As filed with the Securities and Exchange Commission
on April 18, 1996
Securities Act File No. 33-17093
Investment Company Act File No. 811-5324
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 12 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 12 [X]
(Check appropriate box or boxes)
ELFUN DIVERSIFIED 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 General Electric Investment Corporation
3003 Summer Street
Stamford, Connecticut 06905
.........................................
(Name and Address of Agent for Service)
Copies to:
Burton M. Leibert, Esq.
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022-4669
Page 1 of __ Pages
Exhibit Index at Page __
<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) [X]
on (date) pursuant to paragraph (b) [ ]
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. [ ]
An indefinite number of Registrant's units of beneficial interest have been
registered pursuant to Rule 24f-2 under the Investment Company Act of 1940, as
amended. The Rule 24f-2 Notice for Registrant's fiscal year ended December 31,
1995 was filed on February 29, 1996.
<PAGE>
ELFUN DIVERSIFIED FUND
FORM N-1A
CROSS REFERENCE SHEET
Part A
Item No. Prospectus Heading
- -------- ------------------
1. Cover Page......................... Cover Page
2. Synopsis........................... Expense Information
3. Condensed Financial
Information...................... Not applicable
4. General Description of
Registration..................... Cover Page;
Investment
Objectives and
Management Policies;
Additional Matters;
Further Information:
Certain Investment
Techniques and Strategies
5. Management of the Fund............. Expense Information;
Investment Objectives and
Management Policies;
Management of the Funds;
Further Information:
Certain Investment
Techniques and Strategies
5A. Management's Discussion of
Fund Performance .................. Not applicable
6. Capital Stock and Other
Securities....................... Dividends;
Distributions and
Taxes; Additional
Matters
7. Purchase of Securities
Being offered.................... Purchase of Units;
Net Asset Value;
Distributor
8. Redemption or Repurchase........... Redemption of Units
<PAGE>
Part B Heading in Statement of
Item No. Additional Information
- -------- -----------------------
9. Legal Proceedings.................. Not applicable
10. Cover Page......................... Cover Page
11. Table of Contents.................. Contents
12. General Information and History.... Not applicable
13. Investment Objectives and
Policies......................... Investment Objectives
and Management Policies;
Further Information:
Certain Investment
Techniques and Strategies
14. Management of the Fund............. Management of the Funds
15. Control Persons and Principal
Holders of Securities........... Principal Stockholders;
Management of the Funds
See Prospectus--
Additional Matters
16. Investment Advisory and
Other Services................... Management of the Funds
17. Brokerage Allocation
and Other Practices.............. Investment Restrictions;
Management of the Funds
18. Capital Stock and Other
Securities....................... Redemption of Units
19. Purchase, Redemption and Pricing
of Securities Being Offered...... Purchase of Units;
Redemption of Units;
Net Asset Value
20. Tax Status......................... Dividends, Distributions
and Taxes
21. Underwriters....................... Not Applicable
22. Calculation of Performance
Data............................. The Funds' Performance
23. Financial Statements............... Independent Accountants;
ii
<PAGE>
Financial Statements
Part C
Information required to be included in Part C is set forth after
the appropriate item, so numbered, in Part C to this Registration Statement.
iii
<PAGE>
[GE logo]
GE Investments
- -----------------------------------------------------------------------
Dear Elfun Funds Investor:
It has been our pleasure to serve your investment needs over the past year.
Annually, we furnish you an updated Elfun Funds prospectus that reflects
current financial information.
We urge you to read again those sections of the prospectus relating to the
investment objectives of the Fund(s) in which you own shares to help you
determine if they are still suitable for your personal financial needs. Also,
we encourage you to familiarize yourself with the other Elfun Funds in the
event that your investment objectives have changed or you desire to further
diversify your portfolio.
Our Inquiry Center Specialists are ready to answer any of your questions
between the hours of 8:30 am and 5:00 pm, Monday through Friday. Our
convenient phone system is available for transactions or to provide price
information during office or non-office hours. Call the GE Inquiry Center at
1-800-242-0134.
Sincerely,
/s/ Mary R. Stone
Mary R. Stone
Manager, Shareholder Services
<PAGE>
Elfun Mutual Funds
3003 Summer Street
Stamford, CT 06905
BULK RATE
U.S. POSTAGE
PAID
BOSTON, MA
PERMIT NO. 54201
[Elfun logo]
- -------------------------------------------------------------------------------
<PAGE>
ELFUN FUNDS
- -------------------------------------------------------------------------------
[behind the following information is the elfun logo as a backdrop]
(bullet) Elfun Trusts
(bullet) Elfun Global Fund
(bullet) Elfun Diversified Fund
(bullet) Elfun Tax-Exempt Income Fund
(bullet) Elfun Income Fund
(bullet) Elfun Money Market Fund
PROSPECTUS
April 18, 1996
This Prospectus briefly sets forth certain information about the Funds that
prospective investors will find helpful in making an investment decision.
Investors are encouraged to read this Prospectus carefully and retain it for
future reference.
An investment in Elfun Money Market Fund is neither insured nor guaranteed by
the U.S. Government. Additionally, no assurance can be given that Elfun Money
Market Fund will be able to maintain a stable net asset value of $1.00 per
unit.
Additional information about the Funds, contained in a Statement of
Additional Information ("SAI") dated the same date as this Prospectus, has
been filed with the Securities and Exchange Commission (the "SEC") and is
available upon request and without charge by calling the telephone number
listed below or by contacting the Funds at 3003 Summer Street, P.O. Box
120074, Stamford, Connecticut 06912-0074. The SAI is incorporated in its
entirety by reference into this Prospectus.
GENERAL ELECTRIC INVESTMENT CORPORATION
Investment Adviser
ELFUN FUNDS
3003 Summer Street
Stamford, Connecticut 06905
(800) 242-0134
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
- ------------------------------------------------------------------------------
Page No.
Expense Information 1
Who May Own Fund Units 6
Not Sponsored by GE 6
Investment Objectives and Management Policies 6
Portfolio Transactions and Turnover 18
Management of the Funds 19
Purchase of Units 20
Redemption of Units 21
Transfer Privilege 23
Net Asset Value 23
Dividends, Distributions and Taxes 24
Custodian, Transfer Agent and Dividend Paying Agent 25
Distributor and Unitholder Servicing Agent 25
The Funds' Performance 26
Further Information: Certain Investment Techniques and Strategies 28
Additional Matters 33
Each fund listed below is a diversified open-end management investment
company (each a "Fund" and collectively the "Funds") that is registered under
the Investment Company Act of 1940, as amended (the "1940 Act"). Each of the
Funds has a separate and distinct investment objective(s) that it seeks by
following certain investment policies. This Prospectus describes the
following six Funds:
(bullet) Elfun Trusts' investment objectives are long-term growth of capital
and future income rather than current income, which the Fund seeks to achieve
by investing in stocks, bonds, notes or other types of securities described
herein.
(bullet) Elfun Global Fund's investment objectives are long-term growth of
capital and future income, which the Fund seeks to achieve by investing
principally in foreign securities consistent with prudent investment
management and the preservation of capital.
(bullet) Elfun Diversified Fund's investment objective is to seek the highest
total return, consistent with prudent investment management and the
preservation of capital, which the Fund seeks to achieve by following an
asset allocation strategy contemplating shifts among a range of investments.
(bullet) Elfun Tax-Exempt Income Fund's investment objective is to seek 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.
(bullet) Elfun Income Fund's investment objective is to seek a high level of
income consistent with prudent investment management and the preservation of
capital, which the Fund seeks to achieve by investing in fixed income
securities.
(bullet) Elfun Money Market Fund's investment objective is to seek a high
level of current income consistent with prudent investment management and the
preservation of capital, which the Fund seeks to achieve by investing in a
defined group of U.S. dollar denominated, short-term money market
instruments.
<PAGE>
EXPENSE INFORMATION
- -------------------------------------------------------------------------------
Fee Table
- -------------------------------------------------------------------------------
The purpose of the following table is to assist the investor in understanding
the expenses that an investor in the Funds will bear directly or indirectly.
The costs listed in the table are based upon each particular Fund's operating
expenses for the year ended December 31, 1995.
Elfun
Elfun Tax- Elfun
Elfun Diver- Exempt Elfun Money
Elfun Global sified Income Income Market
Trusts Fund Fund Fund Fund Fund
----- ---- ---- ---- ---- ------
Annual Fund Operating
Expenses (as a
percentage of
average net assets)
Management fees 0.05% 0.09% 0.05% 0.05% 0.05% 0.02%
Other expenses 0.08% 0.25% 0.29% 0.08% 0.20% 0.28%
Total Operating
Expenses 0.13% 0.34% 0.34% 0.13% 0.25% 0.30%
The nature of the services provided to, and the management fees paid by, each
Fund are described under "Management of the Funds." "Other expenses" include
fees for 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. See "Management of
the Funds -- Expenses of the Funds" for a complete description of expenses.
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 proceeds
wired to a bank, in which case each Fund will charge a fee of $15; there is
no fee to redeem units by telephone if the proceeds are transferred to
another Fund.
Example
- ------------------------------------------------------------------------------
The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over a one-year, three-year,
five-year and ten-year period with respect to a hypothetical investment in
each Fund. These amounts are based upon (1) payment by the Fund of operating
expenses at the levels set out in the table above and (2) the specific
assumptions stated below. 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.
1 3 5 10
Year Years Years Years
--- ---- ---- ------
A unitholder would pay the following
expenses on a $1,000 investment,
assuming (1) a 5% annual return
and (2) redemption at the end of
the time periods shown:
Elfun Trusts $1 $ 4 $ 7 $17
Elfun Global Fund 3 11 19 43
Elfun Diversified Fund 3 11 19 43
Elfun Tax-Exempt Income Fund 1 4 7 17
Elfun Income Fund 3 8 14 32
Elfun Money Market Fund 3 10 7 38
The above example is intended to assist an investor in understanding various
costs and expenses that an investor in a Fund will bear directly or
indirectly. Although the table assumes a 5% annual return, a Fund's actual
performance will vary and may result in an actual return that is greater or
less than 5%. See "Management of the Funds -- Expenses of the Funds" for a
complete description of expenses.
1
<PAGE>
Financial Highlights
- -------------------------------------------------------------------------------
The tables below set forth selected financial data for a Fund Unit
outstanding throughout the period presented. The financial data for each of
the years in the five-year period ended December 31, 1995 for each Fund have
been audited by the Funds' independent auditors, KPMG Peat Marwick LLP,
independent certified public accountants, whose unqualified reports thereon
appear in the Funds' December 31, 1995 Annual Report (the "Annual Report").
The following information should be read in conjunction with the Financial
Statements and the Notes to the Financial Statements, which are incorporated
by reference into the Statement of Additional Information. Further
information about the performance of the Funds is contained in the Funds'
Annual Report, copies of which may be obtained without charge upon request to
the Funds at the address or telephone number listed on the front cover page
of this Prospectus.
Elfun Trusts
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $30.91 $33.76 $33.93 $33.05 $27.42
-------- -------- -------- -------- ---------
Income (loss) from investment operations:
Net investment income 0.77 0.77 0.81 0.83 0.83
Net realized and unrealized gains
(losses) on investments 11.33 (0.68) 2.25 2.24 6.87
-------- -------- -------- -------- ---------
Total income (loss) from
investment operations 12.10 0.09 3.06 3.07 7.70
-------- -------- -------- -------- ---------
Less distributions from:
Net investment income 0.77 0.77 0.80 0.83 0.83
Net realized gains 2.36 2.17 2.43 1.36 1.24
-------- -------- -------- -------- ---------
Total distributions 3.13 2.94 3.23 2.19 2.07
-------- -------- -------- -------- ---------
Net asset value, end of year $39.88 $30.91 $33.76 $33.93 $33.05
======== ======== ======== ======== =========
Total Return 39.19% 0.23% 8.98% 9.28% 28.17%
Ratios/Supplemental Data:
Net assets, end of year (in
thousands) $1,228,366 $900,349 $937,676 $872,288 $789,879
Ratio of net investment income
to average net assets 2.08% 2.28% 2.29% 2.49% 2.67%
Ratio of expenses to average
net assets 0.13% 0.17% 0.11% 0.11% 0.13%
Portfolio turnover rate 15% 19% 18% 11% 14%
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------
1990 1989 1988 1987 1986
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $31.29 $25.99 $24.17 $27.48 $28.83
-------- -------- -------- -------- ---------
Income (loss) from investment operations:
Net investment income 0.91 1.05 0.85 0.80 0.89
Net realized and unrealized gains
(losses) on investments (2.11) 8.10 3.58 0.15 2.94
-------- -------- -------- -------- ---------
Total income (loss) from
investment operations (1.20) 9.15 4.43 0.95 3.83
-------- -------- -------- -------- ---------
Less distributions from:
Net investment income 0.99 1.05 0.88 1.75 0.99
Net realized gains 1.68 2.80 1.73 2.51 4.19
-------- -------- -------- -------- ---------
Total distributions 2.67 3.85 2.61 4.26 5.18
-------- -------- -------- -------- ---------
Net asset value, end of year $27.42 $31.29 $25.99 $24.17 $27.48
======== ======== ======== ======== =========
Total Return (3.71)% 35.81% 18.41% 3.49% 14.40%
Ratios/Supplemental Data:
Net assets, end of year (in
thousands) $622,142 $662,245 $521,084 $474,814 $483,595
Ratio of net investment income
to average net assets 3.05% 3.32% 3.33% 2.85% 3.19%
Ratio of expenses to average net
assets 0.20% 0.18% 0.24% 0.26% 0.18%
Portfolio turnover rate 17% 20% 21% 26% 20%
</TABLE>
2
<PAGE>
Elfun Global Fund
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $15.58 $16.48 $12.80 $12.63 $11.13
-------- -------- -------- -------- ---------
Income (loss) from investment operations:
Net investment income 0.23 0.21 0.18 0.18 0.14
Net realized and unrealized gains
(losses) on investments 2.27 (0.32) 3.90 0.57 1.51
-------- -------- -------- -------- ---------
Total income (loss) from investment
operations 2.50 (0.11) 4.08 0.75 1.65
-------- -------- -------- -------- ---------
Less distributions from:
Net investment income 0.19 0.19 0.12 0.17 0.15
Net realized gains 1.24 0.60 0.28 0.41 0.00
-------- -------- -------- -------- ---------
Total distributions 1.43 0.79 0.40 0.58 0.15
-------- -------- -------- -------- ---------
Net asset value, end of period $16.65 $15.58 $16.48 $12.80 $12.63
======== ======== ======== ======== =========
Total Return 16.03% (0.63%) 31.88% 5.94% 14.81%
Ratios/Supplemental Data:
Net assets, end of period (in
thousands) $142,262 $126,196 $83,196 $38,469 $25,029
Ratio of net investment income to
average net assets 1.36% 1.44% 1.42% 1.52% 1.58%
Ratio of expenses to average net
assets 0.34% 0.38% 0.31% 0.60% 0.98%
Portfolio turnover rate 55% 30% 43% 63% 100%
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------
For the Period
May 15, 1987
(commencement
of operations)
through
1990 1989 1988 December 31, 1987
--------- --------- --------- ------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $12.45 $10.73 $10.00 $10.00
-------- -------- -------- ----------------
Income (loss) from investment operations:
Net investment income 0.21 0.02 0.09 0.00
Net realized and unrealized gains
(losses) on investments (1.27) 2.59 0.90 0.00
-------- -------- -------- ----------------
Total income (loss) from investment
operations (1.06) 2.61 0.99 0.00
-------- -------- -------- ----------------
Less distributions from:
Net investment income 0.26 0.02 0.07 0.00
Net realized gains 0.00 0.87 0.19 0.00
-------- -------- -------- ----------------
Total distributions 0.26 0.89 0.26 0.00
-------- -------- -------- ----------------
Net asset value, end of period $11.13 $12.45 $10.73 $10.00
======== ======== ======== ================
Total Return (8.56)% 24.74% 9.94% 0.00%
Ratios/Supplemental Data:
Net assets, end of period (in
thousands) $19,415 $12,692 $6,868 $150
Ratio of net investment income to
average net assets 2.13% 0.30% 1.30% 0.00%
Ratio of expenses to average net
assets 1.00% 1.00% 1.00% 2.00*
Portfolio turnover rate 219% 219% 159% 0.00%
</TABLE>
* Annualized.
Elfun Diversified Fund
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $13.24 $14.05 $13.54 $12.84 $11.74
-------- -------- -------- -------- ---------
Income (loss) from investment operations:
Net investment income 0.53 0.47 0.48 0.46 0.68
Net realized and unrealized gains
(losses) on investments 3.06 (0.51) 0.73 0.74 1.38
-------- -------- -------- -------- ---------
Total income (loss) from investment
operations 3.59 (0.04) 1.21 1.20 2.06
-------- -------- -------- -------- ---------
Less distributions from:
Net investment income 0.53 0.46 0.47 0.46 0.70
Net realized gains 0.44 0.31 0.23 0.04 0.26
-------- -------- -------- -------- ---------
Total distributions 0.97 0.77 0.70 0.50 0.96
-------- -------- -------- -------- ---------
Net asset value, end of period $15.86 $13.24 $14.05 $13.54 $12.84
======== ======== ======== ======== =========
Total Return 27.11% (0.26%) 8.90% 9.35% 17.70%
Ratios/Supplemental Data:
Net assets, end of period (in
thousands) $77,255 $57,774 $54,911 $36,780 $23,959
Ratio of net investment income to
average net assets 3.62% 3.42% 3.65% 3.93% 4.96%
Ratio of expenses to average net
assets 0.34% 0.39% 0.39% 0.49% 0.90%
Portfolio turnover rate 93% 82% 25% 31% 67%
</TABLE>
<TABLE>
<CAPTION>
For the Period
June 1, 1987
(commencement
of operations)
through
1990 1989 1988 December 31, 1987
--------- --------- --------- ------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $11.86 $10.33 $10.00 $10.00
-------- -------- -------- ----------------
Income (loss) from investment operations:
Net investment income 0.65 0.56 0.34 0.00
Net realized and unrealized gains
(losses) on investments (.09) 1.65 0.32 0.00
-------- -------- -------- ----------------
Total income (loss) from investment
operations 0.56 2.21 0.66 0.00
-------- -------- -------- ----------------
Less distributions from:
Net investment income 0.59 0.56 0.33 0.00
Net realized gains 0.09 0.12 0.00 0.00
-------- -------- -------- ----------------
Total distributions 0.68 0.68 0.33 0.00
-------- -------- -------- ----------------
Net asset value, end of period $11.74 $11.86 $10.33 $10.00
======== ======== ======== ================
Total Return 4.75% 21.51% 6.57% 0.00%
Ratios/Supplemental Data:
Net assets, end of period (in
thousands) $18,992 $12,565 $7,771 $150
Ratio of net investment income to
average net assets 6.29% 5.20% 5.02% 0.00%
Ratio of expenses to average net
assets 1.00% 1.00% 1.00% 2.00*
Portfolio turnover rate 24% 146% 4% 0%
</TABLE>
* Annualized.
3
<PAGE>
Elfun Tax-Exempt Income Fund
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
year $10.83 $12.29 $11.76 $11.59 $11.03
-------- -------- -------- -------- ---------
Income (loss) from investment operations:
Net investment income 0.68 0.67 0.71 0.73 0.73
Net realized and unrealized
gains (losses) on investments 1.15 (1.37) 0.68 0.22 0.56
-------- -------- -------- -------- ---------
Total income (loss) from
investment operations 1.83 (0.70) 1.39 0.95 1.29
-------- -------- -------- -------- ---------
Less distributions from:
Net investment income 0.68 0.67 0.71 0.73 0.73
Net realized gains 0.07 0.09 0.15 0.05 0.00
-------- -------- -------- -------- ---------
Total distributions 0.75 0.76 0.86 0.78 0.73
-------- -------- -------- -------- ---------
Net asset value, end of year $11.91 $10.83 $12.29 $11.76 $11.59
======== ======== ======== ======== =========
Total Return 17.32% (5.77%) 12.11% 8.50% 12.08%
Ratios/Supplemental Data:
Net assets, end of year (in
thousands) $1,312,342 $1,145,873 $1,297,256 $1,115,254 $962,751
Ratio of net investment income
to average net assets 5.91% 5.90% 5.79% 6.25% 6.49%
Ratio of expenses to average
net assets 0.13% 0.13% 0.10% 0.11% 0.14%
Portfolio turnover rate 59% 24% 29% 29% 36%
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------
1990 1989 1988 1987 1986
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
year $11.14 $11.04 $10.49 $11.45 $10.95
-------- -------- -------- -------- ---------
Income (loss) from investment operations:
Net investment income 0.68 0.78 0.78 0.81 0.92
Net realized and unrealized
gains (losses) on investments (.05) 0.21 0.55 (.79) 1.24
-------- -------- -------- -------- ---------
Total income (loss) from
investment operations 0.63 0.99 1.33 0.02 2.16
-------- -------- -------- -------- ---------
Less distributions from:
Net investment income 0.74 0.78 0.78 0.81 0.92
Net realized gains 0.00 0.11 0.00 0.17 0.74
-------- -------- -------- -------- ---------
Total distributions 0.74 0.89 0.78 0.98 1.66
-------- -------- -------- -------- ---------
Net asset value, end of year $11.03 $11.14 $11.04 $10.49 $11.45
======== ======== ======== ======== =========
Total Return 5.98% 9.21% 13.07% 0.26% 20.65%
Ratios/Supplemental Data:
Net assets, end of year (in
thousands) $827,187 $773,651 $677,929 $593,028 $589,202
Ratio of net investment income
to average net assets 6.78% 6.98% 7.23% 7.56% 7.9%
Ratio of expenses to average
net assets 0.19% 0.17% 0.24% 0.22% 0.31%
Portfolio turnover rate 62% 75% 116% 103% 117%
</TABLE>
Elfun Income Fund
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
year $10.55 $11.68 $11.58 $11.92 $11.10
-------- -------- -------- -------- ---------
Income (loss) from investment operations:
Net investment income 0.77 0.70 0.73 0.86 0.89
Net realized and unrealized
gains (losses) on
investments 1.09 (0.97) 0.38 (.10) 0.82
-------- -------- -------- -------- ---------
Total income (loss) from
investment operations 1.86 (0.27) 1.11 0.76 1.71
-------- -------- -------- -------- ---------
Less distributions from:
Net investment income 0.77 0.70 0.73 0.87 0.89
Net realized gains 0.00 0.16 0.28 0.23 0.00
-------- -------- -------- -------- ---------
Total distributions 0.77 0.86 1.01 1.10 0.89
-------- -------- -------- -------- ---------
Net asset value, end of year $11.64 $10.55 $11.68 $11.58 $11.92
======== ======== ======== ======== =========
Total Return 18.21% (2.33%) 9.72% 6.61% 16.13%
Ratios/Supplemental Data:
Net assets, end of year (in
thousands) $218,880 $185,665 $199,478 $175,210 $137,873
Ratio of net investment
income to average net
assets 6.90% 6.34% 6.10% 7.24% 7.75%
Ratio of expenses to
average net assets 0.25% 0.30% 0.17% 0.22% 0.36%
Portfolio turnover rate 367% 215% 131% 62% 133%
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------
1990 1989 1988 1987 1986
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
year $11.11 $10.57 $10.70 $11.99 $11.78
-------- -------- -------- -------- ---------
Income (loss) from investment operations:
Net investment income 0.83 0.92 0.92 0.85 0.96
Net realized and unrealized
gains (losses) on
investments 0.07 0.54 (.13) (.77) 0.86
-------- -------- -------- -------- ---------
Total income (loss) from
investment operations 0.90 1.46 0.79 0.08 1.82
-------- -------- -------- -------- ---------
Less distributions from:
Net investment income 0.91 0.92 0.92 0.85 0.96
Net realized gains 0.00 0.00 0.00 0.52 0.65
-------- -------- -------- -------- ---------
Total distributions 0.91 0.92 0.92 1.37 1.61
-------- -------- -------- -------- ---------
Net asset value,
end of year $11.10 $11.11 $10.57 $10.70 $11.99
======== ======== ======== ======== =========
Total Return 8.61% 14.34% 7.52% 0.79% 16.46%
Ratios/Supplemental Data:
Net assets, end of year (in
thousands) $102,653 $93,332 $81,812 $73,905 $61,505
Ratio of net investment
income to average net
assets 8.38% 8.48% 7.77% 7.81% 10.68%
Ratio of expenses to
average net assets 0.46% 0.63% 0.50% 0.78% 0.72%
Portfolio turnover rate 214% 367% 631% 624% 506%
</TABLE>
4
<PAGE>
Elfun Money Market Fund
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------
For the Period
May 9, 1990
(commencement
of operations)
through
1995 1994* 1993* 1992* 1991* December 31, 1990*
------- ------- ------- ------- ------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- ----- -------------------
Income from investment
operations:
Net investment income 0.06 0.04 0.03 0.04 0.06 0.05
Net realized and unrealized
gains (losses) on investments 0.00 0.00 0.00 0.00 0.00 0.00
----- ----- ----- ----- ----- -------------------
Total income from investment
operations 0.06 0.04 0.03 0.04 0.06 0.05
----- ----- ----- ----- ----- -------------------
Less distributions from:
Net investment income 0.06 0.04 0.03 0.04 0.06 0.05
Net realized gains 0.00 0.00 0.00 0.00 0.00 0.00
----- ----- ----- ----- ----- -------------------
Total distributions 0.06 0.04 0.03 0.04 0.06 0.05
----- ----- ----- ----- ----- -------------------
Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
===== ===== ===== ===== ===== ===================
Total Return 5.82% 4.17% 3.31% 3.91% 6.55% 4.54%**
Ratios/Supplemental Data:
Net assets, end of period (in
thousands) $117,506 $107,406 $59,959 $52,774 $47,623 $31,470
Ratio of net investment
income to average net assets 5.68% 4.20% 3.27% 3.86% 6.33% 8.25%***
Ratio of expenses to average
net assets 0.30% 0.16% 0.00% 0.11% 0.04% 0.05%***
Portfolio turnover rate N/A N/A N/A N/A N/A N/A
</TABLE>
- ---------------------
* Had GEIC not absorbed a portion of the expenses, the net investment
income per unit would have been the same, the total return would have
been lower, and the ratio of expenses to average net assets would have
been .34%, .39%, .35%, .49% and .63% for the years ended December 31,
1994, 1993, 1992 and 1991 and for the period May 9, 1990 through December
31, 1990, respectively.
** Not Annualized.
*** Annualized.
N/A -- Not Applicable.
5
<PAGE>
WHO MAY OWN FUND UNITS
- -------------------------------------------------------------------------------
Purchase of units ("Units") of any of the six Funds may be made 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 and children of a deceased member, (5) members
of the Board of Directors of General Electric Company ("GE"), (6) GE and its
subsidiaries, and (7) such others as the trustees of the Funds (the
"Trustees") 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 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.
NOT SPONSORED BY GE
- -------------------------------------------------------------------------------
GE is not a party to the trust agreements which created each Fund and does
not sponsor the Funds.
INVESTMENT OBJECTIVES AND
MANAGEMENT POLICIES
- -------------------------------------------------------------------------------
Set forth below is a description of the investment objective(s) and policies
of each Fund. The investment objective(s) of a Fund may not be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities as defined in the 1940 Act. Such a majority is defined in
the 1940 Act as the lesser of (1) 67% or more of the Units present at a Fund
meeting, if the holders of more than 50% of the outstanding Units of the Fund
are present or represented by proxy or (2) more than 50% of the outstanding
Units of the Fund. No assurance can be given that a Fund will be able to
achieve its investment objective(s).
Elfun Trusts
- ------------------------------------------------------------------------------
Elfun Trusts was organized as a common law trust in the State of New York on
May 27, 1935. The investment objectives of Elfun Trusts are long-term growth
of capital and future income rather than current income. In pursuing its
objectives, Elfun Trusts, under normal conditions, invests in common stocks,
preferred stocks, convertible securities, warrants, bonds, debentures, notes
and convertible bonds issued by U.S. and foreign companies; securities issued
or guaranteed by the U.S. Government, its agencies and instrumentalities
("Government Securities"); Municipal Obligations (as defined below);
obligations of foreign governments or their agencies or instrumentalities;
and domestic and foreign money market instruments.
Although Elfun Trusts has generally invested a majority of its assets in
common stock or securities convertible into common stock, when GEIC believes
there will be a market decline in particular securities, it may, for
temporary defensive purposes, hold cash and/or invest in investment grade
short-term securities or money market instruments without limitation. In
addition, during normal market conditions, a portion of Elfun Trusts' total
assets may be held in cash and/or invested in money market instruments of the
types described below under "Additional Investments -- Money Market
Instruments" for cash management purposes, pending investment in accordance
with the Fund's investment objective and policies and to meet operating
expenses. Included among the money market instruments in which Elfun Trusts
may invest are repurchase agreements, the risks and special considerations of
which are described below under "Risk Factors and Special Considerations --
Repurchase and Reverse Repurchase Agreements." Other money market instruments
in which Elfun Trusts may invest are described below under "Additional
Investments -- Money Market Instruments." To the extent that it invests in
money market instruments, Elfun Trusts may not achieve its investment
objective of long-term growth of capital.
Elfun Trusts' investments in debt securities are limited to those that are
rated investment grade, except that up to 5% of the Fund's assets may be
invested in securities rated lower than investment grade. A security will be
considered investment grade if it is rated at the time of purchase within the
four highest grades assigned by Standard & Poor's Corporation ("S&P") or by
Moody's Investors Service, Inc. ("Moody's") or has received an equivalent
rating from another nationally recognized statistical rating organization
("NRSRO") or, if unrated, is deemed by GEIC to be of comparable quality.
Risks and special considerations applicable to certain investment grade
obligations and obligations rated lower than investment grade are described
below under "Risk Factors and Special Considerations." A description of S&P
and Moody's ratings relevant to Elfun Trusts' investments is included as an
Appendix to the Statement of Additional Information.
Elfun Trusts, in addition to investing as described above, may hold the
following types of instruments: non-publicly traded securities, illiquid
securities, securities that are not registered under the Securities Act of
1933, as amended (the "1933 Act"), but that can be sold to "qualified
institutional buyers" in accordance with Rule 144A under the 1933 Act (each,
a "Rule 144A Security" and collectively, "Rule 144A Securities") and
securities of other investment funds. In addition, Elfun Trusts may engage in
the following types of investment techniques and strategies: purchasing put
and call options on securities, writing put and call options on securities,
purchasing put and call options on securities indexes, entering into interest
rate, financial and stock or bond index futures contracts or related options
that are traded on a U.S. exchange or board of trade, entering into
securities transactions on a when-issued or delayed delivery basis and
lending portfolio securities. These other instruments, investment techniques
and strategies have risks and special considerations associated with them
that are described below under "Risk Factors and Special Considerations" and
in "Further Information: Certain Investment Techniques and Strategies."
Investing in accordance with Elfun Trusts' objectives, policies and
restrictions has resulted in a portfolio turnover rate of 15% in 1995 and 19%
in 1994. See "Portfolio Transactions and Turnover" below for further
information on portfolio turnover rates.
6
<PAGE>
Elfun Global Fund
- -------------------------------------------------------------------------------
Elfun Global Fund (the "Global Fund") was organized as a common law trust in
the State of Connecticut on May 15, 1987. The investment objectives of the
Global Fund are long-term growth of capital and future income, which the Fund
seeks to achieve by investing principally in foreign securities consistent
with prudent investment management and the preservation of capital. The
Global Fund is designed for long-term investors who can accept international
investment risk. The Global Fund invests in domestic and foreign companies,
wherever organized, including companies organized in developing countries.
Although the Global Fund is subject to no prescribed limits on geographic
asset distribution, under normal circumstances, at least 65% of the Fund's
assets will be invested in the aggregate in no fewer than three different
countries. A more complete description of foreign securities and the risks
and special considerations applicable to them is included below under "Risk
Factors and Special Considerations" and in "Further Information: Certain
Investment Techniques and Strategies."
The Global Fund intends to diversify investments among companies in several
countries and not to concentrate investments in any particular industry. The
Global Fund will implement its strategy by investing in common stocks,
preferred stocks, notes, bonds, convertible bonds, convertible preferred
stock, options and indexes, as well as common stock purchase warrants or
rights issued by established companies. The Global Fund may also invest in
foreign currencies and in securities of foreign issuers in the form of
depositary receipts. The equity securities in which the Global Fund invests
are issued by foreign or U.S. companies and in most cases are traded on
foreign or U.S. securities exchanges. The dollar value of the Global Fund's
portfolio securities fluctuates with changes in market and economic
conditions abroad and with changes in relative currency values. Changes in
the Unit price of the Global Fund may not be related to changes in the U.S.
stock and bond markets.
The Global Fund's investments in debt instruments are limited to those that
are rated investment grade by S&P, or Moody's or another NRSRO. Unrated
securities are eligible for investment by the Fund if, in the opinion of
GEIC, they would if rated, be in one of the four highest categories. The
Global Fund will not purchase any security if, as a result of the purchase, a
total of more than 20% of the Fund's total assets would be invested either in
securities rated BBB or Baa or in unrated securities which in the opinion of
GEIC would be rated in those categories. Risks and special considerations
applicable to certain investment grade obligations and obligations rated
below investment grade are described below under "Risk Factors and Special
Considerations." A description of S&P and Moody's ratings relevant to the
Global Fund's investments is included as an Appendix to the Statement of
Additional Information.
During normal market conditions, the Global Fund invests principally in
securities of issuers located in a number of different countries as described
above, and a portion of its total assets may be held in cash and/or invested
in money market instruments of the types described below under "Additional
Investments -- Money Market Instruments," for cash management purposes,
pending investment in accordance with the Fund's investment objectives and
policies and to meet operating expenses. In the event GEIC determines that a
temporary defensive posture is warranted due to unstable market, economic,
political or currency conditions outside of the United States, the Fund may
(1) restrict the securities markets in which its assets will be invested or
(2) without limitation hold cash and/or invest in such money market
instruments. In that event, the Global Fund may, in seeking to achieve its
objectives, invest all or a significant portion of its assets in securities
of the types described above issued by U.S. or Canadian entities or in U.S.
currency. Investments may be on a hedged or unhedged basis, without
protection from changes in currency exchange rates. Included among the money
market instruments in which the Global Fund may invest are repurchase
agreements, the risks and special considerations of which are described below
under "Risk Factors and Special Considerations -- Repurchase and Reverse
Repurchase Agreements." Other money market instruments in which the Global
Fund may invest are described below under "Additional Investments -- Money
Market Instruments." To the extent that it holds cash or invests in money
market instruments, the Global Fund may not achieve its investment objective
of long-term growth of capital.
The Global Fund, in addition to investing as described above, may hold the
following types of instruments: non-publicly traded securities, illiquid
securities, Rule 144A Securities and securities of other investment funds. In
addition, the Global Fund may engage in the following types of investment
techniques and strategies: purchasing put and call options on securities,
writing put and call options on securities, purchasing put and call options
on securities indexes, entering into interest rate, financial and stock or
bond index futures contracts or related options that are traded on a U.S. or
foreign exchange or board of trade, or in the over-the-counter market,
engaging in forward currency transactions, purchasing and writing put and
call options on foreign currencies, entering into securities transactions on
a when-issued or delayed-delivery basis and lending portfolio securities.
These other instruments, investment techniques and strategies have risks and
special considerations associated with them that are described below under
"Risk Factors and Special Considerations" and in "Further Information:
Certain Investment Techniques and Strategies."
Investing in accordance with the Global Fund's objectives, policies and
restrictions has resulted in a portfolio turnover rate of 55% in 1995 and 30%
in 1994. See "Portfolio Transactions and Turnover" below for further
information on portfolio turnover rates.
Elfun Diversified Fund
- -------------------------------------------------------------------------------
Elfun Diversified Fund (the "Diversified Fund") was organized as a common law
trust in the State of Connecticut on June 1, 1987. The investment objective
of the Diversified Fund is to seek the highest total return, consistent with
prudent investment management and the preservation of capital. In seeking its
objective, the Diversified Fund follows an asset allocation strategy
contemplating shifts among a range of investments. The investment philosophy
of the Diversified Fund is based on a belief that the structure of the United
States economy
7
<PAGE>
and other economies and their securities markets are undergoing continuous
change. The asset allocation approach puts maximum emphasis on flexibility.
An investor should not, however, expect either income levels or capital
appreciation comparable to that of funds for which either is a primary
objective.
The Diversified Fund invests in the following classes of investments: common
stocks, preferred stocks, convertible securities, warrants, bonds,
debentures, notes and convertible bonds issued by U.S. and foreign companies;
Government Securities; Municipal Obligations (as defined below); obligations
of foreign governments or their agencies or instrumentalities; mortgage
related securities, adjustable rate mortgage related securities ("ARMs"),
collateralized mortgage related securities ("CMOs") and government stripped
mortgage related securities; asset-backed and receivable-backed securities;
and domestic and foreign money market instruments. The U.S. equity and debt
instruments in which the Diversified Fund invests are traded on U.S.
securities exchanges or in the U.S. over-the-counter market, except that the
Fund may invest up to 10% of its assets in non-publicly traded securities. In
addition, up to 20% of the Diversified Fund's total assets may be invested in
foreign securities that are listed on foreign securities exchanges or traded
in foreign over-the-counter markets. Investments may be on a hedged or
unhedged basis and may be short-term or long-term, without protection from
changes in currency exchange rates. Investments in foreign companies and
agencies of foreign governments usually involve currencies of foreign
countries. Risks and special considerations applicable to investing in
non-publicly traded and foreign securities are described below under "Risk
Factors and Special Considerations." The Diversified Fund may also invest in
depositary receipts and indexed securities, the value of which is linked to
currencies, interest rates, commodities, indexes or other financial
indicators. Mortgage related securities, ARMs, CMOs, government stripped
mortgage related securities and asset-backed and receivable-backed securities
are subject to several risks including the prepayment of principal. Other
risks and special considerations applicable to these instruments are
described in "Further Information: Certain Investment Techniques and
Strategies."
GEIC has broad latitude in selecting the classes of investments to which the
Diversified Fund's assets will be committed. Although the Diversified 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, GEIC anticipates that at most times the Fund will be
invested in a combination of equity and debt instruments.
The Diversified Fund's investments are designed to achieve favorable
performance with lower volatility than a fund that invests solely in equity
or debt securities. The weightings of equity and debt holdings for the
Diversified Fund will be established from time to time by the Trustees of the
Diversified Fund with the assistance of GEIC in light of its assessment of
the attractiveness of each market. Although GEIC cannot predict the mix of
the Diversified Fund's investments at any one time, GEIC can delineate
certain situations that can lead to a shift in the mix of the Diversified
Fund's investments. During normal market conditions, a portion of the
Diversified Fund's total assets may be held in cash and/or invested in money
market instruments of the types described below under "Additional Investments
- -- Money Market Instruments" for cash management purposes, pending investment
in accordance with the Fund's investment objective and policies and to meet
operating expenses. In addition, if GEIC determines that the outlook for
equity and debt securities is unfavorable, GEIC could cause a major portion
of the Diversified Fund's assets to be invested in such money market
instruments. GEIC's decision that the Diversified Fund make a substantial
commitment to foreign securities would be predicated on the outlook for the
foreign securities markets of selected countries, the underlying economies of
those countries and the direction of the U.S. dollar relative to the
currencies of those countries.
The Diversified Fund typically purchases a debt security if GEIC believes
that the yield and potential for capital appreciation of the security are
sufficiently attractive in light of the risks of ownership of the security.
In determining whether the Diversified Fund should invest in particular debt
instruments, GEIC will consider factors such as: the price, coupon and yield
to maturity; GEIC's assessment of the credit quality of the issuer; the
issuer's available cash flow and the related coverage ratios; the property,
if any, securing the obligation; and the terms of the debt securities,
including the subordination, default, sinking fund and early redemption
provisions.
The Diversified Fund limits its purchases of debt instruments to those that
are rated within the six highest categories by S&P, Moody's or another NRSRO,
or if unrated, are deemed by GEIC to be of comparable quality. The
Diversified Fund will not purchase a debt security if, as a result of the
purchase, more than 25% of the Fund's total assets would be invested in
securities rated BBB by S&P or Baa by Moody's or, if unrated, deemed by GEIC
to be of comparable quality. In addition, the Diversified Fund will not
purchase any obligation rated BB or B by S&P or B by Moody's if, as a result
of the purchase, more than 10% of the Fund's total assets would be invested
in obligations rated in those categories or in unrated obligations that are
deemed by GEIC to be of comparable quality. Risks and special considerations
applicable to certain investment grade obligations and obligations rated
lower than investment grade are described below under "Risk Factors and
Special Considerations." A description of S&P and Moody's ratings relevant to
the Diversified Fund's investments is included as an Appendix to the
Statement of Additional Information.
The Diversified Fund, in addition to investing as described above, may hold
the following types of instruments: repurchase agreements, illiquid
securities, Rule 144A Securities, securities of supranational agencies,
securities of other investment funds, zero coupon obligations, municipal
leases, floating and variable rate instruments, participation interests in
certain Municipal Obligations, Municipal Obligation components and custodial
receipts. In addition, the Diversified Fund may engage in the following types
of investment techniques and strategies: purchasing put and call options on
securities, writing put and call options on securities, purchasing put and
call options on securities indexes, entering into interest rate, financial
and stock or bond index futures contracts or related options that are traded
on a U.S. or foreign exchange or board of trade or in the over-the-counter
market, engaging in forward currency transactions, trading
8
<PAGE>
in commodity futures contracts on exchanges located outside the United
States, purchasing and writing put and call options on foreign currencies,
entering into securities transactions on a when-issued or delayed-delivery
basis, entering into mortgage dollar rolls and lending portfolio securities.
These other instruments, investment techniques and strategies have risks and
special considerations associated with them that are described below under
"Risk Factors and Special Considerations" and in "Further Information:
Certain Investment Techniques and Strategies."
Investing in accordance with the Diversified Fund's objective, policies and
restrictions has resulted in a portfolio turnover rate of 93% in 1995 and 82%
in 1994. See "Portfolio Transactions and Turnover" below for more information
on portfolio turnover rates.
Elfun Tax-Exempt Income Fund
- -------------------------------------------------------------------------------
Elfun Tax-Exempt Income Fund (the "Tax-Exempt Fund") was organized as a
common law trust in the State of Connecticut on March 14, 1977. The
investment objective of the Tax-Exempt Fund is to seek 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 Tax-Exempt Fund
seeks to achieve its objective by investing in a diversified portfolio of
bonds issued by, or on behalf of, states, territories and possessions of the
United States and the District of Columbia and their political subdivisions,
agencies and instrumentalities or multi-state agencies or authorities, the
interest from which bonds is in the opinion of counsel to their issuers,
excluded from gross income for Federal income tax purposes ("Municipal
Obligations"). The Tax-Exempt Fund's income may be subject to state and local
taxes.
The Tax-Exempt Fund operates subject to a fundamental investment policy
providing that, under normal conditions, the Fund will invest at least 80% of
its net assets in Municipal Obligations, the income from which is exempt from
Federal income taxation and is not a specific tax preference item for
purposes of the Federal individual and corporate alternative minimum tax.
Under normal conditions, the Tax-Exempt Fund may hold a portion of its total
assets in cash or money market instruments, including taxable money market
instruments of the sort described below under "Additional Investments --
Money Market Instruments" for cash management purposes, pending investment in
accordance with the Fund's investment objective and policies and to meet
operating expenses. In addition, the Tax-Exempt Fund may, without limitation,
as a temporary defensive posture, hold cash, or invest in short-term
Municipal Obligations and/or money market instruments of the type described
below under "Additional Investments -- Money Market Instruments."
Municipal Obligations are classified as general obligation bonds or revenue
bonds. General obligation bonds are secured by the issuer's pledge of its
full faith, credit and taxing power for the payment of principal and
interest. Revenue bonds are payable from the revenue derived from a
particular facility or class of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source but not from
the general taxing power. Notes are short-term obligations of issuing
municipalities or agencies and are sold in anticipation of a bond sale,
collection of taxes or receipt of other revenues. Municipal Obligations bear
fixed, floating and variable rates of interest. Variations exist in the
security of Municipal Obligations, both within a particular classification
and between classifications. Risks and special considerations applicable to
Municipal Obligations are described below under "Risk Factors and Special
Considerations."
The Tax-Exempt Fund has the authority to invest in Municipal Obligations that
are rated at the time of purchase within the six highest categories
established by S&P, Moody's or another NRSRO, or which, although not rated,
are, in the opinion of GEIC, of comparable quality. The six highest ratings
currently assigned to Municipal Bonds by S&P are AAA, AA, A, BBB, BB and B
and by Moody's are Aaa, Aa, A, Baa, Ba and B. Bonds coming within the highest
four S&P and Moody's Municipal Bond ratings are considered investment grade.
Risks and special considerations applicable to certain investment grade
obligations and obligations rated lower than investment grade are described
below under "Risk Factors and Special Considerations." A description of S&P
and Moody's ratings relevant to the Tax-Exempt Fund's investments is included
as an Appendix to the Statement of Additional Information.
At least 50% of the Tax-Exempt Fund's total assets are invested in
obligations rated A or better by S&P or Moody's. In addition, the Tax-Exempt
Fund will limit its investments in obligations rated BBB by S&P or Baa by
Moody's to no more than 25% of its total assets and will limit its
investments in obligations rated BB or B by S&P or Ba or B by Moody's to no
more than 10% of its total assets. No more than 25% of the Tax-Exempt Fund's
total assets may be invested in obligations that are not rated and no
non-rated obligation will be purchased by the Fund unless GEIC determines the
obligation to be of a quality comparable to an obligation rated B or better
by S&P or Moody's. For purposes of determining compliance with these
fundamental policies with respect to ratings, non-rated obligations will be
included with rated obligations of comparable quality. If the S&P or Moody's
rating of a particular obligation is lowered, or if S&P or Moody's ceases to
rate the obligation, subsequent to that purchase by the Tax-Exempt Fund, GEIC
will consider the event in its determination of whether the Fund should
continue to hold the obligation; the Fund will not, however, be required to
sell the obligation in either case. Risks and special considerations
applicable to certain investment grade obligations and obligations rated
below investment grade are described below under "Risk Factors and Special
Considerations."
The Tax-Exempt Fund, in addition to investing as described above, may hold
the following types of instruments: repurchase agreements, illiquid
securities, Rule 144A Securities, zero coupon obligations, municipal leases,
floating or variable rate instruments, participation interests in certain
Municipal Obligations, Municipal Obligation components and custodial
receipts. In addition, the Tax-Exempt Fund may engage in the following types
of investment techniques and strategies: purchasing put and call options on
securities, writing put and call options on securities, purchasing put and
call options on securities indexes, entering into interest rate, financial
and bond
9
<PAGE>
index futures contracts (including tax-exempt bond index futures contracts)
or related options that are traded on a U.S. or foreign exchange or board of
trade or in the over-the-counter market, borrowing for long-term or
leveraging purposes in an amount not to exceed 10% of the value of its total
assets, entering into securities transactions on a when-issued or
delayed-delivery basis and lending portfolio securities. These other
instruments, investment techniques and strategies have risks and special
considerations associated with them that are described below under "Risk
Factors and Special Considerations" and in "Further Information: Certain
Investment Techniques and Strategies." Income derived by the Tax-Exempt Fund
with respect to certain of these instruments, investment techniques and
strategies, will not be exempt from Federal income taxation.
Investing in accordance with the Tax-Exempt Fund's objective, policies and
restrictions has resulted in a portfolio turnover rate of 59% in 1995 and 24%
in 1994. See "Portfolio Transactions and Turnover" below for further
information on portfolio turnover rates.
Elfun Income Fund
- -------------------------------------------------------------------------------
Elfun Income Fund (the "Income Fund") was organized as a common law trust in
the State of Connecticut on December 22, 1982. The investment objective of
the Income Fund is to seek a high level of income consistent with prudent
investment management and the preservation of capital. Capital appreciation
with respect to the Income Fund's portfolio securities may occur but is not
an objective of the Fund. In seeking to achieve its investment objective, the
Income Fund invests in the following types of fixed income instruments:
Government Securities; obligations of foreign governments or their agencies
or instrumentalities; bonds, debentures, notes and preferred stocks issued by
domestic and foreign companies; equipment trust certificates (indebtedness
secured by liens on personal property such as airplanes and railroad cars);
mortgage related securities, ARMs, CMOs and government stripped mortgage
related securities; asset-backed and receivable-backed securities; and money
market instruments. The Income Fund may also invest in indexed securities,
the value of which is linked to currencies, interest rates, commodities,
indexes or other financial indicators. Mortgage related securities, ARMs,
CMOs, government stripped mortgage related securities and asset-backed and
receivable-backed securities are subject to several risks, including the
early prepayment of principal. Other risks and special considerations
applicable to these instruments are described in "Further Information:
Certain Investment Techniques and Strategies."
The Income Fund is subject to no limitation with respect to the maturities of
the instruments in which it may invest. The Income Fund's investments in
bonds will be limited to those that are rated within the six highest
categories by S&P, Moody's or another NRSRO, or if unrated, are deemed by
GEIC to be of comparable quality. Risks and special considerations applicable
to certain investment grade obligations and obligations rated lower than
investment grade are described below under "Risk Factors and Special
Considerations." A description of S&P and Moody's ratings relevant to the
Income Fund's investments is included as an Appendix to the Statement of
Additional Information.
The Income Fund will not purchase any obligation rated BBB by S&P or Baa by
Moody's if, as a result of the purchase, more than 25% of the Fund's total
assets would be invested in obligations rated in those categories or in
unrated obligations that are deemed by GEIC to be of comparable quality. In
addition, no obligation will be purchased by the Income Fund if, as a result
of the purchase, more than 10% of the Fund's total assets would be invested
in obligations rated BB or B by S&P or Ba or B by Moody's or in unrated
obligations that GEIC deems to be of comparable quality.
Up to 35% of the Income Fund's total assets may be invested in obligations of
foreign companies or foreign governments or their agencies and
instrumentalities. Investments in foreign companies and agencies or
instrumentalities of foreign governments made by the Income Fund usually will
involve currencies of foreign countries. Investments may be on a hedged or
unhedged basis and may be short-term or long-term, without protection from
changes in currency rates. Risks and special considerations applicable to
investing in foreign countries are described below under "Risk Factors and
Special Considerations." Under normal market conditions, the Income Fund may
invest a substantial portion of its assets in money market instruments of the
types described below under "Additional Investments -- Money Market
Instruments" for cash management purposes, pending investment in accordance
with the Fund's investment objective and policies and to meet operating
expenses.
Under unstable market conditions, when GEIC deems it advisable, the Income
Fund may assume a temporary defensive measure and without limitation hold
cash and/ or invest in money market instruments of the types described below
under "Additional Investments -- Money Market Instruments." Included among
the money market instruments in which the Fund may invest are repurchase
agreements, the risks and special considerations of which are described below
under "Risk Factors and Special Considerations -- Repurchase and Reverse
Repurchase Agreements."
The Income Fund, in addition to investing as described above, may hold the
following types of instruments: repurchase agreements if collateralized by
Government Securities or other securities rated at least AA by S&P, illiquid
securities, Rule 144A Securities, securities of supranational agencies,
securities of other investment funds, zero coupon obligations, floating and
variable rate instruments and participation interests in certain Municipal
Obligations. In addition, the Income Fund may engage in the following types
of investment techniques and strategies: purchasing put and call options on
securities, writing put and call options on securities, purchasing put and
call options on securities indexes, entering into interest rate, financial
and bond index futures contracts or related options that are traded on a U.S.
or foreign exchange or board of trade or in the over-the-counter market,
engaging in forward currency transactions, purchasing and writing put and
call options on foreign currencies, entering into securities transactions on
a when-issued or delayed-delivery basis, entering into mortgage dollar rolls
and lending portfolio securities. These other
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instruments, investment techniques and strategies have risks and special
considerations associated with them that are described below under "Risk
Factors and Special Considerations" and in "Further Information: Certain
Investment Techniques and Strategies."
Investing in accordance with the Income Fund's objective, policies and
restrictions has resulted in a portfolio turnover rate of 367% in 1995 and
215% in 1994. See "Portfolio Transactions and Turnover" below for further
information on portfolio turnover rates.
Elfun Money Market Fund
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Elfun Money Market Fund (the "Money Market Fund") was organized as a common
law trust in the State of Connecticut on July 15, 1989. The investment
objective of the Money Market Fund is to seek a high level of current income
consistent with prudent investment management and the preservation of
capital. In seeking its objective, the Money Market 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 other short-term corporate debt securities, 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)
securities issued by foreign issuers; (7) repurchase agreements; and (8) any
other short-term U.S. dollar denominated money market instruments that the
Trustees of the Fund determine present minimal credit risks. The percentage
of the Money Market Fund's assets invested in securities issued by foreign
governments, political subdivisions, agencies or instrumentalities will vary
depending on the relative yields of the securities, the economic and
financial markets of the countries in which the investments are made and the
interest rate climate of those countries, but will in no event exceed 10% of
the Fund's assets.
The Money Market Fund limits its portfolio investments to securities that the
Trustees determine present minimal credit risk and that are "Eligible
Securities" at the time of acquisition by the Fund. "Eligible Securities" as
used in this Prospectus means securities rated by the "Requisite NRSROs" in
one of the two highest short-term rating categories, consisting of issuers
that have received these ratings with respect to other short-term debt
securities and comparable unrated securities. "Requisite NRSROs" means (1)
any two NRSROs that have issued ratings with respect to a security or class
of debt obligations of an issuer or (2) one NRSRO, if only one NRSRO has
issued such a rating at the time that the Money Market Fund acquires the
security. Currently, six organizations are NRSROs: S&P, Moody's, Fitch
Investors Service, Inc., Duff and Phelps, Inc., IBCA Limited and its
affiliate, IBCA, Inc., and Thomson BankWatch Inc. A discussion of the ratings
categories is contained in the Appendix to the Statement of Additional
Information. By limiting its investments to Eligible Securities, the Money
Market Fund may not achieve as high a level of current income as a fund
investing in lower-rated securities.
The Money Market Fund may not invest more than 5% of its total assets in the
securities of any one issuer, except for Government Securities and except to
the extent permitted under rules adopted by the SEC under the 1940 Act. In
addition, the Money Market Fund may not invest more than 5% of its total
assets in Eligible Securities that have not received the highest rating
category from the Requisite NRSROs and comparable unrated securities ("Second
Tier Securities"), and may not invest the greater of $1,000,000 in Second
Tier Securities of an issuer or 1% of its total assets in Second Tier
Securities of any one issuer. The Money Market Fund may invest more than 5%
(but not more than 25%) of the then-current value of the Fund's total assets
in the securities of a single issuer for a period of up to three business
days, so long as (1) the securities either are rated by the Requisite NRSROs
in the highest short-term rating category or are securities of issuers that
have received such ratings with respect to other short-term debt securities
or are comparable unrated securities and (2) the Fund does not make more than
one such investment at any one time. If the Money Market Fund acquires
securities that are unrated or that have been rated by a single NRSRO, the
acquisition must be approved or ratified by the Fund's Trustees.
Determination of comparable quality will be made by GEIC in accordance with
procedures established by the Trustees. The Money Market Fund invests only in
instruments that have (or, pursuant to regulations adopted by the SEC, are
deemed to have) remaining maturities of 13 months or less at the date of
purchase (except securities subject to repurchase agreements), determined in
accordance with a rule promulgated by the SEC. The Money Market Fund will
maintain a dollar-weighted average portfolio maturity of 90 days or less. The
assets of the Money Market Fund will be valued on the basis of amortized
cost, as described below under "Net Asset Value."
The Money Market Fund, in addition to investing as described above, may hold
illiquid securities, Rule 144A Securities and securities of other investment
funds, and may purchase floating and variable rate demand notes and bonds. In
addition, the Money Market Fund may engage in the following types of
investment techniques and strategies: entering into reverse repurchase
agreements, entering into securities transactions on a when-issued or
delayed-delivery basis, selling securities short against the box and lending
portfolio securities. These other instruments, investment techniques and
strategies have risks and special considerations associated with them that
are described below under "Risk Factors and Special Considerations" and in
"Further Information: Certain Investment Techniques and Strategies."
Additional Investments
- ------------------------------------------------------------------------------
Some or all of the Funds may invest in the types of instruments and engage in
the types of strategies described in detail below. These instruments and
strategies may be subject to the risks and special considerations described
below under "Risk Factors and Special Considerations."
The Annual Report contains information regarding relevant market conditions
and investment strategies and techniques pursued by GEIC during 1995, and is
available to unitholders without charge upon request made to the Funds at the
address listed on the front cover page of this Prospectus.
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Money Market Instruments. Each Fund, other than the Money Market Fund, may
invest only in the following types of money market instruments: Government
Securities; obligations issued or guaranteed by foreign governments or by any
of their political subdivisions, authorities, agencies or instrumentalities;
bank obligations (including certificates of deposit, time deposits and
bankers' acceptances of foreign (limited to Canadian banks in the case of the
Tax-Exempt Fund) or domestic banks and their foreign branches, domestic
savings and loan associations and other banking institutions having total
assets in excess of $500 million); commercial paper; and repurchase
agreements. Short-term investments, with respect to the Tax-Exempt Fund, do
not include any security which, at the time of purchase, has a rating lower
than A in the Moody's rating system or in the opinion of GEIC, is of
equivalent quality, or any security which matures later than 12 months from
the date of purchase.
Each of the Funds may invest in the following types of Government Securities:
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, 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 GEIC 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 Global Fund and the Tax-Exempt Fund may invest in these
instruments only if they are rated AAA or AA by S&P or Aaa or Aa by Moody's
or have received an equivalent rating from another NRSRO, or, if unrated, are
deemed by GEIC 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 GEIC 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 an Appendix to the Statement of Additional Information.
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 will be monitored on an ongoing basis by GEIC
to ensure that the value is at least equal at all times to the total amount
of the repurchase obligation, including interest. GEIC also monitors, on an
ongoing basis to evaluate potential risks, the creditworthiness of those
banks and dealers with which a Fund enters into repurchase 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 the Money Market 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 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 high grade debt
obligations equal in value to the Money Market Fund's obligations with
respect to reverse repurchase agreements are segregated and maintained with
the Fund's custodian or designated sub-custodian.
Non-publicly Traded and Illiquid Securities. The Tax-Exempt Fund and the
Money Market Fund may each invest up to 5% of their assets in non-publicly
traded securities. Elfun Trusts, the Global Fund, the Diversified Fund and
the Income Fund may each invest up to 10% of their 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 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
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<PAGE>
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 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 GEIC
has determined are not liquid under guidelines established by the Funds'
Board of Trustees. In addition, securities which, if sold, might position the
Income Fund or the Tax-Exempt Fund as an underwriter under the Securities Act
of 1933 will be deemed to be illiquid.
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 (unlike most fixed income securities) the
principal amount payable at maturity of an indexed security 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.
Purchasing Put and Call Options on Securities. Each Fund, other than the
Money Market Fund, may purchase put and call options that are traded on a
U.S. or foreign securities exchange or in the over-the-counter market. A Fund
may utilize up to 10% of its assets to purchase put options on portfolio
securities and may do so at or about the same time that it purchases the
underlying security or at a later time. The Money Market Fund will not,
immediately after the acquisition of any put options, have more than 5% of
its total assets in securities underlying put options from the same
institution. By buying a put, a Fund will seek to limit its risk of loss from
a decline in the market value of the security until the put expires. Any
appreciation in the value of the underlying security, however, will be
partially offset by the amount of the premium paid for the put option and any
related transaction costs. A Fund may utilize up to 10% of its assets to
purchase call options on portfolio securities. Call options may be purchased
by a Fund in order to acquire the underlying securities for a price that
avoids any additional cost that would result from a substantial increase in
the market value of a security. A Fund may also purchase call options to
increase its return at a time when the call is expected to increase in value
due to anticipated appreciation of the underlying security. Prior to their
expirations, put and call options may be sold by a Fund in closing sale
transactions, which are sales by the Fund, prior to the exercise of options
that it has purchased, of options of the same series. Profit or loss from the
sale will depend on whether the amount received is more or less than the
premium paid for the option plus the related transaction costs. The aggregate
value of the securities underlying the calls or obligations underlying the
puts, determined as of the date the options are sold, shall not exceed 25% of
the net assets of a Fund. In addition, the premiums paid by a Fund in
purchasing options on securities, options on securities indexes, options on
foreign currencies and options on futures contracts will not exceed 20% of
the Fund's net assets.
Covered Option Writing. A Fund, other than the Money Market Fund, may write
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.
The Funds with option-writing authority will write only options that are
covered. A put or call 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. See "Strategies
Available to Some But Not All Funds -- Writing Options on Securities" in the
Statement of Additional Information for specific situations where put and
call options will be deemed to be covered by a Fund.
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.
To facilitate closing purchase transactions, the Funds with option-writing
authority will ordinarily write options only if a secondary market for the
options exists on a U.S. or foreign securities exchange or in the
over-the-counter market.
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 position's being offset by a loss on the hedge position. No Fund
will enter into a transaction involving options for speculative purposes.
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
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<PAGE>
securities indexes listed on U.S. or foreign securities exchanges or 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. No Fund will enter into a transaction involving securities index
options for speculative purposes.
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 indexes are generally similar to options on specific securities.
Unlike options on securities, however, options on securities indexes do not
involve the delivery of an underlying security; the option in the case of an
option on a securities index represents the holder's right to obtain from the
writer 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 underlying securities index on the exercise date.
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. See "Strategies
Available to Some But Not All Funds -- Covered Option Writing" in the
Statement of Additional Information for specific situations where securities
index options will be deemed to be covered by a Fund. If the Fund has written
a securities index option, it may terminate its obligation by effecting a
closing purchase transaction, which is accomplished by purchasing an option
of the same series as the option previously written.
Futures and Options on Futures. Each Fund, other than the Money Market Fund,
may enter into 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 Commodity Futures Trading Commission or in the
over-the-counter market. If entered into, these transactions will be made
solely for the purpose of hedging against the effects of changes in the value
of portfolio securities due to anticipated changes in interest rates and/or
market conditions, for duration management, or when the transactions are
economically appropriate to the reduction of risks inherent in the management
of the Fund involved. No Fund will enter into a transaction involving futures
and options on futures for speculative purposes.
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 SEC staff 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
certain liquid assets held in a segregated account or "covered" in a manner
similar to that for covered options on securities (see "Strategies Available
to Some But Not All Funds -- Covered Option Writing" in the Funds' Statement
of Additional Information) and designed to eliminate any potential
leveraging.
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 indexes that reflect the market value of common stock
of the companies included in the indexes. 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.
Forward Currency Transactions. The Income Fund, the Global 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 a transaction involving 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 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
readily marketable securities 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
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in the contract and the then current exchange rate. A Fund may also be able
to negotiate such an offset 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 GEIC. 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.
Options on Foreign Currencies. The Income Fund, the Global 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.
Investment Restrictions
- -------------------------------------------------------------------------------
Each Fund has adopted certain fundamental investment restrictions that may
not be changed without approval of a majority of the Fund's outstanding
voting securities (as defined in the 1940 Act). Included among those
fundamental restrictions are those listed below.
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 Global 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 Global 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 Global Fund, the
Diversified Fund and the Money Market Fund, 20% of the value of the Fund's
total assets. The Global 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 Global 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 Global 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
Global 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 indices 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.
For purposes of investment restriction 1(a) above, the Global Fund has
undertaken not to invest more than 5% of its assets in securities issued or
guaranteed by a foreign country or its instrumentalities. For purposes of
investment restriction 1(b), the Income Fund, the Tax-Exempt Fund and the
Global Fund have undertaken not to purchase more than 10% of the outstanding
securities of any class of issuer. For purposes of investment restriction 2,
the Tax-Exempt Fund has undertaken to include domestic bank obligations when
determining the percentage of its total assets to be invested in any one
industry. See the Funds' Statement of Additional Information for further
information.
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Risk Factors and Special Considerations
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Investing in the Funds involves risk factors and special considerations, such
as those described below:
General. GEIC's principal officers, directors and portfolio managers serve in
similar capacities with respect to GE Investment Management Incorporated
("GEIM"), which like GEIC is a wholly-owned subsidiary of GE. GEIM and GEIC
collectively provide investment management services to various institutional
accounts with total assets, as of December 31, 1995, in excess of $52.3
billion. An investment in shares of any Fund, however, should not be
considered to be a complete investment program.
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 units 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.
Certain Investment Grade 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.
Low-rated 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 low-rated securities tend to react less to
fluctuations in interest rate levels than the 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 a 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.
Non-Publicly Traded and Illiquid Securities. Non-publicly traded securities
(also commonly referred to as "restricted securities") are securities that
are subject to contractual or legal restrictions on transfer. 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. Illiquid
securities (also commonly referred to as "not readily marketable 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. 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 GEIC deems
representative of their value, the value of the Fund's net assets could be
adversely affected.
Repurchase and Reverse Repurchase Agreements. 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 the Money Market 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, the Money Market 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.
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
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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 within 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. Warrants acquired by
a Fund in units or attached to securities may be deemed to be without value.
Investment in Foreign Securities. Investing in securities issued by foreign
companies and governments 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.
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.
Municipal Obligations. 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.
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. GEIC 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 Tax-Exempt Fund should any of the related
projects or facilities experience financial difficulties.
In past years, the U.S. Government has enacted various laws that have
restricted or diminished the income tax exemption on various types of
Municipal Obligations and may enact other similar laws in the future. If any
such laws are enacted that would reduce the availability of Municipal
Obligations for investment by the Tax-Exempt Fund so as to affect the Fund's
unitholders adversely, the Fund will reevaluate its investment objective and
policies and might submit possible changes in its structure to its
unitholders 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 within the applicable limits set forth in
this Prospectus.
Covered Option Writing. Upon the exercise of a put option written by a Fund,
the Fund may suffer a loss equal to the difference between the price at which
the Fund is required to purchase the underlying security and its market value
at the time of the option exercise, less the premium received for writing the
option. Upon the exercise of a call option written by a Fund, the Fund may
suffer a loss equal to the excess of the security's market value at the time
of the option's exercise over the Fund's acquisition cost of the security,
less the premium received for writing the option. In addition, no assurance
can be given that a Fund will be able to effect 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
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<PAGE>
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.
A Fund will engage in hedging transactions only when deemed advisable by
GEIC. Successful use by a Fund of options will depend on GEIC'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. 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 GEIC desires that a Fund engage in such a transaction.
Futures and Options on Futures. 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, and no assurance can be given that an active market
will exist for a particular contract or option at any particular time.
Furthermore, because any income earned from transactions in futures contracts
and related options will be taxable, GEIC anticipates that the Tax-Exempt
Fund will invest in these instruments only in unusual circumstances, such as
when GEIC 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. 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 GEIC's special skills and experience with respect to those instruments
and will usually depend upon GEIC'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 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 Fund's ability to dispose of a position in forward currency contracts
will depend on the availability of active markets in those instruments, and
GEIC cannot now 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. 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.
Instruments and Strategies Involving Special Risks. Certain instruments in
which the Funds can invest and certain investment strategies that the Funds
may employ could expose the Funds to various risks and special
considerations. The instruments presenting risks to a Fund that holds the
instruments are: Rule 144A Securities, depositary receipts, securities of
supranational agencies, securities of other investment funds, municipal
leases, floating and variable rate instruments, participation interests, zero
coupon obligations, Municipal Obligation components, custodial receipts,
mortgage related securities, government stripped mortgage related securities,
and asset-backed and receivable-backed securities. Among the risks that some,
but not all, of these instruments involve are lack of liquid secondary
markets and the risk of prepayment of principal. The investment strategies
involving special risks to some or all of the Funds are: engaging in
when-issued or delayed delivery transactions, lending portfolio securities,
borrowing for long-term or leveraging purposes and selling securities short
against the box. Among the risks that some, but not all, of these strategies
involve are increased exposure to fluctuations in market value of the
securities and certain credit risks. See "Further Information: Certain
Investment Techniques and Strategies" for a more complete description of
these instruments and strategies.
PORTFOLIO TRANSACTIONS AND
TURNOVER
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The Boards of Trustees of the Funds have determined that, to the extent
consistent with applicable provisions of the 1940 Act and rules thereunder,
transactions for a Fund may be executed through a broker-dealer affiliated
with the Funds, if, in the judgment of GEIC, the use of such affiliated
broker-dealer is likely to result in price and execution at least as
favorable to the Fund as those obtainable through other qualified
broker-dealers, and if,
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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 the brokerage compensation
that it receives from a Fund.
A 100% annual turnover rate would occur if all of a Fund's securities were
replaced one time during a period of one year. Short-term gains realized from
portfolio turnover are taxable to shareholders as ordinary income. In
addition, higher portfolio turnover rates can result in corresponding
increases in brokerage commissions. GEIC will 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.
MANAGEMENT OF THE FUNDS
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Board of Trustees
- -------------------------------------------------------------------------------
Overall responsibility for management and supervision of the Funds rests with
each Fund's Board of Trustees. The Trustees appoint the Funds' auditors,
elect the Trustees, supervise the management and affairs of the Funds and
review the performance of the investment adviser. The day-to-day operations
of the Funds have been delegated to GEIC. The Statement of Additional
Information contains background information regarding each Trustee and
executive officer of the Funds.
Portfolio Management
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David B. Carlson is the Portfolio Manager of Elfun Trusts and is also
responsible for the management of the equity related investments of the
portfolio of the Diversified Fund. Mr. Carlson has served Elfun Trusts as a
Portfolio Manager since 1988 and has served the Diversified Fund as a
Portfolio Manager since 1992. He has more than 13 years of investment
experience and has held positions with GEIM or GEIC (or their predecessors)
(collectively referred to as "GE Investments") since 1982. Mr. Carlson is
currently a Senior Vice President of GE Investments.
Robert R. Kaelin is the Portfolio Manager of the Tax-Exempt Fund and has
served in that capacity since 1984. He has more than 26 years of investment
experience and has held positions with GE Investments since 1984. Mr. Kaelin
is currently a Senior Vice President of GE Investments.
Ralph R. Layman is the Portfolio Manager of the Global Fund and has served in
that capacity since 1991. He has more than 16 years of investment experience
and has held positions with GE Investments since 1991. From 1989 to 1991, Mr.
Layman served as an Executive Vice President, Partner and Portfolio Manager
of Northern Capital Management, and prior thereto, served as Vice President
and Portfolio Manager of Templeton Investment Counsel. Mr. Layman is
currently an Executive Vice President of GE Investments.
Robert A. MacDougall is the Portfolio Manager of the Income Fund and is also
responsible for the management of fixed income related investments of the
portfolio of the Diversified Fund. Mr. MacDougall has served those Funds as a
Portfolio Manager since 1986. He has more than 12 years of investment
experience and has held positions with GE Investments since 1986. Mr.
MacDougall is currently a Senior Vice President of GE Investments.
GEIC 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.
Investment Adviser and Administrator
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GEIC, located at 3003 Summer Street, P.O. Box 7900, Stamford, Connecticut
06904-7900, serves as the investment adviser of each Fund. GEIC, which was
formed under the laws of Delaware in 1977, is a wholly-owned subsidiary of GE
and is a registered investment adviser under the Investment Advisers Act of
1940, as amended. GEIC 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 GE S&S Program Mutual Fund and
the GE S&S Long-Term Interest Fund.
GEIC's principal officers and directors serve in similar capacities with
respect to GEIM, which like GEIC is a wholly-owned subsidiary of GE, and
which currently acts as the investment adviser of GE U.S. Equity Fund, GE
Tax-Exempt Fund, GE Fixed Income Fund, GE Global Equity Fund, GE
International Equity Fund, GE Short-Term Government Fund, GE Strategic
Investment Fund, GE Money Market Fund (collectively, the "GE Funds") and two
other GE Funds, GE International Fixed Income Fund and GE Mid-Cap Growth
Fund, which as of the date of this Prospectus have not yet commenced
operations, and other institutional accounts, including PaineWebber Global
Equity Fund, a series of Mitchell Hutchins/Kidder Peabody Investment Trust,
since its inception in 1991, the Global Growth Portfolio of PaineWebber
Series Trust and Global Small Cap Fund Inc. since March, 1995 and the
investment portfolios of Variable Investment Trust, currently consisting of
five portfolios offered only to insurance companies that fund certain
variable contracts. GEIC and GEIM collectively provide investment management
services to various institutional accounts with total assets, as of December
31, 1995, in excess of $52.3 billion, of which approximately $10 billion is
invested in mutual funds. Through GEIM and GEIC and their predecessors, GE
has more than 60 years of investment management experience.
As a Fund's investment adviser, GEIC, subject to the supervision and
direction of each Fund's Board of Trustees, manages the Fund's portfolio in
accordance with its investment objective(s) and stated policies, makes
investment decisions for the Fund and places purchase and sale orders for the
Fund's portfolio transactions.
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Expenses of the Funds
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The management fee charged to the Funds by GEIC is the reasonable cost, both
direct and indirect, incurred by GEIC in providing advisory and
administration services. Direct and indirect costs incurred by GEIC for a
Fund are charged to the Fund and are paid out of, or reimbursed to GEIC from,
gross income. The costs to be charged to a Fund include: SEC fees, state Blue
Sky qualification fees, fees of custodians, transfer and dividend disbursing
agents (including fees and expenses incurred by GEIC as the Funds' unitholder
servicing agent (the "Servicing Agent")), 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 GEIC 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 GEIC 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 GEIC employees. In addition, the
following costs 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, 1995, the total expenses of each Fund and the
portion of those expenses that were paid to GEIC for advisory and
administration services, respectively, were in aggregate dollar amount and as
a percentage of net assets as follows: Elfun Trusts -- $1,389,000 (.13%) and
$503,000 (.05%); the Global Fund $462,000 (.34%) and $118,000 (.09%); the
Diversified Fund -- $234,000 (.34%) and $39,000 (.05%); the Tax-Exempt Fund
- -- $1,589,000 (.13%) and $665,000 (.05%); the Income Fund -- $514,00 (.25%)
and $105,000 (.05%) and the Money Market Fund $333,000 (.25%) and $24,000
(.05%). Annual costs are estimated and accrued daily so as not to create
dramatic fluctuations in Unit pricing.
PURCHASE OF UNITS
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General
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Units of the Funds are sold at the net asset value per Unit next determined
after receipt and acceptance of the unitholder's check or funds. For a
description of the manner of calculating a Fund's net asset value, see "Net
Asset Value."
For unitholder convenience and in the interest of economy, the Funds no
longer issue physical certificates representing Units in any Fund
("Certificate Units"). Ownership of Units is evidenced by Statements of
Account representing Units issued in book-entry form ("Bookunits").
The minimum initial investment in the Global Fund, the Diversified Fund and
the Money Market Fund is $100 and the minimum for subsequent investments is
$25. The minimum for any purchase by payroll deduction (including initial
investment) is $25 per month. 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. See "Net Asset Value" below. 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 unitholder's check or funds.
Units of the Funds may be purchased as follows:
By Mail. Investors may send 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 to:
Elfun Mutual Funds
P.O. Box 8309
Boston, MA 02266-8309
For overnight package delivery:
Elfun Mutual Funds
c/o Boston Financial Data Services Inc.
Two Heritage Drive
Quincy, MA 02171
A Statement of Account will be sent acknowledging the purchase.
A purchase of Units of a Fund will be effected in accordance with a completed
order at the Fund's net asset value next determined after receipt of the
application. If the check used for the 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.
By Wire Transfer. Investors can purchase Units of a Fund by transferring
funds by wire from the unitholder's bank account to the Fund. The
unitholder's bank may charge a fee for this service. The Servicing Agent
should be contacted concerning the details of wire transfers.
By Payroll Deduction. An investor can purchase Units of a Fund (minimum of
$25 per monthly 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.
By Automatic Investment Plan. Investors may arrange to make purchases of
shares automatically on a monthly basis by electronic funds transfer (minimum
$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. Unitholders 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. 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.
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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
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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.
Elfun Retirement Accounts
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Units of each of the Funds, other than the Tax-Exempt Fund, are available for
purchase by an Elfun Individual Retirement Account ("Elfun IRA"). Individuals
eligible to hold Units who are wage earners and under the age of 70-1/2 may
establish their own Elfun IRA. They may make annual contributions from
qualified income up to $2,000 (and an additional $250 for a spouse who is not
a wage earner). If one contributes $2,250, the amount must be divided between
two accounts, one for each spouse, but not more than $2,000 in either
account. Under certain circumstances, contributions to an Elfun IRA will be
deductible for Federal income tax purposes.
REDEMPTION OF UNITS
- -------------------------------------------------------------------------------
Redemptions in General
- -------------------------------------------------------------------------------
Units may be redeemed and their proceeds remitted to the unitholder 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 as described below under "Net Asset Value." A duly executed
redemption form received by mail in proper form will be effected at the net
asset value per Unit next determined. If the unitholder has completed and
returned a telephone redemption form, the unitholder 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 New York Stock Exchange ("NYSE") (currently 4:00
p.m. New York time) will be effected at the net asset value as determined for
that day. If the request is received after 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
unitholder'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 unitholder
realizing a taxable gain or loss.
The Trustees of a Fund may suspend the unitholders' 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 to fairly determine the value of
its net assets, or (3) the SEC may by order permit for the protection of
unitholders of the Fund.
A unitholder of the Money Market Fund must maintain a minimum investment in
the Fund of $100, so that care should be exercised to ensure that redemptions
do not reduce the unitholder's investment below this minimum. Two exceptions
exist to this minimum investment requirement: an account established by an
Elfun IRA and an account established by payroll deductions which does not yet
have a $100 account balance. In the case of a payroll deduction account with
a balance that has exceeded $100, however, the unitholder is not permitted to
redeem Units if the redemption would reduce the account balance below $100
(except to close the account). If the unitholder's account balance is less
than $100 (except in the two cases described above), the Money Market Fund
may automatically redeem the Units in the account and remit the proceeds to
the unitholder so long as the unitholder is given 30 days' prior written
notice of the action. In addition, if the unitholder has checkwriting
privileges, redemption of $100 or more may be made by writing a check either
to the unitholder or to a third party.
Units of a Fund may be redeemed in either of the following two ways:
Redemption by Mail
- -------------------------------------------------------------------------------
To redeem Bookunits, complete the redemption form on the Statement of Account
and for Certificate Units complete the redemption form on the reverse side of
the certificate and send it to:
Elfun Mutual Funds
P.O. Box 8309
Boston, MA 02266-8309
For overnight package delivery:
Elfun Mutual Funds
c/o Boston Financial Data Services Inc.
Two Heritage Drive
Quincy, MA 02171
Redemptions will be made at the net asset value next computed after receipt
of the redemption form 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. Unitholders 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 all redemptions over $25,000. In
addition, signature guarantees are required for requests to have redemption
proceeds (1) mailed to an address other than the address of record, (2) paid
to other than the shareholder, (3) wired to a bank other than the bank of
record, or (4) mailed to an address that has been changed 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
21
<PAGE>
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 unitholder. 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 unitholder redeeming Units by mail, the unitholder may
request that the proceeds be transferred by wire to the unitholder's bank
account (which is identified in writing to the Servicing Agent). The minimum
amount that may be transferred by wire is $1,000. If no request for wire
transfer is made, the proceeds will be mailed to the unitholder.
Redemption by Telephone
- -------------------------------------------------------------------------------
Bookunits (not Certificate Units) of a Fund may be redeemed by telephone,
although a unitholder 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. The minimum telephonic
redemption request is $1,000 or the entire balance in the account if the
amount is less than $1,000. Proceeds from a telephonic redemption request
will either be transferred by wire to the unitholder's bank account (which
has previously been identified in writing to the Servicing Agent) or by check
to the unitholder's address of record or transferred to another Elfun Fund,
as the unitholder directs. A single $15 charge will be assessed by the Fund
in connection with each telephonic redemption wire request. The redemption
proceeds will be reduced by this charge. There is no fee to redeem Units by
telephone if the proceeds are transferred to another Fund or paid by check.
See "Transfer Privilege." If the account is registered jointly in the name of
more than one unitholder, only one unitholder will be required to authorize
redemption of Units by telephone, and the Servicing Agent will be entitled to
act upon telephonic instructions of any unitholder of a joint account. Wire
transfers will be made directly to the account specified by the unitholder 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 may be imposed by
the bank and will be the responsibility of the unitholder. A Fund may modify
or terminate the charge assessed with telephonic requests at any time.
Telephonic redemption requests should be made by calling 1-800-242-0134.
Except for Money Market Fund transactions, confirmation of telephonic
redemptions will be sent within seven days of the date of redemption. Wire
transfer of funds will be made within two business days following the
telephonic request. Dividends will be earned through and including t.he date
of receipt of the redemption request.
Telephone redemption requests may be difficult to implement in times of
drastic economic or market changes. In the event unitholders of a Fund are
unable to contact the Fund by telephone, unitholders should write to the Fund
at its address set forth on the cover of this Prospectus.
By making a telephonic redemption request, a unitholder authorizes the
Servicing Agent to act on the telephonic redemption instructions by any
person representing himself or herself to be the unitholder 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") on the automated telephone 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 unitholder 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. Unitholders 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 unitholder, depending upon the unitholder's cost. Participation
in the Withdrawal Plan may be terminated at any time without penalty upon
written notice from the unitholder. The cost of administering the Withdrawal
Plan is borne by each Fund
22
<PAGE>
as an expense of its unitholders. Further information about the Withdrawal
Plan can be obtained from the Servicing Agent.
Involuntary Redemptions
- -------------------------------------------------------------------------------
An account of a unitholder of the Money Market Fund (except an IRA account)
that is reduced to a value of $100 or less, may be redeemed by the Fund, but
only after the unitholder has been given at least 30 days' notice in which to
increase the balance in the account to more than $100. Proceeds of such a
redemption will be mailed to the unitholder.
Distributions in Kind
- -------------------------------------------------------------------------------
If a Fund's Board of Trustees determines that it would be detrimental to the
best interests of the Fund's unitholders to make a redemption payment wholly
in cash, the 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 GEIC
to be readily marketable. Unitholders receiving distributions in kind of
portfolio securities may incur brokerage commissions when subsequently
disposing of those securities.
Checkwriting Privileges
- -------------------------------------------------------------------------------
A unitholder 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 unitholder. The Money Market Fund will provide
redemption checks ("Checks") drawn on the unitholder's account. Checks will
be sent only to the unitholder of the account and only to the address of
record. The application or written request must be manually signed by the
unitholder. 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
unitholder's account to cover the amount of the Check. After clearance, the
Check will be returned to the unitholder. Unitholders 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 unitholder 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 unitholder'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 unitholder
will be responsible for any loss that the Money Market Fund or State Street
incurs.
The Money Market Fund may modify or terminate the checkwriting privilege at
any time on 30 days' notice to participating unitholders. The checkwriting
privilege is subject to State Street's rules and regulations and is governed
by the Massachusetts Uniform Commercial Code. All notices with respect to
Checks drawn on State Street must be given to State Street. Stop payment
instructions may be given by calling 1-617-985-8543 (collect).
TRANSFER PRIVILEGE
- -------------------------------------------------------------------------------
Under a transfer privilege offered by the Funds, Units of one Fund may be
redeemed and their proceeds remitted to the unitholder or transferred to any
other Fund either by telephone request or by mail. See "Redemption by Mail"
and "Redemption by Telephone" for a description of the redemption procedure.
The privilege is available to unitholders residing in any state in which
Units of the Fund being acquired may legally be sold. Transfers can only be
made to an account with another Fund held by the unitholder in an identical
name and manner. A portion of the amount transferred may represent a taxable
capital gain or loss to the unitholder, depending on the unitholder's cost.
Prior to the transfer to another Fund, a unitholder must have a current
prospectus for the Fund to which the proceeds are being transferred. A Fund
may, upon 60 days' prior written notice to the unitholders of the Fund,
materially modify or terminate the transfer privilege with respect to a Fund.
NET ASSET VALUE
- -------------------------------------------------------------------------------
With certain limited exceptions, each Fund's net asset value per Unit is
calculated by GEIC or the Custodian on each day, Monday through Friday,
except on days on which the NYSE is closed. The NYSE is currently scheduled
to be closed on New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas, and on the preceding
Friday or subsequent Monday when one of these holidays falls on a Saturday or
Sunday, respectively.
Each Fund's net asset value per Unit is determined as of the close of regular
trading on the NYSE (currently 4:00 p.m., New York time), and is computed by
adding the value of the Fund's investments plus cash and other assets,
deducting liabilities and then dividing the result by the total number of its
Units outstanding. The Money Market Fund will seek to maintain a net asset
value of $1.00 per Unit for purposes of purchases and redemptions, although
no assurance can be given that the Fund will be able to do so on a continuous
basis.
Securities that are primarily traded on a foreign exchange generally will be
valued for purposes of calculating a Fund's net asset value at the preceding
closing value of the securities on the exchange, except that, when an
occurrence subsequent to the time a value was so established is likely to
have changed that value, the fair market value of those securities will be
determined by consideration of other factors by or under the direction of the
officers of each Fund in a manner authorized by the Fund's Board of Trustees
and applied on a consistent basis.
23
<PAGE>
A security that is primarily traded on a domestic or foreign securities
exchange will be valued at the last sale price on that exchange or, if no
sales occurred during the day, at the current quoted bid price. An option
that is written or purchased by a Fund generally will be valued at the mean
between the last asked and bid prices. The value of a futures contract will
be 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 settlement price may not be
used if the market makes a limit move with respect to a particular futures
contract or if the securities underlying the futures contract experience
significant price fluctuations after the determination of the settlement
price. When a settlement price cannot be used, futures contracts will be
valued at their fair market value as determined by or under the direction of
the officers of a Fund in a manner authorized by the Fund's Board of
Trustees.
All assets and liabilities of a Fund 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 the bid and offered quotations are not
available, the rate of exchange will be determined in good faith by or under
the direction of the officers of the Fund in a manner authorized by the Board
of Trustees and applied on a consistent basis. In carrying out the Board's
valuation policies, GEIC may consult with an independent pricing service or
services, retained by the Fund. Further information regarding the Fund's
valuation policies is contained in the Statement of Additional Information.
All portfolio securities held by the Money Market Fund, and any short-term
investments of the other Funds that mature in 60 days or less, will be valued
on the basis of amortized cost (which involves valuing an investment 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 investment) when the Fund's Board of Trustees
determines that amortized cost is fair value.
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 will be
determined separately for each Fund. Dividends derived from net investment
income and distributions of net realized long- and short-term capital gains
paid by a Fund to a unitholder will be automatically reinvested (at current
net asset value) in additional Units of the Fund (which will be deposited in
the unitholder's account) unless the unitholder instructs the Fund, by
telephone or in writing, to pay all dividends and distributions in cash. A
cash election remains in effect until the unitholder 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 unitholder, the Fund will terminate the unitholder's election to
receive dividends and other distributions in cash. Thereafter, the
unitholder's subsequent dividends and other distributions will be
automatically reinvested in additional Units of the Fund until the unitholder
notifies the Fund in writing of his or her correct address and requests in
writing that the election to receive dividends and other distributions in
cash be reinstated. Unitholders may contact the Servicing Agent for details
concerning this election. Unitholders 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
unitholder in the identical name and manner as the account held with the
Fund. Dividends attributable to net investment income of the Tax-Exempt Fund,
the Income Fund and the Money Market Fund will be declared daily and paid
monthly. Dividends attributable to the net investment income of Elfun Trusts,
the Global Fund and the Diversified Fund will be declared and paid annually.
If a unitholder 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 unitholder is entitled will be paid to the unitholder along with
the proceeds of his redemption. Written confirmations relating to the
automatic reinvestment of daily dividends will be sent to unitholders 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 will be made annually. These dividends and
distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. All expenses of the
Money Market Fund will be accrued daily and deducted before declaration of
dividends to unitholders. 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 preceding the Saturday,
Sunday or holiday.
Each Fund will be subject to a 4% non-deductible 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 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.
Taxes
- -------------------------------------------------------------------------------
Each Fund is treated as a separate entity for Federal income tax purposes. As
a result, the amounts of net investment income and net realized capital gains
subject to tax will be determined separately for each Fund.
Each Fund intends to continue to qualify each year as a regulated investment
company under the Code. Dividends paid from a Fund's net investment income
and distributions of a Fund's net realized short-term capital gains will be
taxable to unitholders (other than tax-exempt investors) as ordinary income,
regardless of how long unitholders have held their Units of the Fund and
whether the dividends or distributions are received in cash or reinvested in
additional Units of the Fund. Distributions of a Fund's net realized
long-term capital gains will be taxable to unitholders as long-term capital
gains, regardless of how long unitholders have held their Units of the Fund
and
24
<PAGE>
whether the distributions are received in cash or are reinvested in
additional Units of the Fund. In addition, as a general rule, a unitholder'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 unitholder has held the Units for more than one
year and will be a short-term capital gain or loss if the unitholder has held
the Units for one year or less.
Dividends and distributions paid by the Tax-Exempt Fund, the Income Fund and
the Money Market Fund, and distributions of capital gains paid by all the
Funds, will not qualify for the Federal dividends-received deduction for
corporations. Dividends paid by the Diversified Fund, Elfun Trusts and the
Global Fund, to the extent derived from dividends attributable to certain
types of stock issued by U.S. corporations, will qualify for the
dividends-received deduction for corporations. Some states, if certain asset
and diversification requirements are satisfied, permit unitholders to treat
their portions of a Fund's dividends that are attributable to interest on
U.S. Treasury securities and certain Government Securities as income that is
exempt from state and local income taxes. Dividends attributable to
repurchase agreement earnings are, as a general rule, subject to state and
local taxation.
Dividends paid by the Tax-Exempt Fund that are derived from interest earned
on qualifying tax-exempt obligations are expected to be "exempt-interest"
dividends that unitholders may exclude from their gross income for Federal
income tax purposes if the Fund satisfies certain asset percentage
requirements. To the extent that the Tax-Exempt Fund invests in bonds, the
interest on which is a specific tax preference item for Federal income tax
purposes ("AMT-Subject Bonds"), any exempt-interest dividends derived from
interest on AMT-Subject Bonds will be a specific tax preference item for
purposes of the Federal individual and corporate alternative minimum taxes.
All exempt-interest dividends will be a component of the "current earnings"
adjustment item for purposes of the Federal corporate alternative minimum
income tax, and corporate unitholders may incur a larger Federal
environmental tax liability through the receipt of dividends and
distributions from the Tax-Exempt Fund.
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 amortization of market discount on the
Tax-Exempt Fund's assets is not included in the calculation of net income,
unless the Fund elects to include accrued market discount currently.
Net investment income or capital gains earned by the Funds 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 will
vary depending upon the amount of a Fund's assets invested within various
countries. The Funds intend to seek 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 Fund 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 unitholders.
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 unitholders and
the unitholders would be entitled to credit their 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. Shortly after any year for which it makes
an election, the Fund will report to its unitholders, in writing, the amount
per unit of foreign tax that must be included in each unitholder's gross
income and the amount that will be available for deduction or credit. No
deduction for foreign taxes may be claimed by a unitholder who does not
itemize deductions. Certain limitations will be imposed on the extent to
which the credit (but not the deduction) for foreign taxes may be claimed.
Federal tax laws require the Funds to withhold 31% of dividends and
redemption proceeds for accounts which have not provided a certified social
security or tax identification number.
Statements as to the tax status of each unitholder's dividends and
distributions are mailed annually. Unitholders 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
unitholders during the preceding taxable year, including the amount of
dividends that represents interest derived from Government Securities.
Unitholders should consult with their own tax advisors with specific
reference to their own tax situations.
CUSTODIAN, TRANSFER AGENT AND
DIVIDEND PAYING AGENT
- -------------------------------------------------------------------------------
State Street, located at 225 Franklin Street, Boston, Massachusetts 02101,
serves as the Funds' custodian, transfer agent and dividend paying agent.
DISTRIBUTOR AND UNITHOLDER
SERVICING AGENT
- -------------------------------------------------------------------------------
GE Investment Services Inc., located at 3003 Summer Street, P.O. Box 7900,
Stamford, Connecticut 06904-7900, serves as distributor of the Funds' Units
(the "Distributor"). The Distributor, a wholly-owned subsidiary of GEIM, also
serves as distributor for the GE Funds.
GEIC serves as the Funds' unitholder servicing agent. As Servicing Agent,
GEIC is responsible for processing redemption requests, providing services
which assist the Funds' transfer agent and responding to unitholder
inquiries. GEIC is reimbursed for the reasonable costs incurred in providing
its services as Servicing Agent. The amounts paid by the Funds to GEIC for
its services as Servicing Agent for the years ended December 31, 1995,
25
<PAGE>
1994, and 1993 were as follows: Elfun Trusts -- $160,000, $67,000 and
$68,000; the Diversified Fund -- $35,000, $16,000 and $10,000; the Global
Fund -- $70,000, $32,000 and $14,000; the Income Fund -- $90,000, $37,000 and
$23,000; and the Tax-Exempt Fund -- $245,000, $105,000 and $43,000. For the
years ended December 31, 1995 and 1994, the Money Market Fund paid $35,000
and $8,000 to GEIC for its services as Servicing Agent. Absent the waiver by
GEIC of fees relating to the Money Market Fund, the Money Market Fund would
have paid to GEIC during the years ended December 31, 1994 and 1993, $16,000
and $9,000, respectively, for its services as Servicing Agent.
If a unitholder has questions about purchases or redemptions of Units, please
write to:
Elfun Mutual Funds
3003 Summer Street
P.O. Box 120065
Stamford, CT 06912-0074
or telephone any of the following numbers: 1-800-242-0134 (toll-free), (203)
326-4040 or 8*225-4040 (Dial Comm).
THE FUNDS' PERFORMANCE
- -------------------------------------------------------------------------------
Certain information about the Funds' performance is set out below. Further
information about the performance of the Funds is contained in the Funds'
Annual Report to shareholders which may be obtained upon request without
charge.
Yield
- -------------------------------------------------------------------------------
From time to time, the yield and effective yield of the Money Market Fund may
be included in advertisements or reports to unitholders or prospective
investors. Current yield for the Money Market Fund will be based upon income
received by a hypothetical investment in a given seven-day period (which
period will be stated in the advertisement), and then "annualized" (that is,
assuming that the seven-day yield would be received for 52 weeks, stated in
terms of an annual percentage return on the investment). "Effective yield"
for the Money Market Fund will be calculated in a manner similar to that used
to calculate yield, but will reflect the compounding effect of earnings on
reinvested dividends. The current seven-day yield and effective seven-day
yield as of December 31, 1995 were 5.42% and 5.56%, respectively.
From time to time, a 30-day "yield" for Elfun Trusts, the Tax-Exempt Fund,
the Income Fund, the Global Fund and the Diversified Fund and an "equivalent
taxable yield" for the Tax-Exempt Fund may be advertised. The yield of a Fund
refers to the income generated by an investment in the Fund over the 30-day
period identified in the advertisement and is computed by dividing the net
investment income per Unit earned by the Fund during the period by the net
asset value per Unit on the last day of the period. This income is
"annualized" by assuming that the amount of income is generated each month
over a one-year period and is compounded semiannually. The annualized income
is then shown as a percentage of the Fund's net asset value. The 30-day yield
for the period ended December 31, 1995 for the Tax-Exempt Fund and the Income
Fund was 5.53% and 6.37%, respectively.
Equivalent Taxable Yield
- -------------------------------------------------------------------------------
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. Equivalent taxable yield is calculated by increasing
the yield shown for the Tax-Exempt Fund, calculated as described above, to
the extent necessary to reflect the payment of specified tax rates. Thus, the
equivalent taxable yield of the Tax-Exempt Fund will always exceed the Fund's
yield. Assuming an effective tax rate of 39.6%, for the 30-day period ended
December 31, 1995, the equivalent taxable yield of the Tax-Exempt Fund was
9.03%.
The table below shows individual taxpayers how to translate the tax savings
from investments such as the Tax-Exempt Fund into an equivalent return from a
taxable investment. The yields used below are for illustration only and are
not intended to represent current or future yields for the Tax-Exempt Fund,
which may be higher or lower than those shown.
26
<PAGE>
FEDERAL TAXABLE EQUIVALENT YIELD TABLE -- 1996 RATES
- ------------------------------------------------------------------------------
Taxable Income Bracket
----------------------------------------- Federal Effective
Joint Single Tax Federal
Year Return Return Rate Rate
- ----- ------------------ ------------------ ----- ---------
1995 $0-40,100 $0-24,000 15.00% 15.00%
$40,101-96,900 $24,001-58,150 28.00% 28.00%
$96,901-117,950 $58,151-117,950 31.00% 31.00%
$117,951-147,700 $117,951-121,300 31.00% 31.93%
$147,701-263,750 $121,301-263,750 36.00% 37.08%
OVER $263,750 OVER $263,750 39.60% 40.79%
- ----- ----------------- ----------------- --- -------
<TABLE>
<CAPTION>
Tax-Free Yield
---------------------------------------------------------------------------
4.00% 4.50% 5.00% 5.50% 6.00% 6.50% 7.00% 7.50% 8.00%
Year Equivalent Taxable Yield
- ----- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 4.71% 5.29% 5.88% 6.47% 7.06% 7.65% 8.24% 8.82% 9.41%
5.56% 6.25% 6.94% 7.64% 8.33% 9.03% 9.72% 10.42% 11.11%
5.80% 6.52% 7.25% 7.97% 8.70% 9.42% 10.14% 10.87% 11.59%
5.88% 6.61% 7.35% 8.08% 8.81% 9.55% 10.28% 11.02% 11.75%
6.36% 7.15% 7.95% 8.74% 9.54% 10.33% 11.13% 11.92% 12.71%
6.76% 7.60% 8.44% 9.29% 10.13% 10.98% 11.82% 12.67% 13.51%
- ----- -- -- -- -- --- --- --- --- -----
</TABLE>
NOTE: THIS TABLE REFLECTS THE FOLLOWING:
1. THE ABOVE IS A FEDERAL TAXABLE EQUIVALENT YIELD TABLE ONLY. THE EFFECT OF
STATE INCOME TAX RATES HAS NOT BEEN FACTORED INTO THE TAXABLE EQUIVALENT
YIELD CALCULATION.
2. TAXABLE INCOME EQUALS ADJUSTED GROSS INCOME LESS PERSONAL EXEMPTIONS OF
$2,500 LESS THE STANDARD DEDUCTION OF $6,550 ON A JOINT RETURN OR TOTAL
ITEMIZED DEDUCTIONS, WHICHEVER IS GREATER. HOWEVER, UNDER THE PROVISIONS
OF THE OMNIBUS BUDGET RECONCILIATION ACT OF 1990, ITEMIZED DEDUCTIONS ARE
REDUCED BY 3% OF THE AMOUNT OF A TAXPAYER'S AGI OVER $114,700. THIS IS
REFLECTED IN THE BRACKETS ABOVE BY HIGHER EFFECTIVE FEDERAL TAX RATES.
FURTHERMORE, PERSONAL EXEMPTIONS ARE PHASED OUT FOR THE AMOUNT OF A
TAXPAYER'S AGI OVER $114,700 FOR SINGLE TAXPAYERS AND $172,050 FOR MARRIED
TAXPAYERS FILING JOINTLY. THIS LATTER PROVISION IS NOT INCORPORATED INTO
THE ABOVE BRACKETS.
3. INTEREST EARNED ON MUNICIPAL OBLIGATIONS MAY BE SUBJECT TO THE FEDERAL
ALTERNATIVE MINIMUM TAX. THIS PROVISION IS NOT INCORPORATED INTO THE
TABLE.
4. THE TAXABLE EQUIVALENT YIELD TABLE DOES NOT INCORPORATE THE EFFECT OF
GRADUATED RATE STRUCTURES IN DETERMINING YIELDS. INSTEAD, THE TAX RATES
USED ARE THE HIGHEST RATES APPLICABLE TO THE INCOME LEVELS INDICATED
WITHIN EACH BRACKET.
27
<PAGE>
Total Return
- -------------------------------------------------------------------------------
From time to time, the "average annual total return" over various periods of
time for each Fund other than the Money Market Fund may be advertised and may
be included in supplemental sales literature of the Money Market Fund. This
total return figure shows an average percentage change in value of an
investment in a Fund from the beginning date of the measuring period to the
ending date of the period. The figure reflects changes in the price of a
Fund's Units and assumes that any income, dividends and/or capital gains
distributions made by the Fund during the period are reinvested in Units of
the Fund. Figures will be given for recent one-, five- and 10-year periods
(if applicable), and may be given for other periods as well (such as from
commencement of a Fund's operations, or on a year-by-year basis). 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 period might have been greater or less than the average for the
entire period.
A Fund may use "aggregate total return" figures for various periods,
representing the cumulative change in value of an investment in a Fund for
the specific period (again reflecting changes in the Fund's Unit price and
assuming reinvestment of dividends and distributions). Aggregate total
returns 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 initial investment, income dividends and capital gains
distributions). The Funds' average annual total returns were as follows for
the year ended December 31, 1995: Elfun Trusts -- 39.19%; Global Fund --
16.03%; Diversified Fund -- 27.11%; Tax-Exempt Fund -- 17.32%; Income Fund --
18.21%; and Money Market Fund -- 5.82%.
Yield and total return figures are based on historical earnings and are thus
not intended to indicate future performances. The Statement of Additional
Information describes the method used to determine a Fund's yield and total
return.
Comparative Performance Information
- -------------------------------------------------------------------------------
In reports or other communications to unitholders of a Fund or in advertising
materials, a Fund may compare its performance with (1) 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, (2) various unmanaged indexes, including the Russell Index,
S&P Index, and the Dow Jones Industrial Average or (3) other appropriate
indexes of investment securities or with data developed by GEIC derived from
those indexes. The performance information may also 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 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, the
Fund's. Such comparisons or rankings are made on the basis of several
factors, including objectives and policies, management style and strategy,
and portfolio composition, and may change over time if any of those factors
change.
FURTHER INFORMATION: CERTAIN
INVESTMENT TECHNIQUES AND
STRATEGIES
- -------------------------------------------------------------------------------
The Funds may engage in a number of investment techniques and strategies,
including those described below. No Fund is under any obligation to use any
of the techniques or strategies at any given time or under any particular
economic condition. In addition, no assurance can be given that the use of
any practice will have its intended result or that the use of any practice
is, or will be, available to any Fund.
Strategies Available to All Funds
- -------------------------------------------------------------------------------
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, Government Securities or other liquid, high-grade debt obligations 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 a
designated sub-custodian 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.
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 Global Fund or the
Diversified Fund, 30% of the Fund's net assets taken at value. The Fund's
loans of securities will be at least 100% 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
28
<PAGE>
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
designated sub-custodian in an amount at least equal to the current market
value of the loaned securities. In lending securities, a Fund is 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 is not exempt from Federal income taxation.
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
Fund's Board of Trustees 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 of Trustees has established standards and procedures for
determining the liquidity of a Rule 144A Security and monitors GEIC's
implementation of the standards and procedures. The ability to sell to
qualified institutional buyers under Rule 144A is a recent development and
GEIC cannot predict how this market will develop.
Strategies Available to Some But Not All
Funds
- -------------------------------------------------------------------------------
Depositary Receipts. Elfun Trusts, the Diversified Fund and the Global Fund
may each invest in securities of foreign issuers in the form of American
Depositary Receipts ("ADRs"), which are U.S. dollar-denominated receipts
typically issued by domestic banks or trust companies that represent the
deposit with those entities of securities of a foreign issuer, 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. Elfun
Trusts, the Diversified Fund and the Global Fund may each 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.
Supranational Agencies. The Income Fund, the Diversified Fund and the Money
Market Fund may each invest up to 10% of its assets in securities 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. Securities of
supranational agencies are not considered Government Securities and are not
supported, directly or indirectly, by the U.S. Government.
Investments In Other Investment Funds. Elfun Trusts, the Global 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
1940 Act, a Fund may invest a maximum of 10% of its total assets in the
securities of other investment companies. In addition, under the 1940 Act,
not more than 5% of a Fund's total assets may be invested in the securities
of any one investment company, and the Fund may not own more than 3% of the
securities of any investment company. To the extent a Fund invests in other
investment companies, the Fund's unitholders will incur certain duplicative
fees and expenses, including investment advisory fees.
Municipal Leases. Among the Municipal Obligations in which the Tax-Exempt
Fund and the Diversified Fund may invest are municipal leases, which may take
the form of a lease or an installment purchase or conditional sales contract
to acquire a wide variety of equipment and facilities. Interest payments on
qualifying municipal leases are exempt from Federal income taxes and state
income taxes within the state of issuance. A Fund may invest in municipal
leases containing "non-appropriation" clauses that provide that the
governmental issuer has no obligation to make future payments under the lease
or contract, unless money is appropriated for the purpose by the appropriate
legislative body on a yearly or other periodic basis.
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. Risks and special
considerations applicable to certain investment grade obligations are
described above under "Risk Factors and Special Considerations -- Certain
Investment Grade Obligations." A Fund may acquire unrated issues that GEIC
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 the lease will not be cancelled will be subject to
oversight and approval by the Fund's Board of Trustees.
Municipal leases held by a Fund will be considered illiquid securities unless
the Fund's Board of Trustees 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 GEIC to be of high quality and
minimal credit risk, will not be deemed to be illiquid solely because the
underlying
29
<PAGE>
municipal lease is unrated, if GEIC determines that the lease is readily
marketable because it is backed by the letter of credit or insurance policy.
Municipal leases in which a Fund may invest have special risks not normally
associated with Municipal Obligations.
Municipal leases represent a type of financing that has not yet developed the
depth of marketability generally associated with other Municipal Obligations.
Moreover, although a municipal lease will be secured by financed equipment or
facilities, the disposition of the equipment or facilities in the event of
foreclosure might prove difficult.
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.
Floating and Variable Rate Instruments. The Tax-Exempt Fund, the Income Fund,
the Diversified Fund and the Money Market Fund (except as limited below) 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 Inter Bank Offered Rate (LIBOR). Alternatively, the rate may be
determined through an auction or remarketing process period. The rate also
may be indexed to changes in the values of interest rate or securities
indexes, currency exchange rates or other commodities. The amount by which
the rate paid on an income security may increase or decrease may be subject
to periodic or lifetime caps. Floating and variable rate income securities
include securities whose rates vary inversely with changes in market rates of
interest. (The Money Market Fund is not permitted to invest in these types of
floating and variable rate instruments.) 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 GEIC for the purchase of Municipal Obligations of
each Fund. GEIC, on behalf of a Fund, will consider on an ongoing basis the
creditworthiness of the issuers of the floating and variable rate demand
obligations in the Fund's portfolio.
Participation Interests. The Tax-Exempt Fund, the Income Fund and the
Diversified Fund may purchase from financial institutions participation
interests in certain debt 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 Fund intends to exercise its right to demand payment only upon
a default under the terms of the Municipal Obligation, or to maintain or
improve the quality of its investment portfolio. 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 none of the Funds will
receive any payments on zero coupon securities, prior to their maturity or
disposition, they will be required for federal income tax purposes generally
to include in their dividends each year an amount equal to the annual income
that accrues on their zero coupon securities. Such dividends will be paid
from cash assets of the Funds, from the borrowings or liquidation of
portfolio securities, if necessary, at a time that the Fund otherwise would
not have done so. To the extent the 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 risk
associated with holding securities that are not readily marketable may be
accentuated at such time. To the extent
30
<PAGE>
the proceeds from any such dispositions are used by the Funds to pay
distributions, the Funds will not be able to purchase additional
income-producing securities with such proceeds, and as a result their 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 obligation may be capitalized as incremental
principal. The value to the investor of a zero coupon debt 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.
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 described above. 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 a non-taxable entity, the yield on the underlying security would
be reduced in recognition of any taxes paid.
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 pool 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. Reinvestment of
prepayments may occur at higher or lower interest rates than the original
investment, thus affecting the yield of the Income Fund or the Diversified
Fund. 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.
ARMs have interest rates that reset at periodic intervals, thereby allowing
the Income Fund and the Diversified
31
<PAGE>
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 the adjustable
rate mortgages will slightly lag behind changes in market rates, creating the
potential for some principal loss for unitholders who redeem their shares of
the Income Fund or the Diversified Fund before the interest rates on the
underlying mortgages are adjusted to reflect current market rates.
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.
Mortgage related securities may not be readily marketable. To the extent any
of these securities are not readily marketable in the judgment of GEIC, 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 GEIC
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 the Income Fund's or the Diversified Fund's not fully
recovering its initial investment in an interest-only government stripped
mortgage related security. Under current market conditions, the Income Fund
and the Diversified Fund expect that investments in government stripped
mortgage related securities will consist primarily of interest-only
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 the Income Fund and the Diversified Fund will
be able to effect a trade of a government stripped mortgage related security
at a desired time. The Income Fund and the Diversified Fund 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 will treat government stripped mortgage
related securities as illiquid and will limit the investments of the Income
Fund and the Diversified Fund 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. CARs(SM)
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.
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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, the Income Fund and the Diversified Fund 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 the investment objective and policies of
the Income Fund and the Diversified Fund and subject to the review and
approval of each Fund's Board of Trustees, the Income Fund and the
Diversified Fund may also invest in other types of asset-backed and
receivable-backed securities.
Mortgage Dollar Rolls. With respect to up to 25% of its total assets the
Diversified Fund may, and with respect to up to 10% of its total assets 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. Cash or other liquid, high-grade debt obligations
equal in value to the Fund's obligations with respect to the forward purchase
price will be segregated with the Fund's custodian or designated
sub-custodian. The benefits derived from the use of mortgage dollar rolls may
depend upon GEIC'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.
Strategies Available to Individual Funds
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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. Conversely, any decline in the value of the securities purchased
would cause the Tax-Exempt Fund's net asset value per Unit to decrease 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.
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 the Money
Market 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. Short sales against the box are typically used by
sophisticated investors to defer recognition of capital gains or losses.
ADDITIONAL MATTERS
- -------------------------------------------------------------------------------
The registration of the Funds under the 1940 Act does not involve supervision
by the SEC of the management or investment practices or policies of the
Funds. As employees' securities companies, the Funds are exempt from certain
provisions of the 1940 Act and, as a result, the Funds are precluded from
selling to the general public.
Each Fund issues one class of Units. Unitholders have no voting rights except
with respect to amendments to the Fund agreement affecting the unitholders'
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 unitholder
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.
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.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR IN THE
STATEMENT OF ADDITIONAL INFORMATION INCORPORATED INTO THIS PROSPECTUS BY
REFERENCE IN CONNECTION WITH THE OFFERING OF UNITS OF ELFUN FUNDS, AND IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY ELFUN FUNDS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER IN ANY STATE IN WHICH, OR TO ANY PERSON TO WHOM, AN OFFER
MAY NOT LAWFULLY BE MADE.
<PAGE>
91460080
SUBJECT TO COMPLETION, Dated April 18, 1996
STATEMENT OF ADDITIONAL INFORMATION
April 18, 1996
ELFUN FUNDS
3003 Summer Street
Stamford, Connecticut 06905
For information, call
(203) 326-4040
o Elfun Trusts o Elfun Tax-Exempt Income Fund
o Elfun Global Fund o Elfun Income Fund
o Elfun Diversified Fund o Elfun Money Market Fund
Contents Page
-------- ----
Investment Objectives And Management Policies.............................. 2
Investment Restrictions.................................................... 12
Portfolio Transactions and Turnover........................................ 20
Who May Own Fund Units..................................................... 21
Management of the Funds.................................................... 22
Purchase of Units.......................................................... 26
Redemption of Units........................................................ 27
Transfer Privilege......................................................... 27
Net Asset Value............................................................ 27
Dividends, Distributions and Taxes......................................... 29
The Funds' Performance..................................................... 32
Additional Information..................................................... 35
Independent Auditors....................................................... 36
Financial Statements....................................................... 36
Appendix................................................................... A-1
This Statement of Additional Information ("SAI") supplements the
information contained in the current Prospectus of Elfun Funds, dated April 18,
1996, and should be read in conjunction with the Prospectus. Copies of the
Prospectus may be obtained without charge by calling the Funds at the telephone
number listed above. Information regarding the status of unitholder accounts may
be obtained by calling the Funds at 1-800-242-0134 or by writing to the Funds at
P.O. Box 120074, Stamford, CT 06912-0074. This SAI, although not a prospectus,
is incorporated in its entirety by reference into the Prospectus.
<PAGE>
91460080
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
The Prospectus discusses the investment objectives and policies of
the following six managed investment funds (each a "Fund" and collectively the
"Funds"): Elfun Trusts, Elfun Global Fund (the "Global Fund"), Elfun Diversified
Fund (the "Diversified Fund"), Elfun Tax-Exempt Income Fund (the "Tax-Exempt
Fund"), Elfun Income Fund (the "Income Fund") and Elfun Money Market Fund (the
"Money Market Fund"). Supplemental information is set out below 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.
Strategies Available to All Funds
Lending Portfolio Securities. 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 Trust'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".
Government Securities. Securities issued or guaranteed by the U.S.
Government or one of its agencies or instrumentalities ("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,
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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. 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 General Electric Investment Corporation ("GEIC"), as the
Fund's investment adviser, determines that the instrumentality's credit risk
does not make its securities unsuitable for investment by the Fund.
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
Federal Deposit Insurance Corporation ("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 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.
Ratings as Investment Criteria. The ratings of nationally
recognized statistical rating organizations ("NRSROs") such as
Standard & Poor's Corporation ("S&P") or Moody's Investors
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91460080
Service, Inc. ("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
GEIC as initial criteria for the selection of portfolio securities on behalf of
the Funds, GEIC 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, GEIC 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.
Strategies Available to Some But Not All Funds
Covered Option Writing. 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, high-grade debt obligations, 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, high-grade debt obligations 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
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91460080
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 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.
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91460080
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. GEIC 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.
Stock Index Options. A Fund may purchase and write put and call
options on stock indexes or stock 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 stock index
fluctuates with changes in the market values of the stocks included in the
index. Stock index options may be based on a broad or narrow market index or on
an industry or market segment.
The delivery requirements of options on stock indexes differ from
options on stock. Unlike a stock option, which contemplates the right to take or
make delivery of stock 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 underlying 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 stock 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
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91460080
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 stock index
options prior to expiration by entering into a closing transaction on an
exchange or it may allow the option to expire unexercised.
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 indexes, 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 indexes will be subject to GEIC'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.
Futures Contracts. 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.
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91460080
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 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.
Options on Futures Contracts. 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.
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Forward Currency Transactions. 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.
Options on Foreign Currencies. 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
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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.
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.
Municipal Obligations. The term "Municipal Obligations" as used in
the Prospectus and this Statement of Additional Information 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,
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.
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
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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.
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. 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. 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.
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. GEIC 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, GEIC can not predict whether additional
legislation adversely affecting the Municipal Obligation market will be enacted
in the future. GEIC monitors legislative developments and consider whether
changes in the objective or policies of a Fund need to be made in response to
those developments.
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
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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.
The Government National Mortgage Association ("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 the Federal National Mortgage Association
("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a
government-sponsored corporation owned entirely by private stockholders, which
is 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. GEIC assesses new types of mortgage related securities as they are
developed and offered to determine their appropriateness for investment by the
Income Fund.
INVESTMENT RESTRICTIONS
Investment restrictions numbered 1 through 18 below have been
adopted by the Funds as fundamental policies. Under the Investment Company Act
of 1940, as amended (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 19
through 31 may be changed by a vote of a Fund's Board of Trustees at any time.
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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 Global 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 Global 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 Global Fund, the Diversified Fund
and the Money Market Fund, 20% of the value of the Fund's total assets. The
Global 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
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91460080
agreements) of 5% or more of either the Income Fund's, the Global 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 Global 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 Global
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 Global Fund and
the Diversified Fund may join with other investment companies or client accounts
managed by GEIC 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
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91460080
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 Global Fund and the Diversified
Fund, foreign currency forward, futures 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 Global 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 Global 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 Global 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
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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 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 GEIC,
its portfolio securities.
15. Options, Straddles and Spreads. Neither the Global 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
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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 GEIC or the Fund's Trustees, officers or Trustees of the Fund or
officers and directors of GEIC 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 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 Global 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.
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22. Pledging. Neither Elfun Trusts, the Global 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 Global Fund, the Diversified
Fund nor the Money Market Fund may purchase or retain securities of any company
if, to the knowledge of GEIC or the Fund's Trustees, officers or trustees of the
Fund or officers and directors of GEIC 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
Global 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 Global Fund from investing in real
estate, the Tax-Exempt Fund and the Global 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
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91460080
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.
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 Global 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
unitholders. The loans are to be secured by Elfun Trusts' Units of the
unitholder, 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 Global
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 Global 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.
A Fund may make commitments more restrictive than the restrictions
listed above to permit the sale of Units of the Fund in certain states. Should a
Fund determine that any such commitment is no longer in the best interests of
the Fund and its unitholders, the Fund will revoke the commitment by terminating
the sale of Units of the Fund in the state involved or may otherwise modify its
commitment based on a change in the state's restrictions. The percentage
limitations in the restrictions
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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
Decisions to buy and sell securities for each Fund will be made by
GEIC, 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. No stated commission will be generally
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 GEIC deems it to be beneficial to a Fund, it may aggregate
the Fund's purchase, sale or other activities with those being performed by GEIC
for other customers. In selecting brokers or dealers to execute securities
transactions on behalf of a Fund, GEIC will seek the best overall terms
available. In assessing the best overall terms available for any transaction,
GEIC will consider 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, the investment advisory agreement between each Fund and GEIC,
authorizes GEIC, 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 GEIC or its affiliates exercise investment
discretion. The fees under the investment advisory
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agreement relating to a Fund will not be reduced by reason of the Fund's
receiving brokerage and research services. 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 GEIC is a member, except
to the extent permitted under rules, interpretations or exemptions of the SEC.
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 high brokerage commissions.
During the years ended December 31, 1995, 1994 and 1993, the
following commissions were paid to broker-dealers for execution of portfolio
transactions: Elfun Trusts paid $483,616, $611,683 and $607,995, respectively;
the Global Fund paid $494,655, $345,730 and $229,202, respectively; and the
Diversified Fund paid $42,795, $48,523 and $58,966, respectively. Of such
amounts, the following amounts were paid to a broker because of research
services provided during the respective year: Elfun Trusts paid $212,847,
$204,555 and $428,847, respectively; the Global Fund paid $195,023, $243,695 and
$85,913, respectively; and the Diversified Fund paid $7,264, $8,824 and $37,845,
respectively. The Tax-Exempt Fund, the Income Fund and the Money Market Fund
made no payments to broker-dealers for execution of portfolio transactions
during 1995, 1994 and 1993. During 1994 and 1993, Elfun Trusts paid $4,508 and
$10,241, respectively, the Global Fund paid $0 and $1,617, respectively, and the
Diversified Fund paid $49 and $98, respectively, in brokerage commissions to
Kidder, Peabody & Co. Incorporated ("Kidder"), an affiliate of GEIC. The Funds
made no payments to Kidder for execution of portfolio transactions during 1995.
During 1994 and 1993, General Electric Capital Services, Inc. ("GECC"), a
wholly-owned subsidiary of GE, owned all of the outstanding stock of Kidder,
Peabody Group Inc., the parent company of Kidder. Effective January 30, 1995,
GECC no longer owns any of this stock.
WHO MAY OWN FUND UNITS
In the case of minor children of Elfun Society members, Units must
be registered in the name of a custodian under a
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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 unitholders may assign their
right to redeem their Units and to receive from the Trustees their distributive
share. A form of assignment of a unitholder's right to redeem is set forth in
each Fund Agreement pursuant to which the Funds were created.
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
unitholders, unless the unitholders reside in a community property state or
request tenancy in common.
MANAGEMENT OF THE FUNDS
Trustees and Officers
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. The address of each person 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 and
are "interested persons" within the meaning of Section 2(a)(19) of the 1940 Act.
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.
Principal
Position(s) Held Occupation(s)
Name and Address with the Funds During Past Five Years
- ---------------- ---------------- ----------------------
Dale F. Frey Chairman of Age 63. Vice President of GE
Trustees since 1980, Chairman of the
Board and President of
GEIC since 1984 and
Chairman of the Board,
Chief Executive
Officer and President
of GE Investment
Management
Incorporated (GEIM)
since 1988; from 1980
until 1984 and from
1986 until 1993, Mr.
Frey also served as
Treasurer of GE.
Eugene K. Bolton Trustee Age 52. Executive Vice
President - Domestic Equity
Investments and Director of
22
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91460080
GEIC and Executive
Vice President and
Director of GEIM since
1991; from 1987 to
1991, Mr. Bolton
served as Senior Vice
President - Pension
Fund Portfolios of
GEIC.
Michael J. Cosgrove Trustee Age 46. Executive Vice
President - Mutual Funds of
GEIC and GEIM since 1993
(responsibilities include
general management of all
mutual funds managed by GEIC
and GEIM) and Director of GEIC
and Executive Vice President
and Director of GEIM since
1988; from 1988 until 1993,
Mr. Cosgrove served as
Executive Vice President -
Finance and Administration of
GEIC and GEIM.
Alan M. Lewis Trustee and Age 49. Executive Vice
Secretary President, General Counsel and
Secretary of GEIM
since 1988 and of GEIC
since October 1987.
John H. Myers Trustee Age 50. Executive Vice
President - Fixed Income and
Corporate Investments of GEIC
since 1987, Director of GEIC
since 1986 and Executive Vice
President and Director of GEIM
since 1988.
David B. Carlson Portfolio Age 38. Senior Vice President
Manager (Elfun - Equity Portfolios of GEIC
Trusts and since 1991, prior to 1991, Mr.
Diversified Fund) Carlson served
as Senior Vice
President - Mutual
Fund Portfolios since
1990 and Vice
President - Mutual
Fund Portfolios since
1987.
Robert R. Kaelin Portfolio Age 49. Senior Vice President
Manager (Tax- - Municipal Bonds of GEIC
Exempt Fund) since 1984.
Ralph R. Layman Portfolio Age 40. Executive Vice
Manager President - International
and Trustee Equity Investments of GEIC
(Global Fund) since 1993 and Senior Vice
President -
International Equity
Investments of GEIC
from 1991 until 1993;
from 1989 to 1991, Mr.
Layman served as
Executive Vice
President, Partner and
Portfolio Manager of
Northern Capital
Management, and prior
thereto, served as
Vice President and
Portfolio
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91460080
Manager of Templeton
Investment Counsel.
Robert A. MacDougall Portfolio Age 47. Senior Vice President
Manager - Fixed Income of GEIC since
(Income Fund, 1990 and Vice President -
Diversified Fixed Income Portfolios from
Fund and Money 1986 until 1990.
Market Fund)
Donald W. Torey Trustee and Prin- Age 39. Executive Vice
cipal Financial President - Finance and
Officer Administration and Director
of GEIC and Executive
Vice President,
Treasurer and Director
of GEIM since 1993;
from 1989 until 1993,
Mr. Torey served as
Manager Mergers and
Acquisitions Finance
for GE and from 1988
until 1989, he served
as Vice President -
Private Placements of
GEIC.
While Trustees of the Fund who are employees of GE will serve as
Trustees without compensation, each Fund will be required to reimburse GEIC 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 GEIC does not 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.
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91460080
Trustees' Compensation
(for the year ended December 31, 1995)
Total Compensation from
Total all Investment Companies
Compensation from Managed by
Name of Trustee Each Fund GEIC OR GEIM*
- --------------- --------- -------------
Dale F. Frey None None
Eugene K. Bolton None None
Michael J. Cosgrove None None**
Alan M. Lewis None None**
John H. Myers None None
Ralph R. Layman None None
Donald W. Torey None None
* Each Trustee serves as a Trustee of eight investment companies
advised by GEIC, including the Funds. Messrs. Cosgrove and
Lewis also serve as Trustees of two investment companies
advised by GEIM.
** Messrs. Cosgrove and Lewis are also considered to be interested persons
of each investment company advised by GEIM, as defined under
Section 2(a)(19) of the 1940 Act, and accordingly, serve as Trustees
thereof without compensation.
As of March 25, 1996, no person owned of record or to the
knowledge of any Fund, beneficially owned more than 5% of the outstanding Units
of the Fund. 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, other than the Money Market Fund. As of that
same date, the current Trustees and officers of the Funds as a group
beneficially owned 1.14% of the outstanding Units of the Money Market Fund.
Investment Adviser and Administrator
GE is not a party to any Fund Agreement and does not
sponsor any of the Funds. The Funds were formed at the request
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91460080
of the Elfun Society and GE does not guarantee performance or continued
operation of the Funds, or encourage participation in the Funds.
GEIC, located at 3003 Summer Street, P.O. Box 7900, Stamford,
Connecticut 06904-7900, is a wholly-owned subsidiary of GE. GE provides the
personnel and other resources necessary for GEIC to perform its obligations
under the investment advisory agreements with the Funds. GEIC 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 incurred by it for providing services as adviser and
administrator for the years ended December 31, 1995, 1994 and 1993 were as
follows: Elfun Trusts--$503,000, $599,000 and $491,000; the Global
Fund--$118,000, $142,000 and $59,000; the Diversified Fund--$37,000, $46,000 and
$48,000; the Tax-Exempt Income Fund--$665,000, $600,000 and $726,000; the Income
Fund-- $105,000, $182,000 and $96,000; and, for the year ended December 31,
1995, for the Money Market Fund--$24,000, respectively. Absent the waiver by
GEIC of fees relating to the Money Market Fund, the Money Market Fund would have
paid to GEIC for the years ended December 31, 1994 and 1993, $64,000 and
$50,000, respectively, for its services as investment adviser and administrator.
Pursuant to state securities laws, GEIC has agreed that, if in any fiscal year
of a Fund, the aggregate expenses of a Fund (including management fees, but
excluding interest, taxes, brokerage fees, and, with the prior written consent
of the necessary state securities commissions, extraordinary expenses) exceed
the expense limitation of any state having jurisdiction over the Fund, GEIC will
reimburse that Fund up to the amount of the Fund's investment advisory and
administration fee. As of the date of this Statement of Additional Information,
the most restrictive state expense limitation applicable to the Funds requires
reimbursement of expenses in any year that a Fund's expenses, subject to the
limitation, exceed 2-1/2% of the first $30 million of the average daily value of
the Fund's net assets, 2% of the next $70 million of the average daily value of
the Fund's net assets and 1-1/2% of the remaining average daily value of the
Fund's net assets.
Unitholder Servicing Agent
GEIC, located at 3003 Summer Street, P.O. Box 120074, Stamford,
CT 06912-0074 acts as Unitholder Servicing Agent. The amounts paid to GEIC by
the Funds for the reasonable costs incurred by it for providing services as
Unitholder Servicing Agent for the years ended December 31, 1995, 1994 and 1993
were as follows: Elfun Trusts--$160,000, $67,000 and $68,000; the
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<PAGE>
91460080
Global Fund--$70,000, $32,000 and $14,000; the Diversified Fund-- $35,000,
$16,000 and $10,000; the Tax-Exempt Income Fund-- $245,000, $105,000 and 43,000;
the Income Fund--$90,000, $37,000 and $23,000; and, for the years ended December
31, 1995 and 1994, for the Money Market Fund--$35,000 and $8,000, respectively.
Absent the waiver by GEIC of fees relating to the Money Market Fund, the Money
Market Fund would have paid to GEIC for the years ended December 31, 1994 and
1993, $16,000 and $9,000, respectively, for its services as Unitholder Servicing
Agent.
Custodian, Transfer Agent and Dividend Paying Agent
State Street Bank and Trust Company ("State Street") is located
at 225 Franklin Street, Boston, Massachusetts 02101 and 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.
Distributor
GE Investment Services Inc. serves as the distributor
of Units of the Funds on a best efforts basis.
PURCHASE OF UNITS
Units of the Funds are offered to unitholders on a continuous
basis. The offering price per Unit of a Fund is equal to its net asset value. As
noted in the Prospectus, the Money Market Fund will seek to maintain its net
asset value at $1.00 per Unit. The offering price of a Fund, other than the
Money Market Fund, is illustrated in the following example (all amounts are
hypothetical):
Cash..............................................$ 170
Investment securities, at market.................. 12,400
Interest receivable............................... 53
Receivable for investment securities sold......... 550
Receivable for Units subscribed.................. 17
-------
Total assets..................................$13,190
-------
Expenses payable.................................. 24
Payable for investment securities purchased....... 455
Other liabilities and accrued expenses............ 35
-------
Total liabilities............................. 514
-------
Net assets........................................$12,676
=======
Number of Units outstanding...................... 980
=======
Net asset value and redemption price per Unit ....$ 12.93
=======
Offering price per Unit ..........................$ 12.93
=======
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91460080
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.
TRANSFER PRIVILEGE
The transfer privilege described in the Prospectus enables a
unitholder of a Fund to acquire Units in a Fund having a different investment
objective and policies when the unitholder believes that a shift between Funds
is an appropriate investment decision.
NET ASSET VALUE
The Funds will not calculate their net asset value on certain
holidays. 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, GEIC 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 GEIC
after consultation with a Pricing Service. 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 mean between the quoted bid prices and asked
prices. Investments of the Tax-Exempt Fund that
28
<PAGE>
91460080
are not regularly quoted are carried at fair value as determined by the Board of
Trustees, which may rely on the assistance of the Pricing Service. The
procedures of the Pricing Service are reviewed periodically by GEIC under the
general supervision and responsibility of the Board of Trustees of the Fund.
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 13 months or less, and invest only in "eligible
securities" as defined in the rule, which are determined by GEIC to present
minimal credit risks. Pursuant to the rule, GEIC 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 GEIC 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 any deviation 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 unitholders 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
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<PAGE>
91460080
establishing a net asset value per Unit by using available market
quotations.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Set forth below is a summary of certain Federal income tax
considerations generally affecting the Funds and their unitholders. The summary
is not intended as a substitute for individual tax planning, and unitholders are
urged to consult their tax advisors regarding the application of Federal, state,
local and foreign tax laws to their specific tax situations.
Tax Status of the Funds and their Unitholders
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 unitholders 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 unitholders. 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 year period ending on October 31 of such calendar year. 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 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 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 Government Securities or
the securities of other regulated investment companies).
The requirements for qualifications as a regulated investment
company also include two significant rules as to
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91460080
investment results. First, a 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"). Second, a Fund must derive
less than 30% of its gross income from the sale or other disposition of (i)
stock or securities held for less than three months, (ii) options, futures, or
forward contracts held for less than three months (other than options, futures,
or forward contracts on foreign currencies), and (iii) foreign currencies (or
options, futures, or forward contracts) that are not directly related to the
Fund's principal business of investing in stock or securities (or options and
futures with respect to stocks or securities) (the "30% Test").
The 30% Test will restrict the extent to which a Fund may, among
other things: (1) sell or purchase put options on securities held for less than
three months or purchase put options on substantially identical securities
(unless the option and the security are acquired on the same day); (2) write
options that expire in less than three months; and (3) close options that were
written or purchased within the preceding three months. For purposes of the 30%
Test, a Fund's increases or decreases in value of short-term investment
positions that constitute certain designated hedging transactions may generally
be netted. The Funds do not expect that the 30% Test will significantly affect
the investment policies of any Fund.
A Fund's transactions in options and futures contracts will be
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 unitholders 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.
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91460080
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 Fund's portfolio must consist of exempt-interest
obligations. Within 60 days after the close of the taxable year of the
Tax-Exempt Fund, unitholders 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 unitholders receiving dividends from the Fund for that year.
Interest on indebtedness incurred by a unitholder 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 unitholder's taxable
year. In addition, if a unitholder 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.
As a general rule, a unitholder'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
unitholder has held the Units for more than one year. The gain or loss will be a
short-term capital gain or loss if the unitholder has held the Units for one
year or less.
Each Fund's net realized long-term capital gains will be
distributed as described in the Prospectus. The distributions ("capital gain
dividends"), if any, will be taxable to a unitholder of a Fund as long-term
capital gains, regardless of how long a unitholder has held the Units and
whether the distributions are received in cash or reinvested in additional Fund
Units, and will be designated as capital gain dividends in a written notice
mailed by the Trust to the unitholders of the Fund after the close of the Fund's
prior taxable year. If a unitholder 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 unitholder 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.
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91460080
If Units of a Fund are purchased within 30 days of redeeming
Units at a loss, the loss will not be deductible and instead will increase the
basis of the newly purchased Units.
If a unitholder 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
unitholder may be subject to a 31% "backup withholding" tax with respect to (1)
taxable dividends and distributions from the Fund and (2) the proceeds of any
redemptions of Units of the 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.
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 unitholders of the Fund or in advertising
material. Additional information regarding the manner in which performance
figures are calculated is provided below.
Yield
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, 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.
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:
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91460080
Yield = 2[(a-b + 1)6-1]
---
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. Unitholders 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.
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91460080
Average Annual Total Return
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:
P(1 + T)n = 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.
Aggregate Total Return
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.
Based on the above formula, the aggregate total return figures
for the one-, five- and 10-year periods (if applicable) ended December 31, 1995
were as follows: Elfun Trusts - 39.19%, 16.32% and 14.59%; the Global Fund -
16.03% and 13.04%; the Diversified Fund - 27.11% and 12.18%; the Tax-Exempt Fund
- - 17.32%, 8.55% and 9.08%; the Income Fund - 18.21%, 9.42% and 9.41%; and the
Money Market Fund - 5.82% and 4.75%.
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91460080
ADDITIONAL INFORMATION
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 GEIC is a party or of which property of any Fund or GEIC 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 unitholders
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 unitholders or their assignees. In
addition, 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 unitholders 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 unitholders or their assignees to surrender to the Unitholder 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 unitholders.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York 10154,
serves as the Funds' independent auditors.
36
<PAGE>
91460080
FINANCIAL STATEMENTS
The December 31, 1995 Annual Report, which either accompanies
this Statement of Additional Information or has previously 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 unitholders 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.
37
<PAGE>
91460080
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
A-1
<PAGE>
91460080
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 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
A-2
<PAGE>
91460080
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.
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
A-3
<PAGE>
91460080
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.
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.
A-4
<PAGE>
91460080
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 time. Basic security provisions are no
more than adequate. Management performance could be stronger.
A-5
<PAGE>
91460080
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.
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-6
<PAGE>
91460080
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.
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.
A-7
<PAGE>
91460080
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-8
<PAGE>
ELFUN DIVERSIFIED FUND
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
(1) Financial Highlights**
(2) Schedule of Investments as of December 31, 1995**
(3) Statements of Assets and Liabilities as of
December 31, 1995**
(4) Statement of Operations for the fiscal year ended
December 31, 1995**
(5) Statement of Changes in Net Assets for the fiscal year
ended December 31, 1995 and the fiscal year ended December
31, 1994**
(6) Notes to Financial Statements**
- --------------------
** Incorporated by reference to the Fund's Annual Report to shareholders
for the fiscal year ended December 31, 1995.
(b) Exhibits
Exhibit
No. Description of Exhibit
1 Fund Agreement, dated as of June 1, 1987, as
amended July 1, 1989*
2 Inapplicable
3 Inapplicable
4 Inapplicable
- ------------------------
* Previously filed
C-1
<PAGE>
5(a) Investment Advisory Agreement dated June 1, 1987,
between the Fund and General Electric
Investment Corporation*
5(b) Servicing Agreement dated as of March 13, 1992
between the Fund and General Electric Investment
Corporation*
6 Distribution Agreement dated February 10, 1994
between the Fund and GE Investment Services Inc.*
7 Inapplicable
8 Custodian Contract with State Street Bank and
Trust Company dated as of July 1, 1989*
9 Transfer Agency Agreement with State Street Bank
and Trust Company dated as of February 10, 1994*
10 Opinion of counsel, including consent
(incorporated by reference to the Fund's
Registration Statement on Form N-1A (33-16690),
Exhibit F)*
11 Consent of Independent Auditors
12 Inapplicable
13 Inapplicable
14 Individual Retirement Account documents*
15 Inapplicable
16 Schedule for computation of performance data
information
- ----------------------------------
* Previously filed
Item 25. Persons Controlled by or Under Common Control with
Registrant.
See Item 28
C-2
<PAGE>
Item 26. Number of Holders of Securities
Number of Record
Title of Class Holders as of March 8, 1996
-------------- ---------------------------
Units 4,746
Item 27. 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.
C-3
<PAGE>
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 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 28. Business and Other Connections of Investment
Adviser
The following persons may be deemed to have direct or
indirect control of, or may be deemed to be under common control
with, the Fund: General Electric Company, a New York corporation
("GE"); General Electric Investment Corporation, a Delaware
corporation; Elfun Tax-Exempt Income Fund; Elfun Trusts; Elfun
Global Fund; Elfun Money Market Fund; Elfun Income Fund; Dale F.
Frey; Eugene K. Bolton; Michael J. Cosgrove, Ralph R. Layman,
Alan M. Lewis; John H. Myers; and Donald W. Torey.
General Electric Investment Corporation, the Fund's investment
adviser, is also the investment adviser of certain employee benefit plan trusts
of GE and of each of the Elfun mutual funds listed above. The Trustees of the
Fund serve as directors and executive officers of the investment adviser and as
trustees of such mutual funds. Such trustees are also employees of GE. The
investment adviser is a wholly-owned subsidiary of GE. The principal business
address of GE is 3135 Easton Turnpike, Fairfield, Connecticut 06431.
Item 29. Principal Underwriters
(a) GE Investment Services Inc. ("GEIS") also serves as
distributor for Elfun Tax-Exempt Income Fund, Elfun Income Fund, Elfun Trusts,
Elfun Money Market Fund, Elfun Global Fund and the GE Funds, all of which are
registered open-end investment companies.
(b) The information required by this Item 29, with
respect to each director and officer of GEIS is incorporated by
C-4
<PAGE>
reference to Schedule A of Form BD filed by GEIS pursuant to the
Securities Exchange Act of 1934 (SEC File No. 8-45710).
(c) Inapplicable.
Item 30. 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
custodian and transfer agent, located at 225 Franklin Street, Boston,
Massachusetts 02101; and Boston Financial Data Services, Inc., a subsidiary of
State Street, located at 2 Heritage Drive, Quincy, Massachusetts 02171.
Item 31. Management Services
Inapplicable.
Item 32. Undertakings
Registrant undertakes to furnish each person to whom a prospectus
is delivered with a copy of the Registrant's annual report to shareholders,
covering fiscal year 1995, upon request and without charge.
C-5
<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 Post-Effective Amendment to the Registration Statement pursuant to Rule
485(b) under the Securities Act and has duly caused this Post-Effective
Amendment to its Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Stamford, State of
Connecticut on the 14th day of April, 1996.
By: Dale F. Frey
------------
Dale F. Frey
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.
Signature Title Date
Dale F. Frey Chairman of the Board April 14, 1996
- ------------------- and Chief Executive
Dale F. Frey Officer
Ralph R. Layman Trustee and Portfolio April 14, 1996
- ------------------- Manager
Ralph R. Layman
Eugene K. Bolton Trustee April 14, 1996
- ----------------
Eugene K. Bolton
Michael J. Cosgrove Trustee April 14, 1996
- -------------------
Michael J. Cosgrove
Alan M. Lewis Trustee and Secretary April 14, 1996
- -------------------
Alan M. Lewis
John H. Myers Trustee April 14, 1996
- -------------
John H. Myers
Donald W. Torey Trustee and Chief April 14, 1996
- ------------------- Financial and Accounting
Donald W. Torey Officer
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit Numbered Page
1 Trust Agreement* --
2 Inapplicable --
3 Inapplicable --
4 Inapplicable --
5(a) Investment Advisory
Agreement* --
5(b) Servicing Agreement* --
6 Distribution Agreement,
as amended* --
7 Inapplicable --
8 Custodian Contract* --
9 Transfer Agency
Agreement* --
10 Opinion of Counsel* --
11 Consent of Independent
Auditors
12 Inapplicable --
13 Inapplicable --
14 Individual Retirement
Account documents* --
15 Inapplicable --
16 Schedule of computation of
performance data information
- ------------------
* Previously filed
Exhibit 11
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
To the Board of Trustees and Shareholders of
Elfun Diversified Fund:
We consent to the use of our report dated February 8, 1996 which is incorporated
herein by reference, and to the references to our firm, included herein under
the captions "Financial Highlights" in the Prospectus and "Independent Auditors"
in the Statement of Additional Information.
KPMG Peat Marwick LLP
New York, New York
April 12, 1996
Elfun Diversified
Calculation of 1995 Total Return
This method compares a fund's net asset value (NAV), at the beginning and end of
a period with the results being expressed as a percent change of the beginning
net asset value. The net asset value is adjusted to reflect the compounding
effect of reinvesting dividends as well as capital gains distributions, if any.
Dividends and distributions are reinvested on the ex-dividend date at the
ex-dividend NAV.
The following computation illustrates this methodology for 1995.
Factual Data Elfun Diversified
1. Opening NAV 12/30/94 13.24
2. Closing NAV 12/29/95 15.86
3. Distributions:
Ex Date 12/28/95
Amount / Unit 0.96574
NAV on ex-date 15.81
Income Sources
Ordinary Income 0.52934
Long Term Capital Gains 0.4364
Computation
= 15.86 * (1 + (.96574 / 15.81)) -13.24)
--------------------------------------
13.24
= 0.271057
= 0.271057 or 27.11%
<PAGE>
Elfun Diversified
The three, five and since inception returns are average annual compounded
rates of return.
Rates are calculated using the following geometric return formula:
Geometric Return = {(1+R1) x (1+R2) x (1+R3)......x (1+RN)} ^ (1/M) -1
where
R1, R2, R3....RN = Rate of return for periods 1,2,3 through N
N = Number of periods
M = Number of years that comprise N periods
Three Year Average Return 1993-1995
The three year average annual rate of return is calculated as follows:
1993 1994 1995
0.113505383 = 1.3806 ^ (1/3) -1 = {(1 + 0.089)x(1 + -0.003)x(1 + 0.271)}^(1/3)-1
= 11.35% rounded
Five Year Annual Return 1991-1995
The five year average annual rate of return is calculated as follows:
1991 1992 1993
0.121849097 = 1.7769 ^ (1/5) - 1 = {(1 + 0.177)x(1 + 0.094)x(1 + 0.089)x
1994 1995
(1 + -0.003)x(1 + 0.271)}^(1/5)-1
= 12.18% rounded
Since Inception Return 1988-1995
The since inception rate of return is calculated as follows:
1988 1989 1990 1991
0.11624 = 2.4103 ^ (1/8) - 1 = {(1 + 0.066)x(1 + 0.215)x(1 + 0.048)x(1 + 0.177)x
1992 1993 1994 1995
(1 + 0.094) (1 + 0.089)x(1 + -0.003)x(1 + 0.271)}^(1/8)-1
= 11.62% rounded
