As filed with the Securities and Exchange Commission on November 7, 2000
1933 Act Registration No. 333-66181
1940 Act Registration No. 811-09079
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ X ]
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Pre-Effective Amendment No. _____ [ ]
-----
Post-Effective Amendment No. 8 [ X ]
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and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ X ]
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Amendment No. 9
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(Check appropriate box or boxes)
MORGAN KEEGAN SELECT FUND, INC.
(Exact name of registrant as specified in charter)
Morgan Keegan Tower
Fifty Front Street
Memphis, Tennessee 38103
(Address of principal executive offices)
Registrant's telephone number, including area code: (901) 524-4100
ALLEN B. MORGAN, JR.
Morgan Keegan Tower
Memphis, Tennessee 38103
(Name and Address of Agent for Service)
Copies to:
ARTHUR J. BROWN, ESQ.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Ave., N.W.
Washington, D.C. 20036-1800
Telephone: (202) 778-9000
Approximate date of proposed public offering: As soon as practicable after the
effective date of this Registration Statement
It is proposed that this filing will become effective (check appropriate box):
[ ] Immediately upon filing pursuant to paragraph (b)
[ ] On ____________, 2000 pursuant to paragraph (b)
[X ] 60 days after filing pursuant to paragraph (a)(1)
[ ] On ___________ pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] On _________ pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
The Growth Stock Portfolio and the Utilities Stock Portfolio have also executed
this Registration Statement.
<PAGE>
Morgan Keegan Select Fund, Inc.
Contents of Registration Statement
This Registration Statement consists of the following papers and documents.
Cover Sheet
Contents of Registration Statement
Part A - Prospectus - Morgan Keegan Core Equity Fund and Morgan Keegan
Utility Fund
Part B - Statements of Additional Information - Morgan Keegan Core Equity
Fund and Morgan Keegan Utility Fund
Part C - Other Information
Signature Page
<PAGE>
MORGAN KEEGAN SELECT FUND, INC.
PROSPECTUS MORGAN KEEGAN CORE EQUITY FUND
_________, 2000 MORGAN KEEGAN UTILITY FUND
[LOGOS]
Morgan Keegan Select Funds are a family of funds that include the Morgan
Keegan Core Equity Fund ("Core Equity Fund") and the Morgan Keegan Utility Fund
("Utility Fund").
This Prospectus gives you important information about the funds that you
should know before you invest. Please read this Prospectus carefully and keep it
handy for future reference.
The Securities and Exchange Commission has not approved or disapproved
these securities or passed upon the adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
Morgan Keegan & Company, Inc.
Morgan Keegan Tower
Fifty Front Street
Memphis, Tennessee 38103
(901) 524-4100
(800) 366-7426
Internet: WWW.MORGANKEEGAN.COM
<PAGE>
CONTENTS
--------------------------------------------------------------------- THE FUNDS
A fund by fund look at Morgan Keegan Core Equity Fund _____
investment goals, strategies, Morgan Keegan Utility Fund _____
risks, performance and expenses
Information on who may want to Who May Want to Invest _____
invest and who may not want to invest
More information about the funds More Information about the Funds _____
you should know before investing Who Manages the Funds? _____
How is the Company Organized? _____
How Does Taxation Affect the
Funds and Their Shareholders? _____
Financial Highlights _____
SHAREHOLDER MANUAL
Information about account Policies for Buying Shares _____
transactions and services Selling Shares _____
Account Policies _____
Investor Services _____
MORE ABOUT RISK
Investment Practices, Securities
and Related Risks _____
Risk and Investment Glossary _____
FOR MORE INFORMATION
Where to learn more about the funds Back Cover
2
<PAGE>
MORGAN KEEGAN CORE EQUITY FUND
[TICKER SYMBOL]
[ICON] INVESTMENT GOAL
The fund seeks growth of capital. To pursue this goal, the fund
invests in a diversified portfolio of domestic common stocks with
greater than average growth characteristics selected primarily from
the Standard & Poor's 500 Composite Stock Price Index ("S&P 500").
Current income is not a primary objective.
[ICON] PRINCIPAL INVESTMENT STRATEGIES
The fund invests all of its assets in the Growth Stock Portfolio, a
master fund having the same investment goal as the fund. See "Each
Fund's Investment in a Portfolio" under "More Information About the
Funds." Normally, at least 80% of the Portfolio's total assets will be
invested in domestic common stocks and at least 65% of the Portfolio's
total assets will be invested in growth stocks. At least 70% of the
Portfolio's assets invested in common stocks will be invested in S&P
500 stocks.
The Portfolio consists of investment portfolios representing each of
the industry sectors comprising the S&P 500: utilities,
transportation, capital goods, consumer durables, consumer
non-durables, energy, materials and services, finance, technology and
health. The Portfolio's assets will be allocated to each of these
industry sectors in approximately the same proportion as these
industry sectors are represented in the S&P 500 on a
market-capitalization weighted basis.
The assets of the Portfolio representing each of these industry
sectors are managed on a discretionary basis by one or more separate
investment advisers, called sector advisers, selected by the Portfolio
subadviser, subject to the review and approval of the trustees of the
Portfolio.
Each sector adviser is limited to the list of companies identified by
the Portfolio's subadviser which represents the sector adviser's
specific industry sector. Each sector adviser then selects those
common stocks which, in its opinion, best represent the industry
sector the sector adviser has been assigned. In selecting securities
for the Portfolio, the sector advisers evaluate factors believed to be
favorable to long term growth of capital, including specific financial
characteristics of the issuer such as historical earnings growth,
sales growth, profitability and return on equity. The sector advisers
also analyze the issuer's position within its industry sector as well
as the quality and experience of the issuer's management.
The fund's investment goal is not fundamental and may be changed
without shareholder approval.
For more information, see "How Does the Fund Pursue Its Investment
Goal?" under "More Information About the Funds."
3
<PAGE>
[ICON] PRINCIPAL RISKS
MARKET CONDITIONS. The value of your investment will fluctuate in
response to stock market movements.
GROWTH-ORIENTED SECURITIES. To the extent that the fund invests in
higher risk securities, it encounters additional risks that could
adversely affect its performance.
INVESTMENT STRUCTURE. The use of several sector advisers or the
replacement of a sector adviser may increase the Portfolio's turnover,
gains or losses, and brokerage commissions.
As with any mutual fund, loss of money is a risk of investing in this
fund. Please read "More About Risk" carefully before investing.
PERFORMANCE
THE CORE EQUITY FUND
The Core Equity Fund was recently organized and has had no investment
activity prior to the date of this Prospectus.
The Core Equity Fund and the Growth Stock Portfolio have a common
investment objective. The Core Equity Fund seeks to achieve its objective by
investing substantially all of its investable assets in the Growth Stock
Portfolio which, including its predecessor, has an investment history dating
back to 1988.
The bar chart and table below are an illustration of the net investment results
of the Growth Stock Portfolio for periods that preceded the existence of The
Core Equity Fund. The bar chart below shows changes in the Growth Stock
Portfolio's net annual total returns from year to year during the past ten
calendar years. Prior to January 1, 1997, the Portfolio had different investment
policies than it and The Core Equity Fund now have. Prior to January 1, 1997,
the Portfolio sought long-term growth of capital through investment in two
representative groups of common stocks: one comprised of large capitalization
stocks, the other of small capitalization stocks. The table below compares the
Growth Stock Portfolio's net performance with a broad measure of market
performance and the returns of an index of funds with similar investment
objectives. The net annual returns shown are not returns for the Core Equity
Fund. The net annual returns depicted below should not be considered as an
indication of actual performance for Class A shares of The Core Equity Fund. How
the Portfolio has performed in the past is not necessarily an indication of how
the fund will perform in the future.
GROWTH STOCK PORTFOLIO
NET ANNUAL TOTAL RETURNS1
[The following table will be shown in bar chart form.]
YEAR ANNUAL NET TOTAL RETURN
1990 1.41%
1991 18.65%
1992 3.53%
1993 4.38%
1994 -3.47%
1995 24.25%
1996 8.73%
1997 29.15%
1998 23.36%
1999 20.72%
1Figures do not reflect sales charges. If they did, returns would be lower.
4
<PAGE>
During the period shown in the bar chart, the highest net total return for a
quarter was 19.64% (quarter ending December 31, 1998), and the lowest net total
return for a quarter was -11.17% (quarter ending September 30, 1998).
Average Net Annual Total Returns
(for the periods ending
DECEMBER 31, 1999) PAST ONE YEAR PAST FIVE YEARS PAST TEN YEARS
--------------------------------------------------------------------------------
Growth Stock Portfolio 17.10% 20.13% 13.19%
S&P 500 Index1 21.04% 28.54% 18.20%
Morningstar's Average
Growth Fund 29.92% 24.44% 16.49%
1The S&P 500 is a widely recognized unmanaged index of common stock prices. The
S&P 500 does not take into account the deduction of expenses associated with a
mutual fund, such as investment management and accounting fees. One cannot
invest directly in an index.
[ICON] FEES AND EXPENSES OF THE FUND
The following table describes the fees and expenses that you may pay
if you buy and hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)1
<TABLE>
<CAPTION>
<S> <C> <C> <C>
CLASS A CLASS C CLASS I
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of offering price) 3.00%2 None None
Maximum Deferred Sales Charge (Load) (as a
percentage of offering price or redemption
proceeds, as applicable) None 1.00%3 None
Exchange fee None None None
<FN>
1 The Fee Table and Example reflect the expenses of both the fund and
the Portfolio.
2 The sales charge declines as the amount invested increases. See
"Class Comparison - Class A - Front Load."
3 A deferred sales charge on Class C shares applies only if redemption
occurs within one year from purchase. See "Class Comparison - Class C
- Level Load."
</FN>
</TABLE>
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND
ASSETS) 1
CLASS A CLASS C CLASS I
Management Fees 1.00% 1.00% 1.00%
Distribution and Service (12b-1) Fees 0.25% 1.00% 0.00%
Other Expenses2 0.75% 0.75% 0.75%
----- ----- -----
Total Annual Fund Operating Expenses 2.00% 2.75% 1.75%
5
<PAGE>
1 This table and the Example below reflect the expenses of the fund
and its proportionate share of expenses from its corresponding
Portfolio. See "Each Fund's Investment in a Portfolio" under "More
Information About the Funds."
2 "Other Expenses" are based upon estimated amounts for the current
fiscal year.
EXAMPLE
The example in the table below is intended to help you compare the
cost of investing in the fund with the cost of investing in other
mutual funds.
Assuming you
o invest $10,000 in the fund
o redeem your shares at the end of the periods shown below
o earn a 5% return each year and
o incur the same fund operating expenses shown above,
your cost of investing in the fund would be:
1 YEAR 3 YEARS
------ -------
Class A $497 $909
Class C $378 $853
Class I $178 $551
You would pay the following expenses if you did not redeem your
shares:
1 YEAR 3 YEARS
------ -------
Class A $497 $909
Class C $278 $853
Class I $178 $551
Of course, your actual costs may be higher or lower.
6
<PAGE>
MORGAN KEEGAN UTILITY FUND
[TICKER SYMBOL]
[ICON] INVESTMENT GOAL
The fund seeks current income and growth of income by investing
primarily in equity securities of domestic and foreign public utility
companies; however, the fund will not invest in electric utilities
that generate power from nuclear reactors. The fund also seeks capital
appreciation, but only when consistent with its primary investment
objective.
[ICON] PRINCIPAL INVESTMENT STRATEGIES
The fund invests all of its assets in The Utilities Stock Portfolio, a
master fund having the same investment goal as the fund. See "Each
Fund's Investment in a Portfolio" under "More Information About the
Funds." The Portfolio generally invests at least 65% of its total
assets in equity securities of domestic or foreign companies that
provide electricity, natural gas, water, telecommunications or
sanitary services to the public. The remaining 35% of the Portfolio's
total assets may be invested in debt securities of public utility
companies, or debt or equity securities of other issuers who stand to
benefit from developments in the utilities industry.
The subadviser utilizes fundamental analysis to identify those
securities that it believes provide current income and growth of
income. Fundamental analysis involves assessing a company and its
business environment, management, balance sheet, income statement,
anticipated earnings and dividends, and other related measures of
value.
Except for the Portfolio's concentration policy, none of the
Portfolio's investment goals are fundamental and may be changed
without shareholder approval.
For more information, see "How Does the Fund Pursue Its Investment
Goals?" under "More Information About the Funds."
[ICON] PRINCIPAL RISKS
INTEREST RATE RISK. Utility stocks are subject to interest rate risk -
i.e., price fluctuations due to changing interest rates. Rising
interest rates can be expected to reduce the fund's net asset value.
INDUSTRY RISK. Because the fund concentrates in the utility industry,
its performance is largely dependent on the utility industry's
performance, which may differ from that of the overall stock market.
Governmental regulation of public utility companies can limit their
ability to expand their business or to pass cost increases on to
customers. Companies providing power or energy-related services may
also be affected by fuel shortages or cost increases, environmental
protection or energy conservation regulations, as well as fluctuating
demand for their services.
FOREIGN INVESTMENTS. Investments in securities of foreign companies
involve additional risks relating to political and economic
developments abroad, including currency fluctuations.
TELECOMMUNICATIONS. The fund may invest in telecommunications
companies. The telecommunications sector has historically been more
volatile due to the rapid pace of product
7
<PAGE>
change and development within the sector. The stock prices of
companies operating within this sector may be subject to abrupt or
erratic movements.
OPPORTUNITY RISK. The fund may not invest in electric utilities that
generate power from nuclear reactors. Because of this prohibition, the
fund may miss out on investment opportunities that become profitable
in these types of electrical utilities.
As with any mutual fund, loss of money is a risk of investing in the
fund. Please read "More About Risk" carefully before investing.
PERFORMANCE
THE UTILITY FUND
The Utility Fund was recently organized and has had no investment activity
prior to the date of this Prospectus.
The Utility Fund and the Utilities Stock Portfolio have a common investment
objective. The Utility Fund seeks to achieve its objective by investing all of
its investable assets in the Utilities Stock Portfolio which, including its
predecessor, has an investment history dating back to 1995.
The bar chart and table below are an illustration of the net investment results
of the Utilities Stock Portfolio for periods that preceded the existence of The
Utility Fund. The bar chart below shows changes in the Utilities Stock
Portfolio's net annual returns from year to year during the past ten calendar
years. The table below compares the Utilities Stock Portfolio's net performance
with a broad measure of market performance and the returns of an index of funds
with similar investment objectives. The net annual returns shown are not returns
for the Utility Fund. The net annual returns depicted below should not be
considered as an indication of actual performance for Class A shares of The
Utility Fund. How the Portfolio has performed in the past is not necessarily an
indication of how the fund will perform in the future.
UTILITY STOCK PORTFOLIO
NET ANNUAL TOTAL RETURNS1
[The following table will be shown in bar chart form.]
YEAR ANNUAL TOTAL RETURN
1996 12.58%
1997 28.48%
1998 8.57%
1999 19.81%
1Figures do not reflect sales charges. If they did, returns would be lower.
During the period shown in the bar chart, the highest net total return for a
quarter was 13.03% (quarter ending December 31, 1998), and the lowest net total
return for a quarter was -10.79% (quarter ending September 30, 1998).
Average Net Annual Total Returns
(for the periods ending
DECEMBER 31, 1999) PAST ONE YEAR SINCE INCEPTION1
----------------------------------------------------------------
Utilities Stock Portfolio 16.22% 16.08%
S&P 500 Index2 21.04% 26.88%
Morningstar's Average
Utility Fund 15.13% 18.67%
1Inception date for the Utilities Stock Portfolio was June 21, 1995.
2The S&P 500 is a widely recognized unmanaged index of common stock prices. The
S&P 500 does not take into account the deduction of expenses associated with a
mutual fund, such as investment management and accounting fees. One cannot
invest directly in an index.
8
<PAGE>
[ICON] FEES AND EXPENSES OF THE FUND
The following table describes the fees and expenses that you may pay
if you buy and hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)1
<TABLE>
<CAPTION>
CLASS A CLASS C CLASS I
<S> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of offering price) 3.00%2 None None
Maximum Deferred Sales Charge (Load) (as a
percentage of the lesser of offering price
or redemption proceeds) None 1.00%3 None
Exchange fee None None None
<FN>
1 The Fee Table and Example reflect the expenses of both the and the
Portfolio.
2 The sales charge declines as the amount invested increases. See
"Class Comparison - Class A - Front Load."
3 A deferred sales charge on Class C shares applies only if redemption
occurs within one year from purchase. See "Class Comparison - Class C
- Level Load."
</FN>
</TABLE>
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND
ASSETS) 1
CLASS A CLASS C CLASS I
Management Fees 1.00% 1.00% 1.00%
Distribution and Service (12b-1) Fees 0.25% 1.00% 0.00%
Other Expenses2 0.75% 0.75% 0.75%
----- ----- -----
Total Annual Fund Operating Expenses 2.00% 2.75% 1.75%
1 This table and the Example below reflect the expenses of the fund
and its proportionate share of expenses from its corresponding
Portfolio. See "Each Fund's Investment in a Portfolio" under "More
Information About the Funds."
2 "Other Expenses" are based upon estimated amounts for the current
fiscal year.
9
<PAGE>
EXAMPLE
The example in the table below is intended to help you compare the
cost of investing in the fund with the cost of investing in other
mutual funds.
Assuming you
o invest $10,000 in the fund
o redeem your shares at the end of the periods shown below
o earn a 5% return each year and
o incur the same fund operating expenses shown above,
your cost of investing in the fund would be:
1 YEAR 3 YEARS
------ -------
Class A $497 $909
Class C $378 $853
Class I $178 $551
You would pay the following expenses if you did not redeem your
shares:
1 YEAR 3 YEARS
------ -------
Class A $497 $909
Class C $278 $853
Class I $178 $551
Of course, your actual costs may be higher or lower.
10
<PAGE>
WHO MAY WANT TO INVEST
THE CORE EQUITY FUND
The fund may be appropriate if you:
o are seeking long-term growth potential
o are seeking a fund for the growth portion of an asset allocation
portfolio
o are more comfortable with a focus on established, well-known companies
o are seeking to diversify your portfolio
o are willing to accept the higher short-term risk along with
potentially higher long-term returns
The fund may not be appropriate if you:
o are unwilling to accept an investment that will go up and down in
value
o are investing to meet short-term financial goals
THE UTILITY FUND
The fund may be appropriate if you:
o are seeking a more conservative equity investment
o are looking to supplement your core equity holdings
o are a socially responsible investor
The fund may not be appropriate if you:
o are unwilling to accept an investment that will go up and down in
value
o are investing to meet short-term financial goals
o desire an investment that is diversified over several market sectors
11
<PAGE>
MORE INFORMATION ABOUT THE FUNDS
EACH FUND'S INVESTMENT IN A PORTFOLIO
Each fund seeks to achieve its investment goal by investing substantially
all of its assets in a corresponding Portfolio. This investment structure is
sometimes called a "master/feeder" structure. The funds and their corresponding
Portfolios are as follows:
FUND PORTFOLIO
Core Equity Fund -- Growth Stock Portfolio
Utility Fund -- Utilities Stock Portfolio
Each PORTFOLIO has the same investment goal as its corresponding fund. Each
of these funds' investment policies are also substantially similar to its
corresponding Portfolio's, except the fund may pursue its policies by investing
in an open-end management investment company with the same investment goal and
substantially similar policies and restrictions as the fund. Each of these funds
buys shares of its corresponding Portfolio at net asset value. An investment in
a fund is an indirect investment in its corresponding Portfolio.
It is possible that a fund may have to withdraw its investment in its
corresponding Portfolio and subsequently invest in another open-end management
investment company with the same investment goal and substantially similar
policies. This could happen if a Portfolio changes its investment goal or if the
board of directors, at any time, considers it in the fund's best interest.
You will find more detailed information about the "master/feeder" structure
and the potential risks associated with it in the Statement of Additional
Information.
CORE EQUITY FUND
HOW DOES THE FUND PURSUE ITS INVESTMENT GOAL?
Under normal conditions, at least 80% of the Portfolio's total assets will
be invested in domestic common stocks and at least 65% of the Portfolio's
total assets will be invested in growth stocks.
The manager selects for the Portfolio common stocks from all domestic
publicly traded common stocks; however, at least 70% of the assets of the
Portfolio invested in common stocks will be invested in common stocks which
are included in the S&P 500.
The Portfolio consists of investment portfolios representing each of the
industry sectors (identified by the Portfolio's subadviser) comprising the
S&P 500. The assets of the Portfolio will be allocated to each of these
industry sectors in approximately the same proportion as these industry
sectors are represented in the S&P 500 on a market capitalization-weighted
basis. The subadviser continuously reviews the representation of the
industry sectors in the S&P 500 and continuously groups domestic publicly
traded common stocks into a specific industry sector.
The Portfolio subadviser compares the total market value of the common
stocks in each industry sector of the S&P 500 to the total market value of
all common stocks in the S&P 500 to determine each industry sector's
weighting in the S&P 500. If the weighting of any industry sector in the
Portfolio varies from the weighting on a market-capitalization basis of
that industry sector in the S&P 500 at the end of any month, the Portfolio
subadviser will reallocate the amount of assets in the Portfolio allocated
to that industry sector. The subadviser may reallocate more frequently than
12
<PAGE>
monthly if it chooses to do so. These reallocations may cause additional
transaction costs to the extent that securities may be sold as part of such
reallocations.
The assets of the Portfolio representing each of these industry sectors are
managed on a discretionary basis by one or more separate investment
advisers, called sector advisers, selected by the Portfolio subadviser. The
Portfolio subadviser's selection of sector advisers is reviewed and
approved by the trustees of the Portfolio.
Assets of the Portfolio representing each of the industry sectors are
managed by one or more sector advisers. However, if an advisory agreement
between a sector adviser and the Portfolio is terminated leaving no sector
adviser to manage the assets of the Portfolio representing an industry
sector, the Portfolio's subadviser will, upon termination and until a new
sector adviser is selected, manage and "index" the assets of the Portfolio
representing the applicable industry sector. In this case, the subadviser
will "index" the assets of the Portfolio representing its industry sector
by selling any stocks representing the industry sector that are not
included in the S&P 500 and investing the assets comprising the industry
sector in S&P 500 stocks identified by the Portfolio's subadviser as
belonging to that industry sector in the same proportion as those stocks
are represented in the S&P 500 on a market capitalization-weighted basis.
The Portfolio may invest in "traditional" derivatives, such as financial
futures contracts and related options as a hedge against changes, resulting
from market conditions, in the value of securities held or intended to be
held by the Portfolio.
Up to 20% of the Portfolio's assets may be invested in temporary defensive
investments such as money market instruments and investment grade bonds.
Money market instruments consist of commercial paper, certificates of
deposit, banker's acceptances and other bank obligations, obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, high grade corporate obligations and repurchase
agreements. Investment grade bonds are those rated A or better by S&P or
Moody's or deemed to be of equivalent quality in the judgment of the
subadviser. If the Portfolio takes a temporary defensive position, it may
be unable to achieve its investment goal and it may miss out on investment
opportunities that are more advantageous. The Portfolio may purchase stock
index futures contracts and related options. Up to 5% of the total assets
of the Portfolio may be invested in American Depositary Receipts. The
Portfolio will not invest more than 10% of its net assets in securities
that are deemed to be illiquid.
UTILITY FUND
HOW DOES THE FUND PURSUE ITS INVESTMENT GOAL?
The Portfolio seeks to achieve its goal by investing, under normal
conditions, at least 65% of its total assets in a diversified portfolio of
common stocks, preferred stocks, warrants and rights, and securities
convertible into common or preferred stock of public utility companies.
Public utility companies include domestic or foreign companies that provide
electricity, natural gas, water, telecommunications or sanitary services to
the public. The Portfolio will not invest more than 5% of its total assets
in equity securities of issuers whose debt securities are rated below
investment grade, that is, rated below one of the four highest rating
categories by Standard & Poor's Corporation ("S&P") or Moody's Investors
Service, Inc. ("Moody's") or deemed to be of equivalent quality in the
judgment of the subadviser. Debt securities rated below investment grade
are rated below Baa or BBB.
The remaining 35% of the Portfolio's assets may be invested in debt
securities issued by public utility companies, and/or equity and debt
securities of issuers outside of the public utility industry which in the
opinion of the subadviser stand to benefit from developments in the public
utilities industry. The
13
<PAGE>
Portfolio will not invest more than 40% of its total assets in the
telephone industry. The Portfolio may invest up to 25% of its total assets
in securities of foreign issuers. The Portfolio will not invest more than
10% of its net assets in securities that are deemed to be illiquid.
Investments are selected on the basis of fundamental analysis to identify
those securities that, in the judgment of the subadviser, provide current
income and growth of income, and secondarily, capital appreciation, but
only when consistent with its primary investment goal.
Fundamental analysis involves assessing a company and its business
environment, management, balance sheet, income statement, anticipated
earnings and dividends and other related measures of value. The subadviser
monitors and evaluates the economic and political climate of the area in
which each company is located. The relative weightings among common stocks,
debt securities and preferred stocks will vary from time to time based upon
the subadviser's judgment of the extent to which investments in each
category will contribute to meeting the Portfolio's investment goal.
The subadviser emphasizes quality in selecting investments for the
Portfolio. In addition to looking for high credit ratings, the subadviser
ordinarily looks for several of the following characteristics: above
average earnings growth; above average growth of book value; an above
average balance sheet; high earnings to debt service coverage; low ratio of
dividends to earnings; high return on equity; low debt to equity ratio; an
above average rating with respect to government regulation; growing rate
base; lack of major construction programs and strong management.
The Portfolio may invest up to 35% of its total assets in debt securities
of issuers in the public utility industries. Debt securities in which the
Portfolio invests are limited to those rated A or better by S&P or Moody's
or deemed to be of equivalent quality in the judgment of the subadviser.
The Portfolio may invest in "traditional" derivatives, such as financial
futures contracts and related options as a hedge against changes, resulting
from market conditions, in the value of securities held or intended to be
held by the Portfolio.
During periods when the subadviser deems it necessary for temporary
defensive purposes, the fund may invest without limit in high quality money
market instruments. These instruments consist of commercial paper,
certificates of deposit, banker's acceptances and other bank obligations,
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, high grade corporate obligations and repurchase
agreements. If the Portfolio takes a temporary defensive position, it may
be unable to achieve its investment goal and it may miss out on investment
opportunities that are more advantageous.
The Portfolio, under normal circumstances, will invest 25% or more of its
total assets in securities of public utility companies. This concentration
policy is fundamental and may not be changed without shareholder approval.
WHAT ARE DERIVATIVES?
A derivative is a financial contract whose value is based on or derived
from a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for over
20 years. These "traditional" derivatives are standardized contracts that can
easily be bought and sold, and whose market values are determined and published
daily. It is these characteristics that differentiate futures and options from
the relatively new types of derivatives. If used for speculation or as leveraged
investments, derivatives can carry considerable risks.
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<PAGE>
Similar risks exist for warrants (securities that permit their owners to
purchase a specific number of shares of stock at a predetermined price), and
convertible securities (securities that may be exchanged for a different asset).
For this reason, the Portfolios will not use futures, options, warrants or
convertible securities for speculative purposes or as leveraged investments that
magnify the gains or losses of an investment.
The Portfolio will invest in futures and options for the following reasons:
o To keep cash on hand to meet shareholder redemptions or other needs
while simulating full investment in stocks or bonds;
o To reduce the Portfolio's transaction costs or add value when these
instruments are favorably priced;
o To forego taxes that would otherwise have to be paid on gains from the
sale of the Portfolio's securities; and
o To attempt to protect the value of certain securities owned or
intended to be purchased by the Portfolio while the manager is making
a change in the Portfolio's investment position.
WHO MANAGES THE FUNDS?
THE BOARDS. The board of directors of Morgan Keegan Select Fund, Inc. elects its
officers and oversees the management of the funds. The board of trustees of the
Portfolios oversees the management of the Portfolios and elects their officers.
The officers of the funds and the Portfolios are responsible for the funds and
the Portfolios' day-to-day operations, respectively. Information concerning the
directors, trustees and officers of both the funds and the Portfolios appears in
the Statement of Additional Information.
INVESTMENT ADVISER - CORE EQUITY FUND AND UTILITY FUND. Morgan Asset Management,
Inc. serves as investment adviser to the funds. Founded in 1986, Morgan Asset is
a wholly owned subsidiary of Morgan Keegan, Inc. As of September 30, 2000,
Morgan Asset managed over $1.4 billion in assets. Morgan Asset maintains its
principal offices at 50 North Front Street, Memphis, TN 38103.
Morgan Asset, which is responsible for directing the investments of the
funds, pursues the investment objective(s) of each fund by investing
substantially all of the investable assets of the fund into its corresponding
Portfolio. Pursuant to an Investment Advisory and Administration Agreement
between Morgan Asset and the funds, as long as the funds invest substantially
all of their investable assets in the corresponding Portfolios, Morgan Asset
will perform only corporate and administrative functions and receive an
effective annual fee of 0.05% of each fund's average daily net assets. If a fund
were to withdraw its investment in its corresponding Portfolio, Morgan Asset
would assume sole responsibility for the investment management of the fund,
including responsibility for making investment decisions and placing orders to
buy, sell or hold a particular security.
INVESTMENT ADVISER - GROWTH STOCK PORTFOLIO AND UTILITIES STOCK PORTFOLIO.
Meeder Asset Management, Inc. ("Meeder"), formerly known as R. Meeder &
Associates, Inc., serves as investment adviser to the Portfolios. Meeder has
been an investment adviser to individuals, pension and profit sharing plans,
trusts, charitable organizations, corporations and other institutions since
1974. As of September 30, 2000, Meeder and its affiliates managed approximately
$1.7 billion in assets. Meeder maintains its principal offices at 6000 Memorial
Drive, Dublin, OH 43017.
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MANAGERS - PORTFOLIOS. The Portfolios' investment advisers and subadvisers are
as follows:
<TABLE>
<CAPTION>
Portfolio and Investment Investment
CORRESPONDING FUND ADVISER SUBADVISER(S)
------------------ ------------- -------------
<S> <C> <C>
Growth Stock Portfolio Meeder Asset Management, Inc. Sector Capital Management, L.L.C.
(Core Equity Fund) and the SECTOR ADVISERS (see
"Sector Advisers - Growth Stock
Portfolio")
Utilities Stock Portfolio Meeder Asset Management, Inc. Miller/Howard Investments, Inc.
(Utility Fund)
</TABLE>
INVESTMENT SUBADVISER - GROWTH STOCK PORTFOLIO
Sector Capital Management, L.L.C. ("Sector Capital"), the Growth Stock
Portfolio's subadviser, furnishes investment advisory services in connection
with the management of the Growth Stock Portfolio. Sector Capital has been a
registered investment adviser to individuals, pension and profit sharing plans,
trusts, charitable organizations, corporations and other institutions since
January 1995. As of September 30, 2000, Sector Capital managed approximately
$1.2 billion in assets. Sector Capital has its principal offices at 5350 Poplar
Avenue, Suite 490, Memphis, Tennessee 38119.
Sector Capital utilizes its "Sector Plus" investment strategy to manage the
assets of the Growth Stock Portfolio. Pursuant to this strategy, Sector Capital
divides the assets of the Growth Stock Portfolio among ten industry sectors of
the S&P 500, each of which is managed by a separate sector adviser. Sector
Capital is responsible for overseeing the sector advisers and recommending their
hiring, termination and replacement. Meeder and Sector Capital are ultimately
responsible for the investment performance of the Growth Stock Portfolio because
of Meeder's responsibility to oversee Sector Capital and Sector Capital's
responsibility to oversee the sector advisers and recommend their hiring,
termination and replacement.
Sector Capital and the Growth Stock Portfolio have entered into a
sub-subadvisory agreement with each sector adviser selected for the Portfolio.
Sector Capital is responsible for selecting, subject to the review and approval
of the Growth Stock Portfolio's Board of Trustees, the sector advisers that have
distinguished themselves by able performance in respective areas of expertise in
sector management, and to review their continued performance. In addition,
Sector Capital is responsible for categorizing publicly traded domestic common
stocks into a specific industry sector. Sector Capital may also invest the
Growth Stock Portfolio's financial futures contracts and related options.
During the sector adviser selection process, Sector Capital performs initial due
diligence on all prospective sector advisers. In evaluating prospective sector
advisers, Sector Capital considers, among other factors, each candidate's level
of expertise; relative performance and consistency of performance; level of
adherence to investment discipline or philosophy; personnel, facilities and
financial strength; and quality of service and client communications.
Sector Capital monitors sector adviser performance through quantitative and
qualitative analysis, as well as periodic in-person, telephonic and written
consultations with sector advisers. Sector Capital has responsibility for
communicating performance expectations and evaluations to sector advisers and
ultimately recommending to the Board of Trustees of the Growth Stock Portfolio
whether sector advisers' contracts should be renewed, modified, or terminated.
Sector Capital provides reports to the Growth Stock Portfolio's Board of
Trustees regarding the results of its evaluation and monitoring functions.
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The Securities and Exchange Commission has granted the Growth Stock Portfolio an
exemptive order that permits the Growth Stock Portfolio and Sector Capital to
enter into and materially amend sub-subadvisory agreements with sector advisers,
without such agreements being approved by the Growth Stock Portfolio's investors
or the Core Equity Fund's shareholders. The exemptive order does not apply,
however, to sub-subadvisory agreements with affiliated persons of the Growth
Stock Portfolio, the Manager or Sector Capital, other than by reason of such
affiliated person serving as an existing sector adviser to the Growth Stock
Portfolio, which still require shareholder approval. The exemptive order also
permits the Growth Stock Portfolio and the Core Equity Fund to disclose, on an
aggregate basis rather than individually, the fees paid to sector advisers that
are not such affiliated persons. In addition, the exemptive order includes the
condition that within 90 days of the hiring of any new sector advisers, the
Manager and Sector Capital will furnish shareholders of the fund with an
information statement about the new sector adviser and sub-subadvisory
agreement. Any changes to the advisory contract between the Growth Stock
Portfolio and the manager or the subadvisory agreement among the Growth Stock
Portfolio, Manager and Sector Capital will still require shareholder approval. A
majority of the shareholders of the Core Equity Fund approved the operation of
the Trust in accordance with the exemption.
SECTOR ADVISERS - GROWTH STOCK PORTFOLIO
Subject to the supervision and direction of Sector Capital and, ultimately, the
Board of Trustees of the Growth Stock Portfolio, each sector adviser's
responsibilities are limited to:
o managing its portion of the securities held by the Growth Stock
Portfolio in accordance with the Portfolio's stated investment goals
and strategies,
o making investment decisions for the Growth Stock Portfolio, and
o placing orders to purchase and sell securities on behalf of the Growth
Stock Portfolio.
The following sets forth certain information about each of the sector advisers:
MILLER/HOWARD INVESTMENTS, INC. serves as sector adviser to the utilities
and transportation sectors of the Growth Stock Portfolio. Miller/Howard is a
registered investment adviser that has been providing investment services to
broker-dealers, investment advisers, employee benefit plans, endowment
portfolios, foundations and other institutions and individuals since 1984. As of
September 30, 2000, Miller/Howard managed approximately $356 million in assets.
Lowell G. Miller, President and CIO of Miller/Howard, is the portfolio manager
primarily responsible for the day-to-day management of those assets of the
Growth Stock Portfolio allocated to Miller/Howard. Mr. Miller has served as
President and portfolio manager of Miller/Howard since 1984. Miller/Howard is
also the subadviser to the Utilities Stock Portfolio, a corresponding portfolio
to The Flex-funds' Total Return Utilities Fund and the Meeder Advisor Funds'
Utility Growth Fund. Miller/Howard's principal executive offices are located at
141 Upper Byrdcliffe Road, Post Office Box 549, Woodstock, New York 12498.
HALLMARK CAPITAL MANAGEMENT, INC. serves as sector adviser to the capital
goods sector of the Growth Stock Portfolio. Hallmark is a registered investment
adviser that has been providing investment services to individuals; banks;
pension, profit sharing, and other retirement plans; trusts; endowments;
foundations; and other charitable organizations since 1986. As of September 30,
2000, Hallmark managed approximately $211 million in assets. Peter S. Hagerman
is the portfolio manager primarily responsible for the day-to-day management of
those assets of the Growth Stock Portfolio allocated to Hallmark. Mr. Hagerman
has been Chairman of the Board, President, and Chief Executive Officer of
Hallmark since 1994 and has been associated with Hallmark since 1986. Hallmark's
principal executive offices are located at One Greenbrook Corporate Center, 100
Passaic Avenue, Fairfield, New Jersey 07004.
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<PAGE>
BARROW, HANLEY, MEWHINNEY & STRAUSS, INC. serves as sector adviser to the
consumer durable and non-durable sectors of the Growth Stock Portfolio. Barrow
is a registered investment adviser that has been providing investment services
to banks; investment companies; pension and profit sharing plans; charitable
organizations and corporations since 1979. As of September 30, 2000, Barrow
managed approximately $26.0 billion in assets. Jane Gilday, CFA, is the
portfolio manager primarily responsible for the day-to-day management of those
assets of the Growth Stock Portfolio allocated to Barrow. From 1993 to 1998, Ms.
Gilday worked as a securities analyst at Hancock Institutional Equity Services
and Advest Inc. Ms. Gilday has been associated with Barrow since 1998. Barrow's
principal executive offices are located at 3232 McKinney Avenue, 15th Floor,
Dallas, Texas 75204-2429.
THE MITCHELL GROUP, INC. serves as sector adviser to the energy sector of
the Growth Stock Portfolio. The Mitchell Group is a registered investment
adviser that has been providing investment services to individuals, banks,
investment companies, pension and profit sharing plans, charitable
organizations, corporations and other institutions since 1989. As of September
30, 2000, The Mitchell Group managed approximately $425 million in assets.
Rodney Mitchell, who has served as President, Chief Executive Officer, and Chief
Financial Officer of The Mitchell Group since 1989, is the portfolio manager
primarily responsible for the day-to-day management of those assets of the
Growth Stock Portfolio allocated to The Mitchell Group. The Mitchell Group's
principal executive offices are located at 1100 Louisiana, #4810, Houston, Texas
77002.
ASHLAND MANAGEMENT INCORPORATED serves as sector adviser to the materials
and services sector of the Growth Stock Portfolio. Ashland is a registered
investment adviser that has been providing investment services to individuals,
pension and profit sharing plans, charitable organizations, corporations and
other institutions since 1975. As of September 30, 2000, Ashland managed
approximately $2.0 billion in assets. Terence J. McLaughlin, Managing Director
of Ashland, and Deborah C. Ohl, a Portfolio Manager, are the portfolio managers
primarily responsible for the day-to-day management of those assets of the
Growth Stock Portfolio allocated to Ashland. Mr. McLaughlin has been a Portfolio
Manager for Ashland since 1986. Ms. Ohl has been employed by Ashland since
August 1992 and has served as a Portfolio Manager for Ashland since 1993.
Ashland's principal executive offices are located at 26 Broadway, New York, New
York 10004.
DELTA CAPITAL MANAGEMENT INC. serves as sector adviser to the finance
sector of the Portfolio. Delta Capital is a registered investment adviser that
has been providing investment services to individuals, endowments, corporations
and other institutions since 1992. As of September 30, 2000, Delta Capital
managed approximately $900 million in assets. Delta Capital is controlled by
Francis L. Fraenkel, Chairman of Delta Capital. Jonathan Kay is the portfolio
manager primarily responsible for the day-to-day management of those assets of
the Portfolio allocated to Delta Capital. Mr. Kay has been a portfolio manager
for Delta Capital since April 1998. From 1993 to March 1998, Mr. Kay was a
portfolio manager for Scudder Kemper Investments, Inc., a registered investment
adviser. Delta Capital's principal executive offices are located at 745 Fifth
Avenue, Suite 816, New York, New York 10151.
DRESDNER RCM GLOBAL INVESTORS, L.L.C. (formerly RCM Capital Management,
L.L.C.) serves as sector adviser to the technology sector of the Growth Stock
Portfolio. Dresdner RCM is a registered investment adviser that provides
investment services to institutional and individual clients and registered
investment companies. Dresdner RCM was established in April 1996 as the
successor to the business and operations of RCM Capital Management, a California
Limited Partnership that, with its predecessors, has been in operation since
1970. As of September 30, 2000, Dresdner RCM managed approximately $85.2 billion
under management and advice. This included approximately $51.2 billion under
management and advice in San Francisco and approximately $34.0 billion by
affiliates in London, Hong Kong, and San Diego. Walter C. Price and Huachen
Chen, each Principals of Dresdner RCM, are the portfolio managers primarily
responsible for the day-to-day management of those assets of the Growth Stock
Portfolio allocated to Dresdner RCM. Messrs. Price and Chen have managed equity
portfolios on behalf of Dresdner RCM since 1985. Dresdner RCM's principal
executive offices are located at Four Embarcadero Center, San Francisco, CA
94111.
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<PAGE>
ALLIANCE CAPITAL MANAGEMENT L.P. serves as sector adviser to the health
sector of the Growth Stock Portfolio. Alliance, a registered investment adviser,
is an international investment manager supervising client accounts with assets
as of September 30, 2000 totaling approximately $388 billion. Alliance provides
investment services primarily to corporate employee benefit funds, public
employee retirement systems, investment companies, foundations, and endowment
funds. Raphael L. Edelman, Vice President of Alliance, is the portfolio manager
primarily responsible for the day-to-day management of those assets of the
Growth Stock Portfolio allocated to Alliance. Mr. Edelman, who has sixteen years
of investment experience, joined Alliance's research department in 1986 as an
analyst after working two years as a manager in Alliance's mutual fund division.
Alliance's principal executive offices are located at 1345 Avenue of the
Americas, New York, NY 10105.
INVESTMENT SUBADVISER - UTILITIES STOCK PORTFOLIO
Miller/Howard Investments, Inc. ("Miller/Howard"), the Utilities Stock
Portfolio's subadviser, makes investment decisions for the Utilities Stock
Portfolio. Meeder continues to have responsibility for all investment advisory
services provided to the Utilities Stock Portfolio and supervises
Miller/Howard's performance of such services. Miller/Howard is a registered
investment adviser that has been providing investment services to
broker-dealers, investment advisers, employee benefit plans, endowment
portfolios, foundations and other institutions and individuals since 1984. As of
September 30, 2000, Miller/Howard managed approximately $356 million in assets.
Miller/Howard has its principal offices at 141 Upper Byrdcliffe Road, P. O. Box
549, Woodstock, New York 12498.
PORTFOLIO MANAGERS
The individuals primarily responsible for the management of each of the
Portfolios are listed below:
THE GROWTH STOCK PORTFOLIO. William L. Gurner, President of Sector Capital, is
primarily responsible for the day-to-day management of the Growth Stock
Portfolio through interaction with each of the sector advisers. Mr. Gurner is
also primarily responsible for managing the futures contracts and related
options of the Portfolio on behalf of the subadviser. Mr. Gurner has managed the
Portfolio since December 1996. Mr. Gurner has been President and portfolio
manager of Sector Capital since January 1995. From September 1987 through
December 1994, Mr. Gurner served as Manager of Pension Funds for Federal
Express. Philip A. Voelker, Senior Vice President and Chief Investment Officer
of Meeder, is primarily responsible for managing the Portfolio's liquidity
reserve and managing the futures contracts and related options of the Portfolio
on behalf of Meeder. Mr. Voelker has managed assets on behalf of Meeder since
1975. Please see "Sector Advisers - Growth Stock Portfolio" for more information
about each of the Portfolio's sector advisers.
THE UTILITIES STOCK PORTFOLIO. The portfolio manager responsible for the
Utilities Stock Portfolio's investments is Lowell G. Miller, a director and the
President of Miller/Howard, the subadviser to the Portfolio. Mr. Miller has
served as President and portfolio manager of Miller/Howard and its predecessor
since 1984 and has managed the Portfolio since its inception in 1995.
MANAGEMENT FEES
During the calendar year ended December 31, 1999, the Portfolios paid management
fees totaling the following:
Management Fee as Percentage
FUND OF AVERAGE DAILY NET ASSETS
Growth Stock Portfolio 0.96%
Utilities Stock Portfolio 1.00%
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For more information about management fees, please see "Investment Adviser" and
"Investment Subadviser" in the Statement of Additional Information.
DISTRIBUTOR
Morgan Keegan & Company, Inc., Fifty Front Street, Memphis, Tennessee 38103,
serves as the distributor of the shares of the funds.
HOW IS THE COMPANY ORGANIZED?
Each fund is an open-end management investment company that is a series of
the Morgan Keegan Select Fund, Inc. (the "Company").
The board of directors of the Company oversees the funds' activities. The
board of the Company retains various companies to carry out the funds'
operations, including the distributor, funds' accounting agent, transfer agent,
auditor and others. The board has the right to terminate the funds' relationship
with any of these companies and to retain a different company if the board
believes it is in the shareholders' best interests.
The Company does not hold annual shareholder meetings, but may hold special
meetings for such purposes as electing or removing board members, changing
fundamental policies, approving a management contract or approving a 12b-1 plan
(12b-1 fees are explained in "Distribution Fees").
PORTFOLIO TRADES
In placing portfolio trades, each Portfolio's advisers may use brokerage
firms that market the Portfolio's corresponding fund's shares, but only when the
advisers believe no other firm offers a better combination of quality execution
(i.e., timeliness and completeness) and favorable price. As long as the advisers
believe a brokerage firm can provide this combination, they may consider
research and related services when choosing a brokerage firm. Brokerage firms
may use a portion of the commissions paid by a Portfolio to reduce it, or its
corresponding fund's, expenses.
DIVERSIFICATION
Both funds and both Portfolios are diversified, which means each fund may
not, with respect to at least 75% of its assets, invest more than 5% of its
assets in the securities of one issuer.
HOW DOES TAXATION AFFECT THE FUNDS AND THEIR SHAREHOLDERS?
HOW DO THE PORTFOLIOS EARN INCOME AND GAINS?
The Portfolios may earn dividends and interest (the Portfolios' "income")
on their investments. When a Portfolio sells a security for a price that is
higher than it paid, it has a gain. When a Portfolio sells a security for a
price that is lower than it paid, it has a loss. If a Portfolio has held the
security for more than one year, the gain or loss will be a long-term capital
gain or loss. If a Portfolio has held the security for one year or less, the
gain or loss will be a short-term capital gain or loss.
TAXATION OF THE PORTFOLIOS' INVESTMENTS
The Portfolios invest your money in the securities that are described in
the sections "Principal Investment Strategies" and "How Does the Fund Pursue Its
Investment Goal?" Special tax rules may apply in
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<PAGE>
determining the income and gains that a Portfolio earns on its investments.
These rules may, in turn, affect the amount of distributions that the funds pay
to you. These special tax rules are discussed in the SAI.
TAXATION OF A FUND. Regulated investment companies, like the Portfolios and
the funds, generally pay no federal income tax on the income and gains that they
distribute to their shareholders.
FOREIGN TAXES. Foreign governments may impose taxes on the income and gains
from a Portfolio's investments in foreign securities. These taxes will reduce
the amount of the funds' distributions to you.
TAXATION OF SHAREHOLDERS
WHAT IS A DISTRIBUTION?
As a shareholder, you will receive your share of the funds' income and
gains on their corresponding Portfolios' investments in stocks and other
securities. The funds' income and short-term capital gains are paid to you as
ordinary dividends. The funds' long-term capital gains are paid to you as
capital gain distributions. If the fund pays you an amount in excess of its
income and gains, this excess will generally be treated as a non-taxable return
of capital. These amounts, taken together, are what we call the funds'
distributions to you. In general, any dividends and net short-term capital gain
distributions you receive from the funds are taxable as ordinary income.
Distributions of other capital gains generally are taxable as long-term capital
gains. Each of the funds pay dividends from its net investment income on a
quarterly basis. Each of the funds distribute capital gains, if any, annually.
DIVIDEND REINVESTMENTS. Most investors have their dividends reinvested in
additional shares of the same fund. If you choose this option, or if you do not
indicate any choice, your dividends will be reinvested on the dividend payable
date. Alternatively, you can choose to have a check for your dividends mailed to
you or your Morgan Keegan brokerage account. However, if the check is not
deliverable, your dividends will be reinvested.
DISTRIBUTIONS. Distributions from a fund, whether you receive them in cash
or in additional shares, are generally subject to income tax. A fund will send
you a statement in January of the current year that reflects the amount of
ordinary dividends, capital gain distributions and non-taxable distributions you
received from the funds in the prior year. This statement will include
distributions declared in December and paid to you in January of the current
year, but which are taxable as if paid on December 31 of the prior year. The IRS
requires you to report these amounts on your income tax return for the prior
year.
DISTRIBUTIONS TO RETIREMENT PLANS. Fund distributions received by your
qualified retirement plan, such as a 401(k) plan or IRA, are generally
tax-deferred; this means that you are not required to report fund distributions
on your income tax return when paid to your plan, but, rather, when your plan
makes payments to you. Special rules apply to payouts from Roth and Education
IRAs.
DIVIDENDS-RECEIVED DEDUCTION. Corporate investors may be entitled to a
dividends-received deduction on a portion of the ordinary dividends they receive
from the funds.
BUYING A DIVIDEND. Purchasing fund shares in a taxable account shortly
before a distribution is known as "buying a dividend." In taxable accounts, you
must pay income taxes on the distribution whether you take the distribution in
cash or reinvest it. In addition, you will have to pay taxes on the distribution
whether the value of your investment decreased, increased or remained the same
after you bought the fund shares. The risk in buying a dividend is that the
Portfolios may build up taxable gains throughout the period covered by a
distribution, as securities are sold at a profit. We distribute those gains to
you, after subtracting any losses, even if you did not own the shares when the
gains occurred.
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REDEMPTIONS AND EXCHANGES
WHAT IS A REDEMPTION?
A redemption is a sale by you to a fund of some or all of your shares in
the fund. The price per share you receive when you redeem fund shares may be
more or less than the price at which you purchased those shares. An exchange of
shares in a fund for shares of another Morgan Keegan fund is treated as a
redemption of fund shares and then a purchase of shares of the other Morgan
Keegan fund. When you redeem or exchange your shares, you will generally have a
gain or loss, depending upon whether the amount you receive for your shares is
more or less than your cost or other basis in the shares.
If you redeem your shares or if you exchange your shares in a fund for
shares in another Morgan Keegan Select Fund, you will generally have a gain or
loss that the IRS requires you to report on your income tax return. All or a
portion of any loss on the redemption or exchange of your shares will be
disallowed by the IRS if you purchase other shares in the fund within 30 days
before or after your redemption or exchange.
BACKUP WITHHOLDING
By law, the funds must withhold 31% of your distributions and redemption
proceeds if you have not provided complete, correct taxpayer information and 31%
of your distributions if you are otherwise subject to backup withholding.
FINANCIAL HIGHLIGHTS
The funds have no prior operations and therefore, no historic financial
highlights.
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SHAREHOLDER MANUAL
YOUR ACCOUNT
BUYING SHARES. If you are buying shares through a Morgan Keegan & Company, Inc.
("Morgan Keegan") investment broker, he or she can assist you with all phases of
your investment.
MINIMUM INITIAL INVESTMENT FOR CLASS A AND CLASS C SHARES:
o $500
o $250 for Individual Retirement Accounts
MINIMUM ADDITIONAL INVESTMENTS:
o $250 for any account
If you are investing through a large retirement plan or other special program,
follow the instructions in your program materials.
To buy shares without the help of a Morgan Keegan investment broker, please use
the instructions on these pages.
CHOOSING A SHARE CLASS
Each fund offers three share classes. Each class has its own expense structure.
Your investment plans will determine which class is most suitable for you. For
example, if you are investing a substantial amount OR if you plan to hold your
shares for a long period, Class A shares may make the most sense for you. If you
are investing for less than five years, you may want to consider Class C shares.
Class I shares are available only to a limited group of investors. If you are
investing through a special program, such as a large employer-sponsored
retirement plan or certain programs available through brokers, you may be
eligible to purchase Class I shares.
Because all future investments in your account will be made in the share class
you designate when opening the account, you should make your decision carefully.
Your Morgan Keegan investment broker can help you choose the share class that
makes the most sense for you.
CLASS COMPARISON
CLASS A -- FRONT LOAD
o Initial sales charge of 3.00% (as a percentage of offering price which
includes the sales load); see schedule below.
o Lower sales charges for larger investments of $50,000 or more; no sales
charge for purchases of $1 million or more.
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o Lower annual expenses than Class C shares due to lower distribution (12b-1)
fee of 0.25%.
o "Letter of intent" allows you to count all investments in this or other
Morgan Keegan Funds over the next 13 months as if you were making them all
at once, for purposes of calculating sales charges.
--------------------------------------------------------------------------------
Morgan Keegan Core Equity Fund
and
Morgan Keegan Utility Fund
--------------------------------------------------------------------------------
Class A Sales Charge
--------------------------------------------------------------------------------
As a % of net
YOUR INVESTMENT AS A % OF OFFERING PRICE AMOUNT INVESTED
--------------------------------------------------------------------------------
up to $49,999 3.00% 3.09%
$50,000 to $99,999 2.40% 2.46%
$100,000 to $249,999 1.80% 1.88%
$250,000 to $499,999 1.20% 1.21%
$500,000 to $999,999 1.00% 1.01%
$1 million and over 0.00% 0.00%
--------------------------------------------------------------------------------
CLASS C -- LEVEL LOAD
o Deferred sales charge of 1% of the lesser of the purchase price of the
shares or their net asset value at the time of redemption, payable by you
if you sell shares within one year of purchase. In the event of a partial
redemption, the deferred sales charge will be applied to the oldest shares
held first.
o Annual distribution (12b-1) fee of 0.75%.
CLASS I -- NO LOAD
o No sales charges of any kind.
o No distribution (12b-1) fees; annual expenses are lower than other share
classes.
o Available only to certain retirement accounts, advisory accounts of the
investment manager and broker special programs, including broker programs
with record-keeping and other services; these programs usually involve
special conditions and separate fees (contact your Morgan Keegan investment
broker for information).
POLICIES FOR BUYING SHARES
Once you have chosen a share class, complete the enclosed application. You can
avoid future inconvenience by signing up now for any services you might later
use.
TIMING OF REQUESTS. All requests received by the close of the New York Stock
Exchange ("NYSE") (normally 4:00 p.m. eastern time) will be executed the same
day, at that day's closing share price. Orders received after the closing of the
NYSE will be executed the following day, at
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that day's closing share price. To purchase shares at the next computed net
asset value an investor must submit an order to Morgan Keegan by completing the
enclosed purchase application and sending it along with a check to Morgan Keegan
at the address listed in the application or through a pre-authorized check or
transfer plan offered by other financial institutions.
PURCHASES BY CHECK. Complete the enclosed purchase application. Forward your
application, with all appropriate sections completed, along with a check for
your initial investment payable to your Morgan Keegan investment broker or
Morgan Keegan at 50 North Front Street, Memphis, TN 38103.
Call your Morgan Keegan investment broker or Morgan Keegan at 800-366-7426 or
visit our Web site at WWW.MORGANKEEGAN.COM.
TO ADD TO AN ACCOUNT
BY PHONE. Contact Morgan Keegan at 800-366-7426.
BY CHECK. Fill out the investment stub from an account statement, or indicate
the fund name and share class on your check. Make checks payable to "Morgan
Keegan." Mail the check and stub to Morgan Keegan at 50 North Front Street,
Memphis, TN 38103.
SYSTEMATIC INVESTMENT. Call Morgan Keegan to verify that systematic investment
is in place on your account, or to request a form to add it. Investments are
automatic once this is in place. Call your Morgan Keegan investment broker or
Morgan Keegan at 800-366-7426 or visit our Web site at WWW.MORGANKEEGAN.COM.
BUYING SHARES THROUGH AN INVESTMENT BROKER
BY MAIL. Send a completed purchase application to Morgan Keegan at the address
at the bottom of this page. Specify the fund, the share class, the account
number and the dollar value or number, if any, of shares. Be sure to include any
necessary signatures and any additional documents.
BY TELEPHONE. As long as the transaction does not require a written request, you
or your investment broker can buy shares by calling Morgan Keegan at
800-366-7426. A confirmation will be mailed to you promptly. Purchase requests,
where the investor making the request does not currently have an account with
Morgan Keegan, must be made by written application and be accompanied by a check
to Morgan Keegan.
BY EXCHANGE. Read the prospectus for the fund into which you are exchanging.
Call Morgan Keegan at 800-366-7426 or visit our Web site at
www.morgankeegan.com. All exchanges will be made by telephone.
BY SYSTEMATIC INVESTMENT. See plan information on page __.
MORGAN KEEGAN & CO., INC.
50 North Front Street, Memphis, TN 38103
Call toll-free: 1-800-366-7426
(8:30 a.m. - 4:30 p.m., business days, central time)
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INTERNET
WWW.MORGANKEEGAN.COM
SELLING SHARES
POLICIES FOR SELLING SHARES
CIRCUMSTANCES THAT REQUIRE WRITTEN REQUESTS. Please submit instructions in
writing when any of the following apply:
o You are selling more than $100,000 worth of shares
o The name or address on the account has changed within the last 30 days
o You want the proceeds to go to a name or address not on the account
registration
o You are transferring shares to an account with a different registration or
share class
o You are selling shares held in a corporate or fiduciary account; for these
accounts additional documents are required:
CORPORATE ACCOUNTS: certified copy of a corporate resolution
FIDUCIARY ACCOUNTS: copy of power of attorney or other governing document
To protect your account against fraud, all written requests must bear signature
guarantees. You may obtain a signature guarantee at most banks and securities
dealers. A notary public cannot provide a signature guarantee.
TIMING OF REQUESTS. All requests received by Morgan Keegan before the close of
the NYSE (normally 4:00 p.m. eastern time) will be executed the same day, at
that day's closing price. Requests received after the close of the NYSE will be
executed the following day, at that day's closing share price.
SELLING RECENTLY PURCHASED SHARES. If you sell shares before the payment for
those shares has been collected, you will not receive the proceeds until your
initial payment has cleared. This may take up to 15 days after your purchase
date. Any delay would occur only when it cannot be determined that payment has
cleared.
TO SELL SOME OR ALL OF YOUR SHARES
THROUGH AN INVESTMENT BROKER
BY MAIL. Send a letter of instruction, an endorsed stock power or share
certificates (if you hold certificate shares) to Morgan Keegan at the address at
the bottom of this page. Specify the share class, the account number and the
dollar value or number of shares. Be sure to include any necessary signatures
and any additional documents.
BY TELEPHONE. As long as the transaction does not require a written request (see
facing page), you or your financial professional can sell shares by calling
Morgan Keegan at 800-366-7426. A check will be mailed to you on the following
business day.
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BY EXCHANGE. Read the prospectus for the fund into which you are exchanging.
Call Morgan Keegan at 800-366-7426 or visit our Web site at
www.morgankeegan.com. All exchanges may be made by telephone and mail.
BY SYSTEMATIC WITHDRAWAL. See plan information on page 14.
MORGAN KEEGAN & CO., INC.
50 North Front Street
Memphis, TN 38103
Call toll-free: 1-800-366-7426
(8:30 a.m. - 4:30 p.m., business days, central time)
INTERNET
WWW.MORGANKEEGAN.COM
ACCOUNT POLICIES
BUSINESS HOURS. The fund is open the same days as the NYSE (generally Monday
through Friday). Representatives of the fund are available normally from 8:30
a.m. to 4:30 p.m. central time on these days.
CALCULATING SHARE PRICE. The offering price of a share is its net asset value
plus a sales charge, if applicable. The Fund calculates net asset value (NAV)
every business day at the close of regular trading on the NYSE (usually 4:00
p.m. eastern time) by subtracting the liabilities attributable to shares from
the total assets attributable to such shares and dividing the result by the
number of shares outstanding. Please refer to the Statement of Additional
Information for a listing of days when the NYSE is closed.
The securities of the Portfolios are generally valued on the basis of market
quotations or, where market quotations are not readily available, on the basis
of fair value as determined by the adviser under procedures adopted by the
Portfolios' Board of Trustees.
TELEPHONE REQUESTS. When you open an account you automatically receive telephone
privileges, allowing you to place requests on your account by telephone. Your
investment broker can also use these privileges to request exchanges on your
account, and with your written permission, redemptions.
As long as Morgan Keegan takes certain measures to authenticate telephone
requests on your account, you may be held responsible for unauthorized requests.
Unauthorized telephone requests are rare, but if you want to protect yourself
completely, you can decline the telephone privilege on your application. The
fund may suspend or eliminate the telephone privilege at any time. The fund will
provide 7 days' prior written notice before suspending or eliminating telephone
privileges.
EXCHANGE PRIVILEGES. There is no fee to exchange Class A shares of the Fund for
Class A shares of any other Morgan Keegan fund. Your new fund shares will be the
same class as your current
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shares. Any contingent deferred sales charges will
continue to be calculated from the date of your initial investment.
Frequent exchanges can interfere with fund management and drive up costs for all
shareholders. Because of this, the fund currently limits each account, or group
of accounts under common ownership or control, to six exchanges per calendar
year. The fund may change or eliminate the exchange privilege at any time, may
limit or cancel any shareholder's exchange privilege and may refuse to accept
any exchange request. The fund will provide 60 days' prior written notice before
materially amending, suspending or eliminating exchange privileges.
ACCOUNTS WITH LOW BALANCES. If the value of your account falls below $500, due
to exchanges and redemption, Morgan Keegan may mail you a notice asking you to
bring the account back up to $500 or close it out. If you do not take action
within 60 days, Morgan Keegan may sell your shares and mail the proceeds to you
at the address of record.
REINSTATING RECENTLY SOLD SHARES. For 120 days after you sell Class A shares,
you have the right to "reinstate" your investment by putting some or all of the
proceeds into Class A Shares of the fund, or any other Morgan Keegan fund, at
net asset value, without payment of a sales charge.
ADDITIONAL POLICIES
Please note that the fund maintains additional policies and reserves certain
rights, including:
Class A shares may be acquired without a sales charge if the purchase is made
through a Morgan Keegan investment broker who formerly was employed as a broker
with another firm registered as a broker-dealer with the Securities and Exchange
Commission, if the following conditions are met: (1) the purchaser was a client
of the investment executive at the other firm for which the investment executive
previously served as a broker; (2) within 90 days of the purchase of the fund's
shares, the purchaser redeemed shares of one or more mutual funds for which that
other firm or its affiliates served as principal underwriter, provided that
either the purchaser had paid a sales charge in connection with investment in
such funds or a contingent deferred sales charge upon redeeming shares in such
funds; and (3) the aggregate amount of the fund's shares purchased pursuant to
this sales charge waiver does not exceed the amount of the purchaser's
redemption proceeds from the shares of the mutual fund(s) for which the other
firm or its affiliates served as principal underwriter. In addition, Class A
shares may be acquired without a sales charge if a purchase is made with the
proceeds of a redemption of other mutual fund shares, provided that the
purchaser paid a sales charge in connection with purchasing or redeeming these
shares and further provided that the purchase of the Class A shares of the fund
is made within 30 days of a redemption.
The fund may vary its initial or additional investment levels in the case of
exchanges, reinvestments, periodic investment plans, retirement and employee
benefit plans, sponsored arrangements and other similar programs.
At any time, the fund may change or discontinue any sales charge waivers and any
of its order acceptance practices, and may suspend the sale of its shares.
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To permit investors to obtain the current price, dealers are responsible for
transmitting all orders to Morgan Keegan promptly.
Dealers may impose a transaction fee on the purchase or sale of shares by
shareholders.
INVESTOR SERVICES
SYSTEMATIC INVESTMENT PROGRAM (SIP). Use SIP to set up regular automatic
investments in the fund from your bank account. You determine the frequency and
the amount of your investments, and you can skip an investment with three days'
notice. Not available with Class I shares.
SYSTEMATIC WITHDRAWAL PLAN. This plan is designated for retirees and other
investors who want regular withdrawals from a fund account. Certain terms and
minimums apply.
DIVIDEND ALLOCATION PLAN. This plan automatically invests your distributions
from the fund into another fund of your choice, without any fees or sales
charges.
AUTOMATIC BANK CONNECTION. This plan lets you route any distributions or
Systematic Withdrawal Plan payments directly to your bank account.
AUTOMATED INVESTMENTS OR WITHDRAWALS. Set up regular investments or withdrawals
to suit your needs and let Morgan Keegan do the work for you.
MOVE MONEY BY PHONE. Designate this on your application and you can move money
between your bank account and your Morgan Keegan account with a phone call.
DIVIDEND REINVESTMENT. Have your dividends automatically reinvested at no sales
charge.
EXCHANGES. It's easy to move money from the fund to any other Morgan Keegan
fund, with no exchange fees. (Exchange privilege may be changed or discontinued
at any time.) Call 800-366-7426 or visit our Web site at WWW.MORGANKEEGAN.COM.
OPENING a regular investment or a tax-deferred retirement account at Morgan
Keegan is easy. Your investment broker can help you determine if this fund is
right for you. He or she is trained to understand investments and can help speed
the application process.
TAKE ADVANTAGE of everything your investment broker and Morgan Keegan have to
offer. The services described on this page can make investing easy for you. And
your investment broker can be a valuable source of guidance and additional
services, for planning your investments and for keeping them on track with your
goals.
Morgan Keegan also offers a full range of prototype retirement plans for
individuals, sole proprietors, partnerships, corporations and employees. Call
800-366-7426 for information on retirement plans or any of the services
described above.
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MORE ABOUT RISK
A fund's risk profile is largely defined by the fund's principal securities
and investment practices. You may find the most concise description of each
fund's and corresponding Portfolios' risk profile in the fund-by-fund
information.
The Portfolios are permitted to use - within limits established by the
trustees - certain other securities and investment practices that have higher
risks and opportunities associated with them. To the extent that a fund uses
these securities or practices, its overall performance may be affected, either
positively or negatively. On the following pages are brief descriptions of these
securities and investment practices, along with the risks associated with them.
The Portfolios follow certain policies that may reduce these risks.
As with any mutual fund, there is no guarantee that the Core Equity Fund or
the Utility Fund or their corresponding Portfolios will earn income or show a
positive total return over any period of time - days, months or years.
INVESTMENT PRACTICES, SECURITIES AND RELATED RISKS
This table shows each Portfolio's or fund's investment limitations as a
percentage of the Portfolio's or fund's assets, if a percentage applies. In each
case the principal types of risk are listed (see following pages for
definitions). Numbers in this table show allowable usage only; for actual usage,
consult the Portfolios and funds' annual/semiannual reports.
NL -- No policy limitation on usage; Portfolio or fund may be using
currently
P -- Permitted, but has not typically been used
NP -- Not permitted
GROWTH STOCK UTILITIES
PORTFOLIO STOCK
(CORE EQUITY PORTFOLIO
FUND) (UTILITY
FUND)
SMALL AND MID-SIZED COMPANY NL P
SECURITIES. Market, liquidity
and information risks.
FOREIGN SECURITIES. Market, NP 25%
currency, transaction, liquidity,
information and political risks.
SECTOR FOCUS. Market and NP NL
liquidity risks.
CONVERTIBLE SECURITIES. Market, P P
interest rate, prepayment and
credit risks.
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INVESTMENT GRADE BONDS. Interest P P
rate, prepayment, market and
credit risks.
COMPANIES WITH LIMITED OPERATING P P
HISTORIES. Market, liquidity and
information risks.
ILLIQUID AND RESTRICTED 10% 10%
SECURITIES. Market, liquidity
and transaction risks.
DEFENSIVE MEASURES. Opportunity 20% 100%
risk.
REPURCHASE AGREEMENTS. Credit 20% 100%
risk.
BORROWING; REVERSE REPURCHASE 5% 33-1/3%
AGREEMENTS. Leverage and credit
risks.
HEDGING STRATEGIES; FINANCIAL 100% 100%
FUTURES AND OPTIONS; SECURITIES
AND INDEX OPTIONS. Hedging,
correlation, opportunity,
leverage, interest rate, market,
and liquidity risks.
CURRENCY CONTRACTS. Currency NP P
leverage, credit, correlation,
liquidity and opportunity risks.
SECURITIES LENDING. Credit risk. NP 30%
SHORT-TERM TRADING. Market risk. NL NL
WHEN-ISSUED SECURITIES AND NP P
FORWARD COMMITMENTS. Market,
opportunity and leverage risks.
RISK AND INVESTMENT GLOSSARY
BORROWING AND REVERSE REPURCHASE AGREEMENTS refer to a loan of money from a
bank or other financial institution undertaken by a PORTFOLIO or fund.
COMMON STOCK is a share of ownership (equity) interest in a company.
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<PAGE>
COMPANIES WITH LIMITED OPERATING HISTORIES are securities issued by
companies that have been in continuous operation for less than three years.
Sometimes called "unseasoned" issuers.
CONVERTIBLE SECURITIES are debt or equity securities which may be converted
on specified terms into stock of the issuer.
CORRELATION RISK occurs when a Portfolio "hedges" - uses one investment to
offset the Portfolio's position in another. If the two investments do not behave
in relation to one another the way the portfolio managers expect them to, then
unexpected results may occur.
CREDIT RISK means that the issuer of a security or the counterparty to an
investment contract may default or become unable to pay its obligations when
due.
CURRENCY CONTRACTS involve the right or obligation to buy or sell a given
amount of foreign currency at a specified price and future date.
CURRENCY RISK happens when a Portfolio buys or sells a security denominated
in foreign currency. Foreign currencies "float" in value against the U.S.
dollar. Adverse changes in foreign currency value can cause investment losses
when a Portfolio's investments are converted to U.S. dollars.
DEFENSIVE MEASURES may be taken when a Portfolio's adviser believes they
are warranted due to market conditions. When this happens, the Portfolio may
increase its investment in government securities and other short-term securities
without regard to the Portfolio's investment restrictions, policies or normal
investment emphasis. As a result, the Portfolio could be unable to achieve its
investment objective.
DIVERSIFICATION means a diversified fund may not, with respect to at least
75% of its assets, invest more than 5% of its assets in the securities of one
company. A non-diversified fund may be more volatile than a diversified fund
because it invests more of its assets in a smaller number of companies and the
gains or losses on a single stock will therefore have a greater impact on the
fund's share price. Both of the funds are diversified funds.
FINANCIAL FUTURES are exchange-traded contracts on securities, securities
indexes or foreign currencies that obligate the holder to take or make future
delivery of a specified quantity of those underlying securities or currencies on
a predetermined future date.
FOREIGN SECURITIES are issued by companies located outside of the United
States. A Portfolio considers a company to be located outside the United States
if the principal securities trading market for its equity securities is located
outside the U.S. or it is organized under the laws of, and has its principal
office in, a country other than the U.S. The risks of investing in foreign
countries include the possibility of the imposition of exchange controls,
currency devaluations, foreign ownership limitations, expropriation,
restrictions on removal of currency or other assets, nationalization of assets,
punitive taxes, and certain custody and settlement risks.
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<PAGE>
DEVELOPING COUNTRIES: Investments in developing or emerging markets are
subject to all of the risks of foreign investing generally, and have
additional heightened risks due to a lack of established legal,
business and social frameworks to support securities markets. Foreign
securities markets, including emerging markets, may have substantially
lower trading volumes than U.S. markets, resulting in less liquidity
and more volatility than experienced in the U.S.
FORWARD FOREIGN CURRENCY CONTRACTS are privately negotiated contracts
committing the holder to purchase or sell a specified quantity of a foreign
currency on a predetermined future date.
HEDGING RISK comes into play when a Portfolio uses a security whose value
is based on an underlying security or index to "offset" the Portfolio or fund's
position in another security or currency. The objective of hedging is to offset
potential losses in one security with gains in the hedge. But a hedge can
eliminate or reduce gains as well as offset losses. (Also see "Correlation
Risk.")
ILLIQUID AND RESTRICTED SECURITIES are securities which, by rules of their
issue or by their nature, cannot be sold readily. These include illiquid Rule
144A securities.
INFORMATION RISK means that information about a security or issuer may not
be available, complete, accurate or comparable.
INTEREST RATE RISK is the risk that changes in interest rates will
adversely affect the value of an investor's securities. When interest rates
rise, the value of fixed-income securities will generally fall. Conversely, a
drop in interest rates will generally cause an increase in the value of
fixed-income securities. Longer-term securities are subject to greater interest
rate risk.
INVESTMENT GRADE BONDS are rated BBB (Standard & Poor's) or Baa (Moody's)
or above. Bonds rated below investment grade are subject to greater credit risk
than investment grade bonds.
LEVERAGE RISK occurs in some securities or techniques that tend to magnify
the effect of small changes in an index or a market. This can result in a loss
that exceeds the account that was invested in the contract.
LIQUIDITY RISK occurs when investments cannot be sold readily. A Portfolio
may have to accept a less-than-desirable price to complete the sale of an
illiquid security or may not be able to sell it at all.
MARKET CAPITALIZATION is the total current market value of a company's
outstanding common stock.
MARKET RISK exists in all mutual funds and means the risk that the prices
of securities in a market, a sector, or an industry will fluctuate, and that
such movements might reduce an investment's value.
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<PAGE>
OPPORTUNITY RISK means missing out on an investment opportunity because the
assets necessary to take advantage of it are committed to less advantageous
investments or strategies.
OPTIONS are contracts giving the holder the right but not the obligation to
purchase or sell a security on or before a predetermined future date for a fixed
price. Options on securities indexes are similar, but settle in cash.
POLITICAL RISK comes into play with investments, particularly foreign
investments, which may be adversely affected by nationalization, taxation, war,
government instability or other economic or political actions or factors.
PREPAYMENT RISK is the risk that, as interest rates fall, borrowers are
more likely to refinance their debts. As a result, the principal on certain
fixed income securities may be paid earlier than expected, which could cause
investment losses and cause prepaid amounts to have to be reinvested at a
relatively lower interest rate.
REPURCHASE AGREEMENTS means the purchase of a security that must later be
sold back to the issuer at the same price plus interest.
SECTOR FOCUS occurs when a significant portion of a Portfolio's assets is
invested in a relatively small number of related industries. Only the Utility
Fund will concentrate more than 25% of its total assets in any one industry.
SECURITIES LENDING means the lending of securities to financial
institutions, which provide cash or government securities as collateral.
SHORT-TERM TRADING means selling a security soon after purchase. A
portfolio engaging in short-term trading will have higher turnover and
transaction expenses. Short-term trading may also result in short-term capital
gains. Upon the distribution to you of any net short-term capital gains from a
fund, you will be taxed at ordinary tax rates. Because the adviser or subadviser
may take defensive measures with regard to 100% of the assets in the
corresponding Portfolios of the funds, the risks and expenses of short-term
trading may be high in these Portfolios.
SMALL AND MID-SIZED COMPANY SECURITIES are securities issued by small or
mid-sized companies, as measured by their market capitalization. Small companies
are those with a market capitalization ranging from $250 million to $1 billion.
Mid-sized companies are those with a market capitalization ranging from $1
billion to $5 billion. Historically, smaller company securities have been more
volatile in price than larger company securities, especially over the
short-term. Among the reasons for the greater price volatility are the less
certain growth prospects of smaller companies, the lower degree of liquidity in
the markets for such securities, and the greater sensitivity of smaller
companies to changing economic conditions. In general, the smaller the company,
the greater its risks.
TRANSACTION RISK means that a portfolio may be delayed or unable to settle
a transaction or that commissions and settlement expenses may be higher than
usual.
WHEN ISSUED SECURITIES AND FORWARD COMMITMENTS involve the purchase and
sale of securities for delivery at a future date, market value may change before
delivery.
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<PAGE>
FOR MORE INFORMATION:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more detailed information about the funds. The SAI has
been filed with the Securities and Exchange Commission and is incorporated
by reference in this Prospectus (is legally a part of this Prospectus).
ANNUAL AND SEMIANNUAL REPORTS
These reports include portfolio holdings, financial statements, performance
information, the auditor's report (in the case of the annual report), and a
discussion of the market conditions and investment strategies that
significantly affected the funds' performance during their last fiscal
year.
Information about the funds (including the SAIs) can be reviewed and copied
at the Commission's Public Reference Room in Washington, D.C., and
information on the operation of the Public Reference Room may be obtained
by calling the Commission at 1-202-942-8090. Reports and other information
about the funds are available on the EDGAR Database on the Commission's
Internet site at http://www.sec.gov, and copies of this information may be
obtained, after paying a duplicating fee, by electronic request at the
following E-mail address: [email protected], or by writing the
Commission's Public Reference Section, Washington, D.C. 20549-0102.
To request a free copy of the current annual/semi-annual report or SAI,
request other information about the funds, or make shareholder inquiries,
please write, call or E-mail us at:
Morgan Keegan & Company, Inc.
Morgan Keegan Tower
Fifty Front Street
Memphis, Tennessee 38103
(901) 524-4100
(800) 366-7426
Internet: WWW.MORGANKEEGAN.COM
--------------------
SEC File No.: 811-09079
35
<PAGE>
THE MORGAN KEEGAN CORE EQUITY FUND
A SERIES OF THE MORGAN KEEGAN SELECT FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
________________, 2000
The Morgan Keegan Core Equity Fund is a series of the Morgan Keegan Select
Fund, Inc. (the "Company"), a diversified open-end management investment company
incorporated in Maryland on October 27, 1998. The fund invests in a diversified
portfolio of domestic common stocks with greater than average growth
characteristics selected primarily from the Standard and Poor's 500 Composite
Stock Price Index.
This Statement of Additional Information is not a prospectus but should be
read in conjunction with the fund's Prospectus, dated ______________, 2000,
which has been filed with the Securities and Exchange Commission. A copy of the
current Prospectus is available without charge from Morgan Keegan & Company,
Inc., the fund's distributor, by calling (800) 366-7426. Please retain this
document for future reference. Capitalized terms used and not otherwise defined
herein have the same meanings as defined in the Prospectus.
TABLE OF CONTENTS PAGE
Additional Information About Investment Policies and Limitations 2
Additional Tax Information 12
Additional Purchase and Redemption Information 13
Valuation of Shares 15
Purchase of Shares 15
Performance Information 16
Tax-Deferred Retirement Plans 18
The Company's Officers and Directors 19
The Portfolio's Officers and Trustees 21
The Fund's Investment Adviser 24
The Portfolio's Investment Adviser 25
The Portfolio's Investment Subadviser 28
The Portfolio's Investment Sub-subadvisers 29
Portfolio Transactions and Brokerage 33
Valuation of Portfolio Securities 35
The Fund's Distributor 36
Description of the Fund's Shares 38
The Fund's Custodian, Transfer Agent, Dividend Disbursing Agent
and Portfolio Accounting Service Agent 41
The Fund's Legal Counsel 41
The Fund's Certified Public Accountants 42
Financial Statements 42
INVESTMENT ADVISER TRANSFER AGENT & DISTRIBUTOR
------------------ ----------------------------
Meeder Asset Management, Inc. Morgan Keegan & Company, Inc.
INVESTMENT SUBADVISER PORTFOLIO ACCOUNTING SERVICE AGENT
--------------------- AND ADMINISTRATOR
Sector Capital Management, L.L.C. -----------------------------------
Mutual Funds Service Co.
<PAGE>
ADDITIONAL INFORMATION ABOUT
INVESTMENT POLICIES AND LIMITATIONS
The following policies and limitations supplement those set forth in the
Prospectus. Unless otherwise noted, whenever an investment policy or limitation
states a maximum percentage of the Portfolio's assets that may be invested in
any security or other asset, or sets forth a policy regarding quality standards,
such standard or percentage limitation will be determined immediately after and
as a result of the Portfolio's acquisition of such security or other asset.
Accordingly, any subsequent change in values, net assets, or other circumstances
will not be considered when determining whether the investment complies with the
fund's investment policies and limitations.
The fund's fundamental investment limitations cannot be changed without
approval by a "majority of the outstanding voting securities" (as defined in the
Investment Company Act of 1940) of the fund. However, except for the fundamental
investment limitations set forth below, the investment policies and limitations
described in this Statement of Additional Information are not fundamental and
may be changed by the Board of Directors without shareholder approval. THE
FOLLOWING ARE THE PORTFOLIO'S FUNDAMENTAL INVESTMENT LIMITATIONS SET FORTH IN
THEIR ENTIRETY; PROVIDED THAT NOTHING IN THE FOLLOWING INVESTMENT RESTRICTIONS
WILL PREVENT THE FUND FROM INVESTING ALL OR PART OF THE FUND'S ASSETS IN AN
OPEN-END MANAGEMENT INVESTMENT COMPANY WITH THE SAME INVESTMENT OBJECTIVE AS THE
FUND. THE FUND OR THE PORTFOLIO MAY NOT:
(1) with respect to 75% of the Portfolio's total assets, purchase the
securities of any issuer (other than obligations issued or guaranteed by the
government of the United States, or any of its agencies or instrumentalities)
if, as a result thereof, (a) more than 5% of the Portfolio's total assets would
be invested in the securities of such issuer, or (b) the Fund would hold more
than 10% of the voting securities of such issuer;
(2) issue senior securities, except as permitted under the Investment
Company Act of 1940;
(3) borrow money, except that the Portfolio may borrow money for temporary
or emergency purposes (not for leveraging or investment) in an amount not
exceeding 5% of its total assets including the amount borrowed less liabilities
(other than borrowings). Any borrowings that come to exceed this amount will be
reduced within three days (not including Sundays and holidays) to the extent
necessary to comply with the 5% limitation;
(4) underwrite securities issued by others (except to the extent that the
Portfolio may be deemed to be an underwriter within the meaning of the
Securities Act of 1933 in the disposition of restricted securities);
(5) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or instrumentalities)
if, as a result, more than 25% of the Portfolio's total assets would be invested
in the securities of companies whose principal business activities are in the
same industry;
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<PAGE>
(6) purchase or sell real estate unless acquired as a result of ownership
of securities or other instruments (but this shall not prevent the Portfolio
from investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business); or
(7) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
Portfolio from purchasing or selling options and futures contracts or from
investing in securities or other instruments backed by physical commodities).
THE FOLLOWING INVESTMENT LIMITATIONS ARE NOT FUNDAMENTAL, AND MAY BE CHANGED
WITHOUT SHAREHOLDER APPROVAL.
(i) The Portfolio does not currently intend to engage in short sales, but
may engage in short sales "against the box" to the extent that the Portfolio
contemporaneously owns or has the right to obtain at no added cost securities
identical to those sold short, and provided that transactions in futures
contracts and options are not deemed to constitute selling securities short.
(ii) The Portfolio does not currently intend to purchase securities on
margin, except that the Fund may obtain such short-term credits as are necessary
for the clearance of transactions, and provided that margin payments in
connection with futures contracts and options on futures contracts shall not
constitute purchasing securities on margin.
(iii) The Portfolio may borrow money only from a bank. The Portfolio will
not purchase any security while borrowings representing more than 5% of its
total assets are outstanding.
(iv) The Portfolio does not currently intend to purchase any security if,
as a result, more than 10% of its net assets would be invested in securities
that are deemed to be illiquid because they are subject to legal or contractual
restrictions on resale or because they cannot be sold or disposed of in the
ordinary course of business at approximately the prices at which they are
valued, including repurchase agreements with remaining maturities in excess of
seven days or securities without readily available market quotes.
(v) The Portfolio does not currently intend to invest in securities of real
estate investment trusts that are not readily marketable, or to invest in
securities of real estate limited partnerships that are not listed on the New
York Stock Exchange or the American Stock Exchange or traded on the NASDAQ
National Market System.
(vi) The Portfolio does not currently intend to purchase securities of
other investment companies. This limitation does not apply to securities
received as dividends, through offers of exchange, or as a result of
reorganization, consolidation, or merger.
(vii) The Portfolio does not currently intend to purchase the securities of
any issuer (other than securities issued or guaranteed by the U.S. Government or
political subdivisions thereof) if, as a result, more than 5% of its total
assets would be invested in the securities of business enterprises that,
including predecessors, have a record of less than three years of continuous
operation.
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(viii) The Portfolio does not currently intend to purchase warrants, valued
at the lower of cost or market, in excess of 5% of the Portfolio's net assets.
Included in that amount, but not to exceed 2% of the Portfolio's net assets, may
be warrants that are not listed on the New York Stock Exchange or the American
Stock Exchange. Warrants acquired by the Portfolio in units or attached to
securities are not subject to these restrictions.
(ix) The Portfolio does not currently intend to invest in oil, gas, or
other mineral exploration or development programs or leases.
(x) The Portfolio does not currently intend to purchase the securities of
any issuer if those officers and Trustees of the Trust and those officers and
directors of the Manager, the Subadviser, or the Sector Advisers who
individually own more than 1/2 of 1% of the securities of such issuer, together
own more than 5% of such issuer's securities.
For the Portfolio's limitations on futures and options transactions, see
the section entitled "Limitations on Futures and Options Transactions." For the
Portfolio's limitations on short sales, see the section entitled "Short Sales."
MONEY MARKET INSTRUMENTS When investing in money market instruments, the
Portfolio will limit its purchases, denominated in U.S. dollars, to the
following securities.
U.S. Government Securities and Securities of its Agencies and
Instrumentalities - obligations issued or guaranteed as to principal or interest
by the United States or its agencies (such as the Export Import Bank of the
United States, Federal Housing Administration, and Government National Mortgage
Association) or its instrumentalities (such as the Federal Home Loan Bank,
Federal Intermediate Credit Banks and Federal Land Bank), including Treasury
bills, notes and bonds.
Bank Obligations and Instruments Secured Thereby - obligations (including
certificates of deposit, time deposits and bankers' acceptances) of domestic
banks having total assets of $1,000,000,000 or more, instruments secured by such
obligations and obligations of foreign branches of such banks, if the domestic
parent bank is unconditionally liable to make payment on the instrument if the
foreign branch fails to make payment for any reason. The Portfolio may also
invest in obligations (including certificates of deposit and bankers'
acceptances) of domestic branches of foreign banks having assets of
$1,000,000,000 or more, if the domestic branch is subject to the same regulation
as United States banks. The Portfolio will not invest at time of purchase more
than 25% of its assets in obligations of banks, nor will the Portfolio invest
more than 10% of its assets in time deposits.
High Quality Commercial Paper - The Portfolio may invest in commercial
paper rated no lower than "A-2" by Standard & Poor's Corporation or "Prime-2" by
Moody's Investors Services, Inc., or, if not rated, issued by a company having
an outstanding debt issue rated at least A by Standard & Poor's or Moody's.
Private Placement Commercial Paper - Private placement commercial paper
consists of unregistered securities which are traded in public markets to
qualified institutional investors, such as the Portfolio. The Portfolio's risk
is that the universe of potential buyers for
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the securities, should the Portfolio desire to liquidate a position, is limited
to qualified dealers and institutions, and therefore such securities could have
the effect of being illiquid.
High Grade Corporate Obligations - obligations rated at least A by Standard
& Poor's or Moody's. See rating information below.
Repurchase Agreements - See "Repurchase Agreements" below.
The Manager exercises due care in the selection of money market
instruments. However, there is a risk that the issuers of the securities may not
be able to meet their obligations to pay interest or principal when due. There
is also a risk that some of the Portfolio's securities might have to be
liquidated prior to maturity at a price less than original amortized cost or
value, face amount or maturity value to meet larger than expected redemptions.
Any of these risks, if encountered, could cause a reduction in net income or in
the net asset value of the Portfolio.
RATINGS
1. Moody's Investors Services, Inc.'s ("Moody's") Corporate Bond Rating:
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be 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 or
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A 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 which are rated Baa 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 or time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
2. Standard and Poor's Corporation's ("S&P") Corporate Bond Rating:
AAA - Bonds rated AAA are highest grade obligations. They possess the
ultimate degree of protection as to principal and interest. Marketwise they move
with interest rates, and hence provide the maximum safety on all counts.
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AA - Bonds rated AA also qualify as high grade obligations, and in the
majority of instances differ from AAA issues only in small degree. Here, too,
prices move with the long-term money market.
A - Bonds rated A are regarded as upper medium grade. They have
considerable investment strength but are not entirely free from the adverse
effect of changes in economic and trade conditions. Interest and principal are
regarded as safe. They predominantly reflect money rates in their market
behavior but, to some extent, also economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
3. Commercial Paper Ratings:
Commercial paper rated A-1 by S&P has the following characteristics:
Liquidity ratios are adequate to meet cash requirements. Long term senior debt
is rated "A" or better. The issuer has access to at least two additional
channels of borrowing. Basic earnings and cash flow have an upward trend.
Typically, the issuer's industry is well established and the issuer has a strong
position within the industry. The reliability and quality of management are
unquestioned. Relative strength or weakness of the above factors determines
whether the issuer's commercial paper is A-1, A-2, or A-3.
The rating P-1 is the highest commercial paper rating assigned by Moody's.
Among the factors considered by Moody's in assigning ratings are the following:
(1) evaluation of the management of the issuer; (2) economic evaluation of the
issuer's industry or industries and an appraisal of speculative-type risks which
may be inherent in certain areas; (3) evaluation of the issuer's products in
relation to competition and customer acceptance; (4) liquidity; (5) amount and
quality of long-term debt; (6) trend of earnings over a period of ten years; (7)
financial strength of a parent company and the relationships which exist with
the issuer; and (8) recognition by the management of obligations which may be
present or may arise as a result of public interest questions and preparations
to meet such obligations.
4. Description of Permitted Money Market Investments:
Commercial Paper - refers to promissory notes issued by corporations in
order to finance their short term credit needs.
U.S. Government Obligations - are bills, certificates of indebtedness notes
and bonds issued by the U.S. Treasury and agencies, authorities and
instrumentalities of the U.S. Government established under the authority of an
act of Congress. Some obligations of U.S. Government agencies, authorities and
instrumentalities are supported by the full faith and credit of the U.S.
Treasury, as for example, the Government National Mortgage Association; others
by the right of the issuer to borrow from the Treasury, as in the case of
Federal Farm Credit Banks and Federal National Mortgage Association; and others
only by the credit of the agency, authority or instrumentality; as for example,
Federal Home Loan Mortgage and Federal Home Loan Bank.
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Repurchase Agreements - See "Repurchase Agreements" below.
Certificates of Deposit - are certificates issued against funds deposited
in a bank, are for a definite period of time, earn a specified or variable rate
of return and are normally negotiable.
Banker's Acceptances - are short-term credit instruments used to finance
the import, export, transfer or storage of goods. They are termed "accepted"
when a bank guarantees their payment at maturity.
Corporate Obligations - include bonds and notes issued by corporations in
order to finance longer term credit needs.
ILLIQUID INVESTMENTS are investments that cannot be sold or disposed of in
the ordinary course of business (within seven days) at approximately the prices
at which they are valued. Under the supervision of the Board of Trustees, the
Manager, Subadviser and/or Sector Advisers determine the liquidity of the
Portfolio's investments and, through reports from the Manager, Subadviser and/or
Sector Advisers, the Board monitors investments in illiquid instruments. In
determining the liquidity of the Portfolio's investments, the Manager,
Subadviser and Sector Advisers may consider various factors, including (1) the
frequency of trades and quotations, (2) the number of dealers and prospective
purchasers in the marketplace, (3) dealer undertakings to make a market, (4) the
nature of the security (including any demand or tender features), and (5) the
nature of the marketplace for trades (including the ability to assign or offset
the Portfolio's rights and obligations relating to the investment). Investments
currently considered by the Portfolio to be illiquid include repurchase
agreements not entitling the holder to payment of principal and interest within
seven days, over-the-counter options, and non-government stripped fixed-rate
mortgage-backed securities. Also, the Manager, Subadviser and/or Sector Advisers
may determine some restricted securities to be illiquid. However, with respect
to over-the-counter options the Portfolio writes, all or a portion of the value
of the underlying instrument may be illiquid depending on the assets held to
cover the option and the nature and terms of any agreement the Portfolio may
have to close out the option before expiration. In the absence of market
quotations, illiquid investments are priced at fair value as determined in good
faith by the Board of Trustees. If through a change in values, net assets, or
other circumstances, the Portfolio were in a position where more than 10% of its
net assets were invested in illiquid securities, it would seek to take
appropriate steps to protect liquidity.
RESTRICTED SECURITIES generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the Securities
Act of 1933, or in a registered public offering. Where registration is required,
the Portfolio may be obligated to pay all or part of the registration expense
and a considerable period may elapse between the time it decides to seek
registration and the time the Portfolio may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, the Portfolio might obtain a less favorable
price than prevailed when it decided to seek registration of the security.
REPURCHASE AGREEMENTS. In a repurchase agreement, the Portfolio purchases a
security and simultaneously commits to resell that security to the seller at an
agreed upon
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price on an agreed upon date within a number of days from the date of purchase.
The resale price reflects the purchase price plus an agreed upon incremental
amount which is unrelated to the coupon rate or maturity of the purchased
security. A repurchase agreement involves the obligation of the seller to pay
the agreed upon price, which obligation is in effect secured by the value (at
least equal to the amount of the agreed upon resale price and marked to market
daily) of the underlying security. The Portfolio may engage in repurchase
agreements with respect to any security in which it is authorized to invest.
While it does not presently appear possible to eliminate all risks from
these transactions (particularly the possibility of a decline in the market
value of the underlying securities, as well as delays and costs to the Portfolio
in connection with bankruptcy proceedings), it is the Portfolio's current policy
to limit repurchase agreement transactions to parties whose creditworthiness has
been reviewed and found satisfactory by the Manager.
HEDGING STRATEGIES. The Portfolio may engage in hedging transactions in
carrying out its investment policies. The Manager may conduct a hedging program
on behalf of the Portfolio for the following reasons: (1) to keep cash on hand
to meet shareholder redemptions or other needs while simulating full investment
in stocks; (2) to reduce the fund's transaction costs or add value when these
instruments are favorably priced; (3) to forego taxes that would otherwise have
to be paid on gains from the sale of the fund's securities; and (4) to attempt
to protect the value of certain securities owned or intended to be purchased by
the fund's while the manager is making a change in the fund's investment
position.
A hedging program involves entering into an "option" or "futures"
transaction in lieu of the actual purchase or sale of securities. At present,
many groups of common stocks (stock market indices) may be made the subject of
futures contracts, while government securities such as Treasury Bonds and Notes
are among debt securities currently covered by futures contracts.
Financial futures contracts or related options used by the Portfolio to
implement its hedging strategies are considered derivatives. The value of
derivatives can be affected significantly by even small market movements,
sometimes in unpredictable ways.
LIMITATIONS ON FUTURES AND OPTIONS TRANSACTIONS. The Portfolio will not:
(a) write call options if, as a result, more than 25% of the Portfolio's total
assets would be hedged with options under normal conditions; or (b) purchase
futures contracts if, as a result, the Portfolio's total obligations upon
settlement or exercise of purchased futures contracts would exceed 25% of its
total assets. These limitations do not apply to options attached to or acquired
or traded together with their underlying securities, and do not apply to
securities that incorporate features similar to options.
For certain regulatory purposes, the Commodity Futures Trading Commission
("CFTC") limits the types of futures positions that can be taken in conjunction
with the management of a securities portfolio for mutual funds, such as the
Portfolio. All futures transactions for the Portfolio will consequently be
subject to the restrictions on the use of futures contracts established in CFTC
rules, such as observation of the CFTC's definition of "hedging." In addition,
whenever the Portfolio establishes a long futures position, it will set aside
cash or cash equivalents equal to the underlying commodity value of the long
futures contracts held by the Portfolio. Although all futures contracts involve
leverage by virtue of
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the margin system applicable to trading on futures exchanges, the Portfolio will
not, on a net basis, have leverage exposure on any long futures contracts that
it establishes because of the cash set aside requirement. All futures
transactions can produce a gain or a loss when they are closed, regardless of
the purpose for which they have been established. Unlike short futures contracts
positions established to protect against the risk of a decline in value of
existing securities holdings, the long futures positions established by the
Portfolio to protect against reinvestment risk are intended to protect the
Portfolio against the risks of reinvesting portfolio assets that arise during
periods when the assets are not fully invested in securities.
The Portfolio may not purchase or sell financial futures or purchase
related options if immediately thereafter the sum of the amount of margin
deposits on the Portfolio's existing futures positions and premiums paid for
related options would exceed 5% of the market value of the Portfolio's total
assets.
The above limitations on the Portfolio's investments in futures contracts
and options, and the Portfolio's policies regarding futures contracts and
options discussed elsewhere in this Statement of Additional Information, may be
changed as regulatory agencies permit.
FUTURES CONTRACTS. When the Portfolio purchases a futures contract, it
agrees to purchase a specified underlying instrument at a specified future date.
When the Portfolio sells a futures contract, it agrees to sell the underlying
instrument at a specified future date. The price at which the purchase and sale
will take place is fixed when the Portfolio enters into the contract.
Some currently available futures contracts are based on indices of
securities-prices, such as the Standard & Poor's 500 Composite Stock Price Index
(S&P 500). Futures can be held until their delivery dates, or can be closed out
before then if a liquid secondary market is available.
The value of a futures contract tends to increase and decrease in tandem
with the value of its underlying instrument. Therefore, purchasing futures
contracts will tend to increase the Portfolio's exposure to positive and
negative price fluctuations in the underlying instrument, much as if it had
purchased the underlying instrument directly. When the Portfolio sells a futures
contract, by contrast, the value of its futures position will tend to move in a
direction contrary to the market. Selling futures contracts, therefore, will
tend to offset both positive and negative market price changes, much as if the
underlying instrument had been sold.
FUTURES MARGIN PAYMENTS. The purchaser or seller of a futures contract is
not required to deliver or pay for the underlying instrument unless the contract
is held until the delivery date. However, both the purchaser and seller are
required to deposit "initial margin" with a futures broker, known as a futures
commission merchant (FCM), when the contract is entered into. Initial margin
deposits are typically equal to a percentage of the contract's value.
If the value of either party's position declines, that party will be
required to make additional "variation margin" payments to settle the change in
value on a daily basis. The party that has a gain may be entitled to receive all
or a portion of this amount. Initial and variation margin payments do not
constitute purchasing securities on margin for purposes of the Portfolio's
investment limitations. In the event of the bankruptcy of an FCM that holds
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margin on behalf of the Portfolio, the Portfolio may be entitled to return of
margin owed to it only in proportion to the amount received by the FCM's other
customers, potentially resulting in losses to the Portfolio.
WRITING CALL OPTIONS. Writing a call option obligates the Portfolio to sell
or deliver the option's underlying instrument, in return for the strike price,
upon exercise of the option. The characteristics of writing call options are
similar to those of writing put options, except that writing calls generally is
a profitable strategy if prices remain the same or fall. Through receipt of the
option premium, a call writer mitigates the effects of a price decline. At the
same time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
CORRELATION OF PRICE CHANGES. Because there are a limited number of types
of exchange traded options and futures contracts, it is likely that the
standardized contracts available will not match the Portfolio's current or
anticipated investments exactly. The Portfolio may invest in options and futures
contracts based on securities with different issuers, maturities, or other
characteristics from the securities in which it typically invests, which
involves a risk that the options or futures position will not track the
performance of the Portfolio's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match the Portfolio's
investments well. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation may
also result from differing levels of demand in the options and futures markets
and the securities markets, from structural differences in how options and
futures and securities are traded, or from imposition of daily price fluctuation
limits or trading halts.
The Portfolio may purchase or sell options and futures contracts with a
greater or lesser value than the securities it wishes to hedge or intends to
purchase in order to attempt to compensate for differences in volatility between
the contract and the securities, although this may not be successful in all
cases. If price changes in the Portfolio's options or futures positions are
poorly correlated with its other investments, the positions may fail to produce
anticipated gains or result in losses that are not offset by gains in other
investments.
LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS. There is no assurance a liquid
secondary market will exist for any particular options or futures contract at
any particular time. Options may have relatively low trading volume and
liquidity if their strike prices are not close to the underlying instrument's
current price. In addition, exchanges may establish daily price fluctuation
limits for options and futures contracts, and may halt trading if a contract's
price moves upward or downward more than the limit in a given day. On volatile
trading days when the price fluctuation limit is reached or a trading halt is
imposed, it may be impossible for the Portfolio to enter into new positions or
close out existing positions. If the secondary market for a contract is not
liquid because of price fluctuation limits or otherwise, it could prevent prompt
liquidation of unfavorable positions, and potentially could require the
Portfolio to continue to hold a position until delivery or expiration regardless
of changes in
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its value. As a result, the Portfolio's access to other assets held to cover its
options or futures positions could also be impaired.
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS. The Portfolio will comply
with guidelines established by the SEC with respect to coverage of options and
futures strategies by mutual funds, and if the guidelines so require, will set
aside appropriate liquid assets in a segregated custodial account in the amount
prescribed. Securities held in a segregated account cannot be sold while the
futures or option strategy is outstanding, unless they are replaced with other
suitable assets. As a result, there is a possibility that segregation of a large
percentage of the Portfolio's assets could impede portfolio management or the
Fund's ability to meet redemption requests or other current obligations.
SHORT SALES. The Portfolio may enter into short sales "against the box"
with respect to equity securities it holds. For example, if a Sector Adviser
anticipates a decline in the price of a stock the Portfolio holds, it may sell
the stock short "against the box." If the stock price subsequently declines, the
proceeds of the short sale could be expected to offset all or a portion of the
stock's decline. The Portfolio currently intends to hedge no more than 15% of
its total assets with short sales "against the box" on equity securities under
normal circumstances.
When the Portfolio enters into a short sale "against the box", it will be
required to own or have the right to obtain at no added cost securities
identical to those sold short "against the box" and will be required to continue
to hold them while the short sale "against the box" is outstanding. The
Portfolio will incur transaction costs, including interest expense, in
connection with opening, maintaining, and closing short sales.
PORTFOLIO TURNOVER.
Decisions to buy and sell securities are made by the Sector Advisers for
the assets assigned to them, and by the Manager and Sector Capital for assets
not assigned to a Sector Adviser. Currently, each portfolio representing an
industry sector has one Sector Adviser. The Manager invests the Growth Stock
Portfolio's liquidity reserves and the Manager or Sector Capital may invest the
Growth Stock Portfolio's assets in financial futures contracts and related
options. Each Sector Adviser makes decisions to buy or sell securities
independently from other Sector Advisers. In addition, when a Sector Adviser's
services are terminated and another retained, the new Sector Adviser may
significantly restructure the Growth Stock Portfolio's assets assigned to it.
These practices may increase the Growth Stock Portfolio's portfolio turnover
rates, realization of gains or losses, and brokerage commissions. The portfolio
turnover rates for the Growth Stock Portfolio may vary greatly from year to year
as well as within a year and may be affected by sales of investments necessary
to meet cash requirements for redemptions of shares. A high rate of turnover
involves correspondingly greater expenses, increased brokerage commissions and
other transaction costs, which must be borne by the Growth Stock Portfolio and
its investors. In addition, high portfolio turnover may result in increased
short-term capital gains, which, when distributed to shareholders, are treated
as ordinary income.
The Portfolio's portfolio turnover rate for the fiscal year ended December
31, 1999 was 51% (80% in 1998).
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Major changes in the portfolio have resulted in portfolio turnover rates of
as much as 338%, which is greater than that of most other investment companies,
including many which emphasize capital appreciation as a basic policy. The
policies of the Growth Stock Portfolio may be expected to result in
correspondingly heavier brokerage commissions and taxes, which ultimately must
be borne by the Trust's shareholders.
ADDITIONAL TAX INFORMATION
The following is a general summary of certain federal income tax
considerations affecting the fund and its shareholders. Investors are urged to
consult their own tax advisers for more detailed information and for information
regarding any state, local or foreign taxes that may be applicable to them.
GENERAL
The fund (which is treated as a separate corporation for federal tax
purposes) intends to qualify for treatment as a regulated investment company
("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended
("Code"). In order to qualify for that treatment, the fund must distribute
annually to its shareholders at least 90% of its investment company taxable
income (generally, net investment income plus net short-term capital gain) and
must meet several additional requirements. Among these requirements are the
following: (1) at least 90% of the fund's gross income each taxable year must be
derived from dividends, interest, payments with respect to securities loans and
gains from the sale or other disposition of securities, or other income
(including gains from options and futures) derived with respect to its business
of investing in securities; (2) at the close of each quarter of the fund's
taxable year, at least 50% of the value of its total assets must be represented
by cash and cash items, U.S. government securities, securities of other RICs and
other securities, with such other securities limited, with respect to any one
issuer, to an amount that does not exceed 5% of the value of the fund's total
assets and that does not represent more than 10% of the issuer's outstanding
voting securities; and (3) at the close of each quarter of the fund's taxable
year, not more than 25% of the value of its total assets may be invested in
securities (other than U.S. government securities or the securities of other
RICs) of any one issuer. If the Fund failed to qualify for treatment as a RIC
for any taxable year, (1) it would be taxed at corporate rates on the full
amount of its taxable income for that year without being able to deduct the
distributions it makes to its shareholders and (2) the shareholders would treat
all those distributions, including distributions of net capital gain (the excess
of net long-term capital gain over net short-term capital loss), as dividends
(that is, ordinary income) to the extent of the Fund's earnings and profits. In
addition, the Fund could be required to recognize unrealized gains, pay
substantial taxes and interest and make substantial distributions before
requalifying for RIC treatment.
The fund will be subject to a nondeductible 4% excise tax to the extent
that it fails to distribute by the end of any calendar year substantially all of
its ordinary income for that year and capital gain net income for the one-year
period ending on October 31 of that year, plus certain other amounts.
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DIVIDENDS AND OTHER DISTRIBUTIONS
The fund's dividends, if any, are declared payable on a quarterly basis. In
December, the fund may distribute an additional ordinary income dividend
(consisting of net short-term capital gains and undistributed income) in order
to preserve its status as a registered investment company (mutual fund) under
the Code. Net long-term capital gains, if any, also are declared and distributed
in December.
A portion of the dividends from the fund's investment company taxable
income (whether paid in cash or reinvested in additional fund shares) is
eligible for the dividends-received deduction allowed to corporations. The
eligible portion may not exceed the aggregate dividends received by the fund
from domestic corporations. However, dividends received by a corporate
shareholder and deducted by it pursuant to the dividends-received deduction are
subject indirectly to the alternative minimum tax. Distributions by the fund of
net capital gain (the excess of net long-term capital gain over net short-term
capital loss) do not qualify for the dividends-received deduction.
Dividends and other distributions declared by the fund in December of any
year and payable to shareholders of record on a date in that month will be
deemed to have been paid by the fund and received by the shareholders on
December 31 if they are paid by the fund during the following January.
Accordingly, such distributions will be taxed to the shareholders for the year
in which that December 31 falls.
A dividend or capital gain distribution paid shortly after shares have been
purchased, although in effect a return of investment, is subject to federal
taxation. Accordingly, an investor should not purchase fund shares immediately
prior to a dividend or capital gain distribution record date solely for the
purpose of receiving the dividend or distribution.
REDEMPTIONS
A redemption of the fund's shares will result in a taxable gain or loss to
the redeeming shareholder, depending on whether the redemption proceeds are more
or less than the shareholder's adjusted basis for the redeemed shares (which
normally includes any sales load paid on Class A shares). An exchange of shares
of the fund for shares of another Morgan Keegan fund generally will have similar
tax consequences. Special rules apply when a shareholder disposes of Class A
shares of the fund through a redemption or exchange within 60 days after
purchase thereof and subsequently reacquires Class A shares of the fund or
acquires Class A shares of another Morgan Keegan fund without paying a sales
charge due to the reinstatement privilege or exchange privilege. In these cases,
any gain on the disposition of the original Class A shares will be increased, or
any loss decreased, by the amount of the sales charge paid when the shareholder
acquired those shares, and that amount will increase the basis of the shares
subsequently acquired. In addition, if a shareholder purchases shares of the
fund (whether pursuant to the reinstatement privilege or otherwise) within 30
days before or after redeeming at a loss other shares of the fund (regardless of
class), all or part of that loss will not be deductible and instead will
increase the basis of the newly purchased shares.
Any loss on a sale or exchange of fund shares held for six months or less
will be treated as a long-term, instead of a short-term, capital loss to the
extent of any capital gain distributions received on those shares.
13
<PAGE>
U.S. GOVERNMENT INTEREST. Many states grant tax-free status to dividends
paid from interest earned on direct obligations of the U.S. Government, subject
to certain restrictions. The fund will provide shareholders with information at
the end of each calendar year on the amount of any such dividends that may
qualify for exemption from reporting on shareholders' individual income tax
returns.
NON-U.S. INVESTORS. Ordinary dividends generally will be subject to U.S.
income tax withholding. A shareholder's home country may also tax ordinary
dividends, capital gain distributions and gains arising from redemptions or
exchanges of fund shares. Fund shares held by the estate of a non-U.S.
shareholder may be subject to U.S. estate tax. Shareholders may wish to contact
their tax advisors to determine the U.S. and non-U.S. tax consequences of an
investment in the fund.
STATE TAXES. Ordinary dividends and capital gain distributions that a
shareholder receives from the fund, and gains arising from redemptions or
exchanges of funds shares will generally be subject to state and local income
tax. The holding of fund shares may also be subject to state and local
intangibles taxes. A shareholder may wish to contact his tax advisor to
determine the state and local tax consequences of an investment in the fund.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
LETTER OF INTENTION
The sales charge applicable to purchases is reduced to 1% pursuant to a
Letter of Intention that states that the purchaser intends to purchase shares
equal to at least $1,000,000 within a 13-month period. Investors may obtain a
form of a Letter of Intention ("Letter") from their Morgan Keegan investment
broker or from the fund's transfer agent, Morgan Keegan & Company, Inc.
("Transfer Agent"). Under a Letter, purchases of shares of the fund which are
sold with a sales charge made within a 13-month period starting with the first
purchase pursuant to a Letter will be aggregated for purposes of calculating the
sales charges applicable to each purchase. To qualify under a Letter, a minimum
initial purchase of $50,000 must be made; purchases must be made for a single
account; and purchases made for related accounts may not be aggregated under a
single Letter. The Letter is not a binding obligation to purchase any amount of
shares, but its execution will result in paying a reduced sales charge for the
anticipated amount of the purchase. If the total amount of shares purchased does
not equal the amount stated in the Letter (minimum of $1,000,000), the investor
will be notified and must pay, within 20 days of the expiration of the Letter,
the difference between the sales charge on the shares purchased at the reduced
rate and the sales charge applicable to the shares actually purchased under the
Letter. Shares equal to 5% of the intended amount will be held in escrow during
the 13-month period (while remaining registered in the name of the purchaser)
for this purpose.
SALES CHARGE WAIVERS
The sales charge is waived on Class A shares of the fund purchased (1) as a
result of reinvestment of dividends and capital gain distributions and (2) by
officers, directors and full-time employees (and their immediate families, which
includes their spouse, children, mother, father and siblings) of Morgan Keegan &
Company, Inc. (or its direct or indirect subsidiaries), or by directors or
officers (and their immediate families, which includes their
14
<PAGE>
spouse, children, mother, father and siblings) of the fund. The sales charge
also is waived on purchases of Class A shares of the fund in an initial amount
of not less than $250,000, and thereafter for subsequent purchases if the
purchaser's fund account balance is at least $250,000, by (1) common or
collective trust funds maintained by a bank, (2) stock bonus, pension or profit
sharing plans qualified under section 401(a) of the Code (including Keogh Plans
and 401(k) Plans), and (3) organizations exempt from taxation pursuant to
section 501(a) of the Code. Also, Class A shares of the fund may be acquired
without a sales charge if the purchase is made through a Morgan Keegan
representative who formerly was employed as a broker with another firm
registered as a broker-dealer with the Securities and Exchange Commission, if
the following conditions are met: (1) the purchaser was a client of the
investment executive at the other firm for which the investment executive
previously served as a broker; (2) within 90 days of the purchase of the fund's
Class A shares, the purchaser redeemed shares of one or more mutual funds for
which that other firm or its affiliates served as principal underwriter,
provided that either the purchaser had paid a sales charge in connection with
investment in such funds or a contingent deferred sales charge upon redeeming
shares in such funds; and (3) the aggregate amount of the fund's Class A shares
purchased pursuant to this sales charge waiver does not exceed the amount of the
purchaser's redemption proceeds from the shares of the mutual fund(s) for which
the other firm or its affiliates served as principal underwriter. The sales
charge on Class A shares is also waived on purchases through Morgan Keegan
Mutual fund "Wrap Accounts." Investors seeking to avail themselves of this
waiver will be required to provide satisfactory evidence that all the
above-noted conditions are met and should contact their Morgan Keegan
representative for more information.
ADDITIONAL INFORMATION ON REDEMPTIONS
Suspension of the right of redemption, or postponement of the date of
payment, may be made (1) for any periods when the Exchange is closed (other than
customary weekend and holiday closings); (2) when trading is restricted in
markets normally utilized by the fund or when an emergency, as defined by the
rules and regulations of the Securities and Exchange Commission ("SEC") exists,
making disposal of the fund's investments or determination of its net asset
value not reasonably practicable; or (3) for such other periods as the SEC by
order may permit for protection of the fund's shareholders. In the case of any
such suspension, you may either withdraw your request for redemption or receive
payment based upon the net asset value next determined after the suspension is
lifted.
The fund reserves the right, if conditions exist which make cash payments
undesirable, to honor any request for redemption by making payment in whole or
in part by securities valued in the same way as they would be valued for
purposes of computing the fund's per share net asset value. However, the fund
has committed itself to pay in cash all requests for redemption by any
shareholder of record, limited in amount with respect to each shareholder during
any ninety-day period to the lesser of (1) $250,000, or (2) 1% of the net asset
value of the fund at the beginning of such period. If payment is made in
securities, a shareholder will incur brokerage or transactional expenses in
converting those securities into cash, will be subject to fluctuation in the
market price of those securities until they are sold, and may realize taxable
gain or loss (depending on the value of the securities received and the
shareholder's adjusted basis of the redeemed shares).
15
<PAGE>
VALUATION OF SHARES
Net asset value of a fund share will be determined daily as of the close of
the Exchange, on every day that the Exchange is open for business, by dividing
the value of the total assets of the fund, less liabilities, by the total number
of shares outstanding at such time. Pricing will not be done on days the
Exchange is closed. Currently, the Exchange is closed on weekends and on certain
days relating to the following holidays: New Year's Day, President's Day, Good
Friday, Memorial Day, July 4th, Labor Day, Thanksgiving, and Christmas.
Securities owned by the Portfolio for which market quotations are readily
available will be valued at current market value, or, in their absence, at fair
value as determined under procedures adopted by the Portfolio's Board of
Trustees. Securities traded on an exchange or NASD National Market System
securities (including debt securities) will normally be valued at their last
sale price. Other over-the-counter securities (including debt securities), and
securities traded on exchanges for which there is no sale on a particular day
(including debt securities), will be valued by a method which the Portfolio's
Board of Trustees believes accurately reflects fair value.
Futures contracts and options are valued on the basis of market quotations,
if available. Premiums received on the sale of call options are included in the
fund's net asset value, and the current market value of options sold by the fund
will be subtracted from net assets.
PURCHASE OF SHARES
CLASS A SHARES
Class A shares are offered on a continuous basis at a price equal to their
net asset value plus the applicable "initial sales charge" described in the
Prospectus. Proceeds from the initial sales charge are paid to Morgan Keegan and
are used by Morgan Keegan to defray expenses related to providing
distribution-related services to the funds in connection with sales of Class A
shares, such as the payment of compensation to Morgan Keegan brokers for selling
Class A shares. No initial sales charge is imposed on Class A shares issued as a
result of the automatic reinvestment of dividends or capital gains
distributions.
CLASS C SHARES
Class C shares are offered on a continuous basis at a price equal to their
net asset value. Class C shares that are redeemed within one year of purchase
are subject to a contingent deferred sales charge ("CDSC") charged as a
percentage of the dollar amount subject thereto. In determining whether a Class
C CDSC is applicable to a redemption, the calculation will be determined in the
manner that results in the lowest possible rate being charged. The charge will
be assessed on an amount equal to the lesser of the proceeds of redemption or
the cost of the shares being redeemed. Accordingly, no Class C CDSC will be
imposed on increases in net asset value above the initial purchase price. In
addition, no Class C CDSC will be assessed on shares derived from reinvestment
of dividends or capital gains distributions. The charge will not be applied to
dollar amounts representing an increase in the net asset value since the time of
purchase. Proceeds from the CDSC are paid to Morgan Keegan to defray the
expenses Morgan Keegan incurs in providing distribution-related services to the
Class C shares.
CLASS I SHARES
Class I shares are offered on a continuous basis at a price equal to their
net asset value, without an initial sales charge or CDSC.
16
<PAGE>
PERFORMANCE INFORMATION
The fund's performance information and quoted rankings used in advertising
and other promotional materials ("Performance Advertisements") are indicative
only of past performance and are not intended to and do not represent future
investment results. The fund's share price will fluctuate and your shares, when
redeemed, may be worth more or less than you originally paid for them.
TOTAL RETURN CALCULATIONS
Average annual total return quotes ("Standardized Return") used in the
fund's Performance Advertisements are calculated according to the following
formula:
P(1 + T)n = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of that period
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated at least to
the last day of the most recent quarter prior to submission of the Performance
Advertisements for publication. Total return, or "T" in the formula above, is
computed by finding the average annual change in the value of an initial $1,000
investment over the period. In calculating the ending redeemable value, all
dividends and other distributions by the fund are assumed to have been
reinvested at net asset value.
The fund may also refer in Performance Advertisements to total return
performance data that are not calculated according to the formula set forth
above ("Non-Standardized Return"). The fund calculates Non-Standardized Return
for specified periods of time by assuming an investment of $1,000 in fund shares
and assuming the reinvestment of all dividends and other distributions. The rate
of return is determined by subtracting the initial value of the investment from
the ending value and by dividing the remainder from the initial value. Initial
sales charges are not taken into account in calculating Non-Standardized Return;
the inclusion of those charges would reduce the return.
Because each class of the fund has its own sales charge and fee structure,
the classes have different performance results. In the case of each class, this
calculation assumes the maximum sales charge is included in the initial
investment or CDSC is applied at the end of the period, respectively. This
calculation assumes that all dividends and other distributions are reinvested at
net asset value on the reinvestment dates during the period. The "distribution
rate" is determined by annualizing the result of dividing the declared
distributions of the fund during the period stated by the maximum offering price
or net asset value at the end of the period. Excluding the fund's sales charge
on Class A shares and the CDSC on Class C shares from the distribution rate
produces a higher rate.
In addition to average annual total returns, the fund may quote unaveraged
or cumulative total returns reflecting the simple change in value of an
investment over a stated
17
<PAGE>
period. Cumulative total returns may be quoted as a percentage or as a dollar
amount, and may be calculated for a single investment, a series of investments,
and/or a series of redemptions, over any time period. Total returns may be
quoted with or without taking the fund's sales charge on Class A shares or the
CDSC on Class C shares into account. Excluding the fund's sales charge on Class
A shares and the CDSC on Class C shares from a total return calculation produces
a higher total return figure.
OTHER INFORMATION
From time to time the fund may compare its performance in Performance
Advertisements to the performance of other mutual funds or various market
indices. One such market index is the S&P 500, a widely recognized unmanaged
index composed of the capitalization-weighted average of the prices of 500 of
the largest publicly traded stocks in the United States. The S&P 500 includes
reinvestment of all dividends. It takes no account of the costs of investing or
the tax consequences of distributions. The fund may invest in securities that
are not included in the Standard & Poor's Composite Stock Price Index ("S&P
500").
The fund may also quote rankings and ratings, and compare the return of the
fund with data published by Lipper Analytical Services, Inc., IBC/Donaghue's
Money Market fund Report, CDA Investment Technologies, Inc., Wiesenberger
Investment Companies Service, Investment Company Data Inc., Morningstar Mutual
funds, Value Line and other services or publications that monitor, compare, rank
and/or rate the performance of mutual funds. The fund may refer in such
materials to mutual fund performance rankings, ratings or comparisons with funds
having similar investment objectives, and other mutual funds reported in
independent periodicals, including, but not limited to, THE WALL STREET JOURNAL,
MONEY Magazine, FORBES, BUSINESS WEEK, FINANCIAL WORLD, BARRON'S, FORTUNE, THE
NEW YORK TIMES, THE CHICAGO TRIBUNE, THE WASHINGTON POST and KIPLINGER LETTERS.
The fund may also compare its performance with, or may otherwise discuss,
the performance of bank certificates of deposit ("CDs") and other bank deposits,
and may quote from organizations that track the rates offered on such deposits.
In comparing the fund or its performance to CDs, investors should keep in mind
that bank CDs are insured up to specified limits by an agency of the U.S.
government. Shares of the fund are not insured or guaranteed by the U.S.
government, the value of fund shares will fluctuate, and your shares, when
redeemed, may be worth more or less than you originally paid for them. Unlike
the interest paid on many CDs, which remains as a specified rate for a specified
period of time, the return on the fund's shares will vary.
The fund's Performance Advertisements may reference the history of the
fund's Advisor and its affiliates or biographical information of key investment
and managerial personnel, including the portfolio manager. The fund may
illustrate hypothetical investment plans designed to help investors meet
long-term financial goals, such as saving for a college education or for
retirement. The fund may discuss the advantages of saving through tax-deferred
retirement plans or accounts.
18
<PAGE>
TAX-DEFERRED RETIREMENT PLANS
As noted in the fund's Prospectus, an investment in fund shares may be
appropriate for various types of tax-deferred retirement plans. In general,
income earned through the investment of assets of such a plan is not taxed to
the beneficiaries until the income is distributed to them. Investors who are
considering establishing such a plan may wish to consult their attorneys or
other tax advisers with respect to individual tax questions. Additional
information with respect to these plans is available upon request from any
Morgan Keegan broker.
INDIVIDUAL RETIREMENT ACCOUNTS - IRAS
If you have earned income from employment (including self-employment), you
can contribute each year to an IRA up to the lesser of (1) $2,000 for yourself
or $4,000 for you and your spouse, regardless of whether your spouse is
employed, or (2) 100% of compensation. Some individuals may be able to take an
income tax deduction for the contribution. Regular contributions may not be made
for the year you become 70 1/2 or thereafter. You also may be able to make a
nondeductible contribution to an "Education IRA" or "Roth IRA," distributions
from which are not taxable under certain circumstances.
An investment in fund shares through IRA contributions may be advantageous,
regardless of whether the contributions are deductible by you for tax purposes,
because all dividends and capital gain distributions on your fund shares are not
immediately taxable to you or the IRA; they become taxable only when distributed
to you except as noted above. To avoid penalties, your interest in an IRA must
be distributed, or start to be distributed, to you not later than April 1
following the calendar year in which you attain age 70 1/2. Distributions made
before age 59 1/2, in addition to being taxable, generally are subject to a
penalty equal to 10% of the distribution, except in the case of death or
disability, where the distribution is rolled over into another qualified plan,
or in certain other situations.
SELF-EMPLOYED INDIVIDUAL RETIREMENT PLANS - KEOGH PLANS
Morgan Keegan will assist self-employed individuals to set up a retirement
plan through which fund shares may be purchased. Morgan Keegan generally
arranges for a bank to serve as trustee for the plan and performs custodian
services for the trustee and the plan by holding and handling securities.
However, you have the right to use a bank of your choice to provide these
services at your cost. There are penalties for distributions from a Keogh Plan
prior to age 59 1/2, except in the case of death or disability.
SIMPLIFIED EMPLOYEE PENSION PLANS - SEPPS AND SAVINGS INCENTIVE MATCH PLANS FOR
EMPLOYEES - SIMPLES
Morgan Keegan also will make available in a similar manner to corporate and
other employers a SEPP or SIMPLE for investment in fund shares.
THE COMPANY'S OFFICERS AND DIRECTORS
The Company's officers are responsible for the operation of the fund under
the direction of the Board of Directors. The officers and directors of the fund
and their principal
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<PAGE>
occupations during the past five years are set forth below. An asterisk (*)
indicates officers and/or directors who are interested persons of the fund as
defined by the 1940 Act. The address of each officer and director is Morgan
Keegan Tower, 50 Front Street, Memphis, Tennessee 38103, unless otherwise
indicated.
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION HELD PRINCIPAL OCCUPATION
<S> <C> <C>
Allen B. Morgan, Jr. * President and Director Mr. Morgan is Chairman and Chief
Age 58 Executive Officer and Executive
Managing Director of Morgan Keegan &
Company, Inc. He also is a Chairman
of Morgan Keegan, Inc., and a Director
of Morgan Asset Management, Inc.
James D. Witherington, Jr. Director Mr. Witherington is President of SSM
845 Crossover Lane Corp. (management of venture capital
Suite 140 funds). He also serves as a Director
Memphis, Tennessee 38117 for several private companies.
Age 51
William F. Hughes, Jr.* Director Mr. Hughes is an Executive Managing
Age 57 Director of Morgan Keegan & Company,
Inc. He also is President of Morgan
Asset Management, Inc.
William Jefferies Mann Director Mr. Mann is Chairman and President of
675 Oakleaf Office Lane Mann Investments, Inc. (hotel
Suite 100 investments/ consulting). He also
Memphis, Tennessee 38117 serves as a Director for Heavy
Age 68 Machines, Inc.
James Stillman R. McFadden Director Mr. McFadden is Vice President of
845 Crossover Lane Sterling Equities, Inc. (private
Suite 124 equity financings). He also is
Memphis, Tennessee 38117 President and Director of 1703 Inc.
Age 43 and a Director of Staff Printing Co.
Joseph C. Weller* Vice President, Mr. Weller is Executive Vice President
Age 61 Treasurer & Assistant and Chief Financial Officer and
Secretary Executive Managing Director of Morgan
Keegan & Company, Inc. He also is a
Director of Morgan Asset Management,
Inc.
20
<PAGE>
Charles D. Maxwell* Secretary and Mr. Maxwell is a Managing Director and
Age 46 Assistant Treasurer Assistant Treasurer of Morgan Keegan &
Company, Inc., and Secretary/Treasurer
of Morgan Asset Management, Inc. He
was formerly a senior manager with
Ernst & Young (accountants) (1976-86).
</TABLE>
TABLE OF COMPENSATION1
Total Compensation
Name and Position Aggregate Compensation In the Morgan Keegan funds
with the Company From the Company Complex Paid to Directors
Allen B. Morgan, Jr. $0 $0
President and Director
James D. Witherington, Jr. $12,000 $12,000
Director
William F. Hughes, Jr. $0 $0
Director
William Jefferies Mann $12,000 $12,000
Director
James Stillman R. McFadden $12,000 $12,000
Director
Officers and Directors of the fund who are interested persons of the fund
receive no salary or fees from the fund. Directors of the fund who are not
interested persons of the fund will receive from the Fund an annual retainer of
$1,000 and a fee of $250 and reimbursement for related expenses for each meeting
of the Board of Directors attended by them.
1 These numbers are based on the compensation schedule adopted by the Company
for its operation. The Morgan Keegan Select Funds' Complex consists of one other
investment company with one series.
Each of the Company, the Portfolio, Meeder Asset Management, Inc., formerly
known as R. Meeder & Associates, Inc., the Portfolio's investment adviser, and
Morgan Keegan & Company, Inc., the fund's distributor, has adopted a code of
ethics (each, a "Code") under Rule 17j-1 of the 1940 Act. Each Code permits
personnel subject to the Code to invest in securities, including securities that
may be purchased or held by the fund.
21
<PAGE>
THE PORTFOLIO'S OFFICERS AND TRUSTEES
The Officers and Trustees of the Portfolio and their principal occupations
during the past five years are set forth below. Their titles may have varied
during that period. Asterisks indicate those Trustees who are "interested
persons" (as defined in the 1940 Act) of the Portfolio. Unless otherwise
indicated, the address of each Trustee and officer is P. O. Box 7177, 6000
Memorial Drive, Dublin, Ohio 43017.
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION HELD PRINCIPAL OCCUPATION
<S> <C> <C>
ROBERT S. MEEDER, SR.*+, 71 Trustee/President Chairman of Meeder Asset Management,
Inc., the Portfolio's investment
adviser; Chairman and Director of
Mutual Funds Service Co., the
Portfolio's transfer agent.
MILTON S. BARTHOLOMEW, 71 Trustee Retired; formerly a practicing
1424 Clubview Boulevard, S. attorney in Columbus, Ohio; member of
Worthington, OH 43235 each Portfolio's Audit Committee.
ROGER D. BLACKWELL, 59 Trustee Professor of Marketing and Consumer
Blackwell Associates, Inc. Behavior, The Ohio State University;
3380 Tremont Road President of Blackwell Associates,
Columbus, OH 43221 Inc., a strategic consulting firm.
ROBERT S. MEEDER, JR.*, 39 Trustee and President of Meeder Asset Management,
Vice President Inc.
WALTER L. OGLE, 61 Trustee Executive Vice President of Aon
400 Interstate North Parkway, Suite 1630 Consulting, an employee benefits
Atlanta, GA 30339 consulting group; member of each
Portfolio's Audit Committee.
CHARLES A. DONABEDIAN, 57 Trustee President, Winston Financial, Inc.,
Winston Financial, Inc. which provides a variety of marketing
200 TechneCenter Drive, Suite 200 and consulting services to investment
Milford, OH 45150 management companies; CEO, Winston
Advisors, Inc., an investment adviser;
member of each Portfolio's Audit
Committee.
22
<PAGE>
JAMES W. DIDION, 69 Trustee Retired; formerly Executive Vice
8781 Dunsinane Drive President of Core Source, Inc., an
Dublin, OH 43017 employee benefit and Workers'
Compensation administration and
consulting firm (1991-1997).
JACK W. NICKLAUS II, 39 Trustee Designer, Nicklaus Design, a golf
11780 U.S. Highway #1 course design firm and division of
North Palm Beach, FL 33408 Golden Bear International, Inc.
PHILIP A. VOELKER*+, 46 Trustee and Vice Senior Vice President and Chief
President Investment Officer of Meeder Asset
Management, Inc.
DONALD F. MEEDER*+, 61 Secretary Vice President of Meeder Asset
Management, Inc.; Secretary of Mutual
Funds Service Co., the Funds' transfer
agent.
WESLEY F. HOAG*+, 43 Vice President Vice President and General Counsel of
Meeder Asset Management, Inc. and
Mutual Funds Service Co. (since July
1993); Attorney, Porter, Wright,
Morris & Arthur, a law firm (October
1984 to June 1993).
THOMAS E. LINE*+, 32 Treasurer President, Mutual Funds Service Co.,
the Portfolio's transfer agent, and
Chief Operating Officer, Meeder Asset
Management, Inc., the Portfolio's
investment adviser (since June 1998);
Vice President and Treasurer, BISYS
Fund Services (December 1996 to June
1998); Senior Manager - Financial
Services, KPMG LLP (Sept. 1989 to
December 1996).
23
<PAGE>
BRUCE E. MCKIBBEN*+, 30 Assistant Treasurer Manager/Fund Accounting and Financial
Reporting, Mutual Funds Service Co.,
the Funds' transfer agent (since April
1997); Assistant Treasurer and
Manager/Fund Accounting, The Ohio
Company, a broker-dealer (April 1991
to April 1997).
</TABLE>
* Interested Person of the Portfolio.
+ P.O. Box 7177, 6000 Memorial Drive, Dublin, Ohio 43017.
Robert S. Meeder, Sr. is Robert S. Meeder, Jr.'s father and Donald F.
Meeder's uncle.
Each Trustee and each officer of the Portfolio hold the same positions with
the Utilities Stock Portfolio.
The following table shows the compensation paid by the Portfolio and all
other mutual funds advised by the Adviser, including The Flex-funds, Meeder
Advisor Funds and the corresponding portfolios of The Flex-funds and Meeder
Advisor Funds (collectively, the "Fund Complex") as a whole to the Trustees of
the Portfolio during the fiscal year ended December 31, 1999.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Benefits from
Aggregate Accrued as Estimated Registrant and
Compensation Part of Annual Fund Complex
TRUSTEE from the (3) Portfolio Benefits Upon Paid TO
------- PORTFOLIOS1 EXPENSE RETIREMENT TRUSTEE1, 2
----------- ------- --------------- -----------
<S> <C> <C> <C> <C>
Robert S. Meeder, Sr. None None None None
Milton S. Bartholomew $2,762 None None $16,734
Robert S. Meeder, Jr. None None None None
Walter L. Ogle $2,617 None None $16,234
Philip A. Voelker None None None None
Roger A. Blackwell $2,450 None None $15,234
Charles A. Donabedian $2,864 None None $17,734
James Didion None None None None
Jack W. Nicklaus II $2,665 None None $15,984
24
<PAGE>
<FN>
1 Compensation figures include cash and amounts deferred at the election of
certain non-interested Trustees. For the calendar year ended December 31, 1999,
participating non-interested Trustees accrued deferred compensation from the
funds as follows: Milton S. Bartholomew - $2,762, Roger A. Blackwell - $2,450,
Charles A. Donabedian - $2,864, Jack W. Nicklaus II - $2,665, and Walter L. Ogle
- $1,435.
2 The Fund Complex consists of 19 investment companies.
</FN>
</TABLE>
Each Trustee who is not an "interested person" is paid a meeting fee of
$250 per meeting for the Portfolio. In addition, each such Trustee i s paid a
fee of 0.00375% of the amount of the Portfolio's average net assets exceeding
$15 million. Members of the Audit and Strategic Planning Committees for the
Portfolio are paid $500 for each Committee meeting. All other officers and
Trustees serve without compensation from the Portfolio. Trustee fees for the
Growth Stock Portfolio totaled $27,375 for the year ended December 31, 1999
($15,022 in 1998).
THE FUND'S INVESTMENT ADVISER
Morgan Asset Management, Inc. ("Morgan"), 50 North Front Street, Memphis,
TN 38103, is investment adviser to, and has an Investment Advisory and
Administration Agreement (the "Agreement") with, the Fund.
Pursuant to the Agreement, Morgan, subject to the supervision of the Fund's
Board of Directors and in conformity with the stated objective and policies of
the Fund, directs the investments of the Fund. Currently, Morgan pursues the
investment objective of the Fund by investing substantially all of the
investable assets of the Fund in the Portfolio. In addition, Morgan is
authorized, in its discretion and without prior consultation with the Fund's
Board of Directors, to purchase and sell securities and other investments for
the Fund. Thus, if the Fund's investment in the Portfolio were withdrawn, Morgan
would assume sole responsibility for the investment management of the Fund,
including responsibility for making investment decisions and placing orders to
buy, sell or hold a particular security.
Pursuant to the Agreement, Morgan also performs certain corporate
management services for the Fund relating to research, statistical, and
investment activities. In addition, Morgan personnel serve as officers and
Directors of the Company. Morgan furnishes the Fund office space and all
necessary office facilities, equipment and personnel for servicing the
investments of the Company and pays the salaries of all personnel of the Company
or Morgan performing services relating to the Fund.
The Agreement was approved by a vote of a majority of the Directors, first
by a majority of those Directors who are not "interested persons" (as defined in
the Investment Company Act of 1940) of the Fund and then by the full Board. The
Agreement was also approved by the Fund's shareholders. The Agreement is to
remain in force so long as renewal thereof is specifically approved at least
annually by a majority of the Directors or
25
<PAGE>
by vote of a majority of the interests in the Fund, and in either case by vote
of a majority of the Directors who are not "interested persons" (as defined in
the Investment Company Act of 1940) at a meeting called for the purpose of
voting on such renewal.
The Agreement provides that Morgan will not be liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with the matters to which the Agreement relates except for a loss resulting from
willful misfeasance, bad faith, gross negligence or reckless disregard of duty.
The Agreement will terminate automatically if assigned and may be terminated
without penalty at any time upon 60 days' prior written notice by Majority Vote
(as defined below) of the Fund, by the Directors of the Fund, or by Morgan.
"Majority Vote" means the lesser of (a) 67 percent or more of the shares present
at a shareholder meeting if the holders of more than 50 percent of the
outstanding shares are present or represented by proxy, or (b) more than 50
percent of the outstanding shares.
Morgan receives for its services an annual fee, payable in monthly
installments, at the rate of 1% of the Fund's average net assets. Morgan has
agreed to waive 90% of this annual fee for so long as substantially all of the
Fund's investable assets are invested in another registered investment company,
such as the Portfolio.
THE PORTFOLIO'S INVESTMENT ADVISER
Meeder Asset Management, Inc. (the "Manager"), formerly known as R. Meeder
& Associates, Inc., is the investment adviser and manager for, and has an
Investment Advisory Contract with, the Portfolio.
Pursuant to the Investment Advisory Contract, the Manager, subject to the
supervision of the Portfolio's Board of Trustees and in conformity with the
stated objective and policies of the Portfolio, has general oversight
responsibility for the investment operations of the Portfolio. In connection
therewith, the Manager is obligated to keep certain books and records of the
Portfolio. The Manager also administers the Portfolio's corporate affairs, and
in connection therewith, furnishes the Portfolio with office facilities,
together with those ordinary clerical and bookkeeping services which are not
being furnished by Firstar, N.A., the Portfolio's custodian. The management
services of the Manager are not exclusive under the terms of the Investment
Advisory Contract and the Manager is free to, and does, render management
services to others.
The Manager invests the Portfolio's liquidity reserves and may invest the
Portfolio's assets in financial futures contracts and related options.
The Investment Advisory Contract for the Portfolio was separately approved
by a vote of a majority of the Trustees, including a majority of those Trustees
who are not "interested persons" (as defined in the Investment Company Act of
1940), of the Portfolio. The Investment Advisory Contract is to remain in force
so long as renewal thereof is specifically approved at least annually by a
majority of the Trustees or by vote of a majority of the interests in the
Portfolio, and in either case by vote
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of a majority of the Trustees who are not "interested persons" (as defined in
the Investment Company Act of 1940) at a meeting called for the purpose of
voting on such renewal.
The Investment Advisory Contract provides that the Manager will not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Portfolio in connection with the matters to which the Investment Advisory
Contract relates except for a loss resulting from willful misfeasance, bad
faith, gross negligence or reckless disregard of duty. The Investment Advisory
Contract will terminate automatically if assigned and may be terminated without
penalty at any time upon 60 days prior written notice by Majority Vote of the
Portfolio, by the Trustees of the Portfolio, or by the Manager.
Costs, expenses and liabilities of the Trust attributable to a particular
fund are allocated to that fund. Costs, expenses and liabilities which are not
readily attributable to a particular fund are allocated among all of the Trust's
funds. Thus, each fund pays its proportionate share of: the fees of the Trust's
independent auditors, legal counsel, custodian, transfer agent and accountants;
insurance premiums; the fees and expenses of Trustees who do not receive
compensation from Morgan Keegan & Company, Inc., Meeder Asset Management, Inc.,
Sector Capital Management, L.L.C or any of the Sector Advisers; association
dues; the cost of printing and mailing confirmations, prospectuses, proxies,
proxy statements, notices and reports to existing shareholders; state
registration fees; distribution expenses within the percentage limitations of
each Class of Shares' distribution and service plan, including the cost of
printing and mailing of prospectuses and other materials incident to soliciting
new accounts; and other miscellaneous expenses.
The expenses of the Portfolio include the compensation of the Trustees who
are not affiliated with the Distributor, Manager, Subadviser or Sector Advisers;
registration fees; membership dues allocable to the Portfolio; fees and expenses
of independent accountants, of legal counsel and of any transfer agent or
accountant of the Portfolio; insurance premiums and other miscellaneous
expenses.
Expenses of the Portfolio also include all fees under its Accounting and
Administrative Service Agreement; the expenses connected with the execution,
recording and settlement of security transactions, fees and expenses of the
Portfolio's custodian for all services to the Portfolio, including safekeeping
of funds and securities and maintaining required books and accounts; expenses of
preparing and mailing reports to investors and to governmental offices and
commissions; expenses of meetings of investors and Trustees; the advisory fees
payable to the Manager under the Investment Advisory Contract and other
miscellaneous expenses.
The Board of Trustees of the Trust believe that the aggregate per share
expenses of the fund and the Portfolio will be less than the expenses which the
fund would incur if it retained the services of an investment adviser and the
assets of the fund were invested directly in the type of securities being held
by the Portfolio.
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The Manager earns an annual fee, payable in monthly installments, at the
rate of 1% of the first $50 million, 0.75% of the next $50 million, and 0.60% in
excess of $100 million, of the Portfolio's average net assets. The Manager will
receive 70% and the Subadviser 30% of the fee payable with respect to the net
assets of the Portfolio upon effectiveness of the subadvisory arrangement; then
the Manager will receive 30% and the Subadviser 70% of the fee attributable to
any additional net assets of the Portfolio up to an amount of net assets equal
to the net assets upon effectiveness of the subadvisory arrangement, then the
Manager and the Subadviser will share equally the fee attributable to any
additional net assets of the Portfolio up to $50 million of the net assets. With
respect to net assets of more than $50 million and less than $100 million, the
applicable fees of 0.75% will be shared such that the Manager would receive
0.35% and the Subadviser 0.40%. For net assets of $100 million and more, the
applicable 0.60% fee will be shared such that the Manager will receive 0.25% and
the Subadviser 0.35%.
For the year ending December 31, 1999, the Growth Stock Portfolio paid fees
to the Manager totaling $570,139($435,886 in 1998; $317,772 in 1997).
Meeder Asset Management, Inc., formerly known as R. Meeder & Associates,
Inc., was incorporated in Ohio on February 1, 1974 and maintains its principal
offices at 6000 Memorial Drive, Dublin, Ohio 43017. The Manager is a
wholly-owned subsidiary of Meeder Financial, Inc., formerly known as Muirfield
Investors, Inc. ("MFI"), a holding company which is controlled by Robert S.
Meeder, Sr. through ownership of common stock. MFI conducts business only
through its six subsidiaries, which are the Manager; Mutual Funds Service Co.,
the Trust's transfer agent; Opportunities Management Co., a venture capital
investor; Meeder Advisory Services, Inc., a registered investment adviser; OMCO,
Inc., a registered commodity trading adviser and commodity pool operator; and
Adviser Dealer Services, Inc., a broker-dealer.
The Manager's officers and directors are as set forth as follows: Robert S.
Meeder, Sr., Chairman and Sole Director; Philip A. Voelker, Senior Vice
President and Chief Investment Officer; Donald F. Meeder, Secretary; Robert S.
Meeder, Jr., President; Thomas E. Line, Chief Operating Officer; Michael J.
Sullivan, Vice President of Sales and Marketing, and Wesley F. Hoag, Vice
President and General Counsel. Mr. Robert S. Meeder, Sr. is President and a
Trustee of the Portfolio. Mr. Robert S. Meeder, Jr. and Philip A. Voelker each
are a Trustee and officer of the Portfolio. Each of Messrs. Donald F. Meeder,
Wesley F. Hoag and Thomas E. Line is an officer of the Portfolio.
THE PORTFOLIO'S INVESTMENT SUBADVISER
Sector Capital Management L.L.C. serves as the Portfolio's subadviser. The
Subadviser is a Georgia limited liability company. William L. Gurner and John K.
Donaldson control the Subadviser. Messrs. Gurner and Donaldson are Managers and
Members of the Subadviser. The Subadviser's officers are as set forth as
follows: William L. Gurner, President and Administrator; George S. Kirk,
Director, Sales
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and Marketing; and Kenneth L. Riffle, Director, Client Relations. The Investment
Subadvisory Agreement provides that the Subadviser shall furnish investment
advisory services in connection with the management of the Portfolio. The
Portfolio and the Manager have entered into an Investment Subadvisory Agreement
with the Subadviser which, in turn, has entered into a investment
sub-subadvisory agreement with each of the Sector Advisers selected for the
Portfolio. Under the Investment Subadvisory Agreement, the Subadviser is
required to (i) supervise the general management and investment of the assets
and securities portfolio of the Portfolio; (ii) provide overall investment
programs and strategies for the Portfolio and (iii) select Sector Advisers for
the Portfolio, except as otherwise provided, and allocate the Portfolio's assets
among such Sector Advisers. The Subadviser is obligated to keep certain books
and records of the Portfolio. The Manager continues to have responsibility for
all investment advisory services pursuant to the Investment Advisory Agreement
and supervises the Subadviser's performance of such services. Under the
Investment Subadvisory Agreement, the Manager, not the Portfolio, pays the
Subadviser an investment advisory fee in an amount described above under
"Investment Adviser and Manager."
The Subadviser may invest the Portfolio's assets in financial futures
contracts and related options.
The Investment Subadvisory Agreement provides that the Subadviser will not
be liable for any error of judgment or mistake of law or for any loss arising
out of any investment or for any act or omission in the execution of portfolio
transactions for the Portfolio, except a loss resulting from misfeasance, bad
faith, gross negligence or reckless disregard of duty. The Investment
Subadvisory Agreement provides that it will terminate automatically if assigned,
and that it may be terminated without penalty to the Fund or the Portfolio by
the Manager, the Trustees of the Portfolio or by the vote of a majority of the
outstanding voting securities of the Portfolio upon not less than 30 days
written notice. The Investment Subadvisory Agreement will continue in effect for
a period of more than two years from the date of execution only so long as such
continuance is specifically approved at least annually in conformity with the
1940 Act. The Investment Subadvisory Agreement was approved by the Board of
Trustees of the Portfolio, including all of the Trustees who are not parties to
the contract or "interested persons" of any such party, and by the investors in
the Portfolio.
THE PORTFOLIO'S INVESTMENT SUB-SUBADVISERS
Except as otherwise described above under "The Portfolio's Investment
Adviser" and "The Portfolio's Investment Subadviser", the assets of the
Portfolio are managed by asset managers (each a "Sector Adviser" and
collectively, the "Sector Advisers") selected by the Subadviser, subject to the
review and approval of the Trustees of the Portfolio. The Subadviser recommends,
to the Trustees of the Portfolio, Sector Advisers for each industry sector based
upon its continuing quantitative and qualitative evaluation of the Sector
Advisers' skills in managing assets pursuant to specific investment styles and
strategies. The Portfolio has received an exemptive order from the SEC
permitting
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the Subadviser, subject to certain conditions, to enter into sub-subadvisory
agreements with Sector Advisers approved by the Trustees of the Portfolio but
without the requirement of investor approval. At a meeting held on December 20,
1996, the shareholders of the Portfolio approved the operation of the Portfolio
in this manner. Pursuant to the terms of the exemptive order, the Subadviser is
to be able, subject to the approval of the Trustees of the Portfolio, but
without investor approval, to employ new Sector Advisers for the Portfolio.
Although investor approval will not be required for the termination of
sub-subadvisory agreements, investors of the Portfolio will continue to have the
right to terminate such agreements for the Portfolio at any time by a vote of a
majority of outstanding voting securities of the Portfolio.
Except as otherwise provided above under "The Portfolio's Investment
Adviser" and "The Portfolio's Investment Subadviser," the assets of the
Portfolio are allocated by the Subadviser among the Sector Advisers selected for
the Portfolio. Each Sector Adviser has discretion, subject to oversight by the
Trustees and the Subadviser, to purchase and sell portfolio assets, consistent
with the Portfolio's investment objectives, policies and restrictions. For its
services, the Subadviser receives a management fee from the Manager. A part of
the fee paid to the Subadviser is used by the Subadviser to pay the advisory
fees of the Sector Advisers. Each Sector Adviser is paid a fee for its
investment advisory services that is computed daily and paid monthly based on
the value of the average net assets of the Portfolio assigned by the Subadvisor
to the Sector Adviser at an annual rate equal to 0.25%.
Investors should be aware that the Subadviser may be subject to a conflict
of interest when making decisions regarding the retention and compensation of
particular Sector Advisers. However, the Subadviser's decisions regarding the
selection of Sector Advisers and specific amount of the compensation to be paid
to Sector Advisers, are subject to review and approval by a majority of the
Board of Trustees of the Growth Stock Portfolio.
Although the Subadviser and the Sector Advisers' activities are subject to
general oversight by the Board of Trustees and the officers of the Growth Stock
Portfolio, neither the Board nor the officers evaluate the investment merits of
any Sector Adviser's individual security selections. The Board of Trustees will
review regularly the Growth Stock Portfolio's performance compared to the
applicable indices and also will review the Growth Stock Portfolio's compliance
with its investment objectives and policies.
The Investment Sub-subadvisory Agreements provide that the Sector Advisers
will not be liable for any error of judgment or mistake of law or for any loss
arising out of any investment or for any act or omission in the execution of
portfolio transactions for the Portfolio, except a loss resulting from
misfeasance, bad faith, gross negligence or reckless disregard of duty. The
Investment Sub-subadvisory Agreements provide that they will terminate
automatically if assigned, and that they may be terminated without penalty to
the Fund or the Portfolio by the Subadviser, the Trustees of the Portfolio or by
the vote of a majority of the outstanding voting securities of the Portfolio
upon not less than 15 days
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written notice. The Investment Sub-subadvisory Agreements will continue in
effect for a period of more than two years from the date of execution only so
long as such continuance is specifically approved at least annually in
conformity with the 1940 Act. The Investment Sub-subadvisory Agreements were
approved by the Board of Trustees of the Portfolio, including all of the
Trustees who are not parties to the contract or "interested persons" of any such
party, and by the investors in the Portfolio.
A Sector Adviser may also serve as a discretionary or non-discretionary
investment adviser to management or advisory accounts unrelated in any manner to
the Portfolio or its affiliates. The investment Sub-subadvisory agreements among
the Sector Advisers, the Portfolio and the Subadviser require fair and equitable
treatment to the Portfolio in the selection of the Portfolio investments and the
allocation of investment opportunities, but do not obligate the Sector Advisers
to give the Portfolio exclusive or preferential treatment.
Although the Sector Advisers make investment decisions for the Portfolio
independent of those for their other clients, it is likely that similar
investment decisions will be made from time to time. When the Portfolio and
another client of a Sector Adviser are simultaneously engaged in the purchase or
sale of the same security, the transactions are, to the extent feasible and
practicable, averaged as to price and allocated as to amount between the
Portfolio and the other client(s). In specific cases, this system could have
detrimental effect on the price or volume of the security to be purchased or
sold, as far as the Portfolio is concerned. However, the Trustees of the
Portfolio believe, over time, that coordination and the ability to participate
in volume transactions should be to the benefit of the Portfolio.
Listed below are the Sector Advisers selected by the Subadviser to invest
certain of the Portfolio's assets:
MILLER/HOWARD INVESTMENTS, INC. serves as sector adviser to the utilities
and transportation sectors of the Growth Stock Portfolio. Miller/Howard is a
registered investment adviser that has been providing investment services to
broker-dealers, investment advisers, employee benefit plans, endowment
portfolios, foundations and other institutions and individuals since 1984. As of
September 30, 2000, Miller/Howard managed approximately $356 million in assets.
Lowell G. Miller, President and CIO of Miller/Howard, controls Miller\Howard
through stock ownership. Mr. Miller is the portfolio manager primarily
responsible for the day-to-day management of those assets of the Growth Stock
Portfolio allocated to Miller/Howard. Mr. Miller has been associated with
Miller/Howard since 1984. Miller/Howard's principal executive offices are
located at 141 Upper Byrdcliffe Road, Post Office Box 549, Woodstock, New York
12498.
HALLMARK CAPITAL MANAGEMENT, INC. serves as sector adviser to the capital
goods sector of the Growth Stock Portfolio. Hallmark is a registered investment
adviser that has been providing investment services to individuals; banks;
pension, profit sharing, and other retirement plans; trusts; endowments;
foundations; and other charitable
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organizations since 1986. As of September 30, 2000, Hallmark managed
approximately $211 million in assets. Peter S. Hagerman, Chairman of the Board,
President, and Chief Executive Officer; Katherine A. Swieralski, Senior Vice
President, Treasurer, Chief Financial and Administrative Officer; and Jeffrey P.
Braff each owns more than 10% of the outstanding voting securities of Hallmark,
as would Thomas S. Moore, Senior Vice President and Chief Investment Officer, if
his options were exercised. Mr. Hagerman is the portfolio manager primarily
responsible for the day-to-day management of those assets of the Growth Stock
Portfolio allocated to Hallmark. Mr. Hagerman has been associated with Hallmark
since 1986. Hallmark's principal executive offices are located at One Greenbrook
Corporate Center, 100 Passaic Avenue, Fairfield, New Jersey 07004.
BARROW, HANLEY, MEWHINNEY & STRAUSS, INC. serves as sector adviser to the
consumer durable and non-durable sectors of the Growth Stock Portfolio. Barrow
is a registered investment adviser that has been providing investment services
to banks; investment companies; pension and profit sharing plans; charitable
organizations and corporations since 1979. As of September 30, 2000, Barrow
managed approximately $26.0 billion in assets. Jane Gilday, CFA, is the
portfolio manager primarily responsible for the day-to-day management of those
assets of the Growth Stock Portfolio allocated to Barrow. From 1993 to 1998, Ms.
Gilday worked as a securities analyst at Hancock Institutional Equity Services
and Advest, Inc. Ms. Gilday has served as a portfolio manager and Principal for
Barrow since 1998. Barrow's principal executive offices are located at 3232
McKinney Avenue, 15th Floor, Dallas, Texas 75204-2429.
THE MITCHELL GROUP, INC. serves as sector adviser to the energy sector of
the Growth Stock Portfolio. The Mitchell Group is a registered investment
adviser that has been providing investment services to individuals; banks;
investment companies; pension and profit sharing plans; charitable
organizations, corporations and other institutions since 1989. As of September
30, 2000, The Mitchell Group managed approximately $425 million in assets.
Rodney Mitchell, President, Chief Executive Officer, and Chief Financial Officer
of The Mitchell Group, owns more than 10% of the outstanding voting securities
of The Mitchell Group. Mr. Mitchell is the portfolio manager primarily
responsible for the day-to-day management of those assets of the Growth Stock
Portfolio allocated to The Mitchell Group. Mr. Mitchell has been associated with
The Mitchell Group since 1989. The Mitchell Group's principal executive offices
are located at 1100 Louisiana, #4810, Houston, Texas 77002.
ASHLAND MANAGEMENT INCORPORATED serves as sector adviser to the materials
and services sector of the Growth Stock Portfolio. Ashland is a registered
investment adviser that has been providing investment services to individuals,
pension and profit sharing plans, charitable organizations, corporations and
other institutions since 1975. As of September 30, 2000, Ashland managed
approximately $2.0 billion in assets. Charles C. Hickox, Chairman of the Board
and Chief Executive Officer, and Parry v.S. Jones, President and Chief Operating
Officer, each owns more than 10% of the outstanding voting securities of
Ashland. Terence J. McLaughlin, Managing Director of Ashland, and Deborah C.
Ohl, a Portfolio Manager, are the portfolio managers primarily responsible
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for the day-to-day management of those assets of the Growth Stock Portfolio
allocated to Ashland. Mr. McLaughlin has been associated with Ashland since
1984. Ms. Ohl has been employed by Ashland since August 1992 and has served as a
Portfolio Manager for Ashland since 1993. Ashland's principal executive offices
are located at 26 Broadway, New York, New York 10004.
DELTA CAPITAL MANAGEMENT INC. serves as sector adviser to the finance
sector of the Growth Stock Portfolio. Delta Capital is a registered investment
adviser that has been providing investment services to individuals, endowments,
corporations and other institutions since 1992. As of September 30, 2000, Delta
Capital managed approximately $900 million in assets. Delta Capital is
controlled by Francis L. Fraenkel, Chairman of Delta Capital. Jonathan Kay is
the portfolio manager primarily responsible for the day-to-day management of
those assets of the Portfolio allocated to Delta Capital. Mr. Kay has been
associated with Delta Capital since April 1998. From 1993 to March 1998, Mr. Kay
was a portfolio manager for Scudder Kemper Investments, Inc., a registered
investment adviser. Delta Capital's principal executive offices are located at
745 Fifth Avenue, Suite 816, New York, New York 10151.
DRESDNER RCM GLOBAL INVESTORS LLC (formerly RCM Capital Management, L.L.C.)
serves as sector adviser to the technology sector of the Growth Stock Portfolio.
Dresdner RCM is a registered investment adviser that provides investment
services to institutional and individual clients and registered investment
companies. Dresdner RCM was established in April 1996 as the successor to the
business and operations of RCM Capital Management, a California Limited
Partnership that, with its predecessors, has been in operation since 1970. As of
September 30, 2000, Dresdner RCM had approximately $85.2 billion under
management and advice. This includes approximately $51.2 billion under
management and advice in San Francisco and approximately $34.0 billion by
affiliates in London, Hong Kong, and San Diego. Walter C. Price and Huachen
Chen, each Managing Directors of Dresdner RCM, are the portfolio managers
primarily responsible for the day-to-day management of those assets of the
Growth Stock Portfolio allocated to Dresdner RCM. Messrs. Price and Chen have
managed equity portfolios on behalf of Dresdner RCM since 1985. Dresdner RCM's
principal executive offices are located at Four Embarcadero Center, San
Francisco, CA 94111.
ALLIANCE CAPITAL MANAGEMENT L.P. serves as sector adviser to the health
sector of the Growth Stock Portfolio. Alliance, a registered investment adviser,
is an international investment manager supervising client accounts with assets
as of September 30, 2000 totaling approximately $388 billion. Alliance provides
investment services primarily to corporate employee benefit funds, public
employee retirement systems, investment companies, foundations, and endowment
funds. The general partner of Alliance, Alliance Capital Management Corporation,
is an indirect subsidiary of, and is controlled by, AXA, a French insurance
holding company. Alliance Capital conducts no other business. Raphael L.
Edelman, Vice President of Alliance, is the portfolio manager primarily
responsible for the day-to-day management of those assets of the Growth Stock
Portfolio allocated to Alliance. Mr. Edelman, who has sixteen years of
investment experience, joined Alliance's research department in 1986 as an
analyst after working two years as a manager in Alliance's mutual fund division.
Alliance's principal executive offices are located at 1345 Avenue of the
Americas, New York, NY 10105.
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PORTFOLIO TRANSACTIONS AND BROKERAGE
All orders for the purchase or sale of portfolio securities are placed on
behalf of the Portfolio by the Manager, Subadviser or Sector Advisers pursuant
to authority contained in the investment advisory agreement, investment
subadvisory agreement and investment sub-subadvisory agreements. The Manager,
Subadviser and Sector Advisers are also responsible for the placement of
transaction orders for accounts for which they or their affiliates act as
investment adviser. In selecting broker-dealers, subject to applicable
limitations of the federal securities laws, the Manager, Subadviser and Sector
Advisers consider various relevant factors, including, but not limited to, the
size and type of the transaction; the nature and character of the markets for
the security to be purchased or sold; the execution efficiency, settlement
capability, and financial condition of the broker-dealer firm; the
broker-dealer's execution services rendered on a continuing basis; the
reasonableness of any commissions, and arrangements for payment of Portfolio
expenses.
The Portfolio may execute portfolio transactions with broker-dealers who
provide research and execution services to the Portfolio or other accounts over
which the Manager, Subadviser or Sector Advisers or their affiliates exercise
investment discretion. Such services may include advice concerning the value of
securities; the advisability of investing in, purchasing or selling securities;
the availability of securities or the purchasers or sellers of securities;
furnishing analyses and reports concerning issuers industries, securities,
economic factors and trends, portfolio strategy, and performance of accounts;
and effecting securities transactions and performing functions incidental
thereto (such as clearance and settlement). The selection of such broker-dealers
generally is made by the Manager, Subadviser and Sector Advisers (to the extent
possible consistent with execution considerations) in accordance with a ranking
of broker-dealers determined periodically by the Manager, Subadviser and Sector
Advisers' investment staffs based upon the quality of research and execution
services provided.
The receipt of research from broker-dealers that execute transactions on
behalf of the Portfolio may be useful to the Manager, Subadviser and Sector
Advisers in rendering investment management services to the Portfolio or their
other clients, and conversely, such research provided by broker-dealers who have
executed transaction orders on behalf of other Manager, Subadviser and Sector
Advisers' clients may be useful to the Manager, Subadviser and Sector Advisers
in carrying out their obligations to the Portfolio. The receipt of such research
is not expected to reduce the Manager, Subadviser and Sector Advisers' normal
independent research activities; however, it enables the Manager, Subadviser and
Sector Advisers to avoid the additional expenses that could be incurred if the
Manager, Subadviser and Sector Advisers tried to develop comparable information
through their own efforts.
Subject to applicable limitations of the federal securities laws,
broker-dealers may receive commissions for agency transactions that are in
excess of the amount of commissions charged by other broker-dealers in
recognition of their research and
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execution services. In order to cause the Portfolio to pay such higher
commissions, the Manager, Subadviser and/or Sector Advisers must determine in
good faith that such commissions are reasonable in relation to the value of the
brokerage and research services provided by such executing broker-dealers viewed
in terms of a particular transaction or the Manager, Subadviser and/or Sector
Advisers' overall responsibilities to the Portfolio and their other clients. In
reaching this determination, the Manager, Subadviser and/or Sector Advisers will
not attempt to place a specific dollar value on the brokerage and research
services provided or to determine what portion of the compensation should be
related to those services.
The Manager, Subadviser and Sector Advisers may allocate brokerage
transactions to broker-dealers who have entered into arrangements with the
Manager, Subadviser and Sector Advisers under which the broker-dealer allocates
a portion of the commissions paid by the Portfolio toward payment of the
Portfolio's or the fund's expenses, such as transfer agent fees or custodian
fees. The transaction quality must, however, be comparable to those of other
qualified broker-dealers.
The Trustees of the Portfolio periodically review the Manager, Subadviser
and Sector Advisers' performance of their responsibilities in connection with
the placement of portfolio transactions on behalf of the Portfolio and review
the commissions paid by the Portfolio over representative periods of time to
determine if they are reasonable in relation to the benefits to the Portfolio.
From time to time, the Trustees of the Portfolio will review whether the
recapture for the benefit of the Portfolio of some portion of the brokerage
commissions or similar fees paid by the Portfolio on portfolio transactions is
legally permissible and advisable.
The Portfolio seeks to recapture soliciting broker-dealer fees on the
tender of portfolio securities, but at present no other recapture arrangements
are in effect. The Trustees of the Portfolio intend to continue to review
whether recapture opportunities are available and are legally permissible and,
if so, to determine in the exercise of their business judgment, whether it would
be advisable for the Portfolio to seek such recapture.
Although the Trustees and officers of the Portfolio are substantially the
same as those of other portfolios managed by the Manager, investment decisions
for the Portfolio are made independently from those of other portfolios managed
by the Manager or accounts managed by affiliates of the Manager. It sometimes
happens that the same security is held in the portfolio of more than one of
these funds or accounts. Simultaneous transactions are inevitable when several
portfolios are managed by the same investment adviser, particularly when the
same security is suitable for the investment objective of more than one
portfolio.
When two or more portfolios are simultaneously engaged in the purchase or
sale of the same security, the prices and amounts are allocated in accordance
with a policy considered by the Portfolio Trustees to be equitable to each
portfolio. In some cases this
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system could have a detrimental effect on the price or value of the security as
far as the Portfolio is concerned. In other cases, however, the ability of the
Portfolio to participate in volume transactions will produce better executions
and prices for the Portfolio. It is the current opinion of the Trustees of the
Portfolio that the desirability of retaining the Manager as investment adviser
to the Portfolio outweighs any disadvantages that may be said to exist from
exposure to simultaneous transactions. During the period from January 1, 1999 to
December 31, 1999, the Growth Stock Portfolio paid total commissions of $67,629
($78,411 in 1998; $100,888 in 1997) on the purchase and sale of securities, of
which $7,520 in commissions were paid on the purchase and sale of futures and
options contracts.
VALUATION OF PORTFOLIO SECURITIES
Portfolio securities are valued by various methods depending on the primary
market or exchange on which they trade. Equity securities for which the primary
market is the U.S. are valued at last sale price or, if no sale has occurred, at
the closing bid price. Short-term securities less than 60 days to maturity are
valued either at amortized cost or at original cost plus accrued interest, both
of which approximate current value. Fixed-income securities are valued primarily
by a pricing service that uses a vendor security valuation matrix which
incorporates both dealer-supplied valuations and electronic data processing
techniques.
This twofold approach is believed to more accurately reflect fair value
because it takes into account appropriate factors such as institutional trading
in similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data without exclusive reliance
upon quoted, exchange, or over-the-counter prices.
Securities and other assets for which there is no readily available market
are valued in good faith by the Board of Trustees. The procedures set forth
above need not be used to determine the value of the securities owned by the
Portfolio if, in the opinion of the Board of Trustees, some other method (e.g.,
closing over-the-counter bid prices in the case of debt instruments traded on an
exchange) would more accurately reflect the fair market value of such
securities.
Generally, the valuation of equity securities, as well as corporate bonds,
U.S. government securities, money market instruments, and repurchase agreements,
is substantially completed each day at the close of the New York Stock Exchange
(NYSE).
The values of any such securities held by the Portfolio are determined as
of such time for the purpose of computing the Portfolio's net asset value. If an
extraordinary event that is expected to materially affect the value of a
portfolio security occurs after the close of an exchange on which that security
is traded, then the security will be valued as determined in good faith by the
Board of Trustees.
36
<PAGE>
THE FUND'S DISTRIBUTOR
Morgan Keegan acts as distributor of the fund's shares pursuant to an
Underwriting Agreement between the fund and Morgan Keegan dated as of February
26, 1999, as amended ("Underwriting Agreement"). The shares of the fund are
offered continuously. The Underwriting Agreement obligates Morgan Keegan to
provide certain services and to bear certain expenses in connection with the
offering of fund shares, including, but not limited to: printing and
distribution of prospectuses and reports to prospective shareholders;
preparation and distribution of sales literature and advertising; administrative
and overhead cost of distribution, such as the allocable costs of executive
office time expended on developing, managing and operating the distribution
program; operating expenses of branch offices, sales training expenses, and
telephone and other communication expenses. Morgan Keegan compensates investment
brokers of Morgan Keegan and other persons who engage in or support distribution
of shares and shareholder service based on the sales for which they are
responsible and the average daily net asset value of fund shares in accounts of
their clients. Morgan Keegan also pays special additional compensation and
promotional incentives from time to time to investment brokers for sales of fund
shares.
The fund has adopted a Distribution Plan with respect to the Class A shares
and Class C shares (the "Plan") pursuant to Rule 12b-1 under the 1940 Act. Under
the Plan, distribution fees will be paid at an aggregate annual rate of up to
0.25% for Class A shares. Under the Plan, distribution and service fees will be
paid at an aggregate annual rate of up to 1.00% for Class C shares of the fund's
average daily net assets attributable to shares of that class. Class I shares
are not subject to a distribution and service fee.
Service fees and distribution fees paid by the fund to Morgan Keegan under
the plan may exceed or be less than Morgan Keegan's expenses thereunder. No
interested person of the funds or non-interested director had a direct or
indirect interest in the Plan or related agreements. The fund benefits from the
Plan by virtue of an ongoing broker's involvement with individual customers as
well as the benefit from continued promotion.
The Plan was approved by the Initial Shareholder on October 31, 2000, and
as required by Rule 12b-1 under the 1940 Act, by the Board of Directors on
August 21, 2000, including a majority of the directors who are not "interested
persons" of the fund, as that term is defined in the 1940 Act and who have no
direct or indirect financial interest in the operation of the Plan or the
Underwriting Agreement (the "Qualified Directors").
In approving the Plan, in accordance with the requirements of Rule 12b-1,
the Board of Directors determined that the service and distribution fees were
reasonable in view of the compensation Morgan Keegan investment brokers can
receive relative to the compensation offered by competing funds. The Board of
Directors also determined that the fees are reasonable in light of the service
and distribution fees paid by other similar funds. Finally, the Directors
determined that there was a reasonable likelihood that the
37
<PAGE>
Plan, and the amendments to the Plan, would benefit the fund and its
shareholders. This determination was based, in part, on the belief that the Plan
enables the fund to have Morgan Keegan investment brokers available to promote
and sell the fund, thereby assisting the fund to attract assets. Growth of
assets is expected to benefit both the fund and the Adviser. The fund is
expected to benefit from the potential for economies of scale in its operations
that can arise from growth in assets, as well as from the increased potential
for flexibility in portfolio management resulting from a net inflow of assets,
as opposed to net redemptions. Shareholders of the fund are expected to benefit
from continuing services provided by investment brokers and other staff members
of Morgan Keegan as distributor. The Adviser and Morgan Keegan are expected to
benefit from the fact that their advisory, service and distribution fees, which
are based on a percentage of assets, increase as fund assets grow and that their
brokerage commissions and transfer fees will also increase as assets grow. The
Directors acknowledged, however, that there is no assurance that benefits to the
fund will be realized as a result to the Plan. In considering whether to
continue the Plan, the Directors, among other things, also reviewed the expenses
of the Plan, alternative methods of distributing fund shares, and the overall
expected costs and benefits to the fund.
The Plan may be terminated by vote of a majority of the Qualified Directors
or by vote of a majority of the outstanding voting securities of the fund.
Termination of the Plan terminates any obligation of the fund to pay service and
distribution fees to Morgan Keegan, other than service and distribution fees
that may have accrued but that have not been paid as of the date of termination.
Any change in the Plan that would materially increase the service and
distribution costs to the fund requires shareholder approval; otherwise the Plan
may be amended by the Directors, including a majority of the Qualified
Directors, as described above.
The Plan, as currently in effect, will continue for successive one-year
periods, provided that each such continuance specifically is approved by (1) the
vote of a majority of the Qualified Directors and (2) the vote of a majority of
the entire Board of Directors.
Rule 12b-1 requires that any person authorized to direct the disposition of
monies paid or payable by the fund pursuant to the Plan or any related agreement
shall provide to the fund's Board of Directors, and the Directors shall review,
at least quarterly, a written report of the amounts so expended and the purposes
for which expenditures were made. Rule 12b-1 also provides that the fund may
rely on that rule only if the selection and nomination of the fund's independent
directors are committed to the discretion of such independent directors.
The current Underwriting Agreement was approved initially by vote of the
Board and the Qualified Directors on August 21, 2000. The Underwriting Agreement
is subject to the same provisions for annual renewal as the Plan. In addition,
the Underwriting Agreement will terminate upon assignment or upon 60
38
<PAGE>
days' notice from Morgan Keegan. The fund may terminate the Underwriting
Agreement, without penalty, upon 60 days' notice, by a majority vote of either
its Board of Directors, the Qualified Directors, or the outstanding voting
securities of the fund.
DESCRIPTION OF THE FUND'S SHARES
The fund is a diversified open-end management investment company
incorporated as a Maryland corporation. The Articles of Incorporation permit the
Board of Directors the right to issue two billion shares (2,000,000,000), par
value of one tenth of one cent ($0.001). Under the Articles of Incorporation,
the Directors have the authority to divide or combine the shares into a greater
or lesser number, to classify or reclassify any unissued shares of the Company
into one or more separate series or class of shares, without further action by
the shareholders. As of the date of this Statement of Additional Information,
the Directors have authorized six series of shares (Morgan Keegan Core Equity
Fund, Morgan Keegan Utility Fund, Morgan Keegan Intermediate Bond Fund, Morgan
Keegan High Income Fund, Morgan Keegan Select Financial Fund, and Morgan Keegan
Select Capital Growth Fund) and the issuance of three classes of shares of each
fund, designated as Class A, Class C, and Class I. Shares are freely
transferable and have no preemptive, subscription of conversion rights. When
issued, shares are fully paid and non-assessable.
The Articles of Incorporation provide that all dividends and distributions
on shares of each series or class will be distributed pro rata to the holders of
that series or class in proportion to the number of shares of that series or
class held by such holders. In calculating the amount of any dividends or
distributions, (1) each class will be charged with the transfer agency fee
attributable to that class, (2) each class separately with such other expenses
as may be permitted by the SEC and the Board of Directors, and (3) all other
fees and expenses shall be charged to the classes, in the proportion that the
net assets of that class bears to the net assets of the applicable series.
Each class will vote separately on matters pertaining only to that class,
as the Board of Directors may determine. On all other matters, all classes shall
vote together and every share, regardless of class, shall have an equal vote
with every other share. Except as otherwise provided in the Articles of
Incorporation, the By-laws of the Company or as required by the provisions of
the 1940 Act, all matters will be decided by a vote of a majority of the
outstanding voting securities validly cast at a meeting at which a quorum is
present. One-third of the aggregate number of shares of that series or class
outstanding and entitled to vote shall constitute a quorum for the transaction
of business by that series or class.
Unless otherwise required by the 1940 Act or the Articles of Incorporation,
the fund has no intention of holding annual meetings of shareholders. The fund's
shareholders may remove a Director by the majority of all votes of the Company's
outstanding shares and the Board of Directors shall promptly call a meeting for
such purpose when requested to do so in writing by the record holders of not
less than 25% of
39
<PAGE>
the outstanding shares of the fund. At least two-thirds of the Directors holding
office must have been elected by the shareholders.
INVESTMENT STRUCTURE. Unlike other mutual funds which directly acquire and
manage their own portfolio of securities, the fund seeks to achieve its
investment objectives by investing substantially all of its assets in the Growth
Stock Portfolio (the "Portfolio"), a separate registered investment company with
the same investment objectives as the fund. Therefore, an investor's interest in
the Portfolio's securities is indirect. In addition to selling a beneficial
interest to the fund, the Portfolio may sell beneficial interests to other
mutual funds or investors. Such investors will invest in the Portfolio on the
same terms and conditions and will pay a proportionate share of the Portfolio's
expenses. However, the other investors investing in the Portfolio are not
required to sell their shares at the same public offering price as the fund.
Investors in the fund should be aware that these differences may result in
differences in returns experienced by investors in the different funds that
invest in the Portfolio. Such differences in returns are also present in other
mutual fund structures. You may obtain information concerning other holders of
interests in the Portfolio by contacting the fund.
The Growth Stock Portfolio is organized as a trust under the laws of the
State of New York. The Portfolio's Declaration of Trust provides that the fund
and other entities investing in the Portfolio (e.g., other investment companies,
insurance company separate accounts, and common and commingled trust funds) will
each be liable for all obligations of the Portfolio. However, the risk of the
fund incurring financial loss on account of such liability is limited to
circumstances in which both inadequate insurance existed and the Portfolio
itself was unable to meet its obligations. Accordingly, the Board of Directors
of the Company believe that neither the fund nor its shareholders will be
adversely affected by reason of the fund's investing in the Portfolio. In
addition, whenever the Company is requested to vote on matters pertaining to the
fundamental policies of the Portfolio, the Company will hold a meeting of the
fund's shareholders and will cast its vote as instructed by the fund's
shareholders.
Smaller funds investing in the Portfolio may be materially affected by the
actions of larger funds investing in the Portfolio. For example, if a large fund
withdraws from the Portfolio, the remaining funds may experience higher pro rata
operating expenses, thereby producing lower returns. Additionally, the Portfolio
may become less diverse, resulting in increased portfolio risk. (However, this
possibility also exists for traditionally structured funds that have large or
institutional investors.) Also, funds with a greater pro rata ownership in the
Portfolio could have effective voting control of the operations of the
Portfolio. Whenever the Company is requested to vote on matters pertaining to
the Portfolio, the Company will hold a meeting of shareholders of the fund and
will cast all of its votes in the same proportion as do the fund's shareholders.
Certain changes in the Portfolio's investment objectives, policies or
restrictions may require the Company to withdraw the fund's interest in the
Portfolio. Any such withdrawal could result in a distribution in kind of
portfolio securities (as opposed to a cash distribution from the Portfolio). If
such securities are distributed, the fund could incur brokerage, tax
40
<PAGE>
or other charges in converting the securities to cash. In addition, the
distribution in kind may result in a less diversified portfolio of investments
or adversely affect the liquidity of the fund.
The fund may withdraw its investment from its corresponding Portfolio at
any time, if the Board of Directors of the Company determines that it is in the
best interests of the fund to do so. Upon any such withdrawal, the Board of
Directors would consider what action might be taken, including the investment of
all the assets of the fund in another pooled investment entity having the same
investment objectives as that fund or the retaining of an investment adviser to
manage the fund's assets in accordance with the investment policies with respect
to that fund's corresponding Portfolio. The inability to find an adequate
investment pool or investment adviser could have a significant impact on
shareholders' investment in the fund.
As stated in "Additional Information about Investment Limitations and
Policies," except as otherwise expressly provided herein, the fund's investment
objectives and policies are not fundamental and may be changed by the Board of
Directors without shareholder approval.
THE FUND'S CUSTODIAN, TRANSFER AGENT,
DIVIDEND DISBURSING AGENT
AND
PORTFOLIO ACCOUNTING SERVICE AGENT
Morgan Keegan & Company, Inc., Morgan Keegan Tower, Fifty Front Street,
Memphis, Tennessee 38103, serves as the transfer and dividend disbursing agent
of the fund. For these services, Morgan Keegan, the fund's distributor, receives
from the fund a fee of $5,000 per month, or $60,000 per year.
Mutual Funds Service Co., 6000 Memorial Drive, Dublin, Ohio 43017, provides
accounting services to the Portfolio. The minimum annual fee for accounting
services for the Portfolio is $7,500. Subject to the applicable minimum fee, the
Portfolio's annual fee, payable monthly, is computed at the rate of 0.15% of the
first $10 million, 0.10% of the next $20 million, 0.02% of the next $50 million
and 0.01% in excess of $80 million of the Portfolio's average net assets.
Mutual Funds Service Co. also serves as Administrator to the fund pursuant
to an Administration Services Agreement. Services provided to the fund include
coordinating and monitoring any third party services to the fund; providing the
necessary personnel to perform administrative functions for the fund; assisting
in the preparation, filing and distribution of proxy materials, periodic reports
to Directors and shareholders, registration statements and other necessary
documents. The fund incurs an annual fee, payable monthly, of 0.05% of the
fund's average net assets, subject to a minimun annual fee of $15,000 the first
year and $30,000 each year thereafter. These fees are reviewable annually by the
Directors of the fund and the Trustees of the Portfolio.
41
<PAGE>
Shareholders who request an historical transcript of their account will be
charged a fee based on the number of years researched. The fund reserves the
right, upon 60 days' written notice, to make other charges to investors to cover
administrative costs.
Firstar Bank, N.A., 425 Walnut Street, Cincinnati, OH 45202, is custodian
of the assets of the Portfolio and of the FUND. The custodian is responsible for
the safekeeping of the Portfolio's assets and the appointment of subcustodian
banks and clearing agencies. The custodian takes no part in determining the
investment policies of the Portfolio or in deciding which securities are
purchased or sold by the Portfolio. The Portfolio may, however, invest in
obligations of the custodian and may purchase or sell securities from or to the
custodian.
THE FUND'S LEGAL COUNSEL
Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue, N.W., Washington,
D.C. 20036-1800, serves as counsel to the fund and has passed upon certain
matters in connection with this offering.
THE FUND'S CERTIFIED PUBLIC ACCOUNTANTS
KPMG LLP are the fund's independent certified public accountants. KPMG LLP
will perform an audit of the fund's financial statements and review the fund's
federal and state income tax returns.
FINANCIAL STATEMENTS
Financial Statements for the Portfolio are presented on the following
pages. The fund has no prior operations and therefore, no historic financial
statements.
42
<PAGE>
UTILITIES STOCK PORTFOLIO
Portfolio of Investments as of December 31, 1999
<TABLE>
<CAPTION>
INDUSTRIES/CLASSIFICATIONS SHARES OR FACE AMOUNT VALUE
-------------------------- --------------------- -----
<S> <C> <C>
COMMON STOCKS - 100.0%
ELECTRIC/GAS UTILITY - 7.2%
AGL Resources, Inc. 21,955 $ 373,235
MDU Resources Group, Inc. 14,220 284,400
NiSource Inc. 16,355 292,346
UtiliCorp United, Inc. 19,998 388,701
1,338,682
ELECTRIC UTILITY - 11.9%
Cinergy Corp. 11,420 273,366
Keyspan Corp. 25,190 584,093
LG&E Energy Corp. 27,864 485,879
Scottish Power PLC - ADR 10,469 293,121
TECO Energy, Inc. 31,115 577,572
2,214,031
NATURAL GAS (DISTRIBUTOR) - 18.3%
Columbia Energy Group 8,905 563,241
Eastern Enterprises 7,975 458,064
MCN Energy Group Inc. 40655 965,556
Nicor Inc. 4,975 161,687
WICOR, Inc. 14075 410,814
Williams Cos., Inc. 27550 841,997
3,401,359
OIL/GAS (DOMESTIC) - 20.2%
Enron Corp. 10,445 463,497
El Paso Natural Gas Co. 28,420 1,103,051
Kinder Morgan Energy Partners, L.P. # 19,724 817,313
Kinder Morgan Inc. 25,680 518,415
Peoples Energy Corp. 10,585 354,598
Questar Corp. 33,345 500,175
3,757,049
TELECOMMUNICATION EQUIPMENT - 0.9%
P-Com, Inc. # 20,000 176,875
176,875
TELECOMMUNICATION SERVICES - 34.2%
Alltel Corp. 7,420 613,541
AT&T Corp. 10,635 535,073
BCE, Inc. 9,395 847,312
CenturyTel, Inc. 17,035 807,033
Global Crossings Ltd. # 21,585 1,079,237
GTE Corp. 9,585 676,342
MCI Worldcom Inc. # 10,613 563,126
SBC Communications, Inc. 9,650 470,438
U.S. West Communications Group 10,950 788,400
6,380,502
WATER UTILITY - 7.3%
American Water Works Co., Inc. 33,600 714,000
Azurix Corp. # 73,000 652,437
1,366,437
TOTAL COMMON STOCKS
(Cost $16,563,595 ) 18,634,935
<PAGE>
INDUSTRIES/CLASSIFICATIONS SHARES OR FACE AMOUNT VALUE
-------------------------- --------------------- -----
U.S. TREASURY BILLS - 0.0%
* 4.30%, due 01/06/00 1,000 1,000
TOTAL U.S. TREASURY BILLS
(Cost $1,000 ) 1,000
TOTAL INVESTMENTS - 100.0%
(Cost $16,564,595 ) $18,635,935
TRUSTEE DEFERRED COMPENSATION**
Flex-funds Highlands Growth Fund 234 5,206
Flex-funds Muirfield Fund 349 2,210
Flex-funds Total Return Utilities Fund 66 1,333
Flex-Partners International Equity Fund 183 3,133
TOTAL TRUSTEE DEFERRED COMPENSATION
(Cost $11,090 ) $11,882
<FN>
ADR:American Depositary Receipts
L.P.Limited Partnership
# Represents non-income producing securities.
* Pledged as collateral on Letter of Credit.
** Assets of affiliates to the Utility Stock Portfolio held for the
benefit of the Portfolio's Trustees in connection with the Trustees
Deferred Compensation Plan.
</FN>
</TABLE>
See accompanying notes to financial statements.
<PAGE>
GROWTH STOCK PORTFOLIO
Portfolio of Investments as of December 31, 1999
SHARES OR FACE
INDUSTRIES/CLASSIFICATIONS AMOUNT VALUE
-------------------------- ------ -----
COMMON STOCKS - 92.9%
AEROSPACE/DEFENSE - 0.7%
Boeing Co. 3,900 $ 161,606
General Dynamics Corp. 600 31,650
Lockheed Martin Corp. 1,870 40,906
Northrup Grumman Corp. 200 10,813
Raytheon Co. - Class B 1,000 26,563
Textron, Inc. 740 56,749
United Technologies Corp. 2,000 130,000
458,287
AIR TRANSPORTATION - 0.3%
AMR Corp. # 725 48,575
Delta Air Lines, Inc. 685 34,122
Frontier Airlines # 1,990 22,636
Southwest Airlines 2,437 39,297
USAir Group # 1,000 32,063
176,693
ALUMINUM - 0.3%
Aluminum Company of America 2,460 204,180
AUTO & TRUCK - 1.2%
Ford Motor Co. 4,900 261,231
General Motors Corp. 5,000 363,438
Genuine Parts Co. 5,400 133,988
TRW, Inc. 620 32,201
790,858
BANKING - 1.1%
Washington Mutual Savings Bank 2,303 59,590
Wells Fargo Co. 15,900 642,956
702,546
BEVERAGE -- ALCOHOLIC - 0.3%
Anheuser-Busch Cos., Inc. 2,900 205,538
BEVERAGE -- SOFT DRINK - 1.2%
Coca-Cola Co. 9,000 524,250
Pepsico, Inc. 7,600 267,900
792,150
BROADCASTING - 0.3%
SFX Entertainment Inc. # 3,900 141,131
World Wrestling Federation Entertainment Co. # 1,000 17,250
158,381
BUILDING MATERIALS - 0.1%
Masco Corp. 1,860 47,198
Vulcan Materials Co. 590 23,563
70,761
CAPITAL GOODS - 0.1%
Eaton Corp. 367 26,653
Ingersoll-Rand 839 46,197
72,850
<PAGE>
SHARES OR FACE
INDUSTRIES/CLASSIFICATIONS AMOUNT VALUE
-------------------------- ------ -----
CHEMICAL -- DIVERSIFIED - 1.0%
Air Products & Chemicals, Inc. 570 19,131
Dow Chemical Co. 1,210 161,686
E.I. du Pont de Nemours & Co. 3,650 240,444
Imperial Chemical Industries 680 28,943
Monsanto Corp. 2,900 103,313
Praxair, Inc. 840 42,263
Rohm & Haas Co. 1,185 48,215
643,995
CHEMICAL -- SPECIALTY - 0.1%
Eastman Chemical Co. 500 23,844
MacDermid Inc. 800 32,850
Sigma Aldrich 610 18,338
75,032
COMMERCIAL SERVICES - 0.3%
Cendant Corp. # 4,600 122,188
Dun & Bradstreet 1,470 43,365
165,553
COMPUTERS & PERIPHERALS - 4.8%
Apple Computer # 720 74,025
Compaq Computer Corp. 6,710 182,428
Dell Computer Corp. # 10,210 520,710
EMC Corp./Mass # 5,460 596,505
Gateway 2000, Inc. # 1,500 108,094
IBM Corp. 7,830 845,640
Micron Technology, Inc. # 820 63,755
QRS Corporation Delaware # 320 33,380
Sanmina Corp # 850 84,894
Seagate Technology Inc. # 950 44,234
Sun Microsystems # 7,460 577,684
3,131,349
COMPUTER SOFTWARE & SERVICES - 8.0%
America Online, Inc. # 10,710 806,597
BMC Software, Inc. # 1,460 116,709
Ceridian Co. # 840 18,113
Computer Associates International Inc. 2,380 166,451
Computer Sciences Corp. # 790 74,754
Compuware Corp. # 820 30,545
Electronic Data System Corp. 2,450 163,997
Microsoft Corp. # 25,100 2,930,425
Novell, Inc. # 1,490 59,507
Oracle Corp. # 7,400 829,263
Unisys Corp. # 1,270 40,561
5,236,922
CONSUMER NON-DURABLE - 2.3%
Corning Inc. 1,240 159,883
Fortune Brands, Inc. 7,800 257,888
Gillette Co. 5,800 238,888
Haggar Corp. 11,500 130,813
Procter & Gamble Co. 6,500 712,156
1,499,628
COSMETICS - 0.5%
Avon Products Inc. 3,300 108,900
Kimberly Clark 3,300 215,325
324,225
Growth Stock Portfolio, continued on next page
<PAGE>
SHARES OR FACE
INDUSTRIES/CLASSIFICATIONS AMOUNT VALUE
-------------------------- ------ -----
Growth Stock Portfolio, continued
DATA PROCESSING - 0.5%
Automatic Data Processing, Inc. 3,300 177,788
First Data Corp. 2,170 107,008
Fiserv, Inc. # 910 34,864
319,660
DIVERSIFIED - 1.2%
Honeywell International Inc. 3,402 196,253
Minnesota Mining & Manufacturing Co. 1,570 153,664
Norfolk Southern Corp. 1,830 37,515
PPG Industries, Inc. 830 51,927
Tyco International 7,860 306,540
745,899
DRUG - 5.5%
Abbott Labs 6,830 248,014
Bristol Myers Squibb 10,870 697,718
Eli Lilly & Co. 4,550 302,575
Merck & Co., Inc. 10,830 726,287
Pfizer, Inc. 20,210 655,562
Pharmacia & Upjohn 1,470 66,150
Schering Plough Corp. 9,550 404,681
Warner Lambert Co. 4,800 393,300
3,494,287
DRUGSTORE - 0.2%
Rite Aid Corp. 11,400 127,538
ELECTRIC -- INTEGRATED - 0.2%
Edison International 1,800 47,138
FPL Group, Inc. 960 41,100
Teco Energy Inc. 2,930 54,388
142,626
ELECTRIC UTILITY - 0.5%
AES Corp. # 2,460 183,885
Duke Power Co. 2,940 147,368
331,253
ELECTRICAL EQUIPMENT - 4.3%
General Electric Corp. 17,552 2,712,858
ELECTRONIC COMPONENT SEMICONDUCTORS - 4.6%
Advanced Micro Devices Inc. # 1,520 43,985
Applied Materials, Inc. # 1,880 238,173
Caliper Technology # 580 38,715
Epcos AG - Sponsored ADR # 1,650 122,925
Intel 14,750 1,214,109
KLA -Tencor Corp. # 600 66,825
LSI Logic Corp. # 810 54,675
Maxim Integrated Products Inc. # 1,100 51,906
Motorola, Inc. 3,600 530,100
STMicroelectronics NV 860 130,236
Texas Instruments Inc. 3,620 349,783
Xilinx Inc. # 2,360 107,306
2,948,738
<PAGE>
SHARES OR FACE
INDUSTRIES/CLASSIFICATIONS AMOUNT VALUE
-------------------------- ------ -----
ELECTRONIC COMPONENTS - 0.3%
Emerson Electric 3,674 210,796
ELECTRONICS - 0.1%
Rockwell International Corp. 840 40,215
Scientific Atlanta 680 37,995
78,210
FINANCE - 6.3%
Bank One Corp. 4,326 138,432
BankAmerica Corp. 10,214 512,615
Chase Manhattan Corp. 3,900 302,981
Equifax, Inc. 710 16,729
Fannie Mae 6,600 412,088
First Union Corp. 4,968 163,634
FleetBoston Financial Corp. 7,008 243,966
Freddie Mac 9,300 437,681
Lehman Brothers Holdings, Inc. 1,500 127,031
Mellon Bank Corp. 7,200 245,250
Merrill Lynch & Co. 800 66,650
Metris Cos., Inc. 10,000 356,875
Morgan Stanley Dean Witter & Co. 1,800 256,950
PNC Bank Corp. 3,100 137,950
Providian Financial Corp. 5,650 514,503
Ryder Systems, Inc. 310 7,576
SLM Holding Corp. 4,000 169,000
4,109,911
FINANCIAL SERVICES - 3.6%
American Express Co. 1,700 282,625
Associates First Capital 10,400 285,350
Avery Dennison Corp. 920 67,045
Capital One Financial Corp. 20,600 992,663
Citigroup Inc. 11,995 667,972
Concord EFS Inc. # 690 17,768
H&R Block, Inc. 1,370 59,938
2,373,361
FOOD -- DIVERSIFIED - 1.3%
General Mills 4,800 171,600
Hershey Food Corp. 2,700 128,081
Safeway Inc. # 3,300 117,975
Sara Lee Corp. 10,200 225,038
Sysco Corp. 5,700 225,506
868,200
FOREST PRODUCTS - 0.2%
Georgia Pacific Corp. 860 43,645
Weyerhauser Co. 1,120 80,430
Willamette Industries, Inc. 640 29,720
153,795
GOLD/SILVER MINING - 0.1%
Barrick Gold Corp. 2,090 36,967
HEALTH - 1.3%
American Home Products 5,820 228,435
Johnson & Johnson 6,910 644,358
872,793
Growth Stock Portfolio, continued on next page
<PAGE>
SHARES OR FACE
INDUSTRIES/CLASSIFICATIONS AMOUNT VALUE
-------------------------- ------ -----
Growth Stock Portfolio, continued
INSTRUMENTS -- CONTROLS - 0.0%
Johnson Controls Inc. 432 24,570
24,570
INSTRUMENTS -- SCIENTIFIC - 0.1%
PE Biosystems Group 380 45,719
INTERNET SERVICE - 0.5%
Yahoo, Inc. # 740 320,189
INSURANCE -- MULTILINE - 2.2%
Allstate 6,700 160,800
American International Group 10,543 1,139,962
PMI Group 3,300 161,081
1,461,843
MACHINERY - 0.3%
Caterpillar, Inc. 1,813 85,324
Deere & Co. 1,197 51,920
Dover Corp. 1,071 48,597
185,841
MANUFACTURING - 0.1%
Mueller Industries, Inc. # 1,150 41,688
Owens Illinois # 780 19,549
61,237
MARKETING SERVICES - 0.2%
Omnicom Group, Inc. 1,205 120,500
MATERIALS & SERVICES - 0.4%
Champion International Corp. 425 26,323
Dana Corp. 970 29,039
Ecolab, Inc. 1,970 77,076
Illinois Tool Works, Inc. 1,730 116,883
Sherwin-Williams Co. 1,070 22,470
271,791
MEDICAL PRODUCTS - 1.3%
Amgen, Inc. # 4,600 276,288
Biogen Inc.# 400 33,800
Guidant Corp. # 810 38,070
Human Genome # 890 135,836
IDEC Pharmaceuticals Corp. # 980 96,285
MedImmune, Inc. # 1,260 209,003
Millennium Pharmaceutical # 400 48,800
838,082
MEDICAL HMO - 0.0%
Wellpoint Health Networks # 390 25,716
MEDICAL SERVICES - 0.4%
Columbia/HCA Healthcare Corp. 2,410 70,643
Health Management # 5,120 68,480
IMS Health, Inc. 1,080 29,363
Shared Medical Systems 310 15,791
Tenet Healthcare Corp. # 2,230 52,405
236,682
MEDICAL SUPPLIES - 0.5%
Boston Scientific Co. # 1,200 26,250
Cardinal Health Inc 1,220 58,408
<PAGE>
SHARES OR FACE
INDUSTRIES/CLASSIFICATIONS AMOUNT VALUE
-------------------------- ------ -----
Medtronic, Inc. 6,970 253,969
338,627
MULTIMEDIA - 1.0%
Time Warner Inc. 6,300 456,356
Viacom Inc Class B # 3,000 181,313
637,669
NATURAL GAS DISTRIBUTOR - 0.3%
MCN Corp. 4,770 113,288
Williams Cos., Inc. 2,600 79,463
192,751
NETWORKING PRODUCTS - 2.9%
3COM Corp. # 980 46,060
Cisco Systems, Inc. # 16,860 1,806,128
Network Appliance # 840 69,773
1,921,961
OFFICE AUTOMATION & EQUIPMENT - 1.2%
Hewlett Packard 5,620 639,275
Pitney Bowes, Inc. 1,325 64,014
Xerox Corp. 2,180 49,595
752,884
OIL/GAS -- DOMESTIC - 0.8%
Atlantic Richfield 1,700 147,050
Baker Hughes 1,540 32,436
Burlington Resources 1,000 33,063
Devon Energy 1,200 39,450
Enron Corp. 3,000 133,125
Noble Affiliates Inc. 2,100 45,019
Noble Drilling Co. # 1,300 42,575
USX Marathon Group 2,800 69,125
541,843
OIL/GAS -- INTERNATIONAL - 2.7%
Chevron Corp. 3,200 277,200
Exxon Corp. 18,362 1,479,289
Transocean Sedco 621 20,913
1,777,402
OILFIELD SERVICES/EQUIPMENT - 0.6%
Coastal Corp. 1,900 67,331
Kerr-McGee Corp. 1,000 62,000
Schlumberger Ltd. 3,200 179,600
Smith International Inc. # 1,500 74,531
383,462
OIL & NATURAL GAS - 0.1%
Apache Corp. 1,200 44,325
Amerada Hess 500 28,375
Ocean Energy, Inc. # 10,160 78,740
151,440
PAPER & FOREST PRODUCTS - 0.2%
International Paper 2,185 123,316
Mead Corp. 840 36,488
159,804
Growth Stock Portfolio, continued on next page
<PAGE>
SHARES OR FACE
INDUSTRIES/CLASSIFICATIONS AMOUNT VALUE
-------------------------- ------ -----
Growth Stock Portfolio, continued
PETROLEUM -- INTEGRATED - 1.4%
Conoco, Inc. - Class B 4,500 111,938
Occidental Petroleum Corp. 3,600 77,850
Royal Dutch Petroleum 9,700 587,456
Texaco 3,100 168,369
945,613
PUBLISHING - 0.4%
The Reader's Digest Association, Inc. 9,500 277,875
RAILROAD TRANSPORTATION - 0.2%
Burlington Northern Santa Fe 2,005 48,621
Kansas City Southern Industries, Inc. 540 40,298
Union Pacific Corp. 765 33,421
122,340
RENTAL -- AUTO/EQUIPMENT - 0.4%
The Hertz Corp. 5,600 280,700
280,700
RESTAURANT - 0.7%
McDonalds Corp. 6,500 262,031
Wendy's International, Inc. 10,400 216,450
478,481
RETAIL GROCERY - 0.2%
Albertson's, Inc. 3,700 119,325
RETAIL STORE - 2.2%
Action Performance # 23,400 269,100
Amazon.Com # 500 38,063
Kmart # 40,000 402,500
PETsMART, Inc. # 30,000 172,500
WalMart Stores, Inc. 8,000 553,000
1,435,163
RUBBER/PLASTICS - 0.5%
Newell Rubbermaid Co. 10,700 310,300
S&L / THRIFTS -- SOUTHERN U.S. - 0.1%
Greater Atlantic Financial Corp. # 10,000 44,375
SERVICES - 0.1%
Paychex Inc. 1,675 67,000
STEEL - 0.0%
Nucor Corp. 410 22,473
TELECOMMUNICATION EQUIPMENT - 3.6%
General Instrument Corp. # 890 75,650
JDS Uniphase Corp. # 1,960 316,173
Loral Space & Communications Ltd. # 10,110 245,799
Metromedia Fiber Network Inc. - Class A # 3,880 185,998
Nokia Corp. - ADR - Class A 150 28,659
Nortel Networks 6,300 636,300
P-Com, Inc. # 8,760 77,471
QUALCOMM, Inc. # 3,280 577,690
Sprint Corp. PCS Group # 2,285 234,213
2,377,953
TELECOMMUNICATION SERVICES - 11.6%
AT&T Corp. 17,095 860,092
Bell Atlantic Corp. 8,590 528,822
BellSouth Corp. 10,980 514,001
<PAGE>
SHARES OR FACE
INDUSTRIES/CLASSIFICATIONS AMOUNT VALUE
-------------------------- ------ -----
CenturyTel, Inc. 1,730 81,959
Global Crossing LTD # 24,429 1,221,450
GTE Corp. 5,320 375,393
Lucent Technologies Inc. 14,700 1,102,500
MCI Worldcom, Inc. # 19,167 1,017,049
Nextel Communications # 2,630 271,219
Qwest Communications # 4,090 175,870
SBC Communications 17,674 861,608
Sprint Corp. FON Group 2,370 159,531
Teleglobe Inc. 5,720 129,773
Tellabs, Inc. # 1,590 102,058
U.S. West, Inc. 2,665 191,880
7,593,205
TOBACCO - 0.7%
Gallaher Group, PLC - ADR 11,400 175,275
Philip Morris Cos. 12,500 287,500
462,775
TOYS - 1.9%
Hasbro Bradley Inc. 9,450 179,550
JAKKS Pacific Co. # 7,600 142,025
Toys "R" Us Inc. # 64,000 916,000
1,237,575
TRANSPORTATION - 0.1%
FDX Corp. # 1,000 40,938
TRUCKING/TRANSPORTATION LEASING - 0.0%
CSX, Corp. 1,017 31,908
WATER UTILITY - 0.2%
Azurix Corp. # 16,095 143,849
TOTAL COMMON STOCKS
(Cost $43,996,840 ) 60,677,701
U.S. TREASURY OBLIGATIONS - 0.9%
U.S. Treasury Bills
** 4.30% 01/06/00 6,000 5,997
* 5.04% 03/09/00 600,000 594,112
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $600,285 ) 600,109
REPURCHASE AGREEMENT - 6.2%
Bank of America Securities LLC, 4.60%,
01/03/00, (Collateralized by $4,165,707
various commercial papers, 5.50%,
03/14/00 - 03/24/00 4,037,000 4,037,000
TOTAL REPURCHASE AGREEMENT
(Cost $4,037,000 ) 4,037,000
TOTAL INVESTMENTS - 100.0%
(Cost $48,634,125 ) $65,314,810
Growth Stock Portfolio, continued on next page
<PAGE>
Growth Stock Portfolio, continued
CONTRACTS VALUE
--------- -----
FUTURES CONTRACTS
Long, S&P 500 Futures, face amount 10 3,710,500
$3,610,500 expiring March 2000
$3,710,500
TRUSTEE DEFERRED COMPENSATION***
Flex-funds Highlands Growth Fund 483 10,771
Flex-funds Muirfield Fund 775 4,908
Flex-funds Total Return Utilities Fund 171 3,462
Flex-Partners International Equity Fund 377 6,458
TOTAL TRUSTEE DEFERRED COMPENSATION
(Cost $24,138 ) $25,599
ADR: American Depositary Receipt
# Represents non-income producing securities.
* Pledged as collateral on futures contracts.
** Pledged as collateral on Letter of Credit.
*** Assets of affiliates to the Growth Stock Portfolio held for the
benefit of the Portfolio's Trustees in connection with the Trustee
Deferred Compensation Plan.
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
UTILITIES GROWTH
STOCK STOCK
PORTFOLIO PORTFOLIO
Assets:
Investments, at market value* $18,635,935 $61,277,810
Repurchase agreements, at cost* --- 4,037,000
Trustee deferred compensation investments, 11,882 25,599
at market value
Cash --- 556
Receivable for securities sold 695,684 ---
Receivable for net variation margin on futures --- 8,500
contracts
Receivable from corresponding Fund --- ---
Interest and dividend receivable 45,025 43,604
Prepaid/Other assets 1,954 630
Total Assets 19,390,480 65,393,699
Liabilities:
Payable for securities purchased --- 64,139
Payable for Trustee Deferred Compensation Plan 11,882 25,599
Payable to custodian for cash overdraft 1,292,032 ---
Payable to investment adviser 17,541 51,743
Accrued audit fees 13,984 14,813
Accrued custodian fees 958 8,237
Accrued trustee fees --- 6,307
Accrued fund accounting fees 2,198 3,690
Other accrued liabilities 792 1,699
Total Liabilities 1,339,387 176,227
Net Assets $18,051,093 $65,217,472
Net Assets:
Capital 15,979,753 48,528,287
Net unrealized appreciation (depreciation) of 2,071,340 16,689,185
investments
Net Assets $18,051,093 $65,217,472
*Securities at cost $16,564,595 $48,634,125
See accompanying notes to financial statements
<PAGE>
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
UTILITIES GROWTH
STOCK STOCK
PORTFOLIO PORTFOLIO
NET INVESTMENT INCOME
Interest $32,181 $285,463
Dividends 459,721 627,091
Total Investment Income 491,902 912,554
Expenses:
Investment advisory fees 149,369 570,139
Accounting fees 19,937 40,870
Trustees fees and expenses 8,682 27,375
Audit fees 13,999 14,827
Custodian fees 3,310 27,806
Other expenses 6,292 6,868
Legal fees 372 971
Insurance 85 109
Total Expenses 202,046 688,965
Investment advisory fees waived --- ---
Directed brokerage payments received --- (6,058)
Total Net Expenses 202,046 682,907
NET INVESTMENT INCOME 289,856 229,647
REALIZED AND UNREALIZED GAIN (LOSS)
FROM INVESTMENTS:
Net realized gain (loss) from futures --- 245,618
contracts
Net realized gain (loss) from investments 3,637,703 5,094,690
Net change in unrealized appreciation
(depreciation) of investments (1,322,044) 6,025,737
NET GAIN (LOSS) ON INVESTMENTS 2,315,659 11,366,045
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $2,605,515 $11,595,692
See accompanying notes to financial statements
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1999
UTILITIES GROWTH
STOCK STOCK
PORTFOLIO PORTFOLIO
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $289,856 $229,647
Net realized gain (loss) from investments
and futures contracts 3,637,703 5,340,308
Net change in unrealized appreciation
(depreciation) of investments (1,322,044) 6,025,737
Net increase in net assets
resulting from operations 2,605,515 11,595,692
TRANSACTIONS OF INVESTORS' BENEFICIAL INTERESTS:
Contributions 11,399,891 105,405,498
Withdrawals (9,173,858) (102,951,461)
Net increase in net assets resulting from
transactions of investors' beneficial interests 2,226,033 2,454,037
TOTAL INCREASE IN NET ASSETS 4,831,548 14,049,729
NET ASSETS - Beginning of period 13,219,545 51,167,743
NET ASSETS - End of period $18,051,093 $65,217,472
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1998
UTILITIES GROWTH
STOCK STOCK
PORTFOLIO PORTFOLIO
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $218,745 $335,278
Net realized gain (loss) from investments
and futures contracts (364,390) 4,583,800
Net change in unrealized appreciation
(depreciation) of investments 1,126,399 4,790,713
Net increase in net assets
resulting from operations 980,754 9,709,791
TRANSACTIONS OF INVESTORS' BENEFICIAL INTERESTS:
Contributions 6,977,776 74,136,798
Withdrawals (5,408,703) (66,072,809)
Net increase (decrease) in net assets
resulting from transactions of investors'
beneficial interests 1,569,073 8,063,989
TOTAL INCREASE (DECREASE) IN NET ASSETS 2,549,827 17,773,780
NET ASSETS - Beginning of period 10,669,718 33,393,963
NET ASSETS - End of period $13,219,545 $51,167,743
See accompanying notes to financial statements
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
UTILITIES STOCK PORTFOLIO
<CAPTION>
Period from
Year Ended December 31, June 21, 1995* to
1999 1998 1997 1996 December 31, 1995
<S> <C> <C> <C> <C> <C>
Net Assets, End of Period ($000) $18,051 $13,220 $10,670 $7,964 $4,291
Ratio of Expenses to Average Net Assets 1.35% 1.44% 1.60% 1.61% 2.32%(1)
Ratio of Net Investment Income to
Average Net Assets 1.94% 1.73% 1.79% 2.24% 2.09%(1)
Ratio of Expenses to Average Net Assets
before directed brokerage payments 1.35% 1.46% 1.65% 1.66% 2.40%(1)
Ratio of Net Investment Income to Average Net
Assets before directed brokerage payments 1.94% 1.71% 1.74% 2.19% 2.01%(1)
Portfolio Turnover Rate 69.20% 51.36% 41.22% 50.79% 5.06%
<FN>
(1) Annualized
* Date of commencement of operations
</FN>
</TABLE>
<TABLE>
GROWTH STOCK PORTFOLIO
<CAPTION>
Year Ended December 31,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Assets, End of Period ($000) $65,217 $51,168 $33,394 $24,414 $24,537
Ratio of Expenses to Average Net Assets 1.15% 1.25% 1.34% 1.24% 1.25%
Ratio of Net Investment Income to
Average Net Assets 0.39% 0.77% 0.83% 2.33% 3.78%
Ratio of Expenses to Average Net Assets
before waiver of fees 1.16% 1.26% 1.34% 1.24% 1.25%
Ratio of Net Investment Income to Average
Net Assets before waiver of fees 0.38% 0.76% 0.83% 2.33% 3.78%
Portfolio Turnover Rate 51.22% 79.98% 129.79% 81.66% 337.57%
</TABLE>
See accompanying notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION
Each Fund of The Flex-Partners Trust (the "Trust") invests all of its investable
assets in a corresponding open-end management investment company (each a
"Portfolio" and collectively the "Portfolios") having the same investment
objective as the Fund. Each Portfolio is registered under the Investment Company
Act of 1940, as amended (the "Act"), as a no-load, open-end management
investment company which was organized as a trust under the laws of the State of
New York. Each Declaration of Trust permits the Trustees, who are the same for
each Portfolio, to issue beneficial interests in each Portfolio.
The investment objective of each Portfolio is as follows:
The Utilities Stock Portfolio seeks a high level of current income and
growth of income by investing primarily in equity securities of domestic
and foreign public utility companies; however, it will not invest in
electric utilities whose generation of power is derived from nuclear
reactors. The Portfolio also seeks capital appreciation, but only when
consistent with its primary investment objective.
The Growth Stock Portfolio seeks capital growth by investing in a
diversified portfolio of domestic common stocks with greater than average
growth characteristics selected primarily from the Standard & Poor's 500
Composite Stock Price Index (the "S&P 500").
The financial statements of the Funds are included elsewhere in this report.
2. SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INVESTMENTS
Securities which are traded on stock exchanges are valued at the last sales
price as of the close of business of the New York Stock Exchange on the day of
valuation or, lacking any sales, at the closing bid prices. Securities traded
over-the-counter are valued at the most recent bid price or yield equivalent as
obtained from one or more dealers that make markets in such securities. Mutual
funds are valued at the daily redemption value as reported by the underlying
fund. The Portfolios obtain prices from independent pricing services which use
valuation techniques approved by the Board of Trustees.
Money market securities held in the Portfolios maturing more than sixty days
after the valuation date are valued at the last sales price as of the close of
business on the day of valuation, or, lacking any sales, at the most recent bid
price or yield equivalent as obtained from dealers that make markets in such
securities. When such securities are valued within sixty days to maturity, the
difference between the valuation existing on the sixty-first day before maturity
and maturity value is amortized on a straight-line basis to maturity. Securities
maturing within sixty days from their date of acquisition are valued at
amortized cost.
REPURCHASE AGREEMENTS
Each Portfolio may engage in repurchase agreement transactions whereby the
Portfolio takes possession of an underlying debt instrument subject to an
obligation of the seller to repurchase the instrument from the Portfolio and an
obligation of the Portfolio to resell the instrument at an agreed upon price and
term. At all times, the Portfolio maintains the value of collateral, including
accrued interest, at least 100% of the amount of the repurchase agreement, plus
accrued interest. If the seller defaults or the fair value of the collateral
declines, realization of the collateral by the Portfolios may be delayed or
limited.
DEFERRED TRUSTEE COMPENSATION
Under a Deferred Compensation Plan (the "Plan") non-interested Trustees may
elect to defer receipt of a portion of their annual compensation. Under the
Plan, deferred amounts are invested in the shares of the Flex-funds and
Flex-Partners Funds. Deferred amounts remain in the Portfolios until distributed
in accordance with the Plan.
<PAGE>
FUTURES & OPTIONS
Each Portfolio may engage in transactions in financial futures contracts and
options contracts in order to manage the risk of unanticipated changes in market
values of securities held in the portfolio, or which it intends to purchase. The
expectation is that any gain or loss on such transactions will be substantially
offset by any gain or loss on the securities in the underlying portfolio or on
those which are being considered for purchase.
To the extent that the Portfolio enters into futures contracts on an index or
group of securities the Portfolio exposes itself to an indeterminate liability
and will be required to pay or receive a sum of money measured by the change in
the market value of the index. Upon entering into a futures contract the
Portfolio is required to deposit an initial margin, which is either cash or
securities in an amount equal to a certain percentage of the contract value.
Subsequently, the variation margin, which is equal to changes in the daily
settlement price or last sale price on the exchanges where they trade, is
received or paid. The Portfolios record realized gains or losses for the daily
variation margin when they are recorded as gains or losses from futures
contracts.
Call and put option contracts involve the payment of a premium for the right to
purchase or sell an individual security or index aggregate at a specified price
until the expiration of the contract. Such transactions expose the Portfolio to
the loss of the premium paid if the Portfolio does not sell or exercise the
contract prior to the expiration date. In the case of a call option, sufficient
cash or money market instruments will be segregated to complete the purchase.
Options are valued on the basis of the daily settlement price or last sale on
the exchanges where they trade and the changes in value are recorded as an
unrealized appreciation or depreciation until closed, exercised or expired.
The Portfolios may write covered call or put options for which premiums received
are recorded as liabilities and are subsequently adjusted to current market
value of the options written. When written options are closed or exercised,
premiums received are offset against the proceeds paid, and the Portfolio
records realized gains or losses for the difference. When written options
expire, the liability is eliminated, and the Portfolio records realized gains
for the entire amount of premiums received.
During the year ended December 31, 1999, the Portfolios had the following
activity in futures contracts:
LONG CONTRACTS
Number of contracts Notional amount
GROWTH STOCK PORTFOLIO:
Outstanding, beginning of year 7 $2,055,875
Contracts opened 324 107,321,562
Contracts closed (321) (105,766,937)
Outstanding, end of year 10 $3,610,500
LETTER OF CREDIT
Each Portfolio has pledged as collateral a U.S. Government security, cash or
other high-grade debt security solely for the benefit of ICI Mutual Insurance
Co. for the Portfolios' fidelity bond coverage.
INCOME TAXES
The Portfolios will be treated as a partnership for Federal income tax purposes.
As such, each investor in the Portfolios will be subject to taxation on its
share of the Portfolios' ordinary income and capital gains. It is each
Portfolio's policy to comply with the requirements of the Internal Revenue Code
applicable to it. Therefore, no Federal income tax provision is required.
SECURITIES TRANSACTIONS
The Portfolios record security transactions on the trade date. Gains and losses
realized from the sale of securities are determined on the specific
identification basis. Dividend income is recognized on the ex-dividend date, and
interest income (including amortization of premium and accretion of discount) is
recognized as earned.
<PAGE>
3. AGREEMENTS AND TRANSACTIONS WITH AFFILIATES
R. Meeder & Associates (RMA), a wholly-owned subsidiary of Muirfield Investors,
Inc. (MII), provides each Portfolio with investment management, research,
statistical and advisory services. Under separate Investment Subadvisory
Agreements with RMA, Miller/Howard Investments, Inc. and Sector Capital
Management, Inc. serve as subadvisor of the Utilities Stock Portfolio and Growth
Stock Portfolio, respectively. Sub-subadvisers, selected by Sector Capital
Management, Inc., subject to the review and approval of the Trustees of the
Growth Stock Portfolio, are responsible for the selection of individual
portfolio securities for the assets of the Portfolio assigned to them by Sector
Capital Management, Inc.
For such services the Portfolios pay monthly fees based upon the average daily
value of each Portfolio's net assets at the following annual rate: 1.00% of
average daily net assets up to $50 million, 0.75% of average daily net assets
exceeding $50 million up to $100 million and 0.60% of average daily net assets
exceeding $100 million. As subadviser to the Utilities Stock Portfolio,
Miller/Howard Investments, Inc. is paid 0.00% of the 1.00% of average daily net
assets up to $10 million, 0.40% of the 1.00% of average daily net assets
exceeding $10 million up to $50 million, 0.40% of the 0.75% of average daily net
assets net assets exceeding $50 million up to $60 million, 0.30% of the 0.75% of
average daily net assets exceeding $60 million up to $100 million and 0.25% of
the 0.60% of average daily net assets exceeding $100 million. As subadviser to
the Growth Stock Portfolio, Sector Capital Management, Inc. is paid 0.30% of the
1.00% of average daily net assets up to $25 million, 0.70% of the 1.00% of
average daily net assets exceeding $25 million up to $50 million, 0.40% of the
0.75% of average daily net assets exceeding $50 million up to $100 million and
0.35% of the 0.60% of average daily net assets exceeding $100 million. Sector
Capital Management, Inc. pays all sub-subadvisers 0.25% on all average net
assets.
Mutual Funds Service Co. ("MFSCo"), a wholly-owned subsidiary of MII, serves as
accounting services agent for each Portfolio. In compensation for such services,
each Portfolio pays MFSCo an annual fee equal to the greater of:
a. 0.15% of the first $10 million of average daily net assets, 0.10% of the
next $20 million of average daily net assets, 0.02% of the next $50 million
of average daily net assets, and 0.01% in excess of $80 million of average
daily net assets,
or
b. $7,500.
Certain officers and trustees of the Portfolios are also officers or directors
of MII, RMA and MFSCo.
4. SECURITIES TRANSACTIONS
For the year ended December 31, 1999, the cost of purchases and proceeds from
sales or maturities of long-term investments for the Portfolios were as follows:
PORTFOLIO PURCHASES SALES
--------- --------- -----
Utilities Stock Portfolio $12,829,792 $ 9,928,610
Growth Stock Portfolio 28,470,710 27,440,601
As of December 31, 1999, the aggregate cost basis of investments and unrealized
appreciation (depreciation) for Federal income tax purposes was as follows:
COST BASIS UNREALIZED UNREALIZED NET UNREALIZED
PORTFOLIO OF INVESTMENTS APPRECIATION DEPRECIATION APPRECIATION
--------- -------------- ------------ ------------ -------------
Utilities Stock Portfolio $16,740,715 $ 3,217,376 $(1,322,156) $ 1,895,220
Growth Stock Portfolio 48,859,539 19,887,220 (3,423,449) 16,463,771
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Trustees of the Utilities Stock Portfolio
and Growth Stock Portfolio:
We have audited the accompanying statements of assets and liabilities of the
Utilities Stock Portfolio and Growth Stock Portfolio (Portfolios), including the
portfolios of investments, as of December 31, 1999, and the related statements
of operations, statements of changes in net assets and the financial highlights
for each of the periods indicated herein. These financial statements and the
financial highlights are the responsibility of the Portfolios' 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 verification of securities owned as of
December 31, 1999, by confirmation with the custodian and brokers and other
appropriate audit procedures. 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 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 the
Utilities Stock Portfolio and Growth Stock Portfolio at December 31, 1999, and
the results of their operations, the changes in their net assets and the
financial highlights for each of the periods indicated herein, in conformity
with generally accepted accounting principles.
KPMG LLP
Columbus, Ohio
February 11, 2000
<PAGE>
THE MORGAN KEEGAN UTILITY FUND
A SERIES OF THE MORGAN KEEGAN SELECT FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
________________, 2000
The Morgan Keegan Utility Fund is a series of the Morgan Keegan Select
Fund, Inc. (the "Company"), a diversified open-end management investment company
incorporated in Maryland on October 27, 1998. The fund invests principally in
equity securities of domestic and foreign public utility companies; however, the
fund will not invest in electric utilities that generate power from nuclear
reactors. The fund offers three classes of shares: Class A shares, Class C
shares, and Class I shares.
This Statement of Additional Information is not a prospectus but should be
read in conjunction with the fund's Prospectus, dated ______________, 2000,
which has been filed with the Securities and Exchange Commission. A copy of the
current Prospectus is available without charge from Morgan Keegan & Company,
Inc., the fund's distributor. Please retain this document for future reference.
Capitalized terms used and not otherwise defined herein have the same meanings
as defined in the Prospectus.
TABLE OF CONTENTS PAGE
Additional Information About Investment Limitations and Policies 2
Risk Considerations 23
Additional Tax Information 24
Additional Purchase and Redemption Information 26
Valuation of Shares 27
Purchase of Shares 28
Performance Information 29
Tax-Deferred Retirement Plans 31
The Company's Officers and Directors 32
The Portfolio's Officers and Trustees 35
The Fund's Investment Adviser 38
The Portfolio's Investment Adviser 39
The Portfolio's Investment Subadviser 41
Portfolio Transactions and Brokerage 42
Valuation of Portfolio Securities 44
The Fund's Distributor 45
Description of the Fund's Shares 47
The Fund's Custodian, Transfer Agent, Dividend Disbursing Agent
and Portfolio Accounting Service Agent 49
The Fund's Legal Counsel 50
The Fund's Certified Public Accountants 50
Financial Statements 50
INVESTMENT ADVISER TRANSFER AGENT & DISTRIBUTOR
------------------ ----------------------------
Meeder Asset Management, Inc. Morgan Keegan & Company, Inc.
INVESTMENT SUBADVISER PORTFOLIO ACCOUNTING SERVICE AGENT
--------------------- AND ADMINISTRATOR
Miller/Howard Investments, Inc. -----------------------------------
Mutual Funds Service Co.
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ADDITIONAL INFORMATION ABOUT
INVESTMENT LIMITATIONS AND POLICIES
The following policies and limitations supplement those set forth in the
Prospectus. Unless otherwise noted, whenever an investment policy or limitation
states a maximum percentage of the Portfolio's assets that may be invested in
any security or other asset, or sets forth a policy regarding quality standards,
such standard or percentage limitation will be determined immediately after and
as a result of the Portfolio's acquisition of such security or other asset.
Accordingly, any subsequent change in values, net assets or other circumstances
will not be considered when determining whether the investment complies with the
fund's investment policies and limitations.
The fund's fundamental investment limitations cannot be changed without
approval by a majority of the outstanding voting securities (as defined in the
Investment Company Act of 1940) of the fund. However, except for the fundamental
investment limitations set forth below, the investment policies and limitations
described in this Statement of Additional Information are not fundamental and
may be changed by the Board of Directors without shareholder approval. THE
FOLLOWING ARE THE PORTFOLIO'S FUNDAMENTAL INVESTMENT LIMITATIONS SET FORTH IN
THEIR ENTIRETY; PROVIDED THAT NOTHING IN THE FOLLOWING INVESTMENT RESTRICTIONS
WILL PREVENT THE FUND FROM INVESTING ALL OR PART OF THE FUND'S ASSETS IN AN
OPEN-END MANAGEMENT INVESTMENT COMPANY WITH THE SAME INVESTMENT OBJECTIVE AS THE
FUND. THE FUND OR THE PORTFOLIO MAY NOT
(1) with respect to 75% of the Portfolio's total assets, purchase the
securities of any issuer (other than obligations issued or guaranteed by the
government of the United States or any of its agencies or instrumentalities) if,
as a result thereof, (a) more than 5% of the Portfolio's total assets would be
invested in the securities of such issuer or (b) the Fund would hold more than
10% of the voting securities of such issuer;
(2) issue senior securities except as permitted under the Investment
Company Act of 1940;
(3) borrow money except that the Portfolio may borrow money for temporary
or emergency purposes (not for leveraging or investment) in an amount not
exceeding 33-1/3% of its total assets (including the amount borrowed) less
liabilities (other than borrowings). Any borrowings that come to exceed this
amount will be reduced within three days (not including Sundays and holidays) to
the extent necessary to comply with the 33-1/3% limitation;
(4) underwrite securities issued by others (except to the extent that the
Portfolio may be deemed to be an underwriter within the meaning of the
Securities Act of 1933 in the disposition of restricted securities);
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(5) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or instrumentalities)
if, as a result, more than 25% of the Portfolio's total assets would be invested
in the securities of companies whose principal business activities are in the
same industry except that the Portfolio, under normal circumstances, will invest
more than 25% of its total assets in securities of public utility companies;
(6) purchase or sell real estate unless acquired as a result of ownership
of securities or other instruments (but this shall not prevent the Portfolio
from investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business);
(7) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
Portfolio from purchasing or selling options and futures contracts or from
investing in securities or other instruments backed by physical commodities); or
(8) lend any security or make any other loan if, as a result, more than
33-1/3% of its total assets would be lent to other parties (but this limitation
does not apply to purchases of debt securities or to repurchase agreements).
THE FOLLOWING INVESTMENT LIMITATIONS ARE NOT FUNDAMENTAL AND MAY BE CHANGED
WITHOUT SHAREHOLDER APPROVAL.
(i) The Portfolio does not currently intend to sell securities short unless
it owns or has the right to obtain securities equivalent in kind and amount to
the securities sold short and provided that transactions in futures contracts
and options are not deemed to constitute selling securities short.
(ii) The Portfolio does not currently intend to purchase securities on
margin except that the Fund may obtain such short-term credits as are necessary
for the clearance of transactions and provided that margin payments in
connection with futures contracts and options on futures contracts shall not
constitute purchasing securities on margin.
(iii) The Portfolio may borrow money only (a) from a bank, or from a
registered investment company for which the Manager serves as investment adviser
if an applicable exemptive order has been granted or (b) by engaging in reverse
repurchase agreements with any party (reverse repurchase agreements are treated
as borrowings for purposes of fundamental investment limitation (3)). The
Portfolio will not purchase any security while borrowings representing more than
5% of its total assets are outstanding. The Portfolio will not borrow from other
funds advised by the Manager if total outstanding borrowings immediately after
such borrowing would exceed 15% of the Portfolio's total assets.
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(iv) The Portfolio does not currently intend to purchase any security if,
as a result more than 10% of its net assets would be invested in securities that
are deemed to be illiquid because they are subject to legal or contractual
restrictions on resale or because they cannot be sold or disposed of in the
ordinary course of business at approximately the prices at which they are
valued, including repurchase agreements with remaining maturities in excess of
seven days or securities without readily available market quotes.
(v) The Portfolio does not currently intend to invest in securities of real
estate investment trusts that are not readily marketable or to invest in
securities of real estate limited partnerships that are not listed on the New
York Stock Exchange or the American Stock Exchange or traded on the NASDAQ
National Market System.
(vi) The Portfolio does not currently intend to lend assets other than
securities to other parties except by (a) lending money (up to 5% of the
Portfolio's net assets) to a registered investment company for which the Manager
serves as investment adviser or (b) acquiring loans, loan participations, or
other forms of direct debt instruments and in connection therewith assuming any
associated unfunded commitments of the sellers. (This limitation does not apply
to purchases or debt securities or to repurchase agreements.)
(vii) The Portfolio does not currently intend to purchase securities of
other investment companies.
This limitation does not apply to securities received as dividends, through
offers of exchange, or as a result of reorganization, consolidation, or merger.
(viii) The Portfolio does not currently intend to purchase the securities
of any issuer (other than securities issued or guaranteed by domestic or foreign
governments or political subdivisions thereof) if, as a result, more than 5% of
its total assets would be invested in the securities of business enterprises
that, including predecessors, have a record of less than three years of
continuous operation.
(ix) The Portfolio does not currently intend to purchase warrants, valued
at the lower of cost or market, in excess of 5% of the Portfolio's net assets.
Included in that amount, but not to exceed 2% of the Portfolio's net assets, may
be warrants that are not listed on the New York Stock Exchange or the American
Stock Exchange. Warrants acquired by the Portfolio in units or attached to
securities are not subject to these restrictions.
(x) The Portfolio does not currently intend to invest in oil, gas, or other
mineral exploration or development programs or leases.
(xi) The Portfolio does not currently intend to purchase the securities of
any issuer if those officers and Trustees of the Trust and those officers and
directors of the
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Manager or the Subadviser who individually own more than 1/2 of 1% of the
securities of such issuer, together own more than 5% of such issuer's
securities.
(xii) The Portfolio does not currently intend to invest in electric
utilities whose generation of power is derived from nuclear reactors.
For the Portfolio's limitations on futures and options transactions, see
the section entitled "Limitations on Futures and Options Transactions" beginning
on page 17. For the Portfolio's limitations on short sales, see the section
entitled "Short Sales."
MONEY MARKET INSTRUMENTS. When investing in money market instruments, the
Portfolio will limit its purchases, denominated in U.S. dollars, to the
following securities.
* U.S. Government Securities and Securities of its Agencies and
Instrumentalities - obligations issued or guaranteed as to principal
or interest by the United States or its agencies (such as the Export
Import Bank of the United States, Federal Housing Administration, and
Government National Mortgage Association) or its instrumentalities
(such as the Federal Home Loan Bank, Federal Intermediate Credit Banks
and Federal Land Bank), including Treasury bills, notes and bonds.
* Bank Obligations and Instruments Secured Thereby - obligations
including certificates of deposit, time deposits and bankers'
acceptances) of domestic banks having total assets of $1,000,000,000
or more, instruments secured by such obligations and obligations of
foreign branches of such banks, if the domestic parent bank is
unconditionally liable to make payment on the instrument if the
foreign branch fails to make payment for any reason. The Portfolio may
also invest in obligations (including certificates of deposit and
bankers acceptances) of domestic branches of foreign banks having
assets of $1,000,000,000 or more if the domestic branch is subject to
the same regulation as United States banks. The Portfolio will not
invest at time of purchase more than 25% of its assets in obligations
of banks nor will the Portfolio invest more than 10% of its assets in
time deposits.
* High quality Commercial Paper - The Portfolio may invest in commercial
paper rated no lower than A-2 by Standard & Poor's Corporation or
Prime-2 by Moody's Investors Services Inc. or, if not rated, issued by
a company having an outstanding debt issue rated at least A by
Standard & Poor's or Moody's.
* Private Placement Commercial Paper - Private placement commercial
paper consists of unregistered securities which are traded in public
markets to qualified institutional investors such as the Portfolio.
The Portfolio's risk is that the universe of potential buyers for the
securities should the
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Portfolio desire to liquidate a position is limited to qualified
dealers and institutions and therefore such securities could have the
effect of being illiquid.
* High Grade Corporate Obligations - obligations rated at least A by
Standard & Poor's or Moody's. See rating information below.
* Repurchase Agreements -- See Repurchase Agreements below.
The Subadviser exercises due care in the selection of money market
instruments. However, there is a risk that the issuers of the securities may not
be able to meet their obligations to pay interest or principal when due. There
is also a risk that some of the Portfolio's securities might have to be
liquidated prior to maturity at a price less than original amortized cost or
value face amount or maturity value to meet larger than expected redemptions.
Any of these risks if encountered could cause a reduction in net income or in
the net asset value of the Portfolio.
RATINGS
1. Moody's Investors Services Inc.'s ("Moody's") Corporate Bond Rating:
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be 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 or
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A 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 which are rated Baa 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 or time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
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2. Standard and Poor's Corporation's ("S&P") Corporate Bond Rating:
AAA- Bonds rated AAA are highest grade obligations. They possess the
ultimate degree of protection as to principal and interest. Marketwise they move
with interest rates and hence provide the maximum safety on all counts.
AA - Bonds rated AA also qualify as high grade obligations and in the
majority of instances differ from AAA issues only in small degree. Here too
prices move with the long-term money market.
A - Bonds rated A are regarded as upper medium grade. They have
considerable investment strength but are not entirely free from the adverse
effect of changes in economic and trade conditions. Interest and principal are
regarded as safe. They predominantly reflect money rates in their market
behavior but to some extent also economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
3. A-1 and P-1 Commercial Paper Ratings:
Commercial paper rated A-1 by S&P has the following characteristics:
Liquidity ratios are adequate to meet cash requirements. Long-term senior debt
is rated A or better. The issuer has access to at least two additional channels
of borrowing. Basic earnings and cash flow have an upward trend. Typically the
issuer's industry is well established and the issuer has a strong position
within the industry. The reliability and quality of management are unquestioned.
Relative strength or weakness of the above factors determines whether the
issuer's commercial paper is A-1 A-2 or A-3.
The rating P-1 is the highest commercial paper rating assigned by Moody's.
Among the factors considered by Moody's in assigning ratings are the following:
(1) evaluation of the management of the issuer; (2) economic evaluation of the
issuer's industry or industries and an appraisal of speculative-type risks which
may be inherent in certain areas; (3) evaluation of the issuer's products in
relation to competition and customer acceptance; (4) liquidity; (5) amount and
quality of long-term debt; (6) trend of earnings over a period of ten years; (7)
financial strength of a parent company and the relationships which exist with
the issuer; and (8) recognition by the management of obligations which may be
present or may arise as a result of public interest questions and preparations
to meet such obligations.
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4. Description of Permitted Money Market Investments:
Commercial Paper - refers to promissory notes issued by corporations in
order to finance their short term credit needs.
U.S. Government Obligations - are bills, certificates of indebtedness,
notes and bonds issued by the U.S. Treasury and agencies, authorities and
instrumentalities of the U.S. Government established under the authority of an
act of Congress. Some obligations of U.S. Government agencies, authorities and
instrumentalities are supported by the full faith and credit of the U.S.
Treasury, as for example, the Government National Mortgage Association; others
by the right of the issuer to borrow from the Treasury, as in the case of
Federal Farm Credit Banks and Federal National Mortgage Association; and others
only by the credit of the agency authority or instrumentality; as for example,
Federal Home Loan Mortgage and Federal Home Loan Bank.
Repurchase Agreements - See Repurchase Agreements below.
Certificates of Deposit - are certificates issued against funds deposited
in a bank, are for a definite period of time, earn a specified or variable rate
of return, and are normally negotiable.
Banker's Acceptances - are short-term credit instruments used to finance
the import, export, transfer or storage of goods. They are termed accepted when
a bank guarantees their payment at maturity. Corporate Obligations - include
bonds and notes issued by corporations in order to finance longer term credit
needs.
ILLIQUID INVESTMENTS are investments that cannot be sold or disposed of in
the ordinary course of business (within 7 days) at approximately the prices at
which they are valued. Under the supervision of the Board of Trustees, the
Subadviser determines the liquidity of the Portfolio's investments and through
reports from the Subadviser, the Board monitors investments in illiquid
instruments. In determining the liquidity of the Portfolio's investments, the
Subadviser may consider various factors including (1) the frequency of trades
and quotations, (2) the number of dealers and prospective purchasers in the
marketplace, (3) dealer undertakings to make a market, (4) the nature of the
security (including any demand or tender features), and (5) the nature of the
marketplace for trades (including the ability to assign or offset the
Portfolio's rights and obligations relating to the investment). Investments
currently considered by the Portfolio to be illiquid include repurchase
agreements not entitling the holder to payment of principal and interest within
seven days, over-the-counter options and non-government stripped fixed-rate
mortgage-backed securities. Also, the Subadviser may determine some restricted
securities, government-stripped fixed-rate mortgage-backed securities, loans and
other direct debt instruments and swap agreements to be illiquid. However, with
respect to over-the-counter options, the Portfolio writes all or a portion of
the value of the underlying instrument may be illiquid depending on the assets
held to cover the option and the nature and terms of any agreement the Portfolio
may have to close out the option
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before expiration. In the absence of market quotations, illiquid investments are
priced at fair value as determined in good faith by the Board of Trustees. If
through a change in values, net assets or other circumstances, the Portfolio
were in a position where more than 10% of its net assets were invested in
illiquid securities, it would seek to take appropriate steps to protect
liquidity.
RESTRICTED SECURITIES generally can be sold in privately negotiated
transactions pursuant to an exemption from registration under the Securities Act
of 1933 or in a registered public offering. Where registration is required, the
Portfolio may be obligated to pay all or part of the registration expense, and a
considerable period may elapse between the time it decides to seek registration
and the time the Portfolio may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, the Portfolio might obtain a less favorable price
than prevailed when it decided to seek registration of the security.
REPURCHASE AGREEMENTS. In a repurchase agreement, the Portfolio purchases a
security and simultaneously commits to resell that security to the seller at an
agreed upon price on an agreed upon date within a number of days from the date
of purchase. The resale price reflects the purchase price plus an agreed upon
incremental amount which is unrelated to the coupon rate or maturity of the
purchased security. A repurchase agreement involves the obligation of the seller
to pay the agreed upon price which obligation is in effect secured by the value
(at least equal to the amount of the agreed upon resale price and marked to
market daily) of the underlying security. The Portfolio may engage in repurchase
agreements with respect to any security in which it is authorized to invest.
The Portfolio's repurchase agreements will at all times be fully
collateralized in an amount at least equal to the purchase price, including
accrued interest earned on the underlying securities. The instruments held as
collateral are valued daily, and as the value of instruments declines, the
Portfolio will require additional collateral. If the seller defaults or becomes
insolvent and the value of the collateral securing the repurchase agreement
declines, the Portfolio may incur a loss.
While it does not presently appear possible to eliminate all risks from
these transactions (particularly the possibility of a decline in the market
value of the underlying securities, as well as delays and costs to the Portfolio
in connection with bankruptcy proceedings), it is the Portfolio's current policy
to limit repurchase agreement transactions to parties whose creditworthiness has
been reviewed and found satisfactory by the Subadviser.
REVERSE REPURCHASE AGREEMENTS In a reverse repurchase agreement, a
Portfolio sells a portfolio instrument to another party, such as a bank or
broker-dealer, in return for cash and agrees to repurchase the instrument at a
particular price and time. While a reverse repurchase agreement is outstanding,
the Portfolio will maintain appropriate liquid assets in a segregated custodian
account to cover its obligation under the
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agreement. The Portfolio will enter into reverse repurchase agreements only with
parties whose creditworthiness has been found satisfactory by the Subadviser.
Such transactions may increase fluctuations in the market value of the
Portfolio's assets and may be viewed as a form of leverage.
SECURITIES LENDING. The Portfolio may lend securities to parties such as
broker-dealers or institutional investors.
During the time portfolio securities are on loan, the borrower will pay the
Portfolio an amount equivalent to any dividend or interest paid on such
securities and earn additional income, or the Portfolio may receive an
agreed-upon amount of interest income from the borrower. In accordance with
applicable regulatory requirements, the Portfolio may lend up to 30% of the
value of its total assets. The risks in lending portfolio securities, as well as
with other extensions of secured credit, consist of possible delay in receiving
additional collateral or in recovery of the securities or possible loss of
rights in the collateral should the borrower fail financially.
Securities lending allows the Portfolio to retain ownership of the
securities loaned and, at the same time, to earn additional income. Since there
may be delays in the recovery of loaned securities or even a loss of rights in
collateral supplied should the borrower fail financially, loans will be made
only to parties deemed by the Subadviser to be of good standing. Furthermore,
they will only be made if in the Subadviser s judgment the consideration to be
earned from such loans would justify the risk.
The Subadviser understands that it is the current view of the SEC Staff
that the Portfolio may engage in loan transactions only under the following
conditions: (1) the Portfolio must receive 100% collateral in the form of cash
or cash equivalents (e.g. U.S. Treasury bills or notes) from the borrower; (2)
the borrower must increase the collateral whenever the market value of the
securities loaned (determined on a daily basis) rises above the value of the
collateral; (3) after giving notice, the Portfolio must be able to terminate the
loan at any time; (4) the Portfolio must receive reasonable interest on the loan
or a flat fee from the borrower, as well as amounts equivalent to any dividends,
interest or other distributions on the securities loaned and to any increase in
market value; (5) the Portfolio may pay only reasonable custodian fees in
connection with the loan; and (6) the Board of Trustees must be able to vote
proxies on the securities loaned, either by terminating the loan or by entering
into an alternative arrangement with the borrower.
Cash received through loan transactions may be invested in any security in
which the Portfolio is authorized to invest. Investing this cash subjects that
investment as well as the security loaned to market forces (i.e. capital
appreciation or depreciation).
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase or
sell securities on a when-issued or delayed delivery basis. When-issued or
delayed delivery transactions arise when securities are purchased or sold by the
Portfolio with payment and delivery taking place as much as a month or more in
the future in order to
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secure what is considered to be an advantageous price and yield to the Portfolio
at the time of entering into the transaction. The Portfolio's Custodian will
maintain, in a segregated account of the Portfolio, cash, U.S. Government
securities or other liquid high-grade debt obligations having a value equal to
or greater than the Portfolio's purchase commitments; the Custodian will
likewise segregate securities sold on a delayed delivery basis. The securities
so purchased are subject to market fluctuation and no interest accrues to the
purchaser during the period between purchase and settlement. At the time of
delivery of the securities the value may be more or less than the purchase price
and an increase in the percentage of the Portfolio's assets committed to the
purchase of securities on a when-issued or delayed delivery basis may increase
the volatility of the Portfolio's net asset value.
FOREIGN INVESTMENTS. Foreign investments can involve significant risks in
addition to the risks inherent in U.S. investments. The value of securities
denominated in or indexed to foreign currencies and of dividends and interest
from such securities can change significantly when foreign currencies strengthen
or weaken relative to the U.S. dollar. Foreign securities markets generally have
less trading volume and less liquidity than U.S. markets, and prices on some
foreign markets can be highly volatile.
Many foreign countries lack uniform accounting and disclosure standards
comparable to those applicable to U.S. companies, and it may be more difficult
to obtain reliable information regarding an issuer's financial condition and
operations.
In addition, the costs of foreign investing, including withholding taxes,
brokerage commissions, and custodial costs, are generally higher than for U.S.
investments.
Foreign markets may offer less protection to investors than U.S. markets.
Foreign issuers, brokers, and securities markets may be subject to less
government supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer, and
may involve substantial delays. It may also be difficult to enforce legal rights
in foreign countries.
Investing abroad also involves different political and economic risks.
Foreign investments may be affected by actions of foreign governments adverse to
the interests of U.S. investors, including the possibility of expropriation or
nationalization of assets, confiscatory taxation, restrictions on U.S.
investment or on the ability to repatriate assets or convert currency into U.S.
dollars, or other government intervention. There may be a greater possibility of
default by foreign governments or foreign government-sponsored enterprises.
Investments in foreign countries also involve a risk of local political,
economic, or social instability, military action or unrest, or adverse
diplomatic developments. There is no assurance that the Subadviser will be able
to anticipate or counter these potential events.
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The considerations noted above generally are intensified for investments in
developing countries. Developing countries may have relatively unstable
governments, economies based on only a few industries, and securities markets
that trade a small number of securities.
The Portfolio may invest in foreign securities that impose restrictions on
transfer within the U.S. or to U.S. persons. Although securities subject to
transfer restrictions may be marketable abroad, they may be less liquid than
foreign securities of the same class that are not subject to such restrictions.
American Depository Receipts and European Depository Receipts (ADRs and
EDRs) are certificates evidencing ownership of shares of a foreign-based
corporation held in trust by a bank or similar financial institution. Designed
for use in U.S. and European securities markets, respectively, ADRs and EDRs are
alternatives to the purchase of the underlying securities in their national
markets and currencies.
HEDGING STRATEGIES. The Portfolio may engage in hedging transactions in
carrying out its investment policies. The Manager may conduct a hedging program
on behalf of the Portfolio for the following reasons: (1) to keep cash on hand
to meet shareholder redemptions or other needs while simulating full investment
in stocks; (2) to reduce the fund's transaction costs or add value when these
instruments are favorably priced; (3) to forego taxes that would otherwise have
to be paid on gains from the sale of the fund's securities; and (4) to attempt
to protect the value of certain securities owned or intended to be purchased by
the fund's while the manager is making a change in the fund's investment
position.
A hedging program involves entering into an "option" or "futures"
transaction in lieu of the actual purchase or sale of securities. At present,
many groups of common stocks (stock market indices) may be made the subject of
futures contracts, while government securities such as Treasury Bonds and Notes
are among debt securities currently covered by futures contracts.
Financial futures contracts or related options used by the Portfolio to
implement its hedging strategies are considered derivatives. The value of
derivatives can be affected significantly by even small market movements,
sometimes in unpredictable ways.
The Portfolio may not purchase or sell financial futures or purchase
related options if immediately thereafter the sum of the amount of margin
deposits on the Portfolio's existing futures positions and premiums paid for
related options would exceed 5% of the market value of the Portfolio's total
assets.
The Portfolio expects that any gain or loss on hedging transactions will be
substantially offset by any gain or loss on the securities underlying the
contracts or being considered for purchase. There can be no guarantee that the
Portfolio will be able to realize this objective, and there are some risks in
utilizing a hedging strategy.
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FOREIGN CURRENCY TRANSACTIONS. The Portfolio may hold foreign currency
deposits from time to time and may convert dollars and foreign currencies in the
foreign exchange markets. Currency conversion involves dealer spreads and other
costs although commissions usually are not charged. Currencies may be exchanged
on a spot (i.e., cash) basis, or by entering into forward contracts to purchase
or sell foreign currencies at a future date and price. Forward contracts
generally are traded in an interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. The parties to a
forward contract may agree to offset or terminate the contract before its
maturity or may hold the contract to maturity and complete the contemplated
currency exchange.
The Portfolio may use currency forward contracts to manage currency risks
and to facilitate transactions in foreign securities. The following discussion
summarizes the principal currency management strategies involving forward
contracts that could be used by the Portfolio.
In connection with purchases and sales of securities denominated in foreign
currencies, the Portfolio may enter into currency forward contracts to fix a
definite price for the purchase or sale in advance of the trade's settlement
date. This technique is sometimes referred to as a settlement hedge or
transaction hedge.
The Subadviser expects to enter into settlement hedges in the normal course
of managing the Portfolio's foreign investments. The Portfolio could also enter
into forward contracts to purchase or sell a foreign currency in anticipation of
future purchases or sales of securities denominated in foreign currency even if
the specific investments have not yet been selected by the Subadviser.
The Portfolio may also use forward contracts to hedge against a decline in
the value of existing investments denominated in foreign currency. For example,
if the Portfolio owned securities denominated in pounds sterling, it could enter
into a forward contract to sell pounds sterling in return for U.S. dollars to
hedge against possible declines in the pound's value. Such a hedge sometimes
referred to as a "position hedge," would tend to offset both positive and
negative currency fluctuations but would not offset changes in security values
caused by other factors. The Portfolio could also hedge the position by selling
another currency expected to perform similarly to the pound sterling - for
example, by entering into a forward contract to sell Deutschemarks or European
Currency Units in return for U.S. dollars. This type of hedge sometimes referred
to as a "proxy hedge," could offer advantages in terms of cost, yield, or
efficiency, but generally would not hedge currency exposure as effectively as a
simple hedge into U.S. dollars. Proxy hedges may result in losses if the
currency used to hedge does not perform similarly to the currency in which the
hedged securities are denominated.
Under certain conditions, SEC guidelines require mutual funds to set aside
cash and appropriate liquid assets in a segregated custodial account to cover
currency forward
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contracts. As required by SEC guidelines, the Portfolio will segregate assets to
cover currency forward contracts, if any, whose purpose is essentially
speculative. The Portfolio will not segregate assets to cover forward contracts
entered into for hedging purposes, including settlement hedges position hedges
and proxy hedges.
Successful use of forward currency contracts will depend on the
Subadviser's skill in analyzing and predicting currency values. Forward
contracts may substantially change the Portfolio's investment exposure to
changes in currency exchange rates and could result in losses to the Portfolio
if currencies do not perform as the Subadviser anticipates. For example, if a
currency's value rose at a time when the Subadviser had hedged the Portfolio by
selling that currency in exchange for dollars, the Portfolio would be unable to
participate in the currency's appreciation. If the Subadviser hedges currency
exposure through proxy hedges, the Portfolio could realize currency losses from
the hedge and the security position at the same time if the two currencies do
not move in tandem. Similarly, if the Subadviser increases the Portfolio's
exposure to a foreign currency and that currency's value declines, the Portfolio
will realize a loss. There is no assurance that the Subadviser's use of forward
currency contracts will be advantageous to the Portfolio or that it will hedge
at an appropriate time. The policies described in this section are
non-fundamental policies of the Portfolio.
LIMITATIONS ON FUTURES AND OPTIONS TRANSACTIONS. The Portfolio will not:
(a) sell futures contracts, purchase put options or write call options if, as a
result, more than 50% of the Portfolio's total assets would be hedged with
futures and options under normal conditions; (b) purchase futures contracts or
write put options if, as a result, the Portfolio's total obligations upon
settlement or exercise of purchased futures contracts and written put options
would exceed 25% of its total assets; or (c) purchase call options if, as a
result, the current value of option premiums for call options purchased by the
Portfolio would exceed 5% of the Portfolio's total assets. These limitations do
not apply to options attached to or acquired or traded together with their
underlying securities, and do not apply to securities that incorporate features
similar to options.
For certain regulatory purposes, the Commodity Futures Trading Commission
("CFTC") limits the types of futures positions that can be taken in conjunction
with the management of a securities portfolio for mutual funds, such as the
Portfolio. All futures transactions for the Portfolio will consequently be
subject to the restrictions on the use of futures contracts established in CFTC
rules, such as observation of the CFTC's definition of "hedging." In addition,
whenever the Portfolio establishes a long futures position, it will set aside
cash or cash equivalents equal to the underlying commodity value of the long
futures contracts held by the Portfolio. Although all futures contracts involve
leverage by virtue of the margin system applicable to trading on futures
exchanges, the Portfolio will not, on a net basis, have leverage exposure on any
long futures contracts that it establishes because of the cash set aside
requirement. All futures transactions can produce a gain or a loss when they are
closed, regardless of the purpose for which they have been established. Unlike
short futures contracts positions established to protect against the risk of a
decline in value of existing securities holdings, the long futures
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positions established by the Portfolio to protect against reinvestment risk are
intended to protect the Portfolio against the risks of reinvesting portfolio
assets that arise during periods when the assets are not fully invested in
securities.
The above limitations on the Portfolio's investments in futures contracts
and options and the Portfolio's policies regarding futures contracts and options
discussed elsewhere in this Statement of Additional Information may be changed
as regulatory agencies permit.
FUTURES CONTRACTS. When the Portfolio purchases a futures contract, it
agrees to purchase a specified underlying instrument at a specified future date.
When the Portfolio sells a futures contract, it agrees to sell the underlying
instrument at a specified future date. The price at which the purchase and sale
will take place is fixed when the Portfolio enters into the contract.
Some currently available futures contracts are based on specific
securities, such as U.S. Treasury bonds or notes, and some are based on indices
of securities prices, such as the Standard & Poor's 500 Composite Stock Price
Index (S&P 500). Futures can be held until their delivery dates or can be closed
out before then if a liquid secondary market is available.
The value of a futures contract tends to increase and decrease in tandem
with the value of its underlying instrument. Therefore, purchasing futures
contracts will tend to increase the Portfolio's exposure to positive and
negative price fluctuations in the underlying instrument, much as if it had
purchased the underlying instrument directly. When the Portfolio sells a futures
contract, by contrast, the value of its futures position will tend to move in a
direction contrary to the market. Selling futures contracts, therefore, will
tend to offset both positive and negative market price changes much as if the
underlying instrument had been sold.
FUTURES MARGIN PAYMENTS. The purchaser or seller of a futures contract is
not required to deliver or pay for the underlying instrument unless the contract
is held until the delivery date. However, both the purchaser and seller are
required to deposit "initial margin" with a futures broker, known as a futures
commission merchant (FCM), when the contract is entered into. Initial margin
deposits are typically equal to a percentage of the contract's value.
If the value of either party's position declines, that party will be
required to make additional "variation margin" payments to settle the change in
value on a daily basis. The party that has a gain may be entitled to receive all
or a portion of this amount. Initial and variation margin payments do not
constitute purchasing securities on margin for purposes of the Portfolio's
investment limitations. In the event of the bankruptcy of an FCM that holds
margin on behalf of the Portfolio, the Portfolio may be entitled to return of
margin owed to it only in proportion to the amount received by the FCM's other
customers, potentially resulting in losses to the Portfolio.
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PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, the Portfolio
obtains the right (but not the obligation) to sell the option's underlying
instrument at a fixed strike price. In return for this right, the Portfolio pays
the current market price for the option (known as the option premium). Options
have various types of underlying instruments, including specific securities,
indices of securities prices and futures contracts. The Portfolio may terminate
its position in a put option it has purchased by allowing it to expire or by
exercising the option. If the option is allowed to expire, the Fund will lose
the entire premium it paid. If the Portfolio exercises the option, it completes
the sale of the underlying instrument at the strike price. The Portfolio may
also terminate a put option position by closing it out in the secondary market
at its current price, if a liquid secondary market exists.
The buyer of a typical put option can expect to realize a gain if security
prices fall substantially. However, if the underlying instrument's price does
not fall enough to offset the cost of purchasing the option, a put buyer can
expect to suffer a loss (limited to the amount of the premium paid, plus related
transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price.
A call buyer typically attempts to participate in potential price increases
of the underlying instrument with risk limited to the cost of the option if
security prices fall. At the same time, the buyer can expect to suffer a loss if
security prices do not rise sufficiently to offset the cost of the option.
WRITING PUT AND CALL OPTIONS. When the Portfolio writes a put option, it
takes the opposite side of the transaction from the option's purchaser. In
return for receipt of the premium the Portfolio assumes the obligation to pay
the strike price for the option's underlying instrument if the other party to
the option chooses to exercise it. When writing an option on a futures contract
the Portfolio will be required to make margin payments to an FCM as described
above for futures contracts. The Portfolio may seek to terminate its position in
a put option it writes before exercise by closing out the option in the
secondary market at its current price. If the secondary market is not liquid for
a put option the Portfolio has written, however, the Portfolio must continue to
be prepared to pay the strike price while the option is outstanding, regardless
of price changes and must continue to set aside assets to cover its position.
When the Portfolio writes a put option, it takes the opposite side of the
transaction from the option's purchaser. In return for receipt of the premium,
the Portfolio assumes the obligation to pay the strike price for the option's
underlying instrument if the other party to the option chooses to exercise it.
When writing an option on a futures contract the Portfolio will be required to
make margin payments to an FCM as described above for futures contracts. The
Portfolio may seek to terminate its position in a put option it writes
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before exercise by closing out the option in the secondary market at its current
price. If the secondary market is not liquid for a put option the Portfolio has
written, however, the Portfolio must continue to be prepared to pay the strike
price while the option is outstanding, regardless of price changes, and must
continue to set aside assets to cover its position.
If security prices rise, a put writer would generally expect to profit,
although its gain would be limited to the amount of the premium it received. If
security prices remain the same over time, it is likely that the writer will
also profit because it should be able to close out the option at a lower price.
If security prices fall, the put writer would expect to suffer a loss. This loss
should be less than the loss from purchasing the underlying instrument directly,
however, because the premium received for writing the option should mitigate the
effects of the decline.
Writing a call option obligates the Portfolio to sell or deliver the
option's underlying instrument in return for the strike price, upon exercise of
the option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium, a call writer mitigates the effects of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
The Portfolio may write only "covered" call options. An option written on a
security or currency is "covered" when, so long as the Portfolio is obligated
under the option, it owns the underlying security or currency. The Portfolio
will "cover" stock index options and options on futures contracts it writes by
maintaining in a segregated account either marketable securities, which in the
Subadviser's judgment correlate to the underlying index or futures contract or
an amount of cash, U.S. government securities or other liquid, high grade debt
securities equal in value to the amount the Portfolio would be required to pay
were the option exercised.
COMBINED POSITIONS. The Portfolio may purchase and write options in
combination with each other or in combination with futures or forward contracts,
to adjust the risk and return characteristics of the overall position. For
example, the Portfolio may purchase a put option and write a call option on the
same underlying instrument, in order to construct a combined position whose risk
and return characteristics are similar to selling a futures contract. Another
possible combined position would involve writing a call option at one strike
price and buying a call option at a lower price, in order to reduce the risk of
the written call option in the event of a substantial price increase. Because
combined options positions involve multiple trades, they result in higher
transaction costs and may be more difficult to open and close out.
CORRELATION OF PRICE CHANGES. Because there are a limited number of types
of exchange-traded options and futures contracts, it is likely that the
standardized contracts
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available will not match the Portfolio's current or anticipated investments
exactly. The Portfolio may invest in options and futures contracts based on
securities with different issuers, maturities or other characteristics from the
securities in which it typically invests, which involves a risk that the options
or futures position will not track the performance of the Portfolio's other
investments.
Options and futures prices can also diverge from the prices of their
underlying instruments even if the underlying instruments match the Portfolio's
investments well. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation may
also result from differing levels of demand in the options and futures markets
and the securities markets, from structural differences in how options and
futures and securities are traded, or from imposition of daily price fluctuation
limits or trading halts.
The Fund may purchase or sell options and futures contracts with a greater
or lesser value than the securities it wishes to hedge or intends to purchase in
order to attempt to compensate for differences in volatility between the
contract and the securities, although this may not be successful in all cases.
If price changes in the Portfolio's options or futures positions are poorly
correlated with its other investments, the positions may fail to produce
anticipated gains or result in losses that are not offset by gains in other
investments.
LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS. There is no assurance a liquid
secondary market will exist for any particular options or futures contract at
any particular time. Options may have relatively low trading volume and
liquidity if their strike prices are not close to the underlying instrument's
current price. In addition, exchanges may establish daily price fluctuation
limits for options and futures contracts, and may halt trading if a contract's
price moves upward or downward more than the limit in a given day. On volatile
trading days when the price fluctuation limit is reached or a trading halt is
imposed, it may be impossible for the Portfolio to enter into new positions or
close out existing positions. If the secondary market for a contract is not
liquid because of price fluctuation limits or otherwise, it could prevent prompt
liquidation of unfavorable positions, and potentially could require the
Portfolio to continue to hold a position until delivery or expiration regardless
of changes in its value. As a result, the Portfolio's access to other assets
held to cover its options or futures positions could also be impaired.
OTC OPTIONS. Unlike exchange-traded options, which are standardized with
respect to the underlying instrument, expiration date, contract size, and strike
price, the terms of over-the-counter options (options not traded on exchanges)
generally are established through negotiation with the other party to the option
contract. While this type of arrangement allows the Portfolio greater
flexibility to tailor an option to its needs, OTC options generally involve
greater credit risk than exchange-traded options, which are guaranteed by the
clearing organization of the exchanges where they are traded.
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OPTIONS AND FUTURES RELATING TO FOREIGN CURRENCIES. Currency futures
contracts are similar to forward currency exchange contracts, except that they
are traded on exchanges (and have margin requirements) and are standardized as
to contract size and delivery date. Most currency futures contracts call for
payment or delivery in U.S. dollars. The underlying instrument of a currency
option may be a foreign currency, which generally is purchased or delivered in
exchange for U.S. dollars, or may be a futures contract. The purchaser of a
currency call obtains the right to purchase the underlying currency, and the
purchaser of a currency put obtains the right to sell the underlying currency.
The uses and risks of currency options and futures are similar to options
and futures relating to securities or indices, as discussed above. The Portfolio
may purchase and sell currency futures and may purchase and write currency
options to increase or decrease its exposure to different foreign currencies.
The Portfolio may also purchase and write currency options in conjunction with
each other or with currency futures or forward contracts. Currency futures and
options values can be expected to correlate with exchange rates, but may not
reflect other factors that affect the value of the Fund's investments. A
currency hedge, for example, should protect a Yen-denominated security from a
decline in the Yen, but will not protect the Portfolio against a price decline
resulting from deterioration in the issuer's creditworthiness. Because the value
of the Portfolio's foreign-denominated investments changes in response to many
factors other than exchange rates, it may not be possible to match the amount of
currency options and futures to the value of the Portfolio's investments exactly
over time.
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS. The Portfolio will comply
with guidelines established by the SEC with respect to coverage of options and
futures strategies by mutual funds, and if the guidelines so require, will set
aside appropriate liquid assets in a segregated custodial account in the amount
prescribed. Securities held in a segregated account cannot be sold while the
futures or option strategy is outstanding, unless they are replaced with other
suitable assets. As a result, there is a possibility that segregation of a large
percentage of the Portfolio's assets could impede portfolio management or the
Fund's ability to meet redemption requests or other current obligations.
SHORT SALES. The Portfolio may enter into short sales with respect to
stocks underlying its convertible security holdings. For example, if the
Subadviser anticipates a decline in the price of the stock underlying a
convertible security the Portfolio holds, it may sell the stock short. If the
stock price subsequently declines, the proceeds of the short sale could be
expected to offset all or a portion of the effect of the stock's decline on the
value of the convertible security. The Fund currently intends to hedge no more
than 15% of its total assets with short sales on equity securities underlying
its convertible security holdings under normal circumstances.
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When the Portfolio enters into a short sale, it will be required to set
aside securities equivalent in kind and amount to those sold short (or
securities convertible or exchangeable into such securities) and will be
required to continue to hold them while the short sale is outstanding. The
Portfolio will incur transaction costs, including interest expense, in
connection with opening, maintaining, and closing short sales.
SOCIAL INVESTMENT POLICY. The Fund offers investors the opportunity for
capital appreciation, current income, and growth of income, in environmentally
and socially preferable equity investment strategies. The Fund provides a unique
opportunity to be involved in the equity market without being involved in many
areas of the economy that may be objectionable to an investor. The Portfolio
combines carefully selected and screened portfolios with positive social action
on policy issues through proxy voting and shareholder advocacy.
STOCK SELECTION PROCESS. The Subadviser makes use of third party research
from sources such as Investor Responsibility Resource Center (IRRC), the Council
on Economic Priorities (CEP), Franklin Research and Development Corp., Kinder,
Lyndenberg, and Domini, Value Line, and the internet to develop an overall
social profile and screen companies that meet its financial criteria, paying
particular attention to the following:
EXCLUSIONARY SCREENS
TOBACCO/ALCOHOL/GAMBLING/FIREARMS. The Portfolio is free from companies
with primary or subsidiary businesses involved in the alcohol, tobacco, gambling
and firearms industries.
WEAPONS/MILITARISM. None of the companies in the Portfolio has a primary
involvement in the defense industry, and companies with greater than three
percent dependence on revenues from weapons production will be screened out.
NUCLEAR POWER. The Portfolio will not invest in any company involved in
nuclear power production. If a company merges with, acquires or is acquired by a
company that is involved in nuclear power production, the Portfolio will divest.
ANIMAL TESTING. The Portfolio will not invest in any company involved in
animal testing or animal misuse.
EQUAL EMPLOYMENT OPPORTUNITY/LABOR ISSUES. The Portfolio is committed to
promoting workplace diversity (see section on proxy voting/shareholder
activism). If a company has unremediated or egregious problems in the area of
Equal Employment Opportunity (such as discrimination or harassment), Workplace
Safety (such as OSHA safety violations), or Union/Labor Issues (such as WARN act
violations), the fund will either divest or participate in shareholder action in
an attempt to work with the company to address the issues.
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THE ENVIRONMENT. Excluding companies involved in nuclear power generation
is not the only positive environmental feature of the Fund.
The investment portfolio typically invests across all the essential service
areas: telephone, electric, water, and natural gas. Consideration is given to
natural gas not only because it's an environmentally preferable alternative
fuel, but because the industry shows tremendous potential as an area of growth.
In addition, the Portfolio seeks to invest in companies involved in energy
production from renewable and alternative resources, whenever such investments
are in keeping with the financial objectives and liquidity concerns of the
strategy.
The Portfolio seeks to exclude companies that have a history of
environmental negligence or a pattern of violation of environmental regulations.
If a company has unremediated or egregious problems in the area of environmental
performance, the Subadviser will either divest or participate in shareholder
action in an attempt to work with the company to address the issues.
INTERNATIONAL LABOR ISSUES. Sweatshop operations and slave labor are other
potential areas of concern. If these issues exist at companies the Portfolio
invests in, the Subadviser will work to open dialogue in an attempt to encourage
the company to adopt comprehensive supplier standards.
In the case of companies with Maquiladora operations, the Subadviser will
work to encourage the company to address any environmental problems or labor
related issues, such as below subsistence wages or unsafe working conditions.
SHAREHOLDER ADVOCACY/PROXY VOTING GUIDELINES. Socially responsible
investing is a complex process involving education and choice. All companies
have the potential to improve their performance in a number of areas that affect
the environment and quality of life. Investors have an opportunity to engage
corporate management in dialogue about issues that are of concern to them.
Proxy voting is one of the best ways for an investor to communicate support
or disagreement with management policy. The Subadviser votes proxies on a case
by case basis, but will generally vote with management on most standard business
issues such as the appointment of independent auditors and the election of board
directors. In cases where a company's board lacks representation of women and
minorities, the Subadviser will vote against the board and send a letter to
management explaining their position and encourage diversity on the board.
In addition to the "standard" issues placed on the ballot by management,
there may be a number of other important issues put forward by shareholders for
inclusion on the ballot in the form of shareholder resolutions. Shareholder
resolutions can cover a wide range of issues, such as workplace diversity,
militarism, labor relations, and the
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environment. The primary goal of the resolution process is not a vote, but to
engage the company in a dialogue on an issues. These resolutions are filed well
in advance of the annual meeting, and if dialogue with the company is fruitful,
the filers may withdraw the resolution before it even comes to a vote.
The Subadviser is an associate member of the Interfaith Center on Corporate
Responsibility (ICCR), and makes use of information from ICCR as well as
research from Investor Responsibility Resource Center (IRRC) to keep track of
resolutions as they are filed. When a resolution is filed on an issue of concern
for the Portfolio, a letter is sent to the company echoing the concern of the
filers and encouraging the company to enter a dialogue on the subject. In
addition, the Subadviser co-files resolutions on issues such as the
implementation of the Coalition for Environmentally Responsible Economies
(CERES) principles (1997: Enron Corporation, U.S. West, Inc.) and foreign
military sales reporting (1997: GTE Corporation).
The Subadviser will likely support and vote for resolutions such as those
requesting reports on workplace diversity, the implementation of the CERES
principles, reports on foreign military sales, implementation of the MacBride
principles, shareholder approval of golden parachute plans and other social and
environmental issues. When a vote on such a resolution is made, a position
letter is sent to management, in an effort to re-enforce the importance of the
issues, and to urge a greater level of management awareness.
PORTFOLIO TURNOVER. The Portfolio's portfolio turnover rate for 1999 was
69% (51% in 1998). The portfolio turnover rate is calculated by dividing the
lesser of sales or purchases of portfolio securities by the average monthly
value of the Portfolio's securities, excluding securities having a maturity at
the date of purchase of one year or less.
The portfolio turnover rate is calculated by dividing the lesser of sales
or purchases of portfolio securities by the average monthly value of the
Portfolio's securities, excluding securities having a maturity at the date of
purchase of one year or less.
Because the Subadviser may employ flexible defensive investment strategies
when market trends are not considered favorable, the Subadviser may occasionally
change the entire portfolio in the Portfolio. High transaction costs could
result when compared with other funds. Trading may also result in realization of
net short-term capital gains upon which shareholders may be taxed at ordinary
tax rates when distributed from a Fund. This defensive investment strategy can
produce high portfolio turnover ratios when calculated in accordance with SEC
rules. High portfolio turnover may involve correspondingly greater brokerage
commissions and other transaction costs, which will be borne directly by the
Portfolio.
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RISK CONSIDERATIONS
By itself, the Utilities Stock Portfolio does not constitute a balanced
investment plan. Changes in interest rates may affect the value of the Utilities
Stock Portfolio's investments, and rising interest rates can be expected to
reduce the Utilities Stock Portfolio's net asset value. The fund's share price
and total return fluctuate and your investment may be worth more or less than
your original cost when you redeem your shares.
Because the Utilities Stock Portfolio concentrates its investments in
public utility companies, its performance will depend in large part on
conditions in the public utility industries. Utility stocks have traditionally
been popular among more conservative stock market investors because they have
generally paid above average dividends. However, utility stocks can still be
affected by the risks of the stock market, as well as factors specific to public
utility companies.
Governmental regulation of public utility companies can limit their ability
to expand their business or to pass cost increases on to customers. Companies
providing power or energy-related services may also be affected by fuel
shortages or cost increases, environmental protection or energy conservation
regulations, as well as fluctuating demand for their services. Some public
utility companies are facing increased competition, which may reduce their
profits. All of these factors are subject to rapid change, which may affect
utility companies independently from the stock market as a whole.
In seeking its investment objectives, the Utilities Stock Portfolio may
invest in securities of foreign issuers. Foreign securities may involve a higher
degree of risk and may be less liquid or more volatile than domestic
investments. Foreign securities usually are denominated in foreign currencies,
which means their value will be affected by changes in the strength of foreign
currencies relative to the U.S. dollar as well as the other factors that affect
security prices. Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there often is less
publicly available information about their operations. Generally, there is less
governmental regulation of foreign securities markets, and security trading
practices abroad may offer less protection to investors such as the Utilities
Stock Portfolio.
The value of such investments may be adversely affected by changes in
political or social conditions, diplomatic relations, confiscatory taxation,
expropriation, nationalization, limitation on the removal of portfolios or
assets, or imposition of (or change in) exchange control or tax regulations in
those foreign countries. Additional risks of foreign securities include
settlement delays and costs, difficulties in obtaining and enforcing judgments,
and taxation of dividends at the source of payment.
The Subadviser intends to manage the Utilities Stock Portfolio actively in
pursuit of its investment objective. The Utilities Stock Portfolio does not
expect to trade in
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securities for short-term profits but, when circumstances warrant, securities
may be sold without regard to the length of time held.
ADDITIONAL TAX INFORMATION
The following is a general summary of certain federal income tax
considerations affecting the fund and its shareholders. Investors are urged to
consult their own tax advisers for more detailed information and for information
regarding any state, local or foreign taxes that may be applicable to them.
GENERAL
The fund (which is treated as a separate corporation for federal tax
purposes) intends to qualify for treatment as a regulated investment company
("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended
("Code"). In order to qualify for that treatment, the fund must distribute
annually to its shareholders at least 90% of its investment company taxable
income (generally, net investment income plus net short-term capital gain) and
must meet several additional requirements. Among these requirements are the
following: (1) at least 90% of the fund's gross income each taxable year must be
derived from dividends, interest, payments with respect to securities loans and
gains from the sale or other disposition of securities, or other income
(including gains from options and futures) derived with respect to its business
of investing in securities; (2) at the close of each quarter of the fund's
taxable year, at least 50% of the value of its total assets must be represented
by cash and cash items, U.S. government securities, securities of other RICs and
other securities, with such other securities limited, with respect to any one
issuer, to an amount that does not exceed 5% of the value of the fund's total
assets and that does not represent more than 10% of the issuer's outstanding
voting securities; and (3) at the close of each quarter of the fund's taxable
year, not more than 25% of the value of its total assets may be invested in
securities (other than U.S. government securities or the securities of other
RICs) of any one issuer. If the Fund failed to qualify for treatment as a RIC
for any taxable year, (1) it would be taxed at corporate rates on the full
amount of its taxable income for that year without being able to deduct the
distributions it makes to its shareholders and (2) the shareholders would treat
all those distributions, including distributions of net capital gain (the excess
of net long-term capital gain over net short-term capital loss), as dividends
(that is, ordinary income) to the extent of the Fund's earnings and profits. In
addition, the Fund could be required to recognize unrealized gains, pay
substantial taxes and interest and make substantial distributions before
requalifying for RIC treatment.
The fund will be subject to a nondeductible 4% excise tax to the extent
that it fails to distribute by the end of any calendar year substantially all of
its ordinary income for that year and capital gain net income for the one-year
period ending on October 31 of that year, plus certain other amounts.
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DIVIDENDS AND OTHER DISTRIBUTIONS
The fund's dividends, if any, are distributed at the end of the quarter and
declared payable to shareholders on the last business day of the quarter to
shareholders of record as of the previous business day. In December, the fund
may distribute an additional ordinary income dividend (consisting of net
short-term capital gains and undistributed income) in order to preserve its
status as a registered investment company (mutual fund) under the Code. Net
long-term capital gains, if any, also are declared and distributed in December.
A portion of the dividends from the fund's investment company taxable
income (whether paid in cash or reinvested in additional fund shares) is
eligible for the dividends-received deduction allowed to corporations. The
eligible portion may not exceed the aggregate dividends received by the fund
from domestic corporations. However, dividends received by a corporate
shareholder and deducted by it pursuant to the dividends-received deduction are
subject indirectly to the alternative minimum tax. Distributions by the fund of
net capital gain (the excess of net long-term capital gain over net short-term
capital loss) do not qualify for the dividends-received deduction.
Dividends and other distributions declared by the fund in December of any
year and payable to shareholders of record on a date in that month will be
deemed to have been paid by the fund and received by the shareholders on
December 31 if they are paid by the fund during the following January.
Accordingly, such distributions will be taxed to the shareholders for the year
in which that December 31 falls.
A dividend or capital gain distribution paid shortly after shares have been
purchased, although in effect a return of investment, is subject to federal
taxation. Accordingly, an investor should not purchase fund shares immediately
prior to a dividend or capital gain distribution record date solely for the
purpose of receiving the dividend or distribution.
REDEMPTIONS
A redemption of the fund's shares will result in a taxable gain or loss to
the redeeming shareholder, depending on whether the redemption proceeds are more
or less than the shareholder's adjusted basis for the redeemed shares (which
normally includes any sales load paid on Class A shares). An exchange of shares
of the fund for shares of another Morgan Keegan fund generally will have similar
tax consequences. Special rules apply when a shareholder disposes of Class A
shares of the fund through a redemption or exchange within 60 days after
purchase thereof and subsequently reacquires Class A shares of the fund or
acquires Class A shares of another Morgan Keegan fund without paying a sales
charge due to the reinstatement privilege or exchange privilege. In these cases,
any gain on the disposition of the original Class A shares will be increased, or
any loss decreased, by the amount of the sales charge paid when the shareholder
acquired those shares, and that amount will increase the basis of the shares
subsequently acquired. In addition, if a shareholder purchases shares of the
fund (whether pursuant to the
25
<PAGE>
reinstatement privilege or otherwise) within 30 days before or after redeeming
at a loss other shares of the fund (regardless of class), all or part of that
loss will not be deductible and instead will increase the basis of the newly
purchased shares.
Any loss on a sale or exchange of fund shares held for six months or less
will be treated as a long-term, instead of a short-term, capital loss to the
extent of any capital gain distributions received on those shares.
U.S. GOVERNMENT INTEREST. Many states grant tax-free status to dividends
paid from interest earned on direct obligations of the U.S. Government, subject
to certain restrictions. The fund will provide shareholders with information at
the end of each calendar year on the amount of any such dividends that may
qualify for exemption from reporting on shareholders' individual income tax
returns.
NON-U.S. INVESTORS. Ordinary dividends generally will be subject to U.S.
income tax withholding. A shareholder's home country may also tax ordinary
dividends, capital gain distributions and gains arising from redemptions or
exchanges of fund shares. Fund shares held by the estate of a non-U.S.
shareholder may be subject to U.S. estate tax. Shareholders may wish to contact
their tax advisors to determine the U.S. and non-U.S. tax consequences of an
investment in the fund.
STATE TAXES. Ordinary dividends and capital gain distributions that a
shareholder receives from the fund, and gains arising from redemptions or
exchanges of funds shares will generally be subject to state and local income
tax. The holding of fund shares may also be subject to state and local
intangibles taxes. A shareholder may wish to contact his tax advisor to
determine the state and local tax consequences of an investment in the fund.
26
<PAGE>
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
LETTER OF INTENTION
The sales charge applicable to purchases is reduced to 1% pursuant to a
Letter of Intention that states that the purchaser intends to purchase shares
equal to at least $1,000,000 within a 13-month period. Investors may obtain a
form of a Letter of Intention ("Letter") from their Morgan Keegan investment
broker or from the fund's transfer agent, Morgan Keegan & Company, Inc.
("Transfer Agent"). Under a Letter, purchases of shares of the fund which are
sold with a sales charge made within a 13-month period starting with the first
purchase pursuant to a Letter will be aggregated for purposes of calculating the
sales charges applicable to each purchase. To qualify under a Letter, a minimum
initial purchase of $50,000 must be made; purchases must be made for a single
account; and purchases made for related accounts may not be aggregated under a
single Letter. The Letter is not a binding obligation to purchase any amount of
shares, but its execution will result in paying a reduced sales charge for the
anticipated amount of the purchase. If the total amount of shares purchased does
not equal the amount stated in the Letter (minimum of $1,000,000), the investor
will be notified and must pay, within 20 days of the expiration of the Letter,
the difference between the sales charge on the shares purchased at the reduced
rate and the sales charge applicable to the shares actually purchased under the
Letter. Shares equal to 5% of the intended amount will be held in escrow during
the 13-month period (while remaining registered in the name of the purchaser)
for this purpose.
SALES CHARGE WAIVERS
The sales charge is waived on shares of the fund purchased (1) as a result
of reinvestment of dividends and capital gain distributions and (2) by officers,
directors and full-time employees (and their immediate families, which includes
their spouse, children, mother, father and siblings) of Morgan Keegan & Company,
Inc. (or its direct or indirect subsidiaries), or by directors or officers (and
their immediate families, which includes their spouse, children, mother, father
and siblings) of the fund. The sales charge also is waived on purchases of fund
shares in an initial amount of not less than $250,000, and thereafter for
subsequent purchases if the purchaser's fund account balance is at least
$250,000, by (1) common or collective trust funds maintained by a bank, (2)
stock bonus, pension or profit sharing plans qualified under section 401(a) of
the Code (including Keogh Plans and 401(k) Plans), and (3) organizations exempt
from taxation pursuant to section 501(a) of the Code. Also, shares of the fund
may be acquired without a sales charge if the purchase is made through a Morgan
Keegan representative who formerly was employed as a broker with another firm
registered as a broker-dealer with the Securities and Exchange Commission, if
the following conditions are met: (1) the purchaser was a client of the
investment executive at the other firm for which the investment executive
previously served as a broker; (2) within 90 days of the purchase of the fund's
shares, the purchaser redeemed shares of one or more mutual funds for which that
other firm or its affiliates served as principal underwriter, provided that
either the
27
<PAGE>
purchaser had paid a sales charge in connection with investment in such funds or
a contingent deferred sales charge upon redeeming shares in such funds; and (3)
the aggregate amount of the fund's shares purchased pursuant to this sales
charge waiver does not exceed the amount of the purchaser's redemption proceeds
from the shares of the mutual fund(s) for which the other firm or its affiliates
served as principal underwriter. The sales charge is also waived on purchases
through Morgan Keegan Mutual fund "Wrap Accounts." Investors seeking to avail
themselves of this waiver will be required to provide satisfactory evidence that
all the above-noted conditions are met and should contact their Morgan Keegan
representative for more information.
ADDITIONAL INFORMATION ON REDEMPTIONS
Suspension of the right of redemption, or postponement of the date of
payment, may be made (1) for any periods when the Exchange is closed (other than
customary weekend and holiday closings); (2) when trading is restricted in
markets normally utilized by the fund or when an emergency, as defined by the
rules and regulations of the Securities and Exchange Commission ("SEC") exists,
making disposal of the fund's investments or determination of its net asset
value not reasonably practicable; or (3) for such other periods as the SEC by
order may permit for protection of the fund's shareholders. In the case of any
such suspension, you may either withdraw your request for redemption or receive
payment based upon the net asset value next determined after the suspension is
lifted.
The fund reserves the right, if conditions exist which make cash payments
undesirable, to honor any request for redemption by making payment in whole or
in part by securities valued in the same way as they would be valued for
purposes of computing the fund's per share net asset value. However, the fund
has committed itself to pay in cash all requests for redemption by any
shareholder of record, limited in amount with respect to each shareholder during
any ninety-day period to the lesser of (1) $250,000, or (2) 1% of the net asset
value of the fund at the beginning of such period. If payment is made in
securities, a shareholder will incur brokerage or transactional expenses in
converting those securities into cash, will be subject to fluctuation in the
market price of those securities until they are sold, and may realize taxable
gain or loss (depending on the value of the securities received and the
shareholder's adjusted basis of the redeemed shares).
VALUATION OF SHARES
Net asset value of a fund share will be determined daily as of the close of
the Exchange, on every day that the Exchange is open for business, by dividing
the value of the total assets of the fund, less liabilities, by the total number
of shares outstanding at such time. Pricing will not be done on days the
Exchange is closed. Currently, the Exchange is closed on weekends and on certain
days relating to the following holidays: New Year's Day, President's Day, Good
Friday, Memorial Day, July 4th, Labor Day, Thanksgiving, and Christmas.
Securities owned by the Portfolio for which market quotations
28
<PAGE>
are readily available will be valued at current market value, or, in their
absence, at fair value as determined under procedures adopted by the Portfolio's
Board of Trustees. Securities traded on an exchange or NASD National Market
System securities (including debt securities) will normally be valued at their
last sale price. Other over-the-counter securities (including debt securities),
and securities traded on exchanges for which there is no sale on a particular
day (including debt securities), will be valued by a method which the
Portfolio's Board of Trustees believes accurately reflects fair value.
Foreign securities are valued based on prices furnished by independent
brokers or quotation services which express the value of securities in their
local currency. The Adviser gathers all exchange rates daily at the close of the
NYSE using the last quoted price on the local currency and then translates the
value of foreign currencies from their local currencies into U.S. dollars. Any
changes in the value of forward contracts due to exchange rate fluctuations and
days to maturity are included in the calculation of the net asset value. If an
extraordinary event that is expected to materially affect the value of a
portfolio security occurs after the close of an exchange on which that security
is traded, then that security will be valued as determined in good faith by a
committee appointed by the Board of Directors.
Futures contracts and options are valued on the basis of market quotations,
if available. Premiums received on the sale of call options are included in the
fund's net asset value, and the current market value of options sold by the fund
will be subtracted from net assets.
PURCHASE OF SHARES
CLASS A SHARES
Class A shares are offered on a continuous basis at a price equal to their
net asset value plus the applicable "initial sales charge" described in the
Prospectus. Proceeds from the initial sales charge are paid to Morgan Keegan and
are used by Morgan Keegan to defray expenses related to providing
distribution-related services to the funds in connection with sales of Class A
shares, such as the payment of compensation to Morgan Keegan brokers for selling
Class A shares. No initial sales charge is imposed on Class A shares issued as a
result of the automatic reinvestment of dividends or capital gains
distributions.
CLASS C SHARES
Class C shares are offered on a continuous basis at a price equal to their
net asset value. Class C shares that are redeemed within one year of purchase
are subject to a contingent deferred sales charge ("CDSC") charged as a
percentage of the dollar amount subject thereto. In determining whether a Class
C CDSC is applicable to a redemption, the calculation will be determined in the
manner that results in the lowest possible rate being charged. The charge will
be assessed on an amount equal to the lesser of the
29
<PAGE>
proceeds of redemption or the cost of the shares being redeemed. Accordingly, no
Class C CDSC will be imposed on increases in net asset value above the initial
purchase price. In addition, no Class C CDSC will be assessed on shares derived
from reinvestment of dividends or capital gains distributions. The charge will
not be applied to dollar amounts representing an increase in the net asset value
since the time of purchase. Proceeds from the CDSC are paid to Morgan Keegan to
defray the expenses Morgan Keegan incurs in providing distribution-related
services to the Class C shares.
CLASS I SHARES
Class I shares are offered on a continuous basis at a price equal to their
net asset value, without an initial sales charge or CDSC.
PERFORMANCE INFORMATION
The fund's performance information and quoted rankings used in advertising
and other promotional materials ("Performance Advertisements") are indicative
only of past performance and are not intended to and do not represent future
investment results. The fund's share price will fluctuate and your shares, when
redeemed, may be worth more or less than you originally paid for them.
TOTAL RETURN CALCULATIONS
Average annual total return quotes ("Standardized Return") used in the
fund's Performance Advertisements are calculated according to the following
formula:
P(1 + T)n = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of that period
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated at least to
the last day of the most recent quarter prior to submission of the Performance
Advertisements for publication. Total return, or "T" in the formula above, is
computed by finding the average annual change in the value of an initial $1,000
investment over the period. In calculating the ending redeemable value, all
dividends and other distributions by the fund are assumed to have been
reinvested at net asset value.
The fund may also refer in Performance Advertisements to total return
performance data that are not calculated according to the formula set forth
above ("Non-Standardized Return"). The fund calculates Non-Standardized Return
for specified periods of time by assuming an investment of $1,000 in fund shares
and assuming the
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<PAGE>
reinvestment of all dividends and other distributions. The rate of return is
determined by subtracting the initial value of the investment from the ending
value and by dividing the remainder from the initial value. Initial sales
charges are not taken into account in calculating Non-Standardized Return; the
inclusion of those charges would reduce the return.
Because each class of the fund has its own sales charge and fee structure,
the classes have different performance results. In the case of each class, this
calculation assumes the maximum sales charge is included in the initial
investment or CDSC is applied at the end of the period, respectively. This
calculation assumes that all dividends and other distributions are reinvested at
net asset value on the reinvestment dates during the period. The "distribution
rate" is determined by annualizing the result of dividing the declared
distributions of the fund during the period stated by the maximum offering price
or net asset value at the end of the period. Excluding the fund's sales charge
on Class A shares and the CDSC on Class C shares from the distribution rate
produces a higher rate.
In addition to average annual total returns, the fund may quote unaveraged
or cumulative total returns reflecting the simple change in value of an
investment over a stated period. Cumulative total returns may be quoted as a
percentage or as a dollar amount, and may be calculated for a single investment,
a series of investments, and/or a series of redemptions, over any time period.
Total returns may be quoted with or without taking the fund's sales charge on
Class A shares or the CDSC on Class C shares into account. Excluding the fund's
sales charge on Class A shares and the CDSC on Class C shares from a total
return calculation produces a higher total return figure.
OTHER INFORMATION
From time to time the fund may compare its performance in Performance
Advertisements to the performance of other mutual funds or various market
indices. One such market index is the S&P 500, a widely recognized unmanaged
index composed of the capitalization-weighted average of the prices of 500 of
the largest publicly traded stocks in the United States. The S&P 500 includes
reinvestment of all dividends. It takes no account of the costs of investing or
the tax consequences of distributions. The fund may invest in securities that
are not included in the Standard & Poor's Composite Stock Price Index ("S&P
500").
The fund may also quote rankings and ratings, and compare the return of the
fund with data published by Lipper Analytical Services, Inc., IBC/Donaghue's
Money Market fund Report, CDA Investment Technologies, Inc., Wiesenberger
Investment Companies Service, Investment Company Data Inc., Morningstar Mutual
funds, Value Line and other services or publications that monitor, compare, rank
and/or rate the performance of mutual funds. The fund may refer in such
materials to mutual fund performance rankings, ratings or comparisons with funds
having similar investment objectives, and other mutual funds reported in
independent periodicals, including, but not limited to, THE WALL STREET JOURNAL,
MONEY Magazine, FORBES, BUSINESS WEEK,
31
<PAGE>
FINANCIAL WORLD, BARRON'S, FORTUNE, THE NEW YORK TIMES, THE CHICAGO TRIBUNE, THE
WASHINGTON POST and KIPLINGER LETTERS.
The fund may also compare its performance with, or may otherwise discuss,
the performance of bank certificates of deposit ("CDs") and other bank deposits,
and may quote from organizations that track the rates offered on such deposits.
In comparing the fund or its performance to CDs, investors should keep in mind
that bank CDs are insured up to specified limits by an agency of the U.S.
government. Shares of the fund are not insured or guaranteed by the U.S.
government, the value of fund shares will fluctuate, and your shares, when
redeemed, may be worth more or less than you originally paid for them. Unlike
the interest paid on many CDs, which remains as a specified rate for a specified
period of time, the return on the fund's shares will vary.
The fund's Performance Advertisements may reference the history of the
fund's Advisor and its affiliates or biographical information of key investment
and managerial personnel, including the portfolio manager. The fund may
illustrate hypothetical investment plans designed to help investors meet
long-term financial goals, such as saving for a college education or for
retirement. The fund may discuss the advantages of saving through tax-deferred
retirement plans or accounts.
TAX-DEFERRED RETIREMENT PLANS
As noted in the fund's Prospectus, an investment in fund shares may be
appropriate for various types of tax-deferred retirement plans. In general,
income earned through the investment of assets of such a plan is not taxed to
the beneficiaries until the income is distributed to them. Investors who are
considering establishing such a plan may wish to consult their attorneys or
other tax advisers with respect to individual tax questions. Additional
information with respect to these plans is available upon request from any
Morgan Keegan broker.
INDIVIDUAL RETIREMENT ACCOUNTS - IRAS
If you have earned income from employment (including self-employment), you
can contribute each year to an IRA up to the lesser of (1) $2,000 for yourself
or $4,000 for you and your spouse, regardless of whether your spouse is
employed, or (2) 100% of compensation. Some individuals may be able to take an
income tax deduction for the contribution. Regular contributions may not be made
for the year you become 70 1/2 or thereafter. You also may be able to make a
nondeductible contribution to an "Education IRA" or "Roth IRA," distributions
from which are not taxable under certain circumstances.
An investment in fund shares through IRA contributions may be advantageous,
regardless of whether the contributions are deductible by you for tax purposes,
because all dividends and capital gain distributions on your fund shares are not
immediately taxable to you or the IRA; they become taxable only when distributed
to you except as
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<PAGE>
noted above. To avoid penalties, your interest in an IRA must be distributed, or
start to be distributed, to you not later than April 1 following the calendar
year in which you attain age 70 1/2. Distributions made before age 59 1/2, in
addition to being taxable, generally are subject to a penalty equal to 10% of
the distribution, except in the case of death or disability, where the
distribution is rolled over into another qualified plan, or in certain other
situations.
SELF-EMPLOYED INDIVIDUAL RETIREMENT PLANS - KEOGH PLANS
Morgan Keegan will assist self-employed individuals to set up a retirement
plan through which fund shares may be purchased. Morgan Keegan generally
arranges for a bank to serve as trustee for the plan and performs custodian
services for the trustee and the plan by holding and handling securities.
However, you have the right to use a bank of your choice to provide these
services at your cost. There are penalties for distributions from a Keogh Plan
prior to age 59 1/2, except in the case of death or disability.
SIMPLIFIED EMPLOYEE PENSION PLANS - SEPPS AND SAVINGS INCENTIVE MATCH PLANS FOR
EMPLOYEES - SIMPLES
Morgan Keegan also will make available in a similar manner to corporate and
other employers a SEPP or SIMPLE for investment in fund shares.
THE COMPANY'S DIRECTORS AND OFFICERS
The Company's officers are responsible for the operation of the fund under
the direction of the Board of Directors. The officers and directors of the
Company and their principal occupations during the past five years are set forth
below. An asterisk (*) indicates officers and/or directors who are interested
persons of the fund as defined by the 1940 Act. The address of each officer and
director is Morgan Keegan Tower, 50 Front Street, Memphis, Tennessee 38103,
unless otherwise indicated.
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION HELD PRINCIPAL OCCUPATION
<S> <C> <C>
Allen B. Morgan, Jr. * President and Director Mr. Morgan is Chairman and Chief
Age 58 Executive Officer and Executive
Managing Director of Morgan Keegan &
Company, Inc. He also is a Chairman
of Morgan Keegan, Inc., and a Director
of Morgan Asset Management, Inc.
33
<PAGE>
James D. Witherington, Jr. Director Mr. Witherington is President of SSM
845 Crossover Lane Corp. (management of venture capital
Suite 140 funds). He also serves as a Director
Memphis, Tennessee 38117 for several private companies.
Age 51
William F. Hughes, Jr.* Director Mr. Hughes is an Executive Managing
Age 57 Director of Morgan Keegan & Company,
Inc. He also is President of Morgan
Asset Management, Inc.
William Jefferies Mann Director Mr. Mann is Chairman and President of
675 Oakleaf Office Lane Mann Investments, Inc. (hotel
Suite 100 investments/ consulting). He also
Memphis, Tennessee 38117 serves as a Director for Heavy
Age 68 Machines, Inc.
James Stillman R. McFadden Director Mr. McFadden is Vice President of
845 Crossover Lane Sterling Equities, Inc. (private
Suite 124 equity financings). He also is
Memphis, Tennessee 38117 President and Director of 1703 Inc.
Age 43 and a Director of Staff Printing Co.
Joseph C. Weller* Vice President, Mr. Weller is Executive Vice President
Age 61 Treasurer & Assistant and Chief Financial Officer and
Secretary Executive Managing Director of Morgan
Keegan & Company, Inc. He also is a
Director of Morgan Asset Management,
Inc.
Charles D. Maxwell* Secretary and Mr. Maxwell is a Managing Director and
Age 46 Assistant Treasurer Assistant Treasurer of Morgan Keegan &
Company, Inc., and Secretary/Treasurer
of Morgan Asset Management, Inc. He
was formerly a senior manager with
Ernst & Young (accountants) (1976-86).
</TABLE>
34
<PAGE>
TABLE OF COMPENSATION1
Total Compensation
Name and Position Aggregate Compensation in the Morgan Keegan funds
with the Company From the Company Complex Paid to Directors
Allen B. Morgan, Jr. $0 $0
President and Director
James D. Witherington, Jr. $12,000 $12,000
Director
William F. Hughes, Jr. $0 $0
Director
William Jefferies Mann $12,000 $12,000
Director
James Stillman R. McFadden $12,000 $12,000
Director
Officers and Directors of the Company who are interested persons of the fund
receive no salary or fees from the fund. Directors of the Company who are not
interested persons of the fund will receive from the Fund an annual retainer of
$1,000 and a fee of $250 and reimbursement for related expenses for each meeting
of the Board of Directors attended by them.
1 These numbers are based on the compensation schedule adopted by the Company
for its operation. The Morgan Keegan Select Funds' Complex consists of one other
investment company with one series.
Each of the Company, the Portfolio, Meeder Asset Management, Inc. formerly
known as R. Meeder & Associates, Inc., the Portfolio's investment adviser, and
Morgan Keegan & Company, Inc., the fund's distributor, has adopted a code of
ethics (each, a "Code") under Rule 17j-1 of the 1940 Act. Each Code permits
personnel subject to the Code to invest in securities, including securities that
may be purchased or held by the fund.
35
<PAGE>
THE PORTFOLIO'S OFFICERS AND TRUSTEES
The Officers and Trustees of the Portfolio and their principal occupations
during the past five years are set forth below. Their titles may have varied
during that period. Asterisks indicate those Trustees who are "interested
persons" (as defined in the 1940 Act) of the Portfolio. Unless otherwise
indicated, the address of each Trustee and officer is P. O. Box 7177, 6000
Memorial Drive, Dublin, Ohio 43017.
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION HELD PRINCIPAL OCCUPATION
<S> <C> <C>
ROBERT S. MEEDER, SR.*+, 71 Trustee/President Chairman of Meeder Asset Management,
Inc., the Portfolio's investment
adviser; Chairman and Director of
Mutual Funds Service Co., the
Portfolio's transfer agent.
MILTON S. BARTHOLOMEW, 71 Trustee Retired; formerly a practicing
1424 Clubview Boulevard, S. attorney in Columbus, Ohio; member of
Worthington, OH 43235 each Portfolio's Audit Committee.
ROGER D. BLACKWELL, 59 Trustee Professor of Marketing and Consumer
Blackwell Associates, Inc. Behavior, The Ohio State University;
3380 Tremont Road President of Blackwell Associates,
Columbus, OH 43221 Inc., a strategic consulting firm.
ROBERT S. MEEDER, JR.*, 39 Trustee and President of Meeder Asset Management,
Vice President Inc.
WALTER L. OGLE, 61 Trustee Executive Vice President of Aon
400 Interstate North Parkway, Suite 1630 Consulting, an employee benefits
Atlanta, GA 30339 consulting group; member of each
Portfolio's Audit Committee.
CHARLES A. DONABEDIAN, 57 Trustee President, Winston Financial, Inc.,
Winston Financial, Inc. which provides a variety of marketing
200 TechneCenter Drive, Suite 200 and consulting services to investment
Milford, OH 45150 management companies; CEO, Winston
Advisors, Inc., an investment adviser;
member of each Portfolio's Audit
Committee.
36
<PAGE>
JAMES W. DIDION, 69 Trustee Retired; formerly Executive Vice
8781 Dunsinane Drive President of Core Source, Inc., an
Dublin, OH 43017 employee benefit and Workers'
Compensation administration and
consulting firm (1991-1997).
JACK W. NICKLAUS II, 39 Trustee Designer, Nicklaus Design, a golf
11780 U.S. Highway #1 course design firm and division of
North Palm Beach, FL 33408 Golden Bear International, Inc.
PHILIP A. VOELKER*+, 46 Trustee and Vice Senior Vice President and Chief
President Investment Officer of Meeder Asset
Management, Inc.
DONALD F. MEEDER*+, 61 Secretary Vice President of Meeder Asset
Management, Inc.; Secretary of Mutual
Funds Service Co., the Funds' transfer
agent.
WESLEY F. HOAG*+, 43 Vice President Vice President and General Counsel of
Meeder Asset Management, Inc. and
Mutual Funds Service Co. (since July
1993); Attorney, Porter, Wright,
Morris & Arthur, a law firm (October
1984 to June 1993).
THOMAS E. LINE*+, 32 Treasurer President, Mutual Funds Service Co.,
the Portfolio's transfer agent, and
Chief Operating Officer, Meeder Asset
Management, Inc., the Portfolio's
investment adviser (since June 1998);
Vice President and Treasurer, BISYS
Fund Services (December 1996 to June
1998); Senior Manager - Financial
Services, KPMG LLP (Sept. 1989 to
December 1996).
37
<PAGE>
BRUCE E. MCKIBBEN*+, 30 Assistant Treasurer Manager/Fund Accounting and Financial
Reporting, Mutual Funds Service Co.,
the Funds' transfer agent (since April
1997); Assistant Treasurer and
Manager/Fund Accounting, The Ohio
Company, a broker-dealer (April 1991
to April 1997).
</TABLE>
* Interested Person of the Portfolio.
+ P.O. Box 7177, 6000 Memorial Drive, Dublin, Ohio 43017.
Robert S. Meeder, Sr. is Robert S. Meeder, Jr.'s father and Donald F.
Meeder's uncle.
Each Trustee and each officer of the Portfolio hold the same positions with
the Utilities Stock Portfolio.
The following table shows the compensation paid by the Portfolio and all
other mutual funds advised by the Adviser, including The Flex-funds, Meeder
Advisor Funds and the corresponding portfolios of The Flex-funds and Meeder
Advisor Funds (collectively, the "Fund Complex") as a whole to the Trustees of
the Portfolio during the fiscal year ended December 31, 1999.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Benefits from
Aggregate Accrued as Estimated Registrant and
Compensation Part of Annual Fund Complex
TRUSTEE from the (3) Portfolio Benefits Upon Paid TO
------- PORTFOLIOS1 EXPENSE RETIREMENT TRUSTEE1, 2
----------- ------- --------------- -----------
<S> <C> <C> <C> <C>
Robert S. Meeder, Sr. None None None None
Milton S. Bartholomew $1,200 None None $16,734
Robert S. Meeder, Jr. None None None None
Walter L. Ogle $1,088 None None $16,234
Philip A. Voelker None None None None
Roger A. Blackwell $869 None None $15,234
Charles A. Donabedian $1,235 None None $17,734
38
<PAGE>
James Didion $1,114 None None $16,234
Jack W. Nicklaus II $1,150 None None $15,984
</TABLE>
1 Compensation figures include cash and amounts deferred at the election of
certain non-interested Trustees. For the calendar year ended December 31, 1999,
participating non-interested Trustees accrued deferred compensation from the
funds as follows: Milton S. Bartholomew - $1,200, Roger A. Blackwell - $869,
Charles A. Donabedian - $1,235, Jack W. Nicklaus II - $1,150, and Walter L. Ogle
- $583.
2 The Fund Complex consists of 19 investment companies.
Each Trustee who is not an "interested person" is paid a meeting fee of
$250 per meeting for the Portfolio. In addition, each such Trustee is paid a fee
of 0.00375% of the amount of the Portfolio's average net assets exceeding $15
million. Members of the Audit and Strategic Planning Committees for the
Portfolio are paid $500 for each Committee meeting. All other officers and
Trustees serve without compensation from the Portfolio. Trustee fees for the
Growth Stock Portfolio totaled $8,682 for the year ended December 31, 1999.
THE FUND'S INVESTMENT ADVISER
Morgan Asset Management, Inc. ("Morgan"), 50 North Front Street, Memphis,
TN 38103, is investment adviser to, and has an Investment Advisory and
Administration Agreement (the "Agreement") with, the Fund.
Pursuant to the Agreement, Morgan, subject to the supervision of the Fund's
Board of Directors and in conformity with the stated objective and policies of
the Fund, directs the investments of the Fund. Currently, Morgan pursues the
investment objective of the Fund by investing substantially all of the
investable assets of the Fund in the Portfolio. In addition, Morgan is
authorized, in its discretion and without prior consultation with the Fund's
Board of Directors, to purchase and sell securities and other investments for
the Fund. Thus, if the Fund's investment in the Portfolio were withdrawn, Morgan
would assume sole responsibility for the investment management of the Fund,
including responsibility for making investment decisions and placing orders to
buy, sell or hold a particular security.
Pursuant to the Agreement, Morgan also performs certain corporate
management services for the Fund relating to research, statistical, and
investment activities. In addition, Morgan personnel serve as officers and
Directors of the Company. Morgan furnishes the Fund office space and all
necessary office facilities, equipment and personnel for servicing the
investments of the Company and pays the salaries of all personnel of the Company
or Morgan performing services relating to the Fund.
The Agreement was approved by a vote of a majority of the Directors, first
by a majority of those Directors who are not "interested persons" (as defined in
the Investment Company Act of 1940) of the Fund and then by the full Board. The
Agreement was also
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approved by the Fund's shareholders. The Agreement is to remain in force so long
as renewal thereof is specifically approved at least annually by a majority of
the Directors or by vote of a majority of the interests in the Fund, and in
either case by vote of a majority of the Directors who are not "interested
persons" (as defined in the Investment Company Act of 1940) at a meeting called
for the purpose of voting on such renewal.
The Agreement provides that Morgan will not be liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with the matters to which the Agreement relates except for a loss resulting from
willful misfeasance, bad faith, gross negligence or reckless disregard of duty.
The Agreement will terminate automatically if assigned and may be terminated
without penalty at any time upon 60 days' prior written notice by Majority Vote
(as defined below) of the Fund, by the Directors of the Fund, or by Morgan.
"Majority Vote" means the lesser of (a) 67 percent or more of the shares present
at a shareholder meeting if the holders of more than 50 percent of the
outstanding shares are present or represented by proxy, or (b) more than 50
percent of the outstanding shares.
Morgan receives for its services an annual fee, payable in monthly
installments, at the rate of 1% of the Fund's average net assets. Morgan has
agreed to waive 90% of this annual fee for so long as substantially all of the
Fund's investable assets are invested in another registered investment company,
such as the Portfolio.
THE PORTFOLIO'S INVESTMENT ADVISER
Meeder Asset Management, Inc. (the "Manager"), formerly known as R. Meeder
& Associates, Inc., is the investment adviser and manager for, and has an
Investment Advisory Contract with, the Portfolio.
Pursuant to the Investment Advisory Contract with the Portfolio, the
Manager, subject to the supervision of the Portfolio's Board of Trustees and in
conformity with the stated objective and policies of the fund, manages both the
investment operations of the fund and the composition of the Portfolio's
portfolio, including the purchase, retention, disposition and loan of
securities. In connection therewith, the Manager is obligated to keep certain
books and records of the Portfolio. The Manager also administers the fund's
corporate affairs, and in connection therewith, furnishes the fund with office
facilities, together with those ordinary clerical and bookkeeping services which
are not being furnished by Firstar, N.A., the Portfolio's custodian, and Morgan
Keegan & Company, Inc., the Fund's transfer and disbursing agent. The management
services of the Manager are not exclusive under the terms of the Investment
Advisory Agreement, and the Manager is free to, and does, render management
services to others.
The Investment Advisory Contract for the Portfolio was separately approved
by a vote of a majority of the Trustees, including a majority of those Trustees
who are not "interested persons" (as defined in the Investment Company Act of
1940) of the Portfolio. The Investment Advisory Contract is to remain in force
so long as renewal thereof is specifically approved at least annually by a
majority
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of the Trustees or by vote of a majority of the interests in the Portfolio, and
in either case by vote of a majority of the Trustees who are not "interested
persons" (as defined in the Investment Company Act of 1940) at a meeting called
for the purpose of voting on such renewal.
The Investment Advisory Contract provides that the Manager will not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Portfolio in connection with the matters to which the Investment Advisory
Contract relates except for a loss resulting from willful misfeasance, bad
faith, gross negligence or reckless disregard of duty. The Investment Advisory
Contract will terminate automatically if assigned and may be terminated without
penalty at any time upon 60 days' prior written notice by Majority Vote of the
Portfolio, by the Trustees of the Portfolio, or by the Manager.
Costs, expenses and liabilities of the Trust attributable to a particular
fund are allocated to that fund. Costs, expenses and liabilities which are not
readily attributable to a particular fund are allocated among all of the Trust's
funds. Thus, each fund pays its proportionate share of: the fees of the Trust's
independent auditors, legal counsel, custodian, transfer agent and accountants;
insurance premiums; the fees and expenses of Directors who do not receive
compensation from Morgan Keegan & Company, Inc., Meeder Asset Management, Inc.
or Miller/Howard Investments, Inc.; association dues; the cost of printing and
mailing confirmations, prospectuses, proxies, proxy statements, notices and
reports to existing shareholders; state registration fees; distribution expenses
within the percentage limitations of each class of shares' distribution and
service plan, including the cost of printing and mailing of prospectuses and
other materials incident to soliciting new accounts; and other miscellaneous
expenses.
The expenses of the Portfolio include the compensation of the Trustees who
are not affiliated with the Adviser or Subadviser; registration fees; membership
dues allocable to the Portfolio; fees and expenses of independent accountants,
of legal counsel and of any transfer agent or accountant of the Portfolio;
insurance premiums and other miscellaneous expenses.
Expenses of the Portfolio also include all fees under its Accounting and
Administrative Service Agreement; the expenses connected with the execution,
recording and settlement of security transactions; fees and expenses of the
Portfolio's custodian for all services to the Portfolio, including safekeeping
of funds and securities and maintaining required books and accounts; expenses of
preparing and mailing reports to investors and to governmental offices and
commissions; expenses of meetings of investors and Trustees; the advisory fees
payable to the Manager under the Investment Advisory Contract and other
miscellaneous expenses.
The Board of Trustees of the Company believe that the aggregate per share
expenses of the fund and the Portfolio will be less than or approximately equal
to the expenses which the fund would incur if it retained the services of an
investment adviser and the assets of the fund were invested directly in the type
of securities being held by the Portfolio.
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The Manager earns an annual fee, payable in monthly installments as
follows. The fee for the Portfolio is based upon the average net assets of the
Portfolio and is at the rate of 1% of the first $50 million, 0.75% of the next
$50 million and 0.60% in excess of $100 million of average net assets.
For the year ended December 31, 1999, the Utilities Stock Portfolio paid
total fees to the Manager of $149,369 ($126,301 in 1998; $88,486 in 1997).
Meeder Asset Management, Inc., formerly known as R. Meeder & Associates,
Inc., was incorporated in Ohio on February 1, 1974 and maintains its principal
offices at 6000 Memorial Drive, Dublin, Ohio 43017. The Manager is a
wholly-owned subsidiary of Meeder Financial, Inc., ("MFI"), a holding company
which is controlled by Robert S. Meeder, Sr. through ownership of common stock.
MFI conducts business only through its six subsidiaries, which are the Manager;
Mutual Funds Service Co., the Trust's transfer agent; Opportunities Management
Co., a venture capital investor; Meeder Advisory Services, Inc., a registered
investment adviser; OMCO, Inc., a registered commodity trading adviser and
commodity pool operator; and Adviser Dealer Services, Inc., a broker-dealer.
The Manager's officers and directors are as set forth as follows: Robert S.
Meeder, Sr., Chairman and Sole Director; Philip A. Voelker, Senior Vice
President and Chief Investment Officer; Donald F. Meeder, Secretary; Robert S.
Meeder, Jr., President; Thomas E. Line, Chief Operating Officer; Michael J.
Sullivan, Vice President of Sales and Marketing, and Wesley F. Hoag, Vice
President and General Counsel. Mr. Robert S. Meeder, Sr. is President and a
Trustee of the Portfolio. Mr. Robert S. Meeder, Jr. and Philip A. Voelker each
are a Trustee and officer of the Portfolio. Each of Messrs. Donald F. Meeder,
Wesley F. Hoag and Thomas E. Line is an officer of the Portfolio.
THE PORTFOLIO'S INVESTMENT SUBADVISER
Miller/Howard Investments, Inc., 141 Upper Byrdcliffe, Woodstock, New York
12498, serves as the Portfolio's Subadviser. Lowell G. Miller controls the
Subadviser through the ownership of voting common stock. The Investment
Subadvisory Agreement provides that the Subadviser shall furnish investment
advisory services in connection with the management of the Portfolio. In
connection therewith, the Subadviser is obligated to keep certain books and
records of the Portfolio. The Manager continues to have responsibility for all
investment advisory services pursuant to the Investment Advisory Agreement and
supervises the Subadviser's performance of such services. Under the Investment
Subadvisory Agreement, the Manager, not the Portfolio, pays the Subadviser a
fee, computed daily and payable monthly, computed at the rate of .00% of the
first $10 million; 0.40% of the next $50 million; 0.30% of the next $40 million
and 0.25% in excess of $100 million of the Portfolio's average net assets.
The Investment Subadvisory Agreement provides that the Subadviser will not
be liable for any error of judgment or mistake of law or for any loss arising
out of any investment or for any act or omission in the execution of portfolio
transactions for the
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Portfolio, except a loss resulting from misfeasance, bad faith, gross negligence
or reckless disregard of duty. The Investment Subadvisory Agreement provides
that it will terminate automatically if assigned, and that it may be terminated
by the Manager without penalty to the Fund or the Portfolio by the Manager, the
Trustees of the Portfolio or by the vote of a majority of the outstanding voting
securities of the Portfolio upon not less than 30 days' written notice. The
Investment Subadvisory Agreement will continue in effect for a period of more
than two years from the date of execution only so long as such continuance is
specifically approved at least annually in conformity with the 1940 Act. The
Investment Subadvisory Agreement was approved by the Board of Trustees of the
Portfolio, including all of the Trustees who are not parties to the contract or
"interested persons" of any such party, and by the shareholders of the fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE
All orders for the purchase or sale of portfolio securities are placed on
behalf of the Portfolio by the Subadviser pursuant to authority contained in the
investment advisory agreement and investment subadvisory agreement. The
Subadviser is also responsible for the placement of transaction orders for
accounts for which it or its affiliates act as investment adviser. In selecting
broker-dealers, subject to applicable limitations of the federal securities
laws, the Subadviser considers various relevant factors, including, but not
limited to, the size and type of the transaction; the nature and character of
the markets for the security to be purchased or sold; the execution efficiency,
settlement capability, and financial condition of the broker-dealer firm- the
broker-dealer's execution services rendered on a continuing basis; the
reasonableness of any commissions, and arrangements for payment of Portfolio
expenses.
The fund's brokerage transactions involving securities of companies
headquartered in countries other than the United States will be conducted
primarily on the markets and principal exchanges of such countries. Foreign
markets are generally not as developed as those located in the United States,
which may result in higher transaction costs, delayed settlement and less
liquidity for trades effected in foreign markets. Transactions on foreign
exchanges are usually subject to fixed commissions that generally are higher
than negotiated commissions on U.S. transactions. There is generally less
government supervision and regulation of exchanges and brokers in foreign
countries than in the United States.
The Portfolio may execute portfolio transactions with broker-dealers who
provide research and execution services to the Portfolio or other accounts over
which the Subadviser or its affiliates exercise investment discretion. Such
services may include advice concerning the value of securities; the advisability
of investing in purchasing or selling securities; the availability of securities
or the purchasers or sellers of securities; furnishing analyses and reports
concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and performance of accounts; and effecting securities
transactions and performing functions incidental thereto (such as clearance and
settlement). The selection of such broker-dealers generally is made by the
Subadviser (to the extent possible consistent with execution considerations) in
accordance with a ranking of broker-dealers determined periodically by the
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Subadviser's investment staff based upon the quality of research and execution
services provided.
The receipt of research from broker-dealers that execute transactions on
behalf of the Portfolio may be useful to the Subadviser in rendering investment
management services to the Portfolio or its other clients, and conversely, such
research provided by broker-dealers who have executed transaction orders on
behalf of other Subadviser clients may be useful to the Subadviser in carrying
out its obligations to the Portfolio. The receipt of such research is not
expected to reduce the Subadviser's normal independent research activities;
however, it enables the Subadviser to avoid the additional expenses that could
be incurred if the Subadviser tried to develop comparable information through
its own efforts.
Subject to applicable limitations of the federal securities laws,
broker-dealers may receive commissions for agency transactions that are in
excess of the amount of commissions charged by other broker-dealers in
recognition of their research and execution services. In order to cause the
Portfolio to pay such higher commissions, the Subadviser must determine in good
faith that such commissions are reasonable in relation to the value of the
brokerage and research services provided by such executing broker-dealers,
viewed in terms of a particular transaction or the Subadviser`s overall
responsibilities to the Portfolio and its other clients. In reaching this
determination, the Subadviser will not attempt to place a specific dollar value
on the brokerage and research services provided or to determine what portion of
the compensation should be related to those services.
The Subadviser may allocate brokerage transactions to broker-dealers who
have entered into arrangements with the Subadviser under which the broker-dealer
allocates a portion of the commissions paid by the Portfolio toward payment of
the Portfolio's or the fund's expenses, such as transfer agent fees or custodian
fees. The transaction quality must, however, be comparable to those of other
qualified broker-dealers. For the year ended December 31, 1999, directed
brokerage payments of $0 were made to reduce expenses of the Portfolio ($2,246
in 1998; $3,934 in 1997).
The Trustees of the Portfolio periodically review the Subadviser's
performance of its responsibilities in connection with the placement of
portfolio transactions on behalf of the Portfolio and review the commissions
paid by the Portfolio over representative periods of time to determine if they
are reasonable in relation to the benefits to the Portfolio.
From time to time, the Trustees of the Portfolio will review whether the
recapture for the benefit of the Portfolio of some portion of the brokerage
commissions or similar fees paid by the Portfolio on portfolio transactions is
legally permissible and advisable.
The Portfolio seeks to recapture soliciting broker-dealer fees on the
tender of portfolio securities, but at present no other recapture arrangements
are in effect. The Trustees of the Portfolio intend to continue to review
whether recapture opportunities are available and are legally permissible and,
if so, to determine in the exercise of their business judgment, whether it would
be advisable for the Portfolio to seek such recapture.
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Although the Trustees and officers of the Portfolio are substantially the
same as those of other portfolios managed by the Manager, investment decisions
for the Portfolio are made independently from those of other portfolios managed
by the Manager or accounts managed by affiliates of the Manager. It sometimes
happens that the same security is held in the portfolio of more than one of
these funds or accounts. Simultaneous transactions are inevitable when several
portfolios are managed by the same investment adviser, particularly when the
same security is suitable for the investment objective of more than one
portfolio.
When two or more portfolios are simultaneously engaged in the purchase or
sale of the same security, the prices and amounts are allocated in accordance
with a formula considered by the officers of the portfolios involved to be
equitable to each portfolio. In some cases this system could have a detrimental
effect on the price or value of the security as far as the Portfolio is
concerned. In other cases, however, the ability of the Portfolio to participate
in volume transactions will produce better executions and prices for the
Portfolio. It is the current opinion of the Trustees of the Portfolio that the
desirability of retaining the Manager as investment adviser to the Portfolio
outweighs any disadvantages that may be said to exist from exposure to
simultaneous transactions.
During the year ended December 31, 1999, the Utilities Stock Portfolio paid
total commissions of $42,417 ($31,922 in 1998; $15,202 in 1997) on the purchase
and sale of portfolio securities.
VALUATION OF PORTFOLIO SECURITIES
Portfolio securities are valued by various methods depending on the primary
market or exchange on which they trade. Equity securities for which the primary
market is the U.S. are valued at last sale price or, if no sale has occurred, at
the closing bid price. Equity securities for which the primary market is outside
the U.S. are valued using the official closing price or the last sale price in
the principal market where they are traded. If the last sale price (on the local
exchange) is unavailable, the last evaluated quote or last bid price is normally
used. Short-term securities are valued either at amortized cost or at original
cost plus accrued interest, both of which approximate current value. Fixed
income securities are valued primarily by a pricing service that uses direct
exchange quotes and a vendor security valuation matrix which incorporates both
dealer-supplied valuations and electronic data processing techniques.
This twofold approach is believed to more accurately reflect fair value
because it takes into account appropriate factors such as institutional trading
in similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data, without exclusive
reliance upon quoted, exchange, or over-the-counter prices.
Securities and other assets for which there is no readily available market
are valued in good faith by the Board of Trustees. The procedures set forth
above need not be used to
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determine the value of the securities owned by the Portfolio if, in the opinion
of the Board of Trustees, some other method (e.g., closing over-the-counter bid
prices in the case of debt instruments traded on an exchange) would more
accurately reflect the fair market value of such securities.
Generally, the valuation of foreign and domestic equity securities, as well
as corporate bonds, U.S. government securities, money market instruments, and
repurchase agreements, is substantially completed each day at the close of the
New York Stock Exchange (NYSE).
The values of any such securities held by the Portfolio are determined as
of such time for the purpose of computing the Portfolio's net asset value.
Foreign security prices are furnished by independent brokers or quotation
services which express the value of securities in their local currency. The
Manager gathers all exchange rates daily at the close of the NYSE using the last
quoted price on the local currency and then translates the value of foreign
securities from their local currency into U.S. dollars. Any changes in the value
of forward contracts due to exchange rate fluctuations and days to maturity are
included in the calculation of net asset value. If an extraordinary event that
is expected to materially affect the value of a portfolio security occurs after
the close of an exchange on which that security is traded, the security will be
valued as determined in good faith by the Board of Trustees.
THE FUND'S DISTRIBUTOR
Morgan Keegan acts as distributor of the fund's shares pursuant to an
Underwriting Agreement between the fund and Morgan Keegan dated as of February
26, 1999 ("Underwriting Agreement"). The shares of the fund are offered
continuously. The Underwriting Agreement obligates Morgan Keegan to provide
certain services and to bear certain expenses in connection with the offering of
fund shares, including, but not limited to: printing and distribution of
prospectuses and reports to prospective shareholders; preparation and
distribution of sales literature and advertising; administrative and overhead
cost of distribution, such as the allocable costs of executive office time
expended on developing, managing and operating the distribution program;
operating expenses of branch offices, sales training expenses, and telephone and
other communication expenses. Morgan Keegan compensates investment brokers of
Morgan Keegan and other persons who engage in or support distribution of shares
and shareholder service based on the sales for which they are responsible and
the average daily net asset value of fund shares in accounts of their clients.
Morgan Keegan also pays special additional compensation and promotional
incentives from time to time to investment brokers for sales of fund shares.
The fund has adopted a Distribution Plan with respect to the Class A shares
and Class C shares (the "Plan") pursuant to Rule 12b-1 under the 1940 Act. Under
the Plan, distribution fees will be paid at an aggregate annual rate of up to
0.25% for Class A shares. Under the Plan, distribution and service fees will be
paid at an aggregate annual rate of up to 1.00% for Class C shares of the fund's
average daily net assets attributable to shares of that class. Class I shares
are not subject to a distribution and service fee.
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Service fees and distribution fees paid by the fund to Morgan Keegan under
the plan may exceed or be less than Morgan Keegan's expenses thereunder. No
interested person of the funds or non-interested director had a direct or
indirect interest in the Plan or related agreements. The fund benefits from the
Plan by virtue of an ongoing broker's involvement with individual customers as
well as the benefit from continued promotion.
The Plan was approved by the Initial Shareholder on October 31, 2000, and
as required by Rule 12b-1 under the 1940 Act, by the Board of Directors on
August 21, 2000, including a majority of the directors who are not "interested
persons" of the fund, as that term is defined in the 1940 Act and who have no
direct or indirect financial interest in the operation of the Plan or the
Underwriting Agreement (the "Qualified Directors").
In approving the Plan, in accordance with the requirements of Rule 12b-1,
the Board of Directors determined that the service and distribution fees were
reasonable in view of the compensation Morgan Keegan investment brokers can
receive relative to the compensation offered by competing funds. The Board of
Directors also determined that the fees are reasonable in light of the service
and distribution fees paid by other similar funds. Finally, the Directors
determined that there was a reasonable likelihood that the Plan, and the
amendments to the Plan, would benefit the fund and its shareholders. This
determination was based, in part, on the belief that the Plan enables the fund
to have Morgan Keegan investment brokers available to promote and sell the fund,
thereby assisting the fund to attract assets. Growth of assets is expected to
benefit both the fund and the Adviser. The fund is expected to benefit from the
potential for economies of scale in its operations that can arise from growth in
assets, as well as from the increased potential for flexibility in portfolio
management resulting from a net inflow of assets, as opposed to net redemptions.
Shareholders of the fund are expected to benefit from continuing services
provided by investment brokers and other staff members of Morgan Keegan as
distributor. The Adviser and Morgan Keegan are expected to benefit from the fact
that their advisory, service and distribution fees, which are based on a
percentage of assets, increase as fund assets grow and that their brokerage
commissions and transfer fees will also increase as assets grow. The Directors
acknowledged, however, that there is no assurance that benefits to the fund will
be realized as a result to the Plan. In considering whether to continue the
Plan, the Directors, among other things, also reviewed the expenses of the Plan,
alternative methods of distributing fund shares, and the overall expected costs
and benefits to the fund.
The Plan may be terminated by vote of a majority of the Qualified Directors
or by vote of a majority of the outstanding voting securities of the fund.
Termination of the Plan terminates any obligation of the fund to pay service and
distribution fees to Morgan Keegan, other than service and distribution fees
that may have accrued but that have not been paid as of the date of termination.
Any change in the Plan that would materially increase the service and
distribution costs to the fund requires shareholder approval; otherwise the Plan
may be amended by the Directors, including a majority of the Qualified
Directors, as described above.
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The Plan, as currently in effect, will continue for successive one-year
periods, provided that each such continuance specifically is approved by (1) the
vote of a majority of the Qualified Directors and (2) the vote of a majority of
the entire Board of Directors.
Rule 12b-1 requires that any person authorized to direct the disposition of
monies paid or payable by the fund pursuant to the Plan or any related agreement
shall provide to the Company's Board of Directors, and the Directors shall
review, at least quarterly, a written report of the amounts so expended and the
purposes for which expenditures were made. Rule 12b-1 also provides that the
fund may rely on that rule only if the selection and nomination of the fund's
independent directors are committed to the discretion of such independent
directors.
The current Underwriting Agreement was approved initially by vote of the
Board and the Qualified Directors on August 21, 2000. The Underwriting Agreement
is subject to the same provisions for annual renewal as the Plan. In addition,
the Underwriting Agreement will terminate upon assignment or upon 60 days'
notice from Morgan Keegan. The fund may terminate the Underwriting Agreement,
without penalty, upon 60 days' notice, by a majority vote of either its Board of
Directors, the Qualified Directors, or the outstanding voting securities of the
fund.
DESCRIPTION OF THE FUND'S SHARES
The Company is a diversified open-end management investment company
incorporated as a Maryland corporation. The Articles of Incorporation permit the
Board of Directors the right to issue two billion shares (2,000,000,000), par
value of one tenth of one cent ($0.001). Under the Articles of Incorporation,
the Directors have the authority to divide or combine the shares into a greater
or lesser number, to classify or reclassify any unissued shares of the Company
into one or more separate series or class of shares, without further action by
the shareholders. As of the date of this Statement of Additional Information,
the Directors have authorized six series of shares (Morgan Keegan Core Equity
Fund, Morgan Keegan Utility Fund, Morgan Keegan Intermediate Bond Fund, Morgan
Keegan High Income Fund, Morgan Keegan Select Financial Fund, and Morgan Keegan
Select Capital Growth Fund) and the issuance of three classes of shares of each
fund, designated as Class A, Class C, and Class I. Shares are freely
transferable and have no preemptive, subscription of conversion rights. When
issued, shares are fully paid and non-assessable.
The Articles of Incorporation provide that all dividends and distributions
on shares of each series or class will be distributed pro rata to the holders of
that series or class in proportion to the number of shares of that series or
class held by such holders. In calculating the amount of any dividends or
distributions, (1) each class will be charged with the transfer agency fee
attributable to that class, (2) each class separately with such other expenses
as may be permitted by the SEC and the Board of Directors, and (3) all other
fees and expenses shall be charged to the classes, in the proportion that the
net assets of that class bears to the net assets of the applicable series.
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Each class will vote separately on matters pertaining only to that class,
as the Board of Directors may determine. On all other matters, all classes shall
vote together and every share, regardless of class, shall have an equal vote
with every other share. Except as otherwise provided in the Articles of
Incorporation, the By-laws of the Company or as required by the provisions of
the 1940 Act, all matters will be decided by a vote of a majority of the
outstanding voting securities validly cast at a meeting at which a quorum is
present. One-third of the aggregate number of shares of that series or class
outstanding and entitled to vote shall constitute a quorum for the transaction
of business by that series or class.
Unless otherwise required by the 1940 Act or the Articles of Incorporation,
the fund has no intention of holding annual meetings of shareholders. The fund's
shareholders may remove a Director by the majority of all votes of the Company's
outstanding shares and the Board of Directors shall promptly call a meeting for
such purpose when requested to do so in writing by the record holders of not
less than 25% of the outstanding shares of the fund. At least two-thirds of the
Directors holding office must have been elected by the shareholders.
INVESTMENT STRUCTURE. Unlike other mutual funds which directly acquire and
manage their own portfolio of securities, the fund seeks to achieve its
investment objectives by investing substantially all of its assets in the
Utilities Stock Portfolio (the "Portfolio"), a separate registered investment
company with the same investment objectives as the fund. Therefore, an
investor's interest in the Portfolio's securities is indirect. In addition to
selling a beneficial interest to the fund, the Portfolio may sell beneficial
interests to other mutual funds or investors. Such investors will invest in the
Portfolio on the same terms and conditions and will pay a proportionate share of
the Portfolio's expenses. However, the other investors investing in the
Portfolio are not required to sell their shares at the same public offering
price as the fund. Investors in the fund should be aware that these differences
may result in differences in returns experienced by investors in the different
funds that invest in the Portfolio. Such differences in returns are also present
in other mutual fund structures. You may obtain information concerning other
holders of interests in the Portfolio by contacting the fund.
The Utilities Stock Portfolio is organized as a trust under the laws of the
State of New York. The Portfolio's Declaration of Trust provides that the fund
and other entities investing in the Portfolio (e.g., other investment companies,
insurance company separate accounts, and common and commingled trust funds) will
each be liable for all obligations of the Portfolio. However, the risk of the
fund incurring financial loss on account of such liability is limited to
circumstances in which both inadequate insurance existed and the Portfolio
itself was unable to meet its obligations. Accordingly, the Board of Directors
of the Company believe that neither the fund nor its shareholders will be
adversely affected by reason of the fund's investing in the Portfolio. In
addition, whenever the Company is requested to vote on matters pertaining to the
fundamental policies of the Portfolio, the Company will hold a meeting of the
fund's shareholders and will cast its vote as instructed by the fund's
shareholders.
Smaller funds investing in the Portfolio may be materially affected by the
actions of larger funds investing in the Portfolio. For example, if a large fund
withdraws from the
49
<PAGE>
Portfolio, the remaining funds may experience higher pro rata operating
expenses, thereby producing lower returns. Additionally, the Portfolio may
become less diverse, resulting in increased portfolio risk. (However, this
possibility also exists for traditionally structured funds that have large or
institutional investors.) Also, funds with a greater pro rata ownership in the
Portfolio could have effective voting control of the operations of the
Portfolio. Whenever the Company is requested to vote on matters pertaining to
the Portfolio, the Company will hold a meeting of shareholders of the fund and
will cast all of its votes in the same proportion as do the fund's shareholders.
Certain changes in the Portfolio's investment objectives, policies or
restrictions may require the Company to withdraw the fund's interest in the
Portfolio. Any such withdrawal could result in a distribution in kind of
portfolio securities (as opposed to a cash distribution from the Portfolio). If
such securities are distributed, the fund could incur brokerage, tax or other
charges in converting the securities to cash. In addition, the distribution in
kind may result in a less diversified portfolio of investments or adversely
affect the liquidity of the fund.
The fund may withdraw its investment from its corresponding Portfolio at
any time, if the Board of Directors of the Company determines that it is in the
best interests of the Company to do so. Upon any such withdrawal, the Board of
Directors would consider what action might be taken, including the investment of
all the assets of the fund in another pooled investment entity having the same
investment objectives as that fund or the retaining of an investment adviser to
manage the fund's assets in accordance with the investment policies with respect
to that fund's corresponding Portfolio. The inability to find an adequate
investment pool or investment adviser could have a significant impact on
shareholders' investment in the fund.
As stated in "Additional Information about Investment Limitations and
Policies," except as otherwise expressly provided herein, the fund's investment
objectives and policies are not fundamental and may be changed by Directors
without shareholder approval.
THE FUND'S CUSTODIAN, TRANSFER AGENT,
DIVIDEND DISBURSING AGENT
AND
PORTFOLIO ACCOUNTING SERVICE AGENT
Morgan Keegan & Company, Inc., Morgan Keegan Tower, Fifty Front Street,
Memphis, Tennessee 38103, serves as the transfer and dividend disbursing agent
of the fund. For these services, Morgan Keegan, the fund's distributor, receives
from the fund a fee of $5,000 per month, or $60,000 per year.
Mutual Funds Service Co., 6000 Memorial Drive, Dublin, Ohio 43017, provides
accounting services to the Portfolio. The minimum annual fee for accounting
services for the Portfolio is $7,500. Subject to the applicable minimum fee, the
Portfolio's annual fee, payable monthly, is computed at the rate of 0.15% of the
first $10 million, 0.10% of the next $20 million, 0.02% of the next $50 million
and 0.01% in excess of $80 million of the Portfolio's average net assets.
50
<PAGE>
Mutual Funds Service Co. also serves as Administrator to the fund pursuant
to an Administration Services Agreement. Services provided to the fund include
coordinating and monitoring any third party services to the fund; providing the
necessary personnel to perform administrative functions for the fund; assisting
in the preparation, filing and distribution of proxy materials, periodic reports
to Directors and shareholders, registration statements and other necessary
documents. The fund incurs an annual fee, payable monthly, of 0.05% of the
fund's average net assets, subject to a minimum annual fee of $15,000 the first
year and $30,000 each year thereafter. These fees are reviewable annually by the
Directors of the fund and the Trustees of the Portfolio.
Shareholders who request an historical transcript of their account will be
charged a fee based on the number of years researched. The fund reserves the
right, upon 60 days' written notice, to make other charges to investors to cover
administrative costs.
Firstar Bank, N.A., 425 Walnut Street, Cincinnati, OH 45202, is custodian
of the assets of the Portfolio and of the Fund. The custodian is responsible for
the safekeeping of the Portfolio's assets and the appointment of subcustodian
banks and clearing agencies. The custodian takes no part in determining the
investment policies of the Portfolio or in deciding which securities are
purchased or sold by the Portfolio. The Portfolio may, however, invest in
obligations of the custodian and may purchase or sell securities from or to the
custodian.
THE FUND'S LEGAL COUNSEL
Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue, N.W., Washington,
D.C. 20036-1800, serves as counsel to the fund and has passed upon certain
matters in connection with this offering.
THE FUND'S CERTIFIED PUBLIC ACCOUNTANTS
KPMG LLP are the fund's independent certified public accountants. KPMG LLP
will perform an audit of the fund's financial statements and review the fund's
federal and state income tax returns.
FINANCIAL STATEMENTS
Financial Statements for the Portfolio are presented on the following
pages. The fund has no prior operations and therefore, no historic financial
statements.
51
<PAGE>
UTILITIES STOCK PORTFOLIO
Portfolio of Investments as of December 31, 1999
<TABLE>
<CAPTION>
INDUSTRIES/CLASSIFICATIONS SHARES OR FACE AMOUNT VALUE
-------------------------- --------------------- -----
<S> <C> <C>
COMMON STOCKS - 100.0%
ELECTRIC/GAS UTILITY - 7.2%
AGL Resources, Inc. 21,955 $ 373,235
MDU Resources Group, Inc. 14,220 284,400
NiSource Inc. 16,355 292,346
UtiliCorp United, Inc. 19,998 388,701
1,338,682
ELECTRIC UTILITY - 11.9%
Cinergy Corp. 11,420 273,366
Keyspan Corp. 25,190 584,093
LG&E Energy Corp. 27,864 485,879
Scottish Power PLC - ADR 10,469 293,121
TECO Energy, Inc. 31,115 577,572
2,214,031
NATURAL GAS (DISTRIBUTOR) - 18.3%
Columbia Energy Group 8,905 563,241
Eastern Enterprises 7,975 458,064
MCN Energy Group Inc. 40655 965,556
Nicor Inc. 4,975 161,687
WICOR, Inc. 14075 410,814
Williams Cos., Inc. 27550 841,997
3,401,359
OIL/GAS (DOMESTIC) - 20.2%
Enron Corp. 10,445 463,497
El Paso Natural Gas Co. 28,420 1,103,051
Kinder Morgan Energy Partners, L.P. # 19,724 817,313
Kinder Morgan Inc. 25,680 518,415
Peoples Energy Corp. 10,585 354,598
Questar Corp. 33,345 500,175
3,757,049
TELECOMMUNICATION EQUIPMENT - 0.9%
P-Com, Inc. # 20,000 176,875
176,875
TELECOMMUNICATION SERVICES - 34.2%
Alltel Corp. 7,420 613,541
AT&T Corp. 10,635 535,073
BCE, Inc. 9,395 847,312
CenturyTel, Inc. 17,035 807,033
Global Crossings Ltd. # 21,585 1,079,237
GTE Corp. 9,585 676,342
MCI Worldcom Inc. # 10,613 563,126
SBC Communications, Inc. 9,650 470,438
U.S. West Communications Group 10,950 788,400
6,380,502
WATER UTILITY - 7.3%
American Water Works Co., Inc. 33,600 714,000
Azurix Corp. # 73,000 652,437
1,366,437
TOTAL COMMON STOCKS
(Cost $16,563,595 ) 18,634,935
<PAGE>
INDUSTRIES/CLASSIFICATIONS SHARES OR FACE AMOUNT VALUE
-------------------------- --------------------- -----
U.S. TREASURY BILLS - 0.0%
* 4.30%, due 01/06/00 1,000 1,000
TOTAL U.S. TREASURY BILLS
(Cost $1,000 ) 1,000
TOTAL INVESTMENTS - 100.0%
(Cost $16,564,595 ) $18,635,935
TRUSTEE DEFERRED COMPENSATION**
Flex-funds Highlands Growth Fund 234 5,206
Flex-funds Muirfield Fund 349 2,210
Flex-funds Total Return Utilities Fund 66 1,333
Flex-Partners International Equity Fund 183 3,133
TOTAL TRUSTEE DEFERRED COMPENSATION
(Cost $11,090 ) $11,882
<FN>
ADR:American Depositary Receipts
L.P.Limited Partnership
# Represents non-income producing securities.
* Pledged as collateral on Letter of Credit.
** Assets of affiliates to the Utility Stock Portfolio held for the
benefit of the Portfolio's Trustees in connection with the Trustees
Deferred Compensation Plan.
</FN>
</TABLE>
See accompanying notes to financial statements.
<PAGE>
GROWTH STOCK PORTFOLIO
Portfolio of Investments as of December 31, 1999
SHARES OR FACE
INDUSTRIES/CLASSIFICATIONS AMOUNT VALUE
-------------------------- ------ -----
COMMON STOCKS - 92.9%
AEROSPACE/DEFENSE - 0.7%
Boeing Co. 3,900 $ 161,606
General Dynamics Corp. 600 31,650
Lockheed Martin Corp. 1,870 40,906
Northrup Grumman Corp. 200 10,813
Raytheon Co. - Class B 1,000 26,563
Textron, Inc. 740 56,749
United Technologies Corp. 2,000 130,000
458,287
AIR TRANSPORTATION - 0.3%
AMR Corp. # 725 48,575
Delta Air Lines, Inc. 685 34,122
Frontier Airlines # 1,990 22,636
Southwest Airlines 2,437 39,297
USAir Group # 1,000 32,063
176,693
ALUMINUM - 0.3%
Aluminum Company of America 2,460 204,180
AUTO & TRUCK - 1.2%
Ford Motor Co. 4,900 261,231
General Motors Corp. 5,000 363,438
Genuine Parts Co. 5,400 133,988
TRW, Inc. 620 32,201
790,858
BANKING - 1.1%
Washington Mutual Savings Bank 2,303 59,590
Wells Fargo Co. 15,900 642,956
702,546
BEVERAGE -- ALCOHOLIC - 0.3%
Anheuser-Busch Cos., Inc. 2,900 205,538
BEVERAGE -- SOFT DRINK - 1.2%
Coca-Cola Co. 9,000 524,250
Pepsico, Inc. 7,600 267,900
792,150
BROADCASTING - 0.3%
SFX Entertainment Inc. # 3,900 141,131
World Wrestling Federation Entertainment Co. # 1,000 17,250
158,381
BUILDING MATERIALS - 0.1%
Masco Corp. 1,860 47,198
Vulcan Materials Co. 590 23,563
70,761
CAPITAL GOODS - 0.1%
Eaton Corp. 367 26,653
Ingersoll-Rand 839 46,197
72,850
<PAGE>
SHARES OR FACE
INDUSTRIES/CLASSIFICATIONS AMOUNT VALUE
-------------------------- ------ -----
CHEMICAL -- DIVERSIFIED - 1.0%
Air Products & Chemicals, Inc. 570 19,131
Dow Chemical Co. 1,210 161,686
E.I. du Pont de Nemours & Co. 3,650 240,444
Imperial Chemical Industries 680 28,943
Monsanto Corp. 2,900 103,313
Praxair, Inc. 840 42,263
Rohm & Haas Co. 1,185 48,215
643,995
CHEMICAL -- SPECIALTY - 0.1%
Eastman Chemical Co. 500 23,844
MacDermid Inc. 800 32,850
Sigma Aldrich 610 18,338
75,032
COMMERCIAL SERVICES - 0.3%
Cendant Corp. # 4,600 122,188
Dun & Bradstreet 1,470 43,365
165,553
COMPUTERS & PERIPHERALS - 4.8%
Apple Computer # 720 74,025
Compaq Computer Corp. 6,710 182,428
Dell Computer Corp. # 10,210 520,710
EMC Corp./Mass # 5,460 596,505
Gateway 2000, Inc. # 1,500 108,094
IBM Corp. 7,830 845,640
Micron Technology, Inc. # 820 63,755
QRS Corporation Delaware # 320 33,380
Sanmina Corp # 850 84,894
Seagate Technology Inc. # 950 44,234
Sun Microsystems # 7,460 577,684
3,131,349
COMPUTER SOFTWARE & SERVICES - 8.0%
America Online, Inc. # 10,710 806,597
BMC Software, Inc. # 1,460 116,709
Ceridian Co. # 840 18,113
Computer Associates International Inc. 2,380 166,451
Computer Sciences Corp. # 790 74,754
Compuware Corp. # 820 30,545
Electronic Data System Corp. 2,450 163,997
Microsoft Corp. # 25,100 2,930,425
Novell, Inc. # 1,490 59,507
Oracle Corp. # 7,400 829,263
Unisys Corp. # 1,270 40,561
5,236,922
CONSUMER NON-DURABLE - 2.3%
Corning Inc. 1,240 159,883
Fortune Brands, Inc. 7,800 257,888
Gillette Co. 5,800 238,888
Haggar Corp. 11,500 130,813
Procter & Gamble Co. 6,500 712,156
1,499,628
COSMETICS - 0.5%
Avon Products Inc. 3,300 108,900
Kimberly Clark 3,300 215,325
324,225
Growth Stock Portfolio, continued on next page
<PAGE>
SHARES OR FACE
INDUSTRIES/CLASSIFICATIONS AMOUNT VALUE
-------------------------- ------ -----
Growth Stock Portfolio, continued
DATA PROCESSING - 0.5%
Automatic Data Processing, Inc. 3,300 177,788
First Data Corp. 2,170 107,008
Fiserv, Inc. # 910 34,864
319,660
DIVERSIFIED - 1.2%
Honeywell International Inc. 3,402 196,253
Minnesota Mining & Manufacturing Co. 1,570 153,664
Norfolk Southern Corp. 1,830 37,515
PPG Industries, Inc. 830 51,927
Tyco International 7,860 306,540
745,899
DRUG - 5.5%
Abbott Labs 6,830 248,014
Bristol Myers Squibb 10,870 697,718
Eli Lilly & Co. 4,550 302,575
Merck & Co., Inc. 10,830 726,287
Pfizer, Inc. 20,210 655,562
Pharmacia & Upjohn 1,470 66,150
Schering Plough Corp. 9,550 404,681
Warner Lambert Co. 4,800 393,300
3,494,287
DRUGSTORE - 0.2%
Rite Aid Corp. 11,400 127,538
ELECTRIC -- INTEGRATED - 0.2%
Edison International 1,800 47,138
FPL Group, Inc. 960 41,100
Teco Energy Inc. 2,930 54,388
142,626
ELECTRIC UTILITY - 0.5%
AES Corp. # 2,460 183,885
Duke Power Co. 2,940 147,368
331,253
ELECTRICAL EQUIPMENT - 4.3%
General Electric Corp. 17,552 2,712,858
ELECTRONIC COMPONENT SEMICONDUCTORS - 4.6%
Advanced Micro Devices Inc. # 1,520 43,985
Applied Materials, Inc. # 1,880 238,173
Caliper Technology # 580 38,715
Epcos AG - Sponsored ADR # 1,650 122,925
Intel 14,750 1,214,109
KLA -Tencor Corp. # 600 66,825
LSI Logic Corp. # 810 54,675
Maxim Integrated Products Inc. # 1,100 51,906
Motorola, Inc. 3,600 530,100
STMicroelectronics NV 860 130,236
Texas Instruments Inc. 3,620 349,783
Xilinx Inc. # 2,360 107,306
2,948,738
<PAGE>
SHARES OR FACE
INDUSTRIES/CLASSIFICATIONS AMOUNT VALUE
-------------------------- ------ -----
ELECTRONIC COMPONENTS - 0.3%
Emerson Electric 3,674 210,796
ELECTRONICS - 0.1%
Rockwell International Corp. 840 40,215
Scientific Atlanta 680 37,995
78,210
FINANCE - 6.3%
Bank One Corp. 4,326 138,432
BankAmerica Corp. 10,214 512,615
Chase Manhattan Corp. 3,900 302,981
Equifax, Inc. 710 16,729
Fannie Mae 6,600 412,088
First Union Corp. 4,968 163,634
FleetBoston Financial Corp. 7,008 243,966
Freddie Mac 9,300 437,681
Lehman Brothers Holdings, Inc. 1,500 127,031
Mellon Bank Corp. 7,200 245,250
Merrill Lynch & Co. 800 66,650
Metris Cos., Inc. 10,000 356,875
Morgan Stanley Dean Witter & Co. 1,800 256,950
PNC Bank Corp. 3,100 137,950
Providian Financial Corp. 5,650 514,503
Ryder Systems, Inc. 310 7,576
SLM Holding Corp. 4,000 169,000
4,109,911
FINANCIAL SERVICES - 3.6%
American Express Co. 1,700 282,625
Associates First Capital 10,400 285,350
Avery Dennison Corp. 920 67,045
Capital One Financial Corp. 20,600 992,663
Citigroup Inc. 11,995 667,972
Concord EFS Inc. # 690 17,768
H&R Block, Inc. 1,370 59,938
2,373,361
FOOD -- DIVERSIFIED - 1.3%
General Mills 4,800 171,600
Hershey Food Corp. 2,700 128,081
Safeway Inc. # 3,300 117,975
Sara Lee Corp. 10,200 225,038
Sysco Corp. 5,700 225,506
868,200
FOREST PRODUCTS - 0.2%
Georgia Pacific Corp. 860 43,645
Weyerhauser Co. 1,120 80,430
Willamette Industries, Inc. 640 29,720
153,795
GOLD/SILVER MINING - 0.1%
Barrick Gold Corp. 2,090 36,967
HEALTH - 1.3%
American Home Products 5,820 228,435
Johnson & Johnson 6,910 644,358
872,793
Growth Stock Portfolio, continued on next page
<PAGE>
SHARES OR FACE
INDUSTRIES/CLASSIFICATIONS AMOUNT VALUE
-------------------------- ------ -----
Growth Stock Portfolio, continued
INSTRUMENTS -- CONTROLS - 0.0%
Johnson Controls Inc. 432 24,570
24,570
INSTRUMENTS -- SCIENTIFIC - 0.1%
PE Biosystems Group 380 45,719
INTERNET SERVICE - 0.5%
Yahoo, Inc. # 740 320,189
INSURANCE -- MULTILINE - 2.2%
Allstate 6,700 160,800
American International Group 10,543 1,139,962
PMI Group 3,300 161,081
1,461,843
MACHINERY - 0.3%
Caterpillar, Inc. 1,813 85,324
Deere & Co. 1,197 51,920
Dover Corp. 1,071 48,597
185,841
MANUFACTURING - 0.1%
Mueller Industries, Inc. # 1,150 41,688
Owens Illinois # 780 19,549
61,237
MARKETING SERVICES - 0.2%
Omnicom Group, Inc. 1,205 120,500
MATERIALS & SERVICES - 0.4%
Champion International Corp. 425 26,323
Dana Corp. 970 29,039
Ecolab, Inc. 1,970 77,076
Illinois Tool Works, Inc. 1,730 116,883
Sherwin-Williams Co. 1,070 22,470
271,791
MEDICAL PRODUCTS - 1.3%
Amgen, Inc. # 4,600 276,288
Biogen Inc.# 400 33,800
Guidant Corp. # 810 38,070
Human Genome # 890 135,836
IDEC Pharmaceuticals Corp. # 980 96,285
MedImmune, Inc. # 1,260 209,003
Millennium Pharmaceutical # 400 48,800
838,082
MEDICAL HMO - 0.0%
Wellpoint Health Networks # 390 25,716
MEDICAL SERVICES - 0.4%
Columbia/HCA Healthcare Corp. 2,410 70,643
Health Management # 5,120 68,480
IMS Health, Inc. 1,080 29,363
Shared Medical Systems 310 15,791
Tenet Healthcare Corp. # 2,230 52,405
236,682
MEDICAL SUPPLIES - 0.5%
Boston Scientific Co. # 1,200 26,250
Cardinal Health Inc 1,220 58,408
<PAGE>
SHARES OR FACE
INDUSTRIES/CLASSIFICATIONS AMOUNT VALUE
-------------------------- ------ -----
Medtronic, Inc. 6,970 253,969
338,627
MULTIMEDIA - 1.0%
Time Warner Inc. 6,300 456,356
Viacom Inc Class B # 3,000 181,313
637,669
NATURAL GAS DISTRIBUTOR - 0.3%
MCN Corp. 4,770 113,288
Williams Cos., Inc. 2,600 79,463
192,751
NETWORKING PRODUCTS - 2.9%
3COM Corp. # 980 46,060
Cisco Systems, Inc. # 16,860 1,806,128
Network Appliance # 840 69,773
1,921,961
OFFICE AUTOMATION & EQUIPMENT - 1.2%
Hewlett Packard 5,620 639,275
Pitney Bowes, Inc. 1,325 64,014
Xerox Corp. 2,180 49,595
752,884
OIL/GAS -- DOMESTIC - 0.8%
Atlantic Richfield 1,700 147,050
Baker Hughes 1,540 32,436
Burlington Resources 1,000 33,063
Devon Energy 1,200 39,450
Enron Corp. 3,000 133,125
Noble Affiliates Inc. 2,100 45,019
Noble Drilling Co. # 1,300 42,575
USX Marathon Group 2,800 69,125
541,843
OIL/GAS -- INTERNATIONAL - 2.7%
Chevron Corp. 3,200 277,200
Exxon Corp. 18,362 1,479,289
Transocean Sedco 621 20,913
1,777,402
OILFIELD SERVICES/EQUIPMENT - 0.6%
Coastal Corp. 1,900 67,331
Kerr-McGee Corp. 1,000 62,000
Schlumberger Ltd. 3,200 179,600
Smith International Inc. # 1,500 74,531
383,462
OIL & NATURAL GAS - 0.1%
Apache Corp. 1,200 44,325
Amerada Hess 500 28,375
Ocean Energy, Inc. # 10,160 78,740
151,440
PAPER & FOREST PRODUCTS - 0.2%
International Paper 2,185 123,316
Mead Corp. 840 36,488
159,804
Growth Stock Portfolio, continued on next page
<PAGE>
SHARES OR FACE
INDUSTRIES/CLASSIFICATIONS AMOUNT VALUE
-------------------------- ------ -----
Growth Stock Portfolio, continued
PETROLEUM -- INTEGRATED - 1.4%
Conoco, Inc. - Class B 4,500 111,938
Occidental Petroleum Corp. 3,600 77,850
Royal Dutch Petroleum 9,700 587,456
Texaco 3,100 168,369
945,613
PUBLISHING - 0.4%
The Reader's Digest Association, Inc. 9,500 277,875
RAILROAD TRANSPORTATION - 0.2%
Burlington Northern Santa Fe 2,005 48,621
Kansas City Southern Industries, Inc. 540 40,298
Union Pacific Corp. 765 33,421
122,340
RENTAL -- AUTO/EQUIPMENT - 0.4%
The Hertz Corp. 5,600 280,700
280,700
RESTAURANT - 0.7%
McDonalds Corp. 6,500 262,031
Wendy's International, Inc. 10,400 216,450
478,481
RETAIL GROCERY - 0.2%
Albertson's, Inc. 3,700 119,325
RETAIL STORE - 2.2%
Action Performance # 23,400 269,100
Amazon.Com # 500 38,063
Kmart # 40,000 402,500
PETsMART, Inc. # 30,000 172,500
WalMart Stores, Inc. 8,000 553,000
1,435,163
RUBBER/PLASTICS - 0.5%
Newell Rubbermaid Co. 10,700 310,300
S&L / THRIFTS -- SOUTHERN U.S. - 0.1%
Greater Atlantic Financial Corp. # 10,000 44,375
SERVICES - 0.1%
Paychex Inc. 1,675 67,000
STEEL - 0.0%
Nucor Corp. 410 22,473
TELECOMMUNICATION EQUIPMENT - 3.6%
General Instrument Corp. # 890 75,650
JDS Uniphase Corp. # 1,960 316,173
Loral Space & Communications Ltd. # 10,110 245,799
Metromedia Fiber Network Inc. - Class A # 3,880 185,998
Nokia Corp. - ADR - Class A 150 28,659
Nortel Networks 6,300 636,300
P-Com, Inc. # 8,760 77,471
QUALCOMM, Inc. # 3,280 577,690
Sprint Corp. PCS Group # 2,285 234,213
2,377,953
TELECOMMUNICATION SERVICES - 11.6%
AT&T Corp. 17,095 860,092
Bell Atlantic Corp. 8,590 528,822
BellSouth Corp. 10,980 514,001
<PAGE>
SHARES OR FACE
INDUSTRIES/CLASSIFICATIONS AMOUNT VALUE
-------------------------- ------ -----
CenturyTel, Inc. 1,730 81,959
Global Crossing LTD # 24,429 1,221,450
GTE Corp. 5,320 375,393
Lucent Technologies Inc. 14,700 1,102,500
MCI Worldcom, Inc. # 19,167 1,017,049
Nextel Communications # 2,630 271,219
Qwest Communications # 4,090 175,870
SBC Communications 17,674 861,608
Sprint Corp. FON Group 2,370 159,531
Teleglobe Inc. 5,720 129,773
Tellabs, Inc. # 1,590 102,058
U.S. West, Inc. 2,665 191,880
7,593,205
TOBACCO - 0.7%
Gallaher Group, PLC - ADR 11,400 175,275
Philip Morris Cos. 12,500 287,500
462,775
TOYS - 1.9%
Hasbro Bradley Inc. 9,450 179,550
JAKKS Pacific Co. # 7,600 142,025
Toys "R" Us Inc. # 64,000 916,000
1,237,575
TRANSPORTATION - 0.1%
FDX Corp. # 1,000 40,938
TRUCKING/TRANSPORTATION LEASING - 0.0%
CSX, Corp. 1,017 31,908
WATER UTILITY - 0.2%
Azurix Corp. # 16,095 143,849
TOTAL COMMON STOCKS
(Cost $43,996,840 ) 60,677,701
U.S. TREASURY OBLIGATIONS - 0.9%
U.S. Treasury Bills
** 4.30% 01/06/00 6,000 5,997
* 5.04% 03/09/00 600,000 594,112
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $600,285 ) 600,109
REPURCHASE AGREEMENT - 6.2%
Bank of America Securities LLC, 4.60%,
01/03/00, (Collateralized by $4,165,707
various commercial papers, 5.50%,
03/14/00 - 03/24/00 4,037,000 4,037,000
TOTAL REPURCHASE AGREEMENT
(Cost $4,037,000 ) 4,037,000
TOTAL INVESTMENTS - 100.0%
(Cost $48,634,125 ) $65,314,810
Growth Stock Portfolio, continued on next page
<PAGE>
Growth Stock Portfolio, continued
CONTRACTS VALUE
--------- -----
FUTURES CONTRACTS
Long, S&P 500 Futures, face amount 10 3,710,500
$3,610,500 expiring March 2000
$3,710,500
TRUSTEE DEFERRED COMPENSATION***
Flex-funds Highlands Growth Fund 483 10,771
Flex-funds Muirfield Fund 775 4,908
Flex-funds Total Return Utilities Fund 171 3,462
Flex-Partners International Equity Fund 377 6,458
TOTAL TRUSTEE DEFERRED COMPENSATION
(Cost $24,138 ) $25,599
ADR: American Depositary Receipt
# Represents non-income producing securities.
* Pledged as collateral on futures contracts.
** Pledged as collateral on Letter of Credit.
*** Assets of affiliates to the Growth Stock Portfolio held for the
benefit of the Portfolio's Trustees in connection with the Trustee
Deferred Compensation Plan.
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
UTILITIES GROWTH
STOCK STOCK
PORTFOLIO PORTFOLIO
Assets:
Investments, at market value* $18,635,935 $61,277,810
Repurchase agreements, at cost* --- 4,037,000
Trustee deferred compensation investments, 11,882 25,599
at market value
Cash --- 556
Receivable for securities sold 695,684 ---
Receivable for net variation margin on futures --- 8,500
contracts
Receivable from corresponding Fund --- ---
Interest and dividend receivable 45,025 43,604
Prepaid/Other assets 1,954 630
Total Assets 19,390,480 65,393,699
Liabilities:
Payable for securities purchased --- 64,139
Payable for Trustee Deferred Compensation Plan 11,882 25,599
Payable to custodian for cash overdraft 1,292,032 ---
Payable to investment adviser 17,541 51,743
Accrued audit fees 13,984 14,813
Accrued custodian fees 958 8,237
Accrued trustee fees --- 6,307
Accrued fund accounting fees 2,198 3,690
Other accrued liabilities 792 1,699
Total Liabilities 1,339,387 176,227
Net Assets $18,051,093 $65,217,472
Net Assets:
Capital 15,979,753 48,528,287
Net unrealized appreciation (depreciation) of 2,071,340 16,689,185
investments
Net Assets $18,051,093 $65,217,472
*Securities at cost $16,564,595 $48,634,125
See accompanying notes to financial statements
<PAGE>
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
UTILITIES GROWTH
STOCK STOCK
PORTFOLIO PORTFOLIO
NET INVESTMENT INCOME
Interest $32,181 $285,463
Dividends 459,721 627,091
Total Investment Income 491,902 912,554
Expenses:
Investment advisory fees 149,369 570,139
Accounting fees 19,937 40,870
Trustees fees and expenses 8,682 27,375
Audit fees 13,999 14,827
Custodian fees 3,310 27,806
Other expenses 6,292 6,868
Legal fees 372 971
Insurance 85 109
Total Expenses 202,046 688,965
Investment advisory fees waived --- ---
Directed brokerage payments received --- (6,058)
Total Net Expenses 202,046 682,907
NET INVESTMENT INCOME 289,856 229,647
REALIZED AND UNREALIZED GAIN (LOSS)
FROM INVESTMENTS:
Net realized gain (loss) from futures --- 245,618
contracts
Net realized gain (loss) from investments 3,637,703 5,094,690
Net change in unrealized appreciation
(depreciation) of investments (1,322,044) 6,025,737
NET GAIN (LOSS) ON INVESTMENTS 2,315,659 11,366,045
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $2,605,515 $11,595,692
See accompanying notes to financial statements
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1999
UTILITIES GROWTH
STOCK STOCK
PORTFOLIO PORTFOLIO
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $289,856 $229,647
Net realized gain (loss) from investments
and futures contracts 3,637,703 5,340,308
Net change in unrealized appreciation
(depreciation) of investments (1,322,044) 6,025,737
Net increase in net assets
resulting from operations 2,605,515 11,595,692
TRANSACTIONS OF INVESTORS' BENEFICIAL INTERESTS:
Contributions 11,399,891 105,405,498
Withdrawals (9,173,858) (102,951,461)
Net increase in net assets resulting from
transactions of investors' beneficial interests 2,226,033 2,454,037
TOTAL INCREASE IN NET ASSETS 4,831,548 14,049,729
NET ASSETS - Beginning of period 13,219,545 51,167,743
NET ASSETS - End of period $18,051,093 $65,217,472
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1998
UTILITIES GROWTH
STOCK STOCK
PORTFOLIO PORTFOLIO
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $218,745 $335,278
Net realized gain (loss) from investments
and futures contracts (364,390) 4,583,800
Net change in unrealized appreciation
(depreciation) of investments 1,126,399 4,790,713
Net increase in net assets
resulting from operations 980,754 9,709,791
TRANSACTIONS OF INVESTORS' BENEFICIAL INTERESTS:
Contributions 6,977,776 74,136,798
Withdrawals (5,408,703) (66,072,809)
Net increase (decrease) in net assets
resulting from transactions of investors'
beneficial interests 1,569,073 8,063,989
TOTAL INCREASE (DECREASE) IN NET ASSETS 2,549,827 17,773,780
NET ASSETS - Beginning of period 10,669,718 33,393,963
NET ASSETS - End of period $13,219,545 $51,167,743
See accompanying notes to financial statements
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
UTILITIES STOCK PORTFOLIO
<CAPTION>
Period from
Year Ended December 31, June 21, 1995* to
1999 1998 1997 1996 December 31, 1995
<S> <C> <C> <C> <C> <C>
Net Assets, End of Period ($000) $18,051 $13,220 $10,670 $7,964 $4,291
Ratio of Expenses to Average Net Assets 1.35% 1.44% 1.60% 1.61% 2.32%(1)
Ratio of Net Investment Income to
Average Net Assets 1.94% 1.73% 1.79% 2.24% 2.09%(1)
Ratio of Expenses to Average Net Assets
before directed brokerage payments 1.35% 1.46% 1.65% 1.66% 2.40%(1)
Ratio of Net Investment Income to Average Net
Assets before directed brokerage payments 1.94% 1.71% 1.74% 2.19% 2.01%(1)
Portfolio Turnover Rate 69.20% 51.36% 41.22% 50.79% 5.06%
<FN>
(1) Annualized
* Date of commencement of operations
</FN>
</TABLE>
<TABLE>
GROWTH STOCK PORTFOLIO
<CAPTION>
Year Ended December 31,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Assets, End of Period ($000) $65,217 $51,168 $33,394 $24,414 $24,537
Ratio of Expenses to Average Net Assets 1.15% 1.25% 1.34% 1.24% 1.25%
Ratio of Net Investment Income to
Average Net Assets 0.39% 0.77% 0.83% 2.33% 3.78%
Ratio of Expenses to Average Net Assets
before waiver of fees 1.16% 1.26% 1.34% 1.24% 1.25%
Ratio of Net Investment Income to Average
Net Assets before waiver of fees 0.38% 0.76% 0.83% 2.33% 3.78%
Portfolio Turnover Rate 51.22% 79.98% 129.79% 81.66% 337.57%
</TABLE>
See accompanying notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION
Each Fund of The Flex-Partners Trust (the "Trust") invests all of its investable
assets in a corresponding open-end management investment company (each a
"Portfolio" and collectively the "Portfolios") having the same investment
objective as the Fund. Each Portfolio is registered under the Investment Company
Act of 1940, as amended (the "Act"), as a no-load, open-end management
investment company which was organized as a trust under the laws of the State of
New York. Each Declaration of Trust permits the Trustees, who are the same for
each Portfolio, to issue beneficial interests in each Portfolio.
The investment objective of each Portfolio is as follows:
The Utilities Stock Portfolio seeks a high level of current income and
growth of income by investing primarily in equity securities of domestic
and foreign public utility companies; however, it will not invest in
electric utilities whose generation of power is derived from nuclear
reactors. The Portfolio also seeks capital appreciation, but only when
consistent with its primary investment objective.
The Growth Stock Portfolio seeks capital growth by investing in a
diversified portfolio of domestic common stocks with greater than average
growth characteristics selected primarily from the Standard & Poor's 500
Composite Stock Price Index (the "S&P 500").
The financial statements of the Funds are included elsewhere in this report.
2. SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INVESTMENTS
Securities which are traded on stock exchanges are valued at the last sales
price as of the close of business of the New York Stock Exchange on the day of
valuation or, lacking any sales, at the closing bid prices. Securities traded
over-the-counter are valued at the most recent bid price or yield equivalent as
obtained from one or more dealers that make markets in such securities. Mutual
funds are valued at the daily redemption value as reported by the underlying
fund. The Portfolios obtain prices from independent pricing services which use
valuation techniques approved by the Board of Trustees.
Money market securities held in the Portfolios maturing more than sixty days
after the valuation date are valued at the last sales price as of the close of
business on the day of valuation, or, lacking any sales, at the most recent bid
price or yield equivalent as obtained from dealers that make markets in such
securities. When such securities are valued within sixty days to maturity, the
difference between the valuation existing on the sixty-first day before maturity
and maturity value is amortized on a straight-line basis to maturity. Securities
maturing within sixty days from their date of acquisition are valued at
amortized cost.
REPURCHASE AGREEMENTS
Each Portfolio may engage in repurchase agreement transactions whereby the
Portfolio takes possession of an underlying debt instrument subject to an
obligation of the seller to repurchase the instrument from the Portfolio and an
obligation of the Portfolio to resell the instrument at an agreed upon price and
term. At all times, the Portfolio maintains the value of collateral, including
accrued interest, at least 100% of the amount of the repurchase agreement, plus
accrued interest. If the seller defaults or the fair value of the collateral
declines, realization of the collateral by the Portfolios may be delayed or
limited.
DEFERRED TRUSTEE COMPENSATION
Under a Deferred Compensation Plan (the "Plan") non-interested Trustees may
elect to defer receipt of a portion of their annual compensation. Under the
Plan, deferred amounts are invested in the shares of the Flex-funds and
Flex-Partners Funds. Deferred amounts remain in the Portfolios until distributed
in accordance with the Plan.
<PAGE>
FUTURES & OPTIONS
Each Portfolio may engage in transactions in financial futures contracts and
options contracts in order to manage the risk of unanticipated changes in market
values of securities held in the portfolio, or which it intends to purchase. The
expectation is that any gain or loss on such transactions will be substantially
offset by any gain or loss on the securities in the underlying portfolio or on
those which are being considered for purchase.
To the extent that the Portfolio enters into futures contracts on an index or
group of securities the Portfolio exposes itself to an indeterminate liability
and will be required to pay or receive a sum of money measured by the change in
the market value of the index. Upon entering into a futures contract the
Portfolio is required to deposit an initial margin, which is either cash or
securities in an amount equal to a certain percentage of the contract value.
Subsequently, the variation margin, which is equal to changes in the daily
settlement price or last sale price on the exchanges where they trade, is
received or paid. The Portfolios record realized gains or losses for the daily
variation margin when they are recorded as gains or losses from futures
contracts.
Call and put option contracts involve the payment of a premium for the right to
purchase or sell an individual security or index aggregate at a specified price
until the expiration of the contract. Such transactions expose the Portfolio to
the loss of the premium paid if the Portfolio does not sell or exercise the
contract prior to the expiration date. In the case of a call option, sufficient
cash or money market instruments will be segregated to complete the purchase.
Options are valued on the basis of the daily settlement price or last sale on
the exchanges where they trade and the changes in value are recorded as an
unrealized appreciation or depreciation until closed, exercised or expired.
The Portfolios may write covered call or put options for which premiums received
are recorded as liabilities and are subsequently adjusted to current market
value of the options written. When written options are closed or exercised,
premiums received are offset against the proceeds paid, and the Portfolio
records realized gains or losses for the difference. When written options
expire, the liability is eliminated, and the Portfolio records realized gains
for the entire amount of premiums received.
During the year ended December 31, 1999, the Portfolios had the following
activity in futures contracts:
LONG CONTRACTS
Number of contracts Notional amount
GROWTH STOCK PORTFOLIO:
Outstanding, beginning of year 7 $2,055,875
Contracts opened 324 107,321,562
Contracts closed (321) (105,766,937)
Outstanding, end of year 10 $3,610,500
LETTER OF CREDIT
Each Portfolio has pledged as collateral a U.S. Government security, cash or
other high-grade debt security solely for the benefit of ICI Mutual Insurance
Co. for the Portfolios' fidelity bond coverage.
INCOME TAXES
The Portfolios will be treated as a partnership for Federal income tax purposes.
As such, each investor in the Portfolios will be subject to taxation on its
share of the Portfolios' ordinary income and capital gains. It is each
Portfolio's policy to comply with the requirements of the Internal Revenue Code
applicable to it. Therefore, no Federal income tax provision is required.
SECURITIES TRANSACTIONS
The Portfolios record security transactions on the trade date. Gains and losses
realized from the sale of securities are determined on the specific
identification basis. Dividend income is recognized on the ex-dividend date, and
interest income (including amortization of premium and accretion of discount) is
recognized as earned.
<PAGE>
3. AGREEMENTS AND TRANSACTIONS WITH AFFILIATES
R. Meeder & Associates (RMA), a wholly-owned subsidiary of Muirfield Investors,
Inc. (MII), provides each Portfolio with investment management, research,
statistical and advisory services. Under separate Investment Subadvisory
Agreements with RMA, Miller/Howard Investments, Inc. and Sector Capital
Management, Inc. serve as subadvisor of the Utilities Stock Portfolio and Growth
Stock Portfolio, respectively. Sub-subadvisers, selected by Sector Capital
Management, Inc., subject to the review and approval of the Trustees of the
Growth Stock Portfolio, are responsible for the selection of individual
portfolio securities for the assets of the Portfolio assigned to them by Sector
Capital Management, Inc.
For such services the Portfolios pay monthly fees based upon the average daily
value of each Portfolio's net assets at the following annual rate: 1.00% of
average daily net assets up to $50 million, 0.75% of average daily net assets
exceeding $50 million up to $100 million and 0.60% of average daily net assets
exceeding $100 million. As subadviser to the Utilities Stock Portfolio,
Miller/Howard Investments, Inc. is paid 0.00% of the 1.00% of average daily net
assets up to $10 million, 0.40% of the 1.00% of average daily net assets
exceeding $10 million up to $50 million, 0.40% of the 0.75% of average daily net
assets net assets exceeding $50 million up to $60 million, 0.30% of the 0.75% of
average daily net assets exceeding $60 million up to $100 million and 0.25% of
the 0.60% of average daily net assets exceeding $100 million. As subadviser to
the Growth Stock Portfolio, Sector Capital Management, Inc. is paid 0.30% of the
1.00% of average daily net assets up to $25 million, 0.70% of the 1.00% of
average daily net assets exceeding $25 million up to $50 million, 0.40% of the
0.75% of average daily net assets exceeding $50 million up to $100 million and
0.35% of the 0.60% of average daily net assets exceeding $100 million. Sector
Capital Management, Inc. pays all sub-subadvisers 0.25% on all average net
assets.
Mutual Funds Service Co. ("MFSCo"), a wholly-owned subsidiary of MII, serves as
accounting services agent for each Portfolio. In compensation for such services,
each Portfolio pays MFSCo an annual fee equal to the greater of:
a. 0.15% of the first $10 million of average daily net assets, 0.10% of the
next $20 million of average daily net assets, 0.02% of the next $50 million
of average daily net assets, and 0.01% in excess of $80 million of average
daily net assets,
or
b. $7,500.
Certain officers and trustees of the Portfolios are also officers or directors
of MII, RMA and MFSCo.
4. SECURITIES TRANSACTIONS
For the year ended December 31, 1999, the cost of purchases and proceeds from
sales or maturities of long-term investments for the Portfolios were as follows:
PORTFOLIO PURCHASES SALES
--------- --------- -----
Utilities Stock Portfolio $12,829,792 $ 9,928,610
Growth Stock Portfolio 28,470,710 27,440,601
As of December 31, 1999, the aggregate cost basis of investments and unrealized
appreciation (depreciation) for Federal income tax purposes was as follows:
COST BASIS UNREALIZED UNREALIZED NET UNREALIZED
PORTFOLIO OF INVESTMENTS APPRECIATION DEPRECIATION APPRECIATION
--------- -------------- ------------ ------------ -------------
Utilities Stock Portfolio $16,740,715 $ 3,217,376 $(1,322,156) $ 1,895,220
Growth Stock Portfolio 48,859,539 19,887,220 (3,423,449) 16,463,771
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Trustees of the Utilities Stock Portfolio
and Growth Stock Portfolio:
We have audited the accompanying statements of assets and liabilities of the
Utilities Stock Portfolio and Growth Stock Portfolio (Portfolios), including the
portfolios of investments, as of December 31, 1999, and the related statements
of operations, statements of changes in net assets and the financial highlights
for each of the periods indicated herein. These financial statements and the
financial highlights are the responsibility of the Portfolios' 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 verification of securities owned as of
December 31, 1999, by confirmation with the custodian and brokers and other
appropriate audit procedures. 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 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 the
Utilities Stock Portfolio and Growth Stock Portfolio at December 31, 1999, and
the results of their operations, the changes in their net assets and the
financial highlights for each of the periods indicated herein, in conformity
with generally accepted accounting principles.
KPMG LLP
Columbus, Ohio
February 11, 2000
<PAGE>
PART C: OTHER INFORMATION
23. Exhibits:
(a) (1) Articles of Incorporation 1/
(2) Amendment to Articles of Incorporation dated January 12, 1999 2/
(3) Amendment to Articles of Incorporation dated July 21, 2000 6/
(4) Amendment to Articles of Incorporation 8/
(b) By-laws 2/
(1) Amendment to By-Laws 8/
(c) Instruments Defining Rights of Security Holders
(1) Articles of Incorporation 1/
(2) Bylaws 2/
(d) (1) Advisory Agreement between Registrant and Morgan Asset Management, Inc.
with respect to Morgan Keegan Intermediate Bond Fund and Morgan Keegan
High Income Fund 2/
(2) Investment Advisory Agreement between Growth Stock Portfolio and
Meeder Asset Management, Inc., formerly known as R. Meeder &
Associates, Inc. with respect to Morgan Keegan Core Equity Fund 4/
(a) Investment Sub-Advisory Agreement with Sector Capital Management
L.L.C. 5/
(b) Investment Sub-Subadvisory Agreement with Miller/Howard
Investments, Inc. 5/
(c) Investment Sub-Subadvisory Agreement with Hallmark Capital
Management, Inc. 5/
(d) Investment Sub-Subadvisory Agreement with Barrow, Hanley,
Mewhinney & Strauss, Inc. 5/
(e) Investment Sub-Subadvisory Agreement with The Mitchell Group,
Inc. 5/
(f) Investment Sub-Subadvisory Agreement with Ashland Management
Incorporated 5/
(g) Investment Sub-Subadvisory Agreement with Delta Capital
Management, Inc. 5/
(h) Investment Sub-Subadvisory Agreement with Dresdner RCM Global
Investors LLC 5/
(i) Investment Sub-Subadvisory Agreement with Alliance Capital
Management L.P. 5/
(3) Investment Advisory Agreement between The Utilities Stock Portfolio
and Meeder Asset Management, Inc., formerly known as R. Meeder &
Associates, Inc. with respect to Morgan Keegan Utility Fund 4/
(a) Investment Sub-Advisory Agreement with Miller/Howard Investment,
Inc. (filed herewith)
(4) Investment Advisory and Administration Agreement between Registrant
and Morgan Asset Management, Inc. with respect to the Morgan Keegan
Core Equity Fund and the Morgan Keegan Utility Fund (filed herewith)
(5) Investment Advisory and Administration Agreement between Registrant
and Morgan Asset Management, Inc. with respect to Morgan Keegan Select
Financial Fund 7/
(a) Form of Sub-Advisory Agreement among Registrant, Morgan Asset
Management, Inc. and T.S.J. Advisory Group, Inc. with respect to
Morgan Keegan Select Financial Fund 7/
(6) Investment Advisory Agreement between Registrant and Morgan Asset
Management, Inc. with respect to Morgan Keegan Select Capital Growth
Fund 8/
(e) Underwriting Agreement 2/
(f) Bonus or Profit Sharing Contracts - none
<PAGE>
(g) (1) Custodian Agreement between Registrant and State Street Bank & Trust
Company with respect to Morgan Keegan Intermediate Bond Fund, Morgan
Keegan High Income Fund, Morgan Keegan Select Financial Fund and
Morgan Select Capital Growth Fund 3/
(2) Custody Agreement between Growth Stock Portfolio and Star Bank, N.A.
with respect to the Morgan Keegan Core Equity Fund 4/
(3) Custody Agreement between Utilities Stock Portfolio and Star Bank,
N.A. with respect to the Utilities Fund 4/
(4) Form of Custody Agreement between Registrant and Firstar Bank, N.A.
with respect to Morgan Keegan Core Equity Fund and Morgan Keegan
Utility Fund (filed herewith)
(h) Other Material Contracts
(1) Amended and Restated Fund Accounting Services Agreement with respect
to Morgan Keegan Intermediate Bond Fund, Morgan Keegan High Income
Fund, Morgan Keegan Select Financial Fund and Morgan Keegan Select
Capital Growth Fund 8/
(2) Amended and Restated Transfer Agency and Service Agreement with
respect to Morgan Keegan Intermediate Bond Fund, Morgan Keegan High
Income Fund, Morgan Keegan Select Financial Fund, Morgan Keegan Core
Equity Fund, Morgan Keegan Utility Fund and Morgan Keegan Select
Capital Growth Fund 8/
(3) Accounting Services Agreement between Registrant and Mutual Funds
Service Co. with respect to the Morgan Keegan Core Equity Fund and the
Morgan Keegan Utility Fund (filed herewith)
(6) Participation Agreement among Meeder Asset Management, Inc., Growth
Stock Portfolio, Sector Capital Management, L.L.C. and Morgan Keegan
Select Fund, Inc., on behalf of Morgan Keegan Core Equity Fund 8/
(7) Participation Agreement among Meeder Asset Management, Inc., The
Utilities Stock Portfolio, Miller/Howard Investment, Inc. and Morgan
Keegan Select Fund, Inc., on behalf of Morgan Keegan Utility Fund 8/
(8) Sub-Administration Agreement among Morgan Keegan Select Fund, Inc.,
Morgan Asset Management, Inc. and Mutual Funds Service Company with
respect to Morgan Keegan Core Equity Fund and Morgan Keegan Utility
Fund (filed herewith)
(i) Legal Opinion
(1) Legal Opinion with respect to Morgan Keegan Select Financial Fund 7/
(2) Legal Opinion with respect to Morgan Keegan High Income Fund, Morgan
Keegan Intermediate Bond Fund, and Morgan Keegan Select Capital Growth
Fund 8/
(3) Legal Opinion with respect to Morgan Keegan Core Equity Fund and
Morgan Keegan Utility Fund (filed herewith)
(j) Other Opinions
(1) Accountants' Consent with respect to Morgan Keegan Select Financial
Fund 7/
(2) Accountants' Consent with respect to Morgan Keegan High Income Fund
and Morgan Keegan Intermediate Bond Fund 8/
(3) Accountants' Consent with respect to Morgan Keegan Select Capital
Growth Fund 8/
(4) Accountant's Consent with respect to Morgan Keegan Core Equity Fund
and Morgan Keegan Utility Fund (filed herewith)
(k) Omitted Financial Statements - none
(l) Initial Capital Agreement 2/
(m) (1) Distribution Plan pursuant to Rule 12b-1 for Class A Shares of Morgan
Keegan Intermediate Bond Fund and Morgan Keegan High Income Fund 2/
(2) Distribution Plan pursuant to Rule 12b-1 for Class A shares with
respect to Morgan Keegan Select Financial Fund, Morgan Keegan Select
Capital Growth Fund, Morgan Keegan Core Equity Fund and Morgan Keegan
Utility Fund 8/
(3) Distribution Plan pursuant to Rule 12b-1 for Class C shares of Morgan
Keegan Select Fund, Inc. 8/
(a) Distribution Fee Addendum for Class C shares with respect to
Morgan Keegan Intermediate Bond Fund, Morgan Keegan High Income
Fund, Morgan Keegan Select Financial Fund, Morgan Keegan Select
Capital Growth Fund, Morgan Keegan Core Equity Fund and Morgan
Keegan Utility Fund 8/
<PAGE>
(n) Amended and Restated Multiple Class Plan with respect to Morgan Keegan
Intermediate Bond Fund, Morgan Keegan High Income Fund, Morgan Keegan Core
Equity Fund, Morgan Keegan Utility Fund, Morgan Keegan Select Financial
Fund and Morgan Keegan Select Capital Growth Fund 8/
(p) Codes of Ethics
(1) Codes of Ethics for Growth Stock Portfolio and Utilities Stock
Portfolio 4/
(2) Code of Ethics for Meeder Financial, Inc. 4/
(3) Amended and Restated Code of Ethics for Morgan Keegan Select Fund,
Inc., Morgan Keegan & Company, Inc. and Morgan Asset Management, Inc.
7/
(4) Code of Ethics for T.S.J. Advisory Group, Inc. 7/
1/ Incorporated by reference to the Registrant's Registration Statement on
Form N-1A, SEC File No. 333-66181, filed on October 27, 1998.
2/ Incorporated by reference to Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form N-1A, SEC File No. 333-66181,
filed on January 21, 1999.
3/ Incorporated by reference to Post-Effective Amendment No. 2 to the
Registrant's Registration Statement on Form N-1A, SEC File No. 333-66181,
filed on October 28, 1999.
4/ Incorporated by reference to Post-Effective Amendment No. 3 to the
Registrant's Registration Statement on Form N-1A, SEC File No. 333-66181,
filed on June 6, 2000.
5/ Incorporated by reference to Post-Effective Amendment No. 11 to the
Registration Statement on Form N-1A for Growth Stock Portfolio, SEC File
No. 811-6647, filed on April 28, 2000.
6/ Incorporated by reference to Post-Effective Amendment No. 5 to the
Registrant's Registration Statement on Form N-1A, SEC File No. 333-66181,
filed on August 17, 2000.
7/ Incorporated by reference to Post-Effective Amendment No. 6 to the
Registrant's Registration Statement on Form N-1A, SEC No. 333-66181, filed
on August 25, 2000.
8/ Incorporated by reference to Post-Effective Amendment No. 7 to the
Registrant's Registration Statement on Form N-1A, SEC No. 333-66181, filed
on October 30, 2000.
<PAGE>
Item 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
-------------------------------------------------------------
None.
Item 25.Indemnification
---------------
Section Eleventh of the Articles of Incorporation of the Corporation
states:
Section 11.1. To the maximum extent permitted by applicable law
(including Maryland law and the 1940 Act) as currently in effect or as
it may hereafter be amended, no director or officer of the Corporation
shall be liable to the Corporation or its stockholders for money
damages.
Section 11.2. To the maximum extent permitted by applicable law
(including Maryland law and the 1940 Act) currently in effect or as it
may hereafter be amended, the Corporation shall indemnify and advance
expenses to its present and past directors, officers, or employees,
and persons who are serving or have served at the request of the
Corporation as a director, officer, employee, partner, trustee or
agent, of or in similar capacities, for other entities. The Board of
Directors may determine that the Corporation shall provide information
or advance expenses to an agent.
Section 11.3. Repeal or Modifications. No repeal or modification of
this Article ELEVENTH by the stockholders of the Corporation, or
adoption or modification of any other provision of the Articles of
Incorporation or By-Laws inconsistent with this Article ELEVENTH,
shall repeal or narrow any limitation on (1) the liability of any
director, officer or employee of the Corporation or (2) right of
indemnification available to any person covered by these provisions
with respect to any act or omission which occurred prior to such
repeal, modification or adoption.
Section 10.01 of the Bylaws of the Corporation states:
The Corporation shall indemnify each person who was or is a party or
is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (the "Proceeding"), by reason of the
fact that he or she is or was a director, officer or employee of the
Corporation, or is or was serving at the request of the Corporation as
a director, officer, employee, partner, trustee or agent of another
corporation, partnership, joint venture, trust, or other enterprise,
against all reasonable expenses (including attorneys' fees) actually
incurred, and judgments, fines, penalties and amounts paid in
settlement in connection with such Proceeding to the maximum extent
permitted by law, now existing or hereafter adopted.
Paragraph 7 of the Advisory Agreement between the Corporation and Morgan
Asset Management, Inc. with respect to Morgan Keegan Intermediate Bond Fund
and Morgan Keegan High Income Fund states:
A. Except as provided below, in the absence of willful misfeasance,
bad faith, gross negligence, or reckless disregard of obligations or
duties hereunder on the part of the Adviser, the Adviser shall not be
subject to liability to the Fund or to any shareholder of the Fund or
its Portfolios for any act or omission in the course of, or connected
with, rendering services hereunder or for any losses that may be
sustained in the purchase, holding or sale of any security or the
making of any investment for or on behalf of the Fund.
B. No provision of this Agreement shall be construed to protect any
Director or officer of the Fund, or the Adviser, from liability in
violation of Sections 17(h), 17(i), 36(a) or 36(b) of the 1940 Act.
<PAGE>
Paragraphs 7 and 8 of the Underwriting Agreement between the Corporation
and Morgan Keegan & Company, Inc. state:
7. The Fund agrees to indemnify, defend and hold the Distributor, its
several officers and directors, and any person who controls the
Distributor within the meaning of Section 15 of the 1933 Act, free and
harmless from and against any and all claims, demands, liabilities and
expenses (including the cost of investigating or defending such
claims, demands or liabilities and any counsel fees incurred in
connection therewith) which the Distributor, its officers or
directors, or any such controlling person may incur, under the 1933
Act or under common law or otherwise, arising out of or based upon any
alleged untrue statement of a material fact contained in the
Registration Statement or arising out of or based upon any alleged
omission to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, provided,
however, that the Fund shall not indemnify or defend such persons or
hold them harmless with respect to any claims, demands, or liabilities
based on information provided to the Fund by the Distributor; and
provided further that this indemnification provision shall not inure
to the benefit of any person who is an officer or director of the Fund
or who controls the Fund within the meaning of Section 15 of the 1933
Act, as amended, unless a court of competent jurisdiction shall
determine, or it shall have been determined by controlling precedent,
that such result would not be against public policy as expressed in
the 1933 Act, as amended, and further provided that in no event shall
anything contained in this Agreement be construed so as to protect the
Distributor against any liability to the Fund or its shareholders to
which the Distributor would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence in the performance of its
duties, or by reason of its reckless disregard of its obligations and
duties under this Agreement.
8. The Distributor agrees to indemnify, defend and hold the Fund, its
several officers and directors, and any person who controls the Fund
within the meaning of Section 15 of the 1933 Act, free and harmless
from and against any and all claims, demands, liabilities and expenses
(including the cost of investigating or defending such claims, demands
or liabilities and any counsel fees incurred in connection therewith)
which the Fund, its officers or directors, or any such controlling
person may incur, under the 1933 Act or under common law or otherwise,
arising out of or based upon any alleged untrue statement of a
material fact contained in information furnished in writing by the
Distributor to the Fund for use in the Registration Statement or
arising out of or based upon any alleged omission by the Distributor
to state a material fact in connection with such information required
to be stated in the Registration Statement or necessary to make such
information not misleading.
Paragraph 3 of the Amended and Restated Fund Accounting Service Agreement
between Morgan Keegan & Company, Inc. and Morgan Keegan Select Fund, Inc.
with respect to Morgan Keegan Intermediate Bond Fund, Morgan Keen High
Income Fund, Morgan Keegan Select Financial Fund and Morgan Keegan Select
Capital Growth Fund states:
RESPONSIBILITY OF MORGAN KEEGAN & Company, Inc. Morgan Keegan
shall be held to the exercise of reasonable care in carrying out the
provisions of this Agreement, but shall be indemnified by and shall be
without liability to the Fund for any action taken or omitted by it in
good faith without negligence or willful misconduct. Morgan Keegan
shall be entitled to rely on and may act upon the reasonable advice of
the Fund's auditors or of counsel (who may be counsel of the Fund) on
all matters, and shall not be liable for any action reasonably taken
or omitted pursuant to such advice.
<PAGE>
In addition, Morgan Keegan shall not be liable for any loss of data or
any delay in its performance under this Agreement to the extent such
loss or delay is due to causes beyond its control, including but not
limited to: acts of God, interruption in, loss of or malfunction in
power, significant computer hardware or systems software or telephone
communication service; acts of civil or military authority; sabotage;
war or civil commotion; fire; explosion; or strike beyond delivery of
minimum critical services. Morgan Keegan shall use its best efforts to
minimize any such loss or delay by all practical means and to replace
any lost data promptly. Morgan Keegan agrees not to discriminate
against the Fund in favor of any other customer of Morgan Keegan in
making computer time and its personnel available to input and process
the transactions hereunder when a loss or delay occurs.
Paragraph 10 of the Amended and Restated Transfer Agency and Service
Agreement between the Corporation and Morgan Keegan & Company, Inc. states:
RESPONSIBILITY OF MORGAN KEEGAN; LIMITATION OF LIABILITY. Morgan
Keegan shall be held to the exercise of reasonable care in carrying
out the provisions of this Agreement, but the Fund shall indemnify and
hold Morgan Keegan harmless against any losses, claims, damages,
liabilities or expenses (including reasonable counsel fees and
expenses) resulting from any claim, demand, action or suit brought by
any person (including a shareholder naming the Fund as a party) other
than the Fund arising out of, or in connection with, Morgan Keegan's
performance of its obligations hereunder, provided, that Morgan Keegan
does not act with bad faith, willful misfeasance, reckless disregard
of its obligations and duties, or gross negligence.
The Fund shall also indemnify and hold Morgan Keegan harmless against
any losses, claims, damages, liabilities or expenses (including
reasonable counsel fees and expenses) resulting from any claim,
demand, action or suit (except to the extent contributed to by Morgan
Keegan's bad faith, willful misfeasance, reckless disregard of its
obligations and duties, or gross negligence) resulting from the
negligence of the Fund, or Morgan Keegan's acting upon any
instructions reasonably believed by it to have been executed or
communicated by any person duly authorized by the Fund, or as a result
of Morgan Keegan's acting in reliance upon advice reasonably believed
by Morgan Keegan to have been given by counsel for the Fund, or as a
result of Morgan Keegan's acting in reliance upon any instrument
reasonably believed by it to have been genuine and signed,
countersigned or executed by the proper person.
In no event shall Morgan Keegan be liable for indirect, special, or
consequential damages (even if Morgan Keegan has been advised of the
possibility of such damages) arising from the obligations assumed
hereunder and the services provided for by this Agreement, including
but not limited to lost profits, loss of use of the shareholder
accounting system, cost of capital, cost of substitute facilities,
programs or services, downtime costs, or claims of the Fund's
shareholders for such damage.
Article VI, Paragraph 4, of the Investment Advisory Agreement between
Growth Stock Portfolio and R. Meeder & Associates, Inc. states:
(4) The Adviser shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the portfolio in connection
with the matters to which this Agreement relates (including, but not
limited to, loss sustained by reason of the adoption or implementation
of any investment policy or the purchase, sale or retention of any
security), except for loss resulting from willful misfeasance, bad
faith or gross negligence of the Adviser in the performance of its
duties or from reckless disregard by the Adviser of its obligations
and duties under this Agreement.
<PAGE>
Article VI, Paragraph 4, of the Investment Advisory Agreement between The
Utilities Stock Portfolio and R. Meeder & Associates, Inc. states:
(4) The Adviser shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the portfolio in connection
with the matters to which this Agreement relates (including, but not
limited to, loss sustained by reason of the adoption or implementation
of any investment policy or the purchase, sale or retention of any
security), except for loss resulting from willful misfeasance, bad
faith or gross negligence of the Adviser in the performance of its
duties or from reckless disregard by the Adviser of its obligations
and duties under this Agreement.
Paragraph 8 of the Investment Advisory and Admnistration Agreement between
Morgan Keegan Select Fund, Inc. and Morgan Asset Management, Inc. with
respect to Morgan Keegan Select Financial Fund states:
A. Except as provided below, in the absence of willful
misfeasance, bad faith, gross negligence, or reckless disregard of
obligations or duties hereunder on the part of the Adviser, the
Adviser shall not be subject to liability to Morgan Keegan Select or
to any shareholder of Morgan Keegan Select or its Fund for any error
of judgment or mistake of law in the course of, or connected with,
rendering services hereunder or for any losses that may be sustained
by the Fund, Morgan Keegan Select, or its shareholders in connection
with the matters to which this Agreement relates.
B. Nothing in this paragraph shall be deemed a limitation or
waiver of any obligation or duty that may not by law be limited or
waived.
Paragraph 8 of the Sub-Advisory Agreement among Morgan Keegan Select Fund,
Inc., Morgan Asset Management, Inc. and T.S.J. Advisory Group, Inc. with
respect to Morgan Keegan Select Financial Fund states:
8. Limitation of Liability. The Sub-Adviser shall not be liable
for any error of judgment or mistake of law or for any loss suffered
by the Fund, Morgan Keegan Select, its shareholders or by the Adviser
in connection with the matters to which this Agreement relates, except
a loss resulting from willful misfeasance, bad faith or gross
negligence on its part in the performance of its services and duties
or from reckless disregard by it of its obligations and duties under
this Agreement. Nothing in this paragraph shall be deemed a limitation
or waiver of any obligation or duty that may not by law be limited or
waived.
Paragraph 7 of the Investment Advisory and Management Agreement between
Morgan Keegan Select Fund, Inc. and Morgan Asset Management, Inc. with
respect to Morgan Keegan Select Capital Growth Fund states:
The Adviser assumes no responsibility under this Agreement other
than to render the services called for hereunder in good faith, and
shall not be responsible for any action of the Board of Directors of
the Fund in following or declining to follow any advice or
recommendations of the Adviser; provided that nothing in this
Agreement shall protect the Adviser against any liability to the
Portfolio, the Fund or its stockholders to which it would otherwise be
subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties or by reason of its
reckless disregard of its obligations and duties hereunder.
<PAGE>
Paragraph 3.2 of the Participation Agreement among Growth Stock Portfolio,
Meeder Asset Management, Inc. , Sector Capital Management, L.L.C. and
Morgan Keegan Select Fund, Inc. with respect to the Morgan Keegan Core
Equity Portfolio states:
Indemnification by the Portfolio.
(a) The Portfolio will indemnify and hold harmless the Company,
the Fund, and their directors, officers and employees and each other
person who controls the Fund, as the case may be, within the meaning
of Section 15 of the 1933 Act (each a "Covered Person" and
collectively "Covered Persons"), against any and all losses, claims,
demands, damages, liabilities and expenses (each a "Liability" and
collectively, the "Liabilities") (including the reasonable costs of
investigating and defending against any claims therefor and any
counsel fees incurred in connection therewith) which
(i) arise out of or are based upon any of the Securities
Laws, any other statute or common law or are incurred in
connection with or as a result of any formal or informal
administrative proceeding or investigation by a regulatory
agency, insofar as such Liabilities arise out of or are based
upon any omission or commission by the Portfolio (either during
the course of its daily activities or in connection with the
accuracy of its representations or warranties in this Agreement)
that caused or continues to cause the Fund to violate any federal
or state securities laws or regulations or any other applicable
domestic or foreign law or regulations or common law duties or
obligations, but only to the extent that such Liabilities do not
arise out of and are not based upon an omission or commission of
the Company or Fund (other than an imputed act or omission based
upon an act or omission of the Portfolio);
(ii) arise out of or are based upon an inaccurate
calculation of the Portfolio's net asset value (whether by the
Portfolio or any party retained by the Portfolio for that
purpose);
(iii) arise out of (A) any untrue statement of a material
fact in the registration statement of the Portfolio filed on Form
N-1A (including amendments and supplements thereto) or omission
of any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances
under which they were made, not misleading, (B) any untrue
statement of a material fact in the registration statement of the
Company (relating to the Fund) filed on Form N-1A (including
amendments and supplements thereto) with respect to information
about the Portfolio (including any investment performance
information of the Portfolio) that is furnished by the Portfolio
specifically for inclusion in the Company's Form N-1A, or
omission of any material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, or (C)
any untrue statement of a material fact in advertising or sales
literature used by the Company on behalf of the Fund, or an
omission of any material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, if
included at the request, or with the written permission, of the
Portfolio;
(iv) arise out of the Portfolio's failure to qualify as a
regulated investment company under the Code;
(v) result from the failure of any representation or
warranty made by the Portfolio to be accurate when made or the
failure of the Portfolio to perform any covenant contained herein
or to otherwise comply with the terms of this Agreement;
<PAGE>
(vi) arise out of any unlawful or negligent act by the
Portfolio, whether such act was committed against Meeder, Sector
Capital, the Portfolio, the Fund or any third party;
(vii) arise out of any claim that the systems,
methodologies, or technology used in connection with operating
the Portfolio, including the technologies associated with
maintaining the master-feeder structure of the Portfolio,
violates any license or infringes upon any patent or trademark;
(viii) arise out of any claim that the use of the names used
by the Portfolio or any corresponding use by the Fund of names
used by the Portfolio violates any license or infringes upon any
trademark; or
(ix) result from any Liability of the Portfolio to any
investor in the Portfolio (or shareholder thereof), other than
the Fund (and its shareholders); provided, however, that in no
case shall the Portfolio be liable with respect to any claim made
against any such Covered Person unless such Covered Person shall
have notified the Portfolio in writing of the nature of the claim
within a reasonable time after the summons, other first legal
process or formal or informal initiation of a regulatory
investigation or proceeding shall have been served upon or
provided to a Covered Person or any federal, state or local tax
deficiency has come to the attention of the Fund or a Covered
Person. Failure to notify the Portfolio of such claim shall not
relieve it from any liability that it may have to any Covered
Person otherwise than on account of the indemnification contained
in this paragraph.
(b) INDEMNIFICATION OF SECTOR CAPITAL. The Portfolio will
indemnify and hold harmless Sector Capital, and each of its respective
Trustees, directors and officers and each person, if any, who controls
Sector Capital within the meaning of Section 15 of the 1933 Act (each
a "Sector Indemnified Party" and collectively, the "Sector Indemnified
Parties") against any and all Liabilities (including the reasonable
costs of investigating and defending against any claims therefor and
any counsel fees incurred in connection therewith), which
(i) arise out of (A) any untrue statement of a material fact
in the registration statement of the Portfolio filed on Form N-1A
(including amendments and supplements thereto) or omission of any
material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which
they were made, not misleading, (B) any untrue statement of a
material fact in advertising or sales literature used by Sector
Capital, or an omission of any material fact required to be
stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not
misleading, if included at the request, or with the written
permission, of the Portfolio;
(ii) result from the failure of any representation or
warranty made by the Portfolio to be accurate when made or the
failure of the Portfolio to perform any covenant contained herein
or to otherwise comply with the terms of this Agreement;
(iii) arise out of any unlawful or negligent act by the,
whether such act was committed against Sector Capital, the Fund,
the Company, the Portfolio, Meeder, or any third party.
<PAGE>
Paragraph 3.2 of the Participation Agreement among the Utilities Stock
Portfolio, Meeder Asset Management, Inc., Miller/Howard Investments, Inc.
and Morgan Keegan Select Fund, Inc. with respect to the Morgan Keegan
Utility Fund states:
Indemnification by the Portfolio.
(a) The Portfolio will indemnify and hold harmless the Company,
the Fund, and their directors, officers and employees and each other
person who controls the Fund, as the case may be, within the meaning
of Section 15 of the 1933 Act (each a "Covered Person" and
collectively "Covered Persons"), against any and all losses, claims,
demands, damages, liabilities and expenses (each a "Liability" and
collectively, the "Liabilities") (including the reasonable costs of
investigating and defending against any claims therefor and any
counsel fees incurred in connection therewith) which
(i) arise out of or are based upon any of the Securities
Laws, any other statute or common law or are incurred in
connection with or as a result of any formal or informal
administrative proceeding or investigation by a regulatory
agency, insofar as such Liabilities arise out of or are based
upon any omission or commission by the Portfolio (either during
the course of its daily activities or in connection with the
accuracy of its representations or warranties in this Agreement)
that caused or continues to cause the Fund to violate any federal
or state securities laws or regulations or any other applicable
domestic or foreign law or regulations or common law duties or
obligations, but only to the extent that such Liabilities do not
arise out of and are not based upon an omission or commission of
the Company or Fund (other than an imputed act or omission based
upon an act or omission of the Portfolio);
(ii) arise out of or are based upon an inaccurate
calculation of the Portfolio's net asset value (whether by the
Portfolio or any party retained by the Portfolio for that
purpose);
(iii) arise out of (A) any untrue statement of a material
fact in the registration statement of the Portfolio filed on Form
N-1A (including amendments and supplements thereto) or omission
of any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances
under which they were made, not misleading, (B) any untrue
statement of a material fact in the registration statement of the
Company (relating to the Fund) filed on Form N-1A (including
amendments and supplements thereto) with respect to information
about the Portfolio (including any investment performance
information of the Portfolio) that is furnished by the Portfolio
specifically for inclusion in the Company's Form N-1A, or
omission of any material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, or (C)
any untrue statement of a material fact in advertising or sales
literature used by the Company on behalf of the Fund, or an
omission of any material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, ot misleading, if
included at the request, or with the written permission, of the
Portfolio;
(iv) arise out of the Portfolio's failure to qualify as a
regulated investment company under the Code;
(v) result from the failure of any representation or
warranty made by the Portfolio to be accurate when made or the
failure of the Portfolio to perform any covenant contained herein
or to otherwise comply with the terms of this Agreement;
<PAGE>
(vi) arise out of any unlawful or negligent act by the
Portfolio, whether such act was committed against Meeder,
Miller/Howard, the Portfolio, the Fund or any third party;
(vii) arise out of any claim that the systems,
methodologies, or technology used in connection with operating
the Portfolio, including the technologies associated with
maintaining the master-feeder structure of the Portfolio,
violates any license or infringes upon any patent or trademark;
(viii) arise out of any claim that the use of the names used
by the Portfolio or any corresponding use by the Fund of names
used by the Portfolio violates any license or infringes upon any
trademark; or
(ix) result from any Liability of the Portfolio to any
investor in the Portfolio (or shareholder thereof), other than
the Fund (and its shareholders); provided, however, that in no
case shall the Portfolio be liable with respect to any claim made
against any such Covered Person unless such Covered Person shall
have notified the Portfolio in writing of the nature of the claim
within a reasonable time after the summons, other first legal
process or formal or informal initiation of a regulatory
investigation or proceeding shall have been served upon or
provided to a Covered Person or any federal, state or local tax
deficiency has come to the attention of the Fund or a Covered
Person. Failure to notify the Portfolio of such claim shall not
relieve it from any liability that it may have to any Covered
Person otherwise than on account of the indemnification contained
in this paragraph.
(b) INDEMNIFICATION OF MILLER/HOWARD. The Portfolio will
indemnify and hold harmless Miller/Howard, and each of its respective
Trustees, directors and officers and each person, if any, who controls
Miller/Howard within the meaning of Section 15 of the 1933 Act (each a
"Miller/Howard Indemnified Party" and collectively, the "Miller/Howard
Indemnified Parties") against any and all Liabilities (including the
reasonable costs of investigating and defending against any claims
therefor and any counsel fees incurred in connection therewith), which
(i) arise out of (A) any untrue statement of a material fact
in the registration statement of the Portfolio filed on Form N-1A
(including amendments and supplements thereto) or omission of any
material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which
they were made, not misleading, (B) any untrue statement of a
material fact in advertising or sales literature used by
Miller/Howard, or an omission of any material fact required to be
stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not
misleading, if included at the request, or with the written
permission, of the Portfolio;
<PAGE>
(ii) result from the failure of any representation or
warranty made by the Portfolio to be accurate when made or the
failure of the Portfolio to perform any covenant contained herein
or to otherwise comply with the terms of this Agreement;
(iii) arise out of any unlawful or negligent act by the
Portfolio, whether such act was committed against Miller/Howard,
the Fund, the Company, the Portfolio, Meeder, or any third party.
Paragraph 8 of the Investment Advisory and Administration Agreement between
Morgan Keegan Select Fund, Inc. and Morgan Asset Management, Inc. with
respect to Morgan Keegan Core Equity Fund and Morgan Keegan Utility Fund
states:
A. Except as provided below, in the absence of willful misfeasance,
bad faith, gross negligence, or reckless disregard of obligations or
duties hereunder on the part of the Adviser, the Adviser shall not be
subject to liability to Morgan Keegan Select or to any shareholder of
Morgan Keegan Select or the Funds for any error in judgment or mistake
of law in the course of, or connected with, rendering services
hereunder or for any losses that may be sustained by the Fund, Morgan
Keegan Select, or its shareholders in connection with the matters to
which this Agreement relates.
B. Nothing in this paragraph shall be deemed a limitation or waiver of
any obligation or duty that may not by law be limited or waived.
Section 11 of the Accounting Services Agreement between Morgan Keegan
Select Fund, Inc. and Mutual Funds Service Co. states:
The Agent shall not be liable for any action taken in good faith
reliance upon any authorized oral instructions, any written
instructions, any certified copy of any resolution of the Directors of
the Company or any other document reasonably believed by the Agent to
be genuine and to have been executed or signed by the proper person or
persons. The Company will send written instructions to cover oral
instructions, and the Agent will compare the information against the
oral instructions previously furnished. The Agent will inform the
Company immediately of any noted discrepancy or will request, if no
written instruction is received in a reasonable time, that the Company
forward same to Agent.
The Agent shall not be held to have notice of any change of authority
of any officer, employee, or agent of the Company until receipt of
notification thereof by the Company.
In addition to indemnification expressly provided elsewhere in this
Agreement, the Company shall indemnify and hold harmless the Agent
from all claims and liabilities (including reasonable expenses for
legal counsel) incurred by or assessed against the Agent in connection
with the performance of this Agreement, except such as may arise from
the Agent's own negligent action, omission, or willful misconduct;
provided, however, that before confessing any claim against it, the
Agent shall give the Company reasonable opportunity to defend against
such claim in the name of the Company, the Fund or the Agent or any of
them.
<PAGE>
Paragraph 11 of the Money Manager Agreements among The Growth Stock
Portfolio, Sector Capital Management, L.L.C., and each of Alliance Capital
Management L.P., Ashland Management Incorporated, Barrow, Hanley Mewhinney
& Strauss, Inc., Delta Capital Management Inc., Dresdner RCM Global
Investors, L.L.C., Hallmark Capital Management, Inc., Miller/Howard
Investments, Inc. and The Mitchell Group, Inc. states:
LIMITATION OF LIABILITY. The Money Manager shall not be liable
for, and shall be indemnified by the Portfolio for any action taken,
omitted or suffered to be taken by it in its reasonable judgment, in
good faith and believed by it to be authorized or within the
discretion or rights or powers conferred upon it by this Agreement, or
in accordance with (or in the absence of) specific directions or
instructions from the Portfolio or the Manager; provided, however,
that such acts or omissions shall not have resulted from the Money
Manager's willful misfeasance, bad faith or gross negligence,
violation of applicable law, or reckless disregard of its duty or of
its obligations hereunder. The rights and obligations that are
provided for in this Paragraph 11 shall survive the cancellation,
expiration or termination of this Agreement.
Section 4 of the Sub-Administration Agreement between Morgan Keegan Select
Fund, Inc., Morgan Asset Management, Inc. and Mutual Funds Service Co.
states:
LIMITATION OF LIABILITY OF THE ADMINISTRATOR. The Administrator
and its directors, officers, employees and agents shall not be liable
for any error of judgment or mistake of law or for any act or omission
in the administration of the Funds or the performance of its duties
hereunder, unless caused by the Administrator's negligence, willful
misfeasance, or breach of this Agreement.
Sections 10 and 11 of the Custody Agreement between Morgan Keegan Select
Fund, Inc. and Firstar Bank, N.A. with respect to Morgan Keegan Core Equity
Fund and Morgan Keegan Utility Fund state:
The Custodian shall be entitled to charge against any money held
by it for the account of the Funds the amount of any loss, damage,
liability or expense, including counsel fees, for which it shall be
entitled to reimbursement under the provisions of this Agreement as
determined by agreement of the Custodian and the Funds or by the final
order of any court or arbitrator having jurisdiction and as to which
all rights to appeal have expired.
Custodian shall not be liable for any action taken in good faith
upon any certificate herein described or certified copy of any
resolution of the Board, and may rely on the genuineness of any such
document which it may in good faith and reasonably believe to have
been validly executed. Custodian shall be liable for any loss or
damage, including counsel fees, resulting from its action or omission
to act, or otherwise, where any such loss or damage arises out of its
own negligence, willful misconduct or reckless disregard of its
duties.
The Funds agree to indemnify and hold harmless Custodian and its
nominee from all taxes, charges, expenses, assessments, losses, claims
and liabilities (including counsel fees) incurred or assessed against
it or by its nominee in connection with the performance of this
Agreement, except such as may arise from its or its nominee's own
negligent action, negligent failure to act or willful misconduct. In
the event of any advance of cash for any purpose made by Custodian
resulting from orders or instructions of the Funds, or in the event
that Custodian or its nominee shall incur or be assessed any taxes,
charges, expenses, assessments, claims or liabilities in connection
with the performance of this Agreement, except such as may arise from
its or its nominee's own negligent action, negligent failure to act or
willful misconduct, any property at any time held for the account of
the Funds shall be security therefor. The Custodian may, with respect
to questions of law, apply for and obtain the advice and opinion of
counsel to the Funds at the expense of the Funds, or of its own
counsel at its own expense and shall be fully protected with respect
to anything done or omitted by it in good faith in conformity with
advice or opinion of its counsel, unless counsel to the Funds shall,
within a reasonable time after notification, have a differing opinion
of such question of law.
<PAGE>
Notwithstanding anything contained herein, if the Funds require
the Custodian to engage specific Subcustodians for the safekeeping
and/or clearing of assets, the Funds agree to indemnify and hold
harmless Custodian from all claims, expenses and liabilities incurred
or assessed against it in connection with the use of such Subcustodian
in regard to the Funds' assets, except as may arise from its own
negligent action, negligent failure to act or willful misconduct.
Item 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Morgan Asset Management, Inc., a Tennessee corporation, the investment
adviser to the Morgan Keegan Intermediate Bond Fund, the Morgan Keegan High
Income Fund and the Morgan Keegan Select Financial Fund, is a registered
investment adviser and offers investment management services to investment
companies and other types of investors. Information on its officers and
directors is included in its Form ADV filed on October 22, 1999 with the
Securities and Exchange Commission (registration number 801-27629) and is
incorporated herein by reference. T. S. J. Advisory Group, Inc., the Sub-Adviser
to the Morgan Keegan Select Financial Fund is controlled by T. Stephen Johnson
who also controls T. Stephen Johnson & Associates, Inc., a bank consulting firm
and investment manager.
Meeder Asset Management, Inc., formerly known as R. Meeder & Associates,
Inc., the investment adviser to the Growth Stock Portfolio, is an investment
adviser to individuals, pension and profit sharing plans, trusts, charitable
organizations, corporations and other institutions. Information on its officers
and directors is included in its Form ADV filed on June 6, 2000 with the
Securities and Exchange Commission (registration number 801-9839) and is
incorporated herein by reference.
Item 27. PRINCIPAL UNDERWRITER
(a) Bedford Money Market Fund
Morgan Keegan Southern Capital Fund, Inc.
<PAGE>
(b) Morgan Keegan & Company, Inc.
Name and Positions and Positions and
Principal Business Offices With Offices With
ADDRESS UNDERWRITER REGISTRANT
------------------ ------------- -------------
(Principal Business Address,
unless otherwise noted, is:
Morgan Keegan Tower
Fifty Front Street
Memphis, Tennessee 38103)
Allen B. Morgan, Jr. Chairman and Director,
Chief Executive
President
Officer, Executive
Managing Director
Joseph C. Weller Chief Financial Vice President,
Officer, Executive Treasurer and
Managing Director, Assistant Secretary
Executive Vice
President, Secretary
and Treasurer
John W. Stokes, Jr. Vice Chairman, None
Executive Managing
Director
Robert A. Baird Executive None
Managing Director
G. Douglas Edwards Executive Managing None
Director
James H. Ganier Executive Managing None
Director
Stephen P. Laffey Executive Managing None
Director
Thomas V. Orr, Jr. Executive Managing None
Director
James A. Parish, Jr. Executive Managing None
Director
Minor Perkins Executive Managing None
Director
Allen B. Adler Managing Director None
Franklin P. Allen, III Managing Director None
George E. Arras, Jr. Managing Director None
James N. Augustine, Jr. Managing Director None
<PAGE>
Joseph K. Ayers Managing Director None
Rodney D. Baber, Jr. Managing Director None
George E. Bagwell Managing Director None
Woodley H. Bagwell Managing Director None
Charles E. Bailey Managing Director None
Milton A. Barber Managing Director None
Joseph C. Barkley Managing Director None
Reginald E. Barnes Managing Director None
Glen E. Bascom Managing Director None
W. Preston Battle Managing Director None
Robert C. Berry Managing Director None
John D. Brewer Managing Director None
Susan Leonard Brown Managing Director None
Paul S. Burd Managing Director None
John B. Carr, Jr. Managing Director None
John C. Carson, Jr. Managing Director None
Ted H. Cashion Managing Director None
Marshall A. Clark Managing Director None
William F. Clay Managing Director None
Robert E. Cope Managing Director None
Mark W. Crowl Managing Director None
Harold L. Deaton Managing Director None
William W. Deupree, Jr. Managing Director None
James J. Dieck Managing Director None
Robert H. Dudley, Jr. Managing Director None
Richard H. Eckels Managing Director None
Richard K. Fellows Managing Director None
<PAGE>
Richard S. Ferguson Managing Director None
Robert M. Fockler Managing Director None
James M. Fowler, Jr. Managing Director None
Wilmer J. Freiberg Managing Director None
Graham D.S. Fulton Managing Director None
John H. Geary Managing Director None
Robert D. Gooch, Jr. Managing Director None
James F. Gould Managing Director None
Terry C. Graves Managing Director None
John H. Grayson, Jr. Managing Director None
Gary W. Guinn Managing Director None
David M. Guthrie Managing Director None
Jan L. Gwin Managing Director None
Thomas M. Hahn Managing Director None
Thomas V. Harkins Managing Director None
Michael J. Harris Managing Director None
Haywood Henderson Managing Director None
Roderick E. Hennek Managing Director None
William P. Hinckley Managing Director None
Edwin L. Hoopes, III Managing Director None
William F. Hughes, Jr. Managing Director Director
Joe R. Jennings Managing Director None
Robert Jetmundsen Managing Director None
Ram P. Kasargod Managing Director None
Carol Sue Keathley Managing Director None
Dan T. Keel III Managing Director None
Peter R. Klyce Managing Director None
Peter Stephen Knoop Managing Director None
<PAGE>
W. Lawrence M. Knox, Jr. Managing Director None
E. Carl Krausnick, Jr. Managing Director None
James R. Ladyman Managing Director None
A. Welling LaGrone, Jr. Managing Director None
Benton G. Landers Managing Director None
William M. Lellyett, Jr. Managing Director None
W. G. Logan, Jr. Managing Director None
W. Gage Logan III Managing Director None
Wiley H. Maiden Managing Director None
John Henry Martin Managing Director None
William D. Mathis, III Managing Director None
John Fox Matthews Managing Director None
Francis J. Maus Managing Director None
Charles D. Maxwell Managing Director Secretary and
Assistant Treasurer
John Welsh Mayer Managing Director None
W. Ward Mayer Managing Director None
W. Neal McAtee Managing Director None
Harris L. McCraw III Managing Director None
Thomas J. McQuiston Managing Director None
Edward S. Michelson Managing Director None
G. Rolfe Miller Managing Director None
Gary C. Mills Managing Director None
David Montague Managing Director None
Robert M. Montague Managing Director None
K. Brooks Monypeny Managing Director None
John G. Moss Managing Director None
Lewis A. Moyse Managing Director None
<PAGE>
William G. Mueller Managing Director None
Mortimer S. Neblett Managing Director None
Philip G. Nichols Managing Director None
Michael O'Keefe Managing Director None
Jack A. Paratore Managing Director None
William T. Patterson Managing Director None
J. Christopher Perkins Managing Director None
Logan B. Phillips, Jr. Managing Director None
L. Jack Powell Managing Director None
S. Mark Powell Managing Director None
Richard L. Preis Managing Director None
C. David Ramsey Managing Director None
Hedi H. Reynolds Managing Director None
Donna L. Richardson Managing Director None
R. Michael Ricketts Managing Director None
Kathy L. Ridley Managing Director None
Thomas H. Roberts III Managing Director None
Terry A. Robertson Managing Director None
Darien M. Roche Managing Director None
Kenneth L. Rowland Managing Director None
Michael L. Sain Managing Director None
W. Wendell Sanders Managing Director None
E. Elkan Scheidt Managing Director None
Ronald J. Schuberth Managing Director None
H. Wade Schuessler Managing Director None
Lynn T. Shaw Managing Director None
Fred B. Smith Managing Director None
<PAGE>
Richard J. Smith Managing Director None
Robert L. Snider Managing Director None
John B. Snowden, IV Managing Director None
Thomas A. Snyder Managing Director None
Richard A. Spell Managing Director None
John W. Stokes, III Managing Director None
John Burke Strange Managing Director None
James M. Tait, III Managing Director None
J. Crosby Taylor, Jr. Managing Director None
Phillip C. Taylor Managing Director None
Van C. Thompson Managing Director None
John D. Threadgill Managing Director None
P. Gibbs Vestal Managing Director None
Edmund J. Wall Managing Director None
W. Charles Warner Managing Director None
Richard E. Watson Managing Director None
John E. Wilfong Managing Director None
John S. Wilson Managing Director None
J. William Wyker III Managing Director None
Paul B. Young, Jr. Managing Director None
John J. Zollinger, III Managing Director None
William D. Zollinger Managing Director None
(c) None
<PAGE>
Item 28. LOCATION OF ACCOUNTS AND RECORDS
MORGAN KEEGAN INTERMEDIATE BOND FUND, MORGAN KEEGAN HIGH INCOME FUND AND
MORGAN KEEGAN SELECT FINANCIAL FUND AND MORGAN KEEGAN SELECT CAPITAL GROWTH
FUND:
The books and other documents required by paragraphs (b)(4), (c) and (d) of
Rule 31a-1 under the Investment Company Act of 1940 are maintained in the
physical possession of Registrant's adviser, Morgan Asset Management, Inc.,
Morgan Keegan Tower, Fifty Front Street, Memphis, Tennessee 38103. All other
accounts, books and other documents required by Rule 31a-1 are maintained in the
physical possession of Registrant's transfer agent and portfolio accounting
service provider, Morgan Keegan & Co., Morgan Keegan Tower, Fifty Front Street,
Memphis, Tennessee 38103.
MORGAN KEEGAN CORE EQUITY FUND AND MORGAN KEEGAN UTILITY FUND:
The books and other documents required by paragraphs (b) (4), (c) and (d)
of Rule 31a-1 under the Investment Company Act of 1940 are maintained in
the physical possession of Meeder Asset Management, Inc., formerly known as
R. Meeder & Associates, Inc., at 6000 Memorial Drive, Dublin, OH 43017. All
other accounts, books and other documents required by Rule 31a-1 are
maintained in the physical possession of Registrant's transfer agent,
Morgan Keegan & Co., Morgan Keegan Tower, Fifty Front Street, Memphis,
Tennessee 38103. Certain custodial records are in the custody of Firstar
Bank, N.A., the Funds' custodian at 425 Walnut Street, Cincinnati, Ohio
45202. All other records are kept in the custody of Mutual Funds Service
Co., 6000 Memorial Drive, Dublin, OH 43017.
Item 29. MANAGEMENT SERVICES
Not applicable
Item 30. UNDERTAKINGS - none
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, Morgan Keegan Select Fund, Inc.,
has duly caused this Post-Effective Amendment No. 8 to its Registration
Statement on Form N-1A to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Memphis and State of Tennessee, on the 27th day
of October, 2000.
MORGAN KEEGAN SELECT FUND, INC.
By: /s/ William F. Hughes, Jr.
----------------------------------------
William F. Hughes, Jr., Director
Pursuant to the requirements of the Securities Act, this Post-Effective
Amendment No. 8 to the Registration Statement on Form N-1A has been signed below
by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Allen B. Morgan, Jr. Director and President October 27, 2000
----------------------------------
Allen B. Morgan, Jr. (Chief Executive
Officer)
/s/ Joseph C. Weller Vice President and October 27, 2000
----------------------------------
Joseph C. Weller Treasurer (Chief
Financial Officer)
/s/ James D. Witherington, Jr. Director October 26, 2000
----------------------------------
James D. Witherington, Jr.
/s/ William F. Hughes, Jr. Director October 27, 2000
----------------------------------
William F. Hughes, Jr.
/s/ William Jefferies Mann Director October 27, 2000
----------------------------------
William Jefferies Mann
/s/ James Stillman R. McFadden Director October 26, 2000
----------------------------------
James Stillman R. McFadden
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Utilities Stock Portfolio, has duly caused
this Post-Effective Amendment No. 8 to Morgan Keegan Select Fund, Inc.'s
Registration Statement to be signed on its behalf by the undersigned, duly
authorized, in the City of Dublin, and the State of Ohio, on the 6th day of
November, 2000.
UTILITIES STOCK PORTFOLIO
By: /S/ WESLEY F. HOAG
------------------------------
Wesley F. Hoag
Pursuant to requirements of the Securities Act, this Post-Effective
Amendment No. 8 to the Registration Statement on Form N-1A has been signed below
by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
ROBERT S. MEEDER, SR.* President and Trustee November 6, 2000
-----------------------------
Robert S. Meeder, Sr.
MILTON S. BARTHOLOMEW* Trustee November 6, 2000
-----------------------------
Milton S. Bartholomew
ROGER D. BLACKWELL* Trustee November 6, 2000
-----------------------------
Roger D. Blackwell
JAMES W. DIDION* Trustee November 6, 2000
-----------------------------
James W. Didion
CHARLES A. DONABEDIAN* Trustee November 6, 2000
-----------------------------
Charles A. Donabedian
THOMAS E. LINE* Principal Financial Officer,
----------------------------- Principal Accounting
Thomas E. Line Officer and Treasurer November 6, 2000
ROBERT S. MEEDER, JR.* Vice President and Trustee November 6, 2000
-----------------------------
Robert S. Meeder, Jr.
JACK W. NICKLAUS II* Trustee November 6, 2000
-----------------------------
Jack W. Nicklaus II
WALTER L. OGLE* Trustee November 6, 2000
-----------------------------
Walter L. Ogle
PHILIP A. VOELKER* Vice President and Trustee November 6, 2000
-----------------------------
Philip A. Voelker
*By: /S/ WESLEY F. HOAG
----------------------------------
Wesley F. Hoag
Executed by Wesley F. Hoag on behalf
of those indicated pursuant to Powers of Attorney
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Growth Stock Portfolio, has duly caused this
Post-Effective Amendment No. 8 to Morgan Keegan Select Fund, Inc.'s Registration
Statement to be signed on its behalf by the undersigned, duly authorized, in the
City of Dublin, and the State of Ohio, on the 6th day of November, 2000.
GROWTH STOCK PORTFOLIO
By: /S/ WESLEY F. HOAG
-------------------------------
Wesley F. Hoag
Pursuant to the requirements of the Securities Act, this Post-Effective
Amendment No. 8 to the Registration Statement on Form N-1A has been signed below
by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
ROBERT S. MEEDER, SR.* President and Trustee November 6, 2000
-----------------------------
Robert S. Meeder, Sr.
MILTON S. BARTHOLOMEW* Trustee November 6, 2000
-----------------------------
Milton S. Bartholomew
ROGER D. BLACKWELL* Trustee November 6, 2000
-----------------------------
Roger D. Blackwell
JAMES W. DIDION* Trustee November 6, 2000
-----------------------------
James W. Didion
CHARLES A. DONABEDIAN* Trustee November 6, 2000
-----------------------------
Charles A. Donabedian
THOMAS E. LINE* Principal Financial Officer,
----------------------------- Principal Accounting
Thomas E. Line Officer and Treasurer November 6, 2000
ROBERT S. MEEDER, JR.* Vice President and Trustee November 6, 2000
-----------------------------
Robert S. Meeder, Jr.
JACK W. NICKLAUS II* Trustee November 6, 2000
-----------------------------
Jack W. Nicklaus II
WALTER L. OGLE* Trustee November 6, 2000
-----------------------------
Walter L. Ogle
PHILIP A. VOELKER* Vice President and Trustee November 6, 2000
-----------------------------
Philip A. Voelker
*By: /S/ WESLEY F. HOAG
----------------------------------
Wesley F. Hoag
Executed by Wesley F. Hoag on behalf
of those indicated pursuant to Powers of Attorney
<PAGE>
MORGAN KEEGAN SELECT FUND, INC.
Exhibit Index
Exhibit (d) (3) (a) Investment Sub-Advisory Agreement with Miller/Howard
Investment, Inc.
Exhibit (d) (4) Investment Advisory and Administration Agreement between
Registrant and Morgan Asset Management, Inc. with
respect to the Morgan Keegan Core Equity Fund and the
Morgan Keegan Utility Fund
Exhibit (g) (4) Form of Custody Agreement between Registrant and Firstar
Bank, N.A. with respect to Morgan Keegan Core Equity
Fund and Morgan Keegan Utility Fund
Exhibit (h) (3) Accounting Services Agreement between Registrant and
Mutual Funds Service Co. with respect to the Morgan
Keegan Core Equity Fund and the Morgan Keegan Utility
Fund
Exhibit (h) (8) Sub-Administration Agreement among Morgan Keegan Select
Fund, Inc., Morgan Asset Management, Inc. and Mutual
Funds Service Company with respect to Morgan Keegan Core
Equity Fund and Morgan Keegan Utility Fund
Exhibit (i) (2) Legal Opinion with respect to Morgan Keegan Core Equity
Fund and Morgan Keegan Utility Fund
Exhibit (j) (2) Accountant's Consent with respect to Morgan Keegan Core
Equity Fund and Morgan Keegan Utility Fund