<PAGE>
As filed with the Securities and Exchange Commission
on April 28, 2000
Securities Act File No. 2-83041
Investment Company Act File No. 811-3866
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-lA
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
--
Pre-Effective Amendment No. / /
--
Post-Effective Amendment No. 27
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
--
Amendment No. 27 /X/
(Check appropriate box or boxes)
ELFUN INCOME FUND
...................................................
(Exact Name of Registrant as Specified in Charter)
3003 Summer Street
Stamford, Connecticut 06905
.........................................................
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code: (203) 326-4040
Alan M. Lewis, Esq.
Executive Vice President, General Counsel & Secretary
c/o GE Asset Management Incorporated
3003 Summer Street
Stamford, Connecticut 06905
...................................................
(Name and Address of Agent for Service)
Copies to:
Burton M. Leibert, Esq.
Willkie Farr & Gallagher
787 Seventh Avenue
New York, New York 10019-6099
<PAGE>
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of this Registration Statement.
It is proposed that this filing will become effective (check appropriate box):
immediately upon filing pursuant to paragraph (b) ____
on April 30, 2000 pursuant to paragraph (b) X
60 days after filing pursuant to paragraph (a)(1) ____
on (date) pursuant to paragraph (a)(1) of Rule 485 ____
75 days after filing pursuant to paragraph (a)(2) ____
on (date) pursuant to paragraph (a)(2) of Rule 485 ____
If appropriate, check the following box:
This post-effective amendment designates a new
effective date for a previously
filed post-effective amendment. ____
<PAGE>
Prospectus
-----------
Elfun Funds
April 30, 2000
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Equity Funds
Elfun Trusts
Elfun International Equity Fund
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Income Funds
Elfun Income Fund
Elfun Tax-Exempt Income Fund
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Asset Allocation Fund
Elfun Diversified Fund
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Money Market Fund
Elfun Money Market Fund
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Like all mutual funds, these securities have not been approved or disapproved by
the Securities and Exchange Commission, nor has the Securities and Exchange
Commission passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
[GRAPHIC OMITTED]
<PAGE>
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Contents
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Elfun Funds
Prospectus
Equity Funds 3
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Elfun Trusts 4
Elfun International Equity Fund 6
Income Funds 9
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Elfun Income Fund 10
Elfun Tax-Exempt Income Fund 12
Asset Allocation Fund 15
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Elfun Diversified Fund 16
Money Market Fund 19
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Elfun Money Market Fund 20
Fund Expenses 22
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More on Strategies and Risks 24
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Important Definitions 24
More on Investment Strategies 27
More on Risks 30
Other Risk Considerations 33
About the Investment Adviser,
Distributor and Servicing Agent 35
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Investment Adviser and
Administrator 35
Distributor and Servicing Agent 35
About the Portfolio Managers 36
How to Invest 37
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How to Purchase Units 37
How to Redeem Units 39
How to Exchange Units 41
Dividends, Capital Gains and
Other Tax Information 42
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Calculating Unit Value 44
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Financial Highlights 45
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Additional information regarding the Elfun Funds ("Funds") is contained in the
Statement of Additional Information ("SAI") dated April 30, 2000 which is
incorporated by reference into (legally forms a part of) this Prospectus.
General Electric Company ("GE") is not a party to the trust agreements which
created each Fund and does not sponsor the Funds.
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Equity Funds Elfun Funds 3
Prospectus
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An investment in an Elfun Equity Fund is not a deposit of any bank and is not
insured by the Federal Deposit Insurance Corporation or any other government
agency. An investment in an Elfun Fund is subject to investment risks, including
possible loss of principal invested.
Who may want to invest in an Elfun Equity Fund?
Elfun Equity Funds may be appropriate for your investment portfolio if you:
o have a long-term investment goal
o are willing to accept higher short-term risk for potential long-term
returns
o want to diversify a portfolio composed mostly of fixed income investments
The Elfun Equity Funds may not be appropriate if you want:
o to avoid potentially significant changes in share price
o a short-term investment
o regular income
Equity funds generally invest in equity securities. Equity securities may
include common stocks, preferred stocks, depositary receipts, convertible
preferred stocks, convertible bonds, convertible debentures, convertible notes,
and rights and warrants of U.S. and foreign companies. Stocks represent an
ownership interest in a corporation. Equity funds have more potential for
capital growth than other funds, but they have greater risk.
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4 Elfun Funds
Prospectus
Equity Funds
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Elfun Trusts
- ---------------
Investment Objective: Long-term growth of capital and future income rather than
current income.
The Strategy
Elfun Trusts invests primarily in equity securities of U.S. companies. The
portfolio manager selects equity securities from a number of industries based on
the merits of individual companies. Stock selection is key to the performance of
the Fund. The portfolio manager seeks to identify securities of issuers with
characteristics such as:
o above-average annual growth rates
o financial strength
o leadership in their respective industries
o high quality management focused on generating shareholder value
The Fund may invest to a lesser extent in foreign securities and debt
securities. The portfolio manager also may use various investment techniques to
adjust the Fund's investment exposure, but there is no guarantee that these
techniques will work.
The Risks
The principal risks of investing in this Fund are stock market risk and style
risk (growth investing risk). To the extent that the portfolio manager invests
in foreign securities and debt securities, the Fund would be subject to foreign
exposure risk or interest rate risk and credit risk.
If you would like additional information regarding the Fund's investment
strategies and risks, including a description of the terms in bold type, please
refer to "More on Strategies and Risks" later in this Prospectus.
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5
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Fund Performance
The bar chart and table opposite illustrate the short-term variability in the
Fund's performance and the Fund's returns relative to a common measure of
performance.
The bar chart illustrates how the Fund's performance varies from year to year
over the periods shown. During the periods presented in the bar chart, the
Fund's highest return for a quarter was 18.67% for the quarter ended December
31,1998. The Fund's lowest return for a quarter was -15.03% for the quarter
ended September 30,1990. The Fund's year-to-date return was 3.22% as of March
31, 2000.
The table opposite illustrates how the Fund's average annual returns for
different calendar periods compare to the returns of the Standard & Poor's 500
Composite Stock Index ("S&P 500 Index"). The table reflects the impact of the
Fund's expenses. It assumes you sold your Units at the end of each period.
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Calendar Year Total Returns
[BAR CHART]
1990 -3.71%
1991 28.17%
1992 9.28%
1993 8.98%
1994 0.23%
1995 39.19%
1996 23.55%
1997 30.86%
1998 22.94%
1999 19.74%
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Average Annual Total Return
(as of December 31, 1999)
1 Year 5 Years 10 Years
------ ------- --------
Elfun Trusts 19.74% 27.07% 17.18%
S&P 500 Index 21.07% 28.59% 18.23%
Both the bar chart and table assume reinvestment of dividends and distributions.
As with all mutual funds, past performance is not an indication of future
performance.
All mutual funds use a standard formula to calculate total return. Total return
measures the price change in a Unit assuming the reinvestment of all dividend
income and capital gain distributions.
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<PAGE>
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6 Elfun Funds
Prospectus
Equity Funds
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Elfun
International
Equity
Fund
- ---------------
Investment Objective: Long-term growth of capital and future income by investing
principally in foreign securities consistent with prudent investment management
and the preservation of capital.
The Strategy
The Elfun International Equity Fund (formerly named Elfun Global Fund) invests
primarily in equity securities of companies located in developed and developing
countries other than the United States. The portfolio managers focus on
companies that they expect will grow faster than relevant markets and whose
security prices do not fully reflect their potential for growth. Under normal
circumstances, the Fund's assets are invested in foreign securities of companies
representing at least three different countries. Stock selection is key to the
performance of the Fund.
The portfolio managers seek to identify securities of growth companies with
characteristics such as:
o low prices relative to their long-term cash earnings potential
o potential for significant improvement in the company's business
o financial strength
o sufficient liquidity
The Fund may invest to a lesser extent in investment-grade debt securities and
in securities of companies located in the United States. The portfolio managers
also may use various investment techniques to adjust the Fund's investment
exposure, but there is no guarantee that these techniques will work.
The Risks
The principal risks of investing in this Fund are stock market risk, foreign
exposure risk, style risk (growth investing risk) and emerging markets risk. To
the extent that the portfolio managers invest in debt securities, the Fund would
be subject to interest rate risk and credit risk.
If you would like additional information regarding the Fund's investment
strategies and risks, including a description of the terms in bold type, please
refer to "More on Strategies and Risks" later in this Prospectus.
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<PAGE>
----------
7
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Fund Performance
The bar chart and table opposite illustrate the short-term variability in the
Fund's performance and the Fund's returns relative to a common measure of
performance.
The bar chart illustrates how the Fund's performance varies from year to year
over the periods shown. During the periods presented in the bar chart, the
Fund's highest return for a quarter was 22.70% for the quarter ended December
31, 1998. The Fund's lowest return for a quarter was -19.02% for the quarter
ended September 30, 1998. The Fund's year-to-date return was 5.06% as of March
31, 2000.
The table opposite illustrates how the Fund's average annual returns for
different calendar periods compare to the returns of the Morgan Stanley Capital
International World Index ("MSCIW Index") and the Morgan Stanley Capital
International Europe Australasia Far East Index ("MSCI EAFE Index"). Consistent
with the Fund's focus on investments outside the United States, the Fund is
replacing the MSCIW Index with the MSCI EAFE Index as its benchmark. The MSCI
EAFE Index is a composite of foreign securities traded in approximately 20
developed markets. The MSCIW Index, in contrast, includes U.S. securities. The
table reflects the impact of the Fund's expenses. It assumes that you sold your
Units at the end of each period.
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Calendar Year Total Returns
[BAR CHART]
1990 -8.56%
1991 14.81%
1992 5.94%
1993 31.88%
1994 -0.63%
1995 16.03%
1996 16.13%
1997 8.47%
1998 17.36%
1999 38.90%
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Average Annual Total Return
(as of December 31, 1999)
1 Year 5 Years 10 Years
------ ------- --------
Elfun International Equity Fund 38.90% 18.96% 13.26%
MSCIW Index 24.94% 19.76% 11.42%
MSCI EAFE Index 26.96% 12.83% 7.01%
Both the bar chart and table assume reinvestment of dividends and distributions.
As with all mutual funds, past performance is not an indication of future
performance.
All mutual funds use a standard formula to calculate total return. Total return
measures the price change in a Unit assuming the reinvestment of all dividend
income and capital gain distributions.
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<PAGE>
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8
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<PAGE>
----------------------------------------------------
Income Funds Elfun Funds 9
Prospectus
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An investment in an Elfun Income Fund is not a deposit of any bank and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. An investment in an Elfun Fund is subject to risk, including
possible loss of principal invested.
Who may want to invest in an Elfun Income Fund?
Elfun Income Funds may be appropriate for your investment portfolio if you:
o seek regular income
o seek lower potential volatility than equity funds over the long term
o want to diversify a portfolio composed mostly of equity investments
The Elfun Tax-Exempt Income Fund may be appropriate for your investment
portfolio if you:
o are in a high tax bracket
o want income that is exempt from federal income tax
Elfun Income Funds may not be appropriate if you want:
o high potential capital appreciation
Income funds generally invest in debt securities. Debt securities are bonds and
other securities that are used by issuers to borrow money from investors.
Holders of debt securities have a higher priority claim to assets than do equity
holders. Typically, the debt issuer pays the investor a fixed, variable or
floating rate of interest and must repay the borrowed amount at maturity. Some
debt securities, such as zero coupon bonds, are sold at a discount from their
face values instead of paying interest. Income funds provide regular income and
some provide federally tax-exempt income.
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<PAGE>
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10 Elfun Funds
Prospectus
Income Funds
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Elfun
Income
Fund
- ----------------
Investment Objective: A high level of income consistent with prudent investment
management and the preservation of capital.
The Strategy
The Elfun Income Fund invests primarily in investment grade debt securities,
including mortgage-backed securities, corporate bonds, U.S. Government
securities and money market instruments. The Fund normally has a weighted
average maturity of approximately five to ten years, but is subject to no
limitation with respect to the maturities of the instruments in which it may
invest.
The portfolio managers seek to identify debt securities with characteristics
such as:
o attractive yields and prices
o the potential for capital appreciation
o reasonable credit quality
The Fund may invest to a lesser extent in asset-backed securities, high yield
securities and foreign debt securities. The portfolio managers also may use
various investment techniques to adjust the Fund's investment exposure, but
there is no guarantee that these techniques will work.
The Fund's investment strategy may result in a high portfolio turnover rate,
which may cause the Fund to experience increased transaction costs and
unitholders to incur increased taxes on their investment in the Fund.
The Risks
The principal risks of investing in this Fund are interest rate risk, credit
risk and prepayment risk. To the extent that the portfolio managers invest in
foreign securities, the Fund would be subject to foreign exposure risk. Certain
portfolio securities are derivative securities that carry derivative securities
risk.
If you would like additional information regarding the Fund's investment
strategies and risks, including a description of the terms in bold type, please
refer to "More on Strategies and Risks" later in this Prospectus.
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<PAGE>
----------
11
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Fund Performance
The bar chart and table opposite illustrate the short-term variability in the
Fund's performance and the Fund's returns relative to a common measure of
performance.
The bar chart illustrates how the Fund's performance varies from year to year
over the periods shown. During the periods presented in the bar chart, the
Fund's highest return for a quarter was 6.25% for the quarter ended June 30,
1995. The Fund's lowest return for a quarter was -2.37% for the quarter ended
March 31, 1994. The Fund's year-to-date return was 1.96% as of March 31, 2000.
The table opposite illustrates how the Fund's average annual returns for
different calendar periods compare to the returns of the Lehman Brothers
Aggregate Bond Index ("LB Aggregate Bond Index"). The table reflects the impact
of the Fund's expenses. It assumes that you sold your Units at the end of each
period.
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Calendar Year Total Returns
[BAR CHART]
1990 8.61%
1991 16.13%
1992 6.61%
1993 9.72%
1994 -2.33%
1995 18.21%
1996 4.01%
1997 9.58%
1998 8.49%
1999 -0.62%
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Average Annual Total Return
(as of December 31, 1999)
1 Year 5 Years 10 Years
------ ------- --------
Elfun Income Fund -0.62% 7.75% 7.67%
LB Aggregate Bond Index -0.83% 7.73% 7.69%
Both the bar chart and table assume reinvestment of dividends and distributions.
As with all mutual funds, past performance is not an indication of future
performance.
All mutual funds use a standard formula to calculate total return. Total return
measures the price change in a Unit assuming the reinvestment of all dividend
income and capital gain distributions
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<PAGE>
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12 Elfun Funds
Prospectus
Income Funds
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Elfun Tax-
Exempt
Income
Fund
- ----------------
Investment Objective: As high a level of current interest income exempt from
Federal income taxation as is available from concentration of investment in
municipal bonds consistent with prudent investment management and the
preservation of capital.
The Strategy
The Elfun Tax-Exempt Income Fund invests primarily in investment-grade municipal
securities. Under normal conditions, at least 80% of the Fund's net assets is
invested in municipal securities, the income from which is typically exempt from
federal personal income tax and the federal alternative minimum tax.
The portfolio manager seeks to identify debt securities with characteristics
such as:
o attractive yields and prices
o the potential for income generation
o the potential for capital appreciation
o reasonable credit quality
The Fund may invest to a lesser extent in tax-free or taxable money market
instruments and may hold cash. The portfolio manager also may use various
investment techniques to adjust the Fund's investment exposure, but there is no
guarantee that these techniques will work.
The Risks
The principal risks of investing in this Fund are municipal securities risk,
interest rate risk and credit risk. The Fund's income may be subject to state
and local taxes. Capital gains, if any, are subject to capital gains tax.
If you would like additional information regarding the Fund's investment
strategies and risks, including a description of the terms in bold type, please
refer to "More on Strategies and Risks" later in this Prospectus.
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<PAGE>
----------
13
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Fund Performance
The bar chart and table opposite illustrate the short-term variability in the
Fund's performance and the Fund's returns relative to a common measure of
performance.
The bar chart illustrates how the Fund's performance varies from year to year
over the periods shown. During the periods presented in the bar chart, the
Fund's highest return for a quarter was 7.07% for the quarter ended March 31,
1995. The Fund's lowest return for a quarter was -5.35% for the quarter ended
March 31, 1994. The Fund's year-to-date return was 3.23% as of March 31, 2000.
The table opposite illustrates how the Fund's average annual returns for
different calendar periods compare to the returns of the Lehman Brothers
Municipal Bond Index ("LB Muni Bond Index"). The table reflects the impact of
the Fund's expenses. It assumes that you sold your Units at the end of each
period.
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Calendar Year Total Returns
[BAR CHART]
1990 5.98%
1991 12.08%
1992 8.50%
1993 12.11%
1994 -5.77%
1995 17.32%
1996 3.60%
1997 9.59%
1998 6.21%
1999 -3.01%
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Average Annual Total Return
(as of December 31, 1999)
1 Year 5 Years 10 Years
------ ------- --------
Elfun Tax-Exempt Income Fund -3.01% 6.53% 6.45%
LB Muni Bond Index -2.07% 6.91% 6.89%
Both the bar chart and table assume reinvestment of dividends and distributions.
As with all mutual funds, past performance is not an indication of future
performance.
Tax-Exempt Investing--
Tax-exempt investing usually benefits investors in higher tax brackets.
All mutual funds use a standard formula to calculate total return. Total return
measures the price change in a Unit assuming the reinvestment of all dividend
income and capital gain distributions.
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<PAGE>
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14
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[This page intentionally left blank.]
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Asset Allocation Elfun Funds 15
Fund Prospectus
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An investment in an Elfun Asset Allocation Fund is not a deposit of any bank and
is not insured by the Federal Deposit Insurance Corporation or any other
government agency. An investment in an Elfun Fund is subject to investment
risks, including possible loss of principal invested.
Who may want to invest in an Elfun Asset Allocation Fund?
An Asset Allocation Fund may be appropriate for your investment portfolio if
you:
o seek both capital appreciation and current income
o want a single diversified investment
Asset allocation funds are designed to meet the needs of investors who prefer to
have their asset allocation decisions made by professional money managers. They
provide an investor with a means to diversify by investing in a core portfolio
that typically holds both equity securities and debt securities. Although an
investor may achieve the same level of diversification by buying individual
Elfun Equity or Income Funds, the Elfun Diversified Fund presents a
diversification alternative within one fund. An investor should not expect
capital appreciation or current income levels comparable to funds for which
either capital appreciation or current income is their sole objective.
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<PAGE>
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16 Elfun Funds
Prospectus
Asset Allocation
Fund
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Elfun
Diversified
Fund
- --------------------
Investment Objective: The highest total return consistent with prudent
investment management and the preservation of capital.
The Strategy
The Elfun Diversified Fund invests primarily in a combination of U.S. equity
securities, foreign equity securities and debt securities. The portfolio
managers follow an asset allocation process established by the Adviser's Asset
Allocation Committee to diversify holdings across asset classes. The Fund
adjusts its weightings among U.S. equity securities, foreign equity securities,
and debt securities based on the relative attractiveness of the asset classes.
The Fund invests in equity securities principally for their capital appreciation
potential and debt securities principally for their income potential. Within
each asset class, the portfolio managers use active security selection to choose
securities based on the merits of individual issuers.
The portfolio managers seek to identify equity securities of companies with
characteristics such as:
o above-average annual growth rates
o financial strength
o leadership in their respective industries
o high quality management focused on generating shareholder value
The portfolio managers seek to identify debt securities with characteristics
such as:
o attractive yields, coupons and prices
o favorable cash flow
o reasonable credit quality
The portion of the Fund invested in debt securities normally has a weighted
average maturity of approximately five to ten years.
The portfolio managers may use various investment techniques to adjust the
Fund's investment exposure, but there is no guarantee that these techniques will
work.
The Fund's asset allocation process may result in a high portfolio turnover
rate, which may cause the Fund to experience increased transaction costs and
unitholders to incur increased taxes on their investment in the Fund.
The Risks
The principal risks of investing in this Fund are stock market risk, foreign
exposure risk, interest rate risk, credit risk, prepayment risk and style risk
(growth investing risk). To the extent the portfolio managers invest in high
yield securities, the Fund would be subject to high yield securities risk.
Certain portfolio securities are derivative securities that carry derivative
securities risk.
If you would like additional information regarding the Fund's investment
strategies and risks, including a description of the terms in bold type, please
refer to "More on Strategies and Risks" later in this Prospectus.
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<PAGE>
----------
17
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Fund Performance
The bar chart and table opposite illustrate the short-term variability in the
Fund's performance.
The bar chart illustrates how the Fund's performance varies from year to year
over the periods shown. During the periods presented in the bar chart, the
Fund's highest return for a quarter was 11.94% for the quarter ended December
31, 1998. The Fund's lowest return for a quarter was -5.78% for the quarter
ended September 30, 1998. The Fund's year-to-date return was 3.08% as of March
31, 2000.
The table opposite illustrates how the Fund's average annual returns for
different calendar periods compare to the return of the S&P 500 Index and the
return of the LB Aggregate Bond Index. The table reflects the impact of the
Fund's expenses. It assumes that you sold your Units at the end of each period.
- --------------------------------------------------------------------------------
Calendar Year Total Returns
[BAR CHART]
1990 4.75%
1991 17.70%
1992 9.35%
1993 8.90%
1994 -0.26%
1995 27.11%
1996 14.40%
1997 18.58%
1998 17.14%
1999 14.04%
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Average Annual Total Return
(as of December 31, 1999)
1 Year 5 Years 10 Years
------ ------- --------
Elfun Diversified Fund 14.04% 18.16% 12.93%
S&P 500 Index 21.07% 28.59% 18.23%
LB Aggregate Bond Index -0.83% 7.73% 7.69%
Both the bar chart and table assume reinvestment of dividends and distributions.
As with all mutual funds, past performance is not an indication of future
performance.
All mutual funds use a standard formula to calculate total return. Total return
measures the price change in a Unit assuming the reinvestment of all dividend
income and capital gain distributions.
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<PAGE>
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18
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[This page intentionally left blank.]
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<PAGE>
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Money Elfun Funds 19
Market Fund Prospectus
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Who may want to invest in an Elfun Money Market Fund?
A Money Market Fund may be appropriate for your investment portfolio if you:
o want regular income
o are investing for a short period of time
o want an investment that seeks to maintain a stable share price
A Money Market Fund may not be appropriate if you:
o want a potentially higher rate of income
o want a long-term investment
o seek capital appreciation
Money Market Funds invest in short-term, high quality debt securities. They seek
to provide stability of principal and regular income. The income provided by a
money market fund varies with interest rate movements.
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<PAGE>
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20 Elfun Funds
Prospectus
Money Market
Fund
- --------------------------------------------------------------------------------
Elfun
Money
Market
Fund
- ----------------
Investment Objective: A high level of current income consistent with prudent
investment management and the preservation of capital.
The Strategy
The Elfun Money Market Fund invests primarily in short-term, U.S.
dollar-denominated money market instruments. The Fund's investments may include
U.S. Government securities, repurchase agreements, commercial paper,
certificates of deposit, variable rate securities, foreign debt securities,
Eurodollar deposits and domestic and foreign bank deposits.
The Fund invests consistent with regulatory standards governing security
quality, maturity and portfolio diversification. For example, the portfolio
manager limits investments to high quality securities with maturities of up to
13 months and limits the average maturity of the Fund's portfolio to 90 days.
The Fund may invest more than 25% of its total assets in the banking industry.
Changes in banking regulations or the economy can have a significant negative
impact on the banking industry.
All of the Fund's assets are rated in the two highest short-term rating
categories (or their unrated equivalents), and at least 95% of its assets are
rated in the highest rating category (or its unrated equivalent) by a nationally
recognized statistical rating organization. Additional information about the
money market securities in which the Fund may invest, including rating
categories, is contained in the SAI.
The Risks
The principal risks of investing in this Fund are interest rate risk, credit
risk and foreign exposure risk.
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Corporation (FDIC) or any other government
agency. Although the Fund seeks to maintain a value of $1.00 per Unit, it is
possible to lose money by investing in the Fund. The Fund's yield will change
due to movements in current short-term interest rates and market conditions. A
change in interest rates or default on the Fund's investments could cause the
Fund's Unit price to decline below $1.00.
If you would like additional information regarding the Fund's investment
strategies and risks, including a description of the terms in bold type, please
refer to "More on Strategies and Risks" later in this Prospectus.
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<PAGE>
----------
21
- --------------------------------------------------------------------------------
Fund Performance
The bar chart and table opposite illustrate the short-term variability in the
Fund's performance and the Fund's returns relative to a common measure of
performance.
The bar chart illustrates how the Fund's performance varies from year to year
over the periods shown. During the periods presented in the bar chart, the
Fund's highest return for a quarter was 1.82% for the quarter ended March 31,
1991. The Fund's lowest return for a quarter was 0.78% for the quarter ended
June 30, 1993. The Fund's year-to-date return was 1.44% as of March 31, 2000.
The table opposite illustrates how the Fund's average annual returns for
different calendar periods compare to the returns of the 90 Day U.S. Treasury
Bill Rate ("90 Day U.S. T-Bill"). The table reflects the impact of the Fund's
expenses. It assumes that you sold your Units at the end of each period. The
Fund's seven day current yield was 5.74% and the seven day effective yield was
5.91% as of December 31, 1999. "Effective yield" reflects the compounding effect
of earnings on reinvested dividends.
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Calendar Year Total Returns
[BAR CHART]
1991 6.55%
1992 3.91%
1993 3.31%
1994 4.17%
1995 5.82%
1996 5.23%
1997 5.45%
1998 5.39%
1999 5.11%
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Average Annual Total Return
(as of December 31, 1999)
Since
1 Year 5 Years Inception*
------ ------- ----------
Elfun Money Market Fund 5.11% 5.40% 5.18%
90 Day U.S. T-Bill 4.83% 5.14% 4.85%
Both the bar chart and table assume reinvestment of dividends and distributions.
If GE Asset Management had not reduced certain expenses during certain of the
periods shown, the Fund's total return would have been lower. As with all mutual
funds, past performance is not an indication of future performance.
* Inception date (commencement of investment operations): June 14, 1990
All mutual funds use a standard formula to calculate total return. Total return
measures the price change in a Unit assuming the reinvestment of all dividend
income and capital gain distributions.
- --------------------------------------------------------------------------------
<PAGE>
- ----------------------------------------------------
22 Elfun Funds Fund Expenses
Prospectus
- --------------------------------------------------------------------------------
This table describes the fees and expenses you may pay if you buy and hold
shares of a Fund.
No sales charges, redemption fees or transfer fees are assessed by any Fund,
except if a unitholder elects to redeem units by telephone and have the proceeds
wired to a bank, in which case a Fund will charge a $10 fee.
Annual fund operating expenses come out of a Fund's assets and are reflected in
the Fund's Unit price and dividends.
The figures below reflect actual expenses for the year ended December 31, 1999.
- --------------------------------------------------------------------------------
Annual Fund
Operating
Expenses
(as a percentage of
average net
assets)
<TABLE>
<CAPTION>
Elfun Elfun International Elfun Elfun Tax-Exempt Elfun Elfun Money
Trusts Equity Fund Income Fund Income Fund Diversified Fund Market Fund
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Management expenses:* 0.06% 0.06% 0.05% 0.08% 0.06% 0.03%
Other expenses:** 0.06% 0.14% 0.13% 0.06% 0.14% 0.16%
Total Operating Expenses: 0.12% 0.20% 0.18% 0.14% 0.20% 0.19%
</TABLE>
* The nature of the services provided to, and the management expenses paid by,
each Fund are described under "About the Investment Adviser, Distributor and
Service Agent."
** "Other expenses" include costs of unitholder services, custodial fees, legal
and accounting fees, printing costs and registration fees, the costs of
regulatory compliance, the costs associated with maintaining a Fund's legal
existence and the costs involved in communicating with unitholders of the Funds.
- --------------------------------------------------------------------------------
<PAGE>
----------
23
- --------------------------------------------------------------------------------
The Impact
of Fund
Expenses
The following example is intended to help you compare the cost of investing in a
Fund with the cost of investing in other mutual funds. Although actual costs may
be higher or lower, you would pay the following expenses on a $10,000
investment, assuming a 5% annual return and that the Fund's operating expenses
remain the same. The example also assumes that you redeem all of your Units at
the end of each period shown. The example should not be considered to be a
representation of past or future expenses of a Fund. Actual expenses may be
greater or less than those shown.
- --------------------------------------------------------------------------------
Example You would pay the following expenses on a $10,000 investment:
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
Elfun Trusts: $ 12 $ 39 $ 68 $ 154
- --------------------------------------------------------------------------------
Elfun International Equity Fund: 20 64 113 255
- --------------------------------------------------------------------------------
Elfun Income Fund: 18 58 101 230
- --------------------------------------------------------------------------------
Elfun Tax-Exempt Income Fund: 14 45 79 179
- --------------------------------------------------------------------------------
Elfun Diversified Fund: 20 64 113 255
- --------------------------------------------------------------------------------
Elfun Money Market Fund: 19 61 107 243
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
- ----------------------------------------------------
24 Elfun Funds More on
Prospectus Strategies
and Risks
- --------------------------------------------------------------------------------
Important Definitions
This section defines important terms that may be unfamiliar to an investor
reading about the Elfun Funds:
Asset-backed securities represent a participation in, or are secured by and
payable from, a stream of payments generated by particular assets, such as
credit card receivables or auto loans.
Bank deposits are cash, checks or drafts deposited in a financial institution
for credit to a customer's account. Banks differentiate between demand deposits
(checking accounts on which the customer may draw) and time deposits (which pay
interest and have a specified maturity or require 30 days' notice before
withdrawal).
Cash and cash equivalents are highly liquid and highly rated instruments such as
commercial paper and bank deposits.
Certificates of deposit include short-term debt securities issued by banks.
Commercial paper includes short-term debt securities issued by banks,
corporations and other borrowers.
Convertible securities may be debt or equity securities that pay interest or
dividends or are sold at a discount and that may be converted on specified terms
into the stock of the issuer.
Corporate bonds are debt securities issued by companies.
Debt securities are bonds and other securities that are used by issuers to
borrow money from investors. Holders of debt securities have a higher priority
claim to assets than do equity holders. Typically, the debt issuer pays the
investor a fixed, variable or floating rate of interest and must repay the
borrowed amount at maturity. Some debt securities, such as zero coupon bonds,
are sold at a discount from their face values instead of paying interest.
Depositary receipts represent interests in an account at a bank or trust company
which holds equity securities. These interests may include American Depositary
Receipts (held at U.S. banks and traded in the United States), European
Depositary Receipts, Global Depositary Receipts or other similar instruments.
Derivative securities are securities whose values are based on other securities,
currencies or indices and include options (on stocks, indices, currencies,
futures contracts or bonds), forward currency exchange contracts, futures
contracts, swap agreements or contracts, interest-only and principal-only debt
securities, certain mortgage-backed securities and structured securities.
Duration represents a mathematical calculation of the average life of a bond (or
portfolio of bonds) based on cash flows that serves as a useful measure of the
security's sensitivity to changes in interest rates. Each year of duration
approximates an expected one percent change in the bond's price for every one
percent change in the interest rate.
Equity securities may include common stocks, preferred securities, depositary
receipts, convertible securities and rights and warrants of U.S. and foreign
companies. Stocks represent an ownership interest in a corporation.
Eurodollar deposits are deposits issued in U.S. dollars by foreign banks and
foreign branches of U.S. banks.
Foreign debt securities are issued by foreign corporations or governments. They
may include the following:
o Eurodollar bonds, which are dollar-denominated securities issued outside
the United States by foreign corporations and financial institutions and
by foreign branches of U.S. corporations and financial institutions
o Yankee Bonds, which are dollar-denominated securities issued by foreign
issuers in the United States.
o Securities denominated in currencies other than U.S. dollars
Foreign securities include interests in or obligations of entities located
outside of the United States. The determination of where an issuer of a security
is located will be made by reference to the country in which the issuer (a) is
organized, (b) derives at least 50% of its revenues or profits from goods
produced or sold, investments made or services performed, (c) has at least 50%
of
- --------------------------------------------------------------------------------
<PAGE>
----------
25
- --------------------------------------------------------------------------------
its assets situated, or (d) has the principal trading market for its securities.
Foreign securities may be denominated in non-U.S. currencies and traded outside
the United States or may be in the form of depositary receipts.
Government stripped mortgage-related securities are mortgage-backed securities
that have been stripped into their interest and principal components. They
represent interests in distributions of interest on or principal underlying
mortgage-backed certificates.
High yield securities are debt securities of corporations, preferred stock and
convertible preferred stock that are rated Ba through C by Moody's or BB through
D by S&P (or comparably rated by another nationally recognized statistical
rating organization) or, if not rated by Moody's or S&P, are considered by
portfolio management to be of speculative quality. High yield securities include
bonds rated below investment grade, sometimes called "junk bonds," and are
considered speculative by the major credit rating agencies.
Illiquid securities are securities that cannot be disposed of by a Fund within
seven days in the ordinary course of business at approximately the amount at
which the Fund has valued the securities.
Investment-grade securities are debt securities rated Baa or better by Moody's
and BBB or better by S&P or are comparably rated by another nationally
recognized statistical rating organization, or, if not rated, are of similar
quality to such securities. Securities rated in the fourth highest grade have
some speculative elements.
Maturity represents the date on which a debt security matures or when the issuer
must pay back the principal amount of the security.
Money market instruments are short-term debt securities of the U.S. government,
banks and corporations. The Funds (other than the Elfun Money Market Fund) also
may invest in money market instruments indirectly through investments in the GEI
Short-Term Investment Fund ("Investment Fund"). The Investment Fund is advised
by GE Asset Management, which charges no advisory fee for such services.
Mortgage-backed securities include securities issued by the Government National
Mortgage Association ("Ginnie Mae"), the Federal National Mortgage Association
("Fannie Mae"), the Federal Home Loan Mortgage Corporation ("Freddie Mac") and
other government agencies and private issuers. They may also include
collateralized mortgage obligations ("CMOs") which are derivative securities
that are fully collateralized by a portfolio of mortgages.
Mortgage dollar rolls are transactions involving the sale of a mortgage-backed
security with a simultaneous contract (with the purchaser) to buy similar, but
not identical, securities at a future date.
Municipal securities are debt obligations of local, state or regional
governments. Municipal securities include both municipal bonds (securities with
maturities of more than one year) and municipal notes (securities with
maturities of less than one year). They may be a general obligation of the
municipality that issued them or they may be secured by the revenues of a
special project or facility. Income derived from investments in municipal
securities is typically exempt from federal income tax, however, capital gains
are subject to federal tax.
Preferred securities are classes of stock that pay dividends at a specified
rate. Dividends are paid on preferred stocks before they are paid on common
stocks. In addition, preferred stockholders have priority over common
stockholders as to the proceeds from the liquidation of a company's assets.
Purchasing and writing options are permitted investment strategies for certain
Funds. An option is the right to buy (i.e., a "call") or sell (i.e., a "put")
securities or other interests for a predetermined price on or before a fixed
date. An option on a securities index represents the option holder's right to
obtain from the seller, in cash, a fixed multiple of the amount by which the
exercise price exceeds (in the case of a call) or is less than (in the case of a
put) the closing value of the securities index on
- --------------------------------------------------------------------------------
<PAGE>
- ----------------------
26 Elfun Funds
Prospectus
More on Strategies
and Risks
- --------------------------------------------------------------------------------
the exercise data. An option on a foreign currency represents the right to buy
or sell a particular amount of that currency for a predetermined price on or
before a fixed date.
Repurchase agreements (repos) are transactions in which a security (usually a
government security) is purchased with a simultaneous commitment to sell it back
to the seller (a commercial bank or recognized securities dealer) at an agreed
upon price on an agreed upon date -- usually the next day.
Restricted securities (which include Rule 144A Securities) may have contractual
restrictions on resale, or cannot be resold publicly until registered. Certain
restricted securities may be illiquid. Illiquid securities may be difficult or
impossible to sell when a Fund wants to sell them at a price at which the Fund
values them. Rule 144A securities are restricted securities that may be sold to
certain institutional purchasers under Rule 144A.
Reverse repurchase agreements involve a Fund selling securities held and
concurrently agreeing to repurchase the same securities at a specified price and
future date.
U.S. Government securities are issued or guaranteed by the U.S. Government or
one of its agencies or instrumentalities. Some U.S. Government securities are
backed by the full faith and credit of the federal government. Other U.S.
Government securities are backed by the issuer's right to borrow from the U.S.
Treasury and some are backed only by the credit of the issuing organization. All
U.S. Government securities are considered highly creditworthy.
Variable rate securities carry interest rates that may be adjusted periodically
to market rates. Interest rate adjustments could increase or decrease the income
generated by the securities.
Various investment techniques are utilized by a Fund to increase or decrease its
exposure to changing security prices, interest rates, currency exchange rates,
commodity prices or other factors that affect security values. For certain
Funds, these techniques may involve derivative securities and transactions such
as buying and selling options and futures contracts, entering into currency
exchange contracts or swap agreements or contracts and purchasing indexed
securities. These techniques are designed to adjust the risk and return
characteristics of a Fund's portfolio of investments and are not used for
leverage. No Fund is under any obligation to use any of these techniques at any
given time or under any particular economic condition. To the extent that a Fund
employs these techniques, the Fund would be subject to derivative securities
risk.
Weighted average maturity represents the length of time in days or years until
the average security in a money market or bond fund will mature or be redeemed
by its issuer. The average maturity is weighted according to the dollar amounts
invested in the various securities in the fund. This measure indicates an income
fund's sensitivity to changes in interest rates. In general, the longer a fund's
average weighted maturity, the more its share price will fluctuate in response
to changing interest rates.
- --------------------------------------------------------------------------------
<PAGE>
----------
27
- --------------------------------------------------------------------------------
More on Investment Strategies
In addition to each Fund's principal investment strategies described earlier in
this Prospectus, a Fund is permitted to use other investment strategies and
techniques in pursuit of its investment objective. No Fund is under any
obligation to use any of these strategies or techniques at any given time or
under any particular economic condition. Certain investment strategies or
techniques may expose the Funds to other risks and considerations, which are
discussed later in this Prospectus or in the Funds' SAI.
Borrowing: Each Fund may borrow for temporary or emergency purposes. The Elfun
Tax-Exempt Income Fund also may borrow from banks for long-term or leveraging
purposes in an amount not to exceed 10% of total assets. Borrowing for long-term
or leveraging purposes may increase the impact on the Fund of fluctuations in
the value of securities purchased with borrowed money. There can be no assurance
that the Fund would realize a higher return on its investment than the interest
rate on borrowed money.
Holding Cash and Temporary Defensive Positions: Under normal circumstances, each
Fund may hold cash and/or money market instruments (i) pending investment, (ii)
for cash management purposes, and (iii) to meet operating expenses. A Fund may
from time to time take temporary defensive positions when the portfolio manager
believes that adverse market, economic, political or other conditions exist. In
these circumstances, the portfolio manager may (i) without limit hold cash and
cash equivalents and/or invest in money market instruments, or (ii) restrict the
securities markets in which a Fund's assets are invested by investing those
assets in securities markets deemed to be conservative in light of the Fund's
investment objective and strategies.
To the extent that a Fund, other than the Elfun Money Market Fund, holds cash or
invests in money market instruments, it may not achieve its investment
objective.
- --------------------------------------------------------------------------------
<PAGE>
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28 Elfun Funds
Prospectus
More on Strategies
and Risks
- --------------------------------------------------------------------------------
The following table summarizes investment strategies and techniques that may be
employed by a Fund. Certain strategies, techniques and limitations may be
changed at the discretion of GE Asset Management. Percentage figures refer to
the percentage of a Fund's assets that may be invested in accordance with the
indicated technique.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Purchasing Purchasing
Reverse Restricted Structured and Writing and Writing
Temporary Repurchase Repurchase and Illiquid and Indexed Securities Securities
Borrowing Agreements Agreements Securities Securities Options Index Options
--------- ---------- ---------- ---------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Elfun Trusts 331/3 Yes No Yes No Yes Yes
- -------------------------------------------------------------------------------------------------------------------------------
Elfun International Equity Fund 331/3 Yes No Yes No Yes Yes
- -------------------------------------------------------------------------------------------------------------------------------
Elfun Income Fund 331/3 Yes No Yes Yes Yes Yes
- -------------------------------------------------------------------------------------------------------------------------------
Elfun Tax-Exempt Income Fund 331/3* Yes No Yes No Yes Yes
- -------------------------------------------------------------------------------------------------------------------------------
Elfun Diversified Fund 331/3 Yes No Yes Yes Yes Yes
- -------------------------------------------------------------------------------------------------------------------------------
Elfun Money Market Fund 331/3 Yes Yes Yes No No No
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The Elfun Tax-Exempt Income Fund also may borrow from banks for long-term
or leveraging purposes in an amount not to exceed 10% of total assets.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Maximum Maximum When-Issued
Futures and Forward Options on Maximum Investment in Investment in and Delayed
Options on Currency Foreign Investment in High Yield Foreign Delivery
Futures Transactions Currencies Debt Securities Securities Securities Securities
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Elfun Trusts Yes No No 35% 5% 35%* Yes
- ------------------------------------------------------------------------------------------------------------------------------------
Elfun International Equity Fund Yes Yes Yes 35% None 100% Yes
- ------------------------------------------------------------------------------------------------------------------------------------
Elfun Income Fund Yes Yes Yes 100% (maximum 10% BB or B by 35%* Yes
of 25% BBB by S&P S&P or Ba or B
or Baa by Moody's by Moody's or
or equivalent) equivalent
- ------------------------------------------------------------------------------------------------------------------------------------
Elfun Tax-Exempt Income Fund Yes No No 100% (maximum 10% BB or B by None Yes
of 25% BBB by S&P S&P or Ba or B
or Baa by Moody's by Moody's or
or equivalent) equivalent
- ------------------------------------------------------------------------------------------------------------------------------------
Elfun Diversified Fund Yes Yes Yes 100% (maximum 10% BB or B by 20%* Yes
of 25% BBB by S&P S&P or Ba or B
or Baa by Moody's by Moody's or
or equivalent) equivalent
- ------------------------------------------------------------------------------------------------------------------------------------
Elfun Money Market Fund No No No 100% None 25%* Yes
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* This limitation excludes ADRs and securities of a foreign issuer with a
class of securities registered with the SEC and listed on a U.S. national
securities exchange or traded on the Nasdaq National Market or Nasdaq
Small Cap Market.
- --------------------------------------------------------------------------------
<PAGE>
----------
29
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Debt Securities Participation
Lending Obligations of of Other Floating and Interests in
Portfolio Rule 144A Supranational Depositary Investment Municipal Variable Rate Municipal
Securities Securities Agencies Receipts Funds Leases Instruments Obligations
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Elfun Trusts Yes Yes No Yes Yes No No No
- ------------------------------------------------------------------------------------------------------------------------------------
Elfun International Equity Fund Yes Yes No Yes Yes No No* No
- ------------------------------------------------------------------------------------------------------------------------------------
Elfun Income Fund Yes Yes Yes No Yes No Yes Yes
- ------------------------------------------------------------------------------------------------------------------------------------
Elfun Tax-Exempt Income Fund Yes Yes No No No Yes Yes Yes
- ------------------------------------------------------------------------------------------------------------------------------------
Elfun Diversified Fund Yes Yes Yes Yes Yes Yes Yes Yes
- ------------------------------------------------------------------------------------------------------------------------------------
Elfun Money Market Fund Yes Yes Yes No Yes No Yes No
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Excludes commercial paper and notes with variable and floating rates of
interest.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Government
Custodial Mortgage Stripped Asset Backed Short
Zero Municipal Receipts on Related Mortgage Securities Mortgage Sales
Coupon Obligations Municipal Securities, Related and Receivable- Dollar Against
Obligations Components Obligations including CMOs Securities Backed Securities Rolls the Box
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Elfun Trusts No No No No No No No No
- ------------------------------------------------------------------------------------------------------------------------------------
Elfun International Equity Fund No No No No No No No No
- ------------------------------------------------------------------------------------------------------------------------------------
Elfun Income Fund Yes No No Yes Yes Yes Yes No
- ------------------------------------------------------------------------------------------------------------------------------------
Elfun Tax-Exempt Income Fund Yes Yes Yes No No No No No
- ------------------------------------------------------------------------------------------------------------------------------------
Elfun Diversified Fund Yes Yes Yes Yes Yes Yes Yes No
- ------------------------------------------------------------------------------------------------------------------------------------
Elfun Money Market Fund No No No No No No No Yes
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
- ----------------------
30 Elfun Funds
Prospectus
More on Strategies
and Risks
- --------------------------------------------------------------------------------
More on Risks
Like all mutual funds, investing in the Elfun Funds involves risk factors and
special considerations. A Fund's risk is defined primarily by its principal
investment strategies, which are described earlier in this Prospectus.
Investments in a Fund are not insured against loss of principal. As with any
mutual fund, there can be no assurance that an Elfun Fund will achieve its
investment objective. Investing in Units of a Fund should not be considered a
complete investment program. The Unit value of the Equity Funds, Income Funds
and Elfun Diversified Fund will rise and fall. Although the Elfun Money Market
Fund seeks to preserve the value of your investment at $1.00 per Unit, it is
possible to lose money by investing in it.
One of your most important investment considerations should be balancing risk
and return. Different types of investments tend to respond differently to shifts
in the economic and financial environment. So, diversifying your investments
among different asset classes--such as stocks, bonds and cash--and within an
asset class--such as small-cap and large-cap stocks--can help you manage risk
and achieve the results you need to comfortably reach your financial goals.
The primary risks of particular investment strategies and techniques are
summarized below. For more information about the risks associated with the
Funds, please see the SAI.
Credit Risk: The price of a bond is affected by the issuer's or counterparty's
credit quality. Changes in financial condition and general economic conditions
can affect credit quality and therefore the ability to honor financial
obligations and therefore credit quality. Lower quality bonds generally are more
sensitive to these changes than higher quality bonds. Even within securities
considered investment grade, differences exist in credit quality and some
investment grade debt securities may have speculative characteristics. A
security's price may be adversely affected by the market's opinion of the
security's credit quality level even if the issuer or counterparty has suffered
no degradation in ability to honor the obligation.
Derivative Securities Risk: A Fund's use of various investment techniques to
increase or decrease its exposure to changing security prices, interest rates,
currency exchange rates, commodity prices or other factors that affect security
values may involve derivative securities and contracts. Derivative securities
and contracts may be used as a direct investment or as a hedge for a Fund's
portfolio or a portion of a portfolio. Hedging involves using a security or
contract to offset investment risk. Hedging may include reducing the risk of a
position held in a portfolio. Hedging and other investment techniques also may
be used to increase a Fund's exposure to a particular investment strategy. If
the portfolio manager's judgment of market conditions proves incorrect or the
strategy does not correlate properly with a Fund's investments, the use of
derivatives could result in a loss regardless of whether the intent was to
reduce risk or increase return and may increase a Fund's volatility. In
addition, in the event that non-exchange traded derivatives are used, those
derivatives could result in a loss if the counterparty to the transaction does
not perform as promised. A Fund is not obligated to pursue any hedging strategy.
In addition, hedging techniques may not be available, may be too costly to be
used effectively or may be unable to be used for other reasons. These
investments may be considered speculative.
Emerging Markets Risk: Emerging market securities bear most foreign exposure
risks discussed below. In addition, there are greater risks involved in
investing in emerging markets than in developed foreign markets. Specifically,
the economic structures in emerging market countries are less diverse and mature
than those in developed countries, and their political systems are less stable.
Investments in emerging market countries may be affected by national policies
that restrict foreign investment. Emerging market countries may have less
developed legal structures, and the small size of their securities markets and
low trading volumes can make investments
- --------------------------------------------------------------------------------
<PAGE>
----------
31
- --------------------------------------------------------------------------------
illiquid and more volatile than investments in developed countries. As a result,
a Fund investing in emerging market countries may be required to establish
special custody or other arrangements before investing.
Foreign Exposure Risk: Investing in foreign securities, including depositary
receipts, or securities of U.S. entities with significant foreign operations,
involves additional risks which can affect a Fund's performance. Foreign
markets, particularly emerging markets, may be less liquid, more volatile and
subject to less government supervision than U.S. markets. There may be
difficulties enforcing contractual obligations, and it may take more time for
transactions to clear and settle in foreign countries than in the United States.
Less information may be available about foreign issuers. The costs of buying and
selling foreign securities, including tax, brokerage and custody costs,
generally are higher than those involving domestic transactions. The specific
risks of investing in foreign securities include:
o Currency Risk: The values of foreign investments may be affected by
changes in currency rates or exchange control regulations. If the local
currency gains strength against the U.S. dollar, the value of the foreign
security increases in U.S. dollar terms. Alternatively, if the local
currency weakens against the U.S. dollar, the value of the foreign
security declines in U.S. dollar terms. U.S. dollar-denominated securities
of foreign issuers, including depositary receipts, also are subject to
currency risk based on their related investments.
o Political/Economic Risk: Changes in economic, tax or foreign investment
policies, government stability, war or other political or economic actions
may have an adverse effect on a Fund's foreign investments.
o Regulatory Risk: Foreign companies often are not subject to uniform
accounting, auditing and financial reporting standards or to other
regulatory practices and requirements common to U.S. companies.
High Yield Securities Risk: Below investment-grade securities, sometimes called
"junk bonds," are considered speculative. These securities have greater risk of
default than higher rated securities. The market value of below investment-grade
securities is more sensitive to individual corporate developments and economic
changes than higher rated securities. The market for below investment-grade
securities may be less active than for higher rated securities, which can
adversely affect the price at which these securities may be sold. Less active
markets may diminish a Fund's ability to obtain accurate market quotations when
valuing the portfolio securities and calculating a Fund's net asset value. In
addition, a Fund may incur additional expenses if a holding defaults and a Fund
has to seek recovery of its principal investment. Below investment-grade
securities may also present risks based on payment expectations. For example,
these securities may contain redemption or call provisions. If an issuer
exercises these provisions in a declining interest rate market, the Fund would
have to replace the security with a lower yielding security resulting in a
decreased return for investors.
Illiquid Securities Risk: Illiquid securities may be difficult to resell at
approximately the price they are valued in the ordinary course of business in
seven days or less. When investments cannot be sold readily at the desired time
or price, a Fund may have to accept a lower price or may not be able to sell the
security at all, or forego other investment opportunities, all of which may have
an impact on the Fund.
Interest Rate Risk: Bond prices generally rise when interest rates decline and
decline when interest rates rise. The longer the duration of a bond, the more a
change in interest rates affects the bond's price. Short-term and long-term
interest rates may not move the same amount and may not move in the same
direction.
Municipal Securities Risk: Municipal securities are backed by the entities that
issue them and/or other revenue streams. Like other debt securities, prices of
municipal securities are affected inversely by changes in interest rates and by
changes in the credit rating or
- --------------------------------------------------------------------------------
<PAGE>
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32 Elfun Funds
Prospectus
More on Strategies
and Risks
- --------------------------------------------------------------------------------
financial condition of the issuer. Income derived from investments in municipal
securities typically is exempt from federal income tax, however capital gains
are subject to federal tax. The municipal securities market is volatile and may
be significantly affected by tax, legislative or political changes. Some
municipal securities are insured and guarantee the timely payment of interest
and repayment of principal.
Prepayment Risk: Prices and yields of mortgage-backed securities assume the
securities will be redeemed at a given time. When interest rates decline,
mortgage-backed securities experience higher prepayments because the underlying
mortgages are repaid earlier than expected. A Fund's portfolio manager may be
forced to invest the proceeds from prepaid mortgage-backed securities at lower
rates, which would result in a lower return for the Fund. When interest rates
increase, mortgage-backed securities experience lower prepayments because the
underlying mortgages may be repaid later than expected. This typically reduces
the value of the underlying securities.
Repurchase and Reverse Repurchase Agreements Risk: A Fund entering into a
repurchase agreement may suffer a loss if the other party to the transaction
defaults on its obligations and could be delayed or prevented from exercising
its rights to dispose of the underlying securities. The value of the underlying
securities might decline while the Fund seeks to assert its rights. The Fund
could incur additional expenses in asserting its rights or may lose all or part
of the income from the agreement. A reverse repurchase agreement involves the
risk that the market value of the securities retained by a Fund may decline
below the price of the securities the Fund has sold but is obligated to
repurchase at a higher price under the agreement.
Restricted Securities Risk: Restricted securities (including Rule 144A
Securities) may be subject to legal restraints on resale and therefore often are
less liquid than other securities. The prices received from reselling restricted
securities in privately negotiated transactions may be less than those
originally paid by a Fund. Companies whose securities are restricted are not
subject to the same investor protection requirements as publicly traded
securities.
Stock Market Risk: Stock market risk is the risk that the value of equity
securities may decline. Stock prices change daily in response to company
activity and general economic and market conditions. Stock prices may decline in
value even during periods when equity securities in general are rising, or may
not perform as well as the market in general. Additional stock market risk may
be introduced when a particular equity security is traded on a foreign market,
which would create foreign exposure risk.
Style Risk: Securities with different characteristics tend to shift in and out
of favor depending upon market and economic conditions as well as investor
sentiment. A fund may underperform other funds that employ a different style. A
fund also may employ a combination of styles that impact its risk
characteristics. Examples of different styles include growth and value
investing, as well as those focusing on large, medium, or small company
securities.
o Growth Investing Risk: Growth stocks may be more volatile than other
stocks because they are more sensitive to investor perceptions of the
issuing company's growth potential. Growth oriented funds typically will
underperform when value investing is in favor.
o Value Investing Risk: Undervalued stocks may not realize their perceived
value for extended periods of time or may never realize their perceived
value. Value stocks may respond differently to market and other
developments than other types of stocks. Value oriented funds typically
will underperform when growth investing is in favor.
o Mid-Cap Company Risk: Investments in securities of mid-cap companies
entail greater risks than investments in larger, more established
companies. Mid-cap companies tend to have more narrow product lines, more
limited finan-
- --------------------------------------------------------------------------------
<PAGE>
----------
33
- --------------------------------------------------------------------------------
cial resources and a more limited trading market for their stocks, as
compared with larger companies. As a result, their stock prices may
decline significantly as market conditions change.
o Small-Cap Company Risk: Investing in securities of small-cap companies may
involve greater risks than investing in larger, more established issuers.
Smaller companies may have limited product lines, markets or financial
resources. Their securities may trade less frequently and in more limited
volume than securities of larger, more established companies. In addition,
smaller companies typically are subject to greater changes in earnings and
business prospects than are larger companies. Consequently, the prices of
small company stocks tend to rise and fall in value more than other
stocks. Although investing in small-cap companies offers potential for
above-average returns, the companies may not succeed and the value of
stock shares could decline significantly.
Other Risk Considerations
EURO Conversion: The introduction and use of the EURO, a common currency in
Europe, may result in uncertainties for European companies and markets.
Individual issuers may suffer increased costs and decreased earnings due to the
long-term impact of the EURO conversion. Market disruptions may occur that could
adversely affect the value of European securities and currencies.
Year 2000: The inability of computer systems worldwide to process correctly
date-related information from before, on, and after January 1, 2000 could cause
difficulties for systems' users (the "Year 2000 Issue"). The impact of failures
by companies, markets, or governments of countries in which a Fund invests to
address effectively the Year 2000 Issue may be felt well after January 1, 2000
and may negatively impact a Fund's performance. In addition, a Fund could be
adversely affected if the computer systems used by its investment manager or
external service providers do not correctly process such date-related
information.
- --------------------------------------------------------------------------------
<PAGE>
- ----------------------------------------------------
34
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[This page intentionally left blank.]
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<PAGE>
----------------------------------------------------
About the Investment Elfun Funds 35
Adviser, Distributor Prospectus
and Servicing Agent
- --------------------------------------------------------------------------------
Investment Adviser and Administrator
GE Asset Management Incorporated, ("GE Asset Management"), located at 3003
Summer Street, Stamford, Connecticut 06904, is the investment adviser of each
Fund. GE Asset Management is a wholly-owned subsidiary of GE and a registered
investment adviser. On March 31, 2000, General Electric Investment Corporation
("GEIC"), also a wholly-owned subsidiary of GE and a registered investment
adviser, and which previously had served as the Funds' investment adviser, was
merged into GE Asset Management.
As of March 31, 2000, GE Asset Management oversaw $120.3 billion and managed
individual and institutional assets of $94.0 billion, of which more than $18.7
billion was invested in mutual funds.
The management and administration fee charged to the Funds by GE Asset
Management is the reasonable cost, both direct and indirect, incurred by GE
Asset Management in providing advisory and administration services. Direct and
indirect costs incurred by GE Asset Management for a Fund are paid out of, or
reimbursed to GE Asset Management from, gross income. These costs include: SEC
fees, state Blue Sky notification fees, fees of custodians, transfer and
dividend disbursing agents, industry association fees, external accounting,
audit and legal expenses, costs of independent pricing services, costs of
maintaining the Fund's existence, costs attributable to unitholder services
(including, without limitation, telephone and personnel expenses), costs of
preparing and pricing unitholders' reports, prospectuses and statements of
additional information and holding meetings, the direct and indirect cost of GE
Asset Management personnel providing investment advisory and other services to
the Fund. Some of these costs may be incurred directly by the Funds. While
Trustees who are employees of GE serve as trustees without compensation, each
Fund is required to reimburse GE Asset Management for the portion of the
remuneration such persons receive from GE which is allocable to the time they
spend on Fund matters in their capacity as GE Asset Management employees. In
addition, the following cost and expenses will be incurred directly by a Fund:
taxes, brokerage fees and expenses, interest on borrowings and extraordinary
expenses.
- --------------------------------------------------------------------------------
For the year ended December 31, 1999, the Funds paid GEIC the following amounts
as a percentage of average net assets for investment management and
administration services:
Elfun Trusts 0.06%
- --------------------------------------------------------------------------------
Elfun International Equity Fund 0.06%
- --------------------------------------------------------------------------------
Elfun Income Fund 0.05%
- --------------------------------------------------------------------------------
Elfun Tax-Exempt Income Fund 0.08%
- --------------------------------------------------------------------------------
Elfun Diversified Fund 0.06%
- --------------------------------------------------------------------------------
Elfun Money Market Fund 0.03%
- --------------------------------------------------------------------------------
- -------------------------------
Distributor and Servicing Agent
GE Investment Distributors, Inc. ("GEID"), serves as the Fund's distributor (the
"Distributor") and unitholder servicing agent (the "Servicing Agent"). As
Servicing Agent, GEID is responsible for processing redemption requests,
providing certain services that assist the Funds' transfer agent, and responding
to unitholder inquiries. GEID is a wholly-owned subsidiary of GE Financial
Assurance Holdings, Inc., an indirect wholly-owned subsidiary of GE. GEID does
not receive any fee for acting as Distributor. GEID is reimbursed its reasonable
costs incurred in performing its services as Servicing Agent.
- --------------------------------------------------------------------------------
For the year ended December 31, 1999, the Funds paid GEID the following amounts
as a percentage of average net assets for unitholder servicing:
Elfun Trusts 0.01%
- --------------------------------------------------------------------------------
Elfun International Equity Fund 0.04%
- --------------------------------------------------------------------------------
Elfun Income Fund 0.03%
- --------------------------------------------------------------------------------
Elfun Tax-Exempt Income Fund 0.01%
- --------------------------------------------------------------------------------
Elfun Diversified Fund 0.03%
- --------------------------------------------------------------------------------
Elfun Money Market Fund 0.03%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
- ----------------------
36 Elfun Funds
Prospectus
About the
Investment Adviser
- --------------------------------------------------------------------------------
About the Portfolio Managers
David B. Carlson is a Senior Vice President of GE Asset Management. He is
portfolio manager of Elfun Trusts and manages domestic equity investments for
Elfun Diversified Fund. He has served Elfun Trusts as a portfolio manager since
1988 and has served Elfun Diversified Fund as a portfolio manager since 1992.
Mr. Carlson joined GE Asset Management in 1982 as a Securities Analyst for
Investment Operations. He became a Vice President for Mutual Fund Portfolios in
1987 and a Senior Vice President in 1989.
Robert R. Kaelin is a Senior Vice President of GE Investments and is the
portfolio manager of the Elfun Tax-Exempt Income Fund. He has served as a
portfolio manager for the Fund since 1984 and has over 30 years of investment
experience. Mr. Kaelin has held positions with GE Asset Management since 1984.
Ralph R. Layman is a Director and Executive Vice President of GE Asset
Management. He manages the overall international equity investments for GE Asset
Management. Mr. Layman leads a team of portfolio managers for Elfun
International Equity Fund and has served the Fund in a portfolio management
capacity since 1991. He has also managed foreign investments of Elfun
Diversified Fund since March 1997. Mr. Layman has more than 20 years of
investment experience. He joined GE Asset Management in 1991 as Executive Vice
President for International Investments.
Robert A. MacDougall is a Director and Executive Vice President of GE Asset
Management. He manages the overall fixed income investments for GE Asset
Management. He leads a team of portfolio managers for Elfun Income Fund, the
fixed income investments for Elfun Diversified Fund, and the Elfun Money Market
Fund. Mr. MacDougall has served in those capacities for the Elfun Income Fund
since 1986 and the Elfun Diversified Fund since its inception in 1987. He has
more than 15 years of investment experience. Mr. MacDougall joined GE Asset
Management in 1986 as Vice President. He became a Senior Vice President of Fixed
Income in 1993 and a Director and Executive Vice President of Fixed Income in
1997.
- --------------------------------------------------------------------------------
<PAGE>
----------------------------------------------------
How to Invest Elfun Funds 37
Prospectus
- --------------------------------------------------------------------------------
How to
Purchase
Units
Who may Purchase Units
Units of any of the six Elfun Funds to which this prospectus pertains may be
purchased by:
1. Regular and senior members of the Elfun Society,
2. The immediate family of those members,
3. Trusts whose sole beneficiaries are such members,
4. The surviving unremarried spouse of a deceased member,
5. Members of the Board of Directors of GE,
6. GE and its subsidiaries, and
7. Such others as the Trustees of the Funds may permit provided that their
participation does not affect the Funds' status as "employees' securities
companies" within the meaning of section 2(a)(13) of the Investment Company Act
of 1940, as amended (the "1940 Act").
Regular members of the Elfun Society are selected from active employees of GE
and/or its majority owned subsidiaries. Senior members are former members who
have retired from those companies. Immediate family is defined as spouse,
children or step-children.
Units may be purchased in several ways. You may open an account and make an
investment by mail and make subsequent investments by bank wire, payroll
deduction or electronic funds transfer, as described later in this section.
The Funds no longer issue physical certificates representing units in any Fund.
Ownership of units is evidenced by Statements of Account representing units
issued in book-entry form.
A Fund may, in its descretion, reject any order for the purchase of units.
Investing By Mail
o Read this prospectus.
o If opening a new account, complete and sign the application. You may
obtain an application by calling the Distributor at the number listed on
the back cover.
o Send a check drawn on a U.S. bank in U.S. dollars payable to the
applicable Fund. Third-party checks or endorsed checks are not accepted by
the Funds.
o If adding to an existing account, include your account number on the
check.
o If a check used to open or add to an account does not clear, you may be
assessed an additional change.
Mail to:
Elfun Mutual Funds
P.O. Box 219631
Kansas City, MO 64121-9631
Overnight delivery:
Elfun Mutual Funds
c/o National Financial Data Services Inc.
330 West 9th Street
Kansas City, MO 64105
- --------------------------------------------------------------------------------
Minimum
Investments
Initial Investment $500
- --------------------------------------------------------------------------------
Subsequent Investments $100
- --------------------------------------------------------------------------------
Subsequent minimums are reduced to $25 for Automatic Investment and Payroll
Savings Plans. Accounts that fall below the $500 account minimum may be
automatically redeemed by a Fund on 30 days' notice.
- --------------------------------------------------------------------------------
<PAGE>
- ----------------------
38 Elfun Funds
Prospectus
How to Invest
- --------------------------------------------------------------------------------
Once You Have Opened an Account--You Have Additional Options
By Wire
o Wire to the address below. Include your name, the name of the Fund and
your account number. The unitholder's bank may charge a fee for this
service.
o Wire orders received by the close of regular trading on the New York Stock
Exchange ("NYSE") are executed at that day's net asset value per unit.
Wire orders received after the close of regular trading on the NYSE
receive the next business day's price.
Wire Address:
State Street Bank and Trust Company
ABA #0110-0002-8
DDA #9905-101-3
Payroll Deduction
o You must furnish a completed Elfun Mutual Funds Payroll Deduction
Authorization Form to the Distributor. Contact the Distributor for a copy
of the Payroll Deduction Form at (800) 242-0134.
o Statements of Account are sent on a quarterly basis to those investing
through payroll deductions.
Automatic Investment Plan
o You may have funds transferred directly from your bank account each month.
Call (800) 242-0134 to make arrangements.
o If an automatic investment transaction fails due to insufficient funds in
your account, you may be assessed an additional charge.
Retirement Accounts
Units of the Funds, other than the Elfun Tax-Exempt Fund, are available for
purchase by an Elfun Traditional or Roth Individual Retirement Account ("Elfun
IRAs"). An Elfun IRA application and further details about Elfun IRA plans are
available from the Distributor.
- --------------------------------------------------------------------------------
<PAGE>
----------
39
- --------------------------------------------------------------------------------
How to
Redeem
Units
Redemption of Units in General
Bookunits may be redeemed either by telephonic request or by mail. Units
represented by Certificates should be mailed to the addresses listed below for
deposit into Bookunits.
A redemption request received in proper form will be effected at the net asset
value per unit next determined less any redemption fee as the Trustees may
prescribe. At the present time, the Trustees do not contemplate instituting any
redemption fee for redemption by mail.
By Mail
Send a signed written request, stating the number of units or specific dollar
amount you want to sell. The written request also must identify the Fund and the
account number from which units are to be redeemed. Your signature must appear
exactly as it does on the account registration.
Signatures must be guaranteed for any redemption:
o exceeding $50,000
o mailed to a different address from that on record
o paid to someone else
o wired to a financial institution (other than the bank of record)
o mailed to an address that has been changed within the last 30 days
Mail to:
Elfun Mutual Funds
P.O. Box 219631
Kansas City, MO 64121-9631
Overnight Delivery:
Elfun Mutual Funds
c/o National Financial Data Services Inc.
330 West 9th Street
Kansas City, MO 64105
By Telephone
Units may be redeemed by telephone utilizing the Funds' automated system or by
an agent during business hours. The telephone option must have been selected
during initial account setup or subsequently by written request signed by all
registered unitholders. A single $10 charge will be assessed with each
telephonic redemption wire request. Call toll-free (800) 242-0134.
- --------------------------------------------------------------------------------
<PAGE>
- -----------------
40 Elfun Funds
Prospectus
How to Invest
- --------------------------------------------------------------------------------
By Systematic Withdrawal Plan
You may select a specific amount to be redeemed from your account on a regular
basis.
o Your account balance must be at least $10,000
o Minimum of $50 per withdrawal
o You may sell units monthly
o If an automatic monthly investment transaction fails due to insufficient
funds in your account, you may be assessed an additional charge.
o You will receive written confirmation of transactions on a quarterly basis
(except the Elfun Money Market Fund which provides a written confirmation
monthly)
o Further information about the Withdrawal Plan may be obtained from the
Servicing Agent.
Checkwriting
Checkwriting privileges may be elected at no cost by shareholders of the Money
Market Fund. Checks may be made payable to any person in amounts of $100 or
more. The Transfer Agent will redeem units in an amount sufficient to cover the
amount of a check. If the amount of the check is greater than the value of the
units in a unitholder's account, the check will be returned marked "insufficient
funds" and you may be assessed an additional charge. Please contact the
Distributor at the number listed on the back cover for additional details.
Special Considerations for Selling Units
o When using a check to sell units of the Money Market Fund, the minimum
check amount is $100.
o If you have purchased units of a Fund by personal check, redemption of
these units can only be processed after your check is cleared by your
bank. This could take up to 15 days or more.
o If your account balance falls below $500, the Transfer Agent may request
that you bring your balance up to the $500 minimum or request that you
close your account. If you take no action within 30 days, the transfer
agent may sell your units and mail the proceeds to you.
Redemptions in Kind
Large redemptions that exceed $250,000 or 1% of a Fund's assets may be
considered detrimental to the Fund's existing unitholders. Therefore, the Fund
may require that you take a "distribution in kind" upon redemption and may give
you portfolio securities instead of cash proceeds. Such Fund portfolio
securities will have to be sold through a broker and you may incur transaction
costs when you sell them.
When We Receive Your Transaction Request
Purchase and redemption requests received in good order will be executed at the
net asset value next calculated after receipt of transaction instructions.
Purchase and redemption orders are executed only on days when the NYSE is open
for trading. If the NYSE closes early, the deadlines for purchase and redemption
orders will be accelerated to the earlier closing time. Redemption may be
suspended when trading on the NYSE is restricted or as permitted by the SEC. For
Funds declaring daily income dividends, you will begin to earn income as of the
first business day after payment for your order has been received by the Fund.
You may initiate certain transactions by telephone if you have completed and
returned a telephone transaction form. The Distributor will not be responsible
for losses resulting from unauthorized telephone transaction instructions if it
follows reasonable procedures to verify the identity of the investor.
- --------------------------------------------------------------------------------
<PAGE>
----------
41
- --------------------------------------------------------------------------------
How to
Exchange
Units
You can exchange units of one Elfun Fund for units of another Elfun Fund. An
exchange is a sale and purchase of units for tax purposes. You may have a
taxable gain or loss when you exchange your units. To exchange units:
o by telephone, call (800) 242-0134.
o by mail, send your written request to Elfun Mutual Funds at the address
below.
Mail to:
Elfun Mutual Funds
P.O. Box 219631
Kansas City, MO 64121-9631
Overnight Delivery:
Elfun Mutual Fund
c/o National Financial Data Services Inc.
330 West 9th Street
Kansas City, MO 64105
You should review the description of the Fund that you wish to purchase.
- --------------------------------------------------------------------------------
<PAGE>
- ----------------------------------------------------
42 Elfun Funds Dividends,
Prospectus Capital Gains
and Other Tax
Information
- --------------------------------------------------------------------------------
Unless you instruct a Fund to mail dividends from net investment income and net
capital gains to you, they will be reinvested in your account. There are no fees
or charges to reinvest dividends.
Each Fund may be subject to a 4% excise tax on undistributed net investment
income and net capital gains. To avoid this tax, the Funds may pay dividends
from net investment income and net capital gains more frequently.
Fund Distribution Schedule
- --------------------------------------------------------------------------------
o Dividends typically are declared and
Elfun Trusts paid annually.
Elfun International Equity Fund o Short-term and long-term capital
gains, if any, typically are declared
and paid annually
Elfun Diversified Fund
- --------------------------------------------------------------------------------
Elfun Tax-Exempt Income Fund o Dividends are declared daily and paid
monthly.
Elfun Income Fund
Elfun Money Market Fund* o Short-term and long-term capital
gains, if any, are declared and paid
annually.
* All expenses of the Elfun Money Market Fund are accrued daily and deducted
before declaration of dividends to unitholders.
- --------------------------------------------------------------------------------
<PAGE>
----------
43
- --------------------------------------------------------------------------------
Taxes
Tax issues can be complicated. We suggest you see your investment professional
or tax advisor for any questions you may have.
Dividends and distributions from net investment income and short-term capital
gains are taxed as ordinary income. Long-term capital gains distributions are
taxed at the long-term capital gains rate, whether you reinvest your
distributions or have them paid to you.
- --------------------------------------------------------------------------------
Distributions from Elfun Tax-Exempt Income Fund
In general, income from the Elfun Tax-Exempt Income Fund is exempt from federal
income tax but may be subject to state and local taxes. Because the Fund may
invest in taxable securities, some dividends from net investment income may be
subject to federal and state income taxes. Short-term and long-term capital
gains distributed by the Fund are taxable.
Foreign Taxes of Elfun International Equity Fund
Foreign governments may impose taxes on a Fund's investments, and these taxes
generally will reduce the Fund's distributions. An eligible Fund may elect to
pass through to its unitholders foreign taxes paid from its investments meeting
certain holding period requirements. If you meet certain holding period
requirements with respect to your Fund units, an offsetting tax credit may be
available to you. If you do not meet such holding period requirements, you may
still be entitled to a deduction for certain foreign taxes. In either case, your
tax statement will show more taxable income than was actually distributed by the
Fund, but will also show the amount of the available offsetting credit or
deduction.
Tax Statement
You will receive an annual statement summarizing your dividend and capital gains
distributions. Please consult a tax advisor if you have questions about your
specific tax situation.
- --------------------------------------------------------------------------------
Backup Withholding
If you do not provide complete and certified taxpayer identification
information, each Fund is obligated by law to withhold 31% of most Fund
distributions.
- --------------------------------------------------------------------------------
<PAGE>
- ----------------------------------------------------
44 Elfun Funds Calculating
Prospectus Unit Value
- --------------------------------------------------------------------------------
Fund units are sold at net asset value ("NAV"). The NAV of each Fund is
calculated at the close of regular trading on the New York Stock Exchange
("NYSE"), normally 4:00 p.m. Eastern time, each day the NYSE is open for
trading. The NAV per unit for Funds (other than the Elfun Money Market Fund) is
determined by adding the value of the Fund's investments, cash, and other assets
attributable to that Fund, subtracting its liabilities, and then dividing the
result by the number of that Fund's outstanding units.
A Fund's portfolio securities are valued most often on the basis of market
quotations. Foreign securities are valued on the basis of quotations from the
primary market in which they are traded. Some debt securities are valued using
dealers and pricing services. Municipal bond valuations are based on prices
supplied by a qualified municipal pricing service. The prices are composed of
the mean average of the bid and ask prices on the secondary market. All
portfolio securities of the Money Market Fund and any short-term securities held
by any other Fund with remaining maturities of sixty days or less are valued on
the basis of amortized cost or original cost plus accrued interest. A Fund's
written or purchased options are generally valued at the last sales price, or if
no sales occurred on that day, at the last quoted bid price. The value of a
futures contract is generally equal to the unrealized gain or loss on the
contract that is determined by marking the contract to the current settlement
price for a like contract on the valuation date of the futures contract. A
Fund's NAV may change on days when unitholders will not be able to purchase or
redeem the Fund's Units.
If quotations are not readily available for any security, or if the value of a
security has been materially affected by events occurring after the closing of a
market, the security may be valued by using procedures approved by a Fund's
Board of Trustees that it believes accurately reflects "fair value."
- --------------------------------------------------------------------------------
<PAGE>
----------------------------------------------------
Financial Elfun Funds 45
Highlights Prospectus
- --------------------------------------------------------------------------------
The financial highlights tables that follow are intended to help you understand
a Fund's financial performance for the fiscal years ended December 31. Certain
information reflects financial results for a single Fund unit. The total returns
in the table represent the rate that an investor would have earned or lost on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by KPMG LLP, whose report,
along with the Funds' financial statements, is included in the Funds' Annual
Report, which is available upon request.
- --------------------------------------------------------------------------------
<PAGE>
- ---------------
46 Elfun Funds
Prospectus
Financial
Highlights
- --------------------------------------------------------------------------------
Elfun Trusts
<TABLE>
<CAPTION>
Years ended December 31 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 62.58 $ 55.81 $ 46.46 $ 39.88 $ 30.91
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Investment Operations:
Net Investment Income (Loss) 0.63 0.83 0.75 0.75 0.77
- ------------------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gains (Losses) on Investments 11.64 11.93 13.48 8.68 11.33
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) from Investment Operations 12.27 12.76 14.23 9.43 12.10
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions:
Dividends (from net investment income) 0.62 0.83 0.74 0.75 0.77
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions (from capital gains) 4.42 5.16 4.14 2.10 2.36
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions 5.04 5.99 4.88 2.85 3.13
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 69.81 $ 62.58 $ 55.81 $ 46.46 $ 39.88
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return (a) 19.74% 22.94% 30.86% 23.55% 39.19%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net Assets, End of Period (in thousands) $2,758,535 $2,368,878 $1,981,395 $1,525,979 $1,228,366
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets
Net Investment Income 0.91% 1.35% 1.39% 1.71% 2.08%
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses 0.12% 0.12% 0.09% 0.13% 0.13%
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 11% 15% 16% 12% 15%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Elfun
International
Equity Fund
<TABLE>
<CAPTION>
Years ended December 31 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 19.60 $ 17.00 $ 17.67 $ 16.65 $ 15.58
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Investment Operations
Net Investment Income (Loss) 0.26 0.26 0.22 0.24 0.23
- ------------------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gains (Losses) on Investments 7.30 2.69 1.26 2.45 2.27
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) from Investment Operations 7.56 2.95 1.48 2.69 2.50
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions from:
Dividends (from net investment income) 0.23 0.22 0.17 0.23 0.19
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions (from capital gains) 2.61 0.13 1.98 1.44 1.24
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions 2.84 0.35 2.15 1.67 1.43
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 24.32 $ 19.60 $ 17.00 $ 17.67 $ 16.65
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return (a) 38.90% 17.36% 8.47% 16.13% 16.03%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
Net Assets, End of Period (in thousands) $292,334 $207,446 $193,492 $176,303 $142,262
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets
Net Investment Income 1.22% 1.32% 1.17% 1.37% 1.36%
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses 0.20% 0.31% 0.24% 0.25% 0.34%
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 67% 54% 83% 45% 55%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Highlights
- --------------------------------------------------------------------------------
<PAGE>
----------
47
- --------------------------------------------------------------------------------
Elfun Income
Fund
<TABLE>
<CAPTION>
Years ended December 31 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 11.56 $ 11.61 $ 11.32 $ 11.64 $ 10.55
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Investment Operations:
Net Investment Income 0.73 0.72 0.75 0.76 0.77
- ------------------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gains (Losses) on Investments (0.80) 0.24 0.29 (0.32) 1.09
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) from Investment Operations (0.07) 0.96 1.04 0.44 1.86
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions from:
Dividends (from net investment income) 0.73 0.75 0.75 0.76 0.77
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions (from capital gains) 0.04 0.26 0.00 0.00 0.00
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions 0.77 1.01 0.75 0.76 0.77
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 10.72 $ 11.56 $ 11.61 $ 11.32 $ 11.64
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return (a) (0.62)% 8.49% 9.58% 4.01% 18.21%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
Net Assets, End of Period (in thousands) $267,981 $274,082 $230,963 $219,451 $218,880
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets
Net Investment Income 6.55% 6.12% 6.56% 6.68% 6.90%
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses 0.18% 0.22% 0.20% 0.24% 0.25%
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 211% 216% 222% 201% 367%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Elfun Tax-
Exempt Income
Fund
<TABLE>
<CAPTION>
Years ended December 31 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 11.98 $ 11.93 $ 11.61 $ 11.91 $ 10.83
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Investment Operations
Net Investment Income 0.61 0.62 0.65 0.66 0.68
- ------------------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gains (Losses) on Investments (0.96) 0.10 0.43 (0.25) 1.15
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Investment Operations (0.35) 0.72 1.08 0.41 1.83
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions from:
Dividends (from net investment income) 0.61 0.62 0.65 0.66 0.68
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions (from capital gains) 0.04 0.05 0.11 0.05 0.07
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions 0.65 0.67 0.76 0.71 0.75
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 10.98 $ 11.98 $ 11.93 $ 11.61 $ 11.91
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return (a) (3.01)% 6.21% 9.59% 3.60% 17.32%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net Assets, End of Period (in thousands) $1,365,181 $1,486,373 $1,394,734 $1,301,737 $1,312,342
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets
Net Investment Income 5.31% 5.18% 5.52% 5.67% 5.91%
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses 0.14% 0.10% 0.10% 0.13% 0.13%
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 24% 18% 28% 22% 59%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Highlights
- --------------------------------------------------------------------------------
<PAGE>
- ---------------
48 Elfun Funds
Prospectus
Financial
Highlights
- --------------------------------------------------------------------------------
Elfun Diversified Fund
<TABLE>
<CAPTION>
Years ended December 31 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 20.18 $ 19.16 $ 17.27 $ 15.86 $ 13.24
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Investment Operations:
Net Investment Income (Loss) 0.60 0.61 0.56 0.54 0.53
- ------------------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gains (Losses) on Investments 2.22 2.66 2.64 1.75 3.06
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) from Investment Operations 2.82 3.27 3.20 2.29 3.59
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions from:
Dividends (from net investment income) 0.59 0.60 0.56 0.54 0.53
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions (from capital gains) 1.29 1.65 0.75 0.34 0.44
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions 1.88 2.25 1.31 0.88 0.97
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 21.12 $ 20.18 $ 19.16 $ 17.27 $ 15.86
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return (a) 14.04% 17.14% 18.58% 14.40% 27.11%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
Net Assets, End of Period (in thousands) $208,128 $177,582 $143,808 $102,157 $ 77,255
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets
Net Investment Income 2.83% 3.00% 3.11% 3.41% 3.62%
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses 0.20% 0.25% 0.22% 0.28% 0.34%
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 98% 126% 100% 89% 93%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Elfun Money
Market Fund
<TABLE>
<CAPTION>
Years ended December 31 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ------------------------------------------------------------------------------------------------------------------------------------
Income from Investment Operations:
Net Investment Income (Loss) 0.05 0.05 0.05 0.05 0.06
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) from Investment Operations 0.05 0.05 0.05 0.05 0.06
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions from:
Dividends (from net investment income) 0.05 0.05 0.05 0.05 0.06
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions 0.05 0.05 0.05 0.05 0.06
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return (a) 5.11% 5.39% 5.45% 5.23% 5.82%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net Assets, End of Period (in thousands) $286,992 $203,920 $167,385 $139,474 $117,506
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets
Net Investment Income 4.91% 5.21% 5.27% 5.08% 5.68%
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses 0.19% 0.25% 0.24% 0.31% 0.30%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Notes to (a) Total returns are historical and assume changes in share
Financial price, reinvestment of dividends and capital gains, and assume
Highlights no sales charge.
- --------------------------------------------------------------------------------
<PAGE>
----------
49
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<PAGE>
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50
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<PAGE>
----------
51
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<PAGE>
- ---------------
52 Elfun Funds
Prospectus
- --------------------------------------------------------------------------------
If you wish to know more
You will find additional information about the Elfun Funds in the following
documents:
Annual Report to Unitholders: This report details the Funds' actual investments
as of the report date. The report usually includes performance numbers and a
discussion of market conditions and investment strategies that affected Fund
performance during the Funds' last fiscal year.
Statement of Additional Information ("SAI"): The SAI contains additional
information about the Funds and their investment strategies and policies and is
incorporated by reference (legally considered part of the prospectus).
You may visit the SEC's Internet Website (http://www.sec.gov) to view the SAI
and other information about the Funds. Also, you can obtain copies of this
information, after paying a duplicating fee, by sending your request
electronically to the following e-mail address: [email protected], or writing
to the SEC's Public Reference Section, Washington, D.C. 20549-0102. You may
review and copy information about the Funds, including the SAI, at the SEC's
Public Reference Room in Washington, D.C. To find out more about the Public
Reference Room, call the SEC at 1-202-942-8090.
- --------------------------------------------------------------------------------
Elfun
Funds
You may obtain a free copy of the SAI or the Funds' annual report and make
inquiries by contacting:
Elfun Mutual Funds
3003 Summer Street
P.O. Box 120065
Stamford, CT 06912-0074
Telephone: 1-800-242-0134
Website: http://www.elfun.org
- --------------------------------------------------------------------------------
Investment
Adviser
GE Asset Management Incorporated
P.O. Box 7900
3003 Summer Street
Stamford, CT 06904
- --------------------------------------------------------------------------------
Transfer Agent
and Custodian
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02101
- --------------------------------------------------------------------------------
Distributor and
Servicing Agent
GE Investment Distributors, Inc.
777 Long Ridge Road, Building B
Stamford, CT 06927
Investment Company Act file numbers:
Elfun Trusts: 811-00483
Elfun International Equity Fund: 811-05216
Elfun Income Fund: 811-03866
Elfun Tax-Exempt Income Fund: 811-02735
Elfun Diversified Fund: 811-05324
Elfun Money Market Fund: 811-05904
- --------------------------------------------------------------------------------
ELF-1
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
April 30, 2000
ELFUN FUNDS
3003 Summer Street, Stamford, Connecticut 06905
For information, call 1-800-242-0134 or 203-326-4040
* Elfun Trusts * Elfun Tax-Exempt Income Fund
* Elfun International Equity Fund * Elfun Income Fund
* Elfun Diversified Fund * Elfun Money Market Fund
Contents
Page
INVESTMENT STRATEGIES AND RISKS...........................................1
INVESTMENT RESTRICTIONS..................................................31
PORTFOLIO TRANSACTIONS AND TURNOVER......................................37
WHO MAY OWN FUND UNITS...................................................40
MANAGEMENT OF THE FUNDS..................................................41
PURCHASE, REDEMPTION AND EXCHANGE OF UNITS...............................47
NET ASSET VALUE..........................................................53
DIVIDENDS, DISTRIBUTIONS AND TAXES.......................................55
THE FUNDS' PERFORMANCE...................................................59
PRINCIPAL UNITHOLDERS....................................................64
FUND HISTORY AND ADDITIONAL INFORMATION..................................64
FINANCIAL STATEMENTS.....................................................65
APPENDIX................................................................A-1
This Statement of Additional Information ("SAI") supplements
the information contained in the current Prospectus of Elfun Funds dated April
30, 2000 (the "Prospectus") and should be read in conjunction with the
Prospectus. This SAI, although not a prospectus, is incorporated in its entirety
by reference into the Prospectus. Copies of the Prospectus describing each Trust
listed above (each a "Fund," collectively the "Funds") may be obtained without
charge by calling the Funds at the telephone number listed above. The Funds'
financial statements for the fiscal year ended December 31, 1999 and the
Independent Auditor's Report thereon are incorporated by reference to the Funds'
Annual Report, which may be obtained without charge by calling the Funds at the
telephone number listed above. Information regarding the status of unit-holder
accounts may be obtained by calling the Funds at the telephone number listed
above or by writing to the Funds at P.O. Box 120074, Stamford, CT 06912-0074.
Terms that are defined in the Prospectus shall have the same meanings in this
SAI.
<PAGE>
INVESTMENT STRATEGIES AND RISKS
The Prospectus discusses the investment objectives and
policies of the following six managed investment funds: Elfun Trusts, Elfun
International Equity Fund (the "International Fund" and formerly named the
"Elfun Global Fund"), Elfun Income Fund (the "Income Fund"), Elfun Tax-Exempt
Income Fund (the "Tax-Exempt Fund"), Elfun Diversified Fund (the "Diversified
Fund") and Elfun Money Market Fund (the "Money Market Fund").
Elfun Trusts. The investment objective of the Elfun Trusts is
long-term growth of capital and future income rather than current income, which
objective the Fund seeks to achieve through investment primarily in equity
securities issued by U.S. and foreign issuers. In pursuing its objective, the
Fund, under normal market conditions, will invest a majority of its assets in
equity securities.
International Fund. The investment objective of the
International Fund is long-term growth of capital and future income, which the
Fund seeks to achieve by investing primarily in foreign equity securities. In
seeking its objective, the Fund invests primarily in a portfolio of securities
issued by companies located in developed and developing countries throughout the
world, including the United States. During normal market conditions, at least
65% of the Fund's assets are invested in no fewer than three different
countries.
Income Fund. The investment objective of the Income Fund is
high level of income consistent with prudent investment management and the
preservation of capital. Capital appreciation with respect to the Fund's
portfolio securities may occur but is not an objective of the Fund.
Tax-Exempt Fund. The investment objective of the Tax-Exempt
Fund is high level of current interest income exempt from Federal income
taxation as is consistent with prudent investment management and the
preservation of capital. The Fund operates subject to a fundamental investment
policy providing that it will invest its assets so that, during any fiscal year,
at least 80% of the income generated by the Fund is exempt from Federal personal
income taxes and the Federal alternative minimum tax. Under normal conditions,
the Fund may hold a portion of its total assets in cash or money market
instruments, including taxable money market instruments.
Diversified Fund. The investment objective of the Diversified
Fund is the highest total return consistent with prudent investment management
and the preservation of capital. In seeking its objective, the Fund follows an
asset allocation strategy that provides diversification across a range of asset
classes and contemplates shifts among them from time to time.
GE Asset Management Incorporated ("GEAM") has broad latitude
in selecting the classes of investments to which the Fund's assets are
committed. Although the Fund has the authority to invest solely in equity
securities, solely in debt securities, solely in money market instruments or in
any combination of these classes of investments, GEAM anticipates that at most
times the Fund will be invested in a combination of equity and debt instruments.
<PAGE>
Money Market Fund. The investment objective of the Money
Market Fund is a high level of current income consistent with prudent investment
management and the preservation of capital. In seeking its objective, the Fund
invests in the following U.S. dollar denominated, short-term money market
instruments: (1) Government Securities; (2) debt obligations of banks, savings
and loan institutions, insurance companies and mortgage bankers; (3) commercial
paper and notes, including those with floating or variable rates of interest;
(4) debt obligations of foreign branches of U.S. banks, U.S. branches of foreign
banks and foreign branches of foreign banks; (5) debt obligations issued or
guaranteed by one or more foreign governments or any of their political
subdivisions, agencies or instrumentalities, including obligations of
supranational entities; (6) debt securities issued by foreign issuers; (7)
repurchase agreements; and any other short-term U.S. dollar denominated money
market instruments that the Trustees of the Fund determine present minimal
credit risks.
***********
Supplemental information concerning certain of the securities
and other instruments in which the Funds may invest, the investment policies and
strategies that the Funds may utilize and certain risks attendant to those
investments, policies and strategies are discussed below. Some or all of the
Funds may invest in the types of instruments and engage in the types of
strategies described in detail below. Unless otherwise indicated, all Funds are
permitted to engage in the following strategies or techniques. The Funds are not
obligated to pursue the following strategies or techniques and do not represent
that these strategies or techniques are available now or will be available at
any time in the future. A Fund will not purchase all of the following types of
securities or employ all of the following strategies unless doing so is
consistent with its investment objective.
-2-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------- ----------- ---------------- ------------- -------------- -------------- -------------
Elfun International Tax-Exempt Diversified Money
Trusts Fund Income Fund Fund Fund Market Fund
- ------------------------------- ----------- ---------------- ------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Temporary Borrowing 33 1/3 33 1/3 33 1/3 33 1/3* 33 1/3 33 1/3
- ------------------------------- ----------- ---------------- ------------- -------------- -------------- -------------
Repurchase Agreements Yes Yes Yes Yes Yes Yes
- ------------------------------- ----------- ---------------- ------------- -------------- -------------- -------------
Reverse Repurchase Agreements No No No No No Yes
- ------------------------------- ----------- ---------------- ------------- -------------- -------------- -------------
Restricted and Illiquid
Securities Yes Yes Yes Yes Yes Yes
- ------------------------------- ----------- ---------------- ------------- -------------- -------------- -------------
Structured and Indexed
Securities No No Yes No Yes No
- ------------------------------- ----------- ---------------- ------------- -------------- -------------- -------------
Purchasing and Writing
Securities Options Yes Yes Yes Yes Yes No
- ------------------------------- ----------- ---------------- ------------- -------------- -------------- -------------
Purchasing and Writing
Securities Index Options Yes Yes Yes Yes Yes No
- ------------------------------- ----------- ---------------- ------------- -------------- -------------- -------------
Futures and Options on Futures Yes Yes Yes Yes Yes No
- ------------------------------- ----------- ---------------- ------------- -------------- -------------- -------------
Forward Currency Transactions No Yes Yes No Yes No
- ------------------------------- ----------- ---------------- ------------- -------------- -------------- -------------
Options on Foreign Currencies No Yes Yes No Yes No
- ------------------------------- ----------- ---------------- ------------- -------------- -------------- -------------
Maximum Investment in
Debt Securities 35% 35% 100% 100% 100% 100%
(maximum of (maximum of (maximum of
25% BBB by 25% BBB by 25% BBB by
S&P or Baa S&P or Baa S&P or Baa
by Moody's by Moody's by Moody's
or equivalent or equivalent or
equivalent
- ------------------------------- ----------- ---------------- ------------- -------------- -------------- -------------
Maximum Investment in
High Yield Securities 5% None 10% BB or B 10% BB or B 10% BB or B None
Securities by S&P or Ba by S&P or Ba by S&P or
or B by or B by Ba or B by
Moody's or Moody's or Moody's or
equivalent equivalent equivalent
- ------------------------------- ----------- ---------------- ------------- -------------- -------------- -------------
Maximum Investment in Foreign
Securities 35%** 100% 35%** None 20%** 25%**
- ------------------------------- ----------- ---------------- ------------- -------------- -------------- -------------
When-Issued and Delayed
Delivered Securities Yes Yes Yes Yes Yes Yes
- ------------------------------- ----------- ---------------- ------------- -------------- -------------- -------------
Lending Portfolio Securities Yes Yes Yes Yes Yes Yes
- ------------------------------- ----------- ---------------- ------------- -------------- -------------- -------------
Rule 144A Securities Yes Yes Yes Yes Yes Yes
- ------------------------------- ----------- ---------------- ------------- -------------- -------------- -------------
Debt Obligations of
Supranational Agencies No No Yes No Yes Yes
- ------------------------------- ----------- ---------------- ------------- -------------- -------------- -------------
Depositary Receipts Yes Yes No No Yes No
- ------------------------------- ----------- ---------------- ------------- -------------- -------------- -------------
Securities of Other
Investment Funds Yes Yes Yes No Yes Yes
- ------------------------------- ----------- ---------------- ------------- -------------- -------------- -------------
Municipal Leases No No No Yes Yes No
- ------------------------------- ----------- ---------------- ------------- -------------- -------------- -------------
Floating and Variable Rate
Instruments No No*** Yes Yes Yes Yes
</TABLE>
-3-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------- ----------- ---------------- ------------- -------------- -------------- -------------
Elfun International Tax-Exempt Diversified Money
Trusts Fund Income Fund Fund Fund Market Fund
- ------------------------------- ----------- ---------------- ------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Participation Interests in
Municipal Obligations No No Yes Yes Yes No
- ------------------------------- ----------- ---------------- ------------- -------------- -------------- -------------
Zero Coupon Obligations No No Yes Yes Yes No
- ------------------------------- ----------- ---------------- ------------- -------------- -------------- -------------
Municipal Obligations
Components No No No Yes Yes No
- ------------------------------- ----------- ---------------- ------------- -------------- -------------- -------------
Custodial Receipts on
Municipal Obligations No No No Yes Yes No
- ------------------------------- ----------- ---------------- ------------- -------------- -------------- -------------
Mortgage Related Securities,
including CMO's No No Yes No Yes No
- ------------------------------- ----------- ---------------- ------------- -------------- -------------- -------------
Government Stripped Mortgage
Related Securities No No Yes No Yes No
- ------------------------------- ----------- ---------------- ------------- -------------- -------------- -------------
Asset Backed Securities and
Receivable-Backed Securities No No Yes No Yes No
- ------------------------------- ----------- ---------------- ------------- -------------- -------------- -------------
Mortgage Dollar Rolls No No Yes No Yes No
- ------------------------------- ----------- ---------------- ------------- -------------- -------------- -------------
Short Sales Against the Box No No No No No Yes
- ------------------------------- ----------- ---------------- ------------- -------------- -------------- -------------
</TABLE>
* The Elfun Tax-Exempt Fund also may borrow from banks for long-term or
leveraging purposes in an amount not to exceed 10% of total assets.
** This limitation excludes ADRs and securities of a foreign issuer with a
class of securities registered with the SEC and listed on a U.S. national
securities exchange or traded on the NASDAQ National Market or NASDAQ Small
Cap Market.
*** Excludes commercial paper and notes with variable and floating rates of
interest.
Strategies Available to All Funds
Money Market Instruments. The types of money market
instruments in which each Fund, other than the Money Market Fund, may invest
directly or indirectly through its investment in the GEI Short-Term Investment
Fund (the "Investment Fund"), described below, are as follows: (i) securities
issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities ("Government Securities"), (ii) debt obligations of banks,
savings and loan institutions, insurance companies and mortgage bankers, (iii)
commercial paper and notes, including those with variable and floating rates of
interest, (iv) debt obligations of foreign branches of U.S. banks, U.S. branches
of foreign banks and foreign branches of foreign banks, (v) debt obligations
issued or guaranteed by one or more foreign governments or any of their
political subdivisions, agencies or instrumentalities, including obligations of
supranational entities, (vi) debt securities issued by foreign issuers and (vii)
repurchase agreements. Each Fund, other than the Money Market Fund, may also
invest in the Investment Fund, an investment fund created specifically to serve
as a vehicle for the collective investment of cash balances of the
-4-
<PAGE>
Funds (other than the Money Market Fund) and other accounts advised by GEAM. The
Investment Fund invests exclusively in the money market instruments described in
(i) through (vii) above. The Investment Fund is advised by GEAM. No advisory fee
is charged by GEAM to the Investment Fund, nor will a Fund incur any sales
charge, redemption fee, distribution fee or service fee in connection with its
investments in the Investment Fund. The Income Fund and the Tax-Exempt Fund are
authorized to invest up to 25% of their assets in the Investment Fund; Elfun
Trusts, the Diversified Fund and the International Fund may invest up to 5% of
their assets in the Investment Fund.
Government Securities in which the Funds may invest are debt
obligations of varying maturities issued by the U.S. Treasury or issued or
guaranteed by the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration,
Government National Mortgage Association ("GNMA"), General Services
Administration, Central Bank for Cooperatives, Federal Farm Credit Banks,
Federal Home Loan Banks, Federal Home Loan Mortgage Corporation ("FHLMC"),
Federal Intermediate Credit Banks, Federal Land Banks, Federal National Mortgage
Association ("FNMA"), Federal Deposit Insurance Corporation ("FDIC"), Maritime
Administration, Tennessee Valley Authority, District of Columbia Armory Board,
Student Loan Marketing Association and Resolution Trust Corporation. Direct
obligations of the U.S. Treasury include a variety of securities that differ in
their interest rates, maturities and dates of issuance.
Certain of the Government Securities that may be held by the
Funds are instruments that are supported by the full faith and credit of the
United States, whereas other Government Securities that may be held by the Funds
are supported by the right of the issuer to borrow from the U.S. Treasury or are
supported solely by the credit of the instrumentality. Because the U.S.
Government is not obligated by law to provide support to an instrumentality that
it sponsors, a Fund will invest in obligations issued by an instrumentality of
the U.S. Government, only if GEAM, as the Fund's investment adviser, determines
that the instrumentality's credit risk does not make its securities unsuitable
for investment by the Fund.
Each Fund, other than the Money Market Fund, may invest in
money market instruments issued or guaranteed by foreign governments or by any
of their political subdivisions, authorities, agencies or instrumentalities.
Elfun Trusts, the International Fund and the Tax-Exempt Fund may invest in these
instruments only if they are rated AAA or AA by Standard & Poors Ratings
Services, a division of McGraw-Hill Companies, Inc. ("S&P") or Aaa or Aa by
Moody's Investor's Service, Inc. ("Moody's") or have received an equivalent
rating from another nationally recognized statistical rating organization
("NRSRO"), or, if unrated, are deemed by GEAM to be of equivalent quality. The
Diversified Fund and the Income Fund may invest in such money market instruments
if they are rated no lower than B by S&P or Moody's or have received an
equivalent rating from another NRSRO, or, if unrated, are deemed by GEAM to be
of equivalent quality. Commercial paper held by a Fund, other than the Money
Market Fund, may be rated no lower than A-2 by S&P or Prime-2 by Moody's or the
equivalent from another NRSRO, or if unrated, must be issued by an issuer having
an outstanding unsecured debt issue then rated within the three highest
categories. A description of the rating systems of Moody's and S&P is contained
in the Appendix.
-5-
<PAGE>
Lending Portfolio Securities. Each Fund is authorized to lend
its portfolio securities to well-known and recognized U.S. and foreign brokers,
dealers and banks. These loans, if and when made, may not exceed, in the case of
the Tax-Exempt Fund, the Income Fund and the Money Market Fund, 33-1/3% of the
Fund's net assets, or, in the case of Elfun Trusts, the International Fund or
the Diversified Fund, 30% of the Fund's net assets taken at value. The Funds'
loans of securities will be collateralized by cash, letters of credit or
Government Securities. The Funds will retain the right to all interest and
dividends payable with respect to the loaned securities. When the Funds lend
portfolio securities they charge interest at reasonable rates and retain the
ability to terminate the loan at any time. Cash or instruments collateralizing a
Fund's loans of securities are segregated and maintained at all times with the
Fund's custodian, or with a designated sub-custodian, in an amount at least
equal to the current market value of the loaned securities. In lending
securities, a Fund will be subject to risks, which, like those associated with
other extensions of credit, include possible loss of rights in the collateral
should the borrower fail financially. Income derived by the Tax-Exempt Fund on
any loan of its portfolio securities will not be exempt from Federal income
taxation.
A Fund will adhere to the following conditions whenever its
portfolio securities are loaned: (1) the Fund must receive at least 100% cash
collateral or equivalent securities from the borrower; (2) the borrower must
increase the collateral whenever the market value of the securities loaned rises
above the level of the collateral; (3) the Fund must be able to terminate the
loan at any time; (4) the Fund must receive reasonable interest on the loan, as
well as any dividends, interest or other distributions on the loaned securities,
and any increase in market value; (5) the Fund may pay only reasonable custodian
fees in connection with the loan; and (6) voting rights on the loaned securities
may pass to the borrower except that, if a material event adversely affecting
the investment in the loaned securities occurs, the Fund's Board of Trustees
must terminate the loan and regain the right to vote the securities. From time
to time, a Fund may pay a part of the interest earned from the investment of
collateral received for securities loaned to the borrower and/or a third party
that is unaffiliated with the Fund and is acting as a "finder".
Bank Obligations. Domestic commercial banks organized under
Federal law are supervised and examined by the U.S. Comptroller of the Currency
and are required to be members of the Federal Reserve System and to be insured
by the FDIC. Foreign branches of U.S. banks and foreign banks are not regulated
by U.S. banking authorities and generally are not bound by mandatory reserve
requirements, loan limitations, accounting, auditing and financial reporting
standards comparable to U.S. banks. Obligations of foreign branches of U.S.
banks and foreign banks are subject to the risks associated with investing in
foreign securities generally. These obligations entail risks that are different
from those of investments in obligations in domestic banks, including foreign
economic and political developments outside the United States, foreign
governmental restrictions that may adversely affect payment of principal and
interest on the obligations, foreign exchange controls and foreign withholding
or other taxes on income.
A U.S. branch of a foreign bank may or may not be subject to
reserve requirements imposed by the Federal Reserve System or by the state in
which the branch is
-6-
<PAGE>
located if the branch is licensed in that state. In addition, branches licensed
by the Comptroller of the Currency and branches licensed by certain states
("State Branches") may or may not be required to: (1) pledge to the regulator by
depositing assets with a designated bank within the state, an amount of its
assets equal to 5% of its total liabilities; and (2) maintain assets within the
state in an amount equal to a specified percentage of the aggregate amount of
liabilities of the foreign bank payable at or through all of its agencies or
branches within the state. The deposits of State Branches may not necessarily be
insured by the FDIC. In addition, less information may be available to the
public about a U.S. branch of a foreign bank than about a U.S. bank.
Debt Instruments. A debt instrument held by a Fund will be
affected by general changes in interest rates that will in turn result in
increases or decreases in the market value of those obligations. The market
value of debt instruments in a Fund's portfolio can be expected to vary
inversely to changes in prevailing interest rates. In periods of declining
interest rates, the yield of a Fund holding a significant amount of debt
instruments will tend to be somewhat higher than prevailing market rates, and in
periods of rising interest rates, the Fund's yield will tend to be somewhat
lower. In addition, when interest rates are falling, money received by such a
Fund from the continuous sale of its shares will likely be invested in portfolio
instruments producing lower yields than the balance of its portfolio, thereby
reducing the Fund's current yield. In periods of rising interest rates, the
opposite result can be expected to occur.
Ratings as Investment Criteria. The ratings of NRSROs such as
S&P or Moody's represent the opinions of those organizations as to the quality
of securities that they rate. Although these ratings, which are relative and
subjective and are not absolute standards of quality, are used by GEAM as
initial criteria for the selection of portfolio securities on behalf of the
Funds, GEAM also relies upon its own analysis to evaluate potential investments.
Subsequent to its purchase by a Fund, an issue of securities
may cease to be rated or its rating may be reduced below the minimum required
for purchase by the Fund. Although neither event will require the sale of the
securities by a Fund, other than the Money Market Fund, GEAM will consider the
event in its determination of whether the Fund should continue to hold the
securities. In the event of a lowering of the rating of a security held by the
Money Market Fund or a default by the issuer of the security, the Fund will
dispose of the security as soon as practicable, unless the Fund's Board of
Trustees determines that disposal of the security would not be in the best
interests of the Fund. To the extent that a NRSRO's ratings change as a result
of a change in the NRSRO or its rating system, the Funds will attempt to use
comparable ratings as standards for their investments in accordance with their
investment objectives and policies.
Certain Investment Grade Debt Obligations. Although
obligations rated BBB by S&P or Baa by Moody's are considered investment grade,
they may be viewed as being subject to greater risks than other investment grade
obligations. Obligations rated BBB by S&P are regarded as having only an
adequate capacity to pay principal and interest and those rated Baa by Moody's
are considered medium-grade obligations that lack outstanding investment
characteristics and have speculative characteristics as well.
-7-
<PAGE>
Rule 144A Securities. Each of the Funds may purchase Rule 144A
Securities. Certain Rule 144A Securities may be considered illiquid and
therefore subject to a Fund's limitation on the purchase of illiquid securities,
unless the Board determines on an ongoing basis that an adequate trading market
exists for the Rule 144A Securities. A Fund's purchase of Rule 144A Securities
could have the effect of increasing the level of illiquidity in the Fund to the
extent that qualified institutional buyers become uninterested for a time in
purchasing Rule 144A Securities held by the Fund. The Board has established
standards and procedures for determining the liquidity of a Rule 144A Security
and monitors GEAM's implementation of the standards and procedures. The ability
to sell to qualified institutional buyers under Rule 144A is a recent
development and GEAM cannot predict how this market will develop.
When-Issued and Delayed-Delivery Securities. To secure prices
or yields deemed advantageous at a particular time, a Fund may purchase
securities on a when-issued or delayed-delivery basis, in which case, delivery
of the securities occurs beyond the normal settlement period; no payment for or
delivery of the securities is made by, and no income accrues to, the Fund,
however, prior to the actual delivery or payment by the other party to the
transaction. Each Fund will enter into when-issued or delayed-delivery
transactions for the purpose of acquiring securities and not for the purpose of
leverage. When-issued securities purchased by a Fund may include securities
purchased on a "when, as and if issued" basis under which the issuance of the
securities depends on the occurrence of a subsequent event, such as approval of
a merger, corporate reorganization or debt restructuring. Cash or other liquid
assets in an amount equal to the amount of each Fund's when-issued or
delayed-delivery purchase commitments will be segregated with the Fund's
custodian, or with a designated subcustodian, in order to avoid or limit any
leveraging effect that may arise in the purchase of a security pursuant to such
a commitment.
Securities purchased on a when-issued or delayed-delivery
basis may expose a Fund to risk because the securities may experience
fluctuations in value prior to their delivery. Purchasing securities on a
when-issued or delayed-delivery basis can involve the additional risk that the
return available in the market when the delivery takes place may be higher than
that applicable at the time of the purchase. This characteristic of when-issued
and delayed-delivery securities could result in exaggerated movements in a
Fund's net asset value.
When a Fund engages in when-issued or delayed-delivery
securities transactions, it relies on the selling party to consummate the trade.
Failure of the seller to do so may result in the Funds incurring a loss or
missing an opportunity to obtain a price considered to be advantageous.
Temporary Defensive Positions. During periods when GEAM
believes there are unstable market, economic, political or currency conditions
domestically or abroad, GEAM may assume, on behalf of a Fund, a temporary
defensive posture and (i) without limitation hold cash and/or invest in money
market instruments, or (ii) restrict the securities markets in which the Fund's
assets will be invested by investing those assets in securities markets deemed
by GEAM to be conservative in light of the Fund's investment objective and
policies. Under normal circumstances, each Fund may invest a portion of its
total assets in cash and/or money market
-8-
<PAGE>
instruments for cash management purposes, pending investment in accordance with
the Fund's investment objective and policies and to meet operating expenses. To
the extent that a Fund, other than the Money Market Fund, holds cash or invests
in money market instruments, it may not achieve its investment objective.
Strategies Available to Some But Not All Funds
Low-rated Debt Securities. Certain Funds are authorized to
invest in securities rated lower than investment-grade (sometimes referred to as
"junk bonds"). Low-rated and comparable unrated securities (collectively
referred to as "low-rated" securities) likely have quality and protective
characteristics that, in the judgment of a rating organization, are outweighed
by large uncertainties or major risk exposures to adverse conditions, and are
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. Securities
in the lowest rating categories may be in default or may present substantial
risks of default.
Although the market values of certain low-rated securities
tend to react less to fluctuations in interest rate levels than market values of
higher-rated securities, the market values of certain low-rated securities tend
to be more sensitive to individual corporate developments and changes in
economic conditions than higher-rated securities. In addition, low-rated
securities generally present a higher degree of credit risk. Issuers of
low-rated securities are often highly leveraged and may not have more
traditional methods of financing available to them, so that their ability to
service their debt obligations during an economic downturn or during sustained
periods of rising interest rates may be impaired. The risk of loss due to
default by these issuers is significantly greater because low-rated securities
generally are unsecured and frequently are subordinated to the prior payment of
senior indebtedness. A Fund may incur additional expenses to the extent that it
is required to seek recovery upon a default in the payment of principal or
interest on its portfolio holdings. The existence of limited markets for
low-rated securities may diminish the Fund's ability to obtain accurate market
quotations for purposes of valuing the securities held by a Fund and calculating
the Fund's net asset value.
Repurchase and Reverse Repurchase Agreements. Each Fund may
engage in repurchase agreement transactions with respect to instruments in which
the Fund is authorized to invest. The Funds may engage in repurchase agreement
transactions with certain member banks of the Federal Reserve System and with
certain dealers listed on the Federal Reserve Bank of New York's list of
reporting dealers. Under the terms of a typical repurchase agreement, which is
deemed a loan for purposes of the 1940 Act, a Fund would acquire an underlying
obligation for a relatively short period (usually from one to seven days)
subject to an obligation of the seller to repurchase, and the Fund to resell,
the obligation at an agreed-upon price and time, thereby determining the yield
during the Fund's holding period. This arrangement results in a fixed rate of
return that is not subject to market fluctuations during the Fund's holding
period. The value of the securities underlying a repurchase agreement of a Fund
are monitored on an ongoing basis by GEAM to ensure that the value is at least
equal at all times to the total amount of the repurchase obligation, including
interest. GEAM also monitors, on an ongoing basis to evaluate potential risks,
the creditworthiness of those banks and dealers with which a Fund enters into
repurchase
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agreements. Income derived by the Tax-Exempt Fund when engaging in a repurchase
agreement is not exempt from Federal income taxation.
The Money Market Fund may engage in reverse repurchase
agreements, subject to its investment restrictions. A reverse repurchase
agreement, which is considered a borrowing by a Fund, involves a sale by the
Fund of securities that it holds concurrently with an agreement by the Fund to
repurchase the same securities at an agreed upon price and date. The Money
Market Fund will use the proceeds of reverse repurchase agreements to provide
liquidity to meet redemption requests and to make cash payments of dividends and
distributions when the sale of the Fund's securities is considered to be
disadvantageous. Cash, Government Securities or other liquid assets equal in
value to a Fund's obligations with respect to reverse repurchase agreements are
segregated and maintained with the Fund's custodian or designated sub-custodian.
A Fund entering into a repurchase agreement will bear a risk
of loss in the event that the other party to the transaction defaults on its
obligations and the Fund is delayed or prevented from exercising its rights to
dispose of the underlying securities. The Fund will be, in particular, subject
to the risk of a possible decline in the value of the underlying securities
during the period in which the Fund seeks to assert its right to them, the risk
of incurring expenses associated with asserting those rights and the risk of
losing all or a part of the income from the agreement.
A reverse repurchase agreement involves the risk that the
market value of the securities retained by a Fund may decline below the price of
the securities the Fund has sold but is obligated to repurchase under the
agreement. In the event the buyer of securities under a reverse repurchase
agreement files for bankruptcy or becomes insolvent, a Fund's use of the
proceeds of the agreement may be restricted pending a determination by the
party, or its trustee or receiver, whether to enforce the Fund's obligation to
repurchase the securities.
Non-Publicly Traded and Illiquid Securities. The Tax-Exempt
Fund and the Money Market Fund may each invest up to 5% of its assets in
non-publicly traded securities. Elfun Trusts, the International Fund, the
Diversified Fund and the Income Fund may each invest up to 10% of its assets in
such securities. Non-publicly traded securities are securities that are subject
to contractual or legal restrictions on transfer, excluding for purposes of this
restriction, Rule 144A Securities, that have been determined to be liquid by
each Fund's Board of Trustees based upon the trading markets for the securities.
In addition, each Fund, other than the Money Market Fund and the Tax-Exempt
Fund, may invest up to 10% of its assets in "illiquid securities." The Money
Market Fund may not, under any circumstance, invest in illiquid securities. In
no event, however, will any Fund's investments in illiquid and non-publicly
traded securities, in the aggregate, exceed 10% of its assets (5% in the case of
the Tax-Exempt Fund). Illiquid securities are securities that cannot be disposed
of by a Fund within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the securities. Illiquid
securities that are held by a Fund may take the form of options traded
over-the-counter, repurchase agreements maturing in more than seven days,
certain mortgage related securities and securities subject to restrictions on
resale that GEAM has determined are not liquid under guidelines established by
the Fund's Board of Trustees. In addition, securities which, if
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sold, might position the Income Fund or the Tax-Exempt Fund as an underwriter
under the Securities Act of 1933, as amended will be deemed to be illiquid.
Non-publicly traded securities may be less liquid than
publicly traded securities. Although these securities may be resold in privately
negotiated transactions, the prices realized from these sales could be less than
those originally paid by a Fund. In addition, companies whose securities are not
publicly traded are not subject to the disclosure and other investor protection
requirements that may be applicable if their securities were publicly traded. A
Fund's investments in illiquid securities are subject to the risk that should
the Fund desire to sell any of these securities when a ready buyer is not
available at a price that GEAM deems representative of their value, the value of
the Fund's net assets could be adversely affected.
Investment in Foreign Securities. Investing in securities
issued by foreign companies and governments, including securities issued in the
form of depositary receipts, involves considerations and potential risks not
typically associated with investing in obligations issued by the U.S. Government
and U.S. corporations. Less information may be available about foreign companies
than about U.S. companies, and foreign companies generally are not subject to
uniform accounting, auditing and financial reporting standards or to other
regulatory practices and requirements comparable to those applicable to U.S.
companies. The values of foreign investments are affected by changes in currency
rates or exchange control regulations, restrictions or prohibitions on the
repatriation of foreign currencies, 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 also incurred in connection with conversions
between various currencies. In addition, foreign brokerage commissions are
generally higher than those charged 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
expropriation, confiscatory taxation, lack of uniform accounting and auditing
standards, limitations on the use or removal of funds or other assets (including
the withholding of dividends), and potential difficulties in enforcing
contractual obligations, and could be subject to extended clearance and
settlement periods.
Depositary Receipts. Elfun Trusts, the Diversified Fund and
the International Fund may each invest in securities of foreign issuers in the
form of American Depositary Receipts ("ADRs") and European Depositary Receipts
("EDRs"), which are sometimes referred to as Continental Depositary Receipts
("CDRs"). ADRs are publicly traded on exchanges or over-the-counter in the
United States and are issued through "sponsored" or "unsponsored" arrangements.
In a sponsored ADR arrangement, the foreign issuer assumes the obligation to pay
some or all of the depositary's transaction fees, whereas under an unsponsored
arrangement, the foreign issuer assumes no obligations and the depositary's
transaction fees are paid directly by the ADR holders. In addition, less
information is available in the United States about an unsponsored ADR than
about a sponsored ADR. Each of these Funds may invest in ADRs through both
sponsored and unsponsored arrangements. EDRs and CDRs are generally issued by
foreign banks and evidence ownership of either foreign or domestic securities.
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Currency Exchange Rates. A Fund's unit value may change
significantly when the currencies, other than the U.S. dollar, in which the
Fund's portfolio investments are denominated, strengthen or weaken against the
U.S. dollar. Currency exchange rates generally are determined by the forces of
supply and demand in the foreign exchange markets and the relative merits of
investments in different countries as seen from an international perspective.
Currency exchange rates can also be affected unpredictably by intervention by
U.S. or foreign governments or central banks or by currency controls or
political developments in the United States or abroad.
Investing in Developing Countries. Each Fund other than the
Tax-Exempt Fund may invest in securities issued by companies located in
developing countries. Investing in securities issued by companies located in
developing countries involves not only the risks described above with respect to
investing in foreign securities, but also other risks, including exposure to
economic structures that are generally less diverse and mature than, and to
political systems that can be expected to have less stability than, those of
developed countries. Other characteristics of developing countries that may
affect investment in their markets include certain national policies that may
restrict investment by foreigners in issuers or industries deemed sensitive to
relevant national interests and the absence of developed legal structures
governing private and foreign investments and private property. The typically
small size of the markets for securities issued by companies located in
developing countries and the possibility of a low or nonexistent volume of
trading in those securities may also result in a lack of liquidity and in price
volatility of those securities.
Securities of Other Investment Companies. Elfun Trusts, the
International Fund, the Income Fund and the Diversified Fund may each invest in
investment funds that invest principally in securities in which the Fund is
authorized to invest. The Money Market Fund may invest only in other money
market funds. Under the Investment Company Act of 1940, as amended (the "1940
Act"), a Fund may hold securities of another investment company in amounts which
(a) do not exceed 3% of the total outstanding voting stock of such company, (b)
do not exceed 5% of the value of the Fund's total assets and (c) when added to
all other investment company securities held by the Fund, do not exceed 10% of
the value of the Fund's total assets. Investments by a Fund (other than the
Money Market Fund) in the Investment Fund, created specifically to serve as a
vehicle for the collective investment of cash balances of the Funds (other than
the Money Market Fund) and other accounts advised by GEAM is not considered an
investment in another investment company for purposes of this restriction. To
the extent a Fund invests in other investment companies, the Fund's unit-holders
will incur certain duplicative fees and expenses, including investment advisory
fees.
Covered Option Writing. Each Fund, other than the Money Market
Fund, may write covered put and call options on securities. A Fund will realize
fees (referred to as "premiums") for granting the rights evidenced by the
options. A put option embodies the right of its purchaser to compel the writer
of the option to purchase from the option holder an underlying security at a
specified price at any time during the option period. In contrast, a call option
embodies the right of its purchaser to compel the writer of the option to sell
to the option holder an underlying security at a specified price at any time
during the option period.
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The Funds with option-writing authority will write only
options that are covered. A call option written by a Fund will be deemed covered
(1) if the Fund owns the securities underlying the call or has an absolute and
immediate right to acquire those securities without additional cash
consideration upon conversion or exchange of other securities held in its
portfolio, (2) if the Fund holds a call at the same exercise price for the same
exercise period and on the same securities as the call written, (3) in the case
of a call option on a stock index, if the Fund owns a portfolio of securities
substantially replicating the movement of the index underlying the call option,
or (4) if, at the time the call is written, an amount of cash, Government
Securities or other liquid assets equal to the fluctuating market value of the
optioned securities, is segregated with the Fund's custodian or a designated
sub-custodian. A put option will be deemed covered (1) if, at the time the put
is written, an amount of cash, Government Securities or other liquid assets
having a value at least equal to the exercise price of the underlying securities
is segregated with the Fund's custodian or a designated sub-custodian, or (2) if
the Fund continues to own an equivalent number of puts of the same "series"
(that is, puts on the same underlying securities having the same exercise prices
and expiration dates as those written by the Fund), or an equivalent number of
puts of the same "class" (that is, puts on the same underlying securities) with
exercise prices greater than those that it has written (or, if the exercise
prices of the puts it holds are less than the exercise prices of those it has
written, the difference is segregated with the custodian or a designated
sub-custodian).
The principal reason for writing covered call options on a
securities portfolio is to attempt to realize, through the receipt of premiums,
a greater return than would be realized on the securities alone. In return for a
premium, the writer of a covered call option forfeits the right to any
appreciation in the value of the underlying security above the strike price for
the life of the option (or until a closing purchase transaction can be
effected). Nevertheless, the call writer retains the risk of a decline in the
price of the underlying security. Similarly, the principal reason for writing
covered put options is to realize income in the form of premiums. The writer of
a covered put option accepts the risk of a decline in the price of the
underlying security. The size of the premiums that a Fund may receive may be
adversely affected as new or existing institutions, including other investment
companies, engage in or increase their option-writing activities.
Options written by a Fund will normally have expiration dates
between one and nine months from the date written. The exercise price of the
options may be below, equal to or above the market values of the underlying
securities at the times the options are written. In the case of call options,
these exercise prices are referred to as "in-the-money," "at-the-money" and
"out-of-the-money," respectively.
So long as the obligation of a Fund as the writer of an option
continues, the Fund may be assigned an exercise notice by the broker-dealer
through which the option was sold, requiring the Fund to deliver, in the case of
a call, or take delivery of, in the case of a put, the underlying security
against payment of the exercise price. This obligation terminates when the
option expires or the Fund effects a closing purchase transaction. A Fund can no
longer effect a closing purchase transaction with respect to an option once it
has been assigned an exercise notice. To secure its obligation to deliver the
underlying security when it writes a call option, or
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to pay for the underlying security when it writes a put option, a Fund will be
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the Options Clearing Corporation (the "Clearing
Corporation") and of the securities exchange on which the option is written.
A Fund may engage in a closing purchase transaction to realize
a profit, to prevent an underlying security from being called or put or, in the
case of a call option, to unfreeze an underlying security (thereby permitting
its sale or the writing of a new option on the security prior to the outstanding
option's expiration). To effect a closing purchase transaction, a Fund would
purchase, prior to the holder's exercise of an option that the Fund has written,
an option of the same series as that on which the Fund desires to terminate its
obligation. The obligation of a Fund under an option that it has written would
be terminated by a closing purchase transaction, but the Fund would not be
deemed to own an option as the result of the transaction. An option position may
be closed out only if a secondary market exists for an option of the same series
on a recognized securities exchange or in the over-the-counter market. In light
of the need for a secondary market in which to close an option position, the
Funds are expected to purchase only call or put options issued by the Clearing
Corporation. GEAM expects that the Funds will write options, other than those on
Government Securities, only on national securities exchanges. Options on
Government Securities may be written by the Funds in the over-the-counter
market.
A Fund may realize a profit or loss upon entering into closing
transactions. When a Fund has written an option, for example, it will realize a
profit if the cost of the closing purchase transaction is less than the premium
received upon writing the original option; the Fund will incur a loss if the
cost of the closing purchase transaction exceeds the premium received upon
writing the original option. When a Fund has purchased an option and engages in
a closing sale transaction, whether the Fund realizes a profit or loss will
depend upon whether the amount received in the closing sale transaction is more
or less than the premium the Fund initially paid for the original option plus
the related transaction costs.
No assurance can be given that a Fund will be able to affect
closing purchase transactions at a desired time. The ability of a Fund to engage
in closing purchase transactions with respect to options depends on the
existence of a liquid secondary market. Although a Fund will generally purchase
or write securities options only if a liquid secondary market appears to exist
for the option purchased or sold, no such secondary market may exist or the
market may cease to exist.
Option writing for a Fund may be limited by position and
exercise limits established by U.S. securities exchanges and the National
Association of Securities Dealers, Inc. and by requirements of the Internal
Revenue Code of 1986, as amended (the "Code") for qualification as a regulated
investment company. In addition to writing covered put and call options to
generate current income, a Fund may enter into options transactions as hedges to
reduce investment risk, generally by making an investment expected to move in
the opposite direction of a portfolio position. A hedge is designed to offset a
loss on a portfolio position with a gain on the hedge position; at the same
time, however, a properly correlated hedge will result in a gain on the
portfolio's position being offset by a loss on the hedge position.
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A Fund will engage in hedging transactions only when deemed
advisable by GEAM. Successful use by a Fund of options will depend on GEAM's
ability to predict correctly movements in the direction of the securities
underlying the option used as a hedge. Losses incurred in hedging transactions
and the costs of these transactions will affect a Fund's performance.
Securities Index Options. In seeking to hedge all or a portion
of its investments, a Fund, other than the Money Market Fund, may purchase and
write put and call options on securities indexes listed on U.S. or foreign
securities exchanges or traded in the over-the-counter market, which indexes
include securities held in the Fund's portfolio. The Funds with such
option-writing authority may write only covered options. A Fund may also use
securities index options as a means of participating in a securities market
without making direct purchases of securities.
A Fund may purchase and write put and call options on
securities indices or securities index futures contracts that are traded on a
U.S. exchange or board of trade or a foreign exchange, to the extent permitted
under rules and interpretations of the Commodity Futures Trading Commission
("CFTC"), as a hedge against changes in market conditions and interest rates,
and for duration management, and may enter into closing transactions with
respect to those options to terminate existing positions. A securities index
fluctuates with changes in the market values of the securities included in the
index. Securities index options may be based on a broad or narrow market index
or on an industry or market segment.
A securities index option written by a Fund will be deemed
covered in any manner permitted under the 1940 Act or the rules and regulations
thereunder or any other method determined by the SEC to be permissible.
A securities index measures the movement of a certain group of
securities by assigning relative values to the securities included in the index.
Options on securities indices are generally similar to options on specific
securities. Unlike options on securities, however, options on securities indices
do not involve the delivery of an underlying security. Unlike a securities
option, which contemplates the right to take or make delivery of securities at a
specified price, an option on a stock index gives the holder the right to
receive a cash "exercise settlement amount" equal to (1) the amount, if any, by
which the fixed exercise price of the option exceeds (in the case of a put) or
is less than (in the case of a call) the closing value of the securities index
on the date of exercise, multiplied by (2) a fixed "index multiplier." Receipt
of this cash amount will depend upon the closing level of the securities index
upon which the option is based being greater than, in the case of a call, or
less than, in the case of a put, the exercise price of the option. The amount of
cash received will be equal to the difference between the closing price of the
index and the exercise price of the option expressed in dollars times a
specified multiple. The writer of the option is obligated, in return for the
premium received, to make delivery of this amount. The writer may offset its
position in securities index options prior to expiration by entering into a
closing transaction on an exchange, which is accomplished by purchasing an
option of the same series as the option previously written, or it may allow the
option to expire unexercised.
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The effectiveness of purchasing or writing stock index options
as a hedging technique will depend upon the extent to which price movements in
the portion of a securities portfolio being hedged correlate with price
movements of the stock index selected. Because the value of an index option
depends upon movements in the level of the index rather than the price of a
particular stock, whether a Fund realizes a gain or loss from the purchase or
writing of options on an index depends upon movements in the level of stock
prices in the stock market generally or, in the case of certain indices, in an
industry or market segment, rather than movements in the price of a particular
stock. As a result, successful use by a Fund of options on stock indices will be
subject to GEAM's ability to predict correctly movements in the direction of the
stock market generally or of a particular industry. This ability contemplates
different skills and techniques from those used in predicting changes in the
price of individual stocks.
Securities index options are subject to position and exercise
limits and other regulations imposed by the exchange on which they are traded.
The ability of a Fund to engage in closing purchase transactions with respect to
securities index options depends on the existence of a liquid secondary market.
Although a Fund will generally purchase or write securities index options only
if a liquid secondary market for the options purchased or sold appears to exist,
no such secondary market may exist, or the market may cease to exist at some
future date, for some options. No assurance can be given that a closing purchase
transaction can be effected when GEAM desires that a Fund engage in such a
transaction.
Futures and Related Options. Each Fund, other than the Money
Market Fund, may enter into interest rate, financial and stock or bond index
futures contracts and options on financial futures contracts, securities
(limited to debt securities in the case of the Tax-Exempt Fund) and, in the case
of the Diversified Fund, interest rate futures contracts and options on interest
rate futures contracts that are traded on a U.S. or foreign exchange or board of
trade approved by the CFTC or in the over-the-counter market. If entered into,
these transactions will be made for the following reasons: (1) for the purpose
of hedging against the effects of changes in the value of portfolio securities
due to anticipated changes in interest rates, stock market conditions and
currency market conditions, (2) to gain stock, bond, or currency market exposure
for accumulating and residual cash positions, (3) for duration management, (4)
when such transactions are economically appropriate to the reduction of risks
inherent in the management of the Fund involved, and (5) for non-hedging
purposes such as seeking additional income or otherwise seeking to increase
total return. No Fund will enter into a transaction involving futures and
options on futures for speculative purposes.
An interest rate futures contract provides for the future sale
by one party and the purchase by the other party of a specified amount of a
particular financial instrument (debt security) at a specified price, date, time
and place. Financial futures contracts are contracts that obligate the holder to
deliver (in the case of a futures contract that is sold) or receive (in the case
of a futures contract that is purchased) at a future date a specified quantity
of a financial instrument, specified securities, or the cash value of a
securities index. A municipal bond index futures contract is based on an index
of long-term, tax-exempt municipal bonds and a corporate bond index futures
contract is based on an index of corporate bonds. Stock index futures contracts
are based on indices that reflect the market value of common stock of the
companies
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included in the indices. An index futures contract is an agreement pursuant to
which two parties agree to take or make delivery of an amount of cash equal to
the difference between the value of the index at the close of the last trading
day of the contract and the price at which the index contract was originally
written. An option on an interest rate or index futures contract generally gives
the purchaser the right, in return for the premium paid, to assume a position in
a futures contract at a specified exercise price at any time prior to the
expiration date of the option.
A Fund may not enter into futures and options contracts for
which aggregate initial margin deposits and premiums paid for unexpired options
exceed 5% of the fair market value of the Fund's total assets, after taking into
account unrealized losses or profits on futures contracts or options on futures
contracts into which it has entered. The current view of the staff of the SEC is
that a Fund's long and short positions in futures contracts as well as put and
call options on futures written by it must be collateralized with cash or other
liquid assets and segregated with the Fund's custodian or a designated
sub-custodian or "covered" in a manner similar to that for covered options on
securities.
No consideration is paid or received by a Fund upon trading a
futures contract. Upon entering into a futures contract, cash, short-term
Government Securities or other U.S. dollar-denominated, high-grade, short-term
money market instruments equal to approximately 1% to 10% of the contract amount
will be segregated with the Fund's custodian or a designated sub-custodian. This
amount, which is subject to change by the exchange on which the contract is
traded, is known as "initial margin" and is in the nature of a performance bond
or good faith deposit on the contract that is returned to the Fund upon
termination of the futures contract, so long as all contractual obligations have
been satisfied; the broker will have access to amounts in the margin account if
the Fund fails to meet its contractual obligations. Subsequent payments, known
as "variation margin," to and from the broker, will be made daily as the price
of the securities underlying the futures contract fluctuates, making the long
and short positions in the contract more or less valuable, a process known as
"marking-to-market." At any time prior to the expiration of a futures contract,
a Fund may elect to close a position by taking an opposite position, which will
operate to terminate the Fund's existing position in the contract.
Although the Funds intend to enter into futures contracts only
if an active market exists for the contracts, no assurance can be given that an
active market will exist for the contracts at any particular time. Most U.S.
futures exchanges and boards of trade limit the amount of fluctuation permitted
in futures contract prices during a single trading day. Once the daily limit has
been reached in a particular contract, no trades may be made on that day at a
price beyond that limit. Futures contract prices may move to the daily limit for
several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions and subjecting some futures traders to
substantial losses. In such a case, and in the event of adverse price movements,
a Fund would be required to make daily cash payments of variation margin. In
such circumstances, an increase in the value of the portion of the portfolio
being hedged, if any, may partially or completely offset losses on the futures
contract.
If a Fund has hedged against the possibility of an increase in
interest rates adversely affecting the value of securities held in its portfolio
and rates decrease instead, the
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Fund will lose part or all of the benefit of the increased value of securities
that it has hedged because it will have offsetting losses in its futures
positions. In addition, in such situations, if the Fund had insufficient cash,
it may have to sell securities to meet daily variation margins requirements at a
time when it may be disadvantageous to do so. These sales of securities may, but
will not necessarily, be at increased prices that reflect the decline in
interest rates.
An option on a futures contract, unlike a direct investment in
such a contract, gives the purchaser the right, in return for the premium paid,
to assume a position in the futures contract at a specified exercise price at
any time prior to the expiration date of the option. Upon exercise of an option,
the delivery of the futures position by the writer of the option to the holder
of the option will be accompanied by delivery of the accumulated balance in the
writer's futures margin account, which represents the amount by which the market
price of the futures contract exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option on the futures contract.
The potential loss related to the purchase of an option on futures contracts is
limited to the premium paid for the option (plus transaction costs). Because the
price of the option to the purchaser is fixed at the point of sale, no daily
cash payments are made to reflect changes in the value of the underlying
contract. The value of the option, however, does change daily and that change
would be reflected in the net asset value of the Fund holding the options.
The use of futures contracts and options on futures contracts
as a hedging device involves several risks. No assurance can be given that a
correlation will exist between price movements in the underlying securities or
index and price movements in the securities that are the subject of the hedge.
Positions in futures contracts and options on futures contracts may be closed
out only on the exchange or board of trade on which they were entered.
Furthermore, because any income earned from transactions in futures contracts
and related options will be taxable, GEAM anticipates that the Tax-Exempt Fund
will invest in these instruments only in unusual circumstances, such as when the
GEAM anticipates a significant change in interest rates or market conditions.
Losses incurred in hedging transactions and the costs of these transactions will
affect a Fund's performance.
Forward Currency Transactions. The Income Fund, the
International Fund and the Diversified Fund may each hold currencies to meet
settlement requirements for foreign securities and may engage in currency
exchange transactions to protect against uncertainty in the level of future
exchange rates between a particular foreign currency and the U.S. dollar or
between foreign currencies in which the Fund's securities are or may be
denominated. No Fund will enter into forward currency transactions for
speculative purposes.
Forward currency contracts are agreements to exchange one
currency for another at a future date. The date (which may be any agreed-upon
fixed number of days in the future), the amount of currency to be exchanged and
the price at which the exchange will take place will be negotiated and fixed for
the term of the contract at the time that a Fund enters into the contract.
Forward currency contracts (1) are traded in a market conducted directly between
currency traders (typically, commercial banks or other financial institutions)
and their customers, (2) generally have no deposit requirements and (3) are
typically consummated without payment of
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any commissions. A Fund, however, may enter into forward currency contracts
requiring deposits or involving the payment of commissions. To assure that a
Fund's forward currency contracts are not used to achieve investment leverage,
cash or other liquid assets will be segregated with the Fund's custodian or a
designated sub-custodian in an amount at all times equal to or exceeding the
Fund's commitment with respect to the contracts.
Upon maturity of a forward currency contract, a Fund may (1)
pay for and receive the underlying currency, (2) negotiate with the dealer to
roll over the contract into a new forward currency contract with a new future
settlement date or (3) negotiate with the dealer to terminate the forward
contract into an offset with the currency trader providing for the Fund's paying
or receiving the difference between the exchange rate fixed in the contract and
the then current exchange rate. The Fund may also be able to negotiate such an
offset on behalf of a Fund prior to maturity of the original forward contract.
No assurance can be given that new forward contracts or offsets will always be
available to a Fund.
In hedging a specific portfolio position, a Fund may enter
into a forward contract with respect to either the currency in which the
position is denominated or another currency deemed appropriate by GEAM. A Fund's
exposure with respect to forward currency contracts is limited to the amount of
the Fund's aggregate investments in instruments denominated in foreign
currencies.
The cost to a Fund of engaging in currency transactions varies
with factors such as the currency involved, the length of the contract period
and the market conditions then prevailing. Because transactions in currency
exchange are usually conducted on a principal basis, no fees or commissions are
involved. The use of forward currency contracts does not eliminate fluctuations
in the underlying prices of the securities, but it does establish a rate of
exchange that can be achieved in the future. In addition, although forward
currency contracts limit the risk of loss due to a decline in the value of the
hedged currency, at the same time, they limit any potential gain that might
result should the value of the currency increase. If a devaluation is generally
anticipated, a Fund may not be able to sell currency at a price above the
anticipated devaluation level. A Fund will not enter into a currency transaction
if, as a result, it will fail to qualify as a regulated investment company under
the Internal Revenue Code of 1986, as amended (the "Code"), for a given year.
In entering into forward currency contracts, a Fund will be
subject to a number of risks and special considerations. The market for forward
currency contracts, for example, may be limited with respect to certain
currencies. The existence of a limited market may in turn restrict the Fund's
ability to hedge against the risk of devaluation of currencies in which the Fund
holds a substantial quantity of securities. The successful use of forward
currency contracts as a hedging technique draws upon GEAM's special skills and
experience with respect to those instruments and will usually depend upon GEAM's
ability to forecast interest rate and currency exchange rate movements
correctly. Should interest or exchange rates move in an unexpected manner, a
Fund may not achieve the anticipated benefits of forward currency contracts or
may realize losses and thus be in a less advantageous position than if those
strategies had not been used. Many forward currency contracts are subject to no
daily price fluctuation limits so that adverse
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market movements could continue with respect to those contracts to an unlimited
extent over a period of time. In addition, the correlation between movements in
the prices of those contracts and movements in the prices of the currencies
hedged or used for cover will not be perfect.
The ability to dispose of a Fund's positions in forward
currency contracts depends on the availability of active markets in those
instruments, and GEAM cannot predict the amount of trading interest that may
exist in the future in forward currency contracts. Forward currency contracts
may be closed out only by the parties entering into an offsetting contract. As a
result, no assurance can be given that a Fund will be able to utilize these
contracts effectively for the intended purposes.
Options on Foreign Currencies. The Income Fund, the
International Fund and the Diversified Fund may each purchase and write put and
call options on foreign currencies for the purpose of hedging against declines
in the U.S. dollar value of foreign currency denominated securities and against
increases in the U.S. dollar cost of securities to be acquired by the Fund. The
Funds with such option-writing authority write only covered options. No Fund
will enter into a transaction involving options on foreign currencies for
speculative purposes. Options on foreign currencies to be written or purchased
by a Fund are traded on U.S. and foreign exchanges or in the over-the-counter
market. Premiums paid on a Fund's options on foreign currencies will be limited
to 5% of the value of the Fund's total assets.
Certain transactions involving options on foreign currencies
are undertaken on contract markets that are not regulated by the CFTC. Options
on foreign currencies traded on national securities exchanges are within the
jurisdiction of the Securities and Exchange Commission (the "SEC"), as are other
securities traded on those exchanges. As a result, many of the protections
provided to traders on organized exchanges will be available with respect to
those transactions. In particular, all foreign currency option positions entered
into on a national securities exchange are cleared and guaranteed by the
Clearing Corporation, thereby reducing the risk of counterparty default. In
addition, a liquid secondary market in options traded on a national securities
exchange may exist, potentially permitting a Fund to liquidate open positions at
a profit prior to exercise or expiration, or to limit losses in the event of
adverse market movements.
The purchase and sale of exchange-traded foreign currency
options are subject to the risks of the availability of a liquid secondary
market as described above, as well as the risks regarding adverse market
movements, margining of options written, the nature of the foreign currency
market, possible intervention by governmental authorities and the effects of
other political and economic events. In addition, exercise and settlement of
exchange-traded foreign currency options must be made exclusively through the
Clearing Corporation, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the Clearing Corporation may,
if it determines that foreign governmental restrictions or taxes would prevent
the orderly settlement of foreign currency option exercises, or would result in
undue burdens on the Clearing Corporation or its clearing members, impose
special procedures on exercise and settlement, such as technical changes in the
mechanics of delivery of currency, the fixing of dollar settlement prices or
prohibitions on exercise.
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Like the writing of other kinds of options, the writing of an
option on a foreign currency constitutes only a partial hedge, up to the amount
of the premium received; a Fund could also be required, with respect to any
option it has written, to purchase or sell foreign currencies at disadvantageous
exchange rates, thereby incurring losses. The purchase of an option on a foreign
currency may constitute an effective hedge against fluctuation in exchange
rates, although in the event of rate movements adverse to a Fund's position, the
Fund could forfeit the entire amount of the premium plus related transaction
costs.
Options on foreign currencies may be traded on foreign
exchanges, to the extent permitted by the CFTC. These transactions are subject
to the risk of governmental actions affecting trading in or the prices of
foreign currencies or securities. The value of these positions could also be
adversely affected by (1) other complex foreign political and economic factors,
(2) lesser availability of data on which to make trading decisions than in the
United States, (3) delays in a Fund's ability to act upon economic events
occurring in foreign markets during non-business hours in the United States, (4)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the United States and (5) lesser trading volume.
Warrants. Because a warrant, which is a security permitting,
but not obligating, its holder to subscribe for another security, does not carry
with it the right to dividends or voting rights with respect to the securities
that the warrant holder is entitled to purchase, and because a warrant does not
represent any rights to the assets of the issuer, a warrant may be considered
more speculative than certain other types of investments. In addition, the value
of a warrant does not necessarily change with the value of the underlying
security and a warrant ceases to have value if it is not exercised prior to its
expiration date. The investment by a Fund in warrants valued at the lower of
cost or market, may not exceed 5% of the value of the Fund's net assets.
Included in that amount, but not to exceed 2% of the value of the Fund's net
assets, may be warrants that are not listed on the New York Stock Exchange, Inc.
("NYSE") or the American Stock Exchange. The Money Market Fund may not invest in
any form of warrants. Warrants acquired by a Fund in units or attached to
securities may be deemed to be without value.
Supranational Agencies. The Income Fund, the Diversified Fund
and the Money Market Fund may each invest up to 10% of its assets in debt
obligations of supranational agencies such as: the International Bank for
Reconstruction and Development (commonly referred to as the World Bank), which
was chartered to finance development projects in developing member countries;
the European Community, which is a twelve-nation organization engaged in
cooperative economic activities; the European Coal and Steel Community, which is
an economic union of various European nations' steel and coal industries; and
the Asian Development Bank, which is an international development bank
established to lend funds, promote investment and provide technical assistance
to member nations in the Asian and Pacific regions. Debt obligations of
supranational agencies are not considered Government Securities and are not
supported, directly or indirectly, by the U.S. Government.
Municipal Obligations. The term "Municipal Obligations" as
used in the Prospectus and this SAI means debt obligations issued by, or on
behalf of, states, territories and possessions of the United States and the
District of Columbia and their political subdivisions,
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agencies and instrumentalities or multistate agencies or authorities, the
interest from which debt obligations is, in the opinion of bond counsel to the
issuer, excluded from gross income for Federal income tax purposes. Municipal
Obligations generally are understood to include debt obligations issued to
obtain funds for various public purposes, including the construction of a wide
range of public facilities, refunding of outstanding obligations, payment of
general operating expenses and extensions of loans to public institutions and
facilities. Private activity bonds that are issued by or on behalf of public
authorities to finance privately operated facilities are considered to be
Municipal Obligations if the interest paid on them qualifies as excluded from
gross income (but not necessarily from alternative minimum taxable income) for
Federal income tax purposes in the opinion of bond counsel to the issuer.
Opinions relating to the validity of Municipal Obligations and
to the exemption of interest on them from Federal income taxes are rendered by
bond counsel to the respective issuers at the time of issuance. GEAM will not
review the proceedings relating to the issuance of Municipal Obligations or the
basis for opinions of counsel. The Tax-Exempt Fund may invest without limit in
debt obligations that are repayable out of revenues generated from economically
related projects or facilities or debt obligations whose issuers are located in
the same state. Sizable investments in these obligations could involve an
increased risk to the Funds should any of the related projects or facilities
experience financial difficulties.
Municipal Obligations may be issued to finance life care
facilities, which are an alternative form of long-term housing for the elderly
that offer residents the independence of a condominium life-style and, if
needed, the comprehensive care of nursing home services. Bonds to finance these
facilities have been issued by various state industrial development authorities.
Because the bonds are secured only by the revenues of each facility and not by
state or local government tax payments, they are subject to a wide variety of
risks, including a drop in occupancy levels, the difficulty of maintaining
adequate financial reserves to secure estimated actuarial liabilities, the
possibility of regulatory cost restrictions applied to health care delivery and
competition from alternative health care or conventional housing facilities.
Even though Municipal Obligations are interest-bearing
investments that promise a stable flow of income, their prices are inversely
affected by changes in interest rates and, therefore, are subject to the risk of
market price fluctuations. The values of Municipal Obligations with longer
remaining maturities typically fluctuate more than those of similarly rated
Municipal Obligations with shorter remaining maturities. The values of fixed
income securities also may be affected by changes in the credit rating or
financial condition of the issuing entities.
Tax legislation in recent years has included several
provisions that may affect the supply of, and the demand for, Municipal
Obligations, as well as the tax-exempt nature of interest paid on those
obligations. GEAM can not predict with certainty the effect of recent tax law
changes upon the Municipal Obligation market, including the availability of
instruments for investment by a Fund. In addition, GEAM can not predict whether
additional legislation adversely affecting the Municipal Obligation market will
be enacted in the future. If any such laws are enacted that would reduce the
availability of Municipal Obligation for investment by the
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Tax-Exempt Fund so as to affect the Fund's unit-holders adversely, the Fund will
reevaluate its investment objective and policies and might submit possible
changes in its structure to its unit-holders for their consideration. If
legislation were enacted that would treat a type of Municipal Obligation as
taxable for Federal income tax purposes, the Tax-Exempt Fund would treat the
security as a permissible taxable money market instrument for the Fund within
the applicable limits set forth in the Prospectus.
The Diversified Fund and Tax-Exempt Fund intend to invest in
Municipal Obligations of a broad range of issuers, consistent with prudent
regional diversification. Investors in certain states may be subject to state
taxation on all or a portion of the income and capital gains produced by such
securities.
Municipal Leases. Among the Municipal Obligations in which the
Tax-Exempt Fund and the Diversified Fund may invest are municipal leases.
Municipal leases are Municipal Obligations that may take the form of a lease or
an installment purchase or conditional sales contract issued by state and local
governmental authorities to obtain funds to acquire a wide variety of equipment
and facilities such as fire and sanitation vehicles, computer equipment and
other capital assets.
Interest payments on qualifying municipal leases are exempt
from Federal income taxes and state income taxes within the state of issuance.
Although municipal lease obligations do not normally constitute general
obligations of the municipality, a lease obligation is ordinarily backed by the
municipality's agreement to make the payments due under the lease obligation.
These obligations have evolved to make it possible for state
and local government authorities to acquire property and equipment without
meeting constitutional and statutory requirements for the issuance of debt.
Thus, municipal leases have special risks not normally associated with Municipal
Obligations. These obligations frequently contain "non-appropriation" clauses
that provide that the governmental issuer of the obligation has no obligation to
make future payments under the lease or contract unless money is appropriated
for those purposes by the legislative body on a yearly or other periodic basis.
In addition to the non-appropriation risk, municipal leases represent a type of
financing that has not yet developed the depth of marketability associated with
other Municipal Obligations. Some municipal lease obligations may be, and could
become, illiquid. Moreover, although municipal leases will be secured by the
leased equipment, the disposition of the equipment in the event of foreclosure
might prove to be difficult.
Municipal leases held by a Fund will be considered illiquid
securities unless the Board determines on an ongoing basis that the leases are
readily marketable. An unrated municipal lease with a non-appropriation risk
that is backed by an irrevocable bank letter of credit or an insurance policy
issued by a bank or insurer deemed by GEAM to be of high quality and minimal
credit risk, will not be deemed to be illiquid solely because the underlying
municipal lease is unrated, if GEAM determines that the lease is readily
marketable because it is backed by the letter of credit or insurance policy.
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Municipal leases that a Fund may acquire will be both rated
and unrated. Rated leases that may be held by a Fund include those rated
investment grade at the time of investment or those issued by issuers whose
senior debt is rated investment grade at the time of investment. A Fund may
acquire unrated issues that GEAM deems to be comparable in quality to rated
issues in which a Fund is authorized to invest. A determination that an unrated
lease obligation is comparable in quality to a rated lease obligation and that
there is a reasonable likelihood that the lease will not be canceled will be
subject to oversight and approval by the Board.
To limit the risks associated with municipal leases, a Fund
will invest no more than 5% of its total assets in those leases. In addition, a
Fund will purchase lease obligations that contain non-appropriation clauses when
the lease payments will commence amortization of principal at an early date
resulting in an average life of five years or less for the lease obligation.
Municipal Obligation Components. The Tax-Exempt Fund and the
Diversified Fund may each invest in Municipal Obligations the interest rate on
which has been divided by the issuer into two different and variable components,
which together result in a fixed interest rate. Typically, the first of the
components (the "Auction Component") pays an interest rate that is reset
periodically through an auction process, whereas the second of the components
(the "Residual Component") pays a residual interest rate based on the difference
between the total interest paid by the issuer on the Municipal Obligation and
the auction rate paid on the Auction Component. A Fund may purchase both Auction
and Residual Components. Because the interest rate paid to holders of Residual
Components is generally determined by subtracting the interest rate paid to the
holders of Auction Components from a fixed amount, the interest rate paid to
Residual Component holders will decrease as the Auction Component's rate
increases and increase as the Auction Component's rate decreases. Moreover, the
extent of the increases and decreases in market value of Residual Components may
be larger than comparable changes in the market value of an equal principal
amount of a fixed rate Municipal Obligation having similar credit quality,
redemption provisions and maturity.
Custodial Receipts. The Tax-Exempt Fund and the Diversified
Fund may each acquire custodial receipts or certificates underwritten by
securities dealers or banks that evidence ownership of future interest payments,
principal payments, or both, on certain Municipal Obligations. The underwriter
of these certificates or receipts typically purchases Municipal Obligations and
deposits the obligations in an irrevocable trust or custodial account with a
custodian bank, which then issues receipts or certificates that evidence
ownership of the periodic unmatured coupon payments and the final principal
payment on the obligations. Custodial receipts evidencing specific coupon or
principal payments have the same general attributes as zero coupon Municipal
Obligations. Although under the terms of a custodial receipt a Fund would be
typically authorized to assert its rights directly against the issuer of the
underlying obligation, the Fund could be required to assert through the
custodian bank those rights as may exist against the underlying issuers. Thus,
in the event the underlying issuer fails to pay principal and/or interest when
due, a Fund may be subject to delays, expenses and risks that are greater than
those that would have been involved if the Fund had purchased a direct
obligation of the issuer. In addition, in the event that the trust or custodial
account in which the underlying security has been deposited is determined to be
an association taxable as a corporation, instead of
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a non-taxable entity, the yield on the underlying security would be reduced in
recognition of any taxes paid.
Floating and Variable Rate Instruments. The Tax-Exempt Fund,
the Income Fund, the Diversified Fund and the Money Market Fund may invest in
floating and variable rate instruments. Income securities may provide for
floating or variable rate interest or dividend payments. The floating or
variable rate may be determined by reference to a known lending rate, such as a
bank's prime rate, a certificate of deposit rate or the London InterBank Offered
Rate (LIBOR). Alternatively, the rate may be determined through an auction or
remarketing process. The rate also may be indexed to changes in the values of
interest rate or securities indexes, currency exchange rate or other
commodities. Variable and floating rate securities tend to be less sensitive
than fixed rate securities to interest rate changes and to have higher yields
when interest rates increase. However, during periods of rising interest rates,
changes in the interest rate of an adjustable rate security may lag changes in
market rates.
The amount by which the rates paid on an income security may
increase or decrease may be subject to periodic or lifetime caps. Fluctuations
in interest rates above these caps could cause adjustable rate securities to
behave more like fixed rate securities in response to extreme movements in
interest rates.
Floating and variable rate income securities include
securities whose rates vary inversely with changes in market rates of interest.
Such securities may also pay a rate of interest determined by applying a
multiple to the variable rate. The extent of increases and decreases in the
value of securities whose rates vary inversely with changes in market rates of
interest generally will be larger than comparable changes in the value of an
equal principal amount of a fixed rate security having similar credit quality,
redemption provisions and maturity.
The Tax-Exempt Fund, the Income Fund, the Diversified Fund and
the Money Market Fund may purchase floating and variable rate demand bonds and
notes, which are Municipal Obligations ordinarily having stated maturities in
excess of one year but which permit their holder to demand payment of principal
at any time or at specified intervals. Variable rate demand notes include master
demand notes, which are obligations that permit a Fund to invest fluctuating
amounts, which may change daily without penalty, pursuant to direct arrangements
between the Fund, as lender, and the borrower. These obligations have interest
rates that fluctuate from time to time and frequently are secured by letters of
credit or other credit support arrangements provided by banks. Use of letters of
credit or other credit support arrangements will not adversely affect the
tax-exempt status of variable rate demand notes. Because they are direct lending
arrangements between the lender and borrower, variable rate demand notes
generally will not be traded and no established secondary market generally
exists for them, although they are redeemable at face value. If variable rate
demand notes are not secured by letters of credit or other credit support
arrangements, a Fund's right to demand payment will be dependent on the ability
of the borrower to pay principal and interest on demand. Each obligation
purchased by a Fund will meet the quality criteria established by GEAM for the
purchase of Municipal Obligations. GEAM considers on an ongoing basis the
creditworthiness of the issuers of the floating and variable rate demand
obligations in the relevant Fund's portfolio.
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Participation Interests. The Tax Exempt Fund, the Income Fund
and the Diversified Fund may purchase from financial institutions participation
interests in certain Municipal Obligations. A participation interest gives the
Fund an undivided interest in the Municipal Obligation in the proportion that
the Fund's participation interest bears to the total principal amount of the
Municipal Obligation. These instruments may have fixed, floating or variable
rates of interest. If the participation interest is unrated, or has been given a
rating below one that is otherwise permissible for purchase by a Fund, the
participation interest will be backed by an irrevocable letter of credit or
guarantee of a bank that the Fund's Board of Trustees has determined meets
certain quality standards, or the payment obligation otherwise will be
collateralized by Government Securities. A Fund will have the right, with
respect to certain participation interests, to demand payment, on a specified
number of days' notice, for all or any part of the Fund's participation interest
in the Municipal Obligation, plus accrued interest. The Funds intend to exercise
their right to demand payment only upon a default under the terms of the
Municipal Obligation, or to maintain or improve the quality of their investment
portfolios. A Fund will invest no more than 5% of the value of its total assets
in participation interests.
Zero Coupon Obligations. The Tax-Exempt Fund, the Income Fund
and the Diversified Fund may invest in zero coupon obligations. Zero coupon
securities generally pay no cash interest (or dividends in the case of preferred
stock) to their holders prior to maturity. Accordingly, such securities usually
are issued and traded at a deep discount from their face or par value and
generally are subject to greater fluctuations of market value in response to
changing interest rates than securities of comparable maturities and credit
quality that pay cash interest (or dividends in the case of preferred stock) on
a current basis. Although each of these Funds will receive no payments on its
zero coupon securities prior to their maturity or disposition, it will be
required for federal income tax purposes generally to include in its dividends
each year an amount equal to the annual income that accrues on its zero coupon
securities. Such dividends will be paid from the cash assets of the Fund, from
borrowings or by liquidation of portfolio securities, if necessary, at a time
that the Fund otherwise would not have done so. To the extent these Funds are
required to liquidate thinly traded securities, the Funds may be able to sell
such securities only at prices lower than if such securities were more widely
traded. The risks associated with holding securities that are not readily
marketable may be accentuated at such time. To the extent the proceeds from any
such dispositions are used by these Funds to pay distributions, each of those
Funds will not be able to purchase additional income-producing securities with
such proceeds, and as a result its current income ultimately may be reduced.
The Tax-Exempt Fund, the Income Fund and the Diversified Fund
may each invest up to 10% of its assets in zero coupon debt obligations. Zero
coupon debt obligations are generally divided into two categories: "Pure Zero
Obligations," which are those that pay no interest for their entire life and
"Zero/Fixed Obligations," which pay no interest for some initial period and
thereafter pay interest currently. In the case of a Pure Zero Obligation, the
failure to pay interest currently may result from the obligation's having no
stated interest rate, in which case the obligation pays only principal at
maturity and is sold at a discount from its stated principal. A Pure Zero
Obligation may, in the alternative, provide for a stated interest rate, but
provide that no interest is payable until maturity, in which case accrued,
unpaid interest on the
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obligation may be capitalized as incremental principal. The value to the
investor of a zero coupon Municipal Obligation consists of the economic
accretion either of the difference between the purchase price and the nominal
principal amount (if no interest is stated to accrue) or of accrued, unpaid
interest during the life or payment deferral period of the obligation.
Indexed Securities. The Diversified Fund and the Income Fund
may invest in indexed securities, the value of which is linked to currencies,
interest rates, commodities, indexes or other financial indicators ("reference
instruments"). The interest rate or the principal amount payable at maturity or
redemption may be increased or decreased depending on changes in the value of
the reference instrument. Indexed securities may be positively or negatively
indexed, so that appreciation of the reference instrument may produce an
increase or a decrease in interest rate or value at maturity of the security. In
addition, the change in the interest rate or value at maturity of the security
may be some multiple of the change in value of the reference instrument. Thus,
in addition to the credit risk of the security's issuer, the Funds will bear the
market risk of the reference instrument.
Mortgage Related Securities. The mortgage related securities
in which the Income Fund and the Diversified Fund will invest represent pools of
mortgage loans assembled for sale to investors by various governmental agencies,
such as GNMA, by government related organizations, such as FNMA and FHLMC, as
well as by private issuers, such as commercial banks, savings and loan
institutions, mortgage bankers and private mortgage insurance companies.
Several risks are associated with mortgage related securities
generally. The monthly cash inflow from the underlying loans, for example, may
not be sufficient to meet the monthly payment requirements of the mortgage
related security. Prepayment of principal by mortgagors or mortgage foreclosures
will shorten the term of the underlying mortgage pools for a mortgage related
security. Early returns of principal will affect the average life of the
mortgage related securities remaining in the Income Fund or the Diversified
Fund. The occurrence of mortgage prepayments is affected by factors including
the level of interest rates, general economic conditions, the location and age
of the mortgage and other social and demographic conditions. In periods of
rising interest rates, the rate of prepayment tends to decrease, thereby
lengthening the average life of a pool of mortgage related securities.
Conversely, in periods of falling interest rates, the rate of prepayment tends
to increase, thereby shortening the average life of a pool. Because prepayments
of principal generally occur when interest rates are declining, a Fund will
likely have to reinvest the proceeds of prepayments at lower interest rates than
those at which its assets were previously invested, resulting in a corresponding
decline in the Fund's yield. Thus, mortgage related securities may have less
potential for capital appreciation in periods of falling interest rates than
other fixed income securities of comparable maturity, although those other fixed
income securities may have a comparable risk of decline in market value in
periods of rising interest rates. To the extent that the Income Fund or the
Diversified Fund purchases mortgage related securities at a premium, unscheduled
prepayments, which are made at par, will result in a loss equal to any
unamortized premium.
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Adjustable Rate Mortgages ("ARMs") have interest rates that
reset at periodic intervals, thereby allowing the Income Fund and the
Diversified Fund to participate in increases in interest rates through periodic
adjustments in the coupons of the underlying mortgages, resulting in both higher
current yields and lower price fluctuation than would be the case with more
traditional long-term debt securities. Furthermore, if prepayments of principal
are made on the underlying mortgages during periods of rising interest rates,
the Income Fund or the Diversified Fund generally will be able to reinvest these
amounts in securities with a higher current rate of return. Neither the Income
Fund nor the Diversified Fund, however, will benefit from increases in interest
rates to the extent that interest rates rise to the point at which they cause
the current yield of ARMs to exceed the maximum allowable annual or lifetime
reset limits (or "caps") for a particular mortgage. In addition, fluctuations in
interest rates above these caps could cause ARMs to behave more like long-term
fixed rate securities in response to extreme movements in interest rates. As a
result, during periods of volatile interest rates, the net asset value of the
Income Fund or the Diversified Fund may fluctuate more than if it did not
purchase ARMs. Moreover, during periods of rising interest rates, changes in the
coupon of ARMs will slightly lag behind changes in market rates, creating the
potential for some principal loss for unit-holders who redeem their Units of the
Income Fund or the Diversified Fund before the interest rates on the underlying
mortgages are adjusted to reflect current market rates.
Collateralized Mortgage Obligations ("CMOs") are obligations
fully collateralized by a portfolio of mortgages or mortgage related securities.
Payments of principal and interest on the mortgages are passed through to the
holders of the CMOs on the same schedule as they are received, although certain
classes of CMOs have priority over others with respect to the receipt of
prepayments on the mortgages. Therefore, depending on the type of CMOs in which
the Income Fund or the Diversified Fund invests, the investment may be subject
to a greater or lesser risk of prepayment than other types of mortgage related
securities.
The average maturity of pass-through pools of mortgage related
securities in which the Income Fund and the Diversified Fund may invest varies
with the maturities of the underlying mortgage instruments. In addition, a
pool's stated maturity may be shortened by unscheduled payments on the
underlying mortgages. Factors affecting mortgage prepayments include the level
of interest rates, general economic and social conditions, the location of the
mortgaged property and age of the mortgage. Because prepayment rates of
individual mortgage pools vary widely, the average life of a particular pool
cannot be predicted accurately.
Mortgage related securities may be classified as private,
governmental or government-related, depending on the issuer or guarantor.
Private mortgage related securities represent pass-through pools consisting
principally of conventional residential mortgage loans created by
non-governmental issuers, such as commercial banks, savings and loan
associations and private mortgage insurance companies. Governmental mortgage
related securities are backed by the full faith and credit of the United States.
GNMA, the principal U.S. guarantor of these securities, is a wholly-owned U.S.
government corporation within the Department of Housing and Urban Development.
Government-related mortgage related securities are not backed by the full faith
and credit of the United States. Issuers include FNMA and FHLMC. FNMA is a
government-sponsored corporation owned entirely by private stockholders, which
is
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<PAGE>
subject to general regulation by the Secretary of Housing and Urban Development.
Pass-through securities issued by FNMA are guaranteed as to timely payment of
principal and interest by FNMA. FHLMC is a corporate instrumentality of the
United States, the stock of which is owned by the Federal Home Loan Banks.
Participation certificates representing interests in mortgages from FHLMC's
national portfolio are guaranteed as to the timely payment of interest and
ultimate collection of principal by FHLMC.
Private, governmental or government-related entities may
create mortgage loan pools offering pass-through investments in addition to
those described above. The mortgages underlying these securities may be
alternative mortgage instruments, that is, mortgage instruments whose principal
or interest payments may vary or whose terms to maturity may be shorter than
previously customary. GEAM assesses new types of mortgage related securities as
they are developed and offered to determine their appropriateness for investment
by the Diversified Fund and the Income Fund.
Mortgage related securities may not be readily marketable. To
the extent any of these securities are not readily marketable in the judgement
of GEAM, the Income Fund and the Diversified Fund will limit their investments
in these securities, together with other illiquid instruments, to not more than
10% of the value of the net assets of each Fund.
Government Stripped Mortgage Related Securities. The Income
Fund and the Diversified Fund may invest in government stripped mortgage related
securities issued and guaranteed by GNMA, FNMA or FHLMC. These securities
represent beneficial ownership interests in either periodic principal
distributions ("principal-only") or interest distributions ("interest-only") on
mortgage related certificates issued by GNMA, FNMA or FHLMC. The certificates
underlying the government stripped mortgage related securities represent all or
part of the beneficial interest in pools of mortgage loans. The Income Fund and
the Diversified Fund will invest in government stripped mortgage related
securities in order to enhance yield or to benefit from anticipated appreciation
in value of the securities at times when GEAM believes that interest rates will
remain stable or increase. In periods of rising interest rates, the expected
increase in the value of government stripped mortgage related securities may
offset all or a portion of any decline in value of the securities held by the
Income Fund or the Diversified Fund.
Investing in government stripped mortgage related securities
involves risks normally associated with investing in mortgage related securities
issued by government or government related entities. In addition, the yields on
government stripped mortgage related securities are extremely sensitive to the
prepayment experience on the mortgage loans underlying the certificates
collateralizing the securities. If a decline in the level of prevailing interest
rates results in a rate of principal prepayments higher than anticipated,
distributions of principal will be accelerated, thereby reducing the yield to
maturity on interest-only government stripped mortgage related securities and
increasing the yield to maturity on principal-only government stripped mortgage
related securities. Sufficiently high prepayment rates could result in these
Funds' not fully recovering their initial investment in an interest-only
government stripped mortgage related security. Under current market conditions,
these Funds expect that investments in government stripped mortgage related
securities will consist primarily of interest-only
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<PAGE>
securities. The sensitivity of an interest-only security that represents the
interest portion of a particular class, as opposed to the interest portion of an
entire pool, to interest rate fluctuations, may be increased because of the
characteristics of the principal portion to which they relate. Government
stripped mortgage related securities are currently traded in an over-the-counter
market maintained by several large investment banking firms. No assurance can be
given that these Funds will be able to effect a trade of a government stripped
mortgage related security at a desired time. These Funds will acquire government
stripped mortgage related securities only if a secondary market for the
securities exists at the time of acquisition. Except for government stripped
mortgage related securities based on fixed rate FNMA and FHLMC mortgage
certificates that meet certain liquidity criteria established by a Fund's Board
of Trustees, each Fund treats government stripped mortgage related securities as
illiquid and will limit each of these Funds' investments in these securities,
together with other illiquid investments, to not more than 10% of the net assets
of each Fund.
Asset-Backed and Receivable-Backed Securities. The Income Fund
and the Diversified Fund may invest in asset-backed and receivable-backed
securities. To date, several types of asset-backed and receivable-backed
securities have been offered to investors including "Certificates for Automobile
Receivables" ("CARs(SM)") and interests in pools of credit card receivables.
CARsSM represent undivided fractional interests in a trust, the assets of which
consist of a pool of motor vehicle retail installment sales contracts and
security interests in the vehicles securing the contracts. Payments of principal
and interest on CARs(SM) are passed through monthly to certificate holders and
are guaranteed up to certain amounts and for a certain time period by a letter
of credit issued by a financial institution unaffiliated with the trustee or
originator of the trust.
An investor's return on CARs(SM) may be affected by early
prepayment of principal on the underlying vehicle sales contracts. If the letter
of credit is exhausted, these Funds may be prevented from realizing the full
amount due on a sales contract because of state law requirements and
restrictions relating to foreclosure sales of vehicles and the availability of
deficiency judgments following these sales, because of depreciation, damage or
loss of a vehicle, because of the application of Federal and state bankruptcy
and insolvency laws or other factors. As a result, certificate holders may
experience delays in payment if the letter of credit is exhausted. Consistent
with each of these Funds' investment objective and policies and subject to the
review and approval of the Board, these Funds may also invest in other types of
asset-backed and receivable-backed securities.
WEBS and Other Index-Related Securities. The Diversified Fund
may invest in shares in an investment company whose shares are known as "World
Equity Benchmark Shares" or "WEBS." WEBS have been listed for trading on the
American Stock Exchange, Inc. The Funds also may invest in the CountryBaskets
Index Fund, Inc., or another fund the shares of which are the substantial
equivalent of WEBS. The Diversified Fund may also invest in S&P Depositary
Receipts, or "SPDRs." SPDRs are securities that represent ownership in a
long-term unit investment trust that holds a portfolio of common stocks designed
to track the performance of the S&P 500 Index. A Fund investing in a SPDR would
be entitled to the dividends that accrue to the S&P 500 stocks in the underlying
portfolio, less trust expenses.
-30-
<PAGE>
Mortgage Dollar Rolls. With respect to 25% of total assets,
the Diversified Fund and the Income Fund may enter into mortgage "dollar rolls"
in which a Fund sells securities for delivery in the current month and
simultaneously contracts with the same counterparty to repurchase similar (same
type, coupon and maturity) but not identical securities on a specified future
date. The Fund loses the right to receive principal and interest paid on the
securities sold. However, the Fund would benefit to the extent of any price
received for the securities sold and the lower forward price for the future
purchase (often referred to as the "drop") or fee income plus the interest
earned on the cash proceeds of the securities sold until the settlement date of
the forward purchase. Unless such benefits exceed the income, capital
appreciation and gain or loss due to mortgage repayments that would have been
realized on the securities sold as part of the mortgage dollar roll, the use of
this technique will diminish the investment performance of the Fund compared
with what such performance would have been without the use of mortgage dollar
rolls. The Fund will hold and maintain in a segregated account until the
settlement date cash or liquid assets in an amount equal to the forward purchase
price. The benefits derived from the use of mortgage dollar rolls may depend
upon GEAM's ability to predict correctly mortgage prepayments and interest
rates. There is no assurance that mortgage dollar rolls can be successfully
employed.
For financial reporting and tax purposes, the Income Fund and
the Diversified Fund propose to treat mortgage dollar rolls as two separate
transactions: one involving the purchase of a security and a separate
transaction involving a sale. The Funds do not currently intend to enter into
mortgage dollar rolls that are accounted for as a financing.
Short Sales Against the Box. The Money Market Fund may sell
securities "short against the box." Whereas a short sale is the sale of a
security a Fund does not own, a short sale is "against the box" if at all times
during which the short position is open, the Fund owns at least an equal amount
of the securities or securities convertible into, or exchangeable without
further consideration for, securities of the same issue as the securities sold
short.
Borrowing for Long-term or Leveraging Purposes. The Tax-Exempt
Fund may borrow, in an amount not to exceed 10% of the value of its total assets
for long-term or leveraging purposes. The Tax-Exempt Fund may leverage its
investments by purchasing securities with borrowed money. In leveraging its
investments, the Tax-Exempt Fund will borrow money only from banks. Borrowing
money to purchase securities will increase the Tax-Exempt Fund's exposure to
capital risk and higher current expenses. Any gain in the value of securities
purchased with borrowed money or income earned from these securities that
exceeds the interest paid on the amount borrowed would cause the Tax-Exempt
Fund's net asset value per Unit to increase faster than would otherwise be the
case. There can be no assurance that the Tax-Exempt Fund will be able to realize
a higher return on its investment portfolio than the then-current interest rate
on borrowed money. If the Tax-Exempt Fund's current investment income were not
sufficient to meet interest costs on borrowings, it could be necessary for the
Fund to liquidate certain of its investments, thereby reducing the net asset
value attributable to the Fund's Units.
INVESTMENT RESTRICTIONS
-31-
<PAGE>
The following policies and limitations supplement those
described in the Prospectus and this SAI. Each Fund is subject to fundamental
and non-fundamental investment policies and limitations. Under the 1940 Act, a
fundamental policy may not be changed with respect to a Fund without the vote of
a majority of the outstanding voting securities (as defined in the 1940 Act) of
the Fund. Investment restrictions numbered 1 through 18 below have been adopted
by the Funds as fundamental policies. Investment restrictions 19 through 31 are
not fundamental policies and may be changed by a vote of a Fund's Board of
Trustees at any time.
1. Investment in the Securities of any one Issuer. (a) No Fund
may invest more than 5% of its total assets in the securities (other than
Government Securities and, in the case of the International Fund, other than
securities issued or guaranteed by a foreign country or its instrumentalities)
of a single issuer, except that up to 25% of the value of the assets of the
Money Market Fund, the Income Fund and the Tax-Exempt Fund may be invested
without regard to this limitation. (b) No Fund may purchase more than 10% (or
15%, in the case of the Income Fund, the Tax-Exempt Fund and the International
Fund) of the outstanding securities of any class of issuer, treating all debt
securities of an issuer as a single class for purposes of this restriction. (c)
No Fund may purchase more than 10% of the outstanding voting securities of any
one issuer. Securities of a foreign government will be treated as a single
issuer for purposes of this restriction. The Tax-Exempt Fund will regard each
state and each of its political subdivisions, agencies and instrumentalities as
a single issuer; if private companies are responsible for payment of principal
and interest, the Tax-Exempt Fund will regard each as a separate issuer for
purposes of this restriction.
2. Investment in a Particular Industry. No Fund may invest
more than 25% of the value of its total assets in the securities of issuers in
any one industry. The Tax-Exempt Fund may invest more than 25% of the value of
its total assets in securities issued or guaranteed by a state, municipality or
other political subdivision, unless the securities are backed only by the assets
and revenues of non-governmental users. For purposes of this restriction, the
term industry will be deemed to include the government of any country other than
the United States, but not the U.S. Government. In addition, domestic bank
obligations held by the Money Market Fund and the Tax-Exempt Fund are excluded
from this restriction.
3. Borrowing. The Funds may not borrow money, except that (i)
the Money Market Fund may enter into reverse repurchase agreements, (ii) the
Tax-Exempt Fund may borrow for long-term or leveraging purposes in an amount not
to exceed 10% of the value of its total assets and (iii) each Fund may borrow
for temporary or emergency purposes, including the meeting of redemption
requests and cash payments of dividends and distributions that might otherwise
require the untimely disposition of securities, in an amount not to exceed, in
the case of the Income Fund and the Tax-Exempt Fund, 10% of the value of the
Fund's total assets, and in the case of the International Fund, the Diversified
Fund and the Money Market Fund, 20% of the value of the Fund's total assets. The
International Fund, Elfun Trusts and the Diversified Fund can borrow money from
banks with minimum assets of one billion dollars as long as, immediately after
the borrowing, asset coverage of 300% exists. Whenever borrowings (including
reverse repurchase agreements) of 5% or more of either the Income Fund's, the
-32-
<PAGE>
International Fund's, the Diversified Fund's or the Money Market Fund's total
assets are outstanding, the respective Fund will not make any additional
investments.
4. Lending. No Fund may lend its assets or money to other
persons, except through (a) lending its portfolio securities in an amount not to
exceed 30%, in the case of Elfun Trusts', the International Fund's and the
Diversified Fund's, or 33 1/3% in the case of the Income Fund's, the Tax-Exempt
Fund's or the Money Market Fund's, net assets taken at market value; (b) in the
case of the International Fund or the Diversified Fund, the purchase of
obligations of persons not in control of, or under common control with, the Fund
(including obligations of restricted securities); (c) in the case of the Income
Fund, entering into repurchase agreements; (d) in the case of the Income Fund
and the Tax-Exempt Fund, entering into security lending agreements and
purchasing debt obligations; and (e) in the case of Elfun Trusts, the Income
Fund and the Tax-Exempt Fund, trading in financial futures contracts, options on
financial futures contracts, securities indexes and securities. The Tax-Exempt
Fund will not make any loan if more than 20% of its assets would be subject to
security lending agreements.
5. Purchase Securities on Margin; Short Sales. No Fund may
purchase securities on margin or make short sales, except that the Money Market
Fund may make short sales against the box and in order to achieve better net
results on portfolio transactions or lower brokerage commission rates, the
International Fund and the Diversified Fund may join with other investment
companies or client accounts managed by GEAM in the purchase or sale of
securities. For purposes of this restriction, the deposit or payment of initial
or variation margin in connection with futures contracts, financial futures
contracts or related options, and options on securities, options on securities
indexes and options on currencies will not be deemed to be a purchase of
securities on margin by a Fund.
6. Participation in the Underwriting of Securities. No Fund
may participate in the underwriting of securities or joint trading accounts,
except to the extent that the sale of portfolio securities in accordance with
the Fund's investment objective, policies and limitations may be deemed to be an
underwriting, and except that the Income and the Tax-Exempt Funds may acquire
securities under circumstances in which, if the securities were sold, the Fund
might be deemed to be an underwriter for purposes of the Securities Act of 1933,
as amended.
7. Real Estate. No Fund, other than the Income Fund, may
purchase or sell real estate and neither Elfun Trusts nor the Money Market Fund
may invest in real estate limited partnership interests, except that a Fund,
other than the Tax-Exempt Fund, may (a) engage in the purchase or sale of real
estate as necessary to provide it with an office for the transaction of
business, (b) invest in the securities of real estate investment trusts or in
the securities of companies that invest or deal in real estate, mortgages or
interests in real estate or mortgages and (c) invest in securities secured by
real estate.
8. Commodities. No Fund may purchase or sell commodities or
commodities contracts, except that each Fund, other than the Money Market Fund,
may invest in futures contracts and related options and other similar contracts
(including, in the case of the Income Fund, the International Fund and the
Diversified Fund, foreign currency forward, futures
-33-
<PAGE>
and options contracts) as described in this Statement of Additional Information
and in the Prospectus.
9. Restricted and Illiquid Securities. No Fund may purchase
securities which are illiquid or restricted (as those terms are described below
and in the Prospectus), if, in the case of Elfun Trusts, the Income Fund, the
Money Market Fund, the International Fund and the Diversified Fund, more than
10% of the net assets of the Fund would be invested in any combination of these
securities, and, in the case of the Tax-Exempt Fund, no more than 5% of the net
assets of the Fund would be invested in any combination of these securities. For
purposes of this restriction, illiquid securities are securities that cannot be
disposed of by a Fund within seven days in the ordinary course of business at
approximately the amount which the Fund has valued the securities; restricted
securities are securities that are subject to contractual or legal restrictions
on transfer, excluding for purposes of this restriction, restricted securities
that are eligible for resale pursuant to Rule 144A under the Securities Act of
1933, as amended, that have been determined to be liquid by the Fund's Board of
Trustees based upon the trading markets for the securities.
10. Other Investment Companies. (a) Elfun Trusts, the
International Fund, the Diversified Fund or the Money Market Fund may not invest
in the securities of other investment companies except by purchase in the open
market where no commission or profit to a sponsor or dealer results, other than
the customary broker's commission. (b) Elfun Trusts, the Income Fund, the
International Fund, the Diversified Fund or the Money Market Fund may not invest
in the securities of closed-end investment companies if the Fund would own more
than 3% of the total outstanding voting stock of the company or more than 5% of
the value of the Fund's total assets would be invested in the securities of any
one investment company or the aggregate investment by the Fund in all investment
companies would have a value in excess of 10% of the Fund's total assets. (c)
The Income Fund may not purchase the securities of other investment companies,
except for money market funds and investment in equity securities issued by
foreign banks provided that all other investment companies having the same
adviser as the Income Fund would not own more than 10% of the total outstanding
voting securities of the foreign bank. (d) The Tax-Exempt Fund may not invest in
the securities of other investment companies. The limitations described above do
not apply if the investment is part of a plan of merger, consolidation,
reorganization or acquisition.
11. Foreign Issuers. The Diversified Fund may not invest more
than 20% of its total assets in securities issued by foreign issuers that are
not listed on a U.S. exchange.
12. Options. Neither the Income Fund nor the Tax-Exempt Fund
may purchase put options on securities if more than 10% of the Fund's net assets
would be invested in premiums on options or if the aggregate value of the
obligations underlying the put options written by the Fund exceed 50% of the
Fund's net assets.
13. Pledging. Neither the Income Fund nor the Tax-Exempt Fund
may pledge, mortgage or hypothecate its assets except (a) to secure borrowings,
the Income Fund and the Tax-Exempt Fund may pledge securities which together
with all securities previously
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<PAGE>
pledged do not exceed 5% of the Fund's total assets and (b) the Income Fund and
the Tax-Exempt Fund may make premium and margin payments in connection with
transactions involving financial futures contracts and options on financial
futures contracts, securities indexes and securities.
14. Transactions with Affiliates. Neither the Income Fund nor
the Tax-Exempt Fund may purchase from or sell to any of its officers or
Trustees, or the officers or directors of GEAM, its portfolio securities.
15. Options, Straddles and Spreads. Neither the International
Fund nor the Diversified Fund may purchase or sell put options, call options,
straddles, spreads or combinations of put options, call options, straddles and
spreads, except as described in this Statement of Additional Information and the
Prospectus, and the Money Market Fund may not purchase or sell put options, call
options, straddles, spreads or combinations of put options, call options,
straddles and spreads, if the value of the Money Market Fund's aggregate
investment in these types of securities would exceed 5% of its total assets.
16. Mineral Exploration. The Tax-Exempt Fund may not invest in
oil, gas, or other mineral leases or production agreements, although the Fund
may invest in municipal bonds secured by mineral interests.
17. Affiliate Ownership. Neither Elfun Trusts, the Tax-Exempt
Fund nor the Income Fund may purchase or retain securities of any company if, to
the knowledge of GEAM or the Fund's Trustees, officers or Trustees of the Fund
or officers and directors of GEAM individually own more than 1/2 of 1% of the
outstanding securities of the company and together they beneficially own more
than 5% of the securities.
18. Control/Management. The Tax-Exempt Fund may not invest in
companies for the purpose of exercising control or management.
19. Unseasoned Issuers, Restricted Securities and Illiquid
Securities. No Fund may purchase securities if, as a result of the purchase, the
Fund would then have more than 5% of its total assets invested in securities of
companies (including predecessors) that have been in continuous operation for
fewer than three years. No Fund may invest more than 15% of its total assets
(10% in the case of the Tax-Exempt Fund), in the aggregate, in the securities of
unseasoned issuers, restricted securities and illiquid securities, excluding,
for purposes of this 15% restriction, restricted securities that are eligible
for resale pursuant to Rule 144A under the Securities Act of 1933, as amended,
that have been determined to be liquid by the Fund's Board of Trustees based
upon the trading markets for the securities ("Rule 144A Securities"). In
addition, no Fund may invest more than 50% of its net assets in the securities
of unseasoned issuers and restricted securities, including, for purposes of this
50% restriction, Rule 144A Securities.
20. Warrants. No Fund may purchase warrants if, as a result,
the investment (valued at the lower of cost or market) would exceed 5% of the
value of the Fund's net assets of which not more than 2% of the value of the
Fund's net assets may be invested in warrants not
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<PAGE>
listed on the New York Stock Exchange, Inc. ("NYSE") or the American Stock
Exchange. The Money Market Fund may not invest in any form of warrants.
21. Mineral Exploration. Neither Elfun Trusts, the
International Fund nor the Diversified Fund may invest in oil, gas, or other
mineral exploration or development programs, or leases, although the Funds may
invest in securities of companies involved in these programs or leases. The
Income Fund may not invest in oil, gas, or other mineral exploration or
development programs or partnerships, or leases. The Money Market Fund may not
invest in oil, gas, or other mineral exploration or development programs.
22. Pledging. Neither Elfun Trusts, the International Fund nor
the Diversified Fund may pledge more than 10% of its assets, except as provided
in this Statement of Additional Information and in the Prospectus. The Money
Market Fund may not pledge, mortgage or hypothecate its assets except for
emergency or extraordinary purposes.
23. Hedging. No Fund may (a) enter into forward foreign
currency exchange or futures contracts or foreign currency options contracts to
sell foreign currencies, except for the purpose of hedging to protect portfolio
securities against the decline in the value of currency or to lock-in the dollar
value of an anticipated disbursement or receipt in a foreign currency, (b)
purchase and write put and call options on stock indexes, purchase and sell
stock index futures and invest in interest in rate futures contracts and options
on interest rate futures contracts, except for the purpose of hedging or (c)
enter into foreign currency futures if the aggregate margin deposits made by the
Fund exceed 5% of the Fund's total assets excluding amounts in-the-money.
24. Affiliate Ownership. Neither the International Fund, the
Diversified Fund nor the Money Market Fund may purchase or retain securities of
any company if, to the knowledge of GEAM or the Fund's Trustees, officers or
trustees of the Fund or officers and directors of GEAM individually own more
than 1/2 of 1% of the outstanding securities of the company and together they
beneficially own more than 5% of the securities.
25. Control/Management. Neither the Income Fund, the
International Fund or Elfun Trusts may invest in companies for the purpose of
exercising control or management.
26. Real Estate. In connection with the fundamental
restriction prohibiting the Tax-Exempt Fund and the International Fund from
investing in real estate, the Tax-Exempt Fund and the International Fund may not
invest in real estate limited partnerships. The Income Fund may not purchase or
sell real estate, except that the Fund may (a) engage in the purchase or sale of
real estate as necessary to provide it with an office for the transaction of
business, (b) invest in the securities of real estate investment trusts in an
amount not to exceed 10% of the Fund's net assets or in the securities of
companies that invest or deal in real estate, mortgages or interests in real
estate or mortgages and (c) invest in securities secured by real estate.
27. Other Investment Companies. In connection with the
fundamental restriction prohibiting the Income Fund from investing in the
securities of other investment companies, the Income Fund may not invest in the
securities of these other investment
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<PAGE>
companies, except by purchase in the open market where no commission or profit
to a sponsor or dealer results, other than the customary broker's commission.
28. Options. The Money Market Fund may not purchase or sell
options on securities, options on stock index futures or financial futures
unless they are written by other persons and listed on a national securities or
commodities exchange and any premiums on the options held by the Fund may not
exceed 20% of the Fund's total net assets. The International Fund may not write,
sell or purchase additional options if as a result thereof the value of the
options will exceed 5% of its net assets or if the value of the stock underlying
calls written would exceed 25% of its net assets.
29. Loans. The Trust Agreement of Elfun Trusts does not
restrict the power of the Trustees to make loans to individuals. While it is not
the policy of the trustees of Elfun Trusts to make loans, the registration
statement filed with the SEC under the Securities Act of 1933 and the 1940 Act
reserved for Elfun Trusts freedom of action to make interest-bearing loans to
unit-holders. The loans are to be secured by Elfun Trusts' Units of the
unit-holder, either with or without other collateral, in principal amounts
aggregating not more than 15% of the then total assets of Elfun Trusts. This
policy does not restrict the authority of Elfun Trusts with respect to its
investment in financial futures contracts and options contracts on financial
futures, securities indices and securities.
30. Investment in the Securities of any one Issuer. (a) The
International Fund will not invest more than 5% of its total assets in the
securities (other than Government Securities) of a single issuer. (b) Neither
the Income Fund, the Tax-Exempt Fund nor the International Fund may purchase
more than 10% of the outstanding securities of any class of issuer, treating all
debt securities of an issuer as a single class for purposes of this restriction.
31. Investment in a Particular Industry. The Tax-Exempt Fund
will not exclude domestic bank obligations in determining the amount of its
assets which may be invested in a particular industry.
Notes to Investment Restrictions
With respect to investment restriction No. 10, investments by
the Funds (other than the Money Market Fund) in the Investment Fund is not
considered an investment in another investment company.
The percentage limitations in the restrictions listed above
apply at the time of purchases of securities and a later increase or decrease in
percentage resulting from a change in value of net assets, or in any ratings,
will not be deemed to result in a violation of the restriction. For purposes of
investment restrictions numbered 2 and 31, the Funds may use the industry
classifications reflected by the Directory of Companies Required to File Annual
Reports with the SEC, Bloomberg Inc. and the S&P 500 Composite Stock Price
Index. In addition, each Fund may select its own industry classifications,
provided such classifications are reasonable.
PORTFOLIO TRANSACTIONS AND TURNOVER
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<PAGE>
Decisions to buy and sell securities for each Fund will be
made by GEAM, subject to review by the Fund's Board of Trustees. Transactions on
domestic stock exchanges and some foreign stock exchanges involve the payment of
negotiated brokerage commissions. On exchanges on which commissions are
negotiated, the cost of transactions may vary among different brokers. On most
foreign exchanges, commissions are fixed and may be higher than for securities
traded on U.S. exchanges. Generally, no stated commissions are applicable to
securities traded in U.S. over-the-counter markets, but the prices of those
securities include undisclosed commissions or mark-ups. The cost of securities
purchased from underwriters include an underwriting commission or concession,
and the prices at which securities are purchased from and sold to dealers
include a dealer's mark-up or mark-down. Government Securities generally will be
purchased on behalf of a Fund from underwriters or dealers, although certain
newly issued Government Securities may be purchased directly from the U.S.
Treasury or from the issuing agency or instrumentality. Whenever GEAM deems it
to be beneficial to a Fund, it may aggregate a Fund's purchase, sale or other
activities with those being performed by GEAM for other customers.
The following table shows the total amount of brokerage
commissions paid by each Fund over the past three fiscal years. Variations in
the amount of brokerage commissions paid by a Fund from year to year may result
from changing asset levels, market conditions or changes in GEAM's outlook. Such
services include analyses and reports regarding issuers, industries, economic
trends, portfolio strategy, and may effect securities transactions and perform
certain functions related thereto. In addition, such services may include advice
concerning the advisability of investing in, purchasing or selling securities
and the availability of particular securities or buyers or sellers of
securities. The research services received from broker-dealers that execute
transactions on behalf of a Fund may be useful to GEAM in servicing that Fund as
well as all of GEAM's accounts and not all of these services may be used in
connection with the particular Fund or Funds generating the commissions.
Consistent with limits established by the Federal Securities Laws, a Fund may
pay a broker-dealer commissions for agency transactions that exceed the amount
of commissions charged by other broker-dealers in recognition of their research
and brokerage services. In addition, subject to the overall policy of best
execution, GEAM may consider sales of Fund shares in selecting brokers or
dealers to execute securities transactions on behalf of a Fund.
The following table shows the amount of brokerage commissions
paid by each Fund over the past three fiscal years. Variations in the amount of
brokerage commissions paid by a Fund from year to year may result from changing
asset levels, market conditions or changes in GEAM's outlook.
<TABLE>
<CAPTION>
- ------------------------ ------------------------- --------------------- --------------------
Year ended Year ended Year ended
Fund December 31, 1999 December 31, 1998 December 31, 1997
- ------------------------ ------------------------- --------------------- --------------------
<S> <C> <C> <C>
Elfun Trusts $868,327 $977,113 $625,040
- ------------------------ ------------------------- --------------------- --------------------
International Fund $690,202 $606,734 $833,650
- ------------------------ ------------------------- --------------------- --------------------
Diversified Fund $110,551 $128,951 $123,972
- ------------------------ ------------------------- --------------------- --------------------
Tax-Exempt Fund 0 0 0
- ------------------------ ------------------------- --------------------- --------------------
Income Fund 0 0 0
- ------------------------ ------------------------- --------------------- --------------------
</TABLE>
-38-
<PAGE>
<TABLE>
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C>
Money Market Fund 0 0 0
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
</TABLE>
In selecting brokers or dealers to execute securities
transactions on behalf of a Fund, GEAM seeks the most favorable terms available
under the circumstances ("best execution"). In assessing the overall terms
available to ensure best execution for any transaction, GEAM considers factors
that it deems relevant, including the breadth of the market in the security, the
price of the security, the financial condition and execution capability of the
broker or dealer and the reasonableness of the commission, if any, for the
specific transaction and on a continuing basis.
In addition, each investment advisory agreement between a Fund
and GEAM authorizes GEAM, on behalf of the Fund, in selecting brokers or dealers
to execute a particular transaction and in evaluating the best overall terms
available, to consider the brokerage and research services (as those terms are
defined in Section 28(e) of the Securities Exchange Act of 1934) provided to the
Fund and/or other accounts over which GEAM or its affiliates exercise investment
discretion. The fees under the investment advisory agreement relating to a Fund
will not be reduced by reason of the Fund's receiving brokerage and research
services.
Such services include analyses and reports regarding issuers,
industries, economic trends, portfolio strategy, and may effect securities
transactions and perform certain functions related thereto. In addition, such
services may include advice concerning the advisability of investing in,
purchasing or selling securities and the availability of particular securities
or buyers or sellers of securities. The research services received from
broker-dealers that execute transactions on behalf of a Fund may be useful to
GEAM in servicing that Fund as well as all of GEAM's accounts and not all of
these services may be used in connection with the particular Fund or Funds
generating the commissions. Consistent with limits established by the Federal
Securities Laws, a Fund may pay a broker-dealer commissions for agency
transactions that exceed the amount of commissions charged by other
broker-dealers in recognition of their research and brokerage services. In
addition, subject to the overall policy of best execution, GEAM may consider the
sales of Fund shares in selecting brokers or dealers to execute securities
transactions on behalf of a Fund.
The following table shows the dollar amount of brokerage
commissions paid to firms that provided research and execution services and the
approximate dollar amount of transactions involved during the fiscal period
ended December 31, 1999.
<TABLE>
<CAPTION>
- ------------------------ ----------------------------------------- -----------------------------------
Amount of Transactions To Firms
Providing Brokerage and Research Amount of Commissions on Those
Fund Services Transactions
- ------------------------ ----------------------------------------- -----------------------------------
<S> <C> <C>
Elfun Trusts $73,663,936 $83,111
- ------------------------ ----------------------------------------- -----------------------------------
International Fund $61,488,796 $97,171
- ------------------------ ----------------------------------------- -----------------------------------
Diversified Fund $6,567,572 $7,443
- ------------------------ ----------------------------------------- -----------------------------------
Tax-Exempt Fund 0 0
- ------------------------ ----------------------------------------- -----------------------------------
Income Fund 0 0
- ------------------------ ----------------------------------------- -----------------------------------
Money Market Fund 0 0
- ------------------------ ----------------------------------------- -----------------------------------
</TABLE>
-39-
<PAGE>
Each Fund's Board of Trustees periodically reviews the
commissions paid by a Fund to determine if the commissions paid over
representative periods of time were reasonable in relation to the benefits
inuring to the Fund. Over-the-counter purchases and sales on behalf of the Funds
will be transacted directly with principal market makers except in those cases
in which better prices and executions may be obtained elsewhere. A Fund will not
purchase any security, including Government Securities, during the existence of
any underwriting or selling group relating to the security of which any
affiliate of the Fund or GEAM is a member, except to the extent permitted under
rules, interpretations or exemptions of the SEC.
GEAM may select broker-dealers who are affiliated with the
Funds or GEAM. All brokerage commissions paid to affiliates will be fair and
reasonable. The Boards of Trustees of the Funds have determined that, to the
extent consistent with applicable provisions of the 1940 Act and rules
thereunder and procedures adopted by the Board, transactions for a Fund may be
executed through a broker-dealer affiliated with the Funds (such as the
Distributor), if, in the judgment of GEAM, the use of such affiliated
broker-dealer is likely to result in a price and execution at least as favorable
to the Fund as those obtainable through other qualified broker-dealers, and if,
in the transaction, the affiliated broker-dealer charges the Fund a fair and
reasonable rate consistent with that payable by the Fund to other broker-dealers
on comparable transactions. Under rules adopted by the SEC, an affiliated
broker-dealer may not execute transactions for a Fund on the floor of any
national securities exchange, but may effect transactions by transmitting orders
for execution providing for clearance and settlement, and arranging for the
performance of those functions by members of the exchange not associated with
the affiliated broker-dealer. The affiliated broker-dealer will be required to
pay fees charged by those persons performing the floor brokerage elements out of
brokerage compensation that it receives from a Fund.
Portfolio turnover rates measure the portion of a Fund's
portfolio securities that is replaced in a one-year period. A 100% turnover rate
would occur, if, for example, all of a Fund's securities were replaced one time
during a one-year period. Certain of the Fund's investment strategies may result
in the Fund having a high portfolio turnover rate. Higher portfolio turnover may
cause a Fund to experience increased transaction costs, brokerage expenses and
other acquisition costs, and shareholders to incur increased taxes on their
investment in the Fund. GEAM does not consider portfolio turnover rate a
limiting factor in making investment decisions on behalf of any Fund consistent
with the Fund's investment objective and policies. Variations in portfolio
turnover rate may be due to fluctuations in shareholder purchase, exchange and
redemption transactions, market conditions or changes in GEAM's outlook. The
Money Market Fund may attempt to increase its yield by trading to take advantage
of short-term market variations, which trading would result in the Fund's
experiencing high portfolio turnover. Because purchases and sales of money
market instruments are usually effected as principal transactions, however, this
type of trading by the Money Market Fund will not result in the Fund's paying
higher brokerage commissions.
The following table shows the portfolio turnover rates for
each Fund for the fiscal periods ended December 31, 1999 and December 31, 1998:
-40-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------- -------------------------------------- --------------------------------------
Portfolio Turnover for Period Ended Portfolio Turnover for Period Ended
Fund 12/31/99 12/31/98
- ------------------------------- -------------------------------------- --------------------------------------
<S> <C> <C>
Elfun Trusts 11% 15%
- ------------------------------- -------------------------------------- --------------------------------------
International Fund 67% 54%
- ------------------------------- -------------------------------------- --------------------------------------
Diversified Fund 98% 126%
- ------------------------------- -------------------------------------- --------------------------------------
Tax-Exempt Fund 24% 18%
- ------------------------------- -------------------------------------- --------------------------------------
Income Fund 211% 216%
- ------------------------------- -------------------------------------- --------------------------------------
Money Market Fund N/A N/A
- ------------------------------- -------------------------------------- --------------------------------------
</TABLE>
WHO MAY OWN FUND UNITS
The Prospectus lists eligible purchasers of Fund Units, which
includes Elfun Society members and their spouses and children. In the case of
minor children of Elfun Society members, Units must be registered in the name of
a custodian under a Uniform Gifts to Minors statute or in the name of a trust in
which such children have a beneficial interest.
Units may only be transferred to persons or entities otherwise
eligible to own Units and to trusts for the exclusive benefit of such persons or
entities. Units are not otherwise transferable but unit-holders may assign their
right to redeem their Units for purposes of collateral for a loan by executing
an instrument of assignment from the Servicing Agent.
Units may be registered in the joint names of two adults
eligible to own Units and provide for the right of survivorship as between the
joint unit-holders, unless the unit-holders reside in a community property state
or request tenancy in common.
MANAGEMENT OF THE FUNDS
Trustees and Officers
The Boards of Trustees of the Funds oversee the business
affairs of the Funds. The Boards of Trustees approve all significant agreements
between the Funds and the persons and companies that furnish services to the
Funds, including agreements with the Funds' investment adviser and
administrator, distributor, custodian and transfer agent. The day-to-day
operations of the Funds have been delegated to GEAM.
The names of the Trustees and executive officers of the Funds,
their addresses and their principal occupations during the past five years and
their other affiliations are shown below. Each person named as Trustee also may
serve in a similar capacity for other Funds advised by GEAM. The executive
officers of the Funds are employees of organizations that provide services to
the Funds. The business address of each Trustee and executive officer is 3003
Summer Street, P. O. Box 7900, Stamford, Connecticut 06904-7900. All Trustees
and officers have been officers or employees of GE for more than five years.
Pursuant to an exemptive order received from the Commission, each of the Funds
is exempt from the provisions of the 1940 Act which require a registered
investment company to have non-interested persons on its Board of Trustees.
-41-
<PAGE>
<TABLE>
<CAPTION>
Principal
Position(s) Held Occupation(s)
Name and Address with the Funds During Past Five Years
- ---------------- -------------- ----------------------
<S> <C> <C>
John H. Myers Trustee Age 54. President, Chief Executive Officer and
Director of GEAM since 1997, Director of GEAM since
1988, and Executive Vice President of GEAM - Fixed
Income and Alternative Investments from 1988 - 1996;
President, Chief Executive Officer and Director of
GEIC from 1997 - 2000 (when GEIC was merged into
GEAM), Director of GEIC from 1987 - 2000, Executive
Vice President - Fixed Income and Alternative
Investments of GEIC from 1986 - 1996.
Eugene K. Bolton Trustee Age 56. Executive Vice President - Domestic Equity
Investments and Director of GEAM since 1991;
Executive Vice President - Domestic Equity
Investments and Director of GEIC from 1991 - 2000
(when GEIC was merged into GEAM); Senior Vice
President - Pension Fund Portfolios of GEIC from 1987
to 1991.
Michael J. Cosgrove Trustee Age 50. President, GE Asset Management Services of
GE Financial Assurance Holdings, Inc., an indirect
wholly-owned subsidiary of General Electric Company
("GE"), since 1997; Vice President of GE Capital
Corporation, an indirect wholly-owned subsidiary of
GE, since 1999; Executive Vice President - Mutual
Funds of GEAM, since March 1993; Director of GEAM
since 1988; Chairman of the Board, Chief-Executive
Officer and President of GE Investment Distributors,
Inc., a registered broker-dealer, since 1993;
Chairman of the Board and Chief Executive Officer of
GE Investment Retirement Services, Inc., since 1998;
Executive Vice President - Mutual Funds of GEIC from
1993 - 2000 (when GEIC was merged into GEAM),
Director of GEIC from 1988 - 2000; and Executive
Vice President - Finance and Administration of GEAM
and GEIC from 1988 until 1993.
Alan M. Lewis Trustee and Secretary Age 53. Executive Vice President, General Counsel and
Secretary of GEAM since 1988 and of GEIC from 1987
- 2000 (when GEIC was merged into GEIC).
</TABLE>
-42-
<PAGE>
<TABLE>
<CAPTION>
Principal
Position(s) Held Occupation(s)
Name and Address with the Funds During Past Five Years
- ---------------- -------------- ----------------------
<S> <C> <C>
David B. Carlson Portfolio Manager (Elfun Age 42. Senior Vice President - Equity Portfolios of
Trusts and Diversified GEAM since 1991; Senior Vice President - Equity
Fund) Portfolios of GEIC from 1991 - 2000 (when GEIC was
merged into GEAM); Senior Vice President - Mutual Fund
Portfolios from 1990 - 1991; Vice President - Mutual Fund
Portfolios from 1987 - 1991.
Robert R. Kaelin Portfolio Manager (Tax Age 53. Senior Vice President-Municipal Bonds of
Exempt Fund) GEAM since 1988 and of GEIC from 1984 - 2000 (when
GEIC was merged into GEAM).
Ralph R. Layman Portfolio Manager and Age 44. Executive Vice President - International
Trustee Equity Investments of GEAM since 1993; Executive
(International Fund) Vice President - International Equity Investments of
GEIC from 1993 - 2000 (when GEIC was merged into GEAM);
Senior Vice President - International Equity Investments
of GEAM and GEIC from 1991 until 1993; Executive Vice
President, Partner and Portfolio Manager of Northern
Capital Management from 1989 - 1991; and prior thereto,
Vice President and Portfolio Manager of Templeton
Investment Counsel.
Robert A. MacDougall Portfolio Manager and Age 51. Executive Vice President - Fixed Income and
Trustee (Income Fund, Director of GEAM since 1997; Executive Vice President
Diversified Fund and - Fixed Income and Director of GEIC from 1997 - 2000
Money Market Fund) (when GEIC was merged into GEAM); Senior Vice
President - Taxable Fixed Income of GEAM and GEIC
from 1990 - 1996.
Donald W. Torey Trustee Age 43. Director of GEAM since 1993; Executive Vice
President - Alternative Investments of GEAM since
1997; Director of GEIC from 1993 - 2000 (when GEIC
was merged into GEAM); Executive Vice President -
Alternative Investments of GEIC from 1997 - 2000;
Executive Vice President - Finance and Administration
of GEAM and GEIC from 1993 to 1997; Manager -
Mergers and Acquisitions Finance for GE from 1989 -
1993; Vice President - Private Placements of GEIC
from 1988 - 1989.
John J. Walker Trustee Age 47. Chief Financial Officer of GEAM since 1999; Chief
Financial Officer of GEIC from 1999 - 2000 (when GEIC was
merged into GEAM); Chief Financial Officer of GE Capital
- Global Consumer Finance from 1996 - 1999; Chief
Financial Officer of GE Capital - Commercial Finance from
1992 - 1996; Finance Director of GE Capital - TIFC from
1988 - 1992.
</TABLE>
While Trustees of the Funds who are employees of GE will serve
as Trustees without compensation, each Fund will be required to reimburse GEAM
for the portion of the remuneration such persons receive from GE which is
reasonably allocable to the Fund. All Trustees are currently employees of GE.
However no portion of the remuneration such persons receive from GE has been
allocated to their service as Trustees of the Fund and GEAM does not
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<PAGE>
anticipate that any such allocation will be made in the future. If a Trustee
were not affiliated with GE, such Trustee would be compensated by the Fund in
amounts approved by the other Trustees.
GEAM investment personnel may engage in securities
transactions for their own accounts pursuant to a code of ethics that
establishes procedures for personal investing and restricts certain
transactions.
<TABLE>
<CAPTION>
Trustees' Compensation
(for the year ended December 31, 1999)
Total Compensation Total Compensation from all Investment
Name of Trustee from Each Fund Companies Managed by GEIC or GEAM*
- --------------- -------------- ----------------------------------
<S> <C> <C>
Eugene K. Bolton None None
Michael J. Cosgrove None None**
Alan M. Lewis None None**
Robert A. MacDougall None None
John H. Myers None None
Ralph R. Layman None None
Donald W. Torey None None
Thomas J. Szkutak*** None None
</TABLE>
- ---------------
* As of December 31, 1999, each Trustee served as a Trustee of eight
investment companies advised by GEIC, including the Funds. Effective
March 31, 2000, GEIC was merged into GEAM and GEAM continued as
investment adviser to those Funds. Messrs. Cosgrove and Lewis also
serve as Trustees of four other investment companies advised by GEAM.
** Messrs. Cosgrove and Lewis also are considered to be interested persons
of each investment company advised by GEAM, as defined under Section
2(a)(19) of the 1940 Act, and accordingly, serve as Trustees thereof
without compensation.
*** Mr. Szkutak served as a Trustee until March 31, 1999.
Investment Adviser and Administrator
General Electric Company ("GE") is not a party to any Fund
Agreement and does not sponsor any of the Funds. The Funds were formed at the
request of the Elfun Society and GE does not guarantee performance or continued
operation of the Funds, or encourage participation in the Funds.
-44-
<PAGE>
GE Asset Management Incorporated ("GEAM"), which was formerly
named GE Investment Management Incorporated, serves as the Funds' investment
adviser. GEAM is registered as an investment adviser under the Investment
Advisers Act of 1940, as amended, ("IAA") and is located at 3003 Summer Street,
P.O. Box 7900, Stamford, Connecticut 06904-7900. GEAM, which was formed under
the laws of Delaware in 1988, is a wholly owned subsidiary of GE. General
Electric Investment Company ("GEIC"), a wholly owned subsidiary of GE formed
under the laws of Delaware in 1977 and registered as an investment adviser under
the IAA, served as investment adviser to the Funds until March 31, 2000, when it
was merged into GEAM and at which time GEAM continued as investment adviser to
the Funds. Prior to this merger, the professionals responsible for the
investment operation at GEIC served in similar capacities at GEAM. GE provides
the personnel and other resources necessary for GEAM to perform its obligations
under the investment advisory agreements with the Funds. GE is a highly
diversified conglomerate comprised of 12 global manufacturing and service sector
businesses. GE's businesses include aircraft engines, appliances, capital
services, lighting, medical systems, broadcasting, plastic manufacturing, power
systems, electrical distribution and control systems, industrial control
systems, information services and transportation systems.
GEAM also serves as investment adviser to the General Electric
Pension Trust and, under the General Electric Savings and Security Program,
serves as investment adviser to the various investment portfolios for that
Program, including the GE S&S Program Mutual Fund and the GE S&S Long Term
Interest Fund. In addition, GEAM has acted as the investment adviser to the GE
Funds, currently consisting of twenty-one portfolios, since their inception in
1993, and other institutional accounts, including the three portfolios of
Financial Investors Trust since March 1997 and the investment portfolios of the
GE Investments Funds, Inc., currently consisting of fourteen portfolios offered
solely to insurance companies that fund certain variable contracts since May
1997. GEAM also has acted as an investment adviser to the six portfolios of the
GE Lifestyle Funds, which invest exclusively in certain GE Funds, since their
inception in 1997 and to GE Institutional Funds' fifteen portfolios since their
inception in 1997.
The investment professionals at GEAM and its predecessors have
managed GE's pension assets since 1927. As of December 31, 1999, GEAM oversaw
more than 115.8 billion and managed more than 91.7 billion assets, of which more
than 18.2 billion was invested in mutual fund assets.
Personnel of each of the Funds, GEAM, and GE Investment
Distributors, Inc. are subject to a code of ethics, pursuant to Rule 17j-1 under
the 1940 Act, which establishes procedures for personal investing and restricts
certain transactions by persons subject to the code.
Distributor
GE Investment Distributors, Inc. (formerly named GE Investment
Services Inc.), located at 777 Long Ridge Road, Building B, Stamford,
Connecticut 06927, serves as distributor of the Funds' Units (the "Distributor")
on a continuing best efforts basis. The Distributor, an indirect wholly-owned
subsidiary of GE, also serves as distributor for the GE Funds, GE Institutional
Funds, GE Lifestyle Funds and GE Investments Funds, Inc. Michael J. Cosgrove, a
-45-
<PAGE>
member of the Funds' Board of Trustees, is the Chairman of the Board, Chief
Executive Officer and President of the Distributor.
Investment Advisory and Unit-holder Servicing Agreements
As each Fund's investment adviser, GEAM, subject to the
supervision of the Funds' Board of Trustees, manages the each Fund's portfolio
in accordance with its investment objective(s) and stated policies, makes
investment decisions for the Fund and places purchase and sales orders for the
Fund's portfolio transactions.
Until January 1, 1999, GEIC (predecessor to GEAM) served as
the Fund's unit-holder servicing agent. On January 1, 1999, GEID assumed GEAM's
responsibilities as unit-holder servicing agent. As servicing agent, GEID is
responsible for processing redemption requests, providing services that assisted
the Funds' transfer agent and responding to unit-holder inquiries.
Investment Advisory Fees and Unit-holder Servicing Agent Fees
GEAM will receive, as the sole consideration for services as
investment adviser, the reasonable costs, both direct and indirect, incurred in
providing its services, including costs of office facilities and clerical help.
The amounts paid to GEIC by the Funds for the reasonable costs
-46-
<PAGE>
incurred by it for providing services as adviser and administrator for the
following years ended December 31, were as follows:
<TABLE>
<CAPTION>
- ------------------------------- --------------------------------------------------------------------------------------
Investment Advisory Fees
---------------------------- ---------------------------- ----------------------------
Fund 1999 1998 1997
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C>
Elfun Trusts $1,472,000 $1,051,000 $626,000
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
International Fund $146,000 $200,000 $182,000
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Diversified Fund $123,000 $139,000 $ 93,000
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Tax-Exempt Fund $1,133,000 $587,000 $730,000
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Income Fund $142,000 $164,000 $151,000
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Money Market Fund $74,000 $56,000 $ 78,000
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
</TABLE>
The amounts paid to GEID by the Funds for the reasonable costs
incurred by it for providing services as Unit-holder Servicing Agent for the
following years ended December 31, were as follows:
<TABLE>
<CAPTION>
- ------------------------------- --------------------------------------------------------------------------------------
Unit-holder Servicing Fees
---------------------------- ---------------------------- ----------------------------
Fund 1999 1998 1997
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C>
Elfun Trusts $370,000 $543,000 $175,000
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
International Fund $97,000 $156,000 $ 53,000
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Diversified Fund $65,000 $96,000 $ 32,000
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Tax-Exempt Fund $167,000 $255,000 $ 85,000
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Income Fund $94,000 $140,000 $ 47,000
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Money Market Fund $67,000 $97,000 $32,000
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
</TABLE>
Securities Activities of the Investment Manager
Securities held by the Funds also may be held by other funds
or separate accounts for which GEAM acts as an adviser. Because of different
investment objectives or other factors, a particular security may be bought by
GEAM for one or more of their clients, when one or more other clients are
selling the same security. If purchases or sales of securities for a Fund or
other client of GEAM arise for consideration at or about the same time,
transactions in such securities will be made, insofar as feasible, for the Fund
and other clients in a manner deemed equitable to all. To the extent that
transactions on behalf of more than one client of GEAM during the same period
may increase the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price.
On occasions when GEAM (under the supervision of the Board of
Trustees) deems the purchase or sale of a security to be in the best interests
of the Funds as well as other funds or accounts for which GEAM acts as an
investment adviser, it may, to the extent permitted by applicable laws and
regulations, but will not be obligated to, aggregate the securities to be sold
or purchased for the Funds with those to be sold or purchased for other funds or
accounts in order to obtain favorable execution and low brokerage commissions.
In that event, allocation of the securities purchased or sold, as well as the
expenses incurred in the transaction, will be made
-47-
<PAGE>
by GEAM in the manner it considers to be most equitable and consistent with its
fiduciary obligations to the Funds and to such other funds or accounts. In some
cases this procedure may adversely affect the size the position obtainable for a
Fund.
Custodian, Transfer Agent and Dividend Paying Agent
State Street Bank and Trust Company ("State Street"), located
at 225 Franklin Street, Boston, Massachusetts 02101, serves as custodian,
transfer agent and dividend paying agent of the Funds' investments. As
custodian, State Street is responsible for the safekeeping of securities and
does not otherwise participate in investment policies or in the determination of
investment decisions.
PURCHASE, REDEMPTION AND EXCHANGE OF UNITS
Purchase of Units
Units of the Funds are sold to investors at the net asset
value per unit next determined after receipt of an investment in good order by
State Street Bank and Trust Company, the Funds' custodian and transfer agent.
Purchase orders for Units of a Fund will be accepted by the Fund only on a day
on which the Fund's net asset value is calculated. The Fund may in its
discretion reject any order for the purchase of Units of a Fund. With respect to
all purchases, dividends begin to accrue on the next business day following the
receipt of the unit-holder's check or funds.
For unit-holder convenience and in the interest of economy,
the Funds no longer issue physical certificates representing Units in any Fund
("Certficate Units"). Ownership of Units is evidenced by Statements of Account
representing Units issued in book-entry form ("Bookunits").
Detailed information on how to purchase Units of a Fund is
included in the Prospectus. For a description of the manner of calculating a
Fund's net asset value, see "Net Asset Value" below in this SAI.
By Mail
Investors can purchase Units of a Fund by sending a cash
purchase application form and a check made payable to the applicable Fund in
U.S. currency and drawn on a U.S. bank along with account information and
instructions. Third-party checks or endorsed checks are not accepted by the
Funds for payment of Units of the Fund. Except for Money Market Fund
confirmations which are provided monthly, confirmations will be sent
acknowledging each purchase daily. If the check used for purchase does not
clear, the Fund will cancel the purchase and the investor may be liable for
losses or fees incurred. Checks are accepted subject to collection at full face
value in U.S. funds and must be drawn on a U.S. bank.
-48-
<PAGE>
By Wire Transfer
Investors can purchase Units of a Fund by transferring funds
by wire from the unit-holder's bank account to the Fund. The unit-holder's bank
may charge a fee for this service. The Servicing Agent should be contacted
concerning the details of wire transfers.
By Payroll Savings Plan
An investor can purchase Units of a Fund (minimum of $25 per
transaction) automatically on a regular basis by furnishing a completed Payroll
Deduction Authorization Elfun Mutual Funds Form to their Servicing Agent.
Statements of Account are sent on a quarterly basis to those who invest through
payroll deductions.
Automatic Investment Plan
Investors may arrange to make purchases of Units automatically
on a monthly basis by electronic funds transfer (minimum of $25 per transaction)
from the checking, NOW, bank money market deposit account or credit union
account designated by the investor if their bank or credit union is a member of
an automated clearing house or by preauthorized checks drawn on their bank or
credit union account. Unit-holders will receive written confirmation (for all
Funds other than the Money Market Fund on a quarterly basis, and for the Money
Market Fund, on a monthly basis) for every transaction and a debit entry will
appear on the bank or credit union statement. If an automatic investment
transaction fails due to insufficient funds in your account, you may be assessed
an additional charge. To make arrangements for automatic monthly investments,
call the Funds at 1-800-242-0134 for further information. Investors may change
the purchase amount or terminate this privilege at any time.
The Funds may modify or terminate this privilege at any time
or charge a service fee; however, no service fee is currently contemplated.
Subsequent Purchase of Units
Investors may purchase additional Units of a Fund at any time
in the manner outlined above. All payments should clearly indicate the
investor's account number.
Redemption of Units
Detailed information on how to redeem Units of a Fund is
included in the Prospectus. The right of redemption of Units of a Fund may be
suspended or the date of payment postponed as provided in the Prospectus.
Units may be redeemed and their proceeds remitted to the
unit-holder or transferred to another Fund either by telephonic request or by
mail. Units of a Fund may be redeemed on any day on which the Fund's net asset
value is calculated. A duly executed redemption form received by mail will be
effected at the net asset value per Unit next determined. If the unit-
-49-
<PAGE>
holder has completed and returned a telephone redemption form, the unit-holder
may request that the proceeds be transferred by wire to the bank account
specified in the form or transferred to another Fund. Telephonic redemption
requests received before the close of trading on the NYSE (currently 4:00 p.m.
New York time), the Units will be valued at the net asset value determined for
the next business day.
The value of each Unit on redemption may be more or less than
the unit-holder's cost, depending upon the market value of the portfolio
securities at the time of redemption. Dividends are earned through and including
the date of receipt of the redemption request. For Federal income tax purposes,
a redemption of Units (including a redemption and transfer to another Fund or a
transfer to an Elfun IRA) may result in a unit-holder realizing a taxable gain
or loss.
The Trustees of a Fund may suspend the unit-holders' right of
redemption or postpone the date of payment for any period during which (1)
trading on the NYSE is closed for other than weekends and holidays or during
which trading on the NYSE is restricted, (2) an emergency exists as a result of
which disposal by the Fund of its investments is not reasonably practicable or
it is not reasonably practicable for the Fund fairly to determine the value of
its net assets, or (3) the SEC may by order permit for the protection of
unit-holders of the Fund.
A unit-holder of the Money Market Fund must maintain a minimum
investment in the Fund of $500, so that care should be exercised to ensure that
redemptions do not reduce the unit-holder's investment below this minimum. If
the unit-holder's account balance is less than $500, the Fund may automatically
redeem the Units in the account and remit the proceeds to the unit-holder so
long as the unit-holder is given 30 days' prior written notice of the action. In
addition, if the unit-holder has checkwriting privileges, redemption of $100 or
more may be made by writing a check either to the unit-holder or to a third
party.
Redemption by Mail
Bookunits may be redeemed by mail by making a written request
that (1) states the number of units or the specific dollar amount to be
redeemed, (2) identifies the Fund from which the units are to be redeemed, (3)
identifies the account number, and (4) is signed by each registered owner
exactly as units are registered. Units represented by Certificate should be sent
in for deposit into Bookunits.
Redemptions will be made at the net asset value next computed
after receipt of a written request less any redemption fee (not, however, to
exceed 1%) as the Trustees may from time to time prescribe. At the present time,
the Trustees do not contemplate instituting any redemption fee for redemption by
mail. Unit-holders will be notified in advance in the event that a fee for
redemptions by mail is instituted. Names should be signed exactly as they appear
on the Statement of Account or certificate.
Signature guarantees are required for redemptions over
$25,000. In addition, signature guarantees are required for each signature for
requests to have redemption proceeds (1) mailed to an address other than the
address of record, (2) paid to other than the unit-holder, (3) wired to a bank
other than the bank of record, or (4) mailed to an address that has been changed
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within 30 days of the redemption request. All signature guarantees must be
guaranteed by a commercial bank, trust company, broker, dealer, credit union,
national securities exchange or registered association, clearing agency, savings
association or by Managers of Personnel Accounting of GE or their designated
alternates. The Fund may require additional supporting documents for redemptions
made by corporations, executors, administrators, trustees, guardians or persons
utilizing a power of attorney. A request for redemption will not be deemed to
have been submitted until the Fund receives all documents typically required to
assure the safety of a particular account. The Fund may waive the signature
guarantee on a redemption of $25,000 or less if it is able to verify the
signatures of all registered owners from its accounts.
If the account is a joint account, requests for redemption
must be signed by each unit-holder. The Fund may take up to seven days to mail
the redemption proceeds, but will normally send the payment in less time.
Dividends are earned through and including the date of receipt of the redemption
request.
Upon request of a unit-holder redeeming Units by mail, the
unit-holder may request that the proceeds be transferred by wire to the
unit-holder's bank account (which has been previously identified in writing to
the Servicing Agent or such request is signature guaranteed). The minimum amount
that may be transferred by wire is $1,000 and there is a $10 fee. If no request
for wire transfer is made, the proceeds will be mailed to the unit-holder.
Redemption by Telephone
Bookunits (not Certificate Units) of a Fund may be redeemed by
telephone, although a unit-holder first must complete and return to the
Servicing Agent a form authorizing redemption of Bookunits by telephone. A
telephone redemption form can be obtained from the Servicing Agent. Proceeds
from a telephonic wire redemption request will be either transferred by wire to
the unit-holder's bank account (which has previously been identified in writing
to the Servicing Agent) or by check to the unit-holder's address of record or
transferred to another Elfun Fund, as the unit-holder directs. A single $10
charge will be assessed by the Fund in connection with each telephonic
redemption wire request. The redemption proceeds will either be reduced by this
charge or deducted from the balance of the account. There is no fee to redeem
Units by telephone if the proceeds are transferred to another Fund or paid by
check. If the account is registered jointly in the name of more than one
unit-holder, only one unit-holder will be required to authorize redemption of
Units by telephone, and the Servicing Agent will be entitled to act upon
telephonic instructions of any unit-holder of a joint account. Wire transfers
will be made directly to the account specified by the unit-holder if that bank
is a member of the Federal Reserve System or to a correspondent bank if the bank
holding the account is not a member. Fees on wire transfers may also be imposed
by the bank and will be the responsibility of the unit-holder. A Fund may modify
or terminate the ability to make telephonic requests at any time.
Except for Money Market Fund transactions, confirmations of
the telephonic redemptions will be sent within seven days of the date of
redemption. Wire transfer of funds
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will be made within two business days following the telephonic request.
Dividends will be earned through and including the date of receipt of the
redemption request.
Telephonic redemption requests may be difficult to implement
in times of drastic economic or market changes. In the even unit-holders of a
Fund are unable to contact the Fund by telephone, unit-holders should write to
the Fund at its address set forth on the cover of this Prospectus.
By making a telephonic redemption request, a unit-holder
authorizes the Servicing Agent to act on the telephonic redemption instructions
by any person representing himself or herself to be the unit-holder and believed
by the Servicing Agent to be genuine. The Fund and the Servicing Agent will
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine and the Servicing Agent's records of such instructions
will be binding. If the procedures, which include the use of a personal
identification number ("PIN") system and the provision of written confirmation
of transactions effected by telephone, were not employed by the Fund and the
Servicing Agent, they could be subject to liability for any loss resulting from
unauthorized or fraudulent instructions. As a result of compliance with this
policy, if the Servicing Agent follows the procedures outlined above and has a
good faith belief that the instructions it received were genuine, the
unit-holder will bear the risk of loss in the event of a fraudulent redemption
transaction.
Automatic Withdrawal Plan
The Automatic Withdrawal Plan ("Withdrawal Plan") permits
investors in a Fund to request withdrawal of a specified dollar amount (minimum
of $50) on a monthly, quarterly or annual basis. The entire amount of a payment
automatically withdrawn pursuant to the Withdrawal Plan is taken from redemption
of Units in the investor's account on the twenty-fifth day of each month (or
prior to such date if the twenty-fifth is not a business day). Checks for the
amount withdrawn are mailed or an electronic funds transfer (if requested by an
investor) is processed on the following business day. The withdrawal amount will
be "net " after deduction of any redemption fee should any redemption fee be
imposed.
Payments made under the Withdrawal Plan do not provide a
guaranteed annuity. The minimum rate of withdrawal and minimum investment should
not be regarded as recommendations of a Fund. Under any withdrawal plan,
continued withdrawals in excess of dividends, distributions and increases in
unrealized appreciation, if any, will eventually use up principal, particularly
in a period of declining market prices. Unit-holders will receive written
confirmation of transactions pursuant to the Withdrawal Plan (for all Funds
other than the Money Market Fund on a quarterly basis, and for the Money Market
Fund on a monthly basis).
A portion of the amount withdrawn may represent a taxable
capital gain or loss to the unit-holder, depending upon the unit-holder's cost.
Participation in the Withdrawal Plan may be terminated at any time without
penalty upon written notice from the untiholder. The cost of administering the
Withdrawal Plan is borne by each Fund as an expense of its unit-holders. An
application for and additional information about the Systematic Withdrawal Plan
can be obtained from the Servicing Agent.
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Involuntary Redemptions
An account of a unit-holder of a Fund that is reduced by
redemptions, and not by reason of market fluctuations to a value of $500 or less
may be redeemed by the Funds, but only after the unit-holder has been given
notice of at least 30 days in which to increase the balance in the account to
more than $500.
Distributions In Kind
If the Board of Trustees determines that it would be
detrimental to the best interests of a Fund's unit-holders to make a redemption
payment wholly in cash, each Fund may pay, in accordance with rules adopted by
the SEC, any portion of a redemption in excess of the lesser of $250,000 or 1%
of the Fund's net assets by a distribution in kind of portfolio securities in
lieu of cash. Redemptions failing to meet this threshold must be made in cash.
Portfolio securities issued in a distribution in kind will be deemed by GEAM to
be readily marketable. Unit-holders receiving distributions in kind of portfolio
securities may incur brokerage commissions when subsequently disposing of those
securities.
Checkwriting Privileges
A unit-holder of the Money Market Fund may request in an
application form or by letter sent to State Street Bank and Trust Company
("State Street" or the "Custodian") that he or she would like checkwriting
privileges, which are provided at no cost to the unit-holder. The Money Market
Fund will provide redemption checks ("Checks") drawn on the unit-holder's
account. Checks will be sent only to the unit-holder of the account and only to
the address of record. The application or written request must be manually
signed by the unit-holder. Checks may be made payable to the order of any person
in an amount of $100 or more. Dividends are earned until the Check clears. When
a Check is presented to State Street for payment, State Street, as agent, will
cause the Money Market Fund to redeem a sufficient number of Units in the
unit-holder's account to cover the amount of the Check. Unit-holders generally
will be subject to the same rules and regulations that State Street applies to
checking accounts. Unless otherwise specified in writing to the Servicing Agent,
only the signature of one unit-holder of a joint account is required on Checks.
Checks may not be written to redeem Units purchased by check
until the earlier of (1) the date that good funds are credited to State Street
by its correspondent bank or (2) 15 days from the date of receipt of the check
utilized to purchase Units. If the amount of the Check is greater than the value
of the Units in a unit-holder's account, the Check will be returned marked
"insufficient funds." Checks should not be used to close an account. Checks
written on amounts subject to the hold described above will be returned marked
"uncollected." If the Check does not clear, the unit-holder will be responsible
for any loss that the Money Market Fund or State Street incurs.
The Fund may modify or terminate the checkwriting privilege at
any time on 30 days' notice to participating unit-holders. The checkwriting
privilege is subject to State Street's rules and regulations and is governed by
the Massachusetts Uniform Commercial Code. All
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notices with respect to Checks drawn on State Street must be given to State
Street. Stop payment instructions may be given by calling 800-242-0134.
Exchange Privilege
The exchange privilege described in the Prospectus enables a
unit-holder of a Fund to acquire Units in a Fund having a different investment
objective and policies when the unit-holder believes that a shift between Funds
is an appropriate investment decision. Units of one Fund may be redeemed and
their proceeds remitted to the unit-holder or exchanged to any other Fund either
by telephone request or by mail.
The privilege is available to unit-holders residing in any
state in which Units of the Fund being acquired may legally be sold. Exchanges
can only be made to an account with another Fund held by the unit-holder in an
identical name and manner. A portion of the amount exchanged may represent
taxable capital gain or loss to the unit-holder, depending on the unit-holder's
cost. Prior to exchange with another Fund, a unit-holder must have a current
prospectus for the Fund to which the proceeds are being exchanged. A Fund may,
upon 60 days' prior written notice to the unit-holders of a Fund, may materially
modify or terminate the exchange privilege with respect to a Fund.
NET ASSET VALUE
With certain limited exception, each Fund's net asset value
per Unit is calculated by GEAM or the Custodian on each day, Monday through
Friday, except on days on which the NYSE is closed. On those days, securities
held by a Fund may nevertheless be actively traded, and the value of the Fund's
Units could be significantly affected.
Because of the need to obtain prices as of the close of
trading on various exchanges throughout the world, the calculation of the net
asset value of certain Funds may not take place contemporaneously with the
determination of the prices of many of their portfolio securities used in the
calculation. A security that is listed or traded on more than one exchange is
valued at the quotation on the exchange determined to be the primary market for
the security. All assets and liabilities of the Funds initially expressed in
foreign currency values will be converted into U.S. dollar values at the mean
between the bid and offered quotations of the currencies against U.S. dollars as
last quoted by any recognized dealer. If these quotations are not available, the
rate of exchange will be determined in good faith by a Fund's Board of Trustees.
In carrying out the Board's valuation policies, GEAM may consult with one or
more independent pricing services ("Pricing Service") retained by the Funds.
Debt securities of U.S. issuers (other than Government
Securities and short-term investments), including Municipal Obligations, are
valued by a dealer or by a Pricing Service based upon a computerized matrix
system, which considers market transactions and dealer supplied valuations.
Valuations for municipal bonds are obtained from a qualified municipal bond
pricing service; prices represent the mean of the secondary market. When, in the
judgment of the Pricing Service, quoted bid prices for investments of the
Tax-Exempt Fund are readily available and are representative of the bid side of
the market, these investments are valued at the
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mean between the quoted bid prices and asked prices. Investments of the
Tax-Exempt Fund that are not regularly quoted are carried at fair value as
determined by or under the direction of the Board of Trustees, which may involve
the assistance of the Pricing Service. The procedures of the Pricing Service are
reviewed periodically by GEAM under the general supervision and responsibility
of the Board of Trustees of the Fund.
Securities and assets for which market quotations are not
readily available are valued at fair value as determined in good faith by or
under the direction of the Board of Trustees.
The valuation of the portfolio securities of the Money Market
Fund is based upon amortized cost, which does not take into account unrealized
capital gains or losses. Amortized cost valuation involves initially valuing an
instrument at its cost and thereafter assuming a constant amortization to
maturity of any discount or premium, regardless of the effect of fluctuating
interest rates on the market value of the instrument. Although this method
provides certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price the Money Market
Fund would receive if it sold the instrument.
The use of the amortized cost method of valuing the portfolio
securities of the Money Market Fund is permitted by a rule adopted by the SEC.
Under this rule, the Money Market Fund must maintain a dollar-weighted average
portfolio maturity of 90 days or less, purchase only instruments having
remaining maturities of 397 calendar days or less, and invest only in "eligible
securities" as defined in the rule, which are determined by GEAM to present
minimal credit risks. Pursuant to the rule, GEAM has established procedures
designed to stabilize, to the extent reasonably possible, the Fund's price per
Unit as computed for the purpose of sales and redemptions at $1.00. These
procedures include review of the Money Market Fund's portfolio holdings at such
intervals as GEAM may deem appropriate, to determine whether the Fund's net
asset value calculated by using available market quotations or market
equivalents deviates from $1.00 per Unit based on amortized cost.
The rule regarding amortized cost valuation provides that the
extent of certain significant deviations between the Money Market Fund's net
asset value based upon available market quotations or market equivalents and the
$1.00 per Unit net asset value based on amortized cost must be examined by the
Fund's Board of Trustees. In the event the Board of Trustees determines that a
deviation exists that may result in material dilution or other unfair results to
investors or existing unit-holders of the Money Market Fund, the Board of
Trustees must, in accordance with the rule, cause the Fund to take such
corrective action as the Board of Trustees regards as necessary and appropriate,
including: selling portfolio instruments of the Fund prior to maturity to
realize capital gains or losses or to shorten average portfolio maturity;
withholding dividends or paying distributions from capital or capital gains;
redeeming Units in kind; or establishing a net asset value per Unit by using
available market quotations.
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DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends and Distributions
Net investment income (that is, income other than long- and
short-term capital gains) and net realized long- and short-term capital gains
are determined separately for each Fund. Dividends derived from net investment
income and distributions of net realized long-term and short-term capital gains
paid by a Fund to a unit-holder are automatically reinvested (at current net
asset value) in additional Units of the Fund (which will be depositied in the
unit-holder's account) unless the unit-holder instructs the Fund, by telephone
or in writing, to pay all dividends and distributions in cash. A cash election
remains in effect until the unit-holder notifies the Fund by telephone or in
writing to discontinue the election.
If it is determined, however, that the U.S. Postal Service
cannot properly deliver Fund mailings to the unit-holder, the Fund may terminate
the unit-holder's election to receive dividends and distributions in cash.
Thereafter, the unit-holder's subsequent dividends and other distributions will
be automatically reinvested in additional Units of the Fund until the
unit-holder notifies the Fund in writing his or her correct address and requests
in writing that the election to receive dividends and other distributions in
cash to be reinstated. Unit-holders may contact the Servicing Agent for details
concerning this election.
Unit-holders may elect to apply dividends and distributions to
the purchase of Units in another Elfun Fund with which they have an account. The
account with the other Elfun Fund must be held by the unit-holder in the
identical name and manner as the account held with the Fund.
If a unit-holder redeems all of his Units of the Tax-Exempt
Fund, the Income Fund or the Money Market fund at any time during a month, all
dividends to which the unit-holder is entitled will be paid to the unit-holder
along with the proceeds of his redemption. Written confirmations relating to the
automatic reinvestment of daily dividends are sent to unit-holders within five
days following the end of each quarter for the Tax-Exempt fund and the Income
Fund, and within five days following the end of each month for the Money Market
Fund.
Distributions of any net realized long-term and short-term
capital gains earned by a Fund are made annually. These dividends and
distributions are determined in accordance with income tax regulations which may
differ from generally accepted accounting principals. All expenses of the
Tax-Exempt Fund, the Income Fund and the Money Market Fund are accrued daily and
deducted before declaration of dividends to unit-holders. Earnings of the
Tax-Exempt Fund, the Income Fund and the Money Market Fund for Saturdays,
Sundays and holidays will be declared as dividends on the business day
immediately preceeding the Saturday, Sunday or holiday.
Each Fund will be subject to a 4% non-deductable excise tax
measured with respect to certain undistributed amounts of net investment income
and capital gains. If necessary to avoid the imposition of this tax, and if in
the best interests of a Fund's unitholders, the Fund
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will declare and pay dividends of the Fund's net investment income and
distributions of the Fund's net capital gains more frequently than stated above.
Tax Status of the Funds and their Unit-holders
Set forth below is a summary of certain Federal income tax
considerations generally affecting the Funds and their unit-holders. The summary
is not intended as a substitute for individual tax planning, and unit-holders
are urged to consult their tax advisors regarding the application of Federal,
state, local and foreign tax laws to their specific tax situations.
Each Fund will be treated as a separate entity for Federal
income tax purposes. Each Fund intends to continue to qualify each year as a
"regulated investment company" under the Code. If a Fund (1) is a regulated
investment company and (2) distributes to its unit-holders at least 90% of its
net investment income (including for this purpose its net realized short-term
capital gains) and 90% of its tax-exempt interest income (reduced by certain
expenses), the Fund will not be liable for Federal income taxes to the extent
that its net investment income and its net realized long-term and short-term
capital gains, if any, are distributed to its unit-holders. In addition, in
order to avoid a 4% excise tax, a Fund must declare, no later than December 31
and distribute no later than the following January 31, at least 98% of its
taxable ordinary income earned during the calendar year and 98% of its capital
gain net income for the one-year period ending on October 31 of such calendar
year. Alternatively, Funds having a taxable year ending with November or
December may elect to treat their taxable year end as the capital gains
measuring period for excise tax purposes. One requirement for qualification as a
regulated investment company is that each Fund must diversify its holdings so
that, at the end of each quarter, (i) at least 50% of the market value of the
Fund's total assets is represented by cash and cash items, securities of other
regulated investment companies, U.S. government securities and other securities,
with such other securities limited for purposes of this calculation in respect
of any one issuer to an amount not greater than 5% of the value of the Fund's
total assets and not greater than 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its total assets is
invested in the securities of any one issuer or of two or more issuers that are
controlled by the Fund (within the meaning of Section 851(b)(4)(B) of the Code)
that are engaged in the same or similar trades or businesses or related trades
or businesses (other than U.S. government securities or the securities of other
regulated investment companies).
Another requirement for qualification as a regulated
investment company is that each Fund must earn at least 90% of its gross income
from dividends, interest, payments with respect to securities loans, gains from
the disposition of stock or securities (including gains from related investments
in foreign currencies) and income (including gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stocks, securities or currencies (the "90% Test").
If for any taxable year a Fund does not qualify for the
special Federal income tax treatment afforded regulated investment companies,
all of its taxable income will be subject to Federal income tax at regular
corporate rates (without any deduction for distributions to its unit-holders).
In such event, dividend distributions, including amounts derived from interest
on tax-
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exempt obligations, would be taxable to unit-holders to the extent of current
and accumulated earnings and profits, and would be eligible for the dividends
received deduction for corporations in the case of corporate unit-holders.
Net investment income or capital gains earned by a Fund
investing in foreign securities may be subject to foreign income taxes withheld
at the source. The United States has entered into tax treaties with many foreign
countries that entitle the Funds to a reduced rate of tax or exemption from tax
on this related income and gains. The effective rate of foreign tax cannot be
determined at this time since the amount of these Funds' assets to be invested
within various countries is not now known. The Funds intend to operate so as to
qualify for treaty-reduced rates of tax when applicable. In addition, if a Fund
qualifies as a regulated investment company under the Code, if certain
distribution requirements are satisfied, and if more than 50% of the value of
the Fund's assets at the close of the taxable year consists of stocks or
securities of foreign corporations, the Funds may elect, for U.S. Federal income
tax purposes, to treat foreign income taxes paid by the Fund that can be treated
as income taxes under U.S. income tax principles as paid by its unit-holders.
The International Fund anticipates that it may qualify for and make this
election in most, but not necessarily all, of its taxable years. If a Fund were
to make an election an amount equal to the foreign income taxes paid by the Fund
would be included in the income of its unit-holders and the unit-holders would
be entitled to credit their eligible portions of this amount against their U.S.
tax liabilities, if any, or to deduct those portions from their U.S. taxable
income, if any. Foreign taxes paid by a Fund with respect to dividends accrued
are eligible to be treated as credits by Unit-holders only if the securities
paying such dividends are held by the Fund for a specified period of time.
Within 60 days after any year for which it makes an election, the Trust will
report to the unit-holders of the Fund, in writing, the amount per Unit of
foreign tax that must be included in each unit-holder's gross income and the
amounts that will be available as a credit and/or deduction. No deduction for
foreign taxes may be claimed by a unit-holder who does not itemize deductions.
Certain limitations may be imposed on the extent to which the credit (but not
the deduction) for foreign taxes may be claimed.
A Fund's transactions in options and futures contracts are
subject to special provisions of the Code that, among other things, may affect
the character of gains and losses realized by the Fund (that is, may affect
whether gains or losses are ordinary or capital), accelerate recognition of
income to the Fund and defer losses of the Fund. These rules (1) could affect
the character, amount and timing of distributions to unit-holders of a Fund, (2)
will require the Fund to "mark-to-market" certain types of the positions in its
portfolio (that is, treat them as if they were closed out) and (3) may cause the
Fund to recognize income without receiving cash with which to make distributions
in amounts necessary to satisfy the distribution requirements for avoiding
income and excise taxes described above and in the Prospectus. The Funds seek to
monitor transactions, seek to make the appropriate tax elections and seek to
make the appropriate entries in the Fund's books and records when the Fund
acquires any option, futures contract or hedged investment, to mitigate the
effect of these rules and prevent disqualification of the Fund as a regulated
investment company.
In order for the Tax-Exempt Fund to pay exempt-interest
dividends for any taxable year, at the close of each taxable quarter, at least
50% of the aggregate value of the
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Fund's portfolio must consist of exempt-interest obligations. Within 60 days
after the close of the taxable year of the Tax-Exempt Fund, unit-holders will be
notified of the portion of the dividends paid that constitutes an
exempt-interest dividend with respect to that taxable year. The percentage of
total dividends paid by the Tax-Exempt Fund with respect to any taxable year
that qualifies as Federal exempt-interest dividends will be the same for all
unit-holders receiving dividends from the Fund for that year.
Interest on indebtedness incurred by a unit-holder to purchase
or carry Units of the Tax-Exempt Fund is not deductible for income tax purposes
if the Fund distributes exempt-interest dividends during the unit-holder's
taxable year. In addition, if a unit-holder of the Tax-Exempt Fund holds Units
for six months or less, any loss on the sale or exchange of those Units will be
disallowed to the extent of the amount of exempt-interest dividends received
with respect to the Units.
The Tax-Exempt Fund's net investment income for dividend
purposes consists of (i) interest accrued and discount earned on the Fund's
assets, (ii) less amortization of market premium on such assets, accrued
expenses directly attributable to the fund, and the general expenses (e.g.,
legal, accounting and trustees' fees, if any) of the Fund prorated to such Fund
on the basis of its relative net assets. The Tax-Exempt Fund has elected to
currently accrue market discount. Accrued market discount and any other taxable
interest income, net of allocable expenses, is distributed to unit-holders, as
taxable ordinary income dividends.
As a general rule, a unit-holder's gain or loss on a sale or
redemption of Units of a Fund will be a long-term capital gain or loss if the
unit-holder has held the Units for more than one year. The gain or loss will be
a short-term capital gain or loss if the unit-holder has held the Units for one
year or less.
Each Fund's net realized long-term capital gains are
distributed as described in the Prospectus. The distributions ("capital gain
dividends"), if any, are taxable to a unit-holder of a Fund as long-term capital
gains, regardless of how long a unit-holder has held the Units, and will be
designated as capital gain dividends in a written notice mailed by the Trust to
the unit-holders of the Fund no later than 60 days after the close of the Fund's
taxable year. If a unit-holder receives a capital gain dividend with respect to
any Unit of a Fund, and if the Unit is sold before it has been held by the
unit-holder for six months or less, then any loss on the sale or exchange of the
Unit, to the extent of the capital gain dividend, will be treated as a long-term
capital loss. This rule will apply to a sale of Units of the Tax-Exempt Fund
only to the extent the loss is not disallowed under the provision described
above. Investors considering buying Units of a Fund on or just prior to the
record date for a taxable dividend or capital gain distribution should be aware
that the amount of the dividend or distribution payment will be a taxable
dividend or distribution payment.
If a unit-holder of a Fund fails to furnish a correct taxpayer
identification number, fails to report fully dividend or interest income, or
fails to certify that he or she has provided a correct taxpayer identification
number and that he or she is not subject to "backup withholding," then the
unit-holder may be subject to a 31% "backup withholding" tax with respect to (1)
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taxable dividends and distributions from the Fund and (2) the proceeds of any
redemptions of Units of the Fund (other than the Money Market Fund). An
individual's taxpayer identification number is his or her social security
number. The 31% backup withholding tax is not an additional tax and may be
credited against a taxpayer's regular Federal income tax liability.
Statements as to the tax status of each unit-holder's
dividends and distributions are mailed annually. Unit-holders will also receive,
as appropriate, various written notices after the close of their Fund's taxable
year regarding the tax status of certain dividends and distributions that were
paid (or that are treated as having been paid) by the Fund to its unit-holders
during the preceding taxable year, including the amount of dividends that
represents interest derived from Government Securities.
THE FUNDS' PERFORMANCE
As noted in the Prospectus, from time to time, a Fund's
performance may be quoted, in terms of a Fund's yield and/or total return, in
reports or other communications to unit-holders of the Fund or in advertising
material. Additional information regarding the manner in which performance
figures are calculated is provided below.
Yield for the Money Market Fund
The Money Market Fund may, from time to time, include the
yield and effective yield of the Money Market Fund in advertisements or reports
to unit-holders or prospective investors. "Current yield" will be based upon the
income that a hypothetical investment in the Fund would earn over a states
seven-day period. This amount would then be "annualized," which means the amount
of income generated over that week is assumed to be generated each week over a
52-week period and is shown as a percentage of the investment. The Money Market
Fund's "effective yield" will be calculated similarly, but, when annualized, the
income earned by an investment in the Fund is assumed to be reinvested. The
effective yield would be slightly higher than the current yield because of the
compounding effect of this presumed reinvestment.
The yield for the Money Market Fund is computed by (1)
determining the net change in the value of a hypothetical preexisting account in
the Fund having a balance of one Unit at the beginning of a seven-calendar-day
period for which yield is to be quoted, (2) dividing the net change by the value
of the account at the beginning of the period to obtain the base period return,
and (3) annualizing the results (that is, multiplying the base period return by
365/7). The net change in the value of the account reflects the value of
additional Units purchased with dividends declared on the original Unit and any
such additional Units less a hypothetical charge reflecting deductions from
unit-holder accounts, but does not include realized gains and losses or
unrealized appreciation and depreciation. In addition, the Money Market Fund may
calculate a compound effective annualized yield by adding one to the base period
return (calculated as described above), raising the sum to a power equal to
365/7 and subtracting one.
As of December 31, 1999, the Money Market had a seven-day
current yield of 5.74% and an effective seven-day yield of 5.91%. Had GEIC not
absorbed a portion of the
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Money Market Fund's expenses, the Fund's seven-day yield and effective seven-day
yield as of December 31, 1999 would have been lower.
Yield for Other Funds
The Income Fund may, from time to time, advertise a 30-day
"yield" and the Tax-Exempt Fund may advertise an "equivalent taxable yield." The
30-day yield figure of a Fund described in the Prospectus is calculated
according to a formula prescribed by the SEC. The formula can be expressed as
follows:
6
Yield = 2[(a-b + 1) -1]
---
cd
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursement).
c = the average daily number of Units outstanding
during the period that were entitled to receive
dividends.
d = the maximum offering price per Unit on the last
day of the period.
For the purpose of determining the interest earned (variable
"a" in the formula) on debt obligations that were purchased by a Fund at a
discount or premium, the formula generally calls for amortization of the
discount or premium; the amortization schedule will be adjusted monthly to
reflect changes in the market values of the debt obligations.
The Tax-Exempt Fund's tax equivalent yield is computed by
dividing that portion of the Fund's yield that is tax-exempt by one minus a
stated income tax rate and adding the product to that portion, if any, of the
Fund's yield that is not tax-exempt.
Investors should recognize that, in periods of declining
interest rates, a Fund's yield will tend to be somewhat higher than prevailing
market rates, and in periods of rising interest rates the Fund's yield will tend
to be somewhat lower. In addition, when interest rates are falling, moneys
received by a Fund from the continuous sale of its Units will likely be invested
in portfolio instruments producing lower yields than the balance of the Fund's
portfolio, thereby reducing the current yield of the Fund. In periods of rising
interest rates, the opposite result can be expected to occur.
Yield information is useful in reviewing the performance of a
Fund, but because yields fluctuate, this information cannot necessarily be used
to compare an investment in Units of the Fund with bank deposits, savings
accounts and similar investment alternatives that often provide an agreed or
guaranteed fixed yield for a stated period of time. Unit-holders of a Fund
should remember that yield is a function of the kind and quality of the
instruments in the Fund's portfolio, portfolio maturity, operating expenses and
market conditions.
-61-
<PAGE>
The 30-day yield for the period ended December 31, 1999 for
Units of the Tax-Exempt Fund and the Income Fund were as follows: 5.63% and
6.90%, respectively.
The equivalent taxable yield of the Tax-Exempt Fund
demonstrates the yield on a taxable investment necessary to produce an after-tax
yield equal to the Fund's tax-exempt yield. The Tax-Exempt Fund's tax equivalent
yield is computed by dividing that portion of the Fund's yield that is
tax-exempt by one minus a stated income tax rate and adding the product to that
portion, if any, of the Fund's yield that is not tax-exempt. Thus, the
equivalent taxable yield of the Tax-Exempt Fund will always exceed the yield.
Assuming an effective tax rate of 39.6%, for the 30-day period ended December
31, 1999, the equivalent taxable yield of the Tax-Exempt Fund was 9.32%.
Average Annual Total Return
From time to time, the Funds may advertise an "average annual
total return," which represents the average annual compounded rates of return
over one-, five- and ten-year periods, or over the life of the Fund (as stated
in the advertisement). This total return figure shows an average percentage
change in value of an investment in the Funds from the beginning date of the
measuring period to the ending date of the period. The figure reflects changes
in the price of Units and assumes that any income, dividends and/or capital
gains distributions made by the Fund during the period are reinvested. When
considering average annual total return figures for periods longer than one
year, investors should note that a Fund's annual total return for any one year
in the periods might have been greater or less than the average for the entire
period.
The "average annual total return" figures of a Fund described
in the Prospectus, will be computed according to a formula prescribed by the
SEC. The formula can be expressed as follows:
n
P(1 + T) = ERV
Where P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = Ending Redeemable Value of a hypothetical $1,000
investment made at the beginning of a 1-, 5- or
10-year period at the end of a 1-, 5- or 10-year
period (or fractional portion thereof), assuming
reinvestment of all dividends and distributions.
The ERV assumes complete redemption of the hypothetical
investment at the end of the measuring period.
-62-
<PAGE>
Based on the above formula, the average annual total return
figures for the one-, five- and 10-year periods (if applicable) ended December
31, 1999 were as follows:
<TABLE>
<CAPTION>
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Fund 1 YR 5 YR 10 YR
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C>
Elfun Trusts 19.74% 27.07% 17.18%
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
International Fund 38.90% 18.96% 13.26%
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Diversified Fund 14.04% 18.16% 12.93%
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Tax-Exempt Fund -3.01% 6.53% 6.45%
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Income Fund -0.62% 7.75% 7.67%
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Money Market Fund 5.11% 5.40% 5.18%
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
</TABLE>
The Funds may compare their average annual total returns to
the returns of the following securities market indices. The Standard & Poor's
("S&P") Composite Index of 500 stocks ("S&P 500 Index"), Morgan Stanley Capital
International World Index ("MSCI World"), the Morgan Stanley Capital
International EAFE Index ("MSCI EAFE"); Lehman Brothers Aggregate Bond Index
("LB Aggregate"), the Lehman Brothers Municipal Bond Index ("LBMI") and the
Lehman Brothers 10-Year Municipal Index are unmanaged indexes and do not reflect
the actual cost of investing in the instruments that comprise each index. The
S&P 500 Index is a composite of the prices of 500 widely held stocks recognized
by investors to be representative of the stock market in general. The MSCI World
Index is a composite of stocks in companies from approximately 22 countries
representing the European, Pacific Basin and American regions. The MSCI EAFE
Index is a composite of companies from approximately 20 countries representing
stock markets of Europe, Australasia, New Zealand and the Far East. LB Aggregate
is a composite index of short-, medium-, and long-term bond performance and is
widely recognized as a barometer of the bond market in general. The LBMI is a
composite of investment grade, fixed rate municipal bonds and is considered to
be representative of the municipal bond market. The Lehman Brothers 10-Year
Municipal Index is comprised of approximately 9,000 bonds with a nominal
maturity from eight years up to, but not including, 12 years. The results shown
for the foregoing indexes assume the reinvestment of net dividends.
Actual Annual Total Return
The Funds also may advertise the actual annual and annualized
total return performance data for various periods of time, which may be shown by
means of schedules, charts or graphs. Actual annual or annualized total return
data generally will be lower than average annual total return data because the
latter reflects compounding of return. Yield and total return figures are based
on historical earnings and are not intended to indicate future performance.
Aggregate Total Return
The Funds may use "aggregate total return" figures in
advertisements, which represent the cumulative change in value of an investment
in Units of a Fund for a specific period, and which reflects changes in the
Fund's Unit price and reinvestment of dividends and distributions. Aggregate
total return may be shown by means of schedules, charts or graphs, and may
indicate subtotals of the various components of total return (that is, the
change in value of
-63-
<PAGE>
initial investment, income dividends and capital gains distributions). Aggregate
total return data reflects compounding over a longer period of time than does
annual total return data, and therefore aggregate total return will be higher.
The "aggregate total return" figures of a Fund described in
the Prospectus represent the cumulative change in the value of an investment in
the Fund for the specified period and will be computed by the following formula:
Aggregate Total Return = ERV - P
-------
P
Where P = a hypothetical initial payment of $1,000; and
ERV = Ending Redeemable Value of a hypothetical $1,000
investment made at the beginning of a 1-, 5- or
10-year period at the end of the 1-, 5- or 10-year
period (or fractional portion thereof), assuming
reinvestment of all dividends and distributions.
Distribution Rate
Each Fund may advertise its distribution rate and/or effective
distribution rate. A Fund's distribution rate differs from yield and total
return and therefore is not intended to be a complete measure of performance.
A Fund's distribution rate measures dividends distributed for
a specified period. A Fund's distribution rate is computed by dividing the most
recent monthly distribution per Unit annualized by the current net asset value
per Unit. A Fund's effective distribution rate is computed by dividing the
distribution rate by the ratio used to annualize the distribution and
reinvesting the resulting amount for a full year on the basis of such ratio. The
effective distribution rate will be higher than the distribution rate because of
the compounding effect of the assumed reinvestment. A Fund's yield is calculated
using the standardized formula described above. In contrast, the distribution
rate is based on the Fund's last monthly distribution, which tends to be
relatively stable and may be more or less than the amount of net investment
income and short-term capital gain actually earned by the Fund during the month.
Comparative Performance Information
In addition to the comparative performance information
included in the Prospectus and otherwise quoted in sales and advertising
materials, each Fund may compare the Fund's performance with (a) the performance
of other mutual funds as listed in the rankings prepared by Lipper Analytical
Services, Inc. or similar independent services that monitor the performance of
mutual funds, (b) various unmanaged indices, including the Russell Index, S&P
500 Index, and the Dow Jones Industrial Average or (c) other appropriate indices
of investment securities or with data developed by GEAM derived from those
indices.
Performance information also may include evaluations of a Fund
published by nationally recognized ranking services and by financial
publications that are nationally recognized, such as Barron's, Business Week,
Forbes, Fortune, Institutional Investor, Kiplinger's
-64-
<PAGE>
Personal Finance, Money, Morningstar Mutual Fund Values, The New York Times, The
Wall Street Journal and USA Today. These ranking services or publications may
compare a Fund's performance to, or rank it within, a universe of mutual funds
with investment objectives and policies similar, but not necessarily identical,
to that of the Funds. Such comparisons or rankings are made on the basis of
several factors, including the size of the Fund, objectives and policies,
management style and strategy, and portfolio composition, and may change over
time if any of those factors change.
PRINCIPAL UNITHOLDERS
The following persons are the only persons known by the Trust
to hold beneficially more than 5% of the outstanding units of the Funds as of
March 31, 1999:
<TABLE>
<CAPTION>
Name and Address Amount of Percent
of Record Owner Units Owned of Fund
--------------- ----------- -------
<S> <C> <C>
Tax-Exempt Fund
John F. Welch 6,432,401.568 5.19%
General Electric Company
3135 Easton Turnpike
Fairfield, CT 06431-0001
</TABLE>
As of that same date, the current Trustees and officers of the
Funds as a group owned of record Units representing less than 1% of the total
outstanding Units of each Fund.
FUND HISTORY AND ADDITIONAL INFORMATION
Each of the Funds is a separate, diversified open-end
management investment company registered under the 1940 Act. Elfun Trusts was
organized as a common law trust in the State of New York on May 27, 1935. The
International Fund, the Income Fund, the Elfun Tax-Exempt Fund, the Diversified
Fund and the Money Market Fund were organized as common law trusts in the State
of Connecticut on May 15, 1987, December 22, 1982, March 14, 1977, June 1, 1987
and July 15, 1989, respectively. The Prospectus and this SAI omit certain
information contained in the Registration Statement that the Funds have filed
with the SEC under the Securities Act of 1933 and the 1940 Act and reference is
made to the Registration Statement for further information with respect to the
Funds. The Registration Statement is available for inspection by the public at
the SEC in Washington, D.C.
There are no material pending legal proceedings to which any
Fund or GEAM is a party or of which property of any Fund or GEAM is subject.
The Trustees may at any time, in their absolute discretion,
terminate a Fund, in whole or in part, and cause to be paid to the unit-holders
or their assignees the net asset value of the Units held by them, the net asset
value to be determined as of a date fixed by the Trustees and specified in the
notice of termination delivered to the unit-holders or their assignees. In
addition,
-65-
<PAGE>
the Trustees may, in order to preserve the status of the Fund as an "employees'
securities company" under the 1940 Act, require the redemption of the Units of
any unit-holders if they are individuals or entities whose interest in the Fund
would cause the Fund to lose such status. In this case there will be paid to
such individuals or entities the net asset value of the Units registered in
their names, calculated as of the date determination was made that the
redemption of Units was necessary for the preservation of the status of the
Fund. In case of any termination, the Trustees will, at the same time, direct
the unit-holders or their assignees to surrender to the Unit-holder Servicing
Agent any certificates they hold evidencing their ownership of Certificate Units
and thereafter the Trustees will be discharged from all further obligations as
to the unit-holders.
Unit-holder Liability. Although each Fund is offering only its
own Units, it is possible that a Fund might become liable for a misstatement in
the Prospectus about another Fund. The Trustees have considered this factor in
approving the use of a single combined Prospectus.
Unit-holder Rights and Voting. Each Fund issues one class of
Units. Unit-holders have no voting rights except with respect to amendments to
the Fund agreement affecting the unit-holders' rights and with respect to
changes in their Fund's fundamental policies or as may otherwise be required
under the 1940 Act. There are no preemptive, subscription or conversion rights.
The Funds do not hold annual unit-holder meetings, but will call meetings when
changes in the fundamental policies or investment restrictions of the Funds are
to be voted upon, or as otherwise required by the 1940 Act.
Independent Auditors. KPMG LLP serves as the Funds'
independent auditors.
FINANCIAL STATEMENTS
The December 31, 1999 Annual Report, which either accompanies
this Statement of Additional Information or previously has been provided to the
person to whom this Statement of Additional Information is being sent, is
incorporated herein by reference with respect to all information other than the
information set forth in the letter to unit-holders included therein. The Funds
will furnish, without charge, a copy of the Annual Report, upon request to the
Funds at 3003 Summer Street, P.O. Box 120074, Stamford, CT 06912-0074, (800)
242-0134.
-66-
<PAGE>
APPENDIX
DESCRIPTION OF RATINGS
Commercial Paper Ratings
The rating A-1+ is the highest, and A-1 the second highest
commercial paper rating assigned by S&P. Paper rated A-1+ must have either the
direct credit support of an issuer or guarantor that possesses excellent
long-term operating and financial strength combined with strong liquidity
characteristics (typically, such issuers or guarantors would display credit
quality characteristics that would warrant a senior bond rating of AA or higher)
or the direct credit support of an issuer or guarantor that possesses above
average long-term fundamental operating and financing capabilities combined with
ongoing excellent liquidity characteristics. Paper rated A-1 must have the
following characteristics: liquidity ratios are adequate to meet cash
requirements; long-term senior debt is rated A or better; the issuer has access
to at least two additional channels of borrowing; basic earnings and cash flow
have an upward trend with allowance made for unusual circumstances; typically,
the issuer's industry is well established and the issuer has a strong position
within the industry; and the reliability and quality of management are
unquestioned.
The rating Prime-1 is the highest commercial paper rating
assigned by Moody's. Among the factors considered by Moody's in assigning
ratings are the following: (a) evaluation of the management of the issuer; (b)
economic evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks that may be inherent in certain areas; (c) evaluation of
the issuer's products in relation to competition and customer acceptance; (d)
liquidity; (e) amount and quality of long-term debt; (f) trend of earnings over
a period of ten years; (g) financial strength of parent company and the
relationships that exist with the issue; and (h) recognition by the management
of obligations that may be present or may arise as a result of public interest
questions and preparations to meet the obligations.
Short-term obligations, including commercial paper, rated A-1+
by IBCA Limited or its affiliate IBCA Inc. are obligations supported by the
highest capacity for timely repayment. Obligations rated A-1 have a very strong
capacity for timely repayment. Obligations rated A-2 have a strong capacity for
timely repayment, although that capacity may be susceptible to adverse changes
in business, economic and financial conditions.
Fitch Investors Services, Inc. employs the rating F-1+ to
indicate issues regarded as having the strongest degree of assurance of timely
payment. The rating F-1 reflects an assurance of timely payment only slightly
less in degree than issues rated F-1+, while the rating F-2 indicates a
satisfactory degree of assurance of timely payment although the margin of safety
is not as great as indicated by the F-1+ and F-1 categories.
Duff & Phelps Inc. employs the designation of Duff 1 with
respect to top grade commercial paper and bank money instruments. Duff 1+
indicates the highest certainty of timely payment: short-term liquidity is
clearly outstanding and safety is just below risk-free U.S. Treasury short-term
obligations. Duff 1- indicates high certainty of timely payment. Duff 2
A-1
<PAGE>
indicates good certainty of timely payment; liquidity factors and company
fundamentals are sound.
Thompson BankWatch Inc. employs the rating TBW-1 to indicate
issues having a very high degree of likelihood of timely payment. TBW-2
indicates a strong degree of safety regarding timely payment, however, the
relative degree of safety is not as high as for issues rated TBW-1. While the
rating TBW-3 indicates issues that are more susceptible to adverse developments
than obligations with higher ratings, capacity to service principal and interest
in a timely fashion is considered adequate. The lowest rating category is TBW-4;
this rating is regarded as non-investment grade and, therefore, speculative.
Various NRSROs utilize rankings within ratings categories
indicated by a plus or minus sign. The Funds, in accordance with industry
practice, recognize such ratings within categories or gradations, viewing for
example S&P's ratings of A-1+ and A-1 as being in S&P's highest rating category.
Description of S&P Corporate Bond Ratings
AAA -- This is the highest rating assigned by S&P to a bond
and indicates an extremely strong capacity to pay interest and repay principal.
AA -- Bonds rated AA have a very strong capacity to pay
interest and repay principal and differ from AAA issues only in small degree.
A -- Bonds rated A have a strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in higher
rated categories.
BBB -- Bonds rated BBB have an adequate capacity to pay
interest and repay principal. Adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for bonds in this category (even though they normally exhibit
adequate protection parameters) than for bonds in higher rated categories.
BB, B and CCC -- Bonds rated BB and B are regarded, on
balance, as predominately speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
represents a lower degree of speculation than B, and CCC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
To provide more detailed indications of credit quality, the
ratings from AA to B may be modified by the addition of a plus or minus sign to
show relative standing within this major rating category.
A-2
<PAGE>
Description of Moody's Corporate Bond Ratings
Aaa -- Bonds that are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large or
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa -- Bonds that are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present that make the long-term risks appear somewhat larger than in Aaa
securities.
A -- Bonds that are rated A possess favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present that suggest a susceptibility to impairment sometime in the
future.
Baa -- Bonds that are rated Baa are considered as medium-grade
obligations, that is, they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba -- Bonds that are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B -- Bonds that are rated B generally lack characteristics of
desirable investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds that are rated Caa are of poor standing. These
issues may be in default, or present elements of danger may exist with respect
to principal or interest.
Moody's applies numerical modifiers (1, 2 and 3) with respect
to the bonds rated Aa through B, The modifier 1 indicates that the bond being
rated ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the bond ranks
in the lower end of its generic rating category.
Description of S&P Municipal Bond Ratings
AAA -- Prime -- These are obligations of the highest quality.
They have the strongest capacity for timely payment of debt service.
A-3
<PAGE>
General Obligation Bonds -- In a period of economic stress,
the issuers will suffer the smallest declines in income and will be least
susceptible to autonomous decline. Debt burden is moderate. A strong revenue
structure appears more than adequate to meet future expenditure requirements.
Quality of management appears superior.
Revenue Bonds -- Debt service coverage has been, and is
expected to remain, substantial. Stability of the pledged revenues is also
exceptionally strong due to the competitive position of the municipal enterprise
or to the nature of the revenues. Basic security provisions (including rate
covenant, earnings test for issuance of additional bonds, debt service reserve
requirements) are rigorous. There is evidence of superior management.
AA -- High Grade -- The investment characteristics of bonds in
this group are only slightly less marked than those of the prime quality issues.
Bonds rated AA have the second strongest capacity for payment of debt service.
A -- Good Grade -- Principal and interest payments on bonds in
this category are regarded as safe although the bonds are somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than bonds in higher rated categories. This rating describes the
third strongest capacity for payment of debt service. The ratings differ from
the two higher ratings of municipal bonds, because:
General Obligations Bonds -- There is some weakness, either in
the local economic base, in debt burden, in the balance between revenues and
expenditures, or in quality of management. Under certain adverse circumstances,
any one such weakness might impair the ability of the issuer to meet debt
obligations at some future date.
Revenue Bonds -- Debt service coverage is good, but not
exceptional. Stability of the pledged revenues could show some variations
because of increased competition or economic influences on revenues. Basic
security provisions, while satisfactory, are less stringent. Management
performance appears adequate.
BBB -- Medium Grade -- Of the investment grade ratings, this
is the lowest. Bonds in this group are regarded as having an adequate capacity
to pay interest and repay principal. Adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for bonds in this category (even though they normally exhibit
adequate protection parameters) than for bonds in higher rated categories.
General Obligation Bonds -- Under certain adverse conditions,
several of the above factors could contribute to a lesser capacity for payment
of debt service. The difference between A and BBB ratings is that the latter
shows more than one fundamental weakness, or one very substantial fundamental
weakness, whereas, the former shows only one deficiency among the factors
considered.
Revenue Bonds -- Debt coverage is only fair. Stability of the
pledged revenues could show substantial variations, with the revenue flow
possibly being subject to erosion over
A-4
<PAGE>
time. Basic security provisions are no more than adequate. Management
performance could be stronger.
BB, B, CCC and CC -- Bonds rated BB, B, CCC and CC are
regarded, on balance, as predominately speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of the obligation.
BB includes the lowest degree of speculation and CC the highest degree of
speculation. While these bonds will likely have some quality and protective
characteristics, these characteristics are outweighed by large uncertainties or
major risk exposures to adverse conditions.
C -- The rating C is reserved for income bonds on which no
interest is being paid.
D -- Bonds rated D are in default, and payment of interest
and/or repayment of principal is in arrears.
S&P's letter ratings may be modified by the addition of a plus
or a minus sign, which is used to show relative standing within the major rating
categories, except in the AAA-Prime Grade category.
A-5
<PAGE>
Description of S&P Municipal Note Ratings
Municipal notes with maturities of three years or less are
usually given note ratings (designated SP-1, -2 or -3) to distinguish more
clearly the credit quality of notes as compared to bonds. Notes rated SP-1 have
a very strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics are given the
designation of SP-1+. Notes rated SP-2 have satisfactory capacity to pay
principal and interest.
Description of Moody's Municipal Bond Ratings
Aaa -- Bonds that are rated Aaa are judged to be the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa -- Bonds that are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities, or fluctuation
of protective elements may be of greater amplitude, or there may be other
elements present that make the long-term risks appear somewhat larger than in
Aaa securities.
A -- Bonds that are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present that suggest a susceptibility to impairment sometime in the
future.
Baa -- Bonds that are rated Baa are considered as medium grade
obligations, that is, they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba -- Bonds that are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterize bonds in this class.
B -- Bonds that are rated B generally lack characteristics of
the desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds that are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of danger with respect
to principal or interest.
A-6
<PAGE>
Ca -- Bonds that are rated Ca represent obligations that are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C -- Bonds that are rated C are the lowest rated class of
bonds, and issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Moody's applies the numerical modifiers 1, 2 and 3 in each
generic rating classification from Aa through B. The modifier 1 indicates that
the security ranks in the higher end of its generic ratings category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the
issue ranks in the lower end of its generic ratings category.
Description of Moody's Municipal Note Ratings
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade (MIG) and for variable
rate demand obligations are designated Variable Moody's Investment Grade (VMIG).
This distinction recognizes the differences between short-term credit risk and
long-term risk. Loans bearing the designation MIG 1/VMIG 1 are the best quality,
enjoying strong protection from established cash flows of funds for their
servicing or from established and broad-based access to the market for
refinancing, or both. Loans bearing the designation MIG 2/VMIG 2 are of high
quality, with margins of protection ample, although not as large as the
preceding group. Loans bearing the designation MIG 3/VMIG3 are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the higher grades. Market access for refinancing, in particular, is
likely to be less well established. Loans bearing the designation MIG 4/VMIG 4
are of adequate quality. Protection commonly regarded as required of an
investment security is present and although not distinctly or predominantly
speculative, there is specific risk.
A-7
<PAGE>
ELFUN INCOME FUND
PART C
OTHER INFORMATION
<TABLE>
<CAPTION>
Item 23. Exhibits
- -------- --------
<S> <C>
(a) Fund Agreement, dated December 22, 1982, as amended July 1, 1989*
(b) Inapplicable
(c) Inapplicable
(d) Investment Advisory Agreement dated January 1, 1985, between the Fund and
General Electric Investment Corporation*
(e) Distribution Agreement dated February 10, 1994 between the Fund and
GE Investment Services Inc*
(f) Inapplicable
(g) Custodian Contract with State Street Bank and Trust Company dated as of
July 1, 1989*
(h) Transfer Agency Agreement with State Street Bank and Trust Company dated as of
February 10, 1994*
(i) Opinion of counsel, including consent (incorporated by reference to the Fund's
Registration Statement on Form N-1A (2-83041), Exhibit H, filed on March 23, 1983)*
(j) Consent of Independent Auditors
(k) Inapplicable
(l) Inapplicable
(m) Servicing Agreement dated as of March 13, 1992 between the Fund and General Electric
Investment Corporation*
(n) Inapplicable
(o) Inapplicable
(p) Form of Code of Ethics.
</TABLE>
*Previously filed.
C-1
<PAGE>
Item 24. Persons Controlled by or Under Common Control with Registrant
See Item 26
Item 25. Indemnification
Registrant shall indemnify any officer, director, shareholder
or employee made party to any proceeding (other than an action by or in the
right of the corporation) against judgments, fines, penalties, amounts paid in
settlement and reasonable expenses actually incurred provided that (1) such
person, and the person whose legal representative he is, was successful on the
merits in the defense of the proceeding, or (2) it shall be concluded as
provided by applicable Connecticut statutes that such person, and the person
whose legal representative he is, acted in good faith and in a manner he
reasonably believed to be in the best interests of the Registrant, or, in the
case of a person serving as a fiduciary of an employee benefit plan or trust,
either in the best interests of the corporation or in the best interests of the
participants and beneficiaries of such employee benefit plan or trust and
consistent with the provisions of such employee benefit plan or trust and, with
respect to any criminal action or proceeding, that he had no reasonable cause to
believe his conduct was unlawful, or (3) the court, on application as provided
by applicable Connecticut statutes, shall have determined that in view of all
the circumstances such person is fairly and reasonably entitled to be
indemnified, and then for such amount as the court shall determine; except that,
in connection with an alleged claim based upon his purchase or sale of
securities of the Registrant or of another enterprise, which he serves or served
at the request of the Registrant, the Registrant shall only indemnify such
person after the court shall have determined that in view of all the
circumstances such person is fairly and reasonably entitled to be indemnified,
and then for such amount as the court shall determine. Registrant shall also, in
accordance with applicable Connecticut statutes, indemnify any person made a
party to any proceeding, by or in the right of the Registrant, to procure a
judgment in its favor by reason of the fact that he, or the person whose legal
representative he is, is or was a shareholder, director, officer, employee or
agent of the Registrant. Any payments to be made by Registrant for
indemnification shall be made only in accordance with the procedures outlined by
applicable Connecticut statutory authority.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 ("Act") may be provided to directors, officers and
controlling persons of the Fund, pursuant to the foregoing provisions or
otherwise, the Fund has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
C-2
<PAGE>
against such liabilities (other than the payment by the Fund of expenses
incurred or paid by a director, officer or controlling person of the Fund in
connection with the successful defense of any action, suit or proceeding or
payment pursuant to any insurance policy) is asserted against the Fund by such
director, officer or controlling person in connection with the securities being
registered, the Fund will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 26. Business and Other Connections of Investment Adviser
Reference is made to "About the Investment Adviser" in the
Prospectus forming Part A and "Management of the Funds" in the Statement of
Additional Information forming Part B, of this Registration Statement.
The list required by this Item 26 of officers and directors of
GE Asset Management Incorporated ("GEAM"), the Funds' investment adviser,
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by those officers and directors
during the past two years, is incorporated by reference to Schedules A and D of
the Form ADV filed by GEAM pursuant to the Investment Advisers Act of 1940, as
amended (SEC File No. 801-31947).
Item 27. Principal Underwriters
(a) GE Investment Distributors, Inc. ("GEID") also serves as
distributor for Elfun Tax-Exempt Income Fund, Elfun Trusts, Elfun Money Market
Fund, Elfun Diversified Fund, Elfun International Equity Fund, GE Funds, GE
Institutional Funds, GE Lifestyle Funds and GE Investments Funds, Inc., all of
which are registered open-end investment companies.
(b) The information required by this Item 27, with respect to
each director and officer of GEID is incorporated by reference to Schedule A of
Form BD filed by GEID pursuant to the Securities Exchange Act of 1934 (SEC File
No. 8-45710).
(c) Inapplicable.
Item 28. Location of Accounts and Records
All accounts, books and other documents required to be
maintained by Registrant pursuant to Section 31(a) of the Investment Company Act
of 1940, as amended (the "1940 Act"), and the rules thereunder, are maintained
at the offices of: Registrant located at 3003 Summer Street, Stamford,
Connecticut 06905; State Street Bank and Trust Company ("State Street");
Registrant's distributor, located at 777 Long Ridge Road, Building B, Stamford,
CT 06927; Registrant's custodian and transfer agent, located at 225 Franklin
Street, Boston, Massachusetts 02101; and National Financial Data Services, Inc.,
a subsidiary of State Street, located at P.O. Box 419631, Kansas City, Missouri
64141-6631.
Item 29. Management Services
Inapplicable.
Item 30. Undertakings
Inapplicable.
C-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended (the "Securities Act"), and the Investment Company Act of 1940, as
amended, Registrant certifies that it meets all of the requirements for
effectiveness of this Amendment to the Registration Statement pursuant to Rule
485(b) under the Securites Act and has duly caused this Amendment to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Stamford, State of Connecticut on the 28th day of April, 2000.
By: S/JOHN H. MYERS
---------------
John H. Myers
Chief Executive Officer
Pursuant to the requirements of the Securities Act, this
Post-Effective Amendment to the Registrant's Registration Statement on Form N-1A
has been signed below by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
S/JOHN H. MYERS Trustee and Chief Executive Officer April 28, 2000
- --------------- ----------------------------------- --------------
John H. Myers
S/EUGENE K. BOLTON Trustee April 28, 2000
- ------------------ ------- --------------
Eugene K. Bolton
S/MICHAEL J. COSGROVE Trustee April 28, 2000
- --------------------- ------- --------------
Michael J. Cosgrove
S/RALPH R. LAYMAN Trustee and Portfolio Manager April 28, 2000
- ----------------- ----------------------------- --------------
Ralph R. Layman
S/ALAN M. LEWIS Trustee and Secretary April 28, 2000
- --------------- --------------------- --------------
Alan M. Lewis
S/ROBERT A. MACDOUGALL Trustee April 28, 2000
- ---------------------- ------- --------------
Robert A. MacDougall
S/DONALD W. TOREY Trustee April 28, 2000
- ----------------- ------- --------------
Donald W. Torey
S/JOHN J. WALKER Trustee April 28, 2000
- ---------------- ------- --------------
John W. Walker
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Numbered Page
- ----------- ---------------------- -------------
<S> <C> <C>
(j) Consent of Independent Auditors --
(p) Form of Code of Ethics --
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Numbered Page
- ----------- ---------------------- -------------
<S> <C> <C>
(j) Consent of Independent Auditors --
(p) Form of Code of Ethics --
</TABLE>
<PAGE>
EXHIBIT J
Consent of Independent Auditors
The Board of Trustees and Shareholders of the
Elfun Mutual Funds:
We consent to the use of our report dated February 4, 2000 for the Elfun
International Equity Fund (formerly Elfun Global Fund), Elfun Trusts, Elfun
Diversified Fund, Elfun Tax-Exempt Income Fund, Elfun Income Fund and Elfun
Money Market Fund, incorporated herein by reference under the headings,
"Financial Highlights" in the prospectus and "Independent Auditors" in the
statement of additional information.
/s/ KPMG LLP
New York, New York
April 24, 2000
<PAGE>
- ------------------------------------ ---------------------- ---------------
POLICIES AND GE Asset Legal Operation Number
PROCEDURES [LOGO] Management 10.4J
- ------------------------------------ ---------------------- ---------------
Code of Ethics
INSIDER TRADING AND Issued by: Executive Vice President,
SECURITIES TRANSACTIONS General Counsel & Secretary
Effectiveness Date: March 15, 1999
- ------------------------------------ ------------------------------------------
I. NEED FOR POLICY
GE Asset Management (GEAM) is committed to ensuring compliance with all laws and
General Electric Company (GE or the Company) Policy 20.13, Insider Trading and
Stock Tipping. In addition, as registered investment advisers, GEAM and their
employees have additional ethical and legal obligations which must be fulfilled
in order to maintain the confidence and trust of our clients and to protect the
assets entrusted to us.
The purpose of this Policy is to state the Company's requirement that all
employees comply fully with the laws prohibiting insider trading and tipping,
and to set forth additional requirements and guidelines relating to employee's
personal securities transactions. This Policy is designed to avoid even the
appearance of impropriety, but is not, however, intended to set legal standards
or to result in the imposition of criminal liability, or civil liability to
third parties, that would not otherwise exist in the absence of the Policy.
II. PENALTIES FOR VIOLATION
Disciplinary action, up to and including discharge, may be taken against
employees who violate this policy. Violation of the laws prohibiting insider
trading and tipping could both damage GEAM's reputation and subject the Company,
as a "controlling person under applicable securities laws, to significant civil
liability and fines. Additionally, employees violating the laws could face
individual criminal penalties.
III. INSIDER TRADING, TIPPING AND CONFIDENTIAL INFORMATION
It is the policy of GEAM that employees:
o Must not buy, sell or recommend or suggest that anyone else buy, sell, or
retain, the securities of any company (including GE) while in possession of
inside information regarding such company. This prohibition on insider
trading applies not only to your personal transactions, but also bars
trading for client accounts when in possession of insider information.
o Must not disclose inside information to anyone, inside or outside GEAM
(including family members), except to those who have a need to know such
information in order for GEAM to carry on its business properly and
effectively. Also, any permitted disclosure may only be made under
circumstances which make it reasonable to believe that the information will
not be misused or improperly disclosed by the recipient.
o Must use GEAM's confidential information solely for legitimate Company
purposes and must not improperly disclose such information.
o Must use and protect all confidential information received from others
strictly in accordance with the terms of the express or implied agreement
or understanding under which the information was received and with at least
the same degree of care that would be applied to comparable GEAM
confidential information.
Page 1 of 9
<PAGE>
- ------------------------------ ------------------------------------- ------
Code of Ethics Issued by: Executive Vice President
[LOGO] General Counsel & Secretary
INSIDER TRADING AND Number
SECURITIES TRANSACTIONS Effectiveness Date: March 15, 1999 10.4
- ------------------------------ ------------------------------------- ------
o If an employee believes that they have come into possession of inside
information, it is recommended that they promptly discuss this information
with GEAM's General Counsel or other available member of the GEAM Legal
Operation. It will be the responsibility of the Legal Operation to
safeguard the confidentiality of this information and determine any
appropriate action, such as restricting trading in effected securities,
which needs to be taken.
IV. REQUIREMENTS FOR EMPLOYEES' SECURITIES TRANSACTIONS
GEAM employees are permitted to invest for their own account, provided that such
investment activity must always comply with applicable laws and regulations, and
must be carried out in a manner consistent with GEAM's policy. In addition,
personal securities transactions must avoid even the appearance of conflict of
interest. The procedures and guidelines which follow set forth reporting
obligations and additional rules of conduct which must be adhered to by GEAM's
employees working in GEAM's office facilities and any other persons who may be
determined by the management of GEAM to have potential access to current
portfolio trading information (i.e., knowledge of a purchase or sale of a
security within 15 days following its occurrence and/or knowledge of an intent
to make a purchase or sale of a security within 15 days prior to its
occurrence).
Pre-clearance and reporting of personal securities transactions and other rules
under this policy do not relieve employees from responsibility for compliance
with the proscriptions against insider trading ad tipping set forth above.
All requirements of this policy pertain to each employee's transactions AND
transactions of associated accounts ( Section IV (B) ).
IV. (A) CENTRALIZED BROKER/REPORTING REQUIREMENT
1. All employees are required to use a centralized broker designated by
GEAM. This requirement also applies to Associated Accounts. An employee
may request an exemption to this rule from the compliance Department if
special circumstances exist. All employees must authorize the
centralized broker to provide duplicate confirmations and monthly
statements to the Compliance Officer.
2. Duplicate confirmations and monthly statements are required for exempt
accounts, which are to be mailed directly to the Compliance Officer by
the broker.
3. Duplicate confirmations and monthly statements are required for all
other investments account not held with the centralized broker,
including dividend reinvestment plans (DRIP's), and "blind" managed
accounts.
4. Unaffiliated open-end mutual funds shares are exempt from pre-clearance
and reporting.
Page 2 of 9
<PAGE>
- ------------------------------ ------------------------------------- ------
Code of Ethics Issued by: Executive Vice President
[LOGO] General Counsel & Secretary
INSIDER TRADING AND Number
SECURITIES TRANSACTIONS Effectiveness Date: March 15, 1999 10.4
- ------------------------------ ------------------------------------- ------
IV. (B) TRADING AND PRE-CLEARANCE REQUIREMENTS
(Summary Guidelines and Checklist - Schedule A attached)
1. All employees must receive pre-clearance from the GEAM Trading Room
immediately-prior to engaging in a transaction involving any publicly
traded equity security (or any options or futures relating to such a
security). Pre-clearance must be obtained by receiving an approval log
number and may be obtained by e-mail. If clearance is not given, the
employee must NOT proceed with the transaction. The fact that clearance
is denied should be considered confidential information and must not be
disclosed.
2. All GEAM Employees are prohibited from investing in non-public
securities without the proper approval of the EVP of Private
Placements. Private Placement employees must receive pre-clearance from
the EVP of Private Placements immediately prior to engaging in any
transaction in a publicly traded security in GEAM's Private Placements
Portfolio or a security being considered as an addition to the Private
Placement Portfolio, in addition to pre-clearance with the Trading
Room.
3. Transactions in fixed income securities must be cleared by an
appropriate department portfolio manager (i.e. Taxable, Tax-Exempt)
immediately prior to engaging in a transaction. A pre-clearance log
number may be obtained in person or by calling the department. If
clearance is not given, the employee must NOT proceed with the
transaction. The fact that clearance is denied should be considered
confidential information and must not be disclosed.
4. Employees must provide the ticker, security name, and type of order
(market, limit, buy/sell) to the Trading Room and Clearing Managers.
Clearance will not be granted if there is a pending buy or sell order
for a managed account.
5. Transactions not effected the day clearance is granted must be
re-cleared. Clearance expires 24 hours after clearance is granted or at
the end of the business day on the Monday following a Friday request.
6. All transactions for the employee, his/her spouse, minor child, other
household members, accounts subject to your discretion and control
(e.g. custodial and trust accounts), other accounts in which you have a
beneficial interest and ability to influence transactions (e.g. joint
accounts, co-trustee accounts, partnerships, investment clubs,
associated accounts) must be pre-cleared in accordance with this
policy.
7. Employees are prohibited from participation in initial public offerings
(IPO's). Any purchases of new issues are allowed only in the secondary
markets.
8. Any employee directly participating in the decision or recommendation
to buy, sell, or retain a particular security must disclose to the
appropriate Executive Vice President any direct or indirect personal
ownership of the security or any affiliation (including any
directorships) with the issues which is the subject of the decision or
recommendation.
Page 3 of 9
<PAGE>
- ------------------------------ ------------------------------------- ------
Code of Ethics Issued by: Executive Vice President
[LOGO] General Counsel & Secretary
INSIDER TRADING AND Number
SECURITIES TRANSACTIONS Effectiveness Date: March 15, 1999 10.4
- ------------------------------ ------------------------------------- ------
9. No analyst or portfolio manager may buy or sell a security for his/her
own account within 7 calendar days before or after all transactions for
his/her assigned accounts have been completed for that security. The
client's interests must always take precedence even if it requires the
employee to delay taking action and suffer financial loss.
10. Portfolio managers are required to notify their managers in advance of
any personal transactions in excess of $25,000 or Yen equivalent in any
registered investment company or investment trust over which they have
discretionary trading authority. Mangers will maintain a written record
of such notification.
11. Orders placed with the Trading Room should be treated with the highest
degree of confidentially. Such orders should not be discussed with
anyone until they have been filled.
12. All information received by an employee as a result of the employee's
employment with GEAM is received in trust for GEAM's clients. Subject
to the restriction on insider trading and tipping, and any requirements
to keep such information confidential, it is the obligation of the
employee to make such information known to other analysts and portfolio
managers whose accounts might be interested in such information and not
to misappropriate such information for the employee's own financial
benefit.
13. Particular attention should be paid to transactions in thinly traded
issues where even small transactions for an employee's account might
affect the market. A similar concern attaches to trading in derivative
securities (options, futures, convertible bonds, etc.) where only a
small movement in a security's price may be significant due to
leverage.
14. In order to avoid the appearance of opportunistic trading in front of
transactions for GEAM accounts, employees should seek to avoid
day-trades and should be prepared to hold investments for a significant
interval. Employees shall not profit from the purchase and sale of the
same (or equivalent) securities within 60 calendar days.
15. No employee may solicit or accept any offer made by any person if as a
result the employee would be able to purchase or sell any security at a
price or under conditions more favorable than those offered to GEAM's
clients.
16. Employees are prohibited from selling any security short, except that
short sales may be made "against the box" (the individual already owns
the stock) for tax or hedging purposes with the approval of the
appropriate Executive Vice President.
17. Although GEAM employees may conduct trading for their own account
within the limits of the policy, trading during working hours should be
limited. Extensive trading that my affect on-the job performance may be
considered a violation of this policy and GEAM reserve the right to
restrict trading in such circumstances. In addition, GEAM reserve the
right to prohibit employees from trading in certain securities or
markets.
Page 4 of 9
<PAGE>
- ------------------------------ ------------------------------------- ------
Code of Ethics Issued by: Executive Vice President
[LOGO] General Counsel & Secretary
INSIDER TRADING AND Number
SECURITIES TRANSACTIONS Effectiveness Date: March 15, 1999 10.4
- ------------------------------ ------------------------------------- ------
IV. (C) TRANSACTIONS EXEMPT FROM PRE-CLEARANCE
The following transactions are not subject to the pre-clearance procedures:
o All open-end mutual fund shares
o Direct Obligations of the Japanese Government Securities, Postal
Deposits and other Japanese savings vehicles
o GE Interest Plus
o Dividend Re-Investment Programs
o "Blind" Managed Accounts
o GE S&S Program Transactions [401 (k) Plan]:
Contributions: Payroll deductions
Changes in contribution percentages
Changes in investment vehicle direction or percentages
Investment vehicle switches (transfers)
All Loan Activity
All Withdrawals
V. RESPONSIBILITY
1. The provisions of this Policy must be strictly observed by all
employees. An employee's actions with respect to matters governed by
this Policy are significant indications of the individual's judgement,
ethics, and competence.
2. Any actions in violation of this Policy will constitute an important
element in the evaluation of the employee for retention, assignment,
and promotion.
3. Violations of this Policy will be grounds for appropriate disciplinary
action. Disciplinary action may include disgorging of profits,
liquidation of holdings, suspension of trading privileges, and
discharge.
4. All Managers are required to take appropriate measures to ensure that
their employees understand and comply with this Policy. Managers shall
maintain educational programs, with the assistance of the Legal and
Compliance Operations, to familiarize employees with laws and
regulations governing insider trading or tipping, and the terms of the
policy statement.
5. All employees shall acknowledge in writing, when first assigned to GEAM
and annually thereafter, their commitment to comply with this Policy.
Page 5 of 9
<PAGE>
- ------------------------------ ------------------------------------- ------
Code of Ethics Issued by: Executive Vice President
[LOGO] General Counsel & Secretary
INSIDER TRADING AND Number
SECURITIES TRANSACTIONS Effectiveness Date: March 15, 1999 10.4
- ------------------------------ ------------------------------------- ------
6. The Legal Operation and Finance and Administration shall be responsible
for the interpretation and enforcement of this Policy. Employees with
questions concerning whether conduct is consistent with the mandates of
this Policy shall consult the Legal Operation prior to engaging in such
conduct. Employees who believe any other employee is engaged in conduct
prohibited by this Policy, or that any other person or firm
representing GEAM is engaged in such conduct, will promptly report such
information to the appropriate level of management and the Legal
Operation. The Legal Operation in consultation with Finance and
Administration will promptly investigate the matter and take timely and
appropriate action.
7. Upon request, employees shall submit copies of brokerage account
statements, confirmations, and other related materials with respect to
their personal and associated accounts to be used to audit compliance
with these reporting and clearance procedures and with the
proscriptions against insider trading and tipping set forth above.
VI DEFINITIONS
For purposes of this Policy:
o "Inside Information" means non-public information (i.e. information which
is not available to investors generally) that a reasonable investor would
consider to be important in deciding whether to buy, sell or retain a
security (e.g., stock; bond; option) including, for example, nonpublic
information relating to a pending merger, acquisition, disposition, joint
venture, contract award or termination, major lawsuit or claim, earnings
announcement or change in dividend policy, significant product development,
or the gain or loss of a significant customer or supplier. Any non-public
information may be inside information regardless or whether it is developed
internally or obtained from others (e.g., the issuer, current or
prospective customers, suppliers or business partners) and whether it
relates to GE or any other company or entity. Information is still
considered non-public until the market has had a reasonable time after
public announcement to assimilate and react to the information.
o "Confidential Information" means any non-public information concerning
GEAM's activities or developed by GEAM or received by GEAM under an express
or implied agreement or understanding that the information will be treated
in confidence or used only for a limited purpose, regardless of whether or
not it would be considered to be important by investors. Examples of
confidential information include stocks recommended for purchase or sale
for client accounts, details of financial transactions, and identity and
terms of customer accounts.
o "Associated Account" - The provisions of this Policy apply to transactions
in any personal account or "associated account". "Associated account" means
securities and futures accounts of the employee's (i) spouse, (ii) minor
children, (iii) other household members (iv) any other accounts subject to
an employees' discretion or control (e.g. custodial and trust accounts,
etc.), and (v) any other accounts in which the employee has a beneficial
interest and a substantial ability to influence transactions (e.g. joint
accounts, co-trustee accounts, partnerships, investment clubs).
Page 6 of 9
<PAGE>
- ------------------------------ ------------------------------------- ------
Code of Ethics Issued by: Executive Vice President
[LOGO] General Counsel & Secretary
INSIDER TRADING AND Number
SECURITIES TRANSACTIONS Effectiveness Date: March 15, 1999 10.4
- ------------------------------ ------------------------------------- ------
VII OMBUDSPERSON
To report possible violations of laws, regulations, or Company policies, you may
also write to the General Electric Corporate Ombudsperson at 3135 Easton
Turnpike, Fairfield, CT 06431 or call 1-800-227-5003.
Page 7 of 9
<PAGE>
- ------------------------------ ------------------------------------- ------
Code of Ethics Issued by: Executive Vice President
[LOGO] General Counsel & Secretary
INSIDER TRADING AND Number
SECURITIES TRANSACTIONS Effectiveness Date: March 15, 1999 10.4
- ------------------------------ ------------------------------------- ------
GE ASSET MANAGEMENT
Personal Trading Guidelines
Who Needs to Comply:
o All GEAM employees and household members for all accounts they have
discretion over (their own account and accounts they control for others)
What is Covered by Policy:
o All Stock, Bond, & Derivatives Transactions (excluding direct obligations
of the U.S. or Japanese Gov't)
o GE Stock including options (other than GE Savings & Security)
What is not Covered by Policy 10.4:
o Any Mutual Funds (except portfolio manager transactions in the funds they
manage)
o GE Savings & Security (i.e., switching, withdrawal & loans)
o Accounts in your name managed by others, in which you have no investment
discretion ("Blind" managed accounts)
Requirements:
o Do not trade on "inside" information
o Pre-clear all transactions
o Use Centralized Brokers
o No IPO's
o Hold securities for 60 days
Special Requirement for:
Portfolio Manager (including analysts)
o Do not trade in same security within 7 days of personal & business
portfolio
o Discuss and document personal transactions over $25,000 with your manager
prior to executing in the mutual funds you manage
Private Placement Employees
o Additional pre-clearance required by EVP-Private Placements (Don Torey)
This is meant as a summary only.
Please refer to the complete policy 10.4 for further
explanation of the policy.
Any Questions call
Nora Machata (x-2080) or Alan Lewis (x-2313)
Page 8 of 9
<PAGE>
- ------------------------------ ------------------------------------- ------
Code of Ethics Issued by: Executive Vice President
[LOGO] General Counsel & Secretary
INSIDER TRADING AND Number
SECURITIES TRANSACTIONS Effectiveness Date: March 15, 1999 10.4
- ------------------------------ ------------------------------------- ------
Personal Trading Checklist
<TABLE>
<CAPTION>
Equity Trades Taxable Bond Trades
------------- -------------------
<S> <C>
o Call or e-mail the equity trading room (203 o Call Bob MacDougal (203-326-2387) to
-326-2420) and ask for pre-clearance. If they request pre-clearance. If Bob is not
do not grant pre-clearance, proceed no further. available call Kathy Brooks (203-326-2388).
If pre-clearance is not granted, proceed no
o If pre-clearance is granted, they will issue further.
a log number.
o If pre-clearance is granted, he/she will
o Execute the trade. issue a log number.
o Hold the security for a minimum of 60 days. o Execute the trade.
o Do not trade the security in your GEAM o Hold the security for a minimum of 60 days.
portfolio within 7 days of your personal trade.*
o Do not trade the security in your
GEAM portfolio within 7 days of
your personal trade.*
</TABLE>
Private Placements Personnel
o Call Don Torey (203-326-4060) to request
pre-clearance. If Don is not available
call Mike Pastore (203-326-2312). If
pre-clearance is not granted,
proceed no further.
o If pre-clearance is granted, he will
issue a log number.
o Call or e-mail the trading room for
an equity trade.
Mutual Funds, GE Savings & Security and "Blind" managed
accounts do not require preclearance
* Consult department head if changed circumstances make trade for GEAM
portfolio appropriate in less than 7 days.
Page 9 of 9
