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PROSPECTUS
AUGUST 11, 1999
Armada Advantage
Equity Growth Fund
Armada Advantage
Balanced Allocation Fund
INVESTMENT ADVISER
National City Investment
Management Company
The Securities and Exchange Commission has not approved or disapproved any fund
shares or determined whether this prospectus is accurate or complete. It is a
crime for anyone to tell you otherwise.
ARMADA FUNDS LOGO
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HOW TO READ
THIS PROSPECTUS
The Parkstone Advantage Fund offers shares in separate investment portfolios
(funds). The funds have individual investment goals and strategies. This
prospectus gives you important information about the shares of two of its
portfolios, the Armada Advantage Equity Growth and Balanced Allocation Funds
(Funds) that you should know before investing. Please read this prospectus and
keep it for future reference.
This prospectus has been arranged into different sections so that you can easily
review this important information. On this page, there is some general
information you should know about the Funds. For more detailed information about
each Fund, please see:
Page
INTRODUCTION 1
ARMADA ADVANTAGE EQUITY
GROWTH FUND 2
ARMADA ADVANTAGE BALANCED
ALLOCATION FUND 3
EACH FUND'S OTHER INVESTMENTS 5
MORE INFORMATION ABOUT RISK 5
ANNUAL FUND OPERATING EXPENSES 6
PERFORMANCE INFORMATION
OF COMPARABLE FUNDS 6
THE INVESTMENT ADVISER
AND INVESTMENT TEAMS 7
PURCHASING, SELLING AND
EXCHANGING FUND SHARES 7
DISTRIBUTIONS AND TAXES 8
HOW TO OBTAIN MORE
INFORMATION ABOUT THE
ARMADA ADVANTAGE FUNDS Back Cover
INTRODUCTION
Each Fund is a mutual fund. A mutual fund pools shareholders' money and, using
professional investment managers, invests it in securities. Each Fund is also an
investment vehicle for variable annuity contracts and variable life insurance
policies and for certain tax-qualified investors.
Each Fund has its own investment goal and strategies
for reaching that goal. The investment managers invest Fund assets in a way that
they believe will help a Fund achieve its goal. Still, investing in each Fund
involves risk and there is no guarantee that a Fund will achieve its goal. An
investment manager will make judgments about future events concerning the
markets, the economy, or companies which may not match actual market movements,
economic conditions or company performance, and these judgments may affect the
return on your investment. In fact, no matter how good a job an investment
manager does, you could lose money on your investment in the Fund, just as you
could with other investments.
The value of your investment in a Fund is based on the market value of the
securities the Fund holds. These prices change daily due to economic and other
events that affect particular companies and other issuers. These price
movements, sometimes called volatility, may be greater or lesser depending on
the types of securities a Fund owns and the markets in which they trade. The
effect on a Fund of a change in the value of a single security will depend on
how widely the Fund diversifies its holdings.
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ARMADA ADVANTAGE EQUITY GROWTH FUND
FUND SUMMARY
INVESTMENT GOAL
Capital appreciation
INVESTMENT FOCUS
Large cap equity securities
SHARE PRICE VOLATILITY
High
PRINCIPAL INVESTMENT STRATEGY
Investing in growth oriented common stocks of
larger issuers
INVESTOR PROFILE
Investors seeking capital appreciation and who are willing to
accept the risk of investing in equity securities
PRINCIPAL INVESTMENT STRATEGY OF THE FUND
The investment objective of the Armada Advantage Equity Growth Fund is to
provide capital appreciation by investing in a diversified portfolio of
publicly traded larger cap equity securities. The Fund's investment objective
may be changed without a vote of shareholders, although the Board of Trustees
would only change a fund's objective upon 30 days' notice to shareholders.
The Armada Advantage Equity Growth Fund normally invests at least 80% of its
total assets in a diversified portfolio of common stocks and securities
convertible into common stocks of companies with large stock market
capitalization. The Fund may invest up to 20% of its total assets at the time of
purchase in foreign securities. The Fund considers a "large capitalization"
company as one that has a comparable market capitalization, to the companies in
the S&P 500. In buying and selling securities for the Fund, the Adviser
considers factors such as historical and projected earnings growth, earnings
quality and liquidity. The Fund generally purchases stocks that are listed on a
national securities exchange or unlisted securities with an established
over-the-counter market.
PRINCIPAL RISKS OF INVESTING IN THE FUND
Since it purchases equity securities, the Fund is subject to the risk that stock
prices will fall over short or extended periods of time. Historically, the
equity markets have moved in cycles, and the value of the Fund's equity
securities may fluctuate drastically from day-to-day. Individual companies may
report poor results or be negatively affected by industry and/or economic trends
and developments, causing the prices of securities issued by such companies to
decline. These factors contribute to price volatility, which is the principal
risk of investing in the Fund. The loss of money is a risk of investing in the
Fund.
Investing in foreign countries poses additional risks since political and
economic events unique to a country or region will affect those markets and
their issuers. These events will not necessarily affect the U.S. economy or
similar issuers located in the United States. In addition, investments in
foreign countries are generally denominated in a foreign currency.As a result,
changes in the value of those currencies compared to the U.S. dollar may affect
(positively or negatively) the value of a Fund's investments. These currency
movements may happen separately from and in response to events that do not
otherwise affect the value of the security in the issuer's home country.
The Fund is also subject to the risk that growth-oriented equity securities may
underperform other equity market segments or the equity markets as a whole.
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ARMADA ADVANTAGE BALANCED ALLOCATION FUND
FUND SUMMARY
INVESTMENT GOAL
Long-term capital appreciation and current income
INVESTMENT FOCUS
A combination of growth-oriented common stocks, fixed income securities and cash
equivalents
SHARE PRICE VOLATILITY
Medium
PRINCIPAL INVESTMENT STRATEGY
Investing in a diversified portfolio of growth-oriented common stocks,
investment grade fixed income securities and cash equivalents, with asset
allocation varying depending on the Adviser's assessment of market conditions
INVESTOR PROFILE
Investors seeking a broad diversification by asset class and style to manage
risk and provide the potential for above-average after-tax returns
PRINCIPAL INVESTMENT STRATEGY OF THE FUND
The Armada Advantage Balanced Allocation Fund's investment objective is to
provide long-term capital appreciation and current income. The Fund's investment
objective may be changed without a vote of shareholders, although the Board of
Trustees would only change the Fund's objective upon 30 days' notice to
shareholders.
The Armada Advantage Balanced Allocation Fund is both a "balanced fund," which
means the Adviser will generally strive to invest in a balance of equity
investments and fixed-income investments, and an "asset allocation fund," which
means the Adviser will periodically shift assets from investments it believes
will underperform to investments it believes have greater potential. The Fund
intends to invest 50% to 70% of its net assets in common stocks and convertible
securities, 25% to 55% of its net assets in investment grade fixed income
securities and up to 30% of its net assets in cash and cash equivalent
securities. The Fund may invest up to 20% of its total assets at the time of
purchase in foreign securities. The Adviser buys and sells equity securities
based on their potential for long-term capital appreciation. The Fund invests
the fixed income portion of its portfolio of investments in a broad range of
investment grade debt securities (which are those rated at the time of
investment in one of the four highest rating categories by a major rating
agency) for current income. The Fund invests in cash equivalent, short-term
obligations for stability and liquidity.
PRINCIPAL RISKS OF INVESTING IN THE FUND
Since it purchases equity securities, the Fund is subject to the risk that stock
prices will fall over short or extended periods of time. Historically, the
equity markets have moved in cycles, and at times the value of some or all of
the Fund's equity securities may fluctuate drastically from one day to the next.
Individual companies may report poor results or be negatively affected by
industry and/or economic trends and developments, causing the prices of
securities issued by such companies to decline. These factors contribute to
price volatility, which is the principal risk of investing in the Fund.
The prices of the Fund's fixed income securities respond to economic
developments, particularly interest rate changes, as well as to perceptions
about the creditworthiness of individual issuers, including governments.
Generally, the Fund's fixed income securities will decrease in value if interest
rates rise and vice versa, and the volatility of lower rated securities is even
greater than that of higher rated securities. Also, longer-term securities are
generally more volatile, so the average maturity or duration of these securities
affects risk.
The Fund is also subject to the risk that its market segments, investment grade
fixed income and growth-oriented equity securities, may underperform other fixed
income or equity market segments or the fixed income or equity markets as a
whole.
The Fund is also subject to the risk that the Adviser's asset allocation and
balancing decisions will not anticipate market trends successfully. For example,
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ARMADA ADVANTAGE BALANCED ALLOCATION FUND (continued)
weighting common stocks too heavily during a stock market decline may result in
a failure to preserve capital. Conversely, investing too heavily in fixed income
securities during a period of stock market appreciation may result in lower
total return.
The smaller capitalization companies the Fund invests
in may be more vulnerable to adverse business or economic events than larger,
more established companies. In particular, these small companies may have
limited product lines, markets and financial resources, and may depend upon a
relatively small management group. Therefore, small cap stocks may be more
volatile that those of larger companies may. These securities may be traded
over-the-counter or listed on the exchange and may or may not pay dividends.
Investing in foreign countries poses additional risks since political and
economic events unique to a country or region will affect those markets and
their issuers. These events will not necessarily affect the U.S. economy or
similar issuers located in the United States. In addition, investments in
foreign countries are generally denominated in a foreign currency. As a result,
changes in the value of those currencies compared to the U.S. dollar may affect
(positively or negatively) the value of a Fund's investments. These currency
movements may happen separately from and in response to events that do not
otherwise affect the value of the security in the issuer's home country.
An investment in the Fund is subject to interest rate risk, which is the
possibility that the Fund's yield will decline due to falling interest rates.
Although the Fund's U.S. government securities are considered to be among the
safest investments, they are not guaranteed against price movements due to
changing interest rates. Obligations issued by some U.S. government agencies and
instrumentalities are backed by the U.S. Treasury, while others are backed
solely by the ability of the agency to borrow from the U.S. Treasury or by the
agency's own resources.
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EACH FUND'S
OTHER INVESTMENTS
In addition to the investments and strategies described in this prospectus, each
Fund also may invest in other securities, use other strategies and engage in
other investment practices. These investments and strategies, as well as those
described in this prospectus, are described in detail in our Statement of
Additional Information. Of course, the Fund cannot guarantee that any Fund will
achieve its investment goal.
The investments and strategies described in this prospectus are those that we
use under normal conditions. During unusual economic or market conditions, or
for temporary defensive or liquidity purposes, each Fund may invest up to 100%
of its assets in investments that would not ordinarily be consistent with a
Fund's objectives. A Fund will do so only if the Adviser believes that the risk
of loss outweighs the opportunity for capital gains or higher income.
MORE INFORMATION
ABOUT RISK
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Both Funds
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EQUITY RISK -- Equity securities include public and privately issued equity
securities, common and preferred stocks, warrants, rights to subscribe to common
stock and convertible securities, as well as instruments that attempt to track
the price movement of equity indices. Investments in equity securities and
equity derivatives in general are subject to market risks that may cause their
prices to fluctuate over time. The value of securities convertible into equity
securities, such as warrants or convertible debt, is also affected by prevailing
interest rates, the credit quality of the issuer and any call provision.
Fluctuations in the value of equity securities in which a mutual fund invests
will cause a fund's net asset value to fluctuate. An investment in a portfolio
of equity securities may be more suitable for long-term investors who can bear
the risk of these share price fluctuations.
YEAR 2000 RISK - The Funds depend on the smooth functioning of computer systems
in almost every aspect of their business. Like other mutual funds, businesses
and individuals around the world, the Funds could be adversely affected if the
computer systems used by its service providers do not properly process dates on
and after January 1, 2000, and distinguish between the year 2000 and the year
1900. The Funds have asked their service providers whether they expect to have
their computer systems adjusted for the year 2000 transition, and is seeking
assurances from each service provider that they are devoting significant
resources to prevent material adverse consequences to the Funds. While it is
likely that such assurances will be obtained, the Funds and their shareholders
may experience losses if these assurances prove to be incorrect or as a result
of year 2000 computer difficulties experienced by issuers of portfolio
securities or third parties, such as custodians, banks, broker-dealers or others
with which the Funds do business.
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Armada Advantage Balanced Allocation Fund
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FIXED INCOME RISK - The market value of fixed income investments change in
response to interest rate changes and other factors. During periods of falling
interest rates, the values of outstanding fixed income securities generally
rise. Moreover, while securities with longer maturities tend to produce higher
yields, the prices of longer maturity securities are also subject to greater
market fluctuations as a result of changes in interest rates. In addition to
these fundamental risks, different types of fixed income securities may be
subject to the following additional risks:
CALL RISK - During periods of falling interest rates, certain debt obligations
with high interest rates may be prepaid (or "called") by the issuer Fund prior
to maturity. This may cause a Fund's average weighted maturity to fluctuate, and
may require a Fund to invest the resulting proceeds at lower interest rates.
CREDIT RISK - The possibility that an issuer will be unable to make timely
payments of either principal or interest.
EVENT RISK - Securities may suffer declines in credit quality and market value
due to issuer restructurings or other factors. This risk should be reduced
because of a Fund's multiple holdings.
MORTGAGE-BACKED SECURITIES - Mortgage-backed securities are fixed income
securities representing an interest in a pool of underlying mortgage loans. They
are sensitive to changes in interest rates, but may respond to these changes
differently from other fixed income securities due to the possibility of
prepayment of the underlying mortgage loans. As a result, it may not be possible
to determine in advance the actual maturity date or average life of a
mortgage-backed security. Rising interest rates tend to discourage refinancings,
with the result that the average life and volatility of the security will
increase exacerbating its decrease in market price. When interest rates fall,
however, mortgage-backed securities may not gain as much in market value because
of the expectation of additional mortgage prepayments
5 PROSPECTUS
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that must be reinvested at lower interest rates. Prepayment risk may make it
difficult to calculate the average maturity of a portfolio of mortgage-backed
securities and, therefore, to assess the volatility risk of that portfolio.
ANNUAL FUND
OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Every mutual fund has operating expenses to pay for services such as
professional advisory, shareholder, distribution, administration and custody
services and other costs of doing business. This table describes the highest
fees and expenses that you may pay indirectly if you hold shares of one of the
Funds.
<TABLE>
<CAPTION>
ARMADA ADVANTAGE ARMADA ADVANTAGE
EQUITY GROWTH FUND BALANCED ALLOCATION FUND
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<S> <C> <C>
Investment
Advisory Fees .75%(1) .75%(1)
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Other Expenses .87% .87%
Total Annual
Fund Operating
Expenses 1.62% 1.62%
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(1) The Advisor plans to waive all advisory fees for both funds for the first
three months of operation. The Advisor plans to charge a reduced advisory
fee of 0.25% for each Fund for the next three months, .50% for each Fund
for the following three months and .75% after nine months for each Fund.
</TABLE>
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Example
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This example is intended to help you compare the cost of investing in each Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in each of the Funds for the time periods indicated.
The example also assumes that each year your investment has a 5% return and Fund
expenses remain the same. Although your actual costs and returns might be
different, your approximate costs of investing $10,000 in the Funds would be:
<TABLE>
<CAPTION>
<S> <C> <C>
1 YEAR 3 YEARS
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Armada Advantage
Equity Growth Fund $165 $511
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Armada Advantage
Balanced Allocation Fund $165 $511
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</TABLE>
PERFORMANCE INFORMATION OF COMPARABLE FUNDS
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Armada Advantage Equity Growth Fund
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This Fund is new and has no performance history. The performance table below is
for the Armada Equity Growth Fund, which is managed by the same Portfolio
Management Team of the Adviser. The Armada Advantage Equity Growth Fund and the
Armada Equity Growth Fund have similar investment goals and employ similar
investment strategies. The Armada Advantage Equity Growth Fund's "Other
Expenses" are higher than those of the Armada Equity Growth Fund. Therefore,
performance for this fund will be lower than that of the Armada Equity Growth
Fund.
The performance table illustrates the risks and volatility of investment in a
similar fund. Of course, past performance of the Armada Equity Growth Fund does
not necessarily indicate how the Armada Advantage Equity Growth Fund will
perform in the future.
This table compares the Armada Equity Growth Fund's average annual total returns
for the period ended December 31, 1998, to those of the S&P 500.
<TABLE>
<CAPTION>
ONE FIVE TEN SINCE
YEAR YEARS YEARS INCEPTION
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<S> <C> <C> <C> <C>
Armada Equity Growth
Fund (Institutional) 29.09% 22.11% N/A 16.95%*
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S&P 500 28.60% 24.05 N/A 17.89%
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* Since December 20, 1989
</TABLE>
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Armada Advantage Balanced Allocation Fund
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This Fund is new and has no performance history. The performance table below is
for the Armada Balanced Allocation Fund, which is managed by the same Portfolio
Management Teams of the Adviser. The Armada Advantage Balanced Allocation Fund
and the Armada Balanced Allocation Fund have similar investment goals and employ
similar investment strategies. The Armada Advantage Balanced Allocation Fund's
"Other Expenses" are higher than those of the Armada Balanced Allocation Fund.
Therefore, performance for this fund will be lower than that of the Armada
Balanced Allocation Fund.
The performance table illustrates the risks and volatility of investment in a
similar fund. Of course, past performance of the Armada Balanced Allocation Fund
does not necessarily indicate how the Armada Advantage Balanced Allocation Fund
will perform in the future.
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This table compares the Armada Balanced Allocation Fund's average annual total
returns for the periods ending ended December 31, 1998, to those of a Composite
Index composed of returns from the S&P 500 Index and the Lehman Brothers
Aggregate Bond Index.
<TABLE>
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ONE FIVE TEN SINCE
YEAR YEARS YEARS INCEPTION
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<S> <C> <C> <C> <C>
Armada Balanced
Allocation Fund
(Institutional) N/A N/A N/A 5.69%*
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Composite Index N/A N/A N/A 5.50%
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S&P 500 Index N/A N/A N/A 6.32%
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Lehman Brothers
Aggregate Bond Index N/A N/A N/A 4.27%
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* Since July 10, 1998
</TABLE>
WHAT IS AN INDEX? An index measures the market prices of a specific group of
securities in a particular market or securities in a market sector. You cannot
invest directly in an index. Unlike a mutual fund, an index does not have an
investment adviser and does not pay any commissions or expenses. If an index had
expenses, its performance would be lower.
The S&P 500 Index is an unmanaged index composed of industrial, financial,
utilities and transportation stocks.
The Lehman Brothers Aggregate Bond Index is an unmanaged index made up of the
Lehman Brothers Government Corporate Bond, Mortgage Backed Securities, and Asset
Backed Securities Indices.
The Armada Advantage Balanced Allocation Fund intends to invest 50% to 70% of
its net assets in common stocks and convertible securities, 25% to 55% of its
net assets in fixed income securities and up to 30% of its net assets in cash
and cash equivalent securities.
The Composite Index, a hypothetical combination of unmanaged indices, reflects a
Fund mix of 60% stocks and 40% bonds. The index combines returns from the S&P
500 Index and the Lehman Brothers Aggregate Bond Index.
INVESTMENT ADVISER
The Investment Adviser makes investment decisions for the Funds and continuously
reviews, supervises and administers each Fund's respective investment program.
The Board of Trustees of the Armada Advantage Funds supervises the Adviser and
establishes policies that the Adviser must follow in its management activities.
National City Investment Management Company ("IMC"), serves as the Adviser to
the Funds. As of March 31, 1999, IMC had approximately $23.7 billion in assets
under management. Advisory fees for the Funds are:
<TABLE>
<CAPTION>
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Armada Advantage Equity Growth Fund .75%
Armada Advantage Balanced Allocation Fund .75%
</TABLE>
The Adviser plans to waive all advisory fees for both funds for the first three
months of operation. The Adviser plans to charge a reduced advisory fee of 0.25%
for each Fund for the next three months, 0.50% for each Fund for the following
three months and 0.75% after nine months for each Fund.
THE INVESTMENT TEAMS
The Funds are managed by teams of investment professionals from IMC. No one
person is primarily responsible for making investment recommendations to the
teams. The Equity Growth Fund is managed by the Equity Growth team. The Balanced
Allocation Fund is managed by investment management teams within IMC; each team
manages their respective segment allocation within the Fund, according to their
areas of specialization.
PURCHASING, SELLING AND EXCHANGING FUND SHARES
The Funds offer their shares only to insurance companies for separate accounts
they establish to fund variable life insurance and variable annuity contracts
and by other entities under qualified pension and retirement plans. The contract
prospectus of each plan describes how contract owners may allocate, transfer and
withdraw amounts to, and from, separate accounts.
GENERAL INFORMATION
Shares may be purchased by your insurance company on any day that the New York
Stock Exchange ("NYSE") is open for business (a Business Day). Shares cannot be
purchased by wire transactions on days when banks are closed.
The Trust may suspend the right of redemption or postpone the date of payment
for shares during any 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
7 PROSPECTUS
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suspension; 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.
A Fund may reject any purchase order if it is determined that accepting the
order would not be in the best interests of the Fund or its shareholders.
The insurance company's price per share (the offering price) will be the net
asset value per share (NAV) next determined after a Fund receives your insurance
company's purchase order.
Each Fund calculates its NAV once each Business Day at the regularly-scheduled
close of normal trading on the NYSE (normally, 4:00 p.m., Eastern time). So, for
the insurance company to receive the current Business Day's NAV, generally a
Fund must receive your insurance company's purchase order before 4:00 p.m.,
Eastern time.
HOW WE CALCULATE NAV
NAV for one Fund share is the value of that share's portion of all of the assets
in the Fund.
In calculating NAV, a Fund generally values its investment portfolio at market
price. If market prices are unavailable or a Fund thinks that they are
unreliable, fair value prices may be determined in good faith using methods
approved by the Board of Trustees.
Some Funds hold securities that are listed on foreign exchanges. These
securities may trade on weekends or other days when the Funds do not calculate
NAV. As a result, the market value of these Fund's investments may change on
days when you cannot purchase or sell Fund shares.
DISTRIBUTIONS AND TAXES
The Funds intend to declare and distribute, as dividends or capital gains
distributions, at least annually, substantially all of its net investment income
and net profits realized from the sale of portfolio securities, if any, to its
shareholders (Participating Insurance Companies' separate accounts). The net
investment income of the Funds consists of all dividends or interest received by
the Funds, less estimated expenses (including the advisory and administrative
fees). The Funds will declare and distribute income dividends annually. All net
short-term and long-term capital gains of the Funds, net of carry-forward
losses, if any, realized during the fiscal year, are declared and distributed
periodically, no less frequently than annually. All dividends and distributions
are reinvested in additional shares of the Funds at net asset value, as of the
record date for the distributions.
TAXES
PLEASE CONSULT YOUR TAX ADVISER REGARDING YOUR SPECIFIC QUESTIONS ABOUT FEDERAL,
STATE AND LOCAL INCOME TAXES. Below we have summarized some important tax issues
that affect the Funds and their shareholders. This summary is based on current
tax laws, which may change.
The Funds believe that they will not have to pay income taxes if they distribute
all of their income and gains. Net income and realized capital gains that the
Funds distribute are not currently taxable when left to accumulate within a
variable annuity or variable life insurance contract or under a qualified
pension or retirement plan.
MORE INFORMATION ABOUT TAXES IS IN THE STATEMENT OF ADDITIONAL INFORMATION.
8 PROSPECTUS
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ARMADA FUNDS LOGO
ARMADA ADVANTAGE FUNDS
INVESTMENT ADVISER
National City Investment Management Company ("IMC")
1900 E. Ninth Street
Cleveland, Ohio 44114
DISTRIBUTOR
SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, Pennsylvania 19456
LEGAL COUNSEL
Drinker Biddle & Reath LLP
One Logan Square
18th and Cherry Streets
Philadelphia, PA 19103-6996
More information about each Fund is available without charge through the
following:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI dated August 11, 1999, includes detailed information about the Armada
Advantage Funds. The SAI is on file with the SEC and is incorporated by
reference into this prospectus. This means that the SAI, for legal purposes, is
a part of this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS
Annual and semi-annual reports are not currently available because the funds are
new. When available, the reports will list each Fund's holdings and contain
information from the Fund's managers about strategies, and recent market
conditions and trends. The reports will also contain detailed financial
information about the Funds.
TO OBTAIN MORE INFORMATION:
BY TELEPHONE: Call 1-800-862-6668
BY MAIL: Write to us at One Freedom Valley Drive, Oaks, PA 19456
FROM THE SEC: You can also obtain the SAI or other information about the Armada
Advantage Funds of the Parkstone Advantage Fund, from the SEC's website
("http://www.sec.gov"). You may review and copy documents at the SEC Public
Reference Room in Washington, DC (for information call 1-800-SEC-0330). You may
request documents by mail from the SEC, upon payment of a duplicating fee, by
writing to: Securities and Exchange Commission, Public Reference Section,
Washington, DC 20549-6009.
The Parkstone Advantage Fund's Investment Company Act registration number is
811-7850.
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ARMADA ADVANTAGE EQUITY GROWTH FUND
ARMADA ADVANTAGE BALANCED ALLOCATION FUND
Each an Investment Portfolio of
THE PARKSTONE ADVANTAGE FUND
Statement of Additional Information
August 11, 1999
This Statement of Additional Information is not a Prospectus, but
should be read in conjunction with the Prospectus for Armada Advantage Equity
Growth Fund and the Armada Advantage Balanced Allocation Fund of The Parkstone
Advantage Fund dated August 11, 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 are new mutual funds. Copies of the
Prospectus and the Annual Report to Shareholders, following the Fund's first
fiscal period, may be obtained without charge, upon request, by writing The
Parkstone Advantage Fund at One Freedom Valley Drive, Oaks, PA 19456, or by
calling toll free (800) 862-6668.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
INVESTMENTS AND RISKS............................................................................................1
Additional Information on Portfolio Instruments.........................................................1
Foreign Securities......................................................................................2
Foreign Government Obligations..........................................................................2
Foreign Currency Transactions...........................................................................2
Convertible Securities..................................................................................3
Warrants................................................................................................4
Futures Contracts and Related Options...................................................................4
"Covered Call" Options..................................................................................4
Asset-Backed Securities.................................................................................5
Interest Rate and Total Return Swaps....................................................................7
Income Participation Loans..............................................................................7
Short-Term Obligations..................................................................................8
When-Issued Securities..................................................................................9
Repurchase Agreements...................................................................................9
Reverse Repurchase Agreements..........................................................................10
U.S. Government Obligations............................................................................10
Variable and Floating Rate Obligations.................................................................10
Securities of Other Investment Companies...............................................................11
Lending of Portfolio Securities........................................................................11
Portfolio Turnover.....................................................................................11
Additional Investment Limitations......................................................................12
NET ASSET VALUE.................................................................................................13
Valuation of the Funds.................................................................................13
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION..................................................................13
MANAGEMENT OF THE TRUST.........................................................................................14
Trustees and Officers..................................................................................14
Investment Adviser.....................................................................................18
Portfolio Transactions.................................................................................19
Authority to Act as Investment Adviser.................................................................21
Glass-Steagall Act.....................................................................................21
Administrator..........................................................................................22
Distributor............................................................................................23
Custodians, Transfer Agent and Fund Accounting Services................................................23
Independent Auditors...................................................................................23
ADDITIONAL INFORMATION..........................................................................................24
Description of Shares..................................................................................24
Vote of a Majority of the Outstanding Shares...........................................................25
Shareholder and Trustee Liability......................................................................25
Additional Tax Information.............................................................................26
Performance Information................................................................................27
Yields of the Funds....................................................................................28
Calculation of Total Return............................................................................28
</TABLE>
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TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
Performance Comparisons................................................................................29
Miscellaneous..........................................................................................30
Financial Statements...................................................................................31
APPENDIX A.....................................................................................................A-1
APPENDIX B.....................................................................................................B-1
</TABLE>
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<PAGE> 16
STATEMENT OF ADDITIONAL INFORMATION
THE PARKSTONE ADVANTAGE FUND
The Parkstone Advantage Fund (the "Trust") is an open-end management
company which offers six separate and diversified investment portfolios
(collectively, the "Funds" and each individually, a "Fund"), each with a
different investment objective. The Trust was organized in the Commonwealth of
Massachusetts on May 19, 1993. 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 six variable net asset value funds: the Parkstone
Advantage Small Capitalization Fund, the Parkstone Advantage Mid Capitalization
Fund, the Parkstone Advantage Bond Fund, the Parkstone Advantage International
Discovery Fund, the Armada Advantage Equity Growth Fund (the "Equity Growth
Fund") and the Armada Advantage Balanced Allocation Fund (the "Balanced
Allocation Fund"). This Statement of Additional Information relates solely to
the Equity Growth Fund and Balanced Allocation Fund. The investment objective
of the Equity Growth Fund is to provide capital appreciation by investing in a
diversified portfolio of publicly traded larger cap equity securities. The
investment objective of the Balanced Allocation Fund is to provide long-term
capital appreciation and current income.
Much of the information contained in this Statement of Additional
Information expands upon subjects discussed in the Prospectus of the Funds
described above. Capitalized terms not defined herein are defined in the
Prospectus. No investment in shares of a Fund should be made without first
reading the Funds' Prospectus.
INVESTMENTS AND RISKS
The following policies supplement the investment objectives, principal
investment strategies and related risks of the Balanced Allocation and Equity
Growth Funds of the Trust as set forth in the Balanced Allocation and Equity
Growth Funds' Prospectus for the Trust.
The Armada Advantage Equity Growth Fund may invest up to 20% of its
assets in one or more of the following: futures contracts and related options,
options, foreign securities, foreign currency exchange contracts, exchange-rate
related securities, when-issued securities, short-term obligations, and illiquid
securities. In order to generate additional income, each Fund may, from time to
time, lend its portfolio securities to broker-dealers, banks or other
institutional borrowers.
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS
Attached to this Statement of Additional Information is Appendix A
which contains descriptions of the rating symbols used by Standard & Poor's
Rating Group ("S&P"), Fitch IBCA,
-1-
<PAGE> 17
Inc. ("Fitch IBCA"), Duff & Phelps Credit Rating Co. ("Duff"), and Moody's
Investors Service, Inc. ("Moody's") for securities which may be held by the
Fund.
FOREIGN SECURITIES
- ------------------
Unanticipated political or social developments may affect the value of
the Equity Growth and Balanced Allocation Funds' investments in emerging market
countries and the availability to the Fund of additional investments in those
countries. The small size, relatively unseasoned nature of the securities
markets and limited volume of trading in securities in certain of these
countries may make the Balanced Allocation Fund's investments there illiquid and
more volatile than investments in Japan or most Western European countries. In
addition, the Balanced Allocation Fund may be required to establish special
custodial or other arrangements before making certain investments. Moreover,
there may be little financial or accounting information available with respect
to issuers located in certain emerging market countries, and it may be difficult
as a result to assess the value or prospects of an investment in such issuers.
FOREIGN GOVERNMENT OBLIGATIONS
- ------------------------------
The Equity Growth and Balanced Allocation Funds may purchase debt
obligations issued or guaranteed by governments (including states, provinces or
municipalities) of countries other than the United States, or by their agencies,
authorities or instrumentalities. The percentage of assets invested in
securities of a particular country or denominated in a particular currency will
vary in accordance with the adviser's assessment of gross domestic product in
relation to aggregate debt, current account surplus or deficit, the trend of the
current account, reserves available to defend the currency, and the monetary and
fiscal policies of the government.
FOREIGN CURRENCY TRANSACTIONS
- -----------------------------
In order to protect against a possible loss on investments resulting
from a decline or appreciation in the value of a particular foreign currency
against the U.S. dollar or another foreign currency or for other reasons, the
Equity Growth and Balanced Allocation Funds is authorized to enter into forward
currency exchange contracts. These contracts involve an obligation to purchase
or sell a specified currency at a future date at a price set at the time of the
contract. Forward currency contracts do not eliminate fluctuations in the values
of portfolio securities but rather allow the Balanced Allocation Fund to
establish a rate of exchange for a future point in time.
When entering into a contract for the purchase or sale of a security,
the Balanced Allocation Fund may enter into a forward foreign currency exchange
contract for the amount of the purchase or sale price to protect against
variations, between the date the security is purchased or sold and the date on
which payment is made or received, in the value of the foreign currency relative
to the U.S. dollar or other foreign currency.
When the adviser anticipates that a particular foreign currency may
decline substantially relative to the U.S. dollar or other leading currencies,
in order to reduce risk, the Balanced Allocation Fund may enter into a forward
contract to sell, for a fixed amount, the amount of foreign currency
approximating the value of some or all of the Balanced Allocation Fund's
securities denominated in such foreign currency. Similarly, when the obligations
held by the Balanced Allocation Fund create a short position in a foreign
currency, the Balanced Allocation Fund may
-2-
<PAGE> 18
enter into a forward contract to buy, for a fixed amount, an amount of foreign
currency approximating the short position. With respect to any forward foreign
currency contract, it will not generally be possible to match precisely the
amount covered by that contract and the value of the securities involved due to
the changes in the values of such securities resulting from market movements
between the date the forward contract is entered into and the date it matures.
In addition, while forward contracts may offer protection from losses resulting
from declines or appreciation in the value of a particular foreign currency,
they also limit potential gains which might result from changes in the value of
such currency. The Balanced Allocation Fund will also incur costs in connection
with forward foreign currency exchange contracts and conversions of foreign
currencies and U.S. dollars.
A separate account consisting of cash or liquid securities equal to the
amount of the Balanced Allocation Fund's assets that could be required to
consummate forward contracts will be established with the Trust's custodian
except to the extent the contracts are otherwise "covered." For the purpose of
determining the adequacy of the securities in the account, the deposited
securities will be valued at market or fair value. If the market or fair value
of such securities declines, additional cash or liquid securities will be placed
in the account daily so that the value of the account will equal the amount of
such commitments by the Balanced Allocation Fund. A forward contract to sell a
foreign currency is "covered" if the Balanced Allocation Fund owns the currency
(or securities denominated in the currency) underlying the contract, or holds a
forward contract (or call option) permitting the Balanced Allocation Fund to buy
the same currency at a price no higher than the Fund's price to sell the
currency. A forward contract to buy a foreign currency is "covered" if the
Balanced Allocation Fund holds a forward contract (or call option) permitting
the Balanced Allocation Fund to sell the same currency at a price as high as or
higher than the Balanced Allocation Fund's price to buy the currency.
CONVERTIBLE SECURITIES
- ----------------------
Convertible securities entitle the holder to receive interest paid or
accrued on debt or the dividend paid on preferred stock until the securities
mature or are redeemed, converted or exchanged. Prior to conversion, convertible
securities have characteristics similar to ordinary debt securities in that they
normally provide a stable stream of income with generally higher yields than
those of common stock of the same or similar issuers. Convertible securities
rank senior to common stock in a corporation's capital structure and therefore
generally entail less risk than the corporation's common stock. The value of the
convertibility feature depends in large measure upon the degree to which the
convertible security sells above its value as a fixed income security.
In selecting convertible securities for the Balanced Allocation and
Equity Growth Funds, the adviser will consider, among other factors, the
creditworthiness of the issuers of the securities; the interest or dividend
income generated by the securities; the potential for capital appreciation of
the securities and the underlying common stocks; the prices of the securities
relative to other comparable securities and to the underlying common stocks;
whether the securities are entitled to the benefits of sinking funds or other
protective conditions; diversification of the Balanced Allocation and Equity
Growth Funds' respective portfolios as to issuers; and the ratings of the
securities. Since credit rating agencies may fail to timely change the credit
ratings of securities to reflect subsequent events, the adviser will consider
whether such issuers will have sufficient cash flow and profits to meet required
principal and interest payments. The Balanced Allocation and
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<PAGE> 19
Equity Growth Funds may retain a portfolio security whose rating has been
changed if the adviser deems that retention of such security is warranted.
WARRANTS
- --------
Each Fund may invest in warrants. Warrants enable the owner to
subscribe to and purchase a specified number of shares of the issuing
corporation at a specified price during a specified period of time. The prices
of warrants do not necessarily correlate with the prices of the underlying
securities. The purchase of warrants involves the risk that the purchaser could
lose the purchase value of the warrant if the right to subscribe to additional
shares is not exercised prior to the warrant's expiration. Also, the purchase of
warrants involves the risk that the effective price paid for the warrant added
to the subscription price of the related security may exceed the value of the
subscribed security's market price such as when there is no movement in the
level of the underlying security.
FUTURES CONTRACTS AND RELATED OPTIONS
- -------------------------------------
The Balanced Allocation and Equity Growth Funds may invest in futures
contracts and related options. For a detailed description of these investments
and related risks, see Appendix B attached to this Statement of Additional
Information.
"COVERED CALL" OPTIONS
- ----------------------
The Balanced Allocation and Equity Growth Funds will write call options
only if they are "covered." The option is "covered" if a Fund owns the security
underlying the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or, if additional cash
consideration is required, liquid assets of equal value are held in a segregated
account by its custodian) upon conversion or exchange of other securities held
by it. For a call option on an index, the option is covered if the Fund
maintains with its custodian a portfolio of securities substantially replicating
the movement of the index, or liquid assets equal to the contract value. A call
option is also covered if the Fund holds a call on the same security or index as
the call written where the exercise price of the call held is (i) equal to or
less than the exercise price of the call written, or (ii) greater than the
exercise price of the call written provided the difference is maintained by the
Fund in liquid assets in a segregated account with its custodian.
A Fund's obligation to sell a security subject to a covered call option
written by it may be terminated prior to the expiration date of the option by
the Fund's execution of a closing purchase transaction, which is effected by
purchasing on an exchange an option of the same series (i.e., same underlying
security, exercise price and expiration date) as the option previously written.
Such a purchase does not result in the ownership of an option. A closing
purchase transaction will ordinarily be effected to realize a profit on an
outstanding option, to prevent an underlying security from being called, to
permit the sale of the underlying security or to permit the writing of a new
option containing different terms on such underlying security. The cost of such
a liquidation purchase plus transaction costs may be greater than the premium
received upon the original option, in which event the Fund will have incurred a
loss on the transaction. There is no assurance that a liquid secondary market
will exist for any particular option. An option writer, unable to effect a
closing purchase transaction, will not be able to sell the underlying security
until the option expires or the optioned security is delivered upon exercise
with the result that the writer in such
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<PAGE> 20
circumstances will be subject to the risk of market decline or appreciation in
the security during such period.
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 this 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 current bid
price. If an option written by a Fund expires on the stipulated expiration date
or if the Fund enters into a closing purchase transaction, it will realize a
gain (or 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 written by the Fund is exercised,
the proceeds of the sale will be increased by the net premium originally
received and the Fund will realize a gain or loss.
There are several risks associated with transactions in certain
options. For example, there are significant differences between the securities
and options markets that could result in an imperfect correlation between these
markets, causing a given transaction not to achieve its objectives. In addition,
a liquid secondary market for particular options, whether traded
over-the-counter or on a securities exchange may be absent for reasons which
include the following: there may be insufficient trading interest in certain
options; restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; trading halts, suspensions or other restrictions
may be imposed with respect to particular classes or series of options or
underlying securities or currencies; unusual or unforeseen circumstances may
interrupt normal operations on an exchange; the facilities of an exchange or the
Options Clearing Corporation may not at all times be adequate to handle current
trading value; or one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market on that exchange (or in that class or series of options) would cease to
exist, although outstanding options that had been issued by the Options Clearing
Corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
ASSET-BACKED SECURITIES
- -----------------------
The Balanced Allocation Fund may purchase asset-backed securities,
which are securities backed by mortgages, installment contracts, credit card
receivables or other assets. Asset-backed securities represent interests in
"pools" of assets in which payments of both interest and principal on the
securities are made periodically, thus in effect "passing through" periodic
payments made by the individual borrowers on the assets that underlie the
securities, net of any fees paid to the issuer or guarantor of the securities.
The average life of asset-backed securities varies with the maturities of the
underlying instruments, and the average life of a mortgage-backed instrument, in
particular, is likely to be substantially less than the original maturity of the
mortgage pools underlying the securities as a result of mortgage prepayments.
For this and other reasons, an asset-backed security's stated maturity may be
shortened, and the security's total return may be difficult to predict
precisely. Asset-backed securities acquired by the Balanced Allocation Fund may
include collateralized mortgage obligations ("CMOs") issued by private
companies.
The Balanced Allocation Fund may invest in securities the timely
payment of principal and interest on which are guaranteed by the Government
National Mortgage Association ("GNMA") a
-5-
<PAGE> 21
wholly-owned U.S. Government corporation within the Department of Housing and
Urban Development. The market value and interest yield of these instruments can
vary due to market interest rate fluctuations and early prepayments of
underlying mortgages. These securities represent ownership in a pool of
federally insured mortgage loans. GNMA certificates consist of underlying
mortgages with a maximum maturity of 30 years. However, due to scheduled and
unscheduled principal payments, GNMA certificates have a shorter average
maturity and, therefore, less principal volatility than a comparable 30-year
bond. Since prepayment rates vary widely, it is not possible to predict
accurately the average maturity of a particular GNMA pool. GNMA securities
differ from conventional bonds in that principal is paid back to the certificate
holders over the life of the loan rather than at maturity. The scheduled monthly
interest and principal payments relating to mortgages in the pool are "passed
through" to investors. In addition, there may be unscheduled principal payments
representing prepayments on the underlying mortgages. Although GNMA certificates
may offer yields higher than those available from other types of U.S. Government
securities, GNMA certificates may be less effective than other types of
securities as a means of "locking in" attractive long-term rates because of the
prepayment feature. For instance, when interest rates decline, the value of a
GNMA certificate likely will not rise as much as comparable debt securities due
to the prepayment feature. In addition, these prepayments can cause the price of
a GNMA certificate originally purchased at a premium to decline in price to its
par value, which may result in a loss.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-related securities
and among the securities that they issue. Mortgage-related securities guaranteed
by the 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 guarantee 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 also are
supported by the authority of GNMA to borrow funds from the U.S. Treasury to
make payments under its guarantee. Mortgage-backed securities issued by the FNMA
include FNMA Guaranteed Mortgage Pass-Through Certificates (also known as
"Fannie Maes") which are solely the obligations of the FNMA and are not backed
by or entitled to the full faith and credit of the United States, but are
supported by the right of the issuer to borrow from the Treasury. 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 the FHLMC include FHLMC Mortgage
Participation Certificates (also known as "Freddie Macs" or "PCs"). They are
solely the obligations of the FHLMC and guaranteed as to timely payment of the
principal and interest by FHLMC only.
Non-mortgage asset-backed securities involve certain risks that are not
presented by mortgage-backed securities. Primarily, these securities may not
have the benefit of the same security interest in the underlying collateral.
Credit card receivables are generally unsecured and the debtors are entitled to
the protection of a number of state and federal consumer credit laws, many of
which have given debtors the right to set off certain amounts owed on the credit
cards, thereby reducing the balance due. Most issuers of automobile receivables
permit the servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the
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<PAGE> 22
holders of the automobile receivables may not have an effective security
interest in all of the obligations backing such receivables. Therefore, there is
a possibility that recoveries on repossessed collateral may not, in some cases,
be able to support payments on these securities.
INTEREST RATE AND TOTAL RETURN SWAPS
- ------------------------------------
The Balanced Allocation Fund may enter into interest rate or total
return swaps for hedging purposes and not for speculation. It will typically use
interest rate or total return swaps to preserve a return on a particular
investment or portion of its portfolio or to shorten the effective duration of
its investments. Swaps involve the exchange by the Balanced Allocation Fund with
another party of their respective commitments to pay or receive interest or the
total return of a predefined "index," such as an exchange of fixed rate payments
for floating rate payments or an exchange of a floating rate payment for the
total return on an index.
The Balanced Allocation Fund will only enter into swaps on a net basis,
(i.e., the two payment streams are netted out, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments). Inasmuch
as these transactions are entered into for good faith hedging purposes, the
Balanced Allocation Fund and its adviser believe that such obligations do not
constitute senior securities as defined in the 1940 Act and, accordingly, will
not treat them as being subject to the Fund's borrowing restrictions. The net
amount of the excess, if any, of the Balanced Allocation Fund's obligations over
its entitlements with respect to each swap will be accrued on a daily basis and
an amount of liquid assets, such as cash, U.S. government securities or other
liquid high grade debt securities, having an aggregate net asset value at least
equal to such accrued excess will be maintained in a segregated account by the
Balanced Allocation Fund's custodian.
If there is a default by the other party to a swap transaction, the
Balanced Allocation Fund will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid in comparison with markets
for other similar instruments which are traded in the Interbank market.
INCOME PARTICIPATION LOANS
- --------------------------
The Balanced Allocation Fund may make or acquire participations in
privately negotiated loans to borrowers. Frequently, such loans have variable
interest rates and may be backed by a bank letter of credit; in other cases they
may be unsecured. Such transactions may provide an opportunity to achieve higher
yields than those that may be available from other securities offered and sold
to the general public.
Privately arranged loans, however, will generally not be rated by a
credit rating agency and will normally be liquid, if at all, only through a
provision requiring repayment following demand by the lender. Such loans made by
the Balanced Allocation Fund may have a demand provision permitting the Balanced
Allocation Fund to require repayment within seven days. Participations in such
loans, however, may not have such a demand provision and may not be otherwise
marketable. Recovery of an investment in any such loan that is illiquid and
payable on demand will depend on the ability of the borrower to meet an
obligation for full repayment of principal and payment of accrued interest
within the demand period, normally seven days or less (unless the Balanced
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<PAGE> 23
Allocation Fund determines that a particular loan issue, unlike most such loans,
has a readily available market). As it deems appropriate, the Board of Trustees
of the Trust will establish procedures to monitor the credit standing of each
such borrower, including its ability to honor contractual payment obligations.
SHORT-TERM OBLIGATIONS
- ----------------------
Each Fund may invest directly in various short-term obligations
including those described below.
Investments include commercial paper and other short-term promissory
notes issued by corporations (including variable and floating rate instruments).
In addition, each Fund may invest in Canadian Commercial Paper ("CCP"), which is
commercial paper issued by a Canadian corporation or a Canadian counterpart of a
U.S. corporation, and in Europaper, which is U.S. dollar denominated commercial
paper of a foreign issuer. Each Fund may also acquire zero coupon obligations,
which have greater price volatility than coupon obligations and which will not
result in the payment of interest until maturity.
Bank obligations include bankers' acceptances and negotiable
certificates of deposit, and non-negotiable demand and time deposits issued for
a definite period of time and earning a specified return by a U.S. bank which is
a member of the Federal Reserve System. Bank obligations also include U.S.
dollar denominated bankers' acceptances and certificates of deposit and time
deposits issued by foreign branches of U.S. banks or foreign banks. Investment
in bank obligations is limited to the obligations of financial institutions
having more than $1 billion in total assets at the time of purchase. Each Fund
may also make interest bearing savings deposits in commercial and savings banks
not in excess of 5% of its total assets. Investment in non-negotiable time
deposits is limited to no more than 5% of a Fund's total assets at the time of
purchase.
Each Fund may make limited investments in "GICs" issued by U.S.
insurance companies. When investing in GICs, a Fund makes cash contributions to
a deposit fund or an insurance company's general account. The insurance company
then credits to the Fund monthly a guaranteed minimum interest which is based on
an index. The insurance company may assess periodic charges against a GIC for
expense and service costs allocable to it, and the charges will be deducted from
the value of the deposit fund. A Fund will purchase a GIC only when its adviser
has determined, under guidelines established by the Board of Trustees, that the
GIC presents minimal credit risks to the Fund and is of comparable quality to
instruments that are rated high quality by one or more rating agencies. In
addition, because the Fund may not receive the principal amount of a GIC from
the insurance company on seven days' notice or less, the GIC is considered an
illiquid investment, and, together with other instruments in the Fund which are
not readily marketable, will not exceed 15% of the Fund's net assets.
-8-
<PAGE> 24
WHEN-ISSUED SECURITIES
- ----------------------
Each Fund may purchase securities on a "when-issued" basis (i.e., for
delivery beyond the normal settlement date at a stated price and yield). When a
Fund agrees to purchase when-issued securities, the custodian sets aside cash or
liquid portfolio securities equal to the amount of the commitment in a separate
account. Normally, the custodian will set aside portfolio securities to satisfy
a purchase commitment, and in such a case a Fund may be required subsequently to
place additional assets in the separate account in order to ensure that the
value of the account remains equal to the amount of the Fund's commitment,
marked to market daily. It is likely 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. Because a Fund will set aside cash or
liquid assets to satisfy its purchase commitments in the manner described, the
Fund's liquidity and ability to manage its portfolio might be affected in the
event its commitments to purchase when-issued securities ever exceeded 25% of
the value of its total assets.
When a Fund engages in when-issued transactions, it relies on the
seller to consummate the trade. Failure of the seller to do so may result in the
Fund's incurring a loss or missing an opportunity to obtain a price considered
to be advantageous.
REPURCHASE AGREEMENTS
- ---------------------
Securities held by the Funds may be subject to repurchase agreements.
Under the terms of a repurchase agreement, a Fund purchases securities from
financial institutions such as banks and broker-dealers which the adviser deems
creditworthy under guidelines approved by the Board of Trustees, subject to the
seller's agreement to repurchase such securities at a mutually agreed-upon date
and price. The repurchase price generally equals the price paid by the Fund plus
interest negotiated on the basis of current short term rates, which may be more
or less than the rate on the underlying portfolio securities. The seller under a
repurchase agreement will be required to maintain 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 obligation or
become insolvent, the Fund would suffer a loss to the extent that the proceeds
from a sale of the underlying portfolio securities were less than the repurchase
price under the agreement, or to the extent that the disposition of such
securities by the Fund were delayed pending court action. Although there is no
controlling legal precedent confirming that a Fund would be entitled, as against
a claim by such seller or its receiver or trustee in bankruptcy, to retain the
underlying securities, the Board of Trustees of the Trust believes that, under
the regular procedures normally in effect for 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 the Fund
under the 1940 Act.
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<PAGE> 25
REVERSE REPURCHASE AGREEMENTS
- -----------------------------
Each Fund may borrow funds for temporary purposes by entering into
reverse repurchase agreements in accordance with its 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 them at a
mutually agreed-upon date and price. A Fund intends to enter into reverse
repurchase agreements only to avoid otherwise selling securities during
unfavorable market conditions to meet redemptions. At the time a Fund enters
into a reverse repurchase 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 monitor the account to ensure that such equivalent value is
maintained. Reverse repurchase agreements involve the risk that the market value
of the securities sold by the Fund may decline below the price at which it is
obligated to repurchase the securities. Reverse repurchase agreements are
considered to be borrowings by the Fund under the Investment Company Act of
1940.
U.S. GOVERNMENT OBLIGATIONS
- ---------------------------
As described in the Prospectus, each Fund may purchase obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities.
Some of these obligations are supported by the full faith and credit of the U.S.
Treasury, such as obligations issued by the Government National Mortgage
Association. Others, such as those of the Export-Import Bank of the United
States, are supported by the right of the issuer to borrow from the U.S.
Treasury; others, such as those of the Federal National Mortgage Association,
are supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations; and still others, such as those of the Student Loan
Marketing Association, are supported only by the credit of the agency or
instrumentality issuing the obligation. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored agencies
or instrumentalities if it is not obligated to do so by law.
VARIABLE AND FLOATING RATE OBLIGATIONS
- --------------------------------------
Each Fund may purchase variable and floating rate obligations
(including variable amount master demand notes) which are unsecured instruments
that permit the indebtedness thereunder to vary and provide for periodic
adjustments in the interest rate. Because variable and floating rate obligations
are direct lending arrangements between the Fund and the issuer, they are not
normally traded although certain variable and floating rate obligations, such as
Student Loan Marketing Association variable rate obligations, may have a more
active secondary market because they are issued or guaranteed by the U.S.
Government or its agencies or instrumentalities. Even though there may be no
active secondary market in such instruments, a Fund may demand payment of
principal and accrued interest at a time specified in the instrument or may
resell them to a third party. Such obligations may be backed by bank letters of
credit or guarantees issued by banks, other financial institutions or the U.S.
government, its agencies or instrumentalities. The quality of any letter of
credit or guarantee will be rated high quality or, if unrated, will be
determined to be of comparable quality by the adviser. In the event an issuer of
a variable or floating rate obligation defaulted on its payment obligation, a
Fund might be unable to dispose of the instrument because of the absence of a
secondary market and could, for this or other reasons, suffer a loss to the
extent of the default.
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<PAGE> 26
SECURITIES OF OTHER INVESTMENT COMPANIES
- ----------------------------------------
Each Fund currently intends to limit its investments in securities
issued by other investment companies so that, as determined immediately after a
purchase of such securities is made: (i) not more than 5% of the value of the
Fund's total assets will be invested in the securities of any one investment
company; (ii) not more than 10% of the value of its total assets will be
invested in the aggregate in securities of investment companies as a group; and
(iii) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Fund or by the Trust as a whole.
LENDING OF PORTFOLIO SECURITIES
- -------------------------------
The Equity Growth and Balanced Allocation Funds may lend securities
pursuant to agreements requiring that the loans be continuously secured by cash,
securities of the U.S. government or its agencies, or any combination of cash
and such securities, as collateral equal to 100% of the market value at all
times of the securities lent. Such loans will not be made if, as a result, the
aggregate amount of all outstanding securities loans for the Fund exceed
one-third of the value of its total assets taken at fair market value. The
Equity Growth Fund will continue to receive interest on the securities lent
while simultaneously earning interest on the investment of the cash collateral
in U.S. government securities. However, the Fund will normally pay lending fees
to such broker-dealers and related expenses from the interest earned on invested
collateral. There may be risks of delay in receiving additional collateral or
risks of delay in recovery of the securities or even loss of rights in the
collateral should the borrower of the securities fail financially. However,
loans are made only to borrowers deemed by the Adviser to be of good standing
and when, in the judgment of the adviser, the consideration which can be earned
currently from such securities loans justifies the attendant risk. Any loan may
be terminated by either party upon reasonable notice to the other party.
PORTFOLIO TURNOVER
- ------------------
Each Fund may engage in short term trading and may sell securities
which have been held for periods ranging from several months to less than a day.
Portfolio turnover will tend to rise during periods of economic turbulence and
decline during periods of stable growth. The Balanced Allocation Fund's annual
portfolio turnover is not expected to exceed 200% under normal market
conditions. The Equity Growth Fund's annual portfolio turnover is not expected
to exceed 100% under normal market conditions.
The portfolio turnover rate for each Fund is calculated by dividing the
lesser of purchases or sales of portfolio securities for the year by the monthly
average value of the portfolio securities. The calculation excludes U.S.
Government securities and all securities whose maturities at the time of
acquisition were one year or less. Portfolio turnover may vary greatly from year
to year as well as within a particular year, and may also be affected by cash
requirements for redemptions of shares and by requirements which enable a Fund
to receive certain favorable tax treatment. Portfolio turnover will not be a
limiting factor in making investment decisions.
-11-
<PAGE> 27
ADDITIONAL INVESTMENT LIMITATIONS
- ---------------------------------
In addition to the investment limitations disclosed in the Prospectus,
the Funds are subject to the following investment limitations which may be
changed with respect to a particular Fund only by a vote of the holders of a
majority of such Fund's outstanding shares (as defined under "Miscellaneous" in
the Prospectus).
No Fund may:
1. Purchase or sell real estate, except that the Fund may
purchase securities of issuers which deal in real estate and may purchase
securities which are secured by interests in real estate.
2. Invest in commodities, except that as consistent with its
investment objective and policies the Fund may: (a) purchase and sell options,
forward contracts, futures contracts, including without limitation those
relating to indices; (b) purchase and sell options on futures contracts or
indices; and (c) purchase publicly traded securities of companies engaging in
whole or in part in such activities. For purposes of this investment limitation,
"commodities" will include commodity contracts.
3. Act as an underwriter of securities within the meaning of
the Securities Act of 1933 except insofar as the Fund 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.
In addition, the Funds are subject to the following non-fundamental
limitations, which may be changed without the vote of shareholders.
No Fund may:
1. Acquire any other investment company or investment company
security except 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, futures 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)
the Fund 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.
-12-
<PAGE> 28
5. Invest more than 15% of its net assets in illiquid
securities.
6. Purchase securities while its outstanding borrowings
(including reverse repurchase agreements) are in excess of 5% of its assets.
Securities held in escrow or in separate accounts in connection with a Fund's
investment practices described in its Prospectus are not deemed to be pledged
for purposes of this limitation.
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. With respect to the Armada Advantage Balanced Allocation Fund,
if there have been no sales during such day, portfolio securities will be
valued at the mean between the most recent quoted bid and asked prices.
Portfolio securities, the principal market for which is not a securities
exchange, will be valued at the mean between the most recent quoted bid and
asked prices in such principal market. With respect to the Armada Advantage
Equity Growth Fund and the equity securities of the Armada Advantage Balanced
Allocation Fund, if there have been no sales during such day, portfolio
securities will be valued at the latest bid quotation. In either case, if no
such price is available, then such securities will be valued in good faith at
their respective fair market values using methods determined by or under the
supervision of the Board of Trustees of the Group. 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 market value as
determined in good faith under the general supervision of the Board of Trustees
of the Group.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Funds are sold on a continuous basis by the Trust's
distributor SEI Investments Distribution Co. (the "Distributor"). As described
in the Prospectus, shares of the Funds are sold and redeemed at their net asset
value as next determined after receipt of the purchase or redemption order. Each
purchase is confirmed to a separate account in a written statement of the number
of shares purchased and the aggregate number of shares currently held.
-13-
<PAGE> 29
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 the Distributor, the
Adviser or National City Corporation ("NCC") 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.
SEI receives fees from the Trust for acting as Administrator. State Street Bank
and Trust Co. receives fees from the Trust for acting as Transfer Agent.
-14-
<PAGE> 30
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 &
32980 Creekside Drive Young, April 1984 to September 1993;
Pepper Pike, OH 44124 Director, Cold Metal Products, Inc.,
Age 65 since March 1994; Director,
Strategic Distribution, Inc., since
January 1999.
Herbert R. Martens, Jr. * President and Trustee Executive Vice President, National
c/o NatCity Investments, Inc. City Corporation (bank holding
1965 East Sixth Street company), since July 1997; Chairman,
Cleveland, OH 44114 President and Chief Executive
Age 46 Officer, NatCity Investments, Inc.,
since July 1995 (investment
banking); President and Chief
Executive Officer, Raffensberger,
Hughes & Co. from 1993 until 1995
(broker-dealer).
Leigh Carter * Trustee Retired President and Chief
13901 Shaker Blvd., #6B Operating Officer, B.F. Goodrich
Cleveland, OH 44120 Company, August 1986 to September
Age 73 1990; Director, Adams Express
Company (closed-end investment
company), April 1982 to December
1997; Director, Acromed Corporation
(producer of spinal implants),
June 1992 to March 1998; Director,
Petroleum & Resources Corp.,
April 1987 to December 1997;
Director, Morrison Products
(manufacturer of blower fans and
air moving equipment), since April
1983; Director, Kirtland Capital
Corp. (privately funded investment
group), since January 1992; Director,
TruSeal Technologies (manufacturer of
insulated glass sealants), since April 1997.
</TABLE>
-15-
<PAGE> 31
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH THE TRUST PRINCIPAL OCCUPATION
DURING PAST 5 YEARS
AND OTHER AFFILIATIONS
<S> <C> <C>
John F. Durkott Trustee President and Chief Operating
8600 Allisonville Road Officer, Kittle's Home Furnishings
Indianapolis, IN 46250 Center, Inc. since January 1982;
Age 54 partner, Kittle's Bloomington
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
1608 Balmoral Way Chief Executive Officer, Centerior
Westlake, OH 44145 Energy (electric utility), March
Age 61 1992 to October 1997; 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
600 Autumn Lane Martin Gatton College of Business
Lexington, KY 40502 and Economics, University of
Age 60 Kentucky, since 1981; 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
Pepper Pike, OH 44124 1991 (global manufacturing);
Age 61 Trustee, WVIZ Educational Television
(public television).
J. William Pullen Trustee President and Chief Executive
Whayne Supply Company Officer, Whayne Supply Co. (engine
1400 Cecil Avenue and heavy equipment distribution),
P.O. Box 35900 since 1986; President and Chief
Louisville, KY 40232-5900 Executive Officer, American
Age 60 Contractors Rentals & Sales (rental
subsidiary of Whayne Supply Co.),
since 1988.
</TABLE>
-16-
<PAGE> 32
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH THE TRUST PRINCIPAL OCCUPATION
DURING PAST 5 YEARS
AND OTHER AFFILIATIONS
<S> <C> <C>
W. Bruce McConnel, III Secretary Partner of the law firm Drinker
One Logan Square Biddle & Reath LLP Philadelphia,
18th and Cherry Streets Pennsylvania.
Philadelphia, PA 19103-6996
Age 56
John Leven Treasurer Director, Funds Accounting of SEI Investments
One Freedom Valley Drive Company since March 1999; Division Controller,
Oaks, PA 19456 First Data Corp. from February 1998 to March 1999;
Age 42 Corporate Controller, FPS Services, a
mutual funds servicing company, from February 1993
to February 1998; Treasurer, FPS Broker Services,
Inc. from March 1993 to December 1998.
Lynda Striegel Assistant Treasurer Vice President and Assistant
One Freedom Valley Drive Secretary of SEI Investments Mutual
Oaks, PA 19456 Fund Services and SEI Investments
Age 56 Distribution Co. since 1998; Senior
Asset Management Counsel, Barnett
Banks, Inc. from 1997 to 1998; Partner,
Groom and Nordberg, Chartered from 1996
to 1997; Associate General Counsel, Riggs
Bank, N.A. from 1991 to 1995.
</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.
Mr. Carter is an "interested person" of the Trust, as defined in the
1940 Act, due to his ownership of 7,200 shares of stock of National City
Corporation, an affiliate of National City Investment Management Company, the
Fund's investment adviser.
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.
-17-
<PAGE> 33
COMPENSATION TABLE
<TABLE>
<CAPTION>
NAME OF TRUSTEE AGGREGATE PENSION OR ESTIMATED ANNUAL TOTAL COMPENSATION FROM THE
COMPENSATION FROM RETIREMENT BENEFITS BENEFITS UPON TRUST, THE PARKSTONE GROUP OF
THE FUNDS* ACCRUED AS PART OF RETIREMENT FUNDS AND ARMADA FUNDS PAID TO
FUND EXPENSES TRUSTEES**
<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*** 0 0 0 11,500
Robert M. Beam*** 0 0 0 16,500
Lawrence D. Bryan*** 0 0 0 16,500
Adrian Charles Edwards*** 0 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 SEI 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
Trust for acting as Trustee.
*The Balanced Allocation and Equity Growth Funds, did not operate during 1998.
**Represents total compensation for the period January 1, 1998 through December
31, 1998.
*** Messrs. Rapp, Beam, Bryan, Edwards and Jones served as Trustees until their
resignations on August 14, 1998.
INVESTMENT ADVISER
Subject to the general supervision of the Trust's Board of Trustees and
in accordance with the Funds' 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 an Investment Advisory
Agreement dated as of September 1, 1999 (the "Investment Advisory Agreement").
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.
-18-
<PAGE> 34
Under the Investment Advisory Agreement, 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 Agreement, 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: .75% for the Balanced Allocation Fund and .75% for the
Equity Growth Fund. 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.
The Adviser intends to waive a portion of the advisory fees during the first
nine months of operation of both Funds.
Pursuant to the Investment Advisory Agreement, 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 Agreement other than the cost of
securities (including brokerage commissions) if any, purchased for the Trust.
Unless sooner terminated, the Investment Advisory Agreement 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 Agreement, or interested persons
(as defined in the 1940 Act) of any such party, cast in person at a meeting
called for such purpose. The Investment Advisory Agreement is terminable as to a
particular Fund at any time on 60 days' prior written notice without penalty by
the Trustees, by vote of a majority of outstanding shares of that Fund, by the
Investment Adviser. The Agreement also terminates automatically in the event of
any assignment, as defined in the 1940 Act.
The Investment Advisory Agreement provides that the Investment Adviser
shall not be liable for any error of judgment or mistake of law or for any loss
suffered by the 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
-19-
<PAGE> 35
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. See "INVESTMENT
OBJECTIVES AND POLICIES - Portfolio Transactions" above.
The Trust will not acquire portfolio securities issued by, make savings
deposits in, or enter into repurchase or reverse repurchase agreements with NCC,
the Distributor, or their affiliates, and will not give preference to NCC's
correspondents with respect to such transactions, securities, savings deposits,
repurchase agreements and reverse repurchase agreements.
Investment decisions for each Fund of the Trust are made independently
from those made for the other Funds or any other portfolio investment company or
account managed by the Investment Adviser. Any such other portfolio, investment
company or account may also invest in the same securities as the Trust. When a
purchase or sale of the same security is made at substantially the same time on
behalf of a Fund and another Fund, portfolio, investment company or account, the
transaction will be averaged as to price and available investments will be
allocated as to amount in a manner which the Investment Adviser believes to be
equitable to the Fund(s) and such other portfolio, investment company, or
account. In some instances, this investment procedure may adversely affect the
price paid or received by a Fund or the size of the position obtained by the
Fund. To the extent permitted by law, the Investment Adviser may aggregate the
securities to be sold or purchased for a Fund with those to be sold or purchased
for other Funds or for other portfolios, investment companies, or accounts in
order to obtain best execution. As provided by the Investment Advisory Agreement
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.
-20-
<PAGE> 36
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.
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 Agreement without violation
of applicable statutes and regulations. Future
-21-
<PAGE> 37
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
The Trust and SEI Fund Resources (the "Administrator") have entered
into an administration agreement (the "Administration Agreement") as of July 2,
1999.
The Administration Agreement provides that the Administrator 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 matters to which the Administration
Agreement relates, except a loss resulting from willful misfeasance, bad faith
or negligence on the part of the Administrator in the performance of its duties
or from reckless disregard by it of its duties and obligations thereunder.
The Administrator, a Delaware business trust, has its principal
business offices at One Freedom Valley Drive, Oaks, Pennsylvania 19456. SEI
Investments Management Corporation ("SIMC"), a wholly-owned subsidiary of SEI
Investments Company ("SEI Investments"), is the owner of all beneficial
interests in the Administrator. SEI Investments and its affiliates, including
the Administrator, are leading providers of funds evaluation services, trust
accounting systems, and brokerage and information services to financial
institutions, institutional investors, and money managers. The Administrator and
its affiliates also serve as administrator or sub-administrator to the following
other mutual funds: The Achievement Funds Trust, The Advisors' Inner Circle
Fund, The Arbor Fund, ARK Funds, Bishop Street Funds, Boy 1784 Funds(R), CUFUND,
The Expedition Funds, FMB Funds, Inc., First American Funds, Inc., First
American Investment Funds, Inc., First American Strategy Funds, Inc., HighMark
Funds, Marquis Funds(R), Monitor Funds, Morgan Grenfell Investment Trust, Oak
Associates Funds, The PBHG Funds, Inc., PBHG Insurance Series Fund, Inc., The
Pillar Funds, Santa Barbara Group of Mutual Funds, Inc., SEI Asset Allocation
Trust, SEI Daily Income Trust, SEI Index Funds, SEI Institutional Investments
Trust, SEI Institutional Managed Trust, SEI International Trust, SEI Liquid
Asset Trust, SEI Tax Exempt Trust, STI Classic Funds, STI Classic Variable
Trust, TIP Funds and TIP Institutional Funds.
The Administrator is entitled to receive with respect to the Funds, an
administrative fee of .20% of the Portfolio's average daily net assets, which is
calculated daily and paid monthly, prior to January 1, 2000; thereafter the
Trust shall pay the Administrator the greater of an annual rate of
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.20% of the Portfolio's average daily net assets, calculated daily and paid
monthly, or $135,000 on aggregate net assets in the Trust.
National City Bank serves as the sub-administrator (the
"Sub-Administrator") to the Trust pursuant to a sub-administration agreement
dated July 2, 1999, (the "Sub-Administration Agreement"). The Sub-Administrator
assists the Administrator in providing administrative services with respect to
each Portfolio as may be reasonably requested by the Administrator from time to
time. Such services may include, but are in no way limited to, such clerical,
bookkeeping, accounting, stenographic, and administrative services which will
enable the Administrator to more efficiently perform its obligations under the
Administration Agreement.
The Sub-Administrator will receive a fee from the Administrator for its
services as Sub-Administrator and expenses assumed pursuant to the
Sub-Administration Agreement, calculated and paid monthly, at the annual rate of
0.05% of the average aggregate monthly net assets of the Funds.
DISTRIBUTOR
SEI Investments Distribution Co. serves as distributor (the
"Distributor") to the Trust pursuant to a Distribution Agreement dated as of
July 2, 1999 (the "Distribution Agreement"). Unless otherwise terminated the
Distribution Agreement between the Trust and the Distributor shall continue in
force until May 1, 2001 and thereafter from year to year, provided that such
annual continuance is approved by (i) either the vote of a majority of the
Trustees of the Trust, or the vote of a majority of the outstanding voting
securities of the Trust, and (ii) the vote of a majority of those trustees of
the Trust who are not parties to the Distribution Agreement or the Trust's
Distribution Plan or interested persons of any such party ("Qualified
Trustees"), cast in person at a meeting called for the purpose of voting on the
approval. The Distribution Agreement shall automatically terminate in the event
of its assignment. In addition, the Distribution Agreement may at any time be
terminated by the Distributor, by a vote of a majority of Qualified Trustees or
by vote of a majority of the outstanding voting securities of the Trust upon not
less than sixty days prior written notice to the other party.
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"). The
Custodian's responsibilities include safeguarding and controlling the Funds'
cash and securities, handling the receipt and delivery of securities, and
collecting interest and dividends on the Funds' investments. 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.
State Street Bank and Trust Company serves as transfer agent (the
"Transfer Agent") pursuant to a Transfer Agency and Service Agreement dated July
2, 1999 (the "Transfer Agency Agreement"). The Transfer Agent will, among other
things: receive for acceptance orders for the purchase of shares; pursuant to
orders, issue the appropriate number of shares; receive for acceptance
redemption requests and directions; execute transactions; pay over monies
received from Custodian to redeeming Shareholders; effect transfers of shares;
prepare and transmit payments for dividends and distributions; issue replacement
certificates; maintain records of account; and record the issuance of shares.
INDEPENDENT AUDITORS
Ernst & Young, LLP acts as independent auditor for the Trust and are
located at 10 West Broad Street, Columbus, Ohio 43215. The Funds are new and do
not have Financial Statements.
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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 six series of shares, each representing interest in
one of six separate portfolios: the Parkstone Advantage Small Capitalization
Fund, Parkstone Advantage Mid Capitalization Fund, Parkstone Advantage Bond
Fund, Parkstone Advantage International Discovery Fund, Armada Advantage
Balanced Allocation Fund and Armada Advantage Equity Growth Fund.
The Trust's shares have no pre-emptive rights and only such conversion
or exchange rights as the Board of Trustees may grant in its discretion. When
issued for payment as described in the Prospectus, the Trust's shares will be
fully paid and non-assessable. In the event of the liquidation or dissolution of
the Trust or an individual Fund, shareholders of a Fund are entitled to receive
the assets available for distribution belonging to the particular Fund, at a
proportionate distribution based on the relative asset values of the respective
Funds, of any general assets of the Trust not belonging to any particular Fund
which are available for distribution.
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.
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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 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.
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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 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.
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<PAGE> 42
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.
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.
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
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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 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 SEI voluntarily reduce all or a part of their
respective fees, as further discussed in the 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.
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
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$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.
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.
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Current yields or performance will fluctuate from time to time and are
not necessarily representative of future results. Accordingly a Fund's yield or
performance may not provide for comparison with bank deposits or other
investments which provide fixed returns for a stated period of time. Yield and
performance are functions of a Fund's quality, composition and maturity as well
as expenses allocated to the Fund. Fees imposed on customer accounts by the
Investment Adviser or its affiliated or correspondent banks or cash management
services will reduce a Fund's effective yield to its customers.
MISCELLANEOUS
Individual Trustees are elected by the shareholders and, subject to
removal by a vote of two-thirds of the Board of Trustees, serve for a term
lasting until the next meeting of shareholders at which Trustees are elected.
Such meetings are not required to be held at any specific intervals. Individual
Trustees may be removed by vote of the shareholders voting not less than a
majority of the shares outstanding cast in persons on or by proxy at an meeting
called for that purpose, or by a written declaration signed by the shareholder
voting not less than two-thirds of the shares then outstanding.
The Trust is registered with the SEC as a management investment
company. Such registration does not involve supervision of the management
policies of the Trust.
The 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
Funds' 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 Funds' independent auditors.
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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 30, 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.
FINANCIAL STATEMENTS
The Funds are new and do not have Financial Statements. Ernst & Young
LLP acts as independent auditor for the Trust.
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APPENDIX A
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COMMERCIAL PAPER RATINGS
- ------------------------
A Standard & Poor's 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 on the
obligation 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 in higher rating categories. 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 upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the 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 Standard & Poor's
believes that such payments will be made during such grace period. The "D"
rating will 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 senior debt obligations not having an original
maturity in excess of one
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<PAGE> 48
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 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.
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"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 to 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 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 the
higher ratings.
"F3" - Securities possess fair credit quality. This
designation indicates that the capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in a
reduction to non-investment grade.
"B" - Securities possess speculative credit quality. This
designation indicates minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in financial and
economic conditions.
"C" - Securities possess high default risk. This designation
indicates that default is a real possibility and 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.
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Thomson Financial 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 Financial BankWatch:
"TBW-1" - This designation represents Thomson Financial
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 Financial
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 Financial
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 Financial
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
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likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated "BB," "B," "CCC," "CC" and "C" are 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" - An obligation rated "BB" is less vulnerable to
nonpayment 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" - An obligation rated "B" is more vulnerable to nonpayment
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.
"CCC" - An obligation rated "CCC" is currently vulnerable to
nonpayment, 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 nonpayment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action taken, but payments on this
obligation are being continued.
"D" - An obligation rated "D" is 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 Standard &
Poor's believes that such payments will be made during such grace period. The
"D" rating also will be used upon the filing of a bankruptcy petition or the
taking of a 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 symbol is attached to the ratings of instruments
with significant noncredit risks. It highlights risks to principal or volatility
of expected returns which are
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not addressed in the credit rating. Examples include: obligations linked or
indexed to equities, currencies, or commodities; obligations exposed to severe
prepayment risk - such as interest-only or principal-only mortgage securities;
and obligations with unusually risky interest terms, such as inverse floaters.
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 risk appear somewhat larger than the "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 operating experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches.
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Parenthetical rating denotes probable credit stature upon completion of
construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each
generic rating classification from "Aa" through "Caa". The modifier 1 indicates
that the obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking
in the lower end of its generic rating category.
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 to be 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 in periods of greater 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 credit
risk and are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
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"AA" - Bonds considered to be investment grade and of very
high credit quality. These ratings denote a very low expectation of credit 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 credit risk and
indicate strong capacity for timely payment of financial commitments. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for 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 credit risk. The capacity for timely payment of financial commitments is
considered adequate, but adverse changes in circumstances and in economic
conditions are more likely to impair this capacity.
"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 change over time; however, business or financial
alternatives may be available to allow financial commitments to be met.
Securities rated in this category are not investment grade.
"B" - Bonds are considered highly speculative. These ratings
indicate that significant credit risk is present, but a limited margin of safety
remains. Financial commitments are currently being met; however, capacity for
continued payment is contingent upon a sustained, favorable business and
economic environment.
"CCC", "CC", "C" - Bonds have high default risk. Default is a
real possibility, and capacity for meeting financial commitments is solely
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. The ratings of
obligations in this category are based on their prospects for achieving partial
or full recovery in a reorganization or liquidation of the obligor. While
expected recovery values are highly speculative and cannot be estimated with any
precision, the following serve as general guidelines. "DDD" obligations have the
highest potential for recovery, around 90%-100% of outstanding amounts and
accrued interest. "DD" indicates potential recoveries in the range of 50%-90%,
and "D" the lowest recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all
of their obligations. Entities rated "DDD" have the highest prospect for
resumption of performance or continued operation with or without a formal
reorganization process. Entities rated "DD" and "D" are generally undergoing a
formal reorganization or
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liquidation process; those rated "DD" are likely to satisfy a higher portion of
their outstanding obligations, while entities rated "D" have a poor prospect for
repaying all obligations.
To provide more detailed indications of credit quality, the
Fitch IBCA ratings from and including "AA" to "CCC" may be modified by the
addition of a plus (+) or minus (-) sign to show relative standing within these
major rating categories.
Thomson Financial 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 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 the lowest
investment-grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are 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 Financial 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.
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MUNICIPAL NOTE RATINGS
- ----------------------
A Standard and Poor's rating reflects the liquidity factors
and market access risks unique to notes due in three years or less. The
following summarizes the ratings used by Standard & Poor's 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 a
very strong capacity to pay debt service are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit
speculative capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit risk
and long-term risk. The following summarizes the ratings by Moody's Investors
Service, Inc. for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality.
There is present strong protection by established cash flows, superior liquidity
support or demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality, with
margins of protection that are 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.
Protection commonly regarded as required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
"SG" - This designation denotes speculative quality. Debt
instruments in this category lack of margins of protection.
Fitch IBCA and Duff & Phelps use the short-term ratings
described under Commercial Paper Ratings for municipal notes.
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APPENDIX B
----------
As stated in the Prospectus, the Balanced Allocation and
Equity Growth Funds ("Funds") may enter into certain futures transactions and
options for hedging purposes. Such transactions are described in this Appendix.
1. Index Futures Contracts
-----------------------
GENERAL. A stock index assigns relative values to the stocks
included in the index and the index fluctuates with changes in the market values
of the stocks included. Some stock index futures contracts are based on broad
market indexes, such as the Standard & Poor's Ratings Group 500 or the New York
Stock Exchange Composite Index. In contrast, certain exchanges offer futures
contracts on narrower market indexes or indexes based on an industry or market
segment, such as oil and gas stocks.
Futures contracts are traded on organized exchanges regulated
by the Commodity Futures Trading Commission. Transactions on such exchanges are
cleared through a clearing corporation, which guarantees the performance of the
parties to each contract.
The Equity Index Fund will purchase index futures contracts in
anticipation of purchases of securities. A long futures position may be
terminated without a corresponding purchase of securities.
A Fund may sell index futures contracts in order to offset a
decrease in market value of its portfolio securities that might otherwise result
from a market decline. A Fund may do so either to hedge the value of the Fund as
a whole, or to protect against declines, occurring prior to sales of securities,
in the value of the securities to be sold. Conversely, a Fund will purchase
index futures contracts in anticipation of purchases of securities. A long
futures position may be terminated without a corresponding purchase of
securities.
In addition, a Fund may utilize index futures contracts in
anticipation of changes in the composition of its Fund holdings. For example, in
the event that a Fund expects to narrow the range of industry groups represented
in its holdings it may, prior to making purchases of the actual securities,
establish a long futures position based on a more restricted index, such as an
index comprised of securities of a particular industry group. A Fund may also
sell futures contracts in connection with this strategy, in order to protect
against the possibility that the value of the securities to be sold as part of
the restructuring of the Fund will decline prior to the time of sale.
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II. Margin Payments
---------------
Unlike purchases or sales of portfolio securities, no price is
paid or received by a Fund upon the purchase or sale of a futures contract.
Initially, a Fund will be required to deposit with the broker or in a segregated
account with the Custodian an amount of cash or cash equivalents, known as
initial margin, based on the value of the contract. The nature of initial margin
in futures transactions is different from that of margin in security
transactions in that futures contract margin does not involve the borrowing of
funds by the customer to finance the transactions. Rather, the initial margin is
in the nature of a performance bond or good faith deposit on the contract which
is returned to the Fund upon termination of the futures contract assuming all
contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the broker, will be made on a daily basis as the
price of the underlying instruments fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
marking-to-the-market. For example, when a particular Fund has purchased a
futures contract and the price of the contract has risen in response to a rise
in the underlying instruments, that position will have increased in value and
the Fund will be entitled to receive from the broker a variation margin payment
equal to that increase in value. Conversely, where the Fund has purchased a
futures contract and the price of the future contract has declined in response
to a decrease in the underlying instruments, the position would be less valuable
and the Fund would be required to make a variation margin payment to the broker.
At any time prior to expiration of the futures contract, the Adviser may elect
to close the position by taking an opposite position, subject to the
availability of a secondary market, which will operate to terminate the Fund's
position in the futures contract. A final determination of variation margin is
then made, additional cash is required to be paid by or released to the Fund,
and the Fund realizes a loss or gain.
III. Risks of Transactions in Futures Contracts
------------------------------------------
There are several risks in connection with the use of futures
by the Funds as a hedging device. One risk arises because of the imperfect
correlation between movements in the price of the futures and movements in the
price of the instruments which are the subject of the hedge. The price of the
future may move more than or less than the price of the instruments being
hedged. If the price of the futures moves less than the price of the instruments
which are the subject of the hedge, the hedge will not be fully effective but,
if the price of the instruments being hedged has moved in an unfavorable
direction, a Fund would be in a better position than if it had not hedged at
all. If the price of the instruments being hedged has moved in a favorable
direction, this advantage will be partially offset by the loss on the futures.
If the price of the futures moves more than the price of the hedged instruments,
the Fund involved will experience either a loss or gain on the futures which
will not be completely offset by movements in the price of the instruments which
are the subject of the hedge. To compensate for the imperfect correlation of
movements in the price of instruments being hedged and movements in the price of
futures contracts, a Fund may buy or sell futures contracts in a greater dollar
amount than the dollar amount of instruments being hedged if the volatility over
a particular time period of the prices of such
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instruments has been greater than the volatility over such time period of the
futures, or if otherwise deemed to be appropriate by the Adviser. Conversely, a
Fund may buy or sell fewer futures contracts if the volatility over a particular
time period of the prices of the instruments being hedged is less than the
volatility over such time period of the futures contract being used, or if
otherwise deemed to be appropriate by the Adviser. It is also possible that,
where a Fund has sold futures to hedge its Fund against a decline in the market,
the market may advance and the value of instruments held in the Fund may
decline. If this occurred, the Fund would lose money on the futures and also
experience a decline in value in its portfolio securities.
When futures are purchased to hedge against a possible
increase in the price of securities before a Fund is able to invest its cash (or
cash equivalents) in an orderly fashion, it is possible that the market may
decline instead; if the Fund then concludes not to invest its cash at that time
because of concern as to possible further market decline or for other reasons,
the Fund will realize a loss on the futures contract that is not offset by a
reduction in the price of the instruments that were to be purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
instruments being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market, and because of the imperfect correlation between the movements
in the cash market and movements in the price of futures, a correct forecast of
general market trends or interest rate movements by the Adviser may still not
result in a successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or
board of trade which provides a secondary market for such futures. Although the
Funds intend to purchase or sell futures only on exchanges or boards of trade
where there appear to be active secondary markets, there is no assurance that a
liquid secondary market on any exchange or board of trade will exist for any
particular contract or at any particular time. In such event, it may not be
possible to close a futures investment position, and in the event of adverse
price movements, the Funds will continue to be required to make daily cash
payments of variation margin. However, in the event futures contracts have been
used to hedge portfolio securities, such securities will not be sold until the
futures contract can be terminated. In such circumstances, an increase in the
price of the securities, if any, may partially or completely offset losses on
the futures contract. However, as described above,
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there is no guarantee that the price of the securities will in fact correlate
with the price movements in the futures contract and thus provide an offset on a
futures contract.
Further, it should be noted that the liquidity of a secondary
market in a futures contract may be adversely affected by "daily price
fluctuation limits" established by commodity exchanges which limit the amount of
fluctuation in a futures contract price during a single trading day. Once the
daily limit has been reached in the contract, no trades may be entered into at a
price beyond the limit, thus preventing the liquidation of open futures
positions. The trading of futures contracts is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal activity, which could at times make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
Successful use of futures by a Fund is also subject to the
Adviser's ability to predict correctly movements in the direction of the market.
For example, if a Fund has hedged against the possibility of a decline in the
market adversely affecting securities held by it and securities prices increase
instead, the Fund will lose part or all of the benefit to the increased value of
its securities which it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if a Fund has insufficient
cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may be, but will not necessarily be, at
increased prices which reflect the rising market. A Fund may have to sell
securities at a time when it may be disadvantageous to do so.
IV. Options on Futures Contracts
----------------------------
The Fund may purchase and write options on the futures
contracts described above. A futures option gives the holder, in return for the
premium paid, the right to buy (call) from or sell (put) to the writer of the
option a futures contract at a specified price at any time during the period of
the option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer, of
an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing an option of the same series,
at which time the person entering into the closing transaction will realize a
gain or loss. The Funds will be required to deposit initial margin and variation
margin with respect to put and call options on futures contracts written by it
pursuant to brokers' requirements similar to those described above. Net option
premiums received will be included as initial margin deposits.
Investments in futures options involve some of the same
considerations that are involved in connection with investments in futures
contracts (for example, the existence of a liquid secondary market). In
addition, the purchase or sale of an option also entails the risk that changes
in the value of the underlying futures contract will not correspond to changes
in the value of the option purchased. Depending on the pricing of the option
compared to either the futures contract upon which it is based, or upon the
price of the securities being hedged, an option may or may not be less risky
than ownership of the
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futures contract or such securities. In general, the market prices of options
can be expected to be more volatile than the market prices on the underlying
futures contract. Compared to the purchase or sale of futures contracts,
however, the purchase of call or put options on futures contracts may frequently
involve less potential risk to the Funds because the maximum amount at risk is
the premium paid for the options (plus transaction costs). The writing of an
option on a futures contract involves risks similar to those risks relating to
the sale of futures contracts.
V. Other Matters
-------------
Accounting for futures contracts will be in accordance with
generally accepted accounting principles.
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