File No. 2-71299
File No. 811-03153
As filed with the SEC on September 17, 1998.
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
/_/ Pre-Effective Amendment No. ___ /_/ Post-Effective Amendment No. ___
(Check appropriate box or boxes)
Exact Name of Registrant as Specified in Charter: Area Code and Telephone
Number:
FRANK RUSSELL INVESTMENT COMPANY (253) 627-7001
Address of Principal Executive Offices: (Number, Street, City, State, Zip Code)
909 A Street, Tacoma, WA 98402
Name and Address of Agent for Service: Approximate Date of Proposed
Gregory J. Lyons, Esquire, Assistant Secretary Public Offering:
(Number and Street) (City) (State) (Zip Code) As soon as practicable after
909 A Street, Tacoma WA 98402 this Registration Statement
becomes effective under the
Securities Act of 1933.
Copies to:
Steven M. Felsenstein, Esquire
Stradley, Ronon, Stevens & Young, LLP
2600 One Commerce Square Philadelphia, PA 19103
Title of Securities Being Registered: Shares of Beneficial Interest,
$0.01 Par Value
No filing fee is due because of reliance on Section 24(f) of the Investment
Company Act of 1940. Pursuant to Rule 429(a), this Registration Statement
relates to shares previously registered on Form N-1A (Securities Act of 1933
File No. 002-71299; Investment Company Act of 1940 File No. 811-03153).
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
section 8(a) of the Securities Act of 1933 or until the registration
statement shall become effective on such date as the Commission acting
pursuant to said section 8(a), may determine.
Page 1 of _____
Exhibit Index appears on Page _____
FRANK RUSSELL INVESTMENT COMPANY
CROSS REFERENCE SHEET
(Pursuant to Rule 481(a) under the
Securities Act of 1933)
N-14 Item No. and Caption Location in Prospectus
PART A
1. Beginning of Registration Cover Page of Registration
Statement and Outside Front Statement; Front Cover Page
Cover Page of Prospectus. of Prospectus.
2. Beginning and Outside Back Table of Contents.
Cover Page of Prospectus.
3. Fee Table, Synopsis Summary; Risk Factors.
Information and Risk Factors.
4. Information About the Summary; Summary of Proposed
Transaction. Reorganization; Comparison of
Important Features.
5. Information About the Prospectus Cover Page;
Registrant. Summary; Comparison of
Investment Policies and Risks of the Bond
Fund and the Fixed Income Fund; Information
About The Fixed Income Fund; Information
About The Investment Company.
6. Information About the Prospectus Cover Page;
Company Being Acquired. Comparison of Investment
Policies and Risks of the Bond Fund and the
Fixed Income Fund; Additional Matters
Regarding the Frank Russell Investment
Company; Other Information Relating to the
Frank Russell Investment Company.
7. Voting Information. Prospectus Cover Page;
Notice of Special Meeting of
Shareholders; Solicitation
and Revocation of Proxies
and Voting Information;
Principal Shareholders;
Summary-Voting Information.
8. Interest of Certain Persons None.
and Experts.
N-14 Item No. and Caption Location in Prospectus
PART A
9. Additional Information Not Applicable.
Required for Reoffering by
Persons Deemed to be
Underwriters.
N-14 Item No. and Caption Location in Statement of
PART B Additional Information
10. Cover Page. Cover Page of Statement of
Additional Information.
11. Table of Contents. Not Applicable.
12. Additional Information Incorporation of Documents
about the Registrant. by Reference in the
Statement of Additional
Information.
13. Additional Information
about the Company Being
Acquired.
14. Financial Statements.
N-14 Item No. and Caption Location in
PART C Other Information
15. Indemnification. Indemnification.
16. Exhibits. Exhibits.
17. Undertakings. Undertakings.
SIGNATURES
FRANK RUSSELL INVESTMENT COMPANY
VOLATILITY CONSTRAINED BOND FUND
909 A Street
Tacoma, Washington 98402
1-800-972-0700
Dear Volatility Constrained Bond Fund Shareholder:
Enclosed is a Notice of Special Meeting in lieu of Annual Meeting of
Shareholders of the Frank Russell Investment Company (the "Investment Company").
The Special Meeting has been called for Thursday, November 19, 1998 at 10:00
a.m., local time, at the offices of the Investment Company at 909 A Street,
Tacoma, Washington. The accompanying Prospectus/Proxy Statement details the
proposals being presented for your consideration.
The meeting will consider several proposals, including an Agreement and Plan of
Reorganization. If approved, the Agreement would authorize a merger of the
Volatility Constrained Bond Fund (the "Bond Fund") into the Fixed Income II Fund
(the "Fixed Income Fund"). Each Fund is a sub-trust of the Investment Company.
On the date of the merger, you will receive Class S Shares of the Fixed Income
Fund with an aggregate value equal to your present Class S Shares of the Bond
Fund. Following the merger of the Bond Fund into the Fixed Income Fund, the
Fixed Income Fund will change its name to the Short-Term Bond Fund. After
carefully studying the merits of the proposed merger of the Bond Fund into the
Fixed Income Fund, the Board of Trustees of the Investment Company has
determined that consolidation of the two Funds can provide substantial benefits
to the Bond Funds shareholders. To move forward, however, a majority of the
shareholders of the Bond Fund must vote in favor of the transaction. Subject to
shareholder approval, the merger of the Bond Fund into the Fixed Income Fund is
expected to be completed on or about November 19, 1998, or at such earlier or
subsequent date as the Investment Company determines to be in the interest of
the Funds. In connection with the merger of the Bond Fund into the Fixed Income
Fund, you should note the following:
- The merger of the Bond Fund will be a tax free event.
- The value of your investment will not change as a result of
the merger.
In addition to the proposed merger, shareholders of the Bond Fund will be asked
to vote on other matters described in this Prospectus/Proxy Statement.
Shareholders will be asked to: (i) elect the members of the Board of Trustees of
the Investment Company; (ii) ratify the selection of PricewaterhouseCoopers LLP
as the Investment Companys independent accountants; (iii) approve a proposed
advisory agreement between the Investment Company, on behalf of the Bond Fund,
and Frank Russell Investment Management Company ("FRIMCo"), restructuring the
organization of FRIMCos services and compensating FRIMCo for managing certain
additional assets of the Bond Fund; (iv) approve a proposed advisory agreement
between the Investment Company, on behalf of the Bond Fund, and FRIMCo, to take
effect upon the acquisition of Frank Russell Company by The Northwestern Mutual
Life Insurance Company; (v) approve a change in the Funds fundamental investment
restrictions limiting borrowing to authorize a higher borrowing level for the
purpose of meeting redemptions; and (vi) approve the elimination of certain
fundamental investment restrictions applicable to the Bond Fund. The Bond Funds
shareholders will be asked to approve these latter six items for possible
implementation by the Bond Fund prior to the merger of the Bond Fund into the
Fixed Income Fund.
The enclosed materials provide details of the proposals, and your proxy card is
enclosed. IT IS IMPORTANT THAT YOU COMPLETE, SIGN AND RETURN YOUR CARD AS SOON
AS POSSIBLE TO ENSURE THAT YOUR VOTE IS COUNTED AT THE SPECIAL MEETING. Please
return your proxy card as soon as possible.
Sincerely,
Karl J. Ege, Esq.
Secretary
FRANK RUSSELL INVESTMENT COMPANY
909 A Street
Tacoma, Washington 98402
- -----------------------------------------------------------
NOTICE OF SPECIAL MEETING IN LIEU OF ANNUAL MEETING
OF SHAREHOLDERS OF THE
VOLATILITY CONSTRAINED BOND FUND
OF THE
FRANK RUSSELL INVESTMENT COMPANY
To be held on Thursday, November 19, 1998
To the Shareholders of Volatility Constrained Bond Fund:
NOTICE IS HEREBY GIVEN that a Special Meeting in lieu of Annual Meeting of the
Shareholders (the "Shareholders") of the Volatility Constrained Bond Fund (the
"Bond Fund"), a sub-trust of Frank Russell Investment Company (the "Investment
Company"), will be held at the Investment Company's offices located at 909 A
Street, Tacoma, Washington, on Thursday, November 19, 1998 at 10:00 a.m., local
time, for the following purposes:
1. To approve an Agreement and Plan of Reorganization of
the Investment Company, on behalf of the Bond Fund
and the Fixed Income II Fund (the "Fixed Income
Fund"), each a sub-trust of the Investment Company,
that provides for the merger of the Bond Fund into
the Fixed Income Fund, the distribution of Class S
Shares of the Fixed Income Fund to the Shareholders
of the Bond Fund, and the dissolution of the Bond
Fund.
2. To elect the members of the Board of Trustees of the Investment Company.
3. To ratify the selection of PricewaterhouseCoopers LLP as the Investment
Companys independent accountants.
4. To approve a proposed advisory agreement with Frank Russell Investment
Management Company ("FRIMCo"), the present investment manager of the Bond
Fund, restructuring the manner in which services are provided to the Fund,
and providing for compensation to FRIMCo for managing certain additional
assets of the Bond Fund.
5. To approve a proposed advisory agreement with FRIMCo, to take effect upon
the closing of the acquisition of Frank Russell Company by The Northwestern
Mutual Life
Insurance Company.
6. To approve a change to the Bond Fund's fundamental investment restriction
limiting borrowing activities, authorizing a higher borrowing level for the
purpose of meeting shareholder redemption requests.
7. To approve the elimination of certain fundamental investment restrictions
applicable to the Bond Fund.
The Meeting also will consider and act upon any other business (none being known
as of the date of this notice) as may legally come before the Special Meeting or
any adjournment thereof.
The attached Prospectus/Proxy Statement provides more information concerning the
merger contemplated by the Agreement and Plan of Reorganization, and the other
items upon which Shareholders will be asked to vote. A copy of the Agreement and
Plan of Reorganization is attached as Exhibit A.
Shareholders of record as of the close of business on September 21, 1998, are
entitled to notice of, and to vote at, the Special Meeting or any adjournment
thereof.
By Order of the
Board of Trustees,
KARL J. EGE, ESQ.
Secretary
Tacoma, Washington
October ___, 1998
- ------------------------------------------------------------
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE
MEETING! WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE
MEETING, PLEASE COMPLETE AND SIGN THE ENCLOSED PROXY CARD
AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE, WHICH
NEEDS NO POSTAGE IF MAILED IN THE UNITED STATES. IF YOU
DESIRE TO VOTE IN PERSON YOU MAY REVOKE YOUR PROXY PRIOR
TO THE MEETING.
- ------------------------------------------------------------
Combined Prospectus and Proxy Statement
TABLE OF CONTENTS
Page
Cover Page................................................. Cover
Proposal #1: To Approve an Agreement and Plan of
Reorganization..........................................
Summary of the Proposed Reorganization................
Comparison of Important Features......................
Investment Objectives and Policies................
Management of the Bond Fund and the Fixed Income
Fund..................................................
Fees and Expenses.................................
Distribution Services.............................
Purchase Price, Redemption Price, Dividends and
Distributions
Risk Factors and Comparison of Policies...........
Reasons for the Reorganization........................
Information about the Reorganization..................
Method of Carrying Out the Reorganization.........
Conditions Precedent to Closing...................
Expenses of the Transaction.......................
Tax Considerations................................
Description of the Class S Shares of the Fixed
Income Fund...........................................
Capitalization....................................
Comparison of Investment Policies and Risks of
Investing in the Bond Fund and the Fixed Income Fund
The Bond Fund and the Fixed Income Fund
Risk Factors......................................
Proposal #2: To Elect the Members of the Board of Trustees
The Nominees..........................................
Officers of the Investment Company....................
Proposal #3: To Ratify the Selection of the Independent
Accountants.............................................
Proposal #4: To Approve a Proposed Advisory Agreement
Between the Investment Company, on Behalf of the Bond
Fund, Restructuring Services and Providing Compensation
for Managing Additional Assets..........................
Restructuring and Separating Different Services.....
Compensating FRIMCo for Additional Investment
Advisory Responsibilities...............................
Considerations by the Board.........................
Proposal #5: To Approve a Proposed Advisory Agreement
with Frank Russell Investment Management Company on
Behalf of the Bond Fund, to Take Effect Upon the
Acquisition of Frank Russell Company by The
Northwestern Mutual Life Insurance Company..............
Introduction........................................
Board of Trustees Evaluation and Conclusions........
Information Concerning the Transaction and
Northwestern Mutual.....................................
Required Vote.......................................
Proposal #6: To Approve an Amendment to the Bond Fund's
Fundamental Investment Restriction to Increase the Amount
the Fund May Borrow to Meet Redemptions.................
Proposal #7: To Approve the Elimination of Certain
Fundamental Investment Restrictions Applicable to the
Bond Fund...............................................
Information Regarding the Present Management Agreement.....
Solicitation and Revocation of Proxies and Voting
Information................................................
Principal Shareholders.....................................
Information about the Bond Fund............................
Information about the Fixed Income Fund....................
Exhibit A - Agreement and Plan of Reorganization........... Attached
Exhibit B - Institutional Funds' prospectus, dated May 1,
1998, as supplemented through August 20, 1998.............. Attached
Exhibit C - Institutional Funds' Annual Report to
Shareholders, dated December 31, 1997................... Attached
Exhibit D - Institutional Funds Semi-Annual Report to
Shareholders, dated June 30, 1998....................... Attached
Exhibit E - The Present Management Agreement (the
"Management Agreement") between the Investment Company
and FRIMCo.............................................. Attached
Exhibit F - The Proposed Advisory Agreement (the "Proposed
Advisory Agreement") between the Investment Company and
FRIMCo.................................................. Attached
Exhibit G - Proforma Financial Statements.................. Attached
<PAGE>
COMBINED PROSPECTUS AND PROXY STATEMENT
Dated October ____, 1998
Merger of the
VOLATILITY CONSTRAINED BOND FUND
into the
FIXED INCOME II FUND
of
FRANK RUSSELL INVESTMENT COMPANY
Summary
What is the purpose of this Prospectus/Proxy Statement?
The principal purpose of this combined Prospectus and Proxy Statement (the
"Proxy Statement") is to seek shareholder approval of the merger which is
described below. The transaction will merge the Volatility Constrained Bond Fund
(the "Bond Fund"), a sub-trust of Frank Russell Investment Company (the
"Investment Company"), with Fixed Income II Fund (the "Fixed Income Fund"),
another sub-trust of the Investment Company that has identical investment
objectives, policies and limitations (the "Reorganization"). At the time of the
Reorganization, the Bond Fund's shareholders (the "Shareholders") will become
shareholders of the Fixed Income Fund. Shareholders of the Bond Fund and other
sub-trusts in the Investment Company are also being asked to elect Trustees and
ratify the selection of the independent accountants of the Investment Company.
Shareholders of the Bond Fund are also being asked to approve other items
relative to the Bond Fund's investment policies and operations, including
approval of a new advisory agreement to become effective until the
Reorganization. These items will be implemented for the Bond Fund if the
Reorganization is delayed or does not occur. Shareholders will also consider
approval of a new management or advisory agreement to become effective at the
time of a change of control of Frank Russell Company ("FRC"), the corporate
parent of the investment manager to the Investment Company.
Overview of the Proposed Transaction
The Board is recommending that you approve an Agreement and Plan of
Reorganization (the "Agreement and Plan"). If the Agreement and Plan is
approved, the Bond Fund will be merged into the Fixed Income Fund, and each
Shareholder will receive Class S Shares of the Fixed Income Fund with an
aggregate value equal to the value of the Class S Shares of the Bond Fund held
by that Shareholder prior to the Reorganization. After the Class S Shares of the
Fixed Income Fund are distributed to Shareholders of the Bond Fund, the Bond
Fund will be liquidated.
Who are the parties to the Reorganization?
The Bond Fund and the Fixed Income Fund (together, the "Funds") are each
sub-trusts of the Investment Company, an open-end, management investment company
organized as a business trust under the laws of the Commonwealth of
Massachusetts, with principal offices located at 909 A Street, Tacoma,
Washington 98402. The Fixed Income Fund has investment objectives which are
identical to those of the Bond Fund, namely the preservation of capital and
generation of current income consistent with the preservation of capital. The
investment policies and restrictions and, consequently, the risks of investing
in the Fixed Income Fund, are identical to those of the Bond Fund, which are
described more fully under "Comparison of Investment Policies and Risks" in this
Proxy Statement.
Relevant Information About the Transaction
This Proxy Statement provides the information about the Fixed Income Fund that
Bond Fund Shareholders should know in order to evaluate the proposed
Reorganization. We suggest that you keep this for your records and future
reference. The following documents are incorporated by reference into this Proxy
Statement (and are also attached if indicated). All documents may be obtained
without charge by writing to the address shown above or by calling
1-800-972-0700:
* a Statement of Additional Information, dated October ___, 1998, relating to
this Proxy Statement, is on file with the U.S. Securities and Exchange
Commission (the "SEC") and is available upon request to the Investment
Company.
* the Prospectus of the Investment Company's Institutional Funds, including
the Fixed Income Fund, dated May 1, 1998, as supplemented through August
20, 1998. Attached as Exhibit B.
* the Annual Report of the Investment Company's Institutional Funds,
including the Fixed Income Fund, dated December 31, 1997. Attached as
Exhibit C.
* the Semi-annual Report of the Investment Companys
Institutional Funds, including the Fixed Income Fund,
dated June 30, 1998. Attached as Exhibit D.
* the Investment Company's Russell Funds Class S Prospectus, including the
Bond Fund, dated May 1, 1998, as supplemented through August 20, 1998, and
the Annual Report, dated December 31, 1997, are each on file with the SEC
and are available upon request to the Investment Company.
Consideration of Management and Advisory Agreements
Shareholders will also be asked to approve a new investment advisory agreement
with the present investment manager of the Bond Fund to restructure the services
provided by the manager, and a subsequent advisory agreement, on the same terms
as the agreement then in effect, to become effective upon the closing of the
acquisition of FRC by The Northwestern Mutual Life Insurance Company.
This summary of the Proxy Statement is provided for your convenience. You are
urged to read the more complete information contained elsewhere in this Proxy
Statement. It is expected that this Proxy Statement will first be sent to
Shareholders on or about October __, 1998.
The SEC has not approved or disapproved of these
securities or passed upon the adequacy or accuracy of
this Prospectus/Proxy Statement. Any representation to
the contrary is a criminal offense.
No person has been authorized to give any information or to make any
representations other than those contained in
this Prospectus/Proxy Statement and in the materials
expressly incorporated by reference. If any person
provides any representation or other information, you
should not rely on those representations or other
information since neither the Bond Fund nor the Fixed Income Fund has
authorized those representations.
<PAGE>
PROPOSAL #1: TO APPROVE AN AGREEMENT AND
PLAN OF REORGANIZATION BY THE INVESTMENT
COMPANY, ON BEHALF OF THE VOLATILITY
CONSTRAINED BOND FUND AND THE FIXED INCOME II FUND
Summary of the Proposed Reorganization
This portion of Proposal #1 summarizes the proposed reorganization for your
convenience. You are urged to read the more complete information contained in
this Proxy Statement. The Agreement and Plan of Reorganization (the "Agreement
and Plan"), and the Prospectus, Annual Report and Semi-Annual Report of the
Investment Company's Institutional Funds, which include the Fixed Income Fund,
are each attached to this Proxy Statement as Exhibits A, B, C and D,
respectively.
Why is the Proposed Reorganization being presented at this time?
At its meeting on April 27, 1998, the Investment Company's Board of Trustees
(the "Board" or the "Trustees") considered various alternatives for the future
of the Bond Fund, given its relatively small asset base. These included
continuing as a sub-trust of the Investment Company, or the merger of the Bond
Fund with another sub-trust of the Investment Company. The Board concluded that
the merger of the Bond Fund into the Fixed Income Fund would be in the best
interests of the Bond Fund's Shareholders because the Bond Fund and the Fixed
Income Fund have the same investment objectives, policies and limitations, and
utilize the same money managers to manage their investments.
Of course, each Shareholder's decision to become an investor in the Fixed Income
Fund will involve an assessment of his or her own personal financial situation
and objectives. For the reasons set forth below under "REASONS FOR THE
REORGANIZATION," the Board concluded that the Reorganization is in the best
interests of the Shareholders of the Bond Fund and of the Fixed Income Fund, and
recommended that Shareholders approve the Agreement and Plan. If the Agreement
and Plan is approved by Shareholders and the Reorganization takes place, the
Bond Fund will be merged into the Fixed Income Fund. Following the
Reorganization, it is anticipated that the Fixed Income Fund will change its
name to the Short-Term Bond Fund.
How will the Proposed Reorganization affect Bond Fund
Shareholders?
The Agreement and Plan approved by the Trustees and presented to the
Shareholders provides for the merger of the Bond Fund into the Fixed Income Fund
in exchange for Class S Shares issued by the Fixed Income Fund. The value of
Class S Shares issued by the Fixed Income Fund in connection with the
Reorganization will equal the value of the net assets of the Bond Fund acquired
by the Fixed Income Fund. Pursuant to the Agreement and Plan, Class S Shares
issued to the Bond Fund by the Fixed Income Fund will be distributed to the
Shareholders of the Bond Fund in liquidation of the Bond Fund. As a result, each
Shareholder of the Bond Fund will cease to be a Shareholder of the Bond Fund and
will instead be the owner of that number of full and fractional Class S Shares
of the Fixed Income Fund having an aggregate net asset value equal to the
aggregate net asset value of the Class S Shares of the Bond Fund held by that
Shareholder at the Effective Time of the Reorganization, as defined herein.
What vote is required to approve the Reorganization?
The affirmative vote of the majority of outstanding shares of the Bond Fund as
of September 21, 1998, the record date ("the Record Date") is necessary to
approve the Agreement and Plan. Shareholders are being asked to vote to approve
the Agreement and Plan. If the Agreement and Plan is not approved, the Bond Fund
will continue to operate as a sub-trust of the Investment Company, and the
Trustees will consider what further action, if any, is in the interests of the
Bond Fund and its Shareholders. If you return a signed proxy with no voting
instructions, your shares will be voted in favor of the Agreement and Plan.
What are the tax consequences of the Reorganization for the Shareholders?
Completion of the Reorganization is subject to the receipt of a tax opinion from
counsel to the Investment Company, that, among other things:
* no gain or loss will be recognized by the Bond Fund or its Shareholders for
federal income tax purposes as a result of such Reorganization; and
* the holding period and aggregate tax basis of the Class S Shares of the
Fixed Income Fund received by a Shareholder of the Bond Fund will be the
same as the holding period and aggregate tax basis of the Shareholder's
Class S Shares of the Bond Fund prior to the Reorganization; and
* the holding period and tax basis of the assets of the Bond Fund in the
hands of the Fixed Income Fund as a result of the Reorganization generally
will be the holding period and tax basis of those assets in the hands of
the Bond Fund immediately prior to the Reorganization.
Comparison of Important Features
How do the Investment Objectives and Policies of the Bond Fund and the Fixed
Income Fund Compare?
The investment objectives of the Bond Fund and the Fixed Income Fund are
identical-the preservation of capital and generation of current income
consistent with the preservation of capital by investing in fixed income
securities with low volatility characteristics. The assets of the Bond Fund and
the Fixed Income Fund are invested primarily in those fixed income securities
which mature in two years or less from the date of acquisition or which have
similar volatility characteristics. To minimize credit risk and fluctuation in
net asset value per share, each Fund intends to maintain an average portfolio
maturity of less than five years. The investment policies, limitations and
restrictions of the Bond Fund and the Fixed Income Fund are identical. See
"Comparison of Investment Policies and Risks of the Bond Fund and the Fixed
Income Fund" in this Proxy Statement.
How are the Bond Fund and the Fixed Income Fund each Managed?
The management of the business and affairs of the Investment Company is the
responsibility of the Board. The Board oversees the Funds' operations, including
reviewing and approving the Funds' contracts with Frank Russell Investment
Management Company ("FRIMCo" or the "Manager"), FRC and the Funds' money
managers. The Investment Company's officers, all of whom are employed by and are
officers of FRIMCo or its affiliates, are responsible for the day-to-day
management and administration of the Funds operations. The money managers are
responsible for selection of individual portfolio securities for the assets
assigned to them.
Both the Bond Fund and the Fixed Income Fund are managed by FRIMCo, whose
address is 909 A Street, Tacoma, Washington 98402. As described in more detail
in connection with Proposal #4 below, FRIMCo:
* provides or supervises the general management and
administration, investment advisory and portfolio
management, and distribution services for the
Funds;
* furnishes the Funds with office space, equipment and personnel to operate
and administer the Funds' business, and supervises services provided by
third parties, such as the money managers and the custodian retained by the
Funds;
* develops investment guidelines and restrictions, selects money managers,
allocates assets among money managers and monitors the money managers'
investment programs and results; and
* provides the Funds with transfer agent, dividend disbursing and shareholder
recordkeeping services.
FRIMCo pays the expenses of providing these services (other than transfer agent,
dividend disbursing, and shareholder recordkeeping), as well as a portion of the
costs of preparing and distributing materials that describe the Funds. FRIMCo is
a wholly owned subsidiary of FRC, which provides comprehensive asset management
consulting services to institutional pools of investment assets. George F.
Russell, Jr., Chairman of the Board of the Investment Company, is currently the
Chairman of the Board and controlling shareholder of FRC.
The Investment Company has received an exemptive order from the SEC which
permits the Investment Company, with the approval of the Board, to engage and
terminate money managers without a shareholder vote and to disclose the
aggregate fees paid to the Manager and the money managers of each sub-trust. On
January 22, 1996, the shareholders of the Investment Company voted to approve
this arrangement.
As of the date of this Proxy Statement, the money managers for both the Bond
Fund and the Fixed Income Fund are:
* BlackRock Financial Management, 345 Park Ave., 31st Floor, New York,
NY 10154, which is a wholly-owned indirect subsidiary of PNC Bank;
* Standish, Ayer & Wood, Inc., One Financial Center, Boston, MA 02111,
which is a company whose ownership is divided among seventeen
directors, with no director having more than a 25% ownership interest;
and
STW Fixed Income Management Ltd., Trinity Hall, 43 Cedar Avenue,
Hamilton HM KX, Bermuda, which is a Bermuda exempted company. William
H. Williams III is the sole shareholder.
The Fixed Income Fund's money managers will not change as a result of the
Reorganization.
What are the various fees and expenses for the Bond Fund and the Fixed Income
Fund?
The following summarizes the fees and expenses of the Funds under the present
service agreements. Both the Bond Fund and the Fixed Income Fund are considering
identical proposals to restructure the present arrangements which are described
in Proposal #4 below.
Investment Management Fees:
Under its Management Agreement with the Investment Company, FRIMCo receives a
management fee from each Fund for FRIMCo's services. From this fee, FRIMCo, as
the Investment Company's agent, pays the money managers for their investment
selection services. The remainder of the management fee is retained by FRIMCo as
compensation for the services described above and to pay expenses. The annual
rate of management fees, payable by the two Funds to FRIMCo monthly on a pro
rata basis, is 0.50% of each Fund's average daily net assets.
Quarterly, each money manager is paid the pro rata portion of an annual fee,
based on the average of all assets allocated to the money manager for the
quarter. For the year ended December 31, 1997, management fees paid to the money
managers were equivalent to the following annual rates, expressed as a
percentage of each Fund's average daily net assets: Bond Fund, 0.17%, and Fixed
Income Fund, 0.17%.
Administrative Services:
FRIMCo provides the Investment Company with administrative services and
facilities necessary to operate the Funds. FRIMCo also serves as the
dividend-paying agent, transfer agent and shareholder servicing agent for the
Funds.
Operating Expenses:
The following information is provided in order to assist you in understanding
the fees and expenses of the Bond Fund and the Fixed Income Fund.
FEES FIXED BOND SHORT-TERM
INCOME FUND BOND FUND
FUND (FOLLOWING
REORGANIZATION)
- -----------------------------------------------------------------
Shareholder Transaction
Expenses
Maximum Sales Load Imposed NONE NONE NONE
on Purchases (as a
percentage of offering
price)
Maximum Deferred Sales Load NONE NONE NONE
Maximum Sales Load Imposed NONE NONE NONE
on Reinvested Dividends
Redemption Fees NONE NONE NONE
Exchange Fee (per NONE NONE NONE
transaction)
Annual Class S Shares
Operating Expenses (as a
percentage of average net
assets)
Management Fees 0.50% 0.50% 0.50%
Rule 12b-1 Fees NONE NONE NONE
Other Expenses
0.17% 0.24% 0.17%
Total Class S Shares 0.67% 0.74% 0.67%
Operating Expenses
Example
You would pay the following expenses on a $1,000 investment based on the
level of expenses shown above, assuming (1) a 5% annual return and (2)
redemption at the end of each time period:
1 Year 3 Years 5 Years 10 Years
Bond Fund $7 $23 $41 $93
Short-Term Bond
Fund (After the
Reorganization) $7 $21 $37 $84
The above example should not be considered a representation of past or future
expenses, as actual expenses may be greater or less than those shown. The
assumed 5% annual return is hypothetical and should not be considered a
representation of past or future annual return. The actual return may be greater
or less than the assumed amount. The various costs and expenses reflected in the
foregoing Expense Table and Example are explained in more detail in the
Prospectuses incorporated by reference into this Proxy Statement.
How are the Bond Fund and the Fixed Income Fund
Distributed?
Russell Fund Distributors, Inc. ("Distributors"), located
at 909 A Street, Tacoma, WA 98402, a wholly-owned
subsidiary of FRIMCo, serves as the principal underwriter
of the Investment Company's shares. Distributors
receives no compensation from the Investment Company for
its services.
What is the Purchase Price for Class S Shares?
Class S Shares of the Bond Fund and the Fixed Income Fund are sold on a
continuous basis at the public offering price per share which is equal to the
net asset value per share on each business day on which shares are offered.
Class S Shares of the Funds are sold with no sales load, no commissions, no Rule
12b-1 fees and no exchange fees.
Although there is no specified minimum investment in Class S Shares of the Bond
Fund, the Bond Fund, along with certain other sub-trusts of the Investment
Company, is designed for investors making an aggregate investment of at least
$100,000 in any combination of Class S Shares of the Investment Companys
sub-trusts. Additionally, investors must qualify as "Eligible Investors," as
described in the Russell Funds' prospectus.
At the present time, there is a $5 million minimum aggregate investment
requirement in the Class S Shares of the Fixed Income Fund. The Board has
authorized the restructuring of the Investment Company, so that concurrently
with the completion of the Reorganization, the Class S Shares of the Fixed
Income Fund will be offered through the Investment Company's Specialty Funds
prospectus. There is no minimum investment requirement applicable to the
sub-trusts in that group, although any account with less than $5,000 will be
subject to an account maintenance fee of $12.50 per annum, which will be
deducted from distributions or paid by the redemption of shares.
What are the Dividend and Distribution Policies for the Bond Fund and the Fixed
Income Fund?
The Bond Fund and the Fixed Income Fund have policies of distributing
substantially all of their net investment income and net capital gains to their
respective shareholders each year. The Bond Fund declares income dividends from
its net investment income monthly -- currently for Shareholders of record on the
last business day of the month, payable early the following month. The Fixed
Income Fund pays dividends from net investment income and capital gains, if any,
quarterly. Dividends and capital gains distributions are automatically
reinvested by the Bond Fund and the Fixed Income Fund in additional shares
unless and until a shareholder elects to receive them in cash.
How do the Risk Factors and the Investment Policies of the Fixed Income Bond
Fund and the Bond Fund Compare?
Because of the identical character of the investment objectives and policies of
the Fixed Income Fund and the Bond Fund, the investment risks associated with an
investment in Fixed Income Fund are the same as those of the Bond Fund. See
"Comparison of Investment Policies and Risks" below and the accompanying
prospectus of the Investment Company's Institutional Funds, including the Fixed
Income Fund.
REASONS FOR THE REORGANIZATION
Why is the Board recommending the Reorganization?
The Trustees of the Investment Company considered the fact that the asset base
of the Bond Fund was at a level which did not produce sufficient economies of
scale for the Shareholders. FRIMCo was asked to develop recommendations for the
consideration of the Board. In determining how to best address the Bond Fund's
relatively low asset base, FRIMCo suggested that a merger with a larger fund
could provide the Bond Fund's Shareholders with appropriate economies of scale.
FRIMCo proposed, and the Board concluded, that the Fixed Income Fund is a larger
fund which offers appropriate economies of scale, and has investment objectives
and policies that are identical to the Bond Fund's objectives and policies.
The Agreement and Plan was presented to the Board at a meeting held on April 27,
1998. At the meeting the Trustees questioned FRIMCo about the potential benefits
to be gained by Shareholders of the Bond Fund, as well as any additional costs
to be borne. In determining whether to recommend approval of the Reorganization
to Shareholders, the Board considered, among others, the following factors:
(1) the expense ratio of the Fixed Income Fund, as
well as similar funds; and
(2) the comparative investment performance of the Fixed Income Fund with
the performance of similar funds; and
(3) the compatibility of the investment objectives, policies, restrictions
and portfolios of the Fixed Income Fund with the Bond Fund; and
(4) the tax consequences of the Reorganization.
What are the advantages of the Reorganization?
After carefully considering the proposal for the merger of the Bond Fund, the
Reorganization has been recommended by the Board on behalf of the Bond Fund for
the following reasons:
(1) combining the Bond Fund with a larger portfolio will better diversify
its investments and enable the Bond Fund to make investments on better
terms and with attendant savings in investment costs for the Bond Fund
and the Shareholders; and
(2) the Reorganization would permit Shareholders to pursue their investment
goals in a larger fund which should have an enhanced ability to effect
portfolio transactions on more favorable terms and should have greater
investment flexibility; and
(3) combining the Bond Fund with the Fixed Income Fund means higher
aggregate net assets which should enable shareholders to obtain the
benefits of economies of scale in operational costs; and
(4) combining the Bond Fund with the Fixed Income Fund will enable
Shareholders to continue to obtain the services of the same service
providers, including FRIMCo and the money managers, which currently
provide services to such Shareholders invested in the Bond Fund.
Shareholders in a larger fund generally benefit when fixed costs of fund
operations and certain duplicative costs and expenses are spread over a larger
asset base. As a general rule, this effect can be expected to be realized
primarily with respect to fixed expenses. Expenses that are based on the value
of assets or the number of shareholder accounts, such as certain custody and
transfer agent fees, would be largely unaffected by the Reorganization, unless
the schedule of such fees provides for reduced fees for assets at higher levels.
How will the Reorganization be financed?
During the course of its deliberations, the Board determined that each Fund
would bear its direct operational expenses with respect to the Reorganization.
Will the shares of either Fund be diluted as a result of the Reorganization?
In reaching the decision to recommend that Shareholders of the Bond Fund vote to
approve the Reorganization, the Board of Trustees concluded that the
Reorganization is in the best interests of the Shareholders of the Bond Fund and
that no dilution would result to the Shareholders of the Bond Fund from the
Reorganization.
The Board of Trustees also determined that the Reorganization was in the best
interests of the Class S shareholders of the Fixed Income Fund and that no
dilution would result to the current Class S shareholders of the Fixed Income
Fund as a result of the Reorganization.
FOR THE REASONS DISCUSSED ABOVE, THE BOARD OF
TRUSTEES OF THE INVESTMENT COMPANY RECOMMENDS THAT YOU
VOTE FOR APPROVAL OF THE AGREEMENT AND PLAN.
What happens if the Agreement and Plan is not approved by the Shareholders? If
the Agreement and Plan is not approved by the Shareholders at the meeting, the
Bond Fund will continue as a sub-trust of the Investment Company. In that event,
the Board would have to determine what additional actions, if any, it would
recommend to the Shareholders of the Bond Fund.
INFORMATION ABOUT THE REORGANIZATION
The following is a summary of the Agreement and Plan of Reorganization. It is
subject in all respects to the provisions of, and is qualified in its entirety
by reference to, the Agreement and Plan, a copy of which is attached as Exhibit
A.
What is the Method of Carrying Out the Reorganization? If the Shareholders
approve the Agreement and Plan, it is expected that the Reorganization will be
consummated promptly after the various conditions to the obligations of each of
the parties are satisfied. (See "Conditions Precedent to Closing.") Consummation
of the Reorganization (the "Effective Time of the Reorganization") is expected
to occur on or about November 20, 1998, or such other date as is agreed to by
the Bond Fund and the Fixed Income Fund. The Agreement and Plan may be
terminated at any time before or after its approval by Shareholders by action of
the Board.
The Agreement and Plan provides, first, that substantially all of the assets of
the Bond Fund will be transferred to the Fixed Income Fund, which will assume
all of the Bond Fund's liabilities. The Bond Fund Shareholders will receive a
number of Class S Shares of the Fixed Income Fund with the same aggregate net
asset value as the Class S Shares of the Bond Fund held immediately prior to the
Reorganization. The Bond Fund's Shareholders will not pay a sales charge,
commission or other transaction cost in connection with their receipt of the
Class S Shares of the Fixed Income Fund.
The Agreement and Plan provides that the Bond Fund will declare a dividend
and/or other distribution prior to the Reorganization which, together with all
previous distributions, will have the effect of distributing to the Shareholders
of the Bond Fund all of its investment company taxable income and net capital
gain, if any, realized by the Bond Fund up to and including the Effective Time
of the Reorganization.
Following the transfer of assets and assumption of liabilities of the Bond Fund
to the Fixed Income Fund, and the issuance of Class S Shares by the Fixed Income
Fund to the Bond Fund, the Bond Fund will distribute the Class S Shares of the
Fixed Income Fund pro rata to the Bond Fund Shareholders as described above in
liquidation of the Bond Fund. In addition to the Class S Shares, each Bond Fund
Shareholder will have a right to receive any declared and unpaid dividends or
other distributions. Following the Reorganization, shareholders of the Bond Fund
will be shareholders of the Fixed Income Fund. While not required by the
Agreement and Plan, it is contemplated that following the Reorganization, the
Fixed Income Fund will change its name to the Short-Term Bond Fund.
Conditions Precedent to Closing. The Reorganization is subject to a number of
conditions, including approval of the Agreement and Plan and the transaction
contemplated thereby as described in this Proxy Statement by the Shareholders of
the Bond Fund; the receipt of certain legal opinions described in the Agreement
and Plan; the receipt of certain certificates from the parties concerning the
continuing accuracy of the representations and warranties in the Agreement and
Plan and other matters; and the parties' performance in all material respects of
their agreements and undertakings in the Agreement and Plan.
Expenses of the Transaction. The Bond Fund and the Fixed Income Fund will each
pay its direct expenses incurred in connection with entering into, and
completing, the transaction described in the Agreement and Plan.
Tax Considerations. It is expected that the Reorganization will qualify for
federal income tax purposes as a tax-free reorganization under Section
368(a)(1)(C) of the Internal Revenue Code of 1986, as amended (the "Code"). No
gain or loss will be recognized as a consequence of the Reorganization by the
Shareholders of the Bond Fund, the Bond Fund, the shareholders of the Fixed
Income Fund, or the Fixed Income Fund. The completion of the Reorganization is
subject to the receipt by the Bond Fund and the Fixed Income Fund of an opinion
of counsel to that effect.
Shareholders of the Bond Fund should consult their tax advisors regarding the
effect, if any, of the Reorganization in light of their individual circumstances
and, since the foregoing discussion only relates to the federal income tax
consequences of the Reorganization, as to state and local tax consequences, if
any, of the Reorganization.
Description of Class S Shares of the Fixed Income Fund. The Investment Company
issues shares of beneficial interest divisible into an unlimited number of
sub-trusts, each of which sub-trust is a separate trust under Massachusetts law,
and the sub-trust' shares may be offered in multiple classes. As of the date of
this Proxy Statement, the Fixed Income Fund does not offer shares of beneficial
interest in any class other than the Class S Shares, although it may do so in
the future. Shares of each class of a sub-trust, including the Fixed Income
Fund's Class S Shares, represent proportionate interests in the assets of the
specific sub-trust attributable to that class, and have the same voting and
other rights and preferences as the shares of other classes of the sub-trust.
Shares of each class of a sub-trust are entitled to such dividends and
distributions earned on the assets belonging to the sub-trust as may be declared
by the Board. Shares of each class of a sub-trust have a par value of $.01 per
share, are fully paid and nonassessable, and have no preemptive or conversion
rights. Each share of a class of a sub-trust has one vote; there are no
cumulative voting rights.
Class S Shares of the Fixed Income Fund will be issued to Shareholders of the
Bond Fund in accordance with the procedures under the Agreement and Plan as
described above. Each Class S Share will be fully paid and nonassessable when
issued with no personal liability attaching to the ownership thereof, will have
no preemptive or conversion rights and will be transferable upon the books of
the Fixed Income Fund. In accordance with the Fixed Income Fund's normal
procedures as specified in its the Investment Company's Institutional Funds'
prospectus, the Fixed Income Fund will not issue certificates for shares of
beneficial interest to former Shareholders of the Bond Fund, unless requested in
writing by the Shareholder or by his or her financial intermediary. As of the
Effective Time of the Reorganization, all certificates representing shares of
the Bond Fund shall be deemed to represent an interest of the Shareholder in the
new Class S Shares of the Fixed Income Fund issued to the Shareholder in the
Reorganization. If a certificate for Class S Shares of the Bond Fund is
outstanding, a new certificate for Class S Shares of the Fixed Income Fund
issued in the transaction will not be issued until the old certificate is
delivered to the transfer agent.
As shareholders of the Fixed Income Fund, former Shareholders of the Bond Fund
will have substantially similar voting rights and rights upon dissolution with
respect to the Fixed Income Fund as they currently have with respect to the Bond
Fund.
The terms of the amended Master Trust Agreement do not confer upon Shareholders
of the Bond Fund any appraisal rights; however, after the Effective Time of the
Reorganization, such Shareholders may redeem their Class S Shares in the Fixed
Income Fund at net asset value or exchange their Fixed Income Fund Class S
Shares into shares of certain other sub-trust of the Investment Company.
The Investment Company is an entity of the type commonly known as a
"Massachusetts business trust." Under Massachusetts law, shareholders of such a
trust may, under certain circumstances, be held personally liable as partners
for its obligations. However, the Master Trust Agreement of the Investment
Company contains an express disclaimer of shareholder liability for acts or
obligations of the Investment Company and provides for indemnification and
reimbursement of expenses out of the Investment Company's property for any
shareholder held personally liable for the obligations of the Investment
Company. The amended Master Trust Agreement also provides that the Investment
Company may maintain appropriate insurance (for example, fidelity bonding and
errors and omissions insurance) for the protection of the Investment Company,
the shareholders of the sub-trust, Trustees, officers, employees and agents
covering possible tort and other liabilities. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability also is limited to
circumstances in which both inadequate insurance exists and the Investment
Company itself is unable to meet its obligations.
Under Massachusetts law, the Investment Company is not required to hold annual
meetings. In the past, the Bond Fund and the Fixed Income Fund have availed
themselves of these provisions of state law to achieve cost savings by
eliminating printing costs, mailing charges and other expenses involved to hold
routine annual meetings. Either Fund may, however, hold a meeting for such
purposes as changing fundamental investment restrictions, approving a new
investment management agreement or any other matters which are required to be
acted on by shareholders under the 1940 Act. In addition, a meeting also may be
called by shareholders holding at least 10% of the shares entitled to vote at
the meeting for the purpose of voting upon the removal of Trustees, in which
case shareholders may receive assistance in communicating with other
shareholders such as that provided in Section 16(c) of the 1940 Act. The Bond
Fund is holding the Special Meeting in lieu of an annual meeting because of the
items that must be presented for Shareholders consideration and approval.
Capitalization. The following table sets forth, as of August 21, 1998: (i) the
capitalization of the Bond Fund; (ii) the capitalization of the Fixed Income
Fund; and (iii) the pro forma capitalization of the Fixed Income Fund as
adjusted to give effect to the proposed Reorganization. The capitalization of
the Fixed Income Fund, which will be renamed the Short-Term Bond Fund, is likely
to be different when the Reorganization is consummated.
Bond Fund Fixed Short-Term
Income Bond Fund Pro
Fund Forma
After Reorganization
Net Assets...... $199,466,096 $249,824,282 $449,290,378
Net Asset Value
per Share...... $19.12 $18.53 $18.53
Shares
Outstanding.... 10,431,042 13,484,127 24,250,199
To the extent permitted by law, the Agreement and Plan may be amended without
shareholder approval by a writing of the Board. The Agreement and Plan may be
terminated and the Reorganization abandoned at any time before or, to the extent
permitted by law, after the approval of Shareholders of the Bond Fund by mutual
consent of the parties to the Agreement and Plan.
COMPARISON OF INVESTMENT POLICIES AND RISKS OF
INVESTING IN THE BOND FUND AND THE FIXED INCOME FUND
The Bond Fund and the Fixed Income Fund. The investment objectives of the Bond
Fund and the Fixed Income Fund are identical - the preservation of capital and
the generation of current income consistent with the preservation of capital by
investing primarily in fixed-income securities with low-volatility
characteristics.1 The Funds are managed in an identical manner by their money
managers (which, as discussed earlier in this Proxy Statement, are the same).
The Funds invest primarily in fixed income securities, emphasizing those
securities which mature in two years or less from the date of acquisition or
which have similar volatility characteristics. To minimize credit risk and
fluctuations in net asset value per share, the Funds maintain an average
portfolio maturity of less than five years. The Funds money managers seek to
identify and invest in a managed portfolio of high-quality debt securities
denominated in the U.S.
dollar and a range of foreign currencies.
Although the Funds invest primarily in debt securities denominated in the U.S.
dollar, the money managers actively manage the Funds portfolios in accordance
with a multi-market investment strategy, allocating investments among securities
denominated in the U.S. dollar and the currencies of a number of foreign
countries and, where consistent with their policy of investing only in
high-quality securities, within each such country, among different types of debt
securities. The money managers which invest in foreign denominated securities
maintain a substantially neutral currency exposure relative to the U.S. dollar,
and establish and adjust cross currency hedges based on their perception of the
most favorable markets and issuers. In this regard, the percentage of assets
invested in securities of a particular country or denominated in a particular
currency will vary in accordance with a money manager's assessment of the
relative yield of such securities and the relationship of a country's currency
to the U.S. dollar. Fundamental economic strength, credit quality and interest
rate trends will be the principal factors considered by the money managers in
determining whether to increase or decrease the emphasis placed upon a
particular type of security or industry sector within the Funds investment
portfolios.
1 Based upon the consideration by the Shareholders of the significant
matters set forth in this Proxy Statement, the prospectuses of the funds
in the Investment Comany, including the Short Term Bond Fund, will be
reissued following the Meeting. While the description of the investment
techniques or policies will be improved in the revised materials, no
substantive change of policies will be made.
For a complete description of the investment policies, limitations and
restrictions applicable to the Funds, please refer to the Investment Company's
Institutional Funds' prospectus, dated May 1, 1998, as supplemented through
August 20, 1998, which is attached to this Proxy Statement as Exhibit B. The
investment objectives, policies, limitations and restrictions of the Bond Fund
and the Fixed Income Fund are identical. SEE PROPOSAL #6 AND PROPOSAL #7 BELOW
CONCERNING PROPOSED CHANGES WHICH WILL BE CONSIDERED BY THE SHAREHOLDERS OF EACH
FUND AT THIS MEETING.
Risk Factors. The investment risks of the Bond Fund and the Fixed Income Fund
are identical. The Funds may invest in foreign securities, including securities
denominated in currencies other than the U.S. dollar (including currencies
denominated in the "Euro"). The Funds may enter into forward foreign currency
exchange contracts, and may purchase and sell (write) call and put options on
portfolio securities. These types of investments and related techniques involve
certain risks, which are described in the Investment Company's Institutional
Funds prospectus, attached as Exhibit B to this Proxy Statement, and in the
Investment Company's Statement of Additional Information, dated May 1, 1998, as
supplemented through August 20, 1998, which is available upon request.
To be approved, the Agreement and Plan must receive the affirmative vote of a
"majority of the outstanding voting securities" of the Bond Fund, as defined in
the 1940 Act. Under the 1940 Act, a vote of a majority of the outstanding voting
securities of the Bond Fund means the lesser of (i) 67% or more of the shares of
the Bond Fund represented at the Special Meeting, if more than 50% of the
outstanding shares are present at the Special Meeting or represented by proxy,
or (ii) more than 50% of the outstanding shares of the Bond Fund.
PROPOSAL #2: TO ELECT THE MEMBERS OF THE BOARD OF
TRUSTEES
At its meeting held on October 5, 1998, the Trustees
determined to present the election of the Board of
Trustees to Shareholders at the Special Meeting. Messrs.
Russell, Lynn L. Anderson, Paul E. Anderson, Baxter and
Gingrich, Dr. Anton and Ms. Palmer (the "Current
Trustees"), after due consideration, unanimously approved
each nominee identified below to stand for election to
the Board of Trustees. Mr. Russell will not stand for
reelection as a voting Trustee of the Investment Company,
although he has been elected to serve as a Trustee
Emeritus immediately upon the completion of his present
service as a Trustee. In considering the nominees for
election as Trustees of the Investment Company, the
Trustees took into account the qualifications of each of
the nominees and the concern for the continued efficient
conduct of the Investment Company's business.
In particular, the Trustees considered the requirements of the 1940 Act as they
apply to the election of Trustees. One factor considered by the Board is the
requirement imposed by the 1940 Acts Rule 12b-1 that the selection and
nomination of trustees who are not "interested persons" (as that term is defined
in Section 2(a)(19) of the 1940 Act) under the Investment Company's Rule 12b-1
Plans (the "Independent Trustees") must be committed, in the first instance, to
the Independent Trustees then in office. The Independent Trustees met separately
with Investment Company counsel, and proposed the nomination of the Independent
Trustees whose names are set forth below.
At a meeting held on October 5, 1998, the Board also noted the proposed change
in control of FRC described in Proposal #5 below. Under Section 15(f) of the
1940 Act, for a period of three years following a change of control, at least
75% of the members of the Board of Trustees must be individuals who are not
"interested persons" of FRIMCo or its predecessor entities. Based upon the
current affiliations of the nominees for election, the election of a Board
comprised of the six nominees set forth in this Proposal #2 will satisfy that
requirement.
The Current Trustees will continue to serve as Trustees until the Trustees
elected by the Shareholders take office, although Mr. Russell will resign as a
voting Trustee effective December 30, 1998, or at such date as may be considered
appropriate to assure that the composition of the Board complies with Section
15(f). Upon the election and qualification of the new Trustees, the six nominees
listed below will constitute the Board of Trustees of the Investment Company. It
is anticipated that the nominees will take office at the first regularly
scheduled Board meeting following their election, which Board meeting is
presently anticipated to be held in January 1999. Mr. Russell and Mr. Lynn
Anderson are, and Mr. Lynn Anderson will continue to be, "interested persons" of
the Investment Company. Mr. Russell has been designated by the Board of Trustees
as a Trustee Emeritus of the Investment Company as described above pursuant to
the Amended Master Trust Agreement. As a Trustee Emeritus, he will be expected
to attend meetings of the Board, will participate in discussions of the business
of the Investment Company, and may continue to provide the benefit of his advice
and experience to the Board. Under the Amended Master Trust Agreement, a Trustee
Emeritus does not vote on any matter before the Board, and is not liable for the
actions taken or omitted by the Board.
Because the Investment Company does not hold regular annual meetings, each
nominee, if elected, will hold office until his or her successor is elected and
qualified. The Board may call special meetings of shareholders for action by
shareholder vote as may be required by the 1940 Act or required or permitted by
the Master Trust Agreement and by-laws of the Investment Company. In compliance
with the 1940 Act, shareholder meetings will be held to elect Trustees whenever
fewer than a majority of the Trustees holding office have been elected by the
shareholders or, if necessary in the case of filling vacancies, to assure that
at least two-thirds of the Trustees holding office after vacancies are filled
have been elected by shareholders.
The Nominees
The following information is provided for each of the six nominees. It includes
the nominees name, principal occupation(s) or employment during the past five
years, and directorships with other companies which file reports periodically
with the SEC. Unless otherwise noted, the mailing address for each nominee is
Frank Russell Investment Company, 909 A Street, Tacoma, WA 98402. Each of the
nominees is currently a Trustee of the Investment Company and, except as
otherwise indicated, has served as a Trustee since 1984.
Mr. Lynn Anderson is the only nominee for election as a Trustee who is an
"interested person" of the Investment Company as defined in the 1940 Act. This
designation results from his ownership interest and position as an officer of
certain FRC affiliates. As used in the list below, "Frank Russell Company"
includes its corporate predecessor, Frank Russell Co., Inc.
*Lynn L. Anderson--59 years old--Trustee, President and Chief Executive Officer
since 1987. Trustee, President and Chief Executive Officer, Russell Insurance
Funds; Director, Chief Executive Officer and Chairman of the Board, Russell Fund
Distributors, Inc.; Trustee, Chairman of the Board and President, The SsgA Funds
(investment company); Director, Chief Executive Officer and Chairman of the
Board, Frank Russell Investment Management Company; Director, Chief Executive
Officer and President, Frank Russell Trust Company; Director and Chairman of the
Board, Frank Russell Investment Company Public Limited PLC; Director and
shareholder, Frank Russell Company, Frank Russell Investments (Ireland) Limited,
Frank Russell Investments (Cayman) Ltd. and Frank Russell Investments (UK) Ltd.;
November 1995 to June 1993, Director, Frank Russell Company. Until September
1994, Director and President, The Laurel Funds, Inc.
(investment company).
Paul E. Anderson--66 years old - Trustee. 23 Forest Glen
Lane, Tacoma, Washington 98409. Trustee, Russell
Insurance Funds; 1996 to Present, President, Forest
Limited Partnership. 1984 to 1996, President, Vancouver
Door Company, Inc.
Paul Anton, Ph.D.--78 years old - Trustee since 1985. PO
Box 212, Gig Harbor, Washington 98335. Trustee, Russell
Insurance Funds. President, Paul Anton and Associates
(Marketing Consultant on emerging international markets
for small corporations). 1991-1994, Adjunct Professor,
International Marketing, University of Washington,
Tacoma, Washington.
William E. Baxter--72 years old - Trustee. 800 North C
Street, Tacoma, Washington 98403. Trustee, Russell
Insurance Funds, Retired.
Lee C. Gingrich--67 years old - Trustee. 1730 North
Jackson, Tacoma, Washington 98406. Trustee, Russell
Insurance Funds. President, Gingrich Enterprises, Inc.
(Business and Property Management).
Eleanor W. Palmer--71 years old - Trustee. 2025 Narrows
View Circle #232-D, P.O. Box 1057, Gig Harbor, Washington
98335. Trustee, Russell Insurance Funds; Director of
Frank Russell Trust Company.
The Investment Company pays fees only to the Independent Trustees of the
Investment Company. Compensation of officers and Trustees who are "interested
persons" of the Investment Company (as indicated by an asterisk) is paid by
FRIMCo or its affiliates.
All of the nominees attended each regular Board of Trustees meeting held in 1997
and the special meeting of the Board of Trustees held on June 6, 1997, except
for Paul Anderson, who was absent from two meetings, Lynn L. Anderson, who was
absent from three meetings, and Eleanor W. Palmer, who was absent from one
meeting. The Board of Trustees has an Audit Committee, which is composed of the
Independent Trustees of the Investment Company. The function of the Audit
Committee is to advise the Board with regard to the appointment of the
Investment Company's independent accountants, review and approve audit and
non-audit services of the Investment Companys independent accountants, and meet
with the Investment Companys financial officers to review the conduct of
accounting and internal controls. The Committee also serves as a vehicle for
these Trustees to consult separately with the Investment Company's outside
counsel. The Audit Committee met once during the year ended December 31, 1997.
All members of the Audit Committee attended the Audit Committee meeting. The
Board does not have standing nominating or compensation committees.
The following represents the compensation paid to each Current Trustee for
the year ending December 31, 1997:
PENSION OR
AGGREGATE RETIREMENT ESTIMATED TOTAL
COMPENSATION BENEFITS ANNUAL COMPENSATION
TRUSTEE FROM THE ACCRUED AS BENEFITS FROM
INVESTMENT PART OF THE UPON THE
COMPANY INVESTMENT RETIREMENT INVESTMENT
COMPANY COMPANY
EXPENSES PAID TO
TRUSTEES
Lynn L. $0 $0 $0 $0
Anderson
Paul E. $20,000 $0 $0 $31,263*
Anderson
Paul $20,000 $0 $0 $31,263*
Anton,
PhD.
William $20,000 $0 $0 $31,263*
E. Baxter
Lee C. $20,000 $0 $0 $31,263*
Gingrich
Eleanor $20,000 $0 $0 $31,263*
W. Palmer
George F. $0 $0 $0 $0
Russell
* The Trustees received $11,263 for service as trustees on the Board of
Trustees for the Russell Insurance Funds ($4,000 of which was for services
during 1996).
Officers of the Investment Company
Information about the Investment Companys principal executive officers (other
than Lynn Anderson), including their names, ages, position(s) with the
Investment Company, and principal occupation or employment during the past five
years, is set forth below. An asterisk (*) indicates that the officer is an
"interested person" of the Investment Company as defined in the 1940 Act. As
used in the table, "Frank Russell Company" includes its corporate predecessor,
Frank Russell Co., Inc.
* Mark E. Swanson--34 years old - Treasurer and Chief
Accounting Officer since August 1998. Treasurer and
Chief Accounting Officer, Russell Insurance Funds,
Interim Director, Finance and Operations, Frank Russell
Trust Company; Senior Vice President and Assistant Fund
Treasurer, SSgA Funds (investment company); Interim
Director of Fund Administration and Accounting, Frank
Russell Investment Management Company; Manager, Funds
Accounting and Taxes, Russell Fund Distributors, Inc.
April 1996 to August 1998, Assistant Treasurer, Frank
Russell Investment Company; August 1996 to August 1998,
Assistant Treasurer, Russell Insurance Funds, November
1995 to July 1998, Assistant Secretary, the Seven Seas
Series Fund, February 1997 to July 1998, Manager, Funds
Accounting and Taxes, Frank Russell Investment Management
Company.
* Randall P. Lert--44 years old - Director of Investments
since 1991. Director of Investments, Russell Insurance
Funds, Senior Investment Officer and Director of
Investment Services, Frank Russell Trust Company;
Director and Chief Investment Officer, Frank Russell
Investment Management Company; Director and Chief
Investment Officer, Russell Fund Distributors, Inc.
Director-Futures Trading, Frank Russell Investments
(Ireland) Limited and Frank Russell Investments (Cayman)
Ltd., Senior Vice President and Director of Portfolio
Trading, Frank Russell Canada Limited/Limitee. April 1990
to November 1995, Director of Investments of Frank
Russell Investment Management Company.
* Karl J. Ege--56 years old - Secretary and General Counsel
since 1994. Secretary and General Counsel of Russell
Insurance Funds. Director, Secretary and General Counsel,
Russell Fiduciary Services Co., Frank Russell Capital,
Inc.; Secretary, General Counsel and Managing
Director--Law and Government Affairs of Frank Russell
Company; Secretary and General Counsel of Frank Russell
Investment Management Company, Frank Russell Trust
Company and Russell Fund Distributors, Inc.; Director and
Secretary of Russell Building Management Company Inc.,
Russell MLC Management Co., Russell International
Services Co., Inc. and Russell 20-20 Association;
Director and Assistant Secretary of Frank Russell Company
Limited (London) and Russell Systems Ltd.; Director,
Frank Russell Investment Company LLC, Frank Russell
Investments (Cayman) Ltd., Frank Russell Investment
Company PLC, Frank Russell Investments (Ireland) Limited,
Frank Russell Company S.A., Frank Russell Japan Co. Ltd.,
Frank Russell Company (NZ) Limited, Russell Investment
Nominee Co PTY Ltd and Frank Russell Investments (UK)
Ltd.; From November 1995 to February 1997, Director and
Secretary, Frank Russell Investments (Delaware), Inc.;
July 1992 to June 1994, Director, President and Secretary
of Frank Russell Shelf Corporation.
* Peter Apanovitch--52 years old - Manager of Short-Term Investment Funds
since 1991. Manager of Short-Term Investment Funds, Russell Insurance
Funds; Manager of Short-Term Investment Funds, Frank Russell Investment
Management Company and Frank Russell Trust Company.
* George F. Russell, Jr. -- 65 years old - Trustee and Chairman
of the board. Trustee Emeritus as of 1999. Trustee and
Chairman of the Board of Russell Insurance Funds, and Trustee
Emeritus as of 1999; Director, Chairman of the Board and
Chief Executive Officer, Russell Building Management Company,
Inc.; Director and Chairman of the Board, Frank Russell
Company, Frank Russell Securities, Inc., Frank Russell
Trust Company, Frank Russell Investments (Delaware), Inc.;
Director, Frank Russell Investment Management Company; Director,
Chairman of the Board, and President, Russell 20/20 Association.
The persons named in the proxy intend, in the absence of contrary instructions,
to vote all proxies in favor of the election of each nominee. A Shareholder may
vote for or against any or all of the nominees. If an executed proxy is returned
without voting instructions, the shares will be voted for all nominees named
herein for Trustees. All of the nominees have consented to being named in this
proxy and to serve if elected. The Investment Company knows of no reason why any
nominee would be unable or unwilling to serve if elected. Should any of the
nominees become unable or unwilling to accept nomination or election prior to
the Special Meeting, the persons named in the proxy will exercise their voting
power to vote for such substitute person or persons as the Current Trustees of
the Investment Company may recommend. If any nominee is not approved by the
shareholders of the Investment Company, the Board will consider alternative
nominations.
The nominees who receive the greatest number of votes cast by shareholders of
the Investment Company who are present at the Meeting in person or by proxy will
be declared elected.
THE BOARD OF TRUSTEES RECOMMENDS THAT
SHAREHOLDERS VOTE TO ELECT AS TRUSTEES THE
NOMINEES FOR ELECTION TO THE
BOARD OF TRUSTEES OF THE INVESTMENT COMPANY
<PAGE>
PROPOSAL #3: RATIFICATION OF THE SELECTION OF
PRICEWATERHOUSECOOPERS LLP AS THE
INVESTMENT COMPANYS INDEPENDENT ACCOUNTANTS
At its meeting on April 27, 1998, pursuant to a request by the management of the
Investment Company, the Board, including a majority of the Independent Trustees
of the Investment Company, selected the firm of PricewaterhouseCoopers LLP to be
independent accountants for the Investment Company for the year ending December
31, 1998. Shareholders of all of the sub-trusts of the Investment Company are
being asked at the Special Meeting to ratify the selection of
PricewaterhouseCoopers LLP, a firm formed by the recent merger of the Investment
Company's present accountant with another prominent accounting firm.
Services in connection with the audit function to be performed by the Investment
Companys independent accountants include: (i) the examination of the annual
financial statements of the Investment Company; (ii) all services rendered in
order to permit the accountants to render a formal opinion on the Investment
Companys financial statements; and (iii) provision of assistance and
consultations with respect to filings with the SEC. PricewaterhouseCoopers LLP
does not have any direct or indirect financial interest in the Investment
Company. It is not expected that a representative of PricewaterhouseCoopers LLP
will be present at the Special Meeting. If a representative is present, he or
she will have an opportunity to make a statement if he or she desires to do so,
and would be available to respond to appropriate questions.
To be ratified, the appointment of PricewaterhouseCoopers LLP must receive the
affirmative vote of a majority of the securities of the Investment Company which
are present at the Meeting in person or by proxy and vote on this proposal.
THE BOARD OF TRUSTEES RECOMMENDS
THAT SHAREHOLDERS VOTE TO RATIFY THE
SELECTION OF PRICEWATERHOUSECOOPERS LLP AS
THE INVESTMENT COMPANYS INDEPENDENT ACCOUNTANTS
<PAGE>
PROPOSAL #4: TO APPROVE A NEW ADVISORY
AGREEMENT BETWEEN THE INVESTMENT COMPANY,
ON BEHALF OF THE BOND FUND, AND FRANK RUSSELL
INVESTMENT MANAGEMENT COMPANY, RESTRUCTURING
SERVICES AND PROVIDING COMPENSATION
FOR MANAGING ADDITIONAL ASSETS
Summary of the Proposed Advisory Agreement
The Board of the Investment Company has approved and recommended to the
shareholders of each sub-Trust in the Investment Company, including the
Shareholders of the Bond Fund, a new investment advisory agreement which (i)
would distinguish investment advisory services from administrative services
provided to the Investment Company, and (ii) would assign additional investment
supervisory duties to the Manager and provide compensation for those services.
What are the present arrangements for investment supervisory services for the
Bond Fund?
From the inception of the Investment Company to the present time, the Investment
Company has received both its investment advisory and its administrative
services from FRIMCo pursuant to a management agreement between the Investment
Company and FRIMCo. The current management agreement with FRIMCo (the
"Management Agreement") dated April 1, 1995, as revised to add additional
sub-trusts from time to time, was approved by the shareholders of each sub-trust
of the Investment Company, including the Bond Fund, at a special meeting held on
January 22, 1996 (which special meeting was specifically called to consider and
approve the Management Agreement). The Management Agreement was continued until
April 30, 1999, by the Board, including all of the Trustees who are not
"interested persons" of FRIMCo, at its meeting held on April 27, 1998. The
continuance of the present Management Agreement assured that the Investment
Company would continue to receive the services of FRIMCo after April 30, 1998.
Under the present Management Agreement FRIMCo provides both investment advisory
and administrative services in consideration of the respective fees provided for
with respect to each sub-trust. Additional information concerning the fees paid
by the Bond Fund and certain other sub-trusts is set forth below under
"INFORMATION REGARDING THE PRESENT MANAGEMENT AGREEMENT." The current Management
Agreement is attached hereto as Exhibit E.
What changes would be made under the new Advisory Agreement?
The Board has concluded that the Investment Company would benefit from the
approval of a new investment advisory agreement (the "Advisory Agreement") to
replace the present Management Agreement. This portion of the Proxy Statement
describes the proposed Advisory Agreement and the present Management Agreement.
The Board recommends that the Shareholders approve the proposed Advisory
Agreement. The proposed Advisory Agreement reflects two changes:
(i) The investment advisory and administrative services which are currently
provided under the Management Agreement will be separated into an
Advisory Agreement and a separate administration agreement.
(ii)FRIMCo will assume the responsibility for managing additional assets of
the Bond Fund that are not treated as net assets under the present
agreement, and will be compensated for that responsibility at a rate
not to exceed 0.07 of 1% per annum (0.0007) of those additional assets.
Set forth below is a discussion of the reasons for each of these changes, and a
summary of the terms of proposed Advisory Agreement. A copy of the proposed
Advisory Agreement is attached as Exhibit F to this Proxy Statement.
How will the new agreement restructure and separate different services?
As noted above, since the inception of the Investment Company, FRIMCo has
provided both advisory and administrative services under a single agreement. The
current Management Agreement follows this pattern. Both advisory services and
administrative services, and the aggregate fee paid for both types of services,
are provided for in the Management Agreement. The combination of two types of
services (and of the consolidated fee for those services) in a single agreement
causes the advisory fees paid by the Investment Company's sub-trusts, including
the Bond Fund, to appear to be higher than those which some competitors pay for
investment advisory services. In addition, under the 1940 Act, a change to the
present Management Agreement affecting only administrative services still must
be approved by Shareholders because the Management Agreement also covers
advisory services. This makes it difficult for the Investment Company to refine
or enhance the scope of administrative services that it receives from FRIMCo,
although this effort and expense normally is not imposed on other investment
companies which make changes to a purely administrative agreement.
To address these concerns, management asked the Board to consider a proposal to
separate the Management Agreement into two separate agreements - the proposed
Advisory Agreement and an Administration Agreement. Having a separate Advisory
Agreement would enable the Investment Company to present fee information in a
manner that conforms with the format used by most other mutual funds. This will
allow potential investors to more easily and conveniently compare the Bond
Fund's advisory fees with those of similar mutual funds. Having a separate
Administration Agreement will allow the Investment Company more flexibility in
adjusting the administrative services it receives from FRIMCo. The
Administration Agreement will not deal with the Investment Company's advisory
services and will not be subject to Section 15 of the 1940 Act. Thus, changes
can be made to the Administration Agreement upon Board approval without the need
to hold a shareholder meeting.
At its meeting on June 3, 1998, the Board reviewed the combination of investment
advisory and administrative services currently provided to the Investment
Company under the current Management Agreement. The Board then considered the
scope of the two sets of services which will be provided to the Investment
Company under the proposed Advisory Agreement and the Administration Agreement.
FRIMCo has advised the Board, and the Board has determined after further
analysis, that the services which will be provided under the two proposed
agreements are essentially identical in scope to those currently provided under
the present Management Agreement. The Board has also concluded that, while
changes in the scope of and cost to the sub-trusts of administrative services
could be authorized by the Board in the future, the scope and cost at this time
will not be changed by the adoption of the proposed agreements. FRIMCo has
advised the Board that there is no present expectation of any reduction in
services to, or any material increase in fees payable by, the Investment Company
under the proposed agreements as a result of this restructuring of the present
Management Agreement.
How will the Fund compensate FRIMCo for additional investment responsibilities?
The present Management Agreement provides that the Fund will pay to FRIMCo an
investment management fee which is based upon the net assets of the sub-trusts
under the supervision of FRIMCo. The assets upon which the fee is based include
only that portion of the Fund's assets which are included in the "net assets" of
the Fund.
The development of new investment practices available to investment companies,
or the use by investment companies of some investment techniques to a greater
extent than had been possible in the past, has offered the Investment Company
the opportunity to seek additional investment opportunities which can benefit
its shareholders. Certain of these techniques require that the Investment
Company assume responsibility for investment oversight of cash or other
collateral which the Investment Company receives from other parties to a
transaction. For example, if a sub-trust lends a portfolio security which it
owns to a third party (typically, a broker dealer), it will require that party
to deliver to the sub-trust as collateral for the return of the security an
amount of cash which is greater in amount than the value of the security loaned.
The sub-trust then benefits by a portion of the additional income which it can
obtain by the investment of that cash collateral in U.S. Government securities
or repurchase agreements secured by U.S. Government securities. Neither the
collateral, nor the instrument in which the collateral is invested, are deemed
to be a part of the net assets of the sub-trust upon which FRIMCo's fee is
computed.
For the Bond Fund and the other sub-trusts of the Investment Company to obtain
the benefit of these transactions, however, the investment of these assets is
required. The Board has requested that FRIMCo, as the Manager of the Investment
Company, supervise these additional assets, and has concluded that the careful
use of these techniques by the Investment Company, and the receipt of the
services of FRIMCo required to utilize these techniques, is in the interests of
the sub-trusts and the shareholders of the sub-trusts, including the Bond Fund.
FRIMCo has proposed, and the Trustees have agreed, that it is reasonable to
compensate FRIMCo for its supervision of these additional assets. The Board has
therefore concluded that it is reasonable that the proposed Advisory Agreement
should include a provision which will permit a sub-trust to compensate FRIMCo
for investment management of these assets which are not treated as net assets of
the Fund at a rate not to exceed 0.07 of 1% of such assets.
Considerations by the Board
In its deliberations at the June Board meeting, the Trustees requested and
evaluated information which the Trustees considered appropriate to evaluate the
new structure and compensation arrangements. The Board also considered
information relating to the previous performance of FRIMCo; extensive annual
financial, personnel, and expense information obtained by the Board in
connection with consideration of the extension of the present Management
Agreement; and the duty of the Board to carefully weigh such information in
order to determine whether to approve the Advisory Agreement. While the Board
recognizes that changes under the Administration Agreement could provide for
either increases or decreases in services or fees, any amendment to the
Administration Agreement would have to be approved not only by a majority of the
Board, but also by a majority of the Trustees who are not interested persons of
FRIMCo. The Trustees also noted that the independence of the Board is enhanced
because, as discussed above, the Investment Company has in effect Plans of
Distribution pursuant to which the selection of the Independent Trustees is
committed to the discretion of the Independent Trustees then in office. The
Board considered the fiduciary duty of the Board in connection with continuance
of or amendment to any advisory agreement.
Based upon the information obtained by the Board, the Trustees concluded that
the approval of the proposed Advisory Agreement, including the advisory fee for
management of assets which are not deemed to be part of the net assets of a
sub-trust, is in the interests of the Investment Company (including the Bond
Fund) and its shareholders. Although Proposal #1 above requests the approval of
Shareholders for a merger of the Bond Fund into the Fixed Income Fund,
Shareholders of the Bond Fund are being asked to approve the new form of the
Advisory Agreement so that the Bond Fund can operate in a manner consistent with
that of the other sub-trusts of the Investment Company if the Reorganization of
the Bond Fund, described in Proposal #1, is not completed prior to the
implementation of the new agreements by the other sub-trusts of the Investment
Company.
To be approved, the Advisory Agreement must receive the affirmative vote of a
"majority of the outstanding voting securities" of the Bond Fund, as defined in
the 1940 Act, and as described in more detail in the last paragraph under
Proposal #1.
THE BOARD OF TRUSTEES RECOMMENDS THAT
SHAREHOLDERS VOTE TO APPROVE THE PROPOSED
ADVISORY AGREEMENT WITH FRIMCO FOR THE BOND FUND,
REFLECTING THE RESTRUCTURING OF SERVICES AND
COMPENSATION FOR MANAGING ADDITIONAL ASSETS
<PAGE>
PROPOSAL #5: TO APPROVE A PROPOSED
AGREEMENT WITH FRIMCO ON BEHALF OF THE BOND FUND, TO
TAKE EFFECT UPON THE ACQUISITION OF FRANK RUSSELL COMPANY
BY THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
Introduction
FRIMCo currently serves as the investment manager to the Bond Fund pursuant to
the Management Agreement described above in Proposal #4. If Proposal #4 is
approved and implemented, FRIMCo will continue to serve as the investment
adviser to the Bond Fund pursuant to the new Advisory Agreement. FRIMCo is a
wholly-owned subsidiary of FRC. (The address of each is 909 A Street, Tacoma,
Washington.) On August 10, 1998, FRC entered into an Agreement and Plan of
Merger (the "Transaction Agreement") with The Northwestern Mutual Life Insurance
Company ("Northwestern Mutual") pursuant to which Northwestern Mutual will
acquire at the effective time all of the outstanding common stock of FRC through
the merger of Project Rainier Corp., a wholly-owned subsidiary of Northwestern
Mutual, with and into FRC (the "Transaction"). Northwestern Mutual is a
Milwaukee-based mutual insurance company with assets of more than $76 billion at
June 30, 1998, and annual revenues of more than $12.3 billion for the year ended
December 31, 1997. Northwestern Mutual Investment Services, LLC ("NMIS"), a
wholly-owned subsidiary of Northwestern Mutual, serves as investment adviser to
the Mason Street Funds, Inc. (a family of retail mutual funds sponsored by
Northwestern Mutual) and Northwestern Mutual Series Fund, Inc. (the investment
fund for Northwestern Mutual's variable annuity and life insurance contracts).
NMIS had approximately $9 billion under management at June 30, 1998. The mailing
address of Northwestern Mutual is 720 East Wisconsin Avenue, Milwaukee,
Wisconsin 53202-4797.
Pursuant to the Transaction Agreement, FRC will be the
surviving corporation in the merger, and will continue
to exist as a Washington corporation as a subsidiary of
Northwestern Mutual. The corporate headquarters of FRC
will remain in Tacoma, Washington. FRC will retain its
name and operating independence and will continue to
operate globally as a separate company. George F.
Russell, Jr. will continue as Chairman of the Board of
Directors of FRC. Michael J. A. Phillips will continue
as Chief Executive Officer of FRC and as a member of
FRC's Board of Directors.
Consummation of the Transaction will constitute an "assignment," as that term is
defined in the 1940 Act, of either the Management Agreement or the Advisory
Agreement, whichever agreement is then in effect. As required by the 1940 Act,
each of these Agreements provides for its automatic termination in the event of
its assignment. In anticipation of the Transaction2 and the resulting
termination, a new investment agreement (the "New Agreement") between the Bond
Fund and FRIMCo is being submitted for approval by shareholders of the Bond
Fund. A copy of the Management Agreement is attached hereto as Exhibit E. A copy
of the Advisory Agreement is attached hereto as Exhibit F. THE NEW AGREEMENT FOR
THE BOND FUND WILL CONTAIN IN ALL MATERIAL RESPECTS EITHER THE SAME TERMS AS THE
MANAGEMENT AGREEMENT, OR THE SAME TERMS AS THE ADVISORY AGREEMENT, THAT IS THEN
IN EFFECT AT THE TIME OF THE CONSUMMATION OF THE TRANSACTION, other than the
effective date of the respective agreement.
2 It is currently anticipated that the Reorganization described above in
Proposal #1, if approved, will be completed prior to the completion of the
Transaction. This Proposal #5 is being presented to the shareholders of the
Bond Fund to assure that FRIMCos services may continue to be provided to
the Bond Fund in the event that Proposal #1 is not approved or cannot be
implemented for any reason.
Board of Trustees Evaluation and Conclusions
At a Board of Trustees meeting on August 10, 1998, the Board was advised that
FRC and Northwestern Mutual had entered into the Transaction Agreement. The
Board directed the officers of the Investment Company to obtain additional
information concerning Northwestern Mutual, the terms of the Transaction, and
the impact of the Transaction on the Investment Company. Extensive information
was to the Board provided by FRC and Northwestern Mutual, and this information
was reviewed by the Board. In addition, the Independent Trustees also consulted
with the Investment Company's outside counsel concerning these matters. After a
careful review and evaluation of this information, a special meeting of the
Board was held on October 5, 1998 to consider the information provided by FRC
and Northwestern Mutual.
At its October meeting, the Board of the Investment Company focused upon the
effect of the proposed Transaction on the Investment Company. Representatives of
FRC and Northwestern Mutual attended the meeting and described the terms of the
proposed Transaction and the perceived benefits to the FRC organization, FRIMCo
and FRIMCo's investment advisory clients. In the course of these discussions,
FRIMCo and FRC advised the Independent Trustees that they did not expect that
the proposed Transaction would have a material effect on the operations of the
Investment Company or its shareholders. FRC has advised the Independent Trustees
that the Transaction Agreement, by its terms, does not contemplate any changes
in the structure or operations of FRIMCo, or in the way that FRIMCo provides
services to the Investment Company. Representatives of Northwestern Mutual have
informed the Trustees that Northwestern Mutual currently intends to maintain the
separate existence of the investment companies that FRIMCo advises, and the
funds that NMIS manages.
Though no specific plans have been developed at this time, the Trustees have
been advised by FRC that there may be some changes in personnel currently
involved in providing services to the Investment Company in order to combine the
strengths and efficiencies of FRC and Northwestern Mutual. With respect to
non-investment advisory services, Northwestern Mutual and FRC will seek to
identify ways in which FRIMCo and other subsidiaries of Northwestern Mutual
(including Robert W. Baird & Co., Incorporated) can more effectively meet the
administrative needs of the Investment Company and its affiliates. Any
restructuring of non-advisory services provided by FRIMCo will not be subject to
the review and approval of the Board of Trustees, including the Trustees who are
not "interested persons" of FRC or Northwestern. In their discussions with the
Trustees, Northwestern Mutual representatives also emphasized the strengths of
the Northwestern Mutual organization and its commitment to provide the FRC
organization, including FRIMCo, with the resources necessary to continue to
provide high quality services to the Investment Company and the other investment
advisory clients of the FRC organization.
The Board of the Investment Company was advised that the Transaction Agreement
provides for FRC to rely, and that FRC intends to rely, on Section 15(f) of the
1940 Act, which provides a safe harbor for an investment adviser to an
investment company (and the advisers affiliated persons) to retain any amount or
benefit received in connection with a change in control of the investment
adviser so long as the two conditions described below are met.
First, for a period of three years after the Transaction, at least 75% of the
members of the Board of Trustees of the Investment Company must not be
"interested persons" of the Investment Company's investment adviser or its
predecessor adviser. Assuming the election of the nominees listed in Proposal
#2, the Board of the Investment Company would be in compliance with this
provision of Section 15(f) at the time of, or prior to, the consummation of the
Transaction. (See Proposal #2 concerning the election of the Board of Trustees.)
Second, an "unfair burden" must not be imposed upon the Investment Company as a
result of such Transaction or any express or implied terms, conditions or
understandings applicable thereto. The term "unfair burden" is defined in
Section 15(f) to include any arrangement during the two-year period after the
Transaction whereby the investment adviser, or any interested person of any such
adviser, receives or is entitled to receive any compensation, directly or
indirectly, from the Investment Company or its shareholders (other than fees for
bona fide investment advisory or other services) or from any person in
connection with the purchase or sale of securities or other property to, from or
on behalf of the Investment Company (other than ordinary fees for bona fide
services as principal underwriter for the Investment Company). No compensation
agreements which would violate Section 15(f) are contemplated in connection with
the Transaction.
FRIMCo has undertaken to pay the incremental costs associated with the
preparation, filing, printing, and distribution of these proxy materials, and of
holding the special meeting in lieu of annual meeting, as well as any other fees
and expenses incurred by the Investment Company in connection with the
Transaction, including the fees and expenses of legal counsel to the Investment
Company, to the extent that such costs are more than those associated with the
annual meeting costs which the Investment Company would bear in the absence of
this proposal.
During the course of their deliberations, the Independent Trustees considered a
variety of factors. These included the nature, quality and extent of the
services furnished by FRIMCo to the Investment Company; the investment record of
FRIMCo in managing the Funds in the Investment Company, including the special
role of FRIMCo as a "manager of managers"; the increased complexity of the
domestic and international securities markets; and comparative data as to
investment performance, advisory fees and other fees, including administrative
fees, and expense ratios. The Board also considered the risks assumed by FRIMCo
by serving as Adviser to the Investment Company; the necessity for FRIMCo to
maintain and enhance its ability to retain and attract capable personnel to
serve the Investment Company; FRIMCo's profitability from advising the
Investment Company; and other benefits received by FRIMCo from serving the
Investment Company. In connection with the acquisition of FRC by Northwestern
Mutual, the Board noted that there could be possible economies of scale or other
advantages to the Investment Company of having an adviser with a parent which
also serves other investment companies. The Board also considered current and
developing conditions in the financial services industry, including the entry
into the industry of large and well capitalized companies which are spending and
appear to be prepared to continue to spend substantial sums to engage
experienced personnel and to provide services to competing investment companies;
and the financial resources of FRIMCo and the continuance of appropriate
incentive compensation arrangements to assure that FRIMCo will continue to
furnish high quality services to the Investment Company.
In addition to the foregoing factors, the Independent Trustees gave careful
consideration to the likely impact of the Transaction on the FRC organization.
In this regard, the Independent Trustees considered, among other things, the
following factors: the structure of the Transaction, which is expected to afford
FRIMCo executives significant autonomy over FRIMCo's operations and could
potentially provide meaningful FRC equity participation and incentives for
certain FRIMCo employees; FRIMCo's, FRC's and Northwestern Mutual's commitment
to enable FRIMCo to pay compensation adequate to attract and retain top quality
personnel; information regarding the financial resources and business reputation
of Northwestern Mutual; the complementary nature of various aspects of the
business of FRIMCo and the Northwestern Mutual organization; and the current
intention of Northwestern Mutual to maintain separate Frank Russell and
Northwestern Mutual brands in the mutual fund business. Based on the foregoing,
the Independent Trustees concluded that the Transaction should cause no
reduction in the quality of services provided to the Investment Company and
concluded that the Transaction should enhance FRIMCo's ability to provide such
services. The Independent Trustees considered the foregoing factors with respect
to each of the sub-trusts of the Investment Company, and the Investment Company
collectively. The Trustees, including the Independent Trustees, concluded that
the on-going reorganization of the organizational and operational structure of
the sub-trusts of the Investment Company permitted the Trustees to conclude that
no sub-trust would be affected differently from the Investment Company as a
whole in these respects, and therefore determined that the conclusions of the
Board with respect to these matters would have equal impact with respect to
every sub-trust in the Investment Company.
As a result of these deliberations, at the Board of Trustees meeting on October
5, 1998, the Trustees of the Investment Company, including the Independent
Trustees, approved the New Agreement for the Investment Company, and recommended
that shareholders of each of the sub-trusts in the Investment Company approve
the New Agreement, to become effective upon the completion of the change of
control of FRC and the termination of the agreement then in effect. (See
Proposal #4 concerning the current investment management agreement, and the
proposed advisory agreement.)
The Board has not determined what action would be taken in the event that any
sub-trust does not approve the New Agreement for that sub-trust, and the
Transaction closes. In such a circumstance, the Board would seek to obtain for
the sub-trust suitable advisory services from FRIMCo or another investment
advisor on both an interim and/or a continuing basis. The approval of continuing
arrangements would be subject to the approval of the shareholders of the
affected sub-trust. The Trustees have determined that, in the event the
Transaction is not completed, FRIMCo will continue to serve the Investment
Company under the terms of the agreement then in effect.
Information Concerning the Transaction and Northwestern
Mutual
Under the Transaction Agreement, at the effective time of the Transaction, each
share of FRC common stock then outstanding (other than shares for which
dissenters' rights have been exercised) will be converted into the right to
receive $905,000,000 divided by the number of fully diluted units of equity of
FRC (taking into account all outstanding shares of FRC capital stock, options to
acquire shares of FRC capital stock,, equity appreciation units and other equity
related rights), adjusted as described below. Such share price will be increased
or reduced based on the change (taking into account certain pro forma
adjustments) in FRC's net worth per share between March 31, 1998 and closing. In
addition, $90,000,000 of the $905,000,000 will be held back by Northwestern
Mutual at the closing to cover any loss incurred by Northwestern Mutual or FRC
as a result of any breach of certain representations by FRC in the Transaction
Agreement, and will be distributed to the former FRC shareholders and other
former holders of FRC equity related rights no earlier than October 1, 1999 if
no claim in respect of such loss or potential loss is made. FRC currently has
approximately 200 shareholders. Certain shareholders of FRC who have held their
shares of common stock for less than twelve months will have the option to
convert such shares of common stock into FRC preferred stock prior to the
closing. Such preferred stock will be subject to certain put and call rights
during certain periods (at a price per share equal to the amount that would have
been paid if the preferred stock had been common stock at the effective time of
the Transaction, plus a percentage of cumulative earnings per share of FRC on a
fully diluted basis from such effective time to the quarter preceding the put or
call) but will convert to FRC common stock if not redeemed or repurchased after
four years. George Russell, his family members and their related trusts are
expected to own approximately 59% in the aggregate of the fully diluted equit
units of FRC at the effective time of the Transaction. Lynn Anderson is also a
shareholder of FRC and is expected to own approximately 3% of the fully diluted
equity units of FRC at the effective time of the Transaction.
At and after the effective time of the Transaction, FRC will be a subsidiary of
Northwestern Mutual. FRIMCo will remain a wholly-owned subsidiary of FRC. In
connection with the Transaction, 50,000,000 shares of new FRC common stock will
be reserved for future issuance under an FRC Incentive Payments Plan. The
Incentive Payments Plan will be established to enhance the value of FRC and its
subsidiaries, including FRIMCo, by motivating superior performance of management
and key employees of the FRC organization after the closing of the Transaction
through the award of shares of FRC common stock and cash (to cover certain
income tax consequences of a stock award) to certain employees of FRC and its
subsidiaries. Over the course of a five-year period from the effective time of
the Transaction, participants in the Incentive Payments Plan collectively could
have vested awards constituting up to 20% of the outstanding common stock of
FRC, depending upon FRCs growth in earnings. George Russell and his wife, Jane
Russell, will be awarded 20% in the aggregate of the total number of incentive
shares that may be issued under the Incentive Payments Plan. Lynn Anderson is
expected to participate in the Incentive Payments Plan. Lynn Anderson is
expected to participate in the Incentive Payments Plan. The number of incentive
shares to be granted to Mr. Anderson will be determined after the closing of the
Transaction.
At the closing, FRC and Northwestern Mutual will enter into a Governance
Agreement (the "Governance Agreement"). Under the Governance Agreement, the
Board of Directors of FRC will be comprised of five persons. Initially,
Northwestern Mutual will elect to the FRC Board George F. Russell, Jr., Michael
J.A. Phillips (both of whom are currently members of FRCs Board) and three other
Northwestern Mutual-designated persons. Thereafter, Northwestern Mutual has
agreed to take all actions within its power to cause the FRC Board at all times
to be comprised of (i) FRCs Chief Executive Officer and one other senior officer
or employee of FRC designated by the Chief Executive Officer and approved by a
majority of the FRC directors then in office (with Messrs. Russell and Phillips,
each a "Russell-designated director"); and (ii) three other persons designated
by Northwestern Mutual.
The names, addresses and principal occupations of the initial Russell-designated
directors are as follows:
George F. Russell, Jr., 909 A Street, Tacoma, Washington, 98402; Trustee
(and later Trustee Emeritus) and Chairman of the Board, Frank Russell
Investment Company; Trustee (and later Trustee Emeritus) and Chairman of
the Board, Russell Insurance Funds; Director, Chairman of the Board, and
Chief Executive Officer, Russell Building Management Company, Inc.; Trustee
and Chairman of the Board, Frank Russell Company, Frank Russell Securities,
Inc., Frank Russell Trust Company, Frank Russell Investments (Delaware),
Inc.; Director, Frank Russell Investment Management Company; Director,
Chairman of the Board and President, Russell 20/20 Association.
Michael J.A. Phillips, 909 A Street, Tacoma, Washington, 98402; Director,
President and Chief Executive Officer, Frank Russell Company; Director and
President, Frank Russell Investments (Delaware), Inc.; Director, Frank
Russell Capital Inc., Frank Russell Japan Co., Ltd., Frank Russell Trust
Company, Russell Systems Limited, Frank Russell Company Limited and Frank
Russell Company Pty Limited.
The three initial directors to be designated by Northwestern Mutual have not yet
been determined, but will be selected prior to the closing of the Transaction.
It is currently anticipated that such directors will be selected from among the
executive officers of Northwestern Mutual.
The Governance Agreement, which will terminate no later than December 31, 2008,
vests the officers of FRC with the responsibility for day-to-day management and
implementation of FRCs annual operating budget and strategic plan. However, FRC
Board approval is required before certain specified actions may be taken by FRC
or its subsidiaries including, (i) the registration, issuance and/or sales of
securities of FRC and its subsidiaries; (ii) the merger, consolidation or sale
of a substantial portion of assets with or to another entity (other than another
FRC company); (iii) entering into certain joint ventures, partnerships or other
business combinations or acquisitions; (iv) entering into any material business
or line of business other than investment management, investment consulting,
securities trading, analytical services, and other similar financial services;
or discontinuing any material line of business; (v) entering into material
exclusivity contracts, or other agreements, which materially restrict the manner
in which FRC or its subsidiaries conduct their investment management business in
any jurisdiction, or any U.S. distribution agreements with any life insurance
company or life insurance marketing company other than Northwestern Mutual and
its affiliates; (vi) selling, leasing or otherwise disposing of certain assets
or property; (vii) assuming, incurring, or becoming liable for certain material
indebtedness for borrowed money; (viii) pledging, mortgaging or encumbering
certain assets; (ix) amending its articles of incorporation or bylaws or
undertaking any recapitalization or similar plan; (x) changing FRCs heads of
internal audit or compliance; (xi) approving any transaction with key employees
or certain related parties; (xii) taking any action with respect to an FRC
stockholder meeting; (xiii) declaring dividends or distributions on FRCs shares;
or (xiv) taking any action required to be taken or approved by the FRC Board
under Washington State corporate law. With respect to (iv) and (v) above, FRC
Board approval must include the approval of the Chief Executive Officer of FRC.
In addition, for a period of ten years from the date of the Governance
Agreement, FRC may not change its name or move its principal place of business
to a location other than Tacoma, Washington, without the unanimous vote or
consent of the Board.
The closing of the Transaction is subject to a number of conditions, including,
among others, approval by FRC shareholders; a determination that at the closing
date FRC's annualized revenues from investment advisory, retainer consulting and
analytical services (neutralized for market effect and currency fluctuations)
have not fallen below 90% of the level of such revenues as of July 31, 1998; the
absence of any restraining order or injunction preventing the Transaction, or
any litigation seeking such an injunction; the continued accuracy of the
representations and warranties contained in the Transaction Agreement; delivery
and/or filing of certain documents contemplated by the Transaction Agreement;
all material governmental approvals having been obtained; holders of not more
than 2% of the outstanding FRC common stock having exercised their statutory
appraisal rights; and compliance in all material respects with all agreements
and obligations contained in the Transaction Agreement. Holders entitled to vote
a percentage of shares of FRC sufficient to approve the Transaction have entered
into an agreement with Northwestern Mutual in which they have agreed to vote
such shares in favor of the approval of the Transaction. The Transaction is
expected to close on or about December 30, 1998, with the merger becoming
effective on January 1, 1999.
The information set forth under this Proposal #5 concerning FRC and the
Transaction has been provided to the Bond Fund by FRC, and the information set
forth under this Proposal #5 concerning Northwestern Mutual has been provided to
the Bond Fund by Northwestern Mutual.
Founded in 1857, Northwestern Mutual is a mutual insurance corporation organized
under the laws of Wisconsin. Its home office is located at 720 East Wisconsin
Avenue, Milwaukee, Wisconsin 53202-4797. Northwestern Mutual's products consist
of a full range of permanent and term life insurance, disability income
insurance, long term care insurance, mutual funds and annuities for personal,
estate, retirement, business and benefits planning. Northwestern Mutual provides
its insurance products and services through an exclusive network of
approximately 7,200 agents associated with over 100 general agencies nationwide.
Northwestern Mutual leads the U.S. in both individual life insurance sold
annually (approximately $78 billion in 1997) and total individual life insurance
in force (more than $500 billion at June 30, 1998). Northwestern Mutual employs
over 3,600 people, mostly in Milwaukee, Wisconsin.
FRC, one of the worlds leading investment management and consulting firms,
provides investment advice, analytical tools and funds to institutional and
individual investors in more than 30 countries. FRC, through its subsidiaries,
currently manages approximately $42 billion in assets and provides investment
strategy consulting, including manager selection, for more than $1 trillion in
retainer client assets. It is also well known for its family of market indexes,
including the Russell 2000@. Russell indexes provide complete sets of
performance benchmarks for investors in Australia, Canada, Japan and the United
States. FRC is a three-time winner of Washington CEO magazines "Best Large
Company to Work For" award in Washington state, and in 1997 was chosen from
among some 12 million family companies to receive the "National Family Business
of the Year" Award. Founded in 1936, the FRC organization is an established
presence in the asset management and mutual fund industry.
Required Vote
Approval of this Proposal requires the affirmative vote of a "majority of the
outstanding voting securities" of the Bond Fund, as defined in the 1940 Act, and
as described in more detail in the last paragraph under Proposal #1.
THE BOARD OF TRUSTEES RECOMMENDS THAT SHAREHOLDERS
VOTE TO APPROVE THE PROPOSED ADVISORY AGREEMENT WITH
FRIMCo ON BEHALF OF THE BOND FUND, TO TAKE EFFECT
UPON THE ACQUISITION OF FRC BY NORTHWESTERN MUTUAL
PROPOSAL #6: TO APPROVE AN AMENDMENT TO
THE BOND FUNDS FUNDAMENTAL INVESTMENT
RESTRICTIONS TO INCREASE THE AMOUNT WHICH THE
FUND MAY BORROW TO MEET REDEMPTIONS
What is the present limitation on borrowing by the Funds?
Section 18(f)(1) of the 1940 Act provides that it shall be unlawful for any
registered open-end investment company to issue any class of senior security or
to sell any senior security of which it is the issuer, except that any such
registered company shall be permitted to borrow from any bank; provided, that
immediately after any such borrowing, there is an asset coverage of at least 300
per cent for all borrowings of the investment company: and provided further,
that in the event that such asset coverage shall at any time fall below 300 per
cent the registered company shall, within three days thereafter (not including
Sundays and holidays) or such longer period as the SEC may allow, reduce the
amount of its borrowings to an extent that the asset coverage of such borrowings
shall be at least 300 per cent.
The Investment Company, including the Bond Fund, has previously adopted a
fundamental investment restriction that limits the borrowing authority of each
sub-trust to less than the amount that is permitted by the 1940 Act as described
in the prior paragraph. Specifically, the Bond Fund's investment restriction on
borrowing currently provides:
"[The Bond Fund will not:] Borrow amounts more than 5% of the Funds total
assets taken at cost or at market value, whichever is lower, and only from
banks as a temporary measure for extraordinary or emergency purposes,
except that [the] Fund may engage in reverse repurchase agreements to meet
redemption requests without immediately selling any portfolio instruments.
The Fund will not mortgage, pledge or in any other manner transfer as
security for any indebtedness, any of its assets. Collateral arrangements
with respect to margin for futures contracts are not deemed a pledge of
assets."
Why is an increase in the borrowing limitation proposed?
At a Board meeting held on April 27, 1998, management reported to the Board on
the prospects for entering into a line of credit for the Investment Company with
a commercial bank, whereby the Investment Company's sub-trusts would be
permitted to borrow money under the line of credit in order to meet redemption
requests. This practice would permit the Fund to pay redemption proceeds to
shareholders without the need to make untimely and disadvantageous dispositions
of securities. Given the present investment restriction of the Investment
Company, borrowings by the Bond Fund for this purpose would be limited to five
percent of the Bond Fund's assets.
At the Board meeting, management recommended that the Trustees consider
approving a revision to the fundamental restriction that would authorize a
higher borrowing level for the purpose of efficiently meeting shareholder
redemption requests. FRIMCo, in advocating an increase in the borrowing limits
for the Investment Company's sub-trusts, noted that raising the maximum level of
borrowing to conform to the 1940 Act's limitation would give the Investment
Company's money managers greater flexibility in meeting shareholder redemption
requests.
The officers of the Investment Company noted that an increase in the maximum
level of borrowing permitted to the Investment Company's sub-trusts, including
the Bond Fund, would permit the Investment Company to negotiate a larger line of
credit with a bank, although the officers advised the Board that there is no
present intention to do so at this time.
At a meeting on June 3, 1998, the Board approved a proposal to increase the
borrowing limit under the Bond Fund's fundamental investment restriction, and
directed that the officers of the Investment Company submit to Shareholders a
proposal to approve such amendment to permit borrowing at a higher level by the
Bond Fund. If approved, the Bond Fund's investment restriction would be revised
to state:
"[The Bond Fund will not:] Borrow money, except that the Fund may borrow as
a temporary measure for extraordinary or emergency purposes, and not in
excess of five percent of its net assets; provided, that the Fund may
borrow to facilitate redemptions (not for leveraging or investment),
provided that borrowings do not exceed an amount equal to 33-1/3% of the
current value of the Funds assets taken at market value, less liabilities
other than borrowings. If at any time the Funds borrowings exceed this
limitation due to a decline in net assets, such borrowings will be reduced
to the extent necessary to comply with this limitation within three days.
Reverse repurchase agreements will not be considered borrowings for
purposes of the foregoing restriction, provided that the Fund will not
purchase investments when borrowed funds (including reverse repurchase
agreements) exceed 5% of its total assets."
The revised fundamental investment restriction will take effect after receipt of
approval by Shareholders.
To be approved, the proposal must receive the affirmative vote of "a majority of
the outstanding voting securities" of the Bond Fund, as defined in the 1940 Act
and as described in more detail in the last paragraph under Proposal #1.
THE BOARD OF TRUSTEES RECOMMENDS THAT
SHAREHOLDERS VOTE TO APPROVE A CHANGE IN
THE BOND FUND'S FUNDAMENTAL RESTRICTIONS TO INCREASE THE
LIMITS ON BORROWING MONEY FOR THE PURPOSE
OF MEETING REDEMPTIONS
PROPOSAL #7: TO APPROVE THE ELIMINATION OF
CERTAIN FUNDAMENTAL INVESTMENT RESTRICTIONS
APPLICABLE TO THE BOND FUND
In October 1996, Congress enacted the National Securities Markets Improvement
Act of 1996 ("NSMIA") to promote efficiency and capital formation in the
financial markets. Among its provisions, NSMIA preempted states from regulating
the offering of securities of registered investment companies, such as the
Investment Company. In practical effect, NSMIA nullified a body of differing
state securities laws applicable to operational and investment requirements that
had historically been imposed on investment companies by some states.
As a result of the enactment of NSMIA, certain of the fundamental and
non-fundamental investment policies and restrictions adopted in the past by the
Bond Fund to comply with state qualification requirements were rendered no
longer necessary. At the Board meeting held on November 4, 1996, management
recommended that the Trustees approve, subject to Shareholder approval, the
elimination of certain fundamental and non-fundamental investment policies and
restrictions, which appear in the Investment Company's Statement of Additional
Information. The fundamental restrictions of the Bond Fund which are proposed to
be eliminated are substantially as follows:
1) The Bond Fund will not invest in interests in oil,
gas or other mineral exploration or development
programs;
2) The Bond Fund will not invest in securities of an issuer which, together
with any predecessor, has been in operation for less than three years
if, as a result, more than 5% of the Fund's total assets would then be
invested in such securities; and
3) The Bond Fund will not purchase or retain the securities of an issuer
if, to the Fund's knowledge, one or more of the Trustees or officers of
the Investment Company, or one or more of the officers or directors of
the money manager responsible for the investment or its directors or
officers, individually own beneficially more than 1/2 of 1% of the
securities of such issuer and together own beneficially more than 5% of
such securities.
Management believes that the fundamental restrictions identified above limit the
Bond Funds money managers without a commensurate reduction in risk for the Bond
Fund, and hence, benefit neither the Bond Fund nor its Shareholders. Since NSMIA
has preempted the states' ability to compel the Bond Funds compliance with these
investment restrictions, the Board approved the elimination, subject to
Shareholder approval, of each of the restrictions set forth above.
Shareholders must vote to eliminate each investment restriction identified above
individually. While the Shareholders of the Bond Fund are being asked to approve
the elimination of these fundamental investment restrictions, the collective
elimination will ONLY take effect if the Reorganization of the Bond Fund,
described in Proposal #1 above, is not approved.
To be approved, the elimination of each fundamental investment restriction must
receive the affirmative vote of "a majority of the outstanding voting
securities" of the Bond Fund, as defined in the 1940 Act, and as described in
more detail in the last paragraph under Proposal #1.
THE BOARD OF TRUSTEES RECOMMENDS THAT
SHAREHOLDERS VOTE TO APPROVE THE ELIMINATION OF
CERTAIN FUNDAMENTAL INVESTMENT RESTRICTIONS
APPLICABLE TO THE BOND FUND
INFORMATION REGARDING THE PRESENT
MANAGEMENT AGREEMENT
The table below sets forth (i) the net assets of the Bond Fund as of the
Investment Companys year ended December 31, 1997; and (ii) the rate of
management fee, computed daily and payable monthly, to which FRIMCo is entitled
for the services provided and expenses assumed pursuant to the Management
Agreement. The table also reflects the actual management fee (net of waivers)
paid by the Bond Fund for the year ended December 31, 1997.
Annual Management Management Fees (net
Net Assets as Fee of
of 12/31/97 (Based On Average waivers) for Year
Net Assets) Ended 12/31/97
$172,976,445 .50% $812,308
Included in the total management fee is the amount that FRIMCo, as agent for the
Investment Company, pays as fees to the Bond Fund's money managers for their
investment selection services. For the year ended December 31, 1997, FRIMCo paid
fees to the money managers of the Bond Fund of $282,055.
For the year ended December 31, 1997, the Bond Fund did not pay any brokerage
commissions and did not enter into any brokerage transactions. The Bond Fund,
however, engages in transactions with dealers acting as principal and the costs
of such transactions involve dealer spreads rather than brokerage commissions.
FRIMCo serves as the manager for the following Investment Company sub-trusts
that have investment objectives similar to those of the Bond Fund:
Net Assets Maximum Annual
Investment (As of Aug. Management Fee
Company Sub-Trust 21, 1998) (Based on Average
Net Assets)
Diversified Bond $802,185,368 0.45%
Fund*
Multistrategy $541,119,512 0.65%
Bond Fund*
Limited $109,243,701 0.50%
Volatility
Tax-Free Fund*
Fixed Income I $962,223,108 0.30%
Fund *
Fixed Income II $249,824,282 0.50%
Fund*
Fixed Income III $476,609,388 0.55%
Fund*
* FRIMCo may from time to time waive its management fees and change any
waivers at any time.
Directors and Officers of FRIMCo
Set forth below are the names and current positions of the officers and
directors of FRIMCo, along with their positions with FRC and/or the Investment
Company, as applicable:
Name Investment FRIMCo FRC
Company
George F. Trustee, Director Director,
Russell, Jr. Chairman of Chairman
the Board of the
Board
Lynn L. Trustee, Director, Director
Anderson President, Chairman of
and Chief the Board and
Executive Chief
Officer Executive
Officer
Randall P. Director of Director -------
Lert Investments
Eric A. ------- Director, Director
Russell President
Karl J. Ege Secretary and Secretary and Secretary
General General and
Counsel Counsel General
Counsel
Peter F. Manager of Manager of -------
Apanovitch Short Term Short Term
Investment Investment
Funds Funds
Mark E. Treasurer and Interim Direc- -------
Swanson Chief tor of Fund
Accounting Administration
Officer and Accounting
INFORMATION REGARDING THE SOLICITATION AND REVOCATION
OF PROXIES AND VOTING INFORMATION
This Proxy Statement is provided on behalf of the Board of Trustees of the
Investment Company in connection with a Special Meeting in lieu of Annual
Meeting of Shareholders of the Bond Fund to be held at the offices of the
Investment Company at 909 A Street, Tacoma, Washington 98402, on Thursday,
November 19, 1998 at 10:00 a.m., local time, and at any or all adjournments
thereof. You may revoke your proxy at any time before it is exercised by
delivering a written notice to the Investment Company expressly revoking your
proxy, by signing and forwarding to the Investment Company a later-dated proxy,
or by attending the Special Meeting and casting your votes in person.
The Investment Company requests that broker-dealer firms, custodians, nominees
and fiduciaries forward proxy material to the beneficial owners of the shares
held of record by such persons. The Investment Company may reimburse such
broker-dealer firms, custodians, nominees and fiduciaries for their reasonable
expenses incurred in connection with such proxy solicitation. The cost of
soliciting these proxies will be borne by each Fund, to the extent of its direct
operational expenses, and by FRIMCo. In addition to solicitations by mail, some
of the officers and employees of the Investment Company and FRIMCo, without
extra remuneration, may conduct additional solicitations by telephone, telegraph
and personal interviews. The Investment Company has engaged Management
Information Systems to solicit proxies from brokers, banks, other institutional
holders and individual shareholders for an approximate fee, including
out-of-pocket expenses, ranging between $_______ and
$--------.
Who may vote at the Special Meeting?
The Board of the Investment Company has fixed the close of business on September
21, 1998, as the record date (the "Record Date") for the determination of
Shareholders entitled to notice of and to vote at the Special Meeting and any
adjournments thereof. Only holders of record of shares at the close of business
on the Record Date are entitled to notice of, and to vote at, the Special
Meeting and any adjournments thereof. The holders of 5% or more of the Bond
Fund's shares are listed in the section "Principal Shareholders" below. At the
close of business on the Record Date, the total number of voting shares of the
Bond Fund issued and outstanding was ______________, and the total number of
voting shares of the Investment Company issued and outstanding was
- --------------.
The holder of record of each full share of beneficial interest of the Bond Fund
outstanding as of the close of business on the Record Date is entitled to one
vote for each share held of record upon each matter properly submitted to the
meeting or any adjournments thereof, with a proportionate vote for each
fractional share.
What other business will be discussed at the Special Meeting in Lieu of Annual
Meeting?
The Board of Trustees does not intend to present any matters before the Special
Meeting in Lieu of Annual Meeting other than as described in this Proxy
Statement, and is not aware of any other matters to be brought before the
Meeting or any adjournments thereof by others. If any other matter legally comes
before the meeting, your shares will be voted in accordance with the
instructions of the Board of Trustees of the Investment Company, and in the
judgment of the named proxies.
What if a quorum is not present at the Special Meeting?
In the event a quorum is not present at the Special Meeting or sufficient votes
to approve a proposal are not received, the persons named as proxies may propose
one or more adjournments of the Special Meeting to permit further solicitation
of proxies. A shareholder vote may be taken on any other matter to properly come
before the Special Meeting prior to such adjournment if sufficient votes to
approve such matters have been received and such vote is otherwise appropriate.
An adjournment of the Special Meeting will require the affirmative vote of a
majority of those shares present at the Special Meeting or represented by proxy
and voting. The persons named as proxies on the proxy card will vote against any
such adjournment those proxies required to be voted against such proposal. They
will vote in favor of an adjournment all other proxies which they are entitled
to vote. The costs of any such additional solicitation and of any adjourned
session will be borne by the Investment Company. Abstentions and broker
"non-votes" (i.e., proxies from brokers or nominees indicating that such persons
have not received instructions from the beneficial owner or other person
entitled to vote shares on a particular matter with respect to which the brokers
or nominees do not have discretionary power) will be counted as shares that are
present for purposes of determining the presence of a quorum.
PRINCIPAL SHAREHOLDERS
As of August 21, 1998, all of the respective officers and Trustees of the
Investment Company, as a group, owned less than 1% of the outstanding voting
securities of the Class S Shares of the Bond Fund and of the Fixed Income Fund,
as relevant. As of August 21, 1998, no Class E Shares of either Fund were issued
or outstanding, and the following persons were known by the Investment Company
to be beneficial owners of more than 5% of the voting securities of the Class S
Shares of the Bond Fund and the Fixed Income Fund:
(1) Title of Class: Fixed Income Fund
- -----------------------------------------------------
(3)
(2) Amount and
Name and Address Nature of (4)
of Beneficial Beneficial Percent of
Owner Ownership Class
- -----------------------------------------------------
Anchor/Russell Capital
Advisors, Inc. 841,728 6.24
One Post Office Square, shares
38th Floor
Boston, MA 02109
- -----------------------------------------------------
Boys Republic
3493 Grand Avenue 972,794 7.22
Chino Hills, CA 91709 shares
- -----------------------------------------------------
Corus Asset Management
2401 N. Halsted 868,136 6.44
Chicago, IL 60614 shares
- -----------------------------------------------------
First Tennessee Bank,
N.A. 1,322,220 9.81
Plaza Tower, 5th Floor shares
800 South Gay Street
Knoxville, TN
37995-1230
- -----------------------------------------------------
Reber & Associates
1225 Seventeenth 1,145,304 8.50
Street, Suite 1400 shares
Denver, CO 80202-5820
- -----------------------------------------------------
Ronald Blue & Co.
1100 Johnson Ferry 4,002,139 29.68
Road, N.E., shares
Suite 600
Atlanta, GA 30342
- -----------------------------------------------------
U.S. Bank National
Association 680,130 5.04
601 Second Ave. South, shares
Box A55
Minneapolis, MN
55402-4302
- -----------------------------------------------------
(1) Title of Class: Class S Shares of Bond Fund
- -----------------------------------------------------
(3)
(2) Amount and
Name and Address Nature of (4)
of Beneficial Beneficial Percent of
Owner Ownership Class
- -----------------------------------------------------
A.G. Edwards & Sons,
Inc. 1,078,069 10.33%
One North Jefferson shares
St. Louis, MO 63103
- -----------------------------------------------------
Ballew/Russell, Inc.
4800 I-55 North, 649,998 6.23
Suite 21 shares
Jackson, MS 39211
- -----------------------------------------------------
Harbor Capital
Management, Inc. 858,214 8.23
831 E. Morehead St., shares
Suite 350
Charlotte, NC 28202
- -----------------------------------------------------
INFORMATION ABOUT THE BOND FUND
Information about the Bond Fund and the Investment Company is incorporated
herein by reference from the current Prospectus and Annual Report of the
Investment Company's Russell Funds, dated May 1, 1998, as supplemented through
August 20, 1998, and December 31, 1997, respectively, and the Investment
Company's Statement of Additional Information, dated May 1, 1998, as
supplemented through August 20, 1998, copies of which may be obtained without
charge by writing or calling the Investment Company at the address and telephone
number shown on the cover page of this Proxy Statement. Reports and other
information filed by the Bond Fund may be inspected and copied at prescribed
rates, at the Public Reference Facilities maintained by the SEC at 450 Fifth
Street NW, Washington, DC 20549, at the Los Angeles Regional Office of the SEC
at 5757 Wilshire Boulevard, Suite 500 East, Los Angeles, California 90036-3648,
and at the Midwest Regional Office of the Securities and Exchange commission at
500 West Madison Street, Chicago, Illinois 60661-2511. Information may also be
obtained from the Internet Web site maintained by the Securities and Exchange
Commission at http://www.sec.gov.
INFORMATION ABOUT THE FIXED INCOME FUND
Information about the Fixed Income Fund is included in the current Prospectus
and Annual Report of the Investment Company's Institutional Funds, each of which
is attached to this Proxy Statement (as Exhibits B and C, respectively) and
incorporated by reference herein. Additional information about the Fixed Income
Fund is included in the Investment Company's Statement of Additional
Information, dated May 1, 1998, as supplemented through August 20, 1998. Both
the Investment Companys Statement of Additional Information and the
Institutional Funds Prospectus have been filed with the SEC and are incorporated
by reference herein. A copy of the Investment Companys Statement of Additional
Information may be obtained without charge by writing to the Investment Company
at the address on the cover page of this Proxy Statement or calling
1-800-972-0700.
INFORMATION ABOUT THE INVESTMENT COMPANY
The Investment Company is subject to the informational requirements of the
Securities Exchange Act of 1934 and the 1940 Act, as applicable, and, in
accordance with such requirements, files proxy materials, reports and other
information with the Securities and Exchange Commission. These materials may be
inspected and copied, at prescribed rates, at the Public Reference Facilities
maintained by the Securities and Exchange Commission at 450 Fifth Street NW,
Washington, DC 20549, at the Los Angeles Regional Office of the Securities and
Exchange Commission at 5757 Wilshire Boulevard, Suite 500 East, Los Angeles,
California 90036-3648, and at the Midwest Regional Office of the Securities and
Exchange Commission at 500 West Madison Street, Chicago, Illinois 60661-2511.
Information may also be obtained from the Internet Web site maintained by the
Securities and Exchange Commission at http://www.sec.gov.
<PAGE>
EXHIBITS TO COMBINED
PROSPECTUS/PROXY STATEMENT
Exhibit
A. Agreement and Plan of Reorganization by Frank Russell
Investment Company (the "Investment Company"), for the
Volatility Constrained Bond Fund and the Fixed Income
II Fund (the "Fixed Income Fund").
B. Prospectus dated May 1, 1998, as supplemented through August 20, 1998, of the
Investment Companys Institutional Funds, relating to the Fixed Income Fund.
C. Annual Report dated December 31, 1997 for the
Investment Companys Institutional Funds, relating to
the Fixed Income Fund.
D. Semi-Annual Report of the Investment Companys
Institutional Funds, including the Fixed Income Fund,
dated June 30, 1998.
E. Present Management Agreement (the "Management Agreement") between the
Investment Company and FRIMCo.
F. Proposed Advisory Agreement ("Proposed Advisory Agreement") between the
Investment Company and FRIMCo.
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY PROXY
SPECIAL MEETING IN LIEU OF ANNUAL MEETING OF SHAREHOLDERS
NOVEMBER 19, 1998
The undersigned hereby revokes all previous proxies for the undersigned's shares
and appoints Gregory J. Lyons and Rick Chase, and each of them, proxies of the
undersigned with full power of substitution to vote all shares of the Volatility
Constrained Bond Fund (the "Bond Fund") which the undersigned is entitled to
vote at the Bond Fund's Special Meeting in Lieu of Annual Meeting of
Shareholders ("Special Meeting") to be held at the offices of Frank Russell
Investment Company (the "Investment Company"), at 909 A Street, Tacoma, WA 98402
at 10:00 a.m., local time, on Thursday, the 19th day of November 1998, including
any adjournment thereof, upon such business as may properly be brought before
the Special Meeting.
FOR AGAINST ABSTAIN
No. 1 To approve an Agreement and
Plan of Reorganization
between the Investment
Company, on behalf of the
Bond Fund and on behalf of
the Fixed Income II Fund
(the "Fixed Income Fund"),
that provides for the merger
of the Bond Fund into the
Fixed Income Fund, the
distribution of Class S
Shares of the Fixed Income
Fund to the shareholders of
the Bond Fund, and the
dissolution of the Bond Fund.
No. 2 To elect the Board of
Trustees of the Investment
Company:
a. Lynn L. Anderson
b. Paul E. Anderson
c. Paul Anton, Ph.D.
d. William E. Baxter
e. Lee C. Gingrich
f. Eleanor W. Palmer
No. 3 To ratify the selection of
PricewaterhouseCoopers LLP
as the independent
accountants for the
Investment Company.
No. 4 To approve a new advisory
agreement with Frank Russell
Investment Management
Company ("FRIMCo"), the
present investment manager
to the Bond Fund, reflecting
the restructuring of
services and the
compensation of FRIMCo for
managing certain additional
assets of the Bond Fund, as
set forth in the Proxy
Statement.
No. 5 To approve a new advisory
agreement with FRIMCo, to
take effect upon the
acquisition of Frank Russell
Company by The Northwestern
Mutual Life Insurance
Company.
No. 6 To approve a change to the
Bond Fund's fundamental
investment restrictions,
authorizing a higher
borrowing level for the
purpose of the meeting
redemptions.
No. 7 To approve the amendment of
certain fundamental
investment restrictions
applicable to the Bond Fund
to revise the Bond Fund's
fundamental investment
restrictions to:
No. Eliminate the restriction on
7.a. investing in interests in
oil, gas or other mineral
exploration or developmental
programs;
No. Eliminate the restriction on
7.b. investing in securities of
an issuer which, together with any predecessor, has been in operation for
less than three years if, as a result, more than 5% of the Bond Fund's
total assets would then be invested in such securities; and
No. Eliminate the restriction on
7.c. purchasing or retaining the
securities of an issuer if, to the Bond Fund's knowledge, one or more of
the trustees or officers of the Investment Company, or one or more of the
directors of the money manager responsible for the investment or its
directors or officers, individually own beneficially more than 1/2 of 1%
of the securities of such issuer and together own more than 5% of such
securities.
GRANT WITHHOLD
To consider and act upon any
other business which may
legally come before the
meeting
PLEASE SIGN AND PROMPTLY RETURN IN THE ACCOMPANYING ENVELOPE. NO POSTAGE
REQUIRED IF MAILED IN THE U.S. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF
TRUSTEES. IT WILL BE VOTED AS SPECIFIED. IF NO SPECIFICATION IS MADE, THIS PROXY
SHALL BE VOTED IN FAVOR OF THE PROPOSAL TO MERGE THE BOND FUND INTO THE FIXED
INCOME II FUND, IN FAVOR OF THE ELECTION OF THE NOMINEES TO THE BOARD, AND IN
FAVOR OF THE PROPOSALS TO APPROVE AN ADVISORY AGREEMENT AND TO AMEND CERTAIN
FUNDAMENTAL RESTRICTIONS. IF ANY OTHER MATTERS PROPERLY COME BEFORE THE MEETING
ABOUT WHICH THE PROXY HOLDERS ARE NOT AWARE AT THIS TIME, THE PROXY HOLDERS MAY
VOTE IN ACCORDANCE WITH THE VIEWS OF THE TRUSTEES THEREON. MANAGEMENT IS NOT
AWARE OF ANY SUCH MATTERS.
Dated:
Signature
Note: Please sign exactly as your
name appears on the proxy. If
signing for estates, trusts or
corporations, title or capacity
should be stated. If shares are
held jointly, each holder must
sign.
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
for the
FRANK RUSSELL INVESTMENT COMPANY,
a Massachusetts business trust
on behalf of its
Fixed Income II Fund
and
on behalf of its
Volatility Constrained Bond Fund
November 19, 1998
<PAGE>
CONTENTS
Page
I. Transfer of Assets of the Acquired Portfolio...... A-3
II. Liquidating Distributions and Termination of the
Acquired Portfolio............................ A-4
III. Effective Time of the Reorganization.............. A-5
IV. Certain Representations, Warranties and Agreements
of the Acquired Portfolio..................... A-5
V. Certain Representations, Warranties and Agreements
of the Acquiring Portfolio.................... A-7
VI. Shareholder Action on Behalf of the Acquired
Portfolio..................................... A-9
VII. N-14 Registration Statement and Proxy Solicitation
Materials..................................... A-10
VIII. Delivery of Assets and Shares..................... A-10
IX. Conditions of the Acquiring Portfolio............. A-10
X. Conditions of the Acquired Portfolio.............. A-13
XI. Tax Documents..................................... A-15
XII. Finder's Fees..................................... A-15
XIII. Announcements..................................... A-15
XIV. Further Assurances................................ A-15
XV. Termination of Representations and Warranties..... A-15
XVI. Termination of Agreement.......................... A-16
XVII. Agreement and Waiver.............................. A-16
XVIII.Governing Law..................................... A-16
XIX. Successors and Assigns............................ A-16
XX. Beneficiaries..................................... A-16
XXI. Liability of the Acquired Portfolio and the Acquiring
Portfolio..................................... A-17
XXII. Notices........................................... A-17
XXIII.Expenses.......................................... A-18
XXIV. Entire Agreement.................................. A-18
XXV. Counterparts...................................... A-18
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") made as of November
19, 1998 by FRANK RUSSELL INVESTMENT COMPANY, a Massachusetts business trust
(the "Trust"), on behalf of the Fixed Income II Fund (the "Acquired Portfolio")
of the Trust, and on behalf of the Volatility Constrained Bond Fund (the
"Acquiring Portfolio") of the Trust.
WHEREAS, the Trust currently consists of twenty-eight investment portfolios
organized as Sub-Trusts of the Trust, including the Acquired Portfolio and the
Acquiring Portfolio; and
WHEREAS, the Trust intends that the Acquired Portfolio shall be merged
into, and the assets and liabilities of the Acquired Portfolio, as of the
Effective Time of the Reorganization (as defined in Article III) shall be
transferred to, and be acquired and assumed by, the Acquiring Portfolio, in
exchange for Class S Shares of the Acquiring Portfolio, which shall thereafter
be distributed by the Trust to the holders of the Class S Shares of the Acquired
Portfolio (the "Reorganization"); and
WHEREAS, the parties intend that the Acquiring Portfolio shall assume the
investment operations of the Acquired Portfolio after the Reorganization; and
WHEREAS, the parties intend that the merger of the Portfolios and the
transfer of assets, assumption of liabilities, and distribution of Class S
Shares involving the Acquiring Portfolio and the Acquired Portfolio be treated
as a tax-free reorganization under Section 368(a)(1)(C) of the Internal Revenue
Code of 1986, as amended (the "Code"); and
WHEREAS, the parties intend that in connection with the Reorganization and
the termination of the business of the Acquired Portfolio, the Acquired
Portfolio shall be terminated and shall be dissolved as described in this
Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, and subject to the terms and conditions hereof, and
intending to be legally bound hereby, the Trust, on behalf of the Acquired
Portfolio and the Acquiring Portfolio, resolves
as follows:
I. Transfer of Assets of the Acquired Portfolio.
1.01 At the Effective Time of the Reorganization (as defined in Article
III), all property of every description, and all interests, rights, privileges
and powers of the Acquired Portfolio other than cash in an amount necessary to
pay any unpaid dividends and distributions as provided in Article IV, Section
4.01(h) (such assets, the "Acquired Portfolio Assets"), shall be transferred and
conveyed by the Acquired Portfolio to the Trust on behalf of the Acquiring
Portfolio, and shall be accepted by the Trust on behalf of the Acquiring
Portfolio, and the Trust, in its Acquiring Portfolio, shall assume all known
liabilities, whether accrued, absolute, contingent or otherwise, of the Acquired
Portfolio reflected in the calculation of the Acquired Portfolio's net asset
value (the "Acquired Portfolio Liabilities"), so that at and after the Effective
Time of the Reorganization: (i) all assets of the Acquired Portfolio shall
become and be a part of the assets of the Acquiring Portfolio; and (ii) all
known liabilities of the Acquired Portfolio reflected as such in the calculation
of the Acquired Portfolio's net asset value shall attach to the Acquiring
Portfolio as aforesaid and may thenceforth be enforced against the Acquiring
Portfolio to the extent as if the same had been incurred by it. Without limiting
the generality of the foregoing, the Acquired Portfolio Assets shall include all
property and assets of any nature whatsoever, including, without limitation, all
cash, cash equivalents, securities, claims and receivables (including dividend
and interest receivables) owned by the Acquired Portfolio, and any deferred or
prepaid expenses shown as an asset on the Acquired Portfolio's books, at the
Effective Time of the Reorganization, and all good will, all other intangible
property and all books and records belonging to the Acquired Portfolio. Recourse
by any person for the Acquired Portfolio Liabilities assumed by the Acquiring
Portfolio shall, at and after the Effective Time of the Reorganization, be
limited to the Acquiring Portfolio.
1.02 In exchange for the transfer of the Acquired Portfolio Assets and the
assumption of the Acquired Portfolio Liabilities, the Trust shall simultaneously
issue at the Effective Time of the Reorganization to the shareholders of the
Acquired Portfolio a number of full and fractional (to the third decimal place)
Class S Shares of the Acquiring Portfolio, all determined and adjusted as
provided in this Agreement. The number of Class S Shares of the Acquiring
Portfolio so issued will have an aggregate net asset value equal to the net
value of the Acquired Portfolio Assets that are received in the Acquiring
Portfolio, all determined and adjusted as provided in this Agreement.
1.03 The net asset value of the Class S Shares of the Acquiring Portfolio
and the aggregate value of the assets of the Acquired Portfolio shall be
determined as of the Effective Time of the Reorganization.
1.04 The net asset value of the Class S Shares of the Acquiring Portfolio
to be issued by the Trust shall be computed in the manner set forth in the
Acquiring Portfolio's then current prospectuses under the Securities Act of
1933, as amended (the "1933 Act"). In determining the value of the securities
transferred by the Acquired Portfolio to the Acquiring Portfolio, each security
shall be priced in accordance with the policies and procedures of the Trust
described in its then current prospectuses and statement of additional
information and adopted by the Trust's Board of Trustees (the "Board"). For such
purposes, price quotations and the security characteristics relating to
establishing such quotations shall be determined by the Trust, such
determination being subject to the approval of the Trust, and shall be subject
to adjustment by the amount, if any, agreed to by the parties hereto.
II. Liquidating Distributions and Termination of the
Acquired Portfolio.
Immediately after the Effective Time of the Reorganization the Trust, on
behalf of the Acquiring Portfolio, shall distribute in complete liquidation pro
rata to the record holders of the Acquired Portfolio shares at the Effective
Time of the Reorganization the Class S Shares of the Acquiring Portfolio. Except
as otherwise directed, such Class S Shares shall be distributed to the former
record holders of the shares of the Acquired Portfolio by book entry. In
addition, each shareholder of record of the Acquired Portfolio shall have the
right to receive any unpaid dividends or other distributions which were declared
before the Effective Time of the Reorganization with respect to the shares of
the Acquired Portfolio that are held by the shareholder at the Effective Time of
the Reorganization. The Trust shall record on its books the ownership of Class S
Shares of the Acquiring Portfolio by the former record holders of the shares of
the Acquired Portfolio. No redemption or repurchase of the Acquiring Portfolio
shares credited to the Acquired Portfolio shareholders of record with respect to
the Acquired Portfolio shares represented by share certificates shall be
permitted until such certificates have been surrendered to the Trust's transfer
agent for cancellation. All of the issued and outstanding shares of the Acquired
Portfolio shall be canceled on the books of the Trust at the Effective Time of
the Reorganization and shall thereafter represent only the right to receive
Class S Shares of the Acquiring Portfolio, following which the Acquired
Portfolio's transfer books shall be closed permanently. As soon as practicable
after the Effective Time of the Reorganization and the termination of the
regular business of the Acquired Portfolio, the Trust shall make all filings and
take all other steps as shall be necessary and proper to effect the complete
dissolution of the Acquired Portfolio. After the Effective Time of the
Reorganization and the merger of the Acquired Portfolio, the Acquired Portfolio
shall not conduct any business.
III.Effective Time of the Reorganization.
The Effective Time of the Reorganization shall be 4:00 p.m., Eastern Time,
on _______ __, 1998, or on such other date as may be agreed to in writing by the
duly authorized officers of the Trust.
IV. Certain Representations, Warranties and
Agreements of the Acquired Portfolio.
4.01 The Trust, on behalf of itself and the Acquired Portfolio, represents
and warrants to, and agrees with, the following:
4.01(a) The Trust is a Massachusetts business trust duly created
pursuant to its Master Trust Agreement, dated July 26, 1984 and as amended
from time to time (the "Trust Agreement"), for the purpose of acting as a
management investment company under the Investment Company Act of 1940, as
amended (the "1940 Act) and is validly existing under the laws of, and duly
authorized to transact business in, the Commonwealth of Massachusetts. It
is registered with the Securities and Exchange Commission (the "SEC") as an
open-end, management investment company under the 1940 Act and such
registration is in full force and effect.
4.01(b) The Acquired Portfolio has power to own all of its properties
and assets and, subject to the approval of shareholders referred to herein,
to carry out and consummate the transactions contemplated herein, and has
all necessary federal, state and local authorizations which counsel to the
Trust advises are required to carry on its business as now being conducted
and to consummate the transactions contemplated by this Agreement.
4.01(c) This Agreement has been duly authorized, executed and delivered
by the Trust on behalf of the Acquired Portfolio, and represents a valid
and binding contract, enforceable in accordance with its terms, subject as
to enforcement to bankruptcy, insolvency, reorganization, arrangement,
moratorium, and other similar laws of general applicability relating to or
affecting creditors' rights and to general principles of equity. The
execution and delivery of this Agreement does not and will not, and the
consummation of the transactions contemplated by this Agreement will not,
violate the Trust Agreement or the Trust's By-Laws or any agreement or
arrangement to which it is a party or by which it is bound.
4.01(d) The Acquired Portfolio has elected to qualify and has qualified
as a regulated investment company under Part I of Subchapter M of the Code,
as of and since its first taxable year; has been a regulated investment
company under such Part of the Code at all times since the end of its first
taxable year when it so qualified; and qualifies and shall continue to
qualify as a regulated investment company until the Effective Time of the
Reorganization.
4.01(e) All federal, state, local and foreign income, profits,
franchise, sales, withholding, customs, transfer and other taxes, including
interest, additions to tax and penalties (collectively, "Taxes") relating
to the Acquired Portfolio Assets due or properly shown to be due on any
return filed by or on behalf of the Acquired Portfolio with respect to
taxable periods ending on or prior to, and the portion of any interim
period up to, the date hereof have been fully and timely paid or provided
for; and there are no levies, liens, or other encumbrances relating to
Taxes existing, threatened or pending with respect to the Acquired
Portfolio Assets. At the Effective Time of the Reorganization, all returns
and reports of the Trust and the Acquired Portfolio respecting Taxes
required by law to have been filed by such time shall have been filed.
4.01(f) The financial statements of the Acquired Portfolio for its
fiscal year ended December 31, 1997, examined by PricewaterhouseCoopers
LLP, copies of which have been previously furnished to the Acquiring
Portfolio, present fairly the financial position of the Acquired Portfolio
as of such date and the results of its operations and changes in its net
assets for the year then ended, in conformity with generally accepted
accounting principles.
4.01(g) The unaudited financial statements of the Acquired Portfolio
for the six-month period ended June 30, 1998, copies of which have been
previously furnished to the Acquiring Portfolio, present fairly the
financial position of the Acquired Portfolio as of such date and the
results of its operations and changes in its net assets for the six-month
period then ended, in conformity with generally accepted accounting
principles.
4.01(h) Prior to the Effective Time of the Reorganization, the Acquired
Portfolio shall have declared a dividend, with a record date and
ex-dividend date prior thereto, which, together with all previous
dividends, shall have the effect of distributing to its shareholders all of
its net Trust income, if any, for the taxable year ended on December 31,
1997 and for the period from said date to and including the Effective Time
of the Reorganization (computed without regard to any deduction for
dividends paid), and all of its net capital gain, if any, realized in such
taxable year and period.
4.01(i) At the Effective Time of the Reorganization, there shall be no
known liabilities of the Acquired Portfolio, whether accrued, absolute,
contingent or otherwise, not reflected in the net asset value per share of
its outstanding shares.
4.01(j) There are no legal, administrative or other proceedings pending
or, to the Trust's knowledge, threatened against the Trust or the Acquired
Portfolio which could result in liability on the part of the Trust or the
Acquired Portfolio.
4.01(k) Subject to the approval of shareholders referred to herein, at
the Effective Time of the Reorganization, the Acquired Portfolio shall have
full right, power and authority to sell, assign, transfer and deliver the
Acquired Portfolio Assets and, upon delivery and payment for the Acquired
Portfolio Assets as contemplated herein, the Acquiring Portfolio shall
acquire good and marketable title thereto, free and clear of all liens and
encumbrances, and subject to no restrictions on the ownership or transfer
thereof (except as imposed by federal or state securities laws).
4.01(l) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the Trust of the
transactions contemplated by this Agreement, except such as may be
required, in the opinion of counsel to the parties hereunder, under the
1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act"),
the 1940 Act, the rules and regulations under those Acts, and state
securities laws.
4.01(m) Insofar as the following relate to the Acquired Portfolio, the
registration statement filed by the Trust on Form N-14 relating to the
shares of the Acquiring Portfolio that will be registered with the SEC
pursuant to this Agreement, which, without limitation, shall include a
proxy statement of the Trust and the prospectus of the Acquiring Portfolio
with respect to the transactions contemplated by this Agreement, and any
supplement or amendment thereto or to the documents contained or
incorporated therein by reference (the "N-14 Registration Statement"), on
the effective date of the N-14 Registration Statement, at the time of any
shareholders' meetings referred to herein and at the Effective Time of the
Reorganization: (i) shall comply in all material respects with the
provisions of the 1933 Act, the 1934 Act and the 1940 Act, the rules and
regulations thereunder, and state securities laws, and (ii) shall not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading.
4.01(n) All of the issued and outstanding shares of the Acquired
Portfolio have been duly and validly issued, are fully paid and
non-assessable, and were offered for sale and sold in conformity with all
applicable federal and state securities laws, and no shareholder of the
Acquired Portfolio has any preemptive right of subscription or purchase in
respect of such shares.
4.01(o) The Acquired Portfolio has valued, and will continue to value,
its portfolio securities and other assets in accordance with applicable
legal requirements.
V. Certain Representations, Warranties and
Agreements of the Acquiring Portfolio.
5.01The Trust, on behalf of itself and the Acquiring Portfolio, represents
and warrants to, and agrees with, the following:
5.01(a) The Trust is a Massachusetts business trust duly created
pursuant to the Trust Agreement for the purpose of acting as a management
investment company under the 1940 Act and is validly existing under the
laws of, and duly authorized to transact business in, the Commonwealth of
Massachusetts. It is registered with the SEC as an open-end, management
investment company under the 1940 Act and such registration is in full
force and effect.
5.01(b) The Acquiring Portfolio has power to own all of its properties
and assets and to carry out and consummate the transactions contemplated
herein, and has all necessary federal, state and local authorizations to
carry on its business as now being conducted and to consummate the
transactions contemplated by this Agreement.
5.01(c) This Agreement has been duly authorized, executed and delivered
by the Trust on behalf of the Acquiring Portfolio, and represents the
Trust's valid and binding contract, enforceable in accordance with its
terms, subject as to enforcement to bankruptcy, insolvency, reorganization,
arrangement, moratorium, and other similar laws of general applicability
relating to or affecting creditors rights and to general principles of
equity. The execution and delivery of this Agreement does not and will not,
and the consummation of the transactions contemplated by this Agreement
will not, violate the Trust Agreement or the Trusts By-Laws or any
agreement or arrangement to which it is a party or by which it is bound.
5.01(d) The Acquiring Portfolio has elected to qualify and has
qualified as a regulated investment company under Part I of Subchapter M of
the Code, as of and since its first taxable year; has been a regulated
investment company under such Part of the Code at all times since the end
of its first taxable year when it so qualified; and intends to continue to
so qualify as a regulated investment company.
5.01(e) The financial statements of the Acquiring Portfolio for its
fiscal year ended December 31, 1997, examined by PricewaterhouseCoopers
LLP, copies of which have been previously furnished to the Acquired
Portfolio, present fairly the financial position of the Acquiring Portfolio
as of such date and the results of its operations and changes in its net
assets for the year then ended, in conformity with generally accepted
accounting principles.
5.01(f) The unaudited financial statements of the Acquiring Portfolio
for the six-month period ended June 30, 1998, copies of which have been
previously furnished to the Acquired Portfolio, present fairly the
financial position of the Acquiring Portfolio as of such date and the
results of its operations, and changes in its net assets for the six-month
period then ended, in conformity with generally accepted accounting
principles.
5.01(g) At the Effective Time of the Reorganization, there shall be no
known liabilities applicable to the Class S Shares of the Acquiring
Portfolio, whether accrued, absolute, contingent or otherwise, not
reflected in the net asset value per share of the Acquiring Portfolio's
Class S Shares.
5.01(h) There are no legal, administrative or other proceedings pending
or, to the Trust's knowledge, threatened against the Trust or the Acquiring
Portfolio which could result in liability on the part of the Trust or the
Acquiring Portfolio.
5.01(i) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the Trust of the
transactions contemplated by this Agreement, except such as may be
required, in the opinion of counsel to the parties hereunder, under the
1933 Act, the 1934 Act, the 1940 Act, the rules and regulations under those
Acts, and state securities laws.
5.01(j) Insofar as the following relate to the Acquiring Portfolio, the
N-14 Registration Statement on its effective date, at the time of any
shareholders' meeting referred to herein and at the Effective Time of the
Reorganization: (i) shall comply in all material respects with the
provisions of the 1933 Act, the 1934 Act and the 1940 Act, the rules and
regulations thereunder, and state securities laws, and (ii) shall not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading.
5.01(k) The Class S Shares of the Acquiring Portfolio to be issued and
delivered by the Acquiring Portfolio to the record holders of shares of the
Acquired Portfolio pursuant to the terms hereof, shall have been duly
authorized as of the Effective Time of the Reorganization and, when so
issued and delivered, shall be duly and validly issued, fully paid and
non-assessable, and no shareholder of the Trust shall have any preemptive
right of subscription or purchase in respect thereto.
5.01(l) The Acquiring Portfolio has valued, and will continue to value,
its portfolio securities and other assets in accordance with applicable
legal requirements.
5.01(m) The Board complies with the requirements of Section 15(f)(1)(A)
of the 1940 Act as of the date hereof. If the Board ceases to comply with
such requirements at any time within three years after the Effective Time
of the Reorganization, the Trust will take such action as is necessary to
restore such compliance as soon as is reasonably practicable.
VI. Shareholder Action on Behalf of the Acquired
Portfolio.
6.01 As soon as practicable after the effective date of the N-14
Registration Statement, but in any event prior to the Effective Time of the
Reorganization and as a condition to the Reorganization, the Trust shall hold a
meeting of the shareholders of the Acquired Portfolio for the purpose of
considering and voting upon:
6.01(a) Approval of this Agreement and the transactions contemplated
hereby, including, without limitation:
(i) The transfer of the Acquired Portfolio Assets to the
Acquiring Portfolio, and the assumption by the Acquiring Portfolio
of the Acquired Portfolio Liabilities, in exchange for the
issuance by the Acquiring Portfolio
of Class S Shares.
(ii) The distribution by the Acquiring Portfolio to the record
holders of the Acquired Portfolio of Class S Shares of the
Acquiring Portfolio as described in this Agreement.
6.01(b) Such other matters as may be determined by the Trust.
6.02 Approval of this Agreement and the transactions contemplated herein
by the shareholders of the Acquired Portfolio shall constitute the waiver of the
application of any fundamental policy of the Acquired Portfolio that might be
deemed to prevent it from taking the actions necessary to effectuate the
Reorganization as described, and such policies, if any, shall be deemed to have
been amended accordingly.
VII. N-14 Registration Statement and Proxy
Solicitation Materials.
The Trust shall file (i) the N-14 Registration Statement under the 1933
Act, and (ii) the combined prospectus/proxy statement contained therein under
the 1934 Act and 1940 Act proxy rules, with the SEC as promptly as practicable.
The Trust has furnished and shall continue to furnish the information relating
to itself and affiliated persons thereof that is required by the 1933 Act, the
1934 Act, the 1940 Act, the rules and regulations under each of those Acts and
state securities laws, to be included in the N-14 Registration Statement.
VIII. Delivery of Assets and Shares.
Delivery of the Acquired Portfolio Assets and the Class S Shares of the
Acquiring Portfolio to be issued pursuant to Article I shall occur at the
Effective Time of the Reorganization, or on such other date, and at such place
and time, as may be determined by the President or any Vice President of each
party hereto. To the extent the Acquired Portfolio Assets are, for any reason,
not transferred at the Effective Time of the Reorganization, the Trust shall
cause the Acquired Portfolio Assets to be transferred in accordance with this
Agreement at the earliest practicable date thereafter.
IX. Conditions of the Acquiring Portfolio.
9.01 The obligations of the Acquiring Portfolio hereunder shall be subject
to the following conditions precedent:
9.01(a) This Agreement and the transactions contemplated by this
Agreement shall have been approved by the Board and by the shareholders of
the Acquired Portfolio, in the manner required by law.
9.01(b) The Trust, on behalf of the Acquired Portfolio shall have duly
executed and delivered to the Acquiring Portfolio such bills of sale,
assignments, certificates and other instruments of transfer ("Transfer
Documents") as may be necessary or desirable to transfer all right, title
and interest of the Acquired Portfolio in and to the Acquired Portfolio
Assets. The Acquired Portfolio Assets shall be accompanied by all necessary
state stock transfer stamps or cash for the appropriate purchase price
therefor.
9.01(c) All representations and warranties of the Trust on behalf of
the Acquired Portfolio made in this Agreement shall be true and correct in
all material respects as if made at and as of the Effective Time of the
Reorganization. As of the Effective Time of the Reorganization, there shall
have been no material adverse change in the financial condition of the
Acquired Portfolio since December 31, 1997, other than those changes
incurred in the ordinary course of business as an Trust. No action, suit or
other proceeding shall be threatened or pending before any court or
governmental agency in which it is sought to restrain or prohibit, or
obtain damages or other relief in connection with, this Agreement or the
transactions contemplated herein.
9.01(d) The Trust, on behalf of the Acquiring Portfolio, shall have
received an opinion of Stradley, Ronon, Stevens & Young, LLP, addressed to
the Trust in form reasonably satisfactory to the Trust and dated the
Effective Time of the Reorganization, substantially to the effect that: (i)
the Trust is a Massachusetts business trust duly organized and validly
existing under the laws of the Commonwealth of Massachusetts; (ii) the
shares of the Acquired Portfolio outstanding at the Effective Time of the
Reorganization are duly authorized, validly issued, fully paid and
non-assessable by the Acquired Portfolio, and to such counsels knowledge no
shareholder of the Acquired Portfolio has any option, warrant or preemptive
right to subscription or purchase in respect thereof; (iii) this Agreement
and the Transfer Documents have been duly authorized, executed and
delivered by the Acquired Portfolio and represent its legal, valid and
binding contracts or instruments, enforceable against the Acquired
Portfolio in accordance with their terms, subject to the effect of
bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws
relating to or affecting creditors' rights generally and court decisions
with respect thereto, and such counsel shall not be required to express an
opinion with respect to the application of equitable principles in any
proceeding, whether at law or in equity, or with respect to the provisions
of this Agreement intended to limit liability for particular matters to the
Acquired Portfolio and its assets; (iv) the execution and delivery of this
Agreement did not, and the consummation of the transactions contemplated by
this Agreement will not, violate the Trust Agreement or By-Laws of the
Trust or any material agreement known to such counsel to which the Trust is
a party or by which the Trust is bound; and (v) to such counsel's
knowledge, no consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the Acquired
Portfolio of the transactions contemplated by this Agreement, except such
as have been obtained under the 1933 Act, the 1934 Act, the 1940 Act, the
rules and regulations under those Acts, and such as may be required under
state securities laws. Such opinion may rely on the opinion of other
counsel to the extent set forth in such opinion, provided such other
counsel is reasonably acceptable to the Acquiring Portfolio.
9.01(e) The Trust, on behalf of the Acquiring Portfolio, shall have
received an opinion of Stradley, Ronon, Stevens & Young, LLP, addressed to
the Trust in form reasonably satisfactory to the Trust and dated the
Effective Time of the Reorganization, substantially to the effect that for
federal income tax purposes (i) the transfer by the Acquired Portfolio of
all of the Acquired Portfolio Assets and Acquired Portfolio Liabilities to
the Acquiring Portfolio, in exchange for the issuance to shareholders of
the Acquired Portfolio of Class S Shares of the Acquiring Portfolio, and
the distribution of said Class S Shares to the shareholders of the Acquired
Portfolio, as provided in this Agreement, will constitute a reorganization
within the meaning of Section 368(a)(1)(C) of the Code and with respect to
the reorganization, the Acquired Portfolio and the Acquiring Portfolio will
each be considered "a party to a reorganization" within the meaning of
Section 368(b) of the Code; (ii) in accordance with Sections 361(a),
361(c)(1) and 357(a) of the Code, no gain or loss will be recognized by the
Acquired Portfolio as a result of such transactions; (iii) in accordance
with Section 1032(a) of the Code, no gain or loss will be recognized by the
Acquiring Portfolio as a result of such transactions; (iv) in accordance
with Section 354(a)(1) of the Code, no gain or loss will be recognized by
the shareholders of the Acquired Portfolio on the distribution to them by
the Acquired Portfolio of Class S Shares of the Acquiring Portfolio in
exchange for their shares of the Acquired Portfolio; (v) in accordance with
Section 358(a)(1) of the Code, the aggregate basis of Class S Shares of the
Acquiring Portfolio received by each holder of shares of the Acquired
Portfolio will be the same as the aggregate basis of the shareholder's
Acquired Portfolio shares immediately prior to the transactions; (vi) in
accordance with Section 362(b) of the Code, the basis of the Acquired
Portfolio Assets to the Acquiring Portfolio will be the same as the basis
of the Acquired Portfolio Assets in the hands of the Acquired Portfolio
immediately prior to the exchange; (vii) in accordance with Section 1223 of
the Code, a shareholders holding period for Class S Shares of the Acquiring
Portfolio will be determined by including the period for which the
shareholder held the shares of the Acquired Portfolio exchanged therefor,
provided that the shareholder held such shares of the Acquired Portfolio as
a capital asset; (viii) in accordance with Section 1223 of the Code, the
holding period of the Acquiring Portfolio with respect to the Acquired
Portfolio Assets will include the period for which the Acquired Portfolio
Assets were held by the Acquired Portfolio; and (ix) in accordance with
Section 381(a) of the Code, the Acquiring Portfolio will succeed to the tax
attributes of the Acquired Portfolio described in Section 381(c) of the
Code.
9.01(f) The SEC shall not have issued any unfavorable advisory report
under Section 25(b) of the 1940 Act nor instituted any proceeding seeking
to enjoin consummation of the transactions contemplated by this Agreement
under Section 25(c) of the 1940 Act.
9.01(g) The N-14 Registration Statement shall have become effective
under the 1933 Act and no stop order suspending such effectiveness shall
have been instituted nor, to the knowledge of the Acquiring Portfolio, is
contemplated by the SEC to prevent or limit the completion of the
transactions, and the parties shall have received all permits and other
authorizations necessary under state securities laws to consummate the
transactions contemplated by this Agreement.
9.01(h) The Acquired Portfolio shall have delivered or caused to be
delivered to the Acquiring Portfolio each account, book, record or other
document of the Acquired Portfolio applicable to the Acquired Portfolio
which is required to be maintained by Section 31(a) of the 1940 Act and
Rule 31a-1 to 31a-3 thereunder (regardless of what person possesses the
same), and a copy of all agreements and instruments to which the Acquired
Portfolio is a party or signatory. The Acquired Portfolio has instructed
its service contractors to provide the Acquiring Portfolio upon request
with access to and copies of all documents belonging to the Acquired
Portfolio. The Acquired Portfolio shall have delivered to the Acquiring
Portfolio a list of the tax costs of the securities of the Acquired
Portfolio by lot and the holding periods of such securities, as of the
Effective Time of the Reorganization.
9.01(i) The President or any Vice President of the Trust shall have
certified that the Acquired Portfolio has performed and complied in all
material respects with each of its agreements and covenants required by
this Agreement to be performed or complied with by it prior to or at the
Effective Time of the Reorganization.
9.01(j) The Acquired Portfolio Assets to be transferred to the
Acquiring Portfolio under this Agreement shall not include assets which the
Acquiring Portfolio may not properly acquire pursuant to its investment
objective, policies or limitations, or may not otherwise lawfully acquire.
X. Conditions of the Acquired Portfolio.
10.01 The obligations of the Acquired Portfolio hereunder shall be subject
to the following conditions precedent:
10.01(a) This Agreement and the transactions contemplated by this
Agreement shall have been approved by the shareholders of the Acquired
Portfolio in the manner required by law.
10.01(b) All representations and warranties of the Trust on behalf of
the Acquiring Portfolio made in this Agreement shall be true and correct in
all material respects as if made at and as of the Effective Time of the
Reorganization. As of the Effective Time of the Reorganization, there shall
have been no material adverse change in the financial condition of the
Acquiring Portfolio since December 31, 1997, other than those changes
incurred in the ordinary course of business as an Trust. No action, suit or
other proceeding shall be threatened or pending before any court or
governmental agency in which it is sought to restrain or prohibit, or
obtain damages or other relief in connection with, this Agreement or the
transactions contemplated herein.
10.01(c) The Trust, on behalf of the Acquired Portfolio, shall have
received an opinion of Stradley, Ronon, Stevens & Young, LLP, addressed to
the Trust in form reasonably satisfactory to it and dated the Effective
Time of the Reorganization, substantially to the effect that: (i) the Trust
is a Massachusetts business trust duly organized and validly existing under
the laws of the Commonwealth of Massachusetts; (ii) the Class S Shares of
the Acquiring Portfolio to be delivered at such time to the Acquired
Portfolio as provided for by this Agreement are duly authorized and upon
delivery will be validly issued, fully paid and non-assessable by the
Acquiring Portfolio, and to such counsel's knowledge no shareholder of the
Acquiring Portfolio has any option, warrant or preemptive right to
subscription or purchase in respect thereof; (iii) this Agreement has been
duly authorized, executed and delivered by the Acquiring Portfolio and
represents its legal, valid and binding contract, enforceable against the
Acquiring Portfolio in accordance with its terms, subject to the effect of
bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws
relating to or affecting creditors' rights generally and court decisions
with respect thereto, and such counsel shall not be required to express an
opinion with respect to the application of equitable principles in any
proceeding, whether at law or in equity, or with respect to the provisions
of this Agreement intended to limit liability for particular matters to the
Acquiring Portfolio and its assets; (iv) the execution and delivery of this
Agreement did not, and the consummation of the transactions contemplated by
this Agreement will not, violate the Trust Agreement or By-Laws of the
Trust, or any material agreement known to such counsel to which the Trust
is a party or by which the Trust is bound; and (v) to such counsel's
knowledge no consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the Acquiring
Portfolio of the transactions contemplated by this Agreement, except such
as have been obtained under the 1933 Act, the 1934 Act, the 1940 Act, the
rules and regulations under those Acts and such as may be required under
state securities laws. Such opinion may rely on the opinion of other
counsel to the extent set forth in such opinion, provided such other
counsel is reasonably acceptable to the Acquired Portfolio.
10.01(d) The Trust, on behalf of the Acquired Portfolio, shall have
received an opinion of Stradley, Ronon, Stevens & Young, LLP, addressed to
the Trust in form reasonably satisfactory to the Trust and dated the
Effective Time of the Reorganization, with respect to the matters specified
in Article IX, Section 9.01(e).
10.01(e) The N-14 Registration Statement shall have become effective
under the 1933 Act and no stop order suspending such effectiveness has been
instituted, nor, to the knowledge of the Acquiring Portfolio, is
contemplated by the SEC seeking to limit or prevent the transactions, and
the parties shall have received all permits and other authorizations
necessary under state securities laws to consummate the transactions
contemplated by this Agreement.
10.01(f) The SEC shall not have issued any unfavorable advisory report
under Section 25(b) of the 1940 Act nor instituted any proceeding seeking
to enjoin consummation of the transactions contemplated by this Agreement
under Section 25(c) of the 1940 Act.
10.01(g) The President or any Vice President of the Trust shall have
certified that the Acquiring Portfolio has performed and complied in all
material respects with each of its agreements and covenants required by
this Agreement to be performed or complied with by it prior to or at the
Effective Time of the Reorganization.
XI. Tax Documents.
The Acquired Portfolio shall deliver to the Acquiring Portfolio at the
Effective Time of the Reorganization confirmations or other adequate evidence as
to the adjusted tax basis of the Acquired Portfolio Assets delivered to the
Acquiring Portfolio in accordance with the terms of this Agreement.
XII. Finder's Fees.
Each party represents and warrants to each of the other parties hereto that
there is no person who is entitled to any finders or other similar fee or
commission arising out of the transactions contemplated by this Agreement.
XIII. Announcements.
Any announcements or simi lar publicity with respect to this Agreement or
the transactions contemplated herein shall be at such time and in such manner as
the Trust shall determine; provided, that nothing herein shall prevent the Trust
from making such public announcements as its counsel may consider advisable in
order to satisfy the partys legal and contractual obligations.
XIV. Further Assurances.
Subject to the terms and conditions herein provided, each of the parties
hereto shall use its best efforts to take, or cause to be taken, such action, to
execute and deliver, or cause to be executed and delivered, such additional
documents and instruments, and to do, or cause to be done, all things necessary,
proper or advisable under the provisions of this Agreement and under applicable
law to consummate and make effective the transactions contemplated by this
Agreement.
XV. Termination of Representations and Warranties.
The representations and warranties of the Trust with respect to the
Acquiring Portfolio and the Acquired Portfolio set forth in this Agreement shall
terminate upon the consummation of the Reorganization.
XVI.Termination of Agreement.
16.01 This Agreement may be terminated by the Trust at any time at or prior
to the Effective Time of the Reorganization, by action of the Board of Trustees
of the Trust.
16.02 If the Trust terminates this Agreement because one or more of the
conditions precedent have not been fulfilled, this Agreement will become null
and void without any liability of either portfolio to the other; provided,
however, that if such termination is by the Acquiring Portfolio pursuant to
Section 16.01(a) as a result of a breach by the Acquired Portfolio of any of its
representations, warranties or covenants in this Agreement, or such termination
is by the Acquired Portfolio pursuant to Section 16.01(b) as a result of a
breach by the Acquiring Portfolio of any of its representations, warranties or
covenants in this Agreement, nothing herein shall affect the non-breaching
party's right to damages on account of such other party's breach.
XVII. Agreement and Waiver.
At any time prior to or (to the fullest extent permitted by law) after
approval of this Agreement by the shareholders of the Acquired Portfolio, (a)
the Trust may, by written agreement authorized by the Board or its authorized
officers and with or without the approval of their shareholders, amend any of
the provisions of this Agreement, and (b) the Trust may waive any breach or
failure to satisfy any of the conditions to its obligations (such waiver to be
in writing and authorized by the President or any Vice President of the Trust
with or without the approval of the Trusts shareholders).
XVIII. Governing Law.
This Agreement and the transactions contemplated hereby shall be governed,
construed and enforced in accordance with the laws of the Commonwealth of
Massachusetts, without giving effect to the conflicts of law principles
otherwise applicable therein.
XIX. Successors and Assigns.
This Agreement shall be binding upon the respective successors and
permitted assigns of the parties hereto. This Agreement and the rights,
obligations and liabilities hereunder may not be assigned by either party
without the consent of the other party.
XX. Beneficiaries.
Nothing contained in this Agreement shall be deemed to create rights in or
eliminate liabilities of persons not parties hereto, other than the successors
and permitted assigns of the parties.
XXI. Liability of the Acquired Portfolio and the
Acquiring Portfolio.
21.01 The names "Frank Russell Investment Company" and "Board of Trustees
of Frank Russell Investment Company" refer, respectively, to the trust created
and the trustees, as trustees but not individually or personally, acting from
time to time under the Trust Agreement, which is hereby referred to and a copy
of which is on file at the office of the State Secretary of the Commonwealth of
Massachusetts and at the principal office of the Trust. The obligations of the
Trust entered into in the name or on behalf thereof by any of the trustees,
representatives or agents are made not individually, but in such capacities, and
are not binding upon any of the trustees, shareholders or representatives of the
Trust personally, but bind only the trust property, and all persons dealing with
any sub-trust of shares of the Trust must look solely to the trust property
belonging to such sub-trust for the enforcement of any claims against the Trust.
21.02 It is acknowledged and agreed that any liability of the Trust under
this Agreement with respect to the Acquired Portfolio, or in connection with the
transactions contemplated herein with respect to the Acquired Portfolio, shall
be discharged only out of the assets of the Acquired Portfolio and that no other
portfolio of the Trust shall be liable with respect thereto.
21.03 It is acknowledged and agreed that any liability of the Trust under
this Agreement with respect to the Acquiring Portfolio, or in connection with
the transactions contemplated herein with respect to the Acquiring Portfolio,
shall be discharged only out of the assets of the Acquiring Portfolio and that
no other portfolio of the Trust shall be liable with respect thereto.
XXII. Notices.
All notices required or permitted herein shall be in writing and shall be
deemed to be properly given when delivered personally or by telecopier to the
party entitled to receive the notice or when sent by certified or registered
mail, postage prepaid, or delivered to a nationally recognized overnight courier
service, in each case properly addressed to the party entitled to receive such
notice at the address or telecopier number stated below or to such other address
or telecopier number as may hereafter be furnished in writing by notice
similarly given by one party to the other party hereto:
If to the Acquired Portfolio:
Frank Russell Investment Company
c/o Gregory J. Lyons, Esquire
Frank Russell Company
909 A Street
Tacoma, Washington 98402
Telecopier Number: (253) 596-3284
With a copy to:
Steven M. Felsenstein, Esquire
Stradley, Ronon, Stevens & Young, LLP
2600 One Commerce Square
Philadelphia, PA 19103
Telecopier Number: (215) 564-8120
If to the Acquiring Portfolio:
Frank Russell Investment Company
c/o Gregory J. Lyons, Esquire
Frank Russell Company
909 A Street
Tacoma, Washington 98402
Telecopier Number: (253) 596-3284
With a copy to:
Steven M. Felsenstein, Esquire
Stradley, Ronon, Stevens & Young, LLP
2600 One Commerce Square
Philadelphia, PA 19103
Telecopier Number: (215) 564-8120
XXIV. Expenses.
The Trust shall be responsible for the payment of all of its respective
expenses incurred in connection with this Agreement and the transactions
contemplated hereby.
XXV. Entire Agreement.
This Agreement embodies the entire agreement and understanding of the
parties hereto with respect to the subject matter hereof and supersedes any and
all prior agreements, arrangements and understandings relating to matters
provided for herein.
XXVI. Counterparts
This Agreement may be executed in any number of counterparts, each of
which, when executed and delivered shall be deemed to be an original, but all of
which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their duly authorized officers designated below as of the date first
written above.
FRANK RUSSELL INVESTMENT
COMPANY, on behalf of the
Fixed Income II Fund
ATTEST:
By:
FRANK RUSSELL INVESTMENT
COMPANY, on behalf of the
Volatility Constrained Bond
ATTEST: Fund
By:
Prospectus of the Institutional Funds, EXHIBIT B
dated May 1, 1998,
as supplemented through August 17, 1998.
INSTITUTIONAL FUNDS
FRANK RUSSELL INVESTMENT COMPANY
SUPPLEMENT TO THE PROSPECTUS
DATED MAY 1, 1998
AS SUPPLEMENTED THROUGH AUGUST 17, 1998
Effective August 20, 1998, Frank Russell Investment Company makes the following
changes to the Institutional Funds Prospectus.
In the section captioned "General Management of the Funds," the following is
added as a new second paragraph:
"On August 10, 1998, Frank Russell Company and The Northwestern
Mutual Life Insurance Company ("Northwestern Mutual") announced that
they had agreed that Northwestern Mutual would acquire Frank Russell
Company, the sole shareholder of Frank Russell Investment Management
Company. Frank Russell Company and Northwestern Mutual have signed a
definitive purchase agreement, and it is expected that the
transaction will be finalized at the end of 1998. Frank Russell
Company will retain its identity and operating independence, and
will continue to operate globally as a separate company."
In the section captioned "How to Purchase Shares---Paying for Shares," the
second paragraph shall be revised to read in its entirety as follows:
"Cash, third party checks and checks drawn on credit card accounts
generally will not be accepted. However exceptions may be made by
prior special arrangement with certain Financial Intermediaries."
In the section captioned "How to Redeem Shares," the first paragraph shall be
revised to read in its entirety as follows:
"Shares of the Funds may be redeemed on any business day the Funds
are open at the next net asset value per share calculated after
receipt of an order in proper form (defined in the "Written
Instructions" section). Payment will ordinarily be made within seven
days after receipt of your request in proper form. Shares recently
purchased by check may not be available for liquidation for 15 days
following the purchase to assure payment has been collected."
Equity II Fund will be managed by the following money managers:
Delphi Management, Inc., 30 Rowes Wharf, Suite 440, Boston, MA 02110, is
100% owned by Scott Black.
Fiduciary International, Inc., 2 World Trade Center, New York, NY 10048,
an investment adviser registered with the SEC, is an indirect wholly-owned
subsidiary of Fiduciary Trust Company International, a New York state
chartered bank.
GlobeFlex Capital, L.P., 4365 Executive Drive, Suite 720, San Diego,
CA 92121, is a California limited partnership and an SEC registered
investment adviser. Its general partners are Robert J. Anslow, Jr. and
Marina L. Marelli.
Jacobs Levy Equity Management, Inc., 280 Corporate Center, 3 ADP
Boulevard, Roseland, NJ 07068, is 100% owned by Bruce Jacobs and Kenneth
Levy.
Sirach Capital Management, Inc., One Union Square, Suite 3323, 600 Union
Street, Seattle, WA 98101, is a wholly-owned subsidiary of United Asset
Management Company, a publicly traded corporation.
Wellington Management Company LLP, 75 State Street, Boston, MA 02109, is a
private Massachusetts limited liability partnership, of which the
following persons are managing partners: Robert W. Doran, Duncan M.
McFarland and John R. Ryan.
Westpeak Investment Advisors, L.P., 1011 Walnut Street, Suite 400,
Boulder, CO 80302, is indirectly controlled by Metropolitan Life Insurance
Company.
The date of this supplement is August 17, 1998.
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
909 A STREET, TACOMA, WA 98402
TELEPHONE (800) 972-0700
IN WASHINGTON (253) 627-7001
Frank Russell Investment Company (the "Trust") is an open-end, management
investment company with 28 different investment series or portfolios ("Funds").
This Prospectus describes and offers interests in the Class S Shares of eight
Funds:
Equity I Fund International Fund
Equity II Fund Fixed Income I Fund
Equity III Fund Fixed Income II Fund
Equity Q Fund Fixed Income III Fund
Each Fund has its own investment objective and policies designed to meet
different investment goals. As with all mutual funds, attainment of each Funds
investment objective cannot be assured.
Frank Russell Investment Management Company ("FRIMCo") operates and
administers the Funds. Class S Shares are sold at their net asset value, with no
sales load, no commissions, no Rule 12b-1 fees and no exchange fees. There is a
$5 million minimum initial investment requirement for the Funds described in
this Prospectus in combination with the Funds described in the Trusts Specialty
Funds Prospectus, in an allocated investment portfolio and investors must
qualify as Eligible Investors, as described in this Prospectus.
SHARES OF THE FUNDS ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION (THE "FDIC") OR BY ANY OTHER GOVERNMENT AGENCY; ARE NOT OBLIGATIONS
OF THE FDIC OR ANY OTHER GOVERNMENT AGENCY; ARE NOT DEPOSITS OR OBLIGATIONS OF
ANY BANK; ARE NOT ENDORSED OR GUARANTEED BY ANY BANK; ARE SUBJECT TO INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED; AND MAY
FLUCTUATE IN VALUE, SO THAT WHEN THEY ARE SOLD, THEY MAY BE WORTH MORE OR LESS
THAN WHEN THEY WERE PURCHASED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL SECURITIES IN ANY STATE
OR OTHER JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER
IN SUCH STATE OR OTHER JURISDICTION.
This Prospectus sets forth concisely the information about the Funds that you
should know before investing. Please read it before investing and retain it for
future reference. A Statement of Additional Information ("SAI"), dated May 1,
1998, and supplemented June 15, 1998, has been filed with the Securities and
Exchange Commission ("SEC"). The SAI is incorporated into this Prospectus by
reference and is available without charge by writing to the address listed above
or by telephoning (800) 972-0700.
This Prospectus relates only to the Class S Shares of the Funds. The Funds
listed do not currently offer interests in any other classes of shares.
The SAI, material incorporated by reference into this Prospectus, and further
information regarding the Trust and the Funds is maintained electronically with
the SEC at its Internet Web site (http://www.sec.gov).
PROSPECTUS DATED MAY 1, 1998 AS SUPPLEMENTED THROUGH JUNE 15, 1998
<PAGE>
TABLE OF CONTENTS
CERTAIN TERMS USED IN THIS PROSPECTUS ARE DEFINED IN THE GLOSSARY,
WHICH BEGINS ON PAGE 43 OF THIS PROSPECTUS.
<TABLE>
<S> <C>
Summary..................................................................... 3
Annual Fund Operating Expenses.............................................. 4
Financial Highlights........................................................ 6
The Purpose of the Funds--Multi-Style, Multi-Manager Diversification........ 14
Eligible Investors.......................................................... 15
General Management of the Funds............................................. 16
Expenses of the Funds....................................................... 18
The Money Managers.......................................................... 18
Investment Objectives, Policies and Practices............................... 19
Portfolio Transaction Policies.............................................. 29
Dividends and Distributions................................................. 30
Taxes....................................................................... 30
Performance Information..................................................... 32
How Net Asset Value Is Determined........................................... 33
How to Purchase Shares...................................................... 34
How to Redeem Shares........................................................ 36
Additional Information...................................................... 38
Money Manager Profiles...................................................... 39
Glossary.................................................................... 43
</TABLE>
2
<PAGE>
SUMMARY
The Funds are designed to provide a means for Eligible Investors to use
FRIMCos and Frank Russell Companys ("Russell") "multi-style, multi-manager
diversification" techniques and money manager evaluation services. Unlike most
investment companies that have a single organization that acts as both
administrator and investment adviser, the Trust divides responsibility for
corporate management and investment advice between FRIMCo and a number of
different money managers. See "The Purpose of the Funds--Multi-Style, Multi-
Manager Diversification."
Each Fund seeks to achieve a specific investment objective by using distinct
investment strategies:
EQUITY I FUND -- Income and capital growth by investing principally in equity
securities.
EQUITY II FUND -- Maximum total return, primarily through capital appreciation
and by assuming a higher level of volatility than is ordinarily expected from
Equity I Fund, by investing in equity securities.
EQUITY III FUND -- A high level of current income, while maintaining the
potential for capital appreciation by investing in income-producing equity
securities.
EQUITY Q FUND -- Total return greater than the total return of the US stock
market as measured by the Russell 1000(R) Index over a market cycle of four to
six years, while maintaining volatility and diversification similar to the Index
by investing in equity securities.
INTERNATIONAL FUND -- Favorable total return and additional diversification
for US investors by investing primarily in equity and fixed-income securities of
non-US companies, and securities issued by non-US governments.
FIXED INCOME I FUND -- Effective diversification against equities and a stable
level of cash flow by investing in fixed-income securities.
FIXED INCOME II FUND -- Preservation of capital and generation of current
income consistent with the preservation of capital by investing primarily in
fixed-income securities with low-volatility characteristics.
FIXED INCOME III FUND -- Maximum total return, primarily through capital
appreciation and by assuming a higher level of volatility than is ordinarily
expected from broad fixed-income market portfolios, by investing in fixed-income
securities.
The Trusts Funds had aggregate net assets of approximately $13.6 billion on
April 1, 1998. The net assets of the Funds described in this Prospectus on April
1, 1998 were:
<TABLE>
<S> <C>
Equity I........... $1,342,186,760.20
Equity II.......... $ 565,197,418.13
Equity III......... $ 268,588,956.64
Equity Q........... $1,137,119,684.51
</TABLE>
<TABLE>
<S> <C>
International
Fund.............. $1,108,581,403.76
Fixed Income I..... $ 871,239,142.81
Fixed Income II.... $ 240,672,356.85
Fixed Income III... $ 430,057,483.03
</TABLE>
You may buy and sell Class S Shares of the Fund through an authorized
Financial Intermediary. All Class S Shares are sold without a sales charge,
commission, or Rule 12b-1 fee. Except as indicated below, Class S Shares are
redeemed at net asset value. You may also exchange shares of one Fund for shares
of another Fund. See "How to Purchase Shares" and "How to Redeem Shares."
3
<PAGE>
You should be aware of the general risks associated with investments in mutual
funds. One or more Funds may make investments and engage in investment practices
and techniques that involve risks, including entering into repurchase
agreements, lending portfolio securities and entering into hedging transactions.
Also, foreign securities in which International Fund may invest may be subject
to certain risks in addition to those inherent in US investments. These risks
are described in "Risk Considerations" in "Investment Objectives, Policies and
Practices" and in the Glossary.
SHAREHOLDER TRANSACTION EXPENSES
You would pay the following charges when buying or redeeming Class S Shares of
a Fund:
<TABLE>
<CAPTION>
MAXIMUM SALES MAXIMUM SALES
LOAD IMPOSED LOAD IMPOSED ON DEFERRED REDEMPTION EXCHANGE
ON PURCHASES REINVESTED DIVIDENDS SALES LOAD* FEES FEES
------------- -------------------- ----------- ---------- --------
<S> <C> <C> <C> <C>
None None None None None
</TABLE>
- - ---------------------
* If you purchase shares of any of the Funds, you may pay a quarterly
shareholder investment services fee ("Services Fee") directly to FRIMCo
pursuant to a separate asset management agreement between you and FRIMCo. The
fee is calculated as a percentage of the amount you have invested in the
Funds.
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
<TABLE>
<CAPTION>
TOTAL FUND
MANAGEMENT OTHER OPERATING
FEE EXPENSES* EXPENSES*+
---------- --------- ----------
<S> <C> <C> <C>
Equity I Fund................................... 0.60% 0.10% 0.70%
Equity II Fund.................................. 0.75% 0.18% 0.93%
Equity III Fund................................. 0.60% 0.15% 0.75%
Equity Q Fund................................... 0.60% 0.08% 0.68%
International Fund.............................. 0.75% 0.26% 1.01%
Fixed Income I Fund............................. 0.30% 0.11% 0.41%
Fixed Income II Fund............................ 0.50% 0.17% 0.67%
Fixed Income III Fund........................... 0.55% 0.16% 0.71%
</TABLE>
- - ---------------------
+ Investors purchasing Class S Shares of the Fund through a financial
intermediary, such as a bank or an investment adviser, may also pay additional
fees to the intermediary for services provided by the intermediary. Such
investors should contact the intermediary for information concerning what
additional fees, if any, will be charged.
* Restated to reflect changes to the Trusts Transfer and Dividend Paying Agent
agreement, which became effective June 8, 1998.
Because the Funds described in this Prospectus are designed for investors with
an aggregate investment of at least $5 million, as described in the "Eligible
Investors" section, beginning January 1, 1999, any shareholder account with
respect to any Fund described in this Prospectus with a balance of less than
$10,000 will be subject to an account maintenance fee equal to $12.50 per year.
The fee will be deducted from dividends payable to each applicable account or by
liquidating shares in the account, or both. The fees will be waived for: (i)
accounts held by retirement plans representing multiple participants; (ii)
accounts of trustees, officers, employees, and certain third-party contractors
of the Trust and its affiliates; and (iii) classes of accounts for which
maintenance costs are absorbed by a third-party.
These tables are intended to assist you in understanding the various expenses
of each Fund. Operating expenses are paid out of a Funds assets and are factored
into the Funds share price. Each Fund estimates that it will have the expenses
listed (expressed as a percentage of average net assets) for the current fiscal
year.
4
<PAGE>
EXAMPLE OF EXPENSES FOR THE FUNDS
Assume that each Funds annual return is 5% and that its operating expenses are
as described above, and that you sell your shares after the number of years
shown. These are projected expenses for each $1000 that you invest:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Equity I Fund................................... $ 7 $22 $39 $ 88
Equity II Fund.................................. $ 9 $29 $51 $117
Equity III Fund................................. $ 8 $24 $41 $ 94
Equity Q Fund................................... $ 7 $21 $38 $ 86
International Fund.............................. $10 $32 $56 $ 27
Fixed Income I Fund............................. $ 4 $13 $23 $ 52
Fixed Income II Fund............................ $ 7 $21 $37 $ 84
Fixed Income III Fund........................... $ 7 $22 $39 $ 89
</TABLE>
5
<PAGE>
FINANCIAL HIGHLIGHTS OF THE EQUITY I FUND*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand L.L.P., the Trusts independent
accountants. The table includes selected data for a share outstanding throughout
each year ended December 31, and other performance information derived from the
financial statements. The information in the table represents the Financial
Highlights for the Funds Class S Shares for the periods shown. The table appears
in the Funds financial statements and related notes, which are incorporated by
reference into the Statement of Additional Information and which appear, along
with the report of Coopers & Lybrand L.L.P. in the Funds Annual Report to
Shareholders. More detailed information concerning the Funds performance,
including a complete portfolio listing and audited financial statements, is
available in the Funds Annual Report, which may be obtained without charge by
writing or calling the Trust.
EQUITY I FUND
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
--------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $ 30.34 $ 28.00 $ 23.32 $ 24.91 $ 25.00 $ 25.17 $ 21.13 $ 25.39 $ 22.20 $ 20.18
--------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .34 .42 .52 .62 .60 .61 .75 .91 .88 .81
Net realized and
unrealized gain (loss)
on investments........ 8.89 5.96 7.71 (.41) 2.18 1.54 5.61 (2.37) 5.79 2.46
--------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total From Investment
Operations .......... 9.23 6.38 8.23 .21 2.78 2.15 6.36 (1.46) 6.67 3.27
--------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income.. (.34) (.42) (.52) (.62) (.60) (.62) (.75) (.90) (1.01) (.77)
Net realized gain on
investments........... (8.72) (3.62) (3.03) (.94) (2.11) (1.70) (1.57) (1.90) (2.47) (.48)
In excess of net
realized gain on
investments........... -- -- -- (.24) (.16) -- -- -- -- --
--------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions... (9.06) (4.04) (3.55) (1.80) (2.87) (2.32) (2.32) (2.80) (3.48) (1.25)
--------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
YEAR................... $ 30.51 $ 30.34 $ 28.00 $ 23.32 $ 24.91 $ 25.00 $ 25.17 $ 21.13 $ 25.39 $ 22.20
========= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)(a)..... 32.02 23.58 35.94 .79 11.61 9.02 31.22 (5.64) 30.79 16.42
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses to
average net
assets (a)............ .70 .71 .59 .12 .14 .15 .19 .23 .18 .17
Net investment income
to average net
assets (a) ........... .96 1.38 1.91 2.52 2.36 2.53 3.14 3.66 3.41 3.68
Portfolio turnover..... 110.75 99.51 92.04 75.02 91.87 71.14 119.55 101.30 61.27 67.59
Net assets, end of year
($000 omitted)........ 1,136,373 961,953 751,497 547,242 514,356 410,170 330,507 221,543 300,814 243,691
Average commission rate
paid per share of se-
curity ($ omitted).... .0511 .0464 N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- - ---------------------
(a) For periods prior to April 1, 1995, Fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net of
investment management fees but gross of any investment services fees.
Management fees and investment services fees reduce performance; for
example, an investment services fee of 0.2% of average managed assets will
reduce a 10% return to 9.8%.
* See the notes to financial statements which appear in the Trusts Annual
Report to Shareholders and which are incorporated by reference into the
Statement of Additional Information.
6
<PAGE>
FINANCIAL HIGHLIGHTS OF THE EQUITY II FUND*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand L.L.P., the Trusts independent
accountants. The table includes selected data for a share outstanding throughout
each year ended December 31, and other performance information derived from the
financial statements. The information in the table represents the Financial
Highlights for the Funds Class S Shares for the periods shown. The table appears
in the Funds financial statements and related notes, which are incorporated by
reference into the Statement of Additional Information and which appear, along
with the report of Coopers & Lybrand L.L.P. in the Funds Annual Report to
Shareholders. More detailed information concerning the Funds performance,
including a complete portfolio listing and audited financial statements, is
available in the Funds Annual Report, which may be obtained without charge by
writing or calling the Trust.
EQUITY II FUND
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF YEAR........... $ 30.05 $ 28.88 $ 25.00 $ 26.58 $ 27.71 $ 26.32 $ 19.24 $ 23.32 $22.50 $19.99
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .11 .16 .27 .36 .32 .30 .41 .51 .61 .52
Net realized and
unrealized gain (loss)
on investments........ 8.11 4.96 6.80 (.86) 3.97 3.13 7.65 (3.91) 4.74 2.51
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Total From Investment
Operations........... 8.22 5.12 7.07 (.50) 4.29 3.43 8.06 (3.40) 5.35 3.03
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
LESS DISTRIBUTIONS:
Net investment income.. (.11) (.16) (.29) (.31) (.31) (.30) (.41) (.50) (.71) (.52)
Net realized gain on
investments........... (5.20) (3.79) (2.90) (.21) (4.72) (1.74) (.57) (.18) (3.82) --
In excess of net real-
ized gain on invest-
ments ................ -- -- -- (.56) (.39) -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Total Distributions... (5.31) (3.95) (3.19) (1.08) (5.42) (2.04) (.98) (.68) (4.53) (.52)
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
NET ASSET VALUE, END
OF YEAR................ $ 32.96 $ 30.05 $ 28.88 $ 25.00 $ 26.58 $ 27.71 $ 26.32 $ 19.24 $23.32 $22.50
======= ======= ======= ======= ======= ======= ======= ======= ====== ======
TOTAL RETURN (%)(a)..... 28.66 18.51 28.67 (2.60) 16.70 13.31 42.40 (14.76) 24.63 15.22
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses to
average net assets
(a)................... .92 .95 .83 .23 .34 .32 .37 .48 .41 .35
Net investment income
to average net assets
(a)................... .35 .52 .97 1.46 1.14 1.10 1.79 2.40 2.45 2.40
Portfolio turnover..... 103.00 120.78 89.31 58.04 87.25 43.33 42.16 80.27 77.55 56.38
Net assets, end of year
($000 omitted)........ 482,159 365,955 279,566 202,977 171,421 120,789 101,206 60,668 70,588 63,903
Average commission rate
paid per share of
security ($ omitted).. .0390 .0381 N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- - ---------------------
(a) For periods prior to April 1, 1995, Fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net of
investment management fees but gross of any investment services fees.
Management fees and investment services fees reduce performance; for
example, an investment services fee of 0.2% of average managed assets will
reduce a 10% return to 9.8%.
* See the notes to financial statements which appear in the Trusts Annual
Report to Shareholders and which are incorporated by reference into the
Statement of Additional Information.
7
<PAGE>
FINANCIAL HIGHLIGHTS OF THE EQUITY III FUND*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand L.L.P., the Trusts independent
accountants. The table includes selected data for a share outstanding throughout
each year ended December 31, and other performance information derived from the
financial statements. The information in the table represents the Financial
Highlights for the Funds Class S Shares for the periods shown. The table appears
in the Funds financial statements and related notes, which are incorporated by
reference into the Statement of Additional Information and which appear, along
with the report of Coopers & Lybrand L.L.P. in the Funds Annual Report to
Shareholders. More detailed information concerning the Funds performance,
including a complete portfolio listing and audited financial statements, is
available in the Funds Annual Report, which may be obtained without charge by
writing or calling the Trust.
EQUITY III FUND
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------- ------- ------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $ 29.68 $ 29.11 $ 24.18 $ 27.05 $ 26.75 $ 27.08 $ 23.30 $26.49 $ 24.03 $ 20.74
------- ------- ------- ------- ------- ------- ------- ------ ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .60 .70 .82 .93 .89 .98 1.08 1.33 1.26 1.15
Net realized and
unrealized gain (loss)
on investments........ 8.69 5.10 7.73 (.85) 2.99 2.24 5.21 (2.85) 5.35 3.40
------- ------- ------- ------- ------- ------- ------- ------ ------- -------
Total From Investment
Operations........... 9.29 5.80 8.55 .08 3.88 3.22 6.29 (1.52) 6.61 4.55
------- ------- ------- ------- ------- ------- ------- ------ ------- -------
LESS DISTRIBUTIONS:
Net investment income.. (.60) (.71) (.83) (.91) (.90) (.99) (1.07) (1.30) (1.40) (1.14)
In excess of net
investment income..... (.01) -- -- -- -- -- -- -- -- --
Net realized gain on
investments........... (8.56) (4.52) (2.79) (1.94) (2.68) (2.56) (1.44) (.37) (2.75) (.12)
In excess of net
realized gain on
investments........... -- -- -- (.10) -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------ ------- -------
Total Distributions... (9.17) (5.23) (3.62) (2.95) (3.58) (3.55) (2.51) (1.67) (4.15) (1.26)
------- ------- ------- ------- ------- ------- ------- ------ ------- -------
NET ASSET VALUE, END OF
YEAR................... $ 29.80 $ 29.68 $ 29.11 $ 24.18 $ 27.05 $ 26.75 $ 27.08 $23.30 $ 26.49 $ 24.03
======= ======= ======= ======= ======= ======= ======= ====== ======= =======
TOTAL RETURN (%)(a)..... 33.13 20.90 35.96 1.16 14.95 12.30 27.86 (5.73) 28.07 22.19
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses to
average net assets
(a)................... .78 .79 .65 .17 .16 .20 .25 .27 .23 .20
Net investment income
to average net assets
(a)................... 1.77 2.23 2.90 3.39 3.09 3.57 4.05 4.91 4.58 4.96
Portfolio turnover..... 128.86 100.78 103.40 85.92 76.77 84.56 56.99 65.74 83.13 57.28
Net assets, end of year
($000 omitted)........ 242,112 221,778 222,541 177,807 181,630 166,782 138,076 94,087 135,245 106,695
Average commission rate
paid per share of
security ($ omitted).. .0415 .0447 N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- - ---------------------
(a) For periods prior to April 1, 1995, Fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net of
investment management fees but gross of any investment services fees.
Management fees and investment services fees reduce performance; for
example, an investment services fee of 0.2% of average managed assets will
reduce a 10% return to 9.8%.
* See the notes to financial statements which appear in the Trusts Annual
Report to Shareholders and which are incorporated by reference into the
Statement of Additional Information.
8
<PAGE>
FINANCIAL HIGHLIGHTS OF THE EQUITY Q FUND*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand L.L.P., the Trusts independent
accountants. The table includes selected data for a share outstanding throughout
each year or period ended December 31, and other performance information derived
from the financial statements. The information in the table represents the
Financial Highlights for the Funds Class S Shares for the periods shown. The
table appears in the Funds financial statements and related notes, which are
incorporated by reference into the Statement of Additional Information and which
appear, along with the report of Coopers & Lybrand L.L.P. in the Funds Annual
Report to Shareholders. More detailed information concerning the Funds
performance, including a complete portfolio listing and audited financial
statements, is available in the Funds Annual Report, which may be obtained
without charge by writing or calling the Trust.
EQUITY Q FUND
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF YEAR........... $ 32.94 $ 30.40 $ 24.43 $ 26.03 $ 25.23 $ 24.90 $ 20.20 $ 22.45 $ 18.85 $16.67
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .44 .58 .59 .69 .66 .67 .75 .81 .78 .69
INCOME
Net realized and
unrealized gain (loss)
on investments........ 10.01 6.33 8.52 (.41) 2.71 1.73 5.58 (1.89) 4.26 2.15
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
Total income from
Investment
Operations........... 10.45 6.91 9.11 .28 3.37 2.40 6.33 (1.08) 5.04 2.84
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
LESS DISTRIBUTIONS:
Net investment income.. (.44) (.58) (.61) (.69) (.66) (.68) (.75) (.79) (.86) (.66)
In excess of net in-
vestment income....... -- (.01) -- -- -- -- -- -- -- --
Net realized gain on
investments........... (7.05) (3.78) (2.53) (.97) (1.85) (1.39) (.88) (.38) (.58) --
In excess of net
realized gain on
investments........... -- -- -- (.22) (.06) -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
Total Distributions... (7.49) (4.37) (3.14) (1.88) (2.57) (2.07) (1.63) (1.17) (1.44) (.66)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
NET ASSET VALUE, END OF
YEAR................... $ 35.90 $ 32.94 $ 30.40 $ 24.43 $ 26.03 $ 25.23 24.90 $ 20.20 $ 22.45 $18.85
======= ======= ======= ======= ======= ======= ======= ======= ======= ======
TOTAL RETURN (%)(a)(b).. 33.07 23.67 37.91 .99 13.80 9.97 32.14 (4.81) 27.10 17.16
RATIOS (%) SUPPLEMENTAL
DATA:
Operating expenses to
average net assets
(b)(c)................ .68 .71 .58 .11 .15 .18 .23 .31 .33 .33
Net investment income
to average net
assets (b)(c)......... 1.17 1.80 2.07 2.74 2.50 2.80 3.23 3.70 3.68 3.82
Portfolio turnover
(c)................... 94.89 74.59 74.00 45.87 54.69 58.35 51.37 66.51 88.03 52.21
Net assets, end of year
($000 omitted)........ 987,760 818,281 620,259 430,661 382,939 290,357 215,779 133,869 129,680 89,320
Average commission rate
paid per share of
security ($ omitted).. .0350 .0332 N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- - ---------------------
(a) Periods less than one year are not annualized.
(b) For periods prior to April 1, 1995, Fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net of
investment management fees but gross of any investment services fees.
Management fees and investment services fees reduce performance; for
example, an investment services fee of 0.2% of average managed assets will
reduce a 10% return to 9.8%.
(c) The ratios for the period ended December 31, 1987 are annualized. * See the
notes to financial statements which appear in the Trusts Annual
Report to Shareholders and which are incorporated by reference into the
Statement of Additional Information.
9
<PAGE>
FINANCIAL HIGHLIGHTS OF THE INTERNATIONAL FUND*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand L.L.P., the Trusts independent
accountants. The table includes selected data for a share outstanding throughout
each year ended December 31, and other performance information derived from the
financial statements. The information in the table represents the Financial
Highlights for the Funds Class S Shares for the periods shown. The table appears
in the Funds financial statements and related notes, which are incorporated by
reference into the Statement of Additional Information and which appear, along
with the report of Coopers & Lybrand L.L.P. in the Funds Annual Report to
Shareholders. More detailed information concerning the Funds performance,
including a complete portfolio listing and audited financial statements, is
available in the Funds Annual Report, which may be obtained without charge by
writing or calling the Trust.
INTERNATIONAL FUND
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $ 37.39 $ 36.26 $ 34.28 $ 37.34 $ 28.92 $ 31.96 $ 29.18 $ 38.52 $ 35.44 $ 35.50
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .46 .44 .48 .61 .58 .67 .73 1.23 .85 .95
Net realized and
unrealized gain (loss)
on investments (a).... (.28) 2.41 3.16 .65 9.63 (2.62) 3.16 (7.27) 7.46 5.77
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Income From
Investment
Operations........... .18 2.85 3.64 1.26 10.21 (1.95) 3.89 (6.04) 8.31 6.72
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income.. (.37) (.35) (.64) (.36) (.57) (.67) (.80) (1.19) (1.02) (1.11)
In excess of net
investment income..... (.18) -- (.08) -- (.16) -- -- -- -- --
Net realized gain on
investments........... (1.95) (1.37) (.94) (3.73) (1.06) (.42) (.31) (2.11) (4.21) (5.67)
In excess of net
realized gain on
investments........... (.47) -- -- (.23) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions... (2.97) (1.72) (1.66) (4.32) (1.79) (1.09) (1.11) (3.30) (5.23) (6.78)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
YEAR................... $ 34.60 $ 37.39 $ 36.26 $ 34.28 $ 37.34 $ 28.92 $ 31.96 $ 29.18 $ 38.52 $ 35.44
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)(b)..... .58 7.98 10.71 5.38 35.56 (6.11) 13.47 (15.94) 24.06 20.13
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses,
net, to average net
assets (b)............ 1.00 1.04 .88 .32 .39 .45 .48 .50 .44 .45
Operating expenses,
gross, to average net
assets (b)............ 1.00 1.05 .89 .34 .41 .46 .48 .50 .44 .45
Net investment income
to average net assets
(b)................... 1.14 1.20 1.41 1.63 1.83 2.46 2.61 3.14 2.38 2.52
Portfolio turnover..... 79.45 42.69 36.78 71.09 62.04 48.99 53.13 78.30 53.49 51.17
Net assets, end of year
($000 omitted)........ 972,735 944,380 796,777 674,180 562,497 348,869 252,828 171,613 186,742 149,064
</TABLE>
- - ---------------------
(a) Provision for federal income tax for the year ended December 31, 1991
amounted to $.024 per share.
(b) For periods prior to April 1, 1995, Fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net of
investment management fees but gross of any investment services fees.
Management fees and investment services fees reduce performance; for
example, an investment services fee of 0.2% of average managed assets will
reduce a 10% return to 9.8%.
(c) In certain foreign markets the relationship between the translated US dollar
price per share and commission paid per share may vary from that of domestic
markets.
* See the notes to financial statements which appear in Trusts Annual Report
to Shareholders and which are incorporated by reference into the Statement
of Additional Information.
10
<PAGE>
FINANCIAL HIGHLIGHTS OF THE FIXED INCOME I FUND*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand L.L.P., the Trusts independent
accountants. The table includes selected data for a share outstanding throughout
each year ended December 31, and other performance information derived from the
financial statements. The information in the table represents the Financial
Highlights for the Funds Class S Shares for the periods shown. The table appears
in the Funds financial statements and related notes, which are incorporated by
reference into the Statement of Additional Information and which appear, along
with the report of Coopers & Lybrand L.L.P. in the Funds Annual Report to
Shareholders. More detailed information concerning the Funds performance,
including a complete portfolio listing and audited financial statements, is
available in the Funds Annual Report, which may be obtained without charge by
writing or calling the Trust.
FIXED INCOME I FUND
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF YEAR........... $ 20.99 $ 21.59 $ 19.59 $ 21.74 $ 21.61 $ 22.29 $ 20.86 $ 20.91 $ 20.50 $ 20.48
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. 1.37 1.38 1.42 1.46 1.50 1.63 1.71 1.77 1.93 1.73
Net realized and
unrealized gain (loss)
on investments........ .54 (.62) 2.02 (2.06) .72 (.07) 1.49 (.05) .71 .01
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total From Investment
Operations .......... 1.91 .76 3.44 (.60) 2.22 1.56 3.20 1.72 2.64 1.74
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income.. (1.39) (1.36) (1.44) (1.44) (1.50) (1.62) (1.69) (1.77) (1.92) (1.72)
In excess of net
investment income..... -- -- -- -- (.01) -- -- -- -- --
Net realized gain on
investments........... -- -- -- -- (.58) (.62) (.08) -- (.31) --
In excess of net real-
ized gain on invest-
ments ................ -- -- -- (.11) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions... (1.39) (1.36) (1.44) (1.55) (2.09) (2.24) (1.77) (1.77) (2.23) (1.72)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
YEAR................... $ 21.51 $ 20.99 $ 21.59 $ 19.59 $ 21.74 $ 21.61 $ 22.29 $ 20.86 $ 20.91 $ 20.50
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN (%)(a)..... 9.42 3.75 18.03 (2.97) 10.46 7.26 16.01 8.60 13.35 8.76
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses to
average net assets
(a)................... .42 .42 .35 .10 .09 .10 .10 .11 .12 .13
Net investment income
to average net assets
(a)................... 6.54 6.57 6.82 7.06 6.71 7.45 8.08 8.70 8.96 8.28
Portfolio turnover..... 165.81 147.31 138.05 173.97 173.27 211.26 121.91 114.15 196.18 186.54
Net assets, end of year
($000 omitted)........ 798,252 662,899 638,317 496,038 533,696 530,857 458,201 329,091 297,721 223,216
</TABLE>
- - ---------------------
(a) For periods prior to April 1, 1995, Fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net of
investment management fees but gross of any investment services fees.
Management fees and investment services fees reduce performance; for
example, an investment services fee of 0.2% of average managed assets will
reduce a 10% return to 9.8%.
* See the notes to financial statements which appear in Trusts Annual Report
to Shareholders and which are incorporated by reference into the Statement
of Additional Information.
11
<PAGE>
FINANCIAL HIGHLIGHTS OF THE FIXED INCOME II FUND*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand L.L.P., the Trusts independent
accountants. The table includes selected data for a share outstanding throughout
each year ended December 31, and other performance information derived from the
financial statements. The information in the table represents the Financial
Highlights for the Funds Class S Shares for the periods shown. The table appears
in the Funds financial statements and related notes, which are incorporated by
reference into the Statement of Additional Information and which appear, along
with the report of Coopers & Lybrand L.L.P. in the Funds Annual Report to
Shareholders. More detailed information concerning the Funds performance,
including a complete portfolio listing and audited financial statements, is
available in the Funds Annual Report, which may be obtained without charge by
writing or calling the Trust.
FIXED INCOME II FUND
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR...... $ 18.36 $ 18.55 $ 17.98 $ 18.99 $ 18.56 $ 19.68 $ 18.94 $ 18.69 $18.51 $18.63
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. 1.08 1.04 1.16 1.21 .84 1.35 1.52 1.53 1.69 1.61
Net realized and
unrealized gain (loss)
on investments........ -- .19 .59 (1.07) .44 (.83) .72 .23 .27 (.12)
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Total From Investment
Operations........... 1.08 .85 1.75 .14 1.28 .52 2.24 1.76 1.96 1.49
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
LESS DISTRIBUTIONS:
Net investment income.. (1.09) (1.04) (1.18) (1.15) (.71) (1.36) (1.50) (1.51) (1.78) (1.61)
Net realized gain on
investments........... -- -- -- -- -- (.28) -- -- -- --
Tax return of capital.. -- -- -- -- (.14) -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Total Distributions... (1.09) (1.04) (1.18) (1.15) (.85) (1.64) (1.50) (1.51) (1.78) (1.61)
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
NET ASSET VALUE, END OF
YEAR................... $ 18.35 $ 18.36 $ 18.55 $ 17.98 $ 18.99 $ 18.56 $ 19.68 $ 18.94 $18.69 $18.51
======= ======= ======= ======= ======= ======= ======= ======= ====== ======
TOTAL RETURN (%)(a)..... 6.02 4.76 9.95 .82 6.98 2.74 12.31 9.71 10.99 8.20
RATIOS (%)/SUPPLEMENTAL
DATA:
Operating expenses to
average net assets
(a)................... .66 .70 .58 .19 .16 .19 .13 .15 .17 .13
Net investment income
to average net assets
(a)................... 5.70 5.70 6.41 6.52 6.16 7.21 8.06 8.45 8.97 8.56
Portfolio turnover..... 213.14 264.40 269.31 233.75 229.07 330.58 188.30 184.38 320.16 217.58
Net assets, end of year
($000 omitted)........ 229,470 222,983 183,577 144,030 138,619 182,735 156,685 119,853 83,313 86,052
</TABLE>
- - ---------------------
(a) For periods prior to April 1, 1995, Fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net of
investment management fees but gross of any investment services fees.
Management fees and investment services fees reduce performance; for
example, an investment services fee of 0.2% of average managed assets will
reduce a 10% return to 9.8%.
* See the notes to financial statements which appear in the Trusts Annual
Report to Shareholders and which are incorporated by reference into the
Statement of Additional Information.
12
<PAGE>
FINANCIAL HIGHLIGHTS OF THE FIXED INCOME III FUND*
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand L.L.P., the Trusts independent
accountants. The table includes selected data for a share outstanding throughout
each year ended December 31, and other performance information derived from the
financial statements. The information in the table represents the Financial
Highlights for the Funds Class S Shares for the periods shown. The table appears
in the Funds financial statements and related notes, which are incorporated by
reference into the Statement of Additional Information and which appear, along
with the report of Coopers & Lybrand L.L.P. in the Funds Annual Report to
Shareholders. More detailed information concerning the Funds performance,
including a complete portfolio listing and audited financial statements, is
available in the Funds Annual Report, which may be obtained without charge by
writing or calling the Trust.
FIXED INCOME III FUND
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993++
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
YEAR............................. $ 10.17 $ 10.34 $ 9.37 $ 10.44 $ 10.00
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............ .63 .64 .67 .66 .49
Net realized and unrealized gain
(loss) on investments........... .32 (.16) .97 (1.07) .52
------- ------- ------- ------- -------
Total From Investment Opera-
tions......................... .95 .48 1.64 (.41) 1.01
------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income............ (.62) (.64) (.67) (.66) (.48)
In excess of net investment in-
come............................ (.02) (.01) -- -- --
Net realized gain on invest-
ments........................... (.06) -- -- -- (.08)
In excess of net realized gain on
investments..................... -- -- -- -- (.01)
------- ------- ------- ------- -------
Total Distributions............ (.70) (.65) (.67) (.66) (.57)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF YEAR...... $ 10.42 $ 10.17 $ 10.34 $ 9.37 $ 10.44
======= ======= ======= ======= =======
TOTAL RETURN (%)(a)(c)............ 9.64 4.88 17.99 (3.89) 10.22
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to aver-
age net assets (b)(c)........... .70 .73 .61 .20 .20
Operating expenses, gross, to av-
erage net assets (b)(c)......... .70 .73 .61 .20 .40
Net investment income to average
net assets (b).................. 6.13 6.32 6.83 7.02 6.30
Portfolio turnover (b)........... 274.84 144.26 141.37 134.11 181.86
Net assets, end of year ($000
omitted)........................ 382,433 292,077 252,465 166,620 124,234
</TABLE>
- - ---------------------
++ For the period January 29, 1993 (commencement of operations) to December 31,
1993.
(a) Periods less than one year are not annualized. (b) The ratios for the period
ended December 31, 1993 are annualized. (c) For periods prior to April 1, 1995,
Fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net of
investment management fees but gross of any investment services fees.
Management fees and investment services fees reduce performance; for
example, an investment services fee of 0.2% of average managed assets will
reduce a 10% return to 9.8%.
* See the notes to financial statements which appear in the Trusts Annual
Report to Shareholders and which are incorporated by reference into the
Statement of Additional Information.
13
<PAGE>
THE PURPOSE OF THE FUNDS--MULTI-STYLE, MULTI-MANAGER DIVERSIFICATION
The Funds offer Eligible Investors the opportunities to use FRIMCos and
Russells "multi-style, multi-manager diversification" investment method and to
obtain FRIMCos and Russells money manager evaluation services.
Russell acts as consultant to the Funds. Russell was founded in 1936 and has
been providing comprehensive asset management consulting services for almost 30
years to institutional investors, principally large corporate employee benefit
plans. Russell and its affiliates have offices around the world--in Tacoma, New
York, Toronto, London, Zurich, Paris, Sydney, Auckland and Tokyo.
Three functions form the core of Russells consulting services:
. Objective Setting: Defining appropriate investment objectives and desired
investment returns, based on a clients unique situation and risk
tolerance.
. Asset Allocation: Allocating a clients assets among different asset
classes--such as common stocks, fixed-income securities, international
securities, temporary cash investments and real estate--in a way most likely
to achieve the clients objectives and desired returns.
. Money Manager Research: Evaluating and recommending professional
investment advisory and management organizations ("money managers") to
make specific portfolio investments for each asset class, according to
designated investment objectives, styles and strategies.
When this process is completed, a clients assets are invested using a
"multi-style, multi-manager diversification" technique. The goals of this
process are to reduce risk and to increase returns.
FRIMCo and Russell believe investors should seek to hold fully diversified
portfolios that reflect both their own individual investment time horizons and
their ability to accept risk. FRIMCo and Russell believe that for many, this can
be accomplished through strategically purchasing shares in one or more of the
Funds which have been structured to provide access to specific asset classes in
a multi-style, multi-manager environment.
Capital market history shows that asset classes with greater risk will
generally outperform lower risk asset classes over time. For instance, corporate
equities, over the past 50 years, have outperformed corporate debt in absolute
terms. However, what is generally true of performance over extended periods will
not necessarily be true at any given time during a market cycle, and from time
to time asset classes with greater risk may also underperform lower risk asset
classes, on either a risk adjusted or absolute basis. Investors should select a
mix of asset classes that reflects their overall ability to withstand market
fluctuations over their investment horizons.
Studies have shown that no one investment style within an asset class will
consistently outperform competing styles. For instance, investment styles
favoring securities with growth characteristics may outperform styles favoring
income producing securities, and vice versa. It is largely for this reason that
no single manager has consistently outperformed the market over extended
periods. While performance cycles tend to repeat themselves, they do not do so
predictably.
FRIMCo and Russell believe, however, that it is possible to select managers
who have shown a consistent ability to achieve superior results within specific
asset classes and investment styles by employing a unique combination of
qualitative and quantitative measurements. FRIMCo combines these select managers
with other managers within the same asset class who employ complementary styles.
By combining complementary investment styles within an asset class, investors
are better able to reduce their exposure to any one investment style going out
of favor.
14
<PAGE>
By strategically selecting from among a variety of investments by asset class,
each of which has been constructed using these multi-style, multi- manager
principles, investors are able to design portfolios that meet their specific
investment needs.
ELIGIBLE INVESTORS
Shares of the Funds are currently offered only to Eligible Investors.
Eligible Investors include:
. Institutional investors and Financial Intermediaries investing for their own
accounts or in fiduciary or agency capacity, which have entered into asset
management services agreements ("Agreements") with FRIMCo. "Financial
Intermediaries" include bank trust departments, registered investment
advisers, broker-dealers, employee benefit plans and other financial
services organizations;
. Institutions or individuals who have acquired shares through
institutional investors and Financial Intermediaries; and
. Trustees, officers, employees and certain third-party contractors of the
Trust and its affiliates.
The initial minimum aggregate investment in any combination of the Funds
described in this Prospectus and in the Trusts Specialty Funds Prospectus is $5
million. You may be eligible to purchase shares of these Funds if you do not
meet the required initial minimum investment. FRIMCo at its discretion may waive
the initial minimum investment for some employee benefit plans and other plans
or if the requirements are met for a combined purchase privilege, cumulative
quantity discount or statement of intention. You should consult your Financial
Intermediary for details. Trustees, officers, employees, and certain third-party
contractors of the Trust and its affiliates are not subject to any initial
minimum investment requirement.
The Funds do not generally offer their shares directly to individual (i.e.,
retail) investors, although they may choose to do so. Financial Intermediaries
that have entered into Agreements with FRIMCo may acquire shares of the Funds
for their customers. Under the Agreements, FRIMCo provides objective-setting and
asset-allocation assistance and services to Financial Intermediaries, which in
turn provide similar services to their customers. Financial Intermediaries
receive no compensation from FRIMCo or Class S Shares of the Funds. However,
Financial Intermediaries may charge their customers a fee for providing these
services and other trust or investment-related services.
Each Agreement with respect to the Funds provides that a shareholder
investment services fee (the "Services Fee") may be paid to FRIMCo. The Services
Fee is usually expressed as a percentage of the clients assets invested in the
Funds. The Services Fee may include a fixed-dollar fee for certain specific
services. The client and FRIMCo agree to the Services Fee, which is determined
by the amount of assets the client expects to invest in the Funds, the nature
and extent of services that FRIMCo agrees to provide to the client, and other
factors.
Either the client or FRIMCo may terminate an Agreement upon written notice.
FRIMCo does not anticipate terminating any Agreement unless a client does not
(i) promptly pay fees due to FRIMCo, or (ii) invest sufficient assets in the
Trusts Funds to compensate FRIMCo for its services. If an Agreement is
terminated, FRIMCo will no longer provide asset-allocation, objective-setting or
other services to the client.
15
<PAGE>
GENERAL MANAGEMENT OF THE FUNDS
The Board oversees the Funds operations, including reviewing and approving the
Funds contracts with FRIMCo, Russell and the money managers. The Trusts
officers, all of whom are employed by and are officers of FRIMCo or its
affiliates, are responsible for the day-to-day management and administration of
the Funds operations. The money managers are responsible for selection of
individual portfolio securities for the assets assigned to them.
FRIMCo:
. provides or supervises the general management and administration,
investment advisory and portfolio management, and distribution services
for the Funds;
. furnishes the Funds with office space, equipment and personnel to operate
and administer the Funds business, and supervises services provided by
third parties, such as the money managers and the Custodian;
. develops the investment programs, selects money managers, allocates
assets among money managers and monitors the money managers investment
programs and results;
. manages, or hires money managers to manage, the Liquidity Portfolio; and
. provides the Funds with transfer agent, dividend disbursing and
shareholder recordkeeping services.
FRIMCo pays the expenses of providing these services (other than transfer
agent and shareholder recordkeeping), as well as a portion of the costs of
preparing and distributing materials that describe the Funds.
FRIMCos officers and employees who oversee the money managers are:
. Randall P. Lert, who has been Chief Investment Officer of FRIMCo since
1989.
. Mark D. Amberson, who has been a Portfolio Manager of FRIMCo since
January 1998. From 1991 to 1997, Mr. Amberson was a Portfolio Manager in
Russells Money Market Trading Group. Mr. Amberson, jointly with another
portfolio manager identified herein, has primary responsibility for
management of the Fixed I, Diversified Bond, Fixed II, Volatility
Constrained Bond, Fixed III, and Multistrategy Bond Funds.
. Randal C. Burge, who has been a Portfolio Manager of FRIMCo since 1995.
From 1990 to 1995, Mr. Burge was a Client Executive for Frank Russell
Australia. Mr. Burge, jointly with another portfolio manager identified
herein, has primary responsibility for management of the Fixed I, Fixed
II, Fixed III, Diversified Bond, Volatility Constrained Bond,
Multistrategy Bond, and Emerging Markets Funds.
. Jean E. Carter, who has been a Portfolio Manager of FRIMCo since 1994.
From 1990 to 1994, Ms. Carter was a Client Executive in Russells
Investment Group. Ms. Carter, jointly with another portfolio manager
identified herein, has primary responsibility for management of the
International, and International Securities Funds.
. Ann Duncan, who has been a Portfolio Manager of FRIMCo since January
1998. From 1996 to 1997, Ms. Duncan was a Senior Equity Research Analyst
with Russell. From 1992 to 1995, Ms. Duncan was an equity analyst and
portfolio manager with Avatar Associates. Ms. Duncan, jointly with
another portfolio manager identified herein, has primary responsibility
for management of the International, and International Securities Funds.
16
<PAGE>
. James M. Imhof, Manager of FRIMCos Portfolio Trading, manages the Trust on a
day to day basis and has been responsible for ongoing analysis and
monitoring of the money managers since 1989.
. James A. Jornlin, who has been a Senior Investment Officer of FRIMCo
since April 1995. From 1991 to March 1995, Mr. Jornlin was employed as a
Senior Research Analyst with Russell. Mr. Jornlin, jointly with another
portfolio manager identified herein, has primary responsibility for
management of the Emerging Markets and Real Estate Securities Funds.
. Dennis J. Trittin, who has been a Portfolio Manager of FRIMCo since January
1996. From 1988 to 1996, Mr. Trittin was director of US Equity Manager
Research Department. Mr. Trittin, jointly with another portfolio manager
identified herein, has primary responsibility for management of the Equity
I, Equity II, Equity III, Equity Q, Equity T, Diversified Equity,
Quantitative Equity, Special Growth, and Equity Income Funds.
. C. Nola Williams, who has been a Portfolio Manager of FRIMCo since
January 1996. From 1994 to 1995, Ms. Williams was a member of the Alpha
Strategy Group. From 1988 to 1994, Ms. Williams was Senior Research
Analyst with Russell. Ms. Williams, jointly with another portfolio
manager identified herein, has primary responsibility for management of
the Equity I, Equity II, Equity III, Equity Q, Equity T, Diversified
Equity, Quantitative Equity, Special Growth, and Equity Income Funds.
Russell provides to the Funds and FRIMCo the asset management consulting
services--including objective-setting and asset-allocation technology, and money
manager research and evaluation assistance--that Russell provides to its other
consulting clients. Russell does not receive any compensation from the Funds for
its consulting services.
As affiliates, Russell and FRIMCo may establish certain intercompany cost
allocations that reflect the consulting services supplied to FRIMCo. George F.
Russell, Jr., Chairman of the Trust, is the Chairman of the Board and
controlling shareholder of Russell. FRIMCo is a wholly owned subsidiary of
Russell.
The Trust has received an exemptive order from the SEC which permits the
Trust, with the approval of the Board, to engage and terminate money managers
without a shareholder vote and to disclose the aggregate fees paid to the money
managers of each Fund. On January 22, 1996, the shareholders of the Trusts Funds
voted to approve this arrangement.
Under its Management Agreement with the Trust, FRIMCo receives a management
fee from each Fund for FRIMCos services. From this fee, FRIMCo, as the Trusts
agent, pays the money managers for their investment selection services. The
remainder of the management fee is retained by FRIMCo as compensation for the
services described above and to pay expenses. The annual rate of management
fees, payable to FRIMCo monthly on a pro rata basis, are the following
percentages of each Funds average daily net assets; Equity I Fund, 0.60%; Equity
II Fund, 0.75%; Equity III Fund, 0.60%; Equity Q Fund, 0.60%; International
Fund, 0.75%; Fixed Income I Fund, 0.30%; Fixed Income II Fund, 0.50%; and Fixed
Income III Fund, 0.55%.
FRIMCo has voluntarily agreed to waive all or a portion of its management fees
for certain Funds. This arrangement is not part of the Management Agreement with
the Trust and may be changed or discontinued at any time. FRIMCo currently
calculates its management fee based on a Funds average daily net assets less any
management fee incurred on the Funds assets to the extent the Fund incurs
management fees for investing a portion of its assets in the Trusts Money Market
Fund.
17
<PAGE>
The Board has approved, subject to approval by the shareholders of the
applicable Funds at a meeting to be held during 1998 (the "1998 Shareholder
Meeting"), an amendment to the Management Agreement. Under the amendment, in
addition to the fees set forth above (restructured as described in the next
paragraph), the Funds will pay FRIMCo a fee which compensates FRIMCo for
managing collateral which the Funds have received in securities lending and
certain other portfolio transactions. If the amendment is approved by
shareholders, each Fund will pay a fee to FRIMCo for its services in managing
the Funds cash, securities and other investment assets which are not treated as
net assets of that Fund ("additional assets") in determining the Funds net asset
value per share. If approved, the additional fee payable to FRIMCo will equal an
amount up to 0.07% of each Funds additional assets on an annualized basis.
It is also proposed that the services which FRIMCo provides to the Funds under
the present Management Agreement will be divided into two components. Those
services which are investment advisory in nature will be provided pursuant to a
new Advisory Agreement. Other services which are administrative in nature will
be provided pursuant to a new Administrative Agreement. It is not anticipated
that this restructuring of services provided to the Fund will materially affect
the costs of these services to the Funds, or affect FRIMCos current voluntary
fee waivers.
EXPENSES OF THE FUNDS
The Funds (and each class, when appropriate) pay all their expenses other than
those expressly assumed by FRIMCo. The Funds expenses for Class S Shares for the
year ended December 31, 1997, as a percentage of each Funds average net assets,
are shown in the Financial Highlights tables in this Prospectus.
Principal expenses are:
. the management, transfer agent, and recordkeeping fees payable to FRIMCo;
. fees for custody, preparing tax records, and portfolio accounting,
payable to the Custodian; and
. fees for independent auditing and legal services; and filing and
registration fees payable to the SEC.
THE MONEY MANAGERS
Each Funds assets are allocated among the money managers listed in "Money
Manager Profiles" in this Prospectus. FRIMCo may change the allocation of a
Funds assets among money managers at any time. FRIMCo may employ or terminate a
money manager at any time, subject to the approval by the Board. A Fund will
notify its shareholders within 60 days of when a money manager begins providing
services. The money managers are selected for the Funds based primarily upon the
research and recommendations of FRIMCo and Russell. FRIMCo and Russell evaluate
quantitatively and qualitatively the money managers skills and results in
managing assets for specific asset classes, investment styles and strategies.
Short-term investment performance, by itself, is not a controlling factor in
selecting or terminating a money manager for any Fund.
From its management fees, FRIMCo, as the Trusts agent, pays fees to the money
managers for their investment selection services. Quarterly, each money manager
is paid the pro rata portion of an annual fee, based on the average of all
assets allocated to the manager for the quarter. For the year ended December 31,
1997, management fees paid to the money managers were equivalent to the
following annual rates, expressed as a percentage of each Funds average daily
net assets: Equity I Fund, 0.23%; Equity II Fund, 0.40%; Equity III
18
<PAGE>
Fund, 0.19%; Equity Q Fund, 0.19%; International Fund, 0.39%; Fixed Income I
Fund, 0.08%; Fixed Income II Fund, 0.17%; and Fixed Income III Fund, 0.21%.
Each money manager has agreed that it will look only to FRIMCo for the payment
of the money managers fee, after the Trust has paid FRIMCo. Fees paid to the
money managers are not affected by any voluntary or legal expense limitations.
Some money managers may receive investment research prepared by Russell as
additional compensation, or may receive brokerage commissions for executing
portfolio transactions for the Funds.
Each money manager has complete discretion to purchase and sell portfolio
securities for its segment of a Fund. At the same time, however, each money
manager must operate within the Funds investment objectives, restrictions and
policies and the more specific strategies developed by FRIMCo. Although the
money managers activities are subject to general oversight by the Board and the
Trusts officers, neither the Board, the officers, FRIMCo nor Russell evaluate
the investment merits of the money managers individual security selections.
INVESTMENT OBJECTIVES, POLICIES AND PRACTICES
The investment objective and general investment policies of each Fund are
described in "Investment Objectives." Types of portfolio securities that may be
purchased by the Funds are described in "Fund Investment Securities." Specific
investment practices that may be employed by the Funds are identified in "Other
Investment Practices." The risks associated with portfolio investments by the
Funds are described in those sections, as well as in "Risk Considerations."
Certain terms used in these sections are described in the Glossary in this
Prospectus.
SUMMARY COMPARISON OF THE FUNDS
<TABLE>
<CAPTION>
ANTICIPATED MAXIMUM
EQUITY DEBT
FUND EXPOSURE EXPOSURE FOCUS
---- ----------- -------- -----
<S> <C> <C> <C>
Equity I Fund...................... 65-100% 35% Total return
Equity II Fund..................... 65-100% 35% Maximum total return
Equity III Fund.................... 65-100% 35% Current income
Equity Q Fund...................... 100% --% Total return
International Fund................. 65-100% 35% Total return
Fixed Income I..................... 35% 65-100% Diversification
Fixed Income II Fund............... 35% 65-100% Preservation of capital
Fixed Income III Fund.............. --% 100% Maximum total return
</TABLE>
INVESTMENT OBJECTIVES
Each Funds investment objective is "fundamental," which means each investment
objective may not be changed without the approval of a majority of each Funds
shareholders. Certain investment policies may also be fundamental. Ordinarily,
each Fund will invest more than 65% of its total assets in the types of
securities identified in its investment objective. However, the Funds may hold
assets as cash reserves for temporary and defensive purposes when their money
managers believe a conservative approach is desirable, or when suitable
investments are unavailable.
19
<PAGE>
EQUITY I FUND
Equity I Funds objective is to provide income and capital growth by investing
principally in equity securities. Equity I Fund may invest in common and
preferred stocks, convertible securities, rights and warrants.
EQUITY II FUND
Equity II Funds objective is to maximize total return primarily through
capital appreciation and by assuming a higher level of volatility than Equity I
Fund. Equity II Fund seeks to achieve its objective by investing in equity
securities.
The Fund also seeks to provide current income. The Fund may invest in common
and preferred stock, convertible securities, rights and warrants. The Funds
investments may include companies whose securities have been publicly traded for
less than five years and smaller companies (i.e., companies not listed in the
Russell 1000(R) Index). A substantial portion of the Funds portfolio will
generally consist of equity securities of "emerging growth-type" companies or
companies characterized as "special situations." "Emerging growth-type"
companies tend to reinvest most of their earnings, rather than pay significant
cash dividends. "Special situation" companies are those which the money managers
believe present opportunities for capital growth because of cyclical
developments in the securities markets, the industry, or the issuer.
EQUITY III FUND
Equity III Funds objective is to achieve a high level of current income, while
maintaining the potential for capital appreciation. Equity III Fund seeks to
achieve its objective by investing primarily in income-producing equity
securities.
The income objective of the Fund is to exceed the yield on the S&P 500 Index.
The index yield will change from year to year due to changes in prices and
dividends of stocks in the Index. Income streams will be considered in light of
their current level and the opportunity for future growth. Capital appreciation
may not be comparable to that delivered by Funds such as Equity II Fund whose
major objective is appreciation, although FRIMCo believes that a high and
growing stream of income is conducive to higher capital values. The Fund may
also invest in preferred stock, convertible securities, rights and warrants.
EQUITY Q FUND
Equity Q Funds objectives are to provide a total return greater than the total
return of the US stock market (as measured by the Russell 1000(R) Index over a
market cycle of four to six years), while maintaining volatility and
diversification similar to the Index. Equity Q Fund seeks to achieve its
objectives by investing in equity securities.
The Funds portfolio will be structured similarly to the Russell Index, as the
Fund will maintain industry weights and economic sector weights near those of
the Index. As a result, the Funds money managers generally select stocks from
the set of stocks comprising the Russell 1000(R) Index; however, a money manager
may purchase securities that are not included in the Index or sell securities
still included in the Index to meet the
20
<PAGE>
Funds investment objectives. The money managers anticipate that the Funds
average price/earnings ratio, yield and other fundamental characteristics will
be near the averages of the Russell Index.
The money managers of the Fund will seek to achieve the Funds objectives by
using various quantitative management techniques in selecting investments. A
quantitative manager bases its investment decisions primarily on quantitative
investment models. Money managers use these models to determine the investment
potential of a particular portfolio security and to rank securities based upon
their ability to outperform the total return of the Russell 1000(R) Index. Once
the money manager has ranked the securities, it then selects the securities most
likely to construct a portfolio that has superior return prospects with risks
similar to the Russell 1000(R) Index. FRIMCo believes quantitative management
over a market cycle should provide consistent performance, diversification,
market-like volatility and limited market under performance. However, there is
no guarantee that the Fund will have these characteristics at any one time.
The Fund will attempt to be fully invested in common stock at all times.
However, the Fund is permitted to hold up to 20% of Fund assets in liquid
investments to meet redemption requests.
INTERNATIONAL FUND
International Funds objectives are to provide favorable total return and
additional diversification for US investors. International Fund attempts to
achieve its objectives by investing primarily in equity and fixed-income
securities of foreign companies, and securities issued by foreign governments.
The Fund invests primarily in equity securities of companies domiciled outside
the United States. The Fund may also invest in US companies which derive, or are
expected to derive, a substantial portion of their revenues from operations
outside the United States.
The Fund may invest in equity and debt securities denominated in foreign
currencies and gold-related equity investments, including gold mining stocks and
gold-backed debt instruments. However, as a matter of fundamental policy, the
Fund will not invest more than 20% of its net assets in gold-related
investments.
FIXED INCOME I FUND
Fixed Income I Funds objectives are to provide effective diversification
against equities and a stable level of cash flow by investing in fixed-income
securities.
The Funds portfolio will consist primarily of conventional debt instruments,
including bonds, debentures, US government and US government agency securities,
preferred and convertible preferred stocks, and variable amount demand master
notes. (These notes represent a borrowing arrangement under a letter agreement
between commercial paper issuers and institutional lenders, such as the Fund.)
Money managers will select investments based on fundamental economic and market
factors. Money managers will evaluate potential investments by sector, maturity,
quality and other criteria. The Fund will ordinarily invest at least 65% of its
net assets in securities rated no less than A or A-2 by S&P; A or Prime-2 by
Moodys; or, if unrated, judged by the money managers to be of at least equal
credit quality to those designations.
21
<PAGE>
FIXED INCOME II FUND
Fixed Income II Funds objectives are the preservation of capital and the
generation of current income consistent with preservation of capital, by
investing primarily in fixed-income securities with low-volatility
characteristics.
The Fund will invest primarily in those fixed-income securities which mature
in two years or less from the date of acquisition or which have similar
volatility characteristics. To minimize credit risk and fluctuations in net
asset value per share, the Fund intends to maintain an average portfolio
maturity of less than five years.
Although the Fund will invest primarily in debt securities denominated in the
US dollar, the money managers will actively manage the Funds portfolio in
accordance with a multi-market investment strategy. Accordingly, the money
managers will allocate the Funds investments among securities denominated in the
currencies of the United States and selected foreign countries. The Fund may
also invest in high-quality, foreign debt securities. The money managers which
invest in foreign denominated securities will maintain a substantially neutral
currency exposure relative to the US dollar, and will establish and adjust cross
currency hedges based on their perception of the most favorable markets and
issuers. In this regard, the percentage of assets invested in securities of a
particular country or denominated in a particular currency will vary in
accordance with a money managers assessment of the relative yield of such
securities and the relationship of a countrys currency to the US dollar. Money
managers of the Fund will consider fundamental economic strength, credit quality
and interest rate trends in determining whether to increase or decrease the
emphasis placed upon a particular type of security or industry sector. The Fund
will not invest more than 10% of its total assets in debt securities denominated
in a single foreign currency, and FRIMCo currently intends to limit total
investments in non-US dollar securities to no more than 25% of the Funds total
assets.
The Fund will generally invest in the foreign debt securities of countries
whose governments it considers to be stable (the Fund may invest in countries
considered unstable or undeveloped, provided that it believes it is able to
hedge substantially the risk of a decline in the currency in which the
securities are denominated). In addition to the US dollar, such currencies
include (among others) the Australian Dollar, Austrian Schilling, Belgian Franc,
British Pound Sterling, Canadian Dollar, Danish Krone, Dutch Guilder, European
Currency Unit ("ECU"), French Franc, Irish Punt, Italian Lira, Japanese Yen, New
Zealand Dollar, Norwegian Krone, Spanish Peseta, Swedish Krona, Swiss Franc and
German Mark. An issuer of debt securities purchased by the Fund may be domiciled
in a country other than a country in whose currency the instrument is
denominated.
In selecting particular investments for the Fund, the money managers will seek
to minimize investment risk by limiting their portfolio investments to debt
securities of high-quality issuers. Accordingly, the Funds portfolio will
consist only of: (a) US Government securities; (b) obligations issued or
guaranteed by a foreign government or any of its political subdivisions,
authorities, agencies, or instrumentalities; (c) obligations issued or
guaranteed by supranational entities, all of which are rated AAA or AA by S&P or
Aaa or Aa by Moodys or, if unrated, determined to be of comparable quality by
the money managers; (d) investment grade corporate debt securities (or, if
unrated, corporate debt securities which the money managers determine to be of
equivalent quality); (e) bank instruments; and (f) commercial paper.
The Fund intends to use interest rate swaps as a hedge and not as a
speculative investment. For more information on risks, see "Risk
Considerations."
22
<PAGE>
FIXED INCOME III FUND
Fixed Income III Funds objective is to provide maximum total return, primarily
through capital appreciation and by assuming a higher level of volatility than
is ordinarily expected from broad fixed-income market portfolios. Fixed Income
III Fund seeks to achieve its objective by investing in fixed-income securities.
The Fund will invest primarily in fixed-income securities. The Funds
investments will include: US Government securities; obligations of foreign
governments or their subdivisions, agencies and instrumentalities; securities of
international agencies or supranational agencies; corporate debt securities;
loan participations; corporate commercial paper; indexed commercial paper;
variable, floating and zero coupon rate securities; mortgage and other
asset-backed securities; municipal obligations; variable amount demand master
notes; bank instruments; repurchase agreements and reverse repurchase
agreements; and foreign currency exchange related securities.
The Fund may also invest in convertible securities and derivatives including
warrants and interest rate swaps. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, and to protect against any increase in the price of
securities it anticipates purchasing at a later date. The Fund intends to use
these transactions as a hedge and not as a speculative investment. For more
information on risks, see "Risk Considerations."
FUND INVESTMENT SECURITIES
Commercial Paper
Fixed Income II and Fixed Income III Funds may invest in commercial paper.
Commercial paper represents a debt obligation of a company which is unsecured.
Fixed Income II and Fixed Income III Funds will invest in commercial paper which
is rated A-1 or A-2 by S&P; Prime-1 or Prime-2 by Moodys; Fitch-1 or Fitch-2 by
Fitch Investors Service, Inc.; Duff 1 or Duff 2 by Duff & Phelps, Inc.; or TBW-1
or TBW-2 by Thomson Bank Watch, Inc. Fixed Income II and Fixed Income III Funds
may also invest in commercial paper which is not rated if it is issued by US or
foreign companies which the money managers conclude are of high-quality and have
outstanding debt securities which are rated AAA, AA or A by S&P; or Aaa, Aa or A
by Moodys.
DEBT SECURITIES
The Funds may purchase debt securities that complement their respective
investment objectives. The Funds, except Fixed Income III Fund, do not invest in
debt securities rated less than BBB by S&P or Baa by Moodys, or in unrated
securities judged by the money managers to be of a lesser credit quality than
those designations. Securities rated BBB by S&P or Baa by Moodys and above are
considered to be "investment grade" securities, although Moodys considers
securities rated Baa, and S&P considers bonds rated BBB, to have some
speculative characteristics. The Funds, other than Fixed Income III Fund, will
sell securities whose ratings drop below these minimum ratings, in a prudent
manner as determined by the money managers. The market value of debt securities
generally varies inversely with interest rates.
EQUITY SECURITIES
Equity I, Equity II, Equity III, Equity Q and International Funds invest
primarily in equity securities. Equity I, Equity II, Equity III and Equity Q
Funds may invest in common stock equivalents. The following constitute
23
<PAGE>
common stock equivalents: rights and warrants and convertible securities. Common
stock equivalents may be converted into or provide the holder with the right to
common stock. Equity I, Equity II, Equity III and Equity Q Funds may also invest
in other types of equity securities, including preferred stocks.
INTEREST RATE SWAPS
Fixed Income II and Fixed Income III Funds may enter into interest rate swaps.
When a Fund engages in an interest rate swap, it exchanges its obligations to
pay or rights to receive interest payments for the obligations or rights to
receive interest payments of another party (i.e., an exchange of floating rate
payments for fixed rate payments). The Funds expect to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of their portfolios or to protect against any increase in the price
of securities they anticipate purchasing at a later date.
INVESTMENT COMPANY SECURITIES
Each Fund may invest up to 10% of its total assets in shares of other
investment companies that invest in securities in which a Fund may otherwise
invest. Each Fund may invest its cash reserves in the Trusts Money Market Fund.
Because of restrictions on direct investment by US entities in certain
countries, other investment companies may provide the most practical or only way
for International Fund to invest in certain markets. These investments may
involve the payment of substantial premiums above the net asset value of those
investment companies portfolio securities and are subject to limitations under
the 1940 Act. International Fund also may incur tax liability to the extent it
invests in the stock of a foreign issuer that is a "passive foreign investment
company" ("PFIC"), regardless of whether the PFIC makes distributions to the
Fund. See "Taxes" in this Prospectus and in the SAI.
OTHER DEBT SECURITIES
Fixed Income II and Fixed Income III Funds may invest in debt securities
issued by supranational organizations such as:
The World Bank -- An international bank which was chartered to finance
development projects in developing member countries.
The European Economic Community -- An organization which consists of certain
European states engaged in cooperative economic activities.
The European Coal and Steel Community -- An economic union of various
European nations steel and coal industries.
The Asian Development Bank -- An international development bank established
to lend funds, promote investment and provide technical assistance to member
nations in the Asian and Pacific regions.
Fixed Income II Fund may also invest in debt securities denominated in the
ECU, which is a "basket" consisting of specific amounts of currency of member
states of the European Economic Community. The Counsel of Ministers of the
European Economic Community may adjust specific amounts of currency comprising
the ECU to reflect changes in the relative values of the underlying currencies.
The money managers investing in these securities do not believe that such
adjustments will adversely affect holders of ECU-denominated obligations or the
marketability of the securities.
24
<PAGE>
US GOVERNMENT OBLIGATIONS
The Funds may invest in fixed-rate and floating or variable rate US government
obligations. Certain of the obligations, including US Treasury bills, notes and
bonds, and GNMA participation certificates, are issued or guaranteed by the US
government. Other securities issued by US government agencies or
instrumentalities are supported only by the credit of the agency or
instrumentality (for example, those issued by the Federal Home Loan Bank)
whereas others, such as those issued by FNMA, have an additional line of credit
with the US Treasury.
Short-term US government securities generally are considered to be among the
safest short-term investments. However the US government does not guarantee the
net asset value of the Funds shares. With respect to US government securities
supported only by the credit of the issuing agency or instrumentality or by an
additional line of credit with the US Treasury, there is no guarantee that the
US government will provide support to such agencies or instrumentalities.
Accordingly, such US government securities may involve risk of loss of principal
and interest.
The following table illustrates the investments that the Funds primarily
invest in or are permitted to invest in:
<TABLE>
<CAPTION>
FIXED FIXED FIXED
TYPE OF PORTFOLIO EQUITY I EQUITY II EQUITY III EQUITY Q INTERNATIONAL INCOME I INCOME II INCOME III
SECURITY FUND FUND FUND FUND FUND FUND FUND FUND
----------------- -------- --------- ---------- -------- ------------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common stocks........... X X X X X
Common stock equivalents
(warrants)............. X X X X X
Common stock equivalents
(options) ............. X X X X X
Common stock equivalents
(convertible debt
securities) ........... X X X X
Common stock equivalents
(depository receipts).. X
Preferred stocks........ X X X X X
Equity derivative secu-
rities................. X X X X X
Debt securities (below
investment grade or
junk bonds)............ X
US government securi-
ties................... X X X X X X X X
Municipal obligations... X
Investment company
securities............. X X X X X X X X
Foreign securities...... X X
</TABLE>
25
<PAGE>
OTHER INVESTMENT PRACTICES
The Funds use investment techniques commonly used by other mutual funds. The
table below summarizes the principal investment practices of the Funds, each of
which may involve certain special risks. The Glossary describes each of the
investment techniques identified below. The SAI, under the heading "Investment
Restrictions, Policies and Certain Investments," contains more detailed
information about certain of these practices, including limitations designed to
reduce risks.
<TABLE>
<CAPTION>
FIXED FIXED FIXED
EQUITY I EQUITY II EQUITY III EQUITY Q INTERNATIONAL INCOME I INCOME II INCOME III
TYPE OF PRACTICE FUND FUND FUND FUND FUND FUND FUND FUND
---------------- -------- --------- ---------- -------- ------------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash reserves........... X X X X X X X X
Repurchase agreements
(1) ................... X X X X X X X X
When-issued and forward
commitment securities
....................... X X X X X X X X
Reverse repurchase
agreements ............ X X X X X X X X
Lending portfolio
securities, not to
exceed 33 1/3% of total
Fund assets............ X X X X X X X X
Illiquid securities
(limited to 15% of
Funds net assets)..... X X X X X X X X
Forward currency con-
tracts (2).............
Write (sell) call and
put options on
securities, securities
indexes and foreign
currencies (3)......... X X X X X X X X
Purchase options on
securities, securities
indexes, and
currencies (3)......... X X X X X X X X
Interest rate futures contracts, stock index futures contracts, foreign currency
contracts and options
on futures (4) ........ X X X X X X X X
Liquidity portfolio..... X X X X X
</TABLE>
- - ---------------------
(1) Under the 1940 Act, repurchase agreements are considered to be loans by a
Fund and must be fully collateralized by collateral assets. If the seller
defaults on its obligations to repurchase the underlying security, a Fund
may experience delay or difficulty in exercising its rights to realize upon
the security, may incur a loss if the value of the security declines and may
incur disposition costs in liquidating the security.
(2) International, Fixed Income I, Fixed Income II, and Fixed Income III Funds
may not invest more than 25% of their assets in these contracts.
(3) A Fund will only engage in options where the options are traded on a
national securities exchange or in an over-the-counter market. A Fund may
invest up to 5% of its net assets, represented by the premium paid, in call
and put options. A Fund may write a call or put option to the extent that
the aggregate value of all securities or other assets used to cover all such
outstanding options does not exceed 33% of the value of its net assets. Only
the Fixed Income III Fund currently intends to write or purchase options on
foreign currency.
(4) A Fund does not enter into any futures contracts or related options if the
sum of initial margin deposits on futures contracts, related options
(including options on securities, securities indexes and currencies) and
premiums paid for any such related options would exceed 5% of its total
assets. A Fund does not purchase futures contracts or related options if, as
a result, more than one-third of its total assets would be so invested.
Investment Restrictions. If a Fund changes its investment objective or
policies, you should consider whether the Fund remains right for you. The Funds
are subject to additional investment policies and restrictions described in the
SAI, some of which are fundamental.
26
<PAGE>
RISK CONSIDERATIONS
High Risk Bonds. Fixed Income III Fund may invest up to 25% of its total
assets in debt securities rated less than BBB by S&P or Baa by Moodys, or in
unrated securities judged by the Funds money managers to be of comparable
quality. Lower rated debt securities generally offer a higher yield than that
available from higher grade issues. However, lower rated debt securities involve
higher risks, in that they are especially subject to adverse changes in general
economic conditions and in the industries in which the issuers are engaged, to
changes in the financial condition of the issuers and to price fluctuation in
response to changes in interest rates. During periods of economic downturn or
rising interest rates, highly leveraged issuers may experience financial stress
which could adversely affect their ability to make payments of principal and
interest and increase the possibility of default. While this debt may have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposure to adverse conditions. Fixed Income III
Funds money managers will seek to reduce the risks associated with investing in
lower-rated debt securities by limiting the Funds holding in the securities and
by the depth of the managers credit analysis. For additional information, refer
to the SAI.
Hedging and Risk Management Practices. In seeking to protect against the
effect of adverse changes in financial markets or against currency exchange rate
or interest rate changes that are adverse to the present or prospective
positions of the Funds, each of the Funds may employ certain risk management
practices using certain derivative securities and techniques (known as
"derivatives"). Markets in some countries currently do not have instruments
available for hedging transactions. To the extent that such instruments do not
exist, a money manager may not be able to hedge a Funds investment effectively
in such countries. Furthermore, a Fund engages in hedging activities only when
its money managers deem it to be appropriate, and does not necessarily engage in
hedging transactions with respect to each investment.
Hedging transactions involve certain risks. Although a Fund may benefit from
the use of hedging positions, unanticipated changes in interest rates or
securities prices may result in poorer overall performance for a Fund than if it
had not entered into a hedging position. If the correlation between a hedging
position and a portfolio position is not properly protected, the desired
protection may not be obtained and the Fund may be exposed to risk of financial
loss. In addition, a Fund pays commissions and other costs in connection with
such investments.
Investment in Foreign Securities. The Funds may invest in foreign securities
traded on US or foreign exchanges or in the over-the-counter market. Investing
in securities issued by foreign governments and corporations involves
considerations and risks not typically associated with investing in obligations
issued by the US government and domestic corporations. Less information may be
available about foreign companies than about domestic companies, and foreign
companies generally are not subject to the same uniform accounting, auditing and
financial reporting standards or to other regulatory practices and requirements
comparable to those applicable to domestic companies. The values of foreign
investments are affected by changes in currency rates or exchange control
regulations, application of foreign tax laws, including withholding taxes,
changes in governmental administration or economic or monetary policy (in the
United States or abroad) or changed circumstances in dealings between nations.
Costs are incurred in connection with conversions between various currencies. In
addition, foreign brokerage commissions are generally higher than in the United
States, and foreign securities markets may be less liquid, more volatile and
less subject to governmental supervision than in the United States. Investments
in foreign countries could be affected by other factors not present in the
United States, including nationalization, expropriation, confiscatory taxation,
lack of uniform accounting and auditing standards and potential difficulties in
enforcing contractual obligations and could be subject to extended settlement
periods or restrictions affecting the prompt return of capital to the United
States.
27
<PAGE>
Foreign Debt Securities. Fixed Income III Funds portfolio may include debt
securities issued by domestic or foreign entities, and denominated in US dollars
or foreign currencies. The Fund anticipates that no more than 25% of its net
assets will be denominated in foreign currencies. The Fund will only use foreign
currency exchange transactions (options on foreign currencies, foreign currency
futures contracts and forward foreign currency contracts) for the purpose of
hedging against foreign currency exchange risk arising from the Funds
investment, or anticipated investment, in securities denominated in foreign
currencies. Foreign investment may include emerging market debt.
The risks associated with investing in foreign securities are heightened for
investments in developing or emerging markets. For purposes of the International
and Fixed Income III Funds policy of investing in securities of issuers located
in emerging markets, those Funds will consider emerging markets to be countries
with developing economies and markets. These countries generally include every
country in the world except the United States, Canada, Japan, Australia and most
countries located in Western Europe. Investments in emerging or developing
markets involve exposure to economic structures that are generally less diverse
and mature, and to political systems which can be expected to have less
stability, than those of more developed countries. Moreover, the economies of
individual emerging market countries may differ favorably or unfavorably from
the US economy in such respects as the rate of growth in gross domestic product,
the rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position. Because the Funds foreign securities will
generally be denominated in foreign currencies, the value of such securities to
the Funds will be affected by changes in currency exchange rates and in exchange
control regulations. A change in the value of a foreign currency against the US
dollar will result in a corresponding change in the US dollar value of the Funds
foreign securities. In addition, some emerging market countries may have fixed
or managed currencies which are not free-floating against the US dollar.
Further, certain emerging market countries currencies may not be internationally
traded. Certain of these currencies have experienced a steady devaluation
relative to the US dollar. Many emerging market countries have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had, and may
continue to have, negative effects on the economies and securities markets of
certain emerging market countries.
The Fund may invest in the following types of emerging market debt--bonds;
notes and debentures of emerging market governments; and debt and other fixed
income securities issued or guaranteed by emerging market government agencies,
instrumentalities or central banks, or by banks or other companies in emerging
markets which money managers believe are suitable investments for the Fund.
Under current market conditions, it is expected that emerging market debt will
consist predominantly of Brady Bonds and other sovereign debt. Brady Bonds are
products of the "Brady Plan," under which bonds are issued in exchange for cash
and certain of the countrys outstanding commercial bank loans.
Fixed Income III Fund may invest in bank instruments, which include European
certificates of deposit ("ECDs"), European time deposits ("ETDs") and Yankee
Certificates of deposit ("Yankee CDs"). ECDs, ETDs, and Yankee CDs are subject
to somewhat different risks from the obligations of domestic banks. ECDs are
dollar denominated certificates of deposit issued by foreign branches of US and
foreign banks; ETDs are US dollar denominated time deposits in a foreign branch
of a US bank or a foreign bank; and Yankee CDs are certificates of deposit
issued by a US branch of a foreign bank denominated in US dollars and held in
the United States. Different risks may also exist for ECDs, ETDs, and Yankee CDs
because the banks issuing these instruments, or their domestic or foreign
branches, are not necessarily subject to the same regulatory requirements that
apply to domestic banks, such as reserve requirements, loan limitations,
examinations, accounting, auditing and recordkeeping, and the public
availability of information. These factors will be carefully
28
<PAGE>
considered by the money manager when evaluating credit risk in the selection of
investment for the Fixed Income III Fund.
Variable and Floating Rate Securities. Fixed Income III Fund may invest in
variable and floating rate securities. The variable and floating rate securities
provide for a periodic adjustment in the interest rate paid on the obligations.
The terms of such obligations must provide that interest rates are adjusted
periodically based upon some appropriate interest rate adjustment index. The
adjustment intervals may be regular, (i.e., daily, monthly, annually, etc.)
event based, (i.e., a change in the prime rate). The Fund may also invest in
zero coupon US Treasury, foreign government and US and foreign corporate debt
securities, which are bills, notes and bonds that have been stripped of their
unmatured interest coupons and receipts or certificates representing interests
in such stripped debt obligations and coupons. A zero coupon security pays no
interest to its holder prior to maturity. Accordingly, such securities usually
trade at a deep discount from their face or par value and will be subject to
greater market value fluctuations in response to changing interest rates than
debt obligations of comparable maturities that make current distributions of
interest.
Borrowing. The Funds are authorized to borrow from banks to obtain cash to pay
redemption requests. Currently, each Fund may borrow up to 5% of its total
assets. The Board has approved, subject to approval by the shareholders of the
respective Funds at the 1998 Shareholder Meeting, a proposal to revise the Funds
fundamental policy on borrowing. If approved by shareholders, this limit would
be increased to up to 33 1/3% of the current value of the Funds total assets.
Please see the SAI for a more complete discussion of the Funds permissible
borrowing activities.
PORTFOLIO TRANSACTION POLICIES
Money managers make decisions to buy and sell securities for the Fund assets
assigned to them. FRIMCo makes determinations for any other Fund assets. The
Funds do not seek to realize long-term (rather than short-term) capital gains
while making portfolio investment decisions.
Each money manager makes decisions to buy or sell securities independently
from other managers. Thus, one money manager for a Fund may be selling a
security when another money manager for the Fund (or for another Fund) is
purchasing the same security. Also, when a money managers services are
terminated, the new money manager may significantly restructure an investment
portfolio. These practices may increase the Funds portfolio turnover rates,
realization of gains or losses, brokerage commissions and other transaction
costs. The annual portfolio turnover rates for the Funds are shown in the
Financial Highlights tables in this Prospectus.
FRIMCo and the money managers arrange for the purchase and sale of the Trusts
securities and the selection of brokers and dealers (including affiliates)
("Brokers") that, in the best judgment of FRIMCo and the money managers, provide
prompt and reliable execution at favorable prices and reasonable commission
rates. In addition to price and commission rates, Brokers may be selected based
on research, statistical or other services that they provide. The Trust may pay
commission rates that exceed rates that other Brokers may have charged if the
Trust concludes the commissions are reasonable in relation to the value of the
brokerage and/or research services.
The Funds may effect portfolio transactions through Frank Russell Securities,
Inc. ("Russell Securities"), an affiliate of FRIMCo, when a money manager
believes a Fund will receive competitive execution, price, and commissions. When
these transactions are completed, Russell Securities will refund up to 70% of
the commissions paid by the Fund after reimbursement for research services
provided to FRIMCo. Also, the Funds may effect portfolio transactions through
and pay brokerage commissions to Brokers that are affiliates of the money
managers.
29
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
INCOME DIVIDENDS
Each Fund distributes substantially all of its net investment income and net
capital gains to shareholders each year. The amount and frequency of
distributions are not guaranteed--all distributions are at the Boards
discretion. Currently the Board intends to declare dividends from net investment
income and net short-term capital gains (if any) according to the following
schedule:
<TABLE>
<CAPTION>
DECLARED PAYABLE FUNDS
-------- ------- -----
<S> <C> <C>
Quarterly........... Mid: April, July, October and Equity I, Equity II, Equity III,
December Equity Q, Fixed Income I, Fixed
Income II and Fixed Income III
Funds
Annually................ Mid-December International Fund
</TABLE>
CAPITAL GAINS DISTRIBUTIONS
The Board annually intends to declare capital gains distributions through
October 31 (excess of capital gains over capital losses), generally in mid-
December. To meet certain legal requirements, a Fund may declare special
year-end dividend and capital gains distributions during October, November or
December to shareholders of record in that month. These distributions are deemed
to have been paid by a Fund and received by you on December 31 of the prior
year, provided that you receive them by January 31. Capital gains realized
during November and December will be distributed to you during February of the
following year.
BUYING A DIVIDEND
If you purchase shares just before a distribution, you will pay the full price
for the shares and receive a portion of the purchase price back as a taxable
distribution. This is called "buying a dividend." Unless your account is a
tax-deferred account, dividends paid to you would be included in your gross
income for tax purposes even though you may not have participated in the
increase of the net asset value of a Fund, regardless of whether you reinvested
the dividends.
AUTOMATIC REINVESTMENT
Your dividends and other distributions are automatically reinvested at the
closing net asset value on the record date, in additional shares of the
appropriate Fund, unless you elect to have the dividends or distributions paid
in cash or invested in another Fund. You may change your election by delivering
written notice no later than ten days prior to the payment date to the Transfer
Agent, at Operations Department, P.O. Box 1591, Tacoma, WA 98401.
TAXES
Each Fund has elected and intends to continue to qualify for taxation as a
regulated investment company under Subchapter M of the Code. Each Fund must
distribute substantially all of its net investment income and net capital gains
to shareholders and meet other requirements of the Code relating to the sources
of its income and diversification of assets. Accordingly, a Fund will generally
not be liable for federal income or excise taxes
30
<PAGE>
based on net income except to the extent its earnings are not distributed or are
distributed in a manner that does not satisfy the requirements of the Code.
International Fund may incur tax liability to the extent it invests in PFICs.
See "Portfolio Securities" and the SAI. The Funds may be subject to nominal, if
any, state and local taxes.
For federal income tax purposes, the dividends from net investment income and
any excess of net short-term capital gains over net long-term capital loss that
you receive from the Funds are considered ordinary income. However, depending
upon the relevant state tax rules, a portion of the dividends paid by Fixed
Income I, Fixed Income II and Fixed Income III Funds attributable to direct US
Treasury and agency obligations may be exempt from state and local taxes. 28%
and 20% capital gains distributions declared by the Board are taxed at the
respective capital gains rates regardless of the length of time you have held
the shares. Distributions of income and capital gains are taxed in the manner
described above, whether you receive them in cash or reinvest them in additional
shares of the Funds. Distributions paid in excess of a Funds earnings will be
treated as a nontaxable return of capital.
A Fund will notify you of the source of its dividends and distributions at the
time they are paid. After the close of each calendar year, the Funds will advise
their shareholders of the amounts of:
. ordinary income dividends, 28% capital gains dividend, and 20% capital
gains distributions, including any amounts which are deemed paid on
December 31 of the prior year;
. dividends which qualify for the 70% dividends-received deduction
available to corporations;
. any foreign taxes assessed against International, Fixed Income I, Fixed
Income II and Fixed Income III Funds;
. income which is a tax preference item (if any) for alternative minimum
tax purposes; and
. the percentages of Fixed Income I, Fixed Income II and Fixed Income III
Funds income attributable to US government, Treasury and agency
securities.
If you are a corporate investor, a portion of the dividends from net
investment income paid by Equity I, Equity II, Equity III and Equity Q Funds
will generally qualify in part for the corporate dividends-received deduction.
However, the portion depends on the aggregate qualifying dividend income
received by each Fund from domestic (US) sources. Certain holding period and
debt financing restrictions may apply to corporate investors seeking to claim
the deduction. You should consult your tax adviser.
The sale of shares of a Fund is a taxable event and may result in capital gain
or loss. A capital gain or loss may be realized from an ordinary redemption of
shares or an exchange of shares between two mutual funds (or two series or
portfolios of a mutual fund). Any loss incurred on the sale or exchange of a
Funds shares, held for six months or less, will be treated as a long-term
capital loss to the extent of capital gain dividends received with respect to
such shares.
FRIMCo expects the International, Fixed Income I, Fixed Income II and Fixed
Income III Funds to invest more than 50% of their total assets in foreign
securities. In connection with those investments, FRIMCo intends to file
specified elections with the IRS. These elections will permit shareholders to
either deduct (as an itemized deduction in the case of an individual) such
foreign taxes in computing taxable income, or to use these withheld foreign
taxes as credits against US income taxes. The Funds taxable shareholders must
include their pro rata portion of the taxes withheld on their gross income for
federal income tax purposes.
31
<PAGE>
Shareholders of the Funds with foreign holdings should also be aware that
foreign exchange losses realized by a Fund are treated as ordinary losses for
federal income tax purposes. This treatment may reduce Fund income which is
available for distribution to shareholders.
The Fixed Income I, Fixed Income II and Fixed Income III Funds may acquire
zero coupon securities which were issued with original issue discount. When
holding these types of securities, the Funds will have to include a portion of
the original issue discount that accrues on the security for the taxable year in
taxable income. This requirement is imposed even if the Funds receive no payment
on the security during the year. Also, because the Funds must distribute
substantially all of their net investment income annually, the Funds may be
required to distribute a dividend that is greater than the total amount of cash
the Funds actually received in a particular year. Those distributions will be
made from a Funds cash assets or from the proceeds of sales of portfolio
securities (if necessary). The Funds may realize capital gains or losses from
those sales, which could further increase or decrease the Funds dividends and
distributions paid to shareholders.
Each Fund is required to withhold 31% of all taxable dividends, distributions,
and redemption proceeds payable to any non-corporate shareholder which does not
provide the Fund with the shareholders certified taxpayer identification number
or required certifications or which is subject to backup withholding.
Additional information on these and other tax matters relating to the Funds
and their shareholders is included in the section entitled "Taxes" in the SAI.
PERFORMANCE INFORMATION
From time to time, the Funds may advertise their performance in terms of
average annual total return, which is computed by finding the average annual
compounded rates of return over a period that would equate the initial amount
invested to the ending redeemable value. The calculation assumes that all
dividends and distributions are reinvested on the reinvestment dates during the
relevant time period, and includes all recurring fees that are charged. The
average annual total returns for Class S Shares of the Funds are as follows:
<TABLE>
<CAPTION>
5 YEARS 10 YEARS
1 YEAR ENDED ENDED INCEPTION TO
ENDED DEC. 31, DEC. 31, DEC. 31,
DEC. 31, 1997 1997 1997 INCEPTION
1997 (ANNUALIZED) (ANNUALIZED) (ANNUALIZED) DATE
-------- ------------ ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
Equity I............. 32.02% 20.06% 17.76% 16.70% 10/15/81
Equity II............ 28.66% 17.40% 15.98% 14.87% 12/28/81
Equity III........... 33.13% 20.54% 18.35% 17.73% 11/27/81
Equity Q............. 33.07% 21.14% 18.31% 15.40% 05/29/87
International........ 0.58% 11.42% 8.65% 14.92% 01/31/83
Fixed Income I....... 9.42% 7.51% 9.12% 11.35% 10/15/81
Fixed Income II...... 6.02% 5.66% 7.19% 9.28% 10/30/81
Fixed Income III..... 9.64% --% --% 7.65% 01/29/93
</TABLE>
Funds also may from time to time advertise their yields. Yield, which is based
on historical earnings and is not intended to indicate future performance, is
calculated by dividing the net investment income per share earned during the
most recent 30-day (or one month) period by the maximum offering price per share
on the last day of the month. This income is then annualized the amount of
income generated by the investment during that 30-day (or one month) period is
assumed to be generated each month over a 12-month period and is shown as a
32
<PAGE>
percentage of the investment. For purposes of the yield calculation, interest
income is computed based on the yield to maturity of each debt obligation and
dividend income is computed based upon the stated dividend rate of each security
in a Funds portfolio. The calculation includes all recurring fees that are
charged. The 30-day yields for the year ended December 1, 1997 for the Class S
Shares of the Fixed Income I, Fixed Income II and Fixed Income III Funds were,
respectively, 6.13%, 5.56% and 5.80.
Each Fund may also advertise non-standardized performance information which is
for periods in addition to those that are legally required by the SEC.
HOW NET ASSET VALUE IS DETERMINED
NET ASSET VALUE PER SHARE
The net asset value per share is calculated for shares of each class of each
Fund on each business day on which shares are offered or redemption orders are
tendered. For the Funds, a business day is one on which the NYSE is open for
trading. Net asset value per share is computed for Class S Shares of a Fund by
dividing the current value of the Funds assets attributable to the Class S
Shares, less liabilities attributable to the Class S Shares, by the number of
Class S Shares of the Fund outstanding, and rounding to the nearest cent. All
Funds determine their net asset value as of the close of the NYSE (currently
4:00 p.m. Eastern time).
VALUATION OF PORTFOLIO SECURITIES
With the exceptions noted below, the Funds value their portfolio securities at
"fair market value." This generally means that equity securities and
fixed-income securities listed and principally traded on any national securities
exchange are valued on the basis of the last sale price, or if there were no
sales, at the closing bid price, on the primary exchange on which the security
is traded. US over-the-counter equity and fixed-income securities and options
are valued on the basis of the closing bid price, and futures contracts are
valued on the basis of last sale price.
Because many fixed-income securities do not trade each day, last sale or bid
prices often are not available. As a result, these securities may be valued
using prices provided by a pricing service when the prices are believed to be
reliable--that is, when the prices reflect the fair market value of the
securities.
International equity securities traded on a national securities exchange are
valued on the basis of the last sale price. International securities traded
over-the-counter are valued on the basis of the mean of bid prices. If there is
no last sale or mean bid price, the securities may be valued on the basis of
prices provided by a pricing service when the prices are believed to be
reliable.
Money market instruments maturing within 60 days of the valuation date held by
Funds are valued on the basis of "amortized cost." Under this method, a
portfolio instrument is initially valued at cost, and thereafter a constant
accretion/amortization to maturity of any discount or premium is assumed. The
Funds utilize the amortized cost valuation method in accordance with the Rule.
These money market instruments are valued at "amortized cost" unless the Board
determines that amortized cost does not represent fair value. While amortized
cost provides certainty in valuation, it may result in periods when the value of
an instrument is higher or lower than the price a Fund would receive if it sold
the instrument.
The Funds value securities for which market quotations are not readily
available at "fair value," as determined in good faith and in accordance with
procedures established by the Board.
33
<PAGE>
HOW TO PURCHASE SHARES
Russell Funds are generally available only through a select network of
qualified Financial Intermediaries. If you are not currently working with one of
these Financial Intermediaries, please call Russell Investor Services at (800)
RUSSEL4 (787-7354) for assistance in contacting an investment professional near
you.
Certain information noted below, including trade deadlines and payment
procedures, are included for informational purposes only. Contact your Financial
Intermediary for further details.
PAYING FOR SHARES
Shares of the Funds may be purchased without a sales load on any business day
the Funds are open. Purchase orders are processed at the next net asset value
per share calculated after receipt of an order in proper form (defined in the
"Written Instructions" section), and acceptance of the order. Please note the
following:
Cash, third party checks and checks drawn on credit card accounts will not be
accepted.
All purchases must be made in U.S. dollars.
Checks and other negotiable bank drafts must be drawn on U.S. banks and made
payable to "Frank Russell Investment Company."
The Funds reserve the right to reject any purchase order for any reason
including, but not limited to, receiving a check which does not clear the bank
or a payment which does not arrive in proper form by settlement date. An
overdraft charge may also be applied.
OFFERING DATES AND TIMES
Orders must be received by the Transfer Agent on any day when Fund shares
are offered, prior to the close of the NYSE (currently 4:00 p.m. Eastern
time).
ORDER AND PAYMENT PROCEDURES
There are several ways to invest in the Funds. Purchase orders must be placed
through a Financial Intermediary and can be paid for by mail or electronic funds
transfer. Initial purchases require a completed and signed Application for each
new account regardless of the investment method. Specific payment arrangements
should be made with your Financial Intermediary.
BY MAIL
For new accounts, please mail the completed Application to the Financial
Intermediary. Payment for orders may be made by check or other negotiable bank
draft and sent to the Funds Transfer Agent. Certified checks are not necessary,
but checks are accepted subject to collection at full face value in U.S. funds.
Third party checks will not be accepted. Checks should be made payable to "Frank
Russell Investment Company."
BY FEDERAL FUNDS WIRE
Payment for orders may be made by wiring federal funds to the Funds Custodian,
State Street Bank and Trust Company. All wires must include the investors
account registration and account number for identification. Inability to
properly identify a wire transfer may prevent or delay timely settlement of an
investors purchase.
BY AUTOMATED CLEARING HOUSE ("ACH")
An investor can make initial or subsequent investments through ACH to the
Funds Custodian, State Street Bank and Trust Company. Funds transferred by ACH
may not be converted into federal funds the same day,
34
<PAGE>
depending on the time the funds are received and the bank wiring the funds. If
the funds are not converted the same day, they will be converted on the day
received by the Funds Custodian. In that case, the order would be placed on the
next business day.
AUTOMATED INVESTMENT PROGRAM
An investor can make regular investments (minimum $50) in Funds in an
established account on a monthly, quarterly, semiannual or annual basis by
automatic electronic funds transfer from a bank account. A separate transfer is
required for each Fund in which shares are purchased. An investor may change the
amount or stop the automatic purchase at any time. Contact your Financial
Intermediary for further information on this program and an enrollment form.
THREE DAY SETTLEMENT PROGRAM
The Funds will accept orders from Financial Intermediaries to purchase shares
of the Funds for settlement on the third business day following the receipt of
the order. These orders are paid for by a federal funds wire if the Financial
Intermediary has enrolled in the program and agreed in writing to indemnify the
Funds against any losses resulting from non-receipt of payment.
EXCHANGE PRIVILEGE
BY MAIL OR TELEPHONE
Investors may exchange shares of any Fund they own for shares of any other
Fund on the basis of the current net asset value per share at the time of the
exchange. Shares of a Fund offered by this Prospectus may only be exchanged for
shares of a Fund offered by the Trust through another prospectus under certain
conditions and only in states where the exchange may be legally made. For
additional information, including prospectuses for other Funds, contact your
Financial Intermediary.
Exchanges may be made by mail or by telephone if the registration of the two
accounts is identical. Contact your Financial Intermediary for assistance in
exchanging shares. To request an exchange in writing, please follow the
procedures in the "Written Instructions" section before mailing to your
Financial Intermediary.
An exchange is a redemption of shares and is treated as a sale for income tax
purposes. Thus, capital gain or loss may be realized. Please consult your tax
adviser for more information. The Fund shares to be acquired will be purchased
when the proceeds from the redemption become available (up to seven days from
the receipt of the request).
IN-KIND EXCHANGE OF SECURITIES
FRIMCo, in its capacity as investment manager of the Trust, may, at its
discretion, permit you to purchase Fund shares by exchanging securities you
currently own for Fund shares. Any securities exchanged must: meet the
investment objective, policies and limitations of the particular Fund, have a
readily ascertainable market value, be liquid and not be subject to restrictions
on resale, and have market value, plus any cash, equal to at least $100,000.
Shares purchased in exchange for securities generally may not be redeemed or
exchanged until the transfer has settled. This usually occurs within 15 days
following the purchase by exchange. If you are a taxable investor, you will
generally realize a gain or loss for federal income tax purposes on the
exchange. Investors contemplating an in-kind exchange should consult their tax
adviser.
35
<PAGE>
The basis of the exchange will depend upon the relative net asset value of the
Fund shares purchased and securities exchanged. Securities accepted by a Fund
will be valued in the same manner as the Fund values its assets. Any interest
earned on the securities following their delivery to the Transfer Agent and
prior to the exchange will be considered in valuing the securities. All
interest, dividends, subscription or other rights attached to the securities
becomes the property of the Fund, along with the securities. Please contact your
Financial Intermediary for further information.
HOW TO REDEEM SHARES
Shares of the Funds may be redeemed on any business day the Funds are open at
the next net asset value per share calculated after receipt of an order in
proper form (defined in the "Written Instructions" section). Payment will
ordinarily be made within seven days after receipt of your request in proper
form. Shares recently purchased by check will not be available for liquidation
for 15 days following the purchase to assure payment has been collected.
The Funds reserve the right to reject or delay a redemption on certain legal
grounds or to suspend the right of redemption or postpone the date of payment if
any unlikely emergency conditions, as specified in the 1940 Act or determined by
the SEC, should develop.
REDEMPTION DATES AND TIMES
Redemption requests must be placed by a Financial Intermediary and received by
the Transfer Agent prior to the close of the NYSE (currently 4:00 p.m. Eastern
time). Requests can be made by mail or telephone on any day when Fund shares are
offered, or through the Systematic Withdrawal Program.
BY MAIL OR TELEPHONE
Shareholders may redeem shares by calling or writing to their Financial
Intermediary. Written requests to sell shares are in proper form when the
instructions are signed by all registered owners, with a signature guarantee if
necessary.
SYSTEMATIC WITHDRAWAL PROGRAM
The systematic withdrawal program allows you to redeem your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. If you would like to establish a systematic withdrawal program, please
complete the proper section of the account application and indicate how you
would like to receive your payments. You will generally receive your payment by
the end of the month in which a payment is scheduled. When you redeem your
shares under a systematic withdrawal program, it is a taxable transaction.
You may choose to have the payments mailed to you or directed to your bank
account by an ACH transfer. You may discontinue the systematic withdrawal
program, or change the amount and timing of withdrawal payments by contacting
your Financial Intermediary.
PAYMENT OF REDEMPTION PROCEEDS
BY CHECK
A check for the redemption proceeds will be sent to the shareholder(s) of
record at the address of record within seven days after receipt of a redemption
request in proper form.
36
<PAGE>
BY WIRE
If you have established the electronic redemption option, your redemption
proceeds can be wired to your predesignated bank account on the next bank
business day after receipt of your redemption request by the Transfer Agent.
Wire transfers may be charged a fee to cover the cost of the wire (for
redemptions less than $1,000) and your bank may charge an additional fee to
receive the wire. Wire transfers can be sent to domestic commercial banks which
are members of the Federal Reserve System.
WRITTEN INSTRUCTIONS
PROPER FORM: Written instructions must include:
A description of the request The name of the Fund(s) The class of shares, if
applicable The account number(s)
The amount of money or number of shares being purchased, exchanged,
transferred or redeemed The name(s) on the account(s) The signature(s) of all
registered account owners For exchanges, the name of the Fund you are
exchanging into Your daytime telephone number
SIGNATURE REQUIREMENTS BASED ON ACCOUNT TYPE
<TABLE>
<S> <C>
ACCOUNT TYPE REQUIREMENTS FOR WRITTEN REQUESTS
- - --------------------------------------------------------------------------------
Individual, Joint Written instructions must be signed by each
Tenants, Tenants in shareholder, exactly as the names appear in the
Common account registration.
- - --------------------------------------------------------------------------------
UGMA or UTMA (custodial Written instructions must be signed by the custodian
accounts for minors) in his/her capacity as it appears in the account
registration.
- - --------------------------------------------------------------------------------
Corporation, Association Written instructions must be signed by
authorized person(s), stating his/her capacity as
indicated by the corporate resolution to act on the
account. A copy of the corporate resolution,
certified within the past 90 days, authorizing the
signer to act.
- - --------------------------------------------------------------------------------
Estate, Trust, Pension, Written instructions must be signed by all trustees.
Profit Sharing Plan If the name of the trustee(s) does not appear in the
account registration, please provide a copy of the
trust document certified within the last 60 days.
- - --------------------------------------------------------------------------------
Joint tenancy Written instructions must by signed by the surviving
shareholders whose tenant(s). A certified copy of the death certificate
co-tenants are deceased must accompany the request.
</TABLE>
SIGNATURE GUARANTEE
The Funds reserve the right to require a signature guarantee under certain
circumstances. A signature guarantee verifies the authenticity of your
signature. You should be able to obtain a signature guarantee from a bank,
broker, credit union, savings association, clearing agency, or securities
exchange or association. Call your financial institution to see if it has the
ability to guarantee a signature. A notary public cannot provide a signature
guarantee.
37
<PAGE>
ACCOUNT POLICIES
THIRD PARTY TRANSACTIONS
Investors purchasing Fund shares through a program of services offered by a
Financial Intermediary may be required to pay additional fees. Investors should
contact their Financial Intermediary for information concerning what additional
fees, if any, may be charged.
REDEMPTION IN-KIND
A Fund may pay for any portion of the redemption amount in excess of $250,000
by a distribution in-kind of securities from the Funds portfolio, instead of in
cash. Investors will incur brokerage charges on the sale of these portfolio
securities.
ADDITIONAL INFORMATION
DISTRIBUTOR, CUSTODIAN, INDEPENDENT ACCOUNTANTS, AND REPORTS
Russell Fund Distributors, Inc., a wholly owned subsidiary of FRIMCo, is the
principal distributor for Trust shares. The Distributor receives no compensation
from the Trust for its services with respect to Class S Shares.
State Street Bank and Trust Company ("Custodian"), Boston, Massachusetts,
holds all portfolio securities and cash assets of the Funds, and provides
portfolio recordkeeping services. The Custodian may deposit securities in
securities depositories or use subcustodians. The Custodian has no
responsibility for the supervision and management of the Funds.
Coopers & Lybrand L.L.P. ("Coopers"), Boston, Massachusetts, are the Funds
independent accountants. Shareholders will receive unaudited semiannual
financial statements and annual financial statements audited by Coopers.
Shareholders may also receive additional reports concerning the Funds, or their
accounts, from FRIMCo.
YEAR 2000
The services provided to the Trust and the shareholders by FRIMCo, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of their outside service
providers. Many computer software systems in use today cannot distinguish the
year 2000 from the year 1900 because of the way dates are encoded and
calculated. Such event could have a negative impact of handling securities
trades, payments of interest and dividends, pricing and account services.
Although, at this time, there can be no assurance that there will be no adverse
impact on the Trust, FRIMCo, the Distributor, the Transfer Agent and the
Custodian have advised the Trust that they have been actively working on
necessary changes to their computer systems to prepare for the year 2000 and
expect that their systems, and those of their outside service providers, will be
adapted in time for that event. The obligation to make such adaptations, if any,
would be the responsibility of the service provider that maintains the system.
Therefore, the Trust does not expect to incur any material expense in that
regard.
ORGANIZATION, CAPITALIZATION, AND VOTING
The Trust is organized and operates as a Massachusetts business trust. Russell
has the right to grant (and withdraw) the nonexclusive use of the name "Frank
Russell" or any variation.
38
<PAGE>
The Trust issues shares of beneficial interest which can be divided into an
unlimited number of funds. Each Fund is a separate trust under Massachusetts
law. Each Funds shares may be offered in multiple classes. Shares of each class
of a Fund represent proportionate interests in the assets of that Fund and have
the same voting and other rights and preferences as the shares of other classes
of the Fund. Shares of each class of a Fund are entitled to the dividends and
distributions earned on the assets belonging to the Fund that the Board
declares. Each share of a class of a Fund has one vote in Trustee elections and
other matters submitted for shareholder vote. There are no cumulative voting
rights. As a Massachusetts business trust, the Trust is not required to hold
annual shareholder meetings. Special meetings may be called by the Trustees at
their discretion, but must be called by the Trustees upon the written request of
shareholders owning at least 10% of the Trusts outstanding shares. On any matter
which affects only a particular Fund or class, only shares of that Fund or class
are entitled to vote.
The Trustees hold office for the life of the Trust. A Trustee may resign or
retire, and a Trustee may be removed by the Trustees or by shareholders at a
special meeting.
At March 31, 1998, the following shareholders may be deemed by the 1940 Act to
"control" the Funds listed after their names because they own more than 25% of
the voting shares of the Funds: First Trust, N.A.--Equity Q, International and
Fixed Income III Funds.
MONEY MANAGER PROFILES
The money managers identified below have no other affiliations with the Funds,
FRIMCo or with Russell. Each money manager has been in business for at least
three years and is principally engaged in managing institutional investment
accounts. These money managers may also serve as managers or advisers to other
Funds in the Trust, or to other clients of Russell, including its wholly owned
subsidiary, Frank Russell Trust Company.
EQUITY I FUND
Alliance Capital Management L.P., 601 2nd Ave. South, Suite 5000, Minneapolis,
MN 55402-4322, a limited partnership whose (i) general partner is a wholly owned
subsidiary of The Equitable Companies Incorporated ("The Equitable") and (ii)
majority unit holder is ACM, Inc., a wholly owned subsidiary of The Equitable.
As of March 1, 1995, 60.5% of The Equitable was owned by Axa, a French insurance
holding company.
Barclays Global Fund Advisors, 45 Fremont Street, 17th Floor, San Francisco,
CA 94105, is an indirect, wholly-owned subsidiary of Barclays Bank PLC.
Equinox Capital Management, Inc., 590 Madison Avenue, 41st Floor, New York, NY
10022. Equinox is a registered investment adviser with majority ownership held
by Ron Ulrich.
INVESCO Capital Management, Inc., 1315 Peachtree Street N.E., Suite 500,
Atlanta, GA 30309, is a corporation whose indirect parent is AMVESCO, PLC, a
London-based financial services holding company.
Lincoln Capital Management Company, 200 South Wacker Drive, Suite 2100,
Chicago, IL 60606. Lincoln Capital Management, Inc. is a division of Lincoln
Capital Management Company, and is a registered investment adviser with majority
ownership held by John Croghan, Parker Hall, Ken Meyer, Tim Ubben and Ray Zemon.
39
<PAGE>
Morgan Stanley Asset Management, Inc., 1221 Avenue of the Americas, New York,
NY 10020, is a wholly owned subsidiary of Morgan Stanley Dean Witter & Co., a
publicly held corporation.
Peachtree Asset Management, One Peachtree Center, Suite 4500, 303 Peachtree
Street N.E., Atlanta, GA 30308 Peachtree is a unit of the Smith Barney Asset
Management division of Smith Barney Mutual Funds Management Inc., which is a
wholly owned subsidiary of Travelers Group Inc.
Schneider Capital Management, 460 E. Swedesford Road, Suite 1080, Wayne, PA
19087, is an SEC registered investment adviser owned by Arnold Schneider. In
response to an action brought by partners of Wellington Management Company LLP
("Wellington") on December 13, 1996 to enforce a non-compete provision of its
partnership agreement, a judge of the Middlesex County Superior Court in the
Commonwealth of Massachusetts issued an order on February 17, 1998 enjoining Mr.
Schneider from providing investment advisory services to certain former clients
of Wellington. Though not a party to that litigation, the Trust would have been
affected by that order. On April 7, 1998 the Trust joined a suit brought by its
investment manager and certain other persons in the United States District Court
for the Eastern District of Pennsylvania. On April 13, 1998, that Court issued a
preliminary injunction restraining Wellington from enforcing the non-compete
provision in its partnership agreement against Mr.
Schneider.
Suffolk Capital Management, Inc., 250 West 57th Street, Suite 420, New York,
NY 10107. Suffolk Capital Management, Inc. is a registered investment adviser
and a wholly owned subsidiary of United Asset Management Company, a publicly
traded corporation.
Trinity Investment Management Corporation, 75 Park Plaza, Boston, MA 02116, is
a corporation with seven shareholders, with Stanford M. Calderwood holding
majority ownership.
EQUITY II FUND
Delphi Management, Inc., 50 Rowes Wharf, Suite 440, Boston, MA 02110, is 100%
owned by Scott Black.
Fiduciary International, Inc., 2 World Trade Center, New York, NY 10048, an
investment adviser registered with the SEC, is an indirect wholly-owned
subsidiary of Fiduciary Trust Company International, a New York state chartered
bank.
GlobeFlex Capital, L.P., 4365 Executive Drive, Suite 720, San Diego, CA
92121, is a California limited partnership and an SEC registered investment
adviser. Its general partners are Robert J. Anslow, Jr. and Marina L.
Marrelli.
Jacobs Levy Equity Management, Inc., 280 Corporate Center, 3 ADP Boulevard,
Roseland, NJ 07068, is 100% owned by Bruce Jacobs and Kenneth Levy.
Sirach Capital Management, Inc., One Union Square, Suite 3323, 600 Union
Street, Seattle, WA 98101, is a wholly owned subsidiary of United Asset
Management Company, a publicly traded corporation.
Wellington Management Company LLP, 75 State Street, Boston, MA 02109, is a
private Massachusetts limited liability partnership, of which the following
persons are managing partners: Robert W. Doran, Duncan M. McFarland and John
R. Ryan.
40
<PAGE>
EQUITY III FUND
Brandywine Asset Management, Inc., Three Christina Centre, Suite 1200, 201 N.
Walnut Street, Wilmington, DE 19801, is a wholly owned subsidiary of Legg Mason,
Inc.
Equinox Capital Management, Inc., See: Equity I Fund.
Trinity Investment Management Corporation, See: Equity I Fund.
EQUITY Q FUND
Barclays Global Fund Advisors, See: Equity I Fund.
Franklin Portfolio Associates LLC, Two International Place, 22nd Floor,
Boston, MA 02110-4104, is a Massachusetts business trust owned by Mellon
Financial Services Corporation, a holding company of Mellon Bank Corporation.
J.P. Morgan Investment Management, Inc., 522 Fifth Ave., 14th Floor, New
York, NY 10036, is a wholly owned subsidiary of J.P. Morgan & Co., Inc., a
publicly held bank holding company.
INTERNATIONAL FUND
J.P. Morgan Investment Management, Inc., See: Equity Q Fund.
Marathon Asset Management Limited, Orion House, 5 Upper St. Martins Lane,
London, England WC2H 9EA, is a corporation 33.3% owned by each of the
following: Jeremy Hosking, William Arah and Neil Ostrer.
Mastholm Asset Management, LLC, 10500 N.E. 8th Street, Suite 660, Bellevue,
WA 98004, is a Washington limited liability corporation that is controlled by
the following founding members: Thomas M. Garr, Robert L. Gernstetter, Joseph
P. Jordan, Arthur M. Tyson and Theodore J. Tyson.
Oechsle International Advisors, One International Place, 23rd Floor, Boston,
MA 02110, is a limited partnership which is 100% controlled by its general
partners. The general partners are: S. Dewey Keesler, Stephen P. Langer,
Walter Oechsle, L. Sean Roche, Steven H. Schaefer and Tetsuo Shiozumi.
Rowe Price-Fleming International, Inc., 100 East Pratt Street, 9th Floor,
Baltimore, MD 21202, and 4th Floor, 25 Copthall Ave., London, England EC2R 7DR,
which is a joint venture of T. Rowe Price Associates, Inc., and The Fleming
Group, each of which owns 50% of the company. Ownership of The Fleming Group
holding is split equally between Copthall Overseas Limited, a subsidiary of
Robert Fleming Holdings, and Jardine Fleming International Holdings Limited, a
subsidiary of Jardine Fleming Holdings. Robert Fleming Holdings is a
London-based UK holding company with the majority of the shares distributed: 51%
to public companies and 38% to the Fleming family. Jardine Fleming is a Hong
Kong-based holding company which is owned 50% by Robert Fleming Holdings and 50%
by Jardine Matheson & Co., the Hong Kong trading company, a wholly owned
subsidiary of Jardine Matheson Holdings Limited. The stock of T. Rowe Price
Associates, Inc. is publicly traded with a substantial percentage of such stock
owned by the companys active management.
Sanford C. Bernstein & Co., Inc., 767 Fifth Avenue, New York, NY 10153, is a
registered investment adviser. Founded in 1967, Bernstein is controlled by its
Board of Directors, which consists of the following individuals: Andrew S.
Adelson, Zalman C. Bernstein, Kevin R. Rine, Charles C. Cahn, Jr., Marilyn
Goldstein Fedak, Michael L. Goldstein, Roger Hertog, Lewis A. Sanders and
Francis H. Trainer, Jr.
41
<PAGE>
The Boston Company Asset Management, Inc., One Boston Place, 14th Floor
Boston, MA 02108-4402, is 100% owned by Mellon Bank Corporation, a publicly held
corporation.
FIXED INCOME I FUND
Lincoln Capital Management Company, See: Equity I Fund.
Pacific Investment Management Company, 840 Newport Center Drive, Suite 360,
Newport Beach, CA 92660, is a subsidiary partnership of PIMCO Advisors L.P.
("Partnership"). PIMCO Partners, G.P. is the sole general partner of the
Partnership. Pacific Financial Asset Management Corporation indirectly holds a
majority interest in PIMCO Partners, G.P., with the remainder held indirectly
by a group comprised of PIMCO managing directors.
Standish, Ayer & Wood, Inc., One Financial Center, Boston, MA 02111, is a
company whose ownership is divided among seventeen directors, with no director
having more than a 25% ownership interest.
FIXED INCOME II FUND
BlackRock Financial Management, 345 Park Ave., 31st Floor, New York, NY 10154,
is a wholly-owned indirect subsidiary of PNC Bank.
Standish, Ayer & Wood, Inc., See: Fixed Income I Fund.
STW Fixed Income Management Ltd., Trinity Hall, 43 Cedar Avenue, Hamilton HM
KX, Bermuda, is a Bermuda exempted company. William H. Williams III is the sole
shareholder.
FIXED INCOME III FUND
BEA Associates, One Citicorp Center, 153 East 53rd Street, 58th Floor, New
York, NY 10022, is a general partnership of Credit Suisse Capital Corporation
("CS Capital") and Basic Appraisals, Inc. ("Basic"). CS Capital is an 80%
partner, and is a wholly-owned subsidiary of Credit Suisse Investment
Corporation, which is in turn a wholly-owned subsidiary of Credit Suisse, a
Swiss bank, which is in turn a subsidiary of CS Holding, a Swiss corporation. No
one person or entity possesses a controlling interest in Basic, the 20% partner.
BEA Associates is a registered investment adviser.
Pacific Investment Management Company, See: Fixed Income I Fund.
Standish, Ayer & Wood, Inc., See: Fixed Income I Fund.
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION AND REPRESENTATIONS MUST NOT
BE RELIED UPON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
STATE TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE FUNDS OR THE MONEY MANAGERS SINCE THE DATE HEREOF; HOWEVER, IF
ANY MATERIAL CHANGE OCCURS WHILE THIS PROSPECTUS IS REQUIRED BY LAW TO BE
DELIVERED, THIS PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED ACCORDINGLY.
42
<PAGE>
GLOSSARY
Agreements -- Asset Management Services Agreements, which are between FRIMCo
and institutional investors and Financial Intermediaries.
Bank instruments -- Include certificates of deposit, bankers acceptances and
time deposits, and may include European certificates of deposit ("ECDs"),
European time deposits ("ETDs") and Yankee certificates of deposit ("Yankee
CDs").
Board -- The Board of Trustees of the Trust.
Cash reserves -- The Funds may invest their cash reserves (i.e., funds
awaiting investment) in money market instruments and in debt securities of
comparable quality to each Funds permitted investments. As an alternative to a
Fund directly investing in money market instruments, the Funds and their money
managers may elect to invest the Funds cash reserves in the Trusts Money Market
Fund. To prevent duplication of fees, FRIMCo waives its management fee on that
portion of a Funds assets invested in the Trusts Money Market Fund.
Code -- Internal Revenue Code of 1986, as amended.
Convertible security -- This is a fixed income security (a bond or preferred
stock) that may be converted at a stated price within a specified period of time
into a certain quantity of the common stock of the same or a different issuer.
Convertible securities are senior to common stock in a corporations capital
structure but are usually subordinated to similar non-convertible securities.
The price of a convertible security is influenced by the market value of the
underlying common stock.
Covered call option -- A call option is "covered" if the Fund owns the
underlying securities, has the right to acquire the securities without
additional consideration, has collateral assets sufficient to meet its
obligations under the option or owns an offsetting call option.
Covered put option -- A put option is "covered" if the Fund has collateral
assets with a value not less than the exercise price of the option or holds a
put option on the underlying security.
Custodian -- State Street Bank and Trust Company, the Trusts custodian and
portfolio accountant.
Depository receipts -- These include American Depository Receipts ("ADRs"),
European Depository Receipts ("EDRs"), Global Depository Receipts ("GDRs") and
other similar securities convertible into securities of foreign issuers. ADRs
are receipts typically issued by a US bank or trust company evidencing ownership
of the underlying securities. Generally, ADRs in registered form are designed
for use in US securities markets.
Derivatives -- These include forward currency exchange contracts, stock
options, currency options, stock and stock index options, futures contracts,
swaps and options on futures contracts on US government and foreign government
securities and currencies.
Distributor -- Russell Fund Distributors, Inc., the organization that sells
the shares of the Fund under a contract with the Trust.
Eligible Investors -- Institutional investors and Financial Intermediaries
that invest in the Funds for their own accounts or in a fiduciary or agency
capacity, and that have entered into an Agreement with FRIMCo, and institutions
or individuals who have acquired Fund shares through institutions or Financial
Intermediaries.
43
<PAGE>
Equity derivative securities -- These include, among other instruments,
options on equity securities, warrants and futures contracts on equity
securities.
Financial Intermediary -- Bank trust departments, registered investment
advisers, broker-dealers and other Eligible Investors that have entered into
Service Agreements with FRIMCo.
FNMA -- Federal National Mortgage Association.
Forward Commitments -- Each Fund may agree to purchase securities for a fixed
price at a future date beyond customary settlement time (a "forward commitment"
or "when-issued" transaction), so long as the transactions are consistent with
the Funds ability to manage its portfolio and meet redemption requests. When
effecting these transactions, liquid assets of a Fund of a dollar amount
sufficient to make payment for the portfolio securities to be purchased are
segregated on the Funds records at the trade date and maintained until the
transaction is settled.
Forward currency contracts -- This is a contract individually negotiated and
privately traded by currency traders and their customers and creates an
obligation to purchase or sell a specific currency for an agreed-upon price at a
future date. International, Fixed Income I, Fixed Income II, and Fixed Income
III Funds generally do not enter into forward contracts with terms greater than
one year, and typically enters into forward contracts only under two
circumstances. First, if the Funds enter into a contract for the purchase or
sale of a security denominated in a foreign currency, they may desire to "lock
in" the US dollar price of the security by entering into a forward contract to
buy the amount of a foreign currency needed to settle the transaction. Second,
if a Funds money managers believe that the currency of a particular foreign
country will substantially rise or fall against the US dollar, a Fund may enter
into a forward contract to buy or sell the currency approximating the value of
some or all of the Funds portfolio securities denominated in the currency.
International, Fixed Income I, Fixed Income II and Fixed Income III Funds will
not enter into a forward contract if, as a result, they would have more than
one-third of their assets committed to such contracts (unless they own the
currency that they are obligated to deliver or have caused the Custodian to
segregate segregable assets having a value sufficient to cover their
obligations). Although forward contracts are used primarily to protect
International, Fixed Income I, Fixed Income II, and Fixed Income III Funds from
adverse currency movements, they involve the risk that currency movements will
not be accurately predicted.
FRIMCo -- Frank Russell Investment Management Company, the Trusts
administrator, manager and transfer and dividend paying agent.
Funds -- The 28 investment series of the Trust. Each Fund is considered a
separate registered investment company (or RIC) for federal income tax purposes,
and each Fund has its own investment objective, policies and restrictions. Eight
Funds are described in and offered by this Prospectus.
Futures and options on futures -- An interest rate futures contract is an
agreement to purchase or sell debt securities, usually US government securities,
at a specified date and price. For example, a Fund may sell interest rate
futures contracts (i.e., enter into a futures contract to sell the underlying
debt security) in an attempt to hedge against an anticipated increase in
interest rates and a corresponding decline in debt securities it owns. A Fund
will have collateral assets equal to the purchase price of the portfolio
securities represented by the underlying interest rate futures contracts it has
an obligation to purchase.
GNMA -- Government National Mortgage Association.
44
<PAGE>
Illiquid securities -- The Funds will not purchase or otherwise acquire any
security if, as a result, more than 15% of a Funds net assets (taken at current
value) would be invested in securities, including repurchase agreements maturing
in more than seven days, that are illiquid because of the absence of a readily
available market or because of legal or contractual resale restrictions. No Fund
will invest more than 10% of its respective net assets (taken at current value)
in securities of issuers that may not be sold to the public without registration
under the 1933 Act. These policies do not include (1) commercial paper issued
under Section 4(2) of the 1933 Act, or (2) restricted securities eligible for
resale to qualified institutional purchasers pursuant to Rule 144A under the
1933 Act that are determined to be liquid by the money managers in accordance
with Board-approved guidelines.
Investment grade -- Investment grade debt securities are those rated within
the four highest grades by S&P (at least BBB) or Moodys (at least Baa), or
unrated debt securities deemed to be of comparable quality by a money manager
using Board-approved guidelines.
IRS -- Internal Revenue Service.
Lending portfolio securities -- Each Fund may lend portfolio securities with a
value of up to 33 1/3% of each Funds total assets. These loans may be terminated
at any time. A Fund will receive either cash (and agree to pay a "rebate"
interest rate), US government or US government agency obligations as collateral
in an amount equal to at least 102% (for loans of US securities) or 105% (for
non-US securities) of the current market value of the loaned securities. The
collateral is daily "marked-to-market," and the borrower will furnish additional
collateral in the event that the value of the collateral drops below the
respective percentages set forth above. If the borrower of the securities fails
financially, there is a risk of delay in recovery of the securities or loss of
rights in the collateral. Consequently, loans are made only to borrowers which
are deemed to be of good financial standing.
Liquidity portfolio -- FRIMCo will manage or will select a money manager to
exercise investment discretion for approximately 5%-15% of Equity I, Equity II,
Equity III, Equity Q and International Funds assets assigned to a liquidity
portfolio. The liquidity portfolio will be used to temporarily create an equity
exposure for cash balances until those balances are invested in securities or
used for Fund transactions.
Money Market Funds -- Money Market, US Government Money Market and Tax-Free
Money Market Funds, each a Portfolio of the Trust. Each Money Market Fund seeks
to maintain a stable net asset value of $1 per share.
Moodys -- Moodys Investors Service, Inc., an NRSRO.
Municipal obligations -- Debt obligations issued by states, territories and
possessions of the United States and the District of Columbia, and their
political subdivisions, agencies and instrumentalities, or multi-state agencies
or authorities the interest from which is exempt from federal income tax,
including the alternative minimum tax, in the opinion of bond counsel to the
issuer. Municipal obligations include debt obligations issued to obtain funds
for various public purposes as well as certain industrial development bonds
issued by or on behalf of public authorities. Municipal obligations may include
project, tax anticipation, revenue anticipation, bond anticipation, and
construction loan notes; tax-exempt commercial paper; fixed and variable rate
notes; obligations whose interest and principal are guaranteed or insured by the
US government or fully collateralized by US government obligations; industrial
development bonds; and variable rate obligations.
NASD -- National Association of Securities Dealers, Inc.
45
<PAGE>
Net asset value (NAV) -- The value of a mutual fund is determined by deducting
the Funds liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the Fund by the
number of its shares that are outstanding.
NRSRO -- A nationally recognized statistical rating organization, such as S&P
or Moodys.
NYSE -- New York Stock Exchange.
Options on securities, securities indexes and currencies -- A Fund may
purchase call options on securities that it intends to purchase (or on
currencies in which those securities are denominated) in order to limit the risk
of a substantial increase in the market price of such security (or an adverse
movement in the applicable currency). A Fund may purchase put options on
particular securities (or on currencies in which those securities are
denominated) in order to protect against a decline in the market value of the
underlying security below the exercise price less the premium paid for the
option (or an adverse movement in the applicable currency relative to the US
dollar). Prior to expiration, most options are expected to be sold in a closing
sale transaction. Profit or loss from the sale depends upon whether the amount
received is more or less than the premium paid plus transaction costs. A Fund
may purchase put and call options on stock indexes in order to hedge against
risks of stock market or industry-wide stock price fluctuations.
PFIC -- A passive foreign investment company. International Fund may purchase
interests in an issuer that is considered a PFIC under the Code.
Prime rate -- The interest rate charged by leading US banks on loans to their
most creditworthy customers.
Repurchase agreements -- Each Fund may enter into repurchase agreements with a
bank or broker-dealer that agrees to repurchase the securities at the Funds cost
plus interest within a specified time (normally the next business day). If the
party agreeing to repurchase should default and if the value of the securities
held by the Fund (102% at the time of agreement) should fall below the
repurchase price, the Fund could incur a loss. Subject to the overall
limitations described in "Illiquid Securities" in this Glossary, a Fund will not
invest more than 15% of its net assets (taken at current market value) in
repurchase agreements maturing in more than seven days.
Reverse repurchase agreements -- Each Fund may enter into reverse repurchase
agreements to meet redemption requests when a money manager determines that
selling portfolio securities would be inconvenient or disadvantageous. A reverse
repurchase agreement is a transaction where a Fund transfers possession of a
portfolio security to a bank or broker-dealer in return for a percentage of the
portfolio securitys market value. The Fund retains record ownership of the
transferred security, including the right to receive interest and principal
payments. At an agreed upon future date, the Fund repurchases the security by
paying an agreed upon purchase price plus interest. Liquid assets of the Fund
equal in value to the repurchase price, including any accrued interest, are
segregated on the Funds records while a reverse repurchase agreement is in
effect.
The Rule -- Rule 2a-7 under the 1940 Act, which governs the operations of the
Money Market Funds.
Russell 1000(R) Index -- The Russell 1000(R) Index consists of the 1,000
largest US companies by capitalization (i.e., market price per share times the
number of shares outstanding). The smallest company in the Index at the time of
selection has a capitalization of approximately $1 billion. The Index does not
include cross-corporate holdings in a companys capitalization. For example, when
IBM owned approximately 20% of Intel, only 80% of the total shares outstanding
of Intel were used to determine Intels capitalization. Also not included
46
<PAGE>
in the Index are closed-end investment companies, companies that do not file a
Form 10-K report with the SEC, foreign securities, and American Depository
Receipts. The Indexs composition is changed annually to reflect changes in
market capitalization and share balances outstanding. The Russell 1000(R) Index
is used as the basis for Equity Q Funds performance because FRIMCo believes it
represents the universe of stocks in which most active money managers invest and
is representative of the performance of publicly traded common stocks most
institutional investors purchase.
Russell -- Frank Russell Company, consultant to the Trust and to the Funds.
S&P -- Standard & Poors Ratings Group, an NRSRO.
S&P 500 -- Standard & Poors 500 Composite Price Index.
SAI -- The Trusts Statement of Additional Information, dated as noted on the
first page of this Prospectus.
SEC -- US Securities and Exchange Commission.
Shares -- The Class S Shares in the Funds described in this prospectus. Each
Class S Share of a Fund represents a share of beneficial interest in the Fund.
Transfer Agent -- FRIMCo, in its capacity as the Trusts transfer and dividend
paying agent.
Trust -- Frank Russell Investment Company, an open-end management investment
company which is registered with the SEC.
US -- United States.
US government securities -- These include US Treasury bills, notes, bonds and
other obligations issued or guaranteed by the US government, its agencies or
instrumentalities.
Variable rate obligations -- Municipal obligations with a demand feature that
typically may be exercised within 30 days. The rate of return on variable rate
obligations is readjusted periodically according to a market rate, such as the
Prime rate. Also called floating rate obligations.
Warrants -- Typically, a warrant is a long-term option that permits the holder
to buy a specified number of shares of the issuers underlying common stock at a
specified exercise price by a particular expiration date. A warrant not
exercised or disposed of by its expiration date expires worthless.
1940 Act -- The Investment Company Act of 1940, as amended. The 1940 Act
governs the operations of the Trust and the Funds.
1933 Act -- The Securities Act of 1933, as amended.
47
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
909 A STREET
TACOMA, WASHINGTON 98402
TELEPHONE (800) 972-0700
IN WASHINGTON (253) 627-7001
MONEY MANAGERS
EQUITY I FUND
Alliance Capital Management L.P.
Barclays Global Fund Advisors
Equinox Capital Management, Inc.
INVESCO Capital Management, Inc.
Lincoln Capital Management Company
Morgan Stanley Asset Management, Inc.
Peachtree Asset Management
Schneider Capital Management
Suffolk Capital Management, Inc.
Trinity Investment Management Corporation
EQUITY II FUND
Delphi Management, Inc.
Fiduciary International, Inc.
GlobeFlex Capital, L.P.
Jacobs Levy Equity Management, Inc.
Sirach Capital Management, Inc.
Wellington Management Company LLP
EQUITY III FUND
Brandywine Asset Management, Inc.
Equinox Capital Management, Inc.
Trinity Investment Management Corporation
EQUITY Q FUND
Barclays Global Fund Advisors
Franklin Portfolio Associates LLC
J.P. Morgan Investment Management, Inc.
INTERNATIONAL FUND
J.P. Morgan Investment Management, Inc.
Marathon Asset Management Limited
Mastholm Asset Management, LLC
Oechsle International Advisors
Rowe Price-Fleming International, Inc.
Sanford C. Bernstein & Co., Inc.
The Boston Company Asset Management, Inc.
FIXED INCOME I FUND Lincoln Capital Management Company Pacific Investment
Management Company Standish, Ayer & Wood, Inc.
FIXED INCOME II FUND BlackRock Financial Management Standish, Ayer & Wood, Inc.
STW Fixed Income Management Ltd.
FIXED INCOME III FUND
BEA Associates
Pacific Investment Management Company
Standish, Ayer & Wood, Inc.
MANAGER, TRANSFER AND DIVIDEND PAYING AGENT
Frank Russell Investment Management Company
909 A Street
Tacoma, Washington 98402
CONSULTANT
Frank Russell Company
909 A Street
Tacoma, Washington 98402
DISTRIBUTOR
Russell Fund Distributors, Inc.
909 A Street
Tacoma, Washington 98402
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, MA 02109
LEGAL COUNSEL
Stradley, Ronon, Stevens & Young, LLP
2600 One Commerce Square
Philadelphia, PA 19103-7098
OFFICE OF SHAREHOLDER INQUIRIES
909 A Street
Tacoma, Washington 98402
(800) 787-7354
(800) RUSSEL4
In Washington (253) 627-7001
<PAGE>
Institutional Funds Annual Report EXHIBIT C
Dated December 31, 1997
re: the Fixed Income II Fund
Fixed Income II Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Objective: To preserve capital and generate current income consistent with the
preservation of capital.
Invests in: Fixed-income securities with low-volatility characteristics.
Strategy: The Fund uses a multi-style, multi-manager strategy intended to
achieve higher returns with moderate risk relative to other short-term bond
investments. The Fund employed the investment management services of three
managers using three approaches to investment in short-term fixed income
securities.
Growth of a $10,000 Investment
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Years Fixed II+ ML 1-2.99** Lipper Short 1-5 Yr++
----- --------- ----------- ---------------------
<S> <C> <C> <C>
* $10,000 $10,000 $10,000
1988 $10,820 $10,622 $10,687
1989 $12,009 $11,777 $11,768
1990 $13,175 $12,922 $12,719
1991 $14,796 $14,431 $14,231
1992 $15,202 $15,341 $15,042
1993 $16,264 $16,171 $15,968
1994 $16,397 $16,263 $15,910
1995 $18,028 $18,052 $17,620
1996 $18,886 $18,950 $18,405
1997 $20,023 $20,212 $19,529
</TABLE>
Fixed Income II Fund
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
- - --------------- ---------------- ------------
<S> <C> <C>
1 Year $ 10,602 6.02%
5 Years $ 13,171 5.66%(S)
10 Years $ 20,023 7.19%(S)
</TABLE>
Merrill Lynch 1-2.99 Years Treasury Index
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
- - ----------------- --------------- -------------
<S> <C> <C>
1 Year $ 10,666 6.66%
5 Years $ 13,175 5.67%(S)
10 Years $ 20,212 7.29%(S)
</TABLE>
Lipper(C) Short Investment Grade Debt Funds Average
<TABLE>
<CAPTION>
Periods Ended Growth of Total
12/31/97 $10,000 Return
- - ---------------- --------------- -------------
<S> <C> <C>
1 Year $ 10,611 6.11%
5 Years $ 12,983 5.36%(S)
10 Years $ 19,529 6.92%(S)
</TABLE>
* Assumes initial investment on January 1, 1988
** Merrill Lynch 1-2.99 Years Treasury Index is an index composed of
approximately 160 issues in the form of publicly placed, coupon-bearing US
Treasury debt. Issues must carry a term to maturity of at least one year,
and par amounts outstanding must be no less than $10 million at the start
and at the close of the performance measurement periods.
+ Prior to April 1, 1995, fund performance results are reported gross of
investment management fees. For the period following April 1, 1995, fund
performance results are reported net of investment management fees but gross
of any investment services fees. Information concerning these fees can be
obtained from the funds managers upon request.
++ Lipper(C) Short (1-5 Yr.) Investment Grade Debt Funds Average is the average
total return for the universe of funds within the Short Investment Grade
Debt Funds investment objective. The total return for the funds reflects
adjustments for income dividends and capital gains distributions reinvested
as of the ex-dividend dates. This type of fund which invests at least 65% of
assets in investment grade debt issues (rated in top four grades) with
average maturities of five years or less.
(S) Annualized.
96 Fixed Income II Fund
<PAGE>
Fixed Income II Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Performance Review
For the year ended December 31, 1997, the Fixed Income II Fund reflected a total
return of 6.0%, as compared to the Merrill Lynch 1-2.99 Years Treasury Index
which rose 6.7%. The Fund modestly underperformed the Index as the managers in
the Fund maintained conservative duration positions throughout most of the year
due to concerns over Fed intervention. Weak returns from corporate bonds late in
the year, as the markets flight to defensive sectors favored treasuries, also
contributed to the Funds modest underperformance.
Portfolio Highlights
Indications of the US economys ability to sustain strong growth without
inflation benefited bonds increasingly throughout 1997. However, two factors
diminished the attractiveness of short-term bonds for much of the year. The
first proved to be the Federal Reserve Board which threatened to increase rates
during much of the year, but acted only once, late in the first quarter, when it
increased the Fed Funds rate 1/4%. The second threat was directly attributable
to the problems facing Asian economies during the last four months of the year.
As major holders of short-term US treasuries, it was feared that Korean and
Japanese investors would be forced to redeem their investments to support
weakened businesses in their own countries. Although some withdrawals appeared
to occur late in the year, fears of massive selling of T-bills were not
realized.
The Fund was impacted by these factors in several ways. The Feds inflammatory
comments about the economys strength and inflation risk kept the Funds
investment managers conservatively positioned in terms of portfolio duration
during the first half of the year. The markets flight to quality sectors of the
market in reaction to Asias problems later in the year favored US treasuries.
Other sectors were negatively impacted, particularly where credit weakness was
perceived. Lower quality corporate issues lagged as yield spreads widened.
Credit-sensitive asset- and mortgage-backed securities holdings were also
underperformers in the fourth quarter. The Fund was able to offset some of these
influences. The bond managers captured some value by extending portfolio
duration in the third quarter as economic fundamentals stabilized and the Fed
became less of a factor.
Top Ten Issuers
(as a percent of Total Investments) December 31, 1997
United States Treasury 15.9%
World Omni Automobile Lease 3.3
Barnett Auto Trust 3.3
Sears Credit Account Master Trust 3.1
Olympic Automobile Receivables Trust 2.5
General Electric Capital Corporation 2.4
Associates Corp. North America 2.4
Sears Roebuck Acceptance 2.4
First Chicago Master Trust 2.2
PNC Student Loan Trust 2.2
Portfolio Characteristics
December 31, 1997
Weighted Average Quality Diversification AA1
Weighted Average Years-to-Maturity 2.7 Years
Weighted Average Duration 1.6 Years
Current Yield (SEC 30-day standardized) 5.6%
Number of Issues 157
Number of Issuers 118
Money Managers Styles
BlackRock Financial Management Mortgage/Asset-Backed
Specialist
STW Fixed Income Management, Inc. Sector Rotation Core
Standish, Ayer & Wood, Inc. Corporate Specialist
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an investors
shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Fixed Income II Fund 97
<PAGE>
Fixed Income II Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
---------- ---------
<S> <C> <C>
Long-Term Investments - 92.1%
Asset-Backed Securities - 35.6%
Advanta Home Equity Loan Trust
Series 1994-1 Class A-2
6.300% due 07/25/25 $ 39 $ 38
AFC Home Equity Loan Trust
Series 1993-2 Class A
6.000% due 0l/20/13 386 379
AFC Mortgage Loan Trust
Series 1996-3 Class 1A2
7.220% due 12/25/27 350 350
Associates Manufactured Housing
Pass-thru Certificate
Series 1996-1 Class A3
7.000% due 03/15/27 850 862
Banc One Auto Grantor Trust
Series 1997 -A Class A
6.270% due 11/20/03 3,703 3,712
Barnett Auto Trust
Series 1997-A Class A3
6.030% due 11/15/01 7,500 7,495
Chase Credit Card Master Trust
Series 1997-2 Class A
6.300% due 04/15/03 4,479 4,514
Chase Manhattan Grantor Trust
Series 1996-B Class A
6.610% due 09/15/02 1,204 1,211
Chevy Chase Auto Receivables Trust
Series 1996-2 Class A
5.900% due 07/15/03 970 967
Series 1997-2 Class A
6.350% due 01/15/04 842 845
Series 1997-3 Class A
6.200% due 03/20/04 (c) 653 654
Contimortgage Home Equity Loan Trust
Pass-thru Certificate
Series 1997-4 Class A2
6.270% due 02/15/12 500 499
EQCC Home Equity Loan Trust
Series 1993-4 Class A
5.725% due 12/15/08 40 40
Series 1994-1 Class A
5.800% due 03/15/09 316 313
Equivantage Home Equity Loan Trust
Series 1996-1 Class A
6.550% due 10/25/25 729 732
First Chicago Master Trust II
Credit Card Certificates
Series 1994-L
7.150% due 04/15/0l 4,500 4,580
First Omni Credit Card Master Trust
Series 1996-A Class A
6.650% due 09/15/03 930 945
First Security Auto Grantor Trust
Series 1997-A Class A
6.300% due 08/15/03 998 1,000
Ford Credit Auto Lease Trust
Series 1996-1 Class A2
5.800% due 05/15/99 1,168 1,167
Green Tree Financial Corp.
Series 1996-6 Class A4
7.050% due 09/15/27 500 507
Series 1997-3 Class A2
6.490% due 07/15/28 750 752
Green Tree Securitized Net Interest Margin
Trust
Series 1994-A Class A
6.900% due 02/15/04 528 533
Series 1995-A Class A
7.250% due 07/15/05 413 414
Honda Auto Receivables Grantor Trust
Series 1995-A Class A
6.200% due 12/15/00 346 346
Series 1997-B Class A
5.950% due 05/15/03 1,200 1,198
IMC Home Equity Loan Trust
Series 1997-5 Class Al
6.5 10% due 02/20/06 (c) 765 765
Nationsbank Auto Owner Trust
Series 1996-A Class A3
6.375% due 07/15/00 2,750 2,756
Nationsbank Credit Card Master Trust
Series 1995-1 Class A
6.450% due 04/15/03 3,850 3,887
Newcourt Receivables Asset Trust
Series 1996-2 Class A
6.870% due 06/20/04 208 212
Nissan Auto Receivables Grantor Trust
Series 1997-1 Class A
6.150% due 02/17/03 372 373
Olympic Automobile Receivables
Series 1996-B Class A4
6.700% due 03/15/02 1,000 1,009
Series 1996-D Class CTFS
6.125% due 11/15/04 3,759 3,749
Series 1997-A Class A2
6.125% due 0l/01/99 902 903
PNC Student Loan Trust I
Series 1997-2 Class A3
6.314% due 0l/25/01 5,000 5,041
</TABLE>
98 Fixed Income II Fund
<PAGE>
Fixed Income II Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
---------- ---------
<S> <C> <C>
Premier Auto Trust
Series 1997-3 Class A4
6.200% due 0l/06/01 $ 5,000 $ 5,011
Remodelers Home Improvement Loan
Series 1995-3 Class A2
6.800% due 12/20/07 558 558
Sears Credit Account Master Trust II
Series 1995-3 Class A
7.000% due 10/15/04 900 919
Series 1995-4 Class A
6.250% due 01/15/03 4,000 4,004
Series 1996-2 Class A
6.500% due 10/15/03 1,500 1,510
Series 1997-1 Class A
6.200% due 07/16/07 500 500
SMS Student Loan Trust
Series 1997-A Class A
6.030% due 10/27/25 (c) 500 505
SPNB Home Equity Loan
Series 1991-1 Class B
8.150% due 06/15/20 336 340
Student Loan Marketing Association
Series 1997-3 Class CTFS
6.259% due 08/25/12 (c) 500 494
The Money Store Home Equity Loan Trust
Series 1993-D Class Al
5.675% due 12/15/08 389 383
Series 1996-B Class A3
6.820% due 03/15/10 124 125
TLFC IV Equipment Lease Trust
Series 1996-1 Class A
5.980% due 11/20/02 361 360
TMS Small Business Administration Loan Trust
Series 1997-1 Class A
6.240% due 01/15/25 (c) 995 993
Series 1997-1 Class B
6.719% due 01/15/25 (c) 497 495
UCFC Home Equity Loan Trust
Series 1996-Dl Class A3
6.541% due 11/15/13 675 677
WFS Financial Owner Trust
Series 1996-D Class A3
6.050% due 07/20/01 (c) 4,500 4,508
World Omni Automobile Lease
Securitization Trust
Series 1996-B Class A3
6.250% due 11/15/02 1,098 1,099
Series 1996-B Class B
6.850% due 11/15/02 (c) 350 352
World Omni Automobile Lease
Securitization Trust
Series 1997-A Class A2
6.750% due 06/25/03 (c) 5,500 5,549
Series 1997-A Class A4
6.900% due 06/25/03 500 508
---------
81,638
---------
Corporate Bonds and Notes - 25.0% Ahmanson (H.F.)
9.875% due 11/15/99 875 930
Aristar Inc.
6.125% due 12/01/00 725 722
Associates Corp North America
6.375% due 08/15/00 5,500 5,531
Banponce Corp. (MTN)
Series 2
5.750% due 03/01/99 2,075 2,063
Bear Stearns Co., Inc.
7.625% due 09/15/99 1,125 1,151
Chase Manhattan Corp.
10.125% due 11/01/00 259 285
Chrysler Financial Corp. Series P (MTN)
6.230% due 07/17/98 500 501
CIT Group Holdings, Inc. (MTN)
6.125% due 12/15/00 5,000 4,987
Cox Enterprises, Inc.
6.250% due 08/26/99 1,400 1,400
Crescent Real Estate Equities
6.625% due 09/15/02 750 749
Enterprise Rent-A-Car USA Finance Co. (MTN)
7.875% due 03/15/98 1,100 1,104
ERP Operating, L.P.
8.500% due 05/15/99 1,050 1,079
Finova Capital Corp.
6.450% due 06/01/00 400 401
First Chicago Corp.
9.000% due 06/15/99 500 519
First Union Corp.
6.750% due 01/15/98 750 750
6.600% due 06/15/00 1,000 1,008
Franchise Finance Corp.
7.000% due 11/30/00 1,000 1,010
General Electric Capital Corporation (MTN)
6.120% due 08/15/00 5,500 5,545
General Motors Acceptance Corp.
7.012% due 04/01/20 (c) 988 999
</TABLE>
Fixed Income II Fund 99
<PAGE>
Fixed Income II Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
---------- ---------
<S> <C> <C>
General Motors Acceptance Corp. (MTN)
7.500% due 07/22/99 $ 925 $ 944
7.465% due 07/25/19 1,438 1,448
Heller Financial, Inc. (MTN)
5.928% due 03/01/99 (c) 1,000 1,003
Hertz Corp.
6.500% due 04/01/00 450 453
Homeside Lending, Inc. (MTN)
6.875% due 06/30/02 2,000 2,037
ITT Corp.
6.250% due 11/15/00 1,075 1,057
JC Penney & Co., Inc. (MTN)
6.375% due 09/15/00 1,125 1,134
Lehman Brothers Holdings, Inc. (MTN)
Series E
7.110% due 09/27/99 1,500 1,524
Series IBC
7.000% due 05/13/99 800 810
MBNA Corp. (MTN)
Series B
6.500% due 09/15/00 1,000 1,010
Merrill Lynch & Co., Inc. (MTN)
7.260% due 03/25/02 (c) 1,425 1,457
Midlantic Corp.
9.250% due 09/01/99 375 392
Occidental Petroleum Corp. (MTN)
5.950% due 11/09/98 950 948
Salomon, Inc.
7.750% due 05/15/00 1,000 1,032
6.700% due 07/05/00 500 505
Salomon, Inc. (MTN)
5.718% due 04/05/99(c) 1,100 1,100
Sears Roebuck Acceptance (MTN)
6.160% due 09/20/00 5,500 5,501
Sovereign Bancorp, Inc. (Regd)
6.750% due 07/01/00 750 755
Taubman Realty Group, L.P.
8.000% due 06/15/99 250 256
USF&G Corp.
7.000% due 05/15/98 1,975 1,982
Wellsford Residential Property Trust (MTN)
6.195% due 11/24/99 (c) 1,300 1,302
---------
57,384
---------
Eurodollar Bonds - 2.3%
ALPS Pass-thru Trust
Series 1994-1 Class A2
7.150% due 09/15/04 (c) 280 281
Chase Manhattan Corp.
6.062% due 12/05/09 (c) 200 195
Export-Import Bank of Korea
7.125% due 09/20/01 300 249
Procter & Gamble
9.625% due 0l/14/01 3,020 3,271
Videotron Holdings PLC Step Up Bond
Zero Coupon due 07/01/04 1,375 1,310
---------
5,306
---------
Mortgage-Backed Securities - 11.6%
Bear Stearns Mortgage Securities, Inc.
Series 1996-6 Class A2
7.000% due 11/25/27 925 923
BKD Commercial Mortgage Trust
Series 1997-Cl Class B
7.218% due 04/25/00 (c) 850 851
Citicorp Mortgage Securities, Inc.
REMIC Series 1997-5 Class A1
6.500% due 11/25/27 650 652
CMC Securities Corp. II
Series 1993-2G Class A1
7.194% due 11/25/23 (c) 885 898
Countrywide Home Loans
Series 1997-6 Class A1
6.750% due 11/25/27 675 679
Federal Home Loan Mortgage Corp. Groups
Participation Certificate
7.500% due 2000 657 663
7.500% due 2002 150 152
9.000% due 2005 192 200
7.375% due 2006 (c) 174 179
6.250% due 2007 101 100
7.500% due 2007 276 281
8.500% due 2017 622 648
Federal Home Loan Mortgage Corp.
Series 1714 Class E
6.250% due 09/15/18 650 651
Federal National Mortgage
Association Pools
8.500% due 2001 450 469
7.000% due 2004 833 844
8.500% due 2008 115 118
7.500% due 2009 593 607
8.000% due 2009 896 932
8.500% due 2010 790 824
</TABLE>
100 Fixed Income II Fund
<PAGE>
Fixed Income II Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
---------- ---------
<S> <C> <C>
Federal National Mortgage Association
Grantor Trust
REMIC Series 1996-T6 Class C
6.200% due 02/26/01 $ 1,332 $ 1,324
GE Capital Mortgage Services, Inc.
REMIC Series 1997-9 Class 1A2
6.750% due 10/25/27 1,125 1,131
Government National Mortgage
Association Pools
9.500% due 2025 567 615
7.250% due 2026 1,328 1,359
Merrill Lynch Credit Corp. Mortgage
Investors Inc.
Series 1996-B Class A
6.150% due 07/15/21 (c) 789 806
Prudential Home Mortgage Securities
Series 1994-19 Class A2
7.050% due 05/25/24 636 640
Residential Accredited Loans, Inc.
Series 1997-QS7 Class Al
7.500% due 07/25/27 505 510
Residential Asset Securitization Trust
Mortgage Pass-thru Certificates
Series 1996-A8 Class Al
8.000% due 12/25/26 594 601
Series 1997-A1 Class A
7.000% due 03/25/27 665 667
Series 1997-A5 Class A3
7.125% due 07/25/27 1,277 1,284
Series 1997-A9 Class Al
7.250% due 11/25/27 1,226 1,236
Residential Funding Mortgage Securities I
Series 1997-S12 Class Al0
6.700% due 08/25/27 1,500 1,510
Resolution Trust Corp.
Mortgage Pass-thru Certificates
Series 1992-M3 Class Al
7.750% due 07/25/30 66 66
Series 1994-Cl Class D
8.000% due 06/25/26 (c) 876 892
Series 1995-2 Class Cl
7.450% due 05/25/29 (c) 238 240
SASCO LLC
Series 1997-N1 Class D
6.217% due 09/25/28 (c) 800 800
Sequoia Mortgage Trust
Series 1 Class Al
6.028% due 07/04/27(c) 1,197 1,197
Wilshire Funding Corporation
Series 1997-WFC1 Class Al
7.250% due 08/25/27 1,024 1,035
---------
26,584
---------
Municipal Bonds - 0.4%
Philadelphia, Pennsylvania Authority for
Industrial Development Class A
6.480% due 06/15/04 861 883
---------
883
---------
United States Government
Treasuries - 15.7%
United States Treasury Notes
5.625% due 11/30/98 700 700
5.750% due 09/30/99 1,250 1,252
5.875% due 11/15/99 100 100
5.875% due 02/15/00 16,000 16,063
6.875% due 03/31/00 175 179
5.625% due 11/30/00 850 848
6.375% due 03/31/0l 480 489
6.250% due 06/30/02 3,070 3,131
3.625% due 07/15/02 11,545 11,487
5.750% due 11/30/02 340 340
5.750% due 08/15/03 1,500 1,502
---------
36,091
---------
Yankee Bonds - 1.5%
Household International
5.250% due 10/15/98 1,150 1,144
Ontario, Province of
ll.500% due 03/10/13 760 800
Quebec, Province of
13.250% due 09/15/14 450 520
Westpac Banking, Ltd.
7.875% due 10/15/02 1,000 1,060
---------
3,524
---------
Total Long-Term Investments
(cost $211,058) 211,410
---------
</TABLE>
Fixed Income II Fund 101
<PAGE>
Fixed Income II Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
---------- ---------
<S> <C> <C>
Short-Term Investments - 6.7%
Chrysler Financial Corp. (MTN)
Series P
6.250% due 06/29/98 $ 1,300 $ 1,302
Frank Russell Investment Company
Money Market Fund, due on demand (a) 13,320 13,320
Hertz Corp.
9.500% due 05/15/98 675 684
---------
Total Short-Term Investments
(cost $15,348) 15,306
---------
Total Investments
(identified cost $226,406)(b) - 98.8% 226,716
Other Assets and Liabilities,
Net - 1.2% 2,754
---------
Net Assets - 100.0% $ 229,470
=========
</TABLE>
(a) At cost, which approximates market.
(b) See Note 2 for federal income tax information.
(c) Adjustable or floating rate security.
Abbreviations:
LLC - Limited Liability Corporation
L.P. - Limited Partnership
MTN - Medium Term Note
PLC - Public Limited Company
REMIC - Real Estate Mortgage Investment Conduit
The accompanying notes are an integral part of the financial statements.
102 Fixed Income II Fund
<PAGE>
Fixed Income II Fund
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
Amounts in
thousands (except
per share amount)
--------------------
<S> <C> <C>
Assets
Investments at market (identified cost $226,406)(Note 2).................................................... $ 226,716
Receivables:
Dividends and interest.................................................................................. 2,368
Investments sold........................................................................................ 376
Fund shares sold........................................................................................ 974
--------------------
Total Assets......................................................................................... 230,434
Liabilities
Payables:
Fund shares redeemed............................................................. $ 795
Accrued fees to affiliates (Note 4).............................................. 123
Other accrued expenses........................................................... 46
------------------
Total Liabilities.................................................................................... 964
--------------------
Net Assets.................................................................................................. $ 229,470
====================
Net Assets consist of:
Undistributed net investment income......................................................................... $ 609
Accumulated net realized gain (loss)........................................................................ (7,705)
Unrealized appreciation (depreciation) on investments....................................................... 310
Shares of beneficial interest............................................................................... 125
Additional paid-in capital.................................................................................. 236,131
--------------------
Net Assets.................................................................................................. $ 229,470
====================
Net Asset Value, offering and redemption price per share:
($229,469,933 divided by 12,506,712 shares of $.01 par value
shares of beneficial interest outstanding).............................................................. $ 18.35
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
Fixed Income II Fund 103
<PAGE>
Fixed Income II Fund
Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Amounts in thousands
--------------------
<S> <C> <C>
Investment Income:
Interest.................................................................................................. $ 14,201
Dividends from Money Market Fund (Note 5)................................................................. 889
--------------------
Total Investment Income.............................................................................. 15,090
Expenses (Notes 2 and 4):
Management fees..................................................................... $ 1,185
Custodian fees...................................................................... 142
Transfer agent fees................................................................. 144
Bookkeeping service fees............................................................ 15
Professional fees................................................................... 17
Registration fees................................................................... 31
Trustees fees...................................................................... 4
Miscellaneous....................................................................... 25
------------------
Total Expenses....................................................................................... 1,563
--------------------
Net investment income....................................................................................... 13,527
--------------------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from investments................................................................... (118)
Net change in unrealized appreciation or depreciation of investments........................................ 487
--------------------
Net gain (loss) on investments.............................................................................. 369
--------------------
Net increase (decrease) in net assets resulting from operations............................................. $ 13,896
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
104 Fixed Income II Fund
<PAGE>
Fixed Income II Fund
Statements of changes in Net Assets
For the Years Ended December 31,
<TABLE>
<CAPTION>
Amounts in thousands
1997 1996
--------------- --------------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income.......................................................... $ 13,527 $ 11,273
Net realized gain (loss)....................................................... (118) (1,911)
Net change in unrealized appreciation or depreciation.......................... 487 (86)
--------------- --------------
Net increase (decrease) in net assets resulting from operations.............. 13,896 9,276
--------------- --------------
From Distributions to Shareholders:
Net investment income.......................................................... (13,676) (11,259)
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 6).... 6,267 41,389
--------------- --------------
Total Net Increase (Decrease) in Net Assets...................................... 6,487 39,406
Net Assets
Beginning of period............................................................ 222,983 183,577
--------------- --------------
End of period (including undistributed net investment income of $609 and $402,
respectively)................................................................ $ 229,470 $ 222,983
=============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
Fixed Income II Fund 105
<PAGE>
Fixed Income II Fund
Financial Highlights
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................................... $ 18.36 $ 18.55 $ 17.98 $ 18.99 $ 18.56
-------- -------- -------- -------- --------
Income From Investment Operations:
Net investment income................................................. 1.08 1.04 1.16 1.21 .84
Net realized and unrealized gain (loss) on investments................ -- (.19) .59 (1.07) .44
-------- -------- -------- -------- --------
Total Income From Investment Operations............................. 1.08 .85 1.75 .14 1.28
-------- -------- -------- -------- --------
Less Distributions:
Net investment income................................................. (1.09) (1.04) (1.18) (1.15) (.71)
Tax return of capital................................................. -- -- -- -- (.14)
-------- -------- -------- -------- --------
Total Distributions................................................. (1.09) (1.04) (1.18) (1.15) (.85)
-------- -------- -------- -------- --------
Net Asset Value, End of Period........................................... $ 18.35 $ 18.36 $ 18.55 $ 17.98 $ 18.99
======== ======== ======== ======== ========
Total Return (%)(a)...................................................... 6.02 4.76 9.95 .82 6.98
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted).............................. 229,470 222,983 183,577 144,030 138,619
Ratios to average net assets (%)(a):
Operating expenses................................................. .66 .70 .58 .19 .16
Net investment income.............................................. 5.70 5.70 6.41 6.52 6.16
Portfolio turnover rate (%)........................................... 213.14 264.40 269.31 233.75 229.07
</TABLE>
(a) For periods prior to April 1, 1995, Fund performance, operating expenses,
and net investment income do not include any management fees paid to the
Manager or money managers. For periods thereafter, they are reported net of
investment management fees but gross of any investment services fees. See
Note 4.
106 Fixed Income II Fund
<PAGE>
<PAGE>
Institutional Funds Semi-Annual Report EXHIBIT D
Dated June 30, 1998
<PAGE>
Present Advisory Agreement EXHIBIT E
ADVISORY AGREEMENT
THIS ADVISORY AGREEMENT dated this ___ day of _____, 1998 (the"Agreement"),
between FRANK RUSSELL INVESTMENT COMPANY, a Massachusetts business trust
hereinafter called the "Trust" and FRANK RUSSELL INVESTMENT MANAGEMENT COMPANY,
a Washington Corporation hereinafter called the "Manager."
WHEREAS, the Trust has been organized by and at the expense of a company
affiliated with the Manager and operates as an investment company of the
"series" type registered under the Investment Company Act of 1940 ("1940 Act")
for the purpose of investing and reinvesting its assets in portfolios of
securities, each of which has distinct investment objectives and policies (each
distinct portfolio being referred to herein as a "Sub-Trust"), as set forth more
fully in its Master Trust Agreement, its By-Laws and its Registration Statements
under the 1940 Act and the Securities Act of 1933, all as heretofore amended and
supplemented; and the Trust desires to avail itself of the services,
information, advice, assistance, and facilities of a manager and to have a
manager perform for it various statistical, research, money manager selection,
investment management, and other services; and
WHEREAS, the Manager is registered as an investment adviser under the Investment
Advisers Act of 1940 and will engage in the business of rendering investment
advisor, counseling, money manager recommendation, and supervisory services to
investment consulting clients; and the Manager and its affiliated corporations
have undertaken the initiative and expense of organizing the Trust in order to
have a means to commingle assets for certain investors to have access to and
utilize the "Multi-Style, Multi-Manager" method of investment and to provide
services to the Trust in consideration of and on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, Trust and the Manager agree as follows:
1. Employment of the Manager. The Trust hereby employs the Manager to manage the
investment and reinvestment of the Trusts assets and to act as a
discretionary Money Manager to certain of the Sub-Trusts in the manner set
forth in Section 2(B)of this Agreement, subject to the direction of the Board
of Trustees and the officers of the Trust, for the period, in the manner, and
on the terms hereinafter set forth. The Manager hereby accepts such
employment and agrees during such period to render the services and to assume
the obligations herein set forth. The Manager shall for all purposes herein
be deemed to be an independent contractor and shall, except as expressly
provided or authorized (whether herein or otherwise), have no authority to
act for or represent the Trust in any way.
2. Obligations of and Services to be Provided by the Manager. The Manager
undertakes to provide the services hereinafter set forth and to assume the
following obligations:
A. [Reserved]
B. Investment Management Services.
(1)The Trust intends to appoint one or more persons or companies ("Money
manager[s]") for each of the Sub-Trusts or segments thereof, and each
Money Manager shall have full investment discretion and shall make all
determinations with respect to the investment of a Sub-Trusts assets
assigned to the Money Manager and the purchase and sale of portfolio
securities with those assets, and such steps as may be necessary to
implement its decision. The Manager shall not be responsible or liable
for the investment merits of any decision by a Money Manager to
purchase, hold, or sell a security for a Sub-Trust portfolio.
(2)The Manager shall, subject to and in accordance with the investment
objectives and policies of the Trust and each Sub-Trust and any
directions which the Trusts Board of Trustee may issue to the Manager,
have: (i) overall supervisory responsibility for the general management
and investment of the Trusts assets and securities portfolios; and (ii)
full investment discretion to make all determinations with respect to
the investment of Sub-Trust assets not assigned to a Money Manager.
(3)The Manager shall develop overall investment programs and strategies
for each Sub-Trust, or segments thereof, shall revise such programs as
necessary, an shall monitor and report periodically to the Board of
Trustees concerning the implementation of the programs.
(4)The Manager shall research and evaluate Money Managers and shall advise
the Board of Trustees of the Trust of the Money Managers which the
Manager believes are best suited to invest the assets of each
Sub-Trust; shall monitor and evaluate the investment performance of
each Money Manager employed by the Trust; shall determine the portion
of each Sub-Trusts assets to be managed by each Money Manager; shall
recommend changes or additions of Money Managers when appropriate;
shall coordinate the investment activities of the Money Managers; and
acting as a fiduciary for the Trust shall compensate the Money
Managers.
(5)The Manager shall render to the Trusts Board of Trustees such periodic
reports concerning the Trusts and Sub-Trusts business and investments
as the Board of Trustees shall reasonably request.
C. Use of Frank Russell Company Research.
The Manager is hereby authorized and expected to utilize the research and
other resources of Frank Russell Company, its corporate parent, or any
predecessor organization, in providing the Investment Management Services
specified in Subsection "B," above. Neither the Manager nor the Trust
shall be obligated to pay any fee to Frank Russell Company for these
services.
D. Provision of Information Necessary for Preparation of
Securities Registration Statements, Amendments and Other
Materials.
The Manager will make available and provide financial, accounting, and
statistical information required by the Trust for the preparation of
registration statements, reports, and other documents required by federal
and state securities laws, and with such information as the Trust may
reasonably request for use in the preparation of such documents or of
other materials necessary or helpful for the underwriting and distribution
of the Trusts shares.
E. Other Obligations and Services.
The Manager shall make available its officers and employees to the Board
of Trustees and officers of the Trust for consultation and discussions
regarding the management of the Trust and its investment activities.
3. Execution and Allocation of Portfolio Brokerage Commissions. The Manager or
the Money Managers, subject to and in accordance with any directions which
the Trusts Board of Trustees may issue from time to time, shall place, in the
name of the Trust, orders for the execution of the Sub-Trusts portfolio
transactions. When placing such orders, the primary objective of the Manager
and Money Managers shall be to obtain the best net price and execution for
the Trust, but this requirement shall not be deemed to obligate the Manager
or a Money Manager to place any order solely on the basis of obtaining the
lowest commission rate if the other standards set forth in this section have
been satisfied. The Trust recognizes that there are likely to be many cases
in which different brokers are equally able to provide such best price and
execution and that, in selecting among such brokers with respect to
particular trades, it is desirable to choose those brokers who furnish
"brokerage and research services" (as defined in Section 28(e) (3) of the
Securities Exchange Act of 1934) or statistical quotations and other
information to the Trust, the Manager and/or the Money Managers in accord
with the standards set forth below. Moreover, to the extent that it continues
to be lawful to do so and so long as the Board determines as a matter of
general policy that the Trust will benefit, directly or indirectly, by doing
so, the Manager or a Money Manager may place orders with a broker who charges
a commission for that transaction which is in excess of the amount of
commission that another broker would have charged for effecting that
transaction, provided that the excess commission is reasonable in relation to
the value of brokerage and research services provided by that broker.
Accordingly, the Trust and the Manager agree that the Manager and the Money
Managers shall select brokers for the execution of the Sub-Trusts portfolio
transactions from among:
A. Those brokers and dealers who provide brokerage and research services, or
statistical quotations and other information to the Trust, specifically
including the quotations necessary to determine the Trusts net assets, in
such amount of total brokerage as may reasonably be required in light of
such services;
B. Those brokers and dealers who supply brokerage and research services to
the Manager and/or its affiliated corporations, or the Money Managers,
which relate directly to portfolio securities, actual or potential, of the
Trust, or which place the Manager or Money Managers in a better position
to make decisions in connection with the management of the Trusts assets
and portfolios, whether or not such data may also be useful to the Manager
and its affiliates, or the Money Managers and their affiliates, in
managing other portfolios or advising other clients, in such amount of
total brokerage as may reasonably be required; and
C. Frank Russell Securities, Inc., an affiliate of Manager, when the Manager
or Money Manager has determined that the Trust will receive competitive
execution, price, and commissions. The Manager shall render regular
reports to the Trust, not more frequently than quarterly, of how much
total brokerage business has been placed with Frank Russell Securities,
Inc., and the manner in which the allocation has been accomplished.
The Manager agrees and each Money Manager will be required to agree, that
no investment decision will be made or influenced by a desire to provide
brokerage for allocation in accordance with the foregoing, and that the
right to make such allocation of brokerage shall not interfere with the
Managers or Money Managers primary duty to obtain the best net price and
execution for the Trust.
4. Expenses of the Trust. It is understood that the Trust will pay all its
expenses other than those expressly assumed by the Manager herein, which
expenses payable by the Trust shall include:
A. Fees for the services of the Money Managers;
B. Expenses of all audits by independent public accountants;
C. Expenses of transfer agent, registrar, dividend disbursing agent, and
shareholder recordkeeping services;
D. Expenses of custodial services including recordkeeping
services provided by the Custodian;
E. Expenses of obtaining quotations for calculating the value
of the Trusts net assets;
F. Expenses of obtaining Portfolio Activity Reports and
Analyses of International Management reports for each
portfolio of each Sub-Trust;
G. Expenses of maintaining each Sub-Trusts tax records;
H. Salaries and other compensation of any of the Trusts
executive officers and employees, if any, who are not
officers, directors, stockholders, or employees of the
Manager;
I. Taxes levied against the Trust;
J. Brokerage fees and commissions in connection with the
purchase and sale of portfolio securities for the Trust;
K. Costs, including the interest expense, of borrowing money;
L. Costs and/or fees incident to meetings of the Trust, the preparation and
mailings of prospectuses and reports of the Trust to its Shareholders, the
filing of reports with regulatory bodies, the maintenance of the Trusts
existence, and the registration of shares with federal and state
securities authorities;
M. Legal fees, including the legal fees related to the registration and
continued qualification of the Trust shares for sale;
N. Costs of printing stock certificates representing shares of
the Trust;
O. Trustees fees and expenses to trustees who are not officers, employees, or
stockholders of the Manager or any of its affiliates;
P. The Trusts pro rata portion of the fidelity bond required by Section 17(g)
of the 1940 Act, or other insurance premiums;
Q. Association membership dues; and
R. Extraordinary expenses as may arise including expenses incurred in
connection with litigation, proceedings, other claims, and the legal
obligations of the Trust to indemnify its Trustees, officers, employees,
shareholders, distributors, and agents with respect thereto.
5. Activities and Affiliates of the Manager.
A. The services of the Manager and its affiliated corporations to the Trust
hereunder are not to be deemed exclusive, and the Manager and any of its
affiliates shall be free to render similar services to others.
(1)The Manager and its affiliated corporations shall use the same skill
and care in the management of the Sub-Trusts portfolios as they use in
the administration of other accounts to which they provide asset
management consulting and manager selection services, but they shall
not be obligated to give the Trust more favorable or preferential
treatment vis-a-vis their other clients.
(2) The Trust expressly recognizes that Frank Russell Trust Company ("Trust
Company"), a corporation affiliated with the Manager, is also a client
of a corporation affiliated with the Manager and receives substantially
the same portfolio structuring and money manager selection services
from the affiliate as does the Trust; that Trust Company has, or may
have, commingled investment funds with substantially the same
investment objectives, strategies, and programs as the Trust; that the
Trust was organized by and at the expense of a corporation affiliated
with the Manager for the express purpose of offering the same type of
investment management services to the Trusts shareholders, at least
some of whom could not obtain these services through Trust Company, as
Trust Company provides to its trust customers; and that over time Trust
Company and the Trust may utilize some of the same money managers and
have similar portfolio securities holdings.
B. Subject to and in accordance with the Master Trust Agreement (as defined
below) and By-Laws of the Trust and to Section 10(a) of the 1940 Act, it
is understood that Trustees, officers, agents, and shareholders of the
Trust are or may be interested in the Manager or its affiliates directors,
agents, or shareholders of the Manager or its affiliates; that directors,
officers, agents, and shareholders of the Manager or its affiliates are or
may be interested in the Trust as Trustees, officers, agents,
shareholders, or otherwise; that the Manager or its affiliates may be
interested in the Trust as shareholders or otherwise; and that the effect
of any such interests shall be governed by said Master Trust Agreement,
By-Laws, and the 1940 Act.
<PAGE>
6. Compensation of the Manager.
A. As consideration for the Managers services to the following Sub-Trusts,
the Manager shall receive from each of these Sub-Trusts an annual
management fee, accrued daily at the rate of 1/365th of the applicable
management fee and payable following the last day of each month, of the
following annual percentages of each Sub-Trusts average daily net assets
during the month:
Diversified Equity .73%
Special Growth .90%
Equity Income .75%
Quantitative Equity .73%
Diversified Bond .40%
Volatility Constrained Bond .45%
International Securities .90%
Multistrategy Bond .60%
Limited Volatility Bond .45%
U.S. Government Money Market .20%
Tax Free Money Market .20%
Real Estate Securities .80%
Emerging Markets 1.15%
Money Market .20%
Equity I .55%
Equity II .70%
Equity III .55%
Equity Q .55%
International .70%
Fixed Income I .25%
Fixed Income II .45%
Fixed Income III .50%
Equity T .70%
Aggressive Strategy .20%
Balanced Strategy .20%
Moderate Strategy .20%
Conservative Strategy .20%
Equity Balanced Strategy .20%
From this management fee, the Manager shall compensate the Money Managers
as a fiduciary of the Trust.
7. Liabilities of the Manager.
A. In the absence of willful misfeasance, bad faith, gross negligence, or
reckless disregard of obligations or duties hereunder or on the part of
the Manager or its corporate affiliates, the Manager and its corporate
affiliates shall not be subject to liability to the Trust or to any
Shareholder of the Trust for any act or omission in the course of, or
connected with, rendering services hereunder or for any losses that may be
sustained in the purchase, holding, or sale of any security.
B. No provision of this Agreement shall be construed to protect any, trustee
or officer of the Trust, or the Manager and its corporate affiliates, from
liability in violation of Sections 17(h) and (i) of the 1940 Act.
8. Renewal and Termination.
A. This Agreement shall become effective on and as of__________, 1998 and
shall continue in effect as to each Sub-Trust until April 30, 2000. The
Agreement is renewable annually thereafter for successive one-year periods
(a) by a vote of a majority of the Trustees of the Trust, or (b) as to any
Sub-Trust, by a vote of a majority of the outstanding voting securities of
that Sub-Trust, and in either case by a majority of the Trustees who are
not parties to the Agreement or interested persons of any parties to the
Agreement (other than as Trustees of the Trust) cast in person at a
meeting called for purposes of voting on the Agreement; provided, however,
that if the shareholders of any one or more Sub-Trusts fail to approve the
Agreement as provided herein, the Manager may continue to serve in such
capacity in the manner and to the extent permitted by the 1940 Act and
Rules and Regulation thereunder.
B. This Agreement:
(a) May at any time be terminated without the payment of any penalty
either by vote of the Board of Trustees of the Trust or, as to any
Sub-Trust, by vote of a majority of the outstanding voting securities of
the Sub-Trust, on 60 days written notice to the Manager;
(b) Shall immediately terminate in the event of its
assignment; and
(c) May be terminated by the Manager on 60 days written notice to the
Trust.
C. As used in this Section 8, the terms of "assignment", "interested person"
and "vote of a majority of the outstanding voting securities" shall have
the meanings set forth for any such terms in the 1940 Act.
D. Any notice under this Agreement shall be given in writing addressed and
delivered, or mailed postpaid, to the other party at any office of such
party.
9. Severability. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule, or otherwise, the remainder of
this Agreement shall not be affected thereby.
10.Reservation of Name. The parties hereto acknowledge that Frank Russell
Company has reserved the right to grant the non-exclusive use of the name
"Frank Russell," or any derivative thereof, to any other investment company,
investment advisor, distributor or other business enterprise, and to withdraw
from the Trust the use of the name "Frank Russell." In the event that Frank
Russell Company should elect to withdraw the use of the name "Frank Russell"
from the Trust, the Trust will submit the question of continuing this
Agreement to a vote of its Shareholders.
11.Limitation of Liability. The Master Trust Agreement dated July 26, 1984, as
amended from time to time, establishing the Trust, which is hereby referred
to and a copy of which is on file with the Secretary of The Commonwealth of
Massachusetts, provides that the name Frank Russell Investment Company means
the Trustees from time to time serving (as Trustees but not personally) under
said Master Trust Agreement. It is expressly acknowledged and agreed that the
obligations of the Trust hereunder shall not be binding upon any of the
Shareholders, Trustees, officers, employees, or agents of the Trust,
personally, but shall bind only the trust property of the Trust, as provided
in its Master Trust Agreement. The execution and delivery of this Agreement
have been authorized by the Trustees of the Trust and signed by the President
of the Trust, acting as such, and neither such authorization by such Trustees
nor such execution and delivery by such officer shall be deemed to have been
made by any of them individually or to impose any liability on any of them
personally, but shall bind only the trust property of the Trust as provided
in its Master Trust Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed, as of the day and year first written above.
FRANK RUSSELL INVESTMENT COMPANY
______________________________ By: ___________________________
Karl J. Ege, Secretary Lynn L. Anderson, President
FRANK RUSSELL INVESTMENT
MANAGEMENT COMPANY
______________________________ By: ___________________________
Karl J. Ege, Secretary Eric A. Russell, President
FRANK RUSSELL COMPANY agrees to provide consulting services without charge to
the Investment Company upon the request of the Board of Trustees or officers of
the Trust, or upon the request of manager pursuant to Section 2(C).
FRANK RUSSELL COMPANY
______________________________ By: ___________________________
Karl J. Ege, Secretary Michael J. A. Phillips,
President
<PAGE>
Proposed Advisory Agreement EXHIBIT F
AMENDED AND RESTATED MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT amended and restated this 27th day of April, 1998
(the"Agreement"), between FRANK RUSSELL INVESTMENT COMPANY, a Massachusetts
business trust hereinafter called the "Trust" and FRANK RUSSELL INVESTMENT
MANAGEMENT COMPANY, a Washington Corporation hereinafter called the "Manager."
WHEREAS, the Trust has been organized by and at the expense of a company
affiliated with the Manager and operates as an investment company of the
"series" type registered under the Investment Company Act of 1940 ("1940 Act")
for the purpose of investing and reinvesting its assets in portfolios of
securities, each of which has distinct investment objectives and policies (each
distinct portfolio being referred to herein as a "Sub-Trust"), as set forth more
fully in its Master Trust Agreement, its By-Laws and its Registration Statements
under the 1940 Act and the Securities Act of 1933, all as heretofore amended and
supplemented; and the Trust desires to avail itself of the services,
information, advice, assistance, and facilities of a manager and to have a
manager perform for it various management, administrative, statistical,
research, money manager selection, investment management, and other services;
and
WHEREAS, the Manager is registered as an investment adviser under the Investment
Advisers Act of 1940 and will engage in the business of rendering investment
advisor, counseling, money manager recommendation, and supervisory services to
investment consulting clients; and the Manager and its affiliated corporations
have undertaken the initiative and expense of organizing the Trust in order to
have a means to commingle assets for certain investors to have access to and
utilize the "Multi-Style, Multi-Manager" method of investment and to provide
services to the Trust in consideration of and on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, Trust and the Manager agree as follows:
1. Employment of the Manager. The Trust hereby employs the Manager to manage the
investment and reinvestment of the Trusts assets and to act as a
discretionary Money Manager to certain of the Sub-Trusts in the manner set
forth in Section 2(B) of this Agreement, and to administer its business and
administrative operations, subject to the direction of the Board of Trustees
and the officers of the Trust, for the period, in the manner, and on the
terms hereinafter set forth. The Manager hereby accepts such employment and
agrees during such period to render the services and to assume the
obligations herein set forth. The Manager shall for all purposes herein be
deemed to be an independent contractor and shall, except as expressly
provided or authorized (whether herein or otherwise), have no authority to
act for or represent the Trust in any way.
2. Obligations of and Services to be Provided by the Manager. The Manager
undertakes to provide the services hereinafter set forth and to assume the
following obligations:
A. Management and Administrative Services.
(1)The Manager shall furnish to the Trust adequate (a) office space, which
may be space within the offices of the Manager or in such other place
as may be agreed upon from time to time, (b) office furnishings,
facilities, and equipment as may be reasonably required for managing
and administering the business and operations of the Trust, including
(i) complying with the business trust, securities, and tax reporting
requirements of the United States and the various states in which the
Trust does business, (ii) conducting correspondence and other
communications with the Shareholders of the Trust, and (iii)
maintaining or supervising the maintenance of all internal bookkeeping,
accounting, and auditing services and records in connection with the
Trusts investment and business activities. The Trust agrees that its
shareholder recordkeeping services, the computing of net asset value
and the preparation of certain of its records required by Rule 31 under
the 1940 Act are maintained by the Trusts Transfer Agent, Custodian,
and Money Managers, and that with respect to these records the Managers
obligations under this Section 2(A) are supervisory in nature.
(2)The Manager shall employ or provide and compensate the executive,
administrative, secretarial, and clerical personnel necessary to
supervise the provision of the services set forth in sub-paragraph 2(A)
(l), and shall bear the expense of providing such services except as
provided in Section 4 of this Agreement. The Manager shall also
compensate all officers and employees of the Trust who are officers or
employees of the Manager, or its affiliated companies.
B. Investment Management Services.
(1)The Trust intends to appoint one or more persons or companies ("Money
manager[s]") for each of the Sub-Trusts or segments thereof, and each
Money Manager shall have full investment discretion and shall make all
determinations with respect to the investment of a Sub-Trusts assets
assigned to the Money Manager and the purchase and sale of portfolio
securities with those assets, and such steps as may be necessary to
implement its decision. The Manager shall not be responsible or liable
for the investment merits of any decision by a Money Manager to
purchase, hold, or sell a security for a Sub-Trust portfolio.
(2)The Manager shall, subject to and in accordance with the investment
objectives and policies of the Trust and each Sub-Trust and any
directions which the Trusts Board of Trustee may issue to the Manager,
have: (i) overall supervisory responsibility for the general management
and investment of the Trusts assets and securities portfolios; and (ii)
full investment discretion to make all determinations with respect to
the investment of Sub-Trust assets not assigned to a Money Manager.
(3)The Manager shall develop overall investment programs and strategies
for each Sub-Trust, or segments thereof, shall revise such programs as
necessary, an shall monitor and report periodically to the Board of
Trustees concerning the implementation of the programs.
(4)The Manager shall research and evaluate Money Managers and shall advise
the Board of Trustees of the Trust of the Money Managers which the
Manager believes are best suited to invest the assets of each
Sub-Trust; shall monitor and evaluate the investment performance of
each Money Manager employed by the Trust; shall determine the portion
of each Sub-Trusts assets to be managed by each Money Manager; shall
recommend changes or additions of Money Managers when appropriate;
shall coordinate the investment activities of the Money Managers; and
acting as a fiduciary for the Trust shall compensate the Money
Managers.
(5)The Manager shall render to the Trusts Board of Trustees such periodic
reports concerning the Trusts and Sub-Trusts business and investments
as the Board of Trustees shall reasonably request.
C. Use of Frank Russell Company Research.
The Manager is hereby authorized and expected to utilize the research and
other resources of Frank Russell Company, its corporate parent, or any
predecessor organization, in providing the Investment Management Services
specified in Subsection "B," above. Neither the Manager nor the Trust
shall be obligated to pay any fee to Frank Russell Company for these
services.
D. Provision of Information Necessary for Preparation of
Securities Registration Statements, Amendments and Other
Materials.
The Manager will make available and provide financial, accounting, and
statistical information required by the Trust for the preparation of
registration statements, reports, and other documents required by federal
and state securities laws, and with such information as the Trust may
reasonably request for use in the preparation of such documents or of
other materials necessary or helpful for the underwriting and distribution
of the Trusts shares.
E. Other Obligations and Services.
The Manager shall make available its officers and employees to the Board
of Trustees and officers of the Trust for consultation and discussions
regarding the administration and management of the Trust and its
investment activities.
3. Execution and Allocation of Portfolio Brokerage Commissions. The Manager or
the Money Managers, subject to and in accordance with any directions which
the Trusts Board of Trustees may issue from time to time, shall place, in the
name of the Trust, orders for the execution of the Sub-Trusts portfolio
transactions. When placing such orders, the primary objective of the Manager
and Money Managers shall be to obtain the best net price and execution for
the Trust, but this requirement shall not be deemed to obligate the Manager
or a Money Manager to place any order solely on the basis of obtaining the
lowest commission rate if the other standards set forth in this section have
been satisfied. The Trust recognizes that there are likely to be many cases
in which different brokers are equally able to provide such best price and
execution and that, in selecting among such brokers with respect to
particular trades, it is desirable to choose those brokers who furnish
"brokerage and research services" (as defined in Section 28(e) (3) of the
Securities Exchange Act of 1934) or statistical quotations and other
information to the Trust, the Manager and/or the Money Managers in accord
with the standards set forth below. Moreover, to the extent that it continues
to be lawful to do so and so long as the Board determines as a matter of
general policy that the Trust will benefit, directly or indirectly, by doing
so, the Manager or a Money Manager may place orders with a broker who charges
a commission for that transaction which is in excess of the amount of
commission that another broker would have charged for effecting that
transaction, provided that the excess commission is reasonable in relation to
the value of brokerage and research services provided by that broker.
Accordingly, the Trust and the Manager agree that the Manager and the Money
Managers shall select brokers for the execution of the Sub-Trusts portfolio
transactions from among:
A. Those brokers and dealers who provide brokerage and research services, or
statistical quotations and other information to the Trust, specifically
including the quotations necessary to determine the Trusts net assets, in
such amount of total brokerage as may reasonably be required in light of
such services;
B. Those brokers and dealers who supply brokerage and research services to
the Manager and/or its affiliated corporations, or the Money Managers,
which relate directly to portfolio securities, actual or potential, of the
Trust, or which place the Manager or Money Managers in a better position
to make decisions in connection with the management of the Trusts assets
and portfolios, whether or not such data may also be useful to the Manager
and its affiliates, or the Money Managers and their affiliates, in
managing other portfolios or advising other clients, in such amount of
total brokerage as may reasonably be required; and
C. Frank Russell Securities, Inc., an affiliate of Manager, when the Manager
or Money Manager has determined that the Trust will receive competitive
execution, price, and commissions. The Manager shall render regular
reports to the Trust, not more frequently than quarterly, of how much
total brokerage business has been placed with Frank Russell Securities,
Inc., and the manner in which the allocation has been accomplished.
The Manager agrees and each Money Manager will be required to agree, that
no investment decision will be made or influenced by a desire to provide
brokerage for allocation in accordance with the foregoing, and that the
right to make such allocation of brokerage shall not interfere with the
Managers or Money Managers primary duty to obtain the best net price and
execution for the Trust.
4. Expenses of the Trust. It is understood that the Trust will pay all its
expenses other than those expressly assumed by the Manager herein, which
expenses payable by the Trust shall include:
A. Fees for the services of the Money Managers;
B. Expenses of all audits by independent public accountants;
C. Expenses of transfer agent, registrar, dividend disbursing agent, and
shareholder recordkeeping services;
D. Expenses of custodial services including recordkeeping
services provided by the Custodian;
E. Expenses of obtaining quotations for calculating the value
of the Trusts net assets;
F. Expenses of obtaining Portfolio Activity Reports and
Analyses of International Management reports for each
portfolio of each Sub-Trust;
G. Expenses of maintaining each Sub-Trusts tax records;
H. Salaries and other compensation of any of the Trusts
executive officers and employees, if any, who are not
officers, directors, stockholders, or employees of the
Manager;
I. Taxes levied against the Trust;
J. Brokerage fees and commissions in connection with the
purchase and sale of portfolio securities for the Trust;
K. Costs, including the interest expense, of borrowing money;
L. Costs and/or fees incident to meetings of the Trust, the preparation and
mailings of prospectuses and reports of the Trust to its Shareholders, the
filing of reports with regulatory bodies, the maintenance of the Trusts
existence, and the registration of shares with federal and state
securities authorities;
M. Legal fees, including the legal fees related to the registration and
continued qualification of the Trust shares for sale;
N. Costs of printing stock certificates representing shares of
the Trust;
O. Trustees fees and expenses to trustees who are not officers, employees, or
stockholders of the Manager or any of its affiliates;
P. The Trusts pro rata portion of the fidelity bond required by Section 17(g)
of the 1940 Act, or other insurance premiums;
Q. Association membership dues; and
R. Extraordinary expenses as may arise including expenses incurred in
connection with litigation, proceedings, other claims, and the legal
obligations of the Trust to indemnify its Trustees, officers, employees,
shareholders, distributors, and agents with respect thereto.
5. Activities and Affiliates of the Manager.
A. The services of the Manager and its affiliated corporations to the Trust
hereunder are not to be deemed exclusive, and the Manager and any of its
affiliates shall be free to render similar services to others.
(1)The Manager and its affiliated corporations shall use the same skill
and care in the management of the Sub-Trusts portfolios as they use in
the administration of other accounts to which they provide asset
management consulting and manager selection services, but they shall
not be obligated to give the Trust more favorable or preferential
treatment vis-a-vis their other clients.
(2)The Trust expressly recognizes that Frank Russell Trust Company ("Trust
Company"), a corporation affiliated with the Manager, is also a client
of a corporation affiliated with the Manager and receives substantially
the same portfolio structuring and money manager selection services
from the affiliate as does the Trust that Trust Company has, or may
have, commingled investment funds with substantially the same
investment objectives, strategies, and programs as the Trust; that the
Trust was organized by and at the expense of a corporation affiliated
with the Manager for the express purpose of offering the same type of
investment management services to the Trusts shareholders, at least
some of whom could not obtain these services through Trust Company, as
Trust Company provides to its trust customers; and that over time Trust
Company and the Trust may utilize some of the same money managers and
have similar portfolio securities holdings.
B. Subject to and in accordance with the Master Trust Agreement (as defined
below) and By-Laws of the Trust and to Section 10(a) of the 1940 Act, it
is understood that Trustees, officers, agents, and shareholders of the
Trust are or may be interested in the Manager or its affiliates directors,
agents, or shareholders of the Manager or its affiliates; that directors,
officers, agents, and shareholders of the Manager or its affiliates are or
may be interested in the Trust as Trustees, officers, agents,
shareholders, or otherwise; that the Manager or its affiliates may be
interested in the Trust as shareholders or otherwise; and that the effect
of any such interests shall be governed by said Master Trust Agreement,
By-Laws, and the 1940 Act.
<PAGE>
6. Compensation of the Manager.
A. As consideration for the Managers services to the following Sub-Trusts,
the Manager shall receive from each of these Sub-Trusts an annual
management fee, accrued daily at the rate of 1/365th of the applicable
management fee and payable following the last day of each month, of the
following annual percentages of each Sub-Trusts average daily net assets
during the month:
Diversified Equity .78%
Special Growth .95%
Equity Income .80%
Quantitative Equity .78%
Diversified Bond .45%
Volatility Constrained Bond .50%
International Securities .95%
Multistrategy Bond .65%
Limited Volatility Bond .50%
U.S. Government Money Market .25%
Tax Free Money Market .25%
Real Estate Securities .85%
Emerging Markets 1.20%
Money Market .25%
Equity I .60%
Equity II .75%
Equity III .60%
Equity Q .60%
International .75%
Fixed Income I .30%
Fixed Income II .50%
Fixed Income III .55%.
Equity T .75%
Aggressive Strategy .25%
Balanced Strategy .25%
Moderate Strategy .25%
Conservative Strategy .25%
Equity Balanced Strategy .25%
From this management fee, the Manager shall compensate the Money Managers
as a fiduciary of the Trust.
7. Liabilities of the Manager.
A. In the absence of willful misfeasance, bad faith, gross negligence, or
reckless disregard of obligations or duties hereunder or on the part of
the Manager or its corporate affiliates, the Manager and its corporate
affiliates shall not be subject to liability to the Trust or to any
Shareholder of the Trust for any act or omission in the course of, or
connected with, rendering services hereunder or for any losses that may be
sustained in the purchase, holding, or sale of any security.
B. No provision of this Agreement shall be construed to protect any, trustee
or officer of the Trust, or the Manager and its corporate affiliates, from
liability in violation of Sections 17(h) and (i) of the 1940 Act.
8. Renewal and Termination.
A. This Agreement shall become effective on and as of April 27, 1998 and
shall continue in effect as to each Sub-Trust until April 30, 2000. The
Agreement is renewable annually thereafter for successive one-year periods
(a) by a vote of a majority of the Trustees of the Trust, or (b) as to any
Sub-Trust, by a vote of a majority of the outstanding voting securities of
that Sub-Trust, and in either case by a majority of the Trustees who are
not parties to the Agreement or interested persons of any parties to the
Agreement (other than as Trustees of the Trust) cast in person at a
meeting called for purposes of voting on the Agreement; provided, however,
that if the shareholders of any one or more Sub-Trusts fail to approve the
Agreement as provided herein, the Manager may continue to serve in such
capacity in the manner and to the extent permitted by the 1940 Act and
Rules and Regulation thereunder.
B. This Agreement:
(a) May at any time be terminated without the payment of any penalty
either by vote of the Board of Trustees of the Trust or, as to any
Sub-Trust, by vote of a majority of the outstanding voting securities of
the Sub-Trust, on 60 days written notice to the Manager;
(b) Shall immediately terminate in the event of its
assignment; and
(c) May be terminated by the Manager on 60 days written notice to the
Trust.
C. As used in this Section 8, the terms of "assignment", "interested person"
and "vote of a majority of the outstanding voting securities" shall have
the meanings set forth for any such terms in the 1940 Act.
D. Any notice under this Agreement shall be given in writing addressed and
delivered, or mailed postpaid, to the other party at any office of such
party.
9. Severability. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule, or otherwise, the remainder of
this Agreement shall not be affected thereby.
10.Reservation of Name. The parties hereto acknowledge that Frank Russell
Company has reserved the right to grant the non-exclusive use of the name
"Frank Russell," or any derivative thereof, to any other investment company,
investment advisor, distributor or other business enterprise, and to withdraw
from the Trust the use of the name "Frank Russell." In the event that Frank
Russell Company should elect to withdraw the use of the name "Frank Russell"
from the Trust, the Trust will submit the question of continuing this
Agreement to a vote of its Shareholders.
11.Limitation of Liability. The Master Trust Agreement dated July 26, 1984, as
amended from time to time, establishing the Trust, which is hereby referred
to and a copy of which is on file with the Secretary of The Commonwealth of
Massachusetts, provides that the name Frank Russell Investment Company means
the Trustees from time to time serving (as Trustees but not personally) under
said Master Trust Agreement. It is expressly acknowledged and agreed that the
obligations of the Trust hereunder shall not be binding upon any of the
Shareholders, Trustees, officers, employees, or agents of the Trust,
personally, but shall bind only the trust property of the Trust, as provided
in its Master Trust Agreement. The execution and delivery of this Agreement
have been authorized by the Trustees of the Trust and signed by the President
of the Trust, acting as such, and neither such authorization by such Trustees
nor such execution and delivery by such officer shall be deemed to have been
made by any of them individually or to impose any liability on any of them
personally, but shall bind only the trust property of the Trust as provided
in its Master Trust Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed, as of the day and year first written above.
FRANK RUSSELL INVESTMENT COMPANY
______________________________ By: ___________________________
Karl J. Ege, Secretary Lynn L. Anderson, President
FRANK RUSSELL INVESTMENT
MANAGEMENT COMPANY
______________________________ By: ___________________________
Karl J. Ege, Secretary Eric A. Russell, President
FRANK RUSSELL COMPANY agrees to provide consulting services without charge to
the Investment Company upon the request of the Board of Trustees or officers of
the Trust, or upon the request of manager pursuant to Section 2(C).
FRANK RUSSELL COMPANY
______________________________ By: ___________________________
Karl J. Ege, Secretary Michael J. A. Phillips,
President
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
FOR
FRANK RUSSELL INVESTMENT COMPANY
Relating to the Merger of the
VOLATILITY CONSTRAINED BOND FUND
and the
FIXED INCOME II FUND
Dated October __, 1998
This Statement of Additional Information relates specifically to the
proposed merger of the following two sub-trusts of Frank Russell Investment
Company (the "Investment Company"): the Volatility Constrained Bond Fund (the
"Bond Fund") and the Fixed Income II Fund (the "Fixed Income Fund"). Upon
completion of the merger, the Fixed Income Fund will be renamed
the Short-Term Bond Fund.
This Statement of Additional Information consists of this Cover Page and
the following documents which are attached and incorporated by reference:
Exhibit A: Statement of Additional Information relating to the
prospectus of the Investment Companys Institutional Funds, dated May
1, 1998, as supplemented through August 20, 1998, which prospectus is
included as an exhibit to the Prospectus/ Proxy Statement dated
October ___, 1998 relating to the Reorganization.
Exhibit B: Annual Report of the Investment Companys Class S Funds,
relating to the Bond Fund, dated December 31, 1997.
Exhibit C: Semi-annual Report of the Investment Companys Class S
Funds, relating to the Bond Fund, dated June 30, 1998.
Exhibit D: Pro forma financial statements reflecting the combination
of the Bond Fund and the Fixed Income Fund as if the Proposed
reorganization had occurred on December 31, 1997.
This Statement of Additional Information is not a prospectus; a
Prospectus/Proxy Statement dated October ___, 1998, relating to the
above-referenced transaction may be obtained from the Investment Company. This
document should be read in conjunction with such Prospectus/Proxy Statement, a
copy of which may be obtained without charge by calling 1-800-972-0700 or by
writing to the Investment Company at 909 A Street, Tacoma, WA 98402.
<PAGE>
Statment of Additional Information EXHIBIT A
dated May 1, 1998, as supplemented
through August 17, 1998
is herein incorporated by reference to Exhibit __
of Prospectus/Proxy Statement.
FRANK RUSSELL INVESTMENT COMPANY
SUPPLEMENT DATED AUGUST 20, 1998 TO THE
STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 1998
AS SUPPLEMENTED THROUGH JUNE 15, 1998
Effective August 20, 1998, the Treasurer and Chief Accounting Officer will be
the following person:
Mark E. Swanson, 34, Treasurer and Chief Accounting Officer. Treasurer and
Chief Accounting Officer, Russell Insurance Funds; Interim Director,
Finance and Operations, Frank Russell Trust Company; Senior Vice President
and Assistant Fund Treasurer, SSgA Funds (investment company); Interim
Director of Fund Administration and Accounting, Frank Russell Investment
Management Company; Manager, Funds Accounting and Taxes, Russell Fund
Distributors, Inc. April 1996 to August 1998, Assistant Treasurer, Frank
Russell Investment Company; August 1996 to August 1998, Assistant
Treasurer, Russell Insurance Funds. November 1995 to July 1998, Assistant
Secretary, the Seven Seas Series Fund. February 1997 to July 1998,
Manager, Funds Accounting and Taxes, Frank Russell Investment Management
Company.
<PAGE>
FRANK RUSSELL INVESTMENT COMPANY
SUPPLEMENT DATED JUNE 15, 1998
TO THE STATEMENT OF ADDITIONAL INFORMATION
DATED MAY 1, 1998
Effective June 15, 1998, Frank Russell Investment Company makes the following
changes to the Statement of Additional Information:
All references to "Class C" are hereby changed to "Class E" to reflect a
redesignation of that class of shares.
In the section captioned: "Operation of the Investment Company," under
subsection captioned "Manager," the following two paragraphs will be added
as the third and fourth paragraphs under that sub-section:
The Board has approved, subject to approval by the shareholders of the
applicable Funds at a meeting to be held during 1998 (the "1998
Shareholder Meeting"), an amendment to the Management Agreement. Under
the amendment, in addition to the fees set forth above (restructured
as described in the next paragraph), the Funds will pay FRIMCo a fee
which compensates FRIMCo for managing collateral which the Funds have
received in securities lending and certain other portfolio
transactions. If the amendment is approved by shareholders, each Fund
will pay a fee to FRIMCo for its services in managing the Funds cash,
securities and other investment assets which are not treated as net
assets of that Fund ("additional assets") in determining the Funds net
asset value per share. If approved, the additional fee payable to
FRIMCo will equal an amount of up to 0.07% of each Funds additional
assets on an annualized basis.
It is also proposed that the services which FRIMCo provides to the
Funds under the present Management Agreement will be divided into two
components. Those services which are investment advisory in nature
will be provided pursuant to a new Advisory Agreement. Other services
which are administrative in nature will be provided pursuant to a new
Administrative Agreement. It is not anticipated that this
restructuring of services provided to the Funds will materially affect
the costs of these services to the Funds, or affect FRIMCos current
voluntary fee waiver.
In the section captioned: "Operation of the Trust," the subsection --
Distribution Plan -- shall be revised to read in its entirety as follows:
DISTRIBUTION PLAN. Under the 1940 Act, the SEC has adopted Rule 12b-
1, which regulates the circumstances under which the Funds may,
directly or indirectly, bear distribution expenses. Rule 12b-1
provides that the Funds may pay for such expenses only pursuant to a
plan adopted in
<PAGE>
accordance with Rule 12b-1. Accordingly, the Multiple Class Funds
adopted a distribution plan (the "Distribution Plan") for the Multiple
Class Funds Class E Shares, which are described in the respective
Funds Prospectuses. Effective May 18, 1998, the Distribution Plan was
discontinued with respect to those Shares by a vote of the majority of
Independent Trustees. In adopting the Distribution Plan, a majority of
the Trustees, including a majority of the Trustees who are not
"interested persons" (as defined in the 1940 Act) of the Trust and who
have no direct or indirect financial interest in the operation of the
Distribution Plan or in any agreements entered into in connection with
the Distribution Plan (the "Independent Trustees"), concluded, in
conformity with the requirements of the 1940 Act, that there is a
reasonable likelihood that the Distribution Plan will benefit each
respective Multiple Class Fund and its shareholders. In connection
with the Trustees consideration of whether to adopt the Distribution
Plan, the Distributor, as the Multiple Class Funds principal
underwriter, represented to the Trustees that the Distributor believed
that the Distribution Plan should result in increased sales and asset
retention for the Multiple Class Funds by enabling the Multiple Class
Funds to reach and retain more investors and Financial Intermediaries
(such as brokers, banks, financial planners, investment advisors and
other financial institutions), although it is impossible to know for
certain, in the absence of a Distribution Plan or under an alternative
distribution arrangement, the level of sales and asset retention that
a Multiple Class Fund would have.
The Distribution Plan provided that each Multiple Class Fund could
spend annually, directly or indirectly, up to 0.75% of the average
daily net asset value of its Class E Shares for any activities or
expenses primarily intended to result in the sale of Class E Shares of
a Multiple Class Fund. Such payments by the Trust were to be
calculated daily and paid periodically and were not to be made less
frequently than quarterly. The Board had determined to limit payments
under the Distribution Plan to 0.40% of average daily net assets. Any
amendment to increase materially the costs that a Multiple Class Funds
Shares could bear for distribution pursuant to the Distribution Plan
would have been effective upon a vote of the holders of the lesser of
(a) more than fifty percent (50%) of the outstanding Shares of a
Multiple Class Fund or (b) sixty-seven percent (67%) or more of the
Shares of a Multiple Class Fund present at a shareholders meeting, if
the holders of more than 50% of the outstanding Shares of such Fund
are present or represented by proxy. The Distribution Plan did not
provide for the Multiple Class Funds to be charged for interest,
carrying or any other financing charges on any distribution expenses
carried forward to subsequent years. A quarterly report of the amounts
expended under the Distribution Plan, and the purposes for which such
expenditures were incurred, was made to the Trustees for their review.
The Distribution Plan could not have been amended without approval of
the holders of the Class E Shares. The Distribution Plan and
<PAGE>
material amendments to it was required to be approved annually by all
of the Trustees and by the Independent Trustees. While the
Distribution Plan was in effect, the selection and nomination of the
Independent Trustees was committed to the discretion of such
Independent Trustees. The Distribution Plan was terminable, as to a
Multiple Class Funds Shares, without penalty at any time by (a) a vote
of a majority of the Independent Trustees, or (b) a vote of the
holders of the lesser of (a) more than fifty percent (50%) of the
outstanding Shares of a Multiple Class Fund or (b) sixty-seven percent
(67%) or more of the Shares of a Multiple Class Fund present at a
shareholders meeting, if the holders of more than 50% of the
outstanding Shares of such Fund were present or represented by proxy.
In the section captioned: "Operation of the Trust," the subsection --
Transfer and Dividend Disbursing Agent -- shall be revised to read in its
entirety as follows:
FRIMCo serves as Transfer Agent for the Trust. For this service,
FRIMCo is paid a per-account fee for transfer agency and dividend
disbursing services provided to the Trust. From this fee FRIMCo
compensates unaffiliated agents who assist in providing these
services. FRIMCO is also reimbursed by the Trust for certain
out-of-pocket expenses, including postage, taxes, wires, stationery
and telephone. FRIMCos mailing address is 909 A Street, Tacoma, WA
98402.
In the section captioned: "Investment Restrictions, Policies and Certain
Investments," under the subsection -- Investment Restrictions -- the
following language will be added to No.7:
The Board has approved, subject to approval by the shareholders of the
respective Funds at the 1998 Shareholder Meeting, a proposal to revise
the Funds fundamental policy on borrowing. If approved by the
shareholders, this limit would be increased to up to 33 1/3% of the
current value of the Funds total assets.
<PAGE>
Annual Report dated December 31, 1997 EXHIBIT B of the Investment Companys S
Funds relating to the Bond Fund dated December 31, 1997.
102 Volatility Constrained Bond Fund
<PAGE>
Volatility Constrained Bond Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Performance Review
For the year ended December 31, 1997, the Volatility Constrained Bond Fund
reflected a total return of 5.9%, as compared to the Merrill Lynch 1-2.99 Years
Treasury Index which rose 6.7%. The Fund modestly underperformed the Index as
the managers in the Fund maintained conservative duration positions throughout
most of the year due to concerns over Fed intervention. Weak returns from
corporate bonds late in the year, as the markets flight to defensive sectors
favored treasuries, also contributed to the Funds modest underperformance.
Portfolio Highlights
Indications of the US economys ability to sustain strong growth without
inflation benefited bonds increasingly throughout 1997. However, two factors
diminished the attractiveness of short-term bonds for much of the year. The
first proved to be the Federal Reserve Board which threatened to increase rates
during much of the year, but acted only once, late in the first quarter, when it
increased the Fed Funds rate 1/4%. The second threat was directly attributable
to the problems facing Asian economies during the last four months of the year.
As major holders of short-term US treasuries, it was feared that Korean and
Japanese investors would be forced to redeem their investments to support
weakened businesses in their own countries. Although some withdrawals appeared
to occur late in the year, fears of massive selling of T-bills were not
realized.
The Fund was impacted by these factors in several ways. The Feds inflammatory
comments about the economys strength and inflation risk kept the Funds
investment managers conservatively positioned in terms of portfolio duration
during the first half of the year. The markets flight to quality sectors of the
market in reaction to Asias problems later in the year favored US treasuries.
Other sectors were negatively impacted, particularly where credit weakness was
perceived. Lower quality corporate issues lagged as yield spreads widened.
Credit-sensitive asset- and mortgage-backed securities holdings were also
underperformers in the fourth quarter. The Fund was able to offset some of these
influences. The bond managers captured some value by extending portfolio
duration in the third quarter as economic fundamentals stabilized and the Fed
became less of a factor.
- - -----------------------------------------------------------------------------
Top Ten Issuers
(as a percent of Total Investments) December 31, 1997
United States Treasury 17.6
Barnett Auto Trust 3.3
World Omni Automobile Lease 3.3
Olympic Automobile Receivables Trust 2.5
Proctor & Gamble 2.5
General Electric Capital Corporation 2.4
Associates Corp. North America 2.4
Sears Roebuck Acceptance 2.3
First Chicago Master Trust 2.2
Toyota Auto Lease Trust 2.1
Portfolio Characteristics
December 31, 1997
Weighted Average Quality Diversification AA1
Weighted Average Years-to-Maturity 2.6 Years
Weighted Average Duration 1.6 Years
Current Yield (SEC 30-day standardized) 5.4%
Number of Issues 152
Number of Issuers 120
Money Managers Styles
BlackRock Financial Management Mortgage/Asset-Backed
Specialist
STW Fixed Income Management, Sector Rotation Core
Inc.
Standish, Ayer & Wood, Inc. Corporate Specialist
Performance is historical and assumes reinvestment of all dividends and capital
gains. Investment return and principal value will fluctuate so that an investors
shares, when redeemed, may be worth more or less than when purchased.
Past performance is not indicative of future results.
Volatility Constrained Bond Fund 103
<PAGE>
Volatility Constrained Bond Fund
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
--------- ---------
<S> <C> <C>
Long-Term Investments - 90.7%
Asset-Backed Securities - 34.6%
Advanta Home Equity Loan Trust
Series 1994-1 Class A-2
6.300% due 07/25/25 $ 189 $ 186
AFC Home Equity Loan Trust
Series 1993-2 Class A
6.000% due 0l/20/13 157 154
AFC Mortgage Loan Trust
Series 1996-3 Class 1A2
7.220% due 12/25/27 125 125
Associates Manufactured Housing
Pass-thru Certificates
Series 1996-1 Class A3
7.000% due 03/15/27 700 710
Banc One Auto Grantor Trust
Series 1997-A Class A
6.270% due 11/20/03 2,798 2,804
Barnett Auto Trust
Series 1997-A Class A3
6.030% due 11/15/01 5,700 5,696
California Infrastructure PG&E
Series 1997-1 Class A3
6.150% due 06/25/02 1,600 1,604
Case Equipment Loan Trust
Series 1997-B Class C
6.410% due 09/15/04 284 286
Chase Credit Card Master Trust
Series 1997-2 Class A
6.300% due 04/15/03 2,900 2,922
Chase Manhattan Grantor Trust
Series 1996-B Class A
6.610% due 09/15/02 783 787
Chevy Chase Auto Receivables Trust
Series 1996-2 Class A
5.900% due 07/15/03 803 800
Series 1997-3 Class A
6.200% due 03/20/04 (c) 868 869
Contimortgage Home Equity Loan Trust
Pass-thru Certificate
Series 1997-4 Class A2
6.270% due 02/15/12 500 499
EQCC Home Equity Loan Trust
Series 1993-4 Class A
5.725% due 12/15/08 51 51
Series 1994-1 Class A
5.800% due 03/15/09 260 258
Equivantage Home Equity Loan Trust
Series 1996-1 Class A
6.550% due 10/25/25 486 488
Fifth Third Bank Auto Grantor Trust
Series 1996-B Class A
6.450% due 03/15/02 1,000 1,003
First Chicago Master Trust II
Credit Card Certificates
Series 1994-L
7.150% due 04/15/01 3,200 3,257
First Omni Credit Card Master Trust
Series 1996-A Class A
6.650% due 09/15/03 610 620
First Security Auto Grantor Trust
Series 1997-A Class A
6.300% due 08/15/03 697 698
Fleetwood Credit Corporation Grantor Trust
Series 1997-B Class A
6.400% due 05/15/13 378 381
Ford Credit Auto Lease Trust
Series 1996-1 Class A2
5.800% due 05/15/99 809 808
Green Tree Financial Corp.
Series 1996-6 Class A4
7.050% due 09/15/27 500 507
Green Tree Securitized Net Interest
Margin Trust
Series 1994-A Class A
6.900% due 02/15/04 440 444
Series 1995-A Class A
7.250% due 07/15/05 354 355
Honda Auto Receivables Grantor Trust
Series 1995-A Class A
6.200% due 12/15/00 346 346
Series 1997-B Class A
5.950% due 05/15/03 923 922
IMC Home Equity Loan Trust
Series 1997-5 Class Al
6.510% due 02/20/06 (c) 584 584
Nationsbank Auto Owner Trust
Series 1996-A Class A3
6.375% due 07/15/00 2,500 2,505
Newcourt Receivables Asset Trust
Series 1996-2 Class A
6.870% due 06/20/04 156 159
Nissan Auto Recievables Grantor Trust
Series 1997-1 Class A
6.150% due 02/17/03 837 839
Olympic Automobile Receivables
Series 1996-B Class A4
6.700% due 03/15/02 1,000 1,009
Series 1996-D Class CTFS
6.125% due 11/15/04 2,860 2,852
Series 1997-A Class A2
6.125% due 01/01/99 451 451
PNC Student Loan Trust I
Series 1997-2 Class A3
6.314% due 0l/25/01 3,500 3,529
</TABLE>
104 Volatility Constrained Bond Fund
<PAGE>
Volatility Constrained Bond Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
---------- ---------
<S> <C> <C>
Premier Auto Trust
Series 1997-3 Class A4
6.200% due 01/06/01 $ 3,500 $ 3,508
Remodelers Home Improvement Loan
Series 1995-3 Class A2
6.800% due 12/20/07 269 269
Sears Credit Account Master Trust II
Series 1995-3 Class A
7.000% due 10/15/04 500 511
Series 1997-1 Class A
6.200% due 07/16/07 500 500
SMS Student Loan Trust
Series 1997-A Class A
6.030% due 10/27/25 (c) 500 505
SPNB Home Equity Loan
Series 1991-1 Class B
8.150% due 06/15/20 151 153
Student Loan Marketing Association
Series 1997-3 Class CTFS
6.259% due 08/25/12 (c) 400 395
The Money Store Home Equity Loan Trust
Series 1996-B Class A3
6.820% due 03/15/10 130 131
TLFC IV Equipment Lease Trust
Series 1996-1 Class A
5.980% due 11/20/02 305 305
TMS Small Business Administration Loan Trust
Series 1997-1 Class A
6.240% due 01/15/25 (c) 497 497
Series 1997-1 Class B
6.719% due 01/15/25 (c) 497 495
Toyota Auto Lease Trust
Series 1997-A Class Al
6.200% due 04/26/04 3,600 3,603
UCFC Home Equity Loan Trust
Series 1993-B1 Class Al
6.075% due 07/25/14 95 94
Series 1996-D1 Class A3
6.541% due 11/15/13 275 276
WFS Financial Owner Trust
Series 1996-D Class A3
6.050% due 07/20/01 (c) 3,500 3,506
World Omni Automobile Lease
Securitization Trust
Series 1996-B Class A3
6.250% due 11/15/02 699 699
Series 1996-B Class B
6.850% due 11/15/02 (c) 400 402
World Omni Automobile Lease
Securitization Trust
Series 1997-A Class A2
6.750% due 06/25/03 (c) 3,500 3,531
Series 1997-A Class A4
6.900% due 06/25/03 400 406
Series 1997-B Class Al
6.070% due 11/25/03 600 601
-------
59,895
=======
Corporate Bonds and Notes -- 21.2%
Advanta National Bank
6.450% due 10/30/00 250 244
Ahmanson (H.F.)
9.875% due 11/15/99 400 425
Aristar Inc.
6.125% due 12/01/00 500 498
Associates Corp North America
6.375% due 08/15/00 4,000 4,023
Banponce Corp. (MTN)
Series 2
5.750% due 03/01/99 1,100 1,094
Bear Stearns Co., Inc.
7.625% due 09/15/99 725 742
Caterpillar Financial Services (MTN)
6.100% due 07/15/99 500 500
CIT Group Holdings, Inc. (MTN)
6.125% due 12/15/00 3,100 3,092
Cox Enterprises, Inc.
6.250% due 08/26/99 1,000 1,000
Crescent Real Estate Equities
6.625% due 09/15/02 750 749
ERP Operating, L.P.
8.500% due 05/15/99 225 231
Finova Capital Corp.
6.450% due 06/01/00 625 627
First Chicago Corp.
9.000% due 06/15/99 500 519
First Union Corp.
6.750% due 0l/15/98 410 410
Franchise Finance Corp.
7.000% due 11/30/00 575 581
General Electric Capital Corporation (MTN)
6.120% due 08/15/00 4,000 4,032
General Motors Acceptance Corp.
7.012% due 04/01/20 (c) 984 994
General Motors Acceptance Corp. (MTN)
7.500% due 07/22/99 850 868
7.465% due 07/25/19 974 981
</TABLE>
Volatility Constrained Bond Fund 105
<PAGE>
Volatility Constrained Bond Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
---------- ---------
<S> <C> <C>
Greyhound Financial Corp.
8.500% due 02/15/99 $ 775 $ 793
Heller Financial, Inc. (MTN)
5.928% due 03/01/99 (c) 600 602
Hertz Corp.
6.625% due 07/15/00 650 654
Homeside Lending, Inc. (MTN)
6.875% due 06/30/02 600 611
ITT Corp.
6.250% due 11/15/00 450 442
JC Penney & Co., Inc. (MTN)
6.375% due 09/15/00 675 680
Lehman Brothers Holdings, Inc. (MTN)
Series E
7.110% due 09/27/99 1,075 1,092
Series IBC
7.000% due 05/13/99 700 709
MBNA Corp. (MTN)
Series B
6.500% due 09/15/00 375 379
Merrill Lynch & Co., Inc. (MTN)
7.260% due 03/25/02 (c) 925 946
Midlantic Corp.
9.250% due 09/01/99 450 471
Salomon Smith Barney Holdings
6.625% due 07/01/02 375 379
Salomon, Inc. (MTN)
5.718% due 04/05/99 (c) 1,000 1,000
Sears Roebuck Acceptance (MTN)
6.160% due 09/20/00 4,000 4,001
Sovereign Bancorp, Inc. (Regd)
6.750% due 07/01/00 475 478
USF&G Corp.
7.000% due 05/15/98 1,000 1,003
Wellsford Residential Property Trust (MTN)
6.195% due 11/24/99 (c) 850 851
---------
36,701
---------
Eurodollar Bonds - 3.8%
ALPS Pass-thru Trust
Series 1994-1 Class A-2
7.150% due 09/15/04 (c) 351 353
Chase Manhattan Corp.
6.062% due 12/05/09 (c) 800 782
Export-Import Bank of Korea
7.125% due 09/20/0l 200 166
Procter & Gamble
9.625% due 01/14/01 3,900 4,224
Videotron Holdings PLC Step Up Bond
Zero Coupon due 07/0l/04 1,175 1,119
---------
6,644
=========
Mortgage-Backed Securities -11.0%
Bear Stearns Mortgage Securities, Inc.
Series 1996-6 Class A2
7.000% due 11/25/27 750 748
BKD Commercial Mortgage Trust
Series 1997-CI Class B
7.218% due 04/25/00(c) 550 551
Citicorp Mortgage Securities, Inc.
REMIC Series 1997-5 Class Al
6.500% due 11/25/27 400 401
CMC Securities Corp. II
Series 1993-2G Class Al
7.194% due 11/25/23 (c) 664 674
Federal Home Loan Mortgage Corp. Groups
Participation Certificate
7.500% due 2000 221 223
7.500% due 2002 201 202
9.000% due 2005 256 267
7.375% due 2006 (c) 261 268
7.500% due 2007 369 374
8.500% due 2011 156 162
8.000% due 2018 758 788
Federal Home Loan Mortgage Corp.
Series 1714 Class E
6.250% due 09/l5/18 525 526
Federal National Mortgage
Association Pools
8.500% due 2001 144 148
7.000% due 2004 757 767
8.750% due 2004 44 46
7.000% due 2008 325 331
7.500% due 2009 475 486
8.500% due 2010 711 741
Federal National Mortgage Association
Grantor Trust
REMIC Series 1996-T6 Class C
6.200% due 02/26/01 1,066 1,059
GE Capital Mortgage Services, Inc.
REMIC Series 1997-9 Class 1A2
6.750% due 10/25/27 1,000 1,005
Government National Mortgage
Association Pools
9.500% due 2025 693 752
7.250% due 2026 1,040 1,065
</TABLE>
106 Volatility Constrained Bond Fund
<PAGE>
Volatility Constrained Bond Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Principal Market
Amount Value
(000) (000)
--------- ---------
<S> <C> <C>
Prudential Home Mortgage Securities
Series 1994-19 Class A2
7.050% due 05/25/24 $ 462 $ 465
Residential Accredited Loans, Inc.
Series 1997-Q57 Class Al
7.500% due 07/25/27 367 371
Residential Asset Securitization Trust
Mortgage Pass-thru Certificates
Series 1996-A8 Class Al
8.000% due 12/25/26 396 401
Series 1997-Al Class A
7.000% due 03/25/27 415 417
Series 1997-A5 Class A3
7.125% due 07/25/27 851 856
Series 1997-A9 Class Al
7.250% due 11/25/27 740 745
Residential Funding Mortgage Securities I
Series 1997-S12 Class Al0
6.700% due 08/25/27 850 855
Resolution Trust Corp.
Mortgage Pass-thru Certificates
Series 1992-M3 Class Al
7.750% due 07/25/30 111 111
Series 1994-Cl Class D
8.000% due 06/25/26 (c) 657 669
Series 1995-2 Class C1
7.450% due 05/25/29 (c) 289 292
SASCO LLC
Series 1997-N1 Class D
6.217% due 09/25/28 (c) 600 600
Sequoia Mortgage Trust
Series 1 Class Al
6.028% due 07/04/27 (c) 820 821
Wilshire Funding Corporation
Series 1997-WFC1 Class Al
7.250% due 08/25/27 745 753
---------
18,940
---------
Municipal Bonds - 0.4%
Philadelphia, Pennsylvania, Authority for
Industrial Development Class A
6.480% due 06/15/04 621 638
---------
638
---------
United States Government
Treasuries - 17.4%
United States Treasury Notes
5.625% due 11/30/98 1,250 1,250
6.000% due 06/30/99 1,500 1,508
5.750% due 09/30/99 1,775 1,778
5.875% due 02/l5/00 12,500 12,549
6.875% due 03/31/00 1,075 1,102
5.625% due 11/30/00 500 499
6.375% due 05/15/00 600 609
6.375% due 03/31/0l 280 285
6.250% due 06/30/02 2,325 2,371
3.625% due 07/15/02 7,027 6,992
5.750% due 11/30/02 170 170
5.750% due 08/l5/03 1,000 1,000
---------
30,113
---------
Yankee Bonds - 2.3%
Household International
5.250% due 10/15/98 850 845
Noranda Forest, Inc.
8.875% due 10/15/99 450 470
Ontario, Province of
ll.500% due 03/l0/13 1,240 1,305
Quebec, Province of
13.250% due 09/l5/14 450 520
Westpac Banking, Ltd.
7.875% due 10/15/02 750 796
---------
3,936
---------
Total Long-Term Investments
(cost $156,911) 156,867
---------
Short-Term Investments - 8.2%
Chrysler Financial Corp. (MTN)
Series P
6.250% due 06/29/98 850 851
Frank Russell Investment Company
Money Market Fund, due on demand (a) 12,456 12,456
Goldman Sachs Group
6.300% due 01/05/98 (a) 900 900
---------
Total Short-Term Investments
(cost $14,207) 14,207
</TABLE>
Volatility Constrained Bond Fund 107
<PAGE>
Volatility Constrained Bond Fund
Statement of Net Assets, continued
December 31, 1997
<TABLE>
<CAPTION>
Market
Value
(000)
---------
<S> <C>
Total Investments
(identified cost $171,118)(b) - 98.9% $ 171,074
Other Assets and Liabilities,
Net - 1.1% 1,902
---------
Net Assets - 100.0% $ 172,976
=========
</TABLE>
(a) At cost, which approximates market.
(b) See Note 2 for federal income tax information.
(c) Adjustable or floating rate securities.
Abbreviations:
MTN - Medium Term Note
PLC - Public Limited Company
REMIC - Real Estate Mortgage Investment Conduit
The accompanying notes are an integral part of the financial statements.
108 Volatility Constrained Bond Fund
<PAGE>
Volatility Constrained Bond Fund
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
Amounts in
thousands (except
per share amount)
--------------------
<S> <C> <C>
Assets
Investments at market (identified cost $171,118)(Note 2).................................................... $ 171,074
Receivables:
Dividends and interest.................................................................................. 1,986
Investments sold........................................................................................ 176
Fund shares sold........................................................................................ 513
--------------------
Total Assets.......................................................................................... 173,749
Liabilities
Payables:
Investments purchased............................................................. $ 598
Accrued fees to affiliates (Note 4)............................................... 111
Other accrued expenses............................................................ 64
------------------
Total Liabilities.................................................................................... 773
--------------------
Net Assets.................................................................................................. $ 172,976
====================
Net Assets consist of:
Undistributed net investment income......................................................................... $ 708
Accumulated net realized gain (loss)........................................................................ (10,088)
Unrealized appreciation (depreciation) on investments....................................................... (44)
Shares of beneficial interest............................................................................... 91
Additional paid-in capital.................................................................................. 182,309
--------------------
Net Assets.................................................................................................. $ 172,976
====================
Net Asset Value, offering and redemption price per share:
($172,976,445 divided by 9,074,415 shares of $.01 par value
shares of beneficial interest outstanding)............................................................... $ 19.06
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
Volatility Constrained Bond Fund 109
<PAGE>
Volatility Constrained Bond Fund
Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Amounts in thousands
--------------------
Investment Income:
<S> <C> <C>
Interest............................................................................................... $ 9,879
Dividends from Money Market Fund (Note 5).............................................................. 529
Dividends.............................................................................................. 39
--------------------
Total Investment Income............................................................................. 10,447
Expenses (Notes 2 and 4):
Management fees................................................................... $ 812
Custodian fees.................................................................... 136
Transfer agent fees............................................................... 193
Bookkeeping service fees.......................................................... 15
Professional fees................................................................. 23
Registration fees................................................................. 48
Trustees fees.................................................................... 4
Miscellaneous..................................................................... 34
------------------
Total Expenses....................................................................................... 1,265
--------------------
Net investment income...................................................................................... 9,182
--------------------
Realized and Unrealized
Gain (Loss) on Investments (Notes 2 and 3)
Net realized gain (loss) from investments.................................................................. (141)
Net change in unrealized appreciation or depreciation of investments....................................... 325
--------------------
Net gain (loss) on investments............................................................................. 184
--------------------
Net increase (decrease) in net assets resulting from operations............................................ $ 9,366
====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
110 Volatility Constrained Bond Fund
<PAGE>
Volatility Constrained Bond Fund
Statements of Changes in Net Assets
For the Years Ended December 31,
<TABLE>
<CAPTION>
Amounts in thousands
1997 1996
---------------- -----------------
<S> <C> <C>
Increase (Decrease) in Net Assets
From Operations:
Net investment income................................................................. $ 9,182 $ 9,516
Net realized gain (loss).............................................................. (141) (2,355)
Net change in unrealized appreciation or depreciation................................. 325 275
---------------- -----------------
Net increase (decrease) in net assets resulting from operations..................... 9,366 7,436
---------------- -----------------
From Distributions to Shareholders:
Net investment income................................................................. (9,388) (8,805)
---------------- -----------------
From Fund Share Transactions:
Net increase (decrease) in net assets from Fund share transactions (Note 6) ........... 9,801 (17,315)
---------------- -----------------
Total Net Increase (Decrease) in Net Assets............................................... 9,779 (18,684)
Net Assets
Beginning of period.................................................................... 163,197 181,881
---------------- -----------------
End of period (including undistributed net investment income of
$708 and $763, respectively)......................................................... $ 172,976 $ 163,197
================ =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
Volatility Constrained Bond Fund 111
<PAGE>
Volatility Constrained Bond Fund
Financial Highlights
The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period......................................... $ 19.07 $ 19.21 $ 18.64 $ 19.78 $ 19.51
------- ------- ------- ------- -------
Income From Investment Operations:
Net investment income..................................................... 1.07 1.09 1.21 1.15 .82
Net realized and unrealized gain (loss) on investments.................... .02 (.22) .58 (1.16) .45
------- ------- ------- ------- -------
Total Income From Investment Operations............................... 1.09 .87 1.79 (.01) 1.27
------- ------- ------- ------- -------
Less Distributions:
Net investment income..................................................... (1.10) (1.01) (1.22) (1.13) (.71)
Tax return of capital..................................................... -- -- -- -- (29)
------- ------- ------- ------- -------
Total Distributions................................................... (1.10) (1.01) (1.22) (1.13) (1.00)
------- ------- ------- ------- -------
Net Asset Value, End of Period............................................... $ 19.06 $ 19.07 $ 19.21 $ 18.64 $ 19.78
======= ======= ======= ======= =======
Total Return (%)............................................................. 5.90 4.66 9.89 (.02) 6.67
Ratios/Supplemental Data:
Net Assets, end of period ($000 omitted).................................. 172,976 163,197 181,881 195,007 225,672
Ratios to average net assets (%):
Operating expenses..................................................... .78 .76 .71 .67 .66
Net investment income.................................................. 5.63 5.69 6.33 5.97 5.79
Portfolio turnover rate (%)................................................ 197.45 311.51 256.72 182.65 220.77
</TABLE>
112 Volatility Constrained Bond Fund
<PAGE>
Multistrategy Bond Fund
Portfolio Management Discussion
December 31, 1997 (Unaudited)
Objective: To provide maximum total return through capital appreciation and by
assuming a higher level of volatility than is ordinarily expected from broad
fixed-income market portfolios.
Invests in: Fixed-income securities.
Strategy: The Fund uses a multi-style, multi-manager strategy intended to
achieve higher returns by assuming the additional risk of investment in
non-investment grade US fixed income securities, and foreign bonds including
emerging markets debt in addition to US investment grade fixed income
instruments. The Fund employed the investment management services of three
managers with three separate approaches to bond market investment.
Growth of a $10,000 Investment
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Lipper(C)
Dates Multistrategy Bond LB Aggregate** Intermediate++
- - ----- ------------------ -------------- --------------
<S> <C> <C> <C>
Inception* $10,000 $10,000 $10,000
1993 $10,874 $10,768 $10,950
1994 $10,401 $10,454 $10,585
1995 $12,265 $12,386 $12,340
1996 $12,875 $12,835 $12,732
1997 $14,098 $14,075 $13,807
</TABLE>
<TABLE>
<CAPTION>
Multistrategy Bond Fund Lehman Brothers Aggregate Bond Index
Periods Ended Growth of Total Periods Ended Growth of Total
12/31/97 $10,000 Return 12/31/97 $10,000 Return
- - ------------------- --------------- --------------- ----------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
1 Year $ 10,950 9.50% 1 Year $ 10,966 9.66%
Inception $ 14,098 7.23%(S) Inception $ 14,075 7.20%(S)
<CAPTION>
Lipper(C) Intermediate Investment Grade Debt Funds Average
Periods Ended Growth of Total
12/31/97 $10,000 Return
- - ----------------- ---------------- --------------
<S> <C> <C>
1 Year $ 10,844 8.44%
Inception $ 13,807 6.66%(S)
</TABLE>
* Assumes initial investment on January 29, 1993. Lehman Brothers Index
comparison for the initial investment began February 1, 1993. Lipper index
comparison for the initial investment began January 1, 1993.
** Lehman Brothers Aggregate Bond Index is composed of securities from Lehman
Brothers Government/Corporate Bond Index, Mortgage-Backed Securities Index,
and the Asset-Backed Securities Index. Total return comprises price
appreciation/depreciation and income as a percentage of the original
investment. Indexes are rebalanced monthly by market capitalization.
++ Lipper(C) Intermediate (5-10 Yr.) Investment Grade Debt Funds Average is
the average total return for the universe of funds within the Intermediate
Investment Grade Debt Funds investment objective. The total return for the
funds reflects adjustments for income dividends and capital gains
distributions reinvested as of the ex-dividend dates. This type of funds
invests at least 65% of assets in U.S. Treasury Bills, Notes and Bonds with
average maturities of five to ten years.
(S) Annualized.
<PAGE>
Semi-Annual of the Class S Funds EXHIBIT C
[WAITING FOR JACK TO DOWNLOAD TO ENABLE ME TO INSERT]
<PAGE>
Pro-forma financial statements reflecting EXHIBIT D the combination of the Bond
Fund and the Fixed Income Fund.
Proforma Financial Statements
(Short-Term Bond Fund)
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
Amounts in thousands (except per share amount and number of shares of beneficial interest)
<S> <C> <C> <C> <C>
PRO FORMA SHORT-TERM BOND
FIXED INCOME FUND BOND FUND ADJUSTMENTS FUND (FOLLOWING
REORGANIZATION
Assets
Investments at market (identified cost $226,406, $ 226,716 $ 171,074 $ 397,790
$171,118, $397,524, respectively)
Receivables: -
Dividends and interest 2,368 1,986 4,354
Investment sold 376 176 552
Fund shares sold 974 513 1,487
Total Assets 230,434 173,749 - 404,183
Liabilities
Payables:
Fund shares redeemed 795 - 795
Investments purchased - 598 598
Accrued fees to affiliates 123 111 234
Other accrued expenses 46 64 (151) (41)
Total Liabilities 964 773 (151) 1,586
Net Assets $ 229,470 $ 172,976 $ 151 $ 402,597
Net Assets consist of:
Undistributed net investment income $ 609 $ 708 $ 151 $ 1,468
Accumulated net realized gain (loss) (7,705) (10,088) (17,793)
Unrealized appreciation (depreciation) on investments 310 (44) 266
Shares of beneficial interest 125 91 3 219
Additional paid-in capital 236,131 182,309 (3) 418,437
Net Assets $ 229,470 $ 172,976 $ 151 $ 402,597
Number of shares of beneficial interest outstanding: 12,506,712 9,074,415 21,942,584
Net Asset Value, offering and redemption price per share: $ 18.35 $ 19.06 $ 18.35
Statement of Operations
For the Year Ended December 31, 1997
PROFORMA ADJUSTMENT
FIXED INCOME FUND BOND FUND SHORT-TERM BOND FUND (FOLLOWING REORGANIZATION)
Investment Income:
Interest $ 14,201 $ 9,879 $ - $ 24,080
Dividends from Money Market Fund 889 529 1,418
Dividends - 39 39
Total Investment Income 15,090 10,447 - 25,537
Expenses:
Management fees 1,185 812 1,997
Custodian fees 142 136 (67) 211
Transfer agent fees 144 193 - 337
Bookkeeping service fees 15 15 (15) 15
Professional fees 17 23 (15) 25
Registration fees 31 48 (44) 35
Trustees fees 4 4 (3) 5
Miscellaneous 25 34 (7) 52
Total Expenses 1,563 1,265 (151) 2,677
Net investment income 13,527 9,182 151 22,860
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) from investments (118) (141) (259)
Net change in unrealized appreciation or depreciation
of investments 487 325 812
Net gain on investments 369 184 - 553
Net increase in net assets resulting from operations $ 13,896 $ 9,366 $ 151 $ 23,413
</TABLE>
<PAGE>
Proforma Footnotes of Merger between Fixed Income Fund and Bond Fund
December 31, 1997 (unaudited)
1. General
The accompanying proforma financial statements are presented to show the effect
of the proposed acquisition of the Frank Russell Investment Company Volatility
Constrained Bond Fund ("Bond Fund") by the Frank Russell Investment Company
Fixed Income II Fund ("Fixed Income Fund"), as if such acquisition had taken
place as of January 1, 1997. Following the merger of the Bond Fund into the
Fixed Income Fund, the Fixed Income Fund will change its name to the Frank
Russell Investment Company Short-Term Bond Fund ("Short-Term Bond Fund").
Under the terms of the Agreement and Plan of Reorganization, the combination of
the Fixed Income Fund and the Bond Fund will be treated as a tax-free business
combination and, accordingly, will be accounted for by a method of accounting
for tax free mergers of investment companies (sometimes referred to as the
pooling without restatement method). The acquisition would be accomplished by an
acquisition of the net assets of the Bond Fund in exchange for shares of the
Fixed Income Fund at net asset value. The statement of assets and liabilities
and the related statement of operations of the Fixed Income Fund and the Bond
Fund have been combined as of and for the year ended December 31, 1997.
The accompanying proforma financial statements should be read in conjunction
with the financial statements and statements of net assets of the Fixed Income
Fund and the Bond Fund, which are included in their respective annual reports
dated December 31, 1997.
The following notes refer to the accompanying proforma financial statements as
if the above-mentioned acquisition of the Fixed Income Fund and the Bond Fund
had taken place as of January 1, 1997.
2. Significant Accounting Policies
The Short-Term Bond Fund is a sub-trust of Frank Russell Investment Company, a
Massachusetts business trust registered under the Investment Company Act of
1940, as amended, as a diversified, open-end management investment company. It
is organized and operates as a Massachusetts business trust under an amended
master trust agreement dated July 26, 1984.
The significant accounting policies consistently followed by the Short-Term Bond
Fund are (a) securities transactions are accounted for on the trade date; and
(b) United States securities listed and traded principally on any national
securities exchange are valued on the basis of the last sale price or, lacking
any sale, at the closing bid price, on the primary exchange on which the
security is traded. United States over-the-counter securities are valued on the
basis of the closing bid price. Many fixed-income securities do not trade each
day and, thus, last sale or bid prices are frequently not available.
Fixed-income securities, therefore, may be valued using prices provided by a
pricing service when such prices are believed to reflect the fair market value
of such securities; international securities traded on a national securities
exchange are valued on the
<PAGE>
Proforma Footnotes of Merger between Bond Fund and Fixed Income Fund
December 31, 1997 (unaudited) (continued)
2. Significant Accounting Policies (continued)
basis of the last sale price. International securities traded over-the
- -counter are valued on the basis of the mean of bid prices.
In the absence of a last sale or mean bid price, respectively, such securities
may be valued on the basis of prices provided by a pricing service if those
prices are believed to reflect the fair market value of such securities;
short-term investments that have a maturity of 60 days or less are valued at
"amortized cost," unless the Board of Trustees determines that amortized cost
does not represent fair value; the Short-Term Bond Fund may value certain
securities for which market quotations are not readily available at "fair
value," as determined in good faith pursuant to procedures established by the
Board of Trustees; (c) interest income is recorded on the accrual basis; (d)
direct expenses are charged to each Fund; expenses which cannot be directly
attributed are allocated among all sub-trusts of the Investment Company
principally based on their relative net assets; (e) dividends and distributions
to shareholders are recorded on the ex-dividend date; and (f) Short-Term Bond
Fund intends to comply with the requirements of the Internal Revenue Code of
1986, as amended, pertaining to regulated investment companies and to make the
required distributions to shareholders; therefore, no provision for Federal
income taxes has been made.
3. Proforma Adjustments
The accompanying proforma financial statements reflect changes in fund shares as
if the merger had taken place on December 31, 1997. Adjustments made to expenses
are for duplicated services that would not have been incurred if the merger took
place on January 1, 1997.
4. Management Agreement and Transactions with Affiliated Persons Frank Russell
Investment Management Company (FRIMCo) operates and administers the Short-Term
Bond Fund. FRIMCo is a wholly owned subsidiary of Frank Russell Company, which
researches and recommends to FRIMCo one or more investment management
organizations to manage the portfolio of the Short-Term Bond Fund. The
Short-Term Bond Fund pays FRIMCo a management fee calculated at the annual rate
of 0.50% of the aggregate average daily net assets. All fees are calculated
daily and paid monthly.
5. Investments
At December 31, 1997, the Short-Term Bond Fund had net tax basis capital loss
carryovers of approximately $17,258,326, expiring during the years 2001 through
2005, which may be available to offset future capital gains. To the extent that
these carryover losses are used to offset capital gains, it is probable that any
gains so offset will not be distributed.
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement has been
signed on behalf of the Registrant, by the undersigned, thereunto duly
authorized, in the City of Tacoma and the State of Washington, on the 17th day
of September, 1998.
FRANK RUSSELL INVESTMENT COMPANY
(Registrant)
By: Lynn L. Anderson*
Lynn L. Anderson
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:
Lynn L. Anderson* Chief Executive Officer and Trustee
Lynn L. Anderson Dated: September 17, 1998
Mark Swanson Treasurer and Chief Accounting Officer
Mark Swanson Dated: September 17, 1998
Paul E. Anderson* Trustee
Paul E. Anderson
Paul Anton* Trustee
Paul Anton, PhD
William E. Baxter* Trustee
William E. Baxter
Lee C. Gingrich* Trustee
Lee C. Gingrich
Eleanor W. Palmer* Trustee
Eleanor W. Palmer
George F. Russell, Jr.* Trustee
George F. Russell, Jr.
By: Gregory J. Lyons
Gregory J. Lyons Attorney-in-Fact
Dated ________, 1998
*Original Powers of Attorney authorizing the President, the Treasurer any
Assistant Treasurer, the Secretary or any Assistant Secretary, and each of them
singly, to sign this Registration Statement and any Amendment thereto on behalf
of the Board of Trustees of Frank Russell Investment Company are on file with
the Securities and Exchange Commission.
<PAGE>
Frank Russell Investment
Company (the "Registrant")
File Nos. 2-7199 and
811-3153
PART C
OTHER INFORMATION
Item 15. Indemnification.
Incorporated by reference to the Registrants
Form N-1A Registration Statement Post-Effective
Amendment ("Post-Effective Amendment") No. 6.
Item 16. Exhibits.
1. Charter of the Registrant, as now in effect.
(a) Master Trust Agreement
(Incorporated by reference to Post-Effective Amendment No.32).
Amendments to Master Trust Agreement
(1) Amendment dated 11/29/84.
(Incorporated by reference to Post-Effective Amendment
No. 32).
(2) Amendment dated 5/29/85.
(Incorporated by reference to Post-Effective Amendment
No. 32).
(3) Amendment dated 1/26/87.
(Incorporated by reference to Post-Effective Amendment
No. 32).
(4) Amendment dated 2/23/89.
(Incorporated by reference to Post-Effective Amendment
No. 32).
(5) Amendment dated 5/11/92.
(Incorporated by reference to Post-Effective Amendment
No. 32).
(6) Amendment dated 3/22/96.
(Incorporated by reference to Post-Effective Amendment
No. 32).
(7) Amendment dated 4/22/96.
(Incorporated by reference to Post-Effective Amendment
No. 33).
(8) Amendment dated 11/4/96.
(Incorporated by reference to Post-Effective Amendment
No. 36).
(9) Amendment dated 4/27/98. (To be filed by Amendment).
(10) Amendment dated 4/27/98. (To be filed by Amendment).
(11) Amendment dated 6/31/98. (To be filed by Amendment).
2. Existing bylaws or corresponding instruments of the Registrant.
(Incorporated by reference to the Post-Effective Amendment
No. 38).
3. Voting trust agreement affecting more than 5 percent of any
class of equity securities of the Registrant.
(Not Applicable).
4. Agreement of acquisition, reorganization, merger, liquidation
and any amendments to it. Agreement and Plan of Reorganization
is attached hereto as Exhibit A to Combined Prospectus/Proxy
Statement.
5. All instruments defining the rights of holders of the securities
being registered including, where applicable, the relevant
portion of the articles of incorporation or by-laws of the
Registrant.
(a) Equity I Fund, Equity II Fund, Equity III Fund, Fixed Income
I Fund, Fixed Income II Fund, International Fund and
Money Market Fund.
(Incorporated by reference to Post-Effective Amendment
No. 39).
(b) Diversified Equity Fund, Special Growth Fund, Equity Income
Fund, Diversified Bond Fund, Volatility Constrained Bond
Fund, International Securities Fund, Limited Volatility Tax
Free Fund and U.S. Government Money Market Fund.
(Incorporated by reference to Post-Effective Amendment
No. 39).
(c) Quantitative Equity, Equity Q and Tax-Free Money Market
Fund.
(Incorporated by reference to Post-Effective Amendment
No. 39).
(d) Real Estate Securities Fund
(Incorporated by reference to Post-Effective Amendment
No. 39).
6. All investment advisory contracts
relating to the management of the assets
of the Registrant.
(a) PROPOSED Amended and Restated
Management Agreement between the
Registrant and Frank Russell Investment Management
Company is attached hereto as Exhibit F to Combined
Prospectus/Proxy Statement.
(b) Portfolio Management Contract, as amended, with Money
Managers and Frank Russell Investment Management Company is
attached hereto as Exhibit E to Combined Prospectus/Proxy
Statement.
(c) Service Agreement.
(1) Amendments.
(a) Amendment No. 1 to Service Agreement
with Frank Russell Company and Frank
Russell Investment Management Company
changing services and fees.
(Incorporated by reference to Post-Effective
Amendment No. 38).
(b) Amendment No. 2 to the Service Agreement
with Frank Russell Company and Frank
Russell Investment Management Company
amending Section 4 of the Agreement.
(Incorporated by reference to Post-Effective
Amendment No. 32).
(2) Letter Agreements.
(a) Letter Agreement adding Real Estate
Securities Fund to the Service Agreement.
(Incorporated by reference to Post-Effective
Amendment No. 38).
(b) Letter Agreement adding Fixed Income III,
Multistrategy Bond and Emerging Markets
Funds to the Service Agreement.
(Incorporated by reference to Post-Effective
Amendment No. 38).
(c) Letter Agreement adding Equity T Fund to
the Service Agreement.
(Incorporated by reference to Post-Effective
Amendment No. 32).
(3) Administrative Agreement with Frank Russell Investment
Management Company.
(To be filed by Amendment).
(4) Other.
(a) Letter Agreement with State Street Bank and
Trust Company for development of a Tax
Accounting System.
(Incorporated by reference to Post-Effective
Amendment No. 32).
(b) Letter Agreement adding Aggressive Strategy, Balanced
Strategy, Moderate Strategy, Conservative Strategy
and Equity Balanced Strategy Funds to the Yield
Calculation Services Agreement. (Incorporated by
reference to Post-Effective
Amendment No. 36).
7. Each underwriting or distribution contract between the
Registrant and a principal underwriter, and specimens or copies
of all agreements between principal underwriters and dealers.
(a) Distribution Agreement with Russell Fund
Distributors, Inc.
(Incorporated by reference to Post-Effective
Amendment No. 38).
(b) Letter Agreements.
(1) Letter Agreement adding Real Estate Securities
Fund to the Distribution Agreement.
(Incorporated by reference to Post-Effective
Amendment No. 38).
(2) Letter Agreement adding Fixed Income III,
Multistrategy Bond and Emerging Markets Funds to
the Distribution Agreement.
(Incorporated by reference to Post-Effective
Amendment No. 38).
(3) Letter Agreement adding Equity T Fund to the
Distribution Agreement. (Incorporated by reference to
Post-Effective
Amendment No. 32).
(4) Letter Agreement adding Aggressive Strategy,
Balanced Strategy, Moderate Strategy, Conservative
Strategy and Equity Balanced Strategy Funds to the
Distribution Agreement.
(Incorporated by reference to Post-Effective
Amendment No. 36).
8. All bonus, profit sharing, pension or
other similar contracts or arrangements
wholly or partly for the benefit of
directors or officers of the Registrant
in their capacity as such. Furnish a
reasonably detailed description of any
plan that is not set forth in a formal
document.
(Not Applicable).
9. All custodian agreements and depository
contracts under Section 17(f) of the 1940
Act [15 U.S.C. 80a-17(f)], for securities
and similar investments of the
Registrant, including the schedule of
remuneration.
(a) Custodian Agreement with State Street Bank and
Trust Company.
(Incorporated by reference to Post-Effective Amendment
No. 38).
(1) Amendments to the Custodian Agreement.
(a) Amendment No. 1 to Custodian Agreement
with State Street Bank and Trust Company
amending Section 3.5 of the Agreement.
(Incorporated by reference to Post-Effective
Amendment No. 38).
(b) Form of Amendment to Custodian Agreement with State
Street Bank and Trust Company amending Sections 2.2
and 2.7 of the Agreement.
(Incorporated by reference to Post-Effective
Amendment No. 38).
(c) Amendment to the Custodian Agreement with State
Street Bank and 2.7 of the Agreement.
(Incorporated by reference to Post-Effective
Amendment No. 38).
(d) Amendment to the Fee Schedule of the
Custodian Agreement with State Street Bank
and Trust Company.
(Incorporated by reference to Post-Effective
Amendment No. 38).
(e) Amendment to the Custodian Agreement with State
Street Bank and Trust Company for addition of
Omnibus accounts. (Incorporated by reference to
Post-Effective
Amendment No. 32).
(f) Amendment to the Custodian Agreement with State
Street Bank and Trust Company amending Section 7 of
the Fee Schedule for all Funds except the Emerging
Markets Fund.
(Incorporated by reference to Post-Effective
Amendment No. 32).
(g) Amendment to the Custodian Agreement
with State Street Bank and Trust Company
amending Section 7 of the Fee Schedule for
the Emerging Markets Fund.
(Incorporated by reference to Post-Effective
Amendment No. 32).
(h) Amendment to the Custodian Agreement
with State Street Bank and Trust Company
adding Equity T Fund.
(Incorporated by reference to Post-Effective
Amendment No. 32).
(i) Amendment to the Custodian Agreement with State
Street Bank and Trust Company adding Aggressive
Strategy, Balanced Strategy, Moderate Strategy,
Conservative Strategy and Equity Balanced Strategy
Funds. (Incorporated by reference to Post-Effective
Amendment No. 36).
(2) Letter Agreements.
(a) Letter Agreement adding Real Estate
Securities Fund to the Custodian Agreement.
(Iincorporated by reference to Post-
Effective-Amendment No. 38).
(b) Letter Agreement adding Fixed Income III
and Multistrategy Bond Funds to the
Custodian Agreement.
(Incorporated by reference to Post-Effective
Amendment No. 38).
(c) Letter Agreement adding Emerging Markets
Fund to the Custodian Agreement.
(Incorporated by reference to Post-Effective
Amendment No. 38).
10. Any plan entered into by Registrant
pursuant to rule 12b-1 under the 1940 Act
(17 CFR 270.12b-1] and any agreements
with any person relating to
implementation of the plan, and copies of
any plan entered into by Registrant
pursuant to Rule 18f-3 under the 1940 Act
[17 CFR 270.18f-3], any agreement with
any person relating to implementation of
the plan, any amendment to the plan, and
a copy of the portion of the minutes of
the meeting of the Registrants directors
describing any action taken to revoke the
plan.
[To be filed by Amemdment].
11. An opinion and consent of counsel as to the legality of the
securities being registered, indicating whether they will, when
sold, be legally issued, fully paid and non-assessable. (a)
Opinion and consent of counsel is attached hereto as
EX-___.
(b) Opinion and consent of counsel is attached hereto as
EX-___.
12. An opinion, and consent to their use, of
counsel or, in lieu of an opinion, a copy
of the revenue ruling from the Internal
Revenue Service, supporting the tax
matters and consequences to shareholders
discussed in the prospectus.
Opinion and consent of counsel/tax ruling is attached
hereto as EX-____.
13. All material contracts of the Registrant not made in the
ordinary course of business which are to be performed in whole
or in part on or after the date of filing the registration
statement.
(a) Transfer and Dividend Disbursement Agency
Agreement ("Agency Agreement") with Frank
Russell Investment Management Company
(Incorporated by reference to
Post-Effective Amendment No. 38).
(1) Letter Agreements.
(a) Adding Real Estate Securities Fund.
(Incorporated by reference to Post-Effective
Amendment No. 38).
(b) Adding Fixed III Income, Multistrategy
Bond and Emerging Markets Funds to the
Agency Agreement.
(Incorporated by reference to Post-Effective
Amendment No. 38).
(c) Amending Schedule A of the Agency Agreement with
Frank Russell Investment Management Company
(Incorporated by reference to Post-Effective
Amendment No. 32).
(d) Adding Equity T Fund to the Agency Agreement.
(Incorporated by reference to Post-Effective
Amendment No. 32).
(e) Adding Aggressive Strategy, Balanced Strategy,
Moderate Strategy, Conservative Strategy and
Equity Balanced Strategy Funds to the Agency
Agreement.
(Incorporated by reference to Post-Effective
Amendment No. 36).
14. Any other opinions, appraisals or rulings, and consents to their
use relied on in preparing the registration statement and
required by Section 7 of the 1933 Act (15 U.S.C. 77g]. (a)
Consent of PriceWaterhouseCoopers LLP dated September
___ is attached hereto as Exhibit EX-___.
(b) Consent of PriceWaterhouseCoopers LLP dated September
___ is attached hereto as Exhibit EX-___.
15. All financial statements omitted pursuant to Item 14(a)(1). [
WHAT GOES HERE? ]
16. Manually signed copies of any
power-of-attorney pursuant to which the
name of any person has been signed to the
registration statement.
Limited Power of Attorney with respect to
Amendments to the SEC Registration
Statements of Frank Russell Investment
Company of Frank Russell Investment
Company Trustees
(Incorporated by reference to
Post-Effective Amendment No. 38).
17. Any additional exhibits which the Registrant may wish to file.
(Not applicable).
(a) Multiple Class Plan pursuant to Rule 18f-3.
[To be filed by amendment].
(b) Financial Data Schedules.
1. As of December 31, 1997.
Fixed Income Fund - EX27.___
Bond Fund - EX27.____
2. As of June 30, 1998.
Fixed Income Fund - EX27.___
Bond Fund - EX27.____
Item 17. Undertakings.
(1) The undersigned Registrant agrees that prior to any
public reoffering of the securities registered through the
use of a prospectus which is a part of the registration
statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the
Securities Act, [17 CFR 230.145c] the reoffering
prospectus will contain the information called for by the
applicable registration form for reofferings by
persons who may be deemed underwriters,
in addition to the information call for by the other items of
the applicable form.
(2) The undersigned Registrant agrees that every prospectus
that is filed under paragraph (1) above will be filed as a part
of an amendment to the registration statement and will not
be used until the amendment is effective, and that, in
determining any liability under the 1933 Act, each post
-effective amendment shall be deemed to be a new
registration statement for the securities offered therein, and
the offering of the securities at that time shall be deemed to
be the initial bona fide offering of them.
<PAGE>
EXHIBIT INDEX
Exhibit No. Document
EX-11. Opinion and consent of counsel.
EX-12. Opinion and consent of counsel/tax ruling.
EX-14. Consent of PriceWaterhouseCoopers LLP.
EX-14 Consent of PriceWaterhouseCoopers LLP.
EX-27. Financial Data Schedule - Fixed Income Fund - 6/30/98
EX-27. Financial Data Schedule - Fixed Income Fund - 12/31/97
EX-27. Financial Data Schedule - Bond Fund - 6/30/98
EX-27. Financial Data Schedule - Bond Fund - 12/31/97
FORM OF SECURITIES OPINION
November 20, 1998
Board of Trustees
Frank Russell Investment Company
909 A Street
Tacoma, Washington 98402
Re: Agreement and Plan of Reorganization for the
Frank Russell Investment Company, a
Massachusetts business trust (the "Trust"),
on behalf of the Fixed Income II Fund (the
"Acquiring Portfolio") of the Trust, and on
behalf of the Volatility Constrained Bond
Fund (the "Acquired Portfolio") of the
Trust, dated as of November 20, 1998
Ladies and Gentlemen:
You have requested our opinion as to certain matters relating to the
reorganization of the Acquired Portfolio and the Acquiring Portfolio (the
"Reorganization"). The Reorganization will involve the transfer of all the
assets of the Acquired Portfolio to the Acquiring Portfolio, and the assumption
of the liabilities of the Acquired Portfolio by the Acquiring Portfolio. In
exchange for the foregoing, Class S shares of the Acquiring Portfolio will be
distributed to shareholders of the Acquired Portfolio, following which the
Acquired Portfolio will be dissolved.
In rendering our opinion, we have reviewed and relied upon:
A. The Agreement and Plan of Reorganization, made
as of November 19, 1998, by and between the Acquired
Portfolio and the Acquiring Portfolio (the "Agreement");
B. The registration statement and proxy materials filed by the Trust on
Form N-14 and as provided to shareholders of the Acquired Portfolio in
connection with the Special Meeting in Lieu of Annual Meeting of Shareholders of
the Acquired Portfolio held November 19, 1998;
C. Certain representations concerning the Reorganization made to us by the
Acquired Portfolio and the Acquiring Portfolio in a letter dated November 19,
1998 (the "Representation Letter");
D. All other documents, financial and other reports and corporate minutes
which we deemed relevant or appropriate; and
E. Such statutes, regulations, and interpretations of the Securities and
Exchange Commission as we deemed material to the rendition of this opinion. All
terms used herein, unless otherwise defined, are used as defined in the
Agreement.
We have assumed and therefore have not verified independently the
authenticity of all documents submitted to us as originals and the conformity to
original documents of all documents submitted to us as certified or photostatic
copies. Other than our review of the documents set forth above, we have not
reviewed any other documents or made any independent investigation for the
purpose of rendering this opinion and we make no representations as to the scope
or sufficiency of our document review for your purpose.
Based on the foregoing and provided the Reorganization is carried out
in accordance with the applicable laws of the Commonwealth of Massachusetts, the
Agreement, and the Representation Letter, it is our opinion that as of the date
hereof:
(1) The Trust is a Massachusetts business trust duly organized and validly
existing under the laws of the Commonwealth of Massachusetts;
(2) The shares of the Acquired Portfolio outstanding at the Effective Time
of the Reorganization are duly authorized, validly issued, fully paid and
non-assessable by the Acquired Portfolio, and to our knowledge no shareholder of
the Acquired Portfolio has any option, warrant or preemptive right to
subscription or purchase with respect to the shares of the Acquired Portfolio;
(3) The Agreement and the Transfer Documents have been duly authorized,
executed and delivered by the Acquired Portfolio and represent its legal, valid
and binding contracts or instruments, enforceable against the Acquired Portfolio
in accordance with their terms, subject to the effect of bankruptcy, insolvency,
moratorium, fraudulent conveyance and similar laws relating to or affecting
creditors' rights generally and court decisions with respect thereto, and we
express no opinion with respect to the application of equitable principles in
any proceeding, whether at law or in equity, or with respect to the provisions
of the Agreement intended to limit liability for particular matters to the
Acquired Portfolio and its assets;
(4) The execution and delivery of the Agreement did not, and the
consummation of the transactions contemplated by the Agreement will not, violate
the Trust Agreement or By-Laws of the Trust or any material agreement known to
us to which the Trust is a party or by which the Trust is bound;
(5) To our knowledge, no consent, approval, authorization or order of any
court or governmental authority is required for the consummation by the Acquired
Portfolio of the transactions contemplated by the Agreement, except such as have
been obtained under the 1933 Act, the 1934 Act, the 1940 Act, the rules and
regulations under those Acts, and such as may be required under state securities
laws;
(6)The Class S Shares of the Acquiring Portfolio to be delivered at such
time to the Acquired Portfolio as provided in the Agreement are duly authorized
and upon delivery will be validly issued, fully paid and non-assessable by the
Acquiring Portfolio, and to our knowledge no shareholder of the Acquiring
Portfolio has any option, warrant or preemptive right to subscription or
purchase with respect to the shares of the Acquiring Portfolio;
(7) The Agreement has been duly authorized, executed and delivered by the
Acquiring Portfolio and represents its legal, valid and binding contract,
enforceable against the Acquiring Portfolio in accordance with its terms,
subject to the effect of bankruptcy, insolvency, moratorium, fraudulent
conveyance and similar laws relating to or affecting creditors' rights generally
and court decisions with respect thereto, and we express no opinion with respect
to the application of equitable principles in any proceeding, whether at law or
in equity, or with respect to the provisions of the Agreement intended to limit
liability for particular matters to the Acquiring Portfolio and its assets; and
(8) To our knowledge, no consent, approval, authorization or order of any
court or governmental authority is required for the consummation by the
Acquiring Portfolio and the Acquired Portfolio of the transactions contemplated
by the Agreement, except such as have been obtained under the 1933 Act, the 1934
Act, the 1940 Act, the rules and regulations under those Acts and such as may be
required under state securities laws.
The foregoing opinions are given only with respect to laws, regulations
or orders which are presently in effect. We assume no obligation to update or
supplement this opinion to reflect any facts or circumstances which may
hereafter occur whether the same are retroactively or prospectively applied.
This opinion is being rendered to the Acquired Portfolio and the
Acquiring Portfolio and may be relied upon only by the Acquired Portfolio and
the Acquiring Portfolio and the shareholders of each and may not be published by
the Acquired Portfolio and the Acquiring Portfolio or relied upon in any respect
by any third party, without the prior written consent of a partner in this law
firm.
Very truly yours,
STRADLEY, RONON, STEVENS & YOUNG, LLP
By: Steven M. Felsenstein, a Partner
STRADLEY, RONON, STEVENS & YOUNG, LLP
2600 One Commerce Square
Philadelphia, Pennsylvania 19103
September 17, 1998
Board of Trustees
Frank Russell Investment Company
909 A Street
Tacoma, Washington 98402
Re: Opinions with respect to the Reorganization of the Fixed
Income II Fund (the "Acquiring Portfolio") and the
Volatility Constrained Bond Fund (the "Acquired
Portfolio") of the Frank Russell Investment Company, a
Massachusetts business trust (the "Trust")
Ladies and Gentlemen:
We have provided you with a proposed form of an opinion regarding the tax
treatment of the shareholders and the Trust as a consequence of the
reorganization of the Acquired Portfolio and the Acquiring Portfolio (the
"Reorganization"). We also have provided you with a proposed form of our opinion
regarding the status of the shares to be issued by the Acquiring Portfolio to
the former shareholders of the Acquired Portfolio in connection with the
Reorganization.
In connection with the registration of the shares of the Acquiring Portfolio
to be issued in the Reorganization, and the proxy material filed by the Acquired
Portfolio in connection with the submission of the Reorganization to a vote of
the shareholders of the Acquired Portfolio at a Special Meeting in Lieu of
Annual Meeting, the Trust has filed a Form N-14 registration statement and proxy
statement (the "Form N-14") with the U. S. Securities and Exchange Commission
containing the forms of the proposed opinions.
We hereby consent to the inclusion of the opinions in the Form N-14, and to
the reference in the Form N-14 to the opinion we will provide with respect to
the tax consequences of the Reorganization.
Very truly yours,
STRADLEY, RONON, STEVENS & YOUNG, LLP
By:/s/ Steven M. Felsenstein, a Partner
FORM OF TAX OPINION
November 20, 1998
Board of Trustees
Frank Russell Investment Company
909 A Street
Tacoma, Washington 98402
Re: Agreement and Plan of Reorganization made as of November 20, 1998
by Frank Russell Investment Company, a Massachusetts business trust
(the "Trust"), on behalf of the Volatility Constrained Bond Fund
(the "Acquired Portfolio") of the Trust, and on behalf of the Fixed
Income II Fund (the "Acquiring Portfolio") of the Trust
Ladies and Gentlemen:
You have requested our opinion as to certain federal income tax
consequences of the reorganization of the Acquired Portfolio and the Acquiring
Portfolio (the "Reorganization"). The Reorganization will involve the transfer
of all the assets of the Acquired Portfolio to the Acquiring Portfolio, and the
assumption of the liabilities of the Acquired Portfolio by the Acquiring
Portfolio. In exchange for the foregoing, Class S shares of the Acquiring
Portfolio will be distributed to shareholders of the Acquired Portfolio,
following which the Acquired Portfolio will be dissolved.
In rendering our opinion, we have reviewed and relied upon (a) the
Agreement and Plan of Reorganization, made as of November 20, 1998, by and
between the Acquired Portfolio and the Acquiring Portfolio (the "Agreement"),
(b) the Form N-14 Registration Statement and Proxy Statement provided to
stockholders of the Acquired Portfolio in connection with the Special Meeting in
Lieu of Annual Meeting of Stockholders of the Acquired Portfolio held November
20, 1998, (c) certain representations concerning the Reorganization made to us
by the Acquired Portfolio and the Acquiring Portfolio in a letter dated as of
November 20, 1998 (the "Representation Letter"), (d) all other documents,
financial and other reports and corporate minutes which we deemed relevant or
appropriate, and (e) such statutes, regulations, rulings and decisions as we
deemed material to the rendition of this opinion. All terms used herein, unless
otherwise defined, are used as defined in the Agreement.
For purposes of this opinion, we have assumed that the Acquired
Portfolio on the effective date of the Reorganization satisfies, and following
the Reorganization, the Acquiring Portfolio will continue to satisfy, the
requirements of subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), for qualification as a regulated investment company.
Under regulations to be prescribed by the Secretary of Treasury under
Section 1276(d) of the Code, certain transfers of market discount bonds will be
excepted from the requirement that accrued market discount be recognized on
disposition of a market discount bond under Section 1276(a) of the Code. Such
regulations are to provide, in part, that accrued market discount will not be
included in income if no gain is recognized under Section 361(a) of the Code
where a bond is transferred in an exchange qualifying as a tax-free
reorganization. As of the date hereof, the Secretary has not issued any
regulations under Section 1276 of the Code.
Based on the foregoing and provided the Reorganization is carried out
in accordance with the applicable laws of the Commonwealth of Massachusetts, the
Agreement and the Representation Letter, it is our opinion that:
1. The Reorganization with respect to the Acquired Portfolio and the
Acquiring Portfolio will constitute a tax-free reorganization within the meaning
of Section 368(a)(1)(C) of the Code and both the Acquired Portfolio and the
Acquiring Portfolio will be a party to the reorganization within the meaning of
Section 368(b) of the Code.
2. No gain or loss will be recognized by the Acquired Portfolio upon the
transfer of all of its assets to and assumption of the liabilities by the
Acquiring Portfolio in exchange solely for Class S shares of the Acquiring
Portfolio pursuant to Section 361(a) and Section 357(a) of the Code. We express
no opinion as to whether any accrued market discount will be required to be
recognized as ordinary income pursuant to Section 1276 of the Code.
3. No gain or loss will be recognized by the Acquiring Portfolio upon the
receipt by it of all of the assets of the Acquired Portfolio in exchange solely
for Class S shares of the Acquiring Portfolio pursuant to Section 1032(a) of the
Code.
4. The basis of the assets of the Acquired Portfolio received by the
Acquiring Portfolio will be the same as the basis of such assets to the Acquired
Portfolio immediately prior to the exchange pursuant to Section 362(b) of the
Code.
5. The holding period of the assets of the Acquired Portfolio received by
the Acquiring Portfolio will include the period during which such assets were
held by the Acquired Portfolio pursuant to Section 1223(2) of the Code.
6. No gain or loss will be recognized by the shareholders of the Acquired
Portfolio upon the exchange of their shares in the Acquired Portfolio for Class
S shares of the Acquiring Portfolio (including fractional shares to which they
may be entitled), pursuant to Section 354(a) of the Code.
7. The basis of the Class S shares in the Acquiring Portfolio received by
the shareholders of the Acquired Portfolio (including fractional shares to which
they may be entitled) will be the same as the basis of the shares of the
Acquired Portfolio exchanged therefor pursuant to Section 358(a)(1) of the Code.
8. The holding period of the Class S shares of the Acquiring Portfolio
received by the shareholders of the Acquired Portfolio (including fractional
shares to which they may be entitled) will include the holding period of the
shares of the Acquired Portfolio surrendered in exchange therefor, provided that
the shares of the Acquired Portfolio were held as a capital asset on the
effective date of the Reorganization, pursuant to Section 1223(1) of the Code.
9. The Acquiring Portfolio will succeed to and take into account as of the
date of the proposed transfer the items of the Acquired Portfolio described in
Section 381(c) of the Code as provided in Section 1.381(b)-1(a)(2) of the Income
Tax Regulations.
Our opinion is based upon the Code, the applicable Treasury Regulations
promulgated thereunder, the present position of the Internal Revenue Service as
set forth in published revenue rulings and revenue procedures, present
administrative positions of the Internal Revenue Service, and existing judicial
decisions, all of which are subject to change either prospectively or
retroactively. We do not undertake to make any continuing analysis of the facts
or relevant law following the date of this opinion.
Our opinion is conditioned upon the performance by the Acquired
Portfolio and the Acquiring Portfolio of their undertakings in the
Representation Letter.
This opinion is being rendered to the Acquired Portfolio and the
Acquiring Portfolio and may be relied upon only by the Acquired Portfolio and
the Acquiring Portfolio and the shareholders of each.
Very truly yours,
STRADLEY, RONON, STEVENS & YOUNG, LLP
By: William P. Zimmerman, a Partner
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees of
Frank Russell Investment Company:
We consent to the incorporation by reference in the Registration Statement of
Frank Russell Investment Company on Form N-14 of our reports dated February 17,
1998, on our audits of the financial statements and financial highlights of the
Fund (comprised of Equity I Fund, Equity II Fund, Equity III Fund, Equity Q
Fund, International Fund, Fixed Income I Fund, Fixed Income II Fund, Fixed
Income III Fund, Diversified Equity Fund, Special Growth Fund, Equity Income
Fund, Quantitative Equity Fund, International Securities Fund, Diversified Bond
Fund, Volatility Constrained Bond Fund and Multistrategy Bond Fund) which
reports are included in the Annual Reports to the shareholders for the year
ended December 31, 1997, which are incorporated by reference in the Registration
Statement.
Boston, Massachusetts
PricewaterhouseCoopers LLP
September 3, 1998
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees of
Frank Russell Investment Company:
We consent to the incorporation by reference in the Registration Statement of
Frank Russell Investment Company on Form N-14 of our reports dated February 17,
1998, on our audits of the financial statements and financial highlights of the
Fund (comprised of Equity I Fund, Equity II Fund, Equity III Fund, Equity Q
Fund, International Fund, Fixed Income I Fund, Fixed Income II Fund, Fixed
Income III Fund, Diversified Equity Fund, Special Growth Fund, Equity Income
Fund, Quantitative Equity Fund, International Securities Fund, Diversified Bond
Fund, Volatility Constrained Bond Fund and Multistrategy Bond Fund) which
reports are included in the Annual Reports to the shareholders for the year
ended December 31, 1997, which are incorporated by reference in the Registration
Statement.
Boston, Massachusetts
PricewaterhouseCoopers LLP
September 10, 1998
