[R. MEEDER & THE FLEX-FUNDS
ASSOCIATES, 6000 Memorial Dr. Dublin, OH 43017
INC.'S LOGO] 800-325-FLEX 614-760-2159
THE FLEX-FUNDS ARE A FAMILY OF MUTUAL FUNDS ORGANIZED AS A BUSINESS TRUST
(THE "TRUST") CONSISTING OF FIVE SEPARATE PORTFOLIOS (EACH A "FUND" AND
COLLECTIVELY THE "FUNDS"), EACH OF WHICH HAS SEPARATE INVESTMENT OBJECTIVES AND
POLICIES.
THE TRUST SEEKS TO ACHIEVE THE INVESTMENT OBJECTIVE OF EACH FUND BY
INVESTING ALL OF THE INVESTABLE ASSETS OF A FUND IN A CORRESPONDING OPEN-END
MANAGEMENT INVESTMENT COMPANY HAVING THE SAME INVESTMENT OBJECTIVE AS THAT FUND
(EACH A "PORTFOLIO" AND COLLECTIVELY THE "PORTFOLIOS"). ACCORDINGLY, INVESTORS
SHOULD CAREFULLY CONSIDER THIS INVESTMENT APPROACH. FOR ADDITIONAL INFORMATION
REGARDING THIS UNIQUE CONCEPT, SEE "INVESTMENT OBJECTIVES AND POLICIES" AND
"OTHER INFORMATION - SHARES OF BENEFICIAL INTEREST AND INVESTMENT STRUCTURE."
THE MONEY MARKET FUND WILL SEEK TO MAINTAIN A CONSTANT NET ASSET VALUE OF
$1 PER SHARE, ALTHOUGH THERE IS NO ASSURANCE IT WILL BE ABLE TO DO SO.
INVESTMENTS IN THE MONEY MARKET FUND SHARES ARE NEITHER INSURED NOR GUARANTEED
BY THE U.S. GOVERNMENT.
There are no commissions, fees or charges for the purchase or redemption of
shares, although the Trust has adopted Rule 12b-1 distribution plans to aid in
the distribution of shares. (See "Distribution Plans.")
ADDITIONAL INFORMATION
This Prospectus sets forth basic information about the Trust and the five
Funds that a prospective investor should know before investing and it should be
retained for future reference. A STATEMENT OF ADDITIONAL INFORMATION, dated
April 30, 1998, has been filed with the Securities and Exchange Commission and
is incorporated herein by reference. The Statement of Additional Information is
available upon request and without charge by contacting the Trust at the address
given above or by calling: 1-800-325-FLEX, or (614) 760-2159.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
TABLE OF CONTENTS
Page
Highlights 3
Synopsis of Financial Information 4
Financial Highlights 5
Performance Comparisons 8
Growth Stock Portfolio - Performance
of Mr. Gurner and Subadviser 12
Investment Objectives and Policies 12
The Highlands Growth Fund 13
The Muirfield Fund 13
The Total Return Utilities Fund 14
The U.S. Government Bond Fund 15
The Money Market Fund 15
Additional Investment Policies of The
Growth Stock, Mutual Fund, Bond,
and Money Market Portfolios 16
Additional Investment Policies of The
Utilities Stock Portfolio 18
The Trust and Its Management 20
Growth Stock Portfolio Transaction
Policies 24
Distribution Plans 25
Income Dividends, Capital Gains,
Distributions and Taxes 25
How Net Asset Value is Determined 27
Performance Information 27
Other Information 28
SHAREHOLDER MANUAL
How to Buy Shares 30
How to Make Withdrawals (Redemptions) 31
Exchange Privilege 32
Flex-funds Retirement Plans 33
Other Shareholder Services 33
Shareholder Accounts 34
1
<PAGE>
THE FIVE FLEX-FUNDS AND
THEIR INVESTMENT OBJECTIVES
THE HIGHLANDS GROWTH FUND
THE HIGHLANDS GROWTH FUND'S objective is growth of capital by investing
primarily in a diversified portfolio of domestic common stocks with greater than
average growth characteristics selected primarily from the S&P 500.
THE MUIRFIELD FUND
THE MUIRFIELD FUND'S objective is growth of capital through investment in
the shares of other mutual funds.
THE TOTAL RETURN UTILITIES FUND
THE TOTAL RETURN UTILITIES FUND'S objective is to seek a high level of
current income and growth of income by investing primarily in equity securities
of domestic and foreign public utility companies.
THE U.S. GOVERNMENT BOND FUND
THE U.S. GOVERNMENT BOND FUND'S objective is to maximize current income
through investment in securities which are issued, or guaranteed as to payment
of principal and interest, by the U.S. government or any of its agencies or
instrumentalities.
THE MONEY MARKET FUND
THE MONEY MARKET FUND'S objective is current income and stable asset values
through investment in a portfolio of money market instruments.
INVESTMENT ADVISER: R. MEEDER & ASSOCIATES, INC.
PROSPECTUS APRIL 30, 1998
2
<PAGE>
HIGHLIGHTS
INVESTMENT OBJECTIVES: The Flex-funds (the "Trust") is a mutual fund family with
five portfolios (the "Funds") each with separate investment objectives and
policies. See "Investment Objectives and Policies."
LIQUIDITY: The Trust is an open-end investment company in that each Fund
continuously offers and redeems shares of beneficial interest at the next
determined net asset value per share. See "How to Buy Shares" and "How to Make
Withdrawals (Redemptions)."
DIVERSIFICATION: Each of the Trust's Funds is diversified. In The Money Market
Fund no more than 5% of the Portfolio's assets may be invested in securities
issued by a single issuer. The Highlands Growth, Total Return Utilities, U.S.
Government Bond and Muirfield Funds are diversified because 75% of the assets of
each Fund's Portfolio is restricted by the following rules: (1) No more than 5%
may be invested in the securities of a single company (except U.S. government
securities and securities of other investment companies, if otherwise
permissible) and (2) a Portfolio may not purchase more than 10% of any company's
outstanding voting securities.
NO SALES OR REDEMPTION CHARGES: There are no commissions, fees or charges for
the purchase or redemption of shares. See "Synopsis of Financial Information,"
"How to Buy Shares" and "How to Make Withdrawals (Redemptions)."
RETIREMENT PLANS AND OTHER SHAREHOLDER SERVICES: The Trust offers retirement
plans, which include a prototype Profit Sharing Plan, Money Purchase Pension
Plan, Salary Savings Plan --401(k), Individual Retirement Account (IRA), Roth
IRA, Education IRA, Simple IRA, Simplified Employee Pension (SEP), and a number
of other special shareholder services. See "Flex-funds Retirement Plans."
MINIMUM INVESTMENT: A minimum investment of $2,500 is required to open an
account, except an IRA account, for which the minimum is $500. Subsequent
investments must be at least $100. The Trust has the right to redeem the shares
in an account and pay the proceeds to the shareholder if the value of the
account drops below $1,000 because of shareholder redemptions. The shareholder
will be given 30 days' written notice and an opportunity to restore his account
to $1,000 ($500 for an IRA). See "How to Buy Shares," "Other Shareholder
Services" and "Shareholder Accounts."
INVESTMENT ADVISER, MANAGER, SUBADVISERS AND SUB-SUBADVISERS: R. Meeder &
Associates, Inc. is the Portfolios' Investment Adviser and Manager (the
"Investment Adviser" or the "Manager"). The Manager has been an investment
adviser to individuals, retirement plans, corporations and foundations since
1974.
<PAGE>
Miller/Howard Investments, Inc. is the subadviser to the Utilities Stock
Portfolio. Miller/Howard Investments, Inc. has been an investment adviser to
broker-dealers, investment advisers, employee benefit plans, endowment funds,
foundations and other institutions and individuals since 1984.
Sector Capital Management, L.L.C. ("Sector Capital") is the subadviser to
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.
Sub-subadvisers (the "Sector Advisers") selected by Sector Capital, 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 Growth Stock Potrolio assigned to them by Sector Capital. See "The Trust
and Its Management."
DISTRIBUTION PLAN: The Funds have adopted distribution plans in accordance with
Rule 12b-1 under the Investment Company Act of 1940. Under these plans, in The
Highlands Growth, Muirfield, U.S. Government Bond and Money Market Funds as much
as 2/10 of 1% of each Fund's average net assets may be paid annually to aid in
the distribution of shares. In The Total Return Utilities Fund, as much as
25/100 of 1% of its average net assets may be paid annually to aid in the
distribution of shares. See "Distribution Plans."
HOW TO BUY SHARES: Complete the New Account Application and forward with payment
as directed. Orders accompanied by payment (ordinary check, bank check, bank
wire, and money order for The Highlands Growth, Muirfield, Total Return
Utilities and U.S. Government Bond Funds) are accepted immediately and priced at
the next determined net asset value per share after receipt of the order by
Mutual Funds Service Co., the Transfer Agent for the Funds, or the Funds'
authorized service agent or sub-agent. Investments in The Money Market Fund are
priced at the net asset value next determined after an order is received,
provided Star Bank, N.A. (the "Bank"), the Custodian for the Fund, receives
federal funds that same day. See "How to Buy Shares."
SHAREHOLDER INQUIRIES: Shareholder inquiries should be directed to the Trust by
writing or telephoning the Trust at the address or telephone number indicated on
the cover page of this Prospectus. To protect the confidentiality of shareholder
accounts, information relating to a specific account will be disclosed pursuant
to a telephone inquiry only if the shareholder identifies the account by account
number or by the social security number listed on the account.
3
<PAGE>
SYNOPSIS OF FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FUND
TOTAL U.S.
HIGHLANDS RETURN GOVERNMENT MONEY
GROWTH MUIRFIELD UTILITIES BOND MARKET
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed
on Purchases none none none none none
Maximum Sales Load Imposed
on Reinvested Dividends none none none none none
Deferred Sales Load none none none none none
Redemption Fees none none none none none
Exchange Fee none none none none none
<PAGE>
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
Management Fees --
(Net of Fees Waived)* 1.00% 0.79% 1.00% 0.26% 0.15%
Distribution Plan
(12b-1 Fees)** 0.20% 0.19% 0.25% 0.17% 0.08%
Other Expenses (After Expense
Reimbursements)* 0.67% 0.31% 0.55% 0.57% 0.17%
----- ----- ----- ----- -----
TOTAL FUND OPERATING
EXPENSES (NET OF FEES
WAIVED AND EXPENSE
REIMBURSEMENTS)* 1.87% 1.29% 1.80% 1.00% 0.40%
</TABLE>
EXAMPLE
An investor would pay the following expenses on a $1,000 investment,
assuming (1) a 5% annual return and (2) redemption at the end of each time
period.
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------- ------ ------- ------- --------
The Highlands Growth Fund $19 $59 $101 $219
The Muirfield Fund $13 $41 $ 71 $156
The Total Return Utilities Fund $18 $57 $ 97 $212
Net of Fees Waived and
Expenses Reimbursed*
The U.S. Government Bond Fund
Net of Fees Waived* $10 $32 $ 55 $122
The Money Market Fund
Net of Fees Waived
and Expenses Reimbursed* $ 4 $13 $ 22 $ 51
*Expenses used in these illustrations summarize expenses actually incurred
for each Fund and its proportionate share of its expenses from its corresponding
Portfolio for the year ended December 31, 1997.
<PAGE>
During the year ended December 31, 1997, the Investment Adviser waived
management fees in The U.S. Government Bond and Money Market Funds and
reimbursed expenses in The Money Market and Total Return Utilities Funds in
order to reduce the operating expenses of these Funds. Expenses shown as "Net of
Fees Waived and Expense Reimbursements" are based on actual fees paid by those
Funds. Had management fees not been waived and expenses not been reimbursed,
Management Fees and Other Expenses, as a percentage of average net assets, would
have been, respectively, as follows: The Total Return Utilities Fund 1.00% and
1.26%, The U.S. Government Bond Fund 0.40% and 0.57%; and The Money Market Fund
0.28% and 0.23%. Total Fund Operating Expenses, as a percentage of average net
assets, would have been as follows: The Total Return Utilities Fund 2.51%; The
U.S. Government Bond Fund 1.14%; and The Money Market Fund 0.59%.
The Investment Adviser presently intends to waive a portion of its
management fees in each respective Portfolio to the extent necessary to keep the
expenses of The U.S. Government Bond Fund at or below 1% of average net assets
in 1998; and to waive a portion of its management fee in the Money Market
Portfolio or reimburse Money Market Fund expenses to the extent necessary to
achieve an effective yield for The Money Market Fund that will rank within the
top 10% of yields for all general purpose money market funds in 1998. The
Investment Adviser may change these policies at any time without notice to
shareholders. This would, in some circumstances, have an adverse effect on the
net income of these Funds, and the yields earned by shareholders. For planning
purposes, prospective investors and shareholders should assume that management
fees will not be waived and that expense reimbursements will not be made.
**Distribution Plan Expense: The Trust is party to agreements whereby
consultant companies or individuals (including two Trustees of the Portfolios),
are paid for explaining the Funds, their investment objectives and policies, and
the Trust's retirement plans, to clients. Other distribution plan expense
includes: the expense of printing and mailing prospectuses, periodic reports and
other sales materials to prospective investors; advertising; payment for
marketing programs and the services of public relations consultants; and the
cost of special telephone service to encourage the sale of Trust shares. (See
"Distribution Plans.")
The tables on the preceding page are meant to assist an investor in
understanding the various costs and expenses that an investor in any of the
Funds will bear directly or indirectly. The Trust does not impose a sales
4
<PAGE>
charge, exchange fee or redemption fee with the following exceptions. The
custodian of IRA and 403(b) accounts charges a $5.00 annual maintenance fee and
the transfer agent charges IRA and 403(b) accounts a $7.00 fee if the account is
totally liquidated. For more complete descriptions of the various costs and
expenses of the Trust see "The Trust and Its Management" and "Distribution
Plans."
Principally because there is no duplication of fees or expenses between the
Trust and the Portfolios, the Trustees of the Trust believe that the aggregate
per share expenses of each Fund and corresponding Portfolio will, at a minimum,
be approximately equal to and may be less than the expenses that would be
incurred by the Fund if the Investment Adviser was not waiving fees and if the
Fund continued to retain the services of an investment adviser and to invest
directly in portfolio securities. There can, of course, be no assurance that any
such expense savings will be realized. For additional information concerning
expenses incurred by the Trust and the Portfolios, see "The Trust and Its
Management" herein, and "Investment Adviser and Manager" in the Statement of
Additional Information.
THE TABLE AND HYPOTHETICAL EXAMPLE ON THE PRECEDING PAGE ARE FOR
ILLUSTRATIVE PURPOSES ONLY. THE INVESTMENT RATE OF RETURN AND EXPENSES SHOULD
NOT BE CONSIDERED AS REPRESENTATIONS OF PAST OR FUTURE PERFORMANCE OR EXPENSES,
AS ACTUAL RATES OF RETURN AND EXPENSES MAY BE MORE OR LESS THAN THE RATE AND
AMOUNTS SHOWN.
FINANCIAL HIGHLIGHTS
The financial highlights for each of the Trust's current Funds are listed
below. This information has been audited in conjunction with the annual audits
of the financial statements of The Flex-funds and their corresponding Portfolios
by KPMG Peat Marwick LLP, independent certified public accountants, for each of
the periods ended December 31, 1988 through December 31, 1997.
<PAGE>
<TABLE>
<CAPTION>
THE HIGHLANDS GROWTH FUND
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of period $16.41 $15.34 $13.08 $13.45 $12.70 $12.05 $10.21 $10.33 $ 9.67 $11.27
INCOME FROM INVESTMENT OPERATIONS
Net Investment income 0.06 0.31 0.50 0.27 0.09 0.18 0.34 0.57 0.29 0.59
Net Gains or (Losses) on Securities
(BOTH REALIZED AND UNREALIZED) 4.73 1.07 2.68 (0.37) 0.82 0.58 1.84 (0.12) 0.69 (1.22)
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 4.79 1.38 3.18 (0.10) 0.91 0.76 2.18 0.45 0.98 (0.63)
- ----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends (from net investment income) (0.06) (0.31) (0.50) (0.27) (0.16) (0.11) (0.34) (0.57) (0.32 (0.78)
DISTRIBUTIONS (FROM CAPITAL GAINS) (2.59) - (0.42) - - - - - - (0.19)
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (2.65) (0.31) (0.92) (0.27) (0.16) (0.11) (0.34) (0.57) (0.32) (0.97)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $18.55 $16.41 $15.34 $13.08 $13.45 $12.70 $12.05 $10.21 $10.33 $ 9.67
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 29.28% 9.08% 24.61% (0.69%) 7.21% 6.35% 21.46% 4.31% 10.17% (5.79%)
- ----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period ($000) 33,752 24,204 24,631 22,176 26,171 25,534 32,654 24,664 29,712 4,478
Ratio of Expenses to Average Net Assets 1.87% 1.65% 1.64% 1.63% 1.54% 1.51% 1.42% 1.46% 1.55% 1.50%
Ratio of Net Income to Average Net Assets 0.30% 1.92% 3.38% 1.95% 0.69% 1.31% 2.98% 4.90% 2.63% 2.06%
Portfolio Turnover Rate(1) 129.79% 81.66% 337.57% 102.76% 99.54% 39% 265% 436% 50% 313%
<FN>
(1) Represents turnover rate of corresponding portfolio.
</FN>
</TABLE>
Financial Statements and Notes pertaining thereto appear in the Statement of
Additional Information Dated April 30, 1998.
5
<PAGE>
<TABLE>
<CAPTION>
THE MUIRFIELD FUND
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988*
---- ---- ---- ---- ---- ---- ----- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of period $5.47 $5.73 $5.34 $5.36 $6.25 $6.43 $5.22 $5.84 $5.31 $5.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) 0.11 0.10 0.06 0.14 (0.01) 0.06 0.07 0.22 0.10 0.08
Net Gains or (Losses) on Securities
(BOTH REALIZED AND UNREALIZED) 0.91 0.25 1.31 0.00 0.45 0.34 1.41 (0.10) 0.62 0.23
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.02 0.35 1.37 0.14 0.44 0.40 1.48 0.12 0.72 0.31
- ----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends (from net investment income) (0.11) (0.10) (0.06) (0.14) (0.02) (0.06) (0.27) (0.10) (0.08) -
DISTRIBUTIONS (FROM CAPITAL GAINS) (0.91) (0.51) (0.92) (0.02) (1.31) (0.52) - (0.64) (0.11) -
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.02) (0.61) (0.98) (0.16) (1.33) (0.58) (0.27) (0.74) (0.19) -
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $5.47 $5.47 $5.73 $5.34 $5.36 $6.25 $6.43 $5.22 $5.84 $5.31
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 18.59% 5.99% 25.82% 2.70% 8.11% 6.91% 29.83% 2.33% 13.95% 6.20%
- ----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period ($000) 130,783 121,335 111,751 83,119 73,063 55,280 43,276 29,482 26,031 24,589
Ratio of Expenses to Average Net Assets 1.29% 1.19% 1.26% 1.22% 1.26% 1.40% 1.50% 1.52% 1.53% 1.42%+
Ratio of Net Income (Loss) to Average
Net Assets 1.69% 1.54% 0.97% 2.55% (0.13%) 1.05% 1.25% 4.46% 1.65% 5.02%+
Portfolio Turnover Rate(1) 395.42% 297.41% 186.13% 168.17% 279.56% 324% 107% 649% 202% 63%
<FN>
*For the period August 10, 1988 to December 31, 1988
(1) Represents turnover rate of corresponding portfolio.
+Annualized
</FN>
</TABLE>
Financial Statements and Notes pertaining thereto appear in the Statement of
Additional Information Dated April 30, 1998.
<PAGE>
THE TOTAL RETURN UTILITIES FUND
1997 1996 1995*
---- ---- -----
NET ASSET VALUE, BEGINNING OF PERIOD $14.98 $14.14 $12.50
- --------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------------------------------
NET INVESTMENT INCOME 0.25 0.37 0.21
- --------------------------------------------------------------------
Net Gains or Losses on Securities
(BOTH REALIZED AND UNREALIZED 3.99 1.48 1.64
- --------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 4.24 1.85 1.85
- --------------------------------------------------------------------
LESS DIVIDENDS AND DIVIDENDS
- --------------------------------------------------------------------
FROM NET INVESTMENT INCOME (0.25) (0.37) (0.21)
- --------------------------------------------------------------------
FROM NET CAPITAL GAINS (1.25) (0.64) --
- --------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.50) (1.01) (0.21)
- --------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $17.72 $14.98 $14.14
- --------------------------------------------------------------------
TOTAL RETURN 28.68% 13.33% 15.00%
- --------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- --------------------------------------------------------------------
NET ASSETS, END OF PERIOD ($000) 8,405 5,074 2,881
- --------------------------------------------------------------------
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.80% 1.25% 1.25%+
- --------------------------------------------------------------------
RATIO OF NET INCOME TO AVERAGE NET ASSETS 1.57% 2.55% 3.18%+
- --------------------------------------------------------------------
Ratio of Expenses to Average Net Assets,
BEFORE WAIVER OF FEES(1)(2) 2.51% 2.95% 4.35%+
- --------------------------------------------------------------------
Ratio of Net Income to Average Net Assets,
BEFORE WAIVER OF FEES(1)(2) 0.86% 0.85% 0.08%+
- --------------------------------------------------------------------
PORTFOLIO TURNOVER RATE(3) 41.22% 50.79% 5.06%
- --------------------------------------------------------------------
*For the period June 21, 1995 to December 31, 1995.
(1) See "Synopsis of Financial Information" for explanation of waiver of
advisory fees.
(2) Includes directed brokerage payments in corresponding
portfolio.
(3) Turnover rate of corresponding portfolio.
+ Annualized
Financial Statements and Notes pertaining thereto appear in the Statement of
Additional Information Dated April 30, 1998.
6
<PAGE>
<TABLE>
<CAPTION>
THE U.S. GOVERNMENT BOND FUND
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of period $20.64 $21.58 $19.25 $20.18 $19.46 $19.84 $18.37 $18.24 $18.25 $19.22
INCOME FROM INVESTMENT OPERATIONS
Net Investment income 0.99 0.96 1.11 0.72 0.86 0.99 1.23 1.33 1.54 1.49
Net Gains or (Losses) on Securities
(BOTH REALIZED AND UNREALIZED) 0.55 (0.94) 2.33 (0.93) 0.71 (0.38) 1.47 0.13 (0.01) (0.97)
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.54 0.02 3.44 (0.21) 1.57 0.61 2.70 1.46 1.53 0.52
- ---------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (0.99) (0.96) (1.11) (0.72) (0.85) (0.99) (1.23) (1.33) (1.54) (1.49)
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.99) (0.96) (1.11) (0.72) (0.85) (0.99) (1.23) (1.33) (1.54) (1.49)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $21.19 $20.64 $21.58 $19.25 $20.18 $19.46 $19.84 $18.37 $18.24 $18.25
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 7.70% 0.15% 18.32% (0.99%) 8.21% 3.26% 15.30% 8.35% 8.75% 2.74%
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period ($000) 16,973 17,783 16,048 12,983 13,137 11,100 9,316 5,493 4,547 6,337
Ratio of Expenses to Average Net Assets 1.00% 1.00% 1.00% 1.00% 0.99% 1.00% 0.94% 0.99% 0.81% 0.83%
Ratio of Net Income to Average Net Assets 4.85% 4.61% 5.41% 3.71% 4.25% 5.13% 6.59% 7.33% 8.54% 7.85%
Ratio of Expenses to Average Net Assets,
before waiver of fees(1) 1.14% 1.06% 1.14% 1.14% 1.09% 1.21% 1.23% 1.36% 1.15% 0.89%
Ratio of Net Income to Average Net Assets,
before waiver of fees(1) 4.71% 4.55% 5.27% 3.57% 4.15% 4.92% 6.30% 6.96% 8.20% 7.79%
Portfolio Turnover Rate(2) 375.64% 778.59% 232.34% 707.57% 235.74% 101% 214% 500% 0.00% 188%
<FN>
(1) See "Synopsis of Financial Information" for explanation of adviser's waiver
of fees.
(2) Represents turnover rate of corresponding portfolio.
</FN>
</TABLE>
Financial Statements and Notes pertaining thereto appear in the Statement of
Additional Information dated April 30, 1998.
<PAGE>
<TABLE>
<CAPTION>
THE MONEY MARKET FUND
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME 0.053 0.05 0.06 0.04 0.03 0.04 0.06 0.08 0.09 0.07
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.053 0.05 0.06 0.04 0.03 0.04 0.06 0.08 0.09 0.07
- ----------------------------------------------------------------------------------------------------------------------------------
Less Dividends and Distributions
FROM NET INVESTMENT INCOME (0.053) (0.05) (0.06) (0.04) (0.03) (0.04) (0.06) (0.08) (0.09) (0)
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.053) (0.05) (0.06) (0.04) (0.03) (0.04) (0.06) (0.08) (0.09) (0.07)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 5.38% 5.27% 5.85% 4.10% 2.98% 3.70% 6.12% 8.21% 9.32% 7.59%
- ----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period ($000) 169,335 119,947 141,087 164,838 200,030 245,259 316,951 247,481 264,078 17,183
Ratio of Expenses to Average Net Assets 0.40% 0.40% 0.40% 0.37% 0.37% 0.35% 0.38% 0.38% 0.39% 0.35%
Ratio of Expenses to Average Net Assets 5.26% 5.15% 5.70% 4.02% 2.94% 3.68% 5.96% 7.92% 8.94% 7.50%
before waiver of fees(1) 0.59% 0.58% 0.64% 0.57% 0.57% 0.56% 0.56% 0.55% 0.59% 0.60%
Ratio of Net Income to Average Net Assets,
before waiver of fees(1) 5.07% 4.97% 5.46% 3.82% 2.74% 3.47% 5.78% 7.75% 8.74% 7.25%
<FN>
(1) See "Synopsis of Financial Information" for explanation of adviser's waiver
of fees.
</FN>
</TABLE>
Financial Statements and Notes pertaining thereto appear in the Statement of
Additional Information Dated April 30, 1998.
7
<PAGE>
[Line Graph] The following information was
presented as a line graph.
PERFORMANCE COMPARISONS
THE MUIRFIELD FUND VS. THE S&P 500 COMPOSITE STOCK PRICE INDEX
AND MORNINGSTAR'S AVERAGE ASSET ALLOCATION FUND
The Growth of $10,000 (8/10/88 to 12/31/97)
THE MUIRFIELD FUND
AVERAGE ANNUAL
The The S&P 500 Morningstar's TOTAL RETURN
Muirfield Composite Stock Average Asset
FUND PRICE INDEX* ALLOCATION FUND 1 YEAR
---- ------------ --------------- 18.59%
$10,000 $10,000 $10,000
1988 $10,620 $10,382 $10,270 5 YEARS
1989 $12,102 $13,671 $12,022 11.92%
1990 $12,383 $13,244 $12,176
1991 $16,077 $17,281 $14,969 SINCE INCEPTION
1992 $17,188 $18,598 $16,216 (8/10/88)
1993 $18,581 $20,469 $18,104 12.48%
1994 $19,083 $20,739 $17,787
1995 $24,010 $28,523 $22,086
1996 $25,449 $35,068 $24,803
1997 $30,180 $45,940 $28,922
1997 IN REVIEW.
The total return of The Muirfield Fund was 18.59 percent during 1997. This
compares with the return of the average Asset Allocation Fund, as reported by
Morningstar, Inc., of 16.72 percent during 1997. The S&P 500 Composite Stock
Price Index provided a return of 33.35 percent during 1997.
Due to increased volatility caused in part by the Federal Reserve Board's
decision in March to raise interest rates, The Muirfield Fund adopted several
partially defensive positions during the first quarter of 1997 before gaining
full exposure to the stock market during the second quarter. Throughout much of
the first half of 1997, the Fund achieved its stock market exposure through
investment in large-capitalization, growth-oriented mutual funds and via
exposure to the S&P 500 Index, which outperformed many small-capitalization,
high-technology stocks during this period. The Fund underwent a fairly
substantial change during the latter part of the second quarter and into the
third quarter, as it shifted its focus from an emphasis on mutual funds that
invest in large-capitalization stocks to a 50-50 split between large-cap and
mid- to small-cap mutual funds. As market conditions worsened during October,
the Manager's discipline dictated that it reduce the Fund's equity exposure to
55 percent. Following the October correction, the Fund maintained its partially
defensive position through mid-November, after which it gradually increased its
equity exposure to approximately 90%. Then, by mid-December, the Manager
believed that the market had deteriorated significantly enough to warrant a
return to a partially defensive position, where the Fund remained at year's end.
The graph depicting the growth of $10,000 and the average annual total returns
for The Muirfield Fund are representative of past performance and are not
intended to indicate future performance.
*The returns of the various indexes are from the beginning or end of the month
nearest the Fund's inception to the end of the calendar year.
The index does not reflect the deduction of expenses associated with a mutual
fund, such as investment management and accounting fees. The Fund's performance
reflects the deduction of fees for these value added services.
8
<PAGE>
[Line Graph] The following information was
presented as a line graph.
THE U.S. GOVERNMENT BOND FUND VS. THE LEHMAN BROS.
INTERMEDIATE GOVERNMENT BOND INDEX AND
MORNINGSTAR'S AVERAGE GENERAL GOVERNMENT BOND FUND
The Growth of $10,000 (1/1/88 to 12/31/97) THE U.S. GOVERNMENT
BOND FUND AVERAGE
ANNUAL TOTAL RETURN
The Morningstar's
The U.S. Lehman Bros. Average General
Government Intermediate Government 1 YEAR
BOND FUND GOVT. BOND INDEX* BOND FUND 7.70%
--------- ----------------- -------------
$10,000 $10,000 $10,000 5 YEARS
1988 $10,274 $10,640 $10,654 6.46%
1989 $11,173 $11,989 $11,914
1990 $12,105 $13,135 $12,912 10 YEARS
1991 $13,958 $14,989 $14,722 7.02%
1992 $14,413 $16,027 $15,627
1993 $15,597 $17,358 $16,868
1994 $15,442 $17,054 $16,279
1995 $18,271 $19,515 $18,700
1996 $18,299 $20,338 $19,169
1997 $19,709 $21,659 $20,662
1997 IN REVIEW.
The U.S. Government Bond Fund provided a total return of 7.70% during 1997. For
the same period, the average General Government Bond Fund, as reported by
Morningstar, Inc., provided a total return of 7.84 percent. The Lehman Brothers
Intermediate Government Bond Index provided a total return of 7.73% during 1997.
Fully exposed to 10-year Treasury Notes as 1997 began, The U.S. Government Bond
Fund began to reduce its exposure to the bond market in advance of the
quarter-point increase in the Federal Funds rate by the Federal Reserve Board on
March 25. The Fund remained fully defensive through mid-May, when it again began
gaining exposure to intermediate-term treasuries. The Fund was fully exposed to
the bond market from early June through the end of the year with the exception
of a brief partially-defensive position in early August.
A flight to quality brought on by the Far East's equity crisis spurred the bond
market late in the year, thanks to both foreign and domestic investors seeking a
fallback position from the tumult of stocks. The currency difficulties
throughout Asia that drove the massive Asian stock declines and prompted a
correction in the U.S. stock market seemed to forestall the Federal Reserve
Board's desire to raise interest rates for the near-term, and even prompted
speculation that an interest rate cut was in the works for early 1998. As 1997
drew to a close, the Fund's performance was aided by a continued positive
interest rate environment nurtured by low inflation, low unemployment, and a
strong dollar.
The graph depicting the growth of $10,000 and the average annual total returns
for The U.S. Government Bond Fund are representative of past performance and are
not intended to indicate future performance.
*The returns of the various indexes are from the beginning or end of the month
nearest the Fund's inception to the end of the calendar year.
The index does not reflect the deduction of expenses associated with a mutual
fund, such as investment management and accounting fees. The Fund's performance
reflects the deduction of fees for these value added services.
9
<PAGE>
[Line Graph] The following information was
presented as a line graph.
THE TOTAL RETURN UTILITIES FUND VS. THE DOW THE TOTAL RETURN
JONES UTILITY AVERAGE AND MORNINGSTAR'S UTILITIES FUND
AVERAGE SPECIALTY UTILITIES FUND AVERAGE ANNUAL
The Growth of $10,000 (6/21/95 to 12/31/97) TOTAL RETURN
The Total The Dow Morningstar's
Return Jones Utility Average Specialty 1 YEAR
UTILITIES FUND AVERAGE UTILITIES FUND 28.68%
-------------- ------- --------------
$10,000 $10,000 $10,000
06/30/95 $ 9,880 $10,000 $10,000 SINCE INCEPTION
09/30/95 $10,427 $10,000 $10,695 (6/21/95)
12/31/95 $11,500 $11,483 $11,425 22.68%
03/31/96 $11,415 $10,990 $11,402
06/30/96 $12,103 $11,551 $11,848
09/30/96 $12,085 $11,525 $11,636
12/31/96 $13,032 $12,528 $12,585
03/31/97 $12,729 $11,924 $12,470
06/30/97 $13,749 $12,525 $13,531
09/30/97 $14,898 $13,316 $14,268
12/31/97 $16,770 $15,425 $15,745
1997 IN REVIEW.
The total return of the Total Return Utilities Fund was 28.68% during 1997. The
average Specialty Utilities Fund, as reported by Morningstar, Inc., provided a
total return of 25.20 percent during 1997. For that same period, the Dow Jones
Utility Average provided a total return of 23.00%.
The background environment for utilities, exemplified by the Federal Reserve
Board's decision in March to raise interest rates, was unfriendly during the
first quarter of 1997, though the Total Return Utilities Fund managed to hold
its own with little damage. The environment improved during the second and third
quarters, and the Fund was aided by several mergers, including LGE/ KU Energy
and Bell Atlantic/NyNex. Telecommunications stocks, which accounted for
approximately 30 to 40 percent of the Fund's Portfolio during 1997, benefited
from the trend toward deregulation in the industry. Natural gas holdings, which
accounted for approximately 20 to 23 percent of the Fund's Portfolio, also
performed well. Finally, long-term bond rates continued to decline during 1997,
resulting in an interest rate environment supportive of utilities, which
finished the year favorably as institutional managers rushed to the sector to
lock in gains for the year.
The graph depicting the growth of $10,000 and the average annual total returns
for The Total Return Utilities Fund are representative of past performance and
are not intended to indicate future performance.
*The returns of the various indexes are from the beginning or end of the month
nearest the Fund's inception to the end of the calendar year.
The index does not reflect the deduction of expenses associated with a mutual
fund, such as investment management and accounting fees. The Fund's performance
reflects the deduction of fees for these value added services.
10
<PAGE>
[Line Graph] The following information was
presented as a line graph.
THE HIGHLANDS GROWTH FUND VS. THE S&P 500
COMPOSITE STOCK PRICE INDEX AND
MORNINGSTAR'S AVERAGE GROWTH MUTUAL FUND THE HIGHLANDS
The Growth of $10,000 (1/1/88 to 12/31/97) GROWTH FUND
AVERAGE ANNUAL
The The S&P 500 Morningstar's TOTAL RETURN
Highlands Composite Stock Average Growth
GROWTH FUND PRICE INDEX* MUTUAL FUND 1 YEAR
----------- ------------ ----------- 29.28%
$10,000 $10,000 $10,000
1988 $ 9,421 $11,661 $11,489 5 YEARS
1989 $10,380 $15,355 $14,651 13.35%
1990 $10,828 $14,876 $13,934
1991 $13,151 $19,410 $19,151 10 YEARS
1992 $13,987 $20,889 $20,835 10.10%
1993 $14,995 $22,991 $18,345
1994 $14,891 $23,294 $18,026
1995 $18,557 $32,037 $23,601
1996 $20,242 $39,388 $28,144
1997 $26,169 $51,599 $35,056
1997 IN REVIEW.
The total return of The Highlands Growth Fund was 29.28 percent during 1997.
This compares with the return of the average Growth Mutual Fund, as reported by
Morningstar, Inc., of 24.49 percent during 1997. The S&P 500 Composite Stock
Price Index provided a return of 33.35 percent during 1997.
The Highlands Growth Fund's performance during the first nine months of 1997 was
aided by a period of relatively consistent growth in the stock market,
particularly among the largest capitalization stocks. The performance of the
Fund during October, however, was adversely affected by the financial woes that
plagued Southeast Asian markets and prompted nervousness on Wall Street
sufficient to spark the largest daily point decline in stock market history.
Asian problems not only caused some direct markdowns from surprised investors,
but also prompted a flight to quality that benefited the bond market and
interest sensitive stocks like utilities. The twenty or so largest
capitalization stocks, which had accounted for so much of the market's gain
during the first half of the year, also benefited from the demand created by
investors seeking a haven from the volatility of the broader market. During late
November and into December, the Fund's performance improved as the stock market
rebounded from its October low.
The graph depicting the growth of $10,000 and the average annual total returns
for The Highlands Growth Fund are representative of past performance and are not
intended to indicate future performance.
*The returns of the various indexes are from the beginning or end of the month
nearest the Fund's inception to the end of the calendar year.
The index does not reflect the deduction of expenses associated with a mutual
fund, such as investment management and accounting fees. The Fund's performance
reflects the deduction of fees for these value added services.
11
<PAGE>
PAST PERFORMANCE OF PRIVATE ACCOUNTS OF
MR. GURNER AND SUBADVISER TO GROWTH STOCK PORTFOLIO
William L. Gurner, the President, Administrator and Portfolio Manager of
Sector Capital Management, L.L.C. ("Sector Capital"), served as Manager (Trust
Investments) for an employee benefit plan of a large corporation from September,
1987 through December, 1994. The following table sets forth Mr. Gurner's
performance from March 1, 1991 through December 31, 1994 (from September, 1987
until March 1, 1991, the employee benefit plan did not have investment
objectives, policies, strategies and risks similar to those of the Growth Stock
Portfolio and the Highlands Growth Fund) relating to the historical performance
of the employee benefit plan managed by Mr. Gurner and Sector Capital's
composite performance relating to the historical performance of private accounts
managed by the Subadviser from January 1, 1995 through December 31, 1996, that
have investment objectives, policies, strategies and risks substantially similar
to those of the Growth Stock Portfolio and The Highlands Growth Fund. Mr. Gurner
and Sector Capital engaged substantially the same Sector Advisers currently
engaged by the Growth Stock Portfolio to manage on a discretionary basis the
assets of the employee benefit plan and such private accounts. The data is
provided to illustrate the past performance of Mr. Gurner and Sector Capital in
managing substantially similar accounts as measured against specified market
indices and does not represent the performance of the Growth Stock Portfolio or
The Highlands Growth Fund. Investors should not consider this performance data
as an indication of future performance of the Growth Stock Portfolio or The
Highlands Growth Fund. Mr. Gurner and Sector Capital's composite performance
data shown below were calculated in accordance with recommended standards of the
Association for Investment Management and Research ("AIMR"*), retroactively
applied to all time periods. All returns presented were calculated on a total
return basis and include all dividends and interest, accrued income and realized
and unrealized gains and losses. All returns reflect the deduction of investment
advisory fees, brokerage commissions and execution costs paid by the employee
benefit plan and the private accounts without provision for federal or state
income taxes. Custodial fees, if any, were not included in the calculation.
Sector Capital's composite includes all actual, fee paying, discretionary,
private accounts managed by Sector Capital that have investment objectives,
policies, strategies and risks substantially similar to those of the Growth
Stock Portfolio and The Highlands Growth Fund. Securities transactions are
accounted for on the trade date and accrual accounting is utilized. Cash and
equivalents are included in performance returns. The yearly returns of Sector
Capital's composite combine the individual accounts' returns by asset-weighting
each individual account's asset value as of the beginning of each quarter. The
yearly returns are computed by geometrically linking the returns of each quarter
within the calendar year.
<PAGE>
The employee benefit plan managed by Mr. Gurner and the private accounts
that are included in Sector Capital's composite are not subject to the same
types of expenses to which the Growth Stock Portfolio or The Highlands Fund are
subject nor to the diversification requirements, specific tax restrictions and
investment limitations imposed on the Growth Stock Portfolio and The Highlands
Growth Fund by the Investment Company Act or Subchapter M of the Internal
Revenue Code. Consequently, the performance results for employee benefit plan
managed by Mr. Gurner and Sector Capital's composite could have been adversely
affected if the employee benefit plan and the private accounts included in the
composite had been regulated as investment companies under the federal
securities laws.
The investment results of Mr. Gurner and Sector Capital's composite
presented below are unaudited and not intended to predict or suggest the returns
that might be experienced by the Growth Stock Portfolio or an individual
investor investing in The Highlands GrowthFund. Investors should also be aware
that the use of a methodology different from that used below to calculate
performance could result in different performance data.
-----------------------
*AIMR is a non-profit membership and education organization with more than
60,000 members worldwide that, among other things, has formulated a set of
performance presentation standards for investment advisers. These AIMR
performance presentation standards are intended to (i) promote full and fair
presentations by investment advisers of their performance results, and (ii)
ensure uniformity in reporting so that performance results of investment
advisers are directly comparable.
PERFORMANCE
SECTOR CAPITAL
YEAR MR. GURNER MANAGEMENT, L.L.C. S&P 500(1)
- ---- ---------- ------------------ ----------
1991(2) 18.79% N.A. 16.66%
1992 8.26% N.A. 7.69%
1993 14.78% N.A. 10.00%
1994 0.97% N.A. 1.30%
1995 N.A. 45.79% 37.53%
1996 N.A. 26.27% 23.08%
(1) The S&P 500 Index is an unmanaged index containing common stocks of 500
industrial, transportation, utility and financial companies, regarded as
generally representative of the U.S. stock market. The Index reflects the
reinvestment of income dividends and capital gain distributions, if any, but
does not reflect fees, brokerage commissions, or other expenses of investing.
(2) Commencement of investment operations with regard to Mr. Gurner is March 1,
1991.
INVESTMENT OBJECTIVES AND POLICIES
The Trust offers five separate Funds. Each Fund and each Portfolio has its
own separate investment objectives and policies, as set forth below. Except as
otherwise expressly provided herein, these investment objectives and policies,
which are identical for a Fund and its corresponding Portfolio, are not
fundamental and may be changed by their respective Trustees without approval of
12
<PAGE>
a Fund's shareholders, or approval of a Portfolio's investors. No such change
would be made in a Fund, or Portfolio, without 30 days written notice to
shareholders.
The Trust seeks to achieve each Fund's investment objective by investing
all of its investable assets in a corresponding Portfolio. As a result, The
Highlands Growth Fund invests in the Growth Stock Portfolio, The Muirfield Fund
invests in the Mutual Fund Portfolio, The Total Return Utilities Fund invests in
the Utilities Stock Portfolio, The U.S. Government Bond Fund invests in the Bond
Portfolio and The Money Market Fund invests in the Money Market Portfolio. For
more information concerning the investment structure of each Fund investing its
assets in a corresponding Portfolio, see "Other Information--Investment
Structure."
Since the investment characteristics of each Fund will correspond directly
to those of the corresponding Portfolio, the following is a discussion of the
various investments of and techniques employed by each Portfolio. Additional
information about the investment policies of each Portfolio appears in the
Statement of Additional Information. There can be no assurance that the
investment objectives of any Portfolio will be achieved.
Each Portfolio, except the Money Market Portfolio, may invest in financial
futures contracts or related options as a hedge against changes, resulting from
market conditions, in the values of securities held or which these Portfolios
intend to purchase. These financial futures contracts for related options are
considered derivatives. The value of derivatives can be affected significantly
by even small market movements, sometimes in unpredictable ways. See "Additional
Investment Policies - Hedging Strategies."
THE GROWTH STOCK PORTFOLIO
(THE HIGHLANDS GROWTH FUND)
The Growth Stock Portfolio seeks capital growth by investing primarily 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"). Current income will not be a primary
objective. 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.
Common stocks are selected for the Portfolio 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 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 categorizes domestic publicly traded common stocks into a
specific industry sector.
<PAGE>
The total market value of the common stocks in each industry sector of the
S & P 500 is compared by the Subadviser 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 amount of assets in the Portfolio allocated to
that industry sector will be reallocated by the Subadviser. The Subadviser may
make a reallocation more frequently than monthly if it chooses to do so in its
sole discretion. Reallocations may result in additional transaction costs to the
extent that sales of securities as part of such reallocations result in higher
portfolio turnover.
Except as otherwise provided below, the assets of the Portfolio
representing each of these industry sectors are managed on a discretionary basis
by one or more separate investment advisers (the "Sector Advisers") selected by
the Subadviser, subject to the review and approval of the Board of Trustees of
the Portfolio.
Assets of the Portfolio representing each of the industry sectors are
managed by one or more Sector Advisers, except in the event a proposed
Sub-subadvisory Agreement is terminated leaving no Sector Adviser to manage the
assets of the Portfolio representing an industry sector, the Subadviser will,
upon termination and until a new Sector Adviser were selected, manage and
"index" the assets of the Portfolio representing the applicable 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 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.
Each Sector Adviser is limited to the list of companies identified by the
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.
Up to 20% of the Portfolio's assets may be invested in temporary
investments such as money market instruments, obligations issued or guaranteed
by the U.S. Government, its agencies and instrumentalities, and repurchase
agreements. See "Additional Investment Policies - Money Market Instruments and
Bonds." The Portfolio may purchase stock index futures contracts and related
options. See "Additional Investment Policies - Hedging Strategies." Up to 5% of
the total assets of the Portfolio may be invested in American Depositary
Receipts.
See the Fund's Statement of Additional Information for other details.
THE MUTUAL FUND PORTFOLIO
(THE MUIRFIELD FUND)
The investment objective of the Mutual Fund Portfolio is growth of capital.
The Portfolio will seek to attain its investment objective through investment in
the shares of open-end investment companies--commonly called mutual funds. Under
normal circumstances, at least 65% of the value of the Portfolio's total assets
13
<PAGE>
will be invested in mutual funds. The underlying mutual funds will consist of
diversified mutual funds which invest primarily in common stock or securities
convertible into or exchangeable for common stock (such as convertible preferred
stock, convertible debentures or warrants) and which seek long-term growth or
appreciation, with current income typically of secondary importance.
Underlying funds may include funds which concentrate investments in a
particular industry sector, or which leverage their investments. The Portfolio
will not invest in other Funds of the Flex-funds family of Funds or the
Flex-Partners family of funds, the corresponding portfolios of which are also
managed by the Investment Adviser.
The Portfolio will generally purchase "no-load" mutual funds, which are sold and
purchased without a sales charge. However, the Portfolio may purchase "load"
mutual funds only if the load, or sales commission, is by previous agreement
waived for purchases or sales made by the Portfolio.
The Portfolio may at times desire to gain exposure to the stock market
through the purchase of "Index" funds (funds which purchase stocks represented
in popular stock market averages) with a portion of its assets. "Index" funds
may be purchased with a portion of the Portfolio's assets at times when the
Investment Adviser's selection process identifies the characteristics of a
particular index to be more favorable than those of other mutual funds available
for purchase. If, in the Investment Adviser's opinion, the Portfolio should have
exposure to certain stock indices and the Portfolio can efficiently and
effectively implement such a strategy by directly purchasing the common stocks
of a desired index for the Portfolio itself, it may do so.
An investor in the Portfolio should recognize that he may invest directly
in mutual funds and that by investing in mutual funds indirectly through the
Portfolio, he will bear not only his proportionate share of the expenses of the
Portfolio (including operating costs and investment advisory and administrative
fees) but also indirectly similar expenses of the underlying mutual funds.
The Portfolio is an asset allocation fund. The Manager's tactical asset
allocation discipline, called "defensive investing," has addressed the asset
allocation decision by making shifts in the mix of stocks, bonds and cash in a
portfolio.
See the Fund's Statement of Additional Information for other details.
THE UTILITIES STOCK PORTFOLIO
(THE TOTAL RETURN UTILITIES FUND)
The investment objective of the Utilities Stock Portfolio is to seek a high
level of current income and growth of income by investing primarily in equity
securities of domestic and foreign public utility companies; however, the
Portfolio 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. There can be no
assurance that such objective will be achieved.
<PAGE>
The Portfolio seeks to achieve its objective 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 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. See "Investment Policies
and Limitations" in the Statement of Additional Information of the Total Return
Utilities Fund.
Investments are selected on the basis of fundamental analysis to identify
those securities that, in the judgment of the Subadviser, provide a high level
of current income and growth of income, and secondarily, capital appreciation,
but only when consistent with its primary investment objective.
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 objective.
The Subadviser emphasizes quality in selecting investments for the
Portfolio, and 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.
A change in prevailing interest rates is likely to affect the Portfolio's
net asset value because prices of debt securities and equity securities of
utility companies tend to increase when interest rates decline and decrease when
interest rates rise.
During periods when the Subadviser deems it necessary for temporary
defensive purposes, the Portfolio may invest without limit in high quality money
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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.
Except as otherwise expressly provided herein, all investment objectives
and policies stated throughout this prospectus are not fundamental and may be
changed without approval of the Fund's shareholders. No such change would be
made in the Fund without 30 days prior written notice to shareholders. The
Portfolio may not 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, 25% or more 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 25% or more of its total assets in securities of
public utility companies. The Portfolio may not, with respect to 75% of its
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.
The foregoing investment policies regarding concentration and diversification
are fundamental and may not be changed without shareholder approval. See
"Investment Policies and Limitations" in the Statement of Additional Information
of The Total Return Utilities Fund.
THE BOND PORTFOLIO (THE U.S. GOVERNMENT BOND FUND)
The investment objective of the Bond Portfolio is to maximize, consistent
with its permitted universe of investments, current income through investment in
securities which are issued, or guaranteed as to payment of principal and
interest, by the U.S. government or any of its agencies or instrumentalities.
Under normal circumstances, at least 65% of the value of the Bond Portfolio's
total assets will be invested in U.S. government debt securities.
The U.S. government securities in which the Bond Portfolio invests are
either issued or guaranteed by the U.S. government, its agencies, or
instrumentalities. These securities are limited to: (1) direct obligations of
the U.S. Treasury, such as U.S. Treasury bills, notes, and bonds; (2) notes,
bonds, and discount notes of U.S. government agencies or instrumentalities, such
as the: Farm Credit System, including the National Bank for Cooperatives, Farm
Credit Banks, and Banks for Cooperatives; Farmers Home Administration; Federal
Home Loan Banks; Federal Home Loan Mortgage Corporation; Federal National
Mortgage Association; Government National Mortgage Association; and Student Loan
Marketing Association; and (3) repurchase agreements relating to any of the
foregoing U.S. government securities.
Some obligations issued or guaranteed by agencies or instrumentalities of
the U.S. government, such as Government National Mortgage Association
participation certificates, are backed by the full faith and credit of the U.S.
Treasury. No assurance can be given that the U.S. government will provide
financial support to other agencies or instrumentalities, since it is not
obligated to do so. These agencies and instrumentalities are supported by: (1)
the issuer's right to borrow an amount limited to a specific line of credit from
the U.S. Treasury; (2) discretionary authority of the U.S. government to
purchase certain obligations of an agency or instrumentality; or (3) the credit
of the agency or instrumentality.
<PAGE>
The prices of U.S. government securities fluctuate inversely to the
direction of interest rates.
Repurchase agreements are arrangements in which banks, broker/dealers, and
other recognized financial institutions sell U.S. government securities to the
Bond Portfolio and agree at the time of sale to repurchase them at a mutually
agreed upon time and price. To the extent that the original seller does not
repurchase the securities from the Bond Portfolio, it could receive less than
the repurchase price on any sale of such securities.
The Bond Portfolio will invest in U.S. government securities of varying
maturities. Normally the average portfolio maturity will be approximately ten
years as long as the Investment Adviser believes interest rates are stable or
declining. The Bond Portfolio's assets will be invested in money market
instruments when the Investment Adviser believes an unstable or rising interest
rate trend is occurring. If the Investment Adviser believes that long-term
interest rates offer an abnormally high current return versus inflation, the
Bond Portfolio may be invested in U.S. government securities with maturities as
long as 30 years.
The Manager believes the appropriate way to defend assets against shifts in
interest rates is to be invested in long-term U.S. government securities only
when the trend of interest rates is stable or declining. To determine the U.S.
government securities market environment, the Manager monitors the following
technical indicators: (1) Momentum - the trend of U.S. government securities
prices versus various moving averages; (2) Real Rates - the 10-year treasury
bond yield as compared to the inflation rate; and (3) Yield Spread - the 10-year
treasury bond yield as compared to the T-bill yield.
Information concerning the selection of money market instruments is set
forth in the Trust's Statement of Additional Information.
THE MONEY MARKET PORTFOLIO
(THE MONEY MARKET FUND)
The investment objective of the Money Market Portfolio is current income
and stable asset values through investment in money market instruments. The
Portfolio will seek to maintain a constant net asset value of $1 per share,
although there is no assurance it will be able to do so. The Portfolio will seek
to achieve its objective by investing in a portfolio of high-quality money
market instruments which mature in 397 days or less. Further, the Portfolio will
seek to minimize changes in the value of its assets due to market factors by
maintaining a dollar-weighted average portfolio maturity of 90 days or less.
The Portfolio will value its securities by the amortized cost method, and
will normally include any accrued discount or premium in its daily dividend and
thereby keep constant the value of its assets and its net asset value per share.
This method does not take into account unrealized capital gains or losses.
Further, the Portfolio may change its average portfolio maturity or level
of quality to protect its and the Fund's net asset value when it is perceived
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<PAGE>
that changes in the liquidity of major financial institutions may adversely
affect the money markets. Consequently, for temporary defensive purposes the
Portfolio may shorten the average maturity of its investments and/or invest only
in the highest quality debt instruments, including, for example, U.S. Government
or Agency obligations.
The Portfolio will invest exclusively in money market instruments which are
deemed eligible securities pursuant to rules under the Investment Company Act
applying to money market funds. At least 95% of the Portfolio's assets will be
invested in securities defined by the rules as "first-tier" securities.
First-tier securities must have two quality ratings which are in the highest
rating category, or one if rated by only one organization.
Second-tier securities must have ratings in the highest two rating
categories and will be limited to a maximum of five percent of assets with each
position limited to $1,000,000 or 1% of assets. The Portfolio also intends to
comply with all other quality and credit quality monitoring criteria applying to
money market funds. The Portfolio will limit its purchases to U.S. government
securities and securities of its agencies and instrumentalities, bank
obligations and instruments secured thereby, high quality commercial paper, high
grade corporate obligations and repurchase agreements. Information concerning
specific quality criteria is set forth in the Fund's Statement of Additional
Information.
ADDITIONAL INVESTMENT POLICIES
THE GROWTH STOCK, MUTUAL FUND, BOND
AND MONEY MARKET PORTFOLIOS
The following is a discussion of the additional investment policies of the
Growth Stock, Mutual Fund, Bond and Money Market Portfolios. Discussion
concerning the additional investment policies of the Utilities Stock Portfolio
is set forth elsewhere in this prospectus. (See "Additional Investment Policies
- - The Utilities Stock Portfolio".)
MONEY MARKET INSTRUMENTS AND BONDS -- THE GROWTH STOCK, MUTUAL FUND AND MONEY
MARKET PORTFOLIOS
When investing in money market instruments or bonds, Growth Stock, Mutual
Fund and Money Market Portfolios will limit their purchases, denominated in U.S.
dollars, to the following securities:
o U.S. Government Securities and Securities of its Agencies and
Instrumentalities.
o Bank Obligations and Instruments Secured Thereby.
o High Quality Commercial Paper--The Growth Fund and Mutual Fund
Portfolios 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. The Money Market Portfolio is subject to specific and more
stringent quality criteria and diversification requirements. (See The
Money Market Portfolio above.)
<PAGE>
o Private Placement Commercial Paper--unregistered securities which are
traded in public markets to qualified institutional investors, such as
these three Portfolios. The Trustees have determined that each of
these three Portfolios may invest up to 35% of its assets, at cost on
the date of purchase, in private placement commercial paper.
o High Grade Corporate Obligations--obligations rated at least A by
Standard & Poor's or Moody's.
o Repurchase Agreements Pertaining to the Above--A Portfolio may invest
without limit in any of the above securities subject to repurchase
agreements with any Federal Reserve reporting dealer or member bank of
the Federal Reserve System. Repurchase agreements usually are for
short periods, such as one week or less, but could be longer. No
Portfolio will invest more than 10% of its assets, at time of
purchase, in repurchase agreements which mature in excess of seven
days or in other illiquid or not readily marketable securities.
MONEY MARKET INSTRUMENTS - THE BOND PORTFOLIO
When investing in money market instruments, The Bond Portfolio will limit
its purchases, denominated in U.S. dollars, to securities which are issued, or
guaranteed as to payment of principal and interest, by the U.S. government or
any of its agencies or instrumentalities. Unlike the other Portfolios, the Bond
Portfolio (whether invested defensively or otherwise) may not invest in bank
obligations and instruments secured thereby, high quality commercial paper,
private placement commercial paper or corporate obligations.
HEDGING STRATEGIES
Each Portfolio except the Money Market Portfolio may engage in hedging
transactions in carrying out their investment policies. A hedging program may be
implemented for the following reasons: (1) To protect the value of specific
securities owned or intended to be purchased while the Investment Adviser is
implementing a change in a specific Portfolio's investment position; (2) To
protect portfolio values during periods of extraordinary risk without incurring
transaction costs associated with buying or selling actual securities; and (3)
To utilize the "designated hedge" provisions of Sub-Chapter M of the Internal
Revenue Code as a permitted means of avoiding taxes that would otherwise have to
be paid on gains from the sale of portfolio securities.
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.
Derivatives are financial instruments whose performance is derived, at
least in part, from the performance of an underlying asset, security or index.
Accordingly, these financial futures contracts, related options, and forward
currency contracts used by a Portfolio to implement its hedging strategies are
considered derivatives. The value of derivatives can be affected significanatly
by even small market movements, sometimes in unpredictable ways. They do not
necessarily increase risk, and may in fact reduce risk.
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<PAGE>
Portfolios will not engage in transactions in financial futures contracts
or related options for speculation but only as a hedge against changes in the
market value of securities held in their portfolios, or which they intend to
purchase, and where the transactions are economically appropriate to the
reduction of risks inherent in the ongoing management of a Portfolio.
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
Flex-funds. 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 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.
A 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 Portfolios expect 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 guaranty that a
Portfolio will be able to realize this objective and, as noted below under "Risk
Factors," there are some risks in utilizing a hedging strategy.
RISK FACTORS
The Growth Stock, Mutual Fund and Bond Portfolios will be invested in
securities which fluctuate in market value, so net asset value per share will
fluctuate as well. When the Growth Stock Portfolio is invested in smaller
capitalization issues, it could be subject to wider price fluctuations than the
stock market as measured by popular market indices. The value of the Bond
Portfolio could fluctuate as interest rate levels change, i.e. it can go down if
interest rates increase and conversely its value can increase if interest rates
decline. The Mutual Fund Portfolio may have more than five percent of its assets
invested in one fund. If the underlying fund performs poorly, this could
negatively affect the value of the Mutual Fund Portfolio. Thus, there is no
guarantee that a shareholder will receive the full amount of his investment upon
the redemption of shares. The Portfolios do, however, seek to minimize the risk
of loss through diversification and, at times, the use of hedging techniques and
defensive investment strategies. Hedging involves risks which are not present in
some other mutual funds with similar objectives (See "Hedging Strategies.")
<PAGE>
Put and call option contracts involve some risk. For example, the total
premium paid for an option contract could be lost if the Portfolio does not sell
the contract or exercise the contract prior to its expiration date.
Futures contracts likewise involve some risk. It is possible that the
contract(s) selected by the Investment Adviser will not follow exactly the price
movement of the securities covered by the contract. If this occurs, the
objective of the hedging strategy may not be successful.
Although the Mutual Fund Portfolio will invest in a number of underlying
mutual funds, this practice will not eliminate investment risk. To the extent
that the Mutual Fund Portfolio invests in underlying funds which leverage
investments or concentrate investments in one industry, an investment in the
Mutual Fund Portfolio will indirectly entail the additional risks associated
with these practices. Leveraged mutual funds may have higher volatility than the
over-all market or other mutual funds. This may result in greater gains or
losses than the over-all market or other non-leveraged mutual funds. Mutual
funds which concentrate investments in a single industry lack normal
diversification and are exposed to losses stemming from negative industry-wide
developments.
The Investment Adviser exercises due care in the selection of a Portfolio's
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 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 Fund's shares.
Any of the Portfolios may invest in repurchase agreements with banks and
securities brokers and, except for The Bond Portfolio, in private placement
commercial paper.
All repurchase agreements entered into by a Portfolio will be fully
collateralized. The Portfolio's risk is that the seller may fail to repurchase
the security on the delivery date. If the seller defaults, the underlying
security constitutes collateral for the seller's obligation to pay. It is a
policy of the Portfolio to make settlement on repurchase agreements only upon
proper delivery of the underlying collateral. In the event of a bankruptcy or
other default of a seller of a repurchase agreement to the Portfolio, the
Portfolio could encounter delays and expenses in enforcing its rights and could
experience losses, including a decline in the value of the underlying securities
and loss of income. Repurchase agreements usually are for short periods, such as
one week or less, but could be longer.
Private placement commercial paper ("Rule 144A securities") consists of
unregistered securities which are traded in public markets to qualified
institutional investors, such as the Portfolios. A Portfolio's risk is that the
universe of potential buyers for the securities, should the Portfolio desire to
liquidate a position, is limited to qualified dealers and institutions, and
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<PAGE>
therefore such securities could have the effect of being illiquid.
The use of multiple Sector Advisers or the replacement of a Sector Adviser
may increase the Growth Stock Portfolio's portfolio turnover rate, realizations
or gains or losses, and brokerage commissions. High portfolio turnover may
involve correspondingly greater brokerage commissions and transaction costs,
which will be borne by the Growth Stock Portfolio and may result in increased
short-term capital gains which, when distributed to shareholders, are treated as
ordinary income. See "Income Dividends, Capital Gains, Distributions and Taxes."
PORTFOLIO TURNOVER
Because the Manager intends to employ flexible defensive investment
strategies in the Money Market, Bond and Mutual Fund Portfolios when market
trends are not considered favorable, the Manager may occasionally change the
entire portfolio in any, or several, of these Portfolios. 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.
The portfolio turnover rates for 1997 were as follows: the Growth Stock
Portfolio - 130%; the Mutual Fund Portfolio - 395%; and the Bond Portfolio -
376%.
ADDITIONAL INVESTMENT POLICIES
THE UTILITIES STOCK PORTFOLIO
The following is a discussion of the additional investment policies of the
Utilities Stock Portfolio.
MONEY MARKET INSTRUMENTS
When investing in money market instruments, the Portfolio will limit its
purchases, denominated in U.S. dollars, to the following securities:
o U.S. Government Securities and Securities of its Agencies and
Instrumentalities.
o Bank Obligations and Instruments Secured Thereby.
o 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.
o Private Placement Commercial Paper--unregistered securities which are
traded in public markets to qualified institutional investors, such as
the Portfolio.
o High Grade Corporate Obligations--obligations rated at least A by
Standard & Poor's or Moody's.
o Repurchase Agreements--see "Repurchase Agreements" below.
<PAGE>
At the discretion of the Subadviser, the Portfolio may employ the following
strategies in pursing its investment objective.
HEDGING STRATEGIES
Currency, Options and Futures Transactions. The Portfolio may use forward
currency contracts, futures contracts, options on securities or options on
futures contracts to implement strategies to attempt to hedge its portfolio,
i.e., reduce the overall level of investment risk normally associated with the
Portfolio. There can be no assurance that such efforts will succeed.
These techniques are described below and are further detailed in the
Statement of Additional Information for The Total Return Utilities Fund.
To attempt to hedge against adverse movements in exchange rates between
currencies, the Portfolio may enter into forward currency contracts for the
purchase or sale of a specified currency at a specified future date. Such
contracts may involve the purchase or sale of a foreign currency against the
U.S. dollar, or may involve two foreign currencies. The Portfolio may enter into
forward currency contracts either with respect to specific transactions or with
respect to the Portfolio's positions. For example, when the Portfolio
anticipates making a purchase or sale of a security, the Portfolio may enter
into a forward currency contract in order to set the rate at which a currency
exchange transaction related to the purchase or sale will be made. Further, when
the Subadviser believes that a particular currency may decline compared to the
U.S. dollar or another currency, the Portfolio may enter into a forward contract
to sell the currency the Subadviser expects to decline in an amount
approximating the value of some or all of the Portfolio's securities denominated
in a foreign currency. The Portfolio also may write covered call options and
purchase put and call options on currencies to hedge against movements in
exchange rates.
In addition, the Portfolio may write covered call options and purchase put
and call options on equity and debt securities to hedge against the risk of
fluctuations in the prices of securities held by the Portfolio or which the
Subadviser intends to include in the Portfolio. The Portfolio also may write
covered call options and buy put and call options on stock indexes. Such stock
index options serve to hedge against overall fluctuations in the securities
markets generally or in the utilities market sector specifically, rather than
anticipated increases or decreases in the value of a particular security.
Further, the Portfolio may sell stock index futures contracts and may
purchase put options or write covered call options on such futures contracts to
protect against a general stock market decline or a decline in the utilities
market sector that could adversely affect the Portfolio. The Portfolio also may
buy stock index futures contracts and purchase call options on such contracts to
hedge against a general stock market or market sector advance and thereby
attempt to lessen the cost of future securities acquisitions. The Portfolio may
use interest rate futures contracts and options thereon to hedge the debt
portion of the Portfolio against changes in the general level of interest rates.
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
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<PAGE>
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.
Although the Portfolio might not employ any of the foregoing strategies,
its use of forward currency contracts, options and futures would involve certain
investment risks and transaction costs to which it might not otherwise be
subject. These risks include: dependence on the Subadviser's ability to predict
movements in the prices of individual securities, fluctuations in the general
securities markets or in the utilities market sector and movements in interest
rates and currency markets; imperfect correlation between movements in the price
of currency, options, futures contracts or options thereon and movements in the
price of the currency or security hedged or used for cover; the fact that skills
and techniques needed to trade options, futures contracts and options thereon or
to use forward currency contracts are different from those needed to select the
securities in which the Portfolio invests; lack of assurance that a liquid
secondary market will exist for any particular option, futures contract or
option thereon at any particular time; and the possible need to defer closing
out of certain options, futures contracts and options thereon in order to
continue to qualify for the beneficial tax treatment afforded regulated
investment companies under the Internal Revenue Code of 1986, as amended (the
"Internal Revenue Code"). See "Distributions and Taxes" in the Statement of
Additional Information for The Total Return Utilities Fund.
Derivatives are financial instruments whose performance is derived, at
least in part, from the performance of an underlying asset, security or index.
Accordingly, these financial futures contracts, related options and forward
currency contracts 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. They do not
necessarily increase risk, and may in fact reduce risk.
SECURITIES LENDING
The Portfolio may lend its portfolio securities to brokers or dealers,
banks or other recognized institutional borrowers of securities, provided that
the borrower at all times maintains cash or equivalent collateral or secures a
letter of credit in favor of the Portfolio in an amount equal to at least 100%
of the market value of the securities loaned. 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.
<PAGE>
REPURCHASE AGREEMENTS
The Portfolio may enter into repurchase agreements whereby the seller of a
security agrees to repurchase that security from the Portfolio at a mutually
agreed-upon time and price. The repurchase date is usually within a day or two
of the original purchase, although it may not be for a number of months. The
resale price is in excess of the purchase price, reflecting an agreed-upon rate
of return effective for the period of time the Portfolio's money is invested in
the security. 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.
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 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.
BORROWING
The Portfolio may borrow an amount up to 33-1/3% of the value of its total
assets (calculated when the loan is made) from banks for temporary or emergency
purposes. The Portfolio may pledge up to 33-1/3% of its assets to secure such
borrowings. The Portfolio may borrow from banks or from other funds or
portfolios advised by the Manager, or through reverse repurchase agreements.
However, the Portfolio will not purchase portfolio securities if borrowings
exceed 5% of the Portfolio's total assets.
If the Portfolio borrows money, the Fund's share price may be subject to
greater fluctuation until the borrowing is paid off.
RISK FACTORS
By itself, the Portfolio does not constitute a balanced investment plan;
the Portfolio seeks a high level of current income and growth of income with
capital appreciation as a secondary objective. The Portfolio invests primarily
in common stock, preferred stock and securities convertible into common or
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<PAGE>
preferred stock. Changes in interest rates may also affect the value of the
Portfolio's investments, and rising interest rates can be expected to reduce the
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 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 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 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.
In addition, the Portfolio may invest in 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 Portfolio desire to liquidate a position, is limited
to qualified dealers and institutions, and therefore such securities could have
the effect of being illiquid.
The Subadviser intends to manage the Portfolio actively in pursuit of its
investment objective. The Portfolio does not expect to trade in securities for
short-term profits but, when circumstances warrant, securities may be sold
without regard to the length of time held.
<PAGE>
PORTFOLIO TURNOVER
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. The Portfolio had a portfolio turnover rate of 41% in 1997.
THE TRUST AND ITS MANAGEMENT
The Trust was organized as a Massachusetts business trust on December 31,
1991 as the successor to a Pennsylvania business trust organized on April 30,
1982. Each of its five constituent funds is a diversified open-end management
company. The business and affairs of the Trust are under the direction of its
Board of Trustees.
The Trust has no investment adviser because the Trust seeks to achieve the
investment objective of each Fund by investing each Fund's assets in the
corresponding Portfolio. Each Portfolio has retained the services of R. Meeder &
Associates, Inc. as investment adviser.
R. Meeder & Associates, Inc. (the "Manager"), has been an investment
adviser to individuals and retirement plans since 1974. The Manager served as
the Trust's investment adviser from its inception in 1982 until May of 1992, at
which time the investment by the Funds in the Portfolios was implemented. The
Manager serves the Portfolios pursuant to Investment Advisory Contracts under
the terms of which it has agreed to provide an investment program within the
limitations of each Portfolio's investment policies and restrictions, and to
furnish all executive, administrative, and clerical services required for the
transaction of Portfolio business, other than accounting services and services
which are provided by each Portfolio's custodian, transfer agent, independent
accountants, legal counsel and investment advisory services provided by any
subadviser.
The Manager was incorporated in Ohio in 1974 and maintains its principal
offices at 6000 Memorial Drive, Dublin, OH 43017. The Manager is a wholly-owned
subsidiary of Muirfield Investors, Inc. ("MII"). MII is controlled by Robert S.
Meeder, Sr. through ownership of voting common stock. MII 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 earns an annual fee, payable in monthly installments, as
follows: The fee for each of the Growth Stock, Mutual Fund and Utilities Stock
Portfolios 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 that Portfolio's average net
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assets. These fees are higher than the fees charged to most other investment
companies. The fee for the Bond Portfolio is at the rate of 0.40% of the first
$100 million and 0.20% in excess of $100 million, of average net assets. The fee
for the Money Market Portfolio is at the rate of 0.40% of the first $100 million
and 0.25% in excess of $100 million, of average net assets.
The Manager presently intends to waive a portion of its management fees for
the Bond and Money Market Portfolios, but may change this policy at any time
without notice to shareholders. For planning purposes prospective investors and
shareholders should assume that expenses will be based on the maximum fees. (See
footnotes to "Synopsis of Financial Information.")
Accounting, stock transfer, dividend disbursing, and shareholder services
are provided to each Fund and Portfolio by Mutual Funds Service Co., 6000
Memorial Drive, Dublin, Ohio 43017, a wholly-owned subsidiary of MII. The
minimum annual fee for accounting services for the Growth Stock, Mutual Fund,
Utilities Stock and Bond Portfolios is $7,500. The minimum annual fee for the
Money Market Portfolio is $30,000. Subject to the applicable minimum fee, each
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 each Portfolio's average net assets.
Subject to a $4,000 annual minimum fee, The Highlands Growth, Muirfield and
Total Return Utilities Funds incur the greater of $15 per shareholder account or
0.10% of each Fund's average net assets, payable monthly, for stock transfer and
dividend disbursing services. In The U.S. Government Bond Fund, this annual fee
is the greater of $15 per shareholder account or 0.06% of the Fund's average net
assets. The fee for The Money Market Fund is the greater of $20 per shareholder
account or 0.06% of the Fund's average net assets.
Mutual Funds Service Co. also serves as Administrator to the Trust.
Services provided to the Trust include coordinating and monitoring any third
party services to the Trust; providing the necessary personnel to perform
administrative functions for the Trust, assisting in the preparation, filing and
distribution of proxy materials, periodic reports to Trustees and shareholders,
registration statements and other necessary documents. Each Fund incurs an
annual fee, payable monthly, of 0.05% of each Fund's average net assets. These
fees are reviewable annually by the respective Trustees of the Trust and the
Portfolio. For the year ended December 31, 1997, total payments to Mutual Funds
Service Co. amounted to $574,608 for all of the Funds and Portfolios.
SUBADVISER - UTILITIES STOCK PORTFOLIO
Miller/Howard Investments, Inc. ("Miller/Howard"), 141 Upper Byrdcliffe
Road, P. O. Box 549, Woodstock, New York 12498, serves as the Utilities Stock
Portfolio's subadviser under an Investment Subadvisory Agreement between the
Manager and Miller/Howard. Miller/Howard furnishes investment advisory services
in connection with the management of the Utilities Stock Portfolio. The Manager
continues to have responsibility for all investment advisory services in
accordance with the investment advisory agreement and supervises Miller/Howard's
performance of such services.
<PAGE>
Miller/Howard, a Delaware corporation, is a registered investment adviser
which 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 December 31, 1997, Miller/Howard
held discretionary investment authority over approximately $103 million of
assets. Miller/Howard is controlled by Lowell Miller through ownership of voting
common stock. Lowell Miller, a director and the President of Miller/Howard, is a
Trustee of the Portfolios, a Vice President and Trustee of the Trust and The
Flex-Partners, mutual funds whose corresponding portfolios are also advised by
the Manager, and such portfolios.
SUBADVISER - GROWTH STOCK PORTFOLIO
Sector Capital Management, L.L.C. ("Sector Capital"), 5350 Poplar Avenue,
Suite 490, Memphis, Tennessee 38119, serves as the Growth Stock Portfolio's
subadviser under an Investment Subadvisory Agreement among the Growth Stock
Portfolio, the Manager and Sector Capital. Sector Capital furnishes investment
advisory services in connection with the management of the Growth Stock
Portfolio.
The Manager and Sector Capital have the ultimate responsibility for the
investment performance of the Growth Stock Portfolio due to the Manager'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 is a Georgia limited liability company that 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 December 31, 1997, Sector Capital held discretionary
investment authority over approximately $350 million of assets. Sector Capital
is controlled by William L. Gurner and John K. Donaldson. Mr. Gurner 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 Growth Stock Portfolio on behalf of Sector Capital. Mr. Gurner
has been associated with Sector Capital since its inception in January, 1995.
Mr. Gurner, President, Administrator, Manager and a Member of Sector Capital, is
a Trustee of the Portfolios, the Trust, and The Flex-Partners, mutual funds
whose corresponding portfolios are also advised by the Manager, and such
portfolios.
Sector Capital and the Growth Stock Portfolio have entered into a
Sub-subadvisory Agreement with each Sector Adviser selected for the Portfolio.
It is Sector Capital's responsibility to select, subject to the review and
approval of the Growth Stock Portfolio's Board of Trustees, the Sector Advisers
who have distinguished themselves by able performance in respective areas of
expertise in sector management and to review their continued performance. In
addition, it is the Sector Capital's responsibility to categorize 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.
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Subject to the supervision and direction of the Growth Stock Portfolio's
Board of Trustees, Sector Capital provides to the Growth Stock Portfolio
investment management evaluation services principally by performing initial due
diligence on prospective Sector Advisers for the Growth Stock Portfolio and
thereafter monitoring Sector Adviser performance through quantitative and
qualitative analysis as well as periodic in-person, telephonic and written
consultations with Sector Advisers. In evaluating prospective Sector Advisers,
Sector Capital considers, among other factors, each Sector Adviser'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 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.
Sector Capital pays each Sector Adviser 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 Growth Stock Portfolio assigned by Sector Capital to
the Sector Adviser at an annual rate equal to 0.25%.
Investors should be aware that Sector Capital may be subject to a conflict
of interest when making decisions regarding the retention and compensation of
particular Sector Advisers. However, Sector Capital'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 Sector Capital 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.
While the investment professionals of Sector Capital have experience in
asset management and the selection of investment advisers, prior to Sector
Capital becoming the subadviser to the Growth Stock Portfolio, on December 31,
1996, it did not have previous experience in providing investment advisory
services to an investment company.
The Growth Stock Portfolio has received an exemptive order from the
Securities and Exchange Commission (the "SEC") which permits the Growth Stock
Portfolio and Sector Capital to enter into and materially amend Investment
Sub-subadvisory Agreements with Sector Advisers without such agreements being
approved by the Growth Stock Portfolio's investors or the Fund's shareholders
except for Investment Sub-subadvisory Agreements with an affiliated person 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. The exemptive order also permits the Growth Stock Portfolio and
the Fund to disclose, on an aggregate basis, the fees paid to Sector Advisers
<PAGE>
who 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 Investment
Sub-subadvisory Agreement. Any changes to the Investment Advisory Contract
between the Growth Stock Portfolio and the Manager or the Investment Subadvisory
Agreement among the Growth Stock Portfolio, Manager and Sector Capital will
still require shareholder approval. A majority of the shareholders of The
Highlands Growth Fund approved the operation of the Trust in accordance with the
exemption.
SECTOR ADVISERS - GROWTH STOCK PORTFOLIO
The Sector Advisers have agreed to an investment advisory fee based on the
average net assets of the Growth Stock Portfolio assigned to them by the
Subadviser at an annual rate equal to .25%, which is generally lower than the
fees they charge to institutional accounts for which they serve as investment
adviser, and for which they perform all administrative responsibilities.
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 managing its portion of the securities held by
the Growth Stock Portfolio in accordance with the Portfolio's stated investment
objective and policies, making investment decisions for the Growth Stock
Portfolio and 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 which 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
December 31, 1997, Miller/Howard held discretionary investment authority over
approximately $103 million of assets. Lowell G. Miller and Helen Hamada who are,
respectively, Miller/Howard's President, Secretary and a director and its Vice
President, Treasurer and a director, each owns more than 10% of the outstanding
voting securities of Miller/Howard. Mr. Miller controls Miller/Howard through
stock ownership. Miller/Howard is also the subadviser to the Utilities Stock
Portfolio, a corresponding portfolio to The Flex-funds' Total Return Utilities
Fund and The Flex-Partners' Utility Growth Fund. 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. Mr. Miller is a Trustee of the Trust,
the Portfolios, and The Flex-Partners, mutual funds whose corresponding
portfolios are also advised by the Manager and such portfolios. 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
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adviser which 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 December 31,
1997, Hallmark held discretionary investment authority over approximately $145
million of assets. Peter S. Hagerman, Katherine A. Skwieralski, and Jeffrey P.
Braff each own more than 10% of the outstanding voting securities of Hallmark.
Mr. Hagerman, Chairman of the Board, President, and Chief Executive Officer,
Thomas S. Moore, Senior Vice President and Chief Investment Officer, and Kathryn
A. Skwieralski, Senior Vice President, Treasurer, Chief Financial and
Administrative Officer, are the directors of Hallmark. 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 which has been providing investment services
to banks; investment companies; pension and profit sharing plans; charitable
organizations and corporations since 1979. As of December 31, 1997, Barrow held
discretionary investment authority over approximately $28.8 billion of assets.
Barrow is a wholly-owned subsidiary of United Asset Management. Bryant M.
Hanley, Jr., President and Chief Executive Officer, is the sole director of
Barrow. Michael C. Mewhinney is the portfolio manager primarily responsible for
the day-to-day management of those assets of the Growth Stock Portfolio
allocated to Barrow. Mr. Mewhinney has been associated with Barrow since 1979.
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 which 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 December
31, 1997, The Mitchell Group held discretionary investment authority over
approximately $315 million of assets. Rodney Mitchell, President, Chief
Executive Officer, Chief Financial Officer and sole director, 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.
<PAGE>
ASHLAND MANAGEMENT INCORPORATED serves as Sector Adviser to the materials
and services sector of the Growth Stock Portfolio. Ashland is a registered
investment adviser which has been providing investment services to individuals,
pension and profit sharing plans, charitable organizations, corporations and
other institutions since 1975. As of December 31, 1997, Ashland managed accounts
having a value of approximately $1.3 billion. Charles C. Hickox, Chairman of the
Board, Chief Executive Officer and a director, and Parry v.S. Jones, President,
Chief Operating Officer and a director, each owns more than 10% of the
outstanding voting securities of Ashland. Terrence J. McLaughlin, Managing
Director of Ashland and Deborah C. Ohl, a Portfolio Management Associate, 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 associated with Ashland since 1984. Ms. Ohl has been employed by
Ashland since August, 1992 and has served as a Portfolio Management Associate
for Ashland since 1993. From May, 1991 until July, 1992, Ms. Ohl was a research
and sales assistant with Kidder, Peabody & Co., Incorporated. Ashland's
principal executive offices are located at 26 Broadway, New York, New York
10004.
SCUDDER KEMPER INVESTMENTS, INC. serves as Sector Adviser to the finance
sector of the Growth Stock Portfolio. Scudder Kemper is a registered investment
adviser which has been providing investment services to individuals, banks,
investment companies, pension and profit sharing plans, charitable
organizations, corporations and other institutions for more than seventy years.
As of January 31, 1998, Scudder Kemper held discretionary investment authority
over approximately $210 billion of assets. Scudder Kemper is approximately 70%
owned by Zurich Insurance Company, with the balance owned by Scudder Kemper's
officers and employees. Thaddeus G. Paluszek is the portfolio manager primarily
responsible for the day-to-day management of those assets of the Growth Stock
Portfolio allocated to Scudder Kemper. Mr. Paluszek is Vice President of Scudder
Kemper and has been associated with Scudder Kemper since 1993. Scudder Kemper's
principal executive offices are located at 345 Park Avenue, New York, NY 10017.
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, with approximately $30.0 billion of assets under
management as of December 31, 1997. Dresdner RCM was established in April 1996,
as the successor to the business and operations of RCM Capital Management, a
California Limited Partnership, which, with its predecessors, has been in
operation since 1970. Dresdner RCM is a wholly-owned subsidiary of Dresdner Bank
AG, an international banking organization with principal executive offices in
Frankfurt, Germany. The Board of Managers of Dresdner RCM is comprised of
William L. Price, Chairman of the Board, Chief Investment Officer and Principal
of Dresdner RCM, Michael J. Apatoff, President and Principal of Dresdner RCM,
Gerhard Eberstadt, Senior Chairman of Dresdner, George N. Fugelsang, Senior
General Manager of Dresdner, Joachim Madler, Director of Dresdner, Luke D.
Knecht, Senior Vice President of Dresdner RCM, Jeffrey S. Rudsten, Principal of
Dresdner RCM, William S. Stack, Principal of Dresdner RCM, and Kenneth B.
Weeman, Jr., Principal and Head of Equity Trading of Dresdner RCM. 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
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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.
Banking laws and regulations, including the Glass-Steagall Act as presently
interpreted by the Board of Governors of the Federal Reserve System, prohibit
certain banking entities, such as Dresdner RCM, from sponsoring, organizing,
controlling or distributing the shares of a registered investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from underwriting securities. However, banks and their affiliates generally can
act as an adviser (or sub-subadviser) to an investment company and can purchase
shares of an investment company as agent for and upon the order of customers.
Dresdner RCM believes that it may perform the services contemplated by the
investment management agreement without violating these banking law regulations.
However, future changes in legal requirements relating to the permissible
activities of banks and their affiliates at will as future interpretations of
current requirements, could prevent Dresdner RCM from continuing to perform
investment management services for the Growth Stock Portfolio.
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 December 31, 1997 totaling approximately $218.7 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-UAP, a French insurance
holding company. 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
fourteen 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.
The Manager, the subadvisers or the Sub-subadvisers may take into account
sales of shares of the Funds and other funds advised by the Manager in selecting
broker-dealers to effect portfolio transactions on behalf of the Portfolios.
A Portfolio may effect portfolio transactions with or through the Manager,
Sector Capital or the Sector Advisers, or their affiliates, when the Manager,
Sector Capital or the Sector Advisers, as appropriate, determine that a
Portfolio will receive the best net price and execution. This standard would
allow the Manager, Sector Capital or the Sector Advisers, or their affiliates,
to receive no more than the remuneration that would be expected to be received
by an unaffiliated broker in a commensurate arm's-length transaction.
A broker-dealer, including the Manager's affiliate, Adviser Dealer
Services, Inc., may use a portion of the commissions paid by a Portfolio to
reduce the Portfolio or its corresponding Fund's expenses.
<PAGE>
Information concerning the Trustees and officers of both the Trust and the
Portfolios appears in the Statement of Additional Information.
PORTFOLIO MANAGERS
The individuals primarily responsible for the management of each of the
Portfolios are listed below:
Robert S. Meeder, Jr. and Philip A. Voelker are the portfolio managers
primarily responsible for the day-to-day management of the Mutual Fund
Portfolio. Mr. Meeder is a Trustee and Vice President of The Flex-funds, Trustee
and Vice President of the Mutual Fund Portfolio and President/Portfolio Manager
of R. Meeder & Associates, Inc. Mr. Meeder has been associated with the Manager
since 1983 and has managed the Portfolio since 1988.
In addition, Mr. Voelker is primarily responsible for the day-to-day
management of the Money Market Portfolio. Mr. Voelker is also primarily
responsible for managing the liquidity reserve of the Growth Stock Portfolio and
managing the futures contracts and related options of the Growth Stock Portfolio
on behalf of the Manager. Mr. Voelker is a Vice President and Trustee of the
Portfolios, Vice President of The Flex-funds and Senior Vice President of the
Manager. Mr. Voelker has been associated with the Manager since 1975, has
managed the Money Market Portfolio since 1985 and began co-managing the Mutual
Fund Portfolio on April 30, 1998.
Lowell G. Miller is the portfolio manager primarily responsible for the
day-to-day mangement of the Utilities Stock Portfolio. Mr. Miller is a director
and the President of the Subadviser. Mr. Miller has been associated with
Miller/Howard since 1984, has managed the Utilities Stock Portfolio since its
inception in 1995 and controls Miller/Howard through ownership of voting common
stock.
Joseph A. Zarr is the portfolio manager primarily responsible for the
day-to-day management of the Bond Portfolio. Mr. Zarr was the portfolio manager
of the Short-Term Global Portfolio from May of 1992 until May of 1996. Mr. Zarr
is also a portfolio manager for the Manager. He has been associated with the
Manager since 1991 and has managed the Bond Portfolio since 1996. Mr. Zarr has
been a licensed stockbroker since 1978.
William L. Gurner is primarily responsible for the day-to-day management of
the Growth Stock Portfolio through interaction with each of the Sector Advisers
and has managed the Growth Stock Portfolio since December 31, 1996. Mr. Gurner
is also primarily responsible for managing the futures contracts and related
options of the Growth Stock Portfolio on behalf of Sector Capital. Mr. Gurner
has been associated with Sector Capital since its inception in January, 1995.
Mr. Gurner, President, Administrator, Manager and a Member of Sector Capital, is
a Trustee of the Portfolios, the Trust and The Flex-Partners, mutual funds whose
corresponding portfolios are also advised by the Manager, and such Portfolios.
GROWTH STOCK PORTFOLIO TRANSACTION POLICIES
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
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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. See "Portfolio Turnover" above and in the Statement of Additional
Information. In addition, high portfolio turnover may result in increased
short-term capital gains, which, when distributed to shareholders, are treated
as ordinary income. See "Income Dividends, Capital Gains, Distributions and
Taxes."
DISTRIBUTION PLANS
The Trust has adopted distribution expense plans (the "Plans") which
authorize each Fund to bear a portion of the expense of any activity which is
primarily intended to result in the sale of Fund shares. The Plans permit, among
other things, payment for distribution in the form of commissions and fees,
advertising, the services of public relations consultants, and direct
solicitation. Possible recipients include securities brokers, attorneys,
accountants, investment advisers, investment performance consultants, pension
actuaries, banks, and service organizations, all of them being hereafter
referred to as "Consultants."
The Trust may expend in the Highlands Growth, Muirfield, U.S. Government
Bond and Money Market Funds as much as, but not more than, 2/10 of 1% of each
Fund's average net assets annually pursuant to the Plans. In the Total Return
Utilities Fund, the Trust may expend up to 25/100 of 1% of the Funds average net
assets.
Each Plan was approved by the Board of Trustees, who made a determination
that there is a reasonable likelihood that the Plans will benefit the Trust.
The Trust has entered into agreements whereby Consultants (including two
Trustees of the Portfolios) are paid for their assistance in explaining and
interpreting the Trust, its investment objectives and policies, and its
retirement plans, to their clients. Under these agreements, Consultants are paid
quarterly compensation by the Trust on the average value of shares held by their
clients. Although the compensation is thus seen to be continuing, the Trust
retains the right to terminate any Consultant's agreement on 60 days' notice,
without further obligation beyond the date of termination.
<PAGE>
Although the objective of the Trust is to pay Consultants for a portion of
the expenses they incur, and to provide them with some incentive to be of
assistance to the Trust and its shareholders, no effort has been made to
determine the actual expenses incurred by Consultants. If any Consultant's
expenses are in excess of what the Trust pays, such excess will not be paid by
the Trust. Conversely, if the Consultant's expenses are less than what the Trust
pays, the Consultant is not obligated to refund the excess, and this excess
could represent a profit for the Consultant.
Total payments made under each Plan in 1997, as a percentage of average net
assets, amounted to 0.20% in The Highlands Growth Fund; 0.19% in The Muirfield
Fund; 0.25% in The Total Return Utilities Fund; 0.17% in The U.S. Government
Bond Fund; and 0.08% in The Money Market Fund. (See "Synopsis of Financial
Information.")
INCOME DIVIDENDS, CAPITAL GAINS, DISTRIBUTIONS, AND TAXES
THE HIGHLANDS GROWTH FUND, THE MUIRFIELD FUND, THE U.S. GOVERNMENT
BOND FUND AND THE MONEY MARKET FUND
It is the policy of the Trust to distribute substantially all of its net
income. A Fund's net income consists of the income it earns from its investment
in the corresponding Portfolio, less expenses. Each Fund also intends to
distribute its net capital gains, if any, to its shareholders annually.
In The U.S. Government Bond Fund, net income is calculated daily and
declared as a dividend to shareholders of record at the close of the previous
business day. In The Money Market Fund, net income is calculated daily and
declared as a dividend to shareholders of record at the close of the previous
business day, and to the holders of shares purchased that same day prior to 3:00
p.m., with one exception. If a shareholder requests a redemption and the request
is received by 3:00 p.m., then the shares so redeemed that day will not be paid
that day's dividend. Net income earned by these two Funds on a weekend or a
holiday is declared as a dividend on Friday or the day prior to the holiday. All
such dividends of net income are automatically reinvested in additional shares
at the net asset value on the last business day of each month. A shareholder may
elect to receive such dividends in cash either by checking the appropriate box
on the New Account Application, or by notifying the Trust in writing. If the
entire account of a shareholder is withdrawn, all dividends accrued at the time
of withdrawal will be paid at that time.
The Highlands Growth and Muirfield Funds declare and pay dividends from net
investment income, if any, on a quarterly basis.
The Internal Revenue Code of 1986 imposes on the Trust a nondeductible
excise tax unless the Trust distributes annually at least 98% of its net
investment income earned during the calendar year, at least 98% of capital gain
net income realized in the 12 months preceding October 31, and any undistributed
balances from the previous year. In addition, the Tax Reform Act of 1986 (the
"Tax Act") provides that any dividend declared by a Fund in October, November,
or December and paid in January will be deemed to have been paid by the Fund and
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to have been received by each shareholder in December. Distribution dates and
the amounts paid, if any, are subject to determination by the Board of Trustees.
Dividends and capital gains distributions are ordinarily taxable to
shareholders in the year distributed. However, under the Tax Act, the Trust is
permitted to make distributions up to February 1 and have them apply to the
previous tax year. The Trust expects to make such a distribution in The
Muirfield Fund in future years.
A shareholder is taxed on capital gains and income realized by the Trust,
regardless of the length of time he has been a shareholder. Thus a shareholder
may receive capital gains distributions shortly after purchasing shares, and
this will reduce the market value of the shares by the amount of the
distribution. The shareholder will not be able to recognize the resultant loss
in value for tax purposes until the shares are sold at a later date. In the case
of some mutual funds this effect can be substantial. In the case of The
Muirfield and U.S. Government Bond Funds, each of which frequently liquidates
its portfolio for defensive purposes and therefore tends not to realize large
capital gains accumulated over a long period of time, the effect is not expected
to be substantial.
Dividends and capital gains distributions are taxable to the shareholder
whether received in cash or reinvested in additional shares. Shareholders not
otherwise subject to tax on their income will not be required to pay tax on
amounts distributed to them. Each Shareholder will receive a statement annually
informing him of the amount of the income and capital gains which have been
distributed during the calendar year.
The Trust files federal income tax returns for each of the Funds. Each Fund
is treated as a separate entity for federal income tax purposes. The Trust also
intends to comply with Subchapter M of the Internal Revenue Code, which imposes
such restrictions as (1) appropriate diversification of its portfolio of
investments, and (2) realization of 90% of its annual gross income from
dividends, interest, and gains from the sale of securities. A Fund might deviate
from this policy, and incur a tax liability, if this were necessary to fully
protect shareholder values. The Trust qualified as a "regulated investment
company" for each of the last fifteen fiscal years.
The foregoing discussion of taxes is limited to federal income taxes.
Distributions, whether in cash or in kind may be subject to state and local
taxes. Shareholders are urged to consult their tax advisers regarding specific
questions relating to federal, state, and local taxes.
The Trust is required to withhold and remit to the federal government 31%
of any reportable payments (which may include dividends, capital gains
distributions, if any, and redemptions) paid to certain shareholders. In order
to avoid this withholding requirement, each shareholder must certify on the New
Account Application that the social security or taxpayer identification number
is correct and that the shareholder is not currently subject to backup
withholding or is exempt from backup withholding. The Trust may refuse to sell
shares to investors who have not complied with these requirements, either before
or at the time of purchase. Until we receive your certified TIN, we may redeem
your shares at any time.
<PAGE>
INCOME DIVIDENDS, CAPITAL GAINS, DISTRIBUTIONS, AND TAXES
THE TOTAL RETURN UTILITIES FUND
DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
The Total Return Utilities Fund's dividends, if any, are distributed at the
end of the month and declared payable to shareholders on the last business day
of the month 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 Internal Revenue Code. Net long-term capital gains, if any, also are
declared and distributed in December.
DISTRIBUTION OPTIONS.
You may choose to receive dividends and capital gain distributions in cash
or to reinvest them in additional shares. Please indicate your choice on your
New Account Application or contact the Transfer Agent. If you elect to receive
dividends or capital gain distributions in cash and the U.S. Postal Service
returns your checks to us, the checks will be reinvested in your account at the
Fund's then-current net asset value. Until we receive instructions to the
contrary, subsequent distributions will be reinvested in your account. In
addition, we may reinvest, at the Fund's then-current net asset value, any
distribution checks that remain uncashed for six months.
TAXES.
The Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code by distributing all, or substantially
all, of its net investment income and net realized capital gains to shareholders
each year.
The Fund's dividends and capital gain distributions are subject to federal
income tax whether they are received in cash or reinvested in additional shares.
Distributions declared in December and paid in January of the following year are
taxable as if they were paid on December 31.
Dividends from net investment income (including net short-term capital
gains, if any) are taxable as long-term capital gains, regardless of how long
you have held your shares.
A portion of the Fund's dividends may qualify for the dividends-received
deduction available to corporations. The Fund will send you a tax statement by
January 31 showing the tax status of distributions you received in the previous
year and will file a copy with the IRS.
You may realize a capital gain or loss when you redeem (sell) or exchange
shares of the Fund. For most types of accounts, the proceeds from your
redemption transactions will be reported to you and the IRS annually. However,
because the tax treatment depends on your purchase price and personal tax
position, you should keep your regular account statements to use in determining
your taxes.
"BUYING A DIVIDEND".
Although it is less likely with a fund such as the Total Return Utilities
Fund, which pays monthly dividends, the timing of your investment could have
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undesirable tax consequences.
If you opened a new account or bought more shares for your current account
just before the day a dividend or capital gain distribution was reflected in the
Fund's share price, you would receive a portion of your investment back as a
taxable distribution. This practice is sometimes referred to as "buying a
dividend."
BACKUP WITHHOLDING.
The Fund is required by federal law to withhold 31% of reportable
dividends, capital gain distributions, or redemptions payable to shareholders
who have not complied with IRS regulations. To avoid this withholding
requirement, you must certify on your account application (or on IRS Form W-9)
that your social security or taxpayer identification number (TIN) is correct and
that you are not subject to back-up withholding for previous under-reporting to
the IRS, or that you are exempt from backup withholding.
The Fund may refuse to sell shares to investors who have not complied with
these requirements either before or at the time of purchase. Until we receive
your certified TIN, we may redeem your shares in the Fund at any time.
HOW NET ASSET VALUE IS DETERMINED
Except in The U.S. Government Bond Fund, net asset value per share (the
price at which shares are purchased and redeemed) is determined at each closing
of the New York Stock Exchange each day the Exchange is open for business and
each other day during which there is a sufficient degree of trading that the
current net asset value of a Fund's shares might be materially affected by
changes in the value of the securities held by a Fund's corresponding Portfolio.
In The U.S. Government Bond Fund, the net asset value per share will be
calculated each such day on the basis of portfolio values at 3:00 p.m. Eastern
time. The U.S. Government Bond and Money Market Fund shares will not be priced
on Good Friday or on any holiday observed by the Federal Reserve system. These
presently include New Year's Day, Martin Luther King Day, President's Day,
Memorial Day, Independence Day, Columbus Day, Veterans Day, Thanksgiving Day and
Christmas Day. Net asset value is obtained by dividing the value of a Fund's
assets (i.e., the value of its investment in the corresponding Portfolio and
other assets), less liabilities, by the total number of its shares of beneficial
interest outstanding at the time.
PERFORMANCE INFORMATION--
THE HIGHLANDS GROWTH FUND, THE MUIRFIELD FUND, THE U.S.
GOVERNMENT BOND FUND AND THE MONEY MARKET FUND
The following is a discussion of performance information relating to The
Highlands Growth, Muirfield, U.S. Government Bond and Money Market Funds.
Discussion concerning performance information relating to The Total Return
Utilities Fund is set forth elsewhere in this prospectus. (See "Performance
Information -- The Total Return Utilities Fund".)
<PAGE>
From time to time, the Trust may publish performance information relative
to these Funds, and may include such information in advertisements, sales
literature or shareholder reports. It will do so in accordance with methods
which are described in the Statement of Additional Information.
The Money Market Fund will advertise its yield and effective yield. The
simple annualized yield represents the net income for a seven day period,
expressed on an annualized basis. The effective yield will be higher than the
yield because of the compounding effect of the assumed reinvestment of dividends
over a period of one year.
The yield quotation for The U.S. Government Bond Fund is based upon a
30-day period ended on a specific date, computed by dividing the Fund's net
investment income per share earned during the period by the Fund's price per
share on the last day of the period. Quotations of yield for The U.S. Government
Bond Fund will be accompanied by total return calculations to the most recent
quarter (see "Total Return" below). "Total return" quotations for The Highlands
Growth, Muirfield, Total Return Utilities and U.S. Government Bond Funds will be
expressed in terms of average annual compounded rates of return for the periods
quoted, and will assume that all dividends and distributions were reinvested in
additional shares. When applicable, depending on the Fund, the periods of time
shown will be for a one-year period; a five-year period; a ten-year period; and
since inception.
Comparative performance information may be used from time to time in
advertising or marketing information relative to these Funds, including data
from Lipper Analytical Services, Inc., IBC/Donoghue Money Fund Report,
Morningstar Mutual Fund Report, other publications, various indices or results
of the Consumer Price Index, other mutual funds or investment or savings
vehicles.
BOTH THE YIELD AND THE TOTAL RETURN FIGURE INCLUDED IN ADVERTISEMENTS,
SALES LITERATURE OR SHAREHOLDER REPORTS WILL BE BASED ON HISTORICAL PERFORMANCE
AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION --
THE TOTAL RETURN UTILITIES FUND
The Total Return Utilities Fund's performance may be used from time to time
in advertisements, shareholder reports or other communications to shareholders
or prospective shareholders. Performance information may include the Fund's
investment results and/or comparisons of its investment results to the Standard
& Poor's 500 Composite Stock Price Index, the Standard & Poor's Utility Index,
the Dow Jones Utilities Index or other various unmanaged indices or results of
other mutual funds or investment or savings vehicles. The Fund's investment
results as used in such communications will be calculated on a total rate of
return basis in the manner set forth below. From time to time, Fund rankings may
be quoted from various sources, such as Lipper Analytical Services, Inc. and
Morningstar Mutual Fund Report.
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The Fund may provide period and average annualized "total return"
quotations. The Fund's "total return" refers to the change in the value of an
investment in the Fund over a stated period based on any change in net asset
value per share and including the value of any shares purchasable with any
dividends or capital gains distributed during such period. Period total return
may be annualized. Average annual total return smooths out variations in
performance.
An annualized total return is a compounded total return which assumes that
the period total return is generated over a one-year period, and that all
dividends and capital gain distributions are reinvested. An annualized total
return will be slightly higher than a period total return if the period is
shorter than one year, because of the assumed reinvestment.
Unlike some bank deposits or other investments which pay a fixed yield for
a stated period of time, the total return of the Fund will vary depending upon
interest rates, the current market value of the securities held by the Utilities
Stock Portfolio and changes in the Fund's expenses. In addition, during certain
periods for which total return quotations may be provided, the Manager may have
voluntarily agreed to waive portions of its fees or reimburse Fund expenses on a
month-to-month basis. Such waivers and reimbursements will have the effect of
increasing the Fund's net income (and therefore its total return) during the
period such waivers and reimbursements are in effect.
Shareholders will receive financial reports semi-annually that include the
Fund's financial statements, including listings of investment securities held by
the Utilities Stock Portfolio at those dates. Annual reports are audited by
independent accountants.
OTHER INFORMATION
SHARES OF BENEFICIAL INTEREST
The Trust's Declaration of Trust permits the Trust to offer and sell an
unlimited number of full and fractional shares of beneficial interest in each of
the Trust's existing Funds and to create additional Funds. All shares have a par
value of $.10 per share, are fully paid, nonassessable and fully transferable
when issued. All shares are issued as full or fractional shares.
A fraction of a share has the same rights and privileges as a full share.
Each Fund of the Trust will issue its own series of shares of beneficial
interest. The shares of each Fund represent an interest only in that Fund's
assets (and profits or losses) and in the event of liquidation, each share of a
particular Fund would have the same rights to dividends and assets as every
other share of that Fund.
Each full or fractional share has a proportionate vote. On some issues,
such as the election of Trustees, all shares of the Trust vote together as one
series. On an issue affecting a particular Fund, only its shares vote as a
separate series. An example of such an issue would be a fundamental investment
restriction pertaining to only one Fund. In voting on a Distribution Plan,
approval of the Plan by the shareholders of a particular Fund would make the
Plan effective as to that Fund, whether or not it had been approved by the
shareholders of the other Funds.
<PAGE>
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a business trust
may, under certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the Trust itself was unable to meet its
obligations.
When matters are submitted for shareholder vote, shareholders of each Fund
will have one vote for each full share held and proportionate, fractional votes
for fractional shares held. A separate vote of a Fund is required on any matter
affecting the Fund on which shareholders are entitled to vote. Shareholders of
one Fund are not entitled to vote on a matter that does not affect that Fund but
that does require a separate vote of any other Fund. There normally will be no
meetings of shareholders for the purpose of electing Trustees unless and until
such time as less than a majority of Trustees holding office have been elected
by shareholders, at which time the Trustees then in office will call a
shareholders' meeting for the election of Trustees. Any Trustee may be removed
from office upon the vote of shareholders holding at least two-thirds of the
Trust's outstanding shares at a meeting called for that purpose. The Trustees
are required to call such a meeting upon the written request of shareholders
holding at least 10% of the Trust's outstanding shares. Shareholders have under
certain circumstances (e.g., upon application and submission of certain
specified documents to the Trustees of the Trust by a specified number of
shareholders) the right to communicate with other shareholders in connection
with requesting a meeting of shareholders for the purpose of removing one or
more Trustees. Plumbers & Pipefitters Local Retirement Fund owns a controlling
interest in the shares of The U.S. Government Bond Fund.
Each Portfolio, in which all the assets of a corresponding Fund will be
invested, is organized as a trust under the laws of the State of New York. Each
Portfolio's Declaration of Trust provides that a Fund and other entities
investing in that Portfolio (e.g., other investment companies, insurance company
separate accounts, and common and commingled trust funds) will each be liable
for all obligations of that Portfolio. However, the risk of a Fund incurring
financial loss on account of such liability is limited to circumstances in which
both inadequate insurance existed and that Portfolio itself was unable to meet
its obligations. Accordingly, the Trustees of the Trust believe that neither a
Fund nor its shareholders will be adversely affected by reason of a Fund's
investing in the corresponding Portfolio. In addition, whenever the Trust is
requested to vote on matters pertaining to the fundamental policies of a
Portfolio, the Trust will hold a meeting of the corresponding Fund's
shareholders and will cast its vote as instructed by the Fund's shareholders.
INVESTMENT STRUCTURE
Unlike other mutual funds which directly acquire and manage their own
portfolio of securities, each Fund seeks to achieve its investment objectives by
investing all of its assets in a corresponding 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
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selling a beneficial interest to the Fund, the Portfolio may sell beneficial
interests to other mutual funds or institutional 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. Information concerning other
holders of interests in the Portfolio is available by contacting the Trust by
calling: 1-800-325-FLEX, or (614) 760-2159.
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 which 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 Trust is requested to vote on matters pertaining to the
Portfolio, the Trust 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 Trust 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 Trust may withdraw the investment of any Fund from its corresponding
Portfolio at any time, if the Board of Trustees of the Trust determines that it
is in the best interests of the Fund to do so. Upon any such withdrawal, the
Board of Trustees 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 "Investment Objectives and Policies," except as otherwise
expressly provided herein, a Fund's investment objectives and policies are not
fundamental and may be changed by Trustees without shareholder approval. (No
such change would be made, however, without 30 days' written notice to
shareholders.)
For descriptions of the investment objectives and policies of the
Portfolios, see "Investment Objectives and Policies" and "Additional Investment
Policies." For descriptions of the management and expenses of the Portfolios,
see "The Trust and Its Management" herein, and "Investment Adviser and Manager"
and "Officers and Trustees" in the Statement of Additional Information.
YEAR 2000
Like other mutual funds and businesses, The Flex-funds could be
adversely affected if the computer systems used by the Adviser, Mutual Funds
Service Co. and other service providers to The Flex-funds are unable to process
and calculate date-related information and data from and after January 1, 2000.
Therefore, the Adviser and Mutual Funds Service Co. are currently taking steps
they believe are reasonably designed to assess any potential Year 2000 problems
affecting the computer systems upon which they or The Flex-funds rely. In
addition, The Flex-funds has obtained reasonable assurances that comparable
steps are being taken by its other service providers. All service providers have
informed The Flex-funds that they plan to be Year 2000 compliant by the end of
1998, and The Flex-funds will continue to monitor their progress.
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<PAGE>
HOW TO BUY SHARES
Shares are offered continuously and sold without a direct sales charge,
although the Trust does pay some consultants for services in explaining the
Funds, their investment policies and restrictions, and retirement plans to their
clients. (See "Distribution Plans" and "Synopsis of Financial Information".)
Shares of The Highlands Growth, Muirfield and Total Return Utilities Funds are
purchased at net asset value per share next determined after receipt of the
purchase order by Mutual Funds Service Co., the Fund's transfer agent, or an
authorized service agent or sub-agent of the Funds. Shares of The U.S.
Government Bond Fund are sold at net asset value per share next determined after
receipt of both a purchase order and payment by the Fund's transfer agent or the
Funds' authorized service agent or sub-agent. Shares of The Money Market Fund
are sold at the net asset value per share next determined after receipt of both
a purchase order and payment in federal funds. Investments made by check are
entered and credited at the net asset value determined on the next business day
following receipt. Net asset value generally changes each day, except in The
Money Market Fund, which intends to maintain a constant net asset value of $1.00
per share. (See "How Net Asset Value Is Determined.")
MINIMUM INVESTMENT
The minimum investment to open an account in each Fund is $2,500 except an
Individual Retirement Account (IRA) which has a $500 minimum. Subsequent
investments in any account may be made in amounts of at least $100.
OPENING AN ACCOUNT
You may open an account by mail or bank wire as follows:
<PAGE>
BY MAIL: To purchase shares, fill out the New Account Application
accompanying this Prospectus. BE SURE TO SPECIFY THE NAME OF THE FUND IN
WHICH YOU WISH TO INVEST. A check payable to each Fund you specify must
accompany the New Account Application. The Trust does not accept third
party checks. Payments may be made by check or Federal Reserve Draft
payable to the particular Fund(s) specified on the application (The
Highlands Growth Fund, Muirfield, etc.) and should be mailed to the
following address: THE FLEX-FUNDS, C/O R. MEEDER & ASSOCIATES, INC., P.O.
BOX 7177, DUBLIN, OHIO 43017
BY BANK WIRE: If the wire order is for a new account in the Trust, or to
open an account in a different Fund, YOU MUST TELEPHONE THE FUND PRIOR TO
MAKING YOUR INITIAL INVESTMENT. Call 1-800-325-FLEX, or (614) 760-2159.
Advise the Fund of the amount you wish to invest and obtain an account
number and instructions. Money sent by a single wire can only be invested
in one Fund. Have your bank wire federal funds to:
STAR BANK, N.A. CINTI/TRUST
ABA #: 042-00001-3
ATTENTION: THE FLEX-FUNDS
(AND NAME OF FUND--SEE BELOW)
Credit Account Number (account number for Fund as follows):
Highlands Growth Fund--
Account Number 9304932
Muirfield Fund--
Account Number 9305731
Total Return Utilities Fund--
Account Number 483608915
U.S. Government Bond Fund--
Account Number 9305152
Money Market Fund--
Account Number 9305533
Account Name (your name)
Your Flex-funds account number
On new accounts, a completed application must be sent to The Flex-funds c/o
R. Meeder & Associates, Inc., P.O. Box 7177, Dublin, OH 43017 on the same day
your wire is sent. The Trust will not permit redemptions until it receives the
New Account Application in good order.
SUBSEQUENT INVESTMENTS--Subsequent investments in an existing account in
any Fund may be made by mailing a check payable to: Highlands Growth Fund;
Muirfield Fund; Total Return Utilities Fund; U.S. Government Bond Fund; or Money
Market Fund. PLEASE INCLUDE YOUR ACCOUNT NUMBER ON THE CHECK AND MAIL AS
FOLLOWS:
THE FLEX-FUNDS
LOCATION NUMBER: 00215
CINCINNATI, OH 45264-0215
Subsequent investments may also be made by bank wire as described above. IT
IS NECESSARY TO NOTIFY THE FUND PRIOR TO EACH WIRE PURCHASE. Wires sent without
notifying the Fund will result in a delay of the effective date of your
purchase.
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AUTOMATIC ACCOUNT BUILDER
Periodic investments in an existing account can be made by selecting this
option. (See "Other Shareholder Services.")
WHEN PURCHASES ARE EFFECTIVE
New Account Applications for The Highlands Growth, Muirfield, Total Return
Utilities and U.S. Government Bond Funds, when accompanied by payment, are
accepted immediately and the shares are priced at the next determined net asset
value per share. Subsequent purchase orders are handled the same way, except on
purchases made by telephone, payment for shares purchased in The Highlands
Growth Fund is due within three business days, whereas payment for shares
purchased in The Muirfield and Total Return Utilities Funds is due within one
business day. Shares of The U.S. Government Bond Fund are sold at net asset
value per share next determined after receipt of both a purchase order and
payment. Income dividends in The U.S. Government Bond Fund begin as of the first
business day following the day of purchase.
New Account Applications and subsequent purchase orders for The Money
Market Fund which are received by or on behalf of the Fund prior to 3:00 p.m.,
Eastern time on a business day, begin earning dividends that day, provided
payment in federal funds (bank wire) is received by the bank that day. New
Account Applications and subsequent purchase orders which are received after
3:00 p.m., or for which wire payment is not received, are accepted as a purchase
the following day. Investments made by check are credited to shareholder
accounts, and begin to earn dividends, on the next business day following
receipt.
If a shareholder's check is dishonored, the purchase and any dividends paid
thereon will be reversed. If shares are purchased with federal funds, they may
be redeemed at any time thereafter and the shareholder may secure his funds as
explained below. (See "How to Make Withdrawals (Redemptions).") However, if
shares are purchased by check(s) or the Automatic Account Builder, Mutual Funds
Service Co. will delay payment of redemption proceeds until the check used to
purchase shares, or Automatic Account Builder order, has cleared which could be
fifteen (15) calendar days or more subsequent to the purchase of the shares. The
Fund will forward the proceeds promptly once the check has cleared.
FINANCIAL INSTITUTIONS: You may buy shares or sell shares of the Funds
through a broker or financial institution who may charge you a fee for this
service. If you are purchasing shares of a Fund through a program of services
offered or administered by a securities dealer or financial institution, you
should read the program materials in conjunction with this Prospectus.
<PAGE>
Certain financial institutions that have entered into sales agreements with
the Trust may enter confirmed purchase orders on behalf of customers by
telephone to purchase shares of The Muirfield, Total Return Utilities and U.S.
Government Bond Funds. Payment is due no later than the Fund's pricing on the
following business day. In The Highlands Growth Fund, payment for confirmed
purchase orders is due within three business days. Purchase orders for The Money
Market Fund which are received prior to 3:00 p.m., Eastern time, begin earning
dividends that day, provided Star Bank, N.A., the Custodian for the Fund,
receives federal funds by 4:00 p.m., Eastern time, that same day. If payment for
the purchase of shares is not received in a timely manner, the financial
institution could be held liable for any loss incurred by a Fund.
HOW TO MAKE WITHDRAWALS (REDEMPTIONS)
Shares are redeemed and funds withdrawn at net asset value per share, and
there are no redemption fees. (See "How Net Asset Value Is Determined.")
BY MAIL--A shareholder may redeem shares by mailing a written request in
good order to The Flex-funds, c/o R. Meeder & Associates, Inc., P.O. Box 7177,
Dublin, OH 43017. Good order means that the request must be signed by the
shareholder(s) and the signature(s) must be guaranteed by an eligible guarantor
institution (a bank, broker-dealer, credit union, securities exchange and
association, clearing agency and savings association). The Trust does not accept
signatures guaranteed by a notary public. Further documentation may be required
as to the authority of the person requesting redemption of shares held of record
in the name of corporations, executors, administrators, trustees, guardians or
other fiduciaries. The Trust may waive these requirements in certain instances.
Amounts withdrawn are mailed without charge to the address printed on your
account statement.
BY TELEPHONE--A shareholder may redeem by telephone: 1-800-325-FLEX, or
call (614) 760-2159. Shareholders who wish to use this procedure must so elect
on the New Account Application. Amounts withdrawn from an account by telephone
are mailed without charge to the address printed on the shareholder's account
statement.
As a special service, a shareholder may arrange to have amounts in excess
of $1,000 wired in federal funds to a designated commercial bank account. To use
this procedure please designate on the New Account Application a bank and bank
account number to receive the proceeds of wire withdrawals. There is no charge
for this service.
A shareholder may change the bank account designated to receive
redemptions. This may be done at any time upon written request to the Trust. The
shareholder's signature must be guaranteed. Further documentation may be
required from corporations, executors, administrators, trustees, guardians, or
other fiduciaries.
Neither the Trust nor Mutual Funds Service Co. ("MFSCo") will be
responsible for any loss, expense, or cost arising from any telephone redemption
request made according to the authorization set forth in the New Account
31
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Application if they reasonably believe such request to be genuine and follow
reasonable procedures designed to verify the identity of the person requesting
the redemption. If MFSCo fails to follow reasonable procedures MFSCo or the
Trust may be liable for losses due to unauthorized or fraudulent transactions.
MFSCo will provide each investor seeking telephone redemption privileges with a
personalized security code which, along with other information, will be required
of the caller upon request of a telephone redemption. Other information may also
be required and calls may be recorded.
WHEN REDEMPTIONS ARE EFFECTIVE
Redemptions are made at the net asset value per share next determined after
receipt of a redemption request in good order. (See "How Net Asset Value Is
Determined.")
WHEN PAYMENTS ARE MADE--Amounts withdrawn by telephone are normally mailed
or wired on the next Columbus, Ohio bank business day following the effective
date of the order for withdrawal. In The Money Market Fund, if a request for a
wire redemption is received prior to 3:00 p.m., Eastern time, on a bank business
day, funds will be wired on the same day. Amounts withdrawn by mail are normally
sent by mail within one business day after the request is received, and must be
mailed within seven days with the following exception. If shares are purchased
by check, Mutual Funds Service Co. will not pay a redemption until reasonably
satisfied the check used to purchase shares has been collected which could be
fifteen (15) calendar days or more after shares are first paid for, unless
payment was made with federal funds. The Fund will forward proceeds promptly
once the check has cleared. (See "How to Buy Shares.")
CHECK-WRITING REDEMPTION PROCEDURE--MONEY MARKET FUND ONLY:
Mutual Funds Service Co., as Dividend Disbursing and Transfer Agent for The
Money Market Fund, will provide a supply of drafts to any shareholder when
requested. Drafts are mailed to the shareholder's address of record normally
within two weeks following the date of the initial investment. These drafts may
be used to draw against the shareholder's Money Market Fund account. Drafts may
be written in any amount not less than $100. To use this privilege an investor
must complete the check-writing redemption provision of the New Account
Application form and complete the signature card, or notify the Trust after
making an initial investment.
A commercial check package consisting of 300 drafts is available for a
nominal charge. Shareholders interested in a commercial check package should
contact the Trust for additional information.
<PAGE>
When a draft is presented to the Bank for payment, the Bank (as agent for
the shareholder) will cause the Fund to redeem sufficient shares to cover the
amount of the draft. Shares continue earning dividends until the day on which
the draft is presented to the Bank for payment. Due to the delay caused by the
requirement that redemptions be priced at the next computed net asset value, the
Bank will only accept drafts for payment which are presented through normal bank
clearing channels. If shares are purchased by check, Mutual Funds Service Co.
will return drafts drawn on funds from purchases made by check(s), or any
portion thereof, until the check(s) used to purchase shares has cleared, which
may take up to fifteen (15) calendar days, or more. If you anticipate draft
redemptions soon after you purchase shares, you are advised to wire funds to
avoid the return of any draft(s). If the amount of the draft is greater than the
value of the shares held in a shareholder's account, the draft will be returned
and the shareholder's account will be charged a fee of $15. To avoid the
possibility that a draft may not be accepted due to insufficient share balances,
no shareholder should attempt to withdraw the full amount of an account or to
close out an account by using this procedure. Neither the Trust, The Money
Market Fund, Mutual Funds Service Co., nor the Bank, will be liable for any loss
or expenses associated with returned drafts. Use of this procedure will be
subject to the Bank's rules and regulations governing checking accounts.
Shareholders may request a stop payment on any draft and Mutual Funds
Service Co. will attempt to carry out your request. Mutual Funds Service Co.
cannot guarantee that such efforts will be successful. As the Bank charges the
Trust for this service, the shareholder's account will be charged a $25.00 fee
for any such request that becomes effective. No charge, other than those
specified above, will be made to a shareholder for participation in the
check-writing redemption procedure or for the clearance of any drafts.
EXCHANGE PRIVILEGE
A shareholder may exchange shares of any Fund for shares of any other Fund
that are available for sale in your state at their respective net asset values.
Exchanges are subject to applicable minimum initial and subsequent investment
requirements. It will be necessary to complete a separate New Account
Application if:
1. a shareholder wishes to register a new account in a different name;
2. a shareholder wishes to add telephone redemption to an account; or
3. a shareholder wishes to have check-writing redemption privileges in a
Money Market Fund account.
Exchange requests may be directed to the Trust by telephone or written
request. If a shareholder request is in valid form, and is accepted before the
close of the Trust's business day, shares will be exchanged that day. Exchange
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requests from The Money Market Fund to another Fund of the Trust must be
received prior to 3:00 p.m., Eastern time, to be exchanged that day. Otherwise,
they will be exchanged the next business day.
BY MAIL:
Exchange requests may also be made in writing and should be sent to The
Flex-funds, c/o R. Meeder & Associates, Inc., P.O. Box 7177, Dublin, Ohio 43017.
The letter must be signed exactly as the shareholder's name appears on the
Fund's account records.
BY TELEPHONE:
Exchange requests may be made by telephone: call 1-800-325-FLEX, or call
(614) 760-2159. You may make exchanges by telephone if you have telephone
redemption privileges for your current investment account and the registration
of additional accounts will be identical. Neither the Trust nor Mutual Funds
Service Co. will be responsible for any loss, expense, or cost arising from any
telephone redemption request made according to the authorization set forth in
the New Account Application if they reasonably believe such request to be
genuine and follow reasonable procedures designed to verify the identity of the
person requesting the redemption. If MFSCo fails to follow reasonable procedures
MFSCo or the Trust may be liable for losses due to unauthorized or fraudulent
transactions. MFSCo will provide each investor seeking telephone redemption
privileges with a personalized security code which, along with other
information, will be required of the caller upon request of a telephone
redemption. Other information may also be required and calls may be recorded.
Any exchange involves a redemption of all or a portion of the shares in one
Fund and an investment of the redemption proceeds in shares of one of the other
Funds. The exchange will be based on the respective net asset values of the
shares involved, ordinarily at the value next determined after the request is
received. An exchange may be delayed briefly if redemption proceeds will not be
available immediately for purchase of newly acquired shares. The exchange
privilege may be modified or terminated at any time. The exchange privilege is
designed to accommodate changes in shareholder investment objectives. In
addition, the Trust reserves the right to reject any exchange request and to
limit a shareholder's use of the exchange privilege.
The exchange of shares of one Fund for shares of another Fund is treated
for federal income tax purposes as a sale of the shares given in exchange. A
shareholder may realize a taxable gain or loss on an exchange, and he should
consult his tax adviser for further information concerning the tax consequences
of an exchange.
<PAGE>
FLEX-FUNDS RETIREMENT PLANS
The Trust offers retirement plans which include a prototype Profit Sharing
Plan, a Money Purchase Pension Plan, a Salary Savings Plan - 401(k), an
Individual Retirement Account (IRA), a Roth IRA, an Education IRA, a Simple IRA
and a Simplified Employee Pension (SEP) Plan. Plan Adoption Agreements and other
information required to establish a Flex-funds Retirement Plan are available
from The Flex-funds, c/o R. Meeder & Associates, Inc., P.O. Box 7177, Dublin,
Ohio 43017; or call 1-800-325-FLEX, or call (614) 760-2159.
Minimum purchase requirements for retirement plan accounts are subject to
the same requirements as regular accounts, except for an IRA, which has a
reduced minimum purchase requirement. (See "How to Buy Shares.")
OTHER SHAREHOLDER SERVICES
AUTOMATIC ACCOUNT BUILDER: Regular investments in any Fund of $100 or more
will be deducted from a shareholder's checking or savings account and invested
in shares of the Fund(s) selected. A shareholder's bank must be a member of the
Automated Clearing House (ACH). Shareholders wishing to add to their investment
account must complete the Automatic Account Builder section of the New Account
Application. There is no charge for this service.
DIRECT DEPOSIT: Investments of $100 or more may be directly deposited into
your account. Shareholders wishing to have one or more institutions
electronically transfer funds into their account should contact the Trust for
information on this service. There is no charge associated with this service.
SYSTEMATIC WITHDRAWAL PROGRAM: A Systematic Withdrawal Program is offered
for any investor who wishes to receive regular distributions from his account.
The investor must either own or purchase shares having a value of at least
$10,000 and advise the Trust in writing of the amount to be distributed and the
desired frequency, i.e., monthly, quarterly or annually. This option may be
exercised by completing the appropriate section of the New Account Application.
The investor should realize that if withdrawals exceed income dividends, the
invested principal may be depleted. The investor may make additional investments
and may change or stop the program at any time. There is no charge for this
program.
SUB-ACCOUNTING FOR INSTITUTIONAL INVESTORS: The Trust's optional
sub-accounting system offers a separate shareholder account for each participant
and a master account record for the institution. Share activity is thus recorded
and statements prepared for both individual sub-accounts and for the master
account. For more complete information concerning this program contact the
Trust.
33
<PAGE>
DISTRIBUTOR: Shares of the Funds are sold by the Trust itself in those
states where its shares have been registered for sale or a valid exemption
exists. States where registration or an exemption exists can be obtained by
calling 1-800-325-FLEX or (614) 760-2159.
SHAREHOLDER ACCOUNTS
The Trust maintains an account for each shareholder in full and fractional
shares. The Trust reserves the right to reject any purchase order, and to waive
minimum purchase requirements.
CONFIRMATION STATEMENTS--In The Highlands Growth, Muirfield, Total Return
Utilities and U.S. Government Bond Funds all purchase and sale transactions, and
dividend reinvestments, are confirmed promptly after they become effective. In
The Money Market Fund you will receive a statement of your account confirming
your initial purchase of shares. Thereafter, you will receive a monthly
confirmation statement which contains a summary of transactions for the month as
well as dividend reinvestment information. Monthly statements are mailed
promptly after the last business day of the month. A shareholder may elect to
receive a confirmation statement after each transaction by notifying the Trust.
ACCOUNTS BELOW MINIMUMS--The Trust reserves the right to redeem shares in
any account for their then current net asset value and pay the proceeds to the
shareholder if at any time the account has shares valued at less than $1,000
($500 for an IRA) as a result of redemptions by the shareholder. The Trust also
reserves the right to redeem the shares in any account which may have been
opened under a waiver of minimum purchase requirements if sufficient additional
shares were not subsequently purchased to meet these requirements. Before a
redemption is processed, the shareholder will be allowed 30 days after written
notice from the Trust to make an additional investment sufficient to bring the
value of shares in the account to $1,000 ($500 for an IRA).
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35
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INVESTMENT ADVISER
R. Meeder & Associates, Inc.
ADDRESS OF FUND & ADVISER
6000 Memorial Drive
Dublin, OH 43017
800-325-FLEX
614-760-2159 (in Central Ohio)
SUBADVISER - GROWTH STOCK PORTFOLIO
Sector Capital Management, L.L.C.
5350 Poplar Avenue, Suite 490
Memphis, TN 38119
SUBADVISER - UTILITIES STOCK PORTFOLIO
Miller/Howard Investments, Inc.
141 Upper Bydcliffe Road
P. O. Box 549
Woodstock, NY 12498
CUSTODIAN
Star Bank, N.A.
Star Bank Center
425 Walnut Street
Cincinnati, OH 45202
TRANSFER AGENT & DIVIDEND
DISBURSING AGENT
Mutual Funds Service Co.
6000 Memorial Drive
Dublin, OH 43017
800-325-FLEX
614-760-2159 (in Central Ohio)
AUDITORS
KPMG Peat Marwick LLP
Two Nationwide Plaza
Columbus, OH 43215
THE FLEX-FUNDS
PROSPECTUS
APRIL 30,1998
36
<PAGE>
<PAGE>
TOTAL RETURN UTILITIES FUND
A FUND OF THE FLEX-FUNDS TRUST
STATEMENT OF ADDITIONAL INFORMATION
APRIL 30, 1998
This Statement is not a prospectus but should be read in conjunction with The
Flex-funds current Prospectus (dated April 30, 1998). Please retain this
document for future reference. To obtain an additional copy of the Prospectus,
please call Mutual Funds Service Co. at 1-800-325-3539. Capitalized terms used
and not otherwise defined herein have the same meanings as defined in the
Prospectus.
TABLE OF CONTENTS PAGE
Investment Policies and Limitations 2
Portfolio Transactions 20
Valuation of Portfolio Securities 23
Performance 24
Additional Purchase and Redemption Information 27
Distributions and Taxes 28
Investment Adviser and Manager 30
Investment Subadviser 32
Distribution Plan 32
Trustees and Officers 34
Flex-funds Retirement Plans 38
Contracts With Companies Affiliated With Manager 43
Description of the Trust 44
Principal Holders of Outstanding Shares 45
Financial Statements 46
INVESTMENT ADVISER TRANSFER AGENT
R. Meeder & Associates, Inc. Mutual Funds Service Co.
INVESTMENT SUBADVISER
Miller/Howard Investments, Inc.
<PAGE>
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 Trustees 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);
(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, 25% or more of the Portfolio's total assets would be invested
<PAGE>
in the securities of companies whose principal business activities are in the
same industry, except that the Portfolio may invest 25% or more 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 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 (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.
(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
<PAGE>
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 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.
<PAGE>
For the Portfolio's limitations on futures and options transactions, see
the section entitled "Limitations on Futures and Options Transactions" beginning
on page 13. For the Portfolio's limitations on short sales, see the section
entitled "Short Sales" on page 17.
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 Portfolio desire to liquidate a position, is
limited to qualified dealers and institutions, and therefore such
securities could have the effect of being illiquid.
<PAGE>
* 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 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
<PAGE>
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 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 Standard & Poor's Corporation ("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
Investors Service, Inc. ("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
<PAGE>
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.
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 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.
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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 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.
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 custodial
account to cover its obligation under the 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.
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SECURITIES LENDING. The Portfolio may lend securities to parties such as
broker-dealers or institutional investors.
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).
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.
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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.
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.
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.
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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 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 Subadvisers
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
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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 25% 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. 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.
<PAGE>
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.
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
<PAGE>
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.
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.
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 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.
<PAGE>
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.
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
<PAGE>
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 "against the box"
with respect to equity securities it holds. For example, if the Subadviser
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 Fund 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.
SOCIAL INVESTMENT POLICY. The Fund offers investors the opportunity for
capital appreciation, current income, and growth of income, in environmentally
<PAGE>
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 usury.
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.
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.
<PAGE>
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 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
<PAGE>
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 turnover rate for 1997 was 41% (1996 -
51%). The turnover rate was a result of rebalancing the Portfolio to take
advantage of market opportunities as well as to realize gains in the independent
power and telecommunications areas. The Subadviser expects the annual portfolio
turnover rate will be 60% 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. High portfolio turnover
may involve correspondingly greater brokerage commissions and other transaction
costs which will be borne directly by the Portfolio.
PORTFOLIO TRANSACTIONS
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
<PAGE>
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
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 is authorized to use research services provided by and to
place portfolio transactions with brokerage firms that have provided assistance
in the distribution of shares of the Fund or shares of other Flex-funds funds or
Flex-Partners funds to the extent permitted by law.
<PAGE>
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 or the Fund's expenses, such as transfer agent fees of Mutual
Funds Service Co. or custodian fees. The transaction quality must, however, be
comparable to those of other qualified broker-dealers. For the year ended
December 31, 1997, directed brokerage payments of $3,934 were made to reduce
expenses of the Portfolio.
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.
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.
<PAGE>
During the year ended December 31, 1997, the Utilities Stock Portfolio paid
total commissions of $15,202 ($13,594 in 1996) 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 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 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, then the security
will be valued as determined in good faith by the Board of Trustees.
<PAGE>
PERFORMANCE
The Fund may quote its performance in various ways. All performance
information supplied by the Fund in advertising is historical and is not
intended to indicate future returns. The Fund's share price and total returns
fluctuate in response to market conditions and other factors, and the value of
Fund shares when redeemed may be more or less than their original cost.
TOTAL RETURN CALCULATIONS. Total returns quoted in advertising reflect all
aspects of the Fund's return, including the effect of reinvesting dividends and
capital gain distributions, and any change in the Fund's net asset value over
the period. Average annual returns will be calculated by determining the growth
or decline in value of a hypothetical historical investment in the Fund over a
stated period, and then calculating the annually compounded percentage rate that
would have produced the same result if the rate of growth or decline in value
had been constant over the period while average annual returns are a convenient
means of comparing investment alternatives, investors should realize that the
Fund's performance is not constant over time, but changes from year to year, and
that average annual returns represent averaged figures as opposed to the actual
year-to-year performance of the Fund.
Below is an example of the total return calculation for the Fund assuming a
hypothetical investment of $1,000 at the beginning of each period
Total return is computed by finding the average annual compound d rates of
return over the length of the bas periods that would equate the initial amount
invested to the ending redeemable value, according to the following formula
P (1+T)n = ERV
P = initial investment of $1,000
T = average annual total return
n = Number of years
ERV = ending redeemable value at the end of the base period
THE TOTAL RETURN UTILITIES FUND:
TOTAL RETURN
2.532 Years
1 Year Since Inception
Period Ended Period Ended
DECEMBER 31,1997 DECEMBER 31, 1997
Value of Account
At end of Period $ 1,286.80 $ 1,677.00
<PAGE>
Value of Account
At beginning of Period 1,000.00 1,000.00
----------- --------
Base Period Return $ 286.80 $ 677.00
Average Total Return 28.68% 22.68%
In addition to average annual returns, the Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Average annual and 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, or series of redemptions over any time
period Total returns may be broken down into their components of income and
capital (including capital gains and changes in share price) in order to
illustrate the relationship of these factors and their contributions to total
return. Total returns may be quoted on a before-tax or after-tax basis. Total
returns, yields, and other performance information may be quoted numerically, or
in a table, graph, or similar illustration.
NET ASSET VALUE. Charts and graphs using the Fund's net asset values,
adjusted net asset values, and benchmark indices may be used to exhibit
performance. An adjusted net asset value includes any distributions paid by the
Fund and reflects all elements of its return. Unless otherwise indicated, the
Fund's adjusted net asset values are not adjusted for sales charges, if any.
MOVING AVERAGES. The Fund may illustrate performance using moving averages.
A long-term moving average is the average of each week's adjusted closing net
asset value for a specified period. A short-term moving average is the average
of each day's adjusted closing net asset value for a specified period. Moving
Average Activity Indicators combine adjusted closing net asset values from the
last business day of each week with moving averages for a specified period to
produce indicators showing when a net asset value has crossed, stayed above, or
stayed below its moving average.
HISTORICAL FUND RESULTS. The Fund's performance may be compared to the
performance of other mutual funds in general, or to the performance of
particular types of mutual funds. These comparisons may be expressed as mutual
fund rankings prepared by Lipper Analytical Services, Inc. (Lipper), an
independent service located in Summit, New Jersey that monitors the performance
of mutual funds. Lipper generally ranks funds on the basis of total return,
assuming reinvestment of distributions, but does not take sales charges or
redemption fees into consideration, and total return is prepared without regard
to tax consequences. In addition to the mutual fund rankings, the Fund's
performance may be compared to mutual fund performance indices prepared by
Lipper.
From time to time, the Fund's performance may also be compared to other
mutual funds tracked by financial or business publications and periodicals. For
example, the Fund may quote Morningstar, Inc. in its advertising materials.
<PAGE>
Morningstar, Inc. is a mutual fund rating service that rates mutual funds on the
basis of risk-adjusted performance. Rankings that compare the performance of
Flex-Partners or Flex-funds funds to one another in appropriate categories over
specific periods of time may also be quoted in advertising.
In advertising materials, the Trust may reference or discuss its products
and services, which may include: other Flex-Partners or Flex-funds funds;
retirement investing; the effects of periodic investment plans and dollar; cost
averaging; saving for college; and charitable giving. In addition, the Fund may
quote financial or business publications and periodicals, including model
portfolios or allocations, as they relate to Fund management, investment
philosophy, and investment techniques. The Fund may also reprint, and use as
advertising and sales literature, articles from Reflexions, a quarterly magazine
provided free of charge to Flex-Partners and Flex-funds shareholders.
VOLATILITY. The Fund may quote various measures of volatility and benchmark
correlation in advertising. In addition, the Fund may compare these measures to
those of other funds. Measures of volatility seek to compare the Fund's
historical share price fluctuations or total returns to those of a benchmark.
Measures of benchmark correlation indicate how valid a comparative benchmark may
be. All measures of volatility and correlation are calculated using averages of
historical data.
MOMENTUM INDICATORS indicate the Fund's price movements over specific
periods of time. Each point on the momentum indicator represents the Fund's
percentage change in price movements over that period.
The Fund may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in a Fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals. In evaluating such
a plan, investors should consider their ability to continue purchasing shares
during periods of low price levels.
The Fund may be available for purchase through retirement plans or other
programs offering deferral of, or exemption from, income taxes, which may
produce superior after-tax returns over time. For example, a $1,000 investment
earning a taxable return of 10% annually would have an after-tax value of $1,949
after ten years, assuming tax was deducted from the return each year at a 31%
rate. An equivalent tax deterred investment would have an after tax value of
$2,100 after ten years, assuming tax was deducted at a 31% rate from the
tax-deferred earnings at the end of the ten-year period.
<PAGE>
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Fund is open for business and its net asset value per share (NAV) is
calculated each day the NYSE is open for trading. The NYSE has designated the
following holiday closings for 1997: New Year's Day, Martin Luther King Day,
Washington's Birthday (observed), Good Friday, Memorial Day (observed),
Independence Day (observed), Labor Day, Thanksgiving Day, and Christmas Day
(observed). Although the Subadviser expects the same holiday schedule, with the
addition of New Year's Day, to be observed in the future, the NYSE may modify
its holiday schedule at any time.
The Fund's net asset value is determined as of the close of the NYSE
(normally 4:00 p.m. Eastern time). However, NAV may be calculated earlier if
trading on the NYSE is restricted or as permitted by the SEC. To the extent that
portfolio securities are traded in other markets on days when the NYSE is
closed, the Fund's NAV may be affected on days when investors do not have access
to the Fund to purchase or redeem shares.
Shareholders of the Fund will be able to exchange their shares for shares
of any mutual fund that is a series of The Flex-funds (each a "Flex-funds'
Fund"). No fee or sales load will be imposed upon the exchange.
Additional details about the exchange privilege and prospectuses for each
of the Flex-funds Funds are available from the Fund's Transfer Agent. The
exchange privilege may be modified, terminated or suspended on 60 days' notice
and the Fund has the right to reject any exchange application relating to such
fund's shares. The 60 day notification requirement may be waived if (i) the only
effect of a modification would be to reduce or eliminate an administrative fee
redemption fee, or deferred sales charge ordinarily payable at the time of an
exchange, or (ii) the Fund suspends the redemption of the shares to be exchanged
as permitted under the 1940 Act or the rules and regulations thereunder, or the
fund to be acquired suspends the sale of its shares because it is unable to
invest amounts effectively in accordance with its investment objective and
policies.
In the Prospectus, the Fund has notified shareholders that it reserves the
right at any time, without prior notice, to refuse exchange purchases by any
person or group if, in the Subadviser's judgment, the Fund would be unable to
invest effectively in accordance with its investment objective and policies, or
would otherwise potentially be adversely affected.
Any redemptions in kind made by the Fund will be of readily marketable
securities.
AUTOMATIC ACCOUNT BUILDER. An investor may arrange to have a fixed amount
of $100 or more automatically invested in shares of the Fund monthly by
authorizing his or her bank account to be debited to invest specified dollar
amounts in shares of the Fund. The investor's bank must be a member of the
Automatic Clearing House System.
<PAGE>
Further information about these programs and an application form can be
obtained from the Fund's Transfer Agent.
SYSTEMATIC WITHDRAWAL PROGRAM. A systematic withdrawal plan is available
for shareholders having shares of the Fund with a minimum value of $10,000,
based upon the offering price. The plan provides for monthly, quarterly or
annual checks in any amount, but not less than $100 which amount is not
necessarily recommended).
Dividends and/or distributions on shares held under this plan are invested
in additional full and fractional shares at net asset value. The Transfer Agent
acts as agent for the shareholder in redeeming sufficient full and fractional
shares to provide the amount of the periodic withdrawal payment. The plan may be
terminated at any time.
Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must be recognized for federal income tax purposes. Each
shareholder should consult his or her own tax adviser with regard to the tax
consequences of the plan, particularly if used in connection with a retirement
plan.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS. If you request to have distributions mailed to you and the
U.S. Postal Service cannot deliver your checks, or if your checks remain
uncashed for six months, the Subadviser may reinvest your distributions at the
then-current NAV. All subsequent distributions will then be reinvested until you
provide the Subadviser with alternate instructions.
DIVIDENDS. A portion of the Fund's dividends derived from certain U.S.
government obligations may be exempt from state and local taxation. Gains
(losses) attributable to foreign currency fluctuations are generally taxable as
ordinary income and therefore will increase (decrease) dividend distributions.
The Fund will send each shareholder a notice in January describing the tax
status of dividends and capital gain distributions for the prior year.
CAPITAL GAIN DISTRIBUTIONS. Long-term capital gains earned by the Fund on
the sale of securities by the Portfolio and distributed to shareholders of the
Fund are federally taxable as long-term capital gains regardless of the length
of time shareholders have held their shares. If a shareholder receives a
long-term capital gain distribution on shares of the Fund and such shares are
<PAGE>
held six months or less and are sold at a loss, the portion of the loss equal to
the amount of the long-term capital gain distribution will be considered a
long-term loss for tax purposes.
Short-term capital gains distributed by the Fund are taxable to
shareholders as dividends not as capital gains. Distributions from short-term
capital gains do not qualify for the dividends-received deduction.
FOREIGN TAXES. Foreign governments may withhold taxes on dividends and
interest paid with respect to foreign securities. Because the Fund does not
currently anticipate that securities of foreign issuers will constitute more
than 25% of the Portfolio's total assets at the end of its fiscal year,
shareholders should not expect to claim a foreign tax credit or deduction on
their federal income tax returns with respect to foreign taxes withheld.
TAX STATUS OF THE FUND. The Fund intends to qualify each year as a
"regulated investment company" for tax purposes so that it will not be liable
for federal tax on income and capital gains distributed to shareholders. In
order to qualify as a regulated investment company and avoid being subject to
federal income or excise taxes at the Fund level, the Fund intends to distribute
substantially all of its net investment income (consisting of the income it
earns from its investment in the Portfolio, less expenses) and net realized
capital gains within each calendar year as well as on a fiscal year basis. The
Fund intends to comply with other tax rules applicable to regulated investment
companies.
If the Portfolio purchases shares in certain foreign investment entities,
defined as passive foreign investment companies (PFICs) in the Internal Revenue
Code, it may be subject to U.S. federal income tax on a portion of any excess
distribution or gain from the disposition of such shares. Interest charges may
also be imposed on the Portfolio with respect to deferred taxes arising from
such distributions or gains.
The Fund is treated as a separate entity from the other funds of The
Flex-funds Trust for tax purposes.
OTHER TAX INFORMATION. The information above is only a summary of some of
the tax consequences generally affecting the Fund and its shareholders, and no
attempt has been made to discuss individual tax consequences. In addition to
federal income taxes, shareholders may be subject to state and local taxes on
Fund distributions. Investors should consult their tax advisers to determine
whether the Fund is suitable to their particular tax situation.
<PAGE>
INVESTMENT ADVISER AND MANAGER
R. Meeder & Associates, Inc. (the "Manager") 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 Star Bank, N.A., the Portfolio's custodian and Mutual
Funds Service Co., 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 for 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 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 Trustees who do not receive
compensation from R. Meeder & Associates 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.
<PAGE>
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,
legal counsel and 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 believes 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.
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, 1997, the Utilities Stock Portfolio paid
fees to the Manager totaling $88,486 ($65,190 in 1996).
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 Muirfield Investors, Inc. ("MII"),
which is controlled by Robert S. Meeder, Sr. through the ownership of voting
common stock. The Manager's officers and directors and the principal offices 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, Vice President and Secretary; Sherrie L. Acock, Vice President; Robert
D. Baker, Vice President; Robert S. Meeder, Jr., President; and Wesley F. Hoag,
Vice President and General Counsel. Mr. Robert S. Meeder, Sr. is President and a
Trustee of the Trust and the Portfolio. Each of Mr. Robert S. Meeder, Jr. and
Mr. Philip A. Voelker is a Trustee and officer of the Portfolio and a Trustee
and officer of the Trust. Each of Donald F. Meeder and Wesley F. Hoag is an
officer of the Trust and the Portfolio.
<PAGE>
INVESTMENT SUBADVISER
Miller/Howard Investments, Inc., 141 Upper Byrdcliffe Road, P.O. Box 549,
Woodstock, New York 12498, serves as the Portfolio's Subadviser. Lowell G.
Miller controls the Subadviser through the ownership of voting common stock.
Lowell G. Miller is a Trustee of the Trust, the Portfolio and The Flex-Partners,
mutual funds whose corresponding portfolios are also advised by the Manager. 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, .40% of the next $50 million, .30% of the next $40 million
and .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 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.
DISTRIBUTION PLAN
Rule 12b-1 (the "Rule") under the Investment Company Act of 1940 (the
"Act") describes the circumstances under which an investment company such as the
Fund may, directly or indirectly, bear the expenses of distributing its shares.
The Rule defines such distribution expenses to include the cost of any activity
which is primarily intended to result in the sale of Fund shares.
The Distribution Plan permits, among other things, payment for distribution
in the form of commissions and fees, advertising the services of public
relations consultants, and direct solicitation. possible recipients include
securities brokers, attorneys, accountants, investment advisers, investment
<PAGE>
performance consultants, pension actuaries, and service organizations. Another
class of recipients is banks. Currently, The Glass-Steagall Act and other
applicable laws, among other things, prohibit banks from engaging in the
business of underwriting, selling or distributing securities. Since the only
function of banks who may be engaged as participating organizations, is to
perform administrative and shareholder servicing functions, the Fund believes
that such laws should not preclude banks from acting as participating
organizations; however, future changes in either federal or state statutes or
regulations relating to the permissible activities of banks and their
subsidiaries or affiliates, as well as judicial or administrative decisions or
interpretations of statutes or regulations, could prevent a bank from continuing
to perform all or a part of its shareholder service activities. If a bank were
prohibited from so acting, its shareholder customers would be permitted to
remain Fund shareholders and alternative means for continuing the servicing of
such shareholders would be sought. In such event, changes in the operation of
the Fund might occur and a shareholder being serviced by such bank might no
longer be able to avail himself, or itself, of any automatic investment or other
services then being provided by the bank. It is not expected that shareholders
would suffer any adverse financial consequences as a result of any of these
occurrences. In addition, state securities laws on this issue may differ from
the interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
The Fund may expend as much as, but not more than .25% of its average net
assets annually pursuant to the Plan. A report of the amounts so expended by the
Fund and the purpose of the expenditures must be made to and reviewed by the
Board of Trustees at least quarterly. In addition, the Plan provides that it may
not be amended to increase materially the costs which the Fund may bear for
distribution pursuant to the Plan without shareholder approval of the Plan, and
that other material amendments of the Plan must be approved by the Board of
Trustees, and by the Trustees who are not "interested persons" of the Trust (as
defined in the Act) and who have no direct or indirect financial interest in the
operation of the Plan or in the related service agreements, by vote cast in
person at a meeting called for the purpose of voting on the Plan.
The Plan is terminable at any time by vote of a majority of the Trustees
who are not "interested persons" and who have no direct or indirect financial
interest in the operation of the Plan or in any of the related service
agreements or by vote of a majority of the Fund's shares. Any service agreement
terminates upon assignment and is terminable without penalty at any time by a
vote of a majority of the Trustees who are not "interested persons" and who have
no direct or indirect financial interest in the operation of the Plan or in the
related service agreements, upon not more than 60 days written notice to the
service organization, or by the vote of the holders of a majority of the Fund's
shares, or, upon 15 days notice, by a party to a service agreement.
The Plan was approved by the Trust's Board of Trustees who made a
determination that there is a reasonable likelihood that the Plan will benefit
the Fund. The Plan was approved by shareholders and it will continue in effect
only if approved at least annually by the Board of Trustees. The Trust has
<PAGE>
entered into agreements whereby a Trustee and a company with which one of the
Trustees is affiliated will be paid for their assistance in explaining and
interpreting the Fund, its investment objectives and policies, and the Trust's
retirement plans, to clients. These include: Russel G. Means, a Trustee of the
Trust and the Portfolios; and the firm of Ogle and Waters, Inc. with which
Walter L. Ogle, a Trustee of the Trust and the Portfolios, is affiliated. Total
payments made by the Fund to parties with service agreements for the year ended
December 31, 1997 amounted to $4,999 ($1,343 in 1996). In addition, expenditures
were approved by the Board of Trustees in the amount of $2,940 for the printing
and mailing of prospectuses, periodic reports and other sales materials to
prospective investors; $4,884 for advertising; $8,048 for the services of public
relations and marketing consultants; and $498 for the cost of special telephone
service to encourage the sale of Fund shares. These total expenditures amounted
to $21,369 for the year ended December 31, 1997 ($22,276 in 1996).
TRUSTEES AND OFFICERS
The Trust and the Portfolio are managed by their trustees and officers.
Their names, positions and principal occupations during the past five years are
listed below. Except as indicated, each individual has held the office shown or
other offices in the same company for the last five years. Except as otherwise
shown, all persons named as Trustees also serve in similar capacities for all
other mutual funds advised by the Manager, including The Flex-funds, The
Flex-Partners and the corresponding portfolios of the Flex-Partners and The
Flex-funds (collectively, the "Fund Complex"). Unless otherwise noted, the
business address of each Trustee and officer is 6000 Memorial Drive, Dublin,
Ohio 43017, which is also the address of the Manager. Those Trustees who are
"interested persons" (as defined in the Investment Company Act of 1940) by
virtue of their affiliation with the Fund Complex, the Manager or the Subadviser
are indicated by an asterisk (*).
TRUSTEES AND OFFICERS
NAME, ADDRESS AND AGE POSITION HELD PRINCIPAL OCCUPATION
- --------------------- ------------- --------------------
ROBERT S. MEEDER, SR.*+, 69 Trustee/President Chairman, R. Meeder &
Associates, Inc., an
investment adviser.
MILTON S. BARTHOLOMEW, 69 Trustee Retired; formerly a
1424 Clubview Boulevard, S. practicing attorney in
Worthington, OH 43235 Columbus, Ohio; member of
the Portfolio's Audit
Committee.
ROGER D. BLACKWELL, 57 Trustee Professor of Marketing
Blackwell Associates, Inc. and Consumer Behavior, The
3380 Tremont Road Ohio State University;
Columbus, OH 43221 President of Blackwell
Associates, Inc., a
strategic consulting firm.
<PAGE>
JOHN M. EMERY, 77 Trustee Retired; formerly Vice
2390 McCoy Road President and Treasurer of
Columbus, OH 43220 Columbus & Southern Ohio
Electric Co.; member of
the Portfolio's Audit
Committee.
RICHARD A. FARR, 79 Trustee President of R&R Supply
3250 W. Henderson Road Co. and Farrair Concepts,
Columbus, OH 43220 Inc., two companies
involved in engineering,
consulting and sales of
heating and air
conditioning equipment.
WILLIAM L. GURNER*, 51 Trustee President, Sector Capital
Sector Capital Management, Inc. Management, an investment
5350 Poplar Avenue, Suite 490 adviser (since January
Memphis, TN 38119 1995); Manager of Trust
Investments of Federal
Express Corporation (1987-
1994).
RUSSEL G. MEANS, 72 Trustee Retired; formerly Chairman
5711 Barry Trace of Employee Benefit
Dublin, OH 43017 Management Corporation,
consultants and
administrators of self-
funded health and
retirement plans.
ROBERT S. MEEDER, JR.*+, 37 Trustee and President of R. Meeder &
Vice President Associates, Inc.
LOWELL G. MILLER*, 49 Trustee President, Miller/Howard
Miller/Howard Investments, Inc. Investments, Inc., an
141 Upper Byrdcliffe Road investment adviser whose
P. O. Box 549 clients include the
Woodstock, NY 12498 Portfolio and the
Utilities Stock Portfolio.
WALTER L. OGLE, 59 Trustee Executive Vice President
400 Interstate North Parkway, of Aon Consulting, an
Suite 1630 employee benefits
Atlanta, GA 30339 consulting group.
<PAGE>
CHARLES A. DONABEDIAN, 55 Trustee President, Winston
Winston Financial, Inc. Financial, Inc., which
200 TechneCenter Drive, Suite 200 provides a variety of
Milford, OH 45150 marketing and consulting
services to investment
companies; CEO, Winston
Advisors, Inc., an
investment advisor.
JAMES W. DIDION, 67 Trustee Retired; formerly
8781 Dunsinane Drive Executive Vice President
Dublin, OH 43017 of Core Source, Inc., an
employee benefit and
Workers' Compensation
administration and
consulting firm (1991-
1997).
PHILIP A. VOELKER*+, 44 Trustee and Senior Vice President and
Vice President Chief Investment Officer
of R. Meeder & Associates,
Inc.
JAMES B. CRAVER*, 54 Assistant Practicing Attorney;
42 Miller Hill Road Secretary Special Counsel to Flex-
Box 811 Partners, Flex-funds and
Dover, MA 02030 their Portfolios; Senior
Vice President of
Signature Financial Group,
Inc. (January 1991 to
August 1995).
DONALD F. MEEDER*+, 59 Secretary/ Vice President of R.
Treasurer Meeder & Associates, Inc.,
and President of Mutual
Funds Service Company.
WESLEY F. HOAG*+, 41 Vice President Vice President and General
Counsel of R. Meeder &
Associates, Inc. (since
July 1993); Attorney,
Porter, Wright, Morris &
Arthur, a law firm
(October 1984 to June
1993).
* Interested Person of the Trust (as defined in the Investment Company Act of
1940), Flex-Partners and each 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.
<PAGE>
The following table shows the compensation paid by the Fund and the Fund
Complex as a whole to the Trustees of the Trust and the Fund Complex during the
fiscal year ended December 31, 1997.
COMPENSATION TABLE
Pension or Total
Retirement Compensation
Benefits Estimated from
Aggregate Accrued Benefits Registrant
Compensation as Part of Annual and Fund
from the Portfolio or Upon Complex Paid
TRUSTEE PORTFOLIO FUND EXPENSE RETIREMENT TO TRUSTEE
- ------- --------- ------------ ---------- ----------
Robert S. Meeder, Sr. None None None None
Milton S. Bartholomew $1,183 None None $11,633
John M. Emery $1,183 None None $11,633
Richard A. Farr $1,000 None None $10,633
William F. Gurner None None None None
Russel G. Means $ 500 None None $7,883
Lowell G. Miller None None None None
Robert S. Meeder, Jr. None None None None
Walter L. Ogle $ 833 None None $9,883
Philip A. Voelker None None None None
Roger A. Blackwell $ 833 None None $9,883
Charles A. Donabedian $ 500 None None $5,541
James W. Didion None None None None
Neither the Trust nor any other member of the Fund Complex pays any pension
or retirement benefits to any Trustee or officer or maintains any plan for such
purpose; however, the Portfolio and other members of the Fund Complex have
accrued the payment of certain Trustee fees which have not yet been paid to the
Trustees.
Each Trustee who is not an "interested person" is paid a meeting fee of
$250 per meeting for each of the five Portfolios. In addition, each such Trustee
earns an annual fee, payable quarterly, based on the average net assets in each
<PAGE>
Portfolio based on the following schedule: Money Market Portfolio, 0.0005% of
the amount of average net assets between $500 million and $1 billion; 0.0025% of
the amount of average net assets exceeding $1 billion. For the other four
Portfolios, each Trustee is paid a fee of 0.00375% of the amount of each
Portfolio's average net assets exceeding $15 million. Messrs. Bartholomew, Emery
and Donabedian comprise the Audit Committee for The Flex-funds Trust, The
Flex-Partners Trust, and each corresponding Portfolio of The Flex-funds and the
Flex-Partners Trusts. Each member of the Audit Committee is paid $500 for each
meeting of the Audit Committee attended. Trustee fees for the Utilities Stock
Portfolio totaled $6,033 for the year ended December 31, 1997 ($4,010 in 1996).
Audit Committee fees for the Utilities Stock Portfolio totaled $367 for the year
ended December 31, 1997 ($160 in 1996). All other officers and Trustees serve
without compensation from any Portfolio.
The Trustees and officers of the Fund and the Portfolio own, in the
aggregate, less than 1% of the Fund's total outstanding shares.
FLEX-FUNDS RETIREMENT PLANS
The Trust offers retirement plans which are described in the Prospectus.
Minimum purchase requirements for retirement plan accounts are subject to the
same requirements as regular accounts, except for an IRA, which has a $500
minimum purchase requirement. Information concerning contribution limitations
for IRA accounts and Roth IRA accounts are described below.
INDIVIDUAL RETIREMENT ACCOUNTS (IRA):
DEDUCTIBLE CONTRIBUTIONS
All contributions (other than certain rollover contributions) must be made
in cash and are subject to the following limitations:
REGULAR. Contributions to an IRA (except for rollovers or employer
contributions under a simplified employee pension) may not exceed the amount of
compensation includible in gross income for the tax year or $2,000, whichever is
less. If neither you nor your spouse is an active participant in an employer
plan, you may make a contribution up to this limit and take a deduction for the
entire amount contributed. If you or your spouse is an active participant and
your adjusted gross income (AGI) is below a certain level you may also make a
contribution and take a deduction for the entire amount contributed. However, if
you or your spouse is an active participant and your AGI is above the specified
level, the dollar limit of the deductible contribution you make to your IRA may
be reduced or eliminated.
Regular contributions are not allowed for the year in which you attain age
70-1/2 or for any year thereafter. You do not have to file an itemized federal
tax return to take an IRA deduction. Deductions are not allowed for any
<PAGE>
contribution in excess of the deduction limit. Contributions for a year may be
made during such year or by the tax return filing date for such year (not
including extensions), if irrevocably designated for such year, in writing, when
such contribution is made.
If you and your spouse each receive compensation during the year and are
otherwise eligible, each of you may establish your own IRA. The contribution
limits apply separately to the compensation of each of you, without regard to
the community property laws of your state, if any.
SPOUSAL. You may make spousal IRA contributions for a year, if: 1) your
spouse has "compensation" that is includible in gross income for such year; 2)
you have less compensation than your spouse for such year; 3) you do not reach
age 70-1/2 by the end of such year; and 4) you file a joint federal income tax
return for such year.
If you are the compensated (or higher compensated) spouse, your
contribution must be made in accordance with the regular contribution rules
above. If you are the noncompensated (or lower compensated) spouse, your
contribution may not exceed the lesser of $2,000 or 100% of the combined
compensation of you and your spouse, reduced by the amount of your spouse's IRA
contribution.
Contributions for your spouse must be made to a separate IRA established by
your spouse as the depositor or grantor of his or her own IRA and your spouse
becomes subject to all of the privileges, rules, and restrictions generally
applicable to IRAs. This includes conditions of eligibility for distribution;
penalties for premature distribution, excess accumulation (failure to take a
required distribution) and prohibited transaction; designation of beneficiaries
and distribution in the event of your spouse's death; income and estate tax
treatment of withdrawals and distributions.
ADJUSTED GROSS INCOME (AGI). If you are an active participant or are
considered an active participant, the amount of your AGI for the year (if you
and your spouse file a joint tax return, your combined AGI) will be used to
determine if you can make a deductible IRA contribution. The instructions for
your tax return will show you how to calculate your AGI for this purpose. If you
are at or below a certain AGI level, called the Threshold Level, you can make a
deductible contribution under the same rules as a person who is not an active
participant. This AGI level may change each year. The instructions for your tax
return will show you the AGI level in effect for that year.
For example, if you are single, or treated as being single, your AGI
Threshold Level is $30,000 for 1998. If you are married and file a joint tax
return, your AGI Threshold Level is $50,000 for 1998. If you are not an active
participant, but you file a joint tax return with your spouse who is an active
participant, your AGI Threshold Level is $150,000. If you are married, file a
separate tax return, and live with your spouse for any part of the year, your
AGI Threshold Level is $0.
<PAGE>
If your AGI is less than $10,000* above your AGI Threshold Level, you will
still be able to make a deductible contribution, but it will be limited in
amount. The amount by which your AGI exceeds your AGI Threshold Level (AGI minus
AGI Threshold Level) is called your Excess AGI. The Maximum Allowable Deduction
is $2,000 per individual. You may determine your Deduction Limit by using the
following formula:
($10,000* - EXCESS AGI ) Maximum Allowable = Deduction
--------------------- X Deduction Limit
$10,000*
Round the result up to the next higher multiple of $10 (the next higher
whole dollar amount that ends in zero). If the final result is below $200, but
above zero, your Deduction Limit is $200. Your Deduction Limit cannot exceed
100% of your compensation.
*For years after 2006, $20,000 if you are married, filing jointly.
NONDEDUCTIBLE CONTRIBUTIONS
Eligibility - Even if your deduction limit is less than $2,000, you may
still contribute using the rules in the "Deductible Contributions" section
above. The portion of your IRA contribution that is not deductible will be a
nondeductible contribution. You may choose to make a nondeductible IRA
contribution even if you could have deducted part or all of the contribution.
Generally, interest or other earnings on your IRA contribution, whether from
deductible or nondeductible contributions, will not be taxed until distributed
from your IRA.
Rollover Contributions - Individuals who receive certain lump-sum
distributions from employer-sponsored retirement plans may make rollover
contributions to an IRA and by doing so defer taxes on the distribution and
shelter any investment earnings.
ROTH INDIVIDUAL RETIREMENT ACCOUNTS (ROTH IRA):
CONTRIBUTIONS:
All contributions must be made in cash and are subject to the following
limitations:
REGULAR. Contributions to a Roth IRA (except for rollovers) cannot exceed
the amount of compensation includible in gross income for the tax year or
$2,000, whichever is less. If our adjusted gross income (AGI) is below a certain
level, you may contribute the maximum amount. However, if your AGI is above a
specified level, the dollar limit of the contribution you make to your Roth IRA
may be reduced or eliminated.
<PAGE>
If you are single, and your adjusted gross income (AGI) is $95,000 or less
($150,000 or less if married and filing jointly, or $0 or less if married and
filing separately) you are eligible to contribute the full amount to a Roth IRA.
Contributions to a Roth IRA are aggregated with Traditional IRA
contributions for the purpose of the annual contribution limit. Therefore, you
may contribute up to the lesser of $2,000 or 100% of earned income per year to a
Traditional IRA and a Roth IRA combined.
SPOUSAL. You may make spousal Roth IRA contributions for a year, if: 1)
your spouse has "compensation" that is includible in gross income for such year;
2) you have less compensation than your spouse for such year; and 3) you file a
joint federal income tax return for such year.
If you are the higher compensated spouse, your contribution must be made in
accordance with the regular contribution rules above. If you are the
noncompensated (or lower compensated) spouse, your contribution may not exceed
the lesser of $2,000 or 100% of the combined compensation of you and your
spouse, reduced by the amount of your spouse's Roth IRA contribution.
Contributions for your spouse must be made to a separate Roth IRA
established by your spouse as the depositor or grantor of his or her own Roth
IRA and your spouse becomes subject to all of the privileges, rules, and
restrictions generally applicable to Roth IRAs. This includes conditions of
eligibility for distribution; designation of beneficiaries and distribution in
the event of your spouse's death; tax treatment of withdrawals and
distributions. This form may be used to establish such Roth IRA.
NO MAXIMUM AGE LIMIT. There is no maximum age limit for making a Roth IRA
contribution. Attainment of age 70 1/2 does not prevent you from contributing to
a Roth IRA.
APRIL 15 FUNDING DEADLINE. Contributions to a Roth IRA for the previous tax
year must be made by the tax-filing deadline (not including extensions) for
filing your federal income tax return. If you are a calendar-year taxpayer, your
deadline is usually April 15. If April 15 falls on a Saturday, Sunday, or legal
holiday, the deadline is the following business day.
LOWER CONTRIBUTION LIMITS. To determine the maximum contribution to a Roth
IRA if your AGI is between $95,000 and $110,000 (between $150,000 and $160,000
if married, filing jointly or between $0 and $10,000 if married, filing
separately), the following steps must be taken:
(a) Subtract your AGI from $110,000 ($160,000 if married, filing jointly;
$10,000 if married, filing separately).
<PAGE>
(b) Multiply the result in Step `a' by .1333 (.20 if married).
(c) If the result in Step `b' is not a multiple of $10, round up to the
next multiple of $10.
(d) The result in Step `c' is your allowable contribution limit. If it is
more than $0, but less that $200, your allowable contribution limit is
$200.
INDIVIDUALS NOT ELIGIBLE TO MAKE CONTRIBUTIONS. If you are a single
taxpayer and your AGI is $110,000 or above ($160,000 or above if married and
filing jointly, or $10,000 or above if married and filing separately), you are
not permitted to make a Roth IRA contribution for the year. For this purpose, a
deductible Traditional IRA contribution is not allowed as a deduction in
computing AGI, and any amount of a rollover-conversion from a Traditional IRA to
a Roth IRA is not taken into account. Whether an individual, or his spouse, is
an active participant in an employer retirement plan is irrelevant for
determining whether he may make a Roth contribution.
EXCESS ROTH CONTRIBUTIONS. Excess contributions to a Roth IRA are subject
to a 6% penalty tax unless removed (along with attributable earnings) by your
tax-filing deadline (plus extensions). An excess contribution could occur for
many reasons including, for example, if you contribute more than $2,000 or 100%
of earned income, or if you are not permitted to make a Roth contribution
because your AGI is too high.
CONVERSION OF TRADITIONAL CONTRIBUTIONS TO ROTH CONTRIBUTIONS. Generally,
if you make a contribution to a Traditional IRA, you may transfer the
contribution plus attributable earnings to a Roth IRA by your tax-filing
deadline (not including extensions). The transferred contribution amount is not
taxable if no deduction was allowed for the contribution. Such a contribution is
treated as a Roth IRA contribution.
ROLLING OVER/CONVERTING TRADITIONAL IRAS TO ROTH IRAS
You are allowed to roll over, transfer, or "convert" your Traditional IRAs
to Roth IRAs beginning in 1998. Regardless of whether a Traditional IRA is
rolled over/converted to a Roth IRA in 1998 or afterwards, the
rollover/conversion amount is subject to federal income taxation (but no 10%
penalty tax).
$100,000 AGI LIMIT FOR ROLLOVER. If you are a single taxpayer, or a married
individual who files jointly, you may roll over, transfer, or convert your
Traditional IRAs to Roth IRAs if your AGI is $100,000 or less. If you are a
single taxpayer (or a married individual who files jointly) with AGI of more
than $100,000 you may not roll over, transfer, or convert your Traditional IRAs
to Roth IRAs. Also, if you are a taxpayer who is married, but files separately,
you may not roll over, transfer, or convert your Traditional IRAs to Roth IRAs
regardless of AGI.
<PAGE>
ROLLOVER/CONVERSION IN 1998. If you roll over a Traditional IRA
distribution received after 1998 to a Roth IRA, the taxable portion of the
Traditional IRA distribution is included in your income ratably over a four-year
period starting with 1998 (i.e., the amount included in gross income is spread
evenly over four years beginning with 1998), but the amount is not subject to
the IRS 10% early distribution penalty.
ROLLOVER/CONVERSION AFTER 1998. If you roll over a Traditional IRA
distribution received after 1998, to a Roth IRA the taxable portion of the
Traditional IRA distribution is included in your income for the year in which
the Traditional IRA distribution is received, but the amount is not subject to
the IRS 10% early distribution penalty. No special tax treatments apply.
CONTRACTS WITH COMPANIES AFFILIATED WITH THE MANAGER
Mutual Funds Service Co. provides accounting, stock transfer, dividend
disbursing, and shareholder services to the Fund and 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. Subject to a $4,000 annual minimum fee, each
class of shares of the Fund will incur an annual fee, payable monthly, which
will be the greater of $15 per shareholder account or 0.10% of the Fund's
average net assets, payable monthly, for stock transfer and dividend disbursing
services. Mutual Funds Service Co. also serves as Administrator to the Fund.
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 Trustees and shareholders,
registration statements and other necessary documents. The Fund incurs an annual
fee, payable monthly, of .05% of the Fund's average net assets. These fees are
reviewable annually by the Trustees of the Trust and the Portfolio.
For the year ended December 31, 1997, total payments to Mutual Funds
Service Co. by the Fund and the Portfolio amounted to $22,459.
The general counsel for the Manager was primarily responsible for preparing
and filing with the Securities and Exchange Commission (i) a post-effective
amendment to the registration statement for the Trust to add the Fund as an
additional series of the Trust and (ii) the registration statement for the
Portfolio. Charges in the amounts of $12,000 and $5,000 for such legal services
rendered by the Manager on behalf of the Fund and the Portfolio, respectively,
will be paid and amortized by the Portfolio and the Fund as organization
expenses over a period not exceeding 60 months.
<PAGE>
DESCRIPTION OF THE TRUST
TRUST ORGANIZATION. The assets of the Trust received for the issue or sale
of the shares of the Fund and all income, earnings, profits, and proceeds
thereof, subject only to the rights of creditors, are especially allocated to
the Fund and constitute the underlying assets of the Fund. The underlying assets
of the Fund are segregated on the books of account, and are to be charged with
the liabilities with respect to the Fund and with a share of the general
expenses of the Trust. Expenses with respect to the Trust are to be allocated in
proportion to the asset value of the respective funds except where allocations
of direct expense can otherwise be fairly made. The officers of the Trust,
subject to the general supervision of the Board of Trustees, have the power to
determine which expenses are allocable to a given fund, or which are general or
allocable to all of the funds. In the event of the dissolution or liquidation of
the Trust, shareholders of each fund are entitled to receive as a class the
underlying assets of such fund available for distribution.
SHAREHOLDER AND TRUSTEE LIABILITY. The Trust is an entity of the type
commonly known as a "Massachusetts business trust." Under Massachusetts law,
shareholders of such a trust may, under certain circumstances, be held
personally liable for the obligations of the trust. The Declaration of Trust
provides that the Trust shall not have any claim against shareholders except for
the payment of the purchase price of shares and requires that each agreement,
obligation, or instrument entered into or executed by the Trust or the Trustees
include a provision limiting the obligations created thereby to the Trust and
its assets.
The Declaration of Trust provides for indemnification out of each fund's
property of any shareholder held personally liable for the obligations of the
Fund. The Declaration of Trust also provides that each Fund shall, upon request,
assume the defense of any claim made against any shareholder for any act or
obligation of the Fund and satisfy any judgment thereon. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which a Fund itself would be unable to meet its
obligations. The Manager believes that, in view of the above, the risk of
personal liability to shareholders is remote.
The Declaration of Trust further provides that the Trustees, if they have
exercised reasonable care, will not be liable for any neglect or wrongdoing, but
nothing in the Declaration of Trust protects Trustees against any liability to
which they would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of their office.
VOTING RIGHTS. The Fund's capital consists of shares of beneficial
interest. As a shareholder, you receive one vote for each share you own. The
shares have no preemptive or conversion rights; the voting and dividend rights,
the right of redemption, and the privilege of exchange are described in the
Prospectus. Shares are fully paid and nonassessable, except as set forth under
the heading "Shareholder and Trustee Liability" above. Shareholders representing
<PAGE>
10% or more of the Trust or the Fund may, as set forth in the Declaration of
Trust; call meetings of the Trust or the Fund for any purpose related to the
Trust or Fund, as the case may be, including, in the case of a meeting of the
entire Trust, the purpose of voting on removal of one or more Trustees. The
Trust or any Fund may be terminated upon the sale of its assets to another
open-end management investment company, or upon liquidation and distribution of
its assets, if approved by vote of the holders of a majority of the Trust or the
Fund, as determined by the current value of each shareholder's investment in the
Fund or Trust. If not so terminated, the Trust and the Fund will continue
indefinitely.
CUSTODIAN Star Bank, N.A., 425 Walnut Street, Cincinnati, OH 45202, is
custodian of the assets of the Portfolio. 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.
AUDITORS. KPMG Peat Marwick LLP, Two Nationwide Plaza, Columbus, Ohio
43215, serves as the Trust's independent auditors. The auditors audit financial
statements for the Fund and provide other assurance, tax, and related services.
PRINCIPAL HOLDERS OF OUTSTANDING SHARES
As of April 1, 1998, the following persons owned 5% or more of the Fund's
outstanding shares of beneficial interest:
Name and Address Amount of Record Percent
OF BENEFICIAL OWNER AND BENEFICIALLY OF FUND
Charles Schwab Co. Inc. 119,549.937 22.538%
Special Custody Account
for the Exclusive Benefit
of Customers
101 Montgomery Street
San Francisco, CA 94104
Clark & Co. 27,710.830 5.224%
FAO Douglas C. James GST
P.O. Box 39
Westerville, OH 43086-0039
The shareholders listed above own shares for investment purposes and have no
known intention of exercising any control of the Fund.
<PAGE>
FINANCIAL STATEMENTS
Financial statements for the Fund and the Portfolio are presented on the
following pages.
<PAGE>
MUTUAL FUND PORTFOLIO
Portfolio of Investments as of December 31, 1997
INDUSTRIES/CLASSIFICATIONS SHARES OR FACE AMOUNT VALUE
- --------------------------------------------------------------------------------
COMMON STOCKS - 9.0%
AEROSPACE/DEFENSE - 0.5%
Boeing Co. 7,000 $342,563
United Technologies Corp. 7,000 509,687
=======
852,250
-------
ALUMINUM - 0.3%
Aluminum Company of America 7,000 492,625
AUTO AND TRUCK - 0.3%
General Motors Corp. 7,000 424,375
BANKING - 0.5%
J.P. Morgan & Co. 7,000 790,125
BEVERAGE -- SOFT DRINK -0.3%
Coca-Cola Co. 7,000 466,375
CHEMICAL -- DIVERSIFIED - 0.5%
E.I. du Pont de Nemours & Co. 7,000 420,438
Union Carbide Corp. 7,000 300,562
=======
721,000
-------
COMPUTERS & PERIPHERALS - 0.5%
IBM 7,000 731,937
Raytheon Co. - Class A 446 22,013
======
753,950
-------
CONSUMER NON-DURABLE -0.4%
Proctor & Gamble Co. 7,000 558,687
DIVERSIFIED - 0.5%
Allied-Signal, Inc. 7,000 272,562
Minnesota Mining & Manufacturing Co. 7,000 574,438
=======
847,000
-------
DRUG - 0.5%
Merck & Co., Inc. 7,000 743,750
ELECTRICAL EQUIPMENT - 0.3%
General Electric Corp. 7,000 513,625
FINANCIAL SERVICES - 0.4%
American Express Co. 7,000 624,750
HEALTH - 0.3%
Johnson & Johnson 7,000 461,125
INSURANCE - MULTILINE - 0.2%
Travelers Group, Inc. 7,000 377,125
MACHINERY -- CONSTRUCTION & MINING - 0.2%
Caterpillar, Inc. 7,000 339,937
MULTIMEDIA - 0.5%
Walt Disney Co. 7,000 693,438
OFFICE AUTOMATION & EQUIPMENT - 0.3%
Hewlett Packard 7,000 437,500
OIL/GAS -- INTERNATIONAL - 0.6%
Chevron Corp. 7,000 539,000
Exxon Corp. 7,000 428,312
=======
967,312
-------
PAPER & FOREST PRODUCTS - 0.2%
International Paper 7,000 301,875
PHOTOGRAPHIC EQUIPMENT & SUPPLIES - 0.3%
Eastman Kodak Co. 7,000 425,688
RESTAURANT - 0.2%
McDonald's Corp. 7,000 334,250
RETAIL STORE - 0.4%
Sears, Roebuck & Co. 7,000 316,750
WalMart Stores, Inc. 7,000 276,062
=======
592,812
-------
<PAGE>
INDUSTRIES/CLASSIFICATIONS SHARES OR FACE AMOUNT VALUE
- --------------------------------------------------------------------------------
TELECOMMUNICATION SERVICES - 0.3%
AT&T 7,000 428,750
TIRE & RUBBER - 0.3%
Goodyear Tire & Rubber 7,000 445,375
TOBACCO - 0.2%
Philip Morris Companies, Inc. 7,000 317,188
================================================================================
TOTAL COMMON STOCKS
(Cost $13,792,981 ) 13,910,887
- --------------------------------------------------------------------------------
MUTUAL FUNDS - 70.1%
Aim Constellation Fund 94 $2,467
Aim Weingarten Equity Fund 116 2,307
Federated S&P 500 Maxcap Fund 256,148 5,181,865
Federated Stock Trust Fund 201,166 7,058,906
Fidelity Growth & Income Fund 133,547 5,088,141
Fidelity Mid Cap Fund 400,450 6,683,512
Mutual Shares Fund 321 6,840
Neuberger & Berman Focus Trust Fund 7,406 151,231
Neuberger & Berman Partners Fund 49,971 1,314,226
Oppenheimer Quest Growth Fund 76,805 1,018,433
PBHG Growth Fund 624 15,849
Safeco Growth Fund 451,746 10,141,688
SteinRoe Young Investor Fund 43,783 1,019,702
Strong American Utility Fund 135,593 2,009,492
T. Rowe Price New Era Fund 147 3,820
T. Rowe Price New Horizons Fund 155 3,608
Vontobel U.S. Value Fund 61,162 1,009,786
Wasatch Micro-Cap Fund 151,876 571,055
================================================================================
TOTAL MUTUAL FUNDS
(Cost $42,109,119 ) 41,282,928
- --------------------------------------------------------------------------------
MONEY MARKET MUTUAL FUNDS - 70.1%
Charles Schwab Money Market Fund 15,369,715 15,369,715
Fidelity Core Money Market Fund 51,302,044 51,302,044
================================================================================
TOTAL MONEY MARKET MUTUAL FUNDS
(Cost $66,671,759 ) 66,671,759
- --------------------------------------------------------------------------------
U.S.TREASURY BILLS - 1.0%
** 5.27%, due 01/08/98 30,100 30,069
* 5.10%, due 03/05/98 $1,500,000 1,486,267
================================================================================
TOTAL U.S. TREASURY BILLS
(Cost $1,516,681 ) 1,516,336
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS - 8.4%
Merrill Lynch, 6.80%, 1/2/98,
(Collateralized by $13,165,000
Florida Power Corp. Commercial
Paper, 0.00%, 1/30/98, market
value - $13,165,000) 12,968,000 12,968,000
================================================================================
TOTAL REPURCHASE AGREEMENTS
(Cost $12,968,000 ) 12,968,000
- --------------------------------------------------------------------------------
OPTIONS PURCHASED - 11.5%
CALL OPTIONS
S&P 500 Index futures contract expiring
January 16, 1998 at 960 4,000 8,800,000
PUT OPTIONS
S&P 500 Index futures contract expiring
January 16, 1998 at 980 4,000 8,800,000
================================================================================
TOTAL OPTIONS PURCHASED
(Cost $27,378,320 ) 17,600,000
- --------------------------------------------------------------------------------
================================================================================
TOTAL INVESTMENTS - 100.0%
(Cost $164,436,860) $153,949,910
- --------------------------------------------------------------------------------
<PAGE>
INDUSTRIES/CLASSIFICATIONS SHARES OR FACE AMOUNT VALUE
- --------------------------------------------------------------------------------
FUTURES CONTRACTS
Long, Midcap 400 Futures, face amount
$3,612,350 expiring March 1998. 22 3,686,650
Long, S&P 500 Futures, face amount
$21,452,550 expiring March 1998. 88 $21,540,200
================================================================================
TOTAL FUTURES CONTRACTS $25,226,850
- --------------------------------------------------------------------------------
WRITTEN OPTIONS OUTSTANDING AS OF DECEMBER 31, 1997.
CALL OPTIONS
S&P 500 Index futures contracts expiring
January 16, 1998 at 980 (4,000) (4,604,000)
PUT OPTIONS
S&P 500 Index futures contracts expiring
January 16, 1998 at 960 (4,000) (5,000,000)
================================================================================
TOTAL OPTIONS WRITTEN
(Proceeds $19,383,673 ) ($9,604,000)
- --------------------------------------------------------------------------------
* Pledged $1,500,000 face amount as collateral on futures contracts.
** Pledged $30,100 face amount as collateral on Letter of Credit.
See accompanying notes to financial statements.
<PAGE>
GROWTH STOCK PORTFOLIO
Portfolio of Investments as of December 31, 1997
INDUSTRIES/CLASSIFICATIONS SHARES OR FACE AMOUNT VALUE
- --------------------------------------------------------------------------------
COMMON STOCKS - 97.7%
AEROSPACE/DEFENSE - 1.5%
Boeing Co. 819 $ 40,080
General Dynamics Corp. 730 63,099
Gulfstream Aerospace Corp. # 520 15,210
Lockheed Martin Corp. 980 96,530
Northrup Grumman Corp. 535 61,525
Raytheon Co. - Class B # 1,390 70,195
Textron, Inc. 1,060 66,250
Thiokol Corp. 450 36,563
United Technologies Corp. 740 53,881
=======
503,333
-------
AIR TRANSPORTATION - 0.4%
AMR Corp. # 445 57,183
Delta Air Lines, Inc. 175 20,825
Southwest Airlines 1,050 25,856
USAir Group # 410 25,625
=======
129,489
-------
ALUMINUM - 0.2%
Aluminum Company of America 860 60,523
AUTO & TRUCK - 1.8%
Chrysler Corp. 2,900 102,044
Ford Motor Co. 5,900 287,256
General Motors Corp. 3,100 187,938
Meritor Automotive, Inc. 279 5,876
Paccar, Inc. 218 11,445
TRW, Inc. 375 20,016
=======
614,575
-------
BANKING - 0.5%
J.P. Morgan & Co. 1,000 112,875
Washington Mutual Savings Bank 1,170 74,661
=======
187,536
-------
BEVERAGE--ALCOHOLIC - 0.8%
Canadaigua Wine Co. # 5,200 287,950
BEVERAGE--SOFT DRINK - 2.1%
Coca-Cola Co. 8,800 586,300
Pepsico, Inc. 3,000 109,313
=======
695,613
-------
BUILDING MATERIALS - 0.3%
Crane Co. 280 12,145
Masco Corp. 1,075 54,691
Willbros Group # 1,600 24,000
======
90,836
------
CAPITAL GOODS - 0.2%
Cooper Industries 345 16,905
Eaton Corp. 217 19,367
Ingersoll-Rand 478 19,359
======
55,631
------
CHEMICAL--DIVERSIFIED - 2.0%
Air Products & Chemicals, Inc. 535 44,004
Dow Chemical Co. 995 100,993
E.I. du Pont de Nemours & Co. 5,230 314,127
Monsanto Corp. 2,840 119,280
Praxair, Inc. 1,000 45,000
Rohm & Haas Co. 335 32,076
Union Carbide Corp. 460 19,751
=======
675,231
-------
CHEMICAL--SPECIALTY - 0.1%
Sigma Aldrich 440 17,490
W.R. Grace & Co. 410 32,979
======
50,469
------
COMMERCIAL SERVICES - 0.1%
Dun & Bradstreet 1,110 34,341
COMPUTERS & PERIPHERALS - 2.3%
Compaq Computer Corp. 1,905 107,513
Dell Computer Corp. # 1,600 134,400
EMC Corp./Mass # 5,150 141,303
<PAGE>
INDUSTRIES/CLASSIFICATIONS SHARES OR FACE AMOUNT VALUE
- --------------------------------------------------------------------------------
IBM 3,395 354,990
Raytheon Co. - Class A 198 9,748
Sun Microsystems # 900 35,888
=======
783,842
-------
COMPUTER SOFTWARE & SERVICES - 4.8%
America Online, Inc. # 520 46,377
Cambridge Technologies Partners, Inc. # 970 40,376
Ceridian Co. # 2,850 130,566
Citrix Systems, Inc. # 380 28,880
Computer Associates International, Inc. 3,255 172,108
Computer Sciences Corp. # 980 81,830
First Data Corp. 2,220 64,935
Manugistics Group, Inc. # 690 30,791
Microsoft Corp. # 4,757 614,842
National Data Corp. 540 19,508
Network Associates, Inc. # 600 31,725
Orcale Corp. # 3,500 78,094
Peoplesoft, Inc. # 2,510 97,890
Sterling Commerce, Inc. # 1,600 61,500
Sungard Data Systems, Inc. # 3,190 98,890
Wind River Systems # 350 13,891
=========
1,612,203
---------
COMPUTER SYSTEMS - 0.1%
Visio Corp. # 690 26,479
CONSUMER DURABLES - 0.4%
Snap-On, Inc. 1,600 69,800
Sunbeam Corp. 1,600 67,400
=======
137,200
-------
CONSUMER NON-DURABLE - 3.8%
Chattem, Inc. # 8,700 128,325
Colgate Palmolive 2,000 147,000
EKCO Group # 11,400 88,350
Haggar Corp. 12,800 201,600
Procter & Gamble Co. 5,800 462,912
RJR Nabisco Holdings Corp. 1,600 60,000
Tupperware Corp. 7,200 200,700
=========
1,288,887
---------
CONTAINERS--PAPER & PLASTIC - 0.5%
First Brands Corp. 4,500 121,219
Sealed Air Corp. # 700 43,225
=======
164,444
-------
COPPER - 0.0%
Phelps Dodge Corp. 240 14,940
COSMETICS - 1.0%
Avon Products, Inc. 1,700 104,444
Estee Lauder Co. 4,600 235,472
=======
339,916
-------
DATA PROCESSING - 0.2%
I2 Technologies, Inc. # 1,040 54,860
DIVERSIFIED - 2.9%
Allied Signal, Inc. 2,080 80,990
Corning, Inc. 740 27,472
FMC Corp. # 859 57,821
Minnesota Mining & Manufacturing Co. 610 50,058
National Service Industries 430 21,312
Norfolk Southern Corp. 1,830 56,387
PPG Industries, Inc. 890 50,841
Ralston Purina 1,000 92,938
Raychem Corp. 540 23,254
Tenneco 615 24,292
Tyco International 1,140 51,371
Westinghouse Electric 9,500 279,656
Whitman Corp. 6,500 169,406
=======
985,798
-------
DRUG - 7.2%
Abbott Labs 3,432 225,011
Bristol Myers Squibb 4,443 420,419
Eli Lilly & Co. 4,916 342,276
Merck & Co., Inc. 5,425 576,406
Pfizer, Inc. 5,714 426,050
Pharmacia & Upjohn 2,213 81,051
Schering Plough Corp. 3,524 218,929
Warner Lambert Co. 1,221 151,404
=========
2,441,546
---------
<PAGE>
INDUSTRIES/CLASSIFICATIONS SHARES OR FACE AMOUNT VALUE
- --------------------------------------------------------------------------------
DRUGSTORE - 0.2%
Longs Drug Stores 2,000 64,250
ELECTRIC--INTEGRATED - 0.9%
FPL Group, Inc. 840 49,718
Houston Industries, Inc. 1,600 42,700
Texas Utilities Co. 2,810 116,791
Unicom Corp. 3,270 100,552
=======
309,761
-------
ELECTRIC PRODUCTION - 0.1%
Sundstrand Corp. 820 41,307
ELECTRIC UTILITY - 0.7%
American Electric Power, Inc. 1,250 64,531
Duke Power Co. 1,640 90,815
Southern Co. 2,690 69,604
=======
224,950
-------
ELECTRICAL EQUIPMENT - 3.5%
General Electric Corp. 15,742 1,155,069
Thomas & Betts 350 16,581
=========
1,171,650
---------
ELECTRONIC COMPONENT SEMICONDUCTORS - 1.5%
Analog Devices # 1,000 27,688
Intel 4,370 306,992
KLA -Tencor Corp. # 430 16,609
Linear Tech Corp. 490 28,236
Maxim Integrated Products, Inc. # 1,600 55,200
Motorola, Inc. 930 53,068
Texas Instruments, Inc. 620 27,900
=======
515,693
-------
ELECTRONIC COMPONENTS - 0.3%
Emerson Electric 1,905 107,513
ELECTRONICS - 0.1%
Rockwell International Corp. 840 43,890
ENERGY - 0.1%
Western Atlas # 700 51,800
FINANCE - 9.4%
Banc One Corp. 3,000 162,938
Bank of Boston Corp. 800 75,150
Bankers Trust New York Co. 600 67,462
Barnett Banks, Inc. 1,200 86,250
Chase Manhattan Corp. 3,300 361,350
Citicorp 2,300 290,806
Corestates Financial 1,000 80,063
Equifax, Inc. 1,070 37,918
Federal Home Loan Mortgage Corp. 3,100 130,006
Federal National Mortgage Corp. 2,300 131,244
First Chicago NBD Corp. 1,700 141,950
First Union Corp. 3,800 194,750
Firstplus Financial Group # 4,600 176,525
Fleet Financial Group, Inc. 1,200 89,925
KeyCorp 1,400 99,137
Lehman Brothers Holdings, Inc. 1,300 66,300
Mellon Bank Corp. 1,000 60,625
Merrill Lynch & Co. 600 43,763
NationsBank Corp. 3,800 231,087
Norwest Corp. 6,200 239,475
PNC Bank Corp. 2,400 136,950
Ryder Systems, Inc. 370 12,118
SunTrust Banks, Inc. 900 64,237
Wells Fargo & Co. 600 203,663
=========
3,183,692
---------
FINANCIAL SERVICES - 2.2%
American Express Co. 1,500 133,875
Associates First Capital 1,900 135,137
Avery Dennison Corp. 720 32,220
BankAmerica Corp. 4,400 321,200
HF Ahmanson & Co. 800 53,550
Nationwide Financial Services - Class A 1,900 68,638
=======
744,620
-------
FOOD DIVERSIFIED - 2.4%
CPC International 1,800 193,950
General Mills 3,200 229,200
IBP, Inc. 11,000 230,606
International Home Foods # 1,900 53,200
Kellogg Co. 1,800 89,325
=======
796,281
-------
<PAGE>
INDUSTRIES/CLASSIFICATIONS SHARES OR FACE AMOUNT VALUE
- --------------------------------------------------------------------------------
FOOD WHOLESALER - 0.3%
Nabisco 2,400 116,250
FOREST PRODUCTS - 0.3%
Georgia Pacific Corp. 430 26,122
Timber Group # 430 9,756
Weyerhauser Co. 1,010 49,553
Willamette Industries, Inc. 640 20,600
=======
106,031
-------
HEALTH - 1.9%
Allergan, Inc. 283 9,498
American Home Products 2,701 206,627
Humana, Inc. # 751 15,583
Johnson & Johnson 6,062 399,334
=======
631,042
-------
INSTRUMENTS--CONTROLS - 0.2%
Honeywell, Inc. 650 44,525
Johnson Controls, Inc. 237 11,317
Parker Hannifin Corp. 315 14,451
======
70,293
------
INSTRUMENTS--SCIENTIFIC - 0.0%
Perkin Elmer Corp. 50 3,553
INSURANCE--LIFE - 0.6%
American Heritage Life Investment Co. 1,000 36,000
AmerUs Life Holdings, Inc. 4,841 178,522
=======
214,522
-------
INSURANCE--MULTILINE - 3.3%
Allstate 1,800 163,575
American International Group 2,250 244,687
Conseco, Inc. 5,700 258,994
Leucadia National 1,600 55,200
PAULA Financial # 5,000 115,000
Travelers Group, Inc. 5,347 288,070
=========
1,125,526
---------
LASERS--SYSTEMS & COMPONENTS - 0.2%
Uniphase Corp. # 1,680 69,510
MACHINE TOOL - 0.2%
Cincinnati Milacron 2,471 64,100
MACHINERY - 0.4%
Deere & Co. 981 57,205
Dover Corp. 608 21,964
Lancer Corp. # 4,100 45,100
W.W. Grainger 146 14,189
=======
138,458
-------
MACHINERY--CONSTRUCTION & MINING - 0.6%
Case Corp. 211 12,752
Caterpillar, Inc. 1,581 76,777
Halliburton Co. 1,000 51,938
Harnischfeger Industries 1,990 70,272
=======
211,739
-------
MANUFACTURING - 0.8%
Black & Decker 2,400 93,750
Mueller Industries, Inc. # 750 44,250
Owens Illinois # 670 25,418
Samsonite Corp. # 3,100 102,516
=======
265,934
-------
MATERIALS & SERVICES - 0.8%
Champion International Corp. 425 19,258
Dana Corp. 370 17,575
Deluxe Corp. 300 10,350
Hercules, Inc. 570 28,536
Illinois Tool Works, Inc. 1,270 76,359
Service Corp. International 1,650 60,947
Sherwin-Williams Co. 920 25,530
Waste Management, Inc. 990 27,225
=======
265,780
-------
MEDICAL SERVICES - 1.0%
Amgen, Inc. # 1,159 62,731
Beverly Enterprise # 445 5,785
Columbia/HCA Healthcare Corp. 2,897 85,824
HBO & Co. 1,010 48,480
Healthsouth Rehab # 1,321 36,658
Manor Care, Inc. 264 9,240
<PAGE>
INDUSTRIES/CLASSIFICATIONS SHARES OR FACE AMOUNT VALUE
- --------------------------------------------------------------------------------
Shared Medical Systems 420 27,720
Tenet Healthcare # 1,371 45,414
=======
321,852
-------
MEDICAL SUPPLIES - 1.1%
Alza Corp. # 389 12,375
BIOMET 471 12,069
Bausch & Lomb, Inc. 249 9,867
Baxter International, Inc. 1,237 62,391
Becton Dickinson 545 27,250
Boston Scientific Co. # 855 39,223
Cardinal Health, Inc. 150 11,269
CR Bard, Inc. 250 7,828
Guidant Corp. 662 41,209
Mallinckrodt, Inc. 331 12,578
Medtronic, Inc. 2,240 117,180
St. Jude Medical, Inc. # 347 10,584
U.S. Surgical 311 9,116
=======
372,939
-------
MEDICAL--HMO - 0.1%
United Healthcare Co. 836 41,539
METAL--DIVERSIFIED - 0.0%
Inco LTD 610 10,370
MINING - 0.1%
Tubos de Acero de Mexico SA # 2,100 45,412
MULTIMEDIA - 0.2%
Walt Disney Co. 800 79,250
NATURAL GAS DISTRIBUTOR - 0.1%
Williams Companies, Inc. 1,400 39,725
NETWORKING PRODUCTS - 1.0%
3Com Corp. # 1,060 37,034
Cisco Systems, Inc. # 5,205 290,179
=======
327,213
-------
OFFICE AUTOMATION & EQUIPMENT - 1.4%
Hewlett Packard 4,610 288,125
Pitney Bowes, Inc. 900 80,944
Xerox Corp. 1,300 95,956
=======
465,025
-------
OIL/GAS--DOMESTIC - 2.5%
Amoco Corp. 2,200 187,275
Apache Corp. 200 7,012
Atlantic Richfield 1,200 96,150
Baker Hughes 1,100 47,988
Burlington Resources 900 40,331
Chieftan International # 1,000 20,250
Devon Energy 700 26,819
Enron Corp. 400 16,625
Mitchell Energy & Development - Class B 1,500 43,687
Mobil Corp. 3,000 216,563
Murphy Oil Corp. 400 21,675
Noble Drilling Co. # 1,400 42,875
Sonat, Inc. 500 22,875
USX Marathon Group 1,900 64,125
=======
854,250
-------
OIL/GAS--INTERNATIONAL - 2.5%
Chevron Corp. 2,500 192,500
Exxon Corp. 10,600 648,588
=======
841,088
-------
OILFIELD SERVICES/EQUIPMENT - 1.1%
Dresser Industries 500 20,969
Enron Exchangeable Notes 1,000 20,625
Schlumberger LTD 2,200 177,100
Union Pacific Resources 800 19,400
Union Texas Petroleum Holdings 1,100 22,894
United Meridian Co. # 1,300 36,562
Veritas DGC, Inc. # 800 31,600
Weatherford Enterra # 800 35,000
=======
364,150
-------
<PAGE>
OIL & NATURAL GAS - 0.1%
Amerada Hess 500 27,438
PAPER & FOREST PRODUCTS - 0.5%
Bemis Co., Inc. 310 13,659
Bowater, Inc. 220 9,776
Fort James Corp. 785 30,026
International Paper 1,485 64,041
Mead Corp. 720 20,160
Union Camp Corp. 450 24,159
=======
161,821
-------
PETROLEUM--INTEGRATED - 2.1%
Occidental Petroleum Corp. 400 11,725
Phillips Petroleum 1,500 72,937
Royal Dutch Petroleum 8,900 482,269
Texaco 2,000 108,750
Unocal Corp. 1,000 38,813
=======
714,494
-------
PHARMACEUTICAL - 0.0%
PharMerica, Inc. # 202 2,096
PROTECTION--SAFETY EQUIPMENT - 0.9%
Lo-Jack Corp. # 20,000 295,000
RAILROAD TRANSPORTATION - 0.4%
Burlington Northern Santa Fe 740 68,774
Union Pacific Corp. 1,210 75,549
=======
144,323
-------
RECREATION - 0.2%
Polaris Industries 2,000 61,125
RECYCLING - 0.1%
Philip Services Corp. # 2,070 29,756
RESTAURANT - 0.4%
McDonald's Corp. 3,000 143,250
RETAIL GROCERY - 0.4%
Albertsons, Inc. 2,500 118,437
RETAIL STORE - 2.7%
Dillard Department Stores 1,300 45,825
Kmart # 16,700 193,094
OfficeMax # 8,000 114,000
Sears, Roebuck & Co. 4,000 181,000
Toys "R" Us, Inc. # 1,500 47,156
WalMart Stores, Inc. 8,000 315,500
=======
896,575
-------
SERVICES - 0.4%
Automatic Data Processing, Inc. 1,540 94,518
Paychex, Inc. 525 26,578
=======
121,096
-------
STEEL--INTEGRATED - 0.0%
Nucor Corp. 320 15,460
TELECOMMUNICATION EQUIPMENT - 0.8%
Advanced Fibre Communication, Inc. # 410 11,941
General Signal Corp. 1,567 63,659
Newbridge Networks Corp. # 3,170 110,554
Nokia Corp. - Sponsored ADR - Class A 750 52,406
Northern Telecom LTD 295 26,255
=======
264,815
-------
TELECOMMUNICATION SERVICES - 9.1%
Airtouch Communications # 7,630 317,122
Ameritech Corp. 2,540 204,470
AT&T 7,520 460,600
BellSouth Corp. 4,260 239,891
British Telecom plc 3,860 310,006
Cia de Telecomunicaciones de Chile - Sponsore 1,870 55,866
DSC Communications # 620 14,880
Frontier Corp. 2,880 69,300
GTE Corp. 4,420 230,945
LCI International, Inc. # 3,500 107,625
Lucent Technologies, Inc. 3,645 291,144
MCI Communication 3,070 131,434
SBC Communications 4,100 300,325
Sprint Corp. 1,620 94,972
Telefonaktiebolaget LM Ericsson - ADR 400 14,925
Tellabs, Inc. # 950 50,231
<PAGE>
INDUSTRIES/CLASSIFICATIONS SHARES OR FACE AMOUNT VALUE
- --------------------------------------------------------------------------------
U.S. West, Inc. 1,470 66,334
Worldcom, Inc. # 4,280 129,470
=========
3,089,540
---------
TOBACCO - 3.3%
Gallaher Group, plc - ADR 11,400 243,675
Imperial Tobacco 4,900 60,025
Philip Morris Companies 13,200 598,125
UST, Inc. 5,600 206,850
=========
1,108,675
---------
TOYS - 0.3%
Hasbro Bradley, Inc. 3,700 116,550
TRANSPORTATION - 0.2%
Alaska Air Group # 530 20,538
Caliber Systems, Inc. 190 9,251
Federal Express Corp. # 530 32,363
======
62,152
------
TRUCKING/TRANSPORTATION LEASING - 0.2%
CSX, Corp. 1,027 55,458
WASTE DISPOSAL--NON-HAZARDOUS - 0.3%
Browning Ferris Industries, Inc. 1,180 43,660
USA Waste Services, Inc. # 1,398 54,871
======
98,531
------
================================================================================
TOTAL COMMON STOCKS
(Cost $27,190,038 ) 33,063,192
- --------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS - 0.9%
U.S. Treasury Bills
** 5.27%, 01/08/98 6,000 5,994
* 5.10%, 03/05/98 300,000 297,254
================================================================================
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $303,317 ) 303,248
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS - 1.4%
Merrill Lynch, 6.80%, 1/2/98, (Collateralized
by $470,000 Florida Power Corp. Commercial
Paper, 0.00%, 1/30/98, market value - $470,000) 463,000 463,000
================================================================================
TOTAL REPURCHASE AGREEMENTS
(Cost $463,000 ) 463,000
- --------------------------------------------------------------------------------
================================================================================
TOTAL INVESTMENTS - 100.0%
(Cost $27,956,355 ) $33,829,440
- --------------------------------------------------------------------------------
================================================================================
FUTURES CONTRACTS
Long, S&P 500 Futures, face amount $1,711,037
expiring March 1998. 7 $1,713,425
- --------------------------------------------------------------------------------
================================================================================
TOTAL FUTURES CONTRACTS $1,713,425
- --------------------------------------------------------------------------------
* Pledged $300,000 face amount as collateral on futures contracts.
** Pledged $6,000 face amount as collateral on Letter of Credit.
# Represents non-income producing securities.
See accompanying notes to financial statements.
<PAGE>
UTILITIES STOCK PORTFOLIO
Portfolio of Investments as of December 31, 1997
INDUSTRIES/CLASSIFICATIONS SHARES OR FACE AMOUNT VALUE
- --------------------------------------------------------------------------------
COMMON STOCKS - 97.1%
DIVERSIFIED UTILITY - 1.2%
Citizens Utilities Co.--Class B # 13,808 $132,899
ELECTRIC/GAS UTILITY - 10.7%
AGL Resources, Inc. 16,100 329,044
MDU Resources Group, Inc. 6,000 189,750
NIPSCO Industries, Inc. 4,700 232,356
UtiliCorp United, Inc. 10,000 388,125
=========
1,139,275
---------
ELECTRIC UTILITY - 16.1%
Cinergy Corp. 7,800 298,838
IPALCO Enterprises, Inc. 5,900 247,431
KU Energy Corp. 3,200 125,600
LG&E Energy Corp. 8,600 212,850
New Century Energies, Inc. 5,600 268,450
PacifiCorp 9,800 267,662
TECO Energy, Inc. 10,400 292,500
=========
1,713,331
---------
ENERGY - 2.2%
CalEnergy Co., Inc. # 8,000 230,000
NATURAL GAS (DISTRIBUTOR) - 19.1%
Bay State Gas Co. 11,100 412,088
Consolidated Natural Gas Co. 3,800 229,900
KeySpan Energy Corp. 10,900 401,256
MCN Corp. 6,000 242,250
Pacific Enterprises 6,800 255,850
TransCanada Pipelines Ltd. 8,100 181,237
UGI Corp. 1,900 55,694
WICOR, Inc. 5,600 260,050
=========
2,038,325
---------
OIL/GAS (DOMESTIC) - 5.4%
El Paso Natural Gas Co. 4,220 280,630
Questar Corp. 5,100 227,588
Santa Fe Pacific Pipeline Partners, L.P. 1,600 73,200
=======
581,418
-------
TELECOMMUNICATION EQUIPMENT - 5.3%
Andrew Corp. # 10,000 240,000
QUALCOMM, Inc. # 6,520 329,260
=======
569,260
-------
TELECOMMUNICATION SERVICES - 33.3%
AirTouch Communications, Inc. # 5,400 224,437
Alltel Corp. 7,900 324,394
Bell Atlantic Corp. 2,300 209,300
Frontier Corp. 19,300 464,406
GTE Corp. 5,000 261,250
LCI International, Inc. # 15,000 461,250
MCI Communications Corp. 10,000 428,125
Sprint Corp. 4,300 252,088
Tele Denmark A/S - Sponsored ADR 4,900 150,981
Telecom New Zealand - ADR 5,000 193,750
Telefonica de Espana 3,460 315,076
U.S. West Communications Group 5,900 266,238
=========
3,551,295
---------
WATER UTILITY - 3.8%
American Water Works Co., Inc. 14,900 406,956
================================================================================
TOTAL COMMON STOCKS
(Cost $8,095,774 ) 10,362,759
- --------------------------------------------------------------------------------
<PAGE>
INDUSTRIES/CLASSIFICATIONS SHARES OR FACE AMOUNT VALUE
- --------------------------------------------------------------------------------
U.S. TREASURY BILLS - 0.0%
* 5.27%, due 01/08/98 1,000 1,000
================================================================================
TOTAL U.S. TREASURY BILLS
(Cost $1,000 ) 1,000
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS - 2.9%
Merrill Lynch, 6.80%, 1/2/98, (Collateralized
by $309,000 Florida Power Corp. Commercial
Paper, 0.00%, 1/30/98, market value - $309,000) 304,000 304,000
================================================================================
TOTAL REPURCHASE AGREEMENTS
(Cost $304,000 ) 304,000
- --------------------------------------------------------------------------------
================================================================================
TOTAL INVESTMENTS - 100.0%
(Cost $8,400,774 ) $10,667,759
- --------------------------------------------------------------------------------
* Pledged $1,000 face amount as collateral on Letter of Credit.
# Represents non-income producing securities.
See accompanying notes to financial statements.
<PAGE>
BOND PORTFOLIO
Portfolio of Investments as of December 31, 1997
INDUSTRIES/CLASSIFICATIONS SHARES OR FACE AMOUNT VALUE
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS - 1.5%
Federal National Mortgage Association
5.33%,06/26/98 250,000 $249,566
================================================================================
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(Cost $249,429 ) 249,566
- --------------------------------------------------------------------------------
U.S.TREASURY OBLIGATIONS - 93.8%
U.S. Treasury Bills
* 5.27%, 01/08/98 4,800 4,795
5.01%, 03/12/98 100,000 98,988
==== == == == =======
103,783
-------
U.S. Treasury Bonds
6.63%, 05/15/07 1,500,000 1,587,656
6.13%, 08/15/07 13,500,000 13,875,469
==== == == == ==========
15,463,125
----------
================================================================================
TOTAL U.S.TREASURY OBLIGATIONS
(Cost $15,031,687 ) 15,566,908
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS - 4.7%
Merrill Lynch, 6.80%, 1/2/98, (Collateralized
by $794,000 Florida Power Corp. Commercial
Paper, 0.00%, 1/30/98, market value - $794,000) 782,000 782,000
================================================================================
TOTAL REPURCHASE AGREEMENTS
(Cost $782,000 ) 782,000
- --------------------------------------------------------------------------------
================================================================================
TOTAL INVESTMENTS - 100.0%
(Cost $16,063,116 ) $16,598,474
- --------------------------------------------------------------------------------
* Pledged $4,800 face amount as collateral on Letter of Credit.
See accompanying notes to financial statements.
<PAGE>
MONEY MARKET PORTFOLIO
Portfolio of Investments as of December 31, 1997
AMORTIZED
YIELD MATURITY FACE AMOUNT COST
- --------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT - 2.6%
BB&T Financial Corp. 5.70% 02/11/98 $15,000,000 $15,000,000
================================================================================
TOTAL CERTIFICATES OF DEPOSIT
(Cost $15,000,000 ) 15,000,000
- --------------------------------------------------------------------------------
COMMERCIAL PAPER - 45.1%
American Trading & Products** 5.75% 03/03/98 5,000,000 4,951,285
American Trading & Products** 5.75% 03/10/98 $9,000,000 $8,902,250
Bear Stearns Co., Inc.** 5.73% 03/25/98 25,000,000 24,669,729
Coopertime Tractor 5.57% 04/21/98 4,100,000 4,030,220
Duff & Phelps Utilities & Corp.** 5.70% 02/17/98 4,500,000 4,466,513
Duff & Phelps Utilities & Corp.** 5.55% 04/02/98 6,500,000 6,408,810
Duff & Phelps Utilities & Corp.** 5.58% 04/23/98 5,000,000 4,913,200
Duff & Phelps Utilities & Corp.** 5.56% 05/21/98 2,741,000 2,681,733
Duff & Phelps Utilities & Corp.** 5.65% 07/02/98 5,000,000 4,857,181
Engelhard Corp. 5.62% 06/09/98 7,435,000 7,250,451
Engelhard Corp. 5.70% 06/10/98 10,000,000 9,746,667
Ford Motor Credit Co. 5.47% 06/24/98 20,000,000 19,471,234
GE Capital Corp. 5.68% 02/19/98 15,000,000 14,884,033
GE Capital Corp. 5.56% 05/20/98 8,000,000 7,828,258
GTE Funding, Inc. 6.10% 01/20/98 24,822,000 24,742,087
LG&E Capital Corp. 5.60% 02/19/98 20,000,000 19,847,555
LG&E Capital Corp. 5.70% 04/01/98 5,700,000 5,618,775
LOCAP, Inc.** 5.70% 01/29/98 18,700,000 18,617,097
MCI Communications Corp.** 5.80% 04/15/98 14,500,000 14,257,044
Merrill Lynch & Co., Inc. 5.65% 05/27/98 10,000,000 9,770,861
Merrill Lynch & Co., Inc. 5.59% 06/02/98 15,000,000 14,645,967
Monsanto Co. 5.53% 04/27/98 10,000,000 9,821,811
Safeco Corp.** 5.57% 01/07/98 20,000,000 19,981,433
================================================================================
TOTAL COMMERCIAL PAPER
(Cost $262,364,194 ) 262,364,194
- --------------------------------------------------------------------------------
CORPORATE OBLIGATIONS - 35.5%
AT&T Corp. 5.63% 04/08/98 3,893,000 3,889,653
Albertsons, Inc. 5.65% 03/26/98 1,000,000 999,554
American General Finance Corp. 8.25% 01/15/98 400,000 400,317
American General Finance Corp. 7.25% 03/01/98 5,295,000 5,306,059
Associates Corp., N.A. 7.30% 03/15/98 200,000 200,476
Associates Corp., N.A. 5.25% 09/01/98 180,000 179,007
Barnett Banks, Inc. 6.25% 07/28/98 1,500,000 1,503,172
Care Life Project 6.05%* 01/02/98 1,275,000 1,275,000
Chrysler Financial Corp. 5.66% 01/16/98 1,875,000 1,874,850
Chrysler Financial Corp. 8.26% 01/26/98 10,000,000 10,014,254
Chubb Capital Corp. 6.00% 02/01/98 663,000 662,983
Clark Grave Vault Co. 6.00%* 01/02/98 3,000,000 3,000,000
Comerica Bank 6.75% 05/12/98 4,000,000 4,013,379
Coughlin Family Properties, Inc. 6.00%* 01/15/98 4,675,000 4,675,000
Danis Construction Co. 6.00%* 01/02/98 1,000,000 1,000,000
Dean Witter Discover & Co. 6.00% 03/01/98 2,000,000 2,000,098
Doren, Inc. 6.05%* 01/02/98 675,000 675,000
E.I. du Pont de Nemours & Co. 8.50% 06/25/98 3,095,000 3,129,566
Espanola/Nambe 6.05%* 01/02/98 2,315,000 2,315,000
First Chicago NBD Corp. 5.70% 01/07/98 5,000,000 4,999,808
First Chicago NBD Corp. 8.50% 06/01/98 180,000 181,767
First Fidelity Bancorp. 8.50% 04/01/98 2,000,000 2,012,401
First Union Corp. 6.75% 01/15/98 6,219,000 6,220,662
Ford Motor Credit Co. 6.25% 02/26/98 938,000 938,472
Ford Motor Credit Co. 9.13% 05/01/98 550,000 555,647
General Motors Acceptance Corp. 6.22%* 04/13/98 10,000,000 10,000,000
General Motors Acceptance Corp. 7.13% 05/11/98 11,100,000 11,149,261
GTE California, Inc. 6.25% 01/15/98 1,500,000 1,500,218
Gannett, Inc. 5.25% 03/01/98 2,525,000 2,521,635
GE Capital Corp. 8.63% 03/12/98 5,203,000 5,228,186
Georgia Power Co. 5.50% 04/01/98 1,000,000 999,112
Goldman Sachs Group, L.P. 6.10% 04/15/98 7,550,000 7,554,539
H.J. Heinz Co. 8.00% 01/05/98 5,130,000 5,130,626
Hancor, Inc. 6.05%* 01/02/98 700,000 700,000
Hertz Corp. 8.30% 02/02/98 200,000 200,393
Huntington Bancshares, Inc. 5.91% 06/23/98 5,000,000 5,001,908
<PAGE>
AMORTIZED
YIELD MATURITY FACE AMOUNT COST
- --------------------------------------------------------------------------------
Huntington Bancshares, Inc. 6.15% 10/15/98 2,000,000 2,003,222
IBM Credit Corp. 5.90% 08/10/98 2,050,000 2,050,041
Lehman Brother Holdings Corp. 5.75% 02/15/98 1,250,000 1,249,434
Liberty Mutual Capital Corp. 5.96% 06/01/98 7,000,000 7,002,592
Merrill Lynch & Co., Inc. 6.52% 06/22/98 1,000,000 1,002,838
Midwest Power System, Inc. 6.25% 02/01/98 1,750,000 1,750,325
Morgan Stanley, Inc. 9.25% 03/01/98 1,750,000 1,758,938
Morgan Stanley, Inc. 9.40% 03/05/98 1,000,000 1,006,101
Mubea, Inc. 6.05%* 01/02/98 4,375,000 4,375,000
Mubea, Inc. 6.05%* 01/02/98 6,000,000 6,000,000
National Rural Utilities 8.50% 02/15/98 125,000 125,345
NationsBank Corp. 6.63% 01/15/98 615,000 615,143
Nordstrom, Inc. 8.88% 02/15/98 1,000,000 1,003,462
Nynex Credit Co. 6.72% 06/15/98 10,000,000 10,034,980
Osco Industries, Inc. 6.05%* 01/02/98 3,000,000 3,000,000
Pepsico, Inc. 6.13% 01/15/98 283,000 283,025
Potomac Electric Power Co. 4.38% 02/15/98 100,000 99,807
Presrite Corp. 6.05%* 01/02/98 2,210,000 2,210,000
Proctor & Gamble Co. 9.50% 02/11/98 4,450,000 4,465,491
R.I. Lampus Co. 6.05%* 01/02/98 2,440,000 2,440,000
RSD Technology 6.05%* 01/02/98 3,500,000 3,500,000
Salomon, Inc. 6.92% 04/14/98 3,550,000 3,559,833
Salomon, Inc. 7.25% 05/01/98 2,035,000 2,043,998
Seariver Maritime, Inc. 5.65%* 02/12/98 6,700,000 6,700,000
Southern California Edison Co. 5.88% 02/01/98 600,000 599,955
Surgery Financing Co. 6.05%* 01/12/98 6,585,000 6,585,000
Toyota Motor Corp. 5.63% 03/17/98 2,407,000 2,405,639
Toyota Motor Credit Corp. 5.13% 01/19/98 2,255,000 2,254,036
Toyota Motor Credit Corp. 5.88% 06/26/98 803,000 802,610
Travelers Group, Inc. 5.75% 04/15/98 1,500,000 1,499,727
Unilever Capital Corp. 8.88% 03/26/98 1,400,000 1,408,965
WalMart Stores, Inc. 7.00% 04/27/98 1,100,000 1,103,000
White Castle Project 6.05%* 01/02/98 9,500,000 9,500,000
Wisconsin Public Service Corp. 5.25% 07/01/98 320,000 319,019
================================================================================
TOTAL CORPORATE OBLIGATIONS
(Cost $206,765,529 ) 206,765,529
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS - 2.4%
Federal National Mortgage Assoc. 5.73% 04/13/98 500,000 499,519
Federal National Mortgage Assoc. 6.72% 04/27/98 140,000 140,398
Federal Home Loan Bank 6.00% 01/13/98 200,000 199,977
Federal Home Loan Bank 5.85% 10/15/98 2,785,000 2,785,000
Student Loan Marketing Assoc. 5.62%* 01/06/98 5,000,000 5,000,000
Student Loan Marketing Assoc. 5.68%* 01/06/98 4,350,000 4,352,319
Student Loan Marketing Assoc. 5.76% 01/14/98 1,000,000 999,913
Tennessee Valley Authority -
callable 1/20/98 @ 104 7.75% 12/15/22 250,000 260,125
================================================================================
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(Cost $14,237,251 ) 14,237,251
- --------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS - 1.7%
***U.S. Treasury Bill 5.27% 01/08/98 63,100 63,036
U.S. Treasury Note 6.00% 09/30/98 10,000,000 10,019,615
================================================================================
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $10,082,651 ) 10,082,651
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS - 12.7%
Merrill Lynch, (Collateralized
by $65,582,000 various Discount
Commercial Papers, 1/7/98-1/30/98,
market value - $65,582,000) 6.80%* 01/02/98 64,413,000 64,413,000
Star Bank, (Collateralized by
$9,615,000 GNMA, 7.00%, 3/20/24,
market value - $9,835,784) 5.50%* 01/02/98 9,635,000 9,635,000
================================================================================
TOTAL REPURCHASE AGREEMENTS
(Cost $74,048,000 ) 74,048,000
- --------------------------------------------------------------------------------
================================================================================
TOTAL INVESTMENTS - 100.0%
(Cost $582,497,625 ) $582,497,625
- --------------------------------------------------------------------------------
* Variable rate security. Interest rate is as of December 31, 1997. Maturity
date reflects the next rate change date.
** Security is restricted as to resale to institutional investors, but has been
deemed liquid in accordance with guidelines approved by the Board of Trustees.
***Pledged as collateral on Letter of Credit.
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
THE U.S.
HIGHLANDS TOTAL RETURN GOVERNMENT MONEY
MUIRFIELD GROWTH UTILITIES BOND MARKET
FUND FUND FUND FUND FUND
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Investment in corresponding portfolio at value $129,939,845 $33,065,501 $8,128,657 $16,908,674 $169,269,183
Receivable for capital stock issued 1,142,143 756,704 287,168 75,690 ---
Unamortized organization costs --- --- 12,124 --- ---
Other assets 5,772 29,681 4,304 2,472 85,894
Total Assets 131,087,760 33,851,886 8,432,253 16,986,836 169,355,077
==============================================================================================================================
Liabilites:
Payable for capital stock redeemed 44,606 2,584 (1,912) 349 ---
Dividends payable 112,260 70,501 13,229 2,475 6,915
Accrued 12b-1 distribution fees 115,451 17,221 --- 3,588 ---
Accrued transfer agent and administrative fees 25,788 5,322 1,174 1,607 7,365
Other accrued liabilities 7,062 4,385 14,774 5,898 5,923
Total Liabilities 305,167 100,013 27,265 13,917 20,203
==============================================================================================================================
Net Assets 130,782,593 33,751,873 8,404,988 16,972,919 169,334,874
==============================================================================================================================
Net Assets:
==============================================================================================================================
Capital 129,454,449 27,973,431 6,728,394 17,586,660 169,334,874
Accumulated undistributed net realized
gain (loss) from investments 1,330,199 (89,329) 12 (1,149,099) ---
Net unrealized appreciation of investments (2,055) 5,867,771 1,676,582 535,358 ---
Net Assets $130,782,593 $33,751,873 $8,404,988 $16,972,919 $169,334,874
==============================================================================================================================
Capital Stock Outstanding 23,911,234 1,819,493 474,265 801,162 169,334,874
(indefinite number of shares authorized, $0.10 par value)
Net Asset Value, Offering and
Redemption Price Per Share $5.47 $18.55 $17.72 $21.19 $1.00
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
THE U.S.
HIGHLANDS TOTAL RETURN GOVERNMENT MONEY
MUIRFIELD GROWTH UTILITIES BOND MARKET
FUND FUND FUND FUND FUND
- -------------------------------------------------------------------------------------------------------------------------------
Net Investment Income from Corresponding Portfolio:
===============================================================================================================================
<S> <C> <C> <C> <C> <C>
Interest $2,768,595 $204,460 $10,004 $972,641 $7,911,734
Dividends 1,026,093 483,516 199,520 --- ---
Expenses (1,138,106) (424,305) (99,159) (95,196) (257,032)
Total Net Investment Income from Corresponding Portfolio 2,656,582 263,671 110,365 877,445 7,654,702
===============================================================================================================================
Fund Expenses:
===============================================================================================================================
Administrative fee 62,592 15,930 2,276 7,515 64,760
Transfer agent fees 135,254 30,185 5,820 9,904 107,918
Audit fees 3,446 2,940 2,610 2,458 3,506
Legal fees 2,340 12,783 3,114 2,331 3,150
Printing 20,157 13,622 2,233 3,068 33,714
Amortization of organizational costs --- --- 5,022 --- ---
Distribution plan 238,990 63,425 15,544 27,682 106,810
Postage 19,249 7,172 1,775 2,988 32,771
Registration and filing fees 7,932 13,924 10,888 9,835 12,289
Insurance 1,843 397 62 261 2,162
Other expenses 17,828 7,766 5,100 4,930 28,264
Total Expenses 509,631 168,144 54,444 70,972 395,344
===============================================================================================================================
Expenses reimbursed by investment adviser --- --- (41,788) --- (92,400)
Net Expenses 509,631 168,144 12,656 70,972 302,944
===============================================================================================================================
NET INVESTMENT INCOME 2,146,951 95,527 97,709 806,473 7,351,758
===============================================================================================================================
NET REALIZED AND UNREALIZED GAIN (LOSS)
FROM INVESTMENTS:
===============================================================================================================================
Net realized gains (losses) from futures contracts 6,583,775 850,449 --- 178,131 ---
Net realized gains (losses) from investments 13,220,546 4,450,390 534,844 (434,282) ---
Net change in unrealized appreciation
of investments (579,123) 2,704,273 1,123,897 649,920 ---
NET GAIN (LOSS) FROM INVESTMENTS 19,225,198 8,005,112 1,658,741 393,769 ---
===============================================================================================================================
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $21,372,149 $8,100,639 $1,756,450 $1,200,242 $7,351,758
===============================================================================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
U.S.
HIGHLANDS TOTAL RETURN GOVERNMENT MONEY
MUIRFIELD GROWTH UTILITIES BOND MARKET
FUND FUND FUND FUND FUND
- -------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS:
===============================================================================================================================
OPERATIONS:
===============================================================================================================================
<S> <C> <C> <C> <C> <C>
Net investment income $2,146,951 $95,527 $97,709 $806,473 $7,351,758
Net realized gain (loss) from investments
and futures contracts 19,804,321 5,300,839 534,844 (256,151) ---
Net change in unrealized appreciation/(depreciation)
of investments (579,123) 2,704,273 1,123,897 649,920 ---
Net increase in net assets
resulting from operations 21,372,149 8,100,639 1,756,450 1,200,242 7,351,758
===============================================================================================================================
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (2,146,950) (95,536) (97,709) (806,470) (7,351,758)
Net realized gain from investments
and futures contracts (18,486,618) (4,050,674) (534,832) --- ---
Net decrease in net assets resulting
from dividends and distributions (20,633,568) (4,146,210) (632,541) (806,470) (7,351,758)
===============================================================================================================================
CAPITAL TRANSACTIONS:
Issued 27,440,621 40,445,381 2,971,480 4,843,059 440,552,839
Reinvested 20,501,858 4,073,675 609,798 771,226 7,195,653
Redeemed (39,233,074) (38,925,468) (1,374,317) (6,817,743) (398,361,115)
Net increase (decrease) in net assets resulting
from capital share transactions 8,709,405 5,593,588 2,206,961 (1,203,458) 49,387,377
TOTAL INCREASE (DECREASE) IN NET ASSETS 9,447,986 9,548,017 3,330,870 (809,686) 49,387,377
===============================================================================================================================
NET ASSETS - Beginning of period 121,334,607 24,203,856 5,074,118 17,782,605 119,947,497
NET ASSETS - End of period $130,782,593 $33,751,873 $8,404,988 $16,972,919 $169,334,874
===============================================================================================================================
SHARE TRANSACTIONS:
Issued 4,484,460 2,120,698 186,359 236,594 440,552,839
Reinvested 3,695,889 220,003 34,996 37,521 7,195,653
Redeemed (6,468,067) (1,996,447) (85,714) (334,564) (398,361,115)
Change in shares 1,712,282 344,254 135,641 (60,449) 49,387,377
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
U.S.
HIGHLANDS TOTAL RETURN GOVERNMENT MONEY
MUIRFIELD GROWTH UTILITIES BOND MARKET
FUND FUND FUND FUND FUND
INCREASE (DECREASE) IN NET ASSETS:
===========================================================================================================================
OPERATIONS:
===========================================================================================================================
<S> <C> <C> <C> <C> <C>
Net investment income $1,865,318 $495,160 $94,951 $808,621 $8,138,831
Net realized gain (loss) from investments
and futures contracts 10,225,068 (1,313,621) 209,382 34,127 ---
Net change in unrealized appreciation
of investments (5,306,075) 3,055,094 219,393 776,909) ---
Net increase in net assets
resulting from operations 6,784,311 2,236,633 523,726 65,839 8,138,831
===========================================================================================================================
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (1,865,319) (495,151) (94,951) 808,624) (8,138,831)
Net realized gain from investments
and futures contracts (9,879,664) --- (208,703) --- ---
Net decrease in net assets resulting
from dividends and distributions (11,744,983) (495,151) (303,654) (808,624) (8,138,831)
===========================================================================================================================
CAPITAL TRANSACTIONS:
Issued 31,306,972 3,904,506 2,105,006 4,221,575 389,806,633
Reinvested 11,652,407 488,159 261,364 731,408 7,883,875
Redeemed (28,415,321) (6,561,166) (393,419) (2,475,250) (418,830,047)
Net increase (decrease) in net assets resulting
from capital share transactions 14,544,058 (2,168,501) 1,972,951 2,477,733 (21,139,539)
TOTAL INCREASE (DECREASE) IN NET ASSETS 9,583,386 (427,019) 2,193,023 1,734,948 (21,139,539)
===========================================================================================================================
NET ASSETS - Beginning of period 111,751,221 24,630,875 2,881,095 16,047,657 141,087,036
NET ASSETS - End of period $121,334,607 $24,203,856 $5,074,118 $17,782,605 $119,947,497
===========================================================================================================================
SHARE TRANSACTIONS:
Issued 5,310,158 246,129 143,939 201,655 389,806,633
Reinvested 2,132,111 30,498 17,645 35,083 7,883,875
Redeemed (4,745,388) (406,881) (26,688) (118,887) (418,830,047)
Change in shares 2,696,881 (130,254) 134,896 117,851 (21,139,539)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
THE MUIRFIELD FUND
Years Ended December 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $5.47 $5.73 $5.34 $5.36 $6.25 $6.43
Income from Investment Operations
Net Investment Income 0.11 0.10 0.06 0.14 (0.01) 0.06
Net Gains or Losses from Securities
(both realized and unrealized) 0.91 0.25 1.31 - 0.45 0.34
Total From Investment Operations 1.02 0.35 1.37 0.14 0.44 0.40
Less Distributions
Dividends (from net investment income) (0.11) (0.10) (0.06) (0.14) (0.02) (0.06
Distributions (from capital gains) (0.91) (0.51) (0.92) (0.02) (1.31) (0.52)
Total Distributions (1.02) (0.61) (0.98) (0.16) (1.33) (0.58)
Net Asset Value, End of Period $5.47 $5.47 $5.73 $5.34 $5.36 $6.25
Total Return 18.59% 5.99% 25.82% 2.70% 8.11% 6.91%
Ratios/Supplemental Data
Net Assets, End of Period ($000) $130,783 $121,335 $111,751 $83,119 $73,063 $55,280
Ratio of Expenses to Average Net Assets 1.29% 1.19% 1.26% 1.22% 1.26% 1.40%
Ratio of Net Investment Income to
Average Net Assets 1.69% 1.54% 0.97% 2.55% -0.13% 1.05%
Portfolio Turnover Rate* 395.42% 297.41% 186.13% 168.17% 279.56% 324.14%
<FN>
*Turnover rate of corresponding portfolio
</FN>
</TABLE>
See accompanying notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
THE HIGHLANDS GROWTH FUND
Years Ended December 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $16.41 $15.34 $13.08 $13.45 $12.70 $12.05
Income from Investment Operations
Net Investment Income 0.06 0.31 0.50 0.27 0.09 0.18
Net Gains or Losses from Securities
(both realized and unrealized) 4.73 1.07 2.68 (0.37) 0.82 0.58
Total From Investment Operations 4.79 1.38 3.18 (0.10) 0.91 0.76
Less Distributions
Dividends (from net investment income) (0.06) (0.31) (0.50) (0.27) (0.16) (0.11)
Distributions (from capital gains) (2.59) -- (0.42) -- -- --
Total Distributions (2.65) (0.31) (0.92) (0.27) (0.16) (0.11)
Net Asset Value, End of Period $18.55 $16.41 $15.34 $13.08 $13.45 $12.70
Total Return 29.28% 9.08% 24.61% -0.69% 7.21% 6.35%
Ratios/Supplemental Data
Net Assets, End of Period ($000) $33,752 $24,204 $24,631 $22,176 $26,171 $25,534
Ratio of Expenses to Average Net Assets 1.87% 1.65% 1.64% 1.63% 1.51% 1.51%
Ratio of Net Investment Income to
Average Net Assets 0.30% 1.92% 3.38% 1.95% 0.69% 1.31%
Portfolio Turnover Rate* 129.79% 81.66% 337.57% 102.76% 99.54% 39.03%
<FN>
*Turnover rate of corresponding portfolio
</FN>
</TABLE>
See accompanying notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
THE TOTAL RETURN UTILITIES FUND
Period
Year Ended December 31, June 21, 1995*
1997 1996 to Dec. 31, 1995
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $14.98 $14.14 $12.50
Income from Investment Operations
Net Investment Income 0.25 0.37 0.21
Net Gains or Losses from Securities
(both realized and unrealized) 3.99 1.48 1.64
Total From Investment Operations 4.24 1.85 1.85
Less Distributions
Dividends (from net investment income) (0.25) (0.37) (0.21)
Distributions (from capital gains) (1.25) (0.64) --
Total Distributions (1.50) (1.01) (0.21)
Net Asset Value, End of Period $17.72 $14.98 $14.14
Total Return 28.68% 13.33% 15.00%
Ratios/Supplemental Data
Net Assets, End of Period ($000) $8,405 $5,074 $2,881
Ratio of Expenses to Average Net Assets 1.80% 1.25% 1.25%(1)
Ratio of Net Investment Income to
Average Net Assets 1.57% 2.55% 3.18%(1)
Ratio of Expenses to Average Net Assets,
before waiver of fees(2) 2.51% 2.95% 4.35%(1)
Ratio of Net Investment Income to Average
Net Assets, before waiver of fees(2) 0.86% 0.85% 0.08%(1)
Portfolio Turnover Rate(3) 41.22% 50.79% 5.06%
<FN>
(1) Annualized
(2) Includes directed brokerage payments in corresponding portfolio.
(3) Turnover rate of corresponding portfolio
* Date of commencement of operations
</FN>
</TABLE>
See accompanying notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
THE U.S. GOVERNMENT BOND FUND
Years Ended December 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $20.64 $21.58 $19.25 $20.18 $19.46 $19.84
Income from Investment Operations
Net Investment Income 0.99 0.96 1.11 0.72 0.86 0.99
Net Gains or Losses from Securities
(both realized and unrealized) 0.55 (0.94) 2.33 (0.93) 0.71 (0.38)
Total From Investment Operations 1.54 0.02 3.44 (0.21) 1.57 0.61
Less Distributions
Dividends (from net investment income) (0.99) (0.96) (1.11) (0.72) (0.85) (0.99)
Total Distributions (0.99) (0.96) (1.11) (0.72) (0.85) (0.99)
Net Asset Value, End of Period $21.19 $20.64 $21.58 $19.25 $20.18 $19.46
Total Return 7.70% 0.15% 18.32% -0.99% 8.21% 3.26%
Ratios/Supplemental Data
Net Assets, End of Period ($000) $16,973 $17,783 $16,048 $12,983 $13,137 $11,100
Ratio of Expenses to Average Net Assets 1.00% 1.00% 1.00% 1.00% 0.99% 1.00%
Ratio of Net Investment Income to
Average Net Assets 4.85% 4.61% 5.41% 3.71% 4.25% 5.13%
Ratio of Expenses to Average Net Assets,
before waiver of fees(1) 1.14% 1.06% 1.14% 1.14% 1.09% 1.21%
Ratio of Net Investment Income to Average
Net Assets, before waiver of fees(1) 4.71% 4.55% 5.27% 3.57% 4.15% 4.92%
Portfolio Turnover Rate(2) 375.64% 778.59% 232.34% 707.57% 235.74% 100.53%
<FN>
(1) Includes fees waived in corresponding portfolio
(2) Represents turnover rate of corresponding portfolio
</FN>
</TABLE>
See accompanying notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
MONEY MARKET FUND
Years Ended December 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
Income from Investment Operations
Net Investment Income 0.053 0.05 0.06 0.04 0.03 0.04
Total From Investment Operations 0.053 0.05 0.06 0.04 0.03 0.04
Less Distributions
Dividends (from net investment income) (0.053) (0.05) (0.06) (0.04) (0.03) (0.04)
Total Distributions (0.053) (0.05) (0.06) (0.04) (0.03) (0.04)
Net Asset Value, End of Period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
Total Return 5.38% 5.27% 5.85% 4.10% 2.98% 3.70%
Ratios/Supplemental Data
Net Assets, End of Period ($000) $169,335 $119,947 $141,087 $164,838 $200,030 $245,259
Ratio of Expenses to Average Net Assets 0.40% 0.40% 0.40% 0.37% 0.37% 0.35%
Ratio of Net Investment Income to
Average Net Assets 5.26% 5.15% 5.70% 4.02% 2.94% 3.68%
Ratio of Expenses to Average Net Assets,
before waiver of fees 0.59% 0.58% 0.64% 0.57% 0.57% 0.56%
Ratio of Net Investment Income to Average
Net Assets, before waiver of fees(1) 5.07% 4.97% 5.46% 3.82% 2.74% 3.47%
<FN>
(1) Includes fees waived in corresponding portfolio
</FN>
</TABLE>
See accompanying notes to financial statements
<PAGE>
THE FLEX-FUNDS NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION
The Flex-funds Trust (the "Trust") was organized in 1982 and is registered under
the Investment Company Act of 1940, as amended (the "Act"), as a diversified,
open-end management investment company. The Trust offers five separate series,
and it is presently comprised of five separate funds as follows: The Muirfield
Fund, The Highlands Growth Fund (formerly The Growth Fund), The Total Return
Utilities Fund, The U.S. Government Bond Fund and The Money Market Fund (each a
"Fund" and collectively the "Funds"). Each Fund 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 Fund, each Portfolio into which the Fund invests and
the percentage of each Portfolio owned by the respective Fund is as follows:
PERCENTAGE OF PORTFOLIO
OWNED BY FUND AS OF
FUND PORTFOLIO DECEMBER 31, 1997
The Muirfield Fund Mutual Fund Portfolio 90%
The Highlands Growth Fund Growth Stock Portfolio 99%
The Total Return Utilities Fund Utilities Stock Portfolio 76%
The U.S. Government Bond Fund Bond Portfolio 100%
The Money Market Fund Money Market Portfolio 29%
The financial statements of the Portfolios, including the Portfolios of
Investments, are included elsewhere in this report and should be read in
conjunction with the financial statements of each respective Fund.
2. SIGNIFICANT ACCOUNTING POLICES
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.
Valuation of Investments
Each Fund values its investment in the corresponding Portfolio at fair value.
Valuation of securities held by each Portfolio is further described at Note 2 of
the Portfolios' Notes to Financial Statements which are included elsewhere in
this report.
Income Taxes
It is each Fund's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute
substantially all of its investment company taxable income and net capital gains
to its shareholders. Therefore, no Federal income tax provision is required.
Distributions to Shareholders
Dividends to shareholders are recorded on the ex-dividend date. The Muirfield
Fund and The Highlands Growth Fund declare dividends from net investment income
on a quarterly basis. The Total Return Utilities Fund declares dividends from
net investment income on a monthly basis. The U.S. Government Bond Fund and The
Money Market Fund declare dividends from net investment income on a daily basis
and pay such dividends on a monthly basis. Each Fund distributes net capital
gains, if any, on an annual basis.
Distributions from net investment income and from net capital gains are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due to
deferrals of certain losses, expiring capital loss carryforwards, and differing
treatment of unrealized gains and losses of futures contracts held by the Fund's
corresponding Portfolio. Permanent book and tax basis differences have been
reclassified among the components of net assets.
Organizational Costs
The costs related to the organization of each of the five Funds have been
deferred and are being amortized by each Fund on a straight-line basis over a
five-year period. Such costs for The Muirfield Fund, The Highlands Growth Fund,
The U.S. Government Bond Fund, and The Money Market Fund have been fully
amortized.
<PAGE>
Expenses
Expenses incurred by the Trust that do not specifically relate to an individual
Fund of the Trust are allocated to the Funds based on each Fund's relative net
assets or other appropriate basis. The Funds record daily their proportionate
share of the corresponding portfolio's income, expenses and realized and
unrealized gains and losses.
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, Sector Capital Management, Inc. and Miller/Howard
Investments, Inc. serve as subadvisor of the Growth Stock Portfolio and the
Utilities 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.
Mutual Funds Service Co. ("MFSCo"), a wholly-owned subsidiary of MII, serves as
stock transfer, dividend disbursing and shareholder services agent for each
Fund. In compensation for such services, each Fund pays MFSCo an annual fee
calculated as follows. For The Muirfield Fund, The Highlands Growth Fund, and
The Total Return Utilities Fund, such fee is equal to the greater of $15 per
active shareholder account or 0.10% of the Fund's average daily net assets. For
The U.S. Government Bond Fund, such fee is equal to the greater of $15 per
active shareholder account or 0.06% of the Fund's average daily net assets. For
The Money Market Fund, such fee is equal to the greater of $20 per active
shareholder account or 0.06% of the Fund's average daily net assets. MFSCo is
entitled to receive an annual minimum fee of $4,000 for each Fund.
MFSCo provides the Trust with certain administrative services. In compensation
for such services, each Fund pays MFSCo an annual fee equal to 0.05% of each
Fund's average daily net assets. Prior to January 31, 1997, such fees were
payable at an annual rate of 0.03% of average daily net assets.
RMA has voluntarily agreed to reimburse operating expenses of The Money Market
Fund and The Total Return Utilities Fund. For the year ended December 31, 1997,
such reimbursements, including fees waived in the corresponding portfolio were
0.19% and 0.71% of average daily net assets of The Money Market Fund and The
Total Return Utilities Fund, respectively. Such reimbursement, which is subject
to change, is limited to the total of fees charged the Fund by RMA.
Pursuant to Rule 12b-1 of the Act, each Fund has adopted a Distribution Plan
(the "Plan"). Under the provisions of each Plan, the Fund may incur certain
expenses associated with the distribution of fund shares in amounts not to
exceed an annual limitation. Such limitation, on an annual basis, is 0.20% of
the average daily net assets of each Fund, 0.25% of the average daily net assets
of The Total Return Utilities Fund.
Certain officers of the Funds and trustees of the Trust and the Portfolios are
also officers or directors of MII, RMA and MFSCo.
4. FEDERAL INCOME TAX INFORMATION
At December 31, 1997, The U.S. Government Bond Fund had unused capital loss
carryforwards available to offset future capital gains, if any, for Federal
income tax purposes. The following table sets forth the amount of such losses
and the years such losses expire.
AMOUNT OF CAPITAL LOSS CARRYFOWARD YEAR EXPIRES
$ 48,902 1998
614,421 2002
256,151 2005
5. CAPITAL GAIN DISTRIBUTIONS (UNAUDITED)
Capital gain distributions from long-term capital gains for the Funds for the
year ended December 31, 1997 were as follows:
FUND 28% RATE GAIN 20% RATE GAIN
Amount % of total Amount % of total
The Muirfield Fund $2,916,067 37.8% $4,788,136 61.2%
The Highlands Growth Fund 2,709,173 84.3% 504,852 15.7%
The Total Return Utilities Fund 53,313 16.1% 278,568 83.9%
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Trustees of The Flex-funds:
We have audited the accompanying statements of assets and liabilities of The
Flex-funds (including, respectively, The Muirfield Fund, The Highlands Growth
Fund (formerly The Growth Fund), The Total Return Utilities Fund, The U.S.
Government Bond Fund and The Money Market Fund), as of December 31, 1997, 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
Flex-funds' 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the aforementioned funds comprising The Flex-funds at December 31, 1997, 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 Peat Marwick LLP
Columbus, Ohio
February 12, 1998
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
MUTUAL GROWTH UTILITIES MONEY
FUND STOCK STOCK BOND MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
Assets:
<S> <C> <C> <C> <C> <C>
Investments at market value* $123,381,910 $33,366,440 $10,363,759 $15,816,474 $508,449,625
Repurchase agreements, at cost* 12,968,000 463,000 304,000 782,000 74,048,000
Cash 947 507 347 851 551
Options purchased (cost $27,378,320) 17,600,000 --- --- --- ---
Receivable for net variation margin on
futures contracts 12,800 --- --- --- ---
Interest receivable 264,050 88 57 325,551 5,477,161
Dividends receivable 24,817 52,213 15,135 --- ---
Prepaid/Other assets 13,924 9,407 27 166 2,005
Unamortized organization costs --- --- 8,288 --- ---
Total Assets 154,266,448 33,891,655 10,691,613 16,925,042 587,977,342
=====================================================================================================================
Liabilites:
Payable for securities purchased --- 433,199 --- --- 261,255
Payable for net variation margin on futures contracts --- 350 --- --- ---
Options written (premiums received $19,383,673) 9,604,000 --- --- --- ---
Payable to investment adviser 97,671 30,236 8,829 3,349 78,989
Accrued audit fees 6,663 6,760 6,793 6,157 10,852
Accrued custodian fees 3,826 3,520 588 1,459 5,729
Accrued trustee fees 14,032 3,883 2,374 2,235 2,369
Accrued fund accounting fees 3,931 2,719 849 1,618 8,656
Other accrued liabilities 3,632 17,025 2,462 1,550 2,753
Total Liabilities 9,733,755 497,692 21,895 16,368 958,695
=====================================================================================================================
Net Assets 144,532,693 33,393,963 10,669,718 16,908,674 587,018,647
=====================================================================================================================
Net Assets:
=====================================================================================================================
Capital 145,227,170 27,521,228 8,402,733 16,373,316 587,018,647
Net unrealized appreciation (depreciation) of
investments (694,477) 5,872,735 2,266,985 535,358
Net Assets $144,532,693 $33,393,963 $10,669,718 $16,908,674 $587,018,647
=====================================================================================================================
*Securities at cost 137,058,540 27,956,355 8,400,774 16,063,116 582,497,625
</TABLE>
See accompanying notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
MUTUAL GROWTH UTILITIES MONEY
FUND STOCK STOCK BOND MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
NET INVESTMENT INCOME
================================================================================================================
<S> <C> <C> <C> <C> <C>
Interest $3,091,061 $205,328 $20,737 $972,641 $29,260,441
Dividends 1,145,496 485,616 279,789 --- ---
Total Investment Income 4,236,557 690,944 300,526 972,641 29,260,441
================================================================================================================
Expenses:
================================================================================================================
Investment advisory fees 1,130,843 317,772 88,486 66,626 1,436,168
Audit fees 9,215 9,421 9,223 8,564 14,851
Custodian fees 15,690 35,996 4,425 6,803 36,718
Trustees fees and expenses 42,679 9,347 7,454 7,570 7,762
Legal fees 3,331 11,491 3,053 3,339 3,307
Amortization of organization cost 4,924 2,545 8,972 2,545 2,545
Accounting fees 50,886 34,029 13,098 21,517 89,048
Insurance 2,242 467 80 285 5,027
Other expenses 10,982 5,233 11,131 1,470 11,241
Total Expenses 1,270,792 426,301 145,922 118,719 1,606,667
================================================================================================================
Investment advisory fees waived --- --- --- (23,523) (661,390)
Directed brokerage payments received --- --- (3,934) --- ---
Total Net Expenses 1,270,792 426,301 141,988 95,196 945,277
================================================================================================================
NET INVESTMENT INCOME 2,965,765 264,643 158,538 877,445 28,315,164
================================================================================================================
REALIZED AND UNREALIZED GAIN (LOSS)
FROM INVESTMENTS:
================================================================================================================
Net realized gain from futures contracts 7,384,735 851,686 --- 178,131 ---
Net realized gain (loss) from investments 15,349,402 4,450,516 769,055 (434,282) ---
Net change in unrealized appreciation
(depreciation) of investments (1,244,081) 2,709,218 1,487,258 649,921 ---
NET GAIN (LOSS) ON INVESTMENTS 21,490,056 8,011,420 2,256,313 393,770 ---
================================================================================================================
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $24,455,821 $8,276,063 $2,414,851 $1,271,215 $28,315,164
</TABLE>
See accompanying notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
MUTUAL GROWTH UTILITIES MONEY
FUND STOCK STOCK BOND MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
INCREASE (DECREASE) IN NET ASSETS:
==========================================================================================================================
OPERATIONS:
==========================================================================================================================
<S> <C> <C> <C> <C> <C>
Net investment income $2,965,765 $264,643 $158,538 $877,445 $28,315,164
Net realized gain (loss) from investments
and futures contracts 22,734,137 5,302,202 769,055 (256,151) ---
Net change in unrealized appreciation
(depreciation) of investments (1,244,081) 2,709,218 1,487,258 649,921 ---
Net increase in net assets
resulting from operations 24,455,821 8,276,063 2,414,851 1,271,215 28,315,164
TRANSACTIONS OF INVESTORS' BENEFICIAL INTERESTS:
==========================================================================================================================
Contributions 27,375,051 40,513,401 2,517,724 4,973,499 3,784,994,914
Withdrawals (42,837,747) (39,809,183) (2,227,211) (7,127,634)(3,579,221,656)
Net increase (decrease) in net assets resulting from
transactions of investors' beneficial interests (15,462,696) 704,218 290,513 (2,154,135) 205,773,258
TOTAL INCREASE (DECREASE) IN NET ASSETS 8,993,125 8,980,281 2,705,364 (882,920) 234,088,422
==========================================================================================================================
NET ASSETS - Beginning of period 135,539,568 24,413,682 7,964,354 17,791,594 352,930,225
NET ASSETS - End of period $144,532,693 $33,393,963 $10,669,718 $16,908,674 $587,018,647
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
MUTUAL GROWTH UTILITIES MONEY
FUND STOCK STOCK BOND MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
INCREASE (DECREASE) IN NET ASSETS:
==========================================================================================================================
OPERATIONS:
==========================================================================================================================
<S> <C> <C> <C> <C> <C>
Net investment income $2,510,343 $601,083 $146,376 $876,027 $19,455,266
Net realized gain (loss) from investments
and futures contracts 10,575,124 (1,313,610) 348,392 34,126 ---
Net change in unrealized appreciation
(depreciation) of investments (5,130,740) 3,055,094 357,308 (776,915) ---
Net increase in net assets
resulting from operations 7,954,727 2,342,567 852,076 133,238 19,455,266
TRANSACTIONS OF INVESTORS' BENEFICIAL INTERESTS:
==========================================================================================================================
Contributions 32,575,692 4,020,512 5,138,546 4,220,008 1,414,075,891
Withdrawals (27,099,980) (6,486,427) (2,317,138) (2,627,674)(1,335,249,306)
Net increase (decrease) in net assets resulting from
transactions of investors' beneficial interests 5,475,712 (2,465,915) 2,821,408 1,592,334 78,826,585
TOTAL INCREASE (DECREASE) IN NET ASSETS 13,430,439 (123,348) 3,673,484 1,725,572 98,281,851
==========================================================================================================================
NET ASSETS - Beginning of period 122,109,129 24,537,030 4,290,870 16,066,022 254,648,374
NET ASSETS - End of period $135,539,568 $24,413,682 $7,964,354 $17,791,594 $352,930,225
</TABLE>
See accompanying notes to financial statements
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
MUTUAL FUND PORTFOLIO
<CAPTION>
Year Ended December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net Assets, End of Period ($000) $144,533 $135,540 $122,109 $83,185 $81,605
Ratio of Expenses to Average Net Assets* 0.89% 0.87% 0.95% 1.01% 1.03%
Ratio of Net Investment Income to
Average Net Assets 2.08% 1.86% 1.26% 2.76% 0.09%
Portfolio Turnover Rate 395.42% 297.41% 186.13% 168.17% 279.56%
Average Commission Rate paid(2) $0.0800 --- --- n/a n/a
</TABLE>
<TABLE>
GROWTH STOCK PORTFOLIO
<CAPTION>
Year Ended December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net Assets, End of Period ($000) $33,394 $24,414 $24,537 $22,169 $26,172
Ratio of Expenses to Average Net Assets 1.34% 1.24% 1.25% 1.23% 1.23%
Ratio of Net Investment Income to
Average Net Assets 0.83% 2.33% 3.78% 2.35% 0.99%
Portfolio Turnover Rate 129.79% 81.66% 337.57% 102.76% 99.54%
Average Commission Rate paid(2) $0.0623 $0.0910 $0.0806 N/A N/A
</TABLE>
<TABLE>
UTILITIES STOCK PORTFOLIO
<CAPTION>
Period
Year Ended December 31, June 21, 1995* to
1997 1996 December 31, 1995
<S> <C> <C> <C>
Net Assets, End of Period ($000) $10,670 $7,964 $4,291
Ratio of Expenses to Average Net Assets 1.60% 1.61% 2.32%(1)
Ratio of Net Investment Income to
Average Net Assets 1.79% 2.24% 2.09%(1)
Portfolio Turnover Rate 41.22% 50.79% 5.06%
Average brokerage commission per share(2) $0.0600 $0.0600 $0.0600
<FN>
(1) Annualized
(2) Represents the total dollar amount of commissions paid on portfolio
transactions divided by the total number of shares purchased and sold by the
Portfolio for which commissions were charged. Disclosure is not required for
periods ended before December 31, 1995.
* Date of commencement of operations
</FN>
</TABLE>
See accompanying notes to financial statements
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
BOND PORTFOLIO
<CAPTION>
Year Ended December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net Assets, End of Period ($000) $15,274 $17,792 $16,066 $13,008 $13,178
Ratio of Expenses to Average Net Assets 0.57% 0.61% 0.57% 0.56% 0.60%
Ratio of Net Investment Income to
Average Net Assets 5.27% 4.99% 5.82% 4.15% 4.62%
Ratio of Expenses to Average Net Assets,
before waiver of fees 0.71% 0.68% 0.71% 0.70% 0.71%
Ratio of Net Investment Income to Average
Net Assets, before waiver of fees 5.13% 4.92% 5.68% 4.01% 4.51%
Portfolio Turnover Rate 375.64% 778.59% 232.34% 707.57% 235.74%
</TABLE>
<TABLE>
MONEY MARKET PORTFOLIO
<CAPTION>
Year Ended December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net Assets, End of Period ($000) $587,019 $352,930 $256,126 $224,523 $200,148
Ratio of Expenses to Average Net Assets 0.18% 0.19% 0.21% 0.19% 0.19%
Ratio of Net Investment Income to
Average Net Assets 5.47% 5.34% 5.87% 4.28% 3.09%
Ratio of Expenses to Average Net Assets,
before waiver of fees 0.31% 0.33% 0.37% 0.39% 0.40%
Ratio of Net Investment Income to Average
Net Assets, before waiver of fees 5.34% 5.20% 5.70% 4.08% 2.88%
</TABLE>
See accompanying notes to financial statements
<PAGE>
MUTUAL FUND PORTFOLIO, GROWTH STOCK PORTFOLIO, UTILITIES STOCK PORTFOLIO, BOND
PORTFOLIO, MONEY MARKET PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION
Each Fund of The Flex-funds 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 Mutual Fund Portfolio seeks growth of capital through investment in the
shares of other mutual funds.
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 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 Bond Portfolio seeks to maximize current income through investment in
securities which are issued, or guaranteed as to payment of principal and
interest, by the U.S. government or any of its agencies or instrumentalities.
The Money Market Portfolio seeks current income and stable net asset values
through investment in a portfolio of money market instruments.
The financial statements of the Funds are included elsewhere in this report.
2. SIGNIFICANT ACCOUNTING POLICES
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 Bond Portfolio values the securities held at 3:00 pm eastern time. The
Portfolios obtain prices from independent pricing services which use valuation
techniques approved by the Board of Trustees.
Money market securities held in the Money Market Portfolio are valued at
amortized cost, which approximates market value. Money market securities held in
the four remaining 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 or less 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.
<PAGE>
Futures & Options
Each Portfolio, except the Money Market 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. Such transactions may be considered trading
activity under generally accepted accounting principles. 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 in 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, 1997 the Portfolios had the following
activity in futures contracts and written option contracts:
LONG FUTURES CONTRACTS NUMBER OF CONTRACTS NOTIONAL AMOUNT
================================================================================
Mutual Fund Portfolio:
Outstanding, beginning of year 260 $92,637,850
Contracts opened 1,173 383,416,903
Contracts closed (1,323) (450,989,853)
Outstanding, end of year 110 25,064,900
================================================================================
Growth Stock Portfolio:
Outstanding, beginning of year 21 $7,817,250
Contracts opened 139 47,173,843
Contracts closed (153) (53,280,056)
Outstanding, end of year 7 1,711,037
================================================================================
Bond Portfolio:
Outstanding, beginning of year --- ---
Contracts opened 306 $31,947,563
Contracts closed (306) (31,947,563)
Outstanding, end of year --- ---
<PAGE>
COVERED PUT OPTIONS COVERED CALL OPTIONS
Number of Number of
contracts Premiums contracts Premiums
================================================================================
Mutual Fund Portfolio:
Outstanding, beginning of year --- --- --- ---
Options written 4,000 $7,391,887 4,000 $11,991,787
Outstanding, end of year 4,000 7,391,887 4,000 11,991,787
================================================================================
Growth Stock Portfolio:
Outstanding, beginning of year --- --- --- ---
Options written --- --- 140 $34,315
Options expired --- --- (140) (34,315)
Outstanding, end of year --- --- --- ---
================================================================================
Bond Portfolio:
Outstanding, beginning of year --- --- --- ---
Options written --- --- 20 $15,495
Options exercised --- --- (20) (15,495)
Outstanding, end of year --- --- --- ---
================================================================================
Income Taxes
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.
Organizational Costs
The costs related to the organization of each Portfolio have been deferred and
are being amortized by the Portfolio on a straight-line basis over a five-year
period. Such costs for Mutual Fund Portfolio, Growth Stock Portfolio, Bond
Portfolio and Money Market Portfolio have been fully amortized.
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.
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, Sector Capital Management, Inc. and Miller/Howard
Investments, Inc. serve as subadvisor of the Growth Stock Portfolio and the
Utilities 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 a fee at the following annual
rates: Mutual Fund Portfolio, Growth Stock Portfolio, and Utilities Stock
Portfolio, 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; Bond Portfolio, 0.40% of average daily
net assets up to $100 million and 0.20% of average daily net assets exceeding
$100 million; Money Market Portfolio, 0.40% of average daily net assets up to
$100 million and 0.25% of average daily net assets exceeding $100 million.
During the year ended December 31, 1997, RMA voluntarily waived a portion of its
investment advisory fees in the Bond and Money Market Portfolios.
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 for each Portfolio, except $30,000 for the Money Market Portfolio.
Certain officers and trustees of the Portfolios are also officers or directors
of MII, RMA and MFSCo.
<PAGE>
4. SECURITIES TRANSACTIONS
For the year ended December 31, 1997, the cost of purchases and proceeds from
sales or maturities of long-term investments for the Portfolios were as follows:
PORTFOLIO PURCHASES SALES
Mutual Fund Portfolio $480,151,975 $442,533,548
Growth Stock Portfolio 44,982,486 35,676,667
Utilities Stock Portfolio 4,565,204 3,490,778
Bond Portfolio 41,876,549 35,680,823
As of December 31, 1997, the aggregate cost basis of investments and unrealized
appreciation (depreciation) for Federal income tax purposes was as follows:
PORTFOLIO COST BASIS UNREALIZED UNREALIZED NET UNREALIZED
OF INVESTMENTS APPRECIATION DEPRECIATION APPRECIATION
(DEPRECIATION)
Mutual Fund Portfolio $137,376,306 $10,599,957 ($11,612,200) ($1,012,243)
Growth Stock Portfolio 28,054,467 6,346,447 (571,824) 5,774,623
Utilities Stock Portfolio 8,400,774 2,443,238 (176,253) 2,266,985
Bond Portfolio 16,063,116 535,396 (38) 535,358
Money Market Portfolio 582,497,625 --- --- ---
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Trustees of the
Mutual Fund Portfolio, Growth Stock Portfolio,
Utilities Stock Portfolio, Bond Portfolio and
Money Market Portfolio:
We have audited the accompanying statements of assets and liabilities of the
Mutual Fund Portfolio, Growth Stock Portfolio, Utilities Stock Portfolio, Bond
Portfolio and Money Market Portfolio (Portfolios), including the portfolios of
investments, as of December 31, 1997, 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, 1997, 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 that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Mutual Fund Portfolio, Growth Stock Portfolio, Utilities Stock Portfolio, Bond
Portfolio and Money Market Portfolio at December 31, 1997, 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 Peat Marwick LLP
Columbus, Ohio
February 12, 1998
