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As filed with the Securities and Exchange Commission on April 30, 1999
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. 11 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 12
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
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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>
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THE PARKSTONE ADVANTAGE FUND
PROSPECTUS
MAY 1, 1999
The Securities and Exchange Commission has not approved
or disapproved these securities or passed upon the
adequacy of this prospectus. Any representation
to the contrary is a criminal offense.
An investment in the Fund is not a deposit in a bank
and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
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CONTENTS
<TABLE>
<S> <C> <C> <C>
RISK/RETURN SUMMARY
LOGO
LOGO
4 Small Capitalization Fund
5 Mid Capitalization Fund
6 Bond Fund
7 International Discovery Fund
DESCRIPTION OF THE FUNDS
LOGO
LOGO
8 Investment Objectives and Policies
11 Description Of Investment Practices
14 Additional Risk Considerations
MANAGEMENT OF THE FUNDS
LOGO
LOGO
15 Investment Adviser
PURCHASE AND SALE OF SHARES
LOGO
LOGO
16 How Shares Are Valued
16 Purchase And Redemption Of Shares
DIVIDENDS, DISTRIBUTIONS AND TAXES
LOGO
LOGO
16
FINANCIAL HIGHLIGHTS
LOGO
LOGO
17
</TABLE>
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RISK/RETURN SUMMARY
The following is a summary of certain key information about the Funds. You
will find additional information about the Funds, including a detailed
description of the risks of an investment in the Funds, after this summary.
In this summary, we will describe certain kinds of risks that apply to one or
more of the Funds. These risks are:
- MARKET RISK This is the risk that the value of a Fund's investments will
fluctuate as the stock or bond markets fluctuate and that prices overall
will decline over short or longer-term periods.
- INTEREST RATE RISK This is the risk that changes in interest rates will
affect the value of a Fund's investments in income-producing or
fixed-income or debt securities. Increases in interest rates may cause the
value of a Fund's investments to decline.
- CREDIT RISK This is the risk that the issuer of a security will be unable
or unwilling to make timely payments of interest or principal, or to
otherwise honor its obligations.
- FOREIGN RISK This is the risk of investments in issuers located in foreign
countries, which may have greater price volatility and less liquidity.
Investments in foreign securities also are subject to political,
regulatory, and diplomatic risks.
- CURRENCY RISK This is the risk that fluctuations in the exchange rates
between the U.S. dollar and foreign currencies may negatively affect the
value of a Fund's investments.
THE PARKSTONE ADVANTAGE FUNDS
The Parkstone Advantage Funds provide an investment vehicle for variable
annuity contracts and variable life insurance policies offered by the
separate accounts of various life insurance companies.
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RISK/RETURN SUMMARY SMALL CAPITALIZATION FUND
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- OBJECTIVE. The 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 stock of small- to medium-sized
companies.
- PRINCIPAL INVESTMENT STRATEGIES. The Fund normally invests at least 80% of
its total assets in common stocks and convertible securities of companies
that the Fund's Adviser believes will have sound management and the ability
to finance expected long-term growth. The Fund normally invests at least
65% of its total assets in common stocks or in convertible securities of
companies that have a market capitalization of less than $1 billion. The
Fund also may invest in foreign securities.
- PRINCIPAL INVESTMENT RISKS. The principal risks of investing in the Fund
are market risk and foreign risk. Investments in small- to medium-sized
companies may be more volatile than the over-all market. Smaller companies
tend to have limited resources, product lines and market share. As a
result, their share prices tend to fluctuate more than those of larger
companies. Their shares may also trade less frequently and in limited
volume, making them potentially less liquid. For this reason, the Fund's
returns may vary from the stock market generally. You may lose money by
investing in the Fund.
PERFORMANCE SUMMARY
The chart and table on this
page provides some indication
of the risks of investing in
the Small Capitalization Fund
by showing how the Small
Capitalization Fund has
performed and how its
performance has varied from
year to year. This performance
information does not take into
account any charges or
expenses deducted under your
insurance contract. If it did,
returns would be lower. The
bar chart shows changes in the
Fund's yearly performance over
the past five years to
demonstrate that the Fund has
gained and lost value at
differing times.
The table below compares the
Fund's performance over time
to that of the Russell 2000
Stock Index, a widely
recognized, unmanaged index of
common stocks.
You should consider an
investment in the Fund as a
long-term investment. The Fund's
returns will, however, fluctuate
over shorter periods. Of course,
past performance does not
indicate how the Fund will
perform in the future.
PERFORMANCE BAR CHART
YEAR-BY-YEAR TOTAL RETURNS AS OF 12/31(1)
During the period shown in the bar chart, the Fund's:
Best Quarter was 25.07%, 2nd quarter, 1997
Worst Quarter was -25.37%, 3rd quarter, 1998
PERFORMANCE TABLE
Average Annual Total Returns
(for the period ending December 31, 1998)(1)
<TABLE>
<CAPTION>
PAST PAST 5 SINCE
INCEPTION YEAR YEARS INCEPTION
<S> <C> <C> <C> <C>
Small Capitalization Fund 9/23/93 -2.51% 11.28% 12.69%
Russell 2000 Stock Index 9/30/93 -2.55% 11.87% 11.82%
</TABLE>
(1) Assumes reinvestment of dividends and distributions.
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RISK/RETURN SUMMARY MID CAPITALIZATION FUND
- -
- OBJECTIVE. The 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.
- PRINCIPAL INVESTMENT STRATEGIES. The Fund invests at least 80% of the value
of its total assets in common stocks and convertible securities that the
Fund's Adviser believes have sound management and the ability to finance
expected long-term growth. In addition, the Fund normally invests at least
65% of its total assets in common stocks and convertible securities of
companies with market capitalization between $1 and $5 billion. The Fund
also may invest in foreign stocks.
- PRINCIPAL INVESTMENT RISKS. The principal risks of investing in the Fund
are market risk and foreign risk. Investments in medium-sized companies may
be more volatile than the over-all market. For this reason, the Fund's
returns may vary from the stock market generally. You may lose money by
investing in the Fund.
PERFORMANCE SUMMARY
The chart and table on this
page provides some indication
of the risks of investing in
the Mid Capitalization Fund by
showing how the Mid
Capitalization Fund has
performed and how its
performance has varied from
year to year. This performance
information does not take into
account any charges or
expenses deducted under your
insurance contract. If it did,
returns would be lower. The
bar chart shows changes in the
Fund's yearly performance over
the past five years to
demonstrate that the Fund has
gained and lost value at
differing times.
The table below compares the
Fund's performance over time to
that of the S&P(R) Midcap 400
Index, a widely recognized,
unmanaged index of common
stocks.
You should consider an
investment in the Fund as a
long-term investment. The Fund's
returns will, however, fluctuate
over shorter periods. Of course,
past performance does not
indicate how the Fund will
perform in the future.
PERFORMANCE BAR CHART
YEAR-BY-YEAR TOTAL RETURNS AS OF 12/31(1)
During the period shown in the bar chart, the Fund's:
Best Quarter was 20.12%, 4th quarter, 1998
Worst Quarter was -18.87%, 3rd quarter, 1998
PERFORMANCE TABLE
Average Annual Total Returns
(for the periods ending December 31, 1998)(1)
<TABLE>
<CAPTION>
PAST PAST 5 SINCE
INCEPTION YEAR YEARS INCEPTION
<S> <C> <C> <C> <C>
Mid Capitalization Fund 9/23/93 10.33% 12.26% 11.95%
S&P Midcap 400(R) Index 9/30/93 18.25% 18.67% 18.45%
</TABLE>
(1) Assumes reinvestment of dividends and distributions.
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RISK/RETURN SUMMARY BOND FUND
- -
- OBJECTIVE. The Fund's 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.
- PRINCIPAL INVESTMENT STRATEGIES. The Fund invests in high- and medium-grade
fixed-income securities, primarily in corporate bonds, U.S. government
obligations, mortgage-backed securities and asset-backed securities.
- PRINCIPAL INVESTMENT RISKS. The principal risks of investing in the Fund
are interest rate risk and credit risk. Increases in interest rates may
cause the value of the Fund's investments to decline. In addition, the
Fund's investments in asset-backed securities and mortgage-backed
securities may tend to be more volatile than other types of fixed-income
securities in response to changes in interest rates. These securities also
are subject to prepayment risk when interest rates decline, which could
require the Fund to invest in securities with lower interest rates. You may
lose money by investing in the Fund.
PERFORMANCE SUMMARY
The chart and table on this
page provides some indication
of the risks of investing in
the Bond Fund by showing how
the Bond Fund has performed
and how its performance has
varied from year to year. This
performance information does
not take into account any
charges or expenses deducted
under your insurance contract.
If it did, returns would be
lower. The bar chart shows
changes in the Fund's yearly
performance over the past five
years to demonstrate that the
Fund has gained or lost value
at differing times.
The table below compares the
Fund's performance over time
to that of the Salomon
Brothers Broad Index, an
unmanaged index generally
representative of the bond
market as a whole.
You should consider an
investment in the Fund as a
long-term investment. The Fund's
returns will, however, fluctuate
over shorter periods. Of course,
past performance does not
indicate how the Fund will
perform in the future.
PERFORMANCE BAR CHART
YEAR-BY-YEAR TOTAL RETURNS AS OF 12/31
SHARES(1)
During the period shown in the bar chart, the Fund's:
Best Quarter was 6.03%, 2nd quarter, 1995
Worst Quarter was -3.61%, 1st quarter, 1994
PERFORMANCE TABLE
Average Annual Total Returns*
(for the periods ending December 31, 1998)(1)
<TABLE>
<CAPTION>
PAST PAST 5 SINCE
INCEPTION YEAR YEARS INCEPTION
<S> <C> <C> <C> <C>
Bond Fund 9/23/93 6.71% 5.30% 4.94%
Salomon Brothers Broad Index 8/31/98 8.71% 7.29% 6.90%
</TABLE>
* For current performance information, including the Fund's 30-day yield, call
1-800-355-4555.
(1) Assumes reinvestment of dividends and distributions.
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RISK/RETURN SUMMARY INTERNATIONAL DISCOVERY FUND
- -
- OBJECTIVE. The Fund's investment objective is to seek long-term growth of
capital.
- PRINCIPAL INVESTMENT STRATEGIES. The Fund will seek to achieve its
investment objective by investing, under normal market conditions, at least
80% of its total assets in equity securities of foreign issuers. The Fund's
assets normally will be invested in the securities of issuers located in at
least three foreign countries.
- PRINCIPAL INVESTMENT RISKS. The principal risks of investing in the Fund
are market risk, foreign risk, and currency rate risk. Because the Fund
invests in foreign securities and in small- and medium-sized companies, the
Fund's returns will be more volatile and differ, sometimes significantly,
from U.S. stock returns generally. You may lose money by investing in the
Fund.
Also, the Fund may invest 25% or more of its assets in the securities of
companies located in one country. When the Fund invests a high percentage of
its assets in a particular country, the Fund will be especially susceptible
to factors affecting that country.
PERFORMANCE SUMMARY
The chart and table on this
page provides some indication
of the risks of investing in
the International Discovery
Fund by showing how the
International Discovery Fund
has performed and how its
performance has varied from
year to year. This performance
information does not take into
account any charges or
expenses deducted under your
insurance contract. If it did,
returns would be lower. The
bar chart shows changes in the
Fund's yearly performance
during the past five years to
demonstrate that the Fund has
gained or lost value at
differing times.
The table below compares the
Fund's performance over time to
that of the Morgan Stanley
Capital International-Europe,
Australasia and Far East (MSCI-
EAFE) Index, an unmanaged index
generally representative of the
foreign stock markets.
You should consider an
investment in the Fund as a
long-term investment. The Fund's
returns will, however, fluctuate
over shorter periods. Of course,
past performance does not
indicate how the Fund will
perform in the future.
PERFORMANCE BAR CHART
YEAR-BY-YEAR TOTAL RETURNS AS OF 12/31(1)
During the period shown in the bar chart, the Fund's:
Best Quarter was 17.50%, 4th quarter, 1998
Worst Quarter was -15.69%, 3rd quarter, 1998
PERFORMANCE TABLE
Average Annual Total Returns
(for the period ending December 31, 1998)(1)
<TABLE>
<CAPTION>
PAST PAST 5 SINCE
INCEPTION YEAR YEARS INCEPTION
<S> <C> <C> <C> <C>
International Discovery Fund 9/23/93 11.61% 6.12% 6.49%
MSCI-EAFE Index 9/30/93 20.00% 9.19% 8.92%
</TABLE>
(1) Assumes reinvestment of dividends and distributions.
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DESCRIPTION OF THE FUNDS INVESTMENT OBJECTIVES AND POLICIES
This section of the Prospectus provides a more complete description of the
principal investment objectives and policies of the Funds. Of course, there
can be no assurance that the Funds will achieve their investment objectives.
Please note:
- Additional descriptions of the Fund's risks, strategies, and
investments, as well as other strategies and investments not described
below, may be found in the Fund's Statement of Additional Information
("SAI").
- The Funds' investment objectives are not "fundamental" and may be
changed without shareholder vote, although the Trust's Board of Trustees
would only change a Fund's objective on 30 days' notice to shareholders.
SMALL CAPITALIZATION FUND
The Fund's investment objective is to seek growth of capital by investing
primarily in a diversified portfolio of common stocks and securities
convertible into common stocks of small-to medium-sized companies. The Fund
normally invests at least 80% of its total assets in common stocks and
convertible securities of companies that the Adviser believes to have sound
management and the ability to finance expected long-term growth. The Fund
normally invests at least 65% of its total assets in companies that have a
market capitalization of less than $1 billion.
The 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 Fund limits its investment in securities of medium-sized companies to no
more than 35% of its total assets.
Companies that participate in sectors that are identified as having long-term
growth potential generally make up a substantial portion of the Fund's
holdings. These companies often have established the market niche or have
developed the unique products or technologies that are expected to produce
superior growth in revenues and earnings. As smaller capitalization stocks
are quite volatile and subject to wide fluctuations in both the short and
medium term, the Fund may be characterized as more aggressive than a general
equity fund.
The Fund also may 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");
- up to 20% 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;
- in securities of other investment companies that invest in securities in
which the Fund may invest; and
- in securities issued by foreign branches of U.S. banks and foreign
banks, in Canadian Commercial Paper ("CCP"), and in U.S.
dollar-denominated commercial paper of a foreign issuer ("Europaper").
MID CAPITALIZATION FUND
The 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 Fund normally invests at least 80% of its
total assets in common stocks and convertible securities of companies that
the Adviser believes to have sound management and the ability to finance
expected long-term growth. The Fund normally invests at least 65% of its
total assets in companies that have a market capitalization between $1 and $5
billion.
The 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 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.
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DESCRIPTION OF THE FUNDS INVESTMENT OBJECTIVES AND POLICIES
The Fund also may invest:
- up to 25% of its net assets in foreign securities either directly or
through the purchase of ADRs or EDRs;
- in securities issued by foreign branches of U.S. banks and foreign
banks, CCP and in Europaper;
- 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; and
- in securities of other investment companies that invest in securities in
which the Fund may invest.
BOND FUND
The 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 Fund invests in bonds, notes, and debentures of
a wide range of U.S. corporate issuers. The 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 Fund's Adviser deems
present attractive opportunities and are of comparable quality. The Fund also
invests 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. The fixed-income securities in which the Fund invests
include:
- bonds, debentures, and 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;
- debt securities convertible into, or exchangeable for, common stocks;
- first mortgage loans; and
- asset-backed securities
In making investment decisions for the Fund, the Fund's 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.
The Fund also may invest:
- up to 20% of its assets 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 issued by insurance companies;
- up to 25% of its net assets in foreign securities either directly or
through the purchase of ADRs;
- in securities issued by foreign branches of U.S. banks and foreign
banks;
- in CCP and Europaper;
- in obligations of the Export-Import Bank of the United States;
- 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 Bond");
- in Canadian bonds; and
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DESCRIPTION OF THE FUNDS INVESTMENT OBJECTIVES AND POLICIES
- -
- in 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 Fund's principal risks are interest risk and credit risk. An increase in
interest rates will generally reduce the value of the investments in the Fund
and a decline in interest rates will generally increase the value of those
investments. The Fund's investments in mortgage-backed securities have
prepayment risk, which is the risk that mortgage loans will be repaid when
interest rates decline and the Fund will have to reinvest in securities with
lower interest rates. This risk causes mortgage-backed securities to have
significantly greater price and yield volatility than traditional
fixed-income securities.
INTERNATIONAL DISCOVERY FUND
The Fund's investment objective is to seek long-term growth of capital. The
Fund will seek to achieve its investment objective by investing, under normal
market conditions, at least 80% of its total assets in equity securities of
foreign issuers. The Fund's assets normally will be invested in the
securities of issuers located in at least three foreign countries. Foreign
investments also may include debt obligations issued or guaranteed by foreign
governments or their agencies, authorities, instrumentalities or political
subdivisions, including a foreign state, province or municipality. The Fund
does not presently intend to invest in common stock of domestic companies.
The Fund will invest primarily in equity securities, including common and
preferred stocks, rights, warrants, securities convertible into common stocks
and ADRs of companies included in the Morgan Stanley Capital International
Europe, Australasia, Far East Index, a broadly diversified international
index consisting of more than 1,000 equity securities of companies located in
Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong,
Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Singapore,
Spain, Sweden, Switzerland, and the United Kingdom. The Fund, however, will
not be an "index" fund, and is neither sponsored by nor affiliated with
Morgan Stanley Capital International. The Fund will not presently make
investments in markets where, in the judgement of the adviser, property
rights are not defined and supported by adequate legal infrastructure. More
than 25% of the Fund's assets may be invested in the securities of issuers
located in the same country.
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DESCRIPTION OF THE FUNDS INVESTMENT PRACTICES
COMPLEX SECURITIES Some of the investment techniques utilized by the Fund's
Adviser involve complex securities sometimes referred to as "derivatives."
Among such securities are put and call options, foreign currency transactions
and futures contracts, all of which are described below. The Fund's Adviser
believes that such complex securities may in some circumstances play a
valuable role in successfully implementing each Fund's investment strategy
and achieving its goals. 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 Funds' Adviser 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. The INTERNATIONAL DISCOVERY FUND invests primarily in the
securities of foreign issuers. The SMALL CAPITALIZATION FUND and MID
CAPITALIZATION FUND also may 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. These 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).
Investment in foreign securities may be subject to greater fluctuations in
price than U.S. securities. 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.
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 considered less liquid than securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities. 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.
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.
FORWARD CURRENCY EXCHANGE CONTRACTS. A forward 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. The
Funds may enter into forward currency contracts in order to hedge against
adverse movements in exchange rates between currencies.
A Fund may also hedge its foreign currency exchange rate risk by engaging in
currency financial futures and options transactions. The forecasting of
short-term currency market movement is extremely difficult and whether such a
short-term hedging strategy will be successful is highly uncertain. It is
impossible to forecast with precision the market value of portfolio
securities at the expiration of a forward currency contract. Accordingly, it
may be necessary for a Fund to buy or sell additional currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less or more than the amount of foreign currency the 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.
Although forward currency exchange 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 INTERNATIONAL DISCOVERY FUND limits its investments in forward currency
exchange contracts to 15% of its total assets. The INTERNATIONAL DISCOVERY
FUND does not intend to enter into forward currency exchange contracts or to
maintain a net exposure in these contracts where it would be obligated to
deliver an amount of foreign currency in excess of the value of its portfolio
securities or other assets denominated in that currency.
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<PAGE> 14
DESCRIPTION OF THE FUNDS INVESTMENT PRACTICES
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 futures contracts in an
effort to hedge against market risks.
The Funds may invest in put and call options on futures contracts that give
the 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. The Funds will limit aggregate initial
margin deposits for futures contracts and premiums paid for related options
to not more than 5% of a Fund's total assets.
Futures transactions involve brokerage costs and require a Fund to segregate
assets to cover contracts that would require it to purchase securities or
currencies. A Fund may lose the expected benefit of futures transactions if
interest rates, exchange rates or securities prices move in an unanticipated
manner. Such unanticipated changes may also result in poorer overall
performance than if the Fund had not entered into any futures transactions.
In addition, the value of a Fund's futures positions may not prove to be
perfectly or even highly correlated with the value of its portfolio
securities or foreign currencies, limiting the Fund's ability to hedge
effectively against interest rate, exchange rate and/or market risk and
giving rise to additional risks. There is no assurance of liquidity in the
secondary market for purposes of closing out futures positions.
GOVERNMENT OBLIGATIONS 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 the 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.
The Funds also may invest in stripped Treasury Obligations. 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.
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. A GIC is considered an
illiquid investment unless the Fund has the right to receive the principal
amount from the insurance company within 7 days.
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 Fund's 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. If subsequent events cause the rating of a fixed-income
security to fall below the fourth highest rating category, the BOND FUND'S
Adviser will consider whether the BOND FUND should continue to hold that
security but in no event would the Fund be required to sell the security at a
loss.
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,
including GNMA, FNMA and FHLMC securities. 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, 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.
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<PAGE> 15
DESCRIPTION OF THE FUNDS INVESTMENT PRACTICES
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. 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 that
typically occur when interest rates decline, are important because of their
effect on the yield and price of the securities.
The Funds, excluding the International Discovery Fund, may invest in
mortgage-related securities including 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. Unlike U.S. government pass-through securities, CMOs
are often issued in multiple classes. The principal of and interest on the
mortgage assets may then be allocated among these classes in various ways.
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 also may 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 Fund's Adviser
pursuant to guidelines approved by the Trust's Board of Trustees. The
applicable municipal securities ratings are described in the Funds' SAI.
OTHER MUTUAL FUNDS Each of the Funds may invest up to 5% of its total assets
in the securities of any one money market mutual fund including an affiliated
money market fund, but no more than 10% of its assets may be invested in
other mutual funds. In order to avoid the imposition of additional fees as a
result of a Fund's investments in shares of an affiliated money market fund,
the Funds will bear certain fees and expenses rather than the affiliated
money market fund. Each Fund also will incur additional expenses due to the
duplication of expenses as a result of investing in securities of other
unaffiliated mutual funds. See the Funds' SAI for additional information
regarding the Funds' investments in securities of affiliated or unaffiliated
mutual funds.
PUT AND CALL OPTIONS Each of the Funds may purchase put and call options on
securities and foreign currencies 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.
The Funds will write only covered call options (options on securities or
currencies owned by the particular Fund). The Funds normally will limit
options to not more than 50% of their net assets, and, for the INTERNATIONAL
DISCOVERY FUND, 20% of its net assets.
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.
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<PAGE> 16
DESCRIPTION OF THE FUNDS ADDITIONAL RISK CONSIDERATIONS
PORTFOLIO TURNOVER The Funds' portfolio turnover rates are included in the
Financial Highlights Table. The Funds are actively managed and, in some cases
in response to market conditions, a Fund's portfolio turnover may exceed
100%. High portfolio turnover rates will generally result in higher
transaction costs, including increased 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.
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 Funds' 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 the "Year 2000 Problem." The Funds' Adviser is taking steps that it
believes are reasonably designed to address the 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.
TEMPORARY INVESTMENTS During temporary defensive periods as determined by the
Investment Adviser 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.
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<PAGE> 17
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MANAGEMENT OF THE FUND
- -
INVESTMENT ADVISER
National City Investment Management Company ("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
National City Corporation ("NCC"). As of December 31, 1998 NCC had over $88
billion in assets. IMC reflects a combination of National City Bank's
investment management group and First of America.
Subject to such policies as the Trust's Board of Trustees may determine, IMC
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
International Equity Team manages the International Discovery Fund. The Fixed
Income Team manages the Bond Fund.
For the services provided and expenses assumed pursuant to its Investment
Advisory Agreement with the Trust, IMC 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, IMC'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, IMC's fee is computed daily and
paid monthly, at the annual rate of 0.74% of that Fund's average daily net
assets.
For the period ended December 31, 1998, IMC received fees of 1.00%, 1.00%,
1.25% and 0.74% for the Small Capitalization Fund, the Mid Capitalization
Fund, the International Discovery Fund and the Bond Fund, respectively, of
that Fund's average daily net assets. IMC 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.
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<PAGE> 18
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PURCHASE AND SALE OF SHARES
HOW SHARES ARE VALUED
The net asset value per share is
calculated by adding the total
value of a Fund's investments
and other assets, subtracting
its liabilities and then
dividing that figure by the
number of outstanding shares of
the Fund:
NAV =
Total Assets - Liabilities
---------------------------------
Number of Shares
Outstanding
--------------------------------
The net asset value of shares of the
Funds is determined and their shares are
priced as of the close of trading on the
New York Stock Exchange ("NYSE") on each
Business Day (generally 4:00 p.m. Eastern
Time) ("Valuation Time"). 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. On days
when the primary market is closed due to
a local of regional holiday, securities
will be valued by a method which the
Board of Trustees believes accurately
reflects fair value. For further
information about valuation of
investments, see "NET ASSET VALUE" in the
SAI.
PURCHASE AND REDEMPTION OF SHARES
Investors may not purchase or redeem shares of the Funds directly, but only
through the variable annuity contracts and variable life insurance policies
offered through the Separate Accounts of Participating Insurance Companies.
You should refer to the prospectus of the Participating Insurance Company's
separate account for information on how to purchase a variable annuity
contract or variable life insurance policy, how to select specific Parkstone
Advantage Funds as investment options for your contract or policy and how to
redeem monies from the Funds.
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 Funds may suspend the right of redemption under certain extraordinary
circumstances in accordance with the rules of the Securities and Exchange
Commission. The Funds do not assess any fees when they sell or redeem their
shares.
DIVIDENDS, DISTRIBUTIONS, 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 is treated as a separate corporate entity for tax purposes. Each
Fund intends to elect to be treated as a regulated investment company and
each Fund intends to qualify for such treatment for each taxable year under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").
Provided that a Fund and a separate account investing in the Fund satisfy
applicable tax requirements, any distributions from the Fund to the separate
account will be exempt from current federal income taxation to the extent
that such distributions accumulate in a variable annuity contract or a
variable life insurance contract.
Persons investing in variable annuity or variable life insurance contracts
should refer to the prospectuses with respect to such contracts for further
information regarding the tax treatment of the contracts and the separate
accounts in which the contracts are invested.
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GENERAL INFORMATION
Inquiries regarding the Funds may be directed in writing to The
Parkstone Advantage Fund at 3435 Stelzer Road, Columbus, Ohio 43219,
or by calling toll-free (800) 355-4555.
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<PAGE> 19
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FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand each Fund's
financial performance for the past 5 years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned or lost on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by Ernst & Young LLP, whose
report, along with the Funds' financial statements, are included in the
Trust's December 31, 1998 Annual Report, which is available upon request.
PARKSTONE ADVANTAGE SMALL CAPITALIZATION FUND
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 17.12 $ 18.20 $ 15.71 $ 11.58 $ 11.00
-----------------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net Investment Income (Loss) (0.20) (0.20) (0.15) (0.15) (0.13)
Net Realized and Unrealized Gains (Losses)
From Investments (0.23) (0.79) 4.79 4.28 0.71
-----------------------------------------------------------------------------------------------------------------
Total from Investment Activities (0.43) (0.99) 4.64 4.13 0.58
-----------------------------------------------------------------------------------------------------------------
Distributions From Net Realized Gains -- (0.09) (2.15) -- --
-----------------------------------------------------------------------------------------------------------------
Total Distributions -- (0.09) (2.15) -- --
-----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 16.69 $ 17.12 $ 18.20 $ 15.71 $ 11.58
-----------------------------------------------------------------------------------------------------------------
Total Return (2.51%) (5.47%) 29.66% 35.66% 5.27%
-----------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period $22,454,150 $26,860,472 $24,495,224 $13,272,561 $7,476,444
Ratio of Expenses to Average Net Assets 1.53% 1.55% 1.40% 1.64% 1.98%
Ratio of Net Investment Income (Loss) to
Average Net Assets (1.14%) (1.20%) (1.06%) (1.29%) (1.66%)
Ratio of expenses to average net assets* 1.60% (a) (a) (a) (a)
Portfolio Turnover Rate 83% 51% 60% 64% 39%
</TABLE>
PARKSTONE ADVANTAGE MID CAPITALIZATION FUND
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.23 $ 14.60 $ 12.44 $ 9.64 $ 10.17
-----------------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net Investment Income (Loss) (0.16) (0.11) (0.09) (0.08) (0.07)
Net Realized and Unrealized Gains (Losses)
From Investments 1.63 1.90 2.25 2.88 (0.46)
-----------------------------------------------------------------------------------------------------------------
Total from Investment Activities 1.47 1.79 2.16 2.80 (0.53)
-----------------------------------------------------------------------------------------------------------------
Distributions From Net Realized Gains -- (2.16) -- -- --
-----------------------------------------------------------------------------------------------------------------
Total Distributions -- (2.16) -- -- --
-----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 15.70 $ 14.23 $ 14.60 $ 12.44 $ 9.64
-----------------------------------------------------------------------------------------------------------------
Total Return 10.33% 12.58% 17.36% 29.05% (5.21%)
-----------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period $29,065,627 $31,059,179 $24,040,588 $14,977,130 $9,095,015
Ratio of Expenses to Average Net Assets 1.51% 1.53% 1.42% 1.62% 1.86%
Ratio of Net Investment Income (Loss) to
Average Net Assets (0.98%) (0.88%) (0.73%) (0.84%) (0.92%)
Ratio of expenses to average net assets* 1.57% (a) (a) (a) (a)
Portfolio Turnover Rate 71% 55% 127% 44% 51%
</TABLE>
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<PAGE> 20
FINANCIAL HIGHLIGHTS
PARKSTONE ADVANTAGE BOND FUND
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.70 $ 10.33 $ 10.50 $ 9.35 $ 9.96
-----------------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net Investment Income (Loss) 0.51 0.48 0.36 0.40 0.42
Net Realized and Unrealized Gains (Losses)
From Investments 0.20 0.30 (0.18) 1.17 (0.96)
-----------------------------------------------------------------------------------------------------------------
Total from Investment Activities 0.71 0.78 0.18 1.57 (0.54)
-----------------------------------------------------------------------------------------------------------------
Distributions From Net Investment Income (0.49) (0.41) (0.35) (0.42) (0.07)
-----------------------------------------------------------------------------------------------------------------
Total Distributions (0.49) (0.41) (0.35) (0.42) (0.07)
-----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 10.92 $ 10.70 $ 10.33 $ 10.50 $ 9.35
-----------------------------------------------------------------------------------------------------------------
Total Return 6.71% 7.69% 1.83% 16.98% (5.38%)
-----------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period $12,337,690 $11,856,187 $ 9,754,430 $ 6,758,241 $4,651,157
Ratio of Expenses to Average Net Assets 1.44% 1.36% 1.29% 1.57% 1.80%
Ratio of Net Investment Income to Average
Net Assets 5.00% 5.36% 5.32% 5.31% 5.27%
Ratio of expenses to average net assets* 1.50% (a) (a) (a) (a)
Portfolio Turnover Rate 190% 144% 492% 178% 159%
</TABLE>
PARKSTONE ADVANTAGE INTERNATIONAL DISCOVERY FUND
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.44 $ 12.18 $ 10.59 $ 9.65 $ 10.35
-----------------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net Investment Income (Loss) (0.10) (0.06) (0.04) (0.03) (0.07)
Net Realized and Unrealized Gains (Losses)
on Investments 1.55 0.32 1.67 0.97 (0.63)
-----------------------------------------------------------------------------------------------------------------
Total from Investment Activities 1.45 0.26 1.63 0.94 (0.70)
-----------------------------------------------------------------------------------------------------------------
Distributions in Excess of Net Investment
Income -- -- (0.04) -- --
-----------------------------------------------------------------------------------------------------------------
Distributions From Net Realized Gains (0.06) -- -- -- --
-----------------------------------------------------------------------------------------------------------------
Total Distributions (0.06) -- (0.04) -- --
-----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 13.83 $ 12.44 $ 12.18 $ 10.59 $ 9.65
-----------------------------------------------------------------------------------------------------------------
Total Return 11.61% 2.13% 15.41% 9.74% (6.76%)
-----------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period $18,371,025 $18,784,361 $17,000,747 $11,645,200 $9,537,019
Ratio of Expenses to Average Net Assets 2.05% 1.90% 2.00% 2.38% 2.34%
Ratio of Net Investment Income (Loss) to
Average Net Assets (0.66%) (0.46%) (0.35%) (0.39%) (1.13%)
Ratio of expenses to average net assets* 2.11% (a) (a) (a) (a)
Portfolio Turnover Rate 73% 34% 65% 86% 87%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been as
indicated.
(a) There were no waivers or reimbursements during this period.
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<PAGE> 21
For more information about the Funds, the following documents are available free
upon request:
ANNUAL/SEMIANNUAL REPORTS (REPORTS):
The Funds' annual and semi-annual reports to shareholders contain detailed
information on the Funds' investments. In the annual report, you will find a
discussion of the market conditions and investment strategies that significantly
affected each Fund's performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI):
The SAI provides more detailed information about the Funds, including their
operations and investment policies. It is incorporated by reference, and is
legally considered a part of this prospectus.
You can get free copies of Reports and SAI, or request other information
and discuss your questions about the Parkstone Advantage Funds by
contacting the Funds at:
Parkstone Advantage Funds
3435 Stelzer Road
Columbus, Ohio 43219
Telephone: 1-800-355-4555
You can review the Funds' reports and SAIs at the Public Reference Room of the
Securities and Exchange Commission. You can get text-only copies for a fee, by
writing the Public Reference Section of the Commission, Washington, D.C.
20549-6009 or calling 1-800-SEC-0330.
Free from the Commission's Website at http://www.sec.gov.
(Investment Company Act file no. 811-7850)
PAR-F-005-0 1000
<PAGE> 22
SMALL CAPITALIZATION FUND
MID CAPITALIZATION FUND
BOND FUND
INTERNATIONAL DISCOVERY FUND
Each an Investment Portfolio of
THE PARKSTONE ADVANTAGE FUND
Statement of Additional Information
May 1, 1999
This Statement of Additional Information is not a Prospectus, but
should be read in conjunction with the Prospectus for The Parkstone Advantage
Fund dated May 1, 1999, which may be supplemented from time to time. This
Statement of Additional Information is incorporated by reference in its entirety
into the Prospectus. The Funds' audited financial statements and financial
highlights appearing in the 1998 Annual Report to Shareholders are incorporated
by reference into this Statement of Additional Information. Copies of the
Prospectus and the 1998 Annual Report to Shareholders may be obtained without
charge, upon request, by writing The Parkstone Advantage Fund at 3435 Stelzer
Road, Columbus, Ohio 43219, or by calling toll free (800) 355-4555.
<PAGE> 23
<TABLE>
TABLE OF CONTENTS
<CAPTION>
Page
<S> <C> <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..........................................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
Distributor..........................................................B-33
Custodians, 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
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>
<PAGE> 24
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, 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. 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
<PAGE> 25
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 an
NRSRO. In general, investment in lower-rated instruments is more risky than
investment in instruments in higher-rated categories. For a description of the
rating symbols of 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 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.
GUARANTEED INVESTMENT CONTRACTS ("GICS")
The Bond Fund may invest in GICs. 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.
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.
<PAGE> 26
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 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," occurred on January 1, 1999. As a result of the
conversion, securities issued by the member states are 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 indices); continuity of material contracts and potential
tax consequences. Other risks include the legal treatment of certain outstanding
financial contracts after January 1, 1999 that refer to currencies other than
the euro; the maintenance of exchange rates for currencies that were 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 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
believes that the risks associated with such investments are minimal.
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
<PAGE> 27
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 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.
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 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
<PAGE> 28
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.
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.
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, 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.
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
<PAGE> 29
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.
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 the 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 potential benefit represented by market
depreciation over the exercise price.
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.
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 in 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.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
Each Fund 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 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 Adviser to manage it might be affected in the event its
commitments to purchase "when-issued" or "delayed-delivery" securities ever
exceeded 25% of the value of its total 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 total assets.
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
<PAGE> 30
yield considered to be advantageous.
If a Fund sells a "when-issued" or "delayed-delivery" security before
a delivery, any gain would not be tax-exempt.
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. Accelerated prepayments have an adverse impact on yields for
pass-through securities 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-through securities purchased at a
discount. The Funds may purchase mortgage-related securities at a premium or at
a discount. If a Fund purchases a mortgage-related security at a premium, that
portion may be lost if there is a decline in the market value of the security
whether resulting from changes in interest rates or prepayments in the
underlying mortgage collateral. As with other interest-bearing securities, the
prices of such securities are inversely affected by changes in interest rates.
However, though the value of a mortgage-related security may decline when
interest rates rise, the converse is not necessarily true, since in periods of
declining interest rates the mortgages underlying the securities are prone to
prepayment, thereby shortening the life of the security and shortening the
period of time over which income at the higher rate is received. When interest
rates are rising, though, the rate of prepayment tends to decrease thereby
lengthening the period of time over which income at the lower rate is received.
For these and other reasons, a mortgage-related security's average maturity may
be shortened or lengthened as a result of interest rate fluctuations and,
therefore, it is not possible to predict accurately the security's return to the
Funds. In addition, regular payments received in respect of mortgage-related
securities include both interest and principal. No assurance can be given as to
the return the Funds will receive when these amounts are reinvested.
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
<PAGE> 31
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.
Mortgage-related securities in which the above-named Funds may invest
may also include collateralized mortgage obligations ("CMOs"). CMOs are debt
obligations issued generally by finance subsidiaries or trusts that are secured
by mortgage-backed certificates, including, in many cases, certificates issued
by government-related guarantors, including GNMA, FNMA and FHLMC, together with
certain funds and other collateral. Although payment of the principal of and
interest on the mortgage-backed certificates pledged to secure the CMOs may be
guaranteed by GNMA, FNMA or FHLMC, the CMOs represent obligations solely of the
issuer and are not insured or guaranteed by GNMA, FHLMC, FNMA or any other
governmental agency, or by any other person or entity. The issuers of the CMOs
typically have no significant assets other than those pledged as collateral for
the obligations.
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.
CORPORATE DEBT SECURITIES
The Bond Fund 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.
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.
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 changes in
interest rates. The value and liquidity of Medium-Grade Securities may be
diminished by adverse publicity and investor perceptions.
<PAGE> 32
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
Securities in which each of 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. 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.
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.
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
<PAGE> 33
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 repurchase agreements and dollar roll agreements are
considered to be borrowings by a Fund 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 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.
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.
<PAGE> 34
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Each of the Funds may invest in forward foreign currency exchange
contracts. 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 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.
The Funds may enter into forward currency contracts in order to hedge
against adverse movements in exchange rates between currencies. For example,
when a Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may want to establish the United States
dollar cost or proceeds, as the case may be. By entering into a forward currency
contract in United States dollars for the purchase or sale of the amount of
foreign currency involved in an underlying security transaction, such Fund is
able to protect itself against a possible loss between trade and settlement
dates resulting from an adverse change in the relationship between the United
States dollar and such foreign currency. Additionally, for example, when a Fund
believes that a foreign currency may suffer a substantial decline against the
U.S. dollar, it may enter into a forward currency sale contract to sell an
amount of that foreign currency approximating the value of some or all of that
Fund's portfolio securities or other assets denominated in such foreign
currency. 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.
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 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.
If the Fund retains the portfolio security and engages in an
offsetting transaction, such Fund will incur a gain or a loss 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. 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.
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
<PAGE> 35
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.
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 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 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 shares of that Fund (as
defined under "ADDITIONAL INFORMATION - Vote of a Majority of the Outstanding
Shares" in this Statement of Additional Information).
<PAGE> 36
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.
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;
4. 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:
(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.
5. 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.
6. 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.
7. 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.
In addition, the Funds are subject to the following non-fundamental
limitations, which may be changed without the vote of shareholders.
With respect to investment limitation No. 2 above, "commodities"
includes commodity contracts. With respect to investment limitation No. 7 above,
and as a non-fundamental policy which may be changed without the vote of
shareholders, no Fund will purchase securities while its outstanding borrowings
(including reverse repurchase agreements) are in excess of 5% of its total
assets. Securities held in escrow or in separate accounts in connection with a
Fund's investment practices described in the Funds' Prospectus or Statement of
Additional Information are not deemed to be pledged for purposes of this
limitation.
<PAGE> 37
No Fund may:
1. Acquire any other investment company or investment company security
except in 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.
Except for the Funds' policy on illiquid securities, and borrowing, 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.
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.
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.
Currently, the NYSE will not be open in observance of the following holidays:
New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, 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
<PAGE> 38
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.
The Trust 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 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.
The Trustees and Officers of the Trust, their addresses and their
principal occupations during the past 5 years are as follows:
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH THE TRUST PRINCIPAL OCCUPATION
DURING PAST 5 YEARS
AND OTHER AFFILIATIONS
<S> <C> <C>
Robert D. Neary Chairman of the Board and Trustee Retired Co-Chairman of Ernst & Young,
32980 Creekside Drive April 1984 to September 1993; Director,
Pepper Pike, OH 44124 Cold Metal Products, Inc., since March 1994;
Age 65 Director. Strategic Distribution, Inc., since
January 1999.
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.
</TABLE>
<PAGE> 39
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH THE TRUST PRINCIPAL OCCUPATION
DURING PAST 5 YEARS
AND OTHER AFFILIATIONS
<S> <C> <C>
Leigh Carter * Trustee Retired President and Chief Operating Officer,
13901 Shaker Blvd., #6B B.F. Goodrich Company, August 1986 to
Cleveland, OH 44120 September 1990; Director, Adams Express Company
Age 73 (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;
Director, TruSeal Technologies (manufacturer of
insulated glass sealants), since April 1997.
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, Kittle's Bloomington
Age 54 Properties LLC, since January 1981; partner,
KK&D LLC, since January 1989; partner KK&D II
LLC, since February 1998 (affiliated Real
Estate Companies of Kittle's Home Furnishings
Center, Inc.).
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 62 Director, National City Bank until October
1997; Director, Republic Engineered Steels,
October 1997 to September 1998.
Richard W. Furst Trustee Professor of Finance and Dean, Carol Martin
600 Autum Lane Gatton College of Business and Economics,
Lexington, KY 40502 University of Kentucky, since 1981;
Age 60 Director, 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
3679 Greenwood Drive Counsel, Eaton Corporation, since 1991
Pepper Pike, OH 44124 (global manufacturing); Trustee, WVIZ
Age 61 Educational Television (public television).
J. William Pullen Trustee President and Chief Executive Officer,
Whayne Supply Company Whayne Supply Co. (engine and heavy
1400 Cecil Avenue equipment distribution), since 1986;
P.O. Box 35900 President and Chief Executive Officer,
Louisville, KY 40232-5900 American Contractors Rentals & Sales
Age 60 (rental subsidiary of Whayne Supply Co.),
since 1988.
W. Bruce McConnel, III Secretary Partner of the law firm Drinker, Biddle &
Reath LLP Philadelphia, Pennsylvania.
Gary Tenkman Treasurer Director Financial Services, BISYS Fund
Services since April 1998; formerly, Audit
Manager, Ernst & Young LLP.
R. Jeffrey Young Assistant Treasurer Employee of BISYS Fund Services.
</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.
<PAGE> 40
The Trust paid an aggregate of $16,500 in Trustees' fees and expenses
for the fiscal year ended December 31, 1998 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 and Armada Funds, open-end investment companies managed by the Trust's
Investment Adviser. The following table depicts, for the fiscal year ended
December 31, 1998, 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.
<TABLE>
COMPENSATION TABLE
<CAPTION>
- -------------------------- ------------ ------------ ---------- -------------------------
NAME OF AGGREGATE PENSION OR ESTIMATED TOTAL COMPENSATION
TRUSTEE COMPENSATION RETIREMENT ANNUAL FROM THE TRUST, THE
FROM THE BENEFITS BENEFITS PARKSTONE GROUP OF FUNDS
TRUST ACCRUED AS UPON AND THE ARMADA FUNDS PAID
PART OF FUND RETIREMENT TO TRUSTEES*
EXPENSES
- -------------------------- ------------ ------------ ---------- -------------------------
<S> <C> <C> <C> <C>
Robert D. Neary 0 0 0 27,000
- -------------------------- ------------ ------------ ---------- -------------------------
Leigh Carter 0 0 0 23,250
- -------------------------- ------------ ------------ ---------- -------------------------
John F. Durkott 0 0 0 23,250
- -------------------------- ------------ ------------ ---------- -------------------------
Robert J. Farling 0 0 0 23,250
- -------------------------- ------------ ------------ ---------- -------------------------
Richard W. Furst 0 0 0 23,250
- -------------------------- ------------ ------------ ---------- -------------------------
Gerald L. Gherlein 0 0 0 23,250
- -------------------------- ------------ ------------ ---------- -------------------------
Herbert R. Martens, Jr 0 0 0 0
- -------------------------- ------------ ------------ ---------- -------------------------
J. William Pullen 0 0 0 23,250
- -------------------------- ------------ ------------ ---------- -------------------------
John B. Rapp 3,000 0 0 11,500
- -------------------------- ------------ ------------ ---------- -------------------------
Robert M. Beam 4,500 0 0 16,500
- -------------------------- ------------ ------------ ---------- -------------------------
Lawrence D. Bryan 4,500 0 0 16,500
- -------------------------- ------------ ------------ ---------- -------------------------
Adrian Charles Edwards 4,500 0 0 16,500
- -------------------------- ------------ ------------ ---------- -------------------------
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 National City Investment Management Company,
receives an annual fee of $15,000 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 on August 14, 1998.
[FN]
*Represents total compensation for the period January 1, 1998 through December
31, 1998.
<PAGE> 41
INVESTMENT ADVISER
Subject to the general supervision of the Trust's Board of Trustees
and in accordance with the Fund's investment objectives and restrictions,
investment advisory services are provided to the Funds of the Trust by National
City Investment Management Company ("IMC" or the "Investment Adviser"), 1900
East Ninth Street, Cleveland, Ohio 44114, 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. From the commencement of operations
(September 23, 1993) until December 1, 1998, Gulfstream Global Investors, Ltd.
was the Sub-Adviser of the International Discovery Fund and was paid a fee by
the Investment Adviser.
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 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.
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. 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, 1998, 1997 and 1996, IMC or
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:
<PAGE> 42
<TABLE>
<CAPTION>
- ----------------- --------------------------------- ---------------------------------- ---------------------------------
JANUARY 1, 1998 TO JANUARY 1, 1997 TO JANUARY 1, 1996 TO
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
- ----------------- ---------------- ---------------- ---------------- ---------------- ---------------- ----------------
FUND GROSS FEES FEES GROSS FEES FEES GROSS FEES FEES
COLLECTED VOLUNTARILY COLLECTED VOLUNTARILY COLLECTED VOLUNTARILY
REDUCED REDUCED REDUCED
- ----------------- ---------------- ---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Small $241,606 $0 $256,828 $0 $189,694 $0
Capitalization
- ----------------- ---------------- ---------------- ---------------- ---------------- ---------------- ----------------
Mid $295,464 $0 $278,450 $0 $200,885 $0
Capitalization
- ----------------- ---------------- ---------------- ---------------- ---------------- ---------------- ----------------
Bond $ 91,640 $0 $ 78,638 $0 $59,493 $0
- ----------------- ---------------- ---------------- ---------------- ---------------- ---------------- ----------------
International $233,750 $0 $239,144 $0 $177,635 $0
Discovery
- ----------------- ---------------- ---------------- ---------------- ---------------- ---------------- ----------------
</TABLE>
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,
<PAGE> 43
or interested persons (as defined in the 1940 Act) of any such party, cast in
person at a meeting called for such purpose. Each of the Investment Advisory
Agreements 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. The Agreements also
terminate automatically in the event of any assignment, as defined in the 1940
Act.
The Investment Advisory Agreements provide that the Investment Adviser
shall not 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 its duties, except a
loss suffered by a Fund resulting from a breach of fiduciary duty with respect
to its receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Investment Adviser
in the performance of its duties, or from reckless disregard of its duties and
obligations thereunder.
PORTFOLIO TRANSACTIONS
With respect to all Funds of the Trust 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.
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 in its 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 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 and does not reduce the fees payable to such adviser by the Trust . Such
information may be useful to the Investment Adviser in serving both the Trust
and other clients and, conversely supplemental information obtained by the
placement of business of other clients may be useful to the Adviser in carrying
out its obligations to the Trust.
While the Investment Adviser generally seeks competitive commissions,
the Trust may not necessarily pay the lowest commission available on each
brokerage transaction for the reasons discussed above. For the fiscal years
ended December 31, 1998, 1997 and 1996, the Trust paid an aggregate of
approximately $146,751, $204,067, and $155,690, 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.
<PAGE> 44
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, 1998, 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, 1998, the
Bond Fund held $149,015 in asset-backed securities of Banc One Auto Grantor
Trust, and $172,770 in asset-backed securities of Prudential Securities Secured
Financing Corp.
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.
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.
<PAGE> 45
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,
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 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 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
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, 1998, 1997 and 1996, 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:
<PAGE> 46
<TABLE>
<CAPTION>
JANUARY 1, 1998 TO JANUARY 1, 1997 TO JANUARY 1, 1996 TO
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996*
- ------------------ ---------- ------------- ------------- ------------- ---------- -------------
FUND GROSS FEES FEES GROSS FEES FEES GROSS FEES FEES
COLLECTED VOLUNTARILY COLLECTED VOLUNTARILY COLLECTED VOLUNTARILY
REDUCED REDUCED REDUCED
- ------------------ ---------- ------------- ------------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Small $48,322 $ 0 $51,366 $0 $37,603 $0
Capitalization
- ------------------ ---------- ------------- ------------- ------------- ---------- -------------
Mid $59,093 $ 0 $55,690 $0 $39,847 $0
Capitalization
- ------------------ ---------- ------------- ------------- ------------- ---------- -------------
Bond $24,768 $ 0 $21,254 $0 $15,952 $0
- ------------------ ---------- ------------- ------------- ------------- ---------- -------------
International $37,400 $ 0 $38,263 $0 $28,310 $0
Discovery
- ------------------ ---------- ------------- ------------- ------------- ---------- -------------
</TABLE>
For the fiscal year ended December 31, 1998, the Administrator paid certain
expenses of the Funds totaling $16,299 for the Small Capitalization Fund,
$19,932 for the Mid Capitalization Fund, $8,355 for the Bond Fund and $12,615
for the International Discovery Fund.
* Of the $121,712 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.
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 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 continue in effect 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.
CUSTODIANS, 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
<PAGE> 47
safeguarding and controlling the Funds' cash and securities, handling the
receipt and delivery of securities, and collecting interest and dividends on the
Funds' investments. National City Bank is paid an annual custody fee of .02% of
each Fund's first $100 million of average daily net assets, .01% of each Fund's
next $650 million of average daily net assets and .008% of the average daily net
assets of each Fund which exceed $750 million, exclusive of out-of-pocket
expenses and transaction charges. Custody fees shall be calculated daily and
paid monthly.
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.
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,
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, 1998, 1997 and 1996, the Transfer Agent received
$161,426, $162,071 and $75,000, respectively, from the Trust. 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, 1998,
appearing in the Trust's Annual Report dated December 31, 1998, 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.
<PAGE> 48
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.
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 dollar of net asset
value invested and a proportionate fractional vote for any fraction of one
dollar of net asset value invested, and will vote in the aggregate, and not by
class except as otherwise required by the 1940 Act or other applicable law, or
when the matter to be voted upon affects only interests of the shareholders of a
particular class. Voting rights are not cumulative, and, accordingly, the
holders of more than 50% of the Trust's outstanding shares may elect all of the
Trustees, irrespective of the votes of other shareholders.
The Trust does not intend to hold annual shareholder meetings except
as may be required by the 1940 Act. The Trust's Agreement and Declaration of
Trust provides that a meeting of shareholders shall be called by the Board of
Trustees upon written request of shareholders owning at least 10% of the
outstanding shares of the Trust entitled to vote.
The Trust's Agreement and Declaration of Trust authorizes the Board of
Trustees, without shareholder approval (unless otherwise required by applicable
law) to (a) sell and convey the assets of a class of shares to another
management investment company for consideration which may include securities
issued by the purchaser and, in connection therewith, to cause all outstanding
shares of such class to be redeemed at a price which is equal to their net asset
value and which may be cash or by distribution of the securities or other
consideration received from the sale and conveyance; (b) sell and convert the
assets belonging to a class of shares into money and, in connection therewith,
to cause all outstanding shares of such class to be redeemed at their net asset
value; or (c) combine the assets belonging to a class of shares with the assets
belonging to one or more other classes of shares of the Trust if the Board of
Trustees reasonably determines that such combination will not have a material
adverse effect on the shareholders of any class participating in such
combination and, in connection therewith, to cause all outstanding shares of any
class to be redeemed at their net asset value or converted into shares of
another class of the Trust's shares at their net asset value. However, the
exercise of such authority by the Board of Trustees may be subject to certain
restrictions under the 1940 Act. The Board of Trustees may authorize the
termination of any class of shares after the assets belonging to such class have
been distributed to its shareholders.
VOTE OF A MAJORITY OF THE OUTSTANDING SHARES
As used in the Funds' Prospectus and the Statement of Additional
Information, "vote of a majority of the outstanding shares" of the Trust or the
Fund means the affirmative vote, at an annual or special meeting of shareholders
duly called, of the lesser of: (a) 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
<PAGE> 49
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
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. Depending on the extent of each Fund's 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.
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 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.
<PAGE> 50
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
Adviser, 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.
PERFORMANCE INFORMATION
From time to time performance information for the Funds showing their
average annual total return, aggregate total return and/or yield may be
presented in advertisements, sales literature and shareholder reports. Such
performance figures are based on historical earnings and are not intended to
indicate future performance. Average annual total return of a Fund will be
calculated for the period since the establishment of the Fund and will reflect
the imposition of the maximum sales charge, if any. Average annual total return
is measured by comparing the value of an investment in a Fund at the beginning
of the relevant period to the redemption value of the investment at the end of
the period (assuming immediate reinvestment of any dividends or capital gains
distributions) and annualizing the result. Aggregate total return is calculated
similarly to average annual total return except that the return figure is
aggregated over the relevant period instead of annualized. Yield of a Fund will
be computed by dividing a Fund's net investment income per share earned during a
recent 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.
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
<PAGE> 51
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.
YIELDS OF THE FUNDS
Yields of each of the Funds will be computed by analyzing net
investment income per share for a recent 30-day period and dividing that amount
by a Fund shares maximum offering price (reduced by any undeclared earned income
expected to be paid shortly as a dividend) on the last trading day of that
period. Net investment income will reflect amortization of any market value
premium or discount of fixed-income securities (except for obligations backed by
mortgages or other assets) and may include recognition of a pro-rata portion of
the stated dividend rate of dividend paying portfolio securities. The yield of
each of the 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, 1998, the yields for the
Funds were as follows:
Yield
-----
Parkstone Advantage Bond Fund 4.45%
CALCULATION OF TOTAL RETURN
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 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.
<PAGE> 52
For the one and five-year periods ended December 31, 1998 and the
period from commencement of operations (September 23, 1993) to December 31,
1998, the average annual total returns for the Funds were, respectively: Small
Capitalization Fund, -2.51%, 11.28% and 12.69%; Mid Capitalization Fund, 10.33%,
12.26% and 11.95%; Bond Fund, 6.71%, 5.30% and 4.94%; and International
Discovery Fund, 11.61%, 6.12% and 6.49%.
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 Growth 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 may not include the Funds; (7)
comparisons of investment products (including the Funds) with relevant market or
industry indices or other appropriate benchmarks; and (8) discussions of fund
rankings or ratings by recognized rating organizations. The Funds may also
include calculations, such as hypothetical compounding examples which describe
hypothetical investment results in such communications. Such performance
examples will be based on an expressed set of assumptions and are not indicative
of the performance of any of the Funds.
Morningstar, Inc., Chicago, Illinois, rates mutual funds on a one- to
five-star rating scale with five stars representing the highest rating. Such
ratings are based on a fund's historical -risk/reward ratio as determined by
Morningstar relative to other funds in that fund's class. Funds are divided into
classes based upon the respective investment objectives. The one- to five-star
ratings represent the following ratings by Morningstar, respectively:
Lowest, Below Average, Neutral, Above Average and Highest.
Current yields or performance will fluctuate from time to time and are
not necessarily representative of future results. Accordingly a Fund's yield or
performance may not provide for comparison with bank deposits or other
investments which provide fixed returns for a stated period of time. Yield and
performance are functions of a Fund's quality, composition and maturity as well
as expenses allocated to the Fund. Fees imposed on customer accounts by the
Investment Adviser or its affiliated or correspondent banks or cash management
services will reduce a Fund's effective yield to its customers.
MISCELLANEOUS
Individual Trustees are elected by the shareholders and, subject to
removal by a vote of two-thirds of the Board of Trustees, serve for a term
lasting until the next meeting of shareholders at which Trustees are elected.
Such meetings are not required to be held at any specific intervals. Individual
Trustees may be removed by vote of the shareholders voting not less than a
majority of the shares outstanding cast in 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.
<PAGE> 53
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.
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.
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.
As of April 16, 1999, 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 April 16, 1999, NCC, as trustee of the
NCC Non-Contributory Pension Plan owned beneficially the following percentages
of the Funds, respectively: Bond Fund, 22%, Small Capitalization Fund, 19%, Mid
Capitalization Fund, 14% and International Discovery Fund, 40%. NCC 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 of certain of the Funds. As a result, National City Bank may have
the ability to elect the Trustees of the Trust, approve the 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.
<PAGE> 54
FINANCIAL STATEMENTS
The Funds' financial statements for the year ended December 31, 1998,
and the financial highlights for each of the respective periods presented,
appearing in the 1998 Annual Report, and the report thereon of Ernst & Young
LLP, independent auditors of the Trust, are on file with the SEC (File Nos.
33-65690 and 811-7850) and are incorporated herein by reference to this
Statement of Additional Information. No other parts of the 1998 Annual Report
are incorporated herein.
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:
"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
<PAGE> 55
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.
"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.
<PAGE> 56
"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."
"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. Adverse business, financial or economic conditions
will likely impair the obligor's capacity or willingness to meet its financial
commitment on the obligation.
<PAGE> 57
"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 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.
<PAGE> 58
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.
"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.
"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.
<PAGE> 59
"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.
"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.
<PAGE> 60
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.
"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.
Fitch IBCA and Duff & Phelps use the short-term ratings
described under Commercial Paper Ratings for municipal notes.
<PAGE> 61
THE PARKSTONE ADVANTAGE FUND
FORM N-1A
PART C. OTHER INFORMATION
ITEM NO.
- --------------------------------------------------------------------------------
ITEM 23. EXHIBITS
(a) Declaration of Trust dated May 18, 1993 is incorporated herein
by reference to Exhibit 1 of Post-Effective Amendment No. 5 to
the Registrant's Registration Statement on Form N-1A (Nos.
33-65690/811-7850) as filed with the Securities and Exchange
Commission (the "SEC") on April 16, 1997 ("PEA No. 5").
(b) (1) Code of Regulations is incorporated herein by
reference to Exhibit 2(a) of PEA No. 5.
(2) Amendment to Code of Regulations dated February 10,
1994 is incorporated herein by reference to Exhibit
2(b) of PEA No. 5.
(c) Not Applicable.
(d) (1) 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 is
incorporated herein to Exhibit 5(a) of PEA No. 5.
(2) Investment Advisory Agreement between Registrant and
National City Investment Management Company, dated
August 18, 1993, relating to the International
Discovery Fund is incorporated herein by reference to
Exhibit 5(b) of PEA No. 5.
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<PAGE> 62
(e) Distribution Agreement between Registrant and BISYS Fund
Services, L.P., dated July 1, 1996 is incorporated herein by
reference to Exhibit No. 6 of PEA No. 5.
(f) Not Applicable.
(g) (1) Custody Agreement between Registrant and National
City Bank, dated July 24, 1998 is incorporated herein
by reference to Exhibit No. 8(a) of Post-Effective
Amendment No. 9 to the Registrant's Registration
Statement on Form N-1A (Nos. 33-65690/811-7850) as
filed with the SEC on September 18, 1998 ("PEA No.
9").
(2) Custodian Agreement between Registrant and The Bank
of California, N.A., dated July 31, 1995, relating to
the International Discovery Fund is incorporated
herein by reference to Exhibit 8(b) of PEA No. 2.
(h) (1) Administration Agreement between Registrant and BISYS
Fund Services, L.P., dated July 1, 1996 is
incorporated herein by reference to Exhibit 9(a) of
PEA No. 5.
(2) Fund Accounting and Transfer Agency Agreement between
Registrant and BISYS Fund Services, Inc., dated July
1, 1996 is incorporated herein by reference to
Exhibit 9(b) of PEA No. 5.
(i) Schedule C to Fund Accounting and
Transfer Agency Agreement between
the Registrant and BISYS Funds
Services, L.P. dated February 12,
1997 is incorporated herein by
reference to Exhibit 9(b)(i) of PEA
No. 5.
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<PAGE> 63
(3) 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 is incorporated herein by
reference to Exhibit 9(c) of PEA No. 5.
(4) Transfer Agency Agreement is incorporated herein by
reference to Exhibit 9(d) of PEA No. 9.
(i) Opinion of Counsel is incorporated herein by reference to
Exhibit 11 of PEA No. 9.
(j) Consent of Ernst & Young LLP.
(k) Purchase Agreement between Registrant and Security Benefit Life
Insurance Company, dated August 17, 1993 is incorporated herein
by reference to Exhibit 13 of PEA No. 5.
(l) Not Applicable.
(m) Financial Data Schedules.
(n) Not Applicable.
C-3
<PAGE> 64
ITEM 24. 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.
C-4
<PAGE> 65
ITEM 25. 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:
C-5
<PAGE> 66
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
C-6
<PAGE> 67
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 26. 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>
Michael Minnaugh Director/Chairman of National City Bank Bank
the Board/Managing
Director
Kathleen T. Barr Director/Managing National City Bank Bank
Director, Sales and
Marketing
Robert M. Leggett Director/Vice Chairman National City Bank Bank
of the Board/President
and Managing Director/CEO
Donald L. Ross Director/Managing National City Bank Bank
Director/Investment
Management
</TABLE>
ITEM 27. 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 Summit Investment
Trust, The Pegasus Funds, The Puget Sound Alternative
Investment Series Trust, The Kent 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 Trust, Meyers Investment Trust, Magna Funds, The M.S.D.
& T. Funds, The Sefton Funds, The Parkstone Group of Funds,
The Infinity Mutual Funds, Inc., Alpine Equity Trust, Governor
Funds, Gradison Custodian Trust, Gradison Growth Trust,
Gradison-McDonald Cash Reserves Trust, Gradison-McDonald
Municipal Custodian Trust, Fifth Third Funds, HSBC Mutual
Funds Trust, SSgA International Liquidty Fund, The
C-7
<PAGE> 68
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,
1998, 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, 1998 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 28. 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).
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<PAGE> 69
(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 29. MANAGEMENT SERVICES
Not Applicable.
ITEM 30. 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.
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<PAGE> 70
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, Registrant has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of Cleveland, State of Ohio on the 30th day
of April, 1999.
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; April 30, 1999
- --------------------------------- Trustee
Robert D. Neary*
/s/ Leigh Carter Trustee April 30, 1999
- ---------------------------------
Leigh Carter*
/s/ John F. Durkott Trustee April 30, 1999
- ---------------------------------
John F. Durkott*
/s/ Robert J. Farling Trustee April 30, 1999
- ---------------------------------
Robert J. Farling*
/s/ Richard W. Furst Trustee April 30, 1999
- ---------------------------------
Richard W. Furst*
/s/ Gerald L. Gherlein Trustee April 30, 1999
- ---------------------------------
Gerald L. Gherlein*
</TABLE>
C-10
<PAGE> 71
<TABLE>
<S> <C> <C>
/s/ J. William Pullen Trustee April 30, 1999
- ---------------------------------
J. William Pullen*
/s/ Herbert R. Martens, Jr. Trustee April 30, 1999
- ---------------------------------
Herbert R. Martens, Jr.
/s/ Gary Tenkman Treasurer April 30, 1999
- -----------------
Gary Tenkman
</TABLE>
*By: /s/ Herbert R. Martens, Jr.
----------------------------------------------
Herbert R. Martens, Jr., Attorney-In-Fact
C-11
<PAGE> 1
Exhibit 23(j)
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. 11 to the Registration Statement (Form
N-1A No. 811-7850) of The Parkstone Advantage Fund and to the use of our report
dated February 4, 1999, incorporated by reference therein.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Columbus, Ohio
April 26, 1999
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