As filed with the Securities and Exchange Commission on April 30, 1999.
COMMISSION FILE NO. 33-88420
COMMISSION FILE NO. 811-3462
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 8
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 42
THE FLEX-FUNDS
(Exact Name of Registrant as Specified in Charter)
P.O. BOX 7177, 6000 MEMORIAL DRIVE, DUBLIN, OHIO 43017
(Address of Principal Executive Offices-Zip Code)
Registrant's Telephone Number, including Area Code: (614)766-7000
WESLEY F. HOAG, VICE PRESIDENT - R. MEEDER & ASSOCIATES, INC.
P.O. BOX 7177, 6000 MEMORIAL DRIVE, DUBLIN, OHIO 43017
(Name and Address of Agent for Service)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
It is proposed that this filing will become effective (check appropriate
box).
-----
/ XXX / immediately upon filing pursuant to paragraph (b) of Rule 485
-----
/ / on pursuant to paragraph (b) of Rule 485.
-----
/ / 60 days after filing pursuant to paragraph (a)(1).
-----
/ / on ___________ pursuant to paragraph (a)(1).
-----
/ / 75 days after filing pursuant to paragraph (a)(2).
-----
/ / on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
-----
/ / This post-effective amendment designates a new effective date for
----- a previously filed post-effective amendment.
The Utilities Stock Portfolio has also executed this Registration Statement.
<PAGE>
THE FLEX-FUNDS
CROSS REFERENCE SHEET TO FORM N-1A
FOR THE HIGHLANDS GROWTH FUND, THE MUIRFIELD FUND,
THE U.S. GOVERNMENT BOND FUND AND THE MONEY MARKET FUND
PART A.
ITEM NO. PROSPECTUS CAPTION
1(a) Front Cover Page
1(b) Back Cover Page
2(a) Investment Goal
2(b) Strategies
2(c)(1) Main Risk Factors
2(c)(2) Performance
3 Fees and Expenses of the Fund
4(a)(b) More Information About the Funds
How is the Trust Organized?
4(c) More About Risk
Risk and Investment Glossary
5 Results of a $10,000 Investment
6(a) Who Manages the Funds?
6(b) Not applicable
7(a) Transaction Policies
7(b) How to Buy Shares
Other Shareholder Services
7(c) How to Make Withdrawals (Redemptions)
Exchange Privilege
Other Shareholder Services
7(d)(e) How Does Taxation Affect the Funds and Their Shareholders?
7(f) Not applicable
8(a) Not applicable
8(b) Distribution Fees
8(c) More Information About the Funds - Each Fund's Investment in a
Portfolio
9 How to Read the Financial Highlights Table
Financial Highlights
<PAGE>
THE FLEX-FUNDS
PROSPECTUS HIGHLANDS GROWTH FUND
APRIL 30, 1999
TOTAL RETURN UTILITIES FUND
MUIRFIELD FUND
[LOGOS] U. S. GOVERNMENT BOND FUND
MONEY MARKET FUND
The Flex-funds is a family of funds that includes five no-load mutual funds
covering a variety of investment opportunities.
This Prospectus gives you important information about the funds that you
should know before you invest. Please read this Prospectus carefully and keep it
handy for future reference.
The Securities and Exchange Commission has not approved or disapproved
these securities or passed upon the adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
The Flex-funds
6000 Memorial Drive
Dublin, OH 43017
1-800-325-FLEX or 614-760-2159
Internet: WWW.FLEXFUNDS.COM
<PAGE>
CONTENTS
- -------------------------------------------------------------------- THE FUNDS
A fund by fund look at Highlands Growth Fund _____
investment goals, strategies, Total Return Utilities Fund _____
risks, expenses and performance Muirfield Fund _____
U.S. Government Bond Fund _____
Money Market Fund _____
Information on who may want to Who May Want to Invest _____
invest and who may not want
to invest
Information about the results of Results of a $10,000 Investment _____
a hypothetical $10,000 investment
in the funds versus benchmark
indexes
More information about the funds More Information about the Funds _____
you should know before investing Who Manages the Funds? _____
Distribution Fees _____
How is the Trust Organized? _____
How Does Taxation Affect the
Funds and Their Shareholders? _____
How to Read the Financial
Highlights Table _____
- ------------------------------------------------------------ SHAREHOLDER MANUAL
Information about account How to Buy Shares _____
transactions and services How to Make Withdrawals
(Redemptions) _____
Transaction Policies _____
Other Shareholder Services _____
- --------------------------------------------------------------- MORE ABOUT RISK
Investment Practices, Securities
and Related Risks _____
Risk and Investment Glossary _____
- ---------------------------------------------------------- FOR MORE INFORMATION
Where to learn more about the funds Back Cover
2
<PAGE>
HIGHLANDS GROWTH FUND - FLCGX
[ICON] INVESTMENT GOAL
The fund seeks growth of capital. To pursue this goal, the fund
invests in a diversified portfolio of domestic common stocks with
greater than average growth characteristics selected primarily from
the Standard & Poor's 500 Composite Stock Price Index (S&P 500).
Current income is not a primary objective.
[ICON] STRATEGIES
The fund invests all of its assets in the Growth Stock Portfolio, a
master fund having the same investment goal as the fund. See "Each
Fund's Investment in a Portfolio" under "More Information About the
Funds." Normally, at least 80% of the Portfolio's total assets will be
invested in domestic common stocks and at least 65% of the Portfolio's
total assets will be invested in growth stocks. At least 70% of the
Portfolio's assets invested in common stocks will be invested in S&P
500 stocks.
The Portfolio consists of investment portfolios representing each of
the industry sectors comprising the S&P 500: utilities,
transportation, capital goods, consumer durables, consumer
non-durables, energy, materials and services, finance, technology and
health. The Portfolio's assets will be allocated to each of these
industry sectors in approximately the same proportion as these
industry sectors are represented in the S&P 500 on a
market-capitalization weighted basis.
The assets of the Portfolio representing each of these industry
sectors are managed by one or more separate investment advisers.
The Portfolio may invest in "traditional" derivatives, such as
financial futures contracts and related options as a hedge against
changes, resulting from market conditions, in the value of securities
held or intended to be held by the Portfolio.
For more information, see "How Does the Fund Pursue Its Investment
Goal?" under "More Information About the Funds."
[ICON] MAIN RISK FACTORS
The value of your investment will fluctuate in response to stock
market movements. To the extent that the fund invests in higher risk
securities, it encounters additional risks that could adversely affect
its performance. The use of several sector advisers or the replacement
of a sector adviser may increase the Portfolio's turnover, gains or
losses, and brokerage commissions. As with any mutual fund, loss of
money is a risk of investing in this fund. Please read "More About
Risk" carefully before investing.
3
<PAGE>
PERFORMANCE
The bar chart below provides some indication of the risks of investing in
the Highlands Growth Fund by showing changes in the fund's performance from year
to year over a 10-year period. The table below the bar chart compares the fund's
performance with a broad measure of market performance and the returns of an
index of funds with similar investment objectives. How the fund has performed in
the past is not necessarily an indication of how the fund will perform in the
future.
[GRAPH] The following information was presented in the form of a bar graph:
YEAR ANNUAL TOTAL RETURN
---- -------------------
1989 10.17%
1990 4.31%
1991 21.46%
1992 6.35%
1993 7.21%
1994 -0.69%
1995 24.61%
1996 9.08%
1997* 29.28%
1998* 23.67%
* The fund changed its investment objective and strategies on January 1, 1997.
The annual total return reflects the results of the change in investment
objective and strategies.
During the period shown in the bar chart, the highest return for a quarter was
19.82% (quarter ending December 31, 1998), and the lowest return for a quarter
was -10.99% (quarter ending September 30, 1998).
Average Annual Total Returns
(for the periods ending
DECEMBER 31, 1998) PAST ONE YEAR PAST 5 YEARS PAST 10 YEARS
- -------------------------------------------------------------------------------
The Highlands Growth Fund 23.67% 16.63% 13.13%
The S&P 500 Composite Stock
Price Index* 28.58% 24.05% 19.20%
Morningstar's Average Growth
Mutual Fund 18.80% 18.14% 16.75%
*The S&P 500 Composite Stock Price Index is a widely recognized unmanaged index
of common stock prices. The S&P 500 does not take into account the deduction of
expenses associated with a mutual fund, such as investment management and
accounting fees. One cannot invest directly in an index.
[ICON] FEES AND EXPENSES OF THE FUND
The following table describes the fees and expenses that you may pay
if you buy and hold shares of the fund.
There are no sales loads, fees or other charges
o to buy fund shares directly from the fund
o to reinvest dividends in additional shares
4
<PAGE>
o to exchange into shares of other funds in the Flex-funds
family of funds
o or to redeem your shares.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND
ASSETS)1
Management Fees 1.00%
Distribution (12b-1) Fees 0.14%
Other Expenses2 0.56%
-----
Total Annual Fund Operating Expenses 1.70%
(1) This table and the Example below reflect the expenses of the fund
and its proportionate share of expenses from its corresponding
Portfolio. See "Each Fund's Investment in a Portfolio" under "More
Information About the Funds."
(2) "Other Expenses" are based upon expenses actually incurred by the
fund for the year ended December 31, 1998.
EXAMPLE
The example in the table below is intended to help you compare the
cost of investing in the fund with the cost of investing in other
mutual funds.
Assuming you
o invest $10,000 in the fund
o redeem your shares at the end of the periods shown below
o earn a 5% return each year and
o incur the same fund operating expenses shown above,
your cost of investing in the fund would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$173 $536 $923 $2,009
Of course, your actual costs may be higher or lower.
5
<PAGE>
TOTAL RETURN UTILITIES FUND - FLRUX
[ICON] INVESTMENT GOAL
The fund seeks an above average level of current income and growth of
income by investing primarily in equity securities of domestic and
foreign public utility companies; however, the fund will not invest in
electric utilities that generate power from nuclear reactors. The fund
also seeks capital appreciation, but only when consistent with its
primary investment objective.
[ICON] STRATEGIES
The fund invests all of its assets in The Utilities Stock Portfolio, a
master fund having the same investment goal as the fund. See "Each
Fund's Investment in a Portfolio" under "More Information About the
Funds." The Portfolio generally invests at least 65% of its total
assets in equity securities of domestic or foreign companies that
provide electricity, natural gas, water, telecommunications or
sanitary services to the public. The remaining 35% of the Portfolio's
total assets may be invested in debt securities of public utility
companies, or debt or equity securities of other issuers who stand to
benefit from developments in the utilities industry.
The subadviser uses fundamental analysis to identify those securities
that it believes provide an above average level of current income and
growth of income. Fundamental analysis involves assessing a company
and its business environment, management, balance sheet, income
statement, anticipated earnings and dividends, and other related
measures of value.
The Portfolio may invest in "traditional" derivatives, such as
financial futures contracts and related options as a hedge against
changes, resulting from market conditions, in the value of securities
held or intended to be held by the Portfolio.
For more information, see "How Does the Fund Pursue Its Investment
Goal?" under "More Information About the Funds."
[ICON] MAIN RISK FACTORS
Utility stocks are subject to interest rate risk - i.e., price
fluctuations due to changing interest rates. Rising interest rates can
be expected to reduce the fund's net asset value. Because the fund
concentrates in the utility industry, its performance is largely
dependent on the utility industry's performance, which may differ from
that of the overall stock market. Governmental regulation of public
utility companies can limit their ability to expand their business or
to pass cost increases on to customers. Companies providing power or
energy-related services may also be affected by fuel shortages or cost
increases, environmental protection or energy conservation
regulations, as well as fluctuating demand for their services.
Investments in securities of foreign companies involve additional
risks relating to political and economic developments abroad,
including currency fluctuations. As with any mutual fund, loss of
money is a risk of investing in the fund. Please read "More About
Risk" carefully before investing.
6
<PAGE>
PERFORMANCE
The bar chart below provides some indication of the risks of investing in
the Total Return Utilities Fund by showing changes in the fund's performance
from year to year during the past three calendar years. The table below the bar
chart compares the fund's performance with a broad measure of market performance
and the returns of an index of funds with similar investment objectives. How the
fund has performed in the past is not necessarily an indication of how the fund
will perform in the future.
[GRAPH] The following information was presented in the form of a bar graph:
YEAR ANNUAL TOTAL RETURN
1996 13.33%
1997 28.68%
1998 8.77%
During the period shown in the bar chart, the highest return for a quarter was
13.53% (quarter ending December 31, 1998), and the lowest return for a quarter
was -10.29% (quarter ending September 30, 1998).
Average Annual Total Returns
(for the periods ending
DECEMBER 31, 1998) PAST ONE YEAR SINCE INCEPTION (6/21/95)
- -------------------------------------------------------------------------------
Total Return Utilities Fund 8.77% 18.57%
The S&P 500 Composite Stock
Price Index* 28.58% 28.61%
Morningstar's Average
Utilities Fund 18.00% 19.52%
*The S&P 500 Composite Stock Price Index is a widely recognized unmanaged index
of common stock prices. The S&P 500 does not take into account the deduction of
expenses associated with a mutual fund, such as investment management and
accounting fees. One cannot invest directly in an index.
[ICON] FEES AND EXPENSES OF THE FUND
The following table describes the fees and expenses that you may pay
if you buy and hold shares of the fund.
There are no sales loads, fees or other charges
o to buy fund shares directly from the fund
o to reinvest dividends in additional shares
o to exchange into shares of other funds in the Flex-funds
family of funds
o or to redeem your shares.
7
<PAGE>
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND
ASSETS)1
Management Fees 1.00%
Distribution (12b-1) Fees 0.24%
Other Expenses2 0.87%
-----
Total Annual Fund Operating Expenses 2.11%
Expense Reimbursement3 0.31%
-----
Net Expenses 1.80%
(1) This table and the Example below reflect the expenses of the fund
and its proportionate share of expenses from its corresponding
Portfolio. See "Each Fund's Investment in a Portfolio" under "More
Information About the Funds."
(2) "Other Expenses" are based upon expenses actually incurred by the
fund for the year ended December 31, 1998.
(3) The adviser has agreed to reduce its fees and/or absorb expenses
to limit the fund's total annual operating expenses to 1.80%. The
adviser may terminate this agreement after December 31, 1999.
EXAMPLE
The example in the table below is intended to help you compare the
cost of investing in the fund with the cost of investing in other
mutual funds.
Assuming you
o invest $10,000 in the fund
o redeem your shares at the end of the periods shown below
o earn a 5% return each year and
o incur the same fund operating expenses shown above,
your cost of investing in the fund would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$183 $631 $1,106 $2,417
Of course, your actual costs may be higher or lower.
8
<PAGE>
THE MUIRFIELD FUND - FLMFX
[ICON] INVESTMENT GOAL
The fund seeks growth of capital. To pursue this goal, the fund
invests primarily in other growth mutual funds that are not affiliated
with the fund.
[ICON] STRATEGIES
The fund invests all of its assets in the Mutual Fund Portfolio, a
master fund having the same investment goal as the fund. See "Each
Fund's Investment in a Portfolio" under "More Information About the
Funds." The Portfolio pursues its investment goal through asset
allocation and mutual fund selection. Normally, at least 65% of the
value of the Portfolio's total assets will be invested in mutual
funds. The mutual funds in which the Portfolio invests are primarily
growth funds investing in common stocks. In the underlying mutual
funds, current income will usually be of secondary importance. The
adviser overweights mutual fund types that it believes represent above
average market potential with below average market risk. The adviser
continually evaluates market capitalization (for example, blue chip
versus small capitalization) and sector rotation (for example, high
tech versus industrial companies) when selecting mutual funds.
The Portfolio may invest up to 100% of its assets in money market
securities and investment grade bonds as a defensive tactic. When
invested defensively, the Portfolio could be unable to achieve its
investment objective. The Portfolio places a high degree of importance
on maintaining and protecting portfolio values from adverse market
conditions. The Portfolio strives to avoid losses during high risk
market environments and strives to provide attractive returns during
low risk markets. When the adviser's evaluation of the stock market
indicates that the risks of the stock market are greater than the
potential rewards, the Portfolio will reduce or eliminate its position
in growth mutual funds in order to attempt to preserve your capital.
The Portfolio may also invest in common stocks directly.
The Portfolio may invest in "traditional" derivatives, such as
financial futures contracts and related options as a hedge against
changes, resulting from market conditions, in the value of securities
held or intended to be held by the Portfolio.
For more information, see "How Does the Fund Pursue Its Investment
Goal?" under "More Information About the Funds."
[ICON] MAIN RISK FACTORS
When the Portfolio is invested primarily in growth mutual funds, the
value of your investment will fluctuate in response to stock market
movements. Investing through the fund in an underlying portfolio of
mutual funds involves additional expenses and tax results which would
not arise if you invested directly in the mutual funds in which the
fund invests. The underlying mutual funds may invest in smaller or
newer companies which are more likely to grow as well as suffer more
significant losses than larger or more established companies.
Investments in such companies can be both more volatile and more
speculative. In addition, if the adviser does not accurately predict
changing market conditions and other economic factors, the Portfolio's
assets might be allocated in a manner that is disadvantageous. As with
any mutual fund, loss of money is a risk of investing in the fund.
Please read "More About Risk" carefully before investing.
9
<PAGE>
PERFORMANCE
The bar chart below provides some indication of the risks of investing in
The Muirfield Fund by showing changes in the fund's performance from year to
year over a 10-year period. The table below the bar chart compares the fund's
performance with a broad measure of market performance and the returns of an
index of funds with similar investment objectives. How the fund has performed in
the past is not necessarily an indication of how the fund will perform in the
future.
[GRAPH] The following information was presented in the form of a bar graph:
YEAR ANNUAL TOTAL RETURN
---- -------------------
1989 13.95%
1990 2.33%
1991 29.83%
1992 6.91%
1993 8.11%
1994 2.70%
1995 25.82%
1996 5.99%
1997 18.59%
1998 29.33%
During the 10-year period shown in the bar chart, the highest return for a
quarter was 25.45% (quarter ended December 31, 1998) and the lowest return for a
quarter was -6.19% (quarter ending September 30, 1990).
Average Annual Total Returns
(for the periods ending
DECEMBER 31, 1998) PAST ONE YEAR PAST 5 YEARS PAST 10 YEARS
- --------------------------------------------------------------------------------
The Muirfield Fund 29.33% 16.00% 13.90%
The S&P 500 Composite
Stock Price Index* 28.58% 24.05% 19.20%
Morningstar's Average Asset
Allocation Fund 11.40% 12.33% 12.11%
*The S&P 500 Composite Stock Price Index is a widely recognized unmanaged index
of common stock prices. The S&P 500 does not take into account the deduction of
expenses associated with a mutual fund, such as investment management and
accounting fees. One cannot invest directly in an index.
[ICON] FEES AND EXPENSES OF THE FUND
The following table describes the fees and expenses that you may pay
if you buy and hold shares of the fund.
There are no sales loads, fees or other charges
o to buy fund shares directly from the fund
o to reinvest dividends in additional shares
o to exchange into shares of other funds in the Flex-funds
family of funds
o or to redeem your shares.
10
<PAGE>
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND
ASSETS)1
Management Fees 0.81%
Distribution (12b-1) Fees 0.11%
Other Expenses2 0.32%
-----
Total Annual Fund Operating Expenses 1.24%
(1) This table and the Example below reflect the expenses of the fund
and its proportionate share of expenses from its corresponding
Portfolio. See "Each Fund's Investment in a Portfolio" under "More
Information About the Funds."
(2) "Other Expenses" are based upon expenses actually incurred by the
fund for the year ended December 31, 1998.
EXAMPLE
The example in the table below is intended to help you compare the
cost of investing in the fund with the cost of investing in other
mutual funds.
Assuming you
o invest $10,000 in the fund
o redeem your shares at the end of the periods shown below
o earn a 5% return each year and
o incur the same fund operating expenses shown above,
your cost of investing in the fund would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$126 $393 $681 $1,500
Of course, your actual costs may be higher or lower.
11
<PAGE>
U.S. GOVERNMENT BOND FUND - FLXBX
[ICON] INVESTMENT GOAL
The fund seeks to maximize current income through investment in:
o securities which are issued, or guaranteed as to principal
and interest, by the U.S. government or any of its agencies
or instrumentalities and
o repurchase agreements involving these U.S. government
securities
[ICON] STRATEGIES
The fund invests all of its assets in The Bond Portfolio, a master
fund having the same investment goal as the fund. See "Each Fund's
Investment in a Portfolio" under "More Information About the Funds."
Normally, the Portfolio invests at least 65% of the value of its
assets in U.S. government debt securities. The Portfolio may invest in
U.S. Treasuries; agency securities such as Ginnie Maes, Sally Maes,
Fanny Maes and Freddie Macs; and repurchase agreements involving these
securities.
The Portfolio may invest in U.S. government securities having any
maturity. Normally, the Portfolio will invest in 10 year U.S.
government securities if the adviser believes the risk/reward
relationship of the bond market is positive. The Portfolio will invest
in short-term U.S. government securities or money market securities
when the adviser believes the risk/reward relationship of the bond
market is negative. If the adviser believes that long-term interest
rates are significantly greater than inflation, the Portfolio may
invest in U.S. government securities with maturities as long as 30
years.
When analyzing the market for U.S. government securities, the adviser
monitors the following indicators:
o momentum - the trend of U.S. government securities prices
compared to moving averages
o real interest rates - the 10-year Treasury bond yield
compared to the rate of inflation
o yield spread - the 10-year Treasury bond yield as compared
to the 90 day Treasury bill yield
The Portfolio may invest in "traditional" derivatives, such as
financial futures contracts and related options as a hedge against
changes, resulting from market conditions, in the value of securities
held or intended to be held by the Portfolio.
For more information, see "How Does the Fund Pursue Its Investment
Goal?" under "More Information About the Funds."
[ICON] MAIN RISK FACTORS
As with most bond funds, the value of your investment will fluctuate
with changes in interest rates. Typically, a rise in interest rates
causes a decline in the market value of debt securities (including
U.S. government securities). These and other risks of investing in the
12
<PAGE>
fund are set forth in "More About Risk." Other factors may affect the
market price and yield of the fund's securities, including investor
demand and domestic and worldwide economic conditions. As with any
mutual fund, loss of money is a risk of investing in the fund.
PERFORMANCE
The bar chart shown below provides some indication of the risks of
investing in the U.S. Government Bond Fund by showing changes in the fund's
performance from year to year over a 10-year period. The table below the bar
chart compares the fund's performance with a broad measure of market performance
and the returns of an index of funds with similar investment objectives. How the
fund has performed in the past is not necessarily an indication of how the fund
will perform in the future.
[GRAPH] The following information was presented in the form of a bar graph:
YEAR ANNUAL TOTAL RETURN
---- -------------------
1989 8.75%
1990 8.35%
1991 15.30%
1992 3.26%
1993 8.22%
1994 -0.99%
1995 18.32%
1996 0.15%
1997 7.70%
1998 9.62%
During the 10-year period shown in the bar chart, the highest return for a
quarter was 7.60% (quarter ended June 30, 1995) and the lowest return for a
quarter was -4.05% (quarter ending March 31, 1992).
Average Annual Total Returns
(for the periods ending
DECEMBER 31, 1998) PAST ONE YEAR PAST 5 YEARS PAST 10 YEARS
- -------------------------------------------------------------------------------
U.S. Government Bond Fund 9.62% 6.74% 7.72%
The Lehman Brothers Intermediate
Government Bond Index* 8.51% 6.49% 8.37%
Morningstar's Average General
Government Bond Fund 7.40% 5.70% 7.61%
*The Lehman Brothers Intermediate Government Bond Index is an unmanaged index of
fixed-rate bonds issued by the U.S. government and its agencies that are rated
investment grade or higher and have one to ten years remaining until maturity
and at least $100 million outstanding. The Lehman Brother Intermediate
Government Bond Index does not take into account the deduction of expenses
associated with a mutual fund, such as investment management and accounting
fees. One cannot invest directly in an index.
[ICON] FEES AND EXPENSES OF THE FUND
The following table describes the fees and expenses that you may pay
if you buy and hold shares of the fund.
There are no sales loads, fees or other charges
13
<PAGE>
o to buy fund shares directly from the fund
o to reinvest dividends in additional shares
o to exchange into shares of other funds in the Flex-funds
family of funds
o or to redeem your shares.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND
ASSETS)1
Management Fees 0.40%
Distribution (12b-1) Fees 0.19%
Other Expenses2 0.57%
-----
Total Annual Fund Operating Expenses 1.16%
Fee Waiver and Expense
Reimbursement3 0.16%
-----
Net Expenses 1.00%
(1) This table and the Example below reflect the expenses of the fund
and its proportionate share of expenses from its corresponding
Portfolio. See "Each Fund's Investment in a Portfolio" under "More
Information About the Funds."
(2) "Other Expenses" are based upon expenses actually incurred by the
fund for the year ended December 31, 1998.
(3) The adviser has agreed to reduce its fees and/or absorb expenses
to limit the fund's total annual operating expenses to 1.00%. The
adviser may terminate this agreement after December 31, 1999.
EXAMPLE
The example in the table below is intended to help you compare the
cost of investing in the fund with the cost of investing in other
mutual funds.
Assuming you
o invest $10,000 in the fund
o redeem your shares at the end of the periods shown below
o earn a 5% return each year and
o incur the same fund operating expenses shown above,
your cost of investing in the fund would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$102 $353 $623 $1,395
Of course, your actual costs may be higher or lower.
14
<PAGE>
MONEY MARKET FUND - FFMXX
[ICON] INVESTMENT GOAL
The fund seeks to provide current income while maintaining a stable
share price of $1.00. To pursue this goal, the fund invests primarily
in high-quality, short-term money market instruments, such as
securities backed by the full faith and credit of the U.S. government,
securities issued by U.S. government agencies, or obligations issued
by corporations and financial institutions.
[ICON] PORTFOLIO SECURITIES
The fund invests all of its assets in The Money Market Portfolio, a
master fund having the same investment goal as the fund. See "Each
Fund's Investment in a Portfolio" under "More Information about the
Funds." The Portfolio, like all money funds, follows SEC guidelines on
the quality, maturity and diversification of its investments. These
guidelines are designed to help reduce a money fund's risks so that it
is more likely to keep its share price at $1.00.
o The Portfolio only buys securities that the adviser
determines present minimal credit risks and that are rated
in one of the top two short-term rating categories or that
are comparable unrated securities in the adviser's opinion.
o The Portfolio only buys securities with remaining maturities
of 397 calendar days or less and maintains a dollar-weighted
average portfolio maturity of 90 days or less.
o Generally, the Portfolio may not invest more than 5% of its
total assets in the securities of a single issuer, other
than in U.S. government securities.
o Generally, the adviser will attempt to purchase securities
with longer maturities when it believes interest rates are
falling and will attempt to purchase securities with shorter
maturities when it believes interest rates are rising.
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, funding agreements and repurchase
agreements.
For more information, see "How Does the Fund Pursue Its Investment
Goal?" under "More Information About the Funds."
[ICON] MAIN RISK FACTORS
The fund is subject to income risk, which is the possibility that the
fund's dividends or income will decline because of falling interest
rates. The fund is subject, to a limited extent, to credit risk which
is the possibility that the issuer of a security owned by the fund
will be unable to repay interest and principal in a timely manner.
An investment in the fund is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency. Although
the fund seeks to preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in the fund. Please
read "More About Risk" carefully before investing.
15
<PAGE>
PERFORMANCE
The bar chart shown below provides some indication of the risks of
investing in the Money Market Fund by showing changes in the fund's performance
from year to year over a 10-year period. The table below the bar chart compares
the fund's performance with the returns of an index of funds with similar
investment objectives. How the fund has performed in the past is not necessarily
an indication of how the fund will perform in the future.
[GRAPH] The following information was presented in the form of a bar graph:
YEAR ANNUAL TOTAL RETURN
---- -------------------
1989 9.32%
1990 8.21%
1991 6.12%
1992 3.70%
1993 2.98%
1994 4.10%
1995 5.85%
1996 5.27%
1997 5.38%
1998 5.31%
During the 10-year period shown in the bar chart, the highest return for a
quarter was 2.40% (quarter ended June 30, 1989) and the lowest return for a
quarter was 0.71% (quarter ending June 30, 1993).
The fund's seven-day simple yield ended on December 31, 1998 was 4.96%
and the seven-day compound yield ended December 31, 1998 was 5.07%. To request
the fund's current seven-day yield, please call 1-800-325-FLEX or 614-760-2159.
Average Annual Total Returns
(for the periods ending
DECEMBER 31, 1998) PAST ONE YEAR PAST 5 YEARS PAST 10 YEARS
- --------------------------------------------------------------------------------
Money Market Fund 5.31% 5.18% 5.61%
Lipper's Average General Purpose
Money Market Fund 4.84% 4.77% 5.20%
[ICON] FEES AND EXPENSES OF THE FUND
The following table describes the fees and expenses that you may pay
if you buy and hold shares of the fund.
There are no sales loads, fees or other charges
o to buy fund shares directly from the fund
o to reinvest dividends in additional shares
o to exchange into shares of other funds in the Flex-funds
family of funds
o or to redeem your shares.
16
<PAGE>
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND
ASSETS)1
Management Fees 0.27%
Distribution (12b-1) Fees 0.10%
Other Expenses2 0.22%
-----
Total Annual Fund Operating Expenses 0.59%
Fee Waiver and Expense
Reimbursement3 0.18%
-----
Net Expenses 0.41%
(1) This table and the Example below reflect the expenses of the fund
and its proportionate share of expenses from its corresponding
Portfolio. See "Each Fund's Investment in a Portfolio" under "More
Information About the Funds."
(2) "Other Expenses" are based upon expenses actually incurred by the
fund for the year ended December 31, 1999.
(3) Reflects the adviser's agreement to reduce its fees and/or absorb
expenses to the extent necessary to achieve an effective yield for the
fund that will rank in the top 10% of yields for all general purpose
money market funds in 1999. The adviser may terminate this agreement
after December 31, 1999.
EXAMPLE
The example in the table below is intended to help you compare the
cost of investing in the fund with the cost of investing in other
mutual funds.
Assuming you
o invest $10,000 in the fund
o redeem your shares at the end of the periods shown below
o earn a 5% return each year and
o incur the same fund operating expenses shown above,
your cost of investing in the fund would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$42 $171 $311 $721
Of course, your actual costs may be higher or lower.
17
<PAGE>
WHO MAY WANT TO INVEST
HIGHLANDS GROWTH FUND
The fund may be appropriate if you:
o are seeking long-term growth potential
o are seeking a fund for the growth portion of an asset allocation
portfolio
o are more comfortable with a focus on established, well-known
companies
o are seeking to diversify your portfolio
o are willing to accept higher short-term risk along with
potentially higher long-term returns
The fund may not be appropriate if you:
o are unwilling to accept an investment that will go up and down in
value
o are investing to meet short-term financial goals
TOTAL RETURN UTILITIES FUND
The fund may be appropriate if you:
o are seeking a more conservative, income-oriented equity
investment or are looking to supplement your core equity holdings
o are a socially responsible investor
The Fund may not be appropriate if you:
o are seeking a short-term investment vehicle
o desire an investment that is diversified over several market
sectors
MUIRFIELD FUND
The fund may be appropriate if you:
o are seeking long-term growth potential but are concerned about
moderating the risks associated with being invested in stocks at
all times
o are seeking to diversify your portfolio
o are investing with a long-term horizon
18
<PAGE>
The fund may not be appropriate if you:
o are investing to meet short-term financial goals
o are seeking to be invested in the stock market at all times
o are seeking to maximize returns from an aggressive growth
strategy that is invested in stocks at all times
U.S. GOVERNMENT BOND FUND
The fund may be appropriate if you:
o are seeking a regular stream of income
o have common stock holdings and want a bond investment in order to
diversify your portfolio
o are seeking higher potential returns than money market
investments provide and are willing to accept moderate risk of
volatility
o have retired or are about to retire
The fund may not be appropriate if you:
o require maximum stability of principal
o are investing for a maximum return over a long-term horizon
MONEY MARKET FUND
The fund may be appropriate if you:
o like to earn income at current money market rates while
preserving the value of your investment
o are looking for a short-term component of an asset allocation
program
o characterize your investment outlook as "very conservative"
o want to be able to move your money into stock or bond investments
quickly and without penalty
The fund may not be appropriate if you:
o are investing for maximum return over a long-term horizon
19
<PAGE>
RESULTS OF A $10,000 INVESTMENT
THE HIGHLANDS GROWTH FUND VS. BENCHMARK INDEXES
AVERAGE ANNUAL TOTAL RETURNS
AS OF 12/31/98
1 YEAR 23.67%
5 YEARS 16.63%
10 YEARS 13.13%
SINCE INCEPTION (1/1/88) 10.90%
[GRAPH] The following information was presented as a line graph:
Morningstar's
The Highlands Average Growth
YEAR Growth Fund S&P 500 Mutual Fund Index
- ---- ------------- ------- -----------------
1988 $10,000 $10,000 $10,000
1989 $11,017 $13,168 $12,730
1990 $11,493 $12,758 $12,149
1991 $13,959 $16,647 $16,684
1992 $14,846 $17,915 $18,201
1993 $15,916 $19,717 $20,438
1994 $15,806 $19,976 $20,091
1995 $19,697 $27,474 $26,364
1996 $21,485 $33,778 $31,666
1997 $27,776 $45,043 $39,588
1998 $34,351 $57,915 $47,032
The chart compares The Highlands Growth Fund's shares to benchmark indexes. It
is intended to give you a general idea of how the Fund performed compared to
these benchmarks over the period 1/1/88-12/31/98. It is important to understand
differences between your Fund and these indexes. An index measures performance
of a hypothetical portfolio.
A market index such as the S&P 500 Composite Stock Price Index is not managed,
incurring no sales charges, expenses, or fees. If you could buy all the
securities that make up a market index, you would incur expenses that would
affect your investment's return. An index of funds such as the Morningstar's
Average Growth Mutual Fund Index includes a number of mutual funds grouped by
investment objective. Each of those funds interprets that objective differently,
and each employs a different management style and investment strategy.
For a descriptions of indexes referred to on this page, please refer to
"Performance."
PAST PERFORMANCE IS NO GUARANTEE OF COMPARABLE FUTURE RESULTS. MARKET VOLATILITY
CAN SIGNIFICANTLY IMPACT SHORT-TERM PERFORMANCE. RESULTS OF AN INVESTMENT MADE
TODAY MAY DIFFER SUBSTANTIALLY FROM THE HISTORICAL PERFORMANCE SHOWN.
20
<PAGE>
1998 IN REVIEW
Two words can best describe the performance of the stock market during
1998: "volatile" and "narrow." While the first six months of the year were
relatively calm, with the market performing much to our expectations, the second
six months were anything but.
Investors received a cold shot of reality during the third quarter, as
equity markets plunged in response to financial crises in many emerging markets
and concerns about the effect of these crises on U.S. corporate earnings. By
early October, the Dow Jones Industrial Average had given back nearly all of its
year-to-date gains. However, the spectacular market comeback of the fourth
quarter helped the Dow and other large-cap market indexes finish the year in or
near record territory.
Through the whipsaw volatility and extreme narrowness that characterized
the performance of the stock market in 1998, The Highlands Growth Fund adhered
to its investment strategy by remaining nearly fully invested in equities
throughout the year. While such exposure may have left some investors feeling
queasy at times, especially during the market corrections of the third quarter,
our position ultimately helped us achieve strong returns in the fourth quarter
and for all of 1998.
For the year, The Highlands Growth Fund had an annual total return of
23.67%, outperforming the 18.80% annual total return for the average growth fund
according to Morningstar, but underperforming the 28.58% annual total return of
the S&P 500 Index for the year.
RESULTS OF A $10,000 INVESTMENT
THE TOTAL RETURN UTILITIES FUND VS. BENCHMARK INDEXES
AVERAGE ANNUAL TOTAL RETURNS
AS OF 12/31/98
1 YEAR 8.77%
SINCE INCEPTION (6/21/95) 18.57%
[GRAPH] The following information was presented as a line graph:
Morningstar's
The Total Return Average Utilities
DATE Utilities Fund S&P 500 Fund Index
- ---- ---------------- ------- -----------------
6/21/95 $10,000 $10,000 $10,000
9/30/95 $10,427 $10,794 $10,703
12/31/95 $11,500 $11,443 $11,432
3/31/96 $11,415 $12,058 $11,417
6/30/96 $12,103 $12,598 $11,868
9/30/96 $12,085 $12,988 $11,660
12/31/96 $13,032 $14,069 $12,623
3/31/97 $12,729 $14,447 $12,506
6/30/97 $13,749 $16,967 $13,602
9/30/97 $14,898 $18,238 $14,341
12/31/97 $16,770 $18,761 $15,818
3/31/98 $18,465 $21,376 $17,429
6/30/98 $17,910 $22,082 $17,145
9/30/98 $16,067 $19,890 $16,863
12/31/98 $18,241 $24,122 $18,666
21
<PAGE>
The chart compares The Total Return Utilities Fund's shares to benchmark
indexes. It is intended to give you a general idea of how the Fund performed
compared to these benchmarks over the period 6/21/95-12/31/98. (Please note that
performance figures for the indexes are from 6/30/95-12/31/98.) It is important
to understand differences between your Fund and these indexes. An index measures
performance of a hypothetical portfolio.
A market index such as the S&P 500 Composite Stock Price Index is not managed,
incurring no sales charges, expenses, or fees. If you could buy all the
securities that make up a market index, you would incur expenses that would
affect your investment's return. An index of funds such as the Morningstar's
Average Utilities Fund Index includes a number of mutual funds grouped by
investment objective. Each of those funds interprets that objective differently,
and each employs a different management style and investment strategy.
For a description of indexes referred to on this page, please refer to
"Performance."
PAST PERFORMANCE IS NO GUARANTEE OF COMPARABLE FUTURE RESULTS. MARKET VOLATILITY
CAN SIGNIFICANTLY IMPACT SHORT-TERM PERFORMANCE. RESULTS OF AN INVESTMENT MADE
TODAY MAY DIFFER SUBSTANTIALLY FROM THE HISTORICAL PERFORMANCE SHOWN.
1998 IN REVIEW
1998 proved to be a challenging year for The Total Return Utilities Fund.
Following the Fund's strong first quarter performance, this summer's market
downturn adversely affected the Fund's returns for the year. A robust 13.53%
gain in the fourth quarter helped the Fund finish 1998 on a positive note with
an annual total return of 8.77%, below the 18.00% annual total return of the
average utilities fund according to Morningstar and the 28.58% annual total
return of the S&P 500 Composite Stock Price Index.
The strong performance of the leading utility funds in the United States
was mostly due to the "flight to quality" of investors fleeing the turmoil of
the world's equity markets, as well as higher than normal gains by many electric
utility companies that generate nuclear power. The Fund's socially-conscious
investment policy prevents us from investing in these equities, for we consider
the risks and strict regulatory environment of the nuclear power industry to be
a hindrance to the long-term profitability of these companies.
22
<PAGE>
RESULTS OF A $10,000 INVESTMENT
THE MUIRFIELD FUND VS. BENCHMARK INDEXES
AVERAGE ANNUAL TOTAL RETURNS
AS OF 12/31/98
1 YEAR 29.33%
5 YEARS 16.00%
10 YEARS 13.90%
SINCE INCEPTION (8/10/88) 14.00%
[GRAPH] The following information was presented as a line graph:
Morningstar's
Average Asset
YEAR The Muirfield Fund S&P 500 Allocation Fund
- ---- ------------------ ------- ---------------
1988 $10,000 $10,000 $10,000
1989 $11,395 $13,168 $11,661
1990 $11,660 $12,758 $11,799
1991 $15,139 $16,647 $14,499
1992 $16,185 $17,915 $15,733
1993 $17,497 $19,717 $17,545
1994 $17,969 $19,976 $17,308
1995 $22,608 $27,474 $21,461
1996 $23,964 $33,778 $24,117
1997 $28,419 $45,043 $28,165
1998 $36,752 $57,915 $31,376
The chart compares The Muirfield Fund's shares to benchmark indexes. It is
intended to give you a general idea of how the Fund performed compared to these
benchmarks over the period 8/10/88-12/31/98. (Please note that performance
figures for the indexes are from 8/31/88-12/31/98.) It is important to
understand differences between your Fund and these indexes. An index measures
performance of a hypothetical portfolio.
A market index such as the S&P 500 Composite Stock Price Index is not managed,
incurring no sales charges, expenses, or fees. If you could buy all the
securities that make up a market index, you would incur expenses that would
affect your investment's return. An index of funds such as the Morningstar's
Average Asset Allocation Fund Index includes a number of mutual funds grouped by
investment objective. Each of those funds interprets that objective differently,
and each employs a different management style and investment strategy.
For a description of indexes referred to on this page, please refer to
"Performance."
PAST PERFORMANCE IS NO GUARANTEE OF COMPARABLE FUTURE RESULTS. MARKET VOLATILITY
CAN SIGNIFICANTLY IMPACT SHORT-TERM PERFORMANCE. RESULTS OF AN INVESTMENT MADE
TODAY MAY DIFFER SUBSTANTIALLY FROM THE HISTORICAL PERFORMANCE SHOWN.
23
<PAGE>
1998 IN REVIEW
The Muirfield Fund was able to outperform its peer group with an impressive
annual total return of 29.33% for 1998, versus the 11.40% annual total return of
the average asset allocation fund according to Morningstar, as well as the
28.58% annual total return of the S&P 500 Index for 1998.
Our evaluation of market conditions through the first half of the year
caused us to approach our equity mutual fund investments with caution, as we
periodically maintained defensive positions in cash equivalents. Moreover,
technical measurements also raised doubts about the health of the market during
1998.
The third quarter confirmed our assessment of overvalution, as the stock
market suffered its worst decline in many years. Timely decisions to adopt a
more defensive position as the market began to decline significantly helped the
Fund preserve year-to-date gains and avoid losses that affected most other
equity funds.
Our investment discipline prompted us to return to a fully invested
position by late October, once our evaluation of the risk/reward relationships
in the stock market turned positive again. Through most of the quarter, the
Fund's portfolio was split rather evenly between Nasdaq-oriented funds that
favor the technology sector and growth funds that are pegged to the S&P 500
Index.
RESULTS OF A $10,000 INVESTMENT
THE U.S. GOVERNMENT BOND FUND VS. BENCHMARK INDEXES
AVERAGE ANNUAL TOTAL RETURNS
AS OF 12/31/98
1 YEAR 9.62%
5 YEARS 6.74%
10 YEARS 7.72%
SINCE INCEPTION (1/1/88) 7.40%
[GRAPH] The following information was presented as a line graph:
The Lehman Bros. Morningstar's Average
The U.S. Government Intermediate Government General Government
DATE Bond Fund Bond Index Bond Fund Index
- ---- ------------------- ----------------------- ---------------------
1988 $10,000 $10,000 $10,000
1989 $10,875 $11,268 $11,174
1990 $11,782 $12,345 $12,127
1991 $13,585 $14,087 $13,825
1992 $14,028 $15,063 $14,637
1993 $15,181 $16,313 $15,773
1994 $15,030 $16,029 $15,217
1995 $17,784 $18,341 $17,515
1996 $17,811 $19,114 $17,959
1997 $19,189 $20,591 $19,379
1998 $21,035 $22,344 $20,814
24
<PAGE>
The chart compares The U.S. Government Bond Fund's shares to benchmark indexes.
It is intended to give you a general idea of how the Fund performed compared to
these benchmarks over the period 1/1/88-12/31/98. It is important to understand
differences between your Fund and these indexes. An index measures performance
of a hypothetical portfolio.
A market index such as The Lehman Bros. Intermediate Government Bond Index is
not managed, incurring no sales charges, expenses, or fees. If you could buy all
the securities that make up a market index, you would incur expenses that would
affect your investment's return. An index of funds such as the Morningstar's
Average General Government Bond Fund Index includes a number of mutual funds
grouped by investment objective. Each of those funds interprets that objective
differently, and each employs a different management style and investment
strategy.
For a description of indexes referred to on this page, please refer to
"Performance."
PAST PERFORMANCE IS NO GUARANTEE OF COMPARABLE FUTURE RESULTS. MARKET VOLATILITY
CAN SIGNIFICANTLY IMPACT SHORT-TERM PERFORMANCE. RESULTS OF AN INVESTMENT MADE
TODAY MAY DIFFER SUBSTANTIALLY FROM THE HISTORICAL PERFORMANCE SHOWN.
<PAGE>
1998 IN REVIEW
During 1998, we witnessed some of the most significant swings in interest
rates in many years, as the market pendulum swayed from serenity to fear then
back again. Throughout all the emotional oscillations of the financial markets
in 1998, The U.S. Government Bond Fund posted an annual total return of 9.62%,
outperforming the 7.40% annual total return of the average government bond fund,
according to Morningstar and the 8.51% annual total return of The Lehman
Brothers Intermediate Government Bond Fund Index.
The Fund's strong performance for the year was due mostly to our adherence
to our investment discipline to raise or lower exposure to U.S. Treasury bonds
in response to the events which shaped the markets in 1998. Early in the year,
the Federal Reserve was prepared to raise rates in order to offset an expanding
economy and creeping inflation. Accordingly through the first half of the year,
the U.S. Government Bond Fund gradually increased its cash equivalents holdings
as yields inched up slowly.
Everything changed upon the arrival of summer. Nervousness over a failing
world economy spread like wildfire, as Russia became the latest casualty of the
global economic blight. Fears that the U.S. would also succumb to the Asian
contagion soon rattled investors. Equity markets began to buckle in July,
lowering intermediate and long-term yields as investors rushed to the safety of
U.S. bonds in a "flight to quality."
Credit spreads widened further once it became clear that loans the
International Monetary Fund had made to Russia had found their way into
individual Swiss bank accounts. A confluence of related events (anxiety over the
collapse of other emerging markets such as Brazil, and the failure of hedge-fund
manager Long Term Capital Management) at last persuaded Federal Reserve Chairman
Alan Greenspan to lower short-term interest rates three times in two months. The
reduction effectively added badly needed liquidity to the wobbling financial
markets and shored up the gaping credit spreads. In response to these events,
the Fund reduced its exposure to 10-year U.S. Treasuries from mid-September
through mid-November. Stability returned to the markets in December, and we
finished 1998 fully-invested in 10-year U.S. Treasuries.
25
<PAGE>
MORE INFORMATION ABOUT THE FUNDS
EACH FUND'S INVESTMENT IN A PORTFOLIO
Each fund seeks to achieve its investment goal by investing all of its
assets in a corresponding portfolio. The funds and their corresponding
portfolios are as follows:
FUND PORTFOLIO
Highlands Growth Fund -- Growth Stock Portfolio
Total Return Utilities Fund -- Utilities Stock Portfolio
Muirfield Fund -- Mutual Fund Portfolio
U.S. Government Bond Fund -- Bond Portfolio
Money Market Fund -- Money Market Portfolio
Each portfolio has the same investment goal as its corresponding fund. Each
fund's investment policies are also substantially similar to its corresponding
portfolio's, except the fund may pursue its policies by investing in an open-end
management investment company with the same investment goal and substantially
similar policies and restrictions as the fund. Each fund buys shares of its
corresponding portfolio at net asset value. An investment in a fund is an
indirect investment in its corresponding portfolio.
It is possible that a fund may withdraw its investment in its corresponding
portfolio and subsequently invest in another open-end management investment
company with the same investment goal and substantially similar policies. This
could happen if a portfolio changes its investment goal or if the board of
trustees, at any time, considers it in the fund's best interest.
A fund's structure, where it invests all of its assets in its corresponding
portfolio, is sometimes called a "master/feeder" structure. You will find more
detailed information about this structure and the potential risks associated
with it in the Statement of Additional Information.
HIGHLANDS GROWTH FUND
HOW DOES THE FUND PURSUE ITS INVESTMENT GOAL?
Under normal conditions, at least 80% of the Portfolio's total assets will
be invested in domestic common stocks and at least 65% of the Portfolio's
total assets will be invested in growth stocks.
The manager selects for the Portfolio common stocks from all domestic
publicly traded common stocks; however, at least 70% of the assets of the
Portfolio invested in common stocks will be invested in common stocks which
are included in the S & P 500.
The Portfolio consists of investment portfolios representing each of the
industry sectors (identified by the Portfolio's subadviser) comprising the
S & P 500. The assets of the Portfolio will be allocated to each of these
industry sectors in approximately the same proportion as these industry
sectors are represented in the S & P 500 on a market
capitalization-weighted basis. The subadviser continuously reviews the
representation of the industry sectors in the S & P 500 and continuously
groups domestic publicly traded common stocks into a specific industry
sector.
26
<PAGE>
The Portfolio subadviser compares the total market value of the common
stocks in each industry sector of the S & P 500 to the total market value
of all common stocks in the S & P 500 to determine each industry sector's
weighting in the S & P 500. If the weighting of any industry sector in the
Portfolio varies from the weighting on a market-capitalization basis of
that industry sector in the S & P 500 at the end of any month, the
Portfolio subadviser will reallocate the amount of assets in the Portfolio
allocated to that industry sector. The subadviser may reallocate more
frequently than monthly if it chooses to do so. These reallocations may
cause additional transaction costs to the extent that securities may be
sold as part of such reallocations.
The assets of the Portfolio representing each of these industry sectors are
managed on a discretionary basis by one or more separate investment
advisers, called sector advisers, selected by the Portfolio subadviser. The
Portfolio subadviser's selection of sector advisers is reviewed and
approved by the trustees of the Portfolio.
Assets of the Portfolio representing each of the industry sectors are
managed by one or more sector advisers. However, if an advisory agreement
between a sector adviser and the Portfolio is terminated leaving no sector
adviser to manage the assets of the Portfolio representing an industry
sector, the Portfolio's subadviser will, upon termination and until a new
sector adviser is selected, manage and "index" the assets of the Portfolio
representing the applicable industry sector. In this case, the subadviser
will "index" the assets of the Portfolio representing its industry sector
by selling any stocks representing the industry sector that are not
included in the S&P 500 and investing the assets comprising the industry
sector in S&P 500 stocks identified by the Portfolio's subadviser as
belonging to that industry sector in the same proportion as those stocks
are represented in the S&P 500 on a market capitalization-weighted basis.
Each sector adviser is limited to the list of companies identified by the
Portfolio's subadviser which represents the sector adviser's specific
industry sector. Each sector adviser then selects those common stocks
which, in its opinion, best represent the industry sector the sector
adviser has been assigned. In selecting securities for the Portfolio, the
sector advisers evaluate factors believed to be favorable to long term
growth of capital, including specific financial characteristics of the
issuer such as historical earnings growth, sales growth, profitability and
return on equity. The sector advisers also analyze the issuer's position
within its industry sector as well as the quality and experience of the
issuer's management.
Up to 20% of the Portfolio's assets may be invested in temporary defensive
investments such as money market instruments and investment grade bonds.
The Portfolio may purchase stock index futures contracts and related
options. Up to 5% of the total assets of the Portfolio may be invested in
American Depositary Receipts.
TOTAL RETURN UTILITIES FUND
HOW DOES THE FUND PURSUE ITS INVESTMENT GOAL?
The Portfolio seeks to achieve its goal by investing, under normal
conditions, at least 65% of its total assets in a diversified portfolio of
common stocks, preferred stocks, warrants and rights, and securities
convertible into common or preferred stock of public utility companies.
Public utility companies include domestic or foreign companies that provide
electricity, natural gas, water, telecommunications or sanitary services to
the public. The Portfolio will not invest more than 5% of its total assets
in equity securities of issuers whose debt securities are rated below
27
<PAGE>
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.
Investments are selected on the basis of fundamental analysis to identify
those securities that, in the judgment of the subadviser, provide an above
average level of current income and growth of income, and secondarily,
capital appreciation, but only when consistent with its primary investment
goal.
Fundamental analysis involves assessing a company and its business
environment, management, balance sheet, income statement, anticipated
earnings and dividends and other related measures of value. The subadviser
monitors and evaluates the economic and political climate of the area in
which each company is located. The relative weightings among common stocks,
debt securities and preferred stocks will vary from time to time based upon
the subadviser's judgment of the extent to which investments in each
category will contribute to meeting the Portfolio's investment goal.
The subadviser emphasizes quality in selecting investments for the
Portfolio. In addition to looking for high credit ratings, the subadviser
ordinarily looks for several of the following characteristics: above
average earnings growth; above average growth of book value; an above
average balance sheet; high earnings to debt service coverage; low ratio of
dividends to earnings; high return on equity; low debt to equity ratio; an
above average rating with respect to government regulation; growing rate
base; lack of major construction programs and strong management.
The Portfolio may invest up to 35% of its total assets in debt securities
of issuers in the public utility industries. Debt securities in which the
Portfolio invests are limited to those rated A or better by S&P or Moody's
or deemed to be of equivalent quality in the judgment of the subadviser.
During periods when the subadviser deems it necessary for temporary
defensive purposes, the fund may invest without limit in high quality money
market instruments. These instruments consist of commercial paper,
certificates of deposit, banker's acceptances and other bank obligations,
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, high grade corporate obligations and repurchase
agreements.
The Portfolio, under normal circumstances, will invest 25% or more of its
total assets in securities of public utility companies. This concentration
policy is fundamental and may not be changed without shareholder approval.
MUIRFIELD FUND
HOW DOES THE FUND PURSUE ITS INVESTMENT GOAL?
The Portfolio will seek to achieve its investment goal through asset
allocation and mutual fund selection. Under normal circumstances, at least
65% of the value of the Portfolio's total assets 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
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appreciation, with current income typically of secondary importance. 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 adviser.
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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
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.
The manager addresses asset allocation decisions by making shifts in the
mix of stocks, bonds and cash in the Portfolio. The Portfolio may at times
assume a defensive position by investing up to 100% of its assets in money
market securities and investment grade bonds.
U.S. GOVERNMENT BOND FUND
HOW DOES THE FUND PURSUE ITS INVESTMENT GOAL?
Under normal circumstances, at least 65% of the value of the Portfolio's
total assets will be invested in U.S. government debt securities.
The U.S. government securities in which the Portfolio invests are either
issued or guaranteed by the U.S. government, its agencies, or
instrumentalities. These securities are limited to:
o direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes, and bonds;
o 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
o 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:
o the issuer's right to borrow an amount limited to a specific line of
credit from the U.S. Treasury;
o discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality; or
o the credit of the agency or instrumentality.
The Portfolio will invest in U.S. government securities of varying
maturities. Normally, the Portfolio will invest in 10-year U.S. government
securities if the adviser believes the risk/reward relationship of the bond
market is positive. The Portfolio will invest in short-term U.S. government
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securities or money market securities when the adviser believes the
risk/reward relationship of the bond market is negative. If the Portfolio's
adviser believes that long-term interest rates are significantly greater
than inflation, the Portfolio may invest in U.S. government securities with
maturities as long as 30 years.
The Portfolio's adviser believes the appropriate way to defend assets
against shifts in interest rates is to be invested in short-term U.S.
government securities only when it believes that the risk/reward
relationship of the bond market is negative. To determine the maturities of
U.S. government securities for purchase, the Manager monitors the following
indicators:
o Momentum - the trend of U.S. government securities prices versus
various moving averages
o Real Rates - the 10-year treasury bond yield as compared to inflation
and
o Yield Spread - the 10-year treasury bond yield as compared to the
90-day T-bill yield.
THE MONEY MARKET FUND
HOW DOES THE FUND PURSUE ITS INVESTMENT GOAL?
The manager seeks to achieve its goal by investing in high-quality money
market instruments which mature in 397 days or less. Also, 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 may change its average portfolio maturity or level of quality
to protect its net asset value when it is perceived 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.
MONEY MARKET INSURANCE
The Portfolio is insured by ICIM Re (the "Insurer"), a wholly-owned
subsidiary of ICI Mutual Insurance Company, against specific types of
losses on certain money market instruments ("eligible securities") held by
the Portfolio. The specific types of losses are losses from non-payment of
principal or interest, or a bankruptcy or insolvency of the issuer or
credit provider, if any. The insurance does not cover losses resulting from
changes in interest rates or other market developments. The Insurer charges
the Portfolio an annual premium for the insurance. The Portfolio may
recover no more than $100 million annually and the Portfolio may only
recover if the amount of the loss exceeds 0.10% of its eligible
instruments. The Fund and another money market fund sponsored by the
manager have invested all of their investable assets in the Portfolio. The
benefit of any recovery would be shared by the Fund and such other money
market fund on the basis of their respective beneficial interests in the
Portfolio. The Portfolio and the Fund may incur losses regardless of the
insurance.
WHAT ARE DERIVATIVES?
A derivative is a financial contract whose value is based on or derived
from a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for over
20 years. These "traditional" derivatives are standardized contracts that can
easily be bought and sold, and whose market values are determined and published
daily. It is these characteristics that differentiate futures and options from
the relatively new types of derivatives. If used for speculation or as leveraged
investments, derivatives can carry considerable risks.
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Similar risks exist for warrants (securities that permit their owners to
purchase a specific number of shares of stock at a predetermined price), and
convertible securities (securities that may be exchanged for a different asset).
For this reason, the Portfolios will not use futures, options, warrants or
convertible securities for speculative purposes or as leveraged investments that
magnify the gains or losses of an investment.
The reasons for which a Portfolio will invest in futures and options are:
o To keep cash on hand to meet shareholder redemptions or other needs
while simulating full investment in stocks or bonds;
o To reduce the Portfolio's transaction costs or add value when these
instruments are favorably priced;
o To forego taxes that would otherwise have to be paid on gains from the
sale of the Portfolio securities; and
o To attempt to protect the value of certain securities owned or
intended to be purchased by the Portfolio while the manager is making
a change in the Portfolio's investment position.
WHO MANAGES THE FUNDS?
THE BOARD. The board of trustees oversees the management of the funds and the
portfolios, and elects their officers. The officers are responsible for the
funds and the portfolios' day-to-day operations. Information concerning the
trustees and officers of the funds and the portfolios appears in the Statement
of Additional Information.
MANAGERS. The Portfolios investment advisers and subadvisers are as follows:
Portfolio and Investment Investment
CORRESPONDING FUND ADVISER SUBADVISER(S)
---------------------- --------------- ----------------------
Growth Stock Portfolio R. Meeder & Sector Capital
(Highlands Growth Fund) Associates, Inc. Management, L.L.C. and
the Sector Advisers
(see "Sector Advisers
- Growth Stock
Portfolio")
Utilities Stock Portfolio R. Meeder & Miller/Howard
(Total Return Utilities Fund) Associates, Inc. Investments, Inc.
Mutual Fund Portfolio R. Meeder & None
(Muirfield Fund) Associates, Inc.
Bond Portfolio R. Meeder & None
(U.S. Government Bond Fund) Associates, Inc.
Money Market Portfolio R. Meeder & None
(Money Market Fund) Associates, Inc.
INVESTMENT ADVISER. R. Meeder & Associates, Inc. ("RMA") serves as investment
adviser to the portfolios. RMA has been an investment adviser to individuals,
pension and profit sharing plans, trusts, charitable organizations, corporations
and other institutions since 1974. As of December 31, 1998, RMA and its
affiliates managed approximately $1.4 billion in assets. RMA has its principal
offices at 6000 Memorial Drive, Dublin, OH 43017.
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INVESTMENT SUBADVISER - UTILITIES STOCK PORTFOLIO
Miller/Howard Investments, Inc. ("Miller/Howard"), the Utilities Stock
Portfolio's subadviser, makes investment decisions for the Utilities Stock
Portfolio. RMA continues to have responsibility for all investment advisory
services provided to the Utilities Stock Portfolio and supervises
Miller/Howard's performance of such services. Miller/Howard is a registered
investment adviser that has been providing investment services to
broker-dealers, investment advisers, employee benefit plans, endowment
portfolios, foundations and other institutions and individuals since 1984. As of
December 31, 1998, Miller/Howard managed approximately $165 million in assets.
Miller/Howard has its principal offices at 141 Upper Byrdcliffe Road, P. O. Box
549, Woodstock, New York 12498.
INVESTMENT SUBADVISER - GROWTH STOCK PORTFOLIO
Sector Capital Management, L.L.C. ("Sector Capital"), the Growth Stock
Portfolio's subadviser, furnishes investment advisory services in connection
with the management of the Growth Stock Portfolio. Sector Capital has been a
registered investment adviser to individuals, pension and profit sharing plans,
trusts, charitable organizations, corporations and other institutions since
January 1995. As of December 31, 1998, Sector Capital managed approximately $550
million in assets. Sector Capital has its principal offices at 5350 Poplar
Avenue, Suite 490, Memphis, Tennessee 38119.
Sector Capital utilizes its "Sector Plus" investment strategy to manage the
assets of the Growth Stock Portfolio. Pursuant to this strategy, Sector Capital
divides the assets of the Growth Stock Portfolio among ten industry sectors of
the S&P 500, each of which is managed by a separate sector adviser. Sector
Capital is responsible for overseeing the sector advisers and recommending their
hiring, termination and replacement. RMA and Sector Capital are ultimately
responsible for the investment performance of the Growth Stock Portfolio because
of RMA's responsibility to oversee Sector Capital and Sector Capital's
responsibility to oversee the sector advisers and recommend their hiring,
termination and replacement.
Sector Capital and the Growth Stock Portfolio have entered into a
sub-subadvisory agreement with each Sector Adviser selected for the Portfolio.
Sector Capital is responsible for selecting, subject to the review and approval
of the Growth Stock Portfolio's Board of Trustees, the sector advisers that have
distinguished themselves by able performance in respective areas of expertise in
sector management, and to review their continued performance. In addition,
Sector Capital is responsible for categorizing publicly traded domestic common
stocks into a specific industry sector. Sector Capital may also invest the
Growth Stock Portfolio's financial futures contracts and related options.
During the sector adviser selection process, Sector Capital performs initial due
diligence on all prospective sector advisers. In evaluating prospective sector
advisers, Sector Capital considers, among other factors, each candidate's level
of expertise; relative performance and consistency of performance; level of
adherence to investment discipline or philosophy; personnel, facilities and
financial strength; and quality of service and client communications.
Sector Capital monitors sector adviser performance through quantitative and
qualitative analysis, as well as periodic in-person, telephonic and written
consultations with sector advisers. Sector Capital has responsibility for
communicating performance expectations and evaluations to sector advisers and
ultimately recommending to the Board of Trustees of the Growth Stock Portfolio
whether sector advisers' contracts should be renewed, modified, or terminated.
Sector Capital provides reports to the Growth Stock Portfolio's Board of
Trustees regarding the results of its evaluation and monitoring functions.
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The Securities and Exchange Commission has granted the Growth Stock Portfolio an
exemptive order that permits the Growth Stock Portfolio and Sector Capital to
enter into and materially amend sub-subadvisory agreements with sector advisers,
without such agreements being approved by the Growth Stock Portfolio's investors
or the Highlands Growth Fund's shareholders. The exemptive order does not apply,
however, to sub-subadvisory agreements with affiliated persons of the Growth
Stock Portfolio, the Manager or Sector Capital, other than by reason of such
affiliated person serving as an existing sector adviser to the Growth Stock
Portfolio, which still require shareholder approval. The exemptive order also
permits the Growth Stock Portfolio and the Highlands Growth Fund to disclose, on
an aggregate basis rather than individually, the fees paid to sector advisers
that are not such affiliated persons. In addition, the exemptive order includes
the condition that within 90 days of the hiring of any new sector advisers, the
Manager and Sector Capital will furnish shareholders of the fund with an
information statement about the new sector adviser and sub-subadvisory
agreement. Any changes to the advisory contract between the Growth Stock
Portfolio and the manager or the subadvisory agreement among the Growth Stock
Portfolio, Manager and Sector Capital will still require shareholder approval. A
majority of the shareholders of The Highlands Growth Fund approved the operation
of the Trust in accordance with the exemption.
SECTOR ADVISERS - GROWTH STOCK PORTFOLIO
Subject to the supervision and direction of Sector Capital and, ultimately, the
Board of Trustees of the Growth Stock Portfolio, each sector adviser's
responsibilities are limited to:
o managing its portion of the securities held by the Growth Stock
Portfolio in accordance with the Portfolio's stated investment goals
and strategies,
o making investment decisions for the Growth Stock Portfolio, and
o placing orders to purchase and sell securities on behalf of the Growth
Stock Portfolio.
The following sets forth certain information about each of the sector advisers:
MILLER/HOWARD INVESTMENTS, INC. serves as sector adviser to the utilities
and transportation sectors of the Growth Stock Portfolio. Miller/Howard is a
registered investment adviser that has been providing investment services to
broker-dealers, investment advisers, employee benefit plans, endowment
portfolios, foundations and other institutions and individuals since 1984. As of
December 31, 1998, Miller/Howard managed approximately $165 million in assets.
Lowell G. Miller, President and Secretary of Miller/Howard, is the portfolio
manager primarily responsible for the day-to-day management of those assets of
the Growth Stock Portfolio allocated to Miller/Howard. Mr. Miller has served as
President and portfolio manager of Miller/Howard since 1984. Miller/Howard is
also the subadviser to the Utilities Stock Portfolio, a corresponding portfolio
to The Flex-funds' Total Return Utilities Fund and The Flex-Partners' Utility
Growth Fund. Miller/Howard's principal executive offices are located at 141
Upper Byrdcliffe Road, Post Office Box 549, Woodstock, New York 12498.
HALLMARK CAPITAL MANAGEMENT, INC. serves as sector adviser to the capital
goods sector of the Growth Stock Portfolio. Hallmark is a registered investment
adviser that has been providing investment services to individuals; banks;
pension, profit sharing, and other retirement plans; trusts; endowments;
foundations; and other charitable organizations since 1986. As of December 31,
1998, Hallmark managed approximately $180 million in assets. Peter S. Hagerman
is the portfolio manager primarily responsible for the day-to-day management of
those assets of the Growth Stock Portfolio allocated to Hallmark. Mr. Hagerman
has been Chairman of the Board, President, and Chief Executive Officer of
Hallmark since 1994 and has been associated with Hallmark since 1986. Hallmark's
principal executive offices are located at One Greenbrook Corporate Center, 100
Passaic Avenue, Fairfield, New Jersey 07004.
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<PAGE>
BARROW, HANLEY, MEWHINNEY & STRAUSS, INC. serves as sector adviser to the
consumer durable and non-durable sectors of the Growth Stock Portfolio. Barrow
is a registered investment adviser that has been providing investment services
to banks; investment companies; pension and profit sharing plans; charitable
organizations and corporations since 1979. As of December 31, 1998, Barrow
managed approximately $36.3 billion in assets. 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
served as a portfolio manager and Principal for 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 that has been providing investment services to individuals, banks,
investment companies, pension and profit sharing plans, charitable
organizations, corporations and other institutions since 1989. As of December
31, 1998, The Mitchell Group managed approximately $269 million in assets.
Rodney Mitchell, who has served as President, Chief Executive Officer, and Chief
Financial Officer of The Mitchell Group since 1989, is the portfolio manager
primarily responsible for the day-to-day management of those assets of the
Growth Stock Portfolio allocated to The Mitchell Group. The Mitchell Group's
principal executive offices are located at 1100 Louisiana, #4810, Houston, Texas
77002.
ASHLAND MANAGEMENT INCORPORATED serves as sector adviser to the materials
and services sector of the Growth Stock Portfolio. Ashland is a registered
investment adviser that has been providing investment services to individuals,
pension and profit sharing plans, charitable organizations, corporations and
other institutions since 1975. As of December 31, 1998, Ashland managed
approximately $1.5 billion in assets. Terence J. McLaughlin, Managing Director
of Ashland, and Deborah C. Ohl, a Portfolio Manager, are the portfolio managers
primarily responsible for the day-to-day management of those assets of the
Growth Stock Portfolio allocated to Ashland. Mr. McLaughlin has been a Portfolio
Manager for Ashland since 1984. Ms. Ohl has been employed by Ashland since
August 1992 and has served as a Portfolio Manager for Ashland since 1993.
Ashland's principal executive offices are located at 26 Broadway, New York, New
York 10004.
DELTA CAPITAL MANAGEMENT INC. serves as sector adviser to the finance
sector of the Portfolio. Delta Capital is a registered investment adviser that
has been providing investment services to individuals, endowments, corporations
and other institutions since 1992. As of December 31, 1998, Delta Capital
managed approximately $700 million in assets. Jonathan Kay is the portfolio
manager primarily responsible for the day-to-day management of those assets of
the Portfolio allocated to Delta Capital. Mr. Kay has been a portfolio manager
for Delta Capital since April 1998. From 1993 to March 1998, Mr. Kay was a
portfolio manager for Scudder Kemper Investments, Inc., a registered investment
adviser. Delta Capital's principal executive offices are located at 745 Fifth
Avenue, Suite 816, New York, New York 10151.
DRESDNER RCM GLOBAL INVESTORS LLC (formerly RCM Capital Management, L.L.C.)
serves as sector adviser to the technology sector of the Growth Stock Portfolio.
Dresdner RCM is a registered investment adviser that provides investment
services to institutional and individual clients and registered investment
companies. Dresdner RCM was established in April 1996 as the successor to the
business and operations of RCM Capital Management, a California Limited
Partnership that, with its predecessors, has been in operation since 1970. As of
December 31, 1998, Dresdner RCM managed approximately $34 billion in assets.
Walter C. Price and Huachen Chen, each Managing Directors of Dresdner RCM, are
the portfolio managers primarily responsible for the day-to-day management of
those assets of the Growth Stock Portfolio allocated to Dresdner RCM. Messrs.
Price and Chen have managed equity portfolios on behalf of Dresdner RCM since
1985. Dresdner RCM's principal executive offices are located at Four Embarcadero
Center, San Francisco, CA 94111.
ALLIANCE CAPITAL MANAGEMENT L.P. serves as sector adviser to the health
sector of the Growth Stock Portfolio. Alliance, a registered investment adviser,
is an international investment manager supervising client accounts with assets
as of December 31, 1998 totaling approximately $286.7 billion. Alliance provides
investment services primarily to corporate employee benefit funds, public
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<PAGE>
employee retirement systems, investment companies, foundations, and endowment
funds. Raphael L. Edelman, Vice President of Alliance, is the portfolio manager
primarily responsible for the day-to-day management of those assets of the
Growth Stock Portfolio allocated to Alliance. Mr. Edelman, who has sixteen years
of investment experience, joined Alliance's research department in 1986 as an
analyst after working two years as a manager in Alliance's mutual fund division.
Alliance's principal executive offices are located at 1345 Avenue of the
Americas, New York, NY 10105.
PORTFOLIO MANAGERS
The individuals primarily responsible for the management of each of the
portfolios are listed below:
THE GROWTH STOCK PORTFOLIO. William L. Gurner, President of Sector Capital, is
primarily responsible for the day-to-day management of the Growth Stock
Portfolio through interaction with each of the sector advisers. Mr. Gurner is
also primarily responsible for managing the futures contracts and related
options of the portfolio on behalf of the subadviser. Mr. Gurner has managed the
portfolio since December 1996. Mr. Gurner has been President and portfolio
manager of Sector Capital since January 1995. From September 1987 through
December 1994, Mr. Gurner served as Manager of Pension Funds for Federal
Express. Philip A. Voelker, Senior Vice President and Chief Investment Officer
of RMA, is primarily responsible for managing the portfolio's liquidity reserve
and managing the futures contracts and related options of the Portfolio on
behalf of RMA. Mr. Voelker has managed assets on behalf of RMA since 1975.
Please see "Sector Advisers - Growth Stock Portfolio" for more information about
each of the portfolio's sector advisers.
THE UTILITIES STOCK PORTFOLIO. The portfolio manager responsible for the
Utilities Stock Portfolio's investments is Lowell G. Miller, a director and the
President of Miller/Howard, the subadviser to the portfolio. Mr. Miller has
served as President and portfolio manager of Miller/Howard and its predecessor
since 1984 and has managed the portfolio since its inception in 1995.
THE MUTUAL FUND PORTFOLIO. The portfolio managers responsible for the Mutual
Fund Portfolio's investments are Robert S. Meeder, Jr. and Philip A. Voelker.
Mr. Meeder, President of RMA, joined RMA in 1983 and has been the portfolio
manager for the portfolio since 1988. Mr. Voelker, Senior Vice President and
Chief Investment Officer of RMA, has managed assets on behalf of RMA since 1975
and began co-managing the portfolio in April 1998.
THE BOND PORTFOLIO. The portfolio manager responsible for the Bond Portfolio's
investments is Joseph A. Zarr. Mr. Zarr has been associated with RMA as a
portfolio manager since 1991 and has managed the portfolio since 1996.
THE MONEY MARKET PORTFOLIO. The portfolio manager responsible for the Money
Market Portfolio's investments is Philip A. Voelker, Senior Vice President and
Chief Investment Officer of RMA. Mr. Voelker has managed assets on behalf of RMA
since 1975 and has managed the portfolio since 1985.
MANAGEMENT FEES. During the calendar year ended December 31, 1998, the
portfolios paid management fees totaling the following:
Management Fee as Percentage
FUND OF AVERAGE DAILY NET ASSETS
The Growth Stock Portfolio 0.99%
The Utilities Stock Portfolio 1.00%
The Mutual Fund Portfolio 0.81%
The Bond Portfolio 0.24%
The Money Market Portfolio 0.15%
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For more information about management fees, see "Investment Adviser" and
"Investment Subadviser" in the Statement of Additional Information.
YEAR 2000. The common past practice in computer programming of using just two
digits to identify a year has resulted in the Year 2000 challenge throughout the
information technology industry. If unchanged, many computer applications and
systems could misinterpret dates occurring after December 31, 1999, leading to
errors or failure. This failure could adversely affect the funds' operations,
including pricing, securities trading and the servicing of shareholder accounts.
RMA is dedicated to providing uninterrupted, high-quality performance from
our computer systems before, during and after 2000. We are now renovating and
testing our internal systems. RMA is diligently working with external partners,
suppliers, vendors and other service providers to ensure that the systems with
which we interact will remain operational at all times.
In addition to taking reasonable steps to secure our internal systems and
external relationships, RMA is further developing contingency plans intended to
ensure that unexpected systems failures will not adversely affect the funds'
operations. RMA intends to monitor these processes through the rollover of 1999
into 2000 and to quickly implement alternative solutions if necessary.
Despite RMA's efforts and contingency plans, however, noncompliant computer
systems would have an adverse material effect on the funds' business, operations
or financial condition. Additionally, the funds' performance could be hurt if a
computer system failure at a company or governmental unit affects the prices of
securities the fund owns. Issuers in countries outside the U.S., particularly in
emerging markets, may not be required to make the same level of disclosure about
year 2000 readiness as required in the U.S. RMA, of course, cannot audit any
company and its major suppliers to verify their year 2000 readiness. RMA
understands that many foreign countries and companies are well behind their U.S.
counterparts in preparing for 2000.
PAST PERFORMANCE OF PRIVATE ACCOUNTS
PURPOSE OF PAST PERFORMANCE. William L. Gurner is the President and
portfolio manager of Sector Capital Management, L.L.C. ("Sector Capital"), the
subadviser to the Growth Stock Portfolio in which all of the assets of the
Highlands Growth Fund are invested. See "Investment Subadviser - Growth Stock
Portfolio" and "Portfolio Managers" under "Who Manages the Funds?" The
performance information below is provided to show the past performance of Mr.
Gurner and Sector Capital in managing substantially similar accounts to the
Growth Stock Portfolio and to measure the past performance against a market
index, the S&P 500 Composite Stock Price Index.
WHAT PAST PERFORMANCE DOES NOT REPRESENT. THE PAST PERFORMANCE SHOWN BELOW
DOES NOT REPRESENT THE PERFORMANCE OF THE GROWTH STOCK PORTFOLIO OR THE
HIGHLANDS GROWTH FUND. You should not consider the past performance shown below
as an indication of the future performance of the Growth Stock Portfolio or the
Highlands Growth Fund.
SIMILAR ACCOUNTS. Mr. Gurner served as Manager - Trust Investments for an
employee benefit plan of a large corporation from September 1987 through
December 1994. The employee benefit plan had investment goals, policies,
strategies and risks substantially similar to those of the Growth Stock
Portfolio and the Highlands Growth Fund, except during the period from September
1987 through February 1991, when the employee benefit plan was managed in a
different manner than the Growth Stock Portfolio and the Highlands Growth Fund.
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Mr. Gurner left the large corporation in December, 1994 and founded Sector
Capital. Sector Capital subadvises the Growth Stock Portfolio and manages
private accounts that have investment goals, policies, strategies and risks
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 the employee benefit
plan and such private accounts.
CALCULATION OF PAST PERFORMANCE. 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 providing for federal
or state income taxes. Custodial fees, if any, were not used to reduce
performance returns. 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. 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 linking the returns of each quarter within the calendar
year.
DIFFERENCES IN REGULATION. 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 Growth 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 federal securities laws governing
mutual funds and tax laws. Consequently, the performance results for the
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 mutual funds 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 that you might
experience by investing in the Highlands Growth Fund. You should also be aware
that the SEC uses a method different from that used below to calculate mutual
fund performance, which could result in different performance returns.
-----------------------
*AIMR is a non-profit membership and education organization that has
formulated a set of performance presentation standards for investment advisers.
These AIMR performance presentation standards are intended to promote full and
fair presentations by investment advisers of their performance results, and
ensure uniformity in reporting so that performance results of investment
advisers can be compared.
PAST PERFORMANCE OF PRIVATE ACCOUNTS
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%
1997 N.A. 32.53% 33.35%
1998 N.A. 27.91% 28.58%
37
<PAGE>
(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) For the period from March 1, 1991 through December 31, 1991.
DISTRIBUTION FEES
Rule 12b-1 of the Investment Company Act permits mutual funds that adopt a
written plan to pay out of fund assets certain expenses relating to the sale and
distribution of their shares. Each of the funds has a 12b-1 plan. Under a plan,
each fund, except for The Total Return Utilities Fund, pays an annual fee of up
to 0.20% of fund assets for distribution services. The Total Return Utilities
Fund pays an annual fee of up to 0.25% of fund assets for distribution services.
Payments under each plan are made for distribution in the form of commissions
and fees, advertising, sales literature, services of public relations
consultants, direct solicitation and expenses of printing prospectuses and
reports used for sales purposes. Persons who receive payments under the plans
include securities brokers, attorneys, accountants, investment advisers,
investment performance consultants, pension actuaries, banks, and service
organizations. Because these fees are paid out of the funds' assets on an
ongoing basis, over time these fees will increase the cost of your investment
and may cost you more than paying out other types of sales charges.
HOW IS THE TRUST ORGANIZED?
Each fund is a no-load, open-end management investment company that is a
series of The Flex-funds trust (the "Trust").
The Trust is supervised by a board of trustees, an independent body that
has ultimate responsibility for the funds' activities. The board retains various
companies to carry out the funds' operations, including the investment adviser,
custodian, transfer agent and others. The board has the right, and the
obligation, to terminate the funds' relationship with any of these companies and
to retain a different company if the board believes it is in the shareholders'
best interests. At a mutual fund's inception, the initial shareholder (typically
the adviser) appoints the fund's board. Thereafter, the board and the
shareholders determine the board's membership. The board of the Trust may
include individuals who are affiliated with the investment adviser.
The funds do not hold annual shareholder meetings, but may hold special
meetings for such purposes as electing or removing board members, changing
fundamental policies, approving a management contract or approving a 12b-1 plan
(12b-1 fees are explained in "Distribution Fees").
PORTFOLIO TRADES
As long as the advisers believe a brokerage firm can provide a combination
of quality execution (i.e., timeliness and completeness) and favorable price,
they may consider research and related services when choosing a brokerage firm.
Brokerage firms may use a portion of the commissions paid by a portfolio to
reduce its, or its corresponding fund's, expenses.
INVESTMENT GOALS
Except as otherwise indicated, none of the funds' investment goals are
fundamental and may be changed without shareholder approval.
38
<PAGE>
DIVERSIFICATION
All of the funds are diversified, which means each fund may not, with
respect to at least 75% of its assets (100% of its assets in the case of The
Money Market Fund), invest more than 5% in the securities of one company.
HOW DOES TAXATION AFFECT THE FUNDS AND THEIR SHAREHOLDERS?
HOW DOES A PORTFOLIO EARN INCOME AND GAINS?
A Portfolio earns dividends and interest (a Portfolio's "income") on its
investments. When a Portfolio sells a security for a price that is higher than
it paid, it has a gain. When a Portfolio sells a security for a price that is
lower than it paid, it has a loss. If a Portfolio has held the security for more
than one year, the gain or loss will be a long-term capital gain or loss. If a
Portfolio has held the security for one year or less, the gain or loss will be a
short-term capital gain or loss. The Portfolio's gains and losses are netted
together, and, if a Portfolio has a net gain (a Portfolio's "gain"), that gain
will generally be distributed to you.
TAXATION OF A PORTFOLIO'S INVESTMENTS
A Portfolio invests your money in the securities that are described in the
sections "Strategies" and "How Does the Fund Pursue Its Investment Goal?"
Special tax rules may apply in determining the income and gains that a Portfolio
earns on its investments. These rules may, in turn, affect the amount of
distributions that the funds pay to you. These special tax rules are discussed
in the SAI.
TAXATION OF A FUND. As a regulated investment company, a fund generally
pays no federal income tax on the income and gains that it distributes to you.
FOREIGN TAXES. Foreign governments may impose taxes on the income and gains
from a Portfolio's investments in foreign securities. These taxes will reduce
the amount of the fund's distributions to you.
TAXATION OF SHAREHOLDERS
WHAT IS A DISTRIBUTION?
As a shareholder, you will receive your share of a fund's income and gains
on its corresponding Portfolio's investments in stocks and other securities. The
fund's income and short-term capital gains are paid to you as ordinary
dividends. The fund's long-term capital gains are paid to you as capital gain
distributions. If the fund pays you an amount in excess of its income and gains,
this excess will generally be treated as a non-taxable distribution. These
amounts, taken together, are what we call the fund's distributions to you. The
Money Market Fund and the U.S. Government Bond Fund pay dividends from their net
investment income on a monthly basis. The Total Return Utilities Fund pays
dividends from its net investment income on a monthly basis. The Highlands
Growth Fund and The Muirfield Fund pay dividends from their net investment
income on a quarterly basis. All funds distribute capital gains, if any,
annually.
DISTRIBUTIONS. Distributions from a fund, whether you receive them in cash
or in additional shares, are generally subject to income tax. A fund will send
you a statement in January of the current year that reflects the amount of
ordinary dividends, capital gain distributions and non-taxable distributions you
received from the fund in the prior year. This statement will include
distributions declared in December and paid to you in January of the current
year, but which are taxable as if paid on December 31 of the prior year. The IRS
requires you to report these amounts on your income tax return for the prior
year.
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<PAGE>
DISTRIBUTIONS TO RETIREMENT PLANS. Fund distributions received by your
qualified retirement plan, such as a 401(k) plan or IRA, are generally
tax-deferred; this means that you are not required to report fund distributions
on your income tax return when paid to your plan, but, rather, when your plan
makes payments to you. Special rules apply to payouts from Roth and Education
IRAs.
DIVIDENDS-RECEIVED DEDUCTION. Corporate investors may be entitled to a
dividends-received deduction on a portion of the ordinary dividends they receive
from a fund.
BUYING A DIVIDEND. Purchasing fund shares in a taxable account shortly
before a distribution is known as "buying a dividend." In taxable accounts, you
must pay income taxes on the distribution whether you take the distribution in
cash or reinvest it. In addition, you will have to pay taxes on the distribution
whether the value of your investment decreased, increased or remained the same
after you bought the fund shares. The risk in buying a dividend is that the
portfolios may build up taxable gains throughout the period covered by a
distribution, as securities are sold at a profit. We distribute those gains to
you, after subtracting any losses, even if you did not own the shares when the
gains occurred.
DIVIDEND REINVESTMENTS. Most investors have their dividends reinvested in
additional shares of the same fund. If you choose this option, or if you do not
indicate any choice, your dividends will be reinvested on the dividend payable
date. Alternatively, you can choose to have a check for your dividends mailed to
you. However, if the check is not deliverable, your dividends will be
reinvested.
REDEMPTIONS AND EXCHANGES
WHAT IS A REDEMPTION?
A redemption is a sale by you to a fund of some or all of your shares in
the fund. The price per share you receive when you redeem fund shares may be
more or less than the price at which you purchased those shares. An exchange of
shares in a fund for shares of another Flex-funds' fund is treated as a
redemption of fund shares and then a purchase of shares of the other Flex-funds'
fund. When you redeem or exchange your shares, you will generally have a gain or
loss, depending upon whether the amount you receive for your shares is more or
less than your cost or other basis in the shares.
If you redeem your shares or if you exchange your shares in a fund for
shares in another Flex-funds fund, you will generally have a gain or loss that
the IRS requires you to report on your income tax return. All or a portion of
any loss on the redemption or exchange of your shares in a fund will be
disallowed by the IRS if you purchase other shares in that fund within 30 days
before or after your redemption or exchange.
U.S. GOVERNMENT INTEREST. Many states grant tax-free status to dividends
paid from interest earned on direct obligations of the U.S. Government, subject
to certain restrictions. The funds will provide you with information at the end
of each calendar year on the amount of any such dividends that may qualify for
exemption from reporting on your individual income tax returns.
NON-U.S. INVESTORS. Ordinary dividends generally will be subject to U.S.
income tax withholding. Your home country may also tax ordinary dividends,
capital gain distributions and gains arising from redemptions or exchanges of
your fund shares. Fund shares held by the estate of a non-U.S. investor may be
subject to U.S. estate tax. You may wish to contact your tax adviser to
determine the U.S. and non-U.S. tax consequences of your investment in the
funds.
STATE TAXES. Ordinary dividends and capital gain distributions that you
receive from the funds, and gains arising from redemptions or exchanges of your
funds shares will generally by subject to state and local income tax. The
holding of funds shares may also be subject to state and local intangibles
taxes. You may wish to contact your tax adviser to determine the state and local
tax consequences of your investment in the funds.
40
<PAGE>
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
This explanation uses the Highlands Growth Fund as an example. The fund
began calendar year 1998 with a net asset value (price) of $18.55 per share.
During the year, the fund earned $0.06 per share from net investment income
(interest and dividends less operating expenses) and $4.32 per share from
investments that had appreciated in value or that were sold for higher prices
than the fund paid for them.
Shareholders received $1.70 per share in the form of dividend and capital
gains distributions. A portion of each year's distributions may come from the
prior year's income or capital gains.
The earnings ($4.38 per share) minus the distributions ($1.70 per share)
resulted in a share price of $21.23 at the end of the year. This was an increase
of $2.68 per share (from $18.55 at the beginning of the year to $21.23 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the fund was 23.67% for the year.
As of December 31, 1998, the fund had approximately $43,908,000 in net
assets. For the year, its expense ratio was 1.69% ($16.90 per $1,000 of net
assets); and its net investment income amounted to 0.31% of its average net
assets. It sold and replaced securities valued at 79.98% of its net assets.
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the
funds' financial performance for the past 5 years (or, if shorter, the period of
the funds' operations). Certain information reflects financial results for a
single fund share. The total returns in the table represent the rate that an
investor would have earned (or lost) on an investment in the funds (assuming
reinvestment of all dividends and distributions). This information has been
audited by KMPG LLP, independent auditors, whose report, along with the funds'
financial statements, are included in the annual report, which is available upon
request.
THE HIGHLANDS GROWTH FUND
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Net Asset Value, Beginning of period $18.55 $16.41 $15.34 $13.08 $13.45
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.06 0.06 0.31 0.50 0.27
Net Gains or (Losses) on Securities
(BOTH REALIZED AND UNREALIZED) 4.32 4.73 1.07 2.68 (0.37)
- -------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 4.38 4.79 1.38 3.18 (0.10)
- --------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends (from net investment
income) (0.06) (0.06) (0.31) (0.50) (0.27)
DISTRIBUTIONS (FROM CAPITAL GAINS) (1.64) (2.59) - (0.42) -
- -------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.70) (2.65) (0.31) (0.92) (0.27)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $21.23 $18.55 $16.41 $15.34 $13.08
- --------------------------------------------------------------------------------
TOTAL RETURN 23.67% 29.28% 9.08% 24.61% (0.69%)
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period ($000) 43,908 33,752 24,204 24,631 22,176
Ratio of Expenses to Average
Net Assets 1.69% 1.87% 1.65% 1.64% 1.63%
Ratio of Net Investment Income to
Average Net Assets 0.31% 0.30% 1.92% 3.38% 1.95%
41
<PAGE>
Ratio of Expenses to Average Net
Assets before Waiver of Fees(1) 1.70% 1.87% 1.65% 1.64% 1.63%
Ratio of Net Investment Income to
Average Net Assets before
Waiver of Fees(1) 0.30% 0.30% 1.92% 3.38% 1.95%
Portfolio Turnover Rate(2) 79.98% 129.79% 81.66% 337.57% 102.76%
(1) Annualized ratio includes fees waived in corresponding portfolio.
(2) Represents turnover rate of corresponding portfolio.
Financial Statements and Notes pertaining thereto appear in the Statement of
Additional Information Dated April 30, 1999.
42
<PAGE>
THE TOTAL RETURN UTILITIES FUND
1998 1997 1996 1995*
---- ---- ---- -----
NET ASSET VALUE, BEGINNING OF PERIOD $17.72 $14.98 $14.14 $12.50
- --------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 0.25 0.25 0.37 0.21
- --------------------------------------------------------------------------------
Net Gains or Losses on Securities
(BOTH REALIZED AND UNREALIZED 1.29 3.99 1.48 1.64
- --------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.54 4.24 1.85 1.85
- --------------------------------------------------------------------------------
LESS DIVIDENDS AND DIVIDENDS
- --------------------------------------------------------------------------------
FROM NET INVESTMENT INCOME (0.25) (0.25) (0.37) (0.21)
- --------------------------------------------------------------------------------
FROM NET CAPITAL GAINS 0.00 (1.25) (0.64) --
- --------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.25) (1.50) (1.01) (0.21)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $19.01 $17.72 $14.98 $14.14
- --------------------------------------------------------------------------------
TOTAL RETURN 8.74% 28.68% 13.33% 15.00%
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD ($000) 10,455 8,405 5,074 2,881
- --------------------------------------------------------------------------------
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.80% 1.80% 1.25% 1.25%+
- --------------------------------------------------------------------------------
RATIO OF NET INCOME TO AVERAGE NET ASSETS 1.35% 1.57% 2.55% 3.18%+
- --------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets,
BEFORE WAIVER OF FEES(1)(2) 2.11% 2.51% 2.95% 4.35%+
- --------------------------------------------------------------------------------
Ratio of Net Income to Average Net Assets,
BEFORE WAIVER OF FEES(1)(2) 1.04% 0.86% 0.85% 0.08%+
- --------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE(3) 51.36% 41.22% 50.79% 5.06%
- --------------------------------------------------------------------------------
*For the period June 21, 1995 to December 31, 1995.
(1) See "Fees and Expenses of the Fund" 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, 1999.
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<PAGE>
THE MUIRFIELD FUND
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Net Asset Value, Beginning of period $5.47 $5.47 $5.73 $5.34 $5.36
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) 0.08 0.11 0.10 0.06 0.14
Net Gains or (Losses) on Securities
(BOTH REALIZED AND UNREALIZED) 1.51 0.91 0.25 1.31 0.00
- --------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.59 1.02 0.35 1.37 0.14
- --------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends (from net investment
income) (0.08) (0.11) (0.10) (0.06) (0.14)
DISTRIBUTIONS (FROM CAPITAL GAINS) (0.10) (0.91) (0.51) (0.92) (0.02)
- --------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.18) (1.02) (0.61) (0.98) (0.16)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $6.88 $5.47 $5.47 $5.73 $5.34
- --------------------------------------------------------------------------------
TOTAL RETURN 29.33% 18.59% 5.99% 25.82% 2.70%
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period ($000) 125.547 130,783 121,335 111,751 83,119
Ratio of Expenses to Average
Net Assets 1.24% 1.29% 1.19% 1.26% 1.22%
Ratio of Net Income (Loss) to
Average Net Assets 1.23% 1.69% 1.54% 0.97% 2.55%
Portfolio Turnover Rate(1) 128.31% 395.42% 297.41% 186.13% 168.17%
(1) Represents turnover rate of corresponding portfolio.
Financial Statements and Notes pertaining thereto appear in the Statement of
Additional Information Dated April 30, 1999.
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<PAGE>
THE U.S. GOVERNMENT BOND FUND
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Net Asset Value, Beginning of period $21.19 $20.64 $21.58 $19.25 $20.18
INCOME FROM INVESTMENT OPERATIONS
Net Investment income 0.97 0.99 0.96 1.11 0.72
Net Gains or (Losses) on Securities
(BOTH REALIZED AND UNREALIZED) 1.02 0.55 (0.94) 2.33 (0.93)
- --------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.99 1.54 0.02 3.44 (0.21)
- --------------------------------------------------------------------------------
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (0.97) (0.99) (0.96) (1.11) (0.72)
- --------------------------------------------------------------------------------
FROM NET REALIZED GAINS (0.07) -- -- -- --
- --------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.04) (0.99) (0.96) (1.11) (0.72)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $22.14 $21.19 $20.64 $21.58 $19.25
- --------------------------------------------------------------------------------
TOTAL RETURN 9.26% 7.70% 0.15% 18.32% (0.99%)
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period ($000) 11,294 16,973 17,783 16,048 12,983
Ratio of Expenses to Average
Net Assets 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of Net Income to Average
Net Assets 4.52% 4.85% 4.61% 5.41% 3.71%
Ratio of Expenses to Average Net
Assets, before waiver of fees(1) 1.16% 1.14% 1.06% 1.14% 1.14%
Ratio of Net Income to Average Net
Assets, before waiver of fees(1) 4.36% 4.71% 4.55% 5.27% 3.57%
Portfolio Turnover Rate(2) 225.11% 375.64% 778.59% 232.34% 707.57%
(1) See "Fees and Expenses of the Fund" for explanation of adviser's waiver of
fees.
(2) Represents turnover rate of corresponding portfolio.
Financial Statements and Notes pertaining thereto appear in the Statement of
Additional Information dated April 30, 1999.
45
<PAGE>
THE MONEY MARKET FUND
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Net Asset Value, Beginning of period $1.00 $1.00 $1.00 $1.00 $1.00
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME 0.052 0.053 0.05 0.06 0.04
- --------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.052 0.053 0.05 0.06 0.04
- --------------------------------------------------------------------------------
Less Dividends and Distributions
FROM NET INVESTMENT INCOME (0.052) (0.053) (0.05) (0.06) (0.04)
- --------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.052) (0.053) (0.05) (0.06) (0.04)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00 $1.00 $1.00
- --------------------------------------------------------------------------------
TOTAL RETURN 5.31% 5.38% 5.27% 5.85% 4.10%
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period ($000) 154,225 169,335 119,947 141,087 164,838
Ratio of Expenses to Average Net
Assets 0.40% 0.40% 0.40% 0.40% 0.37%
Ratio of Net Investment Income to
Average Net Assets 5.19% 5.26% 5.15% 5.70% 4.02%
Ratio of Expenses to Average Net
Assets before waiver of fees(1) 0.59% 0.59% 0.58% 0.64% 0.57%
Ratio of Net Income to Average Net
Assets, before waiver of fees(1) 5.00% 5.07% 4.97% 5.46% 3.82%
(1) See "Fees and Expenses of the Fund" for explanation of adviser's waiver of
fees.
Financial Statements and Notes pertaining thereto appear in the Statement of
Additional Information Dated April 30, 1999.
46
<PAGE>
SHAREHOLDER MANUAL
HOW TO BUY SHARES
Shares are offered continuously and sold without a sales charge. 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 funds' transfer agent, or an authorized 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 fund's authorized 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.
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:
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 ARE INVESTING. A check payable to each fund you specify must
accompany the New Account Application. The funds do 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 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, 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:
FIRSTAR 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
47
<PAGE>
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. A fund will not permit a redemption 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.
WHEN PURCHASES ARE EFFECTIVE. New Account Applications for The Highlands Growth,
Muirfield, Total Return Utilities and U.S. Government 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. For 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).")
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.
48
<PAGE>
Certain financial institutions that have entered into sales agreements with the
funds 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 Firstar 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: You may redeem shares by mailing a written signature guaranteed
request to The Flex-funds, c/o R. Meeder & Associates, Inc., P.O. Box 7177,
Dublin, OH 43017. Signature guaranteed means that the request must be
signed by you and your signature must be guaranteed by an eligible
guarantor institution (a bank, broker-dealer, credit union, securities
exchange and association, clearing agency and savings association). We do
not accept signatures guaranteed by a notary public. Additional
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. We may waive
these requirements in certain instances.
Amounts withdrawn are mailed without charge to the address printed on your
account statement.
BY TELEPHONE: You may redeem by telephone: 1-800-325-FLEX, or call (614)
760-2159. If you who wish to use this procedure, you must select this
feature on the New Account Application. Amounts withdrawn from an account
by telephone are mailed without charge to the address printed on your
account statement.
As a special service, you 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.
You may change the bank account designated to receive redemptions. This may
be done at any time upon written request to the fund. In this case, your
signature must be guaranteed. Additional documentation may be required from
corporations, executors, administrators, trustees, guardians, or other
fiduciaries.
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.")
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WHEN PAYMENTS ARE MADE. Amounts withdrawn by telephone are normally mailed
or wired on the next Columbus, Ohio bank business day following the 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, the funds' transfer agent will
not pay a redemption until reasonably satisfied the check used to purchase
shares has been collected. The fund will forward proceeds promptly once the
check has cleared. (See "How to Buy Shares.")
CHECK-WRITING REDEMPTION PROCEDURE--MONEY MARKET FUND ONLY: The Money
Market Fund will provide a supply of drafts to any shareholder when
requested. Drafts are mailed to your address of record normally within two
weeks following the date of the initial investment. These drafts may be
used to draw against your Money Market Fund account. Drafts may be written
in any amount greater than $100. To use this privilege you must complete
the check-writing redemption feature on the New Account Application form
and complete the signature card, or notify the fund after making an initial
investment.
A commercial check package consisting of 300 drafts is available for a
nominal charge. If you are interested in a commercial check package, you
should contact the funds for additional information.
When a draft is presented to the Bank for payment, the Bank (as your agent)
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,
the funds' transfer agent 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. 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 your account, the draft will be returned and your account
will be charged a fee of $15. To avoid the possibility that a draft may not
be accepted due to insufficient share balances, you should not attempt to
withdraw the full amount of an account or to close out an account by using
this procedure. The Money Market Fund, the transfer agent and the Bank will
not 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.
You may request a stop payment on any draft and the transfer agent will
attempt to carry out your request. The transfer agent cannot guarantee that
such efforts will be successful. As the Bank charges the fund for this
service, your account will be charged a $27.50 fee for any such request
that becomes effective. No fee, other than those specified above, will be
charged to you for participation in the check-writing redemption procedure
or for the clearance of any drafts.
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ACCOUNTS WITH LOW BALANCES. Any fund may redeem shares in your account
for their then current net asset value and pay the proceeds to you if
at any time your account has shares valued at less than $1,000 ($500
for an IRA) as a result of redemptions you have made. Any fund may
redeem the shares in your account if you have opened your account for
less than the minimum purchase amount and you do not purchase
additional shares to meet the minimum. Before any shares are redeemed
for these purposes, you will be notified in writing 30 days before any
such redemption to bring the value of shares in the account to $1,000
($500 for an IRA).
EXCHANGE PRIVILEGE
You may exchange shares of any fund for shares of any other Flex-funds' 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:
o you wish to register a new account in a different name;
o you wish to add telephone redemption to an account; or
o you wish to have check-writing redemption privileges in a Money Market
Fund account.
Exchange requests may be directed to the fund by telephone or written request.
If your request is in valid form, and is accepted before the close of the fund's
business day, shares will be exchanged that day. Exchange requests from The
Money Market Fund to another fund 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 your 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 account. The
registration of additional accounts must be identical.
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.
In addition, each fund may reject any exchange request and limit your 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.
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You may realize a taxable gain or loss on an exchange, and you should
consult your tax adviser for further information concerning the tax
consequences of an exchange.
TRANSACTION POLICIES
VALUATION OF SHARES. The net asset value per share (NAV) for each fund,
except the U.S. Government Bond Fund and the Money Market Fund, is
determined each business day at the close of regular trading on the New
York Stock Exchange (typically 4:00 p.m. Eastern Time) by dividing the
fund's net assets by the number of its shares outstanding. The NAV for the
U.S. Government Bond Fund and the Money Market Fund are determined each
business day that the Federal Reserve System is open. The NAV for the U.S.
Government Bond Fund and the Money Market Fund are calculated on each such
business day at 3:00 p.m.
The assets of each portfolio, except the Money Market Portfolio, are
generally valued on the basis of market quotations or, where market
quotations are not readily available, on the basis of fair value as
determined by the adviser under procedures adopted by the Board of
Trustees. The assets of the Money Market Portfolio (and short-term money
market instruments held by other portfolios) are valued on the basis of
amortized cost.
BUY AND SELL PRICES. When you buy shares, you pay the NAV. When you sell
shares, you receive the NAV.
EXECUTION OF REQUESTS. Each fund, except the U.S. Government Bond Fund and
The Money Market Fund, is open on those days when the New York Stock
Exchange is open, typically Monday through Friday. The U.S. Government Bond
Fund and The Money Market Fund are open on those days when the Federal
Reserve System is open, typically Monday through Friday. Buy and sell
requests are executed at the next NAV to be calculated after your request
is received by the transfer agent.
At times of peak activity, it may be difficult to place requests by phone.
During these times, consider sending your request in writing.
In unusual circumstances, any fund may temporarily suspend the processing
of sell requests, or may postpone payment of proceeds for up to seven
business days, as allowed by federal securities laws.
TELEPHONE TRANSACTIONS. For your protection, telephone requests may be
recorded in order to verify their accuracy. In addition, the transfer agent
will take measures to verify the identity of the caller, such as asking for
name, account number, Social Security or other taxpayer ID number and other
relevant information. If appropriate measures are taken, the transfer agent
is not responsible for any losses that may occur to any account due to an
unauthorized telephone call. Proceeds from telephone transactions can only
be mailed to the address of record.
SALES IN ADVANCE OF PURCHASE PAYMENTS. When you place a request to sell
shares for which the purchase money has not yet been collected, the request
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<PAGE>
will be executed in a timely fashion, but the fund will not release the
proceeds to you until your purchase payment clears. This may take up to
fifteen business days after the purchase.
OTHER SHAREHOLDER SERVICES
AUTOMATIC ACCOUNT BUILDER:
Regular investments in any fund of $100 or more will be deducted from your
checking or savings account and invested in shares of the fund(s) selected.
Your bank must be a member of the Automated Clearing House (ACH). If you
wish to add to your investment account, you 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. If
you wish to have a financial institution electronically transfer funds into
your account, you should contact the fund for information on this service.
There is no charge for this service.
SYSTEMATIC WITHDRAWAL PROGRAM:
A Systematic Withdrawal Program is offered if you wish to receive regular
distributions from your account. You must either own or purchase shares
having a value of at least $10,000 and advise the fund 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. You should realize that
if withdrawals exceed income dividends, the invested principal may be
depleted. You may make additional investments and may change or stop the
program at any time. There is no charge for this program.
RETIREMENT PLANS
The funds offer 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.
SUB-ACCOUNTING FOR INSTITUTIONAL INVESTORS:
A fund'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 fund.
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DISTRIBUTOR:
Shares of the funds are sold in those states where their 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.
MORE ABOUT RISK
A fund's risk profile is largely defined by the fund's principal securities
and investment practices. You may find the most concise description of each
fund's risk profile in the fund-by-fund information.
The funds are permitted to use - within limits established by the trustees
- - certain other securities and investment practices that have higher risks and
opportunities associated with them. To the extent that a fund utilizes these
securities or practices, its overall performance may be affected, either
positively or negatively. On the following pages are brief descriptions of these
securities and investment practices, along with the risks associated with them.
The funds follow certain policies that may reduce these risks.
As with any mutual fund, there is no guarantee that a Flex-funds' fund will
earn income or show a positive total return over any period of time - days,
months or years.
INVESTMENT PRACTICES, SECURITIES AND RELATED RISKS
This table shows each portfolio's investment limitations as a percentage of
portfolio assets, if a percentage applies. In each case the principal types of
risk are listed (see following pages for definitions). Numbers in this table
show allowable usage only; for actual usage, consult the portfolios and funds'
annual/semiannual reports.
NL -- No policy limitation on usage; portfolio may be using currently
P -- Permitted, but has not typically been used
NP -- Not permitted
<TABLE>
<CAPTION>
UTILITIES
GROWTH STOCK BOND MONEY
STOCK PORTFOLIO MUTUAL PORTFOLIO MARKET
PORTFOLIO (TOTAL FUND (U.S. PORTFOLIO
(HIGHLANDS RETURN PORTFOLIO GOV'T (MONEY
GROWTH UTILITIES (MUIRFIELD BOND MARKET
FUND) FUND) FUND) FUND) FUND)
<S> <C> <C> <C> <C> <C>
SMALL AND MID-SIZED COMPANY P P NL NP NP
SECURITIES. Market, liquidity
and information risk.
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FOREIGN SECURITIES. Market, NP 25% P NP NP
currency, transaction, liquidity,
information and political risk.
SECTOR FOCUS. Market and NP NL P NP NP
liquidity risk.
CONVERTIBLE SECURITIES. P P P NP NP
Market, interest rate, prepayment
and credit risk.
INVESTMENT GRADE BONDS. P P P P P
Interest rate, prepayment, market
and credit risk.
COMPANIES WITH LIMITED OPERATING P P P NP P
HISTORIES. Market, liquidity and
information risk.
ILLIQUID AND RESTRICTED 10% 10% 10% 10% 10%
SECURITIES. Market, liquidity
and transaction risk.
DEFENSIVE MEASURES. 20% 100% 100% 100% 100%
Opportunity risk.
REPURCHASE AGREEMENTS. 20% 100% 100% 100% 100%
Credit risk.
BORROWING; REVERSE REPURCHASE 33-1/3% 33-1/3% 5% 5% 5%
AGREEMENTS. Leverage and
credit risk.
HEDGING STRATEGIES; FINANCIAL 100% 100% 100% 100% NP
FUTURES AND OPTIONS;
SECURITIES AND INDEX OPTIONS.
Hedging, correlation, opportunity,
leverage, interest rate, market,
and liquidity risks.
CURRENCY CONTRACTS. NP P NP NP NP
Currency leverage, credit,
correlation, liquidity and
opportunity risks.
SECURITIES LENDING. NP 33 1/3% NP NP NP
Credit risk.
SHORT-TERM TRADING. NL NL NL NL NL
Market risk.
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WHEN-ISSUED SECURITIES AND NP NP P NP NP
FORWARD COMMITMENTS.
Market, opportunity and
leverage risks.
</TABLE>
RISK AND INVESTMENT GLOSSARY
BORROWING refers to a loan of money from a bank or other financial
institution undertaken by a portfolio.
COMMON STOCK is a share of ownership (equity) interest in a company.
COMPANIES WITH LIMITED OPERATING HISTORIES are securities issued by
companies that have been in continuous operation for less than three years.
Sometimes called "unseasoned" issuers.
CONVERTIBLE SECURITIES are debt or equity securities which may be converted
on specified terms into stock of the issuer.
CORRELATION RISK occurs when a portfolio "hedges" - uses one investment to
offset the fund's position in another. If the two investments do not behave in
relation to one another the way portfolio managers expect them to, then
unexpected results may occur.
CREDIT RISK means that the issuer of a security or the counterparty to an
investment contract may default or become unable to pay its obligations when
due.
CURRENCY CONTRACTS involve the right or obligation to buy or sell a given
amount of foreign currency at a specified price and future date.
CURRENCY RISK happens when a portfolio buys or sells a security denominated
in foreign currency. Foreign currencies "float" in value against the U.S.
dollar. Adverse changes in foreign currency value can cause investment losses
when a portfolio's investments are converted to U.S. dollars.
DEFENSIVE MEASURES may be taken when a portfolio's adviser believes they
are warranted due to market conditions. When this happens, the portfolio may
increase its investment in government securities and other short-term securities
without regard to the portfolio's investment restrictions, policies or normal
investment emphasis. As a result, the portfolio could be unable to achieve its
investment objective.
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DIVERSIFICATION means a diversified fund may not, with respect to at least
75% of its assets (in the case of The Money Market Fund, 100% of its assets),
invest more than 5% in the securities of one company. A non-diversified fund may
be more volatile than a diversified fund because it invests more of its assets
in a smaller number of companies and the gains or losses on a single stock will
therefore have a greater impact on the fund's share price. All of the Flex-funds
are diversified funds. However, the Mutual Fund Portfolio (the corresponding
Portfolio of The Muirfield Fund) may invest more than 5% of its assets in one
mutual fund. If this underlying mutual fund performs poorly, this could
negatively affect The Muirfield Fund's share price.
FINANCIAL FUTURES are exchange-traded contracts on securities, securities
indexes or foreign currencies that obligate the holder to take or make future
delivery of a specified quantity of those underlying securities or currencies on
a predetermined future date.
FOREIGN SECURITIES are issued by companies located outside of the United
States. A fund considers a company to be located outside the United States if
the principal securities trading market for its equity securities is located
outside the U.S. or it is organized under the laws of, and has its principal
office in, a country other than the U.S.
FORWARD FOREIGN CURRENCY CONTRACTS are privately negotiated contracts
committing the holder to purchase or sell a specified quantity of a foreign
currency on a predetermined future date.
HEDGING RISK comes into play when a portfolio uses a security whose value
is based on an underlying security or index to "offset" the portfolio's position
in another security or currency. The objective of hedging is to offset potential
losses in one security with gains in the hedge. But a hedge can eliminate or
reduce gains as well as offset losses. (Also see "Correlation Risk.")
ILLIQUID AND RESTRICTED SECURITIES are securities which, by rules of their
issue or by their nature, cannot be sold readily. These include illiquid Rule
144A securities.
INFORMATION RISK means that information about a security or issuer may not
be available, complete, accurate or comparable.
INTEREST RATE RISK is the risk that changes in interest rates will
adversely affect the value of an investor's securities. When interest rates
rise, the value of fixed-income securities will generally fall. Conversely, a
drop in interest rates will generally cause an increase in the value of
fixed-income securities. Longer-term securities are subject to greater interest
rate risk.
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INVESTMENT GRADE BONDS are rated BBB (Standard & Poor's) or Baa (Moody's)
or above. Bonds rated below investment grade are subject to greater credit risk
than investment grade bonds.
LEVERAGE RISK occurs in some securities or techniques that tend to magnify
the effect of small changes in an index or a market. This can result in a loss
that exceeds the account that was invested in the contract. Also, if the Mutual
Fund Portfolio (the corresponding Portfolio of The Muirfield Fund) invests in
mutual funds that use leverage, it will have the risks arising from the use of
leverage.
LIQUIDITY RISK occurs when investments cannot be sold readily. A fund may
have to accept a less-than-desirable price to complete the sale of an illiquid
security or may not be able to sell it at all.
MARKET CAPITALIZATION is the total current market value of a company's
outstanding common stock.
MARKET RISK exists in all mutual funds and means the risk that the prices
of securities in a market, a sector, or an industry will fluctuate, and that
such movements might reduce an investment's value.
OPPORTUNITY RISK means missing out on an investment opportunity because the
assets necessary to take advantage of it are committed to less advantageous
investments or strategies.
OPTIONS are contracts giving the holder the right but not the obligation to
purchase or sell a security on or before a predetermined future date for a fixed
price. Options on securities indexes are similar, but settle in cash.
POLITICAL RISK comes into play with investments, particularly foreign
investments, which may be adversely affected by nationalization, taxation, war,
government instability or other economic or political actions or factors.
PREPAYMENT RISK is the risk that, as interest rates fall, borrowers are
more likely to refinance their debts. As a result, the principal on certain
fixed income securities may be paid earlier than expected, which could cause
investment losses and cause prepaid amounts to have to be reinvested at a
relatively lower interest rate.
REPURCHASE AGREEMENTS means the purchase of a security that must later be
sold back to the issuer at the same price plus interest.
SECTOR FOCUS occurs when a significant portion of a portfolio's assets are
invested in a relatively small number of related industries. None of The
Flex-funds, except the Total Return Utilities Fund, will concentrate more than
25% of their total assets in any one industry. However, if the Mutual Fund
Portfolio (the corresponding Portfolio of The Muirfield Fund) invests in mutual
funds that concentrate investments in one or a small number of related
industries, they will have the risks arising from sector focus. Sector focus may
increase both market and liquidity risk.
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<PAGE>
SECURITIES LENDING means the lending of securities to financial
institutions, which provide cash or government securities as collateral.
SHORT-TERM TRADING means selling a security soon after purchase. A
portfolio engaging in short-term trading will have higher turnover and
transaction expenses. Short-term trading may also result in short-term capital
gains. Upon the distribution to you of any net short-term capital gains from a
fund, you will be taxed at ordinary tax rates. Because the adviser or subadviser
may take defensive measures with regard to 100% of the assets in the
corresponding portfolios of the Total Return Utilities Fund, the Muirfield Fund,
the Money Market Fund and the U.S. Government Bond Fund, the risks and expenses
of short-term trading may be higher in these portfolios.
SMALL AND MID-SIZED COMPANY SECURITIES are securities issued by small or
mid-sized companies, as measured by their market capitalization. Historically,
smaller company securities have been more volatile in price than larger company
securities, especially over the short-term. Among the reasons for the greater
price volatility are the less certain growth prospects of smaller companies, the
lower degree of liquidity in the markets for such securities, and the greater
sensitivity of smaller companies to changing economic conditions. In general,
the smaller the company, the greater its risks.
TRANSACTION RISK means that a portfolio may be delayed or unable to settle
a transaction or that commissions and settlement expenses may be higher than
usual.
WHEN ISSUED SECURITIES AND FORWARD COMMITMENTS involve the purchase and
sale of securities for delivery at a future date, market value may change before
delivery.
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FOR MORE INFORMATION:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more detailed information about the funds. The SAI
has been filed with the Securities and Exchange Commission and is
incorporated by reference in this Prospectus (is legally a part of
this Prospectus).
ANNUAL AND SEMIANNUAL REPORTS
These reports include portfolio holdings, financial statements,
performance information, the auditor's report (in the case of the
annual report), and a discussion of the market conditions and
investment strategies that significantly affected the funds'
performance during their last fiscal year.
The SAI, the reports and other information about the funds may be
viewed on the Commission's Internet website at HTTP://WWW.SEC.GOV and
copies of this information may be obtained (upon payment of a copying
fee) by writing the public reference section of the Commission,
Washington, D.C. 20549-6009 (telephone 1-800-SEC-0330).
To request a free copy of the current annual/semi-annual report or
SAI, request other information about the funds, or make shareholder
inquiries, please write, call or E-mail us at:
The Flex-funds
6000 Memorial Drive
Dublin, OH 43017
Telephone: 1-800-325-3539 or 614-760-2159
WWW.FLEXFUNDS.COM
Investment Company Act File No. 811-3462
60
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THE FLEX-FUNDS TOTAL RETURN UTILITIES FUND
CROSS REFERENCE SHEET TO FORM N-1A
PART B.
ITEM NO. STATEMENT OF ADDITIONAL INFORMATION
10(a) Front Cover Page
10(b) Table of Contents
11 Description of the Trust
12(a) Description of the Trust
12(b) Investment Policies and Limitations
Risk Considerations
12(c)(d)(e) Investment Policies and Limitations
13(a) Description of the Trust
Trustees and Officers
13(b)(c)(d) Trustees and Officers
13(e) Not applicable
14(a) Principal Holders of Outstanding Shares
14(b) Not applicable
14(c) Trustees and Officers
15(a) Investment Adviser and Manager
Investment Subadviser
15(b) Not applicable
15(c) Investment Adviser and Manager
Investment Subadviser
15(d) Contracts with Companies Affiliated With the Manager
15(e)(f) Not applicable
15(g) Distribution Plan
15(h) Contracts with Companies Affiliated With the Manager
Additional Information
16(a)(b)(c)(d) Portfolio Transactions
16(e) Not applicable
17(a) Description of the Trust
17(b) Not applicable
18(a) Additional Purchase and Redemption Information
Flex-funds Retirement Plans
18(b) Not applicable
18(c) Valuation of Portfolio Securities
18(d) Description of the Trust
19 Distributions and Taxes
20 Not applicable
21(a) Not applicable
21(b) Performance
22 Financial Statements
<PAGE>
TOTAL RETURN UTILITIES FUND
A FUND OF THE FLEX-FUNDS TRUST
STATEMENT OF ADDITIONAL INFORMATION
APRIL 30, 1999
This Statement is not a prospectus but should be read in conjunction with The
Flex-funds current Prospectus (dated April 30, 1999). 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
Description of the Trust
Investment Policies and Limitations
Portfolio Transactions
Valuation of Portfolio Securities
Performance
Additional Purchase and Redemption Information
Distributions and Taxes
Investment Adviser and Manager
Investment Subadviser
Distribution Plan
Trustees and Officers
Flex-funds Retirement Plans
Contracts With Companies Affiliated With Manager
Additional Information
Principal Holders of Outstanding Shares
Financial Statements
INVESTMENT ADVISER TRANSFER AGENT
R. Meeder & Associates, Inc. Mutual Funds Service Co.
INVESTMENT SUBADVISER
Miller/Howard Investments, Inc.
<PAGE>
DESCRIPTION OF THE TRUST
BACKGROUND. 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 investment 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.
INVESTMENT STRUCTURE. Unlike other mutual funds which directly acquire and
manage their own portfolio of securities, The Total Return Utilities Fund seeks
to achieve its investment objectives by investing all of its assets in the
Utilities Stock Portfolio, a separate registered investment company with the
same investment objectives as the Fund. Therefore, an investor's interest in the
Portfolio's securities is indirect. In addition to selling a beneficial interest
to the Fund, the Portfolio may sell beneficial interests to other mutual funds
or investors. Such investors will invest in the Portfolio on the same terms and
conditions and will pay a proportionate share of the Portfolio's expenses.
However, the other investors investing in the Portfolio are not required to sell
their shares at the same public offering price as the Fund. Investors in the
Fund should be aware that these differences may result in differences in returns
experienced by investors in the different funds that invest in the Portfolio.
Such differences in returns are also present in other mutual fund structures.
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.
The Utilities Stock Portfolio is organized as a trust under the laws of the
State of New York. The Portfolio's Declaration of Trust provides that the Fund
and other entities investing in the Portfolio (e.g., other investment companies,
insurance company separate accounts, and common and commingled trust funds) will
each be liable for all obligations of the Portfolio. However, the risk of the
Fund incurring financial loss on account of such liability is limited to
circumstances in which both inadequate insurance existed and the Portfolio
itself was unable to meet its obligations. Accordingly, the Trustees of the
Trust believe that neither the Fund nor its shareholders will be adversely
affected by reason of the Fund's investing in the Portfolio. In addition,
whenever the Trust is requested to vote on matters pertaining to the fundamental
policies of the Portfolio, the Trust will hold a meeting of the Fund's
shareholders and will cast its vote as instructed by the Fund's shareholders.
Smaller funds investing in the Portfolio may be materially affected by the
actions of larger funds investing in the Portfolio. For example, if a large fund
withdraws from the Portfolio, the remaining funds may experience higher pro rata
operating expenses, thereby producing lower returns. Additionally, the Portfolio
may become less diverse, resulting in increased portfolio risk. (However, this
possibility also exists for traditionally structured funds that have large or
institutional investors.) Also, funds with a greater pro rata ownership in the
Portfolio could have effective voting control of the operations of the
<PAGE>
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 a 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.
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.
As stated in "Investment Policies and Limitations," except as otherwise
expressly provided herein, the Fund's investment objectives and policies are not
fundamental and may be changed by Trustees without shareholder approval.
For descriptions of the investment objectives and policies of the
Portfolio, see "Investment Policies and Limitations." For descriptions of the
management and expenses of the Portfolios, see "Investment Adviser and Manager"
and "Trustees and Officers."
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
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additional funds. All shares have a par value of $.10 per share, are fully paid,
non-assessable 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.
Shares are fully paid and nonassessable. The Trust or any fund may be
terminated upon the sale of its assets to another open-end management investment
company, 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, or upon liquidation and distribution of its assets, if approved
by a majority of the Trustees of the Trust. If not so terminated, the Trust and
the fund will continue indefinitely.
TRUSTEE LIABILITY. The Declaration of Trust 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. 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 a
fund 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.
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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);
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(5) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or instrumentalities)
if, as a result, more than 25% of the Portfolio's total assets would be invested
in the securities of companies whose principal business activities are in the
same industry, except that the Portfolio may invest more than 25% of its total
assets in securities of public utility companies;
(6) purchase or sell real estate unless acquired as a result of ownership
of securities or other instruments (but this shall not prevent the Portfolio
from investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business);
(7) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
Portfolio from purchasing or selling options and futures contracts or from
investing in securities or other instruments backed by physical commodities); or
(8) lend any security or make any other loan if, as a result, more than
33-1/3% of its total assets would be lent to other parties, but this limitation
does not apply to purchases of debt securities or to repurchase agreements.
THE FOLLOWING INVESTMENT LIMITATIONS ARE NOT FUNDAMENTAL, AND MAY BE CHANGED
WITHOUT SHAREHOLDER APPROVAL.
(i) The Portfolio does not currently intend to 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
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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.
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For the Portfolio's limitations on futures and options transactions, see
the section entitled "Limitations on Futures and Options Transactions" beginning
on page 16. For the Portfolio's limitations on short sales, see the section
entitled "Short Sales" on page 21.
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.
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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.
* 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.
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Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length or time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
2. Standard and Poor's Corporation's 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
of earnings over a period of ten years; (7) financial strength of a parent
company and the relationships which exist with the issuer; and (8) recognition
by the management of obligations which may be present or may arise as a result
of public interest questions and preparations to meet such obligations.
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4. Description of Permitted Money Market Investments:
Commercial Paper - refers to promissory notes issued by corporations in
order to finance their short term credit needs.
U.S. Government Obligations - are bills, certificates of indebtedness notes
and bonds issued by the U.S. Treasury and agencies, authorities and
instrumentalities of the U.S. Government established under the authority of an
act of Congress. Some obligations of U.S. Government agencies, authorities and
instrumentalities are supported by the full faith and credit of the U.S.
Treasury, as for example, the Government National Mortgage Association; others
by the right of the issuer to borrow from the Treasury, as in the case of
Federal Farm Credit Banks and Federal National Mortgage Association; and others
only by the credit of the agency, authority or instrumentality; as for example,
Federal Home Loan Mortgage and Federal Home Loan Bank.
Repurchase Agreements - See "Repurchase Agreements" below.
Certificates of Deposit - are certificates issued against funds deposited
in a bank, are for a definite period of time, earn a specified or variable rate
of return and are normally negotiable.
Banker's Acceptances - are short-term credit instruments used to finance
the import, export, transfer or storage of goods. They are termed "accepted"
when a bank guarantees their payment at maturity.
Corporate Obligations - include bonds and notes issued by corporations in
order to finance longer term credit needs.
ILLIQUID INVESTMENTS are investments that cannot be sold or disposed of in
the ordinary course of business at approximately the prices at which they are
valued. Under the supervision of the Board of Trustees, the Subadviser
determines the liquidity of the Portfolio's investments and, through reports
from the Subadviser, the Board monitors investments in illiquid instruments. In
determining the liquidity of the Portfolio's investments, the Subadviser may
consider various factors, including (1) the frequency of trades and quotations,
(2) the number of dealers and prospective purchasers in the marketplace, (3)
dealer undertakings to make a market, (4) the nature of the security (including
any demand or tender features), and (5) the nature of the marketplace for trades
(including the ability to assign or offset the Portfolio's rights and
obligations relating to the investment). Investments currently considered by the
Portfolio to be illiquid include repurchase agreements not entitling the holder
to payment of principal and interest within seven days, over-the-counter
options, and non-government stripped fixed-rate mortgage-backed securities.
Also, the Subadviser may determine some restricted securities,
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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 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
reflects the purchase price plus an agreed upon incremental amount which is
unrelated to the coupon rate or maturity of the purchased security. A repurchase
agreement involves the obligation of the seller to pay the agreed upon price,
which obligation is in effect secured by the value (at least equal to the amount
of the agreed upon resale price and marked to market daily) of the underlying
security. The Portfolio may engage in repurchase agreements with respect to any
security in which it is authorized to invest.
The Portfolio's repurchase agreements will at all times be fully
collateralized in an amount at least equal to the purchase price, including
accrued interest earned on the underlying securities. The instruments held as
collateral are valued daily, and as the value of instruments declines, the
Portfolio will require additional collateral. If the seller defaults or becomes
insolvent and the value of the collateral securing the repurchase agreement
declines, the Portfolio may incur a loss.
While it does not presently appear possible to eliminate all risks from
these transactions (particularly the possibility of a decline in the market
value of the underlying securities, as well as delays and costs to the Portfolio
in connection with bankruptcy proceedings), it is the Portfolio's current policy
to limit repurchase agreement transactions to parties whose creditworthiness has
been reviewed and found satisfactory by the Subadviser.
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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.
SECURITIES LENDING. The Portfolio may lend securities to parties such as
broker-dealers or institutional investors.
During the time portfolio securities are on loan, the borrower will pay the
Portfolio an amount equivalent to any dividend or interest paid on such
securities and earn additional income, or the Portfolio may receive an
agreed-upon amount of interest income from the borrower. In accordance with
applicable regulatory requirements, the Portfolio may lend up to 30% of the
value of its total assets. The risks in lending portfolio securities, as well as
with other extensions of secured credit, consist of possible delay in receiving
additional collateral or in recovery of the securities or possible loss of
rights in the collateral should the borrower fail financially.
Securities lending allows the Portfolio to retain ownership of the
securities loaned and, at the same time, to earn additional income. Since there
may be delays in the recovery of loaned securities, or even a loss of rights in
collateral supplied should the borrower fail financially, loans will be made
only to parties deemed by the Subadviser to be of good standing. Furthermore,
they will only be made if, in the Subadviser's judgment, the consideration to be
earned from such loans would justify the risk.
The Subadviser understands that it is the current view of the SEC Staff
that the Portfolio may engage in loan transactions only under the following
conditions: (1) the Portfolio must receive 100% collateral in the form of cash
or cash equivalents (e.g., U.S. Treasury bills or notes) from the borrower; (2)
the borrower must increase the collateral whenever the market value of the
securities loaned (determined on a daily basis) rises above the value of the
collateral; (3) after giving notice, the Portfolio must be able to terminate the
loan at any time; (4) the Portfolio must receive reasonable interest on the loan
or a flat fee from the borrower, as well as amounts equivalent to any dividends,
interest, or other distributions on the securities loaned and to any increase in
market value; (5) the Portfolio may pay only reasonable custodian fees in
connection with the loan; and (6) the Board of Trustees must be able to vote
proxies on the securities loaned, either by terminating the loan or by entering
into an alternative arrangement with the borrower.
Cash received through loan transactions may be invested in any security in
which the Portfolio is authorized to invest. Investing this cash subjects that
investment, as well as the security loaned, to market forces (i.e., capital
appreciation or depreciation).
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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.
FOREIGN INVESTMENTS. Foreign investments can involve significant risks in
addition to the risks inherent in U.S. investments. The value of securities
denominated in or indexed to foreign currencies, and of dividends and interest
from such securities, can change significantly when foreign currencies
strengthen or weaken relative to the U.S. dollar. Foreign securities markets
generally have less trading volume and less liquidity than U.S. markets, and
prices on some foreign markets can be highly volatile.
Many foreign countries lack uniform accounting and disclosure standards
comparable to those applicable to U.S. companies, and it may be more difficult
to obtain reliable information regarding an issuer's financial condition and
operations.
In addition, the costs of foreign investing, including withholding taxes,
brokerage commissions, and custodial costs, are generally higher than for U.S.
investments.
Foreign markets may offer less protection to investors than U.S. markets.
Foreign issuers, brokers, and securities markets may be subject to less
government supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer, and
may involve substantial delays. It may also be difficult to enforce legal rights
in foreign countries.
Investing abroad also involves different political and economic risks.
Foreign investments may be affected by actions of foreign governments adverse to
the interests of U.S. investors, including the possibility of expropriation or
nationalization of assets, confiscatory taxation, restrictions on U.S.
investment or on the ability to repatriate assets or convert currency into U.S.
dollars, or other government intervention. There may be a greater possibility of
default by foreign governments or foreign government-sponsored enterprises.
Investments in foreign countries also involve a risk of local political,
economic, or social instability, military action or unrest, or adverse
diplomatic developments. There is no assurance that the Subadviser will be able
to anticipate or counter these potential events.
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The considerations noted above generally are intensified for investments in
developing countries. Developing countries may have relatively unstable
governments, economies based on only a few industries, and securities markets
that trade a small number of securities.
The Portfolio may invest in foreign securities that impose restrictions on
transfer within the U.S. or to U.S. persons. Although securities subject to
transfer restrictions may be marketable abroad, they may be less liquid than
foreign securities of the same class that are not subject to such restrictions.
American Depositary Receipts and European Depositary Receipts (ADRs and
EDRs) are certificates evidencing ownership of shares of a foreign-based
corporation held in trust by a bank or similar financial institution. Designed
for use in U.S. and European securities markets, respectively, ADRs and EDRs are
alternatives to the purchase of the underlying securities in their national
markets and currencies.
HEDGING STRATEGIES. The Portfolio may engage in hedging transactions in
carrying out its investment policies. The Manager may conduct a hedging program
on behalf of the Portfolio for the following reasons: (1) to keep cash on hand
to meet shareholder redemptions or other needs while simulating full investment
in stocks; (2) to reduce the Portfolio's transaction costs or add value when
these instruments are favorably priced; (3) to forego taxes that would otherwise
have to be paid on gains from the sale of the Portfolio's securities; and (4) to
attempt to protect the value of certain securities owned or intended to be
purchased by the portfolio's while the manager is making a change in the
Portfolio's investment position.
A hedging program involves entering into an "option" or "futures"
transaction in lieu of the actual purchase or sale of securities. At present,
many groups of common stocks (stock market indices) may be made the subject of
futures contracts, while government securities such as Treasury Bonds and Notes
are among debt securities currently covered by futures contracts.
Financial futures contracts or related options used by the Portfolio to
implement its hedging strategies are considered derivatives. The value of
derivatives can be affected significantly by even small market movements,
sometimes in unpredictable ways.
The Portfolio may not purchase or sell financial futures or purchase
related options if immediately thereafter the sum of the amount of margin
deposits on the Portfolio's existing futures positions and premiums paid for
related options would exceed 5% of the market value of the Portfolio's total
assets.
The Portfolio expects that any gain or loss on hedging transactions will be
substantially offset by any gain or loss on the securities underlying the
contracts or being considered for purchase. There can be no guarantee that the
Portfolio will be able to realize this objective, and there are some risks in
utilizing a hedging strategy.
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FOREIGN CURRENCY TRANSACTIONS. The Portfolio may hold foreign currency
deposits from time to time, and may convert dollars and foreign currencies in
the foreign exchange markets. Currency conversion involves dealer spreads and
other costs, although commissions usually are not charged. Currencies may be
exchanged on a spot (i.e., cash) basis, or by entering into forward contracts to
purchase or sell foreign currencies at a future date and price. Forward
contracts generally are traded in an interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. The
parties to a forward contract may agree to offset or terminate the contract
before its maturity, or may hold the contract to maturity and complete the
contemplated currency exchange.
The Portfolio may use forward currency contracts to manage currency risks
and to facilitate transactions in foreign securities. Such contracts may involve
the purchase or sale of a foreign currency against the U.S. dollar, or may
involve two foreign currencies. 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
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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
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.
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.
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The above limitations on the Portfolio's investments in futures
contracts and options, and the Portfolio's policies regarding futures contracts
and options discussed elsewhere in this Statement of Additional Information, may
be changed as regulatory agencies permit.
FUTURES CONTRACTS. When the Portfolio purchases a futures contract, it
agrees to purchase a specified underlying instrument at a specified future date.
When the Portfolio sells a futures contract, it agrees to sell the underlying
instrument at a specified future date. The price at which the purchase and sale
will take place is fixed when the Portfolio enters into the contract.
Some currently available futures contracts are based on specific
securities, such as U.S. Treasury bonds or notes, and some are based on indices
of securities-prices, such as the Standard & Poor's 500 Composite Stock Price
Index (S&P 500). Futures can be held until their delivery dates, or can be
closed out before then if a liquid secondary market is available.
The value of a futures contract tends to increase and decrease in tandem
with the value of its underlying instrument. Therefore, purchasing futures
contracts will tend to increase the Portfolio's exposure to positive and
negative price fluctuations in the underlying instrument, much as if it had
purchased the underlying instrument directly. When the Portfolio sells a futures
contract, by contrast, the value of its futures position will tend to move in a
direction contrary to the market. Selling futures contracts, therefore, will
tend to offset both positive and negative market price changes, much as if the
underlying instrument had been sold.
FUTURES MARGIN PAYMENTS. The purchaser or seller of a futures contract is
not required to deliver or pay for the underlying instrument unless the contract
is held until the delivery date. However, both the purchaser and seller are
required to deposit "initial margin" with a futures broker, known as a futures
commission merchant (FCM), when the contract is entered into. Initial margin
deposits are typically equal to a percentage of the contract's value.
If the value of either party's position declines, that party will be
required to make additional "variation margin" payments to settle the change in
value on a daily basis. The party that has a gain may be entitled to receive all
or a portion of this amount. Initial and variation margin payments do not
constitute purchasing securities on margin for purposes of the Portfolio's
investment limitations. In the event of the bankruptcy of an FCM that holds
margin on behalf of the Portfolio, the Portfolio may be entitled to return of
margin owed to it only in proportion to the amount received by the FCM's other
customers, potentially resulting in losses to the Portfolio.
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,
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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. 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.
When the Portfolio writes a put option, it takes the opposite side of the
transaction from the option's purchaser. In return for receipt of the premium,
the Portfolio assumes the obligation to pay the strike price for the option's
underlying instrument if the other party to the option chooses to exercise it.
When writing an option on a futures contract the Portfolio will be required to
make margin payments to an FCM as described above for futures contracts. The
Portfolio may seek to terminate its position in a put option it writes before
exercise by closing out the option in the secondary market at its current price.
If the secondary market is not liquid for a put option the Portfolio has
written, however, the Portfolio must continue to be prepared to pay the strike
price while the option is outstanding, regardless of price changes, and must
continue to set aside assets to cover its position.
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
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should be less than the loss from purchasing the underlying instrument directly
however, because the premium received for writing the option should mitigate the
effects of the decline.
Writing a call option obligates the Portfolio to sell or deliver the
option's underlying instrument, in return for the strike price, upon exercise of
the option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium, a call writer mitigates the effects of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
The Portfolio may write only "covered" call options. An option written on a
security or currency is "covered" when, so long as the Portfolio is obligated
under the option, it owns the underlying security or currency. The Portfolio
will "cover" stock index options and options on futures contracts it writes by
maintaining in a segregated account either marketable securities, which in the
Subadviser's judgment correlate to the underlying index or futures contract or
an amount of cash, U.S. government securities or other liquid, high grade debt
securities equal in value to the amount the Portfolio would be required to pay
were the option exercised.
COMBINED POSITIONS. The Portfolio may purchase and write options in
combination with each other, or in combination with futures or forward
contracts, to adjust the risk and return characteristics of the overall
position. For example, the Portfolio may purchase a put option and write a call
option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a futures
contract. Another possible combined position would involve writing a call option
at one strike price and buying a call option at a lower price, in order to
reduce the risk of the written call option in the event of a substantial price
increase. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.
CORRELATION OF PRICE CHANGES. Because there are a limited number of types
of exchange traded options and futures contracts, it is likely that the
standardized contracts available will not match the Portfolio's current or
anticipated investments exactly. The Portfolio may invest in options and futures
contracts based on securities with different issuers, maturities, or other
characteristics from the securities in which it typically invests, which
involves a risk that the options or futures position will not track the
performance of the Portfolio's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match the Portfolio's
investments well. options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract,
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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
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.
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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
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,
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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.
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.
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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
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).
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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 1998 was 51% (41% in
1997; 51% in 1996). 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.
The portfolio turnover rate is calculated by dividing the lesser of sales
or purchases of portfolio securities by the average monthly value of the
Portfolio's securities, excluding securities having a maturity at the date of
purchase of one year or less.
Because the Subadviser may employ flexible defensive investment strategies
when market trends are not considered favorable, the Subadviser may occasionally
change the entire portfolio in the Portfolio. High transaction costs could
result when compared with other funds. Trading may also result in realization of
net short-term capital gains upon which shareholders may be taxed at ordinary
tax rates when distributed from a Fund. This defensive investment strategy can
produce high portfolio turnover ratios when calculated in accordance with SEC
rules. High portfolio turnover may involve correspondingly greater brokerage
commissions and other transaction costs, which will be borne directly by the
Portfolio.
RISK CONSIDERATIONS
By itself, the Utilities Stock Portfolio does not constitute a balanced
investment plan. Changes in interest rates may affect the value of the Utilities
Stock Portfolio's investments, and rising interest rates can be expected to
reduce the Utilities Stock Portfolio's net asset value. The Total Return
Utilities Fund's share price and total return fluctuate and your investment may
be worth more or less than your original cost when you redeem your shares.
Because the Utilities Stock Portfolio concentrates its investments in
public utility companies, its performance will depend in large part on
conditions in the public utility industries. Utility stocks have traditionally
been popular among more conservative stock market investors because they have
generally paid above average dividends. However, utility stocks can still be
affected by the risks of the stock market, as well as factors specific to public
utility companies.
Governmental regulation of public utility companies can limit their ability
to expand their business or to pass cost increases on to customers. Companies
providing power or energy-related services may also be affected by fuel
shortages or cost increases, environmental protection or energy conservation
regulations, as well as fluctuating demand for their services. Some public
utility companies are facing increased competition, which may reduce their
profits. All of these factors are subject to rapid change, which may affect
utility companies independently from the stock market as a whole.
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In seeking its investment objectives, the Utilities Stock Portfolio may
invest in securities of foreign issuers. Foreign securities may involve a higher
degree of risk and may be less liquid or more volatile than domestic
investments. Foreign securities usually are denominated in foreign currencies,
which means their value will be affected by changes in the strength of foreign
currencies relative to the U.S. dollar as well as the other factors that affect
security prices. Foreign companies may not be subject to accounting standards or
governmental supervision comparable to U.S. companies, and there often is less
publicly available information about their operations. Generally, there is less
governmental regulation of foreign securities markets, and security trading
practices abroad may offer less protection to investors such as the Utilities
Stock Portfolio.
The value of such investments may be adversely affected by changes in
political or social conditions, diplomatic relations, confiscatory taxation,
expropriation, nationalization, limitation on the removal of portfolios or
assets, or imposition of (or change in) exchange control or tax regulations in
those foreign countries. Additional risks of foreign securities include
settlement delays and costs, difficulties in obtaining and enforcing judgments,
and taxation of dividends at the source of payment.
The Subadviser intends to manage the Utilities Stock Portfolio actively in
pursuit of its investment objective. The Utilities Stock Portfolio does not
expect to trade in securities for short-term profits but, when circumstances
warrant, securities may be sold without regard to the length of time held.
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
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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.
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
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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, 1998, directed brokerage payments of $2,246 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.
During the year ended December 31, 1998, the Utilities Stock Portfolio paid
total commissions of $31,922 ($15,202 in 1997; $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
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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.
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.
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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 total 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. 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.
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
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THE TOTAL RETURN UTILITIES FUND:
TOTAL RETURN
3.532 Year
1 Year (Since Inception)
Period Ended Period Ended
DECEMBER 31,1998 DECEMBER 31, 1998
Value of Account
At end of Period $ 1,087.70 $ 1,824.09
Value of Account
At beginning of Period 1,000.00 1,000.00
----------- --------
Base Period Return $ 87.70 $ 824.09
Average Total Return 8.77% 18.57%
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. 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. The Fund's performance may also be compared to
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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.
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.
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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.
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 1998: 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 may 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.
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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.
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
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.
DISTRIBUTIONS. 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 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.
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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
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 Trust files federal income tax returns for the
Fund. The Fund is treated as a separate entity from the other funds of The
Flex-funds Trust for federal income tax purposes.
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 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 sixteen fiscal years. 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
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<PAGE>
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.
At December 31, 1998, The Total Return Utilities Fund had unused capital
loss carryforwards of $357,103 available to offset future gains, if any, for
Federal income tax purposes. The capital loss carryforward expires 2006.
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.
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 Firstar 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.
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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.
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, 1998, the Utilities Stock Portfolio paid
total fees to the Manager of $126,301 ($88,486 in 1997; $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"), a
holding company which is controlled by Robert S. Meeder, Sr. through ownership
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of 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's officers and directors are as set forth as follows: Robert S.
Meeder, Sr., Chairman and Sole Director; Philip A. Voelker, Senior Vice
President and Chief Investment Officer; Donald F. Meeder, Vice President and
Secretary; Robert S. Meeder, Jr., President; Thomas E. Line, Chief Operating
Officer; Michael J. Sullivan, Vice President of Sales and Marketing, and Wesley
F. Hoag, Vice President and General Counsel. Mr. Robert S. Meeder, Sr. is
President and a Trustee of the Trust and each Portfolio. Mr. Robert S. Meeder,
Jr. and Philip A. Voelker each are a Trustee and officer of the Trust and each
Portfolio. Each of Messrs. Donald F. Meeder and Wesley F. Hoag is an officer of
the Trust and each Portfolio.
The Manager and Subadviser may use their resources to pay expenses
associated with the sale of the Fund's shares. This may include payments to
third parties such as banks or broker-dealers that provide shareholder support
services or engage in the sale of the Fund's shares. However, the Fund does not
pay the Manager any separate fees for this service.
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
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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
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
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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. 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.
The Trust has entered into an agreement with Walter L. Ogle whereby Mr.
Ogle is paid for his assistance in explaining and interpreting the Funds, their
investment objectives and policies, and the Trust's retirement plans to clients.
See "Compensation Table" for further information.
The Trust had entered into an agreement with Russel G. Means whereby Mr.
Means was paid for his assistance in explaining and interpreting the Funds,
their investment objectives and policies, and the Trust's retirement plans to
clients. See "Compensation Table" for further information.
Total payments made by the Fund to parties with service agreements for the
year ended December 31, 1998 amounted to $9,292. In addition, expenditures were
approved by the Board of Trustees in the amount of $10,781 for the printing and
mailing of prospectuses, periodic reports and other sales materials to
prospective investors; $6,057 for advertising; $6,821 for the services of public
relations and marketing consultants; and $458 for the cost of special telephone
service to encourage the sale of Fund shares. These total expenditures amounted
to $33,409 for the year ended December 31, 1998.
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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 (*).
NAME, ADDRESS AND AGE POSITION HELD PRINCIPAL OCCUPATION
ROBERT S. MEEDER, SR.*+, 70 Trustee/President Chairman of R. Meeder &
Associates, Inc., an
investment adviser;
Chairman and Director of
Mutual Funds Service Co.,
the Funds' transfer agent.
MILTON S. BARTHOLOMEW, 70 Trustee Retired; formerly a
1424 Clubview Boulevard, S. practicing attorney in
Worthington, OH 43235 Columbus, Ohio; member of
each Fund's Audit
Committee.
ROGER D. BLACKWELL, 58 Trustee Professor of Marketing and
Blackwell Associates, Inc. Consumer Behavior, The
3380 Tremont Road Ohio State University;
Columbus, OH 43221 President of Blackwell
Associates, Inc., a
strategic consulting firm.
ROBERT S. MEEDER, JR.*, 38 Trustee and President of R. Meeder &
Vice President Associates, Inc.
WALTER L. OGLE, 60 Trustee Executive Vice President
400 Interstate North Parkway of Aon Consulting, an
Suite 1630 employee benefits
Atlanta, GA 30339 consulting group.
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CHARLES A. DONABEDIAN, 56 Trustee President, Winston
Winston Financial, Inc. Financial, Inc., which
200 TechneCenter Drive provides a variety of
Suite 200 marketing and consulting
Milford, OH 45150 services to investment
management companies; CEO,
Winston Advisors, Inc., an
investment adviser.
JAMES W. DIDION, 68 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).
JACK W. NICKLAUS II, 38 Trustee Designer, Nicklaus Design,
11780 U.S. Highway #1 a golf course design firm
North Palm Beach, FL 33408 and division of Golden
Bear International, Inc.
PHILIP A. VOELKER*+, 45 Trustee and Vice Senior Vice President and
President Chief Investment Officer
of R. Meeder & Associates,
Inc.
JAMES B. CRAVER*, 55 Assistant Secretary Assistant Secretary and
42 Miller Hill Road Assistant Treasurer of
Box 811 Adviser Dealer Services,
Dover, MA 02030 Inc.; Practicing Attorney;
Special Counsel to
Flex-Partners, Flex-funds
and their Portfolios;
Senior Vice President of
Signature Financial Group,
Inc. (January 1991 to
August 1995).
DONALD F. MEEDER*+, 60 Secretary/Treasurer Vice President of R.
Meeder & Associates, Inc.;
Secretary of Mutual Funds
Service Co., the Funds'
transfer agent.
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WESLEY F. HOAG*+, 42 Vice President Vice President and General
Counsel of R. Meeder &
Associates, Inc. and
Mutual Funds Service Co.
(since July 1993);
Attorney, Porter, Wright,
Morris & Arthur, a law
firm (October 1984 to
June 1993).
RICHARD A. CLEMENS*+, 31 Assistant Treasurer Manager/Financial
Reporting, Mutual Funds
Service Co., the Funds'
transfer agent (since
March 1997); Manager,
Financial Administration,
BISYS Fund Services (May
1995 to February 1997);
Supervising Senior
Accountant, Ernst & Young
LLP (October 1990 to
May 1995)
* Interested Person of the Trust (as defined in the Investment Company Act of
1940), The Flex-funds, 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.
The following table shows the compensation paid by the Portfolio and the
Fund Complex as a whole to the Trustees of the Portfolios and the Fund Complex
during the fiscal year ended December 31, 1998.
COMPENSATION TABLE
Pension or Total
Retirement Compensation
Benefits from
Aggregate Accrued as Estimated Registrant and
Compensation Part of Annual Fund Complex
TRUSTEE from the Portfolio Benefits Upon Paid TO
PORTFOLIO(1) EXPENSE RETIREMENT TRUSTEE(1)(2)
----------- ------- ------------- -----------
Robert S. Meeder, Sr. None None None None
Milton S. Bartholomew $1,014 None None $13,525
Robert S. Meeder, Jr. None None None None
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<PAGE>
John M. Emery $ 757 None None $ 9,867
Richard A. Farr $ 750 None None $ 9,367
Russel G. Means $ 500 None None $36,913(3)
Walter L. Ogle $1,026 None None $16,582(4)
Philip A. Voelker None None None None
Roger A. Blackwell $1,013 None None $13,525
Charles A. Donabedian $ 772 None None $12,525
James Didion None None None None
Jack W. Nicklaus II $ 500 None None $ 6,325
William L. Gurner None None None None
Lowell G. Miller None None None None
1 Compensation figures include cash and amounts deferred at the election of
certain non-interested Trustees. For the calendar year ended December 31, 1998,
participating non-interested Trustees accrued deferred compensation from the
Portfolio as follows: Milton S. Bartholomew - $507, Roger A. Blackwell - $1,013,
Charles A. Donabedian - $772, and Jack W. Nicklaus II - $500.
2 The Fund Complex consists of 15 investment companies.
3 The Trust had entered into an agreement with Russel G. Means whereby Mr. Means
was paid for his assistance in explaining and interpreting the Funds, their
investment objectives and policies, and the Trust's retirement plans to clients.
Mr. Means' compensation figure includes $29,046 paid out by the Trust pursuant
to this agreement.
4 The Trust has entered into an agreement with Walter L. Ogle whereby Mr. Ogle
is paid for his assistance in explaining and interpreting the Funds, their
investment objectives and policies, and the Trust's retirement plans to clients.
Mr. Ogle's compensation figure includes $2,057 paid out by the Trust pursuant
to this agreement.
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
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. Members of the Audit and
Strategic Planning Committees for The Flex-funds Trust, The Flex-Partners Trust,
and the Portfolios are paid $500 for each Committee meeting attended. Trustee
fees for the Utilities Stock Portfolio totaled $7,332 for the year ended
December 31, 1998 ($6,033 in 1997). All other officers and Trustees serve
without compensation from any Portfolio.
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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
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.
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<PAGE>
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.
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*
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<PAGE>
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.
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.
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<PAGE>
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).
(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
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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.
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., 6000 Memorial Drive, Dublin, Ohio 43017, a wholly
owned subsidiary of Muirfield Investors, Inc. and a sister company of R. Meeder
& Associates, Inc., provides accounting, administrative, 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
49
<PAGE>
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, 1998, total payments to Mutual Funds
Service Co. by the Fund and the Portfolio amounted to $32,485.
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.
ADDITIONAL INFORMATION
CUSTODIAN Firstar 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 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.
50
<PAGE>
PRINCIPAL HOLDERS OF OUTSTANDING SHARES
As of January 31, 1999, 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. 146,125.716 27.4%
Special Custody Account
for the Exclusive Benefit
of Customers
101 Montgomery Street
San Francisco, CA 94104
* Indicates control person. Control means beneficial ownership of more than 25%
of the shares of the Fund. Because of this control, a control person could
prevent a change in the investment adviser or subadviser of the Portfolio that
is favored by other shareholders. A control person could also cause a change in
the investment adviser or subadviser of the Portfolio that is opposed by other
shareholders.
To the knowledge of the Trust, the shareholder listed above owns shares for
investment purposes and have no known intention of exercising any control of the
Fund.
FINANCIAL STATEMENTS
The audited Financial Statements and the Notes thereto for the Fund and the
Portfolio, and the auditor's reports of KPMG LLP, independent auditors, are
presented on the following pages.
<PAGE>
Growth Stock Portfolio
Portfolio of Investments as of December 31, 1998
INDUSTRIES/CLASSIFICATIONS SHARES OR FACE AMOUNT VALUE
- -------------------------- --------------------- -----
COMMON STOCKS - 94.3%
ADVERTISING SALES - 0.4%
Outdoor Systems, Inc. # 7,600 $ 228,000
AEROSPACE/DEFENSE - 1.3%
B.F. Goodrich Co. 1,891 67,840
Boeing Co. 3,900 127,481
General Dynamics Corp. 440 25,960
Lockheed Martin Corp. 820 69,495
Northrup Grumman Corp. 250 18,281
Raytheon Co. - Class B # 2,000 106,500
Textron, Inc. 1,240 94,163
United Technologies Corp. 1,480 160,950
670,670
AIR TRANSPORTATION - 0.3%
AMR Corp. # 910 54,031
Delta Air Lines, Inc. 770 40,040
Southwest Airlines 1,685 38,228
USAir Group # 470 24,440
156,739
ALUMINUM - 0.2%
Aluminum Company of America 1,230 91,712
AUTO & TRUCK - 1.5%
Ford Motor Co. 6,500 381,469
General Motors Corp. 5,000 357,812
TRW, Inc. 620 34,759
774,040
BANKING - 0.2%
Washington Mutual Savings Bank 2,303 88,378
BEVERAGE--ALCOHOLIC - 0.6%
Anheuser-Busch Cos., Inc. 2,400 157,500
Canadaigua Wine Co. # 2,400 138,750
296,250
BEVERAGE--SOFT DRINK - 1.8%
Coca-Cola Co. 6,000 402,000
Pepsico, Inc. 7,300 298,388
Whitman Corp. 9,400 238,525
938,913
BUILDING MATERIALS - 0.2%
Crane Co. 495 14,943
Masco Corp. 1,860 53,475
Willbros Group # 1,500 8,344
76,762
CAPITAL GOODS - 0.1%
Ingersoll-Rand 611 28,870
CHEMICAL--DIVERSIFIED - 1.1%
Air Products & Chemicals, Inc. 1,550 62,000
E.I. du Pont de Nemours & Co. 4,780 255,730
Monsanto Corp. 2,950 140,125
Praxair, Inc. 1,140 40,185
Rohm & Haas Co. 1,685 50,761
548,801
CHEMICAL--SPECIALTY - 0.1%
Sigma Aldrich 910 26,731
COMMERCIAL SERVICES - 0.1%
Dun & Bradstreet 1,470 46,397
<PAGE>
INDUSTRIES/CLASSIFICATIONS SHARES OR FACE AMOUNT VALUE
- -------------------------- --------------------- -----
COMPUTERS & PERIPHERALS - 4.5%
Allied Waste Industries, Inc. # 1,260 29,768
Compaq Computer Corp. 8,850 371,700
Dell Computer Corp. # 6,100 446,444
EMC Corp./Mass # 2,825 240,125
Gateway 2000, Inc. # 600 30,712
IBM 4,890 901,594
Micron Technology, Inc. # 1,270 64,214
Seagate Technology, Inc. # 1,470 44,468
Sun Microsystems # 1,880 160,975
2,290,000
COMPUTER SOFTWARE & SERVICES - 4.6%
America Online, Inc. # 210 32,550
BMC Software, Inc. # 1,260 56,149
Ceridian Co. # 420 29,321
Computer Associates International, Inc. 2,895 123,399
Computer Sciences Corp. # 600 38,550
Electronic Data System Corp. 1,700 85,319
Microsoft Corp. # 12,110 1,679,506
National Data Corp. 770 37,489
Network Associates, Inc. # 400 26,500
Novell, Inc. # 1,800 32,625
Oracle Corp. # 4,940 213,038
Parametric Technology Co. # 1,400 22,750
2,377,196
CONSTRUCTION - 0.1%
Centex Corp. 830 37,402
CONSUMER NON-DURABLE - 2.7%
Fortune Brands, Inc. 7,800 246,675
Haggar Corp. 11,500 131,531
Procter & Gamble Co. 10,000 913,125
Tupperware Corp. 6,500 106,844
1,398,175
CONTAINERS - METAL/GLASS - 0.0%
Crown Cork & Seal Co., Inc. 670 20,644
COPPER - 0.0%
Phelps Dodge Corp. 380 19,332
COSMETICS - 1.3%
International Flavors & Fragrances, Inc. 6,700 296,056
Playtex Products, Inc. # 23,300 374,256
670,312
DATA PROCESSING - 0.6%
Automatic Data Processing, Inc. 1,800 144,337
Fiserv, Inc. # 920 47,323
First Data Corp. 2,820 89,888
281,548
DIVERSIFIED - 1.2%
Allied Signal, Inc. 2,190 97,044
Minnesota Mining & Manufacturing Co. 1,650 117,356
National Service Industries 500 19,000
Norfolk Southern Corp. 1,830 57,988
PPG Industries, Inc. 1,130 65,752
Tyco International 3,483 262,749
619,889
DRUG - 8.2%
Abbott Labs 6,700 328,300
Bristol Myers Squibb 5,940 794,846
Elan Corp. plc # 451 31,507
Eli Lilly & Co. 4,290 381,274
Merck & Co., Inc. 5,800 855,500
Pfizer, Inc. 7,780 972,500
Schering Plough Corp. 10,500 580,125
Warner Lambert Co. 3,730 280,449
4,224,501
<PAGE>
INDUSTRIES/CLASSIFICATIONS SHARES OR FACE AMOUNT VALUE
- -------------------------- --------------------- -----
DRUGSTORE - 0.1%
Longs Drug Stores 2,000 75,000
ELECTRIC--INTEGRATED - 0.4%
Edison International 1,830 51,011
FPL Group, Inc. 860 52,998
Texas Utilities Co. 1,930 90,107
194,116
ELECTRIC UTILITY - 0.6%
AES Corp. 3,850 182,394
American Electric Power, Inc. 740 34,826
Duke Power Co. 1,690 108,266
325,486
ELECTRICAL EQUIPMENT - 3.3%
General Electric Corp. 16,519 1,684,938
ELECTRONIC COMPONENT SEMICONDUCTORS - 3.3%
Applied Materials, Inc. # 1,880 80,252
Intel 9,880 1,171,398
KLA -Tencor Corp. # 700 30,362
Linear Tech Corp. 250 22,391
Motorola, Inc. 2,960 180,745
STMicroelectronic NV # 250 19,516
Texas Instruments, Inc. 2,300 196,938
1,701,602
ELECTRONIC COMPONENTS - 0.4%
AMP, Inc. 900 46,856
Emerson Electric 2,544 153,912
200,768
ELECTRONICS - 0.1%
Rockwell International Corp. 1,360 66,045
FINANCE - 9.4%
Banc One Corp. 8,926 455,784
Bank of Boston Corp. 3,300 128,494
Chase Manhattan Corp. 3,900 276,900
Citigroup, Inc, 7,997 397,351
Equifax, Inc. 1,250 42,734
Federal Home Loan Mortgage Corp. 5,700 367,294
Federal National Mortgage Corp. 6,600 488,400
First Union Corp. 7,968 484,554
Fleet Financial Group, Inc. 3,100 138,531
Lehman Brothers Holdings, Inc. 1,500 66,094
Mellon Bank Corp. 3,600 247,500
Merrill Lynch & Co. 800 53,400
Morgan Stanley Dean Witter & Co. 1,800 127,800
Metris Cos., Inc. 2,200 110,687
PNC Bank Corp. 3,100 167,400
Providian Financial Corp. 7,350 551,250
Ryder Systems, Inc. 360 9,360
SunTrust Banks, Inc. 900 68,850
Wells Fargo & Co. 15,900 635,006
4,817,389
FINANCIAL SERVICES - 3.9%
American Express Co. 1,700 174,250
Associates First Capital 10,400 440,700
Avery Dennison Corp. 620 27,939
BankAmerica Corp. 10,214 614,117
Capital One Financial Corp. 6,200 713,000
H&R Block, Inc. 1,370 61,650
2,031,656
FOOD - MISCELLANEOUS - 0.5%
International Home Foods, Inc. # 14,900 251,437
FOREST PRODUCTS - 0.2%
Georgia Pacific Corp. 430 25,182
Weyerhauser Co. 1,120 56,910
<PAGE>
INDUSTRIES/CLASSIFICATIONS SHARES OR FACE AMOUNT VALUE
- -------------------------- --------------------- -----
Willamette Industries, Inc. 640 21,440
103,532
HEALTH - 1.4%
American Home Products 5,670 319,646
Johnson & Johnson 5,040 422,730
742,376
INSTRUMENTS--CONTROLS - 0.2%
Honeywell, Inc. 500 37,656
Parker Hannifin Corp. 1,770 57,967
95,623
INSTRUMENTS--SCIENTIFIC - 0.0%
Perkin Elmer Corp. 190 18,537
INSURANCE--LIFE - 0.5%
AFLAC, Inc. 2,000 87,750
SunAmerica, Inc. 2,000 164,000
251,750
INSURANCE--MULTILINE - 1.6%
Allstate 4,400 169,400
American International Group 6,725 649,803
819,203
MACHINERY - 0.4%
Caterpillar, Inc. 1,499 68,954
Deere & Co. 2,484 81,662
Dover Corp. 840 30,765
Lancer Corp. # 3,700 40,700
222,081
MACHINERY--CONSTRUCTION & MINING - 0.2%
Case Corp. 3,192 69,626
Halliburton Co. 1,900 56,287
125,913
MANUFACTURING - 0.2%
Corning, Inc. 1,110 49,950
Mueller Industries, Inc. # 1,750 35,547
Owens Illinois # 780 23,888
109,385
MARKETING SERVICES - 0.1%
Omnicom Group, Inc. 1,135 65,830
MATERIALS & SERVICES - 0.7%
Champion International Corp. 425 17,213
Dana Corp. 970 39,649
Deluxe Corp. 910 33,272
Ecolab, Inc. 1,970 71,289
Hercules, Inc. 660 17,985
Illinois Tool Works, Inc. 1,730 100,340
Service Corp. International 1,570 59,758
Sherwin-Williams Co. 1,070 31,431
370,937
MEDICAL PRODUCTS - 1.0%
Algos Pharmaceutical Corp. # 2,240 58,240
Amgen, Inc. # 900 94,106
Centor, Inc. # 1,500 67,688
GelTex Pharmaceuticals, Inc. # 5,140 116,293
IDEC Pharmaceuticals Corp. # 1,020 47,940
MedImmune, Inc. # 1,550 154,128
538,395
MEDICAL SERVICES - 0.8%
Columbia/HCA Healthcare Corp. 2,620 64,845
Genzyme Corp. # 2,050 101,987
Genzyme Molecular Oncology # 1 2
HBO & Co. 3,940 113,029
IMS Health, Inc. 540 40,736
Shared Medical Systems 490 24,439
Tenet Healthcare Corp. # 1,820 47,775
392,813
<PAGE>
INDUSTRIES/CLASSIFICATIONS SHARES OR FACE AMOUNT VALUE
- -------------------------- --------------------- -----
MEDICAL SUPPLIES - 0.5%
Boston Scientific Co. # 1,000 26,813
IDEXX Laboratories, Inc. # 1,370 36,862
Medtronic, Inc. 2,860 212,444
276,119
MINING - 0.1%
Barrick Gold Corp. 2,090 40,755
Newmont Mining Corp. 1,510 27,558
68,313
MULTIMEDIA - 0.5%
CBS Corp. # 7,300 239,531
NATURAL GAS DISTRIBUTOR - 0.1%
Williams Companies, Inc. 1,300 40,544
NETWORKING PRODUCTS - 1.6%
3Com Corp. # 1,900 85,144
Cisco Systems, Inc. # 8,027 745,006
830,150
OFFICE AUTOMATION & EQUIPMENT - 1.1%
Hewlett Packard 5,770 394,163
Pitney Bowes, Inc. 1,325 87,533
Xerox Corp. 890 105,020
586,716
OIL/GAS--DOMESTIC - 1.7%
Amoco Corp. 4,000 238,000
Atlantic Richfield 1,100 71,912
Baker Hughes 1,640 28,905
Burlington Resources 1,500 53,719
Devon Energy 1,200 36,825
Enron Corp. 400 22,825
Mobil Corp. 4,000 348,500
Murphy Oil Corp. 400 16,500
Noble Drilling Co. # 1,300 16,819
USX Marathon Group 1,800 54,225
888,230
OIL/GAS--INTERNATIONAL - 2.1%
Chevron Corp. 3,500 290,281
Exxon Corp. 11,050 808,031
1,098,312
OILFIELD SERVICES/EQUIPMENT - 0.4%
Coastal Corp. 1,900 66,737
Kerr-McGee Corp. 1,000 38,250
Schlumberger LTD 2,200 101,888
Union Pacific Resources 1,500 13,594
220,469
OIL & NATURAL GAS - 0.4%
Amerada Hess 500 24,875
K N Energy, Inc. # 1,100 41,319
MCN Energy Group, Inc. 4,840 92,263
Ocean Energy, Inc. # 1,560 9,945
Seagull Energy Corp. # 2,900 18,306
186,708
PAPER & FOREST PRODUCTS - 0.3%
Bemis Co., Inc. 360 13,657
Fort James Corp. 1,060 42,400
International Paper 1,615 72,372
Mead Corp. 840 24,623
153,052
PETROLEUM--INTEGRATED - 1.6%
Occidental Petroleum Corp. 1,600 27,000
Phillips Petroleum 1,600 68,200
<PAGE>
INDUSTRIES/CLASSIFICATIONS SHARES OR FACE AMOUNT VALUE
- -------------------------- --------------------- -----
Royal Dutch Petroleum 11,400 545,775
Texaco 2,900 153,700
Unocal Corp. 1,000 29,188
823,863
PROTECTION--SAFETY EQUIPMENT - 0.6%
Lo-Jack Corp. # 25,500 302,812
PUBLISHING - 0.7%
The Reader's Digest Association, Inc. 14,000 352,625
RADIO - 0.8%
Chancellor Media Corp. # 4,900 234,587
Infinity Broadcasting Corp. # 6,200 169,725
404,312
RAILROAD TRANSPORTATION - 0.3%
Burlington Northern Santa Fe 2,370 81,172
Union Pacific Corp. 1,240 55,877
137,049
RENTAL--AUTO/EQUIPMENT - 0.6%
Budget Group Inc. # 9,400 149,225
The Hertz Corp. 3,600 164,250
313,475
RESTAURANT - 1.2%
Brinker International, Inc. # 8,300 239,662
Wendy's International, Inc. 17,100 372,994
612,656
RETAIL GROCERY - 0.6%
Albertsons, Inc. 5,000 318,438
RETAIL STORE - 3.4%
Kmart # 40,000 612,500
PETsMART, Inc. # 22,500 247,500
Sears, Roebuck & Co. 5,000 212,500
WalMart Stores, Inc. 8,000 651,500
1,724,000
SERVICES - 0.1%
Paychex, Inc. 1,397 71,858
TELECOMMUNICATION EQUIPMENT - 1.0%
General Instrument Corp. # 620 21,041
Loral Space & Communications Ltd. # 5,460 97,256
Newbridge Networks Corp. # 1,700 51,638
Nokia Corp. - ADR - A 380 45,766
Northern Telecom LTD 2,470 123,500
P-Com, Inc. # 8,760 34,903
QUALCOMM, Inc. # 2,550 132,122
506,226
TELECOMMUNICATION SERVICES - 10.5%
Airtouch Communications # 2,730 197,754
Ameritech Corp. 5,510 349,196
Ascend Communications, Inc. # 1,280 84,160
AT&T 9,000 681,750
BCE, Inc. 3,420 129,746
Bell Atlantic Corp. 7,730 417,420
BellSouth Corp. 9,600 478,800
Frontier Corp. 3,470 117,980
GTE Corp. 4,580 297,700
Leap Wireless International, Inc. # 550 3,987
Lucent Technologies, Inc. 6,205 682,162
MediaOne Group, Inc. # 3,130 147,110
MCI Communication 10,288 738,164
PT Indosat - ADR 7,370 90,282
Qwest Communications International, Inc. # 4,240 212,000
<PAGE>
INDUSTRIES/CLASSIFICATIONS SHARES OR FACE AMOUNT VALUE
- -------------------------- --------------------- -----
SBC Communications 7,550 404,869
Sprint Corp. 1,890 158,996
Sprint Corp. - PCS Group # 945 21,853
Tellabs, Inc. # 820 56,221
U.S. West, Inc. 1,825 117,941
5,388,091
TOBACCO - 3.2%
Gallaher Group, plc - ADR 7,200 195,750
Imperial Tobacco 5,000 105,625
Philip Morris Companies 16,900 904,150
UST, Inc. 12,000 418,500
1,624,025
TRANSPORTATION - 0.1%
FDX Corp. # 738 65,820
TRUCKING/TRANSPORTATION LEASING - 0.1%
CSX, Corp. 1,097 45,525
WASTE DISPOSAL--NON-HAZARDOUS - 0.3%
Waste Management, Inc. 3,048 142,113
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost 37,878,933 ) 48,537,106
- --------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS - 0.8%
U.S. Treasury Bills
** 5.02%, 01/07/99 6,000 5,996
* 4.33%, 02/04/99 200,000 199,182
* 4.37%, 03/04/99 200,000 198,470
- --------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost 403,673 ) 403,648
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT - 4.9%
Prudential Securities, 5.10%, 01/04/99,
(Collateralized by $2,468,000 FNMA Remic Series
Pool #93020J, 7.00%, 03/25/23,
market value - $2,557,465) 2,509,000 2,509,000
- --------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENT
(Cost 2,509,000 ) 2,509,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS - 100.0%
(Cost 40,791,606 ) 51,449,754
- --------------------------------------------------------------------------------
FUTURES CONTRACTS CONTRACTS VALUE
Long, S&P 500 Futures, face amount $2,055,875
expiring March 1999 7 2,179,625
- --------------------------------------------------------------------------------
TOTAL FUTURES CONTRACTS 2,179,625
- --------------------------------------------------------------------------------
TRUSTEE DEFERRED COMPENSATION***
Flex-funds Highlands Growth Fund 230 4,888
Flex-funds Muirfield Fund 247 1,702
Flex-funds Total Return Utilities Fund 30 573
Flex-Partners International Equity Fund 154 2,234
- --------------------------------------------------------------------------------
TOTAL TRUSTEE DEFERRED COMPENSATION
(Cost 8,594) 9,397
- --------------------------------------------------------------------------------
ADR American Depositary Receipt
FNMA Federal National Mortgage Association
Remic Real Estate Mortgage Investment Conduit
# Represents non-income producing securities.
* Pledged as collateral on futures contracts.
** Pledged as collateral on Letter of Credit.
***Assets of affiliates to the Growth Stock Portfolio held for the benefit of
the Portfolio's Trustees in connection with the Trustee Deferred
Compensation Plan.
See accompanying notes to financial statements.
<PAGE>
Mutual Fund Portfolio
Portfolio of Investments as of December 31, 1998
INDUSTRIES/CLASSIFICATIONS SHARES OR FACE AMOUNT VALUE
-------------------------- --------------------- -----
MUTUAL FUNDS - 96.6%
Federated S&P 500 Maxcap Fund 632,669 $ 16,057,133
Fidelity OTC Portfolio Fund 856,653 37,375,785
Gabelli Growth 720,481 25,505,045
Janus Twenty Fund 546,887 29,149,088
MFS Investor Growth - Class A 690,955 10,993,091
Mutual Shares Fund 352 6,870
Rydex OTC Fund 375,152 15,516,274
- --------------------------------------------------------------------------------
TOTAL MUTUAL FUNDS
(Cost $111,404,738) 134,603,286
- --------------------------------------------------------------------------------
MONEY MARKET MUTUAL FUNDS - 1.9%
Charles Schwab Money Market Fund 889,006 889,006
Fidelity Core Money Market Fund 1,771,471 1,771,471
- --------------------------------------------------------------------------------
TOTAL MONEY MARKET MUTUAL FUNDS
(Cost $2,660,477 ) 2,660,477
- --------------------------------------------------------------------------------
U.S.TREASURY BILLS - 1.4%
** 5.02%, due 01/07/99 30,100 30,075
* 4.39%, due 02/04/99 $2,000,000 1,991,708
- --------------------------------------------------------------------------------
TOTAL U.S. TREASURY BILLS
(Cost $2,021,783 ) 2,021,783
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT - 0.1%
Prudential Securities, 5.10%, 01/04/99,
(Collateralized by $90,000 FNMA Remic
Series Pool #93020J, 7.00%, 03/25/23,
market value - $93,263) 91,000 91,000
- --------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENT
(Cost $91,000 ) 91,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS - 100.0%
(Cost $116,177,998) $139,376,546
- --------------------------------------------------------------------------------
FUTURES CONTRACT CONTRACTS VALUE
Long, S&P 500 Futures, face amount $6,274,000
expiring March 1999 20 $6,227,500
- --------------------------------------------------------------------------------
TOTAL FUTURES CONTRACT $6,227,500
- --------------------------------------------------------------------------------
TRUSTEE DEFERRED COMPENSATION***
Flex-funds Highlands Growth Fund 687 14,585
Flex-funds Muirfield Fund 778 5,355
Flex-funds Total Return Utilities Fund 76 1,437
Flex Partners International Equity Fund 442 6,390
- --------------------------------------------------------------------------------
TOTAL TRUSTEE DEFERRED COMPENSATION
(Cost $25,368 ) $27,767
- --------------------------------------------------------------------------------
FNMA Federal National Mortgage Association
Remic Real Estate Mortgage Investment Conduit
* Pledged as collateral on futures contracts.
** Pledged as collateral on Letter of Credit.
***Assets of affiliates to the Mutual Fund Portfolio held for the benefit of the
Portfolio's Trustees in connection with the Trustee Deferred Compensation
Plan.
See accompanying notes to financial statements.
<PAGE>
Utilities Stock Portfolio
Portfolio of Investments as of December 31, 1998
INDUSTRIES/CLASSIFICATIONS SHARES OR FACE AMOUNT VALUE
- -------------------------- --------------------- -----
COMMON STOCKS - 97.5%
ELECTRIC/GAS UTILITY - 8.0%
AGL Resources, Inc. 12,100 $ 279,056
MDU Resources Group, Inc. 5,000 131,562
NIPSCO Industries, Inc. 9,400 286,113
UtiliCorp United, Inc. 10,000 366,875
1,063,606
ELECTRIC UTILITY - 10.9%
Cinergy Corp. 7,800 268,125
LG&E Energy Corp. 13,944 394,789
New Century Energies, Inc. 5,600 273,000
PacifiCorp 9,800 206,413
TECO Energy, Inc. 10,400 293,150
1,435,477
NATURAL GAS (DISTRIBUTOR) - 21.1%
Bay State Gas Co.
Consolidated Natural Gas Co. 8,200 442,800
KeySpan Energy Corp. 22,100 685,100
MCN Corp. 22,270 424,522
Peoples Energy Corp. 6,990 278,726
TransCanada Pipelines Ltd. 8,100 119,475
WICOR, Inc. 11,200 244,300
Williams Cos., Inc. 19,140 596,929
2,791,852
OIL/GAS (DOMESTIC) - 11.8%
El Paso Natural Gas Co. 8,440 293,817
Enron Corp. 5,830 332,674
Kinder Morgan Energy Partners, L.P. 14,824 537,370
Questar Corp. 20,200 391,375
1,555,236
TELECOMMUNICATION EQUIPMENT - 2.9%
Loral Space & Communications Ltd. 14,890 265,228
P-Com, Inc. # 30,000 119,531
384,759
TELECOMMUNICATION SERVICES - 40.0%
AT&T Corp. 4,000 303,000
AirTouch Communications, Inc. # 5,400 391,162
Alltel Corp. 7,900 472,519
BCE, Inc. 12,040 456,768
Frontier Corp. 19,300 656,200
GTE Corp. 5,000 325,000
MCI WorldCom, Inc. # 7,420 532,385
Qwest Communications International, Inc.# 13,491 674,550
SBC Communications, Inc. 12,740 683,183
Sprint Corp. 4,300 361,737
Sprint Corp. - PCS Group # 2,150 49,719
U.S. West Communications Group 5,900 381,288
5,287,511
WATER UTILITY - 2.8%
American Water Works Co., Inc. 10,900 367,875
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $9,492,932 ) $12,886,316
- --------------------------------------------------------------------------------
U.S. TREASURY BILLS - 0.0%
* 5.02%, due 01/07/99 1,000 999
- --------------------------------------------------------------------------------
TOTAL U.S. TREASURY BILLS
(Cost $999 ) 999
- --------------------------------------------------------------------------------
<PAGE>
INDUSTRIES/CLASSIFICATIONS SHARES OR FACE AMOUNT VALUE
- -------------------------- --------------------- -----
REPURCHASE AGREEMENT - 2.5%
Prudential Securities, 5.10%, 01/04/99,
(Collateralized by $320,00 FNMA Remic
Series Pool #93020J, 7.00%, 03/25/23,
market value - $331,600 325,000 325,000
- --------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENT
(Cost $325,000 ) 325,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS - 100.0%
(Cost $9,818,931 ) $13,212,315
- --------------------------------------------------------------------------------
TRUSTEE DEFERRED COMPENSATION**
Flex-funds Highlands Growth Fund 120 2,550
Flex-funds Muirfield Fund 120 826
Flex-funds Total Return Utilities 14 274
Flex Partners International Equit 85 1,231
- --------------------------------------------------------------------------------
TOTAL TRUSTEE DEFERRED COMPENSATION
(Cost $4,465 ) $4,881
- --------------------------------------------------------------------------------
FNMA Federal National Mortgage Association
Remic Real Estate Mortgage Investment Conduit
# Represents non-income producing securities.
* Pledged as collateral on Letter of Credit.
** Assets of affiliates to the Utility Stock Portfolio held for the benefit
with the Trustees Deferred Compensation Plan.
See accompanying notes to financial statements.
<PAGE>
Bond Portfolio
Portfolio of Investments as of December 31, 1998
INDUSTRIES/CLASSIFICATIONS SHARES OR FACE VALUE
-------------------------- -------------- -----
U.S.TREASURY OBLIGATIONS - 99.5%
U.S. Treasury Bills
* 5.02%, 01/07/99 4,800 $ 4,796
4,796
U.S. Treasury Bonds
5.63%, 05/15/08 3,300,000 3,521,719
4.75%, 11/15/08 7,300,000 7,357,031
10,878,750
- --------------------------------------------------------------------------------
TOTAL U.S.TREASURY OBLIGATIONS
(Cost $10,939,407 ) 10,883,546
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT - 0.5%
Prudential Securities, 5.10%, 01/04/99,
(Collateralized by $52,000 FNMA Remic Series
Pool #93020J, 7.00%, 03/25/23,
market value - $53,885) 53,000 53,000
- --------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENT
(Cost $53,000 ) 53,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS - 100.0%
(Cost $10,992,407 ) 10,936,546
- --------------------------------------------------------------------------------
TRUSTEE DEFERRED COMPENSATION**
Flex-funds Highlands Growth Fund 124 2,625
Flex-funds Muirfield Fund 124 854
Flex-funds Total Return Utilities Fund 14 273
Flex Partners International Equity Fund 87 1,257
- --------------------------------------------------------------------------------
TOTAL TRUSTEE DEFERRED COMPENSATION
(Cost $4,582 ) $5,009
- --------------------------------------------------------------------------------
FNMA Federal National Mortgage Association
Remic Real Estate Mortgage Investment Conduit
* Pledged as collateral on Letter of Credit.
** Assets of affiliates to the Bond Portfolio held for the benefit of the
Portfolio's with the Trustee Deferred Compensation Plan.
See accompanying notes to financial statements.
<PAGE>
Money Market Portfolio
Portfolio of Investments as of December 31, 1998
<TABLE>
<CAPTION>
COUPON/ FACE
YIELD MATURITY AMOUNT AMORTIZED COST
----- -------- ------ --------------
COMMERCIAL PAPER - 56.2%
<S> <C> <C> <C> <C>
AlliedSignal, Inc. 5.60% 01/29/99 30,000,000 $ 29,869,333
American Home Products Corp.*** 5.10% 02/19/99 5,000,000 4,965,292
American Home Products Corp.*** 5.00% 03/12/99 3,000,000 2,970,833
American Honda Finance Corp. 5.20% 01/29/99 22,000,000 21,911,022
Bankers Trust Corp. 5.04% 05/10/99 25,000,000 24,548,500
CSW Credit, Inc. 5.22% 03/12/99 32,650,000 32,318,603
Carolina Power & Light Co. 4.82% 08/20/99 20,000,000 19,381,433
Credit Suisse First Boston 5.20% 02/24/99 15,350,000 15,230,270
Duff & Phelps Utility and Corporate Bond Trust, Inc. 5.00% 04/20/99 1,000,000 984,861
Duff & Phelps Utility and Corporate Bond Trust, Inc. 5.00% 04/28/99 6,815,000 6,704,256
Duff & Phelps Utility and Corporate Bond Trust, Inc. 4.92% 05/13/99 5,000,000 4,909,800
Duff & Phelps Utility and Corporate Bond Trust, Inc. 4.95% 05/17/99 7,000,000 6,869,100
Eaton Corp.*** 5.38% 03/02/99 10,000,000 9,910,333
Eaton Corp.*** 4.87% 07/19/99 7,475,000 7,273,771
Edison International*** 5.51% 01/22/99 22,227,000 22,156,722
Ford Motor Credit Co. 5.46% 02/17/99 30,000,000 29,786,150
General Electric Capital Corp. 5.44% 03/09/99 20,000,000 19,797,511
Greenwich Asset Funding, Inc.*** 5.34% 01/14/99 30,000,000 29,942,150
J.P. Morgan & Co., Inc. 5.05% 02/19/99 18,311,000 18,185,137
LG&E Capital Corp. 4.92% 05/21/99 25,000,000 24,521,667
Monsanto Co. 5.10% 03/02/99 21,300,000 21,109,897
S.C. Johnson & Son, Inc. 5.20% 03/09/99 20,000,000 19,806,445
Signet Finance*** 5.51% 01/26/99 25,000,000 24,904,340
Toronto-Dominion Holdings USA, Inc. 5.46% 02/02/99 35,000,000 34,830,133
Xerox Credit Corp. 5.47% 02/03/99 7,000,000 6,964,901
Xerox Credit Corp. 5.40% 05/03/99 7,000,000 6,871,900
- ----------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER
(Cost$446,724,360 ) 446,724,360
- ----------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS - 41.1%
ABT 95 Series A-3 5.54%* 01/15/99 20,000,000 20,000,000
Aquarium Holdings KY*** 5.60%* 01/07/99 12,000,000 12,000,000
Bank One Corp. 5.75% 05/17/99 500,000 500,060
Bank One Wisconsin 5.74% 05/11/99 1,000,000 1,000,082
Bear Stearns Corp. 5.24%* 01/05/99 20,000,000 20,000,000
Boeing Capital Corp. 5.87%* 02/27/99 5,000,000 5,011,669
Care Life Project*** 5.30%* 01/07/99 1,225,000 1,225,000
Caterpillar Financial Services Corp. 6.07% 02/09/99 2,135,000 2,135,556
Caterpillar, Inc. 6.80% 08/24/99 500,000 503,499
Chase Manhattan Bank 8.50% 02/15/99 8,300,000 8,326,515
Chase Manhattan Bank 10.00% 06/15/99 3,750,000 3,819,869
Chrysler Financial Corp. 6.37% 06/21/99 2,700,000 2,708,468
Clark Grave Vault Co.*** 5.60%* 01/07/99 2,700,000 2,700,000
Comerica 9.75% 05/01/99 5,000,000 5,061,659
Consolidated Edison*** 5.44%* 01/04/99 8,250,000 8,251,244
Coughlin Family Properties, Inc.*** 5.60%* 01/07/99 4,220,000 4,220,000
D.E.D.E. Realty*** 5.60%* 01/07/99 3,850,000 3,850,000
Danis Construction Co.*** 5.60%* 01/07/99 900,000 900,000
Doren, Inc.*** 5.30%* 01/07/99 500,000 500,000
Eaton Corp. 6.38% 04/01/99 1,742,000 1,745,032
Espanola/Nambe*** 5.30%* 01/07/99 2,115,000 2,115,000
First USA/Bank One 5.75% 01/15/99 1,000,000 999,996
First USA/Bank One 5.42% 01/15/99 5,000,000 5,000,313
Ford Motor Credit Co. 5.63% 01/15/99 1,100,000 1,099,938
General America Life Insurance**** 5.35%* 03/21/99 10,000,000 10,000,000
General Motors Acceptance Corp. 7.75% 01/15/99 100,000 100,068
General Motors Acceptance Corp. 6.55% 06/04/99 2,400,000 2,408,192
General Motors Acceptance Corp. 8.63% 06/15/99 5,420,000 5,489,411
Hancor, Inc.*** 5.30%* 01/07/99 600,000 600,000
Household Finance 7.13% 04/30/99 10,000,000 10,044,817
Isaac Tire, Inc.*** 5.60%* 01/07/99 1,000,000 1,000,000
J.C. Penney Co., Inc. 6.88% 06/15/99 1,000,000 1,004,847
John Deere 6.43% 08/09/99 10,000,000 10,044,974
Key Corp. 6.63% 06/01/99 20,000,000 20,103,102
Merrill Lynch 7.75% 03/01/99 1,650,000 1,655,294
<PAGE>
COUPON/ FACE
YIELD MATURITY AMOUNT AMORTIZED COST
----- -------- ------ --------------
Merrill Lynch 6.38% 03/30/99 500,000 501,270
Merrill Lynch 5.49%* 02/25/99 10,280,000 10,292,233
Morgan Stanley 5.63% 03/01/99 4,850,000 4,849,711
Mubea, Inc.*** 5.30%* 01/07/99 5,400,000 5,400,000
Mubea, Inc.*** 5.30%* 01/07/99 3,750,000 3,750,000
National City Bank 6.00% 03/23/99 14,200,000 14,211,842
NationsBank Corp. 5.39%* 03/17/99 3,000,000 3,003,134
NationsBank Corp. 8.50% 03/01/99 1,095,000 1,099,645
O.K.I. Supply Co.*** 5.60%* 01/07/99 2,150,000 2,150,000
Osco Industries, Inc.*** 5.30%* 01/07/99 2,700,000 2,700,000
Presrite Corp.*** 5.30%* 01/07/99 1,870,000 1,870,000
Pro Tire, Inc.*** 5.60%* 01/07/99 1,200,000 1,200,000
R.I. Lampus Co.*** 5.30%* 01/07/99 2,275,000 2,275,000
RSD Technology*** 5.30%* 01/07/99 4,305,000 4,305,000
Seariver Maritime, Inc. 5.20%* 01/04/99 6,400,000 6,400,000
Surgery Financing Co.*** 5.30%* 01/07/99 6,585,000 6,585,000
Signa Finance 5.71% 03/02/99 3,000,000 3,000,660
Signature Brands (called 8/15/99) 13.00% 08/15/02 18,500,000 20,767,190
SunAmerica, Inc. 9.00% 01/15/99 2,500,000 2,502,839
Transamerica Finance 6.80% 03/15/99 6,435,000 6,452,728
Travelers 5.50% 01/15/99 500,000 500,002
Triangle Funding 5.32%* 03/29/99 7,500,000 7,500,000
Westpac Banking Corp. 5.67% 01/07/99 10,000,000 9,999,787
White Castle Project*** 5.30%* 01/07/99 9,000,000 9,000,000
World Trade Finance 5.48%* 03/01/99 20,000,000 20,000,000
- ----------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE OBLIGATIONS
(Cost$326,440,646 ) 326,440,646
- ----------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS - 0.5%
Student Loan Marketing Assoc. 4.89% 08/03/99 4,350,000 4,350,856
- ----------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(Cost $4,350,856 ) 4,350,856
- ----------------------------------------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS - 0.0%
** U.S. Treasury Bill 5.02% 01/07/99 63,100 63,048
- ----------------------------------------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $63,048 ) 63,048
- ----------------------------------------------------------------------------------------------------------------
<PAGE>
COUPON/ FACE
YIELD MATURITY AMOUNT AMORTIZED COST
----- -------- ------ --------------
REPURCHASE AGREEMENTS - 2.2%
Prudential Securities, 5.10%, 01/04/99,
(Collateralized by $16,750,00001/04/99
FNMA Remic Series Pool #93020J, 7.00%, 03/25/23,
market value - $17,357,188) 5.10% 01/04/99 17,022,000 17,022,000
- ----------------------------------------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS
(Cost $17,022,000 ) 17,022,000
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS - 100.0%
(Cost$794,600,910 )(a) $794,600,910
- ----------------------------------------------------------------------------------------------------------------
TRUSTEE DEFERRED COMPENSATION***** SHARES VALUE
Flex-funds Highlands Growth Fund 260 5,573
Flex-funds Muirfield Fund 351 2,429
Flex-funds Total Return Utilities Fund 56 1,074
Flex Partners International Equity Fund 167 2,429
- ----------------------------------------------------------------------------------------------------------------
TOTAL TRUSTEE DEFERRED COMPENSATION
(Cost $10,454 ) $11,505
- ----------------------------------------------------------------------------------------------------------------
<FN>
(a)Cost for federal income tax and financial reporting purposes are the same.
FNMA Federal National Mortgage Association
Remic Real Estate Mortgage Investment Conduit
* Variable rate security. Interest rate is as of December 31, 1998. Maturity
date reflects the next rate change date.
** Pledged as collateral on Letter of Credit.
***Security is restricted as to resale to institutional investors, but has been
deemed liquid in accordance with guidelines approved by the Board of
Trustees.
****Illiquid security. The sale or disposition of such security would not be
possible in the ordinary course of business within seven days at which the
Fund has valued the security.
*****Assets of affiliates to the Money Market Portfolio held for the benefit of
the Portfolio's Trustees in connection with the Trustee Deferred
Compensation Plan.
</FN>
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
U.S.
HIGHLANDS TOTAL RETURN GOVERNMENT MONEY
MUIRFIELD GROWTH UTILITIES BOND MARKET
FUND FUND FUND FUND FUND
Assets:
<S> <C> <C> <C> <C> <C>
Investment in corresponding portfolio at value $125,718,419 $43,171,779 $10,372,337 $10,995,474 $154,100,549
Receivable for capital stock issued 2,739,456 869,483 303,616 311,456 ---
Unamortized organization costs --- --- 7,294 --- ---
Other assets 13,415 24,501 3,394 5,502 205,030
Total Assets 128,471,290 44,065,763 10,686,641 11,312,432 154,305,579
Liabilities:
Payable for capital stock redeemed 2,768,083 99,345 217,988 7,108 ---
Dividends payable 18,646 21,572 149 3,120 6,725
Accrued 12b-1 distribution fees 115,045 26,781 --- 3,006 18,115
Accrued transfer agent and administrative fees 14,119 5,988 896 888 18,959
Other accrued liabilities 8,104 4,333 12,958 4,303 6,483
Total Liabilities 2,923,997 158,019 231,991 18,425 50,282
Net Assets 125,547,293 43,907,744 10,454,650 11,294,007 154,255,297
Net Assets:
Capital 97,401,143 32,701,737 8,298,985 11,198,026 154,255,297
Accumulated undistributed (distributions in
excess of) net investment income 1,263 131 (15) 151,839 ---
Accumulated undistributed net realized
gain (loss) from investments 6,742,388 1,050,367 (358,941) --- ---
Net unrealized appreciation (depreciation) of 21,402,499 10,155,509 2,514,621 (55,858) ---
investments
Net Assets $125,547,293 $43,907,744 $10,454,650 $11,294,007 $154,255,297
Capital Stock Outstanding 18,244,445 2,068,262 549,849 510,117 154,255,297
(indefinite number of shares authorized,
$0.10 par value)
Net Asset Value, Offering and
Redemption Price Per Share $6.88 $21.23 $19.01 $22.14 $1.00
</TABLE>
See accompanying notes to financial statements
<PAGE>
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
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 $2,539,630 $338,939 $19,497 $704,131 $9,551,155
Dividends 344,142 500,212 294,037 --- ---
Expenses net of waivers and/or reimbursements (1,060,689) (517,523) (142,878) (72,356) (307,115)
Total Net Investment Income from Corresponding Portfolio 1,823,083 321,628 170,656 631,775 9,244,040
Fund Expenses:
Administrative fee 57,417 20,994 4,777 6,373 85,423
Transfer agent fees 114,835 41,988 9,554 7,648 124,669
Audit fees 4,609 4,203 3,915 3,137 3,513
Legal fees 1,964 8,947 758 867 2,054
Printing 19,968 13,589 3,061 3,583 40,888
Amortization of organizational costs --- --- 4,830 --- ---
Distribution plan 126,517 58,827 23,886 24,085 161,737
Postage 19,144 8,743 3,489 3,101 31,392
Registration and filing fees 28,730 22,921 8,462 3,328 32,060
Insurance 1,735 397 70 240 2,003
Other expenses 12,957 11,925 2,469 2,877 12,688
Total Expenses 387,876 192,534 65,271 55,239 496,427
Expenses reimbursed by investment adviser --- --- (28,865) --- (120,223)
Net Expenses 387,876 192,534 36,406 55,239 376,204
NET INVESTMENT INCOME 1,435,207 129,094 134,250 576,536 8,867,836
NET REALIZED AND UNREALIZED GAIN (LOSS)
FROM INVESTMENTS:
Net realized gains from futures contracts 3,409,301 975,030 --- 27,219 ---
Net realized gains (losses) from investments 3,910,704 3,317,148 (358,953) 1,075,370 ---
Net change in unrealized appreciation (depreciation)
of investments 21,404,554 4,287,738 838,039 (591,216) ---
NET GAIN FROM INVESTMENTS 28,724,559 8,579,916 479,086 511,373 ---
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $30,159,766 $8,709,010 $613,336 $1,087,909 $8,867,836
</TABLE>
See accompanying notes to financial statements
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
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 $1,435,207 $129,094 $134,250 $576,536 $8,867,836
Net realized gain (loss) from investments
and futures contracts 7,320,005 4,292,178 (358,953) 1,102,589 ---
Net change in unrealized appreciation
(depreciation) of investments 21,404,554 4,287,738 838,039 (591,216) ---
Net increase in net assets
resulting from operations 30,159,766 8,709,010 613,336 1,087,909 8,867,836
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (1,433,944) (128,963) (134,265) (576,536) (8,867,836)
Net realized gain from investments
and futures contracts (1,907,816) (3,152,482) --- (37,210) ---
Net decrease in net assets resulting
from dividends and distributions (3,341,760) (3,281,445) (134,265) (613,746) (8,867,836)
CAPITAL TRANSACTIONS:
Issued 21,967,180 64,413,686 5,724,377 2,306,810 478,112,579
Reinvested 3,296,460 3,254,744 131,606 576,374 8,641,621
Redeemed (57,316,946) (62,940,124) (4,285,392) (9,036,259) (501,833,777)
Net increase (decrease) in net assets resulting
from capital share transactions (32,053,306) 4,728,306 1,570,591 (6,153,075) (15,079,577)
TOTAL INCREASE (DECREASE) IN NET ASSETS (5,235,300) 10,155,871 2,049,662 (5,678,912) (15,079,577)
NET ASSETS - Beginning of period 130,782,593 33,751,873 8,404,988 16,972,919 169,334,874
NET ASSETS - End of period $125,547,293 $43,907,744 $10,454,650 $11,294,007 $154,255,297
SHARE TRANSACTIONS:
Issued 3,737,873 3,158,058 309,337 106,049 478,112,579
Reinvested 521,019 153,489 7,373 26,662 8,641,621
Redeemed (9,925,681) (3,062,778) (241,126) (423,756) (501,833,777)
Change in shares (5,666,789) 248,769 75,584 (291,045) (15,079,577)
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
THE THE THE U.S. THE
THE 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
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) (398,631,115)
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>
FINANCIAL HIGHLIGHTS
THE HIGHLANDS GROWTH FUND
Years Ended December 31,
-----------------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $18.55 $16.41 $15.34 $13.08 $13.45
Income from Investment Operations
Net Investment Income 0.06 0.06 0.31 0.50 0.27
Net Gains or Losses from Securities
(both realized and unrealized) 4.32 4.73 1.07 2.68 (0.37)
Total From Investment Operations 4.38 4.79 1.38 3.18 (0.10)
Less Distributions
Dividends (from net investment income) (0.06) (0.06) (0.31) (0.50) (0.27)
Distributions (from capital gains) (1.64) (2.59) -- (0.42) --
Total Distributions (1.70) (2.65) (0.31) (0.92) (0.27)
Net Asset Value, End of Period $21.23 $18.55 $16.41 $15.34 $13.08
Total Return 23.67% 29.28% 9.08% 24.61% -0.69%
Ratios/Supplemental Data
Net Assets, End of Period ($000) $43,908 $33,752 $24,204 $24,631 $22,176
Ratio of Expenses to Average Net Assets 1.69% 1.87% 1.65% 1.64% 1.63%
Ratio of Net Investment Income to
Average Net Assets 0.31% 0.30% 1.92% 3.38% 1.95%
Ratio of Expenses to Average Net Assets
before waiver of fees 1.70%(1) 1.87% 1.65% 1.64% 1.63%
Ratio of Net Investment Income to Average
Net Assets 0.30%(1) 0.30% 1.92% 3.38% 1.95%
Portfolio Turnover Rate(2) 79.98% 129.79% 81.66% 337.57% 102.76%
<FN>
1 Ratio 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
THE TOTAL RETURN UTILITIES FUND
Years Ended December 31, Period
------------------------------------------ June 21, 1995*
1998 1997 1996 to Dec. 31, 1995
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $17.72 $14.98 $14.14 $12.50
Income from Investment Operations
Net Investment Income 0.25 0.25 0.37 0.21
Net Gains or Losses from Securities
(both realized and unrealized) 1.29 3.99 1.48 1.64
Total From Investment Operations 1.54 4.24 1.85 1.85
Less Distributions
Dividends (from net investment income) (0.25) (0.25) (0.37) (0.21)
Distributions (from capital gains) --- (1.25) (0.64) --
Total Distributions (0.25) (1.50) (1.01) (0.21)
Net Asset Value, End of Period $19.01 $17.72 $14.98 $14.14
Total Return 8.77% 28.68% 13.33% 15.00%
Ratios/Supplemental Data
Net Assets, End of Period ($000) $10,455 $8,405 $5,074 $2,881
Ratio of Expenses to Average Net Assets 1.80% 1.80% 1.25% 1.25%(1)
Ratio of Net Investment Income to
Average Net Assets 1.35% 1.57% 2.55% 3.18%(1)
Ratio of Expenses to Average Net Assets,
before waiver of fees(2) 2.11% 2.51% 2.95% 4.35%(1)
Ratio of Net Investment Income to Average
Net Assets, before waiver of fees(2) 1.04% 0.86% 0.85% 0.08%(1)
Portfolio Turnover Rate(3) 51.36% 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 MUIRFIELD FUND
Years Ended December 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $5.47 $5.47 $5.73 $5.34 $5.36
Income from Investment Operations
Net Investment Income 0.08 0.11 0.10 0.06 0.14
Net Gains or Losses from Securities
(both realized and unrealized) 1.51 0.91 0.25 1.31 -
Total From Investment Operations 1.59 1.02 0.35 1.37 0.14
Less Distributions
Dividends (from net investment income) (0.08) (0.11) (0.10) (0.06) (0.14)
Distributions (from capital gains) (0.10) (0.91) (0.51) (0.92) (0.02)
Total Distributions (0.18) (1.02) (0.61) (0.98) (0.16)
Net Asset Value, End of Period $6.88 $5.47 $5.47 $5.73 $5.34
Total Return 29.33% 18.59% 5.99% 25.82% 2.70%
Ratios/Supplemental Data
Net Assets, End of Period ($000) $125,547 $130,783 $121,335 $111,751 $83,119
Ratio of Expenses to Average Net Assets 1.24% 1.29% 1.19% 1.26% 1.22%
Ratio of Net Investment Income to
Average Net Assets 1.23% 1.69% 1.54% 0.97% 2.55%
Portfolio Turnover Rate* 128.31% 395.42% 297.41% 186.13% 168.17%
<FN>
*Turnover rate of corresponding portfolio
</FN>
</TABLE>
See accompanying notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
THE U.S. GOVERNMENT BOND FUND
Years Ended December 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $21.19 $20.64 $21.58 $19.25 $20.18
Income from Investment Operations
Net Investment Income 0.97 0.99 0.96 1.11 0.72
Net Gains or Losses from Securities
(both realized and unrealized) 1.02 0.55 (0.94) 2.33 (0.93)
Total From Investment Operations 1.99 1.54 0.02 3.44 (0.21)
Less Distributions and Dividends
From net investment income (0.97) (0.99) (0.96) (1.11) (0.72)
From net realized gains (0.07) -- -- -- --
Total Distributions (1.04) (0.99) (0.96) (1.11) (0.72)
Net Asset Value, End of Period $22.14 $21.19 $20.64 $21.58 $19.25
Total Return 9.62% 7.70% 0.15% 18.32% -0.99%
Ratios/Supplemental Data
Net Assets, End of Period ($000) $11,294 $16,973 $17,783 $16,048 $12,983
Ratio of Expenses to Average Net Assets 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of Net Investment Income to
Average Net Assets 4.52% 4.85% 4.61% 5.41% 3.71%
Ratio of Expenses to Average Net Assets,
before waiver of fees(1) 1.16% 1.14% 1.06% 1.14% 1.14%
Ratio of Net Investment Income to Average
Net Assets, before waiver of fees(1) 4.36% 4.71% 4.55% 5.27% 3.57%
Portfolio Turnover Rate(2) 225.11% 375.64% 778.59% 232.34% 707.57%
<FN>
(1) Ratio 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,
------------------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $1.00 $1.00 $1.00 $1.00 $1.00
Income from Investment Operations
Net Investment Income 0.052 0.053 0.05 0.06 0.04
Total From Investment Operations 0.052 0.053 0.05 0.06 0.04
Less Distributions
Dividends (from net investment income) (0.052) (0.053) (0.05) (0.06) (0.04)
Total Distributions (0.052) (0.053) (0.05) (0.06) (0.04)
Net Asset Value, End of Period $1.00 $1.00 $1.00 $1.00 $1.00
Total Return 5.31% 5.38% 5.27% 5.85% 4.10%
Ratios/Supplemental Data
Net Assets, End of Period ($000) $154,255 $169,335 $119,947 $141,087 $164,838
Ratio of Expenses to Average Net Assets 0.40% 0.40% 0.40% 0.40% 0.37%
Ratio of Net Investment Income to
Average Net Assets 5.19% 5.26% 5.15% 5.70% 4.02%
Ratio of Expenses to Average Net Assets,
before waiver of fees(1) 0.59% 0.59% 0.58% 0.64% 0.57%
Ratio of Net Investment Income to Average
Net Assets, before waiver of fees(1) 5.00% 5.07% 4.97% 5.46% 3.82%
<FN>
(1) Ratio includes fees waived in corresponding portfolio
</FN>
</TABLE>
See accompanying notes to financial statements
<PAGE>
THE FLEX-FUNDS ANNUAL REPORT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
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, 1998
- ---- --------- -----------------
The Muirfield Fund Mutual Fund Portfolio 89%
The Highlands Growth Fund Growth Stock Portfolio 84%
The Total Return Utilities Fund Utilities Stock Portfolio 79%
The U.S. Government Bond Fund Bond Portfolio 100%
The Money Market Fund Money Market Portfolio 19%
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.
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.
<PAGE>
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.
Investment Income & Expenses
The Funds record daily their proportionate share of the Portfolios' income,
expenses, and realized and unrealized gains and losses. In addition, the Funds
accrue their own 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.
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.
RMA has voluntarily agreed to reimburse The Money Market Fund and The Total
Return Utilities Fund for the amount by which annual expenses of such Funds
including expenses allocated from the respective Portfolio (excluding interest,
taxes, brokerage fees, and extraordinary expenses) exceed 0.40% and 1.80% of
average daily net assets of The Money Market Fund and The Total Return Utilities
Fund, respectively. Such reimbursement is limited to the total of fees charged
the Fund by RMA and MFSCo.
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.
<PAGE>
4. Federal Income Tax Information (unaudited)
During the year ended December 31, 1998, the Funds declared long-term capital
distributions in the following amounts:
Amount
The Muirfield Fund $1,907,816
The Highlands Growth Fund 2,730,137
At December 31, 1998, The Total Return Utilities Fund had unused capital loss
carryforwards of $357,103 available to offset future gains, if any, for Federal
income tax purposes. The capital loss carryforward expires 2006.
<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, The Total Return Utilities Fund, The U.S. Government Bond Fund, and The
Money Market Fund), as of December 31, 1998, 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 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, 1998, and
the results of their operations, the changes in their net assets and the
financial highlights for each of the periods indicated herein, in conformity
with generally accepted accounting principles.
KPMG LLP
Columbus, Ohio
February 19, 1999
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
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* $139,285,546 $48,940,754 $12,887,315 $10,883,546 $777,578,910
Repurchase agreements, at cost* 91,000 2,509,000 325,000 53,000 17,022,000
Trustee deferred compensation investments, at 27,767 9,397 4,881 5,009 11,505
market value
Cash 3,600 3,954 3,499 2,920 59,912
Receivable for securities sold 12,500,000 --- --- --- ---
Receivable for net variation margin on futures 16,350 5,300 --- --- ---
Interest receivable 8,018 356 46 69,118 4,790,576
Dividends receivable --- 45,431 22,698 --- ---
Prepaid/Other assets 13,925 1,819 3,437 507 8,722
Total Assets 151,946,206 51,516,011 13,246,876 11,014,100 799,471,625
Liabilites:
Payable for securities purchased 11,000,000 262,923 --- --- ---
Payable for Trustee Deferred Compensation Plan 27,767 9,397 4,881 5,009 11,505
Payable to corresponding Fund --- --- --- --- 1,055,191
Payable to investment adviser 92,531 43,454 10,658 3,202 107,200
Accrued audit fees 6,136 5,775 6,356 5,518 9,231
Accrued legal fees 919 458 915 1,630 660
Accrued custodian fees 3,293 5,131 799 625 6,635
Accrued trustee fees 2,108 --- --- --- ---
Accrued fund accounting fees 4,447 3,470 1,547 1,414 10,510
Other accrued liabilities 1,318 17,660 2,175 1,081 1,370
Total Liabilities 11,138,519 348,268 27,331 18,479 1,202,302
Net Assets $140,807,687 $51,167,743 $13,219,545 $10,995,621 $798,269,323
Net Assets:
Capital 117,592,789 40,504,295 9,826,161 11,051,482 798,269,323
Net unrealized appreciation (depreciation) 23,214,898 10,663,448 3,393,384 (55,861) ---
from investments
Net Assets $140,807,687 $51,167,743 $13,219,545 $10,995,621 $798,269,323
*Securities at cost $116,177,998 $40,791,606 $9,818,931 $10,992,407 $794,600,910
</TABLE>
See accompanying notes to financial statements
<PAGE>
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
MUTUAL GROWTH UTILITIES MONEY
FUND STOCK STOCK BOND MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
NET INVESTMENT INCOME
<S> <C> <C> <C> <C> <C>
Interest $2,842,845 $351,842 $24,854 $704,138 $41,916,923
Dividends 385,119 526,542 375,953 --- ---
Total Investment Income 3,227,964 878,384 400,807 704,138 41,916,923
Expenses:
Investment advisory fees 1,058,035 435,886 126,301 50,844 2,029,468
Audit fees 9,823 9,599 10,135 8,937 15,235
Custodian fees 13,496 27,603 3,257 3,678 49,680
Trustees fees and expenses 44,320 15,022 7,382 8,213 24,375
Legal fees 1,576 10,572 1,066 1,807 5,664
Amortization of organization cost 224 --- 8,357 --- ---
Accounting fees 50,050 38,204 18,154 17,711 112,179
Insurance 1,918 373 88 285 5,759
Other expenses 7,553 10,278 9,568 1,465 9,492
Total Expenses 1,186,995 547,537 184,308 92,940 2,251,852
Investment advisory fees waived --- (4,431) --- (20,584) (901,787)
Directed brokerage payments received --- --- (2,246) --- ---
Total Net Expenses 1,186,995 543,106 182,062 72,356 1,350,065
NET INVESTMENT INCOME 2,040,969 335,278 218,745 631,782 40,566,858
REALIZED AND UNREALIZED GAIN (LOSS)
FROM INVESTMENTS:
Net realized gain from futures contracts 3,842,750 1,087,862 --- 27,219 ---
Net realized gain (loss) from investments 4,379,433 3,495,938 (364,390) 1,075,386 ---
Net change in unrealized appreciation
(depreciation) of investments 23,909,375 4,790,713 1,126,399 (591,219) ---
NET GAIN ON INVESTMENTS 32,131,558 9,374,513 762,009 511,386 ---
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $34,172,527 $9,709,791 $980,754 $1,143,168 $40,566,858
</TABLE>
See accompanying notes to financial statements
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
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 $2,040,969 $335,278 $218,745 $631,782 $40,566,858
Net realized gain (loss) from investments
and futures contracts 8,222,183 4,583,800 (364,390) 1,102,605 ---
Net change in unrealized appreciation
(depreciation) of investments 23,909,375 4,790,713 1,126,399 (591,219) ---
Net increase in net assets
resulting from operations 34,172,527 9,709,791 980,754 1,143,168 40,566,858
TRANSACTIONS OF INVESTORS' BENEFICIAL INTERESTS:
Contributions 21,876,913 74,136,798 6,977,776 2,292,244 3,894,846,315
Withdrawals (59,774,446) (66,072,809) (5,408,703) (9,348,465)(3,724,162,497)
Net increase (decrease) in net assets resulting
from transactions of investors' beneficial
interests (37,897,533) 8,063,989 1,569,073 (7,056,221) 170,683,818
TOTAL INCREASE (DECREASE) IN NET ASSETS (3,725,006) 17,773,780 2,549,827 (5,913,053) 211,250,676
NET ASSETS - Beginning of period 144,532,693 33,393,963 10,669,718 16,908,674 587,018,647
NET ASSETS - End of period $140,807,687 $51,167,743 $13,219,545 $10,995,621 $798,269,323
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
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>
See accompanying notes to financial statements
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
MUTUAL FUND PORTFOLIO
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net Assets, End of Period ($000) $140,808 $144,533 $135,540 $122,109 $83,185
Ratio of Expenses to Average Net Assets 0.91% 0.89% 0.87% 0.95% 1.01%
Ratio of Net Investment Income to
Average Net Assets 1.56% 2.08% 1.86% 1.26% 2.76%
Portfolio Turnover Rate 128.31% 395.42% 297.41% 186.13% 168.17%
</TABLE>
<TABLE>
GROWTH STOCK PORTFOLIO
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net Assets, End of Period ($000) $51,168 $33,394 $24,414 $24,537 $22,169
Ratio of Expenses to Average Net Assets 1.25% 1.34% 1.24% 1.25% 1.23%
Ratio of Net Investment Income to
Average Net Assets 0.77% 0.83% 2.33% 3.78% 2.35%
Ratio of Expenses to Average Net Assets
before waiver of fees 1.26% 1.34% 1.24% 1.25% 1.23%
Ratio of Net Investment Income to Average
Net Assets before waiver of fees 0.76% 0.83% 2.33% 3.78% 2.35%
Portfolio Turnover Rate 79.98% 129.79% 81.66% 337.57% 102.76%
</TABLE>
<TABLE>
UTILITIES STOCK PORTFOLIO
<CAPTION>
Period
Year Ended December 31, June 21, 1995* to
1998 1997 1996 December 31, 1995
<S> <C> <C> <C> <C>
Net Assets, End of Period ($000) $13,220 $10,670 $7,964 $4,291
Ratio of Expenses to Average Net Assets 1.44% 1.60% 1.61% 2.32%(1)
Ratio of Net Investment Income to
Average Net Assets 1.73% 1.79% 2.24% 2.09%(1)
Ratio of Expenses to Average Net Assets
before directed brokerage payments 1.46% 1.65% 1.66% 2.40%(1)
Ratio of Net Investment Income to Average Net
Assets before directed brokerage payments 1.71% 1.74% 2.19% 2.01%(1)
Portfolio Turnover Rate 51.36% 41.22% 50.79% 5.06%
<FN>
(1) Annualized
* Date of commencement of operations
</FN>
</TABLE>
See accompanying notes to financial statements
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
BOND PORTFOLIO
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net Assets, End of Period ($000) $10,996 $15,274 $17,792 $16,066 $13,008
Ratio of Expenses to Average Net Assets 0.57% 0.57% 0.61% 0.57% 0.56%
Ratio of Net Investment Income to
Average Net Assets 4.97% 5.27% 4.99% 5.82% 4.15%
Ratio of Expenses to Average Net Assets,
before waiver of fees 0.73% 0.71% 0.68% 0.71% 0.70%
Ratio of Net Investment Income to Average
Net Assets, before waiver of fees 4.81% 5.13% 4.92% 5.68% 4.01%
Portfolio Turnover Rate 225.11% 375.64% 778.59% 232.34% 707.57%
</TABLE>
<TABLE>
MONEY MARKET PORTFOLIO
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net Assets, End of Period ($000) $798,269 $587,019 $352,930 $256,126 $224,523
Ratio of Expenses to Average Net Assets 0.18% 0.18% 0.19% 0.21% 0.19%
Ratio of Net Investment Income to
Average Net Assets 5.39% 5.47% 5.34% 5.87% 4.28%
Ratio of Expenses to Average Net Assets,
before waiver of fees 0.30% 0.31% 0.33% 0.37% 0.39%
Ratio of Net Investment Income to Average
Net Assets, before waiver of fees 5.27% 5.34% 5.20% 5.70% 4.08%
</TABLE>
See accompanying notes to financial statements
<PAGE>
MUTUAL STOCK PORTFOLIO, GROWTH STOCK PORTFOLIO,
UTILITIES STOCK PORTFOLIO, BOND PORTFOLIO,
MONEY MARKET PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
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. Each Fund, each
Portfolio into which the Fund invests and the percentage of each Portfolio owned
by the respective Fund is as follows:
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.
<PAGE>
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.
Deferred Trustee Compensation
Under a Deferred Compensation Plan (the "Plan") non-interested Trustees may
elect to defer receipt of a portion of their annual compensation. Under the
Plan, deferred amounts are invested in the shares of the Flex-funds and
Flex-Partners Funds. Deferred amounts remain in the Portfolios until distributed
in accordance with the Plan.
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 a 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.
<PAGE>
During the year ended December 31, 1998 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 110 $25,064,900
Contracts opened 1,282 132,898,050
Contracts closed (1,372) (151,688,950)
Outstanding, end of period 20 6,274,000
Growth Stock Portfolio:
Outstanding, beginning of year 7 $1,711,037
Contracts opened 321 82,010,900
Contracts closed (321) (81,666,062)
Outstanding, end of period 7 2,055,875
Bond Portfolio:
Outstanding, beginning of year 0 $0
Contracts opened 90 10,320,938
Contracts closed (90) (10,320,938)
Outstanding, end of period 0 0
Letter of Credit
Each Portfolio has pledged as collateral a U.S. Government Security, cash or
other high-grade debt security solely for the benefit of ICI Mutual Insurance
Co. for the Portfolios' fidelity bond coverage.
Income Taxes
The Prtfolios will be treated as a partnership for Federal income tax purposes.
As such, each investor in the Portfolios will be subject to taxation on its
share of the Portfolios' ordinary income and capital gains. It is each
Portfolio's policy to comply with the requirements of the Internal Revenue Code
applicable to it. Therefore, no Federal income tax provision is required.
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, Utility
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.
<PAGE>
3. AGREEMENTS AND TRANSACTIONS WITH AFFILIATES
R. Meeder & Associates (RMA), a wholly-owned subsidiary of Muirfield Investors,
Inc. (MII), provides each Portfolio with investment management, research,
statistical and advisory services. Under separate Investment Subadvisory
Agreements with RMA, 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, 1998, RMA voluntarily waived a portion of its
investment advisory fees in the Money Market and Bond 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.
4. SECURITIES TRANSACTIONS
For the year ended December 31, 1998, 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 $199,485,528 $145,269,691
Growth Stock Portfolio 37,169,893 29,958,979
Utilities Stock Portfolio 7,985,042 6,219,080
Bond Portfolio 23,126,049 28,533,409
As of December 31, 1998, the aggregate cost basis of investments and unrealized
appreciation (depreciation) for Federal income tax was as follows:
Net unrealized
Cost basis of Unrealized Unrealized appreciation
Portfolio investments appreciation depreciation (depreciation)
- --------- ----------- ------------ ------------ --------------
Mutual Fund Portfolio $116,197,093 $23,275,127 ($79,324) $23,195,803
Growth Stock Portfolio 40,817,038 11,886,639 (1,248,623) 10,638,016
Utilities Stock Portfolio 9,818,931 3,663,864 (270,480) 3,393,384
Bond Portfolio 10,996,767 0 (60,221) (60,221)
Money Market Portfolio 794,600,910 --- --- ---
<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, 1998, 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, 1998, by confirmation with the custodian and brokers and other
appropriate audit procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Mutual Fund Portfolio, Growth Stock Portfolio, Utilities Stock Portfolio, Bond
Portfolio and Money Market Portfolio at December 31, 1998, the results of their
operations, the changes in their net assets and the financial highlights for
each of the periods indicated herein, in conformity with generally accepted
accounting principles.
KPMG LLP
Columbus, Ohio
February 19, 1999
<PAGE>
PART C
OTHER INFORMATION
Item 23. EXHIBITS
(a) Declaration of Trust (effective December 30, 1991) -- filed as an
exhibit to Registrant's Post-Effective Amendment No. 18 on January 16,
1992, which exhibit is incorporated herein by reference.
(b) By-laws of the Trust -- filed as an exhibit to Registrant's
Post-Effective Amendment No. 18 on January 16, 1992, which exhibit is
incorporated herein by reference.
(c) Not applicable.
(d) Not applicable.
(e) Not applicable.
(f) Deferred Compensation Plan for Independent Trustees -- filed as an
exhibit to Registrant's Eighth Post-Effective Amendment to the
Registration Statement on Form N-1A filed with the Commission on March
1, 1999, which exhibit is incorporated herein by reference.
(g) Custodian Agreement -- filed as an exhibit to Registrant's
Post-Effective Amendment No. 16 on April 9, 1991, which exhibit is
incorporated by reference herein.
(h) Administration Services Agreement between the Fund and Mutual Funds
Service Co. -- filed as an exhibit to Registrant's Post-Effective
Amendment No. 31 on or about February 28, 1995, which exhibit is
incorporated by reference herein.
(i) Opinion and Consent of Counsel -- filed as an exhibit to Registrant's
initial Registration Statement on Form N-1A filed with the Commission
on or about July 20, 1982, which exhibit is incorporated herein by
reference.
(j) Consent of KPMG LLP, Independent Auditors, is filed herewith.
(k) Not applicable.
(l) Agreements etc. for initial capital, etc. -- reference is made to Part
II, Item 1(b)(13) of Registrant's First Pre-effective Amendment to the
Registration Statement on Form N-1 filed with the Commission on or
about July 20, 1982, and is incorporated herein by reference.
(m) The 12b-1 Service Plan for the Fund was filed as an exhibit to the
Registrant's 29th Post-Effective Amendment to Form N-1A filed with the
Commission on January 12, 1995 and is incorporated herein by
reference.
<PAGE>
(n) Financial Data Schedule for The Total Return Utilities Fund to be
filed by amendment.
(o) Not applicable.
(p) Powers of Attorney of Trustees of Registrant and each Portfolio are
incorporated by reference herein.
Item 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
Item 25. INDEMNIFICATION
Reference is made to Section 5.3 of the Declaration of Trust filed as
an original exhibit to the Registrant's Post-Effective Amendment No.
18 on January 16, 1992. As provided therein, the Trust is required to
indemnify its officers and trustees against claims and liability
arising in connection with the affairs of the Trust, except liability
arising from breach of trust, bad faith, willful misfeasance, gross
negligence or reckless disregard of duties. The Trust is obligated to
undertake the defense of any action brought against any officer,
trustee or shareholder, and to pay the expenses thereof if he acted in
good faith and in a manner he reasonably believed to in or not opposed
to the best interest of the Trust, and with respect to any criminal
action had no reasonable cause to believe his conduct was unlawful.
Other conditions are applicable to the right of indemnification as set
forth in the Declaration of Trust. In applying these provisions, the
Trust will comply with the provisions of Investment Company Act.
Item 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Not applicable.
Item 27. PRINCIPAL UNDERWRITERS.
Not applicable.
Item 28. LOCATION OF ACCOUNTS AND RECORDS.
Registrant's Declaration of Trust, By-laws, and Minutes of Trustees'
and Shareholders' Meetings, and contracts and like documents are in
the physical possession of Signature Financial Group, Inc., the
Registrant's sub-administrator, at 6 St. James Avenue, Boston,
Massachusetts 02116 or Mutual Funds Service Co., or R. Meeder &
Associates, Inc., at 6000 Memorial Drive, Dublin, Ohio 43017. Certain
custodial records are in the custody of Star Bank, N.A., the Fund's
custodian, at 425 Walnut Street, Cincinnati, Ohio 45202. All other
records are kept in the custody of R. Meeder & Associates, Inc. and
Mutual Funds Service Co., 6000 Memorial Drive, Dublin, OH 43017.
<PAGE>
Item 29. MANAGEMENT SERVICES.
None.
Item 30. UNDERTAKINGS.
Registrant undertakes to call a meeting of shareholders for the
purpose of voting upon the question of removal of one or more
directors, if requested to do so by the holders of at least 10% of the
Registrant's outstanding shares, and will assist communications among
shareholders as set forth within Section 16(c) of the 1940 Act.
Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that this Amendment to
its Registration Statement meets all of the requirements for effectiveness of
this Amendment to its Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this Amendment to its Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Dublin, and the State of Ohio on the 30th day of
April, 1999.
THE FLEX-FUNDS
/s/ Wesley F. Hoag
BY: ------------------------------
Wesley F. Hoag
Vice President
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
/s/ Wesley F. Hoag
Date Signed: April 30, 1999 -------------------------------
Wesley F. Hoag
Vice President
As Attorney-in-Fact pursuant to
Special Powers of Attorney,
for Robert S. Meeder, Sr., Milton S. Bartholomew,
Roger D Blackwell, Charles A. Donabedian, James W. Didion,
Robert S. Meeder, Jr., Jack W. Nicklaus II,
Walter L. Ogle and Philip A. Voelker
Trustees of The Flex-funds
/s/ Wesley F. Hoag
----------------------------------
Date Signed: April 30, 1999 Wesley F. Hoag, Attorney-in-Fact
<PAGE>
SIGNATURES
Utilities Stock Portfolio (the "Portfolio") has duly caused this
Post-Effective Amendment to the Registration on Form N-1A of The Flex-funds
(File No. 33-88420) to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of Dublin and State of Ohio on the 30th day of
April, 1999.
UTILITIES STOCK PORTFOLIO
/s/ Wesley F. Hoag
By: --------------------------------
Wesley F. Hoag
This Post-Effective Amendment to the Registration Statement on Form N-1A of
The Flex-funds (File No. 33-88420) has been signed below by the following
persons in the capacities with respect to the Portfolio indicated on April 30,
1999.
SIGNATURE TITLE
Robert S. Meeder, Sr.* President and Trustee
- --------------------------
ROBERT S. MEEDER, SR.
Milton S. Bartholomew* Trustee
- --------------------------
MILTON S. BARTHOLOMEW
Roger D. Blackwell* Trustee
- --------------------------
ROGER D. BLACKWELL
James W Didion* Trustee
- --------------------------
JAMES W. DIDION
Charles A. Donabedian* Trustee
- --------------------------
CHARLES A. DONABEDIAN
Thomas E. Line* Principal Financial Officer and
- -------------------------- Principal Accounting Officer
THOMAS E. LINE
/s/ Donald F. Meeder Secretary/Treasurer
- --------------------------
DONALD F. MEEDER
Robert S. Meeder, Jr.* Vice President and Trustee
- --------------------------
ROBERT S. MEEDER, JR.
Jack W. Nicklaus II* Trustee
- --------------------------
JACK W. NICKLAUS II
Walter L. Ogle* Trustee
- --------------------------
WALTER L. OGLE
Philip A. Voelker* Vice President and Trustee
- --------------------------
PHILIP A. VOELKER
*By: /S/ Wesley F. Hoag
----------------------
Wesley F. Hoag
Executed by Wesley F. Hoag on behalf
of those indicated pursuant to Powers of Attorney
EXHIBIT 11
Independent Auditors' Consent
The Board of Trustees of
The Flex-funds, Utilities Stock Portfolio,
Mutual Fund Portfolio, Growth Stock Portfolio,
Bond Portfolio, and Money Market Portfolio:
We consent to the use of our reports included herein dated February 19,
1999 on the financial statements of The Flex-funds (comprising The Muirfield,
Highlands Growth, U.S. Government Bond, Total Return Utilities and Money Market
Funds), Mutual Fund Portfolio, Growth Stock Portfolio, Bond Portfolio, Utilities
Stock Portfolio and Money Market Portfolio as of December 31, 1998 and for the
periods indicated therein and to the references to our firm under the headings
"Financial Highlights" in the prospectus and "Auditors" in the Statement of
Additional Information.
KPMG LLP
Columbus, Ohio
April 30, 1999
<TABLE> <S> <C>
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<NAME> THE FLEX-FUNDS
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<NUMBER> 008
<NAME> THE TOTAL RETURN UTILITIES FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 7857716
<INVESTMENTS-AT-VALUE> 10372337
<RECEIVABLES> 303616
<ASSETS-OTHER> 10688
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 10686641
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<SHARES-REINVESTED> 7373
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