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As filed with the Securities and Exchange Commission on December 27, 1996.
File No. 811-6647
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 7
TO
FORM N-1A
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940
GROWTH STOCK PORTFOLIO
(Exact Name of Registrant as Specified in Charter)
P.O. Box 7177, 6000 Memorial Drive
Dublin, Ohio 43017
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: 614-766-7000
Donald F. Meeder, P.O. Box 7177, 6000 Memorial Drive, Dublin, OH 43017
(Name and Address of Agent for Service)
Copy to:
James B. Craver
266 Summer Street
Boston, MA 02210
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EXPLANATORY NOTE
This Amendment to the Registration Statement of Growth Stock Portfolio
has been filed by the Registrant pursuant to Section 8(b) of the Investment
Company Act of 1940, as amended (the "1940 Act"). However, beneficial interests
in the Registrant are not being registered under the Securities Act of 1933, as
amended (the "1933 Act"), since such interests will be offered solely in private
placement transactions which do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. Investments in the Registrant may only
be made by investment companies, insurance company separate accounts, common or
commingled trust funds or similar organizations or entities which are
"accredited investors" as defined in Regulation D under the 1933 Act. This
Registration Statement does not constitute an offer to sell, or the solicitation
of an offer to buy, any beneficial interests in the Registrant.
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PART A
Responses to Items 1 through 3 have been omitted pursuant to paragraph
4 of Instruction F of the General Instructions to Form N-1A.
ITEM 4. GENERAL DESCRIPTION OF REGISTRANT.
Growth Stock Portfolio (the "Portfolio") is a diversified, open-end
management investment company which was organized as a trust under the laws of
the State of New York on November 1, 1991.
Beneficial interests in the Portfolio are offered solely in private
placement transactions which do not involve any "public offering" within the
meaning of Section 4(2) of the Securities Act of 1933, as amended (the "1933
Act"). Investments in the Portfolio may only be made by investment companies,
insurance company separate accounts, common or commingled trust funds or similar
organizations or entities which are "accredited investors" as defined in
Regulation D under the 1933 Act. This Registration Statement does not constitute
an offer to sell, or the solicitation of an offer to buy, any "security" within
the meaning of the 1933 Act.
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The Portfolio's investment adviser and investment subadviser are R. Meeder
& Associates, Inc. (the "Manager" or "Adviser") and Sector Capital Management,
L.L.C. (the "Subadviser"), respectively. The Portfolio seeks capital growth by
investing primarily in a diversified portfolio of domestic common stocks with
greater than average growth characteristics selected primarily from the Standard
& Poor's 500 Composite Stock Price Index (the "S & P 500"). Current income will
not be a primary objective. Under normal conditions, at least 80% of the
Portfolio's total assets will be invested in domestic common stocks.
Common stocks are selected for the Portfolio from all domestic publicly
traded common stocks; however, at least 70% of the assets of the Portfolio
invested in common stocks will be invested in common stocks which are included
in the S & P 500.
The Portfolio consists of investment portfolios representing each of the
industry sectors (identified by the Subadviser) comprising the S & P 500. The
assets of the Portfolio will be allocated to each of these industry sectors in
approximately the same proportion as these industry sectors are represented in
the S & P 500 on a market capitalization-weighted basis. The Subadviser
continuously reviews the representation of the industry sectors in the S & P 500
and continuously categorizes domestic publicly traded common stocks into a
specific industry sector.
The total market value of the common stocks in each industry sector of the
S & P 500 is compared by the Subadviser to the total market value of all common
stocks in the S & P 500 to determine each industry sector's weighting in the S &
P 500. If the weighting of any industry sector in the Portfolio varies from the
weighting on a market-capitalization basis of that industry sector in the S & P
500 at the end of any month, the amount of assets in the Portfolio allocated to
that industry sector will be reallocated by the Subadviser. The Subadviser may
make a reallocation more frequently than monthly if it chooses to do so in its
sole discretion. Reallocations may result in additional transaction costs to the
extent that sales of securities as part of such reallocations result in higher
portfolio turnover.
Except as otherwise provided below, the assets of the Portfolio
representing each of these industry sectors are managed on a discretionary
basis by one or more separate investment advisers (the "Sector Advisers")
selected by the Subadviser, subject to the review and approval of the Board of
Trustees of the Portfolio.
Assets of the Portfolio representing each of the industry sectors are
managed by one or more Sector Advisers, except (i) the assets of the Portfolio
representing the health sector are managed and "indexed" by the Subadviser
until it selects one or more Sector Advisers, subject to the review and
approval of the Portfolio Trustees, to manage the assets of the Portfolio
representing the health sector and (ii) in the event a Sub-subadvisory
Agreement is terminated leaving no Sector Adviser to manage the assets of the
Portfolio representing an industry sector, the Subadviser will, upon
termination and until a new Sector Adviser were selected, manage and "index"
the assets of the Portfolio representing the applicable industry sector by
selling any stocks representing the industry sector that are not included in
the S&P 500 and investing the assets comprising the industry sector in S&P 500
stocks identified by the Subadviser as belonging to that industry sector in
the same proportion as those stocks are represented in the S&P 500 on a market
capitalization-weighted basis.
Each Sector Adviser is limited to the list of companies identified by the
Subadviser which represents the Sector Adviser's specific industry sector. Each
Sector Adviser then selects those common stocks which, in its
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opinion, best represent the industry sector the Sector Adviser has been
assigned. In selecting securities for the Portfolio, the Sector Advisers
evaluate factors believed to be favorable to long term growth of capital
including specific financial characteristics of the issuer such as historical
earnings growth, sales growth, profitability and return on equity. The Sector
Advisers also analyze the issuer's position within its industry sector as well
as the quality and experience of the issuer's management.
Up to 20% of the Portfolio's assets may be invested in temporary
investments such as money market instruments, obligations issued or guaranteed
by the U.S. Government, its agencies and instrumentalities, and repurchase
agreements. See "Additional Investment Policies - Money Market Instruments and
Bonds." The Portfolio may purchase stock index futures contracts and related
options. See "Additional Investment Policies - Hedging Strategies and Option
Strategies". Up to 5% of the total assets of the Portfolio may be invested in
American Depositary Receipts.
As a fundamental policy, the Portfolio may not own more than 10% of the
outstanding voting shares of any issuer and with respect to 75% of the total
assets of the Portfolio, the Portfolio will not purchase a security of any
issuer (other than cash items and U.S. Government Securities, as defined in the
Investment Company Act of 1940) if such purchase would cause the Portfolio's
holdings of that issuer to amount to more than 5% of the Portfolio's total
assets.
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ADDITIONAL INVESTMENT POLICIES
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MONEY MARKET INSTRUMENTS AND BONDS
When investing in money market instruments or bonds, the Portfolio will
limit its purchases to the following securities:
o U.S. Government Securities and Securities of its Agencies and
Instrumentalities.
o Bank Obligations and Instruments Secured Thereby.
o High Quality Commercial Paper -- The Portfolio may invest in commercial
paper rated no lower than "A-2" by Standard & Poor's Corporation or "Prime-2" by
Moody's Investors Services, Inc., or, if not rated, issued by a company having
an outstanding debt issue rated at least A by Standard & Poor's or Moody's.
o Private Placement Commercial Paper -- unregistered securities which are
traded in public markets to qualified institutional investors, such as the
Portfolio.
o High Grade Corporate Obligations -- obligations rated at least A by
Standard & Poor's or Moody's.
o Repurchase Agreements Pertaining to the Above -- The Portfolio may invest
in any of the above securities subject to repurchase agreements with any Federal
Reserve reporting dealer or member bank of the Federal Reserve System.
Repurchase agreements usually are for short periods, such as one week or less,
but
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could be longer. The Portfolio will not invest more than 10% of its assets,
at time of purchase, in repurchase agreements which mature in excess of seven
days or in other illiquid or not readily marketable securities.
HEDGING STRATEGIES
The Portfolio may engage in hedging transactions in carrying out its
investment policies. A hedging program may be implemented for the following
reasons: (1) To gain equity market exposure for unallocated and uninvested cash
balances of the Portfolio; (2) To protect the value of specific securities
owned or intended to be purchased while the Investment Adviser, Subadviser or a
Sector Adviser is implementing a change in the Portfolio's investment position;
(3) To protect portfolio values during periods of extraordinary risk without
incurring transaction costs associated with buying or selling actual
securities; and (4) To utilize the "designated hedge" provisions of Sub-Chapter
M of the Internal Revenue Code as a permitted means of avoiding taxes that
would otherwise have to be paid on gains from the sale of portfolio securities.
A hedging program involves entering into an "option" or "futures"
transaction in lieu of the actual purchase or sale of securities. At present,
many groups of common stocks (stock market indices) may be made the subject of
futures contracts.
Derivatives are financial instruments whose performance is derived, at
least in part, from the performance of an underlying assets, security or index.
Accordingly, these 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. They do not necessarily increase
risk, and may in fact reduce risk.
The Portfolio will not engage in transactions in financial futures
contracts or related options for speculation but only as a hedge against changes
in the market value of securities held in the Portfolio, securities which it
intends to purchase, or to gain market exposure for unallocated and uninvested
cash balances. The Portfolio will only enter in such transactions when they are
economically appropriate to meeting portfolio investment objectives and to the
reduction of risks inherent in the ongoing management of the Portfolio.
For certain regulatory purposes, the Commodity Futures Trading Commission
("CFTC") limits the types of futures positions that can be taken in conjunction
with the management of a securities portfolio for a mutual fund, such as the
Fund. 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 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 guaranty that the
Portfolio will be able to realize this objective and, as noted below under "Risk
Factors," there are some risks in utilizing a hedging strategy.
OPTION STRATEGIES
The Portfolio may write (sell) covered call options. The purpose of such
transactions is to: (1) hedge against changes in the market value of specific
securities held by the Portfolio; and/or (2) to generate incremental income by
capturing the proceeds of options sold.
The Portfolio may write (sell) call options, but only if such options are
covered and remain covered as long as the Portfolio is obligated as a writer of
the option (seller). A call option is "covered" if the Portfolio owns the
underlying security covered by the call. If a "covered" call option expires
un-exercised, the writer realizes a gain in the amount of the premium received.
If the covered call option is exercised, the writer realizes either a gain or a
loss from the sale of the underlying security with the proceeds to the writer
being increased by the amount of the premium. Prior to its expiration, a call
option may be closed out by means of a purchase of an identical option. Any gain
or loss from such transaction will depend on whether the amount paid is more or
less than the premium received for the option plus related transaction costs.
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ITEM 5. MANAGEMENT OF THE PORTFOLIO.
The Portfolio's Board of Trustees provides broad supervision over the
affairs of the Portfolio. The address of the Adviser is P.O. Box 7177, 6000
Memorial Drive, Dublin, Ohio 43017. A majority of the Portfolio's Trustees are
not affiliated with the Adviser. Star Bank, N.A., Cincinnati ("Star Bank") is
the Portfolio's custodian and Mutual Funds Service Co. ("MFSCo") is the
Portfolio's transfer agent and dividend paying agent. The address of the
custodian is Star Bank Center, 425 Walnut Street, Cincinnati, Ohio 45202 and the
address of MFSCo is 6000 Memorial Drive, Dublin, Ohio 43017.
The Portfolio has not retained the services of a principal underwriter
or distributor, as interests in the Portfolio are offered
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solely in private placement transactions. Signature Broker-Dealer Services, Inc.
("SBDS") has been retained to serve without compensation as exclusive placement
agent for the Portfolio in connection with such transactions.
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R. Meeder & Associates, Inc., has been an investment adviser to
individuals and retirement plans since 1974 and has served as investment adviser
to registered investment companies since 1982. The Manager serves the Portfolio
pursuant to an Investment Advisory Contract under the terms of which it has
agreed to provide an investment program within the limitations of the
Portfolio's investment policies and restrictions, and to furnish all executive,
administrative, and clerical services required for the transaction of Portfolio
business, other than accounting services and services which are provided by the
Portfolio's custodian, transfer agent, independent accountants and legal
counsel. The Manager invests the Portfolio's liquidity reserves and may invest
the Portfolio's financial futures contracts and related options.
The Manager was incorporated in Ohio in 1974 and maintains its principal
offices at 6000 Memorial Drive, Dublin, OH 43017. The Manager is a wholly-owned
subsidiary of Muirfield Investors, Inc. ("MII"). MII is controlled by Robert S.
Meeder, Sr. through ownership of voting common stock. MII conducts business only
through its five 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 and
OMCO, Inc., a registered commodity trading adviser and commodity pool operator.
The Manager's officers and directors are as follows: Robert S. Meeder,
Sr., Chairman and Sole Director; Robert S. Meeder, Jr., President; Philip A.
Voelker, Senior Vice President; Donald F. Meeder, Vice President and
Secretary; Sherrie L. Acock, Vice President; Robert D. Baker, Vice President,
Wesley F. Hoag, General Counsel; Steven T. McCabe, Vice President; Elyse Jurman,
Vice President; and Roy E. Rogers, Vice President.
Philip A. Voelker is primarily responsible for managing the liquidity
reserve of the Portfolio and managing the futures contracts and related options
of the Portfolio on behalf of the Manager. Mr. Voelker is a Vice President and
Trustee of the Portfolio, Vice President of the Flex-funds and Senior Vice
President of the Manager. Mr. Voelker has been associated with the Manager
since 1975.
The Manager earns an annual fee, payable in monthly installments, at
the rate of 1% of the first $50 million, 0.75% of the next $50 million, and
0.60% in excess of $100 million, of the Portfolio's average net assets.
All compensation to the Manager will be shared by the Subadviser and the
Manager out of the Manager's fee from the Portfolio in accordance with a
formula such that the Manager will receive 70% and the Subadviser 30% of the
fee payable with respect to the net assets of the Portfolio upon effectiveness
of the subadvisory arrangement; then the Subadviser will receive 70% and the
Manager 30% of the fee attributable to any additional net assets of the
Portfolio up to an amount of net assets equal to the net assets at
effectiveness of the subadvisory arrangement, then the Manager and the
Subadviser will share equally the fee attributable to any additional net
assets of the Portfolio up to $50 million of the net assets. With respect to
net assets of more than $50 million and less than $100 million, the applicable
fee of 0.75% will be shared such that the Manager will receive 0.35% and the
Subadviser 0.40%. For net assets of $100 million and more, the applicable
0.60% fee will be shared such that the Manager will receive 0.25% and
Subadviser 0.35%.
Accounting, stock transfer, dividend disbursing, and shareholder services
are provided to the Portfolio and the Fund by Mutual Funds Service Co., 6000
Memorial Drive, Dublin, Ohio 43017, a wholly-owned subsidiary of MII. The
minimum annual fee, payable monthly, for accounting services in the Portfolio is
$7,500. Subject to the applicable minimum fee, the fee 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.
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For the year ended December 31, 1995, total payments to Mutual Funds
Service Co. amounted to $28,335 for the Portfolio.
SUBADVISER
Sector Capital Management, L.L.C. (the "Subadviser"), 5350 Poplar Avenue,
Suite 490, Memphis, Tennessee 38119, serves as the Growth Stock Portfolio's
subadviser under an Investment Subadvisory Agreement among the Portfolio,
the Manager and the Subadviser. The Subadviser furnishes investment
advisory services in connection with the management of the Growth Stock
Portfolio.
The Subadviser is a Georgia limited liability company that has been a
registered investment adviser to individuals, pension and profit sharing plans,
trusts, charitable organizations, corporations and other institutions since
February, 1995. As of September 30, 1996, the Subadviser held discretionary
investment authority over approximately $88 million of assets. The Subadviser
is controlled by William L. Gurner and John K. Donaldson. Mr. Gurner is
primarily responsible for the day-to-day management of the 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 been associated with the
Subadviser since its inception in February, 1995. Mr. Gurner, President,
Administrator, Manager and a Member of the Subadviser, is a trustee of The
Flex-Partners, mutual funds whose corresponding portfolios are also advised by
the Manager.
The Subadviser and the Portfolio have entered into a Sub-subadvisory
Agreement with each Sector Adviser selected for the Portfolio. It is the
Subadviser's responsibility to select, subject to the review and approval of the
Board of Trustees, the Sector Advisers who have distinguished themselves by able
performance in respective areas of expertise in sector management and to review
their continued performance. In addition, it is the Subadviser's responsibility
to categorize domestic publicly traded common stocks into a specific industry
sector. The Subadviser may also invest the Portfolio's financial futures
contracts and related options.
Subject to the supervision and direction of the Portfolio's Board of
Trustees, the Subadviser provides to the Portfolio investment management
evaluation services principally by performing initial due diligence on
prospective Sector Advisers for the Portfolio and thereafter monitoring Sector
Adviser performance through quantitative and qualitative analysis as well as
periodic in-person, telephonic and written consultations with Sector Advisers.
In evaluating prospective Sector Advisers, the Subadviser considers among other
factors, each Sector Advisers 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. The Subadviser has responsibility for communicating
performance expectations and evaluations to Sector Advisers and ultimately
recommending to the Board of Trustees of the Portfolio whether Sector Advisers'
contracts should be renewed, modified, or terminated. The Subadviser provides
reports to the Portfolio's Board of Trustees regarding the results of its
evaluation and monitoring functions.
The Subadviser pays each Sector Adviser a fee for its investment advisory
services that is computed daily and paid monthly based on the value of the
average net assets of the Portfolio assigned by the Subadviser to the Sector
Adviser at an annual rate equal to .25%.
Investors should be aware that the Subadviser may be subject to a conflict
of interest when making decisions regarding the retention and compensation of
particular Sector Advisers. However, the Subadviser's decisions regarding the
selection of Sector Advisers and specific amount of the compensation to be paid
to Sector Advisers, are subject to review and approval by a majority of the
Board of Trustees of the Portfolio.
Although the Subadviser and the Sector Advisers' activities are subject
to general oversight by the Board of Trustees and the officers of the Portfolio,
neither the Board nor the officers evaluate the investment merits of any Sector
Adviser's individual security selections. The Board of Trustees will review
regularly the Portfolio's performance compared to the applicable indices and
also will review the Portfolio's compliance with its investment objectives and
policies.
While the investment professionals of the Subadviser have experience in
asset management and the selection of investment advisers, prior to the
Subadviser becoming the subadviser to the Portfolio, on December 31, 1996, it
did not have previous experience in providing investment advisory services to an
investment company.
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The Portfolio intends to file an exemptive order application
(the"Application") with the Securities and Exchange Commission (the "SEC")
seeking an exemption from Section 15(a)(1) of the Investment Company Act of 1940
to the extent necessary to permit the Portfolio and the Subadviser to enter into
Investment Subadvisory Agreements with each Sector Adviser without such
agreements being approved by the shareholders of the Portfolio except for
Investment Subadvisory Agreements with an affiliated person of the Portfolio,
the Manager or the Subadviser other than by reason of such affiliated person
serving as an existing Sector Adviser to the Portfolio. Applicable orders
granted by the SEC to other investment companies seeking similar exemptions have
required as a condition to granting the order that the investment company obtain
shareholder approval for such a policy. The Portfolio expects that the SEC will
impose the same condition on the Portfolio and accordingly on December 20, 1996,
at a Special Meeting of the shareholders of the Portfolio, the shareholders
approved a proposal to allow the Portfolio and the Subadviser to enter into
Investment Subadvisory Agreements with Sector Advisers without such agreements
being approved by the shareholders of the Portfolio. In addition, the
Portfolio's Application will likely include the condition that within 90 days of
the hiring of any new Sector Advisers and executing a new Investment Subadvisory
Agreement, the Subadviser will furnish shareholders with an information
statement about the new Sector Adviser and Investment Subadvisory Agreement.
There is no guarantee that the SEC will grant the Portfolio's application for
exemptive relief. Any changes to the Investment Advisory Contract between the
Portfolio and the Manager or the Investment Subadvisory Agreement between the
Portfolio, Manager and Subadviser still require shareholder approval. In
accordance with the terms of the application for exemption, a majority of the
shareholders of the Fund have approved the operation of the Trust in accordance
with the exemption.
SECTOR ADVISERS: The Sector Advisers have agreed to an investment advisory
fee based on the average net assets of the Portfolio assigned to them by the
Subadviser at an annual rate equal to .25%, which is generally lower than the
fees they charge to institutional accounts for which they serve as investment
adviser, and for which they perform all administrative responsibilities.
Subject to the supervision and direction of the Subadviser and,
ultimately, the Board of Trustees of the Portfolio, each Sector Adviser's
responsibilities are limited to managing its portion of the securities held by
the Portfolio in accordance with the Portfolio's stated investment objective and
policies, making investment decisions for the Portfolio and placing orders to
purchase and sell securities on behalf of the 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 Portfolio. Miller/Howard is a
registered investment adviser which has been providing investment services to
broker-dealers, investment advisers, employee benefit plans, endowment
portfolios, foundations and other institutions and individuals since 1984. As of
June 30, 1996, Miller/Howard held discretionary investment authority over
approximately $ 203 million of assets. Lowell Miller and Helen Hamada who are,
respectively, Miller/Howard's President, Secretary and a director and its
Treasurer and a director, each own more than 10% of the outstanding voting
securities of Miller/Howard. Mr. Miller will be the portfolio manager primarily
responsible for the day-to-day management of those assets of the Portfolio
allocated to Miller/Howard. Mr. Miller has been associated with Miller/Howard
since 1984. Mr. Miller is a Vice President of the Trust and a trustee and a Vice
President of the Flex-Partners, mutual funds whose corresponding portfolios are
also advised by the Manager. 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 Portfolio. Hallmark is a registered investment
adviser which has been providing investment services to individuals; banks;
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pension, profit sharing, and other retirement plans; trusts; endowments;
foundations; and other charitable organizations since 1986. As of September 30,
1996, Hallmark held discretionary investment authority over approximately $ 113
million of assets. Peter S. Hagerman owns more than 10% of the outstanding
voting securities of Hallmark. Mr. Hagerman, Chairman of the Board, President,
and Chief Executive Officer, Thomas S. Moore, Senior Vice President and Chief
Investment Officer, and Kathryn A. Skwieralski, Senior Vice President,
Treasurer, Chief Financial and Administrative Officer, are the directors of
Hallmark. Mr. Hagerman will be the portfolio manager primarily responsible for
the day-to-day management of those assets off the Portfolio allocated to
Hallmark. Mr. Hagerman has been associated with Hallmark since 1986. Hallmark's
principal executive offices are located at One Greenbrook Corporate Center, 100
Passaic Avenue, Fairfield, New Jersey, 07004.
BARROW, HANLEY, MEWHINNEY & STRAUSS, INC. serves as Sector Adviser to the
consumer durable and non-durable sectors of the Portfolio. Barrow is a
registered investment adviser which has been providing investment services to
banks; investment companies; pension and profit sharing plans; charitable
organizations and corporations since 1979. As of September 30, 1996, Barrow held
discretionary investment authority over approximately $ 18.8 billion of assets.
Barrow is a wholly-owned subsidiary of United Asset Management Corp. Bryant M.
Hanley, Jr., President and Chief Executive Officer, is the sole director of
Barrow. Michael C. Mewhinney will be the portfolio manager primarily responsible
for the day-to-day management of those assets of the Portfolio allocated to
Barrow. Mr. Mewhinney has been associated with Barrow since 1979. Barrow's
principal executive offices are located at 3232 McKinney Avenue, 15th Floor,
Dallas, Texas, 75204-2429.
THE MITCHELL GROUP, INC. serves as Sector Adviser to the energy sector of the
Portfolio. The Mitchell Group is a registered investment adviser which has been
providing investment services to individuals; banks; investment companies;
pension and profit sharing plans; charitable organizations, corporations and
other institutions since 1989. As of September 30, 1996, The Mitchell Group held
discretionary investment authority over approximately $ 214 million of assets.
Rodney Mitchell, President, Chief Executive Officer and sole director, owns more
than 10% of the outstanding voting securities of The Mitchell Group. Mr.
Mitchell will be the portfolio manager primarily responsible for the day-to-day
management of those assets of the Portfolio allocated to The Mitchell Group. Mr.
Mitchell has been associated with The Mitchell Group since 1989. The Mitchell
Group's principal executive offices are located at 1100 Louisiana, #4810,
Houston, Texas, 77702.
ASHLAND MANAGEMENT INCORPORATED serves as Sector Adviser to the materials and
services sector of the Portfolio. Ashland is a registered investment adviser
which has been providing investment services to individuals, pension and profit
sharing plans, charitable organizations, corporations and other institutions
since 1975. As of September 30, 1996, Ashland managed accounts having a value of
approximately $1.5 billion of assets. Charles C. Hickox, Chairman of the Board,
Chief Executive Officer and a director, and Perry V. S. Jones, President, Chief
Operating Officer and a director, each own more than 10% of the outstanding
voting securities of Ashland. Terrence J. McLaughlin, Managing Director of
Ashland and Deborah C. Ohl, a Portfolio Management Associate, will be the
portfolio managers primarily responsible for the day-to-day management of those
assets of the Portfolio allocated to Ashland. Mr. McLaughlin has been
associated with Ashland since 1987. Ms. Ohl has been employed by Ashland since
August, 1992 and has served as a Portfolio Management Associate for Ashland
since 1993. From May, 1991 until July, 1992, Ms. Ohl was a research and sales
assistant with Kidder, Peabody & Co. Incorporated. Ashland's principal executive
offices are located at 26 Broadway, New York, New York, 10004.
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DREMAN VALUE ADVISORS, Inc. serves as Sector Adviser to the finance sector of
the Portfolio. Dreman is a registered investment adviser which has been
providing investment services to individuals, banks, investment companies,
pension and profit sharing plans, charitable organizations, corporations and
other institutions since 1977. As of June 30, 1996, Dreman held discretionary
investment authority over approximately $2.463 billion of assets. Dreman is a
wholly-owned subsidiary of Zurich Kemper Investments, Inc. ("Zurich Kemper"),
which is a wholly-owned subsidiary of ZKI Holding Corporation, which is
approximately 97% owned by Zurich Holding Company of America, which is a
wholly-owned subsidiary of Zurich Insurance Company. The directors of Dreman are
James R. Neal, President and Chief Executive Officer of Dreman, John E. Neal,
Group President of Zurich Kemper, Stephen R. Timbers, President of Zurich
Kemper, and David N. Dreman, Chairman of the Board of Dreman. Jonathan Kay will
be the portfolio manager primarily responsible for the day-to-day management of
those assets of the Portfolio allocated to Dreman. Mr. Kay has been associated
with Dreman since 1993. From 1990 to 1993, Mr. Kay was an associate with J.S.
Eliezer, a management consulting firm serving primarily the media industry.
Dreman's principal executive offices are located at 280 Park Avenue, 40th Floor,
New York, New York 10017.
RCM CAPITAL MANAGEMENT, L.L.C. serves as Sector Adviser to the technology sector
of the Portfolio. RCM is a registered investment advisor that provides
investment services to institutional and individual clients and registered
investment companies, with approximately $25.7 billion of assets under
management as of September 30, 1996. RCM was established in April 1996, as the
successor to the business operations of RCM Capital Management, a California
Limited Partnership, which, with its predecessors, has been in operation since
1970. RCM is a wholly-owned subsidiary of Dresdner Bank AG ("Dresdner"), an
international banking organization with principal executive offices in
Frankfurt, Germany. The Board of Managers of RCM is comprised of William L.
Price, Chairman of the Board and Chief Investment Officer of RCM, Michael J.
Apatoff, Chief Operating Officer of RCM, Hans-Dieter Bauernfeind, General
Manager of Dresdner, Gerhard Eberstadt, Senior Chairman of Dresdner, George N.
Fugelsang, Senior General Manager of Dresdner, John D. Leland, Jr., Principal of
RCM, Jeffrey S. Rudsten, Principal of RCM, William S. Stack, Principal of RCM
and Kenneth B. Weeman, Jr., Head of Equity Trading of RCM. Walter C. Price and
Huschen Chen, each principals of RCM, will be the portfolio managers primarily
responsible for the day-to-day management of those assets of the Portfolio
allocated to RCM. Messrs. Price and Chen have managed equity portfolios on
behalf of RCM since 1985. RCM's principal executive offices are located at Four
Embarcadero Center, San Francisco, CA 94111.
Banking laws and regulations, including the Glass-Steagall Act as presently
interpreted by the Board of Governors of the Federal Reserve System, prohibit
certain banking entities, such as Dresdner, from sponsoring, organizing,
controlling or distributing the shares of a registered investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from underwriting securities. However, banks and their affiliates generally can
act as an adviser (or sub-subadviser) to an investment company and can purchase
shares of an investment company as agent for and upon the order of customers.
RCM believes that it may perform the services contemplated by the investment
management agreement without violating these banking law regulations. However,
future changes in legal requirements relating to the permissible activities of
banks and their affiliates at will as future interpretations of current
requirements, could prevent RCM from continuing to perform investment management
services for the Portfolio.
A-12
<PAGE> 15
TRANSFER AGENT AND CUSTODIAN
The Portfolio has entered into an Administration and Accounting
Services Agreement with MFSCo pursuant to which MFSCo acts as transfer agent for
the Portfolio, maintains an account for each investor in the Portfolio, performs
other transfer agency functions, and acts as dividend disbursing agent for the
Portfolio. Pursuant to a Custody Agreement, Star Bank acts as the custodian of
the Portfolio's assets. See Part B for more detailed information concerning
custodial arrangements.
EXPENSES
The expenses of the Portfolio include the compensation of its Trustees
who are not affiliated with the Adviser or SBDS; governmental fees; interest
charges; taxes; fees and expenses of independent auditors, of legal counsel and
of any transfer agent, custodian, registrar or dividend disbursing agent of the
Portfolio; insurance premiums; expenses of calculating the net asset value of,
and the net income on, the Portfolio; all fees under its Administration and
Accounting Services and Subadministrative Services Agreements; 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 officers and commissions; expenses of meetings of
investors and Trustees; and the advisory fees payable to the Adviser under the
Investment Advisory Agreement.
ITEM 6. CAPITAL STOCK AND OTHER SECURITIES.
The Portfolio is organized as a trust under the laws of the State of
New York. Under the Declaration of Trust, the Trustees are authorized to issue
beneficial interests in the Portfolio. Each investor is entitled to a vote in
proportion to the amount of its investment in the Portfolio. Investments in the
Portfolio may not be transferred, but an investor may withdraw all or any
portion of its
A-13
<PAGE> 16
investment at any time at net asset value. Investors in the Portfolio (e.g.,
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 an investor in the Portfolio 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.
The net income of the Portfolio is determined each day on which the
N.Y.S.E. is open for trading (and on such other days as are deemed necessary in
order to comply with Rule 22c-1 under the 1940 Act) ("Fund Business Day"). This
determination is made once during each such day. All the net income of the
Portfolio, as defined below, so determined is allocated pro rata among the
investors in the Portfolio at the time of such determination.
For this purpose the net income of the Portfolio (from the time of the
immediately preceding determination thereof) shall consist of (i) all income
accrued, less the amortization of any premium, on the assets of the Portfolio,
less (ii) all actual and accrued expenses of the Portfolio determined in
accordance with generally accepted accounting principles. Interest income
includes discount earned (including both original issue and market discount) on
discount paper accrued ratably to the date of maturity and any net realized
gains or losses on the assets of the Portfolio.
Investments in the Portfolio have no preemptive or conversion rights
and are fully paid and nonassessable, except as set forth below. The Portfolio
is not required to hold annual meetings of investors but the Portfolio will hold
special meetings of investors when in the judgment of the Trustees it is
necessary or desirable to submit matters for an investor vote. Investors have
the right to communicate with other investors to the extent provided in Section
16(c) of the 1940 Act in connection with requesting a meeting of investors for
the purpose of removing one or more Trustees, which removal requires a
two-thirds vote of the Portfolio's beneficial interests. Investors also have
under certain circumstances the right to remove one or more Trustees without a
meeting. Upon liquidation or dissolution of the Portfolio, investors would be
entitled to share pro rata in the net assets of the Portfolio available for
distribution to investors.
Under the anticipated method of operation of the Portfolio, the
Portfolio will not be subject to any income tax. However, each investor in the
Portfolio will be taxable on its share (as determined in accordance with the
governing instruments of the Portfolio) of the Portfolio's taxable income, gain,
loss, deductions and credits in determining its income tax liability. The
determination of such share
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<PAGE> 17
will be made in accordance with the Internal Revenue Code of 1986, as amended,
and regulations promulgated thereunder.
The Portfolio's assets, income and distributions are managed in such a
way that an investor in the Portfolio will be able to satisfy the requirements
of Subchapter M of the Internal Revenue Code of 1986, as amended, assuming that
the investor invested all of its investable assets in the Portfolio.
Investor inquiries may be directed to SBDS at 6 St. James Avenue, Suite
900, Boston, Massachusetts 02116.
ITEM 7. PURCHASE OF SECURITIES.
Beneficial interests in the Portfolio are issued solely in private
placement transactions which do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. Investments in the Portfolio may only
be made by investment companies, insurance company separate accounts, common or
commingled trust funds or similar organizations or entities which are
"accredited investors" as defined in Regulation D under the 1933 Act. This
Registration Statement does not constitute an offer to sell, or the solicitation
of an offer to buy, any "security" within the meaning of the 1933 Act.
An investment in the Portfolio may be made without a sales load at the
net asset value next determined after an order is received in "good order" by
the Portfolio.
There is no minimum initial or subsequent investment in the Portfolio.
However, since the Portfolio intends to be as fully invested at all times as is
reasonably practicable in order to enhance the return on its assets, investments
must be made in federal funds (i.e., monies credited to the account of the
Portfolio's custodian bank by a Federal Reserve Bank).
The Portfolio reserves the right to cease accepting investments at any
time or to reject any investment order.
The exclusive placement agent for the Portfolio is SBDS, whose
principal business address is 6 St. James Avenue, Boston, Massachusetts 02116.
SBDS receives no additional compensation for serving as such agent.
Each investor in the Portfolio may add to or reduce its investment in
the Portfolio on each Fund Business Day. As of 4:00 p.m., New York time, on each
such day, the value of each investor's beneficial interest in the Portfolio will
be determined by multiplying the net asset value of the Portfolio by the
percentage,
A-15
<PAGE> 18
effective for that day, which represents that investor's share of the aggregate
beneficial interests in the Portfolio. Any additions or reductions, which are to
be effected as of 4:00 p.m., New York time, on such day, will then be effected.
The investor's percentage of the aggregate beneficial interests in the Portfolio
will then be recomputed as the percentage equal to the fraction (i) the
numerator of which is the value of such investor's investment in the Portfolio
as of 4:00 p.m., New York time, on such day plus or minus, as the case may be,
the amount of net additions to or reductions in the investor's investment in the
Portfolio effected as of 4:00 p.m., New York time, on such day, and (ii) the
denominator of which is the aggregate net asset value of the Portfolio as of
4:00 p.m., New York time, on such day, plus or minus, as the case may be, the
amount of net additions to or reductions in the aggregate investments in the
Portfolio by all investors in the Portfolio. The percentage so determined will
then be applied to determine the value of the investor's interest in the
Portfolio as of 4:00 p.m., New York time, on the following Fund Business Day.
ITEM 8. REDEMPTION OR REPURCHASE.
An investor in the Portfolio may reduce any portion or all of its
investment at any time at the net asset value next determined after a request in
"good order" is furnished by the investor to the Portfolio. The proceeds of a
reduction will be paid by the Portfolio in federal funds normally on the next
business day after the reduction is effected, but in any event within seven
days. Investments in the Portfolio may not be transferred.
The right of any investor to receive payment with respect to any
reduction may be suspended or the payment of the proceeds therefrom postponed
during any period in which the N.Y.S.E. is closed (other than weekends or
holidays) or trading on such Exchange is restricted, or, to the extent otherwise
permitted by the 1940 Act, if an emergency exists.
ITEM 9. PENDING LEGAL PROCEEDINGS.
Not applicable.
A-16
<PAGE> 19
PART B
ITEM 10. COVER PAGE.
Not applicable.
ITEM 11. TABLE OF CONTENTS.
<TABLE>
<CAPTION>
Page
<S> <C>
General Information and History . . . . . . . . . . . B-1
Investment Objective and Policies . . . . . . . . . . B-1
Management of the Portfolio . . . . . . . . . . . . . B-15
Control Persons and Principal Holders of Securities . B-18
Investment Advisory and Other Services . . . . . . . B-18
Brokerage Allocation and Other Practices . . . . . . B-27
Capital Stock and Other Securities . . . . . . . . . B-29
Purchase, Redemption and Pricing of Securities . . . B-31
Tax Status . . . . . . . . . . . . . . . . . . . . . B-31
Underwriters . . . . . . . . . . . . . . . . . . . . B-31
Calculation of Performance Data . . . . . . . . . . . B-31
Financial Statements . . . . . . . . . . . . . . . . B-31
</TABLE>
ITEM 12. GENERAL INFORMATION AND HISTORY.
Not applicable.
ITEM 13. INVESTMENT OBJECTIVE AND POLICIES.
Part A contains additional information about the investment objective
and policies of the Growth Stock Portfolio (the "Portfolio"). This Part B should
only be read in conjunction with Part A.
The investment policies are not fundamental and may be changed by the
Trustees of the Portfolio without investor approval. No such change would be
made, however, without 30 days' written notice to investors.
B-1
<PAGE> 20
The portfolio turnover rate for the Portfolio was 338% for the year
ended December 31, 1995 (103% in 1994).
The Growth Stock Portfolio began 1995 being 100% invested in money
market instruments and became fully exposed to the stock market in late January.
By mid-March the Portfolio, in response to internal weaknesses which were not
confirming the price movement in the Dow, adopted a partially defensive position
by scaling back exposure to the stock market to approximately 50%. In early May
as negative divergences no longer existed between the major stock market indexes
the Portfolio was returned to a fully invested position where it remained until
the fourth quarter. In October, certain technical and fundamental questions
about the market's continued advance began to indicate that the most prudent
posture was to again adopt a partially defensive position. The Portfolio
remained partially defensive until the first week in December when a fully
invested position was implemented and maintained through the end of 1995.
The Adviser is presently unable to predict the portfolio turnover rate
for the current year, as any major change in investment posture to a defensive
position, or vice versa, will result in a portfolio turnover of 100% or more. It
is conceivable that the turnover rate of the Portfolio will exceed 300% in the
current year.
The Portfolio intends to comply with the short-term trading
restrictions of Subchapter M of the Internal Revenue Code of 1986, as amended,
although these restrictions could inhibit a rapid change in the Portfolio's
investments. The Portfolio will strive for a positive investment return each
calendar year.
B-2
<PAGE> 21
MONEY MARKET INSTRUMENTS AND BONDS
When investing in money market instruments or bonds, 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
B-3
<PAGE> 22
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 ("Standard & Poor's") or "Prime-2" by Moody's Investors
Service, Inc. ("Moody's"), 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 ("Rule 144A securities") consists of unregistered
securities which are traded in public markets to qualified
institutional investors, such as the Portfolio. The Portfolio's risk is
that the universe of potential buyers for the securities, should the
Portfolio desire to liquidate a position, is limited to qualified
dealers and institutions, and therefore such securities could have the
effect of being illiquid. A position in such Rule 144A securities would
ordinarily be subject to a 10% limitation. The Board of Trustees of the
Portfolio has identified the market for, and the categories of
qualified buyers of, Rule 144A securities and has determined that it is
sufficient to consider such securities to be liquid and not subject to
the 10% illiquid asset limitation. The Trustees have determined that
the Portfolio may invest up to 35% of its assets, at cost on the date
of purchase, in private placement commercial paper.
- High Grade Corporate Obligations--obligations rated at least
A by Standard & Poor's or by Moody's. See rating information below.
- Repurchase Agreements Pertaining to the Above--the Portfolio
may invest without limit in any of the above securities subject to
repurchase agreements with any Federal Reserve reporting dealer or
member bank of the Federal Reserve System. A repurchase agreement is an
instrument under which the purchaser (i.e., the Portfolio) acquires
ownership of a debt security and the seller agrees, at the time of the
sale, to repurchase the obligation at a mutually agreed upon time and
price, thereby determining the yield during the purchaser's holding
period. This results in a fixed rate of return insulated from market
B-4
<PAGE> 23
fluctuations during such period. The underlying securities could be any
of those described above, some of which might bear maturities exceeding
one year. The Portfolio's risk is that the seller may fail to
repurchase the security on the delivery date. If the seller defaults,
the underlying security constitutes collateral for the seller's
obligation to pay. It is a policy of the Portfolio to make settlement
on repurchase agreements only upon proper delivery of the underlying
collateral. Repurchase agreements usually are for short periods, such
as one week or less, but could be longer. The Portfolio may enter into
repurchase agreements with its custodian (Star Bank, N.A., Cincinnati)
when it is advantageous to do so. The Portfolio will not invest more
than 10% of its assets, at time of purchase, in repurchase agreements
which mature in excess of seven days.
B-5
<PAGE> 24
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 Manager, Subadviser
and/or Sector Advisers determine the liquidity of the Portfolio's investments
and, through reports from the Manager, Subadviser and/or Sector Advisers, the
Board monitors investments in illiquid instruments. In determining the liquidity
of the Portfolio's investments, the Manager, Subadviser and Sector Advisers may
consider various factors, including (1) the frequency of trades and quotations,
(2) the number of dealers and prospective purchasers in the marketplace, (3)
dealer undertakings to make a market, (4) the nature of the security (including
any demand or tender features), and (5) the nature of the marketplace for trades
(including the ability to assign or offset the Portfolio's rights and
obligations relating to the investment). Investments currently considered by the
Portfolio to be illiquid include repurchase agreements not entitling the holder
to payment of principal and interest within seven days, over-the-counter
options, and non-government stripped fixed-rate mortgage-backed securities.
Also, the Manager, Subadviser and/or Sector Advisers may determine some
restricted securities to be illiquid. However, with respect to over-the-counter
options the Portfolio writes, all or a portion of the value of the underlying
instrument may be illiquid depending on the assets held to cover the option and
the nature and terms of any agreement the Portfolio may have to close out the
option before expiration. In the absence of market quotations, illiquid
investments are priced at fair value as determined in good faith by the Board of
Trustees. If through a change in values, net assets, or other circumstances, the
Portfolio were in a position where more than 10% of its net assets were invested
in illiquid securities, it would seek to take appropriate steps to protect
liquidity.
RESTRICTED SECURITIES generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the Securities
Act of 1933, or in a registered public offering. Where registration is required,
the Portfolio may be obligated to pay all or part of the registration expense
and a considerable period may elapse between the time it decides to seek
registration and the time the Portfolio may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, the Portfolio might obtain a less favorable
price than prevailed when it decided to seek registration of the security.
REPURCHASE AGREEMENTS. In a repurchase agreement, the Portfolio
purchases a security and simultaneously commits to resell that security to the
seller at an agreed upon price on an agreed upon date within a number of days
from the date of purchase. The resale price reflects the purchase price plus an
agreed upon incremental amount which is
B-6
<PAGE> 25
unrelated to the coupon rate or maturity of the purchased security. A repurchase
agreement involves the obligation of the seller to pay the agreed upon price,
which obligation is in effect secured by the value (at least equal to the amount
of the agreed upon resale price and marked to market daily) of the underlying
security. The Portfolio may engage in repurchase agreements with respect to any
security in which it is authorized to invest.
While it does not presently appear possible to eliminate all risks from
these transactions (particularly the possibility of a decline in the market
value of the underlying securities, as well as delays and costs to the Portfolio
in connection with bankruptcy proceedings), it is the Portfolio's current policy
to limit repurchase agreement transactions to parties whose creditworthiness has
been reviewed and found satisfactory by the Manager.
LIMITATIONS ON FUTURES AND OPTIONS TRANSACTIONS. The Portfolio will
not: (a) write call options if, as a result, more than 25% of the Portfolio's
total assets would be hedged with options under normal conditions; or (b)
purchase futures contracts if, as a result, the Portfolio's total obligations
upon settlement or exercise of purchased futures contracts would exceed 25% of
its total assets. These limitations do not apply to options attached to or
acquired or traded together with their underlying securities, and do not apply
to securities that incorporate features similar to options. The above
limitations on the Portfolio's investments in futures contracts and options, and
the Portfolio's policies regarding futures contracts and options discussed
elsewhere in this Statement of Additional Information, may be changed as
regulatory agencies permit.
FUTURES CONTRACTS. When the Portfolio purchases a futures contract, it
agrees to purchase a specified underlying instrument at a specified future date.
When the Portfolio sells a futures contract, it agrees to sell the underlying
instrument at a specified future date. The price at which the purchase and sale
will take place is fixed when the Portfolio enters into the contract.
Some currently available futures contracts are based on indices of
securities-prices, such as the Standard & Poor's 500 Composite Stock Price Index
(S&P 500). Futures can be held until their delivery dates, or can be closed out
before then if a liquid secondary market is available.
The value of a futures contract tends to increase and decrease in
tandem with the value of its underlying instrument. Therefore, purchasing
futures contracts will tend to increase the Portfolio's exposure to positive and
negative price fluctuations in the underlying instrument, much as if it had
purchased the underlying instrument directly. When the Portfolio sells a futures
contract, by contrast, the value of its futures position will tend to move in a
direction contrary to the market. Selling futures contracts, therefore, will
tend to offset both positive and negative market price changes, much as if the
underlying instrument had been sold.
B-7
<PAGE> 26
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.
WRITING CALL OPTIONS. Writing a call option obligates the Portfolio to
sell or deliver the option's underlying instrument, in return for the strike
price, upon exercise of the option. The characteristics of writing call options
are similar to those of writing put options, except that writing calls generally
is a profitable strategy if prices remain the same or fall. Through receipt of
the option premium, a call writer mitigates the effects of a price decline. At
the same time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
CORRELATION OF PRICE CHANGES. Because there are a limited number of
types of exchange traded options and futures contracts, it is likely that the
standardized contracts available will not match the Portfolio's current or
anticipated investments exactly. The Portfolio may invest in options and futures
contracts based on securities with different issuers, maturities, or other
characteristics from the securities in which it typically invests, which
involves a risk that the options or futures position will not track the
performance of the Portfolio's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match the Portfolio's
investments well. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation may
also result from differing levels of demand in the options and futures markets
and the securities markets, from structural differences in how options and
futures and securities are traded, or from imposition of daily price fluctuation
limits or trading halts.
The Portfolio may purchase or sell options and futures contracts with a
greater or lesser value than the securities it wishes to hedge or intends to
purchase in order to
B-8
<PAGE> 27
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.
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS. The Portfolio will
comply with guidelines established by the SEC with respect to coverage of
options and futures strategies by mutual funds, and if the guidelines so
require, will set aside appropriate liquid assets in a segregated custodial
account in the amount prescribed. Securities held in a segregated account cannot
be sold while the futures or option strategy is outstanding, unless they are
replaced with other suitable assets. As a result, there is a possibility that
segregation of a large percentage of the Portfolio's assets could impede
portfolio management or the Fund's ability to meet redemption requests or other
current obligations.
SHORT SALES. The Portfolio may enter into short sales "against the box"
with respect to equity securities it holds. For example, if a Sector Adviser
anticipates a decline in the price of a stock the Portfolio holds, it may sell
the stock short "against the box." If the stock price subsequently declines, the
proceeds of the short sale could be expected to offset all or a portion of the
stock's decline. The Portfolio currently intends to hedge no more than 15% of
its total assets with short sales "against the box" on equity securities under
normal circumstances.
When the Portfolio enters into a short sale "against the box", it will
be required to own or have the right to obtain at no added cost securities
identical to those sold short "against the box" and will be required to continue
to hold them while the short sale "against the box" is outstanding. The
Portfolio will incur transaction costs, including interest expense, in
connection with opening, maintaining, and closing short sales.
B-9
<PAGE> 28
RATINGS
1. Moody's Corporate Bond Ratings:
Aaa--Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins or
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
B-10
<PAGE> 29
2. Standard & Poor's Corporate Bond Ratings:
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 adverse effects
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 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;
B-11
<PAGE> 30
(7) financial strength of a parent company and the relationships which exist
with the issuer; and (8) recognition by the management of obligations which may
be present or may arise as a result of public interest questions and
preparations to meet such obligations.
4. Description of Permitted Money Market Instruments:
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 such as, for example, the Government National Mortgage Association;
others by the right of the issuer to borrow from the Treasury, authority or
instrumentality such as, for example, Federal Home loan Mortgage and Federal
Home Loan Bank.
Repurchase Agreements--a repurchase transaction occurs when an investor
buys a security and simultaneously agrees to resell it at a later date to the
person from whom it was bought, at a higher price. The price differential
represents interest for the period the security is held. Repurchase transactions
will normally be entered into with banks and securities brokers. The Portfolio
could suffer a loss if the bank or securities broker with which the Portfolio
had a repurchase agreement were to default.
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.
Corporation Obligations--include bonds and notes issued by corporations
in order to finance longer term credit needs.
B-12
<PAGE> 31
B-13
<PAGE> 32
INVESTMENT RESTRICTIONS
The investment restrictions below have been adopted by the Portfolio as
fundamental policies. Under the Investment Company Act of 1940 (the "1940 Act"),
a "fundamental" policy may not be changed without the vote of a majority of the
outstanding voting securities of the Portfolio, which is defined in the 1940 Act
with respect to the Portfolio as the lesser of (a) 67 percent or more of the
Portfolio's beneficial interests represented at a meeting of investors if the
holders of more than 50 percent of the outstanding beneficial interests are
present or represented by proxy, or (b) more than 50 percent of the outstanding
beneficial interests ("Majority Vote"). The percentage limitations contained in
the restrictions listed below apply at the time of the purchase of the
securities.
The Portfolio may not: (a) Issue senior securities; (b) Borrow money
except as a temporary measure, and then only in an amount not to exceed 5% of
the value of its net assets (whichever is less) taken at the time the loan is
made, or pledge its assets taken at value to any extent greater than 15% of its
gross assets taken at cost; (c) Act as underwriter of securities of other
issuers; (d) Invest in real estate except for office purposes; (e) Purchase or
sell commodities or commodity contracts, except that it may purchase or sell
financial futures contracts involving U.S. Treasury securities, corporate
securities, or financial indexes; (f) Lend its funds or other assets to any
other person; however, the purchase of a portion of publicly distributed bonds,
debentures or other debt instruments, the purchase of certificates of deposit,
U.S. Treasury debt securities, and the making of repurchase agreements are
permitted, provided repurchase agreements with fixed maturities in excess of
seven days do not exceed 10% of its total assets; (g) Purchase more than 10% of
any class of securities, including voting securities of any issuer, except that
the purchase of U.S. Treasury debt instruments shall not be subject to this
limitation; (h) Invest more than 5% of its total assets (taken at value) in the
securities of any one issuer, other than obligations of the U.S. Treasury; (i)
Purchase securities on margin, or participate in any joint or joint and several
trading account; (j) Make any so-called "short" sales of securities, except
against an identical portfolio position (i.e., a "short sale against the box");
(k) Invest more than 25% of its net assets at time of purchase (taken at value)
in the securities of companies in any one industry; (l) Purchase the securities
of another investment company except where such purchase is part of a plan of
merger or consolidation; (m) Purchase or retain any securities of an issuer, any
of whose officers, directors or security holders is an officer or director of
the Portfolio, if such officer or director owns beneficially more than 1/2 of 1%
of the issuer's securities or together they own beneficially more than 5% of
such securities; (n) Invest in securities of companies which have a record
B-14
<PAGE> 33
of less than three years' continuous operation, if at the time of such purchase,
more than 5% of its assets (taken at value) would be so invested; (o) Purchase
participations or other direct interests in oil, gas or other mineral
exploration or development programs; (p) Invest in warrants; and (q) Invest more
than 10% of its assets in restricted securities and securities for which market
quotations are not readily available and repurchase agreements which mature in
excess of seven days; however, this shall not prohibit the purchase of money
market instruments or other securities which are not precluded by other
particular restrictions.
In order to comply with certain state investment restrictions, the
Portfolio's operating policy is not to: (a) Notwithstanding (b) above, pledge
assets having a value in excess of 10% of its gross assets; (b) Invest in oil,
gas or mineral leases or programs; and (c) Purchase real estate limited
partnerships.
ITEM 14. MANAGEMENT OF THE PORTFOLIO.
The Trustees and officers of the Portfolio and their principal
occupations during the past five years are set forth below. Their titles may
have varied during that period. Asterisks indicate those Trustees who are
"interested persons" (as defined in the 1940 Act) of the Portfolio. Unless
otherwise indicated, the address of each Trustee and officer is P.O. Box 7177,
6000 Memorial Drive, Dublin, Ohio 43017.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
Position
Name, Address and Age Held Principal Occupation
--------------------- -------- --------------------
<S> <C> <C>
ROBERT S. MEEDER, SR.*, 67 Trustee/President Chairman of R. Meeder &
Associates, Inc., an
Investment Adviser.
MILTON S. Trustee Retired, formerly a
BARTHOLOMEW, ESQ., 67 practicing attorney in
1424 Clubview Blvd.S. Columbus, Ohio.
Worthington, OH 43235 Comprises the
Portfolio's Audit
Committee.
</TABLE>
B-15
<PAGE> 34
<TABLE>
<S> <C> <C>
RUSSEL G. MEANS, 70 Trustee Chairman of Employee Benefit
4789 Rings Road Management Corporation,
Dublin, OH 43017 consultants and
administrators of self-funded
health and retirement plans.
WALTER L. OGLE, 58 Trustee Executive Vice President
One Corporate Drive of Aon Consulting, an
Clearwater, FL 34622 employee benefits consulting
group.
PHILIP A. VOELKER*, 42 Trustee and Vice Senior Vice President and
President Chief Operating Officer of R.
Meeder & Associates, Inc.
WESLEY F. HOAG, 39 Vice President General Counsel of R. Meeder
& Associates, Inc. (since
July 1993); Attorney, Porter,
Wright, Morris & Arthur, a
law firm (October 1984 to
June 1993)
DONALD F. MEEDER, 58 Secretary/Treasurer Vice President of R. Meeder
& Associates, Inc.,and
President of Mutual Funds
Service Co.
</TABLE>
B-16
<PAGE> 35
<TABLE>
<S> <C> <C>
ROBERT S. MEEDER, JR., 35 Vice President President, R. Meeder &
Associates, Inc.
STEVEN T. McCABE, 32 Assistant Treasurer Vice President, R. Meeder &
Associates, Inc., and Vice
President, Mutual Funds
Service Co.
JAMES B. CRAVER, 53 Assistant Secretary Managing Director, Eagle
266 Summer Street Institutional Financial
Boston, MA 02210 Services, Inc. (since
September 1995); Senior Vice
President of Signature
Financial Group, Inc.
(January 1991 to August
1995).
</TABLE>
Robert S. Meeder, Sr. is Donald F. Meeder's uncle and Robert S. Meeder,
Jr's. father.
Each Trustee and each officer of the Portfolio hold the same positions
with other Portfolios, each a corresponding Portfolio of The Flex-funds or
Flex-Partners, each a Massachusetts business trust consisting of several
separate series.
Each Trustee who is not an "interested person" receives an annual fee
of $3,000, plus $750 for each meeting of the Board of Trustees attended
regardless of the number of Boards of Trustees on which each Trustee serves. Mr.
Bartholomew comprises the Audit Committee for each corresponding Portfolio of
The Flex-funds and the Flex-Partners Trusts. Mr. Bartholomew is paid $400 for
each meeting of the Audit Committees attended regardless of the number of Audit
Committees on which he serves. Trustee fees for the Growth Stock Portfolio
totaled $3,925 for the year ended December 31, 1995 ($3,750 in 1994). Audit
Committee fees for the Portfolio totaled $147 for the year ended December 31,
1995 ($160 in 1994). All other officers and Trustees serve without compensation
from the Portfolio.
The Declaration of Trust provides that the Portfolio will indemnify its
Trustees and officers as described below under Item 18.
B-17
<PAGE> 36
ITEM 15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.
The Flex-funds The Highlander Fund (the "Fund") has an investment in
the Portfolio equaling approximately 100% of the Portfolio's interests. No
Trustee or officer of the Portfolio or any other person, except the Fund, own in
the aggregate more than a 1% interest in the Portfolio as of the date of this
Registration Statement.
ITEM 16. INVESTMENT ADVISORY AND OTHER SERVICES.
ADVISER
B-18
<PAGE> 37
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 Portfolio, has general
oversight responsibility for the investment operations of the Portfolio. In
connection therewith, the Manager is obligated to keep certain books and records
of the Portfolio. The management services of the Manager are not exclusive under
the terms of the Investment Advisory Contract and the Manager is free to, and
does, render management services for others.
The Manager invests the Portfolio's liquidity reserves and may invest
the Portfolio's assets in financial futures contracts and related options.
The Investment Advisory Contract for the Portfolio was separately
approved by a vote of a majority of the Trustees, including a majority of those
Trustees who are not "interested persons" (as defined in the Investment Company
Act of 1940) of the Portfolio. The Investment Advisory Contract is to remain in
force so long as renewal thereof is specifically approved at least annually by a
majority of the Trustees or by vote of a majority of the interests in the
Portfolio, and in either case by vote 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
B-19
<PAGE> 38
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.
The expenses of the Portfolio include the compensation of the Trustees
who are not affiliated with the Manager, Subadviser or Sector Advisers;
registration fees; membership dues allocable to the Portfolio; fees and expenses
of independent accountants, 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, Subadviser and Sector Advisers under the investment
advisory contracts and other miscellaneous expenses.
The Manager earns an annual fee, payable in monthly installments, at
the rate of 1% of the first $50 million, 0.75% of the next $50 million, and
0.60% in excess of $100 million, of the Portfolio's average net assets. The
Manager will receive 70% and the Subadviser 30% of the fee payable with respect
to the net assets of the Portfolio upon effectiveness of the subadvisory
arrangement; then the Manager will receive 30% and the Subadviser 70% of the fee
attributable to any additional net assets of the Portfolio up to an amount of
net assets equal to the net assets upon effectiveness of the subadvisory
arrangement, then the Manager and the Subadviser will share equally the fee
attributable to any additional net assets of the Portfolio up to $50 million of
the net assets. With respect to net assets of more than $50 million and less
than $100 million, the applicable fees of 0.75% will be shared such that
B-20
<PAGE> 39
the Manager will receive 0.35% and the Subadviser 0.40%. For net assets of $100
million and more, the applicable 0.60% fee will be shared such that the Manager
will receive 0.25% and the Subadviser 0.35%. For the year ending December 31,
1995, the Growth Stock Portfolio paid fees to the Manager totaling $238,640
($240,045 in 1994; $259,462 in 1993).
R. Meeder & Associates, Inc. was incorporated in Ohio on February 1,
1974 and maintains its principal offices at 6000 Memorial Drive, Dublin, Ohio
43017. The Manager is a wholly-owned subsidiary of Muirfield Investors, Inc.
("MII"), which is controlled by Robert S. Meeder, Sr. through the ownership of
voting common stock. The Manager's officers and directors and the principal
offices are as set forth as follows: Robert S. Meeder, Sr. Chairman and Sole
Director; Philip A. Voelker, Senior Vice President and Chief Operating Officer;
Donald F. Meeder, Vice President and Secretary; Sherrie L. Acock, Vice
President; Robert D. Baker, Vice President; Robert S. Meeder, Jr., President;
Wesley F. Hoag, General Counsel; Steven T. McCabe, Vice President; Elyse
Jurman, Vice President and Roy E. Rogers, Vice President. Mr.
Robert S. Meeder, Sr. is President and a Trustee of the Portfolio.
Each of Mr. Robert S. Meeder, Jr., Donald F. Meeder, Wesley F. Hoag and Steven
T. McCabe is an officer of the Portfolio. Mr. Philip A. Voelker is
a Trustee and officer of the Portfolio.
INVESTMENT SUBADVISER
Sector Capital Management L.L.C. serves as the Portfolio's subadviser.
The Subadviser is a Georgia limited liability company. William L. Gurner and
John K. Donaldson control the Subadviser. Messrs. Gurner and Donaldson are
Managers and Members of the Subadviser. The Subadviser's officers are as set
forth as follows: William L. Gurner, President and Administrator; George S.
Kirk, Director, Sales and Marketing; and Kenneth L. Riffle, Director, Client
Relations. Mr. Gurner is a Trustee of 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. The
Portfolio and the Manager have entered into an Investment Subadvisory Agreement
with the Subadviser which, in turn, has entered into a investment
sub-subadvisory agreement with each of the Sector Advisers selected for the
Portfolio. Under the Investment Subadvisory Agreement, the Subadviser is
required to (i) supervise the general management and investment of the assets
and securities portfolio of the Portfolio; (ii) provide overall investment
programs and strategies for the Portfolio and (iii) select Sector Advisers for
the Portfolio and, except as otherwise provided, allocate the Portfolio's assets
among such Sector Advisers. The Subadviser is obligated to keep certain books
and records of the Portfolio. The Manager continues to have responsibility for
all investment advisory services pursuant to the Investment Advisory Agreement
and supervises the Subadviser's performance of such services. Under the
Investment Subadvisory Agreement, the Manager pays the Subadviser an investment
advisory fee in an amount described above under "Investment Adviser and
Manager."
The Subadviser may invest the Portfolio's assets in financial futures
contracts and related options.
B-21
<PAGE> 40
The Investment Subadvisory Agreement provides that the Subadviser will
not be liable for any error of judgment or mistake of law or for any loss
arising out of any investment or for any act or omission in the execution of
portfolio transactions for the Portfolio, except a loss resulting from
misfeasance, bad faith, gross negligence or reckless disregard of duty. The
Investment Subadvisory Agreement provides that it will terminate automatically
if assigned, and that it may be terminated without penalty to the Fund or the
Portfolio by the Manager, the Trustees of the Portfolio or by the vote of a
majority of the outstanding voting securities of the Portfolio upon not less
than 30 days written notice. The Investment Subadvisory Agreement will continue
in effect for a period of more than two years from the date of execution only
so long as such continuance is specifically approved at least annually in
conformity with the 1940 Act. The Investment Subadvisory Agreement was approved
by the Board of Trustees of the Portfolio, including all of the Trustees who
are not parties to the contract or "interested persons" of any such party,
and by the shareholders of the Portfolio.
INVESTMENT SUB-SUBADVISERS
Except as otherwise described above under "Adviser" and "Investment
Subadviser", the assets of the Portfolio are managed by asset managers (each a
"Sector Adviser" and collectively, the "Sector Advisers") selected by the
Subadviser, subject to the review and approval of the Trustees of the Portfolio.
The Subadviser recommends, to the Trustees of the Portfolio, Sector Advisers for
each industry sector based upon its continuing quantitative and qualitative
evaluation of the Sector Advisers' skills in managing assets pursuant to
specific investment styles and strategies. The Portfolio has applied for an
exemptive order from the SEC permitting the Subadviser, subject to certain
conditions, to enter into sub-subadvisory agreements with Sector Advisers
approved by the Trustees of the Portfolio but without the requirement of
shareholder approval. At a meeting held on December 20, 1996, the shareholders
of the Portfolio approved the operation of the Portfolio in this manner.
Pursuant to the terms of the exemptive application, the Subadviser is to be
able, subject to the approval of the Trustees of the Portfolio, but without
shareholder approval, to employ new Sector Advisers for the Portfolio. Although
shareholder approval will not be required for the termination of sub-subadvisory
agreements, shareholders of the Portfolio will continue to have the right to
terminate such agreements for the Portfolio at any time by a vote of a majority
of outstanding voting securities of the Portfolio.
Except as otherwise provided above under "Adviser" and "Investment
Subadviser", the assets of the Portfolio are allocated by the Subadviser among
the Sector Advisers selected for the Portfolio. Each Sector Adviser has
discretion, subject to oversight by the Trustees and the Subadviser, to purchase
and sell portfolio assets, consistent with the Portfolio's investment
objectives, policies and restrictions. For its services, the Subadviser receives
a management fee from the Manager. A part of the fee paid to the Subadviser is
used by the Subadviser to pay the advisory fees of the Sector Advisers. Each
Sector Adviser is paid a fee for its investment advisory services that is
computed daily and paid monthly based on the value of the average net assets of
the
B-22
<PAGE> 41
Portfolio assigned by the Subadvisor to the Sector Adviser at an annual rate
equal to .25%
The Investment Sub-subadvisory Agreements provide that the Sector
Advisers will not be liable for any error of judgment or mistake of law or for
any loss arising out of any investment or for any act or omission in the
execution of portfolio transactions for the Portfolio, except a loss resulting
from misfeasance, bad faith, gross negligence or reckless disregard of duty.
The Investment Sub-subadvisory Agreements provide that they will terminate
automatically if assigned, and that they may be terminated without penalty to
the Fund or the Portfolio by the Subadviser, the Trustees of the Portfolio or
by the vote of a majority of the outstanding voting securities of the Portfolio
upon not less than 15 days written notice. The Investment Sub-subadvisory
Agreements will continue in effect for a period of more than two years from the
date of execution only so long as such continuance is specifically approved at
least annually in conformity with the 1940 Act. The Investment Sub-subadvisory
Agreements were approved by the Board of Trustees of the Portfolio, including
all of the Trustees who are not parties to the contract or "interested persons"
of any such party, and by the shareholders of the Portfolio.
A Sector Adviser may also serve as a discretionary or non-discretionary
investment adviser to management or advisory accounts unrelated in any manner to
the Portfolio or its affiliates. The investment subadvisory agreements among the
Sector Advisers, the Portfolio and the Subadviser require fair and equitable
treatment to the Portfolio in the selection of the Portfolio investments and the
allocation of investment opportunities, but does not obligate the Sector
Advisers to give the Portfolio exclusive or preferential treatment.
Although the Sector Advisers make investment decisions for the
Portfolio independent of those for their other clients, it is likely that
similar investment decisions will be made from time to time. When the Portfolio
and another client of a Sector Adviser are simultaneously engaged in the
purchase or sale of the same security, the transactions are, to the extent
feasible and practicable, averaged as to price and allocated as to amount
between the Portfolio and the other client(s). In specific cases, this system
could have detrimental effect on the price or volume of the security to be
purchased or sold, as far as the Portfolio is concerned. However, the Trustees
of the Portfolio believe, over time, that coordination and the ability to
participate in volume transactions should be to the benefit of the Portfolio.
Listed below are the Sector Advisers selected by the Subadviser to
invest certain of the Portfolio's assets:
MILLER/HOWARD INVESTMENTS, INC. serves as Sector Adviser to the
utilities and transportation sectors of the Portfolio. Miller/Howard is a
registered investment adviser which has been providing investment services to
broker-dealers, investment advisers, employee benefit plans, endowment
portfolios, foundations and other institutions and individuals since 1984. As of
June 30, 1996, Miller/Howard held discretionary investment authority over
approximately $ 203 million of assets. Lowell Miller and Helen Hamada who are,
respectively, Miller/Howard's President, Secretary and a director and its
Treasurer and a director, each own more than 10% of the outstanding voting
securities of Miller/Howard. Mr. Miller will be the portfolio manager primarily
responsible for the day-to-day management of those assets of the Portfolio
allocated to Miller/Howard. Mr. Miller has been associated with Miller/Howard
since 1984. Mr. Miller is a Vice President of the Trust and a trustee and a Vice
President of The Flex-Partners, mutual funds who corresponding portfolios are
also advised by RMA. 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 Portfolio. Hallmark is a registered investment
adviser which has been providing investment services to individuals; banks;
B-23
<PAGE> 42
pension, profit sharing, and other retirement plans; trusts; endowments;
foundations; and other charitable organizations since 1986. As of September 30,
1996, Hallmark held discretionary investment authority over approximately $ 113
million of assets. Peter S. Hagerman owns more than 10% of the outstanding
voting securities of Hallmark. Mr. Hagerman, Chairman of the Board, President,
and Chief Executive Officer, Thomas S. Moore, Senior Vice President and Chief
Investment Officer, and Kathryn A. Skwieralski, Senior Vice President,
Treasurer, Chief Financial and Administrative Officer, are the directors of
Hallmark. Mr. Hagerman will be the portfolio manager primarily responsible for
the day-to-day management of those assets off the Portfolio allocated to
Hallmark. Mr. Hagerman has been associated with Hallmark since 1986. Hallmark's
principal executive offices are located at One Greenbrook Corporate Center, 100
Passaic Avenue, Fairfield, New Jersey, 07004.
BARROW, HANLEY, MEWHINNEY & STRAUSS, INC. serves as Sector Adviser to the
consumer durable and non-durable sectors of the Portfolio. Barrow is a
registered investment adviser which has been providing investment services to
banks; investment companies; pension and profit sharing plans; charitable
organizations and corporations since 1979. As of September 30, 1996, Barrow held
discretionary investment authority over approximately $ 18.8 billion of assets.
Barrow is a wholly-owned subsidiary of United Asset Management Corp. Bryant M.
Hanley, Jr., President and Chief Executive Officer, is the sole director of
Barrow. Michael C. Mewhinney will be the portfolio manager primarily responsible
for the day-to-day management of those assets of the Portfolio allocated to
Barrow. Mr. Mewhinney has been associated with Barrow since 1979. Barrow's
principal executive offices are located at 3232 McKinney Avenue, 15th Floor,
Dallas, Texas, 75204-2429.
THE MITCHELL GROUP, INC. serves as Sector Adviser to the energy sector of
the Portfolio. The Mitchell Group is a registered investment adviser which has
been providing investment services to individuals; banks; investment companies;
pension and profit sharing plans; charitable organizations, corporations and
other institutions since 1989. As of September 30, 1996, The Mitchell Group held
discretionary investment authority over approximately $ 214 million of assets.
Rodney Mitchell, President, Chief Executive Officer and sole director, owns more
than 10% of the outstanding voting securities of The Mitchell Group. Mr.
Mitchell will be the portfolio manager primarily responsible for the day-to-day
management of those assets of the Portfolio allocated to The Mitchell Group. Mr.
Mitchell has been associated with The Mitchell Group since 1989. The Mitchell
Group's principal executive offices are located at 1100 Louisiana, #4810,
Houston, Texas, 77702.
ASHLAND MANAGEMENT INCORPORATED serves as Sector Adviser to the materials
and services sector of the Portfolio. Ashland is a registered investment adviser
which has been providing investment services to individuals, pension and profit
sharing plans, charitable organizations, corporations and other institutions
since 1975. As of September 30, 1996, Ashland managed accounts having a value of
approximately $1.5 billion of assets. Charles C. Hickox, Chairman of the Board,
Chief Executive Officer and a director, and Perry V. S. Jones, President, Chief
Operating Officer and a director, each own more than 10% of the outstanding
voting securities of Ashland. Terrence J. McLaughlin, Managing Director of
Ashland and Deborah C. Ohl, a Portfolio Management Associate, will be the
portfolio managers primarily responsible for the day-to-day management of those
assets of the Portfolio allocated to Ashland. Mr. McLaughlin has been
associated with Ashland since 1987. Ms. Ohl has been employed by Ashland since
August, 1992 and has served as a Portfolio Management Associate for Ashland
since 1993. From May, 1991 until July, 1992, Ms. Ohl was a research and sales
assistant with Kidder, Peabody & Co. Incorporated. Ashland's principal
executive offices are located at 26 Broadway, New York, New York, 10004.
B-24
<PAGE> 43
DREMAN VALUE ADVISORS, Inc. serves as Sector Adviser to the finance sector
of the Portfolio. Dreman is a registered investment adviser which has been
providing investment services to individuals, banks, investment companies,
pension and profit sharing plans, charitable organizations, corporations and
other institutions since 1977. As of June 30, 1996, Dreman held discretionary
investment authority over approximately $2.463 billion of assets. Dreman is a
wholly-owned subsidiary of Zurich Kemper Investments, Inc. ("Zurich Kemper"),
which is a wholly-owned subsidiary of ZKI Holding Corporation, which is
approximately 97% owned by Zurich Holding Company of America, which is a
wholly-owned subsidiary of Zurich Insurance Company. The directors of Dreman are
James R. Neal, President and Chief Executive Officer of Dreman, John E. Neal,
Group President of Zurich Kemper, Stephen R. Timbers, President of Zurich
Kemper, and David N. Dreman, Chairman of the Board of Dreman. Jonathan Kay will
be the portfolio manager primarily responsible for the day-to-day management of
those assets of the Portfolio allocated to Dreman. Mr. Kay has been associated
with Dreman since 1993. From 1990 to 1993, Mr. Kay was an associate with J.S.
Eliezer, a management consulting firm serving primarily the media industry.
Dreman's principal executive offices are located at 280 Park Avenue,
40th Floor, New York, New York 10017.
RCM CAPITAL MANAGEMENT, L.L.C. serves as Sector Adviser to the technology
sector of the Portfolio. RCM is a registered investment advisor that provides
investment services to institutional and individual clients and registered
investment companies, with approximately $25.7 billion of assets under
management as of September 30, 1996. RCM was established in April 1996, as the
successor to the business operations of RCM Capital Management, a California
Limited Partnership, which, with its predecessors, has been in operation since
1970. RCM is a wholly-owned subsidiary of Dresdner Bank AG ("Dresdner"), an
international banking organization with principal executive offices in
Frankfurt, Germany. The Board of Managers of RCM is comprised of William L.
Price, Chairman of the Board and Chief Investment Officer of RCM, Michael J.
Apatoff, Chief Operating Officer of RCM, Hans-Dieter Bauernfeind, General
Manager of Dresdner, Gerhard Eberstadt, Senior Chairman of Dresdner, George N.
Fugelsang, Senior General Manager of Dresdner, John D. Leland, Jr., Principal of
RCM, Jeffrey S. Rudsten, Principal of RCM, William S. Stack, Principal of RCM
and Kenneth B. Weeman, Jr., Head of Equity Trading of RCM. Walter C. Price and
Huschen Chen, each principals of RCM, will be the portfolio managers primarily
responsible for the day-to-day management of those assets of the Portfolio
allocated to RCM. Messrs. Price and Chen have managed equity portfolios on
behalf of RCM since 1985. RCM's principal executive offices are located at Four
Embarcadero Center, San Francisco, CA 94111.
Banking laws and regulations, including the Glass-Steagall Act as presently
interpreted by the Board of Governors of the Federal Reserve System, prohibit
certain banking entities, such as Dresdner, from sponsoring, organizing,
controlling or distributing the shares of a registered investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from underwriting securities. However, banks and their affiliates generally can
act as an adviser (or sub-subadviser) to an investment company and can purchase
shares of an investment company as agent for and upon the order of customers.
RCM believes that it may perform the services contemplated by the investment
management agreement without violating these banking law regulations. However,
future changes in legal requirements relating to the permissible activities of
banks and their affiliates at will as future interpretations of current
requirements, could prevent RCM from continuing to perform investment management
services for the Portfolio.
B-25
<PAGE> 44
TRANSFER AGENT
The Portfolio has entered into an Administration and Accounting
Services Agreement with Mutual Funds Service Co. ("MFSCo"), which acts as
transfer agent for the Portfolio. MFSCo maintains an account for each investor
in the Portfolio, performs other transfer agency functions and acts as dividend
disbursing agent for the Portfolio.
B-26
<PAGE> 45
CUSTODIAN
Pursuant to a Custody Agreement, Star Bank, N.A., Cincinnati, acts as
the custodian of the Portfolio's assets (the "Custodian"). The Custodian's
responsibilities include safeguarding and controlling the Portfolio's cash and
securities, handling the receipt and delivery of securities, determining income
and collecting interest on the Portfolio's investments and maintaining books of
original entry for Portfolio accounting and other required books and accounts.
Securities held by the Portfolio may be deposited into the Federal
Reserve-Treasury Department Book Entry System or the Depository Trust Company
and may be held by a subcustodian bank if such arrangements are reviewed and
approved by the Trustees of the Portfolio. The Custodian does not determine the
investment policies of the Portfolio or decide which securities the Portfolio
will buy or sell. The Portfolio may, however, invest in securities of the
Custodian and may deal with the Custodian as principal in securities
transactions. For its services, the Custodian will receive such compensation as
may from time to time be agreed upon by it and the Portfolio.
INDEPENDENT ACCOUNTANTS
KPMG Peat Marwick, LLP Two Nationwide Plaza, Columbus, Ohio 43215,
serves as the Portfolio's independent accountant. The auditor examines financial
statements for the Portfolio and provides other audit, tax, and related
services.
ITEM 17. BROKERAGE ALLOCATION AND OTHER PRACTICES.
All orders for the purchase or sale of portfolio securities are placed
on behalf of the Portfolio by the Manager, Subadviser or Sector Advisers
pursuant to authority contained in the investment advisory agreement, investment
subadvisory agreement and investment sub-subadvisory agreements. The Manager,
Subadviser and Sector Advisers are also responsible for the placement of
transaction orders for accounts for which they or their affiliates act as
investment adviser. In selecting broker-dealers, subject to applicable
limitations of the federal securities laws, the Manager, Subadviser and Sector
Advisers consider various relevant factors, including, but not limited to, the
size and type of the transaction; the nature and character of the markets for
the security to be purchased or sold; the execution efficiency, settlement
capability, and financial condition of the broker-dealer firm; the
broker-dealer's execution services rendered on a continuing basis; the
reasonableness of any commissions, and arrangements for payment of Portfolio
expenses.
The Portfolio may execute portfolio transactions with broker-dealers
who provide research and execution services to the Portfolio or other accounts
over which the Manager, Subadviser or Sector Advisers or their affiliates
exercise investment discretion. Such services may include advice concerning the
value of securities; the advisability of investing in, purchasing or selling
securities; the availability of securities or the purchasers or sellers of
securities; furnishing analyses and reports concerning issuers industries,
securities, economic factors and trends, portfolio strategy, and performance of
accounts; and effecting securities transactions and performing functions
incidental thereto (such as clearance and settlement). The selection of such
broker-dealers generally is made by the Manager, Subadviser and Sector Advisers
(to the extent possible consistent with execution considerations) in accordance
with a ranking of broker-dealers determined periodically by the Manager,
Subadviser and Sector Advisers' investment staffs based upon the quality of
research and execution services provided.
The receipt of research from broker-dealers that execute transactions
on behalf of the Portfolio may be useful to the Manager, Subadviser and Sector
Advisers in rendering investment management services to the Portfolio or their
other clients, and conversely, such research provided by broker-dealers who have
executed transaction orders on behalf of other Manager, Subadviser and Sector
Advisers' clients may be useful to the Manger, Subadviser and Sector Advisers in
carrying out their obligations to the Portfolio. The receipt of such research is
not expected to reduce the Manager, Subadviser and Sector Advisers' normal
independent research activities; however, it enables the Manager, Subadviser and
Sector Advisers to avoid the additional expenses that could be incurred if the
Manager, Subadviser and Sector Advisers tried to develop comparable information
through their own efforts.
Subject to applicable limitations of the federal securities laws,
broker-dealers may receive commissions for agency transactions that are in
excess of the amount of commissions charged by other broker-dealers in
recognition of their research and execution services. In order to cause the
Portfolio to pay such higher commissions, the Manager, Subadviser and/or Sector
Advisers must determine in good faith that such commissions are reasonable in
relation to the value of the brokerage and research services provided by such
executing broker-dealers viewed in terms of a particular transaction or the
Manager, Subadviser and/or Sector Advisers' overall responsibilities to the
Portfolio and their other clients. In reaching this determination, the Manager,
Subadviser and/or Sector Advisers will not attempt to place a specific dollar
value on the brokerage and research services provided or to determine what
portion of the compensation should be related to those services.
The Manager, Subadviser and Sector Advisers are 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 Manager, Subadviser and Sector Advisers may allocate brokerage
transactions to broker-dealers who have entered into arrangements with the
Manager, Subadviser and Sector Advisers under which the broker-dealer allocates
a portion of the commissions paid by the Portfolio toward payment of the
Portfolio or the Fund's expenses, such as transfer agent fees of Mutual Funds
Service Co. or custodian fees. The transaction quality must, however, be
comparable to those of other qualified broker-dealers.
The Trustees of the Portfolio periodically review the Manager,
Subadviser and Sector Advisers' performance of their responsibilities in
connection with the placement of portfolio transactions on behalf of the
Portfolio and review the commissions paid by the Portfolio over representative
periods of time to determine if they are reasonable in relation to the benefits
to the Portfolio.
From time to time, the Trustees of the Portfolio will review whether
the recapture for the benefit of the Portfolio of some portion of the brokerage
commissions or similar fees paid by the Portfolio on portfolio transactions is
legally permissible and advisable.
The Portfolio seeks to recapture soliciting broker-dealer fees on the
tender of portfolio securities, but at present no other recapture arrangements
are in effect. The Trustees of the Portfolio intend to continue to review
whether recapture opportunities are available and are legally permissible and,
if so, to determine in the exercise of their business judgment, whether it would
be advisable for the Portfolio to seek such recapture.
Although the Trustees and officers of the Portfolio are substantially
the same as those of other portfolios managed by the Manager, investment
decisions for the Portfolio are made independently from those of other
portfolios managed by the Manager or accounts managed by affiliates of the
Manager. It sometimes happens that the same security is held in the portfolio of
more than one of these funds or accounts. Simultaneous transactions are
inevitable when several portfolios are managed by the same investment adviser,
particularly when the same security is suitable for the investment objective of
more than one portfolio.
When two or more portfolios are simultaneously engaged in the purchase
or sale of the same security, the prices and amounts are allocated in accordance
with a 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 period from January 1, 1995 to December
31, 1995, the Growth Stock Portfolio paid total commissions of $ 44,655
($135,422 in 1994; $99,419 in 1993) on the purchase and sale of common stocks.
Brokerage commissions paid on the purchases and sales by the Portfolio of
futures and option contracts for the year ending December 31, 1995 were $22,399.
B-27
<PAGE> 46
The Adviser, and the open-end management investment companies managed
by the Adviser (including the Portfolio) have previously purchased various
research and other services with brokerage commissions paid to or for the
benefit of certain entities, whose service, annual fees and charges for the year
ended December 31, 1995 were as follows: (1) Standard & Poors Securities, Inc.,
fixed income research, $6,163 per year, $2,805 paid in 1995. (2) The Clifton
Group, equity and fixed income research and trading $20,123 per year, $20,123
paid in 1995. (3) Yanni Bilkey, fixed income research, $7,500 per year, $3,750
paid in 1995. (4) Wellington & Co., miscellaneous research services and reports,
$10,652 per year, $10,652 paid in 1995. (5) Merrill Lynch Capital Markets,
miscellaneous research services and reports, $9,389 per year, $9,389 paid in
1995. (6) Bloomberg Financial, equity and fixed income research, $20,298 per
year, $20,298
B-28
<PAGE> 47
paid in 1995. (7) Moody's Investor Services, fixed income research, $12,290 per
year, $12,290 paid in 1995. (8) Commodity Quote Graphics, equity and fixed
income research, $14,640 per year, $14,640 paid in 1995. These entities receive
payments through Wellington and Company and The Citation Group which received
$1.75 and $1.70 respectively for each $1 paid. The fees listed above include
those paid by both the Adviser and the Trust. Total commissions paid by the
Trust to Wellington and Company and The Citation Group amounted to $1,656 and
$15,993, respectively.
ITEM 18. CAPITAL STOCK AND OTHER SECURITIES.
Under the Declaration of Trust, the Trustees are authorized to issue
beneficial interests in the Portfolio. Investors are entitled to participate pro
rata in distributions of taxable income, loss, gain and credit of the Portfolio.
Upon liquidation or dissolution of the Portfolio, investors are entitled to
share pro rata in the Portfolio's net assets available for distribution to its
investors. Investments in the Portfolio have no preference, preemptive,
conversion or similar rights and are fully paid and nonassessable, except as set
forth below. Investments in the Portfolio may not be transferred. Certificates
representing an investor's beneficial interest in the Portfolio are issued only
upon the written request of an investor.
Each investor is entitled to a vote in proportion to the amount of its
investment in the Portfolio. Investors in the Portfolio do not have cumulative
voting rights, and investors holding more than 50% of the aggregate beneficial
interest in the Portfolio may elect all of the Trustees of the Portfolio if they
choose to do so and in such event the other investors in the Portfolio would not
be able to elect any Trustee. The Portfolio is not required to hold annual
meetings of investors but the Portfolio will hold special meetings of investors
when in the judgment of the Portfolio's Trustees it is necessary or desirable to
submit matters for an investor vote. No material amendment may be made to the
Portfolio's Declaration of Trust without the affirmative majority vote of
investors (with the vote of each being in proportion to the amount of their
investment).
B-29
<PAGE> 48
The Portfolio may enter into a merger or consolidation, or sell all or
substantially all of its assets, if approved by the vote of two-thirds of its
investors (with the vote of each being in proportion to the amount of their
investment), except that if the Trustees of the Portfolio recommend such sale of
assets, the approval by vote of a majority of the investors (with the vote of
each being in proportion to the amount of their investment) will be sufficient.
The Portfolio may also be terminated (i) upon liquidation and distribution of
its assets, if approved by the vote of two-thirds of its investors (with the
vote of each being in proportion to the amount of their investment), or (ii) by
the Trustees of the Portfolio by written notice to its investors.
The Portfolio is organized as a trust under the laws of the State of
New York. Investors in the Portfolio will be held personally liable for its
obligations and liabilities, subject, however, to indemnification by the
Portfolio in the event that there is imposed upon an investor a greater portion
of the liabilities and obligations of the Portfolio than its proportionate
beneficial interest in the Portfolio. The Declaration of Trust also provides
that the Portfolio shall maintain appropriate insurance (for example, fidelity
bonding and errors and omissions insurance) for the protection of the Portfolio,
its investors, Trustees, officers, employees and agents covering possible tort
and other liabilities. Thus, the risk of an investor incurring financial loss on
account of investor liability is limited to circumstances in which both
inadequate insurance existed and the Portfolio itself was unable to meet its
obligations.
The Declaration of Trust further provides that obligations of the
Portfolio are not binding upon the Trustees individually but only upon the
property of the Portfolio and that the Trustees will not be liable for any
action or failure to act, but nothing in the Declaration of Trust protects a
Trustee against any liability to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office. The Declaration of Trust provides
that the trustees and officers will be indemnified by the Portfolio against
liabilities and expenses incurred in connection with litigation in which they
may be involved because of their offices with the Portfolio, unless, as to
liability to the Portfolio or its investors, it is finally adjudicated that they
engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in their offices, or unless with respect to any
other matter it is finally adjudicated that they did not act in good faith in
the reasonable belief that their actions were in the best interests of the
Portfolio. In the case of settlement, such indemnification will not be provided
unless it has been determined by a court or other body approving the settlement
or other disposition, or by a reasonable
B-30
<PAGE> 49
determination, based upon a review of readily available facts, by vote of a
majority of disinterested Trustees or in a written opinion of independent
counsel, that such officers or Trustees have not engaged in willful misfeasance,
bad faith, gross negligence or reckless disregard of their duties.
ITEM 19. PURCHASE, REDEMPTION AND PRICING OF SECURITIES.
Beneficial interests in the Portfolio are issued solely in private
placement transactions which do not involve any "public offering" within the
meaning of Section 4(2) of the Securities Act of 1933, as amended (the "1933
Act"). Investments in the Portfolio may only be made by investment companies,
insurance company separate accounts, common or commingled trust funds or similar
organizations or entities which are "accredited investors" as defined in
Regulation D under the 1933 Act. This Registration Statement does not constitute
an offer to sell, or the solicitation of an offer to buy, any "security" within
the meaning of the 1933 Act.
The Portfolio determines its net asset value as of 4:00 p.m., New York
time, each Fund Business Day by dividing the value of the Portfolio's net assets
by the value of the investment of the investors in the Portfolio at the time the
determination is made. (As of the date of this Registration Statement, the New
York Stock Exchange is open for trading every weekday except for the following
holidays (or days on which such holiday is observed): New Year's Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas.) Purchases and reductions will be effected at
the time of determination of net asset value next following the receipt of any
purchase or reduction order.
Securities owned by the Portfolio and listed or traded on any national
securities exchange are valued at each closing of the N.Y.S.E. on the basis of
the last sale on such exchange each day that the exchange is open for business.
If there is no sale on that day, or if the security is not listed, it is valued
at its last bid quotation on the exchange or, in the case of unlisted
securities, as obtained from an established market maker. Futures contracts are
valued on the basis of the cost of closing out the liability; i.e., at the
settlement price of a closing contract or at the asked quotation for such a
contract if there is no sale. Money market instruments having maturities of 60
days or less are valued at amortized cost if not materially different from
market value. Portfolio securities for which market quotations are not readily
available are to be valued by the Adviser in good faith at its own expense under
the direction of the Trustees.
ITEM 20. TAX STATUS.
The Portfolio is organized as a trust under New York law. Under the
method of operation of the Portfolio, the Portfolio is not subject to any income
tax. However, each investor in the Portfolio is taxable on its share (as
determined in accordance with the governing instruments of the Portfolio) of the
Portfolio's ordinary income and capital gain in determining its income tax
liability. The determination of such share is made in accordance with the
Internal Revenue Code of 1986, as amended, and regulations promulgated
thereunder.
The Portfolio's taxable year-end is December 31. Although, as described
above, the Portfolio is not subject to federal income tax, it files appropriate
federal income tax returns.
The Portfolio's assets, income and distributions are managed in such a
way that an investor in the Portfolio will be able to satisfy the requirements
of Subchapter M of the Internal Revenue Code of 1986, as amended, assuming that
the investor invested all of its investable assets in the Portfolio.
ITEM 21. UNDERWRITERS.
The exclusive placement agent for the Portfolio is SBDS, which receives
no additional compensation for serving in this capacity. Investment companies,
insurance company separate accounts, common and commingled trust funds and
similar organizations and entities may continuously invest in the Portfolio.
ITEM 22. CALCULATION OF PERFORMANCE DATA.
Not applicable.
ITEM 23. FINANCIAL STATEMENTS.
The audited Financial Statements and the Notes thereto for the Portfolio
and the auditor's reports of KPMG Peat Marwick L.L.P., independent public
accountants, are herein incorporated by reference from the Portfolio's Annual
Reports dated December 31, 1995 and December 31, 1994.
B-31
<PAGE> 50
FX0019
PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS
The following report and financial statement are incorporated
by reference in Part B: Portfolio of Investments - December
31, 1995; Statements of Assets and Liabilities - December 31,
1995; Statements of Operations - for the year ended December
31, 1995; Statements of Changes in Net Assets for the years
ended December 31, 1995 and 1994; Financial Highlights for the
years ended December 31, 1995, 1994 and 1993; Notes to
Financial Statements; Independent Auditors' Report dated
February 2, 1996.
(b) EXHIBITS
*1. Declaration of Trust of the Registrant.
*2. By-Laws of the Registrant.
*5.(a) Form of Investment Advisory Agreement between the
Registrant and R. Meeder & Associates, Inc.
(b) Form of Investment Subadvisory Agreement among the
Registrant, R. Meeder & Associates, Inc. and Sector
Capital Management, L.L.C. is filed herewith.
(c) Form of Investment Sub-subadvisory Agreement among the
Registrant, Sector Capital Management, L.L.C. and each of
the Sub-subadvisors is filed herewith.
*6. Form of Exclusive Placement Agent Agreement between the
Registrant and Signature Broker-Dealer Services, Inc.
**8. Form of Custody Agreement between the Registrant and Star
Bank, N.A., Cincinnati.
**9.(a) Form of Administration Agreement between the Registrant
and Mutual Funds Service Co. (MFSCo)
(b) Form of Accounting Services Agreement between the
Registrant and MFSCo.
11. Consent of KPMG Peat Marwick LLP, Independent Certified
Public Accountants, filed as an Exhibit to Registrant's
Sixth Post-Effective Amendment on or about April 25, 1996,
which exhibit is incorporated by reference herein.
**13. Investment representation letters of initial investors.
- -------------------
*Filed April 30, 1992.
**Filed June 8, 1992 and incorporated herein by reference.
C-1
<PAGE> 51
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Beneficial Interests 2 (as of December 31, 1995)
ITEM 27. INDEMNIFICATION.
Reference is hereby made to Article V of the Registrant's Declaration
of Trust, filed as Exhibit 1 to Registrant's initial Registration Statement on
April 30, 1992.
The Trustees and officers of the Registrant are insured under an errors
and omissions liability insurance policy and under the fidelity bond required by
Rule 17g-1 under the Investment Company Act of 1940 (the "1940 Act").
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Not applicable.
ITEM 29. PRINCIPAL UNDERWRITERS.
Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
The accounts and records of the Registrant are located, in whole or in
part, at the office of the Registrant and the following locations:
NAME ADDRESS
Signature Broker-Dealer 6 St. James Avenue,
Services, Inc. Suite 900
(exclusive placement agent) Boston, MA 02116
R. Meeder & Associates, Inc. 6000 Memorial Drive
(investment adviser) Dublin, OH 43017
Mutual Funds Service Co. 6000 Memorial Drive
(transfer and accounting Dublin, OH 43017
services agent)
C-2
<PAGE> 52
Star Bank, N.A., Cincinnati Star Bank Center
(custodian) 425 Walnut Street
Cincinnati, OH 45202
ITEM 31. MANAGEMENT SERVICES.
Not applicable.
ITEM 32. UNDERTAKINGS.
Not applicable.
C-3
<PAGE> 53
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940, the
Registrant has duly caused this Registration Statement on Form N-1A to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Dublin and State of Ohio on the 26th day of December, 1996.
GROWTH STOCK PORTFOLIO
By /s/ Donald F. Meeder
-----------------------
Donald F. Meeder
Secretary/Treasurer
<PAGE> 1
Exhibit 5B
INVESTMENT SUBADVISORY AGREEMENT
Among
GROWTH STOCK PORTFOLIO
and
R. MEEDER & ASSOCIATES, INC.
and
SECTOR CAPITAL MANAGEMENT, L.L.C.
This Agreement is made the ___ day of December, 1996, by and among
Growth Stock Portfolio, a trust organized and existing under the laws of the
state of New York and operating as an open-end investment company (the
"Portfolio"), R. Meeder & Associates, Inc., an Ohio corporation (the
"Adviser"), and Sector Capital Management, L.L.C., a Georgia limited liability
company (the "Subadviser").
W I T N E S S E T H :
WHEREAS, the Portfolio is engaged in business as an open-end
management investment company and is registered as such under the Investment
Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Adviser and the Subadviser are each engaged principally
in the business of rendering investment supervisory services and each is
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended; and
WHEREAS, the Portfolio has retained the Adviser as its investment
adviser pursuant to an Investment Advisory Agreement dated April 30, 1992
(the "Advisory Agreement") which expressly provides that the Adviser may
contract for such supplementary advisory services as it deems necessary or
desirable, provided that any such contract is approved by the Portfolio and the
holders of interests therein in accordance with the 1940 Act; and
WHEREAS, the Portfolio and the Adviser desire to retain the Subadviser
to render investment and supervisory services to the Portfolio in the manner
and on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual promises hereinafter
set forth, the parties hereto agree as follows:
<PAGE> 2
I
INVESTMENT RESPONSIBILITY
(1) The Portfolio and the Adviser hereby retain the Subadviser to
supervise and assist in the management of the assets of the Portfolio and to
furnish the Portfolio with a continuous program for the investment of the
Portfolio's assets.
In such capacity, the Subadviser is authorized to enter into sub-subadvisory
agreements for investment advisory services in connection with the management of
the Portfolio. Any such agreement may be entered into by the Subadviser on such
terms and in such manner as may be permitted by the 1940 Act and the rules and
regulations of the Securities and Exchange Commission thereunder. The
Subadviser will continue to have responsibility for all investment advisory
services furnished pursuant to any such sub-subadvisory agreements. The Sub-
adviser will review the performance of all sub-subadvisers and make
recommendations to the Trustees of the Portfolio with respect to their retention
and renewal of their contracts.
(2) Subject to the supervision of the Trustees of the Portfolio, and
subject to the foregoing Section (1) hereof, the Subadviser shall be responsible
for the management of the investment strategy of the Portfolio and the
composition thereof, including the purchase, retention and disposition
strategies relating thereto, in accordance with the Portfolio's investment
objective, policies and restrictions as stated in its then current registration
statement (the "Registration Statement") under the 1940 Act and subject to the
following understandings:
(a) The Subadviser, in the performance of its duties and
obligations under this Agreement shall act in conformity with the
Declaration of Trust, By-Laws and Registration Statement of the
Portfolio and with the instructions and directions of the
Trustees of the Portfolio and will conform to and comply with the
requirements of the 1940 Act and with all other applicable
federal and state laws and regulations.
(b) The Subadviser, in the performance of its duties and
obligations under this Agreement, shall also act in conformity
with the "Sector Plus" investment discipline developed by the
Subadviser, as described in the Proxy Statement dated November 15,
1996, of the Flex-funds The Growth Fund relating to the approval
by the shareholders of this Agreement.
(3) The Subadviser shall furnish to the Portfolio the services of one
or more persons who shall be authorized by the Portfolio to place orders for
the purchase and sale of securities for the account of the Portfolio. Acting
through a person so authorized by the Portfolio, the Adviser shall place orders
for the Portfolio.
(4) Notwithstanding the generality of paragraph (3) above, and subject
to the provisions of paragraphs (5) and (6) below, the Subadviser shall
endeavor to secure for the Portfolio the best possible price and execution of
every purchase and sale for the account of the Portfolio. In seeking such best
price and execution the Subadviser shall use its own judgment as to the
<PAGE> 3
implementation of its own investment recommendations, including the
Subadviser's judgment as to the time when an order should be placed, the number
of securities to be bought or sold in any one trade that is a part of any
particular recommendation, and the market in which an order should be placed.
(5) The Subadviser shall use its own judgment in determining the
broker-dealers who shall be employed to execute orders for the purchase or sale
of securities for the Portfolio, in order to:
a. Secure best price and execution on purchases and sales
for the Portfolio; and
b. Secure supplemental research and statistical data for use
in making its recommendations to the Portfolio.
(6) The Subadviser shall use its discretion as to when, and in which
market, the Portfolio's transactions shall be executed, in order to secure for
the Portfolio the benefits of best price and execution, and supplemental
research and statistical data. The use of such discretion shall be subject to
review by the Trustees of the Portfolio at any time and from time to time. The
Portfolio, acting by its Trustees, may withdraw said discretion at any time,
and may direct the execution of portfolio transactions for the Portfolio in any
lawful manner different from that provided for herein. Until a decision is made
to withdraw or limit the discretion herein granted, the Subadviser shall not be
liable for any loss suffered by the Portfolio through the exercise by the
Subadviser of that discretion unless the Subadviser shall be guilty of gross
negligence or willful misconduct.
II
COMPENSATION
The Portfolio shall not pay the Subadviser any fee pursuant to this Agreement.
Instead, the Subadviser shall be compensated by a sharing of the fee (the "Fee")
payable by the Portfolio to the Adviser under the Advisory Agreement. Such
sharing shall be in accordance with the following formula: The Adviser shall
receive 70% and the Subadviser shall receive 30% of the Fee payable with respect
to the net assets of the Portfolio as such net assets exist on the effective
date of this Agreement (the "Effective Date"). The Adviser shall receive 30% and
the Subadviser shall receive 70% of the Fee attributable to any additional net
assets of the Portfolio, up to an amount of net assets equal to the net assets
of the Portfolio on the Effective Date and the Adviser and the Subadviser shall
share equally the Fee attributable to any additional net assets of the
Portfolio, up to $50 million of such net assets. With respect to net assets of
more than $50 million and less than $100 million, the applicable Fee (75 basis
points) shall be shared such that the Adviser receives 35 basis points and the
Subadviser receives 40 basis points. With respect to net assets of $100 million
and more, the applicable Fee (60 basis points) shall be shared such that the
Adviser receives 25 basis points and the Subadviser receives 35 basis points.
The parties to this Agreement agree that arrangements may be
<PAGE> 4
made for disbursement of fees to each of the Adviser and Subadviser
directly from the Portfolio without affecting the fact that the
contractual obligation to pay fees to the Subadviser is that of the
Adviser and not the Portfolio.
III
DURATION AND TERMINATION
(1) The Effective Date of this Agreement shall be the date
first above written and, unless sooner terminated as hereinafter
provided, this Agreement shall remain in effect for a period of two
years. Thereafter this Agreement shall continue in effect from year to
year, subject to the termination provisions and all other terms and
conditions hereof; if: (a) such continuation shall be specifically
approved at least annually by vote of a majority of the outstanding
voting securities of the Portfolio or by the vote, cast in person at a
meeting called for the purpose of voting on such approval, of a
majority of the Trustees of the Portfolio who are not parties to this
Agreement or interested persons of any such party; and (b) the
Subadviser shall not have notified the Portfolio and the Adviser, in
writing, at least 60 days prior to the expiration of any term, that it
does not desire such continuation. The Subadviser shall furnish to the
Portfolio, promptly upon its request, such information as may
reasonably be necessary to evaluate the terms of this Agreement or any
extension, renewal or amendment hereof.
(2) This Agreement may not be amended, transferred, sold or
in any manner hypothecated or pledged, without the affirmative vote of
a majority of the outstanding voting securities of the Portfolio, and
this Agreement shall automatically and immediately terminate in the
event of its assignment.
(3) This Agreement may be terminated by any party hereto,
without the payment of any penalty, upon 60 days' notice in writing to
the other parties, provided, that in the case of termination by the
Portfolio such action shall have been authorized by resolution of the
Trustees or by vote of a majority of the outstanding voting securities
of the Portfolio.
IV
MISCELLANEOUS
(1) The Subadviser shall not deal with the Portfolio as
broker or dealer but the Subadviser may enter orders for the purchase
or sale of portfolio securities through a company or companies that
are under common control with the Subadviser, provided such company
acts as broker, and charges a commission that does not exceed the
usual and customary broker's commission if the sale is effected on a
securities exchange, or, 1 per centum of the purchase or sale price of
such securities if the sale is otherwise effected. In connection with
the purchase or sale of portfolio securities for the account of the
Portfolio, neither the Subadviser nor any officer or member of the
Subadviser shall act as a principal.
<PAGE> 5
(2) Except as expressly prohibited in this Agreement, nothing
herein shall in any way limit or restrict the Subadviser, or any
members, officers, shareholders or employees of the Subadviser, from
buying, selling or trading in any security for its or their own
account. Neither the Subadviser nor any officer or member thereof
shall take a short position in any shares of the Portfolio or
otherwise purchase its shares for any purpose other than that of
investment. However, the Subadviser may act as underwriter or
distributor provided it does so pursuant to a written contract
approved in the manner specified in the 1940 Act.
(3) The Subadviser may act as investment adviser to, and
provide management services for, other investment companies, and may
engage in businesses that are unrelated to investment companies,
without limitation, provided the performance of such services and the
transaction of such businesses do not impair the Subadviser's
performance of this Agreement.
The Subadviser shall not be liable for any error of judgment
or mistake of law or for any loss suffered by the Portfolio in
connection with the matters to which this Agreement relates
(including, but not limited to, loss sustained by reason of the
adoption or implementation of any investment policy or the purchase,
sale or retention of any security), except for loss resulting from
willful misfeasance, bad faith or gross negligence of the Subadviser
in the performance of its duties or from reckless disregard by the
Subadviser of its obligations and duties under this Agreement.
(5) Any question of interpretation of any term or provision
of this Agreement having a counterpart in or otherwise derived from a
term or provision of the 1940 Act shall be resolved by reference to
such term or provision of said Act and to interpretations thereof, if
any, by the United States courts or, in the absence of any controlling
decision of any such court, by rules, regulations or orders of the
Securities and Exchange Commission validly issued pursuant to said
Act. Specifically, the terms "vote of a majority of the outstanding
voting securities", "annually", "interested person", "assignment", and
"affiliated person", as used herein, shall have the meanings assigned
to them by the 1940 Act. In addition, where the effect of a
requirement of the 1940 Act reflected in any provision of this
Agreement is relaxed by a rule, regulations or order of the Securities
and Exchange Commission, whether of special or of general application,
such provision shall be deemed to incorporate the effect of such rule,
regulation or order.
(6) The Portfolio will provide the Subadviser with all
information concerning the investment policies and restrictions of the
Portfolio as the Subadviser may from time to time request or which the
Portfolio deems necessary. In the event of any change in the
investment policies or restrictions of the Portfolio, the Portfolio
will promptly provide the Subadviser with all information concerning
such change including, but not limited to, copies of all documents
filed by the Portfolio with the Securities and Exchange Commission.
<PAGE> 6
(7) The Trustees, officers, employees and agents of the
Portfolio shall not be personally bound by or liable hereunder, nor
shall resort be had to their private property for the satisfaction of
any obligation or claim hereunder.
(8) The Subadviser agrees to notify the Adviser and the
Portfolio of any change in the senior officers or members of the
Subadviser responsible for the management of the Portfolio in advance,
if reasonable, and otherwise as soon as practicable after such change
occurs.
(9) Except to the extent the provisions of this Agreement are
governed by Federal law, they shall be governed by the law of the
State of Ohio.
(10) This Agreement represents the entire agreement among the
parties hereto.
(11) This Agreement may be executed in three or more
counterparts, each of which shall be considered an original.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be signed by their respective officers thereunto duly
authorized as of the day and year first above written.
GROWTH STOCK PORTFOLIO
Attest: /s/ DONALD F. MEEDER By: /s/ ROBERT S. MEEDER, SR.
------------------------------- --------------------------------
Donald F. Meeder, Secretary Robert S. Meeder, Sr., President
R. MEEDER & ASSOCIATES, INC.
Attest: /s/ DONALD F. MEEDER By: /s/ ROBERT S. MEEDER, SR.
------------------------------- --------------------------------
Donald F. Meeder, Secretary Robert S. Meeder, Sr., Chairman
SECTOR CAPITAL MANAGEMENT, L.L.C.
Attest: By: /s/ WILLIAM L. GURNER
------------------------------- --------------------------------
William L. Gurner, President
<PAGE> 1
Exhibit 5C
MONEY MANAGER AGREEMENT
Effective Date: December __, 1996
Termination Date: Two years after Effective
Attn:______________________________
Re: The Growth Stock Portfolio
Ladies and Gentlemen:
The Growth Stock Portfolio (all of the assets of the Growth Stock
Portfolio including those assets not managed by the Money Manager, hereinafter
referred to as the "Portfolio") is an open-end management investment company
registered as an investment company under the Investment Company Act of 1940,
as amended (the "1940 Act"), and subject to the rules and regulations
promulgated thereunder.
Sector Capital Management, L.L.C. (the "Manager") acts as the
investment subadviser of the Portfolio pursuant to the terms of an Investment
Advisory Agreement, and is an "investment adviser", as that term is defined in
Section 2(a)(20) of the 1940 Act, to the Portfolio. The Manager is responsible
for the day-to-day management of the Portfolio and for the coordination of
investments of the Portfolio's assets; however, specific portfolio purchases
and sales for the Portfolio, or a portion thereof, are to be made by the
portfolio management organizations recommended and selected by the Manager,
subject to the approval of the Board of Trustees of the Portfolio (the
"Board").
1. APPOINTMENT AS A MONEY MANAGER. The Manager and the Portfolio
hereby appoint and employ, ___________________________ (the "Money Manager") as
a discretionary investment sub-subadviser to the Portfolio for that portion of
the assets of the Portfolio which the Manager determines from time to time to
assign to the Money Manager (those assets being referred to as the "Account").
2. ACCEPTANCE OF APPOINTMENT: STANDARD OF PERFORMANCE. The
Money Manager accepts the appointment as a discretionary investment
sub-subadviser to the Portfolio and agrees to use its best professional
judgment to make and implement investment decisions for the Portfolio with
respect to the investments of the Account in accordance with the provisions of
this Agreement.
3. PORTFOLIO MANAGEMENT SERVICES OF THE MONEY MANAGER. The Money
Manager is hereby employed and authorized to select portfolio securities for
investment by the Portfolio, to determine whether to purchase and sell
securities for the Account, and upon making any purchase or sale decision, to
place orders for the execution of such portfolio transactions in accordance
with paragraphs 5 and 6 hereof and Exhibit A attached hereto and incorporated
by this reference herein (as it may be amended in writing by the parties from
<PAGE> 2
time to time). In providing portfolio management services to the Account, the
Money Manager shall be subject to such investment restrictions as are set forth
in the 1940 Act and rules thereunder, the supervision and control of the Board,
such specific written instructions as the Board may adopt and communicate to the
Money Manager; the investment objectives, policies and restrictions of the
Portfolio furnished pursuant to paragraph 4; and written instructions from the
Manager. The Money Manager shall maintain on behalf of the Portfolio the records
listed in Exhibit B attached hereto and incorporated by this reference herein
(as it may be amended in writing by the parties from time to time). At the
Portfolio's or the Manager's reasonable request (as communicated by the Board or
the officers of such entities), the Money Manager will consult with the officers
of the Portfolio or the Manager, as the case may be, with respect to any
decision made by it with respect to the investments of the Account. R. Meeder &
Associates, Inc., the investment adviser to the Portfolio, will invest any cash
in the Account.
4. INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS. The Portfolio
shall provide the Money Manager with a written statement of the investment
objectives and policies of the Portfolio and any specific investment
restrictions applicable thereto as established by the Portfolio, including those
set forth in its Prospectus, as amended from time to time. The Portfolio retains
the right, on reasonable prior written notice to the Money Manager, from the
Portfolio or the Manager, to modify any such objectives, policies or
restrictions in any manner at any time. The Money Manager shall have no duty to
investigate, and the Money Manager may also rely upon, any instructions received
from the Portfolio, the Manager, or both, and absent manifest error, such
instructions shall be presumed reasonable.
5. TRANSACTION PROCEDURES. All transactions will be settled by Star
Bank, N.A. (the "Custodian"), or such depository or agents as may be designated
by the Custodian, as custodian for the Portfolio, of all cash and/or securities
due to or from the Account, and the Money Manager shall not have possession or
custody thereof or any responsibility or liability with respect thereto. The
Money Manager shall advise Mutual Funds Service Co. ("MFSC"), the accounting
agent for the Portfolio, and confirm by facsimile all investment orders for the
Portfolio placed by it with broker/dealers at the time and in the manner set
forth in Exhibit A hereto. The Portfolio shall be responsible for all custodial
arrangements and the payment of all custodial charges and fees and, upon the
Money Manager giving proper instructions to MFSC, the Money Manager shall have
no responsibility or liability with respect to custodial arrangements or the
acts, omissions or other conduct of the Custodian.
6. ALLOCATION OF BROKERAGE. The Money Manager shall have the
authority and discretion to select broker/dealers to execute portfolio
transactions initiated by the Money Manager, and for the selection of the
markets on which the transactions will be executed.
A. In doing so, the Money Manager's primary objective shall be
to select a broker/dealer that can be expected to obtain the best
execution for the Portfolio. However, this responsibility shall not be
deemed to obligate the Money Manager to solicit competitive bids for
each transaction; and the Money Manager shall have no obligation to
seek the lowest available commission cost to the Portfolio, so long as
the Money Manager believes in good faith, based upon its knowledge of
the capabilities of the broker/dealer selected, that the commission
cost is reasonable in relation to the total quality and reliability of
the brokerage and research services made available by the broker/dealer
to the Money Manager viewed in terms of either that particular
transaction or of the Money Manager's overall responsibilities with
respect to its clients, including the Portfolio, as to which the Money
Manager exercises investment discretion, notwithstanding that the
Portfolio may not be the direct or exclusive beneficiary of any such
services or that
2
<PAGE> 3
another broker/dealer may be willing to charge the Portfolio a lower
commission on the particular transaction.
B. The Portfolio shall retain the right to request that
transactions involving the Account that give rise to brokerage
commissions in an annual amount of up to [25% or 50%] of the Money
Manager's executed brokerage commissions for the Portfolio be executed
through one or more broker-dealers selected by the Portfolio, which
broker-dealers will allocate a portion of such commissions, in an
amount mutually satisfactory to the Portfolio and the broker-dealer
selected, to pay the direct expenses of the Portfolio or its feeder
funds. The Money Manager may reject any request for directed brokerage
that does not appear to it to be reasonable or for which it reasonably
believes that best execution will not be obtained. The Money Manager
shall not be liable for failure to comply with such directed brokerage
threshold if it rejects any such request for directed brokerage in
accordance with the immediately preceding sentence or if the Portfolio
fails to make sufficient requests to enable the Money Manager to meet
such threshold. The Manager and the Portfolio acknowledge that, with
respect to those transactions for which the Portfolio has requested
that the transaction be executed through one or more broker-dealers
selected by the Portfolio, such direction may result in the Portfolio
paying higher commissions than otherwise might be obtainable or
receiving less favorable net prices and execution of some transactions,
or both, and may result in the Money Manager's inability to aggregate
trades for the Portfolio with those of the Money Manager's other
clients in order to obtain volume discounts.
C. The Portfolio agrees that it will provide the Money
Manager with a list of broker/dealers which are "affiliated persons"
of the Portfolio's other money managers. Upon receipt of such list,
the Money Manager agrees that it will not execute any portfolio
transactions with a broker/dealer which is an "affiliated person" (as
defined in the 1940 Act) of the Portfolio or of any money manager for
the Portfolio without the prior written approval of the Portfolio.
7. PROXIES. Unless the Manager gives written instructions to the contrary, the
Money Manager shall vote all proxies solicited by or with respect to the
issuers of securities in which assets of the Account may be invested. The Money
Manager shall use its best good faith judgment to vote such proxies in a manner
which best serves the interests of the Portfolio's investors.
8. REPORTS TO THE MONEY MANAGER. The Portfolio and the Manager shall furnish or
otherwise make available to the Money Manager such information relating to the
business affairs of the Portfolio, including periodic reports concerning the
Portfolio, as the Money Manager at any time, or from time to time, may
reasonably request in order to discharge its obligations hereunder.
9. FEES FOR SERVICES. The compensation of the Money Manager for its
services under this Agreement shall be calculated and paid monthly at an annual
rate of .25% of the Account's average daily net assets.
10. OTHER INVESTMENT ACTIVITIES OF THE MONEY MANAGER. The Portfolio
acknowledges that the Money Manager, or one or more of its affiliates, may have
investment responsibilities or render investment advice to, or perform other
investment advisory services for, other individuals or entities (the
"Affiliated Accounts"). Subject to the provisions of paragraph 2 hereof, The
Portfolio agrees that the Money Manager and its affiliates may give advice,
exercise investment responsibility and take other action with respect to the
Affiliated Accounts which may differ from the advice given or the timing or
nature of action taken with respect to the Account, provided that the Money
Manager acts in good faith, and provided further that it is the Money Manager's
policy to allocate, within its reasonable discretion, investment opportunities
to the Account over a period of time on a fair and equitable basis relative to
the Affiliated Accounts, taking into account the
3
<PAGE> 4
investment objectives and policies of the Portfolio and any specific investment
restrictions applicable thereto. The Portfolio acknowledges that one or more
of the Affiliated Accounts may at any time hold, acquire, increase, decrease,
dispose of or otherwise deal with positions in investments in which the Account
may have an interest from time to time, whether in transactions which may
involve the Account or otherwise. The Money Manager shall have no obligation to
acquire for the Account a position in any investment which any Affiliated
Account may acquire, and the Portfolio shall have no first refusal,
co-investment or other rights in respect of any such investment, either for the
Account or otherwise.
11. LIMITATION OF LIABILITY. The Money Manager shall not be liable for, and
shall be indemnified by the Portfolio for any action taken, omitted or suffered
to be taken by it in its reasonable judgment, in good faith and believed by it
to be authorized or within the discretion or rights or powers conferred upon it
by this Agreement, or in accordance with (or in the absence of) specific
directions or instructions from the Portfolio or the Manager; provided,
however, that such acts or omissions shall not have resulted from the Money
Manager's willful misfeasance, bad faith or gross negligence, violation of
applicable law, or reckless disregard of its duty or of its obligations
hereunder. The rights and obligations that are provided for in this Paragraph
11 shall survive the cancellation, expiration or termination of this Agreement.
12. CONFIDENTIALITY. Subject to the right of the Money Manager and the
Portfolio to comply with applicable law, including any demand or request of any
regulatory or taxing authority having jurisdiction over it, the parties hereto
shall treat as confidential all information pertaining to the Portfolio and the
actions of the Money Manager, the Manager and the Portfolio in respect
thereof, other than any such information which is or hereafter becomes
ascertainable from public or published information. The rights and obligations
that are provided for in this Paragraph 12 shall survive the cancellation,
expiration or termination of this Agreement.
13. USE OF THE MONEY MANAGER'S NAME. The Portfolio and the Manager agree to
furnish the Money Manager at its principal office prior to use thereof copies
of all prospectuses, proxy statements, reports to stockholders, sales
literature, or other material prepared for distribution to stockholders of the
feeder funds of the Portfolio or the public that refer in any way to the Money
Manager, and not to use such material if the Money Manager reasonably objects
in writing within five business days (or such other time as may be mutually
agreed) after receipt thereof. In the event of termination of this Agreement,
the Portfolio and the Manager will continue to furnish to the Money Manager
copies of any of the above mentioned materials that refer in any way to the
Money Manager, and will not use such material if the Money Manager reasonably
objects in writing within five business days (or such other time as may be
mutually agreed) after receipt thereof.
14. ASSIGNMENT. No assignment, as that term is defined in Section 2(a)(4) of
the 1940 Act, of this Agreement shall be made by the Money Manager, and this
Agreement shall terminate automatically in the event that it is assigned. The
Money Manager shall notify the Manager and the Portfolio in writing
sufficiently in advance of any proposed change of control, as defined in
Section 2(a)(9) of the 1940 Act, to enable the Manager and the Portfolio to
consider whether an assignment as that term is defined in section 2(a)(4) of
the 1940 Act, will occur, and to take the steps necessary to enter into a new
money manager agreement with the Money Manager or other investment adviser.
15. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE PORTFOLIO. The Portfolio
represents, warrants and agrees that:
A. The Money Manager has been duly appointed by the
Board to provide investment advisory services to the Account as
contemplated hereby.
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<PAGE> 5
B. The Portfolio will deliver to the Money Manager a true and
complete copy of its current prospectus as effective from time to
time, such other documents or instruments governing the investments of
the Portfolio, and such other information as is necessary for the
Money Manager to carry out its obligations under this Agreement.
C. The organization of the Portfolio and the conduct of the
business of the Portfolio as contemplated by this Agreement,
materially complies, and shall at all times materially comply, with
the requirements imposed upon the Portfolio by applicable law.
16. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF MANAGER. The Manager
represents, warrants and agrees that:
A. The Manager acts as an "investment adviser", as that
term is defined in Section 2(a)(20) of the 1940 Act, to the Portfolio
pursuant to an Investment Subadvisory Agreement with the Portfolio.
B. The appointment of the Money Manager by the Manager
to provide the investment services as contemplated hereby has been
approved by the Board.
C. The Manager is registered as an "investment adviser"
under the Investment Advisers Act of 1940, as amended (the "Advisers
Act").
17. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF MONEY MANAGER. The
Money Manager represents, warrants and agrees that:
A. The Money Manager is registered as an "investment adviser"
under the Advisers Act; or it is a "bank" as defined in Section
202(a)(2) of the Advisers Act or an "insurance company" as defined in
Section 202(a)(12) of the Advisers Act and is exempt from registration
thereunder.
B. The Money Manager will maintain, keep current and
preserve on behalf of the Portfolio the records identified in Exhibit
B in the manner required by such Exhibit. The Money Manager agrees
that such records (other than those required by No. 4 of Exhibit B)
are the property of the Portfolio and will be surrendered to the
Portfolio promptly upon request.
C. The Money Manager will adopt or has adopted a written code
of ethics complying with the requirements of Rule 17j-1 under the 1940
Act, will provide to the Portfolio a copy of the code of ethics and
evidence of its adoption, and will make such reports to the Portfolio
as required by Rule 17j-1 under the 1940 Act. The Money Manager has
policies and procedures believed by it to be sufficient to enable the
Money Manager to detect and prevent the misuse of material, nonpublic
information by the Money Manager or any person associated with the
Money Manager, in compliance with the Insider Trading and Securities
Fraud Enforcement Act of 1988 and any other applicable federal and
state securities laws.
D. The Money Manager will notify the Portfolio of any changes
in the membership of its partnership or in the case of a corporation
in the ownership of more than five percent of its voting securities,
within a reasonable time after such change.
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<PAGE> 6
18. AMENDMENT. This Agreement may be amended at any time, but only by
written agreement among the Money Manager, the Manager and the Portfolio, which
amendment, other than amendments to Exhibits A and B, must be approved by the
Board in the manner required by the 1940 Act.
19. EFFECTIVE DATE. This Agreement shall become effective for the Portfolio on
the effective date set forth on page 1 of this Agreement, and shall continue in
effect until the termination date set forth on page 1 of this Agreement.
Thereafter, the Agreement shall continue in effect for successive annual
periods only so long as its continuance has been specifically approved at least
annually (a) by a vote of a majority of the Board or (b) by a vote of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
the Portfolio, and in either case by a majority of the Trustees who are not
parties to this Agreement or interested persons of any parties to this
Agreement (other than as Trustees of the Portfolio) cast in person at a meeting
called for purposes of voting on the Agreement.
20. TERMINATION. This Agreement may be terminated, without the payment of any
penalty, by the Board, the Manager, the Money Manager or by the vote of a
majority of the outstanding voting securities (as that term is defined in the
1940 Act) of the Portfolio, upon 30 days prior written notice to the other
parties hereto. Any such termination shall not affect the status, obligations or
liabilities of any party hereto to any of the other parties that accrued prior
to such termination.
21. APPLICABLE LAW. To the extent that state law shall not have been preempted
by the provisions of any laws of the United States heretofore or hereafter
enacted, as the same may be amended from time to time, this Agreement shall be
administered, construed and enforced according to the laws of the State of
Ohio, without reference to its choice of law principles.
TITLE
BY:
----------------------------------
NAME
DATE:
--------------------------------
TITLE
BY:
----------------------------------
NAME
DATE:
--------------------------------
6
<PAGE> 7
Accepted and agreed to:
BY:
----------------------------------
Authorized Signatory
DATE:
--------------------------------
EXHIBITS: A. Operational Procedures.
B. Recordkeeping Requirements.
7
<PAGE> 8
EXHIBIT A
OPERATIONAL PROCEDURES
The Money Manager (the "MM") shall abide by certain rules and
procedures in order to minimize operational problems. The MM will be required
to have various records and files (as required by regulatory agencies) at its
offices. The MM will have to maintain a certain flow of information to Mutual
Funds Service Co. ("MFSC") and Star Bank, N.A. ("Star"), the accounting agent
and the custodian bank, respectively, for the Portfolio.
The MM will be required to furnish MFSC with daily information as to
executed trades. MFSC should receive this data no later than 4:30 PM Eastern
Standard Time on the day of the trade. MM shall verify that such information
has been received by MFSC. MFSC shall reasonably cooperate to confirm that it
has received such information. The necessary information should be transmitted
via facsimile machine to MFSC in the form of a daily trade authorization form
signed by an authorized individual. A list of authorized persons with specimen
signatures must be sent to MFSC. The authorization will contain information on
which MFSC and Star can rely to either accept delivery or deliver out of the
account securities as per each trade by the MM. A preprinted form will be
supplied to the MM by the Portfolio. Upon receipt of brokers' confirmations,
the MM or MFSC will be required to notify the other party if any differences
exist. MFSC will affirm trades through DTC. The reporting of trades by the MM
to MFSC must include the following:
o Whether Purchase or Sale
o Security name
o CUSIP Number
o Ticker Symbol
o Number of shares or principal amount
o Price per share or bond
o Accrued interest
o Commission dollars per trade, or if a net trade
o Executing broker
o Trade date
o Settlement date
o If security is not eligible for DTC (Purchase only), Proper Settlement
Instructions
MFSC will provide the necessary information to Star.
When opening accounts with brokers for the Portfolio, the
account should be a delivery versus payment account. No margin accounts are to
be maintained. The broker should be advised to use Star's ID system number (NO.
_____________________), with interested party ID confirmations to NO. 71394, to
facilitate the receipt of information by Star and MFSC. If this procedure is
followed, DK problems will be held down to a minimum and additional costs of
security trades will not become an important factor in doing business.
<PAGE> 9
EXHIBIT B
RECORDS TO BE MAINTAINED BY MONEY MANAGER
1. A record of each brokerage order, and all other portfolio purchases and
sales orders by the Money Manager or on behalf of the Portfolio for, or in
connection with, the purchase or sale of securities, whether executed or
unexecuted. Such records shall include:
A. The name of the broker,
B. The terms and conditions of the order, and of any
modification or cancellation thereof,
C. The time of entry or cancellation,
D. The price at which executed,
E. The time of receipt of report of execution, and
F. The name of the person who placed the order on behalf of
the Portfolio (Rule 31a-1(b)(5) and (6) of the 1940 Act).
2. A record for each fiscal quarter, completed within ten (10) days after the
end of the quarter, showing specifically the basis or bases upon which the
allocation of orders for the purchase and sale of portfolio securities to
brokers or dealers was made, and the division of brokerage commissions or other
compensation on such purchase and sale orders. The record:
A. Shall include the consideration given to:
(i) the sale of shares of a feeder fund of the
Portfolio
(ii) the supplying of services or benefits by
brokers or dealers to:
(a) The Portfolio,
(b) The Manager,
(c) Yourself (the Money Manager), and
(d) Any person other than the foregoing
(iii) Any other considerations other than the
technical qualifications of the brokers and dealers as such.
B. Shall show the nature of the services or benefits
made available.
Page 1 of Exhibit B
<PAGE> 10
C. Shall describe in detail the application of any general or
specific formula or other determinant used in arriving at such allocation of
purchase and sale orders and such division of brokerage commissions or other
compensation.
D. The identities of the persons responsible for making
the determination of such allocation and such division of brokerage commissions
or other compensation (Rule 31a-1(b)(9) of the 1940 Act) . *
3. A record in the form of an appropriate memorandum identifying the person or
persons, committees, or groups authorizing the purchase or sale of portfolio
securities. Where an authorization is made by a committee or group, a record
shall be kept of the names of its members who participate in the authorization.
There shall be retained as part of this record any memorandum, recommendation,
or instruction supporting or authorizing the purchase or sale of portfolio
securities (Rule 31a-1(b)(10) of the 1940 Act) and such other information as is
appropriate to support the authorization. **
4. Such accounts, books and other documents as are required to be maintained by
registered investment advisers by rule adopted under Section 204 of the
Advisers Act, to the extent such records are necessary or appropriate to record
the Money Manager's transactions made with respect to the Portfolio.
(Rule 31a-1(f) of the 1940 Act).
5. All accounts, books, records, or other documents that are required to be
maintained pursuant to the 1940 Act, the Advisers Act, or any rule or
regulation thereunder, need only be retained by the Money Manager as required
under such laws, rule or regulations. Any other account, book , record or other
document that is required to be maintained by the Money Manager pursuant to
this Exhibit B need only be maintained for six years after the date of its
creation.
* Maintained as property of the Portfolio pursuant to Rule 31a-3(a) of
the 1940 Act.
** Such information might include: the current Form 10-K, annual and quarterly
reports, press releases, reports by analysts and from brokerage firms
(including their recommendations, i.e., buy, sell, hold), and any internal
reports or portfolio manager reviews.
Page 2 of Exhibit B
