Fremont
Mutual
Funds, Inc.
n Institutional
U.S. Micro-Cap Fund
August 4, 1997
<PAGE>
Fremont Mutual Funds, Inc.
Institutional U.S. Micro-Cap Fund
August 4, 1997
TABLE OF CONTENTS
ITEM PAGE NO.
Summary of Fees and Expenses................................... 3
The Advisor and the Fund....................................... 4
Investment Objective, Policies and Risk Considerations......... 5
General Investment Policies.................................... 6
Investment Results............................................ 10
How to Invest................................................. 11
Shareholder Account Services and Privileges................... 11
How to Redeem Shares.......................................... 12
Retirement Plans.............................................. 14
Dividends, Distributions and Federal Income Taxation.......... 14
Calculation of Net Asset Value and Public Offering Price...... 15
Execution of Portfolio Transactions........................... 15
General Information........................................... 16
Telephone Numbers and Addresses............................... 17
<PAGE>
Prospectus
FREMONT MUTUAL FUNDS, INC. is an open-end investment company which under this
Prospectus is offering shares in the Fremont Institutional U.S. Micro-Cap
Fund (the "Fund").
FREMONT INSTITUTIONAL U.S. MICRO-CAP FUND seeks to achieve long-term capital
appreciation by investing primarily in equity securities of micro-cap companies
domiciled within the United States.
There can be no assurance that the Fund will achieve its investment objective.
The Fund is a diversified fund as defined by the Investment Company Act of 1940,
as amended (the "1940 Act").
Shares of the Fund are offered without a sales charge.
This Prospectus, which should be retained for future reference, sets forth
concisely the information an investor should know before investing. Should more
detailed information be desired, a Statement of Additional Information, which is
incorporated by reference into this Prospectus, is available without charge by
calling toll-free 800-548-4539 (press 1) or by writing to Fremont Mutual Funds,
Inc., 50 Beale Street, Suite 100, San Francisco, California 94105.
LIKE ALL MUTUAL FUNDS, 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 ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is August 4, 1997.
FOR FURTHER INFORMATION OR TO REQUEST A COPY OF THE STATEMENT OF ADDITIONAL
INFORMATION, CALL 800-548-4539.
<PAGE>
SUMMARY OF FEES AND EXPENSES
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases None
Maximum Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees (a) None
Exchange Fee None
Estimated Annual Fund Operating Expenses (as a percentage of average
net assets)(b)
Management Fee 1.15%
12b-1 Expenses None
Other Expenses After Reimbursement .10%
Total Fund Operating Expenses 1.25%
Example: You would pay the following total expenses on a $1,000 investment
in the Fund, assuming (1) a 5% annual return and (2) redemption at the end of
each time period:
1 Year 3 Years
Institutional U.S. Micro-Cap Fund $13 $40
THIS EXAMPLE SHOULD NOT BE CONSIDERED AS REPRESENTATIVE OF FUTURE EXPENSES OR
ANNUAL RETURNS. ACTUAL EXPENSES AND ANNUAL RETURNS MAY BE GREATER OR LESS THAN
THOSE SHOWN ABOVE.
The purpose of the above table is to give you information and assistance in
understanding the various costs and expenses of the Fund that an investor may
bear directly or indirectly. Other expenses include, but are not limited to,
transfer agent fees paid to Fremont Investment Advisors, Inc.; custody, legal
and audit fees, costs of registration of Fund shares under applicable laws; and
costs of printing and distributing reports to shareholders. The percentages
expressing annual fund operating expenses of the Fund are based on estimated
expenses for the current fiscal year.
See "The Advisor and the Fund."
(a) A wire transfer fee is charged by the Transfer Agent in the case of
redemptions made by wire. Such fee is subject to change and is currently $8.
See "How to Redeem Shares."
(b) The Advisor has agreed to limit the Fund's total operating expenses to 1.25%
of average daily net assets. The Fund may reimburse the Advisor for any
reductions in the Advisor's fees during the three years following that reduction
if such reimbursement is requested by the Advisor, if such reimbursement can be
achieved within the foregoing expense limit, and if the Board of Directors
approves the reimbursement at the time of the request as not inconsistent with
the best interests of the Fund. The Advisor generally seeks to reimburse the
oldest reductions and waivers before payment of fees and expenses for the
current year. Absent reimbursements of expenses by the Advisor, other expenses
and total operating expenses are estimated to be .30% and 1.45%, respectively.
<PAGE>
THE ADVISOR AND THE FUND
Fremont Mutual Funds, Inc. (the "Investment Company" ) is an open-end investment
company which under this Prospectus is offering shares in the Fremont
Institutional U.S. Micro-Cap Fund. The Investment Company has other series
offered with a different prospectus, and the Board of Directors of the
Investment Company is permitted to create additional funds at any time. The Fund
has its own investment objective and policies and operates as a separate mutual
fund. The Fund is the successor to the post-venture Fund of Fund A of the
Bechtel Trust and Thrift Plan.
The management of the business and affairs of the Investment Company is the
responsibility of the Board of Directors. Fremont Investment Advisors, Inc. (the
"Advisor") and Kern Capital Management, LLC (the "Sub-Advisor") provide the Fund
with investment management and administrative services under, respectively, an
Investment Advisory and Administrative Agreement (the "Advisory Agreement") with
the Investment Company and a Portfolio Management Agreement between the Advisor
and the Sub-Advisor. The Advisory Agreement and Portfolio Management Agreement
provide that the Advisor and Sub-Advisor, respectively, shall furnish advice to
the Fund with respect to its investments and shall, to the extent authorized by
the Board of Directors, determine what securities shall be purchased or sold by
the Fund.
The professional staff of the Advisor has offered professional investment
management services regarding asset allocation in connection with securities
portfolios to the Bechtel Trust and Thrift Plan and the Bechtel Foundation since
1978 and to Fremont Investors, Inc. (formerly Fremont Group, Inc.) since 1987.
Similarly, the professional staff of the Sub-Advisor have over ten years of
experience with this particular Fund. The Advisor also provides investment
advisory services regarding asset allocation, investment manager selection and
portfolio diversification to a number of large Bechtel-related investors.
The Investment Company is one of its clients.
As compensation for its services to the Fund, the Advisor receives from the Fund
a management fee, computed daily and paid monthly, of 1.15% per annum of the
Fund's average net assets. In addition to the fees described above, the Fund
pays its own operating expenses including, but not limited to: the Advisor's
fees; taxes, if any; brokerage and commission expenses, if any; interest charges
on any borrowings; transfer agent, administrator, custodian, legal and auditing
fees; shareholder servicing fees including fees to third-party servicing agents;
fees and expenses of Directors who are not interested persons of the Advisor or
the Sub-Advisor; costs and expenses of calculating daily net asset value; costs
and expenses of accounting, bookkeeping and recordkeeping required under the
1940 Act; insurance premiums; trade association dues; fees and expenses of
registering and maintaining registration of shares under federal and applicable
state securities laws; all costs associated with shareholders' meetings and the
preparation and dissemination of proxy materials, except for meetings called
solely for the benefit of the Advisor or its affiliates; printing and mailing
prospectuses, statements of additional information and reports to shareholders;
and other expenses relating to the Fund's operations, plus any extraordinary and
nonrecurring expenses that are not expressly assumed by the Advisor.
<PAGE>
All operating expenses of the Fund are subject to a voluntary limitation of
1.25% per annum. To the extent management fees are waived and/or other expenses
are reimbursed by the Advisor, the Advisor may elect to recapture such amounts
if it requests reimbursement within three years of the year in which the waiver
and/or reimbursement is made, and the Board of Directors approves the
reimbursement, and the Fund is able to make reimbursement and still stay within
the then current operating expense limitation.
The portfolio manager for the Fund is Robert E. Kern, a Senior Vice President of
the Advisor. Bob Kern has over 30 years of investment management experience and
was employed by Morgan Grenfell Capital Management, Inc. from 1986 through April
1997, where he headed Morgan Grenfell's Smaller Capitalization Equities Team.
Bob Kern has organized a new advisory firm, Kern Capital Management, LLC (the
"Sub-Advisor"), 114 West 47th Street, Suite 1926, New York, New York 10036, and
has registered the Sub-Advisor with the Securities and Exchange Commission as an
investment advisor. When such registration becomes effective, it is the
intention of the Advisor to retain the Sub-Advisor to serve as discretionary
portfolio manager of the Fund pursuant to a Portfolio Management Agreement, and
the Board of Directors and the initial shareholder(s) of the Fund have approved
both Agreements (with the Advisor and the Sub-Advisor). The controlling economic
and voting members of the Sub-Advisor are Bob Kern, his son David G. Kern, and
the Advisor; consequently, the Advisor is an affiliate of the Sub-Advisor. The
Portfolio Management Agreement will provide that the Sub-Advisor will manage the
investment and reinvestment of the assets of the Fund and continually review and
administer the Fund's investments. As compensation for its services, the Advisor
(not the Fund) will pay the Sub-Advisor a fee equal to .75% per annum of Fund
assets managed by the Sub-Advisor. The Advisor will have day-to-day authority to
increase or decrease the amount of the Fund's assets under management by the
Sub-Advisor.
The Advisor will provide direct portfolio management services to the extent that
the Sub-Advisor does not provide these services.
<PAGE>
The Investment Company and the Advisor have received from the Securities and
Exchange Commission an order (the "SEC Order") exempting the Fund from the
provisions of the 1940 Act that require the shareholders of the Fund to approve
the Fund's subadvisory agreement(s) and any amendments thereto. The SEC Order
permits the Advisor to hire new sub-advisors, terminate sub-advisors, rehire
existing sub-advisors whose agreements have been assigned (and, thus,
automatically terminated), and modify subadvisory agreements without the prior
approval of shareholders. By eliminating shareholder approval in these matters,
the Advisor would have greater flexibility in managing sub-advisors, and
shareholders would save the considerable expense involved in holding shareholder
meetings and soliciting proxies. The Advisor may in its discretion manage all or
a portion of the Fund's portfolio directly with or without the use of a
sub-advisor.
Investment Company Administration Corporation (the "Administrator"), pursuant to
an administration agreement with the Advisor, supervises the administration of
the Investment Company and the Fund including, among other responsibilities, the
preparation and filing of documents required for compliance by the Fund with
applicable laws and regulations. Certain officers of the Investment Company may
be provided by the Administrator.
For additional information, see "Investment Advisory and Other Services" in the
Statement of Additional Information.
INVESTMENT OBJECTIVE, POLICIES AND RISK CONSIDERATIONS
The investment objective and policies of the Fund is stated below. The Fund is
intended for long-term investors, not for those who may wish to redeem their
shares after a short period of time.
All investments, including mutual funds, have risks, and no investment is
suitable for all investors. Investors should consult with their financial and
other advisors concerning the suitability of this investment for their own
particular circumstances. Accordingly, there is no assurance that the Fund will
achieve its investment objective.
<PAGE>
The Fund seeks to achieve long-term capital appreciation by investing primarily
in a diversified portfolio of common stocks and securities convertible into
common stock. Under normal market conditions, at least 65% of the total assets
of the Fund will be invested in equity securities of U.S. micro-cap companies
(described below). These securities will trade on a U.S. exchange or in the
over-the-counter (OTC) market. However, up to 25% of the Fund's total assets, at
the time of purchase, may be invested in securities of micro-cap companies
domiciled outside the United States, including sponsored and unsponsored
American Depository Receipts ("ADRs") and European Depository Receipts ("EDRs").
See "General Investment Policies" for a discussion of ADRs. EDRs are similar to
ADRs but are designed for use in the European securities market. The Fund may
also invest in stock index futures contracts, options on index futures and
options on portfolio securities and stock indices.
The Fund generally selects its portfolio securities among micro-cap companies,
which the Fund defines as companies whose individual market capitalizations
would place them in the smallest 10% of market capitalization of companies in
the United States as measured by the Wilshire 5000 Index. Currently, these
companies have a market capitalization of about $425 million or less. Under
normal market conditions, the weighted average capitalization of the portfolio
will be less than the market capitalization of the largest company in the bottom
5% of the market value of all U.S. equities as measured by the Wilshire 5000
Index (currently about $200 million).
Many micro-cap companies in which the Fund is likely to invest may be more
vulnerable than larger companies to adverse business or market developments, may
have limited product lines, markets or financial resources and may lack
management depth. In addition, many micro-cap companies are not well-known to
the investing public, do not have significant institutional ownership and are
followed by relatively few securities analysts, with the result that there may
tend to be less publicly available information concerning such companies
compared to what is available for larger capitalization securities. Finally, the
securities of micro-cap companies traded in the OTC market may have fewer market
makers, wider spreads between their quoted bid and asked prices and lower
trading volumes, resulting in comparatively greater price volatility and less
liquidity than the securities of companies that have larger market
capitalizations and/or that are traded on the New York or American Stock
Exchanges or the market averages in general. Thus, the Fund may involve
considerably more risk than an investment company investing in the more liquid
equity securities of companies traded on the New York or American Stock
Exchanges.
The Advisor and Sub-Advisor believe that an investment in shares of the Fund
provides an opportunity for greater rewards but will involve more risk than an
investment in a fund which seeks capital appreciation from investment in common
stocks of larger, better-known companies. This is due to greater opportunities
for superior returns from companies with small stock market capitalizations
which are not as well-known to the general public. These shares may have less
investor following, and, therefore, may provide opportunities for investment
gains due to the inefficiencies in this sector of the marketplace.
<PAGE>
The Fund seeks to invest in those companies which are in the early stages of an
emerging growth cycle, where the Advisor and Sub-Advisor believe earnings will
grow faster than both inflation and the economy in general and where it believes
such growth has not yet been fully reflected in the market price of these
stocks. In seeking investments, the Advisor and Sub-Advisor will give weight to
companies possessing a variety of characteristics including quality of
management, companies which have gone public in recent years, an entrepreneurial
management team, a narrow product line focus, or established companies where the
growth potential has been significantly enhanced by new product developments,
new market opportunities, mergers or divestitures, or new management. The
investable universe provides what the Advisor and Sub-Advisor believe is a broad
range of stock selection opportunities.
Although the Fund invests primarily in common stocks and securities convertible
into common stock, for liquidity purposes it will normally invest a portion of
its assets in high quality debt securities and money market instruments with
remaining maturities of one year or less, including repurchase agreements.
Whenever in the judgment of the Advisor or the Sub-Advisor market or economic
conditions warrant, the Fund may, for temporary defensive purposes, invest
without limitation in these instruments. During times that the Fund is investing
defensively, the Fund will not be pursuing its stated investment objective. The
Fund may also hold other types of securities from time to time, including
non-convertible bonds and preferred stocks, in an amount not exceeding 5% of its
net assets. Preferred stocks and bonds will be rated at the time of purchase in
the top two categories of Moody's Investor Service, Inc. (Aaa or Aa) or Standard
& Poor's Ratings Group, (AAA or AA) or be of comparable quality as determined by
the Advisor.
GENERAL INVESTMENT POLICIES
Money Market Instruments. The Fund may invest in any of the following "money
market" instruments: certificates of deposit, time deposits, commercial paper,
bankers' acceptances and Eurodollar certificates of deposit; U.S.
dollar-denominated money market instruments of foreign financial institutions,
corporations and governments; U.S. Government and agency securities; money
market mutual funds; and other debt securities which are not specifically named
but which meet the Fund's quality guidelines. The Fund also may enter into
repurchase agreements as described below and may purchase variable and floating
rate debt securities.
At the time of purchase, short-term securities must be rated in the top rating
category by at least two nationally recognized statistical rating organizations
("NRSROs") or by a single NRSRO in the case of a security rated by only one
NRSRO, or, if not rated by an NRSRO, must be of comparable quality as determined
by the Advisor. Generally, high quality short-term securities must be issued by
an entity with an outstanding debt issue rated A or better by an NRSRO, or an
entity of comparable quality as determined by the Advisor. Obligations of
foreign banks, foreign corporations and foreign branches of domestic banks must
be payable in U.S. dollars. See Appendix A to the Statement of Additional
information for a description of rating categories.
<PAGE>
U.S. Government Securities. The Fund may invest in U.S. Government securities,
which are obligations of, or guaranteed by, the U.S. Government, its agencies or
instrumentalities. Some U.S. Government securities, such as Treasury bills,
notes and bonds and Government National Mortgage Association ("GNMA")
certificates, are supported by the full faith and credit of the United States;
others, such as those of the Federal Home Loan Mortgage Corporation ("FHLMC") ,
are supported by the right of the issuer to borrow from the Treasury; others,
such as those of the Federal National Mortgage Association ("FNMA") , are
supported by the discretionary authority of the U.S. Government to purchase the
agency's obligations; and still others, such as those of the Student Loan
Marketing Association, are supported only by the credit of the instrumentality.
No assurance can be given that the U.S. Government will provide financial
support to U.S. Government agencies or instrumentalities as described above in
the future, other than as set forth above, because it is not obligated to do so
by law.
When-Issued Securities and Firm Commitment Agreements. The Fund may purchase
securities on a delayed delivery or "when-issued" basis and enter into firm
commitment agreements (transactions whereby the payment obligation and interest
rate are fixed at the time of the transaction, but the settlement is delayed).
The Fund will not purchase securities the value of which is greater than 5% of
its net assets on a when-issued basis. The Fund, as purchaser, assumes the risk
of any decline in value of the security beginning on the date of the agreement
or purchase, and no interest accrues to the Fund until it accepts delivery of
the security. The Fund will not use such transactions for leveraging purposes,
and accordingly will segregate cash, cash equivalents or liquid securities or
hold a covered position in an amount sufficient to meet its payment obligations
thereunder.
There is always a risk that the securities may not be delivered and that the
Fund may incur a loss or will have lost the opportunity to invest the amount set
aside for such transaction in the segregated asset account. Settlements in the
ordinary course of business, which may take substantially more than three
business days for non-U.S. securities, are not treated by the Fund as
when-issued or forward commitment transactions and, accordingly, are not subject
to the foregoing limitations, even though some of the risks described above may
be present in such transactions.
<PAGE>
Shares of Investment Companies. The Fund may invest some portion of its assets
in shares of other no-load, open-end investment companies and closed-end
investment companies to the extent that they may facilitate achieving the
objective of the Fund or to the extent that they afford the principal or most
practical means of access to a particular market or markets or they represent
attractive investments in their own right. The percentage of Fund assets which
may be so invested is not limited, provided that the Fund and its affiliates do
not acquire more than 3% of the shares of any such investment company. The
provisions of the 1940 Act may also impose certain restrictions on redemption of
the Fund's shares in other investment companies. The Fund's purchase of shares
of investment companies may result in the payment by a shareholder of
duplicative management fees. The Advisor and/or the Sub-Advisor will consider
such fees in determining whether to invest in other mutual funds. The Fund will
invest only in investment companies which do not charge a sales load; however,
the Fund may invest in such companies with distribution plans and fees, and may
pay customary brokerage commissions to buy and sell shares of closed-end
investment companies.
The return on the Fund's investments in investment companies will be reduced by
the operating expenses, including investment advisory and administrative fees,
of such companies. The Fund's investment in a closed-end investment company may
require the payment of a premium above the net asset value of the investment
company's shares, and the market price of the investment company thereafter may
decline without any change in the value of the investment company's assets. The
Fund, however, will not invest in any investment company or trust unless it is
believed that the potential benefits of such investment are sufficient to
warrant the payment of any such premium. As an exception to the above, the Fund
has the authority to invest all of its assets in the securities of a single
open-end investment company with substantially the same fundamental investment
objectives, restrictions and policies as that of the Fund. The Fund will notify
its shareholders prior to initiating such an arrangement.
Repurchase Agreements. As part of its cash reserve position, the Fund may enter
into repurchase agreements through which the Fund acquires a security (the
"underlying security") from the seller, a well-established securities dealer or
a bank that is a member of the Federal Reserve System. At that time, the bank or
securities dealer agrees to repurchase the underlying security at the same
price, plus a specified amount of interest. Repurchase agreements are generally
for a short period of time, often less than a week. The seller must maintain
with the Fund's custodian collateral equal to at least 100% of the repurchase
price, including accrued interest, as monitored daily by the Advisor and/or the
Sub-Advisor. The Fund will not enter into a repurchase agreement with a maturity
of more than seven business days if, as a result, more than 15% of the value of
its net assets, would then be invested in such repurchase agreements. The Fund
will only enter into repurchase agreements where (1) the underlying securities
are issued or guaranteed by the U.S. Government, (2) the market value of the
underlying security, including accrued interest, will be at all times equal to
or in excess of the value of the repurchase agreement, and (3) payment for the
underlying securities is made only upon physical delivery or evidence of
book-entry transfer to the account of the custodian or a bank acting as agent.
In the event of a bankruptcy or other default of a seller of a repurchase
agreement, the Fund could experience both delays in liquidating the underlying
securities and losses, including: (1) a possible decline in the value of the
underlying security during the period in which the Fund seeks to enforce its
rights thereto; (2) possible subnormal levels of income and lack of access to
income during this period; and (3) expenses of enforcing the Fund's rights.
<PAGE>
Portfolio Turnover. The Fund expects to trade in securities for short-term gain
whenever deemed advisable by the Advisor and/or the Sub-Advisor in order to take
advantage of anomalies occurring in general market, economic or political
conditions. Therefore, the Fund may have a higher portfolio turnover rate than
that of some other investment companies, but it is anticipated that the annual
portfolio turnover rate of the Fund will not exceed 200%. The portfolio turnover
rate is calculated by dividing the lesser of sales or purchases of long-term
portfolio securities by the Fund's average month-end long-term investments. High
portfolio turnover involves correspondingly greater transaction costs in the
form of dealer spreads or brokerage commissions and other costs that the Fund
will bear directly, and may result in the realization of net capital gains,
which are generally taxable whether or not distributed to shareholders.
Loans of Portfolio Securities. The Fund is authorized to make loans of its
portfolio securities to broker-dealers or to other institutional investors in an
amount not exceeding 331/3% of its net assets. The borrower must maintain with
the Fund's custodian collateral consisting of cash, cash equivalents or U.S.
Government securities equal to at least 100% of the value of the borrowed
securities, plus any accrued interest. The Fund will receive any interest or
dividends paid on the loaned securities and a fee or a portion of the interest
earned on the collateral. The risks in lending portfolio securities, as with
other extensions of secured credit, consist of possible delay in receiving
additional collateral or in the recovery of the securities, or possible loss of
rights in the collateral should the borrower fail financially. The lender also
may bear the risk of capital loss on investment of the cash collateral, which
must be returned in full to the borrower when the loan is terminated. Loans will
be made only to firms deemed by the Advisor to be of good standing and will not
be made unless, in the judgment of the Advisor, the consideration to be earned
from such loans would justify the associated risk.
Borrowing. The Fund may borrow from banks an amount not exceeding 30% of the
value of its total assets for temporary or emergency purposes and may enter into
reverse repurchase agreements. If the income and gains on securities purchased
with the proceeds of borrowings or reverse repurchase agreements exceed the cost
of such borrowings or agreements, the Fund's earnings or net asset value will
increase faster than otherwise would be the case; conversely, if the income and
gains fail to exceed the cost, earnings or net asset value would decline faster
than otherwise would be the case.
Restricted Securities. The Fund may purchase securities that are not registered
under federal securities laws, but can be offered and sold to "qualified
institutional buyers" ("restricted securities"). However, the Fund will not
invest more than 15% of its net assets in illiquid investments, which includes
repurchase agreements and fixed time deposits maturing in more than seven days,
and securities that are not readily marketable and restricted securities, unless
the Board of Directors determines, based upon a continuing review of the trading
markets for the specific restricted security, that such restricted securities
are liquid. The Board of Directors may adopt guidelines and delegate to the
Advisor or the Sub-Advisor the daily function of determining and monitoring
liquidity of restricted securities. The Board, however, will retain sufficient
oversight and ultimate responsibility for the determinations.
<PAGE>
Warrants or Rights. Warrants or rights may be acquired by the Fund in connection
with other securities or separately and provide the Fund with the right to
purchase other securities of the issuer at a later date. It is the present
intention of the Fund to limit its investments in warrants or rights, valued at
the lower of cost or market, to no more than 5% of the value of its net assets.
Warrants or rights acquired by the Fund in units or attached to securities will
be deemed to be without value for purposes of this restriction.
Options and Futures Contracts. When the Fund is not fully invested, strategies
such as buying calls, writing puts, and buying futures may be used to increase
its exposure to price changes in stocks or debt securities. When the Advisor
and/or the Sub-Advisor wishes to hedge against market fluctuations, strategies
such as buying puts, writing calls, and selling futures may be used to reduce
market exposure. Because most stock index futures and options are based on broad
stock market indices, their performance tends to track the performance of common
stocks generally - which may or may not correspond to the types of securities in
which the Fund invests. The Fund will maintain segregated accounts consisting of
cash, U.S. Government securities or other liquid securities (or, as permitted by
applicable regulations, enter into certain offsetting positions) to cover its
obligations under options and futures contracts to avoid leveraging.
In seeking appreciation or to reduce principal volatility, the Fund may also (1)
enter into futures contracts (contracts for the future delivery of debt
securities, stock, stock index futures contracts with respect to the S&P 500
Index, small capitalization stock market indices or other similar broad-based
stock market indices, the initial margins of which are limited to 5% of the
Fund's assets); and (2) purchase put and call options on portfolio securities,
stock indices or stock index futures contracts - the premiums of which are
limited to 5% of the Fund's assets.
The Fund may write put and call options. It will only do so by writing covered
put or call options, and the aggregate value of the securities underlying put
options, as of the date of sale of the options, will not exceed 50% of the net
assets of the Fund.
The Fund will set aside cash, cash equivalents, or liquid securities, or hold a
covered position against any potential delivery or payment obligations under any
outstanding option or futures contracts.
Options and futures can be volatile investments. If the Advisor and/or the
Sub-Advisor applies a hedge at an inappropriate time or evaluates market
conditions incorrectly, options and futures strategies may lower the Fund's
return. The Fund could also experience a loss if the prices of its options or
futures positions were poorly correlated with its other investments, or if it
could not close out its positions because of an illiquid secondary market.
Although these investment practices will be used primarily to generate income or
to minimize the fluctuation of principal, they do involve risks which are
different in some respects from the investment risks associated with similar
funds which do not engage in such activities. These risks may include the
following: futures contracts - no assurance that closing purchase transactions
will be available at favorable prices, possible reduction of the Fund's income
due to the use of hedging, the possible reduction in value of both the
securities hedged and the hedging instrument, and possible loss in excess of the
initial margin payment; options and futures contracts - imperfect correlation
between the contract and the underlying security, commodity or index and
unsuccessful hedging transactions due to incorrect forecasts of market trends;
writing covered call options - the inability to effect closing transactions at
favorable prices and the inability to participate in the appreciation of the
underlying securities above the exercise price and premium received; and
purchasing or selling put and call options -possible loss of the entire premium.
A more thorough description of these investment practices and their associated
risks is contained in the Statement of Additional Information.
<PAGE>
Risk Factors and Special Considerations for International Investing. Investment
in securities of foreign entities and securities denominated in foreign
currencies involves risks typically not present to the same degree in domestic
investments. Likewise, investment in ADRs and EDRs presents similar risks, even
though the Fund will purchase, sell and be paid dividends on ADRs in U.S.
dollars. These risks include fluctuations in currency exchange rates, which are
affected by international balances of payments and other economic and financial
conditions; government intervention; speculation; and other factors. With
respect to certain foreign countries, there is the possibility of expropriation
or nationalization of assets, confiscatory taxation and political, social or
economic instability. The Fund may be required to pay foreign withholding or
other taxes on certain of its foreign investments, but investors may or may not
be able to deduct their pro rata shares of such taxes in computing their taxable
income, or take such shares as a credit against their U.S. income taxes. See
"Dividends, Distributions and Federal Income Taxation."
There may be less publicly available information about foreign issuers or
securities than about U.S. issuers or securities, and foreign issuers may not be
subject to accounting, auditing and financial reporting standards and
requirements comparable to those of U.S. entities. With respect to unsponsored
ADRs, these programs cover securities of companies which are not required to
meet either the reporting or accounting standards of the United States. Many
foreign financial markets, while generally growing in volume, continue to have
substantially less volume than domestic markets, and securities of many foreign
companies are less liquid and their prices are more volatile than are securities
of comparable U.S. companies. Such markets may have longer settlement periods
than markets in the United States. In addition, brokerage commissions, custodial
services and other costs related to investment in foreign markets generally are
more expensive than in the United States, particularly with respect to emerging
markets. Such markets have different settlement and clearance procedures. In
certain markets, there have been times when settlements have been unable to keep
pace with the volume of securities transactions, making it difficult to conduct
such transactions. The inability of the Fund to make intended securities
purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. Inability to dispose of a portfolio security caused by
settlement problems could result either in losses to the Fund due to subsequent
declines in value of a portfolio security or, if the Fund had entered into a
contract to sell the security, could result in possible liability to the
purchaser. Settlement procedures in certain emerging markets also carry with
them a heightened risk of loss due to the failure of the broker or other service
provider to deliver cash or securities.
The risks of foreign investing are of greater concern in the case of investments
in emerging markets which may exhibit greater price volatility, have less
liquidity and have settlement arrangements which are less efficient than in
developed markets. Furthermore, the economies of emerging market countries
generally are heavily dependent upon international trade and, accordingly, have
been and may continue to be adversely affected by trade barriers, managed
adjustments in relative currency values, and other protectionist measures
imposed or negotiated by the countries with which they trade. These emerging
market economies also have been and may continue to be adversely affected by
economic conditions in the countries with which they trade.
<PAGE>
The value of the Fund's portfolio securities computed in U.S. dollars will vary
with increases and decreases in the exchange rate between the currencies in
which the Fund has invested and the U.S. dollar. A decline in the value of any
particular currency against the U.S. dollar will cause a decline in the U.S.
dollar value of the Fund's holdings of securities denominated in such currency
and, therefore, will cause an overall decline in the Fund's net asset value and
net investment income and capital gains, if any, to be distributed in U.S.
dollars to shareholders by the Fund.
The rate of exchange between the U.S. dollar and other currencies is influenced
by many factors, including the supply and demand for particular currencies,
central bank efforts to support particular currencies, the movement of interest
rates, the price of oil, the pace of activity in the industrial countries,
including the United States, and other economic and financial conditions
affecting the world economy.
The Fund will not invest in a foreign currency or in securities denominated in a
foreign currency if such currency is not at the time of investment considered by
the Advisor to be fully exchangeable into U.S. dollars without legal
restriction. The Fund may purchase securities that are issued by the government
or a corporation or financial institution of one nation but denominated in the
currency of another nation. To the extent that the Fund invests in ADRs, the
depository bank generally pays cash dividends in U.S. dollars regardless of the
currency in which such dividends originally are paid by the issuer of the
underlying security.
The operating expense ratio of the Fund when investing in foreign securities may
be higher than that of an investment company investing exclusively in U.S.
securities because certain expenses, such as custodial costs, may be higher.
Several of the countries in which the Fund may invest restrict, to varying
degrees, foreign investments in their securities markets. Governmental and
private restrictions take a variety of forms, including (i) limitation on the
amount of funds that may be invested into or repatriated from the country
(including limitations on repatriation of investment income and capital gains),
(ii) prohibitions or substantial restrictions on foreign investment in certain
industries or market sectors, such as defense, energy and transportation, (iii)
restrictions (whether contained in the charter of an individual company or
mandated by the government) on the percentage of securities of a single issuer
which may be owned by a foreign investor, (iv) limitations on the types of
securities which a foreign investor may purchase and (v) restrictions on a
foreign investor's right to invest in companies whose securities are not
publicly traded. In some circumstances, these restrictions may limit or preclude
investment in certain countries. Therefore, the Fund intends to invest in such
countries through the purchase of shares of investment companies organized under
the laws of such countries.
The Fund's interest and dividend income from foreign issuers may be subject to
non-U.S. withholding taxes. The Fund also may be subject to taxes on trading
profits in some countries. In addition, many of the countries in the Pacific
Basin have a transfer or stamp duties tax on certain securities transactions.
The imposition of these taxes will increase the cost to the Fund of investing in
any country imposing such taxes. For United States federal income tax purposes,
United States shareholders may be entitled to a credit or deduction to the
extent of any foreign income taxes paid by the Fund. See "Dividends,
Distributions and Federal Income Taxation."
<PAGE>
American Depository Receipts. American Depository Receipts ("ADRs") are
negotiable receipts issued by a United States bank or trust to evidence
ownership of securities in a foreign company which have been deposited with such
bank or trust's office or agent in a foreign country. Investing in ADRs presents
risks not present to the same degree as investing in domestic securities even
though the Fund will purchase, sell and be paid dividends on ADRs in U.S.
dollars. These risks include fluctuations in currency exchange rates, which are
affected by international balances of payments and other economic and financial
conditions; government intervention; speculation; and other factors. With
respect to certain foreign countries, there is the possibility of expropriation
or nationalization of assets, confiscatory taxation and political, social and
economic instability. The Fund may be required to pay foreign withholding or
other taxes on certain of its ADRs, but investors may or may not be able to
deduct their pro rata shares of such taxes in computing their taxable income, or
take such shares as a credit against their U.S. federal income tax. See
"Dividends, Distributions and Federal Income Taxation. "Unsponsored ADRs are
offered by companies which are not prepared to meet either the reporting or
accounting standards of the United States. While readily exchangeable with stock
in local markets, unsponsored ADRs may be less liquid than sponsored ADRs.
Additionally, there generally is less publicly available information with
respect to unsponsored ADRs.
Investment Restrictions. The Fund has certain fundamental policies that are
described in the Statement of Additional Information under "Investment
Restrictions." These investment restrictions include prohibitions against
borrowing money (except as described above) and against concentrating the Fund's
investments in issuers conducting their principal business activities in a
single industry (except that this limitation does not apply with respect to U.S.
Government securities). These investment restrictions and the Fund's investment
objective cannot be changed without the approval of shareholders of the Fund;
all other investment practices described in this Prospectus and in the Statement
of Additional Information can be changed by the Board of Directors without
shareholder approval.
INVESTMENT RESULTS
The Fund may from time to time include information on its investment results
and/or comparisons of its investment results to various unmanaged indices or
results of other mutual funds or groups of mutual funds in advertisements, sales
literature or reports furnished to present or prospective shareholders. All such
figures are based on historical performance data and are not intended to be
indicative of future performance. The investment return and principal value of
an investment in the Fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
The Fund may calculate performance on an average annual total return basis for
1-, 5- and 10-year periods and over the life of the Fund, after such periods
have elapsed. Average annual total return will be computed by determining the
average annual compounded rate of return over the applicable period that would
equate the initial amount invested to the ending redeemable value of the
investment. Ending redeemable value includes dividends and capital gain
distributions, reinvested at net asset value at the reinvestment date determined
by the Board of Directors. The resulting percentages indicate the positive or
negative investment results that an investor would have experienced from
reinvested dividends and capital gain distributions and changes in share price
during the period. The average annual compounded rate of return over various
periods may also be computed by utilizing ending redeemable values as determined
above.
<PAGE>
The Fund's investment results will vary from time to time depending upon market
conditions, the composition of the Fund's portfolio, and operating expenses of
the Fund, so that any investment results reported by the Fund should not be
considered representative of what an investment in the Fund may earn in any
future period. When utilized, total return for the unmanaged indices described
in the Statement of Additional Information will be calculated assuming
reinvestment of dividends and interest, but will not reflect any deductions for
recurring expenses such as advisory fees, brokerage costs or administrative
expenses. These factors and possible differences in calculation methods should
be considered when comparing the Fund's investment results with those published
for other investment companies, other investment vehicles and unmanaged indices.
The comparison of the Fund to an alternative investment should be made with
consideration of differences in features and expected performance. The Fund may
also be mentioned in newspapers, magazines, or other media from time to time.
The Fund assumes no responsibility for the accuracy of such data. The Fund's
results also should be considered relative to the risks associated with its
investment objective and policies. See "Investment Results" in the Statement of
Additional Information.
The Fund commenced operations upon the transfer to the Fund of assets held in
the post-venture Fund of Fund A of the Bechtel Trust and Thrift Plan (the
"Separate Account"), over which the Advisor has exercised portfolio supervision
responsibilities since the inception of the Separate Account in 1982. Mr. Robert
E. Kern, the Fund's portfolio manager, was employed by Morgan Grenfell Capital
Management, Inc. from 1986 through April 1997 and headed up their team that
managed the Separate Account. He currently is employed by the Advisor. The
investment policies, objective, guidelines and restrictions of the Fund are in
all material respects equivalent to those of the Separate Account, and the
management practices of the Fund are in all material respects identical to those
of the Separate Account. Assets in the Separate Account were transferred to the
Fund in exchange for an interest in the Fund. As a result of this transaction,
the investment holdings in the Fund were the same as the investment holdings in
the portfolio of the Separate Account immediately prior to the transfer. While
the Separate Account continues to exist, its assets consist solely of shares of
the Fund.
The Separate Account was not a registered investment company because it was
exempt from registration under the 1940 Act. However, the Separate Account was
managed in a fashion similar to a mutual fund and, while not subject to mutual
fund tax rules, would have qualified as a regulated investment company under
relevant tax rules in each year of its operation. Because, in a practical sense,
the Separate Account constitutes the "predecessor" of the Fund, the Fund
calculates its performance for periods commencing prior to the transfer of the
Separate Account's assets to the Fund by including the Separate Account's total
return, adjusted to reflect the deduction of actual fees and expenses incurred
by the Separate Account. The fees and expenses incurred by the Separate Account
are higher than the fees and expenses, net of fee waivers, to be incurred by the
Fund.
The performance data set forth below includes the performance of the Separate
Account for periods before the Fund's registration statement became effective.
As noted above, the Separate Account was not registered under the 1940 Act and
thus was not subject to certain investment restrictions that are imposed by the
1940 Act. If the Separate Account had been registered under the 1940 Act, the
Separate Account's performance might have been adversely affected. Total return
for the Separate Account was calculated using a methodology that incorporates a
time-weighted total rate of return concept and is adjusted for cash flows. This
methodology of calculating total return differs from the methodology required to
be employed by a mutual fund in calculating total return, which is not
time-weighted or dollar-weighted but simply measures the total return of an
investment in the Fund over a period of time. The Advisor believes, however,
that the Separate Account's performance would be substantially the same if it
was recalculated in accordance with mutual fund performance rules.
<PAGE>
<TABLE>
AVERAGE ANNUAL TOTAL RETURNS
(for periods ended June 30, 1997)
<CAPTION>
SEPARATE ACCOUNT (1) STANDARD & RUSSELL
POOR'S 500 INDEX 2000 INDEX
---------------- ----------
<S> <C> <C> <C>
1 Year 21.41% 34.70% 16.33%
3 Years 33.56% 28.85% 20.06%
5 Years 25.96% 19.75% 17.87%
10 Years 17.56% 14.63% 11.14%
<FN>
(1) Total return data for the Separate Account reflect the performance of
the pool of assets transferred on that date into the Fund, net of actual
fees and expenses.
</FN>
</TABLE>
Additional performance information regarding the Fund will be included in its
annual report, which will be mailed to shareholders without charge upon request.
<PAGE>
HOW TO INVEST
Shares of the Fund may be purchased through the Transfer Agent by submitting
payment by check, bank wire or electronic (Automated Clearing House or "ACH")
transfer and, in the case of new accounts, a completed account application form.
There is no sales load or contingent deferred sales load charged to purchase
shares of the Fund. All orders for the purchase of shares are subject to
acceptance or rejection by the Board of Directors or the Advisor. Purchases of
shares are made at the current public offering price next determined after the
purchase order is received by the Transfer Agent or by a selling agent of the
Fund. A minimum initial investment of $250,000 is required to open a shareholder
account. Investments not meeting the minimum will be returned. The minimum
initial investment requirement may be waived in other instances at the sole
discretion of the Advisor. Each subsequent investment in the Fund must be $5,000
or more.
Investors wishing to open a new account by bank wire must call the Transfer
Agent at 800-548-4539 to obtain an account number and detailed wire
instructions. Bank wire instructions are also provided in the last section of
this Prospectus. All bank wire investments received before 4:00 p.m., Eastern
time, will be credited the same day. Bank wire investments received after 4:00
p.m., Eastern time, will be credited the next business day. A bank wire
investment is considered received when the Transfer Agent is notified that the
bank wire has been credited to its account.
Shares of the Fund may also be purchased through broker-dealers or other
financial intermediaries who have made appropriate arrangements with the Fund.
Such agents are responsible for ensuring that the account documentation is
complete and that timely payment is made for the Fund shares purchased for their
customers pursuant to such orders. These agents may charge a reasonable
transaction fee to their customers. In some instances, all or a portion of the
transaction fee may be paid by the Advisor. To the extent these agents perform
shareholder servicing activities for the Fund, they may receive fees from the
Fund or the Advisor for such services.
From time to time the Advisor may engage third parties as "finders" for the
purpose of soliciting potential investors. Such parties may be compensated by
the Advisor to do so.
As a condition of this offering, if an order to purchase shares is cancelled due
to nonpayment (for example, a check returned for "insufficient funds"), the
person who made the order will be subject to a $20 charge and must reimburse the
Fund for any loss incurred by reason of such cancellation. For more information,
see "Other Investment and Redemption Services" in the Statement of Additional
Information.
Funds Distributor, Inc., 60 State Street, Suite 1300, Boston, Massachusetts
02109, is the principal underwriter for the Fund.
<PAGE>
SHAREHOLDER ACCOUNT SERVICES AND PRIVILEGES
Statements and Reports. When a shareholder makes an initial investment in the
Fund, a shareholder account is opened in accordance with registration
instructions. Each time there is a transaction, such as an additional
investment, a dividend or other distribution, or a redemption, the shareholder
will receive from the Transfer Agent a confirmation statement showing the
current transaction in the account and the transaction date. Shareholders of the
Fund will receive statements as of the end of March, June, September and
December.
Shares are issued only in book-entry form (without certificates).
The fiscal year of the Fund ends on October 31 of each year. The Investment
Company issues to its shareholders semi-annual and annual reports, which contain
a schedule of the Fund's portfolio securities and financial statements. Annual
reports will include audited financial statements. The federal income tax status
of shareholder distributions also will be reported to the Fund's shareholders
after the end of the calendar year on Form 1099-DIV.
Exchanges Between Funds. Shares of one Fremont Fund may be exchanged for shares
of another Fremont Fund at their respective net asset values, provided that the
account registration remains identical. Exchanges may only be made for shares of
a Fremont Fund then offered for sale in your state of residence. These exchanges
are not tax-free and will result in a shareholder realizing a gain or loss for
tax purposes, except in the case of tax-deferred retirement accounts or other
tax-exempt shareholders that have not borrowed to acquire the shares exchanged.
Any exchanges into the Fremont Institutional U.S. Micro-Cap Fund must meet the
account minimums.
Exchanges by mail should be sent to the Transfer Agent at the address set forth
in the last section of this Prospectus.
Purchases, redemptions and exchanges should be made for investment purposes
only. A pattern of frequent exchanges, purchases and sales is not acceptable
and, at the discretion of the Board of Directors, can be limited by the
Investment Company's refusal to accept further purchase and exchange orders from
the shareholder.
The Investment Company reserves the right to modify or eliminate the exchange
privilege upon 60 days' written notice to shareholders.
Telephone Exchange Privilege. An investor may elect on the account application
to authorize exchanges by telephone. A shareholder may give instructions
regarding exchanges by calling 800-548-4539. A shareholder wishing to initiate
the telephone exchange privilege should contact the Fund. This privilege will
not be added to an account without written instruction to do so from the
shareholder. Telephone requests received by 4:00 p.m., Eastern time, will be
processed the same day. During times of drastic economic or market conditions,
the telephone exchange privilege may be difficult to implement. The Transfer
Agent will make its best effort to accommodate shareholders when its telephone
lines are used to capacity. Under these circumstances, a shareholder should
consider using overnight mail to send a written exchange request.
See "Telephone Redemption Privilege" in the next section of this Prospectus.
<PAGE>
Automatic Investment Plan. After a minimum initial investment is made, a
shareholder may authorize a withdrawal to be made automatically once or twice
each month from a credit balance in the shareholder's bank checking, savings,
negotiable on withdrawal (NOW), or similar account, with the proceeds to be used
to purchase shares of the Fund. The amount of the monthly investment must be at
least $50. There is no obligation to make additional payments, and the plan may
be terminated by the shareholder at any time. Termination requests must be
received in writing at least 5 days prior to the regular draft date, or the
drafts will not cease until the next cycle. The Transfer Agent may impose a
charge for this service, although no such charge currently is contemplated. If a
shareholder's order to purchase shares is cancelled due to nonpayment (for
example, "insufficient funds"), the shareholder's account will be subject to a
$20 charge and the shareholder will be responsible for reimbursing the Fund for
any loss incurred by reason of such cancellation. A shareholder wishing to
initiate the plan on a new or existing account must fill out an Automatic
Investment Plan form. The form is available on request.
HOW TO REDEEM SHARES
Shares are redeemed at no charge (other than wire transfer fees, if any) at the
net asset value next determined after receipt by the Transfer Agent of proper
written redemption instructions. The current charge for a wire transfer is $8
per wire. This is subject to change by the Transfer Agent at any time, without
prior notification. See "Calculation of Net Asset Value and Public Offering
Price."
Redemption orders received in proper form by the Transfer Agent before 4:00
p.m., Eastern time, will be priced at the net asset value determined on that day
(with certain limited exceptions discussed in the Statement of Additional
Information). Orders received by the Transfer Agent after 4:00 p.m., Eastern
time, will be entered at the next calculated net asset value.
Redemption proceeds can be sent by check, electronic transfer, or bank wire. An
electronic transfer can be processed only to bank checking and savings accounts.
Before requesting an electronic transfer, shareholders should confirm that their
financial institution can receive an electronic transfer. Currently, there is no
charge to shareholders for processing an electronic transfer.
Shareholders may have redemption proceeds sent by bank wire, electronic
transfer, or check to a designated bank account by providing in writing the
appropriate bank information to the Transfer Agent at the time of original
application. If the investor wishes to change the predesignated account, this
must be requested in writing with a signature guarantee (see "Signature
Guarantee" below).
Redemptions from retirement accounts require a written request, with a signature
guarantee, unless authorized under the Automatic Withdrawal Plan. Call the
Transfer Agent for specific instructions on redemptions.
<PAGE>
For written redemption requests that direct proceeds to a party other than the
registered account owner(s), all signatures must be guaranteed (see "Signature
Guarantee" below).
Because of market fluctuations, the amount a shareholder receives for shares
redeemed may be more or less than the amount paid for them. Redemption of shares
and exchanges may result in taxable capital gains or losses.
Telephone Redemption Privilege. An investor may elect on the regular account
application to authorize redemptions by telephone. This privilege will not be
added to an account without written authorization to do so from the shareholder.
A shareholder may then give instructions regarding redemptions by calling
800-548-4539. Telephone requests received by 4:00 p.m., Eastern time, will be
processed at the net asset value calculated that same day. During times of
drastic economic or market conditions, the telephone redemption privilege may be
difficult to implement. The Transfer Agent will make its best effort to
accommodate shareholders when its telephone lines are used to capacity. Under
these circumstances, a shareholder should consider using overnight mail to send
a written redemption request.
Neither the Investment Company, the Transfer Agent, nor their respective
affiliates, will be liable for complying with telephone instructions they
reasonably believe to be genuine or for any loss, damage, cost or expense in
acting on such telephone instructions. The affected shareholder(s) will bear the
risk of any such loss. The Investment Company, or the Transfer Agent, or both,
will employ reasonable procedures to determine that telephone instructions are
genuine. If the Investment Company and/or the Transfer Agent do not employ such
procedures, they may be liable for losses due to unauthorized or fraudulent
instructions. These procedures may include, among others, requiring forms of
personal identification prior to acting upon telephone instructions, providing
written confirmation of the transactions, and/or tape recording telephone
instructions.
Automatic Withdrawal Plan. A shareholder may request redemptions of a specified
dollar amount (minimum of $100) on either a monthly, quarterly, or yearly basis.
Currently, there is no charge for this service. Redemptions will be made on the
last business day of the month. Because a redemption constitutes a liquidation
of shares, the number of shares owned in the account will be reduced.
Shareholders may terminate the Automatic Withdrawal Plan at any time, but not
less than five days before a scheduled payment date. When an exchange is made
between Funds, shareholders must specify if they desire the automatic withdrawal
option to be transferred to a new account opened by the exchange. As an account
balance declines to the minimum permitted, the shareholder must advise the
Transfer Agent if the automatic withdrawal feature is to be transferred to
another account of the shareholder. Shareholders should note that if there is an
Automatic Withdrawal Plan established for an account and the entire account is
exchanged into another Fremont Fund, the automatic withdrawal option must be
renewed by written request to the Transfer Agent. A shareholder wishing to
initiate automatic redemptions must complete an Automatic Withdrawal Plan form
available from the Transfer Agent.
<PAGE>
Signature Guarantee. To better protect the Fund and shareholders' accounts, a
signature guarantee is required for certain transactions. Signatures must be
guaranteed by an "eligible guarantor institution" as defined in applicable
regulations. Eligible guarantor institutions include banks, brokers, dealers,
credit unions, national securities exchanges, registered securities
associations, clearing agencies and savings associations. Signature guarantees
will be accepted from any eligible guarantor institution which participates in a
signature guarantee program. A notary public is not an acceptable guarantor.
Other Important Redemption Information. A request for redemption will not be
processed until all of the documentation described above has been received by
the Transfer Agent in proper form. A shareholder in doubt about what documents
are required should contact the Transfer Agent.
Payment in redemption of shares is normally made within three business days
after receipt by the Transfer Agent of a request in proper form, provided that
payment in redemption of shares purchased by check or draft will be effected
only after such check or draft has been collected. Although it is anticipated
that this process will be completed in less time, it may take up to 15 days.
Redemption proceeds will not be delayed when shares have been paid for by bank
wire or where the account holds a sufficient number of shares already paid for
with collected funds.
Except in extraordinary circumstances, payment for shares redeemed will be made
promptly after receipt of a redemption request, if in good order, but not later
than seven calendar days after the redemption request is received in proper
form. Requests for redemption which are subject to any special conditions or
which specify an effective date other than as provided herein cannot be
accepted.
Redemption In Kind. The Investment Company reserves the right, if conditions
exist which make cash payments undesirable, to honor any request for redemption
or repurchase order by making payment in whole or in part in readily marketable
securities chosen by the Fund and valued as they are for purposes of computing
the Fund's net asset value (a redemption in kind). If payment is made in
securities, a shareholder may incur transaction expenses in converting these
securities into cash.
Transfer Agent. Countrywide Fund Services, Inc., P.O. Box 5354, Cincinnati,
Ohio 45201-5354, has been retained by the Advisor to serve as the Fund's
transfer agent, dividend paying and shareholder service agent. Countrywide Fund
Services, Inc. is an indirect wholly-owned subsidiary of Countrywide Credit
Industries, Inc., a New York Stock Exchange listed company principally engaged
in residential mortgage lending.
<PAGE>
RETIREMENT PLANS
Shares of the Fund may be purchased in connection with various tax-deferred
retirement plans. These include Individual Retirement Accounts (IRAs); SEP-IRAs;
SIMPLE IRAs; Qualified Retirement Plans for self-employed persons and their
employees; corporate pension and profit-sharing plans; and Section 403(b) Plans,
which are deferred compensation arrangements for employees of public schools and
certain charitable organizations. Forms for establishing IRAs, SEP-IRAs, SIMPLE
IRAs, and Qualified Retirement Plans are available through the Investment
Company, as are forms for corporate Pension and Profit-Sharing plans. Please
contact the Investment Company for more information about establishing these
accounts. In accordance with industry practice, there may be an annual account
charge for participation in these plans. Information regarding these charges is
available from the Investment Company.
Retirement plan participants may receive additional services related to their
plan at no extra cost to any shareholder.
DIVIDENDS, DISTRIBUTIONS AND FEDERAL INCOME TAXATION
The Fund intends to qualify and elect, and to continue to qualify, to be treated
as a "regulated investment company" under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"). For any tax year in which the Fund so
qualifies and meets certain other distribution requirements, it will not incur a
federal tax liability. Such qualification under the Code requires a Fund to
diversify its investments so that, at the end of each fiscal quarter, (1) at
least 50% of the market value of the Fund's assets is represented by cash, U.S.
government securities, securities of other regulated investment companies, and
other securities, limited, in respect to any one issuer, to an amount not
greater than 5% of the Fund's assets and 10% of the outstanding voting
securities of such issuer, and (2) not more than 25% of the value of its assets
is invested in the securities of any one issuer (other than U.S. government
securities or the securities of other regulated investment companies), or in two
or more issuers which the Fund controls and which are engaged in the same or
similar trades or businesses.
The Fund intends to distribute substantially all of its net investment income
once each year in October. As the assets in the post-venture fund of Fund A of
the Bechtel Trust & Thrift were transferred with unrealized appreciation,
shareholders could realize long-term capital gains if a distribution is
required.
<PAGE>
The Fund intends to distribute substantially all of its net realized capital
gains, if any, at the end of the calendar year (on or about December 15).
Dividend and capital gains distributions, if any, may be reinvested in
additional shares at net asset value on the day of reinvestment, or may be
received in cash. All dividends and distributions are taxable to a shareholder
(except tax-exempt shareholders who have not borrowed to acquire their shares)
whether or not they are reinvested in shares of the Fund. Any long-term capital
gains distributions are taxable to shareholders as long-term capital gains,
regardless of how long shareholders have held Fund shares. Distributions of
short-term capital gains will be subject to the tax as ordinary income.
Corporate investors may be entitled to the "dividends received" deduction on all
or a portion of the dividends paid by the Fund. Availability of the "dividends
received" deduction is subject to certain holding period and debt-financing
limitations.
Shareholders may elect:
o to have all dividends and capital gains distributions automatically
reinvested in additional shares; or
o to receive the income dividends and short-term capital gains distributions
in cash and accept the long-term capital gains distributions in additional
shares; or
o to receive all distributions of income dividends and capital gains in cash.
Automatic reinvestments will be at net asset value on the day of reinvestment.
If no election is made by a shareholder, all dividends and capital gains
distributions will be automatically reinvested. These elections may be changed
by the shareholder at any time, but to be effective for a particular dividend or
capital gains distribution, the election must be received by the Transfer Agent
approximately 5 business days prior to the payment date to permit the change to
be entered into the shareholder account. The federal income tax status of
dividends and capital gains distributions is the same whether taken in cash or
reinvested in shares.
Dividends and capital gains generally are taxable to shareholders at the time
they are paid. However, dividends or capital gains declared in October, November
or December by the Fund and paid in January are taxable as if paid in December.
The Fund will provide to its shareholders federal tax information annually by
January 31, including information about dividends and distributions paid during
the year.
<PAGE>
If a shareholder has not furnished a certified correct taxpayer identification
number (generally a Social Security number) and has not certified that
withholding does not apply, or if the Internal Revenue Service has notified the
Fund that the taxpayer identification number listed on the account is incorrect
according to their records or that the shareholder is subject to backup
withholding, federal law generally requires the Fund to withhold 31% from any
dividends and/or redemptions (including exchange redemptions to the
shareholder). Amounts withheld are applied to the shareholder's federal tax
liability; a refund may be obtained from the Internal Revenue Service if
withholding results in overpayment of taxes. A shareholder should contact the
Transfer Agent if the shareholder is uncertain whether a proper taxpayer
identification number is on file with the Transfer Agent. Federal law also
requires the Fund to withhold 30%, or the applicable tax treaty rate, from
ordinary dividends paid to certain nonresident alien, non-U.S. partnership and
non-U.S. corporation shareholder accounts. Long-term capital gains distributions
may be subject to this withholding.
Dividends and interest from foreign issuers earned by the Fund may give rise to
withholding and other taxes imposed by foreign countries, generally at rates
from 10% to 40%. Tax conventions between certain countries and the United States
may reduce or eliminate these taxes. Foreign countries generally do not impose
taxes on capital gains with respect to investments by non-resident investors.
Except as indicated below, to the extent that the Fund does pay foreign
withholding or other foreign taxes on certain of its investments, investors will
not be able to deduct their pro rata shares of such taxes in computing their
taxable income nor be able to take their shares of such taxes as a credit
against U.S. income taxes.
If more than 50% of the value of the Fund's total assets at the close of its
fiscal year consist of securities of foreign corporations, the Fund will be
eligible to file, and will file, elections with the Internal Revenue Service
pursuant to which shareholders of the Fund will be required to include in their
federal income tax returns as gross income their respective pro rata portions of
foreign taxes paid by the Fund, to treat such amounts as foreign taxes paid by
them, and to deduct such respective pro rata portions in computing their taxable
incomes, or, alternatively, to use them as foreign tax credits, (subject to
certain limitations) against their U.S. income taxes. The Fund will report
annually to its shareholders the amount per share of such withholding, if any.
The foregoing is a brief discussion of certain federal income tax
considerations. Please see "Taxes - Mutual Funds" in the Statement of Additional
Information for further information regarding the tax implications of an
investment in the Fund.
CALCULATION OF NET ASSET VALUE AND PUBLIC OFFERING PRICE
The Fund's net asset value per share is computed by dividing the value of the
securities held by the Fund, plus any cash or other assets (including interest
accrued and dividends declared but not yet received) minus all liabilities
(including accrued expenses), by the total number of shares outstanding at such
time. There is no sales charge in connection with purchases or redemptions of
Fund shares.
The Fund will calculate its net asset value and public offering price and
complete orders to purchase, exchange or redeem shares on a Monday through
Friday basis when the New York Stock Exchange is open. The Fund's portfolio may
include securities which trade primarily on non-U.S. exchanges or otherwise in
non-U.S. markets. Because of time zone differences, the prices of these
securities, as used for net asset value calculations, may be established
substantially in advance of the close of the New York Stock Exchange. Foreign
securities may also trade on days when the New York Stock Exchange is closed
(such as a Saturday). The net asset value and public offering price of the Fund,
to the extent that it holds securities valued on foreign markets, may vary
during periods when the New York Stock Exchange is closed. As a result, the
value of the Fund's portfolio may be affected significantly by such trading on
days when a shareholder has no access to the Fund. For further information, see
"How to Invest," "How to Redeem Shares" and "Exchanges Between Funds" in this
Prospectus, and "How to Invest" and "Other Investment and Redemption Services"
in the Statement of Additional Information.
The net asset value and public offering price of the Fund will be determined as
of the close of the regular session of the New York Stock Exchange. The shares
of the Fund are offered at net asset value without a sales charge. Purchase,
redemption and exchange orders received in proper form by the Transfer Agent
before 4:00 p.m., Eastern time, will be priced at the net asset value next
determined on that day (with certain limited exceptions discussed in the
Statement of Additional Information). Orders received by the Transfer Agent
after 4:00 p.m., Eastern time, will be entered at the next calculated net asset
value.
<PAGE>
EXECUTION OF PORTFOLIO TRANSACTIONS
Orders for the Fund's portfolio securities transactions are placed by the
Advisor or the Sub-Advisor. The Advisor and the Sub-Advisor strive to obtain the
best available prices in the Fund's portfolio transactions, taking into account
the costs and promptness of executions. Subject to this policy, transactions may
be directed to those broker-dealers who provide research, statistical and other
information to the Fund, the Advisor or the Sub-Advisor or who provide
assistance with respect to the distribution of Fund shares. There is no
agreement or commitment to place orders with any broker-dealer.
Debt securities are generally traded on a "net" basis with a dealer acting as
principal for its own account without a stated commission, although the price of
the security usually includes a profit to the dealer. Government securities
issued by the United States and other countries and money market securities in
which the Fund may invest are generally traded in the OTC markets. In
underwritten offerings, securities usually are purchased at a fixed price which
includes an amount of compensation to the underwriter, generally referred to as
the underwriter's concession or discount. On occasion, securities may be
purchased directly from an issuer, in which case no commissions or discounts are
paid. Dealers may receive commissions on futures, currency and options
transactions. Commissions or discounts in foreign securities exchanges or OTC
markets typically are fixed and generally are higher than those in U.S.
securities exchanges or OTC markets. There is generally less government
supervision and regulation of foreign exchanges and brokers than in the United
States. Foreign security settlements may, in some instances, be subject to
delays and related administrative uncertainties.
Subject to the requirements of the 1940 Act and procedures adopted by the Board
of Directors, the Fund may execute portfolio transactions through any broker or
dealer and pay brokerage commissions to a broker which is an affiliated person
of the Investment Company, the Advisor, or an affiliated person of such person.
GENERAL INFORMATION
The Investment Company, organized as a Maryland corporation on July 13, 1988, is
a fully managed open-end investment company. Currently, the Investment Company
has authorized several series of capital stock with equal dividend and
liquidation rights within each series. Investment Company shares are entitled to
one vote per share (with proportional voting for fractional shares) and are
freely transferable. Shareholders have no preemptive or conversion rights.
Shares may be voted in the election of directors and on other matters submitted
to the vote of shareholders. As permitted by Maryland law, there normally will
be no annual meeting of shareholders in any year, except as required under the
1940 Act. The 1940 Act requires that a meeting be held within 60 days in the
event that less than a majority of the directors holding office has been elected
by shareholders. Directors shall continue to hold office until their successors
are elected and have qualified. Investment Company shares do not have cumulative
voting rights, which means that the holders of a majority of the shares voting
for the election of directors can elect all of the directors. Shareholders
holding 10% of the outstanding shares may call a meeting of shareholders for any
purpose, including that of removing any director. A director may be removed upon
a majority vote of the shareholders qualified to vote in the election. The 1940
Act requires the Investment Company to assist shareholders in calling such a
meeting.
On any matter submitted to a vote of shareholders, such matter shall be voted by
the Fund's shareholders separately when the matter affects the specific interest
of the Fund (such as approval of the Advisory Agreement with the Advisor) except
in matters where a vote of all series in the aggregate is required by the 1940
Act or otherwise.
<PAGE>
Pursuant to the Articles of Incorporation, the Investment Company may issue ten
billion shares. This amount may be increased or decreased from time to time in
the discretion of the Board of Directors. Each share of a series represents an
interest in that series only, has a par value of $0.0001 per share, represents
an equal proportionate interest in that series with other shares of that series
and is entitled to such dividends and distributions out of the income earned on
the assets belonging to that series as may be declared at the discretion of the
Board of Directors. Shares of a series when issued are fully paid and are
non-assessable. The Board of Directors may, at its discretion, establish and
issue shares of additional series of the Investment Company.
Stephen D. Bechtel, Jr., and members of his family, including trusts for family
members, due to their shareholdings, may be considered controlling persons of
the Fund under applicable Securities and Exchange Commission regulations.
<PAGE>
TELEPHONE NUMBERS AND ADDRESSES To make an initial purchase:
1. By mail:
Fremont Mutual Funds, Inc.
c/o Countrywide Fund Services, Inc.
P.O. Box 5354
Cincinnati, OH 45201-5354
Street address:
312 Walnut Street, 21st Floor
Cincinnati, OH 45202-3874
2. By wire:
Via the Federal Reserve Bank Wire System to:
Fifth CIN
(Fifth Third Bank)
ABA No. 042000314
Credit to: Fremont Mutual Funds, Inc.
Account No. 999-36844
Further Credit to: Fremont Fund Name, shareholder name, and account
number To make a subsequent purchase: Include shareholder name and account
number. Use the same instructions for initial purchase.
To redeem shares:
1. By mail: same instructions as above for purchase by mail. Redemptions
requesting payments to a party or address other than registered on
the account require a signature guarantee. See "Signature Guarantees."
2. By telephone: 800-548-4539
Requires prior selection of telephone redemption option.
For further copies of this Prospectus, the Statement of Additional Information,
and details of automatic investment, retirement, and automatic withdrawal plans,
please contact:
Fremont Mutual Funds, Inc.
50 Beale Street, Suite 100
San Francisco, CA 94105
800-548-4539 or 415-284-8900
Fremont Mutual Funds, Inc.
Fremont Money Market Fund
Fremont California Intermediate Tax-Free Fund
Fremont Bond Fund
Fremont Growth Fund
Fremont Global Fund
Fremont International Growth Fund
Fremont International Small Cap Fund
Fremont Emerging Markets Fund
Fremont U.S. Micro-Cap Fund
Fremont Institutional U.S. Micro-Cap Fund
<PAGE>
For more information on the Fremont Family of Mutual Funds please call
800-548-4539 or write to:
Fremont Mutual Funds, Inc.
50 Beale Street, Suite 100
San Francisco, CA 94105
Advisor/Transfer Agent
Fremont Investment Advisors, Inc.
333 Market Street, Suite 2600
San Francisco, CA 94105
Sub-Transfer Agent
Mailing Address:
Countrywide Fund Services, Inc.
P.O. Box 5354
Cincinnati, OH 45201-5354
800-548-4539
Street Address:
Countrywide Fund Services, Inc.
312 Walnut Street, 21st Floor
Cincinnati, OH 45202-3874
Custodian
The Northern Trust Company
50 South LaSalle Street
Chicago, IL 60675
Legal Counsel
Paul, Hastings, Janofsky & Walker
345 California Street, 20th Floor
San Francisco, CA 94104
Auditors
Coopers & Lybrand L.L.P.
333 Market Street
San Francisco, CA 94105
No dealer, salesman, or other person has been authorized to give any information
or to make any representation not contained in this Prospectus and, if given or
made, such information or representation must not be relied upon as having been
authorized by the Fund or the Advisor. This Prospectus does not constitute an
offer to sell or a solicitation of any offer to buy any of the securities
offered hereby in any jurisdiction to any person to whom it is unlawful to make
such offer in such jurisdiction.
<PAGE>
FREMONT MUTUAL FUNDS, INC.
FREMONT INSTITUTIONAL U.S. MICRO-CAP FUND
TOLL-FREE: 1-800-548-4539
PART B
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information concerning Fremont Mutual Funds, Inc.
(the "Investment Company") is not a prospectus for the Investment Company. This
Statement supplements the Prospectus for the Fremont Institutional U.S.
Micro-Cap Fund (the "Fund") dated August 4, 1997 and should be read in
conjunction with the Prospectus. Copies of the Prospectus are available without
charge by calling the Investment Company at the phone number printed above.
The date of this Statement of Additional Information is August 4, 1997.
August 14, 1997
<PAGE>
TABLE OF CONTENTS
PAGE
INVESTMENT OBJECTIVE, POLICIES, AND RISK
CONSIDERATIONS............................................... 3
INVESTMENT RESTRICTIONS........................................ 20
INVESTMENT COMPANY DIRECTORS AND OFFICERS...................... 22
INVESTMENT ADVISORY AND OTHER SERVICES......................... 26
EXECUTION OF PORTFOLIO TRANSACTIONS............................ 30
HOW TO INVEST......................................... 31
OTHER INVESTMENT AND REDEMPTION SERVICES.............. 33
TAXES - MUTUAL FUNDS.................................. 34
ADDITIONAL INFORMATION................................ 37
INVESTMENT RESULTS.................................... 39
INFORMATION ABOUT FREMONT INVESTMENT ADVISORS...................48
APPENDIX A: DESCRIPTION OF RATINGS............................ A-1
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INVESTMENT OBJECTIVE, POLICIES, AND RISK CONSIDERATIONS
The descriptions below are intended to supplement the material in the Prospectus
under "Investment Objective, Policies, and Risk Considerations" and "General
Investment Policies."
WRITING COVERED CALL OPTIONS. The Fund may write (sell) "covered" call options
and purchase options to close out options previously written by the Fund. The
purpose of writing covered call options is to generate additional premium income
for the Fund. This premium income will serve to enhance the Fund's total return
and will reduce the effect of any price decline of the security or currency
involved in the option. Covered call options will generally be written on
securities and currencies which, in the opinion of Fremont Investment Advisors,
Inc. (the "Advisor"), are not expected to make any major price moves in the near
future but which, over the long term, are deemed to be attractive investments
for the Fund.
A call option gives the holder (buyer) the "right to purchase" a security or
currency at a specified price (the exercise price) at any time until a certain
date (the expiration date). So long as the obligation of the writer of a call
option continues, he may be assigned an exercise notice by the broker-dealer
through whom such option was sold, requiring him to deliver the underlying
security or currency against payment of the exercise price. This obligation
terminates upon the expiration of the call option, or such earlier time at which
the writer effects a closing purchase transaction by purchasing an option
identical to that previously sold. To secure his obligation to deliver the
underlying security or currency in the case of a call option, a writer is
required to deposit in escrow the underlying security or currency or other
assets in accordance with the rules of the Options Clearing Corporation. The
Fund will write only covered call options. This means that the Fund will only
write a call option on a security, index, or currency which the Fund already
effectively owns or has the right to acquire without additional cost.
Portfolio securities or currencies on which call options may be written will be
purchased solely on the basis of investment considerations consistent with the
Fund's investment objective. The writing of covered call options is a
conservative investment technique believed to involve relatively little risk (in
contrast to the writing of naked or uncovered options, which the Fund will not
do), but capable of enhancing the Fund's total return. When writing a covered
call option, the Fund, in return for the premium, gives up the opportunity for
profit from a price increase in the underlying security or currency above the
exercise price, but conversely retains the risk of loss should the price of the
security or currency decline. Unlike one who owns securities or currencies not
subject to an option, the Fund has no control over when it may be required to
sell the underlying securities or currencies, since it may be assigned an
exercise notice at any time prior to the expiration of its obligation as a
writer. If a call option which the Fund has written expires, the Fund will
realize a gain in the amount of the premium; however, such
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<PAGE>
gain may be offset by a decline in the market value of the underlying security
or currency during the option period. If the call option is exercised, the Fund
will realize a gain or loss from the sale of the underlying security or
currency. The security or currency covering the call will be maintained in a
separate account by the Fund's custodian. The Fund will consider a security or
currency covered by a call to be "pledged" as that term is used in its policy
which limits the pledging or mortgaging of its assets.
The premium received is the market value of an option. The premium the Fund will
receive from writing a call option will reflect, among other things, the current
market price of the underlying security or currency, the relationship of the
exercise price to such market price, the historical price volatility of the
underlying security or currency, and the length of the option period. Once the
decision to write a call option has been made, the Advisor, in determining
whether a particular call option should be written on a particular security or
currency, will consider the reasonableness of the anticipated premium and the
likelihood that a liquid secondary market will exist for those options. The
premium received by the Fund for writing covered call options will be recorded
as a liability in the Fund's statement of assets and liabilities. This liability
will be adjusted daily to the option's current market value, which will be the
latest sales price at the time at which the net asset value per share of the
Fund is computed (close of the regular trading session of the New York Stock
Exchange), or, in the absence of such sale, the latest asked price. The
liability will be extinguished upon expiration of the option, the purchase of an
identical option in a closing transaction, or delivery of the underlying
security or currency upon the exercise of the option.
Closing transactions will be effected in order to realize a profit on an
outstanding call option, to prevent an underlying security or currency from
being called, or to permit the sale of the underlying security or currency.
Furthermore, effecting a closing transaction will permit the Fund to write
another call option on the underlying security or currency with either a
different exercise price or expiration date or both. If the Fund desires to sell
a particular security or currency from its portfolio on which it has written a
call option, it will seek to effect a closing transaction prior to, or
concurrently with, the sale of the security or currency. There is, of course, no
assurance that the Fund will be able to effect such closing transactions at a
favorable price. If the Fund cannot enter into such a transaction, it may be
required to hold a security or currency that it might otherwise have sold, in
which case it would continue to be at market risk with respect to the security
or currency. The Fund will pay transaction costs in connection with the writing
of options to close out previously written options. Such transaction costs are
normally higher than those applicable to purchases and sales of portfolio
securities.
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<PAGE>
Call options written by the Fund will normally have expiration dates of less
than nine months from the date written. The exercise price of the options may be
below, equal to, or above the current market values of the underlying securities
or currencies at the time the options are written. From time to time, the Fund
may purchase an underlying security or currency for delivery in accordance with
an exercise notice of a call option assigned to it, rather than delivering such
security or currency from its portfolio. In such cases, additional costs will be
incurred.
The Fund will realize a profit or loss from a closing purchase transaction if
the cost of the transaction is less or more than the premium received from the
writing of the option. Because increases in the market price of a call option
will generally reflect increases in the market price of the underlying security
or currency, any loss resulting from the repurchase of a call option is likely
to be offset in whole or in part by appreciation of the underlying security or
currency owned by the Fund.
FEDERAL INCOME TAX TREATMENT OF COVERED CALL OPTIONS. Expiration of an option or
entry into a closing purchase transaction will result in capital gain or loss.
If the option was "in-the-money" (i.e., the option strike price was less than
the market value of the security or currency covering the option) at the time it
was written, any gain or loss realized as a result of the closing purchase
transaction will be long-term capital gain or loss if the security or currency
covering the option was held for more than one year prior to the writing of the
option. The holding period of the securities or currencies covering an
"in-the-money" option will not include the period of time the option is
outstanding. If the option is exercised, the Fund will realize a gain or loss
from the sale of the security or currency covering the call option, and in
determining such gain or loss the premium will be included in the proceeds of
the sale.
If the Fund writes options other than "qualified covered call options," as
defined in the Internal Revenue Code of 1986, as amended (the "Code"), any
losses on such options transactions, to the extent they do not exceed the
unrealized gains on the securities or currencies covering the options, may be
subject to deferral until the securities or currencies covering the options have
been sold. In addition, any options written against securities other than bonds
or currencies will be considered to have been closed out at the end of the
Fund's fiscal year, and any gains or losses will be recognized for tax purposes
at that time. Under Code Section 1256, such gains or losses would be
characterized as 60% long-term capital gain or loss and 40% short-term capital
gain or loss. Code Section 988 may also apply to currency transactions. Under
Section 988, each foreign currency gain or loss is generally computed separately
and treated as ordinary income or loss. In the case of overlap between Sections
1256 and 988, special provisions determine the character and timing of any
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<PAGE>
income, gain, or loss. The Fund will attempt to monitor Section 988 transactions
to avoid an adverse tax impact.
WRITING COVERED PUT OPTIONS. The Fund may write covered put options. A put
option gives the purchaser of the option the right to sell, and the writer
(seller) has the obligation to buy, the underlying security or currency at the
exercise price during the option period. So long as the obligation of the writer
continues, the writer may be assigned an exercise notice by the broker-dealer
through whom such option was sold, requiring the writer to make payment of the
exercise price against delivery of the underlying security or currency. The
operation of put options in other respects, including their related risks and
rewards, is substantially identical to that of call options.
The Fund may write put options only on a covered basis, which means that the
Fund would maintain in a segregated account cash and liquid securities in an
amount not less than the exercise price at all times while the put option is
outstanding. (The rules of the Options Clearing Corporation currently require
that such assets be deposited in escrow to secure payment of the exercise
price.) The Fund would generally write covered put options in circumstances
where the Advisor wishes to purchase the underlying security or currency for the
Fund's portfolio at a price lower than the current market price of the security
or currency. In such event the Fund would write a put option at an exercise
price which, reduced by the premium received on the option, reflects the lower
price it is willing to pay. Since the Fund would also receive interest on debt
securities or currencies maintained to cover the exercise price of the option,
this technique could be used to enhance current return during periods of market
uncertainty. The risk in such a transaction would be that the market price of
the underlying security or currency would decline below the exercise price less
the premiums received.
PURCHASING PUT OPTIONS. The Fund may purchase put options. As the holder of a
put option, the Fund has the right to sell the underlying security or currency
at the exercise price at any time during the option period. The Fund may enter
into closing sale transactions with respect to such options, exercise them, or
permit them to expire. The Fund may purchase put options for defensive purposes
in order to protect against an anticipated decline in the value of its
securities or currencies. An example of such use of put options is provided
below.
The Fund may purchase a put option on an underlying security or currency (a
"protective put") owned as a defensive technique in order to protect against an
anticipated decline in the value of the security or currency. Such hedge
protection is provided only during the life of the put option when the Fund, as
the holder of the put option, is able to sell the underlying security or
currency at the put exercise price regardless of any decline in the underlying
security's market
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<PAGE>
price or currency's exchange value. For example, a put option may be purchased
in order to protect unrealized appreciation of a security or currency where the
Advisor deems it desirable to continue to hold the security or currency because
of tax considerations. The premium paid for the put option and any transaction
costs would reduce any capital gain otherwise available for distribution when
the security or currency is eventually sold.
The Fund may also purchase put options at a time when the Fund does not own the
underlying security or currency. By purchasing put options on a security or
currency it does not own, the Fund seeks to benefit from a decline in the market
price of the underlying security or currency. If the put option is not sold when
it has remaining value, and if the market price of the underlying security or
currency remains equal to or greater than the exercise price during the life of
the put option, the Fund will lose its entire investment in the put option. In
order for the purchase of a put option to be profitable, the market price of the
underlying security or currency must decline sufficiently below the exercise
price to cover the premium and transaction costs, unless the put option is sold
in a closing sale transaction.
The Fund will commit no more than 5% of its assets to premiums when purchasing
put options. The premium paid by the Fund when purchasing a put option will be
recorded as an asset in the Fund's statement of assets and liabilities. This
asset will be adjusted daily to the option's current market value, which will be
the latest sale price at the time at which the Fund's net asset value per share
is computed (close of trading on the New York Stock Exchange), or, in the
absence of such sale, the latest bid price. The asset will be extinguished upon
expiration of the option, the selling (writing) of an identical option in a
closing transaction, or the delivery of the underlying security or currency upon
the exercise of the option.
PURCHASING CALL OPTIONS. The Fund may purchase call options. As the holder of a
call option, the Fund has the right to purchase the underlying security or
currency at the exercise price at any time during the option period. The Fund
may enter into closing sale transactions with respect to such options, exercise
them, or permit them to expire. The Fund may purchase call options for the
purpose of increasing its current return or avoiding tax consequences which
could reduce its current return. The Fund may also purchase call options in
order to acquire the underlying securities or currencies. Examples of such uses
of call options are provided below.
Call options may be purchased by the Fund for the purpose of acquiring the
underlying securities or currencies for its portfolio. Utilized in this fashion,
the purchase of call options enables the Fund involved to acquire the securities
or currencies at the exercise price of the call option plus the premium paid. At
times the net cost of
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acquiring securities or currencies in this manner may be less than the cost of
acquiring the securities or currencies directly. This technique may also be
useful to the Fund in purchasing a large block of securities that would be more
difficult to acquire by direct market purchases. So long as it holds such a call
option rather than the underlying security or currency itself, the Fund is
partially protected from any unexpected decline in the market price of the
underlying security or currency and in such event could allow the call option to
expire, incurring a loss only to the extent of the premium paid for the option.
The Fund will commit no more than 5% of its assets to premiums when purchasing
call options. The Fund may also purchase call options on underlying securities
or currencies it owns in order to protect unrealized gains on call options
previously written by it. A call option would be purchased for this purpose
where tax considerations make it inadvisable to realize such gains through a
closing purchase transaction. Call options may also be purchased at times to
avoid realizing losses that would result in a reduction of the Fund's current
return. For example, where the Fund has written a call option on an underlying
security or currency having a current market value below the price at which such
security or currency was purchased by the Fund, an increase in the market price
could result in the exercise of the call option written by the Fund and the
realization of a loss on the underlying security or currency with the same
exercise price and expiration date as the option previously written.
DESCRIPTION OF FUTURES CONTRACTS. A Futures Contract provides for the future
sale by one party and purchase by another party of a specified amount of a
specific financial instrument (security or currency) for a specified price at a
designated date, time, and place. Brokerage fees are incurred when a Futures
Contract is bought or sold and margin deposits must be maintained.
Although Futures Contracts typically require future delivery of and payment for
financial instruments or currencies, the Futures Contracts are usually closed
out before the delivery date. Closing out an open Futures Contract sale or
purchase is effected by entering into an offsetting Futures Contract purchase or
sale, respectively, for the same aggregate amount of the identical type of
financial instrument or currency and the same delivery date. If the offsetting
purchase price is less than the original sale price, the Fund realizes a gain;
if it is more, the Fund realizes a loss. Conversely, if the offsetting sale
price is more than the original purchase price, the Fund realizes a gain; if it
is less, the Fund realizes a loss. The transaction costs must also be included
in these calculations. There can be no assurance, however, that the Fund will be
able to enter into an offsetting transaction with respect to a particular
Futures Contract at a particular time. If the Fund is not able to enter into an
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<PAGE>
offsetting transaction, the Fund will continue to be required to maintain the
margin deposits on the Contract.
As an example of an offsetting transaction in which the financial instrument or
currency is not delivered, the contractual obligations arising from the sale of
one Contract of September Treasury Bills on an exchange may be fulfilled at any
time before delivery of the Contract is required (e.g., on a specified date in
September, the "delivery month") by the purchase of one Contract of September
Treasury Bills on the same exchange. In such instance the difference between the
price at which the Futures Contract was sold and the price paid for the
offsetting purchase, after allowance for transaction costs, represents the
profit or loss to the Fund.
The Fund may enter into interest rate, S&P Index (or other major market index),
or currency Futures Contracts as a hedge against changes in prevailing levels of
stock values, interest rates, or currency exchange rates in order to establish
more definitely the effective return on securities or currencies held or
intended to be acquired by the Fund. The Fund's hedging may include sales of
Futures as an offset against the effect of expected increases in currency
exchange rates, purchases of such Futures as an offset against the effect of
expected declines in currency exchange rates, and purchases of Futures in
anticipation of purchasing underlying index stocks prior to the availability of
sufficient assets to purchase such stocks or to offset potential increases in
the prices of such stocks. When selling options or Futures Contracts, the Fund
will segregate cash and liquid securities to cover any related liability.
The Fund will not enter into Futures Contracts for speculation and will only
enter into Futures Contracts which are traded on national futures exchanges and
are standardized as to maturity date and underlying financial instrument. The
principal Futures exchanges in the United States are the Board of Trade of the
City of Chicago and the Chicago Mercantile Exchange. Futures exchanges and
trading are regulated under the Commodity Exchange Act by the Commodity Futures
Trading Commission. Futures are also traded in various overseas markets.
Although techniques other than sales and purchases of Futures Contracts could be
used to reduce the Fund's exposure to currency exchange rate fluctuations, the
Fund may be able to hedge its exposure more effectively and perhaps at a lower
cost through using Futures Contracts.
The Fund will not enter into a Futures Contract if, as a result thereof, more
than 5% of the Fund's total assets (taken at market value at the time of
entering into the contract) would be committed to "margin" (down payment)
deposits on such Futures Contracts.
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A Stock Index contract such as the S&P 500 Stock Index Contract, for example, is
an agreement to take or make delivery at a specified future date of an amount of
cash equal to $500 multiplied by the difference between the value of the Stock
Index at purchase and at the close of the last trading day of the contract. In
order to close long positions in the Stock Index contracts prior to their
settlement date, the Fund will enter into offsetting sales of Stock Index
contracts.
Using Stock Index contracts in anticipation of market transactions involves
certain risks. Although the Fund may intend to purchase or sell Stock Index
contracts only if there is an active market for such contracts, no assurance can
be given that a liquid market will exist for the contracts at any particular
time. In addition, the price of Stock Index contracts may not correlate
perfectly with the movement in the Stock Index due to certain market
distortions. Due to the possibility of price distortions in the futures market
and because of the imperfect correlation between movements in the Stock Index
and movements in the price of Stock Index contracts, a correct forecast of
general market trends may not result in a successful anticipatory hedging
transaction.
FUTURES CONTRACTS GENERALLY. Persons who trade in Futures Contracts may be
broadly classified as "hedgers" and "speculators." Hedgers, such as the Fund,
whose business activity involves investment or other commitments in debt
securities, equity securities, or other obligations, use the Futures markets
primarily to offset unfavorable changes in value that may occur because of
fluctuations in the value of the securities and obligations held or expected to
be acquired by them or fluctuations in the value of the currency in which the
securities or obligations are denominated. Debtors and other obligers may also
hedge the interest cost of their obligations. The speculator, like the hedger,
generally expects neither to deliver nor to receive the financial instrument
underlying the Futures Contract, but, unlike the hedger, hopes to profit from
fluctuations in prevailing interest rates, securities prices, or currency
exchange rates.
A public market exists in Futures Contracts covering foreign financial
instruments such as U.K. Pound, Japanese Yen, and German Mark, among others.
Additional Futures Contracts may be established from time to time as various
exchanges and existing Futures Contract markets may be terminated or altered as
to their terms or methods of operation.
The Fund's Futures transactions will be entered into for traditional hedging
purposes; that is, Futures Contracts will be sold to protect against a decline
in the price of securities or currencies that the Fund owns, or Futures
Contracts will be purchased to protect the Fund against an increase in the price
of securities or currencies it has a fixed commitment to purchase.
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"Margin" with respect to Futures and Futures Contracts is the amount of funds
that must be deposited by the Fund with a broker in order to initiate Futures
trading and to maintain the Fund's open positions in Futures Contracts. A margin
deposit ("initial margin") is intended to assure the Fund's performance of the
Futures Contract. The margin required for a particular Futures Contract is set
by the exchange on which the Contract is traded, and may be significantly
modified from time to time by the exchange during the term of the Contract.
Futures Contracts are customarily purchased and sold on margins that may range
upward from less than 5% of the value of the Contract being traded.
If the price of an open Futures Contract changes (by increase in the case of a
sale or by decrease in the case of a purchase) so that the loss on the Futures
Contract reaches a point at which the margin on deposit does not satisfy margin
requirements, the broker will require an increase in the margin deposit ("margin
variation"). However, if the value of a position increases because of favorable
price changes in the Futures Contract so that the margin deposit exceeds the
required margin, the broker will pay the excess to the Fund. In computing daily
net asset values, the Fund will mark to market the current value of its open
Futures Contracts. The Fund expects to earn interest income on its margin
deposits.
The prices of Futures Contracts are volatile and are influenced, among other
things, by actual and anticipated changes in interest rates, which in turn are
affected by fiscal and monetary policies and national and international
political and economic events.
At best, the correlation between changes in prices of Futures Contracts and of
the securities or currencies being hedged can be only approximate. The degree of
imperfection of correlation depends upon circumstances such as: variations in
speculative market demand for Futures and for securities or currencies,
including technical influences in Futures trading; and differences between the
financial instruments being hedged and the instruments underlying the standard
Futures Contracts available for trading, with respect to interest rate levels,
maturities, and creditworthiness of issuers. A decision of whether, when, and
how to hedge involves skill and judgment, and even a well-conceived hedge may be
unsuccessful to some degree because of unexpected market behavior or interest
rate trends.
Because of the low margin deposits required, Futures trading involves an
extremely high degree of leverage. As a result, a relatively small price
movement in a Futures Contract may result in immediate and substantial loss or
gain to the investor. For example, if at the time of purchase, 10% of the value
of the Futures Contract is deposited as margin, a subsequent 10% decrease in the
value of the Futures Contract would result in a total loss of the margin
deposit, before any deduction for the transaction costs, if the account were
then closed
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out. A 15% decrease would result in a loss equal to 150% of the original margin
deposit, if the Contract were closed out. Thus, a purchase or sale of a Futures
Contract may result in losses in excess of the amount invested in the Futures
Contract. However, the Fund would presumably have sustained comparable losses
if, instead of the Futures Contract, it had invested in the underlying financial
instrument and sold it after the decline. Furthermore, in the case of a Futures
Contract purchase, in order to be certain that the Fund has sufficient assets to
satisfy its obligations under a Futures Contract, the Fund segregates and
commits to back the Futures Contract with money market instruments equal in
value to the current value of the underlying instrument less the margin deposit.
Most United States Futures exchanges limit the amount of fluctuation permitted
in Futures Contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a Futures Contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
Contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures Contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of Futures positions and
subjecting some Futures traders to substantial losses.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS. Except for transactions the Fund
identified as hedging transactions, the Fund is required for federal income tax
purposes to recognize as income for each taxable year its net unrealized gains
and losses on Futures Contracts as of the end of the year as well as those
actually realized during the year. Identified hedging transactions would not be
subject to the mark to market rules and would result in the recognition of
ordinary gain or loss. Otherwise, unless transactions in Futures Contracts are
classified as part of a "mixed straddle," any gain or loss recognized with
respect to a Futures Contract is considered to be 60% long-term capital gain or
loss and 40% short-term capital gain or loss, without regard to the holding
period of the Contract. In the case of a Futures transaction classified as a
"mixed straddle," the recognition of losses may be deferred to a later taxable
year.
Sales of Futures Contracts which are intended to hedge against a change in the
value of securities or currencies held by the Fund may affect the holding period
of such securities or currencies and, consequently, the nature of the gain or
loss on such securities or currencies upon disposition.
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In order for the Fund to continue to qualify for federal income tax treatment as
a regulated investment company, at least 90% of its gross income for a taxable
year must be derived from qualifying income, i.e., dividends, interest, income
derived from loans of securities, and gains from the sale of securities or
currencies. In addition, gains realized on the sale or other disposition of
securities or currencies held for less than three months must be limited to less
than 30% of the Fund's annual gross income. It is anticipated that any net gain
realized from the closing out of Futures Contracts will be considered gain from
the sale of securities or currencies and therefore be qualifying income for
purposes of the 90% requirement. In order to avoid realizing excessive gains on
securities or currencies held less than three months, the Fund may be required
to defer the closing out of Futures Contracts beyond the time when it would
otherwise be advantageous to do so. It is anticipated that unrealized gains on
Futures Contracts, which have been open for less than three months as of the end
of the Investment Company's fiscal year and which are recognized for tax
purposes, will not be considered gains on securities or currencies held less
than three months for purposes of the 30% test.
The Fund will distribute to shareholders annually any net long-term capital
gains which have been recognized for federal income tax purposes (including
unrealized gains at the end of the Investment Company's fiscal year) on Futures
transactions. Such distributions will be combined with distributions of capital
gains realized on the Fund's other investments and shareholders will be advised
of the nature of the payments.
OPTIONS ON INTEREST RATE AND/OR CURRENCY FUTURES CONTRACTS. Options on Futures
Contracts are similar to options on fixed income or equity securities or options
on currencies, except that options on Futures Contracts give the purchaser the
right, in return for the premium paid, to assume a position in a Futures
Contract (a long position if the option is a call and a short position if the
option is a put), rather than to purchase or sell the Futures Contract, at a
specified exercise price at any time during the period of the option. Upon
exercise of the option, the delivery of the Futures position by the writer of
the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's Futures margin account which represents the
amount by which the market price of the Futures Contract, at exercise, exceeds
(in the case of a call) or is less than (in the case of a put) the exercise
price of the option on the Futures Contract. If an option is exercised on the
last trading day prior to the expiration date of the option, the settlement will
be made entirely in cash equal to the difference on the expiration date between
the exercise price of the option and the closing level of the securities or
currencies upon which the Futures Contracts are based.
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Purchasers of options who fail to exercise their options prior to the exercise
date suffer a loss of the premium paid.
As an alternative to purchasing call and put options on Futures, the Fund may
purchase call and put options on the underlying securities or currencies. Such
options would be used in a manner identical to the use of options on Futures
Contracts. To reduce or eliminate the leverage then employed by the Fund or to
reduce or eliminate the hedge position then currently held by the Fund, the Fund
may seek to close out an option position by selling an option covering the same
securities or contract and having the same exercise price and expiration date.
FORWARD CURRENCY AND OPTIONS TRANSACTIONS. A forward currency contract is an
obligation to purchase or sell a currency against another currency at a future
date and price as agreed upon by the parties. The Fund may either accept or make
delivery of the currency at the maturity of the forward contract or, prior to
maturity, enter into a closing transaction involving the purchase or sale of an
offsetting contract. The Fund typically engages in forward currency transactions
in anticipation of, or to protect itself against, fluctuations in exchange
rates. The Fund might sell a particular currency forward, for example, when it
wanted to hold bonds denominated in that currency but anticipated, and sought to
be protected against, a decline in the currency against the U.S. dollar.
Similarly, the Fund might purchase a currency forward to "lock in" the dollar
price of securities denominated in that currency which it anticipated
purchasing.
A put option gives the Fund, as purchaser, the right (but not the obligation) to
sell a specified amount of currency at the exercise price until the expiration
of the option. A call option gives the Fund, as purchaser, the right (but not
the obligation) to purchase a specified amount of currency at the exercise price
until its expiration. The Fund might purchase a currency put option, for
example, to protect itself during the contract period against a decline in the
dollar value of a currency in which it holds or anticipates holding securities.
If the currency's value should decline against the dollar, the loss in currency
value should be offset, in whole or in part, by an increase in the value of the
put.
If the value of the currency instead should rise against the dollar, any gain to
the Fund would be reduced by the premium it had paid for the put option. A
currency call option might be purchased, for example, in anticipation of, or to
protect against, a rise in the value against the dollar of a currency in which
the Fund anticipates purchasing securities.
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Currency options may be either listed on an exchange or traded over-the-counter
(OTC). Listed options are third-party contracts (i.e., performance of the
obligations of the purchaser and seller is guaranteed by the exchange or
clearing corporation), and have standardized strike prices and expiration dates.
OTC options are two-party contracts with negotiated strike prices and expiration
dates. The Fund will not purchase an OTC option unless the Advisor believes that
daily valuation for such option is readily obtainable.
DIVERSIFICATION. The Fund intends to operate as a "diversified" management
investment company, as defined in the Investment Company Act of 1940 (the "1940
Act"). A "diversified" investment company means a company which meets the
following requirements: At least 75% of the value of the Fund's total assets is
represented by cash and cash items (including receivables), "Government
Securities" (as defined below), securities of other investment companies, and
other securities for the purposes of this calculation limited in respect of any
one issuer to an amount not greater in value than 5% of the value of the total
assets of the Fund and to not more than 10% of the outstanding voting securities
of such issuer. "Government Securities" means securities issued or guaranteed as
to principal or interest by the United States, or by a person controlled or
supervised by and acting as an instrumentality of the Government of the United
States pursuant to authority granted by the Congress of the United States.
REVERSE REPURCHASE AGREEMENTS AND LEVERAGE. The Fund may enter into reverse
repurchase agreements which involve the sale of a security by the Fund and its
agreement to repurchase the security at a specified time and price. The Fund
will maintain in a segregated account with its custodian cash, cash equivalents,
or liquid securities in an amount sufficient to cover its obligations under
reverse repurchase agreements with broker-dealers (but not with banks). Under
the 1940 Act, reverse repurchase agreements are considered borrowings by the
Fund; accordingly, the Fund will limit its investments in these transactions,
together with any other borrowings, to no more than one-third of its total
assets. The use of reverse repurchase agreements by the Fund creates leverage
which increases the Fund's investment risk. If the income and gains on
securities purchased with the proceeds of these transactions exceed the cost,
the Fund's earnings or net asset value will increase faster than otherwise would
be the case; conversely, if the income and gains fail to exceed the costs,
earnings or net asset value would decline faster than otherwise would be the
case. If the 300% asset coverage required by the 1940 Act should decline as a
result of market fluctuation or other reasons, the Fund may be required to sell
some of its portfolio securities within three days to reduce the borrowings
(including reverse repurchase agreements) and restore the 300% asset coverage,
even though it may be disadvantageous from an investment standpoint to sell
securities at that time. The Fund intends to enter into reverse
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repurchase agreements only if the income from the investment of the proceeds is
greater than the expense of the transaction, because the proceeds are invested
for a period no longer than the term of the reverse repurchase agreement.
FLOATING RATE AND VARIABLE RATE OBLIGATIONS AND PARTICIPATION INTERESTS. The
Fund may purchase floating rate and variable rate obligations, including
participation interests therein. Floating rate or variable rate obligations
provide that the rate of interest is set as a specific percentage of a
designated base rate (such as the prime rate at a major commercial bank) or is
reset on a regular basis by a bank or investment banking firm to a market rate.
At specified times, the owner can demand payment of the obligation at par plus
accrued interest. Variable rate obligations provide for a specified periodic
adjustment in the interest rate, while floating rate obligations have an
interest rate which changes whenever there is a change in the external interest
rate. Frequently banks provide letters of credit or other credit support or
liquidity arrangements to secure these obligations. The quality of the
underlying creditor or of the bank, as the case may be, must meet the minimum
credit quality standards, as determined by the Advisor, prescribed for the Fund
by the Board of Directors with respect to counterparties in repurchase
agreements and similar transactions.
The Fund may invest in participation interests purchased from banks in floating
rate or variable rate obligations owned by banks. A participation interest gives
the Fund an undivided interest in the obligation in the proportion that the
Fund's participation interest bears to the total principal amount of the
obligation, and provides a demand repayment feature. Each participation is
backed by an irrevocable letter of credit or guarantee of a bank (which may be
the bank issuing the participation interest or another bank). The bank letter of
credit or guarantee must meet the prescribed investment quality standards for
the Fund. The Fund has the right to sell the participation instrument back to
the issuing bank or draw on the letter of credit on demand for all or any part
of the Fund's participation interest in the underlying obligation, plus accrued
interest.
SWAP AGREEMENTS. The Fund may enter into interest rate, index, and currency
exchange rate swap agreements for purposes of attempting to obtain a particular
desired return at a lower cost to the Fund than if the Fund had invested
directly in an instrument that yielded that desired return. Swap agreements are
two-party contracts entered into primarily by institutional investors for
periods ranging from a few weeks to more than one year. In a standard "swap"
transaction, two parties agree to exchange the returns (or differentials in
rates of return) earned or realized on particular predetermined investments or
instruments. The gross returns to be exchanged or "swapped" between
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the parties are calculated with respect to a "notional amount," i.e., the return
on or increase in value of a particular dollar amount invested at a particular
interest rate, in a particular foreign currency, or in a "basket" of securities
representing a particular index. Commonly used swap agreements include interest
rate caps, under which, in return for a premium, one party agrees to make
payments to the other to the extent that interest rates exceed a specified rate,
or "cap"; interest rate floors, under which, in return for a premium, one party
agrees to make payments to the other to the extent that interest rates fall
below a specified level, or "floor"; and interest rate collars, under which a
party sells a cap and purchases a floor or vice versa in an attempt to protect
itself against interest rate movements exceeding minimum or maximum levels.
The "notional amount" of the swap agreement is only a fictive basis on which to
calculate the obligations which the parties to a swap agreement have agreed to
exchange. Most swap agreements entered into by the Fund would calculate the
obligations of the parties to the agreement on a "net basis." Consequently the
Fund's obligations (or rights) under a swap agreement will generally be equal
only to the net amount to be paid or received under the agreement based on the
relative values of the positions held by each party to the agreement (the "net
amount"). The Fund's obligations under a swap agreement will be accrued daily
(offset against amounts owed to the Fund) and any accrued but unpaid net amounts
owed to a swap counterparty will be covered by the maintenance of a segregated
account consisting of cash, U.S. Government securities, or high grade debt
obligations, to avoid any potential leveraging of the Fund's portfolio. The Fund
will not enter into a swap agreement with any single party if the net amount
owed or to be received under existing contracts with that party would exceed 5%
of the Fund's net assets.
Whether the Fund's use of swap agreements will be successful in furthering its
investment objective will depend on the Advisor's ability to predict correctly
whether certain types of investments are likely to produce greater returns than
other investments. Because they are two-party contracts and because they may
have terms of greater than seven days, swap agreements will be considered to be
illiquid. Moreover, the Fund bears the risk of loss of the amount expected to be
received under a swap agreement in the event of the default or bankruptcy of a
swap agreement counterparty. The Advisor will cause the Fund to enter into swap
agreements only with counterparties that would be eligible for consideration as
repurchase agreement counterparties under the Fund's repurchase agreement
guidelines. Certain restrictions imposed on the Fund by the Internal Revenue
Code may limit the Fund's ability to use swap agreements. The swaps market is
largely unregulated. It is possible that developments in the swaps market,
including potential government regulation, could
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adversely affect the Fund's ability to terminate existing swap agreements or to
realize amounts to be received under such agreements.
WHEN-ISSUED SECURITIES AND FIRM COMMITMENT AGREEMENTS. The Fund may purchase
securities on a delayed delivery or "when-issued" basis and enter into firm
commitment agreements (transactions whereby the payment obligation and interest
rate are fixed at the time of the transaction but the settlement is delayed).
The Fund will not purchase securities the value of which is greater than 5% of
its net assets on a when-issued or firm commitment basis. The Fund, as
purchaser, assumes the risk of any decline in value of the security beginning on
the date of the agreement or purchase, and no interest accrues to the Fund until
it accepts delivery of the security. The Fund will not use such transactions for
leveraging purposes and, accordingly, will segregate cash, cash equivalents, or
liquid securities in an amount sufficient to meet its payment obligations
thereunder. Although these transactions will not be entered into for leveraging
purposes, to the extent the Fund's aggregate commitments under these
transactions exceed its holdings of cash and securities that do not fluctuate in
value (such as short-term money market instruments), the Fund temporarily will
be in a leveraged position (I.E., it will have an amount greater than its net
assets subject to market risk). Should market values of the Fund's portfolio
securities decline while the Fund is in a leveraged position, greater
depreciation of its net assets would likely occur than were it not in such a
position. As the Fund's aggregate commitments under these transactions increase,
the opportunity for leverage similarly increases. The Fund will not borrow money
to settle these transactions and, therefore, will liquidate other portfolio
securities in advance of settlement if necessary to generate additional cash to
meet its obligations thereunder.
COMMERCIAL BANK OBLIGATIONS. For the purposes of the Fund's investment policies
with respect to bank obligations, obligations of foreign branches of U.S. banks
and of foreign banks may be general obligations of the parent bank in addition
to the issuing bank, or may be limited by the terms of a specific obligation and
by government regulation. As with investment in non-U.S. securities in general,
investments in the obligations of foreign branches of U.S. banks, and of foreign
banks may subject the Fund to investment risks that are different in some
respects from those of investments in obligations of domestic issuers. Although
the Fund will typically acquire obligations issued and supported by the credit
of U.S. or foreign banks having total assets at the time of purchase in excess
of $1 billion, this $1 billion figure is not a fundamental investment policy or
restriction of the Fund. For the purposes of calculating the $1 billion figure,
the assets of a bank will be deemed to include the assets of its U.S. and
non-U.S. branches.
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ILLIQUID SECURITIES. The Fund may invest up to 15% of its net assets
in all forms of "illiquid securities."
An investment is generally deemed to be "illiquid" if it cannot be disposed of
within seven days in the ordinary course of business at approximately the amount
at which such securities are valued by the Fund. "Restricted" securities are
securities which were originally sold in private placements and which have not
been registered under the Securities Act of 1933 (the "1933 Act"). However, a
market exists for certain restricted securities (for example, securities
qualifying for resale to certain "qualified institutional buyers" pursuant to
Rule 144A under the 1933 Act). Additionally, the Advisor and the Fund believe
that a similar market exists for commercial paper issued pursuant to the private
placement exemption of Section 4(2) of the 1933 Act. The Fund may invest without
limitation in these forms of restricted securities if such securities are
determined by the Advisor to be liquid in accordance with standards established
by the Investment Company's Board of Directors. Under these standards, the
Advisor must consider (a) the frequency of trades and quotes for the security,
(b) the number of dealers willing to purchase or sell the security and the
number of other potential purchasers, (c) any dealer undertaking to make a
market in the security, and (d) the nature of the security and the nature of the
marketplace trades (for example, the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of transfer).
It is not possible to predict with accuracy how the markets for certain
restricted securities will develop. Investing in restricted securities could
have the effect of increasing the level of the Fund's illiquidity to the extent
that qualified institutional buyers become, for a time, uninterested in
purchasing these securities.
LENDING OF PORTFOLIO SECURITIES. For the purpose of realizing additional income,
the Fund may make secured loans of portfolio securities amounting to not more
than 33-1/3% of its net assets. Securities loans are made to broker-dealers or
institutional investors pursuant to agreements requiring that the loans be
continuously secured by collateral at least equal at all times to the value of
the securities lent marked to market on a daily basis. The collateral received
will consist of cash, short-term U.S. Government securities, bank letters of
credit, or such other collateral as may be permitted under the Fund's investment
program and by regulatory agencies and approved by the Board of Directors. While
the securities are being lent, the Fund will continue to receive the equivalent
of the interest or dividends paid by the issuer on the securities, as well as
interest on the investment of the collateral or a fee from the borrower. The
Fund has a right to call each loan and obtain the securities on five business
days' notice. The Fund will not have the right to vote
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equity securities while they are being lent, but it will call a loan in
anticipation of any vote in which it seeks to participate.
REDUCTION IN BOND RATING. In the event that the rating for any security held by
the Fund drops below the minimum acceptable rating applicable to the Fund, the
Advisor will determine whether the Fund should continue to hold such an
obligation in its portfolio. Bonds rated below BBB or Baa are commonly known as
"junk bonds." These bonds are subject to greater fluctuations in value and risk
of loss of income and principal due to default by the issuer than are higher
rated bonds. The market values of junk bonds tend to reflect short-term
corporate, economic, and market developments and investor perceptions of the
issuer's credit quality to a greater extent than higher rated bonds. In
addition, it may be more difficult to dispose of, or to determine the value of,
junk bonds. See Appendix A for a complete description of the bond ratings.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment policies and
restrictions in addition to the policies and restrictions discussed in its
prospectus. The policies and restrictions listed below cannot be changed without
approval by the holders of a "majority of the outstanding voting securities" of
the Fund (which is defined in the 1940 Act to mean the lesser of (i) 67% of the
shares represented at a meeting at which more than 50% of the outstanding shares
are represented or (ii) more than 50% of the outstanding shares). These
restrictions provide that the Fund may not:
1. Invest 25% or more of the value of its total assets in the
securities of issuers conducting their principal business
activities in the same industry, except that this limitation
shall not apply to securities issued or guaranteed as to
principal and interest by the U.S. Government or any of its
agencies or instrumentalities.
2. Buy or sell real estate (including real estate limited
partnerships) or commodities or commodity contracts;
however, the Fund may invest in securities secured by real
estate, or issued by companies which invest in real estate
or interests therein, including real estate investment
trusts, and may purchase and sell currencies (including
forward currency exchange contracts), gold, bullion, futures
contracts, and related options generally as described in the
Prospectus and Statement of Additional Information.
3. Engage in the business of underwriting securities of other
issuers, except to the extent that the disposal of an
investment position may technically cause it to be considered
an underwriter as that term is defined under the Securities
Act of 1933.
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4. Make loans, except that the Fund may purchase debt securities,
enter into repurchase agreements, and make loans of portfolio
securities amounting to not more than 33 1/3% of its net
assets calculated at the time of the securities lending.
5. Borrow money, except from banks for temporary or emergency
purposes not in excess of 30% of the value of the Fund's total
assets. The Fund will not purchase securities while such
borrowings are outstanding.
6. Change its status as a diversified investment company.
7. Issue senior securities, except as permitted under the 1940
Act, and except that the Investment Company and the Fund may
issue shares of common stock in multiple series or classes.
8. Notwithstanding any other fundamental investment restriction
or policy, the Fund may invest all of its assets in the
securities of a single open-end investment company with
substantially the same fundamental investment objectives,
restrictions, and policies as the Fund.
Other current investment policies of the Fund, which are not fundamental and
which may be changed by action of the Board of Directors without shareholder
approval, are as follows. The Fund may not:
9. Invest in companies for the purpose of exercising control or
management.
10. Mortgage, pledge or hypothecate any of its assets, provided
that this restriction shall not apply to the transfer of
securities in connection with any permissible borrowing.
11. Invest in interests in oil, gas, or other mineral
exploration or development programs or leases.
12. Invest more than 5% of its total assets in securities of
companies having, together with their predecessors, a record
of less than three years continuous operation.
13. Purchase securities on margin, provided that the Fund may
obtain such short-term credits as may be necessary for the
clearance of purchases and sales of securities, except that
the Fund may make margin deposits in connection with futures
contracts.
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<PAGE>
14. Enter into a futures contract if, as a result thereof, more
than 5% of the Fund's total assets (taken at market value at
the time of entering into the contract) would be committed to
margin on such futures contract.
15. Acquire securities or assets for which there is no readily
available market or which are illiquid, if, immediately after
and as a result of the acquisition, the value of such
securities would exceed, in the aggregate, 15% of the Fund's
net assets.
16. Make short sales of securities or maintain a short position,
except that the Fund may sell short "against the box."
17. Invest in securities of an issuer if the investment would
cause the Fund to own more than 10% of any class of
securities of any one issuer.
18. Acquire more than 3% of the outstanding voting securities of
any one investment company.
INVESTMENT COMPANY DIRECTORS AND OFFICERS
The Bylaws of Fremont Mutual Funds, Inc. (the "Investment Company"), the
Maryland investment company of which the Fund is a series, authorize a Board of
Directors of between three and 15 persons, as fixed by the Board of Directors. A
majority of directors may fill director vacancies caused by the resignation or
death of a director or the expansion of the Board of Directors. Any director may
be removed by vote of the holders of a majority of all outstanding shares of the
Investment Company qualified to vote at the meeting.
- 22 -
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
DATE OF AND BUSINESS EXPERIENCE
NAME AND ADDRESS BIRTH POSITIONS HELD FOR PAST FIVE YEARS
<S> <C> <C> <C>
David L. Redo (1)(2)(4) 9-1-37 Chairman, Chief Executive President and Director, Fremont
Fremont Investment, Advisors, Inc. Officer and Director Investment Advisors, Inc.;
333 Market Street, 26th Floor Managing Director, Fremont
San Francisco, CA 94105 Group, L.L.C. and Fremont
Investors, Inc.; Director, Sequoia
Ventures, Sit/Kim International
Investment Associates, and J.P.
Morgan Securities Asia.
Michael H. Kosich(1)(2) 3-30-40 President and Director 10/77 - 7/96
Fremont Investment Advisors, Inc. Senior Vice President Business
333 Market Street, 26th Floor Development, Benham
San Francisco, CA 94105 Management.
Vincent P. Kuhn, Jr.(1)(2)(4) 4-22-32 Executive Vice President Executive Vice President and
Fremont Investment Advisors, Inc. and Director Director, Fremont
333 Market Street, 26th Floor. Investment Advisors, Inc.
San Francisco, CA 94105
Richard E. Holmes(3) 5-14-43 Director Vice President and Director,
P.O. Box 479 BelMar Advisors, Inc.
Sanibel, FL 33957 (marketing firm).
William W. Jahnke(3) 2-6-44 Director 1/96 - Present
Jahnke & Associates Chairman, Financial Design
58 Camino del Diablo Education Corp.
Orinda, CA 94563 3/93 - Present
Principal, Jahnke & Associates
(Consultants)
6/83 - 3/93
Chairman, Board of Directors,
Vestek Systems, Inc.
Donald C. Luchessa(3) 2-18-30 Director Principal, DCL Advisory
DCL Advisory (marketer for investment
345 California Street, 10th Fl advisors).
San Francisco, CA 94104
David L. Egan(3) 5-1-34 Director President, Fairfield Capital
Fairfield Capital Associates, Inc. Associates, Inc. (an investment
1640 Sylvaner advisor) and Fairfield Capital
St. Helena, CA 94574 Funding, Inc. (a broker-dealer).
- 23 -
<PAGE>
<CAPTION>
<S> <C> <C> <C>
Albert W. Kirschbaum(4) 8-17-38 Senior Vice President Senior Vice President and
Fremont Investment Advisors, Inc. Director, Fremont Investment
333 Market Street, 26th Floor Advisors, Inc.
San Francisco, CA 94105
Peter F. Landini(4) 5-10-51 Senior Vice President Senior Vice President and
Fremont Investment Advisors, Inc. Director, Fremont Investment
333 Market Street, 26th Floor Advisors, Inc.
San Francisco, CA 94105
John Kosecoff 10-29-51 Vice President 10/96 - Present
Fremont Investment Advisors, Inc. Vice President, Fremont
333 Market Street, 26th Floor Investment Advisors, Inc.
San Francisco, CA 94105 12/93 - 9/96
Senior Analyst and Portfolio
Manager, RCM Capital Management
11/92 - 12/93
Hedge Fund Analyst and
Portfolio Manager, Omega Advisors
10/90 - 11/92
Senior Consumer Sector
Analyst, Lord Abbett & Co.
William M. Feeney 3-27-56 Vice President Vice President, Fremont
Fremont Investment Advisors, Inc. Investment Advisors, Inc.
333 Market Street, 26th Floor
San Francisco, CA 94105
Norman Gee 3-29-50 Vice President Vice President, Fremont
Fremont Investment Advisors, Inc. Investment Advisors, Inc.
333 Market Street, 26th Floor
San Francisco, CA 94105
Alexandra W. Kinchen(4) 4-25-45 Vice President Vice President, Fremont
Fremont Investment Advisors, Inc. Investment Advisors, Inc.
333 Market Street, 26th Floor
San Francisco, CA 94105
Andrew L. Pang(4) 4-15-49 Vice President Vice President, Fremont
Fremont Investment Advisors, Inc. Investment Advisors, Inc.
333 Market Street, 26th Floor
San Francisco, CA 94105
Robert J. Haddick(4) 2-26-60 Vice President Vice President, Fremont
Fremont Investment Advisors, Inc. Investment Advisors, Inc.
333 Market Street, 26th Floor Fund Group, Inc.
San Francisco, CA 94105
- 24 -
<PAGE>
<CAPTION>
<S> <C> <C> <C>
Tina Thomas 8-7-49 Vice President, Secretary, and 6/96 - Present
Fremont Investment Advisors, Inc. Chief Compliance Officer Vice President and Chief
333 Market Street, 26th Floor Compliance Officer, Fremont
San Francisco, CA 94105 Investment Advisors, Inc.
9/88 - 5/96
Chief Compliance Officer and
Vice President, Bailard, Biehl &
Kaiser, Inc.; Treasurer, Bailard,
Biehl & Kaiser International Fund
Group, Inc. and Bailard, Biehl &
Kaiser Fund Group; Principal, BB&K
Fund Services, Inc.
Richard G. Thomas 1-7-57 Senior Vice President Vice President, Fremont
Fremont Investment Advisors, Inc. Investment Advisors, Inc.
333 Market Street, 26th Floor
San Francisco, CA 94105
Gretchen Hollstein 3-23-67 Vice President Vice President, Fremont
Fremont Investment Advisors, Inc. Investment Advisors, Inc.
333 Market Street, 26th Floor
San Francisco, CA 94105
Allyn Hughes 6-12-60 Vice President Vice President, Fremont
Fremont Investment Advisors, Inc. Investment Advisors, Inc.
333 Market Street, 26th Floor
San Francisco, CA 94105
Dean Boebinger 11-21-55 Vice President Regional Sales Manager,
Fremont Investment Advisors, Inc. Fremont Investment
3000 Post Oak Blvd., Suite 100 Advisors, Inc.
Houston, TX 77056 3/92-7/94
Certified Financial Planner and
Account Executive, GNA, Inc.
</TABLE>
(1) Director who is an "interested person" of the Company due to his
affiliation with the Company's investment manager.
(2) Member of the Executive Committee.
(3) Member of the Audit Committee and the Contracts Committee.
(4) Member of the Fremont Investment Committee.
During the fiscal year ended October 31, 1996, Richard E. Holmes, William W.
Jahnke, and David L. Egan each received $4,500 and Donald C. Luchessa received
$3,000 for serving as directors of the Investment Company.
As of April 30, 1997, the officers and directors as a group owned in the
aggregate beneficially or of record less than 1% of the outstanding shares of
the Investment Company.
- 25 -
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
MANAGEMENT AGREEMENT. The Advisor, in addition to providing investment
management services, furnishes the services and pays the compensation and travel
expenses of persons who perform the executive, administrative, clerical, and
bookkeeping functions of the Investment Company, provides suitable office space,
necessary small office equipment and utilities, and general purpose accounting
forms, supplies, and postage used at the offices of the Investment Company. The
Advisor is responsible to pay sub-transfer agency fees when such entities are
engaged in connection with share holdings in the Fund acquired by certain
retirement plans.
For its services under the Investment Advisory and Administration Agreement (the
"Advisory Agreement"), the Advisor is paid a monthly fee at the annual rate of
1.15% of the Fund's average net assets. The Fund will pay all of its own
expenses not assumed by the Advisor, including, but not limited to, the
following: custodian, stock transfer, and dividend disbursing fees and expenses;
taxes and insurance; expenses of the issuance and redemption of shares of the
Fund (including stock certificates, registration or qualification fees and
expenses); legal and auditing expenses; and the costs of stationery and forms
prepared exclusively for the Fund.
The allocation of general Investment Company expenses among its series is made
on a basis that the Directors deem fair and equitable, which may be based on the
relative net assets of each series or the nature of the services performed and
relative applicability to each series.
As noted in the Prospectus, the Advisor has agreed to reduce some or all of its
fees under the Advisory Agreement if necessary to keep total operating expenses,
expressed on an annualized basis, at or below the rate of 1.25% of the Fund's
average net assets. Any reductions made by the Advisor in its fees are subject
to reimbursement by the Fund within the following three years provided the Fund
is able to effect such reimbursement and remain in compliance with the foregoing
expense limitation. The Advisor generally seeks reimbursement for the oldest
reductions before payment by the Fund for fees and expenses for the current
year. In considering approval of the Fund's Advisory Agreement, the Board of
Directors specifically considered and approved the provision which permits the
Advisor to seek reimbursement of any reduction made to its fees within the
three-year period. The Advisor's ability to request reimbursement is subject to
various conditions. First, any reimbursement is subject to the Fund's ability to
effect such reimbursement and remain in compliance with the 1.25% limitation on
annual operating expenses. Second, the Advisor must specifically request the
reimbursement from the Board of Directors. Third, the Board of Directors must
approve such reimbursement as appropriate and not inconsistent with the best
- 26 -
<PAGE>
interests of the Fund and the shareholders at the time such reimbursement is
requested. Because of these substantial contingencies, the potential
reimbursements will be accounted for as contingent liabilities that are not
recordable on the balance sheet of the Fund until collection is probable; but
the full amount of the potential liability will appear in a footnote to the
Fund's financial statements. At such time as it appears probable that the Fund
is able to effect such reimbursement, that the Advisor intends to seek such
reimbursement and that the Board of Directors has or is likely to approve the
payment of such reimbursement, the amount of the reimbursement will be accrued
as an expense of the Fund for that current period.
The directors of the Advisor are David L. Redo, Vincent P. Kuhn, Jr.,
Jon S. Higgins, Peter F. Landini, and Albert W. Kirschbaum.
The Advisory Agreement with respect to the Fund may be renewed annually,
provided that any such renewal has been specifically approved by (i) the Board
of Directors, or by the vote of a majority (as defined in the 1940 Act) of the
outstanding voting securities of the Fund, and (ii) the vote of a majority of
directors who are not parties to the Advisory Agreement or "interested persons"
(as defined in the 1940 Act) of any such party, cast in person, at a meeting
called for the purpose of voting on such approval. The Advisory Agreement also
provides that either party thereto has the right with respect to the Fund to
terminate it without penalty upon sixty (60) days' written notice to the other
party, and that the Advisory Agreement terminates automatically in the event of
its assignment (as defined in the 1940 Act).
The Advisor's employees may engage in personal securities transactions. However,
the Investment Company and the Advisor have adopted a Code of Ethics for the
purpose of establishing standards of conduct for the Advisor's employees with
respect to such transactions. The Code of Ethics includes some broad
prohibitions against fraudulent conduct, and also includes specific rules,
restrictions, and reporting obligations with respect to personal securities
transactions of the Advisor's employees. Generally, each employee is required to
obtain prior approval of the Advisor's compliance officer in order to purchase
or sell a security for the employee's own account. Purchases or sales of
securities which are not eligible for purchase or sale by the Fund or any other
client of the Advisor are exempted from the prior approval requirement, as are
certain other transactions which the Advisor believes present no potential
conflict of interest. The Advisor's employees are also required to file with the
Advisor quarterly reports of their personal securities transactions.
- 27 -
<PAGE>
THE SUB-ADVISOR. The Advisory Agreement authorizes the Advisor, at its option
and at its sole expense, to appoint a sub-advisor, which may assume all or a
portion of the responsibilities and obligations of the Advisor pursuant to the
Advisory Agreement as shall be delegated to the sub-advisor. Any appointment of
a sub-advisor and assumption of responsibilities and obligations of the Advisor
by such sub-advisor is subject to approval by the Board of Directors and, if
required by the law, the shareholders of the Fund. The sub-advisor will be
overseen by the members of the Fremont Investment Committee. See "Investment
Company Directors and Officers."
Robert E. Kern, the Fund's portfolio manager, and his son, David G. Kern, have
organized a new advisory firm, Kern Capital Management, LLC (the "Sub-Advisor"),
114 West 47th Street, Suite 1926, New York, New York 10036, and has registered
the Sub-Advisor with the Securities and Exchange Commission as an investment
adviser. When such registration becomes effective, it is the intention of the
Advisor to retain the Sub-Advisor to serve as discretionary portfolio manager of
the Fund pursuant to a Portfolio Management Agreement. The Portfolio Management
Agreement will provide that the Sub-Advisor agrees to manage the investment of
the Fund's assets, subject to the applicable provisions of the Investment
Company's Articles of Incorporation, Bylaws and current registration statements
(including, but not limited to, the investment objective, policies, and
restrictions delineated in the Fund's current Prospectus and Statement of
Additional Informatin), as interpreted from time to time by the Board of
Directors.
For its services under the Portfolio Management Agreement, the Advisor has
agreed to pay the Sub-Advisor a monthly fee equal to the annual rate of .75% of
the Fund's average net assets.
The Portfolio Management Agreement for the Fund continues in effect from year to
year only as long as such continuance is specifically approved at least annually
by (i) the Board of Directors of the Investment Company or by a vote of a
majority of the outstanding voting shares of the Fund, and (ii) by the vote of a
majority of the directors of the Investment Comapny who are not parties to the
Agremeent or interested persons of the Advisor or the Sub-Advisor or the
Investment Company. The Agreement may be terminated at any time without the
payment of any penalty, by the Board of Directors of the Investment Company or
by the vote of a majority of the outstanding voting shares of the Fund, or by
the Sub-Advisor or the Advisor, upon 30 days' written notice to the other party.
Additionally, the Agreement automatically terminates in the event of its
assignment.
- 28 -
<PAGE>
PRINCIPAL UNDERWRITER. The Fund's principal underwriter is Funds Distributor,
Inc., 60 State Street, Suite 1300, Boston, Massachusetts 02109 (the
"Distributor"). The Distributor is engaged on a non-exclusive basis to assist in
the distribution of shares in various jurisdictions. The Distributor receives
compensation from the Advisor and is not paid either directly or indirectly by
the Investment Company. The Distributor received compensation of $75,000 from
the Advisor with respect to the fiscal year ended October 31, 1996 for services
as Distributor. Additionally, the Distributor received $24,000 in compensation
for separate services related to telephone call coverage during the fiscal year
ended October 31, 1996.
TRANSFER AGENT. The Advisor is also the Fund's transfer agent and is responsible
for maintaining the records of each shareholder's account, answering
shareholders' inquiries concerning their accounts, processing purchases and
redemptions of the Fund's shares, acting as dividend and distribution disbursing
agent, and performing other shareholder service functions. For its services as
transfer agent, the Advisor receives a monthly fee from the Fund at the annual
rate of $24 per shareholder account; provided, however, that the minimum monthly
fee paid to the Advisor is $2,000.
The Advisor retains Countrywide Fund Services, Inc. (the "Sub-Transfer Agent")
to perform many of these services. The Advisor (not the Fund) pays the
Sub-Transfer Agent a monthly fee at the annual rate of $17 per shareholder
account, provided, however, that the minimum monthly fee paid to the
Sub-Transfer Agent is $1,500.
ADMINISTRATOR. The Advisor has retained Investment Company Administration
Corporation (the "Administrator"), with offices at 2025 East Financial Way,
Suite 101, Glendora, California 91741. The Administration Agreement provides
that the Administrator will prepare and coordinate reports and other materials
supplied to the Directors; prepare and/or supervise the preparation and filing
of securities filings, periodic financial reports, prospectuses, statements of
additional information, marketing materials, shareholder reports and other
regulatory reports or filings required of the Fund; prepare all required filings
necessary to maintain the Fund's notice filings to sell shares in all states
where the Fund currently does, or intends to do, business; coordinate the
preparation, printing and mailing of materials required to be sent to
shareholders; and perform such additional services as may be agreed upon by the
Advisor and the Administrator. For its services, the Advisor (not the Fund) pays
the Administrator an annual fee equal to .02% of the Fund's average daily net
assets, subject to a minimum annual fee of $20,000.
- 29 -
<PAGE>
EXECUTION OF PORTFOLIO TRANSACTIONS
There are occasions on which portfolio transactions for the Fund may be executed
as part of concurrent authorizations to purchase or sell the same security for
other accounts served by the Advisor including other series of the Investment
Company. Although such concurrent authorizations potentially could be either
advantageous or disadvantageous to the Fund, they will be effected only when the
Advisor believes that to do so will be in the best interest of the Fund. When
such concurrent authorizations occur, the objective will be to allocate the
executions in a manner which is deemed equitable to the accounts involved,
including the Fund and the other series of the Investment Company.
The Fund contemplates purchasing foreign equity and/or fixed-income securities
in over-the-counter markets or stock exchanges located in the countries in which
the respective principal offices of the issuers of the various securities are
located, if that is the best available market. Fixed commissions on foreign
stock transactions and transaction costs with respect to foreign fixed-income
securities are generally higher than negotiated commissions on United States
transactions, although the Fund will endeavor to achieve the best net results on
its portfolio transactions. There is generally less government supervision and
regulation of foreign stock exchanges and brokers than in the United States.
Foreign security settlements may in some instances be subject to delays and
related administrative uncertainties.
Foreign equity securities may be held by the Fund in the form of American
Depository Receipts ("ADRs") or similar instruments. ADRs may be listed on stock
exchanges or traded in the over-the-counter markets in the United States. ADRs,
like other securities traded in the United States, will be subject to negotiated
commission rates. The government securities issued by the United States and
other countries and money market securities in which the Fund may invest are
generally traded in the over-the-counter markets.
Subject to the requirement of seeking the best available prices and executions,
the Advisor may, in circumstances in which two or more broker-dealers are in a
position to offer comparable prices and executions, give preference to
broker-dealers who have provided investment research, statistical, and other
related services to the Advisor for the benefit of the Fund and/or other
accounts served by the Advisor. Such preferences would only be afforded to a
broker-dealer if the Advisor determines that the amount of the commission is
reasonable in relation to the value of the brokerage and research services
provided by that broker-dealer and only to a broker-dealer acting as agent and
not as principal. The Advisor is of the opinion that, while such information is
useful in varying degrees, it is of indeterminable value and does not reduce the
expenses of the Advisor in managing the Fund's portfolio.
- 30 -
<PAGE>
Subject to the requirements of the 1940 Act and procedures adopted by the Board
of Directors, the Fund may execute portfolio transactions through any broker or
dealer and pay brokerage commissions to a broker which is an affiliated person
of the Investment Company, the Advisor, or an affiliated person of such person.
HOW TO INVEST
PRICE OF SHARES. The price to be paid by an investor for shares of the Fund, the
public offering price, is based on the net asset value per share which is
calculated once daily as of the close of trading (currently 4:00 p.m., Eastern
time) each day the New York Stock Exchange is open as set forth below. The New
York Stock Exchange is currently closed on weekends and on the following
holidays: (i) New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, July 4th, Labor Day, Thanksgiving, and Christmas Day; and
(ii) the preceding Friday when any one of those holidays falls on a Saturday or
the subsequent Monday when any one of those holidays falls on a Sunday.
The Fund will calculate its net asset value and complete orders to purchase,
exchange, or redeem shares only on a Monday-Friday basis (excluding holidays on
which the New York Stock Exchange is closed). The Fund's portfolio securities
may from time to time be listed on foreign stock exchanges or otherwise traded
on foreign markets which may trade on other days (such as Saturday). As a
result, the net asset value of the Fund may be significantly affected by such
trading on days when a shareholder has no access to the Fund. See also in the
Prospectus at "General Investment Policies - Special Considerations in
International Investing," "Calculation of Net Asset Value and Public Offering
Price," "How to Invest," "How to Redeem Shares," and "Shareholder Account
Services and Privileges - Exchanges Between Funds."
1. Fixed-income obligations with original or remaining maturities
in excess of 60 days are valued at the mean of representative
quoted bid and asked prices for such securities or, if such
prices are not available, at prices for securities of
comparable maturity, quality, and type. However, in
circumstances where the Advisor deems it appropriate to do so,
prices obtained for the day of valuation from a bond pricing
service will be used. The Fund amortizes to maturity all
securities with 60 days or less remaining to maturity based on
their cost to the Fund if acquired within 60 days of maturity
or, if already held by the Fund on the 60th day, based on the
value determined on the 61st day. Options on currencies
purchased by the Fund are valued at their last bid price in
the case of listed options or at the average of the last bid
prices obtained from dealers in the case of OTC options.
- 31 -
<PAGE>
Where market quotations are not readily available, securities are
valued at fair value pursuant to methods approved by the Board of
Directors.
2. Equity securities, including ADRs, which are traded on stock
exchanges, are valued at the last sale price on the exchange
on which such securities are traded, as of the close of
business on the day the securities are being valued or,
lacking any sales, at the last available mean price. In cases
where securities are traded on more than one exchange, the
securities are valued on the exchange designated by or under
the authority of the Board of Directors as the primary market.
Securities traded in the over-the-counter market are valued at
the last available bid price in the over-the-counter market
prior to the time of valuation. Securities and assets for
which market quotations are not readily available (including
restricted securities which are subject to limitations as to
their sale) are valued at fair value as determined in good
faith by or under the direction of the Board of Directors.
3. Trading in securities on European and Far Eastern securities
exchanges and over-the-counter markets is normally completed
well before the close of the business day in New York. In
addition, European or Far Eastern securities trading may not
take place on all business days in New York. Furthermore,
trading takes place in Japanese markets on certain Saturdays
and in various foreign markets on days which are not business
days in New York and on which the Fund's net asset value is
not calculated. The calculation of net asset value may not
take place contemporaneously with the determination of the
prices of securities held by the Fund used in such
calculation. Events affecting the values of portfolio
securities that occur between the time their prices are
determined and the close of the New York Stock Exchange will
not be reflected in the Fund's calculation of net asset value
unless the Board of Directors deems that the particular event
would materially affect net asset value, in which case an
adjustment will be made.
4. The value of each security denominated in a currency other
than U.S. dollars will be translated into U.S. dollars at the
prevailing market rate as determined by the Advisor.
5. The Fund's liabilities, including proper accruals of taxes and
other expense items, are deducted from total assets and a net
asset figure is obtained.
- 32 -
<PAGE>
6. The net assets so obtained are then divided by the total number of
shares outstanding (excluding treasury shares), and the result,
rounded to the nearest cent, is the net asset value per share.
OTHER INVESTMENT AND REDEMPTION SERVICES
THE OPEN ACCOUNT. When an investor makes an initial investment in the Fund, a
shareholder account is opened in accordance with the investor's registration
instructions. Each time there is a transaction in a shareholder account, such as
an additional investment, redemption, or distribution (dividend or capital
gain), the shareholder will receive from the Sub-Transfer Agent a confirmation
statement showing the current transaction in the shareholder account, along with
a summary of the status of the account as of the transaction date.
PAYMENT AND TERMS OF OFFERING. Payment of shares purchased should accompany
the purchase order, or funds should be wired to the Sub- Transfer Agent as
described in the Prospectus. Payment, other than by wire transfer, must be made
by check or money order drawn on a U.S. bank. Checks or money orders must be
payable in U.S. dollars.
As a condition of this offering, if an order to purchase shares is cancelled due
to nonpayment (for example, because of a check returned for "not sufficient
funds"), the person who made the order will be subject to a $20 charge and will
be responsible for reimbursing the Advisor for any loss incurred by reason of
such cancellation. If such purchaser is a shareholder, the Fund shall have the
authority as agent of the shareholder to redeem shares in the shareholder's
account for the then-current net asset value per share to reimburse the Fund for
the loss incurred. Such loss shall be the difference between the net asset value
of the Fund on the date of purchase and the net asset value on the date of
cancellation of the purchase. Investors whose purchase orders have been
cancelled due to nonpayment may be prohibited from placing future orders.
The Investment Company reserves the right at any time to waive or increase the
minimum requirements applicable to initial or subsequent investments with
respect to any person or class of persons. An order to purchase shares is not
binding on the Investment Company until it has been confirmed in writing by the
Sub-Transfer Agent (or other arrangements made with the Investment Company, in
the case of orders utilizing wire transfer of funds) and payment has been
received. To protect existing shareholders, the Investment Company reserves the
right to reject any offer for a purchase of shares by any individual.
- 33 -
<PAGE>
REDEMPTION IN KIND. The Investment Company may elect to redeem shares in assets
other than cash but must pay in cash all redemptions with respect to any
shareholder during any 90-day period in an amount equal to the lesser of (i)
$250,000 or (ii) 1% of the net asset value of the Fund at the beginning of such
period.
SUSPENSION OF REDEMPTION PRIVILEGES. The Investment Company may suspend
redemption privileges with respect to the Fund or postpone the date of payment
for more than seven calendar days after the redemption order is received during
any period (1) when the New York Stock Exchange is closed other than customary
weekend and holiday closings, or trading on the Exchange is restricted as
determined by the SEC, (2) when an emergency exists, as defined by the SEC,
which makes it not reasonably practicable for the Investment Company to dispose
of securities owned by it or to fairly determine the value of its assets, or (3)
as the SEC may otherwise permit.
TAXES - MUTUAL FUNDS
STATUS AS A "REGULATED INVESTMENT COMPANY." The Fund will be treated under the
Code as a separate entity, and the Fund intends to qualify and elect, and to
continue to qualify, to be treated as a separate "regulated investment company"
under Subchapter M of the Code. To qualify for the tax treatment afforded a
regulated investment company under the Code, the Fund must annually distribute
at least 90% of the sum of its investment company taxable income (generally net
investment income and certain short-term capital gains), its tax-exempt interest
income (if any) and net capital gains, and meet certain diversification of
assets and other requirements of the Code. If the Fund qualifies for such tax
treatment, it will not be subject to federal income tax on the part of its
investment company taxable income and its net capital gain which it distributes
to shareholders. To meet the requirements of the Code, the Fund must (a) derive
at least 90% of its gross income from dividends, interest, payments with respect
to securities loans, and gains from the sale or other disposition of securities
or currencies; (b) derive less than 30% of its gross income from the sale or
other disposition of securities held less than three months; and (c) diversify
its holdings so that, at the end of each fiscal quarter, (i) at least 50% of the
market value of the Fund's total assets is represented by cash, U.S. Government
securities, securities of other regulated investment companies, and other
securities, limited, in respect of any one issuer, to an amount not greater than
5% of the Fund's total assets and 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its total assets is
invested in the securities of any one issuer (other than U.S. Government
securities or the securities of other regulated investment companies), or in two
or more issuers which the Fund controls and which are engaged in the same or
similar trades or businesses. Income and gain from investing in gold or other
commodities will not qualify in meeting the 90% gross income test.
- 34 -
<PAGE>
Even though the Fund intends to qualify as a "regulated investment company," it
may be subject to certain federal excise taxes unless the Fund meets certain
additional distribution requirements. Under the Code, a nondeductible excise tax
of 4% is imposed on the excess of a regulated investment company's "required
distribution" for the calendar year over the "distributed amount" for such
calendar year. The term "required distribution" means the sum of (i) 98% of
ordinary income (generally net investment income) for the calendar year, (ii)
98% of capital gain net income (both long-term and short-term) for the one-year
period ending on October 31 of such year, and (iii) the sum of any untaxed,
undistributed net investment income and net capital gains of the regulated
investment company for prior periods. The term "distributed amount" generally
means the sum of (i) amounts actually distributed by the Fund from its current
year's ordinary income and capital gain net income and (ii) any amount on which
the Fund pays income tax for the year. The Fund intends to meet these
distribution requirements to avoid the excise tax liability.
If for any taxable year the Fund does not qualify for the special tax treatment
afforded regulated investment companies, all of its taxable income will be
subject to tax at regular corporate rates (without any deduction for
distributions to its shareholders). In such event, dividend distributions would
be taxable to shareholders to the extent of earnings and profits.
DISTRIBUTIONS OF NET INVESTMENT INCOME. Dividends from net investment income
(including net short-term capital gains) are taxable as ordinary income.
Shareholders will be taxed for federal income tax purposes on dividends from the
Fund in the same manner whether such dividends are received as shares or in
cash. If the Fund does not receive any dividend income from U.S. corporations,
dividends from the Fund will not be eligible for the dividends received
deduction allowed to corporations. To the extent that dividends received by the
Fund would qualify for the dividends received deduction available to
corporations, the Fund must designate in a written notice to shareholders the
amount of the Fund's dividends that would be eligible for this treatment. In
order to qualify for the dividends received deduction, a corporate shareholder
must hold the Fund's shares paying the dividends, upon which a dividend received
deduction would be based, for at least 46 days.
NET CAPITAL GAINS. Any distributions designated as being made from the Fund's
net capital gains will be taxable as long-term capital gains, regardless of the
holding period of the shareholders of the Fund's shares. Shareholders are
advised to consult their tax advisor regarding application of these rules to
their particular circumstances.
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<PAGE>
Capital loss carryforwards result when the Fund has net capital losses
during a tax year. These are carried over to subsequent years and may reduce
distributions of realized gains in those years. Unused capital loss
carryforwards expire in eight years. Until such capital loss carryforwards are
offset or expire, it is unlikely that the Board of Directors will authorize a
distribution of any net realized gains.
NON-U.S. SHAREHOLDERS. Under the Code, distributions of net investment
income by the Fund to a shareholder who, as to the U.S., is a nonresident alien
individual, nonresident alien fiduciary of a trust or estate, foreign
corporation, or foreign partnership (a "foreign shareholder") will be subject to
U.S. tax withholding (at a 30% or lower treaty rate). Withholding will not apply
if a dividend paid by the Fund to a foreign shareholder is "effectively
connected" with a U.S. trade or business, in which case the reporting and
withholding requirements applicable to U.S. citizens, U.S. residents, or
domestic corporations will apply. Distributions of net long-term capital gains
are not subject to tax withholding, but in the case of a foreign shareholder who
is a nonresident alien individual, such distributions ordinarily will be subject
to U.S. income tax withholding at a rate of 30% if the individual is physically
present in the U.S. for more than 182 days during the taxable year.
OTHER INFORMATION. The amount of any realized gain or loss on closing out a
futures contract such as a forward commitment for the purchase or sale of
foreign currency will generally result in a realized capital gain or loss for
tax purposes. Under Code Section 1256, futures contracts held by the Fund at the
end of each fiscal year will be required to be "marked to market" for federal
income tax purposes, that is, deemed to have been sold at market value. Sixty
percent (60%) of any net gain or loss recognized on these deemed sales and sixty
percent (60%) of any net realized gain or loss from any actual sales will be
treated as long-term capital gain or loss, and the remainder will be treated as
short-term capital gain or loss. Code Section 988 may also apply to currency
transactions. Under Section 988, each foreign currency gain or loss is generally
computed separately and treated as ordinary income or loss. In the case of
overlap between Sections 1256 and 988, special provisions determine the
character and timing of any income, gain, or loss. The Fund will attempt to
monitor Section 988 transactions to avoid an adverse tax impact. See also
"Investment Objective, Policies, and Risk Considerations" in this Statement of
Additional Information.
Any loss realized on redemption or exchange of the Fund's shares will be
disallowed to the extent shares are reacquired within the 61 day period
beginning 30 days before and ending 30 days after the shares are redeemed or
exchanged.
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<PAGE>
Under the Code, the Fund's taxable income for each year will be computed without
regard to any net foreign currency loss attributable to transactions after
October 31, and any such net foreign currency loss will be treated as arising on
the first day of the following taxable year. The Fund may be required to pay
withholding and other taxes imposed by foreign countries generally at rates from
10% to 40% which would reduce the Fund's investment income. Tax conventions
between certain countries and the United States may reduce or eliminate such
taxes. It is not anticipated that shareholders will be entitled to a foreign tax
credit or deduction for such foreign taxes. The Fund may purchase the securities
of certain foreign investment funds or trusts called passive foreign investment
companies ("PFICs"). Currently, PFICs are the only or primary means by which the
Fund may invest in some countries. If the Fund invests in PFICs, it may be
subject to U.S. federal income tax on a portion of any "excess distribution" or
gain from the disposition of such shares even if such income is distributed as a
taxable dividend to shareholders. In addition to bearing their proportionate
share of the Fund's expenses, shareholders will also bear indirectly similar
expenses of PFICs in which the Fund has invested. Additional charges in the
nature of interest may be imposed on either the Fund or its shareholders in
respect of deferred taxes arising from such distributions or gains. Capital
gains on the sale of such holdings will be deemed to be ordinary income
regardless of how long such PFICs are held. If the Fund were to invest in a PFIC
and elect to treat the PFIC as a "qualified electing fund" under the Code, in
lieu of the foregoing requirements, the Fund might be required to include in
income each year a portion of the ordinary earnings and net capital gains of the
qualified electing fund, even if not distributed to the Fund, and such amounts
would be subject to the 90% and calendar year distribution requirements
described above.
The foregoing is a general abbreviated summary of present United States federal
income taxes on dividends and distributions by the Fund. Investors are urged to
consult their own tax advisors for more detailed information and for information
regarding any foreign, state, and local taxes applicable to dividends and
distributions received.
ADDITIONAL INFORMATION
CUSTODIAN. The Northern Trust Company, 50 South LaSalle Street, Chicago,
Illinois 60675, acts as Custodian for the Investment Company's assets, and as
such safekeeps the Fund's portfolio securities, collects all income and other
payments with respect thereto, disburses funds at the Investment Company's
request, and maintains records in connection with its duties.
INDEPENDENT AUDITORS; FINANCIAL STATEMENTS. The Investment Company's
independent auditors are Coopers & Lybrand L.L.P., 333 Market Street,
San Francisco, California 94105. Coopers & Lybrand L.L.P. will
conduct an annual audit of the Fund, assist in the preparation of the
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<PAGE>
Fund's federal and state income tax returns, and consult with the Investment
Company as to matters of accounting, regulatory filings, and federal and state
income taxation.
LEGAL OPINIONS. The validity of the shares of common stock offered hereby will
be passed upon by Paul, Hastings, Janofsky & Walker, 345 California Street, San
Francisco, California 94104. In addition to acting as counsel to the Investment
Company, Paul, Hastings, Janofsky & Walker has acted and may continue to act as
counsel to the Advisor and its affiliates in various matters.
USE OF NAME. The Advisor has granted the Investment Company the right to use the
"Fremont" name and has reserved the rights to withdraw its consent to the use of
such name by the Investment Company at any time, or to grant the use of such
name to any other company, and the Investment Company has granted the Advisor,
under certain conditions, the use of any other name it might assume in the
future, with respect to any other investment company sponsored by the Advisor.
SHAREHOLDER VOTING RIGHTS. The Investment Company currently issues shares in ten
series and may establish additional classes or series of shares in the future.
When more than one class or series of shares is outstanding, shares of all
classes and series will vote together for a single set of directors, and on
other matters affecting the entire Investment Company, with each share entitled
to a single vote. On matters affecting only one class or series, only the
shareholders of that class or series shall be entitled to vote. On matters
relating to more than one class or series but affecting the classes and series
differently, separate votes by class and series are required. Shareholders
holding 10% of the shares of the Investment Company may call a special meeting
of shareholders.
LIABILITY OF DIRECTORS AND OFFICERS. The Articles of Incorporation of the
Investment Company provide that, subject to the provisions of the 1940 Act, to
the fullest extent permitted under Maryland law, no officer or director of the
Investment Company may be held personally liable to the Investment Company or
its shareholders.
OTHER INVESTMENT INFORMATION. The Advisor directs the management of over $4.7
billion of assets and internally manages over $1.9 billion of assets for
retirement plans, foundations, private portfolios, and mutual funds. The
Advisor's philosophy is to apply a long-term approach to investing that balances
risk and return potential.
Historical annual returns of various market indices may be used to represent the
returns of various asset classes as follows:
(1) U.S. Stocks: Standard & Poor's 500 Index;
(2) Foreign Stocks: Morgan Stanley Europe, Australia and Far East
(EAFE) Index;
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<PAGE>
(3) Intermediate U.S. Bonds: Lehman Brothers Intermediate
Government/Corporate Bond Index;
(4) Foreign Bonds: Salomon Brothers Non-U.S. Dollar Bond Index;
and
(5) Money Market Securities: 1980-1986, 90 day U.S. Treasury Bill
rate: 1987-1992 Donoghue First Tier Money Market Fund Average.
The total returns for the above indices for the years 1980 through
1996 are as follows (source: Fremont Investment Advisors, Inc.):
<TABLE>
<CAPTION>
U.S. Foreign Intmdte Foreign Money Market
Stocks Stocks U.S.Bonds Bonds Securities
<S> <C> <C> <C> <C> <C>
1980 32.4% 24.4% 6.4% 14.2% 11.8%
1981 -5.0% -1.0% 10.5% -4.6% 16.1%
1982 21.3% -0.9% 26.1% 11.9% 10.7%
1983 22.3% 24.6% 8.6% 4.4% 8.6%
1984 6.3% 7.9% 14.4% -1.9% 10.0%
1985 31.8% 56.7% 18.1% 35.0% 7.5%
1986 18.7% 70.0% 13.1% 31.4% 5.9%
1987 5.1% 24.9% 3.7% 35.2% 6.0%
1988 16.8% 28.8% 6.7% 2.4% 6.9%
1989 31.4% 11.1% 12.8% -3.4% 8.5%
1990 -3.2% -23.0% 9.2% 15.3% 7.5%
1991 30.6% 12.9% 14.6% 16.2% 5.5%
1992 7.7% -11.5% 7.2% 4.8% 3.3%
1993 10.0% 33.3% 8.8% 15.1% 2.6%
1994 1.3% 8.1% -1.9% 6.0% 3.6%
1995 37.5% 11.2% 15.3% 19.6% 5.3%
1996 23.0% 6.1% 4.1% 4.5% 4.8%
</TABLE>
The Fund is best suited as a long-term investment. While it offers higher
potential total returns than certificates of deposit or money market funds, it
involves added return volatility or risk. The prospective investor must weigh
this potential for higher return against the associated higher risk.
The Investment Company offers shares in ten additional series under separate
Prospectuses and Statements of Additional Information.
INVESTMENT RESULTS
The Investment Company may from time to time include information on the
investment results of the Fund in advertisements or in reports furnished to
current or prospective shareholders.
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<PAGE>
The average annual rate of return ("T") for a given period is computed by using
the redeemable value at the end of the period ("ERV") of a hypothetical initial
investment of $1,000 ("P") over the period in years ("n") according to the
following formula as required by the SEC:
P(1+T)n = ERV
The following assumptions will be reflected in computations made in accordance
with the formula stated above: (1) reinvestment of dividends and distributions
at net asset value on the reinvestment date determined by the Board of
Directors; and (2) a complete redemption at the end of any period illustrated.
The Fund will calculate total return for one, five, and ten-year periods after
such a period has elapsed, and may calculate total returns for other periods as
well. In addition, the Fund will provide lifetime average annual total return
figures.
The Fund's investment results will vary from time to time depending upon market
conditions, the composition of the Fund's portfolio, and operating expenses of
the Fund, so that current or past total return should not be considered
representations of what an investment in the Fund may earn in any future period.
These factors and possible differences in the methods used in calculating
investment results should be considered when comparing the Fund's investment
results with those published for other investment companies and other investment
vehicles. The Fund's results also should be considered relative to the risks
associated with the Fund's investment objective and policies.
The Investment Company may from time to time compare the investment results of
the Fund with, or refer to, the following:
(1) Average of Savings Accounts, which is a measure of all kinds
of savings deposits, including longer-term certificates (based
on figures supplied by the U.S. League of Savings
Institutions). Savings accounts offer a guaranteed rate of
return on principal, but no opportunity for capital growth.
During certain periods, the maximum rates paid on some savings
deposits were fixed by law.
(2) The Consumer Price Index, which is a measure of the average change
in prices over time in a fixed market basket of goods and services
(e.g., food, clothing, shelter, and fuels, transportation fares,
charges for doctors' and dentists' services, prescription
medicines, and other goods and services that people buy for
day-to-day living).
(3) Statistics reported by Lipper Analytical Services, Inc., which
ranks mutual funds by overall performance, investment objectives,
and assets.
(4) Standard & Poor's "500" Index, which is a widely recognized index
composed of the capitalization-weighted average of the price of
500 large publicly traded U.S. common stocks.
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<PAGE>
(5) Dow Jones Industrial Average.
(6) CNBC/Financial News Composite Index.
(7) Russell 1000 Index, which reflects the common stock price
changes of the 1,000 largest publicly traded U.S. companies by
market capitalization.
(8) Russell 2000 Index, which reflects the common stock price
changes of the 2,000 largest publicly traded U.S. companies by
market capitalization.
(9) Russell 3000 Index, which reflects the common stock price
changes of the 3,000 largest publicly traded U.S. companies by
market capitalization.
(10) Wilshire 5000 Index, which reflects the investment return of the
approximately 5,000 publicly traded securities for which daily
pricing is available, weighted by market capitalization, excluding
income.
(11) Salomon Brothers Broad Investment Grade Index, which is a widely
used index composed of U.S. domestic government, corporate, and
mortgage-backed fixed income securities.
(12) Wilshire Associates, an on-line database for international
financial and economic data including performance measures for a
wide variety of securities.
(13) Morgan Stanley Europe, Australia and Far East (EAFE) Index, which
is composed of foreign stocks.
(14) IFC Emerging Markets Investables Indices, which measure stock
market performance in various developing countries around the
world.
(15) Salomon Brothers World Bond Index, which is composed of domestic
and foreign corporate and government fixed income securities.
(16) Lehman Brothers Government/Corporate Bond Index, which is a
widely used index composed of investment quality U.S.
government and corporate fixed income securities.
(17) Lehman Brothers Government/Corporate Intermediate Bond Index,
which is a widely used index composed of investment quality U.S.
government and corporate fixed income securities with maturities
between one and ten years.
(18) Salomon Brothers World Government Bond Index, which is a
widely used index composed of U.S. and non-U.S. government
fixed income securities of the major countries of the World.
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<PAGE>
(19) 90-day U.S. Treasury Bills Index, which is a measure of the
performance of constant maturity 90-day U.S. Treasury Bills.
(20) Donoghue First Tier Money Fund Average, which is an average of the
30-day yield of approximately 250 major domestic money market
funds.
(21) Salomon Brothers Non-U.S. World Government Bond Index, which
is the World Government Bond index excluding its U.S. market
component.
(22) Salomon Brothers Non-Dollar Bond Index, which is composed of
foreign corporate and government fixed income securities.
(23) Bear Stearns Foreign Bond Index, which provides simple average
returns for individual countries and GNP-weighted index, beginning
in 1975. The returns are broken down by local market and currency.
(24) Ibbottson Associates International Bond Index, which provides a
detailed breakdown of local market and currency returns since
1960.
(25) The World Bank Publication of Trends in Developing Countries
("TIDE"), which provides brief reports on most of the World Bank's
borrowing members. The World Development Report is published
annually and looks at global and regional economic trends and
their implications for the developing economies.
(26) Datastream and Worldscope, which is an on-line database retrieval
service for information including but not limited to international
financial and economic data.
(27) International Financial Statistics, which is produced by the
International Monetary Fund.
(28) Various publications and annual reports such as the World
Development Report, produced by the World Bank and its affiliates.
(29) Various publications from the International Bank for
Reconstruction and Development/The World Bank.
(30) Various publications including but not limited to ratings agencies
such as Moody's Investors Service, Fitch Investors Service, and
Standard Poor's Ratings Group.
(31) Various publications from the Organization for Economic
Cooperation and Development.
Indices prepared by the research departments of such financial
organizations as J.P. Morgan; Lehman Brothers; S.G. Warburg; Jardine
Fleming; the Asian Development Bank; Bloomberg, L.P.; Morningstar,
Inc; Salomon Brothers, Inc.; Merrill Lynch, Pierce, Fenner & Smith,
- 42 -
<PAGE>
Inc.; Morgan Stanley; Bear Stearns & Co., Inc.; Prudential Securities, Inc.;
Smith Barney Inc.; and Ibbottson Associates of Chicago, Illinois ("Ibbottson")
may be used, as well as information provided by the Federal Reserve and the
respective central banks of various countries.
The Investment Company may use performance rankings and ratings reported
periodically in national financial publications such as, but not limited to,
MONEY MAGAZINE, FORBES, THE WALL STREET JOURNAL, INVESTOR'S BUSINESS DAILY,
FORTUNE, SMART MONEY, BUSINESS WEEK, and BARRON'S.
The Advisor believes the Fund is an appropriate investment for long-term
investment goals including, but not limited to, funding retirement, paying for
education, or purchasing a house. The Fund does not represent a complete
investment program, and investors should consider the Fund as appropriate for a
portion of their overall investment portfolio with regard to their long-term
investment goals.
The Advisor believes that a growing number of consumer products, including, but
not limited to, home appliances, automobiles, and clothing, purchased by
Americans are manufactured abroad. The Advisor believes that investing globally
in the companies that produce products for U.S. consumers can help U.S.
investors seek protection of the value of their assets against the potentially
increasing costs of foreign manufactured goods. Of course, there can be no
assurance that there will be any correlation between global investing and the
costs of such foreign goods unless there is a corresponding change in value of
the U.S. dollar to foreign currencies. From time to time, the Investment Company
may refer to or advertise the names of such companies although there can be no
assurance that the Fund may own the securities of these companies.
From time to time, the Investment Company may refer to the number of
shareholders in the Fund or the aggregate number of shareholders in all Fremont
Mutual Funds or the dollar amount of Fund assets under management or rankings by
DALBAR Savings, Inc. in advertising materials.
The Fund may compare its performance to that of other compilations or indices of
comparable quality to those listed above which may be developed and made
available in the future. The Fund may be compared in advertising to Certificates
of Deposit (CDs), the Bank Rate Monitor National Index, an average of the quoted
rates for 100 leading banks and thrifts in ten U.S. cities chosen to represent
the ten largest Consumer Metropolitan statistical areas, or other investments
issued by banks. The Fund differs from bank investments in several respects. The
Fund may offer greater liquidity or higher potential returns than CDs; but
unlike CDs, the Fund will have a fluctuating share price and return and is not
FDIC insured.
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<PAGE>
The Fund's performance may be compared to the performance of other mutual funds
in general, or to the performance of particular types of mutual funds. These
comparisons may be expressed as mutual fund rankings prepared by Lipper
Analytical Services, Inc. (Lipper), an independent service which monitors the
performance of mutual funds. Lipper generally ranks funds on the basis of total
return, assuming reinvestment of distributions, but does not take sales charges
or redemption fees into consideration, and is prepared without regard to tax
consequences. In addition to the mutual fund rankings, the Fund's performance
may be compared to mutual fund performance indices prepared by Lipper.
The Investment Company may provide information designed to help individuals
understand their investment goals and explore various financial strategies. For
example, the Investment Company may describe general principles of investing,
such as asset allocation, diversification, and risk tolerance.
Ibbottson provides historical returns of capital markets in the United States,
including common stocks, small capitalization stocks, long-term corporate bonds,
intermediate-term government bonds, long-term government bonds, Treasury bills,
the U.S. rate of inflation (based on the CPI), and combinations of various
capital markets. The performance of these capital markets is based on the
returns of different indices.
The Investment Company may use the performance of these capital markets in order
to demonstrate general risk-versus-reward investment scenarios. Performance
comparisons may also include the value of a hypothetical investment in any of
these capital markets. The risks associated with the security types in any
capital market may or may not correspond directly to those of the Fund. The Fund
may also compare performance to that of other compilations or indices that may
be developed and made available in the future.
In advertising materials, the Advisor may reference or discuss its products and
services, which may include retirement investing, the effects of dollar-cost
averaging, and saving for college or a home. In addition, the Advisor may quote
financial or business publications and periodicals, including model portfolios
or allocations, as they relate to fund management, investment philosophy, and
investment techniques.
The Fund may discuss its NASDAQ symbol, CUSIP number, and its current portfolio
management team.
From time to time, the Fund's performance also may be compared to
other mutual funds tracked by financial or business publications and
periodicals. For example, the Fund may quote Morningstar, Inc. in its
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<PAGE>
advertising materials. Morningstar, Inc. is a mutual fund rating service that
rates mutual funds on the basis of risk-adjusted performance. In addition, the
Fund may quote financial or business publications and periodicals as they relate
to fund management, investment philosophy, and investment techniques. Rankings
that compare the performance of Fremont Mutual Funds to one another in
appropriate categories over specific periods of time may also be quoted in
advertising.
The Fund may quote various measures of volatility and benchmark correlation such
as beta, standard deviation, and R2 in advertising. In addition, the Fund may
compare these measures to those of other funds. Measures of volatility seek to
compare the Fund's historical share price fluctuations or total returns compared
to those of a benchmark. Measures of benchmark correlation indicate how valid a
comparative benchmark may be. All measures of volatility and correlation are
calculated using averages of historical data.
The Fund may advertise examples of the effects of periodic investment plans,
including the principle of dollar cost averaging. In such a program, an investor
invests a fixed dollar amount in the Fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against loss in a
declining market, the investor's average cost per share can be lower than if a
fixed number of shares are purchased at the same intervals. In evaluating such a
plan, investors should consider their ability to continue purchasing shares
through periods of low price levels.
The Fund may be available for purchase through retirement plans of other
programs offering deferral of or exemption from income taxes, which may produce
superior after-tax returns over time. For example, a $10,000 investment earning
a taxable return of 10% annually would have an after-tax value of $17,976 after
ten years, assuming tax was deducted from the return each year at a 39.6% rate.
An equivalent tax-deferred investment would have an after-tax value of $19,626
after ten years, assuming tax was deducted at a 39.6% rate from the deferred
earnings at the end of the ten-year period.
The Fund may describe in its sales material and advertisements how an investor
may invest in the Fund through various retirement accounts and plans that offer
deferral of income taxes on investment earnings and may also enable an investor
to make pre-tax contributions. Because of their advantages, these retirement
accounts and plans may produce returns superior to comparable non-retirement
investments. The Fund may also discuss these accounts and plans which include
the following:
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<PAGE>
INDIVIDUAL RETIREMENT ACCOUNTS (IRAS): Any individual who receives earned income
from employment (including self-employment) can contribute up to $2,000 each
year to an IRA (or 100% of compensation, whichever is less). If your spouse is
not employed, a total of $2,250 may be contributed each year to IRAs set up for
each individual (subject to the maximum of $2,000 per IRA). Some individuals may
be able to take an income tax deduction for the contribution. Regular
contributions may not be made for the year after you become 70 1/2, or
thereafter.
ROLLOVER IRAS: Individuals who receive distributions from qualified retirement
plans (other than required distributions) and who wish to keep their savings
growing tax-deferred can rollover (or make a direct transfer of) their
distribution to a Rollover IRA. These accounts can also receive rollovers or
transfers from an existing IRA.
SEP-IRAS AND SIMPLE IRAS: Simplified employee pension (SEP) plans and SIMPLE
plans provide employers and self-employed individuals (and any eligible
employees) with benefits similar to Keogh-type plans or 401(k) plans, but with
fewer administrative requirements and therefore lower annual administration
expenses.
PROFIT SHARING (INCLUDING 401(K) AND MONEY PURCHASE PENSION PLANS): Corporations
can sponsor these qualified defined contribution plans for their employees. A
401(k) plan, a type of profit sharing plan, additionally permits the eligible,
participating employees to make pre-tax salary reduction contributions to the
plan (up to certain limitations).
The Advisor may from time to time in its sales methods and advertising discuss
the risks inherent in investing. The major types of investment risk are market
risk, industry risk, credit risk, interest rate risk, and inflation risk. Risk
represents the possibility that you may lose some or all of your investment over
a period of time. A basic tenet of investing is the greater the potential
reward, the greater the risk.
From time to time, the Fund and the Advisor will quote certain information
including, but not limited to, data regarding: individual countries, regions,
world stock exchanges, and economic and demographic statistics from sources the
Advisor deems reliable, including, but not limited to, the economic and
financial data of such financial organizations as:
1) Stock market capitalization: Morgan Stanley Capital International
World Indices, International Finance Corporation, and Datastream.
2) Stock market trading volume: Morgan Stanley Capital International
World Indices, and International Finance Corporation.
- 46 -
<PAGE>
3) The number of listed companies: International Finance
Corporation, Salomon Brothers, Inc., and S.G. Warburg.
4) Wage rates: U.S. Department of Labor Statistics and Morgan
Stanley Capital International World Indices.
5) International industry performance: Morgan Stanley Capital
International World Indices, Wilshire Associates, and Salomon
Brothers, Inc.
6) Stock market performance: Morgan Stanley Capital International
World Indices, International Finance Corporation, and Datastream.
7) The Consumer Price Index and inflation rate: The World Bank,
Datastream, and International Finance Corporation.
8) Gross Domestic Product (GDP): Datastream and The World Bank.
9) GDP growth rate: International Finance Corporation, The World
Bank, and Datastream.
10) Population: The World Bank, Datastream, and United Nations.
11) Average annual growth rate (%) of population: The World Bank,
Datastream, and United Nations.
12) Age distribution within populations: Organization for Economic
Cooperation and Development and United Nations.
13) Total exports and imports by year: International Finance
Corporation, The World Bank, and Datastream.
14) Top three companies by country, industry, or market:
International Finance Corporation, Salomon Brothers, Inc., and
S.G. Warburg.
15) Foreign direct investments to developing countries: The World
Bank and Datastream.
16) Supply, consumption, demand, and growth in demand of certain
products, services, and industries, including, but not limited
to, electricity, water, transportation, construction materials,
natural resources, technology, other basic infrastructure,
financial services, health care services and supplies, consumer
products and services, and telecommunications equipment and
services (sources of such information may include, but would not
be limited to, The World Bank, OECD, IMF, Bloomberg, and
Datastream).
17) Standard deviation and performance returns for U.S. and non-U.S.
equity and bond markets: Morgan Stanley Capital International.
18) Political and economic structure of countries: Economist
Intelligence Unit.
19) Government and corporate bonds - credit ratings, yield to
maturity and performance returns: Salomon Brothers, Inc.
20) Dividend for U.S. and non-U.S. companies: Bloomberg.
In advertising and sales materials, the Advisor may make reference to or discuss
its products, services, and accomplishments. Such accomplishments do not provide
any assurance that the Fund's investment objective will be achieved.
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<PAGE>
FREMONT INVESTMENT ADVISORS
INNOVATIVE INVESTMENT
MANAGEMENT AND
ADVISORY SERVICES
A subsidiary of Fremont Investors, Inc.
- 48 -
<PAGE>
THE FREMONT GROUP
THE FREMONT GROUP MANAGES OVER $6 BILLION IN FOUR KEY BUSINESS AREAS.
Fremont Investment Advisors, Inc. (FIA), is a subsidiary of Fremont
Investments, Inc., which is affiliated with The Fremont Group.
Fremont Investors, Inc. employs over 200 professionals in offices
throughout the United States and manages over $6 billion in four key
business areas.
Direct Investments - Fremont holds significant equity positions in
companies from a broad range of industries including:
o Crown Pacific -- timber/lumber
o Petro Shopping Centers -- full-service truck stops
o Trinity Ventures -- venture capital
Real Estate - Fremont Properties, Inc., a subsidiary of Fremont Investors, Inc.
acquires and develops commercial, retail and industrial real estate. Fremont
Properties also manages over 6 million square feet of real estate in 29
properties across the U.S.
Energy - Activities of The Fremont Group's energy affiliate, Fremont Energy
L.P., include oil and natural gas exploration and development
Securities Management - Through its affiliated company, Fremont Investment
Advisors, The Fremont Group manages over $4.7 billion in global investment
portfolios.
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<PAGE>
FREMONT INVESTMENT ADVISORS
FREMONT INVESTMENT ADVISORS PROVIDES INVESTMENT
MANAGEMENT SERVICES TO BOTH
INSTITUTIONAL AND INDIVIDUAL CLIENTS.
Originally organized to manage the marketable securities of Bechtel,
Fremont Investment Advisors' professional staff operated for many years within
Bechtel's treasury area. In 1986, FIA became a separate organization.
FIA is a registered investment advisor which provides investment
management and advisory services to a variety of clients including:
-- defined benefit plans
-- defined contribution plans
-- foundations and trusts
-- high net worth individuals
Major clients include the Bechtel Retirement Plan which has over
15,000 participants and was recently rated as one of the ten best
corporate retirement plans in the U.S. by Worth Magazine.
FREMONT MUTUAL FUNDS
THE FREMONT FUNDS OFFER INVESTORS
NINE NO-LOAD MUTUAL FUNDS IN A
WIDE VARIETY OF INVESTMENT AREAS.
Fremont Investment Advisors formed the Fremont Mutual Funds in 1988 in response
to retiring Bechtel employees who were taking their retirement savings out of
the Bechtel Retirement Plan. These employees were looking for low cost mutual
fund options for their personal investments and retirement plan distributions.
The Fremont Family of Funds includes nine no-load mutual funds in a
variety of investment disciplines. From conservative bond and money market funds
to aggressive U.S. micro-cap and international small cap stock funds, Fremont
Mutual Funds offer investors a full range of investment options.
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<PAGE>
INNOVATIVE INVESTMENT MANAGEMENT
FREMONT INVESTMENT ADVISORS UTILIZES BOTH
INTERNAL AND EXTERNAL INVESTMENT
MANAGEMENT EXPERTISE.
Fremont Investment Advisors is innovative in its approach to
investment management. By combining the talents of both internal and
external investment managers, FIA offers the
highest quality management in each
investment discipline.
This "hybrid" approach allows FIA to concentrate
resources in investment areas where its investment
professionals excel. These areas include global
asset allocation, economic analysis and the
municipal bond market.
For other specialty investment disciplines, FIA
selects external or "outside" managers with excellent
long-term performance track records within the
institutional marketplace. This close partnership
provides
smaller institutional and individual investors with access to the
investment management expertise usually reserved only for the largest
institutional investors.
FIA's current team of external managers includes:
International Stock Investments
--Acadian Asset Management
Nicholas-Applegate Capital Management
Bond Investments
--Pacific Investment Management Company
(PIMCO)
FOR MORE INFORMATION ABOUT FREMONT OR
THE FREMONT FUNDS, PLEASE CALL
800-548-4539 (PRESS 1).
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<PAGE>
THE FREMONT GROUP
ORGANIZATION
Direct Investments
Real Estate
Energy
Securities Management
Fremont Fremont
Investment -- Mutual
Advisors Funds
- 52 -
<PAGE>
APPENDIX A: DESCRIPTION OF RATINGS
DESCRIPTION OF COMMERCIAL PAPER RATINGS:
MOODY'S INVESTORS SERVICE, INC. employs the designation "Prime-1" to
indicate commercial paper having the highest capacity for timely repayment.
Issuers rated Prime-1 "have a superior capacity for repayment of short-term
promissory obligations. Prime-1 repayment capacity will normally be evidenced by
the following characteristics: leading market positions in well-established
industries; high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protections; broad
margins in earnings coverage of fixed financial charges and high internal cash
generation; and well-established access to a range of financial markets and
assured sources of alternate liquidity."
STANDARD & POOR'S RATINGS GROUP'S ratings of commercial paper are graded into
four categories ranging from "A" for the highest quality obligations to "D" for
the lowest. Issues assigned the highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with numbers 1, 2, and 3 to indicate the relative degree of safety.
A-1 - "This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation."
FITCH INVESTORS SERVICES, INC.'s short-term ratings apply to debt obligations
that are payable on demand or have original maturities of generally up to three
years, including commercial paper, certificates of deposit, medium-term notes,
and municipal and investment notes. The short-term rating places greater
emphasis than a long-term rating on the existence of liquidity necessary to meet
the issuer's obligations in a timely manner.
F-1+ - "Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely payment."
F-1 - "Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
F-1+."
DUFF & PHELPS CREDIT RATING CO. employs the designation "D-1" to indicate
high-grade short-term debt.
D-1+ - "Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources or funds, is
outstanding, and safety is just below risk-free U.S. Treasury short-term
obligations."
A-1
<PAGE>
D-1 - "Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor."
D-1- - "High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small."
IBCA LIMITED's short-term ratings range from "A1" for the highest quality
obligation to "C" for the lowest.
A1 - "Obligations supported by the highest capacity for timely repayment. Where
issues possess a particularly strong credit feature, a rating of 'A1+' is
assigned."
THOMSON BANKWATCH assigns short-term debt ratings ranging from "TBW-1" to
"TBW-4." Important factors that may influence its assessment are the overall
financial health of the particular company, and the probability that the
government will come to the aid of a troubled institution in order to avoid a
default or failure.
TBW-1 - "The highest category; indicates a very high likelihood that principal
and interest will be paid on a timely basis."
DESCRIPTION OF BOND RATINGS:
MOODY'S INVESTORS SERVICE, INC. rates the long-term debt securities issued
by various entities from "Aaa" to "C." The ratings from "Aa" through "B" may be
modified by the addition of 1, 2 or 3 to show relative standing within the major
rating categories. Investment ratings are as follows:
Aaa - Best quality. These securities "carry the smallest degree of investment
risk and are generally referred to as 'gilt edge.' Interest payments are
protected by a large or by an exceptionally stable margin, and principal is
secure. While the various protective elements are likely to change, such changes
as can be visualized are most unlikely to impair the fundamentally strong
position of such issues."
Aa - High quality by all standards. "They are rated lower than the best bond
because margins of protection may not be as large as in Aaa securities, or
fluctuation of protective elements may be of greater amplitude, or there may be
other elements present which make the long-term risks appear somewhat greater."
A - Upper medium grade obligations. These bonds possess many favorable
investment attributes. "Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a susceptibility
to impairment sometime in the future."
A-2
<PAGE>
Baa - Medium grade obligations. "Interest payments and principal security appear
adequate for the present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and, in fact, have speculative
characteristics as well."
STANDARD & POOR'S RATINGS GROUP rates the long-term debt securities of various
entities in categories ranging from "AAA" to "D" according to quality. The
ratings from "AA" to "CCC" may be modified by the addition of a plus or minus
sign to show relative standing within the major rating categories. Investment
ratings are as follows:
AAA - Highest rating. "Capacity to pay interest and repay principal is
extremely strong."
AA - High grade. "Very strong capacity to pay interest and repay principal."
A - "Strong capacity to pay interest and repay principal," although "somewhat
more susceptible to the adverse effects of change in circumstances and economic
conditions than debt in higher rated categories."
BBB - "Adequate capacity to pay interest and repay principal." These bonds
normally exhibit adequate protection parameters, but "adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal than for debt in higher rated
categories."
FITCH INVESTORS SERVICES, INC. rates the long-term debt securities of various
entities in categories ranging from "AAA" to "D." The ratings from "AA" through
"C" may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories. Investment ratings are as follows:
AAA - "Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events."
AA - "Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated 'AAA.' Because bonds are rated
'AAA' and 'AA' categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally
rated 'F-1+'."
A - "Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings."
A-3
<PAGE>
BBB - "Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds and, therefore,
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings."
DUFF & PHELPS CREDIT RATING CO. rates the long-term debt securities of various
entities in categories ranging from "AAA" to "DD." The ratings from "AA" through
"B" may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories. Investment ratings are as follows:
AAA - "Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt."
AA - "High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions."
A - "Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress."
BBB - "Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles."
IBCA LIMITED rates the long-term debt securities of various entities in
categories ranging from "AAA" to "C." The ratings below "AAA" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories. Investment ratings are as follows:
AAA - "Obligations for which there is the lowest expectation of investment risk.
Capacity for timely repayment of principal and interest is substantial, such
that adverse changes in business, economic or financial conditions are unlikely
to increase investment risk substantially."
AA - "Obligations for which there is a very low expectation of investment risk.
Capacity for timely repayment of principal and interest is substantial. Adverse
changes in business, economic or financial conditions may increase investment
risk, albeit not very significantly."
A - "Obligations for which there is a low expectation of investment risk.
Capacity for timely repayment of principal and interest is strong, although
adverse changes in business, economic or financial conditions may lead to
increased investment risk."
A-4
<PAGE>
BBB - "Obligations for which there is currently a low expectation of investment
risk. Capacity for timely repayment of principal and interest is adequate,
although adverse changes in business, economic or financial conditions are more
likely to lead to increased investment risk than for obligations in other
categories."
THOMSON BANKWATCH rates the long-term debt securities of various entities in
categories ranging from "AAA" to "D." The ratings may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories. Investment ratings are as follows:
AAA - "Indicates that the ability to repay principal and interest on a timely
basis is extremely high."
AA - "Indicates a very strong ability to repay principal and interest on a
timely basis, with limited incremental risk compared to issues rated in the
highest category."
A - " Indicates the ability to repay principal and interest is strong. Issues
rated A could be more vulnerable to adverse developments (both internal and
external) than obligations with higher ratings."
BBB - "The lowest investment-grade category; indicates an acceptable capacity to
repay principal and interest. BBB issues are more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings."
A-5
