FLEMING FUND
Dear Shareholder:
In spite of giving up the bulk of its earlier gains in the final two months, the
Fleming Fund was still able to generate a positive return during the 10 1/2
month stub period of its first financial year, albeit a rather paltry 6.5%.
While it is disappointing to have experienced severe share price declines for so
many of the portfolio holdings during the stock market correction, the
indiscriminate selling among mid cap stocks gave us an opportunity to build a
concentrated portfolio of high quality companies at valuations which were simply
not available at the Fund's inception a year ago. In fact it was not until
September that the Fund became fully invested in equities. Given that price
volatility can be beneficial when building a portfolio, the turnover rate of
73.34% was much higher than is likely in the future.
Since the middle of August it has felt as though U.S. equity managers have been
switching their portfolios from cyclical to defensive. In the absence of new
cash flows, particularly in the domestic equity mutual fund segment, this
involves actually selling stocks thought to be at risk from a slowing economy
and reinvesting in such rock solid sectors as drugs, food, electric and
telephone utilities. On the face of it this is an entirely logical reaction in
anticipation of waning consumer confidence and severe problems in emerging
market economies but it also seems to be a reactionary rather than a predictive
strategy. The utilities and pharmaceuticals have already performed exceedingly
well in 1998 and are no longer particularly good value. By contrast the various
cyclical sectors have seen declines which are symptomatic of a full blown bear
market.
The Fund has concentrated its portfolio in discount retailing, lodging,
diversified media, financial services and real estate in the belief that only a
severe recession could derail the long term capital appreciation prospects for
our chosen companies. We do not try to make predictions for the economy but do
feel that blindly assuming such dire circumstances would be foolhardy. In most
cases our investee companies are sharing our optimistic view by repurchasing
their own shares in the market.
One exception to the repurchase trend is the real estate sector, where companies
are obliged to pay out 90% of their earnings in dividends in order to preserve a
favorable tax status. The sector has failed to live up to its defensive,
rate-sensitive reputation in 1998. The average real estate investment trust
(REIT) has suffered a 20% decline and is now trading at about 10% below its
underlying asset value. Real estate itself appears undervalued as an asset
class, particularly when compared to bonds. The key to investing in this sector
would appear to be identifying companies capable of growth without having to
issue equity in a dormant capital market. Kimco Realty, our largest holding in
the sector, is one such company and its stock has been a stellar performer this
year (relatively, that is!)
<PAGE>
Ironically the main reason for our affection for Marriott International is that
it divested its real estate into Host Marriott some years ago. As a result the
level of maintenance capital expenditure is very low and free cash flow is
significantly higher than earnings. Amid anticipation of a downturn in the
lodging industry Marriott has sold down to a level of approximately 11 times
free cash flow per share. For a company with the best brands in its industry and
a business model which uses other people's money to fund its growth this would
seem to be a golden opportunity. Or else we are missing something!
Sincerely,
Jonathan Simon
President and Portfolio Manager of the Fleming Fund
<PAGE>
FLEMING FLEDGLING FUND
ANNUAL REPORT TO SEPTEMBER 30TH 1998
Dear Shareholder:
While the past twelve months have clearly been somewhat traumatic for global
equity and bond markets, I am pleased to report that the first year of your
fund's existence resulted in strong investment performance relative to its
benchmark and peer group. Since the Fund commenced operations on November 14th
1997 its net asset value declined to $9.47 per share, representing a total
return of -5.15 percent for the period. This compared to the Lipper Small Cap
Index's decline of 17.07 percent, and the Russell 2000 and Russell 2000 Growth
at declines of 15.13 and 17.7 percent, respectively.
After starting the year in reasonable shape, the market correction that began
for small cap stocks in April entered a more virulent phase in July as the
narrow leadership cadre of supercap stocks began to crumble. It had become clear
that small company stocks were not going to shine until the large cap mania was
extinguished, and perhaps we can finally say that this seems to be in process.
Even Warren Buffett's "inevitables," Coca Cola and Gillette, have fallen victim
to their overseas exposures and experienced a decline in their lofty PE
multiples. Large and small companies have lately been falling in tandem; it is
our hope that small caps will finally assume leadership once the selling abates,
as they did in 1991 and 1988 following prior sell-offs.
The positive side of a very painful period in the stock market has been the
wringing out of many disturbing excesses. What clearer signal of a market top
could there have been than the commercial banks' lemming-like acquisition of
almost every major regional investment bank? Most of the fund's high quality
growth stocks appeared to be reasonably valued going into this phase, but many
were butchered in spite of this. However, starting with a clean sheet of paper,
the portfolio appears to offer a valuation profile that is comparable to the
beginning of the last cycle in September 1990. In the context of today's much
lower interest rate environment, and in relation to large stocks, small caps
look much cheaper. The difference this time is that the economic cycle is far
more mature, and the tired U.S. growth locomotive finds little global help with
its burden. Consequently your fund is primarily invested in service companies
and exploiters of low-cost technology. The market's biggest issue in the
near-term is going to be the delivery of expected earnings, and this will
continue to be our primary emphasis in portfolio construction.
<PAGE>
OUTLOOK
Given that small caps have been underperforming since 1994, and declining in
absolute terms since April, we are inclined to believe that the worst pain is
behind us, although year end tax-loss selling is likely to confuse the market in
the very short term. However a dormant initial public offering market will
improve supply-demand equilibrium, and permit the virtues of superior earnings
momentum and lower valuation to shine through.
Sincerely,
Christopher M.V. Jones
Vice President and Portfolio Manager of the Fleming Fledgling Fund
<PAGE>
FLEMING FUND
Fleming Fund S&P 500 Wilshire 5000
--------------------------------------------------------------
13-Nov-97 10,000 10,000 10,000
30-Nov-97 10,200 10,423 10,361
31-Dec-97 10,490 10,587 10,538
31-Jan-98 10,570 10,694 10,586
28-Feb-98 11,072 11,447 11,341
31-Mar-98 11,934 12,019 11,894
30-Apr-98 11,994 12,128 12,024
30-May-98 11,854 11,900 11,689
30-Jun-98 11,974 12,369 12,085
31-Jul-98 11,362 12,226 11,810
31-Aug-98 10,169 10,443 9,957
30-Sep-98 10,650 11,095 10,593
The Fleming Fund's average annual total return from its inception on November
13, 1997 through September 30, 1998 was 6.50%.
Past performance is not predictive of future performance.
FLEMING FLEDGLING FUND
Fledgling Fund Russell 2000 Lipper Small Cap
------------------------------------------------------------------
14-Nov-97 10,000 10,000 10,000
30-Nov-97 9,970 10,035 9,813
31-Dec-97 10,206 10,201 9,911
31-Jan-98 10,386 10,038 9,720
28-Feb-98 10,927 10,780 10,504
31-Mar-98 11,618 11,220 10,973
30-Apr-98 11,748 11,272 11,019
30-May-98 11,298 10,658 10,409
30-Jun-98 11,608 10,676 10,550
31-Jul-98 10,777 9,798 9,814
31-Aug-98 8,664 7,888 7,867
30-Sep-98 9,485 8,487 8,293
The Fleming Fledgling Fund's average annual total return from its inception on
November 14, 1997 through September 30, 1998 was -5.15%.
Past performance is not predictive of future performance.
<PAGE>
FLEMING FUND
SCHEDULE OF INVESTMENTS SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
Shares COMMON STOCKS: 96.6% Value
- --------------------------------------------------------------------------------
BANKS: 4.8%
1,600 Bank of New York Co., Inc. $ 43,800
600 Mellon Bank Corp. 33,037
130 M & T Bank Corp. 59,930
-----------
136,767
-----------
BEVERAGES: 2.1%
1,100 Brown-Forman Corp. - Class A 61,875
-----------
BUILDING RELATED: 3.7%
1,000 Martin Marietta Materials 43,188
2,500 Palm Harbor Homes, Inc.* 62,187
-----------
105,375
-----------
COMMERCIAL SERVICES: 5.2%
3,200 Dun & Bradstreet Corp. 86,400
1,700 Galileo International, Inc. 64,175
-----------
150,575
-----------
CHEMICALS: 2.0%
2,000 Sigma-Aldrich 57,750
-----------
DISTRIBUTION/WHOLESALE: 5.0%
3,600 VWR Scientific Products 90,225
3,100 Fisher Scientific International 53,281
-----------
143,506
-----------
DIVERSIFIED FINANCIAL: 0.8%
700 SLM Holding Corp. 22,706
-----------
FINANCE: 4.9%
1,250 American Express Co. 97,031
700 Federal National Mortgage Assoc. 44,975
-----------
142,006
-----------
FOOD: 1.9%
4,000 Ral Corp Holdings, Inc.* 56,000
<PAGE>
SCHEDULE OF INVESTMENTS SEPTEMBER 30, 1998, CONTINUED
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
FOREST PRODUCTS & PAPER: 0.7%
1,000 Schweitzer-Mauduit International, Inc. $ 21,750
-----------
INSURANCE: 14.3%
4,400 CNA Surety Corp.* 63,800
3,000 Horace Mann Educators 90,000
4,300 Medical Assurance, Inc. 113,950
1,500 NAC Re Corp. 73,875
1,900 Torchmark Corp. 68,281
-----------
409,906
-----------
INVESTMENT MANAGEMENT: 2.0%
3,000 Waddell & Reed Financial 57,000
-----------
LODGING: 4.2%
5,000 Marriott International, Inc. - Class A 119,375
-----------
MEDIA: 11.3%
1,900 E.W. Scripps Co. 82,650
1,000 Pulitzer Publishing Co. 79,125
1,300 The Times Mirror Company 69,062
1,500 TCA Cable TV, Inc. 42,188
100 Washington Post Co. - Class B 51,100
-----------
324,125
-----------
MISCELLANEOUS MANUFACTURING: 5.3%
1,200 Carlisle Companies, Inc. 46,725
2,500 Hon Industries, Inc. 59,063
1,700 Idex Corp. 45,156
-----------
150,944
-----------
OIL FIELD MACHINERY & EQUIPMENT: 1.5%
2,000 Weatherford International, Inc.* 43,250
-----------
OILS & GAS PRODUCERS: 2.0%
1,800 Devon Energy Corp. 59,288
-----------
<PAGE>
SCHEDULE OF INVESTMENTS SEPTEMBER 30, 1998, CONTINUED
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
REAL ESTATE: 1.9%
3,000 Security Capital Group - Class B* $ 54,000
-----------
REITS: 6.0%
4,500 Kimco Realty Corp. 171,000
-----------
RETAIL: 12.8%
1,800 Dayton-Hudson Corp. 64,350
5,000 Hancock Fabrics 48,125
4,666 Midas, Inc. 113,150
1,600 Payless Shoesource, Inc.* 66,200
2,300 Shopko Stores, Inc. 74,750
-----------
366,575
-----------
TELEPHONE COMMUNICATIONS: 1.8%
2,000 Cincinnati Bell, Inc. 52,000
-----------
TOBACCO: 2.4%
1,500 Philip Morris Companies, Inc. 69,094
-----------
TOTAL COMMON STOCKS: 96.6%
(cost $2,889,352) $ 2,774,867
-----------
CONVERTIBLE PREFERRED STOCK: 0.8%
----------------------------------
REITS: 0.8%
900 Kimco Realty Corp. Series D 22,444
callable 6/19/01 -----------
(cost $21,080)
<PAGE>
SCHEDULE OF INVESTMENTS SEPTEMBER 30, 1998, CONTINUED
- --------------------------------------------------------------------------------
Principal Amount SHORT-TERM INVESTMENTS: 1.5% Value
- --------------------------------------------------------------------------------
$43,473 Star Treasury Money Market Fund
(cost $43,473) $43,473
-----------
TOTAL INVESTMENTS
(cost $2,953,905): 98.9% 2,840,784
Other Assets, less Liabilities: 1.1% 31,986
-----------
NET ASSETS: 100.0% $2,872,770
==========
*Non-income producing security
<PAGE>
FLEMING FLEDGLING FUND
SCHEDULE OF INVESTMENTS SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
Shares COMMON STOCKS: 95.0% Value
- --------------------------------------------------------------------------------
ADVERTISING: 4.4%
870 Advo, Inc.* $ 21,261
849 TMP Worldwide, Inc.* 27,858
-------------
49,119
-------------
BANKS: 3.8%
310 Investors Financial Services 15,190
58 M & T Bank Corp. 26,738
-------------
41,928
-------------
CHEMICALS: 3.4%
1,215 Scotts Co.* 37,209
-------------
COMMERCIAL SERVICES: 18.7%
2,550 Ace Cash Express, Inc.* 30,600
1,000 Acnielsen Corp.* 22,250
1,100 Coinmack Laundry Corp.* 10,862
3,160 Data Broadcasting Corp.* 14,812
370 Duff & Phelps Credit Rating 17,043
460 Envoy Corp.* 10,063
800 Interim Services, Inc.* 16,450
765 Iron Mountain, Inc.* 22,950
690 Pittston Brink's Group 24,150
900 Rental Service Corp.* 16,200
2,790 Tyler Corp.* 21,274
-------------
206,654
-------------
CONSULTING SERVICES: 1.3%
340 Superior Consultants Holdings* 14,790
-------------
DATA PROCESSING: 2.7%
800 CCC Information Services* 10,000
400 Choicepoint, Inc.* 19,250
-------------
29,250
-------------
<PAGE>
FLEMING FLEDGLING FUND
SCHEDULE OF INVESTMENTS SEPTEMBER 30, 1998, CONTINUED
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
DISTRIBUTION/WHOLESALE: 8.9%
260 CDW Computer Centers, Inc.* $ 13,845
1,700 Daisytek International Corp.* 38,250
860 Keystone Automotive Industries, Inc.* 16,985
810 Scansource, Inc.* 12,757
340 Tech Data Corp.* 17,021
------------
98,858
------------
ELECTRICAL COMPONENTS & EQUIPMENT: 0.6%
25 Jabil Circuit, Inc.* 869
720 Vicor Corp.* 5,895
------------
6,764
------------
ELECTRONICS: 4.6%
760 Cyberoptics Corp.* 7,695
980 Kemet Corp.* 10,902
600 Pittway Corp. - Class A 14,325
360 Solectron Corp.* 17,280
------------
50,202
------------
HAND/MACHINE TOOLS: 2.0%
825 Applied Power, Inc. - Class A 22,533
------------
HEALTH CARE: 1.7%
675 Hanger Orthopedic Group* 12,572
720 Staar Surgical Co.* 6,525
------------
19,097
------------
INSURANCE BROKERS: 1.2%
350 Poe & Brown, Inc. 12,797
------------
LEISURE TIME: 1.1%
850 American Classic Voyages* 12,538
------------
<PAGE>
FLEMING FLEDGLING FUND
SCHEDULE OF INVESTMENTS SEPTEMBER 30, 1998, CONTINUED
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
MEDIA: 6.6%
1,190 Jones Intercable, Inc. - Class A * $ 29,601
950 Penton Media, Inc. 12,944
2,080 United Video Satellite* 30,810
-------------
73,355
-------------
MISCELLANEOUS MANUFACTURING: 3.7%
400 Carbo Ceramics Inc. 9,100
900 Hawk Corp. - Class A* 8,663
1,050 Mettler-Toledo International* 22,575
-------------
40,338
-------------
OILS & GAS PRODUCERS: 4.8%
1,515 Newfield Exploration Co.* 34,087
1,650 Vintage Petroleum, Inc. 18,975
-------------
53,062
-------------
REAL ESTATE INVESTMENT MGMT.: 1.0%
1,300 Grubb & Ellis Co.* 11,375
-------------
REITS: 5.0%
380 Kimco Realty Corp. 14,440
800 Meridian Industrial Trust 17,700
1,090 SL Green Realty Corp. 22,890
-------------
55,030
-------------
RENTAL EQUIPMENT: 1.2%
640 Cole National Corp.* 13,320
-------------
RETAIL: 4.3%
625 Regis Corp. 19,687
972 Sonic Corp.* 17,010
550 Tractor Supply Co.* 10,863
-------------
47,560
-------------
SEMICONDUCTORS: 1.4%
450 Xilinx Inc.* 15,750
-------------
<PAGE>
FLEMING FLEDGLING FUND
SCHEDULE OF INVESTMENTS SEPTEMBER 30, 1998, CONTINUED
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
SOFTWARE: 6.1%
550 Acxiom Corp.* $ 13,647
510 Advent Software, Inc.* 17,436
390 CSG Systems Int'l, Inc.* 17,257
1,250 Integrated Systems, Inc.* 10,391
600 Pegasystems, Inc.* 9,225
------------
67,956
------------
TRANSPORTATION: 6.5%
1,045 Air Express International 16,720
410 Expeditors International Wash, Inc. 11,377
1,000 Forward Air Corp.* 14,625
780 Heartland Express, Inc.* 12,870
1,000 Landair Corp.* 4,000
700 Swift Transporation Co.* 12,163
------------
71,755
------------
TOTAL COMMON STOCKS: 95.0%
(cost $1,173,062) $ 1,051,240
------------
Principal Amount SHORT-TERM INVESTMENTS: 2.6%
- ---------------- -----------------------------
$28,507 Star Treasury Money Market Fund
(cost $28,507) $28,507
------------
TOTAL INVESTMENTS
(cost $1,201,570): 97.6% 1,079,747
Other Assets, less Liabilities: 2.4% 26,922
------------
NET ASSETS: 100.0% $ 1,106,669
============
*Non-income producing security
<PAGE>
FLEMING CAPITAL MUTUAL FUND GROUP, INC.
STATEMENTS OF ASSETS AND LIABILITIES, SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
FLEMING FLEMING FLEDGLING
FUND FUND
- --------------------------------------------------------------------------------
ASSETS
Investments securities at value
(cost $2,953,905 and $1,201,570 respectively) $ 2,840,784 $ 1,079,747
Receivables:
Dividends and interest 4,732 710
Investment securities sold -- 9,822
From Adviser 20,351 22,741
Deferred organization costs, net 57,299 57,347
Other Assets 6,092 3,607
----------- -----------
Total assets $ 2,929,258 $ 1,173,974
----------- -----------
LIABILITIES
Payables:
For investment securities purchased -- 7,623
Other accrued expenses 56,488 59,682
----------- -----------
Total liabilities 56,488 67,305
----------- -----------
NET ASSETS $ 2,872,770 $ 1,106,669
=========== ===========
COMPOSITION OF NET ASSETS
Paid-in capital $ 2,910,817 $ 1,182,464
Accumulated undistributed
net investment income 22,579 6,517
Accumulated undistributed net realized gain
on investments 52,495 39,511
Net unrealized depreciation on investments (113,121) (121,823)
----------- -----------
Net assets $ 2,872,770 $ 1,106,669
=========== ===========
Number of shares issued and outstanding
(unlimited shares authorized no par value) 270,445 116,881
=========== ===========
Net asset value per share $ 10.62 $ 9.47
=========== ===========
See Accompanying Notes to Financial Statements.
<PAGE>
FLEMING CAPITAL MUTUAL FUND GROUP, INC.
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
FLEMING FLEMING FLEDGLING
FUND FUND
- --------------------------------------------------------------------------------
Nov. 13, 1997* Nov. 14, 1997*
to to
September 30, 1998 September 30, 1998
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
INCOME:
Dividend income $ 23,603 $ 3,241
Interest income 16,502 7,846
--------- ---------
Total income 40,105 11,087
EXPENSES:
Advisory fees 18,183 10,621
Custodian fees 5,162 5,146
Administration fees 35,288 35,178
Fund accounting fees 17,642 17,588
Transfer agent fees 12,793 12,753
Legal fees 14,537 14,564
Insurance 6,176 6,157
Audit fees 18,671 19,483
Reports to shareholders 2,647 2,639
Registration fees 2,119 2,112
Directors fees 7,277 7,255
Amortization of deferred
organization costs 11,375 11,350
Miscellaneous expenses 4,411 4,398
--------- ---------
Total expenses 156,281 149,244
Expenses reimbursed/waived (131,012) (134,932)
--------- ---------
Net expenses 25,269 14,312
--------- ---------
NET INVESTMENT INCOME (LOSS) 14,836 (3,225)
--------- ---------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 52,495 39,511
Net change in unrealized depreciation
on investments (113,121) (121,823)
--------- ---------
Net realized and unrealized loss
on investments (60,626) (82,312)
--------- ---------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ (45,790) $ (85,537)
========= =========
*Commemcement of Operations
See Accompanying Notes to Financial Statements.
<PAGE>
FLEMING CAPITAL MUTUAL FUND GROUP, INC.
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
FLEMING FLEMING FLEDGLING
FUND FUND
- --------------------------------------------------------------------------------
Nov. 13, 1997* Nov. 14, 1997*
to to
September 30, 1998 September 30, 1998
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) $ 14,836 $ (3,225)
Net realized gain on investments 52,495 39,511
Net change in unrealized depreciation
on investments (113,121) (121,823)
----------- -----------
Net decrease in net assets
resulting from operations (45,790) (85,537)
----------- -----------
Distributions to shareholders:
From net investment income (3,632) (1,608)
Capital share transactions:
Proceeds from shares sold 3,048,047 1,190,227
Net asset value of shares issued on
reinvestment of distributions 3,632 1,608
Cost of shares redeemed (229,487) (98,021)
----------- -----------
Net increase from capital share
transactions 2,822,192 1,093,814
----------- -----------
NET INCREASE IN NET ASSETS 2,772,770 1,006,669
NET ASSETS
Beginning of period 100,000 100,000
----------- -----------
End of period (including undistributed net
investment income of $22,579 and $6,517
respectively) $ 2,872,770 $ 1,106,669
=========== ===========
CHANGE IN SHARES
Shares sold 280,770 116,718
Shares issued on reinvestment of
distributions 347 158
Shares redeemed (20,672) (9,995)
----------- -----------
Net increase 260,445 106,881
=========== ===========
*Commemcement of Operations
See Accompanying Notes to Financial Statements.
<PAGE>
FLEMING CAPITAL MUTUAL FUND GROUP, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following information should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this Annual Report.
<TABLE>
<CAPTION>
FLEMING FLEMING FLEDGLING
FUND FUND
- --------------------------------------------------------------------------------------------------
November 13, 1997* November 14, 1997*
to to
September 30, 1998 September 30, 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.11 0.08
Net Realized and Unrealized Gains (Losses)
on Investments 0.54 (0.59)
Total from Investment Operations 0.65 (0.51)
LESS DISTRIBUTIONS:
Dividends from net investment income (0.03) (0.02)
NET ASSET VALUE, END OF PERIOD $ 10.62 $ 9.47
Total Return+ 6.50% (5.15%)
Net Assets at End of Period ('000) $ 2,873 $ 1,107
Ratio of Expenses to Average Net Assets
Before Expense Reimbursement++ 7.72% 13.84%
After Expense Reimbursement++ 1.25% 1.35%
Ratio of Net Investment Income (Loss) to Average++
Net Assets (Net of Expense Reimbursement) 0.73% (0.30%)
Portfolio Turnover Rate+ 73.34% 35.47%
</TABLE>
* Commencement of operations
+ Not annualized
++ Annualized
See Accompanying Notes to Financial Statements.
<PAGE>
Fleming Capital Mutual Fund Group, Inc.
Notes to Financial Statements
September 30, 1998
- --------------------------------------------------------------------------------
(1) ORGANIZATION
The Fleming Capital Mutual Fund Group, Inc., (the "Group"), was
organized as a Maryland corporation on August 19, 1997 and is
registered under the Investment Company Act of 1940, as amended (the
"1940 Act"), as an open-end management investment company. The Group
consist of two separate series: the Fleming Fund and the Fleming
Fledgling Fund (each a "Fund" and collectively the "Funds"). Robert
Fleming, Inc. (the "Adviser") serves as the investment adviser to the
Funds and purchased 10,000 shares of each Fund on September 26, 1997.
Investment operations began on November 13, 1997 for the Fleming Fund
and November 14, 1997 for the Fleming Fledgling Fund.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies
consistently followed by the Group in the preparation of its financial
statements. These policies are in conformity with generally accepted
accounting principles ("GAAP"). The presentation of financial
statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates and assumptions.
Expenses directly attributable to each Fund are charged to that Fund's
operations; expenses which are applicable to both Funds are allocated
among them on a pro-rata basis.
(a) Investment Valuation
Securities which are traded on a recognized stock exchange are
valued at the last sale price on the securities exchange on
which such securities are traded. Short-term investments with
maturities of sixty days or less are valued at amortized cost.
Securities and other assets for which market prices are not
readily available are valued at fair value as determined in
good faith in accordance with procedures approved by the Board
of Directors.
Repurchase Agreements. The Funds' custodian takes possession
of the collateral pledged for investments in repurchase
agreements. The underlying collateral is valued daily on a
mark-to market basis to ensure that the value, including
accrued interest, is at least equal to the repurchase price.
In the event of default of the obligation to repurchase, each
Fund has the right to liquidate the collateral and apply the
proceeds in satisfaction of the obligation. Under certain
circumstances, in the event of default or bankruptcy by the
other party to the agreement, realization and/or retention
<PAGE>
Fleming Capital Mutual Fund Group, Inc.
Notes to Financial Statements
September 30, 1998
- --------------------------------------------------------------------------------
of the collateral may be subject to legal proceedings.
(b) Organization Costs
Costs incurred by the Funds in connection with their
organization, registration and the initial public offering of
shares have been deferred and are amortized over 5 years. If
any of the original shares of the Funds are redeemed by any
holder thereof prior to the end of the amortization period,
the redemption proceeds will be reduced by the pro rata share
of the unamortized expenses as of the date of redemption. The
pro rata share by which the proceeds are reduced will be
derived by dividing the number of original shares outstanding
at the time of redemption.
(c) Federal Income and Excise Taxes
The Funds intend to meet the requirements of the Internal
Revenue Code applicable to regulated investment companies and
to distribute substantially all investment company net taxable
income and net capital gains to shareholders in a manner which
results in no tax cost to the Fund. Therefore, no federal
income or excise tax provision is required.
(d) Distributions to Shareholders
Dividends from net investment income are generally declared
and paid annually. Distributions of net realized gains, if
any, are generally declared at least annually. Distributions
to shareholders are recorded on the ex-dividend date. The
Funds periodically make reclassifications among certain of its
capital accounts as a result of the recognition and
characterization of certain income and capital gain
distributions determined annually in accordance with federal
tax regulations which may differ from generally accepted
accounting principles.
Due to permanent book to tax differences relating to the
treatment of deferred organizational expenses, the Fleming
Fund and the Fleming Fledgling Fund reclassified $11,375 and
$11,350, respectively, from accumulated undistributed net
investment income (loss) to paid-in-capital. These
reclassifications had no effect on net assets of the Funds.
(e) Investment Transactions and Investment Income
Investment transactions are accounted for on trade date. The
Funds determine the gain or loss realized from investment
transactions using the identified cost method. Dividend income
is recognized on the ex-dividend
<PAGE>
Fleming Capital Mutual Fund Group, Inc.
Notes to Financial Statements (Continued)
September 30, 1998
- --------------------------------------------------------------------------------
date and interest income is recognized on an accrual basis.
Discounts are accreted and premiums are amortized as
adjustments to interest income and the identified costs of
investments.
(3) INVESTMENT ADVISER AND OTHER TRANSACTIONS WITH AFFILIATES
The Group has an Investment Advisory Agreement with the Adviser, with
whom certain officers and directors of the Funds are affiliated, to
furnish investment advisory services to the Funds. Under the terms of
this agreement, the Funds pay the Adviser equal to the following annual
percentage of average daily net assets:
Fleming Fund 0.90%
Fledgling Fund 1.00%
The Adviser has agreed to voluntarily reduce fees for expenses
(exclusive of brokerage, interest, taxes and extraordinary expenses)
that exceed the annual expense limitation of 1.25% for the Fleming Fund
and 1.35% for the Fleming Fledgling Fund of average daily net assets.
For the Fleming Fund, during the period from November 13, 1997
(inception) to September 30, 1998, the Adviser reimbursed and waived
$131,012 of expenses. For the Fleming Fledgling Fund, during the period
from November 14, 1997 (inception) to September 30, 1998, the Adviser
reimbursed and waived $134,932 of expenses. The Investment Advisory
Agreement permits the Adviser to seek reimbursement of any reductions
made to its advisory fees and payments made to limit expenses which are
the responsibility of the Funds within the three-year period following
such reduction, subject to the Funds ability to effect such
reimbursement and remain in compliance with applicable expense
limitations.
Investment Company Administration Corporation is the Administrator to
the Funds pursuant to an administration agreement. Each Fund pays the
Administrator an annual fee equal to 0.10% of the first $200 million of
average daily net assets, 0.05% of the next $300 million, and 0.03%
assets over $500 million, payable monthly and subject to a minimum
annual fee of $40,000 per Fund.
First Fund Distributors, Inc. serves as the Distributor to the Funds
pursuant to a Distribution Agreement. The Distributor receives no fee
for its distribution services.
Each independent Director is compensated by the Group at an annual rate
of $5,000, plus related travel expense.
Certain officers of the Adviser, Administrator and Distributor are also
officers and/or Directors of the Funds.
<PAGE>
Fleming Capital Mutual Fund Group, Inc.
Notes to Financial Statements (Continued)
September 30, 1998
- --------------------------------------------------------------------------------
(4) INVESTMENT TRANSACTIONS
The aggregate purchases and sales of securities, excluding short-term
investments, for the Funds are summarized below:
Fleming
Fleming Fund Fledgling Fund
------------ --------------
November 13, 1997 November 14, 1997
to September 30, 1998 to September 30, 1998
Purchases $4,263,399 $1,491,661
Sales 1,405,462 358,109
At September 30, 1998, the Fleming Fund and the Fleming Fledgling Fund
had gross unrealized appreciation and depreciation of investments,
based on cost for the federal income tax purposes of $2,953,905 and
$1,201,570 respectively, as follows:
Fleming
Fleming Fund Fledgling Fund
------------ --------------
Gross appreciation $ 156,856 $ 79,510
Gross depreciation (269,977) (201,333)
---------- ----------
Net unrealized depreciation on
investments $ (113,121) $ (121,823)
========== ==========
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of
Fleming Capital Mutual Fund Group, Inc.
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of Fleming Capital Mutual Fund Group, Inc.
(comprising, respectively, the Fleming Fund and the Fleming Fledgling Fund), as
of September 30, 1998, and the related statements of operations, changes in net
assets and the financial highlights for the period from November 13, 1997 and
November 14, 1997, respectively, (commencement of operations) to September 30,
1998. These financial statements and financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 1998, by correspondence with the custodian and others. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective portfolios constituting the Fleming Capital Mutual Fund Group,
Inc., at September 30, 1998, the results of their operations, the changes in
their net assets and their financial highlights for the period from November 13,
1997 and November 14, 1997, respectively, to September 30, 1998, in conformity
with generally accepted accounting principles.
Ernst & Young LLP
New York, New York
November 6, 1998
