<PAGE> 1
As filed with the Securities and Exchange Commission on April 30, 1996
Securities Act File No. 33-65690
Investment Company Act File No. 811-7850
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
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POST-EFFECTIVE AMENDMENT NO. 4 /X/
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AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
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AMENDMENT NO. 5 /X/
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THE PARKSTONE ADVANTAGE FUND
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(Exact Name of Registrant as Specified in Charter)
700 HARRISON STREET
TOPEKA, KANSAS 66636-0001
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (913) 295-3000
DAVID E. RIGGS, ESQ.
HOWARD & HOWARD ATTORNEYS, P.C.
400 The Kalamazoo Building
107 West Michigan Avenue
Kalamazoo, Michigan 49007
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(Name and Address of Agent for Service)
Copies to:
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Amy J. Lee, Esq.
Security Benefit Group
700 Harrison Street
Topeka, Kansas 66636-0001
Approximate Date of Proposed Public Offering: Immediately, upon effectiveness.
It is proposed that this filing will become effective (check appropriate box):
/X/ immediately, upon filing pursuant to paragraph (b)
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/ / on (date), pursuant to paragraph (b)
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/ / 60 days after filing pursuant to paragraph (a)
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/ / on (date), pursuant to paragraph (a) of Rule 485.
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The Registrant has registered an indefinite number or amount of securities under
the Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company
Act of 1940. On February 22, 1996, the Registrant filed its Rule 24f-2 Notice
with respect to its fiscal year ended December 31, 1995.
<PAGE> 2
THE PARKSTONE ADVANTAGE FUND
FORM N-1A
CROSS REFERENCE SHEET
PART A. INFORMATION REQUIRED IN A PROSPECTUS
<TABLE>
<CAPTION>
ITEM NO. (RULE 404(a) CROSS REFERENCE)
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<S> <C>
1. Cover Page Cover Page
2. Synopsis Not Applicable
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Investment Objectives and Policies;
Investment Restrictions; Risk
Factors and Investment Techniques
5. Management of the Fund Management of the Trust; Investment
Objectives and Policies; Fees and
Expenses; Performance and Yield
Information; Miscellaneous
5A. Management's Discussion of Fund Not Applicable
Performance
6. Capital Stock and Other Securities Dividends and Taxes; Description of
the Trust and its Shares;
Miscellaneous
7. Purchase of Securities Being Purchase and Redemption of
Offered Shares; Distributor; How Shares are
Valued
8. Redemption or Repurchase Purchase and Redemption of Shares;
Distributor
9. Pending Legal Proceedings Not Applicable
</TABLE>
(i)
<PAGE> 3
THE PARKSTONE ADVANTAGE FUND
700 HARRISON STREET
TOPEKA, KANSAS 66636-0001
PROSPECTUS
April 30, 1996
The Parkstone Advantage Fund (the "Trust") is an open-end, diversified
series investment company established exclusively for the purpose of providing
an investment vehicle for variable annuity contracts and variable life insurance
policies offered by the separate accounts of various life insurance companies
("Participating Insurance Companies"). Shares of the Trust are not offered to
the general public but solely to such separate accounts ("Separate Accounts").
As of the date of this Prospectus, the only Participating Insurance Company is
Security Benefit Life Insurance Company. The Trust may, when it deems desirable,
file an application for an exemptive order with the Securities and Exchange
Commission which, if granted, would permit shares of the Trust to be sold to and
held by Separate Accounts funding variable annuity contracts and variable life
insurance policies issued by both affiliated and unaffiliated life insurance
companies. Until such time as the requested order is granted, shares of the
Trust will be offered only to Separate Accounts funding variable annuity
contracts issued by Security Benefit Life Insurance Company and its affiliated
life insurance companies. There is no assurance that the order, if requested,
would be granted.
The Trust currently offers five portfolios - Prime Obligations Fund,
Equity Fund, Small Capitalization Fund, Bond Fund, and International Discovery
Fund (collectively, the "Funds" and singly, a "Fund") with investment objectives
as follows. There is, of course, no assurance that a Fund will achieve its
stated objective.
The PRIME OBLIGATIONS FUND'S investment objective is to seek current
income with liquidity and stability of principal. The Fund invests in
high-quality money market instruments and other instruments deemed to be of
comparable high-quality as determined by the Board of Trustees.
The EQUITY FUND'S investment objective is to seek growth of capital by
investing primarily in a diversified portfolio of common stocks and securities
convertible into common stocks. Under normal market conditions, the Fund will
invest at least 80% of the value of its total assets in common stocks and
securities convertible into common stocks of companies believed by the
investment adviser to be characterized by sound management and the ability to
finance expected long-term growth.
The SMALL CAPITALIZATION FUND'S investment objective is to seek growth
of capital by investing primarily in a diversified portfolio of common stocks
and securities convertible into common stocks of small- to medium-sized
companies. The Fund anticipates investing at least 80% of the value of its total
assets in common stocks and securities convertible into common stocks of small-
to medium-sized companies believed by the investment adviser to be characterized
by sound management and the ability to finance expected growth.
<PAGE> 4
The BOND FUND'S investment objective is to seek current income as well
as preservation of capital by investing in a portfolio of high- and medium-grade
fixed-income securities. Under normal market conditions, the Fund will invest at
least 80% of the value of its total assets in bonds, debentures, and certain
other debt securities specified in this Prospectus.
The INTERNATIONAL DISCOVERY FUND'S investment objective is to seek
long-term growth of capital by investing at least 65% of its total assets in an
internationally diversified portfolio of equity securities which trade on
markets in countries other than the United States and which are issued by
companies (i) domiciled in countries other than the United States, or (ii) that
derive at least 50% of either the revenues or pre-tax income from activities
outside of the United States, and (iii) which are ranked as small- or
medium-sized companies on the basis of their capitalization.
Each of the Funds is distributed by Security Distributors, Inc. and
advised by First of America Investment Corporation ("First of America" or
"Investment Adviser"). First of America has retained the services of Gulfstream
Global Investors, Ltd. ("Gulfstream" or "Subadviser") to assist in the
management of the International Discovery Fund. Shares of the Funds may only be
purchased by the separate accounts of Participating Insurance Companies for the
purpose of funding variable annuity contracts and variable life insurance
policies. A particular Fund may not be available under the variable annuity
contract or variable life insurance policy which you have chosen. The prospectus
of the specific insurance product you have chosen will indicate which Funds are
available and should be read in conjunction with this Prospectus. Inclusion in
this Prospectus of a Fund which is not available under your contract or policy
is not to be considered a solicitation.
This Prospectus sets forth concisely the information about the Trust
that a prospective investor ought to know before investing and should be
retained for future reference. Certain additional information about the Trust is
contained in a Statement of Additional Information of the same date as this
Prospectus which has been filed with the Securities and Exchange Commission and
is incorporated herein by reference. This Statement of Additional Information as
it may be amended from time to time is available upon request and without charge
by writing to the Trust or calling the Participating Insurance Company
sponsoring the variable annuity contract or variable life insurance policy.
While the Prime Obligations Fund seeks to maintain a stable $1.00 net
asset value per share, there is no assurance that it will be able to do so. THE
SHARES OF THE PARKSTONE ADVANTAGE FUND ARE NOT OBLIGATIONS OR DEPOSITS OF FIRST
OF AMERICA INVESTMENT CORPORATION OR ITS PARENT, AND THE INVESTMENTS DESCRIBED
IN THE PROSPECTUS ARE NOT ENDORSED, INSURED OR GUARANTEED BY FIRST OF AMERICA
INVESTMENT CORPORATION, ITS PARENT OR THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER AGENCY. INVESTMENTS IN THE PARKSTONE ADVANTAGE FUND INVOLVE
INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
(2)
<PAGE> 5
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 PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
(3)
<PAGE> 6
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
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<S> <C>
FINANCIAL HIGHLIGHTS .................................................... (5)
INVESTMENT OBJECTIVES AND POLICIES ...................................... (11)
RISK FACTORS AND INVESTMENT TECHNIQUES .................................. (17)
INVESTMENT RESTRICTIONS ................................................. (31)
MANAGEMENT OF THE TRUST ................................................. (32)
DESCRIPTION OF THE TRUST AND ITS SHARES ................................. (36)
PURCHASE AND REDEMPTION OF SHARES ....................................... (37)
FEES AND EXPENSES ....................................................... (38)
HOW SHARES ARE VALUED ................................................... (39)
DIVIDENDS AND TAXES ..................................................... (40)
PERFORMANCE INFORMATION ................................................. (42)
MISCELLANEOUS ........................................................... (43)
</TABLE>
(4)
<PAGE> 7
FINANCIAL HIGHLIGHTS
The tables on the following pages set forth certain information
concerning the investment results of each Fund since its inception. Further
financial information is included in the Statement of Additional Information.
The information contained in the tables on the following pages has been derived
from financial statements audited by Ernst & Young LLP, independent auditors
for the Trust, whose report thereon is incorporated by reference in the
Statement of Additional Information.
(5)
<PAGE> 8
PARKSTONE ADVANTAGE PRIME OBLIGATIONS FUND
<TABLE>
<CAPTION>
Year ended Year ended Period ended
December 31, 1995 December 31, 1994 December 31, 1993(a)
----------------- ----------------- --------------------
<S> <C> <C> <C>
Net Asset Value
Beginning of Period $ 1.00 $ 1.00 $ 1.00
------- ------- -------
Investment Activities
Net investment income 0.041 0.023 0.009
Net realized and
unrealized gain
(loss) on investments - - -
------- ------- -------
Total from Investment
Activities 0.041 0.023 0.009
------- ------- -------
Distributions
Net investment income (0.041) (0.023) (0.009)
------- ------- -------
Net Asset Value, End of
Period $ 1.00 $ 1.00 $ 1.00
======= ======= =======
Total Return (c) 4.19% 2.29% 0.88%
Ratios/Supplemental
Data:
Net Assets at end of
period (000) 2,945 2,232 2,028
Ratio of expenses to
average net assets 1.64% 1.90% 1.79%(b)
Ratio of net invest-
ment income
to average net assets 4.15% 2.29% 1.53%(b)
</TABLE>
(6)
<PAGE> 9
PARKSTONE ADVANTAGE EQUITY FUND
<TABLE>
<CAPTION>
Year ended Year ended Period ended
December 31, 1995 December 31, 1994 December 31, 1993(a)
----------------- ----------------- --------------------
<S> <C> <C> <C>
Net Asset Value
Beginning of Period $ 9.64 $10.17 $10.00
------- ------ ------
Investment Activities
Net investment loss (0.08) (0.07) (0.02)
Net realized and
unrealized gain
(loss) on investments 2.88 (0.46) 0.19
------- ------ ------
Total from Investment
Activities 2.80 (0.53) 0.17
------- ------ ------
Net Asset Value, End of
Period $ 12.44 $ 9.64 $10.17
======= ====== ======
Total Return (c) 29.05% (5.21%) 1.70%
Ratios/Supplemental
Data:
Net Assets at end of
period (000) $ 14,977 $ 9,095 $ 3,893
Ratio of expenses to
average net assets 1.62% 1.86% 2.11%(b)
Ratio of net invest-
ment loss
to average net assets (0.84%) (0.92%) (1.09%)(b)
Portfolio turnover 44% 51% 45%(b)
</TABLE>
(7)
<PAGE> 10
PARKSTONE ADVANTAGE SMALL CAPITALIZATION FUND
<TABLE>
<CAPTION>
Year ended Year ended Period ended
December 31, 1995 December 31, 1994 December 31, 1993(a)
----------------- ----------------- --------------------
<S> <C> <C> <C>
Net Asset Value
Beginning of Period $ 11.58 $11.00 $10.00
------- ------ ------
Investment Activities
Net investment loss (0.15) (0.13) (0.03)
Net realized and
unrealized gain
on investments 4.28 0.71 1.03
------- ------ ------
Total from Investment
Activities 4.13 0.58 1.00
------- ------ ------
Net Asset Value, End of
Period $ 15.71 $11.58 $11.00
======= ====== ======
Total Return (c) 35.66% 5.27% 10.00%
Ratios/Supplemental
Data:
Net Assets at end of
period (000) $ 13,273 $ 7,476 $ 3,065
Ratio of expenses to
average net assets 1.64% 1.98% 1.87%(b)
Ratio of net invest-
ment loss to average
net assets (1.29%) (1.66%) (1.40%)(b)
Ratio of expenses to
average net assets* - - 2.23%(b)
Ratio of net invest-
ment loss to average
net assets* - - (1.76%)(b)
Portfolio turnover 64% 39% 23%(b)
</TABLE>
(8)
<PAGE> 11
PARKSTONE ADVANTAGE BOND FUND
<TABLE>
<CAPTION>
Year ended Year ended Period ended
December 31, 1995 December 31, 1994 December 31, 1993(a)
----------------- ----------------- --------------------
<S> <C> <C> <C>
Net Asset Value
Beginning of Period $ 9.35 $ 9.96 $10.00
------ ------- ------
Investment Activities
Net investment income 0.40 0.42 0.10
Net realized and
unrealized gain
(loss) on investments 1.17 (0.96) (0.14)
------ ------- ------
Total from Investment
Activities 1.57 (0.54) (0.04)
------ ------- ------
Distributions
Net Investment Income (0.42) (0.07) --
------ ------- ------
Net Asset Value, End of
Period $10.50 $ 9.35 $ 9.96
====== ======= ======
Total Return (c) 16.98% (5.38%) (0.40%)
Ratios/Supplemental
Data:
Net Assets at end of
period (000) $ 6,758 $ 4,651 $ 3,216
Ratio of expenses to
average net assets 1.57% 1.80% 2.03%(b)
Ratio of net invest-
ment income to
average net assets 5.31% 5.27% 5.23%(b)
Portfolio turnover 178% 159% 101%(b)
</TABLE>
(9)
<PAGE> 12
PARKSTONE ADVANTAGE INTERNATIONAL DISCOVERY FUND
<TABLE>
<CAPTION>
Year ended Year ended Period ended
December 31, 1995 December 31, 1994 December 31, 1993(a)
----------------- ----------------- --------------------
<S> <C> <C> <C>
Net Asset Value
Beginning of Period $ 9.65 $10.35 $10.00
------- ------ ------
Investment Activities
Net investment loss (0.03) (0.07) (0.03)
Net realized and
unrealized gain
(loss) on investments 0.97 (0.63) 0.38
------- ------ ------
Total from Investment
Activities 0.94 (0.70) 0.35
------- ------ ------
Distributions
Net Investment Income - - -
------- ------ ------
Net Asset Value, End of
Period $ 10.59 $ 9.65 $10.35
======= ====== ======
Total Return (c) 9.74% (6.76%) 3.50%
Ratios/Supplemental
Data:
Net Assets at end of
period (000) $ 11,645 $ 9,537 $ 6,335
Ratio of expenses to
average net assets 2.38% 2.34% 2.51%(b)
Ratio of net invest-
ment loss
to average net assets (0.39%) (1.13%) (1.38%)(b)
Portfolio turnover 86% 87% 13%(b)
</TABLE>
* During the period the investment advisory fee was voluntarily reduced.
If such voluntary fee reductions had not occurred, the ratios would
have been as indicated.
(a) Period from commencement of operations (September 23, 1993).
(b) Annualized.
(c) Total return information does not take into account any charges paid
at the time of purchase and for the period ended December 31, 1993 is
not annualized.
(10)
<PAGE> 13
INVESTMENT OBJECTIVES AND POLICIES
GENERAL
The investment objectives of each of the Funds is set forth below
under the headings describing the Funds. The investment objective of each Fund
is fundamental and may not be changed without a vote of the holders of a
majority of the outstanding shares of that Fund (as defined in the Statement of
Additional Information). The investment policies of a Fund may be changed
without a vote of the holders of a majority of outstanding shares of that Fund
unless the policy is expressly deemed to be a fundamental policy or changeable
only by such majority vote. There can be no assurance that the investment
objective of any Fund will be achieved. Depending upon the performance of a
Fund's investments, the net asset value per share of that Fund may decrease
instead of increase.
During temporary defensive periods as determined by First of America
or the Subadviser, as the case may be, each of the Funds may hold up to 100% of
its total assets in short-term obligations including domestic bank certificates
of deposit, bankers' acceptances and repurchase agreements secured by bank
instruments. However, to the extent that a Fund is so invested, its investment
objective may not be achieved during that time. Uninvested cash reserves will
not earn income.
INVESTMENT OBJECTIVE AND POLICIES OF THE PRIME OBLIGATIONS FUND
The Prime Obligations Fund's investment objective is to seek current
income with liquidity and stability of principal. The Fund seeks to achieve
its objective by investing in high-quality money market instruments, including
municipal securities and other instruments deemed to be of comparable
high-quality as determined by the Board of Trustees. The Prime Obligations
Fund invests exclusively in United States dollar denominated instruments which
the Trustees of the Fund and the Investment Adviser determine present minimal
credit risks and which at the time of acquisition are rated by one or more
nationally recognized statistical rating organizations ("NRSRO") (e.g.,
Standard and Poor's Corporation or Moody's Investors Service, Inc.) in one of
the two highest rating categories for short-term debt obligations or, if
unrated, are determined by the Investment Adviser to be of comparable quality.
In addition, the Prime Obligations Fund diversifies its investments so that,
with minor exceptions and except for United States Government securities, not
more than 5% of its total assets is invested in the securities of any one
issuer, not more than 5% of its total assets is invested in securities of all
issuers rated by the NRSRO at the time of investment in the second highest
rating category for short-term debt obligations or deemed to be of comparable
quality to securities rated in the second highest rating categories for
short-term debt obligations ("second tier securities") and not more than the
greater of 1% of total assets or $1,000,000 is invested in second tier
securities of one issuer. All securities or instruments in which the Prime
Obligations Fund invests have remaining maturities of 397 calendar days (13
months) or less (except for certain variable and floating rate notes and
securities underlying certain repurchase agreements). The dollar-weighted
average maturity of the obligations in which the Fund invests will not exceed
90 days.
(11)
<PAGE> 14
The Prime Obligations Fund may invest in commercial paper or
short-term promissory notes issued by corporations (including variable amount
master demand notes) rated at the time of purchase within the two highest
categories assigned by an NRSRO or, if not rated, found by the Investment
Adviser pursuant to procedures adopted by the Trust's Board of Trustees, to be
of comparable quality to instruments that are so rated. Instruments may be
purchased in reliance upon a rating only when the rating organization is not
affiliated with the issuer or guarantor of the instrument. See Appendix to the
Statement of Additional Information for a description of the rating categories
of the NRSROs.
The Prime Obligations Fund may also invest in Canadian commercial
paper ("CCP") and in Europaper (U.S. dollar-denominated commercial paper of a
foreign issuer). Variable amount master demand notes in which the Prime
Obligations Fund may invest are unsecured demand notes that permit the
indebtedness thereunder to vary, and that provide for periodic adjustments in
the interest rate according to the terms of the instrument. Because master
demand notes are direct lending arrangements between the Fund and the issuers,
they are not normally traded. Although there is no secondary market in the
notes, the Fund may demand payment of principal and accrued interest at any
time. While the notes are not typically rated by credit rating agencies,
issuers of variable amount master demand notes (which are normally
manufacturing, retail, financial and other business concerns) must satisfy the
same criteria as set forth above for commercial paper. First of America will
consider the earning power, cash flow and other liquidity ratios of the issuers
of such notes and will continuously monitor their financial status and ability
to meet payment on demand. In determining average weighted portfolio maturity,
a variable amount master demand note will be deemed to have a maturity equal to
the period of time remaining until the principal amount can be recovered from
the issuer through demand, which shall not exceed 7 days.
The Prime Obligations Fund may acquire securities that are subject to
puts and standby commitments ("demand features") to purchase the securities at
their principal amount (usually with accrued interest) within a fixed period
(usually seven days) following a demand by the Fund. The demand feature may be
issued by the issuer of the underlying security, a dealer in the security, or
by another third party, and may not be transferred separately from the
underlying security. The Prime Obligations Fund uses these arrangements to
provide liquidity and not to protect against changes in the market value of the
underlying securities. The bankruptcy, receivership, or default by the issuer
of the demand feature, or a default on the underlying security or other event
that terminates the demand feature before its exercise, will adversely affect
the liquidity of the underlying security. Demand features that are exercisable
after a payment default on the underlying security may be treated as a form of
credit enhancement.
Certain of the Prime Obligations Fund's permitted investments may have
received credit enhancement by a guaranty, letter of credit, or insurance. The
Prime Obligations Fund may evaluate the credit quality and ratings of
credit-enhanced securities based upon the financial condition and ratings of
the entity providing the credit enhancement, rather than the issuer. The
(12)
<PAGE> 15
bankruptcy, receivership, or default of an entity providing credit enhancement
may adversely affect the quality and marketability of the underlying security.
Pursuant to the requirements of Rule 2a-7 adopted under the Investment
Company Act of 1940 (the "1940 Act"), with respect to seventy-five percent of
its assets, the Prime Obligations Fund will limit its investment in the demand
features of a single issuer to ten percent of the Fund's assets. With respect
to the remaining twenty-five percent of the Prime Obligations Fund's assets,
the Fund may invest in securities subject to demand features from, or directly
issued by, one or more institutions, provided they are rated in the highest
rating category by an NRSRO and are issued by a "non-controlled person," as
defined in the Rule. In addition, a demand feature, other than a standby
commitment, may be acquired by the Prime Obligations Fund only if the demand
feature or its issuer has received a short-term rating from an NRSRO and not
more than five percent of the Fund's assets are invested in demand features
from a single issuer rated in the second highest short-term rating category by
an NRSRO.
The Prime Obligations Fund intends to follow the operational policies
described above, as well as other non-fundamental policies that will enable the
Fund to comply with the laws and regulations applicable to money market mutual
funds, particularly Rule 2a-7 under the 1940 Act. The Prime Obligations Fund
shall determine the effective maturity of its investments, the applicable
credit rating of securities, and adequate diversification by reference to Rule
2a-7. The Prime Obligations Fund may change its operational policies to
reflect changes in the laws and regulations applicable to money market mutual
funds without shareholder approval.
INVESTMENT OBJECTIVE AND POLICIES OF THE EQUITY FUND
The Equity Fund's investment objective is to seek growth of capital by
investing primarily in a diversified portfolio of common stocks and securities
convertible into common stocks. Under normal market conditions, the Equity
Fund will invest at least 80% of the value of its total assets in common stocks
and securities convertible into common stocks of companies believed by First of
America to be characterized by sound management and the ability to finance
expected long-term growth. The Fund may also invest up to 20% of the value of
its total assets in preferred stocks, corporate bonds, notes, units of real
estate investment trusts, warrants, and short-term obligations (with maturities
of 12 months or less) consisting of commercial paper (including variable amount
master demand notes), bankers' acceptances, certificates of deposit, repurchase
agreements, obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities, and demand and time deposits of domestic and
foreign banks and savings associations. The Fund may also hold securities of
other investment companies and depository or custodial receipts representing
beneficial interests in any of the foregoing securities.
Subject to the foregoing policies, the Fund may also invest up to 25%
of its net assets in foreign securities either directly or through the purchase
of American Depositary Receipts ("ADRs") and may also invest in securities
issued by foreign branches of U.S. banks and foreign banks, in CCP and in
Europaper. For a discussion of risks associated with foreign securities, see
"RISK FACTORS AND INVESTMENT TECHNIQUES - Foreign Securities" below.
(13)
<PAGE> 16
The Equity Fund anticipates investing in growth-oriented medium
capitalization companies. These companies have typically exhibited consistent,
above average growth in revenues and earnings, strong management, and sound and
improving financial fundamentals. Often, these companies are market or
industry leaders, have excellent products and/or services, and exhibit the
potential for growth. Core holdings of the Equity Fund are in companies that
participate in long-term growth industries, although these will be supplemented
by holdings in non-growth industries that exhibit the desired characteristics.
Consistent with the foregoing, the Fund will focus its investment in
those companies and types of companies that First of America believes will
enable the Fund to achieve its ultimate investment objective.
INVESTMENT OBJECTIVE AND POLICIES OF THE SMALL CAPITALIZATION FUND
The investment objective of the Small Capitalization Fund is to seek
growth of capital by investing primarily in a diversified portfolio of common
stocks and securities convertible into common stocks of small- to medium-sized
companies. Under normal market conditions, the Small Capitalization Fund will
invest at least 80% of the value of its total assets in common stocks and
securities convertible into common stocks of companies believed by First of
America to be characterized by sound management and the ability to finance
expected long-term growth. In addition, under normal market conditions, the
Small Capitalization Fund will invest at least 65% of the value of its total
assets in common stock or in securities convertible into common stocks of small
capitalization companies. For purposes of the foregoing sentence, small
capitalization companies are considered to be those with a market
capitalization of less than $1 billion. The Small Capitalization Fund may also
invest up to 20% of the value of its total assets in preferred stocks,
corporate bonds, notes, units of real estate investment trusts, warrants, and
short-term obligations (with maturities of 12 months or less) consisting of
commercial paper (including variable amount master demand notes), bankers'
acceptances, certificates of deposit, repurchase agreements, obligations issued
or guaranteed by the U.S. Government or its agencies or instrumentalities, and
demand and time deposits of domestic and foreign banks and savings
associations. The Small Capitalization Fund may also hold securities of other
investment companies in depository or custodial receipts representing
beneficial interests in any of the foregoing securities.
Subject to the foregoing policies, the Small Capitalization Fund may
also invest up to 25% of its net assets in foreign securities either directly
or through the purchase of ADRs and may also invest in securities issued by
foreign branches of U.S. banks and foreign banks, in CCP, and in Europaper.
For a discussion of risks associated with foreign securities, see "RISK FACTORS
AND INVESTMENT TECHNIQUES - Foreign Securities" below.
The Small Capitalization Fund anticipates investing in dynamic small-
to medium-sized companies that exhibit outstanding potential for superior
growth. Medium-sized companies are considered to be those with market
capitalization of between $1 billion and $5 billion. The Small Capitalization
Fund will limit its investment in securities of medium-sized companies to
(14)
<PAGE> 17
not more than 35% of the value of its total assets. Companies that participate
in sectors that are identified as having long-term growth potential generally
make up a substantial portion of the Fund's holdings. These companies often
have established the market niche or have developed the unique products or
technologies that are expected to produce superior growth in revenues and
earnings. As smaller capitalization stocks are quite volatile and subject to
wide fluctuations in both the short and medium term, the Small Capitalization
Fund may be fairly characterized as more aggressive than a general equity fund
such as the Equity Fund.
Consistent with the foregoing, the Small Capitalization Fund will
focus its investments in those companies and types of companies that First of
America believes will enable the Fund to achieve its investment objective.
INVESTMENT OBJECTIVE AND POLICIES OF THE BOND FUND
The Bond Fund's investment objective is to seek current income as well
as preservation of capital by investing in a portfolio of high- and
medium-grade fixed-income securities. Under normal market conditions, the Bond
Fund will invest at least 80% of the value of its total assets in bonds;
debentures; notes with remaining maturities at the time of purchase of one year
or more; zero-coupon securities; mortgage-related securities; state, municipal
or industrial revenue bonds; obligations issued or guaranteed by the U.S.
Government or its agencies or instrumentalities; debt securities convertible
into, or exchangeable for, common stocks; first mortgage loans; and
participation certificates in pools of mortgages issued or guaranteed by the
U.S. Government or its agencies or instrumentalities. The Bond Fund will
invest in state and municipal securities when, in the opinion of First of
America, their yields are competitive with comparable taxable debt obligations.
In addition, up to 20% of the value of the Bond Fund's total assets may be
invested in preferred stocks, notes with remaining maturities at the time of
purchase of less than one year, short-term debt obligations consisting of
domestic and foreign commercial paper (including variable amount master demand
notes), bankers' acceptances, certificates of deposit and time deposits of
domestic and foreign branches of U.S. banks and foreign banks, repurchase
agreements, securities of other investment companies, and Guaranteed Investment
Contracts ("GICs") issued by insurance companies, as more fully described
below. The Bond Fund intends that under normal market conditions its portfolio
will maintain an average weighted duration of approximately 8 to 12 years.
However, the Bond Fund may extend or shorten the average duration of its
portfolio depending upon anticipated changes in interest rates or other
relevant market factors. Some of the securities in which the Bond Fund invests
may have warrants or options attached.
The Fund expects to invest in a variety of U.S. Treasury obligations,
differing in their interest rates, maturities, and times of issuance, as well
as "stripped" U.S. Treasury obligations and other obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities. See
"RISK FACTORS AND INVESTMENT TECHNIQUES - Government Obligations" below.
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The Bond Fund also expects to invest in bonds, notes and debentures of
a wide range of U.S. corporate issuers. Such obligations, in the case of
debentures will represent unsecured promises to pay, in the case of notes and
bonds, may be secured by mortgages on real property or security interests in
personal property and will in most cases differ in their interest rates,
maturities and times of issuance.
The Bond Fund will invest only in corporate debt securities which are
rated at the time of purchase within the four highest rating groups assigned by
an NRSRO or, if unrated, which First of America deems present attractive
opportunities and are of comparable quality. For a discussion of debt
securities rated within the fourth highest rating group assigned by an NRSRO,
see "RISK FACTORS AND INVESTMENT TECHNIQUES - Medium-Grade Securities" below.
The Bond Fund may also hold some short-term obligations (with
maturities of 12 months or less) consisting of domestic and foreign commercial
paper (including variable amount master demand notes), bankers' acceptances,
certificates of deposit and time deposits of domestic and foreign branches of
U.S. banks and foreign banks, and repurchase agreements. The Bond Fund may
also invest in securities of other investment companies or in GICs.
The Bond Fund may invest in obligations of the Export-Import Bank of
the United States, and in Yankee Bonds, in Eurodollar Bonds, in Canadian Bonds
and in Supranational Agency Bonds. The Bond Fund may also invest up to 25% of
its net assets in foreign securities either directly or through the purchase of
ADRs and may also invest in securities issued by foreign branches of U.S.
banks and foreign banks, in CCP and in Europaper.
An increase in interest rates will generally reduce the value of the
investments in the Bond Fund and a decline in interest rates will generally
increase the value of those investments. Depending upon the prevailing market
conditions, First of America may purchase debt securities at a discount from
face value, which produces a yield greater than the coupon rate. Conversely,
if debt securities are purchased at a premium over face value the yield will be
lower than the coupon rate. In making investment decisions for the Bond Fund,
First of America will consider many factors other than current yield, including
the preservation of capital, the potential for realizing capital appreciation,
maturity, and yield to maturity.
INVESTMENT OBJECTIVE AND POLICIES OF THE INTERNATIONAL DISCOVERY FUND
The investment objective of the International Discovery Fund (the
"International Fund") is the long-term growth of capital. Under normal market
conditions, the International Fund will invest at least 65% of its total assets
in an internationally diversified portfolio of equity securities which trade on
markets in countries other than the United States and which are issued by
companies (i) domiciled in countries other than the United States, or (ii) that
derive at least 50% of either their revenues or pre- tax income from activities
outside of the United States, and (iii) which are small- or medium-sized
companies on the basis of their capitalization.
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Equity securities include common and preferred stock, securities
(bonds and preferred stock) convertible into common stock, warrants and
securities representing underlying international securities such as ADRs or
European Depositary Receipts ("EDRs").
Companies are deemed to be small- or medium-sized which at the time of
purchase are of a size which would rank them in the lower half of a major
market index in each country weighted by market capitalization and all equity
securities in listed recognized secondary markets where such markets exists.
In addition, in countries with less well-developed stock markets, where the
range of investment opportunities is more restrictive, the equity securities of
all listed companies will be eligible for investment. In major markets,
issuers could have capitalizations of approximately $10 billion while in
smaller markets issuers would be eligible with capitalizations as low as
approximately $200 million.
The International Fund may invest in securities of issuers in, but not
limited to, Australia, Austria, Belgium, Canada, Denmark, Finland, France,
Germany, Hong Kong, Italy, Japan, Korea, Malaysia, the Netherlands, New
Zealand, Norway, Singapore, Spain, Sweden, Switzerland and the United Kingdom.
Normally, the International Fund will invest at least 65% of its total assets
in securities traded in at least three foreign countries, including the
countries listed above. It is possible, although not currently anticipated,
that up to 35% of the International Fund's assets could be invested in the
securities of U.S. companies.
In addition, the International Fund temporarily may invest in
short-term debt instruments of U.S. and foreign issuers for cash management
purposes or pending investment.
RISK FACTORS AND INVESTMENT TECHNIQUES
Like any investment program, an investment in a Fund entails certain
risks. The Funds will not acquire portfolio securities issued by, make savings
deposits in or enter into repurchase, reverse repurchase or dollar roll
agreements with First of America Bank-Michigan, N.A. (the parent corporation of
First of America) or its affiliates, and will not give preference to First of
America Bank-Michigan, N.A.'s correspondents with respect to transactions,
securities, savings deposits, repurchase agreements, reverse repurchase
agreements and dollar roll agreements.
COMPLEX SECURITIES
Some of the investment techniques utilized by First of America and, in
the case of the International Fund, the Subadviser, in the management of each
of the Funds involve complex securities sometimes referred to as "derivatives."
Among such securities are put and call options, foreign currency transactions
and futures contracts, all of which are described below. The Investment
Adviser and Subadviser believe that such complex securities may in some
circumstances play a valuable role in successfully implementing each Fund's
investment strategy and achieving its goals. However, because complex
securities and the strategies for which they are used are by their nature
complicated, they present substantial opportunities for misunderstanding and
misuse. To guard against these risks, the Adviser and Subadviser will
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utilize complex securities primarily for hedging, not speculative, purposes and
only after careful review of the unique risk factors associated with each such
security.
FOREIGN SECURITIES
The International Fund invests primarily in the securities of foreign
issuers. The Equity and Small Capitalization Funds may also invest in foreign
securities as permitted by their respective investment policies. The Bond Fund
may also invest up to 25% of its net assets in foreign securities either
directly or through the purchase of American Depositary Receipts and may also
invest in securities issued by foreign branches of U.S. banks and foreign
banks, in Canadian commercial paper, and in Europaper. The Prime Obligations
Fund may invest in foreign securities by purchasing: Eurodollar Certificates
of Deposit ("ECDs"), which are U.S. dollar-denominated certificates of deposit
issued by offices of foreign and domestic banks outside the U.S.; Eurodollar
Time Deposits ("ETDs"), which are U.S. dollar-denominated deposits in a foreign
branch of a U.S. or foreign bank; Canadian time deposits ("CTDs"), which are
essentially the same as ETDs except that they are issued by Canadian offices of
major Canadian banks; Yankee certificates of deposit ("Yankee CDs"), which are
U.S. dollar-denominated certificates of deposit issued by a U.S. branch of a
foreign bank but held in the U.S.; CCP; and Europaper.
Investment in foreign securities is subject to special investment
risks that differ in some respects from those related to investments and
securities of U.S. domestic issuers. Such risks include political, social or
economic instability in the country of the issuer, the difficulty of predicting
international trade patterns, the possibility of the imposition of exchange
controls, expropriation, limits on removal of currency or other assets,
nationalization of assets, foreign withholding and income taxation, and foreign
trading practices (including higher trading commissions, custodial charges and
delayed settlements). Such securities may be subject to greater fluctuations
in price than securities issued by U.S. corporations or issued or guaranteed by
the U.S. Government, its agencies or instrumentalities. The markets on which
such securities trade may have less volume and liquidity, and may be more
volatile than securities markets in the U.S. In addition, there may be less
publicly available information about a foreign company than about a U.S.
domiciled company. Foreign companies generally are not subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to U.S. domestic companies. There is generally less government
regulation of securities exchanges, brokers and listed companies abroad than in
the U.S. Confiscatory taxation or diplomatic developments could also affect
investment in those countries. In addition, foreign branches of U.S. banks,
foreign banks and foreign issuers may be subject to less stringent reserve
requirements and to different accounting, auditing, reporting, and
recordkeeping standards than those applicable to domestic branches of U.S.
banks and U.S. domestic issuers.
In many instances, foreign debt securities may provide higher yields
than securities of domestic issuers which have similar maturities and quality.
Under certain market conditions, these investments may be less liquid than the
securities of U.S. corporations and are certainly less liquid than securities
issued or guaranteed by the U.S. government, its agencies or
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instrumentalities. Finally, in the event of a default of any such foreign debt
obligations, it may be more difficult for a Fund to obtain or enforce a
judgment against the issuers of such securities. If a security is denominated
in foreign currency, the value of the security to the Fund will be affected by
changes in currency exchange rates and in exchange control regulations, and
costs will be incurred in connection with conversions between currencies. A
change in the value of any foreign currency against a U.S. dollar will result
in a corresponding change in the U.S. dollar value of a Fund's securities
denominated in that currency. Such changes will also affect a Fund's income
and distributions to shareholders. In addition, although a Fund will receive
income on foreign securities in such currencies, such Fund will be required to
compute and distribute its income in U.S. dollars. Therefore, if the exchange
rate for any such currency declines materially after such Fund's income has
been accrued and translated into U.S. dollars, the Fund could be required to
liquidate portfolio securities to make required distributions. Similarly, if
an exchange rate declines between the time a Fund incurs expenses in U.S.
dollars and the time such expenses are paid, the amount of such currency
required to be converted into U.S. dollars in order to pay such expenses in
U.S. dollars will be greater.
For many foreign securities, U.S. dollar-denominated ADRs which are
traded in the United States on exchanges or over-the- counter, are issued by
domestic banks. ADRs represent the right to receive securities of foreign
issuers deposited in a domestic bank or a correspondent bank. ADRs do not
eliminate all the risk inherent in investing in the securities of foreign
issuers. However, by investing in ADRs rather than directly in foreign
issuers' stock, a Fund can avoid currency risks during the settlement period
for either purchases or sales. In general, there is a large, liquid market in
the United States for many ADRs. The information available for ADRs is subject
to the accounting, auditing and financial reporting standards of the domestic
market or exchange on which they are traded, which standards are more uniform
and more exacting than those to which many foreign issuers may be subject. The
International Fund may also invest in EDRs which are receipts evidencing an
arrangement with a European bank similar to that for ADRs and are designed for
use in the European securities markets. EDRs are not necessarily denominated
in the currency of the underlying security.
Certain of the ADRs and EDRs, typically those denominated as
unsponsored, require the holders thereof to bear most of the costs of such
facilities while issuers of sponsored facilities normally pay more of the costs
thereof. The depository of an unsponsored facility frequently is under no
obligation to distribute shareholder communications received from the issuer of
the deposited securities or to pass through the voting rights to facility
holders in respect to the deposited securities, whereas the depository of a
sponsored facility typically distributes shareholder communications and passes
through the voting rights.
Subject to its applicable investment policies, each of the Bond Fund,
Equity Fund, Small Capitalization Fund and International Fund may invest in
debt securities denominated in the ECU, which is a "basket" consisting of
specified amounts of the currencies of certain of the 12 member states of the
European Community. The specific amounts of the currencies comprising the ECU
may be adjusted by the Council of Ministers of the European Community to
reflect changes in relative values of the underlying currencies. Such
adjustments may adversely affect
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<PAGE> 22
holders of ECU-denominated obligations or the market stability of such
securities. European governments and supranationals, in particular, issue
ECU-denominated obligations.
FOREIGN CURRENCY TRANSACTIONS
Each of the Bond Fund, Equity Fund, Small Capitalization Fund, and
International Fund may utilize foreign currency transactions in its portfolio.
The value of the assets of a Fund, as measured in United States dollars, may be
affected favorably or unfavorably by changes in foreign currency exchange rates
and exchange control regulations, and a Fund may incur costs in connection with
conversions between various currencies. A Fund will conduct its foreign
currency exchange transactions either on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market, or through forward
contracts to purchase or sell foreign currencies. A forward currency exchange
contract ("forward currency contracts") involves an obligation to purchase or
sell a specific currency at a future date, which may be any fixed number of
days from the date of the contract agreed upon by the parties, at a price set
at the time of the contract. These forward currency contracts are traded
directly between currency traders (usually large commercial banks) and their
customers. The Funds may enter into forward currency contracts in order to
hedge against adverse movements in exchange rates between currencies.
For example, when a Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, it may want to establish
the United States dollar cost or proceeds, as the case may be. By entering
into a forward currency contract in United States dollars for the purchase or
sale of the amount of foreign currency involved in an underlying security
transaction, such Fund is able to protect itself against a possible loss
between trade and settlement dates resulting from an adverse change in the
relationship between the United States dollar and such foreign currency.
Additionally, for example, when a Fund believes that a foreign currency may
suffer a substantial decline against the U.S. dollar, it may enter into a
forward currency sale contract to sell an amount of that foreign currency
approximating the value of some or all of that Fund's portfolio securities or
other assets denominated in such foreign currency, or when a Fund believes that
the U.S. dollar may suffer a substantial decline against a foreign currency, it
may enter into a forward currency purchase contract to buy that foreign
currency for a fixed U.S. dollar amount. However, this tends to limit
potential gains which might result from a positive change in such currency
relationships. A Fund may also hedge its foreign currency exchange rate risk
by engaging in currency financial futures and options transactions. The
forecasting of short-term currency market movement is extremely difficult and
whether such a short-term hedging strategy will be successful is highly
uncertain.
It is impossible to forecast with precision the market value of
portfolio securities at the expiration of a forward currency contract.
Accordingly, it may be necessary for a Fund to purchase additional currency on
the spot market (and bear the expense of such purchase) if the market value of
the security is less than the amount of foreign currency such Fund is obligated
to deliver when a decision is made to sell the security and make delivery of
the foreign currency in settlement of a forward contract. Conversely, it may
be necessary to sell on the spot market
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some of the foreign currency received upon the sale of the portfolio security
if its market value exceeds the amount of foreign currency such Fund is
obligated to deliver.
If the Fund retains the portfolio security and engages in an
offsetting transaction, such Fund will incur a gain or a loss (as described
below) to the extent that there has been a movement in forward currency
contract prices. If the Fund engages in an offsetting transaction, it may
subsequently enter into a new forward currency contract to sell the foreign
currency. Should forward prices decline during the period between a Fund's
entering into a forward currency contract for the sale of foreign currency and
the date it enters into an offsetting contract for the purchase of the foreign
currency, such Fund would realize a gain to the extent the price of the
currency it has agreed to sell exceeds the price of the currency it has agreed
to purchase. Should forward prices increase, such Fund would suffer a loss to
the extent the price of the currency it has agreed to purchase exceeds the
price of the currency it has agreed to sell. Although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
they also tend to limit any potential gain which might result should the value
of such currency increase. The Funds will have to convert their holdings of
foreign currencies into United States dollars from time to time. Although
foreign exchange dealers do not charge a fee for conversion, they do realize a
profit based on the difference (the "spread") between the prices at which they
are buying and selling various currencies.
The International Fund does not intend to enter into forward currency
contracts if the International Fund would have more than 15% of the value of
its total assets committed to such contracts on a regular or continuous basis.
The International Fund does not intend to enter into forward currency contracts
or maintain a net exposure in such contracts where the International Fund would
be obligated to deliver an amount of foreign currency in excess of the value of
the International Fund's portfolio securities or other assets denominated in
that currency.
For further information about the characteristics, risks and possible
benefits of options, futures and foreign currency transactions, see "INVESTMENT
OBJECTIVES AND POLICIES - Additional Information on Portfolio Instruments" in
the Statement of Additional Information.
FUTURES CONTRACTS
Each of the Bond Fund, Equity Fund, Small Capitalization Fund, and
International Fund may also enter into contracts for the future delivery of
securities or foreign currencies and futures contracts based upon a specific
security, class of securities, foreign currency or an index, purchase or sell
options on any futures contracts and engage in related closing transactions. A
futures contract on a securities index is an agreement obligating either party
to pay, and entitling the other party to receive, while the contract is
outstanding, cash payments based on the level of a specified securities index.
A Fund may engage in such futures contracts in an effort to hedge
against market risks. For example, when interest rates are expected to rise or
market values of portfolio securities are expected to fall, a Fund can seek
through the sale of futures contracts to offset a decline in the
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value of its portfolio securities. When interest rates are expected to fall or
market values are expected to rise, a Fund, through the purchase of such
contracts, can attempt to secure better rates or prices for the Fund than might
later be available in the market when it effects anticipated purchases.
The acquisition of put and call options on futures contracts will,
respectively, give a Fund the right (but not the obligation), for a specified
price, to sell or to purchase the underlying futures contract, upon exercise of
the option, at any time during the option period.
Aggregate initial margin deposits for futures contracts, and premiums
paid for related options, may not exceed 5% of a Fund's total assets, and the
value of securities that are the subject of such futures and options (both for
receipt and delivery) may not exceed one-third of the market value of a Fund's
total assets. Futures transactions will be limited to the extent necessary to
maintain each Fund's qualification as a regulated investment company.
Futures transactions involve brokerage costs and require a Fund to
segregate assets to cover contracts that would require it to purchase
securities or currencies. A Fund may lose the expected benefit of futures
transactions if interest rates, exchange rates or securities prices move in an
unanticipated manner. Such unanticipated changes may also result in poorer
overall performance than if the Fund had not entered into any futures
transactions. In addition, the value of a Fund's futures positions may not
prove to be perfectly or even highly correlated with the value of its portfolio
securities or foreign currencies, limiting the Fund's ability to hedge
effectively against interest rate, exchange rate and/or market risk and giving
rise to additional risks. There is no assurance of liquidity in the secondary
market for purposes of closing out futures positions.
GOVERNMENT OBLIGATIONS
Subject to the investment parameters described above, all of the Funds
may invest in obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities. The types of U.S. Government obligations in
which each of these Funds may invest include U.S. Treasury notes, bills, bonds,
and any other securities directly issued by the U.S. Government that are
available for public investment, which differ only in their interest rates,
maturities, and times of issuance, as well as stripped U.S. Treasury
obligations, such as Treasury receipts issued by the U.S. Treasury and
representing either future interest or principal payments, and obligations
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. Stripped securities are issued at a discount to their "face
value" and may exhibit greater price volatility than ordinary debt securities
because of the manner in which their principal and interest are returned to
investors. The stripped Treasury obligations in which the Prime Obligations
Fund may invest do not include certificates of accrual on Treasury securities
("CATS") or Treasury income growth receipts ("TIGRs").
Obligations of certain agencies and instrumentalities of the U.S.
government, such as the Government National Mortgage Association ("GNMA"), are
supported by the full faith and
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credit of the U.S. Treasury; others, such as those of Federal National Mortgage
Association ("FNMA"), are supported by the right of the issuer to borrow from
the Treasury; others, such as those of the Student Loan Marketing Association
("SLMA"), are supported by the discretionary authority of the U.S. government
to purchase the agency's obligations; still others, such as those of the
Federal Farm Credit Banks or the Federal Home Loan Mortgage Corporation
("FHLMC"), are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. government would provide financial support
to other agencies or instrumentalities, such as FNMA, SLMA, or the FHLMC, since
it is not obligated to do so. These agencies or instrumentalities are
supported by the issuer's right to borrow specific amounts from the U.S.
Treasury, the discretionary authority of the U.S. Government to purchase
certain obligations from such agencies or instrumentalities, or the credit of
the agency or instrumentality. The Funds which may invest in these government
obligations will invest in the obligations of such agencies or
instrumentalities only when First of America believes that the credit risk with
respect thereto is minimal.
GUARANTEED INVESTMENT CONTRACTS ("GICS")
The Bond Fund may invest in GICs. When investing in GICs, the Bond
Fund makes cash contributions to a deposit fund of an insurance company's
general account. The insurance company then credits to the deposit Fund on a
monthly basis guaranteed interest. The GICs provide that this guaranteed
interest will not be less than a certain minimum rate. The insurance company
may assess periodic charges against a GIC for expense and service costs
allocable to it, and the charges will be deducted from the value of the deposit
fund. The Bond Fund may invest in GICs of insurance companies without regard
to the ratings, if any, assigned to such insurance companies' outstanding debt
securities. Because the Bond Fund may not receive the principal amount of a
GIC from the insurance company on 7 days notice or less, the GIC is considered
an illiquid investment, and, together with other instruments in the Bond Fund
which are deemed to be illiquid, will not exceed 15% of the Bond Fund's total
assets. In determining average portfolio maturity, GICs will be deemed to have
a maturity equal to the period of time remaining until the next readjustment of
the guaranteed interest rate.
LENDING PORTFOLIO SECURITIES
In order to generate additional income, each of the Funds may, from
time to time, lend its portfolio securities to broker-dealers, banks, or
institutional borrowers of securities. A Fund must receive 100% collateral in
the form of cash or U.S. government securities. This collateral will be
valued daily by First of America or by the Subadviser, as the case may be.
Should the market value of the loan securities increase, the borrower must
furnish additional collateral to that Fund. During the time portfolio
securities are on loan, the borrower pays that Fund any dividends or interest
paid on such securities. Loans are subject to termination by the Fund or the
borrower at any time. While a Fund does not have the right to vote securities
on loan, each Fund intends to terminate the loan and regain the right to vote
if that is considered important with respect to the investment. In the event
the borrower defaults in its obligation to a Fund,
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<PAGE> 26
such Fund bears the risk of delay in the recovery of its portfolio securities
and the risk of rights in the collateral. The Funds will enter into loan
agreements only with broker-dealers, banks, or other institutions that First of
America or the Subadviser, as the case may be, has determined are creditworthy
under guidelines established by the Trust's Board of Trustees.
MEDIUM-GRADE SECURITIES
The Bond Fund may invest in fixed-income securities rated within the
fourth highest rating group assigned by an NRSRO (i.e., BBB or Baa by S&P and
Moody's, respectively) and comparable unrated securities. These types of fixed
income securities are considered by the NRSROs to have some speculative
characteristics, and are more vulnerable to changes and economic conditions,
higher interest rates or adverse issuer-specific developments which are more
likely to lead to weaker capacity to make principal and interest payments than
comparable higher rated debt securities.
Should subsequent events cause the rating of a fixed-income security
purchased by the Bond Fund to fall below the fourth highest rating category,
First of America will consider such an event in determining whether the Bond
Fund should continue to hold that security. In no event, however, would the
Bond Fund be required to liquidate any such portfolio security where the Bond
Fund would suffer a loss on the sale of such security.
MORTGAGE-RELATED SECURITIES
The Bond Fund and the Prime Obligations Fund may invest in
mortgage-related securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities. Such agencies or instrumentalities include the
GNMA, FNMA and FHLMC. The Bond Fund may also invest in mortgage-related
securities issued by nongovernmental entities which are rated, at the time of
purchase, within the three highest bond rating categories assigned by an NRSRO
or, if unrated, which First of America deems to present attractive
opportunities and are of comparable quality. The Prime Obligations Fund may
invest in such nongovernmental mortgage-related securities only if they are
appropriately rated and satisfy the requirements of such Fund described above.
The mortgage-related securities in which these Funds may invest have
mortgage obligations backing such securities, consisting of conventional
30-year fixed-rate mortgage obligations, graduated payment mortgage
obligations, 15-year mortgage obligations and/or adjustable rate mortgage
obligations. All of these mortgage obligations can be used to create
pass-through securities when they are pooled together and undivided interests
in the pool or pools are sold. The cash flow from the mortgage obligations is
passed through to the holders of the securities in the form of periodic
payments of interest, principal and prepayments (net of a service fee).
Prepayments occur when the holder of an individual mortgage obligation prepays
the remaining principal before the mortgage obligation's scheduled maturity
date. As a result of the pass-through of prepayments of principal on the
underlying securities, mortgage-backed securities are often subject to more
rapid prepayment of principal than their stated maturities
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<PAGE> 27
would indicate. Because the prepayment characteristics of the underlying
mortgage obligations vary, it is not possible to predict accurately the
realized yield or average life of a particular issue of pass-through
certificates. Prepayment rates are important because of their effect on the
yield and price of the securities. Accelerated prepayments have an adverse
impact on yields for pass-throughs purchased at a premium (i.e., a price in
excess of principal amount) and may involve additional risk of loss of
principal because the premium may not have been fully amortized at the time the
obligation is prepaid. The opposite is true for pass-throughs purchased at a
discount. The Funds may purchase mortgage-related securities at a premium or
at a discount.
If a Fund purchases a mortgage-related security at a premium, that
portion may be lost if there is a decline in the market value of the security,
whether resulting from changes in interest rates or prepayments in the
underlying mortgage collateral. As with other interest-bearing securities, the
prices of such securities are inversely affected by changes in interest rates.
However, though the value of a mortgage-related security may decline when
interest rates rise, the converse is not necessarily true, since in periods of
declining interest rates the mortgages underlying the securities are prone to
prepayment, thereby shortening the average life of the security and shortening
the period of time over which income at the higher rate is received. When
interest rates are rising, though, the rate of prepayment tends to decrease,
thereby lengthening the period of time over which income at the lower rate is
received. For these and other reasons, a mortgage-related security's average
maturity may be shortened or lengthened as a result of interest rate
fluctuations and, therefore, it is not possible to predict accurately the
securities' return to a Fund. In addition, regular payments received with
respect to mortgage-related securities include both interest and principal. No
assurance can be given as to the return a Fund will receive when these amounts
are reinvested.
The principal governmental (i.e., backed by the full faith and credit
of the United States Government) guarantor of mortgage-related securities is
GNMA. GNMA is a wholly-owned United States Government corporation within the
Department of Housing and Urban Development. GNMA is authorized to guarantee,
with the full faith and credit of the United States Government, the timely
payment of principal and interest on securities issued by institutions approved
by GNMA (such as savings associations, commercial banks and mortgage bankers)
and backed by pools of mortgages insured by the Federal Housing Administration
or guaranteed by the Veterans Administration.
Government-related (i.e., not backed by the full faith and credit of
the United States Government) guarantors include FNMA and FHLMC. FNMA is a
government-sponsored corporation owned entirely by private stockholders.
Pass-through securities issued by FNMA are guaranteed as to timely payment of
principal and interest by FNMA, but are not backed by the full faith and credit
of the United States Government. FHLMC is a corporate instrumentality of the
United States Government whose stock is owned by the Federal Home Loan Banks.
Participation certificates issued by FHLMC are guaranteed as to the timely
payment of interest and ultimate collection of principal, but are not backed by
the full faith and credit of the United States Government.
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Mortgage-related securities in which the above-named Funds may invest
may also include collateralized mortgage obligations ("CMOs"). CMOs are debt
obligations issued generally by finance subsidiaries or trusts that are secured
by mortgage-backed certificates, including, in many cases, certificates issued
by government-related guarantors, including GNMA, FNMA and FHLMC, together with
certain funds and other collateral. Although payment of the principal of and
interest on the mortgage-backed certificates pledged to secure the CMOs may be
guaranteed by GNMA, FNMA or FHLMC, the CMOs represent obligations solely of the
issuer and are not insured or guaranteed by GNMA, FHLMC, FNMA or any other
governmental agency, or by any other person or entity. The issuers of the CMOs
typically have no significant assets other than those pledged as collateral for
the obligations.
MUNICIPAL SECURITIES
The two principal classifications of Municipal Securities which may be
held by the Bond Fund and the Prime Obligations Fund are "general obligation"
securities and "revenue" securities. General obligation securities are secured
by the issuer's pledge of its full faith, credit and taxing power for the
payment of principal and interest. Revenue securities are payable only from
the revenues derived from a particular facility or class of facilities or, in
some cases, from the proceeds of a special excise tax or other specific revenue
source such as the user of the facility being financed.
The Bond Fund and the Prime Obligations Fund may also invest in "moral
obligation" securities, which are normally issued by special purpose public
authorities. If the issuer of moral obligation securities is unable to meet
its debt service obligations from current revenues, it may draw on a reserve
fund, the restoration of which is a moral commitment, but not a legal
obligation of the state or municipality which created the issuer.
The Bond Fund invests primarily in Municipal Securities which are
rated at the time of purchase within the four highest rating categories
assigned by an NRSRO or in the highest rating category assigned by an NRSRO in
the case of notes, tax-exempt commercial paper or variable rate demand
obligations. The Prime Obligations Fund may invest in Municipal Securities
only in compliance with the requirements of Rule 2a-7 under the 1940 Act, which
generally requires that it invest only in securities rated in the two highest
rating categories by an NRSRO (with no more than five percent of its assets
invested in securities rated in the second highest rating category). The Funds
may also purchase Municipal Securities which are unrated at the time of
purchase but are determined to be of comparable quality by First of America
pursuant to guidelines approved by the Trust's Board of Trustees. The
applicable Municipal Securities ratings are described in the Appendix to the
Statement of Additional Information.
For a discussion of debt securities rated within the fourth highest
rating category assigned by an NRSRO, see "RISK FACTORS AND INVESTMENT
TECHNIQUES - Medium-Grade Securities" above. Opinions relating to the validity
of Municipal Securities and the exemption of interest thereon from federal
income tax are rendered by bond counsel to the respective issuers at the time
of issuance. Neither the Bond Fund, the Prime Obligations Fund nor First
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of America will review the proceedings relating to the issuance of Municipal
Securities or the basis for such opinions.
OTHER MUTUAL FUNDS
Each of the Bond Fund, Equity Fund, Small Capitalization Fund, and
International Fund may invest up to 5% of the value of its total assets in the
securities of any one money market mutual fund (including, if permitted by rule
or order of the Securities and Exchange Commission, shares of the Prime
Obligations Fund and other affiliated money market funds), provided that no
more than 10% of the Fund's total assets may be invested in the securities of
mutual funds in the aggregate. In order to avoid the imposition of additional
fees as a result of investments by a Fund in shares of the Prime Obligations
Fund, the Investment Adviser, Administrator and their affiliates (See
"MANAGEMENT OF THE TRUST - Investment Adviser and Subadviser" and
"Administrator, Sub- Administrator and Distributor" and "GENERAL INFORMATION -
Transfer Agent and Fund Accounting Services") will not retain any portion of
their usual asset-based service fees from a Fund that are attributable to
investments by the Fund in shares of the Prime Obligations Fund if the fee is
being taken in the Fund. The Investment Adviser and the Administrator will
promptly forward such fees to the appropriate Fund. Each Fund will incur
additional expenses due to the duplication of expenses as a result of investing
in securities of other unaffiliated mutual funds. Additional restrictions
regarding the Funds' investments in securities of unaffiliated mutual funds
and/or the Prime Obligations Fund are contained in the Statement of Additional
Information.
PUT AND CALL OPTIONS
Each of the Equity Fund, Small Capitalization Fund, Bond Fund, and
International Fund may purchase put and call options on securities and foreign
currencies, subject to its applicable investment policies, for the purposes of
hedging against market risks related to its portfolio securities and adverse
movements in exchange rates between currencies, respectively. Purchasing
options is a specialized investment technique that entails a substantial risk
of complete loss of the amounts paid as premiums to writers of options. Each
of these Funds may also engage in writing call options from time to time as
First of America or the Subadviser deems appropriate. The Funds will write
only covered call options (options on securities or currencies owned by the
particular Fund). In order to close out a call option it has written, the Fund
will enter into a "closing purchase transaction" - the purchase of a call
option on the same security or currency with the same exercise price and
expiration date as the call option which such Fund previously has written.
When a portfolio security or currency subject to a call option is sold, the
Fund will effect a closing purchase transaction to close out any existing call
option on that security or currency. If such Fund is unable to effect a
closing purchase transaction, it will not be able to sell the underlying
security or currency until the option expires or that Fund delivers the
underlying security or currency upon exercise. In addition, upon the exercise
of a call option by the holder thereof, the Fund will forego the potential
benefit represented by market depreciation over the exercise price. Under
normal market conditions, it is not expected that the Funds will cause the
underlying value of portfolio securities and currencies subject to
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such options to exceed 50% of its net assets, and with respect to the
International Fund, 20% of its net assets.
Each of the Equity Fund, Small Capitalization Fund, and International
Fund, as part of its options transactions, also may purchase index put and call
options and write index options. As with options on individual securities, a
Fund will write only covered index call options. Through the writing or
purchase of index options a Fund can achieve many of the same objectives as
through the use of options on individual securities. Options on securities
indices are similar to options on a security except that, rather than the right
to take or make delivery of a security at a specified price, an option on a
securities index gives the holder the right to receive, upon exercise of the
option, an amount of cash if the closing level of the securities index upon
which the option is based is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option.
Price movements in securities which a Fund owns or intends to purchase
probably will not correlate perfectly with movements in the level of an index
and, therefore, a Fund bears the risk of a loss on an index option that is not
completely offset by movements in the price of such securities. Because index
options are settled in cash, a call writer cannot determine the amount of its
settlement obligations in advance and, unlike call writing on specific
securities, cannot provide an advance for, or cover, its potential settlement
obligations by acquiring and holding the underlying securities. A Fund may be
required to segregate assets or provide an initial margin to cover index
options that would require it to pay cash upon exercise.
REPURCHASE AGREEMENTS
Securities held by a Fund may be subject to repurchase agreements.
Under the terms of a repurchase agreement, a Fund acquires securities from a
financial institution such as a member bank of the Federal Deposit Insurance
Corporation or a registered broker-dealer which First of America or the
Subadviser, as the case may be, deems creditworthy under guidelines approved by
the Trust's Board of Trustees, subject to the seller's agreement to repurchase
such securities at a mutually agreed upon date and price. The repurchase price
generally equals the price paid by the Fund plus interest negotiated on the
basis of current short-term rates, which may be more or less than the rate on
the underlying portfolio securities. Securities subject to repurchase
agreements will be held in a segregated account. If the seller were to default
on its repurchase obligation or become insolvent, the Fund would suffer a loss
to the extent that the proceeds from a sale of the underlying portfolio
securities were less than the repurchase price under the agreement, or to the
extent that the disposition of such securities by the Fund were delayed pending
court action. Repurchase agreements are considered to be loans by an
investment company under the 1940 Act. For further information about
repurchase agreements, see "INVESTMENT OBJECTIVES AND POLICIES - Additional
Information on Portfolio Instruments-Repurchase Agreements" in the Statement of
Additional Information.
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RESTRICTED SECURITIES
Securities in which the Funds may invest include securities issued by
corporations without registration under the Securities Act of 1933, as amended
(the "1933 Act"), in reliance on the exemption from such registration afforded
by Section 3(a)(3) thereof, and securities issued in reliance on the so-called
"private placement" exemption from registration which is afforded by Section
4(2) of the 1933 Act ("Section 4(2) securities"). Section 4(2) securities are
restricted as to disposition under the Federal securities laws, and generally
are sold to institutional investors, such as the Funds, who agree that they are
purchasing the securities for investment and not with a view to public
distribution. Any resale must also generally be made in an exempt transaction.
Section 4(2) securities are normally resold to other institutional investors
through or with the assistance of the issuer or investment dealers who make a
market in such Section 4(2) securities, thus providing liquidity. Pursuant to
the procedures adopted by the Trust's Board of Trustees, First of America may
determine Section 4(2) securities to be liquid if such securities are eligible
for resale under Rule 144A under the 1933 Act and are readily saleable. Thus,
subject to the limitations described above, the Funds may acquire investments
that are illiquid or of limited liquidity, such as private placements or
investments that are not registered under the 1933 Act. An illiquid investment
is any investment that cannot be disposed of within seven days in the normal
course of business at approximately the amount at which it is valued by a Fund.
The price a Fund pays for illiquid securities or receives upon resale may be
lower than the price paid or received for similar securities with a more liquid
market. Accordingly, the valuation of these securities will reflect any
limitations on their liquidity. A Fund may not invest in additional illiquid
securities if, as a result, more than 15% of the market value of its net assets
would be invested in illiquid securities or, in the case of the Prime
Obligations Fund, more than 10% of its net assets would be invested in illiquid
securities.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLL AGREEMENTS
Each of the Funds may borrow money by entering into reverse repurchase
agreements, and in the case of the Bond Fund, dollar roll agreements, in
accordance with the investment restrictions described below. Pursuant to such
agreements, a Fund would sell certain of its securities to financial
institutions such as banks and broker-dealers, and agree to repurchase the
securities at a mutually agreed upon date and price. Dollar roll agreements
utilized by the Bond Fund are identical to reverse repurchase agreements except
for the fact that substantially similar securities may be repurchased. At the
time a Fund enters into a reverse repurchase or dollar roll agreement, it will
place in a segregated custodial account assets such as U.S. Government
securities or other liquid high grade debt securities consistent with its
investment restrictions having a value equal to the repurchase price (including
accrued interest), and will subsequently continually monitor the account to
insure that such equivalent value is maintained at all times. Reverse
repurchase and dollar roll agreements involve the risk that the market value of
securities sold by a Fund may decline below the price at which it is obligated
to repurchase the securities. Reverse repurchase and dollar roll agreements
are considered to be borrowings by an investment company under the 1940 Act
and, therefore, a form of leverage. A Fund may experience a negative impact on
its net asset value if interest rates rise during the term of a reverse
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repurchase agreement or dollar roll agreement. A Fund generally will invest
the proceeds of such borrowings only when such borrowings will enhance a Fund's
liquidity or when the Fund reasonably expects that the interest income to be
earned from the investment of the proceeds is greater than the interest expense
of the transaction. For further information about reverse repurchase and
dollar roll agreements, see "INVESTMENT OBJECTIVES AND POLICIES - Additional
Information on Portfolio Instruments- Reverse Repurchase Agreements and Dollar
Roll Agreements" in the Statement of Additional Information.
WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS
Each of the Funds may purchase securities on a when-issued or
delayed-delivery basis. The Funds will engage in when-issued and
delayed-delivery transactions only for the purpose of acquiring portfolio
securities consistent with its investment objective and policies, not for
investment leverage although such transactions represent a form of leveraging.
When-issued securities are securities purchased for delivery beyond the normal
settlement date at a stated price and yield and thereby involve risk that the
yield obtained in the transaction will be less than those available in the
market when the delivery takes place. A Fund will not pay for such securities
or start earning interest on them until they are received. When a Fund agrees
to purchase such securities, its custodian will set aside cash or liquid
securities equal to the amount of the commitment in a separate account.
Securities purchased on a when-issued basis are recorded as an asset and are
subject to changes in the value based upon changes in the general level of
interest rates. In when-issued and delayed-delivery transactions, a Fund
relies on the seller to complete the transaction; the seller's failure to do so
may cause such Fund to miss a price or yield considered to be advantageous.
The Prime Obligations Fund will purchase only Municipal Securities on
a when-issued or delayed-delivery basis. No Fund's commitment to purchase
"when-issued" securities will exceed 25% of the value of its total assets under
normal market conditions, and a commitment by a Fund to purchase "when-issued"
securities will not exceed 60 days. In the event that its commitments to
purchase when-issued securities ever exceeded 25% of the value of its assets, a
Fund's liquidity and the Investment Adviser's or Subadviser's ability to manage
it might be adversely affected. The Funds intend only to purchase
"when-issued" securities for the purpose of acquiring portfolio securities, not
for investment leverage although such transactions represent a form of
leveraging.
PORTFOLIO TURNOVER
The portfolio turnover rate for each Fund is calculated by dividing
the lesser of a Fund's purchases or sales of portfolio securities for the year
by the monthly average value of the portfolio securities. The Securities and
Exchange Commission (the "SEC") requires that the calculation exclude all
securities whose remaining maturities at the time of acquisition are one year
or less. The portfolio turnover rate for a Fund may vary greatly from year to
year, as well as within a particular year, and may also be affected by cash
requirements for redemption of shares. High portfolio turnover rates will
generally result in higher transaction costs, including
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brokerage commissions, to a Fund and may result in additional tax consequences
to a Fund's shareholders. Portfolio turnover will not be a limiting factor in
making investment decisions.
INVESTMENT RESTRICTIONS
Each Fund is subject to a number of investment restrictions that may
be changed only by a vote of a majority of the outstanding shares of that Fund
(as defined in the Statement of Additional Information).
No Fund may:
1. Purchase securities of any one issuer, other than obligations
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, if, immediately after such purchase, more than 5% of the
value of the Fund's total assets would be invested in such issuer, or the Fund
would hold more than 10% of the outstanding voting securities of the issuer,
except that 25% or less of the value of such Fund's total assets may be
invested without regard to such limitations. There is no limit on the
percentage of assets that may be invested in U.S. Treasury bills, notes, or
other obligations issued or guaranteed by the U.S. Government or its agencies
or instrumentalities.
Irrespective of the investment restriction described above, and
pursuant to Rule 2a-7 under the 1940 Act, the Prime Obligations Fund will, with
respect to 100% of its total assets, limit its investment in the securities of
any one issuer in the manner provided by such Rule, which limitations are
referred to above under the caption "Investment Objective and Policies of the
Prime Obligations Fund."
2. Purchase any securities which would cause more than 25% of the
value of the Fund's total assets at the time of purchase to be invested in
securities of one or more issuers conducting their principal business
activities in the same industry, provided that (a) there is no limitation with
respect to obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities and repurchase agreements secured by obligations
of the U.S. government or its agencies or instrumentalities; (b) wholly-owned
finance companies will be considered to be in the industries of their parents
if their activities are primarily related to financing the activities of their
parents; and (c) utilities will be divided according to their services. For
example, gas, gas transmission, electric and gas, electric, and telephone will
each be considered a separate industry.
3. (a) Borrow money (not including reverse repurchase
agreements), except that the Funds may borrow from banks for temporary or
emergency purposes and then only in amounts up to 30% (10% in the case of the
Prime Obligations Fund) of its total assets at the time of borrowing (and
provided that such bank borrowings and reverse repurchase agreements do not
exceed in the aggregate one-third of the Fund's total assets less liabilities
other than the obligations represented by the bank borrowings and reverse
repurchase agreements), or mortgage, pledge or hypothecate any assets except in
connection with a bank borrowing in
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amounts not to exceed 30% of the Fund's net assets at the time of borrowing;
(b) enter into reverse repurchase agreements and other permitted borrowings in
amounts exceeding in the aggregate one-third of the Fund's total assets less
liabilities other than the obligations represented by such reverse repurchase
agreements; and (c) issue senior securities except as permitted by the 1940 Act
rule, order or interpretation thereunder.
4. Make loans, except that the Fund may purchase or hold debt
instruments and lend portfolio securities in accordance with its investment
objective and policies, and may enter into repurchase agreements.
For purposes only of investment limitation number two above, such
limitation shall not apply to Municipal Securities or governmental guarantees
of Municipal Securities. Industrial development bonds or private activity
bonds that are backed only by the assets and revenues of a nongovernmental user
shall not be deemed to be Municipal Securities.
The following additional investment restriction may be changed without
the vote of a majority of the outstanding shares of each Fund.
No Fund may:
1. Purchase or otherwise acquire any securities, if as a result,
more than 15% (10% for the Prime Obligations Fund) of the Fund's net assets
would be invested in securities that are illiquid.
In addition to the above investment restrictions, the Funds are
subject to certain other investment restrictions set forth under "INVESTMENT
OBJECTIVES AND POLICIES - Investment Restrictions" in the Statement of
Additional Information.
MANAGEMENT OF THE TRUST
The business and affairs of the Trust are managed under the direction
of the Trust's Board of Trustees. The Trust's Statement of Additional
Information contains the names and general background information concerning
the Trustees.
INVESTMENT ADVISER AND SUBADVISER
First of America, 303 North Rose Street, Kalamazoo, Michigan 49007,
was established in 1932 and is the investment adviser of the Trust. First of
America, a registered investment adviser, is a wholly-owned subsidiary of First
of America Bank-Michigan, N.A., which is a wholly-owned subsidiary of First of
America Bank Corporation. First of America Bank Corporation currently has over
$23 billion in assets and provides financial services to over 300 communities
in Michigan, Indiana, Illinois and Florida. As of December 31, 1995, First of
America managed over $12 billion on behalf of both taxable and tax-exempt
clients, including pensions, endowments, corporations and individual
portfolios. First of America acts as subadviser
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to the Trust Division of First of America Bank Corporation with respect
to $3.6 billion in discretionary assets, providing equity, fixed income,
balanced and money management services.
Subject to such policies as the Trust's Board of Trustees may
determine, First of America, either directly or, with respect to the
International Fund, through the Subadviser, furnishes a continuous investment
program for each Fund and makes investment decisions on behalf of each Fund.
First of America utilizes a team approach to the investment management
of the Funds, with up to three professionals working as a team to ensure a
disciplined investment process designed to result in long-term performance
consistent with each Fund's investment objectives. Roger H. Stamper, Director
of First of America, is primarily responsible for the day-to-day management of
the Equity Fund and the Small Capitalization Fund. Mark R. Kummerer, Managing
Director-Fixed Income of First of America, is primarily responsible for the
day-to-day management of the Bond Fund. Messrs. Stamper and Kummerer have held
their respective positions with First of America since 1988 and 1986,
respectively.
For the services provided and expenses assumed pursuant to its
Investment Advisory Agreement with the Trust, First of America receives a fee
from each of the Equity Fund and Small Capitalization Fund, computed daily and
paid monthly, at the annual rate of one percent (1.00%) of that Fund's average
daily net assets. For the services in connection with the International Fund,
First of America's fee is computed daily and paid monthly, at the annual rate
of one and twenty-five one-hundredths of one percent (1.25%) of the first $50
million of the International Fund's average daily net assets, one and twenty
one-hundredths of one percent (1.20%) of average daily net assets between $50
million and $100 million, one and fifteen one-hundredths of one percent (1.15%)
of average daily net assets between $100 million and $400 million and one and
five one-hundredths of one percent (1.05%) of average daily net assets above
$400 million. For its services in connection with the Bond Fund, First of
America's fee is computed daily and paid monthly, at the annual rate of
seventy-four one-hundredths of one percent (0.74%) of that Fund's average daily
net assets. For its services in connection with the Prime Obligations Fund,
First of America's fee is computed daily and paid monthly, at the annual rate
of forty one-hundredths of one percent (0.40%) of that Fund's average daily net
assets.
Pursuant to the terms of its Investment Advisory Agreement with the
Trust, First of America has entered into a Sub-Investment Advisory Agreement
with Gulfstream Global Investors, Ltd., 300 Crescent Court, Suite 1605, Dallas,
Texas 75201. Pursuant to the terms of such Sub-Investment Advisory Agreement,
Gulfstream has been retained by First of America to manage the investment and
reinvestment of the assets of the International Fund, subject to the direction
and control of the Trust's Board of Trustees.
Under this arrangement, Gulfstream is responsible for the day-to-day
management of the International Fund's assets, reviews investment performance
policies and guidelines and
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maintains certain books and records, and First of America is responsible for
selecting and monitoring the performance of Gulfstream and for reporting the
activities of Gulfstream in managing the International Fund to the Trust's
Board of Trustees. Gulfstream utilizes a team approach to the investment
management of the International Fund to ensure a disciplined investment process
designed to result in long-term performance consistent with its investment
objective. No one person is responsible for the Fund's management. First of
America may also render advice with respect to the International Fund's
investments in the U.S.
For its services provided and expenses assumed pursuant to its
Sub-Investment Advisory Agreement with First of America, Gulfstream receives
from First of America a fee, computed daily and paid monthly, at the annual
rate of one-half of one percent (.50%) of the first $50 million of the
International Fund's average daily net assets which are invested in foreign
securities, forty-five one-hundredths of one percent (.45%) of such average
daily net assets between $50 million and $100 million, forty one-hundredths of
one percent (.40%) of such average daily net assets between $100 million and
$400 million and thirty one-hundredths of one percent (.30%) of such average
daily net assets above $400 million, provided the minimum annual fee shall be
$75,000.
Gulfstream was organized in 1991 as a Texas limited partnership by
Tull, Doud, Marsh & Triltsch, Inc., a Texas corporation ("TDMT"). TDMT is the
sole general partner of Gulfstream. TDMT is owned by C. Thomas Tull, Stephen
C. Doud, James P. Marsh and Reiner M. Triltsch. Messrs. Tull, Doud and
Triltsch are the portfolio managers and Mr. Marsh is responsible for client
services with Gulfstream. First of America is the sole limited partner,
holding a forty-nine percent (49%) interest in Gulfstream with options which
would under certain circumstances permit it to acquire up to a seventy-two
percent (72%) interest. As of December 31, 1995, Gulfstream had over $483
million in international assets of institutional, investment company,
governmental, pension fund and high net worth individual clients under its
investment management. Gulfstream's portfolio management personnel average
twenty (20) years of investment experience and nine (9) years of international
investment experience.
Prior to January 1, 1995, Ivory & Sime International, Inc. ("ISI") and
Ivory & Sime plc ("ISplc") (together with ISI, "Ivory & Sime") served as
subadvisers to the International Fund. The Trustees voted unanimously to
terminate this arrangement and replace it with the current subadvisory
arrangement with Gulfstream. As required by the 1940 Act, the shareholders of
the International Fund approved the appointment of Gulfstream as Subadviser, as
well as the related Sub-Investment Advisory Agreements, at a meeting held on
February 28, 1995.
Under Gulfstream's partnership agreement, First of America possesses
veto authority over the general budgetary affairs of Gulfstream. Because of
its current forty-nine percent (49%) ownership interest and its possession of
options enabling it to acquire up to a seventy-two percent (72%) ownership
interest, First of America may be deemed to control Gulfstream for purposes of
the 1940 Act.
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For further information regarding the relationship between Gulfstream
and First of America, see "MANAGEMENT OF THE TRUST - Investment Adviser" in the
Statement of Additional Information.
AUTHORITY TO ACT AS INVESTMENT ADVISER
Banking laws and regulations currently prohibit a bank holding company
registered under the Bank Holding Company Act of 1956, as amended, or any bank
or non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibits banks
generally from issuing, underwriting, selling, or distributing securities such
as shares of the Funds, but do not prohibit such a bank holding company or its
affiliates or banks generally from acting as investment adviser, transfer
agent, or custodian to such an investment company or from purchasing shares of
such a company as agent for and upon the order of customers. The investment
adviser and custodians are subject to such banking laws and regulations.
Should legislative, judicial, or administrative action prohibit or restrict the
activities of such companies in connection with their services to the Funds,
the Trust might be required to alter materially or discontinue its arrangements
with such companies and change its method of operation. It is anticipated,
however, that any resulting change in the Trust's method of operation would not
affect a Fund's net asset value per share or result in financial losses to any
shareholder. State securities laws on this issue may differ from federal law
and banks and financial institutions may be required to register as dealers
pursuant to state law.
ADMINISTRATOR
Until July 1, 1996, Security Management Company ("Security
Management"), located at 700 Harrison, Topeka, Kansas 66636, will serve as the
Funds' administrator. Security Management was formed in 1962 to provide
services to investment companies. Security Management is an indirect
wholly-owned subsidiary of Security Benefit Life Insurance Company.
Effective July 1, 1996, BISYS Fund Services, L.P. ("BISYS") will serve
as administrator to the Trust. The term "Administrator" as used in this
Prospectus shall refer to either Security Management or BISYS, as the context
requires.
The Administrator generally assists the Funds in their administration
and operation. For the services provided to the Funds, the Administrator is
entitled to receive administration fees, computed daily and paid monthly, at
the annual rate of twenty one-hundredths of one percent (.20%) of the combined
average daily net assets of the Funds up to $1 billion. In the event that the
combined average daily net assets of the Funds exceed $1 billion, the parties
intend to review the level of compensation payable to the Administrator for its
administrative services. In addition, the Administrator also receives a
separate annual fee from each Fund for certain Fund accounting services. From
time to time, the Administrator may waive all or a portion of the
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administration fee payable to it by the Funds, either voluntarily or pursuant
to applicable statutory expense limitations.
DISTRIBUTOR
Shares of each Fund are sold on a continuous basis by the Trust's
distributor. Until July 1, 1996, Security Distributors, Inc. ("SDI"), a
wholly-owned subsidiary of Security Benefit Life Insurance Company, will serve
as the Trust's distributor. SDI is a registered broker/dealer with principal
offices located at 700 Harrison Street, Topeka, Kansas 66636-0001.
Effective July 1, 1996, BISYS will serve as the Trust's distributor.
The term "Distributor" as used in this Prospectus shall refer to either SDI or
BISYS, as the context requires.
TRANSFER AGENT AND FUND ACCOUNTANT
Until August 3, 1996, Security Management Company, Topeka, Kansas,
will serve as transfer agent for all Funds of the Trust. Effective August 3,
1996, BISYS will serve as the transfer agent for all Funds of the Trust. The
term "Transfer Agent" as used in this Prospectus shall refer to either Security
Management or BISYS, as the context requires. The Transfer Agent also
provides certain fund accounting services to the Trust. For such services, the
Transfer Agent receives an annual fee for each domestic Fund equal to the
greater of $15,000 ($30,000 in the second and subsequent years) or thirty
one-thousandths of one percent (.03%) on the first $100 million, plus twenty
one-thousandths of one percent (.02%) on the next $150 million, plus ten
one-thousandths of one percent (.01%) on the remaining net assets. For
services provided to the International Fund, the Transfer Agent receives an
annual fee equal to the greater of $30,000 or eight one-thousandths of one
percent (.08%) on the first $100 million, plus forty one-thousandths of one
percent (.04%) on the next $150 million, plus twenty one-thousandths of one
percent (.02%) on the next $250 million and fifteen one-thousandths of one
percent (.015%) on the remaining net assets.
CUSTODIAN
The Bank of California, N.A., ("Bank of California") 400 California
Street, P.O. Box 45000, San Francisco, California 94104, serves as custodian of
the Funds' assets. Services performed by Bank of California for the Funds are
described in the Statement of Additional Information.
DESCRIPTION OF THE TRUST AND ITS SHARES
The Trust was organized as a Massachusetts business trust on May 18,
1993. The Trust is a series fund currently authorized to issue its shares in
the following five series: Prime Obligations Fund; Equity Fund; Small
Capitalization Fund; Bond Fund; and International Fund.
(36)
<PAGE> 39
Each share of the Trust has no par value, represents an equal proportionate
interest in the related Fund with other shares of the same class, and is
entitled to such dividends and distributions out of the income earned on the
assets belonging to such Fund as are declared in the discretion of the Board of
Trustees. The Trust's Declaration of Trust authorizes the Board of Trustees to
classify or reclassify any class or series of shares into one or more classes
or series of shares.
Shareholders are entitled to one vote for each full share held, and a
proportionate fractional vote for each fractional share held, and will vote in
the aggregate and not by Fund, expect as otherwise expressly required by law or
when the Board of Trustees determines that the matter to be voted on affects
only the interests of shareholders of a particular Fund. The rights
accompanying Fund shares are legally vested in the separate accounts. However,
holders of variable annuity contracts and variable life insurance policies
funded through the separate accounts generally have the right to instruct
separate accounts as to voting Fund shares on all matters to be voted on by
Fund shareholders. Voting rights of the participants of the separate accounts
are more fully set forth in the prospectus relating to those accounts issued by
the Participating Insurance Companies.
The Trust is not required under Massachusetts law to hold annual
shareholder meetings and intends to do so only if required by the 1940 Act.
Shareholders have the right to remove trustees.
PURCHASE AND REDEMPTION OF SHARES
Investors may not purchase or redeem shares of the Funds directly, but
only through the variable annuity contracts and variable life insurance
policies offered through the separate accounts of Participating Insurance
Companies. You should refer to the prospectus of the Participating Insurance
Company's separate account for information on how to purchase a variable
annuity contract or variable life insurance policy, how to select specific
Funds of the Trust as investment options for your contract or policy and how to
redeem monies from the Trust.
The Separate Accounts of the Participating Insurance Companies place
orders to purchase and redeem shares of the Funds, based on, among other
things, the amount of premium payments to be invested and the amount of
surrender and transfer requests (as defined in the Prospectus describing the
variable annuity contracts and variable life insurance policies issued by the
Insurance Companies) to be effected on that day pursuant to variable annuity
contracts and variable life insurance policies. Orders received by the Trust
are effected on days on which the New York Stock Exchange ("NYSE") is open for
trading. Orders for the purchase and redemption of shares of a Fund received
before the NYSE closes are effected at the net asset value per share determined
as of the close of trading on the NYSE (generally 4:00 p.m. Eastern time) that
day. Orders received after the NYSE closes are effected at the next calculated
net asset value. Payment for redemptions will be made by the Funds within 7
days after the request is received. The Trust may suspend the right of
redemption under certain extraordinary circumstances in accordance with the
rules of the SEC.
(37)
<PAGE> 40
The Funds do not assess any fees, either when they sell or redeem
their shares. Withdrawal charges, mortality and expense risk fees and other
charges may be assessed by Participating Insurance Companies under the variable
annuity contracts or variable life insurance policies. These fees are
described in the Participating Insurance Companies' prospectuses.
As of the date of this Prospectus, Security Benefit Life Insurance
Company is the only Participating Insurance Company. If the requested
exemptive relief is requested and granted, shares of the Funds may be sold to
and held by separate accounts that fund variable annuity and variable life
insurance contracts issued by both affiliated and unaffiliated Participating
Insurance Companies. The Trust currently does not foresee any disadvantages to
the holders of variable annuity contracts and variable life insurance policies
of affiliated and unaffiliated Participating Insurance Companies arising from
the fact that interests of the holders of variable annuity contracts and
variable life insurance policies may differ due to differences of tax treatment
or other considerations or due to conflicts between the affiliated or
unaffiliated Participating Insurance Companies. Nevertheless, the Trustees
will monitor events to seek to identify any material irreconcilable conflicts
which may possibly arise and to determine what action, if any, should be taken
in response to such conflicts. Should a material unreconcilable conflict arise
between the holders of variable annuity contracts and variable life insurance
policies of affiliated or unaffiliated Participating Insurance Companies, the
Participating Insurance Companies may be required to withdraw the assets
allocable to some or all of the Separate Accounts from the Funds. Any such
withdrawal could disrupt orderly portfolio management to the potential
detriment of such holders (See "MISCELLANEOUS" below for more details). The
variable annuity contracts and variable life insurance policies are described
in the separate prospectuses issued by the Participating Insurance Companies.
The Trust assumes no responsibility for such prospectuses.
FEES AND EXPENSES
While the advisory fees paid by the Trust are higher than the advisory
fees paid by most mutual funds, the Board of Trustees believes them to be
comparable to advisory fees paid by many funds having similar objectives and
policies. First of America may periodically voluntarily reduce all or a
portion of its advisory fee with respect to a Fund to increase the net income
of that Fund available for distribution as dividends. The voluntary fee
reduction will cause the return of that Fund to be higher than it would
otherwise be in the absence of such reduction.
(38)
<PAGE> 41
ANNUAL FUND EXPENSES AFTER EXPENSE LIMITATION
(as a percentage of average daily net assets)
<TABLE>
<CAPTION>
Small Inter-
Prime Capit- national
Obliga- aliza- Disc-
tions tion overy Bond Equity
Fund Fund Fund Fund Fund
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Management Fees . . . . . . . . . . . . . . . . . . . . . . 0.40% 1.00% 1.25% 0.74% 1.00%
Administration Fees . . . . . . . . . . . . . . . . . . . . 0.20 0.20 0.20 0.20 0.20
Other Expenses After Voluntary Fee Reduction . . . . . . . 0.77 0.28 0.78 0.49 0.32
Total Fund Operating Expenses . . . . . . . . . . . . 1.37 1.48 2.23 1.43 1.52
</TABLE>
The above expenses as shown for the Funds are based on estimated
expenses for the current fiscal year. The expenses which are borne by the
Funds, including Other Expenses to which reference is made in the above table,
are discussed below. The contracts and separate accounts of the Participating
Insurance Companies also incur fees and expenses. Investors should consult the
prospectus issued by the Participating Insurance Company describing the
variable annuity contract or variable life insurance policy for more
information on such additional fees and expenses.
Except as noted elsewhere in this Prospectus, First of America, the
Subadviser and Administrator bear all expenses in connection with the
performance of their services for the Funds. The Trust bears the expenses in
connection with the Funds' operations, whether incurred directly or on its
behalf by First of America, the Subadviser, the Administrator or the
Participating Insurance Companies, including taxes; interest; fees (including
fees paid to its trustees and officers except those trustees and officers who
are affiliated with the Administrator); SEC fees; state securities
qualification fees; costs of preparing and printing prospectuses for regulatory
purposes and for distribution to existing shareholders; advisory,
administration, Fund accounting and custody fees; certain insurance premiums;
outside auditing and legal expenses; costs of shareholders' reports and
shareholder meetings; and any extraordinary expenses. The Funds also pay for
brokerage fees and commissions in connection with the purchase of portfolio
securities.
HOW SHARES ARE VALUED
The net asset value of shares of the Funds, with the exception of the
Prime Obligations Fund, is determined and their shares are priced as of the
close of trading on the NYSE (generally 4:00 p.m. Eastern Time)(the "Valuation
Time") on each business day. The net asset value of each class of shares of
the Prime Obligations Fund is determined and its shares are priced as of noon
and as of the close of trading on the NYSE (the "Valuation Time") on each
business day. A "business day" is a day in which the NYSE is open for trading
and the Federal Reserve Bank of Chicago is open, and any other day (other than
a day on which no shares are
(39)
<PAGE> 42
tendered for redemption and no order to purchase any shares is received) during
which there is sufficient trading in its portfolio instruments that its net
asset value per share might be materially affected. Currently, the NYSE or the
Federal Reserve Bank of Chicago will not open in observance of the following
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day,
Thanksgiving and Christmas.
Net asset value per share for a particular Fund for purposes of
pricing sales and redemptions is calculated by dividing the value of all
securities and other assets belonging to a Fund, less the liabilities charged
to that Fund, by the number of outstanding shares of such Fund.
The net asset value per share will fluctuate as the value of the
investment portfolio of a Fund changes. However, the assets in the Prime
Obligations Fund are valued based upon the amortized cost method. Pursuant to
the rules and regulations of the SEC regarding the use of the amortized cost
method, the Prime Obligations Fund will maintain a dollar-weighted average
portfolio maturity of 90 days or less. Although the Trust seeks to maintain
the Prime Obligations Fund's net asset value per share at $1.00, there can be
no assurance that net asset value will not vary.
The securities in each Fund will be valued at market value. If market
quotations are not available, the securities will be valued by a method which
the Board of Trustees believes accurately reflects fair value. Foreign
securities are valued based on quotations from the primary market in which they
are traded and are translated from the local currency into U.S. dollars using
current exchange rates. For further information about valuation of
investments, see "NET ASSET VALUE" in the Statement of Additional Information.
DIVIDENDS AND TAXES
Each Fund expects to make a distribution of substantially all of its
net investment income and capital gains each year at least once a year.
Dividends for the Prime Obligations Fund are declared daily at the close of
business on the day of declaration and paid monthly. Dividends for the Equity,
Small Capitalization, Bond, and International Funds are declared and paid at
least annually. Net capital gains, if any, will be distributed at least
annually. All dividends and capital gain distributions will be automatically
reinvested in additional shares of a Fund at the net asset value of such shares
on the payment date.
Each Fund intends to qualify as a "regulated investment company" under
the Internal Revenue Code of 1986, as amended (the "Code"), which would relieve
a Fund of liability for federal income taxes to the extent the Fund's earnings
are distributed in accordance with the Code. In order to so qualify, a Fund
must comply with certain distribution, diversification, source of income and
other applicable requirements. If for any taxable year a Fund does not qualify
for the special federal tax treatment afforded regulated investment companies,
all of the Fund's taxable income would be subject to tax at regular corporate
rates without any deduction for distributions to shareholders. In such event,
a Fund's distributions to segregated asset
(40)
<PAGE> 43
accounts holding shares of the Fund would be taxable as ordinary income to the
extent of the Fund's current and accumulated earnings and profits. A failure
of a Fund to quantity as a regulated investment company could also result in
the loss of the tax favored status of variable annuity contracts and variable
life insurance policies based on a segregated asset account which invests in
the Fund.
Under Code section 817(h), a segregated asset account upon which a
variable annuity contract or variable life insurance policy is based must be
"adequately diversified." A segregated asset account will be adequately
diversified if it complies with certain diversification tests set forth in
treasury regulations. If a regulated investment company satisfies certain
conditions relating to the ownership of its shares, a segregated asset account
investing in such investment company will be entitled to treat its pro rata
portion of each asset of the investment company as an asset for purposes of
these diversification tests. The Fund intends to meet these ownership
conditions and to comply with the diversification tests described above.
Accordingly, a segregated asset account investing solely in shares of a Fund
will be adequately diversified.
Taxes may be imposed on the International Fund by foreign countries
with respect to income received on foreign securities. If more than 50% of the
value of the International Fund's assets at the close of its taxable year
consists of stocks or securities of foreign corporations, the International
Fund may elect to treat any foreign income taxes it has paid as paid by its
shareholders. In this case, shareholders generally will be required to include
in income their pro rata share of such taxes, but will then be entitled to
claim a credit or deduction for their share of such taxes. However, a
particular shareholder's ability to utilize such a credit will be subject to
certain limitations imposed by the Code. The International Fund will report to
its shareholders each year the amount, if any, of foreign taxes per share that
it has elected to have treated as paid by its shareholders.
Provided that the Fund and funds in a segregated asset account
investing in the Fund satisfy the above requirements, any distributions from
the Fund will be exempt from current federal income taxation to the extent that
such distributions accumulate in a variable annuity contract or a variable life
insurance contract.
Persons investing in a variable annuity or variable life insurance
contract offered by a segregated asset account investing in a Fund should refer
to the prospectus with respect to such contract for further tax information.
The foregoing discussion of federal income tax consequences is based
on tax laws and regulations in effect on the date of this Prospectus and is
subject to change by legislative or administrative action. Prospective
investors should consult their own tax advisors as to the tax consequences of
investments in the Funds.
(41)
<PAGE> 44
PERFORMANCE INFORMATION
From time to time performance information for the Funds showing their
average annual total return, aggregate total return and/or yield may be
presented in advertisements, sales literature and shareholder reports. Such
performance figures are based on historical earnings and are not intended to
indicate future performance. Average annual total return of a Fund will be
calculated for the period since the establishment of the Fund and will reflect
the imposition of the maximum sales charge, if any. Average annual total
return is measured by comparing the value of an investment in a Fund at the
beginning of the relevant period to the redemption value of the investment at
the end of the period (assuming immediate reinvestment of any dividends or
capital gains distributions) and annualizing the result. Aggregate total
return is calculated similarly to average annual total return except that the
return figure is aggregated over the relevant period instead of annualized.
Yield of a Fund will be computed by dividing a Fund's net investment income per
share earned during a recent 1-month period by that Fund per share maximum
offering price (reduced by any undeclared earned income expected to be paid
shortly as a dividend) on the last day of the period and annualizing the
result. Each Fund may also present its average annual total return, aggregate
total return and yield, as the case may be, excluding the effect of a sales
charge, if any.
In addition, from time to time the Fund may present their respective
distribution rates for a Fund in supplemental sales literature which is
accompanied or preceded by a Prospectus and in shareholder reports.
Distribution rates will be computed by dividing the distribution per share over
a 12-month period by the maximum offering price per share. The calculation of
income in the distribution rate includes both income and capital gain dividends
and does not reflect unrealized gains or losses, although a Fund may also
present a distribution rate excluding the effect of capital gains. The
distribution rate differs from the yield, because it include capital gains
which are often non-recurring in nature, whereas yield does not include such
items. Distribution rates may also be presented excluding the effect of a
sales charge, if any.
Investors may also judge the performance of a Fund by comparing or
referencing it to the performance of mutual funds with comparable investment
objectives and policies through various mutual fund or market indices such as
those prepared by various services or publications, including, but not limited
to, ratings published by Morningstar, Inc. In addition to performance
information, general information about the Funds that appears in such
publications may be included in advertisements, in sales literature and in
reports to shareholders. For further information regarding such services and
publications, see "ADDITIONAL INFORMATION-Performance Comparisons" in the
Statement of Additional Information.
Total return and yield are functions of the type and quality of
instruments held in the portfolio, operating expenses, and market conditions.
Consequently, total return and yield will fluctuate and are not necessarily
representative of future results. Any fees charged by First of America Bank
Corporation or any of its affiliates with respect to customer accounts for
investing in shares of the Funds will not be included in performance
calculations. Such fees, if charged, will reduce the actual performance from
that quoted. In addition, if First of America and the
(42)
<PAGE> 45
Administrator voluntarily reduce all or a part of their respective fees, as
further discussed in this Prospectus, the total return of such Fund will be
higher than it would otherwise be in the absence of such voluntary fee
reductions.
Yields and total returns quoted for the Funds include the effect of
deducting the Funds' expenses, but may not include charges and expenses
attributable to a particular variable annuity contract or variable life
insurance policy. Since shares of the Funds may be purchased only through a
variable annuity contract or variable life insurance policy, you should
carefully review the prospectus of the variable annuity contract or variable
life insurance policy you have chosen for information on relevant charges and
expenses. Including these charges in the quotations of the Funds' yield and
total return would have the effect of decreasing performance. Performance
information for the Funds must always be accompanied by, and reviewed with,
performance information for the insurance product which invests in the Funds.
MISCELLANEOUS
Effective July 1, 1996, inquiries regarding the Trust may be directed
in writing to The Parkstone Advantage Fund at 3435 Stelzer Road, Columbus, Ohio
43219, or by calling toll free (800) 451-8377. Until that date, inquiries
regarding the Trust should be made by telephone to (913) 295-3000 or, if in
writing, to the Trust's office at 700 Harrison Street, Topeka, Kansas 66636.
Holders of variable annuity contracts or variable life insurance policies
issued by Participating Insurance Companies for which shares of the Funds are
the investment vehicle will receive from the Participating Insurance Companies
the Trust's unaudited semi-annual financial statements and year-end financial
statements audited by the Trust's independent auditors. Each report will show
the investments owned by the Funds and the market values of the investments and
will provide other information about the Funds and their operations.
The Trust currently does not foresee any disadvantages to the holders
of variable annuity contracts and variable life insurance policies of
affiliated and unaffiliated Participating Insurance Companies arising from the
fact that the interests of the holders of variable annuity contracts and
variable life insurance policies may differ due to differences of tax treatment
or other considerations or due to conflict between the affiliated or
unaffiliated Participating Insurance Companies. Nevertheless, the Trustees
intend to monitor events in order to identify any material irreconcilable
conflicts which may possibly arise and to determine what action, if any, should
be taken in response to such conflicts. The variable annuity contracts and
variable life insurance policies are described in the separate prospectuses
issued by the Participating Insurance Companies. The Trust assumes no
responsibility for such prospectuses.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
(43)
<PAGE> 46
PRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST.
(44)
<PAGE> 47
THE PARKSTONE ADVANTAGE FUND
FORM N-1A
CROSS REFERENCE SHEET
PART B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL
INFORMATION
<TABLE>
<CAPTION>
HEADING IN STATEMENT OF
ITEM NO. ADDITIONAL INFORMATION
- -----------------------------------------------------------------------------------
<S> <C>
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Additional Information -
Description of Shares
13. Investment Objectives and Policies Investment Objectives and
Policies; Net Asset Value
14. Management of the Fund Trustees and Officers;
Expenses; Miscellaneous
15. Control Persons and Principal
Holders of Securities Management of the Trust
16. Investment Advisory and Other
Services Investment Adviser;
Administrator; Distributor;
Custodian, Transfer Agent
and Fund Accounting;
Services; Independent Auditors;
Counsel
17. Brokerage Allocation and Other
Practices Portfolio Transactions
18. Capital Stock and Other Securities Additional Information -
Description of Shares
19. Purchase, Redemption and Pricing
of Securities Being Offered Net Asset Value; Additional
Purchase and Redemption
Information; Additional
Information - Description of
Shares
20. Tax Status Additional Tax Information;
Additional Tax Information
Concerning the International
Fund
21. Underwriters Portfolio Transactions
</TABLE>
<PAGE> 48
<TABLE>
<S> <C>
22. Calculation of Performance Date Yield of the Prime
Obligations Fund; Yields of
the Other Funds; Calculation
of Total Return
23. Financial Statements Financial Statements
</TABLE>
<PAGE> 49
PRIME OBLIGATIONS FUND
EQUITY FUND
SMALL CAPITALIZATION FUND
BOND FUND
INTERNATIONAL DISCOVERY FUND
Each an Investment Portfolio of
THE PARKSTONE ADVANTAGE FUND
Statement of Additional Information
April 30, 1996
This Statement of Additional Information is not a Prospectus, but
should be read in conjunction with the Prospectus for The Parkstone Advantage
Fund dated April 30, 1996. This Statement of Additional Information is
incorporated by reference in its entirety into the Prospectus. Effective
July 1, 1996, copies of the Prospectus may be obtained by writing the
Parkstone Advantage Fund at 3435 Stelzer Poad, Columbus, Ohio 43219, or by
calling (800) 451-8377. Until that date, copies may be obtained by writing to
700 Harrison Street, Topeka, Kansas 66636 or by telephoning (913) 295-3000.
<PAGE> 50
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES.......................................................................... B-1
Additional Information on Portfolio Instruments.................................................... B-1
Investment Restrictions............................................................................ B-15
Portfolio Turnover................................................................................. B-17
NET ASSET VALUE............................................................................................. B-18
Valuation of the Prime Obligations Fund............................................................ B-18
Valuation of the Other Funds....................................................................... B-19
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION.............................................................. B-19
MANAGEMENT OF THE TRUST..................................................................................... B-19
Trustees and Officers.............................................................................. B-19
Investment Adviser................................................................................. B-21
Portfolio Transactions............................................................................. B-25
Glass-Steagall Act................................................................................. B-27
Administrator...................................................................................... B-28
Expenses .......................................................................................... B-30
Distributor........................................................................................ B-30
Custodian, Transfer Agent and Fund Accounting Services............................................. B-30
Independent Auditors .............................................................................. B-32
Counsel .......................................................................................... B-32
ADDITIONAL INFORMATION...................................................................................... B-32
Description of Shares.............................................................................. B-32
Vote of a Majority of the Outstanding Shares....................................................... B-33
Shareholder and Trustee Liability.................................................................. B-34
Additional Tax Information......................................................................... B-34
Additional Tax Information Concerning the International Fund....................................... B-37
Yield of the Prime Obligations Fund................................................................ B-38
Yields of the Equity, Small Capitalization, Bond and International Funds........................... B-39
Calculation of Total Return........................................................................ B-39
Performance Comparisons............................................................................ B-40
Miscellaneous...................................................................................... B-41
Financial Statements............................................................................... B-42
APPENDIX ................................................................................................... A-1
</TABLE>
i
<PAGE> 51
STATEMENT OF ADDITIONAL INFORMATION
THE PARKSTONE ADVANTAGE FUND
The Parkstone Advantage Fund (the "Trust") is an open-end management
company which offers five separate and diversified investment portfolios, each
with a different investment objective. The Trust is established exclusively for
the purpose of providing an investment vehicle for variable annuity contracts
and variable life insurance policies offered by the separate accounts of various
life insurance companies ("participating insurance companies"). Shares of the
Trust are not offered to the general public but solely to such separate accounts
("separate accounts").
The Trust includes the Prime Obligations Fund, a money market fund
which seeks current income consistent with liquidity and stability of principal
by investing in high quality money market instruments. In addition, the Trust
offers four variable net asset value funds: the Equity Fund, the Small
Capitalization Fund, the Bond Fund, and the International Discovery Fund. The
Equity Fund seeks capital growth by investing primarily in a diversified
portfolio of common stocks and securities convertible into common stocks. The
Small Capitalization Fund seeks capital growth by investing primarily in a
portfolio of common stocks and securities convertible into common stocks of
small- to medium-sized companies. The Bond Fund seeks current income with the
preservation of capital by investing in a portfolio of high- and medium- grade
fixed- income securities. The International Discovery Fund (the "International
Fund") seeks long-term growth of capital.
Much of the information contained in this Statement of Additional
Information expands upon subjects discussed in the Prospectus of the Funds
described above. Capitalized terms not defined herein are defined in the
Prospectus. No investment in shares of a Fund should be made without first
reading the Fund's Prospectus.
INVESTMENT OBJECTIVES AND POLICIES
Additional Information on Portfolio Instruments
The following policies supplement the investment objectives and
policies of each Fund of the Trust as set forth in the Prospectus for the Trust.
Bank Obligations.
Each of the Prime Obligations Fund, Equity Fund, Small Capitalization
Fund, and Bond Fund may invest in bank obligations consisting of bankers'
acceptances, certificates of deposit and time deposits.
B-1
<PAGE> 52
Bankers' acceptances are negotiable drafts or bills of exchange
typically drawn by an importer or exporter to pay for specific merchandise which
are "accepted" by a bank, meaning, in effect, that the bank unconditionally
agrees to pay the face value of the instrument on maturity. Bankers' acceptances
invested in by the Funds will be those guaranteed by domestic and foreign banks
having, at the time of investment, capital, surplus, and undivided profits in
excess of $100,000,000.00 (as of the date of their most recently published
financial statements).
Certificates of deposit are negotiable certificates issued against
funds deposited in a commercial bank or a savings and loan association for a
definite period of time and earning a specified return. Certificates of deposit
and time deposits will be those of domestic and foreign banks and savings and
loan associations if (a) at the time of investment, the depository or
institution has capital, surplus, and undivided profits in excess of
$100,000,000.00 (as of the date of its most recently published financial
statements), or (b) the principal amount of the instrument is insured in full by
the Federal Deposit Insurance Company.
The Prime Obligations, Equity, Small Capitalization, and Bond Funds may
also invest in Eurodollar Certificates of Deposit, which are U.S.
dollar-denominated certificates of deposit issued by offices of foreign and
domestic banks located outside the United States; Yankee Certificates of Deposit
("Yankee CDs") which are certificates of deposit issued by a U.S. branch of a
foreign bank denominated in U.S. dollars and held in the United States;
Eurodollar Time Deposits ("ETDs") which are U.S. dollar-denominated deposits in
a foreign branch of a U.S. bank or foreign bank; and Canadian time deposits,
which are basically the same as ETDs, except they are issued by Canadian offices
of major Canadian banks.
Commercial Paper.
Commercial paper consists of unsecured promissory notes issued by
corporations. Except as noted below with respect to variable amount master
demand notes, issues of commercial paper normally have maturities of less than 9
months and fixed rates of return.
Subject to the limitations described in the Prospectus, the Prime
Obligations Fund will purchase commercial paper consisting of issues dated at
the time of purchase within the two highest rating categories assigned by a
nationally recognized statistical rating organization ("NRSRO"). The Prime
Obligations Fund may also invest in commercial paper that is not rated but that
is determined by First of America, under guidelines established by the Trust's
Board of Trustees, to be of comparable quality to instruments that are so rated
by an NRSRO that is neither controlling, controlled by or under common control
with the issuer of, or any issuer, guarantor, or provider of credit support for,
the instruments. The Equity Fund, Small Capitalization Fund and Bond Fund may
invest in commercial paper rated in any rating category or not rated by an
NRSRO. In general, investment in lower-rated instruments is more risky than
investment in instruments in higher-rated categories. For a description of the
rating symbols of NRSRO, see the Appendix. The Prime Obligations Fund, Equity
Fund, Small Capitalization Fund, International Fund and Bond Fund may also
invest in Canadian commercial paper, which
B-2
<PAGE> 53
is commercial paper issued by a Canadian corporation or counterpart of a U.S.
corporation and Europaper which is U.S. dollar-denominated commercial paper of a
foreign issuer.
Variable Amount Master Demand Notes.
Variable amount master demand notes in which the Prime Obligations
Fund, Equity Fund, Small Capitalization Fund, and Bond Funds may invest, are
unsecured demand notes that permit the indebtedness thereunder to vary and
provide for periodic adjustments in the interest rate according to the terms of
the instrument. Because master demand notes are direct lending arrangements
between the Fund and the issuer, they are not normally traded. Although there is
no secondary market in the notes, a Fund may demand payment of principal and
accrued interest at any time. While the notes are not rated by credit rating
agencies, issuers of variable amount master demand notes (which are normally
manufacturing, retail, financial, and other business concerns) must satisfy the
same criteria set forth above for commercial paper. First of America will
consider the earning power, cash flow, and other liquidity ratios of such notes
and will continuously monitor the financial status and ability to make payment
on demand. In determining dollar average maturity, a variable amount master
demand note will be deemed to have a maturity equal to the longer of the period
of time remaining until the next interest rate adjustment or the period of time
remaining until the principal amount can be recovered from the issuer through
demand.
Foreign Investment.
Investment in foreign securities is subject to special investment risks
that differ in some respects from those related to securities of U.S. domestic
issuers. Since investments in the securities of foreign issuers may involve
currencies of foreign countries, and since the International Fund may from time
to time temporarily hold funds in bank deposits in foreign currencies, the
International Fund may be affected favorably or unfavorably by changes in
currency rates and in exchange control regulations and may incur costs in
connection with conversions between various currencies. Since foreign companies
are not subject to accounting, auditing and financial reporting standards,
practices and requirements comparable to those applicable to U.S. companies,
there may be less publicly available information about a foreign company than
about a U.S. company. Volume and liquidity in most foreign bond markets are less
than in the U.S. and securities of many foreign companies are less liquid and
more volatile than securities of comparable U.S. companies. Fixed commissions on
foreign securities exchanges are generally higher than negotiated commissions on
U.S. exchanges, although the Funds endeavor to achieve the most favorable net
results in their portfolio transactions. There is generally less government
supervision and regulation of the securities exchanges, brokers, dealers and
listed companies than in the U.S., thus increasing the risk of delayed
settlements of portfolio transactions or loss of certificates for portfolio
securities.
Foreign markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Such delays in
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settlement could result in temporary periods when a portion of the assets of a
Fund is uninvested and no return is earned thereon. The inability of a Fund to
make intended security purchases due to settlement problems could cause such
Fund to miss attractive investment opportunities. Losses to a Fund due to
subsequent declines in the value of portfolio securities, or losses arising out
of the Fund's inability to fulfill a contract to sell such securities, could
result in potential liability to the Fund. In addition, with respect to certain
foreign countries, there is the possibility of expropriation or confiscatory
taxation, political or social instability, or diplomatic developments which
could affect a Fund's investments in those countries. Moreover, individual
foreign economies may differ favorably or unfavorably from the U.S. economy in
such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Each of the Prime Obligations Fund, Equity Fund, Small Capitalization
Fund and Bond Fund will acquire foreign securities only when First of America
believes that the risks associated with such investments are minimal.
Variable and Floating Rate Notes.
The Prime Obligations Fund may acquire variable and floating rate
notes, subject to the Fund's investment objective, policies and restrictions. A
variable rate note is one whose terms provide for the adjustment of its interest
rate on set dates and which, upon such adjustment, can reasonably be expected to
have a market value that approximates its par value. A floating rate note is one
whose terms provide for the adjustment 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. Such notes are frequently not
rated by credit rating agencies; however, unrated variable and floating rate
notes purchased by the Fund will be determined by First of America Investment
Corporation (the "Investment Adviser"), under guidelines established by the
Trust's Board of Trustees, to be of comparable quality at the time of purchase
to rated instruments eligible for purchase under the Fund's investment policies.
In making such determinations, the Investment Adviser will consider the earning
power, cash flow, and liquidity ratios of the issuers of such notes (such
issuers include financial, merchandising, bank holding, and other companies) and
will continuously monitor their financial condition. Although there may be no
active secondary market with respect to a particular variable or floating rate
note purchased by the Fund, the Fund may resell the note at any time to a third
party. The absence of an active secondary market, however, could make it
difficult for the Fund to dispose of a variable or floating rate note in the
event the issuer of the note defaulted on its payment obligations and the Fund
could, as a result, or for other reasons, suffer a loss to the extent of the
default. To the extent that the Fund is not entitled to receive the principal
amount of a note within seven (7) days, such note will be treated as an illiquid
security for purposes of the calculation of the limitation on the Fund's
investment in illiquid securities as set forth in the Fund's investment
restrictions. Variable or floating rate notes may be secured by bank letters of
credit.
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Variable or floating rate notes invested in by the Prime Obligations
Fund may have maturities of more than 397 days, as follows:
1. An instrument that is issued or guaranteed by the United
States government or any agency thereof which has a variable rate of interest
adjusted no less frequently than every 397 days will be deemed by the Fund to
have a maturity equal to the period remaining until the next readjustment of the
interest rate.
2. A variable rate note, the principal amount of which is
scheduled on the face of the instrument to be paid in 397 days or less, will be
deemed by the Fund to have a maturity equal to the period remaining until the
scheduled payment date or the next readjustment of the interest rate.
3. A variable rate note that is subject to a demand feature will
be deemed by the Fund to have a maturity equal to the longer of the period
remaining until the next readjustment of the interest rate or the period
remaining until the principal amount can be recovered through demand.
4. A floating rate note that is subject to a demand feature will
be deemed by the Fund to have a maturity equal to the period remaining until the
principal amount can be recovered through demand.
As used above, a note is "subject to a demand feature" where the Fund
is entitled to receive the principal amount of the note either at any time on no
more than 30 days' notice or at specified intervals not exceeding 397 days.
Money Market Mutual Funds.
Each of the Bond Fund, Equity Fund, Small Capitalization Fund, and
International Fund (the "Non-Money Market Funds") may invest up to 5% of the
value of its total assets in the securities of any one money market mutual fund
(including, if permitted by rule or order of the Securities and Exchange
Commission, shares of the Prime Obligations Fund or another affiliated money
market fund), provided that no more than 10% of the Non-Money Market Fund's
total assets may be invested in the securities of money market mutual funds in
the aggregate. In order to avoid the imposition of additional fees as a result
of investments by the Non-Money Market Funds in shares of the Prime Obligations
Fund, the Investment Adviser, Administrator and their affiliates (See MANAGEMENT
OF THE TRUST - "Investment Adviser," "Administrator and Distributor" and
"Custodians, Transfer Agent and Fund Accounting Services") will not retain any
portion of their usual service fees from a Non-Money Market Fund that is
attributable to investment by the Non-Money Market Fund in shares of the Prime
Obligations Fund if the fee is being taken in the Non-Money Market Fund. The
Investment Adviser and the Administrator will promptly forward such fees to the
Non-Money Market Fund. Each Non-Money Market Fund will incur additional expenses
due to the duplication of expenses as a result of investing in securities of
other unaffiliated money market mutual funds.
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The Non-Money Market Funds will incur no sales charges, contingent
deferred sales charges, 12b-1 fees or other underwriting or distribution fees in
connection with their investments in the Prime Obligations Fund. The Non-Money
Market Funds will vote their shares of the Prime Obligations Fund in proportion
to the vote by all other shareholders of the Prime Obligations Fund. Moreover,
no single Non-Money Market Fund may own more than 3% of the outstanding shares
of the Prime Obligations Fund.
Municipal Securities.
The Bond Fund may invest in Municipal Securities, but shall limit such
investment to the extent necessary to preclude it from paying "exempt-interest
dividends" as that term is defined in the Code. Municipal Securities are
primarily bonds and notes issued by or on behalf of states (including the
District of Columbia), territories, and possessions of United States and their
respective authorities, agencies, instrumentalities, and political subdivisions,
the interest on which is both exempt from federal income tax and not treated as
a preference item for purposes of the federal alternative minimum tax.
Municipal Securities include debt obligations issued by governmental
entities to obtain funds for various public purposes, such as the construction
of a wide range of public facilities, the refunding of outstanding obligations,
the payment of general operating expenses, and the extension of loans to other
public institutions and facilities. Private activity bonds that are issued by or
on behalf of public authorities to finance various privately-operated facilities
are included within the term Municipal Securities if the interest paid thereon
is exempt from both federal income tax and not treated as a preference item for
purposes of the federal alternative minimum tax.
The two principal classifications of Municipal Securities consist of
"general obligation" and "revenue" issues. There are, of course, variations in
the quality of such Municipal Securities, both within a particular
classification and between classifications, and the yields on such Municipal
Securities depend upon a variety of factors, including general money market
conditions, the financial condition of the issuer, general conditions of the
municipal bond market, the size of a particular offering, the maturity of the
obligation and the rating of the issue. The ratings of an NRSRO represent their
opinions as to the quality of such Municipal Securities. It should be
emphasized, however, that ratings are general and are not absolute standards of
quality, and Municipal Securities with the same maturity, interest rate and
rating may have different yields, while Municipal Securities of the same
maturity and interest rate with different ratings may have the same yield.
Subsequent to purchase, an issue of Municipal Securities may cease to be rated
or its rating may be reduced below the minimum rating required for purchase.
First of America will consider such an event in determining whether a Fund
should continue to hold the obligation.
An issuer's obligations under Municipal Securities are subject to the
provisions of bankruptcy, insolvency, and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Code and laws, if any,
which may be enacted by Congress or state
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legislatures extending the time for payment of principal or interest, or both,
or imposing other constraints upon the enforcement of such obligations or upon
the ability of municipalities to levy taxes. The power or ability of an issuer
to meet its obligations for the payment of interest on and principal of
Municipal Securities may be materially adversely affected by litigation or other
conditions.
U.S. Government Obligations.
Each of the Funds may invest in obligations issued or guaranteed by the
U.S. government or its agencies and instrumentalities, including bills, notes
and bonds issued by the U.S. Treasury, as well as "stripped" U.S. Treasury
obligations such as Treasury Receipts issued by the U.S. Treasury representing
either future interest or principal payments. Stripped securities are issued at
a discount to their "face value" and may exhibit greater price volatility than
ordinary debt securities because of the manner in which their principal and
interest are returned to investors. The stripped Treasury obligations in which
the Funds may invest do not include certificates of approval on treasury
securities ("CATS") or treasury income growth receipts ("TIGRs").
Obligations of certain agencies and instrumentalities of the U.S.
government are supported by the full faith and credit of the U.S. Treasury;
others are supported by the right of the issuer to borrow from the Treasury;
others are supported by the discretionary authority of the U.S. government to
purchase the agency's obligations; and still others are supported only by the
credit of the instrumentality. No assurance can be given that the U.S.
government will provide financial support to the U.S. government-sponsored
agencies or instrumentalities if it is not obligated to do so by law.
Options Trading.
Each of the Equity Fund, Small Capitalization Fund, Bond Fund and
International Fund may purchase put and call options. A call option gives the
purchaser of the option the right to buy, and the writer has the obligation to
sell, the underlying security or foreign currency at the stated exercise price
at any time prior to the expiration of the option, regardless of the market
price or exchange rate of the security or foreign currency, as the case may be.
The premium paid to the writer is consideration for undertaking the obligations
under the option contract. A put option gives the purchaser the right to sell
the underlying security or foreign currency at the stated exercise price at any
time prior to the expiration date of the option, regardless of the market price
or exchange rate of the security or foreign currency, as the case may be. Put
and call options purchased by the Funds are valued at the last sale price, or in
the absence of such a price, at the mean between bid and asked price.
When a Fund writes an option, an amount equal to the net premium (the
premium less the commission) 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 value of the option written. The current
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value of the traded option is the last sale price or, in the absence of a sale,
the average of the closing bid and asked prices. If an option expires on the
stipulated expiration date or if the Fund enters into a closing purchase
transaction, it will realize a gain (or a loss if the cost of a closing purchase
transaction exceeds the net premium received when the option is sold) and the
deferred credit related to such option will be eliminated. If an option is
exercised, the Fund may deliver the underlying security in the open market. In
either event, the proceeds of the sale will be increased by the net premium
originally received and the Fund will realize a gain or loss.
Each of the Equity Fund, Small Capitalization Fund and International
Fund may also purchase or sell index options. Index options (or options on
securities indices) are similar in many respects to options on securities except
that an index option gives the holder the right to receive, upon exercise, cash
instead of securities, if the closing level of the securities index upon which
the option is based is greater than, in the case of a call, or less than, in the
case of a put, the exercise price of the option.
When-Issued and Delayed-Delivery Securities.
As discussed in the Prospectus, each Fund may purchase securities on a
"when-issued" or "delayed-delivery" basis (i.e., for delivery beyond the normal
settlement date at a stated price and yield). When the Fund agrees to purchase
securities on a "when-issued" or "delayed- delivery" basis, the Fund's Custodian
will set aside cash or liquid securities equal to the amount of the commitment
in a separate account. Normally, the Custodian will set aside portfolio
securities to satisfy the purchase commitment, and in such case, the Fund may be
required subsequently to place additional assets in the separate account in
order to assure that the value of the account remains equal to the amount of the
Fund's commitment. It may be expected that the Fund's net assets will fluctuate
to a greater degree when it sets aside portfolio securities to cover such
purchase commitments than when it sets aside cash. In addition, because the Fund
will set aside cash or liquid securities to satisfy its purchase commitments in
the manner described above, the Fund's liquidity and the ability of the
Investment Adviser to manage it might be affected in the event its commitments
to purchase "when-issued" or "delayed-delivery" securities ever exceeded 25% of
the value of its assets. Under normal market conditions, however, a Fund's
commitments to purchase "when-issued" or "delayed-delivery" securities will not
exceed 25% of the value of its assets.
If the Fund sells a "when-issued" or "delayed-delivery" security before
a delivery, any gain would not be tax-exempt. When the Fund engages in
"when-issued" or "delayed-delivery" transactions, it relies on the seller to
consummate the trade. Failure of the seller to do so may result in the Fund
incurring a loss or missing the opportunity to obtain a price considered to be
advantageous. The Funds will engage in "when-issued" or "delayed-delivery"
transactions only for the purpose of acquiring securities consistent with the
Funds' investment objectives and policies and not for investment leverage,
although such transactions represent a form of leveraging. Commitments of the
Equity Fund and Small Capitalization Fund to purchase "when- issued" or
"delayed-delivery" securities will not exceed 5% of the value of their
respective assets.
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Mortgage-Related Securities.
Each of the Funds may, consistent with its investment objective and
policies, invest in mortgage-related securities issued or guaranteed by the U.S.
government, agencies or instrumentalities. The Bond Fund may, in addition,
invest in mortgage-related securities issued by non-governmental entities;
provided, however, that to the extent the Fund purchases mortgage-related
securities from such issuers which may, solely for the purposes of Section 12 of
the Investment Company Act (the "1940 Act"), be deemed to be investment
companies, the Fund's investment in such securities will be subject to the
limitations on its investment in investment company securities set forth below
in its Investment Restrictions.
Mortgage-related securities, for purposes of the Trust's Prospectus and
this Statement of Additional Information, represent pools of mortgage loans
assembled for sale to investors by various governmental agencies such as the
Government National Mortgage Association ("GNMA") and government-related
organizations such as the Federal National Mortgage Association ("FNMA") and the
Federal Home Loan Mortgage Corporation ("FHLMC"), as well as by non-governmental
issuers such as commercial banks, savings and loan institutions, mortgage
bankers and private mortgage insurance companies. Although certain
mortgage-related securities are guaranteed by a third party or otherwise
similarly secured, the market value of the security, which may fluctuate, is not
so secured. If a Fund purchases a mortgage-related security at a premium, that
portion may be lost if there is a decline in the market value of the security
whether resulting from changes in interest rates or prepayments in the
underlying mortgage collateral. As with other interest-bearing securities, the
prices of such securities are inversely affected by changes in interest rates.
However, though the value of a mortgage-related security may decline when
interest rates rise, the converse is not necessarily true, since in periods of
declining interest rates the mortgages underlying the securities are prone to
prepayment, thereby shortening the life of the security and shortening the
period of time over which income at the higher rate is received. When interest
rates are rising, though, the rate of prepayment tends to decrease thereby
lengthening the period of time over which income at the lower rate is received.
For these and other reasons, a mortgage-related security's average maturity may
be shortened or lengthened as a result of interest rate fluctuations and,
therefore, it is not possible to predict accurately the security's return to the
Funds. In addition, regular payments received in respect of mortgage-related
securities include both interest and principal. No assurance can be given as to
the return the Funds will receive when these amounts are reinvested.
The Bond Fund may also invest in mortgage-related securities which are
issued by non-governmental entities, including collateralized mortgage
obligations structured on pools of mortgage pass-through certificates or
mortgage loans. Collateralized mortgage obligations will be purchased only if
rated in the three highest bond rating categories assigned by Moody's (i.e.,
Aaa, Aa, A) or S&P (i.e., AAA, AA, A) or if not rated, which are of comparable
quality and present attractive opportunities as determined by the Investment
Adviser.
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There are a number of important differences among the agencies and the
instrumentalities of the U.S. government that issue mortgage-related securities
and among the securities that they issue. Mortgage-related securities issued by
GNMA include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie
Maes") which are guaranteed as to the timely payment of principal and interest
by GNMA and such guaranty is backed by the full faith and credit of the United
States. GNMA is a wholly-owned U.S. government corporation within the Department
of Housing and Urban Development. GNMA certificates are also supported by the
authority of the GNMA to borrow funds from the U.S. Treasury to make payments
under its guarantee. Mortgage-related securities issued by FNMA include FNMA
Guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes")
which are solely the obligations of FNMA and are not backed by or entitled to
the full faith and credit of the United States. FNMA is a government-sponsored
organization owned entirely by private stockholders. Fannie Maes are guaranteed
as to timely payment of the principal and interest by FNMA. Mortgage-related
securities issued by FHLMC include FHLMC mortgage participation certificates
(also known as "Freddie Macs" or "PCs"). FHLMC is a corporate instrumentality of
the United States, pursuant to an Act of Congress, which is owned entirely by
the Federal Home Loan banks. Freddie Macs are not guaranteed by the United
States or by any Federal Home Loan banks and do not constitute a debt or
obligation of the United States or of any Federal Home Loan bank. Freddie Macs
entitle the holder to timely payment of interest, which is guaranteed by the
FHLMC. FHLMC guarantees either ultimate collection or timely payment of all
principal payments on the underlying mortgage loans. When FHLMC does not
guarantee timely payment of principal, FHLMC may remit the amount due on account
of its guarantee of ultimate payment of principal at any time after default on
an underlying mortgage, but in no event later than one year after it becomes
payable.
Medium-Grade Debt Securities.
As stated in the Prospectus, the Bond Fund may invest in securities
which are rated within the four highest rating groups assigned by an NRSRO
(including, for example, securities rated BBB by S&P or Baa by Moody's) or, if
not rated, are of comparable quality as determined by First of America
("Medium-Grade Securities").
As with other fixed-income securities, Medium-Grade Securities are
subject to credit risk and market risk. Market risk relates to changes in a
security's value as a result of changes in interest rates. Credit risk relates
to the ability of an issuer to make payments of principal and interest.
Medium-Grade Securities are considered by Moody's to have speculative
characteristics.
Medium-Grade Securities are generally subject to greater credit risk
than comparable higher-rated securities because issuers are more vulnerable to
economic downturns, higher interest rates or adverse issuer-specific
developments. In addition, the prices of Medium-Grade Securities are generally
subject to greater market risk and therefore react more sharply to changes in
interest rates. The value and liquidity of Medium-Grade Securities may be
diminished by adverse publicity and investor perceptions.
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Because certain Medium-Grade Securities are traded only in markets
where the number of potential purchasers and sellers, if any, is limited, the
ability of the Fund to sell such securities at their fair value, either to meet
redemption requests or to respond to changes in the financial markets, may be
limited.
Particular types of Medium-Grade Securities may present special
concerns. The prices of payment-in-kind or zero-coupon securities react more
strongly to changes in interest rates than the prices of other Medium-Grade
Securities. Some Medium-Grade Securities in which the Fund may invest may be
subject to redemption or call provisions that may limit increases in market
value that might otherwise result from lower interest rates while increasing the
risk that the Fund may be required to reinvest redemption or call proceeds
during a period of relatively low interest rates.
The credit ratings issued by Moody's and S&P are subject to various
limitations. For example, while such ratings evaluate credit risk, they
ordinarily do not evaluate the market risk of Medium-Grade Securities. In
certain circumstances, the ratings may not reflect in a timely fashion adverse
developments affecting an issuer. For these reasons, First of America conducts
its own independent credit analysis of Medium-Grade Securities.
Restricted Securities.
"Section 4(2) securities," as described in the Prospectus, are
securities which are issued in reliance on the "private placement" exemption
from registration which is afforded by Section 4(2) of the Securities Act of
1933 (the "1933 Act"). The Funds will not purchase Section 4(2) securities which
have not been determined to be liquid in excess of 15% (10% in the case of the
Prime Obligations Fund) of the total assets of that Fund. The Trust's Board of
Trustees has delegated to First of America the day-to-day authority to determine
whether a particular issue of Section 4(2) securities that are eligible for
resale under Rule 144A under the 1933 Act should be treated as liquid. Rule 144A
provides a safe-harbor exemption from the registration requirements of the 1933
Act for resales to "qualified institutional buyers" as defined in the Rule. With
the exception of registered broker-dealers, a qualified institutional buyer must
generally own and invest on a discretionary basis at least $100 million in
securities.
First of America may deem Section 4(2) securities liquid if it believes
that, based on the trading markets for such security, such security can be
disposed of within seven (7) days in the ordinary course of business at
approximately the amount at which the Fund has valued the security. In making
such determination, First of America generally considers any and all factors
that it deems relevant, which may include (i) the credit quality of the issuer;
(ii) the frequency of trades and quotes for the security; (iii) the number of
dealers willing to purchase or sell the security and the number of other
potential purchasers; (iv) dealer undertakings to make a market in the security;
and (v) the nature of the security and the nature of market-place trades.
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Treatment of Section 4(2) securities as liquid could have the effect of
decreasing the level of a Fund's liquidity to the extent that qualified
institutional buyers become, for a time, uninterested in purchasing these
securities.
Repurchase Agreements.
Securities held by each of the Funds may be subject to repurchase
agreements. Under the terms of a repurchase agreement, a Fund would acquire
securities from member banks of the Federal Deposit Insurance Corporation and
registered broker-dealers which First of America deems creditworthy under the
guidelines approved by the Trust's Board of Trustees, subject to the seller's
agreement to repurchase such securities at a mutually agreed upon date and
price. The repurchase price would generally equal the price paid by the Fund
plus interest negotiated on the basis of current short-term rates, which may be
more or less than the rate on the underlying portfolio securities. The seller
under a repurchase agreement will be required to maintain at all times the value
of collateral held pursuant to the agreement at not less than the repurchase
price (including accrued interest). If the seller were to default on its
repurchase obligations or become insolvent, the Fund holding such obligation
would suffer a loss to the extent that the proceeds from the sale of the
underlying portfolio securities were less than the repurchase price under the
agreement, or to the extent that the disposition of such securities by the Fund
were delayed pending court action. Additionally, there is no controlling legal
precedent confirming that a Fund would be entitled, as against the claim by such
seller or its receiver or trustee in bankruptcy, to retain the underlying
securities, although the Board of Trustees of the Trust believes that, under the
regular procedures normally in effect for the custody of a Fund's securities
subject to repurchase agreements, and under federal laws, a court of competent
jurisdiction would rule in favor of the Trust if presented with the question.
Securities subject to repurchase agreements will be held by the Trust's
Custodian or another qualified custodian or in the Federal Reserve/Treasury
book-entry system. Repurchase agreements are considered to be loans by a Fund
under the 1940 Act.
Reverse Repurchase Agreements and Dollar Roll Agreements.
As discussed in the Prospectus, each of the Funds may borrow money by
entering into reverse repurchase agreements and, with respect to the Bond Fund,
dollar roll agreements in accordance with that Fund's investment restrictions.
Pursuant to such agreements, a Fund would sell portfolio securities to financial
institutions such as banks and brokers-dealers and agree to repurchase the
securities, or substantially similar securities in the case of a dollar roll
agreement, at a mutually agreed-upon date and price. A dollar roll agreement is
identical to a reverse repurchase agreement except for the fact that
substantially similar securities may be repurchased. At the time a Fund enters
into a reverse repurchase agreement or a dollar roll agreement, it will place in
a segregated custodial account assets such as U.S. government securities or
other liquid high-grade debt securities consistent with the Fund's investment
restrictions having a value equal to the repurchase price (including accrued
interest), and will subsequently continually monitor the account to insure that
such equivalent value is maintained. Reverse repurchase agreements and dollar
roll agreements involve the risk that the market value of the securities sold by
a Fund
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may decline below the price at which a Fund is obligated to repurchase the
securities. Reverse repurchase agreements and dollar roll agreements are
considered to be borrowings by a Fund under the 1940 Act.
Futures Contracts.
As discussed in the Prospectus, each of the Equity Fund, Small
Capitalization Fund, Bond Fund and International Fund may enter into futures
contracts. This investment technique is designed primarily to hedge against
anticipated future changes in market conditions or foreign exchange rates which
otherwise might adversely affect the value of securities which a Fund holds or
intends to purchase. For example, when interest rates are expected to rise or
market values of portfolio securities are expected to fall, a Fund can seek
through the sale of futures contracts to offset a decline in the value of its
portfolio securities. When interest rates are expected to fall or market values
are expected to rise, a Fund, through the purchase of such contract, can attempt
to secure better rates or prices for the Fund than might later be available in
the market when it effects anticipated purchases.
The acquisition of put and call options on futures contracts will,
respectively, give a Fund the right (but not the obligation), for a specified
price to sell or to purchase the underlying futures contract, upon exercising
the option anytime during the option period.
Futures transactions involve broker costs and require a Fund to
segregate liquid assets, such as cash, U.S. government securities or other
liquid high-grade debt obligations to cover its performance under such
contracts. A Fund may lose the expected benefit of futures contracts if interest
rates, securities or foreign exchange rates move in an unanticipated manner.
Such unanticipated changes may also result in poorer overall performance than if
the Fund had not entered into any futures transactions. In addition, the value
of a Fund's futures positions may not prove to be perfectly or even highly
correlated with its portfolio securities and foreign currencies, limiting the
Fund's ability to hedge effectively against interest rate, foreign exchange rate
and/or market risk and giving rise to additional risks. There is no assurance of
liquidity in the secondary market for purposes of closing out futures positions.
Forward Foreign Currency Exchange Contracts.
A forward foreign currency exchange contract involves an obligation to
purchase or sell a specific currency at a future date which may be any fixed
number of days ("term") from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are traded
directly between currency traders (usually large commercial banks) and their
customers.
No Fund intends to enter into such forward foreign currency exchange
contracts if such Fund would have more than 15% of the value of its total assets
committed to such contracts on a regular or continuous basis. A Fund also will
not enter into such forward contracts or maintain a net exposure on such
contracts where such Fund would be obligated to deliver an
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amount of foreign currency in excess of the value of such Fund's securities or
other assets denominated in that currency. First of America believes that it is
important to have the flexibility to enter into such forward contracts when it
determines that to do so is in the best interests of a Fund. The Fund's
Custodian segregates cash or liquid high-grade securities in an amount not less
than the value of the Fund's total assets committed to forward foreign currency
exchange contracts entered into for the purchase of a foreign security. If the
value of the securities segregated declines, additional cash or securities are
added so that the segregated amount is not less than the amount of such Fund's
commitments with respect to such contracts. The Funds generally do not enter
into a forward contract for a term longer than one year.
Foreign Currency Options.
A foreign currency option provides the option buyer with the right to
buy or sell a stated amount of foreign currency at the exercise price at a
specified date or during the option period. A call option gives its owner the
right, but not the obligation, to buy the currency, while a put option gives its
owner the right, but not the obligation, to sell the currency. The option seller
(writer) is obligated to fulfill the terms of an option sold if it is exercised.
However, either seller or buyer may close its position during the option period
in the secondary market for such options at any time prior to expiration.
A call rises in value if the underlying currency appreciates.
Conversely, a put rises in value if the underlying currency depreciates. While
purchasing a foreign currency option can protect the Fund against an adverse
movement in the value of a foreign currency, it does not limit the gain which
might result from a favorable movement in the value of such currency. For
example, if a Fund were holding securities denominated in an appreciating
foreign currency and had purchased a foreign currency put to hedge against the
decline of the value of the currency, it would not have to exercise its put.
Similarly, if a Fund has entered into a contract to purchase a security
denominated in a foreign currency and had purchased a foreign currency call to
hedge against a rise in the value of the currency but instead the currency had
depreciated in value between the date of the purchase and the settlement date,
such Fund would not have to exercise its call, but could acquire in the spot
market the amount of foreign currency needed for settlement.
Foreign Currency Futures Transactions.
As part of its financial futures transactions, a Fund may use foreign
currency futures contracts and options on such futures contracts. Through the
purchase or sale of such contracts, a Fund may be able to achieve many of the
same objectives as through forward foreign currency exchange contracts more
effectively and possibly at a lower cost. Unlike forward foreign currency
exchange contracts, foreign currency futures contracts and options on foreign
currency futures contracts are standardized as to amount and delivery, and may
be traded on boards of trade and commodities exchanges or directly with a dealer
which makes a market in such contracts and options. It is anticipated that such
contracts may provide greater liquidity and lower cost than forward foreign
currency exchange contracts.
B-14
<PAGE> 65
Regulatory Restrictions.
To the extent required to comply with Securities and Exchange
Commission (the "SEC") Release No. IC-10666, when purchasing a futures contract
or writing a put option or entering into a forward foreign currency exchange
purchase, a Fund will maintain in a segregated account cash or liquid high-grade
debt securities equal to the value of such contracts.
To the extent required to comply with Commodity Futures Trading
Commission Regulation 4.5 and thereby avoid being classified as a "commodity
pool operator," a Fund will not enter into a futures contract or purchase an
option thereon if immediately thereafter the initial margin deposits for futures
contracts held by such Fund plus premiums paid by it for open options on futures
would exceed 5% of such Fund's total assets. Such Fund will not engage in
transactions in financial futures contracts or options thereon for speculation,
but only to attempt to hedge against changes in market conditions affecting the
values of securities which such Fund holds or intends to purchase. When futures
contracts or options thereon are purchased to protect against a price increase
on securities intended to be purchased later, it is anticipated that at least
25% of such intended purchases will be completed. When other futures contracts
or options thereon are purchased, the underlying value of such contracts will at
all times not exceed the sum of: (1) accrued profit on such contracts held by
the broker; (2) cash or high-quality money market instruments set aside in an
identifiable manner; and (3) cash proceeds from investments due in 30 days.
Lending of Portfolio Securities.
In order to generate additional income, each of the Funds may, from
time to time, lend its portfolio securities to broker-dealers, banks or
institutional borrowers of securities. A Fund must receive 100% collateral in
the form of cash or U.S. Government securities. This collateral must be valued
daily by First of America or the Subadviser and, should the market value of the
loaned securities increase, the borrower must furnish additional collateral to
the Fund. During the time portfolio securities are on loan, the borrower pays
the Fund any dividends or interest paid on such securities. Loans are subject to
termination by the Fund or the borrower at any time. While the Fund does not
have the right to vote securities on loan, it intends to terminate the loan and
regain the right to vote if that is considered important with respect to the
investment. In the event the borrower defaults in its obligation to a Fund, the
Fund bears the risk of delay in the recovery of its portfolio securities and the
risk of loss of rights in the collateral. The Fund will only enter into loan
arrangements with broker-dealers, banks or other institutions which First of
America or the Subadviser has determined are creditworthy under guidelines
established by the Trust's Board of Trustees.
Investment Restrictions.
Each Fund's investment objective is fundamental and may not be changed
without a vote of the holders of a majority of the Fund's outstanding shares. In
addition, the following investment restrictions may be changed with respect to a
particular Fund only by the vote of a
B-15
<PAGE> 66
majority of the outstanding shares of that Fund (as defined under "ADDITIONAL
INFORMATION - Vote of a Majority of the Outstanding Shares" in this Statement of
Additional Information).
In addition to the investment restrictions set forth in the Prospectus,
the Prime Obligations Fund may not:
1. Purchase securities on margin except for use of short-term
credit necessary for clearance of purchases of portfolio securities.
In addition to the investment restrictions set forth in the Prospectus,
none of the Equity Fund, Small Capitalization Fund, Bond Fund, and International
Fund may:
1. Purchase securities on margin except for use of short-term
credit necessary for clearance of purchases of portfolio securities and except
as may be necessary to make margin payments in connection with foreign currency
futures and other derivative securities transactions.
None of the Funds will:
1. Underwrite the securities issued by other persons except to
the extent that a Fund may be deemed to be an underwriter under certain
securities laws in the disposition of "restricted securities";
2. Purchase or sell commodities or commodities contracts except
to the extent disclosed in the current Prospectus of the Fund; and
3. Purchase or sell real estate (although investment in
marketable securities of companies engaged in such activities and, securities
secured by real estate or interests therein are not prohibited by this
restriction).
The following additional investment restrictions may be changed without
the vote of a majority of outstanding shares of a Fund. None of the Funds may:
1. Engage in any short sales;
2. Invest more than 10% of the Fund's total assets in the
securities of issuers which, together with any predecessors, have a record of
less than 3 years of operations;
3. Purchase securities of other investment companies, except (a)
in connection with a merger, consolidation, acquisition or reorganization, and
(b) to the extent permitted by the 1940 Act or pursuant to any exemptions
therefrom;
4. Purchase or retain securities of any issuer if the officers or
Trustees of the Trust and the officers or directors of its Adviser and of its
Administrator, who each owns beneficially
B-16
<PAGE> 67
more than one-half of 1% of the outstanding securities of such issuer, together
own beneficially more than 5% of such securities;
5. Mortgage or hypothecate the Fund's assets in excess of
one-third of the Fund's total assets; and
6. Purchase participations or direct interests in oil, gas or
other mineral exploration or development programs (although investments by the
Fund in marketable securities of companies engaged in such activities are not
prohibited by this restriction).
If any percentage restriction described above is satisfied at the time
of purchase, a later increase or decrease in percentage resulting from a change
in asset value will not constitute a violation of such restriction. However,
should a change in asset value or other external events cause a Fund's
investments in illiquid securities to exceed the limitations set forth in the
Prospectus, that Fund will act to cause the aggregate amount of illiquid
securities to come within such limit as soon as reasonably practicable. In such
an event, however, that Fund would not be required to liquidate any portfolio
securities where the Fund would suffer a loss on the sale of such securities.
Portfolio Turnover.
The portfolio turnover rate for each of the Funds is calculated by
dividing the lesser of a Fund's purchases or sales of portfolio securities for
the year by the monthly average value of the securities. The Commission requires
that the calculation exclude all securities whose maturities at the time of
acquisition are one year or less.
Because the Prime Obligations Fund intends to invest entirely in
securities with maturities of less than one year and because the Commission
requires such securities to be excluded from the calculation of portfolio
turnover rate, the portfolio turnover rate with respect to the Prime Obligations
Fund is expected to be zero for regulatory purposes.
Portfolio turnover rates for each of the other Funds for the fiscal
years ended December 31, 1995 and 1994, were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR ENDED
FUND DECEMBER 31, 1995 DECEMBER 31, 1994
<S> <C> <C>
Equity 44% 51%
Small Capitalization 64% 39%
Bond 178% 159%
International 86% 87%
</TABLE>
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<PAGE> 68
The portfolio turnover rates for the Funds of the Trust may vary
greatly from year to year as well as within a particular year, and may also be
affected by cash requirements for redemption of shares. High portfolio turnover
rates will generally result in higher transaction costs to a Fund, including
brokerage commissions, and may result in additional tax consequences to a Fund's
shareholders. Portfolio turnover will not be a limiting factor in making
investment decisions.
NET ASSET VALUE
As indicated in the Prospectus, the net asset value of each Fund is
determined and the shares of each Fund are priced as of the Valuation Times
defined in the Prospectus on each business day of the Trust. A "business day" is
a day on which the New York Stock Exchange (the "NYSE") is open for trading and
the Federal Reserve Bank of Chicago is open, and any other day (other than the
day in which no shares of the Fund are tendered for redemption and no order to
purchase any shares is received) during which there is sufficient trading of
portfolio instruments that the Fund's net asset value per share might be
materially affected. Currently, the NYSE or the Federal Reserve Bank of Chicago
will not be open in observance of the following holidays: New Year's Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving, and Christmas.
Valuation of the Prime Obligations Fund.
The Prime Obligations Fund has elected to use the amortized cost method
of valuation pursuant to Rule 2a-7 under the 1940 Act. This involves valuing an
instrument at its cost initially and thereafter assuming a constant amortization
to maturity of any discounted premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. This method may result in
periods during which value, as determined by amortized cost, is higher or lower
than the price the Fund would receive if it sold the instrument. The value of
securities in this Fund can be expected to vary inversely with changes in
prevailing interest rates.
Pursuant to Rule 2a-7, the Prime Obligations Fund will maintain a
dollar-weighted average maturity appropriate to the Fund's objective of
maintaining a stable net asset value per share, provided that the Fund will not
purchase any security with a remaining maturity of more than 397 days (13
months) (securities subject to repurchase agreements may bear longer maturities)
nor will it maintain a dollar-weighted average maturity which exceeds 90 days.
The Trust's Board of Trustees has also undertaken to establish procedures
reasonably designed, taking into account current market conditions and
investment objective of the Fund, to stabilize the net asset value per share of
the Fund for purposes of sales and redemptions at $1.00. These procedures
include review by the Trustees, at such intervals as they deem appropriate, to
determine the extent, if any, to which the net asset value per share of the Fund
calculated by using available market quotations deviates from $1.00 per share.
In the event such deviation exceeds one-half of one percent (0.5%), Rule 2a-7
requires that the Board of Trustees promptly consider what action, if any,
should be initiated. If the Trustees believe that the extent of any deviation
from the Fund's $1.00 amortized cost price per share may result in material
dilution
B-18
<PAGE> 69
or other unfair results to new or existing investors, they will take such steps
as they consider appropriate to eliminate or reduce, to the extent reasonably
practicable, any such dilution or unfair results. These steps may include
selling portfolio instruments prior to maturity, shortening the dollar-weighted
average maturity, withholding or reducing dividends, reducing the number of the
Fund's outstanding shares without monetary consideration, or utilizing a net
asset value per share determined by using available market quotations.
Valuation of the Other Funds.
Portfolio securities, the principal market for which is a securities
exchange, will be valued at the closing sales price on that exchange on the day
of computation or, if there have been no sales during such day, at the latest
bid quotation. Portfolio securities, the principal market for which is not a
securities exchange, will be valued at their latest bid quotation in such
principal market. In either case, if no such bid price is available then such
securities will be valued in good faith at their respective fair market values
using methods by or under the supervision of the Board of Trustees of the Trust.
Portfolio securities with a remaining maturity of 60 days or less will be valued
either at amortized cost or original cost plus accrued interest, which
approximates current value.
All other assets and securities, including securities for which market
quotations are not readily available, will be valued at their fair value as
determined in good faith under the general supervision of the Board of Trustees
of the Trust.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Funds are sold on a continuous basis by the Distributor.
As described in the Prospectus, shares of the Funds are sold and redeemed at
their net asset value as next determined after receipt of the purchase or
redemption order. Each purchase is confirmed to a separate account in a written
statement of the number of shares purchased and the aggregate number of shares
currently held.
The Trust may suspend the right of redemption or postpone the date of
payment for shares more than 7 days during any period when: (a) trading in the
markets the Funds normally utilize is restricted, or if an emergency, as defined
by the Rules and Regulations of the SEC exists making disposal of a Fund's
assets or determination of its net asset value not reasonably practicable; (b)
the NYSE is closed (other than customary weekend and holiday closings); or (c)
the SEC has by order permitted such suspensions.
MANAGEMENT OF THE TRUST
Trustees and Officers.
Overall responsibility for management of the Trust rests with its Board
of Trustees, who are elected by the shareholders of the Trust's Funds. The
Trustees elect the officers of the Trust
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<PAGE> 70
to supervise actively its day-to-day operations. Two officers of the Trust,
James R. Schmank and Brenda M. Luthi also serve as Trustees.
The names of the Trustees and Officers, their addresses and their
principal occupations during the past 5 years are as follows:
<TABLE>
<CAPTION>
Principal Occupation
Names, Position(s) With During Past Five
Addresses and Birth Dates Trust Years
- ------------------------- ---------------- --------------------
<S> <C> <C>
James R. Schmank Chairman of the Board of From September 1988 to present, Senior Vice
Security Management Trustees, President President, Treasurer, Chief Financial
700 Harrison St. Officer and Director, Security Management
Topeka, KS 66636-0001 Company; prior to September 1988, Certified
2/21/53 Public Accountant, Arthur Young & Company
Brenda M. Luthi Trustee, Vice President, From December 1987 to present, Assistant
Security Management Secretary and Treasurer Vice President, Assistant Treasurer and
700 Harrison St. Assistant Secretary, Security Management
Topeka, KS 66636-0001 Company
11/3/63
Robert M. Beam Trustee From January 1985 to present, Vice President
Western Michigan University for Business & Finance and Treasurer,
Kalamazoo, MI 49008 Western Michigan University
8/2/43
Adrian Charles Edwards Trustee Since 1964, Professor of Finance and
College of Business Commercial Law, Western Michigan University;
Western Michigan University since 1977, owner, Economic and Financial
260 North Hall Analysis (financial consulting)
Kalamazoo, MI 49008
4/22/36
</TABLE>
B-20
<PAGE> 71
<TABLE>
<S> <C> <C>
Lawrence D. Bryan Trustee From 1990 to present, President, Kalamazoo
Kalamazoo College College; from 1979 to 1990, Vice President
1200 Academy Street and Dean, Franklin College.
Kalamazoo, Michigan 49006
1/30/45
Amy J. Lee Vice President, Assistant From June 1987 to present, Vice President
Security Benefit Group; Inc. Secretary and Assistant and Associate General Counsel,
700 Harrison St. Treasurer Security Benefit Group, Inc.
Topeka, KS 66636-0001
6/5/61
</TABLE>
The Officers of the Trust receive no compensation directly from the
Trust for performing the duties of their offices. Each Trustee who is not an
affiliated person of the Administrator receives an annual compensation from the
Trust for his services as a Trustee and is reimbursed for expenses incurred in
attending meetings. No employee of the Distributor receives any compensation
from the Trust for acting as a Trustee or Officer. No person who is an officer,
director, or employee of First of America, or any of its affiliates serves as a
Trustee, Officer or employee of the Trust.
Investment Adviser.
Subject to the general supervision of the Trust's Board of Trustees and
in accordance with the Fund's investment objectives and restrictions, investment
advisory services are provided to the Funds of the Trust by First of America
pursuant to two Investment Advisory Agreements dated August 18, 1993 (the
"Investment Advisory Agreements"). The first Investment Advisory Agreement
relates to the management of the Prime Obligations, Bond, Equity and Small
Capitalization Funds (the "First Investment Advisory Agreement"), while the
second Investment Advisory Agreement (the "Second Investment Advisory
Agreement") relates to the management of the International Fund.
First of America is a wholly-owned subsidiary of First of America
Bank-Michigan, N.A., which in turn is a wholly-owned subsidiary of First of
America Bank Corporation, a publicly-held bank holding company.
Under the Investment Advisory Agreements, First of America has agreed
to provide, either directly or through one or more subadvisers, investment
advisory services for each of the Trust's Funds as described in the Prospectus.
For the services provided and the expenses assumed pursuant to the Investment
Advisory Agreements each of the Trust's Funds pays First of America a fee,
computed daily and paid monthly, at an annual rate calculated as a percentage of
the average daily net assets of that Fund. The annual rates for the Funds are as
follows: forty one-hundredths of one percent (.40%) for the Prime Obligations
Fund; seventy-four one-hundredths of one percent (.74%) for the Bond Fund; one
percent (1.00%) for the Equity and Small Capitalization Funds; and, for the
International Fund, one and twenty-five one-hundredths of one percent (1.25%) of
the first $50 million of the International Fund's
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<PAGE> 72
average daily net assets, one and twenty one-hundredths of one percent (1.20%)
of average daily net assets between $50 million and $100 million, one and
fifteen one-hundredths of one percent (1.15%) of average daily net assets
between $100 million and $400 million, and one and five one-hundredths of one
percent (1.05%) of average daily net assets above $400 million. While the fees
for the Equity Fund, the Small Capitalization Fund and the International Fund
are higher than the advisory fees paid by most mutual funds, the Board of
Trustees of the Trust believes them to be comparable to advisory fees paid by
many funds having objectives and policies similar to these Funds. First of
America may periodically voluntarily reduce all or a portion of its advisory fee
with respect to any Fund to increase the net income of one or more of the Funds
available for distribution as dividends.
For the period from the commencement of operations until December 31,
1995, the Investment Adviser collected and voluntarily reduced the amounts
indicated below which were payable to it with respect to its advisory services
to the indicated Funds:
<TABLE>
<CAPTION>
January 1, 1995 to January 1, 1994 to September 23, 1993 to
December 31, 1995 December 31, 1994 December 31, 1993
----------------- ----------------- -----------------
Gross Fees Gross Fees Gross Fees
Fees Voluntarily Fees Voluntarily Fees Voluntarily
Fund Collected Reduced Collected Reduced Collected Reduced
- ---- --------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Prime Obligations $ 9,911 $ 0 $ 8,533 $ 0 $ 2,121 $ 0
Equity $119,192 $ 0 $ 71,773 $ 0 $ 7,357 $ 0
Small Capitalization $ 99,935 $ 0 $ 51,521 $ 0 $ 6,467 $ 2,347
Bond $ 40,840 $ 0 $ 31,862 $ 0 $ 4,857 $ 0
International $129,924 $ 0 $107,053 $ 0 $ 18,114 $ 0
</TABLE>
Pursuant to the terms of the Trust's Second Investment Advisory
Agreement, First of America has entered into a Sub-Investment Advisory Agreement
dated as of February 28, 1995 with Gulfstream Global Investors, Ltd., 100
Crescent Court, Suite 550, Dallas, Texas 75201 ("Gulfstream"). Pursuant to the
terms of such Sub-Investment Advisory Agreement, Gulfstream has been retained by
First of America to manage the investment and reinvestment of the assets of the
International Fund, subject to the direction and control of the Trust's Board of
Trustees.
Prior to January 1, 1995, the International Fund's Subadvisers were
Ivory & Sime International, Inc. ("ISI") and Ivory & Sime plc ("ISplc" and
together with ISI, "Ivory & Sime"). Upon the recommendation of First of America
and pursuant to the unanimous vote of the Trustees of the Trust, ISI were given
notice that the Trust was terminating the Sub-Investment Advisory Agreements
between First of America and ISI and between ISI and ISplc (together the "Prior
Subadvisory Agreements") effective December 31, 1994.
Under the Prior Subadvisory Agreements, ISI was retained by First of
America to manage the investment and reinvestment of the assets of the
International Fund subject to the
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<PAGE> 73
direction and control of First of America and the Trust's Board of Trustees.
ISplc, in turn, was retained by ISI to provide analytical and investment
research services and investment and reinvestment management research services
to ISI in connection with the International Fund.
The Trustees' decision to terminate the Prior Subadvisory Agreements
was based upon a number of factors. Following a substantial change in the
ownership of ISplc, a significant change in ISplc's executive personnel was
implemented. The apparent instability of the management at ISplc was a
significant factor in the Trustees' decision to terminate the Prior Subadvisory
Agreements. Certain philosophical differences between First of America's
investment management style and that of Ivory & Sime with respect to the
International Fund were also a factor in the Trustees' decision to terminate the
Prior Subadvisory Agreements.
To ensure the uninterrupted provision of advisory services to the
International Fund, the Trustees approved, and First of America entered into, a
Sub-Investment Advisory Agreement between First of America and Gulfstream (the
"Initial Sub-Investment Advisory Agreement") dated as of January 1, 1995.
Pursuant to the terms of the Initial Sub-Investment Advisory Agreement,
Gulfstream was retained by First of America to manage the investment and
reinvestment of the assets of the International Fund, subject to the direction
and control of First of America and the Trust's Board of Trustees. Gulfstream is
responsible for the day-to-day management of the International Fund's assets,
reviewing investment performance, policies and guidelines, and maintaining
certain books and records. First of America is responsible for selecting and
monitoring the performance of Gulfstream and for reporting the activities of
Gulfstream in managing the International Fund to the Trust's Board of Trustees.
First of America may also render advice with respect to the International Fund's
investments in the United States and otherwise participate to the extent it
deems necessary or desirable in day-to-day management of the International Fund.
Shareholders of the International Fund approved the Initial Subadvisory
Agreement at their February 28, 1995 meeting.
For its services provided and expenses assumed pursuant to the Initial
Sub-Investment Advisory Agreement, Gulfstream receives from First of America a
fee, computed daily and paid monthly, at the annual rate of one-half of one
percent (.50%) of the first $50 million of the International Fund's average
daily net assets, forty-five one-hundredths of one percent (.45%) of net assets
between $50 million and $100 million, forty one-hundredths of one percent (.40%)
of net assets between $100 million and $400 million and thirty one-hundredths of
one percent (.30%) of net assets above $400 million, provided the minimum annual
fee shall be $75,000. These fees are identical to those previously paid by First
of America to Ivory & Sime and represent no increase in investment advisory fees
charged to the International Fund.
In addition to the Initial Sub-Investment Advisory Agreement,
shareholders of the International Fund approved the current Sub-Investment
Advisory Agreement which became effective upon the acquisition by First of
America Bank Corporation of a controlling interest in Gulfstream (the "Current
Sub-Investment Advisory Agreement," together with the Initial Sub-Investment
Advisory Agreement are referred together herein as the "Gulfstream
Sub-Investment Advisory Agreements"), which is identical in substance to the
Initial
B-23
<PAGE> 74
Sub-Investment Advisory Agreement. The transaction between First of America Bank
Corporation and Gulfstream, described below, resulted in a change of control of
Gulfstream and, as required by the 1940 Act, the termination of the Initial
Sub-Investment Advisory Agreement. As a consequence, the Current Sub-Investment
Advisory Agreement was approved by shareholders to permit Gulfstream to continue
as Subadviser to the International Fund.
Gulfstream was organized in 1991 as a Texas limited partnership by
Tull, Doud, Marsh & Triltsch, Inc., a Texas corporation ("TDMT"). TDMT is the
sole general partner of Gulfstream. TDMT is owned by C. Thomas Tull, Stephen C.
Doud, James P. Marsh and Reiner M. Triltsch. Messrs. Tull, Doud and Triltsch
are the portfolio managers and Mr. Marsh is responsible for client services
with Gulfstream. The Sail Company, a Delaware corporation, ("Sail") is the sole
limited partner, holding a 49 percent interest in Gulfstream. Sail is a
wholly-owned subsidiary of Rosewood Investments, Inc., a Delaware corporation,
100 Crescent Court, Suite 1700, Dallas, Texas 75201. As of December 31, 1995,
Gulfstream had over $483 million in international assets of institutional,
governmental, pension fund and high net worth individual clients under its
investment management. Gulfstream's portfolio management personnel average 20
years investment experience and 9 years of international investment experience.
Gulfstream's investment process is designed to provide long-term growth of
capital. Like First of America, Gulfstream focuses on identifying companies
world-wide with strong balance sheets, superior operating margins and
consistent sales and earnings growth and endeavors to purchase the securities
of those companies at reasonable valuations. Gulfstream generally avoids
investments in the securities of cyclical, financial or turnaround companies,
whose earnings are less predictable and more volatile. These stock selection
criteria lead Gulfstream to invest in small to medium capitalization companies
in international markets in pursuit of superior returns from long-term growth
of capital. First of America and the Trustees of the Trust believe that
Gulfstream's style of investment management is well-suited to the investment
objective and policies of the International Fund.
On December 7, 1994, Gulfstream, Sail, TDMT and the Corporation entered
into a Partnership Interest Purchase Agreement (the "Acquisition Agreement")
under which First of America acquired a controlling interest in Gulfstream. The
Acquisition Agreement provides for the following transactions. First, the
Corporation acquired all of Sail's limited and preferred partnership interests
for a cash payment. Second, TDMT paid to Sail an additional amount with the
proceeds of a loan to TDMT by the First of America Bank Corporation, which loan
bears interest at the annual rate of 10%. Third, the First of America has
committed to contribute to Gulfstream additional working capital to be
represented by an additional preferred partnership interest. Fourth, TDMT has
granted the First of America an irrevocable 3-year option to acquire up to an
additional 20% partnership interest in Gulfstream, which option will become
exercisable when Gulfstream's annualized revenue derived from sources
attributable to First of America Bank Corporation to satisfy certain revenue
targets. First of America's exercise price will be five times Gulfstream's
annualized revenue not derived from sources attributable to the First of America
Bank Corporation multiplied by the additional percentage partnership interest
acquired by the First of America. TDMT has also granted First of America another
irrevocable
B-24
<PAGE> 75
3-year option to acquire an additional 3% partnership interest in Gulfstream
exercisable upon the First of America's acquiring an aggregate 69% partnership
interest but not sooner than 1995. Fifth, TDMT and First of America have granted
each other rights of first refusal with respect to any sale or any other
disposition of their respective interests in Gulfstream. These transactions were
consummated on February 28, 1995.
Unless sooner terminated, each of the Investment Advisory Agreements
continues in effect as to a particular Fund for successive one-year periods
ending December 31 of each year if such continuance is approved at least
annually by the Trust's Board of Trustees or by vote of a majority of the
outstanding shares of such Fund and the majority of the Trustees who are not
parties to the Investment Advisory Agreements or interested persons (as defined
in the 1940 Act) of any party to the Investment Advisory Agreements by votes
cast in person at a meeting called for such purpose. Unless sooner terminated,
each of the Sub-Investment Advisory Agreements continues in effect until June
30, 1995, and thereafter continues for successive one-year periods ending June
30, if such continuance is approved as described above with respect to the
Investment Advisory Agreements. Each of the Investment Advisory Agreements and
the Sub-Investment Advisory Agreements are terminable as to a particular Fund at
any time on 60 days' written notice without penalty by the Trustees, by vote of
a majority of the outstanding shares of that Fund, by First of America or, in
the case of the Subadviser, on 150 days' prior written notice from the
Subadviser. The Agreements also terminate automatically in the event of any
assignment, as defined in the 1940 Act.
The Investment Advisory Agreements and the Sub-Investment Advisory
Agreements provide that neither First of America nor the Subadviser shall be
liable for any error of judgment or mistake of law or for any loss suffered by
the Trust in connection with the performance of their duties, except a loss
resulting from a breach of fiduciary duty with respect to their receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of the respective Investment Adviser or
Subadviser in the performance of their duties, or from reckless disregard of
their duties and obligations thereunder.
Portfolio Transactions.
With respect to all Funds of the Trust other than the International
Fund, pursuant to the Investment Advisory Agreements, First of America
determines, subject to the general supervision of the Trustees of the Trust and
in accordance with each Fund's objective and restrictions, which securities are
to be purchased and sold by a Fund and which brokers are to be eligible to
execute such Fund's portfolio transactions. With respect to the International
Fund, pursuant to the terms of the Gulfstream Sub-Investment Advisory
Agreements, Gulfstream determines, subject to the general supervision of First
of America, the Board of Trustees of the Trust and in accordance with the
International Fund's investment objective and restrictions, which securities are
to be purchased and sold by the International Fund, and which brokers are to be
eligible to execute the International Fund's portfolio transactions.
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Purchases and sales of portfolio securities which are debt securities
usually are principal transactions in which portfolio securities are normally
purchased directly from the issuer or from an underwriter or market maker for
the securities. Purchases from underwriters of portfolio securities generally
include a commission or concession paid by the issuer to the underwriter, and
purchases from dealers, serving as market makers may include the spread between
the bid and asked prices. Transactions on stock exchanges involve the payment of
negotiated brokerage commissions. Transactions in the over-the-counter market
are generally principal transactions with dealers. With respect to the
over-the-counter market, the Trust, where possible will deal directly with the
dealers who make a market in the securities involved except under those
circumstances where better price and execution are available elsewhere.
Allocation of transactions, including their frequency, to various
brokers and dealers is determined by First of America and Gulfstream in their
best judgment and in the manner deemed fair and reasonable to shareholders. The
primary consideration is prompt execution of orders in an effective manner at
the most favorable price. Subject to this consideration, brokers and dealers who
provide supplemental investment research to First of America or Gulfstream may
receive orders for transactions on behalf of the Trust. Information so received
is in addition to and not in lieu of services required to be performed by First
of America or Gulfstream and does not reduce the fees payable to such advisers
by the Trust or First of America, as the case may be. Such information may be
useful to the respective Investment Adviser or Subadviser in serving both the
Trust and other clients and, conversely, supplemental information obtained by
the placement of business of other clients may be useful to such Investment
Adviser or Subadviser in carrying out their obligations to the Trust.
While the respective Investment Adviser or Subadviser generally seeks
competitive commissions, the Trust may not necessarily pay the lowest commission
available on each brokerage transaction for the reasons discussed above. For the
fiscal years ended December 31, 1993, December 31, 1994, and December 31, 1995,
the Trust paid an aggregate of approximately $34,188, $84,223, and $60,622
respectively, as brokerage commissions on behalf of the Funds.
The Trust will not acquire portfolio securities issued by, make savings
deposits in, or enter into repurchase or reverse repurchase agreements with
First of America Bank-Michigan, N.A. (the parent corporation of First of
America), the Distributor, or their affiliates, and will not give preference to
First of America Bank-Michigan's correspondents with respect to such
transactions, securities, savings deposits, repurchase agreements and reverse
repurchase agreements.
Investment decisions for each Fund of the Trust are made independently
from those made for the other Funds or any other portfolio investment company or
account managed by First of America. Any such other portfolio, investment
company or account may also invest in the same securities as the Trust. When a
purchase or sale of the same security is made at substantially the same time on
behalf of a Fund and another Fund, portfolio, investment company or account, the
transaction will be averaged as to price and available investments will be
allocated as to
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<PAGE> 77
amount in a manner which First of America believes to be equitable to the
Fund(s) and such other portfolio, investment company, or account. In some
instances, this investment procedure may adversely affect the price paid or
received by a Fund or the size of the position obtained by the Fund. To the
extent permitted by law, First of America may aggregate the securities to be
sold or purchased for a Fund with those to be sold or purchased for other Funds
or for other portfolios, investment companies, or accounts in order to obtain
best execution. As provided by the Investment Advisory Agreements in making
investment recommendations for the Trust, First of America will not inquire or
take into consideration whether an issuer of securities proposed for purchase or
sale by the Trust is a customer of First of America, its parent or its
subsidiaries or affiliates, and, in dealing with its customers, First of
America, its parent, subsidiaries and affiliates will not inquire or take into
consideration whether securities of such customers are held by the Trust.
The Prime Obligations Fund held from time to time during the fiscal
year ended December 31, 1995, securities of its regular brokers or dealers
defined in Rule 10b-1 under the 1940 Act, or their parent companies, including
those of Merrill Lynch and Goldman Sachs & Company. As of December 31, 1995, the
Prime Obligations Fund held securities of Merrill Lynch in the amount of
$100,000.
Glass-Steagall Act.
In 1971, the United States Supreme Court held in Investment Company
Institute v. Camp, that the federal statute commonly referred to as the
"Glass-Steagall Act" prohibits a national bank from operating a mutual fund for
the collective investment of managing agency accounts. Subsequently, the Board
of Governors of the Federal Reserve System ("the Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision: (a)
forbid a bank holding company registered under the Federal Bank Holding Company
Act of 1956 (the "Holding Company Act") or any non-bank affiliate thereof from
sponsoring, organizing or controlling a registered open-end investment company
continuously engaged in the issuance of its shares, but (b) do not prohibit such
a holding company or affiliate from acting as investment adviser, transfer
agent, and custodian to such an investment company. In 1981, the United States
Supreme Court held in Board of Governors of the Federal Reserve System v.
Investment Company Institute, that the Board did not exceed its authority under
the Holding Company Act when it adopted its regulation and interpretation
authorizing bank holding companies and their non-bank affiliates to act as
investment advisers to registered closed-end investment companies. In the Board
of Governors case, the Supreme Court also stated that if a national bank
complied with the restrictions imposed by the Board in its regulation and
interpretation authorizing bank holding companies and their non-bank affiliates
to act as investment advisers to investment companies, a national bank
performing investment advisory services for an investment company would not
violate the Glass-Steagall Act. The Office of the Comptroller of the Currency,
which has jurisdiction over national banks and their subsidiaries, has
specifically permitted national banks and their subsidiaries to act as
investment advisers to investment companies.
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First of America believes that it possesses the legal authority to
perform the services contemplated by the Prospectus, this Statement of
Additional Information and the Investment Advisory Agreements without violation
of applicable statutes and regulations. Future changes in either federal or
state statutes and regulations relating to the permissible activities of banks
or bank holding companies and the subsidiaries or affiliates of those entities,
as well as further judicial or administrative decisions or interpretations of
present and future statutes and regulations, could prevent or restrict First of
America from continuing to perform such services for the Trust. Depending on the
nature of any changes in the services which could be provided by First of
America, the Board of Trustees would review the Trust's relationship with First
of America and consider taking all action necessary under the circumstances.
Should future legislative, judicial or administrative action prohibit
or restrict the proposed activities of First of America and/or First of America
Bank Corporation's affiliated and correspondent banks in connection with
customer purchases of shares of the Trust, those banks might be required to
alter materially or discontinue the services offered by them to customers. It is
not anticipated, however, that any change in the Trust's method of operations
would affect its net asset value per share or result in financial losses to any
shareholder.
Administrator.
Until July 1, 1996, Security Management Company ("Security Management")
will serve as administrator to the Trust pursuant to an Administration Agreement
dated August 25, 1993 and amended as of February 10, 1994 and May 19, 1994.
Effective July 1, 1996, BISYS Fund Services L.P. ("BISYS") will serve as the
administrator to the Trust pursuant to an Administration Agreement dated as of
July 1, 1996. BISYS will also replace Security Management as Transfer Agent
and Security Distributors, Inc. as Distributor (see discussions below). The
terms "Administration Agreement" and "Administrator" as used in this Statement
of Additional Information shall refer to the Trust's relationship with either
Security Management or BISYS, as the context requires. The Administrator
assists in supervising all operations of each Fund (other than those performed
by First of America under the Investment Advisory Agreements, by Gulfstream
under the Sub-Investment Advisory Agreements, by the Bank of California, N.A.
under the Custody and Custodian Agreements and by Security Management or BISYS,
as applicable, under the Fund Accounting and Transfer Agency Agreement).
Under the Administration Agreement, the Administrator has agreed to
maintain office facilities for the Trust; furnish statistical and research data,
clerical and certain bookkeeping services and stationary and office supplies;
prepare the periodical reports to the SEC on Form N-SAR or any replacement forms
therefor; compile data for, prepare for execution by the Funds and file certain
federal and state tax returns and required tax filings; prepare compliance
filings pursuant to state securities laws with the advice of the Trust's
counsel; keep and maintain the financial accounts and records of the Funds,
including calculation of daily expense accruals; in the case of the Prime
Obligations Fund, determine the actual variance from $1.00 of the Fund's net
asset value per share; and generally assist in all aspects of the Trust's
operations other than those performed by First of America under the Investment
Advisory Agreement, by Gulfstream
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<PAGE> 79
under the Sub-Investment Advisory Agreement, by Bank of California under the
Custody and Custodian Agreements and by Security Management or BISYS, as
applicable, under the Fund Accounting and Transfer Agency Agreement. Under the
Administration Agreement, the Administrator may delegate all or any part of its
responsibilities thereunder.
The Administrator receives a fee from each Fund for its services as
Administrator and expenses assumed pursuant to the Administration Agreement,
calculated daily and paid monthly, at the annual rate of twenty-one hundredths
of one percent (.20%) of the combined average daily net assets of the Funds up
to $1 billion. In the event that the combined average daily net assets of the
Funds exceed $1 billion, the parties intend to review the level of compensation
payable to the Administrator for its administrative services. In addition, the
Administrator also receives a separate annual fee from each Fund for certain
Fund accounting services. From time to time, the Administrator may waive all or
a portion of the administration fee payable to it by the Funds, either
voluntarily or pursuant to applicable statutory expense limitations.
For the period from the commencement of operations until December 31,
1995, the Administrator collected and voluntarily reduced the amounts indicated
below which were payable to it with respect to its administrative services to
the indicated Funds:
<TABLE>
<CAPTION>
January 1, 1995 to January 1, 1994 to September 23, 1993 to
December 31, 1995 December 31, 1994 December 31, 1993
Gross Fees Gross Fees Gross Fees
Fees Voluntarily Fees Voluntarily Fees Voluntarily
Fund Collected Reduced Collected Reduced Collected Reduced
- ---- --------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Prime Obligations $ 4,955 $ 0 $ 3,727 $ 0 $ 716 $ 0
Equity $23,838 $ 0 $12,851 $ 0 $ 993 $ 0
Small Capitalization $19,987 $ 0 $ 9,247 $ 0 $ 873 $ 0
Bond $11,038 $ 0 $ 7,558 $ 0 $ 886 $ 0
International $20,788 $ 0 $14,144 $ 0 $ 1,956 $ 0
</TABLE>
Unless sooner terminated as provided therein, the Administration
Agreement between the Trust and BISYS will take effect on July 1, 1996 and will
continue in effect until June 30, 1997. The Administration Agreement thereafter
shall be renewed for successive annual terms ending on June 30 of each year
unless written notice not to renew is given by the non-renewing party to the
other party at least ninety days prior to the expiration of the then-current
term. The Administration Agreement is terminable with respect to a particular
Fund only upon mutual agreement of the parties to the Administration Agreement
and for cause (as defined in the Administration Agreement) by the party alleging
cause, on not less than sixty days' notice by the Trust's Board of Trustees or
by the Administrator.
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The Administration Agreement provides that the Administrator shall not
be liable for any error of judgment or mistake of law or any loss suffered by
the Trust in connection with the matters to which the Administration Agreement
relates, except a loss from willful misfeasance, bad faith, or gross negligence
in the performance of its duties, or from the reckless disregard by the
Administrator of its obligations and duties thereunder.
Expenses.
If total expenses borne by any of the Funds in any fiscal year exceed
expense limitations imposed by applicable state securities regulations, First of
America, Gulfstream (only with respect to the International Fund) and the
Administrator will reimburse that Fund by the amount of such excess in the
proportion to their respective fees. As of the date of this Statement of
Additional Information, there is no expense limitation applicable to the Trust's
Funds. Any expense reimbursements will be estimated daily and reconciled and
paid on a monthly basis. Fees imposed on customer accounts by First of America
Bank Corporation or its affiliated or correspondent banks' cash management
services are not included within the Trust's expenses for purposes of any such
expense limitation.
Distributor.
Until July 1, 1996, Security Distributors, Inc. ("SDI") will serve as
distributor to the Trust pursuant to a Distribution Agreement dated August 30,
1993. Effective July 1, 1996, BISYS will serve as distributor to the Trust
pursuant to a Distribution Agreement dated as of July 1, 1996. The terms
"Distribution Agreement" and "Distributor" as used in this Statement of
Additional Information shall refer to the Trust's relationship with SDI or
BISYS, as the context requires.
Unless otherwise terminated, the Distribution Agreement between the
Trust and BISYS will take effect on July 1, 1996, continue in effect until June
30, 1997 and thereafter continue for successive one-year periods ending June 30
of each year if approved at least annually (i) by the Trust's Board of Trustees
or by the vote of a majority of the outstanding shares of the Trust, and (ii) by
the vote of a majority of the Trustees of the Trust who are not parties to the
Distribution Agreement or interested persons (as defined in the 1940 Act) of any
party to the Distribution Agreement, cast in person at a meeting called for the
purpose of voting on such approval. The Distribution Agreement may be terminated
in the event of any assignment as defined in the 1940 Act.
Custodian, Transfer Agent and Fund Accounting Services.
The Bank of California, N.A., 400 California Street, P.O. Box 45000,
San Francisco, California 94104, ("Bank of California") serves as Custodian to
the Trust with respect to each Fund, except the International Fund, pursuant to
the Custody Agreement dated as of August 16, 1993. Bank of California serves as
Custodian to the International Fund pursuant to the Custodian Agreement dated as
of July 31, 1995. Bank of California's responsibilities include
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<PAGE> 81
safeguarding and controlling such Funds' cash and securities, handling the
receipt and delivery of securities, and collecting interest and dividends on
such Funds' investments.
Until August 3, 1996, Security Management, an affiliate of SDI, will
serve as transfer agent for all Funds of the Trust pursuant to a Fund
Accounting and Transfer Agency Agreement dated as of August 25, 1993. Effective
August 3, 1996, BISYS will serve as the transfer agent for all Funds of the
Trust pursuant to a Fund Accounting and Transfer Agency Agreement dated as of
August 3, 1996. The terms "Fund Accounting and Transfer Agency Agreement" and
"Transfer Agent" as used in this Statement of Additional Information shall
refer to the Trust's relationship with either Security Management or BISYS, as
the context requires. Pursuant to the Fund Accounting and Transfer Agency
Agreements, the Transfer Agent, among other things, performs the following
services: maintenance of shareholder records for each of the Trust's
shareholders of record; processing shareholder purchase and redemption orders;
processing transfers and exchanges of shares of payments and reinvestments; and
assistance in the mailing of shareholder reports and proxy solicitation
materials.
In addition, the Transfer Agent provides certain fund accounting
services to the Trust pursuant to the Fund Accounting and Transfer Agency
Agreement. The Transfer Agent receives an annual fee for its transfer agency and
fund accounting services for each domestic Fund equal to the greater of $15,000
($30,000 in the second and subsequent years) or thirty one-thousandths of one
percent (.03%) on the first $100 million, plus twenty one-thousandths of one
percent (.02%) on the next $150 million, plus ten one-thousandths of one percent
(.01%) on the remaining net assets. For services provided to the International
Fund, the Transfer Agent receives an annual fee equal to the greater of $30,000
or eighty one-thousandths of one percent of the first $100 million (.08%), forty
one-thousandths of one percent (.04%) on the next $150 million, plus twenty
one-thousandths of one percent (.02%) on the next $250 million and fifteen
one-thousandths of one percent (.015%) on the remaining net assets. The Transfer
Agent maintains the accounting books and records for the Funds, including
journals containing an itemized daily record of all purchases and sales of
portfolio securities, all receipts and disbursements of cash and all other debts
and credits, general and auxiliary ledgers reflecting all asset, liability,
reserve, capital, income and expense accounts, including interest accrued and
interest received, and other required separate ledger accounts; maintains a
monthly trial balance of all ledger accounts; performs certain accounting
services for the Funds, including calculation of the net asset value per share,
calculation of the dividend and capital gain distributions, if any, and of
yield, reconciliation of cash movements with Funds' custodians, affirmation to
the Funds' custodians of all portfolio trades and cash settlements, verification
and reconciliation with the Funds' custodians of all daily trade activities;
provides certain reports; obtains dealer quotations, prices from a pricing
service or matrix prices on all portfolio securities in order to mark the
portfolio to the market; and prepares an interim balance sheet, statement of
income and expense, and statement of changes in net assets for the Funds. For
such transfer agency and accounting services for the period from the
commencement of operations to December 31, 1993, and for the fiscal years ended
December 31, 1994, and December 31, 1995, Security Management received $20,385,
$90,000, and $90,000, respectively, from the Trust.
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<PAGE> 82
Independent Auditors.
Ernst & Young LLP, independent auditors, with offices at One Kansas
City Place, 1200 Main Street, Kansas City, Missouri 64105-2143 serve as auditors
to the Trust. Ernst & Young LLP performs an annual audit of the Funds' financial
statements and provides other services related to filings with respect to
securities regulations. Reports of its activities are provided to the Board of
Trustees.
Counsel.
Howard & Howard Attorneys, P.C., The Kalamazoo Building, Suite 400, 107
West Michigan Avenue, Kalamazoo, Michigan 49007, are counsel to the Trust and
will pass upon certain legal matters pertaining to the shares offered hereby.
Howard & Howard serves as legal counsel to the Investment Adviser and its parent
and, from time to time, its affiliates.
ADDITIONAL INFORMATION
Description of Shares.
The Parkstone Advantage Fund is a Massachusetts business trust. The
Trust was organized on May 18, 1993 and the Trust's Declaration of Trust was
filed with the Secretary of State of the Commonwealth of Massachusetts on May
19, 1993. The Declaration of Trust authorizes through the Board of Trustees to
issue an unlimited number of shares and to classify or re-classify any unissued
shares into one or more additional classes by setting or changing in one or more
respects their respective preferences, conversion or other rights, voting
powers, restrictions, limitations, as to dividends, qualifications and terms and
conditions of redemption. Pursuant to such authority, the Board of Trustees has
authorized the issuance of five series of shares, each representing interest in
one of five separate portfolios: The Prime Obligations Fund, Equity Fund, Small
Capitalization Fund, Bond Fund, and International Fund.
Shares have no pre-emptive rights and only such conversion or exchange
rights as the Board of Trustees may grant in its discretion. When issued for
payment as described in the Prospectus, Shares will be fully paid and
non-assessable. In the event of the liquidation or dissolution of the Trust or
an individual Fund, shareholders of a Fund are entitled to receive the assets
available for distribution belonging to the particular Fund, at a proportionate
distribution based on the relative asset values of the respective Funds, of any
general assets of the Trust not belonging to any particular Fund which are
available for distribution.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the shareholders of the outstanding voting securities in an
investment company such as the Trust shall not be deemed to have been
effectively acted upon unless approved by holders of a majority of the
outstanding shares of each Fund affected by the matter. A particular Fund is
deemed to be affected by a matter unless it is clear that the interest of each
Fund in the matter are substantially identical or that the matter does not
affect any interest of the Fund. Under the
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<PAGE> 83
Rule, the approval of an Investment Advisory Agreement or any change in
fundamental investment policy would be effectively acted upon with respect to a
Fund only if approved by a majority of the outstanding share of such Fund.
However, the Rule also provides that the ratification of the appointment of
independent public accountants, the approval of principal underwriting
contracts, and the election of Trustees may be effectively acted upon by
shareholders of the Trust voting without regard to series.
Shareholders 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 class except as otherwise required by the 1940 Act or other applicable
law, or when the matter to be voted upon affects only interests of the
shareholders of a particular class. Voting rights are not cumulative, and,
accordingly, the holders of more than 50% of the Trust's outstanding shares may
elect all of the Trustees, irrespective of the votes of other shareholders.
The Trust does not intend to hold annual shareholder meetings except as
may be required by the 1940 Act. The Trust's Agreement and Declaration of Trust
provides that a meeting of shareholders shall be called by the Board of Trustees
upon written request of shareholders owning at least 10% of the outstanding
shares of the Trust entitled to vote.
The Trust's Agreement and Declaration of Trust authorizes the Board of
Trustees, without shareholder approval (unless otherwise required by applicable
law) to (a) sell and convey the assets of a class of shares to another
management investment company for consideration which may include securities
issued by the purchaser and, in connection therewith, to cause all outstanding
shares of such class to be redeemed at a price which is equal to their net asset
value and which may be cash or by distribution of the securities or other
consideration received from the sale and conveyance; (b) sell and convert the
assets belonging to a class of shares into money and, in connection therewith,
to cause all outstanding shares of such class to be redeemed at their net asset
value; or (c) combine the assets belonging to a class of shares with the assets
belonging to one or more other classes of shares of the Trust if the Board of
Trustees reasonably determines that such combination will not have a material
adverse effect on the shareholders of any class participating in such
combination and, in connection therewith, to cause all outstanding shares of any
class to be redeemed at their net asset value or converted into shares of
another class of the Trust's shares at their net asset value. However, the
exercise of such authority by the Board of Trustees may be subject to certain
restrictions under the 1940 Act. The Board of Trustees may authorize the
termination of any class of shares after the assets belonging to such class have
been distributed to its shareholders.
Vote of a Majority of the Outstanding Shares.
As used in the Funds' Prospectus and the Statement of Additional
Information, "vote of a majority of the outstanding shares" of the Trust or the
Fund means the affirmative vote, at an annual or special meeting of shareholders
duly called, of the lesser of: (a) sixty-seven percent (67%) or more of the
votes of shareholders of the Trust or the Fund present at such meeting at which
the holders of more than fifty percent (50%) of the votes attributable to the
shareholders
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<PAGE> 84
of record of the group or Fund are represented in person or by proxy, or (b) the
holders of more than fifty percent (50%) of the outstanding votes of
shareholders of the Trust or the Fund.
Shareholder and Trustee Liability.
Under Massachusetts law, holders of units of interest in a business
trust may, under certain circumstances, be held personally liable as partners
for the obligations of the Trust. However, the Trust's Declaration of Trust
provides that the shareholders shall not be subject to any personal liability
for the obligations of the Trust, and that every written agreement, obligation,
instrument or undertaking made by the Trust shall contain a provision to the
effect that the shareholders are not personally liable thereunder. The
Declaration of Trust provides for indemnification out of the Trust property of
any shareholder held personally liable solely by reason of his being or having
been a shareholder. The Declaration of Trust also provides that the Trust shall,
upon request, assume the defense of any claim made against any shareholder for
any act or obligations of the Trust, and shall satisfy any judgment thereon.
Thus, the risk of the shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Trust itself
would be unable to meet its obligations.
The Declaration of Trust states further that no Trustee, officer or
agent of the Trust shall be personally liable in connection with the
administration or preservation of the assets of the Trust or the conduct of the
Trust's business; nor shall any Trustee, officer or agent be personally liable
to any person for any action or failure to act except for bad faith, willful
misfeasance, gross negligence, or reckless disregard of his duties. The
Declaration of Trust also provides that all persons having any claim against the
Trustees or the Trust shall look solely to the assets of the Trust for payment.
Additional Tax Information.
Individual federal income tax is computed on the basis of five
graduated tax rates of 15%, 28%, 31%, 36% and 39.6%. The benefit of personal
exemptions and the benefit of itemized deductions are phased out by a rate
adjustment for taxpayers with gross income in excess of certain threshold
amounts resulting in a marginal federal tax rate in excess of 39.6%. The maximum
tax rate applicable to corporations is 35%. Although a corporation's taxable
income of less than $10 million is subject to tax at lower rates, the benefit of
these lower rates is phased out for corporations with income in excess of $15
million resulting in a maximum effective marginal tax rate of 38%.
For non-corporate taxpayers, the maximum tax rate imposed on net
capital gains is 28%. The limitation on the deductibility of capital losses has
been retained. Capital losses may be used to offset capital gains. Individual
taxpayers may deduct up to $3,000 of capital losses each year to offset ordinary
income and excess capital loss may be carried over in future years.
The Code generally permits a corporation to deduct 70% of dividends
received from a domestic corporations. Each of the Trust's Funds will designate
the portion of any dividend
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<PAGE> 85
distribution for which the dividend received deduction will be allowed. The
amounts so designated may not exceed the aggregate amount of dividends from
domestic corporations that otherwise qualify for the dividends received
deduction received by the Fund for its taxable year.
A non-deductible excise tax is also imposed on regulated investment
companies that do not distribute in each calendar year (regardless of whether
they otherwise have a non-calendar taxable year) an amount equal to 98% of their
ordinary income for the calendar year plus 98% of their capital gain net income
for the one-year period ending on October 31 of such calendar year. The balance
of such income must be distributed during the next calendar year. For the
foregoing purposes, a Fund is treated as having distributed any amount on which
it is subject to income tax for any taxable year ending in such calendar year.
If distributions during a calendar year were less than the required amount, a
particular Fund would be subject to a non-deductible excise tax equal to 4% of
the deficiency.
Each of the Funds will be required in certain cases to withhold and
remit to the United States Treasury 31% of taxable dividends paid to any
shareholder who has provided either an incorrect tax identification number or no
number at all or who is subject to withholding by the Internal Revenue Service
for failure to properly report on the return payments of interest or dividends.
Although each of the Funds expects to qualify as a "regulated
investment company" and to be relieved of all or substantially all federal
income taxes, depending on the extent of its activities in states and localities
in which its offices are maintained, in which its agents or independent
contractors are located, or in which it is otherwise deemed to be conducting
business, each Fund may be subject to the tax laws of such states or localities.
In addition, if for any taxable year the Fund does not qualify for the special
tax treatment afforded regulated investment companies, all of its taxable income
will be subject to a federal tax at regular corporate rates (without any
deduction for distributions to its shareholders). In such event, dividend
distributions would be taxable to shareholders to the extent of earnings and
profits, and would be eligible for the dividends-received deduction for
corporations.
A portion of the difference between the issue price and the face amount
of zero coupon securities (the "Original Issue Discount") will be treated as
income to any Fund holding securities with Original Issue Discount each year,
although no current payments will be received by such Fund with respect to such
income. This original issue discount will comprise a part of that investment
company taxable income of such Fund which must be distributed to shareholders in
order to maintain its qualification as a registered investment company and to
avoid federal income tax at the level of the relevant Fund. Taxable shareholders
of such a Fund will be subject to income tax on such original issue discount,
whether or not they elect to receive their distributions in cash. In the event
that a Fund acquires a debt instrument at a market discount, it is possible that
a portion of any gain recognized on this disposition of such instrument may be
treated as ordinary income.
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A Fund's investment in options, futures contracts and forward
contracts, options on futures contracts, and stock indices and certain other
securities, including transactions involving actual or deemed short sales or
foreign exchange gains or losses are subject to many complex and special tax
rules. For example, over-the-counter options on debt securities and certain
equity options, including options on stock and narrow-based stock indexes, will
be subject to tax under Section 1234 of the Code, generally producing a
long-term or short-term capital gain or loss upon exercise, lapse, or closing
out of the option or sale of the underlying stock or security. By contrast, a
Fund's treatment of certain other options, futures and forward contracts entered
into by the Fund is generally governed by Section 1256 of the Code. These
"Section 1256" positions generally include regulated futures contracts, foreign
currency contracts, non-equity options and dealer equity options.
Absent a tax election to the contrary, each such Section 1256 position
held by a Fund will be marked-to-market (i.e., treated as if it were sold for
fair market value) on the last business day of the Fund's fiscal year, and all
gain or loss associated with fiscal year transactions and marked-to-market
positions at fiscal year end (except certain currency gain or loss covered by
Section 988 of the Code) will generally be treated as 60% long-term capital gain
or loss and 40% short-term capital gain or loss. The effect of Section 1256
mark-to-market rules may be to accelerate income or to convert what otherwise
would have been long-term capital gains into short-term capital gains or
short-term capital losses into long-term capital losses within such Fund. The
acceleration of income on Section 1256 positions may require a Fund to accrue
taxable income without the corresponding receipt of cash. In order to generate
cash to satisfy the distribution requirements of the Code, a fund may be
required to dispose of portfolio securities that it would have continued to hold
or to use cash flows from other sources such as the sale of the Fund's shares.
In these ways, any or all of these rules may affect the amount, character and
timing of income earned and in turn distributed to shareholders by the Funds.
When a Fund holds options or contracts which substantially diminish its
risk of loss with respect to other positions (as might occur in some hedging
transactions), this combination of positions could be treated as a "straddle"
for tax purposes, resulting in possible deferral of losses, adjustments in the
holding periods of securities owned by a Fund and conversion of short-term
capital losses into long-term capital losses. Certain tax elections exist for
mixed straddles, i.e., straddles comprised of at least one Section 1256 position
and at least one non-Section 1256 position which may reduce or eliminate the
operation of these straddle rules.
As a regulated investment company, each Fund is also subject to the
requirement that less than 30% of its annual gross income be derived from the
sale or other disposition of securities and certain other investments held for
less than three months ("short-short income"). This requirement may limit a
Fund's ability to engage in options, spreads, straddles, hedging transactions,
forward or futures contracts, or options on any of these positions because these
transactions are often consummated in less than three months, and may require
the sale of portfolio securities held less than three months and may, as in the
sale of short sales or portfolio securities, reduce the holding periods within
each Fund, resulting in additional short-short income for the Fund.
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Each Fund will monitor its transactions and such options and contracts
and may make such other tax elections in order to mitigate the effect of the
above rules and prevent disqualification of a Fund as a regulated investment
company under Subchapter M of the Code.
In order for a Fund to qualify as a regulated investment company for
any taxable year, at least 90% of the Fund's annual gross income must be derived
from dividends, interest, payments with respect to securities loans, gains from
the sale or other disposition of stock or securities, including gains from
foreign currencies, and other income derived with respect to the business of
investing in stock, securities or currencies. Future Treasury Regulations may
provide that foreign exchange gains may not qualify for purposes of the 90%
limitation if such gains are not directly related to the Fund's principal
business of investing in stock or securities or options or futures with respect
to such stock or securities. Currency speculation or the use of currency forward
contracts or other currency instruments for non-hedging purposes may generate
gains deemed to be not directly related to the Fund's principal business of
investing in stock or securities and related options or futures. Pursuant to the
Code, a Fund is also required to derive less than 30% of its gross income from
the sole or other disposition of stock or securities held for less than 3
months. Under current law, non-directly related gains arising from foreign
currency positions or instruments held for less than three months are treated as
derived from the disposition of securities held less than three months when
determining a Fund's compliance with the 30% limitation. Each Fund will limit
its activities involving foreign exchange gains to the extent necessary to
comply with the above requirements.
The federal income tax treatment of interest rate and currency swaps is
unclear in certain respects and may in some circumstances result in the
realization of income not qualifying under the 90% limitation described above or
be deemed to be derived from the disposition held less than three months in
determining a Fund's compliance with the 30% limitation. Each Fund will limit
its interest rate and currency swaps to the extent necessary to comply with
these requirements.
Information set forth in the Prospectus and this Statement of
Additional Information which relates to federal taxation is only a summary of
some of the important federal tax considerations generally affecting purchasers
of shares of the Funds. No attempt has been made to present a detailed
explanation of the federal income tax treatment of a Fund or its shareholders
and this description is not intended as a substitute for federal tax planning.
Accordingly, potential purchasers of shares of a Fund are urged to consult their
tax advisers with specific reference to their own tax situation. In addition,
the tax discussion in the Prospectus and this Statement of Additional
Information is based on tax laws and regulations which are in effect on the date
of the Prospectus and this Statement of Additional Information; such laws and
regulations may be changed by legislative or administrative action.
Additional Tax Information Concerning the International Fund.
The International Fund may invest in non-U.S. corporations which would
be treated as "passive foreign investment companies," or "PFICs," under the Code
which will result in
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adverse tax consequences upon the disposition of, or the receipt of, "excess
distributions" with respect to such equity investments. To the extent that the
International Fund invests in PFICs, it may adopt certain tax strategies to
reduce or eliminate the adverse effects of certain federal tax provisions
governing PFIC investments. Many non-U.S. banks and insurance companies may not
be treated as PFICs if they satisfy certain technical requirements under the
Code. To the extent that the International Fund does invest in foreign
securities which are determined to be PFIC securities and is required to pay a
tax on such investments, a credit for this tax would not be allowed to be passed
through to the International Fund's shareholders. Therefore, the payment of this
tax would reduce the International Fund's economic return from its PFIC
investments. Gains from dispositions of PFIC shares and excess distributions
received with respect to such shares are treated as ordinary income rather than
capital gains.
If, for any reason, the International Fund were treated as being a
United Kingdom ("UK") resident, the International Fund's worldwide income and
capital gains would be subject to UK tax. If, for any reason, the International
Fund were treated as having a permanent establishment in the UK, the
International Fund's UK source income (although not its capital gains) would
become subject to UK tax and certain other advantages otherwise available to the
International Fund under the double tax treaty between the UK and the US would
not be available. Provided that the International Fund is not treated as being
resident or having a permanent establishment in the UK, the International Fund
will not incur any UK tax liability with respect to the types of income or gains
that it is likely to receive, except with respect to income on UK securities
held in the International Fund's portfolio. The Trust believes, based upon the
advice of special counsel, that it would be highly unlikely for the
International Fund, as a result of the activities of the Fund's Subadviser
Gulfstream, to be deemed or treated as being a UK resident for UK tax purposes
or having a permanent establishment in the UK pursuant to the double tax treaty
between the United States and the UK.
Yield of the Prime Obligations Fund.
The standardized, annualized 7-day yield for the Prime Obligations Fund
is computed by: (1) determining the net change, exclusive of capital changes, in
the value of a hypothetical pre-existing account in the Fund having a balance of
one share at the beginning of the 7-day base period, subtracting a hypothetical
charge reflecting deductions from shareholder accounts, (2) dividing the
difference by the value of the account at the beginning of the base period to
obtain the base period return, and (3) annualizing the results (i.e.,
multiplying the base period return by (365/7)). The net change in the value of
the account in the Fund includes the value of additional shares purchased with
dividends from the original share, dividends declared on both the original share
and any such additional shares, and all fees other than non-recurring account
and sales charges charged by the Fund to all shareholder accounts in proportion
to the length of the base period and assuming that Fund's average account size.
The capital changes to be excluded from the calculation of the net change in
account value are realized gains and losses from the sale of securities and
unrealized appreciation and depreciation. The effective yield for the Fund is
computed by adding one to the base period return (calculated as described above)
raising the sum to a power equal to 365 divided by 7, and subtracting one from
the result.
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For the seven-day period ended December 31, 1995, the yield and
compounded effective yield for the Prime Obligations Fund was 5.16% and 5.29%,
respectively. For the thirty-day period ended December 31, 1995, the yield and
compounded effective yield for the Prime Obligations Fund was 5.15% and
5.27%, respectively. The current yield for the Prime Obligations Fund may be
obtained by calling the Trust at the telephone numbers provided on the cover
page of the Prospectus.
Yields of the Equity, Small Capitalization, Bond and International Funds.
As summarized in the Prospectus under the heading "PERFORMANCE
INFORMATION," yields of each of the Equity Fund, Small Capitalization Fund, Bond
Fund and International Fund will be computed by analyzing net investment income
per share for a recent 30-day period and dividing that amount by a Fund shares
maximum offering price (reduced by any undeclared earned income expected to be
paid shortly as a dividend) on the last trading day of that period. Net
investment income will reflect amortization of any market value premium or
discount of fixed-income securities (except for obligations backed by mortgages
or other assets) and may include recognition of a pro-rata portion of the stated
dividend rate of dividend paying portfolio securities. The yield of each of the
Equity Fund, Small Capitalization Fund, Bond Fund and International Fund will
vary from time to time, depending upon market conditions, the composition of a
funds portfolio and operating expenses of the Trust allocated to each Fund.
These factors and possible differences in the methods used in calculating yield
should be considered when comparing a Fund's yield to yields published for other
investment companies and other investment vehicles. Yield should also be
considered relative to changes in the value of the Fund's shares and to the
relative risks associated with the investment objectives and policies of each of
the Funds.
At any time in the future, yields may be higher or lower than past
yields and there can be no assurance that any historical results will continue.
Investors in the Equity Fund, Small Capitalization Fund, Bond Fund and
International Fund are specifically advised that share prices, expressed as the
net asset values per share, will vary just as yields will vary.
For the period ended December 31, 1995, none of the Equity Fund, Small
Capitalization Fund, Bond Fund or International Fund advertised or quoted yield
information to shareholders or in advertisements. None of these Funds expects to
quote such figures in the current fiscal year.
Calculation of Total Return.
As summarized in the Prospectus under the heading "PERFORMANCE
INFORMATION," each of the Equity Fund's, Small Capitalization Fund's, Bond
Fund's and International Fund's average annual total return is a measure of the
change in value of the investment in a Fund over the period covered, which
assumes any dividends or capital gains distributions are reinvested in the Fund
immediately rather than paid to the investor in cash. Average annual total
return will be calculated by: (1) adding to the total number of shares
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purchased by a hypothetical $1,000 investment in the Fund and all additional
shares which would have been purchased if all dividends and distributions paid
or distributed during the period had immediately been reinvested, (2)
calculating the value of the hypothetical initial investment of $1,000 as of the
end of the period by multiplying the total number of shares owned at the end of
the period by the net asset value per share on the last trading day of the
period, (3) assuming redemption at the end of the period, and (4) dividing this
account value for the hypothetical investor by the initial $1,000 investment and
analyzing the result for periods of less than one year.
For the one-year period ending December 31, 1995, the average annual
total returns for the Funds were: Equity Fund, 29.05%; Small Capitalization
Fund, 35.66%; Bond Fund, 16.98%; and International Fund 9.74%.
Performance Comparisons.
Investors may judge the performance of the Funds by comparing their
performance to the performance of other mutual funds or mutual fund portfolios
with comparable investment objectives and policies through various mutual fund
or market indices such as the Morgan Stanley Capital International EAFE Index
and those prepared by Dow-Jones & Co., Inc., Standard & Poor's Corporation,
Shearson-Lehman Brothers, Inc. and the Russell 2000 Index and to data prepared
by Lipper Analytical Services, Inc. a widely recognized independent service
which monitors the performance of mutual funds, Morningstar, Inc. and the
Consumer Price Index. Comparisons may also be made to indices or data published
in Donoghue's MONEY FUND REPORT of Holliston, Massachusetts 01746, a nationally
recognized money market fund reporting service, Money Magazine, Forbes,
Barron's, The Wall Street Journal, The Bond Buyer's Weekly, 20-Bond Index, The
Bond Buyer's Index, The Bond Buyer, The New York Times, Business Week, Pensions
and Investments, and USA Today. In addition to performance information, general
information about these Funds that appears in a publication such as those
mentioned above, may be included in advertisements and in reports to
shareholders.
From time to time, the Funds may include the following types of
information in advertisements, supplemental sales literature and reports to
shareholders: (1) discussions of general economic or financial principles (such
as the effects of compounding and the benefits of dollar-cost averaging); (2)
discussions of general economic trend; (3) presentations of statistical data to
supplement such discussions; (4) descriptions of past or anticipated portfolio
holdings for one or more of the Funds within the Trust; (5) descriptions of
investment strategies for one or more of the Funds; (6) descriptions or
comparisons of various savings and investment policies (including, but not
limited to, insured bank products, annuities, qualified retirement plans and
individual stocks and bonds), which may or may not include the Funds; (7)
comparisons of investment products (including the Funds) with relevant market or
industry indices or other appropriate benchmarks; and (8) discussions of fund
rankings or ratings by recognized rating organizations. The Funds may also
include calculations, such as hypothetical compounding examples which describe
hypothetical investment results in such communications.
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Such performance examples will be based on an express set of assumptions and are
not indicative of the performance of any of the Funds.
Morningstar, Inc., Chicago, Illinois rates mutual funds on a one- to
five-star rating scale with five stars representing the highest rating. Such
ratings are based on a fund's historical risk/reward ratio as determined by
Morningstar relative to other funds in that fund's class. Funds are divided into
classes based upon the respective investment objectives. The one- to five-star
ratings represent the following ratings by Morningstar, respectively: Lowest,
Below Average, Neutral, Above Average and Highest.
Current yields or performance will fluctuate from time to time and are
not necessarily representative of future results. Accordingly a Fund's yield or
performance may not provide for comparison with bank deposits or other
investments which provide fixed returns for a stated period of time. Yield and
performance are functions of a Fund's quality, composition and maturity as well
as expenses allocated to the Fund. Fees imposed on customer accounts by the
Investment Adviser or its affiliated or correspondent banks or cash management
services will reduce a Fund's effective yield to its customers.
Miscellaneous.
Individual Trustees are elected by the shareholders and, subject to
removal by a vote of two-thirds of the Board of Trustees, serve for a term
lasting until the next meeting of shareholders at which Trustees are elected.
Such meetings are not required to be held at any specific intervals. Individual
Trustees may be removed by vote of the shareholders voting not less than a
majority of the shares outstanding cast in person or by proxy at any meeting
called for that purpose, or by a written declaration signed by the shareholder
voting not less than two-thirds of the shares then outstanding.
The Trust is registered with the SEC as a management investment
company. Such registration does not involve supervision of the management
policies of the Trust. The 1995 Annual Report and, when available, the June 30,
1996 Semi-Annual Report to shareholders of the Trust are incorporated herein by
reference. These reports include the financial statements for the fiscal period
ended December 31, 1995, and the six months ending June 30, 1996, respectively.
In addition, the Annual Report includes management's discussion of Fund
performance for the Bond Fund, Equity Fund, Small Capitalization Fund, and
International Fund, as well as line graph comparisons to appropriate broad-based
securities market indices.
The Prospectus and this Statement of Additional Information omit
certain of the information contained in the Registration Statement filed with
the SEC. Copies of such information may be obtained from the SEC by payment of
the prescribed fee.
The Prospectus and this Statement of Additional Information are not an
offering of the securities herein described in any state in which such offering
may not lawfully be made. No salesman, dealer or other person is authorized to
give any information or make any
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<PAGE> 92
representation other than those contained in the Prospectus and this Statement
of Additional Information.
As of December 31, 1995, the Trustees and officers of the Trust, as a
group, owned, as separate account contract owners or otherwise, none of the
shares of any Fund of the Trust. As of December 31, 1995, First of America
Bank-Michigan, N.A., as trustee of the First of America Bank Corporation
Employees Retirement Plan, owned beneficially the following percentages of the
Funds, respectively: Prime Obligations Fund, 72.7%, Bond Fund, 32.6%, Equity
Fund, 16.6%, Small Capitalization Fund, 23.7%, International Fund, 45.5%. First
of America Bank-Michigan, N.A. may be presumed to control both the Trust and
each of the Funds because it possesses or shares investment or voting power
with respect to more than 25% of the total outstanding shares of the Trust and
each of its Funds. As a result, First of America Bank Corporation may have the
ability to elect the Trustees of the Trust, approve the Investment Advisory,
Sub-Investment Advisory and Distribution Agreements for each of the Funds and
to control any other matters submitted to the shareholders of the Funds for
their approval or ratification.
Financial Statements.
Financial Information describing the Trust's operations for the period
since inception has been audited by Ernst & Young LLP and appears in the Trust's
Annual Report dated December 31, 1995, and is incorporated herein by reference.
Shareholders and contract owners may obtain a copy of the Trust's annual report
at no charge by contacting the Trust or their investment representative.
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APPENDIX
The nationally recognized statistical rating organizations (individually, an
"NRSRO") that may be utilized by First of America with regard to portfolio
investments for the Trust include Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's Corporation ("S&P"), Duff & Phelps, Inc. ("Duff"), Fitch
Investors Service, Inc. ("Fitch"), IBCA Limited and its affiliate, IBCA Inc.
(collectively, "IBCA"), and Thompson BankWatch, Inc. ("Thomson"). Set forth
below is a description of the relevant ratings of each such NRSRO. The NRSROs
that may be utilized by First of America are, and the description of each
NRSRO's ratings is, as of the date of this Statement of Additional Information,
and may subsequently change.
Long-Term Debt Ratings (May be assigned, for example, to corporate and municipal
bonds)
Description of the three highest long-term debt ratings by Moody's (Moody's
supplies numerical modifiers (1, 2, and 3) in each rating category to indicate
the security's ranking within the category):
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt-edged." Interest payments
are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of
such issues.
Aa Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group, they comprise what
are generally known as high-grade bonds. They are rated lower
than the best bonds because margins of protection may not be
as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment
attributes and are 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 some time in the
future.
Description of the three highest long-term debt ratings by S&P (S&P may apply a
plus (+) or a minus (-) to a particular rating classification to show relative
standing within that classification):
AAA Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely
strong.
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AA Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only
in small degree.
A Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
Description of the three highest long-term debt ratings by Duff:
AAA Highest credit quality. The risk factors are negligible being
only slightly more than for risk-free U.S. Treasury debt.
AA+ High credit quality protection factors are strong. AA Risk is
modest but may vary slightly from time to time AA- because of
economic conditions.
A+ Protection factors are average but adequate. However,
A risk factors are more variable and greater in periods
A- of economic stress.
Description of the three highest long-term debt ratings by Fitch (plus or minus
signs are used with a rating symbol to indicate the relative position of the
credit within the rating category):
AAA Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is unlikely
to be affected by reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong
as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issues is
generally rated F-1+ (see below).
A Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
IBCA's description of its three highest long-term debt ratings:
AAA Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal
and interest is substantial such that adverse changes in
business, economic or financial conditions are unlikely to
increase investment risk significantly.
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<PAGE> 95
AA Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal
and interest is substantial. Adverse changes in business,
economic, or financial conditions may increase investment risk
albeit not very significantly.
A Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest
is strong, although adverse changes in business, economic or
financial conditions may lead to increased investment risk.
Thomson's description of its three highest long-term debt ratings (Thomson may
include a plus (+) or minus (-) designation to indicate where within the
respective category the issue is placed):
AAA The highest category; indicates ability to repay principal and
interest on a timely basis is very high.
AA The second highest category; indicates a superior ability to
repay principal and interest on a timely basis with limited
incremental risk versus issues rated in the highest category.
A The third highest category; indicates the ability to repay
principal and interest is strong. Issues rated "A" could be
more vulnerable to adverse developments (both internal and
external) than obligations with higher ratings.
Short-Term Debt Ratings (may be assigned, for example, to commercial paper,
master demand notes, bank instruments, and letters of credit)
Moody's description of its three highest short-term debt ratings:
Prime-1 Issuers rated Prime-1 (or supporting institutions)
have a superior capacity for repayment of senior
short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by many of 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.
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<PAGE> 96
-Well-established access to a range of
financial markets and assured sources of
alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions)
have a strong capacity for repayment of senior
short-term debt 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, may be more subject to
variation. Capitalization characteristics, while
still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
Prime-3 Issuers rated Prime-3 (or supporting institutions)
have an acceptable ability for repayment of senior
short-term obligations. The effect of industry
characteristics and market compositions may be more
pronounced. Variability in earnings and profitability
may result in changes in the level of debt protection
measurements and may require relatively high
financial leverage. Adequate alternate liquidity is
maintained.
S&P's description of its three highest short-term debt ratings:
A-1 This designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to have
extremely strong safety characteristics are denoted with a
plus sign (+).
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 adequate capacity for
timely payment. They are, however, more vulnerable to the
adverse effects of changes in circumstances than obligations
carrying the higher designations.
Duff's description of its three highest short-term debt ratings (Duff
incorporates gradations of "1+" (one plus) and "1-" (one minus) to assist
investors in recognizing quality differences within the highest rating
category):
Duff 1+ Highest certainty of timely payment. Short-term
liquidity, including internal operating factors
and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
Duff 1 Very high certainty of timely payment. Liquidity
factors are excellent and supported by good
fundamental protection factors. Risk factors are
minor.
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Duff 1- High certainty of timely payment. Liquidity
factors are strong and supported by good fundamental
protection factors. Risk factors are very small.
Duff 2 Good certainty of timely payment. Liquidity factors
and company fundamentals are sound. Although ongoing
funding needs may enlarge total financing
requirements, access to capital markets is good. Risk
factors are small.
Duff 3 Satisfactory liquidity and other protection factors
qualify issues as investment grade. Risk factors are
larger and subject to more variation. Nevertheless,
timely payment is expected.
Fitch's description of its three highest short-term debt ratings:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated F-1+.
F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues assigned F-1+
or F-1 ratings.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate, however, near-term adverse changes
could cause these securities to be rated below investment
grade.
IBCA's description of its three highest short-term debt ratings:
A+ Obligations supported by the highest capacity for timely
repayment.
A1 Obligations supported by a very strong capacity for timely
repayment.
A2 Obligations supported by a strong capacity for timely
repayment, although such capacity may be susceptible to
adverse changes in business, economic or financial conditions.
Thompson's description of its three highest short-term ratings:
TBW-1 The highest category; indicates a very high degree of
likelihood that principal and interest will be paid
on a timely basis.
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TBW-2 The second highest category; while the degree of
safety regarding timely repayment of principal and
interest is strong, the relative degree of safety is
not as high as for issues rated "TBW-1".
TBW-3 The lowest investment grade category; indicates that
while more susceptible to adverse developments (both
internal and external) than obligations with higher
ratings, capacity to service principal and interest
in a timely fashion is considered adequate.
Short-Term Loan/Municipal Note Ratings.
Moody's description of its two highest short-term loan/municipal note ratings:
MIG-1/VMIG-1 This designation denotes 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/VMIG-2 This designation denotes high quality. Margins of
protection are ample although not as large as in the
preceding group.
S&P's description of its two highest municipal note ratings:
SP-1 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 Satisfactory capacity to pay principal and interest.
A-6
<PAGE> 99
THE PARKSTONE ADVANTAGE FUND
FORM N-1A
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
Included in Part A:
-- Financial Highlights
Included by reference to Annual Report in Part B:
-- Report of Ernst & Young LLP, Independent Auditors
-- Statement of Assets and Liabilities as of
December 31, 1995
-- Statement of Operations for the year ended
December 31, 1995
-- Statements of Changes in Net Assets for the years ended
December 31, 1995 and 1994.
-- Schedule of Investments as of December 31, 1995
-- Notes to Financial Statements dated December 31, 1995
(b) Exhibits:
(1) Agreement and Declaration of Trust of the Registrant
dated May 18, 1993 is incorporated by reference to
Exhibit (1) of Registrant's Registration Statement on
Form N-1A (filed July 6, 1993).
(2)(a) Registrant's Code of Regulations is incorporated by
reference to Exhibit (2) of Registrant's
Registration Statement on Form N-1A (filed
July 6, 1993).
(b) Amendment to Registrant's Code of Regulations dated
February 10, 1994 is incorporated by reference to
Exhibit 2(b) of Registrant's Post-Effective
Amendment No. 1 (filed March 14, 1994).
(3) None.
(4) None.
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<PAGE> 100
(5)(a) Advisory Agreement dated as of August 18, 1993
between Registrant and First of America Investment
Corporation with respect to the Prime Obligations,
Equity, Small Capitalization and Bond Funds is
incorporated by reference to Exhibit 5(a) of
Registrant's Post-Effective Amendment No. 1 (filed
March 14, 1994).
(b) Advisory Agreement dated as of August 18, 1993
between Registrant and First of America Investment
Corporation with respect to the International Fund is
incorporated by reference to Exhibit 5(b) of
Registrant's Post-Effective Amendment No. 1 (filed
March 14, 1994).
(c) Initial Sub-Investment Advisory Agreement dated as
of January 1, 1995 between First of America
Investment Corporation and Gulfstream Global
Investors, Ltd. relating to the International Fund is
incorporated by reference to Exhibit 5(c) of
Registrant's Post-Effective Amendment No. 3 (filed
April 4, 1995).
(d) Sub-Investment Advisory Agreement dated as of
March 1, 1995 between First of America Investment
Corporation and Gulfstream Global Investors, Ltd.
relating to the International Fund is incorporated by
reference to Exhibit 5(d) of Registrant's Post-
Effective Amendment No. 3 (filed April 4, 1995).
(6) Distribution Agreement dated as of September 10, 1993 between
Registrant and Security Distributors, Inc. is incorporated by
reference to Exhibit 6 of Registrant's Post-Effective
Amendment No. 1 (filed March 14, 1994).
(7) None.
(8) (a) Custody Agreement dated as of August 16, 1993 between
Registrant and Bank of California relating to the
Prime Obligations, Equity, Small Capitalization and
Bond Funds is incorporated by reference to Exhibit
8(a) of Registrant's Post-Effective Amendment No. 1
(filed March 14, 1994).
(b) Custodian Agreement dated as of July 31, 1995 between
Registrant and Bank of California relating to the
International Fund.
C-2
<PAGE> 101
(9) (a) Administration Agreement dated as of August 25, 1993
and amended as of May 19, 1994 between Registrant and
Security Management Company is incorporated by
reference to Exhibit 9(a) of Registrant's
Post-Effective Amendment No. 3 (filed April 4, 1995).
(b) Amendment dated February 10, 1994 to Administration
Agreement between Registrant and Security Management
Company is incorporated by reference to Exhibit 9(b)
of Registrant's Post- Effective Amendment No. 1
(filed March 14, 1994).
(c) Fund Accounting and Transfer Agency Agreement dated
as of August 25, 1993 between Registrant and Security
Management Company is incorporated by reference to
Exhibit 9(c) of Registrant's Post-Effective Amendment
No. 1 (filed March 14, 1994).
(d) Fund Participation and Variable Contract Marketing
Agreement dated as of September 10, 1993 between
Registrant, and Security Benefit Life Insurance
Company, First of America Brokerage Service, Inc.,
and First Advantage Insurance Agency is incorporated
by reference to Exhibit 9(d) of Registrant's
Post-Effective Amendment No. 1 (filed March 14,
1994).
(10) Opinion of counsel that shares are validly issued, fully paid
and non-assessable is incorporated by reference to
Registrant's filing pursuant to Rule 24f-2 (filed February 22,
1996).
(11) (a) Consent of Ernst & Young LLP.
(b) Consent of Howard & Howard.
(12) None.
(13) Purchase Agreement dated as of August 17, 1993 between
Registrant and Security Distributors, Inc. is incorporated by
reference to Exhibit 13 of Registrant's Post-Effective
Amendment No. 1 (filed March 14, 1994).
(14) None.
(15) None.
C-3
<PAGE> 102
(16) Computation of Performance Quotations for the Equity, Small
Capitalization, Bond, Prime Obligations and International
Discovery Funds is incorporated by reference to Exhibit 16 of
the Registrant's Registration Statement on Form N-1A (filed
September 14, 1993).
(17) (a) Powers of Attorney of Robert M. Beam, Adrian C.
Edwards, and James R. Schmank are incorporated by
reference to Exhibit (17)(a) of Registrant's
Registration Statement on Form N-1A (filed July 6,
1993).
(b) Power of Attorney of Brenda M. Luthi is incorporated
by reference to Exhibit (17)(b) of Registrant's
Post-Effective Amendment No. 3 (filed April 4, 1995).
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is controlled by its Board of Trustees, some of the members
of which also serve as members of the Board of Trustees of the
Parkstone Group of Funds. As of December 31, 1995, First of America
Bank Corporation, a bank holding company ("First of America"), and the
parent of First of America Bank - Michigan, N.A., may be deemed to
control the Registrant because of its indirect record ownership and
beneficial ownership through its wholly-owned subsidiaries of more than
25% of the shares of each series of the Registrant outstanding on such
date. In addition to controlling the Registrant, First of America may
be deemed to control, and therefore the Registrant may be under common
control with, First of America Investment Corporation, a Michigan
corporation and a wholly-owned subsidiary of First of America Bank -
Michigan, N.A.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
Security Distributors, Inc. provided the initial capitalization of
Registrant and consequently held all of the outstanding shares of
beneficial interest as of September 10, 1993. The public offering of
the Registrant's shares reduced the holdings of Security Distributors
to less than 4% of each series of Registrant's outstanding shares. In
addition, Registrant was organized primarily for the purpose of
providing a vehicle for the investment of assets received by various
separate investment accounts ("Separate Accounts") established by
various participating life insurance companies the ("Participating
Insurance Companies"). The assets in the Separate Accounts are, under
state law, assets of the Participating Insurance Companies which have
established Separate Accounts. Thus, at any time, the Participating
Insurance Companies will own Registrant's outstanding shares purchased
with Separate Account assets; however, where required to do so, the
Participating Insurance Companies will vote such shares only in
accordance with the instructions received of the contracts pursuant to
which monies are invested in the Separate Accounts. As of December 31,
1995, the only Participating Insurance
C-4
<PAGE> 103
Company was Security Benefit Life Insurance Company and the number of
record holders of each series of shares of the Registrant were as
follows:
<TABLE>
<CAPTION>
Title of Series Number of Record Holders
- --------------------------------------------------------------------------------------
<S> <C>
Prime Obligations Fund 4
Equity Fund 4
Bond Fund 4
Small Capitalization 5
International Discovery Fund 4
</TABLE>
ITEM 27. INDEMNIFICATION
Indemnification of Registrant's principal underwriter and custodian
against certain losses is provided for, respectively, in Section 6 of
the Distribution Agreement filed herein as Exhibit (6), in Section 10.1
of the Custody Agreement filed herein as Exhibit (8)(a), and in Section
16 of the Custodian Agreement as filed herein as Exhibit (8)(b).
Registrant has obtained from a major insurance carrier a director's and
officer's liability policy covering certain types of errors and
omissions. In addition, Section 9.2 of Registrant's Agreement and
Declaration of Trust dated May 18, 1993, filed herein as Exhibit (1),
provides as follows:
9.2 Indemnification of Trustees, Representative and Employees.
The trust shall indemnify, to the fullest extent permitted by
law, every person who is or has been a trustee or officer of
the trust and any person rendering or having rendered
investment advisory, administrative, distribution, custodian
or transfer agency services to the trustee or to the trust or
any series thereof pursuant to Article VII of this Declaration
of Trust or otherwise, and every officer, director, trustee,
shareholder, employee and agent of any such person (all
persons hereinafter referred to as the "covered persons")
against all liabilities and expenses (including amounts paid
in satisfaction of judgments, and compromise, as fines and
penalties, and as counsel fees (reasonably incurred by him in
connection with the defense or disposition of any action,
suit, or other proceeding, whether civil or criminal, in which
he may be involved or which he may be threatened while as a
covered person or thereafter, by reason of his being or having
been such a covered person except with respect to any matter
as to which he shall have been adjudicated to have acted in
bad faith, willful misfeasance, gross negligence, or reckless
disregard of his duties; provided, however, that as to any
matter disposed of by a compromised payment by such person,
pursuant to a consent decree or otherwise, no indemnification
either for said payment or for any other expenses shall be
provided unless the trust shall have received a written
opinion from independent legal counsel approved by the
trustees to the
C-5
<PAGE> 104
effect that, if either the matter of willful misfeasance,
gross negligence, or reckless disregard of duty or the matter
of bad faith had been adjudicated, it would in the opinion of
such counsel, have been adjudicated in favor of such person.
The rights accruing to any covered person under these
provisions shall not exclude any other right to which she may
be lawfully entitled; provided, however, that no covered
person may satisfy any right of indemnity or reimbursement
except out of the property of the trust if the trustees make
advance payments in connection with the indemnification under
this Section 9.2.; provided, however, that the indemnified
covered person shall have given a written undertaking to
reimburse the trust in the event that it is subsequently
determined that he is not entitled to such indemnification.
Rights of indemnification herein provided may be insured
against by policies maintained by the trust. Such rights of
indemnification or severable, and such inure to the benefit of
the heirs, executors, administrators and other legal
representatives of such covered persons.
Section 9.5 of the Registrant's Agreement and Declaration of Trust,
filed herein as Exhibit (1), also provides for the indemnification of
shareholders of the Registrant. Section 9.5 states as follows:
9.5. Indemnification of Shareholders.
In case any shareholder or former shareholder shall be held to
be personally liable solely by reason of his being or having
been a shareholder and not because of his acts or omissions or
for some other reason, the shareholder or former shareholder
(or his heirs, executors, administrators or other legal
representatives, or in the case of a corporation or other
entities, its corporate or other general successor) shall be
entitled out of the trust estate to be held harmless from and
indemnified against all loss and expense arising from such
liability. The trust, upon request by the shareholder, shall
assume the defense of any claims made against any shareholder
for any act or obligations of the trust, and shall satisfy any
judgment thereon from such assets.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
First of America Investment Corporation ("First of America") is an
investment adviser registered under the Investment Advisers Act of 1940
(the "Advisers Act").
The list required by this Item 28 of officers and directors of First of
America, together with information as to any business, profession, or
employment of a substantial nature engaged in by such officers and
directors during the past two years is incorporated herein by reference
to Schedules A and D of Form ADV filed by First of America pursuant to
the Advisers Act (SEC File No. 801-446).
C-6
<PAGE> 105
ITEM 29. PRINCIPAL UNDERWRITER
(a) In addition to the Parkstone Advantage Fund, Security
Distributors, Inc. (the "Distributor") currently acts as
Distributor for the SBL Fund, Security Equity Fund, Security
Income Fund, Security Growth and Income Fund, Security Tax-
Exempt Fund and Security Ultra Fund. The Distributor is
registered with the Securities and Exchange Commission as a
broker-dealer and is a member of the National Association of
Securities Dealers. The Distributor is a wholly-owned
subsidiary of Security Benefit Life Insurance Company which is
located at 700 Harrison Street, Topeka, Kansas 66636.
(b) The information required by this item 29(b) with respect to
each director, officer, or partner of the Distributor is
incorporated by reference to Schedule A of Form BD filed by
the Distributor with the Securities and Exchange Commission
pursuant to the Securities Act 1934 (File No. 008-10781).
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
(1) First of America Investment Corporation, 303 N. Rose Street,
Suite 500, Kalamazoo, Michigan 49007 (records relating to its
functions as investment adviser); Gulfstream Global Investors,
Ltd. 100 Crescent Court, Suite 550, Dallas, Texas 75201
(records relating to certain functions of the subadviser for
the International Discovery Fund).
(2) Security Distributors, Inc., 700 Harrison Street, Topeka,
Kansas 66636 (records relating to its function as
distributor).
(3) Security Management Company, 700 Harrison Street, Topeka,
Kansas 66636 (records relating to its functions as
administrator).
(4) Howard & Howard, Attorneys, P.C., 1400 North Woodward Avenue,
Suite 101, Bloomfield Hills, Michigan 48304-2856 (Registrant's
Declaration of Trust, Code of Regulations and Minutes Books).
(5) Bank of California, 400 California Street, P.O. Box 45000, San
Francisco, California 94101 (records relating to its functions
as custodian for the Funds).
ITEM 31. MANAGEMENT SERVICES
Inapplicable.
C-7
<PAGE> 106
ITEM 32. UNDERTAKINGS
(1) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered a copy of its latest annual report,
containing Management's Discussion of Fund Performance, to
shareholders upon request and without charge.
C-8
<PAGE> 107
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, Registrant has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of Topeka, State of Kansas on the 30th day
of April, 1996. I hereby certify that this amendment qualifies for effectiveness
pursuant to Rule 485(b).
THE PARKSTONE ADVANTAGE FUND
Registrant
/s/ James R. Schmank
-----------------------------
By: James R. Schmank*
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ James R. Schmank Chairman of the Board of April 30, 1996
- ------------------------ Trustees and President
James R. Schmank*
/s/ Brenda M. Luthi Trustee, Secretary and April 30, 1996
- ------------------------ Treasurer
Brenda M. Luthi*
/s/ Robert M. Beam Trustee April 30, 1996
- ------------------------
Robert M. Beam*
/s/ Adrian C. Edwards Trustee April 30, 1996
- ------------------------
Adrian C. Edwards*
*By: /s/ Amy J. Lee
----------------------------
Amy J. Lee, Attorney-In-Fact
</TABLE>
<PAGE> 1
EXHIBIT 11(a) UNDER FORM N-1A
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights", "Independent Auditors" and "Financial Statements" in the
Registration Statement (Form N-1A) and related prospectus of Parkstone
Advantage Fund and to the incorporation by reference of our report dated
January 26, 1996, with respect to the financial statements of Parkstone
Advantage Fund included in its Annual Report for the year ended December 31,
1995 filed with the Securities and Exchange Commission in this Post-Effective
Amendment to the Registration Statement under the Securities Act of 1933
(Registration No. 33-65690) and under the Investment Company Act of 1940
(Registration No. 811-7850).
Ernst & Young LLP
Kansas City, Missouri
April 30, 1996
<PAGE> 1
EXHIBIT 11(b) UNDER FORM N-1A
CONSENT OF HOWARD & HOWARD ATTORNEYS, P.C., LEGAL COUNSEL
We hereby consent to the use of our name and to the references to our
firm under the caption "Counsel" included in or made a part of the
post-effective Amendment No. 4 to the Registration Statement on Form N-1A, File
No. 33-65690, filed under the Securities Act of 1933, as amended, and Amendment
No. 5 to the Registration Statement on Form N-1A, File No. 811-7850, filed under
the Investment Company Act of 1940, as amended, of the Parkstone Advantage Fund.
Kalamazoo, Michigan HOWARD & HOWARD ATTORNEYS, P.C.
April 30, 1996
By: /s/ David E. Riggs
---------------------------
David E. Riggs
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<NAME> THE PARKSTONE ADVANTAGE FUND
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<SHARES-COMMON-STOCK> 2,944,914
<SHARES-COMMON-PRIOR> 2,231,991
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<OVERDISTRIBUTION-GAINS> 0
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<NET-ASSETS> 2,944,914
<DIVIDEND-INCOME> 13,272
<INTEREST-INCOME> 130,512
<OTHER-INCOME> 0
<EXPENSES-NET> 40,731
<NET-INVESTMENT-INCOME> 103,053
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 103,053
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<DISTRIBUTIONS-OF-INCOME> 103,053
<DISTRIBUTIONS-OF-GAINS> 0
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<NUMBER-OF-SHARES-REDEEMED> 277,620
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<OVERDISTRIB-NII-PRIOR> 0
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<GROSS-EXPENSE> 40,731
<AVERAGE-NET-ASSETS> 2,482,515
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<PER-SHARE-NII> .41
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> .41
<PER-SHARE-DISTRIBUTIONS> 0
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<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 1.64%
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<AVG-DEBT-PER-SHARE> 0
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<NAME> THE PARKSTONE ADVANTAGE FUND
<SERIES>
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<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
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<INVESTMENTS-AT-VALUE> 6,648,442
<RECEIVABLES> 110,031
<ASSETS-OTHER> 6,806
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 6,765,279
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 7,038
<TOTAL-LIABILITIES> 7,038
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<SHARES-COMMON-STOCK> 643,818
<SHARES-COMMON-PRIOR> 497,277
<ACCUMULATED-NII-CURRENT> 279,533
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (170,635)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 211,622
<NET-ASSETS> 6,758,241
<DIVIDEND-INCOME> 16,165
<INTEREST-INCOME> 364,471
<OTHER-INCOME> 0
<EXPENSES-NET> 86,863
<NET-INVESTMENT-INCOME> 293,773
<REALIZED-GAINS-CURRENT> 146,496
<APPREC-INCREASE-CURRENT> 405,198
<NET-CHANGE-FROM-OPS> 845,467
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 239,024
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 184,497
<NUMBER-OF-SHARES-REDEEMED> 61,669
<SHARES-REINVESTED> 23,713
<NET-CHANGE-IN-ASSETS> 2,107,084
<ACCUMULATED-NII-PRIOR> 224,784
<ACCUMULATED-GAINS-PRIOR> (317,131)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 40,840
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 86,863
<AVERAGE-NET-ASSETS> 5,528,426
<PER-SHARE-NAV-BEGIN> 9.35
<PER-SHARE-NII> .40
<PER-SHARE-GAIN-APPREC> 1.17
<PER-SHARE-DIVIDEND> .42
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.50
<EXPENSE-RATIO> 1.57%
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<AVG-DEBT-PER-SHARE> 0
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<CIK> 0000908823
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<INVESTMENTS-AT-VALUE> 15,036,494
<RECEIVABLES> 50,696
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<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 15,093,420
<PAYABLE-FOR-SECURITIES> 97,512
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 18,778
<TOTAL-LIABILITIES> 116,290
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 12,055,778
<SHARES-COMMON-STOCK> 1,204,184
<SHARES-COMMON-PRIOR> 943,886
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<OVERDISTRIBUTION-NII> 0
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<OVERDISTRIBUTION-GAINS> 0
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<CIK> 0000908823
<NAME> THE PARKSTONE ADVANTAGE FUND
<SERIES>
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<TOTAL-LIABILITIES> 26,440
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11,098,814
<SHARES-COMMON-STOCK> 1,099,414
<SHARES-COMMON-PRIOR> 988,550
<ACCUMULATED-NII-CURRENT> 51,718
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (708,465)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,203,133
<NET-ASSETS> 11,645,200
<DIVIDEND-INCOME> 185,321
<INTEREST-INCOME> 45,109
<OTHER-INCOME> (24,320)
<EXPENSES-NET> 246,999
<NET-INVESTMENT-INCOME> (40,889)
<REALIZED-GAINS-CURRENT> (36,636)
<APPREC-INCREASE-CURRENT> 1,051,011
<NET-CHANGE-FROM-OPS> 973,486
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
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<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 2,107,084
<ACCUMULATED-NII-PRIOR> (58,473)
<ACCUMULATED-GAINS-PRIOR> (520,780)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 129,924
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 246,999
<AVERAGE-NET-ASSETS> 10,285,075
<PER-SHARE-NAV-BEGIN> 9.65
<PER-SHARE-NII> (.03)
<PER-SHARE-GAIN-APPREC> .97
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000908823
<NAME> THE PARKSTONE ADVANTAGE FUND
<SERIES>
<NUMBER> 3
<NAME> SMALL CAPITALIZATION FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 9,073,625
<INVESTMENTS-AT-VALUE> 13,301,839
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<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 13,308
<TOTAL-LIABILITIES> 126,262
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9,213,029
<SHARES-COMMON-STOCK> 844,999
<SHARES-COMMON-PRIOR> 645,560
<ACCUMULATED-NII-CURRENT> 0
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<OVERDISTRIBUTION-GAINS> 0
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<NET-ASSETS> 13,272,561
<DIVIDEND-INCOME> 35,111
<INTEREST-INCOME> 808
<OTHER-INCOME> 0
<EXPENSES-NET> 164,574
<NET-INVESTMENT-INCOME> (128,655)
<REALIZED-GAINS-CURRENT> 383,283
<APPREC-INCREASE-CURRENT> 2,767,881
<NET-CHANGE-FROM-OPS> 3,022,509
<EQUALIZATION> 0
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<DISTRIBUTIONS-OTHER> 0
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<NUMBER-OF-SHARES-REDEEMED> 77,789
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 5,796,117
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (551,965)
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<INTEREST-EXPENSE> 0
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<PER-SHARE-NAV-BEGIN> 11.58
<PER-SHARE-NII> (.15)
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<PER-SHARE-DIVIDEND> 0
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<PER-SHARE-NAV-END> 15.71
<EXPENSE-RATIO> 1.64%
<AVG-DEBT-OUTSTANDING> 0
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</TABLE>
