growth Fund are registered under the
Investment Company Act of 1940, as amended, as an open-end, management
investment company. Navellier Millennium Large Cap Growth Portfolio, consisting
of Class A, B and C shares, is a non-diversified open-end management company.
Touchstone Strategic Large Cap Growth Fund, consisting of Class A, B and C
shares is a diversified open-end management company.
BASIS OF COMBINATION
The accompanying unaudited pro forma financial statements are presented to
show the effect of the transfer of assets and liabilities of the non-surviving
funds, the Navellier Millennium Funds Large Cap Value Portfolio and the
Touchstone Strategic Trust Large Cap Growth Fund, in exchange for shares of the
surviving fund (for purposes of maintaining the financial statements and
performance), the Navellier Performance Funds Large Cap Growth Portfolio.
Under the terms of the Plan of Reorganization, the combination of the
surviving and non-surviving funds will be accounted for by the method of
accounting for tax-free mergers of investment companies. The statement of assets
and liabilities and the related statement of operations of the surviving and
non-surviving funds have been combined as of and for the twelve months ended
December 31, 2002. In accordance with accounting principles generally accepted
in the United States, the historical cost of investment securities will be
carried forward to the surviving fund and the results of operations for
pre-combination periods of the surviving fund will not be restated.
At the time of the combination, the combined fund will change its name to
the Touchstone Strategic Trust Large Cap Growth Fund and shares of the surviving
fund will actually represent shares of the Navellier Performance Funds Large Cap
Growth Portfolio. Initially, the new Class B and Class C shares net asset values
will equal the Navellier Performance Funds Large Cap Growth Portfolio net asset
value. Performance history for the Class B and Class C shares will not be
carried forward from either of the existing target Funds Class B and Class C
shares, instead performance history will be initiated upon consummation of the
merger.
The accompanying pro forma financial statements should be read in
conjunction with the historical financial statements of the funds included or
incorporated by reference in the Statement of Additional Information.
PORTFOLIO VALUATION
Equity securities listed on national securities exchanges are valued at the
last sale price as of the close of business on the day the securities are being
valued. Over-the-counter securities are valued at the last sales price. Debt
securities with maturities of 60 days or less are valued at amortized cost. In
the absence of readily available market quotations, securities are valued at
fair value under procedures established by and under the general supervision of
the Board of Trustees.
CAPITAL SHARES
The pro forma net asset value per share assumes the issuance of shares of
Acquiring Fund that would have been issued at December 31, 2002, in connection
with the proposed reorganization. The number of shares assumed to be issued is
equal to the net asset value of shares of each Target Fund, as of December 31,
2002, divided by the net asset value per share of the shares of Acquiring Fund
as of December 31, 2002. The pro forma number of shares outstanding for the
combined fund consists of the following at December 31, 2002:
SHARES OF ADDITIONAL SHARES TOTAL OUTSTANDING
ACQUIRING FUND ASSUMED ISSUED SHARES
- -------------------------------------------------------------------------------
Pre-Combination In Reorganization Post-Combination
1,134,468 2,952,003 4,086,471
ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent 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 TAXES
Each fund has elected to be taxed as a "regulated investment company" under
the Internal Revenue Code. After the acquisition, the Acquiring Fund intends to
continue to qualify as a regulated investment company, if such qualification is
in the best interest of its shareholders, by complying with the provisions
available to certain investment companies, as defined in applicable sections of
the Internal Revenue Code, and to make distributions of taxable income
sufficient to relieve it from all, or substantially all, Federal income taxes.
The identified cost of investments for the funds is substantially the same for
both financial accounting and Federal income tax purposes. The tax cost of
investments will remain unchanged for the combined fund.
TOUCHSTONE STRATEGIC TRUST
PART C. OTHER INFORMATION
ITEM 15. INDEMNIFICATION
(a) Article VI of the Restated Agreement and Declaration of Trust of Touchstone
Strategic Trust (the "Registrant") provides for indemnification of officers
and Trustees as follows:
Section 6.4 Indemnification of Trustees, Officers, etc.
The Trust shall indemnify each of its Trustees and officers, including
persons who serve at the Trust's request as directors, officers or trustees
of another organization in which the Trust has any interest as a
shareholder, creditor or otherwise (hereinafter referred to as a "Covered
Person") against all liabilities, including but not limited to amounts paid
in satisfaction of judgments, in compromise or as fines and penalties, and
expenses, including reasonable accountants' and counsel fees, incurred by
any Covered Person in connection with the defense or disposition of any
action, suit or other proceeding, whether civil or criminal, before any
court or administrative or legislative body, in which such Covered Person
may be or may have been involved as a party or otherwise or with which such
person may be or may have been threatened, while in office or thereafter,
by reason of being or having been such a Trustee or Officer or Director and
except that no Covered Person shall be indemnified against any liability to
the Trust or its Shareholders to which such Covered Person would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of such Covered
Person's office ("disabling conduct"). Anything herein contained to the
contrary notwithstanding, no Covered Person shall be indemnified for any
liability to the Trust or its Shareholders to which such Covered Person
would otherwise be subject unless (1) a final decision on the merits is
made by a court or other body before whom the proceeding was brought that
the Covered Person to be indemnified was not liable by reason of disabling
conduct or, (2) in the absence of such a decision, a reasonable
determination is made, based upon a review of the facts, that the Covered
Person was not liable by reason of disabling conduct, by (a) the vote of a
majority of a quorum of Trustees who are neither "interested persons" of
the Company as defined in the Investment Company Act of 1940 nor parties to
the proceeding ("disinterested, non-party Trustees"), or (b) an independent
legal counsel in a written opinion
Section 6.5 Advances of Expenses.
The Trust shall advance attorneys' fees or other expenses incurred by a
Covered Person in defending a proceeding, upon the undertaking by or on
behalf of the Covered Person to repay the advance unless it is ultimately
determined that such Covered Person is entitled to indemnification, so long
as one of the following conditions is met: (i) the Covered Person shall
provide security for his undertaking, (ii) the Trust shall be insured
against losses arising by reason of any lawful advances, or (iii) a
majority of a quorum of the disinterested non-party Trustees of the Trust,
or an independent legal counsel in a written opinion, shall determine,
based on a review of readily available facts (as opposed to a full
trial-type inquiry), that there is reason to believe that the Covered
Person ultimately will be found entitled to indemnification.
Section 6.6 Indemnification Not Exclusive, etc.
The right of indemnification provided by this Article VI shall not be
exclusive of or affect any other rights to which any such Covered Person
may be entitled. As used in this Article VI, "Covered Person" shall include
such person's heirs, executors and administrators, an "interested Covered
Person" is one against whom the action, suit or other proceeding in
question or another action, suit or other proceeding on the same or similar
grounds is then or has been pending or threatened, and a "disinterested"
person is a person against whom none of such actions, suits or other
proceedings or another action, suit or other proceeding on the same or
similar grounds is then or has been pending or threatened. Nothing
contained in this article shall affect any rights to indemnification to
which personnel of the Trust, other than Trustees and officers, and other
persons may be entitled by contract or otherwise under law, nor the power
of the Trust to purchase and maintain liability insurance on behalf of any
such person.
(b) The Registrant maintains a mutual fund and investment advisory professional
and Trustees and officers liability policy. The policy provides coverage to
the Registrant, its trustees and officers, Touchstone Advisors, Inc.
("Touchstone"). Coverage under the policy includes losses by reason of any
act error, omission, misstatement, misleading statement, neglect or breach
of duty. The Registrant may not pay for insurance which protects the
Trustees and officers against liabilities arising from action involving
willful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of their offices.
The Advisory Agreement and the Subadvisory Agreements provide that
Touchstone (or a Sub-advisor) shall not be liable for any act or omission
in the course of rendering services, absent willful misfeasance, bad faith
or gross negligence or reckless disregard by Touchstone (or a Sub-advisor)
of its obligations under the Agreement.
ITEM 16. EXHIBITS
(1) Amended Declaration of Trust of Registrant.*
(2) Amended By-Laws of Registrant.*
(3) Not applicable
(4) Agreement and Plan of Reorganization. (Filed herewith as Appendix A to
Part A)
(5) Not applicable
(6) Advisory Agreement between the Large Cap Growth Fund (a portfolio of
the Touchstone Strategic Trust) and Touchstone Advisors, Inc. (Filed
herewith as Appendix B to Part A.)
(6)(a) Form of Sub-advisory Agreement between Touchstone Advisors, Inc. and
Navellier Management, Inc. (Filed herewith as Appendix C to Part A.)
(7) Underwriting Agreement.*
(8) Not applicable
(9) Custodian Agreements
(a) Custodian Agreement with Brown Brothers Harriman & Co.*
(b) Securities Lending Agreement with Brown Brothers Harriman & Co.*
(10) Rule 12b-1 Distribution Plan. Filed as Appendix D to Part A.
(11) Opinion of legal counsel regarding the legality of securities being
registered. (1)
(12) Opinion of legal counsel regarding certain tax matters and
consequences to shareholders discussed in Part A. (1)
(13) Not Applicable
(14) Consent of Tait, Weller & Baker, independent accountants for The
Navellier Performance Funds and for Navellier Millennium Funds.(1)
(14)(a) Consent of Ernst & Young LLP, independent accountants for
Registrant.(1)
(15) Not Applicable
(16) Powers of Attorney.*
(17) Not Applicable
- --------------------------------------------------------------------------------
* Incorporated by reference to Registration Statement on Form N-1A or
subsequently filed Post-Effective Amendment.
(1) Filed herewith.
ITEM 17 UNDERTAKINGS
(1) The Registrant agrees that prior to any public reoffering of the securities
registered through the use of a prospectus which is part of this
Registration Statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) under the Securities Act of
1933, as amended, the reoffering prospectus will contain the information
called for by the applicable registration form for reofferings by persons
who may be deemed underwriters, in addition to the information called for
by the other items of the applicable form.
(2) The Registrant agrees that every prospectus that is filed under paragraph
(1), above, will be filed as part of an amendment to this Registration
Statement and will not be used until the amendment is effective, and that,
in determining any liability under the Securities Act of 1933, as amended,
each post-effective amendment shall be deemed to be a new registration
statement for the securities offered therein, and the offering of the
securities at that time shall be deemed to be the initial bona fide
offering of them.
- -----------------------------
SIGNATURES
As required by the Securities Act of 1933, as amended, this Registration
Statement has been signed on behalf of the Registrant, in the City of Cincinnati
and the State of Ohio, on the 19th day of August, 2003.
Registrant:
TOUCHSTONE STRATEGIC TRUST
By: /s/ Patrick T. Bannigan
---------------------------
Patrick T. Bannigan
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the 19th day of August, 2003.
/s/ Terrie A. Wiedenheft
- ----------------------- Controller
TERRIE A. WIEDENHEFT
* JOHN F. BARRETT Trustee
- ---------------------
* J. LELAND BREWSTER Trustee
- -----------------------
* WILLIAM O. COLEMAN Trustee
- -----------------------
* PHILLIP R. COX Trustee
- -----------------------
* H. JEROME LERNER Trustee
- -----------------------
* OSCAR P. ROBERTSON Trustee
- -----------------------
* ROBERT E. STAUTBERG Trustee
- -----------------------
*JOHN P. ZANOTTI Trustee
- -----------------------
*JILL T.MCGRUDER Trustee
- -----------------------
By: /s/ Tina D. Hosking
- -----------------------
Tina D.Hosking
*Attorney-in-Fact
August 19, 2003