<PAGE> 1
As filed with the Securities and Exchange Commission on September 18, 1998
Securities Act File No. 33-65690
Investment Company Act File No. 811-7850
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 9 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 10
THE PARKSTONE ADVANTAGE FUND
---------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
3435 STELZER ROAD
COLUMBUS, OHIO 43219
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (800) 451-8377
W. Bruce McConnel, III, Esq.
Audrey C. Talley, Esq.
DRINKER BIDDLE & REATH LLP
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, PA 19107-3496
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: Continuous
It is proposed that this filing will become effective:
[X] immediately upon filing pursuant to paragraph (b).
[ ] on April 30, 1998 pursuant to paragraph (b).
[ ] 60 days after filing pursuant to paragraph (a)(1).
[ ] on (date) pursuant to paragraph (a)(l) of Rule 485.
[ ] 75 days after filing pursuant to paragraph (a)(2).
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title of Securities Being Registered: Shares of Beneficial Interest
<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)
- -------- -----------------------------
<S> <C>
1. Cover Page Cover Page
2. Synopsis Fees and Expenses
3. Condensed Financial Information Financial Highlights; Performance
Information
4. General Description of Registrant Cover Page; Investment Objectives and
Policies; Risk Factors and Investment
Techniques; Investment Restrictions;
Description of the Trust and its Shares
5. Management of the Fund Management of the Trust; Fees and
Expenses
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 Shares; How
Offered Shares are Valued
8. Redemption or Repurchase Purchase and Redemption of Shares
9. Pending Legal Proceedings Not Applicable
</TABLE>
<PAGE> 3
THE PARKSTONE ADVANTAGE FUND
3435 STELZER ROAD
COLUMBUS, OHIO 43219
PROSPECTUS
SEPTEMBER 16, 1998
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 (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. As of the date of this Prospectus, the only Participating Insurance
Company is Security Benefit Life Insurance Company. The Trust may, however,
pursuant to an exemptive order from the Securities and Exchange Commission (the
"SEC"), 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.
The Trust currently offers four portfolios - the Small Capitalization
Fund, the Mid Capitalization Fund (formerly, the Equity Fund), the Bond Fund and
the International Discovery Fund (collectively, the "Funds" and individually, a
"Fund") with investment objectives as described below. There is, of course, no
assurance that a Fund will achieve its stated objective. Formerly, the Trust
also offered the Prime Obligations Fund which ceased operations on March 6,
1998.
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 MID 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.
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.
The INTERNATIONAL DISCOVERY FUND'S investment objective is to seek
long-term growth of capital.
Each of the Funds is advised by National City Investment Management
Company, Cleveland, Ohio ("IMC" or "Investment Adviser"). IMC has
<PAGE> 4
retained the services of Gulfstream Global Investors, Ltd. ("Gulfstream" or the
"Subadviser") to assist in the management of the International Discovery Fund.
The Funds are distributed by BISYS Fund Services, L.P. Limited Partnership
("BISYS"). BISYS also serves as fund accountant and transfer agent. National
City Bank, an affiliate of IMC, and Union Bank of California serve as custodians
(the "Custodians").
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 the September 16, 1998 Statement of Additional Information, as
amended from time to time, which has been filed with the Securities and Exchange
Commission and is incorporated herein by reference. This Statement of Additional
Information is available upon request and without charge by writing to the Trust
at 3435 Stelzer Road, Columbus, Ohio 43219 or calling the Participating
Insurance Company sponsoring the variable annuity contract or variable-life
insurance policy.
SHARES OF THE TRUST ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED OR OTHERWISE SUPPORTED BY, NATIONAL CITY INVESTMENT
MANAGEMENT COMPANY, ITS PARENT COMPANY OR ANY OF ITS AFFILIATES, AND ARE NOT
FEDERALLY INSURED OR GUARANTEED BY THE U.S. GOVERNMENT, FEDERAL DEPOSIT
INSURANCE CORPORATION, OR ANY GOVERNMENTAL AGENCY OR STATE. INVESTMENT IN THE
TRUST INVOLVES RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISION OR ANY STATE SECURITIES COMMISIONS, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 5
<TABLE>
<CAPTION>
PAGE
<S> <C>
TABLE OF CONTENTS
FINANCIAL HIGHLIGHTS..........................................................1
INVESTMENT OBJECTIVES AND POLICIES............................................6
RISK FACTORS AND INVESTMENT TECHNIQUES.......................................10
INVESTMENT RESTRICTIONS......................................................24
MANAGEMENT OF THE TRUST......................................................26
DESCRIPTION OF THE TRUST AND ITS SHARES......................................30
PURCHASE AND REDEMPTION OF SHARES............................................30
FEES AND EXPENSES............................................................32
HOW SHARES ARE VALUED........................................................33
DIVIDENDS AND TAXES..........................................................33
PERFORMANCE INFORMATION......................................................34
MISCELLANEOUS................................................................36
</TABLE>
-i-
<PAGE> 6
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 and
the Trust's June 30, 1998 Semi-Annual Report to Shareholders which may be
obtained free of charge. The information contained in the tables on the
following pages for the six months ended June 30, 1998 has been derived from
unaudited financial statements which are included in the Statement of Additional
Information. The Financial highlights for the years ended December 31, 1997,
1996, 1995, 1994 and 1993 have been audited by Ernst and Young LLP. The
following information should be read in conjunction with those financial
statements.
<PAGE> 7
PARKSTONE ADVANTAGE SMALL CAPITALIZATION FUND
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1998 YEAR ENDED DECEMBER 31,
------------ -------------------------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993(a)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ........ $ 17.12 $ 18.20 $ 15.71 $ 11.58 $ 11.00 $ 10.00
----------- ----------- ----------- ----------- ---------- ----------
Investment Activities
Net Investment Income (Loss) ............. (0.12) (0.20) (0.15) (0.15) (0.13) (0.03)
Net Realized and Unrealized Gains (Losses)
From Investments ......................... 1.37 (0.79) 4.79 4.28 0.71 1.03
----------- ----------- ----------- ----------- ---------- ----------
Total from Investment Activities ....... 1.25 (0.99) 4.64 4.13 0.58 1.00
----------- ----------- ----------- ----------- ---------- ----------
Distributions
From Net Realized Gains .................. -- (0.09) (2.15) -- -- --
----------- ----------- ----------- ----------- ---------- ----------
Total Distributions .................... -- (0.09) (2.15) -- -- --
----------- ----------- ----------- ----------- ---------- ----------
Net Asset Value, End of Period .............. $ 18.37 $ 17.12 $ 18.20 $ 15.71 $ 11.58 $ 11.00
=========== =========== =========== =========== ========== ==========
Total Return (c) ............................ 7.30% (f) (5.47%) 29.66% 35.66% 5.27% 10.00% (f)
Ratios/Supplemental Data:
Net Assets, End of Period ................ $26,864,691 $26,860,472 $24,495,224 $13,272,561 $7,476,444 $3,064,765
Ratio of Expenses to Average Net Assets .. 1.60% (b) 1.55% 1.40% 1.64% 1.98% 1.87% (b)
Ratio of Net Investment Income (Loss)
to Average Net Assets .................... (1.32%)(b) (1.20%) (1.06%) (1.29%) (1.66% (1.40%)(b)
Ratio of Expenses to Average Net Assets* . 1.60% (b) 1.55% 1.40% 1.64% 1.98% 2.23% (b)
----------- ----------- ----------- ----------- ---------- ----------
Ratio of Net Investment Income to Average
Net Assets* .............................. (1.32%)(b) (1.20%) (1.06%) (1.29%) (1.66%) (1.76%)(b)
----------- ----------- ----------- ----------- ---------- ----------
Portfolio Turnover Rate ..................... 21% 51% 60% 64% 39% 23%
Average Commission Rate Paid (d) ............ -- $ 0.0800 $ 0.0799 (e) -- -- --
</TABLE>
-2-
<PAGE> 8
PARKSTONE ADVANTAGE MID CAPITALIZATION FUND
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1998 YEAR ENDED DECEMBER 31,
------------ ---------------------------------------------------------------------
(UNADUDITED) 1997 1996 1995 1994 1993(a)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ....... $ 14.23 $ 14.60 $ 12.44 $ 9.64 $ 10.17 $ 10.00
----------- ----------- ----------- ----------- ---------- ----------
Investment Activities
Net Investment Loss ..................... (0.09) (0.11) (0.09) (0.08) (0.07) (0.02)
Net Realized and Unrealized Gain
(Loss) on Investments ................... 1.97 1.90 2.25 2.88 (0.46) 0.19
----------- ----------- ----------- ---------- ----------
Total from Investment Activities ...... 1.88 1.79 2.16 2.80 (0.53) 0.17
----------- ----------- ----------- ----------- ---------- ----------
Distributions
From Net Realized Gains ................. -- (2.16) -- -- -- --
----------- ----------- ----------- ----------- ---------- ----------
Total Distributions ................... -- (2.16) -- -- -- --
----------- ----------- ----------- ----------- ---------- ----------
Net Asset Value, End of Period ............. $ 16.11 $ 14.23 $ 14.60 $ 12.44 $ 9.64 $ 10.17
=========== =========== =========== =========== ========== ==========
Total Return (c) ........................... 13.21%(f) 12.58% 17.36% 29.05% (5.21% 1.70%(f)
Ratios/Supplemental Data:
Net Assets, End of Period ............... $32,355,769 $31,059,179 $24,040,588 $14,977,130 $9,095,015 $3,893,346
Ratio of Expenses to Average Net Assets . 1.55%(b) 1.53% 1.42% 1.62% 1.86% 2.11% (b)
Ratio of Net Investment Income (Loss)
to Average Net Assets ................... (1.14%)(b) (0.88%) (0.73%) (0.84%) (0.92%) (1.09%) (b)
Portfolio Turnover Rate .................... 16% 55% 127% 44% 51% 45% (b)
Average Commission Rate Paid (d) ........... $ 0.0798 $ 0.0800(e) -- -- --
</TABLE>
-3-
<PAGE> 9
PARKSTONE ADVANTAGE BOND FUND
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1998 YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993(a)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ..... $ 10.70 $ 10.33 $ 10.50 $ 9.35 $ 9.96 $ 10.00
----------- ----------- ---------- ---------- ---------- ----------
Investment Activities
Net Investment Income (Loss) .......... 0.26 0.48 0.36 0.40 0.42 0.10
Net Realized and Unrealized Gains
(Losses) from Investments ............. 0.09 0.30 (0.18) 1.17 (0.96) (0.14)
----------- ----------- ---------- ---------- ---------- ----------
Total from Investment Activities .... 0.35 0.78 0.18 1.57 (0.54) (0.04)
----------- ----------- ---------- ---------- ---------- ----------
Distributions
From Net Investment Income ............ -- (0.41) (0.35) (0.42) (0.07) --
----------- ----------- ---------- ---------- ---------- ----------
Total Distributions ................. -- (0.41) (0.35) (0.42) (0.07) --
----------- ----------- ---------- ---------- ---------- ----------
Net Asset Value, End of Period ........... $ 11.05 $ 10.70 $ 10.33 $ 10.50 $ 9.35 $ 9.96
=========== =========== ========== ========== ========== ==========
Total Return (c) ......................... 3.27%(f) 7.69% 1.83% 16.98% (5.38%) (0.40%)(f)
Ratios/Supplemental Data:
Net Assets, End of Period ............ $12,663,047 $11,856,187 $9,754,430 $6,758,241 $4,651,157 $3,216,233
Ratio of Expenses to Average Net Assets 1.36%(b) 1.36% 1.29% 1.57% 1.80% 2.03% (b)
Ratio of Net Investment Income (Loss)
to Average Net Assets ................. 5.29%(b) 5.36% 5.32% 5.31% 5.27% 5.23% (b)
Portfolio Turnover Rate .................. 68% 144% 492% 178% 159% 101%
</TABLE>
-4-
<PAGE> 10
PARKSTONE ADVANTAGE INTERNATIONAL DISCOVERY FUND
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1998 -------------------------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993(a)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ..... $ 12.44 $ 12.18 $ 10.59 $ 9.65 $ 10.35 $ 10.00
----------- ----------- ----------- ----------- ---------- ----------
Investment Activities
Net Investment Income (Loss) .......... (0.02) (0.06) (0.04) (0.03) (0.07) (0.03)
Net Realized and Unrealized Gain
(Loss) on Investments ................. 1.60 0.32 1.67 0.97 (0.63) 0.38
----------- ----------- ----------- ----------- ---------- ----------
Total from Investment Activities .... 1.58 0.26 1.63 0.94 (0.70) 0.35
----------- ----------- ----------- ----------- ---------- ----------
Distributions
From Net Realized Gains ............... (0.06) -- (0.04) -- -- --
----------- ----------- ----------- ----------- ---------- ----------
Total Distributions ................. (0.06) -- (0.04) -- -- --
----------- ----------- ----------- ----------- ---------- ----------
Net Asset Value, End of Period .......... $ 13.96 $ 12.44 $ 12.18 $ 10.59 $ 9.65 $ 10.35
=========== =========== =========== =========== ========== ==========
Total Return (c) ......................... 12.66%(f) 2.13% 15.41% 9.74% (6.76% 3.50%(f)
Ratios/Supplemental Data:
Net Assets, End of Period ............. $19,859,278 $18,784,361 $17,000,747 $11,645,200 $9,537,019 $6,334,523
Ratio of Expenses to Average Net Assets 2.01%(b) 1.90% 2.00% 2.38% 2.34% 2.51% (b)
Ratio of Net Investment Income (Loss)
to Average Net Assets ................. (0.26%)(b) (0.46%) (0.35%) (0.39%) (1.13%) (1.38%)(b)
Portfolio Turnover Rate .................. 24% 34% 65% 86% 87% 13%
Average Commission Rate Paid (d) ......... $ 0.0264 $ 0.0316(e) -- -- --
</TABLE>
* During the period, certain investment advisory fees were voluntarily
reduced. If such voluntary fee reductions had not occurred, the ratios
would have been as indicated.
(a) Period from commencement of operations (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 year ended December 31, 1993 is not
annualized.
(d) Represents the total dollar amount of commissions paid on portfolio
security transactions divided by total number of shares purchased and
sold by the Fund for which commissions were charged.
(e) For the period June 30, 1996 through December 31, 1996.
(f) Not annualized.
-5-
<PAGE> 11
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 may 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) although the
Board of Trustees would only change a Fund's objective upon 30 days' notice to
shareholders. There can be no assurance that a Fund will achieve its objective.
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 the Investment
Adviser or Gulfstream, 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 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 the
Investment Adviser 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
companies that have 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 American Depository Receipts ("ADRs") or European
Depository Receipts ("EDRs") and may also invest in securities issued by foreign
branches of U.S. banks and foreign banks, in Canadian Commercial Paper ("CCP"),
and in U.S. dollar-denominated
-6-
<PAGE> 12
Commercial paper of a foreign issuer ("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. Small-sized companies are considered to be those companies that have
been determined to have a market capitalization of less than $1 billion based
upon current market data. The Small Capitalization Fund will limit its
investment in securities of medium-sized companies to no 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 Small Capitalization 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.
Consistent with the foregoing, the Small Capitalization Fund will focus
its investments in those companies and types of companies that the Investment
Adviser believes will enable the Fund to achieve its investment objective.
INVESTMENT OBJECTIVE AND POLICIES OF THE MID CAPITALIZATION FUND
The Mid 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. Under normal market conditions, the
Mid 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 the Investment Adviser to be characterized by sound
management and the ability to finance expected long-term growth. In addition,
under normal market conditions, the Mid Capitalization Fund will invest at least
65% of the value of its total assets in common stocks and securities convertible
into common stocks of companies considered by the Investment Adviser to have a
market capitalization between $1 and $5 billion. The Mid 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 Mid Capitalization 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 Mid Capitalization Fund may also
invest up to 25% of its net assets in foreign securities either directly or
through the purchase of ADRs or EDRs and may also invest in securities issued by
foreign branches of U.S. banks and foreign banks, Canadian Commercial Paper CCP
and in Europaper. For a discussion of risks
-7-
<PAGE> 13
associated with foreign securities, see "RISK FACTORS AND TECHNIQUES - Foreign
Securities" below.
The Mid Capitalization Fund anticipates investing in growth-oriented,
medium-sized companies. Medium-sized companies are considered to be those with a
market capitalization between $1 and $5 billion. 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 Mid
Capitalization 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 Mid Capitalization Fund will focus
its investment in those companies and types of companies that the Investment
Adviser 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 issues 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 the Investment
Adviser, 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.
Some of the securities in which the Bond Fund invests may have warrants or
options attached.
The Bond 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 ("Stripped 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.
-8-
<PAGE> 14
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, and 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
a nationally recognized statistical rating organization ("NRSRO") or, if
unrated, which the Investment Adviser 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 invest in obligations of the Export-Import Bank of
the United States, and in U.S. dollar-denominated international bonds for which
the primary trading market is the United States ("Yankee Bonds"), or for which
the primary trading market is abroad ("Eurodollar Bonds"), Canadian bonds and
bonds issued by institutions, such as the World Bank and the European Economic
Community, organized for a specific purpose by two or more sovereign governments
("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, the Investment Adviser 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, the Investment Adviser 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 is to seek
the long-term growth of capital. Under normal market conditions, the
International Discovery 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) which are small- or medium-sized companies on the basis of their
capitalization and (ii) which are either domiciled in countries other than the
United States or derive at least 50% of either their revenues or pre-tax income
from activities outside of the United States.
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 EDRs.
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For purposes of investment by the International Discovery Fund only,
companies are deemed to be small- or medium-sized if, at the time of purchase,
they are of a size which would rank them (i) in the lower half of a major market
index in the applicable country weighted by market capitalization and (ii) in
the lower half of 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 Discovery 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 Discovery 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 Discovery Fund's assets could be invested in the
securities of U.S. companies. In addition, the International Discovery 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 National City Bank, BISYS, or their affiliates, and will not
give preference to the correspondents of their bank affiliates 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 the Investment Adviser
and, in the case of the International Discovery Fund, Gulfstream, 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, also 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 Investment Adviser and Subadviser will
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
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The International Discovery Fund invests primarily in the securities of
foreign issuers. The Small Capitalization Fund and Mid Capitalization Fund may
also invest in foreign securities as permitted by their respective investment
policies. The Bond Fund may 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.
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 United States. 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 United States. 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
record keeping 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 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
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<PAGE> 17
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.
The conversion of the eleven member states of the European Union to a
common currency, the "euro", is scheduled to occur on January 1, 1999. As a
result of the conversion, securities issued by the member states will be subject
to certain risks, including competitive implications of increased price
transparency of European Union markets (including labor markets) resulting from
adoption of a common currency and issuers' plans for pricing their own products
and services in euro; issuers' ability to make any required information
technology updates on a timely basis, and costs associated with the conversion
(including costs of dual currency operations through January 1, 2020); currency
exchange rate risk and derivatives exposure (including the disappearance of
price sources, such as certain interest rate indices); continuity of material
contracts; and potential tax consequences. Other risks include whether the
payment and operational systems of banks and other financial institutions will
be ready by the scheduled launch date; the creation of suitable clearing and
settlement payment systems for the new currency; the legal treatment of certain
outstanding financial contracts after January 1, 1999 that refer to existing
currencies rather than the euro; the establishment and maintenance of exchange
rates for currencies being converted into the euro; the fluctuation of the euro
relative to non-euro currencies during the transition period from January 1,
1999 to December 31, 2000 and beyond; whether the interest rate, tax and labor
regimes of European countries participating in the Fund will converge over time;
and whether the conversion of the currencies of other EU countries such as the
United Kingdom, Denmark and Greece into the euro and the admission of other
non-EU countries such as Poland, Latvia and Lithuania as members of the EU may
have an impact on the euro. These or other factors, including political and
economic risks, could cause market disruptions before or after the introduction
of the euro, and could adversely affect the value of securities and foreign
currencies held by the Funds. Commissions on transactions in foreign securities
may be higher than those for similar transactions on domestic stock markets. In
addition, clearance and settlement procedures may be different in foreign
countries and, in certain markets, such procedures have been unable to keep pace
with the volume of securities transactions, thus making it difficult to conduct
such transactions.
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 of 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, standards which are more uniform and more
exacting than those to which many foreign issuers may be subject. The
International Discovery Fund may also invest in EDRs which are receipts
evidencing an arrangement with a European
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<PAGE> 18
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 categorized as
unsponsored, require the holders to bear most of the costs of such facilities
while issuers of sponsored facilities normally pay more of the costs. 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 with 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 Funds may
invest in debt securities denominated in the ECU, which is a "basket" unit of
currency 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 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 Funds 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
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<PAGE> 19
some or all of that Fund's portfolio securities or other assets denominated in
such foreign currency. Alternatively, when a Fund believes it will increase, 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 tragedy 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 buy 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 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. If forward prices
decline during the period between which a Fund enters 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. If 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 if the value of such currency increases. 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 Discovery Fund does not intend to enter into forward
currency contracts if more than 15% of the value of its total assets would be
committed to such contracts on a regular or continuous basis. The International
Discovery Fund does not intend to enter into forward currency contracts or to
maintain a net exposure in such contracts where the International Discovery Fund
would be obligated to deliver an amount of foreign currency in excess of the
value of the International Discovery Fund's portfolio securities or other assets
denominated in that currency.
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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 Funds 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 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.
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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 for public
investment, which differ only in their interest rates, maturities, and times of
issuance. Stripped Treasury Obligations are also permissible investments.
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.
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 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 U.S. government-sponsored agencies or
instrumentalities, such as FNMA, SLMA, or the FHLMC, since it is not obligated
to do so by law. 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 the
Investment Adviser 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 guaranteed interest to the deposit
fund on a monthly basis. 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 expenses 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 a
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. For the
Bond Fund, no more than 15% of its total assets will be invested in instruments
which are considered to be illiquid. 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.
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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 as determined by the
Investment Adviser. 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, the
Investment Adviser 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
Each of the Funds, except the International Discovery 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 non-governmental entities which are rated, at the time of
purchase, within the three highest bond rating groups assigned by an NRSRO or,
if unrated, which the Investment Adviser deems to present attractive
opportunities and are of comparable quality.
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 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-through 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.
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<PAGE> 23
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
security's 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.
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
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<PAGE> 24
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.
CMOs are issued in multiple classes. Each class of CMOs, often referred
to as a "tranche," is issued at a specific adjustable or fixed interest rate and
must be fully retired no later than its final distribution date. Principal
prepayments on the mortgage loans or the mortgage assets underlying the CMOs may
cause some or all of the classes of CMOs to be retired substantially earlier
than their final distribution dates. Generally, interest is paid or accrues on
all classes of CMOs on a monthly basis.
The principal of and interest on the mortgage assets may be allocated
among the several classes of CMOs in various ways. In certain structures (known
as "sequential pay" CMOs), payments of principal, including any principal
prepayments, on the mortgage assets generally are applied to the classes of CMOs
in the order of their respective final distribution dates. Thus, no payment of
principal will be made on any class of sequential pay CMOs until all other
classes having an earlier final distribution date have been paid in full.
Additional structures of CMOs include, among others, "parallel pay"
CMOs. Parallel pay CMOs are those which are structured to apply principal
payments and prepayments of the mortgage assets to two or more classes
concurrently on a proportionate or disproportionate basis. These simultaneous
payments are taken into account in calculating the final distribution date of
each class.
MUNICIPAL SECURITIES
The two principal classifications of municipal securities which may be
held by the Bond 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 special excise tax or other specific revenue source such as the user of the
facility being financed.
The Bond 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 groups assigned by an
NRSRO or in the highest rating group assigned by an NRSRO in the case of notes,
tax-exempt commercial paper or variable rate demand obligations. The Fund may
also purchase municipal securities which are unrated at the time of purchase but
are determined to be of comparable quality by the Investment Adviser pursuant to
guidelines approved by the Trust's Board of Trustees. The applicable municipal
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<PAGE> 25
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 group 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
nor the Investment Adviser will review the proceedings relating to the issuance
of municipal securities or the basis for such opinions.
OTHER MUTUAL FUNDS
Each of the 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 a
Parkstone affiliated money market fund), provided that no more than 10% of a
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 a Parkstone affiliated money market 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 charge their fees to one of the Trust's Funds, rather than the
affiliated money market 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 affiliated or unaffiliated mutual funds are
contained in the Statement of Additional Information.
PUT AND CALL OPTIONS
Each of the Funds 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 the
Funds may also engage in writing call options from time to time as the
Investment Adviser or Gulfstream, as the case may be, 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 portfolio security or currency subject to a call option is sold, the Fund
will effect a closing purchase transaction to close out an 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 option holder, the Fund will forego the
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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 such options
to exceed 50% of its net assets, and with respect to the International Discovery
Fund, 20% of its net assets.
Each of the Small Capitalization Fund, Mid Capitalization Fund and
International Discovery 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 the Investment Adviser or
Gulfstream, 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 Investment Company Act of 1940 ("the 1940 Act"). For further information
about repurchase agreements, see "INVESTMENT OBJECTIVES AND POLICIES -
Additional Information on Portfolio Instruments-Repurchase Agreements and Dollar
Roll 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, the Investment Adviser
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.
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.
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 reverse
repurchase 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 repurchase
agreement or dollar roll agreement. A Fund generally will invest the
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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 their investment objectives 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.
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 ability of
the Investment Adviser or the Subadviser, as the case may be, 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.
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 the Investment Adviser 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, such
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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 the Investment Adviser or
the Subadviser, as the case may be, has determined are creditworthy under
guidelines established by the Trust's Board of Trustees.
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 SEC requires that the
calculation exclude all securities whose remaining maturities at the time of
acquisition are one year or less. For portfolio turnover rates for each of the
other Funds, see "FINANCIAL HIGHLIGHTS" above.
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 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.
YEAR 2000 RISK
Like other investment companies, and financial and business
organizations and individuals around the world, the Funds could be adversely
affected if the computer systems used by the Investment Adviser and the Funds',
other service providers do not properly process and calculate date-related
information and data from and after January 1, 2000. This is commonly known as
"Year 2000 Problem." The Investment Adviser is taking steps that it believes are
reasonably designed to address Year 2000 Problem with respect to the computer
systems that it uses and to obtain assurance that comparable steps are being
taken by the Funds' other major service providers. At this time however, there
can be no assurance, that these steps will be sufficient to avoid any adverse
impact on the Funds or their shareholders as a result of the Year 2000 Problem.
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 any securities which would cause 25% or more of the value of its
total assets at the time of purchase to be invested in the securities of one or
more issuers conducting their principal business activities in the same
industry, provided that:
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(a) there is no limitation with respect to obligations issued
or guaranteed by the U.S. government, any state, territory or
possession of the United States, the District of Columbia or any of
their authorities, agencies, instrumentalities or political
subdivisions, and repurchase agreements secured by such instruments;
(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 the parents;
(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; and
(d) personal credit and business credit businesses will be
considered separate industries.
2. Purchase securities of any one issuer, other than securities 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
any class of securities of the issuer or more than 10% of the outstanding voting
securities of the issuer, except that up to 25% of the value of the Fund's total
assets may be invested without regard to such limitations.
3. Make loans, except that a Fund may purchase and hold debt instruments and
enter into repurchase agreements in accordance with its investment objective and
policies and may lend portfolio securities in an amount not exceeding one-third
of its total assets.
4. Borrow money, issue senior securities or mortgage, pledge or hypothecate its
assets except to the extent permitted under the 1940 Act.
For purposes of the above investment limitations, the Funds treat all
supranational organizations as a single industry and each foreign government
(and all of its agencies) as a separate industry. In addition, a security is
considered to be issued by the government entity (or entities) whose assets and
revenues back the security.
Except for the Funds' policy on illiquid securities, if a percentage
limitation is satisfied at the time of investment, a later increase or decrease
in such percentage resulting from a change in the value of a Fund's portfolio
securities will not constitute a violation of such limitation for purposes of
the 1940 Act.
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.
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MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES
The business and affairs of the Trust are managed under the direction
of its Board of Trustees. The trustees of the Trust, their addresses, principal
occupations during the past five years, other affiliations, and the compensation
paid by the Trust and the fees and reimbursed expenses they receive in
connection with each meeting of the Board of Trustees they attend are included
in the Statement of Additional Information.
The Trusts will be managed by the Trustees in accordance with the laws
of the Commonwealth of Massachusetts governing business trusts. There are
currently eight Trustees, six of whom are not "interested persons" of the Trust
within the meaning of that term under the 1940 Act. The Trustees, in turn, elect
the officers of the Trust to supervise actively its day to day operations.
The names, addresses and principal occupations during the past five
years of the Trustees are set forth in the Statement of Additional Information.
The Trustees of the Trust receive quarterly fees and fees and expenses for each
meeting of the Board of Trustees attended. However, no officer or employee of
BISYS, BISYS Ohio, or National City Corporation ("NCC," the successor to First
of America Bank Corporation) receives any compensation from the Trust for acting
as a Trustee of the Trust. The officers of the Trust receive no compensation
directly from the Trust for performing the duties of their offices. BISYS
receives fees from the Trust for acting as Administrator. BISYS Ohio, an
affiliate of BISYS, receives fees from the Trust for acting as Transfer Agent
and for providing certain fund accounting services.
INVESTMENT ADVISER AND SUBADVISER
IMC, formerly named First of America Investment Corporation ("First of
America"), 1900 East Ninth Street, Cleveland, Ohio 44114, serves as investment
adviser to the Funds. IMC is a registered investment adviser and an indirect
wholly-owned subsidiary of NCC. Prior to such time, the investment adviser of
the Funds was an indirect wholly-owned subsidiary of First of America Bank
Corporation ("FOA"). As of December 31, 1997, First of America Investment
Corporation managed over $16 billion on behalf of both taxable and tax-exempt
clients, including pensions, endowments, corporations and individual portfolios.
As of December 31, 1997 NCC had over $55 billion in assets. As a result of the
NCC and FOA merger, National City Corporation had assets of over $81 billion as
of June 30, 1998.
IMC reflects a combination of National City Bank's investment
management group and First of America. In connection with this combination,
various portfolio management changes were made.
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Subject to such policies as the Trust's Board of Trustees may
determine, the Investment Adviser, either directly or, with respect to the
International Discovery Fund, through Gulfstream, furnishes a continuous
investment program for each Fund and makes investment decisions on behalf of
each Fund.
IMC utilizes a team approach to the investment management of the funds,
with professionals working as a team to ensure a disciplined investment process
designed to result in long-term performance consistent with each Fund's
investment objective. No one person is responsible for a Fund's management.
IMC has established investment management teams by market segment:
equities and fixed income instruments. Within the equities segment, teams have
been formed based on style - growth or value - and market capitalization.
The Small Capitalization Growth Team manages the Small Capitalization
Fund. The Mid Capitalization Growth Team manages the Mid Capitalization Fund.
The Small Capitalization Team and the Mid Capitalization Team are part of the
Equity Growth Group. The Fixed Income Team manages the Bond Fund.
For the services provided and expenses assumed pursuant to its
Investment Advisory Agreement with the Trust, the Investment Adviser receives a
fee from each of the Small Capitalization Fund and Mid Capitalization Fund,
computed daily and paid monthly, at the annual rate of 1.00% of that Fund's
average daily net assets. For the services in connection with the International
Discovery Fund, the Investment Adviser's fee is computed daily and paid monthly,
at the annual rate of 1.25% of the first $50 million of the International
Discovery Fund's average daily net assets, 1.20% of average daily net assets
between $50 million and $100 million, 1.15% of average daily net assets between
$100 million and $400 million and 1.05% of average daily net assets above $400
million. For its services in connection with the Bond Fund, the Investment
Adviser's fee is computed daily and paid monthly, at the annual rate of 0.74% of
that Fund's average daily net assets. The Investment Adviser 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 yield of that Fund to be higher than
it would otherwise be in the absence of such a reduction.
Pursuant to the terms of its Investment Advisory Agreement with the
Trust, the Investment Adviser has entered into a Sub-Investment Advisory
Agreement with Gulfstream, 100 Crescent Court, Suite 550, Dallas, Texas 75201.
Pursuant to the terms of such Sub-Investment Advisory Agreement, Gulfstream has
been retained by the Investment Adviser to
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manage the investment and reinvestment of the assets of the International
Discovery Fund, subject to the direction and control of the Trust's Board of
Trustees.
Under this arrangement, Gulfstream is responsible for day-to-day
management of the International Discovery Fund's assets, reviewing investment
performance policies and guidelines and maintaining certain books and records,
and the Investment Adviser is responsible for selecting and monitoring the
performance of Gulfstream and for reporting the activities of Gulfstream in
managing the International Discovery Fund to the Trust's Board of Trustees. The
Investment Adviser may also render advice with respect to the International
Discovery Fund's investments in the United States. Gulfstream utilizes a team
approach to the investment management of the International Discovery 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.
For its services provided and expenses assumed pursuant to its
Sub-Investment Advisory Agreement with the Investment Adviser, Gulfstream
receives from the Investment Adviser a fee, computed daily and paid monthly, at
the annual rate of 0.50% of the first $50 million of the International Discovery
Fund's average daily net assets which are invested in foreign securities, 0.45%
of such average daily net assets between $50 million and $100 million, 0.40% of
such average daily net assets between $100 million and $400 million and 0.30% 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 of Gulfstream, holding
a 72% interest. As of May 31, 1998, Gulfstream had over $876 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 over 20 years of investment
experience and 10 years of international investment experience.
Under Gulfstream's partnership agreement, First of America possesses
veto authority over the general budgetary affairs of Gulfstream. Because of its
current 72% ownership interest, First of America may or may not be deemed to
control Gulfstream for purposes of the 1940 Act.
For further information regarding the relationship between Gulfstream
and the Investment Adviser, see "MANAGEMENT OF THE TRUST - Investment Adviser"
in the Statement of Additional Information.
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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
BISYS, 3435 Stelzer Road, Columbus, Ohio 43219, serves as administrator
to the Trust (the "Administrator").
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 0.20% 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.
DISTRIBUTOR
Shares of each Fund are sold on a continuous basis by the Trust's
distributor. BISYS also serves as the Trust's distributor (the "Distributor").
TRANSFER AGENT AND FUND ACCOUNTANT
BISYS (formerly BISYS Fund Services Ohio, Inc.) also serves as the
transfer agent for all Funds of the Trust (the "Transfer Agent"). In addition to
serving as transfer agent, the Transfer Agent also provides certain fund
accounting services to the Trust. The Transfer Agent receives an annual fee for
its transfer agency services equal to $15,000 per Fund. The Transfer
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Agent also receives an annual fee for its fund accounting services equal to
$10,000 per Fund. Each of the Small Capitalization Fund, Mid Capitalization Fund
and Bond Fund pays an additional annual fee of 0.022% of its average daily net
assets and the International Discovery Fund pays an additional annual fee of
0.035% of its average daily net assets.
CUSTODIAN
National City Bank, an affiliate of IMC, and Union Bank of California
serve as custodians of the Funds' assets. Services performed by National City
Bank and Union 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 four series: Small Capitalization Fund; Mid Capitalization Fund; Bond
Fund; and International Discovery Fund. 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, except 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. All of the outstanding Shares of each Fund are held of record by
Security Benefit Life Insurance Company.
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
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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 (the "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 redemption 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.
The Funds do not assess any fees 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. Shares of the Funds,
however, 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 pursuant to an exemptive order from the SEC.
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.
-31-
<PAGE> 37
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. The Investment Adviser 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.
ANNUAL FUND EXPENSES AFTER EXPENSE LIMITATION
(as a percentage of average daily net assets)
<TABLE>
<CAPTION>
SMALL MID INTERNATIONAL
CAPITALIZATION CAPITALIZATION BOND DISCOVERY
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
Management Fees..................... 1.00% 1.00% 0.74% 1.25%
Administration Fees................. 0.20% 0.20% 0.20% 0.20%
Other Expenses After Voluntary
Fee Reduction*...................... 0.35% 0.33% 0.42% 0.45%
----- ----- ----- -----
Total Fund Operating Expenses....... 1.55% l.53% 1.36% 1.90%
===== ===== ===== =====
</TABLE>
* Currently, no fees are being voluntarily waived.
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, the Investment Adviser,
the Subadviser and BISYS 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 the
Investment Adviser, the Subadviser, BISYS 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 BISYS or
IMC); 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.
-32-
<PAGE> 38
HOW SHARES ARE VALUED
The net asset value of shares of the Funds is determined and their
shares are priced as of the close of trading on the NYSE on each Business Day
(generally 4:00 p.m. Eastern Time) ("Valuation Time"). With respect to the Small
Capitalization, Mid Capitalization and International Discovery Funds, if a sale
is not reported for that day, shares are valued at the mean between the most
recent quoted bid and asked prices. Unlisted securities and securities traded on
a national securities market for which market quotations are readily available
are valued at the mean between the most recent bid and asked prices. With
respect to the Bond Fund, other securities, and temporary cash investments
acquired more than 60 days from maturity, are valued at the mean between quoted
bid and asked prices. A "Business Day" is a day on which the NYSE is open for
trading and any other day other than a day on which no shares are tendered for
redemption and no order to purchase any shares is received. Currently, the NYSE
will not open in observance of the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
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.
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 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" (a
"RIC") under the Internal Revenue Code of 1986, as amended (the "Code"). Such
qualification generally will relieve the Funds of liability for federal income
taxes to the extent their earnings are distributed in accordance with the Code.
However, taxes may be imposed on the Funds, particularly the International
Discovery Fund, by foreign countries with respect to income received on foreign
securities.
To qualify as a RIC, 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 RICs, 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 accounts holding
shares of the Fund would be taxable as ordinary income of the extent to the
Fund's current and accumulated
-33-
<PAGE> 39
earnings and profits. A failure of a Fund to qualify as a RIC also could result
in the loss of the tax-favored status of variable annuity contracts 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 RIC 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
Funds intend to meet these ownership conditions and to comply with the
diversification tests noted above. Accordingly, a segregated asset account
investing solely in shares of a Fund will be adequately diversified. However,
the failure of a Fund to meet such conditions and to comply with such tests
could cause the owners of variable annuity contracts and variable life insurance
policies based on such account to recognize ordinary income each year in the
amount of any net appreciation of such contract or policy during the year.
Provided that a Fund and a segregated asset account investing in the
Fund satisfy the above requirements, any distributions from the Fund to such
account will be exempt from current federal income taxation to the extent that
such distributions accumulate in a variable annuity contract or variable life
insurance policy.
Persons investing in a variable annuity contract or variable life
insurance policy offered by a segregated asset account investing in a Fund
should refer to the Prospectus with respect to such contract or policy 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. Each prospective investor
should consult his own tax adviser as to the tax consequences of investments in
the Funds.
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
-34-
<PAGE> 40
investment income per share earned during a recent one-month period by that
Fund's 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 Funds may present their respective
distribution rates in shareholder reports and 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 twelve-month period by the maximum offering price per share. The calculation
of income in the distribution rate includes both income and capital gains
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 includes 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 published by various services, 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, sales literature and 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, levels of operation expenses and changes in
market conditions. Consequently, total return and yield will fluctuate and are
not necessarily representative of future results. Any fees charged by IMC 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
the Investment Adviser or BISYS 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.
-35-
<PAGE> 41
MISCELLANEOUS
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. 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.
Pursuant to Rule 17f-2, since IMC and National City Bank serve as the
Group's Investment Adviser and Custodian, respectively, a procedure has been
established requiring three annual verifications, two of which are to be
unannounced, of all investments held pursuant to the Custodian Services
Agreement, to be conducted by the Group's independent auditors.
The portfolio managers of the Funds and other investment professionals
may from time to time discuss in advertising, sales literature or other
material, including periodic publications, various topics of interest to
shareholders and prospective investors. The topics may include, but are not
limited to, the advantages and disadvantages of investing in tax-deferred and
taxable investments; Fund performance and how such performance may compare to
various market indices; shareholder profiles and hypothetical investor
scenarios; the economy; the financial and capital markets; investment strategies
and techniques; investment products and tax, retirement and investment planning.
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
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST.
-36-
<PAGE> 42
THE PARKSTONE ADVANTAGE FUND
FORM N-lA
CROSS-REFERENCE SHEET
PART B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
ITEM NO. RULE 404(a) CROSS REFERENCE
- -------- ---------------------------
<S> <C> <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 Management of the Trust
Securities
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
l8. Capital Stock and Other Securities Additional Information-Description of Shares
19. Purchase, Redemption and Pricing of Net Asset Value; Additional Purchase and Redemption
Securities Being Offered Information; Additional Information-Description of Shares
20. Tax Status Additional Tax Information; Additional Tax Information
Concerning the International Discovery Fund
21. Underwriters Portfolio Transactions
22. Calculation of Performance Date Yields of the Funds; Calculation of Total Return
23. Financial Statements Financial Statements
</TABLE>
B-1
<PAGE> 43
SMALL CAPITALIZATION FUND
MID CAPITALIZATION FUND
BOND FUND
INTERNATIONAL DISCOVERY FUND
Each an Investment Portfolio of
THE PARKSTONE ADVANTAGE FUND
Statement of Additional Information
September 16, 1998
This Statement of Additional Information is not a Prospectus, but
should be read in conjunction with the Prospectus for The Parkstone Advantage
Fund dated September 16, 1998, which may be supplemented from time to time. This
Statement of Additional Information is incorporated by reference in its entirety
into the Prospectus. Copies of the Prospectus may be obtained by writing The
Parkstone Advantage Fund at 3435 Stelzer Road, Columbus, Ohio 43219, or by
calling toll free (800) 451-8377.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES.........................................................B-4
Additional Information on Portfolio Instruments...................................B-4
Investment Restrictions..........................................................B-16
Portfolio Turnover...............................................................B-18
NET ASSET VALUE...........................................................................B-18
Valuation of the Funds...........................................................B-19
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION............................................B-19
MANAGEMENT OF THE TRUST...................................................................B-19
Trustees and Officers............................................................B-19
Investment Adviser and Subadviser................................................B-24
Portfolio Transactions...........................................................B-27
Authority to Act as Investment Adviser...........................................B-29
Glass-Steagall Act...............................................................B-30
Administrator....................................................................B-31
Expenses.........................................................................B-32
</TABLE>
B-2
<PAGE> 44
<TABLE>
<S> <C>
Distributor......................................................................B-33
Custodian, Transfer Agent and Fund Accounting Services...........................B-33
Independent Auditors.............................................................B-34
ADDITIONAL INFORMATION....................................................................B-34
Description of Shares............................................................B-34
Vote of a Majority of the Outstanding Shares.....................................B-36
Shareholder and Trustee Liability................................................B-36
Additional Tax Information.......................................................B-37
Additional Tax Information Concerning the International Discovery Fund...........B-37
Yields of the Funds..............................................................B-38
Calculation of Total Return......................................................B-38
Performance Comparisons..........................................................B-39
Miscellaneous....................................................................B-40
Financial Statements.............................................................B-41
APPENDIX...................................................................................A-1
</TABLE>
B-3
<PAGE> 45
STATEMENT OF ADDITIONAL INFORMATION
THE PARKSTONE ADVANTAGE FUND
The Parkstone Advantage Fund (the "Trust") is an open-end management
company which offers four separate and diversified investment portfolios
(collectively, the "Funds" and each individually, a "Fund"), 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 (the "Participating Insurance Companies"). Shares of
the Trust are not offered to the general public but solely to such separate
accounts (the "Separate Accounts").
The Trust offers four variable net asset value funds: the Small
Capitalization Fund, the Mid Capitalization Fund (formerly, the Equity Fund),
the Bond Fund and the International Discovery Fund. Until March 6, 1998, the
Trust also offered a money market fund, the Prime Obligations Fund, which is no
longer available. The Small Capitalization Fund seeks 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 Mid
Capitalization Fund seeks growth of capital by investing primarily in a
diversified portfolio of common stocks and securities convertible into common
stocks. The Bond Fund seeks current income as well as preservation of capital by
investing in a portfolio of high- and medium-grade fixed-income securities. The
International Discovery 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 Trust
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 Trust'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 Small Capitalization Fund, Mid Capitalization Fund and Bond
Fund may invest in bank obligations consisting of bankers' acceptances,
certificates of deposit and time deposits.
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.
B-4
<PAGE> 46
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 (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 (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 Corporation.
Each of the Small Capitalization Fund, Mid Capitalization Fund and Bond
Fund may also invest in Eurodollar certificates of deposit ("Euro CDs"), 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.
The Small Capitalization Fund, Mid Capitalization Fund and Bond Fund
may invest in commercial paper rated in any rating category or not rated by
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 each NRSRO, see the Appendix. The Small Capitalization Fund,
Mid Capitalization Fund, International Discovery Fund and Bond Fund may also
invest in Canadian commercial paper, which is commercial paper issued by a
Canadian corporation or counterpart of a U.S. corporation and Europaper.
Variable Amount Master Demand Notes
Variable amount master demand notes in which the Small Capitalization
Fund, Mid Capitalization Fund and Bond Fund 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 a 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
B-5
<PAGE> 47
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. The Investment Adviser 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 Discovery Fund may
from time to time temporarily hold funds in bank deposits in foreign currencies,
the International Discovery 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. bond market 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 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
B-6
<PAGE> 48
as growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position.
The conversion of the eleven member states of the European Union to a
common currency, the "euro," is scheduled to occur on January 1, 1999. As a
result of the conversion, securities issued by the member states will be subject
to certain risks, including competitive implications of increased price
transparency of European Union markets (including labor markets) resulting from
adoption of a common currency and issuers' plans for pricing their own products
and services in euro; an issuer's ability to make any required information
technology updates on a timely basis, and costs associated with the conversion
(including costs of dual currency operations through January 1, 2002); currency
exchange rate risk and derivatives exposure (including the disappearance of
price sources, such as certain interest rate induces); continuity of material
contracts and potential tax consequences. Other risks include whether the
payment and operational systems of banks and other financial institutions will
be ready by the scheduled launch date; the creation of suitable clearing and
settlement payment systems for the new currency; the legal treatment of certain
outstanding financial contracts after January 1, 1999 that refer to existing
currencies rather than the euro; the establishment and maintenance of exchange
rates for currencies being converted into the euro; the fluctuation of the euro
relative to non-euro currencies during the transition period from January 1,
1999 to December 31, 2000 and beyond; whether the interest rate, tax and labor
regimes of European countries participating in the Fund will converge over time;
and whether the conversion of the currencies of other EU countries such as the
United Kingdom, Denmark and Greece into the euro and the admission of other
non-EU countries such as Poland, Latvia and Lithuania as members of the EU may
have an impact on the euro. These or other factors, including political and
economic risks, could cause market disruptions before or after the introduction
of the euro, and could adversely affect the value of securities and foreign
currencies held by the Funds. Commissions on transactions in foreign securities
may be higher than those for similar transactions on domestic stock markets. In
addition, clearance and settlement procedures may be different in foreign
countries and, in certain markets, such procedures have been unable to keep pace
with the volume of securities transactions, thus making it difficult to conduct
such transactions.
Each of the Small Capitalization Fund, Mid Capitalization Fund and Bond
Fund will acquire foreign securities only when the Investment Adviser or
Gulfstream Global Investors, Ltd. ("Gulfstream" or the "Subadviser"), the
subadviser of the International Discovery Fund, believes that the risks
associated with such investments are minimal.
Money Market Mutual Funds
Each of the 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 a
Parkstone affiliated money market fund), provided that no more than 10% of a
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 Funds in shares of a Parkstone affiliated money
market 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 charge their
fees to the Funds, rather than the Parkstone affiliated money market fund. Each
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.
The 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 Parkstone affiliated money market funds. The Funds
will vote their shares of each of the Parkstone affiliated money market funds in
proportion to the vote by all other shareholders of those funds. Moreover, no
single Fund may own more than 3% of the outstanding shares of any Parkstone
affiliated money market 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 Internal Revenue Code of 1986, as
amended (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
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within the term Municipal Securities if the interest paid thereon is exempt from
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 its
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. The
Investment Adviser 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 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.
Government Obligations
Each of the Funds may invest in obligations issued or guaranteed by the
U.S. government or its agencies or instrumentalities, including bills, notes and
bonds issued by the U.S. Treasury, as well as "stripped" U.S. Treasury
obligations ("Stripped 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.
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.
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Options Trading
Each of the Funds 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 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 Small Capitalization Fund, Mid Capitalization Fund and
International Discovery 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
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 a Fund agrees to purchase securities on a
"when-issued" or "delayed-delivery" basis, a 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, a 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 a Fund's commitment. It may
be expected that a 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 a Fund will set aside cash or liquid
securities to satisfy its purchase commitments in the manner described above, a
Fund's liquidity and the ability of the Investment
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Adviser or the Subadviser, as the case may be, 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 a 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.
Mortgage-Related Securities
Each of the Funds, except the International Discovery Fund, may,
consistent with its investment objective and policies, invest in
mortgage-related securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities. The Bond Fund may, in addition, invest in
mortgage-related securities issued by non-governmental entities, including
collateralized mortgage obligations structured on pools of mortgage pass-through
certificates or mortgage loans, subject to the rating limitations described in
the Prospectus.
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 are 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
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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.
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 Securities
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 the Investment Adviser ("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
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changes in interest rates. The value and liquidity of Medium-Grade Securities
may be diminished by adverse publicity and investor perceptions.
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 a 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 a 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 a 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, the Investment Adviser
conducts its own independent credit analysis of Medium-Grade Securities.
Restricted Securities
Each of the Funds may invest in Section 4(2) 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"). A Fund
will not purchase Section 4(2) securities which have not been determined to be
liquid in excess of 15% of the total assets of that Fund. The Trust's Board of
Trustees has delegated to the Investment Adviser 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.
The Investment Adviser 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 a Fund has valued the security. In making such
determination, the Investment Adviser 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 the Investment Adviser 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 a 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 broker-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 may decline below the price at which a Fund is obligated to repurchase
the securities. Reverse
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repurchase agreements and dollar roll agreements are considered to be borrowings
by a Fund under the 1940 Act.
Futures Contracts
Each of the Funds 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 any time 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
Each of the Funds may invest in 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 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 amount of foreign
currency in excess of the value of such Fund's securities or other assets
denominated in that currency. The Investment Adviser and the Subadviser believe
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
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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
Each of the Funds may invest in 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
Each of the Funds may invest in 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 it may achieve 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.
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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 underling 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 the Investment Adviser 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 the Investment Adviser or the Subadviser has determined are creditworthy
under guidelines established by the Trust's Board of Trustees.
Investment Restrictions
Each Fund's investment objective may 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 majority of the outstanding
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shares of that Fund (as defined under "ADDITIONAL INFORMATION - Vote of a
Majority of the Outstanding Shares" in this Statement of Additional
Information).
No Fund may:
1. Act as an underwriter of securities within the meaning of the
Securities Act of 1933 except insofar as it might be deemed to be an underwriter
upon the disposition of portfolio securities acquired within the limitation on
purchases of illiquid securities and except to the extent that the purchase of
obligations directly from the issuer thereof in accordance with its investment
objective, policies and limitations may be deemed to be underwriting;
2. Invest in commodities, except that as consistent with its investment
objective and policies the Fund may: (a) purchase and sell options, forward
contracts, futures contracts, including without limitation those relating to
indices; (b) purchase and sell options on futures contracts or indices; and (c)
purchase publicly traded securities of companies engaging in whole or in part in
such activities. For the purposes of this investment limitation, "commodities"
includes commodity contracts.
3. Purchase or sell real estate, except that it may purchase securities
of issuers which deal in real estate and may purchase securities which are
secured by interests in real estate;
In addition, the Funds are subject to the following non-fundamental
limitations, which may be changed without the vote of shareholders.
No Fund may:
1. Acquire any other investment company or investment company security
except n connection with a merger, consolidation, reorganization or acquisition
of assets or where otherwise permitted under the 1940 Act.
2. Write or sell put options, call options, straddles, spreads, or any
combination thereof, except, as consistent with the Fund's investment objective
and policies for transactions in options on securities or indices of securities,
future contracts and options on futures contracts and in similar investments.
3. Purchase securities on margin, make short sales of securities or
maintain a short position, except that, as consistent with a Fund's investment
objective and policies, (a) this investment limitation shall not apply to the
Fund's transactions in futures contracts and related options, options on
securities or indices of securities and similar instruments, and (b) it may
obtain short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities.
4. Purchase securities of companies for the purpose of exercising
control.
5. Invest more than 15% of its net assets in illiquid securities.
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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 SEC requires that
the calculation exclude all securities whose maturities at the time of
acquisition are one year or less.
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. The decrease in
portfolio turnover for the Mid Capitalization Fund for the year ended December
31, 1997 represented a return to the expected range for that Fund following the
previous year's adjustment of investment strategy. The decrease in portfolio
turnover rate for the Bond Fund for the same period was primarily due to the
decrease in volatility of fixed income securities market versus 1996. The
decrease in portfolio turnover for the International Discovery Fund, which was
lower than the expected range between 50% and 75%, resulted from the fact that
country allocation for the Fund remained relatively stable throughout the year
and performance of most of the companies held in the portfolio met the
Subadviser's expectations.
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
any other day other than a day on which no shares of the Fund are tendered for
redemption and no order to purchase any shares is received. Currently, the
B-18
<PAGE> 60
NYSE will not be open in observance of the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Valuation of the 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 Trust's
distributor BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services
(the "Distributor" or "BISYS"). 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 during a period when: (a) trading on the NYSE is restricted
by applicable rules and regulations of the SEC; (b) the NYSE is closed for other
than customary weekend and holiday closings; (c) the SEC has by order permitted
such suspensions; or (d) an emergency exists as a result of which: (i) disposal
by the Trust of securities owned by it is not reasonably practicable, or (ii) it
is not reasonably practicable for the Trust to determine the fair market value
of its net assets.
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 to supervise actively its day-to-day
operations. One officer of the Trust, Herbert R. Martens, Jr., also serves as a
Trustee.
B-19
<PAGE> 61
The Trustees of the Trust, their addresses and their principal
occupations during the past 5 years are as follows:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST -- AND OTHER AFFILIATIONS
- ---------------- -------------- -------------------------
<S> <C> <C>
Robert D. Neary Chairman of the Board and Trustee Retired Co-Chairman of Ernst & Young, April
32980 Creekside Drive 1984 to September 1993; Director, Cold Metal
Pepper Pike, OH 44124 Products, Inc., since March 1994; Director,
Age 64 Zurn Industries, Inc. (building products and
construction services), June 1995 to June
1998.
Herbert R. Martens, Jr.* President and Trustee Executive Vice President, National City
C/o NatCity Investments, Inc. Corporation (bank holding company), since
1965 East Sixth Street July 1997; Chairman, President and Chief
Cleveland, OH 44114 Executive Officer, NatCity Investments, Inc.,
Age 46 since July 1995 (investment banking);
President and Chief Executive Officer,
Raffensberger, Hughes & Co. from 1993 until
1995 (broker-dealer); President, Reserve
Capital Group, from 1990 until 1993.
Leigh Carter* Trustee Retired President and Chief Operating
13901 Shaker Blvd., #6B Officer, B.F. Goodrich Company, August 1986
Cleveland, OH 44120 to September 1990; Director, Adams Express
Age 73 Company (closed-end investment company),
April 1982 to December 1997; Director,
Acromed Corporation; (producer of spinal
implants), June 1992 to March 1998; Director,
Petroleum & Resources Corp., April 1987 to
December 1997; Director, Morrison Products
(manufacturer of blower fans and air moving
equipment), since April 1983; Director,
Kirtland Capital Corp. (privately funded
investment group), since January 1992.
</TABLE>
B-20
<PAGE> 62
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST -- AND OTHER AFFILIATIONS
- ---------------- -------------- -------------------------
<S> <C> <C>
John F. Durkott Trustee President and Chief Operating Officer,
8600 Allisonville Road Kittle's Home Furnishings Center, Inc., since
Indianapolis, IN 46250 January 1982; partner, Kittles Bloomington
Age 54 Property Company, since January 1981;
partner, KK&D (Affiliated Real Estate
Companies of Kittle's Home Furnishings
Center), since January 1989.
Robert J. Farling Trustee Retired Chairman, President and Chief
1608 Balmoral Way Executive Officer, Centerior Energy (electric
Westlake, OH 44145 utility), March 1992 to October 1997;
Age 61 Director, National City Bank until October
1997; Director, Republic Engineered Steels,
since October 1997.
Richard W. Furst, Dean Trustee Professor of Finance and Dean, Carol Martin
600 Autumn Lane Gatton College of Business and Economics,
Lexington, KY 40502 University of Kentucky, since 1981; Director,
Age 60 The Seed Corporation (restaurant group),
since 1990; Director; Foam Design, Inc.,
(manufacturer of industrial and commercial
foam products), since 1993.
Gerald L. Gherlein Trustee Executive Vice-President and General Counsel,
3679 Greenwood Drive Eaton Corporation, since 1991 (global
Pepper Pike, OH 44124 manufacturing); Trustee, Meridia Health
Age 60 System (four hospital health system), 1994 to
1998; Trustee, WVIZ Educational Television
(public television).
J. William Pullen Trustee President and Chief Executive Officer, Whayne
Whayne Supply Company Supply Co. (engine and heavy equipment
1400 Cecil Avenue distribution), since 1986; President and
P.O. Box 35900 Chief Executive Officer, American Contractors
Louisville, KY 40232-5900 Rentals & Sales (rental subsidiary of Whayne
Age 59 Supply Co.), since 1988.
- -
*
</TABLE>
*Mr. Carter and Mr. Martens are each an "interested person" of the
Trust, as defined in the 1940 Act.
Mr. Martens is an "interested person" because (1) he is an Executive
Vice President of National City Corporation, (2) he owns shares of common stock
and options to purchase common stock of National City Corporation, and (3) he is
the Chief Executive Officer of NatCity Investments, Inc., a broker-dealer
affiliated with National City Investment Management Company.
B-21
<PAGE> 63
The Trust paid an aggregate of $15,000 in Trustees' fees and expenses
for the fiscal year ended December 31, 1997 to all Trustees of the Trust who
served during that year.
All of the Trustees also serve as Trustees of The Parkstone Group of
Funds, an open-end investment company managed by the Group's Investment Adviser
as an investment vehicle for insurance company separate accounts, and as
Trustees for Armada Funds. The following table depicts, for the fiscal year
ended December 31, 1997, the compensation received by each of the Trustees from
the Trust and in total from all investment companies managed by the Investment
Adviser to the Trust.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Total Compensation
from Trust, The
Pension or Parkstone Group of
Retirement Funds and the Fund
Aggregate Benefits Accrued Estimated Annual Complex (Armada
Compensation as Part of Fund Benefits Upon Funds) Paid to
Name of Trustee from the Trust Expenses Retirement Trustees*
--------------- -------------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Robert D. Neary - 0 - - 0 - - 0 - 22,500
Leigh Carter - 0 - - 0 - - 0 - 20,000
John F. Durkott - 0 - - 0 - - 0 - 20,000
Robert J. Farling - 0 - - 0 - - 0 - 4,375
Richard W. Furst - 0 - - 0 - - 0 - 20,000
Gerald L. Gherlein - 0 - - 0 - - 0 - 11,250
Herbert R. Martens, Jr - 0 - - 0 - - 0 - - 0 -
J. William Pullen - 0 - - 0 - - 0 - 20,000
John B. Rapp -0- -0- -0- -0-
Robert M. Beam 5,000 -0- -0- 26,750
Lawrence D. Bryan 5,000 -0- -0- 22,000
Adrian Charles Edwards 5,000 -0- -0- 26,750
James R. Schmank -0- -0- -0- -0-
Brenda M. Harwood -0- -0- -0- -0-
</TABLE>
Each Trustee who is not an affiliated person of BISYS or National City
Corporation, the ultimate parent of IMC, receives an annual fee of $12,500 plus
$3,000 for each Board meeting attended and reimbursement of expenses incurred in
attending meetings for services as a Trustee to the Fund Complex. The Chairman
of the Board is entitled to receive an additional $5,000 per annum for services
in such capacity. Mr. Martens is an employee of National City Corporation. He
receives no compensation from the Group for acting as Trustee. Messrs. Rapp,
Beam, Bryan, Edwards and Jones served as Trustees until their resignations as
August 14, 1998.
[FN]
*Represents total compensation for the period January 1, 1997 through December
31, 1997.
</FN>
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<PAGE> 64
The officers of the Group, their addresses, and principal occupations during the
past five years are as follows:
<TABLE>
<CAPTION>
Position(s) Held Principal Occupation
Name With the Group During Past 5 Years
- ---- ---------------- -------------------
<S> <C> <C>
Herbert R. Martens, Jr. President Executive Vice President, National City
Corporation (bank holding company), since
July 1997; Chairman, President and Chief
Executive Officer, NatCity Investments, Inc.
(investment banking), since July 1995;
President and Chief Executive Officer,
Raffensperger, Hughes & Co., (broker-dealer),
from 1993 until 1995; President, Reserve
Capital Group, from 1990 until 1993;
President, since July 1997 and Trustee, since
November 1997 of Armada Funds.
W. Bruce McConnel, III Secretary Partner of the law firm
Drinker Biddle & Reath LLP
Philadelphia, Pennsylvania.
Gary Tenkman Assistant Treasurer Director of Financial Services, BISYS Fund
Services since April 1998; formerly, Audit
Manager, Ernst & Young LLP.
</TABLE>
The officers of The Trust receive no compensation directly from the
Trust for performing the duties of their offices. As Administrator, BISYS
receives fees from the Trust. BISYS also receives fees from the Trust for acting
as Transfer Agent and Fund Accountant. Mr. Tenkman, the Assistant Treasurer of
the Trust, is an employee of BISYS and receives no compensation directly from
the Trust for performing the duties of office.
Each Trustee who is not an affiliated person of BISYS or National City
Corporation receives annual compensation and compensation for meeting attendance
from the Trust for his services as a Trustee and is reimbursed for expenses
incurred in attending meetings.
Investment Adviser and Subadviser
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 National City
Investment Management Company ("IMC" or the "Investment Adviser"), 1900 East
Ninth Street, Cleveland, Ohio 44114,
B-26
<PAGE> 65
pursuant to two Investment Advisory Agreements dated as of August 18, 1993 (the
"Investment Advisory Agreements"). The first Investment Advisory Agreement
relates to the management of the Small Capitalization Fund, the Mid
Capitalization Fund and the Bond Fund (the "First Investment Advisory
Agreement"), while the second Investment Advisory Agreement (the "Second
Investment Advisory Agreement") relates to the management of the International
Discovery Fund.
The Investment Adviser is a registered investment adviser and an
indirect wholly-owned subsidiary of National City Corporation ("NCC"), a
publicly-held bank holding company. NCC recently consolidated the asset
management responsibilities of its various bank affiliates including First of
America Bank, N.A. ("FOA"). Prior to such time, the investment adviser of the
Funds was First of America Investment Corporation ("First of America"), a
wholly-owned subsidiary of First of America Bank, N.A.
("FOA").
Under the Investment Advisory Agreements, the Investment Adviser 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 the Investment
Adviser 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: 1.00% for the Small Capitalization Fund and the Mid
Capitalization Fund; 0.74% for the Bond Fund; and, for the International
Discovery Fund, 1.25% of the first $50 million of the International Discovery
Fund's average daily net assets, 1.20% of average daily net assets between $50
million and $100 million, 1.15% of average daily net assets between $100 million
and $400 million, and 1.05% of average daily net assets above $400 million.
While the fees for the Small Capitalization Fund, Mid Capitalization Fund and
International Discovery 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. The Investment Adviser 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.
Pursuant to each of the Investment Advisory Agreements, the Investment
Adviser will pay all expenses, including as applicable, the compensation of any
subadvisers directly appointed by it, incurred by it in connection with its
activities under the Investment Advisory Agreements other than the cost of
securities (including brokerage commissions) if any, purchased for the Trust.
For the fiscal years ended December 31, 1997, 1996 and 1995, First of
America collected and voluntarily reduced the amounts indicated below which were
payable to it with respect to its advisory services to the indicated Funds:
B-27
<PAGE> 66
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
January 1, 1997 to January 1, 1996 to January 1, 1995 to
December 31, 1997 December 31, 1996 December 31, 1995
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>
Small
Capitalization $256,828 $ 0 $189,694 $ 0 $ 99,935 $ 0
- -----------------------------------------------------------------------------------------------------------------------------------
Mid
Capitalization $278,450 $ 0 $200,885 $ 0 $119,192 $ 0
- -----------------------------------------------------------------------------------------------------------------------------------
Bond $ 78,638 $ 0 $ 59,493 $ 0 $ 40,840 $ 0
- -----------------------------------------------------------------------------------------------------------------------------------
International
Discovery $239,144 $ 0 $177,635 $ 0 $129,924 $ 0
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Pursuant to the terms of the Trust's Second Investment Advisory
Agreement, the Investment Adviser may retain a subadviser to manage the
investment and reinvestment of the assets of the International Discovery Fund,
subject to the direction and control of the Trust's Board of Trustees.
Pursuant to a Sub-Investment Advisory Agreement between the Investment
Adviser and Gulfstream, 100 Crescent Court, Suite 550, Dallas, Texas 75201 (the
"Sub-Investment Advisory Agreement"), Gulfstream manages the investment and
reinvestment of the assets of the International Discovery Fund, subject to the
direction and control of the Investment Adviser and the Trust's Board of
Trustees.
Under the Sub-Investment Advisory Agreement, Gulfstream is responsible
for the day-to-day management of the International Discovery Fund. Gulfstream
also has responsibility for reviewing investment performance, policies and
guidelines, and maintaining certain books and records. The Investment Adviser is
responsible for selecting and monitoring the performance of Gulfstream and for
reporting the activities of Gulfstream in managing the International Discovery
Fund to the Trust's Board of Trustees. The Investment Adviser may also render
advice with respect to the International Discovery 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 Discovery Fund.
For its services provided and expenses assumed pursuant to the
Sub-Investment Advisory Agreement, Gulfstream is entitled to receive from the
Investment Adviser a fee, computed daily and paid monthly, at the annual rate of
0.50% of the first $50 million of the International
B-28
<PAGE> 67
Discovery Fund's average daily net assets, 0.45% of net assets between $50
million and $100 million, 0.40% of net assets between $100 million and $400
million and 0.30% of net assets above $400 million, provided the minimum annual
fee shall be $75,000.
Pursuant to the Sub-Investment Advisory Agreement, Gulfstream will pay
all expenses incurred by it in connection with its activities under the
Sub-Investment Advisory Agreement other than the cost of securities (including
brokerage commissions, if any) purchased for the Trust.
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. IMC is the sole limited partner of Gulfstream, holding a 72%
interest. As of May 31, 1998, Gulfstream had over $876 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 over 20 years investment experience and over nine
years of international investment experience. Gulfstream's investment process is
designed to provide long-term growth of capital. 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. The Investment Adviser 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 Discovery Fund.
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 (i) by the Trust's Board of Trustees or by vote of a majority of the
outstanding voting securities of such Fund and (ii) by vote of a majority of the
Trustees who are not parties to the Investment Advisory Agreements, or
interested persons (as defined in the 1940 Act) of any such party, cast in
person at a meeting called for such purpose. Unless sooner terminated, the
Sub-Investment Advisory Agreement continues in effect for successive one-year
periods ending December 31 of each year, 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 Agreement is
terminable as to a particular Fund at any time on 60 days' prior written notice
without penalty by the Trustees, by vote of a majority of outstanding shares of
that Fund, by the Investment Adviser or, in the case of the Sub-Investment
Advisory Agreement, on 150 days' prior written notice from Gulfstream. The
Agreements also terminate automatically in the event of any assignment, as
defined in the 1940 Act.
B-29
<PAGE> 68
The Investment Advisory Agreements and the Sub-Investment Advisory
Agreement provide that neither the Investment Adviser nor Gulfstream 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
suffered by a Fund 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 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
Discovery Fund, pursuant to the Investment Advisory Agreements, the Investment
Adviser 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 Discovery Fund, pursuant to the terms of the Sub-Investment
Advisory Agreement, Gulfstream determines, subject to the general supervision of
the Investment Advisory, the Board of Trustees of the Trust and in accordance
with the International Discovery Fund's investment objective and restrictions,
which securities are to be purchased and sold by the International Discovery
Fund, and which brokers are to be eligible to execute the International
Discovery Fund's portfolio transactions.
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 the Investment Adviser 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 the
Investment Adviser 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 the Investment Adviser or Gulfstream and
does not reduce the fees payable to such advisers by the Trust or the Investment
Adviser, as the case may be. Such information may be useful to the Investment
Adviser or Gulfstream in serving both the Trust and other clients and,
conversely supplemental information
B-30
<PAGE> 69
obtained by the placement of business of other clients may be useful to such
advisers in carrying out their obligations to the Trust.
While the Investment Adviser and Gulfstream generally seek 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, 1997, 1996 and 1995, the Trust paid an aggregate of
approximately $204,067, $155,690 and $60,622, respectively, as brokerage
commissions on behalf of the Funds. See "INVESTMENT OBJECTIVES AND POLICIES -
Portfolio Turnover" above.
The Trust will not acquire portfolio securities issued by, make savings
deposits in, or enter into repurchase or reverse repurchase agreements with NCC,
the Distributor, or their affiliates, and will not give preference to NCC'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 the Investment Adviser. 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 amount in a manner which the Investment Adviser 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, the Investment Adviser 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, the Investment
Adviser will not inquire or take into consideration whether an issuer of
securities proposed for purchase or sale by the Trust is a customer of the
Investment Adviser, its parent or affiliates, and, in dealing with its
customers, the Investment Adviser, its parent and affiliates will not inquire or
take into consideration whether securities of such customers are held by the
Trust.
Each of the Funds held from time to time during the fiscal year ended
December 31, 1997, securities of its regular brokers or dealers defined in Rule
l0b-1 under the 1940 Act, or their parent companies, including those of BA
Securities, Lehman Brothers and Chase Securities. As of December 31, 1997, the
Bond Fund held $248,236 in asset-backed securities of Banc One Auto Grantor
Trust, $88,128 in asset-backed securities of Lehman FHA-Title 1 Loan Trust and
$277,148 in corporate bonds of Chase Capital Trust II.
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
B-31
<PAGE> 70
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.
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.
The Investment Adviser 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,
B-32
<PAGE> 71
as well as further judicial or administrative decisions or interpretations of
present and future statutes and regulations, could prevent or restrict the
Investment Adviser from continuing to perform such services for the Trust.
Depending on the nature of any changes in the services which could be provided
by the Investment Adviser, the Board of Trustees would review the Trust's
relationship with the Investment Adviser and consider taking all action
necessary under the circumstances.
Should future legislative, judicial or administrative action prohibit
or restrict the proposed activities of the Investment Adviser and/or NCC'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
BISYS serves as the administrator (the "Administrator") to the Trust
pursuant to an Administration Agreement dated as of July 1, 1996 (the
"Administration Agreement"). Prior to that time, Security Management Company, an
indirect wholly-owned subsidiary of Security Benefit Life Insurance Company
("Security Benefit"), was the Trust's administrator. The Administrator assists
in supervising all operations of each Fund (other than those performed by the
Investment Adviser under the Investment Advisory Agreements, by Gulfstream under
the Sub-Investment Advisory Agreement, by National City Bank and Union Bank of
California (the "Custodians") under the Custody Agreement and by BISYS 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 stationery 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; and generally assist in all
aspects of the Trust's operations other than those performed by the Investment
Adviser under the Investment Advisory Agreements, by Gulfstream under the
Sub-Investment Advisory Agreement, by the Custodian under the Custody Agreement
and by BISYS 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 0.20% 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
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<PAGE> 72
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 fiscal years ended December 31, 1997, 1996 and 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, 1997 to January 1, 1996 to January 1, 1995 to
December 31, 1997* December 31, 1996* December 31, 1995*
------------------------ ------------------------ ------------------------
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>
Small $51,366 $ 0 $37,603 $ 0 $19,987 $ 0
Capitalization
Mid $55,690 $ 0 $39,847 $ 0 $23,838 $ 0
Capitalization
BOND $21,254 $ 0 $15,952 $ 0 $11,038 $ 0
International $38,263 $ 0 $28,310 $ 0 $20,788
Discovery
</TABLE>
* Administration fees for the fiscal year ended December 31, 1995 were paid to
Security Management. Of the $130,116 in administration fees paid in the fiscal
year ended December 31, 1996, $57,773 were paid to Security Management. The
balance was paid to BISYS.
Unless sooner terminated as provided therein, the Administration
Agreement between the Trust and BISYS will continue in effect until December 31,
1999. The Administration Agreement thereafter shall be renewed for successive
five-year terms ending on December 31 of each five-year period if such
continuance is approved at least annually (i) by the Trust's Board of Trustees
or by vote of a majority of the outstanding voting securities of the affected
Fund and (ii) by vote of a majority of the Trustees who are not interested
persons (as defined in the 1940 Act) of any party to the Administration
Agreement cast in person at a meeting called for such purpose. The
Administration Agreement is terminable with respect to a particular Fund at any
time on 90 days' written notice without penalty by vote of the Trustees, by vote
of a majority of the outstanding shares of that Fund or by BISYS.
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.
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<PAGE> 73
Expenses
If total expenses borne by any of the Funds in any fiscal year exceed
expense limitations imposed by applicable state securities regulations, the
Investment Adviser, Gulfstream (only with respect to the International Discovery
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.
Distributor
BISYS serves as distributor to the Trust pursuant to a Distribution
Agreement dated as of July 1, 1996 (the "Distribution Agreement"). Prior to that
time, Security Distributors, Inc. ("SDI"), a wholly-owned subsidiary of Security
Benefit, served as distributor.
Unless otherwise terminated, the Distribution Agreement between the
Trust and BISYS will take effect on July 1, 1996, continue in effect until June
30, 1998 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 is terminable at
any time on 60 days' written notice without penalty by the Trustees, by a vote
of a majority of the shareholders of the Trust, or by BISYS on 90 days' written
notice. The Distribution Agreement will automatically terminate in the event of
any assignment as defined in the 1940 Act.
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<PAGE> 74
Custodian, Transfer Agent and Fund Accounting Services
National City Bank, 1900 East Ninth Street, Cleveland, Ohio 44114,
an affiliate of IMC, serves as Custodian to the Trust pursuant to the Custodian
Services Agreement dated as of July 24, 1998 (the "Custody Agreement"). Union
Bank of California serves as Custodian to the Group with respect to the
International Discovery Fund pursuant to an agreement dated July 31, 1995. The
Custodian's responsibilities include safeguarding and controlling the Funds'
cash and securities, handling the receipt and delivery of securities, and
collecting interest and dividends on the Funds' investments.
BISYS (formerly BISYS Fund Services Ohio, Inc., "BISYS Ohio") serves as
the transfer agent (the "Transfer Agent") for all Funds of the Trust pursuant to
a Fund Accounting and Transfer Agency Agreement dated July 1, 1996, as amended
(the "Fund Accounting and Transfer Agency Agreement") . Prior to that time,
Security Management served as transfer agent and fund accountant. Pursuant to
the Fund Accounting and Transfer Agency Agreement, 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. Pursuant to an amendment to the Fund Accounting and Transfer Agency
Agreement, effective February 12, 1997, the Trust's fee schedule is as follows.
The Transfer Agent receives an annual base fee for its transfer agency services
for each Fund equal to $15,000 per Fund, payable in equal monthly installments.
The Transfer Agent also receives an annual base fee for its fund accounting
services equal to $10,000 per Fund, payable in equal monthly installments. Each
of the Small Capitalization Fund, Mid Capitalization Fund and Bond Fund pays an
additional annual fee of 0.022% of its average daily net assets payable monthly
and the International Discovery Fund pays an additional annual fee of 0.035% of
its average daily net assets payable monthly.
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,
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<PAGE> 75
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 fiscal
years ended December 31, 1997, 1996 and 1995, the Transfer Agent received
$151,071, $75,000 and $90,000, respectively, from the Trust. Fund accounting and
transfer agency fees for the fiscal year ended December 31, 1995 were paid to
Security Management. Of the $75,000 in fees paid in the fiscal year ended
December 31, 1996, $37,500 was paid to Security Management. The balance was paid
to BISYS Ohio.
Independent Auditors
The Financial Statements of the Trust as of December 31, 1997,
appearing in the Trust's Annual Report dated December 31, 1997, have been
audited by Ernst & Young LLP, 10 West Broad St., Columbus, Ohio 43215,
independent auditors, as set forth in their report thereon included therein and
incorporated herein by reference. The Financial Statements are incorporated
herein by reference in reliance upon such report and upon the authority of Ernst
& Young LLP as experts in auditing and accounting.
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 four series of shares, each representing interest in
one of four separate portfolios: The Small Capitalization Fund, Mid
Capitalization Fund, Bond Fund and International Discovery Fund.
The Trust's 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, the Trust's 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.
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<PAGE> 76
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 is substantially identical or that the matter does not affect
any interest of the Fund. Under the 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 shares 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.
B-38
<PAGE> 77
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) 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
50% of the votes attributable to the shareholders of record of the Trust or the
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 or
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
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.
B-39
<PAGE> 78
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 Discovery Fund
If, for any reason, the International Discovery Fund were treated as
being a United Kingdom ("UK") resident, the International Discovery Fund's
worldwide income and capital gains would be subject to UK tax. If, for any
reason, the International Discovery Fund were treated as having a permanent
establishment in the UK, the International Discovery 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 Discovery Fund under
the double tax treaty between the UK and the US would not be available. Provided
that the International Discovery Fund is not treated as being resident or having
a permanent establishment in the UK, the International Discovery 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 Discovery Fund's portfolio. The Trust believes, based upon the
advice of special counsel, that it would be highly unlikely for the
International Discovery 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.
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<PAGE> 79
Yields of the Funds
As summarized in the Prospectus under the heading "PERFORMANCE
INFORMATION," yields of each of the Funds will be computed by analyzing net
investment income per share for a recent thirty-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 Funds 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.
For the 30-day period ended December 31, 1997, the yields for the Funds
were as follows:
<TABLE>
<CAPTION>
Yield
-----
<S> <C>
Parkstone Small Capitalization Fund 0.00%
Parkstone Mid Capitalization Fund 0.00%
Parkstone Large Capitalization Fund 0.00%
Parkstone International Discovery Fund 0.00%
</TABLE>
Calculation of Total Return
As summarized in the Prospectus under the heading "PERFORMANCE
INFORMATION," 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 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
B-41
<PAGE> 80
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 annualizing the result for periods of less
than one year.
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<PAGE> 81
For the one-year period ended June 30, 1998 and the period from
commencement of operations (September 23, 1993) to June 30, 1998, the average
annual total returns for the Funds were, respectively: Small Capitalization
Fund, 5.75% and 16.44%; Mid Capitalization Fund, 23.81% and 13.91%; Bond Fund,
8.69% and 4.76%; and International Discovery Fund, 3.74% and 7.41%.
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 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 trends; (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 my 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. 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
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<PAGE> 82
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 persons on or by proxy at an 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 1997 Annual Report and the June 30, 1998 Semi-Annual
Report to shareholders of the Trust are incorporated herein by reference. These
reports include the financial statements for the fiscal year ended December 31,
1997, and the six months ending June 30, 1998, respectively. In addition, the
Annual Report includes management's discussion of Fund performance for the Small
Capitalization Fund, Mid Capitalization Fund, Bond Fund and International
Discovery 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 representation other than those contained in
the Prospectus and this Statement of Additional Information.
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<PAGE> 83
As of August 21, 1998, 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 August 21, 1998, FOA, as trustee of the
First of America Bank Corporation Employees Retirement Plan owned beneficially
the following percentages of the Funds, respectively: Bond Fund, 20.00%, Small
Capitalization Fund, 15.87%, Mid Capitalization Fund, 11.77% and International
Discovery Fund, 35.85%. FOA 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
certain of its Funds. As a result, National City Bank 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
The Trust's unaudited financial statement and notes thereto for the
period from January 1, 1998 to June 30, 1998 contained in the Trust's
Semi-Annual Report to Shareholders dated June 30, 1998 are incorporated herein
by reference. Financial Statements and notes thereto describing audited
financial information for each Fund's operations since inception appear in the
Trust's Annual Report dated December 31, 1997, and on file with the SEC (File
Nos. 33-65690 and 811-7850) are incorporated herein by reference. The Report of
Ernst & Young LLP, independent auditors of the Trust, appears therein.
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<PAGE> 84
APPENDIX
COMMERCIAL PAPER RATINGS
A Standard & Poor's ("S&P") commercial paper rating is a
current assessment of the likelihood of timely payment of debt having an
original maturity of no more than 365 days. The following summarizes the rating
categories used by Standard and Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category
indicating that the obligor's capacity to meet its financial commitment is
strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations rated "A-1". However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
"B" - Obligations are regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and
are dependent on favorable business, financial, and economic conditions for the
obligor to meet its financial obligation.
"D" - Obligations are in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due,
even if the applicable grace period has not expired, unless S&P believes such
payments will be made during such grace period. The "D" rating will also be used
upon the filing of a bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
Moody's commercial paper ratings are opinions of the ability
of issuers to repay punctually debt obligations not having an original maturity
in excess of one year, unless explicitly noted. The following summarizes the
rating categories used by Moody's for commercial paper:
A-1
<PAGE> 85
"Prime-1" - Issuers (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structure with
moderate reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation; and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong
ability 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 (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt 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.
"Not Prime" - Issuers do not fall within any of the Prime
rating categories.
The three rating categories of Duff & Phelps for investment
grade commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff &
Phelps employs three designations, "D-1+," "D-1" and "D-1-," within the highest
rating category. The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"D-1+" - Debt possesses the 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.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses 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.
"D-3" - Debt possesses 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.
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"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch IBCA short-term ratings apply to debt obligations that
have time horizons of less than 12 months for most obligations, or up to three
years for U.S. public finance securities. The following summarizes the rating
categories used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This
designation indicates the strongest capacity for timely payment of financial
commitments and may have an added "+" to denote any exceptionally strong credit
feature.
"F2" - Securities possess good credit quality. This
designation indicates a satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of
securities rated "F1."
"F3" - Securities possess fair credit quality. This
designation indicates that the capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in a
reduction to non-investment grade.
"B" - Securities possess speculative credit quality. This
designation indicates minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in financial and
economic conditions.
"C" - Securities possess high default risk. This designation
indicates that the capacity for meeting financial commitments is solely reliant
upon a sustained, favorable business and economic environment.
"D" - Securities are in actual or imminent payment default.
Thomson BankWatch short-term ratings assess the likelihood of
an untimely payment of principal and interest of debt instruments with original
maturities of one year or less. The following summarizes the ratings used by
Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's
highest category and indicates a very high likelihood that principal and
interest will be paid on a timely basis.
"TBW-2" - This designation represents Thomson BankWatch's
second-highest category and indicates that 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."
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"TBW-3" - This designation represents Thomson BankWatch's
lowest investment-grade category and indicates that while the obligation is more
susceptible to adverse developments (both internal and external) than those with
higher ratings, the capacity to service principal and interest in a timely
fashion is considered adequate.
"TBW-4" - This designation represents Thomson BankWatch's
lowest rating category and indicates that the obligation is regarded as
non-investment grade and therefore speculative.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating
assigned by Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - Debt is less vulnerable to non-payment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
"B" - Debt is more vulnerable to non-payment than obligations
rated "BB," but the obligor currently has the capacity to meet its financial
commitment on the obligation.
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Adverse business, financial or economic conditions will likely impair the
obligor's capacity or willingness to meet its financial commitment on the
obligation.
"CCC" - Debt is currently vulnerable to non-payment, and is
dependent upon favorable business, financial and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial or economic conditions, the obligor is not likely to
have the capacity to meet its financial commitment on the obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable
to non-payment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
"D" - An obligation rated "D" is in payment default. This
rating is used when payments on an obligation are not made on the date due, even
if the applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. "D" rating is also used upon the
filing of a bankruptcy petition or the taking of similar action if payments on
an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid,
and certain other obligations that S & P believes may experience high volatility
or high variability in expected returns due to non-credit risks. Examples of
such obligations are: securities whose principal or interest return is indexed
to equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds 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 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
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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 possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca" and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" are of poor standing; "Ca" represents obligations
which are speculative in a high degree; and "C" represents the lowest rated
class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which
Moody's believes possess the strongest investment attributes are designated by
the symbols, Aa1, A1, Baa1, Ba1 and B1.
The following summarizes the long-term debt ratings used by
Duff & Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit
quality. The risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
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"BBB" - Debt possesses below-average protection factors but
such protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD" and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when due.
Debt rated "B" possesses the risk that obligations will not be met when due.
Debt rated "CCC" is well below investment grade and has considerable uncertainty
as to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch IBCA for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. These ratings denote the lowest expectation of
investment risk and are assigned only in case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is very unlikely to
be adversely affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very
high credit quality. These ratings denote a very low expectation of investment
risk and indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
"A" - Bonds considered to be investment grade and of high
credit quality. These ratings denote a low expectation of investment risk and
indicate strong capacity for timely payment of financial commitments. This
capacity may, nevertheless, be more vulnerable to adverse changes in
circumstances or in economic conditions than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of good
credit quality. These ratings denote that there is currently a low expectation
of investment risk. The capacity for timely payment of financial commitments is
adequate, but adverse changes in circumstances and in economic conditions are
more likely to impair this category.
"BB" - Bonds considered to be speculative. These ratings
indicate that there is a possibility of credit risk developing, particularly as
the result of adverse economic changes over time; however, business or financial
alternatives may be available to allow financial commitments to be met.
Securities rated in this category are not investment grade.
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"B" - Bonds are considered highly speculative. These ratings
indicate that significant credit risk is present, but a limited margin of safety
remains. Financial commitments are currently being met; however, capacity for
continued payment is contingent upon a sustained, favorable business and
economic environment.
"CCC," "CC" and "C" - Bonds have high default risk. Capacity
for meeting financial commitments is reliant upon sustained, favorable business
or economic developments. "CC" ratings indicate that default of some kind
appears probable, and "C" ratings signal imminent default.
"DDD," "DD" and "D" - Bonds are in default. Securities are not
meeting obligations and are extremely speculative. "DDD" designates the highest
potential for recovery on these securities, and "D" represents the lowest
potential for recovery.
To provide more detailed indications of credit quality, the
Fitch IBCA ratings from and including "AA" to "B" may be modified by the
addition of a plus (+) or minus (-) sign to show relative standing within these
major rating categories.
Thomson BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks, thrifts
and non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" - This designation represents the highest category
assigned by Thomson BankWatch to long-term debt and indicates that the ability
to repay principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to
repay principal and interest on a timely basis with limited incremental risk
compared to issues rated in the highest category.
"A" - This designation indicates that 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.
"BBB" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC" and "CC" - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
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"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC"
may include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
MUNICIPAL NOTE RATINGS
A Standard and Poor's rating reflects the liquidity concerns
and market access risks unique to notes due in three years or less. The
following summarizes the ratings used by Standard & Poor's Ratings Group for
municipal notes:
"SP-1" - The issuers of these municipal notes exhibit a strong
capacity to pay principal and interest. Those issues determined to possess very
strong characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit
speculative capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit risk
and long-term risk. The following summarizes the ratings by Moody's Investors
Service, Inc. for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality,
enjoying 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, with
margins of protection ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality,
with all security elements accounted for but lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
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"MIG-4"/"VMIG-4" - This designation denotes adequate quality,
carrying specific risk but having protection commonly regarded as required of an
investment security and not distinctly or predominantly speculative.
"SG" - This designation denotes speculative quality and lack
of margins of protection.
ITEM 24. DROPPED OFF SOME WHERE IN THIS AREA
Fitch IBCA and Duff & Phelps use the short-term ratings
described under Commercial Paper Ratings for municipal notes.
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<PAGE> 94
THE PARKSTONE ADVANTAGE FUND
FORM N-lA
PART C. OTHER INFORMATION
ITEM NO.
- --------------------------------------------------------------------------------
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, 1997
-- Statement of Operations for the year ended December
31, 1997
-- Statement of Changes in Net Assets for the years
ended December 31, 1997 and 1996
-- Schedule of Investments as of December 31, 1997
-- Notes to Financial Statements dated December 31, 1997
Included by reference to Semi-Annual Report in Part B:
-- Statement of Assets and Liabilities as of June 30,
1998
-- Statement of Operations for the six months ended
June 30, 1998
-- Statement of Changes in Net Assets for the six
months ended June 30, 1998 and the year ended
December 31, 1997
-- Schedule of Portfolio Investments as of December 31,
1997
-- Notes to Financial Statements dated June 30, 1998
(b) Exhibits:
(1) Declaration of Trust of the Registrant dated May 18,
1993.(l)
(2) (a) Code of Regulations as approved and adopted
by the Registrant's Board of Trustees.(l)
(b) Amendment to Code of Regulations dated
February 10, 1994.(l)
(3) Not Applicable.
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(4) Not Applicable.
(5) (a) Investment Advisory Agreement between
Registrant and National City Investment
Management Company, dated August 18, 1993,
relating to the Equity Fund, the Small
Capitalization Fund and the Bond Fund.(1)
(b) Investment Advisory Agreement between
Registrant and National City Investment
Management Company, dated August 18, 1993,
relating to the International Discovery
Fund.(1)
(c) Sub-Investment Advisory Agreement between
National City Investment Management Company
and Gulfstream Global Investors, Ltd., dated
March 5, 1995, relating to the International
Discovery Fund.(1)
(6) Distribution Agreement between Registrant and BISYS
Fund Services, L.P., dated July 1, 1996.(l)
(7) Not Applicable.
(8) (a) Custody Agreement between Registrant and
National City Bank, dated July 24, 1998.*
(b) Custodian Agreement between Registrant
and The Bank of California, N.A., dated July
31, 1995 relating to the International
Discovery Fund.(1)
(9) (a) Administration Agreement between Registrant
and BISYS Fund Services, L.P., dated July 1,
1996 (1)
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(b) Fund Accounting and Transfer Agency
Agreement between Registrant and BISYS Fund
Services, Inc., dated July 1, 1996(1)
(i) Schedule C to Fund Accounting and
Transfer Agency Agreement between
the Registrant and BISYS Funds
Services, L.P. dated February 12,
1997. (1)
(c) Fund Participation and Variable Contract
Marketing Agreement between Registrant and
Security Benefit Life Insurance Company, on
its behalf and on behalf of The Parkstone
Variable Annuity Account, The Parkstone
Advantage Fund, National City Investment
Management Company, Security Management
Company, Security Distributors, Inc., and
[Servicing Agent], dated September 10, 1993.
(9) (d) Transfer Agency Agreement.*
(10) None.
(11) (a) Opinion of Counsel.*
(b) Consent of Ernst & Young LLP.*
(12) Not Applicable.
(13) Purchase Agreement between Registrant and Security
Benefit Life Insurance Company, dated August 17,
1993.(l)
(14) Not Applicable.
(15) Not Applicable.
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(16) (a) Computation of Total Returns for the Small
Capitalization Fund, the Mid Capitalization
Fund, the Bond Fund, and the International
Discovery Fund.(1)
(b) Computation of Yields for the Small
Capitalization Fund, the Mid Capitalization
Fund, the Bond Fund, and the International
Discovery Fund.(l)
(17) Financial Data Schedules.(1)
(18) Not Applicable.
* Filed herewith.
(1) Incorporated by reference to Post-Effective Amendment No. 5 to
Registrant's Registration Statement of Form N-lA filed on or about
April 30, 1997.
(2) Incorporated by reference to Post-Effective Amendment No. 6 to
Registrant's Registration Statement of Form N-1A filed on or about
April 30, 1998.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is controlled by its Board of Trustees, all of the members
of which also serve as members of the Board of Trustees of The
Parkstone Group of Funds and as members of the Board of Trustees of the
Armada Funds. As of April 1, 1998, National City Corporation ("National
City"), a bank holding company which is the ultimate parent of National
City Investment Management Company, 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.
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ITEM 26. NUMBER OF HOLDERS OF SECURITIES
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 July 1, 1998,
the only Participating Insurance 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>
Small Capitalization 6
Mid Capitalization Fund 4
Bond Fund 5
International Discovery Fund 5
</TABLE>
ITEM 27. INDEMNIFICATION
Indemnification of Registrant's principal underwriter, custodian,
investment adviser, administrator, transfer agent and fund accountant is
provided for, respectively, in Section 6 of the Distribution Agreement filed or
incorporated by reference as Exhibit (6) hereto, Sections 12 and 10 of the
Custody Agreements filed or incorporated by reference as Exhibits (8)(a) and
(8)(b), respectively hereto, Section 16 of the Sub-Custodian Agreement filed or
incorporated by reference as Exhibit (8)(b) hereto, Section 8 of the Investment
Advisory and Sub-Investment Advisory Agreements filed or incorporated by
reference as Exhibits 5(a), (b) and (c) hereto, Section 5 of the Administration
Agreement filed or incorporated by reference as Exhibit 9(a) hereto, and Section
8 of the Fund Accounting and Transfer Agency Agreement filed or incorporated by
reference as Exhibit 9(b) hereto. Registrant has obtained from a major insurance
carrier a Trustee's and officer's liability policy covering certain types of
errors and omissions. In no event will Registrant indemnify any of its Trustees,
officers, employees or agents against any liability to which such person would
otherwise be subject by reason of his or her willful misfeasance, bad faith or
gross negligence in the performance of his or her duties, or by reason of his or
her reckless disregard of the duties involved in the conduct of his or her
office or under his or her agreement with Registrant. 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:
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9.2 Indemnification of Trustees, Representatives 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 an 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 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 he 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 are severable, and such inure to the benefit of the
heirs, executors, administrators and other legal representatives of
such covered persons.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid
by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being
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registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
National City Investment Management Company ("National City")
Cleveland, Ohio is an investment adviser registered under the
Investment Advisers' Act of 1940, as amended (the "Advisers Act").
National City is an indirect, wholly-owned subsidiary of National City
Corporation. National City currently manages over $12 billion on behalf
of both taxable and tax-exempt clients, including pensions, endowments,
corporations, individual portfolios, The Parkstone Group of Funds and
Armada Funds. To the knowledge of Registrant, none of the directors or
officers of National City is or has been at any time during the past
two fiscal years engaged in any other business profession, vocation or
employment of a substantial nature, except that certain directors and
officers of National City may also hold positions with, National City's
parent, or National City Corporation or other subsidiaries. Information
relating to any business, profession, or employment of a substantial
nature engaged in by officers and directors of National City during the
past two years is presented below as derived from Schedules A and D of
Form ADV filed by National City pursuant to the Advisers Act (SEC File
No. 811-446).
To the knowledge of Registrant, none of the directors or officers of
IMC, except those set forth below, is or has been, at any time during
the past two calendar years, engaged in any other business, profession,
vocation or employment of a substantial nature, except that certain
directors and officers also hold various positions with, and engage in
business for, the Corporation, which owns all the outstanding stock of
First America Bank, N.A., which in turn owns all the outstanding stock
of IMC, or other subsidiaries of the Corporation. Set forth below are
the names and principal businesses of the directors and certain of the
senior executive officers of IMC who are engaged in any other business,
profession, vocation or employment of a substantial nature.
NATIONAL CITY INVESTMENT MANAGEMENT COMPANY
<TABLE>
<CAPTION>
Position with
National
City Investment
Management Other Business Type of
Name Company Connections Business
- ---- ------- ----------- --------
<S> <C> <C> <C>
Kathleen T. Barr Managing Director, National City Bank Bank
Sales and Marketing
James R. Kirk Managing Director, National City Bank Bank
Portfolio Management
Robert M. Leggett Vice Chairman of the National City Bank Bank
Board, President and
Managing Director
Donald L. Ross Chief Investment National City Bank Bank
Officer and
Managing Director
Harold B. Todd, Jr. Chairman of the Board Executive Vice Bank holding
and Managing Director President, National company; bank
City Corporation; affiliate
Executive Vice President,
Institutional Trust and
Asset Management, National
City Bank
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITER
(a) BISYS Fund Services Limited Partnership, formerly known as The
Winsbury Company Limited Partnership ("BISYS") acts as
distributor and administrator for Registrant. BISYS also
distributes the securities of The Victory Portfolios, The
Victory Variable Funds, The AmSouth Mutual Funds, The Sessions
Group, The Coventry Group, The BB&T Mutual Funds Group, The
American Performance Funds, The ARCH Fund, Inc., MMA Praxis
Mutual Funds, The Pacific Capital Funds, The Riverfront Funds,
Inc., The Summit Investment Trust, The Pegasus Funds, The
Puget Sound Alternative Investment Series Trust, The Fountain
Square Funds, The Kent Group of Funds, The HSBC Funds, The
Empire Builder Tax Free Bond Fund, ESC Strategic Funds, Inc.,
The Eureka Funds, The Hirtle Callaghan Trust, The Intrust
Funds, The Meyers Sheppard Investment Trust, Magna Funds, The
M.S.D. & T. Funds, The Sefton Funds, The Parkstone Group of
Funds, SBSF Funds, Inc., The Infinity Mutual Funds, Inc., The
C-7
<PAGE> 101
Republic Funds Trust, The Republic Advisors Funds Trust ,
Variable Insurance Funds and Vintage Mutual Funds, Inc., each
of which is an investment management company.
(b) Directors, officers and partners of BISYS, as of December 31,
1997, were as follows:
<TABLE>
<CAPTION>
Name and Principal Positions and Offices with Positions and Offices
Business Address BISYS Fund Services, L.P. with Registrant
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
The BISYS Group, Inc. Sole Shareholder of BISYS None
150 Clove Road Fund Services, Inc. and Sole
Little Falls, NJ 07424 Limited Partner
BISYS Fund Services, Inc. Sole General Partner None
3435 Stelzer Road
Columbus, OH 43219
</TABLE>
(c) Compensation to BISYS during the fiscal year ended December
31, 1997 was as follows:
<TABLE>
<CAPTION>
Net Underwriting Compensation
Discounts and on Redemption Brokerage Other
Commissions and Repurchase Commissions Compensation
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[-0-] [-0-] [-0-] [-0-]
</TABLE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
(1) National City Investment Management Company, 1900 East Ninth
Street, Cleveland, Ohio 44114 (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) BISYS Fund Services, L.P., 3435 Stelzer Road, Columbus, Ohio
43219 and Security Distributors, Inc., 700 Harrison Street,
Topeka, Kansas 66636 (records relating to service as
distributor).
(3) BISYS Fund Services, L.P., 3435 Stelzer Road, Columbus, Ohio
43219 and Security Management Company, 700 Harrison Street,
Topeka, Kansas 66636 (records relating to service as
administrator).
C-8
<PAGE> 102
(4) Drinker Biddle & Reath LLP, Philadelphia National Bank
Building, 1345 Chestnut Street, Philadelphia, PA 19107-3496
(Registrant's Declaration of Trust, Code of Regulations and
Minutes Books).
(5) National City Bank, 1900 East Ninth Street, Cleveland, Ohio
44135 (records relating to its functions as custodian for the
Funds).
ITEM 31. MANAGEMENT SERVICES
Not Applicable.
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-9
<PAGE> 103
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, Registrant certifies that it
meets all the requirements for effectiveness of this registration statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of Cleveland, State of Ohio on the 18th day
of September, 1998.
THE PARKSTONE ADVANTAGE FUND
/s/ Herbert R. Martens, Jr.
---------------------------------
By: Herbert R. Martens, Jr.
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/ Robert D. Neary Chairman of the Board; September 16, 1998
- --------------------------------- Trustee
Robert D. Neary*
/s/ Leigh Carter Trustee September 16, 1998
- ---------------------------------
Leigh Carter*
/s/ John F. Durkott Trustee September 16, 1998
- ---------------------------------
John F. Durkott*
/s/ Robert J. Farling Trustee September 16, 1998
- ---------------------------------
Robert J. Farling
/s/ Richard W. Furst Trustee September 16, 1998
- ---------------------------------
Richard W. Furst*
/s/ Gerald L. Gherlein Trustee September 16, 1998
- ---------------------------------
Gerald L. Gherlein*
</TABLE>
C-10
<PAGE> 104
<TABLE>
<S> <C> <C>
/s/ J. William Pullen September 16, 1998
- ---------------------------------
J. William Pullen*
/s/ Herbert R. Martens, Jr. September 16, 1998
- ---------------------------------
Herbert R. Martens, Jr.*
/s/ Gary Tenkman Treasurer September 16, 1998
- -----------------
Gary Tenkman
</TABLE>
*By: /s/ Herbert R. Martens, Jr.
--------------------------------------------
Herbert R. Martens, Jr., Attorney-In-Fact
C-11
<PAGE> 105
THE PARKSTONE ADVANTAGE FUND
POWER OF ATTORNEY
-----------------
Know All Men by These Presents, that the undersigned, Robert D.
Neary, hereby constitutes and appoints Herbert R. Martens, Jr. and W. Bruce
McConnel, III, his true and lawful attorneys, to execute in his name, place,
and stead, in his capacity as Trustee or officer, or both, of The Parkstone
Advantage Fund, the Registration Statement and any amendments thereto and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission; and said attorneys shall have
full power and authority to do and perform in his name and on his behalf, in
any and all capacities, every act whatsoever requisite or necessary to be done
in the premises, as fully and to all intents and purposes as he might or could
do in person, said acts of said attorneys being hereby ratified and approved.
DATED: September 15, 1998
/s/ ROBERT D. NEARY
- -------------------
Robert D. Neary
<PAGE> 106
THE PARKSTONE ADVANTAGE FUND
POWER OF ATTORNEY
-----------------
Know All Men by These Presents, that the undersigned, Leigh Carter,
hereby constitutes and appoints Herbert R. Martens, Jr. and W. Bruce
McConnel, III, his true and lawful attorneys, to execute in his name, place,
and stead, in his capacity as Trustee or officer, or both, of The Parkstone
Advantage Fund, the Registration Statement and any amendments thereto and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission; and said attorneys shall have
full power and authority to do and perform in his name and on his behalf, in
any and all capacities, every act whatsoever requisite or necessary to be done
in the premises, as fully and to all intents and purposes as he might or could
do in person, said acts of said attorneys being hereby ratified and approved.
DATED: September 15, 1998
/s/ LEIGH CARTER
- ----------------
Leigh Carter
<PAGE> 107
THE PARKSTONE ADVANTAGE FUND
POWER OF ATTORNEY
-----------------
Know All Men by These Presents, that the undersigned, John F. Durkott,
hereby constitutes and appoints Herbert R. Martens, Jr. and W. Bruce McConnel,
III, his true and lawful attorneys, to execute in his name, place, and stead, in
his capacity as Trustee or officer, or both, of The Parkstone Advantage Fund,
the Registration Statement and any amendments thereto and all instruments
necessary or incidental in connection therewith, and to file the same with the
Securities and Exchange Commission; and said attorneys shall have full power and
authority to do and perform in his name and on his behalf, in any and all
capacities, every act whatsoever requisite or necessary to be done in the
premises, as fully and to all intents and purposes as he might or could do in
person, said acts of said attorneys being hereby ratified and approved.
DATED: September 15, 1998
/s/ JOHN F. DURKOTT
- -------------------
John F. Durkott
<PAGE> 108
THE PARKSTONE ADVANTAGE FUND
POWER OF ATTORNEY
-----------------
Know All Men by These Presents, that the undersigned, Robert J.
Farling, hereby constitutes and appoints Herbert R. Martens, Jr. and W. Bruce
McConnel, III, his true and lawful attorneys, to execute in his name, place, and
stead, in his capacity as Trustee or officer, or both, of The Parkstone
Advantage Fund, the Registration Statement and any amendments thereto and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission; and said attorneys shall have
full power and authority to do and perform in his name and on his behalf, in any
and all capacities, every act whatsoever requisite or necessary to be done in
the premises, as fully and to all intents and purposes as he might or could do
in person, said acts of said attorneys being hereby ratified and approved.
DATED: September 15, 1998
/s/ ROBERT J. FARLING
- ---------------------
Robert J. Farling
<PAGE> 109
THE PARKSTONE ADVANTAGE FUND
POWER OF ATTORNEY
-----------------
Know All Men by These Presents, that the undersigned, Richard W.
Furst, Dean, hereby constitutes and appoints Herbert R. Martens, Jr. and W.
Bruce McConnel, III, his true and lawful attorneys, to execute in his name,
place, and stead, in his capacity as Trustee or officer, or both, of The
Parkstone Advantage Fund, the Registration Statement and any amendments thereto
and all instruments necessary or incidental in connection therewith, and to file
the same with the Securities and Exchange Commission; and said attorneys shall
have full power and authority to do and perform in his name and on his behalf,
in any and all capacities, every act whatsoever requisite or necessary to be
done in the premises, as fully and to all intents and purposes as he might or
could do in person, said acts of said attorneys being hereby ratified and
approved.
DATED: September 15, 1998
/s/ RICHARD W. FURST
- --------------------------
Richard W. Furst, Dean
<PAGE> 110
THE PARKSTONE ADVANTAGE FUND
POWER OF ATTORNEY
-----------------
Know All Men by These Presents, that the undersigned, Gerald L.
Gherlein, hereby constitutes and appoints Herbert R. Martens, Jr. and W. Bruce
McConnel, III, his true and lawful attorneys, to execute in his name, place, and
stead, in his capacity as Trustee or officer, or both, of The Parkstone
Advantage Fund, the Registration Statement and any amendments thereto and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission; and said attorneys shall have
full power and authority to do and perform in his name and on his behalf, in any
and all capacities, every act whatsoever requisite or necessary to be done in
the premises, as fully and to all intents and purposes as he might or could do
in person, said acts of said attorneys being hereby ratified and approved.
DATED: September 15, 1998
/s/ GERALD L. GHERLEIN
- ----------------------
Gerald L. Gherlein
<PAGE> 111
THE PARKSTONE ADVANTAGE FUND
POWER OF ATTORNEY
-----------------
Know All Men by These Presents, that the undersigned, J. William
Pullen, hereby constitutes and appoints Herbert R. Martens, Jr. and W. Bruce
McConnel, III, his true and lawful attorneys, to execute in his name, place, and
stead, in his capacity as Trustee or officer, or both, of The Parkstone
Advantage Fund, the Registration Statement and any amendments thereto and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission; and said attorneys shall have
full power and authority to do and perform in his name and on his behalf, in any
and all capacities, every act whatsoever requisite or necessary to be done in
the premises, as fully and to all intents and purposes as he might or could do
in person, said acts of said attorneys being hereby ratified and approved.
DATED: September 15, 1998
/s/ J. WILLIAM PULLEN
- ---------------------
J. William Pullen
<PAGE> 112
THE PARKSTONE ADVANTAGE FUND
POWER OF ATTORNEY
-----------------
Know All Men by These Presents, that the undersigned, Gary Tenkman,
hereby constitutes and appoints Herbert R. Martens, Jr. and W. Bruce McConnel,
III, his true and lawful attorneys, to execute in his name, place, and stead, in
his capacity as Trustee or officer, or both, of The Parkstone Advantage Fund,
the Registration Statement and any amendments thereto and all instruments
necessary or incidental in connection therewith, and to file the same with the
Securities and Exchange Commission; and said attorneys shall have full power and
authority to do and perform in his name and on his behalf, in any and all
capacities, every act whatsoever requisite or necessary to be done in the
premises, as fully and to all intents and purposes as he might or could do in
person, said acts of said attorneys being hereby ratified and approved.
DATED: September 15, 1998
/s/ GARY TENKMAN
- ----------------
Gary Tenkman
<PAGE> 113
THE PARKSTONE ADVANTAGE FUND
POWER OF ATTORNEY
-----------------
Know All Men by These Presents, that the undersigned, Herbert R.
Martens, Jr., hereby constitutes and appoints Herbert R. Martens, Jr. and W.
Bruce McConnel, III, his true and lawful attorneys, to execute in his name,
place, and stead, in his capacity as Trustee or officer, or both, of The
Parkstone Advantage Fund, the Registration Statement and any amendments thereto
and all instruments necessary or incidental in connection therewith, and to file
the same with the Securities and Exchange Commission; and said attorneys shall
have full power and authority to do and perform in his name and on his behalf,
in any and all capacities, every act whatsoever requisite or necessary to be
done in the premises, as fully and to all intents and purposes as he might or
could do in person, said acts of said attorneys being hereby ratified and
approved.
DATED: September 15, 1998
/s/ HERBERT R. MARTENS, JR.
- ---------------------------
Herbert R. Martens, Jr.
<PAGE> 114
EXHIBIT INDEX
EXHIBIT NO.
(8) (a) Custodian Services Agreement
(9) (d) Transfer Agency Agreement
(11) (a) Opinion of Counsel.
(b) Consent of Ernst & Young LLP.
C-12
<PAGE> 1
EXHIBIT 8(a)
Custody Agreement
-----------------
<PAGE> 2
EXHIBIT 8(a)
CUSTODIAN SERVICES AGREEMENT
----------------------------
This Agreement is made as of July 24, 1998 by and between
NATIONAL CITY BANK (the "Custodian") and THE PARKSTONE GROUP OF FUNDS, a
Massachusetts business trust (the "Fund").
The Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act").
The Fund wishes to retain the Custodian to provide custodian services to each of
its investment portfolios, as listed on Exhibit A attached hereto and as such
Exhibit A may be amended from time to time (the "Portfolios"), and the Custodian
wishes to furnish custodian services, either directly or though an affiliate or
affiliates, as more fully described herein.
In consideration of the promises and mutual covenants herein
contained, the parties agree as follows:
1. Definitions.
(a) "Authorized Person" shall mean any officer of the
Fund and any other person, who is duly authorized by the Fund's Board of
Trustees, to give Oral and Written Instructions on behalf of the Fund. Such
persons are listed in the Certificate attached hereto as the Authorized Persons
Appendix as such appendix may be amended in writing by the Fund's Board of
Trustees from time to time.
(b) "Book-Entry System" shall mean Federal Reserve
Treasury book-entry system for United States and federal agency securities, its
successor or successors, and its nominee or nominees and any book-entry system
maintained by an exchange registered with the SEC under the 1934 Act.
(c) "CFTC" shall mean the Commodities Futures Trading
Commission.
(d) "Oral Instructions" shall mean oral instructions
received by the Custodian from an Authorized Person or from a person reasonably
believed by the Custodian to be an Authorized Person.
(e) "Custodian" shall mean National City Bank or a
subsidiary or affiliate of National City Bank.
(f) "SEC" shall mean the Securities and Exchange
Commission.
<PAGE> 3
(g) "Securities and Commodities Laws" shall mean the
Securities Act of 1933, as amended (the "1933 Act"), the Securities Exchange Act
of 1934, as amended (the "1934 Act"), the 1940 Act, and the Commodities Exchange
Act, as amended (the "CEA").
(h) "Shares" shall mean the units of beneficial
interest of the Fund.
(i) "Property" shall mean:
(i) any and all securities and other
investment items which the Fund may
from time to time deposit, or cause
to be deposited, with the Custodian
or which the Custodian may from
time to time hold for any
Portfolio;
(ii) all income in respect of any of
such securities or other investment
items;
(iii) all proceeds of the sale of any of
such securities or investment
items; and
(iv) all proceeds of the sale of
securities issued by the Fund,
which are received by the Custodian
from time to time, from or on
behalf of the Fund.
(j) "Written Instructions" shall mean written
instructions signed by one Authorized Person and received by the Custodian. The
instructions may be delivered by hand, mail, tested telegram, cable, telex or
facsimile sending device.
2. Appointment. The Fund hereby appoints the Custodian to
provide custodian services to each of the Portfolios, and the Custodian accepts
such appointment and agrees to furnish such services.
3. Delivery of Documents. The Fund has provided or, where
applicable, will provide the Custodian with the following:
(a) certified or authenticated copies of the
resolutions of the Fund's Board of Trustees,
2
<PAGE> 4
approving the appointment of the Custodian
or its affiliates to provide services;
(b) a copy of the Fund's most recent effective
registration statement;
(c) a copy of each Portfolio's advisory
agreement or agreements;
(d) a copy of each Portfolio's distribution
agreement or agreements;
(e) a copy of each Portfolio's transfer agency
agreement or agreements;
(f) copies of any shareholder servicing
agreements made in respect of the Fund or
any Portfolio; and
(g) certified or authenticated copies of any and
all amendments or supplements to the
foregoing.
4. Compliance with Government Rules and Regulations. The
Custodian undertakes to comply with all applicable requirements of the 1933 Act,
the 1934 Act, the 1940 Act, and the CEA, and any laws, rules and regulations of
governmental authorities having jurisdiction with respect to all duties to be
performed by the Custodian hereunder. Except as specifically set forth herein,
the Custodian assumes no responsibility for such compliance by the Fund.
5. Instructions. Unless otherwise provided in this Agreement,
the Custodian shall act only upon Oral and Written Instructions. The Custodian
shall be entitled to rely upon any Oral and Written Instructions it receives
from an Authorized Person (or from a person reasonably believed by the Custodian
to be an Authorized Person) pursuant to this Agreement. The Custodian may assume
that any Oral or Written Instructions received hereunder are not in any way
inconsistent with the provisions of organizational documents of the Fund or of
any vote, resolution or proceeding of the Fund's Board of Trustees or of the
Fund's shareholders.
The Fund agrees to forward to the Custodian Written
Instructions confirming Oral Instructions so that the Custodian receives the
Written Instructions by the close of business on the same day that such Oral
Instructions are received. The fact that such confirming Written Instructions
are not received by the Custodian shall in no way invalidate the transactions or
3
<PAGE> 5
enforceability of the transactions authorized by the Oral Instructions.
The Fund further agrees that the Custodian shall incur no
liability to the Fund or any Portfolio in acting upon Oral or Written
Instructions provided such instructions reasonably appear to have been received
from an Authorized Person.
6. Right to Receive Advice.
(a) Advice of the Fund. If the Custodian is in doubt
as to any action it should or should not take, the Custodian may request
directions or advice, including Oral or Written Instructions, from the Fund.
(b) Advice of Counsel. If the Custodian shall be in
doubt as to any questions of law pertaining to any action it should or should
not take, the Custodian may request advice at its own cost from such counsel of
its own choosing (who may be counsel for the Fund, the Fund's adviser or the
Custodian, at the option of the Custodian).
(c) Conflicting Advice. In the event of a conflict
between directions, advice or Oral or Written Instructions the Custodian
receives from the Fund, and the advice it receives from counsel, the Custodian
shall be entitled to rely upon and follow the advice of counsel.
(d) Protection of the Custodian. The Custodian shall
be protected in any action it takes or does not take in reliance upon
directions, advice or Oral or Written Instructions it receives from the Fund or
from counsel and which the Custodian believes, in good faith, to be consistent
with those directions, advice or Oral or Written Instructions.
Nothing in this paragraph shall be construed so as to impose
an obligation upon the Custodian (i) to seek such directions, advice or Oral or
Written Instructions, or (ii) to act in accordance with such directions, advice
or Oral or Written Instructions unless, under the terms of other provisions of
this Agreement, the same is a condition of the Custodian's properly taking or
not taking such action.
7. Records. The books and records pertaining to the Fund and
the Portfolios, which are in the possession of the Custodian, shall be the
property of the Fund. Such books and records shall be prepared and maintained as
required by the 1940 Act and other applicable securities laws, rules and
regulations. The Fund, or the Fund's authorized representatives, shall have
access to such books and records at all times during the
4
<PAGE> 6
Custodian's normal business hours. Upon the reasonable request of the Fund,
copies of any such books and records shall be provided by the Custodian to the
Fund or to an authorized representative of the Fund, at the Fund's expense.
8. Confidentiality. The Custodian agrees to keep confidential
all records of the Fund and the Portfolios and information relative to the Fund,
the Portfolios and the shareholders (past, present and potential), unless the
release of such records or information is otherwise consented to, in writing, by
the Fund. The Fund further agrees that, should the Custodian be required to
provide such information or records to duly constituted authorities (who may
institute civil or criminal contempt proceedings for failure to comply), the
Custodian shall not be required to seek the Fund's consent prior to disclosing
such information; provided that the Custodian gives the Fund prior written
notice of the provision of such information and records.
9. Cooperation with Accountants. The Custodian shall cooperate
with the Fund's independent public accountants and shall take all reasonable
action in the performance of its obligations under this Agreement to ensure that
the necessary information is made available to such accountants for the
expression of their opinion, as required by the Fund.
10. Disaster Recovery. The Custodian shall enter into and
shall maintain in effect with appropriate parties one or more agreements making
reasonable provision for emergency use of electronic data processing equipment
to the extent appropriate equipment is available. In the event of equipment
failures, the Custodian shall, at no additional expense to the Fund, take
reasonable steps to minimize service interruptions but shall have no liability
with respect thereto unless such failures result from the Custodian's own
willful misfeasance, bad faith, gross negligence, negligence or reckless
disregard of its duties and obligations under this Agreement.
11. Compensation. As compensation for custody services
rendered by the Custodian during the term of this Agreement, the Fund will pay
to the Custodian a fee or fees as may be agreed to in writing from time to time
by the Fund and the Custodian.
12. Indemnification. The Fund, on behalf of each of the
Portfolios, agrees to indemnify and hold harmless the Custodian and its nominees
from all taxes, charges, expenses, assessments, claims and liabilities
(including, without limitation, liabilities arising under the 1933 Act, the 1934
Act, the 1940 Act, the CEA, and any state and foreign securities and
5
<PAGE> 7
blue sky laws, and amendments thereto), and expenses, including (without
limitation) reasonable attorneys' fees and disbursements, arising directly or
indirectly from any action which the Custodian takes or does not take (i) at the
request or on the direction of or in reliance on the advice of the Fund or (ii)
upon Oral or Written Instructions. Neither the Custodian, nor any of its
nominees, shall be indemnified against any liability to the Fund or to its
shareholders (or any expenses incident to such liability) arising out of the
Custodian's or its nominees' own willful misfeasance, bad faith, negligence or
reckless disregard of its duties and obligations under this Agreement.
In the event of any advance of cash for any purpose made by
the Custodian resulting from Oral or Written Instructions of the Fund, or in the
event that the Custodian or its nominee shall incur or be assessed any taxes,
charges, expenses, assessments, claims or liabilities in respect of the Fund or
any Portfolio in connection with the performance of this Agreement, except such
as may arise from its or its nominee's own negligent action, negligent failure
to act or willful misconduct, any Property at any time held for the account of
the relevant Portfolio or the Fund shall be security therefor.
13. Responsibility of the Custodian. The Custodian shall be
under no duty to take any action on behalf of the Fund except as specifically
set forth herein or as may be specifically agreed to by the Custodian, in
writing. The Custodian shall be obligated to exercise care and diligence in the
performance of its duties hereunder, to act in good faith and to use its best
efforts, within reasonable limits, in performing Services provided for under
this Agreement. The Custodian shall be responsible for its own or its nominees'
(including without limitation foreign sub-custodians approved by the Fund) own
willful misfeasance, bad faith, negligence or reckless disregard of its duties
and obligations under this Agreement or the Custodian's own negligent failure to
perform its duties under this Agreement. Notwithstanding the foregoing, the
Custodian shall not be responsible for losses beyond its control, provided that
the Custodian has acted in accordance with the standard of care set forth above;
and provided further that the Custodian shall only be responsible for that
portion of losses or damages suffered by the Fund or any Portfolio attributable
to the negligence of the Custodian.
Without limiting the generality of the foregoing or of any
other provision of this Agreement, the Custodian, in connection with its duties
under this Agreement, shall not be under any duty or obligation to inquire into
and shall not be liable for (a) the validity or invalidity or authority or lack
6
<PAGE> 8
thereof of any Oral or Written Instruction, notice or other instrument which
conforms to the applicable requirements of this Agreement, and which the
Custodian reasonably believes to be genuine; or (b) delays or errors or loss of
data occurring by reason of circumstances beyond the Custodian's control,
including acts of civil or military authority, national emergencies, fire, flood
or catastrophe, acts of God, insurrection, war, riots or failure of the mails,
transportation, communication or power supply, nor shall the Custodian be under
any duty or obligation to ascertain whether any Property at any time delivered
to or held by the Custodian may properly be held by or for the Fund or any
Portfolio. Notwithstanding the foregoing, the Custodian shall use its best
efforts to mitigate the effects of the events in clause (b) above, although such
efforts shall not impute any liability thereto.
14. Description of Services.
(a) Delivery of the Property. The Fund will deliver
or arrange for delivery to the Custodian, all the property it owns, including
cash received as a result of the distribution of its Shares, during the period
that is set forth in this Agreement. The Custodian will not be responsible for
such property until actual receipt.
(b) Receipt and Disbursement of Money. The Custodian,
acting upon Written Instructions, shall open and maintain a separate account in
the name of the Fund on behalf of each Portfolio using all cash received from or
for the account of any Portfolio, subject to the terms of this Agreement.
The Custodian shall make cash payments to or from the accounts
of a Portfolio only for:
(i) purchases of securities in the name
of a Portfolio or the Custodian or
the Custodian's nominee as provided
in sub-paragraph j and for which
the Custodian has received a copy
of the broker's or dealer's
confirmation or payee's invoice, as
appropriate;
(ii) purchase or redemption of Shares of
the Fund delivered to the
Custodian;
(iii) payment of, subject to Written
Instructions, interest, dividends,
taxes, administration, accounting,
distribution, advisory, management
7
<PAGE> 9
fees or similar expenses which are
to be borne by the Fund or any
Portfolio;
(iv) payment to, subject to receipt of
Written Instructions, the Fund's
transfer agent, as agent for the
shareholders, an amount equal to
the amount of dividends and
distributions stated in the Written
Instructions to be distributed in
cash by the transfer agent to
shareholders, or, in lieu of paying
the Fund's transfer agent, the
Custodian may arrange for the
direct payment of cash dividends
and distributions to shareholders
in accordance with procedures
mutually agreed upon from time to
time by and among the Fund, the
Custodian and the Fund's transfer
agent;
(v) payments, upon receipt of Written
Instructions, in connection with
the conversion, exchange or
surrender of securities owned or
subscribed to by a Portfolio and
held by or delivered to the
Custodian;
(vi) payments of the amounts of
dividends received with respect to
securities sold short;
(vii) payments made to a sub-custodian
pursuant to provisions in
sub-paragraph c of this Paragraph
14; and
(viii) payments, upon Written Instructions
made for other proper Fund
purposes.
The Custodian is hereby authorized to endorse and collect all
checks, drafts or other orders for the payment of money received as custodian
for the account of the Fund or any Portfolio.
8
<PAGE> 10
(c) Receipt of Securities.
(i) The Custodian shall hold all
securities and non cash property
received by it for the account of a
Portfolio in a separate account
that physically segregates such
securities from those of any other
Portfolio, persons, firms or
corporations. All such securities
and property shall be held or
disposed of only upon Written
Instructions of the Fund pursuant
to the terms of this Agreement. The
Custodian shall have no power or
authority to withdraw, deliver,
assign, hypothecate, pledge or
otherwise dispose of any such
securities or investment, except
upon the express terms of this
Agreement and upon Written
Instructions, accompanied by a
certified resolution of the Fund's
Board of Trustees, authorizing the
transaction. In no case may any
member of the Fund's Board of
Trustees, or any officer, employee
or agent of the Fund withdraw any
securities.
At the Custodian's own expense and
for its own convenience, the
Custodian may enter into
sub-custodian agreements with other
United States banks or trust
companies to perform duties
described in this sub-paragraph c.
Such bank or trust company shall
have an aggregate capital, surplus
and undivided profits, according to
its last published report, of at
least one million dollars
($1,000,000), if it is a subsidiary
or affiliate of the Custodian, or
at least twenty million dollars
($20,000,000) if such bank or trust
company is not a subsidiary or
affiliate of the Custodian. In
addition, the Fund may authorize
the Custodian to employ one or more
9
<PAGE> 11
sub-custodians for the Fund's
securities and other assets
maintained outside the United
States. Any such domestic or
foreign sub-custodian must be
qualified to act as custodian and
agree to comply with the relevant
provisions of the 1940 Act and
applicable rules and regulations.
No such arrangement will be entered
into without prior written approval
of the Fund.
The Custodian shall remain
responsible for the performance of
all of its duties as described in
this Agreement and shall be liable
to the Fund for, and shall
indemnify and hold the Fund and
each Portfolio harmless from, its
own acts or omissions and those of
any domestic or foreign
sub-custodian, under the standards
of care provided for herein.
The Fund may appoint or request the
Custodian to appoint certain
sub-custodians with respect to
(including but not limited to) the
facilitation of three party
repurchase agreements. In such an
event, the Custodian shall not be
responsible for the performance or
actions and omissions of any such
sub-custodian.
(d) Transactions Requiring Instructions. Upon receipt
of Oral or Written Instructions and not otherwise, the Custodian, directly or
through the use of the Book-Entry System, shall:
(i) deliver any securities held for a
Portfolio against the receipt of
payment for the sale of such
securities;
(ii) execute and deliver to such persons
as may be designated in such Oral
or Written Instructions, proxies,
consents, authorizations, and any
other instruments whereby the
10
<PAGE> 12
authority of any Portfolio as owner
of any securities may be exercised;
(iii) deliver any securities to the
issuer thereof, or its agent, when
such securities are called,
redeemed, retired or otherwise
become payable; provided that, in
any such case, the cash or other
consideration is to be delivered to
the Custodian;
(iv) deliver any securities held for a
Portfolio against receipt of other
securities or cash issued or paid
in connection with the liquidation,
reorganization, refinancing, tender
offer, merger, consolidation or
recapitalization of any
corporation, or the exercise of any
conversion privilege;
(v) deliver any securities held for a
Portfolio to any protective
committee, reorganization committee
or other person in connection with
the reorganization, refinancing,
merger, consolidation,
recapitalization or sale of assets
of any corporation, and receive and
hold under the terms of this
Agreement such certificates of
deposit, interim receipts or other
instruments or documents as may be
issued to it to evidence such
delivery;
(vi) make such transfer or exchanges of
the assets of the Fund and take
such other steps as shall be stated
in said Oral or Written
Instructions to be for the purpose
of effectuating a duly authorized
plan of liquidation,
reorganization, merger,
consolidation or recapitalization
of the Fund;
(vii) release securities belonging to a
Portfolio to any bank or trust
company for the purpose of a pledge
11
<PAGE> 13
or hypothecation to secure any loan
incurred by a Portfolio; provided,
however, that securities shall be
released only upon payment to the
Custodian of the monies borrowed,
except that in cases where
additional collateral is required
to secure a borrowing already made
subject to proper prior
authorization, further securities
may be released for that purpose;
and repay such loan upon redelivery
to it of the securities pledged or
hypothecated therefor and upon
surrender of the note or notes
evidencing the loan;
(viii) release and deliver securities
owned by a Portfolio in connection
with any repurchase agreement
entered into on behalf of the Fund,
but only on receipt of payment
therefor; and pay out moneys of
such Portfolio in connection with
such repurchase agreements, but
only upon the delivery of the
securities;
(ix) release and deliver or exchange
securities owned by a Portfolio in
connection with any conversion of
such securities, pursuant to their
terms, into other securities;
(x) release and deliver securities
owned by a Portfolio for the
purpose of redeeming in kind shares
of the Fund upon delivery thereof
to the Custodian; and
(xi) release and deliver or exchange
securities owned by a Portfolio for
other corporate purposes.
The Custodian must also receive a
certified resolution describing the
nature of the corporate purpose and
the name and address of the
person(s) to whom delivery shall be
12
<PAGE> 14
made when such action is pursuant
to sub-paragraph d.
(e) Use of Book-Entry System. The Fund shall deliver
to the Custodian certified resolutions of the Fund's Board of Trustees
approving, authorizing and instructing the Custodian on a continuous and
on-going basis, to deposit in the Book-Entry System all securities belonging to
a Portfolio eligible for deposit therein and to utilize the Book-Entry System to
the extent possible in connection with settlements of purchases and sales of
securities by the Portfolios, and deliveries and returns of securities loaned,
subject to repurchase agreements or used as collateral in connection with
borrowings. The Custodian shall continue to perform such duties until it
receives Written or Oral Instructions authorizing contrary actions(s).
To administer the Book-Entry System properly, the following
provisions shall apply:
(i) With respect to securities of the
Fund which are maintained in the
Book-Entry system, established
pursuant to this sub-paragraph e
hereof, the records of the
Custodian shall identify by
Book-Entry or otherwise those
securities belonging to each
Portfolio. The Custodian shall
furnish the Fund a detailed
statement of the Property held for
each Portfolio under this Agreement
at least monthly and from time to
time and upon written request.
(ii) Securities and any cash of each
Portfolio deposited in the
Book-Entry System will at all times
be segregated from any assets and
cash controlled by the Custodian in
other than a fiduciary or custodian
capacity but may be commingled with
other assets held in such
capacities. The Custodian and its
sub-custodian, if any, will pay out
money only upon receipt of
securities and will deliver
securities only upon the receipt of
money.
13
<PAGE> 15
(iii) All books and records maintained by
the Custodian which relate to the
Fund's participation in the
Book-Entry System will at all times
during the Custodian's regular
business hours be open to the
inspection of the Fund's duly
authorized employees or agents, and
the Fund will be furnished with all
information in respect of the
services rendered to it as it may
require.
(iv) The Custodian will provide the Fund
with copies of any report obtained
by the Custodian on the system of
internal accounting control of the
Book-Entry System promptly after
receipt of such a report by the
Custodian.
The Custodian will also provide the Fund with such reports on
its own system of internal control as the Fund may reasonably request from time
to time.
(f) Registration of Securities. All Securities held
for a Portfolio which are issued or issuable only in bearer form, except such
securities held in the Book-Entry System, shall be held by the Custodian in
bearer form; all other securities held for a Portfolio may be registered in the
name of the Fund on behalf of a Portfolio, the Custodian, the Book-Entry System,
a sub-custodian, or any duly appointed nominees of a Portfolio, the Custodian,
Book-Entry system or sub-custodian. The Fund reserves the right to instruct the
Custodian as to the method of registration and safekeeping of the securities of
a Portfolio. The Fund agrees to furnish to the Custodian appropriate instruments
to enable the Custodian to hold or deliver in proper form for transfer, or to
register its registered nominee or in the name of the Book-Entry System, any
securities which it may hold for the account of any Portfolio and which may from
time to time be registered in the name of the Fund on behalf of a Portfolio. The
Custodian shall hold all such securities which are not held in the Book-Entry
System in a separate account for each Portfolio in the name of the Fund on
behalf of the relevant Portfolio physically segregated at all times from those
of any other person or persons.
(g) Voting and Other Action. Neither the Custodian
nor its nominee shall vote any of the securities held pursuant to this Agreement
by or for the account of any
14
<PAGE> 16
Portfolio, except in accordance with Written Instructions. The Custodian,
directly or through the use of the Book-Entry System, shall execute in blank and
promptly deliver all notice, proxies, and proxy soliciting materials to the
registered holder of such securities. If the registered holder is not the Fund
on behalf of a Portfolio, then Written or Oral Instructions must designate the
person who owns such securities.
(h) Transactions Not Requiring Instructions. In the
absence of contrary Written Instructions, the Custodian is authorized to take
the following actions:
(i) Collection of Income and Other
Payments.
(A) collect and receive for the
account of each Portfolio, all
income, dividends, distributions,
coupons, option premiums, other
payments and similar items,
included or to be included in the
Property, and, in addition,
promptly advise the Fund of such
receipt and credit such income,
as collected, to the Portfolio's
custodian account;
(B) endorse and deposit for
collection, in the name of each
Portfolio, checks, drafts, or
other orders for the payment of
money;
(C) receive and hold for the accounts
of each Portfolio all securities
received as a distribution on
that Portfolio's portfolio
securities as a result of a stock
dividend, share split-up or
reorganization, recapitalization,
readjustment or other
rearrangement or distribution of
rights or similar securities
issued with respect to any
portfolio securities belonging to
a Portfolio held by the Custodian
hereunder;
(D) present for payment and collect
the amount payable upon all
securities which may mature or be
called, redeemed or retired, or
otherwise become payable on the
date such securities become
payable; and
15
<PAGE> 17
(E) take any action which may be
necessary and proper in
connection with the collection
and receipt of such income and
other payments and the
endorsement for collection of
checks, drafts, and other
negotiable instruments.
(ii) Miscellaneous Transactions.
(A) The Custodian is authorized to
deliver or cause to be delivered
Property against payment or other
consideration or written receipt
therefor, in the following cases:
(1) for examination by a broker
or dealer selling for the
account of a Portfolio in
accordance with street
delivery custom;
(2) for the exchange of interim
receipts or temporary
securities for definitive
securities; and
(3) for transfer of securities
into name of the Fund on
behalf of a Portfolio or the
Custodian or nominee of
either, or for exchange of
securities for a different
number of bonds,
certificates,or other
evidence, representing the
same aggregate face amount or
number of units bearing the
same interest rate, maturity
date and call provisions, if
any, provided that, in any
such case, the new securities
are to be delivered to the
Custodian.
(B) Unless and until the Custodian
receives Oral or Written
instructions to the contrary, the
Custodian shall:
16
<PAGE> 18
(1) pay all income items held by
it which call for payment
upon presentation and hold
the cash received by it upon
such payment for the account
of each Portfolio;
(2) collect interest and cash
dividends received, with
notice to the Fund, to the
account of each Portfolio;
(3) hold for the account of each
Portfolio all stock
dividends, rights and similar
securities issued with
respect to any securities
held by the Custodian; and
(4) execute as agent on behalf of
the Fund all necessary
ownership certificates
required by the Internal
Revenue Code or the Income
Tax Regulations of the United
States Treasury Department or
under the laws of any State
now or hereafter in effect,
inserting the Fund's name on
behalf of any Portfolio on
such certificate as the owner
of the securities covered
thereby, to the extent it may
lawfully do so.
(i) Segregated Accounts.
(i) The Custodian shall upon receipt of
Written or Oral Instructions
establish and maintain segregated
accounts on its records for and on
behalf of each Portfolio. Such
accounts may be used to transfer
cash and securities, including
securities in the Book-Entry
System:
(A) for the purposes of compliance by
the Fund with the procedures
required by a securities or
option
17
<PAGE> 19
exchange, providing such
procedures comply with the 1940
Act and any releases of the SEC
relating to the maintenance of
segregated accounts by registered
investment companies; and
(B) Upon receipt of Written
Instructions, for other proper
corporate purposes.
(ii) The Custodian may enter into
separate custodial agreements with
various futures commission
merchants ("FCMs") that the Fund
uses (each an "FCM Agreement"),
pursuant to which the Fund's margin
deposits in any transactions
involving futures contracts and
options on futures contracts will
be held by the Custodian in
accounts (each an "FCM Account")
subject to the disposition by the
FCM involved in such contracts in
accordance with the customer
contract between FCM and the Fund
("FCM Contract"), SEC rules
governing such segregated accounts,
CFTC rules and the rules of the
applicable commodities exchange.
Such FCM Agreements shall only be
entered into upon receipt of
Written Instructions from the Fund
which state that (i) a customer
agreement between the FCM and the
Fund has been entered into; and
(ii) the Fund is in compliance with
all the rules and regulations of
the CFTC. Transfers of initial
margin shall be made into an FCM
Account only upon Written
Instructions; transfers of premium
and variation margin may be made
into an FCM Account pursuant to
Oral Instructions. Transfers of
funds from an FCM Account to the
FCM for which the Custodian holds
such an account may only occur upon
certification by the FCM to the
Custodian that pursuant to the FCM
Agreement and the FCM Contract, all
18
<PAGE> 20
conditions precedent to its right
to give the Custodian such
instruction have been satisfied.
(j) Purchases of Securities. The Custodian shall
settle purchased securities upon receipt of Oral or Written Instructions from
the Fund or its investment adviser(s) that specify:
(i) the name of the issuer and the
title of the securities, including
CUSIP number if applicable;
(ii) the number of shares or the
principal amount purchased and
accrued interest, if any;
(iii) the date of purchase and
settlement;
(iv) the purchase price per unit;
(v) the total amount payable upon such
purchase;
(vi) the name of the person from whom or
the broker through whom the
purchase was made. The Custodian
shall upon receipt of securities
purchased by or for a Portfolio pay
out of the moneys held for the
account of a Portfolio the total
amount payable to the person from
whom or the broker through whom the
purchase was made, provided that
the same conforms to the total
amount payable as set forth in such
Oral or Written Instructions; and
(vii) the name of the Portfolio involved.
(k) Sales of Securities. The Custodian shall settle
sold securities upon receipt of Oral or Written Instructions from the Fund that
specify:
(i) the name of the issuer and the
title of the security, including
CUSIP number if applicable;
19
<PAGE> 21
(ii) the number of shares or principal
amount sold, and accrued interest,
if any;
(iii) the date of trade and settlement
and sale;
(iv) the sale price per unit;
(v) the total amount payable to the
Portfolio upon such sale;
(vi) the name of the broker through whom
or the person to whom the sale was
made;
(vii) the location to which the security
must be delivered and delivery
deadline, if any; and
(viii) the name of the Portfolio involved.
The Custodian shall deliver the securities upon receipt of the
total amount payable to the Portfolio upon such sale, provided that the total
amount payable is the same as was set forth in the Oral or Written Instructions.
Subject to the foregoing, the Custodian may accept payment in such form as shall
be satisfactory to it, and may deliver securities and arrange for payment in
accordance with the customs prevailing among dealers in securities.
(l) Reports.
(i) The Custodian shall furnish the
Fund the following reports:
(A) such periodic and special reports
as the Fund may reasonably
request;
(B) a monthly statement summarizing
all transactions and entries for
the account of each Portfolio,
listing the portfolio securities
belonging to each Portfolio with
the adjusted average cost of each
issue and stating the cash
account of each Portfolio
including disbursements;
(C) the reports to be furnished to
the Fund pursuant to Rule l7f-4;
and
20
<PAGE> 22
(D) such other information as may be
agreed upon from time to time
between the Fund and the
Custodian.
(ii) The Custodian shall transmit
promptly to the Fund any proxy
statement, proxy material, notice
of a call or conversion or similar
communication received by it as
custodian of the Property. The
Custodian shall be under no other
obligation to inform the Fund as to
such actions or events.
(m) Collections. All collections of monies or other
property in respect, or which are to become part, of the Property (but not the
safekeeping thereof upon receipt by the Custodian) shall be at the sole risk of
the Fund. If payment is not received by the Custodian within a reasonable time
after proper demands have been made, the Custodian shall notify the Fund in
writing, including copies of all demand letters, any written responses,
memoranda of all oral responses and telephonic demands thereto, and await
instructions from the Fund. The Custodian shall not be obliged to take legal
action for collection unless and until reasonably indemnified to its
satisfaction. The Custodian shall also notify the Fund as soon as reasonably
practicable whenever income due on securities is not collected in due course and
shall provide the Fund with periodic status reports of such income uncollected
after a reasonable time.
15. Duration and Termination. This Agreement shall continue
until terminated by the Fund or by the Custodian on sixty (60) days' prior
written notice to the other party. In the event this Agreement is terminated
(pending appointment of a successor to the Custodian or vote of the shareholders
of the Fund to dissolve or to function without a custodian of its cash,
securities or other property), the Custodian shall not deliver cash, securities
or other property of the Portfolios to the Fund. It may deliver them to a bank
or trust company of the Custodian's choice, having an aggregate capital, surplus
and undivided profits, as shown by its last published report, of not less than
twenty million dollars ($20,000,000), as a custodian for the Fund to be held
under terms similar to those of this Agreement. The Custodian shall not be
required to make any such delivery or payment until full payment shall have been
made to the Custodian of all of its fees, compensation, costs and expenses. The
Custodian shall have a security interest in and shall have a right of setoff
against property in the Fund's
21
<PAGE> 23
possession as security for the payment of such fees, compensation, costs and
expenses.
16. Notices. All notices and other communications, including
Written Instructions, shall be in writing or by confirming telegram, cable,
telex or facsimile sending device. Notice shall be addressed (a) if to the
Custodian, at the Custodian's address, 1900 East Ninth Street, Cleveland, Ohio
44114, marked for the attention of the Custodian Services Department (or its
successor); (b) if to the Fund, at the address of the Fund; or (c) if to neither
of the foregoing, at such other address as shall have been notified to the
sender of any such Notice or other communication. If notice is sent by
confirming telegram, cable, telex or facsimile sending device, it shall be
deemed to have been given immediately. If notice is sent by first-class mail, it
shall be deemed to have been given five days after it has been mailed. If notice
is sent by messenger, it shall be deemed to have been given on the day it is
delivered.
17. Amendments. This Agreement, or any term hereof, may be
changed or waived only by a written amendment, signed by the party against whom
enforcement of such change or waiver is sought.
18. Delegation. The Custodian may assign its rights and
delegate its duties hereunder to any wholly-owned direct or indirect subsidiary
of National City Bank, or National City Corporation, provided that (i) the
Custodian gives the Fund thirty (30) days prior written notice; (ii) the
delegate agrees with the Custodian to comply with all relevant provisions of the
1940 Act; and (iii) the Custodian and such delegate promptly provide such
information as the Fund may request, and respond to such questions as the Fund
may ask, relative to the delegation, including (without limitation) the
capabilities of the delegate.
19. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
20. Further Actions. Each party agrees to perform such further
acts and execute such further documents as are necessary to effectuate the
purposes hereof.
21. Miscellaneous. The Custodian acknowledges that the Fund is
a Massachusetts business trust, and that it is required by the Declaration to
limit its liability in all agreements to the assets of the Fund. Consequently,
the Custodian agrees that any claims by it against the Fund may be
22
<PAGE> 24
satisfied only from the assets of the Fund, and no shareholders, trustees or
officers of the Fund may be held personally liable or responsible for any
obligations arising out of this Agreement. This Agreement embodies the entire
agreement and understanding between the parties and supersedes all prior
agreements and understandings relating to the subject matter hereof, provided
that the parties may embody in one more separate documents their agreement, if
any, with respect to delegated and/or Oral Instructions.
The captions in this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.
This Agreement shall be deemed to be a contract made in Ohio
and governed by Ohio law. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby. This Agreement shall be binding
and shall inure to the benefit of the parties hereto and their respective
successors.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their officers designated below on the day and year
first above written.
NATIONAL CITY BANK
By:
---------------------------------
Title:
------------------------------
THE PARKSTONE GROUP OF FUNDS
By:
---------------------------------
Title:
------------------------------
23
<PAGE> 25
Portfolios
----------
This EXHIBIT A, dated July 24, 1998, is that certain Exhibit A to a
Custodian Services Agreement dated as of July 24, 1998 between the undersigned
parties. This Exhibit A supersedes all previously dated Exhibits A.
Parkstone Small Capitalization Fund
Parkstone Mid Capitalization Fund
Parkstone Large Capitalization Fund
Parkstone International Discovery Fund
Parkstone Balanced Allocation Fund
Parkstone Aggressive Allocation Fund
Parkstone Conservative Allocation Fund
Parkstone Equity Income Fund
Parkstone Bond Fund
Parkstone Limited Maturity Bond Fund
Parkstone Intermediate Government Obligations Fund
Parkstone U.S. Government Income Fund
Parkstone Municipal Bond Fund
Parkstone Michigan Municipal Bond Fund
Parkstone Prime Obligations Fund
Parkstone U.S. Government Obligations Fund
Parkstone Treasury Fund
Parkstone Tax-Free Fund
NATIONAL CITY BANK
By:
---------------------------------
Title:
------------------------------
THE PARKSTONE GROUP OF FUNDS
By:
---------------------------------
Title:
------------------------------
24
<PAGE> 26
AUTHORIZED PERSONS
APPENDIX
This Appendix, dated July 24, 1998, is that certain Appendix
to a Custodian Services Agreement dated as of July 24, 1998 between The
Parkstone Group of Funds and National City Bank.
Names Signatures
- ------------------------------------- -------------------------------------
- ------------------------------------- -------------------------------------
- ------------------------------------- -------------------------------------
- ------------------------------------- -------------------------------------
- ------------------------------------- -------------------------------------
- ------------------------------------- -------------------------------------
25
<PAGE> 27
The Parkstone Group of Funds
3435 Stelzer Road
Columbus, Ohio 43219
Re: Custodian Services Fees
-----------------------
Ladies and Gentlemen:
This letter constitutes our agreement with respect to
compensation to be paid to National City Bank (the "Custodian") under the terms
of a Custodian Services Agreement dated July 24, 1998 (the "Agreement") between
The Parkstone Group of Funds ("you" or the "Fund") and the Custodian. Pursuant
to Paragraph 11 of the Agreement, and in consideration of the services to be
provided to you, you will pay the Custodian the following:
22. With respect to each of the Fund's investment portfolios
listed on Exhibit A to the Agreement (the "Portfolios"), an annual custody fee
of .020% of each Portfolio's first $100 million of average daily net assets,
.010% of each Portfolio's next $650 million of average daily net assets and
.008% of the average daily net assets of each Portfolio which exceed $750
million, exclusive of out-of-pocket expenses and transaction charges. Custody
fees shall be calculated daily and paid monthly.
23. The transaction charges are a bundled fee. This bundled
fee will not exceed .25% of the amount of total The Parkstone Group of Funds
monthly asset based fee.
24. The Custodian's out-of-pocket expenses including, but not
limited to, postage, telephone, telex, interest claim fee ($50.00 per claim),
transfer and registration fees, federal express charges, Federal Reserve and
wire fees.
25. The Custodian's out-of-pocket costs in providing foreign
custody services and/or precious metal custody services.
The fee for the period from the date hereof until the end of
such year shall be pro-rated according to the proportion which such period bears
to the full annual period.
If the foregoing accurately sets forth our agreement and you
intend to be legally bound thereby, please execute a copy of this letter and
return it to us.
26
<PAGE> 28
The Parkstone Group of Funds
- -----------------
Page 2
Very truly yours,
NATIONAL CITY BANK
By:
----------------------------
Accepted:
THE PARKSTONE GROUP OF FUNDS
By:
----------------------------
27
<PAGE> 1
EXHIBIT 9(d)
Transfer Agency Agreement
-------------------------
<PAGE> 2
Exhibit 9(d)
TRANSFER AGENCY AND SERVICE AGREEMENT
between
THE PARKSTONE GROUP OF FUNDS
and
STATE STREET BANK AND TRUST COMPANY
<PAGE> 3
TABLE OF CONTENTS
Page
----
1. Terms of Appointment and Duties ............................ 1
2. Third Party Administrators for Defined Contribution Plans .. 4
3. Fees and Expenses .......................................... 5
4. Representations and Warranties of the Transfer Agent ....... 5
5. Representations and Warranties of the Fund ................. 6
6. Wire Transfer Operating Guidelines ......................... 6
7. Data Access and Proprietary Information .................... 8
8. Indemnification ............................................ 10
9. Standard of Care ........................................... 11
10. Year 2000 .................................................. 11
11. Confidentiality ............................................ 11
12. Covenants of the Fund and the Transfer Agent ............... 12
13. Termination of Agreement ................................... 13
14. Assignment and Third Party Beneficiaries ................... 13
15. Subcontractors ............................................. 13
16. Miscellaneous .............................................. 14
17. Additional Funds ........................................... 16
18. Limitations of Liability of the Trustees and Shareholders .. 16
<PAGE> 4
TRANSFER AGENCY AND SERVICE AGREEMENT
-------------------------------------
AGREEMENT made as of the day of , 1998, by and between THE PARKSTONE
GROUP OF FUNDS, a Massachusetts business trust, having its principal office and
place of business at 3435 Stelzer Road, Columbus, Ohio 43219 (the "Fund"), and
STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company having its
principal office and place of business at 225 Franklin Street, Boston,
Massachusetts 02110 (the "Transfer Agent").
WHEREAS, the Fund is authorized to issue shares in separate series, with each
such series representing interests in a separate portfolio of securities and
other assets;
WHEREAS, the Fund intends to initially offer shares in eighteen (18) series,
such series shall be named in the attached Schedule A which may be amended by
the parties from time to time (each such series, together with all other series
subsequently established by the Fund and made subject to this Agreement in
accordance with Article 13, being herein referred to as a "Portfolio", and
collectively as the "Portfolios"); and
WHEREAS, the Fund on behalf of the Portfolios desires to appoint the Transfer
Agent as its transfer agent, dividend disbursing agent, custodian of certain
retirement plans and agent in connection with certain other activities, and the
Transfer Agent desires to accept such appointment.
NOW, THEREFORE, in consideration of the mutual covenants herein contained, the
parties hereto agree as follows:
1. Terms of Appointment and Duties
-------------------------------
1.1 Transfer Agency Services. Subject to the terms and conditions set forth
in this Agreement, the Fund, on behalf of the Portfolios, hereby employs
and appoints the Transfer Agent to act as, and the Transfer Agent agrees
to act as its transfer agent for the Fund's authorized and issued shares
of its beneficial interest, $ par value, ("Shares"), dividend
disbursing agent, custodian of certain retirement plans and agent in
connection with any accumulation, open-account or similar plan provided
to the shareholders of each of the respective Portfolios of the Fund
("Shareholders") and set out in the currently effective prospectus and
statement of additional information ("prospectus") of the Fund on behalf
of the applicable Portfolio, including without limitation any periodic
investment plan or periodic withdrawal program. In accordance with
procedures established from time to time by agreement between the Fund
on behalf of each of the Portfolios, as applicable and the Transfer
Agent, the Transfer Agent agrees that it will perform the following
services:
(a) Receive for acceptance, orders for the purchase of Shares, and
promptly deliver payment and appropriate documentation thereof to the
Custodian of the Fund authorized pursuant to the Declaration of Trust of
the Fund (the "Custodian");
(b) Pursuant to purchase orders, issue the appropriate number of Shares
and hold such Shares in the appropriate Shareholder account;
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(c) Receive for acceptance redemption requests and redemption directions
and deliver the appropriate documentation thereof to the Custodian;
(d) In respect to the transactions in items (i), (ii) and (iii) above,
the Transfer Agent shall execute transactions directly with
broker-dealers authorized by the Fund;
(e) At the appropriate time as and when it receives monies paid to it by
the Custodian with respect to any redemption, pay over or cause to be
paid over in the appropriate manner such monies as instructed by the
redeeming Shareholders;
(f) Effect transfers of Shares by the registered owners thereof upon
receipt of appropriate instructions;
(g) Prepare and transmit payments for dividends and distributions
declared by the Fund on behalf of the applicable Portfolio;
(h) Issue replacement certificates for those certificates alleged to
have been lost, stolen or destroyed upon receipt by the Transfer Agent
of indemnification satisfactory to the Transfer Agent and protecting the
Transfer Agent and the Fund, and the Transfer Agent at its option, may
issue replacement certificates in place of mutilated stock certificates
upon presentation thereof and without such indemnity;
(i) Maintain records of account for and advise the Fund and its
Shareholders as to the foregoing; and
(j) Record the issuance of Shares of the Fund and maintain pursuant to
SEC Rule 17Ad-10(e) a record of the total number of Shares of the Fund
which are authorized, based upon data provided to it by the Fund, and
issued and outstanding. The Transfer Agent shall also provide the Fund
on a regular basis with the total number of Shares which are authorized
and issued and outstanding and shall have no obligation, when recording
the issuance of Shares, to monitor the issuance of such Shares or to
take cognizance of any laws relating to the issue or sale of such
Shares, which functions shall be the sole responsibility of the Fund.
1.2 Additional Services. In addition to, and neither in lieu nor in
contravention of, the services set forth in the above paragraph, the
Transfer Agent shall perform the following services:
(a) Other Customary Services. Perform the customary services of a
transfer agent, dividend disbursing agent, custodian of certain
retirement plans and, as relevant, agent in connection with
accumulation, open-account or similar plan (including without limitation
any periodic investment plan or periodic withdrawal program), including
but not limited to: maintaining all Shareholder accounts, preparing
Shareholder meeting lists, mailing Shareholder proxies, Shareholder
reports and prospectuses to current Shareholders,
2
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withholding taxes on U.S. resident and non-resident alien accounts,
preparing and filing U.S. Treasury Department Forms 1099 and other
appropriate forms required with respect to dividends and distributions
by federal authorities for all Shareholders, preparing and mailing
confirmation forms and statements of account to Shareholders for all
purchases and redemptions of Shares and other confirmable transactions
in Shareholder accounts, preparing and mailing activity statements for
Shareholders, and providing Shareholder account information.
(b) Control Book (also known as "Super Sheet"). Maintain a daily record
and produce a daily report for the Fund of all transactions and receipts
and disbursements of money and securities and deliver a copy of such
report for the Fund for each business day to the Fund no later than 9:00
AM Eastern Time, or such earlier time as the Fund may reasonably
require, on the next business day;
(c) "Blue Sky" Reporting. The Fund shall (i) identify to the Transfer
Agent in writing those transactions and assets to be treated as exempt
from blue sky reporting for each State; and (ii) verify the
establishment of transactions for each State on the system prior to
activation and thereafter monitor the daily activity for each State. The
responsibility of the Transfer Agent for the Fund's blue sky State
registration status is solely limited to the initial establishment of
transactions subject to blue sky compliance by the Fund and providing a
system which will enable the Fund to monitor the total number of Shares
sold in each State;
(d) National Securities Clearing Corporation (the "NSCC"). (i) accept
and effectuate the registration and maintenance of accounts through
Networking and the purchase, redemption, transfer and exchange of shares
in such accounts through Fund/SERV (networking and Fund/SERV being
programs operated by the NSCC on behalf of NSCC's participants,
including the Fund), in accordance with, instructions transmitted to and
received by the Transfer Agent by transmission from NSCC on behalf of
broker-dealers and banks which have been established by, or in
accordance with the instructions of authorized persons, as hereinafter
defined on the dealer file maintained by the Transfer Agent; (ii) issue
instructions to Fund's banks for the settlement of transactions between
the Fund and NSCC (acting on behalf of its broker-dealer and bank
participants); (iii) provide account and transaction information from
the affected Fund's records on DST Systems, Inc. computer system TA2000
("TA2000 System") in accordance with NSCC's Networking and Fund/SERV
rules for those broker-dealers; and (iv) maintain Shareholder accounts
on TA2000 System through Networking.
(e) New Procedures. New procedures as to who shall provide certain of
these services in Section 1 may be established in writing from time to
time by agreement between the Fund and the Transfer Agent. The Transfer
Agent may at times perform only a portion of these services and the Fund
or its agent may perform these services on the Fund's behalf.
3
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(f) Additional Telephone Support Services. If the parties elect to have
the Transfer Agent provide ADDITIONAL telephone support services under
this Agreement, the parties will agree to such services, fees and
sub-contracting as stated in Schedule 1.2(f) entitled "Telephone Support
Services" attached hereto.
2. Third Party Administrators for Defined Contribution Plans
---------------------------------------------------------
2.1 The Fund may decide to make available to certain of its customers, a
qualified plan program (the "Program") pursuant to which the customers
("Employers") may adopt certain plans of deferred compensation ("Plan or
Plans") for the benefit of the individual Plan participant (the "Plan
Participant"), such Plan(s) being qualified under Section 401(a) of the
Internal Revenue Code of 1986, as amended ("Code") and administered by
third party administrators which may be plan administrators as defined
in the Employee Retirement Income Security Act of 1974, as amended)(the
"TPA(s)").
2.2 In accordance with the procedures established in the initial Schedule
2.1 entitled "Third Party Administrator Procedures", as may be amended
by the Transfer Agent and the Fund from time to time ("Schedule 2.1"),
the Transfer Agent shall:
(a) Treat Shareholder accounts established by the Plans in the name of
the Trustees, Plans or TPAs as the case may be as omnibus accounts;
(b) Maintain omnibus accounts on its records in the name of the TPA or
its designee as the Trustee for the benefit of the Plan; and
(c) Perform all services under SECTION 1 as transfer agent of the Funds
and not as a record-keeper for the Plans.
2.3 Transactions identified under SECTION 2 of this Agreement shall be
deemed exception services ("Exception Services") when such transactions:
(a) Require the Transfer Agent to use methods and procedures other than
those usually employed by the Transfer Agent to perform services under
SECTION 1 of this Agreement;
(b) Involve the provision of information to the Transfer Agent after the
commencement of the nightly processing cycle of the TA2000 System; or
(c) Require more manual intervention by the Transfer Agent, either in
the entry of data or in the modification or amendment of reports
generated by the TA2000 System than is usually required by
non-retirement plan and pre-nightly transactions.
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3. Fees and Expenses
-----------------
3.1 Fee Schedule. For the performance by the Transfer Agent pursuant to this
Agreement, the Fund agrees to pay the Transfer Agent an annual
maintenance fee for each Shareholder account as set forth in the
attached fee schedule ("Schedule 3.1"). Such fees and out-of-pocket
expenses and advances identified under SECTION 3.2 below may be changed
from time to time subject to mutual written agreement between the Fund
and the Transfer Agent.
3.2 Out-of-Pocket Expenses. In addition to the fee paid under SECTION 3.1
above, the Fund agrees to reimburse the Transfer Agent for out-of-pocket
expenses, including but not limited to confirmation production, postage,
forms, telephone, microfilm, microfiche, mailing and tabulating proxies,
records storage, or advances incurred by the Transfer Agent for the
items set out in Schedule 3.1 attached hereto. In addition, any other
expenses incurred by the Transfer Agent at the request or with the
consent of the Fund, will be reimbursed by the Fund.
3.3 Postage. Postage for mailing of dividends, proxies, Fund reports and
other mailings to all shareholder accounts shall be advanced to the
Transfer Agent by the Fund at least seven (7) days prior to the mailing
date of such materials.
3.4 Invoices. The Fund agrees to pay all fees and reimbursable expenses
within thirty (30) days following the receipt of the respective billing
notice, except for any fees or expenses which are subject to good faith
dispute. In the event of such a dispute, the Fund may only withhold that
portion of the fee or expense subject to the good faith dispute. The
Fund shall notify the Transfer Agent in writing within twenty-one (21)
calendar days following the receipt of each billing notice if the Fund
is disputing any amounts in good faith. If the Fund does not provide
such notice of dispute within the required time, the billing notice will
be deemed accepted by the Fund.
4. Representations and Warranties of the Transfer Agent
----------------------------------------------------
The Transfer Agent represents and warrants to the Fund that:
4.1 It is a trust company duly organized and existing and in good standing
under the laws of The Commonwealth of Massachusetts.
4.2 It is duly qualified to carry on its business in The Commonwealth of
Massachusetts.
4.3 It is empowered under applicable laws and by its Charter and By-Laws to
enter into and perform this Agreement.
4.4 All requisite corporate proceedings have been taken to authorize it to
enter into and perform this Agreement.
5
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4.5 It has and will continue to have access to the necessary facilities,
equipment and personnel to perform its duties and obligations under this
Agreement.
5. Representations and Warranties of the Fund
------------------------------------------
The Fund represents and warrants to the Transfer Agent that:
5.1 It is a business trust duly organized and existing and in good standing
under the laws of The Commonwealth of Massachusetts.
5.2 It is empowered under applicable laws and by its Declaration of Trust
and By-Laws to enter into and perform this Agreement.
5.3 All corporate proceedings required by said Declaration of Trust and
By-Laws have been taken to authorize it to enter into and perform this
Agreement.
5.4 It is an open-end and diversified management investment company
registered under the Investment Company Act of 1940, as amended.
5.5 A registration statement under the Securities Act of 1933, as amended is
currently effective and will remain effective, and appropriate state
securities law filings have been made and will continue to be made, with
respect to all Shares of the Fund being offered for sale.
6. Wire Transfer Operating Guidelines/Articles 4A of the Uniform Commercial
------------------------------------------------------------------------
Code
----
6.1 The Transfer Agent is authorized to promptly debit the appropriate Fund
account(s) upon the receipt of a payment order in compliance with the
selected security procedure (the "Security Procedure") chosen for funds
transfer and in the amount of money that the Transfer Agent has been
instructed to transfer. The Transfer Agent shall execute payment orders
in compliance with the Security Procedure and with the Fund instructions
on the execution date provided that such payment order is received by
the customary deadline for processing such a request, unless the payment
order specifies a later time. All payment orders and communications
received after this the customary deadline will be deemed to have been
received the next business day.
6.2 The Fund acknowledges that the Security Procedure it has designated on
the Fund Selection Form was selected by the Fund from security
procedures offered by the Transfer Agent. The Fund shall restrict access
to confidential information relating to the Security Procedure to
authorized persons as communicated to the Transfer Agent in writing. The
Fund must notify the Transfer Agent immediately if it has reason to
believe
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unauthorized persons may have obtained access to such information or of
any change in the Fund's authorized personnel. The Transfer Agent shall
verify the authenticity of all Fund instructions according to the
Security Procedure.
6.3 The Transfer Agent shall process all payment orders on the basis of the
account number contained in the payment order. In the event of a
discrepancy between any name indicated on the payment order and the
account number, the account number shall take precedence and govern.
6.4 The Transfer Agent reserves the right to decline to process or delay the
processing of a payment order which (a) is in excess of the collected
balance in the account to be charged at the time of the Transfer Agent's
receipt of such payment order; (b) if initiating such payment order
would cause the Transfer Agent, in the Transfer Agent's sole judgement,
to exceed any volume, aggregate dollar, network, time, credit or similar
limits which are applicable to the Transfer Agent; or (c) if the
Transfer Agent, in good faith, is unable to satisfy itself that the
transaction has been properly authorized.
6.5 The Transfer Agent shall use reasonable efforts to act on all authorized
requests to cancel or amend payment orders received in compliance with
the Security Procedure provided that such requests are received in a
timely manner affording the Transfer Agent reasonable opportunity to
act. However, the Transfer Agent assumes no liability if the request for
amendment or cancellation cannot be satisfied.
6.6 The Transfer Agent shall assume no responsibility for failure to detect
any erroneous payment order provided that the Transfer Agent complies
with the payment order instructions as received and the Transfer Agent
complies with the Security Procedure. The Security Procedure is
established for the purpose of authenticating payment orders only and
not for the detection of errors in payment orders.
6.7 The Transfer Agent shall assume no responsibility for lost interest with
respect to the refundable amount of any unauthorized payment order,
unless the Transfer Agent is notified of the unauthorized payment order
within thirty (30) days of notification by the Transfer Agent of the
acceptance of such payment order. In no event (including failure to
execute a payment order) shall the Transfer Agent be liable for special,
indirect or consequential damages, even if advised of the possibility of
such damages.
6.8 When the Fund initiates or receives Automated Clearing House credit and
debit entries pursuant to these guidelines and the rules of the National
Automated Clearing House Association and the New England Clearing House
Association, the Transfer Agent will act as an Originating Depository
Financial Institution and/or receiving depository Financial Institution,
as the case may be, with respect to such entries. Credits given by the
Transfer Agent with respect to an ACH credit entry are provisional until
the Transfer Agent receives final settlement for such entry from the
Federal Reserve Bank. If the Transfer Agent does not receive such final
settlement, the Fund agrees that the Transfer
7
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Agent shall receive a refund of the amount credited to the Fund in
connection with such entry, and the party making payment to the Fund via
such entry shall not be deemed to have paid the amount of the entry.
6.9 Confirmation of Transfer Agent's execution of payment orders shall
ordinarily be provided within twenty four (24) hours notice of which may
be delivered through the Transfer Agent's proprietary information
systems, or by facsimile or call-back. Fund must report any objections
to the execution of an order within thirty (30) days.
7. Data Access and Proprietary Information
---------------------------------------
7.1 The Fund acknowledges that the databases, computer programs, screen
formats, report formats, interactive design techniques, and
documentation manuals furnished to the Fund by the Transfer Agent as
part of the Fund's ability to access certain Fund-related data
("Customer Data") maintained by the Transfer Agent on data bases under
the control and ownership of the Transfer Agent or other third party
("Data Access Services") constitute copyrighted, trade secret, or other
proprietary information (collectively, "Proprietary Information") of
substantial value to the Transfer Agent or other third party. In no
event shall Proprietary Information be deemed Customer Data. The Fund
agrees to treat all Proprietary Information as proprietary to the
Transfer Agent and further agrees that it shall not divulge any
Proprietary Information to any person or organization except as may be
provided hereunder. Without limiting the foregoing, the Fund agrees for
itself and its employees and agents to:
(a) Use such programs and databases (i) solely on the Fund's computers,
or (ii) solely from equipment at the location agreed to between the Fund
and the Transfer Agent and (iii) solely in accordance with the Transfer
Agent's applicable user documentation;
(b) Refrain from copying or duplicating in any way (other than in the
normal course or performing processing on the Fund's computer(s)), the
Proprietary Information;
(c) Refrain from obtaining unauthorized access to any portion of the
Proprietary Information, and if such access is inadvertently obtained,
to inform in a timely manner of such fact and dispose of such
information in accordance with the Transfer Agent's instructions;
(d) Refrain from causing or allowing information transmitted from the
Transfer Agent's computer to the Fund's terminal to be retransmitted to
any other computer terminal or other device except as expressly
permitted by the Transfer Agent (such permission not to be unreasonably
withheld);
(e) Allow the Fund to have access only to those authorized transactions
as agreed to between the Fund and the Transfer Agent; and
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(f) Honor all reasonable written requests made by the Transfer Agent to
protect at the Transfer Agent's expense the rights of the Transfer Agent
in Proprietary Information at common law, under federal copyright law
and under other federal or state law.
7.2 Proprietary Information shall not include all or any portion of any of
the foregoing items that: (i) are or become publicly available without
breach of this Agreement; (ii) are released for general disclosure by a
written release by the Transfer Agent; or (iii) are already in the
possession of the receiving party at the time or receipt without
obligation of confidentiality or breach of this Agreement.
7.3 The Fund acknowledges that its obligation to protect the Transfer
Agent's Proprietary Information is essential to the business interest of
the Transfer Agent and that the disclosure of such Proprietary
Information in breach of this Agreement would cause the Transfer Agent
immediate, substantial and irreparable harm, the value of which would be
extremely difficult to determine. Accordingly, the parties agree that,
in addition to any other remedies that may be available in law, equity,
or otherwise for the disclosure or use of the Proprietary Information in
breach of this Agreement, the Transfer Agent shall be entitled to seek
and obtain a temporary restraining order, injunctive relief, or other
equitable relief against the continuance of such breach.
7.4 If the Fund notifies the Transfer Agent that any of the Data Access
Services do not operate in material compliance with the most recently
issued user documentation for such services, the Transfer Agent shall
endeavor in a timely manner to correct such failure. Organizations from
which the Transfer Agent may obtain certain data included in the Data
Access Services are solely responsible for the contents of such data and
the Fund agrees to make no claim against the Transfer Agent arising out
of the contents of such third-party data, including, but not limited to,
the accuracy thereof. DATA ACCESS SERVICES AND ALL COMPUTER PROGRAMS AND
SOFTWARE SPECIFICATIONS USED IN CONNECTION THEREWITH ARE PROVIDED ON AN
AS IS, AS AVAILABLE BASIS. THE TRANSFER AGENT EXPRESSLY DISCLAIMS ALL
WARRANTIES EXCEPT THOSE EXPRESSLY STATED HEREIN INCLUDING, BUT NOT
LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE.
7.5 If the transactions available to the Fund include the ability to
originate electronic instructions to the Transfer Agent in order to: (i)
effect the transfer or movement of cash or Shares; or (ii) transmit
Shareholder information or other information, then in such event the
Transfer Agent shall be entitled to rely on the validity and
authenticity of such instruction without undertaking any further inquiry
as long as such instruction is undertaken in conformity with security
procedures established by the Transfer Agent from time to time.
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<PAGE> 13
7.6 Each party shall take reasonable efforts to advise its employees of
their obligations pursuant to this SECTION 7. The obligations of this
Section shall survive any earlier termination of this Agreement.
8. Indemnification
---------------
8.1 The Transfer Agent shall not be responsible for, and the Fund shall
indemnify and hold the Transfer Agent harmless from and against, any and
all losses, damages, costs, charges, counsel fees, payments, expenses
and liability arising out of or attributable to:
(a) All actions of the Transfer Agent or its agents or subcontractors
required to be taken pursuant to this Agreement, provided that such
actions are taken in good faith and without negligence or willful
misconduct;
(b) The Fund's lack of good faith, negligence or willful misconduct
which arise out of the breach of any representation or warranty of the
Fund hereunder;
(c) The reliance upon, and any subsequent use of or action taken or
omitted, by the Transfer Agent, or its agents or subcontractors on: (i)
any information, records, documents, data, stock certificates or
services, which are received by the Transfer Agent or its agents or
subcontractors by machine readable input, facsimile, CRT data entry,
electronic instructions or other similar means authorized by the Fund,
and which have been prepared, maintained or performed by the Fund or any
other person or firm on behalf of the Fund including but not limited to
any previous transfer agent or registrar; (ii) any instructions or
requests of the Fund or any of its officers; (iii) any instructions or
opinions of legal counsel with respect to any matter arising in
connection with the services to be performed by the Transfer Agent under
this Agreement which are provided to the Transfer Agent after
consultation with such legal counsel; or (iv) any paper or document,
reasonably believed to be genuine, authentic, or signed by the proper
person or persons;
(d) The offer or sale of Shares in violation of federal or state
securities laws or regulations requiring that such Shares be registered
or in violation of any stop order or other determination or ruling by
any federal or any state agency with respect to the offer or sale of
such Shares;
(e) The negotiation and processing of any checks including without
limitation for deposit into the Fund's demand deposit account maintained
by the Transfer Agent; or
(f) Upon the Fund's request entering into any agreements required by the
National Securities Clearing Corporation (the "NSCC") required by the
NSCC for the transmission of Fund or Shareholder data through the NSCC
clearing systems.
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<PAGE> 14
8.2 In order that the indemnification provisions contained in this SECTION 8
shall apply, upon the assertion of a claim for which the Fund may be
required to indemnify the Transfer Agent, the Transfer Agent shall
promptly notify the Fund of such assertion, and shall keep the Fund
advised with respect to all developments concerning such claim. The Fund
shall have the option to participate with the Transfer Agent in the
defense of such claim or to defend against said claim in its own name or
in the name of the Transfer Agent. The Transfer Agent shall in no case
confess any claim or make any compromise in any case in which the Fund
may be required to indemnify the Transfer Agent except with the Fund's
prior written consent.
9. Standard of Care
----------------
9.1 The Transfer Agent shall at all times act in good faith and agrees to
use its best efforts within reasonable limits to insure the accuracy of
all services performed under this Agreement, but assumes no
responsibility and shall not be liable for loss or damage due to errors
unless said errors are caused by its negligence, bad faith, or willful
misconduct or that of its employees, except as provided in SECTION 9.2
below.
9.2 In the case of Exception Services as defined in SECTION 2.3 herein, the
Transfer Agent shall be held to a standard of gross negligence and
encoding and payment processing errors shall not be deemed negligence.
10. Year 2000
---------
The Transfer Agent will take reasonable steps to ensure that its
products (and those of its third-party suppliers) reflect the available
technology to offer products that are Year 2000 ready, including, but
not limited to, century recognition of dates, calculations that
correctly compute same century and multi- century formulas and date
values, and interface values that reflect the date issues arising
between now and the next one-hundred years, and if any changes are
required, the Transfer Agent will make the changes to its products at a
price to be agreed upon by the parties and in a commercially reasonable
time frame and will require third-party suppliers to do likewise.
11. Confidentiality
---------------
11.1 The Transfer Agent and the Fund agree that they will not, at any time
during the term of this Agreement or after its termination, reveal,
divulge, or make known to any person, firm, corporation or other
business organization, any customers' lists, trade secrets, cost figures
and projections, profit figures and projections, or any other secret or
confidential information whatsoever, whether of the Transfer Agent or of
the Fund, used or gained by the Transfer Agent or the Fund during
performance under this Agreement. The Fund and the Transfer Agent
further covenant and agree to retain all such knowledge and information
acquired during and after the term of this Agreement respecting such
lists, trade secrets, or any secret or confidential information
whatsoever in trust for the sole
11
<PAGE> 15
benefit of the Transfer Agent or the Fund and their successors and
assigns. In the event of breach of the foregoing by either party, the
remedies provided by SECTION 7.3 shall be available to the party whose
confidential information is disclosed. The above prohibition of
disclosure shall not apply to the extent that the Transfer Agent must
disclose such data to its sub-contractor or Fund agent for purposes of
providing services under this Agreement.
11.2 In the event that any requests or demands are made for the inspection of
the Shareholder records of the Fund, other than request for records of
Shareholders pursuant to standard subpoenas from state or federal
government authorities (i.e., divorce and criminal actions), the
Transfer Agent will endeavor to notify the Fund and to secure
instructions from an authorized officer of the Fund as to such
inspection. The Transfer Agent expressly reserves the right, however, to
exhibit the Shareholder records to any person whenever it is advised by
counsel that it may be held liable for the failure to exhibit the
Shareholder records to such person or if required by law or court order.
12. Covenants of the Fund and the Transfer Agent
--------------------------------------------
12.1 The Fund shall promptly furnish to the Transfer Agent the following:
(a) A certified copy of the resolution of the Board of Trustees of the
Fund authorizing the appointment of the Transfer Agent and the execution
and delivery of this Agreement; and
(b) A copy of the Declaration of Trust and By-Laws of the Fund and all
amendments thereto.
12.2 The Transfer Agent hereby agrees to establish and maintain facilities
and procedures reasonably acceptable to the Fund for safekeeping of
stock certificates, check forms and facsimile signature imprinting
devices, if any; and for the preparation or use, and for keeping account
of, such certificates, forms and devices.
12.3 The Transfer Agent shall keep records relating to the services to be
performed hereunder, in the form and manner as it may deem advisable. To
the extent required by Section 31 of the Investment Company Act of 1940,
as amended, and the Rules thereunder, the Transfer Agent agrees that all
such records prepared or maintained by the Transfer Agent relating to
the services to be performed by the Transfer Agent hereunder are the
property of the Fund and will be preserved, maintained and made
available in accordance with such Section and Rules, and will be
surrendered promptly to the Fund on and in accordance with its request.
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13. Termination of Agreement
------------------------
13.1 This Agreement may be terminated by either party upon one hundred twenty
(120) days written notice to the other.
13.2 Should the Fund exercise its right to terminate, all out-of-pocket
expenses associated with the movement of records and material will be
borne by the Fund. Additionally, the Transfer Agent reserves the right
to charge for any other reasonable expenses associated with such
termination and a charge equivalent to the average of three (3) months'
fees. Payment of such expenses or costs shall be in accordance with
Section 3.4 of this Agreement.
13.3 Upon termination of this Agreement, each party shall return to the other
party all copies of confidential or proprietary materials or information
received from such other party hereunder, other than materials or
information required to be retained by such party under applicable laws
or regulations.
14. Assignment and Third Party Beneficiaries.
-----------------------------------------
14.1 Except as provided in Section 15.1 below and the Additional Telephone
Support Services Schedule 1.2(f) attached, neither this Agreement nor
any rights or obligations hereunder may be assigned by either party
without the written consent of the other party. Any attempt to do so in
violation of this Section shall be void. Unless specifically stated to
the contrary in any written consent to an assignment, no assignment will
release or discharge the assignor from any duty or responsibility under
this Agreement.
14.2 Except as explicitly stated elsewhere in this Agreement, nothing under
this Agreement shall be construed to give any rights or benefits in this
Agreement to anyone other than the Transfer Agent and the Fund, and the
duties and responsibilities undertaken pursuant to this Agreement shall
be for the sole and exclusive benefit of the Transfer Agent and the
Fund. This Agreement shall inure to the benefit of and be binding upon
the parties and their respective permitted successors and assigns.
14.3 This Agreement does not constitute an agreement for a partnership or
joint venture between the Transfer Agent and the Fund. Other than as
provided in Section 15.1 and Schedule 1.2(f), neither party shall make
any commitments with third parties that are binding on the other party
without the other party's prior written consent.
15. Subcontractors
--------------
15.1 The Transfer Agent may, without further consent on the part of the
Fund, subcontract for the performance hereof with (i) Boston Financial
Data Services, Inc., a Massachusetts corporation ("BFDS") which is duly
registered as a transfer agent pursuant to Section 17A(c)(2) of the
Securities Exchange Act of 1934, as amended, (ii) a BFDS subsidiary
13
<PAGE> 17
duly registered as a transfer agent or (iii) a BFDS affiliate duly
registered as a transfer agent; provided, however, that the Transfer
Agent shall be fully responsible to the Fund for the acts and omissions
of BFDS or its subsidiary or affiliate as it is for its own acts and
omissions.
15.2 Nothing herein shall impose any duty upon the Transfer Agent in
connection with or make the Transfer Agent liable for the actions or
omissions to act of unaffiliated third parties such as by way of example
and not limitation, Airborne Services, Federal Express, United Parcel
Service, the U.S. Mails, the NSCC and telecommunication companies,
provided, if the Transfer Agent selected such company, the Transfer
Agent shall have exercised due care in selecting the same.
16. Miscellaneous
-------------
16.1 Amendment. This Agreement may be amended or modified by a written
agreement executed by both parties and authorized or approved by a
resolution of the Board of Trustees of the Fund.
16.2 Massachusetts Law to Apply. This Agreement shall be construed and the
provisions thereof interpreted under and in accordance with the laws of
The Commonwealth of Massachusetts.
16.3 Force Majeure. In the event either party is unable to perform its
obligations under the terms of this Agreement because of acts of God,
strikes, equipment or transmission failure or damage reasonably beyond
its control, or other causes reasonably beyond its control, such party
shall not be liable for damages to the other for any damages resulting
from such failure to perform or otherwise from such causes.
16.4 Consequential Damages. Neither party to this Agreement shall be liable
to the other party for consequential damages under any provision of this
Agreement or for any consequential damages arising out of any act or
failure to act hereunder.
16.5 Survival. All provisions regarding indemnification, warranty, liability,
and limits thereon, and confidentiality and/or protections of
proprietary rights and trade secrets shall survive the termination of
this Agreement.
16.6 Severability. If any provision or provisions of this Agreement shall be
held invalid, unlawful, or unenforceable, the validity, legality, and
enforceability of the remaining provisions shall not in any way be
affected or impaired.
16.7 Priorities Clause. In the event of any conflict, discrepancy or
ambiguity between the terms and conditions contained in this Agreement
and any Schedules or attachments hereto, the terms and conditions
contained in this Agreement shall take precedence.
14
<PAGE> 18
16.8 Waiver. No waiver by either party or any breach or default of any of the
covenants or conditions herein contained and performed by the other
party shall be construed as a waiver of any succeeding breach of the
same or of any other covenant or condition.
16.9 Merger of Agreement. This Agreement constitutes the entire agreement
between the parties hereto and supersedes any prior agreement with
respect to the subject matter hereof whether oral or written.
16.10 Counterparts. This Agreement may be executed by the parties hereto on
any number of counterparts, and all of said counterparts taken together
shall be deemed to constitute one and the same instrument.
16.11 Reproduction of Documents. This Agreement and all schedules, exhibits,
attachments and amendments hereto may be reproduced by any photographic,
photostatic, microfilm, micro-card, miniature photographic or other
similar process. The parties hereto each agree that any such
reproduction shall be admissible in evidence as the original itself in
any judicial or administrative proceeding, whether or not the original
is in existence and whether or not such reproduction was made by a party
in the regular course of business, and that any enlargement, facsimile
or further reproduction shall likewise be admissible in evidence.
16.12 Notices. All notices and other communications as required or permitted
hereunder shall be in writing and sent by first class mail, postage
prepaid, addressed as follows or to such other address or addresses of
which the respective party shall have notified the other.
(a) If to State Street Bank and Trust Company, to:
State Street Bank and Trust Company
c/o Boston Financial Data Services, Inc.
Two Heritage Drive
Quincy, Massachusetts 02171
Attention: Legal Department
Facsimile: (617) 774-2287
(b) If to the Fund, to:
Attention:
15
<PAGE> 19
17. Additional Funds
----------------
In the event that the Fund establishes one or more series of Shares in
addition to the attached Schedule A with respect to which it desires to
have the Transfer Agent render services as transfer agent under the
terms hereof, it shall so notify the Transfer Agent in writing, and if
the Transfer Agent agrees in writing to provide such services, such
series of Shares shall become a Portfolio hereunder.
18. Limitations of Liability of the Trustees and Shareholders
---------------------------------------------------------
A copy of the Declaration of Trust of the Trust is on file with the
Secretary of The Commonwealth of Massachusetts, and notice is hereby
given that this instrument is executed on behalf of the Trustees of the
Trust as Trustees and not individually and that the obligations of this
instrument are not binding upon any of the Trustees or Shareholders
individually but are binding only upon the assets and property of the
Fund.
16
<PAGE> 20
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in their names and on their behalf by and through their duly authorized
officers, as of the day and year first above written.
THE PARKSTONE GROUP OF FUNDS
BY:
---------------------------------
ATTEST:
- ---------------------------------
STATE STREET BANK AND TRUST
COMPANY
BY:
---------------------------------
Executive Vice President
ATTEST:
17
<PAGE> 21
SCHEDULE A
Parkstone Prime Obligations Fund Parkstone Balanced Allocation Fund
Parkstone Tax-Free Fund Parkstone Aggressive Allocation Fund
Parkstone U.S. Government Obligations Fund Parkstone Conservative Allocation
Fund
Parkstone Treasury Fund
Parkstone Large Capitalization Fund
Parkstone Small Capitalization Fund
Parkstone Mid Capitalization Fund
Parkstone International Discovery Fund
Parkstone Equity Income Fund
Parkstone Bond Fund
Parkstone Limited Maturity Bond Fund
Parkstone Intermediate Government Obligations Fund
Parkstone U.S. Government Income Fund
Parkstone Municipal Bond Fund
Parkstone Michigan Municipal Bond Fund
THE PARKSTONE GROUP OF FUNDS STATE STREET BANK AND TRUST
COMPANY
BY: BY:
------------------------ ----------------------------------
18
<PAGE> 22
SCHEDULE 1.2(f)
ADDITIONAL TELEPHONE SUPPORT FEES AND SERVICES
Dated _______________
I. SERVICES
1. Transfer Agent and Telephone Support Functions
a. Answer telephone inquiries from [XXX 8 a.m. to 8 p.m. Boston time
Monday through Friday XXX] from [XXX existing customers and prospective
customers XXX] of the Fund [XXX for sales literature XXX] in accordance
with the telephone script provided by the Fund.
b. Answer questions pertaining thereto the extent that such questions are
answerable based upon the information supplied to the Transfer Agent by
the Fund.
c. [XXX As the Fund and the Transfer Agent may agree in writing, the
Transfer Agent will receive calls and take written transaction requests
from shareholders of the Fund. Transfer Agent transactions include:
[XXX telephone redemptions, account maintenance, exchanges, transfers,
confirmed purchases, account balances and general inquiries XXX]. Some
transactions may result in research which will be done by the Fund.
Other calls may be referred directly to the Fund. Fax any referrals to
[XXX name of company XXX] on the same day the telephone call is
received.XXX];
2. Incorporate new information into the above referenced script upon
written instructions from the Fund;
3. Maintain prospect detail information for six (6) months thereafter,
provide such information to the Fund in the form that the Fund may
reasonably request;
4. Send all literature orders for information from BFDS/DST [XXX [how?]
[to whom?] XXX] a minimum of [XXX one XXX] transmission per day;
5. Provide the Fund with a [XXX daily/weekly/monthly XXX] telephone report
detailing the calls received during the [XXX day/week/month XXX];
6. [XXX Provide the Fund with monthly conversion reports as selected by
the Fund from DST's standard report package. XXX]
II. SUBCONTRACTORS
1. The Transfer Agent may, without further consent on the part of the
Fund, subcontract ministerial telephone support services for the
performance hereof.
<PAGE> 23
III. FEES
THE PARKSTONE GROUP OF FUNDS STATE STREET BANK AND TRUST
COMPANY
BY: BY:
--------------------------------- ------------------------------
<PAGE> 24
SCHEDULE 2.1
THIRD PARTY ADMINISTRATOR(S) PROCEDURES
Dated _______________
1.On each Business Day, the TPA(s) shall receive, on behalf of and as agent
of the Fund(s), Instructions (as hereinafter defined) from the Plan.
Instructions shall mean as to each Fund (i) orders by the Plan for the
purchases of Shares, and (ii) requests by the Plan for the redemption
of Shares; in each case based on the Plan's receipt of purchase orders
and redemption requests by Participants in proper form by the time
required by the term of the Plan, but not later than the time of day at
which the net asset value of a Fund is calculated, as described from
time to time in that Fund's prospectus. Each Business Day on which the
TPA receives Instructions shall be a "Trade Date".
2. The TPA(s) shall communicate the TPA(s)'s acceptance of such
Instructions, to the applicable Plan.
3. On the next succeeding Business Day following the Trade Date on which
it accepted Instructions for the purchase and redemption of Shares,
(TD+1), the TPA(s) shall notify the Transfer Agent of the net amount
of such purchases or redemptions, as the case may be, for each of the
Plans. In the case of net purchases by any Plan, the TPA(s) shall
instruct the Trustees of such Plan to transmit the aggregate purchase
price for Shares by wire transfer to the Transfer Agent on (TD+1). In
the case of net redemptions by any Plan, the TPA(s) shall instruct the
Fund's custodian to transmit the aggregate redemption proceeds for
Shares by wire transfer to the Trustees of such Plan on (TD+1). The
times at which such notification and transmission shall occur on (TD+l)
shall be as mutually agreed upon by each Fund, the TPA(s), and the
Transfer Agent.
4. The TPA(s) shall maintain separate records for each Plan, which record
shall reflect Shares purchased and redeemed, including the date and
price for all transactions, and Share balances. The TPA(s) shall
maintain on behalf of each of the Plans a single master account with
the Transfer Agent and such account shall be in the name of that Plan,
the TPA(s), or the nominee of either thereof as the record owner of
Shares owned by such Plan.
5. The TPA(s) shall maintain records of all proceeds of redemptions of
Shares and all other distributions not reinvested in Shares.
6. The TPA(s) shall prepare, and transmit to each of the Plans, periodic
account statements showing the total number of Shares owned by that
Plan as of the statement closing date, purchases and redemptions of
Shares by the Plan during the period covered by the statement, and the
dividends and other distributions paid to the Plan on Shares during the
statement period (whether paid in cash or reinvested in Shares).
<PAGE> 25
7. The TPA(s) shall, at the request and expense of each Fund, transmit to
the Plans prospectuses, proxy materials, reports, and other information
provided by each Fund for delivery to its shareholders.
8. The TPA(s) shall, at the request of each Fund, prepare and transmit to
each Fund or any agent designated by it such periodic reports covering
Shares of each Plan as each Fund shall reasonably conclude are
necessary to enable the Fund to comply with state Blue Sky
requirements.
9. The TPA(s) shall transmit to the Plans confirmation of purchase orders
and redemption requests placed by the Plans; and
10. The TPA(s) shall, with respect to Shares, maintain account balance
information for the Plan(s) and daily and monthly purchase summaries
expressed in Shares and dollar amounts.
11. Plan sponsors may request, or the law may require, that prospectuses,
proxy materials, periodic reports and other materials relating to each
Fund be furnished to Participants in which event the Transfer Agent or
each Fund shall mail or cause to be mailed such materials to
Participants. With respect to any such mailing, the TPA(s) shall, at
the request of the Transfer Agent or each Fund, provide at the TPA(s)'s
expense complete and accurate set of mailing labels with the name and
address of each Participant having an interest through the Plans in
Shares.
THE PARKSTONE GROUP OF FUNDS STATE STREET BANK AND TRUST
COMPANY
BY: BY:
--------------------------- ---------------------------
<PAGE> 26
SCHEDULE 3.1
FEES
Dated September 15, 1998
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------
Annual Account Service Fees
- --------------------------------------------------------------------------------
Annual Base Fee (per class/per fund) $15,000
Annual Account Maintenance $15.00/account
Annual Closed Account Fees $ 2.40/account
Each class is considered a fund and will be billed accordingly.
- --------------------------------------------------------------------------------
Conversion Fee
- --------------------------------------------------------------------------------
Fee $25,000
- --------------------------------------------------------------------------------
Activity Based Fees
- --------------------------------------------------------------------------------
New Account Set-up $ 4.00/each
Manual Transactions $ 2.50/each
Telephone Calls $ 5.00/each
Correspondence $ 2.50/each
- --------------------------------------------------------------------------------
IRA Custodial Fees
- --------------------------------------------------------------------------------
Annual Maintenance $ 10.00/account
- --------------------------------------------------------------------------------
Out-of-Pocket Expenses Billed as
incurred
- --------------------------------------------------------------------------------
</TABLE>
Out-of-Pocket expenses include but are not limited to: confirmation statements,
investor statements, postage, forms, audio response, telephone, records
retention, customized programming / enhancements, federal wire, transcripts,
microfilm, microfiche, and expenses incurred at the specific direction of the
fund.
This fee schedule is subject to an annual cost of living ajustment based on a
regional consumer price index.
THE PARKSTONE GROUP OF FUNDS STATE STREET BANK AND TRUST
COMPANY
By: By:
---------------------------- ----------------------------
<PAGE> 27
WIRE TRANSFER SECURITY PROCEDURES
FUND SELECTION FORM
SECTION I
Details the types of funds transfers processed on behalf of
--------------------
SECTION II
Lists the types of security procedures offered.
Please select the appropriate security procedures from Section II for each type
of funds transfer listed in Section I.
I. TYPES OF FUNDS TRANSFERS
Expedited Redemptions
-----
Same Day Wires
-----
Manual Wires
-----
Wire Transfers Initiated by FAX
-----
Group Dividend Wire
-----
Remote Batch Transmissions
-----
ACH Transactions
-----
1
<PAGE> 28
WIRE TRANSFER SECURITY PROCEDURES
II. SECURITY PROCEDURES
A. REPETITIVE WIRES/ACH TRANSACTIONS
B. TELEPHONE CONFIRMATION
C. ENCRYPTION
AUTHORIZATION
Boston Financial Data Services, Inc. Is hereby instructed to implement the above
checked security procedure(s) in regard to payment orders initiated by or on
behalf of our organization or its shareholders.
- ---------------------------------- -----------------------
Authorized Signature Date
- ----------------------------------
Title
2
<PAGE> 29
WIRE TRANSFER SECURITY PROCEDURES
FUNDS TRANSFER SECURITY PROCEDURES DEFINITIONS
REPETITIVE WIRES
1. Shareholder Generated
Wires initiated from existing authorized shareholder accounts. Each wire is sent
to the same pre-established destination bank and beneficiary account number.
Only the date of the wire and dollar amount may vary from instruction to
instruction. Changes to that file can only be performed based on written
instructions coupled with a signature guarantee. The establishment of the
repetitive wire is confirmed via a written notice to the shareholder's address
of record.
2. Client Generated
Manual Wires processed on behalf of the client. Wires are initiated from the
same authorized debit account and sent to the same destination bank and
beneficiary account number each time. Only the date and the dollar amount may
vary from instruction to instruction.
TELEPHONE CONFIRMATION
Telephone confirmation will be used to verify funds transfer instructions
received via telephone, untested facsimile or mail. This security procedure can
be used to authenticate non repetitive and repetitive wire transfers
instructions. Repetitive wires may be subject to a specific threshold at the
client's discretion.
As part of the confirmation process customers must designate individuals as
authorized initiators and authorized confirmers. Within 24 hours of receipt of
the wire instruction and prior to execution, a Boston Financial Data Services
associate will contact someone other than the originator at the customer's
location to authenticate the instructions. Additionally, a confirmation log will
be maintained to provide an evidentiary control as well as providing an
invaluable operational tool for resolving any disputes.
ENCRYPTION
Delivery of wire transfer is completed via computer to computer data
communications between the client and State Street Bank. Recommended security
procedures include encryption, the process by which data traveling over
communication lines is cryptographically transformed (encrypted). This control
is appropriate not only for terminal based initiation, but is also being used by
some institutions in the form of both encrypted facsimile and encrypted voice
communication. This delivery mechanism is typically used for high volume
business such as shareholder redemptions and dividends.
3
<PAGE> 30
WIRE TRANSFER SECURITY PROCEDURES
ADDITIONAL INFORMATION
- ----------------------
Telephone Communications
- All telephone communication between BFDS and the client will
be handled on recorded telephone lines.
Transfers Initiated Via Facsimile Transmission
- Transfers initiated via fax may use either repetitive wire
security procedures, telephone confirmation or a combination
of both.
Optional Security Procedure
- Client may establish telephone confirmation procedures to
authenticate repetitive manual wires initiated via telephone,
untested facsimile or mail in excess of certain dollar amounts
using the attached forms.
4
<PAGE> 31
WIRE TRANSFER SECURITY PROCEDURES
- --------------------------------------------------------------------------------
SECTIONS I and II SHOULD BE COMPLETED BY ALL CLIENTS
- --------------------------------------------------------------------------------
Please type all documentation.
- ------------------------------
SECTION I
Client/Fund
- --------------------------------------------------------------------------------
Street: Apt:
------------------------------------------------ ------------------
City: State: Zip:
------------------------------ ------------- -------------------
Phone Number: ( )
--------------------------
Fax Number: ( )
--------------------------
SECTION II
Please list the number of all demand deposit accounts (DDAs) from which you
intend to initiate wire transfers.
Maximum $ Limit Maximum $ Limit
--------------- ---------------
DDA Number Per Transaction DDA Number Per Transaction
- ---------- --------------- ---------- ---------------
(8 Digits) (if any) (8 Digits) (if any)
- ---------- -------- ---------- --------
1. 7.
--------- --------------- -------- ---------------
2. 8.
--------- --------------- -------- ---------------
3. 9.
--------- --------------- -------- ---------------
4. 10.
--------- --------------- -------- ---------------
5. 11.
--------- --------------- -------- ---------------
6. 12.
--------- --------------- -------- ---------------
5
<PAGE> 32
WIRE TRANSFER SECURITY PROCEDURES
SECTION - III CALLBACK VERIFICATION FORM
COMPLETE THIS SECTION FOR ALL TRANSFERS BY TELEPHONE ONLY.
NOTE: INDIVIDUAL AUTHORIZED FOR CALLBACK IS RESTRICTED TO VERIFICATION ONLY.
INDIVIDUAL INITIATING TRANSFERS CANNOT PERFORM CALLBACK VERIFICATION.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Account A) Individual Authorized to Callback B) Authorized Individual (Optional) Dollar Authorized for Limited to
Number Initiate Transfer Instructions Phone No. for Callback Verification Limitation All Transfers Repetitive
(last name, first name) (last name, first name) Transfers
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$
- ------------------------------------------------------------------------------------------------------------------------------------
$
- ------------------------------------------------------------------------------------------------------------------------------------
$
- ------------------------------------------------------------------------------------------------------------------------------------
$
- ------------------------------------------------------------------------------------------------------------------------------------
$
- ------------------------------------------------------------------------------------------------------------------------------------
$
- ------------------------------------------------------------------------------------------------------------------------------------
$
- ------------------------------------------------------------------------------------------------------------------------------------
$
- ------------------------------------------------------------------------------------------------------------------------------------
$
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------ Check ( ) here if you would like to request callbacks on all repetitive transfers over a specified dollar amount.
Please provide the information below.
Please Callback on Please callback on
Account Number all transfers over this amount: Account Number all transfers over this amount:
-------------- ------------------------------- -------------- -------------------------------
1. $ 3. $
---------------- -------------------------------- ------------- ------------------------------
2. $ 4. $
---------------- -------------------------------- ------------- ------------------------------
</TABLE>
6
<PAGE> 1
EXHIBIT 11(a)
Law Offices
DRINKER BIDDLE & REATH LLP
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, PA 19107-3496
Telephone: (215) 988-2700
Fax: (215) 988-2757
September 15, 1998
The Parkstone Advantage Fund
3435 Stelzer Road
Columbus, Ohio 43219
RE: POST-EFFECTIVE AMENDMENT NO. 8 TO THE REGISTRATION
STATEMENT ON FORM N-1A (FILE NOS. 33-65690
AND 811-7850)
--------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to The Parkstone Advantage Fund, a
Massachusetts business trust (the "Trust"), in connection with the preparation
and filing with the Securities and Exchange Commission of Post-Effective
Amendment No. 8 (the "Amendment") to the Trust's Registration Statement on Form
N-1A under the Securities Act of 1933, as amended.
The Trust is authorized to issue an unlimited number of shares of
beneficial interest (the "Shares"), without par value. The Board of Trustees of
the Trust has the power to designate one or more series ("Series") of Shares and
to classify or reclassify any unissued Shares with respect to such Series.
Currently the Trust is offering Shares of four Series, the Small Capitalization
Fund, Mid Capitalization Fund, Bond Fund and International Discovery Fund. The
Board of Trustees has previously authorized the issuance of Shares to the
public.
We have reviewed the Trust's Declaration of Trust, Code of Regulations,
resolutions of its Board of Trustees and such other legal and factual matters as
we have deemed appropriate. We have also relied upon an opinion of Ropes & Gray,
local Massachusetts counsel to the Trust, as to matter to which the laws of the
Commonwealth of Massachusetts are applicable. We assume that the Shares have
been or will be issued against payment therefor as described in the Trust's
applicable Prospectus.
This opinion is based exclusively on Massachusetts law and the federal
law of the United States of America.
<PAGE> 2
The Parkstone Advantage Fund
September 15, 1998
Page 2
Based upon the foregoing, it is our opinion that the Shares have been
and will be validly issued, fully paid and non-assessable by the Trust.
We note that under Massachusetts law, shareholders of a Massachusetts
business trust could, under certain circumstances, be held personally liable for
the obligations of such trust. However, the Declaration of Trust disclaims
shareholder liability for claims against the Trust. The Declaration of Trust
further provides that every note, bond, contract, instrument, certificate or
other undertaking made or issued by the Trust's trustees or officers shall
recite to the effect that the same was executed or made by or on behalf of the
Trust or by them as trustees or officers and that the obligations of such
instrument are not binding upon the Trust's shareholders individually but are
binding only upon the assets and property of the Trust or a particular Series
thereof. The Declaration of Trust provides for indemnification out of the assets
of the Series of which a shareholder owns or owned Shares, for any and all loss
or expense for which the shareholder shall be charged or held personally liable
solely by reason of the shareholder's being or having been such a shareholder.
Thus, the risk of a shareholder's incurring financial loss on account of
shareholder liability is limited to circumstances in which the relevant Series
itself would be unable to meet its obligations.
We hereby consent to the filing of this opinion as an exhibit to the
Amendment to the Trust's Registration Statement.
Very truly yours,
/s/ Drinker Biddle & Reath LLP
DRINKER BIDDLE & REATH LLP
-2-
<PAGE> 1
EXHIBIT (11)(b)
CONSENT OF INDEPENDENT AUDITORS
We consent to the references to our firm under the caption "Financial
Highlights" in the Prospectus and under the captions "Independent Auditors" and
"Financial Statements" in the Statement of Additional Information, both included
in Post-Effective Amendment No. 7 to the Registration Statement (Form N-lA No.
811-7850) of The Parkstone Advantage Fund and to use of our report dated
February 10, 1998, incorporated by reference therein.
/s/ Ernst & Young L.L.P.
Columbus, Ohio
September 15, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000908823
<NAME> THE PARKSTONE ADVANTAGE FUNDS
<SERIES>
<NUMBER> 004
<NAME> PARKSTONE ADVANTAGE BOND FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 12,346,831
<INVESTMENTS-AT-VALUE> 12,508,740
<RECEIVABLES> 312,549
<ASSETS-OTHER> 5,288
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 12,826,577
<PAYABLE-FOR-SECURITIES> 152,159
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 11,371
<TOTAL-LIABILITIES> 163,530
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11,634,116
<SHARES-COMMON-STOCK> 1,145,721
<SHARES-COMMON-PRIOR> 1,107,616
<ACCUMULATED-NII-CURRENT> 910,450
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 43,428
<ACCUM-APPREC-OR-DEPREC> 161,909
<NET-ASSETS> 12,663,047
<DIVIDEND-INCOME> 17,268
<INTEREST-INCOME> 388,062
<OTHER-INCOME> 0
<EXPENSES-NET> 82,975
<NET-INVESTMENT-INCOME> 322,355
<REALIZED-GAINS-CURRENT> 120,105
<APPREC-INCREASE-CURRENT> (47,708)
<NET-CHANGE-FROM-OPS> 394,752
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 210,227
<NUMBER-OF-SHARES-REDEEMED> 172,122
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 806,860
<ACCUMULATED-NII-PRIOR> 588,095
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 163,533
<GROSS-ADVISORY-FEES> 45,056
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 82,975
<AVERAGE-NET-ASSETS> 12,282,612
<PER-SHARE-NAV-BEGIN> 10.70
<PER-SHARE-NII> .26
<PER-SHARE-GAIN-APPREC> .09
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.05
<EXPENSE-RATIO> 1.36
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000908823
<NAME> THE PARKSTONE ADVANTAGE FUNDS
<SERIES>
<NUMBER> 002
<NAME> PARKSTONE ADVANTAGE MID CAP FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 30,826,772
<INVESTMENTS-AT-VALUE> 39,414,325
<RECEIVABLES> 373,634
<ASSETS-OTHER> 4,862
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 39,792,821
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 7,437,052
<TOTAL-LIABILITIES> 7,437,052
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 23,180,165
<SHARES-COMMON-STOCK> 2,007,899
<SHARES-COMMON-PRIOR> 2,183,328
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 179,363
<ACCUMULATED-NET-GAINS> 767,414
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 8,587,553
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<CIK> 0000908823
<NAME> THE PARKSTONE ADVANTAGE FUNDS
<SERIES>
<NUMBER> 003
<NAME> PARKSTONE ADVANTAGE SMALL CAP FUND
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<TABLE> <S> <C>
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<CIK> 0000908823
<NAME> THE PARKSTONE ADVANTAGE FUNDS
<SERIES>
<NUMBER> 005
<NAME> PARKSTONE ADVANTAGE INTERNATIONAL DISCOVERY FUND
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<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000908823
<NAME> PARKSTONE ADVANTAGE FUNDS
<SERIES>
<NUMBER> 002
<NAME> MID CAPITALIZATION FUND
<S> <C>
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<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000908823
<NAME> PARKSTONE ADVANTAGE FUNDS
<SERIES>
<NUMBER> 003
<NAME> SMALL CAPITALIZATION FUND
<S> <C>
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<TABLE> <S> <C>
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<CIK> 0000908823
<NAME> PARKSTONE ADVANTAGE FUNDS
<SERIES>
<NUMBER> 004
<NAME> BOND
<S> <C>
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<NAME> PARKSTONE ADVANTAGE FUNDS
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<NUMBER> 005
<NAME> INTERNATIONAL DISCOVERY FUNDS
<S> <C>
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