<PAGE> 1
THE ARMADA
ADVANTAGE FUND
Prospectus
May 1, 2000
The Securities and Exchange Commission has not approved or disapproved any Fund
shares or determined whether this prospectus is accurate or complete. Any
statement to the contrary is a criminal offense.
ARMADA ADVANTAGE
EQUITY GROWTH FUND
ARMADE ADVANTAGE
INTERNATIONAL EQUITY FUND
ARMADA ADVANTAGE
MID CAP GROWTH FUND
ARMADA ADVANTAGE
SMALL CAP GROWTH TUND
ARMADA ADVANTAGE
BALANCED ALLOCATION FUND
ARMADA ADVANTAGE
BOND FUND
Investment Adviser
National City Investment
Management Company
<PAGE> 2
Investment Adviser
NATIONAL CITY INVESTMENT
MANAGEMENT COMPANY
ABOUT THIS PROSPECTUS
The Armada Advantage Fund (the Trust) 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 its funds:
the Armada Advantage Equity Growth Fund, the Armada Advantage International
Equity Fund, the Armada Advantage Mid Cap Growth Fund, the Armada Advantage
Small Cap Growth Fund, the Armada Advantage Balanced Allocation Fund and the
Armada Advantage Bond Fund (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 the next page, there is some general
information you should know about risk and return that is common to each of the
Funds. For more detailed information about each Fund, please see:
Risk/Return Information Common to the Funds ........................ 1
Armada Advantage Equity Growth Fund ................................ 2
Armada Advantage International Equity Fund ......................... 4
Armada Advantage Mid Cap Growth Fund ............................... 6
Armada Advantage Small Cap Growth Fund ............................. 8
Armada Advantage Balanced Allocation Fund .......................... 10
Armada Advantage Bond Fund ......................................... 12
Fees and Expenses .................................................. 14
More Information About Risk ........................................ 16
More Information About Fund Investments ............................ 20
Performance Information of Comparable Funds ........................ 20
Investment Adviser and Investment Teams ............................ 21
Purchasing, Selling and Exchanging Fund Shares ..................... 22
General Information ................................................ 22
Dividends and Distributions ........................................ 22
Taxes .............................................................. 22
Financial Highlights ............................................... 23
How to Obtain More Information About
The Armada Advantage Fund .......................................Back Cover
<PAGE> 3
BOARD OF TRUSTEES
ROBERT D. NEARY
Chairman
Retired Co-Chairman, Ernst & Young
Director:
Cold Metal Products, Inc.
Strategic Distribution, Inc.
HERBERT R. MARTENS, JR.
President
Executive Vice President,
National City Corporation
Chairman, President and Chief Executive
Officer, NatCity Investments,Inc.
LEIGH CARTER
Retired President and Chief Operating
Officer, B.F. Goodrich Company
Director:
Kirtland Capital Corporation
Morrison Products
TruSeal Technologies
JOHN F. DURKOTT
President and Chief Operating Officer,
Kittle's Home Furnishings Center, Inc.
ROBERT J. FARLING
Retired Chairman, President and Chief
Executive Officer, Centerior Energy
RICHARD W. FURST
Garvice D. Kincaid Professor of Finance
and Dean, Gatton College of Business
and Economics, University of Kentucky
Director:
Foam Design, Inc.
The Seed Corporation
Office Suites Plus, Inc.
ihigh.com, Inc.
GERALD L. GHERLEIN
Retired Executive Vice President and
General Counsel, Eaton Corporation
J. WILLIAM PULLEN
President and Chief Executive Officer,
Whayne Supply Company
The Armada Advantage Trustees also serve as the Trustees of the Parkstone Funds
and the Armada Funds.
<PAGE> 4
===============================================================================
RISK/RETURN INFORMATION
COMMON TO THE FUNDS
Each Fund is a mutual fund. A mutual fund pools shareholders' money and, using
professional investment managers, invests it in securities. Each Fund is 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's
judgments about the markets, the economy, or companies may not anticipate 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.
An investment in a Fund share is not a bank deposit and it is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any government
agency.
The value of your investment in a Fund is based primarily on the market prices
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.
1 PROSPECTUS
<PAGE> 5
ARMADA ADVANTAGE EQUITY GROWTH FUND
===============================================================================
FUND SUMMARY
INVESTMENT GOAL
Capital appreciation
INVESTMENT FOCUS
Large cap equity securities
SHARE PRICE VOLATILITY
(RELATIVE TO MUTUAL FUNDS GENERALLY)
High
PRINCIPAL INVESTMENT STRATEGY
Investing in growth-oriented common stocks of larger issuers
INVESTOR PROFILE
Investors seeking capital appreciation, who are willing to accept the risk of
investing in equity securities
PRINCIPAL INVESTMENT STRATEGIES
The Fund's investment objective is to provide capital appreciation by investing
in a diversified portfolio of publicly traded larger cap equity securities. The
investment objective may be changed without a shareholder vote.
The Fund will normally invest 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 equity securities. 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 common stocks that are listed on a national securities
exchange or unlisted securities with an established over-the-counter market.
The Fund considers a large capitalization or "large cap" company to be one that
has a comparable market capitalization to the companies in the S&P 500 Composite
Index. The S&P 500 Composite Index is a widely recognized, unmanaged index of
500 common stocks which are generally representative of the U.S. stock market as
a whole.
Due to its investment strategy, the Fund may buy and sell securities frequently.
This may result in higher transaction costs and additional capital gains tax
liabilities, and will lower Fund performance.
2 PROSPECTUS
<PAGE> 6
ARMADA ADVANTAGE EQUITY GROWTH FUND (CONTINUED)
===============================================================================
PRINCIPAL RISKS OF INVESTING
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 from day-to-day. Individual companies may report poor
results or be negatively affected by industry and/or economic trends and
developments. The prices of securities issued by such companies may decline in
response. These factors contribute to price volatility, which is the principal
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 its market segment, large cap equity
securities, may underperform other equity market segments or the equity market
as a whole. For additional information about risks, see "More Information About
Risk."
PERFORMANCE INFORMATION
There is no bar chart for the Fund because it has not completed a full calendar
year of operations.
3 PROSPECTUS
<PAGE> 7
ARMADA ADVANTAGE INTERNATIONAL EQUITY FUND
===============================================================================
FUND SUMMARY
INVESTMENT GOAL
Capital appreciation
INVESTMENT FOCUS
Equity securities of foreign issuers
SHARE PRICE VOLATILITY
(RELATIVE TO MUTUAL FUNDS GENERALLY)
High
PRINCIPAL INVESTMENT STRATEGY
Investing in equity securities of issuers located in at least three foreign
countries
INVESTOR PROFILE
Investors seeking capital appreciation, who are willing to accept the risks of
foreign investing
PRINCIPAL INVESTMENT STRATEGIES
The Fund's investment objective is to provide capital appreciation by investing
in a portfolio of equity securities of foreign issuers. Equity securities of
foreign issuers include common stock, preferred stock and convertible bonds, of
companies headquartered outside the United States. The investment objective may
be changed without a shareholder vote.
The Fund will normally invest at least 80% of its total assets in equity
securities of foreign issuers. The Fund focuses on issuers included in the
Morgan Stanley Capital International Europe, Australasia, Far East (MSCI EAFE)
GDP Weighted Index. The MSCI EAFE Index is an unmanaged index which represents
the performance of more than 1,000 equity securities of companies located in
those regions. The Adviser makes judgments about the attractiveness of countries
based upon a collection of criteria. The relative valuation, growth prospects,
fiscal, monetary and regulatory government policies are considered jointly and
generally in making these judgments. The percentage of the Fund in each country
is determined by its relative attractiveness and weight in the MSCI EAFE Index.
More than 25% of the Fund's assets may be invested in the equity securities of
issuers located in the same country.
Within foreign markets, the Adviser buys and sells securities based on its
analysis of competitive position and valuation. The Adviser sells securities
whose competitive position is deteriorating or whose valuation is unattractive
relative to industry peers. Likewise, companies with strong and durable
competitive advantages and attractive valuation are considered for purchase.
Due to its investment strategy, the Fund may buy and sell securities frequently.
This may result in higher transaction costs and additional capital gains tax
liabilities, and will lower Fund performance.
4 PROSPECTUS
<PAGE> 8
ARMADA ADVANTAGE INTERNATIONAL EQUITY FUND (Continued)
===============================================================================
PRINCIPAL RISKS OF INVESTING
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 from day-to-day. Individual companies may report poor
results or be negatively affected by industry and/or economic trends and
developments. The prices of securities issued by such companies may decline in
response. These factors contribute to price volatility, which is the principal
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.
Companies making up the MSCI EAFE Index are generally issuers of larger cap
securities of multi-national companies who are affected by risks worldwide.
Investment in a particular country of 25% or more of the Fund's total assets
will make the Fund's performance more dependent upon the political and economic
circumstances of that country than a mutual fund more widely diversified among
issuers in different countries.
The Fund is also subject to the risk that its market segment, international
equity securities, may underperform other equity market segments or the equity
market as a whole. For additional information about risks, see "More Information
About Risk."
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the volatility of an
investment in the Fund. Of course, the Fund's past performance does not
necessarily indicate how the Fund will perform in the future.
The bar chart shows changes in the performance of the Fund's shares from year to
year. This performance information does not include the impact of any charges
deducted by your insurance company. If it did, returns would be lower.
CALENDAR YEAR TOTAL RETURN
<TABLE>
<S> <C>
1994 -6.76%
1995 9.74%
1996 15.41%
1997 2.13%
1998 11.61%
1999 55.70%
</TABLE>
Best Quarter 38.67% (12/31/99)
Worst Quarter -15.69% (9/30/98)
This table compares the Fund's average annual total returns for the periods
ended December 31, 1999 to those of the MSCI EAFE Index.
<TABLE>
<CAPTION>
INCEPTION SINCE
DATE 1 YEAR 5 YEARS INCEPTION
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Armada Advantage
International
Equity Fund 9/23/93 55.70% 17.59% 13.14%
MSCI EAFE Index(1) 9/30/93 26.96% 12.83% 11.63%
- ------------------------------------------------------------------------------
</TABLE>
(1) The Morgan Stanley Capital International Europe, Australasia, and Far
East-GDP Weighted Index (MSCI EAFE Index) is a widely-recognized index of over
900 securities listed on the stock exchanges in Europe, Australia and the Far
East. The index is weighted by the market capitalization of the various
companies in the index.
5 PROSPECTUS
<PAGE> 9
ARMADA ADVANTAGE MID CAP GROWTH FUND
===============================================================================
FUND SUMMARY
INVESTMENT GOAL
Capital appreciation
INVESTMENT FOCUS
Mid cap equity securities
SHARE PRICE VOLATILITY
(RELATIVE TO MUTUAL FUNDS GENERALLY)
High
PRINCIPAL INVESTMENT STRATEGY
Investing in growth-oriented equity securities of medium-sized issuers
INVESTOR PROFILE
Investors seeking capital growth, who are willing to accept the
risks of investing in equity securities
PRINCIPAL INVESTMENT STRATEGIES
The Fund's investment objective is to provide capital appreciation by investing
in a diversified portfolio of publicly traded mid cap equity securities. The
investment objective may be changed without a shareholder vote.
The Fund will normally invest at least 80% of its total assets in the common
stock of companies with mid cap stock market capitalizations. The Fund may
invest up to 20% of its total assets at the time of purchase in foreign equity
securities. In selecting investments for the Fund to buy and sell, the Adviser
invests in companies that have typically exhibited consistent, above-average
growth in revenues and earnings, strong management, sound and improving
financial fundamentals and presently exhibit the potential for growth.
The Fund considers a mid-capitalization or "mid cap" company to be one that has
a comparable market capitalization as the companies in the Russell Midcap Growth
Index. The Russell Midcap Growth Index is an unmanaged index which reflects a
medium-sized universe of growth-oriented securities.
Due to its investment strategy, the Fund may buy and sell securities frequently.
This may result in higher transaction costs and additional capital gains tax
liabilities, and will lower Fund performance.
6 PROSPECTUS
<PAGE> 10
ARMADA ADVANTAGE MID CAP GROWTH FUND (CONTINUED)
===============================================================================
PRINCIPAL RISKS OF INVESTING
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 from day-to-day. Individual companies may report poor
results or be negatively affected by industry and/or economic trends and
developments. The prices of securities issued by such companies may decline in
response. These factors contribute to price volatility, which is the principal
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 its market segment, mid cap equity
securities, may underperform other equity market segments or the equity market
as a whole. For additional information about risks, see "More Information About
Risk."
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the volatility of an
investment in the Fund. Of course, the Fund's past performance does not
necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the performance of the Fund's shares from year
to year. This performance information does not include the impact of any charges
deducted by your insurance company. If it did, returns would be lower.
<TABLE>
<CAPTION>
CALENDAR YEAR TOTAL RETURN
<S> <C> <C>
1994 -5.21%
1995 29.05%
1996 17.36%
1997 12.58%
1998 10.33%
1999 44.36%
</TABLE>
Best Quarter 33.69% (12/31/99)
Worst Quarter -18.87% (9/30/98)
This table compares the Fund's average annual total returns for the periods
ended December 31, 1999 to those of the Russell Midcap Growth Index and the S&P
MidCap 400 Index.
<TABLE>
<CAPTION>
INCEPTION SINCE
DATE 1 YEAR 5 YEARS INCEPTION
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Armada Advantage
Mid Cap Growth
Fund 9/23/93 44.36% 22.12% 16.58%
Russell Midcap
Growth
Index(1) 9/30/93 51.30% 28.02% 22.05%
S&P MidCap 400
Index(2) 9/30/93 14.72% 23.04% 17.83%
- -------------------------------------------------------------------------------
</TABLE>
(1) The Russell Midcap Growth Index is a widely-recognized,
capitalization-weighted (companies with larger market capitalizations have more
influence than those with smaller market capitalization) index of the 800
smallest U.S. companies out of the 1000 largest U.S. companies, with higher
growth rates and price-to-book ratios. The Adviser believes that the Russell
Midcap Growth Index will better reflect the Fund's aggressive growth
orientation.
(2) The S&P MidCap 400 Index is a widely-recognized, capitalization-weighted
(companies with larger market capitalizations have more influence than those
with smaller market capitalizations) index of 400 domestic mid-cap stocks chosen
for market size, liquidity, and industry group representation.
7 PROSPECTUS
<PAGE> 11
ARMADA ADVANTAGE SMALL CAP GROWTH FUND
===============================================================================
FUND SUMMARY
INVESTMENT GOAL
Capital appreciation
INVESTMENT FOCUS
Small cap equity securities
SHARE PRICE VOLATILITY
(RELATIVE TO MUTUAL FUNDS GENERALLY)
High
PRINCIPAL INVESTMENT STRATEGY
Investing in growth-oriented equity securities of smaller issuers
INVESTOR PROFILE
Investors seeking capital appreciation, who are willing to accept the risk of
share price volatility that may accompany small cap investing
PRINCIPAL INVESTMENT STRATEGIES
The Fund's investment objective is to provide capital appreciation by investing
in a diversified portfolio of publicly traded small cap equity securities. The
investment objective may be changed without a shareholder vote.
The Fund normally invests at least 80% of its total assets in the common stocks
of companies with small stock market capitalizations. The Fund may invest up to
20% of its total assets at the time of purchase in foreign equity securities.
The Adviser seeks to invest in small capitalization companies with strong growth
in revenue, earnings and cash flow. Purchase decisions are also based on the
security's valuation relative to the company's expected growth rate, earnings
quality and competitive position, valuation compared to similar securities and
the security's trading liquidity. Reasons for selling securities include
disappointing fundamentals, negative industry developments, evidence of
management's inability to execute a sound business plan, capitalization
exceeding the Adviser's definition of "small capitalization," desire to reduce
exposure to an industry or sector, and valuation levels which cannot be
justified by the company's fundamental growth prospects.
The Fund considers a small capitalization or "small cap" company to be one that
has a comparable market capitalization to the companies in the Russell 2000
Growth Index. The Russell 2000 Growth Index is an unmanaged index comprised of
securities in the Russell 2000 Index with a greater than average growth
orientation. The Russell 2000 Index is an unmanaged index comprised of the 2000
smallest companies of the 3000 largest U.S. companies based on market
capitalization.
Due to its investment strategy, the Fund may buy and sell securities frequently.
This may result in higher transaction costs and additional capital gains tax
liabilities, and will lower Fund performance.
8 PROSPECTUS
<PAGE> 12
ARMADA ADVANTAGE SMALL CAP GROWTH FUND (CONTINUED)
===============================================================================
PRINCIPAL RISKS OF INVESTING
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 from day-to-day. Individual companies may report poor
results or be negatively affected by industry and/or economic trends and
developments. The prices of securities issued by such companies may decline in
response. These factors contribute to price volatility, which is the principal
risk of investing in the Fund.
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 than those of larger companies.
These securities may be traded over-the-counter or listed on an 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.
The Fund is also subject to the risk that its market segment, small cap equity
securities, may underperform other equity market segments or the equity market
as a whole. For additional information about risks, see "More Information About
Risk."
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the volatility of an
investment in the Fund. Of course, the Fund's past performance does not
necessarily indicate how the Fund will perform in the future.
The bar chart shows changes in the performance of the Fund's shares from year to
year. This performance information does not include the impact of any charges
deducted by your insurance company. If it did, returns would be lower.
CALENDAR YEAR TOTAL RETURN
1994 5.27%
1995 35.66%
1996 29.66%
1997 -5.47%
1998 -2.51%
1999 31.24%
Best Quarter 35.84% (12/31/99)
Worst Quarter -25.37% (9/30/98)
This table compares the Fund's average annual total returns for the periods
ended December 31, 1999 to those of the Russell 2000 Growth Index and the
Russell 2000 Index.
<TABLE>
<CAPTION>
INCEPTION SINCE
DATE 1 YEAR 5 YEARS INCEPTION
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Armada Advantage
Small Cap Growth
Fund 9/23/93 31.24% 16.30% 15.46%
Russell 2000
Growth Index(1) 9/30/93 43.10% 18.99% 14.95%
Russell 2000
Index(2) 9/30/93 21.26% 16.69% 13.27%
- ------------------------------------------------------------------------------
</TABLE>
(1) The Russell 2000 Growth Index is a widely-recognized,
capitalization-weighted (companies with larger market capitalizations have more
influence than those with smaller market capitalization) index of the largest
U.S. companies with higher growth rates and price-to-book ratios. The Adviser
believes that the Russell 2000 Growth Index will better reflect current bias
toward growth stocks and focus on the small-cap sector of the U.S. stock market.
(2) The Russell 2000 Index is an unmanaged index comprised of the 2000 smallest
companies of the 3000 largest U.S. companies based on market capitalization.
9 PROSPECTUS
<PAGE> 13
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
(RELATIVE TO MUTUAL FUNDS GENERALLY)
Medium
PRINCIPAL INVESTMENT STRATEGY
Investing in a diversified portfolio of growth-oriented common stocks,
investment-grade fixed income securities and cash equivalents with varying asset
allocations 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 total returns (as gauged by the
returns of the S&P 500 Composite Index and the Lehman Aggregate Bond Index)
PRINCIPAL INVESTMENT STRATEGIES
The Fund's investment objective is to provide long-term capital appreciation and
current income. The investment objective may be changed without a shareholder
vote.
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 such as corporate bonds and U.S. government 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 (which includes common stock, preferred stock and convertible bonds
of companies headquartered outside the United States). The Fund also invests in
the common stock of small capitalization companies.
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. If a fixed
income security is downgraded, the Adviser will re-evaluate the holding to
determine whether it is in the best interests of investors to sell. The Adviser
buys and sells fixed income securities and cash equivalents based on a number of
factors, including yield to maturity, maturity, quality and the outlook for
particular issuers and market sectors. The Fund invests in cash equivalent,
short-term obligations for stability and liquidity.
Due to its investment strategy, the Fund may buy and sell securities frequently.
This may result in higher transaction costs and additional capital gains tax
liabilities, and will lower Fund performance.
10 PROSPECTUS
<PAGE> 14
ARMADA ADVANTAGE BALANCED ALLOCATION FUND (Continued)
===============================================================================
PRINCIPAL RISKS OF INVESTING
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 from day-to-day. Individual companies may report poor
results or be negatively affected by industry and/or economic trends and
developments. The prices of securities issued by such companies may decline in
response. 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. 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 the Adviser's asset allocation and
balancing decisions will not anticipate market trends successfully. For example,
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 than those of larger companies.
These securities may be traded over-the-counter or listed on an 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.
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. For additional information about risks, see "More Information About
Risk."
PERFORMANCE INFORMATION
There is no bar chart or performance table for the Fund because it has not yet
commenced operations.
11 PROSPECTUS
<PAGE> 15
ARMADA ADVANTAGE BOND FUND
===============================================================================
FUND SUMMARY
INVESTMENT GOAL
Current income as well as preservation of capital
INVESTMENT FOCUS
Investment-grade fixed income securities
SHARE PRICE VOLATILITY
(RELATIVE TO MUTUAL FUNDS GENERALLY)
Medium
PRINCIPAL INVESTMENT STRATEGY
Investing in a diversified portfolio of investment-grade fixed income
securities, which maintains a dollar-weighted average maturity of between 4 and
twelve years
INVESTOR PROFILE
Investors seeking current income, who are willing to accept the risks of
investing in fixed income securities
PRINCIPAL INVESTMENT STRATEGIES
The Fund's investment objective is to provide current income as well as
preservation of capital by investing primarily in a portfolio of
investment-grade fixed income securities. The investment objective may be
changed without a shareholder vote.
The Fund normally invests at least 80% of the value of its total assets in
investment-grade fixed income securities of all types, including obligations of
corporate and U.S. government issuers and mortgage-backed and asset-backed
securities. Corporate obligations may include bonds, notes and debentures. U.S.
government securities may include U.S. Treasury obligations and obligations of
certain U.S. government agencies or instrumentalities such as Ginnie Maes and
Fannie Maes. Investment-grade fixed income securities are those rated in one of
the four highest rating categories by a major rating agency, or determined by
the Adviser to be of equivalent quality.
If a security is downgraded, the Adviser will re-evaluate the holding to
determine whether it is in the best interests of investors to sell. In buying
and selling securities for the Fund, the Adviser considers a number of factors,
including yield to maturity, maturity, quality and the outlook for particular
issuers and market sectors. The Fund generally maintains a dollar-weighted
average maturity of between four and twelve years.
Due to its investment strategy, the Fund may buy and sell securities frequently.
This may result in higher transaction costs and additional capital gains tax
liabilities, and will lower Fund performance.
12 PROSPECTUS
<PAGE> 16
ARMADA ADVANTAGE BOND FUND (Continued)
===============================================================================
PRINCIPAL RISKS OF INVESTING
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. Also, longer-term securities are generally more
volatile, so the average maturity or duration of these securities affects risk.
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.
The mortgages underlying mortgage-backed securities may be paid off early, which
makes it difficult to determine their actual maturity and therefore calculate
how they will respond to changes in interest rates. The Fund may have to
reinvest prepaid amounts at lower interest rates. This risk of prepayment is an
additional risk of mortgage-backed securities.
Debt extension risk is the risk that an issuer will exercise its right to pay
principal on an obligation held by the Fund (such as an asset-backed security)
later than expected. This may happen during a period of rising interest rates.
Under these circumstances, the value of the obligation will decrease and the
Fund will suffer from the inability to invest in higher yielding securities.
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.
The Fund is also subject to the risk that its market segment, investment grade
fixed income securities, may underperform other fixed income market segments or
the fixed income market as a whole. For additional information about risks, see
"More Information About Risk."
PERFORMANCE INFORMATION
The bar chart and the performance table below illustrate the volatility of an
investment in the Fund. Of course, the Fund's past performance does not
necessarily indicate how the Fund will perform in the future.
This bar chart shows changes in the performance of the Fund's shares from year
to year. This performance information does not include the impact of any charges
deducted by your insurance company. If it did, returns would be lower.
<TABLE>
<CAPTION>
CALENDAR YEAR TOTAL RETURN
<S> <C>
1994 -5.38%
1995 16.98%
1996 1.83%
1997 7.69%
1998 6.71%
1999 -1.96%
</TABLE>
Best Quarter 6.03% (6/30/95)
Worst Quarter -3.61% (3/31/94)
This table compares the Fund's average annual total returns for the periods
ended December 31, 1999 to those of the Lehman Aggregate Bond Index and the
Salomon Brothers Broad Bond Index.
<TABLE>
<CAPTION>
INCEPTION SINCE
DATE 1 YEAR 5 YEARS INCEPTION
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Armada Advantage
Bond Fund 9/23/93 -1.96% 6.05% 3.81%
Lehman Aggregate
Bond Index(1) 9/30/93 -0.83% 7.73% 5.65%
Salomon Brothers
Broad Bond Index(2) 9/30/93 -0.84% 7.74% 5.65%
- -------------------------------------------------------------------------------
</TABLE>
(1) The Lehman Aggregate Bond Index is an unmanaged, fixed income, market
value-weighted index that includes treasury issues, agency issues, corporate
bond issues and mortgage-backed securities. Previously, the Fund's returns had
been compared only to the Salomon Brothers Broad Bond Index. The Adviser
believes that the Lehman Aggregate Bond Index has a more comprehensive coverage
of the types of securities in which the Fund may invest.
(2) The Salomon Brothers Broad Bond Index consists of U.S. Treasury and
Government-sponsored agency bonds with maturity of one year or longer and a
minimum of $100 million outstanding.
13 PROSPECTUS
<PAGE> 17
FEES AND EXPENSES
===============================================================================
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
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 ARMADA ARMADA ARMADA ARMADA ARMADA
ADVANTAGE ADVANTAGE ADVANTAGE MID ADVANTAGE SMALL ADVANTAGE ADVANTAGE
EQUITY GROWTH INTERNATIONAL CAP GROWTH CAP GROWTH BALANCED BOND
FUND EQUITY FUND FUND FUND ALLOCATION FUND FUND
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment Advisory Fees 0.75% 1.15% 1.00% 1.00% 0.75% 0.55%
Other Expenses 1.00% 0.86% 0.59% 0.65% 1.00%1 0.74%
- --------------------------------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 1.75%(2) 2.01% 1.59% 1.65% 1.75%3 1.29%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Other expenses are based on estimated amounts for the current fiscal year.
(2) The Fund's total actual annual fund operating expenses for the most recent
fiscal year were less than the amount shown above because the Adviser is waiving
a portion of their fees in order to keep total operating expenses at a specified
level. The Adviser may discontinue all or part of their waivers' at any time.
With these fee waivers, the Fund's actual total operating expenses are 1.00%.
(3) The Adviser plans to waive a portion of its fees during the Fund's first
year of operation. With these fee waivers, the Fund's actual total operating
expenses for the year are estimated to be 1.00%.
For more information about these fees, see "Investment Adviser and Investment
Teams."
The amounts set forth above do not reflect the fees and expenses of the
insurance contract that are charged by your insurance company.
- ------------------------------------------------------------------------------
EXAMPLE
- ------------------------------------------------------------------------------
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 and does not
include fees and expenses charged by your insurance company, qualified pension
or retirement plan administrator.
The Example also assumes that each year your investment has a 5% return and Fund
operating expenses remain the same. Although your actual costs and returns might
be different, your approximate costs of investing $10,000 in the Fund would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Armada Advantage Equity Growth Fund $178 $551 $ 949 $2,062
Armada Advantage International Equity Fund 204 630 1,083 2,338
Armada Advantage Mid Cap Growth Fund 162 502 866 1,889
Armada Advantage Small Cap Growth Fund 168 520 897 1,955
Armada Advantage Balanced Allocation Fund 178 551 N/A N/A
Armada Advantage Bond Fund 131 409 708 1,556
</TABLE>
14 PROSPECTUS
<PAGE> 18
[This page intentionally left blank]
<PAGE> 19
MORE INFORMATION ABOUT RISK
The following table summarizes the risk related to investments in each of the
Armada Advantage portfolios. For more information about each of these risks,
please refer to the information below and on the following pages.
<TABLE>
<CAPTION>
Mortgage- Asset-
Convertible Fixed Backed Backed Foreign
Equity Securities Income Call Credit Event Securities Securities Security
Risk Risk Risk Risk Risk Risk Risk Risk Risk
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Armada Advantage
Equity Growth Fund + + +
- ------------------------------------------------------------------------------------------------------------------
Armada Advantage
International
Equity Fund + +
- ------------------------------------------------------------------------------------------------------------------
Armada Advantage
Mid Cap
Growth Fund + + +
- ------------------------------------------------------------------------------------------------------------------
Armada Advantage
Small Cap
Growth Fund + +
- ------------------------------------------------------------------------------------------------------------------
Armada Advantage
Balanced
Allocation Fund + + + + + + +
- ------------------------------------------------------------------------------------------------------------------
Armada Advantage
Bond Fund + + + + + +
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
Real
Short Estate Tracking
Currency Hedging Leveraging Derivatives Futures Options Sales Investing Error
Risk Risk Risk Risk Risk Risk Risk Risk Risk
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Armada Advantage
Equity Growth Fund + + + + + +
- ------------------------------------------------------------------------------------------------------------------
Armada Advantage
International
Equity Fund + + + + + +
- ------------------------------------------------------------------------------------------------------------------
Armada Advantage
Mid Cap
Growth Fund + + + + + + + +
- ------------------------------------------------------------------------------------------------------------------
Armada Advantage
Small Cap
Growth Fund + + + + + +
- ------------------------------------------------------------------------------------------------------------------
Armada Advantage
Balanced
Allocation Fund + + + + + + +
- ------------------------------------------------------------------------------------------------------------------
Armada Advantage
Bond Fund + + + + + +
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
CONVERTIBLE SECURITIES RISK
Convertible securities have characteristics of both fixed income and equity
securities. The value of the convertible security tends to move with the
market value of the underlying stock, but may also be affected by interest
rates, credit quality of the issuer and any call provisions.
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 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 the diversification provided by the Fund's multiple holdings.
16 PROSPECTUS
<PAGE> 20
MORTGAGE-BACKED SECURITIES RISK
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
than 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 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.
ASSET-BACKED SECURITIES RISK
Asset-backed securities are fixed income securities representing an
interest in a pool of shorter-term loans such as automobile loans, home
equity loans, equipment or computer leases or credit card receivables. The
payments from the loans are passed through to the security holder. The
loans underlying asset-backed securities tend to have prepayment rates that
do not vary with interest rates. In addition, the short-term nature of the
loans reduces the impact of any change in prepayment level. However, it is
possible that prepayments will alter the cash flow on asset-backed
securities and it is not possible to determine in advance the actual final
maturity date or average life. Faster prepayment will shorten the average
life and slower prepayment will lengthen it, affecting the price volatility
of the security. However, it is possible to determine what the range of
that movement could be and to calculate the effect that it will have on the
price of the security.
FOREIGN SECURITY RISKS
Investments in securities of foreign companies or governments can be more
volatile than investments in U.S. companies or governments. Diplomatic,
political, or economic developments, including nationalization or appropriation,
could affect investments in foreign countries. Foreign securities markets
generally have less trading volume and less liquidity than U.S. markets. In
addition, the value of securities denominated in foreign currencies, and of
dividends from such securities, can change significantly when foreign currencies
strengthen or weaken relative to the U.S. dollar. Foreign companies or
governments generally are not subject to uniform accounting, auditing, and
financial reporting standards comparable to those applicable to domestic U.S.
companies or governments. Transaction costs are generally higher than those in
the U.S. and expenses for custodial arrangements of foreign securities may be
somewhat greater than typical expenses for custodial arrangements of similar
U.S. securities. Some foreign governments levy withholding taxes against
dividend and interest income. Although in some countries a portion of these
taxes are recoverable, the non-recovered portion will reduce the income received
from the securities comprising the portfolio.
In addition to these risks, certain foreign securities may be subject to the
following additional risk factors:
CURRENCY RISK
Investments in foreign securities denominated in foreign currencies involve
additional risks, including:
- The value of a Fund's assets measured in U.S. dollars may be affected
by changes in currency rates and in exchange control regulations.
- A Fund may incur substantial costs in connection with conversions
between various currencies.
- A Fund may be unable to hedge against possible variations in foreign
exchange rates or to hedge a specific security transaction or
portfolio position.
- Only a limited market currently exists for hedging transactions
relating to currencies in certain emerging markets.
HEDGING RISK
Hedging is a strategy designed to offset investment risks. Hedging activities
include, among other things, the use of forwards, options and futures. There are
risks associated with hedging activities, including:
- - The success of a hedging strategy may depend on an ability to predict
movements in the prices of individual securities, fluctuations in markets,
and movements in interest and currency exchange rates;
- - There may be an imperfect or no correlation between the changes in market
value of the securities held by the Fund or the currencies in which those
securities are denominated and the prices of forward contracts, futures and
options on futures;
- - There may not be a liquid secondary market for a futures contract or
option;
17 PROSPECTUS
<PAGE> 21
- - Trading restrictions or limitations may be imposed by an exchange, and
government regulations may restrict trading in currencies, futures
contracts and options.
LEVERAGING RISK
Leveraging activities include, among other things, borrowing and the use of
short sales, options and futures. There are risks associated with leveraging
activities, including:
- - A fund experiencing losses over certain ranges in the market that exceed
losses experienced by a non-leveraged Fund.
- - There may be an imperfect or no correlation between the changes in market
value of the securities held by a fund and the prices of futures and
options on futures.
- - Although the funds will only purchase exchange-traded futures and options,
due to market conditions there may not be a liquid secondary market for a
futures contract or option. As a result, the funds may be unable to close
out their futures or options contracts at a time which is advantageous.
- - Trading restrictions or limitations may be imposed by an exchange, and
government regulations may restrict trading in futures contracts and
options.
In addition, the following leveraged instruments are subject to certain specific
risks:
DERIVATIVES RISK
The Funds use derivatives to attempt to achieve their investment
objectives, while at the same time maintaining liquidity. To collateralize
(or cover) these derivatives transactions, the Funds hold cash or U.S.
government securities.
FUTURES RISK
Futures contracts and options on futures contracts provide for the future
sale by one party and purchase by another party of a specified amount of a
specific security at a specified future time and at a specified price. An
option on a futures contract gives the purchaser the right, in exchange for
a premium, to assume a position in a futures contract at a specified
exercise price during the term of the option. Index futures are futures
contracts for various indices that are traded on registered securities
exchanges.
A Fund may use futures contracts and related
options for bona fide hedging purposes to offset changes in the value of
securities held or expected to be acquired. They may also be used to gain
exposure to a particular market or instrument, to create a synthetic money
market position, and for certain other tax-related purposes. A Fund will
only enter into futures contracts traded on a national futures exchange or
board of trade.
OPTIONS RISK
The buyer of an option acquires the right to buy (a call option) or sell (a
put option) a certain quantity of a security (the underlying security) or
instrument at a certain price up to a specified point in time. The seller
or writer of an option is obligated to sell (a call option) or buy (a put
option) the underlying security. When writing (selling) call options on
securities, a Fund may cover its position by owning the underlying security
on which the option is written or by owning a call option on the underlying
security. Alternatively, a Fund may cover its position by maintaining in a
segregated account cash or liquid securities equal in value to the exercise
price of the call option written by the Fund.
Because option premiums paid or received by the Fund are small in relation
to the market value of the investments underlying the options, buying and
selling put and call options can be more speculative than investing
directly in securities.
SHORT SALES RISK
Short sales are transactions in which a Fund sells a security it does not own.
To complete a short sale, a Fund must borrow the security to deliver to the
buyer. The Fund is then obligated to replace the borrowed security by purchasing
the security at the market price at the time of replacement. This price may be
more or less than the price at which the security was sold by the Fund.
REAL ESTATE INVESTING RISK
The Fund's investments in the securities of REITs and companies principally
engaged in the real estate industry may subject the Fund to the risks associated
with the direct ownership of real estate. Risks commonly associated with the
direct ownership of real estate include fluctuations in the value of underlying
properties and defaults by borrowers or tenants. In addition to these risks,
REITs are dependent on specialized management skills and some REITs may have
investments in relatively few properties, or in a small geographic area or a
single type of property. These factors may increase the volatility of the Fund
investments in REITs.
TRACKING ERROR RISK
Factors such as Fund expenses, imperfect correlation between the Fund's
investments and those of their
18 PROSPECTUS
<PAGE> 22
benchmarks, rounding of share prices, changes to the benchmark, regulatory
policies, and leverage, may affect their ability to achieve perfect correlation.
The magnitude of any tracking error may be affected by a higher portfolio
turnover rate. Because an index is just a composite of the prices of the
securities it represents rather than an actual portfolio of those securities, an
index will have no expenses. As a result, the Fund, which will have expenses
such as taxes, custody, management fees and other operational costs, and
brokerage, may not achieve its investment objective of accurately correlating to
an index.
19 PROSPECTUS
<PAGE> 23
MORE INFORMATION ABOUT FUND 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.
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 short term high quality debt instruments 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 achieving a
Fund's investment objective. Of course, the Fund cannot guarantee that any Fund
will achieve its investment goal.
PERFORMANCE INFORMATION OF COMPARABLE FUNDS
ARMADA ADVANTAGE EQUITY GROWTH FUND
This Fund is relatively new and has less than one year of 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 "Total Operating 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 return
for the period ended December 31, 1999 to those of the S&P 500 Composite Index.
SINCE
1 YEAR 5 YEARS 10 YEARS INCEPTION
- --------------------------------------------------------------------------------
Armada Equity
Growth Fund
(Class I Shares) 22.98% 27.46% 17.18% 17.54%(1)
S&P 500
Composite Index(3) 21.04% 28.55% 18.20% 18.20%(2)
- --------------------------------------------------------------------------------
(1) Since December 20, 1989.
(2) Since December 31, 1989.
(3) The S&P 500 Composite Index is a widely-recognized, market value-weighted
(higher market value stocks have more influence than lower market value
stocks) index of 500 stocks designed to mimic the overall equity market's
industry weightings. Most, but not all, large capitalization stocks are in
the index. There are also some small capitalization stocks in the index.
Stocks included in the index are mostly New York Stock Exchange listed
companies, with some American Stock Exchange and Nasdaq Stock Market stocks.
ARMADA ADVANTAGE BALANCED ALLOCATION FUND
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
"Total Operating 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.
20 PROSPECTUS
<PAGE> 24
This table compares the Armada Balanced Allocation Fund's average annual total
returns for the periods ended December 31, 1999 to those of the S&P 500
Composite Index and the Lehman Aggregate Bond Index.
SINCE
1 YEAR INCEPTION
- --------------------------------------------------------------------------------
Armada Balanced
Allocation Fund (Class I Shares) 15.27% 14.31%(1)
S&P 500 Composite Index(3) 21.04% 22.73%(2)
Lehman Aggregate Bond Index(4) -0.83% 2.45%(2)
Balanced Allocation
Hybrid Benchmark(5) 12.00% 14.77%(2)
- --------------------------------------------------------------------------------
(1) Since July 10, 1998.
(2) Since July 31, 1998.
(3) The S&P 500 Composite Index is a widely-recognized, market value-weighted
(higher market value stocks have more influence than lower
market value stocks) index of 500 stocks designed to mimic the overall
equity market's industry weightings. Most, but not all, large
capitalization stocks are in the index. There are also some small
capitalization stocks in the index. Stocks included in the index are mostly
New York Stock Exchange listed companies, with some American Stock Exchange
and Nasdaq Stock Market stocks.
(4) The Lehman Aggregate Bond Index is an unmanaged, fixed income,
market value-weighted index that includes treasury issues, agency issues,
corporate bond issues and mortgage-backed securities.
(5) The Balanced Allocation Hybrid Benchmark is an unmanaged composite of the
S&P 500 Composite Index and the Lehman Aggregate Bond Index. These two
indices are combined in the same ratio as the stock/bond ratio of the
Balanced Allocation Fund to arrive at the Hybrid Benchmark.
- --------------------------------------------------------------------------------
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.
INVESTMENT ADVISER AND INVESTMENT TEAMS
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 Trust 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, 2000, IMC had approximately $25.732 billion in assets
under management.
The Funds are managed by teams of investment professionals from IMC. No one
person is primarily responsible for making investment recommendations to the
team. Each team manages their respective segment allocation within the Fund,
according to their areas of specialization.
The table below shows the IMC management teams responsible for each fund as well
as the advisory fees IMC received for each fund for the fiscal period ended
December 31, 1999.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Advisory Fees Paid as
a percentage of average
Management Team/ net assets for the Fiscal Year
Fund Name Investment Adviser Ended December 31, 1999
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Armada Advantage Equity Growth Fund Equity Growth Team 0.00%
- ---------------------------------------------------------------------------------------------------------------------------
Armada Advantage International Equity Fund International Equity Team 1.22%
- ---------------------------------------------------------------------------------------------------------------------------
Armada Advantage Mid Cap Growth Mid Cap Growth Team 1.00%
- ---------------------------------------------------------------------------------------------------------------------------
Armada Advantage Small Cap Growth Small Cap Growth Team 1.00%
- ---------------------------------------------------------------------------------------------------------------------------
Armada Advantage Balanced Allocation Fund Equity and Fixed Income Teams N/A(1)
- ---------------------------------------------------------------------------------------------------------------------------
Armada Advantage Bond Fund Taxable Fixed Income Team 0.71%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Fund has not yet commenced operations.
21 PROSPECTUS
<PAGE> 25
PURCHASING, SELLING AND EXCHANGING FUND SHARES
Investors may not purchase or redeem shares of the Funds directly. 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 participating
entities' contract prospectus of each plan describes how contract owners may
allocate, transfer and withdraw amounts to, and from, separate accounts. The
Funds do not assess any fees, either when they sell or redeem shares. Surrender
charges, mortality and expense risk fees, and other charges may be assessed by
participating entities. These fees should be described in the participating
entities contract prospectus. The Trust assumes no responsibility for such
contract prospectuses.
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
Securities and Exchange Commission ("SEC");
(b) the NYSE is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such 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 or redemption 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 or redemption 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
The NAV is calculated by dividing the value of all securities and other assets
belonging to a Fund, less the liabilities charged to the Fund, by the number of
shares of the Fund that are outstanding.
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. Foreign
securities are valued based on quotations from the primary market in which they
are traded and are translated from the local currency into U.S. dollars using
current exchange rates. Sometimes the price of a security trading on a foreign
exchange may be affected by events that happen after the exchange closes. If
this happens, the fair value of the security may be determined using other
factors and may not reflect the security's last quoted price. Foreign 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.
DIVIDENDS AND DISTRIBUTIONS
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
payment 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 a variable life insurance contract or under a qualified
pension or retirement plan.
MORE INFORMATION ABOUT TAXES IS IN THE STATEMENT OF ADDITIONAL INFORMATION.
22 PROSPECTUS
<PAGE> 26
FINANCIAL HIGHLIGHTS
The tables that follow present performance information about each Fund. This
information is intended to help you understand each Fund's financial performance
for the past five years, or, if shorter, the period of the Fund's operations.
Some of this information reflects financial information for a single Fund share.
The total returns in the table represent the rate that you would have earned (or
lost) on an investment in a Fund, assuming you reinvested all of your dividends
and distributions. During the periods covered by these tables, the Armada
Advantage Balanced Allocation Fund had not yet commenced investment operations.
Accordingly, no information is presented for this Fund.
This information has been audited by Ernst & Young LLP, independent auditors.
Their report, along with each Fund's financial statements, appears in the annual
report. You can obtain the annual report, which contains more performance
information, at no charge by calling 1-800-622-FUND (3863).
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
ARMADA ADVANTAGE EQUITY GROWTH FUND
- ---------------------------------------------------------------------------------------------------------------------------
For a Share Outstanding Throughout Each Period
PERIOD ENDED DECEMBER 31,
--------------------------------------------
1999+
-------------------------------------------
<S> <C>
Net asset value, beginning of period $ 10.00
- ---------------------------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment loss (1.00)
Net realized and unrealized gain from investments 2.40
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment activities 1.40
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 11.40
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 14.00%(a)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000) $5,700
Ratio of expenses to average net assets 1.00%(b)
Ratio of net investment loss to average net assets (0.109)%(b)
Ratio of expenses to average net assets* 1.75%(b)
Portfolio turnover rate 26%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios have been indicated.
+ Fund commenced operations on September 13, 1999.
(a) Total return is for the period indicated and has not been annualized.
(b) Annualized.
23 PROSPECTUS
<PAGE> 27
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
ARMADA ADVANTAGE INTERNATIONAL EQUITY FUND
- -----------------------------------------------------------------------------------------------------------------------------------
For a Share Outstanding Throughout the Year
Year Ended December 31,
--------------------------------------------------------------------------------
1999(b) 1998 1997 1996 1995
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 13.83 $ 12.44 $ 12.18 $ 10.59 $ 9.65
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment loss (0.10) (0.10) (0.06) (0.04) (0.03)
Net realized and unrealized gains from investments 7.54 1.55 0.32 1.67 0.97
- -----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 7.44 1.45 0.26 1.63 0.94
- -----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends from net investment income (0.00) (0.00) (0.00) (0.04) (0.00)
Distributions from net realized capital gains (0.76) (0.06) (0.00) (0.00) (0.00)
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.76) (0.06) (0.00) (0.04) (0.00)
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 20.51 $ 13.83 $ 12.44 $ 12.18 $ 10.59
===================================================================================================================================
TOTAL RETURN 55.70% 11.61% 2.13% 15.41% 9.74%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000) $20,584 $18,371 $18,784 $17,001 $11,645
Ratio of expenses to average net assets 2.01% 2.05% 1.90% 2.00% 2.38%
Ratio of net investment loss to
average net assets (0.69)% (0.66)% (0.46)% (0.35)% (0.39)%
Ratio of expenses to average net assets (a) 2.11%* (a) (a) (a)
Portfolio turnover rate 115% 73% 34% 65% 86%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios have been indicated.
(a) There were no waivers or reimbursements during this period.
(b) Per share data calculated using average shares outstanding method.
24 PROSPECTUS
<PAGE> 28
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
ARMADA ADVANTAGE MID CAP GROWTH FUND
- -----------------------------------------------------------------------------------------------------------------------------------
For a Share Outstanding Throughout the Year
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 15.70 $ 14.23 $ 14.60 $ 12.44 $ 9.64
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment loss (0.41) (0.16) (0.11) (0.09) (0.08)
Net realized and unrealized gains from investments 7.08 1.63 1.90 2.25 2.88
- -----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 6.67 1.47 1.79 2.16 2.80
- -----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net realized capital gains (1.10) (0.00) (2.16) (0.00) (0.00)
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 21.27 $ 15.70 $ 14.23 $ 14.60 $ 12.44
===================================================================================================================================
TOTAL RETURN 44.36% 10.33% 12.58% 17.36% 29.05%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000) $22,967 $29,066 $31,059 $24,041 $14,977
Ratio of expenses to average net assets 1.59% 1.51% 1.53% 1.42% 1.62%
Ratio of net investment loss to
average net assets (1.09)% (0.98)% (0.88)% (0.73)% (0.84)%
Ratio of expenses to average net assets* (a) 1.57% (a) (a) (a)
Portfolio turnover rate 139% 71% 55% 127% 44%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios have been indicated.
(a) There were no waivers or reimbursements during this period.
25 PROSPECTUS
<PAGE> 29
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
ARMADA ADVANTAGE SMALL CAP GROWTH FUND
- -----------------------------------------------------------------------------------------------------------------------------------
For a Share Outstanding Throughout the Year
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 16.69 $ 17.12 $ 18.20 $ 15.71 $ 11.58
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment loss (0.22) (0.20) (0.20) (0.15) (0.15)
Net realized and unrealized gains/(losses)
from investments 5.16 (0.23) (0.79) 4.79 4.28
- -----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 4.94 (0.43) (0.99) 4.64 4.13
- -----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net realized capital gains (0.86) (0.00) (0.09) (2.15) (0.00)
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 20.77 $ 16.69 $ 17.12 $ 18.20 $ 15.71
===================================================================================================================================
TOTAL RETURN 31.24% (2.51)% (5.47)% 29.66% 35.66%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000) $16,473 $22,454 $26,860 $24,495 $13,273
Ratio of expenses to average net assets 1.65% 1.53% 1.55% 1.40% 1.64%
Ratio of net investment loss to
average net assets (1.08)% (1.14)% (1.20)% (1.06)% (1.29)%
Ratio of expenses to average net assets* (a) 1.60% (a) (a) (a)
Portfolio turnover rate 135% 83% 51% 60% 64%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios have been indicated.
(a) There were no waivers or reimbursements during this period.
26 PROSPECTUS
<PAGE> 30
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
ARMADA ADVANTAGE BOND FUND
- -----------------------------------------------------------------------------------------------------------------------------------
For a Share Outstanding Throughout the Year
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $10.92 $ 10.70 $ 10.33 $10.50 $ 9.35
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Net investment income 0.96 0.51 0.48 0.36 0.40
Net realized and unrealized gains/(losses)
from investments (1.19) 0.20 0.30 (0.18) 1.17
- -----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations (0.23) 0.71 0.78 0.18 1.57
- -----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends from net investment income (0.83) (0.49) (0.41) (0.35) (0.42)
Distributions from net realized capital gains (0.14) (0.00) (0.00) (0.00) (0.00)
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.97) (0.49) (0.41) (0.35) (0.42)
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 9.72 $ 10.92 $ 10.70 $10.33 $10.50
===================================================================================================================================
TOTAL RETURN (1.96)% 6.71% 7.69% 1.83% 16.98%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000) $7,470 $12,337 $11,856 $9,754 $6,758
Ratio of expenses to average net assets 1.29% 1.44% 1.36% 1.29% 1.57%
Ratio of net investment income to
average net assets 5.25% 5.00% 5.36% 5.32% 5.31%
Ratio of expenses to average net assets* (a) 1.50% (a) (a) (a)
Portfolio turnover rate 242% 190% 144% 492% 178%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios have been indicated.
(a) There were no waivers or reimbursements during this period.
27 PROSPECTUS
<PAGE> 31
NOTES
28 PROSPECTUS
<PAGE> 32
THE ARMADA ADVANTAGE FUND
INVESTMENT ADVISER
National City Investment Management Company
1900 East 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, Pennsylvania 19103-6996
More information about each Fund is available without charge through the
following:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI, as it may be amended or supplemented from time to time, includes more
detailed information about The Armada Advantage Fund. 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
These reports list each Fund's holdings and contain information from the Fund's
managers about strategies, and recent market conditions and trends and their
impact on Fund performance. The reports also contain detailed financial
information about the Funds.
TO OBTAIN AN SAI, ANNUAL OR SEMI-ANNUAL REPORT, OR MORE INFORMATION:
BY TELEPHONE: Call 1-800-622-FUND (3863)
BY MAIL: Write to us at
One Freedom Valley Drive,
Oaks, Pennsylvania 19456
FROM THE SEC: You can also obtain the SAI or the Annual and Semi-Annual reports,
as well as other information about the Armada Advantage Funds, from the EDGAR
Database on 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 on
the operation of the Public Reference Room, call 202-942-8090). 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 20549-0102.
You may also obtain this information, upon payment of a duplicating fee, by
e-mailing the SEC at the following address: [email protected].
The Armada Advantage Fund's Investment Company Act registration number is
811-7850.
ARM-F-010-01000
<PAGE> 33
THE ARMADA ADVANTAGE FUND
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 2000
ARMADA ADVANTAGE EQUITY GROWTH FUND
ARMADA ADVANTAGE INTERNATIONAL EQUITY FUND
ARMADA ADVANTAGE MID CAP GROWTH FUND
ARMADA ADVANTAGE SMALL CAP GROWTH FUND
ARMADA ADVANTAGE BALANCED ALLOCATION FUND
ARMADA ADVANTAGE BOND FUND
This Statement of Additional Information is not a Prospectus, but
should be read in conjunction with the Prospectus for The Armada Advantage Fund
dated May 1, 2000, as it may be supplemented or amended from time to time. This
Statement of Additional Information is incorporated by reference in its entirety
into the Prospectus. The Funds' audited financial statements and highlights
appearing in the 1999 Annual Report to Shareholders are incorporated by
reference into this Statement of Additional Information. Copies of the
Prospectus and the 1999 Annual Report to Shareholders may be obtained without
charge, upon request, by writing The Armada Advantage Fund at One Freedom Valley
Drive, Oaks, PA 19456, or by calling toll free (800) 622-FUND (3863).
<PAGE> 34
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
THE ARMADA ADVANTAGE FUND...........................................................1
INVESTMENT OBJECTIVES AND POLICIES..................................................1
Additional Information on Fund Management..................................1
Additional Information About the Funds.....................................2
Armada Advantage Equity Growth Fund........................................2
Armada Advantage International Equity Fund.................................2
Armada Advantage Mid Cap Growth Fund.......................................3
Armada Advantage Small Cap Growth Fund.....................................4
Armada Advantage Balanced Allocation Fund..................................4
Armada Advantage Bond Fund.................................................5
Additional Information on Portfolio Instruments............................5
Ratings....................................................................5
U.S. Government Obligations and Money Market Instruments...................5
Variable and Floating Rate Obligations.....................................7
Repurchase and Reverse Repurchase Agreements...............................8
Dollar Rolls...............................................................8
Securities Lending.........................................................9
Investment Company Securities..............................................9
REITs.....................................................................10
Derivative Securities.....................................................11
Foreign Securities........................................................20
American, European and Global Depository Receipts.........................21
Asset-Backed Securities...................................................22
Mortgage-Backed Securities................................................23
Convertible Securities....................................................23
When-Issued, Forward Commitment and Delayed Settlement Transactions.......24
Guaranteed Investment Contracts...........................................25
Restricted and Illiquid Securities........................................25
Warrants..................................................................26
U.S. Treasury Obligations and Receipts....................................26
Short Sales...............................................................27
Portfolio Turnover........................................................27
Investment Limitations....................................................27
NET ASSET VALUE....................................................................29
Valuation of the Funds....................................................29
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION.....................................30
MANAGEMENT OF THE TRUST............................................................31
Shareholder and Trustee Liability.........................................35
Investment Adviser........................................................35
Portfolio Transactions....................................................37
Administrator.............................................................38
Distributor...............................................................39
Custodians, Transfer Agent and Fund Accounting Services...................40
</TABLE>
-i-
<PAGE> 35
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors......................................................40
ADDITIONAL INFORMATION.............................................................41
Description of Shares.....................................................41
Vote of a Majority of the Outstanding Shares..............................42
Additional Tax Information................................................42
Additional Tax Information Concerning the International Equity Fund.......44
Codes of Ethics...........................................................44
PERFORMANCE INFORMATION............................................................44
General...................................................................44
Yields of the Funds.......................................................46
Calculation of Total Return...............................................46
Performance Comparisons...................................................47
Miscellaneous.............................................................48
FINANCIAL STATEMENTS...............................................................49
APPENDIX A........................................................................A-1
APPENDIX B........................................................................B-1
</TABLE>
<PAGE> 36
THE ARMADA ADVANTAGE FUND
The Armada Advantage Fund (the "Trust") is an open-end management
investment company which currently 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 as
a Massachusetts business trust on May 18, 1993. The Trust was 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"), and by other entities under qualified pension and retirement plans.
Shares of the Trust are not offered to the general public but solely to such
separate accounts (the "Separate Accounts").
The Trust currently offers shares of beneficial interest in the
following funds: the Equity Growth Fund, the International Equity Fund, the Mid
Cap Growth Fund, the Small Cap Growth Fund, the Balanced Allocation Fund and the
Bond Fund. Until March 6, 1998, the Trust also offered a money market fund, the
Prime Obligations Fund, which is no longer available.
Prior to May 1, 2000, the Trust was named The Parkstone Advantage Fund.
Additionally, prior to May 1, 2000, the International Equity Fund was known as
the International Discovery Fund, the Mid Cap Growth Fund was known as the Mid
Capitalization Fund and Small Cap Growth Fund was known as the Small
Capitalization Fund. References in this Statement of Additional Information are
to the Trust's and the Funds' current names.
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.
INVESTMENT OBJECTIVES AND POLICIES
The following policies supplement the investment objectives, principal
investment strategies and related risks of each Fund as set forth in the
Prospectus.
ADDITIONAL INFORMATION ON FUND MANAGEMENT
Further information on National City Investment Management Company's
("IMC" or the "Adviser") management strategies, techniques, policies and related
matters may be included from time to time in advertisements, sales literature,
communications to shareholders and other materials. See also, "Performance
Information" below.
-1-
<PAGE> 37
ADDITIONAL INFORMATION ABOUT THE FUNDS
ARMADA ADVANTAGE EQUITY GROWTH FUND
Under normal conditions, at least 80% of the Fund's total assets will
be invested in a diversified portfolio of common stocks and securities
convertible into common stocks with large stock market capitalizations
comparable to that of companies in the S&P 500 Composite Index. The Adviser
selects common stocks based on a number of factors, including historical and
projected earnings growth, earnings quality and liquidity, each in relation to
the market price of the stock. Stocks purchased for the Fund generally will be
listed on a national securities exchange or will be unlisted securities with an
established over-the-counter market.
ARMADA ADVANTAGE INTERNATIONAL EQUITY FUND
The Fund seeks to achieve its investment objective by investing, under
normal market conditions, at least 80% of its total assets in equity securities
of foreign issuers. The Fund's assets normally will be invested in the
securities of issuers located in at least three foreign countries. Foreign
investments may also include debt obligations issued or guaranteed by foreign
governments or their agencies, authorities, instrumentalities or political
subdivisions, including a foreign state, province or municipality. The Adviser
does not presently intend to invest in common stock of domestic companies.
The Fund will invest primarily in equity securities, including common
and preferred stocks, rights, warrants, securities convertible into common
stocks and American Depository Receipts ("ADRs") of companies included in the
Morgan Stanley Capital International Europe, Australasia, Far East ("MSCI EAFE")
Index, a broadly diversified international index consisting of more than 1,000
equity securities of companies located in Australia, Austria, Belgium, Denmark,
Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, Malaysia, the
Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland, and the
United Kingdom. The Fund, however, is not an "index" fund, and is neither
sponsored by, nor affiliated with, Morgan Stanley Capital International. The
Fund does not anticipate making investments in markets where, in the judgment of
the Adviser, property rights are not defined and supported by adequate legal
infrastructure.
More than 25% of the Fund's assets may be invested in the securities of
issuers located in the same country. Investment in a particular country of 25%
or more of the Fund's total assets will make the Fund's performance more
dependent upon the political and economic circumstances of that country than a
mutual fund more widely diversified among issuers in different countries.
Criteria for determining the appropriate distribution of investments among
countries may include relative valuation, growth prospects, and fiscal,
monetary, and regulatory government policies. See "Additional Information on
Portfolio Instruments - Foreign Securities" below.
-2-
<PAGE> 38
ARMADA ADVANTAGE MID CAP GROWTH FUND
The Fund normally will invest at least 80% of the value of its total
assets in common stocks and securities convertible into common stocks of
companies believed by the Adviser to be characterized by sound management and
the ability to finance expected long-term growth. The Fund normally will invest
at least 80% of the value of its total assets in common stocks and securities
convertible into common stocks of companies with market capitalizations
comparable to companies in the Russell Midcap Growth Index. The Fund may also
invest up to 20% of the value of its total assets in preferred stocks, corporate
bonds, notes, units of real estate investment trusts, warrants, and short-term
obligations (with maturities of 12 months or less) consisting of commercial
paper (including variable amount master demand notes), bankers' acceptances,
certificates of deposit, repurchase agreements, obligations issued or guaranteed
by the U.S. government, its agencies or instrumentalities, and demand and time
deposits of domestic and foreign banks and savings and loan associations. The
Fund may also hold securities of other investment companies and depository or
custodial receipts representing beneficial interests in any of the foregoing
securities.
Subject to the foregoing policies, the Fund may also invest up to 20%
of its net assets in foreign securities either directly or through the purchase
of ADRs, European Depository Receipts ("EDRs"), Global Depository Receipts
("GDRs") and other similar global instruments, and may also invest in securities
issued by foreign branches of U.S. banks and foreign banks, Canadian commercial
paper and in U.S. dollar-denominated commercial paper of a foreign issuer.
The Fund anticipates investing in growth-oriented, medium-sized
companies. Medium-sized companies are considered to be those with a market
capitalization comparable to companies in the Russell Midcap Growth Index.
Investments will be in companies that have typically exhibited consistent,
above-average growth in revenues and earnings, strong management, and sound and
improving financial fundamentals. Often, these companies are market or industry
leaders, have excellent products and/or services, and exhibit the potential for
growth. Primary holdings of the Fund are in companies that participate in
long-term growth industries, although these will be supplemented by holdings in
non-growth industries that exhibit the desired characteristics.
Consistent with the foregoing, the Fund will focus its investments in
those companies and types of companies that the Adviser believes will enable the
Fund to achieve its investment objective.
-3-
<PAGE> 39
ARMADA ADVANTAGE SMALL CAP GROWTH FUND
The Fund will normally invest at least 80% of its total assets in
equity securities of companies with stock market capitalizations comparable to
that of companies in the Russell 2000 Growth Index. The Adviser will seek
companies with above-average growth prospects. Factors considered in selecting
such issuers include participation in a fast growing industry, a strategic niche
position in a specialized market, and fundamental value. The Adviser will also
consider the relationship between price and book value, and other factors such
as trading volume and bid-ask spreads in an effort to allow the Fund to achieve
diversification.
Securities held by the Fund generally will be issued by public
companies with small capitalizations relative to those which predominate the
major market indices, such as the S&P 500 Composite Index or the Dow Jones
Industrial Average. Securities of these small companies may at times yield
greater returns on investment than stocks of larger, more established companies
as a result of inefficiencies in the marketplace. Small capitalization companies
are generally not as well-known to investors and have less of an investor
following than larger companies. However, the positions of small capitalization
companies in the market may be more tenuous because they typically are subject
to a greater degree of change in earnings and business prospects than larger,
more established companies. In addition, securities of small capitalization
companies are traded in lower volume than those of larger companies and may be
more volatile. As a result, the Fund may be subject to greater price volatility
than a fund consisting of large capitalization stocks. By maintaining a broadly
diversified portfolio, the Adviser will attempt to reduce this volatility.
ARMADA ADVANTAGE BALANCED ALLOCATION FUND
The Fund may invest in any type or class of security. The Fund normally
invests in common stocks, fixed income securities, securities convertible into
common stocks (i.e., warrants, convertible preferred stock, fixed rate preferred
stock, convertible fixed income securities, options and rights) and cash
equivalent securities. The Fund intends to invest 50% to 70% of its net assets
in common stocks and securities convertible into common stocks, 25% to 55% of
its net assets in fixed income securities and up to 30% of its net assets in
cash and cash equivalents. Of these investments, no more than 20% of the Fund's
total assets will be invested in foreign securities.
The Fund holds common stocks primarily for the purpose of providing
long-term growth of capital. When selecting stocks for the Fund, the Adviser
will consider primarily their potential for long-term capital appreciation. The
Fund intends to invest predominantly in those companies which are
growth-oriented and have exhibited consistent, above-average growth in revenues
and earnings.
The Fund invests the fixed income portion of its portfolio of
investments in a broad range of investment grade debt securities which are rated
at the time of purchase within the four highest rating categories assigned by
Moody's, S&P, Fitch or Duff (defined under "Ratings" below). These fixed income
securities will consist of bonds, debentures, notes, zero coupon securities,
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asset-backed securities, state, municipal and industrial revenue bonds,
obligations issued or guaranteed by the U.S. government or its agencies or
instrumentalities, certificates of deposit, time deposits, high quality
commercial paper, bankers' acceptances and variable amount master demand notes.
In addition, a portion of the Fund's assets may be invested from time to time in
first mortgage loans and participation certificates in pools of mortgages issued
or guaranteed by the U.S. government or its agencies or instrumentalities. Some
fixed income securities may have warrants or options attached.
ARMADA ADVANTAGE BOND FUND
The Fund seeks to achieve its objective by normally investing at least
80% of its total assets in investment grade fixed-income securities. The Fund
uses the Lehman Aggregate Bond Index as its performance benchmark. The average
maturity of the Fund will be from four to twelve years.
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS
RATINGS
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, Inc. ("Fitch IBCA"), Duff & Phelps Credit
Rating Co. ("Duff"), and Moody's Investors Service, Inc. ("Moody's") for debt
securities which may be held by the Funds.
All debt obligations, including convertible bonds, purchased by the
Funds are rated investment grade by Moody's ("Aaa," "Aa," "A" and "Baa"), S&P
("AAA," "AA," "A" and "BBB"), Fitch IBCA ("AAA," "AA," "A" and "BBB"), Duff
("AAA," "AA," "A" and "BBB"), or, if not rated, are determined to be of
comparable quality by the Adviser. Debt securities rated "Baa" by Moody's or
"BBB" by S&P, Fitch IBCA and Duff, are generally considered to be investment
grade securities although they have speculative characteristics and changes in
economic conditions or circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case for higher
rated debt obligations.
Subsequent to its purchase by a Fund, an issue of securities may cease
to be rated or its rating may be reduced below the minimum rating required for
purchase by the Fund. The Board of Trustees or IMC, as the case may be, may
determine that it is appropriate for the Fund to continue to hold the obligation
if retention is in accordance with the interests of the particular Fund and
applicable regulations of the Securities and Exchange Commission ("SEC").
However, each Fund will sell promptly any security that is not rated investment
grade by either S&P, Fitch IBCA, Duff or Moody's if such securities exceed 5% of
the Fund's net assets.
U.S. GOVERNMENT OBLIGATIONS AND MONEY MARKET INSTRUMENTS
Each Fund may, in accordance with its investment policies, invest from
time to time in obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities ("U.S. Government obligations") and in other money
market instruments, including but not limited to
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bank obligations, commercial paper and corporate bonds with remaining maturities
of 397 days or less.
Examples of the types of Government obligations that may be held by the
Funds include, without limitation, direct obligations of the U.S. Treasury, and
securities issued or guaranteed by the Federal Home Loan Banks, Federal Farm
Credit Banks, Federal Land Banks, Federal Housing Administration, Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association, Federal National
Mortgage Association, General Services Administration, Central Bank for
Cooperatives, Federal Home Loan Mortgage Corporation, Federal Intermediate
Credit Banks, Resolution Trust Corporation and Maritime Administration.
U.S. Treasury securities differ only in their interest rates,
maturities and time of issuance: Treasury Bills have initial maturities of one
year or less; Treasury Notes have initial maturities of one to ten years; and
Treasury Bonds generally have initial maturities of more than ten years.
Obligations of certain agencies and instrumentalities of the U.S. Government,
such as those of the Government National Mortgage Association, are supported by
the full faith and credit of the U.S. Treasury; others, such as those of the
Federal Home Loan Banks, are supported by the right of the issuer to borrow from
the 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; still others, such as those of the Federal
Home Loan Mortgage Corporation, are supported only by the credit of the
instrumentality. No assurance can be given that the U.S. Government would
provide financial support to U.S. Government-sponsored instrumentalities if it
is not obligated to do so by law. Some of these instruments may be variable or
floating rate instruments.
Bank obligations include bankers' acceptances, negotiable certificates
of deposit and non-negotiable 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 or is insured by the Federal Deposit Insurance Corporation
("FDIC"), or by a savings and loan association or savings bank which is insured
by the FDIC. Bank obligations also include U.S. dollar-denominated obligations
of foreign branches of U.S. banks or of U.S. branches of foreign banks, all of
the same type as domestic bank obligations. Investments in bank obligations are
limited to the obligations of financial institutions having more than $1 billion
in total assets at the time of purchase. Time deposits with a maturity longer
than seven days or that do not provide for payment within seven days after
notice will be limited to 15% of a Fund's net assets. Investments by the Funds
in non-negotiable time deposits are limited to no more than 5% of each Fund's
total assets at the time of purchase.
Domestic and foreign banks are subject to extensive but different
government regulation which may limit the amount and types of their loans and
the interest rates that may be charged. In addition, the profitability of the
banking industry is largely dependent upon the availability and cost of funds to
finance lending operations and the quality of underlying bank assets.
Investments in obligations of foreign branches of U.S. banks and U.S.
branches of foreign banks may subject a Fund to additional risks, including
future political and economic
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developments, the possible imposition of withholding taxes on interest income,
possible seizure or nationalization of foreign deposits, the possible
establishment of exchange controls, or the adoption of foreign governmental
restrictions which might adversely affect the payment of principal and interest
on such obligations. In addition, foreign branches of U.S. banks and U.S.
branches of foreign banks may be subject to less stringent reserve requirements
and to different accounting, auditing, reporting and recordkeeping standards
than those applicable to domestic branches of U.S. banks. Such investments may
also subject the Funds to investment risks similar to those accompanying direct
investments in foreign securities.
Commercial paper may include variable and floating rate instruments
which are unsecured instruments that permit the indebtedness thereunder to vary.
Variable rate instruments provide for periodic adjustments in the interest rate.
Floating rate instruments provide for automatic adjustment of the interest rate
whenever some other specified interest rate changes. Some variable and floating
rate obligations are direct lending arrangements between the purchaser and the
issuer and there may be no active secondary market. However, in the case of
variable and floating rate obligations with a demand feature, a Fund may demand
payment of principal and accrued interest at a time specified in the instrument
or may resell the instrument to a third party. In the event that an issuer of a
variable or floating rate obligation defaulted on its payment obligation, a Fund
might be unable to dispose of the note because of the absence of a secondary
market and could, for this or other reasons, suffer a loss to the extent of the
default. The Funds may also purchase Rule 144A securities. See "Restricted and
Illiquid Securities" below.
VARIABLE AND FLOATING RATE OBLIGATIONS
The Funds may purchase variable and floating rate instruments in
accordance with their investment objectives and policies as described in the
Prospectus and this Statement of Additional Information. If such an instrument
is not rated, IMC must determine that such instrument is comparable to rated
instruments eligible for purchase by the Funds and will consider the earning
power, cash flows and other liquidity ratios of the issuers and guarantors of
such instruments and will continuously monitor their financial status in order
to meet payment on demand.
In determining average weighted portfolio maturity, an instrument will
usually be deemed to have a maturity equal to the longer of the period remaining
until the next regularly scheduled interest rate adjustment or the time the Fund
involved can recover payment of principal as specified in the instrument.
Instruments which are U.S. Government obligations and certain variable rate
instruments having a nominal maturity of 397 days or less when purchased by the
Fund involved, however, will be deemed to have a maturity equal to the period
remaining until the next interest rate adjustment.
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REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
Each Fund may purchase portfolio securities subject to the seller's
agreement to repurchase them at a mutually specified date and price ("repurchase
agreements"). Repurchase agreements will be entered into only with financial
institutions such as banks and broker/dealers which are deemed to be
creditworthy by IMC. No Fund will enter into repurchase agreements with IMC or
any of its affiliates. Unless a repurchase agreement has a remaining maturity of
seven days or less or may be terminated on demand upon notice of seven days or
less, the repurchase agreement will be considered an illiquid security and will
be subject to each Fund's 15% limit on illiquid securities.
The seller under a repurchase agreement will be required to maintain
the value of the securities which are subject to the agreement and held by a
Fund at not less than the agreed upon repurchase price. If the seller defaulted
on its repurchase obligation, the Fund holding such obligation would suffer a
loss to the extent that the proceeds from a sale of the underlying securities
(including accrued interest) were less than the repurchase price (including
accrued interest) under the agreement. In the event that such a defaulting
seller filed for bankruptcy or became insolvent, disposition of such securities
by the Fund might be delayed pending court action.
The repurchase price under a repurchase agreement generally equals the
price paid by a Fund plus interest negotiated on the basis of current short-term
rates (which may be more or less than the rate on the securities underlying the
repurchase agreement). Securities subject to a repurchase agreement will be held
by a Fund's custodian or sub-custodian in a segregated account or in the Federal
Reserve/Treasury book-entry system. Repurchase agreements are considered to be
loans by a Fund under the Investment Company Act of 1940, as amended (the "1940
Act").
Each Fund may also borrow funds for temporary purposes by selling
portfolio securities to financial institutions such as banks and broker/dealers
and agreeing to repurchase them at a mutually specified date and price ("reverse
repurchase agreements"). Reverse repurchase agreements involve the risk that the
market value of the securities sold by a Fund may decline below the repurchase
price. The Funds would pay interest on amounts obtained pursuant to a reverse
repurchase agreement. Whenever a Fund enters into a reverse repurchase
agreement, it will place in a segregated custodial account liquid assets such as
cash or liquid portfolio securities equal to the repurchase price (including
accrued interest). The Fund will monitor the account to ensure such equivalent
value is maintained. Reverse repurchase agreements are considered to be
borrowings by a Fund under the 1940 Act.
DOLLAR ROLLS
The Funds may invest in dollar roll agreements. A dollar roll agreement
is identical to a reverse repurchase agreement except for the fact that
substantially similar securities may be repurchased. At the time a Fund enters
into a reverse repurchase agreement or a dollar roll agreement, it will place in
a segregated custodial account assets such as U.S. government
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securities or other liquid high-grade debt securities consistent with the Fund's
investment restrictions having a value equal to the repurchase price (including
accrued interest), and will subsequently continually monitor the account to
insure that such equivalent value is maintained. Reverse repurchase agreements
and dollar roll agreements involve the risk that the market value of the
securities sold by a Fund may decline below the price at which a Fund is
obligated to repurchase the securities. Reverse repurchase agreements and dollar
roll agreements are considered to be borrowings by a Fund under the 1940 Act
and, therefore, a form of leverage. A Fund may experience a negative impact on
its net asset value if interest rates rise during the term of a reverse
repurchase agreement or dollar roll agreement. A Fund generally will invest the
proceeds of such borrowings only when such borrowings will enhance a Fund's
liquidity or when the Fund reasonably expects that the interest income to be
earned from the investment of the proceeds is greater than the interest expense
of the transaction.
SECURITIES LENDING
Each Fund may lend its portfolio securities to financial institutions
such as banks and broker/dealers in accordance with the investment limitations
described below. Such loans would involve risks of delay in receiving additional
collateral or in recovering the securities loaned or even loss of rights in the
collateral, should the borrower of the securities fail financially. Any
portfolio securities purchased with cash collateral would also be subject to
possible depreciation. A Fund that loans portfolio securities would continue to
accrue interest on the securities loaned and would also earn income on the
loans. Any cash collateral received by the Funds would be invested in high
quality, short-term money market instruments. Loans will generally be
short-term, will be made only to borrowers deemed by IMC to be of good standing
and only when, in IMC's judgment, the income to be earned from the loan
justifies the attendant risks. The Funds currently intend to limit the lending
of their portfolio securities so that, at any given time, securities loaned by a
Fund represent not more than one-third of the value of its total assets.
INVESTMENT COMPANY SECURITIES
The Funds may invest in securities issued by other investment companies
which invest in high quality, short-term debt securities and which determine
their net asset value per share based on the amortized cost or penny-rounding
method. The International Equity Fund may also purchase shares of investment
companies investing primarily in foreign securities, including so-called
"country funds." Country funds have portfolios consisting primarily of
securities of issuers located in one foreign country.
Such "country funds" may be either open-end or closed-end investment
companies, and may include World Equity Benchmark Shares issued by The Foreign
Fund, Inc. ("WEBS") and similar securities of other issuers. WEBS are shares of
an investment company that invests substantially all of its assets in securities
included in the Morgan Stanley Capital International indices for specific
countries. Because the expense associated with an investment in WEBS can be
substantially lower than the expense of small investments directly in the
securities comprising the indices it seeks to track, the Adviser believes that
investments in WEBS of countries that are included in the MSCI EAFE Index can
provide a cost-effective means of diversifying the Fund's assets across a
broader range of equity securities.
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WEBS are listed on the American Stock Exchange (the "AMEX"), and were
initially offered to the public in 1996. The market prices of WEBS are expected
to fluctuate in accordance with both changes in the net asset values of their
underlying indices and supply and demand of WEBS on the AMEX. To date, WEBS have
traded at relatively modest discounts and premiums to their net asset values.
However, WEBS have a limited operating history, and information is lacking
regarding the actual performance and trading liquidity of WEBS for extended
periods or over complete market cycles. In addition, there is no assurance that
the requirements of the AMEX necessary to maintain the listing of WEBS will
continue to be met or will remain unchanged.
In the event substantial market or other disruptions affecting WEBS
should occur in the future, the liquidity and value of the International Equity
Fund's shares could also be substantially and adversely affected, and the Fund's
ability to provide investment results approximating the performance of
securities in the MSCI EAFE Index could be impaired. If such disruptions were to
occur, the Fund could be required to reconsider the use of WEBS or other
"country funds" as part of its investment strategy.
Investments in other investment companies will cause a Fund (and,
indirectly, the Fund's shareholders) to bear proportionately the costs incurred
in connection with the investment companies' operations. Securities of other
investment companies will be acquired by a Fund within the limits prescribed by
the 1940 Act. Each Fund currently intends to limit its investments so that, as
determined immediately after a securities purchase is made: (a) not more than 5%
of the value of its total assets will be invested in the securities of any one
investment company; (b) not more than 10% of the value of its total assets will
be invested in the aggregate in securities of other investment companies as a
group; (c) not more than 3% of the outstanding voting stock of any one
investment company will be owned by the Fund; and (d) not more than 10% of the
outstanding voting stock of any one closed-end investment company will be owned
in the aggregate by the Fund, other investment portfolios of the Trust, or any
other investment companies advised by IMC.
REITS
The Mid Cap Growth Fund may invest in real estate investment trusts
("REITs"). Equity REITs invest directly in real property while mortgage REITs
invest in mortgages on real property. REITs may be subject to certain risks
associated with the direct ownership of real estate, including declines in the
value of real estate, risks related to general and local economic conditions,
overbuilding and increased competition, increases in property taxes and
operating expenses, and variations in rental income. Generally, increases in
interest rates will decrease the value of high yielding securities and increase
the costs of obtaining financing, which could decrease the value of a REIT's
investments. In addition, equity REITs may be affected by changes in the value
of the underlying property owned by the REITs, while mortgage REITs may be
affected by the quality of credit extended. Equity and mortgage REITs are
dependent upon management skill, are not diversified and are subject to the
risks of financing projects. REITs are also subject to heavy cash flow
dependency, defaults by borrowers, self liquidation and the possibility of
failing to qualify for tax-free pass-through of income under the Internal
Revenue
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Code of 1986, as amended (the "Code"), and to maintain exemption from the 1940
Act. REITs pay dividends to their shareholders based upon available funds from
operations. It is quite common for these dividends to exceed a REIT's taxable
earnings and profits resulting in the excess portion of such dividends being
designated as a return of capital. The Mid Cap Growth Fund intends to include
the gross dividends from any investments in REITs in its periodic distributions
to its shareholders and, accordingly, a portion of the Fund's distributions may
also be designated as a return of capital.
DERIVATIVE SECURITIES
The Funds may from time to time, in accordance with their respective
investment policies, purchase certain "derivative" securities. Derivative
securities are instruments that derive their value from the performance of
underlying assets, interest or currency exchange rates, or indices, and include,
but are not limited to, interest rate futures, put and call options, stock index
futures and options, indexed securities and swap agreements, foreign currency
exchange contracts and certain asset-backed and mortgage-backed securities.
Derivative securities present, to varying degrees, market risk that the
performance of the underlying assets, interest or exchange rates or indices will
decline; credit risk that the dealer or other counterparty to the transaction
will fail to pay its obligations; volatility and leveraging risk that, if
interest or exchange rates change adversely, the value of the derivative
security will decline more than the assets, rates or indices on which it is
based; liquidity risk that a Fund will be unable to sell a derivative security
when it wants to because of lack of market depth or market disruption; pricing
risk that the value of a derivative security will not correlate exactly to the
value of the underlying assets, rates or indices on which it is based; and
operations risk that loss will occur as a result of inadequate systems and
controls, human error or otherwise. Some derivative securities are more complex
than others, and for those instruments that have been developed recently, data
are lacking regarding their actual performance over complete market cycles.
The Adviser will evaluate the risks presented by the derivative
securities purchased by the Funds, and will determine, in connection with their
day-to-day management of the Funds, how such securities will be used in
furtherance of the Funds' investment objectives. It is possible, however, that
IMC's evaluations will prove to be inaccurate or incomplete and, even when
accurate and complete, it is possible that the Funds will, because of the risks
discussed above, incur loss as a result of their investments in derivative
securities.
Put and Call Options. The Funds may purchase put options and call
options on securities and securities indices. A put option gives the buyer the
right to sell, and the writer the obligation to buy, the underlying security at
the stated exercise price at any time prior to the expiration of the option. A
call option gives the buyer the right to buy the underlying security at the
stated exercise price at any time prior to the expiration of the option. Options
involving securities indices provide the holder with the right to make or
receive a cash settlement upon exercise of the option based on movements in the
relevant index. Such options must be listed on a national securities exchange
and issued by the Options Clearing Corporation. Such options may relate to
particular securities or to various stock indexes, except that a Fund may not
write covered call
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options on an index. A Fund may not purchase options unless immediately after
any such transaction the aggregate amount of premiums paid for put or call
options does not exceed 5% of its total assets. Purchasing options is a
specialized investment technique that may entail the risk of a complete loss of
the amounts paid as premiums to the writer of the option.
In order to close out put or call option positions, a Fund will be
required to enter into a "closing purchase transaction" -- the purchase of a put
or call option (depending upon the position being closed out) on the same
security with the same exercise price and expiration date as the option that it
previously wrote. When a portfolio security subject to a call option is sold, a
Fund will effect a closing purchase transaction to close out any existing call
option on that security. If a Fund is unable to effect a closing purchase
transaction, it will not be able to sell the underlying security until the
option expires or a Fund delivers the underlying security upon exercise.
In contrast to an option on a particular security, an option on an
index provides the holder with the right to make or receive a cash settlement
upon exercise of the option. The amount of this settlement will be equal to the
difference between the closing price of the index at the time of exercise and
the exercise price of the option expressed in dollars, times a specified
multiple.
When a Fund purchases a put or call option, the premium paid by it is
recorded as an asset of the Fund. The amount of this asset will be subsequently
marked-to-market to reflect the current value of the option purchased. The
current value of the traded option is the last sale price or, in the absence of
a sale, the average of the closing bid and asked prices. If an option purchased
by a Fund expires unexercised, the Fund realizes a loss equal to the premium
paid. If a Fund enters into a closing sale transaction on an option purchased by
it, the Fund will realize a gain if the premium received by the Fund on the
closing transaction is more than the premium paid to purchase the option, or a
loss if it is less.
There are several risks associated with transactions in options on
securities. For example, there are significant differences between the
securities and options markets which could result in an imperfect correlation
between the 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 national 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, 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; 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 volume; 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. A Fund will likely be unable to
control losses by closing its position where a liquid secondary market does not
exist. Moreover, regardless of how much the market price of the underlying
security
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increases or decreases, the option buyer's risk is limited to the amount of the
original investment for the purchase of the option. However, options may be more
volatile than their underlying securities, and therefore, on a percentage basis,
an investment in options may be subject to greater fluctuation than an
investment in the underlying securities.
A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events.
Covered Call Options. To further increase return on their portfolio
securities, in accordance with their respective investment objectives and
policies, the Funds may engage in writing covered call options (options on
securities owned by a Fund) and may enter into closing purchase transactions
with respect to such options. Such options must be listed on a national
securities exchange and issued by the Options Clearing Corporation. The
aggregate value of the securities subject to options written by the Funds may
not exceed 25% of the value of their respective net assets. By writing a covered
call option, a Fund forgoes the opportunity to profit from an increase in the
market price of the underlying security above the exercise price, except insofar
as the premium represents such a profit. A Fund will not be able to sell the
underlying security until the option expires or is exercised or the Fund effects
a closing purchase transaction by purchasing an option of the same series. Such
options will normally be written on underlying securities as to which the
Adviser does not anticipate significant short-term capital appreciation.
The Funds may write listed covered call options. A listed call option
gives the purchaser of the option the right to buy from a clearing corporation,
and obligates the writer to sell to the clearing corporation, the underlying
security at the stated exercise price at any time prior to the expiration of the
option, regardless of the market price of the security. The premium paid to the
writer is consideration for undertaking the obligations under the option
contract. If an option expires unexercised, the writer realizes a gain in the
amount of the premium. Such a gain may be offset by a decline in the market
price of the underlying security during the option period.
A Fund may terminate its obligation to sell prior to the expiration
date of the option by executing 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 call 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 call option containing different terms on such underlying
security. The cost of such a liquidating purchase plus transaction costs may be
greater than the premium received upon the original option, in which event the
writer will have incurred a loss in the transaction. An option position may be
closed out only on an exchange that provides a secondary market for an option of
the same series. There is no assurance that a liquid secondary market on an
exchange will exist for any particular option. A covered option writer, unable
to effect a closing purchase transaction, will not be able to sell the
underlying security until the option expires or the underlying security is
delivered upon exercise. The writer in such circumstances will be subject to the
risk of market decline of the underlying security during such period. A Fund
will write an option on a particular security only if the Adviser believes that
a
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<PAGE> 49
liquid secondary market will exist on an exchange for options of the same
series, which will permit the Fund to make a closing purchase transaction in
order to close out its position.
When a Fund writes an option, an amount equal to the net premium (the
premium less the commission) received by the Fund is included as a deferred
credit in the liability section of the Fund's statement of assets and
liabilities. The amount of the deferred credit will be subsequently
marked-to-market to reflect the current value of the option written. The current
value of the traded option is the last sale price or, in the absence of a sale
price, the average of the closing bid and asked prices. If an option expires on
the stipulated expiration date or if a 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 is
exercised, the Fund may deliver the underlying security from its portfolio and
purchase the underlying security in the open market. In either event, the
proceeds of the sale will be increased by the net premium originally received,
and the Fund will realize a gain or loss. Premiums from expired call options
written by a Fund and net gains from closing purchase transactions are treated
as short-term capital gains for federal income tax purposes, and losses on
closing purchase transactions are treated as short-term capital losses.
Options on Foreign Stock Indexes -- International Equity Fund. The
International Equity Fund may, for the purpose of hedging its portfolio, subject
to applicable securities regulations purchase and write put and call options on
foreign stock indexes listed on foreign and domestic stock exchanges. A stock
index fluctuates with changes in the market values of the stocks included in the
index. Examples of foreign stock indexes are the Canadian Market Portfolio Index
(Montreal Stock Exchange), The Financial Times -- Stock Exchange 100 (London
Stock Exchange) and the Toronto Stock Exchange Composite 300 (Toronto Stock
Exchange).
Options on stock indexes are generally similar to options on stock
except that the delivery requirements are different. Instead of giving the right
to take or make delivery of stock at a specified price, an option on a stock
index gives the holder the right to receive a cash "exercise settlement amount"
equal to (a) the amount, if any, by which the fixed exercise price of the option
exceeds (in the case of a put) or is less than (in the case of a call) the
closing value of the underlying index on the date of exercise, multiplied by (b)
a fixed "index multiplier." Receipt of this cash amount will depend upon the
closing level of the stock index upon which the option is based being greater
than, in the case of a call, or less than, in the case of a put, the exercise
price of the option. The writer of the option is obligated, in return for the
premium received, to make delivery of this amount. The writer may offset its
position in stock index options prior to expiration by entering into a closing
transaction on an exchange or the option may expire unexercised.
The effectiveness of purchasing or writing stock index options as a
hedging technique will depend upon the extent to which price movements in the
portion of the securities portfolio of the International Equity Fund correlate
with price movements of the stock index selected. Because the value of an index
option depends upon movements in the level of the index rather than the price of
a particular stock, whether the Fund realizes a gain or loss from the purchase
or writing of options on an index is dependent upon movements in the level of
stock prices in the
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stock market generally or, in the case of certain indexes, in an industry or
market segment, rather than movements in the price of a particular stock.
Accordingly, successful use by the Fund of options on stock indexes will be
subject to the Adviser's ability to predict correctly movements in the direction
of the stock market generally or of a particular industry. This requires
different skills and techniques than predicting changes in the price of
individual stocks. There can be no assurance that such judgment will be accurate
or that the use of these portfolio strategies will be successful. The Fund will
engage in stock index options transactions that are determined to be consistent
with its efforts to control risk.
When the Fund writes an option on a stock index, the Fund will
establish a segregated account with its custodian or with a foreign
sub-custodian in which the Fund will deposit cash or other liquid assets in an
amount equal to the market value of the option, and will maintain the account
while the option is open.
Options and Futures Contracts. The Funds may buy and sell options and
futures contracts to manage their exposure to changing interest rates, security
prices and currency exchange rates. The Funds may invest in options and futures
based on any type of security, index, or currency, including options and futures
based on foreign exchanges (see "Options on Foreign Stock Indexes --
International Equity Fund" above) and options not traded on exchanges. Some
options and futures strategies, including selling futures, buying puts, and
writing calls, tend to hedge a Fund's investments against price fluctuations.
Other strategies, including buying futures, writing puts, and buying calls, tend
to increase market exposure. Options and futures may be combined with each other
or with forward contracts in order to adjust the risk and return characteristics
of the overall strategy.
Options and futures can be volatile investments, and involve certain
risks. If the Adviser applies a hedge at an inappropriate time or judges market
conditions incorrectly, options and futures may lower a Fund's individual
return. A Fund could also experience losses if the prices of its options and
futures positions were poorly correlated with its other investments, or if it
could not close out its positions because of an illiquid secondary market.
The Funds will not hedge more than 20% of their respective total assets
by selling futures, buying puts, and writing calls under normal conditions. The
Funds will not buy futures or write puts whose underlying value exceeds 20% of
their respective total assets, and will not buy calls with a value exceeding 5%
of their respective total assets.
Futures Contracts -- Bond Fund. The Bond Fund may enter into contracts
(both purchase and sale) for the future delivery of fixed income securities
commonly known as interest rate futures contracts. The Bond Fund will not engage
in futures transactions for speculation, but only to hedge against changes in
the market values of securities which the Fund holds or intends to purchase. The
Bond Fund will engage in futures transactions only to the extent permitted by
the Commodity Futures Trading Commission ("CFTC") and the SEC. The purchase of
futures instruments in connection with securities which the Fund intends to
purchase will require an amount of cash or other liquid assets, equal to the
market value of the outstanding futures contracts, to be deposited in a
segregated account to collateralize the position and thereby insure that the use
of such futures is unleveraged. The Bond Fund will limit its hedging
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transactions in futures contracts so that, immediately after any such
transaction, the aggregate initial margin that is required to be posted by the
Fund under the rules of the exchange on which the futures contract is traded
does not exceed 5% of the Fund's total assets after taking into account any
unrealized profits and unrealized losses on the Fund's open contracts. In
addition, no more than one-third of the Bond Fund's total assets may be covered
by such contracts.
Transactions in futures as a hedging device may subject the Bond Fund
to a number of risks. Successful use of futures by the Bond Fund is subject to
the ability of the Adviser to predict correctly movements in the direction of
the market. In addition, there may be an imperfect correlation, or no
correlation at all, between movements in the price of futures contracts and
movements in the price of the instruments being hedged. There is no assurance
that a liquid market will exist for any particular futures contract at any
particular time. Consequently, the Bond Fund may realize a loss on a futures
transaction that is not offset by a favorable movement in the price of
securities which it holds or intends to purchase or may be unable to close a
futures position in the event of adverse price movements. Any income from
investments in futures contracts will be taxable. Additional information
concerning futures transactions, including special rules regarding the taxation
of such transactions, is contained in Appendix B.
Stock Index Futures, Swap Agreements, Indexed Securities and Options.
The Funds may utilize stock index futures contracts, options, swap agreements,
indexed securities, and options on futures contracts for the purposes of
managing cash flows into and out of their respective portfolios and potentially
reducing transaction costs, subject to the limitation that the value of these
futures contracts, swap agreements, indexed securities, and options will not
exceed 20% of the Funds' respective total assets. The Funds will not purchase
options to the extent that more than 5% of the value of their respective total
assets would be invested in premiums on open put option positions. In addition,
the Funds do not intend to invest more than 5% of the market value of their
respective total assets in each of the following: futures contracts, swap
agreements, and indexed securities. When a Fund enters into a swap agreement,
liquid assets of the Fund equal to the value of the swap agreement will be
segregated by that Fund. The Funds may not use stock index futures contracts and
options for speculative purposes.
There are several risks accompanying the utilization of futures
contracts. Positions in futures contracts may be closed only on an exchange or
board of trade that furnishes a secondary market for such contracts. While the
Funds plan to utilize futures contracts only if there exists an active market
for such contracts, there is no guarantee that a liquid market will exist for
the contracts at a specified time. Furthermore, because by definition, futures
contracts look to projected price levels in the future and not to current levels
of valuation, market circumstances may result in there being a discrepancy
between the price of the stock index future and the movement in the
corresponding stock index. The absence of a perfect price correlation between
the futures contract and its underlying stock index could stem from investors
choosing to close futures contracts by offsetting transactions, rather than
satisfying additional margin requirements. This could result in a distortion of
the relationship between the index and the futures market. In addition, because
the futures market imposes less burdensome margin requirements than the
securities market, an increased amount of participation by speculators in the
futures market could result in price fluctuations.
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As a means of reducing fluctuations in the net asset value of shares of
the Funds, the Funds (except for the Bond Fund) may attempt to hedge all or a
portion of their respective portfolios through the purchase of listed put
options on stocks, stock indices and stock index futures contracts. These
options will be used as a form of forward pricing to protect portfolio
securities against decreases in value resulting from market factors, such as an
anticipated increase in interest rates. A purchased put option gives a Fund, in
return for a premium, the right to sell the underlying security to the writer
(seller) at a specified price during the term of the option. Put options on
stock indices are similar to put options on stocks except for the delivery
requirements. Instead of giving a Fund the right to make delivery of stock at a
specified price, a put option on a stock index gives the Fund, as holder, the
right to receive an amount of cash upon exercise of the option.
The Funds may also write covered call options. As the writer of a call
option, a Fund has the obligation upon exercise of the option during the option
period to deliver the underlying security upon payment of the exercise price.
The Funds may only: (1) buy listed put options on stock indices and
stock index futures contracts; (2) buy listed put options on securities held in
their respective portfolios; and (3) sell listed call options either on
securities held in their respective portfolios or on securities which they have
the right to obtain without payment of further consideration (or have segregated
cash in the amount of any such additional consideration). A Fund will maintain
its positions in securities, option rights, and segregated cash subject to puts
and calls until the options are exercised, closed or expired. A Fund (except for
the Bond Fund) may also enter into stock index futures contracts. A stock index
futures contract is a bilateral agreement which obligates the seller to deliver
(and the purchaser to take delivery of) an amount of cash equal to a specific
dollar amount times the difference between the value of a specific stock index
at the close of trading of the contract and the price at which the agreement is
originally made. There is no physical delivery of the stocks constituting the
index, and no price is paid upon entering into a futures contract.
In general, option contracts are closed out prior to their expiration.
A Fund, when purchasing or selling a futures contract, will initially be
required to deposit in a segregated account in the broker's name with the Fund's
custodian an amount of cash or liquid portfolio securities approximately equal
to 5% - 10% of the contract value. This amount is known as "initial margin," and
it is subject to change by the exchange or board of trade on which the contract
is traded. Subsequent payments to and from the broker are made on a daily basis
as the price of the index or the securities underlying the futures contract
fluctuates. These payments are known as "variation margins," and the fluctuation
in value of the long and short positions in the futures contract is a process
referred to as "marking to market." A Fund may decide to close its position on a
contract at any time prior to the contract's expiration. This is accomplished by
the Fund taking an opposite position at the then prevailing price, thereby
terminating its existing position in the contract. Because the initial margin
resembles a performance bond or good-faith deposit on the contract, it is
returned to the Fund upon the termination of the contract, assuming that all
contractual obligations have been satisfied. Therefore, the margin utilized in
futures contracts is readily distinguishable from the margin employed in
security transactions, since the
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margin employed in futures contracts does not involve the borrowing of funds to
finance the transaction.
None of the Funds will enter into futures contracts if, immediately
thereafter, the sum of its initial margin deposits on open contracts exceed 5%
of the market value of its total assets. Further, a Fund will enter into stock
index futures contracts only for bona fide hedging purposes or such other
purposes permitted under Part 4 of the regulations promulgated by the Commodity
Futures Trading Commission. Also, a Fund may not enter into stock index futures
contracts and options to the extent that the value of such contracts would
exceed 20% of the Fund's total net assets and may not purchase put options to
the extent that more than 5% of the value of the Fund's total assets would be
invested in premiums on open put option positions.
The Funds may invest in indexed securities whose value is linked to
foreign currencies, interest rates, commodities, indices or other financial
indicators. Most indexed securities are short- to intermediate-term fixed income
securities whose values at maturity or interest rates rise or fall according to
the change in one or more specified underlying instruments. Indexed securities
may be positively or negatively indexed (i.e., their value may increase or
decrease if the underlying instrument appreciates), and may have return
characteristics similar to direct investments in the underlying instrument or to
one or more options on the underlying instrument. Indexed securities may be more
volatile than the underlying instrument itself.
As one way of managing their exposure to different types of
investments, the Balanced Allocation and Bond Funds may enter into interest rate
swaps, currency swaps, and other types of swap agreements such as caps, collars,
and floors. In a typical interest rate swap, one party agrees to make regular
payments equal to a floating interest rate times a "notional principal amount,"
in return for payments equal to a fixed rate times the same amount, for a
specified period of time. If a swap agreement provides for payments in different
currencies, the parties might agree to exchange notional principal amount as
well. Swaps may also depend on other prices or rates, such as the value of an
index or mortgage prepayment rates.
In a typical cap or floor agreement, one party agrees to make payments
only under specified circumstances, usually in return for payment of a fee by
the other party. For example, the buyer of an interest rate cap obtains the
right to receive payments to the extent that a specified interest rate exceeds
an agreed upon level, while the seller of an interest rate floor is obligated to
make payments to the extent that a specified interest rate falls below an agreed
upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
Swap agreements will tend to shift a Fund's investment exposure from
one type of investment to another. For example, if a Fund agreed to exchange
payments in dollars for payments in foreign currency, the swap agreement would
tend to decrease the Fund's exposure to U.S. interest rates and increase its
exposure to foreign currency and interest rates. Caps and floors have an effect
similar to buying or writing options. Depending on how they are used, swap
agreements may increase or decrease the overall volatility of a Fund's
investments and its share price and yield.
Swap agreements are sophisticated hedging instruments that typically
involve a small investment of cash relative to the magnitude of risks assumed.
As a result, swaps can be highly volatile and may have a considerable impact on
the Funds' performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Funds may also suffer losses
if they are unable to terminate outstanding swap agreements or reduce their
exposure through offsetting transactions.
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Foreign Currency Exchange Transactions. Because the Funds (except for
the Bond Fund) may buy and sell securities denominated in currencies other than
the U.S. dollar, and may receive interest, dividends and sale proceeds in
currencies other than the U.S. dollar, the Funds from time to time may enter
into foreign currency exchange transactions to convert the U.S. dollar to
foreign currencies, to convert foreign currencies to the U.S. dollar and to
convert foreign currencies to other foreign currencies. A Fund either enters
into these transactions on a spot (i.e., cash) basis at the spot rate prevailing
in the foreign currency exchange market, or uses forward contracts to purchase
or sell foreign currencies. Forward foreign currency exchange contracts are
agreements to exchange one currency for another -- for example, to exchange a
certain amount of U.S. dollars for a certain amount of Japanese yen -- at a
future date, which may be any fixed number of days from the date of the
contract, and at a specified price. Typically, the other party to a currency
exchange contract will be a commercial bank or other financial institution. A
forward foreign currency exchange contract generally has no deposit requirement
and is traded at a net price without commission. Neither spot transactions nor
forward foreign currency exchange contracts eliminate fluctuations in the prices
of a Fund's portfolio securities or in foreign exchange rates, or prevent loss
if the prices of these securities should decline.
Forward foreign currency exchange contracts also allow the Funds
(except for the Bond Fund) to hedge the currency risk of portfolio securities
denominated in a foreign currency. This technique permits the assessment of the
merits of a security to be considered separately from the currency risk. By
separating the asset and the currency decision, it is possible to focus on the
opportunities presented by the security apart from the currency risk. Although
forward foreign currency exchange contracts are of short duration, generally
between one and twelve months, such contracts are rolled over in a manner
consistent with a more long-term currency decision. Because there is a risk of
loss to a Fund if the other party does not complete the transaction, forward
foreign currency exchange contracts will be entered into only with parties
approved by the Board of Trustees.
A Fund (except for the Bond Fund) may maintain "short" positions in
forward foreign currency exchange transactions, which would involve the Fund's
agreeing to exchange currency that it currently does not own for another
currency -- for example, to exchange an amount of Japanese yen that it does not
own for a certain amount of U.S. dollars -- at a future date and at a specified
price in anticipation of a decline in the value of the currency sold short
relative to the currency that the Fund has contracted to receive in the
exchange. In order to ensure that the short position is not used to achieve
leverage with respect to the Fund's investments, the Fund will establish with
its custodian a segregated account consisting of cash or other liquid assets
equal in value to the fluctuating market value of the currency as to which the
short position is being
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maintained. The value of the securities in the segregated account will be
adjusted at least daily to reflect changes in the market value of the short
position.
Forward foreign currency exchange contracts establish an exchange rate
at a future date. These contracts are transferable in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. A forward foreign currency exchange contract generally has no
deposit requirement and is traded at a net price without commission. Neither
spot transactions nor forward foreign currency exchange contracts eliminate
fluctuations in the prices of a Fund's portfolio securities or in foreign
exchange rates, or prevent loss if the prices of these securities should
decline.
The Funds (except for the Bond Fund) may enter into foreign currency
hedging transactions in an attempt to protect against changes in foreign
currency exchange rates between the trade and settlement dates of specific
securities transactions or changes in foreign currency exchange rates that would
adversely affect a portfolio position or an anticipated portfolio position.
Since consideration of the prospect for currency parities will be incorporated
into a Fund's long-term investment decisions, the Funds will not routinely enter
into foreign currency hedging transactions with respect to portfolio security
transactions; however, it is important to have the flexibility to enter into
foreign currency hedging transactions when it is determined that the
transactions would be in the Fund's best interest. Although these transactions
tend to minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time they tend to limit any potential gain that might be
realized should the value of the hedged currency increase. The precise matching
of the forward contract amounts and the value of the securities involved will
not generally be possible because the future value of these securities in
foreign currencies will change as a consequence of market movements in the value
of those securities between the date the forward contract is entered into and
the date it matures. The projection of currency market movements is extremely
difficult, and the successful execution of a hedging strategy is highly
uncertain.
FOREIGN SECURITIES
Investments by the Funds (except for the Bond Fund) in foreign
securities may involve higher costs than investments in U.S. securities,
including higher transaction costs, as well as the imposition of additional
taxes by foreign governments. In addition, foreign investments may include
additional risks associated with currency exchange rates, less complete
financial information about the issuers, less market liquidity, and political
instability. Future political and economic developments, the possible imposition
of withholding taxes on interest income, the possible seizure or nationalization
of foreign holdings, the possible establishment of exchange controls, or the
adoption of other governmental restrictions, might adversely affect the payment
of dividends or principal and interest on foreign obligations.
Although the Funds (except for the Bond Fund) may invest in securities
denominated in foreign currencies, the Funds value their securities and other
assets in U.S. dollars. As a result, the net asset value of a Fund's shares may
fluctuate with U.S. dollar exchange rates as well as with price changes of the
Fund's securities in the various local markets and currencies. Thus, an increase
in the value of the U.S. dollar compared to the currencies in which the Fund
makes its
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foreign investments could reduce the effect of increases and magnify the effect
of decreases in the price of the Fund's securities in their local markets.
Conversely, a decrease in the value of the U.S. dollar will have the opposite
effect of magnifying the effect of increases and reducing the effect of
decreases in the prices of the Funds' securities in their local markets. In
addition to favorable and unfavorable currency exchange rate developments, the
Funds are subject to the possible imposition of exchange control regulations or
freezes on convertibility of currency.
Many European countries have adopted a single European currency, the
euro. On January 1, 1999, the euro became legal tender for all countries
participating in the Economic and Monetary Union ("EMU"). A new European Central
Bank has been created to manage the monetary policy of the new unified region.
On the same date, the exchange rates were irrevocably fixed between the EMU
member countries. National currencies will continue to circulate until they are
replaced by euro coins and bank notes by the middle of 2002.
This change is likely to significantly impact the European capital
markets in which the International Equity Fund invests and may result in the
Fund facing additional risks in pursuing its investment objective. These risks,
which include, but are not limited to, uncertainty as to the proper tax
treatment of the currency conversion, volatility of currency exchange rates as a
result of the conversion, uncertainty as to capital market reaction, conversion
costs that may affect issuer profitability and creditworthiness, and lack of
participation by some European countries, may increase the volatility of the
Fund's net asset value per share.
AMERICAN, EUROPEAN AND GLOBAL DEPOSITORY RECEIPTS
Each Fund (except for the Bond Fund) may invest in ADRs, EDRs and GDRs.
ADRs are receipts issued in registered form by a U.S. bank or trust company
evidencing ownership of underlying securities issued by a foreign issuer. EDRs
are receipts issued in Europe typically by non-U.S. banks or trust companies and
foreign branches of U.S. banks that evidence ownership of foreign or U.S.
securities. GDRs are receipts structured similarly to EDRs and are marketed
globally. The Mid Cap Growth Fund may also invest in MidCap SPDRs. SPDRs are
receipts designed to replicate the performance of the S&P 500 Composite Index.
MidCap SPDRs represent ownership in the MidCap SPDR Trust, a unit investment
trust which holds a portfolio of common stocks that closely tracks the price
performance and dividend yield of the S&P MidCap 400 Index. ADRs may be listed
on a national securities exchange or may be traded in the over-the-counter
market. EDRs are designed for use in European exchange and over-the-counter
markets. GDRs are designed for trading in non-U.S. securities markets. ADRs,
EDRs and GDRs traded in the over-the-counter market which do not have an active
or substantial secondary market will be considered illiquid and therefore will
be subject to the Funds' 15% limitation with respect to such securities. If a
Fund invests in an unsponsored ADR, EDR or GDR, there may be less information
available to the Fund concerning the issuer of the securities underlying the
unsponsored ADR, EDR or GDR than is available for an issuer of securities
underlying a sponsored ADR, EDR or GDR. ADR prices are denominated in U.S.
dollars although the underlying securities are denominated in a foreign
currency. Investments in ADRs, EDRs and GDRs involve risks similar to those
accompanying direct investments in foreign securities.
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ASSET-BACKED SECURITIES
The Balanced Allocation and Bond Funds may purchase asset-backed
securities, which represent a participation in, or are secured by and payable
from, a stream of payments generated by particular assets, most often a pool of
assets similar to one another. Assets generating such payments will consist of
such instruments as motor vehicle installment purchase obligations, credit card
receivables and home equity loans. Payment of principal and interest may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit issued by a financial institution unaffiliated with entities issuing the
securities. The estimated life of an asset-backed security varies with the
prepayment experience with respect to the underlying debt instruments. The rate
of such prepayments, and hence the life of the asset-backed security, will be
primarily a function of current market rates, although other economic and
demographic factors will be involved.
Asset-backed securities are generally issued as pass-through
certificates, which represent undivided fractional ownership interests in an
underlying pool of assets, or as debt instruments, which are also known as
collateralized obligations, and are generally issued as the debt of a special
purpose entity organized solely for the purpose of owning such assets and
issuing such debt. Asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties.
The yield characteristics of asset-backed securities differ from
traditional debt securities. A major difference is that the principal amount of
the obligations may be prepaid at any time because the underlying assets (i.e.,
loans) generally may be prepaid at any time. As a result, if an asset-backed
security is purchased at a premium, a prepayment rate that is faster than
expected will reduce yield to maturity, while a prepayment rate that is slower
than expected will have the opposite effect of increasing yield to maturity.
Conversely, if an asset-backed security is purchased at a discount, faster than
expected prepayments will increase, while slower than expected prepayments will
decrease, yield to maturity.
Prepayments on asset-backed securities generally increase with falling
interest rates and decrease with rising interest rates; furthermore prepayment
rates are influenced by a variety of economic and social factors. In general,
the collateral supporting non-mortgage asset-backed securities is of shorter
maturity than mortgage loans and is less likely to experience substantial
prepayments. Like other fixed income securities, when interest rates rise, the
value of an asset-backed security generally will decline; however, when interest
rates decline, the value of an asset-backed security with prepayment features
may not increase as much as that of other fixed income securities.
Asset-backed securities are subject to greater risk of default during
periods of economic downturn. Also, the secondary market for certain
asset-backed securities may not be as liquid as the market for other types of
securities, which could result in a Fund's experiencing difficulty in valuing or
liquidating such securities. For these reasons, under certain circumstances,
asset-backed securities may be considered illiquid securities.
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MORTGAGE-BACKED SECURITIES
The Balanced Allocation and Bond Funds may invest in mortgage-backed
securities (including collateralized mortgage obligations) that represent pools
of mortgage loans assembled for sale to investors by various governmental
agencies and government-related organizations, such as the Government National
Mortgage Association, the Federal National Mortgage Association, and the Federal
Home Loan Mortgage Corporation. Mortgage-backed securities provide a monthly
payment consisting of interest and principal payments. Additional payment may be
made out of unscheduled repayments of principal resulting from the sale of the
underlying residential property, refinancing or foreclosure, net of fees or
costs that may be incurred. Prepayments of principal on mortgage-backed
securities may tend to increase due to refinancing of mortgages as interest
rates decline. To the extent that a Fund purchases mortgage-backed securities at
a premium, mortgage foreclosures and prepayments of principal by mortgagors
(which may be made at any time without penalty) may result in some loss of the
Fund's principal investment to the extent of the premium paid. The yield of a
Fund, should it invest in mortgage-backed securities, may be affected by
reinvestment of prepayments at higher or lower rates than the original
investment.
Other mortgage-backed securities are issued by private issuers,
generally originators of and investors in mortgage loans, including savings
associations, mortgage bankers, commercial banks, investment bankers, and
special purpose entities. These private mortgage-backed securities may be
supported by U.S. Government mortgage-backed securities or some form of
non-government credit enhancement. Mortgage-backed securities have either fixed
or adjustable interest rates. The rate of return on mortgage-backed securities
may be affected by prepayments of principal on the underlying loans, which
generally increase as interest rates decline; as a result, when interest rates
decline, holders of these securities normally do not benefit from appreciation
in market value to the same extent as holders of other non-callable debt
securities. In addition, like other debt securities, the value of
mortgage-related securities, including government and government-related
mortgage pools, generally will fluctuate in response to market interest rates.
CONVERTIBLE SECURITIES
The Funds may from time to time, in accordance with their respective
investment policies, invest in convertible securities. Convertible securities
are fixed income securities which may be exchanged or converted into a
predetermined number of shares of the issuer's underlying common stock at the
option of the holder during a specified time period. Convertible securities may
take the form of convertible preferred stock, convertible bonds or debentures,
units consisting of "usable" bonds and warrants or a combination of the features
of several of these securities.
Convertible bonds and convertible preferred stocks generally retain the
investment characteristics of fixed income securities until they have been
converted but also react to movements in the underlying equity securities. The
holder is entitled to receive the fixed income of a bond or the dividend
preference of a preferred stock until the holder elects to exercise the
conversion privilege. Usable bonds are corporate bonds that can be used in whole
or in part,
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customarily at full face value, in lieu of cash to purchase the issuer's common
stock. When owned as part of a unit along with warrants, which are options to
buy the common stock, they function as convertible bonds, except that the
warrants generally will expire before the bond's maturity. Convertible
securities are senior to equity securities and therefore have a claim to the
assets of the issuer prior to the holders of common stock in the case of
liquidation. However, convertible securities are generally subordinated to
similar non-convertible securities of the same issuer. The interest income and
dividends from convertible bonds and preferred stocks provide a stable stream of
income with generally higher yields than common stocks, but lower than
non-convertible securities of similar quality. A Fund will exchange or convert
the convertible securities held in its portfolio into shares of the underlying
common stock in instances in which, in the Adviser's opinion, the investment
characteristics of the underlying common shares will assist the Fund in
achieving its investment objective. Otherwise, a Fund will hold or trade the
convertible securities. In selecting convertible securities for a Fund, the
Adviser evaluates the investment characteristics of the convertible security as
a fixed income instrument, and the investment potential of the underlying equity
security for capital appreciation. In evaluating these matters with respect to a
particular convertible security, the Adviser considers numerous factors,
including the economic and political outlook, the value of the security relative
to other investment alternatives, trends in the determinants of the issuer's
profits, and the issuer's management capability and practices.
WHEN-ISSUED, FORWARD COMMITMENT AND DELAYED SETTLEMENT TRANSACTIONS
The Funds may purchase eligible securities on a "when-issued" basis,
and may purchase or sell securities on a "forward commitment" basis. The Funds
may also purchase eligible securities on a "delayed settlement" basis.
When-issued and forward commitment transactions, which involve a commitment by a
Fund to purchase or sell particular securities with payment and delivery taking
place at a future date (perhaps one or two months later), permit the Fund to
lock in a price or yield on a security it owns or intends to purchase,
regardless of future changes in interest rates. Delayed settlement describes
settlement of a securities transaction in the secondary market which will occur
sometime in the future. When-issued, forward commitment and delayed settlement
transactions involve the risk, however, that the yield or price obtained in a
transaction may be less favorable than the yield or price available in the
market when the securities delivery takes place. It is expected that forward
commitments, when-issued purchases and delayed settlements will not exceed 25%
of the value of a Fund's total assets absent unusual market conditions. In the
event a Fund's forward commitments, when-issued purchases and delayed
settlements ever exceeded 25% of the value of its total assets, the Fund's
liquidity and the ability of IMC to manage the Fund might be adversely affected.
The Funds do not intend to engage in when-issued purchases, forward commitments
and delayed settlements for speculative purposes, but only in furtherance of
their investment objectives.
A Fund may dispose of a commitment prior to settlement if the Adviser
deems it appropriate to do so. In addition, a Fund may enter into transactions
to sell its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Funds may realize short-term profits or losses upon the sale of such
commitments.
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<PAGE> 60
When a Fund agrees to purchase securities on a when-issued, forward
commitment or delayed settlement basis, the Fund's custodian will set aside cash
or liquid portfolio securities equal to the amount of the commitment in a
separate account. In the event of a decline in the value of the securities that
the custodian has set aside, the Fund may be required 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. A Fund's net assets may fluctuate
to a greater degree if it sets aside portfolio securities to cover such purchase
commitments than if it sets aside cash. Because a Fund sets aside liquid assets
to satisfy its purchase commitments in the manner described, its liquidity and
ability to manage its portfolio might be adversely affected in the event its
forward commitments, when-issued purchases or delayed settlements exceeded 25%
of the value of its assets.
When a Fund engages in when-issued, forward commitment or delayed
settlement 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 for a
security. For purposes of determining the average weighted maturity of a Fund's
portfolio, the maturity of when-issued securities is calculated from the date of
settlement of the purchase to the maturity date.
GUARANTEED INVESTMENT CONTRACTS
Each Fund may invest in guaranteed investment contracts ("GICs") issued
by U.S. and Canadian insurance companies. Pursuant to GICs, a Fund makes cash
contributions to a deposit fund of the insurance company's general account. The
insurance company then credits to the Fund payments at negotiated, floating or
fixed interest rates. A GIC is a general obligation of the issuing insurance
company and not a separate account. The purchase price paid for a GIC becomes
part of the general assets of the insurance company, and the contract is paid
from the company's general assets. The Funds will only purchase GICs that are
issued or guaranteed by insurance companies that at the time of purchase are
rated at least AA by S&P or receive a similar high quality rating from a
nationally recognized service which provides ratings of insurance companies.
GICs are considered illiquid securities and will be subject to the Funds' 15%
limitation on such investments, unless there is an active and substantial
secondary market for the particular instrument and market quotations are readily
available.
RESTRICTED AND ILLIQUID SECURITIES
Each Fund may invest in commercial paper issued in reliance on the
exemption from registration afforded by Section 4(2) of the Securities Act of
1933, as amended (the "1933 Act"). Section 4(2) commercial paper is restricted
as to disposition under federal securities law and is generally sold to
institutional investors, such as the Funds, who agree that they are purchasing
the paper for investment purposes and not with a view to public distribution.
Any resale by the purchaser must be in an exempt transaction. Section 4(2)
commercial paper is normally resold to other institutional investors like the
Funds through or with the assistance of the issuer or investment dealers who
make a market in Section 4(2) commercial paper, thus providing liquidity. The
Funds believe that Section 4(2) commercial paper and possibly certain other
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<PAGE> 61
restricted securities that meet the criteria for liquidity established by the
Board of Trustees are quite liquid. The Funds intend, therefore, to treat the
restricted securities that meet the criteria for liquidity established by the
Board of Trustees, including Section 4(2) commercial paper (as determined by the
Adviser), as liquid and not subject to the investment limitation applicable to
illiquid securities. In addition, because Section 4(2) commercial paper is
liquid, the Funds do not intend to subject such paper to the limitation
applicable to restricted securities.
Rule 144A under the 1933 Act allows for a broader institutional trading
market for securities otherwise subject to restrictions on resale to the general
public. Rule 144A establishes a "safe harbor" from the registration requirements
of the 1933 Act for resales of certain securities to qualified institutional
buyers. A Fund's investment in Rule 144A securities could have the effect of
increasing the level of illiquidity of the Fund during any period that qualified
institutional buyers were no longer interested in purchasing these securities.
For purposes of each Fund's 15% limitation on purchases of illiquid instruments,
Rule 144A securities will not be considered to be illiquid if the Adviser has
determined, in accordance with guidelines established by the Board of Trustees,
that an adequate trading market exists for such securities.
WARRANTS
Each of the Funds 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.
U.S. TREASURY OBLIGATIONS AND RECEIPTS
The Funds may invest in obligations issued or guaranteed by the U.S.
government or its agencies. The Fund may invest in U.S. Treasury obligations
consisting of bills, notes and bonds issued by the U.S. Treasury, and separately
traded interest and principal component parts of such obligations that are
transferable through the Federal book-entry system known as STRIPS (Separately
Traded Registered Interest and Principal Securities).
The Funds may invest in separately traded interest and principal
component parts of the U.S. Treasury obligations that are issued by banks or
brokerage firms and are created by depositing U.S. Treasury obligations into a
special account at a custodian bank. The custodian holds the interest and
principal payments for the benefit of the registered owners of the certificates
of receipts. The custodian arranges for the issuance of the certificates or
receipts evidencing ownership and maintains the register. Receipts include
Treasury Receipts (TRs), Treasury Investment Growth Receipts (TIGRs), Liquid
Yield Option Notes (LYONs), and Certificates of Accrual on Treasury Securities
(CATS). TIGRs, LYONs and CATS are interests in private proprietary accounts
while TR's are interests in accounts sponsored by the U.S. Treasury.
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<PAGE> 62
Securities denominated as TRs, TIGRs, LYONs and CATS are sold as zero
coupon securities which means that they are sold at a substantial discount and
redeemed at face value at their maturity date without interim cash payments of
interest or principal. This discount is accreted over the life of the security,
and such accretion will constitute the income earned on the security for both
accounting and tax purposes. Because of these features, such securities may be
subject to greater interest rate volatility than interest paying investments.
SHORT SALES
The Funds may engage in short sales of its securities. Selling
securities short involves selling securities the seller does not own (but has
borrowed) in anticipation of a decline in the market price of such securities.
To deliver the securities to the buyer, the seller must arrange through a broker
to borrow the securities and, in so doing, the seller becomes obligated to
replace the securities borrowed at their market price at the time of
replacement. In a short sale, the proceeds the seller receives from the sale are
retained by a broker until the seller replaces the borrowed securities. The
seller may have to pay a premium to borrow the securities and must pay any
dividends or interest payable on the securities until they are replaced.
PORTFOLIO TURNOVER
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.
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.
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
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<PAGE> 63
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.
4. Purchase any securities which would cause 25% or more of the value
of its total assets at the time of purchase to be invested in the securities of
one or more issuers conducting their principal business activities in the same
industry, provided that:
(a) there is no limitation with respect to obligations issued
or guaranteed by the U.S. government, any state, territory or
possession of the United States, the District of Columbia or any of
their authorities, agencies, instrumentalities or political
subdivisions, and repurchase agreements secured by such instruments;
(b) wholly-owned finance companies will be considered to be in
the industries of their parents if their activities are primarily
related to financing the activities of the parents;
(c) utilities will be divided according to their services, for
example, gas, gas transmission, electric and gas, electric, and
telephone will each be considered a separate industry; and
(d) personal credit and business credit businesses will be
considered separate industries.
5. Purchase securities of any one issuer, other than securities issued
or guaranteed by the U.S. government or its agencies or instrumentalities, if,
immediately after such purchase, more than 5% of the value of the Fund's total
assets would be invested in such issuer or the Fund would hold more than 10% of
any class of securities of the issuer or more than 10% of the outstanding voting
securities of the issuer, except that up to 25% of the value of the Fund's total
assets may be invested without regard to such limitations.
6. Make loans, except that a Fund may purchase and hold debt
instruments and enter into repurchase agreements in accordance with its
investment objective and policies and may lend portfolio securities in an amount
not exceeding one-third of its total assets.
7. Borrow money, issue senior securities or mortgage, pledge or
hypothecate its assets except to the extent permitted under the 1940 Act.
For purposes of the above investment limitations, the Funds treat all
supranational organizations as a single industry and each foreign government
(and all of its agencies) as a separate industry. In addition, a security is
considered to be issued by the government entity (or entities) whose assets and
revenues back the security.
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<PAGE> 64
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.
5. Invest more than 15% of its net assets in illiquid securities.
6. Purchase securities while its outstanding borrowings 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 times stated 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 Bond and Balanced Allocation Funds, 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,
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<PAGE> 65
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 Equity Growth, International Equity, Mid Cap Growth
and Small Cap Growth Funds, and the equity securities of the 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 Trust. In determining market value, the International
Equity Fund's portfolio securities which are primarily traded on a domestic
exchange are valued at the last sale price on that exchange or, if there is no
recent sale, at the last current bid quotation. Portfolio securities which are
primarily traded on foreign securities exchanges are generally valued at the
preceding closing values of such securities on their respective exchanges,
except when an occurrence subsequent to the time a value was so established is
likely to have changed such value, then the fair value of those securities may
be determined through consideration of other factors by or under the direction
of the Board of Trustees. A security which is listed or traded on more than one
exchange is valued at the quotation on the exchange determined to be the primary
market for such security. For valuation purposes, quotations of foreign
securities in foreign currency are converted to U.S. dollars equivalent at the
prevailing market rate on the day of valuation. An option is generally valued at
the last sale price or, in the absence of a last sale price, the last offer
price. Certain of the securities acquired by the International Equity Fund may
be traded on foreign exchanges or over-the-counter markets on days on which the
Fund's net asset value is not calculated. In such cases, the net asset value of
the Fund's shares may be significantly affected on days when investors can
neither purchase nor redeem shares of the Fund. Portfolio securities with a
remaining maturity of 60 days or less may 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 Trust.
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.
The Trust may suspend the right of redemption or postpone the date of
payment for shares during a period when: (a) trading on the NYSE is restricted
by applicable rules and regulations of the SEC; (b) the NYSE is closed for other
than customary weekend and holiday closings; (c) the SEC has by order permitted
such suspensions; or (d) an emergency exists as a result of which: (i) disposal
by the Trust of securities owned by it is not reasonably practicable, or (ii) it
is not reasonably practicable for the Trust to determine the fair market value
of its net assets.
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<PAGE> 66
MANAGEMENT OF THE TRUST
The trustees and executive officers of the Trust, their addresses, age
and their principal occupations during the past 5 years are as follows:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- ------------ ----------------------
<S> <C> <C>
Robert D. Neary Chairman of the Board and Trustee Retired Co-Chairman of Ernst & Young,
32980 Creekside Drive April 1984 to September 1993; Director,
Pepper Pike, OH 44124 Cold Metal Products, Inc., since March
Age 66 1994; Director, Strategic Distribution,
Inc., since January 1999. Trustee,
Parkstone Group of Funds and Armada
Funds.
Herbert R. Martens, Jr.* President and Trustee Executive Vice President, National City
c/o NatCity Investments, Inc. Corporation (bank holding company),
1965 East Sixth Street since July 1997; Chairman, President and
Cleveland, OH 44114 Chief Executive Officer, NatCity
Age 47 Investments, Inc. (investment banking),
since July 1995; President and Chief
Executive Officer, Raffensberger, Hughes
& Co. (broker-dealer) from 1993 until
1995; President, Reserve Capital Group,
from 1990 until 1993. Trustee,
Parkstone Group of Funds and Armada
Funds.
Leigh Carter* Trustee Retired President and Chief Operating
13901 Shaker Blvd., #6B Officer, B.F. Goodrich Company, August
Cleveland, OH 44120 1986 to September 1990; Director, Adams
Age 74 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. Trustee, Parkstone Group
of Funds and Armada Funds.
</TABLE>
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<PAGE> 67
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- ------------ ----------------------
<S> <C> <C>
John F. Durkott Trustee President and Chief Operating Officer,
8600 Allisonville Road Kittle's Home Furnishings Center, Inc.,
Indianapolis, IN 46250 since January 1982; partner, Kittle's
Age 55 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.). Trustee, Parkstone Group of
Funds and Armada Funds.
Robert J. Farling Trustee Retired Chairman, President and Chief
1608 Balmoral Way Executive Officer, Centerior Energy
Westlake, OH 44145 (electric utility), March 1992 to
Age 63 October 1997; Director, National City
Bank until October 1997; Director,
Republic Engineered Steels, October 1997
to September 1998. Trustee, Parkstone
Group of Funds and Armada Funds.
Richard W. Furst Trustee Garvice D. Kincaid Professor of Finance
2133 Rothbury Road and Dean, Gatton College of Business and
Lexington, KY 40515 Economics, University of Kentucky, since
Age 61 1981; Director, The Seed Corporation
(restaurant group), since 1990;
Director; Foam Design, Inc.,
(manufacturer of industrial and
commercial foam products), since 1993;
Director, Office Suites Plus, Inc.
(office buildings) since 1998; Director,
ihigh.com, Inc., (Internet company)
since 1999; Trustee, Parkstone Group of
Funds and Armada Funds.
Gerald L. Gherlein Trustee Retired. Executive Vice-President and
109 Goldeneye General Counsel, Eaton Corporation
Kiawah Island, SC 29455 (global manufacturing) from 1991 to
Age 62 February 2000. Trustee, WVIZ
Educational Television (public
television). Trustee, Parkstone Group
of Funds and Armada Funds.
</TABLE>
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<PAGE> 68
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
POSITION WITH DURING PAST 5 YEARS
NAME AND ADDRESS THE TRUST AND OTHER AFFILIATIONS
- ---------------- ------------ ----------------------
<S> <C> <C>
J. William Pullen Trustee President and Chief Executive Officer,
Whayne Supply Company Whayne Supply Co. (engine and heavy
1400 Cecil Avenue equipment distribution), since 1986;
P.O. Box 35900 President and Chief Executive Officer,
Louisville, KY 40232-5900 American Contractors Rentals & Sales
Age 61 (rental subsidiary of Whayne Supply
Co.), since 1988. Trustee, Parkstone
Group of Funds and Armada Funds.
W. Bruce McConnel, III Secretary Partner, Drinker Biddle & Reath LLP,
One Logan Square Philadelphia, Pennsylvania (law firm).
18th and Cherry Streets
Philadelphia, PA 19103-6996
Age 57
John Leven Treasurer Director of Funds Accounting of SEI
One Freedom Valley Drive Investments since March 1999; Division
Oaks, PA 19456 Controller, First Data Corp. from
Age 42 February 1998 to March 1999; 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.
</TABLE>
- --------------------
*Messrs. Carter and Martens are considered by the Trust to be "interested
persons" of the Trust as defined in the 1940 Act.
As of the date of this Statement of Additional Information, the
trustees and officers of the Trust as a group owned beneficially less than 1% of
the outstanding shares of each of the Funds of the Trust, and less than 1% of
the outstanding shares of all of the Funds of the Trust in the aggregate.
Mr. Martens is an "interested person" because (1) he is an Executive
Vice President of National City Corporation ("NCC"), the parent corporation to
IMC, which receives fees as investment adviser to the Trust, (2) he owns shares
of common stock and options to purchase common stock of NCC, and (3) he is the
Chief Executive Officer of NatCity Investments, Inc., a broker-dealer affiliated
with IMC.
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 NCC, an affiliate of
IMC, the Funds' investment adviser.
Mr. Leven is employed by SEI Investments Mutual Funds Services, which
receives fees as Administrator to the Trust. Mr. McConnel is a partner of the
law firm, Drinker Biddle & Reath LLP, which receives fees as counsel to the
Trust.
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<PAGE> 69
With respect to the Trust, The Parkstone Group of Funds and Armada
Funds, each trustee receives an annual fee of $15,000 plus $3,000 for each Board
meeting attended and reimbursement of expenses incurred in attending meetings.
The three fund companies generally hold concurrent Board meetings. The Chairman
of the Board is entitled to receive an additional $5,000 per annum for services
in such capacity.
The following table summarizes the compensation for each of the
Trustees of the Trust for the fiscal year ended December 31, 1999:
<TABLE>
<CAPTION>
Pension or
Aggregate Retirement Benefits Estimated Annual Total Compensation
Name of Compensation Accrued as Part of Benefits Upon from the Trust and
Person, Position from the Trust the Trust's Expense Retirement Fund Complex*
- ---------------- -------------- ------------------- ---------- -------------
<S> <C> <C> <C> <C>
Robert D. Neary, $147 $0 $0 $35,000
Chairman and Trustee
Leigh Carter, Trustee $126 $0 $0 $30,000
John F. Durkott, Trustee $126 $0 $0 $30,000
Robert J. Farling, Trustee $94 $32 $0 $30,000
Richard W. Furst, Trustee $126 $0 $0 $30,000
Gerald L. Gherlein, Trustee $126 $0 $0 $30,000
Herbert R. Martens, Jr., $0 $0 $0 $0
President and Trustee
J. William Pullen, Trustee $62 $64 $0 $30,000
</TABLE>
- ---------------------
* The "Fund Complex" consists of Armada Funds, The Parkstone Group of
Funds and The Armada Advantage Fund. Each of the Trustees serves as
Trustee to all three investment companies.
The Trustees may elect to defer payment of 25% to 100% of the fees they
receive in accordance with a Trustee Deferred Compensation Plan (the "Plan").
Under the Plan, a Trustee may elect to have his or her deferred fees treated as
if they had been invested by the Trust in the shares of one or more portfolios
of Armada Funds and the amount paid to the Trustee under the Plan will be
determined based on the performance of such investments. Distributions are
generally of equal installments over a period of 2 to 15 years. The Plan will
remain unfunded for federal income tax purposes under the Code. Deferral of
Trustee fees in accordance with the Plan will have a negligible impact on
portfolio assets and liabilities and will not obligate the Trust to retain any
Trustee or pay any particular level of compensation.
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<PAGE> 70
SHAREHOLDER AND TRUSTEE LIABILITY
Under Massachusetts law, shareholders of 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
shareholders shall not be subject to any personal liability for the acts or
obligations of the Trust, and that every note, bond, contract, order, or other
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 or her being or having been a
shareholder and not because of his or her acts or omissions or some other
reason. 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 obligation of the Trust, and shall satisfy any judgment thereon. Thus,
the risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the Trust itself would be unable
to meet its obligations.
The Declaration of Trust states further that no trustee, officer, or
agent of the Trust shall be personally liable for or on account of any contract,
debt, tort, claim, damage, judgment or decree arising out of or connected with
the administration or preservation of the trust estate or the conduct of any
business of the Trust; nor shall any trustee be personally liable to any person
for any action or failure to act except by reason of his or her own bad faith,
willful misfeasance, gross negligence, or reckless disregard of his or her
duties as trustee. The Declaration of Trust also provides that all persons
having any claim against the trustees or the Trust shall look solely to the
trust property for payment. With the exceptions stated, the Declaration of Trust
provides that a trustee is entitled to be indemnified against all liabilities
and expense, reasonably incurred by him in connection with the defense or
disposition of any proceeding in which he or she may be involved or with which
he or she may be threatened by reason of his or her being or having been a
trustee, and that the trustees, have the power, but not the duty, to indemnify
officers and employees of the Trust unless any such person would not be entitled
to indemnification had he or she been a trustee.
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, 1900 East Ninth Street, Cleveland, Ohio 44114,
pursuant to two Investment Advisory Agreements dated as of August 18, 1993 and a
third Investment Advisory Agreement dated as of September 1, 1999. One
Investment Advisory Agreement relates to the management of the Small Cap Growth
Fund, the Mid Cap Growth Fund and the Bond Fund, a second Investment Advisory
Agreement relates to the management of the International Equity Fund, and the
third Investment Advisory Agreement relates to the management of the Equity
Growth and Balanced Allocation Funds (collectively, the "Investment Advisory
Agreements"). From the commencement of operations (September 23, 1993) until
December 1, 1998, Gulfstream Global Investors, Ltd. was the Sub-Adviser of the
International Equity Fund and was paid a fee by the Adviser.
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<PAGE> 71
The Adviser is a registered investment adviser and an indirect
wholly-owned subsidiary of NCC, a publicly-held bank holding company. NCC
consolidated the asset management responsibilities of its various bank
affiliates including First of America Bank, N.A. ("FOA"). Prior to such time,
the investment adviser of the Funds was First of America Investment Corporation
("First of America"), a wholly-owned subsidiary of First of America Bank, N.A.
Under the Investment Advisory Agreements, the Adviser has agreed to
provide, either directly or through one or more subadvisers, investment advisory
services for each of the Trust's Funds as described in the Prospectus. For the
services provided and the expenses assumed pursuant to the Investment Advisory
Agreements, each of the Trust's Funds pays the Adviser a fee, computed daily and
paid monthly, at an annual rate calculated as a percentage of the average daily
net assets of that Fund. The annual rates for the Funds are as follows: 1.00%
for the Small Cap Growth Fund and the Mid Cap Growth Fund; 0.55% for the Bond
Fund; 0.75% for the Equity Growth Fund and Balanced Allocation Fund; and 1.15%
for the International Equity Fund. The 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 the Equity Growth and Balanced Allocation
Funds.
Pursuant to each of the Investment Advisory Agreements, the Adviser
will pay all expenses, including as applicable, the compensation of any
subadvisers directly appointed by it, incurred by it in connection with its
activities under the Investment Advisory Agreements other than the cost of
securities (including brokerage commissions) if any, purchased for the Trust.
For the fiscal years ended December 31, 1999, 1998 and 1997, IMC or
First of America received fees and voluntarily reduced the amounts listed below
which were payable to it with respect to its advisory services:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
JANUARY 1, 1999 TO JANUARY 1, 1998 TO JANUARY 1, 1997 TO
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
- -------------------------------------------------------------------------------------------------------------------
FEES FEES FEES
GROSS FEES VOLUNTARILY GROSS FEES VOLUNTARILY GROSS FEES VOLUNTARILY
FUND COLLECTED REDUCED COLLECTED REDUCED COLLECTED REDUCED
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Small $161,238 $0 $241,606 $0 $256,828 $0
Cap Growth
- -------------------------------------------------------------------------------------------------------------------
Mid $243,485 $0 $295,464 $0 $278,450 $0
Cap Growth
- -------------------------------------------------------------------------------------------------------------------
Bond $ 70,729 $0 $ 91,640 $0 $ 78,638 $0
- -------------------------------------------------------------------------------------------------------------------
International $211,347 $0 $233,750 $0 $239,144 $0
Equity
- -------------------------------------------------------------------------------------------------------------------
Equity Growth $0 $11,617 N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------
Balanced N/A N/A N/A N/A N/A N/A
Allocation
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Unless sooner terminated, each of the Investment Advisory Agreements
continues in effect as to a particular Fund for successive one-year periods
ending September 30 of each year if such continuance is approved at least
annually (i) by the Trust's Board of Trustees or by vote of a
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<PAGE> 72
majority of the outstanding voting securities of such Fund and (ii) by vote of a
majority of the Trustees who are not parties to the Investment Advisory
Agreements, or interested persons (as defined in the 1940 Act) of any such
party, cast in person at a meeting called for such purpose. Each of the
Investment Advisory Agreements is terminable as to a particular Fund at any time
on 60 days' prior written notice without penalty by the Trustees, by vote of a
majority of outstanding shares of that Fund, or by the Adviser. The Agreements
also terminate automatically in the event of any assignment, as defined in the
1940 Act.
The Investment Advisory Agreements provide that the 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 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 Adviser determines, subject to the general supervision
of the Trustees of the Trust and in accordance with each Fund's objective and
restrictions, which securities are to be purchased and sold by a Fund and which
brokers are to be eligible to execute such Fund's portfolio transactions.
Purchases and sales of portfolio securities which are debt securities
usually are principal transactions in which portfolio securities are normally
purchased directly from the issuer or from an underwriter or market maker for
the securities. Purchases from underwriters of portfolio securities generally
include a commission or concession paid by the issuer to the underwriter, and
purchases from dealers, serving as market makers may include the spread between
the bid and asked prices. Transactions on stock exchanges involve the payment of
negotiated brokerage commissions. Transactions in the over-the-counter market
are generally principal transactions with dealers. With respect to the
over-the-counter market, the Trust, where possible will deal directly with the
dealers who make a market in the securities involved except under those
circumstances where better price and execution are available elsewhere.
Allocation of transactions, including their frequency, to various
brokers and dealers is determined by the 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 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 Adviser and does not reduce the fees
payable to such adviser by the Trust. Such information may be useful to the
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 Adviser generally seeks competitive commissions, the Trust
may not necessarily pay the lowest commission available on each brokerage
transaction for the reasons
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<PAGE> 73
discussed above. For the fiscal years ended December 31, 1999, 1998 and 1997,
the Trust paid an aggregate of approximately $173,268, $146,751 and $204,067,
respectively, as brokerage commissions on behalf of the Funds.
The Trust will not acquire portfolio securities issued by, make savings
deposits in, or enter into repurchase or reverse repurchase agreements with NCC,
IMC, 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 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 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 Adviser may aggregate the securities to be sold or
purchased for a Fund with those to be sold or purchased for other Funds or for
other portfolios, investment companies, or accounts in order to obtain best
execution. As provided by the Investment Advisory Agreements in making
investment recommendations for the Trust, the 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 Adviser, its parent and affiliates will
not inquire or take into consideration whether securities of such customers are
held by the Trust.
The Funds held from time to time during the fiscal year ended December
31, 1999, securities of its regular brokers or dealers as defined in Rule 10b-1
under the 1940 Act, or their parent companies, including those of BA Securities,
Lehman Brothers and Chase Securities. As of December 31, 1999, the Bond Fund
held $99,000 in asset-backed securities of Banc One Auto Grantor Trust and
$196,450 in asset-backed securities of Prudential Securities Secured Financing
Corp.
ADMINISTRATOR
The Trust and SEI Investments Mutual Fund Services (the
"Administrator") have entered into an administration agreement (the
"Administration Agreement") as of July 2, 1999. Prior to July 2, 1999, BISYS
Fund Services (the "Former Administrator") served as the administrator to the
Trust pursuant to an Administration Agreement dated as of July 1, 1996.
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
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<PAGE> 74
systems, and brokerage and information services to financial institutions,
institutional investors, and money managers.
The Administrator is entitled to receive with respect to the Funds the
greater of an annual rate of .20% of the Funds' average daily net assets,
calculated daily and paid monthly, or $135,000 on aggregate net assets in the
Funds.
For the fiscal years ended December 31, 1999, 1998 and 1997, the
Administrator and the Former Administrator collected and voluntarily reduced the
amounts indicated below which were payable to them with respect to their
administrative services to the indicated Funds:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
JANUARY 1, 1999 TO JANUARY 1, 1997 TO JANUARY 1, 1997 TO
DECEMBER 31, 1999* DECEMBER 31, 1998 DECEMBER 31, 1997
- -------------------------------------------------------------------------------------------------------------------
FUND GROSS FEES FEES GROSS FEES FEES GROSS FEES FEES
COLLECTED VOLUNTARILY COLLECTED VOLUNTARILY COLLECTED VOLUNTARILY
REDUCED REDUCED REDUCED
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Small Cap Growth $32,248 $0 $48,322 $0 $51,366 $0
- -------------------------------------------------------------------------------------------------------------------
Mid Cap Growth $48,697 $0 $59,093 $0 $55,690 $0
- -------------------------------------------------------------------------------------------------------------------
Bond $20,106 $0 $24,768 $0 $21,254 $0
- -------------------------------------------------------------------------------------------------------------------
International $49,187 $0 $37,400 $0 $38,263 $0
Equity
- -------------------------------------------------------------------------------------------------------------------
Equity Growth $3,066 $0 N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------
Balanced $0 $0 N/A N/A N/A N/A
Allocation
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
* Of the $153,304 in administration fees paid in the fiscal year ended December
31, 1999, $90,045 were paid to the Former Administrator. The balance was paid to
the Administrator.
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 Fund
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 may 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
up to 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"). Prior to that time, BISYS Fund
Services served as distributor. 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
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<PAGE> 75
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"). Union
Bank of California served as Custodian to the International Equity Fund for the
period from July 31, 1995 to July 23, 1998. 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"). Prior to that time, BISYS Fund
Services served as transfer agent and fund accountant to the Trust. 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. For such transfer agency services for the fiscal period from July 2,
1999 to December 31, 1999, the Transfer Agent received $16,667 from the Trust.
For such transfer agency services for the fiscal period from January 1, 1999 to
July 1, 1999 and for the fiscal years ended December 31, 1998 and 1997, BISYS,
the former Transfer Agent received $33,333, $161,426 and $162,071, respectively,
from the Trust.
INDEPENDENT AUDITORS
The Financial Statements of the Trust as of December 31, 1999,
appearing in the Trust's Annual Report dated December 31, 1999, have been
audited by Ernst & Young LLP, Two Commerce Square, 2001 Market Street, Suite
4000, Philadelphia, PA 19103, independent auditors, as set forth in their report
thereon included therein and incorporated herein by reference. The financial
statements and schedules audited by Ernst & Young LLP have been included in
reliance on their report given on their authority as experts in accounting and
auditing.
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<PAGE> 76
ADDITIONAL INFORMATION
DESCRIPTION OF SHARES
The Armada 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 the Trust, 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 interests in one of six separate portfolios: the Small
Cap Growth Fund, Mid Cap Growth Fund, Bond Fund, International Equity Fund,
Balanced Allocation Fund and 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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<PAGE> 77
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.
ADDITIONAL TAX INFORMATION
Each Fund intends to qualify as a "regulated investment company" (a
"RIC" under the Code). Such qualification generally will relieve the Funds of
liability for federal income taxes to the extent their earnings are distributed
in accordance with the Code. However, taxes may be imposed on the Funds,
particularly the International Equity Fund, by foreign countries with respect to
income received on foreign securities. Depending on the extent of each Fund's
activities in states and localities in which its offices are maintained, in
which its agents or independent contractors are located, or in which it is
otherwise deemed to be conducting business, each Fund may be subject to the tax
laws of such states or localities.
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<PAGE> 78
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 to the extent of the
Fund's current and accumulated earnings and profits. A failure of a Fund to
qualify as a RIC also could result in the loss of the tax-favored status of
variable annuity contracts based on a segregated asset account which invests in
the Fund.
Under Code Section 817(h), a segregated asset account upon which a
variable annuity contract or variable life insurance policy is based must be
"adequately diversified." A segregated asset account will be adequately
diversified if it complies with certain diversification tests set forth in
Treasury regulations. If a RIC satisfies certain conditions relating to the
ownership of its shares, a segregated asset account investing in such investment
company will be entitled to treat its pro rata portion of each asset of the
investment company as an asset for purposes of these diversification tests. The
Funds intend to meet these ownership conditions and to comply with the
diversification tests noted above. Accordingly, a segregated asset account
investing solely in shares of a Fund will be adequately diversified. However,
the failure of a Fund to meet such conditions and to comply with such tests
could cause the owners of variable annuity contracts and variable life insurance
policies based on such account to recognize ordinary income each year in the
amount of any net appreciation of such contract or policy during the year.
Provided that a Fund and a segregated asset account investing in the
Fund satisfy the above requirements, any distributions from the Fund to such
account will be exempt from current federal income taxation to the extent that
such distributions accumulate in a variable annuity contract or variable life
insurance policy.
Persons investing in a variable annuity contract or variable life
insurance policy offered by a segregated asset account investing in a Fund
should refer to the Prospectus with respect to such contract or policy for
further tax information.
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.
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<PAGE> 79
ADDITIONAL TAX INFORMATION CONCERNING THE INTERNATIONAL EQUITY FUND
If, for any reason, the International Equity Fund were treated as being
a United Kingdom ("UK") resident, the International Equity Fund's worldwide
income and capital gains would be subject to UK tax. If, for any reason, the
International Equity Fund were treated as having a permanent establishment in
the UK, the International Equity Fund's UK source income (although not its
capital gains) would become subject to UK tax and certain other advantages
otherwise available to the International Equity Fund under the double tax treaty
between the UK and the US would not be available. Provided that the
International Equity Fund is not treated as being resident or having a permanent
establishment in the UK, the International Equity Fund will not incur any UK tax
liability with respect to the types of income or gains that it is likely to
receive, except with respect to income on UK securities held in the
International Equity Fund's portfolio. The Trust believes, based upon the advice
of special counsel, that it would be highly unlikely for the International
Equity Fund, as a result of the activities of the Adviser, to be deemed or
treated as being a UK resident for UK tax purposes or having a permanent
establishment in the UK pursuant to the double tax treaty between the United
States and the UK.
CODES OF ETHICS
The Trust, the Adviser and the Distributor have adopted codes of ethics
pursuant to Rule 17j-1 under the 1940 Act that permit investment personnel
subject to their particular codes of ethics to invest in securities, including
securities that may be purchased and held by the Funds for their own accounts.
PERFORMANCE INFORMATION
GENERAL
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.
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<PAGE> 80
In addition, from time to time, the Funds may present their respective
distribution rates in shareholder reports and in supplemental sales literature
which is accompanied or preceded by a Prospectus and in shareholder reports.
Distribution rates will be computed by dividing the distribution per share over
a twelve-month period by the maximum offering price per share. The calculation
of income in the distribution rate includes both income and capital gains
dividends and does not reflect unrealized gains or losses, although a Fund may
also present a distribution rate excluding the effect of capital gains. The
distribution rate differs from the yield, because it includes capital gains
which are often non-recurring in nature, whereas yield does not include such
items. Distribution rates may also be presented excluding the effect of a sales
charge, if any.
Total return and yield are functions of the type and quality of
instruments held in the Fund, 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 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, variable life insurance policy, qualified pension or
retirement plan, 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.
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<PAGE> 81
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 Fund's portfolio and operating expenses of the Trust
allocated to each Fund. These factors and possible differences in the methods
used in calculating yield should be considered when comparing a Fund's yield to
yields published for other investment companies and other investment vehicles.
Yield should also be considered relative to changes in the value of the Fund's
shares and to the relative risks associated with the investment objectives and
policies of each of the Funds.
At any time in the future, yields may be higher or lower than past
yields and there can be no assurance that any historical results will continue.
For the 30-day period ended December 31, 1999, the yield for the Bond
Fund was 5.25%.
CALCULATION OF TOTAL RETURN
Average annual total return is a measure of the change in value of the
investment in a Fund over the period covered, which assumes any dividends or
capital gains distributions are reinvested in the Fund immediately rather than
paid to the investor in cash. Average annual total return will be calculated by:
(1) adding to the total number of shares purchased by a hypothetical $1,000
investment in the Fund and all additional shares which would have been purchased
if all dividends and distributions paid or distributed during the period had
immediately been reinvested, (2) calculating the value of the hypothetical
initial investment of $1,000 as of the end of the period by multiplying the
total number of shares owned at the end of the period by the net asset value per
share on the last trading day of the period, (3) assuming redemption at the end
of the period, and (4) dividing this account value for the hypothetical investor
by the initial $1,000 investment and annualizing the result for periods of less
than one year.
For the one and five-year periods ended December 31, 1999 and the
period from commencement of operations to December 31, 1999, the average annual
total returns for the Funds were, respectively: Small Cap Growth Fund, 31.24%,
16.30% and 15.46%; Mid Cap Growth Fund, 44.36%, 22.12% and 16.58%; Bond Fund,
(1.96%), 6.05% and 3.81%; International Equity Fund, 55.70%, 17.50% and 13.14%;
and the total return for the Equity Growth Fund for the period September 13,
1999 (commencement of operations) to December 31, 1999 was 14.00%. During the
period ended December 31, 1999, the Balanced Allocation Fund had not yet
commenced operations.
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<PAGE> 82
PERFORMANCE COMPARISONS
Investors may judge the performance of the Funds by comparing their
performance to the performance of other mutual funds or mutual fund portfolios
with comparable investment objectives and policies through various mutual fund
or market indices such as the Morgan Stanley Capital International EAFE Index
and those prepared by Dow-Jones & Co., Inc., Standard & Poor's Corporation,
Shearson-Lehman Brothers, Inc. and the Russell 2000 Growth Index and to data
prepared by Lipper Analytical Services, Inc. a widely recognized independent
service which monitors the performance of mutual funds, Morningstar, Inc. and
the Consumer Price Index. Comparisons may also be made to indices or data
published in Money Magazine, Forbes, Barron's, The Wall Street Journal, The Bond
Buyer's Weekly, 20-Bond Index, The Bond Buyer's Index, The Bond Buyer, The New
York Times, Business Week, Pensions and Investments, and USA Today. In addition
to performance information, general information about these Funds that appears
in a publication such as those mentioned above, may be included in
advertisements and in reports to shareholders.
From time to time, the Funds may include the following types of
information in advertisements, supplemental sales literature and reports to
shareholders: (1) discussions of general economic or financial principles (such
as the effects of compounding and the benefits of dollar-cost averaging); (2)
discussions of general economic trends; (3) presentations of statistical data to
supplement such discussions; (4) descriptions of past or anticipated portfolio
holdings for one or more of the Funds within the Trust; (5) descriptions of
investment strategies for one or more of the Funds; (6) descriptions or
comparisons of various savings and investment policies (including, but not
limited to, insured bank products, annuities, qualified retirement plans and
individual stocks and bonds), which may or may not include the Funds; (7)
comparisons of investment products (including the Funds) with relevant market or
industry indices or other appropriate benchmarks; and (8) discussions of fund
rankings or ratings by recognized rating organizations. The Funds may also
include calculations, such as hypothetical compounding examples which describe
hypothetical investment results in such communications. Such performance
examples will be based on an expressed set of assumptions and are not indicative
of the performance of any of the Funds.
Morningstar, Inc., Chicago, Illinois, rates mutual funds on a one- to
five-star rating scale with five stars representing the highest rating. Such
ratings are based on a fund's historical -risk/reward ratio as determined by
Morningstar relative to other funds in that fund's class. Funds are divided into
classes based upon the respective investment objectives. The one- to five-star
ratings represent the following ratings by Morningstar, respectively: Lowest,
Below Average, Neutral, Above Average and Highest.
Current yields or performance will fluctuate from time to time and are
not necessarily representative of future results. Accordingly a Fund's yield or
performance may not provide for comparison with bank deposits or other
investments which provide fixed returns for a stated period of time. Yield and
performance are functions of a Fund's quality, composition and maturity as well
as expenses allocated to the Fund. Fees imposed on customer accounts by the
Investment Adviser or its affiliated or correspondent banks or cash management
services will reduce a Fund's effective yield to its customers.
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<PAGE> 83
MISCELLANEOUS
Individual Trustees are elected by the shareholders and, subject to
removal by a vote of two-thirds of the Board of Trustees, serve for a term
lasting until the next meeting of shareholders at which Trustees are elected.
Such meetings are not required to be held at any specific intervals. Individual
Trustees may be removed by vote of the shareholders voting not less than a
majority of the shares outstanding cast in person or by proxy at a meeting
called for that purpose, or by a written declaration signed by the shareholders
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.
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
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<PAGE> 84
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 7, 2000, NCC or its affiliates owned of record the
following percentages of the Funds, respectively: Equity Growth Fund, 80%, Bond
Fund, 93.42%, Small Cap Growth Fund, 98.79%, Mid Cap Growth Fund, 98.32% and
International Equity Fund, 98.74%. NCC may be presumed to control both the Trust
and each of the Funds because it possesses or shares investment or voting power
with respect to more than 25% of the total outstanding shares of the Trust and
certain of its Funds. As a result, National City Bank may have the ability to
elect the Trustees of the Trust, approve the Investment Advisory and
Distribution Agreements for each of the Funds and to control any other matters
submitted to the shareholders of the Funds for their approval or ratification.
FINANCIAL STATEMENTS
The Funds' financial statements for the year ended December 31, 1999,
and the financial highlights for each of the respective periods presented,
appearing in the 1999 Annual Report, and the report thereon of Ernst & Young
LLP, independent auditors of the Trust, are on file with the SEC (File Nos.
33-65690 and 811-7850) and are incorporated herein by reference to this
Statement of Additional Information. No other parts of the 1999 Annual Report
are incorporated herein.
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<PAGE> 85
APPENDIX A
COMMERCIAL PAPER RATINGS
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A Standard & Poor's commercial paper rating is a current
opinion of the creditworthiness of an obligor with respect to financial
obligations 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.
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LOCAL CURRENCY AND FOREIGN CURRENCY RISKS
Country risk considerations are a standard part of Standard &
Poor's analysis for credit ratings on any issuer or issue. Currency of repayment
is a key factor in this analysis. An obligor's capacity to repay foreign
obligations may be lower than its capacity to repay obligations in its local
currency due to the sovereign government's own relatively lower capacity to
repay external versus domestic debt. These sovereign risk considerations are
incorporated in the debt ratings assigned to specific issues. Foreign currency
issuer ratings are also distinguished from local currency issuer ratings to
identify those instances where sovereign risks make them different for the same
issuer.
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 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:
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"D-1+" - Debt possesses the highest certainty of timely
payment. Short-term liquidity, including internal operating factors and/or
access to alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity and other
protection factors qualify issues as 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 best 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.
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"B" - Securities possess speculative credit quality. This
designation indicates uncertain 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 a capacity for meeting financial commitments which is highly uncertain
and solely reliant upon a sustained, favorable business and economic
environment.
"D" - Securities are in actual or imminent payment default.
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.
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"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
obligations in higher-rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
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
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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.
"c" - The 'c' subscript is used to provide additional
information to investors that the bank may terminate its obligation to purchase
tendered bonds if the long-term credit rating of the issuer is below an
investment-grade level and/or the issuer's bonds are deemed taxable.
"p" - The letter 'p' indicates that the rating is provisional.
A provisional rating assumes the successful completion of the project financed
by the debt being rated and indicates that payment of debt service requirements
is largely or entirely dependent upon the successful, timely completion of the
project. This rating, however, while addressing credit quality subsequent to
completion of the project, makes no comment on the likelihood of or the risk of
default upon failure of such completion. The investor should exercise his own
judgment with respect to such likelihood and risk.
* - Continuance of the ratings is contingent upon Standard &
Poor's receipt of an executed copy of the escrow agreement or closing
documentation confirming investments and cash flows.
"r" - The 'r' highlights derivative, hybrid, and certain other
obligations that Standard & Poor's believes may experience high volatility or
high variability in expected returns as a result of noncredit risks. Examples of
such obligations are securities with principal or interest return indexed to
equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an 'r'
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
N.R. Indicates that no rating has been requested, that there
is insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular obligation as a matter of policy. Debt obligations of
issuers outside that United States and its territories are rated on the same
basis as domestic corporate and municipal issues. The ratings measure
creditworthiness of the obligor but do not take into account currency exchange
and related uncertainties.
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
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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" indicates 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. 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.
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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. This is the
lowest investment grade category.
"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.
"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
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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. This is the lowest
investment grade category.
"BB" - Bonds considered to be speculative. These ratings
indicate that there is a possibility of credit risk developing, particularly as
the result of adverse economic 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" and "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 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 denote relative standing within
these major rating categories.
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`NR' indicates the Fitch IBCA does not rate the issuer or
issue in question.
`Withdrawn': A rating is withdrawn when Fitch IBCA deems the
amount of information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
RatingAlert: Ratings are placed on RatingAlert to notify
investors that there is a reasonable probability of a rating change and the
likely direction of such change. These are designated as "Positive," indicating
a potential upgrade, "Negative," for a potential downgrade, or "Evolving," if
ratings may be raised, lowered or maintained. RatingAlert is typically resolved
over a relatively short period.
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" - A rating of BB suggests that the likelihood of default
is considerably less than for lower-rated issues, although there are significant
uncertainties that could affect the ability to adequately service debt
obligations.
"B" - Issues rated B show a higher degree of uncertainty and
therefore greater likelihood of default than higher-rated issues. Adverse
developments could negatively affect the payment of interest and principal on a
timely basis.
"CCC" - Issues rated CCC clearly have a high likelihood of
default, with little capacity to address further adverse changes in financial
circumstances.
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"CC" - This rating is applied to issues that are subordinate
to other obligations rated CCC and are afforded less protection in the event of
bankruptcy or reorganization.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC"
may include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
MUNICIPAL NOTE RATINGS
- ----------------------
A Standard and Poor's note 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.
Margins of protection 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.
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"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 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 Equity Growth, Balanced
Allocation, Small Cap Growth, Mid Cap Growth, Bond and International Equity
Funds ("Funds") may enter into certain futures transactions and options for
hedging purposes. Such transactions are described in this Appendix.
(a) 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 Funds 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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(b) 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.
(c) 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 instruments has been greater than
the volatility over such time period of the futures, or if
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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.
(d) 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.
(e) Other Matters
Accounting for futures contracts will be in accordance with
generally accepted accounting principles.
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