File Nos. 33-23453
811-5632
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 / X/
Post-Effective Amendment No. 28
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 / X/
--
Amendment No. 31
FREMONT MUTUAL FUNDS, INC.
(Exact Name of Registration as Specified in Charter)
333 Market Street, Suite 2600
SAN FRANCISCO, CALIFORNIA 94105
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code:
(415) 284-8733
Tina Thomas, Secretary
Fremont Mutual Funds, Inc.
333 Market Street, Suite 2600
SAN FRANCISCO, CALIFORNIA 94105
(Name and Address of Agent for Service)
copy to:
Julie Allecta
Paul, Hastings, Janofsky & Walker, LLP
345 California Street, 29th floor
SAN FRANCISCO, CA 94104-2635
The Registrant has filed a declaration pursuant
to Rule 24f-2. On December 30, 1996, it
filed its Rule 24f-2 Notice for
the fiscal year ended
October 31, 1996.
It is proposed that this filing will become effective (check
appropriate box)
/ / immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)
/ / on December 31, 1997 pursuant to paragraph (a) of Rule 485
/X/ 75 days after filing pursuant to paragraph (a)(ii)
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FREMONT MUTUAL FUNDS, INC.
CROSS-REFERENCE SHEET
Between Items Enumerated in Form N-1A and
this Registration Statement
References to items numbered 1 - 23 are for the Fremont Real Estate Securities
Fund and for the Fremont Select Fund, respectively.
Item No. of
PART A OF FORM N-1A CAPTIONS IN PROSPECTUS
1. Cover Page Cover Page
2. Synopsis Summary of Fees and Expenses;
Investment Results
3. Financial Highlights Inapplicable
4. General Description of The Advisor and the Fund;
Registrant Investment Objective,
Policies, and Risk
Considerations; General
Investment Policies
5. Management of the Fund The Advisor and the Fund;
Execution of Portfolio
Transactions; General
Information
6. Capital Stock and Other Shareholder Account Services
Securities and Privileges; Dividends,
Distributions, and Federal
Income Taxation; General
Information
7. Purchase of Securities How to Invest; Calculation of
Being Offered Net Asset Value and
Public Offering Price
8. Redemption or Repurchase How to Redeem Shares;
Calculation of Net Asset Value
and Public Offering Price
9. Pending Legal Proceedings Inapplicable
Item No. of Captions in Statement of
PART B OF FORM N-1A ADDITIONAL INFORMATION
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and Inapplicable
History
13. Investment Objectives and Investment Objective,
Policies Policies, and Risk
Considerations; Investment
Restrictions; Appendix A:
Description of Securities
Ratings
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14. Management of the Funds Investment Company Directors
and Officers; Investment
Advisory and Other Services
15. Control Persons and Investment Company Directors
Principal Holders of and Officers; Investment
Securities Advisory and Other Services;
Additional Information
16. Investment Advisory and Investment Advisory and Other
Other Services Services; Additional
Information
17. Brokerage Allocation and Execution of Portfolio
Other Practices Transactions
18. Capital Stock and Other Additional Information
Securities
19. Purchase, Redemption and How to Invest; Other
Pricing of Securities Investment and Redemption
Being Offered Services
20. Tax Status Taxes -- Mutual Funds
21. Underwriters Investment Advisory and Other
Services
22. Calculation of Performance Investment Results
Data
23. Financial Statements Inapplicable
PART C OF FORM N-1A
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to the Registration Statement.
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FREMONT MUTUAL FUNDS, INC.
Fremont Real Estate Securities Fund
December __, 1997
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TABLE OF CONTENTS
Item Page No.
Summary of Fees and Expenses..................................................
The Advisor, the Sub-Advisor and the Fund.....................................
Investment Objective, Policies,
and Risk Considerations.......................................................
General Investment Policies...................................................
Investment Results............................................................
How to Invest.................................................................
Shareholder Account Services and Privileges...................................
How to Redeem Shares..........................................................
Retirement Plans..............................................................
Dividends, Distributions,
and Federal Income Taxation...................................................
Plan of Distribution..........................................................
Calculation of Net Asset Value and
Public Offering Price.........................................................
Execution of Portfolio Transactions...........................................
General Information...........................................................
Telephone Numbers and Addresses...............................................
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PROSPECTUS
FREMONT MUTUAL FUNDS, INC. is an open-end investment company which under
this Prospectus is offering shares in the FREMONT REAL ESTATE SECURITIES FUND
(the "Fund").
FREMONT REAL ESTATE SECURITIES FUND seeks to obtain maximum total return
through a combination of income and long-term capital appreciation by investing
primarily in equity securities of companies in the real estate industry.
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 (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, NOR HAS THE COMMISSION ON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Prospectus is December __, 1997.
FOR FURTHER INFORMATION OR TO REQUEST A COPY OF THE STATEMENT OF ADDITIONAL
INFORMATION, CALL 800-548-4539.
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SUMMARY OF FEES AND EXPENSES
RETAIL SHARES
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
Annual Fund Operating Expenses (as a percentage of average net assets)(b)
Management Fee 1.00%
12b-1 Expenses (c) .25%
Other Expenses after Reimbursement .25%
Total Fund Operating Expenses 1.50%
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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 $15
3 Years $47
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, the Sub-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 $10.
See "How to Redeem Shares."
(b) The Advisor has agreed to limit the Fund's total operating expenses to 1.50%
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 .55% and 1.80%, respectively.
(c) 12b-1 fees may be paid to financial intermediaries for services provided
through sales program(s). Long-term shareholders may pay more than the economic
equivalent of the maximum front-end sales charges permitted by the rules of the
National Association of Securities Dealers. For more information on 12b-1 fees,
see "Plan of Distribution."
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THE ADVISOR, THE SUB-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 Real
Estate Securities Fund. The Investment Company has other series offered under a
different prospectus, and the Board of Directors of the Investment Company is
permitted to create additional series at any time. The Fund has its own
investment objective and policies and operates as a separate mutual fund.
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") provides the Fund with investment management services under an
Investment Advisory Agreement (the "Advisory Agreement") with the Investment
Company. The Advisory Agreement provides that the Advisor 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. As described more fully below, the Advisor has retained Kensington
Investment Group (the "Sub-Advisor") to provide the Fund with portfolio
management services. The Advisor's Investment Committee oversees the portfolio
management of the Fund, including the services provided by the Sub-Advisor.
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.
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
an advisory fee, computed daily and paid monthly, of 1.00% 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: 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 of 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
non-recurring expenses that are not expressly assumed by the Advisor.
The Advisor anticipates waiving fees and reimbursing the Fund for other
operating expenses in order to limit total operating expenses to 1.50% of
average daily net assets. 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.
Kensington Investment Group is an SEC-registered investment advisor which
specializes in the management of both traded and non-traded real estate
securities portfolios. Kensington was founded in 1993 by principals who have
been active in real estate securities research, trading and portfolio management
since 1985. Kensington currently manages over $65 million in private funds which
have invested in traded real estate investment trusts, real estate related
operating companies and existing real estate limited partnerships. John P.
Kramer, President and founding partner of Kensington Investment Group, is
involved in all aspects of the organization and is primarily responsible for
directing
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the firm's investment policies. Paul Gray, Vice President and Portfolio Manager
is responsible for securities investment decisions on behalf of Kensington's
portfolios.
Until terminated, the Portfolio Management Agreement between the Investment
Company (with respect to the Fund), the Advisor and the Sub-Advisor provides
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) pays the Sub-Advisor a
fee equal to .50% per annum of Fund assets managed by the Sub-Advisor. Both the
Advisor and the Sub-Advisor will waive their fees for the first six months, and
will then continue to waive fees until the earlier of December 31, 1998 or until
assets in the Fund reach $25 million. The Portfolio Management Agreement with
the Sub-Advisor may be terminated by the Advisor or the Investment Company upon
30 days' written notice. The Advisor has 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. 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 sub-advisory 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 re-assigned (and, thus, automatically terminated), and
modify sub-advisory 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 administrative 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 its services, the Administrator receives
an annual fee from the Advisor (not the Fund) equal to 0.02% of the first $1
billion of the Investment Company's average daily net assets and 0.015%
thereafter, subject to a minimum annual fee of $20,000 per Fund.
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 are 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. The Fremont Real Estate Securities Fund is not
intended to constitute a complete investment program. Investors should consult
with their financial and other advisors concerning the suitability of this
investment for their own particular circumstances. There is no assurance that
the Fund will achieve its investment objective.
The investment objective of the Real Estate Securities Fund is to obtain a
balanced combination of income and long-term capital appreciation by investing
primarily in equity securities of companies in the real estate industry. Equity
securities include common stocks (including shares or units in real estate
investment trusts), rights or warrants to purchase common stocks, limited
partnership interests in master limited partnerships, securities convertible
into common stocks, and preferred stocks.
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Under normal market conditions, at least 65% of the Portfolio's total assets
will invested in equity securities of companies principally engaged in the real
estate industry. For purposes of the Fund's investment policies, a company is in
the real estate industry if it derives at least 50% of its revenues from the
ownership, construction, financing, management or sale of commercial,
industrial, or residential real estate or that has at least 50% of its assets in
such real estate. Companies in the real estate industry may include: REITs, real
estate operating companies, companies operating business which own a substantial
amount of real estate such as hotels and assisted living facilities and
development companies.
A substantial portion of the Portfolio's assets will be invested in securities
of real estate investment trusts ('REITs'). REITs pool investors' funds for
investment primarily in income producing real estate or real estate related
loans or interests. A REIT is not taxed on income distributed to shareholders if
it complies with several requirements relating to its organization, ownership,
assets, and income and a requirement that it distribute to its shareholders at
least 95% of its taxable income (other than net capital gains) for each taxable
year. REITs can generally be classified as Equity REITs, Mortgage REITs and
Hybrid REITs. Equity REITs, which invest the majority of their assets directly
in real property, derive their income primarily from rents. Equity REITs can
also realize capital gains by selling properties that have appreciated in value.
Mortgage REITs, which invest the majority of their assets in real estate
mortgages, derive their income primarily from interest payments. Hybrid REITs
combine the characteristics of both Equity REITs and Mortgage REITs.
The Fund will not invest in real estate directly, but only in securities issued
by real estate companies. However, the Fund may be subject to risks similar to
those associated with the direct ownership of real estate (in addition to
securities markets risks) because of its policy of concentration in the
securities of companies in the real estate industry. These include declines in
the value of real estate, risks related to general and local economic
conditions, dependency on management skill, increase in interest rates, possible
lack of availability of mortgage funds, overbuilding, extended vacancies of
properties, increased competition, increases in property taxes and operating
expenses, changes in zoning laws, losses due to costs resulting from the
clean-up of environmental problems, casualty or condemnation losses, limitations
on rents, changes in neighborhood values and the appeal of properties to
tenants. Certain REIT's have relatively small capitalization, which may tend to
increase the volatility of the market price of securities issued by such REITs.
Rising interest rates may cause investors in REITs to demand a higher annual
yield from future distributions, which may in turn decrease market prices for
equity securities issued by REITs. Rising interest rates also generally increase
the costs of obtaining financing, which could cause the value of the Fund's
investments to decline. During periods of declining interest rates, certain
mortgage REITs may hold mortgages that the mortgagors elect to prepay, which
prepayment may diminish the yield on securities issued by such mortgage REITs.
In addition, mortgage REITs may be affected by the ability of borrowers to repay
when due the debt extended by the REIT and equity REITs may be affected by the
ability of tenants to pay rent.
In addition to these risks, Equity REITs may be affected by changes in the value
of the underlying property owned by the trusts, while Mortgage REITs may be
affected by the quality of any credit extended. Further, Equity and Mortgage
REITs are dependent upon management skills and generally may not be diversified.
In addition, Equity and Mortgage REITs could possibly fail to qualify for tax
free pass-through of income under the Internal Revenue Code of 1986, as amended
(the 'Code'), or to maintain their exemptions from registration under the
Investment Company Act of 1940 (the '1940 Act'). The above factors may also
adversely affect a borrower's or a lessee's ability to meet its obligations to
the REIT. In the event of a default by a borrower or lessee, the REIT may
experience delays in enforcing its rights as a mortgagee or lessor and may incur
substantial costs associated with protecting its investments.
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Distributions that the Fund receives from a REIT, and dividends of the Fund
attributable to such distributions, will not constitute "dividends" for purposes
of the dividends-received deduction applicable to corporate shareholders.
The Portfolio is a non-diversified portfolio and is not limited by the 1940 Act
in the proportion of its assets that may be invested in the obligations of a
single issuer. The Portfolio, therefore, may invest a greater proportion of its
assets in the securities of a smaller number of issuers and will be subject to a
greater risk with respect to its portfolio securities. Any economic, regulatory,
or political developments affecting the value of the securities held in the
Portfolio could have a greater impact on the total value of the Portfolio's
holdings than would be the case if the Portfolio were classified as diversified
under the 1940 Act.
Although the Fund invests primarily in common stocks, 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
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
convertible and non-convertible bonds and preferred stocks, when the Advisor and
Sub-Advisor believe that these investments offer opportunities for capital
appreciation. Preferred stocks and bonds will be rated at the time of purchase
in the top four categories of Moody's Investors Service, Inc. (Baa or higher) or
Standard & Poor's Ratings Group (BBB or higher) or be of comparable quality as
determined by the Advisor or Sub-Advisor . Bonds and preferred stocks in the
lowest investment grade category (Baa or BBB) have speculative characteristics;
as a result, changes in the economy or other circumstances are more likely to
lead to a weakened capacity of such securities to make principal and interest
payments or to pay the preferred stock obligations than would occur with bonds
and preferred stocks in higher categories. See Appendix A to the Statement of
Additional Information for a description of rating categories.
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 or the Sub-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 or the
Sub-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.
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 certificates, are
supported by the full faith and credit of the United States; others, such as
those of the Federal Home Loan Mortgage Association, are supported by the right
of the issuer to
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borrow from the Treasury; others, such as those of the Federal National Mortgage
Association, 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 when-issued securities the value of which is greater
than 5% of its net assets.
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 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.
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
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.
Portfolio Turnover. The Fund expects to trade in securities for short-term gain
whenever deemed advisable by the Advisor and/or 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
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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 33 1/3% 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 assets value would decline faster
than otherwise would be the case.
Restricted Securities. The Fund may purchase securities that are not registered
("restricted securities") under federal securities laws, but can be offered and
sold to "qualified institutional buyers." However, the Fund will not invest more
than 15% of its 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 Sub-Advisor the daily function of determining and monitoring
liquidity of restricted securities. The Board, however, will retain sufficient
oversight and be ultimately responsible for the determinations.
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 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 segregate 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
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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 segregate cash, cash equivalents, or liquid securities, or hold a
covered position against any potential delivery or payment obligations under any
outstanding option or futures contacts.
Options and futures can be volatile investments. If the Advisor and/or
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, possible reduction in value of both the securities
hedged and the hedging instrument, 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 --inability to effect closing transactions at favorable
prices and 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 Addition Information.
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 on 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
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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 income 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.
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
the Fund's investment objective and policies. See "Investment Results" in the
Statement of Additional Information.
Additional performance information regarding the Fund will be included in its
annual report, which will be mailed to shareholders without charge upon request.
HOW TO INVEST
The 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 Fund. 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 $2,000 is required to open a shareholder account, except for
retirement plans such as Individual Retirement Accounts (IRAs) and Keogh Plans.
Retirement plans are subject to a $1,000 minimum initial investment. The minimum
initial investment is waived for accounts opened with the Automatic Investment
Plan and may be waived in other instances at the sole discretion of the Advisor.
(See "Automatic Investment Plan.") Each subsequent investment in the Fund must
be $100 or more except in the case of retirement plans or Automatic Investment
Plans. There is a minimum continuing balance of $1,500 required for
non-retirement accounts (calculated on the basis of original investment value).
All investments not meeting the minimum will be returned. In some cases, the
minimum balance requirement may be waived. All purchases made by check should be
in U.S. dollars and be made payable to the appropriate Fremont Fund. Third party
checks, credit cards, and cash will not be accepted.
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. 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
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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 canceled due
to nonpayment (for example, a check returned for "insufficient funds"), the
person who made the order 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.
First Fund Distributors, Inc., 4455 Camelback Road, Suite 261E, Phoenix,
Arizona, 85018, is the principal underwriter for the Fund.
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. It is required
that (1) all shares in one Fund must be exchanged or (2) the remaining balance
must be at least $1,500. This minimum balance requirement may be waived. 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.
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 Fund, cann be limited by the Investment Company's
refusal to accept further purchase and exchange orders from a 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.
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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.
Autobuy Privilege. The autobuy privilege allows shareholders to purchase
subsequent shares by moving money directly from their checking account to a
Fremont Fund. The Autobuy privilege will not be added to an account without
written authorization from the shareholder. A shareholder may then purchase
additional shares in an existing account by calling 800-548-4539 and instructing
the Transfer Agent as to the dollar amount wanting to be invested. The
investment will automatically be processed through the Automatic Clearing House
(ACH) system. There is no fee for this option. If the privilege was not
established at the time the account was opened, the shareholder must complete
the appropriate form. The form is available on request.
Automatic Investment Plan. 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
minimum initial investment is waived for accounts opened with the Automatic
Investment Plan. The amount of the monthly investment must be at least $50, and
is not otherwise subject to the $100 minimum for subsequent investments. If the
purchase falls on a weekend or holiday, the purchase will be made on the
previous business day. Shareholders should note that if there is an Automatic
Investment Plan established for an account and the entire account is exchanged
into another Fund, the Automatic Investment Plan must be renewed by the
shareholder to the Transfer Agent. 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
canceled due to nonpayment (for example, "insufficient funds"), 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 $10
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.
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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.
For written redemption requests for an amount greater than $25,000, or a
redemption request that directs 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 that the amount paid for them.
Redemption of shares by exchanges, transfers and redemptions under an Automatic
Withdrawal Plan 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. (The Telephone Redemption Privilege is not available for IRA or
other retirement accounts.) 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. 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 by check will be
made on the 15th and/or the last business day of the month. Redemptions made by
electronic transfer will be made on any date the shareholder chooses.
Shareholders may also request automatic exchanges and transfers of a specified
dollar amount. Exchanges and transfers will be made on any date the shareholder
chooses. Because a redemption constitutes a liquidation of shares, the number of
shares owned in the account will be reduced. Automatic redemptions should not
reduce the account below the minimum balance required (currently $1,500). If the
redemption date falls on a weekend or holiday, the redemption will be made on
the previous business day. 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 the shareholder to the Transfer Agent. A
shareholder wishing to initiate automatic redemptions must complete an Automatic
Withdrawal Plan form available from the Transfer Agent.
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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.
The Fund reserves the right to redeem mandatorily the shares in a shareholder's
account (other than a retirement plan account) if the balance is reduced to less
than $1,500 in net asset value through redemptions or other action by the
shareholder. Notice will be given to the shareholder at least 30 days prior to
the date fixed for such redemption, during which time the shareholder may
increase its holdings to an aggregate amount of $1,500 or more (with a minimum
purchase of $100 or more.) This minimum balance may be waived.
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. State Street Bank and Trust Company, c/o NFDS, P.O. Box 419343,
Kansas City, Missouri, 64141, serves as Transfer and Dividend Disbursing Agent
and shareholder service agent. The transfer agent is not involved in determining
investment policies of the Fund or its portfolio securities transactions. Its
services do not protect shareholders against possible depreciation of their
assets. The fees of State Street Bank and Trust Company are paid by the Fund and
thus borne by the Fund's shareholders. State Street Bank and Trust Company has
contracted with National Financial Data Services to serve as shareholder
servicing agent. A depository account has been established at United Missouri
Bank of Kansas City ("United Missouri Bank") through which all payments for the
funds will be processed.
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; 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
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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.
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:
* to have all dividends and capital gain distributions automatically reinvested
in additional shares; or
* 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
* to receive all distributions of income dividends and capital gains in cash.
* to invest all dividend and capital gain distributions in another Fremont Fund
owned through an identically registered account.
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 gain
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 gain 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.
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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.
Distributions are taxable to you regardless of whether they are taken in cash or
reinvested, even if the value of your shares is below your cost. If you purchase
shares shortly before a distribution, you must pay income taxes on the
distribution, even though the value of your investment (plus cash received, if
any) remains the same. In addition, the share price at the time you purchase
shares may include unrealized gains in the securities held in the investment
portfolio of the Fund. If these portfolio securities are subsequently sold and
the gains are realized, they will, to the extent not offset by capital losses,
be paid to you as a distribution of capital gains and will be taxable to you as
short-term or long-term capital gains.
Because of the nature of REIT investments, REITs may generate significant non
cash deductions (i.e. depreciation on real estate holdings) while having a
greater cash flow to distribute to its shareholders, If a REIT distributes more
cash than it has taxable income, a "return on capital" results. A "return of
capital" represents a portion of shareholder's original investment that is
generally non taxable when distributed (returned) to the investor. If you do not
reinvest distributions, the cost basis of your shares will be decreased by the
amount of return capital, which may result in a larger capital gain when you
sell your shares. Although a return of capital is generally non taxable to you
upon distribution, it would be taxable to you as a capital gain if your cost
basis in the shares is reduced to zero. This could occur if you do not reinvest
distributions and the returns of capital are significant,
Because REITs invested in by the Fund do not provide complete information about
the taxability of their distributions until after the calendar year end, Fremont
Advisors may not be able to determine how much of the Fund's distribution is
taxable to shareholders until after the January 31 deadline for issuing Form
1099-DIV. As a result, the Fund may request permission each year from the
Internal Revenue Service for an extension of time to issue Form 1099-Div to
February 28.
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 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.
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.
PLAN OF DISTRIBUTION
Pursuant to Rule 12b-1 under the 1940 Act, the Fund has adopted a plan of
distribution (the "Plan") under which the Fund may directly compensate the
Advisor, paying for certain distribution-related expenses, including payments to
securities dealers and others (including the Underwriter) who are engaged in
promoting the sale of shares of the Fund and who may be advising investors
regarding the purchase, sale, or retention of such shares; expenses of
maintaining personnel who engage in or support distribution of shares or who
render shareholder support services not otherwise provided by
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the Advisor or the Transfer Agent; expenses of formulating and implementing
marketing and promotional activities, including direct mail promotions and mass
media advertising; expenses of preparing, printing, and distributing sales
literature, prospectuses, statements of additional information, and reports for
recipients other than existing shareholders of the Fund; expenses of obtaining
such information, analyses, and reports with respect to marketing and
promotional activities as the Investment Company may, from time to time, deem
advisable; and other expenses related to the distribution of the Fund's shares.
The annual limitation for compensation to the Advisor pursuant to the Plan is
.25% of the Fund's average daily net assets. All payments will be reviewed by
the Fund's Board of Directors. However, it is possible that in certain periods,
the amount of the Advisor's compensation could exceed the Advisor's distribution
expenses resulting in a profit to the Advisor. In the event the Plan is
terminated by the Fund in accordance with its terms, the Fund will not be
required to make any payments for expenses incurred by the Advisor after the
date the Plan terminates.
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.
EXECUTION OF PORTFOLIO TRANSACTIONS
Orders for the Fund's portfolio securities transactions are placed by the
Advisor or Sub-Advisor, as applicable. The Advisor and 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.
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<PAGE>
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 the Sub-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.
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.
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<PAGE>
TELEPHONE NUMBERS AND ADDRESSES
To make an initial purchase:
1. By mail:
Fremont Mutual Funds, Inc.
c/o National Financial Data Services
P.O. Box 419343
Kansas City, MO 64141-6343
Street address:
1004 Baltimore Avenue
Kansas City, MO 64105
2. By wire:
Please call the Transfer Agent at 800-548-4539 (press 2) to obtain an
account number and detailed instructions.
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
greater than $25,000 or 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
Fremont Mutual Funds, Inc.
Fremont Money Market Fund
Fremont Bond Fund
Fremont California Intermediate Tax-Free Fund
Fremont Real Estate Securities Fund
Fremont Global Fund
Fremont Growth Fund
Fremont International Growth Fund
Fremont Select Fund
Fremont U.S. Small Cap Fund
Fremont International Small Cap Fund
Fremont Emerging Markets Fund
Fremont U.S. Micro-Cap Fund
Fremont Institutional U.S. Micro-Cap Fund
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<PAGE>
For more information on the Fremont Mutual Funds please call 800-548-4539 or
write to:
Fremont Mutual Funds
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:
National Financial Data Services
P.O. Box 419343
Kansas City, MO 64141-6343
800-548-4539 (press 2)
Street Address:
National Financial Data Services
1004 Baltimore Avenue
Kansas City, MO 64105
Custodian
The Northern Trust Company
50 South Lasalle Street
Chicago, IL 60675
Legal Counsel
Paul, Hastings, Janofsky & Walker LLP
345 California Street, 29th 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 Funds 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.
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<PAGE>
FREMONT MUTUAL FUNDS, INC.
Fremont Real Estate Securities Fund
Toll-Free: 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 Realty Fund (the "Fund")
dated December __, 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 December __, 1997.
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<PAGE>
TABLE OF CONTENTS
Page
Investment Objective, Policies, And Risk Considerations.......................
Investment Restrictions.......................................................
Investment Company Directors And Officers.....................................
Investment Advisory And Other Services........................................
Plan Of Distribution..........................................................
Execution Of Portfolio Transactions...........................................
How To Invest.................................................................
Other Investment And Redemption Services......................................
Taxes - Mutual Funds..........................................................
Additional Information........................................................
Investment Results............................................................
Information About Fremont Investment Advisors.................................
Appendix A: Description Of Ratings............................................
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<PAGE>
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") or the Fund's sub-advisor ("Sub-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 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 or Sub-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
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<PAGE>
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.
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 18 months 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
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
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<PAGE>
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 or Sub-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 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 or Sub-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.
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<PAGE>
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 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
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.
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<PAGE>
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.
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.
- 7 -
<PAGE>
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.
"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 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
- 8 -
<PAGE>
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.
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. 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.
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 -32-
currencies upon which the Futures Contracts are based. 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.
- 9 -
<PAGE>
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.
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 is a "Non-diversified" management investment company,
as defined in the Investment Company Act of 1940 (the "1940 Act"). Therefore, it
is not subject to the diversifications requirements.
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 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.
- 10 -
<PAGE>
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 or Sub-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 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 or Sub-Advisor's ability to
predict correctly whether certain types of
- 11 -
<PAGE>
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 or Sub-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 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.
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 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
- 12 -
<PAGE>
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.
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, the Sub-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 or Sub-Advisor to be liquid in
accordance with standards established by the Investment Company's Board of
Directors. Under these standards, the Advisor or Sub-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 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 or Sub-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
- 13 -
<PAGE>
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. Buy or sell real estate (excluding 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.
2. 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.
3. 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.
4. 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.
5. Change its status as either a diversified or a non-diversified investment
company.
6. 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.
7. 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:
8. Invest in companies for the purpose of exercising control or management.
9. 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.
10. 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.
- 14 -
<PAGE>
11. 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.
12. 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.
13. Make short sales of securities or maintain a short position, except that
the Fund may sell short "against the box."
14. Acquire more than 3% of the outstanding voting securities of any one
investment company.
- 15 -
<PAGE>
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 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.
<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 7/96 - Present
Fremont Investment Advisors, Inc. Senior Vice President and
333 Market Street, 26th Floor Director, Fremont Investment
San Francisco, CA 94105 Advisors, Inc.
10/77 - 7/96
Senior Vice President
Business Development
Benham 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 Investment
333 Market Street, 26th Floor. 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
4105 Shelter Bay Avenue advisors).
Mill Valley, CA 94941
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).
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
</TABLE>
- 16 -
<PAGE>
<TABLE>
<S> <C> <C> <C>
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
Tina Thomas 8-7-49 Vice President, Secretary, and 6/96 - Present Vice President
Fremont Investment Advisors, Inc. Chief Compliance Officer and Chief Compliance Officer,
333 Market Street, 26th Floor Fremont Investment Advisors, Inc.
San Francisco, CA 94105 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, 26h 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
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Dean Boebinger 11-21-55 Vice President 12/95 - Present
Fremont Investment Advisors, Inc. National Sales Manager,
3000 Post Oak Blvd., Suite 100 Fremont Investment
Houston, TX 77056 Advisors, Inc.
8/94 - 12/95
Regional Sales Manager
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 September 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.
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 Agreement (the "Advisory
Agreement"), the Advisor is paid a monthly fee at the annual rate of 1.00% 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 anticipates waiving its fees and
reimbursing the Fund for other operating expenses in order to limit total
operating expenses to 1.50% of 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 1.50% 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 interests of the Fund and the
shareholders at the time such reimbursement is requested. Because of these
substantial
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<PAGE>
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, Michael H. Kosich 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 from 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.
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. Pursuant to this
authority,Kensington Investment Group (the "Sub-Advisor") serves as the Fund's
Sub-Advisor. The Sub-Advisor is overseen by the members of the Fremont
Investment Committee. See "Investment Company Directors and Officers."
The current Portfolio Management Agreement provides 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 statement (including, but not limited to, the investment
objective, policies, and restrictions delineated in the Fund's current
Prospectus and Statement of Additional Information), 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 .50% of the Fund's average net assets. Both the Advisor and
the Sub-Advisor will waive their fees for the first six months, and will then
continue to waive fees until the earlier of December 31, 1998 or until assets in
the Fund reach $25 million.
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 the 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 Company who are not parties to the
- 19 -
<PAGE>
Agreement 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.
Principal Underwriter. The Fund's principal underwriter is First Fund
Distributors, Inc., 4455 E. Camelback Road, Suite 261E, Phoenix, Arizona 85018
(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 will receive compensation
of $50,000 from the Advisor with respect to the fiscal year ended October 31,
1998 for services as Distributor.
Transfer Agent. State Street Bank and Trust Company, c/o NFDS, P.O. Box 419343,
Kansas City, Missouri, 64141, serves as Transfer and Dividend Disbursing Agent
and shareholder service agent. The Transfer Agent is not involved in determining
investment policies of the Fund or its portfolio securities transactions. Its
services do not protect shareholders against possible depreciation of their
assets. The fees of State Street Bank and Trust Company are paid by the Fund and
thus borne by the Fund's shareholders. State Street Bank and Trust Company has
contracted with National Financial Data Services to serve as shareholder
servicing agent. A depository account has been established at United Missouri
Bank of Kansas City ("United Missouri Bank") through which all payments for the
funds will be processed.
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 0.02% of the first $1 billion of the
Investment Company's average daily net assets, 0.015% thereafter, subject to a
minimum annual fee of $20,000 per fund.
PLAN OF DISTRIBUTION
As stated in the Prospectus, the Fund has adopted a plan of distribution (the
"Plan") pursuant to Rule 12b-1 under the 1940 Act which permits the Fund to
compensate the Advisor for expenses incurred in the distribution and promotion
of the Fund's shares, including, but not limited to, the printing of
prospectuses, statements of additional information, and reports used for sales
purposes, advertisements, expenses of preparation and printing of sales
literature, promotion, marketing, and sales expenses, and other
distribution-related expenses, including any distribution fees paid to
securities dealers or other firms who have executed a distribution or service
agreement with the Underwriter. The Plan expressly permits payments in any
fiscal year up to a maximum of .25% of the average daily net assets of the Fund.
It is possible that the Advisor could receive compensation under the Plan that
exceeds the Advisor's costs and related distribution expenses, thus resulting in
a profit to the Advisor.
Agreements implementing the Plan (the "Implementation Agreements") are in
writing and have been approved by the Board of Directors. All payments made
pursuant to the Plan are made in accordance with written agreements and are
reviewed by the Board of Directors at least quarterly.
The continuance of the Plan and the Implementation Agreements must be
specifically approved at least annually by a vote of the Investment Company's
Board of Directors and by a vote of the Directors
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<PAGE>
who are not interested persons of the Investment Company and have no direct or
indirect financial interest in the Plan or any Implementation Agreement (the
"Independent Directors") at a meeting called for the purpose of voting on such
continuance. The Plan may be terminated at any time by a vote of a majority of
the Independent Directors or by a vote of the holders of a majority of the
outstanding shares of the Fund. In the event the Plan is terminated in
accordance with its terms, the Fund will not be required to make any payments
for expenses incurred by the Advisor after the termination date. Each
Implementation Agreement terminates automatically in the event of its assignment
and may be terminated at any time by a vote of a majority of the Independent
Directors or by a vote of the holders of a majority of the outstanding shares of
the Fund on not more than 60 days' written notice to any other party to the
Implementation Agreement. The Plan may not be amended to increase materially the
amount to be spent for distribution without shareholder approval. All material
amendments to the Plan must be approved by a vote of the Investment Company's
Board of Directors and by a vote of the Independent Directors.
In approving the Plan, the Directors determined, in the exercise of their
business judgment and in light of their fiduciary duties as Directors, that
there is a reasonable likelihood that the Plan will benefit the Fund and its
shareholders. The Board of Directors believes that expenditure of the Fund's
assets for distribution expenses under the Plan should assist in the growth of
the Fund, which will benefit the Fund and its shareholders through increased
economies of scale, greater investment flexibility, greater portfolio
diversification, and less chance of disruption of planned investment strategies.
The Plan will be renewed only if the Directors make a similar determination for
each subsequent year of the Plan. There can be no assurance that the benefits
anticipated from the expenditure of the Fund's assets for distribution will be
realized. While the Plan is in effect, the costs to and expenses incurred by the
Advisor pursuant to the Plan and the purposes underlying such cash and
expenditures must be reported quarterly to the Board of Directors for its
review. In addition, the selection and nomination of those Directors who are not
interested persons of the Investment Company are committed to the discretion of
the Independent Directors during such period.
Pursuant to the Plan, the Fund may also make payments to banks or other
financial institutions that provide shareholder services and administer
shareholder accounts. The Glass-Steagall Act prohibits banks from engaging in
the business of underwriting, selling, or distributing securities. Although the
scope of this prohibition under the Glass-Steagall Act has not been clearly
defined by the courts or appropriate regulatory agencies, management of the
Investment Company believes that the Glass-Steagall Act should not preclude a
bank from providing such services. However, state securities laws on this issue
may differ from the interpretations of federal law expressed herein and banks
and financial institutions may be required to register as dealers pursuant to
state law. If a bank were prohibited from continuing to perform all or a part of
such services, management of the Investment Company believes that there would be
no material impact on the Fund or its shareholders. Banks may charge their
customers fees for offering these services to the extent permitted by regulatory
authorities, and the overall return to those shareholders availing themselves of
the bank services will be lower than to those shareholders who do not. The Fund
may from time to time purchase securities issued by banks which provide such
services; however, in selecting investments for the Fund, no preference will be
shown for such securities.
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 or Sub-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 or Sub-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.
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<PAGE>
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 or Sub-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 or Sub-Advisor for the benefit of the
Fund and/or other accounts served by the Advisor or Sub-Advisor. Such
preferences would only be afforded to a broker-dealer if the Advisor or
Sub-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.
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 through 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
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<PAGE>
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. 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.
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 and be made payable to the appropriate Fremont Fund.
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<PAGE>
Third party checks, credit cards, and cash will not be accepted.
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 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.
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) 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.
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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.
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 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
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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.
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 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 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 LLP, 345 California Street,
San Francisco, California 94104. In addition to acting as counsel to the
Investment Company, Paul, Hastings, Janofsky & Walker LLP 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
twelve 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.
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<PAGE>
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;
(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.):
U.S. Foreign Intermediate Foreign Money Market
Stocks Stocks U.S. Bonds Bonds Securities
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%
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 nine 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.
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:
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<PAGE>
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.
(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
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<PAGE>
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.
(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
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<PAGE>
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 the Sub-Advisor of the Funds; 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, 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.
(32) The National Association of Real Estate Investment Trusts' (NAREIT) Equity
REIT Index.
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.
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.
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<PAGE>
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
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.
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<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.
- 34 -
<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:
* Crown Pacific -- timber/lumber
* Petro Shopping Centers -- full-service truck stops
* 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.
- 35 -
<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 eleven 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 eleven 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.
- 36 -
<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 (Hong Kong) LLC
Bond Investments
--Pacific Investment Management Company
(PIMCO)
-- U.S. Micro-Cap and Small Cap Investment
Kern Capital Management LLC
(KCM)
For more information about Fremont or the Fremont Funds,
please call 800-548-4539 (press 1).
- 37 -
<PAGE>
THE FREMONT GROUP
ORGANIZATION
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Direct Investments | | | |
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Real Estate | | |
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Energy | |
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Securities Management
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Fremont Fremont
Investment -- Mutual
Advisors Funds
- 38 -
<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."
Appendix-1
- - 39 -
<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."
Appendix-2
- - 40 -
<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."
Appendix-3
- - 41 -
<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."
Appendix-4
- - 42 -
<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."
Appendix-5
- - 43 -
<PAGE>
FREMONT MUTUAL FUNDS, INC.
Fremont Select Fund
December __, 1997
<PAGE>
TABLE OF CONTENTS
Item Page No.
Summary of Fees and Expenses..................................................
The Advisor and the Fund......................................................
Investment Objective, Policies,
and Risk Considerations.......................................................
General Investment Policies...................................................
Investment Results............................................................
How to Invest.................................................................
Shareholder Account Services and Privileges...................................
How to Redeem Shares..........................................................
Retirement Plans..............................................................
Dividends, Distributions,
and Federal Income Taxation...................................................
Plan of Distribution..........................................................
Calculation of Net Asset Value and
Public Offering Price.........................................................
Execution of Portfolio Transactions...........................................
General Information...........................................................
Telephone Numbers and Addresses...............................................
<PAGE>
PROSPECTUS
FREMONT MUTUAL FUNDS, INC. is an open-end investment company which under this
Prospectus is offering shares in the FREMONT SELECT FUND (the "Fund").
FREMONT SELECT FUND seeks to achieve long-term capital appreciation by investing
primarily in equity securities of medium capitalization U.S. companies.
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
(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, NOR HAS THE SECURITIES AND EXCHANGE
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 December __, 1997.
FOR FURTHER INFORMATION OR TO REQUEST A COPY OF THE STATEMENT OF ADDITIONAL
INFORMATION, CALL 800-548-4539.
-1-
<PAGE>
SUMMARY OF FEES AND EXPENSES
RETAIL SHARES
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
Annual Fund Operating Expenses (as a percentage of average net assets)(b)
Management Fee 1.00%
12b-1 Expenses(c) .25%
Other Expenses after Reimbursement .15%
Total Fund Operating Expenses 1.40%
- --------------------------------------------------------------------------------
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 $15
3 Years $46
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 $10.
See "How to Redeem Shares."
(b) The Advisor has agreed to limit the Fund's total operating expenses to 1.40%
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 consistent 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 .63% and 1.88%, respectively.
(c) 12b-1 fees may be paid to financial intermediaries for services provided
through sales program(s). Long-term shareholders may pay more than the economic
equivalent of the maximum front-end sales charges permitted by the rules of the
National Association of Securities Dealers. For more information on 12b-1 fees,
see "Plan of Distribution."
-2-
<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 Select
Fund (the "Fund"). The Investment Company has other series offered under a
different prospectus, and the Board of Directors of the Investment Company is
permitted to create additional series at any time. The Fund has its own
investment objective and policies and operates as a separate mutual fund.
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") provides the Fund with investment management under an Investment
Advisory Agreement (the "Advisory Agreement") with the Investment Company. The
Advisory Agreement provides that the Advisor 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 Advisor's Investment Committee oversees the portfolio management of 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.
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
an advisory fee, computed daily and paid monthly, of 1.00% per annum of the
Fund's average net assets. The Fund also pays the Advisor a 12b-1 fee of 0.25%
per annum, subject to the terms of a plan of distribution, more fully described
on page xx. In addition to the fees described above, the Fund pays its own
operating expenses including, but not limited to: 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; 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 of 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 non-recurring expenses that are
not expressly assumed by the Advisor.
The Advisor anticipates waiving fees and reimbursing the Fund for other
operating expenses in order to limit total operating expenses to 1.40% of
average daily net assets. 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 managers for the Fund, since inception, are John Kosecoff, Debra
L. McNeill and Peter F. Landini.
* John B. Kosecoff is Vice President of the Advisor, a member of its Equity
Committee and, since November 1996, has co-managed the Fremont Growth Fund.
John earned his B.A. from the University of California at Berkeley and his
M.B.A. from Cornell University. He was previously employed as a senior
analyst and portfolio manager at RCM Capital Management, as a hedge fund
-3-
<PAGE>
analyst and portfolio manager at Omega Advisors, and as a senior consumer
sector analyst at Lord, Abbett & Co. Debra F. McNeill, CFA, is Assistant
Portfolio Manager for the Fund.
* Debra received her B.S. from the University of California at Berkeley. She
was previously employed as a portfolio manager with C.M. Bidwell &
Associates, as a quantitative analyst with RCM Capital Management and as an
equity analyst with Security Pacific Bank.
* Peter F. Landini is Senior Vice President and Director of the Advisor and a
member of its Investment Committee. Pete co-managed the Fremont Global
Fund, Fremont Growth Fund, and Fremont International Growth Fund. He earned
his B.S. from the University of Santa Clara and received an M.B.A. from
Golden Gate University, San Francisco, California. He is Chairman of the
Advisor's Equity and Asset Allocation Committees.
The Advisor currently provides direct portfolio management services for the
Fund. However, 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 sub-advisory agreement(s), if any, 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 sub-advisory 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. The Advisor has no current intention to use a
sub-advisor for the Fund.
Investment Company Administration Corporation (the "Administrator"), pursuant to
an administrative 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 its services, the Administrator receives
an annual fee from the Advisor (not the Fund) equal to 0.02% of the first $1
billion of the Investment Company's average daily net assets and 0.015%
thereafter, subject to a minimum annual fee of $20,000 per Fund.
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 are 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. There is no assurance that the Fund will achieve its
investment objective.
The Fund seeks to achieve long-term capital appreciation by investing primarily
in equity securities of established medium-capitalization U.S.-based companies.
Under normal market conditions, the Fund expects to hold not more than 30 common
stocks representing at least 80% of its total assets.
While limiting the number of securities in the portfolio, the Fund will not
purchase a security if, as a result, more than 15% of the assets of the Fund
would be invested in the voting securities of a single issuer. Additionally, the
Fund may not invest more than 25% of its total assets in any one industry and,
although the Fund will normally invest in common stocks of U.S. companies, up to
10% of the Fund's assets, at the time of purchase, may be invested in securities
of companies domiciled outside the
-4-
<PAGE>
United States. The Fund may also invest in stock index futures contracts,
options on index futures and options on portfolio securities and stock indices.
Medium market capitalization companies are those companies whose market
capitalization falls within the capitalization range of the Russell MidCap
Index. This index measures the performance of the 800 smallest securities in the
Russell 1000 Index, which represent approximately 35% of the capitalization of
the total market.[to be updated with more current data :] As of September 30,
1996, 94% of the companies in the Russell MidCap Index had market
capitalizations of between $1billion and $6 billion. Companies whose
capitalization falls outside this range after purchase may continue to be held
by the Fund.
Investing in medium capitalization stocks may involve greater risk than
investing in large capitalization stocks, since they can be subject to more
abrupt or erratic price movements. Current income, which may be characteristic
of large stocks, will be considered only as part of total return and will not be
emphasized.
Medium capitalization companies tend to involve less risk than stocks of small
capitalization companies. Smaller companies, which often have limited product
lines, markets, and/or financial resources and may be dependent on one-person
management, may have limited marketability and may be subject to more abrupt or
erratic market movements than securities of medium- and large- cap companies or
the market averages in general. Conversely, medium capitalization companies may
have less rapid growth potential than smaller companies and may be able to react
less quickly to changes in the market place.
The Fund, while focusing on securities of mid-cap companies, may also purchase
securities of companies with higher or lower capitalizations.
Stock selection is based, first, on "bottom up" fundamental research that
focuses on superior business growth prospects and, secondly, on statistical
valuation which, at the time of purchase, is measurably below the historic
relative worth of such securities.
The Fund may invest in several types of equity securities, including common and
preferred stocks, convertible securities and warrants. Although equity
securities have a history of long-term growth in value, their prices fluctuate
based on changes in a company's financial condition and on overall market and
economic conditions.
Over the long term, owning equity interests in well-run, quality businesses
should ease the effect of market volatility in the Fund. The Advisor expects
that through exercise of disciplined valuation, the Fund's portfolio typically
should encompass less market risk than other medium capitalization growth funds
as measured by the Fund's price-to-normal-earnings, price-to-book-value, and
enterprise-value-to-internal-cash-flow ratios.
The Advisor believes 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.
The Portfolio is a non-diversified portfolio and is not limited by the 1940 Act
in the proportion of its assets that may be invested in the obligations of a
single issuer. The Portfolio, therefore, may invest a greater proportion of its
assets in the securities of a smaller number of issuers and will be subject to a
greater risk with respect to its portfolio securities. Any economic, regulatory,
or political developments affecting the value of the securities held in the
Portfolio could have a greater impact on the total value of the Portfolio's
holdings than would be the case if the Portfolio were classified as diversified
under the 1940 Act.
Although the Fund invests primarily in common stocks, for liquidity purposes it
will normally invest a portion of its assets in high quality debt securities and
money market instruments with remaining
-5-
<PAGE>
maturities of one year or less, including repurchase agreements. Whenever in the
judgment of the 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
convertible and non-convertible bonds and preferred stocks, when the Advisor
believes that these investments offer opportunities for capital appreciation.
Preferred stocks and bonds will be rated at the time of purchase in the top four
categories of Moody's Investors Service, Inc. (Baa or higher) or Standard &
Poor's Ratings Group (BBB or higher) or be of comparable quality as determined
by the Advisor or Sub-Advisor . Bonds and preferred stocks in the lowest
investment grade category (Baa or BBB) have speculative characteristics; as a
result, changes in the economy or other circumstances are more likely to lead to
a weakened capacity of such securities to make principal and interest payments
or to pay the preferred stock obligations than would occur with bonds and
preferred stocks in higher categories. See Appendix A to the Statement of
Additional Information for a description of rating categories.
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.
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 certificates, are
supported by the full faith and credit of the United States; others, such as
those of the Federal Home Loan Mortgage Association, are supported by the right
of the issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, 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 when-issued securities the value of which is greater
than 5% of its net assets.
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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. 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.
Portfolio Turnover. The Fund expects to trade in securities for short-term gain
whenever deemed advisable by the 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 33 1/3% 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 assets value would decline faster
than otherwise would be the case.
Restricted Securities. The Fund may purchase securities that are not registered
("restricted securities") under federal securities laws, but can be offered and
sold to "qualified institutional buyers." However, the Fund will not invest more
than 15% of its 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
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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 the daily function of determining
and monitoring liquidity of restricted securities. The Board, however, will
retain sufficient oversight and be ultimately responsible for the
determinations.
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
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 segregate 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 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 contacts.
Options and futures can be volatile investments. If the 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, possible reduction in value of both the securities
hedged and the hedging instrument, 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 --inability to effect closing transactions at favorable
prices and 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
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the entire premium. A more thorough description of these investment practices
and their associated risks is contained in the Statement of Addition
Information.
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 American Depository Receipts (" ADRs") and
European Depository Receipts ("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. For more information, please refer to the Statement of Additional
Information.
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."
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 on 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 income 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.
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
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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 the Fund's investment objective and policies. See "Investment
Results" in the Statement of Additional Information.
Additional performance information regarding the Fund will be included in its
annual report, which will be mailed to shareholders without charge upon request.
HOW TO INVEST
The 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 Fund. 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 $2,000 is required to open a shareholder account, except for
retirement plans such as Individual Retirement Accounts (IRAs) and Keogh Plans.
Retirement plans are subject to a $1,000 minimum initial investment. The minimum
initial investment is waived for accounts opened with the Automatic Investment
Plan and may be waived in other instances at the sole discretion of the Advisor.
(See "Automatic Investment Plan.") Each subsequent investment in the Fund must
be $100 or more except in the case of retirement plans or Automatic Investment
Plans. There is a minimum continuing balance of $1,500 required for
non-retirement accounts (calculated on the basis of original investment value).
All investments not meeting the minimum will be returned. In some cases, the
minimum balance requirement may be waived. All purchases made by check should be
in U.S. dollars and be made payable to the appropriate Fremont Fund. Third party
checks, credit cards, and cash will not be accepted.
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. 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 canceled due
to nonpayment (for example, a check returned for "insufficient funds"), the
person who made the order 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.
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First Fund Distributors, Inc., 4455 Camelback Road, Suite 261E, Phoenix,
Arizona, 85018, is the principal underwriter for the Fund.
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. It is required
that (1) all shares in one Fund must be exchanged or (2) the remaining balance
must be at least $1,500. This minimum balance requirement may be waived. 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.
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 Fund, can be limited by the Investment Company's
refusal to accept further purchase and exchange orders from a 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.
Autobuy Privilege. The autobuy privilege allows shareholders to purchase
subsequent shares by moving money directly from their checking account to a
Fremont Fund. The Autobuy privilege will not be added to an account without
written authorization from the shareholder. A shareholder may then purchase
additional shares in an existing account by calling 800-548-4539 and instructing
the Transfer
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Agent as to the dollar amount wanting to be invested. The investment will
automatically be processed through the Automatic Clearing House (ACH) system.
There is no fee for this option. If the privilege was not established at the
time the account was opened, the shareholder must complete the appropriate form.
The form is available on request.
Automatic Investment Plan. 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
minimum initial investment is waived for accounts opened with the Automatic
Investment Plan. The amount of the monthly investment must be at least $50, and
is not otherwise subject to the $100 minimum for subsequent investments. If the
purchase falls on a weekend or holiday, the purchase will be made on the
previous business day. Shareholders should note that if there is an Automatic
Investment Plan established for an account and the entire account is exchanged
into another Fund, the Automatic Investment Plan must be renewed by the
shareholder to the Transfer Agent. 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
canceled due to nonpayment (for example, "insufficient funds"), 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 $10
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.
For written redemption requests for an amount greater than $25,000, or a
redemption request that directs 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 that the amount paid for them.
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Redemption of shares by exchanges, transfers and redemptions under an Automatic
Withdrawal Plan 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. (The Telephone Redemption Privilege is not available for IRA or
other retirement accounts.) 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. 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 by check will be
made on the 15th and/or the last business day of the month. Redemptions made by
electronic transfer will be made on any date the shareholder chooses.
Shareholders may also request automatic exchanges and transfers of a specified
dollar amount. Exchanges and transfers will be made on any date the shareholder
chooses. Because a redemption constitutes a liquidation of shares, the number of
shares owned in the account will be reduced. Automatic redemptions should not
reduce the account below the minimum balance required (currently $1,500). If the
redemption date falls on a weekend or holiday, the redemption will be made on
the previous business day. 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 the shareholder to the Transfer Agent. A
shareholder wishing to initiate automatic redemptions must complete an Automatic
Withdrawal Plan form available from the Transfer Agent.
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
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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.
The Fund reserves the right to redeem mandatorily the shares in a shareholder's
account (other than a retirement plan account) if the balance is reduced to less
than $1,500 in net asset value through redemptions or other action by the
shareholder. Notice will be given to the shareholder at least 30 days prior to
the date fixed for such redemption, during which time the shareholder may
increase its holdings to an aggregate amount of $1,500 or more (with a minimum
purchase of $100 or more.) This minimum balance may be waived.
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. State Street Bank and Trust Company, c/o NFDS, P.O. Box 419343,
Kansas City, Missouri, 64141, serves as Transfer and Dividend Disbursing Agent
and shareholder service agent. The transfer agent is not involved in determining
investment policies of the Fund or its portfolio securities transactions. Its
services do not protect shareholders against possible depreciation of their
assets. The fees of State Street Bank and Trust Company are paid by the Fund and
thus borne by the Fund's shareholders. State Street Bank and Trust Company has
contracted with National Financial Data Services to serve as shareholder
servicing agent. A depository account has been established at United Missouri
Bank of Kansas City ("United Missouri Bank") through which all payments for the
funds will be processed.
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; 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
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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
and short-term net realized capital gains once each year in October.
The Fund intends to distribute substantially all of its long term 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:
* to have all dividends and capital gain distributions automatically
reinvested in additional shares; or
* 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
* to receive all distributions of income dividends and capital gains in cash.
* to invest all dividend and capital gain distributions in another Fremont
Fund owned through an identically registered account.
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 gain
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 gain 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.
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 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
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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.
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.
PLAN OF DISTRIBUTION
Pursuant to Rule 12b-1 under the 1940 Act, the Fund has adopted a plan of
distribution (the "Plan") under which the Fund may directly compensate the
Advisor, paying for certain distribution-related expenses, including payments to
securities dealers and others (including the Underwriter) who are engaged in
promoting the sale of shares of the Fund and who may be advising investors
regarding the purchase, sale, or retention of such shares; expenses of
maintaining personnel who engage in or support distribution of shares or who
render shareholder support services not otherwise provided by the Advisor or the
Transfer Agent; expenses of formulating and implementing marketing and
promotional activities, including direct mail promotions and mass media
advertising; expenses of preparing, printing, and distributing sales literature,
prospectuses, statements of additional information, and reports for recipients
other than existing shareholders of the Fund; expenses of obtaining such
information, analyses, and reports with respect to marketing and promotional
activities as the Investment Company may, from time to time, deem advisable; and
other expenses related to the distribution of the Fund's shares.
The annual limitation for compensation to the Advisor pursuant to the Plan is
.25% of the Fund's average daily net assets. All payments will be reviewed by
the Fund's Board of Directors. However, it is possible that in certain periods,
the amount of the Advisor's compensation could exceed the Advisor's distribution
expenses resulting in a profit to the Advisor. In the event the Plan is
terminated by the Fund in accordance with its terms, the Fund will not be
required to make any payments for expenses incurred by the Advisor after the
date the Plan terminates.
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).
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<PAGE>
Orders received by the Transfer Agent after 4:00 p.m., Eastern time, will be
entered at the next calculated net asset value.
EXECUTION OF PORTFOLIO TRANSACTIONS
Orders for the Fund's portfolio securities transactions are placed by the
Advisor. The Advisor strives 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 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.
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.
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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.
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TELEPHONE NUMBERS AND ADDRESSES
To make an initial purchase:
1. By mail:
Fremont Mutual Funds, Inc.
c/o National Financial Data Services
P.O. Box 419343
Kansas City, MO 64141-6343
Street address:
1004 Baltimore Avenue
Kansas City, MO 64105
2. By wire:
Please call the Transfer Agent at 800-548-4539 (press 2) to obtain an account
number and detailed instructions.
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
greater than $25,000 or 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
Fremont Mutual Funds, Inc.
Fremont Money Market Fund
Fremont Bond Fund
Fremont California Intermediate Tax-Free Fund
Fremont Global Fund
Fremont Growth Fund
Fremont International Growth Fund
Fremont Select Fund
Fremont U.S. Small Cap Fund
Fremont International Small Cap Fund
Fremont Emerging Markets Fund
Fremont U.S. Micro-Cap Fund
Fremont Institutional U.S. Micro-Cap Fund
For more information on the Fremont Mutual Funds please call 800-548-4539 or
write to:
Fremont Mutual Funds
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<PAGE>
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:
National Financial Data Services
P.O. Box 419343
Kansas City, MO 64141-6343
800-548-4539 (press 2)
Street Address:
National Financial Data Services
1004 Baltimore Avenue
Kansas City, MO 64105
Custodian
The Northern Trust Company
50 South LaSalle Street
Chicago, IL 60675
Legal Counsel
Paul, Hastings, Janofsky & Walker LLP
345 California Street, 29th 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 Funds 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.
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<PAGE>
FREMONT MUTUAL FUNDS, INC.
Fremont Select Fund
Toll-Free: 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 Select Fund (the "Fund")
dated December __, 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 December __, 1997.
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TABLE OF CONTENTS
Page
Investment Objective, Policies, And Risk Considerations.......................
Investment Restrictions.......................................................
Investment Company Directors And Officers.....................................
Investment Advisory And Other Services........................................
Plan Of Distribution..........................................................
Execution Of Portfolio Transactions...........................................
How To Invest.................................................................
Other Investment And Redemption Services......................................
Taxes - Mutual Funds..........................................................
Additional Information........................................................
Investment Results............................................................
Information About Fremont Investment Advisors.................................
Appendix A: Description Of Ratings............................................
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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 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
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<PAGE>
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.
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 18 months 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
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
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<PAGE>
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 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 or Sub-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.
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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 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
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.
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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.
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.
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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.
"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 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
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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.
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. 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.
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. 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.
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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.
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 is a "Non-diversified" management investment company,
as defined in the Investment Company Act of 1940 (the "1940 Act"). Therefore, it
is not subject to the diversifications requirements.
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 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.
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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 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
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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 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.
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 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
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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.
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 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
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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, or to tax exempt securities issued
by state governments or political subdivisions thereof.
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.
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 either a diversified or a non-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.
- 14 -
<PAGE>
11. 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.
12. 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.
13. 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.
14. Make short sales of securities or maintain a short position, except that
the Fund may sell short "against the box."
15. Acquire more than 3% of the outstanding voting securities of any one
investment company.
- 15 -
<PAGE>
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 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.
<TABLE>
<CAPTION>
Date of Principal Occupations and Business
Name and Address Birth Positions Held Experience 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 7/96 - Present
Fremont Investment Advisors, Inc. Senior Vice President and
333 Market Street, 26th Floor Director, Fremont Investment
San Francisco, CA 94105 Advisors, Inc. 10/77 - 7/96 Senior Vice
President Business Development
Benham Management.
Vincent P. Kuhn, Jr.(1)(2)(4) 4-22-32 Director Executive Vice President & Director, Fremont
Fremont Investment Advisors, Inc. Investment Advisors, Inc
333 Market Street, 26th Floor.
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
4105 Shelter Bay Avenue advisors).
Mill Valley, CA 94941
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).
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
</TABLE>
- 16 -
<PAGE>
<TABLE>
<S> <C> <C> <C>
333 Market Street, 26th Floor Advisors, Inc.
San Francisco, CA 94105 Director, J.P. Morgan Securities Asia
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
San Francisco, CA 94105
Tina Thomas 8-7-49 Vice President, Secretary, and 6/96 - Present Vice President Advisors, Inc.
Fremont Investment Advisors, Inc. Chief Compliance Officer and Chief Compliance Officer,
333 Market Street, 26th Floor Fremont Investment Advisors, Inc.
San Francisco, CA 94105 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, 26h 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 12/95 - Present
Fremont Investment Advisors, Inc. National Sales Manager,
3000 Post Oak Blvd., Suite 100 Fremont Investment
</TABLE>
- 17 -
<PAGE>
<TABLE>
<S> <C> <C> <C>
Houston, TX 77056 Advisors, Inc.
8/94 - 12/95
Regional Sales Manager
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 September 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.
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
1.00% 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 anticipates waiving its fees and
reimbursing the Fund for other operating expenses in order to limit total
operating expenses to 1.40% of 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 1.40% 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 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
- 18 -
<PAGE>
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, Michael H. Kosich 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 from 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.
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 is overseen
by the members of the Fremont Investment Committee. See "Investment Company
Directors and Officers." The Advisor has no current intention to use a
sub-advisor for the Fund.
Principal Underwriter. The Fund's principal underwriter is First Fund
Distributors, Inc., 4455 E. Camelback Road, Suite 261E, Phoenix, Arizona 85018
(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 will receive compensation
of $50,000 from the Advisor with respect to the fiscal year ended October 31,
1998 for services as Distributor.
Transfer Agent. State Street Bank and Trust Company, c/o NFDS, P.O. Box 419343,
Kansas City, Missouri, 64141, serves as Transfer and Dividend Disbursing Agent
and shareholder service agent. The Transfer Agent is not involved in determining
investment policies of the Fund or its portfolio securities transactions. Its
services do not protect shareholders against possible depreciation of their
assets. The fees of State Street Bank and Trust Company are paid by the Fund and
thus borne by the Fund's shareholders. State Street Bank and Trust Company has
contracted with National Financial Data Services to serve as shareholder
servicing agent. A depository account has been established at United Missouri
Bank of Kansas City ("United Missouri Bank") through which all payments for the
funds will be processed.
Administrator. The Advisor has retained Investment Company Administration
Corporation (the
- 19 -
<PAGE>
"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 first $1 billion of the
Investment Company's average daily net assets, 0.015% thereafter, subject to a
minimum annual fee of $20,000 per Fund.
PLAN OF DISTRIBUTION
As stated in the Prospectus, the Fund has adopted a plan of distribution (the
"Plan") pursuant to Rule 12b-1 under the 1940 Act which permits the Fund to
compensate the Advisor for expenses incurred in the distribution and promotion
of the Fund's shares, including, but not limited to, the printing of
prospectuses, statements of additional information, and reports used for sales
purposes, advertisements, expenses of preparation and printing of sales
literature, promotion, marketing, and sales expenses, and other
distribution-related expenses, including any distribution fees paid to
securities dealers or other firms who have executed a distribution or service
agreement with the Underwriter. The Plan expressly permits payments in any
fiscal year up to a maximum of .25% of the average daily net assets of the Fund.
It is possible that the Advisor could receive compensation under the Plan that
exceeds the Advisor's costs and related distribution expenses, thus resulting in
a profit to the Advisor.
Agreements implementing the Plan (the "Implementation Agreements") are in
writing and have been approved by the Board of Directors. All payments made
pursuant to the Plan are made in accordance with written agreements and are
reviewed by the Board of Directors at least quarterly.
The continuance of the Plan and the Implementation Agreements must be
specifically approved at least annually by a vote of the Investment Company's
Board of Directors and by a vote of the Directors who are not interested persons
of the Investment Company and have no direct or indirect financial interest in
the Plan or any Implementation Agreement (the "Independent Directors") at a
meeting called for the purpose of voting on such continuance. The Plan may be
terminated at any time by a vote of a majority of the Independent Directors or
by a vote of the holders of a majority of the outstanding shares of the Fund. In
the event the Plan is terminated in accordance with its terms, the Fund will not
be required to make any payments for expenses incurred by the Advisor after the
termination date. Each Implementation Agreement terminates automatically in the
event of its assignment and may be terminated at any time by a vote of a
majority of the Independent Directors or by a vote of the holders of a majority
of the outstanding shares of the Fund on not more than 60 days' written notice
to any other party to the Implementation Agreement. The Plan may not be amended
to increase materially the amount to be spent for distribution without
shareholder approval. All material amendments to the Plan must be approved by a
vote of the Investment Company's Board of Directors and by a vote of the
Independent Directors.
In approving the Plan, the Directors determined, in the exercise of their
business judgment and in light of their fiduciary duties as Directors, that
there is a reasonable likelihood that the Plan will benefit the Fund and its
shareholders. The Board of Directors believes that expenditure of the Fund's
assets for distribution expenses under the Plan should assist in the growth of
the Fund, which will benefit the Fund and its shareholders through increased
economies of scale, greater investment flexibility, greater portfolio
diversification, and less chance of disruption of planned investment strategies.
The Plan will be renewed only if the Directors make a similar determination for
each subsequent year of the Plan. There can be no assurance that the benefits
anticipated
- 20 -
<PAGE>
from the expenditure of the Fund's assets for distribution will be realized.
While the Plan is in effect, the costs to and expenses incurred by the Advisor
pursuant to the Plan and the purposes underlying such cash and expenditures must
be reported quarterly to the Board of Directors for its review. In addition, the
selection and nomination of those Directors who are not interested persons of
the Investment Company are committed to the discretion of the Independent
Directors during such period.
Pursuant to the Plan, the Fund may also make payments to banks or other
financial institutions that provide shareholder services and administer
shareholder accounts. The Glass-Steagall Act prohibits banks from engaging in
the business of underwriting, selling, or distributing securities. Although the
scope of this prohibition under the Glass-Steagall Act has not been clearly
defined by the courts or appropriate regulatory agencies, management of the
Investment Company believes that the Glass-Steagall Act should not preclude a
bank from providing such services. However, state securities laws on this issue
may differ from the interpretations of federal law expressed herein and banks
and financial institutions may be required to register as dealers pursuant to
state law. If a bank were prohibited from continuing to perform all or a part of
such services, management of the Investment Company believes that there would be
no material impact on the Fund or its shareholders. Banks may charge their
customers fees for offering these services to the extent permitted by regulatory
authorities, and the overall return to those shareholders availing themselves of
the bank services will be lower than to those shareholders who do not. The Fund
may from time to time purchase securities issued by banks which provide such
services; however, in selecting investments for the Fund, no preference will be
shown for such securities.
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
- 21 -
<PAGE>
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.
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 through 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. 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
- 22 -
<PAGE>
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.
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 and be made payable to the appropriate Fremont Fund. Third party
checks, credit cards, and cash will not be accepted.
As a condition of this offering, if an order to purchase shares is canceled due
to nonpayment (for example, because of a check returned for "not sufficient
funds"), the person who made the order 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 canceled 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
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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.
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) 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.
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.
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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.
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 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
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the shares are redeemed or exchanged.
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 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 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 LLP, 345 California Street,
San Francisco, California 94104. In addition to acting as counsel to the
Investment Company, Paul, Hastings, Janofsky & Walker LLP 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
twelve 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.
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<PAGE>
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;
(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.):
U.S. Foreign Intermediate Foreign Money Market
Stocks Stocks U.S. Bonds Bonds Securities
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%
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 nine 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.
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
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<PAGE>
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.
(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.
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<PAGE>
(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.
(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.
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<PAGE>
(31) Various publications from the Organization for Economic Cooperation and
Development. Indices prepared by the research departments of such financial
organizations as the Sub-Advisor of the Funds; 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, 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.
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
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<PAGE>
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 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:
Individual Retirement Accounts (IRAs): Any individual who receives earned income
from employment
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<PAGE>
(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.
- 32 -
<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.
- 33 -
<PAGE>
FREMONT INVESTMENT ADVISORS
Innovative Investment
Management and
Advisory Services
A subsidiary of Fremont Investors, Inc.
- 34 -
<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:
* Crown Pacific -- timber/lumber
* Petro Shopping Centers -- full-service truck stops
* 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.
- 35 -
<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 eleven 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 eleven 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.
- 36 -
<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
FIA's current team of external managers includes:
International Stock Investments
--Acadian Asset Management
--Nicholas Applegate Capital Management (Hong Kong) LLC
Bond Investments
--Pacific Investment Management Company
(PIMCO)
-- U.S. Micro-Cap and Small Cap Investment
Kern Capital Management LLC
(KCM)
For more information about Fremont or the Fremont Funds,
please call 800-548-4539 (press 1).
- 37 -
<PAGE>
THE FREMONT GROUP
ORGANIZATION
| | | |
| | | |
| | | |
Direct Investments | | | |
| | |
Real Estate | | |
| |
Energy | |
|
Securities Management
|
|
Fremont Fremont
Investment -- Mutual
Advisors Funds
- 38 -
<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."
Appendix-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."
Appendix-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."
Appendix-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."
Appendix-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."
Appendix-5
<PAGE>
FREMONT MUTUAL FUNDS, INC.
PART C; OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS
(a) Financial Statements: None
(b) Exhibits -- Exhibits required by Part C, Item 24 of Form N-1A
(1) (a) Articles of Incorporation -- on file (File No.
811-5632)
(b) Articles of Amendment -- on file (File No. 811-5632)
(c) Articles of Amendment changing name -- on file (File
No. 811-5632)
(d) Articles Supplementary relating to shares of
International Growth Fund -- on file (File No.
811-5632 under Post-Effective Amendment No. 16 filed
December 29, 1993)
(e) Articles Supplementary for Income Fund, changing name
to Bond Fund -- on file (File No. 811-5632 under
Post-Effective Amendment No. 17 filed March 1, 1994)
(f) Articles Supplementary relating to shares of the
International Small-Cap Fund -- on file (File No.
811-5632 under Post-Effective Amendment No. 18 filed
April 22, 1994)
(g) Articles Supplementary relating to shares of the U.S.
Micro-Cap Fund -- on file (File No. 811-5632 under
Post-Effective Amendment No. 18 filed April 22, 1994)
(h) Articles Supplementary relating to shares of the
Emerging Markets Fund -- on file (File No. 811- 5632
under Post-Effective Amendment No. 22 filed April 10,
1996)
(2) Bylaws -- on file (File No. 811-5632 under Post- Effective
Amendment No. 21 filed January 20, 1996)
(3) None
(4) Forms of specimen stock certificate -- shares are issued in
uncertificated form only
<PAGE>
(5) (a) Amended and Restated Investment Advisory and
Administrative Services Agreement relating to Money
Market Fund, Global Fund, California Intermediate
Tax-Free Fund, Bond Fund, Growth Fund and Emerging
Markets Fund -- on file (File No. 811-5632)
(b) Investment Advisory and Administrative Services
Agreement relating to International Growth Fund -- on
file (File No. 811-5632 under Post-Effective
Amendment No. 17 filed March 1, 1994)
(c) Investment Advisory and Administrative Services
Agreement relating to International Small-Cap Fund
and U.S. Micro-Cap Fund -- on file (File No. 811-
5632 under Post-Effective Amendment No. 19 filed
August 1, 1994)
(d) Portfolio Management Agreement with Pacific
Investment Management Co. and Fremont Investment
Advisors, Inc. for Bond (formerly Income) Fund -- on
file (File No. 811-5632 under Post-Effective
Amendment No. 17 filed March 1, 1994)
(e) Portfolio Management Agreement with Acadian Asset
Management, Inc. and Fremont Investment Advisors,
Inc. for International Small Cap Fund -- on file
(File No. 811-5632 under Post-Effective Amendment No.
18 filed April 22, 1994)
(f) Form of Portfolio Management Agreement with Credit
Lyonnais International Asset Management (HK) Limited
for Emerging Markets Fund -- on file (File No.
811-5632 under Post-Effective Amendment No. 22 filed
April 10, 1996)
(6) Distribution Agreement with First Fund Distributors, Inc.
(7) None
(8) Custodian Agreement with The Northern Trust Company -- on file
(File No. 811-5632 under Post-Effective Amendment No. 21 filed
January 20, 1996)
(9) (a) Transfer, Dividend Disbursing, Shareholder Service
and Plan Agency Agreement with Fremont Investment
Advisors, Inc. -- on file (File No. 811-5632 under
Post-Effective Amendment No. 23 filed February 28,
1997)
(b) Sub-Transfer Agency Agreement with Countrywide Fund
Services, Inc. -- on file (File No. 811-5632 under
Post-Effective Amendment No. 23 filed
<PAGE>
February 28, 1997)
(c) Administration Agreement with Investment Company
Administration Corporation
(d) License Agreement relating to the Mark "Fremont" with
Fremont Investment Advisors, Inc. -- on file (File
No. 811-5632)
(e) Investment Accounting Agreement between Investors
Fiduciary Trust Company and Fremont Mutual Funds,
Inc. -- on file (File No. 811-5632 under Post-
Effective Amendment No. 17 filed March 1, 1994)
(10) Opinion and Consent of Counsel -- on file (File No. 811-5632)
(11) Inapplicable
(12) Inapplicable
(13) (a) Subscription Agreement with initial shareholders --
on file (File No. 811-5632 under Post-Effective
Amendment filed May 11, 1992)
(b) Subscription Agreement with initial shareholders of
International Growth Fund -- on file (File No.
811-5632 under Post-Effective Amendment No. 16 filed
December 29, 1993)
(c) Subscription Agreement with initial shareholders of
International Small-Cap Fund -- on file (File No.
811-5632 under Post-Effective Amendment No. 18 filed
April 22, 1994)
(d) Subscription Agreement with initial shareholders of
U.S. Micro-Cap Fund -- on file (File No. 811-5632
under Post-Effective Amendment No. 18 filed April 22,
1994)
(14) Retirement Plans -- on file (File No. 811-5632)
(15) Form of Plan of Distribution Pursuant to Rule 12b-1 -- on file
(File No. 811-5632 under Post-Effective Amendment No. 22 filed
April 10, 1996)
(16) Inapplicable
(17) Inapplicable
(18) Inapplicable
<PAGE>
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE
REGISTRANT
Stephen D. Bechtel, Jr. and members of his family, including trusts for
family members, would be considered controlling persons under
applicable Securities and Exchange Commission regulations, on account
of their shareholdings in the Funds.
Item 26. NUMBER OF HOLDERS OF SECURITIES
Number of Record
Holders as of
TITLE OF CLASS September 30, 1997
Capital Stock -- Money Market Fund 1,554
Capital Stock -- Global Fund 3,517
Capital Stock -- California Intermediate 174
Tax-Free Fund
Capital Stock -- Bond Fund 355
Capital Stock -- Growth Fund 1,882
Capital Stock -- International Growth Fund 249
Capital Stock -- International Small Cap Fund 276
Capital Stock -- U.S. Micro-Cap Fund 6,355
Capital Stock -- Emerging Markets Fund 377
Capital Stock -- Institutional U.S. Micro-Cap Fund 3
Capital Stock -- U.S. Small Cap Fund 2
Item 27. INDEMNIFICATION
Article VII(g) of the Articles of Incorporation, filed as
Exhibit (1), Item 24(b), provides for indemnification of certain persons acting
on behalf of the Funds.
The Funds and the Advisor are jointly insured under an errors
and omissions policy issued by American International Specialty Lines Insurance
Company.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons by the Registrant's charter and bylaws, or otherwise, the Registrant has
<PAGE>
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in said Act, and is,
therefore, unenforceable. In particular, the Articles of the Company provide
certain limitations on liability of officers and directors. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Series of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issues.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR
See the material following the captions "Advisory Agreement"
and "Advisory and Sub-Advisory Agreements" appearing as a portion of Parts A
hereof and "Investment Advisory and Other Services" appearing as a portion of
Part B hereof.
Item 29. Principal Underwriter.
(a) First Fund Distributors, Inc. is the principal underwriter for the
following investment companies or series thereof:
Advisors Series Trust
- American Trust Allegiance Fund
- InformationTech 100(R) Fund
- Kaminski Poland Fund
- Rockhaven Funds (The)
Fleming Capital Mutual Fund Group, Inc.
Fremont Mutual Funds, Inc.
Jurika & Voyles Fund Group
RNC Mutual Fund Group, Inc.
PIC Investment Trust
Professionally Managed Portfolios
- Avondale Total Return Fund
- Perkins Opportunity Fund
- Osterweis Fund
- ProConscience Women's Equity Mutual Fund
- Academy Value Fund
- Kayne, Anderson Rising Dividends Fund
- Trent Equity Fund
- Leonetti Balanced Fund
- Lighthouse Growth Fund
- U.S. Global Leaders Growth Fund
- Boston Managed Growth Fund
- Harris Bretall Sullivan & Smith Growth Fund
- Insightful Investor Growth Fund
- Penza Growth Fund
- Titan Investment Fund
Purisima Total Return Fund
(b) The following information is furnished with respect to the
officers of First Fund Distributors, Inc.:
<PAGE>
<TABLE>
<CAPTION>
Position and Offices Positions and
Name and Principal with First Fund Offices
Business Address* Distributors, Inc. with Registrant
- ----------------- ------------------ ---------------
<S> <C> <C>
Robert H. Wadsworth President and Assistant Secretary
Treasurer
Steven J. Paggioli Vice President and None
Secretary
Eric M. Banhazl Vice President Assistant Treasurer
</TABLE>
* The principal business address of persons and entities listed is 4455 E.
Camelback Road, Suite 261E, Phoenix, AZ 85018
Item 30. LOCATION OF ACCOUNTS AND RECORDS
Accounts, books, and other records required by Rules 31a-1 and
31a-2 under the Investment Company Act of 1940, as amended, are maintained and
held in the offices of the Registrant and its investment manager, Fremont
Investment Advisors, Inc., 333 Market Street, 26th Floor, San Francisco,
California 94105. Other books and records will be maintained by the sub-advisers
to the Funds.
Records covering stockholder accounts and portfolio
transactions are also maintained and kept by the Funds' Sub-Transfer Agent,
Countrywide Fund Services, Inc., and by the Custodian, The Northern Trust
Company.
Item 31. MANAGEMENT SERVICES
None
Item 32. UNDERTAKINGS
(a) Inapplicable
(b) The Registrant undertakes to file a Post-Effective Amendment,
using financial statements of the Fremont Real Estate
Securities Fund and the Fremont Select Fund which need not be
certified, within four to six months from the effective date
of such Fund.
(c) The information required by part 5A of the Form N-1A is or
will be contained in the latest annual report to shareholders,
and Registrant undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest
annual report to shareholders, upon request and without
charge.
(d) The Registrant undertakes that within five business
<PAGE>
days after receipt of a written application by shareholders
holding in the aggregate at least 1% of the shares then
outstanding or shares then having a net asset value of
$25,000, which is less, each of whom shall have been a
shareholder for at least six months prior to the date of
application (hereinafter the "Petitioning Shareholders"),
requesting to communicate with other shareholders with a view
to obtaining signatures to a request for a meeting for the
purpose of voting upon removal of any Director of the
Registrant, which application shall be accompanied by a form
of communication and request which such Petitioning
Shareholders wish to transmit, Registrant will: (i) provide
such Petitioning Shareholders with access to a list of the
names and addresses of all shareholders of the Registrant; or
(ii) inform such Petitioning Shareholders of the approximate
number of shareholders and the estimated costs of mailing such
communication, and to undertake such mailing promptly after
tender by such Petitioning Shareholders to the Registrant of
the material to be mailed and the reasonable expenses of such
mailing.
<PAGE>
SIGNATURE OF THE REGISTRANT
Pursuant to the requirements of the Securities Act of 1933, and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment
No. 31 (1940 Act) and Post-Effective Amendment No. 28 (1933 Act) to the
Registration Statement to be signed on its behalf by the undersigned, thereto
duly authorized, in the City of San Francisco, and the State of California, on
the 16th day of October, 1997.
FREMONT MUTUAL FUNDS, INC.
By: /S/ DAVID L. REDO
Chairman
Pursuant to the requirements of the Securities Act of 1933 this
Post-Effective Amendment No. 28 to the Registration Statement has been signed
below by the following persons in the capacities listed, and each on October 16,
1997
PRINCIPAL EXECUTIVE OFFICER:
/S/ DAVID L. REDO Chairman and Chief
David L. Redo Executive Officer
PRINCIPAL ACCOUNTING OFFICER:
/S/ GREGORY HAND Assistant Treasurer
Gregory Hand
DIRECTORS:
Director
Richard E. Holmes*
Director
William W. Jahnke*
Director
Donald C. Luchessa*
<PAGE>
Director
David L. Egan*
/S/ VINCENT P. KUHN, JR. Director
Vincent P. Kuhn, Jr.
/S/ DAVID L. REDO Director
David L. Redo
/S/ MICHAEL H. KOSICH Director
Michael H. Kosich
*By: /S/ VINCENT P. KUHN, JR.
(Attorney-in-Fact pursuant
to limited powers of attorney
filed with Post-Effective
Amendment No. 19 filed on
August 1, 1994.)
DISTRIBUTION AGREEMENT This Agreement made this 1st day of October, 1997 by
and between FREMONT MUTUAL FUNDS, a Maryland Corporation (the "Funds"), and
FIRST FUND DISTRIBUTORS, INC., a Delaware corporation (the "Distributor").
W I T N E S S E T H:
--------------------
WHEREAS, the Funds are registered as an open-end management investment
company under the Investment Company Act of 1940 (the "1940 Act"), with shares
of common stock organized into separate series ("series" or "portfolios"), and
it is in the interest of the Funds to offer the shares of common stock of the
series for sale continuously; and
WHEREAS, the Distributor is registered as a broker-dealer under the
Securities Exchange Act of 1934 (the "1934 Act") and is a member in good
standing of the National Association of Securities Dealers, Inc. (the "NASD");
and
WHEREAS, the Funds and the Distributor wish to enter into an agreement with
each other with respect to the continuous offering of the shares of common stock
of each series of the Trust (the "Shares");
NOW, THEREFORE, the parties agree as follows:
1. Appointment of Distributor. The Funds hereby appoint the Distributor as
exclusive agent to sell and to arrange for the sale of the Shares, on the terms
and for the period set forth in this Agreement, and the Distributor hereby
accepts such appointment and agrees to act hereunder directly and/or through the
Funds transfer agent in the manner set forth in the Prospectuses (as defined
below). It is understood and agreed that the services of the Distributor
hereunder are not exclusive, and the Distributor may act as principal
underwriter for the shares of any other registered investment company.
2. Services and Duties of the Distributor.
(a) The Distributor agrees to sell the Shares, as agent for
the Funds, from time to time during the term of this Agreement upon the terms
described in a Prospectus. As used in this Agreement, the term "Prospectus"
shall mean a prospectus and statement of additional information included as part
of the Funds' Registration Statement, as such prospectus and statement of
additional information may be amended or supplemented from time to time, and the
term "Registration Statement" shall mean the Registration Statement most
recently filed from time to time by the Funds with the Securities and Exchange
Commission ("SEC") and effective under the Securities Act of 1933 (the "1933
Act") and the 1940 Act, as such Registration Statement is amended by any
amendments thereto at the time in effect. The Distributor shall not be obligated
to sell any certain number of Shares.
(b) Upon commencement of operations of the series, the
Distributor will hold itself available to receive orders, satisfactory to the
Distributor, for the purchase of the Shares and will accept such orders and will
transmit such orders and funds received by it in payment for such Shares as are
so accepted to the Funds' transfer agent or custodian, as appropriate, as
promptly as practicable. Purchase orders shall be deemed accepted and shall be
effective at the time and in the manner set forth in the series' Prospectuses.
The Distributor shall not make any short sales of Shares.
<PAGE>
(c) The offering price of the Shares shall be the net asset
value per share of the Shares, (determined as set forth in the Prospectuses).
The Funds shall furnish the Distributor, with all possible promptness, an advice
of each computation of net asset value and offering price.
(d) The Distributor shall have the right to enter into
selected dealer agreements with securities dealers of its choice ("selected
dealers") for the sale of Shares. Shares sold to selected dealers shall be for
resale by such dealers only at the offering price of the Shares as set forth in
the Prospectuses. The Distributor shall offer and sell Shares only to such
selected dealers as are members in good standing of the NASD.
3. Duties of the Funds.
(a) Maintenance of Federal Registration. The Funds shall, at
their expense, take, from time to time, all necessary action and such steps,
including payment of the related filing fees, as may be necessary to register
and maintain registration of a sufficient number of Shares under the 1933 Act.
The Funds agree to file from time to time such amendments, reports and other
documents as may be necessary in order that there may be no untrue statement of
a material fact in a Registration Statement or Prospectus, or necessary in order
that there may be no omission to state a material fact in the Registration
Statement or Prospectus which omission would make the statements therein
misleading.
(b) Maintenance of "Blue Sky" Qualifications. The Funds shall,
at their expense, use their best efforts to qualify and maintain the
qualification of an appropriate number of Shares for sale under the securities
laws of such states as the Distributor and the Funds may approve, and, if
necessary or appropriate in connection therewith, to qualify and maintain the
qualification of the Funds in such states; provided that the Funds shall not be
required to amend their Articles of Incorporation or By-Laws to comply with the
laws of any state, to maintain an office in any state, to change the terms of
the offering of the Shares in any state, to change the terms of the offering of
the Shares in any state from the terms set forth in Prospectuses, to qualify as
a foreign corporation in any state or to consent to service of process in any
state other than with respect to claims arising out of the offering and sale of
the Shares. The Distributor shall furnish such information and other material
relating to its affairs and activities as may be required by the Funds in
connection with such qualifications.
(c) Copies of Reports and Prospectuses. The Funds shall, at
their expense, keep the Distributor fully informed with regard to their affairs
and in connection therewith shall furnish to the Distributor copies of all
information, financial statements and other papers which the Distributor may
reasonably request for use in connection with the distribution of Shares,
including such reasonable number of copies of Prospectuses and annual and
interim reports as the Distributor may request and shall cooperate fully in the
efforts of the Distributor to sell and arrange for the sale of the Shares and in
the performance of the Distributor under this Agreement.
4. Conformity with Applicable Law and Rules. The Distributor agrees that in
selling Shares hereunder it shall conform in all respects with the laws of the
United States and of any state in which Shares may be offered, and with
applicable rules and regulations of NASD regulation.
5. Independent Contractor. In performing its duties hereunder, the
Distributor shall be an independent contractor and neither the Distributor, nor
any of its officers, directors, employees, or representatives is or shall be an
employee of the Funds in the performance of the Distributor's duties hereunder.
The Distributor shall be responsible for its own conduct and the employment,
control, and conduct of its agents and employees and for injury to such agents
or employees or to others through its agents or employees. The Distributor
assumes full responsibility for its agents and employees under
<PAGE>
applicable statutes and agrees to pay all employee taxes thereunder.
6. Indemnification.
(a) Indemnification of Funds . The Distributor agrees to
indemnify and hold harmless the Funds and each of their present or former
Directors, officers, employees, representatives and each person, if any, who
controls or previously controlled the Funds within the meaning of Section 15 of
the 1933 Act against any and all losses, liabilities, damages, claims or
expenses (including the reasonable costs of investigating or defending any
alleged loss, liability, damage, claims or expense and reasonable legal counsel
fees incurred in connection therewith) to which the Funds or any such person may
become subject under the 1933 Act, under any other statute, at common law, or
otherwise, arising out of the acquisition of any Shares by any person which (i)
may be based upon any wrongful act by the Distributor or any of the
Distributor's directors, officers, employees or representatives, or (ii) may be
based upon any untrue statement or alleged untrue statement of a material fact
contained in a Registration Statement, Prospectus, shareholder report or other
information covering Shares filed or made public by the Funds or any amendment
thereof or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading if such statement or omission was made in
reliance upon and in conformity with information furnished to the Funds by the
Distributor. In no case (i) is the Distributor's indemnity in favor of the
Funds, or any person indemnified to be deemed to protect the Funds or such
indemnified person against any liability to which the Funds or such person would
otherwise be subject by reason of willful misfeasance, bad faith, or gross
negligence in the performance of the Funds' or such person's duties or by reason
of reckless disregard of the Funds' or such person's obligations and duties
under this Agreement or (ii) is the Distributor to be liable under its indemnity
agreement contained in this Paragraph with respect to any claim made against the
Funds or any person indemnified unless the Funds or such person, as the case may
be, shall have notified the Distributor in writing of the claim within a
reasonable time after the summons or other first written notification giving
information of the nature of the claim shall have been served upon the Funds or
upon such person (or after the Funds or such person shall have received notice
of such service on any designated agent). However, failure to notify the
Distributor of any such claim shall not relieve the Distributor from any
liability which the Distributor may have to the Funds or any person against whom
such action is brought otherwise than on account of the Distributor's indemnity
agreement contained in this Paragraph.
The Distributor shall be entitled to participate, at its own expense, in
the defense, or, if the Distributor so elects, to assume the defense of any suit
brought to enforce any such claim, but, if the Distributor elects to assume the
defense, such defense shall be conducted by legal counsel chosen by the
Distributor and satisfactory to the Funds, and to the persons indemnified as
defendant or defendants, in the suit. In the event that the Distributor elects
to assume the defense of any such suit and retain such legal counsel, the Funds,
and the persons indemnified as defendant or defendants in the suit, shall bear
the fees and expenses of any additional legal counsel retained by them. If the
Distributor does not elect to assume the defense of any such suit, the
Distributor will reimburse the Funds and the persons indemnified as defendant or
defendants in such suit for the reasonable fees and expenses of any legal
counsel retained by them. The Distributor agrees to promptly notify the Funds of
the commencement of any litigation of proceedings against them or any of their
officers, employees or representatives in connection with the issue or sale of
any Shares.
(b) Indemnification of the Distributor. The Funds agree to
indemnify and hold harmless the Distributor and each of its present or former
directors, officers, employees, representatives and each person, if any, who
controls or previously controlled the Distributor within the meaning of Section
15 of the 1933 Act against any and all losses, liabilities, damages, claims or
expenses (including the reasonable costs of investigating or defending any
alleged loss, liability, damage, claim or expense and reasonable legal counsel
<PAGE>
fees incurred in connection therewith) to which the Distributor or any such
person may become subject under the 1933 Act, under any other statute, at common
law, or otherwise, arising out of the acquisition of any Shares by any person
which (i) may be based upon any wrongful act by the Funds or any of the Funds'
Directors, officers, employees or representatives, or (ii) may be based upon any
untrue statement or alleged untrue statement of a material fact contained in a
Registration Statement, Prospectus, shareholder report or other information
covering Shares filed or made public by the Funds or any amendment thereof or
supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading unless such statement or omission was made in reliance
upon and in conformity with information furnished to the Funds by the
Distributor. In no case (i) is the Funds' indemnity in favor of the Distributor,
or any person indemnified to be deemed to protect the Distributor or such
indemnified person against any liability to which the Distributor or such person
would otherwise be subject by reason of willful misfeasance, bad faith, or gross
negligence in the performance of such person's duties or by reason of reckless
disregard of such person's obligations and duties under this Agreement or (ii)
are the Funds to be liable under their indemnity agreement contained in this
Paragraph with respect to any claim made against Distributor, or person
indemnified unless the Distributor, or such person, as the case may be, shall
have notified the Funds in writing of the claim within a reasonable time after
the summons or other first written notification giving information of the nature
of the claim shall have been served upon the Distributor or upon such person (or
after the Distributor or such person shall have received notice of such service
on any designated agent). However, failure to notify the Funds of any such claim
shall not relieve the Funds from any liability which the Funds may have to the
Distributor or any person against whom such action is brought otherwise than on
account of the Funds' indemnity agreement contained in this Paragraph.
The Funds shall be entitled to participate, at their own expense, in the
defense, or, if the Funds so elect, to assume the defense of any suit brought to
enforce any such claim, but if the Funds elect to assume the defense, such
defense shall be conducted by legal counsel chosen by the Funds and satisfactory
to the Distributor and to the persons indemnified as defendant or defendants, in
the suit. In the event that the Funds elect to assume the defense of any such
suit and retain such legal counsel, the Distributor, the persons indemnified as
defendant or defendants in the suit, shall bear the fees and expenses of any
additional legal counsel retained by them. If the Funds do not elect to assume
the defense of any such suit, the Funds will reimburse the Distributor and the
persons indemnified as defendant or defendants in such suit for the reasonable
fees and expenses of any legal counsel retained by them. The Funds agree to
promptly notify the Distributor of the commencement of any litigation or
proceedings against it or any of their Directors, officers, employees or
representatives in connection with the issue or sale of any Shares.
7. Authorized Representations. The Distributor is not authorized by the
Funds to give on behalf of the Funds any information or to make any
representations in connection with the sale of Shares other than the information
and representations contained in a Registration Statement or Prospectus filed
with the SEC under the 1933 Act and/or the 1940 Act, covering Shares, as such
Registration Statement and Prospectus may be amended or supplemented from time
to time, or contained in shareholder reports or other material that may be
prepared by or on behalf of the Funds for the Distributor's use. This shall not
be construed to prevent the Distributor from preparing and distributing
tombstone ads and sales literature or other material as it may deem appropriate.
No person other than the Distributor is authorized to act as principal
underwriter (as such term is defined in the 1940 Act) for the Funds.
8. Term of Agreement. The term of this Agreement shall begin on the date
first above written, and unless sooner terminated as hereinafter provided, this
Agreement shall remain in effect for a period of two years from the date first
above written. Thereafter, this Agreement shall continue in effect from year to
year, subject to the termination provisions and all other terms and conditions
thereof, so long as such continuation
<PAGE>
shall be specifically approved at least annually by (i) the Board of Directors
or by vote of a majority of the outstanding voting securities of each investment
portfolio of the Funds and, (ii) by the vote, cast in person at a meeting called
for the purpose of voting on such approval, of a majority of the Directors of
the Funds who are not parties to this Agreement or interested persons of any
such party. The Distributor shall furnish to the Funds, promptly upon their
request, such information as may reasonably be necessary to evaluate the terms
of this Agreement or any extension, renewal or amendment hereof.
9. Compensation. As compensation for services rendered by the Distributor
during the term of this Agreement, Fremont Investment Advisors, Inc. will pay to
the Distributor a quarterly fee at the annual rate of $50,000 plus out of pocket
expenses (e.g., NASD advertising filing fees, annual agent registration fees,
etc.).
10. Amendment or Assignment of Agreement. This Agreement may not be amended
or assigned except as permitted by the 1940 Act, and this Agreement shall
automatically and immediately terminate in the event of its assignment.
11. Termination of Agreement. This Agreement may be terminated by either
party hereto, without the payment of any penalty, on not more than upon 60 days'
nor less than 30 days' prior notice in writing to the other party; provided,
that in the case of termination by the Funds such action shall have been
authorized by resolution of a majority of the Directors of the Funds who are not
parties to this Agreement or interested persons of any such party, or by vote of
a majority of the outstanding voting securities of each series of the Funds.
12. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delineate any of the
provisions hereof or otherwise affect their construction or effect.
This Agreement may be executed simultaneously in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
Nothing herein contained shall be deemed to require the Funds to take any
action contrary to their Articles of Incorporation or By-Laws, or any applicable
statutory or regulatory requirement to which they are subject or by which they
are bound, or to relieve or deprive the Board of Directors of the Funds of
responsibility for and control of the conduct of the affairs of the Funds.
13. Definition of Terms. Any question of interpretation of any term or
provision of this Agreement having a counterpart in or otherwise derived from a
term or provision of the 1940 Act shall be resolved by reference to such term or
provision of the 1940 Act and to interpretation thereof, if any, by the United
States courts or, in the absence of any controlling decision of any such court,
by rules, regulations or orders of the SEC validly issued pursuant to the 1940
Act. Specifically, the terms "vote of a majority of the outstanding voting
securities", "interested persons," "assignment," and "affiliated person," as
used in Paragraphs 8, 9 and 10 hereof, shall have the meanings assigned to them
by Section 2(a) of the 1940 Act. In addition, where the effect of a requirement
of the 1940 Act reflected in any provision of this Agreement is relaxed by a
rule, regulation or order of the SEC, whether of special or of general
application, such provision shall be deemed to incorporate the effect of such
rule, regulation or order.
<PAGE>
14. Compliance with Securities Laws. The Funds represents that they are
registered as an open-end management investment company under the 1940 Act, and
agree that they will comply with all the provisions of the 1940 Act and of the
rules and regulations thereunder. The Funds and the Distributor each agree to
comply with all of the applicable terms and provisions of the 1940 Act, the 1933
Act and, subject to the provisions of Section 4(d), all applicable "Blue Sky"
laws. The Distributor agrees to comply with all of the applicable terms and
provisions of the 1934 Act.
15. Notices. Any notice required to be given pursuant to this Agreement
shall be deemed duly given if delivered or mailed by registered mail, postage
prepaid, to the Distributor at 4455 E. Camelback Road., Suite 261E, Phoenix, AZ
85018 or to the Funds at 333 Market Street, Ste 2600, San Francisco, CA 94105.
16. Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of California
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the date first written above.
FREMONT MUTUAL FUNDS, INC.
By: /s/ Michael H. Kosich
-------------------------------
Name:
Title:
FIRST FUND DISTRIBUTORS, INC.
By: /s/ Eric Banhazl
-------------------------------
Name:
Title:
ADMINISTRATION AGREEMENT
AGREEMENT made this 1st day of July, 1997 by and between FREMONT INVESTMENT
ADVISORS, INC ("Fremont") a California Corporation and INVESTMENT COMPANY
ADMINISTRATION CORPORATION, a Delaware Corporation (the "Administrator").
W I T N E S S E T H
-------------------
WHEREAS, Fremont is registered as an investment advisor under the
Investment Advisors Act of 1940 and has entered into an investment advisory
agreement (the "Management Agreement") with Fremont Mutual Funds, Inc. (the
"Funds"); and
WHEREAS, the Funds have been organized as a Maryland Corporation to operate
as an investment company registered under the Investment Company Act of 1940
(the "1940 Act"), with designated series of shares of common stock, each
referred to as "Fund" or "Series"; and
WHEREAS, Fremont wishes to retain the Administrator to provide certain
administrative services in connection with the management of the operations of
the Funds and the Administrator is willing to furnish such services;
NOW THEREFORE, in consideration of the premises and mutual covenants herein
contained, it is agreed between the parties hereto as follows:
1. Appointment. Fremont hereby appoints the Administrator to provide
certain administrative services, hereinafter enumerated, in connection with the
management of the Funds' operations for the period and on the terms set forth in
this Agreement. The Administrator agrees to comply with all relevant provisions
of the 1940 Act, applicable rules and regulations thereunder, and other
applicable law.
2. Services on a Continuing Basis. The Administrator will perform the
services as detailed on Appendix I on a regular basis which would be daily,
weekly or as otherwise appropriate.
3. Responsibility of the Administrator. The Administrator shall be under no
duty to take any action on behalf of Fremont or the Funds except as set forth
herein or as may be agreed to by the Administrator in writing. In the
performance of its duties hereunder, the Administrator shall be obligated to
exercise reasonable care and diligence and to act in good faith and to use its
best efforts. Without limiting the generality of the foregoing or any other
provision of this Agreement, the Administrator shall not be liable for delays or
errors or loss of data occurring by reason of circumstances beyond the
Administrator's control.
4. Reliance Upon Instructions. Fremont agrees that the Administrator shall
be entitled to rely upon any instructions, oral or written, actually received by
the Administrator from Fremont or the Board of Directors of the Funds and shall
incur no liability to Fremont or the Funds in acting upon such oral or written
instructions, provided such instructions reasonably appear to have been received
from a person duly authorized by the Board of Directors of the Fund to give oral
or written instructions on behalf of the Funds or any portfolio.
<PAGE>
5. Confidentiality; Maintenance of Records. The Administrator agrees on
behalf of itself and its employees to treat confidentially all records and other
information relative to Fremont and the Funds and all prior, present or
potential shareholders of any and all series of the Funds, except after prior
notification to, and approval of release of information in writing by, Fremont,
which approval shall not be unreasonably withheld where the Administrator may be
exposed to civil or criminal contempt proceedings for failure to comply, when
requested to divulge such information by duly constituted authorities, or when
so requested by Fremont or by a series of the Funds. Any records required to be
maintained and preserved by the Administrator under this Agreement are property
of the Funds and will be surrendered to the Funds promptly upon request.
6. Equipment Failures. In the event of equipment failures or the occurrence
of events beyond the Administrator's control which render the performance of the
Administrator's functions under this Agreement impossible, the Administrator
shall take reasonable steps to minimize service interruptions and is authorized
to engage the services of third parties to prevent or remedy such service
interruptions.
7. Compensation. As compensation for services rendered by the Administrator
during the term of this Agreement, Fremont will pay to the Administrator a
monthly fee at the annual rate of 0.02% of the first $1 billion of average daily
net assets, 0.015% thereafter, with a minimum fee of $20,000 annually, per
series of the Funds.
8. Indemnification. Fremont and the Funds agree to indemnify and hold
harmless the Administrator from all taxes, filing fees, charges, expenses,
assessments, claims and liabilities (including without limitation, liabilities
arising under the Securities Act of 1933, the Securities Exchange Act of 1934,
the 1940 Act, and any state and foreign securities laws, all as amended from
time to time) and expenses, including (without limitation) reasonable attorneys
fees and disbursements, reasonably arising directly or indirectly from any
action or thing which the Administrator takes or does or omits to take or do at
the request of or in reliance upon the advice of the Board of Directors of the
Funds or Fremont, provided that the Administrator will not be indemnified
against any liability to a Fund or to shareholders (or any expenses incident to
such liability) arising out of the Administrator's own willful misfeasance, bad
faith, gross negligence or reckless disregard of its duties and obligations
under this Agreement. The Administrator agrees to indemnify and hold harmless
Fremont and each of the Funds' Directors from all claims and liabilities
(including without limitation, liabilities under the Securities Act of 1933, the
Securities Exchange Act of 1934, the 1940 Act, and any state and foreign
securities laws, all as amended from time to time) and expenses, including
(without limitation) reasonable attorneys fees and disbursements, arising
directly or indirectly from any action or thing which the Administrator takes or
does or omits to take or do which is in violation of this Agreement or not in
accordance with instructions properly given to the Administrator, or arising out
of the Administrator's own willful misfeasance, bad faith, gross negligence or
reckless disregard of its duties and obligations under this Agreement.
9. Duration and termination. This Agreement shall continue until
termination by Fremont or the Administrator on 60 days' written notice to the
other party. All notices and other communications hereunder shall be in writing.
10. Amendments. This Agreement or any part hereof may be changed or waived
only by instrument in writing signed by the party against which enforcement of
such change or waiver is sought.
<PAGE>
11. Miscellaneous. This Agreement embodies the entire agreement and
understanding between the parties thereto with respect to the services to be
performed hereunder, and supersedes all prior agreements and understandings,
relating to the subject matter hereof. The captions in this Agreement are
included for convenience of reference only and in no way define or limit any of
the provisions hereof or otherwise affect their construction or effect. This
Agreement shall be deemed to be a contract made in California and governed by
California law. If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of this Agreement
will not be affected thereby. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the date first written above.
FREMONT INVESTMENT ADVISORS, INC.
By: /s/ David L. Redo
---------------------------------------
Name: David L. Redo
Title: President
INVESTMENT COMPANY ADMINISTRATION CORPORATION
By: /s/ Eric Banhazl
---------------------------------------
Name: Eric Banhazl
Title: Executive Vice President
<PAGE>
Appendix A
INVESTMENT COMPANY ADMINISTRATION CORPORATION
ADMINISTRATIVE SERVICES
Responsibility for Board meetings.
* Coordinating the preparation of the agenda.
* Preparing and distributing materials prior to the meeting.
* Preparing minutes of each meeting and maintaining the minute book.
Responsibility for shareholder meetings.
* Determining when meetings are needed as well as those matters to be voted
on.
* Drafting proxy material.
* Coordinating printing of proxy material.
* Coordinating proxy solicitation.
* Preparing minutes of the meeting.
Maintaining the registration statement.
* Drafting annual revisions and circulating drafts to appropriate parties,
including outside counsel.
* Preparing and filing amendments and supplements ("stickers").
* Coordinate with Fremont the printing of final prospectuses and statements
of additional information.
* Preparing and filing registration fee payments (Rule 24f-2).
* Filing semi-annual reports on Form N-SAR.
Maintaining state notice filings.
* Monitoring status of filings in each state.
* Increasing amounts filed as needed.
* Filing renewals as needed.
* Filing copies of registration statement amendments, supplements and other
required documents.
* Filing sales reports.
Monitoring compliance.
* Reviewing 1940 Act, IRS, state and voluntary investment restrictions with
portfolio managers.
* Preparing checklists for use by portfolio managers.
* Reviewing reports from the accounting services agent.
* Preparing compliance reports for management and the Board.
* Monitoring the adequacy of the fidelity bond and D&O insurance.
