<PAGE>
LIFE CYCLE MUTUAL FUNDS(TM), INC.
Life Cycle Equity Fund(TM)
Life Cycle Bond Fund(TM)
Life Cycle Retirement Income Fund(TM)
Life Cycle Harvest Fund(TM)
Annual Report
July 31, 1997
<PAGE>
LIFE CYCLE MUTUAL FUNDS, INC
Life Cycle Equity Fund
Portfolio of Investments - July 31, 1997
<TABLE>
<CAPTION>
Shares/
Principal Value
Amount (Note 2)
- ------ --------
<S> <C> <C>
Common Stocks - 96.00%
Auto Parts & Equipment - 4.95%
5,600 Dana Corp. $ 254,450
5,600 Genuine Parts 182,700
----------
437,150
----------
Banks (Major Regional)- 15.23%
4,400 Banc One 246,950
3,500 Corestates 215,906
3,300 Fleet Financial 223,987
3,400 Keycorp 211,438
4,500 Mellon Bank Corp. 226,969
3,700 National City Corp. 220,150
----------
1,345,400
----------
Banks (Money Center) - 2.63%
2,000 J.P. Morgan 231,750
----------
Chemicals - 4.56%
2,200 Dow Chemical 209,000
3,200 Eastman Chemical 193,600
----------
402,600
----------
Distributors (Food & Health) - 2.57%
5,600 Supervalu Inc. 226,800
----------
Electric Companies - 16.15%
5,700 Carolina Power & Light 203,062
6,500 ConEd 205,563
4,100 Duke Power 207,819
4,300 FPL Group 205,863
5,600 General Public Utilities 194,250
8,900 PECO Energy 209,150
9,100 Southern Co. 199,631
----------
1,425,338
----------
Financial (Diversified) - 2.41%
4,000 American General 213,000
----------
Insurance Brokers - 2.28%
2,600 Marsh & McLennan 201,338
----------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
LIFE CYCLE MUTUAL FUNDS, INC
Life Cycle Equity Fund
Portfolio of Investments - July 31, 1997
<TABLE>
<CAPTION>
Shares/
Principal Value
Amount (Note 2)
- ------ --------
<S> <C> <C>
Insurance (Multi-Line) - 2.41%
3,000 Lincoln Nat'l $ 213,000
---------
Natural Gas - 11.71%
5,800 Eastern Enterprises 207,713
5,600 Nicor 205,100
6,200 Oneok Inc. 217,000
6,000 Pacific Enterprises 200,625
5,300 Peoples Energy 203,387
---------
1,033,825
---------
Oil (Domestic Integrated) - 2.40%
4,600 Phillips Petroleum 211,888
---------
Oil (Int'l Integrated) - 9.96%
2,200 AMOCO 206,800
2,900 Chevron 229,463
2,600 Mobil 198,900
2,100 Texaco 243,731
---------
878,894
---------
Oil & Gas (Exploration/Production) - 2.27%
3,200 Kerr McGee 200,400
---------
Paper & Forest Products - 4.95%
4,800 Potlatch 229,500
6,200 Westvaco 207,312
---------
436,812
---------
Telephone -11.52%
6,300 Alltel 207,113
2,700 Ameritech 182,081
3,000 Bell Atlantic 217,687
4,300 Bellsouth 203,712
10,000 Frontier Corp. 206,250
---------
1,016,843
---------
Total Common Stocks (Cost-$7,321,289) 8,475,038
---------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
LIFE CYCLE MUTUAL FUNDS, INC
Life Cycle Equity Fund
Portfolio of Investments - July 31, 1997
<TABLE>
<CAPTION>
Shares/
Principal Value
Amount (Note 2)
- ------ --------
<S> <C> <C>
U.S. Treasury Obligations - 5.66%
$ 500,000 U.S. Treasury Bills, 5.08%, 8/7/97 $ 499,528
----------
Total U.S. Treasury Obligations (Cost-$499,596) 499,528
----------
Cash Sweep Account - 1.21%
106,709 Bank of New York Cash Reserve 106,709
----------
Total Cash Sweep Account (Cost - $106,709) 106,709
----------
Total Investments (Cost - $7,927,594) (a) - 102.87% 9,081,275
Liabilities in excess of other assets - (2.87)% (253,191)
----------
Net Assets - 100% $8,828,084
----------
(a) Represents cost for financial reporting purposes and differs
from cost basis for federal income tax purposes by the amount of
losses recognized for financial reporting purposes in excess of
federal income tax reporting of $1,835. Cost for federal income
tax purposes differs from value by unrealized appreciation of
securities as follows:
Unrealized appreciation $1,182,731
Unrealized depreciation (30,885)
----------
Net unrealized appreciation $1,151,846
==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
LIFE CYCLE MUTUAL FUNDS, INC.
Life Cycle Bond Fund
Portfolio of Investments - July 31, 1997
<TABLE>
<CAPTION>
Principal Value
Amount (Note 2)
- ---------- ---------
<S> <C>
U.S. Treasury Obligations - 94.71%
U.S. Treasury Notes
$ 20,000 4.75%, 10/31/98 $ 19,784
20,000 5.50%, 2/28/99 19,942
25,000 6.00%, 8/15/99 25,113
75,000 5.875%, 6/30/00 75,123
90,000 5.50%, 12/31/00 89,059
80,000 5.625%, 2/28/01 79,447
75,000 5.75%, 8/15/03 74,312
---------
382,780
---------
Total U.S. Treasury Obligations (Cost-$379,845) 382,780
---------
Cash Sweep Account - 6.06%
24,476 Bank of New York Cash Reserve 24,476
---------
Total Cash Sweep Account (Cost-$24,476) 24,476
---------
Total Investments (Cost-$404,321) (a) - 100.77% 407,256
Liabilities in excess of other assets - (0.77)% (3,123)
---------
Net Assets - 100% $404,133
=========
(a) Represents cost for federal income tax purposes
and differs from value by net unrealized
appreciation of securities as follows:
Unrealized appreciation $ 3,411
Unrealized depreciation (476)
--------
Net unrealized appreciation $ 2,935
========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
LIFE CYCLE MUTUAL FUNDS, INC.
Life Cycle Retirement Income Fund
Portfolio of Investments - July 31, 1997
<TABLE>
<CAPTION>
Principal Value
Amount (Note 2)
- ---------- --------
<S> <C>
U.S. Treasury Obligations - 95.97%
U.S. Treasury Notes
$ 25,000 5.125%, 11/30/98 $ 24,832
25,000 6.00%, 8/15/99 25,113
25,000 6.00%, 10/15/99 25,166
50,000 5.50%, 4/15/00 49,636
55,000 5.75%, 10/31/00 54,865
40,000 5.50%, 12/31/00 39,582
75,000 5.625%, 2/28/01 74,482
50,000 5.75%, 8/15/03 49,541
---------
343,217
---------
Total U.S. Treasury Obligations (Cost-$341,827) 343,217
---------
Cash Sweep Account- 5.93%
21,216 Bank of New York Cash Reserve 21,216
---------
Total Cash Sweep Account (Cost-$21,216) 21,216
---------
Total Investments (Cost-$363,043) (a) - 101.90% 364,433
Liabilities in excess of other assets - (1.90)% (6,795)
---------
Net Assets - 100% $ 357,638
=========
(a) Represents cost for federal income tax purposes and differs
from value by net unrealized appreciation of securities as
follows:
Unrealized appreciation $ 2,249
Unrealized depreciation (859)
---------
Net unrealized appreciation $ 1,390
========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
LIFE CYCLE MUTUAL FUNDS, INC.
Life Cycle Harvest Fund
Portfolio Investments - July 31, 1997
<TABLE>
<CAPTION>
Principal Value
Amount (Note 2)
- ---------- --------
<S> <C>
U.S. Treasury Obligations - 128.42%
$ 200,000 U.S. Treasury Bills, 5.08%, 8/7/97 $ 199,806
---------
Total Investments (Cost-$199,838) (a) - 128.42% 199,806
Liabilities in excess of other assets - (28.42)% (44,217)
---------
Net Assets - 100% $ 155,589
=========
(a) Represents cost for federal income tax purposes and differs
from value by net unrealized depreciation of securities as
follows:
Unrealized appreciation $ 0
Unrealized depreciation (32)
---------
Net unrealized depreciation $ (32)
=========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Life Cycle Mutual Funds, Inc.
Statements of Assets and Liabilities
July 31, 1997
<TABLE>
<CAPTION>
Equity Bond Retirement Harvest
Fund Fund Income Fund Fund
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
ASSETS
Investments, at value (cost $7,927,594;
$404,321; $363,043; and $199,838,
respectively) $ 9,081,275 $ 407,256 $ 364,433 $ 199,806
Interest and dividends receivable 32,998 6,330 6,766 891
Unamortized organization expense 21,300 21,337 16,897 21,337
Receivable from Advisor 263,807 46,464 40,088 43,196
Allowance against Receivable from Adviser (263,807) (46,464) (40,088) (43,196)
------------ ----------- ------------ ------------
Total Assets 9,135,573 434,923 388,096 222,034
------------ ----------- ------------ ------------
LIABILITIES
Dividends payable 42,031 1,106 1,062 574
Cash overdraft 0 0 0 20,346
Administration fee payable 158,651 8,104 8,674 12,071
Audit fee payable 38,499 1,967 2,105 2,929
Distribution fee payable 19,188 914 850 777
Organization expenses payable 9,431 9,431 9,431 9,430
Directors' fee payable 2,538 130 139 193
Custodian fee payable 4,401 3,687 3,531 3,634
Legal fee payable 16,327 834 893 1,242
Registration and filing expense payable 8,867 3,280 3,271 3,491
Fund accounting fee payable 155 81 92 12
Transfer agent fee payable 4,739 1,123 265 453
Miscellaneous payable 2,662 133 145 11,293
------------ ----------- ------------ ------------
Total Liabilities 307,489 30,790 30,458 66,445
------------ ----------- ------------ ------------
NET ASSETS $ 8,828,084 $ 404,133 $ 357,638 $ 155,589
============ =========== =========== ============
NET ASSETS CONSIST OF:
Capital Stock 675 45 40 20
Additional paid in capital 7,680,909 447,614 396,296 198,036
Accumulated net investment losses (263,806) (46,461) (40,088) (42,143)
Accumulated realized gains/(losses) on
investments 256,625 0 0 (292)
Net unrealized appreciation/(depreciation)
from investments 1,153,681 2,935 1,390 (32)
------------ ----------- ----------- -------------
NET ASSETS $ 8,828,084 $ 404,133 $ 357,638 $ 155,589
============ =========== =========== ============
Shares of beneficial interest outstanding 674,768 45,184 40,079 19,783
============ =========== =========== ============
Net Asset Value per share $ 13.08 $ 8.94 $ 8.92 $ 7.86
============ =========== =========== ============
Maximum Offering Price per share
($13.08, $8.94, $8.92, $7.86/0.9475,
respectively) $ 13.80 $ 9.44 $ 9.41 $ 8.30
============ =========== =========== ============
</TABLE>
See accompanying notes to financial statements
<PAGE>
Life Cycle Mutual Funds, Inc.
Statements of Operations
For the Year Ended July 31, 1997
<TABLE>
<CAPTION>
Equity Bond Retirement Harvest
Fund Fund Income Fund Fund
----------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Interest $ 36,727 $ 14,488 $ 16,206 $ 21,277
Dividend 201,102 - - -
----------- ---------- ---------- ----------
Total income 237,829 14,488 16,206 21,277
----------- ---------- ---------- ----------
EXPENSES
Advisory (Note 3) 44,017 2,249 2,407 3,349
Administration (Note 3) 211,534 10,806 11,565 16,095
Custodian 13,571 9,347 9,010 9,804
Legal 22,542 1,151 1,232 1,715
Fund accounting 977 503 416 20
12b-1 distribution fees (Note 3) 44,017 2,249 2,407 3,349
Amortization or organization expenses 6,723 6,723 5,322 6,723
Insurance 13,315 680 728 1,013
Audit 38,499 1,967 2,105 2,929
Registration 14,187 7,870 7,877 8,140
Transfer agent fees (Note 3) 31,468 8,069 2,629 3,624
Directors' fees 10,576 540 578 805
Printing 14,076 719 770 1,071
Miscellaneous 9,651 4,381 4,596 637
----------- ---------- ---------- ----------
Total Expenses before waivers 457,153 57,254 51,642 59,274
Less: Expenses waived (44,017) (2,249) (2,407) (3,349)
Less: Expenses expected to be reimbursed by Advisor (316,692) (49,165) (42,979) (47,219)
Allowance charged against receivable from Advisor 263,807 46,464 40,088 43,196
----------- ---------- ---------- ----------
Net expenses 378,251 52,304 46,344 51,902
----------- ---------- ---------- ----------
Net Investment Income (Loss) (140,422) (37,816) (30,138) (30,625)
----------- ---------- ---------- ----------
REALIZED AND UNREALIZED GAINS/(LOSSES) ON INVESTMENTS
Net realized gains on
investments 280,574 - - 8
Net change in unrealized
appreciation/(depreciation)
on investments 1,236,697 5,441 5,668 (32)
----------- ---------- ---------- ----------
Net realized and unrealized
gain/(loss) on
investments 1,517,271 5,441 5,668 (24)
----------- ---------- ---------- ----------
Change in net assets
resulting from operations $ 1,376,849 $ (32,375) $ (24,470) $ (30,649)
=========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements
<PAGE>
Life Cycle Mutual Funds, Inc.
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Equity Bond
Fund Fund
-------------------------------------- -------------------------------------
October 2, October 4,
Year 1995 (a) Year 1995 (a)
Ended through Ended through
July 31, July 31, July 31, July 31,
1997 1996 1997 1996
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss) $ (140,422) $ 27,052 $ (37,816) $ 2,868
Net realized gains from
investment transactions 280,574 116,521 0 0
Net change in unrealized appreciation/
(depreciation) from investments 1,236,697 (83,016) 5,441 (2,506)
-------------- ------------- ------------- -----------
Change in net assets
resulting from operations 1,376,849 60,557 (32,375) 362
-------------- ------------- ------------- -----------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income 0 (27,052) 0 (2,868)
In excess of net investment income (123,384) 0 (8,645) 0
From net realized gains (140,470) 0 0 0
-------------- ------------- ------------- -----------
Change in net assets from
shareholder distributions (263,854) (27,052) (8,645) (2,868)
-------------- ------------- ------------- -----------
CAPITAL SHARE TRANSACTIONS
Proceeds from sales of shares 5,705,776 3,759,918 262,550 198,264
Net asset value of shares issued to
shareholders in reinvestment
of dividends 204,665 17,037 7,693 2,868
Net asset value of shares redeemed (1,146,572) (884,240) (47,109) (1,607)
-------------- ------------- ------------- -----------
Change in net assets from
capital share transactions 4,763,869 2,892,715 223,134 199,525
-------------- ------------- ------------- -----------
Change in net assets 5,876,864 2,926,220 182,114 197,019
NET ASSETS
Beginning of Year 2,951,220 25,000 222,019 25,000
-------------- ------------- ------------- -----------
End of Year $ 8,828,084 $ 2,951,220 $ 404,133 $ 222,019
============== ============= ============= ===========
</TABLE>
(a) Commencement of Operations.
See accompanying notes to financial statements
<PAGE>
Life Cycle Mutual Funds, Inc.
Statements of Changes in Net Assets (continued)
<TABLE>
<CAPTION>
Retirement Harvest
Income Fund Fund
--------------------------------- -------------------------------
October 4, October 4,
Year 1995 (a) Year 1995 (a)
Ended through Ended through
July 31, July 31, July 31, July 31,
1997 1996 1997 1996
------------ ------------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss) $ (30,138) $ 3,922 $ (30,625) $ 20,365
Net realized gains/(losses) from
investment transactions 0 0 8 (300)
Net change in unrealized appreciation/
(depreciation) from investments 5,668 (4,278) (32) 0
------------ ------------- ----------- -----------
Change in net assets
resulting from operations (24,470) (356) (30,649) 20,065
------------ ------------- ----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income 0 (3,922) 0 (20,365)
In excess of net investment income (9,950) 0 (11,518) 0
------------ ------------- ----------- -----------
Change in net assets from
shareholder distributions (9,950) (3,922) (11,518) (20,365)
------------ ------------- ----------- -----------
CAPITAL SHARE TRANSACTIONS
Proceeds from sales of shares 189,920 299,865 1,188,101 2,279,287
Net asset value of shares issued to
shareholders in reinvestment
of dividends 9,205 3,922 9,943 20,098
Net asset value of shares redeemed (76,229) (52,347) (1,924,981) (1,399,392)
------------ ------------- ----------- -----------
Change in net assets from
capital share transactions 119,896 251,440 (726,937) 899,993
------------ ------------- ----------- -----------
Change in net assets 85,476 247,162 (769,104) 899,693
NET ASSETS
Beginning of Year 272,162 25,000 924,693 25,000
------------ ------------- ----------- -----------
End of Year $ 357,638 $ 272,162 $ 155,589 $ 924,693
============ ============= =========== ===========
</TABLE>
(a) Commencement of Operations
See accompanying notes to financial statements
<PAGE>
LIFE CYCLE MUTUAL FUNDS, INC.
Financial Highlights
For a share of beneficial interest outstanding throughout each period
<TABLE>
<CAPTION>
Equity Fund Bond Fund
------------------------ -----------------------
October 2, October 4,
Year 1995 (a)(d) Year 1995 (a)(d)
Ended through Ended through
July 31, July 31, July 31, July 31,
1997 1996 1997 1996
------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.68 $ 10.00 $ 9.82 $ 10.00
------- ------- ------- -------
Income from Investment Operations:
Net investment income (loss) (0.16) 0.12 (0.73) 0.22
Net realized/unrealized gains/
(losses) on investments 3.10 0.68 0.15 (0.18)
------- ------- ------- -------
Total from Investment Operations 2.94 0.80 (0.58) 0.04
------- ------- ------- -------
Less Distributions:
Dividends from net investment income 0.00 (0.12) 0.00 (0.22)
Dividends in excess of net investment income (0.23) 0.00 (0.30) 0.00
Distributions from net realized gains/losses (0.31) 0.00 0.00 0.00
------- ------- ------- -------
Total Distributions (0.54) (0.12) (0.30) (0.22)
------- ------- ------- -------
Net Asset Value, End of Period $ 13.08 $ 10.68 $ 8.94 $ 9.82
======= ======= ======= =======
Total Return 28.13% 8.05%(b) (6.20)% 0.39%(b)
Net Assets, End of Period (in thousands) $ 8,828 $ 2,951 $ 404 $ 222
Ratios Average Net Assets of:
Net investment income (loss) (2.39)% 1.82%(c) (12.61)% 2.51%(c)
Expenses net of waivers 6.44 % 1.95%(c) 17.45 % 1.95%(c)
Expenses before waivers* 8.10 % 9.70%(c) 19.10 % 76.34%(c)
Portfolio Turnover Rate 60.59% 132.00%(b) 0.00% 0.00%
</TABLE>
* During the period, certain fees were voluntarily waived or reimbursed. If
such voluntary fee reductions had not occurred, the ratios would have been
as indicated.
(a) Commencement of Operations.
(b) Not annualized.
(c) Annualized.
(d) Per share amounts based on the average number of shares outstanding during
the period from commencement of operations to July 31, 1996.
See accompanying notes to financial statements
<PAGE>
LIFE CYCLE MUTUAL FUNDS, INC.
Financial Highlights
For a share of beneficial interest outstanding throughout each period
<TABLE>
<CAPTION>
Retirement Income Fund Harvest Fund
------------------------ -----------------------
October 4, October 4,
Year 1995 (a)(d) Year 1995 (a)(d)
Ended through Ended through
July 31, July 31, July 31, July 31,
1997 1996 1997 1996
------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 9.76 $ 10.00 $ 10.00 $ 10.00
------- ------- ------- -------
Income from Investment Operations:
Net investment income (loss) (0.70) 0.24 (1.87) 0.20
Net realized/unrealized gains/
(losses) on investments 0.16 (0.24) (0.01) 0.00
------- ------- ------- -------
Total from Investment Operations (0.54) 0.00 (1.88) 0.20
------- ------- ------- -------
Less Distributions:
Dividends from net investment income 0.00 (0.24) 0.00 (0.20)
Dividends in excess of net investment income (0.30) 0.00 (0.26) 0.00
------- ------- ------- -------
Total Distributions (0.30) (0.24) (0.26) (0.20)
------- ------- ------- -------
Net Asset Value, End of Period $ 8.92 $ 9.76 $ 7.86 $ 10.00
======= ======= ======= =======
Total Return (5.74)% (0.02)%(b) (19.30)% 2.05%(b)
Net Assets, End of Period (in thousands) $ 358 $ 272 $ 156 $ 925
Ratios to Average Net Assets of:
Net investment income (loss) (9.39)% 2.83%(c) (6.86)% 2.44%(c)
Expenses net of waivers 14.44 % 1.95%(c) 11.62 % 1.95%(c)
Expenses before waivers* 16.09 % 60.32%(c) 13.27 % 12.38%(c)
</TABLE>
* During the period, certain fees were voluntarily waived or reimbursed. If
such voluntary fee reductions had not occurred, the ratios would have been
as indicated.
(a) Commencement of Operations.
(b) Not annualized.
(c) Annualized.
(d) Per share amounts based on the average number of shares outstanding during
the period from commencement of operations to July 31, 1996.
See accompanying notes to financial statements
<PAGE>
LIFE CYCLE MUTUAL FUNDS(TM), INC.
Notes to Financial Statements
July 31, 1997
1. DESCRIPTION. Life Cycle Mutual Funds(TM), Inc. (i.e., The "Fund") was
organized on June 25, 1995, and is registered under the Investment Company Act
of 1940, as amended, as an open end, management investment company and currently
consists of four separate investment portfolios (collectively the "Portfolios"):
the Life Cycle Equity Fund(TM) (the "Equity Fund"), the Life Cycle Bond Fund(TM)
(the "Bond Fund"), the Life Cycle Retirement Income Fund(TM) (the "Retirement
Income Fund"), and the Life Cycle Harvest Fund(TM) (the "Harvest Fund"). The
Portfolios are offered in connection with an age-based asset allocation program
(the "Life Cycle Program") which is designed to meet the long-term retirement
investment needs of individual investors. The Life Cycle Program is intended to
manage investors' retirement assets by making disciplined age-based asset
allocation decisions to achieve this overall objective. The Equity Fund's
investment objective is to maximize investors' total return by investing in a
portfolio of common stocks selected from the Standard & Poor's 500 Index on the
basis of such stocks' ability to provide capital appreciation and generate
dividend income. The Bond Fund's investment objective is to maximize income
consistent with the preservation of capital. The Bond Fund intends to achieve
its investment objective, with a low risk to capital, by investing in a laddered
portfolio of bonds issued and backed by the full faith and credit of the U.S.
Government and its agencies and instrumentalities, mortgage-backed securities,
and investment-grade debt securities issued by corporations and banks. The
Retirement Income Fund's investment objective is to maximize income consistent
with the preservation of capital. The Retirement Income Fund intends to achieve
its investment objective, with moderate risk to capital, by investing in a
laddered portfolio of bonds issued and backed by the full faith and credit of
the U.S. Government and its agencies and instrumentalities, mortgage-backed
securities, and investment-grade debt securities issued by corporations and
banks. The Harvest Fund seeks to earn income consistent with the preservation
of capital. The Harvest Fund intends to achieve its investment objective by
investing in a laddered portfolio of short-term bonds issued and backed by the
full faith and credit of the U.S. Government and its agencies and
instrumentalities, negotiable CD's, repurchase agreements, and short-term
corporate debt securities.
On October 7, 1997, sales of the Fund's shares were suspended by the Fund's
distributor. At a meeting of the Fund's Board of Directors held on May 29, 1998,
the Board determined that the continued operation of the Portfolios was not
economically feasible or in the best interests of the Portfolios or their
shareholders and adopted a Plan of Liquidation and Dissolution (the "Plan"). At
the same meeting, the Board accepted the resignation of Benson White & Company
("the Advisor") as the Portfolios' investment advisor and appointed Wilmington
Trust Company as the interim advisor (See also Notes 2F and 6).
2. SIGNIFICANT ACCOUNTING POLICIES. The following is a summary of the
significant accounting policies followed by the Fund:
A. Portfolio Valuation. The net asset value per share of the Portfolios is
calculated as of 4:00 P.M. (Eastern Time). Securities listed on an exchange are
valued at the last sales price prior to the time the valuation is made. If
there has been no sale since the immediately previous
<PAGE>
LIFE CYCLE MUTUAL FUNDS(TM), INC.
Notes to Financial Statements
July 31, 1997
security is primarily traded. Over-the-counter securities are valued on the
basis of the quoted bid price. Assets for which market quotations are not
readily available are valued in accordance with procedures established by the
Fund's Board of Directors, including use of an independent pricing service.
Short-term securities with maturities of 60 days or less are valued at amortized
cost, if their terms to maturity at purchase were 60 days or less, or by
amortizing their value on the 61st day prior to maturity, if their original term
to maturity at purchase exceeded 60 days.
B. Securities Transactions and Investment Income. Securities transactions
are recorded on a trade date basis. Realized gains and losses from securities
transactions are recorded on the identified cost basis. Dividend income is
recognized on the ex-dividend date and interest income, including amortization
of premium and accretion of discount, is accrued daily.
C. Distributions to Shareholders. The Bond Fund, Retirement Income Fund, and
Harvest Fund declare dividends from net investment income daily and distribute
that income monthly. The Equity Fund declares and distributes net investment
income on a quarterly basis. Net realized capital gains will be declared and
distributed annually. Distributions are recorded on the ex-dividend date.
D. Federal Income Tax. It is the policy of each of the Portfolios to
continue to qualify as a "regulated investment company" under Subchapter M of
the Internal Revenue Code of 1986, as amended. By so qualifying, the Portfolios
will not be subject to Federal income taxes to the extent that they distribute
the majority of their taxable income for the fiscal year. The Portfolios also
intend to meet the distribution requirements to avoid the payment of an excise
tax.
The amounts of dividends from net investment income and of distributions
from net realized gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles. The
reserve against the receivable from the Advisor (See Note 2F) is not currently
deductible for federal income tax purposes. Accordingly, this "book/tax"
difference is considered a temporary difference and the dividends paid to
shareholders during the year ended July 31, 1997 have been classified as
dividends in excess of net investment income in the accompanying statements of
changes in net assets.
E. Organization Expenses. Costs incurred in connection with the organization
and initial registration of the Fund have been deferred and are being amortized
on a straight-line basis over sixty months beginning with each Portfolio's
commencement of operations. In the event any of the initial shares of any of
the Portfolios are redeemed, the appropriate Portfolio should be reimbursed for
any unamortized organization expenses in the same proportion as the number of
shares redeemed bears to the number of initial shares held at time of
redemption.
Subsequent to July 31, 1997 a portion of the initial shares were redeemed.
To date, the redemption has not been reduced by a proportional share of the
unamortized organization expenses (See Note 2F).
<PAGE>
LIFE CYCLE MUTUAL FUNDS(TM), INC.
Notes to Financial Statements
July 31, 1997
F. Net Asset Value Overstatement. In October 1997 the Board of Directors of
the Fund elected to establish an allowance against the receivable from the
Advisor arising from the Advisor's voluntary commitment to reimburse Fund
expenses in excess of 1.95% of average net assets (See Note 3). For financial
reporting purposes, a 100% allowance has also been established against the
receivable from the Advisor at July 31, 1997. While the Board in its oversight
role determined that an allowance was appropriate in October 1997 and at July
31, 1997, it is uncertain whether at some earlier date an allowance should have
been established as part of the Fund's daily net asset per share (NAV)
calculations. In the event that a regulator or other authority determines that
the allowance should have been established at some earlier date, NAVs and shares
outstanding could be materially impacted (defined as greater than one penny per
share) as of July 31, 1997. The Board of Directors and the Fund believe the NAV
and shares outstanding as of July 31, 1997 are appropriately stated, however,
there remains a significant uncertainty as to whether the recording of the
allowance as of an earlier date would be necessary.
In addition, throughout the year, and at July 31, 1997, the Fund had
recorded as an asset unamortized organization expenses. As discussed previously,
in the event of any redemption of the initial shares the Portfolios would be
reimbursed for any unamortized organization expenses. Subsequent to July 31,
1997 the initial shares of the Fund were redeemed by the Advisor and to date the
unamortized organization expenses have not been reimbursed.
The proceeds from the redemption are currently being held in escrow
amounting to $88,518 pending the final determination as to who is entitled to
those proceeds in relation to each of the matters discussed above. It is
uncertain whether the Fund will ultimately be reimbursed for its unamortized
expenses. In the event it is determined that the Fund is not entitled to
recovery of its unamortized organization expenses from the redemption proceeds,
the assets recorded for unamortized organization expenses would be written off
to expense and the net assets of the Fund would be reduced accordingly.
Subsequent to July 31, 1997, each Portfolio continued to overstate its NAVs
as a result of the aforementioned issue. These overstatements likely had a
material adverse impact on the net asset value of each Portfolio of the Fund,
but the impact has not been quantified.
G. Determination of Net Asset Value and Calculation of Expenses. Expenses
directly attributable to a Portfolio are charged to that Portfolio. Other
expenses are allocated proportionately among each Portfolio within the Fund in
relation to the net assets of each Portfolio.
H. Use of Estimates. Estimates and assumptions are required to be made
regarding assets, liabilities, and changes in net assets resulting from
operations when financial statements are prepared. Actual results could differ
from these amounts.
<PAGE>
LIFE CYCLE MUTUAL FUNDS(TM), INC.
Notes to Financial Statements
July 31, 1997
3. INVESTMENT ADVISORY, ADMINISTRATIVE AND OTHER TRANSACTIONS WITH
AFFILIATES. The Fund has entered into an investment advisory agreement (the
"Investment Advisory Agreement") with Benson White & Company (the "Advisor" or
"Benson White"). The Investment Advisory Agreement provides for the Advisor to
supervise all aspects of the Fund's operations and provide investment advice and
portfolio management services to the Fund.
Subject to the general supervision of the Fund's Board of Directors, the Advisor
makes each Portfolio's day-to-day investment decisions, arranges for the
execution of portfolio transactions and generally manages the portfolio
investments. The Advisor is also responsible for the management and
implementation of the Life Cycle Program. Pursuant to the terms of the
Investment Advisory Agreement, the Advisor is paid a monthly advisory fee equal
to 0.75% of each Portfolio's average daily net assets per annum.
For the year ended July 31, 1997, the Advisor earned fees of $44,017, $2,249,
$2,407, and $3,349 for the Equity, Bond, Retirement Income, and Harvest Funds,
respectively. For the year ended July 31, 1997, the Advisor voluntarily waived
fees of $44,017, $2,249, $2,407, and $3,349 for the Equity, Bond, Retirement
Income, and Harvest Funds, respectively.
The Advisor had voluntarily agreed to cap the expense ratios at 1.95% for each
Portfolio. In order to maintain that expense ratio, the Advisor had agreed to
reimburse expenses in excess of its advisory fees as follows: Equity Fund -
$316,692; Bond Fund - $49,165; Retirement Income Fund - $42,979; Harvest Fund -
$47,219. During the year ended July 31, 1997, the Advisor did reimburse
expenses to the Fund for a total of $62,500; however, the Advisor was ultimately
unable to fulfill its entire commitment. This resulted in each Portfolio
recording an allowance against their receivable from the Advisor in the
following amounts: Equity Fund - $263,807; Bond Fund - $46,464; Retirement
Income Fund - $40,088; Harvest Fund - $43,196.
During the year ended July 31, 1997 certain expenses were inappropriately
allocated between Portfolios. As a result, the Equity, Bond and Retirement
Income Funds paid certain expenses on behalf of the Harvest Fund. As of July
31, 1997, the Harvest Fund had recorded an interfund payable in the amount of
$11,087 and the Equity, Bond and Retirement Income Funds had recorded interfund
receivables of $4,755, $3,092, and $3,240, respectively. Subsequent to July 31,
1997 the Harvest Fund was liquidated prior to satisfying the aforementioned
interfund payable. As a result, the interfund receivables as of July 31, 1997
have been deemed uncollectible and were written off to miscellaneous expenses in
the statement of operations.
<PAGE>
LIFE CYCLE MUTUAL FUNDS(TM), INC.
Notes to Financial Statements
July 31, 1997
BISYS Fund Services ("BISYS") is responsible for providing the portfolios with
administrative, fund accounting, dividend and capital gains distribution and
transfer agency services. BISYS assumed these functions during the year ended
July 31, 1997, following the acquisition by the BISYS Group, Inc. of the Mutual
Funds Division of Furman Selz, LLC ("Furman Selz"), which organization had
previously provided these services to the portfolios.
Pursuant to an administrative services agreement, BISYS receives a fee, payable
monthly, equal to 0.20% of the Fund's aggregate average net assets, subject to a
minimum of $250,000 per year, plus out of pocket expenses. For the year ended
July 31, 1997, BISYS and Furman Selz earned, in the aggregate, $250,000 for
services provided to the Fund. This amount is allocated to each Fund based on
average net assets.
The Fund entered into a distribution agreement (the "Distribution Agreement")
with Life Cycle Mutual Funds Distributors, Inc., an affiliate of BISYS. Under
the Distribution Agreement, Life Cycle Mutual Funds Distributors, Inc., as agent
for the Fund, agrees to use its best efforts as sole distributor of the Fund's
shares. Under the agreement, the distributor will receive an annual fee of
0.75% of average daily net assets in return for financing certain distribution
and shareholder related activities related to the Fund's shares.
4. SECURITIES TRANSACTIONS. Purchase and Sale Transactions. The aggregate
amount of purchases and sales of investment securities, other than short-term
securities, for the Equity Fund was $7,433,585 and $3,034,035, respectively, for
the year ended July 31, 1997.
<PAGE>
LIFE CYCLE MUTUAL FUNDS(TM), INC.
Notes to Financial Statements
July 31, 1997
5. CAPITAL SHARE TRANSACTIONS. The Fund is authorized to issue 20 billion
shares of beneficial interest with a par value of $0.001 each. Transactions in
shares of the Portfolios were as follows:
<TABLE>
<CAPTION>
Equity Fund Bond Fund
----------- ---------
October 2, October 4,
Year 1995 (a) Year 1995 (a)
Ended through Ended through
July 31, July 31, July 31, July 31,
1997 1996 1997 1996
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Beginning balance 276,239 2,500 22,605 2,500
------- ------- ------ ------
Shares sold 477,791 351,123 26,576 19,977
Shares issued in
reinvestment of dividends 17,426 1,598 780 291
Shares redeemed (96,688) (78,982) (4,777) (163)
------- ------- ------ ------
Net increase in shares 398,529 273,739 22,579 20,105
------- ------- ------ ------
Ending balance 674,768 276,239 45,184 22,605
======= ======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
Retirement Income Fund Harvest Fund
---------------------- ------------
October 4, October 4,
Year 1995 (a) Year 1995 (a)
Ended through Ended through
July 31, July 31, July 31, July 31,
1997 1996 1997 1996
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Beginning balance 27,883 2,500 92,499 2,500
------ ------ -------- --------
Shares sold 19,020 30,286 118,928 227,927
Shares issued in
reinvestment of dividends 937 397 995 2,010
Shares redeemed (7,761) (5,300) (192,639) (139,938)
------ ------ -------- --------
Net increase/(decrease) in shares 12,196 25,383 (72,716) 89,999
------ ------ -------- --------
Ending balance 40,079 27,883 19,783 92,499
====== ====== ======== ========
</TABLE>
(a) Commencement of Operations.
As of July 31, 1997, one shareholder held approximately 14.5% of the outstanding
shares of the Equity Fund, four shareholders held approximately 65.1% of the
outstanding shares of the Retirement Income Fund and two shareholders held
approximately 96.2% of the outstanding shares of the Harvest Fund (including the
Advisor, who held approximately 46.5% of the outstanding shares of the Harvest
Fund).
<PAGE>
LIFE CYCLE MUTUAL FUNDS(TM), INC.
Notes to Financial Statements
July 31, 1997
6. SUBSEQUENT EVENTS. The Fund proposes to liquidate the assets of the
Portfolios and dissolve pursuant to the provisions of a Plan of Liquidation and
Dissolution (the "Plan") as approved by the Board of Directors on May 29, 1998,
when the Board determined that an orderly liquidation of the Portfolios' assets
was in the best interests of the Fund and its shareholders. The Plan provides
for the complete liquidation of the Portfolios and distribution of their net
assets to shareholders. If the Plan is approved by the requisite shareholder
vote, the Fund will undertake to liquidate each Portfolio's assets at market
prices and on such terms and conditions as the Fund's investment adviser shall
determine to be reasonable and in the best interests of the Portfolios and their
shareholders. The Fund will bear the costs associated with the proposed
liquidation. These financial statements do not include the costs and fees of
liquidation and dissolution.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of the Life Cycle Mutual Funds, Inc.
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments of the Life Cycle Equity, Bond, Retirement Income,
and Harvest Funds (the "Funds") of the Life Cycle Mutual Funds, Inc. as of July
31, 1997, the related statements of operations for the year then ended, and
changes in net assets and financial highlights for each of the two years (or
periods) in the period then ended. These financial statements and financial
highlights are the responsibility of the Funds' management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of July
31, 1997, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective portfolios comprising the Life Cycle Mutual Funds, Inc. as of
July 31, 1997, the results of their operations, the changes in net assets, and
financial highlights for each of the respective periods stated in the first
paragraph, in conformity with generally accepted accounting principles.
As more fully discussed in Note 2F the calculation of the net asset value per
share and shares outstanding of the Funds at July 31, 1997 are subject to the
timing of when certain of the Funds' assets were deemed uncollectible. As more
fully discussed in Note 6 the Board of Directors has approved a plan of
liquidation and dissolution.
PricewaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
September 4, 1998
