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FREMONT MUTUAL FUNDS, INC.
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U.S. Micro-Cap Annual Report | October 31, 2000
fremont
FREMONT INVESTMENT ADVISORS
<PAGE>
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A MESSAGE FROM MICHAEL H. KOSICH,
PRESIDENT OF FREMONT MUTUAL FUNDS, INC.
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Dear Fellow Shareholder,
Greed and fear are said to be the two dominant emotions impacting investor
behavior. During the first four months of this reporting period, greed held
sway, with investors "chasing" exceptional returns in technology stocks. In
early March, greed gave way to fear-first, that valuations were simply too high,
and in mid-summer, that third quarter earnings would fail to live up to
expectations. Indeed, several high profile U.S. multi-nationals and leading
technology companies either reported disappointing third quarter earnings or
warned that future earnings were not going to meet consensus estimates. With the
exception of brief rallies in August and the last week of October, stocks
trended lower from late spring through the end of fiscal 2000. We witnessed a
similar performance pattern in international equities markets, which were
confronted by additional challenges, most notably rapidly rising oil prices and
a plummeting euro.
As I write, global stock markets continue to flounder as investors wrestle with
a host of economic and market issues. Our equities funds' portfolio managers
face the same challenge - interpreting economic and market trends and deciding
how best to respond to the changing environment. They will share their current
thoughts with you in the following Annual Report. As should be expected, the
managers have different opinions on these issues and favor different investment
strategies. But, they all agree that over the long term, the financial markets
will reward investors for their discipline and patience.
Highlights this year include Money Magazine citing the Fremont U.S. Small Cap
Fund as one of the top 100 mutual funds in its June, 2000 issue and Mutual Funds
Magazine pronouncing the Fremont Bond Fund as one of the top 10 funds to buy in
2001 in its recently published December, 2000 issue.
On October 4, 2000, Fremont Investment Advisors announced the appointment of
Nancy Tengler, the former President and Chief Investment Officer of Global
Alliance Value Investors, Ltd., as its new President and CIO. Nancy brings a
wealth of experience and an admirable track record of investment success to the
FIA team. In 2001, we plan to offer a new value oriented growth fund with Nancy
Tengler at the helm.
After more than 30 years in the investment business, I've decided to retire at
year-end. Nancy will also be succeeding me as President of Fremont Funds. I have
enjoyed my tenure at Fremont and am confident I am leaving the firm in good
hands.
Sincerely,
/s/ Michael H. Kosich
Michael H. Kosich
President
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TABLE OF CONTENTS
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Fund Profile and Letter to Shareholders 2
Report of Independent Accountants 4
Schedule of Investments in Securities and Net Assets 5
FINANCIAL STATEMENTS
Statement of Assets and Liabilities 7
Statement of Operations 7
Statements of Changes in Net Assets 8
FINANCIAL HIGHLIGHTS 9
NOTES TO FINANCIAL STATEMENTS 10
TAX DESIGNATION 13
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FREMONT U.S. MICRO-CAP FUND
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Portfolio Manager
Robert E. Kern, Jr.
Kern Capital Management LLC
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Robert E. Kern, Jr.
FUND PROFILE
The U.S. micro-cap stock market is a breeding ground for entrepreneurially-
managed companies with exceptional growth prospects. With minimal Wall Street
research coverage and low institutional ownership, micro-cap stocks represent
the least efficient sector of the domestic equities market. This inefficiency
creates attractive investment opportunities for the research-driven stock
pickers managing the Fremont U.S. Micro-Cap Fund.
Since the investment potential of micro-cap stocks is largely determined by the
business prospects for individual companies rather than macro-economic trends,
the Fund's focus is on bottom-up stock selection. Fund management analyzes
financial statements, the company's competitive position, and meets with key
corporate decision makers to discuss strategies for future growth.
Robert E. Kern, Jr. is nationally recognized as a pioneer and leading
practitioner of micro-cap research and portfolio management.
TO OUR SHAREHOLDERS
For the six and twelve month periods ended October 31, 2000, the Fremont U.S.
Micro-Cap Fund declined 0.77% and gained 46.07% compared to the Russell 2000's
1.10% loss and 17.40% gain. We are pleased to have delivered positive returns in
what has been a very challenging year for micro-cap stock investors.
The Fund has a history of excelling in rising markets and holding up
sufficiently well during declines to produce attractive returns through the
micro-cap market cycle. This has translated into excellent long term performance
versus our benchmark index. This performance pattern repeated itself in fiscal
2000. The Fund achieved exceptional absolute and relative returns in the first
four months of this reporting period. Over the balance of the fiscal year, our
returns did not compare favorably to the bench-mark index. However, by fiscal
year end, we posted positive results and maintained our performance lead.
In first half fiscal 2000, our technology investments performed impressively and
our healthcare holdings contributed to returns. Our consumer and services
investments lagged. Although we began significantly reducing our tech sector
weighting at the beginning of second half fiscal 2000, we still suffered the
consequences of significant exposure to the weakest sector of the market. Our
healthcare investments continued to perform relatively well in the second half,
but our consumer and services holdings continued to stumble.
We have been through challenging markets before, most recently in the first
three quarters of calendar 1998, when micro-cap stocks declined sharply. Our
response to this difficult market was to concentrate the portfolio in stocks we
had the highest degree of confidence in and believed would perform best when the
market turned around. This worked to our advantage in the fourth quarter of 1998
and through all of 1999, a period in which the Fund posted impressive returns.
We are currently laying the groundwork for good gains when the micro-cap stock
market recovers from its present malaise. Let me give two examples of the kind
of stocks we believe will help propel performance in the years ahead.
Two of the Fund's larger holdings, Spectra-Physics Lasers (SPLI) and Zygo
Corporation (ZIGO), are established companies with similar growth drivers. Both
companies are well positioned to participate in the explosive long-term growth
forecasted for fiber optic-based telecommunications. SPLI has leveraged its
strong position in high-power lasers and optical coatings to develop next
generation products for the telecommunications industry. ZIGO has combined its
knowledge of precision optics, metrology and motion control with a recent
acquisition's high-volume, precision-manufacturing skills to potentially
revolutionize the way optical components are manufactured. While neither firm's
share price has been spared in this latest tech fallout, both companies'
businesses remain on track and are expected to rebound with a turn in the stock
market.
The reduction in our technology exposure from 37% of assets at the peak to 24%
of assets at the close of this reporting period, was the only major shift in
sector weighting during second half fiscal 2000. Historically, the Fund's
technology weighting has ranged from a high of around 40% to a low of
approximately 20%. The fact that we are now in the low end of that range
reflects our concern that we may continue to see valuations in the tech sector
decline to come more in line with current fundamentals. Healthcare now
represents 13% of assets, consumer stocks 17%, services 13% and special
situations 9%. The remaining 24% is in cash reserves. We believe this "dry
powder" will allow us to take maximum advantage of opportunities evolving in the
micro-cap market. Once the dust settles, we will probably
2 FREMONT MUTUAL FUNDS
<PAGE>
use much of this cash to rebuild our technology sector commitments.
In closing, volatility in the micro-cap market is a fact of life. We can live
with that. We will make adjustments in response to changing fundamentals and
valuations in the different sectors represented in the portfolio. We will use
cash reserves as a defensive weapon during difficult markets and an offensive
fweapon in more fertile investment environments. However our primary focus will
remain on identifying the most promising businesses in the five most innovative
sectors of the economy. This basic strategy has served us well for a long time
and we believe will continue to generate superior returns in the future.
Sincerely,
/s/ Robert E Kern, Jr.
Robert E Kern, Jr.
Portfolio Manager
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FREMONT U.S. MICRO-CAP FUND
SECTOR DIVERSIFICATION
AS OF 10/31/00
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Short-Term Securities (23.8%)
Health Care (13.2%)
Business Equipment & Services (12.9%)
Technology (Components) (10.3%)
Technology (Equipment) (8.4%)
Retail (7.7%)
Consumer Services (6.7%)
Technology (Software) (5.5%)
Capital Goods (3.4%)
Consumer Non-Durables (2.3%)
Other (5.8%)
ANNUAL RETURNS
6/30/94-10/31/94* +3.60%
11/01/94-10/31/95 +38.68%
11/01/95-10/31/96 +41.46%
11/01/96-10/31/97 +28.80%
11/01/97-10/31/98 -23.45%
11/01/98-10/31/99 +110.46%
11/01/99-10/31/00 +46.07%
TOP TEN HOLDINGS
Boston Communications Group, Inc. ......... 3.0%
Anaren Microwave, Inc. .................... 2.5%
TeleTech Holdings, Inc. ................... 2.5%
Endocare, Inc. ............................ 2.4%
Zygo Corp. ................................ 2.2%
ArthroCare Corp. .......................... 2.2%
Gene Logic, Inc. .......................... 2.2%
Eclipsys Corp.............................. 1.9%
Microsemi Corp. ........................... 1.9%
NeoPharm, Inc.............................. 1.8%
TOTAL .................................. 22.6%
GROWTH OF $10,000(1)
[GRAPHIC OMITTED]
10/31/00
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Fremont U.S. Micro-Cap Fund $ 61,630
Russell 2000 Index $ 22,595
AVERAGE ANNUAL RETURNS FOR PERIODS ENDED 10/31/00
1 Year 3 Years 5 Years Since Inception (6/30/94)
-------------------------------------------------------------
46.07% 33.01% 33.78% 33.23%
*Unannualized. 1 Assumes initial investment of $10,000 on inception date, June
30, 1994. Performance data illustrated is historical. Past performance is not
predictive of future performance. Share price and return will vary so that a
gain or loss may be realized when shares are sold. All performance figures
assume reinvestment of dividends. Management fees and other expenses are
included in the Fund's performance; however, fees and expenses are not
incorporated in the Russell 2000 Index. The returns shown were achieved during a
period of generally rising market values, especially in the technology sector.
Investors should not expect that such favorable returns can be achieved
consistently. Investments in newly emerging companies are subject to erratic
earning patterns, competitive conditions within the industry, limited earnings
history and the reliance on one or a limited number of products.
FREMONT MUTUAL FUNDS 3
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REPORT OF INDEPENDENT ACCOUNTANTS
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To the Board of Directors and Shareholders of Fremont Mutual Funds, Inc.:
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments in securities and net assets, and the related
statements of operations and changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of the Fremont
U.S. Micro-Cap Fund (one of the portfolios constituting Fremont Mutual Funds,
Inc.) (hereafter referred to as the "Fund"), at October 31, 2000, and the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended, and the financial highlights
for each of the periods presented, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
and financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at October
31, 2000 by correspondence with the custodian and brokers, provide a reasonable
basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
December 19, 2000
4 FREMONT MUTUAL FUNDS
<PAGE>
FREMONT U.S. MICRO-CAP FUND
October 31, 2000
SCHEDULE OF INVESTMENTS IN SECURITIES AND NET ASSETS
Value
Shares Security Description (Note 1)
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STOCKS 74.9%
BUSINESS EQUIPMENT & SERVICES 12.9%
* 277,500 Agency.com, Inc. $ 2,913,750
* 1,060,500 Boston Communications
Group, Inc.(a) 25,054,312
* 209,700 Bright Horizons Family
Solutions, Inc. 5,242,500
* 168,000 Corporate Executive Board Co. 7,749,000
* 360,900 CoStar Group, Inc. 11,278,125
* 768,100 Datalink Corp.(a) 9,217,200
* 255,100 Infocrossing, Inc. 3,204,694
* 512,300 Media 100, Inc. 5,058,962
* 169,200 Shuffle Master, Inc. 3,796,425
* 1,045,000 Spectrum Control, Inc.(a) 12,931,875
* 732,000 TeleTech Holdings, Inc. 20,313,000
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106,759,843
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CAPITAL GOODS 3.4%
* 584,300 Aaon, Inc.(a) 12,343,337
* 336,400 IMPCO Technologies, Inc. 6,622,875
* 212,900 Oshkosh Truck Corp. 8,755,512
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27,721,724
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CONSUMER DURABLES 0.4%
* 632,300 Jore Corp. 3,714,762
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3,714,762
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CONSUMER NON-DURABLES 2.3%
* 57,300 Concord Camera Corp. 1,772,719
231,500 K-Swiss, Inc. 6,366,250
* 509,200 McNaughton Apparel Group, Inc.(a) 7,001,500
* 204,500 Universal Electronics, Inc. 3,757,687
------------
18,898,156
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CONSUMER SERVICES 6.7%
* 568,800 American Classic Voyages Co. 7,856,550
1,275,000 Cash America International, Inc.(a) 6,614,062
* 501,100 Championship Auto Racing
Teams, Inc. 12,464,863
* 240,900 Internet.com Corp. 5,013,731
* 1,098,300 Lojack Corp.(a) 8,786,400
* 651,200 Nucentrix Broadband
Networks, Inc.(a) 14,733,400
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55,469,006
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ENERGY 1.1%
* 982,200 Newpark Resources, Inc. 8,839,800
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8,839,800
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HEALTH CARE 13.2%
* 800,700 ArthroCare Corp. 18,165,881
* 813,200 eBenX, Inc. 9,707,575
* 643,300 Eclipsys Corp. 15,881,469
* 1,113,700 Endocare, Inc.(a) 19,698,569
* 791,100 Fusion Medical Technologies, Inc.(a) 6,526,575
* 824,500 Gene Logic, Inc. 17,984,406
* 842,900 Innerdyne, Inc. 5,900,300
* 411,000 NeoPharm, Inc. 14,898,750
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108,763,525
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RAW MATERIALS 0.3%
* 347,850 Northern Technologies
International Corp.(a) $ 2,413,209
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2,413,209
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RETAIL 7.7%
* 188,000 Bebe Stores, Inc. 2,867,000
* 455,600 Buca, Inc. 7,118,750
* 213,200 Electronics Boutique
Holdings Corp. 3,331,250
* 181,600 Finish Line, Inc. (Class A) 1,384,700
* 811,000 Genesco, Inc. 14,395,250
* 458,400 Good Guys, Inc. 2,693,100
* 980,100 Gymboree Corp. 8,759,644
* 723,600 Intertan, Inc. 8,004,825
* 222,100 Quicksilver, Inc. 4,247,663
* 227,300 Stein Mart, Inc. 3,523,150
* 136,800 The Buckle, Inc. 2,299,950
* 196,900 The Children's Place
Retail Stores, Inc. 5,107,094
------------
63,732,376
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SHELTER 1.3%
* 1,033,900 Modtech Holdings, Inc.(a) 10,985,188
------------
10,985,188
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TECHNOLOGY (COMPONENTS) 10.3%
* 201,700 Anaren Microwave, Inc. 20,976,800
* 578,200 California Amplifier, Inc. 14,455,000
* 1,089,500 California Micro Devices Corp.(a) 13,823,031
* 390,100 Microsemi Corp. 15,604,000
* 529,000 Parlex Corp.(a) 8,464,000
* 51,300 Sage, Inc. 679,725
* 316,200 Spectra-Physics Lasers, Inc. 11,165,813
------------
85,168,369
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TECHNOLOGY (EQUIPMENT) 8.4%
301,500 BEI Technologies, Inc. 10,740,938
* 644,100 COMARCO, Inc.(a) 12,439,181
* 804,600 Micro Component
Technology, Inc.(a) 3,620,700
* 636,350 Netopia, Inc. 6,920,306
* 945,400 Repeater Technologies, Inc. 3,308,900
* 415,000 Rimage Corp. 4,150,000
* 696,100 RIT Technologies Ltd.(a) 6,243,147
* 243,000 Trikon Technologies, Inc. 3,994,313
* 367,600 Zygo Corp. 18,196,200
------------
69,613,685
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TECHNOLOGY (SOFTWARE) 5.5%
* 485,710 Exigent International, Inc.(a) 986,598
* 421,700 MDSI Mobile Data Solutions, Inc. 5,429,388
* 446,000 Novadigm, Inc. 4,460,000
* 609,100 PC-Tel, Inc. 10,506,975
* 583,500 Primus Knowledge Solutions, Inc. 4,740,938
* 468,500 Princeton Video Image, Inc. 2,049,688
* 704,900 Puma Technology, Inc. 9,560,206
* 461,100 Take-Two Interactive Software, Inc. 5,734,931
* 191,200 VocalTec Communications Ltd. 1,625,200
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45,093,924
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The accompanying notes are an integral part of these financial statements.
FREMONT MUTUAL FUNDS 5
<PAGE>
FREMONT U.S. MICRO-CAP FUND
October 31, 2000
SCHEDULE OF INVESTMENTS IN SECURITIES AND NET ASSETS
Shares/ Value
Face Amount Security Description (Note 1)
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UTILITIES 1.4%
* 1,093,000 Cadiz, Inc. $ 11,613,125
------------
11,613,125
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TOTAL STOCKS (Cost $579,020,370) 618,786,692
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SHORT-TERM INVESTMENTS 23.8%
$ 10,000,000 Associates Corp. of
North America,
6.620%(b), 11/01/00 10,000,000
36,076,405 Repurchase Agreement,
State Street Bank and Trust Co.,
5.980%, 11/01/00 (Maturity
Value $36,082,398)
(Cost $36,076,405) Collateral:
FHLMC, 7.050%, 09/19/03 36,076,405
50,000,000 Repurchase Agreement,
State Street Bank and Trust Co.,
5.980%, 11/01/00 (Maturity
Value $50,008,306)
(Cost $50,000,000) Collateral:
FNMA, 6.000%, 11/15/01 50,000,000
50,000,000 Repurchase Agreement,
State Street Bank and Trust Co.,
5.980%, 11/01/00 (Maturity
Value $50,008,306)
(Cost $50,000,000) Collateral:
FNMA, 6.030%, 08/06/01 50,000,000
50,000,000 Repurchase Agreement,
State Street Bank and Trust Co.,
5.980%, 11/01/00 (Maturity
Value $50,008,306)
(Cost $50,000,000) Collateral:
FNMA, 6.100%, 08/10/01 50,000,000
TOTAL SHORT-TERM INVESTMENTS (Cost $196,076,405) 196,076,405
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TOTAL INVESTMENTS (Cost $775,096,775), 98.7% 814,863,097
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OTHER ASSETS AND LIABILITIES, NET, 1.3% 11,109,407
------------
NET ASSETS, 100.0% $825,972,504
============
* Non-income producing security.
(a) As of October 31, 2000, these securities represent ownership of at least 5%
of the voting securities of the issuer and are, therefore, affiliates as
defined in the Investment Company Act of 1940; See note 2 of "Notes to
Financial Statements."
(b) Represents discount rate or yield to maturity at the date of acquisition.
The accompanying notes are an integral part of these financial statements.
6 FREMONT MUTUAL FUNDS
<PAGE>
FREMONT U.S. MICRO-CAP FUND
STATEMENT OF ASSETS AND LIABILITIES
October 31, 2000
(All numbers in thousands except net asset value per share)
ASSETS:
Investments in securities at cost $589,021
Repurchase agreements at cost 186,076
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TOTAL INVESTMENTS AT COST $775,097
========
Investments in securities at value $628,787
Repurchase agreements at value 186,076
Cash 88
Dividends and interest receivable 62
Receivable for securities sold 12,502
Receivable from sale of fund shares 5,349
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TOTAL ASSETS 832,864
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LIABILITIES:
Payable for securities purchased 4,433
Payable for fund shares redeemed 1,459
Accrued expenses:
Investment advisory, administrative
and distribution fees 999
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TOTAL LIABILITIES 6,891
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NET ASSETS $825,973
========
Net assets consist of:
Paid in capital $724,563
Undistributed net investment income 8
Unrealized appreciation on investments 39,766
Accumulated net realized gain 61,636
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NET ASSETS $825,973
========
SHARES OF CAPITAL STOCK OUTSTANDING 23,609
========
NET ASSET VALUE PER SHARE $ 34.99
========
STATEMENT OF OPERATIONS
Year Ended October 31, 2000
(All numbers in thousands)
INVESTMENT INCOME:
Interest $ 14,057
Dividends 229
---------
TOTAL INCOME 14,286
---------
EXPENSES:
Investment advisory fees 13,786
---------
TOTAL NET EXPENSES 13,786
---------
NET INVESTMENT INCOME 500
---------
REALIZED AND UNREALIZED GAIN
(LOSS) FROM INVESTMENTS:
Net realized gain from:
Investments 189,664
Net unrealized depreciation on:
Investments (27,312)
---------
Net realized and unrealized gain
from investments 162,352
---------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 162,852
=========
The accompanying notes are an integral part of these financial statements.
FREMONT MUTUAL FUNDS 7
<PAGE>
FREMONT U.S. MICRO-CAP FUND
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended October 31, 2000 and 1999
(All numbers in thousands)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
From operations:
Net investment income (loss) $ 500 $ (1,933)
Net realized gain from investments 189,664 62,303
Net unrealized appreciation (depreciation) on investments (27,312) 79,635
----------- -----------
Net increase in net assets from operations 162,852 140,005
----------- -----------
Distributions to shareholders from:
Net investment income (492) --
Net realized gains (128,587) (53,551)
----------- -----------
Total distributions to shareholders (129,079) (53,551)
----------- -----------
From capital share transactions:
Proceeds from shares sold 1,577,644 448,130
Reinvested dividends 119,451 43,583
Payments for shares redeemed (1,205,398) (397,680)
----------- -----------
Net increase in net assets
from capital share transactions 491,697 94,033
----------- -----------
Net increase in net assets 525,470 180,487
Net assets at beginning of period 300,503 120,016
----------- -----------
NET ASSETS AT END OF PERIOD $ 825,973 $ 300,503
=========== ===========
Undistributed net investment income $ 8 $ --
=========== ===========
CAPITAL TRANSACTIONS IN SHARES:
Sold 36,444 17,299
Reinvested dividends 3,410 1,614
Redeemed (26,839) (15,663)
----------- -----------
Net increase from capital share transactions 13,015 3,250
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
8 FREMONT MUTUAL FUNDS
<PAGE>
FREMONT U.S. MICRO-CAP FUND
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS YEAR ENDED OCTOBER 31
----------------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
For one share outstanding during the period
NET ASSET VALUE, BEGINNING OF PERIOD $ 28.36 $ 16.34 $ 22.69 $ 19.63 $ 14.34
--------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) .02 (.18) (.25) (.10) (.04)
Net realized and unrealized gain (loss) 13.03 17.94 (4.86) 5.60 5.83
--------- --------- --------- --------- ---------
Total investment operations 13.05 17.76 (5.11) 5.50 5.79
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
From net investment income (.02) -- -- -- --
From net realized gains (6.40) (5.74) (1.24) (2.44) (.50)
--------- --------- --------- --------- ---------
Total distributions (6.42) (5.74) (1.24) (2.44) (.50)
--------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 34.99 $ 28.36 $ 16.34 $ 22.69 $ 19.63
========= ========= ========= ========= =========
TOTAL RETURN 46.07% 110.46% (23.45)% 28.80%1 41.46%1
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000s omitted) $ 825,973 $ 300,503 $ 120,016 $ 171,507 $ 102,481
Ratio of net expenses to average net assets 2 1.57% 1.82% 1.94% 1.88% 1.96%
Ratio of gross expenses to average net assets 2 1.57% 1.82% 1.94% 1.90% 2.22%
Ratio of net investment income (loss)
to average net assets .06% -.97% -1.22% -.67% -.51%
Portfolio turnover rate 117% 164% 170% 125% 81%
</TABLE>
1 Total return would have been lower had the advisor not waived and/or
reimbursed expenses.
2 See note 2 of "Notes to Financial Statements."
The accompanying notes are an integral part of these financial statements.
FREMONT MUTUAL FUNDS 9
<PAGE>
FREMONT U.S. MICRO-CAP FUND
Notes to Financial Statements - October 31, 2000
1. SIGNIFICANT ACCOUNTING POLICIES
Fremont Mutual Funds, Inc. (the "Investment Company") is an open-end
investment company authorized to issue ten billion shares of $.0001
par value capital stock. These shares are currently offered in eleven
series, one of which, the U.S. Micro-Cap Fund (the "Fund"), is covered
by this report. The Fund has its own investment objective and policies
and operates as a separate mutual fund.
The following is a summary of significant accounting policies followed
by the Fund. These policies are in conformity with generally accepted
accounting principles for investment companies.
A. SECURITY VALUATION
Investments are stated at value based on recorded closing sales on a
national securities exchange or, in the absence of a recorded sale,
at the mean between the last reported bid and asked prices or at fair
value as determined in good faith by the Board of Directors.
Short-term notes and similar securities are included in investments at
amortized cost, which approximates value.
B. SECURITY TRANSACTIONS
Security transactions are accounted for as of trade date. Realized
gains and losses on security transactions are determined on the basis
of specific identification for both financial statement and Federal
income tax purposes.
C. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Dividends are recorded on the ex-dividend date. Interest income and
estimated expenses are accrued daily. Distributions to shareholders
are recorded on the ex-dividend date. The Investment Company accounts
for the assets of the Fund and allocates general expenses of the
Investment Company to the Fund based upon the relative net assets of
the Fund or the nature of the services performed and their
applicability to the Fund.
D. INCOME TAXES
The Fund's policy is to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to
distribute all taxable income and net capital gains, if any, to
shareholders. Therefore, no income tax provision is required. The Fund
is treated as a separate entity in the determination of compliance
with the Internal Revenue Code.
Income dividends and capital gain distributions paid to shareholders
are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles and, therefore,
may differ from the information presented in the financial
statements. These differences are primarily due to differing
treatments for losses deferred due to wash sale rules.
Permanent differences will be reclassified to paid in capital.
Temporary differences, which will reverse in subsequent periods, will
not be reclassified and will remain in undistributed net investment
income. Any taxable income or gain remaining at fiscal year end is
distributed in the following year.
E. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the amounts of
income and expense for the reporting period. Actual results could
differ from those estimates.
F. 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 at a later date, generally for a period of less than one
week. The seller must maintain on a daily basis, with the Fund's
custodian, collateral equal to at least 100% of the repurchase price,
including accrued interest. At October 31, 2000, all outstanding
repurchase agreements held by the Fund, had been entered into on
October 31, 2000.
10 FREMONT MUTUAL FUNDS
<PAGE>
FREMONT U.S. MICRO-CAP FUND
Notes to Financial Statements - October 31, 2000
2. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
INVESTMENT ADVISOR
The Fund has entered into an advisory agreement (the "Agreement") with
Fremont Investment Advisors, Inc. (the "Advisor"), a majority-owned
subsidiary of Fremont Investors, Inc. Under this agreement, the
Advisor supervises and implements the Fund's investment activities.
Under the terms of the Agreement, the Advisor receives a single
management fee from the Fund, and is obligated to pay all expenses of
the Fund except extraordinary expenses (as determined by a majority of
the disinterested directors) and interest, brokerage commissions, and
other transaction charges relating to the investing activities of the
Fund. The Advisor has agreed to limit the Fund's total operating
expenses to 1.98% of average daily net assets until March 1, 2001. For
its advisory services, the Advisor receives a management fee based on
the average daily net assets of the Fund as described below:
Average Daily Net Assets Advisory Fee
------------------------ ------------
First $30 million 2.50%
Next $70 million 2.00%
On balance over $100 million 1.50%
State Street Bank & Trust Company ("State Street") serves as custodian
and investment accounting agent for the Fund. All fees charged by
State Street are paid by the Fund, subject to the limitations listed
above. Fees for custody services are subject to reductions by credits
earned on the cash balances of the Fund held by State Street as
custodian.
AFFILIATED COMPANY TRANSACTIONS
Investments in portfolio companies, 5% or more of whose outstanding
voting securities are held by a Fund, are defined in the Investment
Act of 1940 as affiliated companies. The Fund had investments in such
companies. A summary of transactions for each issuer who is an
affiliate during the fiscal year ended October 31, 2000, follows:
<TABLE>
<CAPTION>
Share Share
Balance Aggregate Aggregate Net Balance Value
October 31, Purchase Sales Realized October 31, October 31,
Issuer 1999 Cost Cost Gain/(Loss) Income 2000 2000
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Aaon, Inc. -- $11,545,564 $ 2,685,942 $ 270,065 $ -- 584,300 $12,343,337
Boston Communications
Group, Inc. 477,200 7,268,732 -- -- -- 1,060,500 25,054,312
California Micro
Devices Corp. -- 16,596,860 112,884 (30,816) -- 1,089,500 13,823,031
Cash America
International 201,600 10,771,411 -- -- 39,216 1,275,000 6,614,062
COMARCO, Inc. -- 14,288,050 -- -- -- 644,100 12,439,181
Datalink Corp. 305,700 13,567,016 3,012,475 (468,821) -- 768,100 9,217,200
Endocare, Inc. -- 16,315,669 -- -- -- 1,113,700 19,698,569
Exigent
International, Inc. -- 2,382,423 -- -- -- 485,710 986,598
Fusion Medical
Technologies, Inc. 78,000 9,982,000 168,213 (204,559) -- 791,100 6,526,575
Lojack Corp. -- 8,189,691 -- -- -- 1,098,300 8,786,400
McNaughton Apparel
Group, Inc. 316,500 2,780,457 340,855 (9,961) -- 509,200 7,001,500
Micro Component
Technology, Inc. -- 5,553,967 -- -- -- 804,600 3,620,700
Modtech Holdings, Inc. 98,000 8,635,802 -- -- -- 1,033,900 10,985,188
Northern Technologies
International Corp. 258,950 642,504 -- -- -- 347,850 2,413,209
Nucentrix Broadband
Networks, Inc. -- 16,949,900 -- -- -- 651,200 14,733,400
Parlex Corp. -- 21,353,988 1,240,402 (2,237,548) -- 529,000 8,464,000
RIT Technologies Ltd. -- 8,580,769 -- -- -- 696,100 6,243,147
Spectrum Control, Inc. -- 12,536,557 1,345,881 271,144 -- 1,045,000 12,931,875
</TABLE>
FREMONT MUTUAL FUNDS 11
<PAGE>
FREMONT U.S. MICRO-CAP FUND
Notes to Financial Statements - October 31, 2000
OTHER RELATED PARTIES
Certain officers and/or directors of the Fund are also officers and/or
directors of the Advisor and/or Fremont Investors, Inc. None of the
officers and/or directors so affiliated receive compensation for
services as officers and/or directors of the Fund.
3. PURCHASES AND SALES OF INVESTMENT SECURITIES
Aggregate purchases and aggregate proceeds from sales of securities
for the fiscal year ended October 31, 2000 were as follows:
Purchases Proceeds
------------ ------------
Long-term securities: $924,569,929 $720,402,385
4. PORTFOLIO CONCENTRATIONS
Although the Fund has a diversified investment portfolio, there are
certain investment concentrations of risk which may subject the Fund
more significantly to economic changes occurring in certain segments
or industries.
5. UNREALIZED APPRECIATION (DEPRECIATION) - TAX BASIS
At October 31, 2000, the cost of securities for federal income tax
purposes was $778,252,716 and the net unrealized appreciation based on
that cost were as follows:
Unrealized appreciation $ 139,891,784
Unrealized depreciation (103,281,403)
-------------
Net unrealized appreciation $ 36,610,381
=============
6. LINE OF CREDIT
The Investment Company has a Line of Credit Arrangement ("LOC") with
State Street Bank and Trust Company, to be used for extraordinary or
emergency purposes, primarily to cover redemption payments. The Fund's
borrowings cannot exceed 20% of its net assets. Combined borrowings of
all Funds cannot exceed the $75 million limit on the total line of
credit. The Fund is subject to the annual fees and interest on the
unpaid balance based on prevailing market rates as defined in the LOC.
The Fund did not incur such borrowings during the year.
12 FREMONT MUTUAL FUNDS
<PAGE>
FREMONT U.S. MICRO-CAP FUND
Tax Designation (Unaudited)
In accordance with the Internal Revenue Code, the Fund is making the following
designation:
CORPORATE DIVIDEND RECEIVED DEDUCTIONS: 2%
LONG-TERM CAPITAL GAIN DISTRIBUTIONS: $2,990,755
Please refer to the 2000 1099s for purposes of filing tax returns.
FREMONT MUTUAL FUNDS 13
<PAGE>
FREMONT FUNDS
50 Beale Street, Suite 100
San Francisco, CA 94105
www.fremontfunds.com
Distributed by First Fund Distributors, Inc., San Francisco, CA 94105
BR008c-0012.
