<PAGE> 1
STATE STREET INSTITUTIONAL INVESTMENT TRUST
STATE STREET EQUITY 400 INDEX FUND
STATE STREET EQUITY 500 INDEX FUND
STATE STREET EQUITY 2000 INDEX FUND
STATE STREET MSCI EAFE INDEX FUND
STATE STREET AGGREGATE BOND INDEX FUND
This following Statement of Additional Information includes additional
information about the Funds. The Statement of Additional Information is not a
prospectus. To obtain a copy of a Fund's prospectus, please contact the Trust
at:
State Street Institutional Investment Trust
PO Box 1713
Boston, Massachusetts 02105-1713
(877) 517-9758
This Statement of Additional Information dated September 5, 2000 relates to the
Funds' prospectuses dated September 5, 2000.
1
<PAGE> 2
TABLE OF CONTENTS
Trust History.............................................................. 3
Description of the Fund and its Investments and Risks...................... 3
Additional Investments and Risks........................................... 6
Management of the Fund..................................................... 15
Control Persons and Principal Holders of Securities........................ 17
Investment Advisory and Other Services..................................... 17
Brokerage Allocation and Other Practices................................... 19
Capital Stock and Other Securities......................................... 20
Purchase, Redemption and Pricing of Shares................................. 20
Taxation of the Fund....................................................... 21
Underwriters............................................................... 24
Calculation of Performance Data............................................ 25
Financial Statements....................................................... 25
2
<PAGE> 3
TRUST HISTORY
The Trust was organized as a business trust under the laws of the
Commonwealth of Massachusetts on February 16, 2000.
The Trust is an open-end management investment company. Each of the
Equity 500 Index Fund, Equity 400 Index Fund, Equity 2000 Index Fund, MSCI EAFE
Index Fund and Aggregate Bond Index Fund is a separate diversified series of the
Trust.
DESCRIPTION OF FUND AND ITS INVESTMENTS AND RISKS
Each Fund prospectus contains information about the investment
objective and policies of that Fund. This statement of additional information
should only be read in conjunction with the prospectus of the Fund or Funds in
which you intend to invest. In addition to the principal investment strategies
and the principal risks of the Fund described in the Fund's prospectus, the Fund
may employ other investment practices and may be subject to additional risks,
which are described below.
ADDITIONAL INFORMATION CONCERNING THE S&P 500 INDEX
The State Street Equity 500 Index Fund is not sponsored, endorsed, sold
or promoted by Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
("S&P"). S&P makes no representation or warranty, express or implied, to the
owners of shares of the Fund or any member of the public regarding the
advisability of investing in securities generally or in the Fund particularly or
the ability of the S&P 500 Index to track general stock market performance.
S&P's only relationship to the Fund is the licensing of certain trademarks and
trade names of S&P and of the S&P 500 Index, which is determined, composed and
calculated by S&P without regard to the Fund. S&P has no obligation to take the
needs of the Fund or the owners of shares of the Fund into consideration in
determining, composing or calculating the S&P 500 Index. S&P is not responsible
for and has not participated in the determination of the price and number of
shares of the Fund or the timing of the issuance or sale of shares of the Fund,
or calculation of the equation by which shares of the Fund are redeemable for
cash.
S&P has no obligation or liability in connection with the
administration, marketing or trading of shares of the Fund.
S&P does not guarantee the accuracy or the completeness of the S&P 500
Index or any data included therein and S&P shall have no liability for any
errors, omissions or interruptions therein. S&P makes no warranty, express or
implied, as to results to be obtained by the Fund, owners of shares of the Fund
or any other person or entity from the use of the S&P 500 Index or any data
included therein. S&P makes no express or implied warranties, and expressly
disclaims all warranties of merchantability or fitness for a particular purpose
or use with respect to the S&P 500 Index or any data included therein. Without
limiting any of the foregoing, in no event shall S&P have any liability for any
3
<PAGE> 4
special, punitive, indirect or consequential damages (including lost profits),
even if notified of the possibility of such damages.
ADDITIONAL INFORMATION CONCERNING THE S&P 400 INDEX
The State Street Equity 400 Index Fund is not sponsored, endorsed, sold
or promoted by Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
("S&P"). S&P makes no representation or warranty, express or implied, to the
owners of shares of the Fund or any member of the public regarding the
advisability of investing in securities generally or in the Fund particularly or
the ability of the S&P 400 Index to track general stock market performance.
S&P's only relationship to the Fund is the licensing of certain trademarks and
trade names of S&P and of the S&P 400 Index, which is determined, composed and
calculated by S&P without regard to the Fund. S&P has no obligation to take the
needs of the Fund or the owners of shares of the Fund into consideration in
determining, composing or calculating the S&P 400 Index. S&P is not responsible
for and has not participated in the determination of the price and number of
shares of the Fund or the timing of the issuance or sale of shares of the Fund,
or calculation of the equation by which shares of the Fund are redeemable for
cash.
S&P has no obligation or liability in connection with the
administration, marketing or trading of shares of the Fund.
S&P does not guarantee the accuracy or the completeness of the S&P 400
Index or any data included therein and S&P shall have no liability for any
errors, omissions or interruptions therein. S&P makes no warranty, express or
implied, as to results to be obtained by the Fund, owners of shares of the Fund
or any other person or entity from the use of the S&P 400 Index or any data
included therein. S&P makes no express or implied warranties, and expressly
disclaims all warranties of merchantability or fitness for a particular purpose
or use with respect to the S&P 400 Index or any data included therein. Without
limiting any of the foregoing, in no event shall S&P have any liability for any
special, punitive, indirect or consequential damages (including lost profits),
even if notified of the possibility of such damages.
ADDITIONAL INFORMATION CONCERNING THE RUSSELL 2000 INDEX
The State Street Equity 2000 Index Fund is not sponsored, endorsed,
promoted by, or in any way affiliated with Frank Russell Company ("Russell").
Russell is not responsible for and has not reviewed the State Street Equity 2000
Index Fund or any associated literature or publications, and Russell makes no
representation or warranty, express or implied, as to their accuracy or
completeness, or otherwise. Russell reserves the right, at any time and without
notice, to alter, amend, terminate or in any way change the Russell 2000 Index.
Russell has no obligation to take the needs of any particular fund or its
participants or any other product or person into consideration in determining,
composing or calculating the Russell 2000 Index. Russell's publication of the
Index in no way suggests or implies an opinion by Russell as to the
attractiveness or appropriateness of investment in any or all securities upon
which the Index is based.
4
<PAGE> 5
Russell makes no representation, warranty or guarantee as to the accuracy,
completeness, reliability, or otherwise of the Russell 2000 Index or any data
included in the Index. Russell makes no representation or warranty regarding the
use, or the results of use, of the Russell 2000 Index or any data included
therein, or any security (or combination thereof) comprising the Index. Russell
makes no express or implied warranties, and expressly disclaims all warranties
of merchantability or fitness for a particular purpose with respect to the
Russell 2000 Index or any data or any security (or combination thereof) included
therein.
ADDITIONAL INFORMATION CONCERNING THE MSCI EAFE INDEX
The State Street MSCI EAFE Index Fund is not sponsored, endorsed, sold
or promoted by MSCI or any affiliate of MSCI. Neither MSCI nor any other party
makes any representation or warranty, express or implied, to the owners of this
Fund or any member of the public regarding the advisability of investing in
funds generally or in this Fund particularly or the ability of the MSCI EAFE
Index to track general stock market performance. MSCI is the licensor of certain
trademarks, service marks and trade names of MSCI and of the MSCI EAFE Index,
which is determined, composed and calculated by MSCI without regard to the
issuer of the Fund or the Fund. MSCI has no obligation to take the needs of the
issuer of this Fund or the owners of shares of the Fund into consideration in
determining, composing or calculating the MSCI EAFE Index. MSCI is not
responsible for and has not participated in the determination of the timing of,
prices at, or quantities of shares of the Fund to be issued or in the
determination or calculation of the equation by which shares of the Fund are
redeemable for cash. Neither MSCI nor any other party has any obligation or
liability to owners of shares of the Fund in connection with the administration,
marketing or trading of shares of the Fund.
Although MSCI shall obtain information for inclusion in or for use in
the calculation of the indexes from sources which MSCI considers reliable,
neither MSCI nor any other party guarantees the accuracy and/or the completeness
of the indexes or any data included therein. Neither MSCI nor any other party
makes any warranty, express or implied, as to results to be obtained by
licensee, licensee's customers and counterparties, owners of the Funds, or any
other person or entity from the use of the indexes or any data included therein
in connection with the rights licensed hereunder or for any other use. Neither
MSCI nor any other party makes any express or implied warranties, and MSCI
hereby expressly disclaims all warranties of merchantability or fitness for a
particular purpose with respect to the indexes or any data included therein.
Without limiting any of the foregoing, in no event shall MSCI or any other party
have any liability for any direct, indirect, special, punitive, consequential or
any other damages (including lost profits) even if notified of the possibility
of such damages.
ADDITIONAL INFORMATION CONCERNING THE LEHMAN BROTHERS AGGREGATE BOND INDEX
The State Street Aggregate Bond Index Fund is not sponsored, endorsed,
sold or promoted by Lehman Brothers. Lehman Brothers makes no representation or
warranty, express or implied, to the owners of shares of the Fund or any member
of the public
5
<PAGE> 6
regarding the advisability of investing in securities generally or in the
Fund particularly or the ability of the LBAB Index to track general performance.
Lehman Brothers's only relationship to the Fund is the licensing of certain
trademarks and trade names of Lehman Brothers and of the LBAB Index, which is
determined, composed and calculated by Lehman Brothers without regard to the
Fund. Lehman Brothers has no obligation to take the needs of the Fund or the
owners of shares of the Fund into consideration in determining, composing or
calculating the LBAB Index. Lehman Brothers is not responsible for and has not
participated in the determination of the price and number of shares of the Fund
or the timing of the issuance or sale of shares of the Fund. Lehman Brothers has
no obligation or liability in connection with the administration, marketing or
trading of shares of the Fund. Lehman Brothers does not guarantee the accuracy
or the completeness of the LBAB Index or any data included therein and Lehman
Brothers shall have no liability for any errors, omissions or interruptions
therein. Lehman Brothers makes no warranty, express or implied, as to results to
be obtained by the Fund, owners of shares of the Fund or any other person or
entity from the use of the LBAB Index or any data included therein. Lehman
Brothers makes no express or implied warranties, and expressly disclaims all
warranties of merchantability or fitness for a particular purpose or use with
respect to the LBAB Index or any data included therein. Without limiting any of
the foregoing, in no event shall Lehman Brothers have any liability for any
special, punitive, indirect or consequential damages (including lost profits),
even if notified of the possibility of such damages.
ADDITIONAL INVESTMENTS AND RISKS
CASH RESERVES
Each Fund may hold portions of its assets in short-term debt
instruments with remaining maturities of 397 days or less pending investment or
meet anticipated redemptions and day-to-day operating expenses. Short-term debt
instruments consist of: (i) short-term obligations of the U.S. government, its
agencies, instrumentalities, authorities or political subdivisions; (ii) other
short-term debt securities rated at the time of purchase Aa or higher by Moody's
Investors Service, Inc. ("Moody's") or AA or higher by Standard & Poor's Rating
Group ("S&P") or, if unrated, of comparable quality in the opinion of the
Adviser; (iii) commercial paper; (iv) bank obligations, including negotiable
certificates of deposit, time deposits and bankers' acceptances; and (v)
repurchase agreements. At the time a Fund invests in commercial paper, bank
obligations or repurchase agreements, the issuer or the issuer's parent must
have outstanding debt rated Aa or higher by Moody's or AA or higher by S&P or
outstanding commercial paper or bank obligations rated Prime-1 by Moody's or A-1
by S&P or, if no such ratings are available, the instrument must be of
comparable quality in the opinion of the Adviser. To the extent that a Fund
holds the foregoing instruments its ability to track its corresponding Index may
be adversely affected.
6
<PAGE> 7
FUTURES CONTRACTS AND OPTIONS ON FUTURES
Each Fund may enter into futures contracts on securities in which it
may invest or on indices comprised of such securities and may purchase and write
call and put options on such contracts.
A financial futures contract is a contract to buy or sell a specified
quantity of financial instruments such as U.S. Treasury bills, notes and bonds
at a specified future date at a price agreed upon when the contract is made. An
index futures contract is a contract to buy or sell specified units of an index
at a specified future date at a price agreed upon when the contract is made. The
value of a unit is based on the current value of the index. Under such contracts
no delivery of the actual securities making up the index takes place. Rather,
upon expiration of the contract, settlement is made by exchanging cash in an
amount equal to the difference between the contract price and the closing price
of the index at expiration, net of variation margin previously paid.
Substantially all futures contracts are closed out before settlement date or
called for cash settlement. A futures contract is closed out by buying or
selling an identical offsetting futures contract. Upon entering into a futures
contract, a Fund is required to deposit an initial margin with the Custodian for
the benefit of the futures broker. The initial margin serves as a "good faith"
deposit that a Fund will honor its futures commitments. Subsequent payments
(called "variation margin") to and from the broker are made on a daily basis as
the price of the underlying investment fluctuates. Options on futures contracts
give the purchaser the right to assume a position in a futures contract at a
specified price at any time before expiration of the option. A Fund will not
commit more than 5% of the market value of its total assets to initial margin
deposits on futures and premiums paid for options on futures.
ILLIQUID SECURITIES
Each Fund may invest in illiquid securities. A Fund will invest no more
than 15% of its net assets in illiquid securities or securities that are not
readily marketable, including repurchase agreements and time deposits of more
than seven days' duration. The absence of a regular trading market for illiquid
securities imposes additional risks on investments in these securities. Illiquid
securities may be difficult to value and may often be disposed of only after
considerable expense and delay.
LENDING OF FUND SECURITIES
Each Fund has the authority to lend portfolio securities to brokers,
dealers and other financial organizations in amounts up to 33 1/3% of the total
value of its assets. Any such loan must be continuously secured by collateral in
cash or cash equivalents maintained on a current basis in an amount at least
equal to the market value of the securities loaned by a Fund. The Fund would
continue to receive the equivalent of the interest or dividends paid by the
issuer on the securities loaned, and would receive an additional return that may
be in the form of a fixed fee or a percentage of the collateral. The Fund would
have the right to call the loan and obtain the securities loaned at any
7
<PAGE> 8
time on notice of not more than five business days. In the event of
bankruptcy or other default of the borrower, the Fund could experience both
delays in liquidating the loan collateral or recovering the loaned securities
and losses including (a) possible decline in the value of collateral or in the
value of the securities loaned during the period while the Fund seeks to enforce
its rights thereto, (b) possible subnormal levels of income and lack of access
to income during this period, and (c) expenses of enforcing its rights.
OPTIONS ON SECURITIES AND SECURITIES INDICES
Each Fund may purchase or sell options on securities in which it may
invest and on indices that are comprised of securities in which it may invest,
subject to the limitations set forth above and provided such options are traded
on a national securities exchange or in the over-the-counter market. Options on
securities indices are similar to options on securities except there is no
transfer of a security and settlement is in cash. A call option on a securities
index grants the purchaser of the call, for a premium paid to the seller, the
right to receive in cash an amount equal to the difference between the closing
value of the index and the exercise price of the option times a multiplier
established by the exchange upon which the option is traded. Typically, a call
option will be profitable to the holder of the option if the value of the
security or the index increases during the term of the option; a put option will
be valuable if the value of the security or the index decreases during the term
of the option. The Funds may also invest in warrants, which entitle the holder
to buy equity securities at a specific price for a specific period of time.
PURCHASE OF OTHER INVESTMENT COMPANY FUNDS
Each Fund may, to the extent permitted under the 1940 Act and exemptive
rules and orders thereunder, invest in shares of other investment companies
which invest exclusively in money market instruments or in investment companies
with investment policies and objectives which are substantially similar to the
Fund's. These investments may be made temporarily, for example, to invest
uncommitted cash balances or, in limited circumstances, to assist in meeting
shareholder redemptions.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with banks and other
financial institutions, such as broker-dealers. In substance, a repurchase
agreement is a loan for which the Fund receives securities as collateral. Under
a repurchase agreement, the Fund purchases securities from a financial
institution that agrees to repurchase the securities at the Fund's original
purchase price plus interest within a specified time (normally one business
day). The Fund will limit repurchase transactions to those member banks of the
Federal Reserve System and broker-dealers whose creditworthiness the Adviser
considers satisfactory. Should the counterparty to a transaction fail
financially, the Fund may encounter delay and incur costs before being able to
sell the securities, or may be prevented from realizing on the securities.
Further, the amount realized upon the sale of the securities may be less than
that necessary to fully compensate the Fund.
8
<PAGE> 9
U.S. GOVERNMENT SECURITIES
Each Fund may purchase U.S. government securities. U.S. government
securities include U.S. Treasury bills, notes, and bonds and other obligations
issued or guaranteed as to interest and principal by the U.S. government and its
agencies or instrumentalities. Obligations issued or guaranteed as to interest
and principal by the U.S. government, its agencies or instrumentalities include
securities that are supported by the full faith and credit of the United States
Treasury, securities that are supported by the right of the issuer to borrow
from the United States Treasury, discretionary authority of the U.S. government
agency or instrumentality, and securities supported solely by the
creditworthiness of the issuer.
WHEN-ISSUED SECURITIES
Each Fund may purchase securities on a when-issued basis. Delivery of
and payment for these securities may take place as long as a month or more after
the date of the purchase commitment. The value of these securities is subject to
market fluctuation during this period, and no income accrues to the Fund until
settlement takes place. The Fund segregates liquid securities in an amount at
least equal to these commitments. When entering into a when-issued transaction,
the Fund will rely on the other party to consummate the transaction; if the
other party fails to do so, the Fund may be disadvantaged.
ADDITIONAL INVESTMENTS AND RISKS FOR THE MSCI EAFE INDEX FUND AND THE AGGREGATE
BOND INDEX FUND
REVERSE REPURCHASE AGREEMENTS
The MSCI EAFE Index Fund and the Aggregate Bond Index Fund may enter
into reverse repurchase agreements under the circumstances described in
"Investment Restrictions." In substance, a reverse repurchase agreement is a
borrowing for which the Fund provides securities as collateral. Under a reverse
repurchase agreement, the Fund sells portfolio securities to a financial
institution in return for cash in an amount equal to a percentage of the
portfolio securities' market value and agrees to repurchase the securities at a
future date at a prescribed repurchase price equal to the amount of cash
originally received plus interest on such amount. A Fund retains the right to
receive interest and principal payments with respect to the securities while
they are in the possession of the financial institutions. Reverse repurchase
agreements involve the risk of default by the counterparty, which may adversely
affect a Fund's ability to reacquire the underlying securities.
TOTAL RETURN SWAPS
The MSCI EAFE Index Fund and the Aggregate Bond Index Fund may contract
with a counterparty to pay a stream of cash flows and receive the total return
of an index or a security for purposes of attempting to obtain a particular
desired return at a lower
9
<PAGE> 10
cost to the Fund than if the Fund had invested directly in an instrument
that yielded that desired return. A Fund's return on a swap will depend on the
ability of its counterparty to perform its obligations under the swap. The
Adviser 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.
ADDITIONAL INVESTMENTS AND RISKS FOR THE MSCI EAFE INDEX FUND
AMERICAN DEPOSITARY RECEIPTS (ADRS) AND EUROPEAN DEPOSITARY RECEIPTS (EDRS)
The MSCI EAFE Index Fund may purchase American Depositary Receipts and
European Depositary Receipts of foreign corporations represented in the Fund's
Index.
Generally, ADRs, in registered form, are designed for use in the U.S.
securities markets, and EDRs are issued for trading primarily in European
securities markets. ADRs are receipts typically issued by a U.S. bank or trust
company evidencing ownership of the underlying securities. ADRs represent the
right to receive securities of foreign issuers deposited in a domestic bank or a
correspondent bank. ADRs do not eliminate the risk inherent in investing in the
correspondent bank. ADRs do not eliminate the risk inherent in investing in the
securities of foreign issuers. However, by investing in ADRs rather than
directly in a foreign issuer's stock, the Fund can avoid currency risks during
the settlement period for either purchases or sales. In general, there is a
large liquid market in the U.S. for many ADRs. The information available for
ADRs is subject to the accounting, auditing and financial reporting standards of
the domestic market or exchange on which they are traded, which standards are
more uniform and more exacting than those to which many foreign issuers are
subject. For purposes of the Fund's investment policies, the Fund's investments
in ADRs, EDRs, and similar instruments will be deemed to be investments in the
equity securities representing securities of foreign issuers to which they
relate.
FOREIGN CURRENCY EXCHANGE CONTRACTS
The MSCI EAFE Index Fund may invest in foreign currency exchange
contracts. The Fund has the authority to deal in forward foreign currency
exchange contracts (including those involving the US dollar). This is
accomplished through individually negotiated contractual agreements to purchase
or to sell a specified currency at a specified future date and price set at the
time of the contract. The Fund's dealings in forward foreign currency exchange
contracts may be with respect to a specific purchase or sale of a security or
with respect to its portfolio positions generally.
ADDITIONAL INVESTMENTS AND RISKS FOR THE AGGREGATE BOND INDEX FUND
ASSET-BACKED SECURITIES
The Aggregate Bond Index Fund may invest in asset-backed securities.
Asset-backed securities represent undivided fractional interests in pools of
instruments, such as
10
<PAGE> 11
consumer loans, and are similar in structure to mortgage-related securities
described below. Payments of principal and interest are passed through to
holders of the securities and are typically supported by some form of credit
enhancement, such as a letter of credit, surety bond, limited guarantee by
another entity or by priority to certain of the borrower's other securities. The
degree of credit enhancement varies, generally applying only until exhausted and
covering only a fraction of the security's par value. If the credit enhancement
of an asset-backed security held by the Fund has been exhausted, and if any
required payments of principal and interest are not made with respect to the
underlying loans, the Fund may experience loss or delay in receiving payment and
a decrease in the value of the security.
EURODOLLAR CERTIFICATES OF DEPOSIT (ECDS), EURODOLLAR TIME DEPOSITS (ETDS) AND
YANKEE CERTIFICATES OF DEPOSIT (YCDS)
The Aggregate Bond Index Fund may invest in ECDs, ETDs and YCDs. ECDs
are US dollar denominated certificates of deposit issued by foreign branches of
domestic banks. ETDs are US dollar denominated deposits in foreign branches of
US banks and foreign banks. YCDs are US dollar denominated certificates of
deposit issued by US branches of foreign banks.
Different risks than those associated with the obligations of domestic
banks may exist for ECDs, ETDs and YCDs because the banks issuing these
instruments, or their domestic or foreign branches, are not necessarily subject
to the same regulatory requirements that apply to domestic banks, such as loan
limitations, examinations and reserve, accounting, auditing, record-keeping and
public reporting requirements.
FORWARD COMMITMENTS
The Aggregate Bond Index Fund may contract to purchase securities for a
fixed price at a future date beyond customary settlement time. When effecting
such transactions, cash or marketable securities held by a Fund of a dollar
amount sufficient to make payment for the Fund securities to be purchased will
be segregated on a Fund's records at the trade date and maintained until the
transaction is settled. The failure of the other party to complete the
transaction may cause the Fund to miss an advantageous price or yield. Forward
commitments involve risk of loss if the value of the security to be purchased
declines prior to settlement date, or if the other party fails to complete the
transaction.
INTEREST RATE SWAPS
The Aggregate Bond Index Fund may enter into interest rate swap
transactions with respect to any security it is entitled to hold. Interest rate
swaps involve the exchange by the Fund with another party of their respective
rights to receive interest, e.g., an exchange of floating rate payments for
fixed rate payments. The Fund expects to enter into these transactions primarily
to preserve a return or spread on a particular investment or portion of its
portfolio or to protect against any increase in the price of securities it
11
<PAGE> 12
anticipates purchasing at a later date. The Fund intends to use these
transactions as a hedge and not as a speculative investment.
INVESTMENT-GRADE BONDS
The Aggregate Bond Index Fund may invest in corporate notes and bonds
that are rated investment-grade by a Nationally Recognized Statistical Rating
Organization ("NRSRO") or, if unrated, are determined by the Adviser to be of
comparable quality. Investment-grade securities include securities rated Baa by
Moody's or BBB- by S&P (and securities of comparable quality), which securities
have speculative characteristics.
MORTGAGE-RELATED SECURITIES
The Aggregate Bond Index Fund may invest in mortgage-related
securities, including Government National Mortgage Association ("GNMA")
Certificates ("Ginnie Maes"), Federal Home Loan Mortgage Corporation ("FHLMC")
Mortgage Participation Certificates ("Freddie Macs") and Federal National
Mortgage Association ("FNMA") Guaranteed Mortgage Certificates ("Fannie Maes")
and commercial mortgage-backed securities that are in the Index. Mortgage
certificates are mortgage-backed securities representing undivided fractional
interests in pools of mortgage-backed loans. These loans are made by mortgage
bankers, commercial banks, savings and loan associations, and other lenders.
Ginnie Maes are guaranteed by the full faith and credit of the U.S. Government,
but Freddie Macs and Fannie Maes are not.
MORTGAGE-BACKED SECURITY ROLLS
The Aggregate Bond Index Fund may enter into "forward roll"
transactions with respect to mortgage-backed securities issued by GNMA, FNMA or
FHLMC. In a forward roll transaction, the Fund will sell a mortgage security to
a dealer or other permitted entity and simultaneously agree to repurchase a
similar security from the institution at a later date at an agreed upon price.
The mortgage securities that are repurchased will bear the same interest rate as
those sold, but generally will be collateralized by different pools of mortgages
with different prepayment histories than those sold. There are two primary risks
associated with the roll market for mortgage-backed securities. First, the value
and safety of the roll depends entirely upon the counterparty's ability to
redeliver the security at the termination of the roll. Therefore, the
counterparty to a roll must meet the same credit criteria as the Fund's
repurchase agreement counterparties. Second, the security that is redelivered at
the end of the roll period must be substantially the same as the initial
security, i.e., it must have the same original stated term to maturity, be
priced to result in similar market yields and must be "good delivery." Within
these parameters, however, the actual pools that are redelivered could be less
desirable than those originally rolled, especially with respect to prepayment
characteristics.
12
<PAGE> 13
SECTION 4(2) COMMERCIAL PAPER
The Aggregate Bond Index Fund may also invest in commercial paper
issued in reliance on the so-called private placement exemption from
registration afforded by Section 4(2) of the Securities Act of 1933 ("Section
4(2) paper"). Section 4(2) paper is restricted as to disposition under the
federal securities laws and generally is sold to institutional investors that
agree that they are purchasing the paper for investment and not with a view to
public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) paper normally is resold to other institutional
investors like the Fund through or with the assistance of the issuer or
investment dealers that make a market in Section 4(2) paper. Section 4(2) paper
will not be subject to the Fund's percentage limitations on illiquid securities
where the Adviser (pursuant to guidelines adopted by the Board) determines that
a liquid trading market exists.
VARIABLE AND FLOATING RATE SECURITIES
The Aggregate Bond Index Fund may invest in variable and floating rate
securities. A variable rate security provides for the automatic establishment of
a new interest rate on set dates. Interest rates on these securities are
ordinarily tied to, and are a percentage of, a widely recognized interest rate,
such as the yield on 90-day U.S. Treasury bills or the prime rate of a specified
bank. These rates may change as often as twice daily. Generally, changes in
interest rates will have a smaller effect on the market value of variable and
floating rate securities than on the market value of comparable fixed income
obligations. Thus, investing in variable and floating rate securities generally
allows less opportunity for capital appreciation and depreciation than investing
in comparable fixed income securities.
ZERO COUPON SECURITIES
The Aggregate Bond Index Fund may invest in zero coupon securities.
Zero coupon securities are notes, bonds and debentures that: (1) do not pay
current interest and are issued at a substantial discount from par value; (2)
have been stripped of their unmatured interest coupons and receipts; or (3) pay
no interest until a stated date one or more years into the future. These
securities also include certificates representing interests in such stripped
coupons and receipts. Generally, changes in interest rates will have a greater
impact on the market value of a zero coupon security than on the market value of
the comparable securities that pay interest periodically during the life of the
instrument. In order to satisfy a requirement for qualification as a "regulated
investment company" under the Internal Revenue code of 1986, as amended (the
"Code"), the Aggregate Bond Index Fund must distribute at least 90% of its net
investment income, including the original issue discount accrued on zero coupon
bonds. Because the Fund will not receive cash payments on a current basis from
the issuer in respect of accrued original discount, the Fund may have to
distribute cash obtained from other sources in order to satisfy the 90%
distribution requirement. Such cash might be obtained from selling other
portfolio holdings of the Fund. In some circumstances such sales might be
necessary in order to
13
<PAGE> 14
satisfy cash distribution requirements even though investment considerations
might otherwise make it undesirable for the Fund to sell such securities
at such time.
INVESTMENT RESTRICTIONS
The Portfolios in which State Street Equity 500 Index Fund, State
Street Equity 400 Index Fund, State Street Equity 2000 Index Fund, State Street
MSCI EAFE Index Fund and State Street Aggregate Bond Index Fund invest each have
substantially the same investment restrictions as their corresponding Fund. In
reviewing the description of a Fund's investment restrictions below, you should
assume that the investment restrictions of the corresponding Portfolio are the
same in all material respects as those of the Fund.
The Trust has adopted the following restrictions applicable to all of
the Funds, which may not be changed without the affirmative vote of a "majority
of the outstanding voting securities" of a Fund, which is defined in the
Investment Company Act of 1940, as amended (the "1940 Act"), to mean the
affirmative vote of the lesser of (1) more than 50% of the outstanding shares of
the Fund and (2) 67% or more of the shares present at a meeting if more than 50%
of the outstanding shares are present at the meeting in person or by proxy. A
Fund may not:
(1) Borrow more than 33 1/3% of the value of its total assets less all
liabilities and indebtedness (other than such borrowings).
(2) Underwrite securities issued by other persons except to the extent
that, in connection with the disposition of its portfolio
investments, it may be deemed to be an underwriter under certain
federal securities laws.
(3) Purchase or sell real estate, although it may purchase securities
of issuers which deal in real estate, securities which are secured
by interests in real estate, and securities which represent
interests in real estate, and it may acquire and dispose of real
estate or interests in real estate acquired through the exercise
of its rights as a holder of debt obligations secured by real
estate or interests therein.
(4) Purchase or sell commodities or commodity contracts, except that
it may purchase and sell financial futures contracts and options
and may enter into foreign exchange contracts and other financial
transactions not involving the direct purchase or sale of physical
commodities.
(5) Make loans, except by purchase of debt obligations in which the
Fund may invest consistent with its investment policies, by
entering into repurchase agreements, or by lending its portfolio
securities.
(6) With respect to 75% of its total assets, invest in the securities
of any issuer if, immediately after such investment, more than 5%
of the total assets of
14
<PAGE> 15
the Fund (taken at current value) would be invested in the
securities of such issuer; provided that this limitation does not
apply to obligations issued or guaranteed as to interest or
principal by the U.S. government or its agencies or
instrumentalities, or to securities issued by other investment
companies.
(7) With respect to 75% of its total assets, acquire more than 10% of
the outstanding voting securities of any issuer, provided that
such limitation does not apply to securities issued by other
investment companies.
(8) Purchase securities (other than securities of the U.S. government,
its agencies or instrumentalities), if, as a result of such
purchase, more than 25% of the Fund's total assets would be
invested in any one industry.
(9) Issue any class of securities which is senior to the Fund's
shares, to the extent prohibited by the Investment Company Act of
1940, as amended.
In addition, it is contrary to each Fund's present policy, which may be
changed without shareholder approval, to invest in (a) securities which are not
readily marketable, (b) securities restricted as to resale (excluding securities
determined by the Trustees of the Trust (or the person designated by the
Trustees of the Trust to make such determinations) to be readily marketable),
and (c) repurchase agreements maturing in more than seven days, if, as a result,
more than 15% of the Fund's net assets (taken at current value) would be
invested in securities described in (a), (b) and (c) above. All percentage
limitations on investments will apply at the time of the making of an investment
and shall not be considered violated unless an excess of deficiency occurs or
exists immediately after and as a result of such investment. Except for the
investment restrictions listed above as fundamental or to the extent designated
as such in the Prospectus with respect to a Fund, the other investment policies
described in this Statement or in the Prospectus are not fundamental and may be
changed by approval of the Trustees.
MANAGEMENT OF THE FUND
The Trustees are responsible for generally overseeing the Trust's
business. The following table provides biographical information with respect to
each Trustee and officer of the Trust. Each Trustee who is an "interested
person" of the Trust, as defined in the 1940 Act, is indicated by an asterisk.
Unless otherwise listed, the address for each Trustee and Officer of the Trust
is P.O. Box 1713, Boston, Massachusetts 02105-1713.
--------------------------------------------------------------------------------
William L. Boyan Trustee, 2/00 - present; Chairman of the Board of Trustees,
DOB: 1/20/37 1995 - present, Old Mutual South Africa Equity Trust;
Trustee, 1983 - present, Children's Hospital and Children's
Medical Center; Director of John Hancock Mutual Life
--------------------------------------------------------------------------------
15
<PAGE> 16
--------------------------------------------------------------------------------
Insurance Company, 1983 - 1998; President and Chief
Operations Officer of John Hancock Mutual Life Insurance
Company, 1992 - 1998.
--------------------------------------------------------------------------------
Michael F. Holland Chairman of the Board of Trustees, 5/00 - present; Trustee,
DOB: 7/8/44 2/00 - present; Director and President of Holland & Company
LLC, Chairman, 6/95 - present; General Partner of The
Blackstone Group, 1/94 - 5/95.
--------------------------------------------------------------------------------
Rina K. Spence Trustee, 2/00 - present; Founder, President and CEO of
DOB: 10/24/48 Spence Center for Women's Health, 1994 - 1998.
--------------------------------------------------------------------------------
Douglas T. Williams Trustee, 2/00 - present; Executive/Senior Vice President of
DOB: 12/23/40 Chase Manhattan Bank, 1987 - 1999.
--------------------------------------------------------------------------------
James B. Little Treasurer, 2/00 - present; President, 2/00 - 5/00; Senior
DOB: 2/19/35 Vice President and CFO of Mutual Funds, John Hancock, 1986
- 1998.
--------------------------------------------------------------------------------
Kathleen C. Cuocolo President, 5/00 - present; Executive Vice President, State
DOB: 2/3/52 Street Bank and Trust Company, 2000 - present; Senior Vice
President, State Street Bank and Trust Company, 1982 - 2000.
--------------------------------------------------------------------------------
Janine L. Cohen Assistant Treasurer, 5/00 - present; Vice President, State
DOB: 10/12/52 Street Bank and Trust Company, 1992 - present.
--------------------------------------------------------------------------------
Julie A. Tedesco Assistant Secretary, 5/00 - present; Vice President and
DOB: 9/30/57 Associate Counsel, State Street Bank and Trust Company,
2000 - present; Counsel, First Data Investor Services Group
Inc. and The Boston Company Advisors Inc., 1992 - 2000.
--------------------------------------------------------------------------------
The By-Laws of the Trust provide that the Trust shall indemnify each
person who is or was a Trustee of the Trust against all expenses, judgments,
fines settlements and other amounts actually and reasonable incurred in
connection with any proceedings if the person in good faith and reasonably
believes that his or her conduct was in the Trust's best interest. The Trust, at
its expense, provides liability insurance for the benefit of its Trustees and
officers. None of the Trustees has received any fees for his or her services to
the Trust. The Trustees periodically review their fees to assure that such fees
continue
16
<PAGE> 17
to be appropriate in light of their responsibilities as well as in relation to
fees paid to Trustees of other mutual funds.
The following table sets forth the total (estimated) remuneration of
Trustees and officers of the Trust for the fiscal year ended December 31, 2000,
based on an estimated four in-person meetings:
<TABLE>
<CAPTION>
Name/Position Aggregate Pension or Estimated Annual Total Compensation
Compensation from Retirement Benefits Upon from
Trust Benefits Retirement Trust & Trust
Accrued as Part Complex Paid to
of Trust Trustees
Expenses
------------- ----------------- --------------- ---------------- ------------------
<S> <C> <C> <C> <C>
William L. Boyan, Trustee $0 $0 $0 $0
Michael F. Holland, Trustee $0 $0 $0 $0
Rina K. Spence, Trustee $0 $0 $0 $0
Douglas T. Williams, Trustee $0 $0 $0 $0
</TABLE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of August 31, 2000, the Trustees and officers of the Trust owned in
the aggregate less than 1% of the shares of the Funds of the Trust (all series
taken together).
Persons or organizations owning 25% or more of the outstanding shares
of a Fund may be presumed to "control" (as that term is defined in the 1940 Act)
a Fund. As a result, these persons or organizations could have the ability to
approve or reject those matters submitted to the shareholders of such Fund for
their approval. As of August 31, 2000, the following person owned 5% or more of
the shares of a Fund: ALPS Mutual Funds Services, Inc.
INVESTMENT ADVISORY AND OTHER SERVICES
Under the terms of the Investment Advisory Agreement with the Adviser
(the "Advisory Agreement"), the Adviser is required to manage each Fund subject
to the supervision and direction of the Board of Trustees of the Trust.
State Street is a wholly owned subsidiary of State Street Corporation,
a publicly held bank holding company.
State Street may have deposit, loan and other commercial banking
relationships with the issuers of obligations that may be purchased on behalf of
the Funds, including
17
<PAGE> 18
outstanding loans to such issuers that could be repaid in whole or in part with
the proceeds of securities so purchased. Such affiliates deal, trade and invest
for their own accounts in such obligations and are among the leading dealers of
various types of such obligations. The Adviser has informed the Funds that, in
making its investment decisions, it will not obtain or use material inside
information in its possession or in the possession of any of its affiliates. In
making investment recommendations for a Fund, the Adviser will not inquire or
take into consideration whether an issuer of securities proposed for purchase or
sale by the Fund is a customer of State Street, its parent or its subsidiaries
or affiliates and, in dealing with its customers, the Adviser, its parent,
subsidiaries and affiliates will not inquire or take into consideration whether
securities of such customers were held by any Fund managed by the Adviser or any
such affiliate.
INVESTMENT ADVISORY AGREEMENTS
Each Fund current invests all of its assets in a related Portfolio that
has the same investment objectives and substantially the same investment
policies as the relevant Fund. As long as a Fund remains completely invested in
a Portfolio (or any other investment company), State Street is not entitled to
receive any investment advisory fee with respect to the Fund. A Fund may
withdraw its investment from the related Portfolio at any time if the Trust's
Board of Trustees determines that it is in the best interests of the Fund and
its shareholders to do so. The Trust has retained the Adviser as investment
adviser to manage a Fund's assets in the event that the Fund withdraws its
investment from its related Portfolio.
State Street Global Advisors is the investment adviser to each of the
related Portfolios pursuant to an investment advisory agreement (the "Portfolio
Advisory Agreement") between State Street Bank and Trust Company ("State
Street") and State Street Master Funds, on behalf of the Portfolios. State
Street receives an investment advisory fee with respect to each related
Portfolio. The Portfolio Advisory Agreement is the same in all material respects
as the Investment Advisory Agreement between the Trust on behalf of the Funds
and State Street. Each of the Funds that invests in a related Portfolio bears a
proportionate part of the management fees paid by the Portfolio (based on the
percentage of the Portfolio's assets attributable to the Fund).
ADMINISTRATOR, CUSTODIAN AND TRANSFER AGENT
Under the Administrative Services Agreement (the "Administration
Agreement"), State Street is obligated on a continuous basis to provide such
administrative services as the Board of Trustees of the Trust reasonably deems
necessary for the proper administration of the Trust and the Fund. State Street
will generally assist in all aspects of the Trust's and the Funds' operations;
supply and maintain office facilities (which may be in State Street's own
offices); provide statistical and research data, data processing services,
clerical, accounting, bookkeeping and record keeping services (including without
limitation the maintenance of such books and records as are required under the
1940 Act and the rules thereunder, except as maintained by other agents),
internal auditing, executive and administrative services, and stationery and
office supplies;
18
<PAGE> 19
prepare reports to shareholders or investors; prepare and file tax returns;
supply financial information and supporting data for reports to and filings with
the SEC and various state Blue Sky authorities; supply supporting documentation
for meetings of the Board of Trustees; provide monitoring reports and assistance
regarding compliance with Declarations of Trust, by-laws, investment objectives
and policies and with Federal and state securities laws; arrange for appropriate
insurance coverage; calculate NAVs, net income and realized capital gains or
losses; and negotiate arrangements with, and supervise and coordinate the
activities of, agents and others to supply services. Pursuant to the
Administration Agreement, the Trust has agreed to indemnify the Administrator
for certain liabilities, including certain liabilities arising under federal
securities laws, unless such loss or liability results from the Administrator's
gross negligence or willful misconduct in the performance of its duties. State
Street serves as Custodian for the Funds pursuant to the Custody Agreement. As
Custodian, it holds the Funds' assets. State Street also serves as Transfer
Agent of the Funds pursuant to the Transfer Agency and Service Agreement.
FEES
See "Fees and Expenses" in each Fund's prospectus for a description of
the fees paid by each Fund.
RULE 12b-1 PLAN
The Trust has adopted a distribution plan pursuant to Rule 12b-1 (the
"Rule 12b-1 Plan") under which the Funds may compensate their distributor (or
others) for services in connection with the distribution of the Funds' shares
and for services provided to Fund shareholders. The Rule 12b-1 Plan calls for
payments at an annual rate (based on average net assets) as follows:
State Street Equity 500 Index Fund - Class A: 0.15%
State Street Equity 500 Index Fund - Class B: 0.25%
State Street Equity 400 Index Fund: 0.25%
State Street Equity 2000 Index Fund: 0.25%
State Street MSCI EAFE Index Fund: 0.25%
State Street Aggregate Bond Index Fund: 0.25%.
COUNSEL AND INDEPENDENT AUDITORS
Ropes & Gray, One International Place, Boston, Massachusetts 02110,
serves as counsel to the Trust. Ernst & Young LLP are the independent auditors
for the Funds, providing audit services, tax return preparation, and assistance
and consultation with respect to the preparation of filings with the Securities
and Exchange Commission. The principal business address of Ernst & Young LLP is
200 Clarendon St., Boston, Massachusetts 02116.
19
<PAGE> 20
BROKERAGE ALLOCATION AND OTHER PRACTICES
The policy of the Trust regarding purchases and sales of securities for
the Funds is that primary consideration will be given to obtaining the most
favorable prices and efficient executions of transactions. Consistent with this
policy, when securities transactions are effected on a stock exchange, the
Trust's policy is to pay commissions that are considered fair and reasonable
without necessarily determining that the lowest possible commissions are paid in
all circumstances. The Trust believes that a requirement always to seek the
lowest possible commission cost could impede effective portfolio management and
preclude the Fund and the Adviser from obtaining a high quality of brokerage and
research services.
In seeking to determine the reasonableness of brokerage commissions
paid in any transaction, the Adviser relies upon its experience and knowledge
regarding commissions generally charged by various brokers and on its judgment
in evaluating the brokerage and research services received from the broker
effecting the transaction. Such determinations are necessarily subjective and
imprecise, as in most cases an exact dollar value for those services is not
ascertainable. In seeking to implement the Trust's policies, the Adviser effects
transactions with those brokers and dealers who the Adviser believes provides
the most favorable prices and are capable of providing efficient executions. If
the Adviser believes such price and execution are obtainable for more than one
broker or dealer, it may give consideration to placing portfolio transactions
with those brokers and dealers who also furnish research and other services to
the Funds or the Adviser. Such services may include, but are not limited to,
information as to the availability of securities for purchase or sale and
statistical information pertaining to corporate actions affecting stocks,
including but not limited to, stocks within the index whose performance the Fund
in question seeks to replicate. The fee paid by the Funds is not reduced because
the Adviser and its affiliates receive these services even though the Adviser
might otherwise have been required to purchase some of these services for cash.
The Adviser assumes general supervision over placing orders on behalf
of the Trust for the purchase or sale of portfolio securities. If purchases or
sales of portfolio securities of the Trust and one or more other investment
companies or clients supervised by the Adviser are considered at or about the
same time, transactions in such securities are allocated among the several
investment companies and clients in a manner deemed equitable to all by the
Adviser. In some cases, this procedure could have a detrimental effect on the
price or volume of the security so far as the Trust is concerned. However, in
other cases, it is possible that the ability to participate in volume
transactions and to negotiate lower brokerage commission will be beneficial to
the Trust. The primary consideration is prompt execution of orders at the most
favorable net price.
CAPITAL STOCK AND OTHER SECURITIES
Under the Declaration of Trust, the Trustees are authorized to issue an
unlimited number of shares of each Fund. Upon liquidation or dissolution of a
Fund, investors are entitled to share pro rata in the Fund's net assets
available for distribution to its investors.
20
<PAGE> 21
Investments in a Fund have no preference, preemptive, conversion or similar
rights and are fully paid and nonassessable, except as set forth below.
Investments in a Fund may not be transferred.
Each investor is entitled to a vote in proportion to the number of Fund
shares it owns. Shares do not have cumulative voting rights, and investors
holding more than 50% of the aggregate outstanding shares in the Trust may elect
all of the Trustees if they choose to do so. The Trust is not required and has
no current intention to hold annual meetings of investors when in the judgment
of the Trustees it is necessary or desirable to submit matters for an investor
vote.
Under Massachusetts law, shareholders in a Massachusetts business trust
could, under certain circumstances, be held personally liable for the
obligations of the trust. However, the Declaration of Trust disclaims
shareholder liability for acts or obligations of the Trust and provides for
indemnification out of the Trust's property for any claim or liability to which
the shareholder may become subject by reason of being or having been an
shareholder and for reimbursement of the shareholder for all legal and other
expenses reasonably incurred by the shareholder in connection with any such
claim or liability. Thus the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which the Trust
would be unable to meet its obligations.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Shares of the Funds are offered continuously at a price equal to the
net asset value attributable to each share.
Each Fund determines the net asset value per share in the Fund on each
day on which the NYSE is open ("Fund Business Day"). This determination is made
each Fund Business Day at the close of regular trading on the NYSE (the
"Valuation Time") by dividing the value of the Fund's net assets (i.e., the
value of its securities and other assets less its liabilities, including
expenses payable or accrued) by the number of shares outstanding at the time the
determination is made. (As of the date of this Part B, the NYSE is open for
trading every weekday except: (a) the following holidays: New Year's Day, Martin
Luther King, Jr.'s Birthday, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas; and (b) the
preceding Friday or the subsequent Monday when one of the calendar-determined
holidays falls on a Saturday or Sunday, respectively). Purchases and withdrawals
will be effected at the net asset value next determined following the receipt of
any purchase or withdrawal order in good order.
Equity and debt securities (other than short-term debt obligations
maturing in 60 days or less), including listed securities and securities for
which price quotations are available, will normally be valued on the basis of
market value. This generally means that equity securities and fixed income
securities listed and traded principally on any national securities exchange,
including securities traded on the NASDAQ NMS System, are valued on the basis of
the last sale price or, lacking any sales, at the closing bid price,
21
<PAGE> 22
on the primary exchange on which the security is traded. U.S. equity and
fixed-income securities traded principally over-the-counter and options are
valued on the basis of the last reported bid price prior to the Valuation Time.
Futures contracts are valued on the basis of the last reported sale price prior
to the Valuation Time. Short-term debt obligations and money market securities
maturing in 60 days or less are valued at amortized cost, which approximates
market. Other assets are valued at fair value using methods determined in good
faith by the Board of Trustees.
TAXATION OF THE FUND
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
Each Fund intends to qualify each year as a regulated investment
company under Subchapter M of the Code. In order so to qualify and to qualify
for the favorable tax treatment accorded regulated investment companies, each
Fund must, among other things, (i) derive at least 90% of its gross income from
dividends, interest, payments with respect to certain securities loans, gains
from the sale of securities or foreign currencies, or other income (including,
but not limited to, gains from options, futures or forward contracts) derived
with respect to its business of investing in such stock, securities or
currencies; (ii) distribute with respect to each taxable year at least 90% of
the sum of its taxable net investment income, its tax-exempt income and the
excess, if any, of net short-term capital gains over net long-term capital
losses for each year; and (iii) diversify its holdings so that at the end of
each fiscal quarter (a) at least 50% of the value of its total assets are
invested in cash, U.S. government securities, securities of other regulated
investment companies, and other securities of issuers which represent, with
respect to each issuer, no more than 5% of the value of the Fund's total assets
and 10% of the outstanding voting securities of such issuer, and (b) not more
than 25% of its assets are invested in the securities (other than those of the
U.S. government or other regulated investment companies) of any one issuer or of
two or more issuers which the Fund controls and which are engaged in the same,
similar or related trades and businesses. To the extent it qualifies for
treatment as a regulated investment company, the Fund will not be subject to
federal income tax on income paid to its shareholders in the form of dividends
or capital gain distributions.
An excise tax at the rate of 4% will be imposed on the excess, if any,
of each Fund's "required distribution" over its actual distributions in any
calendar year. Generally, the "required distribution" is 98% of the Fund's
ordinary income for the calendar year plus 98% of its capital gain net income
recognized during the one-year period ending October 31 (or December 31, if the
Fund so elects) plus undistributed amounts from prior years. Each Fund intends
to make distributions sufficient to avoid imposition of the excise tax.
Distributions declared by a Fund during October, November and December to
shareholders of record on a date in any such month and paid by the Fund during
the following January will be treated for federal tax purposes as paid by the
Fund and received by shareholders on December 31 of the year in which declared.
22
<PAGE> 23
TAXATION OF DISTRIBUTIONS RECEIVED BY SHAREHOLDERS
Shareholders of each Fund will be subject to federal income taxes on
distributions made by the Fund whether received in cash or additional shares of
the Fund. Distributions by each Fund of net income and short-term capital gains,
if any, will be taxable to shareholders as ordinary income. Distributions
designated by a Fund as deriving from net gains on securities held for more than
one year will be taxable to shareholders as long-term capital gain (generally
taxed at 20% rate for noncorporate shareholders), without regard to how long a
shareholder has held shares of the Fund.
Dividends and distributions on a Fund's shares are generally subject to
federal income tax as described herein to the extent they do not exceed the
Fund's realized income and gains. Even though such dividends and distributions
may economically represent a return of a particular shareholder's investment.
Such distributions are likely to occur in respect of shares purchased at a time
when a Fund's net asset value reflects gains that are either unrealized, or
realized but not distributed. Such realized gains may be required to be
distributed even when a Fund's net asset value also reflects unrealized losses.
TAXATION OF CERTAIN FINANCIAL INSTRUMENTS
A Fund may enter into futures contracts, options on futures contracts
and options on securities indices. Such contracts held by the Fund at the close
of its taxable year will generally be treated for federal income tax purposes as
sold for their fair market value on the last business day of such year, a
process known as "marking-to-market". Forty percent of any gain or loss
resulting from this constructive sale will be treated as short-term capital gain
or loss and 60 percent of such gain or loss will be treated as long-term capital
gain or loss without regard to the period the Fund actually held the
instruments. The amount of any capital gain or loss actually realized by the
Fund in a subsequent sale or other disposition of the instruments is adjusted to
reflect any capital gain or loss taken into account in a prior year as a result
of the constructive sale of the instruments. The hedging transactions undertaken
by the Fund may result in "straddles" for federal income tax purposes. The
straddle rules may affect the character of gains or losses realized by a Fund.
In addition, losses realized by the Fund on positions that are part of a
straddle may be deferred under the straddle rules, rather than being taken into
account in calculating the taxable income for the taxable year in which the
losses are realized.
A Fund may make one or more of the elections available under the Code
that are applicable to straddles. If a Fund makes any of the elections, the
amount, character and timing of the recognition of gains and losses from the
affected straddle positions will be determined under the rules that vary
according to the election(s) made. The rules applicable under certain of the
elections may operate to accelerate the recognition of gains or losses from the
affected straddle positions. Because the straddle rules may affect the character
of gains or loses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which may be reported to
investors and which will be taxable to them as ordinary income or long-term
capital gain,
23
<PAGE> 24
may be increased or decreased as compared to a Fund that did not engage in such
hedging transactions.
FOREIGN INCOME
Income received by the MSCI EAFE Index Fund from sources within foreign
countries may be subject to withholding and other foreign taxes. Tax conventions
between certain countries and the United States may reduce or eliminate such
taxes. It is impossible to determine the effective rate of foreign tax in
advance since the amount of the MSCI EAFE Index Fund's assets to be invested in
various countries will vary. If the MSCI EAFE Index Fund is liable for foreign
taxes, and if more than 50% of the value of the Fund's total assets at the close
of its taxable year consists of stocks or securities of foreign corporations,
the Fund may make an election pursuant to which certain foreign taxes paid by it
would be treated as having been paid directly by its shareholders. Pursuant to
such election, the MSCI EAFE Index Fund's share of the amount of foreign taxes
paid by it will be included in the income of its shareholders, and such
shareholders (except tax-exempt shareholders) may, subject to certain
limitations, claim either a credit or deduction for the taxes. Each MSCI EAFE
Index Fund investor will be notified after the close of the Fund's taxable year
whether the foreign taxes paid will "pass through" for that year and, if so,
such notification will designate (a) the regulated investment company investor's
portion of the foreign taxes paid to each such country and (b) the portion which
represents income derived form sources within each such country.
The amount of foreign taxes for which an investor may claim a credit in
any year will generally be subject to a separate limitation for "passive
income," which includes, among other items of income, dividends, interests and
certain foreign currency gains. Because capital gains realized by a Fund on the
sale of foreign securities will be treated as U.S.-source income, the available
credit of foreign taxes paid with respect to such gains may be restricted by
this limitation. In addition a shareholder must hold shares of the MSCI EAFE
Index Fund (without protection from risk or loss) on the ex-dividend date and
for at least 16 days during the 30-day period beginning on the date that is 15
days before the ex-dividend date in order to be eligible to claim a foreign tax
credit passed through by the Fund.
THE AGGREGATE BOND INDEX FUND'S INVESTMENTS IN ORIGINAL ISSUE DISCOUNT
SECURITIES
A Fund's investment in securities issued at a discount and certain
other obligations will (and investments in securities purchased at a discount
may) require the Fund to accrue and distribute income not yet received. In such
cases, a Fund may be required to sell assets (including when it is not
advantageous to do so) to generate the cash necessary to distribute as dividends
to its shareholders all of its income and gains and therefore to eliminate any
tax liability at the Fund level.
24
<PAGE> 25
REDEMPTIONS AND EXCHANGES
Redemptions and exchanges of each Fund's shares are taxable events and,
accordingly, shareholders may realize gain or loss on these transactions. In
general, any gain realized upon a taxable disposition of shares will be treated
as long-term capital gain if the shares have been held for more than one year.
Otherwise, the gain on the sale, exchange or redemption of Fund shares will be
treated as short-term capital gain. However, if a shareholder sells Fund shares
at a loss within six months after purchasing the shares, the loss will be
treated as a long-term capital loss to the extent of any long-term capital gain
distributions received by the shareholder. Furthermore, no loss will be allowed
on the sale of Fund shares to the extent the shareholder acquired other shares
of the same Fund within 30 days prior to the sale of the loss shares or 30 days
after such sale.
The foregoing discussion summarizes some of the consequences under the
current federal tax law of an investment in the Funds. It is not a substitute
for personal tax advice. Consult your personal tax advisor about the potential
tax consequences of an investment in the Fund including in-kind transactions
under all applicable tax laws.
Non-U.S. investors in the Funds should consult their tax advisors
concerning the tax consequences of ownership of shares in the Funds, including
the possibility that distributions may be subject to a 30 percent United States
withholding tax (or a reduced rate of withholding provided by treaty).
UNDERWRITERS
ALPS Mutual Funds Services, Inc., serves as Distributor (the
"Distributor") pursuant to the Distribution Agreement. The Distributor is
located at 370 17th Street, Suite 3100, Denver, Colorado 80202. Pursuant to the
Distribution Agreement, the Funds pay the Distributor fees under the Rule 12b-1
Plan in effect for each of the Funds of the Trust. For a description of the fees
paid to the Distributor under the Rule 12b-1 Plan, see "Rule 12b-1 Plan", above.
The Distributor is not obligated to sell any specific number of shares and will
sell shares of a Fund on a continuous basis only against orders to purchase
shares.
CALCULATION OF PERFORMANCE DATA
Not applicable.
FINANCIAL STATEMENTS
The Financial Statements for the Trust at August 31, 2000, including
the notes thereto and the report of Ernst & Young LLP thereon are contained in
this Statement of Additional Information on the following pages.
25
<PAGE> 26
State Street Equity 500 Index Fund
Statement of Net Assets
August 24, 2000
Assets
Cash....................................... $100,000
--------
Net Assets.......................................... $100,000
========
Net Assets consist of:
Paid-in capital............................ $100,000
========
Shares Outstanding -Class A........................ 10,000
========
(No Par Value, Unlimited Shares Authorized)
Net Asset Value per share........................... $10.00
========
See Notes to Statement of Net Assets
26
<PAGE> 27
State Street Equity 500 Index Fund
Notes to Statement of Net Assets
August 24, 2000
1. ORGANIZATION
The State Street Equity 500 Index Fund ("the Fund") is a series of the
State Street Institutional Investment Trust ("the Trust"), which is an
open-end management investment company organized as a business trust under
the laws of the Commonwealth of Massachusetts. The Trust was organized on
February 16, 2000, and has had no operations since that date other than
matters relating to its organization and registration and the sale of
10,000 shares of Class A shares for $100,000 to ALPS Mutual Funds Services,
Inc. on August 24, 2000. The Fund's investment objective is to match as
closely as possible, before expenses, the performance of the S&P 500 Index.
2. SIGNIFICANT ACCOUNTING POLICIES
Organization Costs: Costs relating to the organization of the Fund will be
borne by State Street Bank and Trust Company.
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 statement. Actual results could
differ from those estimates.
3. INVESTMENT ADVISORY AND OTHER AGREEMENTS
The Fund has entered into an investment advisory agreement with State
Street Bank and Trust Company ("the Adviser"). Pursuant to the investment
advisory agreement, the Adviser is responsible for the asset management of
the Fund. The Fund will pay the Adviser a monthly fee at the annual rate of
0.045% of the Fund's average daily net assets upon commencement of
investment operations. The Fund has also entered into Administration,
Custody and Transfer Agent Agreements with the Advisor. As compensation for
services provided under these contracts, and for assuming ordinary
operating expenses of the Fund, the Advisor will receive an administration
fee payable on a monthly basis at an annual rate of 0.05% of the Fund's
average daily net assets upon commencement of investment operations.
4. INCOME TAXES
The Fund intends to meet the requirements of the Internal Revenue Code
applicable to regulated investment companies and as such will not be
subject to federal income taxes.
27
<PAGE> 28
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Trustees of State Street Institutional Investment Trust and Shareholder
of State Street Equity 500 Index Fund:
We have audited the accompanying statement of net assets of State Street Equity
500 Index Fund (the "Fund"), a series of the State Street Institutional
Investment Trust, as of August 24, 2000. This financial statement is the
responsibility of the Fund's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of the State Street Equity 500
Index Fund of the State Street Institutional Investment Trust at August 24, 2000
in conformity with accounting principles generally accepted in the United
States.
/s/ ERNST & YOUNG LLP
-------------------------------------
ERNST & YOUNG LLP
Boston, Massachusetts
August 31, 2000
28
