<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF
1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] CONFIDENTIAL, FOR USE OF THE
[_] Preliminary Proxy Statement COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Sec. 240.14a-11(c) or Sec. 240.14a-12
FRANK RUSSELL INVESTMENT COMPANY
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1. Title of each class of securities to which transaction applies:
2. Aggregate number of securities to which transaction applies:
3. Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
4. Proposed maximum aggregate value of transaction:
5. Total fee paid:
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1. Amount Previously Paid:
2. Form, Schedule or Registration Statement No.:
3. Filing Party:
4. Date Filed:
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
VOLATILITY CONSTRAINED BOND FUND
909 A STREET
TACOMA, WASHINGTON 98402
1-800-787-7354
Dear Volatility Constrained Bond Fund Shareholder:
Enclosed is a Notice of Special Meeting in lieu of Annual Meeting of
Shareholders of the Frank Russell Investment Company (the "Investment
Company"). The Special Meeting has been called for Thursday, November 19, 1998
at 10:00 a.m., local time, at the offices of the Investment Company at 909 A
Street, Tacoma, Washington. The accompanying Prospectus/Proxy Statement
details the proposals being presented for your consideration.
The meeting will consider several proposals, including an Agreement and Plan
of Reorganization. If approved, the Agreement would authorize a merger of the
Volatility Constrained Bond Fund (the "Bond Fund") into the Fixed Income II
Fund (the "Fixed Income Fund"). Each Fund is a sub-trust of the Investment
Company. On the date of the merger, you will receive Class S Shares of the
Fixed Income Fund with an aggregate value equal to that of your Class S Shares
of the Bond Fund on that date. (It is currently expected that the Fixed Income
Fund will change its name to the "Short-Term Bond Fund" prior to the
reorganization, and therefore, shareholders would receive shares of the Short-
Term Bond Fund). After carefully studying the merits of the proposed merger of
the Bond Fund into the Fixed Income Fund, the Board of Trustees of the
Investment Company has determined that consolidation of the two Funds can
provide substantial benefits to the Bond Fund's shareholders. To move forward,
however, a majority of the shareholders of the Bond Fund must vote in favor of
the transaction. Subject to shareholder approval, the merger of the Bond Fund
into the Fixed Income Fund is expected to be completed on or about February 1,
1999, or at such earlier or subsequent date as the Investment Company
determines to be in the interest of the Funds. In connection with the merger
of the Bond Fund into the Fixed Income Fund, you should note the following:
.The merger of the Bond Fund will be a tax free event.
.The value of your investment will not change as a result of the merger.
In addition to the proposed merger, shareholders of the Bond Fund will be
asked to vote on other matters described in this Prospectus/Proxy Statement.
Shareholders will be asked to: (i) elect the members of the Board of Trustees
of the Investment Company; (ii) ratify the selection of PricewaterhouseCoopers
LLP as the Investment Company's independent accountants; (iii) approve a
proposed advisory agreement between the Investment Company, on behalf of the
Bond Fund, and Frank Russell Investment Management Company ("FRIMCo"),
restructuring the organization of FRIMCo's services and compensating FRIMCo
for managing certain additional assets of the Bond Fund; (iv) approve a
proposed advisory agreement between the Investment Company, on behalf of the
Bond Fund, and FRIMCo, to take effect upon the acquisition of Frank Russell
Company by The Northwestern Mutual Life Insurance Company; (v) approve a
change in the Fund's fundamental investment restrictions limiting borrowing to
authorize a higher borrowing level for the purpose of meeting redemptions; and
(vi) approve the elimination of certain fundamental investment restrictions
applicable to the Bond Fund. The Bond Fund's shareholders will be asked to
approve these latter six items for probable implementation by the Bond Fund
prior to the merger of the Bond Fund into the Fixed Income Fund.
The enclosed materials provide details of the proposals. Accordingly, a
proxy card for the Special Meeting in lieu of Annual Meeting of Shareholders
is enclosed. IT IS IMPORTANT THAT YOU COMPLETE, SIGN AND RETURN YOUR CARD AS
SOON AS POSSIBLE TO ENSURE THAT YOUR VOTE IS COUNTED AT THE SPECIAL MEETING.
Please return your proxy card as soon as possible.
Sincerely,
/s/ Karl J. Ege
Karl J. Ege, Esq.
Secretary
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
909 A STREET
TACOMA, WASHINGTON 98402
NOTICE OF SPECIAL MEETING IN LIEU OF ANNUAL MEETING
OF SHAREHOLDERS OF THE
VOLATILITY CONSTRAINED BOND FUND
OF THE
FRANK RUSSELL INVESTMENT COMPANY
TO BE HELD ON THURSDAY, NOVEMBER 19, 1998
To the Shareholders of Volatility Constrained Bond Fund:
NOTICE IS HEREBY GIVEN that a Special Meeting in lieu of Annual Meeting of
the Shareholders (the "Shareholders") of the Volatility Constrained Bond Fund
(the "Bond Fund"), a sub-trust of Frank Russell Investment Company (the
"Investment Company"), will be held at the Investment Company's offices
located at 909 A Street, Tacoma, Washington, on Thursday, November 19, 1998 at
10:00 a.m., local time, for the following purposes:
1. To approve an Agreement and Plan of Reorganization of the Investment
Company, on behalf of the Bond Fund and the Fixed Income II Fund (the
"Fixed Income Fund"), each a sub-trust of the Investment Company, that
provides for the merger of the Bond Fund into the Fixed Income Fund, the
distribution of Class S Shares of the Fixed Income Fund to the Shareholders
of the Bond Fund, and the dissolution of the Bond Fund.
2. To elect the members of the Board of Trustees of the Investment
Company.
3. To ratify the selection of PricewaterhouseCoopers LLP as the
Investment Company's independent accountants.
4. To approve a proposed advisory agreement with Frank Russell Investment
Management Company ("FRIMCo"), the present investment manager of the Bond
Fund, restructuring the manner in which services are provided to the Fund,
and providing for compensation to FRIMCo for managing certain additional
assets of the Bond Fund.
5. To approve a proposed advisory agreement with FRIMCo, to take effect
upon the closing of the acquisition of Frank Russell Company by The
Northwestern Mutual Life Insurance Company.
6. To approve a change to the Bond Fund's fundamental investment
restriction limiting borrowing activities, authorizing a higher borrowing
level for the purpose of meeting shareholder redemption requests.
7. To approve the elimination of certain fundamental investment
restrictions applicable to the Bond Fund.
The Special Meeting also will consider and act upon any other business (none
being known as of the date of this notice) as may legally come before the
Special Meeting or any adjournment thereof.
The attached Prospectus/Proxy Statement provides more information concerning
the merger contemplated by the Agreement and Plan of Reorganization, and the
other items upon which Shareholders will be asked to vote. A copy of the
Agreement and Plan of Reorganization is attached as Exhibit A.
<PAGE>
Shareholders of record as of the close of business on September 21, 1998, are
entitled to notice of, and to vote at, the Special Meeting or any adjournment
thereof.
By Order of the
Board of Trustees,
/s/ Karl J. Ege
KARL J. EGE, ESQ.
Secretary
Tacoma, Washington
October 20, 1998
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE MEETING! WHETHER OR
NOT YOU EXPECT TO BE PRESENT AT THE MEETING, PLEASE COMPLETE AND SIGN THE
ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE, WHICH
NEEDS NO POSTAGE IF MAILED IN THE UNITED STATES. IF YOU DESIRE TO VOTE IN
PERSON YOU MAY REVOKE YOUR PROXY PRIOR TO THE MEETING.
<PAGE>
COMBINED PROSPECTUS AND PROXY STATEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Cover Page........................................................... Cover
Proposal #1: To Approve an Agreement and Plan of Reorganization by
the Investment Company, on Behalf of the Volatility Constrained Bond
Fund and the Fixed Income II Fund................................... 3
Summary of the Proposed Reorganization............................. 3
Comparison of Important Features................................... 4
Reasons for the Reorganization..................................... 7
Information about the Reorganization............................... 9
Comparison of Investment Policies and Risks of Investing in the
Bond Fund and the Fixed Income Fund............................... 11
Proposal #2: To Elect the Members of the Board of Trustees........... 12
Proposal #3: Ratification of the Selection of PricewaterhouseCoopers
LLP as the Investment Company's Independent Accountants............. 16
Proposal #4: To Approve a New Advisory Agreement Between the
Investment Company, on Behalf of the Bond Fund and Frank Russell
Investment Management Company, Restructuring Services and Providing
Compensation for Managing Additional Assets......................... 16
Summary of the Proposed Advisory Agreement......................... 16
Considerations by the Board........................................ 19
Proposal #5: To Approve a Proposed Agreement with FRIMCo on Behalf of
the Bond Fund, to Take Effect Upon the Acquisition of Frank Russell
Company by The Northwestern Mutual Life Insurance Company........... 19
Introduction....................................................... 19
Board of Trustees Evaluation and Conclusions....................... 20
Information Concerning the Transaction and Northwestern Mutual..... 22
Required Vote...................................................... 25
Proposal #6: To Approve an Amendment to the Bond Fund's Fundamental
Investment Restrictions to Increase the Amount which the Fund May
Borrow to Meet Redemptions.......................................... 25
Proposal #7: To Approve the Elimination of Certain Fundamental
Investment Restrictions Applicable to the Bond Fund................. 27
Information Regarding the Present Management Agreement............... 28
Information Regarding the Solicitation and Revocation of Proxies and
Voting Information.................................................. 29
Principal Shareholders............................................... 30
Information about the Bond Fund...................................... 31
Information about the Fixed Income Fund.............................. 31
Information about the Investment Company............................. 32
EXHIBIT A --Agreement and Plan of Reorganization..................... Attached
EXHIBIT B --Institutional Funds' prospectus, dated May 1, 1998, as
supplemented
through October 8, 1998................................... Attached
EXHIBIT C(1)--Institutional Funds' Annual Report to Shareholders
relating to the Fixed Income II Fund, dated December 31,
1997...................................................... Attached
EXHIBIT C(2)--Russell Funds' Annual Report to Shareholders relating
to the Volatility Constrained Bond Fund, dated December
31, 1997.................................................. Attached
EXHIBIT D(1)--Institutional Funds' Semi-Annual Report to Shareholders
relating to the Fixed Income II Fund, dated June 30,
1998...................................................... Attached
EXHIBIT D(2)--Russell Funds' Semi-Annual Report to Shareholders
relating to the Volatility Constrained Bond Fund, dated
June 30, 1998............................................. Attached
EXHIBIT E --The Present Management Agreement (the "Management
Agreement") between the Investment Company and FRIMCo..... Attached
EXHIBIT F --The Proposed Advisory Agreement (the "Proposed Advisory
Agreement")
between the Investment Company and FRIMCo................. Attached
EXHIBIT G --Proforma Financial Statements............................ Attached
EXHIBIT H --Expense Tables Reflecting Separation of Advisory and
Administrative Fees.......................................... Attached
EXHIBIT I--Five Percent Shareholders................................. Attached
</TABLE>
i
<PAGE>
COMBINED PROSPECTUS AND PROXY STATEMENT
DATED OCTOBER 20, 1998
MERGER OF THE
VOLATILITY CONSTRAINED BOND FUND
INTO THE
FIXED INCOME II FUND
OF
FRANK RUSSELL INVESTMENT COMPANY
SUMMARY
WHAT IS THE PURPOSE OF THIS PROSPECTUS/PROXY STATEMENT?
The principal purpose of this combined Prospectus and Proxy Statement (the
"Proxy Statement") is to seek shareholder approval of the merger which is
described below. The transaction will merge the Volatility Constrained Bond
Fund (the "Bond Fund"), a sub-trust of Frank Russell Investment Company (the
"Investment Company"), with Fixed Income II Fund (the "Fixed Income Fund"),
another sub-trust of the Investment Company that has identical investment
objectives, policies and limitations (the "Reorganization"). At the time of
the Reorganization, the Bond Fund's shareholders (the "Shareholders") will
become shareholders of the Fixed Income Fund. Shareholders of the Bond Fund
and other sub-trusts in the Investment Company are also being asked to elect
Trustees and ratify the selection of the independent accountants of the
Investment Company.
Shareholders of the Bond Fund are also being asked to approve other items
relative to the Bond Fund's investment policies and operations, including
approval of a new advisory agreement to become effective until the
Reorganization. These items are expected to be implemented for the Bond Fund
prior to the occurrence of the Reorganization. Shareholders will also consider
approval of a new management or advisory agreement to become effective at the
time of a change of control of Frank Russell Company ("FRC"), the corporate
parent of the investment manager to the Investment Company.
OVERVIEW OF THE PROPOSED TRANSACTION
The Board is recommending that you approve an Agreement and Plan of
Reorganization (the "Agreement and Plan"). If the Agreement and Plan is
approved, the Bond Fund will be merged into the Fixed Income Fund, and each
Shareholder will receive Class S Shares of the Fixed Income Fund with an
aggregate value equal to the value of the Class S Shares of the Bond Fund held
by that Shareholder prior to the Reorganization. After the Class S Shares of
the Fixed Income Fund are distributed to Shareholders of the Bond Fund, the
Bond Fund will be liquidated.
WHO ARE THE PARTIES TO THE REORGANIZATION?
The Bond Fund and the Fixed Income Fund (together, the "Funds") are each
sub-trusts of the Investment Company, an open-end, management investment
company organized as a business trust under the laws of the Commonwealth of
Massachusetts, with principal offices located at 909 A Street, Tacoma,
Washington 98402. The Fixed Income Fund has investment objectives which are
identical to those of the Bond Fund, namely the preservation of capital and
generation of current income consistent with the preservation of capital. The
investment policies and restrictions and, consequently, the risks of investing
in the Fixed Income Fund, are identical to those of the Bond Fund, which are
described more fully under "Comparison of Investment Policies and Risks" in
this Proxy Statement.
<PAGE>
RELEVANT INFORMATION ABOUT THE TRANSACTION
This Proxy Statement provides the information about the Fixed Income Fund
that Bond Fund Shareholders should know in order to evaluate the proposed
Reorganization. We suggest that you keep this for your records and future
reference. The following documents are incorporated by reference into this
Proxy Statement (and are also attached if indicated). All documents may be
obtained without charge by writing to the address shown above or by calling 1-
800-787-7354:
. a Statement of Additional Information, dated October 20, 1998, relating
to this Proxy Statement, is on file with the U.S. Securities and Exchange
Commission (the "SEC") and is available upon request to the Investment
Company.
. the Prospectus of the Investment Company's Institutional Funds, including
the Fixed Income Fund, dated May 1, 1998, as supplemented through October
8, 1998. Attached as EXHIBIT B.
. the Annual Report of the Investment Company's Institutional Funds,
relating to the Fixed Income Fund and the Annual Report of the Investment
Company's Russell Funds relating to the Bond Fund, dated December 31,
1997. Attached as EXHIBITS C(1) AND C(2), RESPECTIVELY.
. the Semi-annual Report of the Investment Company's Institutional Funds,
relating to the Fixed Income Fund and the Semi-Annual Report of the
Investment Company's Russell Funds relating to the Bond Fund, dated June
30, 1998. Attached as EXHIBITS D(1) AND D(2), RESPECTIVELY.
. the Investment Company's Russell Funds Class S Prospectus, including the
Bond Fund, dated May 1, 1998, as supplemented through October 8, 1998, is
on file with the SEC and is available upon request to the Investment
Company.
CONSIDERATION OF MANAGEMENT AND ADVISORY AGREEMENTS
Shareholders will also be asked to approve a new investment advisory
agreement with the present investment manager of the Bond Fund to restructure
the services provided by the manager, and a subsequent advisory agreement, on
the same terms as the agreement then in effect, to become effective upon the
closing of the acquisition of FRC by The Northwestern Mutual Life Insurance
Company.
This summary of the Proxy Statement is provided for your convenience. You
are urged to read the more complete information contained elsewhere in this
Proxy Statement. It is expected that this Proxy Statement will first be sent
to Shareholders on or about October 23, 1998.
THE SEC HAS NOT APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON
THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS/PROXY STATEMENT
AND IN THE MATERIALS EXPRESSLY INCORPORATED BY REFERENCE. IF ANY PERSON
PROVIDES ANY REPRESENTATION OR OTHER INFORMATION, YOU SHOULD NOT RELY ON THOSE
REPRESENTATIONS OR OTHER INFORMATION SINCE NEITHER THE BOND FUND NOR THE FIXED
INCOME FUND HAS AUTHORIZED THOSE REPRESENTATIONS.
2
<PAGE>
PROPOSAL #1: TO APPROVE AN AGREEMENT AND
PLAN OF REORGANIZATION BY THE INVESTMENT
COMPANY, ON BEHALF OF THE VOLATILITY
CONSTRAINED BOND FUND AND THE FIXED INCOME II FUND
SUMMARY OF THE PROPOSED REORGANIZATION
This portion of Proposal #1 summarizes the proposed reorganization for your
convenience. You are urged to read the more complete information contained in
this Proxy Statement. The Agreement and Plan of Reorganization (the "Agreement
and Plan"), and the Prospectus and the Annual Report and Semi-Annual Report of
the Investment Company's Institutional Funds, relating to the Fixed Income
Fund, are each attached to this Proxy Statement as Exhibits A, B, C(1) and
D(1), respectively. The Annual Report and Semi-Annual Report of the Investment
Company's Russell Funds, relating to the Bond Fund are each attached to this
Proxy Statement as Exhibits C(2) asnd D(2), respectively.
WHY IS THE PROPOSED REORGANIZATION BEING PRESENTED AT THIS TIME?
At its meeting on April 27, 1998, the Investment Company's Board of Trustees
(the "Board" or the "Trustees") considered various alternatives for the future
of the Bond Fund, given its relatively small asset base. These included
continuing as a sub-trust of the Investment Company, or the merger of the Bond
Fund with another sub-trust of the Investment Company. The Board concluded
that the merger of the Bond Fund into the Fixed Income Fund would be in the
best interests of the Bond Fund's Shareholders because the Bond Fund and the
Fixed Income Fund have the same investment objectives, policies and
limitations, and utilize the same money managers to manage their investments.
Of course, each Shareholder's decision to become an investor in the Fixed
Income Fund will involve an assessment of his or her own personal financial
situation and objectives. For the reasons set forth below under "REASONS FOR
THE REORGANIZATION," the Board concluded that the Reorganization is in the
best interests of the Shareholders of the Bond Fund and of the Fixed Income
Fund, and recommended that Shareholders approve the Agreement and Plan. If the
Agreement and Plan is approved by Shareholders and the Reorganization takes
place, the Bond Fund will be merged into the Fixed Income Fund, which will
have changed its name to the "Short-Term Bond Fund" on or about January 1,
1999.
HOW WILL THE PROPOSED REORGANIZATION AFFECT BOND FUND SHAREHOLDERS?
The Agreement and Plan approved by the Trustees and presented to the
Shareholders provides for the merger of the Bond Fund into the Fixed Income
Fund in exchange for Class S Shares issued by the Fixed Income Fund. The value
of Class S Shares issued by the Fixed Income Fund in connection with the
Reorganization will equal the value of the net assets of the Bond Fund
acquired by the Fixed Income Fund. Pursuant to the Agreement and Plan, Class S
Shares issued to the Bond Fund by the Fixed Income Fund will be distributed to
the Shareholders of the Bond Fund in liquidation of the Bond Fund. As a
result, each Shareholder of the Bond Fund will cease to be a Shareholder of
the Bond Fund and will instead be the owner of that number of full and
fractional Class S Shares of the Fixed Income Fund having an aggregate net
asset value equal to the aggregate net asset value of the Class S Shares of
the Bond Fund held by that Shareholder at the Effective Time of the
Reorganization, as defined herein.
WHAT VOTE IS REQUIRED TO APPROVE THE REORGANIZATION?
The affirmative vote of the majority of outstanding shares of the Bond Fund
as of September 21, 1998, the record date ("the Record Date"), is necessary to
approve the Agreement and Plan. Shareholders are being asked to vote to
approve the Agreement and Plan. If the Agreement and Plan is not approved, the
Bond Fund will continue to operate as a sub-trust of the Investment Company,
and the Trustees will consider what further action, if any, is in the
interests of the Bond Fund and its Shareholders. IF YOU RETURN A SIGNED PROXY
WITH NO VOTING INSTRUCTIONS, YOUR SHARES WILL BE VOTED IN FAVOR OF THE
AGREEMENT AND PLAN.
3
<PAGE>
WHAT ARE THE TAX CONSEQUENCES OF THE REORGANIZATION FOR THE SHAREHOLDERS?
Completion of the Reorganization is subject to the receipt of a tax opinion
from counsel to the Investment Company, that, among other things:
. no gain or loss will be recognized by the Bond Fund or its Shareholders
for federal income tax purposes as a result of such Reorganization; and
. the holding period and aggregate tax basis of the Class S Shares of the
Fixed Income Fund received by a Shareholder of the Bond Fund will be the
same as the holding period and aggregate tax basis of the Shareholder's
Class S Shares of the Bond Fund prior to the Reorganization; and
. the holding period and tax basis of the assets of the Bond Fund in the
hands of the Fixed Income Fund as a result of the Reorganization
generally will be the holding period and tax basis of those assets in the
hands of the Bond Fund immediately prior to the Reorganization.
COMPARISON OF IMPORTANT FEATURES
HOW DO THE INVESTMENT OBJECTIVES AND POLICIES OF THE BOND FUND AND THE FIXED
INCOME FUND COMPARE?
The investment objectives of the Bond Fund and the Fixed Income Fund are
identical-the preservation of capital and generation of current income
consistent with the preservation of capital by investing in fixed income
securities with low volatility characteristics. The assets of the Bond Fund
and the Fixed Income Fund are invested primarily in those fixed income
securities which mature in two years or less from the date of acquisition or
which have similar volatility characteristics. To minimize credit risk and
fluctuation in net asset value per share, each Fund intends to maintain an
average portfolio maturity of less than five years. The investment policies,
limitations and restrictions of the Bond Fund and the Fixed Income Fund are
identical. See "Comparison of Investment Policies and Risks of the Bond Fund
and the Fixed Income Fund" in this Proxy Statement.
HOW ARE THE BOND FUND AND THE FIXED INCOME FUND EACH MANAGED?
The management of the business and affairs of the Investment Company is the
responsibility of the Board. The Board oversees the Funds' operations,
including reviewing and approving the Funds' contracts with Frank Russell
Investment Management Company ("FRIMCo" or the "Manager"), FRC and the Funds'
money managers. The Investment Company's officers, all of whom are employed by
and are officers of FRIMCo or its affiliates, are responsible for the day-to-
day management and administration of the Funds' operations. The money managers
are responsible for selection of individual portfolio securities for the
assets assigned to them.
Both the Bond Fund and the Fixed Income Fund are managed by FRIMCo, whose
address is 909 A Street, Tacoma, Washington 98402. As described in more detail
in connection with Proposal #4 below, FRIMCo:
. provides or supervises the general management and administration,
investment advisory and portfolio management, and distribution services
for the Funds;
. furnishes the Funds with office space, equipment and personnel to operate
and administer the Funds' business, and supervises services provided by
third parties, such as the money managers and the custodian retained by
the Funds;
. develops investment guidelines and restrictions, selects money managers,
allocates assets among money managers and monitors the money managers'
investment programs and results; and
. provides the Funds with transfer agent, dividend disbursing and
shareholder recordkeeping services.
FRIMCo pays the expenses of providing these services (other than transfer
agent, dividend disbursing, and shareholder recordkeeping), as well as a
portion of the costs of preparing and distributing materials that describe the
Funds. FRIMCo is a wholly owned subsidiary of FRC, which provides
comprehensive asset management
4
<PAGE>
consulting services to institutional pools of investment assets. George F.
Russell, Jr., Chairman of the Board of the Investment Company, is currently
the Chairman of the Board and controlling shareholder of FRC.
The Investment Company has received an exemptive order from the SEC which
permits the Investment Company, with the approval of the Board, to engage and
terminate money managers without a shareholder vote and to disclose the
aggregate fees paid to the Manager and the money managers of each sub-trust.
On January 22, 1996, the shareholders of the Investment Company voted to
approve this arrangement.
As of the date of this Proxy Statement, the money managers for both the Bond
Fund and the Fixed Income Fund are:
BlackRock Financial Management, 345 Park Ave., 31st Floor, New York, NY
10154, which is a wholly-owned indirect subsidiary of PNC Bank;
Standish, Ayer & Wood, Inc., One Financial Center, Boston, MA 02111,
which is a company whose ownership is divided among seventeen directors,
with no director having more than a 25% ownership interest; and
STW Fixed Income Management Ltd., Trinity Hall, 43 Cedar Avenue, Hamilton
HM KX, Bermuda, which is a Bermuda exempted company. William H. Williams
III is the sole shareholder.
The Fixed Income Fund's money managers will not change as a result of the
Reorganization.
WHAT ARE THE VARIOUS FEES AND EXPENSES FOR THE BOND FUND AND THE FIXED INCOME
FUND?
The following summarizes the fees and expenses of the Funds under the
present service agreements. Both the Bond Fund and the Fixed Income Fund are
considering identical proposals to restructure the present arrangements which
are described in Proposal #4 below.
Investment Management Fees:
Under its Management Agreement with the Investment Company, FRIMCo receives
a management fee from each Fund for FRIMCo's services. From this fee, FRIMCo,
as the Investment Company's agent, pays the money managers for their
investment selection services. The remainder of the management fee is retained
by FRIMCo as compensation for the services described above and to pay
expenses. The annual rate of management fees, payable by the two Funds to
FRIMCo monthly on a pro rata basis, is 0.50% of each Fund's average daily net
assets.
Quarterly, each money manager is paid the pro rata portion of an annual fee,
based on the average of all assets allocated to the money manager for the
quarter. For the year ended December 31, 1997, management fees paid to the
money managers were equivalent to the following annual rates, expressed as a
percentage of each Fund's average daily net assets: Bond Fund, 0.17%, and
Fixed Income Fund, 0.17%.
Administrative Services:
FRIMCo provides the Investment Company with administrative services and
facilities necessary to operate the Funds. FRIMCo also serves as the dividend-
paying agent, transfer agent and shareholder servicing agent for the Funds.
5
<PAGE>
Operating Expenses:
The following information is provided in order to assist you in
understanding the fees and expenses of the Bond Fund and the Fixed Income
Fund.
<TABLE>
<CAPTION>
SHORT-TERM BOND
FUND (FORMER
FIXED INCOME II
FUND)
FIXED INCOME BOND (FOLLOWING
FEES FUND FUND REORGANIZATION)
- ---- ------------ ---- ---------------
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases (as
a percentage of offering price)............ NONE NONE NONE
Maximum Deferred Sales Load................. NONE NONE NONE
Maximum Sales Load Imposed on Reinvested
Dividends.................................. NONE NONE NONE
Redemption Fees............................. NONE NONE NONE
Exchange Fee (per transaction).............. NONE NONE NONE
Annual Class S Shares Operating Expenses (as
a percentage of average net assets)
Management Fees............................. 0.50% 0.50% 0.50%
Rule 12b-1 Fees............................. NONE NONE NONE
Other Expenses.............................. 0.17% 0.24% 0.17%
---- ---- ----
Total Class S Shares Operating Expenses.... 0.67% 0.74% 0.67%
==== ==== ====
</TABLE>
EXAMPLE
You would pay the following expenses on a $1,000 investment based on the
level of expenses shown above, assuming (1) a 5% annual return and (2)
redemption at the end of each time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Bond Fund..................................... $ 7 $23 $41 $93
Short-Term Bond Fund (Former Fixed Income II
After the Reorganization).................... $ 7 $21 $37 $84
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES, AS ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The assumed 5% annual return is hypothetical and should not be considered a
representation of past or future annual return. The actual return may be
greater or less than the assumed amount. The various costs and expenses
reflected in the foregoing Expense Table and Example are explained in more
detail in the Prospectuses incorporated by reference into this Proxy
Statement.
HOW ARE THE BOND FUND AND THE FIXED INCOME FUND DISTRIBUTED?
Russell Fund Distributors, Inc. ("Distributors"), located at 909 A Street,
Tacoma, WA 98402, a wholly-owned subsidiary of FRIMCo, serves as the principal
underwriter of the Investment Company's shares. Distributors receives no
compensation from the Investment Company for its services.
WHAT IS THE PURCHASE PRICE FOR CLASS S SHARES?
Class S Shares of the Bond Fund and the Fixed Income Fund are sold on a
continuous basis at the public offering price per share which is equal to the
net asset value per share on each business day on which shares are offered.
Class S Shares of the Funds are sold with no sales load, no commissions, no
Rule 12b-1 fees and no exchange fees.
Although there is no specified minimum investment in Class S Shares of the
Bond Fund, the Bond Fund, along with certain other sub-trusts of the
Investment Company, is designed for investors making an aggregate investment
of at least $100,000 in any combination of Class S Shares of the Investment
Company's sub-trusts. Additionally, investors must qualify as "Eligible
Investors," as described in the Investment Company's Russell Funds'
prospectus.
6
<PAGE>
At the present time, there is a $5 million minimum aggregate investment
requirement in the Class S Shares of the Fixed Income Fund. The Board has
authorized the restructuring of the Investment Company, so that prior to the
completion of the Reorganization, the Class S Shares of the Fixed Income Fund
will be offered through the Investment Company's Specialty Funds prospectus.
There is no minimum investment requirement applicable to the sub-trusts in
that group, although any account with less than $5,000 will be subject to an
account maintenance fee of $12.50 per annum, which will be deducted from
distributions or paid by the redemption of shares.
WHAT ARE THE DIVIDEND AND DISTRIBUTION POLICIES FOR THE BOND FUND AND THE
FIXED INCOME FUND?
The Bond Fund and the Fixed Income Fund have policies of distributing
substantially all of their net investment income and net capital gains to
their respective shareholders each year. The Bond Fund declares income
dividends from its net investment income monthly--currently for Shareholders
of record on the last business day of the month, payable early the following
month. The Fixed Income Fund pays dividends from net investment income and
capital gains, if any, quarterly. Dividends and capital gains distributions
are automatically reinvested by the Bond Fund and the Fixed Income Fund in
additional shares unless and until a shareholder elects to receive them in
cash.
HOW DO THE RISK FACTORS AND THE INVESTMENT POLICIES OF THE FIXED INCOME FUND
AND THE BOND FUND COMPARE?
Because of the identical character of the investment objectives and policies
of the Fixed Income Fund and the Bond Fund, the investment risks associated
with an investment in the Fixed Income Fund are the same as those of the Bond
Fund. See "Comparison of Investment Policies and Risks" below and the
accompanying prospectus of the Investment Company's Institutional Funds,
including the Fixed Income Fund.
REASONS FOR THE REORGANIZATION
WHY IS THE BOARD RECOMMENDING THE REORGANIZATION?
The Trustees of the Investment Company considered the fact that the asset
base of the Bond Fund was at a level which did not produce sufficient
economies of scale for the Shareholders. FRIMCo was asked to develop
recommendations for the consideration of the Board. In determining how to best
address the Bond Fund's relatively low asset base, FRIMCo suggested that a
merger with a larger fund could provide the Bond Fund's Shareholders with
appropriate economies of scale. FRIMCo proposed, and the Board concluded, that
the Fixed Income Fund is a larger fund which offers appropriate economies of
scale, and has investment objectives and policies that are identical to the
Bond Fund's objectives and policies.
The Agreement and Plan was presented to the Board at a meeting held on April
27, 1998. At the meeting the Trustees questioned FRIMCo about the potential
benefits to be gained by Shareholders of the Bond Fund, as well as any
additional costs to be borne. In determining whether to recommend approval of
the Reorganization to Shareholders, the Board considered, among others, the
following factors:
(1) the expense ratio of the Fixed Income Fund, as well as similar funds;
and
(2) the comparative investment performance of the Fixed Income Fund with
the performance of similar funds; and
(3) the compatibility of the investment objectives, policies,
restrictions and portfolios of the Fixed Income Fund with the Bond Fund;
and
(4) the tax consequences of the Reorganization.
7
<PAGE>
WHAT ARE THE ADVANTAGES OF THE REORGANIZATION?
After carefully considering the proposal for the merger of the Bond Fund,
the Reorganization has been recommended by the Board on behalf of the Bond
Fund for the following reasons:
(1) combining the Bond Fund with a larger portfolio will better diversify
its investments and enable the Bond Fund to make investments on better
terms and with attendant savings in investment costs for the Bond Fund and
the Shareholders; and
(2) the Reorganization would permit Shareholders to pursue their
investment goals in a larger fund which should have an enhanced ability to
effect portfolio transactions on more favorable terms and should have
greater investment flexibility; and
(3) combining the Bond Fund with the Fixed Income Fund means higher
aggregate net assets which should enable shareholders to obtain the
benefits of economies of scale in operational costs; and
(4) combining the Bond Fund with the Fixed Income Fund will enable
Shareholders to continue to obtain the services of the same service
providers, including FRIMCo and the money managers, which currently provide
services to such Shareholders invested in the Bond Fund.
Shareholders in a larger fund generally benefit when fixed costs of fund
operations and certain duplicative costs and expenses are spread over a larger
asset base. As a general rule, this effect can be expected to be realized
primarily with respect to fixed expenses. Expenses that are based on the value
of assets or the number of shareholder accounts, such as certain custody and
transfer agent fees, would be largely unaffected by the Reorganization, unless
the schedule of such fees provides for reduced fees for assets at higher
levels.
HOW WILL THE REORGANIZATION BE FINANCED?
During the course of its deliberations, the Board determined that each Fund
would bear its direct operational expenses with respect to the Reorganization.
WILL THE SHARES OF EITHER FUND BE DILUTED AS A RESULT OF THE REORGANIZATION?
In reaching the decision to recommend that Shareholders of the Bond Fund
vote to approve the Reorganization, the Board of Trustees concluded that the
Reorganization is in the best interests of the Shareholders of the Bond Fund
and that no dilution would result to the Shareholders of the Bond Fund from
the Reorganization.
The Board of Trustees also determined that the Reorganization was in the
best interests of the Class S shareholders of the Fixed Income Fund and that
no dilution would result to the current Class S shareholders of the Fixed
Income Fund as a result of the Reorganization.
FOR THE REASONS DISCUSSED ABOVE, THE BOARD OF
TRUSTEES OF THE INVESTMENT COMPANY RECOMMENDS THAT YOU
VOTE FOR APPROVAL OF THE AGREEMENT AND PLAN.
WHAT HAPPENS IF THE AGREEMENT AND PLAN IS NOT APPROVED BY THE
SHAREHOLDERS? If the Agreement and Plan is not approved by the Shareholders at
the meeting, the Bond Fund will continue as a sub-trust of the Investment
Company. In that event, the Board would have to determine what additional
actions, if any, it would recommend to the Shareholders of the Bond Fund.
8
<PAGE>
INFORMATION ABOUT THE REORGANIZATION
The following is a summary of the Agreement and Plan of Reorganization. It
is subject in all respects to the provisions of, and is qualified in its
entirety by reference to, the Agreement and Plan, a copy of which is attached
as Exhibit A.
WHAT IS THE METHOD OF CARRYING OUT THE REORGANIZATION? If the Shareholders
approve the Agreement and Plan, it is expected that the Reorganization will be
consummated promptly after the various conditions to the obligations of each
of the parties are satisfied. (See "Conditions Precedent to Closing.")
Consummation of the Reorganization (the "Effective Time of the
Reorganization") is expected to occur on or about February 1, 1999, or such
other date as is agreed to by the Bond Fund and the Fixed Income Fund. The
Agreement and Plan may be terminated at any time before or after its approval
by Shareholders by action of the Board.
The Agreement and Plan provides, first, that substantially all of the assets
of the Bond Fund will be transferred to the Fixed Income Fund, which will
assume all of the Bond Fund's liabilities. The Bond Fund Shareholders will
receive a number of Class S Shares of the Fixed Income Fund with the same
aggregate net asset value as the Class S Shares of the Bond Fund held
immediately prior to the Reorganization. The Bond Fund's Shareholders will not
pay a sales charge, commission or other transaction cost in connection with
their receipt of the Class S Shares of the Fixed Income Fund.
The Agreement and Plan provides that the Bond Fund will declare a dividend
and/or other distribution prior to the Reorganization which, together with all
previous distributions, will have the effect of distributing to the
Shareholders of the Bond Fund all of its investment company taxable income and
net capital gain, if any, realized by the Bond Fund up to and including the
Effective Time of the Reorganization.
Following the transfer of assets and assumption of liabilities of the Bond
Fund to the Fixed Income Fund, and the issuance of Class S Shares by the Fixed
Income Fund to the Bond Fund, the Bond Fund will distribute the Class S Shares
of the Fixed Income Fund pro rata to the Bond Fund Shareholders as described
above in liquidation of the Bond Fund. In addition to the Class S Shares, each
Bond Fund Shareholder will have a right to receive any declared and unpaid
dividends or other distributions. Following the Reorganization, shareholders
of the Bond Fund will be shareholders of the Fixed Income Fund. While not
required by the Agreement and Plan, it is contemplated that prior to the
Reorganization, the Fixed Income Fund will have changed its name to the Short-
Term Bond Fund.
CONDITIONS PRECEDENT TO CLOSING. The Reorganization is subject to a number
of conditions, including approval of the Agreement and Plan and the
transaction contemplated thereby as described in this Proxy Statement by the
Shareholders of the Bond Fund; the receipt of certain legal opinions described
in the Agreement and Plan; the receipt of certain certificates from the
parties concerning the continuing accuracy of the representations and
warranties in the Agreement and Plan and other matters; and the parties'
performance in all material respects of their agreements and undertakings in
the Agreement and Plan.
EXPENSES OF THE TRANSACTION. The Bond Fund and the Fixed Income Fund will
each pay its direct expenses incurred in connection with entering into, and
completing, the transaction described in the Agreement and Plan.
TAX CONSIDERATIONS. It is expected that the Reorganization will qualify for
federal income tax purposes as a tax-free reorganization under Section
368(a)(1)(C) of the Internal Revenue Code of 1986, as amended (the "Code"). No
gain or loss will be recognized as a consequence of the Reorganization by the
Shareholders of the Bond Fund, the Bond Fund, the shareholders of the Fixed
Income Fund, or the Fixed Income Fund. The completion of the Reorganization is
subject to the receipt by the Bond Fund and the Fixed Income Fund of an
opinion of counsel to that effect.
9
<PAGE>
Shareholders of the Bond Fund should consult their tax advisors regarding
the effect, if any, of the Reorganization in light of their individual
circumstances and, since the foregoing discussion only relates to the federal
income tax consequences of the Reorganization, as to state and local tax
consequences, if any, of the Reorganization.
DESCRIPTION OF CLASS S SHARES OF THE FIXED INCOME FUND. The Investment
Company issues shares of beneficial interest divisible into an unlimited
number of sub-trusts, each of which sub-trust is a separate trust under
Massachusetts law, and the sub-trusts' shares may be offered in multiple
classes. As of the date of this Proxy Statement, the Fixed Income Fund does
not offer shares of beneficial interest in any class other than the Class S
Shares, although it may do so in the future. Shares of each class of a sub-
trust, including the Fixed Income Fund's Class S Shares, represent
proportionate interests in the assets of the specific sub-trust attributable
to that class, and have the same voting and other rights and preferences as
the shares of other classes of the sub-trust. Shares of each class of a sub-
trust are entitled to such dividends and distributions earned on the assets
belonging to the sub-trust as may be declared by the Board. Shares of each
class of a sub-trust have a par value of $.01 per share, are fully paid and
nonassessable, and have no preemptive or conversion rights. Each share of a
class of a sub-trust has one vote; there are no cumulative voting rights.
Class S Shares of the Fixed Income Fund will be issued to Shareholders of
the Bond Fund in accordance with the procedures under the Agreement and Plan
as described above. Each Class S Share will be fully paid and nonassessable
when issued with no personal liability attaching to the ownership thereof,
will have no preemptive or conversion rights and will be transferable upon the
books of the Fixed Income Fund. In accordance with the Fixed Income Fund's
normal procedures as specified in its the Investment Company's Institutional
Funds' prospectus, the Fixed Income Fund will not issue certificates for
shares of beneficial interest to former Shareholders of the Bond Fund, unless
requested in writing by the Shareholder or by his or her financial
intermediary. As of the Effective Time of the Reorganization, all certificates
representing shares of the Bond Fund shall be deemed to represent an interest
of the Shareholder in the new Class S Shares of the Fixed Income Fund issued
to the Shareholder in the Reorganization. If a certificate for Class S Shares
of the Bond Fund is outstanding, a new certificate for Class S Shares of the
Fixed Income Fund issued in the transaction will not be issued until the old
certificate is delivered to the transfer agent.
As shareholders of the Fixed Income Fund, former Shareholders of the Bond
Fund will have substantially similar voting rights and rights upon dissolution
with respect to the Fixed Income Fund as they currently have with respect to
the Bond Fund.
The terms of the Amended Master Trust Agreement do not confer upon
Shareholders of the Bond Fund any appraisal rights; however, after the
Effective Time of the Reorganization, such Shareholders may redeem their Class
S Shares in the Fixed Income Fund at net asset value or exchange their Fixed
Income Fund Class S Shares into shares of certain other sub-trusts of the
Investment Company.
The Investment Company is an entity of the type commonly known as a
"Massachusetts business trust." Under Massachusetts law, shareholders of such
a trust may, under certain circumstances, be held personally liable as
partners for its obligations. However, the Amended Master Trust Agreement of
the Investment Company contains an express disclaimer of shareholder liability
for acts or obligations of the Investment Company and provides for
indemnification and reimbursement of expenses out of the Investment Company's
property for any shareholder held personally liable for the obligations of the
Investment Company. The Amended Master Trust Agreement also provides that the
Investment Company may maintain appropriate insurance (for example, fidelity
bonding and errors and omissions insurance) for the protection of the
Investment Company, the shareholders of the sub-trust, Trustees, officers,
employees and agents covering possible tort and other liabilities. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability also is limited to circumstances in which both inadequate insurance
exists and the Investment Company itself is unable to meet its obligations.
Under Massachusetts law, the Investment Company is not required to hold
annual meetings. In the past, the Bond Fund and the Fixed Income Fund have
availed themselves of these provisions of state law to achieve cost
10
<PAGE>
savings by eliminating printing costs, mailing charges and other expenses
involved to hold routine annual meetings. Either Fund may, however, hold a
meeting for such purposes as changing fundamental investment restrictions,
approving a new investment management agreement or any other matters which are
required to be acted on by shareholders under the 1940 Act. In addition, a
meeting also may be called by shareholders holding at least 10% of the shares
entitled to vote at the meeting for the purpose of voting upon the removal of
Trustees, in which case shareholders may receive assistance in communicating
with other shareholders such as that provided in Section 16(c) of the 1940
Act. The Bond Fund is holding the Special Meeting in lieu of an annual meeting
because of the items that must be presented for Shareholders' consideration
and approval.
CAPITALIZATION. The following table sets forth, as of September 21, 1998:
(i) the capitalization of the Bond Fund; (ii) the capitalization of the Fixed
Income Fund; and (iii) the pro forma capitalization of the Fixed Income Fund
as adjusted to give effect to the proposed Reorganization. The capitalization
of the Fixed Income Fund, which is expected to be renamed the Short-Term Bond
Fund, is likely to be different when the Reorganization is consummated.
<TABLE>
<CAPTION>
SHORT-TERM BOND
FUND (FORMER FIXED
FIXED INCOME II FUND)
VOL. CON. INCOME II PRO FORMA AFTER
BOND FUND FUND REORGANIZATION
------------ ------------ ------------------
<S> <C> <C> <C>
Net Assets......................... $201,666,718 $253,456,249 $455,122,967
Net Asset Value per Share.......... $ 19.23 $ 18.72 $ 18.72
Shares Outstanding................. 10,487,602 13,539,000 24,311,795
</TABLE>
To the extent permitted by law, the Agreement and Plan may be amended
without shareholder approval by a writing of the Board. The Agreement and Plan
may be terminated and the Reorganization abandoned at any time before or, to
the extent permitted by law, after the approval of Shareholders of the Bond
Fund by mutual consent of the parties to the Agreement and Plan.
COMPARISON OF INVESTMENT POLICIES AND RISKS OF
INVESTING IN THE BOND FUND AND THE FIXED INCOME FUND
THE BOND FUND AND THE FIXED INCOME FUND. The investment objectives of the
Bond Fund and the Fixed Income Fund are identical--the preservation of capital
and the generation of current income consistent with the preservation of
capital by investing primarily in fixed-income securities with low-volatility
characteristics./1/ The Funds are managed in an identical manner by their
money managers (which, as discussed earlier in this Proxy Statement, are the
same). The Funds invest primarily in fixed income securities, emphasizing
those securities which mature in two years or less from the date of
acquisition or which have similar volatility characteristics. To minimize
credit risk and fluctuations in net asset value per share, the Funds maintain
an average portfolio maturity of less than five years. The Funds' money
managers seek to identify and invest in a managed portfolio of high-quality
debt securities denominated in the U.S. dollar and a range of foreign
currencies.
Although the Funds invest primarily in debt securities denominated in the
U.S. dollar, the money managers actively manage the Funds' portfolios in
accordance with a multi-market investment strategy, allocating investments
among securities denominated in the U.S. dollar and the currencies of a number
of foreign countries and, where consistent with their policy of investing only
in high-quality securities, within each such country, among different types of
debt securities. The money managers which invest in foreign denominated
securities maintain a substantially neutral currency exposure relative to the
U.S. dollar, and establish and adjust cross currency hedges based on their
perception of the most favorable markets and issuers. In this regard, the
percentage of assets invested in securities of a particular country or
denominated in a particular currency will
- ---------------------
/1/Based upon the consideration by the Shareholders of the significant matters
set forth in this Proxy Statement, the prospectuses of Funds in the
Investment Company, including the Short Term Bond Fund, will be amended
following the Special Meeting. While the description of the investment
techniques or policies will be improved in the revised materials, no
substantive change of policies will be made.
11
<PAGE>
vary in accordance with a money manager's assessment of the relative yield of
such securities and the relationship of a country's currency to the U.S.
dollar. Fundamental economic strength, credit quality and interest rate trends
will be the principal factors considered by the money managers in determining
whether to increase or decrease the emphasis placed upon a particular type of
security or industry sector within the Funds' investment portfolios.
For a complete description of the investment policies, limitations and
restrictions applicable to the Funds, please refer to the Investment Company's
Institutional Funds' prospectus, dated May 1, 1998, as supplemented through
October 8, 1998, which is attached to this Proxy Statement as Exhibit B. The
investment objectives, policies, limitations and restrictions of the Bond Fund
and the Fixed Income Fund are identical. SEE PROPOSAL #6 AND PROPOSAL #7 BELOW
CONCERNING PROPOSED CHANGES WHICH WILL BE CONSIDERED BY THE SHAREHOLDERS OF
EACH FUND AT THIS MEETING.
RISK FACTORS. The investment risks of the Bond Fund and the Fixed Income
Fund are identical. The Funds may invest in foreign securities, including
securities denominated in currencies other than the U.S. dollar (including
currencies denominated in the "Euro"). The Funds may enter into forward
foreign currency exchange contracts, and may purchase and sell (write) call
and put options on portfolio securities. These types of investments and
related techniques involve certain risks, which are described in the
Investment Company's Institutional Funds' prospectus, attached as Exhibit B to
this Proxy Statement, and in the Investment Company's Statement of Additional
Information, dated May 1, 1998, as supplemented through August 20, 1998, which
is available upon request.
To be approved, the Agreement and Plan must receive the affirmative vote of
a "majority of the outstanding voting securities" of the Bond Fund, as defined
in the 1940 Act. Under the 1940 Act, a vote of a majority of the outstanding
voting securities of the Bond Fund means the lesser of (i) 67% or more of the
shares of the Bond Fund represented at the Special Meeting, if more than 50%
of the outstanding shares are present at the Special Meeting or represented by
proxy, or (ii) more than 50% of the outstanding shares of the Bond Fund.
PROPOSAL #2: TO ELECT THE MEMBERS OF THE BOARD OF TRUSTEES
At its meeting held on October 5, 1998, the Trustees determined to present
the election of the Board of Trustees to Shareholders at the Special Meeting.
Messrs. Russell, Lynn L. Anderson, Paul E. Anderson, Baxter, Gingrich, Dr.
Anton and Ms. Palmer (the "Current Trustees"), after due consideration,
unanimously approved each nominee identified below to stand for election to
the Board of Trustees. Mr. Russell will not stand for reelection as a voting
Trustee of the Investment Company, although he has been elected to serve as a
Trustee Emeritus immediately upon the completion of his present service as a
Trustee. In considering the nominees for election as Trustees of the
Investment Company, the Trustees took into account the qualifications of each
of the nominees and the concern for the continued efficient conduct of the
Investment Company's business.
In particular, the Trustees considered the requirements of the Investment
Company Act of 1940 (the "1940 Act") as they apply to the election of
Trustees. One factor considered by the Board is the requirement imposed by the
1940 Act's Rule 12b-1 that the selection and nomination of trustees who are
not "interested persons" (as that term is defined in Section 2(a)(19) of the
1940 Act) under the Investment Company's Rule 12b-1 Plans (the "Independent
Trustees") must be committed, in the first instance, to the Independent
Trustees then in office. The Independent Trustees met separately with
Investment Company counsel, and proposed the nomination of the Independent
Trustees whose names are set forth below.
At its meeting held on October 5, 1998, the Board also noted the proposed
change in control of FRC described in Proposal #5 below. Under Section 15(f)
of the 1940 Act, for a period of three years following a change of control, at
least 75% of the members of the Board of Trustees must be individuals who are
not "interested persons" of FRIMCo or its predecessor entities. Based upon the
current affiliations of the nominees for election, the election of a Board
comprised of the six nominees set forth in this Proposal #2 will satisfy that
requirement.
12
<PAGE>
The Current Trustees will continue to serve as Trustees until the Trustees
elected by the Shareholders take office, although Mr. Russell will resign as a
voting Trustee effective December 30, 1998, or at such date as may be
considered appropriate to assure that the composition of the Board complies
with Section 15(f). Upon the election and qualification of the new Trustees,
the six nominees listed below will constitute the Board of Trustees of the
Investment Company. It is anticipated that the nominees will take office at
the first regularly scheduled Board meeting following their election, which
Board meeting is currently anticipated to be held in January 1999. Mr. Russell
and Mr. Lynn Anderson are, and will continue to be, "interested persons" of
the Investment Company. Mr. Russell has been designated by the Board of
Trustees as a Trustee Emeritus of the Investment Company as described above
pursuant to the Amended Master Trust Agreement. As a Trustee Emeritus, he will
be expected to attend meetings of the Board, will participate in discussions
of the business of the Investment Company, and may continue to provide the
benefit of his advice and experience to the Board. Under the Amended Master
Trust Agreement, a Trustee Emeritus does not vote on any matter before the
Board, and is not liable for the actions taken or omitted by the Board.
Because the Investment Company does not hold regular annual meetings, each
nominee, if elected, will hold office until his or her successor is elected
and qualified. The Board may call special meetings of shareholders for action
by shareholder vote as may be required by the 1940 Act or required or
permitted by the Amended Master Trust Agreement and by-laws of the Investment
Company. In compliance with the 1940 Act, shareholder meetings will be held to
elect Trustees whenever fewer than a majority of the Trustees holding office
have been elected by the shareholders or, if necessary in the case of filling
vacancies, to assure that at least two-thirds of the Trustees holding office
after vacancies are filled have been elected by shareholders.
THE NOMINEES
The following information is provided for each of the six nominees. It
includes the nominee's name, principal occupation(s) or employment during the
past five years, and directorships with other companies which file reports
periodically with the SEC. Unless otherwise noted, the mailing address for
each nominee is Frank Russell Investment Company, 909 A Street, Tacoma, WA
98402. Each of the nominees is currently a Trustee of the Investment Company
and, except as otherwise indicated, has served as a Trustee since 1984.
Mr. Lynn Anderson is the only nominee for election as a Trustee who is an
"interested person" of the Investment Company as defined in the 1940 Act. This
designation results from his ownership interest and position as an officer of
certain FRC affiliates. As used in the list below, "Frank Russell Company"
includes its corporate predecessor, Frank Russell Co., Inc.
*Lynn L. Anderson--59 years old--Trustee, President and Chief Executive
Officer since 1987. Trustee, President and Chief Executive Officer, Russell
Insurance Funds; Director, Chief Executive Officer and Chairman of the Board,
Russell Fund Distributors, Inc.; Trustee, Chairman of the Board, President,
and Treasurer, The SSgA Funds (investment company); Director, Chief Executive
Officer and Chairman of the Board, Frank Russell Investment Management
Company; Director, Chief Executive Officer and President, Frank Russell Trust
Company; Director and Chairman of the Board, Frank Russell Investment Company
Public Limited PLC; Director and shareholder, Frank Russell Company; Director,
Frank Russell Investments (Ireland) Limited, Frank Russell Investments
(Cayman) Ltd. and Frank Russell Investments (UK) Ltd., Russell Insurance
Agency, Inc., and Frank Russell Investment Company, PLC; June 1993 to November
1995, Director, Frank Russell Company. Until September 1994, Director and
President, The Laurel Funds, Inc. (investment company); November 1995 to
December 1996, Director and Chairman, Russell MLC Management Company; December
1996 to March 1997, Director and Chairman, Frank Russell Company (Delaware),
Inc.
Paul E. Anderson--67 years old--Trustee. 23 Forest Glen Lane, Tacoma,
Washington 98409. Trustee, Russell Insurance Funds; 1996 to Present,
President, Forest Limited Partnership. 1984 to 1996, President, Vancouver Door
Company, Inc.
13
<PAGE>
Paul Anton, Ph.D.--78 years old--Trustee since 1985. PO Box 212, Gig Harbor,
Washington 98335. Trustee, Russell Insurance Funds. President, Paul Anton and
Associates (Marketing Consultant on emerging international markets for small
corporations). 1991-1994, Adjunct Professor, International Marketing,
University of Washington, Tacoma, Washington.
William E. Baxter--73 years old--Trustee. 800 North C Street, Tacoma,
Washington 98403. Trustee, Russell Insurance Funds, Retired.
Lee C. Gingrich--68 years old--Trustee. 1730 North Jackson, Tacoma,
Washington 98406. Trustee, Russell Insurance Funds. President, Gingrich
Enterprises, Inc. (Business and Property Management).
Eleanor W. Palmer--72 years old--Trustee. 2025 Narrows View Circle #232-D,
P.O. Box 1057, Gig Harbor, Washington 98335. Trustee, Russell Insurance Funds;
Director of Frank Russell Trust Company.
The Investment Company pays fees only to the Independent Trustees of the
Investment Company. Compensation of officers and Trustees who are "interested
persons" of the Investment Company (as indicated by an asterisk) is paid by
FRIMCo or its affiliates.
All of the nominees attended each regular Board of Trustees meeting held in
1997 and the special meeting of the Board of Trustees held on June 6, 1997,
except for Paul Anderson, who was absent from two meetings, Lynn L. Anderson,
who was absent from three meetings, and Eleanor W. Palmer, who was absent from
one meeting. The Board of Trustees has an Audit Committee, which is composed
of the Independent Trustees of the Investment Company. The function of the
Audit Committee is to advise the Board with regard to the appointment of the
Investment Company's independent accountants, review and approve audit and
non-audit services of the Investment Company's independent accountants, and
meet with the Investment Company's financial officers to review the conduct of
accounting and internal controls. The Committee also serves as a vehicle for
these Trustees to consult separately with the Investment Company's outside
counsel. The Audit Committee met once during the year ended December 31, 1997.
All members of the Audit Committee attended the Audit Committee meeting. The
Board does not have standing nominating or compensation committees.
The following represents the compensation paid to each Current Trustee for
the year ending December 31, 1997:
<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION FROM
COMPENSATION THE INVESTMENT COMPANY
FROM THE INVESTMENT AND THE FUND COMPLEX
TRUSTEE COMPANY PAID TO TRUSTEES
------- ------------------- -----------------------
<S> <C> <C>
Lynn L. Anderson................. $ 0 $ 0
Paul E. Anderson................. $20,000 $31,263*
Paul Anton, Ph.D. ............... $20,000 $31,263*
William E. Baxter................ $20,000 $31,263*
Lee C. Gingrich.................. $20,000 $31,263*
Eleanor W. Palmer................ $20,000 $31,263*
George F. Russell................ $ 0 $ 0
</TABLE>
- ---------------------
* The Trustees received $11,263 for service as trustees on the Board of
Trustees for the Russell Insurance Funds ($4,000 of which was for services
during 1996).
OFFICERS OF THE INVESTMENT COMPANY
Information about the Investment Company's principal executive officers
(other than Lynn Anderson), including their names, ages, position(s) with the
Investment Company, and principal occupation or employment during the past
five years, is set forth below. An asterisk (*) indicates that the officer is
an "interested person" of the Investment Company as defined in the 1940 Act.
As used in the table, "Frank Russell Company" includes its corporate
predecessor, Frank Russell Co., Inc.
14
<PAGE>
*George F. Russell, Jr.--66 years old--Trustee and Chairman of the Board
since 1984. Trustee and Chairman of the Board of Russell Insurance Funds since
1996; Director, Chairman of the Board and Chief Executive Officer, Russell
Building Management Company, Inc.; Director and Chairman of the Board, Frank
Russell Company, Frank Russell Securities, Inc., Frank Russell Trust Company,
Frank Russell Investments (Delaware), Inc.; Director, Frank Russell Investment
Management Company; Director, Chairman of the Board, and President, Russell
20/20 Association.
*Mark E. Swanson--34 years old--Treasurer and Chief Accounting Officer since
August 1998. Treasurer and Chief Accounting Officer, Russell Insurance Funds;
Interim Director, Finance and Operations, Frank Russell Trust Company;
Assistant Secretary and Principal Accounting Officer, SSgA Funds (investment
company); Interim Director of Fund Administration and Accounting, Frank
Russell Investment Management Company; Manager, Funds Accounting and Taxes,
Russell Fund Distributors, Inc. April 1996 to August 1998, Assistant
Treasurer, Frank Russell Investment Company; August 1996 to August 1998,
Assistant Treasurer, Russell Insurance Funds; November 1995 to July 1998,
Assistant Secretary, the Seven Seas Series Fund; February 1997 to July 1998,
Manager, Funds Accounting and Taxes, Frank Russell Investment Management
Company.
*Randall P. Lert--45 years old--Director of Investments since 1991. Director
of Investments, Russell Insurance Funds; Senior Investment Officer and
Director of Investment Services, Frank Russell Trust Company; Director and
Chief Investment Officer, Frank Russell Investment Management Company;
Director and Chief Investment Officer, Russell Fund Distributors, Inc.
Director-Futures Trading, Frank Russell Investments (Ireland) Limited and
Frank Russell Investments (Cayman) Ltd.; Senior Vice President and Director of
Portfolio Trading, Frank Russell Canada Limited/Limitee. April 1990 to
November 1995, Director of Investments of Frank Russell Investment Management
Company.
*Karl J. Ege--57 years old--Secretary and General Counsel since 1994.
Secretary and General Counsel of Russell Insurance Funds. Director, Secretary
and General Counsel, Russell Fiduciary Services Co., Frank Russell Capital,
Inc.; Director, Secretary, General Counsel and Managing Director--Law and
Government Affairs of Frank Russell Company; Secretary and General Counsel of
Frank Russell Investment Management Company, Frank Russell Trust Company and
Russell Fund Distributors, Inc.; Director and Secretary of Russell Building
Management Company Inc., Russell International Services Co., Inc. and Russell
20-20 Association; Director and Assistant Secretary of Frank Russell Company
Limited (London) and Russell Systems Ltd.; Director, Frank Russell Investment
Company LLC, Frank Russell Investments (Cayman) Ltd., Frank Russell Investment
Company PLC, Frank Russell Investments (Ireland) Limited, Frank Russell
Company S.A., Frank Russell Japan Co. Ltd., Frank Russell Company (NZ)
Limited, Russell Investment Nominee Co PTY Ltd and Frank Russell Investments
(UK) Ltd.; Secretary, A Street Investments, Inc., Director and Secretary,
Frank Russell Investments (Delaware), Inc.; July 1992 to June 1994, Director,
President and Secretary of Frank Russell Shelf Corporation.
*Peter Apanovitch--53 years old--Manager of Short-Term Investment Funds
since 1991. Manager of Short-Term Investment Funds, Russell Insurance Funds;
Manager of Short-Term Investment Funds, Frank Russell Investment Management
Company and Frank Russell Trust Company.
The persons named in the proxy intend, in the absence of contrary
instructions, to vote all proxies in favor of the election of each nominee. A
Shareholder may vote for or withhold authority with respect to any or all of
the nominees. If an executed proxy is returned without voting instructions,
the shares will be voted for all nominees named herein. All of the nominees
have consented to being named in this Proxy Statement and to serve if elected.
The Investment Company knows of no reason why any nominee would be unable or
unwilling to serve if elected. Should any of the nominees become unable or
unwilling to accept nomination or election prior to the Special Meeting, the
persons named in the proxy will exercise their voting power to vote for such
substitute person or persons as the Current Trustees of the Investment Company
may recommend. If any nominee is not approved by the shareholders of the
Investment Company, the Board will consider alternative nominations.
The nominees who receive the greatest number of votes cast by the
shareholders of the Investment Company who are present at the Meeting in
person or by proxy will be declared elected.
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THE BOARD OF TRUSTEES RECOMMENDS THAT
SHAREHOLDERS VOTE TO ELECT AS TRUSTEES THE
NOMINEES FOR ELECTION TO THE
BOARD OF TRUSTEES OF THE INVESTMENT COMPANY
PROPOSAL #3: RATIFICATION OF THE SELECTION OF
PRICEWATERHOUSECOOPERS LLP AS THE
INVESTMENT COMPANY'S INDEPENDENT ACCOUNTANTS
At its meeting on April 27, 1998, pursuant to a request by the management of
the Investment Company, the Board, including a majority of the Independent
Trustees of the Investment Company, selected the firm of
PricewaterhouseCoopers LLP to be independent accountants for the Investment
Company for the fiscal year ended December 31, 1998. Shareholders of all of
the sub-trusts of the Investment Company are being asked at the Special
Meeting to ratify the selection of PricewaterhouseCoopers LLP, a firm formed
by the recent merger of the Investment Company's accountant with another
prominent accounting firm.
Services in connection with the audit function to be performed by the
Investment Company's independent accountants include: (i) the examination of
the annual financial statements of the Investment Company; (ii) all services
rendered in order to permit the accountants to render a formal opinion on the
Investment Company's financial statements; and (iii) provision of assistance
and consultations with respect to filings with the SEC. PricewaterhouseCoopers
LLP does not have any direct or indirect financial interest in the Investment
Company. It is not expected that a representative of PricewaterhouseCoopers
LLP will be present at the Special Meeting. If a representative is present, he
or she will have an opportunity to make a statement if he or she desires to do
so, and would be available to respond to appropriate questions.
To be ratified, the appointment of PricewaterhouseCoopers LLP must receive
the affirmative vote of a majority of the securities of the Investment Company
which are present at the Meeting in person or by proxy, and vote on this
proposal.
THE BOARD OF TRUSTEES RECOMMENDS
THAT SHAREHOLDERS VOTE TO RATIFY THE
SELECTION OF PRICEWATERHOUSECOOPERS LLP AS
THE INVESTMENT COMPANY'S INDEPENDENT ACCOUNTANTS
PROPOSAL #4: TO APPROVE A NEW ADVISORY
AGREEMENT BETWEEN THE INVESTMENT COMPANY,
ON BEHALF OF THE BOND FUND, AND FRANK RUSSELL
INVESTMENT MANAGEMENT COMPANY, RESTRUCTURING
SERVICES AND PROVIDING COMPENSATION
FOR MANAGING ADDITIONAL ASSETS
SUMMARY OF THE PROPOSED ADVISORY AGREEMENT
The Board of the Investment Company has approved and recommended to the
shareholders of the Investment Company, including the Shareholders of the Bond
Fund, a new investment advisory agreement which (i) would distinguish
investment advisory services from administrative services provided to the
Investment Company, and (ii) would assign additional investment supervisory
duties to the Manager and provide compensation for those services.
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WHAT ARE THE CURRENT ARRANGEMENTS FOR INVESTMENT SUPERVISORY SERVICES FOR THE
BOND FUND?
From the inception of the Investment Company to the present time, the
Investment Company has received both its investment advisory and its
administrative services from FRIMCo pursuant to a management agreement between
the Investment Company and FRIMCo. The current management agreement with
FRIMCo (the "Management Agreement"), dated April 1, 1995, as revised to add
additional sub-trusts from time to time, was approved by the shareholders of
each sub-trust of the Investment Company, including the Bond Fund, at a
special meeting held on January 22, 1996 (which special meeting was
specifically called to consider and approve the Management Agreement). The
Management Agreement was continued until April 30, 1999, by the Board,
including all of the Trustees who are not "interested persons" of FRIMCo, at
its meeting held on April 27, 1998. The continuance of the current Management
Agreement assured that the Investment Company would continue to receive the
services of FRIMCo after April 30, 1998. The current Management Agreement is
attached hereto as Exhibit E.
WHAT CHANGES WOULD BE MADE UNDER THE NEW ADVISORY AGREEMENT?
The Board has concluded that the Investment Company would benefit from the
approval of a new investment advisory agreement (the "Advisory Agreement") to
replace the current Management Agreement. This portion of the Proxy Statement
describes the proposed Advisory Agreement and the current Management
Agreement. The Board recommends that the Shareholders approve the proposed
Advisory Agreement. The proposed Advisory Agreement reflects two changes:
(i) The investment advisory and administrative services which are
currently provided under the Management Agreement will be separated into an
Advisory Agreement and a separate administration agreement.
(ii) FRIMCo will assume the responsibility for managing additional assets
of the Bond Fund that are not treated as net assets under the present
agreement, and will be compensated for that responsibility at a rate not to
exceed 0.07 of 1% per annum (0.0007) of those additional assets.
Set forth below is a discussion of the reasons for each of these changes,
and a summary of the terms of proposed Advisory Agreement. A copy of the
proposed Advisory Agreement is attached as Exhibit F to this Proxy Statement.
HOW WILL THE NEW AGREEMENT RESTRUCTURE AND SEPARATE DIFFERENT SERVICES?
As noted above, since the inception of the Investment Company, FRIMCo has
provided both advisory and administrative services under a single agreement.
The current Management Agreement follows this pattern. Both advisory services
and administrative services, and the aggregate fee paid for both types of
services, are provided for in the Management Agreement. The combination of two
types of services (and of the consolidated fee for those services) in a single
agreement causes the advisory fees paid by the Investment Company's sub-
trusts, including the Bond Fund, to appear to be higher than those which some
competitors pay for investment advisory services. In addition, under the 1940
Act, a change to the current Management Agreement affecting only
administrative services still must be approved by Shareholders because the
Management Agreement also covers advisory services. This makes it difficult
for the Investment Company to refine or enhance the scope of administrative
services that it receives from FRIMCo, although this effort and expense
normally is not imposed on other investment companies which make changes to a
purely administrative agreement.
To address these concerns, management asked the Board to consider a proposal
to separate the Management Agreement into two separate agreements -- the
proposed Advisory Agreement and an Administration Agreement.
Having a separate Advisory Agreement would enable the Investment Company to
present fee information in a manner that conforms with the format used by most
other mutual funds. This will allow potential investors to more easily and
conveniently compare the Bond Fund's advisory fees with those of similar
mutual funds. The stated advisory fee will reflect only amounts paid for
advisory services, while administrative costs will be
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identified under the other expense categories. Expense tables reflecting the
separation of the two components of the current fee are included as Exhibit H
to this Proxy Statement. Having a separate Administration Agreement will allow
the Investment Company more flexibility in adjusting the administrative
services it receives from FRIMCo. The Administration Agreement will not deal
with the Investment Company's advisory services and will not be subject to
Section 15 of the 1940 Act. Thus, changes can be made to the Administration
Agreement upon Board approval without the need to hold a shareholder meeting.
At its meeting on June 3, 1998, the Board reviewed the combination of
investment advisory and administrative services currently provided to the
Investment Company under the current Management Agreement. The Board then
considered the scope of the two sets of services which will be provided to the
Investment Company under the proposed Advisory Agreement and the
Administration Agreement. FRIMCo has advised the Board, and the Board has
determined after further analysis, that the services which will be provided
under the two proposed agreements are essentially identical in scope to those
currently provided under the current Management Agreement. The Board has also
concluded that, while changes in the scope of and cost to the sub-trusts of
administrative services could be authorized by the Board in the future, the
scope and cost at this time will not be changed by the adoption of the
proposed agreements. FRIMCo has advised the Board that there is no current
expectation of any reduction in services to, or any material increase in fees
payable by, the Investment Company under the proposed agreements as a result
of this restructuring of the current Management Agreement.
HOW WILL THE BOND FUND COMPENSATE FRIMCO FOR ADDITIONAL INVESTMENT
RESPONSIBILITIES?
The current Management Agreement provides that the Bond Fund will pay to
FRIMCo an investment management fee which is based upon the net assets of the
sub-trusts under the supervision of FRIMCo. The assets upon which the fee is
based include only that portion of the Bond Fund's assets which are included
in the "net assets" of the Bond Fund.
The development of new investment practices available to investment
companies, or the use by investment companies of some investment techniques to
a greater extent than had been possible in the past, has offered the
Investment Company the opportunity to seek additional investment opportunities
which can benefit its shareholders. Certain of these techniques require that
the Investment Company assume responsibility for investment oversight of cash
or other collateral which the Investment Company receives from other parties
to a transaction. For example, if a sub-trust lends a portfolio security which
it owns to a third party (typically, a broker dealer), it will require that
party to deliver to the sub-trust as collateral for the return of the security
an amount of cash which is greater in amount than the value of the security
loaned. The sub-trust then benefits by a portion of the additional income,
after payment of such items as additional costs and fees, which it can obtain
by the investment of that cash collateral in U.S. Government securities or
repurchase agreements secured by U.S. Government securities. Neither the
collateral, nor the instrument in which the collateral is invested, are deemed
to be a part of the net assets of the sub-trust upon which FRIMCo's current
management fee is computed.
For the Bond Fund and the other sub-trusts of the Investment Company to
obtain the benefit of these transactions, however, the investment of these
assets is required. The Board has requested that FRIMCo, as the Manager of the
Investment Company, supervise the investment of these additional assets, and
has concluded that the careful use of these techniques by the Investment
Company, and the receipt of the services of FRIMCo required to utilize these
techniques, is in the interests of the sub-trusts and the shareholders of the
sub-trusts, including the Bond Fund. The Board has determined that obtaining
these benefits for the Bond Fund is in the interests of its shareholders, and
believes that assigning this responsibility to FRIMCo will allow the Bond Fund
greater control over risks of such investment activities. FRIMCo has proposed,
and the Trustees have agreed, that it is reasonable to compensate FRIMCo for
its supervision of these additional assets. (FRIMCo does not receive any other
fees for its services in connection with the lending of portfolio securities.)
The Board has therefore concluded that it is reasonable that the proposed
Advisory Agreement should include a provision which will permit a sub-trust to
compensate FRIMCo for investment management of these assets which are not
treated as net assets of the Fund at a rate not to exceed 0.07 of 1% per annum
of such assets. Such fee is payable on such assets only as and when they are
held by the Bond Fund and subject to oversight by FRIMCo.
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CONSIDERATIONS BY THE BOARD
In its deliberations at the June Board meeting, the Trustees requested and
evaluated information which the Trustees considered appropriate to evaluate
the new structure and compensation arrangements. The Board also considered
information relating to the previous performance of FRIMCo; extensive annual
financial, personnel, and expense information obtained by the Board in
connection with consideration of the extension of the current Management
Agreement; and the duty of the Board to carefully weigh such information in
order to determine whether to approve the Advisory Agreement. While the Board
recognizes that changes under the Administration Agreement could provide for
either increases or decreases in services or fees, any amendment to the
Administration Agreement would have to be approved not only by a majority of
the Board, but also by a majority of the Trustees who are not interested
persons of FRIMCo. The Trustees also noted that the independence of the Board
is enhanced because, as discussed above, the Investment Company has in effect
Plans of Distribution pursuant to which the selection of the Independent
Trustees is committed to the discretion of the Independent Trustees then in
office. The Board considered the fiduciary duty of the Board in connection
with continuance of or amendment to any advisory agreement.
Based upon the information obtained by the Board, the Trustees concluded
that the approval of the proposed Advisory Agreement, including the advisory
fee for management of assets which are not deemed to be part of the net assets
of a sub-trust, is in the interests of the Investment Company (including the
Bond Fund) and its shareholders. In reaching this decision, the Board did not
determine the relative importance of the factors which were discussed. The
discussion by the Trustees with counsel to the Bond Fund reflected
consideration by the Board of all of the issues considered. Although Proposal
#1 above requests the approval of Shareholders for a merger of the Bond Fund
into the Fixed Income Fund, Shareholders of the Bond Fund are being asked to
approve the new form of the Advisory Agreement so that the Bond Fund can
operate in a manner consistent with that of the other sub-trusts of the
Investment Company if, as is likely, the Reorganization of the Bond Fund,
described in Proposal #1, is not completed prior to the implementation of the
new agreements by the other sub-trusts of the Investment Company.
To be approved, the Advisory Agreement must receive the affirmative vote of
a "majority of the outstanding voting securities" of the Bond Fund, as defined
in the 1940 Act, and as described in more detail in the last paragraph under
Proposal #1.
THE BOARD OF TRUSTEES RECOMMENDS THAT
SHAREHOLDERS VOTE TO APPROVE THE PROPOSED
ADVISORY AGREEMENT WITH FRIMCO FOR THE BOND FUND,
INCLUDING THE RESTRUCTURING OF SERVICES AND
COMPENSATION FOR MANAGING ADDITIONAL ASSETS
PROPOSAL #5: TO APPROVE A PROPOSED
AGREEMENT WITH FRIMCO, ON BEHALF OF THE BOND FUND, TO
TAKE EFFECT UPON THE ACQUISITION OF FRANK RUSSELL COMPANY
BY THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
INTRODUCTION
FRIMCo currently serves as the investment manager to the Bond Fund pursuant
to the Management Agreement described above in Proposal #4. If Proposal #4 is
approved and implemented, FRIMCo will continue to serve as the investment
adviser to the Bond Fund pursuant to the new Advisory Agreement. On August 10,
1998, FRC entered into an Agreement and Plan of Merger (the "Transaction
Agreement") with The Northwestern Mutual Life Insurance Company ("Northwestern
Mutual") pursuant to which Northwestern Mutual will acquire at the effective
time all of the outstanding common stock of FRC through the merger of Project
Rainier Corp., a wholly-owned subsidiary of Northwestern Mutual, with and into
FRC (the "Transaction"). Northwestern Mutual is a Milwaukee-based mutual
insurance company with assets of more than
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$76 billion at June 30, 1998, and annual revenues of more than $12.3 billion
for the year ended December 31, 1997. Northwestern Mutual Investment Services,
LLC ("NMIS"), a wholly-owned subsidiary of Northwestern Mutual, serves as
investment adviser to the Mason Street Funds, Inc. (a family of retail mutual
funds sponsored by Northwestern Mutual) and Northwestern Mutual Series Fund,
Inc. (the investment fund for Northwestern Mutual's variable annuity and life
insurance contracts). NMIS had approximately $9 billion under management at
June 30, 1998. The mailing address of Northwestern Mutual is 720 East
Wisconsin Avenue, Milwaukee, Wisconsin 53202-4797.
Pursuant to the Transaction Agreement, FRC will be the surviving corporation
in the merger, and will continue to exist as a Washington corporation, as a
subsidiary of Northwestern Mutual. The corporate headquarters of FRC will
remain in Tacoma, Washington. FRC will retain its name and operating
independence and will continue to operate globally as a separate company.
George F. Russell, Jr. will continue as Chairman of the Board of Directors of
FRC. Michael J. A. Phillips will continue as Chief Executive Officer of FRC
and as a member of FRC's Board of Directors.
Consummation of the Transaction will constitute an "assignment," as that
term is defined in the 1940 Act, of either the Management Agreement or the
Advisory Agreement, whichever agreement is then in effect. As required by the
1940 Act, each of these Agreements provides for its automatic termination in
the event of its assignment. In anticipation of the Transaction/2/ and the
resulting termination, a new investment agreement (the "New Agreement")
between the Bond Fund and FRIMCo is being submitted for approval by
shareholders of the Bond Fund. A copy of the Management Agreement is attached
hereto as Exhibit E. A copy of the Advisory Agreement is attached hereto as
Exhibit F. THE NEW AGREEMENT FOR THE BOND FUND WILL CONTAIN IN ALL MATERIAL
RESPECTS EITHER THE SAME TERMS AS THE MANAGEMENT AGREEMENT, OR THE SAME TERMS
AS THE ADVISORY AGREEMENT, THAT ARE THEN IN EFFECT AT THE TIME OF THE
CONSUMMATION OF THE TRANSACTION, other than the effective date of the
respective agreement.
BOARD OF TRUSTEES EVALUATION AND CONCLUSIONS
At a Board of Trustees meeting on August 10, 1998, the Board was advised
that FRC and Northwestern Mutual had entered into the Transaction Agreement.
The Board directed the officers of the Investment Company to obtain additional
information concerning Northwestern Mutual, the terms of the Transaction, and
the impact of the Transaction on the Investment Company. Extensive information
was provided to the Board by FRC and Northwestern Mutual, and this information
was reviewed by the Board. In addition, the Independent Trustees also
consulted with the Investment Company's outside counsel concerning these
matters. After a careful review and evaluation of this information, a special
meeting of the Board was held on October 5, 1998 to consider the information
provided by FRC and Northwestern Mutual.
At its October meeting, the Board of the Investment Company focused upon the
effect of the proposed Transaction on the Investment Company. Representatives
of FRC and Northwestern Mutual attended the meeting and described the terms of
the proposed Transaction and the perceived benefits to the FRC organization,
FRIMCo and FRIMCo's investment advisory clients. In the course of these
discussions, FRIMCo and FRC advised the Independent Trustees that they did not
expect that the proposed Transaction would have a material effect on the
operations of the Investment Company or its shareholders. FRC has advised the
Independent Trustees that the Transaction Agreement, by its terms, does not
contemplate any changes in the structure or operations of FRIMCo, or in the
way that FRIMCo provides services to the Investment Company. Representatives
of Northwestern Mutual have informed the Trustees that Northwestern Mutual
currently intends to maintain the separate existence of the investment
companies that FRIMCo advises, and the funds that NMIS manages.
Though no specific plans have been developed at this time, the Trustees have
been advised by FRC that there may be some changes in personnel currently
involved in providing services to the Investment Company in
- ---------------------
/2It/is currently anticipated that the Transaction, if approved, will be
completed prior to the completion of the Reorganization described above in
Proposal #1. This Proposal #5 is being presented to the shareholders of the
Bond Fund to assure that FRIMCo's services may continue to be provided to
the Bond Fund prior to the implementation of Proposal #1 or if Proposal #1
is not approved.
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order to combine the strengths and efficiencies of FRC and Northwestern
Mutual. With respect to non-investment advisory services, Northwestern Mutual
and FRC will seek to identify ways in which FRIMCo and other subsidiaries of
Northwestern Mutual (including Robert W. Baird & Co. Incorporated) can more
effectively meet the administrative needs of the Investment Company and its
affiliates. Any changes in investment advisory services would require approval
of the Board and Shareholders in accordance with the 1940 Act. Any
restructuring of non-advisory services provided by FRIMCo will be subject to
the review and approval of the Board of Trustees, including the Trustees who
are not "interested persons" of FRC or Northwestern. In their discussions with
the Trustees, Northwestern Mutual representatives also emphasized the
strengths of the Northwestern Mutual organization and its commitment to
provide the FRC organization, including FRIMCo, with the resources necessary
to continue to provide high quality services to the Investment Company and the
other investment advisory clients of the FRC organization.
The Board of the Investment Company was advised that the Transaction
Agreement provides for FRC to rely, and that FRC intends to rely, on Section
15(f) of the 1940 Act, which provides a safe harbor for an investment adviser
to an investment company (and the adviser's affiliated persons) to retain any
amount or benefit received in connection with a change in control of the
investment adviser so long as the two conditions described below are met.
First, for a period of three years after the Transaction, at least 75% of
the members of the Board of Trustees of the Investment Company must not be
"interested persons" of the Investment Company's investment adviser or its
predecessor adviser. Assuming the election of the nominees listed in Proposal
#2, the Board of the Investment Company would be in compliance with this
provision of Section 15(f) at the time of, or prior to, the consummation of
the Transaction. (See Proposal #2 concerning the election of the Board of
Trustees.)
Second, an "unfair burden" must not be imposed upon the Investment Company
as a result of such Transaction or any express or implied terms, conditions or
understandings applicable thereto. The term "unfair burden" is defined in
Section 15(f) to include any arrangement during the two-year period after the
Transaction whereby the investment adviser, or any interested person of any
such adviser, receives or is entitled to receive any compensation, directly or
indirectly, from the Investment Company or its shareholders (other than fees
for bona fide investment advisory or other services) or from any person in
connection with the purchase or sale of securities or other property to, from
or on behalf of the Investment Company (other than ordinary fees for bona fide
services as principal underwriter for the Investment Company). No compensation
agreements which would violate Section 15(f) are contemplated in connection
with the Transaction.
FRIMCo has undertaken to pay the incremental costs associated with the
preparation, filing, printing, and distribution of these proxy materials, and
of holding the Special Meeting in lieu of Annual Meeting, as well as any other
fees and expenses incurred by the Investment Company in connection with the
Transaction, including the fees and expenses of legal counsel to the
Investment Company, to the extent that such costs are more than those
associated with the annual meeting costs which the Investment Company would
bear in the absence of this proposal.
During the course of their deliberations, the Independent Trustees
considered a variety of factors. These factors included the nature, quality
and extent of the services furnished by FRIMCo to the Investment Company; the
investment record of FRIMCo in managing the Funds in the Investment Company,
including the special role of FRIMCo as a "manager of managers"; the increased
complexity of the domestic and international securities markets; and
comparative data as to investment performance, advisory fees and other fees,
including administrative fees, and expense ratios. The Board also considered
the risks assumed by FRIMCo by serving as adviser to the Investment Company;
the necessity for FRIMCo to maintain and enhance its ability to retain and
attract capable personnel to serve the Investment Company; FRIMCo's
profitability from advising the Investment Company; and other benefits
received by FRIMCo from serving the Investment Company. In connection with the
acquisition of FRC by Northwestern Mutual, the Board noted that there could be
possible economies of scale or other advantages to the Investment Company of
having an adviser with a parent which also serves other investment companies.
The Board also considered current and developing conditions in the financial
services
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industry, including the entry into the industry of large and well capitalized
companies which are spending and appear to be prepared to continue to spend
substantial sums to engage experienced personnel and to provide services to
competing investment companies; and the financial resources of FRIMCo and the
continuance of appropriate incentive compensation arrangements to assure that
FRIMCo will continue to furnish high quality services to the Investment
Company.
In addition to the foregoing factors, the Independent Trustees gave careful
consideration to the likely impact of the Transaction on the FRC organization.
In this regard, the Independent Trustees considered, among other things, the
following factors: the structure of the Transaction, which is expected to
afford FRIMCo executives significant autonomy over FRIMCo's operations and
could potentially provide meaningful FRC equity participation and incentives
for certain FRIMCo employees; FRIMCo's, FRC's and Northwestern Mutual's
commitment to enable FRIMCo to pay compensation adequate to attract and retain
top quality personnel; information regarding the financial resources and
business reputation of Northwestern Mutual; the complementary nature of
various aspects of the business of FRIMCo and the Northwestern Mutual
organization; and the current intention of Northwestern Mutual to maintain
separate Frank Russell and Northwestern Mutual brands in the mutual fund
business. Based on the foregoing, the Independent Trustees concluded that the
Transaction should cause no reduction in the quality of services provided to
the Investment Company and concluded that the Transaction should enhance
FRIMCo's ability to provide such services. The Independent Trustees considered
the foregoing factors with respect to each of the sub-trusts of the Investment
Company, and the Investment Company collectively. The Trustees, including the
Independent Trustees, concluded that the on-going reorganization of the
organizational and operational structure of the sub-trusts of the Investment
Company permitted the Trustees to conclude that no sub-trust would be affected
differently from the Investment Company as a whole in these respects, and
therefore determined that the conclusions of the Board with respect to these
matters would have equal impact with respect to every sub-trust in the
Investment Company.
As a result of these deliberations, at the Board of Trustees meeting on
October 5, 1998, the Trustees of the Investment Company, including the
Independent Trustees, approved the New Agreement for the Investment Company,
and recommended that shareholders of each of the sub-trusts in the Investment
Company approve the New Agreement, to become effective upon the completion of
the change of control of FRC and the termination of the agreement then in
effect. (See Proposal #4 concerning the current investment management
agreement, and the proposed advisory agreement.) In reaching this decision,
the Board did not determine the relative importance of the factors which were
discussed. The discussion by the Trustees with counsel to the Bond Fund
reflected consideration by the Board of all of the issues considered.
The Board has not determined what action would be taken in the event that
any sub-trust does not approve the New Agreement for that sub-trust, and the
Transaction closes. In such a circumstance, the Board would seek to obtain for
the sub-trust suitable advisory services from FRIMCo or another investment
advisor on both an interim and/or a continuing basis. The approval of
continuing arrangements would be subject to the approval of the shareholders
of the affected sub-trust. The Trustees have determined that, in the event the
Transaction is not completed, FRIMCo will continue to serve the Investment
Company under the terms of the agreement then in effect.
INFORMATION CONCERNING THE TRANSACTION AND NORTHWESTERN MUTUAL
Under the Transaction Agreement, at the effective time of the Transaction,
each share of FRC common stock then outstanding (other than shares for which
dissenters' rights have been exercised) will be converted into the right to
receive $905,000,000 divided by the number of fully diluted units of equity of
FRC (taking into account all outstanding shares of FRC capital stock, options
to acquire shares of FRC capital stock, equity appreciation units and other
equity related rights), adjusted as described below. Such share price will be
increased or reduced based on the change (taking into account certain pro
forma adjustments) in FRC's net worth per share between March 31, 1998 and
closing. In addition, $90,000,000 of the $905,000,000 will be held back by
Northwestern Mutual at the closing to cover any adjustments occasioned by
changes in the net worth of FRC and for any losses incurred by Northwestern
Mutual or FRC as a result of the breach by FRC of certain specified
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representations made by FRC in the Transaction Agreement, and will be
distributed to the former FRC shareholders and other former holders of FRC
equity related rights no earlier than October 1, 1999, to the extent there are
no such adjustments or claims in respect of the breach of the specified
representations. FRC currently has approximately 200 shareholders.
Certain shareholders of FRC who have held their shares of common stock for
less than twelve months will have the option to convert such shares of common
stock into FRC preferred stock prior to the closing. Such preferred stock will
be subject to certain put and call rights during certain periods (at a price
per share equal to the amount that would have been paid if the preferred stock
had been common stock at the effective time of the Transaction, plus a
percentage of cumulative earnings per share of FRC on a fully diluted basis
from such effective time to the quarter preceding the put or call) but will
convert to FRC common stock if not redeemed or repurchased after four years.
George Russell, his family members and their related trusts are expected to
own approximately 59% in the aggregate of the fully diluted equity units of
FRC at the effective time of the Transaction. Lynn Anderson is also a
shareholder of FRC and is expected to own approximately 1% of the fully
diluted equity units of FRC at the effective time of the Transaction.
At and after the effective time of the Transaction, FRC will be a subsidiary
of Northwestern Mutual. FRIMCo will remain a wholly-owned subsidiary of FRC.
In connection with the Transaction, 50,000,000 shares of new FRC common stock
will be reserved for future issuance under a FRC Incentive Payments Plan. The
Incentive Payments Plan will be established to enhance the value of FRC and
its subsidiaries, including FRIMCo, by motivating superior performance of
management and key employees of the FRC organization after the closing of the
Transaction through the award of shares of FRC common stock and cash (to cover
certain income tax consequences of any stock award) to certain employees of
FRC and its subsidiaries. Over the course of a five-year period from the
effective time of the Transaction, participants in the Incentive Payments Plan
could collectively earn awards constituting up to 20% of the outstanding
common stock of FRC, depending upon FRC's cumulative growth in earnings over
the five-year period. George Russell and his wife, Jane Russell, will be
awarded 20% in the aggregate of the total number of incentive shares that may
be issued under the Incentive Payments Plan. Lynn Anderson is expected to
participate in the Incentive Payments Plan. The number of incentive shares to
be granted to Mr. Anderson will be determined after the closing of the
Transaction.
At the closing, FRC and Northwestern Mutual will enter into a Governance
Agreement (the "Governance Agreement"). Under the Governance Agreement, the
Board of Directors of FRC will be comprised of five persons. Initially,
Northwestern Mutual will elect to the FRC Board George F. Russell, Jr.,
Michael J.A. Phillips (both of whom are currently members of FRC's Board) and
three other Northwestern Mutual-designated persons. Thereafter, Northwestern
Mutual has agreed to take all actions within its power to cause the FRC Board
at all times to be comprised of (i) FRC's Chief Executive Officer and one
other senior officer or employee of FRC designated by the Chief Executive
Officer and approved by a majority of the other FRC directors then in office
(with Messrs. Russell and Phillips, each a "Russell-designated director"); and
(ii) three other persons designated by Northwestern Mutual.
The names, addresses and principal occupations of the initial Russell-
designated directors are as follows:
George F. Russell, Jr., 909 A Street, Tacoma, Washington, 98402; Trustee
and Chairman of the Board since 1984, Frank Russell Investment Company;
Trustee and Chairman of the Board, Russell Insurance Funds; Director,
Chairman of the Board, and Chief Executive Officer, Russell Building
Management Company, Inc.; Director and Chairman of the Board, Frank Russell
Company, Frank Russell Securities, Inc., Frank Russell Trust Company, Frank
Russell Investments (Delaware), Inc.; Director, Frank Russell Investment
Management Company; Director, Chairman of the Board and President, Russell
20/20 Association.
Michael J.A. Phillips, 909 A Street, Tacoma, Washington, 98402; Director,
President and Chief Executive Officer, Frank Russell Company; Director and
President, Frank Russell Investments (Delaware), Inc.; Director, Frank
Russell Capital Inc., Frank Russell Japan Co., Ltd., Frank Russell Trust
Company, Russell Systems Limited, Frank Russell Company Limited and Frank
Russell Company Pty Limited.
23
<PAGE>
The three initial directors to be designated by Northwestern Mutual have not
yet been determined, but will be selected prior to the closing of the
Transaction. It is currently anticipated that such directors will be selected
from among the executive officers of Northwestern Mutual.
The Governance Agreement, which will terminate no later than December 31,
2008, vests the officers of FRC with the responsibility for day-to-day
management and implementation of FRC's annual operating budget and strategic
plan. However, FRC Board approval is required before certain specified actions
may be taken by FRC or its subsidiaries including, (i) the registration,
issuance and/or sales of securities of FRC and its subsidiaries; (ii) the
merger, consolidation or sale of a substantial portion of assets with or to
another entity (other than another FRC company); (iii) entering into certain
joint ventures, partnerships or other business combinations or acquisitions;
(iv) entering into any material business or line of business other than
investment management, investment consulting, securities trading, analytical
services, and other similar financial services, or discontinuing any material
line of business; (v) entering into material exclusivity contracts, or other
agreements, which materially restrict the manner in which FRC or its
subsidiaries conduct their investment management business in any jurisdiction,
or any U.S. distribution agreements with any life insurance company or life
insurance marketing company other than Northwestern Mutual and its affiliates;
(vi) selling, leasing or otherwise disposing of certain assets or property;
(vii) assuming, incurring, or becoming liable for certain material
indebtedness for borrowed money; (viii) pledging, mortgaging or encumbering
certain assets; (ix) amending its articles of incorporation or bylaws or
undertaking any recapitalization or similar plan; (x) changing FRC's heads of
internal audit or compliance; (xi) approving any transaction with key
employees or certain related parties; (xii) taking any action with respect to
a FRC stockholder meeting; (xiii) declaring dividends or distributions on
FRC's shares; or (xiv) taking any action required to be taken or approved by
the FRC Board under Washington State corporate law. With respect to (iv) and
(v) above, FRC Board approval must include the approval of the Chief Executive
Officer of FRC. In addition, for a period of ten years from the date of the
Governance Agreement, FRC may not change its name or move its principal place
of business to a location other than Tacoma, Washington, without the unanimous
vote or consent of the FRC Board.
The closing of the Transaction is subject to a number of conditions,
including, among others, approval by FRC shareholders; a determination that at
the closing date FRC's annualized revenues from investment advisory, retainer
consulting and analytical services (neutralized for market effect and currency
fluctuations) have not fallen below 90% of the level of such revenues as of
July 31, 1998; the absence of any restraining order or injunction preventing
the Transaction, or any litigation seeking such an injunction; the continued
accuracy of the representations and warranties contained in the Transaction
Agreement; delivery and/or filing of certain documents contemplated by the
Transaction Agreement; all material governmental approvals having been
obtained; holders of not more than 2% of the outstanding FRC common stock
having exercised their statutory appraisal rights; and compliance in all
material respects with all agreements and obligations contained in the
Transaction Agreement. Holders entitled to vote a percentage of shares of FRC
sufficient to approve the Transaction have entered into an agreement with
Northwestern Mutual in which they have agreed to vote such shares in favor of
the approval of the Transaction. The Transaction is expected to close on or
about December 30, 1998, with the merger becoming effective on January 1,
1999.
The information set forth under this Proposal #5 concerning FRC and the
Transaction has been provided to the Bond Fund by FRC, and the information set
forth under this Proposal #5 concerning Northwestern Mutual has been provided
to the Bond Fund by Northwestern Mutual.
Founded in 1857, Northwestern Mutual is a mutual insurance corporation
organized under the laws of Wisconsin. Its home office is located at 720 East
Wisconsin Avenue, Milwaukee, Wisconsin 53202-4797. Northwestern Mutual's
products consist of a full range of permanent and term life insurance,
disability income insurance, long term care insurance, mutual funds and
annuities for personal, estate, retirement, business and benefits planning.
Northwestern Mutual provides its insurance products and services through an
exclusive network of approximately 7,200 agents associated with over 100
general agencies nationwide. Northwestern Mutual leads the U.S. in both
individual life insurance sold annually (approximately $78 billion in 1997)
and
24
<PAGE>
total individual life insurance in force (more than $500 billion at June 30,
1998). Northwestern Mutual employs over 3,600 people, mostly in Milwaukee,
Wisconsin.
FRC, one of the world's leading investment management and consulting firms,
provides investment advice, analytical tools and funds to institutional and
individual investors in more than 30 countries. FRC, through its subsidiaries,
currently manages approximately $40 billion in assets and provides investment
strategy consulting, including manager selection, for more than $1 trillion in
retainer client assets. It is also well known for its family of market
indexes, including the Russell 2000(R). Russell indexes provide complete sets
of performance benchmarks for investors in Australia, Canada, Japan and the
United States. FRC is a three-time winner of Washington CEO magazine's "Best
Large Company to Work For" award in Washington state, and in 1997 was chosen
from among some 12 million family companies to receive the "National Family
Business of the Year" Award. Founded in 1936, the FRC organization is an
established presence in the asset management and mutual fund industry.
REQUIRED VOTE
Approval of this Proposal requires the affirmative vote of a "majority of
the outstanding voting securities" of the Bond Fund, as defined in the 1940
Act, and as described in more detail in the last paragraph under Proposal #1.
THE BOARD OF TRUSTEES RECOMMENDS THAT SHAREHOLDERS
VOTE TO APPROVE THE PROPOSED AGREEMENT WITH
FRIMCO ON BEHALF OF THE BOND FUND, TO TAKE EFFECT
UPON THE ACQUISITION OF FRC BY NORTHWESTERN MUTUAL
PROPOSAL #6: TO APPROVE AN AMENDMENT TO
THE BOND FUND'S FUNDAMENTAL INVESTMENT
RESTRICTIONS TO INCREASE THE AMOUNT WHICH THE
FUND MAY BORROW TO MEET REDEMPTIONS
WHAT IS THE CURRENT LIMITATION ON BORROWING BY THE FUNDS?
Section 18(f)(1) of the 1940 Act provides that it shall be unlawful for any
registered open-end investment company to issue any class of senior security
or to sell any senior security of which it is the issuer, except that any such
registered company shall be permitted to borrow from any bank; provided, that
immediately after any such borrowing, there is an asset coverage of at least
300 per cent for all borrowings of the investment company; and provided
further, that in the event that such asset coverage shall at any time fall
below 300 per cent the registered company shall, within three days thereafter
(not including Sundays and holidays) or such longer period as the SEC may
allow, reduce the amount of its borrowings to an extent that the asset
coverage of such borrowings shall be at least 300 per cent.
The Investment Company, including the Bond Fund, has previously adopted a
fundamental investment restriction that limits the borrowing authority of each
sub-trust to less than the amount that is permitted by the 1940 Act as
described in the prior paragraph. Specifically, the Bond Fund's investment
restriction on borrowing currently provides:
"[The Bond Fund will not:] Borrow amounts more than 5% of the Fund's
total assets taken at cost or at market value, whichever is lower, and only
from banks as a temporary measure for extraordinary or emergency purposes,
except that [the] Fund may engage in reverse repurchase agreements to meet
redemption requests without immediately selling any portfolio instruments.
The Fund will not mortgage, pledge or in any other manner transfer as
security for any indebtedness, any of its assets. Collateral arrangements
with respect to margin for futures contracts are not deemed a pledge of
assets."
25
<PAGE>
WHY IS AN INCREASE IN THE BORROWING LIMITATION PROPOSED?
At a Board meeting held on April 27, 1998, management reported to the Board
on the prospects for entering into a line of credit for the Investment Company
with a commercial bank, whereby the Investment Company's sub-trusts would be
permitted to borrow money under the line of credit in order to meet redemption
requests. This practice would permit the Bond Fund to pay redemption proceeds
to shareholders without the need to make untimely and disadvantageous
dispositions of securities. Given the current investment restriction of the
Investment Company, borrowings by the Bond Fund for this purpose would be
limited to five percent of the Bond Fund's assets.
At the Board meeting, management recommended that the Trustees consider
approving a revision to the fundamental restriction that would authorize a
higher borrowing level for the purpose of efficiently meeting shareholder
redemption requests. FRIMCo, in advocating an increase in the borrowing limits
for the Investment Company's sub-trusts, noted that raising the maximum level
of borrowing to conform to the 1940 Act's limitation would give the Investment
Company's money managers greater flexibility in meeting shareholder redemption
requests.
The officers of the Investment Company noted that an increase in the maximum
level of borrowing permitted to the Investment Company's sub-trusts, including
the Bond Fund, would permit the Investment Company to negotiate a larger line
of credit with a bank, although the officers advised the Board that there is
no current intention to do so at this time.
At a meeting on June 3, 1998, the Board approved a proposal to increase the
borrowing limit under the Bond Fund's fundamental investment restriction, and
directed that the officers of the Investment Company submit to Shareholders a
proposal to approve such amendment to permit borrowing at a higher level by
the Bond Fund. If approved, the Bond Fund's investment restriction would be
revised to state:
"[The Bond Fund will not:] Borrow money, except that the Fund may borrow
as a temporary measure for extraordinary or emergency purposes, and not in
excess of five percent of its net assets; provided, that the Fund may
borrow to facilitate redemptions (not for leveraging or investment),
provided that borrowings do not exceed an amount equal to 33-1/3% of the
current value of the Fund's assets taken at market value, less liabilities
other than borrowings. If at any time the Fund's borrowings exceed this
limitation due to a decline in net assets, such borrowings will be reduced
to the extent necessary to comply with this limitation within three days.
Reverse repurchase agreements will not be considered borrowings for
purposes of the foregoing restriction, provided that the Fund will not
purchase investments when borrowed funds (including reverse repurchase
agreements) exceed 5% of its total assets."
The revised fundamental investment restriction will take effect after
receipt of approval by Shareholders.
To be approved, the proposal must receive the affirmative vote of "a
majority of the outstanding voting securities" of the Bond Fund, as defined in
the 1940 Act and as described in more detail in the last paragraph under
Proposal #1.
THE BOARD OF TRUSTEES RECOMMENDS THAT
SHAREHOLDERS VOTE TO APPROVE A CHANGE IN
THE BOND FUND'S FUNDAMENTAL RESTRICTIONS TO INCREASE THE
LIMITS ON BORROWING MONEY FOR THE PURPOSE
OF MEETING REDEMPTIONS
26
<PAGE>
PROPOSAL #7: TO APPROVE THE ELIMINATION OF
CERTAIN FUNDAMENTAL INVESTMENT RESTRICTIONS
APPLICABLE TO THE BOND FUND
In October 1996, Congress enacted the National Securities Markets
Improvement Act of 1996 ("NSMIA") to promote efficiency and capital formation
in the financial markets. Among its provisions, NSMIA preempted states from
regulating the offering of securities of registered investment companies, such
as the Investment Company. In practical effect, NSMIA nullified a body of
differing state securities laws applicable to operational and investment
requirements that had historically been imposed on investment companies by
some states.
As a result of the enactment of NSMIA, certain of the fundamental and non-
fundamental investment policies and restrictions adopted in the past by the
Bond Fund to comply with state qualification requirements were rendered no
longer necessary. At the Board meeting held on November 4, 1996, management
recommended that the Trustees approve, subject to Shareholder approval, the
elimination of certain fundamental and non-fundamental investment policies and
restrictions, which appear in the Investment Company's Statement of Additional
Information. The fundamental restrictions of the Bond Fund which are proposed
to be eliminated are substantially as follows:
1) The Bond Fund will not invest in interests in oil, gas or other
mineral exploration or development programs;
2) The Bond Fund will not invest in securities of an issuer which,
together with any predecessor, has been in operation for less than three
years if, as a result, more than 5% of the Fund's total assets would then
be invested in such securities; and
3) The Bond Fund will not purchase or retain the securities of an issuer
if, to the Fund's knowledge, one or more of the Trustees or officers of the
Investment Company, or one or more of the officers or directors of the
money manager responsible for the investment or its directors or officers,
individually own beneficially more than 1/2 of 1% of the securities of such
issuer and together own beneficially more than 5% of such securities.
Management believes that the fundamental restrictions identified above limit
the Bond Fund's money managers without a commensurate reduction in risk for
the Bond Fund, and hence, benefit neither the Bond Fund nor its Shareholders.
Since NSMIA has preempted the states' ability to compel the Bond Fund's
compliance with these investment restrictions, the Board approved the
elimination, subject to Shareholder approval, of each of the restrictions set
forth above. However, the Bond Fund has no current intention to engage in
those types of investment activities from which the Bond Fund was previously
restricted.
Shareholders must vote to eliminate each investment restriction identified
above individually.
To be approved, the elimination of each fundamental investment restriction
must receive the affirmative vote of "a majority of the outstanding voting
securities" of the Bond Fund, as defined in the 1940 Act, and as described in
more detail in the last paragraph under Proposal #1.
THE BOARD OF TRUSTEES RECOMMENDS THAT
SHAREHOLDERS VOTE TO APPROVE THE ELIMINATION OF
CERTAIN FUNDAMENTAL INVESTMENT RESTRICTIONS
APPLICABLE TO THE BOND FUND
27
<PAGE>
INFORMATION REGARDING THE PRESENT
MANAGEMENT AGREEMENT
The table below sets forth (i) the net assets of the Bond Fund as of the
Investment Company's year ended December 31, 1997; and (ii) the rate of
management fee, computed daily and payable monthly, to which FRIMCo is
entitled for the services provided and expenses assumed pursuant to the
Management Agreement. The table also reflects the actual management fee (net
of waivers) paid by the Bond Fund for the year ended December 31, 1997.
<TABLE>
<CAPTION>
ANNUAL MANAGEMENT FEE MANAGEMENT FEES (NET OF
NET ASSETS AS OF 12/31/97 (BASED ON AVERAGE NET ASSETS) WAIVERS) FOR YEAR ENDED 12/31/97
------------------------- ----------------------------- --------------------------------
<S> <C> <C>
$172,976,445 .50% $812,308
</TABLE>
Included in the total management fee is the amount that FRIMCo, as agent for
the Investment Company, pays as fees to the Bond Fund's money managers for
their investment selection services. For the year ending December 31, 1997,
FRIMCo paid fees to the money managers of the Bond Fund of $282,055.
For the year ended December 31, 1997, the Bond Fund did not pay any
brokerage commissions and did not enter into any brokerage transactions. The
Bond Fund, however, engages in transactions with dealers acting as principal
and the costs of such transactions involve dealer spreads rather than
brokerage commissions.
FRIMCo serves as the manager for the following Investment Company sub-trusts
that have investment objectives similar to those of the Bond Fund:
<TABLE>
<CAPTION>
INVESTMENT COMPANY SUB- NET ASSETS MAXIMUM ANNUAL MANAGEMENT
TRUST (AS OF SEPT. 21, 1998) FEE (BASED ON AVERAGE NET ASSETS)
----------------------- ---------------------- ---------------------------------
<S> <C> <C>
Diversified Bond Fund*.. $814,952,124 0.45%
Multistrategy Bond
Fund*.................. $546,082,780 0.65%
Limited Volatility Tax-
Free Fund*............. $121,612,703 0.50%
Fixed Income I Fund*.... $977,769,051 0.30%
Fixed Income II Fund*... $253,456,249 0.50%
Fixed Income III Fund*.. $468,284,118 0.55%
</TABLE>
DIRECTORS AND OFFICERS OF FRIMCO
Set forth below are the names and current positions of the officers and
directors of FRIMCo, along with their positions with FRC and/or the Investment
Company, as applicable:
<TABLE>
<CAPTION>
NAME INVESTMENT COMPANY FRIMCO FRC
---- ------------------ ------ ---
<S> <C> <C> <C>
George F. Russell, Jr... Trustee, Chairman of Director Director,
the Board Chairman of
the Board
Lynn L. Anderson........ Trustee, President, Director, Chairman Director
and Chief Executive of the Board and
Officer Chief Executive
Officer
Randall P. Lert......... Director of Director --
Investments
Eric A. Russell......... -- Director, President Director
Karl J. Ege............. Secretary and Secretary and Director,
General Counsel General Counsel Secretary and
General
Counsel
Peter F. Apanovitch..... Manager of Short Manager of Short --
Term Investment Term Investment
Funds Funds
Mark E. Swanson......... Treasurer and Chief Interim Director of --
Accounting Officer Fund Administration
and Accounting
</TABLE>
- ---------------------
*FRIMCo may from time to time waive its management fees and change any waivers
at any time.
28
<PAGE>
INFORMATION REGARDING THE SOLICITATION AND REVOCATION
OF PROXIES AND VOTING INFORMATION
This Proxy Statement is provided on behalf of the Board of Trustees of the
Investment Company in connection with a Special Meeting in lieu of Annual
Meeting of Shareholders of the Bond Fund to be held at the offices of the
Investment Company at 909 A Street, Tacoma, Washington 98402, on Thursday,
November 19, 1998 at 10:00 a.m., local time, and at any or all adjournments
thereof. This Proxy Statement is first being mailed to shareholders on or
about October 23, 1998. You may revoke your proxy at any time before it is
exercised by delivering a written notice to the Investment Company expressly
revoking your proxy, by signing and forwarding to the Investment Company a
later-dated proxy, or by attending the Special Meeting and casting your votes
in person.
The Investment Company requests that broker-dealer firms, custodians,
nominees and fiduciaries forward proxy material to the beneficial owners of
the shares held of record by such persons. The Investment Company may
reimburse such broker-dealer firms, custodians, nominees and fiduciaries for
their reasonable expenses incurred in connection with such proxy solicitation.
The cost of soliciting these proxies will be borne by each Fund, to the extent
of its direct operational expenses, and by FRIMCo. In addition to
solicitations by mail, some of the officers and employees of the Investment
Company and FRIMCo, without extra remuneration, may conduct additional
solicitations by telephone, telegraph and personal interviews. The Investment
Company has engaged Management Information Systems to solicit proxies from
brokers, banks, other institutional holders and individual shareholders for an
approximate fee, including out-of-pocket expenses, ranging between $100,000
and $125,000 for the entire Investment Company.
WHO MAY VOTE AT THE SPECIAL MEETING?
The Board of the Investment Company has fixed the close of business on
September 21, 1998, as the record date (the "Record Date") for the
determination of Shareholders entitled to notice of and to vote at the Special
Meeting and any adjournments thereof. Only holders of record of shares at the
close of business on the Record Date are entitled to notice of, and to vote
at, the Special Meeting and any adjournments thereof. The holders of 5% or
more of the Bond Fund's shares are listed in the section "Principal
Shareholders" below. At the close of business on the Record Date, the total
number of voting shares of the Bond Fund issued and outstanding was
10,072,487.644, and the total number of voting shares of the Investment
Company issued and outstanding was 1,264,526,959.366.
The holder of record of each full share of beneficial interest of the Bond
Fund outstanding as of the close of business on the Record Date is entitled to
one vote for each share held of record upon each matter properly submitted to
the meeting or any adjournments thereof, with a proportionate vote for each
fractional share.
WHAT OTHER BUSINESS WILL BE DISCUSSED AT THE SPECIAL MEETING IN LIEU OF ANNUAL
MEETING?
The Board of Trustees does not intend to present any matters before the
Special Meeting in lieu of Annual Meeting other than as described in this
Proxy Statement, and is not aware of any other matters to be brought before
the Meeting or any adjournments thereof by others. IF ANY OTHER MATTER LEGALLY
COMES BEFORE THE MEETING, YOUR SHARES WILL BE VOTED IN ACCORDANCE WITH THE
INSTRUCTIONS OF THE BOARD OF TRUSTEES OF THE INVESTMENT COMPANY, AND IN THE
JUDGMENT OF THE NAMED PROXIES.
WHAT IF A QUORUM IS NOT PRESENT AT THE SPECIAL MEETING IN LIEU OF ANNUAL
MEETING?
In the event a quorum is not present at the Special Meeting in lieu of
Annual Meeting or sufficient votes to approve a proposal are not received, the
persons named as proxies may propose one or more adjournments of the Meeting
to permit further solicitation of proxies. A shareholder vote may be taken on
any other matter to properly come before the Special Meeting prior to such
adjournment if sufficient votes to approve such matters have been received and
such vote is otherwise appropriate. An adjournment of the Meeting will require
the
29
<PAGE>
affirmative vote of a majority of those shares present at the Meeting or
represented by proxy and voting. The persons named as proxies on the proxy
card will vote against any such adjournment those proxies required to be voted
against such proposal. They will vote in favor of an adjournment all other
proxies which they are entitled to vote. The costs of any such additional
solicitation and of any adjourned session will be borne by the Investment
Company. Abstentions and broker "non-votes" (i.e., proxies from brokers or
nominees indicating that such persons have not received instructions from the
beneficial owner or other person entitled to vote shares on a particular
matter with respect to which the brokers or nominees do not have discretionary
power) will be counted as shares that are present for purposes of determining
the presence of a quorum. Abstentions (but not broker non-votes) have the
effect of a "no" vote when determining whether a proposal has received
sufficient votes to be approved.
PRINCIPAL SHAREHOLDERS
As of September 21, 1998, all of the respective officers and Trustees of the
Investment Company, as a group, owned less than 1% of the outstanding voting
securities of the Class S Shares of the Bond Fund and of the Fixed Income
Fund, as relevant. The beneficial owners, as of September 21, 1998, of more
than 5% of the Frank Russell Investment Company are listed in the table in
Exhibit I. As of September 21, 1998, no Class E Shares of either Fund were
issued or outstanding, and the following persons were known by the Investment
Company to be beneficial owners of more than 5% of the voting securities of
the Class S Shares of the Bond Fund and the Fixed Income Fund:
TITLE OF CLASS: Fixed Income Fund
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND
OF BENEFICIAL NATURE OF PERCENT OF
OWNER BENEFICIAL OWNERSHIP CLASS
---------------- -------------------- ----------
<S> <C> <C>
Anchor/Russell Capital Advisors, Inc. .......... 845,193 Shares 6.25
One Post Office Square, 38th Floor
Boston, MA 02109
Corus Asset Management.......................... 853,008 Shares 6.31
2401 N. Halsted
Chicago, IL 60614
First Tennessee Bank, N.A....................... 1,288,377 Shares 9.53
Plaza Tower, 5th Floor
800 South Gay Street
Knoxville, TN 37995-1230
Reber & Associates.............................. 1,166,029 Shares 8.63
1225 Seventeenth Street, Suite 1400
Denver, CO 80202-5820
Ronald Blue & Co. .............................. 4,053,239 Shares 29.98
1100 Johnson Ferry Road, N.E.,
Suite 600
Atlanta, GA 30342
</TABLE>
TITLE OF CLASS: Class S Shares of Bond Fund
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND
OF BENEFICIAL NATURE OF PERCENT OF
OWNER BENEFICIAL OWNERSHIP CLASS
---------------- -------------------- ----------
<S> <C> <C>
Harbor Capital Management, Inc. ................ 855,154 Shares 8.50
831 E. Morehead St., Suite 350
Charlotte, NC 28202
</TABLE>
30
<PAGE>
There are three shareholders which hold more than 5% of the total shares of
the entire Investment Company. They are:
<TABLE>
<CAPTION>
BENEFICIAL OWNER NAME
AND ADDRESS SHARES PERCENT
--------------------- --------------- -------
<S> <C> <C>
Ronald Blue & Co. ..................................... 249,972,380.534 19.768%
1100 Johnson Ferry Road, N.E.
Atlanta, GA 30342
Anchor/Russell Capital Advisors, Inc. ................. 93,222,375.280 7.372%
One Post Office Square, 38th Floor
Boston, MA 02109
Miller/Russell and Associates, Inc. ................... 81,373,172.206 6.435%
2929 E. Camelback Road
Suite 223
Phoenix, AZ 85016
</TABLE>
INFORMATION ABOUT THE BOND FUND
Information about the Bond Fund and the Investment Company is incorporated
herein by reference from the current Prospectus and Annual Report of the
Investment Company's Russell Funds, dated May 1, 1998, as supplemented through
October 8, 1998, and December 31, 1997, respectively, and the Investment
Company's Statement of Additional Information, dated May 1, 1998, as
supplemented through August 20, 1998, copies of which may be obtained without
charge by writing or calling the Investment Company at the address and
telephone number shown on the cover page of this Proxy Statement. The Annual
Report and Semi-Annual Report of the Investment Company's Russell Funds,
relating to the Bond Fund, are attached to this Proxy Statement (as Exhibits
C(2) and D(2), respectively). Reports and other information filed by the Bond
Fund may be inspected and copied at prescribed rates, at the Public Reference
Facilities maintained by the SEC at 450 Fifth Street NW, Washington, DC 20549,
at the Los Angeles Regional Office of the Securities and Exchange Commission
at 5757 Wilshire Boulevard, Suite 500 East, Los Angeles, California 90036-
3648, and at the Midwest Regional Office of the Securities and Exchange
Commission at 500 West Madison Street, Chicago, Illinois 60661-2511.
Information may also be obtained from the Internet Web site maintained by the
Securities and Exchange Commission at http://www.sec.gov.
INFORMATION ABOUT THE FIXED INCOME FUND
Information about the Fixed Income Fund is included in the current
Prospectus and the Annual Report and Semi-Annual Report of the Investment
Company's Institutional Funds relating to the Fixed Income Fund, each of which
is attached to this Proxy Statement (as Exhibits B, C(1), and D(1),
respectively) and incorporated by reference herein. Additional information
about the Fixed Income Fund is included in the Investment Company's Statement
of Additional Information, dated May 1, 1998, as supplemented through August
20, 1998. Both the Investment Company's Statement of Additional Information
and the Institutional Funds' Prospectus have been filed with the SEC and are
incorporated by reference herein. A copy of the Investment Company's Statement
of Additional Information may be obtained without charge by writing to the
Investment Company at the address on the cover page of this Proxy Statement or
calling 1-800-787-7354.
31
<PAGE>
INFORMATION ABOUT THE INVESTMENT COMPANY
The Investment Company is subject to the informational requirements of the
Securities Exchange Act of 1934 and the 1940 Act, as applicable, and, in
accordance with such requirements, files proxy materials, reports and other
information with the Securities and Exchange Commission. These materials may
be inspected and copied, at prescribed rates, at the Public Reference
Facilities maintained by the Securities and Exchange Commission at 450 Fifth
Street NW, Washington, DC 20549, at the Los Angeles Regional Office of the
Securities and Exchange Commission at 5757 Wilshire Boulevard, Suite 500 East,
Los Angeles, California 90036-3648, and at the Midwest Regional Office of the
Securities and Exchange Commission at 500 West Madison Street, Chicago,
Illinois 60661-2511. Information may also be obtained from the Internet Web
site maintained by the Securities and Exchange Commission at
http://www.sec.gov.
32
<PAGE>
EXHIBITS TO COMBINED
PROSPECTUS/PROXY STATEMENT
EXHIBIT
A.
Agreement and Plan of Reorganization by Frank Russell Investment Company
(the "Investment Company"), for the Volatility Constrained Bond Fund (the
"Bond Fund") and the Fixed Income II Fund (the "Fixed Income Fund").
B.
Prospectus dated May 1, 1998, as supplemented through October 8, 1998, of
the Investment Company's Institutional Funds relating to the Fixed Income
Fund.
C(1).
Annual Report dated December 31, 1997 for the Investment Company's
Institutional Funds, relating to the Fixed Income Fund. (Information
relating to other Funds omitted.)
C(2).
Annual Report dated December 31, 1997 for the Investment Company's
Russell Funds, relating to the Bond Fund. (Information relating to other
Funds omitted).
D(1).
Semi-Annual Report of the Investment Company's Institutional Funds,
relating to the Fixed Income Fund, dated June 30, 1998. (Information
relating to other Funds omitted.)
D(2).
Semi-Annual Report of the Investment Company's Russell Funds, relating to
the Bond Fund, dated June 30, 1998. (Information relating to other Funds
omitted).
E. Current Management Agreement (the "Management Agreement") between the
Investment Company and FRIMCo.
F. Proposed Advisory Agreement ("Proposed Advisory Agreement") between the
Investment Company and FRIMCo.
G. Proforma Financial Statements.
H. Expense Tables Reflecting Separation of Advisory and Administrative Fees.
I.
Five Percent Shareholders.
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
FOR THE
FRANK RUSSELL INVESTMENT COMPANY,
A MASSACHUSETTS BUSINESS TRUST
ON BEHALF OF ITS
FIXED INCOME II FUND
AND
ON BEHALF OF ITS
VOLATILITY CONSTRAINED BOND FUND
NOVEMBER 20, 1998
A-1
<PAGE>
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
I. Transfer of Assets of the Acquired Portfolio.................... A-3
Liquidating Distributions and Termination of the Acquired
II. Portfolio....................................................... A-4
III. Effective Time of the Reorganization............................ A-4
Certain Representations, Warranties and Agreements of the
IV. Acquired Portfolio.............................................. A-4
Certain Representations, Warranties and Agreements of the
V. Acquiring Portfolio............................................. A-6
VI. Shareholder Action on Behalf of the Acquired Portfolio.......... A-7
VII. N-14 Registration Statement and Proxy Solicitation Materials.... A-8
VIII. Delivery of Assets and Shares................................... A-8
IX. Conditions of the Acquiring Portfolio........................... A-8
X. Conditions of the Acquired Portfolio............................ A-10
XI. Tax Documents................................................... A-11
XII. Finder's Fees................................................... A-11
XIII. Announcements................................................... A-11
XIV. Further Assurances.............................................. A-11
XV. Termination of Representations and Warranties................... A-12
XVI. Termination of Agreement........................................ A-12
XVII. Agreement and Waiver............................................ A-12
XVIII. Governing Law................................................... A-12
XIX. Successors and Assigns.......................................... A-12
XX. Beneficiaries................................................... A-12
Liability of the Acquired Portfolio and the Acquiring
XXI. Portfolio....................................................... A-12
XXII. Notices......................................................... A-13
XXIII. Expenses........................................................ A-14
XXIV. Entire Agreement................................................ A-14
XXV. Counterparts.................................................... A-14
</TABLE>
A-2
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") made as of November
20, 1998 by FRANK RUSSELL INVESTMENT COMPANY, a Massachusetts business trust
(the "Trust"), on behalf of the Fixed Income II Fund (the "Acquiring
Portfolio") of the Trust, and on behalf of the Volatility Constrained Bond
Fund (the "Acquired Portfolio") of the Trust.
WHEREAS, the Trust currently consists of twenty-eight investment portfolios
organized as Sub-Trusts of the Trust, including the Acquired Portfolio and the
Acquiring Portfolio; and
WHEREAS, the Trust intends that the Acquired Portfolio shall be merged into,
and the assets and liabilities of the Acquired Portfolio, as of the Effective
Time of the Reorganization (as defined in Article III) shall be transferred
to, and be acquired and assumed by, the Acquiring Portfolio, in exchange for
Class S Shares of the Acquiring Portfolio, which shall thereafter be
distributed by the Trust to the holders of the Class S Shares of the Acquired
Portfolio (the "Reorganization"); and
WHEREAS, the parties intend that the Acquiring Portfolio shall assume the
investment operations of the Acquired Portfolio after the Reorganization; and
WHEREAS, the parties intend that the merger of the Portfolios and the
transfer of assets, assumption of liabilities, and distribution of Class S
Shares involving the Acquiring Portfolio and the Acquired Portfolio be treated
as a tax-free reorganization under Section 368(a)(1)(C) of the Internal
Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, the parties intend that in connection with the Reorganization and
the termination of the business of the Acquired Portfolio, the Acquired
Portfolio shall be terminated and shall be dissolved as described in this
Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, and subject to the terms and conditions hereof, and
intending to be legally bound hereby, the Trust, on behalf of the Acquired
Portfolio and the Acquiring Portfolio, resolves as follows:
I. TRANSFER OF ASSETS OF THE ACQUIRED PORTFOLIO.
1.01 At the Effective Time of the Reorganization (as defined in Article
III), all property of every description, and all interests, rights, privileges
and powers of the Acquired Portfolio other than cash in an amount necessary to
pay any unpaid dividends and distributions as provided in Article IV, Section
4.01(h) (such assets, the "Acquired Portfolio Assets"), shall be transferred
and conveyed by the Acquired Portfolio to the Trust on behalf of the Acquiring
Portfolio, and shall be accepted by the Trust on behalf of the Acquiring
Portfolio, and the Trust, in its Acquiring Portfolio, shall assume all known
liabilities, whether accrued, absolute, contingent or otherwise, of the
Acquired Portfolio reflected in the calculation of the Acquired Portfolio's
net asset value (the "Acquired Portfolio Liabilities"), so that at and after
the Effective Time of the Reorganization: (i) all assets of the Acquired
Portfolio shall become and be a part of the assets of the Acquiring Portfolio;
and (ii) all known liabilities of the Acquired Portfolio reflected as such in
the calculation of the Acquired Portfolio's net asset value shall attach to
the Acquiring Portfolio as aforesaid and may thenceforth be enforced against
the Acquiring Portfolio to the extent as if the same had been incurred by it.
Without limiting the generality of the foregoing, the Acquired Portfolio
Assets shall include all property and assets of any nature whatsoever,
including, without limitation, all cash, cash equivalents, securities, claims
and receivables (including dividend and interest receivables) owned by the
Acquired Portfolio, and any deferred or prepaid expenses shown as an asset on
the Acquired Portfolio's books, at the Effective Time of the Reorganization,
and all good will, all other intangible property and all books and records
belonging to the Acquired Portfolio. Recourse by any person for the Acquired
Portfolio Liabilities assumed by the Acquiring Portfolio shall, at and after
the Effective Time of the Reorganization, be limited to the Acquiring
Portfolio.
A-3
<PAGE>
1.02 In exchange for the transfer of the Acquired Portfolio Assets and the
assumption of the Acquired Portfolio Liabilities, the Trust shall
simultaneously issue at the Effective Time of the Reorganization to the
shareholders of the Acquired Portfolio a number of full and fractional (to the
third decimal place) Class S Shares of the Acquiring Portfolio, all determined
and adjusted as provided in this Agreement. The number of Class S Shares of
the Acquiring Portfolio so issued will have an aggregate net asset value equal
to the net value of the Acquired Portfolio Assets that are received in the
Acquiring Portfolio, all determined and adjusted as provided in this
Agreement.
1.03 The net asset value of the Class S Shares of the Acquiring Portfolio
and the aggregate value of the assets of the Acquired Portfolio shall be
determined as of the Effective Time of the Reorganization.
1.04 The net asset value of the Class S Shares of the Acquiring Portfolio to
be issued by the Trust shall be computed in the manner set forth in the
Acquiring Portfolio's then current prospectuses under the Securities Act of
1933, as amended (the "1933 Act"). In determining the value of the securities
transferred by the Acquired Portfolio to the Acquiring Portfolio, each
security shall be priced in accordance with the policies and procedures of the
Trust described in its then current prospectuses and statement of additional
information and adopted by the Trust's Board of Trustees (the "Board"). For
such purposes, price quotations and the security characteristics relating to
establishing such quotations shall be determined by the Trust, such
determination being subject to the approval of the Trust, and shall be subject
to adjustment by the amount, if any, agreed to by the parties hereto.
II. LIQUIDATING DISTRIBUTIONS AND TERMINATION OF THE ACQUIRED PORTFOLIO.
Immediately after the Effective Time of the Reorganization the Trust, on
behalf of the Acquiring Portfolio, shall distribute in complete liquidation
pro rata to the record holders of the Acquired Portfolio shares at the
Effective Time of the Reorganization the Class S Shares of the Acquiring
Portfolio. Except as otherwise directed, such Class S Shares shall be
distributed to the former record holders of the shares of the Acquired
Portfolio by book entry. In addition, each shareholder of record of the
Acquired Portfolio shall have the right to receive any unpaid dividends or
other distributions which were declared before the Effective Time of the
Reorganization with respect to the shares of the Acquired Portfolio that are
held by the shareholder at the Effective Time of the Reorganization. The Trust
shall record on its books the ownership of Class S Shares of the Acquiring
Portfolio by the former record holders of the shares of the Acquired
Portfolio. No redemption or repurchase of the Acquiring Portfolio shares
credited to the Acquired Portfolio shareholders of record with respect to the
Acquired Portfolio shares represented by share certificates shall be permitted
until such certificates have been surrendered to the Trust's transfer agent
for cancellation. All of the issued and outstanding shares of the Acquired
Portfolio shall be canceled on the books of the Trust at the Effective Time of
the Reorganization and shall thereafter represent only the right to receive
Class S Shares of the Acquiring Portfolio, following which the Acquired
Portfolio's transfer books shall be closed permanently. As soon as practicable
after the Effective Time of the Reorganization and the termination of the
regular business of the Acquired Portfolio, the Trust shall make all filings
and take all other steps as shall be necessary and proper to effect the
complete dissolution of the Acquired Portfolio. After the Effective Time of
the Reorganization and the merger of the Acquired Portfolio, the Acquired
Portfolio shall not conduct any business.
III. EFFECTIVE TIME OF THE REORGANIZATION.
The Effective Time of the Reorganization shall be 4:00 p.m., Eastern Time,
on February 1, 1999, or on such other date as may be agreed to in writing by
the duly authorized officers of the Trust.
IV. CERTAIN REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE ACQUIRED
PORTFOLIO.
4.01 The Trust, on behalf of itself and the Acquired Portfolio, represents
and warrants to, and agrees with, the following:
4.01(a) The Trust is a Massachusetts business trust duly created pursuant to
its Amended Master Trust Agreement, dated July 26, 1984 and as amended from
time to time (the "Trust Agreement"), for the
A-4
<PAGE>
purpose of acting as a management investment company under the Investment
Company Act of 1940, as amended (the "1940 Act") and is validly existing
under the laws of, and duly authorized to transact business in, the
Commonwealth of Massachusetts. It is registered with the Securities and
Exchange Commission (the "SEC") as an open-end, management investment
company under the 1940 Act and such registration is in full force and
effect.
4.01(b) The Acquired Portfolio has power to own all of its properties and
assets and, subject to the approval of shareholders referred to herein, to
carry out and consummate the transactions contemplated herein, and has all
necessary federal, state and local authorizations which counsel to the
Trust advises are required to carry on its business as now being conducted
and to consummate the transactions contemplated by this Agreement.
4.01(c) This Agreement has been duly authorized, executed and delivered
by the Trust on behalf of the Acquired Portfolio, and represents a valid
and binding contract, enforceable in accordance with its terms, subject as
to enforcement to bankruptcy, insolvency, reorganization, arrangement,
moratorium, and other similar laws of general applicability relating to or
affecting creditors' rights and to general principles of equity. The
execution and delivery of this Agreement does not and will not, and the
consummation of the transactions contemplated by this Agreement will not,
violate the Trust Agreement or the Trust's By-Laws or any agreement or
arrangement to which it is a party or by which it is bound.
4.01(d) The Acquired Portfolio has elected to qualify and has qualified
as a regulated investment company under Part I of Subchapter M of the Code,
as of and since its first taxable year; has been a regulated investment
company under such Part of the Code at all times since the end of its first
taxable year when it so qualified; and qualifies and shall continue to
qualify as a regulated investment company until the Effective Time of the
Reorganization.
4.01(e) All federal, state, local and foreign income, profits, franchise,
sales, withholding, customs, transfer and other taxes, including interest,
additions to tax and penalties (collectively, "Taxes") relating to the
Acquired Portfolio Assets due or properly shown to be due on any return
filed by or on behalf of the Acquired Portfolio with respect to taxable
periods ending on or prior to, and the portion of any interim period up to,
the date hereof have been fully and timely paid or provided for; and there
are no levies, liens, or other encumbrances relating to Taxes existing,
threatened or pending with respect to the Acquired Portfolio Assets. At the
Effective Time of the Reorganization, all returns and reports of the Trust
and the Acquired Portfolio respecting Taxes required by law to have been
filed by such time shall have been filed.
4.01(f) The financial statements of the Acquired Portfolio for its fiscal
year ended December 31, 1997, examined by PricewaterhouseCoopers LLP,
copies of which have been previously furnished to the Acquiring Portfolio,
present fairly the financial position of the Acquired Portfolio as of such
date and the results of its operations, and changes in its net assets for
the year then ended, in conformity with generally accepted accounting
principles.
4.01(g) The unaudited financial statements of the Acquired Portfolio for
the six-month period ended June 30, 1998, copies of which have been
previously furnished to the Acquiring Portfolio, present fairly the
financial position of the Acquired Portfolio as of such date and the
results of its operations and changes in its net assets for the six-month
period then ended, in conformity with generally accepted accounting
principles.
4.01(h) Prior to the Effective Time of the Reorganization, the Acquired
Portfolio shall have declared a dividend, with a record date and ex-
dividend date prior thereto, which, together with all previous dividends,
shall have the effect of distributing to its shareholders all of its net
Trust income, if any, for the taxable year ended on December 31, 1997 and
for the period from said date to and including the Effective Time of the
Reorganization (computed without regard to any deduction for dividends
paid), and all of its net capital gain, if any, realized in such taxable
year and period.
4.01(i) At the Effective Time of the Reorganization, there shall be no
known liabilities of the Acquired Portfolio, whether accrued, absolute,
contingent or otherwise, not reflected in the net asset value per share of
its outstanding shares.
A-5
<PAGE>
4.01(j) There are no legal, administrative or other proceedings pending
or, to the Trust's knowledge, threatened against the Trust or the Acquired
Portfolio which could result in liability on the part of the Trust or the
Acquired Portfolio.
4.01(k) Subject to the approval of shareholders referred to herein, at
the Effective Time of the Reorganization, the Acquired Portfolio shall have
full right, power and authority to sell, assign, transfer and deliver the
Acquired Portfolio Assets and, upon delivery and payment for the Acquired
Portfolio Assets as contemplated herein, the Acquiring Portfolio shall
acquire good and marketable title thereto, free and clear of all liens and
encumbrances, and subject to no restrictions on the ownership or transfer
thereof (except as imposed by federal or state securities laws).
4.01(l) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the Trust of the
transactions contemplated by this Agreement, except such as may be
required, in the opinion of counsel to the parties hereunder, under the
1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act"),
the 1940 Act, the rules and regulations under those Acts, and state
securities laws.
4.01(m) Insofar as the following relate to the Acquired Portfolio, the
registration statement filed by the Trust on Form N-14 relating to the
shares of the Acquiring Portfolio that will be registered with the SEC
pursuant to this Agreement, which, without limitation, shall include a
proxy statement of the Trust and the prospectus of the Acquiring Portfolio
with respect to the transactions contemplated by this Agreement, and any
supplement or amendment thereto or to the documents contained or
incorporated therein by reference (the "N-14 Registration Statement"), on
the effective date of the N-14 Registration Statement, at the time of any
shareholders' meetings referred to herein and at the Effective Time of the
Reorganization: (i) shall comply in all material respects with the
provisions of the 1933 Act, the 1934 Act and the 1940 Act, the rules and
regulations thereunder, and state securities laws, and (ii) shall not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading.
4.01(n) All of the issued and outstanding shares of the Acquired
Portfolio have been duly and validly issued, are fully paid and non-
assessable, and were offered for sale and sold in conformity with all
applicable federal and state securities laws, and no shareholder of the
Acquired Portfolio has any preemptive right of subscription or purchase in
respect of such shares.
4.01(o) The Acquired Portfolio has valued, and will continue to value,
its portfolio securities and other assets in accordance with applicable
legal requirements.
V. CERTAIN REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE ACQUIRING
PORTFOLIO.
5.01 The Trust, on behalf of itself and the Acquiring Portfolio, represents
and warrants to, and agrees with, the following:
5.01(a) The Trust is a Massachusetts business trust duly created pursuant
to the Trust Agreement for the purpose of acting as a management investment
company under the 1940 Act and is validly existing under the laws of, and
duly authorized to transact business in, the Commonwealth of Massachusetts.
It is registered with the SEC as an open-end, management investment company
under the 1940 Act and such registration is in full force and effect.
5.01(b) The Acquiring Portfolio has power to own all of its properties
and assets and to carry out and consummate the transactions contemplated
herein, and has all necessary federal, state and local authorizations to
carry on its business as now being conducted and to consummate the
transactions contemplated by this Agreement.
5.01(c) This Agreement has been duly authorized, executed and delivered
by the Trust on behalf of the Acquiring Portfolio, and represents the
Trust's valid and binding contract, enforceable in accordance with its
terms, subject as to enforcement to bankruptcy, insolvency, reorganization,
arrangement, moratorium, and other similar laws of general applicability
relating to or affecting creditors' rights and to
A-6
<PAGE>
general principles of equity. The execution and delivery of this Agreement
does not and will not, and the consummation of the transactions
contemplated by this Agreement will not, violate the Trust Agreement or the
Trust's By-Laws or any agreement or arrangement to which it is a party or
by which it is bound.
5.01(d) The Acquiring Portfolio has elected to qualify and has qualified
as a regulated investment company under Part I of Subchapter M of the Code,
as of and since its first taxable year; has been a regulated investment
company under such Part of the Code at all times since the end of its first
taxable year when it so qualified; and intends to continue to so qualify as
a regulated investment company.
5.01(e) The financial statements of the Acquiring Portfolio for its
fiscal year ended December 31, 1997, examined by PricewaterhouseCoopers
LLP, copies of which have been previously furnished to the Acquired
Portfolio, present fairly the financial position of the Acquiring Portfolio
as of such date and the results of its operations and changes in its net
assets for the year then ended, in conformity with generally accepted
accounting principles.
5.01(f) The unaudited financial statements of the Acquiring Portfolio for
the six-month period ended June 30, 1998, copies of which have been
previously furnished to the Acquired Portfolio, present fairly the
financial position of the Acquiring Portfolio as of such date and the
results of its operations, and changes in its net assets for the six-month
period then ended, in conformity with generally accepted accounting
principles.
5.01(g) At the Effective Time of the Reorganization, there shall be no
known liabilities applicable to the Class S Shares of the Acquiring
Portfolio, whether accrued, absolute, contingent or otherwise, not
reflected in the net asset value per share of the Acquiring Portfolio's
Class S Shares.
5.01(h) There are no legal, administrative or other proceedings pending
or, to the Trust's knowledge, threatened against the Trust or the Acquiring
Portfolio which could result in liability on the part of the Trust or the
Acquiring Portfolio.
5.01(i) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the Trust of the
transactions contemplated by this Agreement, except such as may be
required, in the opinion of counsel to the parties hereunder, under the
1933 Act, the 1934 Act, the 1940 Act, the rules and regulations under those
Acts, and state securities laws.
5.01(j) Insofar as the following relate to the Acquiring Portfolio, the
N-14 Registration Statement on its effective date, at the time of any
shareholders' meeting referred to herein and at the Effective Time of the
Reorganization: (i) shall comply in all material respects with the
provisions of the 1933 Act, the 1934 Act and the 1940 Act, the rules and
regulations thereunder, and state securities laws, and (ii) shall not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading.
5.01(k) The Class S Shares of the Acquiring Portfolio to be issued and
delivered by the Acquiring Portfolio to the record holders of shares of the
Acquired Portfolio pursuant to the terms hereof, shall have been duly
authorized as of the Effective Time of the Reorganization and, when so
issued and delivered, shall be duly and validly issued, fully paid and non-
assessable, and no shareholder of the Trust shall have any preemptive right
of subscription or purchase in respect thereto.
5.01(l) The Acquiring Portfolio has valued, and will continue to value,
its portfolio securities and other assets in accordance with applicable
legal requirements.
5.01(m) The Board complies with the requirements of Section 15(f)(1)(A)
of the 1940 Act as of the date hereof. If the Board ceases to comply with
such requirements at any time within three years after the Effective Time
of the Reorganization, the Trust will take such action as is necessary to
restore such compliance as soon as is reasonably practicable.
VI. SHAREHOLDER ACTION ON BEHALF OF THE ACQUIRED PORTFOLIO.
6.01 As soon as practicable after the effective date of the N-14
Registration Statement, but in any event prior to the Effective Time of the
Reorganization and as a condition to the Reorganization, the Trust shall hold
a meeting of the shareholders of the Acquired Portfolio for the purpose of
considering and voting upon:
A-7
<PAGE>
6.01(a) Approval of this Agreement and the transactions contemplated
hereby, including, without limitation:
(i) The transfer of the Acquired Portfolio Assets to the Acquiring
Portfolio, and the assumption by the Acquiring Portfolio of the
Acquired Portfolio Liabilities, in exchange for the issuance by the
Acquiring Portfolio of Class S Shares.
(ii) The distribution by the Acquiring Portfolio to the record
holders of the Acquired Portfolio of Class S Shares of the Acquiring
Portfolio as described in this Agreement.
6.01(b) Such other matters as may be determined by the Trust.
6.02 Approval of this Agreement and the transactions contemplated herein by
the shareholders of the Acquired Portfolio shall constitute the waiver of the
application of any fundamental policy of the Acquired Portfolio that might be
deemed to prevent it from taking the actions necessary to effectuate the
Reorganization as described, and such policies, if any, shall be deemed to
have been amended accordingly.
VII. N-14 REGISTRATION STATEMENT AND PROXY SOLICITATION MATERIALS.
The Trust shall file (i) the N-14 Registration Statement under the 1933 Act,
and (ii) the combined prospectus/proxy statement contained therein under the
1934 Act and 1940 Act proxy rules, with the SEC as promptly as practicable.
The Trust has furnished and shall continue to furnish the information relating
to itself and affiliated persons thereof that is required by the 1933 Act, the
1934 Act, the 1940 Act, the rules and regulations under each of those Acts and
state securities laws, to be included in the N-14 Registration Statement.
VIII. DELIVERY OF ASSETS AND SHARES.
Delivery of the Acquired Portfolio Assets and the Class S Shares of the
Acquiring Portfolio to be issued pursuant to Article I shall occur at the
Effective Time of the Reorganization, or on such other date, and at such place
and time, as may be determined by the President or any Vice President of each
party hereto. To the extent the Acquired Portfolio Assets are, for any reason,
not transferred at the Effective Time of the Reorganization, the Trust shall
cause the Acquired Portfolio Assets to be transferred in accordance with this
Agreement at the earliest practicable date thereafter.
IX. CONDITIONS OF THE ACQUIRING PORTFOLIO.
9.01 The obligations of the Acquiring Portfolio hereunder shall be subject
to the following conditions precedent:
9.01(a) This Agreement and the transactions contemplated by this
Agreement shall have been approved by the Board and by the shareholders of
the Acquired Portfolio, in the manner required by law.
9.01(b) The Trust, on behalf of the Acquired Portfolio shall have duly
executed and delivered to the Acquiring Portfolio such bills of sale,
assignments, certificates and other instruments of transfer ("Transfer
Documents") as may be necessary or desirable to transfer all right, title
and interest of the Acquired Portfolio in and to the Acquired Portfolio
Assets. The Acquired Portfolio Assets shall be accompanied by all necessary
state stock transfer stamps or cash for the appropriate purchase price
therefor.
9.01(c) All representations and warranties of the Trust on behalf of the
Acquired Portfolio made in this Agreement shall be true and correct in all
material respects as if made at and as of the Effective Time of the
Reorganization. As of the Effective Time of the Reorganization, there shall
have been no material adverse change in the financial condition of the
Acquired Portfolio since December 31, 1997, other than those changes
incurred in the ordinary course of business as an Trust. No action, suit or
other proceeding shall be threatened or pending before any court or
governmental agency in which it is sought to restrain or prohibit, or
obtain damages or other relief in connection with, this Agreement or the
transactions contemplated herein.
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<PAGE>
9.01(d) The Trust, on behalf of the Acquiring Portfolio, shall have
received an opinion of Stradley, Ronon, Stevens & Young, LLP, addressed to
the Trust in form reasonably satisfactory to the Trust and dated the
Effective Time of the Reorganization, substantially to the effect that: (i)
the Trust is a Massachusetts business trust duly organized and validly
existing under the laws of the Commonwealth of Massachusetts; (ii) the
shares of the Acquired Portfolio outstanding at the Effective Time of the
Reorganization are duly authorized, validly issued, fully paid and non-
assessable by the Acquired Portfolio, and to such counsel's knowledge no
shareholder of the Acquired Portfolio has any option, warrant or preemptive
right to subscription or purchase in respect thereof; (iii) this Agreement
and the Transfer Documents have been duly authorized, executed and
delivered by the Acquired Portfolio and represent its legal, valid and
binding contracts or instruments, enforceable against the Acquired
Portfolio in accordance with their terms, subject to the effect of
bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws
relating to or affecting creditors' rights generally and court decisions
with respect thereto, and such counsel shall not be required to express an
opinion with respect to the application of equitable principles in any
proceeding, whether at law or in equity, or with respect to the provisions
of this Agreement intended to limit liability for particular matters to the
Acquired Portfolio and its assets; (iv) the execution and delivery of this
Agreement did not, and the consummation of the transactions contemplated by
this Agreement will not, violate the Trust Agreement or By-Laws of the
Trust or any material agreement known to such counsel to which the Trust is
a party or by which the Trust is bound; and (v) to such counsel's
knowledge, no consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the Acquired
Portfolio of the transactions contemplated by this Agreement, except such
as have been obtained under the 1933 Act, the 1934 Act, the 1940 Act, the
rules and regulations under those Acts, and such as may be required under
state securities laws. Such opinion may rely on the opinion of other
counsel to the extent set forth in such opinion, provided such other
counsel is reasonably acceptable to the Acquiring Portfolio.
9.01(e) The Trust, on behalf of the Acquiring Portfolio, shall have
received an opinion of Stradley, Ronon, Stevens & Young, LLP, addressed to
the Trust in form reasonably satisfactory to the Trust and dated the
Effective Time of the Reorganization, substantially to the effect that for
federal income tax purposes (i) the transfer by the Acquired Portfolio of
all of the Acquired Portfolio Assets and Acquired Portfolio Liabilities to
the Acquiring Portfolio, in exchange for the issuance to shareholders of
the Acquired Portfolio of Class S Shares of the Acquiring Portfolio, and
the distribution of said Class S Shares to the shareholders of the Acquired
Portfolio, as provided in this Agreement, will constitute a reorganization
within the meaning of Section 368(a)(1)(C) of the Code and with respect to
the reorganization, the Acquired Portfolio and the Acquiring Portfolio will
each be considered "a party to a reorganization" within the meaning of
Section 368(b) of the Code; (ii) in accordance with Sections 361(a),
361(c)(1) and 357(a) of the Code, no gain or loss will be recognized by the
Acquired Portfolio as a result of such transactions; (iii) in accordance
with Section 1032(a) of the Code, no gain or loss will be recognized by the
Acquiring Portfolio as a result of such transactions; (iv) in accordance
with Section 354(a)(1) of the Code, no gain or loss will be recognized by
the shareholders of the Acquired Portfolio on the distribution to them by
the Acquired Portfolio of Class S Shares of the Acquiring Portfolio in
exchange for their shares of the Acquired Portfolio; (v) in accordance with
Section 358(a)(1) of the Code, the aggregate basis of Class S Shares of the
Acquiring Portfolio received by each holder of shares of the Acquired
Portfolio will be the same as the aggregate basis of the shareholder's
Acquired Portfolio shares immediately prior to the transactions; (vi) in
accordance with Section 362(b) of the Code, the basis of the Acquired
Portfolio Assets to the Acquiring Portfolio will be the same as the basis
of the Acquired Portfolio Assets in the hands of the Acquired Portfolio
immediately prior to the exchange; (vii) in accordance with Section 1223 of
the Code, a shareholder's holding period for Class S Shares of the
Acquiring Portfolio will be determined by including the period for which
the shareholder held the shares of the Acquired Portfolio exchanged
therefor, provided that the shareholder held such shares of the Acquired
Portfolio as a capital asset; (viii) in accordance with Section 1223 of the
Code, the holding period of the Acquiring Portfolio with respect to the
Acquired Portfolio Assets will include the period for which the Acquired
Portfolio Assets were held by the Acquired Portfolio; and (ix) in
accordance with Section 381(a) of the Code, the Acquiring Portfolio will
succeed to the tax attributes of the Acquired Portfolio described in
Section 381(c) of the Code.
A-9
<PAGE>
9.01(f) The SEC shall not have issued any unfavorable advisory report
under Section 25(b) of the 1940 Act nor instituted any proceeding seeking
to enjoin consummation of the transactions contemplated by this Agreement
under Section 25(c) of the 1940 Act.
9.01(g) The N-14 Registration Statement shall have become effective under
the 1933 Act and no stop order suspending such effectiveness shall have
been instituted nor, to the knowledge of the Acquiring Portfolio, is
contemplated by the SEC to prevent or limit the completion of the
transactions, and the parties shall have received all permits and other
authorizations necessary under state securities laws to consummate the
transactions contemplated by this Agreement.
9.01(h) The Acquired Portfolio shall have delivered or caused to be
delivered to the Acquiring Portfolio each account, book, record or other
document of the Acquired Portfolio applicable to the Acquired Portfolio
which is required to be maintained by Section 31(a) of the 1940 Act and
Rule 31a-1 to 31a-3 thereunder (regardless of what person possesses the
same), and a copy of all agreements and instruments to which the Acquired
Portfolio is a party or signatory. The Acquired Portfolio has instructed
its service contractors to provide the Acquiring Portfolio upon request
with access to and copies of all documents belonging to the Acquired
Portfolio. The Acquired Portfolio shall have delivered to the Acquiring
Portfolio a list of the tax costs of the securities of the Acquired
Portfolio by lot and the holding periods of such securities, as of the
Effective Time of the Reorganization.
9.01(i) The President or any Vice President of the Trust shall have
certified that the Acquired Portfolio has performed and complied in all
material respects with each of its agreements and covenants required by
this Agreement to be performed or complied with by it prior to or at the
Effective Time of the Reorganization.
9.01(j) The Acquired Portfolio Assets to be transferred to the Acquiring
Portfolio under this Agreement shall not include assets which the Acquiring
Portfolio may not properly acquire pursuant to its investment objective,
policies or limitations, or may not otherwise lawfully acquire.
X. CONDITIONS OF THE ACQUIRED PORTFOLIO.
10.01 The obligations of the Acquired Portfolio hereunder shall be subject
to the following conditions precedent:
10.01(a) This Agreement and the transactions contemplated by this
Agreement shall have been approved by the shareholders of the Acquired
Portfolio in the manner required by law.
10.01(b) All representations and warranties of the Trust on behalf of the
Acquiring Portfolio made in this Agreement shall be true and correct in all
material respects as if made at and as of the Effective Time of the
Reorganization. As of the Effective Time of the Reorganization, there shall
have been no material adverse change in the financial condition of the
Acquiring Portfolio since December 31, 1997, other than those changes
incurred in the ordinary course of business as an Trust. No action, suit or
other proceeding shall be threatened or pending before any court or
governmental agency in which it is sought to restrain or prohibit, or
obtain damages or other relief in connection with, this Agreement or the
transactions contemplated herein.
10.01(c) The Trust, on behalf of the Acquired Portfolio, shall have
received an opinion of Stradley, Ronon, Stevens & Young, LLP, addressed to
the Trust in form reasonably satisfactory to it and dated the Effective
Time of the Reorganization, substantially to the effect that: (i) the Trust
is a Massachusetts business trust duly organized and validly existing under
the laws of the Commonwealth of Massachusetts; (ii) the Class S Shares of
the Acquiring Portfolio to be delivered at such time to the Acquired
Portfolio as provided for by this Agreement are duly authorized and upon
delivery will be validly issued, fully paid and non-assessable by the
Acquiring Portfolio, and to such counsel's knowledge no shareholder of the
Acquiring Portfolio has any option, warrant or preemptive right to
subscription or purchase in respect thereof; (iii) this Agreement has been
duly authorized, executed and delivered by the Acquiring Portfolio and
represents its legal, valid and binding contract, enforceable against the
Acquiring Portfolio in accordance with its terms, subject to the effect of
bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws
relating
A-10
<PAGE>
to or affecting creditors' rights generally and court decisions with
respect thereto, and such counsel shall not be required to express an
opinion with respect to the application of equitable principles in any
proceeding, whether at law or in equity, or with respect to the provisions
of this Agreement intended to limit liability for particular matters to the
Acquiring Portfolio and its assets; (iv) the execution and delivery of this
Agreement did not, and the consummation of the transactions contemplated by
this Agreement will not, violate the Trust Agreement or By-Laws of the
Trust, or any material agreement known to such counsel to which the Trust
is a party or by which the Trust is bound; and (v) to such counsel's
knowledge no consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the Acquiring
Portfolio of the transactions contemplated by this Agreement, except such
as have been obtained under the 1933 Act, the 1934 Act, the 1940 Act, the
rules and regulations under those Acts and such as may be required under
state securities laws. Such opinion may rely on the opinion of other
counsel to the extent set forth in such opinion, provided such other
counsel is reasonably acceptable to the Acquired Portfolio.
10.01(d) The Trust, on behalf of the Acquired Portfolio, shall have
received an opinion of Stradley, Ronon, Stevens & Young, LLP, addressed to
the Trust in form reasonably satisfactory to the Trust and dated the
Effective Time of the Reorganization, with respect to the matters specified
in Article IX, Section 9.01(e).
10.01(e) The N-14 Registration Statement shall have become effective
under the 1933 Act and no stop order suspending such effectiveness has been
instituted, nor, to the knowledge of the Acquiring Portfolio, is
contemplated by the SEC seeking to limit or prevent the transactions, and
the parties shall have received all permits and other authorizations
necessary under state securities laws to consummate the transactions
contemplated by this Agreement.
10.01(f) The SEC shall not have issued any unfavorable advisory report
under Section 25(b) of the 1940 Act nor instituted any proceeding seeking
to enjoin consummation of the transactions contemplated by this Agreement
under Section 25(c) of the 1940 Act.
10.01(g) The President or any Vice President of the Trust shall have
certified that the Acquiring Portfolio has performed and complied in all
material respects with each of its agreements and covenants required by
this Agreement to be performed or complied with by it prior to or at the
Effective Time of the Reorganization.
XI. TAX DOCUMENTS.
The Acquired Portfolio shall deliver to the Acquiring Portfolio at the
Effective Time of the Reorganization confirmations or other adequate evidence
as to the adjusted tax basis of the Acquired Portfolio Assets delivered to the
Acquiring Portfolio in accordance with the terms of this Agreement.
XII. FINDER'S FEES.
Each party represents and warrants to each of the other parties hereto that
there is no person who is entitled to any finder's or other similar fee or
commission arising out of the transactions contemplated by this Agreement.
XIII. ANNOUNCEMENTS.
Any announcements or similar publicity with respect to this Agreement or the
transactions contemplated herein shall be at such time and in such manner as
the Trust shall determine; provided, that nothing herein shall prevent the
Trust from making such public announcements as its counsel may consider
advisable in order to satisfy the party's legal and contractual obligations.
XIV. FURTHER ASSURANCES.
Subject to the terms and conditions herein provided, each of the parties
hereto shall use its best efforts to take, or cause to be taken, such action,
to execute and deliver, or cause to be executed and delivered, such additional
documents and instruments, and to do, or cause to be done, all things
necessary, proper or advisable
A-11
<PAGE>
under the provisions of this Agreement and under applicable law to consummate
and make effective the transactions contemplated by this Agreement.
XV. TERMINATION OF REPRESENTATIONS AND WARRANTIES.
The representations and warranties of the Trust with respect to the
Acquiring Portfolio and the Acquired Portfolio set forth in this Agreement
shall terminate upon the consummation of the Reorganization.
XVI. TERMINATION OF AGREEMENT.
16.01 This Agreement may be terminated by the Trust at any time at or prior
to the Effective Time of the Reorganization, by action of the Board of
Trustees of the Trust.
16.02 If the Trust terminates this Agreement because one or more of the
conditions precedent have not been fulfilled, this Agreement will become null
and void without any liability of either portfolio to the other; provided,
however, that if such termination is by the Acquiring Portfolio pursuant to
Section 16.01(a) as a result of a breach by the Acquired Portfolio of any of
its representations, warranties or covenants in this Agreement, or such
termination is by the Acquired Portfolio pursuant to Section 16.01(b) as a
result of a breach by the Acquiring Portfolio of any of its representations,
warranties or covenants in this Agreement, nothing herein shall affect the
non-breaching party's right to damages on account of such other party's
breach.
XVII. AGREEMENT AND WAIVER.
At any time prior to or (to the fullest extent permitted by law) after
approval of this Agreement by the shareholders of the Acquired Portfolio, (a)
the Trust may, by written agreement authorized by the Board or its authorized
officers and with or without the approval of their shareholders, amend any of
the provisions of this Agreement, and (b) the Trust may waive any breach or
failure to satisfy any of the conditions to its obligations (such waiver to be
in writing and authorized by the President or any Vice President of the Trust
with or without the approval of the Trust's shareholders).
XVIII. GOVERNING LAW.
This Agreement and the transactions contemplated hereby shall be governed,
construed and enforced in accordance with the laws of the Commonwealth of
Massachusetts, without giving effect to the conflicts of law principles
otherwise applicable therein.
XIX. SUCCESSORS AND ASSIGNS.
This Agreement shall be binding upon the respective successors and permitted
assigns of the parties hereto. This Agreement and the rights, obligations and
liabilities hereunder may not be assigned by either party without the consent
of the other party.
XX. BENEFICIARIES.
Nothing contained in this Agreement shall be deemed to create rights in or
eliminate liabilities of persons not parties hereto, other than the successors
and permitted assigns of the parties.
XXI. LIABILITY OF THE ACQUIRED PORTFOLIO AND THE ACQUIRING PORTFOLIO.
21.01 The names "Frank Russell Investment Company" and "Board of Trustees of
Frank Russell Investment Company" refer, respectively, to the trust created
and the trustees, as trustees but not individually or personally, acting from
time to time under the Trust Agreement, which is hereby referred to and a copy
of which is on file at the office of the State Secretary of the Commonwealth
of Massachusetts and at the principal office of the Trust. The obligations of
the Trust entered into in the name or on behalf thereof by any of the
trustees,
A-12
<PAGE>
representatives or agents are made not individually, but in such capacities,
and are not binding upon any of the trustees, shareholders or representatives
of the Trust personally, but bind only the trust property, and all persons
dealing with any sub-trust of shares of the Trust must look solely to the
trust property belonging to such sub-trust for the enforcement of any claims
against the Trust.
21.02 It is acknowledged and agreed that any liability of the Trust under
this Agreement with respect to the Acquired Portfolio, or in connection with
the transactions contemplated herein with respect to the Acquired Portfolio,
shall be discharged only out of the assets of the Acquired Portfolio and that
no other portfolio of the Trust shall be liable with respect thereto.
21.03 It is acknowledged and agreed that any liability of the Trust under
this Agreement with respect to the Acquiring Portfolio, or in connection with
the transactions contemplated herein with respect to the Acquiring Portfolio,
shall be discharged only out of the assets of the Acquiring Portfolio and that
no other portfolio of the Trust shall be liable with respect thereto.
XXII. NOTICES.
All notices required or permitted herein shall be in writing and shall be
deemed to be properly given when delivered personally or by telecopier to the
party entitled to receive the notice or when sent by certified or registered
mail, postage prepaid, or delivered to a nationally recognized overnight
courier service, in each case properly addressed to the party entitled to
receive such notice at the address or telecopier number stated below or to
such other address or telecopier number as may hereafter be furnished in
writing by notice similarly given by one party to the other party hereto:
If to the Acquired Portfolio:
Frank Russell Investment Company
c/o Gregory J. Lyons, Esquire
Frank Russell Company
909 A Street
Tacoma, Washington 98402
Telecopier Number: (253) 596-3284
With a copy to:
Steven M. Felsenstein, Esquire
Stradley, Ronon, Stevens & Young, LLP
2600 One Commerce Square
Philadelphia, PA 19103
Telecopier Number: (215) 564-8120
If to the Acquiring Portfolio:
Frank Russell Investment Company
c/o Gregory J. Lyons, Esquire
Frank Russell Company
909 A Street
Tacoma, Washington 98402
Telecopier Number: (253) 596-3284
With a copy to:
Steven M. Felsenstein, Esquire
Stradley, Ronon, Stevens & Young, LLP
2600 One Commerce Square
Philadelphia, PA 19103
Telecopier Number: (215) 564-8120
A-13
<PAGE>
XXIII. EXPENSES.
The Trust shall be responsible for the payment of all of its respective
expenses incurred in connection with this Agreement and the transactions
contemplated hereby.
XXIV. ENTIRE AGREEMENT.
This Agreement embodies the entire agreement and understanding of the
parties hereto with respect to the subject matter hereof and supersedes any
and all prior agreements, arrangements and understandings relating to matters
provided for herein.
XXV. COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of which,
when executed and delivered shall be deemed to be an original, but all of
which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their duly authorized officers designated below as of the date
first written above.
Attest: Frank Russell Investment Company, on
behalf of the Fixed Income II Fund
_____________________________________
By: _________________________________
Attest: Frank Russell Investment Company, on
behalf of the Volatility
Constrained Bond Fund
_____________________________________
By: _________________________________
A-14
<PAGE>
EXHIBIT B
INSTITUTIONAL FUNDS
FRANK RUSSELL INVESTMENT COMPANY
SUPPLEMENT DATED OCTOBER 8, 1998
TO THE PROSPECTUS DATED MAY 1, 1998
AS SUPPLEMENTED THROUGH AUGUST 20, 1998
Effective October 8, 1998, Frank Russell Investment Company makes the
following changes to its Institutional Funds Prospectus.
In the section captioned "Money Manager Profiles Equity I Fund," the
subsection captioned "Schneider Capital Management" is revised to read in its
entirety as follows:
Schneider Capital Management, 460 East Swedesford Road, Suite 1080, Wayne,
PA 19087, is an SEC registered investment adviser owned by Arnold
Schneider. The Trust and Wellington Management Company LLP have entered
into a settlement which terminates certain litigation concerning use by the
Trust of the services of Schneider Capital Management ("SCM"). Under the
terms of the settlement FRIMCo expects to be selecting another Money
Manager to supervise assets presently assigned to SCM and, after a suitable
transition, SCM will no longer serve as a Money Manager for the Trust. It
is expected that the new Money Manager will be selected shortly.
Equity III Fund will be managed by the following Money Managers:
Equinox Capital Management, Inc., 590 Madison Avenue, 41st Floor, New York,
NY 10022. Equinox is a registered investment adviser with majority
ownership held by Ron Ulrich.
Trinity Investment Management Corporation, 75 Park Plaza, Boston, MA 02116,
is a corporation with seven shareholders, with Stanford M. Calderwood
holding majority ownership.
Westpeak Investment Advisors, L.P., 1011 Walnut Street, Suite 400, Boulder,
CO 80302, is indirectly controlled by Metropolitan Life Insurance Company.
International Fund will be managed by the following Money Managers:
J.P. Morgan Investment Management, Inc., 522 Fifth Ave., New York, NY
10036, is a wholly owned subsidiary of J.P. Morgan & Co., Inc., a publicly
held bank holding company.
Marathon Asset Management Limited, Orion House, 5 Upper St. Martin's Lane,
London, England WC2H 9EA, is a corporation 33.3% owned by each of the
following: Jeremy Hosking, William Arah and Neil Ostrer.
Mastholm Asset Management, LLC, 10500 N.E. 8th Street, Suite 660, Bellevue,
WA 98004, is a Washington limited liability corporation that is controlled
by the following founding members: Thomas M. Garr, Robert L. Gernstetter,
Joseph P. Jordan, Arthur M. Tyson and Theodore J. Tyson.
Oeschle International Advisors, LLC, One International Place, 23rd Floor,
Boston, MA 02110, is a Delaware limited liability company that is
controlled by the following members: S. Dewey Keesler, Stephen P. Langer,
Walter Oeschle, L. Sean Roche, Steven H. Schaefer, Warren R. Walker and
Andrew S. Parlin.
Rowe Price-Fleming International, Inc. 100 East Pratt Street, 9th Floor,
Baltimore, MD 21202, and 4th Floor, 25 Copthall Ave., London, England EC2R
7DR, which is a joint venture of T. Rowe Price Associates, Inc., and The
Fleming Group, each of which owns 50% of the company. Ownership of The
Fleming Group holding is split equally between Copthall Overseas Limited, a
subsidiary of Robert Fleming Holdings, and Jardine Fleming International
Holdings Limited, a subsidiary of Jardine Fleming Holdings. Robert Fleming
Holdings is a London-based UK holding company with the majority of the
shares distributed: 51% to public companies and 38% to the Fleming family.
Jardine Fleming is a Hong Kong-based holding company which
B-(i)
<PAGE>
is owned 50% by Robert Fleming Holdings and 50% by Jardine Matheson & Co.,
the Hong Kong trading company, a wholly owned subsidiary of Jardine
Matheson Holdings Limited. The stock of T. Rowe Price Associates, Inc. is
publicly traded with a substantial percentage of such stock owned by the
company's active management.
Sanford C. Bernstein, Co., Inc., 767 Fifth Avenue, New York, NY 10153, is a
registered investment adviser. Founded in 1967, Bernstein is controlled by
its Board of Directors, which consists of the following individuals: Andrew
S. Adelson, Zalman C. Bernstein, Kevin R. Rine, Charles C. Cahn, Jr.,
Marilyn Goldstein Fedak, Michael L. Goldstein, Roger Hertog, Lewis A.
Sanders and Francis H. Trainer, Jr.
The Boston Company Asset Management, Inc., One Boston Place, 14th Floor,
Boston, MA 02108-4402, is 100% owned by Mellon Bank Corporation, a publicly
held corporation.
B-(ii)
<PAGE>
INSTITUTIONAL FUNDS
FRANK RUSSELL INVESTMENT COMPANY
SUPPLEMENT DATED AUGUST 20, 1998
TO THE PROSPECTUS DATED MAY 1, 1998
AS SUPPLEMENTED THROUGH JUNE 15, 1998
Effective August 20, 1998, Frank Russell Investment Company makes the
following changes to the Institutional Funds Prospectus.
In the section captioned "General Management of the Funds" The following is
added as a new second paragraph:
"On August 10, 1998, Frank Russell Company and the Northwestern Mutual
Life Insurance Company ("Northwestern Mutual") announced that they had
agreed that Northwestern Mutual would acquire Frank Russell Company, the
sole shareholder of Frank Russell Investment Management Company. Frank
Russell Company and Northwestern Mutual have signed a definitive purchase
agreement, and it is expected that the transaction will be finalized at the
end of 1998. Frank Russell Company will retain its identity and operating
independence, and will continue to operate globally as a separate company."
In the section captioned "How to Purchase Shares--Paying for Shares," the
second paragraph shall be revised to read in its entirety as follows:
"Cash, third party checks and checks drawn on credit card accounts
generally will not be accepted. However exceptions may be made by prior
special arrangement with certain Financial Intermediaries."
In the section captioned "How to Redeem Shares," the first paragraph shall
be revised to read in its entirety as follows:
"Shares of the Funds may be redeemed on any business day the Funds are
open at the next net asset value per share calculated after receipt of an
order in proper form (defined in the "Written Instructions" section).
Payment will ordinarily be made within seven days after receipt of your
request in proper form. Shares recently purchased by check may not be
available for liquidation for 15 days following the purchase to assure
payment has been collected."
Equity II Fund will be managed by the following money managers:
Delphi Management, Inc., 30 Rowes Wharf, Suite 440, Boston, MA 02110, is
100% owned by Scott Black.
Fiduciary International, Inc., 2 World Trade Center, New York, NY 10048,
an investment adviser registered with the SEC, is an indirect wholly-owned
subsidiary of Fiduciary Trust Company International, a New York state
chartered bank.
GlobeFlex Capital, L.P., 4365 Executive Drive, Suite 720, San Diego, CA
92121, is a California limited partnership and an SEC registered investment
adviser. Its general partners are Robert J. Anslow, Jr. and Marina L.
Marelli.
Jacobs Levy Equity Management, Inc., 280 Corporate Center, 3 ADP
Boulevard, Roseland, NJ 07068, is 100% owned by Bruce Jacobs and Kenneth
Levy.
Sirach Capital Management, Inc., One Union Square, Suite 3323, 600 Union
Street, Seattle, WA 98101, is a wholly-owned subsidiary of United Asset
Management Company, a publicly traded corporation.
Wellington Management Company LLP, 75 State Street, Boston, MA 02109, is
a private Massachusetts limited liability partnership, of which the
following persons are managing partners: Robert W. Doran, Duncan M.
McFarland and John R. Ryan.
Westpeak Investment Advisors, L.P., 1011 Walnut Street, Suite 400,
Boulder, CO 80302, is indirectly controlled by Metropolitan Life Insurance
Company.
B-(iii)
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
909 A STREET, TACOMA, WA 98402
TELEPHONE (800) 972-0700
IN WASHINGTON (253) 627-7001
Frank Russell Investment Company (the "Trust") is an open-end, management
investment company with 28 different investment series or portfolios
("Funds"). This Prospectus describes and offers interests in the Class S
Shares of eight Funds:
Equity I Fund International Fund
Equity II Fund Fixed Income I Fund
Equity III Fund Fixed Income II Fund
Equity Q Fund Fixed Income III Fund
Each Fund has its own investment objective and policies designed to meet
different investment goals. As with all mutual funds, attainment of each
Fund's investment objective cannot be assured.
Frank Russell Investment Management Company ("FRIMCo") operates and
administers the Funds. Class S Shares are sold at their net asset value, with
no sales load, no commissions, no Rule 12b-1 fees and no exchange fees. There
is a $5 million minimum initial investment requirement for the Funds described
in this Prospectus in combination with the Fund's described in the Trust's
Specialty Funds Prospectus, in an allocated investment portfolio and investors
must qualify as Eligible Investors, as described in this Prospectus.
SHARES OF THE FUNDS ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION (THE "FDIC") OR BY ANY OTHER GOVERNMENT AGENCY; ARE NOT
OBLIGATIONS OF THE FDIC OR ANY OTHER GOVERNMENT AGENCY; ARE NOT DEPOSITS OR
OBLIGATIONS OF ANY BANK; ARE NOT ENDORSED OR GUARANTEED BY ANY BANK; ARE
SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT
INVESTED; AND MAY FLUCTUATE IN VALUE, SO THAT WHEN THEY ARE SOLD, THEY MAY BE
WORTH MORE OR LESS THAN WHEN THEY WERE PURCHASED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL SECURITIES IN ANY STATE
OR OTHER JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN
OFFER IN SUCH STATE OR OTHER JURISDICTION.
This Prospectus sets forth concisely the information about the Funds that
you should know before investing. Please read it before investing and retain
it for future reference. A Statement of Additional Information ("SAI"), dated
May 1, 1998, and supplemented June 15, 1998, has been filed with the
Securities and Exchange Commission ("SEC"). The SAI is incorporated into this
Prospectus by reference and is available without charge by writing to the
address listed above or by telephoning (800) 972-0700.
This Prospectus relates only to the Class S Shares of the Funds. The Funds
listed do not currently offer interests in any other classes of shares.
The SAI, material incorporated by reference into this Prospectus, and
further information regarding the Trust and the Funds is maintained
electronically with the SEC at its Internet Web site (http://www.sec.gov).
PROSPECTUS DATED MAY 1, 1998 AS SUPPLEMENTED THROUGH JUNE 15, 1998
B-1
<PAGE>
TABLE OF CONTENTS
CERTAIN TERMS USED IN THIS PROSPECTUS ARE DEFINED IN THE
GLOSSARY, WHICH BEGINS ON PAGE B-42 OF THIS PROSPECTUS.
<TABLE>
<S> <C>
Summary................................................................... B-3
Annual Fund Operating Expenses............................................ B-4
Financial Highlights...................................................... B-6
The Purpose of the Funds--Multi-Style, Multi-Manager Diversification...... B-14
Eligible Investors........................................................ B-15
General Management of the Funds........................................... B-16
Expenses of the Funds..................................................... B-18
The Money Managers........................................................ B-18
Investment Objectives, Policies and Practices............................. B-19
Portfolio Transaction Policies............................................ B-28
Dividends and Distributions............................................... B-28
Taxes..................................................................... B-29
Performance Information................................................... B-31
How Net Asset Value Is Determined......................................... B-31
How to Purchase Shares.................................................... B-32
How to Redeem Shares...................................................... B-34
Additional Information.................................................... B-36
Money Manager Profiles.................................................... B-37
Glossary.................................................................. B-42
</TABLE>
B-2
<PAGE>
SUMMARY
The Funds are designed to provide a means for Eligible Investors to use
FRIMCo's and Frank Russell Company's ("Russell") "multi-style, multi-manager
diversification" techniques and money manager evaluation services. Unlike most
investment companies that have a single organization that acts as both
administrator and investment adviser, the Trust divides responsibility for
corporate management and investment advice between FRIMCo and a number of
different money managers. See "The Purpose of the Funds--Multi-Style, Multi-
Manager Diversification."
Each Fund seeks to achieve a specific investment objective by using distinct
investment strategies:
EQUITY I FUND -- Income and capital growth by investing principally in
equity securities.
EQUITY II FUND -- Maximum total return, primarily through capital
appreciation and by assuming a higher level of volatility than is ordinarily
expected from Equity I Fund, by investing in equity securities.
EQUITY III FUND -- A high level of current income, while maintaining the
potential for capital appreciation by investing in income-producing equity
securities.
EQUITY Q FUND -- Total return greater than the total return of the US stock
market as measured by the Russell 1000(R) Index over a market cycle of four to
six years, while maintaining volatility and diversification similar to the
Index by investing in equity securities.
INTERNATIONAL FUND -- Favorable total return and additional diversification
for US investors by investing primarily in equity and fixed-income securities
of non-US companies, and securities issued by non-US governments.
FIXED INCOME I FUND -- Effective diversification against equities and a
stable level of cash flow by investing in fixed-income securities.
FIXED INCOME II FUND -- Preservation of capital and generation of current
income consistent with the preservation of capital by investing primarily in
fixed-income securities with low-volatility characteristics.
FIXED INCOME III FUND -- Maximum total return, primarily through capital
appreciation and by assuming a higher level of volatility than is ordinarily
expected from broad fixed-income market portfolios, by investing in fixed-
income securities.
The Trust's Funds had aggregate net assets of approximately $13.6 billion on
April 1, 1998. The net assets of the Funds described in this Prospectus on
April 1, 1998 were:
<TABLE>
<S> <C>
Equity I................................................... $1,342,186,760.20
Equity II.................................................. $ 565,197,418.13
Equity III................................................. $ 268,588,956.64
Equity Q................................................... $1,137,119,684.51
International Fund......................................... $1,108,581,403.76
Fixed Income I............................................. $ 871,239,142.81
Fixed Income II............................................ $ 240,672,356.85
Fixed Income III........................................... $ 430,057,483.03
</TABLE>
You may buy and sell Class S Shares of the Fund through an authorized
Financial Intermediary. All Class S Shares are sold without a sales charge,
commission, or Rule 12b-1 fee. Except as indicated below, Class S Shares are
redeemed at net asset value. You may also exchange shares of one Fund for
shares of another Fund. See "How to Purchase Shares" and "How to Redeem
Shares."
You should be aware of the general risks associated with investments in
mutual funds. One or more Funds may make investments and engage in investment
practices and techniques that involve risks, including entering into
repurchase agreements, lending portfolio securities and entering into hedging
transactions. Also, foreign securities in which International Fund may invest
may be subject to certain risks in addition to those inherent in
B-3
<PAGE>
US investments. These risks are described in "Risk Considerations" in
"Investment Objectives, Policies and Practices" and in the Glossary.
SHAREHOLDER TRANSACTION EXPENSES
You would pay the following charges when buying or redeeming Class S Shares
of a Fund:
<TABLE>
<CAPTION>
MAXIMUM SALES MAXIMUM SALES
LOAD IMPOSED LOAD IMPOSED ON DEFERRED REDEMPTION EXCHANGE
ON PURCHASES REINVESTED DIVIDENDS SALES LOAD* FEES FEES
------------- -------------------- ----------- ---------- --------
<S> <C> <C> <C> <C>
None None None None None
</TABLE>
- ---------------------
* If you purchase shares of any of the Funds, you may pay a quarterly
shareholder investment services fee ("Services Fee") directly to FRIMCo
pursuant to a separate asset management agreement between you and FRIMCo.
The fee is calculated as a percentage of the amount you have invested in the
Funds.
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
<TABLE>
<CAPTION>
TOTAL FUND
MANAGEMENT OTHER OPERATING
FEE EXPENSES* EXPENSES*+
---------- --------- ----------
<S> <C> <C> <C>
Equity I Fund................................... 0.60% 0.10% 0.70%
Equity II Fund.................................. 0.75% 0.18% 0.93%
Equity III Fund................................. 0.60% 0.15% 0.75%
Equity Q Fund................................... 0.60% 0.08% 0.68%
International Fund.............................. 0.75% 0.26% 1.01%
Fixed Income I Fund............................. 0.30% 0.11% 0.41%
Fixed Income II Fund............................ 0.50% 0.17% 0.67%
Fixed Income III Fund........................... 0.55% 0.16% 0.71%
</TABLE>
- ---------------------
+ Investors purchasing Class S Shares of the Fund through a financial
intermediary, such as a bank or an investment adviser, may also pay
additional fees to the intermediary for services provided by the
intermediary. Such investors should contact the intermediary for information
concerning what additional fees, if any, will be charged.
* Restated to reflect changes to the Trust's Transfer and Dividend Paying
Agent agreement, which became effective June 8, 1998.
Because the Funds described in this Prospectus are designed for investors
with an aggregate investment of at least $5 million, as described in the
"Eligible Investors" section, beginning January 1, 1999, any shareholder
account with respect to any Fund described in this Prospectus with a balance
of less than $10,000 will be subject to an account maintenance fee equal to
$12.50 per year. The fee will be deducted from dividends payable to each
applicable account or by liquidating shares in the account, or both. The fees
will be waived for: (i) accounts held by retirement plans representing
multiple participants; (ii) accounts of trustees, officers, employees, and
certain third-party contractors of the Trust and its affiliates; and (iii)
classes of accounts for which maintenance costs are absorbed by a third-party.
These tables are intended to assist you in understanding the various
expenses of each Fund. Operating expenses are paid out of a Fund's assets and
are factored into the Fund's share price. Each Fund estimates that it will
have the expenses listed (expressed as a percentage of average net assets) for
the current fiscal year.
B-4
<PAGE>
EXAMPLE OF EXPENSES FOR THE FUNDS
Assume that each Fund's annual return is 5% and that its operating expenses
are as described above, and that you sell your shares after the number of
years shown. These are projected expenses for each $1000 that you invest:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Equity I Fund................................... $ 7 $22 $39 $ 88
Equity II Fund.................................. $ 9 $29 $51 $117
Equity III Fund................................. $ 8 $24 $41 $ 94
Equity Q Fund................................... $ 7 $21 $38 $ 86
International Fund.............................. $10 $32 $56 $ 27
Fixed Income I Fund............................. $ 4 $13 $23 $ 52
Fixed Income II Fund............................ $ 7 $21 $37 $ 84
Fixed Income III Fund........................... $ 7 $22 $39 $ 89
</TABLE>
B-5
<PAGE>
FINANCIAL HIGHLIGHTS OF THE EQUITY I FUND*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand L.L.P., the Trust's independent
accountants. The table includes selected data for a share outstanding
throughout each year ended December 31, and other performance information
derived from the financial statements. The information in the table represents
the Financial Highlights for the Fund's Class S Shares for the periods shown.
The table appears in the Fund's financial statements and related notes, which
are incorporated by reference into the Statement of Additional Information and
which appear, along with the report of Coopers & Lybrand L.L.P. in the Fund's
Annual Report to Shareholders. More detailed information concerning the Fund's
performance, including a complete portfolio listing and audited financial
statements, is available in the Fund's Annual Report, which may be obtained
without charge by writing or calling the Trust.
EQUITY I FUND
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
--------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $ 30.34 $ 28.00 $ 23.32 $ 24.91 $ 25.00 $ 25.17 $ 21.13 $ 25.39 $ 22.20 $ 20.18
--------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .34 .42 .52 .62 .60 .61 .75 .91 .88 .81
Net realized and
unrealized gain (loss)
on investments........ 8.89 5.96 7.71 (.41) 2.18 1.54 5.61 (2.37) 5.79 2.46
--------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total From Investment
Operations .......... 9.23 6.38 8.23 .21 2.78 2.15 6.36 (1.46) 6.67 3.27
--------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income.. (.34) (.42) (.52) (.62) (.60) (.62) (.75) (.90) (1.01) (.77)
Net realized gain on
investments........... (8.72) (3.62) (3.03) (.94) (2.11) (1.70) (1.57) (1.90) (2.47) (.48)
In excess of net
realized gain on
investments........... -- -- -- (.24) (.16) -- -- -- -- --
--------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions... (9.06) (4.04) (3.55) (1.80) (2.87) (2.32) (2.32) (2.80) (3.48) (1.25)
--------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
YEAR................... $ 30.51 $ 30.34 $ 28.00 $ 23.32 $ 24.91 $ 25.00 $ 25.17 $ 21.13 $ 25.39 $ 22.20
========= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)(A)..... 32.02 23.58 35.94 .79 11.61 9.02 31.22 (5.64) 30.79 16.42
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses to
average net
assets (a)............ .70 .71 .59 .12 .14 .15 .19 .23 .18 .17
Net investment income
to average net
assets (a) ........... .96 1.38 1.91 2.52 2.36 2.53 3.14 3.66 3.41 3.68
Portfolio turnover..... 110.75 99.51 92.04 75.02 91.87 71.14 119.55 101.30 61.27 67.59
Net assets, end of year
($000 omitted)........ 1,136,373 961,953 751,497 547,242 514,356 410,170 330,507 221,543 300,814 243,691
Average commission rate
paid per share of
security
($ omitted)........... .0511 .0464 N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- ---------------------
(a) For periods prior to April 1, 1995, Fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net
of investment management fees but gross of any investment services fees.
Management fees and investment services fees reduce performance; for
example, an investment services fee of 0.2% of average managed assets will
reduce a 10% return to 9.8%.
* See the notes to financial statements which appear in the Trust's Annual
Report to Shareholders and which are incorporated by reference into the
Statement of Additional Information.
B-6
<PAGE>
FINANCIAL HIGHLIGHTS OF THE EQUITY II FUND*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand L.L.P., the Trust's independent
accountants. The table includes selected data for a share outstanding
throughout each year ended December 31, and other performance information
derived from the financial statements. The information in the table represents
the Financial Highlights for the Fund's Class S Shares for the periods shown.
The table appears in the Fund's financial statements and related notes, which
are incorporated by reference into the Statement of Additional Information and
which appear, along with the report of Coopers & Lybrand L.L.P. in the Fund's
Annual Report to Shareholders. More detailed information concerning the Fund's
performance, including a complete portfolio listing and audited financial
statements, is available in the Fund's Annual Report, which may be obtained
without charge by writing or calling the Trust.
EQUITY II FUND
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF YEAR........... $ 30.05 $ 28.88 $ 25.00 $ 26.58 $ 27.71 $ 26.32 $ 19.24 $ 23.32 $22.50 $19.99
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .11 .16 .27 .36 .32 .30 .41 .51 .61 .52
Net realized and
unrealized gain (loss)
on investments........ 8.11 4.96 6.80 (.86) 3.97 3.13 7.65 (3.91) 4.74 2.51
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Total From Investment
Operations........... 8.22 5.12 7.07 (.50) 4.29 3.43 8.06 (3.40) 5.35 3.03
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
LESS DISTRIBUTIONS:
Net investment income.. (.11) (.16) (.29) (.31) (.31) (.30) (.41) (.50) (.71) (.52)
Net realized gain on
investments........... (5.20) (3.79) (2.90) (.21) (4.72) (1.74) (.57) (.18) (3.82) --
In excess of net real-
ized gain on invest-
ments ................ -- -- -- (.56) (.39) -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Total Distributions... (5.31) (3.95) (3.19) (1.08) (5.42) (2.04) (.98) (.68) (4.53) (.52)
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
NET ASSET VALUE, END
OF YEAR................ $ 32.96 $ 30.05 $ 28.88 $ 25.00 $ 26.58 $ 27.71 $ 26.32 $ 19.24 $23.32 $22.50
======= ======= ======= ======= ======= ======= ======= ======= ====== ======
TOTAL RETURN (%)(A)..... 28.66 18.51 28.67 (2.60) 16.70 13.31 42.40 (14.76) 24.63 15.22
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses to
average net assets
(a)................... .92 .95 .83 .23 .34 .32 .37 .48 .41 .35
Net investment income
to average net assets
(a)................... .35 .52 .97 1.46 1.14 1.10 1.79 2.40 2.45 2.40
Portfolio turnover..... 103.00 120.78 89.31 58.04 87.25 43.33 42.16 80.27 77.55 56.38
Net assets, end of year
($000 omitted)........ 482,159 365,955 279,566 202,977 171,421 120,789 101,206 60,668 70,588 63,903
Average commission rate
paid per share of
security ($ omitted).. .0390 .0381 N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- ---------------------
(a) For periods prior to April 1, 1995, Fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net
of investment management fees but gross of any investment services fees.
Management fees and investment services fees reduce performance; for
example, an investment services fee of 0.2% of average managed assets will
reduce a 10% return to 9.8%.
* See the notes to financial statements which appear in the Trust's Annual
Report to Shareholders and which are incorporated by reference into the
Statement of Additional Information.
B-7
<PAGE>
FINANCIAL HIGHLIGHTS OF THE EQUITY III FUND*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand L.L.P., the Trust's independent
accountants. The table includes selected data for a share outstanding
throughout each year ended December 31, and other performance information
derived from the financial statements. The information in the table represents
the Financial Highlights for the Fund's Class S Shares for the periods shown.
The table appears in the Fund's financial statements and related notes, which
are incorporated by reference into the Statement of Additional Information and
which appear, along with the report of Coopers & Lybrand L.L.P. in the Fund's
Annual Report to Shareholders. More detailed information concerning the Fund's
performance, including a complete portfolio listing and audited financial
statements, is available in the Fund's Annual Report, which may be obtained
without charge by writing or calling the Trust.
EQUITY III FUND
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------- ------- ------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $ 29.68 $ 29.11 $ 24.18 $ 27.05 $ 26.75 $ 27.08 $ 23.30 $26.49 $ 24.03 $ 20.74
------- ------- ------- ------- ------- ------- ------- ------ ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .60 .70 .82 .93 .89 .98 1.08 1.33 1.26 1.15
Net realized and
unrealized gain (loss)
on investments........ 8.69 5.10 7.73 (.85) 2.99 2.24 5.21 (2.85) 5.35 3.40
------- ------- ------- ------- ------- ------- ------- ------ ------- -------
Total From Investment
Operations........... 9.29 5.80 8.55 .08 3.88 3.22 6.29 (1.52) 6.61 4.55
------- ------- ------- ------- ------- ------- ------- ------ ------- -------
LESS DISTRIBUTIONS:
Net investment income.. (.60) (.71) (.83) (.91) (.90) (.99) (1.07) (1.30) (1.40) (1.14)
In excess of net
investment income..... (.01) -- -- -- -- -- -- -- -- --
Net realized gain on
investments........... (8.56) (4.52) (2.79) (1.94) (2.68) (2.56) (1.44) (.37) (2.75) (.12)
In excess of net
realized gain on
investments........... -- -- -- (.10) -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------ ------- -------
Total Distributions... (9.17) (5.23) (3.62) (2.95) (3.58) (3.55) (2.51) (1.67) (4.15) (1.26)
------- ------- ------- ------- ------- ------- ------- ------ ------- -------
NET ASSET VALUE, END OF
YEAR................... $ 29.80 $ 29.68 $ 29.11 $ 24.18 $ 27.05 $ 26.75 $ 27.08 $23.30 $ 26.49 $ 24.03
======= ======= ======= ======= ======= ======= ======= ====== ======= =======
TOTAL RETURN (%)(A)..... 33.13 20.90 35.96 1.16 14.95 12.30 27.86 (5.73) 28.07 22.19
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses to
average net assets
(a)................... .78 .79 .65 .17 .16 .20 .25 .27 .23 .20
Net investment income
to average net assets
(a)................... 1.77 2.23 2.90 3.39 3.09 3.57 4.05 4.91 4.58 4.96
Portfolio turnover..... 128.86 100.78 103.40 85.92 76.77 84.56 56.99 65.74 83.13 57.28
Net assets, end of year
($000 omitted)........ 242,112 221,778 222,541 177,807 181,630 166,782 138,076 94,087 135,245 106,695
Average commission rate
paid per share of
security ($ omitted).. .0415 .0447 N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- ---------------------
(a) For periods prior to April 1, 1995, Fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net
of investment management fees but gross of any investment services fees.
Management fees and investment services fees reduce performance; for
example, an investment services fee of 0.2% of average managed assets will
reduce a 10% return to 9.8%.
* See the notes to financial statements which appear in the Trust's Annual
Report to Shareholders and which are incorporated by reference into the
Statement of Additional Information.
B-8
<PAGE>
FINANCIAL HIGHLIGHTS OF THE EQUITY Q FUND*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand L.L.P., the Trust's independent
accountants. The table includes selected data for a share outstanding
throughout each year or period ended December 31, and other performance
information derived from the financial statements. The information in the
table represents the Financial Highlights for the Fund's Class S Shares for
the periods shown. The table appears in the Fund's financial statements and
related notes, which are incorporated by reference into the Statement of
Additional Information and which appear, along with the report of Coopers &
Lybrand L.L.P. in the Fund's Annual Report to Shareholders. More detailed
information concerning the Fund's performance, including a complete portfolio
listing and audited financial statements, is available in the Fund's Annual
Report, which may be obtained without charge by writing or calling the Trust.
EQUITY Q FUND
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $ 32.94 $ 30.40 $ 24.43 $ 26.03 $ 25.23 $ 24.90 $ 20.20 $ 22.45 $ 18.85 $16.67
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .44 .58 .59 .69 .66 .67 .75 .81 .78 .69
INCOME
Net realized and
unrealized gain (loss)
on investments........ 10.01 6.33 8.52 (.41) 2.71 1.73 5.58 (1.89) 4.26 2.15
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
Total income from
Investment
Operations........... 10.45 6.91 9.11 .28 3.37 2.40 6.33 (1.08) 5.04 2.84
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
LESS DISTRIBUTIONS:
Net investment income.. (.44) (.58) (.61) (.69) (.66) (.68) (.75) (.79) (.86) (.66)
In excess of net
investment income..... -- (.01) -- -- -- -- -- -- -- --
Net realized gain on
investments........... (7.05) (3.78) (2.53) (.97) (1.85) (1.39) (.88) (.38) (.58) --
In excess of net
realized gain on
investments........... -- -- -- (.22) (.06) -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
Total Distributions... (7.49) (4.37) (3.14) (1.88) (2.57) (2.07) (1.63) (1.17) (1.44) (.66)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
NET ASSET VALUE, END OF
YEAR................... $ 35.90 $ 32.94 $ 30.40 $ 24.43 $ 26.03 $ 25.23 24.90 $ 20.20 $ 22.45 $18.85
======= ======= ======= ======= ======= ======= ======= ======= ======= ======
TOTAL RETURN (%)(A)(B).. 33.07 23.67 37.91 .99 13.80 9.97 32.14 (4.81) 27.10 17.16
RATIOS (%) SUPPLEMENTAL
DATA:
Operating expenses to
average net assets
(b)(c)................ .68 .71 .58 .11 .15 .18 .23 .31 .33 .33
Net investment income
to average net
assets (b)(c)......... 1.17 1.80 2.07 2.74 2.50 2.80 3.23 3.70 3.68 3.82
Portfolio turnover
(c)................... 94.89 74.59 74.00 45.87 54.69 58.35 51.37 66.51 88.03 52.21
Net assets, end of year
($000 omitted)........ 987,760 818,281 620,259 430,661 382,939 290,357 215,779 133,869 129,680 89,320
Average commission rate
paid per share of
security ($ omitted).. .0350 .0332 N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- ---------------------
(a) Periods less than one year are not annualized.
(b) For periods prior to April 1, 1995, Fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net
of investment management fees but gross of any investment services fees.
Management fees and investment services fees reduce performance; for
example, an investment services fee of 0.2% of average managed assets will
reduce a 10% return to 9.8%.
(c) The ratios for the period ended December 31, 1987 are annualized.
* See the notes to financial statements which appear in the Trust's Annual
Report to Shareholders and which are incorporated by reference into the
Statement of Additional Information.
B-9
<PAGE>
FINANCIAL HIGHLIGHTS OF THE INTERNATIONAL FUND*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand L.L.P., the Trust's independent
accountants. The table includes selected data for a share outstanding
throughout each year ended December 31, and other performance information
derived from the financial statements. The information in the table represents
the Financial Highlights for the Fund's Class S Shares for the periods shown.
The table appears in the Fund's financial statements and related notes, which
are incorporated by reference into the Statement of Additional Information and
which appear, along with the report of Coopers & Lybrand L.L.P. in the Fund's
Annual Report to Shareholders. More detailed information concerning the Fund's
performance, including a complete portfolio listing and audited financial
statements, is available in the Fund's Annual Report, which may be obtained
without charge by writing or calling the Trust.
INTERNATIONAL FUND
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $ 37.39 $ 36.26 $ 34.28 $ 37.34 $ 28.92 $ 31.96 $ 29.18 $ 38.52 $ 35.44 $ 35.50
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .46 .44 .48 .61 .58 .67 .73 1.23 .85 .95
Net realized and
unrealized gain (loss)
on investments (a).... (.28) 2.41 3.16 .65 9.63 (2.62) 3.16 (7.27) 7.46 5.77
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Income From
Investment
Operations........... .18 2.85 3.64 1.26 10.21 (1.95) 3.89 (6.04) 8.31 6.72
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income.. (.37) (.35) (.64) (.36) (.57) (.67) (.80) (1.19) (1.02) (1.11)
In excess of net
investment income..... (.18) -- (.08) -- (.16) -- -- -- -- --
Net realized gain on
investments........... (1.95) (1.37) (.94) (3.73) (1.06) (.42) (.31) (2.11) (4.21) (5.67)
In excess of net
realized gain on
investments........... (.47) -- -- (.23) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions... (2.97) (1.72) (1.66) (4.32) (1.79) (1.09) (1.11) (3.30) (5.23) (6.78)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
YEAR................... $ 34.60 $ 37.39 $ 36.26 $ 34.28 $ 37.34 $ 28.92 $ 31.96 $ 29.18 $ 38.52 $ 35.44
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)(B)..... .58 7.98 10.71 5.38 35.56 (6.11) 13.47 (15.94) 24.06 20.13
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses,
net, to average net
assets (b)............ 1.00 1.04 .88 .32 .39 .45 .48 .50 .44 .45
Operating expenses,
gross, to average net
assets (b)............ 1.00 1.05 .89 .34 .41 .46 .48 .50 .44 .45
Net investment income
to average net assets
(b)................... 1.14 1.20 1.41 1.63 1.83 2.46 2.61 3.14 2.38 2.52
Portfolio turnover..... 79.45 42.69 36.78 71.09 62.04 48.99 53.13 78.30 53.49 51.17
Net assets, end of year
($000 omitted)........ 972,735 944,380 796,777 674,180 562,497 348,869 252,828 171,613 186,742 149,064
</TABLE>
- ---------------------
(a) Provision for federal income tax for the year ended December 31, 1991
amounted to $.024 per share.
(b) For periods prior to April 1, 1995, Fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net
of investment management fees but gross of any investment services fees.
Management fees and investment services fees reduce performance; for
example, an investment services fee of 0.2% of average managed assets will
reduce a 10% return to 9.8%.
(c) In certain foreign markets the relationship between the translated US
dollar price per share and commission paid per share may vary from that of
domestic markets.
* See the notes to financial statements which appear in Trust's Annual Report
to Shareholders and which are incorporated by reference into the Statement
of Additional Information.
B-10
<PAGE>
FINANCIAL HIGHLIGHTS OF THE FIXED INCOME I FUND*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand L.L.P., the Trust's independent
accountants. The table includes selected data for a share outstanding
throughout each year ended December 31, and other performance information
derived from the financial statements. The information in the table represents
the Financial Highlights for the Fund's Class S Shares for the periods shown.
The table appears in the Fund's financial statements and related notes, which
are incorporated by reference into the Statement of Additional Information and
which appear, along with the report of Coopers & Lybrand L.L.P. in the Fund's
Annual Report to Shareholders. More detailed information concerning the Fund's
performance, including a complete portfolio listing and audited financial
statements, is available in the Fund's Annual Report, which may be obtained
without charge by writing or calling the Trust.
FIXED INCOME I FUND
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF YEAR........... $ 20.99 $ 21.59 $ 19.59 $ 21.74 $ 21.61 $ 22.29 $ 20.86 $ 20.91 $ 20.50 $ 20.48
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. 1.37 1.38 1.42 1.46 1.50 1.63 1.71 1.77 1.93 1.73
Net realized and
unrealized gain (loss)
on investments........ .54 (.62) 2.02 (2.06) .72 (.07) 1.49 (.05) .71 .01
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total From Investment
Operations .......... 1.91 .76 3.44 (.60) 2.22 1.56 3.20 1.72 2.64 1.74
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income.. (1.39) (1.36) (1.44) (1.44) (1.50) (1.62) (1.69) (1.77) (1.92) (1.72)
In excess of net
investment income..... -- -- -- -- (.01) -- -- -- -- --
Net realized gain on
investments........... -- -- -- -- (.58) (.62) (.08) -- (.31) --
In excess of net real-
ized gain on invest-
ments ................ -- -- -- (.11) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions... (1.39) (1.36) (1.44) (1.55) (2.09) (2.24) (1.77) (1.77) (2.23) (1.72)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
YEAR................... $ 21.51 $ 20.99 $ 21.59 $ 19.59 $ 21.74 $ 21.61 $ 22.29 $ 20.86 $ 20.91 $ 20.50
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)(A)..... 9.42 3.75 18.03 (2.97) 10.46 7.26 16.01 8.60 13.35 8.76
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses to
average net assets
(a)................... .42 .42 .35 .10 .09 .10 .10 .11 .12 .13
Net investment income
to average net assets
(a)................... 6.54 6.57 6.82 7.06 6.71 7.45 8.08 8.70 8.96 8.28
Portfolio turnover..... 165.81 147.31 138.05 173.97 173.27 211.26 121.91 114.15 196.18 186.54
Net assets, end of year
($000 omitted)........ 798,252 662,899 638,317 496,038 533,696 530,857 458,201 329,091 297,721 223,216
</TABLE>
- ---------------------
(a) For periods prior to April 1, 1995, Fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net
of investment management fees but gross of any investment services fees.
Management fees and investment services fees reduce performance; for
example, an investment services fee of 0.2% of average managed assets will
reduce a 10% return to 9.8%.
* See the notes to financial statements which appear in Trust's Annual
Report to Shareholders and which are incorporated by reference into the
Statement of Additional Information.
B-11
<PAGE>
FINANCIAL HIGHLIGHTS OF THE FIXED INCOME II FUND*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand L.L.P., the Trust's independent
accountants. The table includes selected data for a share outstanding
throughout each year ended December 31, and other performance information
derived from the financial statements. The information in the table represents
the Financial Highlights for the Fund's Class S Shares for the periods shown.
The table appears in the Fund's financial statements and related notes, which
are incorporated by reference into the Statement of Additional Information and
which appear, along with the report of Coopers & Lybrand L.L.P. in the Fund's
Annual Report to Shareholders. More detailed information concerning the Fund's
performance, including a complete portfolio listing and audited financial
statements, is available in the Fund's Annual Report, which may be obtained
without charge by writing or calling the Trust.
FIXED INCOME II FUND
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $ 18.36 $ 18.55 $ 17.98 $ 18.99 $ 18.56 $ 19.68 $ 18.94 $ 18.69 $18.51 $18.63
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. 1.08 1.04 1.16 1.21 .84 1.35 1.52 1.53 1.69 1.61
Net realized and
unrealized gain (loss)
on investments........ -- .19 .59 (1.07) .44 (.83) .72 .23 .27 (.12)
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Total From Investment
Operations........... 1.08 .85 1.75 .14 1.28 .52 2.24 1.76 1.96 1.49
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
LESS DISTRIBUTIONS:
Net investment income.. (1.09) (1.04) (1.18) (1.15) (.71) (1.36) (1.50) (1.51) (1.78) (1.61)
Net realized gain on
investments........... -- -- -- -- -- (.28) -- -- -- --
Tax return of capital.. -- -- -- -- (.14) -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Total Distributions... (1.09) (1.04) (1.18) (1.15) (.85) (1.64) (1.50) (1.51) (1.78) (1.61)
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
NET ASSET VALUE, END OF
YEAR................... $ 18.35 $ 18.36 $ 18.55 $ 17.98 $ 18.99 $ 18.56 $ 19.68 $ 18.94 $18.69 $18.51
======= ======= ======= ======= ======= ======= ======= ======= ====== ======
TOTAL RETURN (%)(A)..... 6.02 4.76 9.95 .82 6.98 2.74 12.31 9.71 10.99 8.20
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses to
average net assets
(a)................... .66 .70 .58 .19 .16 .19 .13 .15 .17 .13
Net investment income
to average net assets
(a)................... 5.70 5.70 6.41 6.52 6.16 7.21 8.06 8.45 8.97 8.56
Portfolio turnover..... 213.14 264.40 269.31 233.75 229.07 330.58 188.30 184.38 320.16 217.58
Net assets, end of year
($000 omitted)........ 229,470 222,983 183,577 144,030 138,619 182,735 156,685 119,853 83,313 86,052
</TABLE>
- ---------------------
(a) For periods prior to April 1, 1995, Fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net
of investment management fees but gross of any investment services fees.
Management fees and investment services fees reduce performance; for
example, an investment services fee of 0.2% of average managed assets will
reduce a 10% return to 9.8%.
* See the notes to financial statements which appear in the Trust's Annual
Report to Shareholders and which are incorporated by reference into the
Statement of Additional Information.
B-12
<PAGE>
FINANCIAL HIGHLIGHTS OF THE FIXED INCOME III FUND*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand L.L.P., the Trust's independent
accountants. The table includes selected data for a share outstanding
throughout each year ended December 31, and other performance information
derived from the financial statements. The information in the table represents
the Financial Highlights for the Fund's Class S Shares for the periods shown.
The table appears in the Fund's financial statements and related notes, which
are incorporated by reference into the Statement of Additional Information and
which appear, along with the report of Coopers & Lybrand L.L.P. in the Fund's
Annual Report to Shareholders. More detailed information concerning the Fund's
performance, including a complete portfolio listing and audited financial
statements, is available in the Fund's Annual Report, which may be obtained
without charge by writing or calling the Trust.
FIXED INCOME III FUND
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993++
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
YEAR............................. $ 10.17 $ 10.34 $ 9.37 $ 10.44 $ 10.00
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............ .63 .64 .67 .66 .49
Net realized and unrealized gain
(loss) on investments........... .32 (.16) .97 (1.07) .52
------- ------- ------- ------- -------
Total From Investment Opera-
tions......................... .95 .48 1.64 (.41) 1.01
------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income............ (.62) (.64) (.67) (.66) (.48)
In excess of net investment in-
come............................ (.02) (.01) -- -- --
Net realized gain on invest-
ments........................... (.06) -- -- -- (.08)
In excess of net realized gain on
investments..................... -- -- -- -- (.01)
------- ------- ------- ------- -------
Total Distributions............ (.70) (.65) (.67) (.66) (.57)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF YEAR...... $ 10.42 $ 10.17 $ 10.34 $ 9.37 $ 10.44
======= ======= ======= ======= =======
TOTAL RETURN (%)(A)(C)............ 9.64 4.88 17.99 (3.89) 10.22
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to aver-
age net assets (b)(c)........... .70 .73 .61 .20 .20
Operating expenses, gross, to av-
erage net assets (b)(c)......... .70 .73 .61 .20 .40
Net investment income to average
net assets (b).................. 6.13 6.32 6.83 7.02 6.30
Portfolio turnover (b)........... 274.84 144.26 141.37 134.11 181.86
Net assets, end of year ($000
omitted)........................ 382,433 292,077 252,465 166,620 124,234
</TABLE>
- ---------------------
++ For the period January 29, 1993 (commencement of operations) to December
31, 1993.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended December 31, 1993 are annualized.
(c) For periods prior to April 1, 1995, Fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net
of investment management fees but gross of any investment services fees.
Management fees and investment services fees reduce performance; for
example, an investment services fee of 0.2% of average managed assets will
reduce a 10% return to 9.8%.
* See the notes to financial statements which appear in the Trust's Annual
Report to Shareholders and which are incorporated by reference into the
Statement of Additional Information.
B-13
<PAGE>
THE PURPOSE OF THE FUNDS--MULTI-STYLE, MULTI-MANAGER DIVERSIFICATION
The Funds offer Eligible Investors the opportunities to use FRIMCo's and
Russell's "multi-style, multi-manager diversification" investment method and
to obtain FRIMCo's and Russell's money manager evaluation services.
Russell acts as consultant to the Funds. Russell was founded in 1936 and has
been providing comprehensive asset management consulting services for almost
30 years to institutional investors, principally large corporate employee
benefit plans. Russell and its affiliates have offices around the world--in
Tacoma, New York, Toronto, London, Zurich, Paris, Sydney, Auckland and Tokyo.
Three functions form the core of Russell's consulting services:
. Objective Setting: Defining appropriate investment objectives and desired
investment returns, based on a client's unique situation and risk
tolerance.
. Asset Allocation: Allocating a client's assets among different asset
classes--such as common stocks, fixed-income securities, international
securities, temporary cash investments and real estate--in a way most
likely to achieve the client's objectives and desired returns.
. Money Manager Research: Evaluating and recommending professional
investment advisory and management organizations ("money managers") to
make specific portfolio investments for each asset class, according to
designated investment objectives, styles and strategies.
When this process is completed, a client's assets are invested using a
"multi-style, multi-manager diversification" technique. The goals of this
process are to reduce risk and to increase returns.
FRIMCo and Russell believe investors should seek to hold fully diversified
portfolios that reflect both their own individual investment time horizons and
their ability to accept risk. FRIMCo and Russell believe that for many, this
can be accomplished through strategically purchasing shares in one or more of
the Funds which have been structured to provide access to specific asset
classes in a multi-style, multi-manager environment.
Capital market history shows that asset classes with greater risk will
generally outperform lower risk asset classes over time. For instance,
corporate equities, over the past 50 years, have outperformed corporate debt
in absolute terms. However, what is generally true of performance over
extended periods will not necessarily be true at any given time during a
market cycle, and from time to time asset classes with greater risk may also
underperform lower risk asset classes, on either a risk adjusted or absolute
basis. Investors should select a mix of asset classes that reflects their
overall ability to withstand market fluctuations over their investment
horizons.
Studies have shown that no one investment style within an asset class will
consistently outperform competing styles. For instance, investment styles
favoring securities with growth characteristics may outperform styles favoring
income producing securities, and vice versa. It is largely for this reason
that no single manager has consistently outperformed the market over extended
periods. While performance cycles tend to repeat themselves, they do not do so
predictably.
FRIMCo and Russell believe, however, that it is possible to select managers
who have shown a consistent ability to achieve superior results within
specific asset classes and investment styles by employing a unique combination
of qualitative and quantitative measurements. FRIMCo combines these select
managers with other managers within the same asset class who employ
complementary styles. By combining complementary investment styles within an
asset class, investors are better able to reduce their exposure to any one
investment style going out of favor.
By strategically selecting from among a variety of investments by asset
class, each of which has been constructed using these multi-style, multi-
manager principles, investors are able to design portfolios that meet their
specific investment needs.
B-14
<PAGE>
ELIGIBLE INVESTORS
Shares of the Funds are currently offered only to Eligible Investors.
Eligible Investors include:
. Institutional investors and Financial Intermediaries investing for their
own accounts or in fiduciary or agency capacity, which have entered into
asset management services agreements ("Agreements") with FRIMCo.
"Financial Intermediaries" include bank trust departments, registered
investment advisers, broker-dealers, employee benefit plans and other
financial services organizations;
. Institutions or individuals who have acquired shares through
institutional investors and Financial Intermediaries; and
. Trustees, officers, employees and certain third-party contractors of the
Trust and its affiliates.
The initial minimum aggregate investment in any combination of the Funds
described in this Prospectus and in the Trust's Specialty Funds Prospectus is
$5 million. You may be eligible to purchase shares of these Funds if you do
not meet the required initial minimum investment. FRIMCo at its discretion may
waive the initial minimum investment for some employee benefit plans and other
plans or if the requirements are met for a combined purchase privilege,
cumulative quantity discount or statement of intention. You should consult
your Financial Intermediary for details. Trustees, officers, employees, and
certain third-party contractors of the Trust and its affiliates are not
subject to any initial minimum investment requirement.
The Funds do not generally offer their shares directly to individual (i.e.,
retail) investors, although they may choose to do so. Financial Intermediaries
that have entered into Agreements with FRIMCo may acquire shares of the Funds
for their customers. Under the Agreements, FRIMCo provides objective-setting
and asset-allocation assistance and services to Financial Intermediaries,
which in turn provide similar services to their customers. Financial
Intermediaries receive no compensation from FRIMCo or Class S Shares of the
Funds. However, Financial Intermediaries may charge their customers a fee for
providing these services and other trust or investment-related services.
Each Agreement with respect to the Funds provides that a shareholder
investment services fee (the "Services Fee") may be paid to FRIMCo. The
Services Fee is usually expressed as a percentage of the client's assets
invested in the Funds. The Services Fee may include a fixed-dollar fee for
certain specific services. The client and FRIMCo agree to the Services Fee,
which is determined by the amount of assets the client expects to invest in
the Funds, the nature and extent of services that FRIMCo agrees to provide to
the client, and other factors.
Either the client or FRIMCo may terminate an Agreement upon written notice.
FRIMCo does not anticipate terminating any Agreement unless a client does not
(i) promptly pay fees due to FRIMCo, or (ii) invest sufficient assets in the
Trust's Funds to compensate FRIMCo for its services. If an Agreement is
terminated, FRIMCo will no longer provide asset-allocation, objective-setting
or other services to the client.
B-15
<PAGE>
GENERAL MANAGEMENT OF THE FUNDS
The Board oversees the Funds' operations, including reviewing and approving
the Funds' contracts with FRIMCo, Russell and the money managers. The Trust's
officers, all of whom are employed by and are officers of FRIMCo or its
affiliates, are responsible for the day-to-day management and administration
of the Funds' operations. The money managers are responsible for selection of
individual portfolio securities for the assets assigned to them.
FRIMCo:
. provides or supervises the general management and administration,
investment advisory and portfolio management, and distribution services
for the Funds;
. furnishes the Funds with office space, equipment and personnel to operate
and administer the Funds' business, and supervises services provided by
third parties, such as the money managers and the Custodian;
. develops the investment programs, selects money managers, allocates
assets among money managers and monitors the money managers' investment
programs and results;
. manages, or hires money managers to manage, the Liquidity Portfolio; and
. provides the Funds with transfer agent, dividend disbursing and
shareholder recordkeeping services.
FRIMCo pays the expenses of providing these services (other than transfer
agent and shareholder recordkeeping), as well as a portion of the costs of
preparing and distributing materials that describe the Funds.
FRIMCo's officers and employees who oversee the money managers are:
. Randall P. Lert, who has been Chief Investment Officer of FRIMCo since
1989.
. Mark D. Amberson, who has been a Portfolio Manager of FRIMCo since
January 1998. From 1991 to 1997, Mr. Amberson was a Portfolio Manager in
Russell's Money Market Trading Group. Mr. Amberson, jointly with another
portfolio manager identified herein, has primary responsibility for
management of the Fixed I, Diversified Bond, Fixed II, Volatility
Constrained Bond, Fixed III, and Multistrategy Bond Funds.
. Randal C. Burge, who has been a Portfolio Manager of FRIMCo since 1995.
From 1990 to 1995, Mr. Burge was a Client Executive for Frank Russell
Australia. Mr. Burge, jointly with another portfolio manager identified
herein, has primary responsibility for management of the Fixed I, Fixed
II, Fixed III, Diversified Bond, Volatility Constrained Bond,
Multistrategy Bond, and Emerging Markets Funds.
. Jean E. Carter, who has been a Portfolio Manager of FRIMCo since 1994.
From 1990 to 1994, Ms. Carter was a Client Executive in Russell's
Investment Group. Ms. Carter, jointly with another portfolio manager
identified herein, has primary responsibility for management of the
International, and International Securities Funds.
. Ann Duncan, who has been a Portfolio Manager of FRIMCo since January
1998. From 1996 to 1997, Ms. Duncan was a Senior Equity Research Analyst
with Russell. From 1992 to 1995, Ms. Duncan was an equity analyst and
portfolio manager with Avatar Associates. Ms. Duncan, jointly with
another portfolio manager identified herein, has primary responsibility
for management of the International, and International Securities Funds.
. James M. Imhof, Manager of FRIMCo's Portfolio Trading, manages the Trust
on a day to day basis and has been responsible for ongoing analysis and
monitoring of the money managers since 1989.
. James A. Jornlin, who has been a Senior Investment Officer of FRIMCo
since April 1995. From 1991 to March 1995, Mr. Jornlin was employed as a
Senior Research Analyst with Russell. Mr. Jornlin, jointly
B-16
<PAGE>
with another portfolio manager identified herein, has primary
responsibility for management of the Emerging Markets and Real Estate
Securities Funds.
. Dennis J. Trittin, who has been a Portfolio Manager of FRIMCo since
January 1996. From 1988 to 1996, Mr. Trittin was director of US Equity
Manager Research Department. Mr. Trittin, jointly with another portfolio
manager identified herein, has primary responsibility for management of
the Equity I, Equity II, Equity III, Equity Q, Equity T, Diversified
Equity, Quantitative Equity, Special Growth, and Equity Income Funds.
. C. Nola Williams, who has been a Portfolio Manager of FRIMCo since
January 1996. From 1994 to 1995, Ms. Williams was a member of the Alpha
Strategy Group. From 1988 to 1994, Ms. Williams was Senior Research
Analyst with Russell. Ms. Williams, jointly with another portfolio
manager identified herein, has primary responsibility for management of
the Equity I, Equity II, Equity III, Equity Q, Equity T, Diversified
Equity, Quantitative Equity, Special Growth, and Equity Income Funds.
Russell provides to the Funds and FRIMCo the asset management consulting
services--including objective-setting and asset-allocation technology, and
money manager research and evaluation assistance--that Russell provides to its
other consulting clients. Russell does not receive any compensation from the
Funds for its consulting services.
As affiliates, Russell and FRIMCo may establish certain intercompany cost
allocations that reflect the consulting services supplied to FRIMCo. George F.
Russell, Jr., Chairman of the Trust, is the Chairman of the Board and
controlling shareholder of Russell. FRIMCo is a wholly owned subsidiary of
Russell.
The Trust has received an exemptive order from the SEC which permits the
Trust, with the approval of the Board, to engage and terminate money managers
without a shareholder vote and to disclose the aggregate fees paid to the
money managers of each Fund. On January 22, 1996, the shareholders of the
Trust's Funds voted to approve this arrangement.
Under its Management Agreement with the Trust, FRIMCo receives a management
fee from each Fund for FRIMCo's services. From this fee, FRIMCo, as the
Trust's agent, pays the money managers for their investment selection
services. The remainder of the management fee is retained by FRIMCo as
compensation for the services described above and to pay expenses. The annual
rate of management fees, payable to FRIMCo monthly on a pro rata basis, are
the following percentages of each Fund's average daily net assets; Equity I
Fund, 0.60%; Equity II Fund, 0.75%; Equity III Fund, 0.60%; Equity Q Fund,
0.60%; International Fund, 0.75%; Fixed Income I Fund, 0.30%; Fixed Income II
Fund, 0.50%; and Fixed Income III Fund, 0.55%.
FRIMCo has voluntarily agreed to waive all or a portion of its management
fees for certain Funds. This arrangement is not part of the Management
Agreement with the Trust and may be changed or discontinued at any time.
FRIMCo currently calculates its management fee based on a Fund's average daily
net assets less any management fee incurred on the Fund's assets to the extent
the Fund incurs management fees for investing a portion of its assets in the
Trust's Money Market Fund.
The Board has approved, subject to approval by the shareholders of the
applicable Funds at a meeting to be held during 1998 (the "1998 Shareholder
Meeting"), an amendment to the Management Agreement. Under the amendment, in
addition to the fees set forth above (restructured as described in the next
paragraph), the Funds will pay FRIMCo a fee which compensates FRIMCo for
managing collateral which the Funds have received in securities lending and
certain other portfolio transactions. If the amendment is approved by
shareholders, each Fund will pay a fee to FRIMCo for its services in managing
the Fund's cash, securities and other investment assets which are not treated
as net assets of that Fund ("additional assets") in determining the Fund's net
asset value per share. If approved, the additional fee payable to FRIMCo will
equal an amount up to 0.07% of each Fund's additional assets on an annualized
basis.
B-17
<PAGE>
It is also proposed that the services which FRIMCo provides to the Funds
under the present Management Agreement will be divided into two components.
Those services which are investment advisory in nature will be provided
pursuant to a new Advisory Agreement. Other services which are administrative
in nature will be provided pursuant to a new Administrative Agreement. It is
not anticipated that this restructuring of services provided to the Fund will
materially affect the costs of these services to the Funds, or affect FRIMCo's
current voluntary fee waivers.
EXPENSES OF THE FUNDS
The Funds (and each class, when appropriate) pay all their expenses other
than those expressly assumed by FRIMCo. The Funds' expenses for Class S Shares
for the year ended December 31, 1997, as a percentage of each Fund's average
net assets, are shown in the Financial Highlights tables in this Prospectus.
Principal expenses are:
. the management, transfer agent, and recordkeeping fees payable to FRIMCo;
. fees for custody, preparing tax records, and portfolio accounting,
payable to the Custodian; and
. fees for independent auditing and legal services; and filing and
registration fees payable to the SEC.
THE MONEY MANAGERS
Each Fund's assets are allocated among the money managers listed in "Money
Manager Profiles" in this Prospectus. FRIMCo may change the allocation of a
Fund's assets among money managers at any time. FRIMCo may employ or terminate
a money manager at any time, subject to the approval by the Board. A Fund will
notify its shareholders within 60 days of when a money manager begins
providing services. The money managers are selected for the Funds based
primarily upon the research and recommendations of FRIMCo and Russell. FRIMCo
and Russell evaluate quantitatively and qualitatively the money manager's
skills and results in managing assets for specific asset classes, investment
styles and strategies. Short-term investment performance, by itself, is not a
controlling factor in selecting or terminating a money manager for any Fund.
From its management fees, FRIMCo, as the Trust's agent, pays fees to the
money managers for their investment selection services. Quarterly, each money
manager is paid the pro rata portion of an annual fee, based on the average of
all assets allocated to the manager for the quarter. For the year ended
December 31, 1997, management fees paid to the money managers were equivalent
to the following annual rates, expressed as a percentage of each Fund's
average daily net assets: Equity I Fund, 0.23%; Equity II Fund, 0.40%; Equity
III Fund, 0.19%; Equity Q Fund, 0.19%; International Fund, 0.39%; Fixed Income
I Fund, 0.08%; Fixed Income II Fund, 0.17%; and Fixed Income III Fund, 0.21%.
Each money manager has agreed that it will look only to FRIMCo for the
payment of the money manager's fee, after the Trust has paid FRIMCo. Fees paid
to the money managers are not affected by any voluntary or legal expense
limitations. Some money managers may receive investment research prepared by
Russell as additional compensation, or may receive brokerage commissions for
executing portfolio transactions for the Funds.
Each money manager has complete discretion to purchase and sell portfolio
securities for its segment of a Fund. At the same time, however, each money
manager must operate within the Fund's investment objectives, restrictions and
policies and the more specific strategies developed by FRIMCo. Although the
money managers' activities are subject to general oversight by the Board and
the Trust's officers, neither the Board, the officers, FRIMCo nor Russell
evaluate the investment merits of the money managers' individual security
selections.
B-18
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND PRACTICES
The investment objective and general investment policies of each Fund are
described in "Investment Objectives." Types of portfolio securities that may
be purchased by the Funds are described in "Fund Investment Securities."
Specific investment practices that may be employed by the Funds are identified
in "Other Investment Practices." The risks associated with portfolio
investments by the Funds are described in those sections, as well as in "Risk
Considerations." Certain terms used in these sections are described in the
Glossary in this Prospectus.
SUMMARY COMPARISON OF THE FUNDS
<TABLE>
<CAPTION>
ANTICIPATED MAXIMUM
EQUITY DEBT
FUND EXPOSURE EXPOSURE FOCUS
---- ----------- -------- -----
<S> <C> <C> <C>
Equity I Fund...................... 65-100% 35% Total return
Equity II Fund..................... 65-100% 35% Maximum total return
Equity III Fund.................... 65-100% 35% Current income
Equity Q Fund...................... 100% --% Total return
International Fund................. 65-100% 35% Total return
Fixed Income I..................... 35% 65-100% Diversification
Fixed Income II Fund............... 35% 65-100% Preservation of capital
Fixed Income III Fund.............. --% 100% Maximum total return
</TABLE>
INVESTMENT OBJECTIVES
Each Fund's investment objective is "fundamental," which means each
investment objective may not be changed without the approval of a majority of
each Fund's shareholders. Certain investment policies may also be fundamental.
Ordinarily, each Fund will invest more than 65% of its total assets in the
types of securities identified in its investment objective. However, the Funds
may hold assets as cash reserves for temporary and defensive purposes when
their money managers believe a conservative approach is desirable, or when
suitable investments are unavailable.
EQUITY I FUND
Equity I Fund's objective is to provide income and capital growth by
investing principally in equity securities. Equity I Fund may invest in common
and preferred stocks, convertible securities, rights and warrants.
EQUITY II FUND
Equity II Fund's objective is to maximize total return primarily through
capital appreciation and by assuming a higher level of volatility than Equity
I Fund. Equity II Fund seeks to achieve its objective by investing in equity
securities.
The Fund also seeks to provide current income. The Fund may invest in common
and preferred stock, convertible securities, rights and warrants. The Fund's
investments may include companies whose securities have been publicly traded
for less than five years and smaller companies (i.e., companies not listed in
the Russell 1000(R) Index). A substantial portion of the Fund's portfolio will
generally consist of equity securities of "emerging growth-type" companies or
companies characterized as "special situations." "Emerging growth-type"
companies tend to reinvest most of their earnings, rather than pay significant
cash dividends. "Special situation" companies are those which the money
managers believe present opportunities for capital growth because of cyclical
developments in the securities markets, the industry, or the issuer.
B-19
<PAGE>
EQUITY III FUND
Equity III Fund's objective is to achieve a high level of current income,
while maintaining the potential for capital appreciation. Equity III Fund
seeks to achieve its objective by investing primarily in income-producing
equity securities.
The income objective of the Fund is to exceed the yield on the S&P 500
Index. The index yield will change from year to year due to changes in prices
and dividends of stocks in the Index. Income streams will be considered in
light of their current level and the opportunity for future growth. Capital
appreciation may not be comparable to that delivered by Funds such as Equity
II Fund whose major objective is appreciation, although FRIMCo believes that a
high and growing stream of income is conducive to higher capital values. The
Fund may also invest in preferred stock, convertible securities, rights and
warrants.
EQUITY Q FUND
Equity Q Fund's objectives are to provide a total return greater than the
total return of the US stock market (as measured by the Russell 1000(R) Index
over a market cycle of four to six years), while maintaining volatility and
diversification similar to the Index. Equity Q Fund seeks to achieve its
objectives by investing in equity securities.
The Fund's portfolio will be structured similarly to the Russell Index, as
the Fund will maintain industry weights and economic sector weights near those
of the Index. As a result, the Fund's money managers generally select stocks
from the set of stocks comprising the Russell 1000(R) Index; however, a money
manager may purchase securities that are not included in the Index or sell
securities still included in the Index to meet the Fund's investment
objectives. The money managers anticipate that the Fund's average
price/earnings ratio, yield and other fundamental characteristics will be near
the averages of the Russell Index.
The money managers of the Fund will seek to achieve the Fund's objectives by
using various quantitative management techniques in selecting investments. A
quantitative manager bases its investment decisions primarily on quantitative
investment models. Money managers use these models to determine the investment
potential of a particular portfolio security and to rank securities based upon
their ability to outperform the total return of the Russell 1000(R) Index.
Once the money manager has ranked the securities, it then selects the
securities most likely to construct a portfolio that has superior return
prospects with risks similar to the Russell 1000(R) Index. FRIMCo believes
quantitative management over a market cycle should provide consistent
performance, diversification, market-like volatility and limited market under
performance. However, there is no guarantee that the Fund will have these
characteristics at any one time.
The Fund will attempt to be fully invested in common stock at all times.
However, the Fund is permitted to hold up to 20% of Fund assets in liquid
investments to meet redemption requests.
INTERNATIONAL FUND
International Fund's objectives are to provide favorable total return and
additional diversification for US investors. International Fund attempts to
achieve its objectives by investing primarily in equity and fixed-income
securities of foreign companies, and securities issued by foreign governments.
The Fund invests primarily in equity securities of companies domiciled outside
the United States. The Fund may also invest in US companies which derive, or
are expected to derive, a substantial portion of their revenues from
operations outside the United States.
The Fund may invest in equity and debt securities denominated in foreign
currencies and gold-related equity investments, including gold mining stocks
and gold-backed debt instruments. However, as a matter of fundamental policy,
the Fund will not invest more than 20% of its net assets in gold-related
investments.
B-20
<PAGE>
FIXED INCOME I FUND
Fixed Income I Fund's objectives are to provide effective diversification
against equities and a stable level of cash flow by investing in fixed-income
securities.
The Fund's portfolio will consist primarily of conventional debt
instruments, including bonds, debentures, US government and US government
agency securities, preferred and convertible preferred stocks, and variable
amount demand master notes. (These notes represent a borrowing arrangement
under a letter agreement between commercial paper issuers and institutional
lenders, such as the Fund.) Money managers will select investments based on
fundamental economic and market factors. Money managers will evaluate
potential investments by sector, maturity, quality and other criteria. The
Fund will ordinarily invest at least 65% of its net assets in securities rated
no less than A or A-2 by S&P; A or Prime-2 by Moody's; or, if unrated, judged
by the money managers to be of at least equal credit quality to those
designations.
FIXED INCOME II FUND
Fixed Income II Fund's objectives are the preservation of capital and the
generation of current income consistent with preservation of capital, by
investing primarily in fixed-income securities with low-volatility
characteristics.
The Fund will invest primarily in those fixed-income securities which mature
in two years or less from the date of acquisition or which have similar
volatility characteristics. To minimize credit risk and fluctuations in net
asset value per share, the Fund intends to maintain an average portfolio
maturity of less than five years.
Although the Fund will invest primarily in debt securities denominated in
the US dollar, the money managers will actively manage the Fund's portfolio in
accordance with a multi-market investment strategy. Accordingly, the money
managers will allocate the Fund's investments among securities denominated in
the currencies of the United States and selected foreign countries. The Fund
may also invest in high-quality, foreign debt securities. The money managers
which invest in foreign denominated securities will maintain a substantially
neutral currency exposure relative to the US dollar, and will establish and
adjust cross currency hedges based on their perception of the most favorable
markets and issuers. In this regard, the percentage of assets invested in
securities of a particular country or denominated in a particular currency
will vary in accordance with a money manager's assessment of the relative
yield of such securities and the relationship of a country's currency to the
US dollar. Money managers of the Fund will consider fundamental economic
strength, credit quality and interest rate trends in determining whether to
increase or decrease the emphasis placed upon a particular type of security or
industry sector. The Fund will not invest more than 10% of its total assets in
debt securities denominated in a single foreign currency, and FRIMCo currently
intends to limit total investments in non-US dollar securities to no more than
25% of the Fund's total assets.
The Fund will generally invest in the foreign debt securities of countries
whose governments it considers to be stable (the Fund may invest in countries
considered unstable or undeveloped, provided that it believes it is able to
hedge substantially the risk of a decline in the currency in which the
securities are denominated). In addition to the US dollar, such currencies
include (among others) the Australian Dollar, Austrian Schilling, Belgian
Franc, British Pound Sterling, Canadian Dollar, Danish Krone, Dutch Guilder,
European Currency Unit ("ECU"), French Franc, Irish Punt, Italian Lira,
Japanese Yen, New Zealand Dollar, Norwegian Krone, Spanish Peseta, Swedish
Krona, Swiss Franc and German Mark. An issuer of debt securities purchased by
the Fund may be domiciled in a country other than a country in whose currency
the instrument is denominated.
In selecting particular investments for the Fund, the money managers will
seek to minimize investment risk by limiting their portfolio investments to
debt securities of high-quality issuers. Accordingly, the Fund's portfolio
will consist only of: (a) US Government securities; (b) obligations issued or
guaranteed by a foreign government or any of its political subdivisions,
authorities, agencies, or instrumentalities; (c) obligations issued or
guaranteed
B-21
<PAGE>
by supranational entities, all of which are rated AAA or AA by S&P or Aaa or
Aa by Moody's or, if unrated, determined to be of comparable quality by the
money managers; (d) investment grade corporate debt securities (or, if
unrated, corporate debt securities which the money managers determine to be of
equivalent quality); (e) bank instruments; and (f) commercial paper.
The Fund intends to use interest rate swaps as a hedge and not as a
speculative investment. For more information on risks, see "Risk
Considerations."
FIXED INCOME III FUND
Fixed Income III Fund's objective is to provide maximum total return,
primarily through capital appreciation and by assuming a higher level of
volatility than is ordinarily expected from broad fixed-income market
portfolios. Fixed Income III Fund seeks to achieve its objective by investing
in fixed-income securities.
The Fund will invest primarily in fixed-income securities. The Fund's
investments will include: US Government securities; obligations of foreign
governments or their subdivisions, agencies and instrumentalities; securities
of international agencies or supranational agencies; corporate debt
securities; loan participations; corporate commercial paper; indexed
commercial paper; variable, floating and zero coupon rate securities; mortgage
and other asset-backed securities; municipal obligations; variable amount
demand master notes; bank instruments; repurchase agreements and reverse
repurchase agreements; and foreign currency exchange related securities.
The Fund may also invest in convertible securities and derivatives including
warrants and interest rate swaps. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, and to protect against any increase in
the price of securities it anticipates purchasing at a later date. The Fund
intends to use these transactions as a hedge and not as a speculative
investment. For more information on risks, see "Risk Considerations."
FUND INVESTMENT SECURITIES
Commercial Paper
Fixed Income II and Fixed Income III Funds may invest in commercial paper.
Commercial paper represents a debt obligation of a company which is unsecured.
Fixed Income II and Fixed Income III Funds will invest in commercial paper
which is rated A-1 or A-2 by S&P; Prime-1 or Prime-2 by Moody's; Fitch-1 or
Fitch-2 by Fitch Investors Service, Inc.; Duff 1 or Duff 2 by Duff & Phelps,
Inc.; or TBW-1 or TBW-2 by Thomson Bank Watch, Inc. Fixed Income II and Fixed
Income III Funds may also invest in commercial paper which is not rated if it
is issued by US or foreign companies which the money managers conclude are of
high-quality and have outstanding debt securities which are rated AAA, AA or A
by S&P; or Aaa, Aa or A by Moody's.
DEBT SECURITIES
The Funds may purchase debt securities that complement their respective
investment objectives. The Funds, except Fixed Income III Fund, do not invest
in debt securities rated less than BBB by S&P or Baa by Moody's, or in unrated
securities judged by the money managers to be of a lesser credit quality than
those designations. Securities rated BBB by S&P or Baa by Moody's and above
are considered to be "investment grade" securities, although Moody's considers
securities rated Baa, and S&P considers bonds rated BBB, to have some
speculative characteristics. The Funds, other than Fixed Income III Fund, will
sell securities whose ratings drop below these minimum ratings, in a prudent
manner as determined by the money managers. The market value of debt
securities generally varies inversely with interest rates.
B-22
<PAGE>
EQUITY SECURITIES
Equity I, Equity II, Equity III, Equity Q and International Funds invest
primarily in equity securities. Equity I, Equity II, Equity III and Equity Q
Funds may invest in common stock equivalents. The following constitute common
stock equivalents: rights and warrants and convertible securities. Common
stock equivalents may be converted into or provide the holder with the right
to common stock. Equity I, Equity II, Equity III and Equity Q Funds may also
invest in other types of equity securities, including preferred stocks.
INTEREST RATE SWAPS
Fixed Income II and Fixed Income III Funds may enter into interest rate
swaps. When a Fund engages in an interest rate swap, it exchanges its
obligations to pay or rights to receive interest payments for the obligations
or rights to receive interest payments of another party (i.e., an exchange of
floating rate payments for fixed rate payments). The Funds expect to enter
into these transactions primarily to preserve a return or spread on a
particular investment or portion of their portfolios or to protect against any
increase in the price of securities they anticipate purchasing at a later
date.
INVESTMENT COMPANY SECURITIES
Each Fund may invest up to 10% of its total assets in shares of other
investment companies that invest in securities in which a Fund may otherwise
invest. Each Fund may invest its cash reserves in the Trust's Money Market
Fund. Because of restrictions on direct investment by US entities in certain
countries, other investment companies may provide the most practical or only
way for International Fund to invest in certain markets. These investments may
involve the payment of substantial premiums above the net asset value of those
investment companies' portfolio securities and are subject to limitations
under the 1940 Act. International Fund also may incur tax liability to the
extent it invests in the stock of a foreign issuer that is a "passive foreign
investment company" ("PFIC"), regardless of whether the PFIC makes
distributions to the Fund. See "Taxes" in this Prospectus and in the SAI.
OTHER DEBT SECURITIES
Fixed Income II and Fixed Income III Funds may invest in debt securities
issued by supranational organizations such as:
The World Bank -- An international bank which was chartered to finance
development projects in developing member countries.
The European Economic Community -- An organization which consists of
certain European states engaged in cooperative economic activities.
The European Coal and Steel Community -- An economic union of various
European nations' steel and coal industries.
The Asian Development Bank -- An international development bank
established to lend funds, promote investment and provide technical
assistance to member nations in the Asian and Pacific regions.
Fixed Income II Fund may also invest in debt securities denominated in the
ECU, which is a "basket" consisting of specific amounts of currency of member
states of the European Economic Community. The Counsel of Ministers of the
European Economic Community may adjust specific amounts of currency comprising
the ECU to reflect changes in the relative values of the underlying
currencies. The money managers investing in these securities do not believe
that such adjustments will adversely affect holders of ECU-denominated
obligations or the marketability of the securities.
B-23
<PAGE>
US GOVERNMENT OBLIGATIONS
The Funds may invest in fixed-rate and floating or variable rate US
government obligations. Certain of the obligations, including US Treasury
bills, notes and bonds, and GNMA participation certificates, are issued or
guaranteed by the US government. Other securities issued by US government
agencies or instrumentalities are supported only by the credit of the agency
or instrumentality (for example, those issued by the Federal Home Loan Bank)
whereas others, such as those issued by FNMA, have an additional line of
credit with the US Treasury.
Short-term US government securities generally are considered to be among the
safest short-term investments. However the US government does not guarantee
the net asset value of the Funds' shares. With respect to US government
securities supported only by the credit of the issuing agency or
instrumentality or by an additional line of credit with the US Treasury, there
is no guarantee that the US government will provide support to such agencies
or instrumentalities. Accordingly, such US government securities may involve
risk of loss of principal and interest.
The following table illustrates the investments that the Funds primarily
invest in or are permitted to invest in:
<TABLE>
<CAPTION>
FIXED FIXED FIXED
TYPE OF PORTFOLIO EQUITY I EQUITY II EQUITY III EQUITY Q INTERNATIONAL INCOME I INCOME II INCOME III
SECURITY FUND FUND FUND FUND FUND FUND FUND FUND
----------------- -------- --------- ---------- -------- ------------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common stocks........... X X X X X
Common stock equivalents
(warrants)............. X X X X X
Common stock equivalents
(options) ............. X X X X X
Common stock equivalents
(convertible debt
securities) ........... X X X X
Common stock equivalents
(depository receipts).. X
Preferred stocks........ X X X X X
Equity derivative secu-
rities................. X X X X X
Debt securities (below
investment grade or
junk bonds)............ X
US government securi-
ties................... X X X X X X X X
Municipal obligations... X
Investment company
securities............. X X X X X X X X
Foreign securities...... X X
</TABLE>
B-24
<PAGE>
OTHER INVESTMENT PRACTICES
The Funds use investment techniques commonly used by other mutual funds. The
table below summarizes the principal investment practices of the Funds, each
of which may involve certain special risks. The Glossary describes each of the
investment techniques identified below. The SAI, under the heading "Investment
Restrictions, Policies and Certain Investments," contains more detailed
information about certain of these practices, including limitations designed
to reduce risks.
<TABLE>
<CAPTION>
FIXED FIXED FIXED
EQUITY I EQUITY II EQUITY III EQUITY Q INTERNATIONAL INCOME I INCOME II INCOME III
TYPE OF PRACTICE FUND FUND FUND FUND FUND FUND FUND FUND
---------------- -------- --------- ---------- -------- ------------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash reserves........... X X X X X X X X
Repurchase agreements
(1) ................... X X X X X X X X
When-issued and forward
commitment securities
....................... X X X X X X X X
Reverse repurchase
agreements ............ X X X X X X X X
Lending portfolio
securities, not to
exceed 33 1/3% of total
Fund assets............ X X X X X X X X
Illiquid securities
(limited to 15% of
Fund's net assets)..... X X X X X X X X
Forward currency con-
tracts (2).............
Write (sell) call and
put options on
securities, securities
indexes and foreign
currencies (3)......... X X X X X X X X
Purchase options on
securities, securities
indexes, and
currencies (3)......... X X X X X X X X
Interest rate futures
contracts, stock index
futures contracts,
foreign currency
contracts and options
on futures (4) ........ X X X X X X X X
Liquidity portfolio..... X X X X X
</TABLE>
- ---------------------
(1) Under the 1940 Act, repurchase agreements are considered to be loans by a
Fund and must be fully collateralized by collateral assets. If the seller
defaults on its obligations to repurchase the underlying security, a Fund
may experience delay or difficulty in exercising its rights to realize
upon the security, may incur a loss if the value of the security declines
and may incur disposition costs in liquidating the security.
(2) International, Fixed Income I, Fixed Income II, and Fixed Income III Funds
may not invest more than 25% of their assets in these contracts.
(3) A Fund will only engage in options where the options are traded on a
national securities exchange or in an over-the-counter market. A Fund may
invest up to 5% of its net assets, represented by the premium paid, in
call and put options. A Fund may write a call or put option to the extent
that the aggregate value of all securities or other assets used to cover
all such outstanding options does not exceed 33% of the value of its net
assets. Only the Fixed Income III Fund currently intends to write or
purchase options on foreign currency.
(4) A Fund does not enter into any futures contracts or related options if the
sum of initial margin deposits on futures contracts, related options
(including options on securities, securities indexes and currencies) and
premiums paid for any such related options would exceed 5% of its total
assets. A Fund does not purchase futures contracts or related options if,
as a result, more than one-third of its total assets would be so invested.
Investment Restrictions. If a Fund changes its investment objective or
policies, you should consider whether the Fund remains right for you. The
Funds are subject to additional investment policies and restrictions described
in the SAI, some of which are fundamental.
RISK CONSIDERATIONS
High Risk Bonds. Fixed Income III Fund may invest up to 25% of its total
assets in debt securities rated less than BBB by S&P or Baa by Moody's, or in
unrated securities judged by the Fund's money managers to be of comparable
quality. Lower rated debt securities generally offer a higher yield than that
available from higher grade issues. However, lower rated debt securities
involve higher risks, in that they are especially subject to adverse changes
in general economic conditions and in the industries in which the issuers are
engaged, to
B-25
<PAGE>
changes in the financial condition of the issuers and to price fluctuation in
response to changes in interest rates. During periods of economic downturn or
rising interest rates, highly leveraged issuers may experience financial
stress which could adversely affect their ability to make payments of
principal and interest and increase the possibility of default. While this
debt may have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposure to adverse
conditions. Fixed Income III Fund's money managers will seek to reduce the
risks associated with investing in lower-rated debt securities by limiting the
Fund's holding in the securities and by the depth of the managers' credit
analysis. For additional information, refer to the SAI.
Hedging and Risk Management Practices. In seeking to protect against the
effect of adverse changes in financial markets or against currency exchange
rate or interest rate changes that are adverse to the present or prospective
positions of the Funds, each of the Funds may employ certain risk management
practices using certain derivative securities and techniques (known as
"derivatives"). Markets in some countries currently do not have instruments
available for hedging transactions. To the extent that such instruments do not
exist, a money manager may not be able to hedge a Fund's investment
effectively in such countries. Furthermore, a Fund engages in hedging
activities only when its money managers deem it to be appropriate, and does
not necessarily engage in hedging transactions with respect to each
investment.
Hedging transactions involve certain risks. Although a Fund may benefit from
the use of hedging positions, unanticipated changes in interest rates or
securities prices may result in poorer overall performance for a Fund than if
it had not entered into a hedging position. If the correlation between a
hedging position and a portfolio position is not properly protected, the
desired protection may not be obtained and the Fund may be exposed to risk of
financial loss. In addition, a Fund pays commissions and other costs in
connection with such investments.
Investment in Foreign Securities. The Funds may invest in foreign securities
traded on US or foreign exchanges or in the over-the-counter market. Investing
in securities issued by foreign governments and corporations involves
considerations and risks not typically associated with investing in
obligations issued by the US government and domestic corporations. Less
information may be available about foreign companies than about domestic
companies, and foreign companies generally are not subject to the same uniform
accounting, auditing and financial reporting standards or to other regulatory
practices and requirements comparable to those applicable to domestic
companies. The values of foreign investments are affected by changes in
currency rates or exchange control regulations, application of foreign tax
laws, including withholding taxes, changes in governmental administration or
economic or monetary policy (in the United States or abroad) or changed
circumstances in dealings between nations. Costs are incurred in connection
with conversions between various currencies. In addition, foreign brokerage
commissions are generally higher than in the United States, and foreign
securities markets may be less liquid, more volatile and less subject to
governmental supervision than in the United States. Investments in foreign
countries could be affected by other factors not present in the United States,
including nationalization, expropriation, confiscatory taxation, lack of
uniform accounting and auditing standards and potential difficulties in
enforcing contractual obligations and could be subject to extended settlement
periods or restrictions affecting the prompt return of capital to the United
States.
Foreign Debt Securities. Fixed Income III Fund's portfolio may include debt
securities issued by domestic or foreign entities, and denominated in US
dollars or foreign currencies. The Fund anticipates that no more than 25% of
its net assets will be denominated in foreign currencies. The Fund will only
use foreign currency exchange transactions (options on foreign currencies,
foreign currency futures contracts and forward foreign currency contracts) for
the purpose of hedging against foreign currency exchange risk arising from the
Fund's investment, or anticipated investment, in securities denominated in
foreign currencies. Foreign investment may include emerging market debt.
The risks associated with investing in foreign securities are heightened for
investments in developing or emerging markets. For purposes of the
International and Fixed Income III Funds' policy of investing in securities of
issuers located in emerging markets, those Funds will consider emerging
markets to be countries with developing economies and markets. These countries
generally include every country in the world except the
B-26
<PAGE>
United States, Canada, Japan, Australia and most countries located in Western
Europe. Investments in emerging or developing markets involve exposure to
economic structures that are generally less diverse and mature, and to
political systems which can be expected to have less stability, than those of
more developed countries. Moreover, the economies of individual emerging
market countries may differ favorably or unfavorably from the US economy in
such respects as the rate of growth in gross domestic product, the rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position. Because the Funds' foreign securities will generally be
denominated in foreign currencies, the value of such securities to the Funds
will be affected by changes in currency exchange rates and in exchange control
regulations. A change in the value of a foreign currency against the US dollar
will result in a corresponding change in the US dollar value of the Funds'
foreign securities. In addition, some emerging market countries may have fixed
or managed currencies which are not free-floating against the US dollar.
Further, certain emerging market countries' currencies may not be
internationally traded. Certain of these currencies have experienced a steady
devaluation relative to the US dollar. Many emerging market countries have
experienced substantial, and in some periods extremely high, rates of
inflation for many years. Inflation and rapid fluctuations in inflation rates
have had, and may continue to have, negative effects on the economies and
securities markets of certain emerging market countries.
The Fund may invest in the following types of emerging market debt--bonds;
notes and debentures of emerging market governments; and debt and other fixed
income securities issued or guaranteed by emerging market government agencies,
instrumentalities or central banks, or by banks or other companies in emerging
markets which money managers believe are suitable investments for the Fund.
Under current market conditions, it is expected that emerging market debt will
consist predominantly of Brady Bonds and other sovereign debt. Brady Bonds are
products of the "Brady Plan," under which bonds are issued in exchange for
cash and certain of the country's outstanding commercial bank loans.
Fixed Income III Fund may invest in bank instruments, which include European
certificates of deposit ("ECDs"), European time deposits ("ETDs") and Yankee
Certificates of deposit ("Yankee CDs"). ECDs, ETDs, and Yankee CDs are subject
to somewhat different risks from the obligations of domestic banks. ECDs are
dollar denominated certificates of deposit issued by foreign branches of US
and foreign banks; ETDs are US dollar denominated time deposits in a foreign
branch of a US bank or a foreign bank; and Yankee CDs are certificates of
deposit issued by a US branch of a foreign bank denominated in US dollars and
held in the United States. Different risks may also exist for ECDs, ETDs, and
Yankee CDs because the banks issuing these instruments, or their domestic or
foreign branches, are not necessarily subject to the same regulatory
requirements that apply to domestic banks, such as reserve requirements, loan
limitations, examinations, accounting, auditing and recordkeeping, and the
public availability of information. These factors will be carefully considered
by the money manager when evaluating credit risk in the selection of
investment for the Fixed Income III Fund.
Variable and Floating Rate Securities. Fixed Income III Fund may invest in
variable and floating rate securities. The variable and floating rate
securities provide for a periodic adjustment in the interest rate paid on the
obligations. The terms of such obligations must provide that interest rates
are adjusted periodically based upon some appropriate interest rate adjustment
index. The adjustment intervals may be regular, (i.e., daily, monthly,
annually, etc.) event based, (i.e., a change in the prime rate). The Fund may
also invest in zero coupon US Treasury, foreign government and US and foreign
corporate debt securities, which are bills, notes and bonds that have been
stripped of their unmatured interest coupons and receipts or certificates
representing interests in such stripped debt obligations and coupons. A zero
coupon security pays no interest to its holder prior to maturity. Accordingly,
such securities usually trade at a deep discount from their face or par value
and will be subject to greater market value fluctuations in response to
changing interest rates than debt obligations of comparable maturities that
make current distributions of interest.
Borrowing. The Funds are authorized to borrow from banks to obtain cash to
pay redemption requests. Currently, each Fund may borrow up to 5% of its total
assets. The Board has approved, subject to approval by the shareholders of the
respective Funds at the 1998 Shareholder Meeting, a proposal to revise the
Funds'
B-27
<PAGE>
fundamental policy on borrowing. If approved by shareholders, this limit would
be increased to up to 33 1/3% of the current value of the Funds' total assets.
Please see the SAI for a more complete discussion of the Funds' permissible
borrowing activities.
PORTFOLIO TRANSACTION POLICIES
Money managers make decisions to buy and sell securities for the Fund assets
assigned to them. FRIMCo makes determinations for any other Fund assets. The
Funds do not seek to realize long-term (rather than short-term) capital gains
while making portfolio investment decisions.
Each money manager makes decisions to buy or sell securities independently
from other managers. Thus, one money manager for a Fund may be selling a
security when another money manager for the Fund (or for another Fund) is
purchasing the same security. Also, when a money manager's services are
terminated, the new money manager may significantly restructure an investment
portfolio. These practices may increase the Funds' portfolio turnover rates,
realization of gains or losses, brokerage commissions and other transaction
costs. The annual portfolio turnover rates for the Funds are shown in the
Financial Highlights tables in this Prospectus.
FRIMCo and the money managers arrange for the purchase and sale of the
Trust's securities and the selection of brokers and dealers (including
affiliates) ("Brokers") that, in the best judgment of FRIMCo and the money
managers, provide prompt and reliable execution at favorable prices and
reasonable commission rates. In addition to price and commission rates,
Brokers may be selected based on research, statistical or other services that
they provide. The Trust may pay commission rates that exceed rates that other
Brokers may have charged if the Trust concludes the commissions are reasonable
in relation to the value of the brokerage and/or research services.
The Funds may effect portfolio transactions through Frank Russell
Securities, Inc. ("Russell Securities"), an affiliate of FRIMCo, when a money
manager believes a Fund will receive competitive execution, price, and
commissions. When these transactions are completed, Russell Securities will
refund up to 70% of the commissions paid by the Fund after reimbursement for
research services provided to FRIMCo. Also, the Funds may effect portfolio
transactions through and pay brokerage commissions to Brokers that are
affiliates of the money managers.
DIVIDENDS AND DISTRIBUTIONS
INCOME DIVIDENDS
Each Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year. The amount and frequency of
distributions are not guaranteed--all distributions are at the Board's
discretion. Currently the Board intends to declare dividends from net
investment income and net short-term capital gains (if any) according to the
following schedule:
<TABLE>
<CAPTION>
DECLARED PAYABLE FUNDS
-------- ------- -----
<S> <C> <C>
Quarterly........... Mid: April, July, October and De- Equity I, Equity II, Equity III,
cember Equity Q, Fixed Income I, Fixed
Income II and Fixed Income III
Funds
Annually................ Mid-December International Fund
</TABLE>
CAPITAL GAINS DISTRIBUTIONS
The Board annually intends to declare capital gains distributions through
October 31 (excess of capital gains over capital losses), generally in mid-
December. To meet certain legal requirements, a Fund may declare special
B-28
<PAGE>
year-end dividend and capital gains distributions during October, November or
December to shareholders of record in that month. These distributions are
deemed to have been paid by a Fund and received by you on December 31 of the
prior year, provided that you receive them by January 31. Capital gains
realized during November and December will be distributed to you during
February of the following year.
BUYING A DIVIDEND
If you purchase shares just before a distribution, you will pay the full
price for the shares and receive a portion of the purchase price back as a
taxable distribution. This is called "buying a dividend." Unless your account
is a tax-deferred account, dividends paid to you would be included in your
gross income for tax purposes even though you may not have participated in the
increase of the net asset value of a Fund, regardless of whether you
reinvested the dividends.
AUTOMATIC REINVESTMENT
Your dividends and other distributions are automatically reinvested at the
closing net asset value on the record date, in additional shares of the
appropriate Fund, unless you elect to have the dividends or distributions paid
in cash or invested in another Fund. You may change your election by
delivering written notice no later than ten days prior to the payment date to
the Transfer Agent, at Operations Department, P.O. Box 1591, Tacoma, WA 98401.
TAXES
Each Fund has elected and intends to continue to qualify for taxation as a
regulated investment company under Subchapter M of the Code. Each Fund must
distribute substantially all of its net investment income and net capital
gains to shareholders and meet other requirements of the Code relating to the
sources of its income and diversification of assets. Accordingly, a Fund will
generally not be liable for federal income or excise taxes based on net income
except to the extent its earnings are not distributed or are distributed in a
manner that does not satisfy the requirements of the Code. International Fund
may incur tax liability to the extent it invests in PFICs. See "Portfolio
Securities" and the SAI. The Funds may be subject to nominal, if any, state
and local taxes.
For federal income tax purposes, the dividends from net investment income
and any excess of net short-term capital gains over net long-term capital loss
that you receive from the Funds are considered ordinary income. However,
depending upon the relevant state tax rules, a portion of the dividends paid
by Fixed Income I, Fixed Income II and Fixed Income III Funds attributable to
direct US Treasury and agency obligations may be exempt from state and local
taxes. 28% and 20% capital gains distributions declared by the Board are taxed
at the respective capital gains rates regardless of the length of time you
have held the shares. Distributions of income and capital gains are taxed in
the manner described above, whether you receive them in cash or reinvest them
in additional shares of the Funds. Distributions paid in excess of a Fund's
earnings will be treated as a nontaxable return of capital.
A Fund will notify you of the source of its dividends and distributions at
the time they are paid. After the close of each calendar year, the Funds will
advise their shareholders of the amounts of:
. ordinary income dividends, 28% capital gains dividend, and 20% capital
gains distributions, including any amounts which are deemed paid on
December 31 of the prior year;
. dividends which qualify for the 70% dividends-received deduction
available to corporations;
. any foreign taxes assessed against International, Fixed Income I, Fixed
Income II and Fixed Income III Funds;
. income which is a tax preference item (if any) for alternative minimum
tax purposes; and
B-29
<PAGE>
. the percentages of Fixed Income I, Fixed Income II and Fixed Income III
Funds' income attributable to US government, Treasury and agency
securities.
If you are a corporate investor, a portion of the dividends from net
investment income paid by Equity I, Equity II, Equity III and Equity Q Funds
will generally qualify in part for the corporate dividends-received deduction.
However, the portion depends on the aggregate qualifying dividend income
received by each Fund from domestic (US) sources. Certain holding period and
debt financing restrictions may apply to corporate investors seeking to claim
the deduction. You should consult your tax adviser.
The sale of shares of a Fund is a taxable event and may result in capital
gain or loss. A capital gain or loss may be realized from an ordinary
redemption of shares or an exchange of shares between two mutual funds (or two
series or portfolios of a mutual fund). Any loss incurred on the sale or
exchange of a Fund's shares, held for six months or less, will be treated as a
long-term capital loss to the extent of capital gain dividends received with
respect to such shares.
FRIMCo expects the International, Fixed Income I, Fixed Income II and Fixed
Income III Funds to invest more than 50% of their total assets in foreign
securities. In connection with those investments, FRIMCo intends to file
specified elections with the IRS. These elections will permit shareholders to
either deduct (as an itemized deduction in the case of an individual) such
foreign taxes in computing taxable income, or to use these withheld foreign
taxes as credits against US income taxes. The Fund's taxable shareholders must
include their pro rata portion of the taxes withheld on their gross income for
federal income tax purposes.
Shareholders of the Funds with foreign holdings should also be aware that
foreign exchange losses realized by a Fund are treated as ordinary losses for
federal income tax purposes. This treatment may reduce Fund income which is
available for distribution to shareholders.
The Fixed Income I, Fixed Income II and Fixed Income III Funds may acquire
zero coupon securities which were issued with original issue discount. When
holding these types of securities, the Funds will have to include a portion of
the original issue discount that accrues on the security for the taxable year
in taxable income. This requirement is imposed even if the Funds receive no
payment on the security during the year. Also, because the Funds must
distribute substantially all of their net investment income annually, the
Funds may be required to distribute a dividend that is greater than the total
amount of cash the Funds actually received in a particular year. Those
distributions will be made from a Fund's cash assets or from the proceeds of
sales of portfolio securities (if necessary). The Funds may realize capital
gains or losses from those sales, which could further increase or decrease the
Funds' dividends and distributions paid to shareholders.
Each Fund is required to withhold 31% of all taxable dividends,
distributions, and redemption proceeds payable to any non-corporate
shareholder which does not provide the Fund with the shareholder's certified
taxpayer identification number or required certifications or which is subject
to backup withholding.
Additional information on these and other tax matters relating to the Funds
and their shareholders is included in the section entitled "Taxes" in the SAI.
B-30
<PAGE>
PERFORMANCE INFORMATION
From time to time, the Funds may advertise their performance in terms of
average annual total return, which is computed by finding the average annual
compounded rates of return over a period that would equate the initial amount
invested to the ending redeemable value. The calculation assumes that all
dividends and distributions are reinvested on the reinvestment dates during
the relevant time period, and includes all recurring fees that are charged.
The average annual total returns for Class S Shares of the Funds are as
follows:
<TABLE>
<CAPTION>
5 YEARS 10 YEARS
1 YEAR ENDED ENDED INCEPTION TO
ENDED DEC. 31, DEC. 31, DEC. 31,
DEC. 31, 1997 1997 1997 INCEPTION
1997 (ANNUALIZED) (ANNUALIZED) (ANNUALIZED) DATE
-------- ------------ ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
Equity I............. 32.02% 20.06% 17.76% 16.70% 10/15/81
Equity II............ 28.66% 17.40% 15.98% 14.87% 12/28/81
Equity III........... 33.13% 20.54% 18.35% 17.73% 11/27/81
Equity Q............. 33.07% 21.14% 18.31% 15.40% 05/29/87
International........ 0.58% 11.42% 8.65% 14.92% 01/31/83
Fixed Income I....... 9.42% 7.51% 9.12% 11.35% 10/15/81
Fixed Income II...... 6.02% 5.66% 7.19% 9.28% 10/30/81
Fixed Income III..... 9.64% --% --% 7.65% 01/29/93
</TABLE>
Funds also may from time to time advertise their yields. Yield, which is
based on historical earnings and is not intended to indicate future
performance, is calculated by dividing the net investment income per share
earned during the most recent 30-day (or one month) period by the maximum
offering price per share on the last day of the month. This income is then
annualized the amount of income generated by the investment during that 30-day
(or one month) period is assumed to be generated each month over a 12-month
period and is shown as a percentage of the investment. For purposes of the
yield calculation, interest income is computed based on the yield to maturity
of each debt obligation and dividend income is computed based upon the stated
dividend rate of each security in a Fund's portfolio. The calculation includes
all recurring fees that are charged. The 30-day yields for the year ended
December 1, 1997 for the Class S Shares of the Fixed Income I, Fixed Income II
and Fixed Income III Funds were, respectively, 6.13%, 5.56% and 5.80.
Each Fund may also advertise non-standardized performance information which
is for periods in addition to those that are legally required by the SEC.
HOW NET ASSET VALUE IS DETERMINED
NET ASSET VALUE PER SHARE
The net asset value per share is calculated for shares of each class of each
Fund on each business day on which shares are offered or redemption orders are
tendered. For the Funds, a business day is one on which the NYSE is open for
trading. Net asset value per share is computed for Class S Shares of a Fund by
dividing the current value of the Fund's assets attributable to the Class S
Shares, less liabilities attributable to the Class S Shares, by the number of
Class S Shares of the Fund outstanding, and rounding to the nearest cent. All
Funds determine their net asset value as of the close of the NYSE (currently
4:00 p.m. Eastern time).
VALUATION OF PORTFOLIO SECURITIES
With the exceptions noted below, the Funds value their portfolio securities
at "fair market value." This generally means that equity securities and fixed-
income securities listed and principally traded on any national securities
exchange are valued on the basis of the last sale price, or if there were no
sales, at the closing bid price, on the primary exchange on which the security
is traded. US over-the-counter equity and fixed-income securities and options
are valued on the basis of the closing bid price, and futures contracts are
valued on the basis of last sale price.
B-31
<PAGE>
Because many fixed-income securities do not trade each day, last sale or bid
prices often are not available. As a result, these securities may be valued
using prices provided by a pricing service when the prices are believed to be
reliable--that is, when the prices reflect the fair market value of the
securities.
International equity securities traded on a national securities exchange are
valued on the basis of the last sale price. International securities traded
over-the-counter are valued on the basis of the mean of bid prices. If there
is no last sale or mean bid price, the securities may be valued on the basis
of prices provided by a pricing service when the prices are believed to be
reliable.
Money market instruments maturing within 60 days of the valuation date held
by Funds are valued on the basis of "amortized cost." Under this method, a
portfolio instrument is initially valued at cost, and thereafter a constant
accretion/amortization to maturity of any discount or premium is assumed. The
Funds utilize the amortized cost valuation method in accordance with the Rule.
These money market instruments are valued at "amortized cost" unless the Board
determines that amortized cost does not represent fair value. While amortized
cost provides certainty in valuation, it may result in periods when the value
of an instrument is higher or lower than the price a Fund would receive if it
sold the instrument.
The Funds value securities for which market quotations are not readily
available at "fair value," as determined in good faith and in accordance with
procedures established by the Board.
HOW TO PURCHASE SHARES
Russell Funds are generally available only through a select network of
qualified Financial Intermediaries. If you are not currently working with one
of these Financial Intermediaries, please call Russell Investor Services at
(800) RUSSEL4 (787-7354) for assistance in contacting an investment
professional near you.
Certain information noted below, including trade deadlines and payment
procedures, are included for informational purposes only. Contact your
Financial Intermediary for further details.
PAYING FOR SHARES
Shares of the Funds may be purchased without a sales load on any business
day the Funds are open. Purchase orders are processed at the next net asset
value per share calculated after receipt of an order in proper form (defined
in the "Written Instructions" section), and acceptance of the order. Please
note the following:
Cash, third party checks and checks drawn on credit card accounts will not
be accepted.
All purchases must be made in U.S. dollars.
Checks and other negotiable bank drafts must be drawn on U.S. banks and made
payable to "Frank Russell Investment Company."
The Funds reserve the right to reject any purchase order for any reason
including, but not limited to, receiving a check which does not clear the bank
or a payment which does not arrive in proper form by settlement date. An
overdraft charge may also be applied.
OFFERING DATES AND TIMES
Orders must be received by the Transfer Agent on any day when Fund shares
are offered, prior to the close of the NYSE (currently 4:00 p.m. Eastern
time).
B-32
<PAGE>
ORDER AND PAYMENT PROCEDURES
There are several ways to invest in the Funds. Purchase orders must be
placed through a Financial Intermediary and can be paid for by mail or
electronic funds transfer. Initial purchases require a completed and signed
Application for each new account regardless of the investment method. Specific
payment arrangements should be made with your Financial Intermediary.
BY MAIL
For new accounts, please mail the completed Application to the Financial
Intermediary. Payment for orders may be made by check or other negotiable bank
draft and sent to the Funds' Transfer Agent. Certified checks are not
necessary, but checks are accepted subject to collection at full face value in
U.S. funds. Third party checks will not be accepted. Checks should be made
payable to "Frank Russell Investment Company."
BY FEDERAL FUNDS WIRE
Payment for orders may be made by wiring federal funds to the Funds'
Custodian, State Street Bank and Trust Company. All wires must include the
investor's account registration and account number for identification.
Inability to properly identify a wire transfer may prevent or delay timely
settlement of an investor's purchase.
BY AUTOMATED CLEARING HOUSE ("ACH")
An investor can make initial or subsequent investments through ACH to the
Funds' Custodian, State Street Bank and Trust Company. Funds transferred by
ACH may not be converted into federal funds the same day, depending on the
time the funds are received and the bank wiring the funds. If the funds are
not converted the same day, they will be converted on the day received by the
Funds' Custodian. In that case, the order would be placed on the next business
day.
AUTOMATED INVESTMENT PROGRAM
An investor can make regular investments (minimum $50) in Funds in an
established account on a monthly, quarterly, semiannual or annual basis by
automatic electronic funds transfer from a bank account. A separate transfer
is required for each Fund in which shares are purchased. An investor may
change the amount or stop the automatic purchase at any time. Contact your
Financial Intermediary for further information on this program and an
enrollment form.
THREE DAY SETTLEMENT PROGRAM
The Funds will accept orders from Financial Intermediaries to purchase
shares of the Funds for settlement on the third business day following the
receipt of the order. These orders are paid for by a federal funds wire if the
Financial Intermediary has enrolled in the program and agreed in writing to
indemnify the Funds against any losses resulting from non-receipt of payment.
EXCHANGE PRIVILEGE
BY MAIL OR TELEPHONE
Investors may exchange shares of any Fund they own for shares of any other
Fund on the basis of the current net asset value per share at the time of the
exchange. Shares of a Fund offered by this Prospectus may only be exchanged
for shares of a Fund offered by the Trust through another prospectus under
certain conditions and only in states where the exchange may be legally made.
For additional information, including prospectuses for other Funds, contact
your Financial Intermediary.
B-33
<PAGE>
Exchanges may be made by mail or by telephone if the registration of the two
accounts is identical. Contact your Financial Intermediary for assistance in
exchanging shares. To request an exchange in writing, please follow the
procedures in the "Written Instructions" section before mailing to your
Financial Intermediary.
An exchange is a redemption of shares and is treated as a sale for income
tax purposes. Thus, capital gain or loss may be realized. Please consult your
tax adviser for more information. The Fund shares to be acquired will be
purchased when the proceeds from the redemption become available (up to seven
days from the receipt of the request).
IN-KIND EXCHANGE OF SECURITIES
FRIMCo, in its capacity as investment manager of the Trust, may, at its
discretion, permit you to purchase Fund shares by exchanging securities you
currently own for Fund shares. Any securities exchanged must: meet the
investment objective, policies and limitations of the particular Fund, have a
readily ascertainable market value, be liquid and not be subject to
restrictions on resale, and have market value, plus any cash, equal to at
least $100,000.
Shares purchased in exchange for securities generally may not be redeemed or
exchanged until the transfer has settled. This usually occurs within 15 days
following the purchase by exchange. If you are a taxable investor, you will
generally realize a gain or loss for federal income tax purposes on the
exchange. Investors contemplating an in-kind exchange should consult their tax
adviser.
The basis of the exchange will depend upon the relative net asset value of
the Fund shares purchased and securities exchanged. Securities accepted by a
Fund will be valued in the same manner as the Fund values its assets. Any
interest earned on the securities following their delivery to the Transfer
Agent and prior to the exchange will be considered in valuing the securities.
All interest, dividends, subscription or other rights attached to the
securities becomes the property of the Fund, along with the securities. Please
contact your Financial Intermediary for further information.
HOW TO REDEEM SHARES
Shares of the Funds may be redeemed on any business day the Funds are open
at the next net asset value per share calculated after receipt of an order in
proper form (defined in the "Written Instructions" section). Payment will
ordinarily be made within seven days after receipt of your request in proper
form. Shares recently purchased by check will not be available for liquidation
for 15 days following the purchase to assure payment has been collected.
The Funds reserve the right to reject or delay a redemption on certain legal
grounds or to suspend the right of redemption or postpone the date of payment
if any unlikely emergency conditions, as specified in the 1940 Act or
determined by the SEC, should develop.
REDEMPTION DATES AND TIMES
Redemption requests must be placed by a Financial Intermediary and received
by the Transfer Agent prior to the close of the NYSE (currently 4:00 p.m.
Eastern time). Requests can be made by mail or telephone on any day when Fund
shares are offered, or through the Systematic Withdrawal Program.
BY MAIL OR TELEPHONE
Shareholders may redeem shares by calling or writing to their Financial
Intermediary. Written requests to sell shares are in proper form when the
instructions are signed by all registered owners, with a signature guarantee
if necessary.
B-34
<PAGE>
SYSTEMATIC WITHDRAWAL PROGRAM
The systematic withdrawal program allows you to redeem your shares and
receive regular payments from your account on a monthly, quarterly, semiannual
or annual basis. If you would like to establish a systematic withdrawal
program, please complete the proper section of the account application and
indicate how you would like to receive your payments. You will generally
receive your payment by the end of the month in which a payment is scheduled.
When you redeem your shares under a systematic withdrawal program, it is a
taxable transaction.
You may choose to have the payments mailed to you or directed to your bank
account by an ACH transfer. You may discontinue the systematic withdrawal
program, or change the amount and timing of withdrawal payments by contacting
your Financial Intermediary.
PAYMENT OF REDEMPTION PROCEEDS
BY CHECK
A check for the redemption proceeds will be sent to the shareholder(s) of
record at the address of record within seven days after receipt of a
redemption request in proper form.
BY WIRE
If you have established the electronic redemption option, your redemption
proceeds can be wired to your predesignated bank account on the next bank
business day after receipt of your redemption request by the Transfer Agent.
Wire transfers may be charged a fee to cover the cost of the wire (for
redemptions less than $1,000) and your bank may charge an additional fee to
receive the wire. Wire transfers can be sent to domestic commercial banks
which are members of the Federal Reserve System.
WRITTEN INSTRUCTIONS
PROPER FORM: Written instructions must include:
A description of the request
The name of the Fund(s)
The class of shares, if applicable
The account number(s)
The amount of money or number of shares being purchased, exchanged,
transferred or redeemed
The name(s) on the account(s)
The signature(s) of all registered account owners
For exchanges, the name of the Fund you are exchanging into
Your daytime telephone number
B-35
<PAGE>
SIGNATURE REQUIREMENTS BASED ON ACCOUNT TYPE
<TABLE>
<S> <C>
ACCOUNT TYPE REQUIREMENTS FOR WRITTEN REQUESTS
- --------------------------------------------------------------------------------
Individual, Joint Written instructions must be signed by each
Tenants, Tenants in shareholder, exactly as the names appear in the
Common account registration.
- --------------------------------------------------------------------------------
UGMA or UTMA (custodial Written instructions must be signed by the custodian
accounts for minors) in his/her capacity as it appears in the account
registration.
- --------------------------------------------------------------------------------
Corporation, Association Written instructions must be signed by authorized
person(s), stating his/her capacity as indicated by
the corporate resolution to act on the account.
A copy of the corporate resolution, certified within
the past 90 days, authorizing the signer to act.
- --------------------------------------------------------------------------------
Estate, Trust, Pension, Written instructions must be signed by all trustees.
Profit Sharing Plan If the name of the trustee(s) does not appear in the
account registration, please provide a copy of the
trust document certified within the last 60 days.
- --------------------------------------------------------------------------------
Joint tenancy Written instructions must by signed by the surviving
shareholders whose tenant(s). A certified copy of the death certificate
co-tenants are deceased must accompany the request.
</TABLE>
SIGNATURE GUARANTEE
The Funds reserve the right to require a signature guarantee under certain
circumstances. A signature guarantee verifies the authenticity of your
signature. You should be able to obtain a signature guarantee from a bank,
broker, credit union, savings association, clearing agency, or securities
exchange or association. Call your financial institution to see if it has the
ability to guarantee a signature. A notary public cannot provide a
signature guarantee.
ACCOUNT POLICIES
THIRD PARTY TRANSACTIONS
Investors purchasing Fund shares through a program of services offered by a
Financial Intermediary may be required to pay additional fees. Investors
should contact their Financial Intermediary for information concerning what
additional fees, if any, may be charged.
REDEMPTION IN-KIND
A Fund may pay for any portion of the redemption amount in excess of
$250,000 by a distribution in-kind of securities from the Fund's portfolio,
instead of in cash. Investors will incur brokerage charges on the sale of
these portfolio securities.
ADDITIONAL INFORMATION
DISTRIBUTOR, CUSTODIAN, INDEPENDENT ACCOUNTANTS, AND REPORTS
Russell Fund Distributors, Inc., a wholly owned subsidiary of FRIMCo, is the
principal distributor for Trust shares. The Distributor receives no
compensation from the Trust for its services with respect to Class S Shares.
State Street Bank and Trust Company ("Custodian"), Boston, Massachusetts,
holds all portfolio securities and cash assets of the Funds, and provides
portfolio recordkeeping services. The Custodian may deposit
B-36
<PAGE>
securities in securities depositories or use subcustodians. The Custodian has
no responsibility for the supervision and management of the Funds.
Coopers & Lybrand L.L.P. ("Coopers"), Boston, Massachusetts, are the Funds'
independent accountants. Shareholders will receive unaudited semiannual
financial statements and annual financial statements audited by Coopers.
Shareholders may also receive additional reports concerning the Funds, or
their accounts, from FRIMCo.
YEAR 2000
The services provided to the Trust and the shareholders by FRIMCo, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of their outside service
providers. Many computer software systems in use today cannot distinguish the
year 2000 from the year 1900 because of the way dates are encoded and
calculated. Such event could have a negative impact of handling securities
trades, payments of interest and dividends, pricing and account services.
Although, at this time, there can be no assurance that there will be no
adverse impact on the Trust, FRIMCo, the Distributor, the Transfer Agent and
the Custodian have advised the Trust that they have been actively working on
necessary changes to their computer systems to prepare for the year 2000 and
expect that their systems, and those of their outside service providers, will
be adapted in time for that event. The obligation to make such adaptations, if
any, would be the responsibility of the service provider that maintains the
system. Therefore, the Trust does not expect to incur any material expense in
that regard.
ORGANIZATION, CAPITALIZATION, AND VOTING
The Trust is organized and operates as a Massachusetts business trust.
Russell has the right to grant (and withdraw) the nonexclusive use of the name
"Frank Russell" or any variation.
The Trust issues shares of beneficial interest which can be divided into an
unlimited number of funds. Each Fund is a separate trust under Massachusetts
law. Each Fund's shares may be offered in multiple classes. Shares of each
class of a Fund represent proportionate interests in the assets of that Fund
and have the same voting and other rights and preferences as the shares of
other classes of the Fund. Shares of each class of a Fund are entitled to the
dividends and distributions earned on the assets belonging to the Fund that
the Board declares. Each share of a class of a Fund has one vote in Trustee
elections and other matters submitted for shareholder vote. There are no
cumulative voting rights. As a Massachusetts business trust, the Trust is not
required to hold annual shareholder meetings. Special meetings may be called
by the Trustees at their discretion, but must be called by the Trustees upon
the written request of shareholders owning at least 10% of the Trust's
outstanding shares. On any matter which affects only a particular Fund or
class, only shares of that Fund or class are entitled to vote.
The Trustees hold office for the life of the Trust. A Trustee may resign or
retire, and a Trustee may be removed by the Trustees or by shareholders at a
special meeting.
At March 31, 1998, the following shareholders may be deemed by the 1940 Act
to "control" the Funds listed after their names because they own more than 25%
of the voting shares of the Funds: First Trust, N.A.--Equity Q, International
and Fixed Income III Funds.
MONEY MANAGER PROFILES
The money managers identified below have no other affiliations with the
Funds, FRIMCo or with Russell. Each money manager has been in business for at
least three years and is principally engaged in managing institutional
investment accounts. These money managers may also serve as managers or
advisers to other Funds in the Trust, or to other clients of Russell,
including its wholly owned subsidiary, Frank Russell Trust Company.
B-37
<PAGE>
EQUITY I FUND
Alliance Capital Management L.P., 601 2nd Ave. South, Suite 5000,
Minneapolis, MN 55402-4322, a limited partnership whose (i) general partner is
a wholly owned subsidiary of The Equitable Companies Incorporated ("The
Equitable") and (ii) majority unit holder is ACM, Inc., a wholly owned
subsidiary of The Equitable. As of March 1, 1995, 60.5% of The Equitable was
owned by Axa, a French insurance holding company.
Barclays Global Fund Advisors, 45 Fremont Street, 17th Floor, San Francisco,
CA 94105, is an indirect, wholly-owned subsidiary of Barclays Bank PLC.
Equinox Capital Management, Inc., 590 Madison Avenue, 41st Floor, New York,
NY 10022. Equinox is a registered investment adviser with majority ownership
held by Ron Ulrich.
INVESCO Capital Management, Inc., 1315 Peachtree Street N.E., Suite 500,
Atlanta, GA 30309, is a corporation whose indirect parent is AMVESCO, PLC, a
London-based financial services holding company.
Lincoln Capital Management Company, 200 South Wacker Drive, Suite 2100,
Chicago, IL 60606. Lincoln Capital Management, Inc. is a division of Lincoln
Capital Management Company, and is a registered investment adviser with
majority ownership held by John Croghan, Parker Hall, Ken Meyer, Tim Ubben and
Ray Zemon.
Morgan Stanley Asset Management, Inc., 1221 Avenue of the Americas, New
York, NY 10020, is a wholly owned subsidiary of Morgan Stanley Dean Witter &
Co., a publicly held corporation.
Peachtree Asset Management, One Peachtree Center, Suite 4500, 303 Peachtree
Street N.E., Atlanta, GA 30308 Peachtree is a unit of the Smith Barney Asset
Management division of Smith Barney Mutual Funds Management Inc., which is a
wholly owned subsidiary of Travelers Group Inc.
Schneider Capital Management, 460 E. Swedesford Road, Suite 1080, Wayne, PA
19087, is an SEC registered investment adviser owned by Arnold Schneider. In
response to an action brought by partners of Wellington Management Company LLP
("Wellington") on December 13, 1996 to enforce a non-compete provision of its
partnership agreement, a judge of the Middlesex County Superior Court in the
Commonwealth of Massachusetts issued an order on February 17, 1998 enjoining
Mr. Schneider from providing investment advisory services to certain former
clients of Wellington. Though not a party to that litigation, the Trust would
have been affected by that order. On April 7, 1998 the Trust joined a suit
brought by its investment manager and certain other persons in the United
States District Court for the Eastern District of Pennsylvania. On April 13,
1998, that Court issued a preliminary injunction restraining Wellington from
enforcing the non-compete provision in its partnership agreement against Mr.
Schneider.
Suffolk Capital Management, Inc., 250 West 57th Street, Suite 420, New York,
NY 10107. Suffolk Capital Management, Inc. is a registered investment adviser
and a wholly owned subsidiary of United Asset Management Company, a publicly
traded corporation.
Trinity Investment Management Corporation, 75 Park Plaza, Boston, MA 02116,
is a corporation with seven shareholders, with Stanford M. Calderwood holding
majority ownership.
EQUITY II FUND
Delphi Management, Inc., 50 Rowes Wharf, Suite 440, Boston, MA 02110, is
100% owned by Scott Black.
Fiduciary International, Inc., 2 World Trade Center, New York, NY 10048, an
investment adviser registered with the SEC, is an indirect wholly-owned
subsidiary of Fiduciary Trust Company International, a New York state
chartered bank.
B-38
<PAGE>
GlobeFlex Capital, L.P., 4365 Executive Drive, Suite 720, San Diego, CA
92121, is a California limited partnership and an SEC registered investment
adviser. Its general partners are Robert J. Anslow, Jr. and Marina L.
Marrelli.
Jacobs Levy Equity Management, Inc., 280 Corporate Center, 3 ADP Boulevard,
Roseland, NJ 07068, is 100% owned by Bruce Jacobs and Kenneth Levy.
Sirach Capital Management, Inc., One Union Square, Suite 3323, 600 Union
Street, Seattle, WA 98101, is a wholly owned subsidiary of United Asset
Management Company, a publicly traded corporation.
Wellington Management Company LLP, 75 State Street, Boston, MA 02109, is a
private Massachusetts limited liability partnership, of which the following
persons are managing partners: Robert W. Doran, Duncan M. McFarland and John
R. Ryan.
EQUITY III FUND
Brandywine Asset Management, Inc., Three Christina Centre, Suite 1200, 201
N. Walnut Street, Wilmington, DE 19801, is a wholly owned subsidiary of Legg
Mason, Inc.
Equinox Capital Management, Inc., See: Equity I Fund.
Trinity Investment Management Corporation, See: Equity I Fund.
EQUITY Q FUND
Barclays Global Fund Advisors, See: Equity I Fund.
Franklin Portfolio Associates LLC, Two International Place, 22nd Floor,
Boston, MA 02110-4104, is a Massachusetts business trust owned by Mellon
Financial Services Corporation, a holding company of Mellon Bank Corporation.
J.P. Morgan Investment Management, Inc., 522 Fifth Ave., 14th Floor, New
York, NY 10036, is a wholly owned subsidiary of J.P. Morgan & Co., Inc., a
publicly held bank holding company.
INTERNATIONAL FUND
J.P. Morgan Investment Management, Inc., See: Equity Q Fund.
Marathon Asset Management Limited, Orion House, 5 Upper St. Martin's Lane,
London, England WC2H 9EA, is a corporation 33.3% owned by each of the
following: Jeremy Hosking, William Arah and Neil Ostrer.
Mastholm Asset Management, LLC, 10500 N.E. 8th Street, Suite 660, Bellevue,
WA 98004, is a Washington limited liability corporation that is controlled by
the following founding members: Thomas M. Garr, Robert L. Gernstetter, Joseph
P. Jordan, Arthur M. Tyson and Theodore J. Tyson.
Oechsle International Advisors, One International Place, 23rd Floor, Boston,
MA 02110, is a limited partnership which is 100% controlled by its general
partners. The general partners are: S. Dewey Keesler, Stephen P. Langer,
Walter Oechsle, L. Sean Roche, Steven H. Schaefer and Tetsuo Shiozumi.
Rowe Price-Fleming International, Inc., 100 East Pratt Street, 9th Floor,
Baltimore, MD 21202, and 4th Floor, 25 Copthall Ave., London, England EC2R
7DR, which is a joint venture of T. Rowe Price Associates,
B-39
<PAGE>
Inc., and The Fleming Group, each of which owns 50% of the company. Ownership
of The Fleming Group holding is split equally between Copthall Overseas
Limited, a subsidiary of Robert Fleming Holdings, and Jardine Fleming
International Holdings Limited, a subsidiary of Jardine Fleming Holdings.
Robert Fleming Holdings is a London-based UK holding company with the majority
of the shares distributed: 51% to public companies and 38% to the Fleming
family. Jardine Fleming is a Hong Kong-based holding company which is owned
50% by Robert Fleming Holdings and 50% by Jardine Matheson & Co., the Hong
Kong trading company, a wholly owned subsidiary of Jardine Matheson Holdings
Limited. The stock of T. Rowe Price Associates, Inc. is publicly traded with a
substantial percentage of such stock owned by the company's active management.
Sanford C. Bernstein & Co., Inc., 767 Fifth Avenue, New York, NY 10153, is a
registered investment adviser. Founded in 1967, Bernstein is controlled by its
Board of Directors, which consists of the following individuals: Andrew S.
Adelson, Zalman C. Bernstein, Kevin R. Rine, Charles C. Cahn, Jr., Marilyn
Goldstein Fedak, Michael L. Goldstein, Roger Hertog, Lewis A. Sanders and
Francis H. Trainer, Jr.
The Boston Company Asset Management, Inc., One Boston Place, 14th Floor
Boston, MA 02108-4402, is 100% owned by Mellon Bank Corporation, a publicly
held corporation.
FIXED INCOME I FUND
Lincoln Capital Management Company, See: Equity I Fund.
Pacific Investment Management Company, 840 Newport Center Drive, Suite 360,
Newport Beach, CA 92660, is a subsidiary partnership of PIMCO Advisors L.P.
("Partnership"). PIMCO Partners, G.P. is the sole general partner of the
Partnership. Pacific Financial Asset Management Corporation indirectly holds a
majority interest in PIMCO Partners, G.P., with the remainder held indirectly
by a group comprised of PIMCO managing directors.
Standish, Ayer & Wood, Inc., One Financial Center, Boston, MA 02111, is a
company whose ownership is divided among seventeen directors, with no director
having more than a 25% ownership interest.
FIXED INCOME II FUND
BlackRock Financial Management, 345 Park Ave., 31st Floor, New York, NY
10154, is a wholly-owned indirect subsidiary of PNC Bank.
Standish, Ayer & Wood, Inc., See: Fixed Income I Fund.
STW Fixed Income Management Ltd., Trinity Hall, 43 Cedar Avenue, Hamilton HM
KX, Bermuda, is a Bermuda exempted company. William H. Williams III is the
sole shareholder.
FIXED INCOME III FUND
BEA Associates, One Citicorp Center, 153 East 53rd Street, 58th Floor, New
York, NY 10022, is a general partnership of Credit Suisse Capital Corporation
("CS Capital") and Basic Appraisals, Inc. ("Basic"). CS Capital is an 80%
partner, and is a wholly-owned subsidiary of Credit Suisse Investment
Corporation, which is in turn a wholly-owned subsidiary of Credit Suisse, a
Swiss bank, which is in turn a subsidiary of CS Holding, a Swiss corporation.
No one person or entity possesses a controlling interest in Basic, the 20%
partner. BEA Associates is a registered investment adviser.
Pacific Investment Management Company, See: Fixed Income I Fund.
B-40
<PAGE>
Standish, Ayer & Wood, Inc., See: Fixed Income I Fund.
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION AND REPRESENTATIONS MUST
NOT BE RELIED UPON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
STATE TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE FUNDS OR THE MONEY MANAGERS SINCE THE DATE HEREOF; HOWEVER, IF
ANY MATERIAL CHANGE OCCURS WHILE THIS PROSPECTUS IS REQUIRED BY LAW TO BE
DELIVERED, THIS PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED ACCORDINGLY.
B-41
<PAGE>
GLOSSARY
Agreements -- Asset Management Services Agreements, which are between FRIMCo
and institutional investors and Financial Intermediaries.
Bank instruments -- Include certificates of deposit, bankers' acceptances
and time deposits, and may include European certificates of deposit ("ECDs"),
European time deposits ("ETDs") and Yankee certificates of deposit ("Yankee
CDs").
Board -- The Board of Trustees of the Trust.
Cash reserves -- The Funds may invest their cash reserves (i.e., funds
awaiting investment) in money market instruments and in debt securities of
comparable quality to each Fund's permitted investments. As an alternative to
a Fund directly investing in money market instruments, the Funds and their
money managers may elect to invest the Funds' cash reserves in the Trust's
Money Market Fund. To prevent duplication of fees, FRIMCo waives its
management fee on that portion of a Fund's assets invested in the Trust's
Money Market Fund.
Code -- Internal Revenue Code of 1986, as amended.
Convertible security -- This is a fixed income security (a bond or preferred
stock) that may be converted at a stated price within a specified period of
time into a certain quantity of the common stock of the same or a different
issuer. Convertible securities are senior to common stock in a corporation's
capital structure but are usually subordinated to similar non-convertible
securities. The price of a convertible security is influenced by the market
value of the underlying common stock.
Covered call option -- A call option is "covered" if the Fund owns the
underlying securities, has the right to acquire the securities without
additional consideration, has collateral assets sufficient to meet its
obligations under the option or owns an offsetting call option.
Covered put option -- A put option is "covered" if the Fund has collateral
assets with a value not less than the exercise price of the option or holds a
put option on the underlying security.
Custodian -- State Street Bank and Trust Company, the Trust's custodian and
portfolio accountant.
Depository receipts -- These include American Depository Receipts ("ADRs"),
European Depository Receipts ("EDRs"), Global Depository Receipts ("GDRs") and
other similar securities convertible into securities of foreign issuers. ADRs
are receipts typically issued by a US bank or trust company evidencing
ownership of the underlying securities. Generally, ADRs in registered form are
designed for use in US securities markets.
Derivatives -- These include forward currency exchange contracts, stock
options, currency options, stock and stock index options, futures contracts,
swaps and options on futures contracts on US government and foreign government
securities and currencies.
Distributor -- Russell Fund Distributors, Inc., the organization that sells
the shares of the Fund under a contract with the Trust.
Eligible Investors -- Institutional investors and Financial Intermediaries
that invest in the Funds for their own accounts or in a fiduciary or agency
capacity, and that have entered into an Agreement with FRIMCo, and
institutions or individuals who have acquired Fund shares through institutions
or Financial Intermediaries.
Equity derivative securities -- These include, among other instruments,
options on equity securities, warrants and futures contracts on equity
securities.
B-42
<PAGE>
Financial Intermediary -- Bank trust departments, registered investment
advisers, broker-dealers and other Eligible Investors that have entered into
Service Agreements with FRIMCo.
FNMA -- Federal National Mortgage Association.
Forward Commitments -- Each Fund may agree to purchase securities for a
fixed price at a future date beyond customary settlement time (a "forward
commitment" or "when-issued" transaction), so long as the transactions are
consistent with the Fund's ability to manage its portfolio and meet redemption
requests. When effecting these transactions, liquid assets of a Fund of a
dollar amount sufficient to make payment for the portfolio securities to be
purchased are segregated on the Fund's records at the trade date and
maintained until the transaction is settled.
Forward currency contracts -- This is a contract individually negotiated and
privately traded by currency traders and their customers and creates an
obligation to purchase or sell a specific currency for an agreed-upon price at
a future date. International, Fixed Income I, Fixed Income II, and Fixed
Income III Funds generally do not enter into forward contracts with terms
greater than one year, and typically enters into forward contracts only under
two circumstances. First, if the Funds enter into a contract for the purchase
or sale of a security denominated in a foreign currency, they may desire to
"lock in" the US dollar price of the security by entering into a forward
contract to buy the amount of a foreign currency needed to settle the
transaction. Second, if a Fund's money managers believe that the currency of a
particular foreign country will substantially rise or fall against the US
dollar, a Fund may enter into a forward contract to buy or sell the currency
approximating the value of some or all of the Fund's portfolio securities
denominated in the currency. International, Fixed Income I, Fixed Income II
and Fixed Income III Funds will not enter into a forward contract if, as a
result, they would have more than one-third of their assets committed to such
contracts (unless they own the currency that they are obligated to deliver or
have caused the Custodian to segregate segregable assets having a value
sufficient to cover their obligations). Although forward contracts are used
primarily to protect International, Fixed Income I, Fixed Income II, and Fixed
Income III Funds from adverse currency movements, they involve the risk that
currency movements will not be accurately predicted.
FRIMCo -- Frank Russell Investment Management Company, the Trust's
administrator, manager and transfer and dividend paying agent.
Funds -- The 28 investment series of the Trust. Each Fund is considered a
separate registered investment company (or RIC) for federal income tax
purposes, and each Fund has its own investment objective, policies and
restrictions. Eight Funds are described in and offered by this Prospectus.
Futures and options on futures -- An interest rate futures contract is an
agreement to purchase or sell debt securities, usually US government
securities, at a specified date and price. For example, a Fund may sell
interest rate futures contracts (i.e., enter into a futures contract to sell
the underlying debt security) in an attempt to hedge against an anticipated
increase in interest rates and a corresponding decline in debt securities it
owns. A Fund will have collateral assets equal to the purchase price of the
portfolio securities represented by the underlying interest rate futures
contracts it has an obligation to purchase.
GNMA -- Government National Mortgage Association.
Illiquid securities -- The Funds will not purchase or otherwise acquire any
security if, as a result, more than 15% of a Fund's net assets (taken at
current value) would be invested in securities, including repurchase
agreements maturing in more than seven days, that are illiquid because of the
absence of a readily available market or because of legal or contractual
resale restrictions. No Fund will invest more than 10% of its respective net
assets (taken at current value) in securities of issuers that may not be sold
to the public without registration under the 1933 Act. These policies do not
include (1) commercial paper issued under Section 4(2) of the 1933 Act, or (2)
restricted securities eligible for resale to qualified institutional
purchasers pursuant to Rule 144A
B-43
<PAGE>
under the 1933 Act that are determined to be liquid by the money managers in
accordance with Board-approved guidelines.
Investment grade -- Investment grade debt securities are those rated within
the four highest grades by S&P (at least BBB) or Moody's (at least Baa), or
unrated debt securities deemed to be of comparable quality by a money manager
using Board-approved guidelines.
IRS -- Internal Revenue Service.
Lending portfolio securities -- Each Fund may lend portfolio securities with
a value of up to 33 1/3% of each Fund's total assets. These loans may be
terminated at any time. A Fund will receive either cash (and agree to pay a
"rebate" interest rate), US government or US government agency obligations as
collateral in an amount equal to at least 102% (for loans of US securities) or
105% (for non-US securities) of the current market value of the loaned
securities. The collateral is daily "marked-to-market," and the borrower will
furnish additional collateral in the event that the value of the collateral
drops below the respective percentages set forth above. If the borrower of the
securities fails financially, there is a risk of delay in recovery of the
securities or loss of rights in the collateral. Consequently, loans are made
only to borrowers which are deemed to be of good financial standing.
Liquidity portfolio -- FRIMCo will manage or will select a money manager to
exercise investment discretion for approximately 5%-15% of Equity I, Equity
II, Equity III, Equity Q and International Funds' assets assigned to a
liquidity portfolio. The liquidity portfolio will be used to temporarily
create an equity exposure for cash balances until those balances are invested
in securities or used for Fund transactions.
Money Market Funds -- Money Market, US Government Money Market and Tax-Free
Money Market Funds, each a Portfolio of the Trust. Each Money Market Fund
seeks to maintain a stable net asset value of $1 per share.
Moody's -- Moody's Investors Service, Inc., an NRSRO.
Municipal obligations -- Debt obligations issued by states, territories and
possessions of the United States and the District of Columbia, and their
political subdivisions, agencies and instrumentalities, or multi-state
agencies or authorities the interest from which is exempt from federal income
tax, including the alternative minimum tax, in the opinion of bond counsel to
the issuer. Municipal obligations include debt obligations issued to obtain
funds for various public purposes as well as certain industrial development
bonds issued by or on behalf of public authorities. Municipal obligations may
include project, tax anticipation, revenue anticipation, bond anticipation,
and construction loan notes; tax-exempt commercial paper; fixed and variable
rate notes; obligations whose interest and principal are guaranteed or insured
by the US government or fully collateralized by US government obligations;
industrial development bonds; and variable rate obligations.
NASD -- National Association of Securities Dealers, Inc.
Net asset value (NAV) -- The value of a mutual fund is determined by
deducting the Fund's liabilities from the total assets of the portfolio. The
net asset value per share is determined by dividing the net asset value of the
Fund by the number of its shares that are outstanding.
NRSRO -- A nationally recognized statistical rating organization, such as
S&P or Moody's.
NYSE -- New York Stock Exchange.
Options on securities, securities indexes and currencies -- A Fund may
purchase call options on securities that it intends to purchase (or on
currencies in which those securities are denominated) in order to limit the
risk of a substantial increase in the market price of such security (or an
adverse movement in the applicable currency). A Fund may purchase put options
on particular securities (or on currencies in which those securities are
B-44
<PAGE>
denominated) in order to protect against a decline in the market value of the
underlying security below the exercise price less the premium paid for the
option (or an adverse movement in the applicable currency relative to the US
dollar). Prior to expiration, most options are expected to be sold in a
closing sale transaction. Profit or loss from the sale depends upon whether
the amount received is more or less than the premium paid plus transaction
costs. A Fund may purchase put and call options on stock indexes in order to
hedge against risks of stock market or industry-wide stock price fluctuations.
PFIC -- A passive foreign investment company. International Fund may
purchase interests in an issuer that is considered a PFIC under the Code.
Prime rate -- The interest rate charged by leading US banks on loans to
their most creditworthy customers.
Repurchase agreements -- Each Fund may enter into repurchase agreements with
a bank or broker-dealer that agrees to repurchase the securities at the Fund's
cost plus interest within a specified time (normally the next business day).
If the party agreeing to repurchase should default and if the value of the
securities held by the Fund (102% at the time of agreement) should fall below
the repurchase price, the Fund could incur a loss. Subject to the overall
limitations described in "Illiquid Securities" in this Glossary, a Fund will
not invest more than 15% of its net assets (taken at current market value) in
repurchase agreements maturing in more than seven days.
Reverse repurchase agreements -- Each Fund may enter into reverse repurchase
agreements to meet redemption requests when a money manager determines that
selling portfolio securities would be inconvenient or disadvantageous. A
reverse repurchase agreement is a transaction where a Fund transfers
possession of a portfolio security to a bank or broker-dealer in return for a
percentage of the portfolio security's market value. The Fund retains record
ownership of the transferred security, including the right to receive interest
and principal payments. At an agreed upon future date, the Fund repurchases
the security by paying an agreed upon purchase price plus interest. Liquid
assets of the Fund equal in value to the repurchase price, including any
accrued interest, are segregated on the Fund's records while a reverse
repurchase agreement is in effect.
The Rule -- Rule 2a-7 under the 1940 Act, which governs the operations of
the Money Market Funds.
Russell 1000(R) Index -- The Russell 1000(R) Index consists of the 1,000
largest US companies by capitalization (i.e., market price per share times the
number of shares outstanding). The smallest company in the Index at the time
of selection has a capitalization of approximately $1 billion. The Index does
not include cross-corporate holdings in a company's capitalization. For
example, when IBM owned approximately 20% of Intel, only 80% of the total
shares outstanding of Intel were used to determine Intel's capitalization.
Also not included
in the Index are closed-end investment companies, companies that do not file a
Form 10-K report with the SEC, foreign securities, and American Depository
Receipts. The Index's composition is changed annually to reflect changes in
market capitalization and share balances outstanding. The Russell 1000(R)
Index is used as the basis for Equity Q Fund's performance because FRIMCo
believes it represents the universe of stocks in which most active money
managers invest and is representative of the performance of publicly traded
common stocks most institutional investors purchase.
Russell -- Frank Russell Company, consultant to the Trust and to the Funds.
S&P -- Standard & Poor's Ratings Group, an NRSRO.
S&P 500 -- Standard & Poor's 500 Composite Price Index.
SAI -- The Trust's Statement of Additional Information, dated as noted on
the first page of this Prospectus.
SEC -- US Securities and Exchange Commission.
Shares -- The Class S Shares in the Funds described in this prospectus. Each
Class S Share of a Fund represents a share of beneficial interest in the Fund.
B-45
<PAGE>
Transfer Agent -- FRIMCo, in its capacity as the Trust's transfer and
dividend paying agent.
Trust -- Frank Russell Investment Company, an open-end management investment
company which is registered with the SEC.
US -- United States.
US government securities -- These include US Treasury bills, notes, bonds
and other obligations issued or guaranteed by the US government, its agencies
or instrumentalities.
Variable rate obligations -- Municipal obligations with a demand feature
that typically may be exercised within 30 days. The rate of return on variable
rate obligations is readjusted periodically according to a market rate, such
as the Prime rate. Also called floating rate obligations.
Warrants -- Typically, a warrant is a long-term option that permits the
holder to buy a specified number of shares of the issuer's underlying common
stock at a specified exercise price by a particular expiration date. A warrant
not exercised or disposed of by its expiration date expires worthless.
1940 Act -- The Investment Company Act of 1940, as amended. The 1940 Act
governs the operations of the Trust and the Funds.
1933 Act -- The Securities Act of 1933, as amended.
B-46
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
909 A STREET
TACOMA, WASHINGTON 98402
TELEPHONE (800) 972-0700
IN WASHINGTON (253) 627-7001
MONEY MANAGERS
EQUITY I FUND FIXED INCOME II FUND
Alliance Capital Management L.P. BlackRock Financial Management
Barclays Global Fund Advisors Standish, Ayer & Wood, Inc.
Equinox Capital Management, Inc. STW Fixed Income Management Ltd.
INVESCO Capital Management, Inc.
Lincoln Capital Management Company FIXED INCOME III FUND
Morgan Stanley Asset Management, Inc. BEA Associates
Peachtree Asset Management Pacific Investment Management
Schneider Capital Management Company
Suffolk Capital Management, Inc. Standish, Ayer & Wood, Inc.
Trinity Investment Management Corporation
MANAGER, TRANSFER AND DIVIDEND
EQUITY II FUND PAYING AGENT
Delphi Management, Inc. Frank Russell Investment Management
Fiduciary International, Inc. Company
GlobeFlex Capital, L.P. 909 A Street
Jacobs Levy Equity Management, Inc. Tacoma, Washington 98402
Sirach Capital Management, Inc.
Wellington Management Company LLP
CONSULTANT
EQUITY III FUND Frank Russell Company
Brandywine Asset Management, Inc. 909 A Street
Equinox Capital Management, Inc. Tacoma, Washington 98402
Trinity Investment Management Corporation
DISTRIBUTOR
EQUITY Q FUND Russell Fund Distributors, Inc.
Barclays Global Fund Advisors 909 A Street
Franklin Portfolio Associates LLC Tacoma, Washington 98402
J.P. Morgan Investment Management, Inc.
INDEPENDENT ACCOUNTANTS
INTERNATIONAL FUND Coopers & Lybrand L.L.P.
J.P. Morgan Investment Management, Inc. One Post Office Square
Marathon Asset Management Limited Boston, MA 02109
Mastholm Asset Management, LLC
Oechsle International Advisors LEGAL COUNSEL
Rowe Price-Fleming International, Inc. Stradley, Ronon, Stevens & Young,
Sanford C. Bernstein & Co., Inc. LLP
The Boston Company Asset Management, Inc. 2600 One Commerce Square
Philadelphia, PA 19103-7098
FIXED INCOME I FUND
Lincoln Capital Management Company OFFICE OF SHAREHOLDER INQUIRIES
Pacific Investment Management Company 909 A Street
Standish, Ayer & Wood, Inc. Tacoma, Washington 98402
(800) 787-7354
(800) RUSSEL4
In Washington (253) 627-7001
B-47
<PAGE>
EXHIBIT C(1)
For your convenience, this annual report has been condensed to
include only the Fixed Income II Fund. Please disregard any
reference to other Frank Russell Investment Company Funds not
relevant to the proposed plan of re-organization.
FRANK RUSSELL INVESTMENT COMPANY
FIXED INCOME II FUND
ANNUAL REPORT
DECEMBER 31, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Portfolio Management Discussion.................................... C(1)-2
Financial Statements............................................... C(1)-4
Notes to Financial Statements...................................... C(1)-13
Report of Independent Accountants.................................. C(1)-17
Manager, Money Managers and Service Providers...................... C(1)-18
</TABLE>
FRANK RUSSELL INVESTMENT COMPANY--FIXED INCOME II FUND
Copyright (C) Frank Russell Company 1998. All rights reserved. This material
is proprietary and may not be reproduced, transferred, or distributed in any
form without prior written permission from Frank Russell Company. It is
delivered on an "as is" basis without warranty. The Russell logo is a
trademark and service mark of Frank Russell Company. Frank Russell Company and
Standard & Poor's Corporation are the owners of the trademarks, service marks,
and copyrights related to their respective indexes. This material must be
accompanied or preceded by a current Frank Russell Investment Company
Prospectus containing complete information concerning the investment
objectives and operations of the Company, charges, and expenses. The
Prospectus should be read carefully before an investment is made. The
performance as of April 1, 1995 is reported gross of investment advisory fees.
For periods thereafter, performance and yields are reported net of investment
advisory fees but gross of investment services fees, descriptions of which can
be obtained from the investment advisor. Investment services fees and other
account expenses will reduce performance (e.g., an investment services fee of
0.2% of average managed assets will reduce a 10.0% annual return to 9.8%). The
performance quoted represents past performance and the investment return and
principal value of an investment will fluctuate so that shares, when redeemed,
may be worth more or less than their original cost. Investments in securities
of non-US issuers and foreign currencies involve investment risks different
than those of US issuers; the Prospectus contains further information and
details regarding these risks. Russell Fund Distributors, Inc., is the
distributor of Frank Russell Investment Company.
C(1)-1
<PAGE>
FIXED INCOME II FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1997 (Unaudited)
OBJECTIVE: To preserve capital and generate current income consistent with the
preservation of capital.
INVESTS IN: Fixed-income securities with low-volatility characteristics.
STRATEGY: The Fund uses a multi-style, multi-manager strategy intended to
achieve higher returns with moderate risk relative to other short-term bond
investments. The Fund employed the investment management services of three
managers using three approaches to investment in short-term fixed income
securities.
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Volatility Lipper(C)
Dates Fixed II ML 1-2.99** Short
- ----- ----------- ----------- ---------
<S> <C> <C> <C>
* $10,000 $10,000 $10,000
1988 $10,820 $10,622 $10,687
1989 $12,009 $11,777 $11,768
1990 $13,175 $12,922 $12,719
1991 $14,796 $14,431 $14,231
1992 $15,202 $15,341 $15,042
1993 $16,264 $16,171 $15,968
1994 $16,397 $16,263 $15,910
1995 $18,028 $18,052 $17,620
1996 $18,886 $18,950 $18,405
1997 $20,023 $20,212 $19,529
-------- -------- --------
Total $165,600 $164,741 $161,879
======== ======== ========
</TABLE>
Fixed Income II Fund
<TABLE>
<CAPTION>
PERIODS ENDED GROWTH OF TOTAL
12/31/97 $10,000 RETURN
------------- --------- ------
<S> <C> <C>
1 Year $10,602 6.02%
5 Years $13,171 5.66%(S)
10 Years $20,023 7.19%(S)
</TABLE>
Merrill Lynch 1-2.99 Years Treasury Index
<TABLE>
<CAPTION>
PERIODS ENDED GROWTH OF TOTAL
12/31/97 $10,000 RETURN
------------- --------- ------
<S> <C> <C>
1 Year $10,666 6.66%
5 Years $13,175 5.67%(S)
10 Years $20,212 7.29%(S)
</TABLE>
Lipper(C) Short Investment Grade Debt Funds Benchmark
<TABLE>
<CAPTION>
PERIODS ENDED GROWTH OF TOTAL
12/31/97 $10,000 RETURN
------------- --------- ------
<S> <C> <C>
1 Year $10,611 6.11%
5 Years $12,983 5.36%(S)
10 Years $19,529 6.92%(S)
</TABLE>
* Assumes initial investment on January 1, 1988
** Merrill Lynch 1-2.99 Years Treasury Index is an index composed of
approximately 160 issues in the form of publicly placed, coupon-bearing US
Treasury debt. Issues must carry a term to maturity of at least one year,
and par amounts outstanding must be no less than $10 million at the start
and at the close of the performance measurement periods.
++ Prior to April 1, 1995, fund performance results are reported gross of
investment management fees. For the period following April 1, 1995, fund
performance results are reported net of investment management fees but gross
of any investment services fees. Information concerning these fees can be
obtained from the fund's managers upon request.
+++ Lipper(C)+Short (1-5 Yr.) Investment Grade Debt Funds Benchmark is the
average total return for the universe of funds within the Short Investment
Grade Debt Funds investment objective. The total return for the funds
reflects adjustments for income dividends and capital gains distributions
reinvested as of the ex-dividend dates. This type of fund which invests at
least 65% of assets in investment grade debt issues (rated in top four
grades) with average maturities of five years or less.
(S) Annualized.
C(1)-2
<PAGE>
FIXED INCOME II FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1997 (Unaudited)
PERFORMANCE REVIEW
For the year ended December 31, 1997, the Fixed Income II Fund reflected a
total return of 6.0%, as compared to the Merrill Lynch 1-2.99 Years Treasury
Index which rose 6.7%. The Fund modestly underperformed the Index as the
managers in the Fund maintained conservative duration positions throughout
most of the year due to concerns over Fed intervention. Weak returns from
corporate bonds late in the year, as the market's flight to defensive sectors
favored treasuries, also contributed to the Fund's modest underperformance.
PORTFOLIO HIGHLIGHTS
Indications of the US economy's ability to sustain strong growth without
inflation benefited bonds increasingly throughout 1997. However, two factors
diminished the attractiveness of short-term bonds for much of the year. The
first proved to be the Federal Reserve Board which threatened to increase
rates during much of the year, but acted only once, late in the first quarter,
when it increased the Fed Funds rate 1/4%. The second threat was directly
attributable to the problems facing Asian economies during the last four
months of the year. As major holders of short-term US treasuries, it was
feared that Korean and Japanese investors would be forced to redeem their
investments to support weakened businesses in their own countries. Although
some withdrawals appeared to occur late in the year, fears of massive selling
of T-bills were not realized.
The Fund was impacted by these factors in several ways. The Fed's inflammatory
comments about the economy's strength and inflation risk kept the Fund's
investment managers conservatively positioned in terms of portfolio duration
during the first half of the year. The market's flight to quality sectors of
the market in reaction to Asia's problems later in the year favored US
treasuries. Other sectors were negatively impacted, particularly where credit
weakness was perceived. Lower quality corporate issues lagged as yield spreads
widened. Credit-sensitive asset- and mortgage-backed securities holdings were
also underperformers in the fourth quarter. The Fund was able to offset some
of these influences. The bond managers captured some value by extending
portfolio duration in the third quarter as economic fundamentals stabilized
and the Fed became less of a factor.
TOP TEN ISSUERS
<TABLE>
<CAPTION>
(as a percent of Total December 31,
Investments) 1997
<S> <C>
United States Treasury 15.9%
World Omni Automobile Lease 3.3
Barnett Auto Trust 3.3
Sears Credit Account Master
Trust 3.1
Olympic Automobile Receiv-
ables Trust 2.5
General Electric Capital Cor-
poration 2.4
Associates Corp. North Amer-
ica 2.4
Sears Roebuck Acceptance 2.4
First Chicago Master Trust 2.2
PNC Student Loan Trust 2.2
</TABLE>
PORTFOLIO CHARACTERISTICS
<TABLE>
<CAPTION>
December 31,
1997
<S> <C>
Weighted Average Quality Di-
versification AA1
Weighted Average Years-to-Ma-
turity 2.7 Years
Weighted Average Duration 1.6 Years
Current Yield (SEC 30-day
standardized) 5.6%
Number of Issues 157
Number of Issuers 118
</TABLE>
MONEY MANAGERS
<TABLE>
<CAPTION>
STYLES
<S> <C>
BlackRock
Financial
Management Mortgage/Asset-Backed Specialist
STW Fixed Income
Management,
Inc. Sector Rotation Core
Standish, Ayer &
Wood,
Inc. Corporate Specialist
</TABLE>
Performance is historical and assumes reinvestment of all dividends and
capital gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when
purchased. Past performance is not indicative of future results.
C(1)-3
<PAGE>
FIXED INCOME II FUND
STATEMENT OF NET ASSETS
December 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- ----------
<S> <C> <C>
LONG-TERM INVESTMENTS - 92.1%
ASSET-BACKED SECURITIES - 35.6%
Advanta Home Equity Loan Trust
Series 1994-1 Class A-2
6.300% due 07/25/25 $ 39 $ 38
AFC Home Equity Loan Trust
Series 1993-2 Class A
6.000% due 01/20/13 386 379
AFC Mortgage Loan Trust
Series 1996-3 Class 1A2
7.220% due 12/25/27 350 350
Associates Manufactured Housing
Pass-thru Certificate
Series 1996-1 Class A3
7.000% due 03/15/27 850 862
Banc One Auto Grantor Trust
Series 1997-A Class A
6.270% due 11/20/03 3,703 3,712
Barnett Auto Trust
Series 1997-A Class A3
6.030% due 11/15/01 7,500 7,495
Chase Credit Card Master Trust
Series 1997-2 Class A
6.300% due 04/15/03 4,479 4,514
Chase Manhattan Grantor Trust
Series 1996-B Class A
6.610% due 09/15/02 1,204 1,211
Chevy Chase Auto Receivables Trust
Series 1996-2 Class A
5.900% due 07/15/03 970 967
Series 1997-2 Class A
6.350% due 01/15/04 842 845
Series 1997-3 Class A
6.200% due 03/20/04 (c) 653 654
Contimortgage Home Equity Loan Trust Pass-thru Certifi-
cate
Series 1997-4 Class A2
6.270% due 02/15/12 500 499
EQCC Home Equity Loan Trust
Series 1993-4 Class A
5.725% due 12/15/08 40 40
Series 1994-1 Class A
5.800% due 03/15/09 316 313
Equivantage Home Equity Loan Trust
Series 1996-1 Class A
6.550% due 10/25/25 729 732
First Chicago Master Trust II
Credit Card Certificates
Series 1994-L
7.150% due 04/15/01 4,500 4,580
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- ----------
<S> <C> <C>
First Omni Credit Card Master Trust
Series 1996-A Class A
6.650% due 09/15/03 $ 930 $ 945
First Security Auto Grantor Trust
Series 1997-A Class A
6.300% due 08/15/03 998 1,000
Ford Credit Auto Lease Trust
Series 1996-1 Class A2
5.800% due 05/15/99 1,168 1,167
Green Tree Financial Corp.
Series 1996-6 Class A4
7.050% due 09/15/27 500 507
Series 1997-3 Class A2
6.490% due 07/15/28 750 752
Green Tree Securitized Net Interest Margin Trust
Series 1994-A Class A
6.900% due 02/15/04 528 533
Series 1995-A Class A
7.250% due 07/15/05 413 414
Honda Auto Receivables Grantor Trust
Series 1995-A Class A
6.200% due 12/15/00 346 346
Series 1997-B Class A
5.950% due 05/15/03 1,200 1,198
IMC Home Equity Loan Trust
Series 1997-5 Class A1
6.510% due 02/20/06 (c) 765 765
Nationsbank Auto Owner Trust
Series 1996-A Class A3
6.375% due 07/15/00 2,750 2,756
Nationsbank Credit Card Master Trust
Series 1995-1 Class A
6.450% due 04/15/03 3,850 3,887
Newcourt Receivables Asset Trust
Series 1996-2 Class A
6.870% due 06/20/04 208 212
Nissan Auto Recievables Grantor Trust
Series 1997-1 Class A
6.150% due 02/17/03 372 373
Olympic Automobile Receivables
Series 1996-B Class A4
6.700% due 03/15/02 1,000 1,009
Series 1996-D Class CTFS
6.125% due 11/15/04 3,759 3,749
Series 1997-A Class A2
6.125% due 01/01/99 902 903
PNC Student Loan Trust I
Series 1997-2 Class A3
6.314% due 01/25/01 5,000 5,041
</TABLE>
C(1)-4
<PAGE>
FIXED INCOME II FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- ----------
<S> <C> <C>
Premier Auto Trust
Series 1997-3 Class A4
6.200% due 01/06/01 $ 5,000 $ 5,011
Remodelers Home Improvement Loan
Series 1995-3 Class A2
6.800% due 12/20/07 558 558
Sears Credit Account Master Trust II
Series 1995-3 Class A
7.000% due 10/15/04 900 919
Series 1995-4 Class A
6.250% due 01/15/03 4,000 4,004
Series 1996-2 Class A
6.500% due 10/15/03 1,500 1,510
Series 1997-1 Class A
6.200% due 07/16/07 500 500
SMS Student Loan Trust
Series 1997-A Class A
6.030% due 10/27/25 (c) 500 505
SPNB Home Equity Loan
Series 1991-1 Class B
8.150% due 06/15/20 336 340
Student Loan Marketing Association
Series 1997-3 Class CTFS
6.259% due 08/25/12 (c) 500 494
The Money Store Home Equity Loan Trust
Series 1993-D Class A1
5.675% due 12/15/08 389 383
Series 1996-B Class A3
6.820% due 03/15/10 124 125
TLFC IV Equipment Lease Trust
Series 1996-1 Class A
5.980% due 11/20/02 361 360
TMS Small Business Administration Loan Trust
Series 1997-1 Class A
6.240% due 01/15/25 (c) 995 993
Series 1997-1 Class B
6.719% due 01/15/25 (c) 497 495
UCFC Home Equity Loan Trust
Series 1996-D1 Class A3
6.541% due 11/15/13 675 677
WFS Financial Owner Trust
Series 1996-D Class A3
6.050% due 07/20/01 (c) 4,500 4,508
World Omni Automobile Lease Securitization Trust
Series 1996-B Class A3
6.250% due 11/15/02 1,098 1,099
Series 1996-B Class B
6.850% due 11/15/02 (c) 350 352
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- ----------
<S> <C> <C>
World Omni Automobile Lease Securitization Trust
Series 1997-A Class A2
6.750% due 06/25/03 (c) $ 5,500 $ 5,549
Series 1997-A Class A4
6.900% due 06/25/03 500 508
----------
81,638
----------
CORPORATE BONDS AND NOTES - 25.0%
Ahmanson (H.F.)
9.875% due 11/15/99 875 930
Aristar Inc.
6.125% due 12/01/00 725 722
Associates Corp North America
6.375% due 08/15/00 5,500 5,531
Banponce Corp. (MTN)
Series 2
5.750% due 03/01/99 2,075 2,063
Bear Stearns Co., Inc.
7.625% due 09/15/99 1,125 1,151
Chase Manhattan Corp.
10.125% due 11/01/00 259 285
Chrysler Financial Corp. Series P (MTN)
6.230% due 07/17/98 500 501
CIT Group Holdings, Inc. (MTN)
6.125% due 12/15/00 5,000 4,987
Cox Enterprises, Inc.
6.250% due 08/26/99 1,400 1,400
Crescent Real Estate Equities
6.625% due 09/15/02 750 749
Enterprise Rent-A-Car USA Finance Co. (MTN)
7.875% due 03/15/98 1,100 1,104
ERP Operating, L.P.
8.500% due 05/15/99 1,050 1,079
Finova Capital Corp.
6.450% due 06/01/00 400 401
First Chicago Corp.
9.000% due 06/15/99 500 519
First Union Corp.
6.750% due 01/15/98 750 750
6.600% due 06/15/00 1,000 1,008
Franchise Finance Corp.
7.000% due 11/30/00 1,000 1,010
General Electric Capital Corporation (MTN)
6.120% due 08/15/00 5,500 5,545
General Motors Acceptance Corp.
7.012% due 04/01/20 (c) 988 999
</TABLE>
C(1)-5
<PAGE>
FIXED INCOME II FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- ----------
<S> <C> <C>
General Motors Acceptance Corp. (MTN)
7.500% due 07/22/99 $ 925 $ 944
7.465% due 07/25/19 1,438 1,448
Heller Financial, Inc. (MTN)
5.928% due 03/01/99 (c) 1,000 1,003
Hertz Corp.
6.500% due 04/01/00 450 453
Homeside Lending, Inc. (MTN)
6.875% due 06/30/02 2,000 2,037
ITT Corp.
6.250% due 11/15/00 1,075 1,057
JC Penney & Co., Inc. (MTN)
6.375% due 09/15/00 1,125 1,134
Lehman Brothers Holdings, Inc. (MTN)
Series E
7.110% due 09/27/99 1,500 1,524
Series IBC
7.000% due 05/13/99 800 810
MBNA Corp. (MTN)
Series B
6.500% due 09/15/00 1,000 1,010
Merrill Lynch & Co., Inc. (MTN)
7.260% due 03/25/02 (c) 1,425 1,457
Midlantic Corp.
9.250% due 09/01/99 375 392
Occidental Petroleum Corp. (MTN)
5.950% due 11/09/98 950 948
Salomon, Inc.
7.750% due 05/15/00 1,000 1,032
6.700% due 07/05/00 500 505
Salomon, Inc. (MTN)
5.718% due 04/05/99 (c) 1,100 1,100
Sears Roebuck Acceptance (MTN)
6.160% due 09/20/00 5,500 5,501
Sovereign Bancorp, Inc. (Regd)
6.750% due 07/01/00 750 755
Taubman Realty Group, L.P.
8.000% due 06/15/99 250 256
USF&G Corp.
7.000% due 05/15/98 1,975 1,982
Wellsford Residential Property Trust (MTN)
6.195% due 11/24/99 (c) 1,300 1,302
----------
57,384
----------
EURODOLLAR BONDS - 2.3%
ALPS Pass-thru Trust
Series 1994-1 Class A2
7.150% due 09/15/04 (c) 280 281
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- ----------
<S> <C> <C>
Chase Manhattan Corp.
6.062% due 12/05/09 (c) $ 200 $ 195
Export-Import Bank of Korea
7.125% due 09/20/01 300 249
Procter & Gamble
9.625% due 01/14/01 3,020 3,271
Videotron Holdings PLC Step Up Bond
Zero Coupon due 07/01/04 1,375 1,310
----------
5,306
----------
MORTGAGE-BACKED SECURITIES - 11.6%
Bear Stearns Mortgage Securities, Inc.
Series 1996-6 Class A2
7.000% due 11/25/27 925 923
BKD Commercial Mortgage Trust
Series 1997-C1 Class B
7.218% due 04/25/00 (c) 850 851
Citicorp Mortgage Securities, Inc.
REMIC Series 1997-5 Class A1
6.500% due 11/25/27 650 652
CMC Securities Corp. II
Series 1993-2G Class A1
7.194% due 11/25/23 (c) 885 898
Countrywide Home Loans
Series 1997-6 Class A1
6.750% due 11/25/27 675 679
Federal Home Loan Mortgage Corp. Groups
Participation Certificate
7.500% due 2000 657 663
7.500% due 2002 150 152
9.000% due 2005 192 200
7.375% due 2006 (c) 174 179
6.250% due 2007 101 100
7.500% due 2007 276 281
8.500% due 2017 622 648
Federal Home Loan Mortgage Corp.
Series 1714 Class E
6.250% due 09/15/18 650 651
Federal National Mortgage
Association Pools
8.500% due 2001 450 469
7.000% due 2004 833 844
8.500% due 2008 115 118
7.500% due 2009 593 607
8.000% due 2009 896 932
8.500% due 2010 790 824
</TABLE>
C(1)-6
<PAGE>
FIXED INCOME II FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- ----------
<S> <C> <C>
Federal National Mortgage Association Grantor Trust
REMIC Series 1996-T6 Class C
6.200% due 02/26/01 $ 1,332 $ 1,324
GE Capital Mortgage Services, Inc.
REMIC Series 1997-9 Class 1A2
6.750% due 10/25/27 1,125 1,131
Government National Mortgage
Association Pools
9.500% due 2025 567 615
7.250% due 2026 1,328 1,359
Merrill Lynch Credit Corp. Mortgage Investors Inc.
Series 1996-B Class A
6.150% due 07/15/21 (c) 789 806
Prudential Home Mortgage Securities
Series 1994-19 Class A2
7.050% due 05/25/24 636 640
Residential Accredited Loans, Inc.
Series 1997-QS7 Class A1
7.500% due 07/25/27 505 510
Residential Asset Securitization Trust Mortgage Pass-thru
Certificates
Series 1996-A8 Class A1
8.000% due 12/25/26 594 601
Series 1997-A1 Class A
7.000% due 03/25/27 665 667
Series 1997-A5 Class A3
7.125% due 07/25/27 1,277 1,284
Series 1997-A9 Class A1
7.250% due 11/25/27 1,226 1,236
Residential Funding Mortgage Securities I
Series 1997-S12 Class A10
6.700% due 08/25/27 1,500 1,510
Resolution Trust Corp.
Mortgage Pass-thru Certificates
Series 1992-M3 Class A1
7.750% due 07/25/30 66 66
Series 1994-C1 Class D
8.000% due 06/25/26 (c) 876 892
Series 1995-2 Class C1
7.450% due 05/25/29 (c) 238 240
SASCO LLC
Series 1997-N1 Class D
6.217% due 09/25/28 (c) 800 800
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- ----------
<S> <C> <C>
Sequoia Mortgage Trust
Series 1 Class A1
6.028% due 07/04/27 (c) $ 1,197 $ 1,197
Wilshire Funding Corporation
Series 1997-WFC1 Class AI
7.250% due 08/25/27 1,024 1,035
----------
26,584
----------
MUNICIPAL BONDS - 0.4%
Philadelphia, Pennsylvania Authority for Industrial
Development Class A
6.480% due 06/15/04 861 883
----------
883
----------
UNITED STATES GOVERNMENT TREASURIES - 15.7%
United States Treasury Notes
5.625% due 11/30/98 700 700
5.750% due 09/30/99 1,250 1,252
5.875% due 11/15/99 100 100
5.875% due 02/15/00 16,000 16,063
6.875% due 03/31/00 175 179
5.625% due 11/30/00 850 848
6.375% due 03/31/01 480 489
6.250% due 06/30/02 3,070 3,131
3.625% due 07/15/02 11,545 11,487
5.750% due 11/30/02 340 340
5.750% due 08/15/03 1,500 1,502
----------
36,091
----------
YANKEE BONDS - 1.5%
Household International
5.250% due 10/15/98 1,150 1,144
Ontario, Province of
11.500% due 03/10/13 760 800
Quebec, Province of
13.250% due 09/15/14 450 520
Westpac Banking, Ltd.
7.875% due 10/15/02 1,000 1,060
----------
3,524
----------
TOTAL LONG-TERM INVESTMENTS
(cost $211,058) 211,410
----------
</TABLE>
C(1)-7
<PAGE>
FIXED INCOME II FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- ----------
<S> <C> <C>
SHORT-TERM INVESTMENTS - 6.7%
Chrysler Financial Corp. (MTN)
Series P
6.250% due 06/29/98 $ 1,300 $ 1,302
Frank Russell Investment Company Money Market Fund, due
on demand (a) 13,320 13,320
Hertz Corp.
9.500% due 05/15/98 675 684
----------
TOTAL SHORT-TERM INVESTMENTS
(cost $15,348) 15,306
----------
TOTAL INVESTMENTS
(identified cost $226,406)(b) - 98.8% 226,716
OTHER ASSETS AND LIABILITIES,
NET - 1.2% 2,754
----------
NET ASSETS - 100.0% $ 229,470
==========
</TABLE>
(a) At cost, which approximates market.
(b) See Note 2 for federal income tax information.
(c) Adjustable or floating rate security.
Abbreviations:
LLC - Limited Liability Corporation
L.P. - Limited Partnership
MTN - Medium Term Note
PLC - Public Limited Company
REMIC - Real Estate Mortage Investment Conduit
The accompanying notes are an integral part of the financial statements.
C(1)-8
<PAGE>
FIXED INCOME II FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<TABLE>
<CAPTION>
Amounts in
thousands (except
per share amount)
<S> <C> <C>
ASSETS
Investments at market (identified cost $226,406)(Note 2)... $ 226,716
Receivables:
Dividends and interest ................................... 2,368
Investments sold ......................................... 376
Fund shares sold.......................................... 974
--------------
Total Assets ............................................ 230,434
LIABILITIES
Payables:
Fund shares redeemed....................... $ 795
Accrued fees to affiliates (Note 4)........ 123
Other accrued expenses..................... 46
--------------
Total Liabilities........................................ 964
--------------
NET ASSETS................................................. $ 229,470
==============
NET ASSETS CONSIST OF:
Undistributed net investment income........................ $ 609
Accumulated net realized gain (loss)....................... (7,705)
Unrealized appreciation (depreciation) on investments...... 310
Shares of beneficial interest.............................. 125
Additional paid-in capital................................. 236,131
--------------
NET ASSETS................................................. $ 229,470
==============
NET ASSET VALUE, offering and redemption price per share:
($229,469,933 divided by 12,506,712 shares of $.01 par
value
shares of beneficial interest outstanding)................ $ 18.35
==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
C(1)-9
<PAGE>
FIXED INCOME II FUND
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Amounts in thousands
<S> <C> <C>
INVESTMENT INCOME:
Interest................................................. $ 14,201
Dividends from Money Market Fund (Note 5)................ 889
--------------
Total Investment Income................................. 15,090
EXPENSES (Notes 2 and 4):
Management fees.......................... $ 1,185
Custodian fees........................... 142
Transfer agent fees...................... 144
Bookkeeping service fees................. 15
Professional fees........................ 17
Registration fees........................ 31
Trustees' fees........................... 4
Miscellaneous............................ 25
---------------
Total Expenses.......................................... 1,563
--------------
Net investment income..................................... 13,527
--------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (Notes
2 and 3)
Net realized gain (loss) from investments................. (118)
Net change in unrealized appreciation or depreciation of
investments.............................................. 487
--------------
Net gain (loss) on investments............................ 369
--------------
Net increase (decrease) in net assets resulting from
operations............................................... $ 13,896
==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
C(1)-10
<PAGE>
FIXED INCOME II FUND
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31,
<TABLE>
<CAPTION>
Amounts in thousands
1997 1996
-------------- --------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income......................... $ 13,527 $ 11,273
Net realized gain (loss)...................... (118) (1,911)
Net change in unrealized appreciation or
depreciation................................. 487 (86)
-------------- --------------
Net increase (decrease) in net assets
resulting from operations................... 13,896 9,276
-------------- --------------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income......................... (13,676) (11,259)
FROM FUND SHARE TRANSACTIONS:
Net increase (decrease) in net assets from
Fund share transactions (Note 6)............. 6,267 41,389
-------------- --------------
TOTAL NET INCREASE (DECREASE) IN NET ASSETS.... 6,487 39,406
NET ASSETS
Beginning of period........................... 222,983 183,577
-------------- --------------
End of period (including undistributed net
investment income of
$609 and $402, respectively)................. $ 229,470 $ 222,983
============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
C(1)-11
<PAGE>
FIXED INCOME II FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD........................... $ 18.36 $ 18.55 $ 17.98 $ 18.99 $ 18.56
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............ 1.08 1.04 1.16 1.21 .84
Net realized and unrealized gain
(loss) on investments........... -- (.19) .59 (1.07) .44
------- ------- ------- ------- -------
Total Income From Investment
Operations..................... 1.08 .85 1.75 .14 1.28
------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income............ (1.09) (1.04) (1.18) (1.15) (.71)
Tax return of capital............ -- -- -- -- (.14)
------- ------- ------- ------- -------
Total Distributions............. (1.09) (1.04) (1.18) (1.15) (.85)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD.... $ 18.35 $ 18.36 $ 18.55 $ 17.98 $ 18.99
======= ======= ======= ======= =======
TOTAL RETURN (%)(a)............... 6.02 4.76 9.95 .82 6.98
RATIOS/SUPPLEMENT DATA:
Net Assets, end of period ($000
omitted)........................ 229,470 222,983 183,577 144,030 138,619
Ratios to average net assets
(%)(a):
Operating expenses.............. .66 .70 .58 .19 .16
Net investment income........... 5.70 5.70 6.41 6.52 6.16
Portfolio turnover rate (%)....... 213.14 264.40 269.31 233.75 229.07
</TABLE>
(a) For periods prior to April 1, 1995, Fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net
of investment management fees but gross of any investment services fees.
See Note 4.
C(1)-12
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
1.ORGANIZATION
Frank Russell Investment Company (the "Investment Company") is a series
mutual fund with 28 different investment portfolios, referred to as "Funds."
These financial statements report on the Fixed Income II Fund (the "Fund").
The Investment Company is registered under the Investment Company Act of
1940, as amended, as a diversified, open-end management investment company.
It is organized and operates as a Massachusetts business trust under an
amended master trust agreement dated July 26, 1984. The Investment Company's
master trust agreement permits the Board of Trustees to issue an unlimited
number of full and fractional shares of beneficial interest at a $.01 par
value.
2.SIGNIFICANT ACCOUNTING POLICIES
The Fund's financial statements are prepared in accordance with generally
accepted accounting principles ("GAAP") which require the use of management
estimates. The following is a summary of the significant accounting policies
consistently followed by the Fund in the preparation of these financial
statements.
SECURITY VALUATION: United States fixed-income securities listed and traded
principally on any national securities exchange are valued on the basis of
the last sale price or, lacking any sale, at the closing bid price, on the
primary exchange on which the security is traded. United States over-the-
counter fixed-income securities and options are valued on the basis of the
closing bid price. Futures contracts are valued on the basis of the last
sale price. Many fixed-income securities do not trade each day and, thus,
last sale or bid prices are frequently not available. Fixed-income
securities, therefore, may be valued using prices provided by a pricing
service when such prices are believed to reflect the fair market value of
such securities.
International fixed-income securities traded on a national securities
exchange are valued on the basis of the last sale price. International
securities traded over the counter are valued on the basis of the mean of
bid prices. In the absence of a last sale or mean bid price, respectively,
such securities may be valued on the basis of prices provided by a pricing
service if those prices are believed to reflect the fair market value of
such securities.
Short-term investments held by the Fund maturing within 60 days of the
valuation date are valued at "amortized cost" unless the Board of Trustees
determines that amortized cost does not represent fair value.
The Fund may value certain securities for which market quotations are not
readily available at "fair value," as determined in good faith pursuant to
procedures established by the Board of Trustees.
INVESTMENT TRANSACTIONS: Securities transactions are recorded on a trade
date basis. Realized gains and losses from securities transactions are
recorded on the basis of specific identified cost incurred by each money
manager within the fund. The Fund may lend portfolio securities but has not
done so during the year ended December 31, 1997.
INVESTMENT INCOME: Dividend income is recorded on the ex-dividend date and
interest income is recorded on the accrual basis.
AMORTIZATION AND ACCRETION: All zero-coupon bond discounts and original
issue discounts are accreted for both tax and financial reporting purposes.
All short-term premiums/discounts are amortized/accreted for both tax and
financial reporting purposes.
FEDERAL INCOME TAXES: As a Massachusetts business trust, the Fund is a
separate corporate taxpayer and determines its net investment income and
capital gains (or losses) and the amounts to be distributed to the Fund's
shareholders without regard to the income and capital gains (or losses) of
the other Funds.
It is the Fund's intention to qualify as a regulated investment company and
distribute all of its taxable income. Therefore, no federal income tax
provision was required for the Fund.
At December 31, 1997, the Fund had net tax basis capital loss carryforwards
which may be applied against any net realized taxable gains in each
succeeding year or until their respective expiration dates, whichever occurs
first. Available capital loss carryforwards and expiration dates are as
follows:
<TABLE>
<CAPTION>
12/31/01 12/31/02 12/31/03 12/31/04 12/31/05 TOTAL
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fixed Income II $948,478 $3,534,633 $698,949 $1,746,912 $538,227 $7,467,199
</TABLE>
C(1)-13
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1997
The aggregate cost of investments and the composition of gross unrealized
appreciation and depreciation of investment securities for federal income
tax purposes as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS NET
FEDERAL TAX UNREALIZED UNREALIZED APPRECIATION
COST APPRECIATION (DEPRECIATION) (DEPRECIATION)
------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
Fixed Income II $226,510,548 $617,290 $(412,006) $205,284
</TABLE>
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: For the Fund, income dividends
and capital gain distributions, if any, are recorded on the ex-dividend
date. Dividends are generally declared and paid quarterly. Capital gain
distributions are generally declared and paid annually. An additional
distribution may be paid by the Fund to avoid imposition of federal income
tax on any remaining undistributed capital gains and net investment income.
The timing and characterization of certain income and capital gain
distributions are determined in accordance with federal tax regulations
which may differ from GAAP. As a result, net investment income and net
realized gain (or loss) on investment and foreign currency-related
transactions for a reporting period may differ significantly from
distributions during such period. The differences between tax regulations
and GAAP primarily relate to investments in options, futures, mortgage-
backed securities, and certain securities sold at a loss. Accordingly, the
Fund may periodically make a reclassification among certain of its capital
accounts without impacting its net asset value.
The following reclassifications have been made to reflect activity for the
year ended December 31, 1997:
<TABLE>
<CAPTION>
ACCUMULATED
UNDISTRIBUTED NET
NET INVESTMENT REALIZED
INCOME GAIN (LOSS)
-------------- -----------
<S> <C> <C>
Fixed Income II $356,118 $(356,118)
</TABLE>
EXPENSES: The Fund will pay its own expenses other than those expressly
assumed by the Management Company. Most expenses can be directly attributed
to the Fund. Expenses which cannot be directly attributed are allocated
among all Funds principally based on their relative net assets.
REPURCHASE AGREEMENTS: The Fund may engage in repurchase agreements with
several financial institutions whereby the Fund, through its custodian,
receives delivery of underlying securities as collateral. The Fund's Money
Managers will monitor repurchase agreements daily to determine that the
market value (including accrued interest) of the underlying securities at
Fedwire closing time remains at least equal to 102% of the repurchase price.
The Money Managers will notify the Seller to immediately increase the
collateral on the repurchase agreement to 102% of the repurchase price if
collateral value falls below 102%.
DERIVATIVES: To the extent permitted by the investment objectives,
restrictions and policies set forth in the Fund's Prospectus and Statement
of Additional Information, the Fund may participate in various derivative-
based transactions. Derivative securities are instruments or agreements
whose value is derived from an underlying security or index. They include
options, futures, swaps, forwards, structured notes and stripped securities.
These instruments offer unique characteristics and risks that assist the
Fund in meeting its investment strategies.
The Funds typically use derivatives in three ways: cash equitization,
hedging, and return enhancement. Cash equitization is a technique that may
be used by certain Funds through the use of options and futures to earn
"market-like" returns with their excess and liquidity reserve cash balances.
Hedging is used by some funds to limit or control risks, such as adverse
movements in exchange rates and interest rates. Return enhancement can be
accomplished through the use of derivatives in a Fund. By purchasing certain
instruments, Funds may more effectively achieve the desired portfolio
characteristics that assist them in meeting their investment objectives.
Depending on how the derivatives are structured and utilized, the risks
associated with them may vary widely. These risks are generally categorized
as market risk, liquidity risk and counterparty or credit risk.
FORWARD COMMITMENTS: The Fund may contract to purchase securities for a
fixed price at a future date beyond customary settlement time (i.e., a
"forward commitment," "delayed settlement" or "when issued" transaction,
e.g., to be announced ("TBA")) consistent with the Fund's ability to manage
its investment portfolio and meet redemption requests. The price of the
underlying securities and the date when the securities will be delivered and
paid for are fixed at the time the transaction is negotiated. The Fund may
dispose of a forward commitment transaction prior to settlement if it is
appropriate to do so and realize short-term gains (or losses) upon such
sale. When effecting such transactions, cash or liquid high-grade debt
obligations of the Fund in a dollar amount sufficient to make payment for
the portfolio securities to be purchased will be segregated on the Fund's
records at the trade date and maintained until the transaction is settled. A
forward commitment transaction involves a risk of loss if the value of the
security to be purchased declines prior to the settlement date or the other
party to the transaction fails to complete the transaction.
C(1)-14
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1997
OPTIONS: The Fund may purchase and sell (write) call and put options on
securities and securities indices, provided such options are traded on a
national securities exchange or in an over-the-counter market. The Fund may
also purchase and sell call and put options on foreign currencies.
3.INVESTMENT TRANSACTIONS
SECURITIES: During the year ended December 31, 1997, the Fund had purchases
and sales of investment securities (excluding U.S. Government and Agency
obligations, short-term investments, options, futures and repurchase
agreements) of $184,987,217 and $118,869,348, respectively.
Purchases and sales of U.S. Government and Agency obligations (excluding
short-term investments, options, futures and repurchase agreements) were
$301,898,763 and $348,018,256, respectively.
4.RELATED PARTIES
MANAGER: Frank Russell Investment Management Company ("FRIMCo" or "Manager")
operates and administers all of the Funds which comprise the Investment
Company, and manages the Money Market and the U.S. Government Money Market
Funds (the Money Market and the U.S. Government Money Market Funds are a
series of the Investment Company that are not presented in this report).
FRIMCo is a wholly owned subsidiary of Frank Russell Company, which
researches and recommends to FRIMCo, and to the Investment Company, one or
more investment management organizations to manage the portfolio of each
Fund.
For the year ended December 31, 1997, the management fee paid to FRIMCo, for
the Fund, in accordance with the Investment Company's Management Agreement
with that firm, amounted to $1,185,000 before waivers. Such fee is payable
monthly and is equal to the annual rate of 0.50% of the average daily net
assets of the Fund.
Effective October 15, 1997, FRIMCo began calculating its management fee
based on average daily net assets for the Fund less any management fee
incurred on assets invested in the Money Market Fund (see Note 5) thereby
eliminating any duplication of fees. Prior to October 15, 1997, FRIMCo
calculated its management fee based on average daily net assets for the
Fund, which may have included an investment in the Money Market Fund. Prior
to October 15, 1997, the Money Market Fund waived all management fees.
BOOKKEEPING SERVICES: Fees for bookkeeping and analytic services provided to
the Fund are paid or accrued to Frank Russell Company, an affiliate of the
Investment Company. Frank Russell Company provides its Portfolio
Verification System ("PVS") and TruVP System to the Fund, pursuant to a
written Service Agreement. The PVS computerized database system records
detailed transactions data for the Fund necessary to prepare various
financial and Internal Revenue Service accounting reports, whereas the TruVP
System provides analytics used by the investment department. The Fund's fees
for the year ended December 31, 1997 were $15,000. The PVS System portion of
the service agreement was terminated during 1997.
TRANSFER AGENT: The Fund has a contract with FRIMCo, to provide transfer
agent services to the Investment Company. Total fees for the year ended
December 31, 1997 were $144,000.
DISTRIBUTOR: Russell Fund Distributors, Inc. (the "Distributor"), a wholly
owned subsidiary of FRIMCo, is the principal Distributor for Investment
Company shares. The Distributor receives no compensation from the Fund for
its services.
ACCRUED FEES PAYABLE TO AFFILIATES AS OF DECEMBER 31, 1997 WERE AS FOLLOWS:
<TABLE>
<CAPTION>
BOOKKEEPING
MANAGEMENT SERVICE TRANSFER
FEES FEES AGENT FEES TOTAL
---------- ----------- ---------- --------
<S> <C> <C> <C> <C>
Fixed Income II $96,560 $10,196 $16,741 $123,497
</TABLE>
BOARD OF TRUSTEES: The Investment Company pays each of its Trustees not
affiliated with FRIMCo a retainer of $20,000 per year plus out-of-pocket
expenses. Total Trustee expenses were $101,243 for the year ended December
31, 1997, and were allocated to the Fund on a pro rata basis, including 27
affiliated funds not represented herein.
5.MONEY MARKET FUND
The Fund is permitted to invest its cash reserves (i.e., monies awaiting
investment in portfolio securities suitable for the Funds' objectives) in
the Frank Russell Investment Company Money Market Fund (a series of Frank
Russell Investment Company not presented herein). As of December 31, 1997,
$13,320,000 of the Money Market Fund's net assets represents investments by
the Fund and $694,612,000 represents the investments of other affiliated
funds not presented herein.
C(1)-15
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1997
6.FUND SHARE TRANSACTIONS
Share transactions for the years ended December 31, were as follows:
<TABLE>
<CAPTION>
SHARES DOLLARS
------------------------------ ------------------------------
1997 1996 1997 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
FIXED INCOME II
Proceeds from shares
sold 7,036,585 4,900,949 $ 129,655,206 $ 90,321,507
Proceeds from
reinvestment of
distributions 641,394 518,160 11,742,346 9,481,619
Payments for shares
redeemed (7,319,010) (3,169,389) (135,131,042) (58,413,181)
-------------- -------------- -------------- --------------
Total net increase
(decrease) 358,969 2,249,720 $ 6,266,510 $ 41,389,945
============== ============== ============== ==============
</TABLE>
7.SUBSEQUENT EVENTS
On August 10, 1998, Frank Russell Company entered into an agreement with The
Northwestern Mutual Life Insurance Co., an insurance organization, pursuant
to which Northwestern Mutual Life will acquire all of the outstanding common
stock of Frank Russell Company.
At its meeting on April 27, 1998, the Investment Company's Board of
Trustees, in an effort to meet the best interests of shareholders of the
Fixed Income II Fund and the Volatility Constrained Bond Fund (a series of
the Investment Company not presented herein), approved a plan of
reorganization for the merger of the two Funds. The merger is subject to
shareholder approval at a meeting scheduled for November 19, 1998.
C(1)-16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board
of Trustees of Frank Russell Investment Company:
We have audited the accompanying statement of assets and liabilities and
statements of net assets of the Fixed Income II Fund (the "Fund") (one of the
funds constituting the Frank Russell Investment Company series) as of December
31, 1997, and the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the five years in the
period then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of December 31, 1997, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Fund as of December 31, 1997, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended, and the financial highlights for each of the five years in the
period then ended, in conformity with generally accepted accounting
principles.
Seattle, Washington
February 17, 1998, except for
Note 7 as to which the
date is August 10, 1998
/s/ PricewaterhouseCoopers LLC
C(1)-17
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
909 A Street, Tacoma, Washington 98402
(800) 832-6688
In Washington (253) 627-7001
TRUSTEES
George F. Russell, Jr., Chairman
Lynn L. Anderson
Paul E. Anderson
Paul Anton, PhD
William E. Baxter
Lee C. Gingrich
Eleanor W. Palmer
OFFICERS
Lynn L. Anderson, President and Chief Executive Officer
Peter Apanovitch, Manager of Short Term Investment Funds
George W. Weber, Treasurer and Chief Accounting Officer
Randall P. Lert, Director of Investments
Karl Ege, Secretary and General Counsel
MANAGER AND TRANSFER AGENT
Frank Russell Investment Management Company
909 A Street
Tacoma, WA 98402
CONSULTANT
Frank Russell Company
909 A Street
Tacoma, WA 98402
CUSTODIAN
State Street Bank and Trust Company
1776 Heritage Drive
North Quincy, MA 02171
OFFICE OF SHAREHOLDER INQUIRES
909 A Street
Tacoma, WA 98402
(800) RUSSEL4
(800) 787-7354
LEGAL COUNSEL
Stradley, Ronon, Stevens & Young, LLP
2600 - One Commerce Square
Philadelphia, PA 19103-7098
INDEPENDENT ACCOUNTANTS
PriceWaterhouseCoopers LLP
One Post Office Square
Boston, MA 02109
DISTRIBUTOR
Russell Fund Distributors, Inc.
909 A Street
Tacoma, WA 98402
MONEY MANAGERS
BlackRock Financial Management, New York, NY
Standish, Ayer & Wood, Inc., Boston, MA
STW Fixed Income Management, Ltd., Hamilton, Bermuda
This report is prepared from the books and records of the Fund and is submitted
for the general information of shareholders and is not authorized for
distribution to prospective investors unless accompanied or preceded by an
effective Prospectus. Nothing herein contained is to be considered an offer of
sale or a solicitation of an offer to buy shares of Frank Russell Investment
Company. Such offering is made only by Prospectus, which includes details as to
offering price and other material information.
C(1)-18
<PAGE>
EXHIBIT C(2)
For your convenience, this annual report has been condensed to
include only the Volatility Constrained Bond Fund. Please
disregard any reference to other Frank Russell Investment
Company Funds not relevant to the proposed plan of re-
organization.
FRANK RUSSELL INVESTMENT COMPANY
VOLATILITY CONSTRAINED BOND FUND
ANNUAL REPORT
DECEMBER 31, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Portfolio Management Discussion.................................... C(2)-2
Financial Statements............................................... C(2)-4
Notes to Financial Statements...................................... C(2)-13
Report of Independent Accountants.................................. C(2)-17
Manager, Money Managers and Service Providers...................... C(2)-18
</TABLE>
FRANK RUSSELL INVESTMENT COMPANY--VOLATILITY CONSTRAINED BOND FUND
Copyright (C) Frank Russell Company 1998. All rights reserved. This material
is proprietary and may not be reproduced, transferred, or distributed in any
form without prior written permission from Frank Russell Company. It is
delivered on an "as is" basis without warranty. The Russell logo is a
trademark and service mark of Frank Russell Company. Frank Russell Company and
Standard & Poor's Corporation are the owners of the trademarks, service marks,
and copyrights related to their respective indexes. This material must be
accompanied or preceded by a current Frank Russell Investment Company
Prospectus containing complete information concerning the investment
objectives and operations of the Company, charges, and expenses. The
Prospectus should be read carefully before an investment is made. The
performance quoted represents past performance and the investment return and
principal value of an investment will fluctuate so that shares, when redeemed,
may be worth more or less than their original cost. Investments in securities
of non-US issuers and foreign currencies involve investment risks different
than those of US issuers; the Prospectus contains further information and
details regarding these risks. Russell Fund Distributors, Inc., is the
distributor of Frank Russell Investment Company.
C(2)-1
<PAGE>
VOLATILITY CONSTRAINED BOND FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1997 (Unaudited)
OBJECTIVE: To preserve capital and generate current income consistent with the
preservation of capital.
INVESTS IN: Fixed-income securities with low-volatility characteristics.
STRATEGY: The Fund uses a multi-manager strategy intended to achieve higher
returns with moderate risk relative to other short-term bond investments. The
Fund employed the investment management services of three managers using three
approaches to investment in short-term fixed income securities.
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Volatility Lipper(C)
Dates Constrained ML 1-2.99** Short 1-5 Yr+
- ----- ----------- ----------- -------------
<S> <C> <C> <C>
* $10,000 $10,000 $10,000
1988 $10,777 $10,622 $10,687
1989 $11,923 $11,777 $11,768
1990 $12,986 $12,922 $12,719
1991 $14,544 $14,431 $14,231
1992 $14,877 $15,341 $15,042
1993 $15,869 $16,171 $15,968
1994 $15,867 $16,263 $15,910
1995 $17,435 $18,052 $17,620
1996 $18,248 $18,950 $18,405
1997 $19,325 $20,212 $19,529
-------- -------- --------
Total $161,851 $164,741 $161,879
======== ======== ========
</TABLE>
Volatility Constrained Bond Fund
<TABLE>
<CAPTION>
PERIODS ENDED GROWTH OF TOTAL
12/31/97 $10,000 RETURN
- ------------- --------- ------
<S> <C> <C>
1 Year $10,590 5.90%
5 Years $12,990 5.37%(S)
10 Years $19,325 6.81%(S)
</TABLE>
<TABLE>
Merrill Lynch 1-2.99 Years Treasury Index
<CAPTION>
PERIODS ENDED GROWTH OF TOTAL
12/31/97 $10,000 RETURN
- ------------- --------- ------
<S> <C> <C>
1 Year $10,666 6.66%
5 Years $13,175 5.67%(S)
10 Years $20,212 7.29%(S)
</TABLE>
Lipper(C) Short Investment Grade
Debt Funds Benchmark
<TABLE>
<CAPTION>
PERIODS ENDED GROWTH OF TOTAL
12/31/97 $10,000 RETURN
------------- --------- ------
<S> <C> <C>
1 Year $10,611 6.11%
5 Years $12,983 5.36%(S)
10 Years $19,529 6.92%(S)
</TABLE>
* Assumes initial investment on January 1, 1988.
** Merrill Lynch 1-2.99 Years Treasury Index is an index composed of
approximately 160 issues in the form of publicly placed, coupon-bearing US
Treasury debt. Issues must carry a term to maturity of at least one year,
and par amounts outstanding must be no less than $10 million at the start
and at the close of the performance measurement periods.
++Lipper(C) Short (1-5 Yr.) Investment Grade Debt Funds Benchmark is the
average total return for the universe of funds within the Short Investment
Grade Debt Funds investment objective. The total return for the funds
reflects adjustments for income dividends and capital gains distributions
reinvested as of the ex-dividend dates. This type of fund which invests at
least 65% of assets in investment grade debt issues (rated in top four
grades) with average maturities of five years or less.
((S) Annualized.)
C(2)-2
<PAGE>
VOLATILITY CONSTRAINED BOND FUND
PORTFOLIO MANAGEMENT DISCUSSION
December 31, 1997 (Unaudited)
PERFORMANCE REVIEW
For the year ended December 31, 1997, the Volatility Constrained Bond Fund
reflected a total return of 5.9%, as compared to the Merrill Lynch 1-2.99
Years Treasury Index which rose 6.7%. The Fund modestly underperformed the
Index as the managers in the Fund maintained conservative duration positions
throughout most of the year due to concerns over Fed intervention. Weak
returns from corporate bonds late in the year, as the market's flight to
defensive sectors favored treasuries, also contributed to the Fund's modest
underperformance.
PORTFOLIO HIGHLIGHTS
Indications of the US economy's ability to sustain strong growth without
inflation benefited bonds increasingly throughout 1997. However, two factors
diminished the attractiveness of short-term bonds for much of the year. The
first proved to be the Federal Reserve Board which threatened to increase
rates during much of the year, but acted only once, late in the first quarter,
when it increased the Fed Funds rate 1/4%. The second threat was directly
attributable to the problems facing Asian economies during the last four
months of the year. As major holders of short-term US treasuries, it was
feared that Korean and Japanese investors would be forced to redeem their
investments to support weakened businesses in their own countries. Although
some withdrawals appeared to occur late in the year, fears of massive selling
of T-bills were not realized.
The Fund was impacted by these factors in several ways. The Fed's inflammatory
comments about the economy's strength and inflation risk kept the Fund's
investment managers conservatively positioned in terms of portfolio duration
during the first half of the year. The market's flight to quality sectors of
the market in reaction to Asia's problems later in the year favored US
treasuries. Other sectors were negatively impacted, particularly where credit
weakness was perceived. Lower quality corporate issues lagged as yield spreads
widened. Credit-sensitive asset- and mortgage-backed securities holdings were
also underperformers in the fourth quarter. The Fund was able to offset some
of these influences. The bond managers captured some value by extending
portfolio duration in the third quarter as economic fundamentals stabilized
and the Fed became less of a factor.
TOP TEN ISSUERS
<TABLE>
<CAPTION>
(as a percent of Total December 31,
Investments) 1997
<S> <C>
United States Treasury 17.6%
Barnett Auto Trust 3.3
World Omni Automobile Lease 3.3
Olympic Automobile Receiv-
ables Trust 2.5
Proctor & Gamble 2.5
General Electric Capital Cor-
poration 2.4
Associates Corp. North Amer-
ica 2.4
Sears Roebuck Acceptance 2.3
First Chicago Master Trust 2.2
Toyota Auto Lease Trust 2.1
</TABLE>
PORTFOLIO CHARACTERISTICS
<TABLE>
<CAPTION>
December 31,
1997
<S> <C>
Weighted Average Quality Di-
versification AA1
Weighted Average Years-to-Ma-
turity 2.6 Years
Weighted Average Duration 1.6 Years
Current Yield (SEC 30-day
standardized) 5.4%
Number of Issues 152
Number of Issuers 120
</TABLE>
MONEY MANAGERS
<TABLE>
<CAPTION>
Styles
<S> <C>
BlackRock Finan-
cial Management Mortgage/Asset-Backed Specialist
STW Fixed Income
Management,
Inc. Sector Rotation Core
Standish, Ayer &
Wood, Inc. Corporate Specialist
</TABLE>
Performance is historical and assumes reinvestment of all dividends and
capital gains. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than when
purchased. Past performance is not indicative of future results.
C(2)-3
<PAGE>
VOLATILITY CONSTRAINED BOND FUND
STATEMENT OF NET ASSETS
December 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
LONG-TERM INVESTMENTS - 90.7%
ASSET-BACKED SECURITIES - 34.6%
Advanta Home Equity Loan Trust
Series 1994-1 Class A-2
6.300% due 07/25/25 $ 189 $ 186
AFC Home Equity Loan Trust
Series 1993-2 Class A
6.000% due 01/20/13 157 154
AFC Mortgage Loan Trust
Series 1996-3 Class 1A2
7.220% due 12/25/27 125 125
Associates Manufactured Housing
Pass-thru Certificates
Series 1996-1 Class A3
7.000% due 03/15/27 700 710
Banc One Auto Grantor Trust
Series 1997-A Class A
6.270% due 11/20/03 2,798 2,804
Barnett Auto Trust
Series 1997-A Class A3
6.030% due 11/15/01 5,700 5,696
California Infrastructure PG&E
Series 1997-1 Class A3
6.150% due 06/25/02 1,600 1,604
Case Equipment Loan Trust
Series 1997-B Class C
6.410% due 09/15/04 284 286
Chase Credit Card Master Trust
Series 1997-2 Class A
6.300% due 04/15/03 2,900 2,922
Chase Manhattan Grantor Trust
Series 1996-B Class A
6.610% due 09/15/02 783 787
Chevy Chase Auto Receivables Trust
Series 1996-2 Class A
5.900% due 07/15/03 803 800
Series 1997-3 Class A
6.200% due 03/20/04 (c) 868 869
Contimortgage Home Equity Loan Trust
Pass-thru Certificate
Series 1997-4 Class A2
6.270% due 02/15/12 500 499
EQCC Home Equity Loan Trust
Series 1993-4 Class A
5.725% due 12/15/08 51 51
Series 1994-1 Class A
5.800% due 03/15/09 260 258
Equivantage Home Equity Loan Trust
Series 1996-1 Class A
6.550% due 10/25/25 486 488
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
Fifth Third Bank Auto Grantor Trust
Series 1996-B Class A
6.450% due 03/15/02 $ 1,000 $ 1,003
First Chicago Master Trust II
Credit Card Certificates
Series 1994-L
7.150% due 04/15/01 3,200 3,257
First Omni Credit Card Master Trust
Series 1996-A Class A
6.650% due 09/15/03 610 620
First Security Auto Grantor Trust
Series 1997-A Class A
6.300% due 08/15/03 697 698
Fleetwood Credit Corporation Grantor Trust
Series 1997-B Class A
6.400% due 05/15/13 378 381
Ford Credit Auto Lease Trust
Series 1996-1 Class A2
5.800% due 05/15/99 809 808
Green Tree Financial Corp.
Series 1996-6 Class A4
7.050% due 09/15/27 500 507
Green Tree Securitized Net
Interest Margin Trust
Series 1994-A Class A
6.900% due 02/15/04 440 444
Series 1995-A Class A
7.250% due 07/15/05 354 355
Honda Auto Receivables Grantor Trust
Series 1995-A Class A
6.200% due 12/15/00 346 346
Series 1997-B Class A
5.950% due 05/15/03 923 922
IMC Home Equity Loan Trust
Series 1997-5 Class A1
6.510% due 02/20/06 (c) 584 584
Nationsbank Auto Owner Trust
Series 1996-A Class A3
6.375% due 07/15/00 2,500 2,505
Newcourt Receivables Asset Trust
Series 1996-2 Class A
6.870% due 06/20/04 156 159
Nissan Auto Receivables Grantor Trust
Series 1997-1 Class A
6.150% due 02/17/03 837 839
</TABLE>
C(2)-4
<PAGE>
VOLATILITY CONSTRAINED BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
Olympic Automobile Receivables
Series 1996-B Class A4
6.700% due 03/15/02 $ 1,000 $ 1,009
Series 1996-D Class CTFS
6.125% due 11/15/04 2,860 2,852
Series 1997-A Class A2
6.125% due 01/01/99 451 451
PNC Student Loan Trust I
Series 1997-2 Class A3
6.314% due 01/25/01 3,500 3,529
<CAPTION>
Premier Auto Trust
<S> <C> <C>
Series 1997-3 Class A4
6.200% due 01/06/01 3,500 3,508
<CAPTION>
Remodelers Home Improvement Loan
<S> <C> <C>
Series 1995-3 Class A2
6.800% due 12/20/07 269 269
<CAPTION>
Sears Credit Account Master Trust II
<S> <C> <C>
Series 1995-3 Class A
7.000% due 10/15/04 500 511
Series 1997-1 Class A
6.200% due 07/16/07 500 500
SMS Student Loan Trust
Series 1997-A Class A
6.030% due 10/27/25 (c) 500 505
SPNB Home Equity Loan
Series 1991-1 Class B
8.150% due 06/15/20 151 153
Student Loan Marketing Association
Series 1997-3 Class CTFS
6.259% due 08/25/12 (c) 400 395
The Money Store Home Equity Loan Trust
Series 1996-B Class A3
6.820% due 03/15/10 130 131
TLFC IV Equipment Lease Trust
Series 1996-1 Class A
5.980% due 11/20/02 305 305
TMS Small Business Administration
Loan Trust
Series 1997-1 Class A
6.240% due 01/15/25 (c) 497 497
Series 1997-1 Class B
6.719% due 01/15/25 (c) 497 495
Toyota Auto Lease Trust
Series 1997-A Class A1
6.200% due 04/26/04 3,600 3,603
UCFC Home Equity Loan Trust
Series 1993-B1 Class A1
6.075% due 07/25/14 95 94
Series 1996-D1 Class A3
6.541% due 11/15/13 275 276
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
WFS Financial Owner Trust
Series 1996-D Class A3
6.050% due 07/20/01 (c) $ 3,500 $ 3,506
World Omni Automobile Lease
Securitization Trust
Series 1996-B Class A3
6.250% due 11/15/02 699 699
Series 1996-B Class B
6.850% due 11/15/02 (c) 400 402
World Omni Automobile Lease
Securitization Trust
Series 1997-A Class A2
6.750% due 06/25/03 (c) 3,500 3,531
Series 1997-A Class A4
6.900% due 06/25/03 400 406
Series 1997-B Class A1
6.070% due 11/25/03 600 601
--------
59,895
--------
CORPORATE BONDS AND NOTES - 21.2%
Advanta National Bank
6.450% due 10/30/00 250 244
Ahmanson (H.F.)
9.875% due 11/15/99 400 425
Aristar Inc.
6.125% due 12/01/00 500 498
Associates Corp. North America
6.375% due 08/15/00 4,000 4,023
Banponce Corp. (MTN)
Series 2
5.750% due 03/01/99 1,100 1,094
Bear Stearns Co., Inc.
7.625% due 09/15/99 725 742
Caterpillar Financial Services (MTN)
6.100% due 07/15/99 500 500
CIT Group Holdings, Inc. (MTN)
6.125% due 12/15/00 3,100 3,092
Cox Enterprises, Inc.
6.250% due 08/26/99 1,000 1,000
Crescent Real Estate Equities
6.625% due 09/15/02 750 749
ERP Operating, L.P.
8.500% due 05/15/99 225 231
Finova Capital Corp.
6.450% due 06/01/00 625 627
First Chicago Corp.
9.000% due 06/15/99 500 519
First Union Corp.
6.750% due 01/15/98 410 410
</TABLE>
C(2)-5
<PAGE>
VOLATILITY CONSTRAINED BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
Franchise Finance Corp.
7.000% due 11/30/00 $ 575 $ 581
General Electric Capital Corporation (MTN)
6.120% due 08/15/00 4,000 4,032
General Motors Acceptance Corp.
7.012% due 04/01/20 (c) 984 994
General Motors Acceptance Corp. (MTN)
7.500% due 07/22/99 850 868
7.465% due 07/25/19 974 981
Greyhound Financial Corp.
8.500% due 02/15/99 775 793
Heller Financial, Inc. (MTN)
5.928% due 03/01/99 (c) 600 602
Hertz Corp.
6.625% due 07/15/00 650 654
Homeside Lending, Inc. (MTN)
6.875% due 06/30/02 600 611
ITT Corp.
6.250% due 11/15/00 450 442
JC Penney & Co., Inc. (MTN)
6.375% due 09/15/00 675 680
Lehman Brothers Holdings, Inc. (MTN)
Series E
7.110% due 09/27/99 1,075 1,092
Series IBC
7.000% due 05/13/99 700 709
MBNA Corp. (MTN)
Series B
6.500% due 09/15/00 375 379
Merrill Lynch & Co., Inc. (MTN)
7.260% due 03/25/02 (c) 925 946
Midlantic Corp.
9.250% due 09/01/99 450 471
Salomon Smith Barney Holdings
6.625% due 07/01/02 375 379
Salomon, Inc. (MTN)
5.718% due 04/05/99 (c) 1,000 1,000
Sears Roebuck Acceptance (MTN)
6.160% due 09/20/00 4,000 4,001
Sovereign Bancorp, Inc. (Regd)
6.750% due 07/01/00 475 478
USF&G Corp.
7.000% due 05/15/98 1,000 1,003
Wellsford Residential Property Trust (MTN)
6.195% due 11/24/99 (c) 850 851
--------
36,701
--------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
EURODOLLAR BONDS - 3.8%
ALPS Pass-thru Trust
<S> <C> <C>
Series 1994-1 Class A-2
7.150% due 09/15/04 (c) $ 351 $ 353
Chase Manhattan Corp.
6.062% due 12/05/09 (c) 800 782
Export-Import Bank of Korea
7.125% due 09/20/01 200 166
Procter & Gamble
9.625% due 01/14/01 3,900 4,224
Videotron Holdings PLC Step Up
Bond
Zero Coupon due 07/01/04 1,175 1,119
--------
6,644
--------
<CAPTION>
MORTGAGE-BACKED SECURITIES -
11.0%
Bear Stearns Mortgage Securities,
Inc.
Series 1996-6 Class A2
7.000% due 11/25/27 750 748
BKD Commercial Mortgage Trust
Series 1997-C1 Class B
7.218% due 04/25/00 (c) 550 551
Citicorp Mortgage Securities, Inc.
REMIC Series 1997-5 Class A1
6.500% due 11/25/27 400 401
CMC Securities Corp. II
Series 1993-2G Class A1
7.194% due 11/25/23 (c) 664 674
Federal Home Loan Mortgage Corp.
Groups Participation Certificate
7.500% due 2000 221 223
7.500% due 2002 201 202
9.000% due 2005 256 267
7.375% due 2006 (c) 261 268
7.500% due 2007 369 374
8.500% due 2011 156 162
8.000% due 2018 758 788
Federal Home Loan Mortgage Corp.
Series 1714 Class E
6.250% due 09/15/18 525 526
Federal National Mortgage
Association Pools
8.500% due 2001 144 148
7.000% due 2004 757 767
8.750% due 2004 44 46
7.000% due 2008 325 331
7.500% due 2009 475 486
8.500% due 2010 711 741
</TABLE>
C(2)-6
<PAGE>
VOLATILITY CONSTRAINED BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1997
C(2)-7
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
Federal National Mortgage Association
Grantor Trust
REMIC Series 1996-T6 Class C
6.200% due 02/26/01 $ 1,066 $ 1,059
<CAPTION>
GE Capital Mortgage Services, Inc.
<S> <C> <C>
REMIC Series 1997-9 Class 1A2
6.750% due 10/25/27 1,000 1,005
<CAPTION>
Government National Mortgage
<S> <C> <C>
Association Pools
9.500% due 2025 693 752
7.250% due 2026 1,040 1,065
Prudential Home Mortgage Securities
Series 1994-19 Class A2
7.050% due 05/25/24 462 465
Residential Accredited Loans, Inc.
Series 1997-QS7 Class Al
7.500% due 07/25/27 367 371
Residential Asset Securitization Trust
Mortgage Pass-thru Certificates
Series 1996-A8 Class A1
8.000% due 12/25/26 396 401
Series 1997-A1 Class A
7.000% due 03/25/27 415 417
Series 1997-A5 Class A3
7.125% due 07/25/27 851 856
Series 1997-A9 Class A1
7.250% due 11/25/27 740 745
Residential Funding Mortgage Securities I
Series 1997-S12 Class A10
6.700% due 08/25/27 850 855
Resolution Trust Corp.
Mortgage Pass-thru Certificates
Series 1992-M3 Class A1
7.750% due 07/25/30 111 111
Series 1994-C1 Class D
8.000% due 06/25/26 (c) 657 669
Series 1995-2 Class C1
7.450% due 05/25/29 (c) 289 292
SASCO LLC
Series 1997-N1 Class D
6.217% due 09/25/28 (c) 600 600
Sequoia Mortgage Trust
Series 1 Class A1
6.028% due 07/04/27 (c) 820 821
Wilshire Funding Corporation
Series 1997-WFC1 Class AI
7.250% due 08/25/27 745 753
--------
18,940
--------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
MUNICIPAL BONDS - 0.4%
Philadelphia, Pennsylvania, Authority for
Industrial Development Class A
6.480% due 06/15/04 $ 621 $ 638
--------
638
--------
UNITED STATES GOVERNMENT
TREASURIES - 17.4%
United States Treasury Notes
5.625% due 11/30/98 1,250 1,250
6.000% due 06/30/99 1,500 1,508
5.750% due 09/30/99 1,775 1,778
5.875% due 02/15/00 12,500 12,549
6.875% due 03/31/00 1,075 1,102
5.625% due 11/30/00 500 499
6.375% due 05/15/00 600 609
6.375% due 03/31/01 280 285
6.250% due 06/30/02 2,325 2,371
3.625% due 07/15/02 7,027 6,992
5.750% due 11/30/02 170 170
5.750% due 08/15/03 1,000 1,000
--------
30,113
--------
YANKEE BONDS - 2.3%
Household International
5.250% due 10/15/98 850 845
Noranda Forest, Inc.
8.875% due 10/15/99 450 470
Ontario, Province of
11.500% due 03/10/13 1,240 1,305
Quebec, Province of
13.250% due 09/15/14 450 520
Westpac Banking, Ltd.
7.875% due 10/15/02 750 796
--------
3,936
--------
TOTAL LONG-TERM INVESTMENTS
(cost $156,911) 156,867
--------
</TABLE>
<PAGE>
VOLATILITY CONSTRAINED BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
December 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
SHORT-TERM INVESTMENTS - 8.2%
Chrysler Financial Corp. (MTN)
Series P
6.250% due 06/29/98 $ 850 $ 851
Frank Russell Investment Company
Money Market Fund, due on demand (a) 12,456 12,456
Goldman Sachs Group
6.300% due 01/05/98 (a) 900 900
--------
TOTAL SHORT-TERM INVESTMENTS
(cost $14,207) 14,207
--------
TOTAL INVESTMENTS
(identified cost $171,118)(b) - 98.9% $171,074
OTHER ASSETS AND LIABILITIES,
NET - 1.1% 1,902
--------
NET ASSETS - 100.0% $172,976
========
</TABLE>
(a)At cost, which approximates market.
(b)See Note 2 for federal income tax information.
(c)Adjustable or floating rate securities.
Abbreviations:
MTN - Medium Term Note
PLC - Public Limited Company
REMIC - Real Estate Mortgage Investment Conduit
The accompanying notes are an integral part of the financial statements.
C(2)-8
<PAGE>
VOLATILITY CONSTRAINED BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<TABLE>
<CAPTION>
Amounts in
thousands (except
per share amount)
<S> <C> <C>
ASSETS
Investments at market (identified cost $171,118)(Note 2)... $ 171,074
Receivables:
Dividends and interest.................................... 1,986
Investments sold.......................................... 176
Fund shares sold.......................................... 513
--------------
Total Assets............................................. 173,749
LIABILITIES
Payables:
Investments purchased...................... $ 598
Accrued fees to affiliates (Note 4)........ 111
Other accrued expenses..................... 64
--------------
Total Liabilities........................................ 773
--------------
NET ASSETS................................................. $ 172,976
==============
NET ASSETS CONSIST OF:
Undistributed net investment income........................ $ 708
Accumulated net realized gain (loss)....................... (10,088)
Unrealized appreciation (depreciation) on investments...... (44)
Shares of beneficial interest.............................. 91
Additional paid-in capital................................. 182,309
--------------
NET ASSETS................................................. $ 172,976
==============
NET ASSET VALUE, offering and redemption price per share:
($172,976,445 divided by 9,074,415 shares of $.01 par
value
shares of beneficial interest outstanding)................ $ 19.06
==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
C(2)-9
<PAGE>
VOLATILITY CONSTRAINED BOND FUND
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Amounts in thousands
<S> <C> <C>
INVESTMENT INCOME:
Interest............................................. $ 9,879
Dividends from Money Market Fund (Note 5)............ 529
Dividends............................................ 39
--------------
Total Investment Income............................. 10,447
EXPENSES (Notes 2 and 4):
Management fees............................ $ 812
Custodian fees............................. 136
Transfer agent fees........................ 193
Bookkeeping service fees................... 15
Professional fees.......................... 23
Registration fees.......................... 48
Trustees' fees............................. 4
Miscellaneous.............................. 34
---------
Total Expenses...................................... 1,265
--------------
Net investment income................................. 9,182
--------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
(Notes 2 and 3)
Net realized gain (loss) from investments............. (141)
Net change in unrealized appreciation or depreciation
of investments....................................... 325
--------------
Net gain (loss) on investments........................ 184
--------------
Net increase (decrease) in net assets resulting from
operations........................................... $ 9,366
==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
C(2)-10
<PAGE>
VOLATILITY CONSTRAINED BOND FUND
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended December 31,
<TABLE>
<CAPTION>
Amounts in thousands
1997 1996
-------------- --------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income......................... $ 9,182 $ 9,516
Net realized gain (loss)...................... (141) (2,355)
Net change in unrealized appreciation or
depreciation................................. 325 275
-------------- --------------
Net increase (decrease) in net assets
resulting from operations................... 9,366 7,436
-------------- --------------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income......................... (9,388) (8,805)
-------------- --------------
FROM FUND SHARE TRANSACTIONS:
Net increase (decrease) in net assets from
Fund share transactions (Note 6)............. 9,801 (17,315)
-------------- --------------
TOTAL NET INCREASE (DECREASE) IN NET ASSETS.... 9,779 (18,684)
NET ASSETS
Beginning of period........................... 163,197 181,881
-------------- --------------
End of period (including undistributed net
investment income of $708 and $763,
respectively)................................ $ 172,976 $ 163,197
============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
C(2)-11
<PAGE>
VOLATILITY CONSTRAINED BOND FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD...................... $ 19.07 $ 19.21 $ 18.64 $ 19.78 $ 19.51
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income....... 1.07 1.09 1.21 1.15 .82
Net realized and unrealized
gain (loss) on
investments................ .02 (.22) .58 (1.16) .45
-------- -------- -------- -------- --------
Total Income From
Investment Operations..... 1.09 .87 1.79 (.01) 1.27
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Net investment income....... (1.10) (1.01) (1.22) (1.13) (.71)
Tax return of capital....... -- -- -- -- (.29)
-------- -------- -------- -------- --------
Total Distributions........ (1.10) (1.01) (1.22) (1.13) (1.00)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF
PERIOD...................... $ 19.06 $ 19.07 $ 19.21 $ 18.64 $ 19.78
======== ======== ======== ======== ========
TOTAL RETURN (%)............. 5.90 4.66 9.89 (.02) 6.67
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period
($000 omitted)............. 172,976 163,197 181,881 195,007 225,672
Ratios to average net assets
(%):
Operating expenses......... .78 .76 .71 .67 .66
Net investment income...... 5.63 5.69 6.33 5.97 5.79
Portfolio turnover rate
(%)........................ 197.45 311.51 256.72 182.65 220.77
</TABLE>
C(2)-12
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
1.ORGANIZATION
Frank Russell Investment Company (the "Investment Company") is a series
mutual fund with 28 different investment portfolios, referred to as "Funds."
These financial statements report on the Volatility Constrained Bond Fund
(the "Fund"). The Investment Company is registered under the Investment
Company Act of 1940, as amended, as a diversified, open-end management
investment company. It is organized and operates as a Massachusetts business
trust under an amended master trust agreement dated July 26, 1984. The
Investment Company's master trust agreement permits the Board of Trustees to
issue an unlimited number of full and fractional shares of beneficial
interest at a $.01 par value. As of July 8, 1996, the Fund has available
Class S and Class C shares, however, Class C has not been funded as of
December 31, 1997.
2.SIGNIFICANT ACCOUNTING POLICIES
The Fund's financial statements are prepared in accordance with generally
accepted accounting principles ("GAAP") which require the use of management
estimates. The following is a summary of the significant accounting policies
consistently followed by the Fund in the preparation of these financial
statements.
SECURITY VALUATION: United States fixed-income securities listed and traded
principally on any national securities exchange are valued on the basis of
the last sale price or, lacking any sale, at the closing bid price, on the
primary exchange on which the security is traded. United States over-the-
counter fixed-income securities and options are valued on the basis of the
closing bid price. Futures contracts are valued on the basis of the last
sale price. Many fixed-income securities do not trade each day and, thus,
last sale or bid prices are frequently not available. Fixed-income
securities, therefore, may be valued using prices provided by a pricing
service when such prices are believed to reflect the fair market value of
such securities.
International fixed-income securities traded on a national securities
exchange are valued on the basis of the last sale price. International
securities traded over the counter are valued on the basis of the mean of
bid prices. In the absence of a last sale or mean bid price, respectively,
such securities may be valued on the basis of prices provided by a pricing
service if those prices are believed to reflect the fair market value of
such securities.
Short-term investments held by the Fund maturing within 60 days of the
valuation date are valued at "amortized cost" unless the Board of Trustees
determines that amortized cost does not represent fair value.
The Fund may value certain securities for which market quotations are not
readily available at "fair value," as determined in good faith pursuant to
procedures established by the Board of Trustees.
INVESTMENT TRANSACTIONS: Securities transactions are recorded on a trade
date basis. Realized gains and losses from securities transactions are
recorded on the basis of specific identified cost incurred by each money
manager within the fund. The Fund may lend portfolio securities but has not
done so during the year ended December 31, 1997.
INVESTMENT INCOME: Dividend income is recorded on the ex-dividend date and
interest income is recorded on the accrual basis.
AMORTIZATION AND ACCRETION: All zero-coupon bond discounts and original
issue discounts are accreted for both tax and financial reporting purposes.
All short-term premiums/discounts are amortized/accreted for both tax and
financial reporting purposes.
FEDERAL INCOME TAXES: As a Massachusetts business trust, each Fund is a
separate corporate taxpayer and determines its net investment income and
capital gains (or losses) and the amounts to be distributed to each Fund's
shareholders without regard to the income and capital gains (or losses) of
the other Funds.
It is each Fund's intention to qualify as a regulated investment company and
distribute all of its taxable income. Therefore, no federal income tax
provision was required for the Fund.
At December 31, 1997, the Fund had net tax basis capital loss carryforwards
which may be applied against any net realized taxable gains in each
succeeding year or until their respective expiration dates, whichever occurs
first. Available capital loss carryforwards and expiration dates are as
follows:
<TABLE>
<CAPTION>
12/31/02 12/31/03 12/31/04 12/31/05 TOTAL
---------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Volatility
Constrained Bond $5,583,410 $1,871,605 $2,135,100 $201,012 $9,791,127
</TABLE>
C(2)-13
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1997
The aggregate cost of investments and the composition of gross unrealized
appreciation and depreciation of investment securities for federal income
tax purposes as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS NET
FEDERAL TAX UNREALIZED UNREALIZED APPRECIATION
COST APPRECIATION (DEPRECIATION) (DEPRECIATION)
------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
Volatility Constrained
Bond $171,175,204 $998,958 $(1,100,384) $(101,426)
</TABLE>
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: For the Fund, income dividends
and capital gain distributions, if any, are recorded on the ex-dividend
date. Dividends are generally declared and paid quarterly for the equity
Funds. Capital gain distributions are generally declared and paid annually.
An additional distribution may be paid by the Fund to avoid imposition of
federal income tax on any remaining undistributed capital gains and net
investment income.
The timing and characterization of certain income and capital gain
distributions are determined in accordance with federal tax regulations
which may differ from GAAP. As a result, net investment income and net
realized gain (or loss) on investment and foreign currency-related
transactions for a reporting period may differ significantly from
distributions during such period. The differences between tax regulations
and GAAP primarily relate to investments in options, futures, mortgage-
backed securities, and certain securities sold at a loss. Accordingly, the
Fund may periodically make reclassifications among certain of its capital
accounts without impacting its net asset value.
The following reclassifications have been made to reflect activity for the
year ended December 31, 1997:
<TABLE>
<CAPTION>
ACCUMULATED
UNDISTRIBUTED NET
NET INVESTMENT REALIZED
INCOME GAIN (LOSS)
-------------- -----------
<S> <C> <C>
Volatility Constrained Bond $151,289 $(151,289)
</TABLE>
EXPENSES: The Fund will pay its own expenses other than those expressly
assumed by Frank Russell Investment Management Company ("FRIMCo" or
"Manager"). Most expenses can be directly attributed to the Fund. Expenses
which cannot be directly attributed are allocated among all Funds
principally based on their relative net assets. In addition, Class C shares
will pay 12b-1 and shareholder servicing fees along with other expenses that
may be attributable to that Class.
REPURCHASE AGREEMENTS: The Fund may engage in repurchase agreements with
several financial institutions whereby a Fund, through its custodian,
receives delivery of underlying securities as collateral. The Fund's Money
Managers will monitor repurchase agreements daily to determine that the
market value (including accrued interest) of the underlying securities at
Fedwire closing time remains at least equal to 102% of the repurchase price.
The Money Managers will notify the Seller to immediately increase the
collateral on the repurchase agreement to 102% of the repurchase price if
collateral value falls below 102%.
DERIVATIVES: To the extent permitted by the investment objectives,
restrictions and policies set forth in the Fund's Prospectus and Statement
of Additional Information, the Fund may participate in various derivative-
based transactions. Derivative securities are instruments or agreements
whose value is derived from an underlying security or index. They include
options, futures, swaps, forwards, structured notes and stripped securities.
These instruments offer unique characteristics and risks that assist the
Fund in meeting its investment strategies.
The Funds typically use derivatives in three ways: cash equitization,
hedging, and return enhancement. Cash equitization is a technique that may
be used by certain Funds through the use of options and futures to earn
"market-like" returns with their excess and liquidity reserve cash balances.
Hedging is used by some Funds to limit or control risks, such as adverse
movements in exchange rates and interest rates. Return enhancement can be
accomplished through the use of derivatives in a Fund. By purchasing certain
instruments, Funds may more effectively achieve the desired portfolio
characteristics that assist them in meeting their investment objectives.
Depending on how the derivatives are structured and utilized, the risks
associated with them may vary widely. These risks are generally categorized
as market risk, liquidity risk and counterparty or credit risk.
FORWARD COMMITMENTS: The Fund may contract to purchase securities for a
fixed price at a future date beyond customary settlement time (i.e., a
"forward commitment", "delayed settlement" or "when issued" transaction,
e.g., to be announced ("TBA")) consistent with the Fund's ability to manage
its investment portfolio and meet redemption requests. The price of the
underlying securities and the date when the securities will be delivered and
paid for are fixed at the time the transaction is negotiated. The Fund may
dispose of a forward commitment transaction prior to settlement if it is
appropriate to do so and realize short-term gains (or losses) upon such
sale. When effecting such transactions, cash or liquid highgrade debt
obligations of the Fund in a dollar amount sufficient to make payment for
the portfolio securities
C(2)-14
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1997
to be purchased will be segregated on the Fund's records at the trade date
and maintained until the transaction is settled. A forward commitment
transaction involves a risk of loss if the value of the security to be
purchased declines prior to the settlement date or the other party to the
transaction fails to complete the transaction.
OPTIONS: The Fund may purchase and sell (write) call and put options on
securities and securities indices, provided such options are traded on a
national securities exchange or in an over-the-counter market. The Fund may
also purchase and sell call and put options on foreign currencies.
3.INVESTMENT TRANSACTIONS
SECURITIES: During the year ended December 31, 1997, the Fund had purchases
and sales of investment securities (excluding U.S. Government and Agency
obligations, short-term investments, options, futures and repurchase
agreements) of $122,596,258 and $84,854,304, respectively.
Purchases and sales of U.S. Government and Agency obligations (excluding
short-term investments, options, futures and repurchase agreements) were
$183,206,901 and $215,956,623, respectively.
4.RELATED PARTIES
MANAGER: FRIMCo operates and administers all of the Funds which comprise the
Investment Company, and manages the Money Market and U.S. Government Money
Market Funds (two series of the Investment Company not presented in this
report). FRIMCo is a wholly owned subsidiary of Frank Russell Company, which
researches and recommends to FRIMCo, and to the Investment Company, one or
more investment management organizations to manage the portfolio of each
Fund.
For the year ended December 31, 1997, the management fee paid to FRIMCo, for
the Fund, in accordance with the Investment Company's Management Agreement
with that firm amounted to $812,000 before waivers. Such fee is payable
monthly and is equal to the annual rate of 0.50% of the average daily net
assets of the Fund.
Effective October 15, 1997, FRIMCo began calculating its management fee
based on average daily net assets for the Fund, less any management fee
incurred on assets invested in the Money Market Fund (see Note 5) thereby
eliminating any duplication of fees. Prior to October 15, 1997, FRIMCo
calculated its management fee based on average daily net assets for the
Fund, which may have included an investment in the Money Market Fund. Prior
to October 15, 1997, the Money Market Fund waived all management fees.
BOOKKEEPING SERVICES: Fees for bookkeeping and analytic services provided to
the Fund are paid or accrued to Frank Russell Company, an affiliate of the
Investment Company. Frank Russell Company provides its Portfolio
Verification System ("PVS") and TruVP System to the Fund, pursuant to a
written Service Agreement. The PVS computerized database system records
detailed transactions data for the Fund necessary to prepare various
financial and Internal Revenue Service accounting reports, whereas the TruVP
System provides analytics used by the investment department. The Fund's fees
for the year ended December 31, 1997 were $15,000. The PVS system portion of
the service agreement was terminated during 1997.
TRANSFER AGENT: The Fund has a contract with FRIMCo to provide transfer
agent services to the Investment Company. Total fees for the year ended
December 31, 1997 were $193,000.
DISTRIBUTOR AND SHAREHOLDER SERVICING: The Investment Company has adopted a
Distribution Plan pursuant to Rule 12b-1 (the "Plan") under the 1940 Act.
Under this Plan, the Investment Company is authorized to make payments to
the Distributor, or any Selling Agents, as defined in the Plan, an amount
(the "12b-1 Fee") for sales support services provided, and related expenses
incurred which are primarily intended to result in the sale of the Class C
Shares subject to the Distribution Plan.
The Investment Company has entered into a Distribution Agreement with
Russell Fund Distributors (the "Distributor") which is a wholly-owned
subsidiary of FRIMCo to promote and offer shares of Class S and Class C of
the Investment Company Fund. The Distributor may enter into sub-distribution
agreements with other non-affiliated parties (the "Selling/Servicing
Agents"). The Distributor receives no compensation from the Investment
Company for its services relating to distributing the Class S Shares.
In addition, the Investment Company has adopted a Shareholder Services Plan
(the "Services Plan") under which it may make payments to the Distributor or
any Servicing Agent for any activities or expenses primarily intended to
assist, support or service the Servicing Agents' clients who beneficially
own Class C Shares of the Funds.
C(2)-15
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
December 31, 1997
The 12b-1 Fee payments shall not exceed .75% of the average daily net assets
of the Fund's Class C Shares on an annual basis. Currently the Board of
Trustees has determined to assess a 12b-1 Fee equal to .40% of the average
daily net assets. The shareholder servicing payments shall not exceed .25%
of the average daily net assets of the Fund's Class C Shares on an annual
basis. The Investment Company does not pay for unreimbursed expenses of the
Distributor including amounts expended by the Distributor in excess of
amounts received by it from the Investment Company, interest, carrying or
other financial charges in connection with excess amounts expended, or the
Distributor's overhead expenses. However, the Distributor may be able to
recover such amount or more from future payments made by the Investment
Company under the Distribution plan.
ACCRUED FEES PAYABLE TO AFFILIATES AS OF DECEMBER 31, 1997 WERE AS FOLLOWS:
<TABLE>
<CAPTION>
BOOKKEEPING TRANSFER
MANAGEMENT SERVICE AGENT
FEES FEES FEES TOTAL
---------- ----------- -------- -----
<S> <C> <C> <C> <C>
Volatility Constrained Bond $72,119 $10,797 $27,585 $110,501
</TABLE>
BOARD OF TRUSTEES: The Investment Company pays each of its Trustees not
affiliated with FRIMCo a retainer of $20,000 per year plus out-of-pocket
expenses. Total Trustee expenses were $101,243 for the year ended December
31, 1997, and were allocated to each Fund and Class, where appropriate, on a
pro rata basis, including 27 other affiliated funds not presented herein.
5.MONEY MARKET FUND
The Fund is permitted to invest its cash reserves (i.e., monies awaiting
investment in portfolio securities suitable for the Funds' objectives) in
the Frank Russell Investment Company Money Market Fund (a series of Frank
Russell Investment Company not presented herein). As of December 31, 1997,
$12,456,000 of the Money Market Fund's net assets represents investments by
the Fund and $695,476,000 represents the investments of other affiliated
Funds not presented herein.
6.FUND SHARE TRANSACTIONS
Share transactions for each Class of shares for the years ended December 31,
were as follows:
<TABLE>
<CAPTION>
SHARES DOLLARS
---------------------- -------------------------
1997 1996 1997 1996
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
VOLATILITY CONSTRAINED
BOND
CLASS S
Proceeds from shares sold 4,531,595 3,498,329 $86,343,467 $ 66,587,891
Proceeds from
reinvestment of
distributions 318,828 296,985 6,058,603 5,642,187
Payments for shares
redeemed (4,334,448) (4,705,618) (82,601,508) (89,544,794)
---------- ---------- ----------- ------------
Total net increase
(decrease) 515,975 (910,304) $ 9,800,562 $(17,314,716)
========== ========== =========== ============
</TABLE>
There was no activity in Class C shares for Volatility Constrained Bond.
7.DIVIDENDS
On February 2, 1998, the Board of Trustees declared a $0.0854 dividend from
net investment income payable on February 10, 1998, to the Fund's
shareholders of record on February 3, 1998.
8.SUBSEQUENT EVENTS
On August 10, 1998, Frank Russell Company entered into an agreement with The
Northwestern Mutual Life Insurance Co., an insurance organization, pursuant
to which Northwestern Mutual Life will acquire all of the outstanding common
stock of Frank Russell Company.
At its meeting on April 27, 1998, the Investment Company's Board of
Trustees, in an effort to meet the best interests of shareholders of the
Volatility Constrained Bond Fund and the Fixed Income II Fund (a series of
the Investment Company not presented herein) approved a plan of
reorganization for the merger of the two Funds. The merger is subject to
shareholder approval at a meeting scheduled for November 19, 1998.
C(2)-16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board
of Trustees of Frank Russell Investment Company:
We have audited the accompanying statement of assets and liabilities and
statements of net assets of the Volatility Constrained Bond Fund (the "Fund")
(one of the funds constituting the Frank Russell Investment Company series) as
of December 31, 1997, and the related statement of operations for the year
then ended, the statement of changes in net assets for each of the two years
in the period then ended, and the financial highlights for each of the five
years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of December 31, 1997, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Fund as of December 31, 1997, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended, and the financial highlights for each of the five years in the
period then ended, in conformity with generally accepted accounting
principles.
Boston, Massachusetts
February 17, 1998, except for
Note 8 as to which the
date is August 10, 1998
/s/ PricewaterhouseCoopers LLC
C(2)-17
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
909 A Street, Tacoma, Washington 98402
(800) 832-6688
In Washington (253) 627-7001
TRUSTEES
George F. Russell, Jr., Chairman
Lynn L. Anderson
Paul E. Anderson
Paul Anton, PhD
William E. Baxter
Lee C. Gingrich
Eleanor W. Palmer
OFFICERS
Lynn L. Anderson, President and Chief Executive Officer
Peter Apanovitch, Manager of Short Term Investment Funds
George W. Weber, Treasurer and Chief Accounting Officer
Randall P. Lert, Director of Investments
Karl Ege, Secretary and General Counsel
MANAGER AND TRANSFER AGENT
Frank Russell Investment Management Company
909 A Street
Tacoma, WA 98402
CONSULTANT
Frank Russell Company
909 A Street
Tacoma, WA 98402
CUSTODIAN
State Street Bank and Trust Company
1776 Heritage Drive
North Quincy, MA 02171
OFFICE OF SHAREHOLDER INQUIRIES
909 A Street
Tacoma, WA 98402
(800) RUSSEL4
(800) 787-7354
LEGAL COUNSEL
Stradley, Ronon, Stevens & Young, LLP
2600--One Commerce Square
Philadelphia, PA 19103-7098
INDEPENDENT ACCOUNTANTS
PriceWaterhouseCoopers LLP
One Post Office Square
Boston, MA 02109
DISTRIBUTOR
Russell Fund Distributors, Inc.
909 A Street
Tacoma, WA 98402
MONEY MANAGERS
BlackRock Financial Management, New York, NY
Standish, Ayer & Wood, Inc., Boston, MA
STW Fixed Income Management, Ltd., Hamilton, Bermuda
This report is prepared from the books and records of the Fund and is submitted
for the general information of shareholders and is not authorized for
distribution to prospective investors unless accompanied or preceded by an
effective Prospectus. Nothing herein contained is to be considered an offer of
sale or a solicitation of an offer to buy shares of Frank Russell Investment
Company. Such offering is made only by Prospectus, which includes details as to
offering price and other material information.
C(2)-18
<PAGE>
EXHIBIT D(1)
For your convenience, this semi-annual report has been
condensed to include only the Fixed Income II Fund. Please
disregard any reference to other Frank Russell Investment
Company Funds not relevant to the proposed plan of re-
organization.
FRANK RUSSELL INVESTMENT COMPANY
FIXED INCOME II FUND
SEMIANNUAL REPORT
JUNE 30, 1998
(UNAUDITED)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Financial Statements............................................... D(1)-2
Notes to Financial Statements...................................... D(1)-11
Manager, Money Managers and Service Providers...................... D(1)-15
</TABLE>
FRANK RUSSELL INVESTMENT COMPANY--FIXED INCOME II FUND
Copyright (C) Frank Russell Company 1998. All rights reserved. This material
is proprietary and may not be reproduced, transferred, or distributed in any
form without prior written permission from Frank Russell Company. It is
delivered on an "as is" basis without warranty. The Russell logo is a
trademark and service mark of Frank Russell Company. Frank Russell Company and
Standard & Poor's Corporation are the owners of the trademarks, service marks,
and copyrights related to their respective indexes. This material must be
accompanied or preceded by a current Frank Russell Investment Company
Prospectus containing complete information concerning the investment
objectives and operations of the Company, charges, and expenses. The
Prospectus should be read carefully before an investment is made. The
performance as of April 1, 1995 is reported gross of investment advisory fees.
For periods thereafter, performance and yields are reported net of investment
advisory fees but gross of investment services fees, descriptions of which can
be obtained from the investment advisor. Investment services fees and other
account expenses will reduce performance (e.g., an investment services fee of
0.2% of average managed assets will reduce a 10.0% annual return to 9.8%). The
performance quoted represents past performance and the investment return and
principal value of an investment will fluctuate so that shares, when redeemed,
may be worth more or less than their original cost. Investments in securities
of non-US issuers and foreign currencies involve investment risks different
than those of US issuers; the Prospectus contains further information and
details regarding these risks. Russell Fund Distributors, Inc., is the
distributor of Frank Russell Investment Company.
D(1)-1
<PAGE>
FIXED INCOME II FUND
STATEMENT OF NET ASSETS
June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
LONG-TERM INVESTMENTS - 95.9%
ASSET-BACKED SECURITIES - 33.4%
ABFS Equipment Contract Trust
6.100% due 10/15/05 $ 500 $ 502
Advanta Home Equity Loan Trust
Series 1994-1 Class A-2
6.300% due 07/25/25 32 32
AFC Home Equity Loan Trust
Series 1993-2 Class A
6.000% due 01/20/13 317 314
AFC Mortgage Loan Trust
Series 1996-3 Class 1A2
7.220% due 02/25/27 344 343
Arcadia Automobile Receivables Trust
Series 1998-B Class A3
5.950% due 11/15/02 1,000 1,000
Banc One Auto Grantor Trust
Series 1997-A Class A
6.270% due 11/20/03 2,917 2,935
Barnett Auto Trust
Series 1997-A Class A3
6.030% due 11/15/01 7,500 7,517
Chase Credit Card Master Trust
Series 1997-2 Class A
6.300% due 04/15/03 4,500 4,551
Series 1997-5 Class A
6.194% due 08/15/05 1,000 1,016
Series 1996-B Class A
6.610% due 09/15/02 508 512
Chemical Master Credit Card Trust I
Series 1996-1 Class A
5.550% due 09/15/03 4,000 3,961
Chevy Chase Auto Receivables Trust
Series 1996-2 Class A
5.900% due 07/15/03 748 748
Series 1997-1 Class A
6.500% due 10/15/03 1,162 1,168
Series 1997-2 Class A
6.350% due 01/15/04 660 664
Series 1997-3 Class A
6.200% due 03/20/04 (c) 526 528
Contimortgage Home Equity Loan Trust Pass-thru Certificate
Series 1997-4 Class A2
6.270% due 02/15/12 500 500
Delta Funding Home Equity Loan Trust
Series 1998-1 Class A2A
5.858% due 05/25/30 (c) 470 470
EQCC Home Equity Loan Trust
Series 1993-4 Class A
5.725% due 12/15/08 33 33
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
Equivantage Home Equity Loan Trust
Series 1996-1 Class A
6.550% due 10/25/25 $ 23 $ 23
Fingerhut Master Trust
Series 1998-1 Class A
6.070% due 02/15/05 325 325
First Chicago Master Trust II Credit Card Certificates
Series 1994-L
7.150% due 04/15/01 4,500 4,569
First Security Auto Grantor Trust
Series 1997-A Class A
6.300% due 08/15/03 716 718
Green Tree Financial Corp.
Series 1998-1 Class A3
5.950% due 04/01/13 750 751
Series 1997-3 Class A2
6.490% due 07/15/28 556 558
Green Tree Home Improvement Loan Trust
Series 1997-A Class HIA3
7.050% due 08/15/23 600 611
Honda Auto Receivables Grantor Trust
Series 1995-A Class A
6.200% due 12/15/00 209 210
Series 1997-A Class A
5.850% due 02/15/03 379 379
IMC Home Equity Loan Trust
Series 1997-5 Class A1
6.510% due 02/20/06 (c) 568 568
Series 1998-1 Class A3
6.410% due 04/20/18 (c) 700 702
Nationsbank Credit Card Master Trust
Series 1995-1 Class A
6.450% due 04/15/03 5,650 5,714
New Century Home Equity Loan Trust
Series 1998-NC3 Class A1
6.000% due 06/26/28 1,000 996
Nissan Auto Receivables Grantor Trust
Series 1997-1 Class A
6.150% due 02/15/03 281 282
NPF VI Inc.
Series 1998-1A Class A
6.220% due 06/01/02 600 601
Olympic Automobile Receivables Trust
Series 1996-B Class A4
6.700% due 03/15/02 1,000 1,010
Series 1996-D Class CTFS
6.125% due 04/15/02 3,043 3,043
</TABLE>
D(1)-2
<PAGE>
FIXED INCOME II FUND
STATEMENT OF NET ASSETS, CONTINUED
June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
PBG Equipment Trust
Series 1A Class A
6.270% due 01/20/12 $ 900 $ 901
PNC Student Loan Trust I
Series 1997-2 Class A3
6.314% due 01/25/01 5,000 5,057
Premier Auto Trust
Series 1997-3 Class A4
6.200% due 01/06/01 5,000 5,020
Prime Credit Card Master Trust
Series 1992-2 Class A2
7.450% due 11/15/02 1,000 1,022
Remodelers Home Improvement Loan
Series 1995-3 Class A2
6.800% due 12/20/07 260 260
Rental Car Finance Corp.
Series 1997-1 Class A1
6.250% due 06/25/03 400 401
Ryder Vehicle Lease Trust
Series 1998-A Class A
6.100% due 09/15/08 (c) 500 500
Sears Credit Account Master Trust
Series 1995-2 Class A
8.100% due 06/15/04 4,300 4,420
Series 1995-3 Class A
7.000% due 10/15/04 900 918
Series 1997-1 Class A
6.200% due 07/16/07 500 503
Series 1998-1 Class A
5.800% due 08/15/05 2,800 2,793
SPNB Home Equity Loan
Series 1991-1 Class B
8.150% due 06/15/20 87 89
Standard Credit Card Master Trust
Series 1994-4 Class A
8.250% due 11/07/03 1,200 1,279
The Money Store Auto Grantor Trust
Series 1997-4 Class A2
6.350% due 03/20/04 600 604
The Money Store Small Business Administration Loan Trust
Series 1997-1 Class A
6.241% due 01/15/25 (c) 965 967
Series 1997-1 Class B
6.720% due 01/15/25 (c) 483 486
WFS Financial Owner Trust
Series 1996-D Class A3
6.050% due 07/20/01 (c) 3,789 3,800
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
World Omni Automobile Lease Securitization Trust
Series 1996-B Class A3
6.250% due 11/15/02 $ 1,094 $ 1,101
Series 1996-B Class B
6.850% due 11/15/02 (c) 349 349
Series 1997-Class A2
6.750% due 06/25/03 (c) 5,497 5,539
Series 1997-A Class A4
6.900% due 06/25/03 500 508
--------
84,371
--------
CORPORATE BONDS AND NOTES - 28.7%
Ahmanson (H.F.)
9.875% due 11/15/99 875 917
Aristar Inc.
6.125% due 12/01/00 725 727
Associates Corp. of North America
6.375% due 08/15/00 5,500 5,546
Banco De Latinoamerica
6.500% due 04/02/01 (c) 1,200 1,216
Bankamerica Corp.
9.500% due 04/01/01 1,250 1,354
Banponce Corp. (MTN)
Series 2
5.750% due 03/01/99 2,075 2,071
Bear Stearns Co., Inc.
7.625% due 09/15/99 1,125 1,146
Chase Manhattan Corp.
10.125% due 11/01/00 1,259 1,371
5.813% due 12/05/09 (c) 200 197
Chrysler Financial Corp. (MTN)
6.610% due 06/16/00 1,150 1,164
CIT Group Holdings, Inc. (MTN)
6.125% due 12/15/00 5,000 5,018
Coca-Cola Put Asset Trust
6.000% due 03/15/01 1,000 1,001
Comdisco Inc. (MTN)
6.070% due 05/08/00 1,000 1,003
Conseco Inc.
6.400% due 06/15/01 (c) 1,000 999
Cox Enterprises, Inc.
6.250% due 08/26/99 1,400 1,403
Crescent Real Estate Equities
6.625% due 09/15/02 750 740
ERAC USA Finance Co.
6.375% due 05/15/03 1,075 1,077
ERP Operating, L.P.
8.500% due 05/15/99 1,050 1,070
</TABLE>
D(1)-3
<PAGE>
FIXED INCOME II FUND
STATEMENT OF NET ASSETS, CONTINUED
June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
Finova Capital Corp.
6.450% due 06/01/00 $ 400 $ 403
First Chicago Corp.
9.000% due 06/15/99 500 514
First Industrial L.P.
6.500% due 04/05/01 (c) 1,375 1,378
First Union Corp.
6.600% due 06/15/00 1,000 1,012
Fleet Financial Group
Inc.
6.875% due 03/01/03 700 718
Franchise Finance Corp.
7.000% due 11/30/00 1,000 1,015
General Electric Capital
Corp. (MTN)
6.120% due 08/15/00 5,500 5,535
General Motors Acceptance
Corp. (MTN)
7.500% due 07/22/99 925 940
7.465% due 07/25/19 1,383 1,386
7.012% due 04/01/20 (c) 979 991
Heller Financial, c.
(MTN)
5.738% due 03/01/99 (c) 1,000 1,001
Hertz Corp.
6.500% due 04/01/00 450 452
Homeside Lending Inc.
(MTN)
6.875% due 05/15/00 1,200 1,220
6.875% due O6/30/02 2,000 2,046
JC Penney & Co., Inc.
(MTN)
6.375% due 09/15/00 1,125 1,137
KeyCorp
8.400% due 04/01/99 1,000 1,017
Lehman Brothers Holdings,
Inc. (MTN)
6.000% due 02/26/01 1,250 1,248
Series IBC
7.000% due 05/13/99 800 807
Liberty Property L.P.
(MTN)
6.600% due 06/05/02 600 608
MBNA Corp. (MTN)
Series B
6.500% due 09/15/00 1,000 1,004
MCI Communications Corp.
6.125% due 04/15/02 (c) 1,500 1,502
Merrill Lynch & Co., Inc.
(MTN)
7.260% due 03/25/02 1,425 1,463
Midlantic Corp.
9.250% due 09/01/99 375 388
Norwest Financial, Inc.
6.375% due 09/15/02 500 505
Occidental Petroleum
Corp. (MTN)
5.950% due 11/09/98 950 949
Procter & Gamble
9.625% due 01/14/01 3,020 3,261
Salomon, Inc.
7.750% due 05/15/00 1,000 1,030
6.700% due 07/05/00 500 507
Salomon, Inc. CMT Floater (MTN)
5.382% due 04/05/99 (c) 1,100 1,100
Sears Roebuck Acceptance Corp. (MTN)
6.160% due 09/20/00 5,500 5,523
Sears Roebuck Acceptance Corp. (MTN)
Series II
6.690% due 04/30/01 1,050 1,069
Sovereign Bancorp, Inc. (Regd)
6.750% due 07/01/00 1,250 1,261
Taubman Realty Group, L.P.
8.000% due 06/15/99 250 254
Wellsford Residential
Property Trust (MTN)
6.019% due 11/24/99 (c) 1,300 1,302
--------
72,566
--------
EURODOLLAR BONDS - 0.6%
ALPS Pass-thru Trust
Series 1994-1 Class A-2
7.150% due 09/15/04 (c) 210 210
Videotron Holdings PLC Step Up Bond
Zero Coupon due 07/01/04 1,375 1,351
--------
1,561
--------
MORTGAGE-BACKED SECURITIES - 10.4%
Bayview Financial Acquisition Trust
Series 1998-1 Class A1
7.010% due 05/25/29 800 812
Bear Stearns Mortgage Securities, Inc.
Series 1996-6 Class A2
7.000% due 11/25/27 821 820
BKD Commercial Mortgage Trust
Series 1997-C1 Class B
7.218% due 04/25/00 (c) 538 536
Chase Mortgage Finance Corp.
Series 1998-S2 Class A1
6.500% due 07/25/28 700 703
Citicorp Mortgage Securities, Inc.
REMIC Series 1997-5 Class A1
6.500% due 11/25/27 650 652
Credit Suisse First Boston Mortgage
7.000% due 12/25/37 600 600
Federal Home Loan Mortgage Corp.
Participation Certificate
Series 1540 Class C
6.050% due 02/15/11 866 866
</TABLE>
D(1)-4
<PAGE>
FIXED INCOME II FUND
STATEMENT OF NET ASSETS, CONTINUED
June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
Federal Home Loan Mortgage Corp. Groups
Participation Certificate
7.500% due 2000 $ 481 $ 484
9.000% due 2005 153 157
7.375% due 2006 126 128
6.250% due 2007 78 78
Federal Home Loan Mortgage Corp.
Series 2061 Class PH
6.000% due 05/15/16 600 600
Federal National Mortgage Association Pools
7.000% due 2004 683 692
8.000% due 2009 790 817
8.500% due 2010 680 709
6.250% due 2013 1,900 1,922
Federal National Mortgage Association Grantor Trust
REMIC Series 1996-T6 Class C
6.200% due 02/26/01 1,235 1,236
GE Capital Mortgage Services, Inc.
Series 1998-10 Class 2A1
6.500% due 05/25/13 600 602
GE Capital Mortgage Services, Inc.
REMIC Series 1997-9 Class 1A2
6.750% due 10/25/27 225 227
Government National Mortgage
Association Pools
9.500% due 2025 488 529
7.250% due 2026 1,165 1,200
5.000% due 2027 1,414 1,432
Merit Securities Corp.
Series II Class 1A1
6.580% due 07/28/22 1,400 1,400
Norwest Integrated Structured Assets, Inc.
Series 1998-1 Class 2A1
7.000% due 06/25/28 600 604
Prudential Home Mortgage Securities Co.
Series 1993-S7 Class A4
5.900% due 12/25/23 1,150 1,140
Series 1994-19 Class A2
7.050% due 05/25/24 509 513
Residential Accredited Loans, Inc.
Series 1997-QS7 Class A1
7.500% due 07/25/27 362 366
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
Residential Asset Secruitization Trust Mortgage Pass-thru
Certificates
Series 1996-A8 Class A1
8.000% due 12/25/26 $ 30 $ 31
Series 1997-A5 Class A3
7.125% due 07/25/27 75 75
Series 1998-A2 Class A1
6.750% due 04/25/28 555 557
Series 1998-A5 Class A1
6.750% due 05/25/28 582 583
Residential Funding Mortgage Securities I
Series 1997-S12 Class A10
6.700% due 08/25/27 1,500 1,505
Resolution Trust Corp.
Mortgage Pass-thru Certificate
Series 1994-C1 Class D
8.000% due 06/25/26 (c) 863 876
Series 1995-2 Class C1
7.450% due 05/25/29 (c) 217 220
SASCO LLC
Series 1997-N1 Class D
6.178% due 09/25/28 (c) 800 800
Structured Asset Securities Corp.
Series 1998-C2A Class A
6.145% due 01/25/13 (c) 300 300
Union Planters Mortgage Finance Corp.
Series 1998-A Class A1
6.350% due 01/25/28 625 626
Wilshire Funding Corporation
Series 1997-WFC1 Class AI
7.250% due 08/25/27 790 797
--------
26,195
--------
MUNICIPAL BONDS - 0.3%
Philadelphia, Pennsylvania, Authority
for Industrial Development Class A
6.480% due 06/15/04 836 863
--------
863
--------
UNITED STATES GOVERNMENT AGENCIES - 0.2%
Federal Home Loan Bank
6.070% due 01/17/01 500 499
--------
499
--------
</TABLE>
D(1)-5
<PAGE>
FUND FIXED INCOME II
STATEMENT OF NET ASSETS, CONTINUED
June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
UNITED STATES GOVERNMENT
TREASURIES - 20.4%
United States Treasury Notes
6.000% due 06/30/99 $ 500 $ 502
5.875% due 11/15/99 100 100
5.375% due 02/01/00 1,030 1,028
6.875% due 03/31/00 175 179
5.625% due 11/30/00 1,450 1,453
5.375% due 02/15/01 25,800 25,711
5.625% due 05/15/01 275 276
6.500% due 08/31/01 2,625 2,696
6.250% due 02/28/02 360 368
3.625% due 07/15/02 13,764 13,614
5.750% due 10/31/02 700 706
5.750% due 11/30/02 4,445 4,482
5.500% due 05/31/03 300 300
--------
51,415
--------
YANKEE BONDS - 1.9%
Brascan, Ltd
7.375% due 10/01/02 1,000 1,028
Household International
5.250% due 10/15/98 1,150 1,149
Quebec, Province of
13.250% due 09/15/14 450 505
Tyco International Group SA
6.125% due 06/15/01 1,000 1,003
Westpac Banking, Ltd.
7.875% due 10/15/02 1,000 1,060
--------
4,745
--------
TOTAL LONG-TERM INVESTMENTS
(cost $241,609) 242,215
--------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
SHORT-TERM INVESTMENTS - 4.2%
Frank Russell Investment Company
Money Market Fund, due on demand (a) $10,103 $ 10,103
Goldman Sachs Group L.P.
5.750% due 07/10/98 (a)(b) 500 499
--------
TOTAL SHORT-TERM INVESTMENTS
(cost $10,602) 10,602
--------
TOTAL SHORT-TERM
(identified cost $252,211)(b) - 100.1% 252,817
OTHER ASSETS AND LIABILITIES,
Net - (0.1%) (342)
--------
Net Assets - 100.0% $252,475
========
</TABLE>
(a) At cost, which approximates market.
(b) See Note 2 for federal income tax information.
(c) Adjustable or floating rate security.
Abbreviations:
MTN - Medium Term Note
PLC - Public Limited Company
RMEIC - Real Estimate Mortgage Investment Conduit
The accompanying notes are an integral part of the financial statements.
D(1)-6
<PAGE>
FIXED INCOME II FUND
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
Amounts in
thousands (except
per share amount)
<S> <C> <C>
ASSETS
Investments at market (identified cost $252,211) (Note 2)...... $ 252,817
Receivables:
Dividends and interest........................................ 2,757
Fund shares sold.............................................. 429
Short-term investments held as collateral for securities
loaned, at market (Note 3).................................... 9,326
--------------
Total Assets................................................. 265,329
LIABILITIES
Payables:
Investments purchased (regular settlement)... $ 2,715
Fund shares redeemed......................... 120
Accrued fees to affiliates (Note 4).......... 126
Other accrued expenses....................... 69
Bank overdraft............................... 498
Payable upon return of securities loaned, at
market (Note 3) ............................. 9,326
----------------
Total Liabilities............................................ 12,854
--------------
Net Assets..................................................... $ 252,475
==============
NET ASSETS CONSIST OF:
Undistributed net investment income............................ $ 3,361
Accumulated net realized loss.................................. (7,934)
Unrealized appreciation (depreciation) on investments.......... 606
Shares of beneficial interest.................................. 136
Additional paid-in capital..................................... 256,306
--------------
NET ASSETS..................................................... $ 252,475
==============
NET ASSET VALUE, offering and redemption price per share:
($252,475,463 divided by 13,600,839 shares of $.01 par value
shares of beneficial interest outstanding) ................... $ 18.56
==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
D(1)-7
<PAGE>
FIXED INCOME II FUND
STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
Amounts in thousands
<S> <C> <C>
INVESTMENT INCOME:
Interest................................................. $ 6,984
Dividends from Money Market Fund (Note 5)................ 361
--------------
Total Investment Income................................. 7,345
EXPENSES (Notes 2 and 4):
Management fees.......................... $ 589
Custodian fees........................... 78
Transfer agent fees...................... 73
Professional fees........................ 15
Registration fees........................ 24
Trustees' fees........................... 1
Miscellaneous............................ 13
---------------
Total Expenses.......................................... 793
--------------
Net investment income..................................... 6,552
--------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (Notes
2 and 3)
Net realized gain (loss) from investments................. (229)
Net change in unrealized appreciation or depreciation of
investments.............................................. 296
--------------
Net gain (loss) on investments............................ 67
--------------
Net increase (decrease) in net assets resulting from
operations............................................... $ 6,619
==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
D(1)-8
<PAGE>
FIXED INCOME II FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Amounts in thousands
FOR THE SIX MONTHS FOR THE YEAR
ENDED JUNE 30, 1998 ENDED
(UNAUDITED) DECEMBER 31, 1997
------------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income................... $ 6,552 $ 13,527
Net realized gain (loss)................ (229) (118)
Net change in unrealized appreciation or
depreciation........................... 296 487
-------------- --------------
Net increase (decrease) in net assets
resulting from operations............. 6,619 13,896
-------------- --------------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income................... (3,800) (13,676)
-------------- --------------
FROM FUND SHARE TRANSACTIONS:
Net increase (decrease) in net assets
from Fund share transactions (Note 6).. 20,186 6,267
-------------- --------------
TOTAL NET INCREASE (DECREASE) IN NET
ASSETS.................................. 23,005 6,487
NET ASSETS
Beginning of period..................... 229,470 222,983
-------------- --------------
End of period (including undistributed
net investment income of
$3,361 and $609, respectively)......... $ 252,475 $ 229,470
============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
D(1)-9
<PAGE>
FIXED INCOME II FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1998* 1997 1996 1995 1994 1993
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD..... $ 18.35 $ 18.36 $ 18.55 $ 17.98 $ 18.99 $ 18.56
------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income... .49 1.08 1.04 1.16 1.21 .84
Net realized and
unrealized gain (loss)
on investments......... .01 -- (.19) .59 (1.07) .44
------- ------- ------- ------- ------- -------
Total Income From
Investment
Operations............ .50 1.08 .85 1.75 .14 1.28
------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income... (.29) (1.09) (1.04) (1.18) (1.15) (.71)
Tax return of capital... -- -- -- -- -- (.14)
------- ------- ------- ------- ------- -------
Total Distributions.... (.29) (1.09) (1.04) (1.18) (1.15) (.85)
------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
PERIOD.................. $ 18.56 $ 18.35 $ 18.36 $ 18.55 $ 17.98 $ 18.99
======= ======= ======= ======= ======= =======
TOTAL RETURN (%)(a)(c)... 2.77 6.02 4.76 9.95 .82 6.98
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of
period ($000 omitted).. 252,475 229,470 222,983 183,577 144,030 138,619
Ratios to average net
assets (%)(b)(c):
Operating expenses..... .67 .66 .70 .58 .19 .16
Net investment income.. 5.51 5.70 5.70 6.41 6.52 6.16
Portfolio turnover rate
(%)(b)................. 136.41 213.14 264.40 269.31 233.75 229.07
</TABLE>
* For the six months ended June 30, 1998 (Unaudited).
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended June 30, 1998 are annualized.
(c) For periods prior to April 1, 1995, Fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net of
investment management fees but gross of any investment services fees. See
Note 4.
D(1)-10
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited)
1. ORGANIZATION
Frank Russell Investment Company (the "Investment Company") is a series
mutual fund with 28 different investment portfolios, referred to as "Funds."
These financial statements report on the Fixed Income II Fund (the "Fund").
The Investment Company is registered under the Investment Company Act of
1940, as amended, as a diversified, open-end management investment company.
It is organized and operates as a Massachusetts business trust under an
amended master trust agreement dated July 26, 1984. The Investment Company's
master trust agreement permits the Board of Trustees to issue an unlimited
number of full and fractional shares of beneficial interest at a $.01 par
value.
2. SIGNIFICANT ACCOUNTING POLICIES
The Fund's financial statements are prepared in accordance with generally
accepted accounting principles ("GAAP") which require the use of management
estimates. The following is a summary of the significant accounting policies
consistently followed by the Funds in the preparation of these financial
statements.
SECURITY VALUATION: United States fixed-income securities listed and traded
principally on any national securities exchange are valued on the basis of
the last sale price or, lacking any sale, at the closing bid price, on the
primary exchange on which the security is traded. United States over-the-
counter fixed-income securities and options are valued on the basis of the
closing bid price. Futures contracts are valued on the basis of the last
sale price. Many fixed-income securities do not trade each day and, thus,
last sale or bid prices are frequently not available. Fixed-income
securities, therefore, may be valued using prices provided by a pricing
service when such prices are believed to reflect the fair market value of
such securities.
International fixed-income securities traded on a national securities
exchange are valued on the basis of the last sale price. International
securities traded over the counter are valued on the basis of the mean of
bid prices. In the absence of a last sale or mean bid price, respectively,
such securities may be valued on the basis of prices provided by a pricing
service if those prices are believed to reflect the fair market value of
such securities.
Short-term investments held by the Funds maturing within 60 days of the
valuation date are valued at "amortized cost" unless the Board of Trustees
determines that amortized cost does not represent fair value.
The Funds may value certain securities for which market quotations are not
readily available at "fair value," as determined in good faith pursuant to
procedures established by the Board of Trustees.
INVESTMENT TRANSACTIONS: Securities transactions are recorded on a trade
date basis. Realized gains and losses from securities transactions are
recorded on the basis of specific identified cost incurred by each money
manager within the fund. The Fund may lend portfolio securities as approved
by the Board of Trustees on April 27, 1998.
INVESTMENT INCOME: Dividend income is recorded on the ex-dividend date and
interest income is recorded on the accrual basis.
AMORTIZATION AND ACCRETION: All premiums and discounts, including original
issue discounts, for the Fund are amortized/accreted for both tax and
financial reporting purposes.
FEDERAL INCOME TAXES: As a Massachusetts business trust, the Fund is a
separate corporate taxpayer and determines its net investment income and
capital gains (or losses) and the amounts to be distributed to the Fund's
shareholders without regard to the income and capital gains (or losses) of
the other Funds.
It is the Fund's intention to qualify as a regulated investment company and
distribute all of its taxable income. Therefore, no federal income tax
provision was required for the Fund.
At December 31, 1997, the Fund had net tax basis capital loss carryforwards
which may be applied against any net realized taxable gains in each
succeeding year or until their respective expiration dates, whichever occurs
first. Available capital loss carryforwards and expiration dates are as
follows:
<TABLE>
<CAPTION>
12/31/01 12/31/02 12/31/03 12/31/04 12/31/05 TOTAL
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fixed Income II $948,478 $3,534,633 $698,949 $1,746,912 $538,227 $7,467,199
</TABLE>
D(1)-11
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
June 30, 1998 (Unaudited)
The aggregate cost of investments and the composition of gross unrealized
appreciation and depreciation of investment securities for federal income
tax purposes as of June 30, 1998 are as follows:
<TABLE>
<CAPTION>
NET
GROSS GROSS UNREALIZED
FEDERAL TAX UNREALIZED UNREALIZED APPRECIATION
COST APPRECIATION (DEPRECIATION) (DEPRECIATION)
------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
Fixed Income II $252,106,452 $1,307,355 $(596,807) $710,548
</TABLE>
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: For the Fund, income dividends
and capital gain distributions, if any, are recorded on the ex-dividend
date. Dividends are generally declared and paid monthly. Capital gain
distributions are generally declared and paid annually. An additional
distribution may be paid by the Fund to avoid imposition of federal income
tax on any remaining undistributed capital gains and net investment income.
The timing and characterization of certain income and capital gain
distributions are determined in accordance with federal tax regulations
which may differ from GAAP. As a result, net investment income and net
realized gain (or loss) on investment and foreign currency-related
transactions for a reporting period may differ significantly from
distributions during such period. The differences between tax regulations
and GAAP primarily relate to investments in options, futures, mortgage-
backed securities, and certain securities sold at a loss. Accordingly, the
Fund may periodically make a reclassification among certain of its capital
accounts without impacting its net asset value.
EXPENSES: The Fund will pay its own expenses other than those expressly
assumed by the Management Company. Most expenses can be directly attributed
to the Fund. Expenses which cannot be directly attributed are allocated
among all Funds principally based on their relative net assets.
REPURCHASE AGREEMENTS: The Fund may engage in repurchase agreements with
several financial institutions whereby the Fund, through its custodian,
receives delivery of underlying securities as collateral. The Fund's Money
Managers will monitor repurchase agreements daily to determine that the
market value (including accrued interest) of the underlying securities at
Fedwire closing time remains at least equal to 102% of the repurchase price.
The Money Managers will notify the Seller to immediately increase the
collateral on the repurchase agreement to 102% of the repurchase price if
collateral value falls below 102%.
DERIVATIVES: To the extent permitted by the investment objectives,
restrictions and policies set forth in the Fund's Prospectus and Statement
of Additional Information, the Fund may participate in various derivative-
based transactions. Derivative securities are instruments or agreements
whose value is derived from an underlying security or index. They include
options, futures, swaps, forwards, structured notes and stripped securities.
These instruments offer unique characteristics and risks that assist the
Fund in meeting its investment strategies.
The Funds typically use derivatives in three ways: cash equitization,
hedging, and return enhancement. Cash equitization is a technique that may
be used by certain Funds through the use of options and futures to earn
"market-like" returns with their excess and liquidity reserve cash balances.
Hedging is used by some funds to limit or control risks, such as adverse
movements in exchange rates and interest rates. Return enhancement can be
accomplished through the use of derivatives in a Fund. By purchasing certain
instruments, Funds may more effectively achieve the desired portfolio
characteristics that assist them in meeting their investment objectives.
Depending on how the derivatives are structured and utilized, the risks
associated with them may vary widely. These risks are generally categorized
as market risk, liquidity risk and counterparty or credit risk.
D(1)-12
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
June 30, 1998 (Unaudited)
FORWARD COMMITMENTS: The Fund may contract to purchase securities for a
fixed price at a future date beyond customary settlement time (i.e., a
"forward commitment", "delayed settlement" or "when issued" transaction,
e.g., to be announced ("TBA")) consistent with the Fund's ability to manage
its investment portfolio and meet redemption requests. The price of the
underlying securities and the date when the securities will be delivered and
paid for are fixed at the time the transaction is negotiated. The Fund may
dispose of a forward commitment transaction prior to settlement if it is
appropriate to do so and realize short-term gains (or losses) upon such
sale. When effecting such transactions, cash or liquid high-grade debt
obligations of the Fund in a dollar amount sufficient to make payment for
the portfolio securities to be purchased will be segregated on the Fund's
records at the trade date and maintained until the transaction is settled. A
forward commitment transaction involves a risk of loss if the value of the
security to be purchased declines prior to the settlement date or the other
parry to the transaction fails to complete the transaction.
OPTIONS: The Fund may purchase and sell (write) call and put options on
securities and securities indices, provided such options are traded on a
national securities exchange or in an over-the-counter market. The Fund may
also purchase and sell call and put options on foreign currencies.
3.INVESTMENT TRANSACTIONS
Securities: During the six months ended June 30, 1998, the Fund had
purchases and sales of investment securities (excluding U.S. Government and
Agency obligations, short-term investments, options, futures and repurchase
agreements) of $60,714,674 and $46,406,807, respectively.
Purchases and sales of U.S. Government and Agency obligations (excluding
short-term investments, options, futures and repurchase agreements) were
$121,434,032 and $105,694,261, respectively.
SECURITIES LENDING: Effective April 27, 1998, the Investment Company resumed
its securities lending program. The program allows the Fund to loan
securities with a value up to 33 1/3% of its total assets to certain
brokers. The Fund receives cash (U.S. currency), U.S. Government or U.S.
Government agency obligations as collateral against the loaned securities.
To the extent that a loan is secured by cash collateral, such collateral
shall be invested by Morgan Stanley Trust Company ("MSTC") in short-term
instruments, money market mutual funds, and such other short-term
investments, provided the investments meet certain quality and
diversification requirements. Under the securities-lending arrangement, the
collateral received is recorded on the Fund's statement of assets and
liabilities along with the related obligation to return the collateral. In
those situations where the Company has relinquished control of securities
transferred, it derecognizes the securities and records a receivable from
the counterparty.
Income generated from the investment of cash collateral, less negotiated
rebate fees paid to participating brokers and transaction costs, is divided
between the Fund and MSTC and is included as interest income for the Fund.
To the extent that a loan is secured by non-cash collateral, brokers pay the
Fund negotiated lenders' fees, which are divided between the Fund and MSTC
and are included as interest income for the Fund. All collateral received
will be in an amount at least equal to 102% (for loans of U.S. securities)
or 105% for non-U.S. securities) of the market value of the loaned
securities at the inception of each loan. This collateral must be maintained
at not less than 100% of the market value of the loaned securities during
the period of the loan. Should the borrower of the securities fail
financially, there is a risk of delay in recovery of the securities or loss
of rights in the collateral. Consequently, loans are made only to borrowers
which are deemed to be of good financial standing. As of June 30, 1998, the
value of outstanding securities on loan and the value of collateral was
$9,142,524 and $9,326,250, respectively.
4.RELATED PARTIES
Manager: Frank Russell Investment Management Company ("FRIMCo" or "Manager")
operates and administers all of the Funds which comprise the Investment
Company, and manages the Money Market and the U.S. Government Money Market
Funds (the Money Market and the U.S. Government Money Market Funds are a
series of the Investment Company that are not presented in this report).
FRIMCo is a wholly owned subsidiary of Frank Russell Company, which
researches and recommends to FRIMCo, and to the Investment Company, one or
more investment management organizations to manage the portfolio of the
Fund.
For the six months ended June 30, 1998, the management fee paid to FRIMCo,
for the Fund, in accordance with the Investment Company's Management
Agreement with that firm, amounted to $589,000 before waivers. Such fee is
payable monthly and is equal to the annual rate of 0.50% of the average
daily net assets of the Fund.
FRIMCo calculates its management fee based on average daily net assets for
the Fund less any management fee incurred on assets invested in the Money
Market Fund (see Note 5) thereby eliminating any duplication of fees.
D(1)-13
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
June 30, 1998 (Unaudited)
ANALYTIC SERVICES: Fees for analytic services provided to the Fund are paid
or accrued to Frank Russell Company, an affiliate of the Investment Company.
Frank Russell Company provides its TruVP System to the Fund, pursuant to a
written Service Agreement. The TruVP System provides analytics used by the
investment department.
TRANSFER AGENT: The Fund has a contract with FRIMCo, to provide transfer
agent services to the Investment Company. Total fees for the six months
ended June 30, 1998 were $73,000.
DISTRIBUTOR: Russell Fund Distributors, Inc. (the "Distributor"), a wholly
owned subsidiary of FRIMCo, is the principal Distributor for Investment
Company shares. The Distributor receives no compensation from the Fund for
its services.
ACCRUED FEES PAYABLE TO AFFILIATES AS OF JUNE 30, 1998 WERE AS FOLLOWS:
<TABLE>
<CAPTION>
MANAGEMENT ANALYTIC TRANSFER
FEES SERVICE FEES AGENT FEES TOTAL
---------- ------------ ---------- --------
<S> <C> <C> <C> <C>
Fixed Income II $102,205 $4,545 $19,368 $126,118
======== ====== ======= ========
</TABLE>
BOARD OF TRUSTEES: The Investment Company pays each of its Trustees not
affiliated with FRIMCo a retainer of $20,000 per year plus out-of-pocket
expenses. Total Trustee expenses were $54,794 for the six months ended June
30, 1998, and were allocated to the Fund on a pro rata basis, including 27
affiliated funds not presented herein.
5.MONEY MARKET FUND
The Fund is permitted to invest its cash reserves (i.e., monies awaiting
investment in portfolio securities suitable for the Funds' objectives) in
the Frank Russell Investment Company Money Market Fund (a series of Frank
Russell Investment Company not presented herein). As of June 30, 1998,
$10,103,000 of the Money Market Fund's net assets represents investments by
the Fund and $736,408,000 represents the investments of other affiliated
funds not presented herein.
6.FUND SHARE TRANSACTIONS
Share transactions for shares for each period were as follows:
<TABLE>
<CAPTION>
SHARES DOLLARS
-------------------------- ----------------------------
FOR THE FOR THE FOR THE FOR THE
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997 (UNAUDITED) 1997
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
FIXED INCOME II
Proceeds from shares
sold 2,784,635 7,036,585 $ 51,419,303 $ 129,655,206
Proceeds from
reinvestment of
distributions 177,960 641,394 3,266,703 11,742,346
Payments for shares
redeemed (1,868,469) (7,319,010) (34,500,357) (135,131,042)
---------- ---------- ------------ -------------
Total net increase
(decrease) 1,094,126 358,969 $ 20,185,649 $ 6,266,510
========== ========== ============ =============
</TABLE>
7.DIVIDENDS
On July 2, 1998, the Board of Trustees declared a $0.2452 dividend from net
investment income payable on July 7, 1998, to the Fund's shareholders of
record on July 2, 1998.
8.SUBSEQUENT EVENTS
On August 10, 1998, Frank Russell Company entered into an agreement with The
Northwestern Mutual Life Insurance Co., an insurance organization, pursuant
to which Northwestern Mutual Life will acquire all of the outstanding common
stock of Frank Russell Company.
At its meeting on April 27, 1998, the Investment Company's Board of
Trustees, in an effort to meet the best interests of shareholders of the
Fixed Income II Fund and the Volatility Constrained Bond Fund (a series of
the Investment Company not presented herein), approved a plan of
reorganization for the merger of the two Funds. The merger is subject to
shareholder approval at a meeting scheduled for November 19, 1998.
D(1)-14
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
909 A Street, Tacoma, Washington 98402
(800) 832-6688
In Washington (253) 627-7001
TRUSTEES
George F. Russell, Jr., Chairman
Lynn L. Anderson
Paul E. Anderson
Paul Anton, PhD
William E. Baxter
Lee C. Gingrich
Eleanor W. Palmer
OFFICERS
Lynn L. Anderson, President and Chief Executive Officer
Peter Apanovitch, Manager of Short Term Investment Funds
Mark E. Swanson, Treasurer and Chief Accounting Officer
Randall P. Lert, Director of Investments
Karl Ege, Secretary and General Counsel
MANAGER AND TRANSFER AGENT
Frank Russell Investment Management Company
909 A Street
Tacoma, WA 98402
CONSULTANT
Frank Russell Company
909 A Street
Tacoma, WA 98402
CUSTODIAN
State Street Bank and Trust Company
1776 Heritage Drive
North Quincy, MA 02171
OFFICE OF SHAREHOLDER INQUIRES
909 A Street
Tacoma, WA 98402
(800) RUSSEL4
(800) 787-7354
LEGAL COUNSEL
Stradley, Ronon, Stevens & Young, LLP
2600 - One Commerce Square
Philadelphia, PA 19103-7098
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
One Post Office Square
Boston, MA 02109
DISTRIBUTOR
Russell Fund Distributors, Inc.
909 A Street
Tacoma, WA 98402
MONEY MANAGERS
BlackRock Financial Management, New York, NY
Standish, Ayer & Wood, Inc., Boston, MA
STW Fixed Income Management, Hamilton, Bermuda
This report is prepared from the books and records of the Fund and is submitted
for the general information of shareholders and is not authorized for
distribution to prospective investors unless accompanied or preceded by an
effective Prospectus. Nothing herein contained is to be considered an offer of
sale or a solicitation of an offer to buy shares of Frank Russell Investment
Company. Such offering is made only by Prospectus, which includes details as to
offering price and other material information.
D(1)-15
<PAGE>
EXHIBIT D(2)
For your convenience, this semi-annual report has been
condensed to include only the Volatility Constrained Bond
Fund. Please disregard any reference to other Frank Russell
Investment Company Funds not relevant to the proposed plan of
re-organization.
FRANK RUSSELL INVESTMENT COMPANY
VOLATILITY CONSTRAINED BOND FUND
SEMIANNUAL REPORT
JUNE 30, 1998
(UNAUDITED)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Financial Statements............................................... D(2)-2
Notes to Financial Statements...................................... D(2)-11
Manager, Money Managers and Service Providers...................... D(2)-16
</TABLE>
FRANK RUSSELL INVESTMENT COMPANY--VOLATILITY CONSTRAINED BOND FUND
Copyright (C) Frank Russell Company 1998. All rights reserved. This material
is proprietary and may not be reproduced, transferred, or distributed in any
form without prior written permission from Frank Russell Company. It is
delivered on an "as is" basis without warranty. The Russell logo is a
trademark and service mark of Frank Russell Company. Frank Russell Company and
Standard & Poor's Corporation are the owners of the trademarks, service marks,
and copyrights related to their respective indexes. This material must be
accompanied or preceded by a current Frank Russell Investment Company
Prospectus containing complete information concerning the investment
objectives and operations of the Company, charges, and expenses. The
Prospectus should be read carefully before an investment is made. The
performance as of April 1, 1995 is reported gross of investment advisory fees.
For periods thereafter, performance and yields are reported net of investment
advisory fees but gross of investment services fees, descriptions of which can
be obtained from the investment advisor. Investment services fees and other
account expenses will reduce performance (e.g., an investment services fee of
0.2% of average managed assets will reduce a 10.0% annual return to 9.8%). The
performance quoted represents past performance and the investment return and
principal value of an investment will fluctuate so that shares, when redeemed,
may be worth more or less than their original cost. Investments in securities
of non-US issuers and foreign currencies involve investment risks different
than those of US issuers; the Prospectus contains further information and
details regarding these risks. Russell Fund Distributors, Inc., is the
distributor of Frank Russell Investment Company.
D(2)-1
<PAGE>
VOLATILITY CONSTRAINED BOND FUND
STATEMENT OF NET ASSETS
June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
LONG-TERM INVESTMENTS - 94.3%
ASSET-BACKED SECURITIES - 34.0%
ABFS Equipment Contract Trust
6.100% due 10/15/05....................................... $ 400 $ 401
Advanta Home Equity Loan Trust
Series 1994-1 Class A-2
6.300% due 07/25/25....................................... 152 152
AFC Home Equity Loan Trust
Series 1993-2 Class A
6.000% due 01/20/13....................................... 129 128
AFC Mortgage Loan Trust
Series 1996-3 Class 1A2
7.220% due 02/25/27....................................... 123 123
Banc One Auto Grantor Trust
Series 1997-A Class A
6.270% due 11/20/03....................................... 2,204 2,218
Barnett Auto Trust
Series 1997-A Class A3
6.030% due 11/15/01....................................... 5,700 5,713
California Infrastructure PG&E
Series 1997-1 Class A3
6.150% due 06/25/02....................................... 1,600 1,610
Case Equipment Loan Trust
Series 1997-B Class C
6.410% due 09/15/04....................................... 233 234
Chase Credit Card Master Trust
Series 1997-2 Class A
6.300% due 04/15/03....................................... 2,900 2,933
Series 1997-5 Class A
6.194% due 08/15/05....................................... 800 813
Chase Manhattan Auto Owner Trust
Series 1998-B Class A4
5.800% due 02/17/03....................................... 2,000 2,000
Chemical Master Credit Card Trust I
Series 1996-1 Class A
5.550% due 09/15/03....................................... 4,000 3,961
Chevy Chase Auto Receivables Trust
Series 1996-2 Class A
5.900% due 07/15/03....................................... 619 619
Series 1997-1 Class A
6.500% due 10/15/03....................................... 872 876
Series 1997-3 Class A
6.200% due 03/20/04 (c)................................... 699 702
Contimortgage Home Equity Loan
Trust Pass-thru Certificate
Series 1997-4 Class A2
6.270% due 02/15/12....................................... 500 500
Delta Funding Home Equity Loan Trust
Series 1998-1 Class A2A
5.858% due 05/25/30 (c)................................... 364 364
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
EQCC Home Equity Loan Trust
Series 1993-4 Class A
5.725% due 12/15/08....................................... $ 42 $ 42
Equivantage Home Equity Loan Trust
Series 1996-1 Class A
6.550% due 10/25/25....................................... 15 15
Fingerhut Master Trust
Series 1998-1 Class A
6.070% due 02/15/05....................................... 250 250
First Chicago Master Trust II
Credit Card Certificates
Series 1994-L
7.150% due 04/15/01....................................... 3,200 3,249
First Security Auto Grantor Trust
Series 1997-A Class A
6.300% due 08/15/03....................................... 500 502
Green Tree Financial Corp.
Series 1998-1 Class A3
5.950% due 04/01/13....................................... 500 500
Series 1998-2 Class A3
6.050% due 10/01/07....................................... 325 326
Green Tree Home Improvement
Loan Trust
Series 1997-A Class HIA3
7.050% due 08/15/23....................................... 500 509
Honda Auto Receivables Grantor Trust
Series 1995-A Class A
6.200% due 12/15/00....................................... 209 209
Series 1997-A Class A
5.850% due 02/15/03....................................... 253 253
IMC Home Equity Loan Trust
Series 1997-5 Class A1
6.510% due 02/20/06 (c)................................... 433 434
Series 1998-1 Class A3
6.410% due 04/20/18....................................... 350 351
Nationsbank Credit Card Master Trust
Series 1995-1 Class A
6.450% due 04/15/03....................................... 2,500 2,528
New Century Home Equity Loan Trust
Series 1998-NC3 Class A1
6.000% due 06/26/28....................................... 1,000 996
Nissan Auto Receivables Grantor Trust
Series 1997-1 Class A
6.150% due 02/15/03....................................... 633 634
NPF VI Inc.
Series 1998-1A Class A
6.220% due 06/01/02....................................... 400 401
</TABLE>
D(2)-2
<PAGE>
VOLATILITY CONSTRAINED BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
Olympic Automobile Receivables Trust
Series 1996-B Class A4
6.700% due 03/15/02....................................... $ 1,000 $ 1,010
Series 1996-D Class CTFS
6.125% due 04/15/02....................................... 2,315 2,316
PBG Equipment Trust
Series 1A Class A
6.270% due 01/20/12....................................... 550 550
PNC Student Loan Trust I
Series 1997-2 Class A3
6.314% due 01/25/01....................................... 3,500 3,540
Premier Auto Trust
Series 1997-3 Class A4
6.200% due 01/06/01....................................... 3,500 3,514
Prime Credit Card Master Trust
Series 1992-2 Class A2
7.450% due 11/15/02....................................... 1,000 1,022
Remodelers Home Improvement Loan
Series 1995-3 Class A2
6.800% due 12/20/07....................................... 76 76
Rental Car Finance Corp.
Series 1997-1 Class A1
6.250% due 06/25/03....................................... 420 421
Ryder Vehicle Lease Trust
Series 1998-A Class A
6.100% due 09/15/08 (c)................................... 400 400
Sears Credit Account Master Trust II
Series 1995-3 Class A
7.000% due 10/15/04....................................... 500 510
Series 1997-1 Class A
6.200% due 07/16/07....................................... 500 503
Series 1998-1 Class A
5.800% due 08/15/05....................................... 1,000 998
SPNB Home Equity Loan
Series 1991-1 Class B
8.150% due 06/15/20....................................... 39 39
Standard Credit Card Master Trust
Series 1994-4 Class A
8.250% due 11/07/03....................................... 850 906
The Money Store Auto Grantor Trust
Series 1997-4 Class A2
6.350% due 03/20/04....................................... 500 504
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
The Money Store Small Business
Administration Loan Trust
Series 1997-1 Class A
6.241% due 01/15/25 (c)................................... $ 483 $ 484
Series 1997-1 Class B
6.720% due 01/15/25 (c)................................... 483 486
Toyota Auto Lease Trust
Series 1997-A Class A1
6.200% due 04/26/04....................................... 3,600 3,612
UCFC Home Equity Loan Trust
Series 1993-B1 Class A-1
6.075% due 07/25/14....................................... 78 78
WFS Financial Owner Trust
Series 1996-D Class A3
6.050% due 07/20/01 (c)................................... 2,947 2,955
World Omni Automobile Lease
Securitization Trust
Series 1996-B Class A3
6.250% due 11/15/02....................................... 696 700
Series 1996-B Class B
6.850% due 11/15/02 (c)................................... 399 399
Series 1997-A Class A2
6.750% due 06/25/03 (c)................................... 3,498 3,525
Series 1997-A Class A4
6.900% due 06/25/03....................................... 400 406
Series 1997-B Class A1
6.070% due 11/25/03....................................... 600 600
--------
64,100
--------
CORPORATE BONDS AND NOTES - 28.4%
Advanta National Bank
6.450% due 10/30/00....................................... 250 239
Ahmanson (H.F.)
9.875% due 11/15/99....................................... 900 944
Aristar Inc.
6.125% due 12/01/00....................................... 500 501
Associates Corp. of North America
6.375% due 08/15/00....................................... 4,000 4,033
Banco De Latinoamerica
6.500% due 04/02/01 (c)................................... 1,000 1,013
Bankamerica Corp.
9.500% due 04/01/01....................................... 750 812
Banponce Corp. (MTN)
Series 2
5.750% due 03/01/99....................................... 1,100 1,098
</TABLE>
D(2)-3
<PAGE>
VOLATILITY CONSTRAINED BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
June 30, 1998 (Unaudited)
D(2)-4
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
Bear Stearns Co., Inc.
7.625% due 09/15/99 $ 725 $ 738
Caterpillar Financial Services (MTN)
6.100% due 07/15/99 500 501
Chase Manhattan Corp.
10.125% due 11/01/00 750 817
5.813% due 12/05/09 (c) 800 790
Chrysler Financial Corp. (MTN)
6.610% due 06/16/00 850 860
CIT Group Holdings, Inc. (MTN)
6.125% due 12/15/00 3,100 3,111
Coca-Cola Put Asset Trust
6.000% due 03/15/01 950 951
Comdisco, Inc. (MTN)
6.070% due 05/08/00 1,000 1,003
Conseco, Inc.
6.400% due 06/15/0 (c) 850 849
Cox Enterprises, Inc.
6.250% due 08/26/99 1,000 1,002
Crescent Real Estate Equities
6.625% due 09/15/02 750 740
ERAC USA Finance Co.
6.375% due 05/15/03 825 827
ERP Operating, L.P.
8.500% due 05/15/99 225 229
Finova Capital Corp.
6.450% due 06/01/00 625 630
First Bank South Dakota
5.722% due 12/20/00 (c) 500 500
First Chicago Corp.
9.000% due 06/15/99 500 514
First Industrial, L.P.
6.500% due 04/05/01 (c) 1,075 1,077
Franchise Finance Corp.
7.000% due 11/30/00 575 584
General Electric Capital Corp. (MTN)
6.120% due 08/15/00 4,000 4,026
General Motors Acceptance Corp. (MTN)
7.500% due 07/22/99 850 864
7.465% due 07/25/19 938 941
7.012% due 04/01/20 (c) 972 984
Greyhound Financial Corp.
8.500% due 02/15/99 775 786
Heller Financial, Inc. (MTN)
5.738% due 03/01/99 (c) 600 600
Hertz Corp.
6.625% due 07/15/00 650 655
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
Homeside Lending, Inc. (MTN)
6.875% due 05/15/00 $ 825 $ 839
JC Penney & Co., Inc. (MTN)
6.375% due 09/15/00 675 682
KeyCorp
8.400% due 04/01/99 1,000 1,017
Lehman Brothers Holdings, Inc. (MTN)
6.000% due 02/26/01 1,250 1,248
Lehman Brothers Holdings, Inc. (MTN)
Series IBC
7.000% due 05/13/99 700 706
Liberty Property, L.P. (MTN)
6.600% due 06/05/02 400 405
MBNA Corp. (MTN)
Series B
6.500% due 09/15/00 375 377
MCI Communications Corp.
6.125% due 04/15/02 (c) 1,250 1,251
Merrill Lynch & Co., Inc. (MTN)
7.260% due 03/25/02 925 950
Midlantic Corp.
9.250% due 09/01/99 450 466
Norwest Financial, Inc.
6.375% due 09/15/02 500 505
Procter & Gamble
9.625% due 01/14/01 3,900 4,211
Salomon Smith Barney Holdings, Inc.
6.625% due 07/01/02 75 76
6.500% due 10/15/02 300 303
Salomon, Inc. (MTN)
5.382% due 04/05/99 (c) 1,000 1,000
Sears Roebuck Acceptance Corp. (MTN)
6.160% due 09/20/00 4,000 4,017
Sears Roebuck Acceptance Corp. (MTN)
Series II
6.690% due 04/30/01 750 763
Sovereign Bancorp, Inc. (Regd)
6.750% due 07/01/00 625 631
Wellsford Residential Property Trust (MTN)
6.019% due 11/24/99 (c) 850 851
--------
53,517
--------
<CAPTION>
EURODOLLAR BONDS - 0.8%
ALPS Pass-thru Trust
<S> <C> <C>
Series 1994-1 Class A-2
7.150% due 09/15/04 (c) 262 262
</TABLE>
<PAGE>
VOLATILITY CONSTRAINED BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
Videotron Holdings PLC Step Up Bond
Zero Coupon due 07/01/04 $ 1,175 $ 1,155
--------
1,417
--------
MORTGAGE-BACKED SECURITIES - 10.4%
Bayview Financial Acquisition Trust
Series 1998-1 Class A1
7.010% due 05/25/29 600 609
Bear Stearns Mortgage Securities, Inc.
Series 1996-6 Class A2
7.000% due 11/25/27 688 688
BKD Commercial Mortgage Trust
Series 1997-C1 Class B
7.218% due 04/25/00 (c) 441 440
Chase Mortgage Finance Corp.
Series 1998-S2 Class A1
6.500% due 07/25/28 500 502
Citicorp Mortgage Securities, Inc.
REMIC Series 1997-5 Class A1
6.500% due 11/25/27 400 401
Credit Suisse First Boston Mortgage
7.000% due 12/25/37 450 450
Federal Home Loan Mortgage Corp. (MTN)
6.770% due 09/15/02 300 311
Federal Home Loan Mortgage Corp. Groups
7.500% due 2000 169 170
7.500% due 2002 70 71
9.000% due 2005 203 209
7.375% due 2006 188 192
8.000% due 2018 645 668
Federal Home Loan Mortgage Corp.
Participation Certificate
Series 1540 Class C
6.050% due 02/15/11 692 693
Series 2061 Class PH
6.000% due 05/15/16 400 400
Federal National Mortgage Association Pools
7.000% due 2004 621 629
8.750% due 2004 40 42
8.500% due 2010 612 638
6.250% due 2013 1,400 1,416
Federal National Mortgage Association Grantor Trust
REMIC Series 1996-T6 Class C
6.200% due 02/26/01 988 988
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
GE Capital Mortgage Services, Inc.
Series 1998-10 Class 2A1
6.500% due 05/25/13 $ 500 $ 502
REMIC Series 1997-9 Class 1A2
6.750% due 10/25/27 300 302
Government National Mortgage
Association Pools
9.500% due 2025 597 647
7.250% due 2026 913 940
Merit Securities Corp.
Series II Class 1A1
6.580% due 07/28/22 1,100 1,100
Norwest Integrated Structured Assets, Inc.
Series 1998-1 Class 2A1
7.000% due 06/25/28 500 503
Prudential Home Mortgage Securities Co.
Series 1993-S7 Class A4
5.900% due 12/25/23 850 843
Series 1994-19 Class A2
7.050% due 05/25/24 370 373
Residential Accredited Loans, Inc.
Series 1997-QS7 Class A1
7.500% due 07/25/27 279 282
Residential Asset Secruitization Trust
Mortgage Pass-thru Certificates
Series 1996-A8 Class A1
8.000% due 12/25/26 20 20
Series 1997-A5 Class A3
7.125% due 07/25/27 50 50
Series 1997-A9 Class A1
7.250% due 11/26/27 6 6
Series 1998-A2 Class A1
6.750% due 04/25/28 473 475
Series 1998-A5 Class A1
6.750% due 05/25/28 494 494
Residential Funding Mortgage Securities I
Series 1997-S12 Class A10
6.700% due 08/25/27 850 853
Resolution Trust Corp.
Mortgage Pass-thru Certificate
Series 1994-C1 Class D
8.000% due 06/25/26 (c) 647 657
Series 1995-2 Class C1
7.450% due 05/25/29 (c) 264 268
SASCO LLC
Series 1997-N1 Class D
6.178% due 09/25/28 (c) 600 600
</TABLE>
D(2)-5
<PAGE>
VOLATILITY CONSTRAINED BOND FUND
STATEMENT OF NET ASSETS, CONTINUED
June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
Structured Asset Securities Corp.
Series 1998-C2A Class A
6.145% due 01/25/13 (c)................................... $ 200 $ 200
Union Planters Mortgage Finance Corp.
Series 1998-A Class A1
6.350% due 01/25/28....................................... 475 476
Wilshire Funding Corporation
Series 1997-WFC1 Class AI
7.250% due 08/25/27....................................... 607 612
--------
19,720
--------
MUNICIPAL BONDS - 0.3%
Philadelphia, Pennsylvania, Authority
for Industrial Development Class A
6.480% due 06/15/04....................................... 604 623
--------
623
--------
UNITED STATES GOVERNMENT
AGENCIES - 0.3%
Federal Home Loan Bank
6.070% due 01/17/01....................................... 500 499
--------
499
--------
UNITED STATES GOVERNMENT
TREASURIES - 17.8%
United States Treasury Notes
6.000% due 06/30/99....................................... 850 854
5.875% due 11/15/99....................................... 225 226
5.375% due 02/01/00....................................... 75 75
5.375% due 02/15/01....................................... 15,800 15,746
6.500% due 08/31/01....................................... 1,625 1,669
6.250% due 02/28/02....................................... 650 665
3.625% due 07/15/02....................................... 10,558 10,442
5.750% due 10/31/02....................................... 500 504
5.750% due 11/30/02....................................... 3,120 3,146
5.500% due 05/31/03....................................... 250 250
--------
33,577
--------
YANKEE BONDS - 2.3%
Brascan, Ltd.
7.375% due 10/01/02....................................... 1,000 1,028
Household International
5.250% due 10/15/98....................................... 850 849
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- --------
<S> <C> <C>
Noranda Forest, Inc.
8.875% due 10/15/99....................................... $ 450 $ 465
Quebec, Province of
13.250% due 09/15/14...................................... 450 506
Tyco International Group SA
6.125% due 06/15/01....................................... 500 501
Westpac Banking, Ltd.
7.875% due 10/15/02....................................... 1,006 1,067
--------
4,416
--------
Total Long-Term Investments (cost $177,577)................. 177,869
--------
SHORT-TERM INVESTMENTS - 5.3%
Frank Russell Investment Company
Money Market Fund, due on demand (a)....................... 9,979 9,979
--------
TOTAL SHORT-TERM INVESTMENTS
(cost $9,979)............................................... 9,979
--------
TOTAL INVESTMENTS
(identified cost $187,556)(b) - 99.6%....................... 187,848
OTHER ASSETS AND LIABILITIES,
NET - 0.4%.................................................. 809
--------
NET ASSETS - 100.0%......................................... $188,657
========
</TABLE>
(a) At cost, which approximates market.
(b) See Note 2 for federal income tax information.
(c) Adjustable or floating rate securities.
Abbreviations:
MTN - Medium Term Note
PLC - Public Limited Company
REMIC - Real Estate Mortgage Investment Conduit
The accompanying notes are an integral part of the financial statements.
D(2)-6
<PAGE>
VOLATILITY CONSTRAINED BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
Amounts in
thousands (except
per share amount)
<S> <C> <C>
ASSETS
Investments at market (identified cost $187,556) (Note
2)....................................................... $ 187,848
Receivables:
Dividends and interest................................... 2,125
Fund shares sold......................................... 1,145
Short-term investments held as collateral for securities
loaned, at market (Note 3)............................... 9,326
--------------
Total Assets............................................ 200,444
LIABILITIES
Payables:
Bank overdraft............................ $ 604
Investments purchased..................... 1,488
Fund shares redeemed...................... 143
Accrued fees to affiliates (Note 4)....... 127
Other accrued expenses.................... 99
Payable upon return of securities loaned,
at market (Note 3)........................ 9,326
--------------
Total Liabilities....................................... 11,787
--------------
Net Assets................................................ $ 188,657
==============
NET ASSETS CONSIST OF:
Undistributed net investment income....................... $ 831
Accumulated net realized gain (loss)...................... (10,357)
Unrealized appreciation (depreciation) on investments..... 292
Shares of beneficial interest............................. 99
Additional paid-in capital................................ 197,792
--------------
NET ASSETS................................................ $ 188,657
==============
NET ASSET VALUE, offering and redemption price per share:
($188,656,577 divided by 9,886,198 shares of $.01 par
value
shares of beneficial interest outstanding)............... $ 19.08
==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
D(2)-7
<PAGE>
VOLATILITY CONSTRAINED BOND FUND
STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
Amounts in thousands
<S> <C> <C>
INVESTMENT INCOME:
Interest................................................. $ 5,292
Dividends from Money Market Fund (Note 5)................ 244
Dividends................................................ 45
--------------
Total Investment Income................................. 5,581
EXPENSES (Notes 2 and 4):
Management fees.......................... $ 448
Custodian fees........................... 86
Transfer agent fees...................... 113
Professional fees........................ 20
Registration fees........................ 23
Trustees' fees........................... 1
Miscellaneous............................ 16
---------------
Total Expenses.......................................... 707
--------------
Net investment income..................................... 4,874
--------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (Notes
2 and 3)
Net realized gain (loss) from investments................. (269)
Net change in unrealized appreciation or depreciation of
investments.............................................. 337
--------------
Net gain (loss) on investments............................ 68
--------------
Net increase (decrease) in net assets resulting from
operations............................................... $ 4,942
==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
D(2)-8
<PAGE>
VOLATILITY CONSTRAINED BOND FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Amounts in thousands
FOR THE SIX MONTHS FOR THE YEAR
ENDED JUNE 30, 1998 ENDED
(UNAUDITED) DECEMBER 31, 1997
------------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS:
Net investment income................... $ 4,874 $ 9,182
Net realized gain (loss)................ (269) (141)
Net change in unrealized appreciation or
depreciation........................... 337 325
-------- --------
Net increase (decrease) in net assets
resulting from operations............. 4,942 9,366
-------- --------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income................... (4,751) (9,388)
-------- --------
FROM FUND SHARE TRANSACTIONS:
Net increase (decrease) in net assets
from Fund share transactions (Note 6).. 15,490 9,801
-------- --------
Total Net Increase (Decrease) in Net
Assets.................................. 15,681 9,779
NET ASSETS
Beginning of period..................... 172,976 163,197
-------- --------
End of period (including undistributed
net investment income of $831 and $708,
respectively).......................... $188,657 $172,976
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
D(2)-9
<PAGE>
VOLATILITY CONSTRAINED BOND FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1998* 1997 1996 1995 1994 1993
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD ... $ 19.06 $ 19.07 $ 19.21 $ 18.64 $ 19.78 $ 19.51
------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income
...................... .50 1.07 1.09 1.21 1.15 .82
Net realized and
unrealized gain (loss)
on investments ....... .02 .02 (.22) .58 (1.16) .45
------- ------- ------- ------- ------- -------
Total Income From
Investment Operations
..................... .52 1.09 .87 1.79 (.01) 1.27
------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income
...................... (.50) (1.10) (1.01) (1.22) (1.13) (.71)
Tax return of capital.. -- -- -- -- -- (.29)
------- ------- ------- ------- ------- -------
Total Distributions... (.50) (1.10) (1.01) (1.22) (1.13) (1.00)
------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
PERIOD ................ $ 19.08 $ 19.06 $ 19.07 $ 19.21 $ 18.64 $ 19.78
======= ======= ======= ======= ======= =======
TOTAL RETURN (%)(a)..... 2.75 5.90 4.66 9.89 (.02) 6.67
RATIOS/SUPPLEMENTAL
DATA:
Net Assets, end of
period ($000 omitted)
...................... 188,657 172,976 163,197 181,881 195,007 225,672
Ratios to average net
assets (%)(b):
Operating expenses ... .78 .78 .76 .71 .67 .66
Net investment income
..................... 5.38 5.63 5.69 6.33 5.97 5.79
Portfolio turnover rate
(%)(b) ............... 136.83 197.45 311.51 256.72 182.65 220.77
</TABLE>
*For the six months ended June 30, 1998 (Unaudited).
(a)Periods less than one year are not annualized.
(b)The ratios for the period ended June 30, 1998 are annualized.
D(2)-10
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited)
1. ORGANIZATION
Frank Russell Investment Company (the "Investment Company") is a series
mutual fund with 28 different investment portfolios, referred to as "Funds."
These financial statements report on the Volatility Constrained Bond Fund
(the "Fund"). The Investment Company is registered under the Investment
Company Act of 1940, as amended, as a diversified, open-end management
investment company. It is organized and operates as a Massachusetts business
trust under an amended master trust agreement dated July 26, 1984. The
Investment Company's master trust agreement permits the Board of Trustees to
issue an unlimited number of full and fractional shares of beneficial
interest at a $.01 par value.
Effective May 18, 1998, pursuant to approval of the Investment Company's
Board of Trustees, Class C shares were renamed Class E shares. As of July 8,
1996, the Fund has available Class S and Class E shares, however, Class E
has not been funded as of June 30, 1998.
2. SIGNIFICANT ACCOUNTING POLICIES
The Fund's financial statements are prepared in accordance with generally
accepted accounting principles ("GAAP") which require the use of management
estimates. The following is a summary of the significant accounting policies
consistently followed by the Fund in the preparation of these financial
statements.
SECURITY VALUATION: United States fixed-income securities listed and traded
principally on any national securities exchange are valued on the basis of
the last sale price or, lacking any sale, at the closing bid price, on the
primary exchange on which the security is traded. United States over-the-
counter equity and fixed-income securities and options are valued on the
basis of the closing bid price. Futures contracts are valued on the basis of
the last sale price. Many fixed-income securities do not trade each day and,
thus, last sale or bid prices are frequently not available. Fixed-income
securities, therefore, may be valued using prices provided by a pricing
service when such prices are believed to reflect the fair market value of
such securities.
International equity and fixed-income securities traded on a national
securities exchange are valued on the basis of the last sale price.
International securities traded over the counter are valued on the basis of
the mean of bid prices. In the absence of a last sale or mean bid price,
respectively, such securities may be valued on the basis of prices provided
by a pricing service if those prices are believed to reflect the fair market
value of such securities.
Short-term investments held by the Fund maturing within 60 days of the
valuation date are valued at "amortized cost" unless the Board of Trustees
determines that amortized cost does not represent fair value.
The Fund may value certain securities for which market quotations are not
readily available at "fair value," as determined in good faith pursuant to
procedures established by the Board of Trustees.
INVESTMENT TRANSACTIONS: Securities transactions are recorded on a trade
date basis. Realized gains and losses from securities transactions are
recorded on the basis of specific identified cost incurred by each money
manager within the fund. The Fund may lend portfolio securities as approved
by the Board of Trustees on April 27, 1998.
INVESTMENT INCOME: Dividend income is recorded on the ex-dividend date and
interest income is recorded on the accrual basis.
AMORTIZATION AND ACCRETION: All premiums and discounts, including original
issue discounts, for the Fund are amortized/accreted for both tax and
financial reporting purposes.
FEDERAL INCOME TAXES: As a Massachusetts business trust, the Fund is a
separate corporate taxpayer and determines its net investment income and
capital gains (or losses) and the amounts to be distributed to the Fund's
shareholders without regard to the income and capital gains (or losses) of
the other Funds.
It is the Fund's intention to qualify as a regulated investment company and
distribute all of its taxable income. Therefore, no federal income tax
provision was required for the Fund.
At December 31, 1997, the Fund had net tax basis capital loss carryforwards
which may be applied against any net realized taxable gains in each
succeeding year or until their respective expiration dates, whichever occurs
first. Available capital loss carryforwards and expiration dates are as
follows:
<TABLE>
<CAPTION>
12/31/02 12/31/03 12/31/04 12/31/05 TOTAL
---------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Volatility Constrained
Bond................... $5,583,410 $1,871,605 $2,135,100 $201,012 $9,791,127
</TABLE>
D(2)-11
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
The aggregate cost of investments and the composition of gross unrealized
appreciation and depreciation of investment securities for federal income
tax purposes as of June 30, 1998 are as follows:
<TABLE>
<CAPTION>
NET
GROSS GROSS UNREALIZED
FEDERAL TAX UNREALIZED UNREALIZED APPRECIATION
COST APPRECIATION (DEPRECIATION) (DEPRECIATION)
------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
Volatility Constrained
Bond................... $187,498,796 $884,054 $(534,850) $349,204
</TABLE>
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: For the Fund, income dividends
and capital gain distributions, if any, are recorded on the ex-dividend
date. Dividends are generally declared and paid monthly. Capital gain
distributions are generally declared and paid annually. An additional
distribution may be paid by the Fund to avoid imposition of federal income
tax on any remaining undistributed capital gains and net investment income.
The timing and characterization of certain income and capital gain
distributions are determined in accordance with federal tax regulations
which may differ from GAAP. As a result, net investment income and net
realized gain (or loss) on investment and foreign currency-related
transactions for a reporting period may differ significantly from
distributions during such period. The differences between tax regulations
and GAAP primarily relate to investments in options, futures, mortgage-
backed securities, and certain securities sold at a loss. Accordingly, the
Fund may periodically make reclassifications among certain of its capital
accounts without impacting its net asset value.
EXPENSES: The Fund will pay its own expenses other than those expressly
assumed by Frank Russell Investment Management Company ("FRIMCo" or
"Manager). Most expenses can be directly attributed to the Fund. Expenses
which cannot be directly attributed are allocated among all Funds
principally based on their relative net assets. In addition, Class E shares
will pay shareholder servicing fees along with other expenses that may be
attributable to that Class.
REPURCHASE AGREEMENTS: The Fund may engage in repurchase agreements with
several financial institutions whereby the Fund, through its custodian,
receives delivery of underlying securities as collateral. The Fund's Money
Managers will monitor repurchase agreements daily to determine that the
market value (including accrued interest) of the underlying securities at
Fedwire closing time remains at least equal to 102% of the repurchase price.
The Money Managers will notify the Seller to immediately increase the
collateral on the repurchase agreement to 102% of the repurchase price if
collateral value falls below 102%.
DERIVATIVES: To the extent permitted by the investment objectives,
restrictions and policies set forth in the Fund's Prospectus and Statement
of Additional Information, the Fund may participate in various derivative-
based transactions. Derivative securities are instruments or agreements
whose value is derived from an underlying security or index. They include
options, futures, swaps, forwards, structured notes and stripped securities.
These instruments offer unique characteristics and risks that assist the
Fund in meeting its investment strategies.
The Funds typically use derivatives in three ways: cash equitization,
hedging, and return enhancement. Cash equitization is a technique that may
be used by certain Funds through the use of options and futures to earn
"market-like" returns with their excess and liquidity reserve cash balances.
Hedging is used by some Funds to limit or control risks, such as adverse
movements in exchange rates and interest rates. Return enhancement can be
accomplished through the use of derivatives in a Fund. By purchasing certain
instruments, Funds may more effectively achieve the desired portfolio
characteristics that assist them in meeting their investment objectives.
Depending on how the derivatives are structured and utilized, the risks
associated with them may vary widely. These risks are generally categorized
as market risk, liquidity risk and counterparty or credit risk.
FORWARD COMMITMENTS: The Fund may contract to purchase securities for a
fixed price at a future date beyond customary settlement time (i.e., a
"forward commitment", "delayed settlement" or "when issued" transaction,
e.g., to be announced ("TBA")) consistent with the Fund's ability to manage
its investment portfolio and meet redemption requests. The price of the
underlying securities and the date when the securities will be delivered and
paid for are fixed at the time the transaction is negotiated. The Fund may
dispose of a forward commitment transaction prior to settlement if it is
appropriate to do so and realize short-term gains (or losses) upon such
sale. When effecting such transactions, cash or liquid high-grade debt
obligations of the Fund in a dollar amount sufficient to make payment for
the portfolio securities to be purchased will be segregated on the Fund's
records at the trade date and maintained until the transaction is settled. A
forward commitment transaction involves a risk of loss if the value of the
security to be purchased declines prior to the settlement date or the other
party to the transaction fails to complete the transaction.
OPTIONS: The Fund may purchase and sell (write) call and put options on
securities and securities indices, provided such options are traded on a
national securities exchange or in an over-the-counter market. The Fund may
also purchase and sell call and put options on foreign currencies.
D(2)-12
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3.INVESTMENT TRANSACTIONS
SECURITIES: During the six months ended June 30, 1998, the Fund had
purchases and sales of investment securities (excluding U.S. Government and
Agency obligations, short-term investments, options, futures and repurchase
agreements) of $46,904,438 and $28,880,536, respectively.
Purchases and sales of U.S. Government and Agency obligations (excluding
short-term investments, options, futures and repurchase agreements) were
$89,504,490 and $86,589,801, respectively.
SECURITIES LENDING: Effective April 27, 1998, the Investment Company resumed
its securities lending program. The program allows the Fund to loan
securities with a value up to 33 1/3% of its total assets to certain
brokers. The Fund receives cash (U.S. currency), U.S. Government or U.S.
Government agency obligations as collateral against the loaned securities.
To the extent that a loan is secured by cash collateral, such collateral
shall be invested by Morgan Stanley Trust Company ("MSTC") in short-term
instruments, money market mutual funds, and such other short-term
investments, provided the investments meet certain quality and
diversification requirements. Under the securities-lending arrangement, the
collateral received is recorded on the Fund's statement of assets and
liabilities along with the related obligation to return the collateral. In
those situations where the Company has relinquished control of securities
transferred, it derecognizes the securities and records a receivable from
the counterparty.
Income generated from the investment of cash collateral, less negotiated
rebate fees paid to participating brokers and transaction costs, is divided
between the Fund and MSTC and is included as interest income for the Fund.
To the extent that a loan is secured by non-cash collateral, brokers pay the
Fund negotiated lenders' fees, which are divided between the Fund and MSTC
and are included as interest income for the Fund. All collateral received
will be in an amount at least equal to 102% (for loans of U.S. securities)
or 105% (for non-U.S. securities) of the market value of the loaned
securities at the inception of each loan. This collateral must be maintained
at not less than 100% of the market value of the loaned securities during
the period of the loan. Should the borrower of the securities fail
financially, there is a risk of delay in recovery of the securities or loss
of rights in the collateral. Consequently, loans are made only to borrowers
which are deemed to be of good financial standing. As of June 30, 1998, the
value of outstanding securities on loan and the value of collateral was
$9,142,524 and $9,326,250, respectively.
4.RELATED PARTIES
MANAGER: FRIMCo operates and administers all of the Funds which comprise the
Investment Company, and manages the Money Market and U.S. Government Money
Market Funds (two series of the Investment Company not presented in this
report). FRIMCo is a wholly owned subsidiary of Frank Russell Company, which
researches and recommends to FRIMCo, and to the Investment Company, one or
more investment management organizations to manage the portfolio of the
Fund.
For the six months ended June 30, 1998, the management fee paid to FRIMCo,
for the Fund in accordance with the Investment Company's Management
Agreement with that firm, amounted to $448,000 before waivers. Such fee is
payable monthly and is equal to the annual rate of 0.50% of the average
daily net assets of the Fund.
FRIMCo calculates its management fee based on average daily net assets for
the Fund, less any management fee incurred on assets invested in the Money
Market Fund (see Note 5) thereby eliminating any duplication of fees.
ANALYTIC SERVICES: Fees for analytic services provided to the Fund are paid
or accrued to Frank Russell Company, an affiliate of the Investment Company.
Frank Russell Company provides TruVP System to the Fund, pursuant to a
written Service Agreement. The TruVP System provides analytics used by the
investment department.
TRANSFER AGENT: The Fund has a contract with FRIMCo to provide transfer
agent services to the Investment Company. Total fees for the six months
ended June 30, 1998 were $113,000.
DISTRIBUTOR AND SHAREHOLDER SERVICING: Prior to May 18, 1998, the Investment
Company had a Distribution Plan pursuant to Rule 12b-1 (the "Plan") under
the 1940 Act. Under this Plan, the Investment Company was authorized to make
payments to the Distributor, or any Selling Agents, as defined in the Plan,
an amount (the "12b-1 Fee") for sales support services provided, and related
expenses incurred which were primarily intended to result in the sale of the
Class C shares subject to the Distribution Plan. Effective May 18, 1998,
Class C shares were renamed Class E shares and the 12b-1 fee was eliminated.
D(2)-13
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
The Investment Company has entered into a Distribution Agreement with
Russell Fund Distributors (the "Distributor") which is a wholly-owned
subsidiary of FRIMCo to promote and offer shares of Class S and Class E of
the Investment Company Funds. The Distributor may enter into sub-
distribution agreements with other non-affiliated parties (the
"Selling/Servicing Agents"). Currently, the Distributor receives no
compensation from the Investment Company for its services relating to
distributing the Class S and Class E Shares.
In addition, the Investment Company has adopted a Shareholder Services Plan
(the "Services Plan") under which it may make payments to the Distributor or
any Servicing Agent for any activities or expenses primarily intended to
assist, support or service the Servicing Agents' clients who beneficially
own Class E Shares of the Fund.
The shareholder servicing payments shall not exceed 0.25% of the average
daily net assets of the Fund's Class E Shares on an annual basis. The
Investment Company does not pay for unreimbursed expenses of the Distributor
including amounts expended by the Distributor in excess of amounts received
by it from the Investment Company, interest, carrying or other financial
charges in connection with excess amounts expended, or the Distributor's
overhead expenses. However, the Distributor may be able to recover such
amount or more from future payments made by the Investment Company under the
Distribution plan.
ACCRUED FEES PAYABLE TO AFFILIATES AS OF JUNE 30, 1998 WERE AS FOLLOWS:
<TABLE>
<CAPTION>
ANALYTIC TRANSFER
MANAGEMENT SERVICE AGENT
FEES FEES FEES TOTAL
---------- -------- -------- --------
<S> <C> <C> <C> <C>
Volatility Constrained Bond $75,827 $5,775 $45,570 $127,172
======= ====== ======= ========
</TABLE>
BOARD OF TRUSTEES: The Investment Company pays each of its Trustees not
aff~liated with FRIMCo a retainer of $20,000 per year plus out-of-pocket
expenses. Total Trustee expenses were $54,794 for the six months ended June
30, 1998, and were allocated to each Fund and Class, where appropriate, on a
pro rata basis, including 27 other affiliated funds not presented herein.
5.MONEY MARKET FUND
The Fund is permitted to invest its cash reserves (i.e., monies awaiting
investment in portfolio securities suitable for the Funds' objectives) in
the Frank Russell Investment Company Money Market Fund (a series of Frank
Russell Investment Company not presented herein). As of June 30, 1998,
$9,979,000 of the Money Market Fund's net assets represents investments by
the Fund and $736,532,000 represents the investments of other affiliated
Funds not presented herein.
6.FUND SHARE TRANSACTIONS
Share transactions for each Class of shares were as follows:
<TABLE>
<CAPTION>
SHARES DOLLARS
-------------------------- --------------------------
FOR THE FOR THE FOR THE FOR THE
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
JUNE 30, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997 (UNAUDITED) 1997
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
VOLATILITY CONSTRAINED
BOND CLASS S
Proceeds from shares
sold 2,678,972 4,531,595 $51,101,263 $86,343,467
Proceeds from
reinvestment of
distributions 171,750 318,828 3,269,608 6,058,603
Payments for shares
redeemed (2,038,939) (4,334,448) (38,880,533) (82,601,508)
---------- ---------- ----------- -----------
Total net increase
(decrease) 811,783 515,975 $15,490,338 $ 9,800,562
========== ========== =========== ===========
</TABLE>
There was no activity in Class E shares for Volatility Constrained Bond
Fund.
D(2)-14
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
7.DIVIDENDS
On July 2, 1998, the Board of Trustees declared a $0.0842 dividend from net
investment income payable on July 7, 1998, to the Fund's shareholders of
record on July 2, 1998.
8.SUBSEQUENT EVENTS
On August 10, 1998, Frank Russell Company entered into an agreement with The
Northwestern Mutual Life Insurance Co., an insurance organization, pursuant
to which Northwestern Mutual Life will acquire all of the outstanding common
stock of Frank Russell Company.
At its meeting on April 27, 1998, the Investment Company's Board of
Trustees, in an effort to meet the best interests of shareholders of the
Volatility Constrained Bond Fund and the Fixed Income II Fund (a series of
the Investment Company not presented herein), approved a plan of
reorganization for the merger of the two Funds. The merger is subject to
shareholder approval at a meeting scheduled for November 19, 1998.
D(2)-15
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
909 A Street, Tacoma, Washington 98402
(800) 832-6688
In Washington (253) 627-7001
TRUSTEES
George F. Russell, Jr., Chairman
Lynn L. Anderson
Paul E. Anderson
Paul Anton, PhD
William E. Baxter
Lee C. Gingrich
Eleanor W. Palmer
OFFICERS
Lynn L. Anderson, President and Chief Executive Officer
Peter Apanovitch, Manager of Short Term Investment Funds
Mark E. Swanson, Treasurer and Chief Accounting Officer
Randall P. Lert, Director of Investments
Karl Ege, Secretary and General Counsel
MANAGER AND TRANSFER AGENT
Frank Russell Investment Management Company
909 A Street
Tacoma, WA 98402
CONSULTANT
Frank Russell Company
909 A Street
Tacoma, WA 98402
CUSTODIAN
State Street Bank and Trust Company
1776 Heritage Drive
North Quincy, MA 02171
OFFICE OF SHAREHOLDER INQUIRES
909 A Street
Tacoma, WA 98402
(800) RUSSEL4
(800) 787-7354
LEGAL COUNSEL
Stradley, Ronon, Stevens & Young, LLP
2600 - One Commerce Square
Philadelphia, PA 19103-7098
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
One Post Office Square
Boston, MA 02109
DISTRIBUTOR
Russell Fund Distributors, Inc.
909 A Street
Tacoma, WA 98402
MONEY MANAGERS
BlackRock Financial Management, New York, NY
Standish, Ayer & Wood, Inc., Boston, MA
STW Fixed Income Management, Hamilton, Bermuda
This report is prepared from the books and records of the Fund and is submitted
for the general information of shareholders and is not authorized for
distribution to prospective investors unless accompanied or preceded by an
effective Prospectus. Nothing herein contained is to be considered an offer of
sale or a solicitation of an offer to buy shares of Frank Russell Investment
Company. Such offering is made only by Prospectus, which includes details as to
offering price and other material information.
D(2)-16
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EXHIBIT E
AMENDED AND RESTATED
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT amended and restated this 27th day of April, 1998
(the"Agreement"), between FRANK RUSSELL INVESTMENT COMPANY, a Massachusetts
business trust hereinafter called the "Trust" and FRANK RUSSELL INVESTMENT
MANAGEMENT COMPANY, a Washington Corporation hereinafter called the "Manager."
WHEREAS, the Trust has been organized by and at the expense of a company
affiliated with the Manager and operates as an investment company of the
"series" type registered under the Investment Company Act of 1940 ("1940 Act")
for the purpose of investing and reinvesting its assets in portfolios of
securities, each of which has distinct investment objectives and policies
(each distinct portfolio being referred to herein as a "Sub-Trust"), as set
forth more fully in its Master Trust Agreement, its By-Laws and its
Registration Statements under the 1940 Act and the Securities Act of 1933, all
as heretofore amended and supplemented; and the Trust desires to avail itself
of the services, information, advice, assistance, and facilities of a manager
and to have a manager perform for it various management, administrative,
statistical, research, money manager selection, investment management, and
other services; and
WHEREAS, the Manager is registered as an investment adviser under the
Investment Adviser's Act of 1940 and will engage in the business of rendering
investment advice, counseling, money manager recommendation, and supervisory
services to investment consulting clients; and the Manager and its affiliated
corporations have undertaken the initiative and expense of organizing the
Trust in order to have a means to commingle assets for certain investors to
have access to and utilize the "Multi-Style, Multi-Manager" method of
investment and to provide services to the Trust in consideration of and on the
terms and conditions hereinafter set forth;
NOW, THEREFORE, Trust and the Manager agree as follows:
1. Employment of the Manager. The Trust hereby employs the Manager to manage
the investment and reinvestment of the Trust's assets and to act as a
discretionary Money Manager to certain of the Sub-Trusts in the manner set
forth in Section 2(B) of this Agreement, and to administer its business and
administrative operations, subject to the direction of the Board of Trustees
and the officers of the Trust, for the period, in the manner, and on the terms
hereinafter set forth. The Manager hereby accepts such employment and agrees
during such period to render the services and to assume the obligations herein
set forth. The Manager shall for all purposes herein be deemed to be an
independent contractor and shall, except as expressly provided or authorized
(whether herein or otherwise), have no authority to act for or represent the
Trust in any way.
2. Obligations of and Services to be Provided by the Manager. The Manager
undertakes to provide the services hereinafter set forth and to assume the
following obligations:
A. Management and Administrative Services.
(1) The Manager shall furnish to the Trust adequate (a) office space,
which may be space within the offices of the Manager or in such other
place as may be agreed upon from time to time, (b) office furnishings,
facilities, and equipment as may be reasonably required for managing
and administering the business and operations of the Trust, including
(i) complying with the business trust, securities, and tax reporting
requirements of the United States and the various states in which the
Trust does business, (ii) conducting correspondence and other
communications with the Shareholders of the Trust, and (iii)
maintaining or supervising the maintenance of all internal bookkeeping,
accounting, and auditing services and records in connection with the
Trust's investment and business activities. The Trust agrees that its
shareholder recordkeeping services, the computing of net asset value
and the preparation of certain of its records required by Rule 31 under
the 1940 Act are maintained by the
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Trust's Transfer Agent, Custodian, and Money Managers, and that with
respect to these records the Manager's obligations under this Section
2(A) are supervisory in nature.
(2) The Manager shall employ or provide and compensate the executive,
administrative, secretarial, and clerical personnel necessary to
supervise the provision of the services set forth in sub-paragraph 2(A)
(l), and shall bear the expense of providing such services except as
provided in Section 4 of this Agreement. The Manager shall also
compensate all officers and employees of the Trust who are officers or
employees of the Manager, or its affiliated companies.
B. Investment Management Services.
(1) The Trust intends to appoint one or more persons or companies
("Money manager[s]") for each of the Sub-Trusts or segments thereof,
and each Money Manager shall have full investment discretion and shall
make all determinations with respect to the investment of a Sub-Trust's
assets assigned to the Money Manager and the purchase and sale of
portfolio securities with those assets, and such steps as may be
necessary to implement its decision. The Manager shall not be
responsible or liable for the investment merits of any decision by a
Money Manager to purchase, hold, or sell a security for a Sub-Trust
portfolio.
(2) The Manager shall, subject to and in accordance with the
investment objectives and policies of the Trust and each Sub-Trust and
any directions which the Trust's Board of Trustees may issue to the
Manager, have: (i) overall supervisory responsibility for the general
management and investment of the Trust's assets and securities
portfolios; and (ii) full investment discretion to make all
determinations with respect to the investment of Sub-Trust assets not
assigned to a Money Manager.
(3) The Manager shall develop overall investment programs and
strategies for each Sub-Trust, or segments thereof, shall revise such
programs as necessary, and shall monitor and report periodically to the
Board of Trustees concerning the implementation of the programs.
(4) The Manager shall research and evaluate Money Managers and shall
advise the Board of Trustees of the Trust of the Money Managers which
the Manager believes are best suited to invest the assets of each Sub-
Trust; shall monitor and evaluate the investment performance of each
Money Manager employed by the Trust; shall determine the portion of
each Sub-Trust's assets to be managed by each Money Manager; shall
recommend changes or additions of Money Managers when appropriate;
shall coordinate the investment activities of the Money Managers; and
acting as a fiduciary for the Trust shall compensate the Money
Managers.
(5) The Manager shall render to the Trust's Board of Trustees such
periodic reports concerning the Trust's and Sub-Trust's business and
investments as the Board of Trustees shall reasonably request.
C. Use of Frank Russell Company Research.
The Manager is hereby authorized and expected to utilize the research and
other resources of Frank Russell Company, its corporate parent, or any
predecessor organization, in providing the Investment Management Services
specified in Subsection "B," above. Neither the Manager nor the Trust shall
be obligated to pay any fee to Frank Russell Company for these services.
D. Provision of Information Necessary for Preparation of Securities
Registration Statements, Amendments and Other Materials.
The Manager will make available and provide financial, accounting, and
statistical information required by the Trust for the preparation of
registration statements, reports, and other documents required by federal
and state securities laws, and with such information as the Trust may
reasonably request for use in the
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preparation of such documents or of other materials necessary or helpful
for the underwriting and distribution of the Trust's shares.
E. Other Obligations and Services.
The Manager shall make available its officers and employees to the Board
of Trustees and officers of the Trust for consultation and discussions
regarding the administration and management of the Trust and its investment
activities.
3. Execution and Allocation of Portfolio Brokerage Commissions. The Manager
or the Money Managers, subject to and in accordance with any directions which
the Trust's Board of Trustees may issue from time to time, shall place, in the
name of the Trust, orders for the execution of the Sub-Trusts' portfolio
transactions. When placing such orders, the primary objective of the Manager
and Money Managers shall be to obtain the best net price and execution for the
Trust, but this requirement shall not be deemed to obligate the Manager or a
Money Manager to place any order solely on the basis of obtaining the lowest
commission rate if the other standards set forth in this section have been
satisfied. The Trust recognizes that there are likely to be many cases in
which different brokers are equally able to provide such best price and
execution and that, in selecting among such brokers with respect to particular
trades, it is desirable to choose those brokers who furnish "brokerage and
research services" (as defined in Section 28(e) (3) of the Securities Exchange
Act of 1934) or statistical quotations and other information to the Trust, the
Manager and/or the Money Managers in accord with the standards set forth
below. Moreover, to the extent that it continues to be lawful to do so and so
long as the Board determines as a matter of general policy that the Trust will
benefit, directly or indirectly, by doing so, the Manager or a Money Manager
may place orders with a broker who charges a commission for that transaction
which is in excess of the amount of commission that another broker would have
charged for effecting that transaction, provided that the excess commission is
reasonable in relation to the value of brokerage and research services
provided by that broker. Accordingly, the Trust and the Manager agree that the
Manager and the Money Managers shall select brokers for the execution of the
Sub-Trusts' portfolio transactions from among:
A. Those brokers and dealers who provide brokerage and research services,
or statistical quotations and other information to the Trust, specifically
including the quotations necessary to determine the Trust's net assets, in
such amount of total brokerage as may reasonably be required in light of
such services;
B. Those brokers and dealers who supply brokerage and research services
to the Manager and/or its affiliated corporations, or the Money Managers,
which relate directly to portfolio securities, actual or potential, of the
Trust, or which place the Manager or Money Managers in a better position to
make decisions in connection with the management of the Trust's assets and
portfolios, whether or not such data may also be useful to the Manager and
its affiliates, or the Money Managers and their affiliates, in managing
other portfolios or advising other clients, in such amount of total
brokerage as may reasonably be required; and
C. Frank Russell Securities, Inc., an affiliate of Manager, when the
Manager or Money Manager has determined that the Trust will receive
competitive execution, price, and commissions. The Manager shall render
regular reports to the Trust, not more frequently than quarterly, of how
much total brokerage business has been placed with Frank Russell
Securities, Inc., and the manner in which the allocation has been
accomplished.
The Manager agrees and each Money Manager will be required to agree, that
no investment decision will be made or influenced by a desire to provide
brokerage for allocation in accordance with the foregoing, and that the
right to make such allocation of brokerage shall not interfere with the
Managers' or Money Managers' primary duty to obtain the best net price and
execution for the Trust.
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4. Expenses of the Trust. It is understood that the Trust will pay all its
expenses other than those expressly assumed by the Manager herein, which
expenses payable by the Trust shall include:
A. Fees for the services of the Money Managers;
B. Expenses of all audits by independent public accountants;
C. Expenses of transfer agent, registrar, dividend disbursing agent, and
shareholder recordkeeping services;
D. Expenses of custodial services including recordkeeping services
provided by the Custodian;
E. Expenses of obtaining quotations for calculating the value of the
Trust's net assets;
F. Expenses of obtaining Portfolio Activity Reports and Analyses of
International Management reports for each portfolio of each Sub-Trust;
G. Expenses of maintaining each Sub-Trust's tax records;
H. Salaries and other compensation of any of the Trust's executive
officers and employees, if any, who are not officers, directors,
stockholders, or employees of the Manager;
I. Taxes levied against the Trust;
J. Brokerage fees and commissions in connection with the purchase and
sale of portfolio securities for the Trust;
K. Costs, including the interest expense, of borrowing money;
L. Costs and/or fees incident to meetings of the Trust, the preparation
and mailings of prospectuses and reports of the Trust to its Shareholders,
the filing of reports with regulatory bodies, the maintenance of the
Trust's existence, and the registration of shares with federal and state
securities authorities;
M. Legal fees, including the legal fees related to the registration and
continued qualification of the Trust shares for sale;
N. Costs of printing stock certificates representing shares of the Trust;
O. Trustees' fees and expenses to trustees who are not officers,
employees, or stockholders of the Manager or any of its affiliates;
P. The Trust's pro rata portion of the fidelity bond required by Section
17(g) of the 1940 Act, or other insurance premiums;
Q. Association membership dues; and
R. Extraordinary expenses as may arise including expenses incurred in
connection with litigation, proceedings, other claims, and the legal
obligations of the Trust to indemnify its Trustees, officers, employees,
shareholders, distributors, and agents with respect thereto.
5. Activities and Affiliates of the Manager.
A. The services of the Manager and its affiliated corporations to the
Trust hereunder are not to be deemed exclusive, and the Manager and any of
its affiliates shall be free to render similar services to others.
(1) The Manager and its affiliated corporations shall use the same
skill and care in the management of the Sub-Trust's portfolios as they
use in the administration of other accounts to which
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they provide asset management consulting and manager selection
services, but they shall not be obligated to give the Trust more
favorable or preferential treatment vis-a-vis their other clients.
(2) The Trust expressly recognizes that Frank Russell Trust Company
("Trust Company"), a corporation affiliated with the Manager, is also a
client of a corporation affiliated with the Manager and receives
substantially the same portfolio structuring and money manager
selection services from the affiliate as does the Trust that Trust
Company has, or may have, commingled investment funds with
substantially the same investment objectives, strategies, and programs
as the Trust; that the Trust was organized by and at the expense of a
corporation affiliated with the Manager for the express purpose of
offering the same type of investment management services to the Trust's
shareholders, at least some of whom could not obtain these services
through Trust Company, as Trust Company provides to its trust
customers; and that over time Trust Company and the Trust may utilize
some of the same money managers and have similar portfolio securities
holdings.
B. Subject to and in accordance with the Master Trust Agreement (as
defined below) and By-Laws of the Trust and to Section 10(a) of the 1940
Act, it is understood that Trustees, officers, agents, and shareholders of
the Trust are or may be interested in the Manager or its affiliates
directors, agents, or shareholders of the Manager or its affiliates; that
directors, officers, agents, and shareholders of the Manager or its
affiliates are or may be interested in the Trust as Trustees, officers,
agents, shareholders, or otherwise; that the Manager or its affiliates may
be interested in the Trust as shareholders or otherwise; and that the
effect of any such interests shall be governed by said Master Trust
Agreement, By-Laws, and the 1940 Act.
6. Compensation of the Manager.
A. As consideration for the Manager's services to the following Sub-
Trusts, the Manager shall receive from each of these Sub-Trusts an annual
management fee, accrued daily at the rate of 1/365th of the applicable
management fee and payable following the last day of each month, of the
following annual percentages of each Sub-Trust's average daily net assets
during the month:
<TABLE>
<S> <C>
Diversified Equity................................................... .78%
Special Growth....................................................... .95%
Equity Income........................................................ .80%
Quantitative Equity.................................................. .78%
Diversified Bond..................................................... .45%
Volatility Constrained Bond.......................................... .50%
International Securities............................................. .95%
Multistrategy Bond................................................... .65%
Limited Volatility Tax Free.......................................... .50%
U.S. Government Money Market......................................... .25%
Tax Free Money Market................................................ .25%
Real Estate Securities............................................... .85%
Emerging Markets..................................................... 1.20%
Money Market......................................................... .25%
Equity I............................................................. .60%
Equity II............................................................ .75%
Equity III........................................................... .60%
Equity Q............................................................. .60%
International........................................................ .75%
Fixed Income I....................................................... .30%
Fixed Income II...................................................... .50%
Fixed Income III..................................................... .55%
Equity T............................................................. .75%
Aggressive Strategy.................................................. .25%
Balanced Strategy.................................................... .25%
Moderate Strategy.................................................... .25%
Conservative Strategy................................................ .25%
Equity Balanced Strategy............................................. .25%
</TABLE>
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From this management fee, the Manager shall compensate the Money Managers as
a fiduciary of the Trust.
7. Liabilities of the Manager.
A. In the absence of willful misfeasance, bad faith, gross negligence, or
reckless disregard of obligations or duties hereunder or on the part of the
Manager or its corporate affiliates, the Manager and its corporate
affiliates shall not be subject to liability to the Trust or to any
Shareholder of the Trust for any act or omission in the course of, or
connected with, rendering services hereunder or for any losses that may be
sustained in the purchase, holding, or sale of any security.
B. No provision of this Agreement shall be construed to protect any,
trustee or officer of the Trust, or the Manager and its corporate
affiliates, from liability in violation of Sections 17(h) and (i) of the
1940 Act.
8. Renewal and Termination.
A. This Agreement shall become effective on and as of April 27, 1998 and
shall continue in effect as to each Sub-Trust until April 30, 2000. The
Agreement is renewable annually thereafter for successive one-year periods
(a) by a vote of a majority of the Trustees of the Trust, or (b) as to any
Sub-Trust, by a vote of a majority of the outstanding voting securities of
that Sub-Trust, and in either case by a majority of the Trustees who are
not parties to the Agreement or interested persons of any parties to the
Agreement (other than as Trustees of the Trust) cast in person at a meeting
called for purposes of voting on the Agreement; provided, however, that if
the shareholders of any one or more Sub-Trusts fail to approve the
Agreement as provided herein, the Manager may continue to serve in such
capacity in the manner and to the extent permitted by the 1940 Act and
Rules and Regulations thereunder.
B. This Agreement:
(a) May at any time be terminated without the payment of any penalty
either by vote of the Board of Trustees of the Trust or, as to any Sub-
Trust, by vote of a majority of the outstanding voting securities of
the Sub-Trust, on 60 days' written notice to the Manager;
(b) Shall immediately terminate in the event of its assignment; and
(c) May be terminated by the Manager on 60 days' written notice to
the Trust.
C. As used in this Section 8, the terms of "assignment", "interested
person" and "vote of a majority of the outstanding voting securities" shall
have the meanings set forth for any such terms in the 1940 Act.
D. Any notice under this Agreement shall be given in writing addressed
and delivered, or mailed postpaid, to the other party at any office of such
party.
9. Severability. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule, or otherwise, the remainder of
this Agreement shall not be affected thereby.
10. Reservation of Name. The parties hereto acknowledge that Frank Russell
Company has reserved the right to grant the non-exclusive use of the name
"Frank Russell," or any derivative thereof, to any other investment company,
investment advisor, distributor or other business enterprise, and to withdraw
from the Trust the use of the name "Frank Russell." In the event that Frank
Russell Company should elect to withdraw the use of the name "Frank Russell"
from the Trust, the Trust will submit the question of continuing this
Agreement to a vote of its Shareholders.
11. Limitation of Liability. The Master Trust Agreement dated July 26, 1984,
as amended from time to time, establishing the Trust, which is hereby referred
to and a copy of which is on file with the Secretary of The Commonwealth of
Massachusetts, provides that the name Frank Russell Investment Company means
the
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Trustees from time to time serving (as Trustees but not personally) under said
Master Trust Agreement. It is expressly acknowledged and agreed that the
obligations of the Trust hereunder shall not be binding upon any of the
Shareholders, Trustees, officers, employees, or agents of the Trust,
personally, but shall bind only the trust property of the Trust, as provided
in its Master Trust Agreement. The execution and delivery of this Agreement
have been authorized by the Trustees of the Trust and signed by the President
of the Trust, acting as such, and neither such authorization by such Trustees
nor such execution and delivery by such officer shall be deemed to have been
made by any of them individually or to impose any liability on any of them
personally, but shall bind only the trust property of the Trust as provided in
its Master Trust Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed, as of the day and year first written above.
FRANK RUSSELL
INVESTMENT COMPANY
/s/ Karl J. Ege
_______________________________
Karl J. Ege, Secretary
/s/ Lynn L. Anderson
By: _________________________
Lynn L. Anderson,
President
FRANK RUSSELL INVESTMENT
MANAGEMENT COMPANY
/s/ Karl J. Ege
_______________________________
Karl J. Ege, Secretary
/s/ Eric A. Russell
By: _________________________
Eric A. Russell,
President
FRANK RUSSELL COMPANY agrees to provide consulting services without charge
to the Investment Company upon the request of the Board of Trustees or
officers of the Trust, or upon the request of manager pursuant to Section
2(C).
FRANK RUSSELL COMPANY
/s/ Karl J. Ege
_______________________________
Karl J. Ege, Secretary
/s/ Michael J. A. Phillips
By: __________________________
Michael J. A. Phillips,
President
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EXHIBIT F
ADVISORY AGREEMENT
THIS ADVISORY AGREEMENT dated this day of , 1998 (the "Agreement"),
between FRANK RUSSELL INVESTMENT COMPANY, a Massachusetts business trust
hereinafter called the "Trust" and FRANK RUSSELL INVESTMENT MANAGEMENT
COMPANY, a Washington Corporation hereinafter called the "Manager."
WHEREAS, the Trust has been organized by and at the expense of a company
affiliated with the Manager and operates as an investment company of the
"series" type registered under the Investment Company Act of 1940 ("1940 Act")
for the purpose of investing and reinvesting its assets in portfolios of
securities, each of which has distinct investment objectives and policies
(each distinct portfolio being referred to herein as a "Sub-Trust"), as set
forth more fully in its Master Trust Agreement, its By-Laws and its
Registration Statements under the 1940 Act and the Securities Act of 1933, all
as heretofore amended and supplemented; and the Trust desires to avail itself
of the services, information, advice, assistance, and facilities of a manager
and to have a manager perform for it various statistical, research, money
manager selection, investment management, and other services; and
WHEREAS, the Manager is registered as an investment adviser under the
Investment Adviser's Act of 1940 and will engage in the business of rendering
investment advice, counseling, money manager recommendation, and supervisory
services to investment consulting clients; and the Manager and its affiliated
corporations have undertaken the initiative and expense of organizing the
Trust in order to have a means to commingle assets for certain investors to
have access to and utilize the "Multi-Style, Multi-Manager" method of
investment and to provide services to the Trust in consideration of and on the
terms and conditions hereinafter set forth;
NOW, THEREFORE, Trust and the Manager agree as follows:
1. Employment of the Manager. The Trust hereby employs the Manager to manage
the investment and reinvestment of the Trust's assets and to act as a
discretionary Money Manager to certain of the Sub-Trusts in the manner set
forth in Section 2(B) of this Agreement, subject to the direction of the Board
of Trustees and the officers of the Trust, for the period, in the manner, and
on the terms hereinafter set forth. The Manager hereby accepts such employment
and agrees during such period to render the services and to assume the
obligations herein set forth. The Manager shall for all purposes herein be
deemed to be an independent contractor and shall, except as expressly provided
or authorized (whether herein or otherwise), have no authority to act for or
represent the Trust in any way.
2. Obligations of and Services to be Provided by the Manager. The Manager
undertakes to provide the services hereinafter set forth and to assume the
following obligations:
A. [Reserved]
B. Investment Management Services.
(1) The Trust intends to appoint one or more persons or companies
("Money Manager[s]") for each of the Sub-Trusts or segments thereof,
and each Money Manager shall have full investment discretion and shall
make all determinations with respect to the investment of a Sub-Trust's
assets assigned to the Money Manager and the purchase and sale of
portfolio securities with those assets, and such steps as may be
necessary to implement its decision. The Manager shall not be
responsible or liable for the investment merits of any decision by a
Money Manager to purchase, hold, or sell a security for a Sub-Trust
portfolio.
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(2) The Manager shall, subject to and in accordance with the
investment objectives and policies of the Trust and each Sub-Trust and
any directions which the Trust's Board of Trustees may issue to the
Manager, have: (i) overall supervisory responsibility for the general
management and investment of the Trust's assets and securities
portfolios; and (ii) full investment discretion to make all
determinations with respect to the investment of Sub-Trust assets not
assigned to a Money Manager.
(3) The Manager shall develop overall investment programs and
strategies for each Sub-Trust, or segments thereof, shall revise such
programs as necessary, and shall monitor and report periodically to the
Board of Trustees concerning the implementation of the programs.
(4) The Manager shall research and evaluate Money Managers and shall
advise the Board of Trustees of the Trust of the Money Managers which
the Manager believes are best suited to invest the assets of each Sub-
Trust; shall monitor and evaluate the investment performance of each
Money Manager employed by the Trust; shall determine the portion of
each Sub-Trust's assets to be managed by each Money Manager; shall
recommend changes or additions of Money Managers when appropriate;
shall coordinate the investment activities of the Money Managers; and
acting as a fiduciary for the Trust shall compensate the Money
Managers.
(5) The Manager shall render to the Trust's Board of Trustees such
periodic reports concerning the Trust's and Sub-Trust's business and
investments as the Board of Trustees shall reasonably request.
C. Use of Frank Russell Company Research.
The Manager is hereby authorized and expected to utilize the research and
other resources of Frank Russell Company, its corporate parent, or any
predecessor organization, in providing the Investment Management Services
specified in Subsection "B," above. Neither the Manager nor the Trust shall
be obligated to pay any fee to Frank Russell Company for these services.
D. Provision of Information Necessary for Preparation of Securities
Registration Statements, Amendments and Other Materials.
The Manager will make available and provide financial, accounting, and
statistical information required by the Trust for the preparation of
registration statements, reports, and other documents required by federal
and state securities laws, and with such information as the Trust may
reasonably request for use in the preparation of such documents or of other
materials necessary or helpful for the underwriting and distribution of the
Trust's shares.
E. Other Obligations and Services.
The Manager shall make available its officers and employees to the Board
of Trustees and officers of the Trust for consultation and discussions
regarding the management of the Trust and its investment activities.
3. Execution and Allocation of Portfolio Brokerage Commissions. The Manager
or the Money Managers, subject to and in accordance with any directions which
the Trust's Board of Trustees may issue from time to time, shall place, in the
name of the Trust, orders for the execution of the Sub-Trusts' portfolio
transactions. When placing such orders, the primary objective of the Manager
and Money Managers shall be to obtain the best net price and execution for the
Trust, but this requirement shall not be deemed to obligate the Manager or a
Money Manager to place any order solely on the basis of obtaining the lowest
commission rate if the other standards set forth in this section have been
satisfied. The Trust recognizes that there are likely to be many cases in
which different brokers are equally able to provide such best price and
execution and that, in selecting among such brokers with respect to particular
trades, it is desirable to choose those brokers who furnish "brokerage and
research services" (as defined in Section 28(e) (3) of the Securities Exchange
Act of 1934) or statistical quotations and other information to the Trust, the
Manager and/or the Money Managers in accord with the
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standards set forth below. Moreover, to the extent that it continues to be
lawful to do so and so long as the Board determines as a matter of general
policy that the Trust will benefit, directly or indirectly, by doing so, the
Manager or a Money Manager may place orders with a broker who charges a
commission for that transaction which is in excess of the amount of commission
that another broker would have charged for effecting that transaction,
provided that the excess commission is reasonable in relation to the value of
brokerage and research services provided by that broker. Accordingly, the
Trust and the Manager agree that the Manager and the Money Managers shall
select brokers for the execution of the Sub-Trusts' portfolio transactions
from among:
A. Those brokers and dealers who provide brokerage and research services,
or statistical quotations and other information to the Trust, specifically
including the quotations necessary to determine the Trust's net assets, in
such amount of total brokerage as may reasonably be required in light of
such services;
B. Those brokers and dealers who supply brokerage and research services
to the Manager and/or its affiliated corporations, or the Money Managers,
which relate directly to portfolio securities, actual or potential, of the
Trust, or which place the Manager or Money Managers in a better position to
make decisions in connection with the management of the Trust's assets and
portfolios, whether or not such data may also be useful to the Manager and
its affiliates, or the Money Managers and their affiliates, in managing
other portfolios or advising other clients, in such amount of total
brokerage as may reasonably be required; and
C. Frank Russell Securities, Inc., an affiliate of Manager, when the
Manager or Money Manager has determined that the Trust will receive
competitive execution, price, and commissions. The Manager shall render
regular reports to the Trust, not more frequently than quarterly, of how
much total brokerage business has been placed with Frank Russell
Securities, Inc., and the manner in which the allocation has been
accomplished.
The Manager agrees and each Money Manager will be required to agree, that no
investment decision will be made or influenced by a desire to provide
brokerage for allocation in accordance with the foregoing, and that the right
to make such allocation of brokerage shall not interfere with the Managers' or
Money Managers' primary duty to obtain the best net price and execution for
the Trust.
4. Expenses of the Trust. It is understood that the Trust will pay all its
expenses other than those expressly assumed by the Manager herein, which
expenses payable by the Trust shall include:
A. Fees for the services of the Money Managers;
B. Expenses of all audits by independent public accountants;
C. Expenses of transfer agent, registrar, dividend disbursing agent, and
shareholder recordkeeping services;
D. Expenses of custodial services including recordkeeping services
provided by the Custodian;
E. Expenses of obtaining quotations for calculating the value of the
Trust's net assets;
F. Expenses of obtaining Portfolio Activity Reports and Analyses of
International Management reports for each portfolio of each Sub-Trust;
G. Expenses of maintaining each Sub-Trust's tax records;
H. Salaries and other compensation of any of the Trust's executive
officers and employees, if any, who are not officers, directors,
stockholders, or employees of the Manager;
I. Taxes levied against the Trust;
F-3
<PAGE>
J. Brokerage fees and commissions in connection with the purchase and
sale of portfolio securities for the Trust;
K. Costs, including the interest expense, of borrowing money;
L. Costs and/or fees incident to meetings of the Trust, the preparation
and mailings of prospectuses and reports of the Trust to its Shareholders,
the filing of reports with regulatory bodies, the maintenance of the
Trust's existence, and the registration of shares with federal and state
securities authorities;
M. Legal fees, including the legal fees related to the registration and
continued qualification of the Trust shares for sale;
N. Costs of printing stock certificates representing shares of the Trust;
O. Trustees' fees and expenses to trustees who are not officers,
employees, or stockholders of the Manager or any of its affiliates;
P. The Trust's pro rata portion of the fidelity bond required by Section
17(g) of the 1940 Act, or other insurance premiums;
Q. Association membership dues; and
R. Extraordinary expenses as may arise including expenses incurred in
connection with litigation, proceedings, other claims, and the legal
obligations of the Trust to indemnify its Trustees, officers, employees,
shareholders, distributors, and agents with respect thereto.
5. Activities and Affiliates of the Manager.
A. The services of the Manager and its affiliated corporations to the
Trust hereunder are not to be deemed exclusive, and the Manager and any of
its affiliates shall be free to render similar services to others.
(1) The Manager and its affiliated corporations shall use the same
skill and care in the management of the Sub-Trust's portfolios as they
use in the administration of other accounts to which they provide asset
management consulting and manager selection services, but they shall
not be obligated to give the Trust more favorable or preferential
treatment vis-a-vis their other clients.
(2) The Trust expressly recognizes that Frank Russell Trust Company
("Trust Company"), a corporation affiliated with the Manager, is also a
client of a corporation affiliated with the Manager and receives
substantially the same portfolio structuring and money manager
selection services from the affiliate as does the Trust; that Trust
Company has, or may have, commingled investment funds with
substantially the same investment objectives, strategies, and programs
as the Trust; that the Trust was organized by and at the expense of a
corporation affiliated with the Manager for the express purpose of
offering the same type of investment management services to the Trust's
shareholders, at least some of whom could not obtain these services
through Trust Company, as Trust Company provides to its trust
customers; and that over time Trust Company and the Trust may utilize
some of the same money managers and have similar portfolio securities
holdings.
B. Subject to and in accordance with the Master Trust Agreement (as defined
below) and By-Laws of the Trust and to Section 10(a) of the 1940 Act, it is
understood that Trustees, officers, agents, and shareholders of the Trust are
or may be interested in the Manager or its affiliates directors, agents, or
shareholders of the Manager or its affiliates; that directors, officers,
agents, and shareholders of the Manager or its affiliates are or may be
interested in the Trust as Trustees, officers, agents, shareholders, or
otherwise; that the Manager or its affiliates may be interested in the Trust
as shareholders or otherwise; and that the effect of any such interests shall
be governed by said Master Trust Agreement, By-Laws, and the 1940 Act.
F-4
<PAGE>
6. Compensation of the Manager.
A. As consideration for the Manager's services to the following Sub-
Trusts, the Manager shall receive from each of these Sub-Trusts an annual
management fee, accrued daily at the rate of 1/365th of the applicable
management fee and payable following the last day of each month, of the
following annual percentages of each Sub-Trust's average daily net assets
during the month:
<TABLE>
<S> <C>
Diversified Equity............................... .73%
Special Growth................................... .90%
Equity Income.................................... .75%
Quantitative Equity.............................. .73%
Diversified Bond................................. .40%
Volatility Constrained Bond...................... .45%
International Securities......................... .90%
Multistrategy Bond............................... .60%
Limited Volatility Tax Free (to be renamed Tax
Free Bond)...................................... .30%
U.S. Government Money Market..................... .20%
Tax Free Money Market............................ .20%
Real Estate Securities........................... .80%
Emerging Markets................................. 1.15%
Money Market..................................... .20%
Equity I......................................... .55%
Equity II........................................ .70%
Equity III....................................... .55%
Equity Q......................................... .55%
International.................................... .70%
Fixed Income I................................... .25%
Fixed Income II (to be renamed Short-Term Bond).. .45%
Fixed Income III................................. .50%
Equity T......................................... .70%
Aggressive Strategy.............................. .20%
Balanced Strategy................................ .20%
Moderate Strategy................................ .20%
Conservative Strategy............................ .20%
Equity Balanced Strategy......................... .20%
</TABLE>
From this management fee, the Manager shall compensate the Money Managers as
a fiduciary of the Trust.
B. When a Sub-Trust holds cash, securities or other investment assets
which are not treated as net assets of the Sub-Trust for the purpose of
determining the net asset value per share of such Sub-Trust, the Manager
may receive an additional annual fee, accrued daily at the rate of 1/365th
of the fee and payable following the last day of each month, of 0.07% of
the value of such assets for the exercise of investment supervision over
such assets.
7. Liabilities of the Manager.
A. In the absence of willful misfeasance, bad faith, gross negligence,
or reckless disregard of obligations or duties hereunder or on the part of
the Manager or its corporate affiliates, the Manager and its corporate
affiliates shall not be subject to liability to the Trust or to any
Shareholder of the Trust for any act or omission in the course of, or
connected with, rendering services hereunder or for any losses that may be
sustained in the purchase, holding, or sale of any security.
B. No provision of this Agreement shall be construed to protect any
trustee or officer of the Trust, or the Manager and its corporate
affiliates, from liability in violation of Sections 17(h) and (i) of the
1940 Act.
8. Renewal and Termination.
A. This Agreement shall become effective on and as of January 1, 1999 and
shall continue in effect as to each Sub-Trust until April 30, 2000. The
Agreement is renewable annually thereafter for successive
F-5
<PAGE>
one-year periods (a) by a vote of a majority of the Trustees of the Trust,
or (b) as to any Sub-Trust, by a vote of a majority of the outstanding
voting securities of that Sub-Trust, and in either case by a majority of
the Trustees who are not parties to the Agreement or interested persons of
any parties to the Agreement (other than as Trustees of the Trust) cast in
person at a meeting called for purposes of voting on the Agreement;
provided, however, that if the shareholders of any one or more Sub-Trusts
fail to approve the Agreement as provided herein, the Manager may continue
to serve in such capacity in the manner and to the extent permitted by the
1940 Act and Rules and Regulations thereunder.
B. This Agreement:
(a) May at any time be terminated without the payment of any penalty
either by vote of the Board of Trustees of the Trust or, as to any Sub-
Trust, by vote of a majority of the outstanding voting securities of
the Sub-Trust, on 60 days' written notice to the Manager;
(b) Shall immediately terminate in the event of its assignment; and
(c) May be terminated by the Manager on 60 days' written notice to
the Trust.
C. As used in this Section 8, the terms of "assignment", "interested
person" and "vote of a majority of the outstanding voting securities" shall
have the meanings set forth for any such terms in the 1940 Act.
D. Any notice under this Agreement shall be given in writing addressed
and delivered, or mailed postpaid, to the other party at any office of such
party.
9. Severability. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule, or otherwise, the remainder of
this Agreement shall not be affected thereby.
10. Reservation of Name. The parties hereto acknowledge that Frank Russell
Company has reserved the right to grant the non-exclusive use of the name
"Frank Russell," or any derivative thereof, to any other investment company,
investment advisor, distributor or other business enterprise, and to withdraw
from the Trust the use of the name "Frank Russell." In the event that Frank
Russell Company should elect to withdraw the use of the name "Frank Russell"
from the Trust, the Trust will submit the question of continuing this
Agreement to a vote of its Shareholders.
11. Limitation of Liability. The Master Trust Agreement dated July 26, 1984,
as amended from time to time, establishing the Trust, which is hereby referred
to and a copy of which is on file with the Secretary of The Commonwealth of
Massachusetts, provides that the name Frank Russell Investment Company means
the Trustees from time to time serving (as Trustees but not personally) under
said Master Trust Agreement. It is expressly acknowledged and agreed that the
obligations of the Trust hereunder shall not be binding upon any of the
Shareholders, Trustees, officers, employees, or agents of the Trust,
personally, but shall bind only the trust property of the Trust, as provided
in its Master Trust Agreement. The execution and delivery of this Agreement
have been authorized by the Trustees of the Trust and signed by the President
of the Trust, acting as such, and neither such authorization by such Trustees
nor such execution and delivery by such officer shall be deemed to have been
made by any of them individually or to impose any liability on any of them
personally, but shall bind only the trust property of the Trust as provided in
its Master Trust Agreement.
F-6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed, as of the day and year first written above.
FRANK RUSSELL INVESTMENT
COMPANY
- --------------------------- By: __________________________________________
Karl J. Ege, Secretary Lynn L. Anderson, President
FRANK RUSSELL INVESTMENT
MANAGEMENT COMPANY
- --------------------------- By: __________________________________________
Karl J. Ege, Secretary Eric A. Russell, President
FRANK RUSSELL COMPANY agrees to provide consulting services without charge
to the Investment Company upon request of the Board of Trustees or offices of
the Trust, or upon the request of manager pursuant to Section 2(C).
FRANK RUSSELL COMPANY
- --------------------------- By: __________________________________________
Karl J. Ege, Secretary Michael J. A. Phillips, President
F-7
<PAGE>
EXHIBIT G
PROFORMA FINANCIAL STATEMENTS
(SHORT-TERM BOND FUND)
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SHORT-TERM BOND
FUND (FOLLOWING
FIXED INCOME FUND BOND FUND REORGANIZATION)
------------------ ------------------ ------------------
PRINCIPAL MARKET PRINCIPAL MARKET PRINCIPAL MARKET
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
(000) (000) (000) (000) (000) (000)
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
LONG-TERM INVESTMENTS -
91.7%
ASSET-BACKED
SECURITIES - 35.2%
Advanta Home Equity Loan
Trust
Series 1994-1 Class A-2
6.300% due 07/25/25... $ 39 $ 38 $ 189 $ 186 $ 226 $ 224
AFC Home Equity Loan
Trust
Series 1993-2 Class A
6.000% due 01/20/13.... 386 379 157 154 543 533
AFC Mortgage Loan Trust
Series 1996-3 Class 1A2
7.220% due 12/25/27.... 350 350 125 125 475 475
Associates Manufactured
Housing
Pass-thru Certificate
Series 1996-1 Class A3
7.000% due 03/15/27.... 850 862 700 710 1,550 1,572
Banc One Auto Grantor
Trust
Series 1997-A Class A
6.270% due 11/20/03.... 3,703 3,712 2,798 2,804 6,501 6,516
Barnett Auto Trust
Series 1997-A Class A3
6.030% due 11/15/01.... 7,500 7,495 5,700 5,696 13,200 13,191
California
Infrastructure PG&E
Series 1997-1 Class A3
6.150% due 06/25/02.... 1,600 1,604 1,600 1,604
Case Equipment Loan
Trust
Series 1997-B Class C
6.410% due 09/15/04.... 284 286 284 286
Chase Credit Card Master
Trust
Series 1997-2 Class A
6.300% due 04/15/03.... 4,479 4,514 2,900 2,922 7,379 7,436
Chase Manhattan Grantor
Trust
Series 1996-B Class A
6.610% due 09/15/02.... 1,204 1,211 783 787 1,987 1,998
Chevy Chase Auto
Receivables Trust
Series 1996-2 Class A
5.900% due 07/15/03... 970 967 803 800 1,773 1,767
Series 1997-2 Class A
6.350% due 01/15/04... 842 845 842 845
Series 1997-3 Class A
6.200% due 03/20/04
(b)................... 653 654 868 869 1,521 1,523
</TABLE>
G-1
<PAGE>
PROFORMA FINANCIAL STATEMENTS
(SHORT-TERM BOND FUND)
STATEMENT OF NET ASSETS--(CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SHORT-TERM BOND
FUND (FOLLOWING
FIXED INCOME FUND BOND FUND REORGANIZATION)
------------------ ------------------ ------------------
PRINCIPAL MARKET PRINCIPAL MARKET PRINCIPAL MARKET
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
(000) (000) (000) (000) (000) (000)
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Contimortgage Home
Equity Loan Trust
Pass-thru Certificate
Series 1997-4 Class A2
6.270% due 02/15/12... $ 500 $ 499 $ 500 $ 499 $ 1,000 $ 998
EQCC Home Equity Loan
Trust
Series 1993-4 Class A
5.725% due 12/15/08... 40 40 51 51 91 91
Series 1994-1 Class A
5.800% due 03/15/09... 316 313 260 258 576 571
Equivantage Home Equity
Loan Trust
Series 1996-1 Class A
6.550% due 10/25/25... 729 732 486 488 1,215 1,220
Fifth Third Bank Auto
Grantor Trust
Series 1996-B Class A
6.450% due 03/15/02... 1,000 1,003 1,000 1,003
First Chicago Master
Trust II
Credit Card
Certificates
Series 1994-L
7.150% due 04/15/01... 4,500 4,580 3,200 3,257 7,700 7,837
First Omni Credit Card
Master Trust
Series 1996-A Class A
6.650% due 09/15/03... 930 945 610 620 1,540 1,565
First Security Auto
Grantor Trust
Series 1997-A Class A
6.300% due 08/15/03... 998 1,000 697 698 1,695 1,698
Fleetwood Credit
Corporation Grantor
Trust
Series 1997-B Class A
6.400% due 05/15/13... 378 381 378 381
Ford Credit Auto Lease
Trust
Series 1996-1 Class A2
5.800% due 05/15/99... 1,168 1,167 809 808 1,977 1,975
Green Tree Financial
Corp.
Series 1996-6 Class A4
7.050% due 09/15/27... 500 507 500 507 1,000 1,014
Series 1997-3 Class A2
6.490% due 07/15/28... 750 752 750 752
Green Tree Securitized
Net Interest Margin
Trust
Series 1994-A Class A
6.900% due 02/15/04... 528 533 440 444 968 977
Series 1995-A Class A
7.250% due 07/15/05... 413 414 354 355 767 769
</TABLE>
G-2
<PAGE>
PROFORMA FINANCIAL STATEMENTS
(SHORT-TERM BOND FUND)
STATEMENT OF NET ASSETS--(CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SHORT-TERM BOND
FUND (FOLLOWING
FIXED INCOME FUND BOND FUND REORGANIZATION)
------------------ ------------------ ------------------
PRINCIPAL MARKET PRINCIPAL MARKET PRINCIPAL MARKET
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
(000) (000) (000) (000) (000) (000)
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Honda Auto Receivables
Grantor Trust
Series 1995-A Class A
6.200% due 12/15/00... $ 346 $ 346 $ 346 $ 346 $ 692 $ 692
Series 1997-B Class A
5.950% due 05/15/03... 1,200 1,198 923 922 2,123 2,120
IMC Home Equity Loan
Trust
Series 1997-5 Class A1
6.510% due 02/20/06
(b)................... 765 765 584 584 1,349 1,349
Nationsbank Auto Owner
Trust
Series 1996-A Class A3
6.375% due 07/15/00... 2,750 2,756 2,500 2,505 5,250 5,261
Nationsbank Credit Card
Master Trust
Series 1995-1 Class A
6.450% due 04/15/03... 3,850 3,887 3,850 3,887
Newcourt Receivables
Asset Trust
Series 1996-2 Class A
6.870% due 06/20/04... 208 212 156 159 364 371
Nissan Auto Receivables
Grantor Trust
Series 1997-1 Class A
6.150% due 02/17/03... 372 373 837 839 1,209 1,212
Olympic Automobile
Receivables
Series 1996-B Class A4
6.700% due 03/15/02... 1,000 1,009 1,000 1,009 2,000 2,018
Series 1996-D Class
CTFS
6.125% due 11/15/04... 3,759 3,749 2,860 2,852 6,619 6,601
Series 1997-A Class A2
6.125% due 01/01/99... 902 903 451 451 1,353 1,354
PNC Student Loan Trust I
Series 1997-2 Class A3
6.314% due 01/25/01... 5,000 5,041 3,500 3,529 8,500 8,570
Premier Auto Trust
Series 1997-3 Class A4
6.200% due 01/06/01... 5,000 5,011 3,500 3,508 8,500 8,519
Remodelers Home
Improvement Loan
Series 1995-3 Class A2
6.800% due 12/20/07... 558 558 269 269 827 827
Sears Credit Account
Master Trust II
Series 1995-3 Class A
7.000% due 10/15/04... 900 919 500 511 1,400 1,430
Series 1995-4 Class A
6.250% due 01/15/03... 4,000 4,004 500 500 4,500 4,504
Series 1996-2 Class A
6.500% due 10/15/03... 1,500 1,510 1,500 1,510
Series 1997-1 Class A
6.200% due 07/16/07... 500 500 500 500
</TABLE>
G-3
<PAGE>
PROFORMA FINANCIAL STATEMENTS
(SHORT-TERM BOND FUND)
STATEMENT OF NET ASSETS--(CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SHORT-TERM BOND
FUND (FOLLOWING
FIXED INCOME FUND BOND FUND REORGANIZATION)
------------------ ------------------ ------------------
PRINCIPAL MARKET PRINCIPAL MARKET PRINCIPAL MARKET
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
(000) (000) (000) (000) (000) (000)
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
SMS Student Loan Trust
Series 1997-A Class A
6.030% due 10/27/25
(b)................... $ 500 $ 505 $ 500 $ 505 $ 1,000 $ 1,010
SPNB Home Equity Loan
Series 1991-1 Class B
8.150% due 06/15/20... 336 340 151 153 487 493
Student Loan Marketing
Association
Series 1997-3 Class
CTFS
6.259% due 08/25/12
(b)................... 500 494 400 395 900 889
The Money Store Home
Equity Loan Trust
Series 1993-D Class A1
5.675% due 12/15/08... 389 383 130 131 519 514
Series 1996-B Class A3
6.820% due 03/15/10... 124 125 124 125
TLFC IV Equipment Lease
Trust
Series 1996-1 Class A
5.980% due 11/20/02... 361 360 305 305 666 665
TMS Small Business
Administration Loan
Trust
Series 1997-1 Class A
6.240% due 01/15/25
(b)................... 995 993 497 497 1,492 1,490
Series 1997-1 Class B
6.719% due 01/15/25
(b)................... 497 495 497 495 994 990
Toyota Auto Lease Trust
Series 1007-A Class A1
6.200% due 04/26/04... 3,600 3,603 3,600 3,603
UCFC Home Equity Loan
Trust
Series 1993-B1 Class A1
6.075% due 07/25/14... 95 94 95 94
Series 1996-D1 Class A3
6.541% due 11/15/13... 675 677 275 276 950 953
WFS Financial Owner
Trust
Series 1996-D Class A3
6.050% due 07/20/01
(b)................... 4,500 4,508 3,500 3,506 8,000 8,014
World Omni Automobile
Lease
Securitization Trust
Series 1996-B Class A3
6.250% due 11/15/02... 1,098 1,099 699 699 1,797 1,798
Series 1996-B Class B
6.850% due 11/15/02
(b)................... 350 352 400 402 750 754
</TABLE>
G-4
<PAGE>
PROFORMA FINANCIAL STATEMENTS
(SHORT-TERM BOND FUND)
STATEMENT OF NET ASSETS--(CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SHORT-TERM BOND
FUND (FOLLOWING
FIXED INCOME FUND BOND FUND REORGANIZATION)
------------------ ------------------ ------------------
PRINCIPAL MARKET PRINCIPAL MARKET PRINCIPAL MARKET
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
(000) (000) (000) (000) (000) (000)
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
World Omni Automobile
Lease
Securitization Trust
Series 1997-A Class A2
6.750% due 06/25/03
(b)................... $ 5,500 $ 5,549 $ 3,500 $ 3,531 $ 9,000 $ 9,080
Series 1997-A Class A4
6.900% due 06/25/03... 500 508 400 406 900 914
Series 1997-B Class A1
6.070% due 11/25/03... 600 601 600 601
-------- -------- --------
81,638 59,895 141,533
-------- -------- --------
CORPORATE BONDS AND
NOTES - 23.4%
Advanta National Bank
6.450% due 10/30/00... 250 244 250 244
Ahmanson (H.F.)
9.875% due 11/15/99... 875 930 400 425 1,275 1,355
Aristar Inc.
6.125% due 12/01/00... 725 722 500 498 1,225 1,220
Associates Corp North
America
6.375% due 08/15/00... 5,500 5,531 4,000 4,023 9,500 9,554
Banponce Corp. (MTN)
Series 2
5.750% due 03/01/99... 2,075 2,063 1,100 1,094 3,175 3,157
Bear Stearns Co., Inc.
7.625% due 09/15/99... 1,125 1,151 725 742 1,850 1,893
Caterpillar Financial
Services (MTN)
6.100% due 07/15/99... 500 500 500 500
Chase Manhattan Corp.
10.125% due 11/01/00.. 259 285 259 285
Chrysler Financial Corp.
Series P (MTN)
6.230% due 07/17/98... 500 501 500 501
CIT Group Holdings, Inc.
(MTN)
6.125% due 12/15/00... 5,000 4,987 3,100 3,092 8,100 8,079
Cox Enterprises, Inc.
6.250% due 08/26/99... 1,400 1,400 1,000 1,000 2,400 2,400
Crescent Real Estate
Equities
6.625% due 09/15/02... 750 749 750 749 1,500 1,498
Enterprise Rent-A-Car
USA Finance Co. (MTN)
7.875% due 03/15/98... 1,100 1,104 1,100 1,104
ERP Operating, L.P.
8.500% due 05/15/99... 1,050 1,079 225 231 1,275 1,310
</TABLE>
G-5
<PAGE>
PROFORMA FINANCIAL STATEMENTS
(SHORT-TERM BOND FUND)
STATEMENT OF NET ASSETS--(CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SHORT-TERM BOND
FUND (FOLLOWING
FIXED INCOME FUND BOND FUND REORGANIZATION)
----------------- ---------------- -------------------
PRINCIPAL MARKET PRINCIPAL MARKET PRINCIPAL MARKET
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
(000) (000) (000) (000) (000) (000)
--------- ------- --------- ------ --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Finova Capital Corp.
6.450% due 06/01/00... $ 400 $ 401 $ 625 $ 627 $ 1,025 $ 1,028
First Chicago Corp.
9.000% due 06/15/99... 500 519 500 519 1,000 1,038
First Union Corp.
6.750% due 01/15/98... 750 750 410 410 1,160 1,160
6.600% due 06/15/00... 1,000 1,008 1,000 1,008
Franchise Finance Corp.
7.000% due 11/30/00... 1,000 1,010 575 581 1,575 1,591
General Electric Capital
Corporation (MTN)
6.120% due 08/15/00... 5,500 5,545 4,000 4,032 9,500 9,577
General Motors
Acceptance Corp.
7.012% due 04/01/20
(b).................. 988 999 984 994 1,972 1,993
General Motors
Acceptance Corp. (MTN)
7.500% due 07/22/99... 925 944 850 868 1,775 1,812
7.465% due 07/25/19... 1,438 1,448 974 981 2,412 2,429
Greyhound Financial Corp
8.500% due 02/15/99... 775 793 775 793
Heller Financial, Inc.
(MTN)
5.928% due 03/01/99
(b).................. 1,000 1,003 600 602 1,600 1,605
Hertz Corp.
6.500% due 04/01/00... 450 453 650 654 1,100 1,107
Homeside Lending, Inc.
(MTN)
6.875% due 06/30/02... 2,000 2,037 600 611 2,600 2,648
ITT Corp.
6.250% due 11/15/00... 1,075 1,057 450 442 1,525 1,499
JC Penney & Co., Inc.
(MTN)
6.375% due 09/15/00... 1,125 1,134 675 680 1,800 1,814
Lehman Brothers
Holdings, Inc. (MTN)
Series E
7.110% due 09/27/99... 1,500 1,524 1,075 1,092 2,575 2,616
Series IBC
7.000% due 05/13/99... 800 810 700 709 1,500 1,519
MBNA Corp. (MTN)
Series B
6.500% due 09/15/00... 1,000 1,010 375 379 1,375 1,389
Merrill Lynch & Co.,
Inc. (MTN)
7.260% due 03/25/02
(b).................. 1,425 1,457 925 946 2,350 2,403
Midlantic Corp.
9.250% due 09/01/99... 375 392 450 471 825 863
Occidental Petroleum
Corp. (MTN)
5.950% due 11/09/98... 950 948 950 948
</TABLE>
G-6
<PAGE>
PROFORMA FINANCIAL STATEMENTS
(SHORT-TERM BOND FUND)
STATEMENT OF NET ASSETS--(CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SHORT-TERM BOND
FUND (FOLLOWING
FIXED INCOME FUND BOND FUND REORGANIZATION)
------------------ ----------------- -----------------
PRINCIPAL MARKET PRINCIPAL MARKET PRINCIPAL MARKET
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
(000) (000) (000) (000) (000) (000)
--------- -------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Salomon Smith Barney
Holdings
6.625% due 07/01/02... $ 375 $ 379 $ 375 $ 379
Salomon, Inc.
7.750% due 05/15/00... $ 1,000 $ 1,032 1,000 1,032
6.700% due 07/05/00... 500 505 500 505
Salomon, Inc. (MTN)
5.718% due 04/05/99
(b).................. 1,100 1,100 1,000 1,000 2,100 2,100
Sears Roebuck Acceptance
(MTN)
6.160% due 09/20/00... 5,500 5,501 4,000 4,001 9,500 9,502
Sovereign Bancorp, Inc.
(Regd)
6.750% due 07/01/00... 750 755 475 478 1,225 1,233
Taubman Realty Group,
L.P.
8.000% due 06/15/99... 250 256 250 256
USF&G Corp.
7.000% due 05/15/98... 1,975 1,982 1,000 1,003 2,975 2,985
Wellsford Residential
Property Trust (MTN)
6.195% due 11/24/99
(b).................. 1,300 1,302 850 851 2,150 2,153
-------- ------- -------
57,384 36,701 94,085
-------- ------- -------
EURODOLLAR BONDS--3.0%
ALPS Pass-thru Trust
Series 1994-1 Class A2
7.150% due 09/15/04
(b).................. 280 281 351 353 631 634
Chase Manhattan Corp.
6.062% due 12/05/09
(b).................. 200 195 800 782 1,000 977
Export-Import Bank of
Korea
7.125% due 09/20/01... 300 249 200 166 500 415
Procter & Gamble
9.625% due 01/14/01... 3,020 3,271 3,900 4,224 6,920 7,495
Videotron Holdings PLC
Step Up Bond
Zero Coupon due
07/01/04............. 1,375 1,310 1,175 1,119 2,550 2,429
-------- ------- -------
5,306 6,644 11,950
-------- ------- -------
MORTGAGE-BACKED
SECURITIES--11.3%
Bear Stearns Mortgage
Securities, Inc.
Series 1996-6 Class A2
7.000% due 11/25/27... 925 923 750 748 1,675 1,671
BKD Commercial Mortgage
Trust
Series 1997-C1
Class B 7.218% due
04/25/00 (b)......... 850 851 550 551 1,400 1,402
Citicorp Mortgage
Securities, Inc.
REMIC Series 1997-5
Class A1 6.500% due
11/25/27............. 650 652 400 401 1,050 1,053
</TABLE>
G-7
<PAGE>
PROFORMA FINANCIAL STATEMENTS
(SHORT-TERM BOND FUND)
STATEMENT OF NET ASSETS--(CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SHORT-TERM BOND
FUND (FOLLOWING
FIXED INCOME FUND BOND FUND REORGANIZATION)
----------------- ----------------- -------------------
PRINCIPAL MARKET PRINCIPAL MARKET PRINCIPAL MARKET
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
(000) (000) (000) (000) (000) (000)
--------- ------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
CMC Securities Corp. II
Series 1993-2G Class A1
7.194% due 11/25/23
(b).................. $ 885 $ 898 $ 664 $ 674 $ 1,549 $ 1,572
Countrywide Home Loans
Series 1997-6 Class A1
6.750% due 11/25/27... 675 679 675 679
Federal Home Loan
Mortgage Corp. Groups
Participation
Certificate
7.500% due 2000....... 657 663 221 223 878 886
7.500% due 2002....... 150 152 201 202 351 354
9.000% due 2005....... 192 200 256 267 448 467
7.375% due 2006 (b)... 174 179 261 268 435 447
6.250% due 2007....... 101 100 101 100
7.500% due 2007....... 276 281 369 374 645 655
8.500% due 2017....... 622 648 622 648
8.500% due 2011....... 156 162 156 162
8.500% due 2018....... 758 788 758 788
Federal Home Loan
Mortgage Corp.
Series 1714 Class E
6.250% due 09/15/18... 650 651 525 526 1,175 1,177
Federal National
Mortgage Association
Pools
8.500% due 2001....... 450 469 144 148 594 617
7.000% due 2004....... 833 844 757 767 1,590 1,611
8.500% due 2008....... 115 118 115 118
8.750% due 2004....... 44 46 44 46
7.000% due 2008....... 325 331 325 331
7.500% due 2009....... 593 607 475 486 1,068 1,093
8.000% due 2009....... 896 932 896 932
8.500% due 2010....... 790 824 711 741 1,501 1,565
Federal National
Mortgage Association
Grantor Trust
REMIC Series 1996-T6
Class C
6.200% due 02/26/01... 1,332 1,324 1,066 1,059 2,398 2,383
GE Capital Mortgage
Services, Inc.
REMIC Series 1997-9
Class 1A2
6.750% due 10/25/27... 1,125 1,131 1,000 1,005 2,125 2,136
Government National
Mortgage Association
Pools
9.500% due 2025....... 567 615 693 752 1,260 1,367
7.250% due 2026....... 1,328 1,359 1,040 1,065 2,368 2,424
</TABLE>
G-8
<PAGE>
PROFORMA FINANCIAL STATEMENTS
(SHORT-TERM BOND FUND)
STATEMENT OF NET ASSETS--(CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SHORT-TERM BOND
FUND (FOLLOWING
FIXED INCOME FUND BOND FUND REORGANIZATION)
----------------- ---------------- -----------------
PRINCIPAL MARKET PRINCIPAL MARKET PRINCIPAL MARKET
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
(000) (000) (000) (000) (000) (000)
--------- ------- --------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C>
Merrill Lynch Credit
Corp. Mortgage Investors
Inc.
Series 1996-B Class A
6.150% due 07/15/21
(b).................... $ 789 $ 806 $ $ $ 789 $ 806
Prudential Home Mortgage
Securities
Series 1994-19 Class A2
7.050% due 05/25/24.... 636 640 462 465 1,098 1,105
Residential Accredited
Loans, Inc.
Series 1997-QS7 Class A1
7.500% due 07/25/27.... 505 510 367 371 872 881
Residential Asset
Securitization Trust
Mortgage Pass-thru
Certificates
Series 1996-A8 Class A1
8.000% due 12/25/26.... 594 601 396 401 990 1,002
Series 1997-A1 Class A
7.000% due 03/25/27.... 665 667 415 417 1,080 1,084
Series 1997-A5 Class A3
7.125% due 07/25/27.... 1,277 1,284 851 856 2,128 2,140
Series 1997-A9 Class A1
7.250% due 11/25/27.... 1,226 1,236 740 745 1,966 1,981
Residential Funding
Mortgage Securities I
Series 1997-S12 Class
A10
6.700% due 08/25/27.... 1,500 1,510 850 855 2,350 2,365
Resolution Trust Corp.
Mortgage Pass-thru
Certificates
Series 1992-M3 Class A1
7.750% due 07/25/30.... 66 66 111 111 177 177
Series 1994-C1 Class D
8.000% due 06/25/26
(b).................... 876 892 657 669 1,533 1,561
Series 1995-2 Class C1
7.450% due 05/25/29
(b).................... 238 240 289 292 527 532
SASCO LLC
Series 1997-N1 Class D
6.217% due 09/25/28
(b).................... 800 800 600 600 1,400 1,400
Sequoia Mortgage Trust
Series 1 Class A1
6.028% due 07/04/27
(b).................... 1,197 1,197 820 821 2,017 2,018
Wilshire Funding
Corporation
Series 1997-WFC1 Class
AI
7.250% due 08/25/27.... 1,024 1,035 745 753 1,769 1,788
------- ------ -------
26,584 18,940 45,524
------- ------ -------
</TABLE>
G-9
<PAGE>
PROFORMA FINANCIAL STATEMENTS
(SHORT-TERM BOND FUND)
STATEMENT OF NET ASSETS--(CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SHORT-TERM BOND
FUND (FOLLOWING
FIXED INCOME FUND BOND FUND REORGANIZATION)
----------------- ----------------- -------------------
PRINCIPAL MARKET PRINCIPAL MARKET PRINCIPAL MARKET
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
(000) (000) (000) (000) (000) (000)
--------- ------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
MUNICIPAL BONDS--0.4%
Philadelphia,
Pennsylvania Authority
for Industrial
Development Class A
6.480% due 06/15/04... $ 861 $ 883 $ 621 $ 638 $ 1,482 $ 1,521
------- ------- ---------
883 638 1,521
------- ------- ---------
UNITED STATES GOVERNMENT
TREASURIES--16.5%
United States Treasury
Notes
5.625% due 11/30/98... 700 700 1,250 1,250 1,950 1,950
6.000% due 6/30/99.... 1,500 1,508 1,500 1,508
5.750% due 09/30/99... 1,250 1,252 1,775 1,778 3,025 3,030
5.875% due 11/15/99... 100 100 100 100
5.875% due 02/15/00... 16,000 16,063 12,500 12,549 28,500 28,612
6.875% due 03/31/00... 175 179 1,075 1,102 1,250 1,281
5.625% due 11/30/00... 850 848 500 499 1,350 1,347
6.375% due 05/15/00... 480 489 600 609 1,080 1,098
6.375% due 03/31/01... 280 285 280 285
6.250% due 06/30/02... 3,070 3,131 2,325 2,371 5,395 5,502
3.625% due 07/15/02... 11,545 11,487 7,027 6,992 18,572 18,479
5.750% due 11/30/02... 340 340 170 170 510 510
5.750% due 08/15/03... 1,500 1,502 1,000 1,000 2,500 2,502
------- ------- ---------
36,091 30,113 66,204
------- ------- ---------
YANKEE BONDS--1.9%
Household International
5.250% due 10/15/98... 1,150 1,144 850 845 2,000 1,989
Noranda Forest, Inc
8.875% due 10/15/99... 450 470 450 470
Ontario, Province of
11.500% due 03/10/13.. 760 800 1,240 1,305 2,000 2,105
Quebec, Province of
13.250% due 09/15/14.. 450 520 450 520 900 1,040
Westpac Banking, Ltd.
7.875% due 10/15/02... 1,000 1,060 750 796 1,750 1,856
------- ------- ---------
3,524 3,936 7,460
------- ------- ---------
TOTAL LONG-TERM
INVESTMENTS
(identified cost
$211,058, $156,911,
$367,969,
respectively).......... 211,410 156,867 368,277
------- ------- ---------
</TABLE>
G-10
<PAGE>
PROFORMA FINANCIAL STATEMENTS
(SHORT-TERM BOND FUND)
STATEMENT OF NET ASSETS--(CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SHORT-TERM BOND
FUND (FOLLOWING
FIXED INCOME FUND BOND FUND REORGANIZATION)
------------------ ------------------ ------------------
PRINCIPAL MARKET PRINCIPAL MARKET PRINCIPAL MARKET
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
(000) (000) (000) (000) (000) (000)
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS--
7.1%
Chrysler Financial Corp.
(MTN)
Series P
6.250% due 06/29/98... $ 1,300 $ 1,302 $ 850 $ 851 $ 2,150 $ 2,153
Frank Russell Investment
Company Money Market
Fund,
due on demand (a)...... 13,320 13,320 12,456 12,456 25,776 25,776
Goldman Sachs Group
6.300% due 01/05/98
(a).................. 900 900 900 900
Hertz Corp.
9.500% due 05/15/98... 675 684 675 684
-------- -------- --------
TOTAL SHORT-TERM
INVESTMENTS
(identified cost
$15,348, $14,207,
$29,555,
respectively).......... 15,306 14,207 29,513
-------- -------- --------
TOTAL INVESTMENTS--98.8%
(identified cost
$226,406 $171,118,
$397,524,
respectively).......... $226,716 $171,074 397,790
======== ========
OTHER ASSETS AND
LIABILITIES,
NET--1.2%.............. 4,807
--------
NET ASSETS--100.0%...... $402,597
========
</TABLE>
- ---------------------
(a) At Cost, which approximates market.
(b) Adjustable or floating rate securities.
Abbreviations:
LLC--Limited Liability Corporation
L.P.--Limited Partnership
MTN--Medium Term Note
PLC--Public Limited Company
REMIC--Real Estate Mortgage Investment Conduit
See notes to proforma statements
G-11
<PAGE>
PROFORMA FOOTNOTES OF MERGER BETWEEN FIXED INCOME FUND AND BOND FUND
DECEMBER 31, 1997 (UNAUDITED)
1. GENERAL
The accompanying proforma financial statements are presented to show the
effect of the proposed acquisition of the Frank Russell Investment Company
Volatility Constrained Bond Fund ("Bond Fund") by the Frank Russell Investment
Company Fixed Income II Fund ("Fixed Income Fund"), as if such acquisition had
taken place as of January 1, 1997. Following the merger of the Bond Fund into
the Fixed Income Fund, the Fixed Income Fund will change its name to the Frank
Russell Investment Company Short-Term Bond Fund ("Short-Term Bond Fund").
Under the terms of the Agreement and Plan of Reorganization, the combination
of the Fixed Income Fund and the Bond Fund will be treated as a tax-free
business combination and, accordingly, will be accounted for by a method of
accounting for tax free mergers of investment companies (sometimes referred to
as the pooling without restatement method). The acquisition would be
accomplished by an acquisition of the net assets of the Bond Fund in exchange
for shares of the Fixed Income Fund at net asset value. The statement of
assets and liabilities and the related statement of operations of the Fixed
Income Fund and the Bond Fund have been combined as of and for the year ended
December 31, 1997.
The accompanying proforma financial statements should be read in conjunction
with the financial statements and statements of net assets of the Fixed Income
Fund and the Bond Fund, which are included in their respective annual reports
dated December 31, 1997.
The following notes refer to the accompanying proforma financial statements
as if the above-mentioned acquisition of the Fixed Income Fund and the Bond
Fund had taken place as of January 1, 1997.
2. SIGNIFICANT ACCOUNTING POLICIES
The Short-Term Bond Fund is a sub-trust of Frank Russell Investment Company,
a Massachusetts business trust registered under the Investment Company Act of
1940, as amended, as a diversified, open-end management investment company. It
is organized and operates as a Massachusetts business trust under an amended
master trust agreement dated July 26, 1984.
The significant accounting policies consistently followed by the Short-Term
Bond Fund are (a) securities transactions are accounted for on the trade date;
and (b) United States securities listed and traded principally on any national
securities exchange are valued on the basis of the last sale price or, lacking
any sale, at the closing bid price, on the primary exchange on which the
security is traded. United States over-the-counter securities are valued on
the basis of the closing bid price. Many fixed-income securities do not trade
each day and, thus, last sale or bid prices are frequently not available.
Fixed-income securities, therefore, may be valued using prices provided by a
pricing service when such prices are believed to reflect the fair market value
of such securities; international securities traded on a national securities
exchange are valued on the basis of the last sale price. International
securities traded over-the-counter are valued on the basis of the mean of bid
prices.
In the absence of a last sale or mean bid price, respectively, such
securities may be valued on the basis of prices provided by a pricing service
if those prices are believed to reflect the fair market value of such
securities; short-term investments that have a maturity of 60 days or less are
valued at "amortized cost," unless the Board of Trustees determines that
amortized cost does not represent fair value; the Short-Term Bond Fund may
value certain securities for which market quotations are not readily available
at "fair value," as determined in good faith pursuant to procedures
established by the Board of Trustees; (c) interest income is recorded on the
accrual basis; (d) direct expenses are charged to each Fund; expenses which
cannot be directly attributed are allocated among all sub-trusts of the
Investment Company principally based on their relative net assets; (e)
dividends and
G-12
<PAGE>
PROFORMA FOOTNOTES OF MERGER BETWEEN FIXED INCOME FUND AND BOND FUND
DECEMBER 31, 1997 (UNAUDITED) (CONTINUED)
distributions to shareholders are recorded on the ex-dividend date; and (f)
Short-Term Bond Fund intends to comply with the requirements of the Internal
Revenue Code of 1986, as amended, pertaining to regulated investment companies
and to make the required distributions to shareholders; therefore, no
provision for Federal income taxes has been made.
3. PROFORMA ADJUSTMENTS
The accompanying proforma financial statements reflect changes in fund
shares as if the merger had taken place on December 31, 1997. Adjustments made
to expenses are for duplicated services that would not have been incurred if
the merger took place on January 1, 1997.
4. MANAGEMENT AGREEMENT AND TRANSACTIONS WITH AFFILIATED PERSONS
Frank Russell Investment Management Company (FRIMCo) operates and
administers the Short-Term Bond Fund. FRIMCo is a wholly owned subsidiary of
Frank Russell Company, which researches and recommends to FRIMCo one or more
investment management organizations to manage the portfolio of the Short-Term
Bond Fund. The Short-Term Bond Fund pays FRIMCo a management fee calculated at
the annual rate of 0.50% of the aggregate average daily net assets. All fees
are calculated daily and paid monthly.
5. INVESTMENTS
The Bond Fund and the Short-Term Bond Fund have the same investment
managers, objectives, policies and practices. Accordingly, no realignment of
investments is presented in the proforma statements of net assets. In
addition, no significant realignment of investments is anticipated as a result
of the proposed merger.
At December 31, 1997, the Short-Term Bond Fund had net tax basis capital
loss carryovers of approximately $17,258,326, expiring during the years 2001
through 2005, which may be available to offset future capital gains. To the
extent that these carryover losses are used to offset capital gains, it is
probable that any gains so offset will not be distributed.
As a result of the proposed merger, there are no anticipated changes to the
Short-Term Bond Fund's capital loss carryovers because the net assets of the
Short-Term Bond Fund will remain constant.
G-13
<PAGE>
EXHIBIT H
EXPENSE TABLES REFLECTING SEPARATION OF ADVISORY AND ADMINISTRATIVE FEES
EQUITY I FUND
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee.................................................. 0.60% 0.55%
12b-1 Fees.................................................... None None
Other Expenses................................................ 0.10% 0.15%
---- ----
Total Fund Operating Expenses................................. 0.70% 0.70%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1,000 investment assuming (1) 5% annual re-
turn and (2) redemption at the end of each
time period
Existing Fee.................................. $ 7 $22 $39 $88
=== === === ===
Proposed Fee.................................. $ 7 $22 $39 $88
=== === === ===
</TABLE>
EQUITY II FUND
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee.................................................. 0.75% 0.70%
12b-1 Fees.................................................... None None
Other Expenses................................................ 0.18% 0.23%
---- ----
Total Fund Operating Expenses................................. 0.93% 0.93%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1,000 investment assuming (1) 5% annual re-
turn and (2) redemption at the end of each
time period
Existing Fee.................................. $ 9 $29 $51 $117
=== === === ====
Proposed Fee.................................. $ 9 $29 $51 $117
=== === === ====
</TABLE>
- ---------------------
* The additional fee of not more than 0.07 of 1% which would be payable on
assets which are not included in net assets for the purpose of computing the
basic advisory fee, is applied only when such assets are invested by FRIMCo.
Such amount is not expected to affect the amount of the gross proposed fee
shown above.
H-1
<PAGE>
EQUITY III FUND
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee.................................................. 0.60% 0.55%
12b-1 Fees.................................................... None None
Other Expenses................................................ 0.15% 0.20%
---- ----
Total Fund Operating Expenses................................. 0.75% 0.75%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1,000 investment assuming (1) 5% annual re-
turn and (2) redemption at the end of each
time period
Existing Fee.................................. $ 8 $24 $41 $94
=== === === ===
Proposed Fee.................................. $ 8 $24 $41 $94
=== === === ===
</TABLE>
EQUITY Q FUND
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee.................................................. 0.60% 0.55%
12b-1 Fees.................................................... None None
Other Expenses................................................ 0.08% 0.13%
---- ----
Total Fund Operating Expenses................................. 0.68% 0.68%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1,000 investment assuming (1) 5% annual re-
turn and (2) redemption at the end of each
time period
Existing Fee.................................. $ 7 $21 $38 $86
=== === === ===
Proposed Fee.................................. $ 7 $21 $38 $86
=== === === ===
</TABLE>
- ---------------------
* The additional fee of not more than 0.07 of 1% which would be payable on
assets which are not included in net assets for the purpose of computing the
basic advisory fee, is applied only when such assets are invested by FRIMCo.
Such amount is not expected to affect the amount of the gross proposed fee
shown above.
H-2
<PAGE>
INTERNATIONAL FUND
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee.................................................. 0.75% 0.70%
12b-1 Fees.................................................... None None
Other Expenses................................................ 0.26% 0.31%
---- ----
Total Fund Operating Expenses................................. 1.01% 1.01%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1000 investment assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Existing Fee.................................. $10 $32 $56 $127
=== === === ====
Proposed Fee.................................. $10 $32 $56 $127
=== === === ====
</TABLE>
FIXED INCOME I FUND
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee.................................................. 0.30% 0.25%
12b-1 Fees.................................................... None None
Other Expenses................................................ 0.11% 0.16%
---- ----
Total Fund Operating Expenses................................. 0.41% 0.41%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1000 investment assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Existing Fee.................................. $ 4 $13 $23 $52
=== === === ===
Proposed Fee.................................. $ 4 $13 $23 $52
=== === === ===
</TABLE>
- ---------------------
* The additional fee of not more than 0.07 of 1% which would be payable on
assets which are not included in net assets for the purpose of computing the
basic advisory fee, is applied only when such assets are invested by FRIMCo.
Such amount is not expected to affect the amount of the gross proposed fee
shown above.
H-3
<PAGE>
FIXED INCOME II FUND
(TO BE RENAMED SHORT-TERM BOND)
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee.................................................. 0.50% 0.45%
12b-1 Fees.................................................... None None
Other Expenses................................................ 0.17% 0.22%
---- ----
Total Fund Operating Expenses................................. 0.67% 0.67%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1000 investment assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Existing Fee.................................. $ 7 $21 $37 $84
=== === === ===
Proposed Fee.................................. $ 7 $21 $37 $84
=== === === ===
</TABLE>
FIXED INCOME III FUND
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee.................................................. 0.55% 0.50%
12b-1 Fees.................................................... None None
Other Expenses................................................ 0.16% 0.21%
---- ----
Total Fund Operating Expenses................................. 0.71% 0.71%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1000 investment assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Existing Fee.................................. $ 7 $22 $39 $89
=== === === ===
Proposed Fee.................................. $ 7 $22 $39 $89
=== === === ===
</TABLE>
- ---------------------
* The additional fee of not more than 0.07 of 1% which would be payable on
assets which are not included in net assets for the purpose of computing the
basic advisory fee, is applied only when such assets are invested by FRIMCo.
Such amount is not expected to affect the amount of the gross proposed fee
shown above.
H-4
<PAGE>
REAL ESTATE SECURITIES FUND CLASS S
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee.................................................. 0.85% 0.80%
12b-1 Fees.................................................... None None
Other Expenses................................................ 0.25% 0.30%
---- ----
Total Fund Operating Expenses................................. 1.10% 1.10%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1000 investment assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Existing Fee.................................. $11 $35 $61 $138
=== === === ====
Proposed Fee.................................. $11 $35 $61 $138
=== === === ====
</TABLE>
EMERGING MARKETS FUND CLASS S
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee.................................................. 1.20% 1.15%
12b-1 Fees.................................................... None None
Other Expenses................................................ 0.61% 0.66%
---- ----
Total Fund Operating Expenses................................. 1.81% 1.81%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1000 investment assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Existing Fee.................................. $18 $57 $100 $228
=== === ==== ====
Proposed Fee.................................. $18 $57 $100 $228
=== === ==== ====
</TABLE>
- ---------------------
* The additional fee of not more than 0.07 of 1% which would be payable on
assets which are not included in net assets for the purpose of computing the
basic advisory fee, is applied only when such assets are invested by FRIMCo.
Such amount is not expected to affect the amount of the gross proposed fee
shown above.
H-5
<PAGE>
EQUITY T FUND
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee (Net of Waivers)................................. 0.68% 0.63%
12b-1 Fees.................................................... None None
Other Expenses................................................ 0.32% 0.37%
---- ----
Total Fund Operating Expenses (Net of Waivers)................ 1.00% 1.00%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1000 investment assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Existing Fee.................................. $20 $63 $111 $252
=== === ==== ====
Proposed Fee.................................. $20 $63 $111 $252
=== === ==== ====
</TABLE>
- ---------------------
You would pay the following expenses on an investment in Equity T fund,
assuming no redemption: 1 year--$10, 3 years--$32, 5 years--$55 and 10 years--
$126
LIMITED VOLATILITY TAX FREE FUND
(TO BE RENAMED TAX FREE BOND FUND)
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee.................................................. 0.50% 0.30%
12b-1 Fees.................................................... None None
Other Expenses................................................ 0.21% 0.26%
---- ----
Total Fund Operating Expenses................................. 0.71% 0.56%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1000 investment assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Existing Fee.................................. $ 7 $22 $39 $89
=== === === ===
Proposed Fee.................................. $ 6 $18 $31 $70
=== === === ===
</TABLE>
- ---------------------
* The additional fee of not more than 0.07 of 1% which would be payable on
assets which are not included in net assets for the purpose of computing
the basic advisory fee, is applied only when such assets are invested by
FRIMCo. Such amount is not expected to affect the amount of the gross
proposed fee shown above.
H-6
<PAGE>
MONEY MARKET FUND
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee (Net of Waiver).................................. 0.10% 0.08%
12b-1 Fees.................................................... None None
Other Expenses................................................ 0.06% 0.08%
---- ----
Total Fund Operating Expenses (Net of Waiver)................. 0.16% 0.16%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1000 investment assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Existing Fee.................................. $ 2 $ 5 $ 9 $20
=== === === ===
Proposed Fee.................................. $ 2 $ 5 $ 9 $20
=== === === ===
</TABLE>
U.S. GOVERNMENT MONEY MARKET FUND
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee (Net of Waiver).................................. 0.03% 0.02%
12b-1 Fees.................................................... None None
Other Expenses (Net of Waiver)................................ 0.27% 0.28%
---- ----
Total Fund Operating Expenses (Net of Waiver)................. 0.30% 0.30%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1000 investment assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Existing Fee.................................. $ 3 $ 9 $17 $38
=== === === ===
Proposed Fee.................................. $ 3 $ 9 $17 $38
=== === === ===
</TABLE>
- ---------------------
* The additional fee of not more than 0.07 of 1% which would be payable on
assets which are not included in net assets for the purpose of computing the
basic advisory fee, is applied only when such assets are invested by FRIMCo.
Such amount is not expected to affect the amount of the gross proposed fee
shown above.
H-7
<PAGE>
TAX FREE MONEY MARKET FUND
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee (Net of Waiver).................................. 0.15% 0.12%
12b-1 Fees.................................................... None None
Other Expenses (Net of Waiver)................................ 0.13% 0.16%
---- ----
Total Fund Operating Expenses (Net of Waiver)................. 0.28% 0.28%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1000 investment assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Existing Fee.................................. $ 3 $ 9 $15 $35
=== === === ===
Proposed Fee.................................. $ 3 $ 9 $15 $35
=== === === ===
</TABLE>
DIVERSIFIED EQUITY FUND CLASS S
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee.................................................. 0.78% 0.73%
12b-1 Fees.................................................... None None
Other Expenses................................................ 0.17% 0.22%
---- ----
Total Fund Operating Expenses................................. 0.95% 0.95%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1000 investment assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Existing Fee.................................. $10 $30 $52 $119
=== === === ====
Proposed Fee.................................. $10 $30 $52 $119
=== === === ====
</TABLE>
- ---------------------
* The additional fee of not more than 0.07 of 1% which would be payable on
assets which are not included in net assets for the purpose of computing the
basic advisory fee, is applied only when such assets are invested by FRIMCo.
Such amount is not expected to affect the amount of the gross proposed fee
shown above.
H-8
<PAGE>
SPECIAL GROWTH FUND CLASS S
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee.................................................. 0.95% 0.90%
12b-1 Fees.................................................... None None
Other Expenses................................................ 0.25% 0.30%
---- ----
Total Fund Operating Expenses................................. 1.20% 1.20%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1000 investment assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Existing Fee.................................. $12 $38 $66 $151
=== === === ====
Proposed Fee.................................. $12 $38 $66 $151
=== === === ====
</TABLE>
EQUITY INCOME FUND CLASS S
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee.................................................. 0.80% 0.75%
12b-1 Fees.................................................... None None
Other Expenses................................................ 0.26% 0.31%
---- ----
Total Fund Operating Expenses................................. 1.06% 1.06%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1000 investment assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Existing Fee.................................. $11 $33 $59 $133
=== === === ====
Proposed Fee.................................. $11 $33 $59 $133
=== === === ====
</TABLE>
- ---------------------
* The additional fee of not more than 0.07 of 1% which would be payable on
assets which are not included in net assets for the purpose of computing the
basic advisory fee, is applied only when such assets are invested by FRIMCo.
Such amount is not expected to affect the amount of the gross proposed fee
shown above.
H-9
<PAGE>
QUANTITATIVE EQUITY FUND CLASS S
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee.................................................. 0.78% 0.73%
12b-1 Fees.................................................... None None
Other Expenses................................................ 0.16% 0.21%
---- ----
Total Fund Operating Expenses................................. 0.94% 0.94%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1000 investment assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Existing Fee.................................. $ 9 $30 $52 $118
=== === === ====
Proposed Fee.................................. $ 9 $30 $52 $118
=== === === ====
</TABLE>
INTERNATIONAL SECURITIES FUND CLASS S
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee.................................................. 0.95% 0.90%
12b-1 Fees.................................................... None None
Other Expenses................................................ 0.35% 0.40%
---- ----
Total Fund Operating Expenses................................. 1.30% 1.30%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1000 investment assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Existing Fee.................................. $13 $41 $72 $164
=== === === ====
Proposed Fee.................................. $13 $41 $72 $164
=== === === ====
</TABLE>
- ---------------------
* The additional fee of not more than 0.07 of 1% which would be payable on
assets which are not included in net assets for the purpose of computing the
basic advisory fee, is applied only when such assets are invested by FRIMCo.
Such amount is not expected to affect the amount of the gross proposed fee
shown above.
H-10
<PAGE>
DIVERSIFIED BOND FUND CLASS S
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee.................................................. 0.45% 0.40%
12b-1 Fees.................................................... None None
Other Expenses................................................ 0.14% 0.19%
---- ----
Total Fund Operating Expenses................................. 0.59% 0.59%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1000 investment assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Existing Fee.................................. $ 6 $19 $33 $74
=== === === ===
Proposed Fee.................................. $ 6 $19 $33 $74
=== === === ===
</TABLE>
VOLATILITY CONSTRAINED BOND FUND CLASS S
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee.................................................. 0.50% 0.45%
12b-1 Fees.................................................... None None
Other Expenses................................................ 0.24% 0.29%
---- ----
Total Fund Operating Expenses................................. 0.74% 0.74%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1000 investment assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Existing Fee.................................. $ 7 $23 $41 $93
=== === === ===
Proposed Fee.................................. $ 7 $23 $41 $93
=== === === ===
</TABLE>
- ---------------------
* The additional fee of not more than 0.07 of 1% which would be payable on
assets which are not included in net assets for the purpose of computing the
basic advisory fee, is applied only when such assets are invested by FRIMCo.
Such amount is not expected to affect the amount of the gross proposed fee
shown above.
H-11
<PAGE>
MULTISTRATEGY BOND FUND CLASS S
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee (Net of Waiver).................................. 0.58% 0.53%
12b-1 Fees.................................................... None None
Other Expenses................................................ 0.22% 0.27%
---- ----
Total Fund Operating Expenses (Net of Waiver)................. 0.80% 0.80%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1000 investment assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Existing Fee.................................. $ 8 $25 $44 $101
--- --- --- ----
Proposed Fee.................................. $ 8 $25 $44 $101
=== === === ====
</TABLE>
DIVERSIFIED EQUITY FUND CLASS E
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee.................................................. 0.78% 0.73%
12b-1 Fees.................................................... None None
Shareholder Servicing Fee..................................... 0.25% 0.25%
Other Expenses................................................ 0.23% 0.28%
---- ----
Total Fund Operating Expenses................................. 1.26% 1.26%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1000 investment assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Existing Fee.................................. $13 $40 $70 $158
--- --- --- ----
Proposed Fee.................................. $13 $40 $70 $158
=== === === ====
</TABLE>
- ---------------------
* The additional fee of not more than 0.07 of 1% which would be payable on
assets which are not included in net assets for the purpose of computing the
basic advisory fee, is applied only when such assets are invested by FRIMCo.
Such amount is not expected to affect the amount of the gross proposed fee
shown above.
H-12
<PAGE>
SPECIAL GROWTH FUND CLASS E
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee.................................................. 0.95% 0.90%
12b-1 Fees.................................................... None None
Shareholder Servicing Fee..................................... 0.25% 0.25%
Other Expenses................................................ 0.30% 0.35%
---- ----
Total Fund Operating Expenses................................. 1.50% 1.50%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1000 investment assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Existing Fee.................................. $15 $47 $83 $189
--- --- --- ----
Proposed Fee.................................. $15 $47 $83 $189
=== === === ====
</TABLE>
EQUITY INCOME FUND CLASS E
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee.................................................. 0.80% 0.75%
12b-1 Fees.................................................... None None
Shareholder Servicing Fee..................................... 0.25% 0.25%
Other Expenses................................................ 0.31% 0.36%
---- ----
Total Fund Operating Expenses................................. 1.36% 1.36%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1000 investment assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Existing Fee.................................. $14 $43 $75 $171
--- --- --- ----
Proposed Fee.................................. $14 $43 $75 $171
=== === === ====
</TABLE>
- ---------------------
* The additional fee of not more than 0.07 of 1% which would be payable on
assets which are not included in net assets for the purpose of computing the
basic advisory fee, is applied only when such assets are invested by FRIMCo.
Such amount is not expected to affect the amount of the gross proposed fee
shown above.
H-13
<PAGE>
QUANTITATIVE EQUITY FUND CLASS E
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee.................................................. 0.78% 0.73%
12b-1 Fees.................................................... None None
Shareholder Servicing Fee..................................... 0.25% 0.25%
Other Expenses................................................ 0.19% 0.24%
---- ----
Total Fund Operating Expenses................................. 1.22% 1.22%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1000 investment assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Existing Fee.................................. $12 $38 $67 $153
--- --- --- ----
Proposed Fee.................................. $12 $38 $67 $153
=== === === ====
</TABLE>
INTERNATIONAL SECURITIES FUND CLASS E
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee.................................................. 0.95% 0.90%
12b-1 Fees.................................................... None None
Shareholder Servicing Fee..................................... 0.25% 0.25%
Other Expenses................................................ 0.40% 0.45%
---- ----
Total Fund Operating Expenses................................. 1.60% 1.60%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1000 investment assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Existing Fee.................................. $16 $50 $88 $201
--- --- --- ----
Proposed Fee.................................. $16 $50 $88 $201
=== === === ====
</TABLE>
- ---------------------
* The additional fee of not more than 0.07 of 1% which would be payable on
assets which are not included in net assets for the purpose of computing the
basic advisory fee, is applied only when such assets are invested by FRIMCo.
Such amount is not expected to affect the amount of the gross proposed fee
shown above.
H-14
<PAGE>
EMERGING MARKETS FUND CLASS E
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee.................................................. 1.20% 1.15%
12b-1 Fees.................................................... None None
Shareholder Servicing Fee..................................... 0.25% 0.25%
Other Expenses................................................ 0.61% 0.66%
---- ----
Total Fund Operating Expenses................................. 2.06% 2.06%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1000 investment assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Existing Fee.................................. $21 $65 $114 $259
--- --- ---- ----
Proposed Fee.................................. $21 $65 $114 $259
=== === ==== ====
</TABLE>
REAL ESTATE SECURITIES FUND CLASS E
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee.................................................. 0.85% 0.80%
12b-1 Fees.................................................... None None
Shareholder Servicing Fee..................................... 0.25% 0.25%
Other Expenses................................................ 0.29% 0.34%
---- ----
Total Fund Operating Expenses................................. 1.39% 1.39%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1000 investment assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Existing Fee.................................. $14 $44 $77 $175
--- --- --- ----
Proposed Fee.................................. $14 $44 $77 $175
=== === === ====
</TABLE>
- ---------------------
* The additional fee of not more than 0.07 of 1% which would be payable on
assets which are not included in net assets for the purpose of computing the
basic advisory fee, is applied only when such assets are invested by FRIMCo.
Such amount is not expected to affect the amount of the gross proposed fee
shown above.
H-15
<PAGE>
DIVERSIFIED BOND FUND CLASS E
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee.................................................. 0.45% 0.40%
12b-1 Fees.................................................... None None
Shareholder Servicing Fee..................................... 0.25% 0.25%
Other Expenses................................................ 0.18% 0.23%
---- ----
Total Fund Operating Expenses................................. 0.88% 0.88%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1000 investment assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Existing Fee.................................. $ 9 $28 $49 $111
--- --- --- ----
Proposed Fee.................................. $ 9 $28 $49 $111
=== === === ====
</TABLE>
VOLATILITY CONSTRAINED BOND FUND CLASS E
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee.................................................. 0.50% 0.45%
12b-1 Fees.................................................... None None
Shareholder Servicing Fee..................................... 0.25% 0.25%
Other Expenses................................................ 0.24% 0.29%
---- ----
Total Fund Operating Expenses................................. 0.99% 0.99%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1000 investment assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Existing Fee.................................. $10 $31 $55 $125
--- --- --- ----
Proposed Fee.................................. $10 $31 $55 $125
=== === === ====
</TABLE>
- ---------------------
* The additional fee of not more than 0.07 of 1% which would be payable on
assets which are not included in net assets for the purpose of computing the
basic advisory fee, is applied only when such assets are invested by FRIMCo.
Such amount is not expected to affect the amount of the gross proposed fee
shown above.
H-16
<PAGE>
MULTISTRATEGY BOND FUND CLASS E
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee (Net of Waiver).................................. 0.58% 0.53%
12b-1 Fees.................................................... None None
Shareholder Servicing Fee..................................... 0.25% 0.25%
Other Expenses................................................ 0.22% 0.27%
---- ----
Total Fund Operating Expenses (Net of Waiver)................. 1.05% 1.05%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1000 investment assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Existing Fee.................................. $11 $33 $58 $132
=== === === ====
Proposed Fee.................................. $11 $33 $58 $132
=== === === ====
</TABLE>
EQUITY BALANCED STRATEGY FUND CLASS D
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee (Net of Waiver)................................ 0.00% 0.00%
12b-1 Fees.................................................. 0.25% 0.25%
Shareholder Servicing Fee................................... 0.25% 0.25%
Other Expenses (Net of Reimbursement)....................... 0.00% 0.00%
---- ----
Total Fund Operating Expenses (Net of Waiver and Reimburse-
ment)...................................................... 0.50% 0.50%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1000 investment assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Existing Fee.................................. $ 5 $16 $28 $63
--- --- --- ---
Proposed Fee.................................. $ 5 $16 $28 $63
=== === === ===
</TABLE>
- ---------------------
* The additional fee of not more than 0.07 of 1% which would be payable on
assets which are not included in net assets for the purpose of computing the
basic advisory fee, is applied only when such assets are invested by FRIMCo.
Such amount is not expected to affect the amount of the gross proposed fee
shown above.
H-17
<PAGE>
AGGRESSIVE STRATEGY FUND CLASS D
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee (Net of Waiver)................................ 0.00% 0.00%
12b-1 Fees.................................................. 0.25% 0.25%
Shareholder Servicing Fee................................... 0.25% 0.25%
Other Expenses (Net of Reimbursement)....................... 0.00% 0.00%
---- ----
Total Fund Operating Expenses (Net of Waiver and Reimburse-
ment)...................................................... 0.50% 0.50%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1000 investment assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Existing Fee.................................. $ 5 $16 $28 $63
=== === === ===
Proposed Fee.................................. $ 5 $16 $28 $63
=== === === ===
</TABLE>
BALANCED STRATEGY FUND CLASS D
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee (Net of Waiver)................................ 0.00% 0.00%
12b-1 Fees.................................................. 0.25% 0.25%
Shareholder Servicing Fee................................... 0.25% 0.25%
Other Expenses (Net of Reimbursement)....................... 0.00% 0.00%
---- ----
Total Fund Operating Expenses (Net of Waiver and Reimburse-
ment)...................................................... 0.50% 0.50%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1000 investment assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Existing Fee.................................. $ 5 $16 $28 $63
--- --- --- ---
Proposed Fee.................................. $ 5 $16 $28 $63
=== === === ===
</TABLE>
- ---------------------
* The additional fee of not more than 0.07 of 1% which would be payable on
assets which are not included in net assets for the purpose of computing the
basic advisory fee, is applied only when such assets are invested by FRIMCo.
Such amount is not expected to affect the amount of the gross proposed fee
shown above.
H-18
<PAGE>
MODERATE STRATEGY FUND CLASS D
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee (Net of Waiver)................................ 0.00% 0.00%
12b-1 Fees.................................................. 0.25% 0.25%
Shareholder Servicing Fee................................... 0.25% 0.25%
Other Expenses (Net of Reimbursement)....................... 0.00% 0.00%
---- ----
Total Fund Operating Expenses (Net of Waiver and Reimburse-
ment)...................................................... 0.50% 0.50%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1000 investment assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Existing Fee.................................. $ 5 $16 $28 $63
=== === === ===
Proposed Fee.................................. $ 5 $16 $28 $63
=== === === ===
</TABLE>
CONSERVATIVE STRATEGY FUND CLASS D
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee (Net of Waiver)................................ 0.00% 0.00%
12b-1 Fees.................................................. 0.25% 0.25%
Shareholder Servicing Fee................................... 0.25% 0.25%
Other Expenses (Net of Reimbursement)....................... 0.00% 0.00%
---- ----
Total Fund Operating Expenses (Net of Waiver and Reimburse-
ment)...................................................... 0.50% 0.50%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1000 investment assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Existing Fee.................................. $ 5 $16 $28 $63
=== === === ===
Proposed Fee.................................. $ 5 $16 $28 $63
=== === === ===
</TABLE>
- ---------------------
* The additional fee of not more than 0.07 of 1% which would be payable on
assets which are not included in net assets for the purpose of computing the
basic advisory fee, is applied only when such assets are invested by FRIMCo.
Such amount is not expected to affect the amount of the gross proposed fee
shown above.
H-19
<PAGE>
EQUITY BALANCED STRATEGY FUND CLASS E
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee (Net of Waiver)................................ 0.00% 0.00%
12b-1 Fees.................................................. None None
Shareholder Servicing Fee................................... 0.25% 0.25%
Other Expenses (Net of Reimbursement)....................... 0.00% 0.00%
---- ----
Total Fund Operating Expenses (Net of Waiver and Reimburse-
ment)...................................................... 0.25% 0.25%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1000 investment assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Existing Fee.................................. $ 3 $ 8 $14 $31
=== === === ===
Proposed Fee.................................. $ 3 $ 8 $14 $31
=== === === ===
</TABLE>
AGGRESSIVE STRATEGY FUND CLASS E
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee (Net of Waiver)................................ 0.00% 0.00%
12b-1 Fees.................................................. None None
Shareholder Servicing Fee................................... 0.25% 0.25%
Other Expenses (Net of Reimbursement)....................... 0.25% 0.25%
---- ----
Total Fund Operating Expenses (Net of Waiver and Reimburse-
ment)...................................................... 0.25% 0.25%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
iYou would pay the following expenses on a
$1000 ivestment assuming (1) 5% annual return
and (2) redemption at the end of each time
period
Existing Fee.................................. $ 3 $ 8 $14 $31
=== === === ===
Proposed Fee.................................. $ 3 $ 8 $14 $31
=== === === ===
</TABLE>
- ---------------------
* The additional fee of not more than 0.07 of 1% which would be payable on
assets which are not included in net assets for the purpose of computing the
basic advisory fee, is applied only when such assets are invested by FRIMCo.
Such amount is not expected to affect the amount of the gross proposed fee
shown above.
H-20
<PAGE>
BALANCED STRATEGY FUND CLASS E
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee (Net of Waiver)................................ 0.00% 0.00%
12b-1 Fees.................................................. None None
Shareholder Servicing Fee................................... 0.25% 0.25%
Other Expenses (Net of Reimbursement)....................... 0.00% 0.00%
---- ----
Total Fund Operating Expenses (Net of Waiver and Reimburse-
ment)...................................................... 0.25% 0.25%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1000 investment assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Existing Fee.................................. $ 3 $ 8 $14 $31
--- --- --- ---
Proposed Fee.................................. $ 3 $ 8 $14 $31
=== === === ===
</TABLE>
MODERATE STRATEGY FUND CLASS E
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee (Net of Waiver)................................ 0.00% 0.00%
12b-1 Fees.................................................. None None
Shareholder Servicing Fee................................... 0.25% 0.25%
Other Expenses (Net of Reimbursement)....................... 0.00% 0.00%
---- ----
Total Fund Operating Expenses (Net of Waiver and Reimburse-
ment)...................................................... 0.25% 0.25%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1000 investment assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Existing Fee.................................. $ 3 $ 8 $14 $31
=== === === ===
Proposed Fee.................................. $ 3 $ 8 $14 $31
=== === === ===
</TABLE>
- ---------------------
* The additional fee of not more than 0.07 of 1% which would be payable on
assets which are not included in net assets for the purpose of computing the
basic advisory fee, is applied only when such assets are invested by FRIMCo.
Such amount is not expected to affect the amount of the gross proposed fee
shown above.
H-21
<PAGE>
CONSERVATIVE STRATEGY FUND CLASS E
<TABLE>
<CAPTION>
EXISTING PROPOSED
FEE FEE*
-------- --------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES:
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee (Net of Waiver)................................ 0.00% 0.00%
12b-1 Fees.................................................. None None
Shareholder Servicing Fee................................... 0.25% 0.25%
Other Expenses (Net of Reimbursement)....................... 0.00% 0.00%
---- ----
Total Fund Operating Expenses (Net of Waiver and Reimburse-
ment)...................................................... 0.25% 0.25%
==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a
$1000 investment assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Existing Fee.................................. $ 3 $ 8 $14 $31
=== === === ===
Proposed Fee.................................. $ 3 $ 8 $14 $31
=== === === ===
</TABLE>
- ---------------------
* The additional fee of not more than 0.07 of 1% which would be payable on
assets which are not included in net assets for the purpose of computing the
basic advisory fee, is applied only when such assets are invested by FRIMCo.
Such amount is not expected to affect the amount of the gross proposed fee
shown above.
H-22
<PAGE>
EXHIBIT I
FIVE PERCENT SHAREHOLDERS
<TABLE>
<CAPTION>
FUND NAME BENEFICIARY OWNER NAME SHARES PERCENT
- --------- ------------------------------- ------------- -------
<S> <C> <C> <C>
Aggressive Strategy..... Board of Pensions of the Church 1,399,606.016 25.954%
of God Inc. TTEES
Church of God Pension Plan
Attn: Doug Hamlin
P.O. Box 2559
Anderson, IN 46108-2559
Aggressive Strategy..... Charles Schwab & Co., Inc. 672,135.484 12.464%
Special Custody Account for the
Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
Aggressive Strategy..... Halbert, Hargrove/Russell, Inc. 443,241.637 8.219%
111 West Ocean Boulevard
Suite 1240
Long Beach, CA 90802
Balanced Strategy....... Board of Pensions of the Church 5,191,190.403 37.614%
of God Inc. TTEES
Church of God Pension Plan-
Annuity
Attn: Doug Hamlin
P.O. Box 2559
Anderson, IN 46108-2559
Balanced Strategy....... Capinco/Sargento 2,451,610.404 17.764%
Firstar Trust Company FBO
Sargento
Attn: Income/Mutual Funds Dept
P.O. Box 1787
Milwaukee, WI 53201-1787
Balanced Strategy....... Board of Pensions of the Church 2,071,489.625 15.010%
of God Inc. TTEES
Church of God Pension Plan
Attn: Doug Hamlin
P.O. Box 2559
Anderson, IN 46108-2559
Balanced Strategy....... Charles Schwab & Co., Inc. 716,417.064 5.191%
Special Custody Account for the
Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
Conservative Strategy... Board of Pensions of the Church 205,490.387 51.144%
of God Inc. TTEES
Church of God Pension Plan
Attn: Doug Hamlin
P.O. Box 2559
Anderson, IN 46108-2559
Conservative Strategy... Standard-Knapp Inc. 57,307.172 14.263%
Prof Sharing & Savings Plan
127 Main Street
Portland, CT 06480-1860
Conservative Strategy... LBMC Employee Benefit Group LLC 36,129.949 8.992%
5203 Maryland Way
Suite 200
Brentwood, TN 37024-186
Conservative Strategy... First Security Bank 401(K) PSP 23,230.097 5.782%
PO Box 690
Batesville, MS 38606-0690
</TABLE>
I-1
<PAGE>
<TABLE>
<CAPTION>
FUND NAME BENEFICIARY OWNER NAME SHARES PERCENT
- --------- ------------------------------- ------------- -------
<S> <C> <C> <C>
Diversified Bond........ Citizens Bank Saginaw 5,090,953.232 15.724%
Attn: Trust/Investment Dept.
101 N Washington
Saginaw, MI 48607-1206
Emerging Markets........ VAR & Co. 4,789,347.018 13.368%
First Trust, N.A.
Funds Accounting
P.O. Box 64482
St Paul, MN 55164-0482
Emerging Markets........ Ronald Blue & Co. 3,523,690.289 9.836%
1100 Johnson Ferry Road, N.E.
Suite 600
Atlanta, GA 30342
Emerging Markets........ Charles Schwab & Co., Inc. 2,432,431.892 6.790%
Special Custody Account for the
Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
Emerging Markets........ Atlantic Capital Management, 1,999,603.701 5.581%
LLC
Two Hannover Square,
Suite 1100
434 Fayetteville Street Mall
Raleigh, NC 27601
Equity Balanced
Strategy............... Capinco/Sargento 4,156,802.274 47.432%
Firstar Trust Company FBO
Sargento
Attn: Income/Mutual Funds Dept.
P.O. Box 1787
Milwaukee, WI 53201-1787
Equity Balanced
Strategy............... Board of Pensions of the Church 1,229,817.873 14.033%
of God Inc. TTEES
Church of God Pension Plan
Attn: Doug Hamlin
P.O. Box 2559
Anderson, IN 46108-2559
Equity Balanced
Strategy............... Halbert, Hargrove/Russell, Inc. 638,029.593 7.280%
111 West Ocean Boulevard
Suite 1240
Long Beach, CA 90802
Equity Balanced
Strategy............... Charles Schwab & Co., Inc 546,424.614 6.235%
Special Custody Account for the
Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
Equity I................ VAR & Co. 7,061,873.323 18.088%
First Trust, N.A.
Funds Accounting
P.O. Box 64482
St. Paul, MN 55164-0482
Equity I................ Ronald Blue & Co. 5,508,631.256 14.110%
1100 Johnson Ferry Road, N.E.
Suite 600
Atlanta, GA 30342
Equity I................ Anchor/Russell Capital 2,006,514.024 5.139%
Advisors, Inc.
One Post Office Square
38th Floor
Boston, MA 02109
</TABLE>
I-2
<PAGE>
<TABLE>
<CAPTION>
FUND NAME BENEFICIARY OWNER NAME SHARES PERCENT
- --------- ------------------------------- ------------- -------
<S> <C> <C> <C>
Equity I............ Charles Schwab & Co., Inc 1,881,302.910 4.819%
Special Custody Account for the
Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
Equity II........... Ronald Blue & Co. 2,245,003.608 14.145%
1100 Johnson Ferry Road, N.E.
Suite 600
Atlanta, GA 30342
Equity II........... Miller/Russell and Associates, 1,256,466.905 7.917%
Inc.
2929 E. Camelback Road
Suite 223
Phoenix, AZ 85016
Equity II........... Atlantic Capital Management, 1,136,051.710 7.158%
LLC
Two Hannover Square, Suite 1100
434 Fayetteville Street Mall
Raleigh, NC 27601
Equity II........... VAR & Co. 1,071,674.757 6.752%
First Trust, N.A.
Funds Accounting
P.O. Box 64482
St. Paul, MN 55164-0482
Equity II........... Anchor/Russell Capital 968,774.194 6.104%
Advisors, Inc.
One Post Office Square
38th Floor
Boston, MA 02109
Equity II........... Reber/Russell Company 900,223.213 5.672%
1225 17th Street
Suite 1400
Denver, CO 80202-582
Equity II........... Charles Schwab & Co., Inc 892,581.586 5.624%
Special Custody Account for the
Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
Equity II........... JATO/ADM 836,807.421 5.273%
National City Bank of
Minneapolis
Attn: Trust Dept
PO Box E 1919
Minneapolis, MN 55480-9999
Equity III.......... VAR & Co. 909,879.749 13.289%
First Trust, N.A.
Funds Accounting
P.O. Box 64482
St. Paul, MN 55164-0482
Equity III.......... VAR & Co. 708,137.285 10.343%
First Trust, N.A.
Funds Accounting
P.O. Box 64482
St. Paul, MN 55164-0482
Equity III.......... Anchor/Russell Capital 691,049.056 10.093%
Advisors, Inc.
One Post Office Square
38th Floor
Boston, MA 02109
Equity III.......... Ingham/Russell Investment 637,098.651 9.305%
Advisors,
1570 Madruga Avenue
4th Floor
Coral Gables, FL 33146
</TABLE>
I-3
<PAGE>
<TABLE>
<CAPTION>
FUND NAME BENEFICIARY OWNER NAME SHARES PERCENT
- --------- ------------------------------- ------------- -------
<S> <C> <C> <C>
Equity III.......... Reber/Russell Company 601,333.042 8.783%
1225 17th Street
Suite 1400
Denver, CO 80202-582
Equity III.......... Miller/Russell and Associates, 547,182.807 7.992%
Inc.
2929 E. Camelback Road
Suite 223
Phoenix, AZ 85016
Equity III.......... International Shipowners 362,069.702 5.288%
Reinsurance Co. S.A.
B.P. 841
L-2018
Luxembourg
Equity Income....... Citizens Bank 358,459.190 5.721%
Saginaw
Attn: Trust/Investment Dept.
101 N. Washington
Saginaw, MI 48607-1206
Equity Income....... Carey & Co. 358,290.934 5.718%
Huntington National Bank
Attn: Mutual Funds MC 1024
P.O. Box 1558
Columbus, OH 43216-1558
Equity Income....... Charles Schwab & Co., Inc 328,048.785 5.235%
Special Custody Account for the
Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
Equity Q............ VAR & Co. 5,949,036.269 20.801%
First Trust, N.A.
Funds Accounting
P.O. Box 64482
St. Paul, MN 55164-0482
Equity Q............ Ronald Blue & Co. 4,593,369.059 16.061%
1100 Johnson Ferry Road, N.E.
Suite 600
Atlanta, GA 30342
Equity Q............ Miller/Russell and Associates, 1,915,456.450 6.698%
Inc.
2929 E. Camelback Road
Suite 223
Phoenix, AZ 85016
Equity Q............ Anchor/Russell Capital 1,715,223.751 5.997%
Advisors, Inc.
One Post Office Square
38th Floor
Boston, MA 02109
Equity T............ Ronald Blue & Co. 3,187,817.168 21.637%
1100 Johnson Ferry Road, N.E.
Suite 600
Atlanta, GA 30342
Equity T............ Charles Schwab & Co., Inc 2,319,803.281 15.745%
Special Custody Account for the
Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
Equity T............ Indiana Trust 1 1,645,641.470 11.170%
Indiana Trust & Investment
Management Company
P.O. Box 5149
Mishawaka, IN 46546-5149
</TABLE>
I-4
<PAGE>
<TABLE>
<CAPTION>
FUND NAME BENEFICIARY OWNER NAME SHARES PERCENT
- --------- ------------------------------- ------------- -------
<S> <C> <C> <C>
Equity T............ Miller/Russell and Associates, 1,057,646.319 7.179%
Inc.
2929 E. Camelback Road
Suite 223
Phoenix, AZ 85016
Equity T............ Atlantic Capital Management, 990,734.951 6.725%
LLC
Two Hannover Square,
Suite 1100
434 Fayetteville Street Mall
Raleigh, NC 27601
Fixed Income I...... Ronald Blue & Co. 5,625,349.097 12.843%
1100 Johnson Ferry Road, N.E.
Suite 600
Atlanta, GA 30342
Fixed Income I...... JATO/ADM 5,346,429.864 12.206%
National City Bank of
Minneapolis
Attn: Trust Dept
PO Box E 1919
Minneapolis, MN 55480-9999
Fixed Income I...... VAR & Co. 4,694,727.218 10.718%
First Trust, N.A.
Funds Accounting
P.O. Box 64482
St. Paul, MN 55164-0482
Fixed Income I...... Anchor/Russell Capital 4,131,527.815 9.432%
Advisors, Inc.
One Post Office Square
38th Floor
Boston, MA 02109
Fixed Income I...... Davis & Co. 3,093,353.081 7.062%
First Union Cust. Serv. Center
1525 West W.T. Harris Boulevard
Mail Code NC 1151-1076
Charlotte, NC 28288
Fixed Income II..... Ronald Blue & Co. 4,053,238.547 29.981%
1100 Johnson Ferry Road, N.E.
Suite 600
Atlanta, GA 30342
Fixed Income II..... First Tennessee Bank NA 1,288,376.704 9.530%
First Tennessee Bank FBO
Knox County Reinvest A/C
Attn: Trust Securities--Third
Floor
165 Madison Avenue
Memphis, TN 38103-2723
Fixed Income II..... Reber/Russell Company 1,166,029.036 8.625%
1225 17th Street
Suite 1400
Denver, CO 80202-582
Fixed Income II..... Lawton/Russell, Inc. 853,007.708 6.310%
311 South Wacker
Suite 1750
Chicago, IL 60606-662
Fixed Income II..... Anchor/Russell Capital 845,193.374 6.252%
Advisors, Inc.
One Post Office Square
38th Floor
Boston, MA 02109
Fixed Income III.... VAR & Co. 9,431,451.501 21.321%
First Trust, N.A.
Funds Accounting
P.O. Box 64482
St. Paul, MN 55164-0482
</TABLE>
I-5
<PAGE>
<TABLE>
<CAPTION>
FUND NAME BENEFICIARY OWNER NAME SHARES PERCENT
- --------- ------------------------------- ------------- -------
<S> <C> <C> <C>
Fixed Income III........ Ronald Blue & Co. 7,372,964.574 16.667%
1100 Johnson Ferry Road, N.E.
Suite 600
Atlanta, GA 30342
Fixed Income III........ Miller/Russell and Associates, 5,072,861.529 11.468%
Inc.
2929 E. Camelback Road
Suite 223
Phoenix, AZ 85016
Fixed Income III........ Savant/Russell, Inc. 2,420,792.356 5.472%
6929 Sunrise Blvd.
Suite 109
Citrus Heights, CA 95610
International........... VAR & Co. 5,395,150.572 19.568%
First Trust, N.A.
Funds Accounting
P.O. Box 64482
St. Paul, MN 55164-0482
International........... Ronald Blue & Co. 4,105,541.845 14.891%
1100 Johnson Ferry Road, N.E.
Suite 600
Atlanta, GA 30342
International........... VAR & Co. 1,474,490.740 5.348%
First Trust, N.A.
Funds Accounting
P.O. Box 64482
St. Paul, MN 55164-0482
International........... Atlantic Capital Management, 1,381,689.415 5.011%
LLC
Two Hannover Square,
Suite 1100
434 Fayetteville Street Mall
Raleigh, NC 27601
International........... Anchor/Russell Capital 1,357,248.689 4.923%
Advisors, Inc.
One Post Office Square
38th Floor
Boston, MA 02109
International........... Miller/Russell and Associates, 1,355,453.337 4.916%
Inc.
2929 E. Camelback Road
Suite 223
Phoenix, AZ 85016
Limited Volatility Tax Ronald Blue & Co. 1,566,334.043 27.867%
Free................... 1100 Johnson Ferry Road, N.E.
Suite 600
Atlanta, GA 30342
Limited Volatility Tax Halbert, Hargrove/Russell, Inc. 1,072,394.730 19.079%
Free................... 111 West Ocean Boulevard
Suite 1240
Long Beach, CA 90802
Moderate Strategy....... Board of Pensions of the Church 833,512.256 51.847%
of God Inc TTEES
Church of God Pension Plan
Attn: Doug Hamlin
P.O. Box 2559
Anderson, IN 46108-2559
Moderate Strategy....... Standard-Knapp Inc. 129,692.037 8.067%
Prof Sharing & Savings Plan
127 Main Street
Portland, CT 06480-1860
</TABLE>
I-6
<PAGE>
<TABLE>
<CAPTION>
FUND NAME BENEFICIARY OWNER NAME SHARES PERCENT
- --------- ------------------------------- --------------- -------
<S> <C> <C> <C>
Moderate Strategy....... Charles Schwab & Co., Inc 86,946.919 5.408%
Special Custody Account for the
Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
Money Market............ Ronald Blue & Co. 177,751,693.790 42.830%
1100 Johnson Ferry Road, N.E.
Suite 600
Atlanta, GA 30342
Money Market............ Anchor/Russell Capital 60,139,028.510 14.491%
Advisors, Inc.
One Post Office Square 38th
Floor
Boston, MA 02109
Money Market............ Board of Pensions of the Church 48,659,508.880 11.725%
of God Inc TTEES
Church of God Pension Plan
Attn: Doug Hamlin
P.O. Box 2559
Anderson, IN 46108-2559
Money Market............ University of Puget Sound 23,025,337.180 5.548%
Attn: Controller
1500 North Warner
Tacoma, WA 98416-0001
Multistrategy Bond...... Halbert, Hargrove/Russell, Inc. 3,135,537.001 6.269%
111 West Ocean Boulevard
Suite 1240
Long Beach, CA 90802
Real Estate Securities.. Ronald Blue & Co. 3,995,098.406 17.286%
1100 Johnson Ferry Road, N.E.
Suite 600
Atlanta, GA 30342
Real Estate Securities.. VAR & Co. 2,229,110.674 9.645%
First Trust, N.A.
Funds Accounting
P.O. Box 64482
St. Paul, MN 55164-0482
Special Growth.......... FM Co 689,274.761 4.870%
Huntington National Bank
One Financial Plaza
Holland, MI 49423-9166
Tax Free Money Market... Citizens Bank 54,327,323.640 31.159%
Saginaw
Attn: Trust/Investment Dept.
101 N Washington
Saginaw, MI 48607-1206
Tax Free Money Market... Miller/Russell and Associates, 32,441,334.180 18.607%
Inc.
2929 E. Camelback Road
Suite 223
Phoenix, AZ 85016
Tax Free Money Market... Ronald Blue & Co. 20,626,188.340 11.830%
1100 Johnson Ferry Road, N.E.
Suite 600
Atlanta, GA 30342
Tax Free Money Market... Sandra N Tillotson TTEE 18,632,276.870 10.687%
Sandra N Tillotson Family Trust
DTD 10/1/96
3500 E Deer Hollow Drive
Sandy, UT 84092-4509
Tax Free Money Market... Craig S Tillotson Fam. Tr. DTD 9,178,110.350 5.264%
10/1/96
Craig S. Tillotson TTE
C/O Clara's
1565 East 3300 South
Salt Lake City, UT 84106-3370
</TABLE>
I-7
<PAGE>
<TABLE>
<CAPTION>
FUND NAME BENEFICIARY OWNER NAME SHARES PERCENT
- --------- ------------------------------ -------------- -------
<S> <C> <C> <C>
Tax Free Money Market... Halbert, Hargrove/Russell, Inc. 9,105,177.630 5.222%
111 West Ocean Boulevard
Suite 1240
Long Beach, CA 90802
US Government Money
Market................. TRI-AD Capital Management, Inc. 15,548,330.480 9.504%
221 West Crest Street
Suite 300
Escondido, CA 92025
US Government Money
Market................. Miller/Russell and Associates, 12,367,748.280 7.560%
Inc.
2929 E. Camelback Road
Suite 223
Phoenix, AZ 85016
US Government Money
Market................. Anchor/Russell Capital 9,773,707.260 5.974%
Advisors, Inc.
One Post Office Square
38th Floor
Boston, MA 02109
US Government Money
Market................. Winona National and Savings 7,953,401.610 4.862%
Bank
Winkalt & Co.
P.O. Box 499
Winona, MN 55987-0499
Volatility Constrained
Bond................... Harbor Capital Management, Inc. 855,154.293 8.500%
831 East Morehead Street
Suite 350
Charlotte, NC 28202
</TABLE>
I-8
<PAGE>
TO AVOID THE EXPENSE OF MULTIPLE MAILINGS TO THE SAME SHAREHOLDER,
WE HAVE, WHENEVER POSSIBLE, INCLUDED PROXY CARDS FOR ALL YOUR
ACCOUNTS IN THE FUNDS INVOLVED IN THIS PROXY IN ONE ENVELOPE.
PLEASE VOTE BY FILLING IN THE BOXES BELOW.
Please fold and detach card at perforation before mailing.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
1. To approve an Agreement and Plan of Reorganization of the
Investment Company's Bond Fund into The Investment Company's
Fixed Income II Fund. [_] [_] [_] 1.
<CAPTION>
WITHHOLD
authority to
FOR all nominees vote for all
except as marked nominees
<S> <C> <C>
2. To elect the following six nominees as Trustees:
Lynn L. Anderson, Paul E. Anderson, Paul Anton, PhD,
William E. Baxter, Lee C. Gingrich, and Eleanor W. Palmer. [_] [_] 2.
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY
INDIVIDUAL NOMINEE(S), WRITE THE NAME(S) OF THE NOMINEE(S)
ON THE LINE BELOW.)
-----------------------------------------------------------
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
3. To ratify the selection of PricewaterhouseCoopers LLP as the
independent accountants for the Investment Company. [_] [_] [_] 3.
4. To approve a new advisory agreement with FRIMCo as described in
Proposal 4 of the proxy statement relating to the Special Meeting. [_] [_] [_] 4.
5. To approve a new advisory agreement with FRIMCo., to take effect
upon the acquisition of Frank Russell Company by The Northwestern
Mutual Life Insurance Company. [_] [_] [_] 5.
6. To approve a change to the Bond Fund's fundamental investment
restrictions, authorizing a higher borrowing level to meet
redemptions. [_] [_] [_] 6.
7. To eliminate the Bond Fund's fundamental investment restrictions
concerning:
7.a. investing in interests in oil, gas or other mineral exploration or
developmental programs; [_] [_] [_] 7.a.
7.b. investing in issuers that have been in operation for less than
three years; and [_] [_] [_] 7.b.
7.c. investing in issuers beneficially owned by certain affiliated
persons of the Investment Company [_] [_] [_] 7.c.
<CAPTION>
GRANT WITHHOLD
<S> <C> <C>
To consider and act upon any other business which may legally come
before the meeting. [_] [_]
</TABLE>
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
PROXY
SPECIAL MEETING IN LIEU OF ANNUAL MEETING OF SHAREHOLDERS
NOVEMBER 19, 1998
Please fold and detach card at perforation before mailing
VOLATILITY CONSTRAINED BOND FUND CLASS S
The undersigned hereby revokes all previous proxies for the undersigned's shares
and appoints Gregory J. Lyons and Rick Chase, and each of them, proxies of the
undersigned with full power of substitution to vote all shares of the Volatility
Constrained Bond Fund (the "Bond Fund") which the undersigned is entitled to
vote at the Bond Fund's Special Meeting in Lieu of Annual Meeting of
Shareholders ("Special Meeting") to be held at the offices of Frank Russell
Investment Company (the "Investment Company"), at 909 A Street, Tacoma, WA 98402
at 10:00 a.m., local time, on Thursday, the 19th day of November 1998, including
any adjournment thereof, upon such business as may properly be brought before
the Special Meeting.
PLEASE SIGN AND PROMPTLY RETURN IN THE ACCOMPANYING ENVELOPE. NO POSTAGE
REQUIRED IF MAILED IN THE U.S. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD
OF TRUSTEES. IT WILL BE VOTED AS SPECIFIED. IF NO SPECIFICATION IS MADE, THIS
PROXY SHALL BE VOTED IN FAVOR OF THE PROPOSAL TO MERGE THE BOND FUND INTO THE
FIXED INCOME II FUND, IN FAVOR OF THE ELECTION OF THE NOMINEES TO THE BOARD, TO
RATIFY THE SELECTION OF ACCOUNTANTS, AND IN FAVOR OF THE PROPOSALS TO APPROVE
AN ADVISORY AGREEMENT AND TO AMEND CERTAIN FUNDAMENTAL INVESTMENT RESTRICTIONS.
IF ANY OTHER MATTERS PROPERLY COME BEFORE THE MEETING ABOUT WHICH THE PROXY
HOLDERS ARE NOT AWARE AT THIS TIME, THE PROXY HOLDERS MAY VOTE IN ACCORDANCE
WITH THE VIEWS OF THE TRUSTEES THEREON. MANAGEMENT IS NOT AWARE OF ANY SUCH
MATTERS.
Dated:
-----------------------
-------------------------------------------
Signature(s)
NOTE: Please sign exactly as your name
appears on the Proxy. If signing for
estates, trusts, or corporations, title or
capacity should be stated. If shares are
held jointly, each holder must sign.
