FLEMING CAPITAL MUTUAL FUND GROUP, INC.
Investment Adviser:
ROBERT FLEMING, INC.
The Fleming Capital Mutual Fund Group, Inc. (the "Corporation") provides a
convenient and economical means of investing in professionally managed
portfolios of securities. This Prospectus offers shares of the following mutual
funds (each a "Fund" and, together, the "Funds"), each of which is a separate
series of the Corporation:
FLEMING FUND
FLEMING FLEDGLING FUND
This Prospectus concisely sets forth the information about the Corporation and
the Funds that a prospective investor should know before investing. Investors
are advised to read this Prospectus and retain it for future reference. A
Statement of Additional Information dated September 30, 1997 has been filed with
the Securities and Exchange Commission, and is available without charge by
calling 1-800-264-0592. The Statement of Additional Information is incorporated
into this Prospectus by reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
September 30, 1997
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TABLE OF CONTENTS
SUMMARY ......................... 3
EXPENSE SUMMARY ................. 5
THE CORPORATION AND THE FUNDS ... 6
INVESTMENT OBJECTIVES ........... 6
INVESTMENT POLICIES ............. 6
RISK FACTORS .................... 7
INVESTMENT LIMITATIONS .......... 7
THE ADVISER ..................... 8
THE DISTRIBUTOR ................. 9
THE ADMINISTRATOR ............... 9
THE TRANSFER AGENT .............. 9
PORTFOLIO TRANSACTIONS .......... 9
PURCHASE AND REDEMPTION OF SHARES 10
PERFORMANCE ..................... 14
TAXES ........................... 15
GENERAL INFORMATION ............. 16
DESCRIPTION OF PERMITTED
INVESTMENTS AND RISK FACTORS .. 19
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SUMMARY
The following provides basic information about the Fleming Fund (the "Fleming
Fund") and Fleming Fledgling Fund (the "Fledgling Fund") (each a "Fund" and,
collectively, the "Funds"). The Funds are the two mutual funds comprising the
Fleming Capital Mutual Fund Group, Inc. (the "Corporation") and are advised by
Robert Fleming, Inc. (the "Adviser"). This summary is qualified in its entirety
by reference to the more detailed information provided elsewhere in this
Prospectus and in the Statement of Additional Information.
What is each Fund's investment objective and primary policies? The Fleming Fund
seeks growth from capital appreciation. It invests primarily in a diversified
portfolio of common stock and preferred stock of issuers the Adviser believes
have above average growth potential.
The Fledgling Fund seeks growth through capital appreciation. It invests
primarily in a diversified portfolio of common stock and preferred stock of
issuers with market capitalizations of not more than $3.0 billion that are
quoted on a stock exchange or traded on an over-the-counter market (OTC) that
the Adviser believes offer strong earnings growth potential.
What are the risks involved with investing in the Funds? The investment policies
of each Fund entail certain risks and considerations of which investors should
be aware. Each Fund invests in securities that fluctuate in value, and investors
should expect each Fund's net asset value per share to fluctuate in value. The
value of equity securities may be affected by the financial markets as well as
by developments impacting specific issuers. The Funds may enter into futures and
options transactions and may purchase zero coupon securities. Investments in
these instruments involve certain other risks.
For more information about each Fund, see "Investment Objectives," "Investment
Policies," "Risk Factors," and "Description of Permitted Investments and Risk
Factors."
Who is the Adviser? Robert Fleming, Inc. serves as the investment adviser to
each Fund. See "Expense Summary" and "The Adviser."
Who is the Administrator? Investment Company Administration Corporation (the
"Administrator") serves as the administrator for the Funds. See "Expense
Summary" and "The Administrator."
Who is the Distributor? First Fund Distributors, Inc. (the "Distributor") serves
as the distributor of the Funds' shares. See "The Distributor."
Who is the Transfer Agent? Countrywide Fund Services, Inc. serves as the
transfer agent and dividend disbursing agent for the Corporation. See "The
Transfer Agent."
Is there a sales load? No, shares of each Fund are offered on a no-load basis.
Is there a minimum investment? The Funds require a minimum initial investment
for each Fund of $1,000,000, which the Adviser may waive at its discretion.
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How do I purchase and redeem shares? Purchases and redemptions may be made
through the Transfer Agent on each day that the New York Stock Exchange is open
for business ("Business Day"). A purchase order will be effective as of the
Business Day received by the Transfer Agent if the Transfer Agent (or its
authorized agent) receives the order and payment, by check or in readily
available funds, prior to 4:00 p.m. Eastern time. Redemption orders received by
the Transfer Agent prior to 4:00 p.m. Eastern time on any Business Day will be
effective that day. The purchase and redemption price for shares is the net
asset value per share determined as of the end of the day the order is
effective. See "Purchase and Redemption of Shares."
How are distributions paid? Each Fund distributes substantially all of its net
investment income (exclusive of capital gains) in the form of periodic
dividends. Any capital gain is distributed at least annually. Distributions are
paid in additional shares unless the shareholder elects to receive the payment
in cash. See "Dividends and Distributions."
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EXPENSE SUMMARY
This table is designed to help a shareholder understand the costs of investing
in the Funds.
SHAREHOLDER TRANSACTION EXPENSES
- --------------------------------
Sales Load Imposed on Purchases ................ None
Sales Load Imposed on Reinvested Dividends...... None
Deferred Sales Load ............................ None
Redemption Fees ................................ None
Exchange Fees .................................. None
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
(as a percentage of average net assets)
Fleming Fund Fledgling Fund
------------ --------------
Advisory Fees ...................................... .90% 1.00%
12b-1 Fees ......................................... None None
Other Expenses (after reimbursements) (1) .......... .35% .35%
--- ---
Total Fund Operating Expenses (after
fee waivers or reimbursements) (2) ....... 1.25% 1.35%
---- ----
(1)"Other Expenses" are estimated for the current fiscal year. Absent
reimbursement, estimated "Other Expenses" for the Fleming and Fledgling Funds
would be 1.65% and 1.65%, respectively.
(2)Although not required to do so, the Adviser has agreed to waive its advisory
fee or reimburse expenses to each Fund to the extent necessary so that the ratio
of total operating expenses to average net assets will not exceed 1.25% and
1.35% for the Fleming Fund and Fledgling Fund, respectively. The Adviser
reserves the right to terminate the waivers or discontinue reimbursements at any
time in its sole discretion. Absent fee waivers and expense reimbursements,
estimated "Total Fund Operating Expenses" for the Fleming and Fledgling Funds
would be 2.55% and 2.65%, respectively.
EXAMPLE
You would pay the following expenses 1 year 3 years
on a $1,000 investment in a Fund assuming ------ -------
(1) a 5% annual return and (2)redemption
at the end of each time period.
Fleming Fund $13 $40
Fledgling Fund $14 $43
THE EXAMPLE IS BASED UPON TOTAL OPERATING EXPENSES OF EACH FUND AFTER WAIVERS
AND REIMBURSEMENTS, IF ANY, AS SHOWN IN THE EXPENSE TABLE. THE EXAMPLE SHOULD
NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN. The purpose of the expense table and
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example is to assist the investor in understanding the various costs and
expenses that may be directly or indirectly borne by shareholders of the Funds.
Additional information may be found under "The Adviser" and "The Administrator."
THE CORPORATION AND THE FUNDS
Fleming Capital Mutual Fund Group, Inc. (the "Corporation") offers shares in two
separately-managed mutual funds, each of which is a separate series of the
Corporation. Each share of each mutual fund represents an undivided,
proportionate interest in that mutual fund. This Prospectus offers shares of the
Corporation's Fleming Fund (the "Fleming Fund") and Fleming Fledgling Fund (the
"Fledgling Fund") (each a "Fund" and, together, the "Funds").
INVESTMENT OBJECTIVES
Fleming Fund -- The Fleming Fund seeks growth from capital appreciation.
Fledgling Fund -- The Fledgling Fund seeks growth through capital appreciation.
There can be no assurance that any Fund will achieve its investment objective.
INVESTMENT POLICIES
Fleming Fund
The Fleming Fund invests primarily (and, under normal conditions, at least 80%
of its total assets) in a diversified portfolio of common stocks and preferred
stock of issuers that the Adviser believes to have above average growth
potential. Any remaining assets may be invested in ADRs, warrants and rights,
securities convertible into common stock, debt securities, other investment
companies. The Fund only will purchase securities that are traded on registered
exchanges or the over-the-counter market in the United States.
Fledgling Fund
The Fledgling Fund invests primarily (and, under normal conditions, at least 80%
of its total assets) in a diversified portfolio of common stocks of issuers with
market capitalizations of not more than $3.0 billion that the Adviser believes
to have strong earnings growth potential. The Fund may invest in warrants and
rights to purchase common stocks, securities convertible into common stock, debt
securities, other investment companies, and ADRs. The Fund only will purchase
securities that are traded on registered exchanges or the over-the-counter
market in the United States.
All Funds
Each Fund may purchase securities on a when-issued basis.
Each Fund may enter into futures and options transactions.
Each Fund may invest up to 15% of its net assets in illiquid securities.
Each Fund may purchase convertible securities.
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Each Fund may, for temporary defensive purposes, invest up to 100% of its total
assets in money market instruments (including certain U.S. Government and U.S.
Treasury securities, bank obligations, commercial paper and other short-term
debt securities rated at the time of purchase in the top two categories by a
nationally recognized statistical rating organization, and repurchase agreements
involving the foregoing securities), shares of money market investment companies
and cash.
For a further description of these types of instruments see "Description of
Permitted Investments and Risk Factors."
RISK FACTORS
Equity Securities - Investments in equity securities in general are subject to
market risks that may cause their prices to fluctuate over time. The value of
securities convertible into equity securities, such as warrants or convertible
debt, is also affected by prevailing interest rates, the credit quality of the
issuer and any call provision. Fluctuations in the value of equity securities in
which a Fund invests will cause the net asset value of that Fund to fluctuate.
An investment in a Fund may be more suitable for long-term investors who can
bear the risk of short-term fluctuations.
The Fledgling Fund invests to a significant degree in equity securities of
smaller companies. The Fleming Fund may invest in the securities of small and
medium capitalization companies. Any investment in smaller or medium
capitalization companies involves greater risk than that customarily associated
with investments in larger, more established companies. This increased risk may
be due to the greater business risks of smaller size, limited markets and
financial resources, narrow product lines and lack of depth of management. The
securities of smaller companies are often traded in the over-the-counter market
and, if listed on a national securities exchange, may not be traded in volumes
typical for that exchange. Thus, the securities of smaller-sized companies are
likely to be less liquid, and subject to more abrupt or erratic market movements
than securities of larger, more established growth companies.
Portfolio Turnover - Under normal circumstances, the portfolio turnover rate for
each Fund is not expected to exceed 75%. See "Taxes."
INVESTMENT LIMITATIONS
The investment objective of each Fund and certain of the investment limitations
set forth here and in the Statement of Additional Information are fundamental
policies of that Fund. Fundamentalpolicies cannot be changed without the consent
of the holders of a majority of that Fund's outstanding shares.
1. No Fund may (i) purchase securities of any issuer (except securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities and
repurchase agreements involving such securities) if, as a result, more than 5%
of the total assets of the Fund would be invested in the securities of such
issuer; or (ii) acquire more than 10% of the outstanding voting securities of
any one issuer. This restriction
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applies to 75% of each Fund's total assets.
2. No Fund may purchase any securities which would cause 25% or more of the
total assets of the Fund to be invested in the securities of one or more issuers
conducting their principal business activities in the same industry, provided
that this limitation does not apply to investments in obligations issued or
guaranteed by the U.S. Government or its agencies and instrumentalities and
repurchase agreements involving such securities.
The foregoing percentages will apply at the time of the purchase of a security.
THE ADVISER
Robert Fleming, Inc. is a professional investment management firm and
broker-dealer founded in 1968. The Adviser is an indirect, wholly-owned
subsidiary of Robert Fleming Holdings, a merchant bank based in London. As of
June 30, 1997, the Adviser had discretionary management authority with respect
to approximately $3.1 billion of assets. The Adviser has, since 1984, provided
investment advisory and subadvisory services to foreign investment companies and
other clients investing in securities in the U.S. The principal business address
of the Adviser is 320 Park Avenue, New York, New York 10022.
The Adviser serves as the investment adviser for each Fund under an investment
advisory agreement (the "Advisory Agreement"). Under the Advisory Agreement, the
Adviser makes the investment decisions for the assets of each Fund and
continuously reviews, supervises and administers each Fund's investment program,
subject to the supervision of, and policies established by, the Board of
Directors (the "Board") of the Corporation.
For its services, the Adviser is entitled to a fee, which is calculated daily
and paid monthly, at an annual rate of .90% of the average daily net assets of
the Fleming Fund and 1.00% of those of the Fledgling Fund. Although not required
to do so, the Adviser has voluntarily agreed to waive all or a portion of its
fee and to reimburse expenses of the Fleming and Fledgling Funds in order to
limit their total operating expenses (as a percentage of average daily net
assets on an annualized basis) to not more than 1.25% and 1.35%, respectively.
The Adviser reserves the right, in its sole discretion, to terminate these
voluntary fee waivers and reimbursements at any time.
Jonathan Kendrew Llewelyn Simon, serves as portfolio manager to the Fleming
Fund. Mr. Simon has worked with various affiliates of the Adviser since 1980 and
is currently a Director of Robert Fleming, Inc. Mr. Simon is head of the
Adviser's Large Cap Investment Team.
Christopher Mark Vyvyan Jones, serves as portfolio manager to the Fledgling
Fund. Mr. Jones has worked with various affiliates of the Adviser since 1982 and
is currently a Director of Robert Fleming, Inc. Mr. Jones is head of the
Adviser's Fledgling Investment Team.
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THE DISTRIBUTOR
First Fund Distributors, Inc. (the "Distributor"), 4455 E. Camelback Road, Suite
261E, Phoenix, Arizona 85018, an affiliate of the Administrator, acts as the
Corporation's distributor pursuant to a distribution agreement (the
"Distribution Agreement"). The Distribution Agreement provides the Distributor
with the right to distribute shares of Funds through other broker-dealers or
financial institutions with whom the Distributor has entered into selected
broker agreements.
THE ADMINISTRATOR
Investment Company Administration Corporation (the "Administrator"), 2025 E.
Financial Way, Suite 101, Glendora, California 91741, an affiliate of the
Distributor, provides the Corporation with administrative services.
The Administrator, pursuant to an administration agreement with the Corporation,
supervises the overall administration of the Funds including, among other
responsibilities, the preparation and filing of all documents required for
compliance by the Corporation or the Funds with applicable laws and regulations,
arranging for the maintenance of books and records of the Corporation and the
Funds, and supervision of other organizations that provide services to the
Corporation and the Funds. Certain officers of the Corporation may be provided
by the Administrator. Under the terms of the agreement, each Fund will pay the
Administrator an annual fee of 0.10% of the first $200 million of average daily
net assets, 0.05% of the next $300 million, and 0.03% of assets over $500
million, payable monthly and subject to an annual minimum of $40,000.
THE TRANSFER AGENT
Countrywide Fund Services, Inc. (the "Transfer Agent"), 312 Walnut Street, 21st
Floor, Cincinnati, Ohio 45202, serves as the transfer agent and dividend
disbursing agent for the Corporation under a transfer agency agreement with the
Corporation.
PORTFOLIO TRANSACTIONS
Each Fund may execute brokerage or other agency transactions through the Adviser
or its affiliates for which the Adviser or its affiliates may receive usual and
customary compensation. The Advisory Agreement authorizes the Adviser to select
the brokers or dealers that will execute the purchases and sales of investment
securities for a Fund and directs the Adviser to use its best efforts to obtain
the best execution with respect to all transactions for the Fund. In doing so, a
Fund may pay higher commission rates than the lowest available when the Adviser
believes it is reasonable to do so in light of the value of the research,
statistical, and pricing services provided by the broker effecting the
transaction. The Adviser is not in the practice of allocating brokerage or
principal business on the basis of sales of the Funds' shares which may be made
through intermediary brokers or dealers. However, the Adviser may place Fund
orders with qualified broker-dealers who recommend a Fund or who act as agents
in the purchase of shares of a Fund for their clients.
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PURCHASE AND REDEMPTION OF SHARES
Purchases and redemptions may be made through the Transfer Agent on each day
that the New York Stock Exchange is open for business ("Business Day").
Investors may purchase and redeem shares of each Fund directly through the
Transfer Agent at: Countrywide Fund Services, Inc., 312 Walnut Street, 21st
Floor, Cincinnati, Ohio, 45202, by mail or wire transfer. Purchases and
redemptions of shares of the Fund may be made on any Business Day. All
shareholders may place orders by telephone; when market conditions are extremely
busy, it is possible that investors may experience difficulties placing orders
by telephone and may wish to place orders by mail.
The minimum initial investment in each Fund is $1,000,000, and subsequent
purchases must be at least $10,000. The Adviser may waive these minimums at its
discretion. No minimum applies to subsequent purchases effected by dividend
reinvestment. Employees of the Adviser and certain of its affiliates may invest
in the Funds subject to certain conditions, including a lower minimum
investment, established by the Adviser.
Certain brokers assist their clients in the purchase or redemption of shares and
charge a fee for this service in addition to a Fund's public offering price.
Purchases by Mail
An account may be opened by mailing a check or other negotiable bank draft for
$1,000,000 or more, together with a completed Account Application to: Fleming
Capital Mutual Fund Group, Inc., P.O. Box 5354, Cincinnati, Ohio 45201-5354.
When purchases are made by check (including certified or cashier's checks),
redemption proceeds will not be forwarded until the investment being redeemed
has been in the account for 15 days. Subsequent investments may also be mailed
directly to the Transfer Agent.
Purchases by Wire Transfer
Shareholders having an account with a commercial bank that is a member of the
Federal Reserve System may purchase shares of the Fund by requesting their bank
to transmit funds by wire to:
Fleming Capital Mutual Fund Group, Inc.
Star Bank
ABA #042000013
Credit Fleming 4864-84413
FFC: Shareholder's Name:_____________________________
Shareholder's Account No.:______________________
The shareholder's name and account number must be specified in the wire.
Initial Purchases: Before making an initial investment by wire, an investor must
first telephone 1-800-264-0592 to be assigned an account number. The investor's
name, account number, taxpayer identification number or Social Security number,
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and address must be specified in the wire. In addition, an Account Application
should be promptly forwarded to: Fleming Capital Mutual Fund Group, Inc., P.O.
Box 5354, Cincinnati, Ohio 45201-5354.
Subsequent Purchases: Additional investments may be made at any time through the
wire procedures described above, which must include a shareholder's name and
account number. The investor's bank may impose a fee for investments by wire.
Purchasing with Securities
Shares may be purchased by tendering payment in kind in the form of marketable
securities, including, but not limited to, shares of common stock and debt
securities, provided the acquisition of such securities is consistent with the
Funds' investment objective and otherwise acceptable to the Adviser.
Purchasing by Retirement Plan and Individual Retirement Accounts (IRAs)
Shares of the Funds are available for purchase by any retirement plan, including
401(k) plans, profit sharing plans, and IRAs. The minimum initial investment in
each Fund is $1,000,000, and subsequent purchases must be at least $10,000. The
Adviser may waive the minimums at its discretion.
Automatic Investment Plan ("AIP")
A shareholder or prospective shareholder may arrange for periodic investments in
a Fund through automatic deductions by ACH from a checking account by completing
the appropriate section on the application. The minimum initial investment
amount for AIPs is $1,000,000, and the minimum pre-authorized investment amount
is $1,000 per month per account. To participate in the AIP, complete the
appropriate section on the account application form.
General Information Regarding Purchases
A purchase request will be effective as of the day received by the Transfer
Agent if the Transfer Agent (or its authorized agent) receives the purchase
request in good order and payment before 4:00 p.m., Eastern time. A purchase
request is in good order if it is complete and accompanied by the appropriate
documentation, including an Account Application and any additional documentation
required. Purchase requests in good order received after 4:00 p.m., Eastern
time, will be effective the next Business Day. Payment may be made by check or
readily available funds. The purchase price of shares of any Fund is that Fund's
net asset value per share next determined after a purchase order is effective.
Purchases will be made in full and fractional shares of each Fund calculated to
three decimal places.
If a check received for the purchase of shares does not clear, the purchase will
be canceled, and the investor could be liable for any losses or fees incurred.
The Corporation reserves the right to reject a purchase order when the
Corporation determines that it is not in the best interest of the Corporation or
its shareholders to
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accept such order.
Exchanges
Shareholders of each Fund may exchange their shares for shares of the other Fund
if it is then offering its shares to the public. Exchanges are made at net asset
value. An exchange is considered a sale of shares and may result in capital gain
or loss for federal income tax purposes. The shareholder must have received a
current prospectus for the new Fund before any exchange will be effected. If the
Transfer Agent (or its authorized agent) receives exchange instructions in
writing or by telephone (an "Exchange Request") in good order by 4:00 p.m.,
Eastern time, on any Business Day, the exchange will be effected that day. The
liability of the Fund or the Transfer Agent for fraudulent or unauthorized
telephone instructions may be limited as described below. The Corporation
reserves the right to modify or terminate this exchange offer on 60 days'
notice.
Redemptions
Shareholders may request redemptions from a Fund either by mail, by writing
Fleming Capital Mutual Fund Group, Inc., P.O. Box 5354, Cincinnati, Ohio
45201-5354, or by calling 1-800-264-0592.
The Transfer Agent may require that the signatures on the written request be
guaranteed. You should be able to obtain a signature guarantee from a bank,
broker, dealer, certain credit unions, securities exchange or association,
clearing agency or savings association. Notaries public cannot guarantee
signatures. The signature guarantee requirement will be waived if all of the
following conditions apply: (1) the redemption is for not more than $25,000
worth of shares, (2) the redemption check is payable to the shareholder(s) of
record, and (3) the redemption check is mailed to the shareholder(s) at his or
her address of record. The Corporation and the Transfer Agent reserve the right
to amend these requirements without notice. Provided the telephone redemption
option has been authorized by the shareholder on the account registration form,
a redemption of shares may be requested by calling 1-800-264-0592 and requesting
that the proceeds be mailed to the primary registration address or wired per the
authorized instructions designated on the shareholder's account registration
form. Shareholders may not close their accounts by telephone.
Redemption requests in good order received by the Transfer Agent (or its
authorized agent) prior to 4:00 p.m., Eastern time on any Business Day will be
effective that day. To redeem shares of the Fund, shareholders must place their
redemption orders with the Transfer Agent (or its authorized agent) prior to
4:00 p.m., Eastern time, on any Business Day. The redemption price of shares of
any Fund is the net asset value per share of that Fund next determined after the
redemption order is effective. Payment of redemption proceeds will be made as
promptly as possible and, in any event, within seven days after the redemption
order is received, provided, however, that redemption proceeds for shares
purchased by check (including certified or cashier's checks) will be forwarded
only upon collection of payment for such
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shares; collection of payment may take up to 15 days.
Shareholders may receive redemption payments in the form of a check or by
Federal Reserve wire transfer. There is no charge for having a check for
redemption proceeds mailed. Shareholders cannot redeem shares of a Fund by
Federal Reserve wire on Federal holidays restricting wire transfers.
If the Board determines that it would be detrimental to the best interests of
the remaining shareholders of a Fund to make payment wholly or partly in cash,
the Fund may pay the redemption proceeds in whole or in part by a distribution
in-kind of readily marketable securities held by the Fund in lieu of cash in
conformity with the applicable rules of the Securities and Exchange Commission.
Investors may incur brokerage charges on the sale of portfolio securities
received in such payments of redemptions.
Neither the Corporation nor the Transfer Agent will be responsible for the
authenticity of instructions received by telephone if they reasonably believe
those instructions to be genuine. The Corporation and the Transfer Agent will
each employ reasonable procedures to confirm that telephone instructions are
genuine. Such procedures may include the taping of telephone conversations.
The right of redemption may be suspended or the date of payment of redemption
proceeds postponed during certain periods as set forth more fully in the
Statement of Additional Information.
Systematic Withdrawal Plan
The Corporation offers a Systematic Withdrawal Plan ("SWP") which may be
utilized by shareholders who wish to receive regular distributions from their
account. Upon commencement of the SWP, the account must have a current value of
$1,000,000 or more. Shareholders may elect to receive automatic payments via
check or ACH of $100 or more on a monthly, quarterly, semi-annual, or annual
basis. Automatic withdrawals are normally processed on the last day of the
applicable month or, if such day is not a business day, on the previous business
day, and are paid promptly thereafter. To arrange a SWP, complete the
appropriate section on the account application form. Shareholders should realize
that if withdrawals exceed income dividends, their invested principal in the
account will be depleted. Thus, depending upon the frequency and amounts of the
withdrawal payments and/or any fluctuations in the net asset value per share,
their original investment could be exhausted entirely. To participate in the
SWP, shareholders must have their dividends automatically reinvested.
Shareholders may change or cancel the SWP at any time, upon written notice to
the Transfer Agent.
Share Price
Shares of a Fund are purchased at the net asset value after an order in proper
from is received by the Transfer Agent. An order in proper form must include all
correct and complete information, documents and signatures required to process
your
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purchase, as well as a check or bank wire payment properly drawn and
collectable. Payment should be made by check drawn on a U.S. bank, savings and
loan, or credit union. The net asset value per share is determined as of the
close of trading of the New York Stock Exchange on each day the Exchange is open
for normal trading. Orders received before 4:00 p.m., Eastern time on a day when
the Exchange is open for normal trading will be processed as of the close of
trading on that day. Otherwise, processing will occur on the next business day.
The Distributor reserves the right to reject any purchase order.
Net Asset Value
The net asset value of each Fund is determined as of the close of trading
(currently 4:00 p.m., Eastern time) on each day that the New York Stock Exchange
is open for trading (a "Business Day"). The net asset value per share of each
Fund is the value of the Fund's assets, less its liabilities, divided by the
number of outstanding shares of the Fund. Each Fund values its investments on
the basis of the market value of its securities. Securities and other assets for
which market prices are not readily available are valued at fair value as
determined in good faith in accordance with procedures approved by the Board.
Debt securities with remaining maturities of 60 days or less are normally valued
at amortized cost, unless the Adviser in accordance with procedures approved by
the Board determines that amortized cost does not represent fair value. Cash and
receivables will be valued at their face amounts. Interest will be recorded as
accrued, and dividends will be recorded on their ex-dividend date.
Share Certificates
Shares are credited to your account and certificates are not issued. This
eliminates the costly problem of lost or destroyed certificates.
PERFORMANCE
From time to time, each Fund may advertise its total return and yield. These
figures will be based on historical earnings and are not intended to indicate
future performance. No representation can be made regarding actual future
returns or yields.
The total return of a Fund refers to the average compounded rate of return on a
hypothetical investment, for designated time periods (including but not limited
to the period from which the Fund commenced operations through the specified
date), assuming that the entire investment is redeemed at the end of each period
and assuming the reinvestment of all dividend and capital gain distributions.
The yield of a Fund refers to the annualized income generated by an investment
in the Fund over a specified 30-day period. The yield is calculated by assuming
that the same amount of income generated by the investment during that period is
generated in each 30-day period over one year and is shown as a percentage of
the investment. A Fund may periodically compare its performance to that of other
mutual funds as reported by mutual fund rating services (such as Lipper
Analytical Services, Inc.),
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financial and business publications and periodicals, broad groups of comparable
mutual funds, unmanaged indices, which may assume investment of dividends but
generally do not reflect deductions for administrative and management costs, or
other investment alternatives. A Fund may quote Morningstar, Inc., a service
that ranks mutual funds on the basis of risk-adjusted performance, and Ibbotson
Associates of Chicago, Illinois, which provides historical returns of the
capital markets in the U.S. A Fund may also quote the Frank Russell Company or
Wilshire Associates consulting firms that compile financial characteristics of
common stocks and fixed income securities, regarding non-performance-related
attributes of a Fund's portfolio. The Fund may use long-term performance of
these capital markets to demonstrate general long-term risk versus reward
scenarios and could include the value of a hypothetical investment in any of the
capital markets. The Fund may also quote financial and business publications and
periodicals as they relate to fund management, investment philosophy, and
investment techniques.
A Fund may quote various measures of volatility and benchmark correlation in
advertising and may compare these measures to those of other funds. Measures of
volatility attempt to compare historical share price fluctuations or total
returns to a benchmark while measures of benchmark correlation indicate how
valid a comparative benchmark might be. Measures of volatility and correlation
are calculated using averages of historical data and cannot be calculated
precisely.
TAXES
The following summary of federal income tax consequences is based on current tax
laws and regulations, which may be changed by legislative, judicial or
administrative action. No attempt has been made to present a detailed
explanation of the federal income tax treatment of a Fund or its shareholders.
Shareholders are urged to consult their tax advisors regarding specific
questions as to federal, state and local income taxes. Further information
concerning taxes is set forth in the Statement of Additional Information.
Tax Status of the Funds:
Each Fund is treated as a separate entity for federal income tax purposes and is
not combined with the Corporation's other portfolios. Each Fund intends to
qualify or to continue to qualify for the special tax treatment afforded
regulated investment companies as defined under Subchapter M of the Internal
Revenue Code of 1986, as amended. So long as a Fund qualifies for this special
tax treatment, it will be relieved of federal income tax on that part of its net
investment income and net capital gain (the excess of net long-term capital gain
over net short-term capital loss) which it distributes to shareholders.
Tax Status of Distributions:
Each Fund will distribute all of its net investment income (including, for this
purpose, net short-term capital gain) to shareholders. Dividends from net
investment income will be taxable to shareholders as ordinary income whether
received in cash or in
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additional shares. Distributions from net investment income will qualify for the
dividends-received deduction for corporate shareholders only to the extent such
distributions are derived from dividends paid by domestic corporations; however,
such distributions which do qualify for the dividends-received deduction may be
subject to the corporate alternative minimum tax. Any net capital gains will be
distributed annually and will be taxed to shareholders as long-term capital
gains, regardless of how long the shareholder has held shares. Each Fund will
mail annual reports to shareholders of the federal income tax status of all
distributions, including the amount of dividends eligible for the
dividends-received deduction.
Certain securities purchased by a Fund are sold with original issue discount and
thus do not make periodic cash interest payments. Each Fund will be required to
include as part of its current income the accrued discount on such obligations
even though the Fund has not received any interest payments on such obligations
during that period. Because each Fund distributes all of its net investment
income to its shareholders, a Fund may have to sell portfolio securities to
distribute such accrued income, which may occur at a time when the Adviser would
not have chosen to sell such securities and which may result in a taxable gain
or loss.
Dividends declared by a Fund in October, November or December of any year and
payable to shareholders of record on a date in one of those months will be
deemed to have been paid by the Fund and received by the shareholders on
December 31 in the year declared, if paid by the Fund at any time during the
following January. Each Fund intends to make sufficient distributions prior to
the end of each calendar year to avoid liability for the federal excise tax
applicable to regulated investment companies.
Each sale, exchange or redemption of a Fund's shares is a taxable event to the
shareholder.
GENERAL INFORMATION
The Corporation
The Corporation, an open-end management investment company, was organized as a
Maryland corporation on August 19, 1997. The Articles of Incorporation permits
the Corporation to offer 100 million shares of common stock, with $.001 par
value per share. Pursuant to the Corporation's Articles of Incorporation, the
Board may increase the number of shares that the Corporation is authorized to
issue without the approval of the Corporation's shareholders. The Board has the
power to designate and redesignate any authorized but unissued shares of capital
stock into one or more classes of shares and separate series within each such
class, to fix the number of shares in any such class or series, and to classify
or reclassify any unissued shares with respect to such class or series. The
shares of common stock are currently classified into two series: the Fleming
Fund and the Fleming Fledgling Fund.
The shares of the Funds, when issued, will be fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. The shares have no
preference as to conversion, exchange, dividends, retirement or other features
and have no
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<PAGE>
pre-emptive rights. The shares of the Funds have non-cumulative rights, which
means that the holders of more than 50% of the shares voting for the election of
Directors can elect 100% of the Directors if they choose to do so. Persons or
organizations owning 25% or more of the outstanding shares of either of the
Funds may be presumed to "control" (as that term is defined in the Investment
Company Act of 1940, as amended ("1940 Act")) that Fund. Under Maryland law, the
Corporation is not required to hold an annual meeting of its shareholders unless
required to do so under the 1940 Act.
The Corporation bears the costs of its operating expenses, including fees of its
service providers, audit and legal expenses, expenses of preparing prospectuses,
proxy solicitation material and reports to shareholders, costs of custodial
services and registering the shares under federal and state securities laws,
pricing and insurance expenses, and pays additional expenses including
litigation and other extraordinary expenses, brokerage costs, interest charges,
taxes and organization expenses.
Directors of the Corporation
The management and affairs of the Corporation are supervised by the Directors
under the laws of the State of Maryland. The Directors have approved contracts
under which, as described above, certain companies provide essential management
services to the Corporation.
Voting Rights
Each share held entitles the shareholder of record to one vote. Shareholders of
each Fund will vote separately on matters pertaining solely to that Fund. As a
Maryland corporation, the Corporation is not required to hold annual meetings of
Shareholders, but approval will be sought for certain changes in the operation
of the Corporation and for the election of Directors under certain
circumstances.
Reporting
The Corporation will issue unaudited financial information semiannually and
audited financial statements annually for each Fund. The Corporation also may
furnish periodic reports and, as necessary, proxy statements to shareholders of
record.
Shareholder Inquiries
Shareholder inquiries should be directed to Fleming Capital Mutual Fund Group,
Inc., 320 Park Avenue, 11th Floor, New York, NY 10022, or by calling the
Transfer Agent at 1-800-264-0592. Purchases, exchanges and redemptions of shares
should be made through the Transfer Agent by calling 1-800-264-0592.
Dividends and Distributions
The Fleming Fund and Fledgling Fund intend to pay dividends annually. Each Fund
makes distributions of its net capital gains, if any, at least annually. The
Board may determine to declare dividends and make distributions more frequently.
Shareholders automatically receive all income dividends and capital gain
distributions
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in additional shares, unless the shareholder has elected to take such payment in
cash. Shareholders may change their election by providing written notice to the
Transfer Agent at least 15 days prior to the distribution. Shareholders may
receive payments for cash distributions in the form of a check or by Federal
Reserve or ACH wire transfer. Dividends and other distributions of each Fund are
paid on a per share basis. The value of each share will be reduced by the amount
of the payment. If shares are purchased shortly before the record date for a
distribution of ordinary income or capital gains, a shareholder will pay the
full price for the shares and receive some portion of the price back as a
taxable distribution or dividend.
Beneficial Owners
As of September 30, 1997, Robert Fleming, Inc. owned a controlling interest (as
that term is defined in the 1940 Act) of each Fund.
Counsel and Independent Auditors
Morgan, Lewis & Bockius LLP serves as counsel to the Corporation. Ernst & Young
LLP serves as the independent auditors for the Corporation.
Custodian
Star Bank, N.A. (the "Custodian") serves as the custodian of the Corporation.
The Custodian holds cash, securities and other assets of the Corporation as
required by the 1940 Act.
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DESCRIPTION OF PERMITTED INVESTMENTS AND RISK FACTORS
The following is a description of permitted investments for one or more of the
Funds:
AMERICAN DEPOSITARY RECEIPTS ("ADRs") - ADRs are securities, typically issued by
a U.S. financial institution (a "depositary"), that evidence ownership interests
in a security or a pool of securities issued by a foreign issuer and deposited
with the depositary. ADRs may be available through "sponsored" or "unsponsored"
facilities. A sponsored facility is established jointly by the issuer of the
security underlying the receipt and a depositary, whereas an unsponsored
facility may be established by a depositary without participation by the issuer
of the underlying security. Holders of unsponsored depositary receipts generally
bear all the costs of the unsponsored facility. The depositary of an unsponsored
facility frequently is under no obligation to distribute shareholder
communications received from the issuer of the deposited security or to pass
through, to the holders of the receipts, voting rights with respect to the
deposited securities.
CONVERTIBLE SECURITIES - Convertible securities are corporate securities that
are exchangeable for a set number of another security at a prestated price.
Convertible securities typically have characteristics similar to both
fixed-income and equity securities. Because of the conversion feature, the
market value of a convertible security tends to move with the market value of
the underlying stock. The value of a convertible security is also affected by
prevailing interest rates, the credit quality of the issuer, and any call
provisions.
FUTURES AND OPTIONS ON FUTURES - Futures contracts provide for the future sale
by one party and purchase by another party of a specified amount of a specific
security at a specified future time and at a specified price. An option on a
futures contract gives the purchaser the right, in exchange for a premium, to
assume a position in a futures contract at a specified exercise price during the
term of the option. A Fund may use futures contracts and related options for
bona fide hedging purposes, to offset changes in the value of securities held or
expected to be acquired or be disposed of, to minimize fluctuations in foreign
currencies, or to gain exposure to a particular market or instrument. A Fund
will minimize the risk that it will be unable to close out a futures contract by
only entering into futures contracts that are traded on national futures
exchanges.
A stock index futures contract is a bilateral agreement pursuant to which two
parties agree to take or make delivery of an amount of cash equal to a specified
dollar amount times the difference between the stock index value at the close of
trading of the contract and the price at which the futures contract is
originally struck. No physical delivery of the stocks comprising the index is
made; generally contracts are closed out prior to the expiration date of the
contract.
In order to avoid leveraging and related risks, when a Fund purchases futures
contracts, it will collateralize its position by depositing an amount of cash or
liquid securities equal to the market value of the futures positions held, less
margin deposits,
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<PAGE>
in a segregated account with the Corporation's Custodian. Collateral equal to
the current market value of the futures position will be marked to market on a
daily basis.
A Fund may enter into futures contracts and options on futures contracts traded
on an exchange regulated by the Commodities Futures Trading Commission ("CFTC"),
so long as, to the extent that such transactions are not for "bona fide hedging
purposes," the aggregate initial margin and premiums on such positions
(excluding the amount by which such options are in the money) do not exceed 5%
of the Fund's net assets.
There are risks associated with these activities, including the following: (i)
the success of a hedging strategy may depend on an ability to predict movements
in the prices of individual securities, fluctuations in markets and movements in
interests rates; (ii) there may be an imperfect or no correlation between the
changes in market value of the securities held by the Fund and the prices of
futures and options on futures; (iii) there may not be a liquid secondary market
for a futures contract or option; (iv) trading restrictions or limitations may
be imposed by an exchange; (v) losses from investing in futures is potentially
unlimited; and (vi) government regulations may restrict trading in futures
contracts and options on futures.
ILLIQUID SECURITIES - Illiquid securities are securities that cannot be disposed
of within seven business days at approximately the price at which they are being
carried on the Fund's books. Illiquid securities include demand instruments with
demand notice periods exceeding seven days, securities for which there is no
active secondary market, and repurchase agreements with durations or maturities
over seven days in length.
MONEY MARKET INSTRUMENTS - Money market instruments are high-quality,
dollar-denominated, short-term debt securities. They consist of: (i) bankers'
acceptances, certificates of deposits, notes and time deposits of highly-rated
U.S. banks and U.S. branches of foreign banks; (ii) U.S. Treasury obligations
and obligations issued or guaranteed by the agencies and instrumentalities of
the U.S. Government; (iii) high-quality commercial paper issued by U.S. and
foreign corporations; (iv) debt obligations with a maturity of one year or less
issued by corporations with outstanding high-quality commercial paper ratings;
and (v) repurchase agreements involving any of the foregoing obligations entered
into with highly-rated banks and broker-dealers.
OPTIONS - A put option gives the purchaser of the option the right to sell, and
the writer of the option the obligation to buy, the underlying security at any
time during the option period. A call option gives the purchaser of the option
the right to buy, and the writer of the option the obligation to sell, the
underlying security at any time during the option period. The premium paid to
the writer is the consideration for undertaking the obligations under the option
contract.
A Fund may purchase and write put and call options on indices and enter into
related closing transactions. Put and call options on indices are similar to
options on securities except that options on an index give the holder the right
to receive, upon
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exercise of the option, an amount of cash if the closing level of the underlying
index is greater than (or less than, in the case of puts) the exercise price of
the option. This amount of cash is equal to the difference between the closing
price of the index and the exercise price of the option, expressed in dollars
multiplied by a specified number. Thus, unlike options on individual securities,
all settlements are in cash, and gain or loss depends on price movements in the
particular market represented by the index generally, rather than the price
movements in individual securities.
All options written on indices must be covered. When a Fund writes an option on
an index or a foreign currency, it will establish a segregated account
containing cash or liquid securities with its Custodian in an amount at least
equal to the market value of the option and will maintain the account while the
option is open or will otherwise cover the transaction.
Risks associated with options transactions include: (i) the success of a hedging
strategy may depend on an ability to predict movements in the prices of
individual securities, fluctuations in markets and movements in interest rates;
(ii) there may be an imperfect correlation between the movement in prices of
options and the securities underlying them; (iii) there may not be a liquid
secondary market for options; and (iv) while a Fund will receive a premium when
it writes covered call options, it may not participate fully in a rise in the
market value of the underlying security.
REPURCHASE AGREEMENTS - Repurchase agreements are agreements by which a Fund
obtains a security and simultaneously commits to return the security to the
seller at an agreed upon price (including principal and interest) on an agreed
upon date within a number of days from the date of purchase. Repurchase
agreements are considered loans under the 1940 Act. The Funds will enter into
repurchase agreements with banks and other financial institutions deemed
creditworthy under procedures adopted by the Board.
U.S. GOVERNMENT AGENCY OBLIGATIONS - Certain Federal agencies, such as the
Government National Mortgage Association ("GNMA"), have been established as
instrumentalities of the U.S. Government to supervise and finance certain types
of activities. Issues of these agencies, while not direct obligations of the
U.S. Government, are either backed by the full faith and credit of the United
States (e.g., GNMA securities) or supported by the issuing agencies' right to
borrow from the Treasury. The issues of other agencies are supported by the
credit of the instrumentality (e.g., Fannie Mae securities).
U.S. GOVERNMENT SECURITIES - Bills, notes and bonds issued by the U.S.
Government and backed by the full faith and credit of the United States.
U.S. TREASURY OBLIGATIONS - Bills, notes and bonds issued by the U.S. Treasury,
and separately traded interest and principal component parts of such obligations
that are transferable through the Federal book-entry system known as Separately
Traded Registered Interested and Principal Securities ("STRIPS") and
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Coupon Under Book Entry Safekeeping ("CUBES").
WARRANTS - Warrants are instruments giving holders the right, but not the
obligation, to buy equity or fixed income securities of a company at a given
price during a specified period.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES - When-issued or delayed
delivery transactions involve the purchase of an instrument with payment and
delivery taking place in the future. Delivery of and payment for these
securities may occur a month or more after the date of the purchase commitment.
The Fund will maintain with the Custodian a separate account with liquid
securities or cash in an amount at least equal to these commitments. The
interest rate realized on these securities is fixed as of the purchase date, and
no interest accrues to the Fund before settlement.
ZERO COUPON SECURITIES - Zero coupon obligations are debt securities that do not
bear any interest, but instead are issued at a deep discount from par. The value
of a zero coupon obligation increases over time to reflect the interest
accreted. Such obligations will not result in the payment of interest until
maturity, and will have greater price volatility than similar securities that
are issued at par and pay interest periodically.
<PAGE>
Corporation:
FLEMING CAPITAL MUTUAL FUND GROUP, INC.
Funds:
FLEMING FUND
FLEMING FLEDGLING FUND
Adviser:
ROBERT FLEMING, INC.
Distributor:
FIRST FUND DISTRIBUTORS, INC.
Administrator:
INVESTMENT COMPANY ADMINISTRATION CORPORATION
Legal Counsel:
MORGAN, LEWIS & BOCKIUS LLP
Independent Auditors:
ERNST & YOUNG LLP
<PAGE>
Corporation:
FLEMING CAPITAL MUTUAL FUND GROUP, INC.
Funds:
FLEMING FUND
FLEMING FLEDGLING FUND
Investment Adviser:
ROBERT FLEMING, INC.
This Statement of Additional Information is not a prospectus and relates only to
the Fleming Fund (the "Fleming Fund") and Fleming Fledgling Fund (the "Fledgling
Fund") (each a "Fund" and, together, the "Funds"). It is intended to provide
additional information regarding the activities and operations of the Fleming
Capital Mutual Fund Group, Inc. (the "Corporation") and should be read in
conjunction with the Funds' Prospectus dated September 30, 1997. The Prospectus
may be obtained without charge by calling 1-800-264-0592.
TABLE OF CONTENTS
THE CORPORATION............................................................. S-2
DESCRIPTION OF PERMITTED INVESTMENTS........................................ S-2
INVESTMENT LIMITATIONS...................................................... S-7
THE ADVISER................................................................. S-8
THE ADMINISTRATOR........................................................... S-9
THE DISTRIBUTOR............................................................ S-10
DIRECTORS AND OFFICERS OF THE CORPORATION.................................. S-10
COMPUTATION OF YIELD AND TOTAL RETURN...................................... S-11
PURCHASE AND REDEMPTION OF SHARES.......................................... S-12
DETERMINATION OF NET ASSET VALUE........................................... S-13
TAXES .................................................................. S-13
PORTFOLIO TRANSACTIONS..................................................... S-14
DESCRIPTION OF SHARES...................................................... S-16
LIMITATION OF DIRECTORS' LIABILITY......................................... S-16
5% SHAREHOLDERS............................................................ S-16
FINANCIAL INFORMATION...................................................... S-17
APPENDIX .................................................................. A-1
September 30, 1997
<PAGE>
THE CORPORATION
This Statement of Additional Information relates only to the Fleming Fund (the
"Fleming Fund") and Fleming Fledgling Fund (the "Fledgling Fund") (each a "Fund"
and, together, the "Funds"). Each Fund is a separate series of the Fleming
Capital Mutual Fund Group, Inc. (the "Corporation"), a diversified, open-end
management investment company established as a Maryland corporation under its
Articles of Incorporation dated August 19, 1997. The Articles of Incorporation
permits the Corporation to offer separate series ("portfolios") of shares of
common stock ("shares"). Each portfolio is a separate mutual fund, and each
share of each portfolio represents an equal proportionate interest in that
portfolio. See "Description of Shares." Capitalized terms not defined herein are
defined in the Prospectus offering shares of the Funds.
DESCRIPTION OF PERMITTED INVESTMENTS
Futures Contracts and Options on Futures Contracts
Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of a specific security at a specified future
time and at a specified price. An option on a futures contract gives the
purchaser the right, in exchange for a premium, to assume a position in a
futures contract at a specified exercise price during the term of the option. A
Fund may use futures contracts and related options for bona fide hedging
purposes, to offset changes in the value of securities held or expected to be
acquired or be disposed of, to minimize fluctuations in foreign currencies, or
to gain exposure to a particular market or instrument. A Fund will minimize the
risk that it will be unable to close out a futures contract by only entering
into futures contracts which are traded on national futures exchanges. In
addition, a Fund will only sell covered futures contracts and options on futures
contracts.
Stock and bond index futures are futures contracts for various stock and bond
indices that are traded on registered securities exchanges. Stock and bond index
futures contracts obligate the seller to deliver (and the purchaser to take) an
amount of cash equal to a specific dollar amount times the difference between
the value of a specific stock or bond index at the close of the last trading day
of the contract and the price at which the agreement is made.
Stock and bond index futures contracts are bilateral agreements pursuant to
which two parties agree to take or make delivery of an amount of cash equal to a
specified dollar amount times the difference between the stock or bond index
value at the close of trading of the contract and the price at which the futures
contract is originally struck. No physical delivery of the stocks or bonds
comprising the index is made; generally contracts are closed out prior to the
expiration date of the contracts.
No price is paid upon entering into futures contracts. Instead, a Fund would be
required to deposit an amount of cash or U.S. Treasury securities known as
"initial margin." Subsequent payments, called "variation margin," to and from
the broker, would be
S-2
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made on a daily basis as the value of the futures position varies (a process
known as "marking to market"). The margin is in the nature of a performance bond
or good-faith deposit on a futures contract.
There are risks associated with these activities, including the following: (1)
the success of a hedging strategy may depend on an ability to predict movements
in the prices of individual securities, fluctuations in markets and movements in
interest rates; (2) there may be an imperfect or no correlation between the
changes in market value of the securities held by the Fund and the prices of
futures and options on futures; (3) there may not be a liquid secondary market
for a futures contract or option; (4) trading restrictions or limitations may be
imposed by an exchange; and (5) government regulations may restrict trading in
futures contracts and futures options.
A Fund may enter into futures contracts and options on futures contracts traded
on an exchange regulated by the Commodities Futures Trading Commission ("CFTC"),
as long as, to the extent that such transactions are not for "bona fide hedging
purposes," the aggregate initial margin and premiums on such positions
(excluding the amount by which such options are in the money) do not exceed 5%
of a Fund's net assets. A Fund may buy and sell futures contracts and related
options to manage its exposure to changing interest rates and securities prices.
Some strategies reduce a Fund's exposure to price fluctuations, while others
tend to increase its market exposure. Futures and options on futures can be
volatile instruments and involve certain risks that could negatively impact a
Fund's return.
In order to avoid leveraging and related risks, when a Fund purchases futures
contracts, it will collateralize its position by depositing an amount of cash or
liquid securities, equal to the market value of the futures positions held, less
margin deposits, in a segregated account with its custodian. Collateral equal to
the current market value of the futures position will be marked to market on a
daily basis.
Investment Company Shares
Each Fund may invest in shares of other investment companies, to the extent
permitted by applicable law and subject to certain restrictions. These
investment companies typically incur fees that are separate from those fees
incurred directly by the Fund. A Fund's purchase of such investment company
securities results in the layering of expenses, such that shareholders would
indirectly bear a proportionate share of the operating expenses of such
investment companies, including advisory fees, in addition to paying Fund
expenses. Under applicable regulations, a Fund is prohibited from acquiring the
securities of another investment company if, as a result of such acquisition:
(1) the Fund owns more than 3% of the total voting stock of the other company;
(2) securities issued by any one investment company represent more than 5% of
the Fund's total assets; or (3) securities (other than treasury stock) issued by
all investment companies represent more than 10% of the total assets of the
Fund. See also "Investment Limitations."
S-3
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Options
A put option gives the purchaser of the option the right to sell, and the writer
of the option the obligation to buy, the underlying security at any time during
the option period. A call option gives the purchaser of the option the right to
buy, and the writer of the option the obligation to sell, the underlying
security at any time during the option period. The premium paid to the writer is
the consideration for undertaking the obligations under the option contract. The
initial purchase (sale) of an option contract is an "opening transaction." In
order to close out an option position, a Fund may enter into a "closing
transaction," which is simply the sale (purchase) of an option contract on the
same security with the same exercise price and expiration date as the option
contract originally opened. If a Fund is unable to effect a closing purchase
transaction with respect to an option it has written, it will not be able to
sell the underlying security until the option expires or the Fund delivers the
security upon exercise.
A Fund may purchase put and call options to protect against a decline in the
market value of the securities in its portfolio or to anticipate an increase in
the market value of securities that the Fund may seek to purchase in the future.
A Fund purchasing put and call options pays a premium therefor. If price
movements in the underlying securities are such that exercise of the options
would not be profitable for the Fund, loss of the premium paid may be offset by
an increase in the value of the Fund's securities or by a decrease in the cost
of acquisition of securities by the Fund.
A Fund may write covered call options as a means of increasing the yield on its
fund and as a means of providing limited protection against decreases in its
market value. When a fund sells an option, if the underlying securities do not
increase or decrease to a price level that would make the exercise of the option
profitable to the holder thereof, the option generally will expire without being
exercised and the Fund will realized as profit the premium received for such
option. When a call option written by a Fund is exercised, the Fund will be
required to sell the underlying securities to the option holder at the strike
price, and will not participate in any increase in the price of such securities
above the strike price. When a put option written by a Fund is exercised, the
Fund will be required to purchase the underlying securities at the strike price,
which may be in excess of the market value of such securities.
A Fund may purchase and write options on an exchange or over-the-counter.
Over-the-counter options ("OTC options") differ from exchange-traded options in
several respects. They are transacted directly with dealers and not with a
clearing corporation, and therefore entail the risk of non-performance by the
dealer. OTC options are available for a greater variety of securities and for a
wider range of expiration dates and exercise prices than are available for
exchange-traded options. Because OTC options are not traded on an exchange,
pricing is done normally by reference to information from a market maker. It is
the position of the SEC that OTC options are generally illiquid.
S-4
<PAGE>
A Fund may purchase and write put and call options on foreign currencies (traded
on U.S. and foreign exchanges or over-the-counter markets) to manage its
exposure to exchange rates. Call options on foreign currency written by a Fund
will be "covered," which means that the Fund will own an equal amount of the
underlying foreign currency. With respect to put options on foreign currency
written by a Fund, the Fund will establish a segregated account with its
Custodian consisting of cash or liquid securities in an amount equal to the
amount the Fund would be required to pay upon exercise of the put.
A Fund may purchase and write put and call options on indices and enter into
related closing transactions. Put and call options on indices are similar to
options on securities except that options on an index give the holder the right
to receive, upon exercise of the option, an amount of cash if the closing level
of the underlying index is greater than (or less than, in the case of puts) the
exercise price of the option. This amount of cash is equal to the difference
between the closing price of the index and the exercise price of the option,
expressed in dollars multiplied by a specified number. Thus, unlike options on
individual securities, all settlements are in cash, and gain or loss depends on
price movements in the particular market represented by the index generally,
rather than the price movements in individual securities. A Fund may choose to
terminate an option position by entering into a closing transaction. The ability
of a Fund to enter into closing transactions depends upon the existence of a
liquid secondary market for such transactions.
All options written on indices must be covered. When a Fund writes an option on
an index, it will establish a segregated account containing cash or liquid
securities with its custodian in an amount at least equal to the market value of
the option and will maintain the account while the option is open or will
otherwise cover the transaction.
Risks associated with options transactions include: (1) the success of a hedging
strategy may depend on an ability to predict movements in the prices of
individual securities, fluctuations in markets and movements in interest rates;
(2) there may be an imperfect correlation between the movement in prices of
options and the securities underlying them; (3) there may not be a liquid
secondary market for options; and (4) while a Fund will receive a premium when
it writes covered call options, it may not participate fully in a rise in the
market value of the underlying security.
Repurchase Agreements
Repurchase agreements are agreements by which a Fund obtains a security and
simultaneously commits to return the security to the seller (a member bank of
the Federal Reserve System or primary securities dealer as recognized by the
Federal Reserve Bank of New York) at an agreed upon price (including principal
and interest) on an agreed upon date within a number of days (usually not more
than seven) from the date of purchase. The resale price reflects the purchase
price plus an agreed upon market rate of interest which is unrelated to the
coupon rate or maturity of the underlying security. A repurchase agreement
involves the obligation of the seller to pay
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the agreed upon price, which obligation is in effect secured by the value of the
underlying security.
Repurchase agreements are considered to be loans by a Fund for purposes of its
investment limitations. The repurchase agreements entered into by a Fund will
provide that the underlying security at all times shall have a value at least
equal to 102% of the resale price stated in the agreement (the Adviser monitors
compliance with this requirement). Under all repurchase agreements entered into
by a Fund, the Corporation's Custodian or its agent must take possession of the
underlying collateral. However, if the seller defaults, the Fund could realize a
loss on the sale of the underlying security to the extent that the proceeds of
sale, including accrued interest, are less than the resale price provided in the
agreement including interest. In addition, even though the Bankruptcy Code
provides protection for most repurchase agreements, if the seller should be
involved in bankruptcy or insolvency proceedings, a Fund may incur delay and
costs in selling the underlying security or may suffer a loss of principal and
interest if the Fund is treated as an unsecured creditor and is required to
return the underlying security to the seller's estate.
Securities Lending
In order to generate additional income, a Fund may lend its securities to
qualified broker-dealers or institutional investors, in an amount up to 33 1/3%
of the total assets taken at market value, pursuant to agreements that require
that the loan be continuously secured by collateral consisting of cash or
securities of the U.S. Government or its agencies equal to at least 100% of the
market value of the loaned securities. A Fund continues to receive interest on
the loaned securities while simultaneously earning interest on the investment of
cash collateral. Collateral is marked to market daily. There may be risks of
delay in recovery of the securities or even loss of rights in the collateral
should the borrower of the securities fail financially or become insolvent.
When-Issued and Delayed Delivery Securities
When-issued or delayed delivery securities are subject to market fluctuations
due to changes in market interest rates and it is possible that the market value
at the time of settlement could be higher or lower than the purchase price if
the general level of interest rates has changed. Although a Fund generally
purchases securities on a when-issued or forward commitment basis with the
intention of actually acquiring securities for its investment portfolio, a Fund
may dispose of a when-issued security or forward commitment prior to settlement
if it deems appropriate.
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INVESTMENT LIMITATIONS
Fundamental Policies
The following investment limitations (and those set forth in the Prospectus) are
fundamental policies of each Fund which cannot be changed with respect to a Fund
without the consent of the holders of a majority of that Fund's outstanding
shares. The term "majority of the outstanding shares" means the vote of (i) 67%
or more of a Fund's shares present at a meeting, if more than 50% of the
outstanding shares of a Fund are present or represented by proxy, or (ii) more
than 50% of a Fund's outstanding shares, whichever is less.
No Fund may:
1. Borrow money in an amount exceeding 33 1/3% of the value of its total
assets, provided that, for purposes of this limitation, investment
strategies which either obligate a Fund to purchase securities or
require a Fund to segregate assets are not considered to be borrowings.
Asset coverage of at least 300% is required for all borrowings, except
where a Fund has borrowed money for temporary purposes in amounts not
exceeding 5% of its total assets. A Fund will not purchase securities
while its borrowings exceed 5% of its total assets.
2. Make loans if, as a result, more than 33 1/3% of its total assets would
be lent to other parties, except that each Fund may (i) purchase or
hold debt instruments in accordance with its investment objective and
policies; (ii) enter into repurchase agreements; and (iii) lend its
securities.
3. Purchase or sell real estate, physical commodities, or commodities
contracts, except that each Fund may purchase (i) marketable securities
issued by companies which own or invest in real estate (including real
estate investment trusts), commodities, or commodities contracts; and
(ii) commodities contracts relating to financial instruments, such as
financial futures contracts and options on such contracts.
4. Issue senior securities (as defined in the Investment Company Act of
1940, as amended (the "1940 Act")) except as permitted by rule,
regulation or order of the Securities and Exchange Commission (the
"SEC").
5. Act as an underwriter of securities of other issuers except as it may
be deemed an underwriter in selling a portfolio security.
The foregoing percentages (except with respect to the limitation on borrowing)
will apply at the time of the purchase of a security and shall not be considered
violated unless an excess or deficiency occurs immediately after or as a result
of a purchase of such security.
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Non-Fundamental Policies
The following investment limitations are non-fundamental policies of each Fund
and may be changed with respect to a Fund by the Board of Directors.
No Fund may:
1. Pledge, mortgage or hypothecate assets except to secure borrowings
permitted by the Fund's fundamental limitation on borrowing, provided
such Fund may segregate assets without limit in order to comply with
the SEC's position regarding the asset segregation requirements of
Section 18 of the 1940 Act.
2. Invest in companies for the purpose of exercising control.
3. Purchase securities on margin or effect short sales, except that each
Fund may (i) obtain short-term credits as necessary for the clearance
of security transactions; (ii) provide initial and variation margin
payments in connection with transactions involving futures contracts
and options on such contracts; and (iii) make short sales "against the
box" or in compliance with the SEC's position regarding the asset
segregation requirements of Section 18 of the 1940 Act.
4. Invest its assets in securities of any investment company, except as
permitted by the 1940 Act.
5. Purchase or hold illiquid securities, i.e., securities that cannot be
disposed of for their approximate carrying value in seven days or less
(which term includes repurchase agreements and time deposits maturing
in more than seven days) if, in the aggregate, more than 15% of its net
assets would be invested in illiquid securities.
6. Enter into a futures contract or options transaction if the Fund's
total outstanding obligations resulting from such futures contract or
option transaction would exceed 10% of the Fund's total assets, and the
Fund will maintain assets sufficient to meet its obligations under such
contracts or transactions with the Fund's custodian or will otherwise
comply with the SEC's position regarding the asset segregation
requirements of Section 18 of the 1940 Act.
THE ADVISER
The Corporation and Robert Fleming, Inc. (the "Adviser") have entered into an
advisory agreement (the "Advisory Agreement"). The Advisory Agreement provides
that the Adviser shall not be protected against any liability to the Corporation
or its shareholders by reason of willful misfeasance, bad faith or gross
negligence on its part in the performance of its duties or from reckless
disregard of its obligations or duties thereunder.
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The Adviser will not be required to bear expenses of any Fund to an extent which
would result in the Fund's inability to qualify as a regulated investment
company under provisions of the Internal Revenue Code of 1986, as amended (the
"Code").
The continuance of the Advisory Agreement as to any Fund after the first two
years must be specifically approved at least annually (i) by the vote of the
Directors or by a vote of the shareholders of that Fund, and (ii) by the vote of
a majority of the Directors who are not parties to the Advisory Agreement or
"interested persons" of any party thereto, cast in person at a meeting called
for the purpose of voting on such approval. The Advisory Agreement will
terminate automatically in the event of its assignment, and is terminable at any
time without penalty by the Directors of the Corporation or, with respect to any
Fund, by a majority of the outstanding shares of that Fund, on not less than 30
days' nor more than 60 days' written notice to the Adviser, or by the Adviser on
90 days' written notice to the Corporation.
Although not required to do so, the Adviser has agreed to waive its advisory fee
or reimburse expenses to each Fund to the extent necessary so that the ratio of
total operating expenses to average net assets will not exceed 1.25% and 1.35%
for the Fleming Fund and the Fledgling Fund, respectively. In subsequent years,
overall Fund operating expenses will not fall below the applicable percentage
limitation until the Adviser has been fully reimbursed for fees forgone and
expenses paid. Any reductions made by the Adviser in its fees or payments or
reimbursement of expenses which are a Fund's obligation are subject to
reimbursement by the Fund. The Adviser believes that it is likely that the Funds
will be of a sufficient size to permit the reimbursement of any such reductions
or payments. However, there is no assurance that any such reimbursements will be
made. Reimbursement is contingent upon the Adviser's determination that it will
seek reimbursement from the Fund. In addition, the Board of Directors must
approve any requested reimbursement. Further, any expenses which cannot be
recouped within three years will never be reimbursed by the Fund. In other
words, any unrecouped amount after the three year period would not require
payment either on liquidation of the Fund or termination of the Advisory
Agreement.
THE ADMINISTRATOR
Investment Company Administration Corporation (the "Administrator") and the
Corporation are parties to an administration agreement (the "Administration
Agreement"). Pursuant to the Administration Agreement, the Administrator
supervises the overall administration of the Corporation, including, among other
responsibilities, the preparation and filing of all documents required by the
Corporation or the Funds with applicable laws and regulations, arranging for the
maintenance of books and records of the Corporation and the Funds, and
supervision of other organizations that provide services to the Corporation and
the Funds. Under the terms of the Administration Agreement, each Fund will pay
the Administrator an annual fee of 0.10% of the first $200 million of average
daily net assets, 0.05% of the next $300 million, and 0.03% of assets over $500
million, payable monthly and subject to an annual minimum of $40,000.
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THE DISTRIBUTOR
First Fund Distributors, Inc. (the "Distributor"), a Delaware corporation, and
the Corporation are parties to a distribution agreement (the "Distribution
Agreement"). The Distributor receives no compensation for distribution of shares
of the Funds.
The Distribution Agreement shall remain in effect for a period of two years
after the effective date of the agreement and is renewable annually. The
Distribution Agreement may be terminated by the Distributor, by a majority vote
of the Directors who are not interested persons and have no financial interest
in the Distribution Agreement, or by a majority vote of the outstanding
securities of the Corporation upon not more than 60 days' written notice by
either party or upon assignment by the Distributor.
DIRECTORS AND OFFICERS OF THE CORPORATION
The management and affairs of the Corporation are supervised by the Directors
under the laws of the State of Maryland. The Directors and Executive Officers of
the Corporation and their principal occupations for the last five years are set
forth below. Each may have held other positions with the named companies during
that period. The Corporation pays the fees for unaffiliated Directors.
The Directors and Executive Officers of the Corporation, their respective dates
of birth, and their principal occupations for the last five years are set forth
below. Each may have held other positions with named companies during that
period. Unless otherwise noted, the business address of each Director and each
Executive Officer is 320 Park Avenue, New York, New York 10022.
*Jonathan K.L. Simon (Born 1/13/59) - Chairman of the Board of Directors and
President - Director of Robert Fleming, Inc. from 1991 to the present.
*Christopher M.V. Jones (Born 11/3/60) - Director and Vice President - Director
of Robert Fleming, Inc. from 1991 to the present.
Robert E. Marks (Born 1/12/52) - Director - President of Marks Ventures from
1995 to the present. Managing Director of Carl Marks & Co. from 1992 to 1995.
Michael A. Petrino (Born 1/26/46) - Director - Investment Manager at Calport
Asset Management since 1991.
Dominic S. Solly (Born 5/21/52) - Director - Teacher for the New York City Board
of Education since 1996. Consultant for Kleinwort Benson Ltd. (investment
adviser) in 1996. Investment banker with Kleinwort Benson Ltd. from 1976 to
1994.
Arthur A. Levy (Born 11/4/42) - Treasurer - Director of Robert Fleming, Inc.
from 1985 to the present. Vice Chairman of Robert Fleming, Inc. since 1989.
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Eric M. Banhazl (Born 8/5/57) - Assistant Treasurer - 2025 E. Financial Way,
Suite 101, Glendora, California 91741. Senior Vice President of The Wadsworth
Group, Senior Vice President of Investment Company Administration Corporation
and Vice President of First Fund Distributors, Inc. since 1990.
Rita Dam (Born 7/2/66) - Assistant Treasurer - 2025 E. Financial Way, Suite 101,
Glendora, California 91741. Vice President of Investment Company Administration
Corporation. Employed by The Wadsworth Group since 1994. Member of Coopers &
Lybrand LLP from 1989 to 1994.
Clarissa Moore (Born 2/4/60) - Secretary - Director of Fleming Capital
Management (a division of Robert Fleming, Inc.) from 1996 to the present.
Registered representative of Seligman Financial Services, Inc. and Vice
President of Seligman Henderson Co. from 1994 to 1996. From 1991 to 1994, Ms.
Moore was a Vice President and Director of Calport Asset Management, and from
1993 to 1994, Ms. Moore was a registered representative of Lafter Advisors, Inc.
Steven J. Paggioli (Born 4/3/50) - Assistant Secretary - 479 West 22nd Street,
New York, New York 10011. Executive Vice President, The Wadsworth Group since
1986. Executive Vice President of Investment Company Administration Corporation,
and Vice President of First Fund Distributors, Inc. since 1986.
Dorothy Cali (Born 5/29/41) - Assistant Secretary - 2025 E. Financial Way, Suite
101, Glendora, California 91741. Vice President of The Wadsworth Group. Employed
by The Wadsworth Group since 1986.
*interested persons
It is estimated that for the first year of operations, the unaffiliated
Directors of the Corporation will receive $5,000 per year as compensation for
serving on the Corporation's board.
COMPUTATION OF YIELD AND TOTAL RETURN
From time to time the Corporation may advertise yield and total return of the
Funds. These figures will be based on historical earnings and are not intended
to indicate future performance. No representation can be made concerning actual
future yields or returns. The yield of a Fund refers to the annualized income
generated by an investment in the Fund over a specified 30-day period. The yield
is calculated by assuming that the income generated by the investment during
that 30-day period is generated in each period over one year and is shown as a
percentage of the investment. In particular, yield will be calculated according
to the following formula:
6
Yield = 2[((a-b)/cd + 1) - 1] where a = dividends and interest earned during
the period; b = expenses accrued for the period (net of reimbursement); c = the
current daily
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number of shares outstanding during the period that were entitled to receive
dividends; and d = the maximum offering price per share on the last day of the
period.
The total return of a Fund refers to the average compounded rate of return of a
hypothetical investment for designated time periods (including but not limited
to, the period from which the Fund commenced operations through the specified
date), assuming that the entire investment is redeemed at the end of each
period. In particular, total return will be calculated according to the
following formula: P (1 + T)n = ERV, where P = a hypothetical initial payment of
$1,000; T = average annual total return; n = number of years; and ERV = ending
redeemable value, as of the end of the designated time period, of a hypothetical
$1,000 payment made at the beginning of the designated time period.
PURCHASE AND REDEMPTION OF SHARES
Purchases and redemptions may be made through the Transfer Agent on days when
the New York Stock Exchange is open for business. Currently, the weekdays on
which the Fund is closed for business are: New Year's Day, Presidents' Day,
Martin Luther King, Jr.'s Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Columbus Day, Veterans' Day, Thanksgiving Day and Christmas Day.
Shares of each Fund are offered on a continuous basis.
It is currently the Corporation's policy to pay all redemptions in cash. The
Corporation retains the right, however, to alter this policy to provide for
redemptions in whole or in part by a distribution in-kind of securities held by
a Fund in lieu of cash. The Corporation has made an election with the SEC
pursuant to Rule 18f-1 under the 1940 Act to pay in cash all redemptions
requested by any shareholder of record limited in amount during any 90-day
period to the lesser of $250,000 or 1% of the net assets of the Fund at the
beginning of such period. Such commitment is irrevocable without the prior
approval of the SEC. Redemptions in excess of the above limits may be paid in
whole or in part in investment securities or in cash, as the Directors may deem
advisable; however, payment will be made wholly in cash unless the Directors
believe that the economic or market conditions exist which would make such a
practice detrimental to the best interests of the Fund. Shareholders may incur
brokerage charges on the sale of any such securities so received in payment of
redemptions.
The Corporation reserves the right to suspend the right of redemption and/or to
postpone the date of payment upon redemption for any period on which trading on
the New York Stock Exchange is restricted, or during the existence of an
emergency (as determined by the SEC by rule or regulation) as a result of which
disposal or valuation of a Fund's securities is not reasonably practicable, or
for such other periods as the SEC has by order permitted. The Corporation also
reserves the right to suspend sales of shares of any Fund for any period during
which the New York Stock Exchange, the Adviser, the Administrator, the Transfer
Agent and/or the Custodian are not open for business.
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DETERMINATION OF NET ASSET VALUE
The securities of each Fund may be valued by an independent pricing service to
obtain valuations of securities. The pricing service relies primarily on prices
of actual market transactions as well as on trade quotations obtained from third
parties. The procedures of the pricing service and its valuations are reviewed
by the officers of the Corporation under the general supervision of the
Directors.
TAXES
The following is only a summary of certain tax considerations generally
affecting the Funds and their shareholders, and is not intended as a substitute
for careful tax planning. Shareholders are urged to consult their tax advisors
with specific reference to their own tax situations, including their state and
local tax liabilities.
Federal Income Tax
The following discussion of federal income tax consequences is based on the Code
and the regulations issued thereunder as in effect on the date of this Statement
of Additional Information. New legislation, as well as administrative changes or
court decisions, may significantly change the conclusions expressed herein, and
may have a retroactive effect with respect to the transactions contemplated
herein.
Each Fund intends to qualify as a "regulated investment company" ("RIC") as
defined under Subchapter M of the Code. By following such a policy, each Fund
expects to eliminate or reduce to a nominal amount the federal taxes to which it
may be subject.
In order to qualify for treatment as a RIC under the Code, each Fund must
distribute annually to its shareholders at least the sum of 90% of its net
interest income excludable from gross income plus 90% of its investment company
taxable income (generally, net investment income plus net short-term capital
gain) ("Distribution Requirement") and also must meet several additional
requirements. Among these requirements are the following: (i) at least 90% of
the Fund's gross income each taxable year must be derived from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stock or securities, or certain other income (including
gains from options, futures or forward contracts); (ii) at the close of each
quarter of the Fund's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. Government securities,
securities of other RICs and other securities, with such other securities
limited, in respect to any one issuer, to an amount that does not exceed 5% of
the value of the Fund's assets and that does not represent more than 10% of the
outstanding voting securities of such issuer; and (iii) at the close of each
quarter of the Fund's taxable year, not more than 25% of the value of its assets
may be invested in securities (other than U.S. Government securities or the
securities of other RICs) of any one issuer, or of two or more issuers which are
engaged in the same, similar or related trades or business if the Fund owns at
least 20% of the voting power of such issuer.
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Notwithstanding the Distribution Requirement described above, which requires
only that the Fund distribute at least 90% of its annual investment company
taxable income and does not require any minimum distribution of net capital gain
(the excess of net long-term capital gain over net short-term capital loss),
each Fund will be subject to a nondeductible 4% federal excise tax to the extent
it fails to distribute by the end of any calendar year 98% of its ordinary
income for that year and 98% of its capital gain net income (the excess of
short- and long-term capital gains over short-and long-term capital losses) for
the one-year period ending on October 31 of that year, plus certain other
amounts.
In certain cases, a Fund will be required to withhold, and remit to the United
States Treasury, 31% of any distributions paid to a shareholder who (1) has
failed to provide a correct taxpayer identification number, (2) is subject to
backup withholding by the Internal Revenue Service, or (3) has not certified to
that Fund that such shareholder is not subject to backup withholding.
If any Fund fails to qualify as a RIC for any taxable year, it will be taxable
at regular corporate rates. In such an event, all distributions (including
capital gains distributions) will be taxable as ordinary dividends to the extent
of the Fund's current and accumulated earnings and profits, and such
distributions will generally be eligible for the corporate dividends-received
deduction.
State Taxes
No Fund is liable for any income or franchise tax in Maryland if it qualifies as
a RIC for federal income tax purposes. Distributions by any Fund to shareholders
and the ownership of shares may be subject to state and local taxes.
PORTFOLIO TRANSACTIONS
The Adviser is authorized to select brokers and dealers to effect securities
transactions for the Funds. The Adviser will seek to obtain the most favorable
net results by taking into account various factors, including price, commission,
if any, size of the transactions and difficulty of executions, the firm's
general execution and operational facilities and the firm's risk in positioning
the securities involved. While the Adviser generally seeks reasonably
competitive spreads or commissions, a Fund will not necessarily be paying the
lowest spread or commission available. The Adviser seeks to select brokers or
dealers that offer a Fund best price and execution or other services which are
of benefit to the Fund.
The Adviser may, consistent with the interests of the Fund, select brokers on
the basis of the research services they provide to the Adviser. Such services
may include analyses of the business or prospects of a company, industry or
economic sector, or statistical and pricing services. Information so received by
the Adviser will be in addition to and not in lieu of the services required to
be performed by the Adviser under the Advisory Agreement. If, in the judgment of
the Adviser, a Fund or other accounts
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managed by the Adviser will be benefitted by supplemental research services, the
Adviser is authorized to pay brokerage commissions to a broker furnishing such
services which are in excess of commissions which another broker may have
charged for effecting the same transaction. These research services include
advice, either directly or through publications or writings, as to the value of
securities, the advisability of investing in, purchasing or selling securities,
and the availability of securities or purchasers or sellers of securities;
furnishing of analyses and reports concerning issuers, securities or industries;
providing information on economic factors and trends; assisting in determining
portfolio strategy; providing computer software used in security analyses; and
providing portfolio performance evaluation and technical market analyses. The
expenses of the Adviser will not necessarily be reduced as a result of the
receipt of such supplemental information, such services may not be used
exclusively, or at all, with respect to the Fund or account generating the
brokerage, and there can be no guarantee that the Adviser will find all of such
services of value in advising that Fund.
It is expected that the Funds may execute brokerage or other agency transactions
through Robert Fleming Inc. or its affiliates, (each an "affiliated broker")
each of which is a registered broker-dealer, for a commission in conformity with
the 1940 Act, the Securities Exchange Act of 1934 and rules promulgated by the
SEC. Under these provisions, an affiliated broker is permitted to receive and
retain compensation for effecting portfolio transactions for a Fund on an
exchange if a written contract is in effect between the Corporation and the
affiliated broker expressly permitting the affiliated broker to receive and
retain such compensation. These rules further require that commissions paid to
the affiliated broker by a Fund for exchange transactions not exceed "usual and
customary" brokerage commissions. The rules define "usual and customary"
commissions to include amounts which are "reasonable and fair compared to the
commission, fee or other remuneration received or to be received by other
brokers in connection with comparable transactions involving similar securities
being purchased or sold on a securities exchange during a comparable period of
time." The Directors, including those who are not "interested persons" of the
Corporation, have adopted procedures for evaluating the reasonableness of
commissions paid to the affiliated brokers and will review these procedures
periodically.
Because no Fund markets its shares through intermediary brokers or dealers, it
is not the Funds' practice to allocate brokerage or principal business on the
basis of sales of its shares which may be made through such firms. However, the
Adviser may place portfolio orders with qualified broker-dealers who recommend a
Fund's shares to clients, and may, when a number of brokers and dealers can
provide best net results on a particular transaction, consider such
recommendations by a broker or dealer in selecting among broker-dealers.
The Adviser serves as investment adviser to other clients and investment
vehicles which may invest in securities of the same issuers as those in which
the Funds invest. The Adviser also may invest for its own account and for the
accounts of its affiliates. Certain of the Adviser's activities may cause it to
come into possession of material,
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nonpublic information ("inside information") about an issuer. When the Adviser
is in possession of inside information about an issuer, the Adviser may be
unable to cause the Funds to purchase or sell securities of that issuer until
the information is released to the public or is no longer material. As a result,
the Funds may be unable to purchase certain suitable securities, or sell certain
securities that it already owns, at the most opportune time. In particular, a
Fund's inability to sell a security that it already owns may require the Fund to
treat the security as an illiquid security and may have a negative effect on the
Fund's valuation of the security. Should the Fund already own a significant
amount of illiquid securities, it could be forced to sell other illiquid
securities at inopportune times and at prices below what could theoretically be
realized in order to comply with the Fund's 15% limit on holding illiquid
securities.
DESCRIPTION OF SHARES
The Articles of Incorporation authorizes the issuance of an unlimited number of
series and shares of each series. Each share of a series represents an equal
proportionate interest in that series with each other share. Shares are entitled
upon liquidation to a pro rata share in the net assets of the series.
Shareholders have no preemptive rights. All consideration received by the
Corporation for shares of any series and all assets in which such consideration
is invested would belong to that series and would be subject to the liabilities
related thereto. Share certificates representing shares will not be issued.
A Director may be removed by Shareholders at a special meeting called upon
written request of 25% of Shareholders entitled to cast votes at the meeting. If
such a meeting is requested, the Corporation will provide appropriate assistance
and information to the Shareholders requesting the meeting to the extent
required by law.
LIMITATION OF DIRECTORS' LIABILITY
The Articles of Incorporation provides that a Director shall be liable only for
his own willful defaults and, if reasonable care has been exercised in the
selection of officers, agents, employees or investment advisers, shall not be
liable for any neglect or wrongdoing of any such person. The Articles of
Incorporation also provides that the Corporation will indemnify its Directors
and officers against liabilities and expenses incurred in connection with actual
or threatened litigation in which they may be involved because of their offices
with the Corporation to the fullest extent permitted by law. However, nothing in
the Articles of Incorporation shall protect or indemnify a Director against any
liability for his willful misfeasance, bad faith, gross negligence or reckless
disregard of his duties.
5% SHAREHOLDERS
As of September 30, 1997, the following persons owned of record or beneficially
5% or more of the shares of a Fund:
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Fleming Fund: Robert Fleming, Inc., New York, NY, 100%;
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Fleming Fledgling Fund: Robert Fleming, Inc., New York, NY, 100%.
- -----------------------
The persons listed above as owning 25% or more of the outstanding shares of each
Fund may be presumed to "control" (as that term is defined in the 1940 Act) such
Funds. As a result, those persons would have the ability to vote a majority of
the shares of the Funds on any matter requiring the approval of shareholders of
such Funds.
FINANCIAL INFORMATION
The financial statements as of September 26, 1997 have been audited by Ernst &
Young LLP, independent auditors, as indicated in their report dated September
29, 1997 with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said report.
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Report of Independent Auditors
Shareholder and Board of Directors
Fleming Capital Mutual Fund Group, Inc.
We have audited the accompanying statement of assets and liabilities of Fleming
Capital Mutual Fund Group, Inc. (comprised of Fleming Fund and Fleming Fledgling
Fund) as of September 26, 1997. This statement of assets and liabilities is the
responsibility of the Fund's management. Our responsibility is to express an
opinion on this statement of assets and liabilities based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of assets and liabilities is free of
material misstatement. An audit included examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of assets and
liabilities. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
statement of assets and liabilities presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above
presents fairly, in all material respects, the financial position of Fleming
Capital Mutual Fund Group, Inc. at September 26, 1997, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
September 29, 1997
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FLEMING CAPITAL MUTUAL FUND GROUP, INC.
Statements of Assets and Liabilities
September 26, 1997
Fleming Fledgling
Fleming Fund Fund
------------ -----------------
ASSETS:
Cash $100,000 $100,000
Deferred organization expense (Note 3) 48,803 48,804
Prepaid registration fees 2,393 2,393
------------ -----------------
Total Assets 151,196 151,197
------------ -----------------
LIABILITIES:
Payable to Adviser for organization and
registration expenses (Note 3) 51,196 51,197
------------ -----------------
NET ASSETS $100,000 $100,000
============ =================
Shares of common stock outstanding
($.001 par value; 50,000,000 shares
authorized per Fund) 10,000 10,000
------------ -----------------
Net asset value, offering and redemption
price per share $10.00 $10.00
============ =================
At September 26, 1997 the net assets of each series consisted entirely of
paid-in capital.
See Notes to Financial Statements.
S-19
<PAGE>
FLEMING CAPITAL MUTUAL FUND GROUP, INC.
Notes to Financial Statements
September 26, 1997
Note 1. Organization
------------
Fleming Capital Mutual Fund Group, Inc. (the "Funds") was
organized on August 19, 1997, as a Maryland Corporation and is
authorized to issue 100,000,000 shares of common stock, $.001
par value. The Funds are registered under the Investment
Company Act of 1940 as an open-end management investment
company comprised of two diversified series; the Fleming Fund
and Fleming Fledgling Fund. The Funds have had no operations
to date other than those relating to its organization and the
sale of 10,000 shares of common stock in each of the series
currently offered at $10.00 per share to Robert Fleming, Inc.
Note 2. Investment Management and Other Agreements
------------------------------------------
The Funds have entered into an investment management agreement
with Robert Fleming, Inc., (the "Investment Advisor"). Under
the terms of the agreement, the Funds will pay a fee equal to
the following annual percentages of average net assets:
Fleming Fund 0.90%
Fleming Fledgling Fund 1.00%
Although not required to do so, the Investment Advisor has
agreed to reimburse each Fund to the extent necessary so that
is ratio of operating expenses to average net assets will not
exceed the following levels. Overall operating expense for
each Fund will not fall below the applicable percentage
limitation until the Investment Advisor has been fully
reimbursed for fee foregone and expenses paid by the
Investment Advisor under this agreement:
Fleming Fund 1.25%
Fleming Fledgling Fund 1.35%
These percentages are based on the average net assets of the
Funds.
Investment Company Administration Corporation is the
Administrator to the Funds pursuant to an administration
agreement. Each Fund will pay the Administrator an annual fee
equal to 0.10% of the first $200 million of average daily net
assets, 0.05% of the next $300 million, and 0.03% of
S-20
<PAGE>
assets over $500 million, payable monthly and subject to a
minimum annual fee of $40,000 per fund.
First Fund Distributors, Inc. serves as the Distributor to the
Funds pursuant to a Distribution Agreement. The Distributor
receives no fee for its distribution services.
Note 3. Organizational Expenses
-----------------------
Organizational expenses of the Funds aggregating $97,607 will
be allocated to each of the series currently offered for sale
and will be amortized by each series using the straight line
method over a five year period from commencement of
operations. During the amortization period the proceeds of any
redemption of initial shares by any holder thereof will be
reduced by a pro rata portion of any then unamortized
organization expense, based on the ratio of shares redeemed to
the total initial shares outstanding immediately prior to the
redemption. The portion of the aggregate organization expenses
allocated to each of the Funds amounted to $ 48,803.
Prepaid registration fees will be amortized over the period of
benefit but not to exceed two years from commencement of
operations.
The Investment Advisor has agreed to advance the organization
costs and registration fees incurred by the Funds and will be
reimbursed for them after commencement of the Funds'
operations.
Note 4. Related Parties
---------------
Certain officers of the Adviser, Administrator and Distributor
are also officers and/or Directors of the Funds.
S-21
<PAGE>
APPENDIX
The following descriptions are summaries of published ratings.
DESCRIPTION OF CORPORATE BOND RATINGS
Bonds rated AAA have the highest rating S&P assigns to a debt obligation. Such a
rating indicates an extremely strong capacity to pay principal and interest.
Bonds rated AA by S&P also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and differs from AAA issues only in
small degree. Debt rated A by S&P has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher rated
categories.
Bonds rated BBB by S&P 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.
Bonds rated Aaa by Moody's are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged". Interest payments are protected by a large, or 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. Bonds rated Aa by Moody's are
judged by Moody's to be of high quality by all standards. Together with bonds
rated Aaa, they comprise what are generally known as high-grade bonds. They are
rated lower than the best bonds because margins of 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 risk appear somewhat larger than in Aaa securities.
Bonds rated A by Moody's 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. Debt rated
Baa by Moody's is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
Fitch uses plus and minus signs with a rating symbol to indicate the relative
position of a credit within the rating category. Plus and minus signs, however,
are not used in the AAA category. Bonds rated AAA by Fitch are considered to be
investment grade and of
A-1
<PAGE>
the highest credit quality. The obligor has an exceptionally strong ability to
pay interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events. Bonds rated AA by Fitch are considered to be investment
grade and of very high credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong as bonds rated AAA.
Because bonds rated in the AAA and AA categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these issuers
is generally rated F-1+. Bonds rated A by Fitch are considered to be investment
grade and of high credit quality. The obligor's ability to pay interest and
repay principal is considered to be strong, but may be more vulnerable to
adverse changes in economic conditions and circumstances than bonds with higher
ratings. Bonds rated BBB by Fitch are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
Bonds rated AAA by Duff are judged by Duff to be of the highest credit quality,
with negligible risk factors being only slightly more than for risk-free U.S.
Treasury debt. Bonds rated AA by Duff are judged by Duff to be of high credit
quality with strong protection factors and risk that is modest but that may vary
slightly from time to time because of economic conditions. Bonds rated A by Duff
are judged by Duff to have average but adequate protection factors. However,
risk factors are more variable and greater in periods of economic stress. Bonds
rated BBB by Duff are judged by Duff as having below average protection factors
but still considered sufficient for prudent investment, with considerable
variability in risk during economic cycles.
Obligations rated AAA by IBCA have the lowest expectation of investment risk.
Capacity for timely repayment of principal and interest is substantial, such
that adverse changes in business, economic or financial conditions are unlikely
to increase investment risk significantly. Obligations for which there is a very
low expectation of investment risk are rated AA by IBCA. Capacity for timely
repayment of principal and interest is substantial. Adverse changes in business,
economic or financial conditions may increase investment risk albeit not very
significantly. Obligations for which there is a low expectation on investment
risk are rated A by IBCA. Capacity for timely repayment of principal and
interest is strong, although adverse changes in business, economic or financial
conditions may lead to increased investment risk. Obligations for which there is
currently a low expectation of investment risk are rated BBB by IBCA. Capacity
for timely repayment of principal and interest is adequate, although adverse
changes in business, economic or financial conditions are more likely to lead to
increased investment risk than for obligations in higher categories.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
Commercial paper rated A by Standard & Poor's Corporation ("S&P") is regarded by
S&P as having the greatest capacity for timely payment. Issues rated A are
further
A-2
<PAGE>
refined by use of the numbers 1, 1 +, and 2 to indicate the relative degree of
safety. Issues rated A-1+ are those with an "overwhelming degree" of credit
protection. Those rated A-1, the highest rating category, reflect a "very
strong" degree of safety regarding timely payment. Those rated A-2, the second
highest rating category, reflect a satisfactory degree of safety regarding
timely payment but not as high as A-1.
Commercial paper issues rated Prime-1 or Prime-2 by Moody's Investors Service,
Inc. ("Moody's") are judged by Moody's to be of "superior" quality and "strong"
quality respectively on the basis of relative repayment capacity.
F-1+ (Exceptionally Strong) is the highest commercial paper rating Fitch
assigns; paper rated F-1+ is regarded as having the strongest degree of
assurance for timely payment. Paper rated F-1 (Very Strong) reflects an
assurance of timely payment only slightly less in degree than paper rated F-1+.
The rating F-2 (Good) reflects a satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as for issues rated F-1+ or
F-1.
The rating Duff-1 is the highest commercial paper rating assigned by Duff. Paper
rated Duff-1 is regarded as having very high certainty of timely payment with
excellent liquidity factors which are supported by good fundamental protection
factors. Risk factors are minor. Duff has incorporated gradations of 1+ and 1-
to assist investors in recognizing quality differences within this highest tier.
Paper rated Duff-1+ has the highest certainty of timely payment, with
outstanding short-term liquidity and safety just below risk-free U.S. Treasury
short-term obligations. Paper rated Duff-1- has high certainty of timely payment
with strong liquidity factors which are supported by good fundamental protection
factors. Risk factors are very small. Paper rated Duff-2 is regarded as having
good certainty of timely payment, good access to capital markets (although
ongoing funding may enlarge total financing requirements) and sound liquidity
factors and company fundamentals. Risk factors are small.
The designation A1, the highest rating by IBCA, indicates that the obligation is
supported by a strong capacity for timely repayment. Those obligations rated A1+
are supported by the highest capacity for timely repayment. Obligations rated
A2, the second highest rating, are supported by a satisfactory capacity for
timely repayment, although such capacity may be susceptible to adverse changes
in business, economic or financial conditions.
A-3
