<PAGE>
Filed Pursuant to Rule 485(b)
As filed with the Securities and Exchange Commission on December 29, 1995
Registration No. 33-19229; 811-5430
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. 35 ( X )
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 (X )
Amendment No. 37 ( X )
(Check appropriate box or boxes)
THE SEVEN SEAS SERIES FUND
(Exact Name of Registrant as Specified in Charter)
909 A Street
Tacoma, Washington 98402
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (206) 627-7001
Name and Address of
Agent for Service: Copies to:
- ------------------- ----------
Karl J. Ege Philip H. Newman, Esq.
Secretary and General Counsel Goodwin, Procter & Hoar
Frank Russell Investment Management Company Exchange Place
909 A Street Boston, Massachusetts 02109
Tacoma, Washington 98402
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 under Rule 485:
( X ) immediately upon filing pursuant to paragraph (b)
( ) on (date) pursuant to paragraph (b)
( ) 60 days after filing pursuant to paragraph (a)
( ) on (date) pursuant to paragraph (a)(1)
( ) 75 days after filing pursuant to paragraph (a)(2)
( ) on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following:
( X ) This post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
DECLARATION PURSUANT TO RULE 24f-2
Registrant has declared its intention to register under the Securities Act
of 1933 an indefinite number of shares of beneficial interest, par value of
$.001, of The Seven Seas Series Fund pursuant to Rule 24f-2(a)(1) under the
Investment Company Act of 1940, as amended. The Registrant filed its Rule 24f-2
notice for the fiscal year ended August 31, 1995 on October 20, 1995.
<PAGE>
THE SEVEN SEAS SERIES FUND
Form N-1A Cross Reference Sheet
Part A Item No.
and Caption Prospectus Caption
--------------- ------------------
1. Cover Page Cover Page
2. Synopsis Table of Contents; and
Fund Operating Expenses
3. Condensed Financial Information Fund Operating Expenses
4. General Description of Registrant
(a)(i) Summary (Classes B and C only);
The Seven Seas Series Fund;
Additional Information -
Organization, Capitalization and
Voting
(a)(ii), (b) Summary (Classes B and C only);
Investment Objectives and Policies;
Investment Restrictions and
Policies; and Portfolio Maturity
(c) Investment Restrictions
and Policies
5. Management of the Fund Summary (Classes B and C only);
General Management; Fund
Operating Expenses; and Portfolio
Maturity
6. Capital Stock and Other Securities
(a) Additional Information -
Organization, Capitalization and
Voting
(b) General Management
(c) Not Applicable
(d) Summary (Classes B and C only);
Additional Information -
Organization, Capitalization and
Voting
-2-
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(e) Additional information - Reports
to Shareholders and Shareholder
Inquiries
(f) Dividends and Distributions
(g) Taxes
7. Purchase of Securities Being Offered
(a) Summary (Classes B and C only);
General Management - Distribution
Services and Shareholder Servicing
Arrangements
(b) Valuation of Fund Shares;
Purchase of Fund Shares
(c) Not Applicable
(d) Manner of Offering; Purchase
of Fund Shares
(e), (f) General Management - Distribution
Services and Shareholder Servicing
Arrangements
8. Redemption or Repurchase
(a) Summary (Classes B and C only);
Redemption of Fund Shares
(b) Not Applicable
(c) Manner of Offering;
Redemption of Fund Shares
(d) Redemption of Fund Shares
9. Pending Legal Proceedings Not Applicable
Part B Item No. Statement of Additional
and Caption Information Caption
-------------- -----------------------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Not Applicable
-3-
<PAGE>
13. Investment Objectives and Policies
(a), (b), (c) Investments
(d) (Prospectus) - Portfolio
Maturity
14. Management of the Fund
(a), (b) Structure and Governance -
Trustees and Officers
(c) Not Applicable
15. Control Persons and Principal Holders
of Securities
(a), (b) Structure and Governance -
Controlling Shareholders;
Additional Information -
Organization, Capitalization and
Voting (Prospectus)
(c) Structure and Governance -
Controlling Shareholders
16. Investment Advisory and Other Services
(a), (b) Operation of Investment Company -
Adviser; General Management -
Advisory Agreement (Prospectus)
(c) Not Applicable
(d) Operation of Investment Company -
Administrator
(e) Not Applicable
(f) Operation of Investment Company -
Distribution Plan
(g) Not Applicable
(h), (i) Operation of Investment Company -
Custodian and Transfer Agent;
Additional Information - Custodian,
Transfer Agent and Accountants
(Prospectus)
-4-
<PAGE>
17. Brokerage Allocation
and Other Practices
(a), (b), (c) Operation of Investment Company -
Brokerage Practices
(d) Not Applicable
(e) Operation of Investment Company -
Brokerage Practices
18. Capital Stock and Other Securities
(a) Structure and Governance -
Organization and Business History
(b) Not Applicable
19. Purchase, Redemption and Pricing of
Securities Being Offered
(a), (b), (c) Operation of Investment Company -
Valuation of Fund Shares;
(Prospectus) - Valuation of Fund
Shares; Redemption of Shares;
Purchase of Fund Shares
20. Tax Status Taxes
21. Underwriters
(a) Operation of Investment Company -
Distribution Plan
(b), (c) Not Applicable
22. Calculation of Performance Data
Operation of Investment Company -
Yield and Total Return Quotations
23. Financial Statements Financial Statements
Part C
Information required to be included in Part C is set forth under the
appropriate item, so numbered in Part C of this Registration Statement.
-5-
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THE SEVEN SEAS SERIES FUND
Contents of Registration Statement
This Registration Statement consists of the following papers and documents:
Cover Sheet
Form N-1A Cross Reference Sheet
Part A - Prospectuses
Part B - Statements of Additional Information
Part C - Other Information
Signature Page
Exhibits
-6-
<PAGE>
Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
THE SEVEN SEAS SERIES FUND
TWO INTERNATIONAL PLACE, 35TH FLOOR
BOSTON, MASSACHUSETTS 02110
(617) 654-6089
MONEY MARKET FUND
CLASS A SHARES
The Seven Seas Series Fund is a registered, open-end investment company with
multiple portfolios, each of which is a mutual fund. This Prospectus describes
and offers shares of beneficial interest in one of the mutual funds, The Seven
Seas Series Money Market Fund (the "Money Market Fund" or "Fund"). The Money
Market Fund seeks to maximize current income, to the extent consistent with the
preservation of capital and liquidity and the maintenance of a stable $1.00 per
share net asset value, by investing in dollar denominated securities with
remaining maturities of one year or less. The Fund's shares are offered without
sales commissions. However, the Fund pays certain distribution expenses under
its Rule 12b-1 plan.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
INVESTMENTS IN THE FUND ARE NEITHER INSURED NOR GUARANTEED BY THE US
GOVERNMENT. THERE IS NO ASSURANCE THAT THE MONEY MARKET FUND WILL MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE. SHARES IN THE FUND ARE NOT DEPOSITS
OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, STATE STREET BANK AND TRUST
COMPANY, AND SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY, AND INVOLVE
INVESTMENT RISKS INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. Please read and retain this
document for future reference. Additional information about the Fund has been
filed with the Securities and Exchange Commission in a Statement of Additional
Information dated December 29, 1995. The Statement of Additional Information is
incorporated herein by reference and is available without charge from
Distributor at its address noted below or by calling (617) 654-6089.
<TABLE>
<S> <C> <C>
INVESTMENT ADVISER, CUSTODIAN
AND TRANSFER AGENT: DISTRIBUTOR: ADMINISTRATOR:
State Street Bank and Trust Russell Fund Distributors, Frank Russell Investment
Company Inc. Management Company
225 Franklin Street Two International Place 909 A Street
Boston, Massachusetts 02110 35th Floor Tacoma, Washington 98402
(617) 654-4721 Boston, Massachusetts 02110 (206) 627-7001
(617) 654-6089
</TABLE>
PROSPECTUS DATED DECEMBER 29, 1995
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Fund Operating Expenses.................................................................................... 3
Financial Highlights....................................................................................... 4
The Seven Seas Series Fund................................................................................. 5
Manner of Offering......................................................................................... 5
Investment Objective, Policies and Restrictions............................................................ 5
Portfolio Maturity......................................................................................... 9
Dividends and Distributions................................................................................ 9
Taxes...................................................................................................... 10
Valuation of Fund Shares................................................................................... 10
Purchase of Fund Shares.................................................................................... 11
Redemption of Fund Shares.................................................................................. 13
General Management......................................................................................... 14
Fund Expenses.............................................................................................. 17
Performance Calculations................................................................................... 17
Additional Information..................................................................................... 18
</TABLE>
2
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FUND OPERATING EXPENSES
THE SEVEN SEAS SERIES MONEY MARKET FUND
CLASS A SHARES
The purpose of the following table is to assist the investor in
understanding the various costs and expenses that an investor in Class A shares
of the Money Market Fund will incur directly or indirectly. THE EXAMPLES
PROVIDED IN THE TABLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. Actual expenses may be greater or less than those shown. For
additional information, see "General Management."
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
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Sales Load Imposed on Purchases.......................................................................................... None
Sales Load Imposed on Reinvested Dividends............................................................................... None
Deferred Sales Load...................................................................................................... None
Redemption Fees.......................................................................................................... None
Exchange Fee............................................................................................................. None
ANNUAL FUND OPERATING EXPENSES:
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(as a percentage of average daily net assets)
Advisory Fees............................................................................................................ .25%
12b-1 Fees (1)........................................................................................................... .05
Other Expenses........................................................................................................... .08
----
Total Operating Expenses (2)............................................................................................. .38%
----
----
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
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<S> <C> <C> <C> <C>
EXAMPLES:
You would pay the following expenses on a $1,000 investment, assuming: (i) 5.0% annual
return; and (ii) redemption at the end of each time period:.............................. $ 4 $ 12 $ 21 $ 48
------ ------- ------- --------
------ ------- ------- --------
</TABLE>
The shares of the Fund are divided into three classes: Class A, Class B and
Class C. Class A shares are designed for institutional investors. Class B shares
are offered through financial institutions that provide certain account
administration services. Class C shares are offered through certain financial
institutions that provide certain account administration and shareholder liaison
services. Each class of shares of the Fund is entitled to the same rights and
privileges as all other classes of shares of the Fund, provided however, that
each class bears the expenses related to its distribution and shareholder
servicing arrangements and certain other expenses attributable to the class.
Annual distribution and shareholder servicing expenses for Class A, Class B and
Class C shares are equal to approximately .05%, .30% and .55%, respectively, of
the average daily net asset value of the shares of the class. Total operating
expenses for Class A, Class B and Class C shares are equal to approximately
.38%, .65% and .93%, respectively, of the average daily net asset value of the
shares of the class.
- ------------------------
(1) Rule 12b-1 fees include expenses paid for shareholder servicing activities.
(2) Investors purchasing Fund shares through a financial intermediary, such as a
bank or an investment adviser, may also be required to pay additional fees
for services provided by the intermediary. Such investors should contact the
intermediary for information concerning what additional fees, if any, will
be charged.
3
<PAGE>
FINANCIAL HIGHLIGHTS
THE SEVEN SEAS SERIES MONEY MARKET FUND
The following table contains important financial information relating to the
Money Market Fund and has been audited by Coopers & Lybrand L.L.P., the Fund's
independent accountants. The table includes selected data for a Class A share
outstanding throughout each fiscal year or period ended August 31, and other
performance information derived from the financial statements. The Investment
Company is authorized to issue Class B and Class C shares of the Money Market
Fund although shares have not been offered on these classes as of the date of
this Prospectus. The table appears in the Fund's Annual Report and should be
read in conjunction with the Fund's financial statements and related notes,
which are incorporated by reference in the Statement of Additional Information
and which appear, along with the report of Coopers & Lybrand L.L.P., in the
Fund's Annual Report to Shareholders. More detailed information concerning the
Fund's performance, including a complete portfolio listing and audited financial
statements, is available in the Fund's Annual Report, which may be obtained
without charge by writing or calling the Distributor.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989 1988
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR... $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
--------- --------- --------- --------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.............. .0538 .0330 .0320 .0458 .0686 .0817 .0883 .0239
--------- --------- --------- --------- --------- --------- --------- ---------
LESS DISTRIBUTIONS:
Net investment income.............. (.0538) (.0330) (.0320) (.0458) (.0686) (.0817) (.0883) (.0239)
--------- --------- --------- --------- --------- --------- --------- ---------
NET ASSET VALUE, END OF YEAR......... $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
TOTAL RETURN (%)(a).................. 5.52 3.35 3.24 4.68 7.08 8.48 9.19 2.41
RATIOS(%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average
daily net assets (b).............. .39 .36 .33 .35 .37 .37 .43 .44
Operating expenses, gross, to
average daily net assets (b)...... .39 .36 .38 .35 .38 .43 .51 .63
Net investment income to average
daily net assets (b).............. 5.37 3.33 3.20 4.40 6.59 8.13 8.97 7.30
Net assets, end of year ($000
omitted).......................... 2,752,895 3,020,796 2,502,483 4,263,057 1,645,428 650,598 442,614 193,777
Per share amount of fees waived ($
omitted).......................... -- -- .0005 -- .0000 .0005 .0004 .0010
</TABLE>
- ------------------------------
++ For the period May 2, 1988 (commencement of operations) to August 31, 1988.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended August 31, 1988 are annualized.
4
<PAGE>
THE SEVEN SEAS SERIES FUND
The Seven Seas Series Fund ("Investment Company") is an open-end management
investment company that is organized as a Massachusetts business trust. In
addition, each series of the Investment Company is diversified as defined in the
Investment Company Act of 1940, as amended ("1940 Act"). As a "series" company,
Investment Company is authorized to issue an unlimited number of shares
evidencing beneficial interests in different investment portfolios. Through this
Prospectus, Investment Company offers Class A shares in The Seven Seas Series
Money Market Fund. State Street Bank and Trust Company (the "Adviser" or "State
Street") serves as the investment adviser for the Fund.
MANNER OF OFFERING
DISTRIBUTION AND ELIGIBLE INVESTORS. Shares of the Fund are offered without
a sales commission by Russell Fund Distributors, Inc., Investment Company's
distributor, to US and foreign institutional and retail investors that invest
for their own account or in a fiduciary or agency capacity. The Fund will incur
distribution expenses under its Rule 12b-1 plan. See "General Management --
Distribution Services and Shareholder Servicing Arrangements."
MINIMUM AND SUBSEQUENT INVESTMENT. The Fund requires a minimum initial
investment of $1,000. A shareholder's investment in the Fund may be subject to
redemption at the Fund's discretion if the account balance is less than $500 as
a result of shareholder redemptions. The Fund reserves the right to reject any
purchase order.
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
The Fund has a fundamental investment objective, which may be changed only
with the approval of a majority of the Fund's shareholders as defined by the
1940 Act. There can be no assurance that the Fund will meet its investment
objective.
The Money Market Fund's fundamental investment objective is to maximize
current income, to the extent consistent with the preservation of capital and
liquidity and the maintenance of a stable $1.00 per share net asset value, by
investing in dollar denominated securities with remaining maturities of one year
or less.
The Fund attempts to meet its investment objective by investing in high
quality money market instruments. Such instruments include: (1) US Treasury
bills, notes and bonds; (2) other obligations issued or guaranteed as to
interest and principal by the US Government, its agencies, or instrumentalities;
(3) instruments of US and foreign banks, including certificates of deposit,
banker's acceptances and time deposits; these instruments may include Eurodollar
Certificates of Deposit ("ECDs"), Eurodollar Time Deposits ("ETDs") and Yankee
Certificates of Deposit ("YCDs"); (4) commercial paper of US and foreign
companies; (5) asset-backed securities; (6) corporate obligations; (7) variable
amount master demand notes; and (8) repurchase agreements.
The Fund will limit its portfolio investments to those United States
dollar-denominated instruments which at the time of acquisition the Adviser
determines present minimal credit risk and which qualify as "eligible"
securities under the Securities and Exchange Commission rules applicable to
money market mutual funds. In general, eligible securities include securities
that: (1) are rated in the
5
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highest category by least two nationally recognized statistical rating
organizations ("NRSRO"); (2) by one NRSRO, if only one rating services has rated
the security; or (3) if unrated, are of comparable quality, as determined by the
Portfolio's Adviser in accordance with procedures established by the Board of
Trustees. See the Appendix in the Statement of Additional Information for a
description of a NRSRO.
INVESTMENT POLICIES
The investment policies described below reflect the Fund's current
practices, are not fundamental and may be changed by the Board of Trustees of
Investment Company without shareholder approval. For more information on these
investment policies, please see the Statement of Additional Information. To the
extent consistent with the Fund's investment objective and restrictions, the
Fund may invest in the following instruments and may use the following
investment techniques:
US GOVERNMENT SECURITIES. US Government securities include US Treasury
bills, notes, and bonds and other obligations issued or guaranteed as to
interest and principal by the US Government and its agencies or
instrumentalities. Obligations issued or guaranteed as to interest and principal
by the US Government, its agencies or instrumentalities include securities that
are supported by the full faith and credit of the United States Treasury,
securities that are supported by the right of the issuer to borrow from the
United States Treasury, discretionary authority of the US Government agency or
instrumentality, and securities supported solely by the creditworthiness of the
issuer.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
banks and other financial institutions, such as broker-dealers. Under a
repurchase agreement, a Fund purchases securities from a financial institution
that agrees to repurchase the securities at the Fund's original purchase price
plus interest within a specified time (normally one business day). The Fund will
invest no more than 10% of its net assets (taken at current market value) in
repurchase agreements maturing in more than seven days. The Fund will limit
repurchase transactions to those member banks of the Federal Reserve System and
broker-dealers whose creditworthiness Adviser considers satisfactory. Should the
counterparty to a transaction fail financially, the Fund may encounter delay and
incur costs before being able to sell the securities. Further, the amount
realized upon the sale of the securities may be less than that necessary to
fully compensate the Fund.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreements under the circumstances described in "Investment Restrictions." Under
a reverse repurchase agreement, the Fund sells portfolio securities to a
financial institution in return for cash in an amount equal to a percentage of
the portfolio securities' market value and agrees to repurchase the securities
at a future date at a prescribed repurchase price equal to the amount of cash
originally received plus interest on such amount. The Fund retains the right to
receive interest and principal payments with respect to the securities while
they are in the possession of the financial institutions. Reverse repurchase
agreements involve the risk of default by the counterparty, which may adversely
affect the Fund's ability to reacquire the underlying securities.
FORWARD COMMITMENTS. The Fund may contract to purchase securities for a
fixed price at a future date beyond customary settlement time. When effecting
such transactions, cash or liquid high quality debt obligations held by the Fund
of a dollar amount sufficient to make payment for the portfolio securities to be
purchased will be segregated on the Fund's records at the trade date and
6
<PAGE>
maintained until the transaction is settled. The failure of the other party to
the transaction to complete the transaction may cause the Fund to miss an
advantageous price or yield. The Fund bears the risk of price fluctuations
during the period between the trade and settlement dates.
WHEN-ISSUED TRANSACTIONS. The Fund may purchase securities on a when-issued
basis. In these transactions, a Fund purchases securities with payment and
delivery scheduled for a future time. Until settlement, the Fund segregates cash
and marketable high quality debt securities equal in value to their when-issued
commitments. Between the trade and settlement dates, the Fund bears the risk of
any fluctuation in the value of the securities. These transactions involve the
additional risk that the other party may fail to complete the transaction and
cause the Fund to miss a price or yield considered advantageous. The Fund will
engage in when-issued transactions only for the purpose of acquiring portfolio
securities consistent with its investment objective and policies and not for
investment leverage. The Fund will not invest more than 25% of its net assets in
when-issued securities.
ILLIQUID SECURITIES. The Fund will invest no more than 10% of its net
assets in illiquid securities or securities that are not readily marketable,
including repurchase agreements and time deposits of more than seven days'
duration. The absence of a regular trading market for illiquid securities
imposes additional risks on investments in these securities. Illiquid securities
may be difficult to value and may often be disposed of only after considerable
expense and delay.
VARIABLE AMOUNT MASTER DEMAND NOTES. Variable amount master demand notes
are unsecured obligations that are redeemable upon demand and are typically
unrated. These instruments are issued pursuant to written agreements between
their issuers and holders. The agreements permit the holders to increase
(subject to an agreed maximum) and the holders and issuers to decrease the
principal amount of the notes, and specify that the rate of interest payable on
the principal fluctuates according to an agreed formula.
ASSET-BACKED SECURITIES. Asset-backed securities represent undivided
fractional interests in pools of instruments, such as consumer loans, and are
similar in structure to mortgage-related pass-through securities described
below. Payments of principal and interest are passed through to holders of the
securities and are typically supported by some form of credit enhancement, such
as a letter of credit, surety bond, limited guarantee by another entity or by
priority to certain of the borrower's other securities. The degree of credit
enhancement varies, generally applying only until exhausted and covering only a
fraction of the security's par value. If the credit enhancement of an
asset-backed security held by the Fund has been exhausted, and if any required
payments of principal and interest are not made with respect to the underlying
loans, the Fund may experience loss or delay in receiving payment and a decrease
in the value of the security. Further details are set forth in the Statement of
Additional Information under "Investment Restrictions and Policies -- Investment
Policies."
MORTGAGE-RELATED PASS-THROUGH SECURITIES. The Fund may invest in
mortgage-related securities, including Government National Mortgage Association
("GNMA") Certificates ("Ginnie Maes"), Federal Home Loan Mortgage Corporation
("FHLMC") Mortgage Participation Certificates ("Freddie Macs") and Federal
National Mortgage Association ("FNMA") Guaranteed Mortgage Pass-Through
Certificates ("Fannie Maes"). Mortgage pass-through certificates are
mortgage-backed securities representing undivided fractional interests in pools
of mortgage-backed loans. These loans are
7
<PAGE>
made by mortgage bankers, commercial banks, savings and loan associations and
other lenders. Ginnie Maes are guaranteed by the full faith and credit of the US
Government, but Freddie Macs and Fannie Maes are not.
ZERO COUPON SECURITIES. Zero coupon securities are notes, bonds and
debentures that: (1) do not pay current interest and are issued at a substantial
discount from par value; (2) have been stripped of their unmatured interest
coupons and receipts; or (3) pay no interest until a stated date one or more
years into the future. These securities also include certificates representing
interests in such stripped coupons and receipts.
VARIABLE AND FLOATING RATE SECURITIES. A floating rate security provides
for the automatic adjustment of its interest rate whenever a specified interest
rate changes. A variable rate security provides for the automatic establishment
of a new interest rate on set dates. Interest rates on these securities are
ordinarily tied to, and are a percentage of, a widely recognized interest rate,
such as the yield on 90-day US Treasury bills or the prime rate of a specified
bank. These rates may change as often as twice daily. Generally, changes in
interest rates will have a smaller effect on the market value of variable and
floating rate securities than on the market value of comparable fixed income
obligations. Thus, investing in variable and floating rate securities generally
allows less opportunity for capital appreciation and depreciation than investing
in comparable fixed income securities.
EURODOLLAR CERTIFICATES OF DEPOSIT, EURODOLLAR TIME DEPOSITS AND YANKEE
CERTIFICATES OF DEPOSIT. ECDs are US dollar denominated certificates of deposit
issued by foreign branches of domestic banks. ETDs are US dollar denominated
deposits in foreign branches of US banks and foreign banks. YCDs are US dollar
denominated certificates of deposit issued by US branches of foreign banks.
Different risks than those associated with the obligations of domestic banks
may exist for ECDs, ETDs and YCDs because the banks issuing these instruments,
or their domestic or foreign branches, are not necessarily subject to the same
regulatory requirements that apply to domestic banks, such as loan limitations,
examinations and reserve, accounting, auditing, recordkeeping and public
reporting requirements.
LENDING PORTFOLIO SECURITIES. The Fund may lend portfolio securities with a
value of up to 33 1/3% of its total assets. Such loans may be terminated at any
time. The Fund will receive cash or US Treasury bills, notes and bonds in an
amount equal to at least 100% of the current market value (on a daily
marked-to-market basis) of the loaned securities plus accrued interest. In a
loan transaction, as compensation for lending it securities, the Fund will
receive a portion of the dividends or interest accrued on the securities held as
collateral or, in the case of cash collateral, a portion of the income from the
investment of such cash. In addition, the Fund will receive the amount of all
dividends, interest and other distributions on the loaned securities. However,
the borrower has the right to vote the loaned securities. The Fund will call
loans to vote proxies if a material issue affecting the investment is to be
voted upon. Should the borrower of the securities fail financially, the Fund may
experience delays in recovering the securities or exercising its rights in the
collateral. Loans are made only to borrowers that are deemed by Adviser to be of
good financial standing. In a loan transaction, the Fund will also bear the risk
of any decline in value of securities acquired with cash collateral. The Fund
will minimize this risk by limiting the investment of cash collateral to high
quality instruments of short maturity.
8
<PAGE>
INVESTMENT RESTRICTIONS
The Fund has fundamental investment restrictions, which may be changed only
with the approval of a majority of the Fund's shareholders as defined in the
1940 Act. A more detailed discussion of the Fund's investment restrictions and
policies appears in the Statement of Additional Information. Unless otherwise
noted, the fundamental restrictions apply at the time an investment is made. The
Fund may not:
1. Invest 25% or more of the value of its total assets in securities of
companies primarily engaged in any one industry (other than the US
Government, its agencies or instrumentalities). Concentration may occur
as a result of changes in the market value of portfolio securities, but
may not result from investment. Domestic and foreign branches of US banks
and domestic branches of foreign banks are not considered a single
industry for purposes of this restriction.
2. Borrow money (including reverse repurchase agreements), except as a
temporary measure for extraordinary or emergency purposes or to
facilitate redemptions (not for leveraging or investment), provided that
borrowings do not exceed an amount equal to 33 1/3% of the current value
of the Fund's assets taken at market value, less liabilities other than
borrowings. If at any time the Fund's borrowings exceed this limitation
due to a decline in net assets, such borrowings will within three days be
reduced to the extent necessary to comply with this limitation. The Fund
will not purchase additional investments if borrowed funds (including
reverse repurchase agreements) exceed 5% of total assets.
3. Pledge, mortgage, or hypothecate its assets. However, the Fund may pledge
securities having a market value at the time of the pledge not exceeding
33 1/3% of the value of the Fund's total assets to secure permitted
borrowings.
PORTFOLIO MATURITY
The Fund must limit investments to securities with remaining maturities of
397 days or less (as determined in accordance with the applicable SEC
regulations) and must maintain a dollar-weighted average maturity of 90 days or
less. The Fund normally holds portfolio instruments to maturity but may dispose
of them prior to maturity if Adviser finds it advantageous.
DIVIDENDS AND DISTRIBUTIONS
The Board of Trustees intends to declare dividends on shares of the Fund
from net investment income daily and have them payable as of the last business
day of each month. Distributions will be made at least annually from net short-
and long-term capital gains, if any. In most instances, distributions will be
declared and paid in mid-October with additional distributions declared and paid
in December, if required, for the Fund to avoid imposition of a 4% federal
excise tax on undistributed capital gains. The Fund does not expect any material
long-term capital gains or losses.
Dividends declared in October, November or December and payable to
shareholders of record in such months will be deemed to have been paid by the
Fund and received by shareholders on December 31 of that year if the dividend is
paid prior to February 1 of the following year.
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Income dividends and capital gains distributions will be paid in additional
shares at their net asset value on the record date unless the shareholder has
elected to receive them in cash. Such election may be made by giving 10 days'
written notice to Transfer Agent.
TAXES
The Fund intends to qualify as a regulated investment company ("RIC") under
Subchapter M of the Internal Revenue Code, as amended (the "Code"). As a RIC,
the Fund will not be subject to federal income taxes to the extent it
distributes its net investment income and capital gain net income (capital gains
in excess of capital losses) to its shareholders. The Board intends to
distribute each year substantially all of the Fund's net investment income and
capital gain net income.
Dividends from net investment income and distributions of net short-term
capital gains are taxable to shareholders as ordinary income under federal
income tax laws whether paid in cash or in additional shares. Distributions from
net long-term capital gains are taxable as long-term capital gains regardless of
the length of time a shareholder has held such shares.
The Fund may purchase bonds at market discount (i.e., bonds with a purchase
price less than original issue price or adjusted issue price). If such bonds are
subsequently sold at a gain then a portion of that gain equal to the amount of
market discount, which should have been accrued through the sale date, will be
taxable to shareholders as ordinary income.
Dividends and distributions may also be subject to state or local taxes.
Depending on the state tax rules pertaining to a shareholder, a portion of the
dividends paid by the Fund attributable to direct obligations of the US Treasury
and certain agencies may be exempt from state and local taxes.
The sale of Fund shares by a shareholder is a taxable event and may result
in capital gain or loss. A capital gain or loss may be realized from an ordinary
redemption of shares or an exchange of shares between two mutual funds (or two
series of portfolios of a mutual fund). Any loss incurred on sale or exchange of
Fund shares held for one year or more will be treated as a long-term capital
loss to the extent of capital gain dividends received with respect to such
shares.
Shareholders will be notified after each calendar year of the amount of
income dividends and net capital gains distributed and the percentage of the
Fund's income attributable to US Treasury and agency obligations. The Fund is
required to withhold a legally determined portion of all taxable dividends,
distributions and redemption proceeds payable to any noncorporate shareholder
that does not provide the Fund with the shareholder's correct taxpayer
identification number or certification that the shareholder is not subject to
backup withholding.
The foregoing discussion is only a summary of certain federal income tax
issues generally affecting the Fund and its shareholders. Circumstances among
investors may vary and each investor is encouraged to discuss investment in the
Fund with the investor's tax adviser.
VALUATION OF FUND SHARES
NET ASSET VALUE PER SHARE. Net asset value per share for each class of
shares of the Fund is computed by adding the value of all securities and other
assets of the Fund, deducting accrued liabilities allocated to the class,
dividing by the number of shares outstanding in a class and rounding to the
nearest cent. The Fund determines net asset value twice each business day, as of
12:00 noon
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Eastern time and as of the close of the regular trading session of the New York
Stock Exchange (ordinarily 4 p.m. Eastern time). A business day is one on which
the New York Stock Exchange and Boston Federal Reserve are open for business.
VALUATION OF FUND SECURITIES. The Fund seeks to maintain a $1.00 per share
net asset value and, accordingly, uses the amortized cost valuation procedure to
value its portfolio instruments. The "amortized cost" valuation procedure
initially prices an instrument at its cost and thereafter assumes a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument.
PURCHASE OF FUND SHARES
MINIMUM INITIAL INVESTMENT AND ACCOUNT BALANCE. The Fund requires a minimum
initial investment of $1,000. The minimum account balance is $500. The Fund
reserves the right to reject any purchase order.
OFFERING DATES AND TIMES. Fund shares may be purchased on any business day
without a sales commission. All purchases must be made in US dollars. Purchase
orders in good form and payments for Fund shares must be received by the
Transfer Agent prior to 4:00 p.m. Eastern time to be effective on the date
received. The accompanying payment must be in federal funds or converted into
federal funds by the Transfer Agent before the purchase order can be accepted.
Purchase orders in good form are described below. Purchase orders which are
accepted: (1) prior to 12:00 noon Eastern time will earn the dividend declared
on the date of purchase; and (2) at or after 12:00 noon Eastern time will earn
the dividend determined on the next day.
ORDER AND PAYMENT PROCEDURES. There are several ways to invest in the Fund.
The Fund requires a purchase order in good form which consists of a completed
and signed Account Registration and Investment Instruction Form ("Application")
for each new account regardless of the investment method. For additional
information, copies of forms or questions, call Transfer Agent at (800)
647-7327, or write to Transfer Agent at: State Street Bank and Trust Company,
P.O. Box 8317, Boston, MA 02266-8317, Attention: The Seven Seas Series Money
Market Fund.
FEDERAL FUNDS WIRE. An investor may purchase shares by wiring federal funds
to State Street Bank and Trust Company as Transfer Agent by:
1. Telephoning State Street Bank and Trust Company at (800) 647-7327 and
providing: (1) the investor's account registration number, address and
social security or tax identification number; (2) the name of the Fund to
be invested in; (3) the amount being wired; (4) the name of the wiring
bank; and (5) the name and telephone number of the person at the wiring
bank to be contacted in connection with the order.
2. Instructing the wiring bank to wire federal funds to: State Street Bank
and Trust Company, Boston, MA (ABA #0110-00028), Attention: The Seven
Seas Series Money Market Fund, Mutual Funds Service Division (DDA
#9904-631-0). The wire instructions should also include the name the
account is registered in, the account number and the name of the Fund to
be invested in.
3. Completing the Application and forwarding it to Transfer Agent at the
above address.
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MAIL. To purchase shares by mail, send a check or other negotiable bank
draft payable to: State Street Bank and Trust Company, P.O. Box 8317, Boston, MA
02266-8317, Attention: The Seven Seas Series Money Market Fund. Certified checks
are not necessary; however, all checks are accepted subject to collection at
full face value in United States funds and must be drawn in United States
dollars on a United States bank. Normally, checks and drafts are converted to
federal funds within two business days following receipt of the check or draft.
Initial investments should be accompanied by a completed Application, and
subsequent investments are to be accompanied by the investor's account number.
CASH SWEEP PROGRAM. Money managers of master trust clients may participate
in a cash sweep program to automatically invest excess cash in the Fund. A money
manager must select the Fund, give authorization to complete the Fund's
Application and authorize the investment of excess cash into or the withdrawal
of required cash from the Fund on a daily basis. Where Adviser acts as money
manager, Adviser will receive an advisory fee from the client.
THIRD PARTY TRANSACTIONS. Investors purchasing Fund shares through a
program of services offered by a financial intermediary, such as a bank,
broker-dealer, investment adviser or others, may be required by such
intermediary to pay additional fees. Investors should contact such intermediary
for information concerning what additional fees, if any, may be charged.
IN-KIND EXCHANGE OF SECURITIES. The Transfer Agent may, at its discretion,
permit investors to purchase shares through the exchange of securities they
hold. Any securities exchanged must meet the investment objective, policies and
limitations of the Fund, must have a readily ascertainable market value, must be
liquid and must not be subject to restrictions on resale. The market value of
any securities exchanged, plus any cash, must be at least $1 million. Shares
purchased in exchange for securities generally may not be redeemed or exchanged
until the transfer has settled -- usually within 15 days following the purchase
by exchange.
The basis of the exchange will depend upon the relative net asset value of
the shares purchased and securities exchanged. Securities accepted by the Fund
will be valued in the same manner as the Fund values its assets. Any interest
earned on the securities following their delivery to the Transfer Agent and
prior to the exchange will be considered in valuing the securities. All
interest, dividends, subscription or other rights attached to the securities
become the property of the Fund, along with the securities.
EXCHANGE PRIVILEGE. Subject to the Fund's minimum investment requirement,
investors may exchange their Fund shares without charge for shares of any other
investment portfolio offered by Investment Company. Shares are exchanged on the
basis of relative net asset value per share. Exchanges may be made: (1) by
telephone if the registrations of the two accounts are identical; or (2) in
writing addressed to State Street Bank and Trust Company, P.O. Box 8317, Boston,
MA 02266-8317, Attention: The Seven Seas Series Money Market Fund. If shares of
the Fund were purchased by check, the shares must have been present in an
account for 10 days before an exchange is made. The exchange privilege will only
be available in states where the exchange may legally be made, and may be
modified or terminated by the Fund upon 60 days' notice to shareholders.
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REDEMPTION OF FUND SHARES
Fund shares may be redeemed on any business day at the net asset value next
determined after the receipt of a redemption request in proper form as described
below. Payment will be made as soon as possible (but will ordinarily not exceed
seven days) and will be mailed to the shareholder's address of record. Upon
request, redemption proceeds will be wire transferred to the shareholder's
account at a domestic commercial bank that is a member of the Federal Reserve
System. Although Investment Company does not currently charge a fee for this
service, Investment Company reserves the right to charge a fee for the cost of
wire-transferred redemptions of less than $1,000. Payment for redemption of
shares purchased by check may be withheld for up to 10 days after the date of
purchase to assure that such checks are honored. A dividend will be paid on
shares redeemed if the redemption request is received by State Street Bank and
Trust Company after 12:00 noon Eastern time. Redemption requests received before
12:00 noon Eastern time will not be entitled to that day's dividend.
EXPEDITED REDEMPTION. Shareholders may normally redeem Fund shares by
telephoning State Street Bank and Trust Company between 9:00 a.m. and 4:00 p.m.
Eastern time at (800) 647-7327, Attention: The Seven Seas Series Money Market
Fund. Shareholders using the expedited redemption method must complete the
appropriate section on the Application. The Fund and the Transfer Agent will
employ reasonable procedures to confirm that instructions communicated by
telephone are properly authorized. The Fund and the Transfer Agent will not be
liable for executing telephone instructions that are deemed to be authorized
after following reasonable procedures. These procedures include recording
telephonic instructions, mailing to the shareholder a written confirmation of
the transaction, performing a personal identity test with private information
not likely to be known by other individuals, and restricting mailing of
redemptions to the shareholder's address of record. During periods of drastic
economic or market changes, shareholders using this method may encounter delays.
In such event, shareholders should consider using the mail redemption procedure
described below.
MAIL. Redemption requests may be made in writing directly to State Street
Bank and Trust Company, P.O. Box 8317, Boston, MA 02266-8317, Attention: The
Seven Seas Series Money Market Fund. The redemption price will be the net asset
value next determined after receipt by State Street of all required documents in
good order. "Good order" means that the request must include the following:
1. A letter of instruction or a stock assignment stating the Fund or Funds
out of which the shares are to be redeemed and designating specifically
the dollar amount to be redeemed signed by all owners of the shares in
the exact names in which they appear on the account, together with a
guarantee of the signature of each owner by a bank, trust company or
member of a recognized stock exchange; and
2. Such other supporting legal documents, if required by applicable law or
Transfer Agent, in the case of estates, trusts, guardianships,
custodianships, corporations and pension and profit-sharing plans.
The Fund reserves the right to redeem the shares in any account with a
balance of less than $500 as a result of shareholder redemptions. Before shares
are redeemed to close an account, the shareholder will be notified in writing
and allowed 60 days to purchase additional shares to meet the minimum account
balance.
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The Fund may pay any portion of the redemption amount in excess of $250,000
by a distribution in kind of readily marketable securities from the portfolio of
the Fund in lieu of cash. Investors will incur brokerage charges on the sale of
these portfolio securities. The Fund reserves the right to suspend the right of
redemption or postpone the date of payment if emergency conditions, as specified
in the 1940 Act or determined by the Securities and Exchange Commission, should
exist.
GENERAL MANAGEMENT
The Board of Trustees supervises the management, activities and affairs of
the Fund and has approved contracts with various financial organizations to
provide, among other services, day-to-day management required by the Fund.
ADVISORY AGREEMENT. Investment Company employs State Street to furnish
investment services to the Fund. State Street is one of the largest providers of
securities processing and recordkeeping services for US mutual funds and pension
funds. State Street is a wholly owned subsidiary of State Street Boston
Corporation, a publicly held bank holding company. State Street, with over
$171.3 billion (US) under management as of September 30, 1995, provides complete
global investment management services from offices in the United States, London,
Sydney, Hong Kong, Tokyo, Toronto, Luxembourg, Melbourne, Montreal and Paris.
Adviser, subject to Board supervision, directs the investments of the Fund
in accordance with the Fund's investment objective, policies and restrictions.
For these services, the Fund pays Adviser a fee, calculated daily and paid
monthly, that on an annual basis is equal to .25% of the Fund's average daily
net assets.
The Glass-Steagall Act prohibits a depository state chartered bank such as
Adviser from engaging in the business of issuing, underwriting, selling or
distributing certain securities. The activities of Adviser in informing its
customers of the Fund, performing investment and redemption services and
providing custodian, transfer, shareholder servicing, dividend disbursing and
investment advisory services may raise issues under these provisions. Adviser
has been advised by its counsel that its activities in connection with the Fund
are consistent with its statutory and regulatory obligations. THE SHARES OFFERED
BY THIS PROSPECTUS ARE NOT ENDORSED OR GUARANTEED BY STATE STREET OR ITS
AFFILIATES, ARE NOT DEPOSITS OR OBLIGATIONS OF STATE STREET OR ITS AFFILIATES,
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
Changes in federal or state statutes and regulations relating to the
permissible activities of banks and their affiliates, as well as judicial or
administrative decisions or interpretations of such or future statutes and
regulations, could prevent Adviser from continuing to perform all or a part of
the above services for its customers and/or the Fund. If Adviser were prohibited
from serving the Fund in any of its present capacities, the Board of Trustees
would seek an alternative provider(s) of such services. In such event, changes
in the operation of the Fund may occur. It is not expected by Adviser that
existing shareholders would suffer any adverse financial consequences (if
another adviser with equivalent abilities is found) as a result of any of these
occurrences.
State Street may from time to time have discretionary authority over
accounts which invest in Investment Company shares. These accounts include
accounts maintained for securities lending clients and accounts which permit the
use of Investment Company portfolios as short-term cash sweep investments.
Shares purchased for all discretionary accounts are held of record by State
Street, who
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retains voting control of such shares. As of November 30, 1995, State Street
held of record 36% of the issued and outstanding shares of Investment Company in
connection with its discretionary accounts. Consequently, State Street may be
deemed to be a controlling person of Investment Company for purposes of the 1940
Act.
Under the Adviser's Code of Ethics, the Adviser's employees in Boston where
investment management operations are conducted are only permitted to engage in
personal securities transactions which do not involve securities which the
Adviser had recommended for purchase or sale, or purchased or sold, on behalf of
its clients. Such employees must report their personal securities transactions
quarterly and supply broker confirmations to the Adviser.
ADMINISTRATION AGREEMENT. Frank Russell Investment Management Company
("Administrator") serves as administrator of the Fund. Administrator currently
serves as investment manager and administrator to 22 mutual funds with assets of
$7.3 billion as of October 31, 1995, and acts as administrator to 17 mutual
funds, including the Fund, with assets of $7.2 billion as of October 31, 1995.
Pursuant to the Administration Agreement with Investment Company,
Administrator will: (1) supervise all aspects of the Fund's operations; (2)
provide the Fund with administrative and clerical services, including the
maintenance of certain of the Fund's books and records; (3) arrange the periodic
updating of the Fund's Prospectuses and any supplements thereto; (4) provide
proxy materials and reports to Fund shareholders and the Securities and Exchange
Commission; and (5) provide the Fund with adequate office space and all
necessary office equipment and services, including telephone service, heat,
utilities, stationery supplies and similar items. For these services, the Fund
and Investment Company's other domestic investment portfolios pay Administrator
a combined fee that on an annual basis is equal to the following percentages of
their average aggregate daily net assets: (1) $0 to and including $500 million
- -- .06%; (2) over $500 million to and including $1 billion -- .05%; and (3) over
$1 billion -- .03%. The percentage of the fee paid by a particular Fund is equal
to the percentage of average aggregate daily net assets that are attributable to
that Fund. Administrator will also receive reimbursement of expenses it incurs
in connection with establishing new investment portfolios. Further, the
administration fee paid by the Investment Company will be reduced by the sum of
certain distribution related expenses (up to a maximum of 15% of the asset-based
administration fee listed above).
Administrator also provides administrative services in connection with the
registration of shares of Investment Company with those states in which its
shares are offered or sold. Compensation for such services is on a "time spent"
basis. Investment Company will pay all registration, exemptive application,
renewal and related fees and reasonable out-of-pocket expenses.
Officers and employees of the Administrator and Distributor are permitted to
engage in personal securities transactions subject to restrictions and
procedures set forth in the Confidentiality Manual and Code of Ethics adopted by
the Investment Company, Administrator and Distributor. Such restrictions and
procedures include substantially all of the recommendations of the Advisory
Group of the Investment Company Institute and comply with Securities and
Exchange Commission rules and regulations.
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DISTRIBUTION SERVICES AND SHAREHOLDER SERVICING ARRANGEMENTS. Pursuant to
the Distribution Agreement with Investment Company, Russell Fund Distributors,
Inc. ("Distributor"), a wholly owned subsidiary of Administrator, serves as
distributor for all Fund shares.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 (the "Plan")
under the 1940 Act for the Class A shares. The purpose of the Plan is to provide
for the payment of certain Investment Company distribution and shareholder
servicing expenses. Under the Plan, Distributor will be reimbursed in an amount
up to .25% of the Fund's average annual net assets for distribution-related and
shareholder servicing expenses. Payments under the Plan will be made to
Distributor to finance activity that is intended to result in the sale and
retention of Fund shares including: (1) the costs of prospectuses, reports to
shareholders and sales literature; (2) advertising; and (3) expenses incurred in
connection with the promotion and sale of Fund shares, including Distributor's
overhead expenses for rent, office supplies, equipment, travel, communication,
compensation and benefits of sales personnel.
Under the Plan, the Fund may also enter into agreements ("Service
Agreements") with financial institutions, which may include Adviser ("Service
Organizations"), to provide shareholder servicing with respect to Fund shares
held by or for the customers of the Service Organizations. Under the Service
Agreements, the Service Organizations may provide various services for such
customers including: answering inquiries regarding the Fund; assisting customers
in changing dividend options, account designations and addresses; performing
subaccounting for such customers; establishing and maintaining customer accounts
and records; processing purchase and redemption transactions; providing periodic
statements showing customers' account balances and integrating such statements
with those of other transactions and balances in the customers' other accounts
serviced by the Service Organizations; arranging for bank wires transferring
customers' funds; and such other services as the customers may request in
connection with the Fund, to the extent permitted by applicable statute, rule or
regulation. Service Organizations may receive from the Fund, for shareholder
servicing, a monthly fee at a rate that shall not exceed .20% per annum of the
average daily net asset value of the Fund's shares owned by or for shareholders
with whom the Service Organization has a servicing relationship. Banks and other
financial service firms may be subject to various state laws, and may be
required to register as dealers pursuant to state law.
Investment Company has entered into Service Agreements with Adviser, State
Street Brokerage Services, Inc. ("SSBSI"), and Adviser's Metropolitan Division
of Commercial Banking ("Commercial Banking") to obtain the services described
above with respect to Fund shares held by or for customers. In return for these
services, Investment Company pays Adviser a fee in an amount that per annum is
equal to .025%, .175% and .175% of the average daily value of all Fund shares
held by or for customers of Adviser, SSBSI, and Commercial Banking,
respectively.
Payments to Distributor, as well as payments to Service Organizations from
the Fund, are not permitted by the Plan to exceed .25% per year of the Fund's
average net asset value per year. Any payments that are required to be made by
the Distribution Agreement and any Service Agreement but could not be made
because of the .25% limitation may be carried forward and paid in subsequent
years so long as the Plan is in effect. The Fund's liability for any such
expenses carried forward shall terminate at the end of two years following the
year in which the expenditure was incurred. Service Organizations will be
responsible for prompt transmission of purchase and redemption orders and may
charge fees for their services.
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FUND EXPENSES
The Fund will pay all of its expenses other than those expressly assumed by
Adviser and Administrator. The Fund's principal expenses are the annual advisory
fee payable to Adviser and distribution and shareholder servicing expenses.
Other expenses include: (1) amortization of deferred organizational costs; (2)
taxes, if any; (3) expenses for legal, auditing and financial accounting
services; (4) expense of preparing (including typesetting, printing and mailing)
reports, prospectuses and notices to existing shareholders; (5) administrative
fees; (6) custodian fees; (7) expense of issuing and redeeming Fund shares; (8)
the cost of registering Fund shares under federal and state laws; (9)
shareholder meetings and related proxy solicitation expenses; (10) the fees,
travel expenses and other out-of-pocket expenses of Trustees who are not
affiliated with Adviser or any of its affiliates; (11) insurance, interest,
brokerage and litigation costs; (12) extraordinary expenses as may arise,
including expenses incurred in connection with litigation proceedings and claims
and the legal obligations of Investment Company to indemnify its Trustees,
officers, employees, shareholders, distributors and agents; and (13) other
expenses properly payable by the Fund. Where any of these other expenses are
attributable to a particular class of shares, they will be borne by the
beneficial owners of such shares.
PERFORMANCE CALCULATIONS
From time to time the Fund may advertise the yield and effective yield of
its Class A shares. The yield of each Fund refers to the income generated by an
investment in Class A shares of the Fund over a seven-day period (which period
will be stated in the advertisement). This income is then annualized. That is,
the amount of income generated by the investment during that week is assumed to
be generated each week over a 52-week period and is shown as a percentage of the
investment. The effective yield is calculated similarly but, when annualized,
the income earned by an investment in the Fund is assumed to be reinvested. The
effective yield will be slightly higher than the yield because of the
compounding effect of this assumed reinvestment.
From time to time, the Fund may also report yield and effective yield as
calculated over a one-month period (which period will also be stated in the
advertisement). These one-month periods will be annualized using the same method
as described above for yields calculated on the basis of seven-day periods. From
time to time, yields calculated on a monthly basis may also be linked to provide
yield figures for periods greater than one month.
From time to time the Fund may advertise the total return of its Class A
Shares. The total return of the Fund is the average annual compounded rate of
return from a hypothetical investment in the Fund's Class A Shares over one-,
five- and ten-year periods or for the life of the Fund (as stated in the
advertisement), assuming the reinvestment of all dividends and capital gains
distributions.
Comparative performance information may be used from time to time in
advertising or marketing Fund shares, including data from Lipper Analytical
Services, Inc., Donoghue's Money Fund Report, the Bank Rate Monitor, Wall Street
Journal Score Card, Lehman Brothers Index or other industry publications,
business periodicals, rating services and market indices. The Fund may also
advertise nonstandardized performance information which is for periods in
addition to those required to be presented.
Quoted yields, returns and other performance figures are based on historical
earnings and are not indications of future performance.
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ADDITIONAL INFORMATION
CUSTODIAN, TRANSFER AGENT AND INDEPENDENT ACCOUNTANTS. State Street holds
all portfolio securities and cash assets of the Fund, provides portfolio
recordkeeping services and serves as the Fund's transfer agent ("Transfer
Agent") and custodian ("Custodian"). State Street is authorized to deposit
securities in securities depositories or to use the services of subcustodians.
State Street has no responsibility for the supervision and management of the
Fund except as investment adviser. Coopers & Lybrand L.L.P., Boston,
Massachusetts, is Investment Company's independent accountants.
REPORTS TO SHAREHOLDERS AND SHAREHOLDER INQUIRIES. Shareholders will
receive unaudited semiannual financial statements and annual financial
statements audited by Investment Company's independent accountants. Shareholder
inquiries regarding the Prospectus and financial statements may be made by
calling Distributor at (617) 654-6089. Inquiries regarding shareholder balances
may be made by calling Transfer Agent at (800) 647-7327.
ORGANIZATION, CAPITALIZATION AND VOTING. Investment Company was organized
as a Massachusetts business trust on October 3, 1987, and operates under a First
Amended and Restated Master Trust Agreement dated October 13, 1993, as amended.
Investment Company issues shares divisible into an unlimited number of series
(or funds), each of which is a separate trust under Massachusetts law. The Money
Market Fund is one such series. Shares of a fund are entitled to such relative
rights and preferences and dividends and distributions earned on assets of the
Fund as may be declared by the Board of Trustees. Each class of shares of the
Fund has identical rights and privileges as all other shares of the Fund and
participates equally in the dividends and distributions of the Fund. Fund shares
are fully paid and nonassessable by Investment Company and have no preemptive
rights. Investment Company is authorized to subdivide each series into two or
more classes of shares. Currently, shares of the Money Market Fund are divided
into Class A, Class B and Class C. Each class of shares of the Fund is entitled
to the same rights and privileges as all other classes of that Fund, provided
however, that each class bears the expenses related to its distribution and
shareholder servicing arrangements, as well as other expenses attributable to
the class and unrelated to managing the Fund's portfolio securities. As
described above, Investment Company has adopted a plan of distribution under
rule 12b-1 for Class A shares. Similar plans have been adopted for Class B and
Class C shares. However, total payments under those plans are limited to .35%
and .60% annually of the average net asset value of the Class B and Class C
shares, respectively of the Fund. As a result of these plan and other class
expenses, the yield on Class B and Class C shares will be approximately .25% and
.50% lower, respectively, than the yield on Class A shares.
Each Fund share has one vote. There are no cumulative voting rights. There
is no annual meeting of shareholders, but special meetings may be held. On any
matter that affects only a particular investment fund, only shareholders of that
fund may vote unless otherwise required by the 1940 Act or the Master Trust
Agreement. Further, any matter that affects only the holders of a particular
class of shares may be voted on only by such shareholders. Each class of shares
votes separately with respect to any Rule 12b-1 plan applicable to such class.
The Trustees hold office for the life of the Trust. A Trustee may resign or
retire, and may be removed at any time by a vote of two-thirds of Investment
Company shares or by a vote of a majority of the Trustees. The Trustees shall
promptly call and give notice of a meeting of shareholders for the purpose of
voting upon removal of any Trustee when
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requested to do so in writing by holders of not less than 10% of the shares then
outstanding. A vacancy on the Board of Trustees may be filled by the vote of a
majority of the remaining Trustees, provided that immediately thereafter at
least two-thirds of the Trustees have been elected by shareholders.
Investment Company does not issue share certificates for the Fund. Transfer
Agent sends monthly statements to shareholders of the Fund concurrent with any
transaction activity, confirming all investments in or redemptions from their
accounts. Each statement also sets forth the balance of shares held in the
account.
19
<PAGE>
THE SEVEN SEAS SERIES FUND
TWO INTERNATIONAL PLACE, 35TH FLOOR
BOSTON, MASSACHUSETTS 02110
INVESTMENT ADVISER, CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
DISTRIBUTOR
Russell Fund Distributors, Inc.
Two International Place, 35th Floor
Boston, Massachusetts 02110
ADMINISTRATOR
Frank Russell Investment Management Company
909 A Street
Tacoma, Washington 98402
LEGAL COUNSEL
Goodwin, Procter & Hoar
Exchange Place
Boston, Massachusetts 02109
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
<PAGE>
THE SEVEN SEAS SERIES FUND
The Seven Seas Series Money Market Fund
The Seven Seas Series US Government Money Market Fund
The Seven Seas Series Tax Free Money Market Fund
The Seven Seas Series S&P 500 Index Fund
The Seven Seas Series Small Cap Fund
The Seven Seas Series Matrix Equity Fund
The Seven Seas Series Yield Plus Fund
The Seven Seas Series Growth and Income Fund
The Seven Seas Series Intermediate Fund
The Seven Seas Series Active International Fund
The Seven Seas Series Emerging Markets Fund
<PAGE>
Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
THE SEVEN SEAS SERIES FUND
TWO INTERNATIONAL PLACE, 35TH FLOOR
BOSTON, MASSACHUSETTS 02110
(617) 654-6089
US GOVERNMENT MONEY MARKET FUND
CLASS A SHARES
The Seven Seas Series Fund is a registered, open-end investment company with
multiple portfolios, each of which is a mutual fund. This Prospectus describes
and offers shares of beneficial interest in one of the mutual funds, The Seven
Seas Series US Government Money Market Fund (the "Government Money Market Fund"
or "Fund"). The Government Money Market Fund seeks to maximize current income,
to the extent consistent with the preservation of capital and liquidity and the
maintenance of a stable $1.00 per share net asset value, by investing in
obligations of the US Government or its instrumentalities with remaining
maturities of one year or less. The Fund's shares are offered without sales
commissions. However, the Fund pays certain distribution expenses under its Rule
12b-1 plan.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
INVESTMENTS IN THE FUND ARE NEITHER INSURED NOR GUARANTEED BY THE US
GOVERNMENT. THERE IS NO ASSURANCE THAT THE GOVERNMENT MONEY MARKET FUND WILL
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
SHARES IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, STATE STREET BANK AND TRUST COMPANY, AND SHARES ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER AGENCY, AND INVOLVE INVESTMENT RISKS INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. Please read and retain this
document for future reference. Additional information about the Fund has been
filed with the Securities and Exchange Commission in a Statement of Additional
Information dated December 29, 1995. The Statement of Additional Information is
incorporated herein by reference and is available without charge from
Distributor at its address noted below or by calling (617) 654-6089.
<TABLE>
<CAPTION>
INVESTMENT ADVISER, CUSTODIAN
AND TRANSFER AGENT: DISTRIBUTOR: ADMINISTRATOR:
<S> <C> <C>
State Street Bank and Trust Russell Fund Distributors, Frank Russell Investment
Company Inc. Management Company
225 Franklin Street Two International Place 909 A Street
Boston, Massachusetts 02110 35th Floor Tacoma, Washington 98402
(617) 654-4721 Boston, Massachusetts 02110 (206) 627-7001
(617) 654-6089
</TABLE>
PROSPECTUS DATED DECEMBER 29, 1995
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Fund Operating Expenses.................................................................................... 3
Financial Highlights....................................................................................... 4
The Seven Seas Series Fund................................................................................. 5
Manner of Offering......................................................................................... 5
Investment Objective, Policies and Restrictions............................................................ 5
Portfolio Maturity......................................................................................... 8
Dividends and Distributions................................................................................ 9
Taxes...................................................................................................... 9
Valuation of Fund Shares................................................................................... 10
Purchase of Fund Shares.................................................................................... 10
Redemption of Fund Shares.................................................................................. 12
General Management......................................................................................... 13
Fund Expenses.............................................................................................. 16
Performance Calculations................................................................................... 16
Additional Information..................................................................................... 17
</TABLE>
2
<PAGE>
FUND OPERATING EXPENSES
THE SEVEN SEAS SERIES US GOVERNMENT MONEY MARKET FUND
CLASS A SHARES
The purpose of the following table is to assist the investor in
understanding the various costs and expenses that an investor in Class A shares
of the US Government Money Market Fund will incur directly or indirectly. THE
EXAMPLES PROVIDED IN THE TABLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES. Actual expenses may be greater or less than those shown. For
additional information, see "General Management."
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
- ------------------------------
Sales Load Imposed on Purchases.......................................................................................... None
Sales Load Imposed on Reinvested Dividends............................................................................... None
Deferred Sales Load...................................................................................................... None
Redemption Fees.......................................................................................................... None
Exchange Fee............................................................................................................. None
ANNUAL FUND OPERATING EXPENSES:
- ------------------------------
(as a percentage of average daily net assets)
Advisory Fees............................................................................................................ .25%
12b-1 Fees (1)........................................................................................................... .05
Other Expenses........................................................................................................... .09
----
Total Operating Expenses (2)............................................................................................. .39%
----
----
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLES:
You would pay the following expenses on a $1,000 investment, assuming: (i) 5% annual
return; and (ii) redemption at the end of each time period:.............................. $ 4 $ 13 $ 22 $ 50
------ ------- ------- --------
------ ------- ------- --------
</TABLE>
The shares of the Fund are divided into three classes: Class A, Class B and
Class C. Class A shares are designed for institutional investors. Class B shares
are offered through financial institutions that provide certain account
administration services. Class C shares are offered through certain financial
institutions that provide certain account administration and shareholder liaison
services. Each class of shares of the Fund is entitled to the same rights and
privileges as all other classes of shares of the Fund, provided however, that
each class bears the expenses related to its distribution and shareholder
servicing arrangements and certain other expenses attributable to the class.
Annual distribution and shareholder servicing expenses for Class A, Class B and
Class C shares are equal to approximately .05%, .30% and .55%, respectively, of
the average daily net asset value of the shares of the class. Total operating
expenses for Class A, Class B and Class C shares are equal to approximately
.39%, .68% and .93%, respectively, of the average daily net asset value of the
shares of the class.
- ------------------------
(1) Rule 12b-1 fees include expenses paid for shareholder servicing activities.
(2) Investors purchasing Fund shares through a financial intermediary, such as a
bank or an investment adviser, may also be required to pay additional fees
for services provided by the intermediary. Such investors should contact the
intermediary for information concerning what additional fees, if any, will
be charged.
3
<PAGE>
FINANCIAL HIGHLIGHTS
THE SEVEN SEAS SERIES US GOVERNMENT MONEY MARKET FUND
The following table contains important financial information relating to the
Government Money Market Fund and has been audited by Coopers & Lybrand L.L.P.,
the Fund's independent accountants. The table includes selected data for a Class
A share outstanding throughout each fiscal year or period ended August 31, and
other performance information derived from the financial statements. The
Investment Company is authorized to issue Class B and Class C shares of the
Government Money Market Fund although shares have not been offered on these
classes as of the date of this Prospectus. The table appears in the Fund's
Annual Report and should be read in conjunction with the Fund's financial
statements and related notes, which are incorporated by reference in the
Statement of Additional Information and which appear, along with the report of
Coopers & Lybrand L.L.P., in the Fund's Annual Report to Shareholders. More
detailed information concerning the Fund's performance, including a complete
portfolio listing and audited financial statements, is available in the Fund's
Annual Report, which may be obtained without charge by writing or calling the
Distributor.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991++
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR.............................. $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
----------- ----------- ----------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income......................... .0528 .0324 .0304 .0441 .0302
----------- ----------- ----------- ----------- -----------
LESS DISTRIBUTIONS:
Net investment income......................... (.0528) (.0324) (.0304) (.0441) (.0302)
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF YEAR.................... $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
TOTAL RETURN (%)(a)............................. 5.38 3.30 3.08 4.49 3.06
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average daily net
assets (b)................................... .42 .38 .39 .41 .23
Operating expenses, gross to average daily net
assets (b)................................... .42 .39 .46 .42 .43
Net investment income to average daily net
assets (b)................................... 5.37 3.27 3.04 4.26 5.94
Net assets, end of year ($000 omitted)........ 490,138 251,165 137,136 156,707 94,646
Per share amount of fees waived
($ omitted).................................. -- -- -- .0001 .0011
Per share amount of fees reimbursed by Adviser
($ omitted).................................. -- .0001 .0007 -- --
</TABLE>
- ------------------------
++ For the period March 1, 1991 (commencement of operations) to August 31,
1991.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended August 31, 1991 are annualized.
4
<PAGE>
THE SEVEN SEAS SERIES FUND
The Seven Seas Series Fund ("Investment Company") is an open-end management
investment company that is organized as a Massachusetts business trust. In
addition, each series of the Investment Company is diversified as defined in the
Investment Company Act of 1940, as amended ("1940 Act"). As a "series" company,
Investment Company is authorized to issue an unlimited number of shares
evidencing beneficial interests in different investment portfolios. Through this
Prospectus, Investment Company offers Class A shares in The Seven Seas Series US
Government Money Market Fund. State Street Bank and Trust Company (the "Adviser"
or "State Street") serves as the investment adviser for the Fund.
MANNER OF OFFERING
DISTRIBUTION AND ELIGIBLE INVESTORS. Shares of the Fund are offered without
a sales commission by Russell Fund Distributors, Inc., Investment Company's
distributor, to US and foreign institutional and retail investors that invest
for their own account or in a fiduciary or agency capacity. The Fund will incur
distribution expenses under its Rule 12b-1 plan. See "General Management --
Distribution Services and Shareholder Servicing Arrangements."
MINIMUM AND SUBSEQUENT INVESTMENT. The Fund requires a minimum initial
investment of $1,000. A shareholder's investment in the Fund may be subject to
redemption at the Fund's discretion if the account balance is less than $500 as
a result of shareholder redemptions. The Fund reserves the right to reject any
purchase order.
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
The Fund has a fundamental investment objective, which may be changed only
with the approval of a majority of the Fund's shareholders as defined by the
1940 Act. There can be no assurance that the Fund will meet its investment
objective.
The Government Money Market Fund's fundamental investment objective is to
maximize current income to the extent consistent with the preservation of
capital and liquidity, and the maintenance of a stable $1.00 per share net asset
value, by investing in obligations of the US Government or its agencies or
instrumentalities with remaining maturities of one year or less.
The Fund attempts to meet its investment objective by investing in
obligations issued or guaranteed as to principal and interest by the US
Government or its agencies or instrumentalities or in repurchase agreements
secured by such instruments. (See "Investment Policies -- US Government
Securities.") Under normal market conditions, the Government Money Market Fund
will be 100% invested in such securities.
INVESTMENT POLICIES
The investment policies described below reflect the Fund's current
practices, are not fundamental and may be changed by the Board of Trustees of
Investment Company without shareholder approval. For more information on these
investment policies, please see the Statement of Additional
5
<PAGE>
Information. To the extent consistent with the Fund's fundamental investment
objective and restrictions, the Fund may invest in the following instruments and
may use the following investment techniques:
US GOVERNMENT SECURITIES. US Government securities include US Treasury
bills, notes, and bonds and other obligations issued or guaranteed as to
interest and principal by the US Government and its agencies or
instrumentalities. Obligations issued or guaranteed as to interest and principal
by the US Government, its agencies or instrumentalities include securities that
are supported by the full faith and credit of the United States Treasury,
securities that are supported by the right of the issuer to borrow from the
United States Treasury, discretionary authority of the US Government agency or
instrumentality, and securities supported solely by the creditworthiness of the
issuer.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
banks and other financial institutions, such as broker-dealers. Under a
repurchase agreement, a Fund purchases securities from a financial institution
that agrees to repurchase the securities at the Fund's original purchase price
plus interest within a specified time (normally one business day). The Fund will
invest no more than 10% of its net assets (taken at current market value) in
repurchase agreements maturing in more than seven days. The Fund will limit
repurchase transactions to those member banks of the Federal Reserve System and
broker-dealers whose creditworthiness Adviser considers satisfactory. Should the
counterparty to a transaction fail financially, the Fund may encounter delay and
incur costs before being able to sell the securities. Further, the amount
realized upon the sale of the securities may be less than that necessary to
fully compensate the Fund.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreements under the circumstances described in "Investment Restrictions." Under
a reverse repurchase agreement, the Fund sells portfolio securities to a
financial institution in return for cash in an amount equal to a percentage of
the portfolio securities' market value and agrees to repurchase the securities
at a future date at a prescribed repurchase price equal to the amount of cash
originally received plus interest on such amount. The Fund retains the right to
receive interest and principal payments with respect to the securities while
they are in the possession of the financial institutions. Reverse repurchase
agreements involve the risk of default by the counterparty, which may adversely
affect the Fund's ability to reacquire the underlying securities.
FORWARD COMMITMENTS. The Fund may contract to purchase securities for a
fixed price at a future date beyond customary settlement time. When effecting
such transactions, cash or liquid high quality debt obligations held by the Fund
of a dollar amount sufficient to make payment for the portfolio securities to be
purchased will be segregated on the Fund's records at the trade date and
maintained until the transaction is settled. The failure of the other party to
the transaction to complete the transaction may cause the Fund to miss an
advantageous price or yield. The Fund bears the risk of price fluctuations
during the period between the trade and settlement dates.
WHEN-ISSUED TRANSACTIONS. The Fund may purchase securities on a when-issued
basis. In these transactions, a Fund purchases securities with payment and
delivery scheduled for a future time. Until settlement, the Fund segregates cash
and marketable high quality debt securities equal in value to their when-issued
commitments. Between the trade and settlement dates, the Fund bears the risk of
any fluctuation in the value of the securities. These transactions involve the
additional risk that the other party may fail to complete the transaction and
cause the Fund to miss a price or yield considered
6
<PAGE>
advantageous. The Fund will engage in when-issued transactions only for the
purpose of acquiring portfolio securities consistent with its investment
objective and policies and not for investment leverage. The Fund will not invest
more than 25% of its net assets in when-issued securities.
ILLIQUID SECURITIES. The Fund will invest no more than 10% of its net
assets in illiquid securities or securities that are not readily marketable,
including repurchase agreements and time deposits of more than seven days'
duration. The absence of a regular trading market for illiquid securities
imposes additional risks on investments in these securities. Illiquid securities
may be difficult to value and may often be disposed of only after considerable
expense and delay.
VARIABLE AMOUNT MASTER DEMAND NOTES. Variable amount master demand notes
are unsecured obligations that are redeemable upon demand and are typically
unrated. These instruments are issued pursuant to written agreements between
their issuers and holders. The agreements permit the holders to increase
(subject to an agreed maximum) and the holders and issuers to decrease the
principal amount of the notes, and specify that the rate of interest payable on
the principal fluctuates according to an agreed formula.
MORTGAGE-RELATED PASS-THROUGH SECURITIES. The Fund may invest in
mortgage-related securities, including Government National Mortgage Association
("GNMA") Certificates ("Ginnie Maes"), Federal Home Loan Mortgage Corporation
("FHLMC") Mortgage Participation Certificates ("Freddie Macs") and Federal
National Mortgage Association ("FNMA") Guaranteed Mortgage Pass-Through
Certificates ("Fannie Maes"). Mortgage pass-through certificates are
mortgage-backed securities representing undivided fractional interests in pools
of mortgage-backed loans. These loans are made by mortgage bankers, commercial
banks, savings and loan associations and other lenders. Ginnie Maes are
guaranteed by the full faith and credit of the US Government, but Freddie Macs
and Fannie Maes are not.
ZERO COUPON SECURITIES. Zero coupon securities are notes, bonds and
debentures that: (1) do not pay current interest and are issued at a substantial
discount from par value; (2) have been stripped of their unmatured interest
coupons and receipts; or (3) pay no interest until a stated date one or more
years into the future. These securities also include certificates representing
interests in such stripped coupons and receipts.
VARIABLE AND FLOATING RATE SECURITIES. A floating rate security provides
for the automatic adjustment of its interest rate whenever a specified interest
rate changes. A variable rate security provides for the automatic establishment
of a new interest rate on set dates. Interest rates on these securities are
ordinarily tied to, and are a percentage of, a widely recognized interest rate,
such as the yield on 90-day US Treasury bills or the prime rate of a specified
bank. These rates may change as often as twice daily. Generally, changes in
interest rates will have a smaller effect on the market value of variable and
floating rate securities than on the market value of comparable fixed income
obligations. Thus, investing in variable and floating rate securities generally
allows less opportunity for capital appreciation and depreciation than investing
in comparable fixed income securities.
LENDING PORTFOLIO SECURITIES. The Fund may lend portfolio securities with a
value of up to 33 1/3% of its total assets. Such loans may be terminated at any
time. The Fund will receive cash or US Treasury bills, notes and bonds in an
amount equal to at least 100% of the current market value (on a daily
marked-to-market basis) of the loaned securities plus accrued interest. In a
loan transaction, as compensation for lending it securities, the Fund will
receive a portion of the dividends or interest
7
<PAGE>
accrued on the securities held as collateral or, in the case of cash collateral,
a portion of the income from the investment of such cash. In addition, the Fund
will receive the amount of all dividends, interest and other distributions on
the loaned securities. However, the borrower has the right to vote the loaned
securities. The Fund will call loans to vote proxies if a material issue
affecting the investment is to be voted upon. Should the borrower of the
securities fail financially, the Fund may experience delays in recovering the
securities or exercising its rights in the collateral. Loans are made only to
borrowers that are deemed by Adviser to be of good financial standing. In a loan
transaction, the Fund will also bear the risk of any decline in value of
securities acquired with cash collateral. The Fund will minimize this risk by
limiting the investment of cash collateral to high quality instruments of short
maturity.
INVESTMENT RESTRICTIONS
The Fund has fundamental investment restrictions, which may be changed only
with the approval of a majority of the Fund's shareholders as defined in the
1940 Act. A more detailed discussion of the Fund's investment restrictions and
policies appears in the Statement of Additional Information. Unless otherwise
noted, the fundamental restrictions apply at the time an investment is made. The
Fund may not:
1. Invest 25% or more of the value of its total assets in securities of
companies primarily engaged in any one industry (other than the US
Government, its agencies or instrumentalities). Concentration may occur
as a result of changes in the market value of portfolio securities, but
may not result from investment. Domestic and foreign branches of US banks
and domestic branches of foreign banks are not considered a single
industry for purposes of this restriction.
2. Borrow money (including reverse repurchase agreements), except as a
temporary measure for extraordinary or emergency purposes or to
facilitate redemptions (not for leveraging or investment), provided that
borrowings do not exceed an amount equal to 33 1/3% of the current value
of the Fund's assets taken at market value, less liabilities other than
borrowings. If at any time the Fund's borrowings exceed this limitation
due to a decline in net assets, such borrowings will within three days be
reduced to the extent necessary to comply with this limitation. A Fund
will not purchase additional investments if borrowed funds (including
reverse repurchase agreements) exceed 5% of total assets.
3. Pledge, mortgage, or hypothecate its assets. However, the Fund may pledge
securities having a market value at the time of the pledge not exceeding
33 1/3% of the value of the Fund's total assets to secure permitted
borrowings.
PORTFOLIO MATURITY
The Fund must limit investments to securities with remaining maturities of
397 days or less (as determined in accordance with applicable SEC regulations)
and must maintain a dollar-weighted average maturity of 90 days or less. The
Fund normally holds portfolio instruments to maturity but may dispose of them
prior to maturity if Adviser finds it advantageous.
8
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
The Board of Trustees intends to declare dividends on shares of the Fund
from net investment income daily and have them payable as of the last business
day of each month. Distributions will be made at least annually from net short-
and long-term capital gains, if any. In most instances, distributions will be
declared and paid in mid-October with additional distributions declared and paid
in December, if required, for the Fund to avoid imposition of a 4% federal
excise tax on undistributed capital gains. The Fund does not expect any material
long-term capital gains or losses.
Dividends declared in October, November or December and payable to
shareholders of record in such months will be deemed to have been paid by the
Fund and received by shareholders on December 31 of that year if the dividend is
paid prior to February 1 of the following year.
Income dividends and capital gains distributions will be paid in additional
shares at their net asset value on the record date unless the shareholder has
elected to receive them in cash. Such election may be made by giving 10 days'
written notice to Transfer Agent.
TAXES
The Fund intends to qualify as a regulated investment company ("RIC") under
Subchapter M of the Internal Revenue Code, as amended (the "Code"). As a RIC,
the Fund will not be subject to federal income taxes to the extent it
distributes its net investment income and capital gain net income (capital gains
in excess of capital losses) to its shareholders. The Board intends to
distribute each year substantially all of the Fund's net investment income and
capital gain net income.
Dividends from net investment income and distributions of net short-term
capital gains are taxable to shareholders as ordinary income under federal
income tax laws whether paid in cash or in additional shares. Distributions from
net long-term capital gains are taxable as long-term capital gains regardless of
the length of time a shareholder has held such shares.
The Fund may purchase bonds at market discount (i.e., bonds with a purchase
price less than original issue price or adjusted issue price). If such bonds are
subsequently sold at a gain then a portion of that gain equal to the amount of
market discount, which should have been accrued through the sale date, will be
taxable to shareholders as ordinary income.
Dividends and distributions may also be subject to state or local taxes.
Depending on the state tax rules pertaining to a shareholder, a portion of the
dividends paid by the Fund attributable to direct obligations of the US Treasury
and certain agencies may be exempt from state and local taxes.
The sale of Fund shares by a shareholder is a taxable event and may result
in capital gain or loss. A capital gain or loss may be realized from an ordinary
redemption of shares or an exchange of shares between two mutual funds (or two
series of portfolios of a mutual fund). Any loss incurred on sale or exchange of
Fund shares held for one year or more will be treated as a long-term capital
loss to the extent of capital gain dividends received with respect to such
shares.
Shareholders will be notified after each calendar year of the amount of
income dividends and net capital gains distributed and the percentage of the
Fund's income attributable to US Treasury and agency obligations. The Fund is
required to withhold a legally determined portion of all taxable
9
<PAGE>
dividends, distributions and redemption proceeds payable to any noncorporate
shareholder that does not provide the Fund with the shareholder's correct
taxpayer identification number or certification that the shareholder is not
subject to backup withholding.
The foregoing discussion is only a summary of certain federal income tax
issues generally affecting the Fund and its shareholders. Circumstances among
investors may vary and each investor is encouraged to discuss investment in the
Fund with the investor's tax adviser.
VALUATION OF FUND SHARES
NET ASSET VALUE PER SHARE. Net asset value per share for each class of
shares of the Fund is computed by adding the value of all securities and other
assets of the Fund, deducting accrued liabilities allocated to the class,
dividing by the number of shares outstanding in a class and rounding to the
nearest cent. The Fund determines net asset value twice each business day, as of
12:00 noon Eastern time and as of the close of the regular trading session of
the New York Stock Exchange (ordinarily 4:00 p.m. Eastern time). A business day
is one on which the New York Stock Exchange and Boston Federal Reserve are open
for business.
VALUATION OF FUND SECURITIES. The Fund seeks to maintain a $1.00 per share
net asset value and, accordingly, uses the amortized cost valuation procedure to
value its portfolio instruments. The "amortized cost" valuation procedure
initially prices an instrument at its cost and thereafter assumes a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument.
PURCHASE OF FUND SHARES
MINIMUM INITIAL INVESTMENT AND ACCOUNT BALANCE. The Fund requires a minimum
initial investment of $1,000. The minimum account balance is $500. The Fund
reserves the right to reject any purchase order.
OFFERING DATES AND TIMES. Fund shares may be purchased on any business day
without a sales commission. All purchases must be made in US dollars. Purchase
orders in good form and payments for Fund shares must be received by the
Transfer Agent prior to 4:00 p.m. Eastern time to be effective on the date
received. The accompanying payment must be in federal funds or converted into
federal funds by the Transfer Agent before the purchase order can be accepted.
Purchase orders in good form are described below. Purchase orders which are
accepted: (1) prior to 12:00 noon Eastern time will earn the dividend declared
on the date of purchase; and (2) at or after 12:00 noon Eastern time will earn
the dividend determined on the next day.
ORDER AND PAYMENT PROCEDURES. There are several ways to invest in the Fund.
The Fund requires a purchase order in good form which consists of a completed
and signed Account Registration and Investment Instruction Form ("Application")
for each new account regardless of the investment method. For additional
information, copies of forms or questions, call Transfer Agent at (800)
647-7327, or write to Transfer Agent at: State Street Bank and Trust Company,
P.O. Box 8317, Boston, MA 02266-8317, Attention: The Seven Seas Series US
Government Money Market Fund.
10
<PAGE>
FEDERAL FUNDS WIRE. An investor may purchase shares by wiring federal funds
to State Street Bank and Trust Company as Transfer Agent by:
1. Telephoning State Street Bank and Trust Company at (800) 647-7327 and
providing: (1) the investor's account registration number, address and
social security or tax identification number; (2) the name of the Fund to
be invested in; (3) the amount being wired; (4) the name of the wiring
bank; and (5) the name and telephone number of the person at the wiring
bank to be contacted in connection with the order.
2. Instructing the wiring bank to wire federal funds to: State Street Bank
and Trust Company, Boston, MA (ABA #0110-00028), Attention: The Seven
Seas Series US Government Money Market Fund, Mutual Funds Service
Division (DDA #9904-631-0). The wire instructions should also include the
name the account is registered in, the account number and the name of the
Fund to be invested in.
3. Completing the Application and forwarding it to Transfer Agent at the
above address.
MAIL. To purchase shares by mail, send a check or other negotiable bank
draft payable to: State Street Bank and Trust Company, P.O. Box 8317, Boston, MA
02266-8317, Attention: The Seven Seas Series US Government Money Market Fund.
Certified checks are not necessary; however, all checks are accepted subject to
collection at full face value in United States funds and must be drawn in United
States dollars on a United States bank. Normally, checks and drafts are
converted to federal funds within two business days following receipt of the
check or draft. Initial investments should be accompanied by a completed
Application, and subsequent investments are to be accompanied by the investor's
account number.
CASH SWEEP PROGRAM. Money managers of master trust clients may participate
in a cash sweep program to automatically invest excess cash in the Fund. A money
manager must select the Fund, give authorization to complete the Fund's
Application and authorize the investment of excess cash into or the withdrawal
of required cash from the Fund on a daily basis. Where Adviser acts as money
manager, Adviser will receive an advisory fee from the client.
THIRD PARTY TRANSACTIONS. Investors purchasing Fund shares through a
program of services offered by a financial intermediary, such as a bank,
broker-dealer, investment adviser or others, may be required by such
intermediary to pay additional fees. Investors should contact such intermediary
for information concerning what additional fees, if any, may be charged.
IN-KIND EXCHANGE OF SECURITIES. The Transfer Agent may, at its discretion,
permit investors to purchase shares through the exchange of securities they
hold. Any securities exchanged must meet the investment objective, policies and
limitations of the Fund, must have a readily ascertainable market value, must be
liquid and must not be subject to restrictions on resale. The market value of
any securities exchanged, plus any cash, must be at least $1 million. Shares
purchased in exchange for securities generally may not be redeemed or exchanged
until the transfer has settled -- usually within 15 days following the purchase
by exchange.
The basis of the exchange will depend upon the relative net asset value of
the shares purchased and securities exchanged. Securities accepted by the Fund
will be valued in the same manner as the Fund values its assets. Any interest
earned on the securities following their delivery to the Transfer
11
<PAGE>
Agent and prior to the exchange will be considered in valuing the securities.
All interest, dividends, subscription or other rights attached to the securities
become the property of the Fund, along with the securities.
EXCHANGE PRIVILEGE. Subject to the Fund's minimum investment requirement,
investors may exchange their Fund shares without charge for shares of any other
investment portfolio offered by Investment Company. Shares are exchanged on the
basis of relative net asset value per share. Exchanges may be made: (1) by
telephone if the registrations of the two accounts are identical; or (2) in
writing addressed to State Street Bank and Trust Company, P.O. Box 8317, Boston,
MA 02266-8317, Attention: The Seven Seas Series US Government Money Market Fund.
If shares of the Fund were purchased by check, the shares must have been present
in an account for 10 days before an exchange is made. The exchange privilege
will only be available in states where the exchange may legally be made, and may
be modified or terminated by the Fund upon 60 days' notice to shareholders.
REDEMPTION OF FUND SHARES
Fund shares may be redeemed on any business day at the net asset value next
determined after the receipt of a redemption request in proper form as described
below. Payment will be made as soon as possible (but will ordinarily not exceed
seven days) and will be mailed to the shareholder's address of record. Upon
request, redemption proceeds will be wire transferred to the shareholder's
account at a domestic commercial bank that is a member of the Federal Reserve
System. Although Investment Company does not currently charge a fee for this
service, Investment Company reserves the right to charge a fee for the cost of
wire-transferred redemptions of less than $1,000. Payment for redemption of
shares purchased by check may be withheld for up to 10 days after the date of
purchase to assure that such checks are honored. A dividend will be paid on
shares redeemed if the redemption request is received by State Street Bank and
Trust Company after 12:00 noon Eastern time. Redemption requests received before
12:00 noon Eastern time will not be entitled to that day's dividend.
EXPEDITED REDEMPTION. Shareholders may normally redeem Fund shares by
telephoning State Street Bank and Trust Company between 9:00 a.m. and 4:00 p.m.
Eastern time at (800) 647-7327, Attention: The Seven Seas Series US Government
Money Market Fund. Shareholders using the expedited redemption method must
complete the appropriate section on the Application. The Fund and the Transfer
Agent will employ reasonable procedures to confirm that instructions
communicated by telephone are properly authorized. The Fund and the Transfer
Agent will not be liable for executing telephone instructions that are deemed to
be authorized after following reasonable procedures. These procedures include
recording telephonic instructions, mailing to the shareholder a written
confirmation of the transaction, performing a personal identity test with
private information not likely to be known by other individuals, and restricting
mailing of redemptions to the shareholder's address of record. During periods of
drastic economic or market changes, shareholders using this method may encounter
delays. In such event, shareholders should consider using the mail redemption
procedure described below.
MAIL. Redemption requests may be made in writing directly to State Street
Bank and Trust Company, P.O. Box 8317, Boston, MA 02266-8317, Attention: The
Seven Seas Series US Government
12
<PAGE>
Money Market Fund. The redemption price will be the net asset value next
determined after receipt by State Street of all required documents in good
order. "Good order" means that the request must include the following:
1. A letter of instruction or a stock assignment stating the Fund or Funds
out of which the shares are to be redeemed and designating specifically
the dollar amount to be redeemed signed by all owners of the shares in
the exact names in which they appear on the account, together with a
guarantee of the signature of each owner by a bank, trust company or
member of a recognized stock exchange; and
2. Such other supporting legal documents, if required by applicable law or
Transfer Agent, in the case of estates, trusts, guardianships,
custodianships, corporations and pension and profit-sharing plans.
The Fund reserves the right to redeem the shares in any account with a
balance of less than $500 as a result of shareholder redemptions. Before shares
are redeemed to close an account, the shareholder will be notified in writing
and allowed 60 days to purchase additional shares to meet the minimum account
balance.
The Fund may pay any portion of the redemption amount in excess of $250,000
by a distribution in kind of readily marketable securities from the portfolio of
the Fund in lieu of cash. Investors will incur brokerage charges on the sale of
these portfolio securities. The Fund reserves the right to suspend the right of
redemption or postpone the date of payment if emergency conditions, as specified
in the 1940 Act or determined by the Securities and Exchange Commission, should
exist.
GENERAL MANAGEMENT
The Board of Trustees supervises the management, activities and affairs of
the Fund and has approved contracts with various financial organizations to
provide, among other services, day-to-day management required by the Fund.
ADVISORY AGREEMENT. Investment Company employs State Street to furnish
investment services to the Fund. State Street is one of the largest providers of
securities processing and recordkeeping services for US mutual funds and pension
funds. State Street is a wholly owned subsidiary of State Street Boston
Corporation, a publicly held bank holding company. State Street, with over
$171.3 billion (US) under management as of September 30, 1995, provides complete
global investment management services from offices in the United States, London,
Sydney, Hong Kong, Tokyo, Toronto, Luxembourg, Melbourne, Montreal and Paris.
Adviser, subject to Board supervision, directs the investments of the Fund
in accordance with the Fund's investment objective, policies and restrictions.
For these services, the Fund pays Adviser a fee, calculated daily and paid
monthly, that on an annual basis is equal to .25% of the Fund's average daily
net assets.
The Glass-Steagall Act prohibits a depository state chartered bank such as
Adviser from engaging in the business of issuing, underwriting, selling or
distributing certain securities. The activities of Adviser in informing its
customers of the Fund, performing investment and redemption services and
providing custodian, transfer, shareholder servicing, dividend disbursing and
investment advisory services may raise issues under these provisions. Adviser
has been advised by its counsel that its
13
<PAGE>
activities in connection with the Fund are consistent with its statutory and
regulatory obligations. THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT ENDORSED
OR GUARANTEED BY STATE STREET OR ITS AFFILIATES, ARE NOT DEPOSITS OR OBLIGATIONS
OF STATE STREET OR ITS AFFILIATES, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
Changes in federal or state statutes and regulations relating to the
permissible activities of banks and their affiliates, as well as judicial or
administrative decisions or interpretations of such or future statutes and
regulations, could prevent Adviser from continuing to perform all or a part of
the above services for its customers and/or the Fund. If Adviser were prohibited
from serving the Fund in any of its present capacities, the Board of Trustees
would seek an alternative provider(s) of such services. In such event, changes
in the operation of the Fund may occur. It is not expected by Adviser that
existing shareholders would suffer any adverse financial consequences (if
another adviser with equivalent abilities is found) as a result of any of these
occurrences.
State Street may from time to time have discretionary authority over
accounts which invest in Investment Company shares. These accounts include
accounts maintained for securities lending clients and accounts which permit the
use of Investment Company portfolios as short-term cash sweep investments.
Shares purchased for all discretionary accounts are held of record by State
Street, who retains voting control of them. As of November 30, 1995, State
Street held of record 36% of the issued and outstanding shares of Investment
Company in connection with its discretionary accounts. Consequently, State
Street may be deemed to be a controlling person of Investment Company for
purposes of the 1940 Act.
Under the Adviser's Code of Ethics, the Adviser's employees in Boston where
investment management operations are conducted are only permitted to engage in
personal securities transactions which do not involve securities which the
Adviser had recommended for purchase or sale, or purchased or sold, on behalf of
its clients. Such employees must report their personal securities transactions
quarterly and supply broker confirmations to the Adviser.
ADMINISTRATION AGREEMENT. Frank Russell Investment Management Company
("Administrator") serves as administrator of the Fund. Administrator currently
serves as investment manager and administrator to 22 mutual funds with assets of
$7.3 billion as of October 31, 1995, and acts as administrator to 17 mutual
funds, including the Fund, with assets of $7.2 billion as of October 31, 1995.
Pursuant to the Administration Agreement with Investment Company,
Administrator will: (1) supervise all aspects of the Fund's operations; (2)
provide the Fund with administrative and clerical services, including the
maintenance of certain of the Fund's books and records; (3) arrange the periodic
updating of the Fund's prospectuses and any supplements thereto; (4) provide
proxy materials and reports to Fund shareholders and the Securities and Exchange
Commission; and (5) provide the Fund with adequate office space and all
necessary office equipment and services, including telephone service, heat,
utilities, stationery supplies and similar items. For these services, the Fund
and Investment Company's other domestic investment portfolios pay Administrator
a combined fee that on an annual basis is equal to the following percentages of
their average aggregate daily net assets: (1) $0 to and including $500 million
- -- .06%; (2) over $500 million to and including $1 billion -- .05%; and (3) over
$1 billion -- .03%. The percentage of the fee paid by a particular Fund is equal
to the percentage of average aggregate daily net assets that are attributable to
that Fund. Administrator will
14
<PAGE>
also receive reimbursement of expenses it incurs in connection with establishing
new investment portfolios. Further, the administration fee paid by the
Investment Company will be reduced by the sum of certain distribution related
expenses (up to a maximum of 15% of the asset-based administration fee listed
above).
Administrator also provides administrative services in connection with the
registration of shares of Investment Company with those states in which its
shares are offered or sold. Compensation for such services is on a "time spent"
basis. Investment Company will pay all registration, exemptive application,
renewal and related fees and reasonable out-of-pocket expenses.
Officers and employees of the Administrator and Distributor are permitted to
engage in personal securities transactions subject to restrictions and
procedures set forth in the Confidentiality Manual and Code of Ethics adopted by
the Investment Company, Administrator and Distributor. Such restrictions and
procedures include substantially all of the recommendations of the Advisory
Group of the Investment Company Institute and comply with Securities and
Exchange Commission rules and regulations.
DISTRIBUTION SERVICES AND SHAREHOLDER SERVICING ARRANGEMENTS. Pursuant to
the Distribution Agreement with Investment Company, Russell Fund Distributors,
Inc. ("Distributor"), a wholly owned subsidiary of Administrator, serves as
distributor for all Fund shares.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 (the "Plan")
under the 1940 Act for the Class A shares. The purpose of the Plan is to provide
for the payment of certain Investment Company distribution and shareholder
servicing expenses. Under the Plan, Distributor will be reimbursed in an amount
up to .25% of the Fund's average annual net assets for distribution-related and
shareholder servicing expenses. Payments under the Plan will be made to
Distributor to finance activity that is intended to result in the sale and
retention of Fund shares including: (1) the costs of prospectuses, reports to
shareholders and sales literature; (2) advertising; and (3) expenses incurred in
connection with the promotion and sale of Fund shares, including Distributor's
overhead expenses for rent, office supplies, equipment, travel, communication,
compensation and benefits of sales personnel.
Under the Plan, the Fund may also enter into agreements ("Service
Agreements") with financial institutions, which may include Adviser ("Service
Organizations"), to provide shareholder servicing with respect to Fund shares
held by or for the customers of the Service Organizations. Under the Service
Agreements, the Service Organizations may provide various services for such
customers including: answering inquiries regarding the Fund; assisting customers
in changing dividend options, account designations and addresses; performing
subaccounting for such customers; establishing and maintaining customer accounts
and records; processing purchase and redemption transactions; providing periodic
statements showing customers' account balances and integrating such statements
with those of other transactions and balances in the customers' other accounts
serviced by the Service Organizations; arranging for bank wires transferring
customers' funds; and such other services as the customers may request in
connection with the Fund, to the extent permitted by applicable statute, rule or
regulation. Service Organizations may receive from the Fund, for shareholder
servicing, a monthly fee at a rate that shall not exceed .20% per annum of the
average daily net asset value of the
15
<PAGE>
Fund's shares owned by or for shareholders with whom the Service Organization
has a servicing relationship. Banks and other financial service firms may be
subject to various state laws, and may be required to register as dealers
pursuant to state law.
Investment Company has entered into Service Agreements with Adviser, State
Street Brokerage Services, Inc. ("SSBSI"), and Adviser's Metropolitan Division
of Commercial Banking ("Commercial Banking") to obtain the services described
above with respect to Fund shares held by or for customers. In return for these
services, Investment Company pays Adviser a fee in an amount that per annum is
equal to .025%, .175% and .175% of the average daily value of all Fund shares
held by or for customers of Adviser, SSBSI, and Commercial Banking,
respectively.
Payments to Distributor, as well as payments to Service Organizations from
the Fund, are not permitted by the Plan to exceed .25% per year of the Fund's
average net asset value per year. Any payments that are required to be made by
the Distribution Agreement and any Service Agreement but could not be made
because of the .25% limitation may be carried forward and paid in subsequent
years so long as the Plan is in effect. The Fund's liability for any such
expenses carried forward shall terminate at the end of two years following the
year in which the expenditure was incurred. Service Organizations will be
responsible for prompt transmission of purchase and redemption orders and may
charge fees for their services.
FUND EXPENSES
The Fund will pay all of its expenses other than those expressly assumed by
Adviser and Administrator. The Fund's principal expenses are the annual advisory
fee payable to Adviser and distribution and shareholder servicing expenses.
Other expenses include: (1) amortization of deferred organizational costs; (2)
taxes, if any; (3) expenses for legal, auditing and financial accounting
services; (4) expense of preparing (including typesetting, printing and mailing)
reports, prospectuses and notices to existing shareholders; (5) administrative
fees; (6) custodian fees; (7) expense of issuing and redeeming Fund shares; (8)
the cost of registering Fund shares under federal and state laws; (9)
shareholder meetings and related proxy solicitation expenses; (10) the fees,
travel expenses and other out-of-pocket expenses of Trustees who are not
affiliated with Adviser or any of its affiliates; (11) insurance, interest,
brokerage and litigation costs; (12) extraordinary expenses as may arise,
including expenses incurred in connection with litigation proceedings and claims
and the legal obligations of Investment Company to indemnify its Trustees,
officers, employees, shareholders, distributors and agents; and (13) other
expenses properly payable by the Fund. Where any of these other expenses are
attributable to a particular class of shares, they will be borne by the
beneficial owners of such shares.
PERFORMANCE CALCULATIONS
From time to time the Fund may advertise the yield and effective yield of
its Class A shares. The yield of each Fund refers to the income generated by an
investment in Class A shares of the Fund over a seven-day period (which period
will be stated in the advertisement). This income is then annualized. That is,
the amount of income generated by the investment during that week is assumed to
be generated each week over a 52-week period and is shown as a percentage of the
investment. The effective yield is calculated similarly but, when annualized,
the income earned by an investment in the Fund is assumed to be reinvested. The
effective yield will be slightly higher than the yield because of the
compounding effect of this assumed reinvestment.
16
<PAGE>
From time to time, the Fund may also report yield and effective yield as
calculated over a one-month period (which period will also be stated in the
advertisement). These one-month periods will be annualized using the same method
as described above for yields calculated on the basis of seven-day periods. From
time to time, yields calculated on a monthly basis may also be linked to provide
yield figures for periods greater than one month.
From time to time the Fund may advertise the total return of its Class A
Shares. The total return of the Fund is the average annual compounded rate of
return from a hypothetical investment in the Fund's Class A Shares over one-,
five- and ten-year periods or for the life of the Fund (as stated in the
advertisement), assuming the reinvestment of all dividends and capital gains
distributions.
Comparative performance information may be used from time to time in
advertising or marketing Fund shares, including data from Lipper Analytical
Services, Inc., Donoghue's Money Fund Report, the Bank Rate Monitor, Wall Street
Journal Score Card, Lehman Brothers Index or other industry publications,
business periodicals, rating services and market indices. The Fund may also
advertise nonstandardized performance information which is for periods in
addition to those required to be presented.
Quoted yields, returns and other performance figures are based on historical
earnings and are not indications of future performance.
ADDITIONAL INFORMATION
CUSTODIAN, TRANSFER AGENT AND INDEPENDENT ACCOUNTANTS. State Street holds
all portfolio securities and cash assets of the Fund, provides portfolio
recordkeeping services and serves as the Fund's transfer agent ("Transfer
Agent") and custodian ("Custodian"). State Street is authorized to deposit
securities in securities depositories or to use the services of subcustodians.
State Street has no responsibility for the supervision and management of the
Fund except as investment adviser. Coopers & Lybrand L.L.P., Boston,
Massachusetts, is Investment Company's independent accountants.
REPORTS TO SHAREHOLDERS AND SHAREHOLDER INQUIRIES. Shareholders will
receive unaudited semiannual financial statements and annual financial
statements audited by Investment Company's independent accountants. Shareholder
inquiries regarding the Prospectus and financial statements may be made by
calling Distributor at (617) 654-6089. Inquiries regarding shareholder balances
may be made by calling Transfer Agent at (800) 647-7327.
ORGANIZATION, CAPITALIZATION AND VOTING. Investment Company was organized
as a Massachusetts business trust on October 3, 1987, and operates under a First
Amended and Restated Master Trust Agreement dated October 13, 1993, as amended.
Investment Company issues shares divisible into an unlimited number of series
(or funds), each of which is a separate trust under Massachusetts law. The
Government Money Market Fund is one such series. Shares of a fund are entitled
to such relative rights and preferences and dividends and distributions earned
on assets of the Fund as may be declared by the Board of Trustees. Each class of
shares of the Fund has identical rights and privileges as all other shares of
the Fund and participates equally in the dividends and distributions of the
Fund. Fund shares are fully paid and nonassessable by Investment Company and
have no preemptive rights. Investment Company is authorized to subdivide each
series into two or more classes of shares. Currently, shares of the Government
Money Market Fund are divided into Class A, Class B and
17
<PAGE>
Class C. Each class of shares of the Fund is entitled to the same rights and
privileges as all other classes of that Fund, provided however, that each class
bears the expenses related to its distribution and shareholder servicing
arrangements, as well as other expenses attributable to the class and unrelated
to managing the Fund's portfolio securities. As described above, Investment
Company has adopted a plan of distribution under rule 12b-1 for Class A shares.
Similar plans have been adopted for Class B and Class C shares. However, total
payments under those plans are limited to .35% and .60% annually of the average
net asset value of the Class B and Class C shares, respectively of the Fund. As
a result of these plan and other class expenses, the yield on Class B and Class
C shares will be approximately .25% and .50% lower, respectively, than the yield
on Class A shares.
Each Fund share has one vote. There are no cumulative voting rights. There
is no annual meeting of shareholders, but special meetings may be held. On any
matter that affects only a particular investment fund, only shareholders of that
fund may vote unless otherwise required by the 1940 Act or the Master Trust
Agreement. Further, any matter that affects only the holders of a particular
class of shares may be voted on only by such shareholders. Each class of shares
votes separately with respect to any Rule 12b-1 plan applicable to such class.
The Trustees hold office for the life of the Trust. A Trustee may resign or
retire, and may be removed at any time by a vote of two-thirds of Investment
Company shares or by a vote of a majority of the Trustees. The Trustees shall
promptly call and give notice of a meeting of shareholders for the purpose of
voting upon removal of any Trustee when requested to do so in writing by holders
of not less than 10% of the shares then outstanding. A vacancy on the Board of
Trustees may be filled by the vote of a majority of the remaining Trustees,
provided that immediately thereafter at least two-thirds of the Trustees have
been elected by shareholders.
Investment Company does not issue share certificates for the Fund. Transfer
Agent sends monthly statements to shareholders of the Fund concurrent with any
transaction activity, confirming all investments in or redemptions from their
accounts. Each statement also sets forth the balance of shares held in the
account.
18
<PAGE>
THE SEVEN SEAS SERIES FUND
TWO INTERNATIONAL PLACE, 35TH FLOOR
BOSTON, MASSACHUSETTS 02110
INVESTMENT ADVISER, CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
DISTRIBUTOR
Russell Fund Distributors, Inc.
Two International Place, 35th Floor
Boston, Massachusetts 02110
ADMINISTRATOR
Frank Russell Investment Management Company
909 A Street
Tacoma, Washington 98402
LEGAL COUNSEL
Goodwin, Procter & Hoar
Exchange Place
Boston, Massachusetts 02109
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
<PAGE>
THE SEVEN SEAS SERIES FUND
The Seven Seas Series Money Market Fund
The Seven Seas Series US Government Money Market Fund
The Seven Seas Series Tax Free Money Market Fund
The Seven Seas Series S&P 500 Index Fund
The Seven Seas Series Small Cap Fund
The Seven Seas Series Matrix Equity Fund
The Seven Seas Series Yield Plus Fund
The Seven Seas Series Growth and Income Fund
The Seven Seas Series Intermediate Fund
The Seven Seas Series Active International Fund
The Seven Seas Series Emerging Markets Fund
<PAGE>
Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
THE SEVEN SEAS SERIES FUND
Two International Place, 35th Floor
Boston, Massachusetts 02110
(617) 654-6089
MONEY MARKET FUNDS
CLASS B SHARES
The Seven Seas Series Fund is a registered, open-end investment company with
multiple portfolios, each of which is a mutual fund. This Prospectus describes
and offers Class B shares of beneficial interest in the mutual funs listed
below, each referred to as a "Fund." Shares may not be purchased by individuals
directly, but must be purchased through a financial institution which is
permitted by contract with the Funds to offer the shares. This Prospectus
should be read together with any materials provided by such institution.
Each Fund seeks to achieve a specific investment objective by using distinct
investment strategies:
THE SEVEN SEAS SERIES MONEY MARKET FUND seeks to maximize current income, to
the extent consistent with the preservation of capital and liquidity and the
maintenance of a stable $1.00 per share net asset value, by investing in dollar
denominated securities with remaining maturities of one year or less.
THE SEVEN SEAS SERIES US GOVERNMENT MONEY MARKET FUND seeks to maximize
current income, to the extent consistent with the preservation of capital and
liquidity and the maintenance of a stable $1.00 per share net asset value, by
investing in obligations of the US Government or its instrumentalities with
remaining maturities of one year or less.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
INVESTMENTS IN THE MONEY MARKET FUND AND US GOVERNMENT MONEY MARKET FUND ARE
NEITHER INSURED NOR GUARANTEED BY THE US GOVERNMENT. THERE IS NO ASSURANCE THAT
EITHER THE MONEY MARKET FUND OR US GOVERNMENT MONEY MARKET FUND WILL MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE.
SHARES IN THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, STATE STREET BANK AND TRUST COMPANY, AND SHARES ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER AGENCY, AND INVOLVE INVESTMENT RISKS INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
This Prospectus sets forth concisely the information about the Funds that a
prospective investor ought to know before investing. Please read and retain
this document for future reference. Additional information about the Funds has
been filed with the Securities and Exchange Commission in a Statement of
Additional Information dated December 29, 1995. The Statement of Additional
Information is incorporated herein by reference and is available without charge
from Distributor at its address noted below or by calling (617) 654-6089.
<TABLE>
<S> <C> <C>
Investment Adviser,
Custodian Distributor: Administrator:
and Transfer Agent: Russell Fund Distributors, Frank Russell Investment
State Street Bank and Trust Inc. Management Company
Company Two International Place 909 A Street
225 Franklin Street 35th Floor Tacoma, Washington 98402
Boston, Massachusetts 02110 Boston, Massachusetts 02110 (206) 627-7001
(617) 654-4721 (617) 654-6089
</TABLE>
PROSPECTUS DATED DECEMBER 29, 1995
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<PAGE>
TABLE OF CONTENTS
Page
----
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Fund Operating Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
The Seven Seas Series Fund . . . . . . . . . . . . . . . . . . . . . . . . . 8
Manner of Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Investment Objectives, Policies and Restrictions . . . . . . . . . . . . . . 8
Portfolio Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Dividends and Distributions. . . . . . . . . . . . . . . . . . . . . . . . . 13
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Valuation of Fund Shares . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Purchase of Fund Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Redemption of Fund Shares. . . . . . . . . . . . . . . . . . . . . . . . . . 16
General Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Fund Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Performance Calculations . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
-2-
<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in the Prospectus.
INVESTMENT OBJECTIVE. The Money Market Fund's investment objective is to
maximize current income, to the extent consistent with the preservation of
capital and liquidity and the maintenance of a stable $1.00 per share net asset
value, by investing in dollar denominated securities with remaining maturities
of one year or less. Such securities consist principally of: US Treasury
bills, notes and bonds; other obligations issued or guaranteed as to interest
and principal by the US Government, its agencies or instrumentalities;
instruments of US and foreign banks; and commercial paper of US and foreign
companies.
The US Government Money Market Fund's investment objective is to maximize
current income, to the extent consistent with the preservation of capital and
liquidity and the maintenance of a stable $1.00 per share net asset value, by
investing in obligations of the US Government or its agencies or
instrumentalities with remaining maturities of one year or less. The Fund's
portfolio typically consists entirely of securities issued or guaranteed by the
US Government or its agencies or instrumentalities.
DIVIDENDS. Dividends from net investment income are declared daily and paid
monthly. Net capital gains, if any, are distributed annually.
POTENTIAL INVESTORS. The Funds are designed to be an economical and efficient
means for retail investors to participate in professionally managed portfolios
of money market instruments. In this Prospectus, Class B shares of the Funds
are offered to customers of certain financial institutions ("Service
Organizations") who act as record holders of the shares and provide services to
their customers who invest in the Funds.
PURCHASES AND REDEMPTIONS. Because shares of the Funds are offered through
Service Organizations, to purchase and redeem shares potential investors should
contact their Service Organizations for information regarding purchase and
redemption procedures. Shares may be purchased or redeemed at the net asset
value next determined after receipt of the order.
INVESTMENT ADVISERS. State Street Bank and Trust Company serves as investment
adviser to the Funds in return for a fee equal to .25% annually of each Fund's
average daily net assets.
CERTAIN CLASS INFORMATION. The shares of each Fund are divided into three
classes: Class A, Class B and Class C. Class A shares are designed for
institutional investors. Class B shares are offered through Service
Organizations that provide certain account administration services. Class C
shares are offered through Service Organizations that provide certain account
administration and shareholder liaison services. Each class of shares of a Fund
is entitled to the same rights and privileges as all other classes of shares of
that Fund, provided however, that each class bears the expenses related to its
distribution and shareholder servicing arrangements and certain other expenses
attributable to the class. Annual distribution and shareholder servicing
expenses for Class A, Class B and Class C shares are equal to approximately
.05%, .30% and .55%, respectively, of the average daily net asset value of the
shares of the class. Total operating expenses for Class A, Class B and Class C
shares of the Money Market Fund are equal to approximately .38%, .65% and .93%,
respectively, of the average daily net asset value of the shares of the class.
Total operating expenses for Class A, Class B and Class C shares of the US
Government Money Market Fund are equal to approximately .39%, .68% and .93%,
respectively, of the average daily net asset value of the shares of the class.
-3-
<PAGE>
FUND OPERATING EXPENSES
THE SEVEN SEAS SERIES MONEY MARKET FUND
CLASS B SHARES
The purpose of the following table is to assist the investor in understanding
the various costs and expenses that an investor in Class B shares of the Money
Market Fund will incur directly or indirectly. THE EXAMPLES PROVIDED IN THE
TABLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES.
Actual expenses may be greater or less than those shown. For additional
information, see "General Management."
<TABLE>
<CAPTION>
Shareholder Transaction Expenses:
- --------------------------------
<S> <C>
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fee None
</TABLE>
<TABLE>
<CAPTION>
Annual Fund Operating Expenses:
- ------------------------------
(as a percentage of average daily net assets)
<S> <C>
Advisory Fees .25%
12b-1 Fees (including Shareholder Servicing Fees) (1,2) .30
Other Expenses(2) .10
----
Total Operating Expenses(3) .65%
----
----
</TABLE>
<TABLE>
<CAPTION>
Examples: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------- ----------------------------------------
<S> <C> <C> <C> <C>
You would pay the following expenses
on a $1,000 investment, assuming: (i)
5% annual return; and (ii) redemption
at the end of each time period: $ 7 $21 $36 $81
--- --- --- ---
--- --- --- ---
</TABLE>
- -------------------------------------
(1) 12b-1 Fees include shareholder servicing fees payable to Service
Organizations in the amount of .25% of annual average daily net asset
value of the Fund's Class B shares.
(2) "Other Expenses" and a portion of 12b-1 fees are based on estimated amounts
for the current fiscal year.
(3) Service organizations may impose additional fees for services provided to
investors. Investors should contact their service organization for
information concerning what additional fees, if any, will be charged.
Long-term holders of the Fund's Class B shares may pay more in Rule 12b-1
fees than the economic equivalent of the front-end sales charge permitted
by the National Association of Securities Dealers, Inc.
-4-
<PAGE>
FUND OPERATING EXPENSES
THE SEVEN SEAS SERIES US GOVERNMENT MONEY MARKET FUND
CLASS B SHARES
The purpose of the following table is to assist the investor in understanding
the various costs and expenses that an investor in Class B shares of the US
Government Money Market Fund will incur directly or indirectly. THE EXAMPLES
PROVIDED IN THE TABLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. Actual expenses may be greater or less than those shown. For
additional information, see "General Management."
<TABLE>
<CAPTION>
Shareholder Transaction Expenses:
- --------------------------------
<S> <C>
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fee None
</TABLE>
<TABLE>
<CAPTION>
Annual Fund Operating Expenses:
- ------------------------------
(as a percentage of average daily net assets)
<S> <C>
Advisory Fees .25%
12b-1 Fees (including Shareholder Servicing Fees)(1,2) .30
Other Expenses(2) .13
----
Total Operating Expenses(3) .68%
----
----
</TABLE>
<TABLE>
<CAPTION>
Examples: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------- -------------------------------------------
<S> <C> <C> <C> <C>
You would pay the following
expenses on a $1,000 investment,
assuming: (i) 5% annual return;
and (ii) redemption at the end
of each time period: $7 $22 $38 $85
-- --- --- ---
-- --- --- ---
</TABLE>
- -------------------------------------
(1) 12b-1 Fees include shareholder servicing fees payable to Service
Organizations in the amount of .25% of annual average daily net asset
value of the Fund's Class B shares.
(2) "Other Expenses" and a portion of 12b-1 fees are based on estimated amounts
for the current fiscal year.
(3) Service organizations may impose additional fees for services provided to
investors. Investors should contact their service organization for
information concerning what additional fees, if any, will be charged.
Long-term holders of the Fund's Class B shares may pay more in Rule 12b-1 fees
than the economic equivalent of the front-end sales charge permitted by the
National Association of Securities Dealers, Inc.
-5-
<PAGE>
FINANCIAL HIGHLIGHTS
THE SEVEN SEAS SERIES MONEY MARKET FUND
The following table contains important financial information relating to the
Money Market Fund and has been audited by Coopers & Lybrand L.L.P., the
Fund's independent accountants. The table includes selected data for a
Class A share outstanding throughout each fiscal year or period ended
August 31, and other performance information derived from the financial
statements. The Investment Company is authorized to issue Class B and
Class C shares of the Money Market Fund although shares have not been
offered on these classes as of the date of this Prospectus. The table appears
in the Fund's Annual Report and should be read in conjunction with the Fund's
financial statements and related notes, which are incorporated by reference
in the Statement of Additional Information and which appear, along with the
report of Coopers & Lybrand L.L.P., in the Fund's Annual Report to
Shareholders. More detailed information concerning the Fund's performance,
including a complete portfolio listing and audited financial statements, is
available in the Fund's Annual Report, which may be obtained without charge
by writing or calling the Distributor.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989 1988++
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .0538 .0330 .0320 .0458 .0686 .0817 .0883 .0239
------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income (.0538) (.0330) (.0320) (.0458) (.0686) (.0817) (.0883) (.0239)
------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE,
END OF YEAR $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
TOTAL RETURN (%)(a) 5.52 3.35 3.24 4.68 7.08 8.48 9.19 2.41
RATIOS(%)/SUPPLE-
MENTAL DATA:
Operating expenses, net,
to average daily net
assets (b) .39 .36 .33 .35 .37 .37 .43 .44
Operating expenses,
gross, to average daily
net assets (b) .39 .36 .38 .35 .38 .43 .51 .63
Net investment income
to average daily net
assets 5.37 3.33 3.20 4.40 6.59 8.13 8.97 7.30
Net assets, end of year
($000 omitted) 2,752,895 3,020,796 2,502,483 4,263,057 1,645,428 650,598 442,614 193,777
Per share amount of fees
waived ($ omitted) -- -- .0005 -- .0000 .0005 .0004 .0010
</TABLE>
- -----------------------
++ For the period May 2, 1988 (commencement of operations) to August 31, 1988.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended August 31, 1988 are annualized.
-6-
<PAGE>
FINANCIAL HIGHLIGHTS
THE SEVEN SEAS SERIES US GOVERNMENT MONEY MARKET FUND
The following table contains important financial information relating to the
Government Money Market Fund and has been audited by Coopers & Lybrand
L.L.P., the Fund's independent accountants. The table includes selected data
for a Class A share outstanding throughout each fiscal year or period
ended August 31, and other performance information derived from the
financial statements. The Investment Company is authorized to issue Class B
and Class C shares of the Government Money Market Fund although shares
have not been offered on these classes as of the date of this Prospectus. The
table appears in the Fund's Annual Report and should be read in conjunction
with the Fund's financial statements and related notes, which are
incorporated by reference in the Statement of Additional Information and
which appear, along with the report of Coopers & Lybrand L.L.P., in the
Fund's Annual Report to Shareholders. More detailed information concerning
the Fund's performance, including a complete portfolio listing and audited
financial statements, is available in the Fund's Annual Report, which may be
obtained without charge by writing or calling the Distributor.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991++
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .0528 .0324 .0304 .0441 .0302
------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income (.0528) (.0324) (.0304) (.0441) (.0302)
------- ------- ------- ------- -------
NET ASSET VALUE,
END OF YEAR $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN (%)(a) 5.38 3.30 3.08 4.49 3.06
RATIOS (%)/SUPPLE-
MENTAL DATA:
Operating expenses, net,
to average daily net
assets (b) .42 .38 .39 .41 .23
Operating expenses, gross
to average daily net
assets (b) .42 .39 .46 .42 .43
Net investment income
to average daily net
assets (b) 5.37 3.27 3.04 4.26 5.94
Net assets, end of year
($000 omitted) 490,138 251,165 137,136 156,707 94,646
Per share amount of fees
waived ($ omitted) -- -- -- .0001 .0011
Per share amount of fees
waived by Adviser
($ omitted) -- .0001 .0007 -- --
</TABLE>
- ----------------------------
++ For the period March 1, 1991 (commencement of operations) to August 31,
1991.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended August 31, 1991 are annualized.
-7-
<PAGE>
THE SEVEN SEAS SERIES FUND
The Seven Seas Series Fund ("Investment Company") is an open-end management
investment company that is organized as a Massachusetts business trust. In
addition, each series of the Investment Company is diversified as defined in the
Investment Company Act of 1940, as amended ("1940 Act"). As a "series" company,
Investment Company is authorized to issue an unlimited number of shares
evidencing beneficial interests in different investment portfolios. Through
this Prospectus, Investment Company offers Class B shares in two such portfolios
(collectively, "Funds"): The Seven Seas Series Money Market Fund ("Money Market
Fund") and The Seven Seas Series US Government Money Market Fund ("Government
Money Market Fund"). State Street Bank and Trust Company (the "Adviser" or
"State Street") serves as the investment adviser for each Fund.
MANNER OF OFFERING
The Funds are designed to be an economical and efficient means for retail
investors to participate in professionally managed portfolios of money market
instruments. Class B shares of the Funds are offered to customers of certain
financial institutions ("Service Organizations") that act as record holders of
shares and provide services to their customers who invest in the Funds. Each
Service Organization may set a minimum initial investment for its customers and
may redeem all shares in an investor's account if the value of these shares
falls below a predetermined amount.
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
Each Fund has a fundamental investment objective, which may be changed only
with the approval of a majority of the Fund's shareholders as defined by the
1940 Act. There can be no assurance that either Fund will meet its investment
objective.
MONEY MARKET FUND
The Money Market Fund's fundamental investment objective is to maximize
current income, to the extent consistent with the preservation of capital and
liquidity and the maintenance of a stable $1.00 per share net asset value, by
investing in dollar denominated securities with remaining maturities of one year
or less.
The Fund attempts to meet its investment objective by investing in high
quality money market instruments. Such instruments include: (1) US Treasury
bills, notes and bonds; (2) other obligations issued or guaranteed as to
interest and principal by the US Government, its agencies, or instrumentalities;
(3) instruments of US and foreign banks, including certificates of deposit,
banker's acceptances and time deposits; these instruments may include Eurodollar
Certificates of Deposit ("ECDs"), Eurodollar Time Deposits ("ETDs") and Yankee
Certificates of Deposit ("YCDs"); (4) commercial paper of US and foreign
companies; (5) asset-backed securities; (6) corporate obligations; (7) variable
amount master demand notes; and (8) repurchase agreements.
The Fund will limit its portfolio investments to those United States
dollar-denominated instruments which at the time of acquisition the Adviser
determines present minimal credit risk and which qualify
-8-
<PAGE>
as "eligible" securities under the Securities and Exchange Commission rules
applicable to money market mutual funds. In general, eligible securities
include securities that: (1) are rated in the highest category by least two
nationally recognized statistical rating organizations ("NRSRO"); (2) by one
NRSRO, if only one rating services has rated the security; or (3) if unrated,
are of comparable quality, as determined by the Portfolio's Adviser in
accordance with procedures established by the Board of Trustees. See the
Appendix in the Statement of Additional Information for a description of a
NRSRO.
GOVERNMENT MONEY MARKET FUND
The Government Money Market Fund's fundamental investment objective is to
maximize current income to the extent consistent with the preservation of
capital and liquidity, and the maintenance of a stable $1.00 per share net asset
value, by investing in obligations of the US Government or its agencies or
instrumentalities with remaining maturities of one year or less.
The Fund attempts to meet its investment objective by investing in
obligations issued or guaranteed as to principal and interest by the US
Government or its agencies or instrumentalities or in repurchase agreements
secured by such instruments. (See "Investment Policies -- US Government
Securities.") Under normal market conditions, the Government Money Market Fund
will be 100% invested in such securities.
INVESTMENT POLICIES
The investment policies described below reflect the Funds' current
practices, are not fundamental and may be changed by the Board of Trustees of
Investment Company without shareholder approval. To the extent consistent with
the Fund's investment objective and restrictions the Fund may invest in the
following instruments and may use the following investment techniques:
US GOVERNMENT SECURITIES. US Government securities include US Treasury
bills, notes, and bonds and other obligations issued or guaranteed as to
interest and principal by the US Government and its agencies or
instrumentalities. Obligations issued or guaranteed as to interest and
principal by the US Government, its agencies or instrumentalities include
securities that are supported by the full faith and credit of the United States
Treasury, securities that are supported by the right of the issuer to borrow
from the United States Treasury, discretionary authority of the US Government
agency or instrumentality, and securities supported solely by the
creditworthiness of the issuer.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
banks and other financial institutions, such as broker-dealers. Under a
repurchase agreement, a Fund purchases securities from a financial institution
that agrees to repurchase the securities at the Fund's original purchase price
plus interest within a specified time (normally one business day). The Fund
will invest no more than 10% of its net assets (taken at current market value)
in repurchase agreements maturing in more than seven days. The Fund will limit
repurchase transactions to those member banks of the Federal Reserve System and
broker-dealers whose creditworthiness Adviser considers satisfactory. Should
the counterparty to a transaction fail financially, the Fund may encounter delay
and incur
-9-
<PAGE>
costs before being able to sell the securities. Further, the amount realized
upon the sale of the securities may be less than that necessary to fully
compensate the Fund.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse
repurchase agreements under the circumstances described in "Investment
Restrictions." Under a reverse repurchase agreement, the Fund sells portfolio
securities to a financial institution in return for cash in an amount equal
to a percentage of the portfolio securities' market value and agrees to
repurchase the securities at a future date at a prescribed repurchase price
equal to the amount of cash originally received plus interest on such amount.
The Fund retains the right to receive interest and principal payments with
respect to the securities while they are in the possession of the financial
institutions. Reverse repurchase agreements involve the risk of default by
the counterparty, which may adversely affect the Fund's ability to reacquire
the underlying securities.
FORWARD COMMITMENTS. Each Fund may contract to purchase securities for a
fixed price at a future date beyond customary settlement time. When effecting
such transactions, cash or liquid high quality debt obligations held by the Fund
of a dollar amount sufficient to make payment for the portfolio securities to be
purchased will be segregated on the Fund's records at the trade date and
maintained until the transaction is settled. The failure of the other party to
the transaction to complete the transaction may cause the Fund to miss an
advantageous price or yield. The Fund bears the risk of price fluctuations
during the period between the trade and settlement dates.
WHEN-ISSUED TRANSACTIONS. The Funds may purchase securities on a when-
issued basis. In these transactions, a Fund purchases securities with payment
and delivery scheduled for a future time. Until settlement, the Funds segregate
cash and marketable high quality debt securities equal in value to their when-
issued commitments. Between the trade and settlement dates, the Fund bears the
risk of any fluctuation in the value of the securities. These transactions
involve the additional risk that the other party may fail to complete the
transaction and cause the Fund to miss a price or yield considered advantageous.
Each Fund will engage in when-issued transactions only for the purpose of
acquiring portfolio securities consistent with its investment objective and
policies and not for investment leverage. The Funds will not invest more than
25% of their net assets in when-issued securities.
ILLIQUID SECURITIES. Neither Fund will invest more than 10% of its net
assets in illiquid securities or securities that are not readily marketable,
including repurchase agreements and time deposits of more than seven days'
duration. The absence of a regular trading market for illiquid securities
imposes additional risks on investments in these securities. Illiquid
securities may be difficult to value and may often be disposed of only after
considerable expense and delay.
VARIABLE AMOUNT MASTER DEMAND NOTES. Variable amount master demand notes
are unsecured obligations that are redeemable upon demand and are typically
unrated. These instruments are issued pursuant to written agreements between
their issuers and holders. The agreements permit the holders to increase
(subject to an agreed maximum) and the holders and issuers to decrease the
principal amount of the notes, and specify that the rate of interest payable on
the principal fluctuates according to an agreed formula.
-10-
<PAGE>
ASSET-BACKED SECURITIES (MONEY MARKET FUND ONLY). Asset-backed securities
represent undivided fractional interests in pools of instruments, such as
consumer loans, and are similar in structure to mortgage-related pass-through
securities described below. Payments of principal and interest are passed
through to holders of the securities and are typically supported by some form of
credit enhancement, such as a letter of credit, surety bond, limited guarantee
by another entity or by priority to certain of the borrower's other securities.
The degree of credit enhancement varies, generally applying only until exhausted
and covering only a fraction of the security's par value. If the credit
enhancement of an asset-backed security held by the Fund has been exhausted, and
if any required payments of principal and interest are not made with respect to
the underlying loans, the Fund may experience loss or delay in receiving payment
and a decrease in the value of the security. Further details are set forth in
the Statement of Additional Information under "Investment Restrictions and
Policies -- Investment Policies."
MORTGAGE-RELATED PASS-THROUGH SECURITIES. The Funds may invest in
mortgage-related securities, including Government National Mortgage Association
("GNMA") Certificates ("Ginnie Maes"), Federal Home Loan Mortgage Corporation
("FHLMC") Mortgage Participation Certificates ("Freddie Macs") and Federal
National Mortgage Association ("FNMA") Guaranteed Mortgage Pass-Through
Certificates ("Fannie Maes"). Mortgage pass-through certificates are mortgage-
backed securities representing undivided fractional interests in pools of
mortgage-backed loans. These loans are made by mortgage bankers, commercial
banks, savings and loan associations and other lenders. Ginnie Maes are
guaranteed by the full faith and credit of the US Government, but Freddie Macs
and Fannie Maes are not.
ZERO COUPON SECURITIES. Zero coupon securities are notes, bonds and
debentures that: (1) do not pay current interest and are issued at a
substantial discount from par value; (2) have been stripped of their unmatured
interest coupons and receipts; or (3) pay no interest until a stated date one or
more years into the future. These securities also include certificates
representing interests in such stripped coupons and receipts.
VARIABLE AND FLOATING RATE SECURITIES. A floating rate security provides
for the automatic adjustment of its interest rate whenever a specified interest
rate changes. A variable rate security provides for the automatic establishment
of a new interest rate on set dates. Interest rates on these securities are
ordinarily tied to, and are a percentage of, a widely recognized interest rate,
such as the yield on 90-day US Treasury bills or the prime rate of a specified
bank. These rates may change as often as twice daily. Generally, changes in
interest rates will have a smaller effect on the market value of variable and
floating rate securities than on the market value of comparable fixed income
obligations. Thus, investing in variable and floating rate securities generally
allows less opportunity for capital appreciation and depreciation than investing
in comparable fixed income securities.
EURODOLLAR CERTIFICATES OF DEPOSIT, EURODOLLAR TIME DEPOSITS AND YANKEE
CERTIFICATES OF DEPOSIT (MONEY MARKET FUND ONLY). ECDs are US dollar
denominated certificates of deposit issued by foreign branches of domestic
banks. ETDs are US dollar denominated deposits in foreign branches of US banks
and foreign banks. YCDs are US dollar denominated certificates of deposit
issued by US branches of foreign banks.
-11-
<PAGE>
Different risks than those associated with the obligations of domestic
banks may exist for ECDs, ETDs and YCDs because the banks issuing these
instruments, or their domestic or foreign branches, are not necessarily subject
to the same regulatory requirements that apply to domestic banks, such as loan
limitations, examinations and reserve, accounting, auditing, record keeping and
public reporting requirements.
LENDING PORTFOLIO SECURITIES. The Fund may lend portfolio securities with
a value of up to 33-1/3% of its total assets. Such loans may be terminated at
any time. The Fund will receive cash or US Treasury bills, notes and bonds in
an amount equal to at least 100% of the current market value (on a daily marked-
to-market basis) of the loaned securities plus accrued interest. In a loan
transaction, as compensation for lending it securities, the Fund will receive a
portion of the dividends or interest accrued on the securities held as
collateral or, in the case of cash collateral, a portion of the income from the
investment of such cash. In addition, the Fund will receive the amount of all
dividends, interest and other distributions on the loaned securities. However,
the borrower has the right to vote the loaned securities. The Fund will call
loans to vote proxies if a material issue affecting the investment is to be
voted upon. Should the borrower of the securities fail financially, the Fund
may experience delays in recovering the securities or exercising its rights in
the collateral. Loans are made only to borrowers that are deemed by Adviser to
be of good financial standing. In a loan transaction, the Fund will also bear
the risk of any decline in value of securities acquired with cash collateral.
The Fund will minimize this risk by limiting the investment of cash collateral
to high quality instruments of short maturity.
INVESTMENT RESTRICTIONS
Each Fund has fundamental investment restrictions, which may be changed
only with the approval of a majority of the Fund's shareholders as defined in
the 1940 Act. A more detailed discussion of the Funds' investment restrictions
and policies appears in the Statement of Additional Information. Unless
otherwise noted, the fundamental restrictions apply at the time an investment is
made. Each Fund may not:
1. Invest 25% or more of the value of its total assets in securities of
companies primarily engaged in any one industry (other than the US
Government, its agencies or instrumentalities). Concentration may
occur as a result of changes in the market value of portfolio
securities, but may not result from investment. Domestic and foreign
branches of US banks and domestic branches of foreign banks are not
considered a single industry for purposes of this restriction.
2. Borrow money (including reverse repurchase agreements), except as a
temporary measure for extraordinary or emergency purposes or to
facilitate redemptions (not for leveraging or investment), provided
that borrowings do not exceed an amount equal to 33-1/3% of the
current value of the Fund's assets taken at market value, less
liabilities other than borrowings. If at any time a Fund's borrowings
exceed this limitation due to a decline in net assets, such borrowings
will within three days be reduced to the extent necessary to comply
with this limitation. A Fund will not purchase additional investments
if borrowed funds (including reverse repurchase agreements) exceed 5%
of total assets.
-12-
<PAGE>
3. Pledge, mortgage, or hypothecate its assets. However, a Fund may
pledge securities having a market value at the time of the pledge not
exceeding 33-1/3% of the value of the Fund's total assets to secure
permitted borrowings.
PORTFOLIO MATURITY
Each Fund must limit investments to securities with remaining maturities of
397 days or less (as determined in accordance with applicable SEC regulations)
and must maintain a dollar-weighted average maturity of 90 days or less. The
Funds normally hold portfolio instruments to maturity, but may dispose of them
prior to maturity if Adviser finds it advantageous.
DIVIDENDS AND DISTRIBUTIONS
The Board of Trustees intends to declare dividends on shares of each Fund
from net investment income daily and have them payable as of the last business
day of each month. Distributions will be made at least annually from net short-
term and long-term capital gains, if any. In most instances, distributions will
be declared and paid in mid-October with additional distributions declared and
paid in December, if required, for a Fund to avoid imposition of a 4% federal
excise tax on undistributed capital gains. The Funds do not expect any material
long-term capital gains or losses.
Income dividends and capital gains distributions will be paid in additional
shares at their net asset value on the record date unless the shareholder has
elected to receive all or a portion of such dividends and distributions in cash.
Such election may be made by giving 10 days' written notice to Transfer Agent.
Investors should contact their Service Organizations regarding procedures for
the payment of dividends.
Dividends declared in October, November or December and payable to
shareholders of record in such months will be deemed to have been paid by the
Funds and received by shareholders on December 31 of that year if the dividend
is paid prior to February 1 of the following year.
TAXES
Each Fund intends to qualify as a regulated investment company ("RIC")
under Subchapter M of the Internal Revenue Code, as amended. As a RIC, each
Fund will not be subject to federal income taxes to the extent it distributes
its net investment income and capital gain net income (capital gains in excess
of capital losses) to its shareholders. The Board intends to distribute each
year substantially all of the Funds' net investment income and capital gain net
income.
Dividends from net investment income and distributions of net short-term
capital gains are taxable to shareholders as ordinary income under federal
income tax laws whether paid in cash or in additional shares. Distributions
from net long-term capital gains are taxable as long-term capital gains
regardless of the length of time a shareholder has held such shares.
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The Fund may purchase bonds at market discount (i.e., bonds with a purchase
price less than original issue price or adjusted issue price). If such bonds
are subsequently sold at a gain then a portion of that gain equal to the amount
of market discount, which should have been accrued through the sale date, will
be taxable to shareholders as ordinary income.
Dividends and distributions may also be subject to state or local taxes.
Depending on the state tax rules pertaining to a shareholder, a portion of the
dividends paid by a Fund attributable to direct obligations of the US Treasury
and certain agencies may be exempt from state and local taxes.
The sale of Fund shares by a shareholder is a taxable event and may result
in capital gain or loss. A capital gain or loss may be realized from an
ordinary redemption of shares or an exchange of shares between two mutual funds
(or two series of portfolios of a mutual fund). Any loss incurred on sale or
exchange of Fund shares held for one year or more will be treated as a long-term
capital loss to the extent of capital gain dividends received with respect to
such shares.
Shareholders will be notified after each calendar year of the amount of
income dividends and net capital gains distributed and the percentage of a
Fund's income attributable to US Treasury and agency obligations. The Funds are
required to withhold a legally determined portion of all taxable dividends,
distributions and redemption proceeds payable to any noncorporate shareholder
that does not provide the Funds with the shareholder's correct taxpayer
identification number or certification that the shareholder is not subject to
backup withholding.
The foregoing discussion is only a summary of certain federal income tax
issues generally affecting the Fund and its shareholders. Circumstances among
investors may vary and each investor is encouraged to discuss investment in the
Fund with the investor's tax adviser.
VALUATION OF FUND SHARES
NET ASSET VALUE PER SHARE. Net asset value per share for each class of
shares of a Fund is determined by adding the value of all securities and other
assets of the Fund, deducting accrued liabilities allocated to the class,
dividing by the number of shares outstanding in a class and rounding to the
nearest cent. The Funds determine net asset value twice each business day, as
of 12:00 noon Eastern time and as of the close of the regular trading session of
the New York Stock Exchange (ordinarily 4:00 p.m. Eastern time). A business day
is one on which the New York Stock Exchange and Boston Federal Reserve are open
for business.
VALUATION OF FUND SECURITIES. Each Fund seeks to maintain a $1.00 per
share net asset value and, accordingly, use the amortized cost valuation
procedure to value its portfolio instruments. The "amortized cost" valuation
procedure initially prices an instrument at its cost and thereafter assumes a
constant amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the instrument.
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PURCHASE OF FUND SHARES
Shares are offered through Service Organizations, who act as record holders
of the shares and provide services to their customers who invest in shares. To
purchase shares, investors should contact a Service Organization and follow its
procedures for the purchase of shares. Beneficial ownership of shares will be
recorded by Service Organizations and reflected in account statements provided
to their customers.
OFFERING DATES AND TIMES. Fund shares may be purchased on any business
day. All purchases must be made in US dollars. Purchase orders and payments
for Fund shares must be received by the Transfer Agent prior to 4:00 p.m.
Eastern time to be effective on the date received. The accompanying payment
must be in federal funds or converted into federal funds by the Transfer Agent
before the purchase order can be accepted. Purchase orders in good form are
described below. Purchase orders which are accepted: (1) prior to 12:00 noon
Eastern time will earn the dividend declared on the date of purchase; and (2) at
or after 12:00 noon Eastern time will earn the dividend determined on the next
day.
ORDER AND PAYMENT PROCEDURES. On behalf of their customers, Service
Organizations may purchase shares by wiring federal funds to State Street Bank
and Trust Company as Transfer Agent by:
1. Telephoning State Street Bank and Trust Company at (800) 647-7327 and
providing: (1) the Service Organization's account registration
number, address and tax identification number; (2) the name of the
Fund to be invested in; (3) the amount being wired; (4) the name of
the wiring bank; and (5) the name and telephone number of the person
at the wiring bank to be contacted in connection with the order.
2. Instructing the wiring bank to wire federal funds to: State Street
Bank and Trust Company, Boston, MA (ABA #0110-00028), Attention: The
Seven Seas Series Fund, Mutual Funds Service Division (DDA #9904-631-
0). The wire instructions should also include the name the account is
registered in, the account number and the name of the Fund to be
invested in.
Each Fund reserves the right to reject any order.
Service Organizations may charge investors fees for certain services.
Investors should contact their Service Organization for information concerning
what additional fees, if any, may be charged.
EXCHANGE PRIVILEGE. An investor's Service Organization may permit shares
of either Fund to be exchanged for shares of certain other investment
portfolios. Shares are exchanged on the basis of relative net asset value per
share. Investors should contact their Service Organizations for information
regarding exchange options and procedures and fees imposed in connection with
exchanges.
REDEMPTION OF FUND SHARES
Investors may redeem all or part of their shares in accordance with
instructions and limitations pertaining to their account at a Service
Organization. These procedures will vary according to the type of account and
the Service Organization involved, and investors should consult their account
managers in this regard. It is the responsibility of the Service Organizations
to transmit redemption orders to the Transfer Agent and credit their customers'
accounts with the redemption proceeds on a timely basis.
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On behalf of their customers, Service Organizations may redeem Fund shares
on any business day at the net asset value next determined after the receipt of
a redemption request. Payment for redemption orders will be wired in federal
funds to the Service Organization's account at a domestic commercial bank that
is a member of the Federal Reserve System. The Funds reserve the right to
suspend redemptions or postpone the date of payment if emergency conditions, as
specified in the 1940 Act or determined by the Securities and Exchange
Commission, should exist.
A dividend will be paid on shares redeemed if the redemption request is
received by State Street Bank and Trust Company after 12:00 noon Eastern time.
Redemption requests received before 12:00 noon Eastern time will not be entitled
to that day's dividend.
GENERAL MANAGEMENT
The Board of Trustees supervises the management, activities and affairs of
the Funds and has approved contracts with various financial organizations to
provide, among other services, day-to-day management required by the Funds.
ADVISORY AGREEMENT. Investment Company employs State Street to furnish
investment services to the Funds. State Street is one of the largest
providers of securities processing and record keeping services for US mutual
funds and pension funds. State Street is a wholly owned subsidiary of State
Street Boston Corporation, a publicly held bank holding company. State
Street, with over $171.3 billion (US) under management as of September 30,
1995, provides complete global investment management services from offices in
the United States, London, Sydney, Hong Kong, Tokyo, Toronto, Luxembourg,
Melbourne, Montreal and Paris.
Adviser, subject to Board supervision, directs the investments of each Fund
in accordance with the Fund's investment objective, policies and restrictions.
For these services, each Fund pays Adviser a fee, calculated daily and paid
monthly, that on an annual basis is equal to .25% of the Fund's average daily
net assets.
The Glass-Steagall Act prohibits a depository state chartered bank such as
Adviser from engaging in the business of issuing, underwriting, selling or
distributing certain securities. The activities of Adviser in informing its
customers of the Funds, performing investment and redemption services and
providing custodian, transfer, shareholder servicing, dividend disbursing and
investment advisory services may raise issues under these provisions. Adviser
has been advised by its counsel that its activities in connection with the Funds
are consistent with its statutory and regulatory obligations. THE SHARES
OFFERED BY THIS PROSPECTUS ARE NOT ENDORSED OR GUARANTEED BY STATE STREET OR ITS
AFFILIATES, ARE NOT DEPOSITS OR OBLIGATIONS OF STATE STREET OR ITS AFFILIATES,
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
Changes in federal or state statutes and regulations relating to the
permissible activities of banks and their affiliates, as well as judicial or
administrative decisions or interpretations of such or future statutes and
regulations, could prevent Adviser from continuing to perform all or a part of
the above services for its customers and/or the Funds. If Adviser were
prohibited from serving the Funds in any of
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its present capacities, the Board of Trustees would seek an alternative
provider(s) of such services. In such event, changes in the operation of the
Funds may occur. It is not expected by Adviser that existing shareholders would
suffer any adverse financial consequences (if another adviser with equivalent
abilities is found) as a result of any of these occurrences.
State Street may from time to time have discretionary authority over
accounts which invest in Investment Company shares. These accounts include
accounts maintained for securities lending clients and accounts which permit the
use of Investment Company portfolios as short-term cash sweep investments.
Shares purchased for all discretionary accounts are held of record by State
Street who retains voting control of such shares. As of November 30, 1995,
State Street held of record 36% of the issued and outstanding shares of
Investment Company in connection with its discretionary accounts. Consequently,
State Street may be deemed to be a controlling person of Investment Company for
purposes of the 1940 Act.
Under the Adviser's Code of Ethics, the Adviser's employees in Boston where
investment management operations are conducted are only permitted to engage in
personal securities transactions which do not involve securities which the
Adviser had recommended for purchase or sale, or purchased or sold, on behalf of
its clients. Such employees must report their personal securities transactions
quarterly and supply broker confirmations to the Adviser.
ADMINISTRATION AGREEMENT. Frank Russell Investment Management Company
("Administrator") serves as administrator of the Funds. Administrator currently
serves as investment manager and administrator to 22 mutual funds with assets
of $7.3 billion as of October 31, 1995, and acts as administrator to 17
mutual funds, including those Funds presented in this Prospectus, with assets of
$7.2 billion as of October 31, 1995.
Pursuant to the Administration Agreement with Investment Company,
Administrator will: (1) supervise all aspects of the Funds' operations;
(2) provide the Funds with administrative and clerical services, including the
maintenance of certain of the Funds' books and records; (3) arrange the periodic
updating of the Funds' prospectuses and any supplements thereto; (4) provide
proxy materials and reports to Fund shareholders and the Securities and Exchange
Commission; and (5) provide the Funds with adequate office space and all
necessary office equipment and services, including telephone service, heat,
utilities, stationery supplies and similar items. For these services, the Funds
and Investment Company's other domestic investment portfolios pay Administrator
a combined fee that on an annual basis is equal to the following percentages of
their average aggregate daily net assets: (1) $0 to and including $500 million
- -- .06%; (2) over $500 million to and including $1 billion -- .05%; and (3) over
$1 billion -- .03%. The percentage of the fee paid by a particular Fund is
equal to the percentage of average aggregate daily net assets that are
attributable to that Fund. Administrator will also receive reimbursement of
expenses it incurs in connection with establishing new investment portfolios.
Further, the administration fee paid by the Investment Company will be reduced
by the sum of certain distribution related expenses (up to a maximum of 15% of
the asset-based administration fee listed above).
Administrator also provides administrative services in connection with the
registration of shares of Investment Company with those states in which its
shares are offered or sold. Compensation for such services is on a "time spent"
basis. Investment Company will pay all registration, exemptive application,
renewal and related fees and reasonable out-of-pocket expenses.
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Officers and employees of the Administrator and Distributor are permitted
to engage in personal securities transactions subject to restrictions and
procedures set forth in the Confidentiality Manual and Code of Ethics adopted by
the Investment Company, Administrator and Distributor. Such restrictions and
procedures include substantially all of the recommendations of the Advisory
Group of the Investment Company Institute and comply with Securities and
Exchange Commission rules and regulations.
DISTRIBUTION SERVICES AND SHAREHOLDER SERVICING ARRANGEMENTS. Pursuant to
the Distribution Agreement with Investment Company, Russell Fund Distributors,
Inc. ("Distributor"), a wholly owned subsidiary of Administrator, serves as
distributor for all Fund shares.
The Funds have adopted a distribution plan pursuant to Rule 12b-1 (the
"Plan") under the 1940 Act for the Class B shares. The purpose of the Plan is
to provide for the payment of certain Investment Company distribution and
shareholder servicing expenses. Under the Plan, Distributor will be reimbursed
in an amount up to .35% of the net asset value of Class B shares of each Fund
for distribution-related and shareholder servicing expenses. Payments under the
Plan will be made to Distributor to finance activity that is intended to result
in the sale and retention of Fund shares including: (1) the costs of
prospectuses, reports to shareholders and sales literature; (2) advertising; and
(3) expenses incurred in connection with the promotion and sale of Fund shares,
including Distributor's overhead expenses for rent, office supplies, equipment,
travel, communication, compensation and benefits of sales personnel.
Under the Plan, the Funds may also enter into agreements ("Service
Agreements") with financial institutions, which may include Adviser ("Service
Organizations"), to provide distribution and shareholder services with respect
to Class B shares of the Funds held by or for the customers of the Service
Organizations. Under the Service Agreements, the Service Organizations may
provide various services for such customers including: processing customer
purchase and redemption requests; answering inquiries regarding the Funds;
assisting customers in changing dividend options, account designations and
addresses; performing subaccounting for such customers; establishing and
maintaining customer accounts and records; processing purchase and redemption
transactions; providing periodic statements showing customers' account balances
and integrating such statements with those of other transactions and balances in
the customers' other accounts serviced by the Service Organizations; arranging
for bank wires transferring customers' funds; transmitting proxy statements,
annual and semi-annual reports, prospectuses and other communications from the
Funds to customers; and such other services as the customers may request in
connection with the Funds, to the extent permitted by applicable statute, rule
or regulation. Service Organizations may receive from each Fund a monthly fee
at a rate that shall not exceed .25% per annum of the average daily net asset
value of the Fund's Class B shares owned by or for shareholders with whom the
Service Organization has a servicing relationship. Banks and other financial
service firms may be subject to various state laws, and may be required to
register as dealers pursuant to state law.
Payments to Distributor, as well as payments to Service Organizations from
a Fund, are not permitted by the Plan to exceed .35% per year of the average net
asset value of the Fund's Class B shares. Any payments that are required to be
made by the Distribution Agreement and any Service Agreement but could not be
made because of the .35% limitation may be carried forward and paid in
subsequent years so long as the Plan is in effect. A Fund's liability for any
such expenses may be carried forward
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indefinitely. Service Organizations will be responsible for prompt transmission
of purchase and redemption orders and may charge fees for their services.
FUND EXPENSES
The Funds will pay all of their expenses other than those expressly assumed
by Adviser and Administrator. The principal expenses of the Funds are the
annual advisory fee payable to Adviser and distribution and shareholder
servicing expenses. Other expenses include: (1) amortization of deferred
organizational costs; (2) taxes, if any; (3) expenses for legal, auditing and
financial accounting services; (4) expense of preparing (including typesetting,
printing and mailing) reports, prospectuses and notices to existing
shareholders; (5) administrative fees; (6) custodian fees, (7) expense of
issuing and redeeming Fund shares; (8) the cost of registering Fund shares under
federal and state laws; (9) shareholder meetings and related proxy solicitation
expenses; (10) the fees, travel expenses and other out-of-pocket expenses of
Trustees who are not affiliated with Adviser or any of its affiliates;
(11) insurance, interest, brokerage and litigation costs; (12) extraordinary
expenses as may arise, including expenses incurred in connection with litigation
proceedings and claims and the legal obligations of Investment Company to
indemnify its Trustees, officers, employees, shareholders, distributors and
agents; and (13) other expenses properly payable by the Funds. Where any of
these other expenses are attributable to a particular class of shares, they will
be borne by the beneficial owners of such shares.
PERFORMANCE CALCULATIONS
From time to time the Funds may advertise the yield and effective yield of
their Class B shares. The yield of each Fund refers to the income generated by
an investment in Class B shares of the Fund over a seven-day period (which
period will be stated in the advertisement). This income is then annualized.
That is, the amount of income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment. The effective yield is calculated similarly but,
when annualized, the income earned by an investment in each Fund is assumed to
be reinvested. The effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
From time to time, the Funds may also report yield and effective yield as
calculated over a one-month period (which period will also be stated in the
advertisement). These one-month periods will be annualized using the same
method as described above for yields calculated on the basis of seven-day
periods. From time to time, yields calculated on a monthly basis may also be
linked to provide yield figures for periods greater than one month.
From time to time, the Funds may advertise the total return of their Class
B shares. The total return of a Fund is the average annual compounded rate of
return from a hypothetical investment in the Fund's Class B shares over one,
five and ten-year periods or for the life of the Fund (as stated in the
advertisement), assuming the reinvestment of all dividends and capital gains
distributions.
Comparative performance information may be used from time to time in
advertising or marketing Fund shares, including data from Lipper Analytical
Services, Inc., Donoghue's Money Fund Report, the
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Bank Rate Monitor, Wall Street Journal Score Card, Lehman Brothers Index or
other industry publications, business periodicals, rating services and market
indices. The Funds may also advertise nonstandardized performance information
which is for periods in addition to those required to be presented.
Quoted yields and other performance figures are based on historical
earnings and are not indications of future performance.
ADDITIONAL INFORMATION
CUSTODIAN, TRANSFER AGENT AND INDEPENDENT ACCOUNTANTS. State Street holds
all portfolio securities and cash assets of the Funds, provides portfolio record
keeping services and serves as the Funds' transfer agent ("Transfer Agent") and
custodian ("Custodian"). State Street is authorized to deposit securities in
securities depositories or to use the services of subcustodians. State Street
has no responsibility for the supervision and management of the Funds except as
investment adviser. Coopers & Lybrand L.L.P., Boston, Massachusetts, is
Investment Company's independent accountants.
REPORTS TO SHAREHOLDERS AND SHAREHOLDER INQUIRIES. Shareholders will
receive unaudited semiannual financial statements and annual financial
statements audited by Investment Company's independent accountants. Potential
investors who wish to obtain more information about the Funds should contact a
Service Organization. Inquiries from Servicing Organizations regarding the
Prospectus and financial statements may be made by calling Distributor at
(617) 654-6089.
ORGANIZATION, CAPITALIZATION AND VOTING. Investment Company was organized
as a Massachusetts business trust on October 3, 1987 and operates under a First
Amended and Restated Master Trust Agreement dated October 13, 1993, as amended.
Investment Company issues shares divisible into an unlimited number of series
(or funds), each of which is a separate trust under Massachusetts law. The
Money Market and Government Money Market Funds are two such series. Shares of a
Fund are entitled to such relative rights and preferences and dividends and
distributions earned on assets of the Fund as may be declared by the Board of
Trustees. Fund shares are fully paid and nonassessable by Investment Company
and have no preemptive rights. Investment Company is authorized to subdivide
each series into two or more classes of shares. Currently, shares of the Money
Market and Government Money Market Funds are divided into Class A, Class B and
Class C. Each class of shares of a Fund is entitled to the same rights and
privileges as all other classes of that Fund, provided, however, that each class
bears the expenses related to its distribution and shareholder servicing
arrangements, as well as other expenses attributable to the class and unrelated
to managing the Fund's portfolio securities. As described above, Investment
Company has adopted a plan of distribution under rule 12b-1 for Class B shares.
Similar plans have been adopted for Class A and Class C shares. However, total
payments under those plans are limited to .25% and .60% annually of the average
net asset value of the Class A and Class C shares, respectively of a Fund. As a
result of these plan and other class expenses, the yield on Class B and Class C
shares will be approximately .25% and .50% lower, respectively, than the yield
on Class A shares.
Each Fund share has one vote. There are no cumulative voting rights.
There is no annual meeting of shareholders, but special meetings may be held.
On any matter that affects only a particular
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investment fund, only shareholders of that fund may vote unless otherwise
required by the 1940 Act or the Master Trust Agreement. Further, any matter
that affects only the holders of a particular class of shares may be voted on
only by such shareholders. Each class of shares votes separately with respect
to any Rule 12b-1 plan applicable to such class. The Trustees hold office for
the life of the Trust. A Trustee may resign or retire, and may be removed at
any time by a vote of two-thirds of Investment Company shares or by vote of a
majority of the Trustees. The Trustees shall promptly call and give notice of a
meeting of shareholders for the purpose of voting upon removal of any Trustee
when requested to do so in writing by holders of not less than 10% of the shares
then outstanding. A vacancy on the Board of Trustees may be filled by the vote
of a majority of the remaining Trustees, provided that immediately thereafter at
least two-thirds of the Trustees have been elected by shareholders.
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THE SEVEN SEAS SERIES FUND
Two International Place, 35th Floor
Boston, Massachusetts 02110
INVESTMENT ADVISER, CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
DISTRIBUTOR
Russell Fund Distributors, Inc.
Two International Place, 35th Floor
Boston, Massachusetts 02110
ADMINISTRATOR
Frank Russell Investment Management Company
909 A Street
Tacoma, Washington 98402
LEGAL COUNSEL
Goodwin, Procter & Hoar
Exchange Place
Boston, Massachusetts 02109
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
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Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
THE SEVEN SEAS SERIES FUND
Two International Place, 35th Floor
Boston, Massachusetts 02110
(617) 654-6089
MONEY MARKET FUNDS
CLASS C SHARES
The Seven Seas Series Fund is a registered open-end investment company with
multiple portfolios, each of which is a mutual fund. This Prospectus describes
and offers Class C shares of beneficial interest in the mutual funds listed
below, each referred to as a "Fund." Shares may not be purchased by individuals
directly, but must be purchased through a financial institution which is
permitted by contract with the Funds to offer the shares. This Prospectus
should be read together with any materials provided by such institution.
Each Fund seeks to achieve a specific investment objective by using distinct
investment strategies:
THE SEVEN SEAS SERIES MONEY MARKET FUND seeks to maximize current income, to
the extent consistent with the preservation of capital and liquidity and the
maintenance of a stable $1.00 per share net asset value, by investing in dollar
denominated securities with remaining maturities of one year or less.
THE SEVEN SEAS SERIES US GOVERNMENT MONEY MARKET FUND seeks to maximize
current income, to the extent consistent with the preservation of capital and
liquidity and the maintenance of a stable $1.00 per share net asset value, by
investing in obligations of the US Government or its instrumentalities with
remaining maturities of one year or less.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
INVESTMENTS IN THE MONEY MARKET FUND AND US GOVERNMENT MONEY MARKET FUND ARE
NEITHER INSURED NOR GUARANTEED BY THE US GOVERNMENT. THERE IS NO ASSURANCE THAT
EITHER THE MONEY MARKET FUND OR US GOVERNMENT MONEY MARKET FUND WILL MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE.
SHARES IN THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, STATE STREET BANK AND TRUST COMPANY, AND SHARES ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER AGENCY, AND INVOLVE INVESTMENT RISKS INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
This Prospectus sets forth concisely the information about the Funds that a
prospective investor ought to know before investing. Please read and retain
this document for future reference. Additional information about the Funds has
been filed with the Securities and Exchange Commission in a Statement of
Additional Information dated December 29, 1995. The Statement of Additional
Information is incorporated herein by reference and is available without charge
from Distributor at its address noted below or by calling (617) 654-6089.
<TABLE>
<S> <C> <C>
Investment Adviser, Custodian
and Transfer Agent: Distributor: Administrator:
State Street Bank and Trust Russell Fund Distributors, Inc. Frank Russell Investment
Company Two International Place Management Company
225 Franklin Street 35th Floor 909 A Street
Boston, Massachusetts 02110 Boston, Massachusetts 02110 Tacoma, Washington 98402
(617) 654-4721 (617) 654-6089 (206) 627-7001
</TABLE>
PROSPECTUS DATED DECEMBER 29, 1995
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TABLE OF CONTENTS
Page
----
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Fund Operating Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 4
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
The Seven Seas Series Fund . . . . . . . . . . . . . . . . . . . . . . . . 8
Manner of Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Investment Objectives, Policies and Restrictions . . . . . . . . . . . . . 8
Portfolio Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Dividends and Distributions. . . . . . . . . . . . . . . . . . . . . . . . 13
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Valuation of Fund Shares . . . . . . . . . . . . . . . . . . . . . . . . . 15
Purchase of Fund Shares. . . . . . . . . . . . . . . . . . . . . . . . . . 15
Redemption of Fund Shares. . . . . . . . . . . . . . . . . . . . . . . . . 16
General Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Fund Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Performance Calculations . . . . . . . . . . . . . . . . . . . . . . . . . 20
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . 21
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SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in the Prospectus.
INVESTMENT OBJECTIVE. The Money Market Fund's investment objective is to
maximize current income, to the extent consistent with the preservation of
capital and liquidity and the maintenance of a stable $1.00 per share net asset
value, by investing in dollar denominated securities with remaining maturities
of one year or less. Such securities consist principally of: US Treasury
bills, notes and bonds; other obligations issued or guaranteed as to interest
and principal by the US Government, its agencies or instrumentalities;
instruments of US and foreign banks; and commercial paper of US and foreign
companies.
The US Government Money Market Fund's investment objective is to maximize
current income, to the extent consistent with the preservation of capital and
liquidity and the maintenance of a stable $1.00 per share net asset value, by
investing in obligations of the US Government or its agencies or
instrumentalities with remaining maturities of one year or less. The Fund's
portfolio typically consists entirely of securities issued or guaranteed by the
US Government or its agencies or instrumentalities.
DIVIDENDS. Dividends from net investment income are declared daily and paid
monthly. Net capital gains, if any, are distributed annually.
POTENTIAL INVESTORS. The Funds are designed to be an economical and efficient
means for retail investors to participate in professionally managed portfolios
of money market instruments. In this Prospectus, Class C shares of the Funds
are offered to customers of certain financial institutions ("Service
Organizations") who act as record holders of the shares and provide services to
their customers who invest in the Funds.
PURCHASES AND REDEMPTIONS. Because shares of the Funds are offered through
Service Organizations, to purchase and redeem shares potential investors should
contact their Service Organizations for information regarding purchase and
redemption procedures. Shares may be purchased or redeemed at the net asset
value next determined after receipt of the order.
INVESTMENT ADVISERS. State Street Bank and Trust Company serves as investment
adviser to the Funds in return for a fee equal to .25% annually of each Fund's
average daily net assets.
CERTAIN CLASS INFORMATION. The shares of each Fund are divided into three
classes: Class A, Class B and Class C. Class A shares are designed for
institutional investors. Class B shares are offered through Service
Organizations that provide certain account administration services. Class C
shares are offered through Service Organizations that provide certain account
administration and shareholder liaison services. Each class of shares of a Fund
is entitled to the same rights and privileges as all other classes of shares of
that Fund, provided however, that each class bears the expenses related to its
distribution and shareholder servicing arrangements and certain other expenses
attributable to the class. Annual distribution and shareholder servicing
expenses for Class A, Class B and Class C shares are equal to approximately
.05%, .30% and .55%, respectively, of the average daily net asset value of the
shares of the class. Total operating expenses for Class A, Class B and Class C
shares of the Money Market Fund are equal to approximately .38%, .65% and .93%,
respectively, of the average daily net asset value of the shares of the class.
Total operating expenses for Class A, Class B and Class C shares of the US
Government Money Market Fund are equal to approximately .39%, .68% and .93%,
respectively, of the average daily net asset value of the shares of the class.
-3-
<PAGE>
FUND OPERATING EXPENSES
THE SEVEN SEAS SERIES MONEY MARKET FUND
CLASS C SHARES
The purpose of the following table is to assist the investor in understanding
the various costs and expenses that an investor in Class C shares of the Money
Market Fund will incur directly or indirectly. THE EXAMPLES PROVIDED IN THE
TABLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES.
Actual expenses may be greater or less than those shown. For additional
information, see "General Management."
Shareholder Transaction Expenses:
- --------------------------------
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividend None
Deferred Sales Load None
Redemption Fees None
Exchange Fee None
Annual Fund Operating Expenses:
- ------------------------------
(as a percentage of average daily net assets)
<TABLE>
<CAPTION>
<S> <C>
Advisory Fees .25%
12b-1 Fees (including Shareholder Servicing Fees)(1,2) .55
Other Expenses(2) .13
----
Total Operating Expenses(3) .93%
----
</TABLE>
<TABLE>
<CAPTION>
Examples: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------- --------------------------------------
<S> <C> <C> <C> <C>
You would pay the following expenses
on a $1,000 investment, assuming: (i)
5% annual return; and (ii) redemption
at the end of each time period: $9 $30 $51 $114
-- --- --- ----
-- --- --- ----
</TABLE>
- -----------------------------------
(1) 12-b Fees include shareholder servicing fees payable to Service
Organizations in the amount of .25% of the annual average daily net asset
value of the Fund's Class C Shares.
(2) "Other Expenses" and a portion of 12b-1 fees are based on estimated amounts
for the current fiscal year.
(3) Service Organizations may impose additional fees for services provided to
investors. Investors should contact their Service Organization for
information concerning what additional fees, if any, will be charged.
Long-term holders of the Fund's Class C shares may pay more in Rule 12b-1
fees than the economic equivalent of the front-end sales charge permitted
by the National Association of Securities Dealers, Inc.
-4-
<PAGE>
FUND OPERATING EXPENSES
THE SEVEN SEAS SERIES US GOVERNMENT MONEY MARKET FUND
CLASS C SHARES
The purpose of the following table is to assist the investor in understanding
the various costs and expenses that an investor in Class C shares of the US
Government Money Market Fund will incur directly or indirectly. THE EXAMPLES
PROVIDED IN THE TABLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. Actual expenses may be greater or less than those shown. For
additional information, see "General Management."
Shareholder Transaction Expenses:
- --------------------------------
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fee None
<TABLE>
<CAPTION>
Annual Fund Operating Expenses:
- ------------------------------
(as a percentage of average daily net assets)
<S> <C>
Advisory Fees .25%
12b-1 Fees (including Shareholder Servicing Fees)(1,2) .55
Other Expenses(2) .13
----
Total Operating Expenses(3) .93%
----
----
</TABLE>
<TABLE>
<CAPTION>
Examples: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------- -------------------------------------------
<S> <C> <C> <C> <C>
Your would pay the following
expenses on a $1,000 investment,
assuming: (i) 5% annual return; and
(ii) redemption at the end of each
time period: $9 $30 $51 $114
-- --- --- ----
-- --- --- ----
</TABLE>
- -----------------------------------
(1) 12-b Fees include shareholder servicing fees payable to Service
Organizations in the amount of .25% of the annual average daily net asset
value of the Fund's Class C Shares.
(2) "Other Expenses" and a portion of 12b-1 fees are based on estimated amounts
for the current fiscal year.
(3) Service Organizations may impose additional fees for services provided to
investors. Investors should contact their Service Organization for
information concerning what additional fees, if any, will be charged.
Long-term holders of the Fund's Class C shares may pay more in Rule 12b-1
fees than the economic equivalent of the front-end sales charge permitted
by the National Association of Securities Dealers, Inc.
-5-
<PAGE>
FINANCIAL HIGHLIGHTS
THE SEVEN SEAS SERIES MONEY MARKET FUND
The following table contains important financial information relating to the
Money Market Fund and has been audited by Coopers & Lybrand L.L.P., the
Fund's independent accountants. The table includes selected data for a
Class A share outstanding throughout each fiscal year or period ended
August 31, and other performance information derived from the financial
statements. The Investment Company is authorized to issue Class B and
Class C shares of the Money Market Fund although shares have not been
offered on these classes as of the date of this Prospectus. The table appears
in the Fund's Annual Report and should be read in conjunction with the Fund's
financial statements and related notes, which are incorporated by reference
in the Statement of Additional Information and which appear, along with the
report of Coopers & Lybrand L.L.P., in the Fund's Annual Report to
Shareholders. More detailed information concerning the Fund's performance,
including a complete portfolio listing and audited financial statements, is
available in the Fund's Annual Report, which may be obtained without charge
by writing or calling the Distributor.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989 1988++
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .0538 .0330 .0320 .0458 .0686 .0817 .0883 .0239
------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income (.0538) (.0330) (.0320) (.0458) (.0686) (.0817) (.0883) (.0239)
------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE,
END OF YEAR $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
TOTAL RETURN (%)(a) 5.52 3.35 3.24 4.68 7.08 8.48 9.19 2.41
RATIOS(%)/SUPPLE-
MENTAL DATA:
Operating expenses, net,
to average daily net
assets (b) .39 .36 .33 .35 .37 .37 .43 .44
Operating expenses,
gross, to average daily
net assets (b) .39 .36 .38 .35 .38 .43 .51 .63
Net investment income
to average daily net
assets 5.37 3.33 3.20 4.40 6.59 8.13 8.97 7.30
Net assets, end of year
($000 omitted) 2,752,895 3,020,796 2,502,483 4,263,057 1,645,428 650,598 442,614 193,777
Per share amount of fees
waived ($ omitted) -- -- .0005 -- .0000 .0005 .0004 .0010
</TABLE>
- -----------------------
++ For the period May 2, 1988 (commencement of operations) to August 31, 1988.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended August 31, 1988 are annualized.
-6-
<PAGE>
FINANCIAL HIGHLIGHTS
THE SEVEN SEAS SERIES US GOVERNMENT MONEY MARKET FUND
The following table contains important financial information relating to the
Government Money Market Fund and has been audited by Coopers & Lybrand
L.L.P., the Fund's independent accountants. The table includes selected data
for a Class A share outstanding throughout each fiscal year or period
ended August 31, and other performance information derived from the
financial statements. The Investment Company is authorized to issue Class B
and Class C shares of the Government Money Market Fund although shares
have not been offered on these classes as of the date of this Prospectus. The
table appears in the Fund's annual Report and should be read in conjunction
with the Fund's financial statements and related notes, which are
incorporated by reference in the Statement of Additional Information and
which appear, along with the report of Coopers & Lybrand L.L.P., in the
Fund's Annual Report to Shareholders. More detailed information concerning
the Fund's performance, including a complete portfolio listing and audited
financial statements, is available in the Fund's Annual Report, which may be
obtained without charge by writing or calling the Distributor.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991++
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .0528 .0324 .0304 .0441 .0302
------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Net investment income (.0528) (.0324) (.0304) (.0441) (.0302)
------- ------- ------- ------- -------
NET ASSET VALUE,
END OF YEAR $1.0000 $1.0000 $1.0000 $1.0000 $1.0000
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN (%)(a) 5.38 3.30 3.08 4.49 3.06
RATIOS (%)/SUPPLE-
MENTAL DATA:
Operating expenses, net,
to average daily net
assets (b) .42 .38 .39 .41 .23
Operating expenses, gross
to average daily net
assets (b) .42 .39 .46 .42 .43
Net investment income
to average daily net
assets (b) 5.37 3.27 3.04 4.26 5.94
Net assets, end of year
($000 omitted) 490,138 251,165 137,136 156,707 94,646
Per share amount of fees
waived ($ omitted) -- -- -- .0001 .0011
Per share amount of fee
reimbursed by Adviser
($ omitted) -- .0001 .0007 -- --
</TABLE>
- -----------------------
++ For the period March 1, 1991 (commencement of operations) to August 31,
1991.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended August 31, 1991 are annualized.
-7-
<PAGE>
THE SEVEN SEAS SERIES FUND
The Seven Seas Series Fund ("Investment Company") is an open-end management
investment company that is organized as a Massachusetts business trust. In
addition, each series of the Investment Company is diversified as defined in the
Investment Company Act of 1940, as amended ("1940 Act"). As a "series" company,
Investment Company is authorized to issue an unlimited number of shares
evidencing beneficial interests in different investment portfolios. Through
this Prospectus, Investment Company offers Class C shares in two such portfolios
(collectively, "Funds"): The Seven Seas Series Money Market Fund ("Money Market
Fund") and The Seven Seas Series US Government Money Market Fund ("Government
Money Market Fund"). State Street Bank and Trust Company (the "Adviser" or
"State Street") serves as the investment adviser for each Fund.
MANNER OF OFFERING
The Funds are designed to be an economical and efficient means for retail
investors to participate in professionally managed portfolios of money market
instruments. Class C shares of the Funds are offered to customers of certain
financial institutions ("Service Organizations") that act as record holders of
shares and provide services to their customers who invest in the Funds. Each
Service Organization may set a minimum initial investment for its customers and
may involuntarily redeem all shares in an investor's account if the value of
these shares falls below a predetermined amount.
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
Each Fund has a fundamental investment objective, which may be changed only
with the approval of a majority of the Fund's shareholders as defined by the
1940 Act. There can be no assurance that either Fund will meet its investment
objective.
MONEY MARKET FUND
The Money Market Fund's fundamental investment objective is to maximize
current income, to the extent consistent with the preservation of capital and
liquidity and the maintenance of a stable $1.00 per share net asset value, by
investing in dollar denominated securities with remaining maturities of one year
or less.
The Fund attempts to meet its investment objective by investing in high
quality money market instruments. Such instruments include: (1) US Treasury
bills, notes and bonds; (2) other obligations issued or guaranteed as to
interest and principal by the US Government, its agencies, or instrumentalities;
(3) instruments of US and foreign banks, including certificates of deposit,
banker's acceptances and time deposits; these instruments may include Eurodollar
Certificates of Deposit ("ECDs"), Eurodollar Time Deposits ("ETDs") and Yankee
Certificates of Deposit ("YCDs"); (4) commercial paper of US and foreign
companies; (5) asset-backed securities; (6) corporate obligations; (7) variable
amount master demand notes; and (8) repurchase agreements.
The Fund will limit its portfolio investments to those United States
dollar-denominated instruments which at the time of acquisition the Adviser
determines present minimal credit risk and which qualify
-8-
<PAGE>
as "eligible" securities under the Securities and Exchange Commission rules
applicable to money market mutual funds. In general, eligible securities
include securities that: (1) are rated in the highest category by least two
nationally recognized statistical rating organizations ("NRSRO"); (2) by one
NRSRO, if only one rating services has rated the security; or (3) if unrated,
are of comparable quality, as determined by the Portfolio's Adviser in
accordance with procedures established by the Board of Trustees. See the
Appendix in the Statement of Additional Information for a description of a
NRSRO.
GOVERNMENT MONEY MARKET FUND
The Government Money Market Fund's fundamental investment objective is to
maximize current income to the extent consistent with the preservation of
capital and liquidity, and the maintenance of a stable $1.00 per share net asset
value, by investing in obligations of the US Government or its agencies or
instrumentalities with remaining maturities of one year or less.
The Fund attempts to meet its investment objective by investing in
obligations issued or guaranteed as to principal and interest by the US
Government or its agencies or instrumentalities or in repurchase agreements
secured by such instruments. (See "Investment Policies -- US Government
Securities.") Under normal market conditions, the Government Money Market Fund
will be 100% invested in such securities.
INVESTMENT POLICIES
The investment policies described below reflect the Funds' current
practices, are not fundamental and may be changed by the Board of Trustees of
Investment Company without shareholder approval. To the extent consistent with
the Fund's fundamental investment objective and restrictions the Fund may invest
in the following instruments and may use the following investment techniques:
US GOVERNMENT SECURITIES. US Government securities include US Treasury
bills, notes, and bonds and other obligations issued or guaranteed as to
interest and principal by the US Government and its agencies or
instrumentalities. Obligations issued or guaranteed as to interest and
principal by the US Government, its agencies or instrumentalities include
securities that are supported by the full faith and credit of the United States
Treasury, securities that are supported by the right of the issuer to borrow
from the United States Treasury, discretionary authority of the US Government
agency or instrumentality, and securities supported solely by the
creditworthiness of the issuer.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
banks and other financial institutions, such as broker-dealers. Under a
repurchase agreement, a Fund purchases securities from a financial institution
that agrees to repurchase the securities at the Fund's original purchase price
plus interest within a specified time (normally one business day). The Fund
will invest no more than 10% of its net assets (taken at current market value)
in repurchase agreements maturing in more than seven days. The Fund will limit
repurchase transactions to those member banks of the Federal Reserve System and
broker-dealers whose creditworthiness Adviser considers satisfactory. Should
the counterparty to a transaction fail financially, the Fund may encounter delay
and incur
-9-
<PAGE>
costs before being able to sell the securities. Further, the amount realized
upon the sale of the securities may be less than that necessary to fully
compensate the Fund.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse
repurchase agreements under the circumstances described in "Investment
Restrictions." Under a reverse repurchase agreement, the Fund sells portfolio
securities to a financial institution in return for cash in an amount equal
to a percentage of the portfolio securities' market value and agrees to
repurchase the securities at a future date at a prescribed repurchase price
equal to the amount of cash originally received plus interest on such amount.
The Fund retains the right to receive interest and principal payments with
respect to the securities while they are in the possession of the financial
institutions. Reverse repurchase agreements involve the risk of default by
the counterparty, which may adversely affect the Fund's ability to reacquire
the underlying securities.
FORWARD COMMITMENTS. Each Fund may contract to purchase securities for a
fixed price at a future date beyond customary settlement time. When effecting
such transactions, cash or liquid high quality debt obligations held by the Fund
of a dollar amount sufficient to make payment for the portfolio securities to be
purchased will be segregated on the Fund's records at the trade date and
maintained until the transaction is settled. The failure of the other party to
the transaction to complete the transaction may cause the Fund to miss an
advantageous price or yield. The Fund bears the risk of price fluctuations
during the period between the trade and settlement dates.
WHEN-ISSUED TRANSACTIONS. The Funds may purchase securities on a when-
issued basis. In these transactions, a Fund purchases securities with payment
and delivery scheduled for a future time. Until settlement, the Funds segregate
cash and marketable high quality debt securities equal in value to their when-
issued commitments. Between the trade and settlement dates, the Fund bears the
risk of any fluctuation in the value of the securities. These transactions
involve the additional risk that the other party may fail to complete the
transaction and cause the Fund to miss a price or yield considered advantageous.
Each Fund will engage in when-issued transactions only for the purpose of
acquiring portfolio securities consistent with its investment objective and
policies and not for investment leverage. The Funds will not invest more than
25% of their net assets in when-issued securities.
ILLIQUID SECURITIES. Neither Fund will invest more than 10% of its net
assets in illiquid securities or securities that are not readily marketable,
including repurchase agreements and time deposits of more than seven days'
duration. The absence of a regular trading market for illiquid securities
imposes additional risks on the investments in these securities. Illiquid
securities may be difficult to value and may often be disposed of only after
considerable expense and delay.
VARIABLE AMOUNT MASTER DEMAND NOTES. Variable amount master demand notes
are unsecured obligations that are redeemable upon demand and are typically
unrated. These instruments are issued pursuant to written agreements between
their issuers and holders. The agreements permit the holders to increase
(subject to an agreed maximum) and the holders and issuers to decrease the
principal amount of the notes, and specify that the rate of interest payable on
the principal fluctuates according to an agreed formula.
-10-
<PAGE>
ASSET-BACKED SECURITIES (MONEY MARKET FUND ONLY). Asset-backed securities
represent undivided fractional interests in pools of instruments, such as
consumer loans, and are similar in structure to mortgage-related pass-through
securities described below. Payments of principal and interest are passed
through to holders of the securities and are typically supported by some form of
credit enhancement, such as a letter of credit, surety bond, limited guarantee
by another entity or by priority to certain of the borrower's other securities.
The degree of credit enhancement varies, generally applying only until exhausted
and covering only a fraction of the security's par value. If the credit
enhancement of an asset-backed security held by the Fund has been exhausted, and
if any required payments of principal and interest are not made with respect to
the underlying loans, the Fund may experience loss or delay in receiving payment
and a decrease in the value of the security. Further details are set forth in
the Statement of Additional Information under "Investment Restrictions and
Policies -- Investment Policies."
MORTGAGE-RELATED PASS-THROUGH SECURITIES. The Funds may invest in
mortgage-related securities, including Government National Mortgage Association
("GNMA") Certificates ("Ginnie Maes"), Federal Home Loan Mortgage Corporation
("FHLMC") Mortgage Participation Certificates ("Freddie Macs") and Federal
National Mortgage Association ("FNMA") Guaranteed Mortgage Pass-Through
Certificates ("Fannie Maes"). Mortgage pass-through certificates are mortgage-
backed securities representing undivided fractional interests in pools of
mortgage-backed loans. These loans are made by mortgage bankers, commercial
banks, savings and loan associations and other lenders. Ginnie Maes are
guaranteed by the full faith and credit of the US Government, but Freddie Macs
and Fannie Maes are not.
ZERO COUPON SECURITIES. Zero coupon securities are notes, bonds and
debentures that: (1) do not pay current interest and are issued at a
substantial discount from par value; (2) have been stripped of their unmatured
interest coupons and receipts; or (3) pay no interest until a stated date one or
more years into the future. These securities also include certificates
representing interests in such stripped coupons and receipts.
VARIABLE AND FLOATING RATE SECURITIES. A floating rate security provides
for the automatic adjustment of its interest rate whenever a specified interest
rate changes. A variable rate security provides for the automatic establishment
of a new interest rate on set dates. Interest rates on these securities are
ordinarily tied to, and are a percentage of, a widely recognized interest rate,
such as the yield on 90-day US Treasury bills or the prime rate of a specified
bank. These rates may change as often as twice daily. Generally, changes in
interest rates will have a smaller effect on the market value of variable and
floating rate securities than on the market value of comparable fixed income
obligations. Thus, investing in variable and floating rate securities generally
allows less opportunity for capital appreciation and depreciation than investing
in comparable fixed income securities.
EURODOLLAR CERTIFICATES OF DEPOSIT, EURODOLLAR TIME DEPOSITS AND YANKEE
CERTIFICATES OF DEPOSIT (MONEY MARKET FUND ONLY). ECDs are US dollar
denominated certificates of deposit issued by foreign branches of domestic
banks. ETDs are US dollar denominated deposits in foreign branches of US banks
and foreign banks. YCDs are US dollar denominated certificates of deposit
issued by US branches of foreign banks.
-11-
<PAGE>
Different risks than those associated with the obligations of domestic
banks may exist for ECDs, ETDs and YCDs because the banks issuing these
instruments, or their domestic or foreign branches, are not necessarily subject
to the same regulatory requirements that apply to domestic banks, such as loan
limitations, examinations and reserve, accounting, auditing, record keeping and
public reporting requirements.
LENDING PORTFOLIO SECURITIES. The Fund may lend portfolio securities with
a value of up to 33-1/3% of its total assets. Such loans may be terminated at
any time. The Fund will receive cash or US Treasury bills, notes and bonds in
an amount equal to at least 100% of the current market value (on a daily marked-
to-market basis) of the loaned securities plus accrued interest. In a loan
transaction, as compensation for lending it securities, the Fund will receive a
portion of the dividends or interest accrued on the securities held as
collateral or, in the case of cash collateral, a portion of the income from the
investment of such cash. In addition, the Fund will receive the amount of all
dividends, interest and other distributions on the loaned securities. However,
the borrower has the right to vote the loaned securities. The Fund will call
loans to vote proxies if a material issue affecting the investment is to be
voted upon. Should the borrower of the securities fail financially, the Fund
may experience delays in recovering the securities or exercising its rights in
the collateral. Loans are made only to borrowers that are deemed by Adviser to
be of good financial standing. In a loan transaction, the Fund will also bear
the risk of any decline in value of securities acquired with cash collateral.
The Fund will minimize this risk by limiting the investment of cash collateral
to high quality instruments of short maturity.
INVESTMENT RESTRICTIONS
Each Fund has fundamental investment restrictions, which may be changed
only with the approval of a majority of the Fund's shareholders as defined in
the 1940 Act. A more detailed discussion of the Funds' investment restrictions
and policies appears in the Statement of Additional Information. Unless
otherwise noted, the fundamental restrictions apply at the time an investment is
made. Each Fund may not:
1. Invest 25% or more of the value of its total assets in securities of
companies primarily engaged in any one industry (other than the US
Government, its agencies or instrumentalities). Concentration may
occur as a result of changes in the market value of portfolio
securities, but may not result from investment. Domestic and foreign
branches of US banks and domestic branches of foreign banks are not
considered a single industry for purposes of this restriction.
2. Borrow money (including reverse repurchase agreements), except as a
temporary measure for extraordinary or emergency purposes or to
facilitate redemptions (not for leveraging or investment), provided
that borrowings do not exceed an amount equal to 33-1/3% of the
current value of the Fund's assets taken at market value, less
liabilities other than borrowings. If at any time a Fund's borrowings
exceed this limitation due to a decline in net assets, such borrowings
will within three days be reduced to the extent necessary to comply
with this limitation. A Fund will not purchase additional investments
if borrowed funds (including reverse repurchase agreements) exceed 5%
of total assets.
-12-
<PAGE>
3. Pledge, mortgage, or hypothecate its assets. However, a Fund may
pledge securities having a market value at the time of the pledge not
exceeding 33-1/3% of the value of the Fund's total assets to secure
permitted borrowings.
PORTFOLIO MATURITY
Each Fund must limit its investments to securities with remaining
maturities of 397 days or less (as determined in accordance with applicable SEC
regulations) and must maintain a dollar-weighted average maturity of 90 days or
less. The Funds normally hold portfolio instruments to maturity, but may
dispose of them prior to maturity if Adviser finds it advantageous.
DIVIDENDS AND DISTRIBUTIONS
The Board of Trustees intends to declare dividends on shares of each Fund
from net investment income daily and have them payable as of the last business
day of each month. Distributions will be made at least annually from net short-
term and long-term capital gains, if any. In most instances, distributions will
be declared and paid in mid-October with additional distributions declared and
paid in December, if required, for a Fund to avoid imposition of a 4% federal
excise tax on undistributed capital gains. The Funds do not expect any material
long-term capital gains or losses.
Income dividends and capital gains distributions will be paid in additional
shares at their net asset value on the record date unless the shareholder has
elected to receive all or a portion of such dividends and distributions in cash.
Such election may be made by giving 10 days' written notice to Transfer Agent.
Investors should contact their Service Organizations regarding procedures for
the payment of dividends.
Dividends declared in October, November or December and payable to
shareholders of record in such months will be deemed to have been paid by the
Funds and received by shareholders on December 31 of that year if the dividend
is paid prior to February 1 of the following year.
-13-
<PAGE>
TAXES
Each Fund intends to qualify as a regulated investment company ("RIC")
under Subchapter M of the Internal Revenue Code, as amended (the "Code"). As a
RIC, each Fund will not be subject to federal income taxes to the extent it
distributes its net investment income and capital gain net income (capital gains
in excess of capital losses) to its shareholders. The Board intends to
distribute each year substantially all of the Funds' net investment income and
capital gain net income.
Dividends from net investment income and distributions of net short-term
capital gains are taxable to shareholders as ordinary income under federal
income tax laws whether paid in cash or in additional shares. Distributions
from net long-term capital gains are taxable as long-term capital gains
regardless of the length of time a shareholder has held such shares.
The Fund may purchase bonds at market discount (i.e., bonds with a purchase
price less than original issue price or adjusted issue price). If such bonds
are subsequently sold at a gain then a portion of that gain equal to the amount
of market discount, which should have been accrued through the sale date, will
be taxable to shareholders as ordinary income.
Dividends and distributions may also be subject to state or local taxes.
Depending on the state tax rules pertaining to a shareholder, a portion of the
dividends paid by a Fund attributable to direct obligations of the US Treasury
and certain agencies may be exempt from state and local taxes.
The sale of Fund shares by a shareholder is a taxable event and may result
in capital gain or loss. A capital gain or loss may be realized from an
ordinary redemption of shares or an exchange of shares between two mutual funds
(or two series of portfolios of a mutual fund). Any loss incurred on sale or
exchange of Fund shares held for one year or more will be treated as a long-term
capital loss to the extent of capital gain dividends received with respect to
such shares.
Shareholders will be notified after each calendar year of the amount of
income dividends and net capital gains distributed and the percentage of a
Fund's income attributable to US Treasury and agency obligations. The Funds are
required to withhold a legally determined portion of all taxable dividends,
distributions and redemption proceeds payable to any noncorporate shareholder
that does not provide the Funds with the shareholder's correct taxpayer
identification number or certification that the shareholder is not subject to
backup withholding.
The foregoing discussion is only a summary of certain federal income tax
issues generally affecting the Fund and its shareholders. Circumstances among
investors may vary and each investor is encouraged to discuss investment in the
Fund with the investor's tax adviser.
VALUATION OF FUND SHARES
NET ASSET VALUE PER SHARE. Net asset value per share for each class of
shares of a Fund is determined by adding the value of all securities and other
assets of the Fund, deducting accrued liabilities allocated to the class,
dividing by the number of shares outstanding in a class and rounding to the
nearest cent. The Funds determine net asset value twice each business day, as
of 12:00 noon Eastern time and as
-14-
<PAGE>
of the close of the regular trading session of the New York Stock Exchange
(ordinarily 4:00 p.m. Eastern time). A business day is one on which the New
York Stock Exchange and Boston Federal Reserve are open for business.
VALUATION OF FUND SECURITIES. Each Fund seeks to maintain a $1.00 per
share net asset value and, accordingly, use the amortized cost valuation
procedure to value its portfolio instruments. The "amortized cost" valuation
procedure initially prices an instrument at its cost and thereafter assumes a
constant amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the instrument.
PURCHASE OF FUND SHARES
Shares are offered through Service Organizations, who act as record holders
of the shares and provide services to their customers who invest in shares. To
purchase shares, investors should contact a Service Organization and follow its
procedures for the purchase of shares. Beneficial ownership of shares will be
recorded by Service Organizations and reflected in account statements provided
to their customers.
OFFERING DATES AND TIMES. Fund shares may be purchased on any business
day. All purchases must be made in US dollars. Purchase orders and payments
for Fund shares must be received by the Transfer Agent prior to 4:00 p.m.
Eastern time to be effective on the date received. The accompanying payment
must be in federal funds or converted into federal funds by the Transfer Agent
before the purchase order can be accepted. Purchase orders in good form are
described below. Purchase orders which are accepted: (1) prior to 12:00 noon
Eastern time will earn the dividend declared on the date of purchase; and (2) at
or after 12:00 noon Eastern time will earn the dividend determined on the next
day.
ORDER AND PAYMENT PROCEDURES. On behalf of their customers, Service
Organizations may purchase shares by wiring federal funds to State Street Bank
and Trust Company as Transfer Agent by:
1. Telephoning State Street Bank and Trust Company at (800) 647-7327 and
providing: (1) the Service Organization's account registration
number, address and tax identification number; (2) the name of the
Fund to be invested in; (3) the amount being wired; (4) the name of
the wiring bank; and (5) the name and telephone number of the person
at the wiring bank to be contacted in connection with the order.
2. Instructing the wiring bank to wire federal funds to: State Street
Bank and Trust Company, Boston, MA (ABA #0110-00028), Attention: The
Seven Seas Series Fund, Mutual Funds Service Division (DDA #9904-631-
0). The wire instructions should also include the name the account is
registered in, the account number and the name of the Fund to be
invested in.
Each Fund reserves the right to reject any order.
Service Organizations may charge investors fees for certain services.
Investors should contact their Service Organization for information concerning
what additional fees, if any, may be charged.
-15-
<PAGE>
EXCHANGE PRIVILEGE. An investor's Service Organization may permit shares
of either Fund to be exchanged for shares of certain other investment
portfolios. Shares are exchanged on the basis of relative net asset value per
share. Investors should contact their Service Organizations for information
regarding exchange options and procedures and fees imposed in connection with
exchanges.
REDEMPTION OF FUND SHARES
An investor may redeem all or part of their shares in accordance with
instructions and limitations pertaining to their account at a Service
Organization. These procedures will vary according to the type of account and
the Service Organization involved, and investors should consult their account
managers in this regard. It is the responsibility of the Service Organizations
to transmit redemption orders to the Transfer Agent and credit their customers'
accounts with the redemption proceeds on a timely basis.
On behalf of their customers, Service Organizations may redeem Fund shares
on any business day at the net asset value next determined after the receipt of
a redemption request. Payment for redemption orders will be wired in federal
funds to the Service Organization's account at a domestic commercial bank that
is a member of the Federal Reserve System. The Funds reserve the right to
suspend redemptions or postpone the date of payment if emergency conditions, as
specified in the 1940 Act or determined by the Securities and Exchange
Commission, should exist.
A dividend will be paid on shares redeemed if the redemption request is
received by State Street Bank and Trust Company after 12:00 noon Eastern time.
Redemption requests received before 12:00 noon Eastern time will not be entitled
to that day's dividend.
GENERAL MANAGEMENT
The Board of Trustees supervises the management, activities and affairs of
the Funds and has approved contracts with various financial organizations to
provide, among other services, day-to-day management required by the Funds.
ADVISORY AGREEMENT. Investment Company employs State Street to furnish
investment services to the Funds. State Street is one of the largest
providers of securities processing and record keeping services for US mutual
funds and pension funds. State Street is a wholly owned subsidiary of State
Street Boston Corporation, a publicly held bank holding company. State
Street, with over $171.3 billion (US) under management as of September 30,
1995, provides complete global investment management services from offices in
the United States, London, Sydney, Hong Kong, Tokyo, Toronto, Luxembourg,
Melbourne, Montreal and Paris.
Adviser, subject to Board supervision, directs the investments of each Fund
in accordance with the Fund's investment objective, policies and restrictions.
For these services, each Fund pays Adviser a fee, calculated daily and paid
monthly, that on an annual basis is equal to .25% of the Fund's average daily
net assets.
-16-
<PAGE>
The Glass-Steagall Act prohibits a depository state chartered bank such as
Adviser from engaging in the business of issuing, underwriting, selling or
distributing certain securities. The activities of Adviser in informing its
customers of the Funds, performing investment and redemption services and
providing custodian, transfer, shareholder servicing, dividend disbursing and
investment advisory services may raise issues under these provisions. Adviser
has been advised by its counsel that its activities in connection with the Funds
are consistent with its statutory and regulatory obligations. THE SHARES
OFFERED BY THIS PROSPECTUS ARE NOT ENDORSED OR GUARANTEED BY STATE STREET OR ITS
AFFILIATES, ARE NOT DEPOSITS OR OBLIGATIONS OF STATE STREET OR ITS AFFILIATES,
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
Changes in federal or state statutes and regulations relating to the
permissible activities of banks and their affiliates, as well as judicial or
administrative decisions or interpretations of such or future statutes and
regulations, could prevent Adviser from continuing to perform all or a part of
the above services for its customers and/or the Funds. If Adviser were
prohibited from serving the Funds in any of its present capacities, the Board of
Trustees would seek an alternative provider(s) of such services. In such event,
changes in the operation of the Funds may occur. It is not expected by Adviser
that existing shareholders would suffer any adverse financial consequences (if
another adviser with equivalent abilities is found) as a result of any of these
occurrences.
State Street may from time to time have discretionary authority over
accounts which invest in Investment Company shares. These accounts include
accounts maintained for securities lending clients and accounts which permit
the use of Investment Company portfolios as short-term cash sweep
investments. Shares purchased for all discretionary accounts are held of
record by State Street who retains voting control of such shares. As of
November 30, 1995, State Street held of record 36% of the issued and
outstanding shares of Investment Company in connection with its discretionary
accounts. Consequently, State Street may be deemed to be a controlling
person of Investment Company for purposes of the 1940 Act.
Under the Adviser's Code of Ethics, the Adviser's employees in Boston where
investment management operations are conducted are only permitted to engage in
personal securities transactions which do not involve securities which the
Adviser had recommended for purchase or sale, or purchased or sold, on behalf of
its clients. Such employees must report their personal securities transactions
quarterly and supply broker confirmations to the Adviser.
ADMINISTRATION AGREEMENT. Frank Russell Investment Management Company
("Administrator") serves as administrator of the Funds. Administrator
currently serves as investment manager and administrator to 22 mutual funds
with assets of $7.3 billion as of October 31, 1995, and acts as administrator
to 17 mutual funds, including those Funds presented in this Prospectus, with
assets of $7.2 billion as of October 31, 1995.
Pursuant to the Administration Agreement with Investment Company,
Administrator will: (1) supervise all aspects of the Funds' operations;
(2) provide the Funds with administrative and clerical services, including the
maintenance of certain of the Funds' books and records; (3) arrange the periodic
updating of the Funds' prospectuses and any supplements thereto; (4) provide
proxy materials and reports to Fund shareholders and the Securities and Exchange
Commission; and (5) provide the Funds with adequate office space and all
necessary office equipment and services, including telephone service, heat,
utilities, stationery supplies and similar items. For these services, the Funds
and Investment
-17-
<PAGE>
Company's other domestic investment portfolios pay Administrator a combined fee
that on an annual basis is equal to the following percentages of their average
aggregate daily net assets: (1) $0 to and including $500 million -- .06%; (2)
over $500 million to and including $1 billion -- .05%; and (3) over $1 billion
- -- .03%. The percentage of the fee paid by a particular Fund is equal to the
percentage of average aggregate daily net assets that are attributable to that
Fund. Administrator will also receive reimbursement of expenses it incurs in
connection with establishing new investment portfolios. Further, the
administration fee paid by the Investment Company will be reduced by the sum of
certain distribution related expenses (up to a maximum of 15% of the asset-based
administration fee listed above).
Administrator also provides administrative services in connection with the
registration of shares of Investment Company with those states in which its
shares are offered or sold. Compensation for such services is on a "time spent"
basis. Investment Company will pay all registration, exemptive application,
renewal and related fees and reasonable out-of-pocket expenses.
Officers and employees of the Administrator and Distributor are permitted
to engage in personal securities transactions subject to restrictions and
procedures set forth in the Confidentiality Manual and Code of Ethics adopted by
the Investment Company, Administrator and Distributor. Such restrictions and
procedures include substantially all of the recommendations of the Advisory
Group of the Investment Company Institute and comply with Securities and
Exchange Commission rules and regulations.
DISTRIBUTION SERVICES AND SHAREHOLDER SERVICING ARRANGEMENTS. Pursuant to
the Distribution Agreement with Investment Company, Russell Fund Distributors,
Inc. ("Distributor"), a wholly owned subsidiary of Administrator, serves as
distributor for all Fund shares.
The Funds have adopted a distribution plan pursuant to Rule 12b-1 (the
"Plan") under the 1940 Act for the Class C shares. The purpose of the Plan is
to provide for the payment of certain Investment Company distribution and
shareholder servicing expenses. Under the Plan, Distributor will be reimbursed
in an amount up to .60% of the net asset value of Class C shares of each Fund
for distribution-related and shareholder servicing expenses. Payments under the
Plan will be made to Distributor to finance activity that is intended to result
in the sale and retention of Fund shares including: (1) the costs of
prospectuses, reports to shareholders and sales literature; (2) advertising; and
(3) expenses incurred in connection with the promotion and sale of Fund shares,
including Distributor's overhead expenses for rent, office supplies, equipment,
travel, communication, compensation and benefits of sales personnel.
Under the Plan, the Funds may also enter into agreements ("Service
Agreements") with financial institutions, which may include Adviser ("Service
Organizations"), to provide distribution and shareholder services with respect
to Class C shares of the Funds held by or for the customers of the Service
Organizations. Under the Service Agreements, the Service Organizations may
provide various services for such customers including: processing customer
purchase and redemption requests; answering inquiries regarding the Funds;
assisting customers in changing dividend options, account designations and
addresses; performing subaccounting for such customers; establishing and
maintaining customer accounts and records; processing purchase and redemption
transactions; providing periodic statements showing customers' account balances
and integrating such statements with those of other transactions and balances
-18-
<PAGE>
in the customers' other accounts serviced by the Service Organizations;
arranging for bank wires transferring customers' funds; transmitting proxy
statements, annual and semi-annual reports, prospectuses and other
communications from the Funds to customers; and such other services as the
customers may request in connection with the Funds, to the extent permitted by
applicable statute, rule or regulation. Service Organizations may receive from
each Fund a monthly fee at a rate that shall not exceed .50% per annum of the
average daily net asset value of the Fund's Class C shares owned by or for
shareholders with whom the Service Organization has a servicing relationship.
Banks and other financial service firms may be subject to various state laws,
and may be required to register as dealers pursuant to state law.
Payments to Distributor, as well as payments to Service Organizations from
a Fund, are not permitted by the Plan to exceed .60% per year of the average net
asset value of the Fund's Class C shares. Any payments that are required to be
made by the Distribution Agreement and any Service Agreement but could not be
made because of the .60% limitation may be carried forward and paid in
subsequent years so long as the Plan is in effect. A Fund's liability for any
such expenses may be carried forward indefinitely. Service Organizations will
be responsible for prompt transmission of purchase and redemption orders and may
charge fees for their services.
FUND EXPENSES
The Funds will pay all of their expenses other than those expressly assumed
by Adviser and Administrator. The principal expenses of the Funds are the
annual advisory fee payable to Adviser and distribution and shareholder
servicing expenses. Other expenses include: (1) amortization of deferred
organizational costs; (2) taxes, if any; (3) expenses for legal, auditing and
financial accounting services; (4) expense of preparing (including typesetting,
printing and mailing) reports, prospectuses and notices to existing
shareholders; (5) administrative fees; (6) custodian fees, (7) expense of
issuing and redeeming Fund shares; (8) the cost of registering Fund shares under
federal and state laws; (9) shareholder meetings and related proxy solicitation
expenses; (10) the fees, travel expenses and other out-of-pocket expenses of
Trustees who are not affiliated with Adviser or any of its affiliates;
(11) insurance, interest, brokerage and litigation costs; (12) extraordinary
expenses as may arise, including expenses incurred in connection with litigation
proceedings and claims and the legal obligations of Investment Company to
indemnify its Trustees, officers, employees, shareholders, distributors and
agents; and (13) other expenses properly payable by the Funds. Where any of
these other expenses are attributable to a particular class of shares, they will
be borne by the beneficial owners of such shares.
-19-
<PAGE>
PERFORMANCE CALCULATIONS
From time to time the Funds may advertise the yield and effective yield of
their Class C shares. The yield of each Fund refers to the income generated by
an investment in Class C shares of the Fund over a seven-day period (which
period will be stated in the advertisement). This income is then annualized.
That is, the amount of income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment. The effective yield is calculated similarly but,
when annualized, the income earned by an investment in each Fund is assumed to
be reinvested. The effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
From time to time, the Funds may also report yield and effective yield as
calculated over a one-month period (which period will also be stated in the
advertisement). These one-month periods will be annualized using the same
method as described above for yields calculated on the basis of seven-day
periods. From time to time, yields calculated on a monthly basis may also be
linked to provide yield figures for periods greater than one month.
From time to time, the Funds may advertise the total return of their Class
C shares. The total return of a Fund is the average annual compounded rate of
return from a hypothetical investment in the Fund's Class C shares over one,
five and ten-year periods or for the life of the Fund (as stated in the
advertisement), assuming the reinvestment of all dividends and capital gains
distributions.
Comparative performance information may be used from time to time in
advertising or marketing Fund shares, including data from Lipper Analytical
Services, Inc., Donoghue's Money Fund Report, the Bank Rate Monitor, Wall Street
Journal Score Card, Lehman Brothers Index or other industry publications,
business periodicals, rating services and market indices. The Funds may also
advertise nonstandardized performance information which is for periods in
addition to those required to be presented.
Quoted yields and other performance figures are based on historical
earnings and are not indications of future performance.
ADDITIONAL INFORMATION
CUSTODIAN, TRANSFER AGENT AND INDEPENDENT ACCOUNTANTS. State Street holds
all portfolio securities and cash assets of the Funds, provides portfolio record
keeping services and serves as the Funds' transfer agent ("Transfer Agent") and
custodian ("Custodian"). State Street is authorized to deposit securities in
securities depositories or to use the services of subcustodians. State Street
has no responsibility for the supervision and management of the Funds except as
investment adviser. Coopers & Lybrand L.L.P., Boston, Massachusetts, is
Investment Company's independent accountants.
REPORTS TO SHAREHOLDERS AND SHAREHOLDER INQUIRIES. Shareholders will
receive unaudited semiannual financial statements and annual financial
statements audited by Investment Company's independent accountants. Potential
investors who wish to obtain more information about the Funds
-20-
<PAGE>
should contact a Service Organization. Inquiries from Servicing Organizations
regarding the Prospectus and financial statements may be made by calling
Distributor at (617) 654-6089.
ORGANIZATION, CAPITALIZATION AND VOTING. Investment Company was organized
as a Massachusetts business trust on October 3, 1987, and operates under a First
Amended and Restated Master Trust Agreement dated October 13, 1993, as amended.
Investment Company issues shares divisible into an unlimited number of series
(or funds), each of which is a separate trust under Massachusetts law. The
Money Market and Government Money Market Funds are two such series. Shares of a
Fund are entitled to such relative rights and preferences and dividends and
distributions earned on assets of the Fund as may be declared by the Board of
Trustees. Fund shares are fully paid and nonassessable by Investment Company
and have no preemptive rights. Investment Company is authorized to subdivide
each series into two or more classes of shares. Currently, shares of the Money
Market and Government Money Market Funds are divided into Class A, Class B and
Class C. Each class of shares of a Fund is entitled to the same rights and
privileges as all other classes of that Fund, provided, however, that each class
bears the expenses related to its distribution and shareholder servicing
arrangements, as well as other expenses attributable to the class and unrelated
to managing the Fund's portfolio securities. As described above, Investment
Company has adopted a plan of distribution under rule 12b-1 for Class C shares.
Similar plans have been adopted for Class A and Class B shares. However, total
payments under those plans are limited to .25% and .35% annually of the average
net asset value of the Class A and Class B shares, respectively of a Fund. As a
result of these plan and other class expenses, the yield on Class B and Class C
shares will be approximately .25% and .50% lower, respectively, than the yield
on Class A shares.
Each Fund share has one vote. There are no cumulative voting rights.
There is no annual meeting of shareholders, but special meetings may be held.
On any matter that affects only a particular investment fund, only shareholders
of that fund may vote unless otherwise required by the 1940 Act or the Master
Trust Agreement. Further, any matter that affects only the holders of a
particular class of shares may be voted on only by such shareholders. Each
class of shares votes separately with respect to any Rule 12b-1 plan applicable
to such class. The Trustees hold office for the life of the Trust. A Trustee
may resign or retire, and may be removed at any time by a vote of two-thirds of
Investment Company shares or by a vote of a majority of the Trustees. The
Trustees shall promptly call and give notice of a meeting of shareholders for
the purpose of voting upon removal of any Trustee when requested to do so in
writing by holders of not less than 10% of the shares then outstanding. A
vacancy on the Board of Trustees may be filled by the vote of a majority of the
remaining Trustees, provided that immediately thereafter at least two-thirds of
the Trustees have been elected by shareholders.
-21-
<PAGE>
THE SEVEN SEAS SERIES FUND
Two International Place, 35th Floor
Boston, Massachusetts 02110
INVESTMENT ADVISER, CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
DISTRIBUTOR
Russell Fund Distributors, Inc.
Two International Place, 35th Floor
Boston, Massachusetts 02110
ADMINISTRATOR
Frank Russell Investment Management Company
909 A Street
Tacoma, Washington 98402
LEGAL COUNSEL
Goodwin, Procter & Hoar
Exchange Place
Boston, Massachusetts 02109
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
-22-
<PAGE>
Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
THE SEVEN SEAS SERIES FUND
TWO INTERNATIONAL PLACE, 35TH FLOOR
BOSTON, MASSACHUSETTS 02110
(617) 654-6089
MATRIX EQUITY FUND
The Seven Seas Series Fund is a registered, open-end investment company with
multiple portfolios, each of which is a mutual fund. This Prospectus describes
and offers shares of beneficial interest in one mutual fund, The Seven Seas
Series Matrix Equity Fund (referred to in this Prospectus as the "Matrix Fund"
or the "Fund"). The Matrix Fund seeks to provide total returns that exceed over
time the S&P 500 Index through investment in equity securities. The Fund's
shares are offered without sales commissions. However, the Fund pays certain
distribution expenses under its Rule 12b-1 plan.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SHARES IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, STATE STREET BANK AND TRUST COMPANY, AND SHARES ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER AGENCY, AND INVOLVE INVESTMENT RISKS INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. Please read and retain this
document for future reference. Additional information about the Fund has been
filed with the Securities and Exchange Commission in a Statement of Additional
Information dated December 29, 1995. The Statement of Additional Information is
incorporated herein by reference and is available without charge from
Distributor at its address noted below or by calling (617) 654-6089.
<TABLE>
<CAPTION>
INVESTMENT ADVISER, CUSTODIAN
AND TRANSFER AGENT: DISTRIBUTOR: ADMINISTRATOR:
<S> <C> <C>
State Street Bank and Trust Russell Fund Distributors, Frank Russell Investment
Company Inc. Management Company
225 Franklin Street Two International Place, 909 A Street
Boston, Massachusetts 02110 35th Floor Tacoma, Washington 98402
(617) 654-4721 Boston, Massachusetts 02110 (206) 627-7001
(617) 654-6089
</TABLE>
PROSPECTUS DATED DECEMBER 29, 1995
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Fund Operating Expenses.................................................................................... 3
Financial Highlights....................................................................................... 4
The Seven Seas Series Fund................................................................................. 5
Manner of Offering......................................................................................... 5
Investment Objective, Policies and Restrictions............................................................ 5
Certain Risk Factors....................................................................................... 9
Portfolio Turnover......................................................................................... 9
Dividends and Distributions................................................................................ 10
Taxes...................................................................................................... 10
Valuation of Fund Shares................................................................................... 11
Purchase of Fund Shares.................................................................................... 12
Redemption of Fund Shares.................................................................................. 13
General Management......................................................................................... 14
Fund Expenses.............................................................................................. 17
Performance Calculations................................................................................... 18
Additional Information..................................................................................... 18
</TABLE>
2
<PAGE>
FUND OPERATING EXPENSES
THE SEVEN SEAS SERIES MATRIX EQUITY FUND
The following table is intended to assist the investor in understanding the
various costs and expenses that an investor in the Matrix Fund will incur
directly or indirectly. THE EXAMPLES PROVIDED IN THE TABLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. Actual expenses may be
greater or less than those shown. For additional information, see "General
Management."
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
- ------------------------------
Sales Load Imposed on Purchases.......................................................................................... None
Sales Load Imposed on Reinvested Dividends............................................................................... None
Deferred Sales Load...................................................................................................... None
Redemption Fees.......................................................................................................... None
Exchange Fee............................................................................................................. None
ANNUAL FUND OPERATING EXPENSES:
- ------------------------------
(as a percentage of average daily net assets)
Advisory Fees (1)........................................................................................................ .38%
12b-1 Fees (2)........................................................................................................... .08
Other Expenses........................................................................................................... .22
----
Total Operating Expenses After Fee Waiver (1)(3)......................................................................... .68%
----
----
</TABLE>
<TABLE>
<CAPTION>
EXAMPLES: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (i) 5% annual return
and (ii) redemption at the end of each time period:...................................... $ 7 $ 22 $ 38 $ 85
------ ------- ------- --------
------ ------- ------- --------
</TABLE>
- ------------------------
(1) Adviser has voluntarily agreed to waive one-half of its advisory fee. The
gross annual Advisory expense before the waiver would be .75% of average
daily net assets. The total operating expense of the Fund absent the fee
waiver would be 1.06% of average daily net assets on an annual basis. The
waiver will be in effect for the current fiscal year.
(2) Rule 12b-1 fees may include expenses paid for shareholder servicing
activities.
(3) The expense information in the table has been restated to reflect current
fees. Investors purchasing Fund shares through a financial intermediary,
such as a bank or an investment adviser, may also be required to pay
additional fees for services provided by the intermediary. Such investors
should contact the intermediary for information concerning what additional
fees, if any, will be charged.
Long-term shareholders of the Fund may pay more in Rule 12b-1 fees than the
economic equivalent of the maximum front-end sales charges permitted by National
Association of Securities Dealers, Inc.
3
<PAGE>
FINANCIAL HIGHLIGHTS
THE SEVEN SEAS SERIES MATRIX EQUITY FUND
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand L.L.P., the Fund's independent
accountants. The table includes selected data for a share outstanding throughout
each fiscal year or period ended August 31, and other performance information
derived from the financial statements. The table appears in the Fund's Annual
Report and should be read in conjunction with the Fund's financial statements
and related notes, which are incorporated by reference in the Statement of
Additional Information and which appear, along with the report of Coopers &
Lybrand L.L.P., in the Fund's Annual Report to Shareholders. More detailed
information concerning the Fund's performance, including a complete portfolio
listing and audited financial statements, is available in the Fund's Annual
Report, which may be obtained without charge by writing or calling the
Distributor.
<TABLE>
<CAPTION>
1995 1994 1993 1992++
----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR.............................. $12.06 $11.95 $ 9.78 $10.00
----------- ----------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income......................................... .28 .24 .18 .05
Net realized and unrealized gain (loss) on investments........ 1.93 .28 2.17 (.27)
----------- ----------- --------- ---------
Total From Investment Operations.............................. 2.21 .52 2.35 (.22)
----------- ----------- --------- ---------
LESS DISTRIBUTIONS:
Net investment income......................................... (.28) (.23) (.18) --
Net realized gain on investments.............................. (.06) (.09) -- --
In excess of net realized gain on investments................. -- (.09) -- --
----------- ----------- --------- ---------
Total Distributions........................................... (.34) (.41) (.18) --
----------- ----------- --------- ---------
NET ASSET VALUE, END OF YEAR.................................... $13.93 $12.06 $11.95 $ 9.78
----------- ----------- --------- ---------
----------- ----------- --------- ---------
TOTAL RETURN (%)(a)............................................. 18.81 4.41 24.24 (2.20)
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average daily net assets (b)...... .68 .58 .60 .18
Operating expenses, gross, to average daily net assets (b).... 1.06 .96 1.25 1.90
Net investment income to average daily net assets (b)......... 2.25 2.16 2.13 2.69
Portfolio turnover (b)........................................ 129.98 127.20 57.65 None
Net assets, end of year ($000 omitted)........................ 198,341 130,764 62,549 12,408
Per share amount of fees waived ($ omitted)................... .0466 .0410 .0314 .0112
Per share amount of fees reimbursed by Adviser ($ omitted).... -- -- .0225 .0202
</TABLE>
- ------------------------
++ For the period May 4, 1992 (commencement of operations) to August 31, 1992.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended August 31, 1992 are annualized.
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THE SEVEN SEAS SERIES FUND
The Seven Seas Series Fund ("Investment Company") is an open-end management
investment company that is organized as a Massachusetts business trust. In
addition, each series of the Investment Company is diversified as defined in the
Investment Company Act of 1940, as amended ("1940 Act"). As a "series" company,
Investment Company is authorized to issue an unlimited number of shares
evidencing beneficial interests in different investment portfolios. Through this
Prospectus, Investment Company offers shares in one such portfolio, The Seven
Seas Series Matrix Equity Fund. State Street Bank and Trust Company (the
"Adviser" or "State Street") serves as the investment adviser for the Fund.
MANNER OF OFFERING
DISTRIBUTION AND ELIGIBLE INVESTORS. Shares of the Fund are offered without
a sales commission by Russell Fund Distributors, Inc., Investment Company's
distributor, to US and foreign institutional and retail investors which invest
for their own account or in a fiduciary or agency capacity. The Fund will incur
distribution expenses under its Rule 12b-1 plan. See "General Management --
Distribution Services and Shareholder Servicing."
MINIMUM AND SUBSEQUENT INVESTMENT. The Fund requires a minimum initial
investment of $1,000. A shareholder's investment in the Fund may be subject to
redemption at the Fund's discretion if the account balance is less than $500 as
a result of shareholder redemptions. The Fund reserves the right to reject any
purchase order.
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
The Fund's fundamental investment objective is to provide total returns that
exceed over time the S&P 500 Index through investment in equity securities. This
objective may be changed only with the approval of a majority of the Fund's
shareholders as defined by the 1940 Act. There can be no assurance that the Fund
will meet its investment objective.
Equity securities will be selected by the Fund on the basis of a proprietary
analytical model of Adviser. Each security will be ranked according to two
separate and uncorrelated measures: value and the momentum of Wall Street
sentiment. The value measure compares a company's assets, projected earnings
growth and cash flow growth with its stock price within the context of its
historical valuation. The measure of Wall Street sentiment examines changes in
Wall Street analysts' earnings estimates and ranks stocks by the strength and
consistency of those changes. These two measures are combined to create a single
composite score of each stock's attractiveness. These scores are then plotted on
a matrix according to their relative attractiveness. Sector weights are
maintained at a similar level to that of the S&P 500 Index to avoid unintended
exposure to factors such as the direction of the economy, interest rates, energy
prices and inflation.
The Fund will invest at least 65% of its total assets in equity securities.
However, the Fund may invest temporarily for defensive purposes, without
limitation, in certain short-term fixed income securities. Such securities may
be used to invest uncommitted cash balances or to maintain liquidity to meet
shareholder redemptions. See "Investment Policies -- Cash Reserves."
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INVESTMENT POLICIES
The investment policies described below reflect the Fund's current
practices, are not fundamental and may be changed by the Board of Trustees of
Investment Company without shareholder approval. For more information on the
Fund's Investment Policies, please see the Statement of Additional Information.
To the extent consistent with the Fund's investment objective and restrictions,
the Fund may invest in the following instruments and may use the following
investment techniques:
US GOVERNMENT SECURITIES. US Government securities include US Treasury
bills, notes and bonds and other obligations issued or guaranteed as to interest
and principal by the US Government, its agencies or instrumentalities.
Obligations issued or guaranteed as to interest and principal by the US
Government, its agencies or instrumentalities include securities that are
supported by the full faith and credit of the United States Treasury, securities
that are supported by the right of the issuer to borrow from the United States
Treasury, discretionary authority of the US Government agency or
instrumentality, and securities supported solely by the creditworthiness of the
issuer.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
banks and other financial institutions, such as broker-dealers. Under a
repurchase agreement, a Fund purchases securities from a financial institution
that agrees to repurchase the securities at the Fund's original purchase price
plus interest within a specified time (normally one business day). The Fund will
invest no more than 10% of its net assets (taken at current market value) in
repurchase agreements maturing in more than seven days. The Fund will limit
repurchase transactions to those member banks of the Federal Reserve System and
broker-dealers whose creditworthiness Adviser considers satisfactory. Should the
counterparty to a transaction fail financially, the Fund may encounter delay and
incur costs before being able to sell the securities. Further, the amount
realized upon the sale of the securities may be less than that necessary to
fully compensate the Fund.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreements under the circumstances described in "Investment Restrictions." Under
a reverse repurchase agreement, the Fund sells portfolio securities to a
financial institution in return for cash in an amount equal to a percentage of
the portfolio securities' market value and agrees to repurchase the securities
at a future date at a prescribed repurchase price equal to the amount of cash
originally received plus interest on such amount. The Fund retains the right to
receive interest and principal payments with respect to the securities while
they are in the possession of the financial institutions. Reverse repurchase
agreements involve the risk of default by the counterparty, which may adversely
affect the Fund's ability to reacquire the underlying securities.
FORWARD COMMITMENTS. The Fund may contract to purchase securities for a
fixed price at a future date beyond customary settlement time. When effecting
such transactions, cash or liquid high quality debt obligations held by the Fund
of a dollar amount sufficient to make payment for the portfolio securities to be
purchased will be segregated on the Fund's records at the trade date and
maintained until the transaction is settled. The failure of the other party to
the transaction to complete the transaction may cause the Fund to miss an
advantageous price or yield. The Fund bears the risk of price fluctuations
during the period between the trade and settlement dates.
WHEN-ISSUED TRANSACTIONS. The Fund may purchase securities on a when-issued
basis. In these transactions, the Fund purchases securities with payment and
delivery scheduled for a future time.
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Until settlement, the Fund segregates cash and marketable high quality debt
securities equal in value to its when-issued commitments. Between the trade and
settlement dates, the Fund bears the risk of any fluctuations in the value of
the securities. These transactions involve the additional risk that the other
party may fail to complete the transaction and cause the Fund to miss a price or
yield considered advantageous. The Fund will engage in when-issued transactions
only for the purpose of acquiring portfolio securities consistent with its
investment objective and policies and not for investment leverage. The Fund will
not invest more than 25% of net assets in when-issued securities.
ILLIQUID SECURITIES. The Fund will not invest more than 15% of its net
assets in illiquid securities or securities that are not readily marketable,
including repurchase agreements and time deposits of more than seven days'
duration. The absence of a regular trading market for illiquid securities
imposes additional risks on investment in these securities. Illiquid securities
may be difficult to value and may often be disposed of only after considerable
expense and delay. In addition, the Fund will not invest more than 10% in
securities of issuers which may not be sold to the public without registration
under the Securities Act of 1933.
VARIABLE AMOUNT MASTER DEMAND NOTES. Variable amount master demand notes
are unsecured obligations that are redeemable upon demand and are typically
unrated. These instruments are issued pursuant to written agreements between the
issuers and the holders. The agreements permit the holders to increase (subject
to an agreed maximum) and the holders and issuers to decrease the principal
amount of the notes, and specify that the rate of interest payable on the
principal fluctuates according to an agreed formula.
FUTURES CONTRACTS AND OPTIONS ON FUTURES. For hedging purposes, including
protecting the price or interest rate of a security the Fund intends to buy, the
Fund may enter into futures contracts that relate to securities in which it may
directly invest and indices comprised of such securities and may purchase and
write call and put options on such contracts.
A financial futures contract is a contract to buy or sell a specified
quantity of financial instruments such as US Treasury bills, notes and bonds,
commercial paper and bank certificates of deposit or the cash value of a
financial instrument index at a specified future date at a price agreed upon
when the contract is made. A stock index futures contract is a contract to buy
or sell specified units of a stock index at a specified date at a price agreed
upon when the contract is made. The value of a unit is based on the current
value of the stock index. Under such contracts, no delivery of the actual
securities making up the index takes place. Rather, upon expiration of the
contract, settlement is made by exchanging cash in an amount equal to the
difference between the contract price and the closing price of the index at
expiration, net of variation margin previously paid.
Substantially all futures contracts are closed out before settlement date or
called for cash settlement. A futures contract is closed out by buying or
selling an identical offsetting futures contract. Upon entering into a futures
contract, the Fund is required to deposit an initial margin with Custodian for
the benefit of the futures broker. The initial margin serves as a "good faith"
deposit that the Fund will honor its futures commitment. Subsequent payments
(called "variation margin") to and from the broker are made on a daily basis as
the price of the underlying investment fluctuates.
Options on futures contracts give the purchaser the right to assume a
position at a specified price in a futures contract at any time before
expiration of the option contract.
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When trading futures contracts, the Fund will not commit more than 5% of the
market value of its total assets to initial margin deposits on futures and
premiums paid for options on futures.
OPTIONS ON SECURITIES AND SECURITIES INDICES. The Fund may write and
purchase covered put and call options on securities in which it may directly
invest. Option transactions will be conducted so that the total amount paid on
premiums for all put and call options outstanding will not exceed 5% of the
value of the Fund's total assets. Further, the Fund will not write a put or call
option or combination thereof if, as a result, the aggregate value of all
securities or collateral used to cover all such options outstanding would exceed
25% of the value of the Fund's total assets.
The Fund may purchase or sell options on securities indices that are
comprised of securities in which the Fund may directly invest, subject to the
limitations set forth above and provided such options are traded on a national
securities exchange or in the over-the-counter market. Options on securities
indices are similar to options on securities except there is no transfer of a
security and settlement is in cash. A call option on a securities index grants
the purchaser of the call, for a premium paid to the seller, the right to
receive in cash an amount equal to the difference between the closing price of
the index and the exercise price of the option times a multiplier established by
the exchange upon which the option is traded.
LENDING PORTFOLIO SECURITIES. The Fund may lend portfolio securities with a
value of up to 33 1/3% of its total assets. Such loans may be terminated at any
time. The Fund will receive cash or US Treasury bills, notes and bonds in an
amount equal to at least 100% of the current market value (on a daily
marked-to-market basis) of the loaned securities plus accrued interest. In a
loan transaction, as compensation for lending it securities, the Fund will
receive a portion of the dividends or interest accrued on the securities held as
collateral or, in the case of cash collateral, a portion of the income from the
investment of such cash. In addition, the Fund will receive the amount of all
dividends, interest and other distributions on the loaned securities. However,
the borrower has the right to vote the loaned securities. The Fund will call
loans to vote proxies if a material issue affecting the investment is to be
voted upon. Should the borrower of the securities fail financially, the Fund may
experience delays in recovering the securities or exercising its rights in the
collateral. Loans are made only to borrowers that are deemed by Adviser to be of
good financial standing. In a loan transaction, the Fund will also bear the risk
of any decline in value of securities acquired with cash collateral. The Fund
will minimize this risk by limiting the investment of cash collateral to high
quality instruments of short maturity.
CASH RESERVES. For defensive purposes, the Fund may temporarily and without
limitation concentrate its portfolio in high quality short-term fixed income
securities. These securities include obligations issued or guaranteed as to
principal and interest by the US Government, its agencies or instrumentalities
and repurchase agreements collateralized by these obligations, commercial paper,
bank certificates of deposit, bankers' acceptances and time deposits.
OTHER INVESTMENT POLICIES. In addition to the policies noted above, the
Fund may invest in obligations of foreign issuers which are US dollar
denominated, American Depository Receipts (ADRs), corporate bonds, debentures,
notes and warrants. Investment in each of these instruments will not exceed 5%
of the Fund's total assets during the coming year. See the Statement of
Additional Information for a more detailed discussion of these instruments.
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INVESTMENT RESTRICTIONS
The Fund has fundamental investment restrictions, which may be changed only
with the approval of a majority of the Fund's shareholders as defined in the
1940 Act. A more detailed discussion of the Fund's investment restrictions and
investment policies appears in the Statement of Additional Information. Unless
otherwise noted, the fundamental restrictions apply at the time an investment is
made. The Fund may not:
1. Invest 25% or more of the value of its total assets in securities of
companies primarily engaged in any one industry (other than the US
Government, its agencies or instrumentalities). Concentration may occur
as a result of changes in the market value of portfolio securities, but
may not result from investment.
2. Borrow money (including reverse repurchase agreements), except as a
temporary measure for extraordinary or emergency purposes or to
facilitate redemptions (not for leveraging or investment), provided that
borrowings do not exceed an amount equal to 33 1/3% of the current value
of the Fund's assets taken at market value, less liabilities other than
borrowings. If at any time the Fund's borrowings exceed this limitation
due to a decline in net assets, such borrowings will, within three days,
be reduced to the extent necessary to comply with this limitation. The
Fund will not purchase additional investments if borrowed funds
(including reverse repurchase agreements) exceed 5% of total assets.
3. Pledge, mortgage, or hypothecate its assets. However, the Fund may pledge
securities having a market value at the time of the pledge not exceeding
33 1/3% of the value of the Fund's total assets to secure permitted
borrowings.
CERTAIN RISK FACTORS
There are certain investment risks in using futures contracts and options as
a hedging technique. Such risks may include: (1) the inability to close out a
futures contract or option caused by the nonexistence of a liquid secondary
market; and (2) an imperfect correlation between price movements of the futures
contracts or option with price movements of the portfolio securities or
securities index subject to the hedge.
PORTFOLIO TURNOVER
The portfolio turnover rate cannot be predicted, but it is anticipated that
the Fund's annual turnover rate generally will not exceed 200%. A high turnover
rate (over 100%) will: (1) increase transaction expenses which will adversely
affect a Fund's performance; and (2) result in increased brokerage commissions
and other transaction costs, and the possibility of realized capital gains.
The Fund may effect portfolio transactions with or through State Street
Brokerage Services, Inc. an affiliate of the Adviser, when the Adviser
determines that the Fund will receive competitive execution, price and
commissions.
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DIVIDENDS AND DISTRIBUTIONS
The Board of Trustees intends to declare and pay dividends quarterly from
net investment income. The Board of Trustees intends to declare distributions
annually from net capital gains, if any, generally in mid-October. An additional
distribution may be declared and paid in December, if required, for the Fund to
avoid imposition of a 4% federal excise tax on undistributed capital gains.
Dividends declared in October, November or December and payable to
shareholders of record in such months will be deemed to have been paid by the
Fund and received by shareholders on December 31 of that year if the dividend is
paid prior to February 1 of the following year.
Income dividends and capital gains distributions will be paid in additional
shares at their net asset value on the record date unless the shareholder has
elected to receive them in cash. Such election may be made by giving 10 days'
written notice to Transfer Agent.
Any dividend or capital gain distribution paid by the Fund shortly after a
purchase of shares will reduce the per share net asset value of the Fund by the
amount of the dividend or distribution. In effect, the payment will represent a
return of capital to the shareholder. However, the shareholder will be subject
to taxes with respect to such dividend or distribution.
TAXES
The Fund intends to qualify as a regulated investment company ("RIC") under
Subchapter M of the Internal Revenue Code, as amended (the "Code"). As a RIC,
the Fund will not be subject to federal income taxes to the extent it
distributes its net investment income and capital gain net income (capital gains
in excess of capital losses) to shareholders. The Board intends to distribute
each year substantially all of the Fund's net investment income and capital gain
net income.
Dividends from net investment income and distributions of net short-term
capital gains are taxable to shareholders as ordinary income under federal
income tax laws whether paid in cash or in additional shares. Distributions from
net long-term capital gains are taxable as long-term capital gains regardless of
the length of time a shareholder has held such shares and whether paid in cash
or additional shares.
The Fund may purchase bonds at market discount (i.e., bonds with a purchase
price less than original issue price or adjusted issue price). If such bonds are
subsequently sold at a gain then a portion of that gain equal to the amount of
market discount, which should have been accrued through the sale date, will be
taxable to shareholders as ordinary income.
Dividends and distributions may also be subject to state or local taxes.
Depending on the state tax rules pertaining to a shareholder, a portion of the
dividends paid by the Fund attributable to direct obligations of the US Treasury
and certain agencies may be exempt from state and local taxes.
The sale of Fund shares by a shareholder is a taxable event and may result
in capital gain or loss. A capital gain or loss may be realized from an ordinary
redemption of shares or an exchange of shares between two mutual funds (or two
series of portfolios of a mutual fund). Any loss incurred on sale or exchange of
Fund shares held for one year or more will be treated as a long-term capital
loss to the extent of capital gain dividends received with respect to such
shares.
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Shareholders will be notified after each calendar year of the amount of
income dividends and net capital gains distributed and the percentage of the
Fund's income attributable to US Treasury and agency obligations. The Fund is
required to withhold a legally determined portion of all taxable dividends,
distributions and redemption proceeds payable to any noncorporate shareholder
that does not provide the Fund with the shareholder's correct taxpayer
identification number or certification that the shareholder is not subject to
backup withholding.
The foregoing discussion is only a summary of certain federal income tax
issues generally affecting the Fund and its shareholders. Circumstances among
investors may vary and each investor is encouraged to discuss investment in the
Fund with the investor's tax adviser.
VALUATION OF FUND SHARES
NET ASSET VALUE PER SHARE. The net asset value per share is calculated on
each business day as of
the close of the regular trading session of the New York Stock Exchange
(ordinarily 4 p.m. Eastern time). A business day is one on which the New York
Stock Exchange is open for business. Net asset value per share is computed by
dividing the current value of the Fund's assets, less its liabilities, by the
number of shares of the Fund outstanding and rounding to the nearest cent.
VALUATION OF FUND SECURITIES. With the exceptions noted below, the Fund
values portfolio securities at market value. This generally means that equity
and fixed income securities listed and traded principally on any national
securities exchange are valued on the basis of the last sale price or, lacking
any sales, at the closing bid price, on the primary exchange on which the
security is traded. United States equity and fixed income securities traded
principally over-the-counter and options are valued on the basis of the last
reported bid price. Futures contracts are valued on the basis of the last
reported sale price.
Because many fixed income securities do not trade each day, last sale or bid
prices are frequently not available. Fixed income securities therefore may be
valued using prices provided by a pricing service when such prices are
determined by Custodian to reflect the market value of such securities.
International securities traded on a national securities exchange are valued
on the basis of the last sale price. International securities traded
over-the-counter are valued on the basis of best bid or official bid, as
determined by the relevant securities exchange. In the absence of a last sale,
best or official bid price, such securities may be valued on the basis of prices
provided by a pricing service if those prices are believed to reflect the market
value of such securities.
Securities maturing within 60 days of the valuation date are valued at
amortized cost unless the Board determines that amortized cost does not
represent market value. The amortized cost valuation procedure initially prices
an instrument at its cost and thereafter assumes a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. While 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 Fund would
receive if it sold the instrument.
The Fund values securities for which market quotations are not readily
available at fair value, as determined in good faith pursuant to procedures
established by the Board of Trustees.
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PURCHASE OF FUND SHARES
MINIMUM INITIAL INVESTMENT AND ACCOUNT BALANCE. The Fund requires a minimum
initial investment of $1,000. The minimum account balance is $500. The Fund
reserves the right to reject any purchase order.
OFFERING DATES AND TIMES. Fund shares may be purchased on any business day
without a sales commission. All purchases must be made in US dollars. Purchase
orders in good form and payments for Fund shares must be received by the
Transfer Agent prior to 4:00 p.m. Eastern time to be effective on the date
received. The accompanying payment must be in federal funds or converted into
federal funds by the Transfer Agent before the purchase order can be accepted.
Purchase orders in good form are described below.
ORDER AND PAYMENT PROCEDURES. There are several ways to invest in the Fund.
The Fund requires a purchase order in good form which consists of a completed
and signed Account Registration and Investment Instruction Form (Application)
for each new account regardless of the investment method. For additional
information, copies of forms or questions, call Transfer Agent at (800)
647-7327, or write to Transfer Agent at: State Street Bank and Trust Company,
P.O. Box 8317, Boston, MA 02266-8317, Attention: The Seven Seas Series Matrix
Equity Fund.
FEDERAL FUNDS WIRE. An investor may purchase shares by wiring federal funds
to State Street Bank and Trust Company as Transfer Agent by:
1. Telephoning State Street Bank and Trust Company at (800) 647-7327, and
stating: (1) the investor's account registration number, address and
social security or tax identification number; (2) the name of the
investment portfolio to be invested in; (3) the amount being wired; (4)
the name of the wiring bank; and (5) the name and telephone number of the
person at the wiring bank to be contacted in connection with the order.
2. Instructing the wiring bank to wire federal funds to: State Street Bank
and Trust Company, Boston, MA (ABA #0110-00028), Attention: The Seven
Seas Series Matrix Equity Fund, Mutual Funds Service Division (DDA
#9904-631-0). The wire instructions should also include the name in which
the account is registered, the account number, and the name of the Fund
in which to be invested.
3. Completing the Application and forwarding it to Transfer Agent at the
above address.
MAIL. To purchase shares by mail, send a check or other negotiable bank
draft payable to: State Street Bank and Trust Company, P.O. Box 8317, Boston, MA
02266-8317, Attention: The Seven Seas Series Matrix Equity Fund. Certified
checks are not necessary; however, all checks are accepted subject to collection
at full face value in United States funds and must be drawn in United States
dollars on a United States bank. Normally, checks and drafts are converted to
federal funds within two business days following receipt of the check or draft.
Initial investments should be accompanied by a completed Application, and
subsequent investments are to be accompanied by the investor's account number.
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THIRD PARTY TRANSACTIONS. Investors purchasing Fund shares through a
program of services offered by a financial intermediary, such as a bank,
broker-dealer, investment adviser or others, may be required by such
intermediary to pay additional fees. Investors should contact such intermediary
for information concerning what additional fees, if any, may be charged.
IN-KIND EXCHANGE OF SECURITIES. The Transfer Agent may, at its discretion,
permit investors to purchase shares through the exchange of securities they
hold. Any securities exchanged must meet the investment objective, policies and
limitations of the Fund, must have a readily ascertainable market value, must be
liquid and must not be subject to restrictions on resale. The market value of
any securities exchanged, plus any cash, must be at least $1 million. Shares
purchased in exchange for securities generally may not be redeemed or exchanged
until the transfer has settled -- usually within 15 days following the purchase
by exchange.
The basis of the exchange will depend upon the relative net asset value of
the shares purchased and securities exchanged. Securities accepted by the Fund
will be valued in the same manner as the Fund values its assets. Any interest
earned on the securities following their delivery to the Transfer Agent and
prior to the exchange will be considered in valuing the securities. All
interest, dividends, subscription or other rights attached to the securities
become the property of the Fund, along with the securities.
EXCHANGE PRIVILEGE. Subject to each Fund's minimum investment requirement,
investors may exchange their Fund shares without charge for shares of any other
investment portfolio offered by Investment Company. Shares are exchanged on the
basis of relative net asset value per share. Exchanges may be made: (1) by
telephone if the registrations of the two accounts are identical; or (2) in
writing addressed to State Street Bank and Trust Company, P.O. Box 8317, Boston,
MA 02266-8317, Attention: The Seven Seas Series Matrix Equity Fund. If shares of
the Fund were purchased by check, the shares must have been present in an
account for 10 days before an exchange is made. The exchange privilege will only
be available in states where the exchange may legally be made, and may be
modified or terminated by the Fund upon 60 days' notice to shareholders.
REDEMPTION OF FUND SHARES
Fund shares may be redeemed on any business day at the net asset value next
determined after the receipt of a redemption request in proper form as described
below. Payment will be made as soon as possible (but will ordinarily not exceed
seven days) and will be mailed to the shareholder's address of record. Upon
request, redemption proceeds will be wire transferred to the shareholder's
account at a domestic commercial bank that is a member of the Federal Reserve
System. Although Investment Company does not currently charge a fee for this
service, Investment Company reserves the right to charge a fee for the cost of
wire-transferred redemptions of less than $1,000. Payment for redemption of
shares purchased by check may be withheld for up to 10 days after the date of
purchase to assure that such checks are honored.
EXPEDITED REDEMPTION. Shareholders may normally redeem Fund shares by
telephoning State Street Bank and Trust Company between 9:00 a.m. and 4:00 p.m.
Eastern time at (800) 647-7327, Attention: The Seven Seas Series Matrix Equity
Fund. Shareholders using the expedited redemption method must complete the
appropriate section on the Application. The Fund and the Transfer Agent will
employ reasonable procedures to confirm that instructions communicated by
telephone are
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properly authorized. The Fund and the Transfer Agent will not be liable for
executing telephone instructions that are deemed to be authorized after
following reasonable procedures. These procedures include recording telephonic
instructions, mailing to the shareholder a written confirmation of the
transaction, performing a personal identity test with private information not
likely to be known by other individuals, and restricting mailing of redemptions
to the shareholder's address of record. During periods of drastic economic or
market changes, shareholders using this method may encounter delays. In such
event, shareholders should consider using the mail redemption procedure
described below.
MAIL. Redemption requests may be made in writing directly to State Street
Bank and Trust Company, P.O. Box 8317, Boston, MA 02266-8317, Attention: The
Seven Seas Series Matrix Equity Fund. The redemption price will be the net asset
value next determined after receipt by State Street of all required documents in
good order. "Good order" means that the request must include the following:
1. A letter of instruction or a stock assignment stating that the shares are
to be redeemed out of The Seven Seas Series Matrix Equity Fund and
designating specifically the dollar amount to be redeemed signed by all
owners of the shares in the exact names in which they appear on the
account, together with a guarantee of the signature of each owner by a
bank, trust company or member of a recognized stock exchange; and
2. Such other supporting legal documents, if required by applicable law or
Transfer Agent, in the case of estates, trusts, guardianships,
custodianships, corporations and pension and profit-sharing plans.
The Fund reserves the right to redeem the shares in any account with a
balance of less than $500 as a result of shareholder redemptions rather than
market value fluctuation. Before shares are redeemed to close an account, the
shareholder will be notified in writing and allowed 60 days to purchase
additional shares to meet the minimum account balance.
The Fund may pay any portion of the redemption amount in excess of $250,000
by a distribution in kind of readily marketable securities from the portfolio of
the Fund in lieu of cash. Investors will incur brokerage charges on the sale of
these portfolio securities. The Fund reserves the right to suspend the right of
redemption or postpone the date of payment if emergency conditions, as specified
in the 1940 Act or determined by the Securities and Exchange Commission, should
exist.
GENERAL MANAGEMENT
The Board of Trustees supervises the management, activities and affairs of
the Fund and has approved contracts with various financial organizations to
provide, among other services, day-to-day management required by the Fund.
ADVISORY AGREEMENT. Investment Company employs State Street to furnish
investment services to the Fund. State Street is one of the largest providers of
securities processing and recordkeeping services for US mutual funds and pension
funds. State Street is a wholly owned subsidiary of State
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Street Boston Corporation, a publicly held bank holding company. State Street,
with over $171.3 billion (US) under management as of September 30, 1995,
provides complete global investment management services from offices in the
United States, London, Sydney, Hong Kong, Tokyo, Toronto, Luxembourg, Melbourne,
Montreal and Paris.
Adviser, subject to Board supervision, directs the investment of the Fund in
accordance with the Fund's investment objective, policies and restrictions. Mr.
Douglas Holmes, Managing Director, has been the portfolio manager primarily
responsible for investment decisions regarding the Fund since its inception in
May 1992. Mr. Holmes has been with State Street since 1984 and has managed State
Street's matrix portfolios for the past five years. There are four other
portfolio managers who work with Mr. Holmes in managing the Fund. For these
services, the Fund pays Adviser a fee, calculated daily and paid monthly, equal
to .75% annually of the Fund's average daily net assets.
The Glass-Steagall Act prohibits a depository state chartered bank such as
Adviser from engaging in the business of issuing, underwriting, selling or
distributing certain securities. The activities of Adviser in informing its
customers of the Fund, performing investment and redemption services and
providing custodian, transfer, shareholder servicing, dividend disbursing and
investment advisory services may raise issues under these provisions. Adviser
has been advised by its counsel that its activities in connection with the Fund
are consistent with its statutory and regulatory obligations. THE SHARES OFFERED
BY THIS PROSPECTUS ARE NOT ENDORSED OR GUARANTEED BY STATE STREET OR ITS
AFFILIATES, ARE NOT DEPOSITS OR OBLIGATIONS OF STATE STREET OR ITS AFFILIATES,
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
Changes in federal or state statutes and regulations relating to the
permissible activities of banks and their affiliates, as well as judicial or
administrative decisions or interpretations of such or future statutes and
regulations, could prevent Adviser from continuing to perform all or a part of
the above services for its customers and/or the Fund. If Adviser were prohibited
from serving the Fund in any of its present capacities, the Board of Trustees
would seek an alternative provider(s) of such services. In such event, changes
in the operation of the Fund may occur. It is not expected by Adviser that
existing shareholders would suffer any adverse financial consequences (if
another adviser with equivalent abilities is found) as a result of any of these
occurrences.
State Street may from time to time have discretionary authority over
accounts which invest in Investment Company shares. These accounts include
accounts maintained for securities lending clients and accounts which permit the
use of Investment Company portfolios as short-term cash sweep investments.
Shares purchased for all discretionary accounts are held of record by State
Street, who retains voting control of such shares. As of November 30, 1995,
State Street held of record 36% of the issued and outstanding shares of
Investment Company in connection with its discretionary accounts. Consequently,
State Street may be deemed to be a controlling person of Investment Company for
purposes of the 1940 Act.
Under the Adviser's Code of Ethics, the Adviser's employees in Boston where
investment management operations are conducted are only permitted to engage in
personal securities transactions which do not involve securities which the
Adviser had recommended for purchase or sale, or purchased or sold, on behalf of
its clients. Such employees must report their personal securities transactions
quarterly and supply broker confirmations to the Adviser.
15
<PAGE>
ADMINISTRATION AGREEMENT. Frank Russell Investment Management Company
("Administrator") serves as administrator of the Fund. Administrator currently
serves as investment manager and administrator to 22 mutual funds with assets of
$7.3 billion as of October 31, 1995, and acts as administrator to 17 mutual
funds, including the Matrix Fund, with assets of $7.2 billion as of October 31,
1995.
Pursuant to the Administration Agreement with Investment Company,
Administrator will: (1) supervise all aspects of the Fund's operations; (2)
provide the Fund with administrative and clerical services, including the
maintenance of certain of the Fund's books and records; (3) arrange the periodic
updating of the Fund's prospectuses and any supplements thereto; (4) provide
proxy materials and reports to Fund shareholders and the Securities and Exchange
Commission; and (5) provide the Fund with adequate office space and all
necessary office equipment and services, including telephone service, heat,
utilities, stationery supplies and similar items. For these services, the Matrix
Fund and Investment Company's other domestic investment portfolios pay
Administrator a combined fee that on an annual basis is equal to the following
percentages of their average aggregate daily net assets: (1) $0 to and including
$500 million -- .06%; (2) over $500 million to and including $1 billion -- .05%;
and (3) over $1 billion -- .03%. The percentage of the fee paid by the Matrix
Fund is equal to the percentage of average aggregate daily net assets that are
attributable to the Fund. Administrator will also receive reimbursement of
expenses it incurs in connection with establishing new investment portfolios.
Further, the administration fee paid by the Investment Company will be reduced
by the sum of certain distribution related expenses (up to a maximum of 15% of
the asset-based administration fee listed above).
Administrator also provides administrative services in connection with the
registration of shares of Investment Company with those states in which its
shares are offered or sold. Compensation for such services is on a "time spent"
basis. Investment Company will pay all registration, exemptive application,
renewal and related fees and reasonable out-of-pocket expenses.
Officers and employees of the Administrator and Distributor are permitted to
engage in personal securities transactions subject to restrictions and
procedures set forth in the Confidentiality Manual and Code of Ethics adopted by
the Investment Company, Administrator and Distributor. Such restrictions and
procedures include substantially all of the recommendations of the Advisory
Group of the Investment Company Institute and comply with Securities and
Exchange Commission rules and regulations.
DISTRIBUTION SERVICES AND SHAREHOLDER SERVICING ARRANGEMENTS. Pursuant to
the Distribution Agreement with Investment Company, Russell Fund Distributors,
Inc. ("Distributor"), a wholly owned subsidiary of Administrator, serves as
distributor for all Fund shares.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 (the "Plan")
under the 1940 Act. The purpose of the Plan is to provide for the payment of
certain Investment Company distribution and shareholder servicing expenses.
Under the Plan, Distributor will be reimbursed in an amount up to .25% of the
Fund's average annual net assets for distribution-related and shareholder
servicing expenses. Payments under the Plan will be made to Distributor to
finance activity which is intended to result in the sale and retention of Fund
shares including: (1) the costs of prospectuses, reports to
16
<PAGE>
shareholders and sales literature; (2) advertising; and (3) expenses incurred in
connection with the promotion and sale of Fund shares, including Distributor's
overhead expenses for rent, office supplies, equipment, travel, communication,
compensation and benefits of sales personnel.
Under the Plan, the Fund may also enter into agreements ("Service
Agreements") with financial institutions, which may include Adviser ("Service
Organizations"), to provide shareholder servicing with respect to Fund shares
held by or for the customers of the Service Organizations. Under the Service
Agreements, the Service Organizations may provide various services for such
customers including: answering inquiries regarding the Fund; assisting customers
in changing dividend options, account designations and addresses; performing
subaccounting for such customers; establishing and maintaining customer accounts
and records; processing purchase and redemption transactions; providing periodic
statements showing customers' account balances and integrating such statements
with those of other transactions and balances in the customers' other accounts
serviced by the Service Organizations; arranging for bank wires transferring
customers' funds; and such other services as the customers may request in
connection with the Fund, to the extent permitted by applicable statute, rule or
regulation. Service Organizations may receive from the Fund, for shareholder
servicing, monthly fees at a rate that shall not exceed .20% per annum of the
average daily net asset value of Fund shares owned by or for shareholders with
whom the Service Organization has a servicing relationship. Banks and other
financial service firms may be subject to various state laws, and may be
required to register as dealers pursuant to state law.
Investment Company has entered into Service Agreements with Adviser, State
Street Brokerage Services, Inc. ("SSBSI"), and Adviser's Metropolitan Division
of Commercial Banking ("Commercial Banking") to obtain the services described
above with respect to Fund shares held by or for customers. In return for these
services, Investment Company pays Adviser a fee in an amount that per annum is
equal to .025%, .175% and .175% of the average daily value of all Fund shares
held by or for customers of Adviser, SSBSI, and Commercial Banking,
respectively.
Payments to Distributor, as well as payments to Service Organizations, are
not permitted by the Plan to exceed .25% of the Fund's average net asset value
per year. Any payments that are required to be made by the Distribution
Agreement and any Service Agreement but could not be made because of the .25%
limitation may be carried forward and paid in subsequent years so long as the
Plan is in effect. The Fund's liability for any such expenses carried forward
shall terminate at the end of two years following the year in which the
expenditure was incurred. Service Organizations will be responsible for prompt
transmission of purchase and redemption orders and may charge fees for their
services.
FUND EXPENSES
The Fund will pay all of its expenses other than those expressly assumed by
Adviser and Administrator. The principal expenses of the Fund are the annual
advisory fee payable to Adviser and distribution and shareholder servicing
expenses. Other expenses include: (1) amortization of deferred organizational
costs; (2) taxes, if any; (3) expenses for legal, auditing and financial
accounting services; (4) expense of preparing (including typesetting, printing
and mailing) reports, prospectuses and notices to existing shareholders; (5)
administrative fees; (6) custodian fees; (7) expense of issuing and redeeming
Fund shares; (8) the cost of registering Fund shares under federal and state
laws; (9) shareholder meetings and related proxy solicitation expenses; (10) the
fees, travel expenses and other out-
17
<PAGE>
of-pocket expenses of Trustees who are not affiliated with Adviser or any of its
affiliates; (11) insurance, interest, brokerage and litigation costs; (12)
extraordinary expenses as may arise, including expenses incurred in connection
with litigation proceedings and claims and the legal obligations of Investment
Company to indemnify its Trustees, officers, employees, shareholders,
distributors and agents; and (13) other expenses properly payable by the Fund.
PERFORMANCE CALCULATIONS
From time to time the Fund may advertise its total return. The total return
of the Fund is the average annual compounded rate of return from a hypothetical
investment in the Fund over one-, five-, and ten-year periods or for the life of
the Fund (as stated in the advertisement), assuming the reinvestment of all
dividend and capital gains distributions.
Comparative performance information may be used from time to time in
advertising or marketing Fund shares, including data from Lipper Analytical
Services, Inc., Wall Street Journal Score Card or other industry publications,
business periodicals, rating services and market indices. The Fund may also
advertise nonstandardized performance information which is for periods in
addition to those required to be presented.
Total return and other performance figures are based on historical earnings
and are not indications of future performance.
ADDITIONAL INFORMATION
CUSTODIAN, TRANSFER AGENT AND INDEPENDENT ACCOUNTANTS. State Street holds
all portfolio securities and cash assets of the Fund, provides portfolio
recordkeeping services and serves as the Fund's transfer agent ("Transfer
Agent") and custodian ("Custodian"). State Street is authorized to deposit
securities in securities depositories or to use the services of subcustodians.
State Street has no responsibility for the supervision and management of the
Fund except as investment adviser. Coopers & Lybrand L.L.P, Boston,
Massachusetts, is Investment Company's independent accountants.
REPORTS TO SHAREHOLDERS AND SHAREHOLDER INQUIRIES. Shareholders will
receive unaudited semiannual financial statements and annual financial
statements audited by Investment Company's independent accountants. Shareholder
inquiries regarding the Prospectus and financial statements may be made by
calling Distributor at (617) 654-6089. Inquiries regarding shareholder balances
may be made by calling Transfer Agent at (800) 647-7327.
ORGANIZATION, CAPITALIZATION AND VOTING. Investment Company was organized
as a Massachusetts business trust on October 3, 1987, and operates under a First
Amended and Restated Master Trust Agreement dated October 13, 1993, as amended.
Investment Company issues shares divisible into an unlimited number of
series (or funds), each of which is a separate trust under Massachusetts law.
The Matrix Fund is one such series.
Each Fund share represents an equal proportionate interest in the Fund, has
a par value of $.001 per share and is entitled to such relative rights and
preferences and dividends and distributions earned on Fund assets as may be
declared by the Board of Trustees. Shares of the Fund are fully paid and
nonassessable by Investment Company and have no preemptive rights.
18
<PAGE>
Each Fund share has one vote. There are no cumulative voting rights. There
is no annual meeting of shareholders, but special meetings may be held. On any
matter which affects only a particular investment fund, only shareholders of
that fund may vote unless otherwise required by the 1940 Act or the Master Trust
Agreement. The Trustees hold office for the life of the Trust. A Trustee may
resign or retire, and may be removed at any time by a vote of two-thirds of the
Investment Company shares or by a vote of a majority of the Trustees. The
Trustees shall promptly call and give notice of a meeting of shareholders for
the purpose of voting upon removal of any Trustee when requested to do so in
writing by the holders of not less than 10% of the shares then outstanding. A
vacancy on the Board of Trustees may be filled by the vote of a majority of the
remaining Trustees, provided that immediately thereafter at least two-thirds of
the Trustees have been elected by shareholders.
Investment Company does not issue share certificates for the Fund. Transfer
Agent sends shareholders statements concurrent with any transaction activity,
confirming all investments in or redemptions from their accounts. Each statement
also sets forth the balance of shares held in the account.
19
<PAGE>
THE SEVEN SEAS SERIES FUND
TWO INTERNATIONAL PLACE, 35TH FLOOR
BOSTON, MASSACHUSETTS 02110
INVESTMENT ADVISER, CUSTODIAN, AND TRANSFER AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
DISTRIBUTOR
Russell Fund Distributors, Inc.
Two International Place, 35th Floor
Boston, Massachusetts 02110
ADMINISTRATOR
Frank Russell Investment Management Company
909 A Street
Tacoma, Washington 98402
LEGAL COUNSEL
Goodwin, Procter & Hoar
Exchange Place
Boston, Massachusetts 02109
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
<PAGE>
THE SEVEN SEAS SERIES FUND
The Seven Seas Series Money Market Fund
The Seven Seas Series US Government Money Market Fund
The Seven Seas Series Tax Free Money Market Fund
The Seven Seas Series S&P 500 Index Fund
The Seven Seas Series Small Cap Fund
The Seven Seas Series Matrix Equity Fund
The Seven Seas Series Yield Plus Fund
The Seven Seas Series Growth and Income Fund
The Seven Seas Series Intermediate Fund
The Seven Seas Series Active International Fund
The Seven Seas Series Emerging Markets Fund
<PAGE>
Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
THE SEVEN SEAS SERIES FUND
TWO INTERNATIONAL PLACE, 35TH FLOOR
BOSTON, MASSACHUSETTS 02110
(617) 654-6089
S&P 500 INDEX FUND
The Seven Seas Series Fund is a registered, open-end investment company with
multiple portfolios, each of which is a mutual fund. This Prospectus describes
and offers shares of beneficial interest in one such mutual fund, The Seven Seas
Series S&P 500 Index Fund (referred to in this Prospectus as the "Fund") The
Fund seeks to replicate the total return of the Standard & Poor's 500 Composite
Stock Price Index. The Fund's shares are offered without sales commissions.
However, the Fund pays certain distribution expenses under its Rule 12b-1 plan.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
"S&P 500" IS A TRADEMARK OF STANDARD & POOR'S CORPORATION AND HAS BEEN
LICENSED FOR USE BY THE SEVEN SEAS SERIES FUND. THE FUND IS NOT SPONSORED,
ENDORSED, SOLD OR PROMOTED BY S&P, AND S&P MAKES NO REPRESENTATION REGARDING THE
ADVISABILITY OF INVESTING IN THIS FUND.
SHARES IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, STATE STREET BANK AND TRUST COMPANY, AND SHARES ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER AGENCY, AND INVOLVE RISKS INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. Please read and retain this
document for future reference. Additional information about the Fund has been
filed with the Securities and Exchange Commission in a Statement of Additional
Information dated December 29, 1995. The Statement of Additional Information is
incorporated herein by reference and is available without charge from
Distributor at its address noted below or by calling (617) 654-6089.
<TABLE>
<S> <C> <C>
INVESTMENT ADVISER,
CUSTODIAN DISTRIBUTOR: ADMINISTRATOR:
AND TRANSFER AGENT:
State Street Bank and Trust Russell Fund Distributors, Inc. Frank Russell Investment
Company Two International Place, Management Company
225 Franklin Street 35th Floor 909 A Street
Boston, Massachusetts 02110 Boston, Massachusetts 02110 Tacoma, Washington 98402
(617) 654-4721 (617) 654-6089 (206) 627-7001
</TABLE>
PROSPECTUS DATED DECEMBER 29, 1995
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Fund Operating Expenses.................................................................................... 3
Financial Highlights....................................................................................... 4
The Seven Seas Series Fund................................................................................. 5
Manner of Offering......................................................................................... 5
Investment Objectives, Policies and Restrictions........................................................... 5
Certain Risk Factors....................................................................................... 10
Portfolio Turnover......................................................................................... 10
Dividends and Distributions................................................................................ 10
Taxes...................................................................................................... 11
Valuation of Fund Shares................................................................................... 12
Purchase of Fund Shares.................................................................................... 13
Redemption of Fund Shares.................................................................................. 14
General Management......................................................................................... 15
Fund Expenses.............................................................................................. 18
Performance Calculations................................................................................... 19
Additional Information..................................................................................... 19
Information Regarding Standard & Poor's Corporation........................................................ 20
</TABLE>
2
<PAGE>
FUND OPERATING EXPENSES
THE SEVEN SEAS SERIES S&P 500 INDEX FUND
The following table is intended to assist the investor in understanding the
various costs and expenses that an investor in the Index Fund will incur
directly or indirectly. THE EXAMPLES PROVIDED IN THE TABLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. Actual expenses may be
greater or less than those shown. For additional information, see "General
Management."
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
- ------------------------------
Sales Load Imposed on Purchases.......................................................................................... None
Sales Load Imposed on Reinvested Dividends............................................................................... None
Deferred Sales Load...................................................................................................... None
Redemption Fees.......................................................................................................... None
Exchange Fee............................................................................................................. None
ANNUAL FUND OPERATING EXPENSES:
- ------------------------------
(as a percentage of average daily net assets)
Advisory Fees (1)........................................................................................................ .00%
12b-1 Fees (2)........................................................................................................... .06
Other Expenses........................................................................................................... .13
----
Total Operating Expenses After Fee Waiver (1)(3)......................................................................... .19%
----
----
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLES:
You would pay the following expenses on a $1,000 investment, assuming (i) 5% annual return
and (ii) redemption at the end of each time period....................................... $ 2 $ 6 $ 11 $ 24
------ ------- ------- --------
------ ------- ------- --------
</TABLE>
- ------------------------
(1) Adviser voluntarily agrees to waive up to the full amount of its Advisory
fee of .10% to the extent that total expenses exceed .15% of average daily
net assets on an annual basis. The gross annual Advisory expense before the
fee waiver would be .10% of average daily net assets. The total operating
expenses of the Fund absent the fee waiver would be .29% of average daily
net assets on an annual basis. The waiver agreement will remain in effect
for the current fiscal year.
(2) Rule 12b-1 fees may include expenses paid for shareholder servicing
activities.
(3) The expense information in the table has been restated to reflect current
fees. Investors purchasing Fund shares through a financial intermediary,
such as a bank or an investment adviser, may also be required to pay
additional fees for services provided by the intermediary. Such investors
should contact the intermediary for information concerning what additional
fees, if any, will be charged.
Long-term shareholders of the Fund may pay more in Rule 12b-1 fees than the
economic equivalent of the maximum front-end sales charges permitted by the
National Association of Securities Dealers, Inc.
3
<PAGE>
FINANCIAL HIGHLIGHTS
THE SEVEN SEAS SERIES S&P 500 INDEX FUND
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand L.L.P., the Fund's independent
accountants. The table includes selected data for a share outstanding throughout
each fiscal year or period ended August 31, and other performance information
derived from the financial statements. The table appears in the Fund's Annual
Report and should be read in conjunction with the Fund's financial statements
and related notes, which are incorporated by reference in the Statement of
Additional Information and which appear, along with the report of Coopers &
Lybrand L.L.P., in the Fund's Annual Report to Shareholders. More detailed
information concerning the Fund's performance, including a complete portfolio
listing and audited financial statements, is available in the Fund's Annual
Report, which may be obtained without charge by writing or calling the
Distributor.
<TABLE>
<CAPTION>
1995 1994 1993++
--------- --------- ---------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR............................................. $ 10.89 $ 10.72 $ 10.00
--------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income........................................................ .29 .26 .15
Net realized and unrealized gain on investments.............................. 1.95 .29 .65
--------- --------- ---------
Total From Investment Operations............................................. 2.24 .55 .80
--------- --------- ---------
LESS DISTRIBUTIONS:
Net investment income........................................................ (.29) (.26) (.08)
Net realized gain on investments............................................. (.03) (.07) --
In excess of net realized gain on investments................................ -- (.05) --
--------- --------- ---------
Total Distributions.......................................................... (.32) (.38) (.08)
--------- --------- ---------
NET ASSET VALUE, END OF YEAR................................................... $ 12.81 $ 10.89 $ 10.72
--------- --------- ---------
--------- --------- ---------
TOTAL RETURN (%)(a)............................................................ 21.11 5.29 8.06
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average daily net assets (b)..................... .19 .15 .15
Operating expenses, gross, to average daily net assets (b)................... .29 .25 .35
Net investment income to average daily net assets (b)........................ 2.76 2.69 3.02
Portfolio turnover (b)....................................................... 38.56 7.97 48.10
Net assets, end of year ($000 omitted)....................................... 545,200 361,712 238,666
Per share amount of fees waived ($ omitted).................................. .0107 .0030 .0027
Per share amount of fees reimbursed by Adviser ($ omitted)................... -- .0067 .0071
</TABLE>
- ------------------------
++ For the period December 30, 1992 (commencement of operations) to August 31,
1993.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended August 31, 1993 are annualized.
4
<PAGE>
THE SEVEN SEAS SERIES FUND
The Seven Seas Series Fund ("Investment Company") is an open-end management
investment company that is organized as a Massachusetts business trust. In
addition, each series of the Investment Company is diversified as defined in the
Investment Company Act of 1940, as amended ("1940 Act"). As a "series" company,
Investment Company is authorized to issue an unlimited number of shares
evidencing beneficial interests in different investment portfolios. Through this
Prospectus, Investment Company offers shares in one such portfolio, The Seven
Seas Series S&P 500 Index Fund. State Street Bank and Trust Company (the
"Adviser" or "State Street") serves as the investment adviser for the Fund
MANNER OF OFFERING
DISTRIBUTION AND ELIGIBLE INVESTORS. Shares of the Fund are offered without
a sales commission by Russell Fund Distributors, Inc., Investment Company's
distributor, to US and foreign institutional and retail investors that invest
for their own account or in a fiduciary or agency capacity. The Fund will incur
distribution expenses under its Rule 12b-1 plan. See "General Management --
Distribution Services and Shareholder Servicing."
MINIMUM AND SUBSEQUENT INVESTMENT. The Fund requires a minimum initial
investment of $1,000. The shareholder's investment in the Fund may be subject to
redemption at the Fund's discretion if the account balance is less than $500 as
a result of shareholder redemptions. The Fund reserves the right to reject any
purchase order.
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVE
The Fund's fundamental investment objective is to seek to replicate the
total return of the Standard & Poor's 500 Composite Stock Price Index (the "S&P
500 Index"). This objective may be changed only with the approval of a majority
of the Fund's shareholders as defined by the 1940 Act. There can be no assurance
that the Fund will meet its investment objective.
The S&P 500 Index is composed of 500 common stocks which are chosen by
Standard & Poor's Corporation ("Standard & Poor's") to best capture the price
performance of a large cross-section of the US publicly traded stock market. The
Index is structured to approximate the general distribution of industries in the
US economy. The inclusion of a stock in the S&P 500 Index in no way implies that
Standard & Poor's believes the stock to be an attractive investment, nor is
Standard & Poor's a sponsor or in any way affiliated with the Fund. The 500
securities, most of which trade on the New York Stock Exchange, represent
approximately 75% of the market value of all US common stocks. Each stock in the
S&P 500 Index is weighted by its market capitalization. That is, each security
is weighted by its total market value relative to the total market values of all
the securities in the Index. Component stocks included in the S&P 500 Index are
chosen with the aim of achieving a distribution at the index level
representative of the various components of the US GNP and therefore do not
represent the 500 largest companies. Aggregate market value and trading activity
are also considered in the selection process. A limited percentage of the Index
may include Canadian securities. No other foreign securities are eligible for
inclusion.
5
<PAGE>
The Fund intends to invest in all 500 stocks in the S&P 500 Index in
proportion to their weighting in the Index. No subscription for the Fund will be
accepted until Adviser has a reasonable basis to believe that the Fund will be
able to acquire substantially all 500 stocks in the Index. To the extent that
all 500 stocks cannot be purchased, the Fund will purchase a representative
sample of the stocks listed in the Index in proportion to their weightings.
To the extent that the Fund seeks to replicate the S&P 500 Index using such
sampling techniques, a close correlation between the Fund's performance and the
performance of the Index is anticipated in both rising and falling markets. The
Fund will attempt to achieve a correlation between the performance of its
portfolio and that of the Index of at least 0.95, before deduction of Fund
expenses. A correlation of 1.00 would represent perfect correlation between
portfolio and index performance. It is anticipated that the correlation of the
Fund's performance to that of the Index will increase as the size of the Fund
increases. The Fund's ability to achieve significant correlation between Fund
and Index performance may be affected by changes in securities markets, changes
in the composition of the Index and the timing of purchases and redemptions of
Fund shares. Adviser will monitor correlation. Should the Fund fail to achieve
an appropriate level of correlation, Adviser will report to the Board of
Trustees, which will consider alternative arrangements.
The Fund will be substantially invested in the securities included in the
S&P 500 Index. However, the Fund may invest temporarily for defensive purposes,
without limitation, in certain short-term fixed income securities. Such
securities may be used to invest uncommitted cash balances or to maintain
liquidity to meet shareholder redemptions. See "Investment Policies -- Cash
Reserves."
INVESTMENT POLICIES
The investment policies described below reflect the Fund's current
practices, are not fundamental and may be changed by the Board of Trustees of
Investment Company without shareholder approval. For more information on the
Fund's Investment Policies, please see the Statement of Additional Information.
To the extent consistent with the Fund's investment objective and restrictions,
the Fund may invest in the following instruments and may use the following
investment techniques:
MANAGEMENT OF AN INDEX FUND. The Fund is not managed according to
traditional methods of "active" investment management, which involve the buying
and selling of securities based upon economic, financial and market analysis and
investment judgment. Instead, the Fund utilizes a "passive" investment approach,
attempting to duplicate the investment performance of its benchmark index
through automated statistical analytic procedures.
US GOVERNMENT SECURITIES. US Government securities include US Treasury
bills, notes and bonds and other obligations issued or guaranteed as to interest
and principal by the US Government and its agencies or instrumentalities.
Obligations issued or guaranteed as to interest and principal by the US
Government, its agencies or instrumentalities include securities that are
supported by the full faith and credit of the United States Treasury, securities
that are supported by the right of the issuer to borrow from the United States
Treasury, discretionary authority of the US Government agency or
instrumentality, and securities supported solely by the creditworthiness of the
issuer.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
banks and other financial institutions, such as broker-dealers. Under a
repurchase agreement, a Fund purchases
6
<PAGE>
securities from a financial institution that agrees to repurchase the securities
at the Fund's original purchase price plus interest within a specified time
(normally one business day). The Fund will invest no more than 10% of its net
assets (taken at current market value) in repurchase agreements maturing in more
than seven days. The Fund will limit repurchase transactions to those member
banks of the Federal Reserve System and broker-dealers whose creditworthiness
Adviser considers satisfactory. Should the counterparty to a transaction fail
financially, the Fund may encounter delay and incur costs before being able to
sell the securities. Further, the amount realized upon the sale of the
securities may be less than that necessary to fully compensate the Fund.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreements under the circumstances described in "Investment Restrictions." Under
a reverse repurchase agreement, the Fund sells portfolio securities to a
financial institution in return for cash in an amount equal to a percentage of
the portfolio securities' market value and agrees to repurchase the securities
at a future date at a prescribed repurchase price equal to the amount of cash
originally received plus interest on such amount. The Fund retains the right to
receive interest and principal payments with respect to the securities while
they are in the possession of the financial institutions. Reverse repurchase
agreements involve the risk of default by the counterparty, which may adversely
affect the Fund's ability to reacquire the underlying securities.
FORWARD COMMITMENTS. The Fund may contract to purchase securities for a
fixed price at a future date beyond customary settlement time. When effecting
such transactions, cash or liquid high quality debt obligations held by the Fund
of a dollar amount sufficient to make payment for the portfolio securities to be
purchased will be segregated on the Fund's records at the trade date and
maintained until the transaction is settled. The failure of the other party to
the transaction to complete the transaction may cause the Fund to miss an
advantageous price or yield. The Fund bears the risk of price fluctuations
during the period between the trade and settlement dates.
WHEN-ISSUED TRANSACTIONS. The Fund may purchase securities on a when-issued
basis. In these transactions, a Fund purchases securities with payment and
delivery scheduled for a future time. Until settlement, the Fund segregates cash
and marketable high quality debt securities equal in value to their when-issued
commitments. Between the trade and settlement dates, the Fund bears the risk of
any fluctuation in the value of the securities. These transactions involve the
additional risk that the other party may fail to complete the transaction and
cause the Fund to miss a price or yield considered advantageous. The Fund will
engage in when-issued transactions only for the purpose of acquiring portfolio
securities consistent with its investment objective and policies and not for
investment leverage. The Fund will not invest more than 25% of its net assets in
when-issued securities.
ILLIQUID SECURITIES. The Fund will not invest more than 15% of its net
assets in illiquid securities or securities that are not readily marketable,
including repurchase agreements and time deposits of more than seven days'
duration. The absence of a regular trading market for illiquid securities
imposes additional risks on investments in these securities. Illiquid securities
may be difficult to value and may often be disposed of only after considerable
expense and delay. In addition, the Fund will not invest more than 10% in
securities of issuers which may not be sold to the public without registration
under the Securities Act of 1933.
VARIABLE AMOUNT MASTER DEMAND NOTES. Variable amount master demand notes
are unsecured obligations that are redeemable upon demand and are typically
unrated. These instruments are issued
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pursuant to written agreements between their issuers and holders. The agreements
permit the holders to increase (subject to an agreed maximum) and the holders
and issuers to decrease the principal amount of the notes, and specify that the
rate of interest payable on the principal fluctuates according to an agreed
formula.
FUTURES CONTRACTS AND OPTIONS ON FUTURES. For hedging purposes, including
protecting the price or interest rate of securities that the Fund intends to
buy, the Fund may enter into futures contracts that relate to securities in
which they may directly invest and indices comprised of such securities and may
purchase and write call and put options on such contracts.
A financial futures contract is a contract to buy or sell a specified
quantity of financial instruments such as US Treasury bills, notes and bonds,
commercial paper and bank certificates of deposit or the cash value of a
financial instrument index at a specified future date at a price agreed upon
when the contract is made. A stock index futures contract is a contract to buy
or sell specified units of a stock index at a specified future date at a price
agreed upon when the contract is made. The value of a unit is based on the
current value of the contract index. Under such contracts no delivery of the
actual stocks making up the index takes place. Rather, upon expiration of the
contract, settlement is made by exchanging cash in an amount equal to the
difference between the contract price and the closing price of the index at
expiration, net of variation margin previously paid.
Substantially all futures contracts are closed out before settlement date or
called for cash settlement. A futures contract is closed out by buying or
selling an identical offsetting futures contract. Upon entering into a futures
contract, a Fund is required to deposit an initial margin with Custodian for the
benefit of the futures broker. The initial margin serves as a "good faith"
deposit that the Fund will honor their futures commitments. Subsequent payments
(called "variation margin") to and from the broker are made on a daily basis as
the price of the underlying investment fluctuates.
Options on futures contracts give the purchaser the right to assume a
position at a specified price in a futures contract at any time before
expiration of the option contract.
When trading futures contracts, the Fund will not commit more than 5% of the
market value of its total assets to initial margin deposits on futures and
premiums paid for options on futures.
OPTIONS ON SECURITIES AND SECURITIES INDICES. The Fund may write and
purchase covered put and call options on securities in which it may directly
invest. Option transactions of the Fund will be conducted so that the total
amount paid on premiums for all put and call options outstanding will not exceed
5% of the value of the Fund's total assets. Further, the Fund will not write a
put or call option or combination thereof if, as a result, the aggregate value
of all securities or collateral used to cover its outstanding options would
exceed 25% of the value of the Fund's total assets.
The Fund may purchase or sell options on securities indices that are
comprised of securities in which it may directly invest, subject to the
limitations set forth above and provided such options are traded on a national
securities exchange or in the over-the-counter market. Options on securities
indices are similar to options on securities except there is no transfer of a
security and settlement is in cash. A call option on a securities index grants
the purchaser of the call, for a premium paid to the seller, the right to
receive in cash an amount equal to the difference between the closing value of
the index and the exercise price of the option times a multiplier established by
the exchange upon which the option is traded.
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LENDING PORTFOLIO SECURITIES. The Fund may lend portfolio securities with a
value of up to 33 1/3% of its total assets. Such loans may be terminated at any
time. The Fund will continuously maintain as collateral cash or obligations
issued by the US Government, its agencies or instrumentalities in an amount
equal to not less than 100% of the current market value (on a daily
marked-to-market basis) of the loaned securities plus accrued interest.
The Fund will retain most rights of beneficial ownership, including the
right to receive dividends, interest or other distributions on the loaned
securities. However, the borrower has the right to vote the loaned securities.
The Fund will call loans to vote proxies if a material issue affecting the
investment is to be voted upon. Should the borrower of the securities fail
financially, the Fund may experience delay in recovering the securities or loss
of rights in the collateral. Loans are made only to borrowers that are deemed by
Adviser to be of good financial standing.
CASH RESERVES. For the purpose of investing uncommitted cash balances or to
maintain liquidity to meet shareholder redemptions, the Fund may invest
temporarily and without limitation in certain high quality short-term fixed
income securities. These securities include obligations issued or guaranteed as
to principal and interest by the US Government, its agencies or
instrumentalities and repurchase agreements collateralized by these obligations,
commercial paper, bank certificates of deposit, bankers' acceptances and time
deposits.
AMERICAN DEPOSITORY RECEIPTS. The Fund may invest in American Depository
Receipts (ADRs). Investment in these instruments will not exceed 5% of the
Fund's total net assets during the coming year. See the Statement of Additional
Information for a more detailed discussion of these instruments. For a
discussion of the risks associated with the use of ADRs, see "Certain Risk
Factors -- Foreign Investments."
DEBT SECURITIES. The Fund may also invest temporarily in investment grade
debt securities for defensive purposes. The Fund will primarily invest in equity
securities as defined under the Securities Exchange Act of 1934 (including
convertible debt securities). Debt securities and cash will typically represent
less than 10% of the Fund's assets. Please see the Statement of Additional
Information for a description of securities ratings.
INVESTMENT RESTRICTIONS
The Fund has fundamental investment restrictions, which may be changed only
with the approval of a majority of the Fund's shareholders as defined in the
1940 Act. A more detailed discussion of the Fund's investment restrictions and
investment policies appears in the Statement of Additional Information. Unless
otherwise noted, the fundamental restrictions apply at the time an investment is
made. The Fund may not:
1. Invest 25% or more of the value of its total assets in securities of
companies primarily engaged in any one industry (other than the US
Government, its agencies or instrumentalities). Concentration may occur
as a result of changes in the market value of portfolio securities, but
may not result from investment. Notwithstanding the foregoing general
restrictions, the Fund will concentrate in particular industries to the
extent the underlying index concentrates in those industries.
2. Borrow money (including reverse repurchase agreements), except as a
temporary measure for extraordinary or emergency purposes or to
facilitate redemptions (not for leveraging or
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investment), provided that borrowings do not exceed an amount equal to
33 1/3% of the current value of the Fund's assets taken at market value,
less liabilities other than borrowings. If at any time a Fund's
borrowings exceed this limitation due to a decline in net assets, such
borrowings will within three days be reduced to the extent necessary to
comply with this limitation. The Fund will not purchase investments once
borrowed funds (including reverse repurchase agreements) exceed 5% of its
total assets.
3. Pledge, mortgage, or hypothecate its assets. However, the Fund may pledge
securities having a market value at the time of the pledge not exceeding
33 1/3% of the value of the Fund's total assets to secure permitted
borrowings.
CERTAIN RISK FACTORS
FUTURES AND OPTIONS CONTRACTS. There are certain investment risks in using
futures contracts and options as a hedging technique. Such risks may
include: (1) the inability to close out a futures contract or option caused by
the nonexistence of a liquid secondary market; and (2) an imperfect correlation
between price movements of the futures contracts or option with price movements
of the portfolio securities or securities index subject to the hedge.
FOREIGN INVESTMENTS. Investment in securities of non-US issuers and
securities denominated in foreign currencies involve investment risks that are
different from those of US issuers, including: changes in currency rates;
uncertain future political, diplomatic and economic developments; possible
imposition of exchange controls or other governmental restrictions; less
publicly available information; lack of uniform accounting, auditing and
financial reporting standards, practices and requirements; lower trading volume,
less liquidity and more volatility for securities; less government regulation of
securities exchanges, brokers and listed companies; political or social
instability; and the possibility of expropriation or confiscatory taxation, each
of which could adversely affect investments in such securities. ADRs are subject
to all of the above risks, except the imposition of exchange controls and
currency fluctuations during the settlement period.
PORTFOLIO TURNOVER
Ordinarily, securities will be sold from the Fund only to reflect certain
changes in its benchmark index (including mergers or changes in the composition
of the index) or to accommodate cash flows into and out of the Fund while
maintaining the similarity of the Fund to the benchmark index. Accordingly, the
turnover rate for the Fund is not expected to exceed 50%, a generally lower
turnover rate than for most actively managed investment companies.
The Fund may effect portfolio transactions with or through State Street
Brokerage Services, Inc., an affiliate of the Adviser, when the Adviser
determines that the Fund will receive competitive execution, price and
commissions.
DIVIDENDS AND DISTRIBUTIONS
The Board of Trustees intends to declare and pay on Fund shares dividends
quarterly from net investment income. The Board of Trustees intends to declare
distributions annually from net capital
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gains, if any, generally in mid-October. An additional distribution may be
declared and paid in December, if required, for the Fund to avoid imposition of
a 4% federal excise tax on undistributed capital gains.
Dividends declared in October, November or December and payable to
shareholders of record in such months will be deemed to have been paid by the
Fund and received by shareholders on December 31 of that year if the dividend is
paid prior to February 1 of the following year.
Income dividends and capital gains distributions will be paid in additional
shares at their net asset value on the record date unless the shareholder has
elected to receive them in cash. Such election may be made by giving 10 days'
written notice to Transfer Agent.
Any dividend or capital gain distribution paid by the Fund shortly after a
purchase of shares will reduce the per share net asset value of the Fund by the
amount of the dividend or distribution. In effect, the payment will represent a
return of capital to the shareholder. However, the shareholder will be subject
to taxes with respect to such dividend or distribution.
TAXES
The Fund intends to qualify as a regulated investment company ("RIC") under
Subchapter M of the Internal Revenue Code, as amended (the "Code"). As a RIC,
the Fund will not be subject to federal income taxes to the extent it
distributes its net investment income and capital gain net income (capital gains
in excess of capital losses) to its shareholders. The Board intends to
distribute each year substantially all of the Fund's net investment income and
capital gain net income.
Dividends from net investment income and distributions of net short-term
capital gains are taxable to shareholders as ordinary income under federal
income tax laws whether paid in cash or in additional shares. Distributions from
net long-term capital gains are taxable as long-term capital gains regardless of
the length of time a shareholder has held such shares and whether paid in cash
or additional shares.
The Fund may purchase bonds at market discount (i.e., bonds with a purchase
price less than original issue price or adjusted issue price). If such bonds are
subsequently sold at a gain then a portion of that gain equal to the amount of
market discount, which should have been accrued through the sale date, will be
taxable to shareholders as ordinary income.
Dividends and distributions may also be subject to state or local taxes.
Depending on the state tax rules pertaining to a shareholder, a portion of the
dividends paid by a Fund attributable to direct obligations of the US Treasury
and certain agencies may be exempt from state and local taxes.
The sale of Fund shares by a shareholder is a taxable event and may result
in capital gain or loss. A capital gain or loss may be realized from an ordinary
redemption of shares or an exchange of shares between two mutual funds (or two
series of portfolios of a mutual fund). Any loss incurred on the sale or
exchange of Fund shares held for one year or more will be treated as a long-term
capital loss to the extent of capital gain dividends received with respect to
such shares.
Shareholders will be notified after each calendar year of the amounts of
income dividends and net capital gains distributions and the percentage of a
Fund's income attributable to US Treasury and agency obligations. The Fund is
required to withhold a legally determined portion of all taxable
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dividends, distributions, and redemption proceeds payable to any noncorporate
shareholder that does not provide the Fund with the shareholder's correct
taxpayer identification number or certification that the shareholder is not
subject to backup withholding.
The foregoing discussion is only a summary of certain federal income tax
issues generally affecting the Fund and its shareholders. Circumstances among
investors may vary and each investor is encouraged to discuss investment in the
Fund with the investor's tax adviser.
VALUATION OF FUND SHARES
NET ASSET VALUE PER SHARE. The Fund determines net asset value once each
business day as of the close of the regular trading session of the New York
Stock Exchange (ordinarily 4 p.m. Eastern time). A business day is one on which
the New York Stock Exchange is open for business. Net asset value per share is
computed by dividing the current value of the Fund's assets, less its
liabilities, by the number of shares of the Fund outstanding and rounding to the
nearest cent.
VALUATION OF FUND SECURITIES. With the exceptions noted below, the Fund
values portfolio securities at market value. This generally means that equity
and fixed-income securities listed and traded principally on any national
securities exchange are valued on the basis of the last sale price or, lacking
any sales, at the closing bid price, on the primary exchange on which the
security is traded. United States equity and fixed income securities traded
principally over-the-counter and options are valued on the basis of the last
reported bid price. Futures contracts are valued on the basis of the last
reported sale price.
Because many fixed income securities do not trade each day, last sale or bid
prices are frequently not available. Fixed income securities therefore may be
valued using prices provided by a pricing service when such prices are
determined by Custodian to reflect the market value of such securities.
International securities traded on a national securities exchange are valued
on the basis of the last sale price. International securities traded
over-the-counter are valued on the basis of best bid or official bid, as
determined by the relevant securities exchange. In the absence of a last sale or
best or official bid price, such securities may be valued on the basis of prices
provided by a pricing service if those prices are believed to reflect the market
value of such securities.
Securities maturing within 60 days of the valuation date are valued at
amortized cost unless the Board determines that amortized cost does not
represent market value. The amortized cost valuation procedure initially prices
an instrument at its cost and thereafter assumes a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. While 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 a Fund would
receive if it sold the instrument.
The Fund values securities for which market quotations are not readily
available at fair value, as determined in good faith pursuant to procedures
established by the Board of Trustees.
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PURCHASE OF FUND SHARES
MINIMUM INITIAL INVESTMENT AND ACCOUNT BALANCE. The Fund requires a minimum
initial investment of $1,000. The minimum account balance is $500. The Fund
reserves the right to reject any purchase order.
OFFERING DATES AND TIMES. Fund shares may be purchased on any business day
without a sales commission. All purchases must be made in US dollars. Purchase
orders in good form and payments for Fund shares must be received by the
Transfer Agent prior to 4:00 p.m. Eastern time to be effective on the date
received. The accompanying payment must be in federal funds or converted into
federal funds by the Transfer Agent before the purchase order can be accepted.
Purchase orders in good form are described below.
ORDER AND PAYMENT PROCEDURES. There are several ways to invest in the Fund.
The Fund requires a purchase order in good form which consists of a completed
and signed Account Registration and Investment Instruction Form (Application)
for each new account regardless of the investment method. For additional
information, copies of forms or questions, call Transfer Agent at (800)
647-7327, or write to Transfer Agent at: State Street Bank and Trust Company,
P.O. Box 8317, Boston, MA 02266-8317, Attention: The Seven Seas Series S&P 500
Index Fund.
FEDERAL FUNDS WIRE. An investor may purchase shares by wiring federal funds
to State Street Bank and Trust Company as Transfer Agent by:
1. Telephoning State Street Bank and Trust Company at (800) 647-7327 and
providing: (1) the investor's account registration number, address and
social security or tax identification number; (2) the name of the Fund to
be invested in; (3) the amount being wired; (4) the name of the wiring
bank and (5) the name and telephone number of the person at the wiring
bank to be contacted in connection with the order.
2. Instructing the wiring bank to wire federal funds to: State Street Bank
and Trust Company, Boston, MA (ABA #0110-00028), Attention: The Seven
Seas Series S&P 500 Index Fund, Mutual Funds Service Division (DDA #
9904-631-0). The wire instructions should also include the name the
account is registered in, the account number and the name of the Fund to
be invested in.
3. Completing the Application and forwarding it to Transfer Agent at the
above address.
MAIL. To purchase shares by mail, send a check or other negotiable bank
draft payable to: State Street Bank and Trust Company, P.O. Box 8317, Boston, MA
02266-8317, Attention: The Seven Seas Series S&P 500 Index Fund. Certified
checks are not necessary, but checks are accepted subject to collection at full
face value in United States funds and must be drawn in United States dollars on
a United States bank. Normally, checks and drafts are converted to federal funds
within two business days following receipt of the check or draft. Initial
investments should be accompanied by a completed Application, and subsequent
investments are to be accompanied by the investor's account number.
THIRD PARTY TRANSACTIONS. Investors purchasing Fund shares through a
program of services offered by a financial intermediary, such as a bank,
broker-dealer, investment adviser or others, may be required to pay additional
fees by such intermediary. Investors should contact such intermediary for
information concerning what additional fees, if any, may be charged.
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IN-KIND EXCHANGE OF SECURITIES. The Transfer Agent may, at its discretion,
permit investors to purchase shares through the exchange of securities they
hold. Any securities exchanged must meet the investment objective, policies and
restrictions of the Fund, must have a readily ascertainable market value, must
be liquid and must not be subject to restrictions on resale. The market value of
any securities exchanged, plus any cash, must be at least $1 million. Shares
purchased in exchange for securities generally may not be redeemed or exchanged
until the transfer has settled -- usually within 15 days following the purchase
by exchange.
The basis of the exchange will depend upon the relative net asset value of
the shares purchased and securities exchanged. Securities accepted by the Fund
will be valued in the same manner as the Fund values its assets. Any interest
earned on the securities following their delivery to the Transfer Agent and
prior to the exchange will be considered in valuing the securities. All
interest, dividends, subscription or other rights attached to the securities
become the property of the Fund, along with the securities.
EXCHANGE PRIVILEGE. Subject to the Fund's minimum investment requirement,
investors may exchange Fund shares without charge for shares of any other
investment portfolio offered by Investment Company. Shares are exchanged on the
basis of relative net asset value per share. Exchanges may be made: (1) by
telephone if the registrations of the two accounts are identical; or (2) in
writing addressed to State Street Bank and Trust Company, P.O. Box 8317, Boston,
MA 02266-8317, Attention: The Seven Seas Series S&P 500 Index Fund. If shares of
a Fund were purchased by check, the shares must have been present in an account
for 10 days before an exchange is made. The exchange privilege will only be
available in states where the exchange may legally be made, and may be modified
or terminated by the Fund upon 60 days' notice to shareholders.
REDEMPTION OF FUND SHARES
Fund shares may be redeemed on any business day at the net asset value next
determined after the receipt of a redemption request in proper form as described
below. Payment will be made as soon as possible (but will ordinarily not exceed
seven days) and will be mailed to the shareholder's address of record. Upon
request, redemption proceeds will be wire transferred to the shareholder's
account at a domestic commercial bank that is a member of the Federal Reserve
System. Although Investment Company does not currently charge a fee for this
service, Investment Company reserves the right to charge a fee for the cost of
wire-transferred redemptions of less than $1,000. Payment for redemption of
shares purchased by check may be withheld for up to 10 days after the date of
purchase to assure that such checks are honored.
EXPEDITED REDEMPTION. Shareholders may normally redeem Fund shares by
telephoning State Street Bank and Trust Company between 9:00 a.m. and 4:00 p.m.
Eastern time at (800) 647-7327, Attention: The Seven Seas Series S&P 500 Index
Fund. Shareholders using the expedited redemption method must complete the
appropriate section on the Application. The Fund and the Transfer Agent will
employ reasonable procedures to confirm that instructions communicated by
telephone are properly authorized. The Fund and the Transfer Agent will not be
liable for executing telephone instructions that are deemed to be authorized
after following reasonable procedures. These procedures include recording
telephonic instructions, mailing to the shareholder a written confirmation of
the transaction, performing a personal identity test with private information
not likely to be known by other individuals, and restricting mailing of
redemptions to the shareholder's address of record.
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During periods of drastic economic or market changes, shareholders using this
method may encounter delays. In such event, shareholders should consider using
the mail redemption procedure described below.
MAIL. Redemption requests may be made in writing directly to State Street
Bank and Trust Company, P.O. Box 8317, Boston, MA 02266-8317, Attention: The
Seven Seas Series S&P 500 Index Fund. The redemption price will be the net asset
value next determined after receipt by State Street of all required documents in
good order. "Good order" means that the request must include the following:
1. A letter of instruction or a stock assignment stating that the Fund
shares are to be redeemed out of The Seven Seas Series S&P 500 Index Fund
and designating specifically the dollar amount to be redeemed signed by
all owners of the shares in the exact names in which they appear on the
account, together with a guarantee of the signature of each owner by a
bank, trust company or member of a recognized stock exchange; and
2. Such other supporting legal documents, if required by applicable law or
Transfer Agent, in the case of estates, trusts, guardianships,
custodianships, corporations and pension and profit-sharing plans.
The Fund reserves the right to redeem the shares in any account with a
balance of less than $500 as a result of shareholder redemptions rather than
market value fluctuations. Before shares are redeemed to close an account, the
shareholder will be notified in writing and allowed 60 days to purchase
additional shares to meet the minimum account balance.
The Fund may pay any portion of the redemption amount in excess of $250,000
by a distribution in kind of readily marketable securities from the portfolio of
the Fund in lieu of cash. Investors will incur brokerage charges on the sale of
these portfolio securities. The Fund reserves the right to suspend the right of
redemption or postpone the date of payment if emergency conditions, as specified
in the 1940 Act or determined by the Securities and Exchange Commission, should
exist.
GENERAL MANAGEMENT
The Board of Trustees supervises the management, activities and affairs of
the Fund and has approved contracts with various financial organizations to
provide, among other services, day-to-day management required by the Fund.
ADVISORY AGREEMENT. The Investment Company employs State Street to furnish
investment services to the Fund. State Street is one of the largest providers of
securities processing and recordkeeping services for US mutual funds and pension
funds. State Street is a wholly owned subsidiary of State Street Boston
Corporation, a publicly held bank holding company. State Street, with over
$171.3 billion (US) under management as of September 30, 1995, provides complete
global investment management services from offices in the United States, London,
Sydney, Hong Kong, Tokyo, Toronto, Luxembourg, Melbourne, Montreal and Paris.
Adviser, subject to Board supervision, directs the investment of the Fund in
accordance with the Fund's investment objective, policies and restrictions. Mr.
James B. May, Investment Officer, has been the portfolio manager primarily
responsible for investment decisions regarding the Fund since May 1995. Mr. May
has been an investment officer since January 1994 and a portfolio manager in the
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US Structured Products Group of State Street since that time. From 1991 to 1993,
he served as an Investment Support Analyst in the US Passive Services Group of
State Street Global Advisors. There are four other portfolio managers who work
with Mr. May in managing the Fund. For these services, the Fund pays Adviser a
fee, calculated daily and paid monthly, that on an annual basis is equal to .10%
of the Fund's average daily net assets.
The Glass-Steagall Act prohibits a depository state chartered bank such as
Adviser from engaging in the business of issuing, underwriting, selling or
distributing certain securities. The activities of Adviser in informing its
customers of the Fund, performing investment and redemption services and
providing custodian, transfer, shareholder servicing, dividend disbursing and
investment advisory services may raise issues under these provisions. Adviser
has been advised by its counsel that its activities in connection with the Fund
are consistent with its statutory and regulatory obligations. THE SHARES OFFERED
BY THIS PROSPECTUS ARE NOT ENDORSED OR GUARANTEED BY STATE STREET OR ITS
AFFILIATES, ARE NOT DEPOSITS OR OBLIGATIONS OF STATE STREET OR ITS AFFILIATES,
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
Changes in federal or state statutes and regulations relating to the
permissible activities of banks and their affiliates, as well as judicial or
administrative decisions or interpretations of such or future statutes and
regulations, could prevent Adviser from continuing to perform all or a part of
the above services for its customers and/or the Fund. If Adviser were prohibited
from serving the Fund in any of its present capacities, the Board of Trustees
would seek an alternative provider(s) of such services. In such event, changes
in the operation of the Fund may occur. It is not expected by Adviser that
existing shareholders would suffer any adverse financial consequences (if
another adviser with equivalent abilities is found) as a result of any of these
occurrences.
State Street may from time to time have discretionary authority over
accounts which invest in Investment Company shares. These accounts include
accounts maintained for securities lending clients and accounts which permit the
use of Investment Company portfolios as short-term cash sweep investments.
Shares purchased for all discretionary accounts are held of record by State
Street, who retains voting control of such shares. As of November 30, 1995,
State Street held of record 36% of the issued and outstanding shares of
Investment Company in connection with its discretionary accounts. Consequently,
State Street may be deemed to be a controlling person of Investment Company for
purposes of the 1940 Act.
Under the Adviser's Code of Ethics, the Adviser's employees in Boston where
investment management operations are conducted are only permitted to engage in
personal securities transactions which do not involve securities which the
Adviser had recommended for purchase or sale, or purchased or sold, on behalf of
its clients. Such employees must report their personal securities transactions
quarterly and supply broker confirmations to the Adviser.
ADMINISTRATION AGREEMENT. Frank Russell Investment Management Company
("Administrator") serves as administrator of the Fund. Administrator currently
serves as investment manager and administrator to 22 mutual funds with assets of
$7.3 billion as of October 31, 1995, and acts as administrator to 17 mutual
funds, including this Fund presented in this Prospectus, with assets of $7.2
billion as of October 31, 1995.
Pursuant to the Administration Agreement with Investment Company,
Administrator will: (1) supervise all aspects of the Fund's operations; (2)
provide the Fund with administrative and
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<PAGE>
clerical services, including the maintenance of certain of the Fund's books and
records; (3) arrange the periodic updating of the Fund's prospectuses and any
supplements thereto; (4) provide proxy materials and reports to Fund
shareholders and the Securities and Exchange Commission; and (5) provide the
Fund with adequate office space and all necessary office equipment and services,
including telephone service, heat, utilities, stationery supplies and similar
items. For these services, the Fund and Investment Company's other domestic
investment portfolios pay Administrator a combined fee that on an annual basis
is equal to the following percentages of their average aggregate daily net
assets: $0 to and including $500 million -- .06%; over $500 million to and
including $1 billion -- .05%; and over $1 billion -- .03%. The percentage of the
fee paid by a particular Fund is equal to the percentage of average aggregate
daily net assets that are attributable to that Fund. Administrator will also
receive reimbursement of expenses it incurs in connection with establishing new
investment portfolios. Further, the administration fee paid by the Investment
Company will be reduced by the sum of certain distribution related expenses (up
to a maximum of 15% of the asset-based administration fee listed above).
Administrator also provides administrative services in connection with the
registration of shares of Investment Company with those states in which its
shares are offered or sold. Compensation for such services is on a "time spent"
basis. Investment Company will pay all registration, exemptive application,
renewal and related fees and reasonable out-of-pocket expenses.
Officers and employees of the Administrator and Distributor are permitted to
engage in personal securities transactions subject to restrictions and
procedures set forth in the Confidentiality Manual and Code of Ethics adopted by
the Investment Company, Administrator and Distributor. Such restrictions and
procedures include substantially all of the recommendations of the Advisory
Group of the Investment Company Institute and comply with Securities and
Exchange Commission rules and regulations.
DISTRIBUTION SERVICES AND SHAREHOLDER SERVICING ARRANGEMENTS. Pursuant to
the Distribution Agreement with Investment Company, Russell Fund Distributors,
Inc. ("Distributor"), a wholly owned subsidiary of Administrator, serves as
distributor for all Fund shares.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 (the "Plan")
under the 1940 Act. The purpose of the Plan is to provide for the payment of
certain Investment Company distribution and shareholder servicing expenses.
Under the Plan, Distributor will be reimbursed in an amount up to .25% of the
Fund's average annual net assets for distribution-related and shareholder
servicing expenses. Payments under the Plan will be made to Distributor to
finance activity which is intended to result in the sale and retention of Fund
shares including: (1) the costs of prospectuses, reports to shareholders and
sales literature; (2) advertising; and (3) expenses incurred in connection with
the promotion and sale of Fund shares, including Distributor's overhead expenses
for rent, office supplies, equipment, travel, communication, compensation and
benefits of sales personnel.
Under the Plan, the Fund may also enter into agreements ("Service
Agreements") with financial institutions, which may include Adviser ("Service
Organizations"), to provide shareholder servicing with respect to Fund shares
held by or for the customers of the Service Organizations. Under the Service
Agreements, the Service Organizations may provide various services for such
customers including: answering inquiries regarding the Fund; assisting customers
in changing dividend options, account designations and addresses; performing
subaccounting for such customers; establishing and
17
<PAGE>
maintaining customer accounts and records; processing purchase and redemption
transactions; providing periodic statements showing customers' account balances
and integrating such statements with those of other transactions and balances in
the customers' other accounts serviced by the Service Organizations; arranging
for bank wires transferring customers' funds; and such other services as the
customers may request in connection with the Fund, to the extent permitted by
applicable statute, rule or regulation. Service Organizations may receive from
the Fund, for shareholder servicing, monthly fees at a rate that shall not
exceed .20% per annum of the average daily net asset value of the Fund's shares
owned by or for shareholders with whom the Service Organization has a servicing
relationship. Banks and other financial service firms may be subject to various
state laws, and may be required to register as dealers pursuant to state law.
Investment Company has entered into Service Agreements with Adviser, State
Street Brokerage Services, Inc. ("SSBSI"), and Adviser's Metropolitan Division
of Commercial Banking ("Commercial Banking") to obtain the services described
above with respect to Fund shares held by or for customers. In return for these
services, Investment Company pays Adviser a fee in an amount that per annum is
equal to .025%, .175% and .175% of the average daily value of all Fund shares
held by or for customers of Adviser, SSBSI, and Commercial Banking,
respectively.
Payments to the Distributor, as well as payments to Service Organizations
from a Fund are not permitted by the Plan to exceed .25% of the Fund's average
net asset value per year. Any payments that are required to be made by the
Distribution Agreement and any Service Agreement but could not be made because
of the .25% limitation may be carried forward and paid in subsequent years so
long as the Plan is in effect. A Fund's liability for any such expenses carried
forward shall terminate at the end of two years following the year in which the
expenditure was incurred. Service Organizations will be responsible for prompt
transmission of purchase and redemption orders and may charge fees for their
services.
FUND EXPENSES
The Fund will pay all of its expenses other than those expressly assumed by
Adviser and Administrator. The principal expenses of the Fund is the annual
advisory fee payable to Adviser and distribution and shareholder servicing
expenses. Other expenses include: (1) amortization of deferred organizational
costs; (2) taxes, if any; (3) expenses for legal, auditing and financial
accounting services; (4) expense of preparing (including typesetting, printing
and mailing) reports, prospectuses and notices to existing shareholders; (5)
administrative fees; (6) custodian fees; (7) expense of issuing and redeeming
Fund shares; (8) the cost of registering Fund shares under federal and state
laws; (9) shareholder meetings and related proxy solicitation expenses; (10) the
fees, travel expenses and other out-of-pocket expenses of Trustees who are not
affiliated with Adviser or any of its affiliates; (11) insurance, interest,
brokerage and litigation costs; (12) extraordinary expenses as may arise,
including expenses incurred in connection with litigation proceedings and claims
and the legal obligations of Investment Company to indemnify its Trustees,
officers, employees, shareholders, distributors and agents; and (13) other
expenses properly payable by the Fund.
18
<PAGE>
PERFORMANCE CALCULATIONS
From time to time the Fund may advertise its total return. The total return
of a Fund refers to the average annual compounded rates of return from a
hypothetical investment in the Fund over one-, five- and ten-year periods or for
the life of the Fund (as stated in the advertisement), assuming the reinvestment
of all dividend and capital gains distributions.
Comparative performance information may be used from time to time in
advertising or marketing Fund shares, including data from Lipper Analytical
Services, Inc., Wall Street Journal Score Card, S&P 500 Index, or other industry
publications, business periodicals, rating services and market indices. The Fund
may also advertise nonstandardized performance information which is for periods
in addition to those required to be presented.
Total return and other performance figures are based on historical earnings
and are not indications of future performance.
ADDITIONAL INFORMATION
CUSTODIAN, TRANSFER AGENT AND INDEPENDENT ACCOUNTANTS. State Street holds
all portfolio securities and cash assets of the Fund, provides portfolio
recordkeeping services and serves as the Fund's transfer agent ("Transfer
Agent") and custodian ("Custodian"). State Street is authorized to deposit
securities in securities depositories or to use the services of subcustodians.
State Street has no responsibility for the supervision and management of the
Fund except as investment adviser. Coopers & Lybrand L.L.P., Boston,
Massachusetts, is Investment Company's independent accountants.
REPORTS TO SHAREHOLDERS AND SHAREHOLDER INQUIRIES. Shareholders will
receive unaudited semiannual financial statements and annual financial
statements audited by Investment Company's independent accountants. Shareholder
inquiries regarding the Prospectus and financial statements may be made by
calling Distributor at (617) 654-6089. Inquiries regarding shareholder balances
may be made by calling the Transfer Agent at (800) 647-7327.
ORGANIZATION, CAPITALIZATION AND VOTING. Investment Company was organized
as a Massachusetts business trust on October 3, 1987, and operates under a First
Amended and Restated Master Trust Agreement dated October 13, 1993, as amended.
Investment Company issues shares divisible into an unlimited number of
series (or funds), each of which is a separate trust under Massachusetts law.
The Fund is one such series.
Each Fund share represents an equal proportionate interest in the Fund, has
a par value of $.001 per share and is entitled to such relative rights and
preferences and dividends and distributions earned on the assets belonging to
the Fund as may be declared by the Board of Trustees. Fund shares are fully paid
and nonassessable by Investment Company and have no preemptive rights.
Each Fund share has one vote. There are no cumulative voting rights. There
is no annual meeting of shareholders, but special meetings may be held. On any
matter that affects only a particular investment fund, only shareholders of that
fund vote unless otherwise required by the 1940 Act or the Master Trust
Agreement. The Trustees hold office for the life of the Trust. A Trustee may
resign or retire, and a Trustee may be removed at any time by a vote of
two-thirds of the Investment Company
19
<PAGE>
shares or by a vote of a majority of the Trustees. The Trustees shall promptly
call and give notice of a meeting of shareholders for the purpose of voting upon
removal of any Trustee when requested to do so in writing by holders of not less
than 10% of the shares then outstanding. A vacancy on the Board of Trustees may
be filled by the vote of a majority of the remaining Trustees, provided that
immediately thereafter at least two-thirds of the Trustees have been elected by
shareholders.
Investment Company does not issue share certificates for the Fund. Transfer
Agent sends shareholders of the Fund statements concurrent with any transaction
activity, confirming all investments in or redemptions from their accounts. Each
statement also sets forth the balance of shares held in the account.
As of November 30, 1995, American Home Assurance Company owned of record 26%
of the issued and outstanding shares of the Fund, and is therefore deemed to be
a controlling person of the Fund for purposes of the 1940 Act.
INFORMATION REGARDING STANDARD & POOR'S CORPORATION
"Standard & Poor's," "S&P," "Standard & Poor's 500," and "500" are
trademarks of Standard & Poor's and have been licensed for use by The Seven Seas
Series Fund. The Fund is not sponsored, endorsed, sold or promoted by Standard &
Poor's. Standard & Poor's makes no representation or warranty, express or
implied, to the shareholders of the Fund regarding the advisability of investing
in securities generally or in the Fund particularly or the ability of the S&P
500 Index to track general stock market performance. Standard & Poor's only
relationship to the Fund is the licensing of the trademarks and tradenames of
Standard & Poor's including the S&P 500 Index, which is determined, composed and
calculated by Standard & Poor's without regard to the Fund. Standard & Poor's
has no obligation to take the needs of the shareholders of the Fund into
consideration in determining, composing or calculating this Index. Standard &
Poor's is not responsible for and has not participated in the determination of
the prices and amount of the Fund or the timing of the issuance or sale of the
shares or in the determination or calculation of the equation by which the
shares of the Fund are to be redeemed. Standard & Poor's has no obligation or
liability in connection with the administration, marketing or trading of the
Fund.
STANDARD & POOR'S DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF
THE INDEX OR ANY DATA INCLUDED THEREIN AND STANDARD & POOR'S SHALL HAVE NO
LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. STANDARD & POOR'S
MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE FUND
OR THE SHAREHOLDERS OF THE FUND OR ANY OTHER PERSON OR ENTITY FROM THE USE OF
THE INDEX OR ANY DATA INCLUDED THEREIN. STANDARD & POOR'S MAKES NO EXPRESS OR
IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE INDEX OR ANY DATA
INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL
STANDARD & POOR'S HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR
CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS) EVEN IF NOTIFIED OF THE
POSSIBILITY OF SUCH DAMAGES.
20
<PAGE>
THE SEVEN SEAS SERIES FUND
TWO INTERNATIONAL PLACE, 35TH FLOOR
BOSTON, MASSACHUSETTS 02110
INVESTMENT ADVISER, CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
DISTRIBUTOR
Russell Fund Distributors, Inc.
Two International Place, 35th Floor
Boston, Massachusetts 02110
ADMINISTRATOR
Frank Russell Investment Management Company
909 A Street
Tacoma, Washington 98402
LEGAL COUNSEL
Goodwin, Procter & Hoar
Exchange Place
Boston, Massachusetts 02109
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
<PAGE>
THE SEVEN SEAS SERIES FUND
The Seven Seas Series Money Market Fund
The Seven Seas Series US Government Money Market Fund
The Seven Seas Series Tax Free Money Market Fund
The Seven Seas Series S&P 500 Index Fund
The Seven Seas Series Small Cap Fund
The Seven Seas Series Matrix Equity Fund
The Seven Seas Series Yield Plus Fund
The Seven Seas Series Growth and Income Fund
The Seven Seas Series Intermediate Fund
The Seven Seas Series Active International Fund
The Seven Seas Series Emerging Markets Fund
<PAGE>
Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
THE SEVEN SEAS SERIES FUND
TWO INTERNATIONAL PLACE, 35TH FLOOR
BOSTON, MASSACHUSETTS 02110
(617) 654-6089
YIELD PLUS FUND
The Seven Seas Series Fund is a registered, open-end investment company with
multiple portfolios, each of which is a mutual fund. This Prospectus describes
and offers shares of beneficial interest in one mutual fund, The Seven Seas
Series Yield Plus Fund, (referred to in this Prospectus as the "Yield Plus Fund"
or the "Fund"). The Yield Plus Fund seeks high current income and liquidity by
investing primarily in a diversified portfolio of high-quality debt securities
and by maintaining a portfolio duration of one year or less. The Fund's shares
are offered without sales commissions. However, the Fund pays certain
distribution expenses under its Rule 12b-1 plan.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SHARES IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, STATE STREET BANK AND TRUST COMPANY, AND SHARES ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER AGENCY, AND INVOLVE INVESTMENT RISKS INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. Please read and retain this
document for future reference. Additional information about the Fund has been
filed with the Securities and Exchange Commission in a Statement of Additional
Information dated December 29, 1995. The Statement of Additional Information is
incorporated herein by reference and is available without charge from
Distributor at its address noted below or by calling (617) 654-6089.
<TABLE>
<CAPTION>
INVESTMENT ADVISER, CUSTODIAN
AND TRANSFER AGENT: DISTRIBUTOR: ADMINISTRATOR:
<S> <C> <C>
Russell Fund Distributors,
State Street Bank and Trust Inc. Frank Russell Investment
Company Two International Place, 35th Management Company
225 Franklin Street Floor 909 A Street
Boston, Massachusetts 02110 Boston, Massachusetts 02110 Tacoma, Washington 98402
(617) 654-4721 (617) 654-6089 (206) 627-7001
</TABLE>
PROSPECTUS DATED DECEMBER 29, 1995
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Fund Operating Expenses.................................................................................... 3
Financial Highlights....................................................................................... 4
The Seven Seas Series Fund................................................................................. 5
Manner of Offering......................................................................................... 5
Investment Objective, Policies and Restrictions............................................................ 5
Certain Risk Factors....................................................................................... 11
Portfolio Turnover......................................................................................... 12
Dividends and Distributions................................................................................ 12
Taxes...................................................................................................... 12
Valuation of Fund Shares................................................................................... 13
Purchase of Fund Shares.................................................................................... 14
Redemption of Fund Shares.................................................................................. 16
General Management......................................................................................... 17
Fund Expenses.............................................................................................. 20
Performance Calculations................................................................................... 20
Additional Information..................................................................................... 21
</TABLE>
2
<PAGE>
FUND OPERATING EXPENSES
THE SEVEN SEAS YIELD PLUS FUND
The purpose of the following table is to assist the investor in
understanding the various costs and expenses that an investor in the Yield Plus
Fund will incur directly or indirectly. THE EXAMPLES PROVIDED IN THE TABLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. Actual
expenses may be greater or less than those shown. For additional information,
see "General Management."
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
- ------------------------------
Sales Load Imposed on Purchases.......................................................................................... None
Sales Load Imposed on Reinvested Dividends............................................................................... None
Deferred Sales Load...................................................................................................... None
Redemption Fees.......................................................................................................... None
Exchange Fee............................................................................................................. None
ANNUAL FUND OPERATING EXPENSES:
- ------------------------------
(as a percentage of average daily net assets)
Advisory Fees............................................................................................................ .25%
12b-1 Fees (1)........................................................................................................... .06
Other Expenses........................................................................................................... .07
----
Total Operating Expenses (2)............................................................................................. .38%
----
----
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLES:
You would pay the following expenses on a $1,000 investment, assuming (i) 5.0% annual
return and (ii) redemption at the end of each time period:............................... $ 4 $ 12 $ 21 $ 48
------ ------- ------- --------
------ ------- ------- --------
</TABLE>
- ------------------------
(1) Rule 12b-1 fees may include expenses paid for shareholder servicing
activities.
(2) The expense information in the table has been restated to reflect current
fees. Investors purchasing Fund shares through a financial intermediary,
such as a bank or an investment adviser, may also be required to pay
additional fees for services provided by the intermediary. Such investors
should contact the intermediary for information concerning what additional
fees, if any, will be charged.
Long-term shareholders of the Fund may pay more in Rule 12b-1 fees than the
economic equivalent of the maximum front-end sales charge permitted by the
National Association of Securities Dealers, Inc.
3
<PAGE>
FINANCIAL HIGHLIGHTS
THE SEVEN SEAS SERIES YIELD PLUS FUND
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand L.L.P., the Fund's independent
accountants. The table includes selected data for a share outstanding throughout
each fiscal year or period ended August 31, and other performance information
derived from the financial statements. The table appears in the Fund's Annual
Report and should be read in conjunction with the Fund's financial statements
and related notes, which are incorporated by reference in the Statement of
Additional Information and which appear, along with the report of Coopers &
Lybrand L.L.P., in the Fund's Annual Report to Shareholders. More detailed
information concerning the Fund's performance, including a complete portfolio
listing and audited financial statements, is available in the Fund's Annual
Report, which may be obtained without charge by writing or calling the
Distributor.
<TABLE>
<CAPTION>
1995 1994 1993++
------------- ------------- -----------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR..................................... $ 9.99 $ 10.01 $ 10.00
------------- ------------- -----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................................ .56 .38 .27
Net realized and unrealized gain (loss) on investments............... .02 (.02) .01
------------- ------------- -----------
Total From Investment Operations..................................... .58 .36 .28
------------- ------------- -----------
LESS DISTRIBUTIONS:
Net investment income................................................ (.56) (.38) (.27)
In excess of net realized gain on investments........................ (.01) -- --
------------- ------------- -----------
Total Distributions.................................................. (.57) (.38) (.27)
------------- ------------- -----------
NET ASSET VALUE, END OF YEAR........................................... $ 10.00 $ 9.99 $ 10.01
------------- ------------- -----------
------------- ------------- -----------
TOTAL RETURN (%)(a).................................................... 6.01 3.65 2.85
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, gross, and net to average daily net assets (b)... .38 .35 .38
Net investment income to average daily net assets (b)................ 5.64 3.82 3.54
Portfolio turnover (b)............................................... 199.69 142.68 137.86
Net assets, end of year
($000 omitted)...................................................... 1,447,097 1,358,464 589,594
Per share amount of fees waived ($ omitted).......................... -- -- .00042
</TABLE>
- ------------------------
++ For the period November 9, 1992 (commencement of operations) to August 31,
1993.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended August 31, 1993 are annualized.
4
<PAGE>
THE SEVEN SEAS SERIES FUND
The Seven Seas Series Fund ("Investment Company") is an open-end management
investment company that is organized as a Massachusetts business trust. In
addition, each series of the Investment Company is diversified as defined in the
Investment Company Act of 1940, as amended ("1940 Act"). As a "series" company,
Investment Company is authorized to issue an unlimited number of shares
evidencing beneficial interests in different investment portfolios. Through this
Prospectus, Investment Company offers shares in one such portfolio, The Seven
Seas Series Yield Plus Fund. State Street Bank and Trust Company (the "Adviser"
or "State Street") serves as the investment adviser for each Fund.
MANNER OF OFFERING
DISTRIBUTION AND ELIGIBLE INVESTORS. Shares of the Fund are offered without
a sales commission by Russell Fund Distributors, Inc., Investment Company's
distributor, to US and foreign institutional and retail investors that invest
for their own account or in a fiduciary or agency capacity. The Fund will incur
distribution expenses under a Rule 12b-1 plan. See "General Management --
Distribution Services and Shareholder Servicing."
MINIMUM AND SUBSEQUENT INVESTMENT. The Fund requires a minimum initial
investment of $1,000. A shareholder's investment in the Fund may be subject to
redemption at the Fund's discretion if the account balance is less than $500 as
a result of shareholder redemptions. The Fund reserves the right to reject any
purchase order.
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
The Fund's investment objective is to seek high current income and liquidity
by investing primarily in a diversified portfolio of high-quality debt
securities and by maintaining a portfolio duration of one year or less. This
investment objective may be changed with the approval of a majority of the
Fund's Board of Trustees. Shareholders would, however, receive at least 60 days
prior notice of any change to the Fund's investment objective. There can be no
assurance that the Fund will meet its investment objective.
The Fund attempts to meet its objective by investing primarily in: (1) US
Government securities (including repurchase agreements relating to such
securities); (2) instruments of US and foreign banks, including ETDs, ECDs,
YCDs, certificates of deposit, time deposits, letters of credit and banker's
acceptances; (3) commercial paper, notes and bonds issued by foreign and
domestic corporations; (4) securities of foreign governments, agencies and
subdivisions of foreign governments and supranational organizations (such as the
World Bank); (5) asset-backed securities; (6) mortgage-related pass-through
securities; and (7) interest rate swaps.
The Fund limits its portfolio investments to bank instruments,
mortgage-related pass-throughs, asset-backed securities, commercial paper,
corporate notes and bonds and obligations of foreign governments and agencies
and subdivisions of foreign governments and supranational organizations that, at
the time of acquisition: (1) are rated in one of the four highest categories (or
in the case of commercial paper, in the two highest categories) by at least one
nationally recognized statistical rating organization; or (2) if not rated, are
of comparable quality, as determined by the Fund's adviser, State
5
<PAGE>
Street Bank and Trust Company, in accordance with procedures established by the
Board of Trustees. All securities may be either fixed income, zero coupon or
variable- or floating-rate securities and may be denominated in US dollars or
selected foreign currencies.
INVESTMENT POLICIES
The investment policies described below reflect the Fund's current
practices, are not fundamental and may be changed by the Board of Trustees of
Investment Company without shareholder approval. For more information on the
Fund's Investment Policies, see the Statement of Additional Information. To the
extent consistent with the Fund's investment objective and restrictions, the
Fund may invest in the following instruments and may use the following
investment techniques:
PORTFOLIO DURATION. The Fund will maintain a portfolio duration of one year
or less. Duration is a measure of the price sensitivity of a security to changes
in interest rates. Unlike maturity, which measures the period of time until
final payment is to be made on a security, duration measures the dollar-weighted
average maturity of a security's expected cash flows (i.e., interest and
principal payments), discounted to their present values, after giving effect to
all maturity shortening features, such as call or redemption rights. With
respect to a variable or floating-rate instrument, duration is adjusted to
indicate the price sensitivity of the instrument to changes in the interest rate
in effect until the next reset date. For substantially all securities, the
duration of a security is equal to or less than its stated maturity.
US GOVERNMENT SECURITIES. US Government securities include US Treasury
bills, notes, and bonds and other obligations issued or guaranteed as to
interest and principal by the US Government and its agencies or
instrumentalities. Obligations issued or guaranteed as to interest and principal
by the US Government, its agencies or instrumentalities include securities that
are supported by the full faith and credit of the United States Treasury,
securities that are supported by the right of the issuer to borrow from the
United States Treasury, discretionary authority of the US Government agency or
instrumentality, and securities supported solely by the creditworthiness of the
issuer.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
banks and other financial institutions, such as broker-dealers. Under a
repurchase agreement, a Fund purchases securities from a financial institution
that agrees to repurchase the securities at the Fund's original purchase price
plus interest within a specified time (normally one business day). The Fund will
invest no more than 10% of its net assets (taken at current market value) in
repurchase agreements maturing in more than seven days. The Fund will limit
repurchase transactions to those member banks of the Federal Reserve System and
broker-dealers whose creditworthiness Adviser considers satisfactory. Should the
counterparty to a transaction fail financially, the Fund may encounter delay and
incur costs before being able to sell the securities. Further, the amount
realized upon the sale of the securities may be less than that necessary to
fully compensate the Fund.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreements under the circumstances described in "Investment Restrictions." Under
a reverse repurchase agreement, the Fund sells portfolio securities to a
financial institution in return for cash in an amount equal to a percentage of
the portfolio securities' market value and agrees to repurchase the securities
at a future date at a prescribed repurchase price equal to the amount of cash
originally received plus interest on such amount. The Fund retains the right to
receive interest and principal payments with
6
<PAGE>
respect to the securities while they are in the possession of the financial
institutions. Reverse repurchase agreements involve the risk of default by the
counterparty, which may adversely affect the Fund's ability to reacquire the
underlying securities.
FORWARD COMMITMENTS. The Fund may contract to purchase securities for a
fixed price at a future date beyond customary settlement time. When effecting
such transactions, cash or liquid high quality debt obligations held by the Fund
of a dollar amount sufficient to make payment for the portfolio securities to be
purchased will be segregated on the Fund's records at the trade date and
maintained until the transaction is settled. The failure of the other party to
the transaction to complete the transaction may cause the Fund to miss an
advantageous price or yield. The Fund bears the risk of price fluctuations
during the period between the trade and settlement dates.
WHEN-ISSUED TRANSACTIONS. The Fund may purchase securities on a when-issued
basis. In these transactions, the Fund purchases securities with payment and
delivery scheduled for a future time. Until settlement, the Fund segregates cash
and marketable high quality debt securities equal in value to their when-issued
commitments. Between the trade and settlement dates, the Fund bears the risk of
any fluctuation in the value of the securities. These transactions involve the
additional risk that the other party may fail to complete the transaction and
cause the Fund to miss a price or yield considered advantageous. The Fund will
engage in when-issued transactions only for the purpose of acquiring portfolio
securities consistent with its investment objective and policies and not for
investment leverage. The Fund will not invest more than 25% of its net assets in
when-issued securities.
ILLIQUID SECURITIES. The Fund will not invest more than 15% of its net
assets in illiquid securities or securities that are not readily marketable,
including repurchase agreements and time deposits of more than seven days'
duration. The absence of a regular trading market for illiquid securities
imposes additional risks on investments in these securities. Illiquid securities
may be difficult to value and may often be disposed of only after considerable
expense and delay. In addition, the Fund will not invest more than 10% in
securities of issues which may not be sold to the public without registration
under the Securities Act of 1933.
VARIABLE AMOUNT MASTER DEMAND NOTES. Variable amount master demand notes
are unsecured obligations that are redeemable upon demand and are typically
unrated. These instruments are issued pursuant to written agreements between
their issuers and holders. The agreements permit the holders to increase
(subject to an agreed maximum) and the holders and issuers to decrease the
principal amount of the notes, and specify that the rate of interest payable on
the principal fluctuates according to an agreed formula.
ASSET-BACKED SECURITIES. Asset-backed securities represent undivided
fractional interests in pools of instruments, such as consumer loans, and are
similar in structure to mortgage-related pass-through securities described
below. Payments of principal and interest are passed through to holders of the
securities and are typically supported by some form of credit enhancement, such
as a letter of credit, surety bond, limited guarantee by another entity or by
priority to certain of the borrower's other securities. The degree of credit
enhancement varies, generally applying only until exhausted and covering only a
fraction of the security's par value. If the credit enhancement of an
asset-backed security held by the Fund has been exhausted, and if any required
payments of principal and interest
7
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are not made with respect to the underlying loans, the Fund may experience loss
or delay in receiving payment and a decrease in the value of the security.
Further details are set forth in the Statement of Additional Information under
"Investment Restrictions and Policies -- Investment Policies."
MORTGAGE-RELATED PASS-THROUGH SECURITIES. The Fund may invest in
mortgage-related securities, including Government National Mortgage Association
("GNMA") Certificates ("Ginnie Maes"), Federal Home Loan Mortgage Corporation
("FHLMC") Mortgage Participation Certificates ("Freddie Macs") and Federal
National Mortgage Association ("FNMA") Guaranteed Mortgage Pass-Through
Certificates ("Fannie Maes"). Mortgage pass-through certificates are
mortgage-backed securities representing undivided fractional interests in pools
of mortgage-backed loans. These loans are made by mortgage bankers, commercial
banks, savings and loan associations and other lenders. Ginnie Maes are
guaranteed by the full faith and credit of the US Government, but Freddie Macs
and Fannie Maes are not.
ZERO COUPON SECURITIES. Zero coupon securities are notes, bonds and
debentures that: (1) do not pay current interest and are issued at a substantial
discount from par value; (2) have been stripped of their unmatured interest
coupons and receipts; or (3) pay no interest until a stated date one or more
years into the future. These securities also include certificates representing
interests in such stripped coupons and receipts.
VARIABLE AND FLOATING RATE SECURITIES. A floating rate security provides
for the automatic adjustment of its interest rate whenever a specified interest
rate changes. A variable rate security provides for the automatic establishment
of a new interest rate on set dates. Interest rates on these securities are
ordinarily tied to, and are a percentage of, a widely recognized interest rate,
such as the yield on 90-day US Treasury bills or the prime rate of a specified
bank. These rates may change as often as twice daily. Generally, changes in
interest rates will have a smaller effect on the market value of variable and
floating rate securities than on the market value of comparable fixed income
obligations. Thus, investing in variable and floating rate securities generally
allows less opportunity for capital appreciation and depreciation than investing
in comparable fixed income securities.
EURODOLLAR CERTIFICATES OF DEPOSIT, EURODOLLAR TIME DEPOSITS AND YANKEE
CERTIFICATES OF DEPOSIT. ECDs are US dollar denominated certificates of deposit
issued by foreign branches of domestic banks. ETDs are US dollar denominated
deposits in foreign branches of US banks and foreign banks. YCDs are US dollar
denominated certificates of deposit issued by US branches of foreign banks.
Different risks than those associated with the obligations of domestic banks
may exist for ECDs, ETDs and YCDs because the banks issuing these instruments,
or their domestic or foreign branches, are not necessarily subject to the same
regulatory requirements that apply to domestic banks, such as loan limitations,
examinations and reserve, accounting, auditing, recordkeeping and public
reporting requirements.
FOREIGN CURRENCY TRANSACTIONS. The Fund may engage in foreign currency
transactions as described below. The US dollar value of assets held by the Fund
may be affected favorably or unfavorably by changes in foreign currency exchange
rates and exchange control regulations, and the Fund may incur costs in
connection with conversions between various currencies. The Fund will engage in
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate
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prevailing in the foreign currency exchange market, through forward and futures
contracts to purchase or sell foreign currencies or by purchasing and writing
put and call options on foreign currencies. The Fund may purchase and write
these contracts for the purpose of protecting against declines in the dollar
value of foreign securities it holds and against increases in the dollar cost of
foreign securities it plans to acquire.
A forward foreign currency exchange contract is an obligation to purchase or
sell a specific currency at a future date, which may be any fixed number of days
from the date upon which the parties enter the contract, at a price set at the
time the contract is made. These contracts are traded directly between currency
traders (usually large commercial banks) and their customers. Foreign currency
futures contracts are traded on exchanges and are subject to procedures and
regulations applicable to other futures contracts. Forward foreign currency
exchange contracts and foreign currency futures contracts may protect the Fund
from uncertainty in foreign currency exchange rates, and may also limit
potential gains from favorable changes in such rates.
Put and call options on foreign currencies are traded on securities
exchanges, in the over-the-counter market, and privately among major recognized
dealers in such options. The Fund may purchase and write these options for the
purpose of protecting against declines in the dollar value of foreign securities
it holds and against increases in the dollar cost of foreign securities it plans
to acquire. If a rise is anticipated in the dollar value of a foreign currency
in which securities to be acquired are denominated, the increased cost of such
securities may be offset in whole or in part by purchasing calls or writing puts
on that foreign currency. If a decline in the dollar value of a foreign currency
is anticipated, the decline in value of portfolio securities denominated in that
currency may be offset in whole or in part by writing calls or purchasing puts
on that foreign currency. However, certain currency rate fluctuations would
cause the option to expire unexercised, and thereby cause the Fund to lose the
premium it paid and its transaction costs.
FUTURES CONTRACTS AND OPTIONS ON FUTURES. For hedging purposes, including
protecting the price or interest rate of a security that the Fund intends to
buy, the Fund may enter into futures contracts that relate to securities in
which it may directly invest and indices comprised of such securities and may
purchase and write call and put options on such contracts.
A financial futures contract is a contract to buy or sell a specified
quantity of financial instruments such as US Treasury bills, notes and bonds,
commercial paper and bank certificates of deposit or the cash value of a
financial instrument index at a specified future date at a price agreed upon
when the contract is made. Under such contracts no delivery of the actual
securities making up the index takes place. Rather, upon expiration of the
contract, settlement is made by exchanging cash in an amount equal to the
difference between the contract price and the closing price of the index at
expiration, net of variation margin previously paid.
Substantially all futures contracts are closed out before settlement date or
called for cash settlement. A futures contract is closed out by buying or
selling an identical offsetting futures contract. Upon entering into a futures
contract, the Fund is required to deposit an initial margin with Custodian for
the benefit of the futures broker. The initial margin serves as a "good faith"
deposit that the Fund will honor its futures commitments. Subsequent payments
(called "variation margin") to and from the broker are made on a daily basis as
the price of the underlying investment fluctuates.
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Options on futures contracts give the purchaser the right to assume a
position at a specified price in a futures contract at any time before
expiration of the option contract.
When trading futures contracts, the Fund will not commit more than 5% of the
market value of its total assets to initial margin deposits on futures and
premiums paid for options on futures.
OPTIONS ON SECURITIES AND SECURITIES INDICES. The Fund may write and
purchase covered put and call options on securities in which it may directly
invest. Option transactions of the Fund will be conducted so that the total
amount paid on premiums for all put and call options outstanding will not exceed
5% of the value of the Fund's total assets. Further, the Fund will not write a
put or call option or combination thereof if, as a result, the aggregate value
of all securities or collateral used to cover its outstanding options would
exceed 25% of the value of the Fund's total assets.
The Fund may purchase or sell options on securities indices that are
comprised of securities in which the Fund may directly invest, subject to the
limitations set forth above and provided such options are traded on a national
securities exchange or in the over-the-counter market. Options on securities
indices are similar to options on securities except there is no transfer of a
security and settlement is in cash. A call option on a securities index grants
the purchaser of the call, for a premium paid to the seller, the right to
receive in cash an amount equal to the difference between the closing value of
the index and the exercise price of the option times a multiplier established by
the exchange upon which the option is traded.
LENDING PORTFOLIO SECURITIES. The Fund may lend portfolio securities with a
value of up to 33 1/3% of its total assets. Such loans may be terminated at any
time. The Fund will receive cash or US Treasury bills, notes and bonds in an
amount equal to at least 100% of the current market value (on a daily
marked-to-market basis) of the loaned securities plus accrued interest. In a
loan transaction, as compensation for lending it securities, the Fund will
receive a portion of the dividends or interest accrued on the securities held as
collateral or, in the case of cash collateral, a portion of the income from the
investment of such cash. In addition, the Fund will receive the amount of all
dividends, interest and other distributions on the loaned securities. However,
the borrower has the right to vote the loaned securities. The Fund will call
loans to vote proxies if a material issue affecting the investment is to be
voted upon. Should the borrower of the securities fail financially, the Fund may
experience delays in recovering the securities or exercising its rights in the
collateral. Loans are made only to borrowers that are deemed by Adviser to be of
good financial standing. In a loan transaction, the Fund will also bear the risk
of any decline in value of securities acquired with cash collateral. The Fund
will minimize this risk by limiting the investment of cash collateral to high
quality instruments of short maturity.
CASH RESERVES. For defensive purposes, the Fund may temporarily invest,
without limitation, in high quality short-term fixed income securities. These
securities include obligations issued or guaranteed as to principal and interest
by the US Government, its agencies or instrumentalities and repurchase
agreements collateralized by these obligations, commercial paper, bank
certificates of deposit, bankers' acceptances and time deposits. When using this
strategy, the weighted average maturity of securities held by the Fund will
decline, and thereby possibly cause its yield to decline as well.
INTEREST RATE SWAPS. The Fund may enter into interest rate swap
transactions with respect to any security it is entitled to hold. Interest rate
swaps involve the exchange by the Fund with another party of their respective
rights to receive interest, e.g., an exchange of floating rate payments for
fixed
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rate payments. The Fund expects to enter into these transactions primarily to
preserve a return or spread on a particular investment or portion of its
portfolio or to protect against any increase in the price of securities it
anticipates purchasing at a later date. The Fund intends to use these
transactions as a hedge and not as a speculative investment.
INVESTMENT RESTRICTIONS
The Fund has fundamental investment restrictions, which may be changed only
with the approval of a majority of the Fund's shareholders as defined in the
1940 Act. A more detailed discussion of the Fund's investment restrictions and
policies appears in the Statement of Additional Information. Unless otherwise
noted, the fundamental restrictions apply at the time an investment is made. The
Fund may not:
1. Invest 25% or more of the value of its total assets in securities of
companies primarily engaged in any one industry (other than the US
Government, its agencies or instrumentalities). Concentration may occur
as a result of changes in the market value of portfolio securities, but
may not result from investment.
2. Borrow money (including reverse repurchase agreements), except as a
temporary measure for extraordinary or emergency purposes or to
facilitate redemptions (not for leveraging or investment), provided that
borrowings do not exceed an amount equal to 33 1/3% of the current value
of the Fund's assets taken at market value, less liabilities other than
borrowings. If at any time the Fund's borrowings exceed this limitation
due to a decline in net assets, such borrowings will within three days be
reduced to the extent necessary to comply with this limitation. The Fund
will not purchase additional investments if borrowed funds (including
reverse repurchase agreements) exceed 5% of total assets.
3. Pledge, mortgage, or hypothecate its assets. However, the Fund may pledge
securities having a market value at the time of the pledge not exceeding
33 1/3% of the value of the Fund's total assets to secure permitted
borrowings.
CERTAIN RISK FACTORS
FUTURES AND OPTIONS CONTRACTS. There are certain investment risks in using
futures contracts and options as a hedging technique. Such risks may include:
(1) the inability to close out a futures contract or option caused by the
nonexistence of a liquid secondary market; and (2) an imperfect correlation
between price movements of the futures contracts or option with price movements
of the portfolio securities or securities index subject to the hedge.
FOREIGN INVESTMENTS. Investment in securities of non-US issuers and
securities denominated in foreign currencies involve investment risks that are
different from those of US issuers, including: changes in currency rates;
uncertain future political, diplomatic and economic developments; possible
imposition of exchange controls or other governmental restrictions; less
publicly available information; lack of uniform accounting, auditing and
financial reporting standards, practices and requirements; lower trading volume,
less liquidity and more volatility for securities; less government regulation of
securities exchanges, brokers and listed companies; political or social
instability; and the possibility of expropriation or confiscatory taxation, each
of which could adversely affect investments in such securities.
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PORTFOLIO TURNOVER
Because the Fund will actively trade to benefit from short-term yield
disparities among different issues of fixed-income securities, or otherwise to
increase its income, the Fund may be subject to a greater degree of portfolio
turnover than might be expected from investment companies which invest
substantially all of their assets on a long-term basis. The portfolio turnover
rate cannot be predicted, but it is anticipated that the Fund's annual turnover
rate generally will not exceed 100% (excluding turnover of securities having a
maturity of one year or less).
DIVIDENDS AND DISTRIBUTIONS
The Board of Trustees intends to declare dividends on shares of the Fund
from net investment income daily, and have them payable as of the last business
day of each month. Distributions will be made at least annually from net short
and long-term capital gains, if any. In most instances, distributions will be
declared and paid in mid-October with additional distributions declared and paid
in December, if required, for the Fund to avoid imposition of a 4% federal
excise tax on undistributed capital gains.
Dividends declared in October, November or December and payable to
shareholders of record in such months will be deemed to have been paid by the
Fund and received by shareholders on December 31 of that year if the dividend is
paid prior to February 1 of the following year.
Income dividends and capital gains distributions will be paid in additional
shares at their net asset value on the record date unless the shareholder has
elected to receive them in cash. Such election may be made by giving 10 days'
written notice to Transfer Agent.
Any dividend or capital gain distribution paid by the Fund shortly after a
purchase of shares will reduce the per share net asset value of the Fund by the
amount of the dividend or distribution. In effect, the payment will represent a
return of capital to the shareholder. However, the shareholder will be subject
to taxes with respect to such dividend or distribution.
TAXES
The Fund intends to qualify as a regulated investment company ("RIC") under
Subchapter M of the Internal Revenue Code, as amended (the "Code") . As a RIC,
the Fund will not be subject to federal income taxes to the extent it
distributes its net investment income and capital gain net income (capital gains
in excess of capital losses) to its shareholders. The Board intends to
distribute each year substantially all of the Fund's net investment income and
capital gain net income.
Dividends from net investment income and distributions of net short-term
capital gains are taxable to shareholders as ordinary income under federal
income tax laws whether paid in cash or in additional shares. Distributions from
net long-term capital gains are taxable as long-term capital gains regardless of
the length of time a shareholder has held such shares and whether paid in cash
or additional shares.
The Fund may purchase bonds at market discount (i.e., bonds with a purchase
price less than original issue price or adjusted issue price). If such bonds are
subsequently sold at a gain then a portion of that gain equal to the amount of
market discount, which should have been accrued through the sale date, will be
taxable to shareholders as ordinary income.
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Dividends and distributions may also be subject to state or local taxes.
Depending on the state tax rules pertaining to a shareholder, a portion of the
dividends paid by the Fund attributable to direct obligations of the US Treasury
and certain agencies may be exempt from state and local taxes.
The sale of Fund shares by a shareholder is a taxable event and may result
in capital gain or loss. A capital gain or loss may be realized from an ordinary
redemption of shares or an exchange of shares between two mutual funds (or two
series of portfolios of a mutual fund). Any loss incurred on sale or exchange of
Fund shares held for one year or more will be treated as a long-term capital
loss to the extent of capital gain dividends received with respect to such
shares.
Shareholders will be notified after each calendar year of the amount of
income dividends and net capital gains distributed and the percentage of a
Fund's income attributable to US Treasury and agency obligations. The Fund is
required to withhold a legally determined portion of all taxable dividends,
distributions and redemption proceeds payable to any noncorporate shareholder
that does not provide the Fund with the shareholder's correct taxpayer
identification number or certification that the shareholder is not subject to
backup withholding.
The forgoing discussion is only a summary of certain federal income tax
issues generally affecting the Fund and its shareholders. Circumstances among
investors may vary and each investor is encouraged to discuss investment in the
Fund with the investor's tax adviser.
VALUATION OF FUND SHARES
NET ASSET VALUE PER SHARE. The Fund determines net asset value once each
business day, as of the close of the regular trading session of the New York
Stock Exchange (ordinarily 4 p.m. Eastern time). A business day is one on which
the New York Stock Exchange is open. Net asset value per share is computed by
dividing the current value of a Fund's assets, less its liabilities, by the
number of shares of the Fund outstanding and rounding to the nearest cent.
VALUATION OF FUND SECURITIES. The Fund values securities maturing within 60
days of the valuation date at amortized cost unless the Board determines that
amortized cost does not represent their market value. The "amortized cost"
valuation procedure initially prices an instrument at its cost and thereafter
assumes a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. While 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 Fund would receive if it sold the instrument.
With the exceptions noted below, the Fund values portfolio securities with
remaining maturities in excess of 60 days at "market value." This generally
means that fixed income securities listed and traded principally on any national
securities exchange are valued on the basis of the last sale price or, lacking
any sales, at the closing bid price, on the primary exchange on which the
security is traded. United States fixed income securities traded principally
over-the-counter and options are valued on the basis of the last reported bid
price. Futures contracts are valued on the basis of the last reported sale
price.
Because many fixed income securities do not trade each day, last sale or bid
prices are frequently not available. Fixed income securities therefore may be
valued using prices provided by a pricing service when such prices are
determined by Custodian to reflect the market value of such securities.
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International securities traded on a national securities exchange are valued
on the basis of the last sale price. International securities traded
over-the-counter are valued on the basis of best bid or official bid, as
determined by the relevant securities exchange. In the absence of a last sale,
best or official bid price, such securities may be valued on the basis of prices
provided by a pricing service if those prices are believed to reflect the market
value of such securities.
The Fund values securities for which market quotations are not readily
available at "fair value," as determined in good faith pursuant to procedures
established by the Board of Trustees.
PURCHASE OF FUND SHARES
MINIMUM INITIAL INVESTMENT AND ACCOUNT BALANCE. The Fund requires a minimum
initial investment of $1,000. The minimum account balance is $500. The Fund
reserves the right to reject any purchase order.
OFFERING DATES AND TIMES. Fund shares may be purchased on any business day
without a sales commission. All purchases must be made in US dollars. Purchase
orders in good form and payments for Fund shares must be received by the
Transfer Agent prior to 4:00 p.m. Eastern time to be effective on the date
received. The accompanying payment must be in federal funds or converted into
federal funds by the Transfer Agent before the purchase order can be accepted.
Purchase orders in good form are described below. Purchase orders which are
accepted: (1) prior to 12:00 noon Eastern time will earn the dividend declared
on the date of purchase; and (2) at or after 12:00 noon Eastern time will earn
the dividend determined on the next day.
ORDER AND PAYMENT PROCEDURES. There are several ways to invest in the Fund.
The Fund requires a purchase order in good form which consists of a completed
and signed Account Registration and Investment Instruction Form ("Application")
for each new account regardless of the investment method. For additional
information, copies of forms or questions, call Transfer Agent at (800)
647-7327, or write to Transfer Agent at: State Street Bank and Trust Company,
P.O. Box 8317, Boston, MA 02266-8317, Attention: The Seven Seas Series Yield
Plus Fund.
FEDERAL FUNDS WIRE. An investor may purchase shares by wiring federal funds
to State Street Bank and Trust Company as Transfer Agent by:
1. Telephoning State Street Bank and Trust Company at (800) 647-7327 and
stating: (1) the investor's account registration number, address and
social security or tax identification number; (2) the name of the
investment portfolio to be invested in; (3) the amount being wired; (4)
the name of the wiring bank; (5) the name and telephone number of the
person at the wiring bank to be contacted in connection with the order.
2. Instructing the wiring bank to wire federal funds to: State Street Bank
and Trust Company, Boston, MA (ABA #0110-00028), Attention: The Seven
Seas Series Yield Plus Fund, Mutual Funds Service Division (DDA
#9904-631-0). The wire instructions should also include the name in which
the account is registered, the account number, and the name of the Fund
in which to be invested.
3. Completing the Application and forwarding it to Transfer Agent at the
above address.
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MAIL. To purchase shares by mail, send a check or other negotiable bank
draft payable to: State Street Bank and Trust Company, P.O. Box 8317, Boston, MA
02266-8317, Attention: The Seven Seas Series Yield Plus Fund. Certified checks
are not necessary; however, all checks are accepted subject to collection at
full face value in United States funds and must be drawn in United States
dollars on a United States bank. Normally, checks and drafts are converted to
federal funds within two business days following receipt of the check or draft.
Initial investments should be accompanied by a completed Application, and
subsequent investments are to be accompanied by the investor's account number.
CASH SWEEP PROGRAM. Money managers of master trust clients may participate
in a cash sweep program to automatically invest excess cash in the Fund. A money
manager must select the Fund, give authorization to complete the Fund's
Application and authorize the investment of excess cash into or the withdrawal
of required cash from the Fund on a daily basis. Where Adviser acts as money
manager, Adviser will receive an advisory fee from the client.
THIRD PARTY TRANSACTIONS. Investors purchasing Fund shares through a
program of services offered by a financial intermediary, such as a bank,
broker-dealer, investment adviser or others, may be required by such
intermediary to pay additional fees. Investors should contact such intermediary
for information concerning what additional fees, if any, may be charged.
IN-KIND EXCHANGE OF SECURITIES. The Transfer Agent may, at its discretion,
permit investors to purchase shares through the exchange of securities they
hold. Any securities exchanged must meet the investment objective, policies and
limitations of the Fund, must have a readily ascertainable market value, must be
liquid and must not be subject to restrictions on resale. The market value of
any securities exchanged, plus any cash, must be at least $1 million. Shares
purchased in exchange for securities generally may not be redeemed or exchanged
until the transfer has settled -- usually within 15 days following the purchase
by exchange.
The basis of the exchange will depend upon the relative net asset value of
the shares purchased and securities exchanged. Securities accepted by the Fund
will be valued in the same manner as the Fund values its assets. Any interest
earned on the securities following their delivery to the Transfer Agent and
prior to the exchange will be considered in valuing the securities. All
interest, dividends, subscription or other rights attached to the securities
become the property of the Fund, along with the securities.
EXCHANGE PRIVILEGE. Subject to the Fund's minimum investment requirement,
investors may exchange their Fund shares without charge for shares of any other
investment portfolio offered by Investment Company. Shares are exchanged on the
basis of relative net asset value per share. Exchanges may be made: (1) by
telephone if the registrations of the two accounts are identical; or (2) in
writing addressed to State Street Bank and Trust Company, P.O. Box 8317, Boston,
MA 02266-8317, Attention: The Seven Seas Series Yield Plus Fund. If shares of
the Fund were purchased by check, the shares must have been present in an
account for 10 days before an exchange is made. The exchange privilege will only
be available in states where the exchange may legally be made, and may be
modified or terminated by the Fund upon 60 days' notice to shareholders.
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REDEMPTION OF FUND SHARES
Fund shares may be redeemed on any business day at the net asset value next
determined after the receipt of a redemption request in proper form as described
below. Payment will be made as soon as possible (but will ordinarily not exceed
seven days) and will be mailed to the shareholder's address of record. Upon
request, redemption proceeds will be wire transferred to the shareholder's
account at a domestic commercial bank that is a member of the Federal Reserve
System. Although Investment Company does not currently charge a fee for this
service, Investment Company reserves the right to charge a fee for the cost of
wire-transferred redemptions of less than $1,000. Payment for redemption of
shares purchased by check may be withheld for up to 10 days after the date of
purchase to assure that such checks are honored. A dividend will be paid on
shares redeemed if the redemption request is received by State Street Bank and
Trust Company after 12:00 noon Eastern time. Redemption requests received before
12:00 noon Eastern time will not be entitled to that day's dividend.
EXPEDITED REDEMPTION. Shareholders may normally redeem Fund shares by
telephoning State Street Bank and Trust Company between 9:00 a.m. and 4:00 p.m.
Eastern time at (800) 647-7327, Attention: The Seven Seas Series Yield Plus
Fund. Shareholders using the expedited redemption method must complete the
appropriate section on the Application. The Fund and the Transfer Agent will
employ reasonable procedures to confirm that instructions communicated by
telephone are properly authorized. The Fund and the Transfer Agent will not be
liable for executing telephone instructions that are deemed to be authorized
after following reasonable procedures. These procedures include recording
telephonic instructions, mailing to the shareholder a written confirmation of
the transaction, performing a personal identity test with private information
not likely to be known by other individuals, and restricting mailing of
redemptions to the shareholder's address of record. During periods of drastic
economic or market changes, shareholders using this method may encounter delays.
In such event, shareholders should consider using the mail redemption procedure
described below.
MAIL. Redemption requests may be made in writing directly to State Street
Bank and Trust Company, P.O. Box 8317, Boston, MA 02266-8317, Attention: The
Seven Seas Series Yield Plus Fund. The redemption price will be the net asset
value next determined after receipt by State Street of all required documents in
good order. "Good order" means that the request must include the following:
1. A letter of instruction or a stock assignment stating that the shares are
to be redeemed out of The Seven Seas Series Yield Plus Fund and
designating specifically the dollar amount to be redeemed signed by all
owners of the shares in the exact names in which they appear on the
account, together with a guarantee of the signature of each owner by a
bank, trust company or member of a recognized stock exchange; and
2. Such other supporting legal documents, if required by applicable law or
Transfer Agent, in the case of estates, trusts, guardianships,
custodianships, corporations and pension and profit-sharing plans.
The Fund reserves the right to redeem the shares in any account with a
balance of less than $500 as a result of shareholder redemptions rather than
market value fluctuation. Before shares are redeemed to close an account, the
shareholder will be notified in writing and allowed 60 days to purchase
additional shares to meet the minimum account balance.
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The Fund may pay any portion of the redemption amount in excess of $250,000
by a distribution in kind of readily marketable securities from the portfolio of
the Fund in lieu of cash. Investors will incur brokerage charges on the sale of
these portfolio securities. The Fund reserves the right to suspend the right of
redemption or postpone the date of payment if emergency conditions, as specified
in the 1940 Act or determined by the Securities and Exchange Commission, should
exist.
GENERAL MANAGEMENT
The Board of Trustees supervises the management, activities and affairs of
the Fund and has approved contracts with various financial organizations to
provide, among other services, day-to-day management required by the Fund.
ADVISORY AGREEMENT. Investment Company employs State Street Bank and Trust
Company ("State Street" or "Adviser") to furnish investment services to the
Fund. State Street is one of the largest providers of securities processing and
recordkeeping services for US mutual funds and pension funds. State Street is a
wholly owned subsidiary of State Street Boston Corporation, a publicly held bank
holding company. State Street, with over $171.3 billion (US) under management as
of September 30, 1995, provides complete global investment management services
from offices in the United States, London, Sydney, Hong Kong, Tokyo, Toronto,
Luxembourg, Melbourne, Montreal and Paris.
Adviser, subject to Board supervision, directs the investments of the Fund
in accordance with the Fund's investment objective, policies and restrictions.
Mr. David Hertan, Vice President, has been the portfolio manager primarily
responsible for investment decisions regarding the Fund since April 1994. Mr.
Hertan has been with State Street since 1991 as a director of investments --
Sallie Mae. Prior to that he was a manager of foreign exchange at Ford Europe.
There are eight other portfolio managers who work with Mr. Hertan in managing
the Fund. For these services, the Fund pays Adviser a fee, calculated daily and
paid monthly, that on an annual basis is equal to .25% of the Fund's average
daily net assets.
The Glass-Steagall Act prohibits a depository state chartered bank such as
Adviser from engaging in the business of issuing, underwriting, selling or
distributing certain securities. The activities of Adviser in informing its
customers of the Fund, performing investment and redemption services and
providing custodian, transfer, shareholder servicing, dividend disbursing and
investment advisory services may raise issues under these provisions. Adviser
has been advised by its counsel that its activities in connection with the Fund
are consistent with its statutory and regulatory obligations. THE SHARES OFFERED
BY THIS PROSPECTUS ARE NOT ENDORSED OR GUARANTEED BY STATE STREET OR ITS
AFFILIATES, ARE NOT DEPOSITS OR OBLIGATIONS OF STATE STREET OR ITS AFFILIATES,
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
Changes in federal or state statutes and regulations relating to the
permissible activities of banks and their affiliates, as well as judicial or
administrative decisions or interpretations of such or future statutes and
regulations, could prevent Adviser from continuing to perform all or a part of
the above services for its customers and/or the Fund. If Adviser were prohibited
from serving the Fund in any of its present capacities, the Board of Trustees
would seek an alternative provider(s) of such services. In such event, changes
in the operation of the Fund may occur. It is not expected by Adviser that
existing shareholders would suffer any adverse financial consequences (if
another adviser with equivalent abilities is found) as a result of any of these
occurrences.
17
<PAGE>
State Street may from time to time have discretionary authority over
accounts which invest in Investment Company shares. These accounts include
accounts maintained for securities lending clients and accounts which permit the
use of Investment Company portfolios as short-term cash sweep investments.
Shares purchased for all discretionary accounts are held of record by State
Street, who retains voting control of such shares. As of November 30, 1995,
State Street held of record 36% of the issued and outstanding shares of
Investment Company in connection with its discretionary accounts. Consequently,
State Street may be deemed to be a controlling person of Investment Company for
purposes of the 1940 Act.
Under the Adviser's Code of Ethics, the Adviser's employees in Boston where
investment management operations are conducted are only permitted to engage in
personal securities transactions which do not involve securities which the
Adviser had recommended for purchase or sale, or purchased or sold, on behalf of
its clients. Such employees must report their personal securities transactions
quarterly and supply broker confirmations to the Adviser.
ADMINISTRATION AGREEMENT. Frank Russell Investment Management Company
("Administrator") serves as administrator of the Fund. Administrator currently
serves as investment manager and administrator to 22 mutual funds with assets of
$7.3 billion as of October 31, 1995, and acts as administrator to 17 mutual
funds, including the Fund presented in this Prospectus, with assets of $7.2
billion as of October 31, 1995.
Pursuant to the Administration Agreement with Investment Company,
Administrator will: (1) supervise all aspects of the Fund's operations; (2)
provide the Fund with administrative and clerical services, including the
maintenance of certain of the Fund's books and records; (3) arrange the periodic
updating of the Fund's prospectuses and any supplements thereto; (4) provide
proxy materials and reports to Fund shareholders and the Securities and Exchange
Commission; and (5) provide the Fund with adequate office space and all
necessary office equipment and services, including telephone service, heat,
utilities, stationery supplies and similar items. For these services, the Yield
Plus Fund and Investment Company's other domestic investment portfolios pay
Administrator a combined fee that on an annual basis is equal to the following
percentages of their average aggregate daily net assets: (1) $0 to and including
$500 million -- .06%; (2) over $500 million to and including $1 billion -- .05%;
and (3) over $1 billion -- .03%. The percentage of the fee paid by the Yield
Plus Fund is equal to the percentage of average aggregate daily net assets that
are attributable to the Fund. Administrator will also receive reimbursement of
expenses it incurs in connection with establishing new investment portfolios.
Further, the administration fee paid by the Investment Company will be reduced
by the sum of certain distribution related expenses (up to a maximum of 15% of
the asset-based administration fee listed above).
Administrator also provides administrative services in connection with the
registration of shares of Investment Company with those states in which its
shares are offered or sold. Compensation for such services is on a "time spent"
basis. Investment Company will pay all registration, exemptive application,
renewal and related fees and reasonable out-of-pocket expenses.
Officers and employees of the Administrator and Distributor are permitted to
engage in personal securities transactions subject to restrictions and
procedures set forth in the Confidentiality Manual
18
<PAGE>
and Code of Ethics adopted by the Investment Company, Administrator and
Distributor. Such restrictions and procedures include substantially all of the
recommendations of the Advisory Group of the Investment Company Institute and
comply with Securities and Exchange Commission rules and regulations.
DISTRIBUTION SERVICES AND SHAREHOLDER SERVICING ARRANGEMENTS. Pursuant to
the Distribution Agreement with Investment Company, Russell Fund Distributors,
Inc. ("Distributor"), a wholly owned subsidiary of Administrator, serves as
distributor for all Fund shares.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 (the "Plan")
under the 1940 Act. The purpose of the Plan is to provide for the payment of
certain Investment Company distribution and shareholder servicing expenses.
Under the Plan, Distributor will be reimbursed in an amount up to .25% of the
Fund's average annual net assets for distribution-related and shareholder
servicing expenses. Payments under the Plan will be made to Distributor to
finance activity that is intended to result in the sale and retention of Fund
shares including: (1) the costs of prospectuses, reports to shareholders and
sales literature; (2) advertising; and (3) expenses incurred in connection with
the promotion and sale of Fund shares, including Distributor's overhead expenses
for rent, office supplies, equipment, travel, communication, compensation and
benefits of sales personnel.
Under the Plan, the Fund may also enter into agreements ("Service
Agreements") with financial institutions, which may include Adviser ("Service
Organizations"), to provide shareholder servicing with respect to Fund shares
held by or for the customers of the Service Organizations. Under the Service
Agreements, the Service Organizations may provide various services for such
customers including: answering inquiries regarding the Fund; assisting customers
in changing dividend options, account designations and addresses; performing
subaccounting for such customers; establishing and maintaining customer accounts
and records; processing purchase and redemption transactions; providing periodic
statements showing customers' account balances and integrating such statements
with those of other transactions and balances in the customers' other accounts
serviced by the Service Organizations; arranging for bank wires transferring
customers' funds; and such other services as the customers may request in
connection with the Fund, to the extent permitted by applicable statute, rule or
regulation. Service Organizations may receive from the Fund, for shareholder
servicing, a monthly fee at a rate that shall not exceed .20% per annum of the
average daily net asset value of the Fund's shares owned by or for shareholders
with whom the Service Organization has a servicing relationship. Banks and other
financial service firms may be subject to various state laws, and may be
required to register as dealers pursuant to state law.
Investment Company has entered into Service Agreements with Adviser, State
Street Brokerage Services, Inc. ("SSBSI"), and Adviser's Metropolitan Division
of Commercial Banking ("Commercial Banking") to obtain the services described
above with respect to Fund shares held by or for customers. In return for these
services, Investment Company pays Adviser a fee in an amount that per annum is
equal to .025%, .175% and .175% of the average daily value of all Fund shares
held by or for customers of Adviser, SSBSI, and Commercial Banking,
respectively.
Payments to Distributor, as well as payments to Service Organizations from
the Fund, are not permitted by the Plan to exceed .25% of the Fund's average net
asset value per year. Any payments that are required to be made by the
Distribution Agreement and any Service Agreement but could not be made because
of the .25% limitation may be carried forward and paid in subsequent years so
long as
19
<PAGE>
the Plan is in effect. The Fund's liability for any such expenses carried
forward shall terminate at the end of two years following the year in which the
expenditure was incurred. Service Organizations will be responsible for prompt
transmission of purchase and redemption orders and may charge fees for their
services.
FUND EXPENSES
The Fund will pay all of its expenses other than those expressly assumed by
Adviser and Administrator. The principal expenses of the Fund are the annual
advisory fee payable to Adviser and distribution and shareholder servicing
expenses. Other expenses include: (1) amortization of deferred organizational
costs; (2) taxes, if any; (3) expenses for legal, auditing and financial
accounting services; (4) expense of preparing (including typesetting, printing
and mailing) reports, prospectuses and notices to existing shareholders; (5)
administrative fees; (6) custodian fees; (7) expense of issuing and redeeming
Fund shares; (8) the cost of registering Fund shares under federal and state
laws; (9) shareholder meetings and related proxy solicitation expenses; (10) the
fees, travel expenses and other out-of-pocket expenses of Trustees who are not
affiliated with Adviser or any of its affiliates; (11) insurance, interest,
brokerage and litigation costs; (12) extraordinary expenses as may arise,
including expenses incurred in connection with litigation proceedings and claims
and the legal obligations of Investment Company to indemnify its Trustees,
officers, employees, shareholders, distributors and agents; and (13) other
expenses properly payable by the Fund.
PERFORMANCE CALCULATIONS
The Fund may from time to time advertise its yield. Yield is calculated by
dividing the net investment income per share earned during the most recent
30-day (or one-month) period by the maximum offering price per share on the last
day of the month. This income is then annualized. That is, the amount of income
generated by the investment during that 30-day period is assumed to be generated
each month over a 12-month period and is shown as a percentage of the
investment. For purposes of the yield calculation, interest income is computed
based on the yield to maturity of each debt obligation. The calculation includes
all recurring fees that are charged to all shareholder accounts.
From time to time the Fund may advertise its total return. The total return
of the Fund is the average annual compounded rate of return from a hypothetical
investment in the Fund over one-year, five-year and ten-year periods or for the
life of the Fund (as stated in the advertisement), assuming the reinvestment of
all dividend and capital gains distributions.
Comparative performance information may be used from time to time in
advertising or marketing Fund shares, including data from Lipper Analytical
Services, Inc., Donoghue's Money Fund Report, the Bank Rate Monitor, Wall Street
Journal Score Card, Lehman Brothers Index or other industry publications,
business periodicals, rating services and market indices. The Fund may also
advertise nonstandardized performance information which is for periods in
addition to those required to be presented.
Quoted yields, returns and other performance figures are based on historical
earnings and are not indications of future performance.
20
<PAGE>
ADDITIONAL INFORMATION
CUSTODIAN, TRANSFER AGENT AND INDEPENDENT ACCOUNTANTS. State Street holds
all portfolio securities and cash assets of the Fund, provides portfolio
recordkeeping services and serves as the Fund's transfer agent ("Transfer
Agent") and custodian ("Custodian"). State Street is authorized to deposit
securities in securities depositories or to use the services of subcustodians.
State Street has no responsibility for the supervision and management of the
Fund except as investment adviser. Coopers & Lybrand L.L.P., Boston,
Massachusetts, is Investment Company's independent accountants.
REPORTS TO SHAREHOLDERS AND SHAREHOLDER INQUIRIES. Shareholders will
receive unaudited semiannual financial statements and annual financial
statements audited by Investment Company's independent accountants. Shareholder
inquiries regarding the Prospectus and financial statements may be made by
calling Distributor at (617) 654-6089. Inquiries regarding shareholder balances
may be made by calling Transfer Agent at (800) 647-7327.
ORGANIZATION, CAPITALIZATION AND VOTING. Investment Company was organized
as a Massachusetts business trust on October 3, 1987, and operates under a First
Amended and Restated Master Trust Agreement dated October 13, 1993, as amended.
Investment Company issues shares divisible into an unlimited number of
series (or funds), each of which is a separate trust under Massachusetts law.
The Yield Plus Fund is one of such series.
Each Fund share represents an equal proportionate interest in the Fund, has
a par value of $.001 per share and is entitled to such relative rights and
preferences and dividends and distributions earned on assets of the Fund as may
be declared by the Board of Trustees. Fund shares are fully paid and
nonassessable by Investment Company and have no preemptive rights.
Each Fund share has one vote. There are no cumulative voting rights. There
is no annual meeting of shareholders, but special meetings may be held. On any
matter that affects only a particular investment fund, only shareholders of that
fund may vote unless otherwise required by the 1940 Act or the Master Trust
Agreement. The Trustees hold office for the life of the Trust. A Trustee may
resign or retire, and may be removed at any time by a vote of two-thirds of
Investment Company shares or by a vote of a majority of the Trustees. The
Trustees shall promptly call and give notice of a meeting of shareholders for
the purpose of voting upon removal of any Trustee when requested to do so in
writing by holders of not less than 10% of the shares then outstanding. A
vacancy on the Board of Trustees may be filled by the vote of a majority of the
remaining Trustees, provided that immediately thereafter at least two-thirds of
the Trustees have been elected by shareholders.
Investment Company does not issue share certificates for the Fund. Transfer
Agent sends shareholders statements concurrent with any transaction activity,
confirming all investments in or redemptions from their accounts. Each statement
also sets forth the balance of shares held in the account.
As of November 30, 1995, Stock Performance Index Futures Fund CM18, a fund
of State Street Bank and Trust Company; and International Clearing Stock Loan, a
department of State Street Bank and Trust Company, owned of record 35% and 32%,
respectively, of the issued and outstanding shares of the Fund. Each is
therefore deemed to be a controlling person of the Fund for purposes of the 1940
Act.
21
<PAGE>
THE SEVEN SEAS SERIES FUND
TWO INTERNATIONAL PLACE, 35TH FLOOR
BOSTON, MASSACHUSETTS 02110
INVESTMENT ADVISER, CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
DISTRIBUTOR
Russell Fund Distributors, Inc.
Two International Place, 35th Floor
Boston, Massachusetts 02110
ADMINISTRATOR
Frank Russell Investment Management Company
909 A Street
Tacoma, Washington 98402
LEGAL COUNSEL
Goodwin, Procter & Hoar
Exchange Place
Boston, Massachusetts 02109
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
<PAGE>
THE SEVEN SEAS SERIES FUND
The Seven Seas Series Money Market Fund
The Seven Seas Series US Government Money Market Fund
The Seven Seas Series Tax Free Money Market Fund
The Seven Seas Series S&P 500 Index Fund
The Seven Seas Series Small Cap Fund
The Seven Seas Series Matrix Equity Fund
The Seven Seas Series Yield Plus Fund
The Seven Seas Series Growth and Income Fund
The Seven Seas Series Intermediate Fund
The Seven Seas Series Active International Fund
The Seven Seas Series Emerging Markets Fund
<PAGE>
Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
THE SEVEN SEAS SERIES FUND
TWO INTERNATIONAL PLACE, 35TH FLOOR
BOSTON, MASSACHUSETTS 02110
(617) 654-6089
EMERGING MARKETS FUND
The Seven Seas Series Fund is a registered, open-end investment company with
multiple portfolios, each of which is a mutual fund. This Prospectus describes
and offers shares of beneficial interest in one such mutual fund, The Seven Seas
Series Emerging Markets Fund (referred to in this Prospectus as the "Emerging
Markets Fund" or the "Fund"). The Emerging Markets Fund seeks to provide maximum
total return, primarily through capital appreciation, by investing primarily in
securities of foreign issuers.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SHARES IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, STATE STREET BANK AND TRUST COMPANY, AND SHARES ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER AGENCY, AND INVOLVE INVESTMENT RISKS INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. Please read and retain this
document for future reference. Additional information about the Fund has been
filed with the Securities and Exchange Commission in a Statement of Additional
Information dated December 29, 1995. The Statement of Additional Information is
incorporated herein by reference and is available without charge from the
Distributor at its address noted below or by calling (617) 654-6089.
<TABLE>
<S> <C> <C>
INVESTMENT ADVISER, CUSTODIAN
AND TRANSFER AGENT: DISTRIBUTOR: ADMINISTRATOR:
Russell Fund Distributors,
State Street Bank and Trust Inc. Frank Russell Investment
Company Two International Place, Management Company
225 Franklin Street 35th Floor 909 A Street
Boston, Massachusetts 02110 Boston, Massachusetts 02110 Tacoma, Washington 98402
(617) 654-4721 (617) 654-6089 (206) 627-7001
</TABLE>
PROSPECTUS DATED DECEMBER 29, 1995
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Fund Operating Expenses.................................................................................... 3
Financial Highlights....................................................................................... 4
The Seven Seas Series Fund................................................................................. 5
Manner of Offering......................................................................................... 5
Investment Objective, Policies and Restrictions............................................................ 5
Risk Factors............................................................................................... 10
Portfolio Turnover......................................................................................... 11
Dividends and Distributions................................................................................ 12
Taxes...................................................................................................... 12
Valuation of Fund Shares................................................................................... 13
Purchase of Fund Shares.................................................................................... 14
Redemption of Fund Shares.................................................................................. 16
General Management......................................................................................... 17
Fund Expenses.............................................................................................. 20
Performance Calculations................................................................................... 20
Additional Information..................................................................................... 21
</TABLE>
2
<PAGE>
FUND OPERATING EXPENSES
THE SEVEN SEAS SERIES EMERGING MARKETS FUND
The following table is intended to assist the investor in understanding the
various costs and expenses that an investor in the Emerging Markets Fund will
incur directly or indirectly. THE EXAMPLES PROVIDED IN THE TABLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. Actual expenses may be
greater or less than those shown. For additional information, see "General
Management."
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
- ------------------------------
Sales Load Imposed on Purchases........................................................................................... None
Sales Load Imposed on Reinvested Dividends................................................................................ None
Deferred Sales Load....................................................................................................... None
Redemption Fees........................................................................................................... None
Exchange Fee.............................................................................................................. None
ANNUAL FUND OPERATING EXPENSES:
- ------------------------------
(as a percentage of average daily net assets)
Advisory Fees (1)......................................................................................................... .49 %
12b-1 Fees (1)(2)......................................................................................................... .16
Other Expenses (1)........................................................................................................ .60
----
Total Operating Expenses After Reimbursement (1)(3)....................................................................... 1.25%
----
----
</TABLE>
<TABLE>
<CAPTION>
EXAMPLES: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (i) 5% annual return and (ii) redemption at the end
of each time period:......................................... $ 13 $ 40 $ 69 $ 151
--- --- --- -----
--- --- --- -----
</TABLE>
- ------------------------
(1) Adviser has voluntarily agreed to reimburse the Fund for all expenses in
excess of 1.25% of average daily net assets on an annual basis. The gross
annual expenses before reimbursement of Advisory, 12b-1 and Other Expenses
would be .75%, .25% and .92% of average daily net assets, respectively. The
total operating expenses of the Fund absent reimbursement would be 1.92% of
average daily net assets on an annual basis. This agreement will remain in
effect for the current fiscal year.
(2) Rule 12b-1 fees may include expenses paid for shareholder servicing
activities.
(3) Investors purchasing Fund shares through a financial intermediary, such as a
bank or an investment adviser, may also be required to pay additional fees
for services provided by the intermediary. Such investors should contact the
intermediary for information concerning what additional fees, if any, will
be charged.
Long-term shareholders of the Fund may pay more in Rule 12b-1 fees than the
economic equivalent of the maximum front-end sales charges permitted by the
National Association of Securities Dealers, Inc.
3
<PAGE>
FINANCIAL HIGHLIGHTS
THE SEVEN SEAS SERIES EMERGING MARKETS FUND
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand L.L.P., the Fund's independent
accountants. The table includes selected data for a share outstanding throughout
each fiscal year or period ended August 31, and other performance information
derived from the financial statements. The table appears in the Fund's Annual
Report and should be read in conjunction with the Fund's financial statements
and related notes, which are incorporated by reference in the Statement of
Additional Information and which appear, along with the report of Coopers &
Lybrand L.L.P., in the Fund's Annual Report to Shareholders. More detailed
information concerning the Fund's performance, including a complete portfolio
listing and audited financial statements, is available in the Fund's Annual
Report, which may be obtained without charge by writing or calling the
Distributor.
<TABLE>
<CAPTION>
1995 1994++
--------- ---------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR........................................................... $11.45 $10.00
--------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income...................................................................... .14 .05
Net realized and unrealized gain (loss) on investments..................................... (1.19) 1.40
--------- ---------
Total From Investment Operations........................................................... (1.05) 1.45
--------- ---------
LESS DISTRIBUTIONS:
Net investment income...................................................................... (.10) --
--------- ---------
NET ASSET VALUE, END OF YEAR................................................................. $10.30 $11.45
--------- ---------
--------- ---------
TOTAL RETURN (%) (a)......................................................................... (9.28) 14.50
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average daily net assets (b)................................... 1.50 1.50
Operating expenses, gross, to average daily net assets (b)................................. 1.90 2.45
Net investment income to average daily net assets (b)...................................... 1.74 1.31
Portfolio turnover......................................................................... 19.77 --
Net assets, end of year ($000 omitted)..................................................... 68,385 27,479
Per share amount of fees waived ($ omitted)................................................ -- .0130
Per share amount of fees reimbursed by Adviser ($ omitted)................................. .0320 .0204
</TABLE>
- ------------------------
++ For the period March 1, 1994 (commencement of operations) to August 31,
1994.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended August 31, 1994 are annualized.
4
<PAGE>
THE SEVEN SEAS SERIES FUND
The Seven Seas Series Fund (the "Investment Company") is an open-end
management investment company that is organized as a Massachusetts business
trust. In addition, each series of the Investment Company is diversified as
defined in the Investment Company Act of 1940, as amended (the "1940 Act"). As a
"series" company, the Investment Company is authorized to issue an unlimited
number of shares evidencing beneficial interests in different investment
portfolios. Through this Prospectus, the Investment Company offers shares in one
such portfolio, The Seven Seas Series Emerging Markets Fund. State Street Bank
and Trust Company (the "Adviser" or "State Street") serves as the investment
adviser for the Fund.
MANNER OF OFFERING
DISTRIBUTION AND ELIGIBLE INVESTORS. Shares of the Fund are offered without
a sales commission by Russell Fund Distributors, Inc., the Investment Company's
distributor, to US and foreign institutional and retail investors which invest
for their own account or in a fiduciary or agency capacity. The Fund will incur
distribution expenses under its Rule 12b-1 plan. See "General Management --
Distribution Services and Shareholder Servicing."
MINIMUM AND SUBSEQUENT INVESTMENT. The Fund requires a minimum initial
investment of $1,000. A shareholder's investment in the Fund may be subject to
redemption at the Fund's discretion if the account balance is less than $500 as
a result of shareholder redemptions. The Fund reserves the right to reject any
purchase order.
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
The Emerging Market Fund's investment objective is to provide maximum total
return, primarily through capital appreciation, by investing primarily in
securities of foreign issuers.
INVESTMENT POLICIES
The investment policies described below reflect the Fund's current
practices, are not fundamental and may be changed by the Board of Trustees of
Investment Company without shareholder approval. For more information on the
Fund's Investment Policies, see the Statement of Additional Information. To the
extent consistent with the Fund's investment objective and restrictions, the
Fund may invest in the following instruments and may use the following
investment techniques:
EMERGING MARKETS. Under normal circumstances, the Fund will invest
primarily in equity securities issued by companies domiciled, or doing a
substantial portion of their business, in countries determined by the Fund's
Adviser to have a developing or emerging economy or securities market. The Fund
will diversify investments across many countries (typically at least 10) in
order to reduce the volatility associated with specific markets. The countries
in which the Fund invests will be expanded over time as the stock markets in
other countries evolve and in countries for which subcustodian arrangements are
approved by the Fund's Board of Trustees. Nearly all of the Fund's assets will
be invested in these countries (i.e., typically over 95%). Currently, the
definition of an emerging market is that gross domestic product per capita is
less than $8,000 per year. However, due to the status of a country's stock
market, the country may still qualify as an emerging market even if it exceeds
this amount. In determining securities in which to invest, the Adviser will
evaluate the
5
<PAGE>
countries' economic and political climates and take into account traditional
securities valuation methods, including (but not limited to) an analysis of
price in relation to assets, earnings, cash flows, projected earnings growth,
inflation, and interest rates. Liquidity and transaction costs will also be
considered.
EQUITY SECURITIES. The Fund may invest in common and preferred equity
securities publicly traded in the United States or in foreign countries on
developed or emerging markets. The Fund's equity securities may be denominated
in foreign currencies and may be held outside the United States. Certain
emerging markets are closed in whole or part to the direct purchase of equity
securities by foreigners. In these markets, the Fund may be able to invest in
equity securities solely or primarily through foreign government authorized
pooled investment vehicles. Risks associated with investment in foreign
companies are noted under "Risk Factors -- Emerging Markets." The risks
associated with investment in securities issued by foreign governments and
companies are described below under "Foreign Government Securities."
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities of
foreign or domestic issues. A convertible security is a fixed-income security (a
bond or preferred stock) which may be converted at a stated price within a
specified period of time into a certain quantity of the common stock of the same
or a different issuer. Convertible securities are senior to common stocks in a
corporation's capital structure but are usually subordinated to similar
nonconvertible securities. Convertible securities provide, through their
conversion feature, an opportunity to participate in capital appreciation
resulting from a market price advance in a convertible security's underlying
common stock. The price of a convertible security is influenced by the market
value of the underlying common stock and tends to increase as the market value
of the underlying stock rises, whereas it tends to decrease as the market value
of the underlying stock declines.
SECURITIES WARRANTS. The Fund may invest up to 5% of its net assets in
warrants of foreign or domestic issuers, including warrants that are not listed
on a securities exchange. A warrant typically is a long term option issued by a
corporation which generally gives the holder the privilege of buying a specified
number of shares of the underlying common stock of the issuer at a specified
exercise price at any time on or before an expiration date. Stock index warrants
entitle the holder to receive, upon exercise, an amount in cash determined by
reference to fluctuations in the level of a specified stock index. If the Fund
does not exercise or dispose of a warrant prior to its expiration, it will
expire worthless.
SPECIAL SITUATIONS AND ILLIQUID SECURITIES. The Fund and the Adviser
believe that carefully selected investments in joint ventures, cooperatives,
partnerships, private placements, unlisted securities, and other similar
vehicles (collectively, "special situations") could enhance the Fund's capital
appreciation potential. These investments are generally illiquid. The Fund will
invest no more than 15% of its net assets in all types of illiquid securities or
securities that are not readily marketable, including special situations. The
Fund is not likely to hold illiquid securities initially. However, due to
foreign ownership restrictions, the Fund may invest periodically in illiquid
securities which are or become illiquid due to restrictions on foreign ownership
imposed by foreign governments. Said securities may be more difficult to price
and trade. The absence of a regular trading market for illiquid securities
imposes additional risks on investment in these securities. Illiquid securities
may be difficult to value and may often be disposed of only after considerable
expense and delay.
6
<PAGE>
DEPOSITORY RECEIPTS. The Fund may invest in securities of foreign issuers
in the form of American Depository Receipts ("ADRs"), European Depository
Receipts ("EDRs") and similar instruments available in emerging markets, or
other securities convertible into securities of eligible issuers. These
securities may not necessarily be denominated in the same currency as the
securities for which they may be exchanged. Generally, ADRs, in registered form,
are designed for use in the US securities markets, and EDRs are issued for
trading primarily in European securities markets. ADRs are receipts typically
issued by a US bank or trust company evidencing ownership of the underlying
securities. ADRs represent the right to receive securities of foreign issuers
deposited in a domestic bank or a correspondent bank. ADRs do not eliminate the
risk inherent in investing in the securities of foreign issuers. In general,
there is a large liquid market in the US for many ADRs. The information
available for ADRs is subject to the accounting, auditing and financial
reporting standards of the domestic market or exchange on which they are traded,
which standards are more uniform and more exacting than those to which many
foreign issuers are subject. For purposes of the Fund's investment policies, the
Fund's investments in ADRs, EDRs and similar instruments will be deemed to be
investments in the equity securities representing securities of foreign issuers
into which they may be converted.
DEBT SECURITIES. The Fund may also invest in debt securities, including
instruments issued by emerging market companies, governments and their agencies.
The Fund will primarily invest in equity securities as defined under the
Securities Exchange Act of 1934 (including convertible debt securities). Other
debt will typically represent less than 10% of the Fund's assets. The Fund is
likely to purchase debt securities which are not investment grade debt, since
much of the emerging market debt falls in this category. These securities are
subject to market and credit risk. These lower rated debt securities may include
obligations that are in default or that face the risk of default with respect to
principal or interest. Such securities are sometimes referred to as "junk
bonds." Please see the Statement of Additional Information for a description of
securities ratings.
FOREIGN GOVERNMENT SECURITIES. Foreign government securities which the Fund
may invest in generally consist of obligations issued or backed by the national,
state or provincial government or similar political subdivisions or central
banks in foreign countries. Foreign government securities also include debt
obligations of supranational entities, which include international organizations
designated or backed by governmental entities to promote economic reconstruction
or development, international banking institutions and related government
agencies. These securities also include debt securities of "quasi-government
agencies" and debt securities denominated in multinational currency units of an
issuer. The Fund will not invest a material percentage of its assets in
sovereign debt.
FOREIGN CURRENCY. The Fund has authority to deal in forward foreign
currency exchange contracts (including those involving the US dollar) as a hedge
against possible variations in the exchange rate between various currencies.
This is accomplished through individually negotiated contractual agreements to
purchase or to sell a specified currency at a specified future date and price
set at the time of the contract. The Fund's dealings in forward foreign currency
exchange contracts may be with respect to a specific purchase or sale of a
security, or with respect to its portfolio positions generally. The Fund is not
obligated to hedge its portfolio positions and will enter into such transactions
only to the extent, if any, deemed appropriate by Adviser. Forward commitments
generally provide a cost-effective way of defending against losses due to
foreign currency depreciation in which the securities are denominated.
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In addition to the forward exchange contracts, the Fund may also purchase or
sell listed or OTC foreign currency options and foreign currency futures and
related options as a short or long hedge against possible variations in foreign
currency exchange rates. The cost to the Fund of engaging in foreign currency
transactions varies with such factors as the currencies involved, the length of
the contract period and the market conditions then prevailing. Transactions
involving forward exchange contracts and futures contracts and options thereon
are subject to certain risks. Put and call options on currency may also be used
to hedge against fluctuation in currency notes when forward contracts and/or
futures are deemed to be not cost effective. Options will not be used to provide
leverage in any way. See "Risk Factors -- Futures Contracts and Options on
Futures" for further discussion of the risks associated with such investment
techniques.
Certain differences exist among these hedging instruments. For example,
foreign currency options provide the holder thereof the rights to buy or sell a
currency at a fixed price on a future date. A futures contract on a foreign
currency is an agreement between two parties to buy and sell a specified amount
of a currency for a set price on a future date. Futures contracts and options on
futures contracts are traded on boards of trade of futures exchanges. The Fund
will not speculate in foreign security or currency options or futures or related
options.
The Fund may not hedge its positions with respect to the currency of a
particular country to an extent greater than the aggregate market value (at the
time of making such sale) of the securities held in its portfolio denominated or
quoted in that particular foreign currency. The Fund will not enter into a
position hedging commitment if, as a result thereof, the Fund would have more
than 10% of the value of its assets committed to such contracts. The Fund will
not enter into a forward contract with a term of more than one year.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
banks and other financial institutions, such as broker-dealers. Under a
repurchase agreement, a Fund purchases securities from a financial institution
that agrees to repurchase the securities at the Fund's original purchase price
plus interest within a specified time (normally one business day). The Fund will
invest no more than 10% of its net assets (taken at current market value) in
repurchase agreements maturing in more than seven days. The Fund will limit
repurchase transactions to those member banks of the Federal Reserve System and
broker-dealers whose creditworthiness Adviser considers satisfactory. Should the
counterparty to a transaction fail financially, the Fund may encounter delay and
incur costs before being able to sell the securities. Further, the amount
realized upon the sale of the securities may be less than that necessary to
fully compensate the Fund.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreements under the circumstances described in "Investment Restrictions." Under
a reverse repurchase agreement, the Fund sells portfolio securities to a
financial institution in return for cash in an amount equal to a percentage of
the portfolio securities' market value and agrees to repurchase the securities
at a future date at a prescribed repurchase price equal to the amount of cash
originally received plus interest on such amount. The Fund retains the right to
receive interest and principal payments with respect to the securities while
they are in the possession of the financial institutions. Reverse repurchase
agreements involve the risk of default by the counterparty, which may adversely
affect the Fund's ability to reacquire the underlying securities.
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FUTURES CONTRACTS AND OPTIONS ON FUTURES. For hedging purposes, including
protecting the price or interest rate of a security the Fund intends to buy, the
Fund may enter into futures contracts that relate to securities in which it may
directly invest and indices comprised of such securities and may purchase and
write call and put options on such contracts.
A financial futures contract is a contract to buy or sell a specified
quantity of financial instruments such as US Treasury bills, notes and bonds,
commercial paper and bank certificates of deposit or the cash value of a
financial instrument index at a specified future date at a price agreed upon
when the contract is made. A stock index futures contract is a contract to buy
or sell specified units of a stock index at a specified date at a price agreed
upon when the contract is made. The value of a unit is based on the current
value of the stock index. Under such contracts, no delivery of the actual
securities making up the index takes place. Rather, upon expiration of the
contract, settlement is made by exchanging cash in an amount equal to the
difference between the contract price and the closing price of the index at
expiration, net of variation margin previously paid.
Substantially all futures contracts are closed out before settlement date or
called for cash settlement. A futures contract is closed out by buying or
selling an identical offsetting futures contract. Upon entering into a futures
contract, the Fund is required to deposit an initial margin with Custodian for
the benefit of the futures broker. The initial margin serves as a "good faith"
deposit that the Fund will honor its futures commitment. Subsequent payments
(called "variation margin") to and from the broker are made on a daily basis as
the price of the underlying investment fluctuates.
Options on futures contracts give the purchaser the right to assume a
position at a specified price in a futures contract at any time before
expiration of the option contract.
When trading futures contracts, the Fund will not commit more than 5% of the
market value of its total assets to initial margin deposits on futures and
premiums paid for options on futures.
To the extent permitted under the 1940 Act and exemptive rules and orders
thereunder, the Fund may seek to achieve its investment objective by investing
solely in the shares of another investment company that has substantially
similar investment objectives and policies.
INVESTMENT RESTRICTIONS
The Fund's fundamental investment restrictions described below may be
amended only with approval of the Fund's shareholders and, unless otherwise
noted, apply at the time an investment is made. See the Statement of Additional
Information for other investment restrictions. The Fund may not:
1. Invest 25% or more of the value of its total assets in securities of
companies primarily engaged in any one industry (other than the US
Government, emerging market governments, their agencies or
instrumentalities). Concentration may occur as a result of changes in the
market value of portfolio securities, but may not result from investment.
2. Borrow money, except as a temporary measure for extraordinary or
emergency purposes or to facilitate redemptions (not for leveraging or
investment), provided that borrowings do not exceed an amount equal to
33 1/3% of the current value of the Fund's assets taken at market value,
less liabilities other than borrowings. If at any time a Fund's
borrowings exceed this
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limitation due to a decline in net assets, such borrowings will within
three days be reduced to the extent necessary to comply with this
limitation. A Fund will not purchase investments once borrowed funds
exceed 5% of its total assets.
3. Pledge, mortgage, or hypothecate its assets. However, the Fund may
pledge securities having a market value (on a daily marked-to-market
basis) at the time of the pledge not exceeding 33 1/3% of the value of
the Fund's total assets to secure permitted borrowings.
RISK FACTORS
FOREIGN SECURITIES. Investors should consider carefully the substantial
risks involved in securities of companies and governments of foreign nations.
There may be less publicly available information about foreign companies
comparable to the reports and ratings published regarding US companies. Foreign
companies are not generally subject to uniform accounting, auditing and
financial reporting standards, and auditing practices and requirements may not
be comparable to those applicable to US companies. Many foreign markets have
substantially less volume than either the established domestic securities
exchanges or the OTC markets. Securities of some foreign companies are less
liquid and more volatile than securities of comparable US companies. Commission
rates in foreign countries, which may be fixed rather than subject to
negotiation as in the US, are likely to be higher. In many foreign countries
there is less government supervision and regulation of securities exchanges,
brokers and listed companies than in the US, and capital requirements for
brokerage firms are generally lower. Settlement of transactions in foreign
securities may, in some instances, be subject to delays and related
administrative uncertainties.
EMERGING MARKETS. Investments in companies domiciled in emerging market
countries may be subject to additional risks. These risks include: (1) Volatile
social, political and economic conditions can cause investments in emerging or
developing markets exposure to economic structures that are generally less
diverse and mature. Emerging market countries can have political systems which
can be expected to have less stability than those of more developed countries.
The possibility may exist that recent favorable economic developments in certain
emerging market countries may be suddenly slowed or reversed by unanticipated
political or social events in such countries. Moreover, the economies of
individual emerging market countries may differ favorably or unfavorably from
the US economy in such respects as the rate of growth in gross domestic product,
the rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position. (2) The small current size of the markets for such
securities and the currently low or nonexistent volume of trading can result in
a lack of liquidity and in greater price volatility. Until recently, there has
been an absence of a capital market structure or market-oriented economy in
certain emerging market countries. Because the Fund's securities will generally
be denominated in foreign currencies, the value of such securities to the Fund
will be affected by changes in currency exchange rates and in exchange control
regulations. A change in the value of a foreign currency against the US dollar
will result in a corresponding change in the US dollar value of the Fund's
securities. In addition, some emerging market countries may have fixed or
managed currencies which are not free-floating against the US dollar. Further,
certain emerging market currencies may not be internationally traded. Certain of
these currencies have experienced a steady devaluation relative to the US
dollar. Many emerging markets countries have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had, and may continue to have,
negative effects
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on the economies and securities markets of certain emerging market countries.
(3) The existence of national policies may restrict the Fund's investment
opportunities and may include restrictions on investment in issuers or
industries deemed sensitive to national interests. (4) Some emerging markets
countries may not have developed structures governing private or foreign
investment and may not allow for judicial redress for injury to private
property.
FOREIGN CURRENCY. The Fund may be affected either favorably or unfavorably
by fluctuations in the relative rates of exchange between the currencies of
different nations, exchange control regulations and indigenous economic and
political developments. The Fund endeavors to buy and sell foreign currencies on
favorable terms. Such price spread on currency exchange (to cover service
charges) may be incurred, particularly when the Fund changes investments from
one country to another or when proceeds from the sale of shares in US dollars
are used for the purchase of securities in foreign countries. Also, some
countries may adopt policies which would prevent the Fund from repatriating
invested capital and dividends, withhold portions of interest and dividends at
the source, or impose other taxes, with respect to the Fund's investments in
securities of issuers of that country. There also is the possibility of
expropriation, nationalization, confiscatory or other taxation, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country), default in foreign government securities, political or social
instability, or diplomatic developments that could adversely affect investments
in securities of issuers in those nations.
FUTURES CONTRACTS AND OPTIONS ON FUTURES. There are certain investment
risks in using futures contracts and options as a hedging technique. Such risks
may include: (1) the inability to close out a futures contract or option caused
by the nonexistence of a liquid secondary market; and (2) an imperfect
correlation between price movements of the futures contracts or option with
price movements of the portfolio securities or securities index subject to the
hedge.
PORTFOLIO TURNOVER
The portfolio turnover rate cannot be predicted, but it is anticipated that
the Fund's annual turnover rate generally will not exceed 50%. A high turnover
rate (over 100%) will: (1) increase transaction expenses which will adversely
affect a Fund's performance; and (2) result in increased brokerage commissions
and other transaction costs, and the possibility of realized capital gains. The
Adviser's sell discipline for the Fund's investment in emerging market companies
is based on the premise of a long-term investment horizon, however, sudden
changes in valuation levels arising from, for example, new macroeconomic
policies, political developments, and industry conditions could change the
assumed time horizon. Some countries impose restrictions on repatriation of
capital and/or dividends which would lengthen the Adviser's assumed time horizon
in those countries. Liquidity, volatility, and overall risk of a position are
other factors considered by the Adviser in determining the appropriate
investment horizon. Therefore, the Fund may dispose of securities without regard
to the time they have been held when such action, for defensive or other
purposes, appears advisable.
The Fund may effect portfolio transactions with or through State Street
Brokerage Services, Inc., an affiliate of the Adviser, when the Adviser
determines that the Fund will receive competitive execution, price and
commissions.
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DIVIDENDS AND DISTRIBUTIONS
The Board of Trustees intends to declare and pay dividends annually from net
investment income. The Board of Trustees intends to declare distributions
annually from net capital gains, if any, generally in mid-October. An additional
distribution may be declared and paid in December, if required, for the Fund to
avoid imposition of a 4% federal excise tax on undistributed capital gains.
Dividends declared in October, November or December and payable to
shareholders of record in such months will be deemed to have been paid by the
Fund and received by shareholders on December 31 of that year if the dividend is
paid prior to February 1 of the following year.
Income dividends and capital gains distributions will be paid in additional
shares at their net asset value on the record date unless the shareholder has
elected to receive them in cash. Such election may be made by giving 10 days'
written notice to the Transfer Agent.
Any dividend or capital gain distribution paid by the Fund shortly after a
purchase of shares will reduce the per share net asset value of the Fund by the
amount of the dividend or distribution. In effect, the payment will represent a
return of capital to the shareholder. However, the shareholder will be subject
to taxes with respect to such dividend or distribution.
TAXES
The Fund intends to qualify as a regulated investment company ("RIC") under
Subchapter M of the Internal Revenue Code, as amended ("the Code"). As a RIC,
the Fund will not be subject to federal income taxes to the extent it
distributes its net investment income and capital gain net income (capital gains
in excess of capital losses) to shareholders. The Board intends to distribute
each year substantially all of the Fund's net investment income and capital gain
net income.
Dividends from net investment income and distributions of net short-term
capital gains are taxable to shareholders as ordinary income under federal
income tax laws whether paid in cash or in additional shares. Distributions from
net long-term capital gains are taxable as long-term capital gains regardless of
the length of time a shareholder has held such shares and whether paid in cash
or additional shares.
The Fund may purchase bonds at market discount (i.e., bonds with a purchase
price less than original issue price or adjusted issue price). If such bonds are
subsequently sold at a gain then a portion of that gain equal to the amount of
market discount, which should have been accrued through the sale date, will be
taxable to shareholders as ordinary income.
Dividends and distributions may also be subject to state or local taxes.
Depending on the state tax rules pertaining to a shareholder, a portion of the
dividends paid by the Fund attributable to direct obligations of the US Treasury
and certain agencies may be exempt from state and local taxes.
The sale of Fund shares by a shareholder is a taxable event and may result
in capital gain or loss. A capital gain or loss may be realized from an ordinary
redemption of shares or an exchange of shares between two mutual funds (or two
series of portfolios of a mutual fund). Any loss incurred on the sale or
exchange of Fund shares held for one year or more will be treated as a long-term
capital loss to the extent of capital gain dividends received with respect to
such shares.
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Shareholders will be notified after each calendar year of the amount of
income dividends and net capital gains distributed and the percentage of the
Fund's income attributable to US Treasury and agency obligations. The Fund is
required to withhold a legally determined portion of all taxable dividends,
distributions and redemption proceeds payable to any noncorporate shareholder
that does not provide the Fund with the shareholder's correct taxpayer
identification number or certification that the shareholder is not subject to
backup withholding.
The foregoing discussion is only a summary of certain federal income tax
issues generally affecting the Fund and its shareholders. Circumstances among
investors may vary and each investor is encouraged to discuss investment in the
Fund with the investor's tax adviser.
FOREIGN INCOME TAXES. Investment income received by the Fund from sources
within foreign countries may be subject to foreign income taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries which would entitle the Fund to a reduced rate of such taxes or
exemption from taxes on such income. It is impossible to determine the effective
rate of foreign tax for the Fund in advance since the amount of the assets to be
invested within various countries is not known.
If the Fund invests in an entity that is classified as a "passive foreign
investment company" ("PFIC") for federal income tax purposes, the application of
certain provisions of the Code applying to PFICs could result in the imposition
of certain federal income taxes on the Fund. It is anticipated that any taxes on
the Fund with respect to investments in PFICs would be insignificant. Under US
Treasury regulations issued in 1992 for PFICs, the Fund can elect to
mark-to-market its PFIC holdings in lieu of paying taxes on gains or
distributions therefrom. It is anticipated that any taxes on a Fund with respect
to investments in PFICs would be insignificant.
Foreign shareholders should consult with their tax advisers as to if and how
the federal income tax and its withholding requirements applies to them.
If more than 50% in value of a Fund's total assets at the close of any
taxable year consists of securities of foreign corporations, the Fund may file
an election with the Internal Revenue Service (the "Foreign Election") that
would permit shareholders to take a credit (or a deduction) for foreign income
taxes paid by the Fund. If the Foreign Election is made, shareholders would
include in their gross income both dividends received from the Fund and foreign
income taxes paid by the Fund. Shareholders of the Fund would be entitled to
treat the foreign income taxes withheld as a credit against their United States
federal income taxes, subject to the limitations set forth in the Internal
Revenue Code with respect to the foreign tax credit generally. Alternatively,
shareholders could treat the foreign income taxes withheld as a deduction from
gross income in computing taxable income rather than as a tax credit. It is
anticipated that the Fund will qualify to make the Foreign Election; however,
the Fund cannot be certain that it will be eligible to make such an election or
that any particular shareholder will be eligible for the foreign tax credit.
VALUATION OF FUND SHARES
NET ASSET VALUE PER SHARE. The net asset value per share is calculated on
each business day as of the close of the regular trading session of the New York
Stock Exchange (ordinarily 4 p.m. Eastern
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time). A business day is one on which the New York Stock Exchange is open for
business. Net asset value per share is computed by dividing the current value of
the Fund's assets, less its liabilities, by the number of shares of the Fund
outstanding and rounding to the nearest cent.
VALUATION OF FUND SECURITIES. With the exceptions noted below, the Fund
values portfolio securities at market value. This generally means that equity
and fixed income securities listed and traded principally on any national
securities exchange are valued on the basis of the last sale price or, lacking
any sales, at the closing bid price, on the primary exchange on which the
security is traded. United States equity and fixed income securities traded
principally over-the-counter and options are valued on the basis of the last
reported bid price. Futures contracts are valued on the basis of the last
reported sale price.
Because many fixed income securities do not trade each day, last sale or bid
prices are frequently not available. Fixed income securities therefore may be
valued using prices provided by a pricing service when such prices are
determined by the Custodian to reflect the market value of such securities.
International securities traded on a national securities exchange are valued
on the basis of the last sale price. International securities traded
over-the-counter are valued on the basis of best bid or official bid, as
determined by the relevant securities exchange. In the absence of a last sale or
best or official bid price, such securities may be valued on the basis of prices
provided by a pricing service if those prices are believed to reflect the market
value of such securities.
Debt maturing within 60 days of the valuation date is valued at amortized
cost. The amortized cost valuation procedure initially prices an instrument at
its cost and thereafter assumes a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the instrument. While 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 Fund would receive if it
sold the instrument.
The Fund values securities for which market quotations are not readily
available at fair value, as determined in good faith pursuant to procedures
established by the Board of Trustees.
PURCHASE OF FUND SHARES
MINIMUM INITIAL INVESTMENT AND ACCOUNT BALANCE. The Fund requires a minimum
initial investment of $1,000. The minimum account balance is $500. The Fund
reserves the right to reject any purchase order.
OFFERING DATES AND TIMES. Fund shares may be purchased on any business day
without a sales commission. All purchases must be made in US dollars. Purchase
orders in good form and payments for Fund shares must be received by the
Transfer Agent prior to 4 p.m. Eastern time to be effective on the date
received. The accompanying payment must be in federal funds or converted into
federal funds by the Transfer Agent before the purchase order can be accepted.
Purchase orders in good form are described below.
ORDER AND PAYMENT PROCEDURES. There are several ways to invest in the Fund.
The Fund requires a purchase order in good form which consists of a completed
and signed Account Registration
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and Investment Instruction Form (the "Application") for each new account
regardless of the investment method. For additional information, copies of forms
or questions, call the Transfer Agent at (800) 647-7327, or write to the
Transfer Agent at: State Street Bank and Trust Company, P.O. Box 8317, Boston,
MA 02266-8317, Attention: The Seven Seas Series Emerging Markets Fund.
FEDERAL FUNDS WIRE. An investor may purchase shares by wiring federal funds
to State Street Bank and Trust Company as the Transfer Agent by:
1. Telephoning State Street Bank and Trust Company at (800) 647-7327, and
stating: (1) the investor's account registration number, address and
social security or tax identification number; (2) the amount being wired;
(3) the name of the wiring bank; (4) the name and telephone number of the
person at the wiring bank to be contacted in connection with the order;
and (5) that the funds should be invested in The Seven Seas Series
Emerging Markets Fund.
2. Instructing the wiring bank to wire federal funds to: State Street Bank
and Trust Company, Boston, MA (ABA #0110-00028), Attention: The Seven
Seas Series Emerging Markets Fund, Mutual Funds Service Division (DDA
#9904-631-0). The wire instructions should also include the name in which
the account is registered, the account number, and the name of the Fund
in which to be invested.
3. Completing the Application and forwarding it to the Transfer Agent at
the above address.
MAIL. To purchase shares by mail, send a check or other negotiable bank
draft payable to: State Street Bank and Trust Company, P.O. Box 8317, Boston, MA
02266-8317, Attention: The Seven Seas Series Emerging Markets Fund. Certified
checks are not necessary; however, all checks are accepted subject to collection
at full face value in United States funds and must be drawn in United States
dollars on a United States bank. Normally, checks and drafts are converted to
federal funds within two business days following receipt of the check or draft.
Initial investments should be accompanied by a completed Application, and
subsequent investments are to be accompanied by the investor's account number.
THIRD PARTY TRANSACTIONS. Investors purchasing Fund shares through a
program of services offered by a financial intermediary, such as a bank,
broker-dealer, investment adviser or others, may be required by such
intermediary to pay additional fees. Investors should contact such intermediary
for information concerning what additional fees, if any, may be charged.
IN-KIND EXCHANGE OF SECURITIES. The Transfer Agent may, at its discretion,
permit investors to purchase shares through the exchange of securities they
hold. Any securities exchanged must meet the investment objective, policies and
limitations of the Fund, must have a readily ascertainable market value, must be
liquid and must not be subject to restrictions on resale. The market value of
any securities exchanged, plus any cash, must be at least $1 million. Shares
purchased in exchange for securities generally may not be redeemed or exchanged
until the transfer has settled -- usually within 15 days following the purchase
by exchange.
The basis of the exchange will depend upon the relative net asset value of
the shares purchased and securities exchanged. Securities accepted by the Fund
will be valued in the same manner as the Fund values its assets. Any interest
earned on the securities following their delivery to the Transfer
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Agent and prior to the exchange will be considered in valuing the securities.
All interest, dividends, subscription or other rights attached to the securities
become the property of the Fund, along with the securities.
EXCHANGE PRIVILEGE. Subject to each Fund's minimum investment requirement,
investors may exchange their Fund shares without charge for shares of any other
investment portfolio offered by the Investment Company. Shares are exchanged on
the basis of relative net asset value per share. Exchanges may be made: (1) by
telephone if the registrations of the two accounts are identical; or (2) in
writing addressed to State Street Bank and Trust Company, P.O. Box 8317, Boston,
MA 02266-8317, Attention: The Seven Seas Series Emerging Markets Fund. If shares
of the Fund were purchased by check, the shares must have been present in an
account for 10 days before an exchange is made. The exchange privilege will only
be available in states where the exchange may legally be made, and may be
modified or terminated by the Fund upon 60 days' notice to shareholders.
REDEMPTION OF FUND SHARES
Fund shares may be redeemed on any business day at the net asset value next
determined after the receipt of a redemption request in proper form as described
below. Payment will be made as soon as possible (but will ordinarily not exceed
seven days) and will be mailed to the shareholder's address of record. Upon
request, redemption proceeds will be wire transferred to the shareholder's
account at a domestic commercial bank that is a member of the Federal Reserve
System. Although the Investment Company does not currently charge a fee for this
service, the Investment Company reserves the right to charge a fee for the cost
of wire-transferred redemptions of less than $1,000. Payment for redemption of
shares purchased by check may be withheld for up to 10 days after the date of
purchase to assure that such checks are honored.
EXPEDITED REDEMPTION. Shareholders may normally redeem Fund shares by
telephoning State Street Bank and Trust Company between 9:00 a.m. and 4:00 p.m.
Eastern time at (800) 647-7327, Attention: The Seven Seas Series Emerging
Markets Fund. Shareholders using the expedited redemption method must complete
the appropriate section on the Application. The Fund and the Transfer Agent will
employ reasonable procedures to confirm that instructions communicated by
telephone are properly authorized. The Fund and the Transfer Agent will not be
liable for executing telephone instructions that are deemed to be authorized
after following reasonable procedures. These procedures include recording
telephonic instructions, mailing to the shareholder a written confirmation of
the transaction, performing a personal identity test with private information
not likely to be known by other individuals, and restricting mailing of
redemptions to the shareholder's address of record. During periods of drastic
economic or market changes, shareholders using this method may encounter delays.
In such event, shareholders should consider using the mail redemption procedure
described below.
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MAIL. Redemption requests may be made in writing directly to State Street
Bank and Trust Company, P.O. Box 8317, Boston, MA 02266-8317, Attention: The
Seven Seas Series Emerging Markets Fund. The redemption price will be the net
asset value next determined after receipt by State Street of all required
documents in good order. "Good order" means that the request must include the
following:
1. A letter of instruction or a stock assignment stating that the shares
are to be redeemed out of The Seven Seas Series Emerging Markets Fund and
designating specifically the dollar amount to be redeemed signed by all
owners of the shares in the exact names in which they appear on the
account, together with a guarantee of the signature of each owner by a
bank, trust company or member of a recognized stock exchange; and
2. Such other supporting legal documents, if required by applicable law or
the Transfer Agent, in the case of estates, trusts, guardianships,
custodianships, corporations and pension and profit-sharing plans.
The Fund reserves the right to redeem the shares in any account with a
balance of less than $500 as a result of shareholder redemptions rather than
market value fluctuations. Before shares are redeemed to close an account, the
shareholder will be notified in writing and allowed 60 days to purchase
additional shares to meet the minimum account balance.
The Fund may pay any portion of the redemption amount in excess of $250,000
by a distribution in kind of readily marketable securities from the portfolio of
the Fund in lieu of cash. Investors will incur brokerage charges on the sale of
these portfolio securities. The Fund reserves the right to suspend the right of
redemption or postpone the date of payment if emergency conditions, as specified
in the 1940 Act or determined by the Securities and Exchange Commission, should
exist.
GENERAL MANAGEMENT
The Board of Trustees supervises the management, activities and affairs of
the Fund and has approved contracts with various financial organizations to
provide, among other services, day-to-day management required by the Fund.
ADVISORY AGREEMENT. The Investment Company employs State Street Bank and
Trust Company ("State Street" or the "Adviser") to furnish investment services
to the Fund. State Street is one of the largest providers of securities
processing and recordkeeping services for US mutual funds and pension funds.
State Street is a wholly owned subsidiary of State Street Boston Corporation, a
publicly held bank holding company. State Street, with over $171.3 billion (US)
under management as of September 30, 1995, provides complete global investment
management services from offices in the United States, London, Sydney, Hong
Kong, Tokyo, Toronto, Luxembourg, Melbourne, Montreal and Paris.
The Adviser, subject to Board supervision, directs the investment of the
Fund in accordance with the Fund's investment objective, policies and
restrictions. Mr. Robert E. Furdak, CFA, Managing Director, has been the
portfolio manager primarily responsible for investment decisions regarding the
Fund since its inception in March 1994. Mr. Furdak has been with State Street
since 1989, working on the non-US active equity team. There are seven other
portfolio managers who work with Mr. Furdak in managing the Fund. For these
services, the Fund pays the Adviser a fee, calculated daily and paid monthly,
equal to .75% annually of the Fund's average daily net assets.
17
<PAGE>
The Glass-Steagall Act prohibits a depository state chartered bank such as
the Adviser from engaging in the business of issuing, underwriting, selling or
distributing certain securities. The activities of the Adviser in informing its
customers of the Fund, performing investment and redemption services and
providing custodian, transfer, shareholder servicing, dividend disbursing and
investment advisory services may raise issues under these provisions. The
Adviser has been advised by its counsel that its activities in connection with
the Fund are consistent with its statutory and regulatory obligations. THE
SHARES OFFERED BY THIS PROSPECTUS ARE NOT ENDORSED OR GUARANTEED BY STATE STREET
OR ITS AFFILIATES, ARE NOT DEPOSITS OR OBLIGATIONS OF STATE STREET OR ITS
AFFILIATES, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR
ANY OTHER GOVERNMENTAL AGENCY.
Changes in federal or state statutes and regulations relating to the
permissible activities of banks and their affiliates, as well as judicial or
administrative decisions or interpretations of such or future statutes and
regulations, could prevent the Adviser from continuing to perform all or a part
of the above services for its customers and/or the Fund. If the Adviser were
prohibited from serving the Fund in any of its present capacities, the Board of
Trustees would seek an alternative provider(s) of such services. In such event,
changes in the operation of the Fund may occur. It is not expected by the
Adviser that existing shareholders would suffer any adverse financial
consequences (if another adviser with equivalent abilities is found) as a result
of any of these occurrences.
State Street may from time to time have discretionary authority over
accounts which invest in Investment Company shares. These accounts include
accounts maintained for securities lending clients and accounts which permit the
use of Investment Company portfolios as short-term cash sweep investments.
Shares purchased for all discretionary accounts are held of record by State
Street, who retains voting control of such shares. As of November 30, 1995,
State Street held of record 36% of the issued and outstanding shares of
Investment Company in connection with its discretionary accounts. Consequently,
State Street may be deemed to be a controlling person of Investment Company for
purposes of the 1940 Act.
Under the Adviser's Code of Ethics, the Adviser's employees in Boston where
investment management operations are conducted are only permitted to engage in
personal securities transactions which do not involve securities which the
Adviser had recommended for purchase or sale, or purchased or sold, on behalf of
its clients. Such employees must report their personal securities transactions
quarterly and supply broker confirmations to the Adviser.
ADMINISTRATION AGREEMENT. Frank Russell Investment Management Company (the
"Administrator") serves as administrator to the Fund. The Administrator
currently serves as investment manager and administrator to 22 mutual funds with
assets of $7.3 billion as of October 31, 1995, and acts as administrator to 17
mutual funds, including the Emerging Markets Fund, with assets of $7.2 billion
as of October 31, 1995.
Pursuant to the Administration Agreement with the Investment Company, the
Administrator will: (1) supervise all aspects of the Fund's operations; (2)
provide the Fund with administrative and clerical services, including the
maintenance of certain of the Fund's books and records; (3) arrange the periodic
updating of the Fund's prospectuses and any supplements thereto; (4) provide
proxy materials and reports to Fund shareholders and the Securities and Exchange
Commission; and (5) provide the Fund with adequate office space and all
necessary office equipment and services, including
18
<PAGE>
telephone service, heat, utilities, stationery supplies and similar items. For
these services, the Emerging Markets Fund pays the Administrator a fee that on
an annual basis is equal to the following percentages of average aggregate daily
net assets: $0 to and including $500 million -- .07%; over $500 million to and
including $1 billion -- .06%; over $1 billion to and including $1.5
billion -- .04%; and over $1.5 billion -- .03%. The percentage of the fee paid
by the Emerging Markets Fund is equal to the percentage of average aggregate
daily net assets. The Administrator will also receive reimbursement of expenses
it incurs in connection with establishing new investment portfolios. Further,
the administration fee paid by the Investment Company will be reduced by the sum
of certain distribution related expenses (up to a maximum of 15% of the
asset-based administration fee listed above).
The Administrator also provides administrative services in connection with
the registration of shares of the Investment Company with those states in which
its shares are offered or sold. Compensation for such services is on a "time
spent" basis. The Investment Company will pay all registration, exemptive
application, renewal and related fees and reasonable out-of-pocket expenses.
Officers and employees of the Administrator and Distributor are permitted to
engage in personal securities transactions subject to restrictions and
procedures set forth in the Confidentiality Manual and Code of Ethics adopted by
the Investment Company, Administrator and Distributor. Such restrictions and
procedures include substantially all of the recommendations of the Advisory
Group of the Investment Company Institute and comply with Securities and
Exchange Commission rules and regulations.
DISTRIBUTION SERVICES AND SHAREHOLDER SERVICING ARRANGEMENTS. Pursuant to
the Distribution Agreement with the Investment Company, Russell Fund
Distributors, Inc. (the "Distributor"), a wholly owned subsidiary of the
Administrator, serves as distributor for all Fund shares.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 (the "Plan")
under the 1940 Act. The purpose of the Plan is to provide for the payment of
certain Investment Company distribution and shareholder servicing expenses.
Under the Plan, the Distributor will be reimbursed in an amount up to .25% of
the Fund's average annual net assets for distribution-related and shareholder
servicing expenses. Payments under the Plan will be made to the Distributor to
finance activity which is intended to result in the sale and retention of Fund
shares including: (1) the costs of prospectuses, reports to shareholders and
sales literature; (2) advertising; and (3) expenses incurred in connection with
the promotion and sale of Fund shares, including the Distributor's overhead
expenses for rent, office supplies, equipment, travel, communication,
compensation and benefits of sales personnel.
Under the Plan, the Fund may also enter into agreements (the "Service
Agreements") with financial institutions, which may include the Adviser (the
"Service Organizations"), to provide shareholder servicing with respect to Fund
shares held by or for the customers of the Service Organizations. Under the
Service Agreements, the Service Organizations may provide various services for
such customers including: answering inquiries regarding the Fund; assisting
customers in changing dividend options, account designations and addresses;
performing subaccounting for such customers; establishing and maintaining
customer accounts and records; processing purchase and redemption transactions;
providing periodic statements showing customers' account balances and
integrating such statements with those of other transactions and balances in the
customers' other accounts serviced by the Service Organizations; arranging for
bank wires transferring customers' funds; and such other services as the
customers may request in connection with the Fund, to the
19
<PAGE>
extent permitted by applicable statute, rule or regulation. The Service
Organizations may receive from the Fund, for shareholder servicing, monthly fees
at a rate that shall not exceed .20% per annum of the average daily net asset
value of Fund shares owned by or for shareholders with whom the Service
Organization has a servicing relationship. Banks and other financial service
firms may be subject to various state laws, and may be required to register as
dealers pursuant to state law.
Investment Company has entered into Service Agreements with Adviser, State
Street Brokerage Services, Inc. ("SSBSI"), and Adviser's Metropolitan Division
of Commercial Banking ("Commercial Banking") to obtain the services described
above with respect to Fund shares held by or for customers. In return for these
services, Investment Company pays Adviser a fee in an amount that per annum is
equal to .025%, .175% and .175% of the average daily value of all Fund shares
held by or for customers of Adviser, SSBSI, and Commercial Banking,
respectively.
Payments to the Distributor, as well as payments to the Service
Organizations, are not permitted by the Plan to exceed .25% of the Fund's
average net asset value per year. Any payments that are required to be made by
the Distribution Agreement and any Service Agreement but could not be made
because of the .25% limitation may be carried forward and paid in subsequent
years so long as the Plan is in effect. The Fund's liability for any such
expenses carried forward shall terminate at the end of two years following the
year in which the expenditure was incurred. The Service Organizations will be
responsible for prompt transmission of purchase and redemption orders and may
charge fees for their services.
FUND EXPENSES
The Fund will pay all of its expenses other than those expressly assumed by
the Adviser and the Administrator. The principal expenses of the Fund are the
annual advisory fee payable to the Adviser and distribution and shareholder
servicing expenses. Other expenses include: (1) amortization of deferred
organizational costs; (2) taxes, if any; (3) expenses for legal, auditing and
financial accounting services; (4) expense of preparing (including typesetting,
printing and mailing) reports, prospectuses and notices to existing
shareholders; (5) administrative fees; (6) custodian fees; (7) expense of
issuing and redeeming Fund shares; (8) the cost of registering Fund shares under
federal and state laws; (9) shareholder meetings and related proxy solicitation
expenses; (10) the fees, travel expenses and other out-of-pocket expenses of
Trustees who are not affiliated with Adviser or any of its affiliates; (11)
insurance, interest, brokerage and litigation costs; (12) extraordinary expenses
as may arise, including expenses incurred in connection with litigation
proceedings and claims and the legal obligations of Investment Company to
indemnify its Trustees, officers, employees, shareholders, distributors and
agents; and (13) other expenses properly payable by the Fund.
PERFORMANCE CALCULATIONS
From time to time the Fund may advertise its "total return." The "total
return" of the Fund is the average annual compounded rate of return from a
hypothetical investment in the Fund over one-, five-, and ten-year periods or
for the life of the Fund (as stated in the advertisement), assuming the
reinvestment of all dividend and capital gains distributions.
Comparative performance information may be used from time to time in
advertising or marketing Fund shares, including data from Lipper Analytical
Services, Inc., Wall Street Journal Score Card
20
<PAGE>
or other industry publications, business periodicals, rating services and market
indices. The Fund may also advertise nonstandardized performance information
which is for periods in addition to those required to be presented.
Total return and other performance figures are based on historical earnings
and are not indications of future performance.
ADDITIONAL INFORMATION
CUSTODIAN, TRANSFER AGENT AND INDEPENDENT ACCOUNTANTS. State Street holds
all portfolio securities and cash assets of the Fund, provides portfolio
recordkeeping services and serves as the Fund's transfer agent (the "Transfer
Agent") and custodian (the "Custodian"). State Street is authorized to deposit
securities in securities depositories or to use the services of subcustodians.
State Street has no responsibility for the supervision and management of the
Fund except as investment adviser. Coopers & Lybrand L.L.P., Boston,
Massachusetts, is the Investment Company's independent accountants.
REPORTS TO SHAREHOLDERS AND SHAREHOLDER INQUIRIES. Shareholders will
receive unaudited semiannual financial statements and annual financial
statements audited by the Investment Company's independent accountants.
Shareholder inquiries regarding the Prospectus and financial statements may be
made by calling the Distributor at (617) 654-6089. Inquiries regarding
shareholder balances may be made by calling the Transfer Agent at (800)
647-7327.
ORGANIZATION, CAPITALIZATION AND VOTING. The Investment Company was
organized as a Massachusetts business trust on October 3, 1987, and operates
under a First Amended and Restated Master Trust Agreement dated October 13,
1993, as amended.
The Investment Company issues a single class of shares divisible into an
unlimited number of series (or funds), each of which is a separate trust under
Massachusetts law. The Emerging Markets Fund is one such series.
Each Fund share represents an equal proportionate interest in the Fund, has
a par value of $.001 per share and is entitled to such relative rights and
preferences and dividends and distributions earned on Fund assets as may be
declared by the Board of Trustees. Shares of the Fund are fully paid and
nonassessable by the Investment Company and have no preemptive rights.
Each Fund share has one vote. There are no cumulative voting rights. There
is no annual meeting of shareholders, but special meetings may be held. On any
matter which affects only a particular investment fund, only shareholders of
that fund may vote unless otherwise required by the 1940 Act or the Master Trust
Agreement. The Trustees hold office for the life of the Trust. A Trustee may
resign or retire, and may be removed at any time by a vote of two-thirds of the
Investment Company shares or by a vote of a majority of the Trustees. The
Trustees shall promptly call and give notice of a meeting of shareholders for
the purpose of voting upon removal of any Trustee when requested to do so in
writing by the holders of not less than 10% of the shares then outstanding. A
vacancy on the Board of Trustees may be filled by the vote of a majority of the
remaining Trustees, provided that immediately thereafter at least two-thirds of
the Trustees have been elected by shareholders.
21
<PAGE>
The Investment Company does not issue share certificates for the Fund. The
Transfer Agent sends shareholders statements concurrent with any transaction
activity, confirming all investments in or redemptions from their accounts. Each
statement also sets forth the balance of shares held in the account.
As of November 30, 1995, Charles Schwab & Company, Inc., owned of record 70%
of the issued and outstanding shares of the Fund, and is therefore deemed to be
a controlling person of the Fund for purposes of the 1940 Act.
22
<PAGE>
THE SEVEN SEAS SERIES FUND
TWO INTERNATIONAL PLACE, 35TH FLOOR
BOSTON, MASSACHUSETTS 02110
INVESTMENT ADVISER, CUSTODIAN, AND TRANSFER AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
DISTRIBUTOR
Russell Fund Distributors, Inc.
Two International Place, 35th Floor
Boston, Massachusetts 02110
ADMINISTRATOR
Frank Russell Investment Management Company
909 A Street
Tacoma, Washington 98402
LEGAL COUNSEL
Goodwin, Procter & Hoar
Exchange Place
Boston, Massachusetts 02109
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
<PAGE>
THE SEVEN SEAS SERIES FUND
The Seven Seas Series Money Market Fund
The Seven Seas Series US Government Money Market Fund
The Seven Seas Series Tax Free Money Market Fund
The Seven Seas Series S&P 500 Index Fund
The Seven Seas Series Small Cap Fund
The Seven Seas Series Matrix Equity Fund
The Seven Seas Series Yield Plus Fund
The Seven Seas Series Growth and Income Fund
The Seven Seas Series Intermediate Fund
The Seven Seas Series Active International Fund
The Seven Seas Series Emerging Markets Fund
<PAGE>
Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
THE SEVEN SEAS SERIES FUND
TWO INTERNATIONAL PLACE, 35TH FLOOR
BOSTON, MASSACHUSETTS 02110
(617) 654-6089
US TREASURY MONEY MARKET PORTFOLIO
PRIME MONEY MARKET PORTFOLIO
This Prospectus describes and offers shares of beneficial interest in two
portfolios of the Seven Seas Series Fund (the "Investment Company"), a
registered, open-end investment company with multiple portfolios, each of which
is a mutual fund. The Portfolios' shares are offered without sales commissions.
However, the Portfolios pay certain distribution expenses under their Rule 12b-1
Plan.
Each Portfolio seeks to achieve its specific investment objective by using
distinct investment strategies:
THE SEVEN SEAS SERIES US TREASURY MONEY MARKET PORTFOLIO seeks to maximize
current income, to the extent consistent with the preservation of capital and
liquidity and the maintenance of a stable $1.00 per share net asset value, by
investing in obligations that are issued or guaranteed as to principal and
interest by the US Government and repurchase agreements backed by such
securities. The Portfolio intends to meet its investment objective by investing
only in US Treasury bills, notes and bonds.
THE SEVEN SEAS SERIES PRIME MONEY MARKET PORTFOLIO seeks to maximize current
income, to the extent consistent with the preservation of capital and liquidity
and the maintenance of a stable $1.00 per share net asset value, by investing in
dollar denominated securities.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
INVESTMENTS IN THE PORTFOLIOS ARE NEITHER INSURED NOR GUARANTEED BY THE US
GOVERNMENT. THERE IS NO ASSURANCE THAT EITHER PORTFOLIO WILL MAINTAIN A STABLE
NET ASSET VALUE OF $1.00 PER SHARE.
SHARES IN THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, STATE STREET BANK AND TRUST COMPANY, AND SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY, AND INVOLVE INVESTMENT RISK, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
This Prospectus sets forth concisely the information about the Portfolios
that a prospective investor ought to know before investing. Please read and
retain this document for future reference. Additional information about the
Portfolios has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated December 29, 1995. The Statement of
Additional Information is incorporated herein by reference and is available
without charge from the Distributor at its address noted below or by calling
(617) 654-6089.
<TABLE>
<S> <C> <C>
INVESTMENT ADVISER, CUSTODIAN
AND TRANSFER AGENT: DISTRIBUTOR: ADMINISTRATOR:
State Street Bank and Trust Russell Fund Distributors, Frank Russell Investment
Company Inc. Management Company
225 Franklin Street Two International Place, 909 A Street
Boston, Massachusetts 02110 35th Floor Tacoma, Washington 98402
(617) 654-4721 Boston, Massachusetts 02110 (206) 627-7001
(617) 654-6089
</TABLE>
PROSPECTUS DATED DECEMBER 29, 1995
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Summary.................................................................................................... 3
Portfolio Operating Expenses............................................................................... 5
Financial Highlights....................................................................................... 7
The Seven Seas Series Fund................................................................................. 9
Manner of Offering......................................................................................... 9
Investment Objectives and Policies......................................................................... 9
Purchase of Portfolio Shares............................................................................... 14
Redemption of Portfolio Shares............................................................................. 16
Additional Purchase and Redemption Information............................................................. 17
Investment Restrictions.................................................................................... 18
Portfolio Maturity......................................................................................... 18
Dividends and Distributions................................................................................ 19
Taxes...................................................................................................... 19
Valuation of Portfolio Shares.............................................................................. 20
General Management......................................................................................... 20
Portfolio Expenses......................................................................................... 23
Performance Calculations................................................................................... 24
Description of the Portfolio............................................................................... 24
</TABLE>
2
<PAGE>
SUMMARY
ELIGIBLE INVESTORS. The US Treasury Money Market Portfolio and Prime Money
Market Portfolio are designed to provide institutional and corporate investors
with a convenient and economical means of investing in professionally managed
portfolios of money market instruments. See "Manner of Offering -- Distribution
and Eligible Investors."
INVESTMENT OBJECTIVE AND POLICIES. Each Portfolio's investment objective is
to maximize current income, to the extent consistent with the preservation of
capital and liquidity and the maintenance of a stable $1.00 per share net asset
value, by investing in certain types of money market instruments.
-The US Treasury Money Market Portfolio invests in obligations that are
issued or guaranteed as to principal and interest by the US Government and
repurchase agreements backed by such securities. The Portfolio's investment
policy is to invest 100% of its assets in US Treasury bills, notes and
bonds and repurchase agreements backed by such securities.
-The Prime Money Market Portfolio invests in dollar denominated, short-term
money market securities. Such instruments include US Treasury bills, notes
and bonds, certificates of deposit, time deposits, banker's acceptances,
commercial paper, corporate obligations, variable amount master demand
notes and repurchase agreements. See "Investment Objectives and Policies."
Each Portfolio may purchase securities on a when-issued basis and may lend
its portfolio securities. The Prime Money Market Portfolio may also engage in
reverse repurchase agreements and may enter into certain forward commitments.
See "Investment Restrictions."
PURCHASE OF PORTFOLIO SHARES. Portfolio shares may be purchased on any
business day without sales commission. Investors are strongly encouraged to
purchase shares by wiring payment to the Portfolios' transfer agent, State
Street Bank and Trust Company ("State Street"). Purchase orders for the Treasury
Money Market Portfolio and Prime Money Market Portfolio must be received prior
to 3:00 p.m. Eastern time to receive the dividend declared on the date of
purchase. See "Purchase of Portfolio Shares."
The Treasury Money Market Portfolio requires a minimum initial investment of
$10 million. The Prime Money Market Portfolio requires a minimum initial
investment of $20 million. See "Manner of Offering -- Minimum and Subsequent
Investment."
REDEMPTION OF PORTFOLIO SHARES. Portfolio shares may be redeemed without
charge on any business day by telephoning State Street between 9:00 a.m. and
4:00 p.m. Eastern time. Proceeds of the redemption will ordinarily be wired to
the shareholder's designated bank account on the same day as the request is
received if it is received prior to 3:00 p.m. Eastern time.
The Treasury Money Market Portfolio may redeem all the shares in a
shareholder's account if the value of the account falls below $7.5 million as a
result of shareholder redemptions. The Prime Money Market Portfolio may do
likewise if the value of the account falls below $15 million as a result of
shareholder redemptions.
INVESTMENT ADVISER. State Street serves as investment adviser to the
Portfolios. With over $171.3 billion under management as of September 30, 1995,
State Street provides complete global
3
<PAGE>
investment management services from offices in the United States, London,
Sydney, Hong Kong, Tokyo, Toronto, Luxembourg, Melbourne, Montreal and Paris.
See "General Management -- Advisory Agreement."
ADVISORY, ADMINISTRATION AND DISTRIBUTION FEES. For its advisory services,
State Street receives a fee at an annual rate equal to .15% and .25% of the
Prime Money Market Portfolio's and Treasury Money Market Portfolio's net assets,
respectively. These fees are subject to decrease as the net assets of the
respective portfolios increase. The Portfolios pay Frank Russell Investment
Management Company, as the Administrator, a combined fee that on an annual basis
is equal to a percentage of average aggregate daily net assets. See "General
Management -- Administration Agreement". Russell Fund Distributors, Inc., as
Distributor receives an annual fee not to exceed .25% of the Portfolios' average
net assets. See "General Management -- Distribution Services."
4
<PAGE>
PORTFOLIO OPERATING EXPENSES
THE SEVEN SEAS SERIES US TREASURY MONEY MARKET PORTFOLIO
The following table is intended to assist the investor in understanding the
costs and expenses that an investor in the Treasury Money Market Portfolio will
incur directly or indirectly. THE EXAMPLES PROVIDED IN THE TABLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. Actual expenses may be
greater or less than those shown. For additional information, see "General
Management."
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
- ------------------------------
Sales Load Imposed on Purchases......................................................................................... None
Sales Load Imposed on Reinvested Dividends.............................................................................. None
Deferred Sales Load..................................................................................................... None
Redemption Fees......................................................................................................... None
Exchange Fee............................................................................................................ None
ANNUAL PORTFOLIO OPERATING EXPENSES:
- ---------------------------------
(as a percentage of average daily net assets)
Advisory Fees (1)....................................................................................................... .12%
12b-1 Fees (1)(2)....................................................................................................... .04
Other Expenses (1)...................................................................................................... .04
-----
Total Operating Expenses After Reimbursement (1)(3)..................................................................... .20%
-----
-----
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLES:
You would pay the following expenses on a $1,000 investment, assuming (i) 5% annual return
and (ii) redemption at the end of each time period:...................................... $ 2 $ 6 $ 11 $ 26
------ ------- ------- --------
------ ------- ------- --------
</TABLE>
- ------------------------
(1) Adviser has agreed to reimburse the Portfolio for all expenses in excess of
.20% of average daily net assets on an annual basis. The gross annual
expenses before reimbursement of Advisory, 12b-1 and Other Expenses would be
.25%, .08% and .08% of average daily net assets, respectively. The total
operating expenses of the Portfolio absent fee reimbursement would be .41%
of average daily net assets on an annual basis. The reimbursement will be in
effect for the current fiscal year.
(2) Rule 12b-1 fees may include expenses paid for shareholder servicing
activities.
(3) The expense information in the table has been adjusted to reflect current
fees. Investors purchasing Portfolio shares through a financial
intermediary, such as a bank or an investment adviser, may also be required
to pay additional fees for services provided by the intermediary. Such
investors should contact the intermediary for information concerning what
additional fees, if any, will be charged.
5
<PAGE>
PORTFOLIO OPERATING EXPENSES
THE SEVEN SEAS SERIES PRIME MONEY MARKET PORTFOLIO
The following table is intended to assist the investor in understanding the
costs and expenses that an investor in the Treasury Money Market Portfolio will
incur directly or indirectly. THE EXAMPLES PROVIDED IN THE TABLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. Actual expenses may be
greater or less than those shown. For additional information, see "General
Management."
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES:
- ------------------------------
<S> <C>
Sales Load Imposed on Purchases......................................................................................... None
Sales Load Imposed on Reinvested Dividends.............................................................................. None
Deferred Sales Load..................................................................................................... None
Redemption Fees......................................................................................................... None
Exchange Fee............................................................................................................ None
ANNUAL PORTFOLIO OPERATING EXPENSES:
- ---------------------------------
(as a percentage of average daily net assets)
Advisory Fees (1)....................................................................................................... .11%
12b-1 Fees (1)(2)....................................................................................................... .04
Other Expenses (1)...................................................................................................... .05
-----
Total Operating Expenses After Reimbursement (1)(3)..................................................................... .20%
-----
-----
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLES:
You would pay the following expenses on a $1,000 investment, assuming (i) 5% annual return
and (ii) redemption at the end of each time period:...................................... $ 2 $ 6 $ 11 $ 26
------ ------- ------- --------
------ ------- ------- --------
</TABLE>
- ------------------------
(1) Adviser has agreed to reimburse the Portfolio for all expenses in excess of
.20% of average daily net assets on an annual basis. The gross annual
expenses before reimbursement of Advisory, 12b-1 and Other Expenses would be
.15%, .05% and .07% of average daily net assets, respectively. The total
operating expenses of the Portfolio absent reimbursement would be .27% on an
annual basis. The reimbursement will be in effect for the current fiscal
year.
(2) Rule 12b-1 fees may include expenses paid for shareholder servicing
activities.
(3) The expense information in the table has been adjusted to reflect current
fees. Investors purchasing Portfolio shares through a financial
intermediary, such as a bank or an investment adviser, may also be required
to pay additional fees for services provided by the intermediary. Such
investors should contact the intermediary for information concerning what
additional fees, if any, will be charged.
6
<PAGE>
FINANCIAL HIGHLIGHTS
THE SEVEN SEAS SERIES US TREASURY MONEY MARKET PORTFOLIO
The following table contains important financial information relating to the
Portfolio and has been audited by Coopers & Lybrand L.L.P., the Portfolio's
independent accountants. The table includes selected data for a share
outstanding throughout each fiscal year or period ended August 31, and other
performance information derived from the financial statements. The table appears
in the Portfolio's Annual Report and should be read in conjunction with the
Portfolio's financial statements and related notes, which are incorporated by
reference in the Statement of Additional Information and which appear, along
with the report of Coopers & Lybrand L.L.P., in the Portfolio's Annual Report to
Shareholders. More detailed information concerning the Portfolio's performance,
including a complete portfolio listing and audited financial statements, is
available in the Portfolio's Annual Report, which may be obtained without charge
by writing or calling the Distributor.
<TABLE>
<CAPTION>
1995 1994++
----------- -----------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR...................................................... $ 1.0000 $ 1.0000
----------- -----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................................................. .0536 .0249
----------- -----------
LESS DISTRIBUTIONS:
Net investment income................................................................. (.0536) (.0249)
----------- -----------
NET ASSET VALUE, END OF YEAR............................................................ $ 1.0000 $ 1.0000
----------- -----------
----------- -----------
TOTAL RETURN (%)(a)..................................................................... 5.48 2.51
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average daily net assets (b).............................. .13 .13
Operating expenses, gross, to average daily net assets (b)............................ .39 .38
Net investment income to average daily net assets (b)................................. 5.38 3.28
Net assets, end of year ($000 omitted)................................................ 160,893 154,858
Per share amount of fees waived ($ omitted)........................................... .0018 .0019
</TABLE>
- ------------------------
++ For the period December 1, 1993 (commencement of operations) to August 31,
1994.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended August 31, 1994 are annualized.
7
<PAGE>
FINANCIAL HIGHLIGHTS
THE SEVEN SEAS SERIES PRIME MONEY MARKET PORTFOLIO
The following table contains important financial information relating to the
Portfolio and has been audited by Coopers & Lybrand L.L.P., the Portfolio's
independent accountants. The table includes selected data for a share
outstanding throughout each fiscal year or period ended August 31, and other
performance information derived from the financial statements. The table appears
in the Portfolio's Annual Report and should be read in conjunction with the
Portfolio's financial statements and related notes, which are incorporated by
reference in the Statement of Additional Information and which appear, along
with the report of Coopers & Lybrand L.L.P., in the Portfolio's Annual Report to
Shareholders. More detailed information concerning the Portfolio's performance,
including a complete portfolio listing and audited financial statements, is
available in the Portfolio's Annual Report, which may be obtained without charge
by writing or calling the Distributor.
<TABLE>
<CAPTION>
1995 1994++
------------- -----------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR.................................................... $ 1.0000 $ 1.0000
------------- -----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................................... .0567 .0207
------------- -----------
LESS DISTRIBUTIONS:
Net investment income............................................................... (.0567) (.0207)
------------- -----------
NET ASSET VALUE, END OF YEAR.......................................................... $ 1.0000 $ 1.0000
------------- -----------
------------- -----------
TOTAL RETURN (%)(a)................................................................... 5.82 2.09
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average daily net assets (b)............................ .14 .16
Operating expenses, gross, to average daily net assets (b).......................... .27 .32
Net investment income to average daily net assets (b)............................... 5.76 4.00
Net assets, end of year ($000 omitted).............................................. 1,076,630 432,224
Per share amount of fees waived ($ omitted)......................................... .0013 .0007
Per share amount of fees reimbursed by Adviser ($ omitted).......................... -- .0001
</TABLE>
- ------------------------
++ For the period February 22, 1994 (commencement of operations) to August 31,
1994.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended August 31, 1994 are annualized.
8
<PAGE>
THE SEVEN SEAS SERIES FUND
Investment Company is a registered open-end management investment company
that is organized as a Massachusetts business trust. In addition, each series of
the Investment Company is diversified as defined in the Investment Company Act
of 1940, as amended (the "1940 Act"). As a "series" company, the Investment
Company is authorized to issue an unlimited number of shares evidencing
beneficial interests in a variety of investment portfolios. Through this
Prospectus, the Investment Company offers shares in two portfolios: The Seven
Seas Series US Treasury Money Market Portfolio (the "Treasury Money Market
Portfolio") and The Seven Seas Series Prime Money Market Portfolio (the "Prime
Money Market Portfolio") (collectively, the "Portfolios"). State Street Bank and
Trust Company (the "Adviser" or "State Street") serves as the investment adviser
for each Portfolio.
MANNER OF OFFERING
DISTRIBUTION AND ELIGIBLE INVESTORS. Shares of the Portfolios are offered
without a sales commission by Russell Fund Distributors, Inc., the Investment
Company's distributor, to US and foreign institutional and corporate investors
that invest for their own account or in a fiduciary or agency capacity. The Fund
will incur distribution expenses under its Rule 12b-1 Plan. See "General
Management -- Distribution Services and Shareholder Servicing."
MINIMUM AND SUBSEQUENT INVESTMENT. The Treasury Money Market Portfolio
requires a minimum initial investment of $10 million, and a shareholder's
investment may be subject to redemption at the Portfolio's discretion if the
account balance is less than $7.5 million as a result of shareholder
redemptions. The Prime Money Market Portfolio requires a minimum initial
investment of $20 million, and a shareholder's investment in the Prime Money
Market Portfolio may be subject to redemption at the Portfolio's discretion if
the account balance is less than $15 million as a result of shareholder
redemptions. Each Portfolio reserves the right to reject any purchase order.
INVESTMENT OBJECTIVES AND POLICIES
Each Portfolio has a fundamental investment objective which may be changed
only with the approval of a majority of the Portfolio's shareholders as defined
by the 1940 Act. The Portfolios also maintain certain nonfundamental investment
policies which reflect the Portfolios' current practices and may be changed at
any time by the Investment Company's Board of Trustees upon written notice to
the shareholders. In the following section the fundamental investment objective
and nonfundamental investment policies are described in the first and second
paragraphs, respectively, for each of the Portfolios. There can be no assurance
the Portfolios will meet their investment objective.
TREASURY MONEY MARKET PORTFOLIO
The Treasury Money Market Portfolio's investment objective is to maximize
current income, to the extent consistent with the preservation of capital and
liquidity and the maintenance of a stable $1.00 per share net asset value, by
investing in obligations that are issued or guaranteed as to principal and
interest by the US Government and repurchase agreements backed by such
securities.
9
<PAGE>
The Treasury Money Market Portfolio's investment policy is to invest its
assets primarily in US Treasury bills, notes and bonds (which are direct
obligations of the US Government) and repurchase agreements backed by such
securities.
The Treasury Money Market Portfolio intends to seek a quality rating from
one or more national security rating organizations. To obtain such rating the
Portfolio may be required to adopt additional investment restrictions, which may
affect the Portfolio's performance.
PRIME MONEY MARKET PORTFOLIO
The Prime Money Market Portfolio's investment objective is to maximize
current income, to the extent consistent with the preservation of capital and
liquidity and the maintenance of a stable $1.00 per share net asset value, by
investing in dollar denominated securities.
The Prime Money Market Portfolio attempts to meet its investment objective
by investing in high quality money market instruments. Such instruments include:
(1) US Treasury bills, notes and bonds; (2) other obligations issued or
guaranteed as to interest and principal by the US Government, its agencies, or
instrumentalities; (3) instruments of US and foreign banks, including
certificates of deposit, banker's acceptances and time deposits; these
instruments may include Eurodollar Certificates of Deposit ("ECDs"), Eurodollar
Time Deposits ("ETDs") and Yankee Certificates of Deposit ("YCDs"); (4)
commercial paper of US and foreign companies; (5) corporate obligations; (6)
variable amount master demand notes; and (7) repurchase agreements. The
Portfolio may invest in restricted securities.
INVESTMENT POLICIES
The Portfolios will limit their portfolio investments to securities that, at
the time of acquisition: (1) are rated in the highest category by least two
nationally recognized statistical rating organizations ("NRSRO"); (2) by one
NRSRO, if only one rating services has rated the security; or (3) if unrated,
are of comparable quality, as determined by the Portfolios' Adviser in
accordance with procedures established by the Board of Trustees. See the
Appendix in the Statement of Additional Information for a description of a
NRSRO.
The investment policies described below reflect the Portfolios' current
practices and are not fundamental. Investment policies may be changed by the
Board of Trustees of the Investment Company without shareholder approval. For
more information on the Portfolios' Investment Policies, please see the
Statement of Additional Information. To the extent consistent with each
Portfolio's fundamental investment objective and restrictions, and unless
otherwise indicated, each Portfolio may invest in the following instruments and
may use the following investment techniques:
US GOVERNMENT OBLIGATIONS. These securities include US Treasury bills,
notes and bonds and other obligations issued by the US Government. These
securities also include securities issued by agencies or instrumentalities of
the US Government that are guaranteed as to the payment of interest and
principal by the US Government, although the Treasury Money Market Portfolio has
no present intention to invest in such securities. Examples of such agencies
include the Government National Mortgage Association, the Export-Import Bank of
the US, the General Services Administration and the Small Business
Administration.
WHEN-ISSUED TRANSACTIONS. The Portfolios may purchase securities on a
when-issued or delayed delivery basis. In these transactions, a Portfolio
purchases securities with payment and delivery
10
<PAGE>
scheduled for a future time. Until settlement, the Portfolio segregates cash and
marketable high quality debt securities equal in value to their when-issued
commitments. Between the trade and settlement dates, the Portfolio bears the
risk of any fluctuation in the value of the securities. These transactions
involve the additional risk that the other party may fail to complete the
transaction and cause the Portfolio to miss a price or yield considered
advantageous. Each Portfolio will engage in when-issued transactions only for
the purpose of acquiring portfolio securities consistent with its investment
objective and policies and not for investment leverage. No Portfolio will invest
more than 25% of its net assets in when-issued securities.
LENDING PORTFOLIO SECURITIES. Each Portfolio may lend portfolio securities
with a value of up to 33 1/3% of its total assets. Such loans may be terminated
at any time. A Portfolio will receive cash or US Treasury bills, notes and bonds
in an amount equal to at least 100% of the current market value (on a daily
marked-to-market basis) of the loaned securities plus accrued interest. In a
loan transaction, as compensation for lending it securities, a Portfolio will
receive a portion of the dividends or interest accrued on the securities held as
collateral or, in the case of cash collateral, a portion of the income from the
investment of such cash. In addition, a Portfolio will receive the amount of all
dividends, interest and other distributions on the loaned securities. However,
the borrower has the right to vote the loaned securities. A Portfolio will call
loans to vote proxies if a material issue affecting the investment is to be
voted upon. Should the borrower of the securities fail financially, a Portfolio
may experience delays in recovering the securities or exercising its rights in
the collateral. Loans are made only to borrowers that are deemed by Adviser to
be of good financial standing. In a loan transaction, a Portfolio will also bear
the risk of any decline in value of securities acquired with cash collateral. A
Portfolio will minimize this risk by limiting the investment of cash collateral
to high quality instruments of short maturity.
REPURCHASE AGREEMENTS. Each Portfolio may enter into repurchase agreements
with banks and other financial institutions, such as broker-dealers. Under a
repurchase agreement, a Portfolio purchases securities from a financial
institution that agrees to repurchase the securities at a Portfolio's original
purchase price plus interest within a specified time (normally one business
day). A Portfolio will invest no more than 10% of its net assets (taken at
current market value) in repurchase agreements maturing in more than seven days.
A Portfolio will limit repurchase transactions to those member banks of the
Federal Reserve System and broker-dealers whose creditworthiness Adviser
considers satisfactory. Should the counterparty to a transaction fail
financially, a Portfolio may encounter delay and incur costs before being able
to sell the securities. Further, the amount realized upon the sale of the
securities may be less than that necessary to fully compensate a Portfolio.
Neither Portfolio will invest more than 10% of its net assets (taken at
current market value) in repurchase agreements maturing in more than seven days.
STRIPPED SECURITIES. Each Portfolio may invest in stripped securities,
which are US Treasury bonds and notes the unmatured interest coupons of which
have been separated from the underlying obligation. Stripped securities are zero
coupon obligations that are normally issued at a discount to their face value,
and may exhibit greater price volatility than ordinary debt securities because
of the manner in which their principal securities issued by the US Treasury and
recorded in the Federal Reserve book-entry record-keeping system. The Portfolios
may invest no more than 25% of their assets in stripped securities that have
been stripped by their holder, typically a custodian bank or investment
brokerage firm. A number of securities firms and banks have stripped the
interest
11
<PAGE>
coupons and resold them in custodian receipt programs with different names such
as Treasury Income Growth Receipts ("TIGRS") and Certificates of Accrual on
Treasuries ("CATS"). The Treasury Money Market Portfolio intends to rely on the
opinions of counsel to the sellers of these certificates or other evidences of
ownership of US Treasury obligations that, for Federal tax and securities
purposes, purchasers of such certificates most likely will be deemed the
beneficial holders of the underlying US Government obligations. Privately-issued
stripped securities such as TIGRS and CATS are not themselves guaranteed by the
US Government, but the future payment of principal or interest on US Treasury
obligations which they represent is so guaranteed.
VARIABLE AND FLOATING RATE SECURITIES. A floating rate security provides
for the automatic adjustment of its interest rate whenever a specified interest
rate changes. A variable rate security provides for the automatic establishment
of a new interest rate on set dates. Interest rates on these securities are
ordinarily tied to, and are a percentage of, a widely recognized interest rate,
such as the yield on 90-day US Treasury bills or the prime rate of a specified
bank. These rates may change as often as twice daily. Generally, changes in
interest rates will have a smaller effect on the market value of variable and
floating rate securities than on the market value of comparable fixed income
obligations. Thus, investing in variable and floating rate securities generally
allows less opportunity for capital appreciation and depreciation than investing
in comparable fixed income securities.
Securities purchased by the Portfolios may include variable and floating
rate instruments, which may have a stated maturity in excess of the Portfolio's
maturity limitations but which will, except for certain US Government
obligations, permit a Portfolio to demand payment of the principal of the
instrument at least once every thirteen months upon not more than 30 days'
notice. Variable and floating rate instruments purchased by the Treasury Money
Market Portfolio will be US Government agency securities with stated maturities
of typically up to 10 years, although stated maturities of up to 30 years are
possible. Variable and floating rate instruments may include variable amount
master demand notes that permit the indebtedness thereunder to vary in addition
to providing for periodic adjustments in the interest rate. There may be no
active secondary market with respect to a particular variable or floating rate
instrument. Nevertheless, the periodic readjustments of their interest rates
tend to assure that their value to a Portfolio will approximate their par value.
Illiquid variable and floating rate instruments (instruments which are not
payable upon seven days' notice and do not have an active trading market) that
are acquired by the Portfolios are subject to a Portfolio's percentage
limitations regarding securities that are illiquid or not readily marketable.
The Portfolios' investment adviser will continuously monitor the
creditworthiness of issuers of variable and floating rate instruments in which
the Investment Company invests, and their ability to repay principal and
interest.
AFFILIATED BANK TRANSACTIONS. Pursuant to exemptive orders issued by the
SEC, the Portfolios may engage in certain transactions with banks that are, or
may be considered to be, affiliated persons of the Portfolios under the 1940
Act. Such transactions may be entered into only pursuant to procedures
established, and periodically reviewed by the Board of Trustees. These
transactions may include repurchase agreements with custodian banks; purchases,
as principal, of short-term obligations of, and repurchase agreements with, the
50 largest US banks (measured by deposits); transactions in municipal
securities; and transactions in US government securities with affiliated banks
that are primary dealers in these securities.
INTER-PORTFOLIO AND INTER-FUND BORROWING PROGRAM (PRIME MONEY MARKET
PORTFOLIO ONLY). The Prime Money Market Portfolio has received permission from
the SEC to lend money to and borrow
12
<PAGE>
money from other Portfolios advised by State Street Bank and Trust Company and
its affiliates. Inter-fund loans and borrowings normally will extend overnight,
but can have a maximum duration of seven days. The Portfolio will borrow through
the program only when costs are equal to or lower than the cost of bank loans.
The Portfolio will lend through the program only when the returns are higher
than those available at the same time from other short-term instruments (such as
repurchase agreements). The Portfolio will not lend more than 10% of its assets
to other funds and will not borrow through the program if, after doing so, the
borrowings exceed an amount equal to one-third of the current value of the
Portfolio's assets taken at market value, less liabilities other than
borrowings. Loans may be called on one day's notice and a Portfolio may have to
borrow from a bank at a higher interest rate if an inter-fund loan is called or
not renewed. Any delay in repayment to a lending fund could result in a lost
investment opportunity or additional borrowing costs.
REVERSE REPURCHASE AGREEMENTS (PRIME MONEY MARKET PORTFOLIO ONLY). The
Prime Money Market Portfolio may enter into reverse repurchase agreements under
the circumstances described in "Investment Restrictions." Under a reverse
repurchase agreement, the Portfolio sells portfolio securities to a financial
institution in return for cash in an amount equal to a percentage of the
portfolio securities' market value and agrees to repurchase the securities at a
future date at a prescribed repurchase price equal to the amount of cash
originally received plus interest on such amount. The Portfolio retains the
right to receive interest and principal payments with respect to the securities
while they are in the possession of the financial institutions. Reverse
repurchase agreements involve the risk of default by the counterparty, which may
adversely affect the Portfolio's ability to reacquire the underlying securities.
FORWARD COMMITMENTS (PRIME MONEY MARKET PORTFOLIO ONLY). The Prime Money
Market Portfolio may contract to purchase securities for a fixed price at a
future date beyond customary settlement time. When effecting such transactions,
cash or liquid high quality debt obligations held by the Portfolio of a dollar
amount sufficient to make payment for the portfolio securities to be purchased
will be segregated on the Portfolio's records at the trade date and maintained
until the transaction is settled. The failure of the other party to the
transaction to complete the transaction may cause the Portfolio to miss an
advantageous price or yield. The Portfolio bears the risk of price fluctuations
during the period between the trade and settlement dates.
SECTION 4(2) COMMERCIAL PAPER (PRIME MONEY MARKET PORTFOLIO ONLY). The
Prime Money Market Portfolio may also invest in commercial paper issued in
reliance on the so-called private placement exemption from registration afforded
by Section 4(2) of the Securities Act of 1933 ("Section 4(2) paper"). Section
4(2) paper is restricted as to disposition under the Federal securities laws and
generally is sold to institutional investors such as the Prime Money Market
Portfolio that agree that they are purchasing the paper for investment and not
with a view to public distribution. Any resale by the purchaser must be in an
exempt transaction. Section 4(2) paper normally is resold to other institutional
investors like the Portfolio through or with the assistance of the issuer or
investment dealers that make a market in Section 4(2) paper. Section 4(2) paper
will not be subject to the Investment Company's 10% limitation on illiquid
securities set forth below where the Board of Trustees of the Investment Company
(pursuant to guidelines adopted by the Board) determines that a liquid trading
market exists.
ILLIQUID SECURITIES (PRIME MONEY MARKET PORTFOLIO ONLY). The Prime Money
Market Portfolio will not invest more than 10% of its net assets in illiquid
securities or securities that are not readily
13
<PAGE>
marketable, including repurchase agreements and time deposits of more than seven
days' duration. The absence of a regular trading market for illiquid securities
imposes additional risks on investments in these securities. Illiquid securities
may be difficult to value and may often be disposed of only after considerable
expense and delay.
VARIABLE AMOUNT MASTER DEMAND NOTES (PRIME MONEY MARKET PORTFOLIO
ONLY). Variable amount master demand notes are unsecured obligations that are
redeemable upon demand and are typically unrated. These instruments are issued
pursuant to written agreements between their issuers and holders. The agreements
permit the holders to increase (subject to an agreed maximum) and the holders
and issuers to decrease the principal amount of the notes, and specify that the
rate of interest payable on the principal fluctuates according to an agreed
formula.
MORTGAGE-RELATED PASS-THROUGH SECURITIES (PRIME MONEY MARKET PORTFOLIO
ONLY). The Prime Money Market Portfolio may invest in mortgage-related
securities, including Government National Mortgage Association ("GNMA")
Certificates ("Ginnie Maes"), Federal Home Loan Mortgage Corporation ("FHLMC")
Mortgage Participation Certificates ("Freddie Macs") and Federal National
Mortgage Association ("FNMA") Guaranteed Mortgage Pass-Through Certificates
("Fannie Maes"). Mortgage pass-through certificates are mortgage-backed
securities representing undivided fractional interests in pools of
mortgage-backed loans. These loans are made by mortgage bankers, commercial
banks, savings and loan associations and other lenders. Ginnie Maes are
guaranteed by the full faith and credit of the US Government, but Freddie Macs
and Fannie Maes are not.
ZERO COUPON SECURITIES (MONEY MARKET PORTFOLIO ONLY). Zero coupon
securities are notes, bonds and debentures that: (1) do not pay current interest
and are issued at a substantial discount from par value; (2) have been stripped
of their unmatured interest coupons and receipts; or (3) pay no interest until a
stated date one or more years into the future. These securities also include
certificates representing interests in such stripped coupons and receipts.
EURODOLLAR CERTIFICATES OF DEPOSIT (ECDS), EURODOLLAR TIME DEPOSITS (ETDS)
AND YANKEE CERTIFICATES OF DEPOSIT (YCDS) (PRIME MONEY MARKET PORTFOLIO
ONLY). ECDs are US dollar denominated certificates of deposit issued by foreign
branches of domestic banks. ETDs are US dollar denominated deposits in foreign
branches of US banks and foreign banks. YCDs are US dollar denominated
certificates of deposit issued by US branches of foreign banks.
Different risks than those associated with the obligations of domestic banks
may exist for ECDs, ETDs and YCDs because the banks issuing these instruments,
or their domestic or foreign branches, are not necessarily subject to the same
regulatory requirements that apply to domestic banks, such as loan limitations,
examinations and reserve, accounting, auditing, recordkeeping and public
reporting requirements.
To the extent permitted under the 1940 Act and exemptive rules and orders
thereunder, the Portfolio may seek to achieve its investment objective by
investing solely in the shares of another investment company that has
substantially similar investment objectives and policies.
PURCHASE OF PORTFOLIO SHARES
MINIMUM INITIAL INVESTMENT AND ACCOUNT BALANCE. The Treasury Money Market
Portfolio requires a minimum initial investment of $10 million and a minimum
account balance of $7.5 million.
14
<PAGE>
The Prime Money Market Portfolio requires a minimum initial investment of $20
million and a minimum account balance of $15 million. Each Portfolio reserves
the right to reject any purchase order.
OFFERING DATES AND TIMES. Portfolio shares may be purchased on any business
day without a sales commission. All purchases must be made in US dollars.
Payments for Portfolio shares must be received by the Transfer Agent, and the
accompanying payment must be in federal funds or converted into federal funds by
the Transfer Agent before the purchase order can be accepted. Shares of the
Treasury Money Market and the Prime Money Market Portfolios purchased by orders
which are accepted: (1) prior to 3:00 p.m. Eastern time will earn the dividend
declared on the date of purchase; and (2) on or after 3:00 p.m. Eastern time
will earn the dividend determined on the next day.
ORDER AND PAYMENT PROCEDURES. There are several ways to invest in the
Portfolios. Each Portfolio requires a purchase order in good form which consists
of a completed and signed Application Form ("Application") for each new account
regardless of the investment method. For additional information, copies of forms
or questions, call the Transfer Agent at (800) 647-7327, or write to Transfer
Agent at: State Street Bank and Trust Company, P.O. Box 8317, Boston, MA
02266-8317 Attention: The Seven Seas Series Fund.
FEDERAL FUNDS WIRE. In order to assure timely processing of purchase
orders, the Investment Company strongly recommends that investors purchase
shares by wiring federal funds to State Street Bank and Trust Company as the
Transfer Agent. An investor using this purchase method should:
1. Telephone State Street Bank and Trust Company at (800) 647-7327 and
provide: (1) the investor's account registration number, address and
social security or tax identification number; (2) the name of the
Portfolio; (3) the amount being wired; (4) the name of the wiring bank;
and (5) the name and telephone number of the person at the wiring bank to
be contacted in connection with the order.
2. Instruct the wiring bank to wire federal funds to: State Street Bank and
Trust Company, Boston, MA, (ABA #0110-00028) Attention: The Seven Seas
Series Fund, Mutual Funds Service Division (DDA #9904-631-0). The wire
instructions should also include the name in which the account is
registered, the account number, and the name of the Portfolio in which to
be invested.
3. Complete the Application and forward it to the Transfer Agent at the
above address.
Orders transmitted via this purchase method will be credited when federal funds
are received by State Street, even though the investor's Application may not
arrive until later. However, an investor will not be permitted to redeem shares
from the account until a completed Application is on file.
MAIL. To purchase shares by mail, send a check or other negotiable bank
draft payable to: State Street Bank and Trust Company, P.O. Box 8317, Boston, MA
02266-8317, Attention: The Seven Seas Series Fund. Certified checks are not
necessary; however, all checks are accepted subject to collection at full face
value in United States funds and must be drawn in United States dollars on a
United States bank. Normally, checks and drafts are converted to federal funds
within two business days following receipt of the check or draft. Initial
investments should be accompanied by a completed Application, and subsequent
investments are to be accompanied by the investor's account number.
15
<PAGE>
THIRD PARTY TRANSACTIONS. Investors purchasing Portfolio shares through a
program of services offered by a financial intermediary, such as a bank,
broker-dealer, investment adviser or others, may be required by such
intermediary to pay additional fees. Investors should contact such intermediary
for information concerning what additional fees, if any, may be charged.
IN-KIND EXCHANGE OF SECURITIES. The Transfer Agent may, at its discretion,
permit investors to purchase shares through the exchange of securities they
hold. Any securities exchanged must meet the investment objective, policies and
limitations of the Portfolio, must have a readily ascertainable market value,
must be liquid and must not be subject to restrictions on resale. The market
value of any securities exchanged, plus any cash, must be at least $1 million.
Shares purchased in exchange for securities generally may not be redeemed or
exchanged until the transfer has settled -- usually within 15 days following the
purchase by exchange.
The basis of the exchange will depend upon the relative net asset value of
the shares purchased and securities exchanged. Securities accepted by the
Portfolio will be valued in the same manner as the Portfolio values its assets.
Any interest earned on the securities following their delivery to the Transfer
Agent and prior to the exchange will be considered in valuing the securities.
All interest, dividends, subscription or other rights attached to the securities
become the property of the Portfolio, along with the securities.
EXCHANGE PRIVILEGE. Subject to each Portfolio's minimum investment
requirement, investors may exchange their Portfolio shares without charge for
shares of any other investment portfolio offered by the Investment Company.
Shares are exchanged on the basis of relative net asset value per share.
Exchanges may be made: (1) by telephone if the registrations of the two accounts
are identical; or (2) in writing addressed to State Street Bank and Trust
Company, P.O. Box 8317, Boston, MA 02266-8317, Attention: The Seven Seas Series
Fund. If shares of a Portfolio were purchased by check, the shares must have
been present in an account for 10 days before an exchange is made. The exchange
privilege will only be available in states where the exchange may legally be
made, and may be modified or terminated by the Portfolios upon 60 days' notice
to shareholders.
REDEMPTION OF PORTFOLIO SHARES
Portfolio shares may be redeemed on any business day at the net asset value
next determined after the receipt of a redemption request in proper form as
described below. Payment will be made as soon as possible (but will ordinarily
not exceed seven days) and will be mailed to the shareholder's address of
record. Upon request, redemption proceeds will be wire transferred to the
shareholder's account at a domestic commercial bank that is a member of the
Federal Reserve System. Although the Investment Company does not currently
charge a fee for this service, Investment Company reserves the right to charge a
fee for the cost of wire-transferred redemptions of less than $1,000. Payment
for redemption of shares purchased by check may be withheld for up to 10 days
after the date of purchase to assure that such checks are honored. An investor
will not be permitted to redeem shares from the account until a completed
Application is on file. Shareholders who redeem shares of the Treasury Money
Market Portfolio or Prime Money Market Portfolio pursuant to a request received
by State Street prior to 3:00 p.m. Eastern time will not be entitled to that
day's dividend with respect to the shares redeemed.
16
<PAGE>
EXPEDITED REDEMPTION. Shareholders may normally redeem Portfolio shares by
telephoning State Street between 9:00 a.m. and 4:00 p.m. Eastern time at (800)
647-7327, Attention: The Seven Seas Series Fund. Shareholders using the
expedited redemption method must complete the appropriate section on the
Application. The Portfolios and the Transfer Agent will employ reasonable
procedures to confirm that instructions communicated by telephone are properly
authorized. The Portfolios and the Transfer Agent will not be liable for
executing telephone instructions that are deemed to be authorized after
following reasonable procedures. These procedures include recording telephonic
instructions, mailing to the shareholder a written confirmation of the
transaction, performing a personal identity test with private information not
likely to be known by other individuals, and restricting mailing of redemptions
to the shareholder's address of record. During periods of drastic economic or
market changes, shareholders using this method may encounter delays. In such
event, shareholders should consider using the mail redemption procedure
described below.
MAIL. Redemption requests may be made in writing directly to State Street
Bank and Trust Company, P.O. Box 8317, Boston, MA 02266-8317, Attention: The
Seven Seas Series Fund. The redemption price will be the net asset value next
determined after receipt by State Street of all required documents in good
order. Good order means that the request must include the following:
1. A letter of instruction or a stock assignment stating the Portfolio or
Portfolios out of which the shares are to be redeemed and designating
specifically the dollar amount to be redeemed signed by all owners of the
shares in the exact names in which they appear on the account, together
with a guarantee of the signature of each owner by a bank, trust company
or member of a recognized stock exchange; and
2. Such other supporting legal documents, if required by applicable law or
the Transfer Agent, in the case of estates, trusts, guardianships,
custodianships, corporations and pension and profit-sharing plans.
The Treasury Money Market Portfolio reserves the right to redeem the shares
in any account with a balance of less than $7.5 million as a result of
shareholder redemptions. The Prime Money Market Portfolio reserves the right to
redeem the shares in any account with a balance of less than $15 million as a
result of shareholder redemptions. Before shares are redeemed to close an
account, the shareholder will be notified in writing and allowed 60 days to
purchase additional shares to meet the minimum account balance.
The Treasury Money Market Portfolio may pay any portion of the redemption
amount in excess of $5 million by a distribution in kind of readily marketable
securities from the portfolio of the Portfolio in lieu of cash. The Prime Money
Market Portfolio may pay any portion of the redemption amount in excess of $10
million by a distribution in kind of readily marketable securities from the
portfolio of the Portfolio in lieu of cash. Investors will incur brokerage
charges on the sale of these portfolio securities. The Portfolios reserve the
right to suspend the right of redemption or postpone the date of payment if
emergency conditions, as specified in the 1940 Act or determined by the
Securities and Exchange Commission, should exist.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
To allow the Adviser to manage the Portfolios most effectively, investors
are strongly urged to initiate all trades (investments, exchanges or redemptions
of shares) as early in the day as possible and
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to notify the Transfer Agent at least one day in advance of transactions in
excess of $5 million. To protect each Portfolio's performance and shareholders,
the Adviser discourages frequent trading in response to short-term market
fluctuations.
Neither the Portfolios, the Distributor nor the Transfer Agent will be
responsible for any loss or expense for acting upon any telephone instructions
that are reasonably believed to be genuine. In attempting to confirm that
telephone instructions are genuine, the Transfer Agent will use such procedures
as are considered reasonable, including recording those instructions and
requesting information as to account registration (such as the name in which an
account is registered, the account number, recent transactions in the account,
the account holder's taxpayer identification number and its bank routing
information). To the extent the Transfer Agent fails to use reasonable
procedures as a basis for its belief, it and/or its service contractors may be
liable for telephone instructions that prove to be fraudulent or unauthorized.
The Portfolios, the Distributor or the Transfer Agent will be responsible for
the authenticity of terminal access instructions only if it acts with willful
misfeasance, bad faith or gross negligence.
INVESTMENT RESTRICTIONS
The Portfolios' fundamental investment restrictions described below may be
amended only with the approval of each Portfolio's shareholders and, unless
otherwise noted, apply at the time an investment is made. See the Statement of
Additional Information for other investment restrictions. Neither Portfolio
will:
1. Invest 25% or more of the value of its total assets in securities of
companies primarily engaged in any one industry (other than the US
Government, its agencies or instrumentalities). Concentration may occur
as a result of changes in the market value of portfolio securities, but
may not result from investment. With respect to the Prime Money Market
Portfolio, domestic and foreign branches of US banks and domestic
branches of foreign banks are not considered a single industry for
purposes of this restriction.
2. Borrow money, except as a temporary measure for extraordinary or
emergency purposes or to facilitate redemptions (not for leveraging or
investment), provided that borrowings do not exceed an amount equal to
33 1/3% of the current value of the Portfolio's assets taken at market
value, less liabilities other than borrowings. If at any time the
Portfolio's borrowings exceed this limitation due to a decline in net
assets, such borrowings will within three days be reduced to the extent
necessary to comply with this limitation. The Portfolio will not purchase
additional investments if borrowed funds (including reverse repurchase
agreements) exceed 5% of total assets.
3. Pledge, mortgage, or hypothecate its assets. However, the Portfolio may
pledge securities having a market value at the time of the pledge not
exceeding 33 1/3% of the value of the Portfolio's total assets to secure
permitted borrowings.
PORTFOLIO MATURITY
Each Portfolio must limit its investments to securities with remaining
maturities of 397 days or less (as determined in accordance with applicable SEC
regulations) and must maintain a dollar-weighted average maturity of 90 days or
less.
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The Portfolios will normally hold portfolio instruments to maturity, but may
dispose of them prior to maturity if the Adviser finds it advantageous or
necessary. Investing in short-term money market instruments will result in high
portfolio turnover. Since the cost of these transactions is small, high turnover
is not expected to adversely affect net asset value or yield of the Portfolios.
DIVIDENDS AND DISTRIBUTIONS
The Board of Trustees intends to declare dividends on shares of the
Portfolios from net investment income daily and have them payable as of the last
business day of each month. Distributions will be made at least annually from
net short- and long-term capital gains, if any. In most instances, distributions
will be declared and paid in mid-October, with an additional distribution
declared and paid in December, if required, for a Portfolio to avoid imposition
of a 4% federal excise tax on undistributed capital gains. The Portfolios do not
expect any material long-term capital gains or losses.
Dividends declared in December and payable to shareholders of record in such
month will be deemed to have been paid by the Portfolios and received by
shareholders on December 31 of that year if the dividend is paid prior to
February 1 of the following year.
Income dividends and capital gains distributions, if any, will be paid in
additional shares at their net asset value on the record date unless the
shareholder has elected to receive them in cash. Such election may be made by
giving 10 days' written notice to the Transfer Agent.
TAXES
Each Portfolio intends to qualify as a regulated investment company ("RIC")
under Subchapter M of the Internal Revenue Code, as amended (the "Code"). As a
RIC, the Portfolios will not be subject to federal income taxes to the extent
they distribute their net investment income and capital gain net income (capital
gains in excess of capital losses) to shareholders. The Board intends to
distribute each year substantially all of the Portfolios' net investment income
and capital gain net income. The Portfolios do not expect to be subject to any
state and local taxes.
Dividends from net investment income and distributions of net short-term
capital gains are taxable to shareholders as ordinary income under federal
income tax laws whether paid in cash or in additional shares. Distributions from
net long-term capital gains are taxable as long-term capital gains regardless of
the length of time a shareholder has held such shares and whether paid in cash
or additional shares.
The Portfolios may purchase bonds at market discount (i.e., bonds with a
purchase price less than original issue price or adjusted issue price). If such
bonds are subsequently sold at a gain then a portion of that gain equal to the
amount of market discount, which should have been accrued through the sale date,
will be taxable to shareholders as ordinary income.
Under federal law, the income derived from obligations issued by the US
Government and certain of its agencies or instrumentalities is exempt from state
income taxes. All states that tax personal income, other than Pennsylvania,
permit mutual funds to pass this tax exemption through to their shareholders.
Income from repurchase agreements where the underlying securities are US
Government obligations does not receive this exempt treatment.
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The sale of Portfolio shares by a shareholder is a taxable event and may
result in capital gain or loss. A capital gain or loss may be realized from an
ordinary redemption of shares or an exchange of shares between two mutual funds
(or two series of portfolios of a mutual Portfolio). Any loss incurred on sale
or exchange of Portfolio shares, held for one year or more, will be treated as a
long-term capital loss to the extent of capital gain dividends received with
respect to such shares.
Shareholders will be notified after each calendar year of the amount of
income dividends and net capital gains distributed and the percentage of a
Portfolio's income attributable to US Treasury and agency obligations. The
Portfolios are required to withhold a legally determined portion of all taxable
dividends, distributions and redemption proceeds payable to any noncorporate
shareholder that does not provide the Portfolios with the shareholder's correct
taxpayer identification number or certification that the shareholder is not
subject to backup withholding.
The foregoing discussion is only a summary of certain federal income tax
issues generally affecting the Portfolios and their shareholders. Circumstances
among investors may vary and each investor is encouraged to discuss investment
in the Portfolios with the investor's tax adviser.
VALUATION OF PORTFOLIO SHARES
NET ASSET VALUE PER SHARE. The Portfolios determine net asset value twice
each business day, as of 12 noon Eastern time and as of the close of the regular
trading session of the New York Stock Exchange (ordinarily 4 p.m. Eastern time).
A business day is one on which the New York Stock Exchange and Boston Federal
Reserve are open for business. Net asset value per share is computed by dividing
the current value of a Portfolio's assets, less its liabilities, by the number
of shares of the Portfolio outstanding and rounding to the nearest cent.
VALUATION OF PORTFOLIO SECURITIES. Each Portfolio seeks to maintain a $1.00
per share net asset value and, accordingly, uses the amortized cost valuation
procedure to value its portfolio instruments. The amortized cost valuation
procedure initially prices an instrument at its cost and thereafter assumes a
constant amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the instrument.
GENERAL MANAGEMENT
The Board of Trustees supervises the management, activities and affairs of
the Portfolios and has approved contracts with various financial organizations
to provide, among other services, day-to-day management required by the
Portfolios.
ADVISORY AGREEMENT. The Investment Company employs State Street to furnish
investment services to the Portfolios. State Street is one of the largest
providers of securities processing and recordkeeping services for US mutual
funds and pension funds. State Street is a wholly owned subsidiary of State
Street Boston Corporation, a publicly held bank holding company. State Street,
with over $171.3 billion (US) under management as of September 30, 1995,
provides complete global investment management services from offices in the
United States, London, Sydney, Hong Kong, Tokyo, Toronto, Luxembourg, Melbourne,
Montreal and Paris.
The Adviser, subject to Board supervision, directs the investments of each
Portfolio in accordance with the Portfolio's investment objective, policies and
restrictions. For these services, each Portfolio
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pays the Adviser a fee, calculated daily and paid monthly, that on an annual
basis is equal to .15% and .25% of the Prime Money Market Portfolio's and the
Treasury Money Market Portfolio's average daily net assets, respectively.
The Glass-Steagall Act prohibits a depository state chartered bank such as
the Adviser from engaging in the business of issuing, underwriting, selling or
distributing certain securities. The activities of the Adviser in informing its
customers of the funds, performing investment and redemption services and
providing custodian, transfer agency, shareholder servicing, dividend disbursing
and investment advisory services may raise issues under these provisions. The
Adviser has been advised by its counsel that its activities in connection with
the Portfolios are consistent with its statutory and regulatory obligations. THE
SHARES OFFERED BY THIS PROSPECTUS ARE NOT ENDORSED OR GUARANTEED BY STATE STREET
OR ITS AFFILIATES, ARE NOT DEPOSITS OR OBLIGATIONS OF STATE STREET OR ITS
AFFILIATES, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR
ANY OTHER GOVERNMENTAL AGENCY.
Changes in federal or state statutes and regulations relating to the
permissible activities of banks and their affiliates, as well as judicial or
administrative decisions or interpretations of such or future statutes and
regulations, could prevent the Adviser from continuing to perform all or a part
of the above services for its customers and/or the Portfolios. If the Adviser
were prohibited from serving the Portfolios in any of its present capacities,
the Board of Trustees would seek an alternative provider(s) of such services. In
such event, changes in the operation of the Portfolios may occur. The Adviser
does not expect that existing shareholders would suffer any adverse financial
consequences (if another adviser with equivalent abilities is found) as a result
of any of these occurrences.
State Street may from time to time have discretionary authority over
accounts which invest in Investment Company shares. These accounts include
accounts maintained for securities lending clients and accounts which permit the
use of Investment Company portfolios as short-term cash sweep investments.
Shares purchased for all discretionary accounts are held of record by State
Street, who retains voting control of such shares. As of November 30, 1995,
State Street held of record 36% of the issued and outstanding shares of
Investment Company in connection with its discretionary accounts. Consequently,
State Street may be deemed to be a controlling person of Investment Company for
purposes of the 1940 Act.
Under the Adviser's Code of Ethics, the Adviser's employees in Boston where
investment management operations are conducted are only permitted to engage in
personal securities transactions which do not involve securities which the
Adviser had recommended for purchase or sale, or purchased or sold, on behalf of
its clients. Such employees must report their personal securities transactions
quarterly and supply broker confirmations to the Adviser.
ADMINISTRATION AGREEMENT. Frank Russell Investment Management Company (the
"Administrator") serves as the Portfolios' administrator. The Administrator
currently serves as investment manager and administrator to 22 mutual funds with
assets of $7.3 billion as of October 31, 1995, and acts as administrator to 17
mutual funds, including those Portfolios described in this Prospectus, with
assets of $7.2 billion as of October 31, 1995.
Pursuant to the Administration Agreement with the Investment Company, the
Administrator will: (1) supervise all aspects of the Portfolios' operations; (2)
provide the Portfolios with administrative and clerical services, including the
maintenance of certain of the Portfolios' books and records;
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(3) arrange the periodic updating of the Portfolios' Prospectus and any
supplements thereto; (4) provide proxy materials and reports to Portfolio
shareholders and the Securities and Exchange Commission; and (5) provide the
Portfolios with adequate office space and all necessary office equipment and
services, including telephone service, heat, utilities, stationery supplies and
similar items. For these services, the Portfolios and the Investment Company's
other domestic investment portfolios pay the Administrator a combined fee that
on an annual basis is equal to the following percentages of their average
aggregate daily net assets: (1) $0 to and including $500 million -- .06%; (2)
over $500 million to and including $1 billion -- .05%; and (3) over $1 billion
- -- .03%. The percentage of the fee paid by a particular Portfolio is equal to
the percentage of average aggregate daily net assets that are attributable to
that Portfolio. The Administrator will also receive reimbursement of expenses it
incurs in connection with establishing new investment portfolios. Further, the
administration fee paid by the Investment Company will be reduced by the sum of
certain distribution related expenses (up to a maximum of 15% of the asset-based
administration fee listed above).
The Administrator also provides administrative services in connection with
the registration of shares of the Investment Company with those states in which
its shares are offered or sold. Compensation for such services is on a "time
spent" basis. The Investment Company will pay all registration, exemptive
application, renewal and related fees and reasonable out-of-pocket expenses.
Officers and employees of the Administrator and Distributor are permitted to
engage in personal securities transactions subject to restrictions and
procedures set forth in the Confidentiality Manual and Code of Ethics adopted by
the Investment Company, Administrator and Distributor. Such restrictions and
procedures include substantially all of the recommendations of the Advisory
Group of the Investment Company Institute and comply with Securities and
Exchange Commission rules and regulations.
DISTRIBUTION SERVICES AND SHAREHOLDER SERVICING ARRANGEMENTS. Pursuant to
the Distribution Agreement with the Investment Company, Russell Fund
Distributors, Inc. (the "Distributor"), a wholly owned subsidiary of the
Administrator, serves as distributor for all Portfolio shares. Under the
Distribution Agreement, the Distributor is responsible for advertising the
offering and sale of Portfolio shares and distributing copies of the
Prospectuses and reports to shareholders. Expenses incurred in connection with
these activities are paid by Advisor.
The Portfolios have adopted a distribution plan pursuant to Rule 12b-1 (the
"Plan") under the 1940 Act. The purpose of the Plan is to provide for the
payment of certain Investment Company distribution and shareholder servicing
expenses. Under the Plan, Distributor will be reimbursed in an amount up to .25%
of each Portfolio's average annual net assets for distribution-related and
shareholder servicing expenses. Payments under the Plan will be made to
Distributor to finance activity that is intended to result in the sale and
retention of Portfolio shares including (1) the costs of Prospectuses, reports
to shareholders and sales literature, (2) advertising and (3) expenses incurred
in connection with the promotion and sale of Portfolio shares, including
Distributor's overhead expenses for rent, office supplies, equipment, travel,
communication, compensation and benefits of sales personnel.
Under the Plan, the Portfolios may also enter into agreements (the "Service
Agreements") with financial institutions, which may include the Adviser (the
"Service Organizations"), to provide shareholder servicing with respect to
Portfolio shares held by or for the customers of the Service
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Organizations. Under the Service Agreements, the Service Organizations may
provide various services for such customers including: answering inquiries
regarding the Portfolios; assisting customers in changing dividend options,
account designations and addresses; performing subaccounting for such customers;
establishing and maintaining customer accounts and records; processing purchase
and redemption transactions; providing periodic statements showing customers'
account balances and integrating such statements with those of other
transactions and balances in the customers' other accounts serviced by the
Service Organizations; arranging for bank wires transferring customer's funds;
and such other services as the customers may request in connection with the
Portfolios, to the extent permitted by applicable statute, rule or regulations.
The Service Organizations may receive from each Portfolio, for shareholder
servicing, a monthly fee at a rate that shall not exceed .20% per annum of the
average daily net asset value of the Portfolio's shares owned by or for
shareholders with whom the Service Organization has a servicing relationship.
Banks and other financial service firms may be subject to various state laws,
and may be required to register as dealers pursuant to state law.
Investment Company has entered into Service Agreements with Adviser, State
Street Brokerage Services, Inc. ("SSBSI"), and Adviser's Metropolitan Division
of Commercial Banking ("Commercial Banking") to obtain the services described
above with respect to Fund shares held by or for customers. In return for these
services, Investment Company pays Adviser a fee in an amount that per annum is
equal to .025%, .175% and .175% of the average daily value of all Fund shares
held by or for customers of Adviser, SSBSI, and Commercial Banking,
respectively.
Payments to the Distributor, as well as payments to the Service
Organizations from a Portfolio, are not permitted by the Plan to exceed .25% of
the Portfolio's average net asset value per year. Any payments that are required
to be made by the Distribution Agreement and any Service Agreement but could not
be made because of the .25% limitation may be carried forward and paid in
subsequent years so long as the Plan is in effect. A Portfolio's liability for
any such expenses carried forward shall terminate at the end of two years
following the year in which the expenditure was incurred. The Service
Organizations will be responsible for prompt transmission of purchase and
redemption orders and may charge fees for their services.
PORTFOLIO EXPENSES
The Portfolios will pay all of their expenses other than those expressly
assumed by the Adviser and the Administrator. The principal expenses of the
Portfolios are the annual advisory fee payable to the Adviser and distribution
and shareholder servicing expenses. Other expenses include: (1) amortization of
deferred organizational costs; (2) taxes, if any; (3) expenses for legal,
auditing and financial accounting services; (4) expense of preparing (including
typesetting, printing and mailing) reports, prospectuses and notices to existing
shareholders; (5) administrative fees; (6) custodian fees; (7) expense of
issuing and redeeming Portfolio shares; (8) the cost of registering Portfolio
shares under federal and state laws; (9) shareholder meetings and related proxy
solicitation expenses; (10) the fees, travel expenses and other out-of-pocket
expenses of Trustees who are not affiliated with Adviser or any of its
affiliates; (11) insurance, interest, brokerage and litigation costs; (12)
extraordinary expenses as may arise, including expenses incurred in connection
with litigation proceedings and claims and the legal obligations of Investment
Company to indemnify its Trustees, officers, employees, shareholders,
distributors and agents; and (13) other expenses properly payable by the
Portfolios.
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PERFORMANCE CALCULATIONS
From time to time the Portfolios may advertise their yield and effective
yield. The yield of each Portfolio refers to the income generated by an
investment in the Portfolio over a seven-day period (which period will be stated
in the advertisement). This income is then annualized. That is, the amount of
income generated by the investment during that week is assumed to be generated
each week over a 52-week period and is shown as a percentage of the investment.
The effective yield is calculated similarly but, when annualized, the income
earned by an investment in each Portfolio is assumed to be reinvested. The
effective yield will be slightly higher than the yield because of the
compounding effect of this assumed reinvestment.
From time to time, the Portfolios may also report yield and effective yield
as calculated over a one-month period (which period will also be stated in the
advertisement). These one-month periods will be annualized using the same method
as described above for yields calculated on the basis of seven-day periods. From
time to time, yields calculated on a monthly basis may also be linked to provide
yield figures for periods greater than one month.
From time to time, the Portfolios may advertise their total return. The
total return of a Portfolio is the average annual compounded rate of return from
a hypothetical investment in the Portfolio over one-, five- and ten-year periods
or for the life of the Portfolio (as stated in the advertisement), assuming the
reinvestment of all dividends and capital gains distributions.
Comparative performance information may be used from time to time in
advertising or marketing Portfolio shares, including data from Lipper Analytical
Services, Inc., Donoghue's Money Fund Report, the Bank Rate Monitor, Wall Street
Journal Score Card or other industry publications, business periodicals, rating
services and market indices. The Portfolios may also advertise nonstandardized
performance information which is for periods in addition to those required to be
presented.
Quoted yields, returns and other performance figures are based on historical
earnings and are not indications of future performance.
DESCRIPTION OF THE PORTFOLIO
PORTFOLIO ORGANIZATION. Treasury Money Market and Prime Money Market are
portfolios of the Investment Company. The Investment Company is a registered,
open management investment company that was organized as a Massachusetts
business trust on October 3, 1987, and operates under a First Amended and
Restated Master Trust Agreement dated October 13, 1993, as amended. he
Investment Company issues shares divisible into an unlimited number of series
(or funds), each of which is a separate trust under Massachusetts law.
Each Portfolio share represents an equal proportionate interest in a
particular Portfolio, has a par value of $.001 per share and is entitled to such
relative rights and preferences and dividends and distributions earned on assets
of the Portfolio as may be declared by the Board of Trustees. Portfolio shares
are fully paid and nonassessable by the Investment Company and have no
preemptive rights.
Each Portfolio share has one vote. There are no cumulative voting rights.
There is no annual meeting of shareholders, but special meetings may be held. On
any matter that affects only a
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particular investment portfolio, only shareholders of that Portfolio may vote
unless otherwise required by the 1940 Act or the Master Trust Agreement. The
Trustees hold office for the life of the Trust. A Trustee may resign or retire,
and may be removed at any time by a vote of two-thirds of Investment Company
shares or by a vote of a majority of the Trustees. The Trustees shall promptly
call and give notice of a meeting of shareholders for the purpose of voting upon
removal of any Trustee when requested to do so in writing by holders of not less
than 10% of the shares then outstanding. A vacancy on the Board of Trustees may
be filled by the vote of a majority of the remaining Trustees, provided that
immediately thereafter at least two-thirds of the Trustees have been elected by
shareholders.
The Investment Company does not issue share certificates for Portfolio
shares. The Transfer Agent sends monthly statements to Portfolio shareholders.
Each statement also sets forth the balance of shares held in the account and
describes any activity in the account during the period covered by the
statement.
As of November 30, 1995, Securities Lending SL01, a department of State
Street Bank and Trust Company, owned of record 64% of the issued and outstanding
shares of the Prime Money Market Portfolio; and Short Term Investment Fund FC02,
a fund of State Street Bank and Trust Company, owned of record 75% of the issued
and outstanding shares of the Treasury Money Market Portfolio. Each is therefore
deemed to be a controlling person of the respective Portfolio for purposes of
the 1940 Act.
CUSTODIAN, TRANSFER AGENT AND INDEPENDENT ACCOUNTANTS. State Street Bank
and Trust Company holds all portfolio securities and cash assets of the
Portfolios, provides portfolio recordkeeping services and serves as the
Portfolios' transfer agent (the "Transfer Agent") and custodian (the
"Custodian"). State Street is authorized to deposit securities in securities
depositories or to use the services of subcustodians. State Street has no
responsibility for the supervision and management of the Portfolios except as
investment adviser. Coopers & Lybrand L.L.P., Boston, Massachusetts, is the
Investment Company's independent accountants.
REPORTS TO SHAREHOLDERS AND SHAREHOLDER INQUIRIES. Shareholders will
receive unaudited semiannual financial statements and annual financial
statements audited by the Investment Company's independent accountants.
Shareholder inquiries regarding the Prospectus and financial statements may be
made by calling the Distributor at (617) 654-6089. Inquiries regarding
shareholder balances may be made by calling the Transfer Agent at (800)
647-7327.
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THE SEVEN SEAS SERIES FUND
TWO INTERNATIONAL PLACE, 35TH FLOOR
BOSTON, MASSACHUSETTS 02110
INVESTMENT ADVISER, CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
DISTRIBUTOR
Russell Fund Distributors, Inc.
Two International Place, 35th Floor
Boston, Massachusetts 02110
ADMINISTRATOR
Frank Russell Investment Management Company
909 A Street
Tacoma, Washington 98402
LEGAL COUNSEL
Goodwin, Procter & Hoar
Exchange Place
Boston, Massachusetts 02109
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
<PAGE>
Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
THE SEVEN SEAS SERIES FUND
TWO INTERNATIONAL PLACE, 35TH FLOOR
BOSTON, MASSACHUSETTS 02110
(617) 654-6089
GROWTH AND INCOME FUND
The Seven Seas Series Fund is a registered, open-end investment company with
multiple portfolios, each of which is a mutual fund. This Prospectus describes
and offers shares of beneficial interest in one such mutual fund, The Seven Seas
Series Growth and Income Fund (referred to in this Prospectus as the "Growth and
Income Fund" or the "Fund"). The Fund seeks to achieve its investment objective
of long-term capital growth, current income and growth of income primarily
through investments in equity securities. The Fund's shares are offered without
sales commissions. However, the Fund pays certain distribution expenses under
its Rule 12b-1 plan.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SHARES IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, STATE STREET BANK AND TRUST COMPANY, AND SHARES ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER AGENCY, AND INVOLVE INVESTMENT RISKS INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. Please read and retain this
document for future reference. Additional information about the Fund has been
filed with the Securities and Exchange Commission in a Statement of Additional
Information dated December 29, 1995. The Statement of Additional Information is
incorporated herein by reference and is available without charge from
Distributor at its address noted below or by calling (617) 654-6089.
<TABLE>
<S> <C> <C>
INVESTMENT ADVISER, CUSTODIAN DISTRIBUTOR:
AND TRANSFER AGENT: Russell Fund Distributors, ADMINISTRATOR:
State Street Bank and Trust Inc. Frank Russell Investment
Company Two International Place, Management Company
225 Franklin Street 35th Floor 909 A Street
Boston, Massachusetts 02110 Boston, Massachusetts 02110 Tacoma, Washington 98402
(617) 654-4721 (617) 654-6089 (206) 627-7001
</TABLE>
PROSPECTUS DATED DECEMBER 29, 1995
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Fund Operating Expenses.................................................................................... 3
Financial Highlights....................................................................................... 4
The Seven Seas Series Fund................................................................................. 5
Manner of Offering......................................................................................... 5
Investment Objective, Policies and Restrictions............................................................ 5
Certain Risk Factors....................................................................................... 10
Portfolio Turnover......................................................................................... 10
Dividends and Distributions................................................................................ 11
Taxes...................................................................................................... 11
Valuation of Fund Shares................................................................................... 12
Purchase of Fund Shares.................................................................................... 13
Redemption of Fund Shares.................................................................................. 14
General Management......................................................................................... 15
Fund Expenses.............................................................................................. 18
Performance Calculations................................................................................... 19
Additional Information..................................................................................... 19
</TABLE>
2
<PAGE>
FUND OPERATING EXPENSES
THE SEVEN SEAS SERIES GROWTH AND INCOME FUND
The following table is intended to assist the investor in understanding the
various costs and expenses that an investor in the Growth and Income Fund will
incur directly or indirectly. THE EXAMPLES PROVIDED IN THE TABLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. Actual expenses may be
greater or less than those shown. For additional information, see "General
Management."
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
- ------------------------------
Sales Load Imposed on Purchases......................................................................................... None
Sales Load Imposed on Reinvested Dividends.............................................................................. None
Deferred Sales Load..................................................................................................... None
Redemption Fees......................................................................................................... None
Exchange Fee............................................................................................................ None
ANNUAL FUND OPERATING EXPENSES:
- ------------------------------
(as a percentage of average daily net assets)
Advisory Fees (1)....................................................................................................... .50%
12b-1 Fees (1)(2)....................................................................................................... .08
Other Expenses (1)...................................................................................................... .37
----
Total Operating Expenses After Reimbursement (1)(3)..................................................................... .95%
----
----
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
EXAMPLES:
You would pay the following expenses on a $1,000 investment, assuming (i) 5%
annual return and (ii) redemption at the end of each time period:........... $ 10 $ 30 $ 53 $ 117
--- --- --- -----
--- --- --- -----
</TABLE>
- ------------------------
(1) Adviser has agreed to reimburse the Fund for all expenses in excess of .95%
of average daily net assets on an annual basis. The gross annual expenses
before reimbursement of Advisory, 12b-1 and Other Expenses would be .85%,
.14% and .62% of average daily net assets, respectively. The total operating
expenses of the Fund absent reimbursement would be 1.61% of average daily
net assets on an annual basis. This reimbursement will continue until such
time as the Board of Trustees agrees to its modification or elimination but
is anticipated to be in effect for the current fiscal year.
(2) Rule 12b-1 fees may include expenses paid for shareholder servicing
activities.
(3) The expense information in the table has been restated to reflect current
fees. Investors purchasing Fund shares through a financial intermediary,
such as a bank or an investment adviser, may also be required to pay
additional fees for services provided by the intermediary. Such investors
should contact the intermediary for information concerning what additional
fees, if any, will be charged.
Long-term shareholders of the Fund may pay more in Rule 12b-1 fees than the
economic equivalent of the maximum front-end sales charges permitted by the
National Association of Securities Dealers, Inc.
3
<PAGE>
FINANCIAL HIGHLIGHTS
THE SEVEN SEAS SERIES GROWTH AND INCOME FUND
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand L.L.P., the Fund's independent
accountants. The table includes selected data for a share outstanding throughout
each fiscal year or period ended August 31, and other performance information
derived from the financial statements. The table appears in the Fund's Annual
Report and should be read in conjunction with the Fund's financial statements
and related notes, which are incorporated by reference in the Statement of
Additional Information and which appear, along with the report of Coopers &
Lybrand L.L.P., in the Fund's Annual Report to Shareholders. More detailed
information concerning the Fund's performance, including a complete portfolio
listing and audited financial statements, is available in the Fund's Annual
Report, which may be obtained without charge by writing or calling the
Distributor.
<TABLE>
<CAPTION>
1995 1994++
--------- ---------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR......................................................... $ 10.51 $ 10.00
--------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................................................................... .18 .15
Net realized and unrealized gain (loss) on investments................................... 1.44 .47
--------- ---------
Total From Investment Operations......................................................... 1.62 .62
--------- ---------
LESS DISTRIBUTIONS:
Net investment income.................................................................... (.18) (.11)
--------- ---------
NET ASSET VALUE, END OF YEAR............................................................... $ 11.95 $ 10.51
--------- ---------
--------- ---------
TOTAL RETURN (%)........................................................................... 15.66 6.23
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average daily net assets..................................... .95 .95
Operating expenses, gross, to average daily net assets................................... 1.61 1.44
Net investment income to average daily net assets........................................ 1.72 1.75
Portfolio turnover....................................................................... 39.32 36.48
Net assets, end of year ($000 omitted)................................................... 43,884 26,747
Per share amount of fees waived ($ omitted).............................................. -- .0002
Per share amount of fees reimbursed by Adviser ($ omitted)............................... .0685 .0418
</TABLE>
- ------------------------
++ For the period September 1, 1993 (commencement of operations) to August 31,
1994.
4
<PAGE>
THE SEVEN SEAS SERIES FUND
The Seven Seas Series Fund ("Investment Company") is an open-end management
investment company that is organized as a Massachusetts business trust. In
addition, each series of the Investment Company is diversified as defined in the
Investment Company Act of 1940, as amended ("1940 Act"). As a "series" company,
Investment Company is authorized to issue an unlimited number of shares
evidencing beneficial interests in different investment portfolios. Through this
Prospectus, Investment Company offers shares in one such portfolio, the Seven
Seas Series Growth and Income Fund (the "Fund" or "Growth and Income Fund").
State Street Bank and Trust Company (the "Adviser" or "State Street") serves as
the investment adviser for the Fund.
MANNER OF OFFERING
DISTRIBUTION AND ELIGIBLE INVESTORS. Shares of the Fund are offered without
a sales commission by Russell Fund Distributors, Inc., Investment Company's
distributor, to US and foreign institutional and retail investors which invest
for their own account or in a fiduciary or agency capacity. The Fund will incur
distribution expenses under its Rule 12b-1 plan. See "General Management --
Distribution Services and Shareholder Servicing Arrangements."
MINIMUM AND SUBSEQUENT INVESTMENT. The Fund requires a minimum initial
investment of $1,000. A shareholder's investment in the Fund may be subject to
redemption at the Fund's discretion if the account balance is less than $500 as
a result of shareholder redemptions. The Fund reserves the right to reject any
purchase order.
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
The Fund's investment objective is to achieve long-term capital growth,
current income and growth of income primarily through investments in equity
securities. This investment objective may be changed only with the approval of a
majority of the Fund's shareholders as defined by the 1940 Act. There can be no
assurance that the Fund will meet its investment objective.
The Fund will invest at least 65% of its total assets in equity securities.
The Fund may invest in common and preferred stock, convertible securities,
rights and warrants. The Fund will invest in publicly traded companies that are
generally well-established, but may invest up to 5% of its total assets in
securities of any issuer which has been in operation for less than three years.
The balance of the Fund's assets may be invested in American Depository Receipts
(ADRs), corporate bonds, debentures and notes and other debt securities. Debt
securities may include obligations of foreign issuers that are US-dollar
denominated. Except for convertible securities, any debt securities purchased
will have a dollar-weighted average maturity of 10 years or less. The Fund will
invest in investment grade bonds rated as such by an independent rating agency
or if unrated, of comparable quality as determined by the Fund's Adviser. In
addition, the Fund may invest temporarily for defensive purposes, without
limitation, in certain short-term fixed income securities. Such securities may
be used to invest uncommitted cash balances or to maintain liquidity to meet
shareholder redemptions. See "Investment Policies -- Cash Reserves."
5
<PAGE>
The Fund's goal is to provide greater long-term returns than the overall US
equity market without incurring greater risks than those commonly associated
with investments in equity securities. For this purpose, the Fund will measure
its performance against the Standard & Poor's 500 Composite Stock Price Index
(the "S&P 500 Index").
The Fund's portfolio strategy combines market economics with fundamental
research. The Adviser begins by assessing current economic conditions and
forecasting economic expectations for the coming months. The industry sectors of
the S&P 500 Index are examined to determine the sector's market capitalized
weighting and to identify the performance of each sector relative to the Index
as a whole. A balance is determined for the portfolio, giving greater weight to
market sectors that are expected to outperform the overall market. Stocks are
then selected for each sector of the Fund's portfolio based on the issuer's
industry classification, the stock's historical sensitivity to changing economic
events and conditions and an assessment of the stock's current valuation.
INVESTMENT POLICIES
The investment policies described below reflect the Fund's current
practices, are not fundamental and may be changed by the Board of Trustees of
Investment Company without shareholder approval. For more information on the
Fund's Investment Policies, see the Statement of Additional Information. To the
extent consistent with the Fund's fundamental investment objective and
restrictions, the Fund may invest in the following instruments and may use the
following investment techniques:
US GOVERNMENT SECURITIES. US Government securities include US Treasury
bills, notes and bonds and other obligations issued or guaranteed as to interest
and principal by the US Government, its agencies or instrumentalities.
Obligations issued or guaranteed as to interest and principal by the US
Government, its agencies or instrumentalities include securities that are
supported by the full faith and credit of the United States Treasury, securities
that are supported by the right of the issuer to borrow from the United States
Treasury, discretionary authority of the US Government agency or
instrumentality, and securities supported solely by the creditworthiness of the
issuer.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
banks and other financial institutions, such as broker-dealers. Under a
repurchase agreement, a Fund purchases securities from a financial institution
that agrees to repurchase the securities at the Fund's original purchase price
plus interest within a specified time (normally one business day). The Fund will
invest no more than 10% of its net assets (taken at current market value) in
repurchase agreements maturing in more than seven days. The Fund will limit
repurchase transactions to those member banks of the Federal Reserve System and
broker-dealers whose creditworthiness Adviser considers satisfactory. Should the
counterparty to a transaction fail financially, the Fund may encounter delay and
incur costs before being able to sell the securities. Further, the amount
realized upon the sale of the securities may be less than that necessary to
fully compensate the Fund.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreements under the circumstances described in "Investment Restrictions." Under
a reverse repurchase agreement, the Fund sells portfolio securities to a
financial institution in return for cash in an amount equal to a percentage of
the portfolio securities' market value and agrees to repurchase the securities
at a future date at a prescribed repurchase price equal to the amount of cash
originally received plus interest on such amount. The Fund retains the right to
receive interest and principal payments with
6
<PAGE>
respect to the securities while they are in the possession of the financial
institutions. Reverse repurchase agreements involve the risk of default by the
counterparty, which may adversely affect the Fund's ability to reacquire the
underlying securities.
FORWARD COMMITMENTS. The Fund may contract to purchase securities for a
fixed price at a future date beyond customary settlement time. When effecting
such transactions, cash or liquid high quality debt obligations held by the Fund
of a dollar amount sufficient to make payment for the portfolio securities to be
purchased will be segregated on the Fund's records at the trade date and
maintained until the transaction is settled. The failure of the other party to
the transaction to complete the transaction may cause the Fund to miss an
advantageous price or yield. The Fund bears the risk of price fluctuations
during the period between the trade and settlement dates.
WHEN-ISSUED TRANSACTIONS. The Fund may purchase securities on a when-issued
or delayed delivery basis. In these transactions, the Fund purchases securities
with payment and delivery scheduled for a future time. Until settlement, the
Fund segregates cash and marketable high quality debt securities equal in value
to its when-issued commitments. Between the trade and settlement dates, the Fund
bears the risk of any fluctuations in the value of the securities. These
transactions involve the additional risk that the other party may fail to
complete the transaction and cause the Fund to miss a price or yield considered
advantageous. The Fund will engage in when-issued transactions only for the
purpose of acquiring portfolio securities consistent with its investment
objective and policies and not for investment leverage. The Fund will not invest
more than 25% of its net assets in when-issued securities.
ILLIQUID SECURITIES. The Fund will not invest more than 15% of its net
assets in illiquid securities or securities that are not readily marketable,
including repurchase agreements and time deposits of more than seven days'
duration. The absence of a regular trading market for illiquid securities
imposes additional risks on investment in these securities. Illiquid securities
may be difficult to value and may often be disposed of only after considerable
expense and delay. In addition, the Fund will not invest more than 10% of its
net assets in securities of issuers which may not be sold to the public without
registration under the Securities Act of 1933.
VARIABLE AMOUNT MASTER DEMAND NOTES. Variable amount master demand notes
are unsecured obligations that are redeemable upon demand and are typically
unrated. These instruments are issued pursuant to written agreements between the
issuers and the holders. The agreements permit the holders to increase (subject
to an agreed maximum), and the holders and issuers to decrease, the principal
amount of the notes, and specify that the rate of interest payable on the
principal fluctuates according to an agreed formula.
FUTURES CONTRACTS AND OPTIONS ON FUTURES. For hedging purposes, including
protecting the price or interest rate of a security the Fund intends to buy, the
Fund may enter into futures contracts that relate to securities in which it may
directly invest and indices comprised of such securities and may purchase and
write call and put options on such contracts.
A financial futures contract is a contract to buy or sell a specified
quantity of financial instruments such as US Treasury bills, notes and bonds,
commercial paper and bank certificates of deposit or the cash value of a
financial instrument index at a specified future date at a price agreed upon
when the contract is made. A stock index futures contract is a contract to buy
or sell specified units of a stock index at a specified date at a price agreed
upon when the contract is made. The value of a unit is based
7
<PAGE>
on the current value of the stock index. Under such contracts, no delivery of
the actual securities making up the index takes place. Rather, upon expiration
of the contract, settlement is made by exchanging cash in an amount equal to the
difference between the contract price and the closing price of the index at
expiration, net of variation margin previously paid.
Substantially all futures contracts are closed out before settlement date or
called for cash settlement. A futures contract is closed out by buying or
selling an identical offsetting futures contract. Upon entering into a futures
contract, the Fund is required to deposit an initial margin with Custodian for
the benefit of the futures broker. The initial margin serves as a "good faith"
deposit that the Fund will honor its futures commitment. Subsequent payments
(called "variation margin") to and from the broker are made on a daily basis as
the price of the underlying investment fluctuates.
Options on futures contracts give the purchaser the right to assume a
position at a specified price in a futures contract at any time before
expiration of the option contract.
When trading futures contracts, the Fund will not commit more than 5% of the
market value of its total assets to initial margin deposits on futures and
premiums paid for options on futures.
OPTIONS ON SECURITIES AND SECURITIES INDICES. The Fund may write and
purchase covered put and call options on securities in which it may directly
invest. Option transactions of the Fund will be conducted so that the total
amount paid on premiums for all put and call options outstanding will not exceed
5% of the value of the Fund's total assets. Further, the Fund will not write a
put or call option or combination thereof if, as a result, the aggregate value
of all securities or collateral used to cover all such options outstanding would
exceed 25% of the value of the Fund's total assets.
The Fund may purchase or sell options on securities indices that are
comprised of securities in which it may directly invest, subject to the
limitations set forth above and provided such options are traded on a national
securities exchange or in the over-the-counter market. Options on securities
indices are similar to options on securities except there is no transfer of a
security and settlement is in cash. A call option on a securities index grants
the purchaser of the call, for a premium paid to the seller, the right to
receive in cash an amount equal to the difference between the closing price of
the index and the exercise price of the option times a multiplier established by
the exchange upon which the option is traded.
LENDING PORTFOLIO SECURITIES. he Fund may lend portfolio securities with a
value of up to 33 1/3% of its total assets. Such loans may be terminated at any
time. The Fund will receive cash or US Treasury bills, notes and bonds in an
amount equal to at least 100% of the current market value (on a daily
marked-to-market basis) of the loaned securities plus accrued interest. In a
loan transaction, as compensation for lending it securities, the Fund will
receive a portion of the dividends or interest accrued on the securities held as
collateral or, in the case of cash collateral, a portion of the income from the
investment of such cash. In addition, the Fund will receive the amount of all
dividends, interest and other distributions on the loaned securities. However,
the borrower has the right to vote the loaned securities. The Fund will call
loans to vote proxies if a material issue affecting the investment is to be
voted upon. Should the borrower of the securities fail financially, the Fund may
experience delays in recovering the securities or exercising its rights in the
collateral. Loans are made only to borrowers that are deemed by Adviser to be of
good financial standing. In a loan transaction,
8
<PAGE>
the Fund will also bear the risk of any decline in value of securities acquired
with cash collateral. The Fund will minimize this risk by limiting the
investment of cash collateral to high quality instruments of short maturity.
WARRANTS. The Fund may invest in warrants which entitle the holder to buy
equity securities at a specific price for a specific period of time. Warrants
may be considered more speculative than certain other types of investments in
that they do not entitle a holder to dividends or voting rights with respect to
the securities which may be purchased nor do they represent any rights in the
assets of the issuing company. Also, the value of the warrant does not
necessarily change with the value of the underlying securities, and a warrant
ceases to have value if it is not exercised prior to the expiration date. The
Fund will not invest more than 5% of the value of its net assets in warrants, or
more than 2% of net assets in warrants which are not listed on the New York or
American Stock Exchange.
AMERICAN DEPOSITORY RECEIPTS (ADRS). The Fund may invest in ADRs under
certain circumstances as an alternative to directly investing in foreign
securities. Generally, ADRs, in registered form, are designed for use in the US
securities markets. ADRs are receipts typically issued by a US bank or trust
company evidencing ownership of the underlying securities. ADRs represent the
right to receive securities of foreign issuers deposited in a domestic bank or a
correspondent bank. ADRs do not eliminate the risk inherent in investing in the
securities of foreign issuers. However, by investing in ADRs rather than
directly in a foreign issuer's stock, the Fund can avoid currency risks during
the settlement period for either purchases or sales. In general, there is a
large liquid market in the US for many ADRs. The information available for ADRs
is subject to the accounting, auditing and financial reporting standards of the
domestic market or exchange on which they are traded, which standards are more
uniform and more exacting than those to which many foreign issuers are subject.
For a discussion of the risks associated with the use of ADRs, see "Certain Risk
Factors -- Foreign Investments."
CASH RESERVES. For defensive purposes, the Fund may temporarily and without
limitation concentrate its portfolio in high quality short-term fixed income
securities. These securities include obligations issued or guaranteed as to
principal and interest by the US Government, its agencies or instrumentalities
and repurchase agreements collateralized by these obligations, commercial paper,
bank certificates of deposit, bankers' acceptances and time deposits.
To the extent permitted under the 1940 Act and exemptive rules and orders
thereunder, the Fund may seek to achieve its investment objective by investing
solely in the shares of another investment company that has substantially
similar investment objectives and policies.
INVESTMENT RESTRICTIONS
The Fund has fundamental investment restrictions, which may be changed only
with the approval of a majority of the Fund's shareholders as defined in the
1940 Act. A more detailed discussion
9
<PAGE>
of the Fund's investment restrictions and investment policies appears in the
Statement of Additional Information. Unless otherwise noted, the fundamental
restrictions apply at the time an investment is made. The Fund may not:
1. Invest 25% or more of the value of its total assets in securities of
companies primarily engaged in any one industry (other than the US
Government, its agencies or instrumentalities). Concentration may occur
as a result of changes in the market value of portfolio securities, but
may not result from investment.
2. Borrow money (including reverse repurchase agreements), except as a
temporary measure for extraordinary or emergency purposes or to
facilitate redemptions (not for leveraging or investment), provided that
borrowings do not exceed an amount equal to 33 1/3% of the current value
of the Fund's assets taken at market value, less liabilities other than
borrowings. If at any time the Fund's borrowings exceed this limitation
due to a decline in net assets, such borrowings will within three days be
reduced to the extent necessary to comply with this limitation. The Fund
will not purchase additional investments if borrowed funds (including
reverse repurchase agreements) exceed 5% of total assets.
3. Pledge, mortgage, or hypothecate its assets. However, the Fund may pledge
securities having a market value at the time of the pledge not exceeding
33 1/3% of the value of the Fund's total assets to secure permitted
borrowings.
CERTAIN RISK FACTORS
FUTURES AND OPTIONS CONTRACTS. There are certain investment risks in using
futures contracts and options as a hedging technique. Such risks may include:
(1) the inability to close out a futures contract or option caused by the
nonexistence of a liquid secondary market; and (2) an imperfect correlation
between price movements of the futures contracts or option with price movements
of the portfolio securities or securities index subject to the hedge.
FOREIGN INVESTMENTS. Investment in securities of non-US issuers and
securities denominated in foreign currencies involve investment risks that are
different from those of US issuers, including: uncertain future political,
diplomatic and economic developments; possible imposition of exchange controls
or other governmental restrictions; less publicly available information; lack of
uniform accounting, auditing and financial reporting standards, practices and
requirements; lower trading volume, less liquidity and more volatility for
securities; less government regulation of securities exchanges, brokers and
listed companies; political or social instability; and the possibility of
expropriation or confiscatory taxation, each of which could adversely affect
investments in such securities. ADRs are subject to all of the above risks,
except the imposition of exchange controls, and currency fluctuations during the
settlement period.
PORTFOLIO TURNOVER
The portfolio turnover rate cannot be predicted, but it is anticipated that
the Fund's annual turnover rate generally will not exceed 80%. A high turnover
rate (over 100%) will increase transaction expenses, which will adversely affect
a mutual fund's performance.
10
<PAGE>
The Fund may effect portfolio transactions with or through State Street
Brokerage Services, Inc., an affiliate of the Adviser, when the Adviser
determines that the Fund will receive competitive execution, price and
commissions.
DIVIDENDS AND DISTRIBUTIONS
The Board of Trustees intends to declare and pay dividends on Fund shares
quarterly from net investment income. The Board of Trustees intends to declare
distributions annually from net capital gains, if any, generally in mid-October.
An additional distribution may be declared and paid in December, if required,
for the Fund to avoid imposition of a 4% federal excise tax on undistributed
capital gains.
Dividends declared in October, November or December and payable to
shareholders of record in such months will be deemed to have been paid by the
Fund and received by shareholders on December 31 of that year if the dividend is
paid prior to February 1 of the following year.
Income dividends and capital gains distributions will be paid in additional
shares at their net asset value on the record date unless the shareholder has
elected to receive them in cash. Such election may be made by giving 10 days'
written notice to Transfer Agent.
Any dividend or capital gain distribution paid by the Fund shortly after a
purchase of shares will reduce the per share net asset value of the Fund by the
amount of the dividend or distribution. In effect, the payment will represent a
return of capital to the shareholder. However, the shareholder will be subject
to taxes with respect to such dividend or distribution.
TAXES
The Fund intends to qualify as a "regulated investment company" ("RIC")
under Subchapter M of the Internal Revenue Code, as amended (the "Code"). As a
RIC, the Fund will not be subject to federal income taxes to the extent it
distributes its net investment income and capital gain net income (capital gains
in excess of capital losses) to shareholders. The Board intends to distribute
each year substantially all of the Fund's net investment income and capital gain
net income.
Dividends from net investment income and distributions of net short-term
capital gains are taxable to shareholders as ordinary income under federal
income tax laws whether paid in cash or in additional shares. Distributions from
net long-term capital gains are taxable as long-term capital gains regardless of
the length of time a shareholder has held such shares and whether paid in cash
or additional shares.
The Fund may purchase bonds at market discount (i.e., bonds with a spurchase
price less than original issue price or adjusted issue price). If such bonds are
subsequently sold at a gain then a portion of that gain equal to the amount of
market discount, which should have been accrued through the sale date, will be
taxable to shareholders as ordinary income.
Dividends and distributions may also be subject to state or local taxes.
Depending on the state tax rules pertaining to a shareholder, a portion of the
dividends paid by the Fund, attributable to direct obligations of the US
Treasury and certain agencies, may be exempt from state and local taxes.
11
<PAGE>
The sale of Fund shares by a shareholder is a taxable event and may result
in capital gain or loss. A capital gain or loss may be realized from an ordinary
redemption of shares or an exchange of shares between two mutual funds (or two
series or portfolios of a mutual fund). Any loss incurred on the sale or
exchange of Fund shares held for one year or more will be treated as a long-term
capital loss to the extent of capital gain dividends received with respect to
such shares.
Shareholders will be notified after each calendar year of the amount of
income dividends and net capital gains distributed and the percentage of the
Fund's income attributable to US Treasury and agency obligations. The Fund is
required to withhold a legally determined portion of all taxable dividends,
distributions and redemption proceeds payable to any noncorporate shareholder
that does not provide the Fund with the shareholder's correct taxpayer
identification number or certification that the shareholder is not subject to
backup withholding.
The foregoing discussion is only a summary of certain federal income tax
issues generally affecting the Fund and its shareholders. Circumstances among
investors may vary and each investor is encouraged to discuss investment in the
Fund with the investor's tax adviser.
VALUATION OF FUND SHARES
NET ASSET VALUE PER SHARE. The Fund determines net asset value per share
once each business day as of the close of the regular trading session of the New
York Stock Exchange (ordinarily 4 p.m. Eastern time). A business day is one on
which the New York Stock Exchange is open for business. Net asset value per
share is computed by dividing the current value of the Fund's assets, less its
liabilities, by the number of shares of the Fund outstanding and rounding to the
nearest cent.
VALUATION OF FUND SECURITIES. With the exceptions noted below, the Fund
values portfolio securities at market value. This generally means that equity
and fixed income securities listed and traded principally on any national
securities exchange are valued on the basis of the last sale price or, lacking
any sales, at the closing bid price, on the primary exchange on which the
security is traded. United States equity and fixed income securities traded
principally over-the-counter and options are valued on the basis of the last
reported bid price. Futures contracts are valued on the basis of the last
reported sale price.
Because many fixed income securities do not trade each day, last sale or bid
prices are frequently not available. Fixed income securities therefore may be
valued using prices provided by a pricing service when such prices are
determined by Custodian to reflect the market value of such securities.
International securities traded on a national securities exchange are valued
on the basis of the last sale price. International securities traded
over-the-counter are valued on the basis of best bid or official bid, as
determined by the relevant securities exchange. In the absence of a last sale,
best or official bid price, such securities may be valued on the basis of prices
provided by a pricing service if those prices are believed to reflect the market
value of such securities.
Securities maturing within 60 days of the valuation date are valued at
"amortized cost" unless the Board determines that amortized cost does not
represent market value. The "amortized cost" valuation procedure initially
prices an instrument at its cost and thereafter assumes a constant amortization
to maturity of any discount or premium, regardless of the impact of fluctuating
interest
12
<PAGE>
rates on the market value of the instrument. While 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 Fund would
receive if it sold the instrument.
The Fund values securities for which market quotations are not readily
available at fair value, as determined in good faith pursuant to procedures
established by the Board of Trustees.
PURCHASE OF FUND SHARES
MINIMUM INITIAL INVESTMENT AND ACCOUNT BALANCE. The Fund requires a minimum
initial investment of $1,000. The minimum account balance is $500. The Fund
reserves the right to reject any purchase order.
OFFERING DATES AND TIMES. Fund shares may be purchased on any business day
without a sales commission. All purchases must be made in US dollars. Purchase
orders in good form and payments for Fund shares must be received by the
Transfer Agent prior to 4:00 p.m. Eastern time to be effective on the date
received. The accompanying payment must be in federal funds or converted into
federal funds by the Transfer Agent before the purchase order can be accepted.
Purchase orders in good form are described below.
ORDER AND PAYMENT PROCEDURES. There are several ways to invest in the Fund.
The Fund requires a purchase order in good form which consists of a completed
and signed Account Registration and Investment Instruction Form (Application)
for each new account regardless of the investment method. For additional
information, copies of forms or questions, call Transfer Agent at (800)
647-7327, or write to Transfer Agent at: State Street Bank and Trust Company,
P.O. Box 8317, Boston, MA 02266-8317, Attention: The Seven Seas Series Growth
and Income Fund.
FEDERAL FUNDS WIRE. An investor may purchase shares by wiring federal funds
to State Street Bank and Trust Company as Transfer Agent by:
1. Telephoning State Street Bank and Trust Company at (800) 647-7327, and
stating: (1) the investor's account registration number, address and
social security or tax identification number; (2) the name of the
investment portfolio to be invested in; (3) the amount being wired; (4)
the name of the wiring bank; and (5) the name and telephone number of the
person at the wiring bank to be contacted in connection with the order.
2. Instructing the wiring bank to wire federal funds to: State Street Bank
and Trust Company, Boston, MA (ABA #0110-00028), Attention: The Seven
Seas Series Growth and Income Fund, Mutual Funds Service Division (DDA
#9904-631-0). The wire instructions should also include the name in which
the account is registered, the account number, and the name of the Fund
in which to be invested.
3. Completing the Application and forwarding it to Transfer Agent at the
above address.
MAIL. To purchase shares by mail, send a check or other negotiable bank
draft payable to: State Street Bank and Trust Company, P.O. Box 8317, Boston, MA
02266-8317, Attention: The Seven Seas Series Growth and Income Fund. Certified
checks are not necessary; however, all checks are accepted subject to collection
at full face value in United States funds and must be drawn in United States
dollars on a United States bank. Normally, checks and drafts are converted to
federal funds within two
13
<PAGE>
business days following receipt of the check or draft. Initial investments
should be accompanied by a completed Application, and subsequent investments are
to be accompanied by the investor's account number.
THIRD PARTY TRANSACTIONS. Investors purchasing Fund shares through a
program of services offered by a financial intermediary, such as a bank,
broker-dealer, investment adviser or others, may be required by such
intermediary to pay additional fees. Investors should contact such intermediary
for information concerning what additional fees, if any, may be charged.
IN-KIND EXCHANGE OF SECURITIES. The Transfer Agent may, at its discretion,
permit investors to purchase shares through the exchange of securities they
hold. Any securities exchanged must meet the investment objective, policies and
limitations of the Fund, must have a readily ascertainable market value, must be
liquid and must not be subject to restrictions on resale. The market value of
any securities exchanged, plus any cash, must be at least $1 million. Shares
purchased in exchange for securities generally may not be redeemed or exchanged
until the transfer has settled -- usually within 15 days following the purchase
by exchange.
The basis of the exchange will depend upon the relative net asset value of
the shares purchased and securities exchanged. Securities accepted by the Fund
will be valued in the same manner as the Fund values its assets. Any interest
earned on the securities following their delivery to the Transfer Agent and
prior to the exchange will be considered in valuing the securities. All
interest, dividends, subscription or other rights attached to the securities
become the property of the Fund, along with the securities.
EXCHANGE PRIVILEGE. Subject to each investment portfolio's minimum
investment, investors may exchange their Fund shares without charge for shares
of any other investment portfolio offered by Investment Company. Shares are
exchanged on the basis of relative net asset value per share. Exchanges may be
made: (1) by telephone if the registrations of the two accounts are identical;
or (2) in writing addressed to State Street Bank and Trust Company, P.O. Box
8317, Boston, MA 02266-8317, Attention: The Seven Seas Series Growth and Income
Fund. If shares of the Fund were purchased by check, the shares must have been
present in an account for 10 days before an exchange is made. The exchange
privilege will only be available in states where the exchange may legally be
made, and may be modified or terminated by the Fund upon 60 days notice to
shareholders.
REDEMPTION OF FUND SHARES
Fund shares may be redeemed on any business day at the net asset value next
determined after the receipt of a redemption request in proper form as described
below. Payment will be made as soon as possible (but will ordinarily not exceed
seven days) and will be mailed to the shareholder's address of record. Upon
request, redemption proceeds will be wire transferred to the shareholder's
account at a domestic commercial bank that is a member of the Federal Reserve
System. Although Investment Company does not currently charge a fee for this
service, Investment Company reserves the right to charge a fee for the cost of
wire-transferred redemptions of less than $1,000. Payment for redemption of
shares purchased by check may be withheld for up to 10 days after the date of
purchase to assure that such checks are honored.
EXPEDITED REDEMPTION. Shareholders may normally redeem Fund shares by
telephoning State Street Bank and Trust Company between 9:00 a.m. and 4:00 p.m.
Eastern time at (800) 647-7327,
14
<PAGE>
Attention: The Seven Seas Series Growth and Income Fund. Shareholders using the
expedited redemption method must complete the appropriate section on the
Application. The Fund and the Transfer Agent will employ reasonable procedures
to confirm that instructions communicated by telephone are properly authorized.
The Fund and the Transfer Agent will not be liable for executing telephone
instructions that are deemed to be authorized after following reasonable
procedures. These procedures include recording telephonic instructions, mailing
to the shareholder a written confirmation of the transaction, performing a
personal identity test with private information not likely to be known by other
individuals, and restricting mailing of redemptions to the shareholder's address
of record. During periods of drastic economic or market changes, shareholders
using this method may encounter delays. In such event, shareholders should
consider using the mail redemption procedure described below.
MAIL. Redemption requests may be made in writing directly to State Street
Bank and Trust Company, P.O. Box 8317, Boston, MA 02266-8317, Attention: The
Seven Seas Series Growth and Income Fund. The redemption price will be the net
asset value next determined after receipt by State Street of all required
documents in good order. "Good order" means that the request must include the
following:
1. A letter of instruction or a stock assignment stating that the shares are
to be redeemed out of The Seven Seas Series Growth and Income Fund and
designating specifically the dollar amount to be redeemed signed by all
owners of the shares in the exact names in which they appear on the
account, together with a guarantee of the signature of each owner by a
bank, trust company or member of a recognized stock exchange; and
2. Such other supporting legal documents, if required by applicable law or
Transfer Agent, in the case of estates, trusts, guardianships,
custodianships, corporations and pension and profit-sharing plans.
The Fund reserves the right to redeem the shares in any account with a
balance of less than $500 as a result of shareholder redemptions rather than
market value fluctuations. Before shares are redeemed to close an account, the
shareholder will be notified in writing and allowed 60 days to purchase
additional shares to meet the minimum account balance.
The Fund may pay any portion of the redemption amount in excess of $250,000
by a distribution in kind of readily marketable securities from the portfolio of
the Fund in lieu of cash. Investors will incur brokerage charges on the sale of
these portfolio securities. The Fund reserves the right to suspend the right of
redemption or postpone the date of payment if emergency conditions, as specified
in the 1940 Act or determined by the Securities and Exchange Commission, should
exist.
GENERAL MANAGEMENT
The Board of Trustees supervises the management, activities and affairs of
the Fund and has approved contracts with various financial organizations to
provide, among other services, day-to-day management required by the Fund.
ADVISORY AGREEMENT. Investment Company employs State Street Bank and Trust
Company to furnish investment services to the Fund. State Street is one of the
largest providers of securities processing and recordkeeping services for US
mutual funds and pension funds. State Street is a wholly
15
<PAGE>
owned subsidiary of State Street Boston Corporation, a publicly held bank
holding company. State Street, with over $171.3 billion under management as of
September 30, 1995, provides complete global investment management services from
offices in the United States, London, Sydney, Hong Kong, Tokyo, Toronto,
Luxembourg, Melbourne, Montreal and Paris.
Adviser, subject to Board supervision, directs the investment of the Fund in
accordance with the Fund's investment objective, policies and restrictions. Mr.
Brenton H. Dickson, Senior Vice President, has been the portfolio manager
primarily responsible for investment decisions regarding the Fund since its
inception in September 1993. Mr. Dickson has been a manager in State Street's
Investment Research Division since 1981. He is a member of the board of
directors of the Boston Security Analyst Society and a portfolio manager of the
Personal Trust Stock Common Trust Funds. There are five other portfolio managers
who work with Mr. Dickson in managing the Fund. For these services, the Fund
pays Adviser a fee, calculated daily and paid monthly, that on an annual basis
is equal to .85% of the Fund's average daily net assets.
The Glass-Steagall Act prohibits a depository state chartered bank such as
Adviser from engaging in the business of issuing, underwriting, selling or
distributing certain securities. The activities of Adviser in informing its
customers of the Fund, performing investment and redemption services and
providing custodian, transfer, shareholder servicing, dividend disbursing and
investment advisory services may raise issues under these provisions. Adviser
has been advised by its counsel that its activities in connection with the Fund
are consistent with its statutory and regulatory obligations. THE SHARES OFFERED
BY THIS PROSPECTUS ARE NOT ENDORSED OR GUARANTEED BY STATE STREET OR ITS
AFFILIATES, ARE NOT DEPOSITS OR OBLIGATIONS OF STATE STREET OR ITS AFFILIATES,
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
Changes in federal or state statutes and regulations relating to the
permissible activities of banks and their affiliates, as well as judicial or
administrative decisions or interpretations of such or future statutes and
regulations, could prevent Adviser from continuing to perform all or a part of
the above services for its customers and/or the Fund. If Adviser were prohibited
from serving the Fund in any of its present capacities, the Board of Trustees
would seek an alternative provider(s) of such services. In such event, changes
in the operation of the Fund may occur. It is not expected by Adviser that
existing shareholders would suffer any adverse financial consequences (if
another adviser with equivalent abilities is found) as a result of any of these
occurrences.
State Street may from time to time have discretionary authority over
accounts which invest in Investment Company shares. These accounts include
accounts maintained for securities lending clients and accounts which permit the
use of Investment Company portfolios as short-term cash sweep investments.
Shares purchased for all discretionary accounts are held of record by State
Street, who retains voting control of such shares. As of November 30, 1995,
State Street held of record 36% of the issued and outstanding shares of
Investment Company in connection with its discretionary accounts. Consequently,
State Street may be deemed to be a controlling person of Investment Company for
purposes of the 1940 Act.
Under the Adviser's Code of Ethics, the Adviser's employees in Boston where
investment management operations are conducted are only permitted to engage in
personal securities transactions
16
<PAGE>
which do not involve securities which the Adviser had recommended for purchase
or sale, or purchased or sold, on behalf of its clients. Such employees must
report their personal securities transactions quarterly and supply broker
confirmations to the Adviser.
ADMINISTRATION AGREEMENT. Frank Russell Investment Management Company
("Administrator") serves as administrator to the Fund. Administrator currently
serves as investment manager and administrator to 22 mutual funds with assets of
$7.3 billion as of October 31, 1995, and acts as administrator to 17 mutual
funds, including the Growth and Income Fund, with assets of $7.2 billion as of
October 31, 1995.
Pursuant to the Administration Agreement with Investment Company,
Administrator will: (1) supervise all aspects of the Fund's operations; (2)
provide the Fund with administrative and clerical services, including the
maintenance of certain of the Fund's books and records; (3) arrange the periodic
updating of the Fund's prospectuses and any supplements thereto; (4) provide
proxy materials and reports to Fund shareholders and the Securities and Exchange
Commission; and (5) provide the Fund with adequate office space and all
necessary office equipment and services, including telephone service, heat,
utilities, stationery supplies and similar items. For these services, the Fund
and Investment Company's other domestic investment portfolios pay Administrator
a combined fee that on an annual basis is equal to the following percentages of
their average aggregate daily net assets: (1) $0 to and including $500 million
- -- .06%; (2) over $500 million to and including $1 billion -- .05%; and (3) over
$1 billion -- .03%. The percentage of the fee paid by the Fund is equal to the
percentage of average aggregate daily net assets that are attributable to the
Fund. Administrator also receives reimbursement of expenses it incurs in
connection with establishing new investment portfolios. Further, the
administration fee paid by the Investment Company will be reduced by the sum of
certain distribution related expenses (up to a maximum of 15% of the asset-based
administration fee listed above).
Administrator also provides administrative services in connection with the
registration of shares of Investment Company with those states in which its
shares are offered or sold. Compensation for such services is on a "time spent"
basis. Investment Company will pay all registration, exemptive application,
renewal and related fees and reasonable out-of-pocket expenses.
Officers and employees of the Administrator and Distributor are permitted to
engage in personal securities transactions subject to restrictions and
procedures set forth in the Confidentiality Manual and Code of Ethics adopted by
the Investment Company, Administrator and Distributor. Such restrictions and
procedures include substantially all of the recommendations of the Advisory
Group of the Investment Company Institute and comply with Securities and
Exchange Commission rules and regulations.
DISTRIBUTION SERVICES AND SHAREHOLDER SERVICING ARRANGEMENTS. Pursuant to
the Distribution Agreement with Investment Company, Russell Fund Distributors,
Inc. ("Distributor"), a wholly owned subsidiary of Administrator, serves as
distributor for all Fund shares.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 (the "Plan")
under the 1940 Act. The purpose of the Plan is to provide for the payment of
certain Investment Company distribution and shareholder servicing expenses.
Under the Plan, Distributor will be reimbursed in an amount up to .25% of the
Fund's average annual net assets for distribution-related and shareholder
servicing expenses. Payments under the Plan will be made to Distributor to
finance activity which is intended to
17
<PAGE>
result in the sale and retention of Fund shares including: (1) the costs of
prospectuses, reports to shareholders and sales literature; (2) advertising; and
(3) expenses incurred in connection with the promotion and sale of Fund shares,
including Distributor's overhead expenses for rent, office supplies, equipment,
travel, communication, compensation and benefits of sales personnel.
Under the Plan, the Fund may also enter into agreements ("Service
Agreements") with financial institutions, which may include Adviser ("Service
Organizations"), to provide shareholder servicing with respect to Fund shares
held by or for the customers of the Service Organizations. Under the Service
Agreements, the Service Organizations may provide various services for such
customers including: answering inquiries regarding the Fund; assisting customers
in changing dividend options, account designations and addresses; performing
subaccounting for such customers; establishing and maintaining customer accounts
and records; processing purchase and redemption transactions; providing periodic
statements showing customers' account balances and integrating such statements
with those of other transactions and balances in the customers' other accounts
serviced by the Service Organizations; arranging for bank wires transferring
customers' funds; and such other services as the customers may request in
connection with the Fund, to the extent permitted by applicable statute, rule or
regulation. Service Organizations may receive from the Fund, for shareholder
servicing, monthly fees at a rate that shall not exceed .20% per annum of the
average daily net asset value of the Fund's shares owned by or for shareholders
with whom the Service Organization has a servicing relationship. Banks and other
financial service firms may be subject to various state laws, and may be
required to register as dealers pursuant to state law.
Investment Company has entered into Service Agreements with Adviser, State
Street Brokerage Services, Inc. ("SSBSI"), and Adviser's Metropolitan Division
of Commercial Banking ("Commercial Banking") to obtain the services described
above with respect to Fund shares held by or for customers. In return for these
services, Investment Company pays Adviser a fee in an amount that per annum is
equal to .025%, .175% and .175% of the average daily value of all Fund shares
held by or for customers of Adviser, SSBSI, and Commercial Banking,
respectively.
Payments to Distributor, as well as payments to Service Organizations from
the Fund, are not permitted by the Plan to exceed .25% of the Fund's average net
asset value per year. Any payments that are required to be made by the
Distribution Agreement and any Service Agreement but could not be made because
of the .25% limitation may be carried forward and paid in subsequent years so
long as the Plan is in effect. The Fund's liability for any such expenses
carried forward shall terminate at the end of two years following the year in
which the expenditure was incurred. Service Organizations will be responsible
for prompt transmission of purchase and redemption orders and may charge fees
for their services.
FUND EXPENSES
The Fund will pay all of its expenses other than those expressly assumed by
Adviser and Administrator. The principal expenses of the Fund are the annual
advisory fee payable to Adviser and distribution and shareholder servicing
expenses. Other expenses include: (1) amortization of deferred organizational
costs; (2) taxes, if any; (3) expenses for legal, auditing and financial
accounting services; (4) expense of preparing (including typesetting, printing
and mailing) reports, prospectuses and notices to existing shareholders; (5)
administrative fees; (6) custodian fees; (7) expense of issuing and
18
<PAGE>
redeeming Fund shares; (8) the cost of registering Fund shares under federal and
state laws; (9) shareholder meetings and related proxy solicitation expenses;
(10) the fees, travel expenses and other out-of-pocket expenses of Trustees who
are not affiliated with Adviser or any of its affiliates; (11) insurance,
interest, brokerage and litigation costs; (12) extraordinary expenses as may
arise, including expenses incurred in connection with litigation proceedings and
claims and the legal obligations of Investment Company to indemnify its
Trustees, officers, employees, shareholders, distributors and agents; and (13)
other expenses properly payable by the Fund.
PERFORMANCE CALCULATIONS
From time to time the Fund may advertise its "total return." The total
return of the Fund is the average annual compounded rate of return from a
hypothetical investment in the Fund over one-, five-and ten-year periods or for
the life of the Fund (as stated in the advertisement), assuming the reinvestment
of all dividend and capital gains distributions.
Comparative performance information may be used from time to time in
advertising or marketing Fund shares, including data from Lipper Analytical
Services, Inc., Wall Street Journal Score Card or other industry publications,
business periodicals, rating services and market indices. The Fund may also
advertise nonstandardized performance information which is for periods in
addition to those required to be presented.
Total return and other performance figures are based on historical earnings
and are not indications of future performance.
ADDITIONAL INFORMATION
CUSTODIAN, TRANSFER AGENT AND INDEPENDENT ACCOUNTANTS. State Street holds
all portfolio securities and cash assets of the Fund, provides portfolio
recordkeeping services and serves as the Fund's transfer agent ("Transfer
Agent") and custodian ("Custodian"). State Street is authorized to deposit
securities in securities depositories or to use the services of subcustodians.
State Street has no responsibility for the supervision and management of the
Fund except as investment adviser. Coopers & Lybrand L.L.P., Boston,
Massachusetts, is Investment Company's independent accountants.
REPORTS TO SHAREHOLDERS AND SHAREHOLDER INQUIRIES. Shareholders will
receive unaudited semiannual financial statements and annual financial
statements audited by Investment Company's independent accountants. Shareholder
inquiries regarding the Prospectus and financial statements may be made by
calling Distributor at (617) 654-6089. Inquiries regarding shareholder balances
may be made by calling Transfer Agent at (800) 647-7327.
ORGANIZATION, CAPITALIZATION AND VOTING. Investment Company was organized
as a Massachusetts business trust on October 3, 1987, and operates under a First
Amended and Restated Master Trust Agreement dated October 13, 1993, as amended.
Investment Company issues shares divisible into an unlimited number of
series (or investment portfolios), each of which is a separate trust under
Massachusetts law. The Growth and Income Fund is one such series.
19
<PAGE>
Each Fund share represents an equal proportionate interest in the Fund, has
a par value of $.001 per share and is entitled to such relative rights and
preferences and dividends and distributions earned on assets belonging to the
Fund as may be declared by the Board of Trustees. Fund shares are fully paid and
nonassessable by Investment Company and have no preemptive rights.
Each Fund share has one vote. There are no cumulative voting rights. There
is no annual meeting of shareholders, but special meetings may be held. On any
matter which affects only a particular investment portfolio, only shareholders
of that portfolio may vote unless otherwise required by the 1940 Act or the
Master Trust Agreement. The Trustees hold office for the life of the Trust. A
Trustee may resign or retire, and may be removed at any time by a vote of
two-thirds of the Investment Company shares or by a vote of a majority of the
Trustees. The Trustees shall promptly call and give notice of a meeting of
shareholders for the purpose of voting upon removal of any Trustee when
requested to do so in writing by the holders of not less than 10% of the shares
then outstanding. A vacancy on the Board of Trustees may be filled by the vote
of a majority of the remaining Trustees, provided that immediately thereafter at
least two-thirds of the Trustees have been elected by shareholders.
Investment Company does not issue share certificates for the Fund. Transfer
Agent sends shareholders of the Fund statements concurrent with any transaction
activity, confirming all investments in or redemptions from their accounts. Each
statement also sets forth the balance of shares held in the account.
20
<PAGE>
THE SEVEN SEAS SERIES FUND
TWO INTERNATIONAL PLACE, 35TH FLOOR
BOSTON, MASSACHUSETTS 02110
INVESTMENT ADVISER, CUSTODIAN, AND TRANSFER AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
DISTRIBUTOR
Russell Fund Distributors, Inc.
Two International Place, 35th Floor
Boston, Massachusetts 02110
ADMINISTRATOR
Frank Russell Investment Management Company
909 A Street
Tacoma, Washington 98402
LEGAL COUNSEL
Goodwin, Procter & Hoar
Exchange Place
Boston, Massachusetts 02109
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
<PAGE>
THE SEVEN SEAS SERIES FUND
The Seven Seas Series Money Market Fund
The Seven Seas Series US Government Money Market Fund
The Seven Seas Series Tax Free Money Market Fund
The Seven Seas Series S&P 500 Index Fund
The Seven Seas Series Small Cap Fund
The Seven Seas Series Matrix Equity Fund
The Seven Seas Series Yield Plus Fund
The Seven Seas Series Growth and Income Fund
The Seven Seas Series Intermediate Fund
The Seven Seas Series Active International Fund
The Seven Seas Series Emerging Markets Fund
<PAGE>
Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
THE SEVEN SEAS SERIES FUND
TWO INTERNATIONAL PLACE, 35TH FLOOR
BOSTON, MASSACHUSETTS 02110
(617) 654-6089
INTERMEDIATE FUND
The Seven Seas Series Fund is a registered, open-end investment company with
multiple portfolios, each of which is a mutual fund. This Prospectus describes
and offers shares of beneficial interest in one such mutual fund, The Seven Seas
Series Intermediate Fund (referred to in this Prospectus as the "Intermediate
Fund" or the "Fund"). The Fund seeks to achieve its investment objective of a
high level of current income while preserving principal by investing primarily
in a diversified portfolio of debt securities with a dollar-weighted average
maturity between three and ten years. The Fund's shares are offered without
sales commissions. However, the Fund pays certain distribution expenses under
its Rule 12b-1 plan.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SHARES IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, STATE STREET BANK AND TRUST COMPANY, AND SHARES ARE NOT FEDERALLY INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER AGENCY, AND INVOLVE INVESTMENT RISKS INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. Please read and retain this
document for future reference. Additional information about the Fund has been
filed with the Securities and Exchange Commission in a Statement of Additional
Information dated December 29, 1995. The Statement of Additional Information is
incorporated herein by reference and is available without charge from
Distributor at its address noted below or by calling (617) 654-6089.
<TABLE>
<S> <C> <C>
INVESTMENT ADVISER,
CUSTODIAN, DISTRIBUTOR:
AND TRANSFER AGENT: Russell Fund Distributors, ADMINISTRATOR:
State Street Bank and Trust Inc. Frank Russell Investment
Company Two International Place, Management Company
225 Franklin Street 35th Floor 909 A Street
Boston, Massachusetts 02110 Boston, Massachusetts 02110 Tacoma, Washington 98402
(617) 654-4721 (617) 654-6089 (206) 627-7001
</TABLE>
PROSPECTUS DATED DECEMBER 29, 1995
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Fund Operating Expenses.................................................................................... 3
Financial Highlights....................................................................................... 4
The Seven Seas Series Fund................................................................................. 5
Manner of Offering......................................................................................... 5
Investment Objective, Policies and Restrictions............................................................ 5
Certain Risk Factors....................................................................................... 12
Portfolio Turnover......................................................................................... 12
Dividends and Distributions................................................................................ 12
Taxes...................................................................................................... 13
Valuation of Fund Shares................................................................................... 14
Purchase of Fund Shares.................................................................................... 14
Redemption of Fund Shares.................................................................................. 16
General Management......................................................................................... 17
Fund Expenses.............................................................................................. 20
Performance Calculations................................................................................... 20
Additional Information..................................................................................... 21
</TABLE>
2
<PAGE>
FUND OPERATING EXPENSES
THE SEVEN SEAS SERIES INTERMEDIATE FUND
The following table is intended to assist the investor in understanding the
costs and expenses that an investor in the Intermediate Fund will incur directly
or indirectly. THE EXAMPLES PROVIDED IN THE TABLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. Actual expenses may be greater or
less than those shown. For additional information, see "General Management."
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES:
- ------------------------------
<S> <C>
Sales Load Imposed on Purchases.......................................................................................... None
Sales Load Imposed on Reinvested Dividends............................................................................... None
Deferred Sales Load...................................................................................................... None
Redemption Fees.......................................................................................................... None
Exchange Fee............................................................................................................. None
ANNUAL FUND OPERATING EXPENSES:
- ------------------------------
(as a percentage of average daily net assets)
Advisory Fees (1)........................................................................................................ .29%
12b-1 Fee (1)(2)......................................................................................................... .05
Other Expenses (1)....................................................................................................... .26
----
Total Operating Expenses After Reimbursement (1)(3)...................................................................... .60%
----
----
</TABLE>
<TABLE>
<CAPTION>
EXAMPLES: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (i) 5% annual return
and (ii) redemption at the end of each time period:...................................... $ 6 $ 19 $ 33 $ 75
------ ------- ------- --------
------ ------- ------- --------
</TABLE>
- ------------------------
(1) Adviser has agreed to reimburse the Fund for all expenses in excess of .60%
of average daily net assets on an annual basis. The gross annual expenses
before reimbursement of Advisory, 12b-1 and Other Expenses would be .80%,
.14% and .73% of average daily net assets, respectively. The total operating
expense of the Fund absent reimbursement would be 1.67% of average daily net
assets on an annual basis. The reimbursement will continue until such time
as the Board of Trustees of the Fund agrees to its modification or
elimination but is anticipated to be in effect for the current fiscal year.
(2) Rule 12b-1 fees may include expenses paid for shareholder servicing
activities.
(3) The expense information in the table has been restated to reflect current
fees. Investors purchasing Fund shares through a financial intermediary,
such as a bank or an investment adviser, may also be required to pay
additional fees for services provided by the intermediary. Such investors
should contact the intermediary for information concerning what additional
fees, if any, will be charged.
Long-term shareholders of the Fund may pay more in Rule 12b-1 fees than the
economic equivalent of the maximum front-end sales charges permitted by the
National Association of Securities Dealers, Inc.
3
<PAGE>
FINANCIAL HIGHLIGHTS
THE SEVEN SEAS SERIES INTERMEDIATE FUND
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand L.L.P., the Fund's independent
accountants. The table includes selected data for a share outstanding throughout
each fiscal year or period ended August 31, and other performance information
derived from the financial statements. The table appears in the Fund's Annual
Report and should be read in conjunction with the Fund's financial statements
and related notes, which are incorporated by reference in the Statement of
Additional Information and which appear, along with the report of Coopers &
Lybrand L.L.P., in the Fund's Annual Report to Shareholders. More detailed
information concerning the Fund's performance, including a complete portfolio
listing and audited financial statements, is available in the Fund's Annual
Report, which may be obtained without charge by writing or calling the
Distributor.
<TABLE>
<CAPTION>
1995 1994+
--------- ---------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR........................................................... $ 9.37 $ 10.00
--------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income...................................................................... .56 .42
Net realized and unrealized gain (loss) on investments..................................... .34 (.76)
--------- ---------
Total From Investment Operations........................................................... .90 (.34)
--------- ---------
LESS DISTRIBUTIONS:
Net investment income...................................................................... (.55) (.29)
--------- ---------
NET ASSET VALUE, END OF YEAR................................................................. $ 9.72 $ 9.37
--------- ---------
--------- ---------
TOTAL RETURN (%)............................................................................. 10.05 (3.42)
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average daily net assets....................................... .60 .60
Operating expenses, gross, to average daily net assets..................................... 1.67 1.51
Net investment income to average daily net assets.......................................... 6.29 5.11
Portfolio turnover......................................................................... 26.31 15.70
Net assets, end of year ($000 omitted)..................................................... 33,893 19,963
Per share amount of fees waived ($omitted)................................................. -- .0002
Per share amount of fees reimbursed by Adviser ($omitted).................................. .0946 .0753
</TABLE>
- ------------------------
+ For the period September 1, 1993 (commencement of operations) to August 31,
1994.
4
<PAGE>
THE SEVEN SEAS SERIES FUND
The Seven Seas Series Fund ("Investment Company") is an open-end management
investment company that is organized as a Massachusetts business trust. In
addition, each series of the Investment Company is diversified as defined under
the Investment Company Act of 1940, as amended ("1940 Act"). As a "series mutual
fund," Investment Company is authorized to issue an unlimited number of shares
evidencing beneficial interests in different investment portfolios. Through this
Prospectus, Investment Company offers shares in one such portfolio The Seven
Seas Series Intermediate Fund (the "Intermediate Fund" or the "Fund"). State
Street Bank and Trust Company ("Adviser" or "State Street") serves as the
investment adviser for the Fund.
MANNER OF OFFERING
DISTRIBUTION AND ELIGIBLE INVESTORS. Shares of the Fund are offered without
a sales commission by Russell Fund Distributors, Inc., Investment Company's
distributor, to US and foreign institutional and retail investors which invest
for their own account or in a fiduciary or agency capacity. The Fund will incur
distribution expenses under its Rule 12b-1 plan. See "General Management --
Distribution Services and Shareholder Servicing."
MINIMUM AND SUBSEQUENT INVESTMENT. The Fund requires a minimum initial
investment of $1,000. A shareholder's investment in the Fund may be subject to
redemption at the Fund's discretion if the account balance is less than $500 as
a result of shareholder redemptions. The Fund reserves the right to reject any
purchase order.
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
The Fund's investment objective is to seek a high level of current income
while preserving principal by investing primarily in a diversified portfolio of
debt securities with a dollar-weighted average maturity between three and ten
years. This investment objective may be changed only with the approval of a
majority of the Fund's shareholders as defined by the 1940 Act. There can be no
assurance that the Fund will meet its investment objective.
The Fund attempts to meet its objective by investing at least 65% of its
total assets in: (1) US Government securities (including repurchase and reverse
repurchase agreements relating to such securities); (2) commercial paper, notes
and bonds (including convertible bonds) issued by foreign and domestic
corporations; (3) mortgage-related pass-through securities; (4) asset-backed
securities; and (5) instruments of US and foreign banks, including Eurodollar
Time Deposits ("ETDs"), Eurodollar Certificates of Deposit ("ECDs"), Yankee
Certificates of Deposit ("YCDs"), certificates of deposit, time deposits,
letters of credit and banker's acceptances.
The Fund's portfolio strategy combines an economic overview with fundamental
research. First, the likely direction of interest rates and the spread
relationships among issues in various market sectors are assessed. Each market
sector is distinct depending on its quality, industry classification, and
maturity. Next, an ideal portfolio balance is determined for the portfolio based
on the relative attractiveness of each market sector. Finally, individual issues
are selected for each sector of the portfolio based on the issue's
attractiveness within such market sector.
5
<PAGE>
Although each investment is selected with the intention that it will be held
to maturity, the portfolio is monitored to take advantage of spread
relationships. The portfolio is regularly reviewed in light of overall economic
conditions so that investments are positioned to take best advantage of emerging
trends.
The Fund limits its portfolio investments in commercial paper and corporate
notes and bonds to those that, at the time of acquisition: (1) are rated in one
of the four highest categories (or in the case of commercial paper, in the two
highest categories) by at least one nationally recognized statistical rating
organization; or (2) if not rated, are of comparable quality, as determined by
the Fund's adviser, State Street Bank and Trust Company.
INVESTMENT POLICIES
The investment policies described below reflect the Fund's current
practices, are not fundamental and may be changed by the Board of Trustees of
Investment Company without shareholder approval. For more information on the
Fund's Investment Policies, please see the Statement of Additional Information.
To the extent consistent with the Fund's investment objective and restrictions,
the Fund may invest in the following instruments and may use the following
investment techniques:
US GOVERNMENT SECURITIES. US Government securities include US Treasury
bills, notes and bonds and other obligations issued or guaranteed as to interest
and principal by the US Government, its agencies or instrumentalities.
Obligations issued or guaranteed as to interest and principal by the US
Government, its agencies or instrumentalities include securities that are
supported by the full faith and credit of the United States Treasury, securities
that are supported by the right of the issuer to borrow from the United States
Treasury, discretionary authority of the US Government agency or
instrumentality, and securities supported solely by the creditworthiness of the
issuer.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
banks and other financial institutions, such as broker-dealers. Under a
repurchase agreement, a Fund purchases securities from a financial institution
that agrees to repurchase the securities at the Fund's original purchase price
plus interest within a specified time (normally one business day). The Fund will
invest no more than 10% of its net assets (taken at current market value) in
repurchase agreements maturing in more than seven days. The Fund will limit
repurchase transactions to those member banks of the Federal Reserve System and
broker-dealers whose creditworthiness Adviser considers satisfactory. Should the
counterparty to a transaction fail financially, the Fund may encounter delay and
incur costs before being able to sell the securities. Further, the amount
realized upon the sale of the securities may be less than that necessary to
fully compensate the Fund.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreements under the circumstances described in "Investment Restrictions." Under
a reverse repurchase agreement, the Fund sells portfolio securities to a
financial institution in return for cash in an amount equal to a percentage of
the portfolio securities' market value and agrees to repurchase the securities
at a future date at a prescribed repurchase price equal to the amount of cash
originally received plus interest on such amount. The Fund retains the right to
receive interest and principal payments with respect to the securities while
they are in the possession of the financial institutions. Reverse repurchase
agreements involve the risk of default by the counterparty, which may adversely
affect the Fund's ability to reacquire the underlying securities.
6
<PAGE>
FORWARD COMMITMENTS. The Fund may contract to purchase securities for a
fixed price at a future date beyond customary settlement time. When effecting
such transactions, cash or liquid high quality debt obligations held by the Fund
of a dollar amount sufficient to make payment for the portfolio securities to be
purchased will be segregated on the Fund's records at the trade date and
maintained until the transaction is settled. The failure of the other party to
the transaction to complete the transaction may cause the Fund to miss an
advantageous price or yield. The Fund bears the risk of price fluctuations
during the period between the trade and settlement dates.
WHEN-ISSUED TRANSACTIONS. The Fund may purchase securities on a when-issued
or delayed delivery basis. In these transactions, the Fund purchases securities
with payment and delivery scheduled for a future time. Until settlement, the
Fund segregates cash and marketable high quality debt securities equal in value
to its when-issued commitments. Between the trade and settlement dates, the Fund
bears the risk of any fluctuations in the value of the securities. These
transactions involve the additional risk that the other party may fail to
complete the transaction and cause the Fund to miss a price or yield considered
advantageous. The Fund will engage in when-issued transactions only for the
purpose of acquiring portfolio securities consistent with its investment
objective and policies and not for investment leverage. The Fund will not invest
more than 25% of its net assets in when-issued securities.
ILLIQUID SECURITIES. The Fund will not invest more than 15% of its net
assets in illiquid securities or securities that are not readily marketable,
including repurchase agreements and time deposits of more than seven days'
duration. The absence of a regular trading market for illiquid securities
imposes additional risks on investments in these securities. Illiquid securities
may be difficult to value and may often be disposed of only after considerable
expense and delay. In addition, the Fund will not invest more than 10% in
securities of issuers which may not be sold to the public without registration
under the Securities Act of 1933.
VARIABLE AMOUNT MASTER DEMAND NOTES. Variable amount master demand notes
are unsecured obligations that are redeemable upon demand and are typically
unrated. These instruments are issued pursuant to written agreements between the
issuers and the holders. The agreements permit the holders to increase (subject
to an agreed maximum) and the holders and issuers to decrease the principal
amount of the notes, and specify that the rate of interest payable on the
principal fluctuates according to an agreed formula.
ASSET-BACKED SECURITIES. Asset-backed securities represent undivided
fractional interests in pools of instruments, such as consumer loans, and are
similar in structure to mortgage-related pass-through securities described
below. Payments of principal and interest are passed through to holders of the
securities and are typically supported by some form of credit enhancement, such
as a letter of credit, surety bond, limited guarantee by another entity or by
priority to certain of the borrower's other securities. The degree of credit
enhancement varies, generally applying only until exhausted and covering only a
fraction of the security's par value. If the credit enhancement of an
asset-backed security held by the Fund has been exhausted, and if any required
payments of principal and interest are not made with respect to the underlying
loans, the Fund may experience loss or delay in receiving payment and a decrease
in the value of the security. Further details are set forth in the Statement of
Additional Information under "Investment Restrictions and Policies -- Investment
Policies."
7
<PAGE>
MORTGAGE-RELATED PASS-THROUGH SECURITIES. The Fund may invest in
mortgage-related securities, including Government National Mortgage Association
("GNMA") Certificates ("Ginnie Maes"), Federal Home Loan Mortgage Corporation
("FHLMC") Mortgage Participation Certificates ("Freddie Macs") and Federal
National Mortgage Association ("FNMA") Guaranteed Mortgage Pass-Through
Certificates ("Fannie Maes"). Mortgage pass-through certificates are
mortgage-backed securities representing undivided fractional interests in pools
of mortgage-backed loans. These loans are made by mortgage bankers, commercial
banks, savings and loan associations, and other lenders. Ginnie Maes are
guaranteed by the full faith and credit of the US Government, but Freddie Macs
and Fannie Maes are not.
MORTGAGE-BACKED SECURITY ROLLS. The Fund may enter into "forward roll"
transactions with respect to mortgage-backed securities issued by GNMA, FNMA or
FHLMC. In a forward roll transaction, the Fund will sell a mortgage security to
a dealer or other permitted entity and simultaneously agree to repurchase a
similar security from the institution at a later date at an agreed upon price.
The mortgage securities that are repurchased will bear the same interest rate as
those sold, but generally will be collateralized by different pools of mortgages
with different prepayment histories than those sold. Risks of mortgage-backed
security rolls include: (1) the risk of prepayment prior to maturity; (2) the
possibility that the Fund may not be entitled to receive interest and principal
payments on the securities sold and that the proceeds of the sale may have to be
invested in money market instruments (typically repurchase agreements) maturing
not later than the expiration of the roll; and (3) the risk that the market
value of the securities sold by the Fund may decline below the price at which
the Fund is obligated to purchase the securities. Upon entering into a
mortgage-backed security roll, the Fund will place cash, US Government
securities or other high-grade debt securities in a segregated account with
Custodian in an amount equal to its obligation under the roll.
INTEREST RATE SWAPS. The Fund may enter into interest rate swap
transactions with respect to any security it is entitled to hold. Interest rate
swaps involve the exchange by a Fund with another party of their respective
rights to receive interest, e.g., an exchange of floating rate payments for
fixed rate payments. The Fund expects to enter into these transactions primarily
to preserve a return or spread on a particular investment or portion of its
portfolio or to protect against any increase in the price of securities it
anticipates purchasing at a later date. The Fund intends to use these
transactions as a hedge and not as a speculative investment.
PREFERRED STOCKS. Preferred stock, unlike common stock, generally confers a
stated dividend rate payable from the corporation's earnings. Such preferred
stock dividends may be cumulative or noncumulative, fixed, participating,
auction rate or other. If interest rates rise, a fixed dividend on preferred
stocks may be less attractive, causing the price of preferred stocks to decline
either absolutely or relative to alternative investments. Preferred stock may
have mandatory sinking fund provisions, as well as provisions that allow the
issuer to call or redeem the stock. The rights to payment of preferred stocks
are generally subordinate to rights associated with a corporation's debt
securities.
ZERO COUPON SECURITIES. Zero coupon securities are notes, bonds and
debentures that: (1) do not pay current interest and are issued at a substantial
discount from par value; (2) have been stripped of their unmatured interest
coupons and receipts; or (3) pay no interest until a stated date one or more
years into the future. These securities also include certificates representing
interests in such stripped coupons and receipts.
8
<PAGE>
VARIABLE AND FLOATING RATE SECURITIES. A floating rate security provides
for the automatic adjustment of its interest rate whenever a specified interest
rate changes. A variable rate security provides for the automatic establishment
of a new interest rate on set dates. Interest rates on these securities are
ordinarily tied to, and are a percentage of, a widely recognized interest rate
such as the yield on 90-day US Treasury bills or the prime rate of a specified
bank. These rates may change as often as twice daily. Generally, changes in
interest rates will have a smaller effect on the market value of variable and
floating rate securities than on the market value of comparable fixed income
obligations. Thus, investing in variable and floating rate securities generally
allows less opportunity for capital appreciation and depreciation than investing
in comparable fixed income securities.
EURODOLLAR CERTIFICATES OF DEPOSIT (ECDS), EURODOLLAR TIME DEPOSITS (ETDS)
AND YANKEE CERTIFICATES OF DEPOSIT (YCDS). ECDs are US dollar denominated
certificates of deposit issued by foreign branches of domestic banks. ETDs are
US dollar denominated deposits in foreign banks or foreign branches of US banks.
YCDs are US dollar denominated certificates of deposit issued by US branches of
foreign banks.
Different risks than those associated with the obligations of domestic banks
may exist for ECDs, ETDs and YCDs because the banks issuing these instruments,
or their domestic or foreign branches, are not necessarily subject to the same
regulatory requirements that apply to domestic banks, such as loan limitations,
examinations and reserve, accounting, auditing, recordkeeping and public
reporting requirements.
FOREIGN CURRENCY TRANSACTIONS. The Fund may engage in foreign currency
transactions as described below. The US dollar value of assets held by the Fund
may be affected favorably or unfavorably by changes in foreign currency exchange
rates and exchange control regulations, and the Fund may incur costs in
connection with conversions between various currencies. The Fund will engage in
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, through
forward and futures contracts to purchase or sell foreign currencies or by
purchasing and writing put and call options on foreign currencies. The Fund may
purchase and write these contracts for the purpose of protecting against
declines in the dollar value of foreign securities it holds and against
increases in the dollar cost of foreign securities it plans to acquire.
A forward foreign currency exchange contract is an obligation to purchase or
sell a specific currency at a future date, which may be any fixed number of days
from the date upon which the parties enter the contract, at a price set at the
time the contract is made. These contracts are traded directly between currency
traders (usually large commercial banks) and their customers. Foreign currency
futures contracts are traded on exchanges and are subject to procedures and
regulations applicable to other futures contracts. Forward foreign currency
exchange contracts and foreign currency futures contracts may protect the Fund
from uncertainty in foreign currency exchange rates, and may also limit
potential gains from favorable changes in such rates.
Put and call options on foreign currencies are traded on securities and
commodities exchanges, in the over-the-counter market, and privately among major
recognized dealers in such options. The Fund may purchase and write these
options for the purpose of protecting against declines in the dollar value of
foreign securities it holds and against increases in the dollar cost of foreign
securities it plans to acquire. If a rise is anticipated in the dollar value of
a foreign currency in which securities to be
9
<PAGE>
acquired are denominated, the increased cost of such securities may be offset in
whole or in part by purchasing calls or writing puts on that foreign currency.
If a decline in the dollar value of a foreign currency is anticipated, the
decline in value of portfolio securities denominated in that currency may be in
whole or in part by writing calls or purchasing puts on that foreign currency.
However, certain currency rate fluctuations would cause the option to expire
unexercised, and thereby cause the Fund to lose the premium it paid and its
transaction costs.
FUTURES CONTRACTS AND OPTIONS ON FUTURES. For hedging purposes, including
protecting the price or interest rate of a security the Fund intends to buy, the
Fund may enter into futures contracts that relate to securities in which it may
directly invest and indices comprised of such securities and may purchase and
write call and put options on such contracts.
A financial futures contract is a contract to buy or sell a specified
quantity of financial instruments such as US Treasury bills, notes and bonds,
commercial paper and bank certificates of deposit or the cash value of a
financial instrument index at a specified future date at a price agreed upon
when the contract is made. Under such contracts, no delivery of the actual
securities making up the index takes place. Rather, upon expiration of the
contract, settlement is made by exchanging cash in an amount equal to the
difference between the contract price and the closing price of the index at
expiration, net of variation margin previously paid.
Substantially all futures contracts are closed out before settlement date or
called for cash settlement. A futures contract is closed out by buying or
selling an identical offsetting futures contract. Upon entering into a futures
contract, the Fund is required to deposit an initial margin with Custodian for
the benefit of the futures broker. The initial margin serves as a "good faith"
deposit that the Fund will honor its futures commitment. Subsequent payments
(called "variation margin") to and from the broker are made on a daily basis as
the price of the underlying investment fluctuates.
Options on futures contracts give the purchaser the right to assume a
position at a specified price in a futures contract at any time before
expiration of the option contract.
When trading futures contracts, the Fund will not commit more than 5% of the
market value of its total assets to initial margin deposits on futures and
premiums paid for options on futures.
OPTIONS ON SECURITIES AND SECURITIES INDICES. The Fund may write and
purchase covered put and call options on securities in which it may directly
invest. Option transactions of the Fund will be conducted so that the total
amount paid on premiums for all put and call options outstanding will not exceed
5% of the value of the Fund's total assets. Further, the Fund will not write a
put or call option or combination thereof if, as a result, the aggregate value
of all securities or collateral used to cover all such options outstanding would
exceed 25% of the value of the Fund's total assets.
The Fund may purchase or sell options on securities indices that are
comprised of securities in which they may directly invest, subject to the
limitations set forth above and provided such options are traded on a national
securities exchange or in the over-the-counter market. Options on securities
indices are similar to options on securities except there is no transfer of a
security and settlement is in cash. A call option on a securities index grants
the purchaser of the call, for a premium paid to the seller, the right to
receive in cash an amount equal to the difference between the closing price of
the index and the exercise price of the option times a multiplier established by
the exchange upon which the option is traded.
10
<PAGE>
LENDING PORTFOLIO SECURITIES. The Fund may lend portfolio securities with a
value of up to 33 1/3% of its total assets. Such loans may be terminated at any
time. The Fund will receive cash or US Treasury bills, notes and bonds in an
amount equal to at least 100% of the current market value (on a daily
marked-to-market basis) of the loaned securities plus accrued interest. In a
loan transaction, as compensation for lending it securities, the Fund will
receive a portion of the dividends or interest accrued on the securities held as
collateral or, in the case of cash collateral, a portion of the income from the
investment of such cash. In addition, the Fund will receive the amount of all
dividends, interest and other distributions on the loaned securities. However,
the borrower has the right to vote the loaned securities. The Fund will call
loans to vote proxies if a material issue affecting the investment is to be
voted upon. Should the borrower of the securities fail financially, the Fund may
experience delays in recovering the securities or exercising its rights in the
collateral. Loans are made only to borrowers that are deemed by Adviser to be of
good financial standing. In a loan transaction, the Fund will also bear the risk
of any decline in value of securities acquired with cash collateral. The Fund
will minimize this risk by limiting the investment of cash collateral to high
quality instruments of short maturity.
CASH RESERVES. For defensive purposes, the Fund may temporarily and without
limitation concentrate its portfolio in high quality short-term fixed income
securities. These securities include obligations issued or guaranteed as to
principal and interest by the US Government, its agencies or instrumentalities
and repurchase agreements collateralized by these obligations, commercial paper,
bank certificates of deposit, bankers' acceptances and time deposits.
To the extent permitted under the 1940 Act and exemptive rules and orders
thereunder, the Fund may seek to achieve its investment objective by investing
solely in the shares of another investment company that has substantially
similar investment objectives and policies.
INVESTMENT RESTRICTIONS
The Fund has fundamental investment restrictions, which may be changed only
with the approval of a majority of the Fund's shareholders as defined in the
1940 Act. A more detailed discussion of the Fund's investment restrictions and
investment policies appears in the Statement of Additional Information. Unless
otherwise noted, the fundamental restrictions apply at the time an investment is
made. The Fund may not:
1. Invest 25% or more of the value of its total assets in securities of
companies primarily engaged in any one industry (other than the US
Government, its agencies or instrumentalities). Concentration may occur
as a result of changes in the market value of portfolio securities, but
may not result from investment.
2. Borrow money (including reverse repurchase agreements), except as a
temporary measure for extraordinary or emergency purposes or to
facilitate redemptions (not for leveraging or investment), provided that
borrowings do not exceed an amount equal to 33 1/3% of the current value
of the Fund's assets taken at market value, less liabilities other than
borrowings. If at any time the Fund's borrowings exceed this limitation
due to a decline in net assets, such borrowings will within three days be
reduced to the extent necessary to comply with this limitation. The Fund
will not purchase additional investments if borrowed funds (including
reverse repurchase agreements) exceed 5% of total assets.
11
<PAGE>
3. Pledge, mortgage, or hypothecate its assets. However, the Fund may pledge
securities having a market value at the time of the pledge not exceeding
33 1/3% of the value of the Fund's total assets to secure permitted
borrowings.
CERTAIN RISK FACTORS
FUTURES AND OPTIONS CONTRACTS. There are certain investment risks in using
futures contracts and options as a hedging technique. Such risks may include:
(1) the inability to close out a futures contract or option caused by the
nonexistence of a liquid secondary market; and (2) an imperfect correlation
between price movements of the futures contracts or option with price movements
of the portfolio securities or securities index subject to the hedge.
FOREIGN INVESTMENTS. Investment in securities of non-US issuers involves
investment risks that are different from those of US issuers, including: changes
in currency rates; uncertain future political, diplomatic and economic
developments; possible imposition of exchange controls or other governmental
restrictions; less publicly available information; lack of uniform accounting,
auditing and financial reporting standards, practices and requirements; lower
trading volume, less liquidity and more volatility for securities; less
government regulation of securities exchanges, brokers and listed companies;
political or social instability; and the possibility of expropriation or
confiscatory taxation, each of which could adversely affect investments in
securities of issuers located in those countries.
PORTFOLIO TURNOVER
Because the Fund will actively trade to benefit from short-term yield
disparities among different issues of fixed-income securities, or otherwise to
increase its income, the Fund may be subject to a greater degree of portfolio
turnover than might be expected from investment companies which invest
substantially all of their assets on a long-term basis. The portfolio turnover
rate cannot be predicted, but it is anticipated that the annual turnover rate of
the Fund generally will not exceed 80% (excluding securities having a maturity
of one year or less).
The Fund may effect portfolio transactions with or through State Street
Brokerage Services, Inc. an affiliate of the Adviser, when the Adviser
determines that the Fund will receive competitive execution, price and
commissions.
DIVIDENDS AND DISTRIBUTIONS
The Board of Trustees intends to declare and pay dividends on Fund shares
quarterly from net investment income. The Board of Trustees intends to declare
distributions annually from net capital gains, if any, generally in mid-October.
It is intended that an additional distribution may be declared and paid in
December, if required, for a Fund to avoid imposition of a 4% federal excise tax
on undistributed capital gains.
Dividends declared in October, November or December and payable to
shareholders of record in such months will be deemed to have been paid by the
Fund and received by shareholders on December 31 of that year if the dividend is
paid prior to February 1 of the following year.
12
<PAGE>
Income dividends and capital gains distributions will be paid in additional
shares at their net asset value on the record date unless the shareholder has
elected to receive them in cash. Such election may be made by giving 10 days'
written notice to Transfer Agent.
Any dividend or capital gain distribution paid by the Fund shortly after a
purchase of shares will reduce the per share net asset value of the Fund by the
amount of the dividend or distribution. In effect, the payment will represent a
return of capital to the shareholder. However, the shareholder will be subject
to taxes with respect to such dividend or distribution.
TAXES
The Fund intends to qualify as a regulated investment company ("RIC") under
Subchapter M of the Internal Revenue Code, as amended (the "Code"). As a
regulated investment company, the Fund will not be subject to federal income
taxes to the extent it distributes its net investment income and capital gain
net income (capital gains in excess of capital losses) to shareholders. The
Board intends to distribute each year substantially all of the Fund's net
investment income and capital gain net income.
Dividends from net investment income and distributions of net short-term
capital gains are taxable to shareholders as ordinary income under federal
income tax laws whether paid in cash or in additional shares. Distributions from
net long-term capital gains are taxable as long-term capital gains regardless of
the length of time a shareholder has held such shares and whether paid in cash
or additional shares.
The Fund may purchase bonds at market discount (i.e., bonds with a purchase
price less than original issue price or adjusted issue price). If such bonds are
subsequently sold at a gain then a portion of that gain equal to the amount of
market discount, which should have been accrued through the sale date, will be
taxable to shareholders as ordinary income.
Dividends and distributions may also be subject to state or local taxes.
Depending on the state tax rules pertaining to a shareholder, a portion of the
dividends paid by the Fund attributable to direct obligations of the US Treasury
and certain agencies may be exempt from state and local taxes.
The sale of Fund shares by a shareholder is a taxable event and may result
in capital gain or loss. A capital gain or loss may be realized from an ordinary
redemption of shares or an exchange of shares between two mutual funds (or two
series or portfolios of a mutual fund). Any loss incurred on sale or exchange of
Fund shares held for one year or more will be treated as a long-term capital
loss to the extent of capital gain dividends received with respect to such
shares.
Shareholders will be notified after each calendar year of the amount of
income dividends and net capital gains distributed and the percentage of the
Fund's income attributable to US Treasury and agency obligations. The Fund is
required to withhold a legally determined portion of all taxable dividends,
distributions and redemption proceeds payable to any noncorporate shareholder
that does not provide the Fund with the shareholder's correct taxpayer
identification number or certification that the shareholder is not subject to
backup withholding.
The foregoing discussion is only a summary of certain federal income tax
issues generally affecting the Fund and its shareholders. Circumstances among
investors may vary and each investor is encouraged to discuss investment in the
Fund with the investor's tax adviser.
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<PAGE>
VALUATION OF FUND SHARES
NET ASSET VALUE PER SHARE. The Fund determines net asset value per share
once each business day as of the close of the regular trading session of the New
York Stock Exchange (ordinarily 4 p.m. Eastern time). A business day is one on
which the New York Stock Exchange is open for business. Net asset value per
share is computed by dividing the current value of the Fund's assets, less its
liabilities, by the number of shares of the Fund outstanding and rounding to the
nearest cent.
VALUATION OF FUND SECURITIES. With the exceptions noted below, the Fund
values portfolio securities at market value. This generally means that fixed
income securities listed and traded principally on any national securities
exchange are valued on the basis of the last sale price or, lacking any sales,
at the closing bid price, on the primary exchange on which the security is
traded. United States fixed income securities traded principally
over-the-counter and options are valued on the basis of the last reported bid
price. Futures contracts are valued on the basis of last reported sale price.
Because many fixed income securities do not trade each day, last sale or bid
prices are frequently not available. Fixed income securities therefore may be
valued using prices provided by a pricing service when such prices are
determined by Custodian to reflect the market value of such securities.
International securities traded on a national securities exchange are valued
on the basis of the last sale price. International securities traded
over-the-counter are valued on the basis of best bid or official bid, as
determined by the relevant securities exchange. In the absence of a last sale,
best or official bid price, such securities may be valued on the basis of prices
provided by a pricing service if those prices are believed to reflect the market
value of such securities.
Securities maturing within 60 days of the valuation date are valued at
"amortized cost" unless the Board determines that amortized cost does not
represent market value. The "amortized cost" valuation procedure initially
prices an instrument at its cost and thereafter assumes a constant amortization
to maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. While 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 Fund would
receive if it sold the instrument.
The Fund values securities for which market quotations are not readily
available at fair value, as determined in good faith pursuant to procedures
established by the Board of Trustees.
PURCHASE OF FUND SHARES
MINIMUM INITIAL INVESTMENT AND ACCOUNT BALANCE. The Fund requires a minimum
initial investment of $1,000. The minimum account balance is $500. The Fund
reserves the right to reject any purchase order.
OFFERING DATES AND TIMES. Fund shares may be purchased on any business day
without a sales commission. All purchases must be made in US dollars. Purchase
orders in good form and payments for Fund shares must be received by the
Transfer Agent prior to 4:00 p.m. Eastern time to be effective on the date
received. The accompanying payment must be in federal funds or converted into
federal funds by the Transfer Agent before the purchase order can be accepted.
Purchase orders in good form are described below.
14
<PAGE>
ORDER AND PAYMENT PROCEDURES. There are several ways to invest in the Fund.
The Fund requires a purchase order in good form which consists of a completed
and signed Account Registration and Investment Instruction Form (Application)
for each new account regardless of the investment method. For additional
information, copies of forms or questions, call Transfer Agent at (800)
647-7327, or write to Transfer Agent at: State Street Bank and Trust Company,
P.O. Box 8317, Boston, MA 02266-8317, Attention: The Seven Seas Series
Intermediate Fund.
FEDERAL FUNDS WIRE. An investor may purchase shares by wiring federal funds
to State Street Bank and Trust Company as Transfer Agent by:
1. Telephoning State Street Bank and Trust Company at (800) 647-7327, and
stating: (1) the investor's account registration number, address and
social security or tax identification number, (2) the name of the
investment portfolio to be invested in, (3) the amount being wired, (4)
the name of the wiring bank and (5) the name and telephone number of the
person at the wiring bank to be contacted in connection with the order.
2. Instructing the wiring bank to wire federal funds to: State Street Bank
and Trust Company, Boston, MA (ABA #0110-00028), Attention: The Seven
Seas Series Intermediate Fund, Mutual Funds Service Division (DDA
#9904-631-0). The wire instructions should also include the name in which
the account is registered, the account number and the name of the Fund in
which to be invested.
3. Completing the Application and forwarding it to Transfer Agent at the
above address.
MAIL. To purchase shares by mail, send a check or other negotiable bank
draft payable to: State Street Bank and Trust Company, P.O. Box 8317, Boston, MA
02266-8317, Attention: The Seven Seas Series Intermediate Fund. Certified checks
are not necessary; however, all checks are accepted subject to collection at
full face value in United States funds and must be drawn in United States
dollars on a United States bank. Normally, checks and drafts are converted to
federal funds within two business days following receipt of the check or draft.
Initial investments should be accompanied by a completed Application, and
subsequent investments are to be accompanied by the investor's account number.
THIRD PARTY TRANSACTIONS. Investors purchasing Fund shares through a
program of services offered by a financial intermediary, such as a bank,
broker-dealer, investment adviser or others, may be required by such
intermediary to pay additional fees. Investors should contact such intermediary
for information concerning what additional fees, if any, may be charged.
IN-KIND EXCHANGE OF SECURITIES. The Transfer Agent may, at its discretion,
permit investors to purchase shares through the exchange of securities they
hold. Any securities exchanged must meet the investment objective, policies and
limitations of the Fund, must have a readily ascertainable market value, must be
liquid and must not be subject to restrictions on resale. The market value of
any securities exchanged, plus any cash, must be at least $1 million. Shares
purchased in exchange for securities generally may not be redeemed or exchanged
until the transfer has settled -- usually within 15 days following the purchase
by exchange.
The basis of the exchange will depend upon the relative net asset value of
the shares purchased and securities exchanged. Securities accepted by the Fund
will be valued in the same manner as the Fund values its assets. Any interest
earned on the securities following their delivery to the Transfer
15
<PAGE>
Agent and prior to the exchange will be considered in valuing the securities.
All interest, dividends, subscription or other rights attached to the securities
become the property of the Fund, along with the securities.
EXCHANGE PRIVILEGE. Subject to each investment portfolio's minimum
investment, investors may exchange their Fund shares without charge for shares
of any other investment portfolio offered by Investment Company. Shares are
exchanged on the basis of relative net asset value per share. Exchanges may be
made (1) by telephone if the registrations of the two accounts are identical; or
(2) in writing addressed to State Street Bank and Trust Company, P.O. Box 8317,
Boston, MA 02266-8317, Attention: The Seven Seas Series Intermediate Fund. If
shares of a Fund were purchased by check, the shares must have been present in
an account for 10 days before an exchange is made. The exchange privilege will
only be available in states where the exchange may legally be made, and may be
modified or terminated by the Fund upon 60 days' notice to shareholders.
REDEMPTION OF FUND SHARES
Fund shares may be redeemed on any business day at the net asset value next
determined after the receipt of a redemption request in proper form as described
below. Payment will be made as soon as possible (but will ordinarily not exceed
seven days) and will be mailed to the shareholder's address of record. Upon
request, redemption proceeds will be wire transferred to the shareholder's
account at a domestic commercial bank that is a member of the Federal Reserve
System. Although Investment Company does not currently charge a fee for this
service, Investment Company reserves the right to charge a fee for the cost of
wire-transferred redemptions of less than $1,000. Payment for redemption of
shares purchased by check may be withheld for up to 10 days after the date of
purchase to assure that such checks are honored.
EXPEDITED REDEMPTION. Shareholders may normally redeem Fund shares by
telephoning State Street Bank and Trust Company between 9:00 a.m. and 4:00 p.m.
Eastern time at (800) 647-7327, Attention: The Seven Seas Series Intermediate
Fund. Shareholders using the expedited redemption method must complete the
appropriate section on the Application. The Fund and the Transfer Agent will
employ reasonable procedures to confirm that instructions communicated by
telephone are properly authorized. The Fund and the Transfer Agent will not be
liable for executing telephone instructions that are deemed to be authorized
after following reasonable procedures. These procedures include recording
telephonic instructions, mailing to the shareholder a written confirmation of
the transaction, performing a personal identity test with private information
not likely to be known by other individuals, and restricting mailing of
redemptions to the shareholder's address of record. During periods of drastic
economic or market changes, shareholders using this method may encounter delays.
In such event, shareholders should consider using the mail redemption procedure
described below.
MAIL. Redemption requests may be made in writing directly to State Street
Bank and Trust Company, P.O. Box 8317, Boston, MA 02266-8317, Attention: The
Seven Seas Series Intermediate
16
<PAGE>
Fund. The redemption price will be the net asset value next determined after
receipt by State Street of all required documents in good order. "Good order"
means that the request must include the following:
1. A letter of instruction or a stock assignment stating that the shares are
to be redeemed out of The Seven Seas Series Intermediate Fund and
designating specifically the dollar amount to be redeemed signed by all
owners of the shares in the exact names in which they appear on the
account, together with a guarantee of the signature of each owner by a
bank, trust company or member of a recognized stock exchange; and
2. Such other supporting legal documents, if required by applicable law or
Transfer Agent, in the case of estates, trusts, guardianships,
custodianships, corporations and pension and profit-sharing plans.
The Fund reserves the right to redeem the shares in any account with a
balance of less than $500 as a result of shareholder redemptions rather than
market value fluctuations. Before shares are redeemed to close an account, the
shareholder will be notified in writing and allowed 60 days to purchase
additional shares to meet the minimum account balance.
The Fund may pay any portion of the redemption amount in excess of $250,000
by a distribution in kind of readily marketable securities from the portfolio of
the Fund in lieu of cash. Investors will incur brokerage charges on the sale of
these portfolio securities. The Fund reserves the right to suspend the right of
redemption or postpone the date of payment if emergency conditions, as specified
in the 1940 Act or determined by the Securities and Exchange Commission, should
exist.
GENERAL MANAGEMENT
The Board of Trustees supervises the management, activities and affairs of
the Fund and has approved contracts with various financial organizations to
provide, among other services, day-to-day management required by the Fund.
ADVISORY AGREEMENT. Investment Company employs State Street to furnish
investment services to the Fund. State Street is one of the largest providers of
securities processing and recordkeeping services for US mutual funds and pension
funds. State Street is a wholly owned subsidiary of State Street Boston
Corporation, a publicly held bank holding company. State Street, with over
$171.3 billion under management as of September 30, 1995, provides complete
global investment management services from offices in the United States, London,
Sydney, Hong Kong, Tokyo, Toronto, Luxembourg, Melbourne, Montreal and Paris.
Adviser, subject to Board supervision, directs the investment of the Fund in
accordance with the Fund's investment objective, policies and restrictions. Mr.
Paul Mattocks, Vice President, has been the portfolio manager primarily
responsible for investment decisions regarding the Fund since December 1994. For
the past five years, Mr. Mattocks has been a portfolio manager for several
pooled funds and has worked with State Street's Trust Division in the management
of fixed-income assets. There are two other portfolio managers who work with Mr.
Mattocks in managing the Fund. For these services, the Fund pays Adviser a fee,
calculated daily and paid monthly, that on an annual basis is equal to .80% of
the Fund's average daily net assets.
17
<PAGE>
The Glass-Steagall Act prohibits a depository state chartered bank such as
Adviser from engaging in the business of issuing, underwriting, selling or
distributing certain securities. The activities of Adviser in informing its
customers of the Fund, performing investment and redemption services and
providing custodian, transfer, shareholder servicing, dividend disbursing and
investment advisory services may raise issues under these provisions. Adviser
has been advised by its counsel that its activities in connection with the Fund
are consistent with its statutory and regulatory obligations. THE SHARES OFFERED
BY THIS PROSPECTUS ARE NOT ENDORSED OR GUARANTEED BY STATE STREET OR ITS
AFFILIATES, ARE NOT DEPOSITS OR OBLIGATIONS OF STATE STREET OR ITS AFFILIATES,
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
Changes in federal or state statutes and regulations relating to the
permissible activities of banks and their affiliates, as well as judicial or
administrative decisions or interpretations of such or future statutes and
regulations, could prevent Adviser from continuing to perform all or a part of
the above services for its customers and/or the Fund. If Adviser were prohibited
from serving the Fund in any of its present capacities, the Board of Trustees
would seek an alternative provider(s) of such services. In such event, changes
in the operation of the Fund may occur. It is not expected by Adviser that
existing shareholders would suffer any adverse financial consequences (if
another adviser with equivalent abilities is found) as a result of any of these
occurrences.
State Street may from time to time have discretionary authority over
accounts which invest in Investment Company shares. These accounts include
accounts maintained for securities lending clients and accounts which permit the
use of Investment Company portfolios as short-term cash sweep investments.
Shares purchased for all discretionary accounts are held of record by State
Street, who retains voting control of such shares. As of November 30, 1995,
State Street held of record 36% of the issued and outstanding shares of
Investment Company in connection with its discretionary accounts. Consequently,
State Street may be deemed to be a controlling person of Investment Company for
purposes of the 1940 Act.
Under the Adviser's Code of Ethics, the Adviser's employees in Boston where
investment management operations are conducted are only permitted to engage in
personal securities transactions which do not involve securities which the
Adviser had recommended for purchase or sale, or purchased or sold, on behalf of
its clients. Such employees must report their personal securities transactions
quarterly and supply broker confirmations to the Adviser.
ADMINISTRATION AGREEMENT. Frank Russell Investment Management Company
("Administrator") serves as administrator to the Fund. Administrator currently
serves as investment manager and administrator to 22 mutual funds with assets of
$7.3 billion as of October 31, 1995, and acts as administrator to 17 mutual
funds, including the Intermediate Fund, with assets of $7.2 billion as of
October 31, 1995.
Pursuant to the Administration Agreement with Investment Company,
Administrator will: (1) supervise all aspects of the Fund's operations; (2)
provide the Fund with administrative and clerical services, including the
maintenance of certain of the Fund's books and records; (3) arrange the periodic
updating of the Fund's prospectuses and any supplements thereto; (4) provide
proxy materials and reports to Fund shareholders and the Securities and Exchange
Commission; and (5) provide the Fund with adequate office space and all
necessary office equipment and services, including telephone service, heat,
utilities, stationery supplies and similar items. For these services, the Fund
18
<PAGE>
and Investment Company's other domestic portfolios pay Administrator a combined
fee that on an annual basis is equal to the following percentages of their
average aggregate daily net assets: (1) $0 to and including $500 million --
.06%; (2) over $500 million to and including $1 billion -- .05%; and (3) over $1
billion -- .03%. The percentage of the fee paid by the Fund is equal to the
percentage of average aggregate daily net assets that are attributable to the
Fund. Administrator also receives reimbursement of expenses it incurs in
connection with establishing new investment portfolios. Further, the
administration fee paid by the Investment Company will be reduced by the sum of
certain distribution related expenses (up to a maximum of 15% of the asset-based
administration fee listed above).
Administrator also provides administrative services in connection with the
registration of shares of Investment Company with those states in which its
shares are offered or sold. Compensation for such services is on a "time spent"
basis. Investment Company will pay all registration, exemptive application,
renewal and related fees and reasonable out-of-pocket expenses.
Officers and employees of the Administrator and Distributor are permitted to
engage in personal securities transactions subject to restrictions and
procedures set forth in the Confidentiality Manual and Code of Ethics adopted by
the Investment Company, Administrator and Distributor. Such restrictions and
procedures include substantially all of the recommendations of the Advisory
Group of the Investment Company Institute and comply with Securities and
Exchange Commission rules and regulations.
DISTRIBUTION SERVICES AND SHAREHOLDER SERVICING. Pursuant to the
Distribution Agreement with Investment Company, Russell Fund Distributors, Inc.
("Distributor"), a wholly owned subsidiary of Administrator, serves as
distributor for all Fund shares.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 (the "Plan")
under the 1940 Act. The purpose of the Plan is to provide for the payment of
certain Investment Company distribution and shareholder servicing expenses.
Under the Plan, Distributor will be reimbursed in an amount up to .25% of the
Fund's average annual net assets for distribution-related and shareholder
servicing expenses. Payments under the Plan will be made to Distributor to
finance activity which is intended to result in the sale and retention of Fund
shares including: (1) the costs of prospectuses, reports to shareholders and
sales literature, (2) advertising and (3) expenses incurred in connection with
the promotion and sale of Fund shares, including Distributor's overhead expenses
for rent, office supplies, equipment, travel, communication, compensation and
benefits of sales personnel.
Under the Plan, the Fund may also enter into agreements ("Service
Agreements") with financial institutions, which may include Adviser ("Service
Organizations"), to provide shareholder servicing with respect to Fund shares
held by or for the customers of the Service Organizations. Under the Service
Agreements, the Service Organizations may provide various services for such
customers including: answering inquiries regarding the Fund; assisting customers
in changing dividend options, account designations and addresses; performing
subaccounting for such customers; establishing and maintaining customer accounts
and records; processing purchase and redemption transactions; providing periodic
statements showing customers' account balances and integrating such statements
with those of other transactions and balances in the customers' other accounts
serviced by the Service Organizations; arranging for bank wires transferring
customers' funds; and such other services as the customers may request in
connection with the Fund, to the extent permitted by applicable statute,
19
<PAGE>
rule or regulation. Service Organizations may receive from the Fund, for
shareholder servicing, monthly fees at a rate that shall not exceed .20% per
annum of the average daily net asset value of the Fund's shares owned by or for
shareholders with whom the Service Organization has a servicing relationship.
Banks and other financial service firms may be subject to various state laws,
and may be required to register as dealers pursuant to state law.
Investment Company has entered into Service Agreements with Adviser, State
Street Brokerage Services, Inc. ("SSBSI"), and Adviser's Metropolitan Division
of Commercial Banking ("Commercial Banking") to obtain the services described
above with respect to Fund shares held by or for customers. In return for these
services, Investment Company pays Adviser a fee in an amount that per annum is
equal to .025%, .175% and .175% of the average daily value of all Fund shares
held by or for customers of Adviser, SSBSI, and Commercial Banking,
respectively.
Payments to Distributor, as well as payments to Service Organizations, from
a Fund are not permitted by the Plan to exceed .25% of the Fund's average net
asset value per year. Any payments that are required to be made by the
Distribution Agreement and any Service Agreement but could not be made because
of the .25% limitation may be carried forward and paid in subsequent years so
long as the Plan is in effect. The Fund's liability for any such expenses
carried forward shall terminate at the end of two years following the year in
which the expenditure was incurred. Service Organizations will be responsible
for prompt transmission of purchase and redemption orders and may charge fees
for their services.
FUND EXPENSES
The Fund will pay all of its expenses other than those expressly assumed by
Adviser and Administrator. The principal expenses of the Fund are the annual
advisory fee payable to Adviser and distribution and shareholder servicing
expenses. Other expenses include: (1) amortization of deferred organizational
costs; (2) taxes, if any; (3) expenses for legal, auditing and financial
accounting services; (4) expense of preparing (including typesetting, printing
and mailing) reports, prospectuses and notices to existing shareholders; (5)
administrative fees; (6) custodian fees; (7) expense of issuing and redeeming
Fund shares; (8) the cost of registering Fund shares under federal and state
laws; (9) shareholder meetings and related proxy solicitation expenses; (10) the
fees, travel expenses and other out-of-pocket expenses of Trustees who are not
affiliated with Adviser or any of its affiliates; (11) insurance, interest,
brokerage and litigation costs; (12) extraordinary expenses as may arise,
including expenses incurred in connection with litigation proceedings and claims
and the legal obligations of Investment Company to indemnify its Trustees,
officers, employees, shareholders, distributors and agents; and (13) other
expenses properly payable by the Fund.
PERFORMANCE CALCULATIONS
From time to time the Fund may advertise its "yield." Yield is calculated by
dividing the net investment income per share earned during the most recent
30-day (or one-month) period by the maximum offering price per share on the last
day of the month. This income is then annualized. That is, the amount of income
generated by the investment during that 30-day period is assumed to be generated
each month over a 12-month period and is shown as a percentage of the
investment. For purposes of the yield calculation, interest income is computed
based on the yield to maturity of each
20
<PAGE>
debt obligation and dividend income is computed based upon the stated dividend
rate of each security in the Fund's portfolio. The calculation includes all
recurring fees that are charged to all shareholder accounts.
From time to time the Fund may advertise its "total return." The total
return of the Fund is the average annual compounded rate of return from a
hypothetical investment in the Fund over one-, five-and ten-year periods or for
the life of the Fund (as stated in the advertisement), assuming the reinvestment
of all dividend and capital gains distributions.
Comparative performance information may be used from time to time in
advertising or marketing Fund shares, including data from Lipper Analytical
Services, Inc., Donoghue's Money Fund Report, the Bank Rate Monitor, Wall Street
Journal Score Card, Lehman Brothers Index or other industry publications,
business periodicals, rating services and market indices. The Fund may also
advertise nonstandardized performance information which is for periods in
addition to those required to be presented.
Quoted yields, returns and other performance figures are based on historical
earnings and are not indications of future performance.
ADDITIONAL INFORMATION
CUSTODIAN, TRANSFER AGENT AND INDEPENDENT ACCOUNTANTS. State Street holds
all portfolio securities and cash assets of the Fund, provides portfolio
recordkeeping services and serves as the Fund's transfer agent ("Transfer
Agent") and custodian ("Custodian"). State Street is authorized to deposit
securities in securities depositories or to use the services of subcustodians.
State Street has no responsibility for the supervision and management of the
Fund except as investment adviser. Coopers & Lybrand L.L.P., Boston,
Massachusetts, is Investment Company's independent accountants.
REPORTS TO SHAREHOLDERS AND SHAREHOLDER INQUIRIES. Shareholders will
receive unaudited semiannual financial statements and annual financial
statements audited by Investment Company's independent accountants. Shareholder
inquiries regarding the Prospectus and financial statements may be made by
calling Distributor at (617) 654-6089. Inquiries regarding shareholder balances
may be made by calling Transfer Agent at (800) 647-7327.
ORGANIZATION, CAPITALIZATION AND VOTING. Investment Company was organized
as a Massachusetts business trust on October 3, 1987, and operates under a First
Amended and Restated Master Trust Agreement dated October 13, 1993, as amended.
Investment Company issues shares divisible into an unlimited number of
series (or investment portfolios), each of which is a separate trust under
Massachusetts law. The Intermediate Fund is one such series.
Each Fund share represents an equal proportionate interest in the Fund, has
a par value of $.001 per share and is entitled to such relative rights and
preferences and dividends and distributions earned on assets belonging to the
Fund as may be declared by the Board of Trustees. Fund shares are fully paid and
nonassessable by Investment Company and have no preemptive rights.
21
<PAGE>
Each Fund share has one vote. There are no cumulative voting rights. There
is no annual meeting of shareholders, but special meetings may be held. On any
matter which affects only a particular investment portfolio, only shareholders
of that portfolio may vote unless otherwise required by the 1940 Act or the
Master Trust Agreement. The Trustees hold office for the life of the Trust. A
Trustee may resign or retire, and may be removed at any time by a vote of
two-thirds of the Investment Company shares or by a vote of a majority of the
Trustees. The Trustees shall promptly call and give notice of a meeting of
shareholders for the purpose of voting upon removal of any Trustee when
requested to do so in writing by the holders of not less than 10% of the shares
then outstanding. A vacancy on the Board of Trustees may be filled by the vote
of a majority of the remaining Trustees, provided that immediately thereafter at
least two-thirds of the Trustees have been elected by shareholders.
Investment Company does not issue share certificates for the Fund. Transfer
Agent sends Fund shareholders statements concurrent with any transaction
activity, confirming all investments in or redemptions from their accounts. Each
statement also sets forth the balance of shares held in the account.
22
<PAGE>
THE SEVEN SEAS SERIES FUND
TWO INTERNATIONAL PLACE, 35TH FLOOR
BOSTON, MASSACHUSETTS 02110
INVESTMENT ADVISER, CUSTODIAN, AND TRANSFER AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
DISTRIBUTOR
Russell Fund Distributors, Inc.
Two International Place, 35th Floor
Boston, Massachusetts 02110
ADMINISTRATOR
Frank Russell Investment Management Company
909 A Street
Tacoma, Washington 98402
LEGAL COUNSEL
Goodwin, Procter & Hoar
Exchange Place
Boston, Massachusetts 02109
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
<PAGE>
THE SEVEN SEAS SERIES FUND
The Seven Seas Series Money Market Fund
The Seven Seas Series US Government Money Market Fund
The Seven Seas Series Tax Free Money Market Fund
The Seven Seas Series S&P 500 Index Fund
The Seven Seas Series Small Cap Fund
The Seven Seas Series Matrix Equity Fund
The Seven Seas Series Yield Plus Fund
The Seven Seas Series Growth and Income Fund
The Seven Seas Series Intermediate Fund
The Seven Seas Series Active International Fund
The Seven Seas Series Emerging Markets Fund
<PAGE>
Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
THE SEVEN SEAS SERIES FUND
TWO INTERNATIONAL PLACE, 35TH FLOOR
BOSTON, MASSACHUSETTS 02110
(617) 654-6089
ACTIVE INTERNATIONAL FUND
The Seven Seas Series Fund is a registered, open-end investment company with
multiple portfolios, each of which is a mutual fund. This Prospectus describes
and offers shares of beneficial interest in one mutual fund, The Seven Seas
Series Active International Fund (referred to in this Prospectus as the "Active
International Fund" or the "Fund"). The Active International Fund seeks to
provide long-term capital growth by investing primarily in securities of foreign
issuers. The Fund's shares are offered without sales commissions. However, the
Fund pays certain distribution expenses under its Rule 12b-1 plan.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SHARES IN THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, STATE STREET BANK AND TRUST COMPANY, AND SHARES ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER AGENCY, AND INVOLVE INVESTMENT RISKS INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. Please read and retain this
document for future reference. Additional information about the Fund has been
filed with the Securities and Exchange Commission in a Statement of Additional
Information dated December 29, 1995. The Statement of Additional Information is
incorporated herein by reference and is available without charge from
Distributor at its address noted below or by calling (617) 654-6089.
<TABLE>
<S> <C> <C>
INVESTMENT ADVISER, CUSTODIAN
TRANSFER AGENT: DISTRIBUTOR: ADMINISTRATOR:
State Street Bank and Trust Russell Fund Distributors, Frank Russell Investment
Company Inc. Management Company
225 Franklin Street Two International Place, 909 A Street
Boston, Massachusetts 02110 35th Floor Tacoma, Washington 98402
(617) 654-4721 Boston, Massachusetts 02110 (206) 627-7001
(617) 654-6089
</TABLE>
PROSPECTUS DATED DECEMBER 29, 1995
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Fund Operating Expenses.................................................................................... 3
Financial Highlights....................................................................................... 4
The Seven Seas Series Fund................................................................................. 5
Manner of Offering......................................................................................... 5
Investment Objectives, Policies and Restrictions........................................................... 5
Risk Factors............................................................................................... 11
Portfolio Turnover......................................................................................... 13
Dividends and Distributions................................................................................ 13
Taxes...................................................................................................... 13
Valuation of Fund Shares................................................................................... 15
Purchase of Fund Shares.................................................................................... 16
Redemption of Fund Shares.................................................................................. 17
General Management......................................................................................... 18
Fund Expenses.............................................................................................. 21
Performance Calculations................................................................................... 22
Additional Information..................................................................................... 22
</TABLE>
2
<PAGE>
FUND OPERATING EXPENSES
THE SEVEN SEAS SERIES ACTIVE INTERNATIONAL FUND
The following table is intended to assist the investor in understanding the
various costs and expenses that an investor in the Active International Fund
will incur directly or indirectly. The examples provided in the table should not
be considered a representation of past or future expenses. Actual expenses may
be greater or less than those shown. For additional information, see "General
Management."
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
- ------------------------------
Sales Load Imposed on Purchases........................................................................................ None
Sales Load Imposed on Reinvested Dividends............................................................................. None
Deferred Sales Load.................................................................................................... None
Redemption Fees........................................................................................................ None
Exchange Fee........................................................................................................... None
ANNUAL FUND OPERATING EXPENSES:
- ------------------------------
(as a percentage of average daily net assets)
Advisory Fees (1)...................................................................................................... .48%
12b-1 Fees (2)(3)...................................................................................................... .05
Other Expenses (2)..................................................................................................... .47
------
Total Operating Expenses After Fee Waivers (1)(4)...................................................................... 1.00%
------
------
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (i) 5% annual return
and (ii) redemption at the end of each time period:...................................... $ 10 $ 32
------ -------
------ -------
</TABLE>
- ------------------------
(1) The Adviser voluntarily agrees to waive up to the full amount of its
Advisory fee of .75% to the extent that total expenses exceed 1.00% on an
annual basis. The gross annual Advisory expense before the waiver would be
.75% of average daily net assets. The total operating expenses of the Fund
absent the fee waiver would be 1.27% of average daily net assets on an
annual basis. This agreement will remain in effect for the current fiscal
year.
(2) The ratios for "12b-1 fees" and "other expenses" are based on estimated
amounts for the current fiscal year with expected annual average net assets
of $45 million.
(3) Rule 12b-1 fees may include expenses paid for shareholder servicing
activities.
(4) Investors purchasing Fund shares through a financial intermediary, such as a
bank or an investment adviser, may also be required to pay additional fees
for services provided by the intermediary. Such investors should contact the
intermediary for information concerning what additional fees, if any, will
be charged.
Long-term shareholders of the Fund may pay more in Rule 12b-1 fees than the
economic equivalent of the maximum front-end sales charges permitted by the
National Association of Securities Dealers, Inc.
3
<PAGE>
FINANCIAL HIGHLIGHTS
THE SEVEN SEAS SERIES ACTIVE INTERNATIONAL FUND
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand L.L.P., the Fund's independent
accountants. The table includes selected data for a share outstanding throughout
each fiscal year or period ended August 31, and other performance information
derived from the financial statements. The table appears in the Fund's Annual
Report and should be read in conjunction with the Fund's financial statements
and related notes, which are incorporated by reference in the Statement of
Additional Information and which appear, along with the report of Coopers &
Lybrand L.L.P., in the Fund's Annual Report to Shareholders. More detailed
information concerning the Fund's performance, including a complete portfolio
listing and audited financial statements, is available in the Fund's Annual
Report, which may be obtained without charge by writing or calling the
Distributor.
<TABLE>
<CAPTION>
1995++
---------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD................................................................... $ 10.00
---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................................................................ .03
Net realized and unrealized gain (loss) on investments............................................... .86
---------
Total From Investment Operations..................................................................... .89
---------
NET ASSET VALUE, END OF PERIOD......................................................................... $ 10.89
---------
---------
TOTAL RETURN (%)(a).................................................................................... 8.90
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average daily net assets (b)............................................. 1.79
Operating expenses, gross, to average daily net assets (b)........................................... 2.56
Net investment income to average daily net assets (b)................................................ 1.11
Portfolio turnover (b)............................................................................... 7.17
Net assets, end of period ($000 omitted)............................................................. 25,186
Per share amount of fees waived ($ omitted).......................................................... .0207
</TABLE>
- ------------------------
++ For the period March 7, 1995 (commencement of operations) to August 31,
1995.
(a) Periods less than one year are not annualized.
(b) Annualized.
4
<PAGE>
THE SEVEN SEAS SERIES FUND
The Seven Seas Series Fund ("Investment Company") is an open-end management
investment company that is organized as a Massachusetts business trust. In
addition, each series of the Investment Company is diversified as defined in the
Investment Company Act of 1940, as amended ("1940 Act"). As a "series" company,
Investment Company is authorized to issue an unlimited number of shares
evidencing beneficial interests in different investment portfolios. Through this
Prospectus, Investment Company offers shares in one such portfolio, The Seven
Seas Series Active International Fund. State Street Bank and Trust Company (the
"Adviser" or "State Street") serves as the investment adviser for the Fund.
MANNER OF OFFERING
DISTRIBUTION AND ELIGIBLE INVESTORS. Shares of the Fund are offered without
a sales commission by Russell Fund Distributors, Inc., Investment Company's
distributor, to US and foreign institutional and retail investors that invest
for their own account or in a fiduciary or agency capacity. The Fund will incur
distribution expenses under its Rule 12b-1 plan. See "General Management --
Distribution Services and Shareholder Servicing."
MINIMUM AND SUBSEQUENT INVESTMENT. The Fund requires a minimum initial
investment of $1,000. The shareholder's investment in the Fund may be subject to
redemption at the Fund's discretion if the account balance is less than $500 as
a result of shareholder redemptions. The Fund reserves the right to reject any
purchase order.
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVE
The Active International Fund's nonfundamental investment objective is to
provide long-term capital growth by investing primarily in securities of foreign
issuers. This objective may be changed with the approval of a majority of the
Fund's Board of Trustees. Shareholders would, however receive at least 60 days'
prior notice of any change to the Fund's investment objective. It may be
determined that the objective will only be changed with the approval of a
majority of the Fund's shareholders, as defined by the 1940 Act. There can be no
assurance that the Fund will meet its stated investment objective.
The Fund will attempt to meet its objective through the active selection of
countries, currencies and securities. The selection of investments will be made
through a proprietary, quantitative process developed by the Adviser.
Investments will be made in, but not limited to, countries included in the
Morgan Stanley Capital International Europe, Australia, Far East ("MSCI EAFE")
Index. For additional investment policies, see "Investment Policies."
The MSCI EAFE Index is an arithmetic, market value-weighted average of the
performance of over 1,000 securities listed on the stock exchanges of the
following countries: Australia, Austria, Belgium, Denmark, Finland, France,
Germany, Hong Kong, Ireland, Italy, Japan, Malaysia, Netherlands, New Zealand,
Norway, Singapore, Spain, Sweden, Switzerland and the United Kingdom. These are
the countries listed in the MSCI EAFE Index as of the date of this Prospectus.
Countries may be added to or deleted from the list.
5
<PAGE>
The Fund will invest at least 65% of its total assets in equity securities
of foreign issuers. In addition to investment in equities, the Fund may hold
fixed-income instruments (including convertibles), forward contracts, cash, and
cash equivalents as well as derivatives, including options on securities and
securities indices and futures contracts and options on futures. For investment
restrictions on the use of these derivatives, please refer to the investment
policies section of this Prospectus. However, the Fund may invest in other
equity securities and may temporarily for defensive purposes, without
limitation, invest in certain short-term fixed income securities. Such
securities may be used to invest uncommitted cash balances or to maintain
liquidity to meet shareholder redemptions. See "Investment Policies -- Cash
Reserves."
Of the fixed-income instruments used by the Fund, less than 5% will be
considered lower than investment-grade. Such securities are regarded as
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. These lower rated debt
securities may include obligations that are in default or that face the risk of
default with respect to principal or interest. Therefore, such securities are
sometimes referred to as "junk bonds." Please see the Statement of Additional
Information for a description of the securities ratings.
INVESTMENT POLICIES
The investment policies described below reflect the Fund's current
practices, are not fundamental and may be changed by the Board of Trustees of
Investment Company without shareholder approval. For more information on the
Fund's Investment Policies, see the Statement of Additional Information. To the
extent consistent with the Fund's investment objective and restrictions, the
Fund may invest in the following instruments and may use the following
investment techniques:
US AND INTERNATIONAL EQUITY SECURITIES. The Fund may invest in common and
preferred equity securities publicly traded in the United States or in foreign
countries. The Fund's equity securities may be denominated in foreign currencies
and may be held outside the United States. The risks associated with investment
in securities issued by foreign governments and companies are described under
"Risk Factors -- Foreign Securities."
FOREIGN CURRENCY. The Fund has authority to deal in forward foreign
currency exchange contracts (including those involving the US dollar) as a hedge
against possible variations in the exchange rate between various currencies.
This is accomplished through individually negotiated contractual agreements to
purchase or to sell a specified currency at a specified future date and price
set at the time of the contract. The Fund's dealings in forward foreign currency
exchange contracts may be with respect to a specific purchase or sale of a
security, or with respect to its portfolio positions generally. The Fund is not
obligated to hedge its portfolio positions and will enter into such transactions
only to the extent, if any, deemed appropriate by Adviser. Forward commitments
generally provide a cost-effective way of defending against losses due to
foreign currency depreciation in which the securities are denominated.
In addition to the forward exchange contracts, the Fund may also purchase or
sell listed or over-the-counter foreign currency options and foreign currency
futures and related options as a short or long hedge against possible variations
in foreign currency exchange rates. The cost to the Fund of engaging in foreign
currency transactions varies with such factors as the currencies involved, the
length of the contract period and the market conditions then prevailing.
Transactions involving forward exchange contracts and futures contracts and
options thereon are subject to certain risks. Put
6
<PAGE>
and call options on currency may also be used to hedge against fluctuation in
currency notes when forward contracts and/or futures are deemed to be not cost
effective. Options will not be used to provide leverage in any way. See "Risk
Factors -- Futures Contracts and Options on Futures" for further discussion of
the risks associated with such investment techniques.
Certain differences exist among these hedging instruments. For example,
foreign currency options provide the holder thereof the rights to buy or sell a
currency at a fixed price on a future date. A futures contract on a foreign
currency is an agreement between two parties to buy and sell a specified amount
of a currency for a set price on a future date. Futures contracts and options on
futures contracts are traded on boards of trade of futures exchanges. The Fund
will not speculate in foreign security or currency options or futures or related
options. Long hedges (buying foreign currency futures or options) and short
hedges (selling foreign currency futures or options) are a cost-effective way to
hedge (eliminate or limit) the risk of possible variations in the exchange rate
between various currencies.
The Fund may not hedge its positions with respect to the currency of a
particular country to an extent greater than the aggregate market value (at the
time of making such sale) of the securities held in its portfolio denominated or
quoted in that particular foreign currency. The Fund may enter into forward
exchange contracts for hedging purposes to the extent the Fund holds foreign
currencies. The Fund will not enter into a forward contract with a term of more
than one year.
EMERGING MARKETS. The Fund may invest in equity securities issued by
companies domiciled, or doing a substantial portion of their business, in
countries determined by the Fund's Adviser to have a developing or emerging
economy or securities market. The Fund will diversify investments across many
countries (typically at least 10) in order to reduce the volatility associated
with specific markets. The countries in which the Fund invests will be expanded
over time as the stock markets in other countries evolve and in countries for
which subcustodian arrangements are approved by the Fund's Board of Trustees. In
determining securities in which to invest, the Adviser will evaluate the
countries' economic and political climates and take into account traditional
securities valuation methods, including (but not limited to) an analysis of
price in relation to assets, earnings, cash flows, projected earnings growth,
inflation, and interest rates. Liquidity and transaction costs will also be
considered.
LENDING PORTFOLIO SECURITIES. The Fund may lend portfolio securities with a
value of up to 33 1/3% of its total assets. Such loans may be terminated at any
time. The Fund will receive cash or US Treasury bills, notes and bonds in an
amount equal to at least 100% of the current market value (on a daily
marked-to-market basis) of the loaned securities plus accrued interest. In a
loan transaction, as compensation for lending it securities, the Fund will
receive a portion of the dividends or interest accrued on the securities held as
collateral or, in the case of cash collateral, a portion of the income from the
investment of such cash. In addition, the Fund will receive the amount of all
dividends, interest and other distributions on the loaned securities. However,
the borrower has the right to vote the loaned securities. The Fund will call
loans to vote proxies if a material issue affecting the investment is to be
voted upon. Should the borrower of the securities fail financially, the Fund may
experience delays in recovering the securities or exercising its rights in the
collateral. Loans are made only to borrowers that are deemed by Adviser to be of
good financial standing. In a loan transaction, the Fund will also bear the risk
of any decline in value of securities acquired with cash collateral. The Fund
will minimize this risk by limiting the investment of cash collateral to high
quality instruments of short maturity.
7
<PAGE>
DEPOSITORY RECEIPTS. The Fund may invest in securities of foreign issuers
in the form of American Depository Receipts ("ADRs"), European Depository
Receipts ("EDRs") and similar instruments, or other securities convertible into
securities of eligible issuers. These securities may not necessarily be
denominated in the same currency as the securities for which they may be
exchanged. Generally, ADRs, in registered form, are designed for use in the US
securities markets, and EDRs are issued for trading primarily in European
securities markets. ADRs are receipts typically issued by a US bank or trust
company evidencing ownership of the underlying securities. ADRs represent the
right to receive securities of foreign issuers deposited in a domestic bank or a
correspondent bank. ADRs do not eliminate the risk inherent in investing in the
securities of foreign issuers. In general, there is a large liquid market in the
US for many ADRs. The information available for ADRs is subject to the
accounting, auditing and financial reporting standards of the domestic market or
exchange on which they are traded, which standards are more uniform and more
exacting than those to which many foreign issuers are subject. For purposes of
the Fund's investment policies, the Fund's investments in ADRs, EDRs and similar
instruments will be deemed to be investments in the equity securities
representing securities of foreign issuers into which they may be converted.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
banks and other financial institutions, such as broker-dealers. Under a
repurchase agreement, a Fund purchases securities from a financial institution
that agrees to repurchase the securities at the Fund's original purchase price
plus interest within a specified time (normally one business day). The Fund will
invest no more than 10% of its net assets (taken at current market value) in
repurchase agreements maturing in more than seven days. The Fund will limit
repurchase transactions to those member banks of the Federal Reserve System and
broker-dealers whose creditworthiness Adviser considers satisfactory. Should the
counterparty to a transaction fail financially, the Fund may encounter delay and
incur costs before being able to sell the securities. Further, the amount
realized upon the sale of the securities may be less than that necessary to
fully compensate the Fund.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreements under the circumstances described in "Investment Restrictions." Under
a reverse repurchase agreement, the Fund sells portfolio securities to a
financial institution in return for cash in an amount equal to a percentage of
the portfolio securities' market value and agrees to repurchase the securities
at a future date at a prescribed repurchase price equal to the amount of cash
originally received plus interest on such amount. The Fund retains the right to
receive interest and principal payments with respect to the securities while
they are in the possession of the financial institutions. Reverse repurchase
agreements involve the risk of default by the counterparty, which may adversely
affect the Fund's ability to reacquire the underlying securities.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities of
foreign or domestic issues. A convertible security is a fixed-income security (a
bond or preferred stock) which may be converted at a stated price within a
specified period of time into a certain quantity of the common stock of the same
or a different issuer. Convertible securities are senior to common stocks in a
corporation's capital structure but are usually subordinated to similar
nonconvertible securities. Convertible securities provide, through their
conversion feature, an opportunity to participate in capital appreciation
resulting from a market price advance in a convertible security's underlying
common stock. The price of a convertible security is influenced by the market
value of the underlying common stock and tends to increase as the market value
of the underlying stock rises, whereas it
8
<PAGE>
tends to decrease as the market value of the underlying stock declines. Of the
convertible securities used by the Fund, less than 5% will be considered lower
than investment-grade. Such securities are regarded as speculative with respect
to the issuer's capacity to pay interest and repay principal in accordance with
the terms of the obligation. These lower rated debt securities may include
obligations that are in default or that face the risk of default with respect to
principal or interest. Therefore, such securities are sometimes referred to as
"junk bonds." Please see the Statement of Additional Information for a
description of the securities ratings.
CASH RESERVES. For the purpose of investing uncommitted cash balances or to
maintain liquidity to meet shareholder redemptions, the Fund may invest
temporarily and without limitation in high quality short-term fixed income
securities. These securities include obligations issued or guaranteed as to
principal and interest by the US Government, its agencies or instrumentalities
and repurchase agreements collateralized by these obligations, commercial paper,
bank certificates of deposit, bankers' acceptances and time deposits.
SECURITIES WARRANTS. The Fund may invest up to 5% of its net assets in
warrants of foreign or domestic issuers. Included in such amount, but not to
exceed 2% of the value of the Fund's assets, may be warrants that are not listed
on a securities exchange. A warrant typically is a long term option issued by a
corporation which generally gives the holder the privilege of buying a specified
number of shares of the underlying common stock of the issuer at a specified
exercise price at any time on or before an expiration date. Stock index warrants
entitle the holder to receive, upon exercise, an amount in cash determined by
reference to fluctuations in the level of a specified stock index. If the Fund
does not exercise or dispose of a warrant prior to its expiration, it will
expire worthless.
FOREIGN GOVERNMENT SECURITIES. Foreign government securities which the Fund
may invest in generally consist of obligations issued or backed by the national,
state or provincial government or similar political subdivisions or central
banks in foreign countries. Foreign government securities also include debt
obligations of supranational entities, which include international organizations
designated or backed by governmental entities to promote economic reconstruction
or development, international banking institutions and related government
agencies. These securities also include debt securities of quasi-government
agencies and debt securities denominated in multinational currency units of an
issuer.
FORWARD COMMITMENTS. The Fund may contract to purchase securities for a
fixed price at a future date beyond customary settlement time. When effecting
such transactions, cash or liquid high quality debt obligations held by the Fund
of a dollar amount sufficient to make payment for the portfolio securities to be
purchased will be segregated on the Fund's records at the trade date and
maintained until the transaction is settled. The failure of the other party to
the transaction to complete the transaction may cause the Fund to miss an
advantageous price or yield. The Fund bears the risk of price fluctuations
during the period between the trade and settlement dates. For additional
discussion of the risks associated with the use of foreign currency
transactions, see "Risk Factors -- Foreign Currency."
OPTIONS ON SECURITIES AND SECURITIES INDICES. The Fund may write and
purchase covered put and call options on securities in which it may directly
invest. Option transactions of the Fund will be conducted so that the total
amount paid on premiums for all put and call options outstanding will not
9
<PAGE>
exceed 5% of the value of the Fund's total assets. Further, the Fund will not
write a put or call option or combination thereof if, as a result, the aggregate
value of all securities or collateral used to cover its outstanding options
would exceed 25% of the value of the Fund's total assets.
The Fund may purchase or sell options on securities indices that are
comprised of securities in which it may directly invest, subject to the
limitations set forth above and provided such options are traded on a national
securities exchange or in the over-the-counter market. Options on securities
indices are similar to options on securities except there is no transfer of a
security and settlement is in cash. A call option on a securities index grants
the purchaser of the call, for a premium paid to the seller, the right to
receive in cash an amount equal to the difference between the closing value of
the index and the exercise price of the option times a multiplier established by
the exchange upon which the option is traded. Please refer to the section
entitled "Hedging Strategies and Related Investment Techniques" in the Statement
of Additional Information for further information.
FUTURES CONTRACTS AND OPTIONS ON FUTURES. For hedging purposes, including
protecting the price or interest rate of a security the Fund intends to buy, the
Fund may enter into futures contracts that relate to securities in which it may
directly invest and indices comprised of such securities and may purchase and
write call and put options on such contracts.
A financial futures contract is a contract to buy or sell a specified
quantity of financial instruments such as US Treasury bills, notes and bonds,
commercial paper and bank certificates of deposit or the cash value of a
financial instrument index at a specified future date at a price agreed upon
when the contract is made. A stock index futures contract is a contract to buy
or sell specified units of a stock index at a specified date at a price agreed
upon when the contract is made. The value of a unit is based on the current
value of the stock index. Under such contracts, no delivery of the actual
securities making up the index takes place. Rather, upon expiration of the
contract, settlement is made by exchanging cash in an amount equal to the
difference between the contract price and the closing price of the index at
expiration, net of variation margin previously paid.
Substantially all futures contracts are closed out before settlement date or
called for cash settlement. A futures contract is closed out by buying or
selling an identical offsetting futures contract. Upon entering into a futures
contract, the Fund is required to deposit an initial margin with Custodian for
the benefit of the futures broker. The initial margin serves as a "good faith"
deposit that the Fund will honor its futures commitment. Subsequent payments
(called "variation margin") to and from the broker are made on a daily basis as
the price of the underlying investment fluctuates.
Options on futures contracts give the purchaser the right to assume a
position at a specified price in a futures contract at any time before
expiration of the option contract.
When trading futures contracts, the Fund will not commit more than 5% of the
market value of its total assets to initial margin deposits on futures and
premiums paid for options on futures. Please refer to the section entitled
"Hedging Strategies and Related Investment Techniques" in the Statement of
Additional Information for further information.
To the extent permitted under the 1940 Act and exemptive rules and orders
thereunder, the Fund may seek to achieve its investment objective by investing
solely in the shares of another investment company that has substantially
similar investment objectives and policies.
10
<PAGE>
INVESTMENT RESTRICTIONS
The Fund has fundamental investment restrictions, which may be changed only
with the approval of a majority of the Fund's shareholders as defined in the
1940 Act. A more detailed discussion of the Fund's investment restrictions and
investment policies appears in the Statement of Additional Information.
Unless otherwise noted, the fundamental restrictions apply at the time an
investment is made. The Fund may not:
1. Invest 25% or more of the value of its total assets in securities of
companies primarily engaged in any one industry (other than the US
Government, its agencies or instrumentalities). Concentration may occur
as a result of changes in the market value of portfolio securities, but
may not result from investment.
2. Borrow money (including reverse repurchase agreements), except as a
temporary measure for extraordinary or emergency purposes or to
facilitate redemptions (not for leveraging or investment), provided that
borrowings do not exceed an amount equal to 33 1/3% of the current value
of the Fund's assets taken at market value, less liabilities other than
borrowings. If at any time a Fund's borrowings exceed this limitation due
to a decline in net assets, such borrowings will within three days be
reduced to the extent necessary to comply with this limitation. A Fund
will not purchase investments once borrowed funds (including reverse
repurchase agreements) exceed 5% of its total assets.
3. Pledge, mortgage, or hypothecate its assets. However, a Fund may pledge
securities having a market value at the time of the pledge not exceeding
33 1/3% of the value of the Fund's total assets to secure permitted
borrowings.
RISK FACTORS
FOREIGN SECURITIES. Investors should consider carefully the substantial
risks involved in securities of companies and governments of foreign nations.
There may be less publicly available information about foreign companies
comparable to the reports and ratings published regarding US companies. Foreign
companies are not generally subject to uniform accounting, auditing and
financial reporting standards, and auditing practices and requirements may not
be comparable to those applicable to US companies. Many foreign markets have
substantially less volume than either the established domestic securities
exchanges or the over-the-counter markets. Securities of some foreign companies
are less liquid and more volatile than securities of comparable US companies.
Commission rates in foreign countries, which may be fixed rather than subject to
negotiation as in the US, are likely to be higher. In many foreign countries
there is less government supervision and regulation of securities exchanges,
brokers and listed companies than in the US, and capital requirements for
brokerage firms are generally lower. Settlement of transactions in foreign
securities may, in some instances, be subject to delays and related
administrative uncertainties.
FOREIGN CURRENCY. The Fund may be affected either favorably or unfavorably
by fluctuations in the relative rates of exchange between the currencies of
different nations, exchange control regulations and indigenous economic and
political developments. The Fund endeavors to buy and sell foreign currencies on
favorable terms. Such price spread on currency exchange (to cover service
11
<PAGE>
charges) may be incurred, particularly when the Fund changes investments from
one country to another or when proceeds from the sale of shares in US dollars
are used for the purchase of securities in foreign countries. Also, some
countries may adopt policies which would prevent the Fund from repatriating
invested capital and dividends, withhold portions of interest and dividends at
the source, or impose other taxes, with respect to the Fund's investments in
securities of issuers of that country. There also is the possibility of
expropriation, nationalization, confiscatory or other taxation, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country), default in foreign government securities, political or social
instability, or diplomatic developments that could adversely affect investments
in securities of issuers in those nations.
FUTURES CONTRACTS AND OPTIONS ON FUTURES. There are certain investment
risks in using futures contracts and options as a hedging technique. Such risks
may include: (1) the inability to close out a futures contract or option caused
by the nonexistence of a liquid secondary market; and (2) an imperfect
correlation between price movements of the futures contracts or option with
price movements of the portfolio securities or securities index subject to the
hedge. Finally, the successful use of options and futures also depends on the
Adviser's ability to correctly predict price movements in the market involved in
a particular option or futures transaction. Please refer to the section "Hedging
Strategies and Related Investment Techniques -- Risk Factors in Options,
Futures, Forward and Currency Transactions" in the Statement of Additional
Information for further information.
EMERGING MARKETS. Investments in companies domiciled in emerging market
countries may be subject to additional risks. These risks include: (1) Volatile
social, political and economic conditions can cause investments in emerging or
developing markets exposure to economic structures that are generally less
diverse and mature. Emerging market countries can have political systems which
can be expected to have less stability than those of more developed countries.
The possibility may exist that recent favorable economic developments in certain
emerging market countries may be suddenly slowed or reversed by unanticipated
political or social events in such countries. Moreover, the economies of
individual emerging market countries may differ favorably or unfavorably from
the US economy in such respects as the rate of growth in gross domestic product,
the rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position. (2) The small current size of the markets for such
securities and the currently low or nonexistent volume of trading can result in
a lack of liquidity and in greater price volatility. Until recently, there has
been an absence of a capital market structure or market-oriented economy in
certain emerging market countries. Because the Fund's securities will generally
be denominated in foreign currencies, the value of such securities to the Fund
will be affected by changes in currency exchange rates and in exchange control
regulations. A change in the value of a foreign currency against the US dollar
will result in a corresponding change in the US dollar value of the Fund's
securities. In addition, some emerging market countries may have fixed or
managed currencies which are not free-floating against the US dollar. Further,
certain emerging market currencies may not be internationally traded. Certain of
these currencies have experienced a steady devaluation relative to the US
dollar. Many emerging markets countries have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had, and may continue to have,
negative effects on the economies and securities markets of certain emerging
market countries. (3) The existence of national policies may restrict the Fund's
investment opportunities and may include restrictions on
12
<PAGE>
investment in issuers or industries deemed sensitive to national interests. (4)
Some emerging markets countries may not have developed structures governing
private or foreign investment and may not allow for judicial redress for injury
to private property.
PORTFOLIO TURNOVER
The portfolio turnover rate cannot be predicted, but it is anticipated that
the Fund's annual turnover rate generally will not exceed 80%. A high turnover
rate (over 100%) will: (1) increase transaction expenses which will adversely
affect a Fund's performance; and (2) result in increased brokerage commissions
and other transaction costs, and the possibility of realized capital gains. The
Adviser's sell discipline for the Fund's investment in securities of foreign
issuers is based on the premise of a long-term investment horizon, however,
sudden changes in valuation levels arising from, for example, new macroeconomic
policies, political developments, and industry conditions could change the
assumed time horizon. Some countries impose restrictions on repatriation of
capital and/or dividends which would lengthen the Adviser's assumed time horizon
in those countries. Liquidity, volatility, and overall risk of a position are
other factors considered by the Adviser in determining the appropriate
investment horizon. Therefore, the Fund may dispose of securities without regard
to the time they have been held when such action, for defensive or other
purposes, appears advisable.
The Fund may effect portfolio transactions with or through State Street
Brokerage Services, Inc. an affiliate of the Adviser, when the Adviser
determines that the Fund will receive competitive execution, price and
commissions.
DIVIDENDS AND DISTRIBUTIONS
The Board of Trustees intends to declare and pay on Fund shares dividends
annually from net investment income. The Board of Trustees intends to declare
distributions annually from net capital gains, if any, generally in mid-October.
An additional distribution may be declared and paid in December, if required,
for the Fund to avoid imposition of a 4% federal excise tax on undistributed
capital gains.
Dividends declared in October, November or December and payable to
shareholders of record in such months will be deemed to have been paid by the
Fund and received by shareholders on December 31 of that year if the dividend is
paid prior to February 1 of the following year.
Income dividends and capital gains distributions will be paid in additional
shares at their net asset value on the record date unless the shareholder has
elected to receive them in cash. Such election may be made by giving 10 days'
written notice to Transfer Agent.
Any dividend or capital gain distribution paid by the Fund shortly after a
purchase of shares will reduce the per share net asset value of the Fund by the
amount of the dividend or distribution. In effect, the payment will represent a
return of capital to the shareholder. However, the shareholder will be subject
to taxes with respect to such dividend or distribution.
TAXES
The Fund intends to qualify as a regulated investment company ("RIC") under
Subchapter M of the Internal Revenue Code, as amended (the "Code"). As a RIC,
the Fund will not be subject to federal
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income taxes to the extent it distributes its net investment income and capital
gain net income (capital gains in excess of capital losses) to its shareholders.
The Board intends to distribute each year substantially all of the Fund's net
investment income and capital gain net income.
Dividends from net investment income and distributions of net short-term
capital gains are taxable to shareholders as ordinary income under federal
income tax laws whether paid in cash or in additional shares. Distributions from
net long-term capital gains are taxable as long-term capital gains regardless of
the length of time a shareholder has held such shares and whether paid in cash
or additional shares.
Dividends and distributions may also be subject to state or local taxes.
Depending on the state tax rules pertaining to a shareholder, a portion of the
dividends paid by the Fund attributable to direct obligations of the US Treasury
and certain agencies may be exempt from state and local taxes.
The sale of Fund shares by a shareholder is a taxable event and may result
in capital gain or loss. A capital gain or loss may be realized from an ordinary
redemption of shares or an exchange of shares between two mutual funds (or two
series of portfolios of a mutual fund). Any loss incurred on the sale or
exchange of Fund shares held for one year or more will be treated as a long-term
capital loss to the extent of capital gain dividends received with respect to
such shares.
Shareholders will be notified after each calendar year of the amounts of
income dividends and net capital gains distributions and the percentage of the
Fund's income attributable to US Treasury and agency obligations. The Fund is
required to withhold a legally determined portion of all taxable dividends,
distributions, and redemption proceeds payable to any noncorporate shareholder
that does not provide the Fund with the shareholder's correct taxpayer
identification number or certification that the shareholder is not subject to
backup withholding.
FOREIGN INCOME TAXES. Investment income received by the Fund from sources
within foreign countries may be subject to foreign income taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries which would entitle the Fund to a reduced rate of such taxes or
exemption from taxes on such income. It is impossible to determine the effective
rate of foreign tax for the Fund in advance since the amount of the assets to be
invested within various countries is not known.
If the Fund invests in an entity that is classified as a "passive foreign
investment company" ("PFIC") for federal income tax purposes, the application of
certain provisions of the Code applying to PFICs could result in the imposition
of certain federal income taxes on the Fund. It is anticipated that any taxes on
the Fund with respect to investments in PFICs would be insignificant. Under US
Treasury regulations for PFICs, the Fund can elect to mark-to-market its PFIC
holdings in lieu of paying taxes on gains or distributions therefrom. It is
anticipated that any taxes on a Fund with respect to investments in PFICs would
be insignificant.
Foreign shareholders should consult with their tax advisers as to if and how
the federal income tax and its withholding requirements applies to them.
If more than 50% in value of a Fund's total assets at the close of any
taxable year consists of securities of foreign corporations, the Fund may file
an election with the Internal Revenue Service (the "Foreign Election") that
would permit shareholders to take a credit (or a deduction) for foreign income
taxes paid by the Fund. If the Foreign Election is made, shareholders would
include in their
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gross income both dividends received from the Fund and foreign income taxes paid
by the Fund. Shareholders of the Fund would be entitled to treat the foreign
income taxes withheld as a credit against their United States federal income
taxes, subject to the limitations set forth in the Internal Revenue Code with
respect to the foreign tax credit generally. Alternatively, shareholders could
treat the foreign income taxes withheld as a deduction from gross income in
computing taxable income rather than as a tax credit. It is anticipated that the
Fund will qualify to make the Foreign Election; however, the Fund cannot be
certain that it will be eligible to make such an election or that any particular
shareholder will be eligible for the foreign tax credit.
The foregoing discussion is only a summary of certain federal income tax
issues generally affecting the Fund and its shareholders. Circumstances among
investors may vary and each investor is encouraged to discuss investment in the
Fund with the investor's tax adviser.
VALUATION OF FUND SHARES
NET ASSET VALUE PER SHARE. The Fund determines net asset value once each
business day as of the close of the regular trading session of the New York
Stock Exchange (ordinarily 4 p.m. Eastern time). A business day is one on which
the New York Stock Exchange is open for business. Net asset value per share is
computed by dividing the current value of the Fund's assets, less its
liabilities, by the number of shares of the Fund outstanding and rounding to the
nearest cent.
VALUATION OF FUND SECURITIES. With the exceptions noted below, the Fund
values portfolio securities at market value. This generally means that equity
and fixed income securities listed and traded principally on any national
securities exchange are valued on the basis of the last sale price or, lacking
any sales, at the closing bid price, on the primary exchange on which the
security is traded. United States equity and fixed income securities traded
principally over-the-counter and options are valued on the basis of the last
reported bid price. Futures contracts are valued on the basis of the last
reported sale price.
Because many fixed income securities do not trade each day, last sale or bid
prices are frequently not available. Fixed income securities therefore may be
valued using prices provided by a pricing service when such prices are
determined by Custodian to reflect the market value of such securities.
International securities traded on a national securities exchange are valued
on the basis of the last sale price. International securities traded
over-the-counter are valued on the basis of best bid or official bid, as
determined by the relevant securities exchange. In the absence of a last sale or
best or official bid price, such securities may be valued on the basis of prices
provided by a pricing service if those prices are believed to reflect the market
value of such securities.
Fixed income securities maturing within 60 days of the valuation date are
valued at amortized cost unless the Board determines that amortized cost does
not represent market value. The amortized cost valuation procedure initially
prices an instrument at its cost and thereafter assumes a constant amortization
to maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. While 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 a Fund would
receive if it sold the instrument.
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The Fund values securities for which market quotations are not readily
available at fair value, as determined in good faith pursuant to procedures
established by the Board of Trustees.
PURCHASE OF FUND SHARES
MINIMUM INITIAL INVESTMENT AND ACCOUNT BALANCE. The Fund requires a minimum
initial investment of $1,000. The minimum account balance is $500. The Fund
reserves the right to reject any purchase order.
OFFERING DATES AND TIMES. Fund shares may be purchased on any business day
without a sales commission. All purchases must be made in US dollars. Purchase
orders in good form and payments for Fund shares must be received by the
Transfer Agent prior to 4:00 p.m. Eastern time to be effective on the date
received. The accompanying payment must be in federal funds or converted into
federal funds by the Transfer Agent before the purchase order can be accepted.
Purchase orders in good form are described below.
ORDER AND PAYMENT PROCEDURES. There are several ways to invest in the Fund.
The Fund requires a purchase order in good form which consists of a completed
and signed Account Registration and Investment Instruction Form (the
"Application") for each new account regardless of the investment method. For
additional information, copies of Applications or questions, call Transfer Agent
at (800) 647-7327, or write to Transfer Agent at: State Street Bank and Trust
Company, P.O. Box 8317, Boston, MA 02266-8317, Attention: The Seven Seas Series
Active International Fund.
FEDERAL FUNDS WIRE. An investor may purchase shares by wiring federal funds
to State Street Bank and Trust Company as Transfer Agent by:
1. Telephoning State Street Bank and Trust Company at (800) 647-7327 and
stating: (1) the investor's account registration number, address and
social security or tax identification number; (2) the amount being wired;
(3) the name of the wiring bank; (4) the name and telephone number of the
person at the wiring bank to be contacted in connection with the order;
and (5) that the funds should be invested in The Seven Seas Series Active
International Fund.
2. Instructing the wiring bank to wire federal funds to: State Street Bank
and Trust Company, Boston, MA (ABA #0110-00028), Attention: The Seven
Seas Series Active International Fund, Mutual Funds Service Division (DDA
#9904-631-0). The wire instructions should also include the name in which
the account is registered, the account number, and the name of the Fund
in which to be invested.
3. Completing the Application and forwarding it to Transfer Agent at the
above address.
MAIL. To purchase shares by mail, send a check or other negotiable bank
draft payable to: State Street Bank and Trust Company, P.O. Box 8317, Boston, MA
02266-8317, Attention: The Seven Seas Series Active International Fund.
Certified checks are not necessary, but checks are accepted subject to
collection at full face value in United States funds and must be drawn in United
States dollars on a United States bank. Normally, checks and drafts are
converted to federal funds within two business days following receipt of the
check or draft. Initial investments should be accompanied by a completed
Application, and subsequent investments are to be accompanied by the investor's
account number.
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THIRD PARTY TRANSACTIONS. Investors purchasing Fund shares through a
program of services offered by a financial intermediary, such as a bank,
broker-dealer, investment adviser or others, may be required to pay additional
fees by such intermediary. Investors should contact such intermediary for
information concerning what additional fees, if any, may be charged.
IN-KIND EXCHANGE OF SECURITIES. The Transfer Agent may, at its discretion,
permit investors to purchase shares through the exchange of securities they
hold. Any securities exchanged must meet the investment objective, policies and
limitations of the Fund, must have a readily ascertainable market value, must be
liquid and not restricted as to transfer either by law or liquidity of the
market and must be acquired by the Fund for investment and not for resale. The
market value of any securities exchanged, plus any cash, must be at least $1
million. Shares purchased in exchange for securities generally may not be
redeemed or exchanged until the transfer has settled -- usually within 15 days
following the purchase by exchange.
The basis of the exchange will depend upon the relative net asset value of
the shares purchased and securities exchanged. Securities accepted by the Fund
will be valued in the same manner as the Fund values its assets. Any interest
earned on the securities following their delivery to the Transfer Agent and
prior to the exchange will be considered in valuing the securities. All
interest, dividends, subscription or other rights attached to the securities
become the property of the Fund, along with the securities.
EXCHANGE PRIVILEGE. Subject to the Fund's minimum investment requirement,
investors may exchange their Fund shares without charge for shares of any other
investment portfolio offered by Investment Company. Shares are exchanged on the
basis of relative net asset value per share. Exchanges may be made: (1) by
telephone if the registrations of the two accounts are identical; or (2) in
writing addressed to State Street Bank and Trust Company, P.O. Box 8317, Boston,
MA 02266-8317, Attention: The Seven Seas Series Active International Fund. If
shares of a Fund were purchased by check, the shares must have been present in
an account for 10 days before an exchange is made. The exchange privilege will
only be available in states where the exchange may legally be made, and may be
modified or terminated by the Funds upon 60 days' notice to shareholders.
REDEMPTION OF FUND SHARES
Fund shares may be redeemed on any business day at the net asset value next
determined after the receipt of a redemption request in proper form as described
below. Payment will be made as soon as possible (but will ordinarily not exceed
seven days) and will be mailed to the shareholder's address of record. Upon
request, redemption proceeds will be wire transferred to the shareholder's
account at a domestic commercial bank that is a member of the Federal Reserve
System. Although Investment Company does not currently charge a fee for this
service, Investment Company reserves the right to charge a fee for the cost of
wire-transferred redemptions of less than $1,000. Payment for redemption of
shares purchased by check may be withheld for up to 10 days after the date of
purchase to assure that such checks are honored.
EXPEDITED REDEMPTION. Shareholders may normally redeem Fund shares by
telephoning State Street Bank and Trust Company between 9:00 a.m. and 4:00 p.m.
Eastern time at (800) 647-7327, Attention: The Seven Seas Series Active
International Fund. Shareholders using the expedited redemption method must
complete the appropriate section on the Application. The Fund and the
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Transfer Agent will employ reasonable procedures to confirm that instructions
communicated by telephone are properly authorized. The Fund and the Transfer
Agent will not be liable for executing telephone instructions that are deemed to
be authorized after following reasonable procedures. These procedures include
recording telephonic instructions, mailing to the shareholder a written
confirmation of the transaction, performing a personal identity test with
private information not likely to be known by other individuals, and restricting
mailing of redemptions to the shareholder's address of record. During periods of
drastic economic or market changes, shareholders using this method may encounter
delays. In such event, shareholders should consider using the mail redemption
procedure described below.
MAIL. Redemption requests may be made in writing directly to State Street
Bank and Trust Company, P.O. Box 8317, Boston, MA 02266-8317, Attention: The
Seven Seas Series Active International Fund. The redemption price will be the
net asset value next determined after receipt by State Street of all required
documents in good order. Good order means that the request must include the
following:
1. A letter of instruction or a stock assignment stating the Fund or Funds
out of which the shares are to be redeemed and designating specifically
the dollar amount to be redeemed signed by all owners of the shares in
the exact names in which they appear on the account, together with a
guarantee of the signature of each owner by a bank, trust company or
member of a recognized stock exchange; and
2. Such other supporting legal documents, if required by applicable law or
Transfer Agent, in the case of estates, trusts, guardianships,
custodianships, corporations and pension and profit-sharing plans.
The Fund reserves the right to redeem the shares in any account with a
balance of less than $500 as a result of shareholder redemptions rather than
market value fluctuations. Before shares are redeemed to close an account, the
shareholder will be notified in writing and allowed 60 days to purchase
additional shares to meet the minimum account balance.
The Fund may pay any portion of the redemption amount in excess of $250,000
by a distribution in kind of readily marketable securities from the portfolio of
the Fund in lieu of cash. Investors will incur brokerage charges on the sale of
these portfolio securities. The Fund reserves the right to suspend the right of
redemption or postpone the date of payment if emergency conditions, as specified
in the 1940 Act or determined by the Securities and Exchange Commission, should
exist.
GENERAL MANAGEMENT
The Board of Trustees supervises the management, activities and affairs of
the Fund and has approved contracts with various financial organizations to
provide, among other services, day-to-day management required by the Fund.
ADVISORY AGREEMENT. The Investment Company employs State Street to furnish
investment services to the Fund. State Street is one of the largest providers of
securities processing and recordkeeping services for US mutual funds and pension
funds. State Street is a wholly owned subsidiary of State Street Boston
Corporation, a publicly held bank holding company. State Street, with over
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<PAGE>
$171.3 billion (US) under management as of September 30, 1995, provides complete
global investment management services from offices in the United States, London,
Sydney, Hong Kong, Tokyo, Toronto, Luxembourg, Melbourne, Montreal, Paris,
Dubai, Munich and Brussels.
Adviser, subject to Board supervision, directs the investment of the Fund in
accordance with the Fund's investment objective, policies and restrictions. Mr.
Robert Rubano, Assistant Vice President, has been the portfolio manager
primarily responsible for investment decisions regarding the Fund since its
inception in March 1993. Mr. Rubano has been with State Street since 1990 as a
portfolio manager of active international funds. There are seven other portfolio
managers who work with Mr. Rubano in managing the Fund. For these services, the
Fund pays Adviser a fee, calculated daily and paid monthly, that on an annual
basis is equal to .75% of the Fund's average daily net assets. This fee is
higher than the investment advisory fees paid by most investment companies.
However, the fee is comparable to that of other funds with similar investment
objectives.
The Glass-Steagall Act prohibits a depository state chartered bank such as
Adviser from engaging in the business of issuing, underwriting, selling or
distributing certain securities. The activities of Adviser in informing its
customers of the Fund, performing investment and redemption services and
providing custodian, transfer, shareholder servicing, dividend disbursing and
investment advisory services may raise issues under these provisions. Adviser
has been advised by its counsel that its activities in connection with the Fund
are consistent with its statutory and regulatory obligations. THE SHARES OFFERED
BY THIS PROSPECTUS ARE NOT ENDORSED OR GUARANTEED BY STATE STREET OR ITS
AFFILIATES, ARE NOT DEPOSITS OR OBLIGATIONS OF STATE STREET OR ITS AFFILIATES,
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
Changes in federal or state statutes and regulations relating to the
permissible activities of banks and their affiliates, as well as judicial or
administrative decisions or interpretations of such or future statutes and
regulations, could prevent Adviser from continuing to perform all or a part of
the above services for its customers and/or the Funds. If Adviser were
prohibited from serving the Funds in any of its present capacities, the Board of
Trustees would seek an alternative provider(s) of such services. In such event,
changes in the operation of the Fund may occur. It is not expected by Adviser
that existing shareholders would suffer any adverse financial consequences (if
another adviser with equivalent abilities is found) as a result of any of these
occurrences.
State Street may from time to time have discretionary authority over
accounts which invest in Investment Company shares. These accounts include
accounts maintained for securities lending clients and accounts which permit the
use of Investment Company portfolios as short-term cash sweep investments.
Shares purchased for all discretionary accounts are held of record by State
Street, who retains voting control of such shares. As of November 30, 1995,
State Street held of record 36% of the issued and outstanding shares of
Investment Company in connection with its discretionary accounts. Consequently,
State Street may be deemed to be a controlling person of Investment Company for
purposes of the 1940 Act.
Under the Adviser's Code of Ethics, the Adviser's employees in Boston where
investment management operations are conducted are only permitted to engage in
personal securities transactions which do not involve securities which the
Adviser had recommended for purchase or sale, or purchased or sold, on behalf of
its clients. Such employees must report their personal securities transactions
quarterly and supply broker confirmations to the Adviser.
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ADMINISTRATION AGREEMENT. Frank Russell Investment Management Company
("Administrator") serves as administrator to the Fund. Administrator currently
serves as investment manager and administrator to 22 mutual funds with assets of
$7.3 billion as of October 31, 1995, and acts as administrator to 17 mutual
funds, including the Fund, with assets of $7.2 billion as of October 31, 1995.
Pursuant to the Administration Agreement with Investment Company,
Administrator will: (1) supervise all aspects of the Funds' operations; (2)
provide the Funds with administrative and clerical services, including the
maintenance of certain of the Funds' books and records; (3) arrange the periodic
updating of the Funds' prospectuses and any supplements thereto; (4) provide
proxy materials and reports to Fund shareholders and the Securities and Exchange
Commission; and (5) provide the Funds with adequate office space and all
necessary office equipment and services, including telephone service, heat,
utilities, stationery supplies and similar items. For these services, the Active
International Fund pays Administrator a fee that on an annual basis is equal to
the following percentages of each Fund's average daily net assets: $0 to and
including $500 million -- .07%; over $500 million to and including $1 billion --
.06%; over $1 billion to and including $1.5 billion -- .04%; and over $1.5
billion -- .03%. The percentage of the fee paid by a particular Fund is equal to
the percentage of average aggregate daily net assets that are attributable to
that Fund. Administrator will also receive reimbursement of expenses it incurs
in connection with establishing new investment portfolios. Further, the
administration fee paid by Investment Company will be reduced by the sum of
certain distribution related expenses (up to a maximum of 15% of the asset-based
administration fee listed above).
Administrator also provides administrative services in connection with the
registration of shares of Investment Company with those states in which its
shares are offered or sold. Compensation for such services is on a time spent
basis. Investment Company will pay all registration, exemptive application,
renewal and related fees and reasonable out-of-pocket expenses.
Officers and employees of the Administrator and Distributor are permitted to
engage in personal securities transactions subject to restrictions and
procedures set forth in the Confidentiality Manual and Code of Ethics adopted by
the Investment Company, Administrator and Distributor. Such restrictions and
procedures include substantially all of the recommendations of the Advisory
Group of the Investment Company Institute and comply with Securities and
Exchange Commission rules and regulations.
DISTRIBUTION SERVICES AND SHAREHOLDER SERVICING ARRANGEMENTS. Pursuant to
the Distribution Agreement with Investment Company, Russell Fund Distributors,
Inc. ("Distributor"), a wholly owned subsidiary of Administrator, serves as
distributor for all Fund shares.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 (the "Plan")
under the 1940 Act. The purpose of the Plan is to provide for the payment of
certain Investment Company distribution and shareholder servicing expenses.
Under the Plan, Distributor will be reimbursed in an amount up to .25% of the
Fund's average annual net assets for distribution-related and shareholder
servicing expenses. Payments under the Plan will be made to Distributor to
finance activity which is intended to result in the sale and retention of Fund
shares including: (1) the costs of prospectuses, reports to
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shareholders and sales literature; (2) advertising; and (3) expenses incurred in
connection with the promotion and sale of Fund shares, including Distributor's
overhead expenses for rent, office supplies, equipment, travel, communication,
compensation and benefits of sales personnel.
Under the Plan, the Fund may also enter into agreements ("Service
Agreements") with financial institutions, which may include Adviser ("Service
Organizations"), to provide shareholder servicing with respect to Fund shares
held by or for the customers of the Service Organizations. Under the Service
Agreements, the Service Organizations may provide various services for such
customers including: answering inquiries regarding the Fund; assisting customers
in changing dividend options, account designations and addresses; performing
subaccounting for such customers; establishing and maintaining customer accounts
and records; processing purchase and redemption transactions; providing periodic
statements showing customers' account balances and integrating such statements
with those of other transactions and balances in the customers' other accounts
serviced by the Service Organizations; arranging for bank wires transferring
customers' funds; and such other services as the customers may request in
connection with the Fund, to the extent permitted by applicable statute, rule or
regulation. Service Organizations may receive from the Fund, for shareholder
servicing, monthly fees at a rate that shall not exceed .20% per annum of the
average daily net asset value of the Fund's shares owned by or for shareholders
with whom the Service Organization has a servicing relationship. Banks and other
financial service firms may be subject to various state laws, and may be
required to register as dealers pursuant to state law.
Investment Company has entered into Service Agreements with Adviser, State
Street Brokerage Services, Inc. ("SSBSI"), and Adviser's Metropolitan Division
of Commercial Banking ("Commercial Banking") to obtain the services described
above with respect to Fund shares held by or for customers. In return for these
services, Investment Company pays Adviser a fee in an amount that per annum is
equal to .025%, .175% and .175% of the average daily value of all Fund shares
held by or for customers of Adviser, SSBSI, and Commercial Banking,
respectively.
Payments to the Distributor, as well as payments to Service Organizations
from the Fund are not permitted by the Plan to exceed .25% of the Fund's average
net asset value per year. Any payments that are required to be made by the
Distribution Agreement and any Service Agreement but could not be made because
of the .25% limitation may be carried forward and paid in subsequent years so
long as the Plan is in effect. A Fund's liability for any such expenses carried
forward shall terminate at the end of two years following the year in which the
expenditure was incurred. Service Organizations will be responsible for prompt
transmission of purchase and redemption orders and may charge fees for their
services.
FUND EXPENSES
The Fund will pay all of their expenses other than those expressly assumed
by Adviser and Administrator. The principal expenses of the Fund are the annual
advisory fee payable to Adviser and distribution and shareholder servicing
expenses. Other expenses include: (1) amortization of deferred organizational
costs; (2) taxes, if any; (3) expenses for legal, auditing and financial
accounting services; (4) expense of preparing (including typesetting, printing
and mailing) reports, prospectuses and notices to existing shareholders; (5)
administrative fees; (6) custodian fees; (7) expense of issuing and redeeming
Fund shares; (8) the cost of registering Fund shares under federal and state
laws; (9) shareholder meetings and related proxy solicitation expenses; (10) the
fees, travel expenses and other out-
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of-pocket expenses of Trustees who are not affiliated with Adviser or any of its
affiliates; (11) insurance, interest, brokerage and litigation costs; (12)
extraordinary expenses as may arise, including expenses incurred in connection
with litigation proceedings and claims and the legal obligations of Investment
Company to indemnify its Trustees, officers, employees, shareholders,
distributors and agents; and (13) other expenses properly payable by the Fund.
PERFORMANCE CALCULATIONS
From time to time the Fund may advertise its total return. The total return
of a Fund refers to the average annual compounded rates of return from a
hypothetical investment in the Fund over one-, five-and ten-year periods or for
the life of the Fund (as stated in the advertisement), assuming the reinvestment
of all dividend and capital gains distributions.
Comparative performance information may be used from time to time in
advertising or marketing Fund shares, including data from Lipper Analytical
Services, Inc., Wall Street Journal Score Card, MSCI EAFE Index, or other
industry publications, business periodicals, rating services and market indices.
The Fund may also advertise nonstandardized performance information which is for
periods in addition to those required to be presented.
Total return and other performance figures are based on historical earnings
and are not indications of future performance.
ADDITIONAL INFORMATION
CUSTODIAN, TRANSFER AGENT AND INDEPENDENT ACCOUNTANTS. State Street holds
all portfolio securities and cash assets of the Fund, provides portfolio
recordkeeping services and serves as the Fund's transfer agent ("Transfer
Agent") and custodian ("Custodian"). State Street is authorized to deposit
securities in securities depositories or to use the services of subcustodians.
State Street has no responsibility for the supervision and management of the
Fund except as investment adviser. Coopers & Lybrand L.L.P., Boston,
Massachusetts, is Investment Company's independent accountants.
REPORTS TO SHAREHOLDERS AND SHAREHOLDER INQUIRIES. Shareholders will
receive an unaudited semiannual financial statement and an annual financial
statement audited by Investment Company's independent accountants. Shareholder
inquiries regarding the Prospectus and financial statements may be made by
calling Distributor at (617) 654-6089. Inquiries regarding shareholder balances
may be made by calling the Transfer Agent at (800) 647-7327.
ORGANIZATION, CAPITALIZATION AND VOTING. Investment Company was organized
as a Massachusetts business trust on October 3, 1987, and operates under a First
Amended and Restated Master Trust Agreement dated October 13, 1993, as amended.
Investment Company issues shares divisible into an unlimited number of
series (or funds), each of which is a separate trust under Massachusetts law.
The Active International Fund is one such series.
Fund shares represent an equal proportionate interest in the Fund, have a
par value of $.001 per share and are entitled to such relative rights and
preferences and dividends and distributions earned on the assets belonging to
the Fund as may be declared by the Board of Trustees. Fund shares are fully paid
and nonassessable by Investment Company and have no preemptive rights.
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Each Fund share has one vote. There are no cumulative voting rights. There
is no annual meeting of shareholders, but special meetings may be held. On any
matter that affects only a particular investment fund, only shareholders of that
fund vote unless otherwise required by the 1940 Act or the Master Trust
Agreement. The Trustees hold office for the life of the Trust. A Trustee may
resign or retire, and a Trustee may be removed at any time by a vote of
two-thirds of the Investment Company shares or by a vote of a majority of the
Trustees. The Trustees shall promptly call and give notice of a meeting of
shareholders for the purpose of voting upon removal of any Trustee when
requested to do so in writing by holders of not less than 10% of the shares then
outstanding. A vacancy on the Board of Trustees may be filled by the vote of a
majority of the remaining Trustees, provided that immediately thereafter at
least two-thirds of the Trustees have been elected by shareholders.
Investment Company does not issue share certificates for the Fund. Transfer
Agent sends Fund shareholders statements concurrent with any transaction
activity, confirming all investments in or redemptions from their accounts. Each
statement also sets forth the balance of shares held in the account.
As of November 30, 1995, State Street Bank Retirement CM01, an account of
State Street Bank and Trust Company, owned of record 38% of the issued and
outstanding shares of the Fund, and is therefore deemed to be a controlling
person of the Fund for purposes of the 1940 Act.
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THE SEVEN SEAS SERIES FUND
TWO INTERNATIONAL PLACE, 35TH FLOOR
BOSTON, MASSACHUSETTS 02110
INVESTMENT ADVISER, CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
DISTRIBUTOR
Russell Fund Distributors, Inc.
Two International Place, 35th Floor
Boston, Massachusetts 02110
ADMINISTRATOR
Frank Russell Investment Management Company
909 A Street
Tacoma, Washington 98402
LEGAL COUNSEL
Goodwin, Procter & Hoar
Exchange Place
Boston, Massachusetts 02109
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
<PAGE>
THE SEVEN SEAS SERIES FUND
The Seven Seas Series Money Market Fund
The Seven Seas Series US Government Money Market Fund
The Seven Seas Series Tax Free Money Market Fund
The Seven Seas Series S&P 500 Index Fund
The Seven Seas Series Small Cap Fund
The Seven Seas Series Matrix Equity Fund
The Seven Seas Series Yield Plus Fund
The Seven Seas Series Growth and Income Fund
The Seven Seas Series Intermediate Fund
The Seven Seas Series Active International Fund
The Seven Seas Series Emerging Markets Fund
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Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
THE SEVEN SEAS SERIES FUND
TWO INTERNATIONAL PLACE, 35TH FLOOR
BOSTON, MASSACHUSETTS 02110
(617) 654-6089
SMALL CAP FUND
The Seven Seas Series Fund is a registered, open-end investment company with
multiple portfolios, each of which is a mutual fund. This Prospectus describes
and offers shares of beneficial interest in one such mutual fund, The Seven Seas
Series Small Cap Fund (referred to in this Prospectus as the "Fund") The Fund
seeks to maximize total return through investment in equity securities; at least
65% of total assets will be invested in securities issued by smaller capitalized
issuers. The Fund's shares are offered without sales commissions. However, the
Fund pays certain distribution expenses under its Rule 12b-1 plan.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SHARES IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, STATE STREET BANK AND TRUST COMPANY, AND SHARES ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER AGENCY, AND INVOLVE RISKS INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. Please read and retain this
document for future reference. Additional information about the Fund has been
filed with the Securities and Exchange Commission in a Statement of Additional
Information dated December 29, 1995. The Statement of Additional Information is
incorporated herein by reference and is available without charge from
Distributor at its address noted below or by calling (617) 654-6089.
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<S> <C> <C>
INVESTMENT ADVISER, CUSTODIAN
AND TRANSFER AGENT: DISTRIBUTOR: ADMINISTRATOR:
State Street Bank and Trust Russell Fund Distributors, Frank Russell Investment
Company Inc. Management Company
225 Franklin Street Two International Place, 909 A Street
Boston, Massachusetts 02110 35th Floor Tacoma, Washington 98402
(617) 654-4721 Boston, Massachusetts 02110 (206) 627-7001
(617) 654-6089
</TABLE>
PROSPECTUS DATED DECEMBER 29, 1995
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TABLE OF CONTENTS
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PAGE
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<S> <C>
Fund Operating Expenses.................................................................................... 3
Financial Highlights....................................................................................... 4
The Seven Seas Series Fund................................................................................. 5
Manner of Offering......................................................................................... 5
Investment Objectives, Policies and Restrictions........................................................... 5
Certain Risk Factors....................................................................................... 10
Portfolio Turnover......................................................................................... 11
Dividends and Distributions................................................................................ 11
Taxes...................................................................................................... 11
Valuation of Fund Shares................................................................................... 12
Purchase of Fund Shares.................................................................................... 13
Redemption of Fund Shares.................................................................................. 15
General Management......................................................................................... 16
Fund Expenses.............................................................................................. 19
Performance Calculations................................................................................... 19
Additional Information..................................................................................... 19
</TABLE>
2
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FUND OPERATING EXPENSES
THE SEVEN SEAS SERIES SMALL CAP FUND
The following table is intended to assist the investor in understanding the
various costs and expenses that an investor in the Small Cap Fund will incur
directly or indirectly. The examples provided in the table should not be
considered a representation of past or future expenses. Actual expenses may be
greater or less than those shown. For additional information, see "General
Management."
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
- ------------------------------
Sales Load Imposed on Purchases......................................................................................... None
Sales Load Imposed on Reinvested Dividends.............................................................................. None
Deferred Sales Load..................................................................................................... None
Redemption Fees......................................................................................................... None
Exchange Fee............................................................................................................ None
ANNUAL FUND OPERATING EXPENSES:
- --------------------------------
(as a percentage of average daily net assets)
Advisory Fees (1)....................................................................................................... .42%
12b-1 Fees (1)(2)....................................................................................................... .14
Other Expenses (1)...................................................................................................... .44
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Total Operating Expenses After Fee Reimbursement (1)(3)................................................................. 1.00%
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<CAPTION>
EXAMPLES: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
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<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (i) 5% annual return
and (ii) redemption at the end of each time period:...................................... $ 10 $ 32 $ 55 $122
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(1) The Adviser has voluntarily agreed to reimburse the Fund for all expenses in
excess of 1.00% of average daily net assets on an annual basis. The gross
annual expenses before reimbursement of Advisory, 12b-1 and Other Expenses
would be .75%, .25% and .77% of average daily net assets, respectively. The
total operating expenses of the Fund absent reimbursement would be 1.77% of
average daily net assets on an annual basis. This agreement will remain in
effect for the current fiscal year.
(2) Rule 12b-1 fees may include expenses paid for shareholder servicing
activities.
(3) Investors purchasing Fund shares through a financial intermediary, such as a
bank or an investment adviser, may also be required to pay additional fees
for services provided by the intermediary. Such investors should contact the
intermediary for information concerning what additional fees, if any, will
be charged.
Long-term shareholders of the Fund may pay more in Rule 12b-1 fees that the
economic equivalent of the maximum front-end sales charges permitted by the
National Association of Securities Dealers, Inc.
3
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FINANCIAL HIGHLIGHTS
THE SEVEN SEAS SERIES SMALL CAP FUND
The following table contains important financial information relating to the
Fund and has been audited by Coopers & Lybrand L.L.P., the Fund's independent
accountants. The table includes selected data for a share outstanding throughout
each fiscal year or period ended August 31, and other performance information
derived from the financial statements. The table appears in the Fund's Annual
Report and should be read in conjunction with the Fund's financial statements
and related notes, which are incorporated by reference in the Statement of
Additional Information and which appear, along with the report of Coopers &
Lybrand L.L.P., in the Fund's Annual Report to Shareholders. More detailed
information concerning the Fund's performance, including a complete portfolio
listing and audited financial statements, is available in the Fund's Annual
Report, which may be obtained without charge by writing or calling the
Distributor.
<TABLE>
<CAPTION>
1995+ 1994 1993 1992++
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<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR............................... $11.88 $12.24 $10.09 $10.00
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.......................................... .13 .21 .22 .04
Net realized and unrealized gain on investments................ 3.19 .24 2.14 .05
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Total From Investment Operations............................... 3.32 .45 2.36 .09
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LESS DISTRIBUTIONS:
Net investment income.......................................... (.15) (.21) (.21) --
Net realized gain on investments............................... (.58) (.60) -- --
In excess of net realized gain on investments.................. (.05) -- -- --
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Total Distributions............................................ (.78) (.81) (.21) --
------ ------ ------ ------
------ ------ ------ ------
NET ASSET VALUE, END OF YEAR..................................... $14.42 $11.88 $12.24 $10.09
------ ------ ------ ------
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TOTAL RETURN (%)(a).............................................. 30.04 3.90 23.66 .90
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average daily net assets (b)....... .97 .30 .25 .25
Operating expenses, gross, to average daily net assets (b)..... 1.58 .81 1.18 1.71
Net investment income to average daily net assets (b).......... .81 1.73 1.85 2.55
Portfolio turnover (b)......................................... 192.88 44.86 81.14 4.59
Net assets, end of year ($000 omitted)......................... 23,301 25,716 34,815 9,392
Per share amount of fees waived ($ omitted).................... .0261 .0046 .0083 .0021
Per share amount of fees reimbursed by Adviser ($ omitted)..... .0730 .0582 .1040 .0226
</TABLE>
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+ Prior to November 22, 1994, the Fund was passively managed as the S&P Midcap
Index Fund.
++ For the period July 1, 1992 (commencement of operations) to August 31, 1992.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended August 31, 1992 are annualized.
4
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THE SEVEN SEAS SERIES FUND
The Seven Seas Series Fund ("Investment Company") is an open-end management
investment company that is organized as a Massachusetts business trust. In
addition, each series of the Investment Company is diversified as defined in the
Investment Company Act of 1940, as amended ("1940 Act"). As a "series" company,
Investment Company is authorized to issue an unlimited number of shares
evidencing beneficial interest in different investment portfolios. Through this
Prospectus, Investment Company offers shares in one such portfolio, The Seven
Seas Series Small Cap Fund. State Street Bank and Trust Company (the "Adviser"
or "State Street") serves as the investment adviser for the Fund.
MANNER OF OFFERING
DISTRIBUTION AND ELIGIBLE INVESTORS. Shares of the Fund are offered without
a sales commission by Russell Fund Distributors, Inc., Investment Company's
distributor, to US and foreign institutional and retail investors that invest
for their own account or in a fiduciary or agency capacity. The Fund will incur
distribution expenses under its Rule 12b-1 plan. See "General Management --
Distribution Services and Shareholder Servicing."
MINIMUM AND SUBSEQUENT INVESTMENT. The Fund requires a minimum initial
investment of $1,000. The shareholder's investment in the Fund may be subject to
redemption at the Fund's discretion if the account balance is less than $500 as
a result of shareholder redemptions. The Fund reserves the right to reject any
purchase order.
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVE
The Fund's non-fundamental investment objective is to maximize total return
through investment in equity securities; at least 65% of total assets will be
invested in securities of smaller capitalized issuers. This objective may be
changed with the approval of a majority of the Fund's Trustees. Shareholders
would, however, receive at least 60 days prior notice of any change to the
Fund's investment objective. The objective will only be changed with the
approval of a majority of the Fund's shareholders, as defined by the 1940 Act.
There can be no assurance that the Fund will meet its investment objective.
Equity securities will be selected by the Fund on the basis of a proprietary
analytical model of Adviser. Each security will be ranked on the basis of a
single measure: the momentum of Wall Street sentiment. The measure examines
changes in Wall Street analyst's earnings estimates and ranks stocks by the
strength and consistency of those changes. Sector and industry weight are
maintained at a similar level to that of the Russell 2000 Index to avoid
unintended exposure to factors such as the direction of the economy, interest
rates, energy prices and inflation.
The Fund will invest primarily in a portfolio of small to medium sized
domestic companies. Small to medium sized companies will include those stocks
with market capitalization generally ranging in value from $100 million to $1.5
billion. Investments in small to medium sized companies may involve greater
risks because these companies generally have a limited track record and often
experience higher price volatility.
5
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The Russell 2000-Registered Trademark- Index consists of the smallest 2,000
companies in the Russell 3000-Registered Trademark- Index, representing
approximately 11% of the Russell 3000 Index total market capitalization. The
Russell 3000 Index is composed of 3,000 large US companies, as determined by
market capitalization, representing approximately 98% of the total US equity
market. The purpose of the Russell 2000 Index is to provide a comprehensive
representation of the investable US small-capitalization equity market. The
average market capitalization is $255 million.
The Fund will invest at least 65% of its total assets in small to medium
sized companies. However, the Fund may invest in other equity securities and may
temporarily for defensive purposes, without limitation, in certain short-term
investment grade debt securities. Such securities may be used to invest
uncommitted cash balances or to maintain liquidity to meet shareholder
redemptions. See "Investment Policies -- Cash Reserves." For additional
investment strategies, see "Investment Policies."
INVESTMENT POLICIES
The investment policies described below reflect the Fund's current
practices, are not fundamental and may be changed by the Board of Trustees of
Investment Company without shareholder approval. For more information on the
Fund's Investment Policies, see the Statement of Additional Information. To the
extent consistent with the Fund's investment objective and restrictions, the
Fund may invest in the following instruments and may use the following
investment techniques:
US GOVERNMENT SECURITIES. US Government securities include US Treasury
bills, notes and bonds and other obligations issued or guaranteed as to interest
and principal by the US Government and its agencies or instrumentalities.
Obligations issued or guaranteed as to interest and principal by the US
Government, its agencies or instrumentalities include securities that are
supported by the full faith and credit of the United States Treasury, securities
that are supported by the right of the issuer to borrow from the United States
Treasury, discretionary authority of the US Government agency or
instrumentality, and securities supported solely by the creditworthiness of the
issuer.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
banks and other financial institutions, such as broker-dealers. Under a
repurchase agreement, a Fund purchases securities from a financial institution
that agrees to repurchase the securities at the Fund's original purchase price
plus interest within a specified time (normally one business day). The Fund will
invest no more than 10% of its net assets (taken at current market value) in
repurchase agreements maturing in more than seven days. The Fund will limit
repurchase transactions to those member banks of the Federal Reserve System and
broker-dealers whose creditworthiness Adviser considers satisfactory. Should the
counterparty to a transaction fail financially, the Fund may encounter delay and
incur costs before being able to sell the securities. Further, the amount
realized upon the sale of the securities may be less than that necessary to
fully compensate the Fund.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreements under the circumstances described in "Investment Restrictions." Under
a reverse repurchase agreement, the Fund sells portfolio securities to a
financial institution in return for cash in an amount equal to a percentage of
the portfolio securities' market value and agrees to repurchase the securities
at a future date at a prescribed repurchase price equal to the amount of cash
originally received plus interest on such amount. The Fund retains the right to
receive interest and principal payments with
6
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respect to the securities while they are in the possession of the financial
institutions. Reverse repurchase agreements involve the risk of default by the
counterparty, which may adversely affect the Fund's ability to reacquire the
underlying securities.
FORWARD COMMITMENTS. The Fund may contract to purchase securities for a
fixed price at a future date beyond customary settlement time. When effecting
such transactions, cash or liquid high quality debt obligations held by the Fund
of a dollar amount sufficient to make payment for the portfolio securities to be
purchased will be segregated on the Fund's records at the trade date and
maintained until the transaction is settled. The failure of the other party to
the transaction to complete the transaction may cause the Fund to miss an
advantageous price or yield. The Fund bears the risk of price fluctuations
during the period between the trade and settlement dates.
WHEN-ISSUED TRANSACTIONS. The Fund may purchase securities on a when-issued
basis. In these transactions, a Fund purchases securities with payment and
delivery scheduled for a future time. Until settlement, the Fund segregates cash
and marketable high quality debt securities equal in value to their when-issued
commitments. Between the trade and settlement dates, the Fund bears the risk of
any fluctuation in the value of the securities. These transactions involve the
additional risk that the other party may fail to complete the transaction and
cause the Fund to miss a price or yield considered advantageous. The Fund will
engage in when-issued transactions only for the purpose of acquiring portfolio
securities consistent with its investment objective and policies and not for
investment leverage. The Fund will not invest more than 25% of its net assets in
when-issued securities.
ILLIQUID SECURITIES. The Fund will not invest more than 15% of its net
assets in illiquid securities or securities that are not readily marketable,
including repurchase agreements and time deposits of more than seven days'
duration. The absence of a regular trading market for illiquid securities
imposes additional risks on investments in these securities. Illiquid securities
may be difficult to value and may often be disposed of only after considerable
expense and delay. In addition, the Fund will not invest more than 10% in
securities of issuers which may not be sold to the public without registration
under the Securities Act of 1933.
VARIABLE AMOUNT MASTER DEMAND NOTES. Variable amount master demand notes
are unsecured obligations that are redeemable upon demand and are typically
unrated. These instruments are issued pursuant to written agreements between
their issuers and holders. The agreements permit the holders to increase
(subject to an agreed maximum) and the holders and issuers to decrease the
principal amount of the notes, and specify that the rate of interest payable on
the principal fluctuates according to an agreed formula.
FUTURES CONTRACTS AND OPTIONS ON FUTURES. For hedging purposes, including
protecting the price or interest rate of securities that the Fund intends to
buy, the Fund may enter into futures contracts that relate to securities in
which they may directly invest and indices comprised of such securities and may
purchase and write call and put options on such contracts.
A financial futures contract is a contract to buy or sell a specified
quantity of financial instruments such as US Treasury bills, notes and bonds,
commercial paper and bank certificates of deposit or the cash value of a
financial instrument index at a specified future date at a price agreed upon
when the contract is made. A stock index futures contract is a contract to buy
or sell specified units of a stock index at a specified future date at a price
agreed upon when the contract is made. The value of a unit is based on the
current value of the contract index. Under such contracts no delivery of the
actual stocks
7
<PAGE>
making up the index takes place. Rather, upon expiration of the contract,
settlement is made by exchanging cash in an amount equal to the difference
between the contract price and the closing price of the index at expiration, net
of variation margin previously paid.
Substantially all futures contracts are closed out before settlement date or
called for cash settlement. A futures contract is closed out by buying or
selling an identical offsetting futures contract. Upon entering into a futures
contract, a Fund is required to deposit an initial margin with Custodian for the
benefit of the futures broker. The initial margin serves as a "good faith"
deposit that the Fund will honor their futures commitments. Subsequent payments
(called "variation margin") to and from the broker are made on a daily basis as
the price of the underlying investment fluctuates.
Options on futures contracts give the purchaser the right to assume a
position at a specified price in a futures contract at any time before
expiration of the option contract.
When trading futures contracts, the Fund will not commit more than 5% of the
market value of its total assets to initial margin deposits on futures and
premiums paid for options on futures.
OPTIONS ON SECURITIES AND SECURITIES INDICES. The Fund may write and
purchase covered put and call options on securities in which it may directly
invest. Option transactions of the Fund will be conducted so that the total
amount paid on premiums for all put and call options outstanding will not exceed
5% of the value of the Fund's total assets. Further, the Fund will not write a
put or call option or combination thereof if, as a result, the aggregate value
of all securities or collateral used to cover its outstanding options would
exceed 25% of the value of the Fund's total assets.
The Fund may purchase or sell options on securities indices that are
comprised of securities in which it may directly invest, subject to the
limitations set forth above and provided such options are traded on a national
securities exchange or in the over-the-counter market. Options on securities
indices are similar to options on securities except there is no transfer of a
security and settlement is in cash. A call option on a securities index grants
the purchaser of the call, for a premium paid to the seller, the right to
receive in cash an amount equal to the difference between the closing value of
the index and the exercise price of the option times a multiplier established by
the exchange upon which the option is traded.
LENDING PORTFOLIO SECURITIES. The Fund may lend portfolio securities with a
value of up to 33 1/3% of its total assets. Such loans may be terminated at any
time. The Fund will receive cash or US Treasury bills, notes and bonds in an
amount equal to at least 100% of the current market value (on a daily
marked-to-market basis) of the loaned securities plus accrued interest. In a
loan transaction, as compensation for lending it securities, the Fund will
receive a portion of the dividends or interest accrued on the securities held as
collateral or, in the case of cash collateral, a portion of the income from the
investment of such cash. In addition, the Fund will receive the amount of all
dividends, interest and other distributions on the loaned securities. However,
the borrower has the right to vote the loaned securities. The Fund will call
loans to vote proxies if a material issue affecting the investment is to be
voted upon. Should the borrower of the securities fail financially, the Fund may
experience delays in recovering the securities or exercising its rights in the
collateral. Loans are made only to borrowers that are deemed by Adviser to be of
good financial standing. In a loan transaction, the Fund will also bear the risk
of any decline in value of securities acquired with cash collateral. The Fund
will minimize this risk by limiting the investment of cash collateral to high
quality instruments of short maturity.
8
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CASH RESERVES. For the purpose of investing uncommitted cash balances or to
maintain liquidity to meet shareholder redemptions, the Fund may invest
temporarily and without limitation in high quality short-term fixed income
securities. These securities include obligations issued or guaranteed as to
principal and interest by the US Government, its agencies or instrumentalities
and repurchase agreements collateralized by these obligations, commercial paper,
bank certificates of deposit, bankers' acceptances and time deposits.
WARRANTS. The Fund may invest in warrants which entitle the holder to buy
equity securities at a specific price for a specific period of time. Warrants
may be considered more speculative than certain other types of investments in
that they do not entitle a holder to dividends or voting rights with respect to
the securities which may be purchased nor do they represent any rights in the
assets of the issuing company. Also, the value of the warrant does not
necessarily change with the value of the underlying securities and a warrant
ceases to have value if it is not exercised prior to the expiration date. The
Fund will not invest more than 5% of the value of its net assets in warrants, or
more than 2% in warrants which are not listed on the New York or American Stock
Exchanges.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities of
foreign or domestic issues. A convertible security is a fixed-income security (a
bond or preferred stock) which may be converted at a stated price within a
specified period of time into a certain quantity of the common stock of the same
or a different issuer. Convertible securities are senior to common stocks in a
corporation's capital structure but are usually subordinated to similar
nonconvertible securities. Convertible securities provide, through their
conversion feature, an opportunity to participate in capital appreciation
resulting from a market price advance in a convertible security's underlying
common stock. The price of a convertible security is influenced by the market
value of the underlying common stock and tends to increase as the market value
of the underlying stock rises, whereas it tends to decrease as the market value
of the underlying stock declines.
AMERICAN DEPOSITORY RECEIPTS (ADRS). The Fund may invest in ADRs under
certain circumstances as an alternative to directly investing in foreign
securities. Generally, ADRs, in registered form, are designed for use in the US
securities markets. ADRs are receipts typically issued by a US bank or trust
company evidencing ownership of the underlying securities. ADRs represent the
right to receive securities of foreign issuers deposited in a domestic bank or a
correspondent bank. ADRs do not eliminate the risk inherent in investing in the
securities of foreign issuers. However, by investing in ADRs rather than
directly in a foreign issuer's stock, the Fund can avoid currency risks during
the settlement period for either purchases or sales. In general, there is a
large liquid market in the US for many ADRs. The information available for ADRs
is subject to the accounting, auditing and financial reporting standards of the
domestic market or exchange on which they are traded, which standards are more
uniform and more exacting than those to which many foreign issuers are subject.
DEBT SECURITIES. The Fund may also invest temporarily in investment grade
debt securities for defensive purposes. The Fund will primarily invest in equity
securities as defined under the Securities Exchange Act of 1934 (including
convertible debt securities). Other debt will typically represent less than 10%
of the Fund's assets. Please see the Statement of Additional Information for a
description of securities ratings.
9
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INVESTMENT RESTRICTIONS
The Fund has fundamental investment restrictions, which may be changed only
with the approval of a majority of the Fund's shareholders as defined in the
1940 Act. A more detailed discussion of the Fund's investment restrictions and
investment policies appears in the Statement of Additional Information. Unless
otherwise noted, the fundamental restrictions apply at the time an investment is
made. The Fund may not:
1. Invest 25% or more of the value of its total assets in securities of
companies primarily engaged in any one industry (other than the US
Government, its agencies or instrumentalities). Concentration may occur
as a result of changes in the market value of portfolio securities, but
may not result from investment.
2. Borrow money (including reverse repurchase agreements), except as a
temporary measure for extraordinary or emergency purposes or to
facilitate redemptions (not for leveraging or investment), provided that
borrowings do not exceed an amount equal to 33 1/3% of the current value
of the Fund's assets taken at market value, less liabilities other than
borrowings. If at any time a Fund's borrowings exceed this limitation due
to a decline in net assets, such borrowings will within three days be
reduced to the extent necessary to comply with this limitation. The Fund
will not purchase investments once borrowed funds (including reverse
repurchase agreements) exceed 5% of its total assets.
3. Pledge, mortgage, or hypothecate its assets. However, the Fund may pledge
securities having a market value at the time of the pledge not exceeding
33 1/3% of the value of the Fund's total assets to secure permitted
borrowings.
CERTAIN RISK FACTORS
FUTURES AND OPTIONS CONTRACTS. There are certain investment risks in using
futures contracts and options as a hedging technique. Such risks may include:
(1) the inability to close out a futures contract or option caused by the
nonexistence of a liquid secondary market; and (2) an imperfect correlation
between price movements of the futures contracts or option with price movements
of the portfolio securities or securities index subject to the hedge.
FOREIGN INVESTMENTS. Investors should consider carefully the substantial
risks involved in securities of companies and governments of foreign nations.
There may be less publicly available information about foreign companies
comparable to the reports and ratings published regarding US companies. Foreign
companies are not generally subject to uniform accounting, auditing and
financial reporting standards, and auditing practices and requirements may not
be comparable to those applicable to US companies. Many foreign markets have
substantially less volume than either the established domestic securities
exchanges or the OTC markets. Securities of some foreign companies are less
liquid and more volatile than securities of comparable US companies. Commission
rates in foreign countries, which may be fixed rather than subject to
negotiation as in the US, are likely to be higher. In many foreign countries
there is less government supervision and regulation of securities exchanges,
brokers and listed companies than in the US, and capital requirements for
brokerage firms are generally lower. Settlement of transactions in foreign
securities may, in some instances, be subject to delays and related
administrative uncertainties. Because the some of the Fund's securities may be
denominated in foreign currencies, the value of such securities to the Fund will
be affected by changes
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in currency exchange rates and in exchange control regulations. A change in the
value of a foreign currency against the US dollar will result in a corresponding
change in the US dollar value of the Fund's securities. In addition, some
emerging market countries may have fixed or managed currencies which are not
free-floating against the US dollar. Further, certain emerging market currencies
may not be internationally traded. Certain of these currencies have experienced
a steady devaluation relative to the US dollar. ADRs are subject to all the
above risks, except the imposition of exchange controls and currency
fluctuations during the settlement period.
PORTFOLIO TURNOVER
The portfolio turnover rate cannot be predicted, but it is anticipated that
the Fund's annual turnover rate generally will not exceed 150%. A high turnover
rate (over 100%) will: (1) increase transaction expenses which will adversely
affect a Fund's performance; and (2) result in increased brokerage commissions
and other transaction costs, and the possibility of realized capital gains.
The Fund may effect portfolio transactions with or through State Street
Brokerage Services, Inc., an affiliate of the Adviser, when the Adviser
determines that the Fund will receive competitive execution, price and
commissions.
DIVIDENDS AND DISTRIBUTIONS
The Board of Trustees intends to declare and pay on Fund shares dividends
quarterly from net investment income. The Board of Trustees intends to declare
distributions annually from net capital gains, if any, generally in mid-October.
An additional distribution may be declared and paid in December, if required,
for the Fund to avoid imposition of a 4% federal excise tax on undistributed
capital gains.
Dividends declared in October, November or December and payable to
shareholders of record in such months will be deemed to have been paid by the
Fund and received by shareholders on December 31 of that year if the dividend is
paid prior to February 1 of the following year.
Income dividends and capital gains distributions will be paid in additional
shares at their net asset value on the record date unless the shareholder has
elected to receive them in cash. Such election may be made by giving 10 days'
written notice to Transfer Agent.
Any dividend or capital gain distribution paid by the Fund shortly after a
purchase of shares will reduce the per share net asset value of the Fund by the
amount of the dividend or distribution. In effect, the payment will represent a
return of capital to the shareholder. However, the shareholder will be subject
to taxes with respect to such dividend or distribution.
TAXES
The Fund intends to qualify as a regulated investment company ("RIC") under
Subchapter M of the Internal Revenue Code, as amended (the "Code"). As a RIC,
the Fund will not be subject to federal income taxes to the extent it
distributes its net investment income and capital gain net income (capital gains
in excess of capital losses) to its shareholders. The Board intends to
distribute each year substantially all of the Fund's net investment income and
capital gain net income.
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Dividends from net investment income and distributions of net short-term
capital gains are taxable to shareholders as ordinary income under federal
income tax laws whether paid in cash or in additional shares. Distributions from
net long-term capital gains are taxable as long-term capital gains regardless of
the length of time a shareholder has held such shares and whether paid in cash
or additional shares.
The Fund may purchase bonds at market discount (i.e., bonds with a purchase
price less than original issue price or adjusted issue price). If such bonds are
subsequently sold at a gain then a portion of that gain equal to the amount of
market discount, which should have been accrued through the sale date, will be
taxable to shareholders as ordinary income.
Dividends and distributions may also be subject to state or local taxes.
Depending on the state tax rules pertaining to a shareholder, a portion of the
dividends paid by a Fund attributable to direct obligations of the US Treasury
and certain agencies may be exempt from state and local taxes.
The sale of Fund shares by a shareholder is a taxable event and may result
in capital gain or loss. A capital gain or loss may be realized from an ordinary
redemption of shares or an exchange of shares between two mutual funds (or two
series of portfolios of a mutual fund). Any loss incurred on the sale or
exchange of Fund shares held for one year or more will be treated as a long-term
capital loss to the extent of capital gain dividends received with respect to
such shares.
Shareholders will be notified after each calendar year of the amounts of
income dividends and net capital gains distributions and the percentage of a
Fund's income attributable to US Treasury and agency obligations. The Fund is
required to withhold a legally determined portion of all taxable dividends,
distributions, and redemption proceeds payable to any noncorporate shareholder
that does not provide the Fund with the shareholder's correct taxpayer
identification number or certification that the shareholder is not subject to
backup withholding.
The foregoing discussion is only a summary of certain federal income tax
issues generally affecting the Fund and its shareholders. Circumstances among
investors may vary and each investor is encouraged to discuss investment in the
Fund with the investor's tax adviser.
VALUATION OF FUND SHARES
NET ASSET VALUE PER SHARE. The Fund determines net asset value once each
business day as of the close of the regular trading session of the New York
Stock Exchange (ordinarily 4 p.m. Eastern time). A business day is one on which
the New York Stock Exchange is open for business. Net asset value per share is
computed by dividing the current value of the Fund's assets, less its
liabilities, by the number of shares of the Fund outstanding and rounding to the
nearest cent.
VALUATION OF FUND SECURITIES. With the exceptions noted below, the Fund
values portfolio securities at market value. This generally means that equity
and fixed-income securities listed and traded principally on any national
securities exchange are valued on the basis of the last sale price or, lacking
any sales, at the closing bid price, on the primary exchange on which the
security is traded. United States equity and fixed income securities traded
principally over-the-counter and options are valued on the basis of the last
reported bid price. Futures contracts are valued on the basis of the last
reported sell price.
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Because many fixed income securities do not trade each day, last sale or bid
prices are frequently not available. Fixed income securities therefore may be
valued using prices provided by a pricing service when such prices are
determined by Custodian to reflect the market value of such securities.
International securities traded on a national securities exchange are valued
on the basis of the last sale price. International securities traded
over-the-counter are valued on the basis of best bid or official bid, as
determined by the relevant securities exchange. In the absence of a last sale or
best or official bid price, such securities may be valued on the basis of prices
provided by a pricing service if those prices are believed to reflect the market
value of such securities.
Securities maturing within 60 days of the valuation date are valued at
amortized cost unless the Board determines that amortized cost does not
represent market value. The amortized cost valuation procedure initially prices
an instrument at its cost and thereafter assumes a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. While 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 a Fund would
receive if it sold the instrument.
The Fund values securities for which market quotations are not readily
available at fair value, as determined in good faith pursuant to procedures
established by the Board of Trustees.
PURCHASE OF FUND SHARES
MINIMUM INITIAL INVESTMENT AND ACCOUNT BALANCE. The Fund requires a minimum
initial investment of $1,000. The minimum account balance is $500. The Fund
reserves the right to reject any purchase order.
OFFERING DATES AND TIMES. Fund shares may be purchased on any business day
without a sales commission. All purchases must be made in US dollars. Purchase
orders in good form and payments for Fund shares must be received by the
Transfer Agent prior to 4:00 p.m. Eastern time to be effective on the date
received. The accompanying payment must be in federal funds or converted into
federal funds by the Transfer Agent before the purchase order can be accepted.
Purchase orders in good form are described below.
ORDER AND PAYMENT PROCEDURES. There are several ways to invest in the Fund.
The Fund requires a purchase order in good form which consists of a completed
and signed Account Registration and Investment Instruction Form (Application)
for each new account regardless of the investment method. For additional
information, copies of forms or questions, call the Transfer Agent at (800)
647-7327, or write to the Transfer Agent at: State Street Bank and Trust
Company, P.O. Box 8317, Boston, MA 02266-8317, Attention: The Seven Seas Series
Small Cap Fund.
FEDERAL FUNDS WIRE. An investor may purchase shares by wiring federal funds
to State Street Bank and Trust Company as Transfer Agent by:
1. Telephoning State Street Bank and Trust Company at (800) 647-7327 and
providing: (1) the investor's account registration number, address and
social security or tax identification number; (2) the name of the Fund to
be invested in; (3) the amount being wired; (4) the name of the wiring
bank and (5) the name and telephone number of the person at the wiring
bank to be contacted in connection with the order.
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2. Instructing the wiring bank to wire federal funds to: State Street Bank
and Trust Company, Boston, MA (ABA #0110-00028), Attention: The Seven
Seas Series Fund, Mutual Funds Service Division (DDA #9904-631-0). The
wire instructions should also include the name the account is registered
in, the account number and the name of the Fund to be invested in.
3. Completing the Application and forwarding it to Transfer Agent at the
above address.
MAIL. To purchase shares by mail, send a check or other negotiable bank
draft payable to: State Street Bank and Trust Company, P.O. Box 8317, Boston, MA
02266-8317, Attention: The Seven Seas Series Small Cap Fund. Certified checks
are not necessary, but checks are accepted subject to collection at full face
value in United States funds and must be drawn in United States dollars on a
United States bank. Normally, checks and drafts are converted to federal funds
within two business days following receipt of the check or draft. Initial
investments should be accompanied by a completed Application, and subsequent
investments are to be accompanied by the investor's account number.
THIRD PARTY TRANSACTIONS. Investors purchasing Fund shares through a
program of services offered by a financial intermediary, such as a bank,
broker-dealer, investment adviser or others, may be required to pay additional
fees by such intermediary. Investors should contact such intermediary for
information concerning what additional fees, if any, may be charged.
IN-KIND EXCHANGE OF SECURITIES. The Transfer Agent may, at its discretion,
permit investors to purchase shares through the exchange of securities they
hold. Any securities exchanged must meet the investment objective, policies and
restrictions of the Fund, must have a readily ascertainable market value, must
be liquid and must not be subject to restrictions on resale. The market value of
any securities exchanged, plus any cash, must be at least $1 million. Shares
purchased in exchange for securities generally may not be redeemed or exchanged
until the transfer has settled -- usually within 15 days following the purchase
by exchange.
The basis of the exchange will depend upon the relative net asset value of
the shares purchased and securities exchanged. Securities accepted by the Fund
will be valued in the same manner as the Fund values its assets. Any interest
earned on the securities following their delivery to the Transfer Agent and
prior to the exchange will be considered in valuing the securities. All
interest, dividends, subscription or other rights attached to the securities
become the property of the Fund, along with the securities.
EXCHANGE PRIVILEGE. Subject to the Fund's minimum investment requirement,
investors may exchange Fund shares without charge for shares of any other
investment portfolio offered by Investment Company. Shares are exchanged on the
basis of relative net asset value per share. Exchanges may be made: (1) by
telephone if the registrations of the two accounts are identical; or (2) in
writing addressed to State Street Bank and Trust Company, P.O. Box 8317, Boston,
MA 02266-8317, Attention: The Seven Seas Series Small Cap Fund. If shares of a
Fund were purchased by check, the shares must have been present in an account
for 10 days before an exchange is made. The exchange privilege will only be
available in states where the exchange may legally be made, and may be modified
or terminated by the Fund upon 60 days' notice to shareholders.
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REDEMPTION OF FUND SHARES
Fund shares may be redeemed on any business day at the net asset value next
determined after the receipt of a redemption request in proper form as described
below. Payment will be made as soon as possible (but will ordinarily not exceed
seven days) and will be mailed to the shareholder's address of record. Upon
request, redemption proceeds will be wire transferred to the shareholder's
account at a domestic commercial bank that is a member of the Federal Reserve
System. Although Investment Company does not currently charge a fee for this
service, Investment Company reserves the right to charge a fee for the cost of
wire-transferred redemptions of less than $1,000. Payment for redemption of
shares purchased by check may be withheld for up to 10 days after the date of
purchase to assure that such checks are honored.
EXPEDITED REDEMPTION. Shareholders may normally redeem Fund shares by
telephoning State Street Bank and Trust Company between 9:00 a.m. and 4:00 p.m.
Eastern time at (800) 647-7327, Attention: The Seven Seas Series Small Cap Fund.
Shareholders using the expedited redemption method must complete the appropriate
section on the Application. The Fund and the Transfer Agent will employ
reasonable procedures to confirm that instructions communicated by telephone are
properly authorized. The Fund and the Transfer Agent will not be liable for
executing telephone instructions that are deemed to be authorized after
following reasonable procedures. These procedures include recording telephonic
instructions, mailing to the shareholder a written confirmation of the
transaction, performing a personal identity test with private information not
likely to be known by other individuals, and restricting mailing of redemptions
to the shareholder's address of record. During periods of drastic economic or
market changes, shareholders using this method may encounter delays. In such
event, shareholders should consider using the mail redemption procedure
described below.
MAIL. Redemption requests may be made in writing directly to State Street
Bank and Trust Company, P.O. Box 8317, Boston, MA 02266-8317, Attention: The
Seven Seas Series Small Cap Fund. The redemption price will be the net asset
value next determined after receipt by State Street of all required documents in
good order. "Good order" means that the request must include the following:
1. A letter of instruction or a stock assignment stating that shares are to
be redeemed out of The Seven Seas Series Small Cap Fund and designating
specifically the dollar amount to be redeemed signed by all owners of the
shares in the exact names in which they appear on the account, together
with a guarantee of the signature of each owner by a bank, trust company
or member of a recognized stock exchange; and
2. Such other supporting legal documents, if required by applicable law or
Transfer Agent, in the case of estates, trusts, guardianships,
custodianships, corporations and pension and profit-sharing plans.
The Fund reserves the right to redeem the shares in any account with a
balance of less than $500 as a result of shareholder redemptions rather than
market value fluctuations. Before shares are redeemed to close an account, the
shareholder will be notified in writing and allowed 60 days to purchase
additional shares to meet the minimum account balance.
The Fund may pay any portion of the redemption amount in excess of $250,000
by a distribution in kind of readily marketable securities from the portfolio of
the Fund in lieu of cash. Investors will
15
<PAGE>
incur brokerage charges on the sale of these portfolio securities. The Fund
reserves the right to suspend the right of redemption or postpone the date of
payment if emergency conditions, as specified in the 1940 Act or determined by
the Securities and Exchange Commission, should exist.
GENERAL MANAGEMENT
The Board of Trustees supervises the management, activities and affairs of
the Fund and has approved contracts with various financial organizations to
provide, among other services, day-to-day management required by the Fund.
ADVISORY AGREEMENT. The Investment Company employs State Street to furnish
investment services to the Fund. State Street is one of the largest providers of
securities processing and recordkeeping services for US mutual funds and pension
funds. State Street is a wholly owned subsidiary of State Street Boston
Corporation, a publicly held bank holding company. State Street, with over
$171.3 billion (US) under management as of September 30, 1995, provides complete
global investment management services from offices in the United States, London,
Sydney, Hong Kong, Tokyo, Toronto, Luxembourg, Melbourne, Montreal and Paris.
Adviser, subject to Board supervision, directs the investment of the Fund in
accordance with the Fund's investment objective, policies and restrictions. Mr.
Jeffrey Adams, Assistant Vice President, has been the portfolio manager
primarily responsible for investment decisions regarding the Fund since December
1994. Mr. Adams has been with State Street since 1990, as a portfolio manager
for the past three years, and as an account administrator for two years prior to
that. There are four other portfolio managers who work with Mr. Adams in
managing the Fund. For these services, the Fund pays Adviser a fee, calculated
daily and paid monthly, that on an annual basis is equal to .75% of the Fund's
average daily net assets.
The Glass-Steagall Act prohibits a depository state chartered bank such as
Adviser from engaging in the business of issuing, underwriting, selling or
distributing certain securities. The activities of Adviser in informing its
customers of the Fund, performing investment and redemption services and
providing custodian, transfer, shareholder servicing, dividend disbursing and
investment advisory services may raise issues under these provisions. Adviser
has been advised by its counsel that its activities in connection with the Fund
are consistent with its statutory and regulatory obligations. THE SHARES OFFERED
BY THIS PROSPECTUS ARE NOT ENDORSED OR GUARANTEED BY STATE STREET OR ITS
AFFILIATES, ARE NOT DEPOSITS OR OBLIGATIONS OF STATE STREET OR ITS AFFILIATES,
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
Changes in federal or state statutes and regulations relating to the
permissible activities of banks and their affiliates, as well as judicial or
administrative decisions or interpretations of such or future statutes and
regulations, could prevent Adviser from continuing to perform all or a part of
the above services for its customers and/or the Fund. If Adviser were prohibited
from serving the Fund in any of its present capacities, the Board of Trustees
would seek an alternative provider(s) of such services. In such event, changes
in the operation of the Fund may occur. It is not expected by Adviser that
existing shareholders would suffer any adverse financial consequences (if
another adviser with equivalent abilities is found) as a result of any of these
occurrences.
State Street may from time to time have discretionary authority over
accounts which invest in Investment Company shares. These accounts include
accounts maintained for securities lending
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clients and accounts which permit the use of Investment Company portfolios as
short-term cash sweep investments. Shares purchased for all discretionary
accounts are held of record by State Street, who retains voting control of such
shares. As of November 30, 1995, State Street held of record 36% of the issued
and outstanding shares of Investment Company in connection with its
discretionary accounts. Consequently, State Street may be deemed to be a
controlling person of Investment Company for purposes of the 1940 Act.
Under the Adviser's Code of Ethics, the Adviser's employees in Boston where
investment management operations are conducted are only permitted to engage in
personal securities transactions which do not involve securities which the
Adviser had recommended for purchase or sale, or purchased or sold, on behalf of
its clients. Such employees must report their personal securities transactions
quarterly and supply broker confirmations to the Adviser.
ADMINISTRATION AGREEMENT. Frank Russell Investment Management Company
("Administrator") serves as administrator of the Fund. Administrator currently
serves as investment manager and administrator to 22 mutual funds with assets of
$7.3 billion as of October 31, 1995, and acts as administrator to 17 mutual
funds, including this Fund presented in this Prospectus, with assets of $7.2
billion as of October 31, 1995.
Pursuant to the Administration Agreement with Investment Company,
Administrator will: (1) supervise all aspects of the Fund's operations; (2)
provide the Fund with administrative and clerical services, including the
maintenance of certain of the Fund's books and records; (3) arrange the periodic
updating of the Fund's prospectuses and any supplements thereto; (4) provide
proxy materials and reports to Fund shareholders and the Securities and Exchange
Commission; and (5) provide the Fund with adequate office space and all
necessary office equipment and services, including telephone service, heat,
utilities, stationery supplies and similar items. For these services, the Fund
and Investment Company's other domestic investment portfolios pay Administrator
a combined fee that on an annual basis is equal to the following percentages of
their average aggregate daily net assets: $0 to and including $500 million --
.06%; over $500 million to and including $1 billion -- .05%; and over $1 billion
- -- .03%. The percentage of the fee paid by a particular Fund is equal to the
percentage of average aggregate daily net assets that are attributable to that
Fund. Administrator will also receive reimbursement of expenses it incurs in
connection with establishing new investment portfolios. Further, the
administration fee paid by the Investment Company will be reduced by the sum of
certain distribution related expenses (up to a maximum of 15% of the asset-based
administration fee listed above).
Administrator also provides administrative services in connection with the
registration of shares of Investment Company with those states in which its
shares are offered or sold. Compensation for such services is on a "time spent"
basis. Investment Company will pay all registration, exemptive application,
renewal and related fees and reasonable out-of-pocket expenses.
Officers and employees of the Administrator and Distributor are permitted to
engage in personal securities transactions subject to restrictions and
procedures set forth in the Confidentiality Manual and Code of Ethics adopted by
the Investment Company, Administrator and Distributor. Such restrictions and
procedures include substantially all of the recommendations of the Advisory
Group of the Investment Company Institute and comply with Securities and
Exchange Commission rules and regulations.
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DISTRIBUTION SERVICES AND SHAREHOLDER SERVICING ARRANGEMENTS. Pursuant to
the Distribution Agreement with Investment Company, Russell Fund Distributors,
Inc. ("Distributor"), a wholly owned subsidiary of Administrator, serves as
distributor for all Fund shares.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 (the "Plan")
under the 1940 Act. The purpose of the Plan is to provide for the payment of
certain Investment Company distribution and shareholder servicing expenses.
Under the Plan, Distributor will be reimbursed in an amount up to .25% of the
Fund's average annual net assets for distribution-related and shareholder
servicing expenses. Payments under the Plan will be made to Distributor to
finance activity which is intended to result in the sale and retention of Fund
shares including: (1) the costs of prospectuses, reports to shareholders and
sales literature; (2) advertising; and (3) expenses incurred in connection with
the promotion and sale of Fund shares, including Distributor's overhead expenses
for rent, office supplies, equipment, travel, communication, compensation and
benefits of sales personnel.
Under the Plan, the Fund may also enter into agreements ("Service
Agreements") with financial institutions, which may include Adviser ("Service
Organizations"), to provide shareholder servicing with respect to Fund shares
held by or for the customers of the Service Organizations. Under the Service
Agreements, the Service Organizations may provide various services for such
customers including: answering inquiries regarding the Fund; assisting customers
in changing dividend options, account designations and addresses; performing
subaccounting for such customers; establishing and maintaining customer accounts
and records; processing purchase and redemption transactions; providing periodic
statements showing customers' account balances and integrating such statements
with those of other transactions and balances in the customers' other accounts
serviced by the Service Organizations; arranging for bank wires transferring
customers' funds; and such other services as the customers may request in
connection with the Fund, to the extent permitted by applicable statute, rule or
regulation. Service Organizations may receive from the Fund, for shareholder
servicing, monthly fees at a rate that shall not exceed .20% per annum of the
average daily net asset value of the Fund's shares owned by or for shareholders
with whom the Service Organization has a servicing relationship. Banks and other
financial service firms may be subject to various state laws, and may be
required to register as dealers pursuant to state law.
Investment Company has entered into Service Agreements with Adviser, State
Street Brokerage Services, Inc. ("SSBSI"), and Adviser's Metropolitan Division
of Commercial Banking ("Commercial Banking") to obtain the services described
above with respect to Fund shares held by or for customers. In return for these
services, Investment Company pays Adviser a fee in an amount that per annum is
equal to .025%, .175% and .175% of the average daily value of all Fund shares
held by or for customers of Adviser, SSBSI, and Commercial Banking,
respectively.
Payments to the Distributor, as well as payments to Service Organizations
from a Fund are not permitted by the Plan to exceed .25% of the Fund's average
net asset value per year. Any payments that are required to be made by the
Distribution Agreement and any Service Agreement but could not be made because
of the .25% limitation may be carried forward and paid in subsequent years so
long as the Plan is in effect. A Fund's liability for any such expenses carried
forward shall terminate at the end of two years following the year in which the
expenditure was incurred. Service Organizations will be responsible for prompt
transmission of purchase and redemption orders and may charge fees for their
services.
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FUND EXPENSES
The Fund will pay all of its expenses other than those expressly assumed by
Adviser and Administrator. The principal expenses of the Fund is the annual
advisory fee payable to Adviser and distribution and shareholder servicing
expenses. Other expenses include: (1) amortization of deferred organizational
costs; (2) taxes, if any; (3) expenses for legal, auditing and financial
accounting services; (4) expense of preparing (including typesetting, printing
and mailing) reports, prospectuses and notices to existing shareholders; (5)
administrative fees; (6) custodian fees; (7) expense of issuing and redeeming
Fund shares; (8) the cost of registering Fund shares under federal and state
laws; (9) shareholder meetings and related proxy solicitation expenses; (10) the
fees, travel expenses and other out-of-pocket expenses of Trustees who are not
affiliated with Adviser or any of its affiliates; (11) insurance, interest,
brokerage and litigation costs; (12) extraordinary expenses as may arise,
including expenses incurred in connection with litigation proceedings and claims
and the legal obligations of Investment Company to indemnify its Trustees,
officers, employees, shareholders, distributors and agents; and (13) other
expenses properly payable by the Fund.
PERFORMANCE CALCULATIONS
From time to time the Fund may advertise its total return. The total return
of a Fund refers to the average annual compounded rates of return from a
hypothetical investment in the Fund over one-, five- and ten-year periods or for
the life of the Fund (as stated in the advertisement), assuming the reinvestment
of all dividend and capital gains distributions.
Comparative performance information may be used from time to time in
advertising or marketing Fund shares, including data from Lipper Analytical
Services, Inc., Wall Street Journal Score Card, Russell
2000-Registered Trademark- Index, or other industry publications, business
periodicals, rating services and market indices. The Fund may also advertise
nonstandardized performance information which is for periods in addition to
those required to be presented.
Total return and other performance figures are based on historical earnings
and are not indications of future performance.
ADDITIONAL INFORMATION
CUSTODIAN, TRANSFER AGENT AND INDEPENDENT ACCOUNTANTS. State Street holds
all portfolio securities and cash assets of the Fund, provides portfolio
recordkeeping services and serves as the Fund's transfer agent ("Transfer
Agent") and custodian ("Custodian"). State Street is authorized to deposit
securities in securities depositories or to use the services of subcustodians.
State Street has no responsibility for the supervision and management of the
Fund except as investment adviser. Coopers & Lybrand L.L.P., Boston,
Massachusetts, is Investment Company's independent accountants.
REPORTS TO SHAREHOLDERS AND SHAREHOLDER INQUIRIES. Shareholders will
receive unaudited semiannual financial statements and annual financial
statements audited by Investment Company's independent accountants. Shareholder
inquiries regarding the Prospectus and financial statements may be made by
calling Distributor at (617) 654-6089. Inquiries regarding shareholder balances
may be made by calling the Transfer Agent at (800) 647-7327.
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ORGANIZATION, CAPITALIZATION AND VOTING. Investment Company was organized
as a Massachusetts business trust on October 3, 1987, and operates under a First
Amended and Restated Master Trust Agreement dated October 13, 1993, as amended.
Investment Company issues shares divisible into an unlimited number of
series (or funds), each of which is a separate trust under Massachusetts law.
The Fund is one such series.
The Fund share represents an equal proportionate interest in the Fund, has a
par value of $.001 per share and is entitled to such relative rights and
preferences and dividends and distributions earned on the assets belonging to
the Fund as may be declared by the Board of Trustees. Fund shares are fully paid
and nonassessable by Investment Company and have no preemptive rights.
Each Fund share has one vote. There are no cumulative voting rights. There
is no annual meeting of shareholders, but special meetings may be held. On any
matter that affects only a particular investment fund, only shareholders of that
fund vote unless otherwise required by the 1940 Act or the Master Trust
Agreement. The Trustees hold office for the life of the Trust. A Trustee may
resign or retire, and a Trustee may be removed at any time by a vote of
two-thirds of the Investment Company shares or by a vote of a majority of the
Trustees. The Trustees shall promptly call and give notice of a meeting of
shareholders for the purpose of voting upon removal of any Trustee when
requested to do so in writing by holders of not less than 10% of the shares then
outstanding. A vacancy on the Board of Trustees may be filled by the vote of a
majority of the remaining Trustees, provided that immediately thereafter at
least two-thirds of the Trustees have been elected by shareholders.
Investment Company does not issue share certificates for the Fund. Transfer
Agent sends shareholders of the Fund statements concurrent with any transaction
activity, confirming all investments in or redemptions from their accounts. Each
statement also sets forth the balance of shares held in the account.
As of November 30, 1995, State Street Bank Retirement CM01, an account of
State Street Bank and Trust Company, owned of record 46% of the issued and
outstanding shares of the Fund, and is therefore deemed to be a controlling
person of the Fund for purposes of the 1940 Act.
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THE SEVEN SEAS SERIES FUND
TWO INTERNATIONAL PLACE, 35TH FLOOR
BOSTON, MASSACHUSETTS 02110
INVESTMENT ADVISER, CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
DISTRIBUTOR
Russell Fund Distributors, Inc.
Two International Place, 35th Floor
Boston, Massachusetts 02110
ADMINISTRATOR
Frank Russell Investment Management Company
909 A Street
Tacoma, Washington 98402
LEGAL COUNSEL
Goodwin, Procter & Hoar Exchange Place
Boston, Massachusetts 02109
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
<PAGE>
THE SEVEN SEAS SERIES FUND
The Seven Seas Series Money Market Fund
The Seven Seas Series US Government Money Market Fund
The Seven Seas Series Tax Free Money Market Fund
The Seven Seas Series S&P 500 Index Fund
The Seven Seas Series Small Cap Fund
The Seven Seas Series Matrix Equity Fund
The Seven Seas Series Yield Plus Fund
The Seven Seas Series Growth and Income Fund
The Seven Seas Series Intermediate Fund
The Seven Seas Series Active International Fund
The Seven Seas Series Emerging Markets Fund
<PAGE>
Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
THE SEVEN SEAS SERIES FUND
Two International Place, 35th Floor
Boston, Massachusetts 02110
(617) 654-6089
US TREASURY OBLIGATIONS FUND
The Seven Seas Series Fund is a series registered, open-end investment
company with multiple portfolios, each of which is a mutual fund. This
Prospectus describes and offers shares of beneficial interest in one such mutual
fund, The Seven Seas Series US Treasury Obligations Fund (referred to in this
Prospectus as the "Treasury Obligations Fund" or the "Fund"). The Fund seeks to
maximize current income, to the extent consistent with the preservation of
capital and liquidity and the maintenance of a stable $1.00 per share net asset
value, by investing only in obligations that are issued by the US Treasury or
guaranteed as to principal and interest by the full faith and credit of the US
Government. The Fund intends to meet its investment objective by investing only
in US Treasury bills, notes and bonds. Dividends paid by the Fund are exempt
from taxation by most state governments. The Fund's shares are offered without
sales commissions. However, the Fund pays certain distribution expenses under
its Rule 12b-1 Plan.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
INVESTMENTS IN THE FUND ARE NEITHER INSURED NOR GUARANTEED BY THE US
GOVERNMENT. THERE IS NO ASSURANCE THAT THE FUND WILL MAINTAIN A STABLE NET
ASSET VALUE OF $1.00 PER SHARE.
SHARES IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, STATE STREET BANK AND TRUST COMPANY, AND SHARES ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER AGENCY, AND INVOLVE INVESTMENT RISK INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. Please read and retain
this document for future reference. Additional information about the Fund has
been filed with the Securities and Exchange Commission in a Statement of
Additional Information, dated December 29, 1995. The Statement of Additional
Information is incorporated herein by reference and is available without charge
from Distributor at its address noted below or by calling (617) 654-6089.
<TABLE>
<S> <C> <C>
Investment Adviser, Custodian
Transfer Agent: Distributor: Administrator:
State Street Bank and Trust Russell Fund Distributors, Inc. Frank Russell Investment
Company Two International Place Management Company
225 Franklin Street 35th Fl. 909 A Street
Boston, Massachusetts 02110 Boston, Massachusetts 02110 Tacoma, Washington 98402
(617) 654-4721 (617) 654-6089 (206) 627-7001
</TABLE>
PROSPECTUS DATED DECEMBER 29, 1995
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<PAGE>
TABLE OF CONTENTS
Page
----
Fund Operating Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The Seven Seas Series Fund . . . . . . . . . . . . . . . . . . . . . . . . . 4
Manner of Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Investment Objective, Policies and Restrictions. . . . . . . . . . . . . . . 4
Portfolio Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Portfolio Turnover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Dividends and Distributions. . . . . . . . . . . . . . . . . . . . . . . . . 7
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Valuation of Fund Shares . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Purchase of Fund Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Redemption of Fund Shares. . . . . . . . . . . . . . . . . . . . . . . . . . 10
General Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Fund Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Performance Calculations . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
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<PAGE>
FUND OPERATING EXPENSES
THE SEVEN SEAS SERIES US TREASURY OBLIGATIONS FUND
The following table is intended to assist the investor in understanding the
costs and expenses that an investor in the Treasury Obligations Fund will incur
directly or indirectly. THE EXAMPLES PROVIDED IN THE TABLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. Actual expenses may be
greater or less than those shown. For additional information, see "General
Management."
<TABLE>
<CAPTION>
Shareholder Transaction Expenses:
- --------------------------------
<S> <C> <C> <C>
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fee None
Annual Fund Operating Expenses:
- ------------------------------
(as a percentage of average daily net assets)
Advisory Fees(1) .13%
12b-1 Fees(1, 2, 3) .02
Other Expenses:(1, 2) .05
---
Total Operating Expenses After Fee Waivers And Reimbursement(1, 4) .20%
---
---
Examples: 1 year 3 years
-------- ------ -------
You would pay the following
expenses on a $1,000
investment, assuming (i) 5%
annual return and (ii) redemption
at the end of each time period: $2 $6
-- --
-- --
</TABLE>
- ---------------------------------
1 Adviser has voluntarily agreed to reimburse the Fund for all expenses in
excess of .20% of average daily net assets on an annual basis.
Additionally, the Administrator has voluntarily agreed to waive a portion
of its fees for the first three months after the Fund becomes operational.
The gross annual Advisory, 12b-1 and Other Expenses before waivers and
reimbursement would be .25%, .04% and .11% of average daily net assets,
respectively. The total operating expenses of the Fund absent fee waivers
and reimbursement would be .40% of average daily net assets
on an annual basis. The reimbursement will be in effect for the current
fiscal year.
2 The ratio for "other expenses" is based on estimated amounts for the
current fiscal year, with expected annual average net assets of $500
million.
3 Rule 12b-1 fees may include expenses paid for shareholder servicing
activities.
4 Investors purchasing Fund shares through a financial intermediary, such as
a bank or an investment adviser, may also be required to pay additional
fees for services provided by the intermediary. Such investors should
contact the intermediary for information concerning what additional fees,
if any, will be charged.
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<PAGE>
THE SEVEN SEAS SERIES FUND
The Seven Seas Series Fund ("Investment Company") is a registered open-end
management investment company that is organized as a Massachusetts business
trust. In addition, each series of the Investment Company is diversified as
defined in the Investment Company Act of 1940, as amended ("1940 Act"). As a
"series" company, Investment Company is authorized to issue an unlimited number
of shares evidencing beneficial interests in a variety of investment portfolios.
Through this Prospectus, Investment Company offers shares in one such portfolio,
The Seven Seas Series US Treasury Obligations Fund ("Treasury Obligations Fund"
or the "Fund"). State Street Bank and Trust Company ("Adviser" or "State
Street") serves as the investment adviser for the Fund.
MANNER OF OFFERING
DISTRIBUTION AND ELIGIBLE INVESTORS. Shares of the Fund are offered
without a sales commission by Russell Fund Distributors, Inc., Investment
Company's distributor, to US and foreign institutional and retail investors that
invest for their own account or in a fiduciary or agency capacity. The Fund
will incur distribution expenses under the Investment Company's Rule 12b-1 plan.
See "General Management -- Distribution Services and Shareholder Servicing."
MINIMUM AND SUBSEQUENT INVESTMENT. The Fund requires a minimum initial
investment of $100,000. A shareholder's investment in the Fund may be subject
to redemption at the Fund's discretion if the account balance is less than
$100,000. The Fund reserves the right to reject any purchase order.
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
The Treasury Obligations Fund's fundamental investment objective is to
maximize current income, to the extent consistent with the preservation of
capital and liquidity and the maintenance of a stable $1.00 per share net asset
value, by investing only in obligations that are issued by the US Treasury or
guaranteed as to principal and interest by the full faith and credit of the US
Government. This investment objective may be changed only with the approval of
a majority of the Fund's shareholders as defined by the 1940 Act. There can be
no assurance that the Fund will meet its investment objective.
The Treasury Obligations Fund's investment policy is to invest only in US
Treasury bills, notes and bonds (which are direct obligations of the US
Government). Dividends paid by the Fund are exempt from taxation by most state
governments. See "Taxes."
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<PAGE>
INVESTMENT POLICIES
The investment policies described below reflect the Fund's current
practices, are not fundamental and may be changed by the Board of Trustees of
Investment Company without shareholder approval. To the extent consistent with
the Fund's fundamental investment objective and restrictions, the Fund may
invest in the following instruments and may use the following investment
techniques:
US GOVERNMENT OBLIGATIONS. These securities include US Treasury bills,
notes and bonds and other obligations issued by the US Government. These
securities also include securities issued by agencies or instrumentalities of
the US Government that are guaranteed as to the payment of interest and
principal by the US Government, although the Fund has no present intention to
invest in such securities. Examples of such agencies include the Government
National Mortgage Association, the Export-Import Bank of the US, the General
Services Administration and the Small Business Administration.
WHEN-ISSUED TRANSACTIONS. The Fund may purchase securities on a when-
issued or delayed delivery basis. In these transactions, the Fund purchases
securities with payment and delivery scheduled for a future time. Until
settlement, the Fund segregates cash and marketable high quality debt securities
equal in value to its when-issued commitments. Between the trade and settlement
dates, the Fund bears the risk of any fluctuation in the value of the
securities. These transactions involve the additional risk that the other party
may fail to complete the transaction and cause the Fund to miss a price or yield
considered advantageous. The Fund will engage in when-issued transactions only
for the purpose of acquiring portfolio securities consistent with its investment
objective and policies and not for investment leverage. The Fund will invest no
more than 25% of its net assets in when-issued securities.
LENDING PORTFOLIO SECURITIES. The Fund may lend portfolio securities with
a value of up to 33-1/3% of its total assets. Such loans may be terminated at
any time. The Fund will receive cash or US Treasury bills, notes and bonds in
an amount equal to at least 100% of the current market value (on a daily marked-
to-market basis) of the loaned securities plus accrued interest. In a loan
transaction, as compensation for lending it securities, the Fund will receive a
portion of the dividends or interest accrued on the securities held as
collateral or, in the case of cash collateral, a portion of the income from the
investment of such cash. In addition, the Fund will receive the amount of all
dividends, interest and other distributions on the loaned securities. However,
the borrower has the right to vote the loaned securities. The Fund will call
loans to vote proxies if a material issue affecting the investment is to be
voted upon. Should the borrower of the securities fail financially, the Fund
may experience delays in recovering the securities or exercising its rights in
the collateral. Loans are made only to borrowers that are deemed by Adviser to
be of good financial standing. In a loan transaction, the Fund will also bear
the risk of any decline in value of securities acquired with cash collateral.
The Fund will minimize this risk by limiting the investment of cash collateral
to high quality instruments of short maturity.
-5-
<PAGE>
INVESTMENT RESTRICTIONS
The Fund has fundamental investment restrictions, which may be changed only
with the approval of a majority of the Fund's shareholders as defined in the
1940 Act. A more detailed discussion of the Fund's investment restrictions and
policies appears in the Statement of Additional Information. Unless otherwise
noted, the fundamental restrictions apply at the time an investment is made.
The Fund may not:
1. Borrow money, except as a temporary measure for extraordinary or
emergency purposes or to facilitate redemptions (not for
leveraging or investment), provided that borrowings do not exceed
an amount equal to 33-1/3% of the current value of the Fund's
assets taken at market value, less liabilities other than
borrowings. If at any time the Fund's borrowings exceed this
limitation due to a decline in net assets, such borrowings will
within three days be reduced to the extent necessary to comply
with this limitation. The Fund will not purchase additional
investments if borrowed funds (including reverse repurchase
agreements) exceed 5% of total assets.
2. Pledge, mortgage, or hypothecate its assets. However, the Fund
may pledge securities having a market value at the time of the
pledge not exceeding 33-1/3% of the value of the Fund's total
assets to secure permitted borrowings.
PORTFOLIO MATURITY
The Fund must limit investments to securities with remaining maturities of
397 days or less (as calculated in accordance with Rule 2a-7 of the 1940 Act)
and must maintain a dollar-weighted average maturity of 90 days or less. The
Fund normally holds portfolio instruments to maturity, but may dispose of them
prior to maturity if Adviser finds it advantageous or necessary.
PORTFOLIO TURNOVER
The Fund will normally hold portfolio instruments to maturity, but may
dispose of them prior to maturity if Adviser finds it advantageous or necessary.
Investing in short-term money market instruments will result in high portfolio
turnover. Since the cost of these transactions is small, high turnover is not
expected to adversely affect net asset value or yield of the Fund.
DIVIDENDS AND DISTRIBUTIONS
The Board of Trustees intends to declare dividends on shares of the Fund
from net investment income daily and have them payable as of the last business
day of each month. Distributions will be made at least annually from net short-
and long-term capital gains, if any. In most instances, distributions will be
declared and paid in mid-October with additional distributions declared and paid
in December, if required, for a Fund to avoid imposition of a 4% federal excise
tax on undistributed capital gains. The Fund does not expect any material long-
term capital gains or losses.
-6-
<PAGE>
Dividends declared in December and payable to shareholders of record in
such month will be deemed to have been paid by the Fund and received by
shareholders on December 31 of that year if the dividend is paid prior to
February 1 of the following year.
Income dividends and capital gains distributions, if any, will be paid in
additional shares at their net asset value on the record date unless the
shareholder has elected to receive them in cash. Such election may be made by
giving 10 days' written notice to Transfer Agent.
TAXES
The Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code, as amended. As a regulated
investment company, the Fund will not be subject to federal income taxes to the
extent it distributes its net investment income and capital gain net income
(capital gains in excess of capital losses) to its shareholders. The Board
intends to distribute each year substantially all of the Fund's net investment
income and capital gain net income.
Dividends from net investment income and distributions of net short-term
capital gains are taxable to shareholders as ordinary income under federal
income tax laws whether paid in cash or in additional shares. Distributions
from net long-term capital gains are taxable as long-term capital gains
regardless of the length of time a shareholder has held such shares and whether
paid in cash or additional shares.
The Fund may purchase bonds at market discount (i.e., bonds with a purchase
price less than original issue price or adjusted issue price). If such bonds
are subsequently sold at a gain then a portion of that gain equal to the amount
of market discount, which should have been accrued through the sale date, will
be taxable to shareholders as ordinary income.
Under federal law, the income derived from obligations issued by the US
Government and certain of its agencies or instrumentalities is exempt from state
income taxes.
Shareholders will be notified after each calendar year of the amount of
income dividends and net capital gains distributed and the percentage of the
Fund's income attributable to US Treasury and agency obligations. The Fund is
required to withhold a legally determined portion of all taxable dividends,
distributions and redemption proceeds payable to any noncorporate shareholder
that does not provide the Fund with the shareholder's correct taxpayer
identification number or certification that the shareholder is not subject to
backup withholding.
The foregoing discussion is only a summary of certain federal income tax
issues generally affecting the Fund and its shareholders. Circumstances among
investors may vary and each investor is encouraged to discuss investment in the
Fund with the investor's tax adviser.
-7-
<PAGE>
VALUATION OF FUND SHARES
NET ASSET VALUE PER SHARE. The Fund will determine net asset value twice
each business day, as of 12:00 noon Eastern time and as of the close of the
regular trading session of the New York Stock Exchange (ordinarily 4 p.m.
Eastern time). A business day is one on which the New York Stock Exchange and
the Boston Federal Reserve are open for business. Net asset value per share is
computed by dividing the current value of the Fund's assets, less its
liabilities, by the number of shares of the Fund outstanding and rounding to the
nearest cent.
VALUATION OF FUND SECURITIES. The Fund seeks to maintain a $1.00 per share
net asset value and, accordingly, uses the amortized cost valuation procedure to
value its portfolio instruments. The amortized cost valuation procedure
initially prices an instrument at its cost and thereafter assumes a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument.
PURCHASE OF FUND SHARES
MINIMUM INITIAL INVESTMENT AND ACCOUNT BALANCE. The Fund requires a
minimum initial investment and account balance of $100,000. The Fund reserves
the right to reject any purchase order.
OFFERING DATES AND TIMES. Fund shares may be purchased on any business day
without a sales commission. All purchases must be made in US dollars. Payments
for Fund shares must be received by the Transfer Agent, and the accompanying
payment must be in federal funds or converted into federal funds by the Transfer
Agent before the purchase order can be accepted. Shares of the Fund purchased
by orders which are accepted: (1) prior to Noon Eastern time will earn the
dividend declared on the date of purchase; and (2) on or after Noon Eastern time
will earn the dividend determined on the next day.
ORDER AND PAYMENT PROCEDURES. There are several ways to invest in
the Fund. The Fund requires a purchase order in good form which consists of
a completed and signed Application Form ("Application") for each new account
regardless of the investment method. For additional information, copies of
forms or questions, call Transfer Agent at (800) 647-7327, or write to
Transfer Agent at: State Street Bank and Trust Company, P.O. Box 8317,
Boston, MA 02266-8317 Attention: The Seven Seas Series US Treasury
Obligations Fund.
FEDERAL FUND WIRE. In order to assure timely processing of purchase
orders, the Investment Company strongly recommends that investors purchase
shares by wiring federal funds to State Street Bank and Trust Company as
Transfer Agent. An investor using this purchase method should:
1. Telephone State Street Bank and Trust Company at (800) 647-7327
and provide: (1) the investor's account registration number,
address and social security or tax
-8-
<PAGE>
identification number; (2) the amount being wired; (3) the name
of the wiring bank; (4) the name and telephone number of the
person at the wiring bank to be contacted in connection with the
order; and (5) that the funds should be invested in The Seven
Seas Series US Treasury Obligations Fund.
2. Instruct the wiring bank to wire federal funds to: State Street
Bank and Trust Company, Boston, MA, (ABA #0110-00028) Attention:
The Seven Seas Series US Treasury Obligations Fund, Mutual Funds
Service Division (DDA #9904-631-0). The wire instructions should
also include the name in which the account is registered, the
account number, and the name of the Fund in which to be invested.
3. Complete the Application and forward it to Transfer Agent at the
above address.
Orders transmitted via this purchase method will be credited when federal funds
are received by State Street Bank and Trust Company, even though the investor's
Application may not arrive until later. However, an investor will not be
permitted to redeem shares from the account until a completed Application is on
file.
MAIL. To purchase shares by mail, send a check or other negotiable
bank draft payable to: State Street Bank and Trust Company, P.O. Box 8317,
Boston, MA 02266-8317, Attention: The Seven Seas Series US Treasury
Obligations Fund. Certified checks are not necessary; however, all checks are
accepted subject to collection at full face value in United States funds and
must be drawn in United States dollars on a United States bank. Normally,
checks and drafts are converted to federal funds within two business days
following receipt of the check or draft. Initial investments should be
accompanied by a completed Application, and subsequent investments are to be
accompanied by the investor's account number.
THIRD PARTY TRANSACTIONS. Investors purchasing Fund shares through a
program of services offered by a financial intermediary, such as a bank, broker-
dealer, investment adviser or others, may be required by such intermediary to
pay additional fees. Investors should contact such intermediary for information
concerning what additional fees, if any, may be charged.
"IN-KIND" EXCHANGE OF SECURITIES. The Transfer Agent may, at its
discretion, permit investors to purchase shares through the exchange of
securities they hold. Any securities exchanged must meet the investment
objective, policies and limitations of the Fund, must have a readily
ascertainable market value, must be liquid and must not be subject to
restrictions on resale. The market value of any securities exchanged, plus any
cash, must be at least $1 million. Shares purchased in exchange for securities
generally may not be redeemed or exchanged until the transfer has settled --
usually within 15 days following the purchase by exchange.
The basis of the exchange will depend upon the relative net asset value of
the shares purchased and securities exchanged. Securities accepted by the Fund
will be valued in the same manner as the Fund values its assets. Any interest
earned on the securities following their delivery to the Transfer Agent and
prior to the exchange will be considered in valuing the
-9-
<PAGE>
securities. All interest, dividends, subscription or other rights attached to
the securities become the property of the Fund, along with the securities.
EXCHANGE PRIVILEGE. Subject to the Fund's minimum investment
requirement, investors may exchange their Fund shares without charge for
shares of any other investment portfolio offered by Investment Company.
Shares are exchanged on the basis of relative net asset value per share.
Exchanges may be made: (1) by telephone if the registrations of the two
accounts are identical; or (2) in writing addressed to State Street Bank and
Trust Company, P.O. Box 8317, Boston, MA 02266-8317, Attention: The Seven
Seas Series US Treasury Obligations Fund. If shares of the Fund were
purchased by check, the shares must have been present in an account for 10
days before an exchange is made. The exchange privilege will only be
available in states where the exchange may legally be made, and may be
modified or terminated by the Fund upon 60 days' notice to shareholders.
REDEMPTION OF FUND SHARES
Fund shares may be redeemed on any business day at the net asset value next
determined after the receipt of a redemption request in proper form as described
below. Payment will be made as soon as possible (but will ordinarily not exceed
seven days) and will be mailed to the shareholder's address of record. Upon
request, redemption proceeds will be wire transferred to the shareholder's
account at a domestic commercial bank that is a member of the Federal Reserve
System. Although Investment Company does not currently charge a fee for this
service, Investment Company reserves the right to charge a fee for the cost of
wire-transferred redemptions of less than $1,000. Payment for redemption of
shares purchased by check may be withheld for up to 10 days after the date of
purchase to assure that such checks are honored. An investor will not be
permitted to redeem shares from the account until a completed Application is on
file. Shareholders who redeem shares of the Fund pursuant to a request received
by State Street Bank and Trust Company prior to Noon Eastern time will not be
entitled to that day's dividend with respect to the shares redeemed.
EXPEDITED REDEMPTION. Shareholders may normally redeem Fund shares by
telephoning State Street Bank and Trust Company between 9:00 a.m. and 4:00 p.m.
Eastern time at (800) 647-7327, Attention: The Seven Seas Series US Treasury
Obligations Fund. Shareholders using the expedited redemption method must
complete the appropriate section on the Application. The Fund and the Transfer
Agent will employ reasonable procedures to confirm that instructions
communicated by telephone are properly authorized. The Fund and the Transfer
Agent will not be liable for executing telephone instructions that are deemed to
be authorized after following reasonable procedures. These procedures include
recording telephonic instructions, mailing to the shareholder a written
confirmation of the transaction, performing a personal identity test with
private information not likely to be known by other individuals, and restricting
mailing of redemptions to the shareholder's address of record. During periods
of drastic economic or market changes, shareholders using this method may
encounter delays. In such event, shareholders should consider using the mail
redemption procedure described below.
-10-
<PAGE>
MAIL. Redemption requests may be made in writing directly to State
Street Bank and Trust Company, P.O. Box 8317, Boston, MA 02266-8317,
Attention: The Seven Seas Series US Treasury Obligations Fund. The
redemption price will be the net asset value next determined after receipt by
State Street of all required documents in good order. "Good order" means
that the request must include the following:
1. A letter of instruction or a stock assignment stating that the
shares are to be redeemed out of The Seven Seas Series US
Treasury Obligations and designating specifically the dollar
amount to be redeemed signed by all owners of the shares in the
exact names in which they appear on the account, together with a
guarantee of the signature of each owner by a bank, trust company
or member of a recognized stock exchange; and
2. Such other supporting legal documents, if required by applicable
law or Transfer Agent, in the case of estates, trusts,
guardianships, custodianships, corporations and pension and
profit-sharing plans.
The Fund reserves the right to redeem the shares in any account with a
balance of less than $100,000 as a result of shareholder redemptions rather than
market value fluctuations. Before shares are redeemed to close an account, the
shareholder will be notified in writing and allowed 60 days to purchase
additional shares to meet the minimum account balance.
The Fund may pay any portion of the redemption amount in excess of $250,000
by a distribution in kind of readily marketable securities from the portfolio of
the Fund in lieu of cash. Investors will incur brokerage charges on the sale of
these portfolio securities. The Fund reserves the right to suspend the right of
redemption or postpone the date of payment if emergency conditions, as specified
in the 1940 Act or determined by the Securities and Exchange Commission, should
exist.
GENERAL MANAGEMENT
The Board of Trustees supervises the Fund's management, activities and
affairs and has approved contracts with various financial organizations to
provide, among other services, day-to-day management required by the Fund.
ADVISORY AGREEMENT. Investment Company employs State Street to furnish the
Fund's investment services. State Street is one of the largest providers of
securities processing and recordkeeping services for US mutual funds and pension
funds. State Street is a wholly owned subsidiary of State Street Boston
Corporation, a publicly held bank holding company. State Street, with over
$171.3 billion (US) under management as of September 30, 1995, provides complete
global investment management services from offices in the United States, London,
Sydney, Hong Kong, Tokyo, Toronto, Luxembourg, Melbourne, Montreal and Paris.
-11-
<PAGE>
Adviser, subject to Board supervision, directs the Fund's investments in
accordance with the Fund's investment objective, policies and restrictions. For
these services, the Fund pays Adviser a fee, calculated daily and paid monthly,
that on an annual basis is equal to .25% of the Fund's average daily net assets.
The Glass-Steagall Act prohibits a depository state chartered bank such as
Adviser from engaging in the business of issuing, underwriting, selling or
distributing certain securities. The activities of Adviser in informing its
customers of the Fund, performing investment and redemption services and
providing custodian, transfer, shareholder servicing, dividend disbursing and
investment advisory services may raise issues under these provisions. Adviser
has been advised by its counsel that its activities in connection with the Fund
are consistent with its statutory and regulatory obligations. THE SHARES
OFFERED BY THIS PROSPECTUS ARE NOT ENDORSED OR GUARANTEED BY STATE STREET OR ITS
AFFILIATES, ARE NOT DEPOSITS OR OBLIGATIONS OF STATE STREET OR ITS AFFILIATES
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
Changes in federal or state statutes and regulations relating to the
permissible activities of banks and their affiliates, as well as judicial or
administrative decisions or interpretations of such or future statutes and
regulations, could prevent Adviser from continuing to perform all or a part of
the above services for its customers and/or the Fund. If Adviser were
prohibited from serving the Fund in any of its present capacities, the Board of
Trustees would seek an alternative provider(s) of such services. In such event,
changes in the operation of the Fund may occur. Adviser does not expect that
existing shareholders would suffer any adverse financial consequences (if
another adviser with equivalent abilities is found) as a result of any of these
occurrences.
State Street may from time to time have discretionary authority over
accounts which invest in Investment Company shares. These accounts include
accounts maintained for securities lending clients and accounts which permit the
use of Investment Company portfolios as short-term cash sweep investments.
Shares purchased for all discretionary accounts are held of record by State
Street, who retains voting control of such shares. As of November 30, 1995,
State Street held of record 36% of the issued and outstanding shares of
Investment Company in connection with its discretionary accounts. Consequently,
State Street may be deemed to be a controlling person of Investment Company for
purposes of the 1940 Act.
Under the Adviser's Code of Ethics, the Adviser's employees in Boston where
investment management operations are conducted are only permitted to engage in
personal securities transactions which do not involve securities which the
Adviser had recommended for purchase or sale, or purchased or sold, on behalf of
its clients. Such employees must report their personal securities transactions
quarterly and supply broker confirmations to the Adviser.
ADMINISTRATION AGREEMENT. Frank Russell Investment Management
Company ("Administrator") serves as Fund administrator. Administrator
currently serves as investment manager and administrator to 22 mutual funds
with assets of $7.3 billion as of
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<PAGE>
October 31, 1995, and acts as administrator to 17 mutual funds, including
the Fund, with assets of $7.2 billion as of October 31, 1995.
Pursuant to the Administration Agreement with Investment Company,
Administrator will: (1) supervise all aspects of the Fund's operations;
(2) provide the Fund with administrative and clerical services, including the
maintenance of certain of the Fund's books and records; (3) arrange the periodic
updating of the Fund's prospectus and any supplements thereto; (4) provide proxy
materials and reports to Fund shareholders and the Securities and Exchange
Commission; and (5) provide the Fund with adequate office space and all
necessary office equipment and services, including telephone service, heat,
utilities, stationery supplies and similar items. For these services, the Fund
and Investment Company's other domestic investment portfolios pay Administrator
a combined fee that on an annual basis is equal to the following percentages of
their average aggregate daily net assets: (1) $0 to and including $500 million
- -- .06%; (2) over $500 million to and including $1 billion -- .05%; and (3)
over $1 billion -- .03%. The percentage of the fee paid by the Fund is equal to
the percentage of average aggregate daily net assets attributable to the Fund.
Administrator will also receive reimbursement of expenses it incurs in
connection with establishing new investment portfolios. Further, the
administration fee paid by the Investment Company will be reduced by the sum of
certain distribution related expenses (up to a maximum of 15% of the asset-based
administration fee listed above).
Administrator also provides administrative services in connection with the
registration of shares of Investment Company with those states in which its
shares are offered or sold. Compensation for such services is on a "time spent"
basis. Investment Company will pay all registration, exemptive application,
renewal and related fees and reasonable out-of-pocket expenses.
Officers and employees of the Administrator and Distributor are permitted
to engage in personal securities transactions subject to restrictions and
procedures set forth in the Confidentiality Manual and Code of Ethics adopted by
the Investment Company, Administrator and Distributor. Such restrictions and
procedures include substantially all of the recommendations of the Advisory
Group of the Investment Company Institute and comply with Securities and
Exchange Commission rules and regulations.
DISTRIBUTION SERVICES AND SHAREHOLDER SERVICING ARRANGEMENTS. Pursuant to
the Distribution Agreement with Investment Company, Russell Fund Distributors,
Inc. ("Distributor"), a wholly owned subsidiary of Administrator, serves as
distributor for all Fund shares.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 (the
"Plan") under the 1940 Act. The purpose of the Plan is to provide for the
payment of certain Investment Company distribution and shareholder servicing
expenses. Under the Plan, Distributor will be reimbursed in an amount up to
.25% of each Fund's average annual net assets for distribution-related and
shareholder servicing expenses. Payments under the Plan will be made to
Distributor to finance activity that is intended to result in the sale and
retention of Fund shares including (1) the costs
-13-
<PAGE>
of prospectuses, reports to shareholders and sales literature, (2) advertising
and (3) expenses incurred in connection with the promotion and sale of Fund
shares, including Distributor's overhead expenses for rent, office supplies,
equipment, travel, communication, compensation and benefits of sales personnel.
Under the Plan, the Fund may also enter into agreements ("Service
Agreements") with financial institutions, which may include Adviser ("Service
Organizations"), to provide shareholder servicing with respect to Fund shares
held by or for the customers of the Service Organizations. Under the Service
Agreements, the Service Organizations may provide various services for such
customers including: answering inquiries regarding the Fund; assisting customers
in changing dividend options, account designations and addresses; performing
subaccounting for such customers; establishing and maintaining customer accounts
and records; processing purchase and redemption transactions; providing periodic
statements showing customers' account balances and integrating such statements
with those of other transactions and balances in the customers' other accounts
serviced by the Service Organizations; arranging for bank wires transferring
customers' funds; and such other services as the customers may request in
connection with the Fund, to the extent permitted by applicable statute, rule or
regulation. Service Organizations may receive from the Fund, for shareholder
servicing, a monthly fee at a rate that shall not exceed .10% per annum of the
average daily net asset value of the Fund's shares owned by or for shareholders
with whom the Service Organization has a servicing relationship. Banks and
other financial service firms may be subject to various state laws, and may be
required to register as dealers pursuant to state law.
Investment Company has entered into Service Agreements with Adviser,
State Street Brokerage Services, Inc., and Adviser's Metropolitan Division
of Commercial Banking ("Commercial Banking") State Street Brokerage
Services, Inc. ("SSBSI") to obtain the services described above with respect
to Fund shares held by or for customers. In return for these services,
Investment Company pays Adviser a fee in an amount that per annum is equal to
.025%, .175% and .175% of the average daily value of all Fund shares held by or
for customers of Adviser and, SSBSI, and Commercial Banking, respectively.
Payments to Distributor, as well as payments to Service Organizations from
the Fund, will not be permitted by the Plan to exceed .25% of the Fund's average
net asset value per year. Any payments that are required to be made by the
Distribution Agreement and any Service Agreement but could not be made because
of the .25% limitation may be carried forward and paid in subsequent years so
long as the Plan is in effect. The Fund's liability for any such expenses
carried forward would terminate at the end of two years following the year in
which the expenditure was incurred. Service Organizations would be responsible
for prompt transmission of purchase and redemption orders and may charge fees
for their services.
FUND EXPENSES
The Fund will pay all of its expenses other than those expressly assumed by
Adviser and Administrator. The principal Fund expenses are the annual advisory
fee payable to Adviser and distribution and shareholder servicing expenses.
Other expenses include: (1) amortization of deferred organizational costs;
(2) taxes, if any; (3) expenses for legal, auditing and financial accounting
services; (4) expense of preparing (including typesetting, printing and mailing)
-14-
<PAGE>
reports, prospectuses and notices to existing shareholders; (5) administrative
fees; (6) custodian fees; (7) expense of issuing and redeeming Fund shares;
(8) the cost of registering Fund shares under federal and state laws;
(9) shareholder meetings and related proxy solicitation expenses; (10) the fees,
travel expenses and other out-of-pocket expenses of Trustees who are not
affiliated with Adviser or any of its affiliates; (11) insurance, interest,
brokerage and litigation costs; (12) extraordinary expenses as may arise,
including expenses incurred in connection with litigation proceedings and claims
and the legal obligations of Investment Company to indemnify its Trustees,
officers, employees, shareholders, distributors and agents; and (13) other
expenses properly payable by the Fund.
PERFORMANCE CALCULATIONS
From time to time the Fund may advertise its yield and effective
yield. The yield of the Fund refers to the income generated by an investment in
the Fund over a seven-day period (which period will be stated in the
advertisement). This income is then annualized. That is, the amount of income
generated by the investment during that week is assumed to be generated each
week over a 52-week period and is shown as a percentage of the investment. The
effective yield is calculated similarly but, when annualized, the income earned
by an investment in the Fund is assumed to be reinvested. The effective yield
will be slightly higher than the yield because of the compounding effect of this
assumed reinvestment.
From time to time, the Fund may also report yield and effective yield
as calculated over a one-month period (which period will also be stated in the
advertisement). These one-month periods will be "annualized" using the same
method as described above for yields calculated on the basis of seven-day
periods. From time to time, yields calculated on a monthly basis may also be
linked to provide yield figures for periods greater than one month.
From time to time, the Fund may advertise its total return. The Fund's
total return is the average annual compounded rate of return from a hypothetical
investment in the Fund over one-, five- and ten-year periods or for the life of
the Fund (as stated in the advertisement), assuming the reinvestment of all
dividends and capital gains distributions.
Comparative performance information may be used from time to time in
advertising or marketing Fund shares, including data from Lipper Analytical
Services, Inc., Donoghue's Money Fund Report, the Bank Rate Monitor, Wall Street
Journal Score Card or other industry publications, business periodicals, rating
services and market indices. The Fund may also advertise nonstandardized
performance information which is for periods in addition to those required to be
presented.
Quoted yields, returns and other performance figures are based on
historical earnings and are not indications of future performance.
-15-
<PAGE>
ADDITIONAL INFORMATION
CUSTODIAN, TRANSFER AGENT AND INDEPENDENT ACCOUNTANTS. State Street Bank
and Trust Company holds all portfolio securities and cash assets of the Fund,
provides portfolio recordkeeping services and serves as the Fund's transfer
agent ("Transfer Agent") and custodian ("Custodian"). State Street is
authorized to deposit securities in securities depositories or to use the
services of subcustodians. State Street has no responsibility for Fund
supervision and management except as investment adviser. Coopers & Lybrand
L.L.P., Boston, Massachusetts, is Investment Company's independent accountants.
REPORTS TO SHAREHOLDERS AND SHAREHOLDER INQUIRIES. Shareholders will
receive unaudited semiannual financial statements and annual financial
statements audited by Investment Company's independent accountants. Shareholder
inquiries regarding the Prospectus and financial statements may be made by
calling Distributor at (617) 654-6089. Inquiries regarding shareholder balances
may be made by calling Transfer Agent at (800) 647-7327.
ORGANIZATION, CAPITALIZATION AND VOTING. Investment Company was organized
as a Massachusetts business trust on October 3, 1987, and operates under a First
Amended and Restated Master Trust Agreement dated October 13, 1993, as amended.
Investment Company issues shares divisible into an unlimited number of
series (or funds), each of which is a separate trust under Massachusetts law.
The Treasury Obligations Fund is one such series.
Fund shares represents an equal proportionate interest in a the Fund, have
a par value of $.001 per share and are entitled to such relative rights and
preferences and dividends and distributions earned on assets of the Fund as may
be declared by the Board of Trustees. Fund shares are fully paid and
nonassessable by Investment Company and have no preemptive rights.
Each Fund share has one vote. There are no cumulative voting rights.
There is no annual meeting of shareholders, but special meetings may be held.
On any matter that affects only a particular investment fund, only shareholders
of that fund may vote unless otherwise required by the 1940 Act or the Master
Trust Agreement. The Trustees hold office for the life of the Trust. A Trustee
may resign or retire, and may be removed at any time by a vote of two-thirds of
Investment Company shares or by a vote of a majority of the Trustees. The
Trustees shall promptly call and give notice of a meeting of shareholders for
the purpose of voting upon removal of any Trustee when requested to do so in
writing by holders of not less than 10% of the shares then outstanding. A
vacancy on the Board of Trustees may be filled by the vote of a majority of the
remaining Trustees, provided that immediately thereafter at least two-thirds of
the Trustees have been elected by shareholders.
Investment Company does not issue share certificates for Fund shares.
Transfer Agent sends monthly statements to Fund shareholders. Each statement
also sets forth the balance of shares held in the account and describes any
activity in the account during the period covered by the statement.
-16-
<PAGE>
THE SEVEN SEAS SERIES FUND
Two International Place, 35th Floor
Boston, Massachusetts 02110
INVESTMENT ADVISER, CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
DISTRIBUTOR
Russell Fund Distributors, Inc.
Two International Place, 35th Floor
Boston, Massachusetts 02110
ADMINISTRATOR
Frank Russell Investment Management Company
909 A Street
Tacoma, Washington 98402
LEGAL COUNSEL
Goodwin, Procter & Hoar
Exchange Place
Boston, Massachusetts 02109
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
-17-
<PAGE>
Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
THE SEVEN SEAS SERIES FUND
TWO INTERNATIONAL PLACE, 35TH FLOOR
BOSTON, MASSACHUSETTS 02110
(617) 654-6089
TAX FREE MONEY MARKET FUND
CLASS A SHARES
The Seven Seas Series Fund is a registered, open-end investment company with
multiple portfolios, each of which is a mutual fund. This Prospectus describes
and offers Class A shares of beneficial interest in one such mutual fund, The
Seven Seas Series Tax Free Money Market Fund (referred to in this Prospectus as
the "Tax Free Fund" or the "Fund"). The Tax Free Fund seeks to maximize current
income, exempt from federal income taxes, to the extent consistent with the
preservation of capital and liquidity and the maintenance of a stable $1.00 per
share net asset value. The Fund's shares are offered without sales commissions.
However, the Fund pays certain distribution expenses under its Rule 12b-1 plan.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
INVESTMENTS IN THE TAX FREE FUND ARE NEITHER INSURED NOR GUARANTEED BY THE
US GOVERNMENT. THERE IS NO ASSURANCE THAT THE FUND WILL MAINTAIN A STABLE NET
ASSET VALUE OF $1.00 PER SHARE.
SHARES IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, STATE STREET BANK AND TRUST COMPANY, AND SHARES ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER AGENCY, AND INVOLVE INVESTMENT RISKS INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. Please read and retain this
document for future reference. Additional information about the Fund has been
filed with the Securities and Exchange Commission in a Statement of Additional
Information dated December 29, 1995. The Statement of Additional Information is
incorporated herein by reference and is available without charge from
Distributor at its address noted below or by calling (617) 654-6089.
<TABLE>
<S> <C> <C>
INVESTMENT ADVISER, CUSTODIAN DISTRIBUTOR:
AND TRANSFER AGENT: Russell Fund Distributors, ADMINISTRATOR:
State Street Bank and Trust Inc. Frank Russell Investment
Company Two International Place, Management Company
225 Franklin Street 35th Floor 909 A Street
Boston, Massachusetts 02110 Boston, Massachusetts 02110 Tacoma, Washington 98402
(617) 654-4721 (617) 654-6089 (206) 627-7001
</TABLE>
PROSPECTUS DATED DECEMBER 29, 1995
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Fund Operating Expenses.................................................................................... 3
Financial Highlights....................................................................................... 4
The Seven Seas Series Fund................................................................................. 5
Manner of Offering......................................................................................... 5
Investment Objective, Policies and Restrictions............................................................ 5
Portfolio Maturity......................................................................................... 10
Dividends and Distributions................................................................................ 10
Taxes...................................................................................................... 11
Valuation of Fund Shares................................................................................... 12
Purchase of Fund Shares.................................................................................... 12
Redemption of Fund Shares.................................................................................. 14
General Management......................................................................................... 15
Fund Expenses.............................................................................................. 18
Performance Calculations................................................................................... 18
Additional Information..................................................................................... 19
</TABLE>
2
<PAGE>
FUND OPERATING EXPENSES
THE SEVEN SEAS SERIES TAX FREE MONEY MARKET FUND
CLASS A SHARES
The following table is intended to assist the investor in understanding the
various costs and expenses that an investor in Class A shares of the Tax Free
Fund will incur directly or indirectly. THE EXAMPLES PROVIDED IN THE TABLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. Actual
expenses may be greater or less than those shown. For additional information,
see "General Management."
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
- ------------------------------
Sales Load Imposed on Purchases......................................................................................... None
Sales Load Imposed on Reinvested Dividends.............................................................................. None
Deferred Sales Load..................................................................................................... None
Redemption Fees......................................................................................................... None
Exchange Fee............................................................................................................ None
ANNUAL FUND OPERATING EXPENSES:
- -----------------------------------
(as a percentage of average daily net assets)
Advisory Fees........................................................................................................... .25%
12b-1 Fees (1)(2)....................................................................................................... .05
Other Expenses (2)...................................................................................................... .17
----
Total Operating Expenses (3)............................................................................................ .47%
----
----
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C> <C>
EXAMPLES:
You would pay the following expenses on a $1,000 investment, assuming (i) 5% annual return
and (ii) redemption at the end of each time period:...................................... $ 5 $ 15
------ -------
------ -------
</TABLE>
The shares of the Fund are divided into three classes: Class A, Class B and
Class C. Class A shares are designed for institutional investors. Class B shares
are offered through financial institutions that provide certain account
administration services. Class C shares are offered through financial
institutions that provide certain account administration and shareholder liaison
services. Each class of shares of the Fund is entitled to the same rights and
privileges as all other classes of shares of the Fund, provided however, that
each class bears the expenses related to its distribution and shareholder
servicing arrangements and certain other expenses attributable to the class.
Annual distribution and shareholder servicing expenses for Class A, Class B and
Class C shares are equal to approximately .05%, .30% and .55%, respectively, of
the average daily net asset value of the shares of the class.
- ------------------------
(1) Rule 12b-1 fees may include expenses paid for shareholder servicing
activities.
(2) The ratios "12b-1 Fees" and "Other Expenses" are based on estimated amounts
for the current fiscal year, with expected annual average Fund net assets of
$155 million.
(3) Investors purchasing Fund shares through a financial intermediary, such as a
bank or an investment adviser, may also be required to pay additional fees
for services provided by the intermediary. Such investors should contact the
intermediary for information concerning what additional fees, if any, will
be charged.
3
<PAGE>
FINANCIAL HIGHLIGHTS
THE SEVEN SEAS SERIES TAX FREE MONEY MARKET FUND
The following table contains important financial information relating to the
Tax Free Fund and has been audited by Coopers & Lybrand L.L.P., the Fund's
independent accountants. The table includes selected data for a Class A share
outstanding throughout each fiscal year or period ended August 31, and other
performance information derived from the financial statements. The Investment
Company is authorized to issue Class B and Class C shares of the Tax Free Fund
although shares have not been offered on these classes as of the date of this
Prospectus. The table appears in the Fund's Annual Report and should be read in
conjunction with the Fund's financial statements and related notes, which are
incorporated by reference in the Statement of Additional Information and which
appear, along with the report of Coopers & Lybrand L.L.P., in the Fund's Annual
Report to Shareholders. More detailed information concerning the Fund's
performance, including a complete portfolio listing and audited financial
statements, is available in the Fund's Annual Report, which may be obtained
without charge by writing or calling the Distributor.
<TABLE>
<CAPTION>
1995++
---------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD................................................................... $ 1.0000
---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................................................................ .0251
---------
LESS DISTRIBUTIONS:
Net investment income................................................................................ (.0251)
---------
NET ASSET VALUE, END OF PERIOD......................................................................... $ 1.0000
---------
---------
TOTAL RETURN (%)(a).................................................................................... 2.54
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average daily net assets (b)............................................. .59
Operating expenses, gross, to average daily net assets (b)........................................... .60
Net investment income to average daily net assets (b)................................................ 3.40
Net assets, end of year ($000 omitted)............................................................... 42,607
Per share amount of fees waived ($ omitted).......................................................... .0001
</TABLE>
- ------------------------
++ For the period December 1, 1994 (commencement of operations) to August 31,
1995.
(a) Periods less than one year are not annualized.
(b) The ratios for the period ended August 31, 1995 are not annualized.
4
<PAGE>
THE SEVEN SEAS SERIES FUND
The Seven Seas Series Fund ("Investment Company") is an open-end management
investment company that is organized as a Massachusetts business trust. In
addition, each series of the Investment Company is diversified as defined in the
Investment Company Act of 1940, as amended ("1940 Act"). As a "series" company,
Investment Company is authorized to issue an unlimited number of shares
evidencing beneficial interests in different investment portfolios. Through this
Prospectus, Investment Company offers Class A shares in one such portfolio, The
Seven Seas Series Tax Free Money Market Fund. State Street Bank and Trust
Company ("Adviser" or "State Street") serves as the investment adviser for the
Fund.
MANNER OF OFFERING
DISTRIBUTION AND ELIGIBLE INVESTORS. Shares of the Fund are offered without
a sales commission by Russell Fund Distributors, Inc., Investment Company's
distributor, to US and foreign institutional and retail investors which invest
for their own account or in a fiduciary or agency capacity. The Fund will incur
distribution expenses under its Rule 12b-1 plan. See "General Management --
Distribution Services and Shareholder Servicing."
MINIMUM AND SUBSEQUENT INVESTMENT. The Fund requires a minimum initial
investment of $1,000. A shareholder's investment in the Fund may be subject to
redemption at the Fund's discretion if the account balance is less than $500 as
a result of shareholder redemptions. The Fund reserves the right to reject any
purchase order.
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
The Fund's fundamental investment objective is to seek to maximize current
income, exempt from federal income taxes, to the extent consistent with the
preservation of capital and liquidity, and the maintenance of a stable $1.00 per
share net asset value. This objective may be changed only with the approval of a
majority of the Fund's shareholders as defined by the 1940 Act. There can be no
assurance that the Fund will meet its investment objective.
The Fund has a fundamental policy of investing at least 80% of its assets in
federal tax exempt, high quality and short-term municipal securities of all
types. These securities are issued by states, municipalities and their political
subdivisions and agencies and certain territories and possessions of the United
States. Investments may include general obligation bonds and notes, revenue
bonds and notes, commercial paper, private placements, tender option bonds,
private activity bonds, industrial development bonds and municipal lease
contracts. Securities purchased may bear fixed, variable or floating rates of
interest or may be zero coupon securities. The Fund may buy or sell securities
on a when-issued or forward commitment basis.
The Fund may invest not more than 20% of its assets in federally taxable
money market instruments including securities issued by or guaranteed as to
principal and interest by the US government or its agencies or
instrumentalities, certificates of deposit, commercial paper and repurchase
agreements.
The Fund will invest in securities with remaining maturities of 397 days or
less (as computed according to Rule 2a-7 of the 1940 Act) and will maintain a
dollar-weighted average maturity of 90
5
<PAGE>
days or less. The Fund will limit its portfolio investments to investment grade
securities which at the time of acquisition the Adviser determines present
minimal credit risk and which: (1) are rated in the highest category by least
two nationally recognized statistical rating organizations ("NRSRO"); (2) by one
NRSRO, if only one rating services has rated the security; or (3) if unrated,
are of comparable quality, as determined by the Portfolio's Adviser in
accordance with procedures established by the Board of Trustees. See the
Appendix in the Statement of Additional Information for a description of a
NRSRO.
INVESTMENT POLICIES
The investment policies described below reflect the Fund's current
practices, are not fundamental and may be changed by the Board of Trustees of
Investment Company without shareholder approval. For more information about the
Fund's Investment Policies, please see the Statement of Additional Information.
To the extent consistent with the Fund's fundamental investment objective and
restrictions, the Fund may invest in the following instruments and may use the
following investment techniques:
MUNICIPAL SECURITIES. The Fund may purchase municipal securities issued by
or on behalf of public authorities to obtain funds to be used for various public
purposes, including general purpose financing for state and local governments,
refunding outstanding obligations, and financings for specific projects or
public facilities. General obligations are backed by the full faith and credit
of the issuer. These securities include tax anticipation notes, bond
anticipation notes and general obligation bonds. Revenue obligations are backed
by the revenues generated from a specific project or facility and include
project revenue bonds, such as private activity and industrial development
bonds. Private activity and industrial development bonds are dependent on the
ability of the facility's user to meet its financial obligations and the value
of any real or personal property pledged as security for such payment. Private
activity and industrial development bonds, although issued by industrial
development authorities, may be backed only by the assets of the
non-governmental users. Municipal notes are short-term instruments which are
issued and sold in anticipation of a bond sale, collection of taxes or receipt
of other revenues.
Some municipal securities are insured by private insurance companies, while
others may be supported by letters of credit furnished by domestic or foreign
banks. In determining the credit quality of insured or letter of credit backed
securities, the Adviser reviews the financial condition and creditworthiness of
such parties including insurance companies, banks and corporations.
Municipal obligations involve possible risks, including being affected by
economic, business and political developments and being subject to provisions of
litigation, bankruptcy and other laws affecting the rights and remedies of
creditors. Future laws may be effected extending the time for payment of
principal and/or interest, or limiting the rights of municipalities to levy
taxes. For instance, legislative proposals are introduced from time to time to
restrict or eliminate the federal income tax exemption for municipal obligations
interest. If such legislation is adopted, the Board of Trustees will reevaluate
the fund's investment objective and may submit possible changes in the structure
of the Fund to its shareholders.
VARIABLE AND FLOATING RATE SECURITIES. A floating rate security provides
for the automatic adjustment of its interest rate whenever a specified interest
rate changes. The coupon rate on variable rate securities is reset by a
remarketing agent on a periodic basis ranging from once a day to twice a year.
6
<PAGE>
The agent sets the new rate at a level such that, in the judgment of the agent,
the security could be resold in the secondary market at par. Generally, changes
in interest rates will have a smaller effect on the market value of variable and
floating rate securities than on the market value of comparable fixed income
obligations. Thus, investing in variable and floating rate securities generally
allows less opportunity for capital appreciation and depreciation than investing
in comparable fixed rate securities.
Tax-exempt floating rate and variable rate demand notes and bonds ordinarily
have stated maturities in excess of 13 months, but often permit the holder to
demand payment of principal at any time, or at specified intervals not exceeding
13 months, in each case upon not more than 30 days' notice. For the purpose of
determining the remaining maturity of certain variable or floating rate
obligations, the Fund may look to the later of the period remaining until the
net readjustment of the interest rate or the period remaining until the
principal amount can be recovered through demand.
ZERO COUPON SECURITIES. Zero coupon securities are notes, bonds and
debentures that: (1) do not pay current interest and are issued at a substantial
discount from par value; (2) have been stripped of their unmatured interest
coupons and receipts; or (3) pay no interest until a stated date one or more
years into the future. These securities also include certificates representing
interests in such stripped coupons and receipts. Because zero coupon bonds do
not pay current income, their prices can be very volatile when interest rates
change.
MUNICIPAL LEASES. The Fund may purchase participation interests in
municipal obligations, including municipal lease/purchase agreements. Municipal
leases are an undivided interest in a portion of an obligation in the form of a
lease or installment purchase issued by a state or local government to acquire
equipment or facilities. These instruments may have fixed, floating or variable
rates of interest, with remaining maturities of 13 months or less. Municipal
leases may be backed by an irrevocable letter of credit or guarantee of a bank,
or the payment obligation otherwise may be collateralized by US Government
securities. Certain participation interests may permit the Fund to demand
payment on not more than seven days' notice, for all or any part of the Fund's
interest, plus accrued interest.
Municipal leases frequently have special risks not normally associated with
general obligation or revenue bonds. Some leases or contracts include
"non-appropriation" clauses, which provide that the governmental issuer has no
obligation to make future payments under the lease or contract unless money is
appropriated for such purpose by the appropriate legislative body on a yearly or
other periodic basis. To reduce these risks, the Fund will only purchase
municipal leases subject to a non-appropriation clause when the payment of
principal and accrued interest is backed by a letter of credit or guarantee of a
bank.
Whether a municipal lease agreement will be considered illiquid for the
purpose of the Fund's restriction on investments in illiquid securities will be
determined by officers of the Investment Company in accordance with procedures
established by the Board of Trustees.
TENDER OPTION BONDS. A tender option is a municipal obligation (generally
held pursuant to a custodial arrangement) having a relatively long maturity and
bearing interest at a fixed rate substantially higher than prevailing short-term
tax exempt rates, that has been coupled with the agreement of a third party,
such as a bank, broker-dealer or other financial institution, pursuant to which
such institution grants the security holders the option, at periodic intervals,
to tender their securities to the
7
<PAGE>
institution and receive the face value thereof. As consideration for providing
the option, the financial institution receives periodic fees equal to the
difference between the municipal obligation's fixed coupon rate and the rate, as
determined by a remarketing or similar agent at or near the commencement of such
period, that would cause the securities, coupled with the tender option, to
trade at par on the date of such determination. Thus, after payment of this fee,
the security holder effectively holds a demand obligation that bears interest at
the prevailing short-term tax exempt rate. Subject to applicable regulatory
requirements, the Fund may buy tender option bonds if the agreement gives the
Fund the right to tender the bond to its sponsor no less frequently than once
every 397 days. The Adviser will consider on an ongoing basis the
creditworthiness of the issuer of the underlying obligation, any custodian and
the third party provider of the tender option. In certain instances and for
certain tender option bonds, the option may be terminable in the event of a
default in payment of principal or interest on the underlying municipal
obligation and for other reasons.
STANDBY COMMITMENTS. The Fund's investments may include standby
commitments, which are rights to resell municipal securities at specified
periods prior to their maturity dates to the seller or to some third party at an
agreed upon price or yield. Standby commitments may involve certain expenses and
risks, including the inability of the issuer of the commitment to pay for the
securities at the time the commitment is exercised, non-marketability of the
commitment, and difference between the duration of the commitment and the
maturity of the underlying security. The Fund will limit standby commitment
transactions to institutions which the Adviser believes present minimal credit
risk.
FORWARD COMMITMENTS. The Fund may contract to purchase securities for a
fixed price at a future date beyond customary settlement time. When effecting
such transactions, cash or liquid high quality debt obligations held by the Fund
of a dollar amount sufficient to make payment for the portfolio securities to be
purchased will be segregated on the Fund's records at the trade date and
maintained until the transaction is settled. The failure of the other party to
the transaction to complete the transaction may cause the Fund to miss an
advantageous price or yield. The Fund bears the risk of price fluctuations
during the period between the trade and settlement dates.
WHEN-ISSUED TRANSACTIONS. The Fund may purchase securities on a when-issued
basis. In these transactions, the Fund purchases securities with payment and
delivery scheduled for a future time. Until settlement, the Fund segregates cash
and marketable high quality debt securities equal in value to its when-issued
commitments. Between the trade and settlement dates, the Fund bears the risk of
any fluctuations in the value of the securities. These transactions involve the
additional risk that the other party may fail to complete the transaction and
cause the Fund to miss a price or yield considered advantageous. The Fund will
engage in when-issued transactions only for the purpose of acquiring portfolio
securities consistent with its investment objective and policies and not for
investment leverage. The Fund will not invest more than 25% of net assets in
when-issued securities.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
banks and other financial institutions, such as broker-dealers. Under a
repurchase agreement, a Fund purchases securities from a financial institution
that agrees to repurchase the securities at the Fund's original purchase price
plus interest within a specified time (normally one business day). The Fund will
invest no more than 10% of its net assets (taken at current market value) in
repurchase agreements maturing in more than seven days. The Fund will limit
repurchase transactions to those member banks of the Federal Reserve System and
broker-dealers whose creditworthiness Adviser considers
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satisfactory. Should the counterparty to a transaction fail financially, the
Fund may encounter delay and incur costs before being able to sell the
securities. Further, the amount realized upon the sale of the securities may be
less than that necessary to fully compensate the Fund.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreements under the circumstances described in "Investment Restrictions." Under
a reverse repurchase agreement, the Fund sells portfolio securities to a
financial institution in return for cash in an amount equal to a percentage of
the portfolio securities' market value and agrees to repurchase the securities
at a future date at a prescribed repurchase price equal to the amount of cash
originally received plus interest on such amount. The Fund retains the right to
receive interest and principal payments with respect to the securities while
they are in the possession of the financial institutions. Reverse repurchase
agreements involve the risk of default by the counterparty, which may adversely
affect the Fund's ability to reacquire the underlying securities.
ILLIQUID SECURITIES. The Fund will not invest more than 10% of its net
assets in illiquid securities or securities that are not readily marketable.
These securities include repurchase agreements and time deposits of more than
seven days' duration and participation interests (including municipal leases),
floating and variable rate demand obligations and tender option bonds as to
which the Fund cannot exercise a demand feature in seven or fewer days and for
which there is no secondary market.
US GOVERNMENT SECURITIES. US Government securities include US Treasury
bills, notes and bonds and other obligations issued or guaranteed as to interest
and principal by the US Government, its agencies or instrumentalities.
Obligations issued or guaranteed as to interest and principal by the US
Government, its agencies or instrumentalities include securities that are
supported by the full faith and credit of the United States Treasury, securities
that are supported by the right of the issuer to borrow from the United States
Treasury, discretionary authority of the US Government agency or
instrumentality, and securities supported solely by the creditworthiness of the
issuer.
COMMERCIAL PAPER. Tax exempt commercial paper is a short-term obligation
with a stated maturity of 365 days or less. It is typically issued to finance
seasonal working capital needs or as short-term financing in anticipation of
longer term financing. Each instrument may be backed only by the credit of the
issuer or may be backed by some form of credit enhancement, typically in the
form of a guarantee by a commercial bank. Commercial paper backed by guarantees
of foreign banks may involve additional risk due to the difficulty of obtaining
and enforcing judgments against such banks and the generally less restrictive
regulations to which such banks are subject. The Fund will only invest in
commercial paper rated at the time of purchase not less than Prime-1 by Moody's
Investors Service, Inc., A-1 by Standard & Poor's Rating Group or F-1 by Fitch's
Investor Service.
LENDING PORTFOLIO SECURITIES. The Fund may lend portfolio securities with a
value of up to 33 1/3% of its total assets. Such loans may be terminated at any
time. The Fund will receive cash or US Treasury bills, notes and bonds in an
amount equal to at least 100% of the current market value (on a daily
marked-to-market basis) of the loaned securities plus accrued interest. In a
loan transaction, as compensation for lending it securities, the Fund will
receive a portion of the dividends or interest accrued on the securities held as
collateral or, in the case of cash collateral, a portion of the income from the
investment of such cash. In addition, the Fund will receive the amount of all
dividends, interest and other distributions on the loaned securities. However,
the borrower has the right to vote the loaned securities. The Fund will call
loans to vote proxies if a material issue affecting the
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<PAGE>
investment is to be voted upon. Should the borrower of the securities fail
financially, the Fund may experience delays in recovering the securities or
exercising its rights in the collateral. Loans are made only to borrowers that
are deemed by Adviser to be of good financial standing. In a loan transaction,
the Fund will also bear the risk of any decline in value of securities acquired
with cash collateral. The Fund will minimize this risk by limiting the
investment of cash collateral to high quality instruments of short maturity.
INVESTMENT RESTRICTIONS
The Fund has fundamental investment restrictions, which may be changed only
with the approval of a majority of the Fund's shareholders as defined in the
1940 Act. A more detailed discussion of the Fund's investment restrictions and
investment policies appears in the Statement of Additional Information. Unless
otherwise noted, the fundamental restrictions apply at the time an investment is
made. The Fund may not:
1. Invest 25% or more of the value of its total assets in securities of
issuers located in any one state or group of public agencies primarily
engaged in any one industry (such as power generation) (other than the US
Government, its agencies or instrumentalities). Concentration may occur
as a result of changes in the market value of portfolio securities, but
may not
result from investment.
2. Borrow money (including reverse repurchase agreements), except as a
temporary measure for extraordinary or emergency purposes or to
facilitate redemptions (not for leveraging or investment), provided that
borrowings do not exceed an amount equal to 33 1/3% of the current value
of the Fund's assets taken at market value, less liabilities other than
borrowings. If at any time the Fund's borrowings exceed this limitation
due to a decline in net assets, such borrowings will, within three days,
be reduced to the extent necessary to comply with this limitation. The
Fund will not purchase additional investments if borrowed funds
(including reverse repurchase agreements) exceed 5% of total assets.
3. Pledge, mortgage, or hypothecate its assets. However, the Fund may pledge
securities having a market value at the time of the pledge not exceeding
33 1/3% of the value of the Fund's total assets to secure permitted
borrowings.
PORTFOLIO MATURITY
The Fund must limit investments to securities with remaining maturities of
397 days or less (as calculated in accordance with Rule 2a-7) and must maintain
a dollar-weighted average maturity of 90 days or less. The Fund normally holds
portfolio instruments to maturity, but may dispose of them prior to maturity if
Adviser finds it advantageous or necessary.
DIVIDENDS AND DISTRIBUTIONS
The Board of Trustees intends to declare dividends on shares of the Fund
from net investment income daily and have them payable as of the last business
day of each month. Distributions will be
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made at least annually from net short- and long-term capital gains, if any. In
most instances, distributions will be declared in mid-October with additional
distributions declared and paid in December, if required, for the Fund to avoid
imposition of a 4% federal excise tax on undistributed capital gains. The Fund
does not expect any material long-term capital gains or losses.
Dividends declared in December and payable to shareholders of record in such
month will be deemed to have been paid by the Fund and received by shareholders
on December 31 of that year if the dividend is paid prior to February 1 of the
following year.
Income dividends and capital gains distributions will be paid in additional
shares at their net asset value on the record date unless the shareholder has
elected to receive all or a portion of such dividends and distributions in cash.
Such election may be made by giving 10 days' written notice to Transfer Agent.
TAXES
The Fund intends to qualify as a regulated investment company ("RIC") under
Subchapter M of the Internal Revenue Code, as amended (the "Code"). As a RIC,
the Fund will not be subject to federal income taxes to the extent it
distributes its net investment income and capital gain net income (capital gains
in excess of capital losses) to shareholders. The Board intends to distribute
each year substantially all of the Fund's net investment income and capital gain
net income. In addition, the Fund intends to continue to qualify to pay
"exempt-interest" dividends, which requires, among other things, that at the
close of each quarter of its taxable year at least 50% of the value of its total
assets must consist of municipal securities.
Distributions by the Fund that are designated by it as "exempt-interest
dividends" generally may be excluded from the shareholder's gross income.
Dividends from taxable net investment income and distributions of net short-term
capital gains are taxable to shareholders as ordinary income under federal
income tax laws whether paid in cash or in additional shares. Distributions from
net long-term capital gains are taxable as long-term capital gains regardless of
the length of time a shareholder has held such shares and whether paid in cash
or additional shares.
The Fund may purchase certain private activity securities whose interest is
subject to the federal alternative minimum tax for individuals. If the Fund
purchases such securities, investors who are subject to the alternative minimum
tax will be required to report a legally determined portion of the Fund's
dividends as a tax preference item in determining their federal tax.
The Fund may purchase bonds at market discount (i.e., bonds with a purchase
price less then original issue price or adjusted issue price). If such bonds are
subsequently sold at a gain, then a portion of that gain equal to the amount of
market discount, which should have been accrued through the sale date, will be
taxable to shareholders as ordinary income.
Dividends and distributions may also be subject to state or local taxes.
Depending on the state tax rules pertaining to a shareholder, a portion of the
dividends paid by the Fund attributable to direct obligations of the US Treasury
and certain agencies may be exempt from state and local taxes.
Although the sale or exchange of Fund shares is a taxable event, no gain or
loss is anticipated because the Fund seeks to maintain a stable $1.00 per share
net asset value.
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Shareholders will be notified after each calendar year of the amount of
income dividends and net capital gains distributed. Shareholders of the Fund
will also be advised of the percentage, if any, of the dividends by the Fund
that are exempt from federal income tax and the portion, if any, of those
dividends that is a tax preference item for purposes of the alternative minimum
tax. The Fund is required to withhold a legally determined portion of all
taxable dividends, distributions and redemption proceeds payable to any
noncorporate shareholder that does not provide the Fund with the shareholder's
correct taxpayer identification number or certification that the shareholder is
not subject to backup withholding.
The foregoing discussion is only a summary of certain federal income tax
issues generally affecting the Fund and its shareholders. Circumstances among
investors may vary and each investor is encouraged to discuss investment in the
Fund with the investor's tax adviser.
VALUATION OF FUND SHARES
NET ASSET VALUE PER SHARE. Net asset value per share for each class of
shares of the Fund is computed by adding the value of all securities and other
assets of the Fund, deducting accrued liabilities allocated to the class,
dividing by the number of shares outstanding in the class and rounding to the
nearest cent. The Fund determines net asset value twice each business day, as of
12:00 noon Eastern time and as of the close of the regular trading session of
the New York Stock Exchange (ordinarily 4 p.m. Eastern time). A business day is
one on which the New York Stock Exchange and Boston Federal Reserve are open for
business.
VALUATION OF FUND SECURITIES. The Fund seeks to maintain a $1.00 per share
net asset value and, accordingly, uses the amortized cost valuation procedure to
value its portfolio instruments. The "amortized cost" valuation procedure
initially prices an instrument at its cost and thereafter assumes a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument.
PURCHASE OF FUND SHARES
MINIMUM INITIAL INVESTMENT AND ACCOUNT BALANCE. The Fund requires a minimum
initial investment of $1,000. The minimum account balance is $500. The Fund
reserves the right to reject any purchase order.
OFFERING DATES AND TIMES. Fund shares may be purchased on any business day
without a sales commission. All purchases must be made in US dollars. Purchase
orders in good form and payments for Fund shares must be received by the
Transfer Agent prior to 4:00 p.m. Eastern time to be effective on the date
received. The accompanying payment must be in federal funds or converted into
federal funds by the Transfer Agent before the purchase order can be accepted.
Purchase orders in good form are described below. Purchase orders which are
accepted: (1) prior to 12:00 noon Eastern time will earn the dividend declared
on the date of purchase; and (2) at or after 12:00 noon Eastern time will earn
the dividend determined on the next day.
ORDER AND PAYMENT PROCEDURES. There are several ways to invest in the Fund.
The Fund requires a purchase order in good form which consists of a completed
and signed Account Registration and Investment Instruction Form (Application)
for each new account regardless of the investment
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<PAGE>
method. For additional information, copies of forms or questions, call Transfer
Agent at (800) 647-7327, or write to Transfer Agent at: State Street Bank and
Trust Company, P.O. Box 8317, Boston, MA 02266-8317, Attention: The Seven Seas
Series Fund.
FEDERAL FUNDS WIRE. An investor may purchase shares by wiring federal funds
to State Street Bank and Trust Company as Transfer Agent by:
1. Telephoning State Street Bank and Trust Company at (800) 647-7327, and
stating: (1) the investor's account registration number, address and
social security or tax identification number; (2) the amount being wired;
(3) the name of the wiring bank; (4) the name and telephone number of the
person at the wiring bank to be contacted in connection with the order;
and (5) that the funds should be invested in The Seven Seas Series Tax
Free Money Market Fund.
2. Instructing the wiring bank to wire federal funds to: State Street Bank
and Trust Company, Boston, MA (ABA #0110-00028), Attention: The Seven
Seas Series Tax Free Money Market Fund, Mutual Funds Service Division
(DDA #9904-631-0). The wire instructions should also include the name the
account is registered in, the account number and the name of the Fund to
be invested in.
3. Completing the Application and forwarding it to Transfer Agent at the
above address.
MAIL. To purchase shares by mail, send a check or other negotiable bank
draft payable to: State Street Bank and Trust Company, P.O. Box 8317, Boston, MA
02266-8317, Attention: The Seven Seas Series Tax Free Money Market Fund.
Certified checks are not necessary; however, all checks are accepted subject to
collection at full face value in United States funds and must be drawn in United
States dollars on a United States bank. Normally, checks and drafts are
converted to federal funds within two business days following receipt of the
check or draft. Initial investments should be accompanied by a completed
Application, and subsequent investments are to be accompanied by the investor's
account number.
THIRD PARTY TRANSACTIONS. Investors purchasing Fund shares through a
program of services offered by a financial intermediary, such as a bank,
broker-dealer, investment adviser or others, may be required by such
intermediary to pay additional fees. Investors should contact such intermediary
for information concerning what additional fees, if any, may be charged.
"IN-KIND" EXCHANGE OF SECURITIES. The Transfer Agent may, at its
discretion, permit investors to purchase shares through the exchange of
securities they hold. Any securities exchanged must meet the investment
objective, policies and limitations of the Fund, must have a readily
ascertainable market value, must be liquid and must not be subject to
restrictions on resale. The market value of any securities exchanged, plus any
cash, must be at least $1 million. Shares purchased in exchange for securities
generally may not be redeemed or exchanged until the transfer has settled --
usually within 15 days following the purchase by exchange.
The basis of the exchange will depend upon the relative net asset value of
the shares purchased and securities exchanged. Securities accepted by the Fund
will be valued in the same manner as the Fund values its assets. Any interest
earned on the securities following their delivery to the Transfer
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Agent and prior to the exchange will be considered in valuing the securities.
All interest, dividends, subscription or other rights attached to the securities
become the property of the Fund, along with the securities.
EXCHANGE PRIVILEGE. Subject to each Fund's minimum investment requirement,
investors may exchange their Fund shares without charge for shares of any other
investment portfolio offered by Investment Company. Shares are exchanged on the
basis of relative net asset value per share. Exchanges may be made: (1) by
telephone if the registrations of the two accounts are identical; or (2) in
writing addressed to State Street Bank and Trust Company, P.O. Box 8317, Boston,
MA 02266-8317, Attention: The Seven Seas Series Tax Free Money Market Fund. If
shares of the Fund were purchased by check, the shares must have been present in
an account for 10 days before an exchange is made. The exchange privilege will
only be available in states where the exchange may legally be made, and may be
modified or terminated by the Fund upon 60 days' notice to shareholders.
REDEMPTION OF FUND SHARES
Fund shares may be redeemed on any business day at the net asset value next
determined after the receipt of a redemption request in proper form as described
below. Payment will be made as soon as possible (but will ordinarily not exceed
seven days) and will be mailed to the shareholder's address of record. Upon
request, redemption proceeds will be wire transferred to the shareholder's
account at a domestic commercial bank that is a member of the Federal Reserve
System. Although Investment Company does not currently charge a fee for this
service, Investment Company reserves the right to charge a fee for the cost of
wire-transferred redemptions of less than $1,000. Payment for redemption of
shares purchased by check may be withheld for up to 10 days after the date of
purchase to assure that such checks are honored. A dividend will be paid on
shares redeemed if the redemption request is received by State Street Bank and
Trust Company after 12:00 noon Eastern time. Redemption requests received before
12:00 noon Eastern time will not be entitled to that day's dividend.
EXPEDITED REDEMPTION. Shareholders may normally redeem Fund shares by
telephoning State Street Bank and Trust Company between 9:00 a.m. and 4:00 p.m.
Eastern time at (800) 647-7327, Attention: The Seven Seas Series Tax Free Money
Market Fund. Shareholders using the expedited redemption method must complete
the appropriate section on the Application. The Fund and the Transfer Agent will
employ reasonable procedures to confirm that instructions communicated by
telephone are properly authorized. The Fund and the Transfer Agent will not be
liable for executing telephone instructions that are deemed to be authorized
after following reasonable procedures. These procedures include recording
telephonic instructions, mailing to the shareholder a written confirmation of
the transaction, performing a personal identity test with private information
not likely to be known by other individuals, and restricting mailing of
redemptions to the shareholder's address of record. During periods of drastic
economic or market changes, shareholders using this method may encounter delays.
In such event, shareholders should consider using the mail redemption procedure
described below.
MAIL. Redemption requests may be made in writing directly to State Street
Bank and Trust Company, P.O. Box 8317, Boston, MA 02266-8317, Attention: The
Seven Seas Series Tax Free Money
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Market Fund. The redemption price will be the net asset value next determined
after receipt by State Street of all required documents in good order. "Good
order" means that the request must include the following:
1. A letter of instruction or a stock assignment stating that the shares are
to be redeemed out of The Seven Seas Series Tax Free Money Market Fund
and designating specifically the dollar amount to be redeemed signed by
all owners of the shares in the exact names in which they appear on the
account, together with a guarantee of the signature of each owner by a
bank, trust company or member of a recognized stock exchange; and
2. Such other supporting legal documents, if required by applicable law or
Transfer Agent, in the case of estates, trusts, guardianships,
custodianships, corporations and pension and profit-sharing plans.
The Fund reserves the right to redeem the shares in any account with a
balance of less than $500 as a result of shareholder redemptions rather than
market value fluctuations. Before shares are redeemed to close an account, the
shareholder will be notified in writing and allowed 60 days to purchase
additional shares to meet the minimum account balance.
The Fund may pay any portion of the redemption amount in excess of $250,000
by a distribution in kind of readily marketable securities from the portfolio of
the Fund in lieu of cash. Investors will incur brokerage charges on the sale of
these portfolio securities. The Fund reserves the right to suspend the right of
redemption or postpone the date of payment if emergency conditions, as specified
in the 1940 Act or determined by the Securities and Exchange Commission, should
exist.
GENERAL MANAGEMENT
The Board of Trustees supervises the management, activities and affairs of
the Fund and has approved contracts with various financial organizations to
provide, among other services, day-to-day management required by the Fund.
ADVISORY AGREEMENT. Investment Company employs State Street to furnish
investment services to the Fund. State Street is one of the largest providers of
securities processing and record keeping services for US mutual funds and
pension funds. State Street is a wholly owned subsidiary of State Street Boston
Corporation, a publicly held bank holding company. State Street, with over
$171.3 billion (US) under management as of September 30, 1995, provides complete
global investment management services from offices in the United States, London,
Sydney, Hong Kong, Tokyo, Toronto, Luxembourg, Melbourne, Montreal and Paris.
Adviser, subject to Board supervision, directs the investment of the Fund in
accordance with the Fund's investment objective, policies and restrictions. For
these services, the Fund pays Adviser a fee, calculated daily and paid monthly,
equal to .25% annually of the Fund's average daily net assets.
The Glass-Steagall Act prohibits a depository state chartered bank such as
Adviser from engaging in the business of issuing, underwriting, selling or
distributing certain securities. The activities of Adviser in informing its
customers of the Fund, performing investment and redemption services and
providing custodian, transfer, shareholder servicing, dividend disbursing and
investment advisory services may raise issues under these provisions. Adviser
has been advised by its counsel that its activities in connection with the Fund
are consistent with its statutory and regulatory obligations. THE
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SHARES OFFERED BY THIS PROSPECTUS ARE NOT ENDORSED OR GUARANTEED BY STATE STREET
OR ITS AFFILIATES, ARE NOT DEPOSITS OR OBLIGATIONS OF STATE STREET OR ITS
AFFILIATES, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR
ANY OTHER GOVERNMENTAL AGENCY.
Changes in federal or state statutes and regulations relating to the
permissible activities of banks and their affiliates, as well as judicial or
administrative decisions or interpretations of such or future statutes and
regulations, could prevent Adviser from continuing to perform all or a part of
the above services for its customers and/or the Fund. If Adviser were prohibited
from serving the Fund in any of its present capacities, the Board of Trustees
would seek an alternative provider(s) of such services. In such event, changes
in the operation of the Fund may occur. It is not expected by Adviser that
existing shareholders would suffer any adverse financial consequences (if
another adviser with equivalent abilities is found) as a result of any of these
occurrences.
State Street may from time to time have discretionary authority over
accounts which invest in Investment Company shares. These accounts include
accounts maintained for securities lending clients and accounts which permit the
use of Investment Company portfolios as short-term cash sweep investments.
Shares purchased for all discretionary accounts are held of record by State
Street, who retains voting control of such shares. As of November 30, 1995,
State Street held of record 36% of the issued and outstanding shares of
Investment Company in connection with its discretionary accounts. Consequently,
State Street may be deemed to be a controlling person of Investment Company for
purposes of the 1940 Act.
Under the Adviser's Code of Ethics, the Adviser's employees in Boston where
investment management operations are conducted are only permitted to engage in
personal securities transactions which do not involve securities which the
Adviser had recommended for purchase or sale, or purchased or sold, on behalf of
its clients. Such employees must report their personal securities transactions
quarterly and supply broker confirmations to the Adviser.
ADMINISTRATION AGREEMENT. Frank Russell Investment Management Company
("Administrator") serves as administrator of the Fund. Administrator currently
serves as investment manager and administrator to 22 mutual funds with assets of
$7.3 billion as of October 31, 1995, and acts as administrator to 17 mutual
funds, including the Tax Free Fund, with assets of $7.2 billion as of October
31, 1995.
Pursuant to the Administration Agreement with Investment Company,
Administrator will: (1) supervise all aspects of the Fund's operations; (2)
provide the Fund with administrative and clerical services, including the
maintenance of certain of the Fund's books and records; (3) arrange the periodic
updating of the Fund's prospectuses and any supplements thereto; (4) provide
proxy materials and reports to Fund shareholders and the Securities and Exchange
Commission; and (5) provide the Fund with adequate office space and all
necessary office equipment and services, including telephone service, heat,
utilities, stationery supplies and similar items. For these services, the Fund
and Investment Company's other domestic investment portfolios pay Administrator
a combined fee that on an annual basis is equal to the following percentages of
their average aggregate daily net assets: (1) $0 to and including $500 million
- -- .06%; (2) over $500 million to and including $1 billion -- .05%; and (3) over
$1 billion -- .03%. The percentage of the fee paid by the Tax Free Fund is equal
to the percentage of average aggregate daily net assets that are attributable to
the Fund. Administrator will also receive reimbursement of expenses it incurs in
connection with establishing new investment
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<PAGE>
portfolios. Further, the administration fee paid by the Investment Company will
be reduced by the sum of certain distribution related expenses (up to a maximum
of 15% of the asset-based administration fee listed above).
Administrator also provides administrative services in connection with the
registration of shares of Investment Company with those states in which its
shares are offered or sold. Compensation for such services is on a "time spent"
basis. Investment Company will pay all registration, exemptive application,
renewal and related fees and reasonable out-of-pocket expenses.
Officers and employees of the Administrator and Distributor are permitted to
engage in personal securities transactions subject to restrictions and
procedures set forth in the Confidentiality Manual and Code of Ethics adopted by
the Investment Company, Administrator and Distributor. Such restrictions and
procedures include substantially all of the recommendations of the Advisory
Group of the Investment Company Institute and comply with Securities and
Exchange Commission rules and regulations.
DISTRIBUTION SERVICES AND SHAREHOLDER SERVICING ARRANGEMENTS. Pursuant to
the Distribution Agreement with Investment Company, Russell Fund Distributors,
Inc. ("Distributor"), a wholly owned subsidiary of Administrator, serves as
distributor for all Fund shares.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 (the "Plan")
under the 1940 Act for the Class A shares. The purpose of the Plan is to provide
for the payment of certain Investment Company distribution and shareholder
servicing expenses. Under the Plan, Distributor will be reimbursed in an amount
up to .25% of the net asset value of Class A shares of the Fund for
distribution-related and shareholder servicing expenses. Payments under the Plan
will be made to Distributor to finance activity which is intended to result in
the sale and retention of Fund shares including: (1) the costs of prospectuses,
reports to shareholders and sales literature; (2) advertising; and (3) expenses
incurred in connection with the promotion and sale of Fund shares, including
Distributor's overhead expenses for rent, office supplies, equipment, travel,
communication, compensation and benefits of sales personnel.
Under the Plan, the Fund may also enter into agreements ("Service
Agreements") with financial institutions, which may include Adviser ("Service
Organizations"), to provide shareholder servicing with respect to Class A shares
of the Fund held by or for the customers of the Service Organizations. Under the
Service Agreements, the Service Organizations may provide various services for
such customers, including: answering inquiries regarding the Fund; assisting
customers in changing dividend options, account designations and addresses;
performing subaccounting for such customers; establishing and maintaining
customer accounts and records; processing purchase and redemption transactions;
providing periodic statements showing customers' account balances and
integrating such statements with those of other transactions and balances in the
customers' other accounts serviced by the Service Organizations; arranging for
bank wires transferring customers' funds; and such other services as the
customers may request in connection with the Fund, to the extent permitted by
applicable statute, rule or regulation. Service Organizations may receive from
the Fund, for shareholder servicing, monthly fees at a rate that shall not
exceed .20% per annum of the average daily net asset value of the Fund's Class A
shares owned by or for shareholders with whom the Service Organization has a
servicing relationship. Banks and other financial service firms may be subject
to various state laws, and may be required to register as dealers pursuant to
state law.
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Investment Company has entered into Service Agreements with Adviser, State
Street Brokerage Services, Inc. ("SSBSI"), and Adviser's Metropolitan Division
of Commercial Banking ("Commercial Banking") to obtain the services described
above with respect to Fund shares held by or for customers. In return for these
services, Investment Company pays Adviser a fee in an amount that per annum is
equal to .025%, .175% and .175% of the average daily value of all Fund shares
held by or for customers of Adviser, SSBSI, and Commercial Banking,
respectively.
Payments to Distributor, as well as payments to Service Organizations, are
not permitted by the Plan to exceed .25% per year of the average net asset value
of the Fund's Class A shares. Any payments that are required to be made by the
Distribution Agreement and any Service Agreement but could not be made because
of the .25% limitation may be carried forward and paid in subsequent years so
long as the Plan is in effect. The Fund's liability for any such expenses
carried forward shall terminate at the end of two years following the year in
which the expenditure was incurred. Service Organizations will be responsible
for prompt transmission of purchase and redemption orders and may charge fees
for their services.
FUND EXPENSES
The Fund will pay all of its expenses other than those expressly assumed by
Adviser and Administrator. The principal expenses of the Fund are the annual
advisory fee payable to Adviser and distribution and shareholder servicing
expenses. Other expenses include: (1) amortization of deferred organizational
costs; (2) taxes, if any; (3) expenses for legal, auditing and financial
accounting services; (4) expense of preparing (including typesetting, printing
and mailing) reports, prospectuses and notices to existing shareholders; (5)
administrative fees; (6) custodian fees; (7) expense of issuing and redeeming
Fund shares; (8) the cost of registering Fund shares under federal and state
laws; (9) shareholder meetings and related proxy solicitation expenses; (10) the
fees, travel expenses and other out-of-pocket expenses of Trustees who are not
affiliated with Adviser or any of its affiliates; (11) insurance, interest,
brokerage and litigation costs; (12) extraordinary expenses as may arise,
including expenses incurred in connection with litigation proceedings and claims
and the legal obligations of Investment Company to indemnify its Trustees,
officers, employees, shareholders, distributors and agents; and (13) other
expenses properly payable by the Fund. Where any of these other expenses are
attributable to a particular class of shares, they will be borne by the
beneficial owners of such shares.
PERFORMANCE CALCULATIONS
From time to time the Fund may advertise its yield, effective yield and
tax-equivalent yield of its Class A shares. The yield of the Fund refers to the
income generated by an investment in Class A shares of the Fund over a seven-day
period (which period will be stated in the advertisement). This income is then
annualized. That is, the amount of income generated by the investment during
that week is assumed to be generated each week over a 52-week period and is
shown as a percentage of the investment. The effective yield is calculated
similarly but, when annualized, the income earned by an investment in each Fund
is assumed to be reinvested. The effective yield will be slightly higher than
the yield because of the compounding effect of this assumed reinvestment. The
tax-equivalent yield shows the level of taxable yield needed to produce an
after-tax equivalent to the Fund's tax-free yield. This is done by increasing
the Fund's yield by the amount necessary to reflect the payment of federal
income tax (and state income tax, if applicable) at a stated tax rate.
18
<PAGE>
From time to time, the Fund may also report yield, effective yield and
tax-equivalent yield as calculated over a one-month period (which period will
also be stated in the advertisement). These one-month periods will be annualized
using the same method as described above for yields calculated on the basis of
seven-day periods. From time to time, yields calculated on a monthly basis may
also be linked to provide yield figures for periods greater than one month.
The Fund may also advertise the total return of its Class A shares. The
total return of the Fund is the average annual compounded rate of return from a
hypothetical investment in the Funds' Class A shares over one-, five- and
ten-year periods or for the life of the Fund (as stated in the advertisement),
assuming the reinvestment of all dividends and capital gains distributions.
Comparative performance information may be used from time to time in
advertising or marketing Fund shares, including data from Lipper Analytical
Services, Inc., Morningstar, Inc., Donoghue's Money Fund Report, Wall Street
Journal Score Card or other industry publications, business periodicals, rating
services and market indices. The Fund may also advertise nonstandardized
performance information which is for periods in addition to those required to be
presented.
Quoted yields, returns and other performance figures are based on historical
earnings and are not indications of future performance.
ADDITIONAL INFORMATION
CUSTODIAN, TRANSFER AGENT AND INDEPENDENT ACCOUNTANTS. State Street holds
all portfolio securities and cash assets of the Fund, provides portfolio record
keeping services and serves as the Fund's transfer agent ("Transfer Agent") and
custodian ("Custodian"). State Street is authorized to deposit securities in
securities depositories or to use the services of subcustodians. State Street
has no responsibility for the supervision and management of the Fund except as
investment adviser. Coopers & Lybrand L.L.P., Boston, Massachusetts, is
Investment Company's independent accountants.
REPORTS TO SHAREHOLDERS AND SHAREHOLDER INQUIRIES. Shareholders will
receive unaudited semiannual financial statements and annual financial
statements audited by Investment Company's independent accountants. Shareholder
inquiries regarding the Prospectus and financial statements may be made by
calling Distributor at (617) 654-6089. Inquiries regarding shareholder balances
may be made by calling Transfer Agent at (800) 647-7327.
ORGANIZATION, CAPITALIZATION AND VOTING. Investment Company was organized
as a Massachusetts business trust on October 3, 1987, and operates under a First
Amended and Restated Master Trust Agreement dated October 13, 1993, as amended.
Investment Company issues shares divisible into an unlimited number of series
(or funds), each of which is a separate trust under Massachusetts law. The Tax
Free Money Market Fund is one such series. Shares of the Fund are entitled to
such relative rights and preferences and dividends and distributions earned on
assets of the Fund as may be declared by the Board of Trustees. Each class of
shares of the Fund has identical rights and privileges as all other shares of
the Fund and participates equally in the dividends and distributions of the
Fund. Fund shares are fully paid and nonassessable by Investment Company and
have no preemptive rights.
Investment Company is authorized to subdivide each series into two or more
classes of shares. Currently, shares of the Tax Free Money Market Fund are
divided into Class A, Class B and Class C.
19
<PAGE>
Each class of shares of the Fund is entitled to the same rights and privileges
as all other classes of the Fund, provided however, that each class bears the
expenses related to its distribution and shareholder servicing arrangements, as
well as other expenses attributable to the class and unrelated to managing the
Fund's portfolio securities. As described above, Investment Company has adopted
a plan of distribution under Rule 12b-1 for Class A shares. Similar plans have
been adopted for Class B and Class C shares. However, total payments under those
plans are limited to .35% and .60% annually of the average net asset value of
the Class B and Class C shares, respectively of the Fund. As a result of these
plan and other class expenses, the yield on Class B and Class C shares will be
approximately .25% and .50% lower, respectively, than the yield on Class A
shares.
Each Fund share has one vote. There are no cumulative voting rights. There
is no annual meeting of shareholders, but special meetings may be held. On any
matter which affects only a particular investment fund, only shareholders of
that fund may vote unless otherwise required by the 1940 Act or the Master Trust
Agreement. Further, any matter that affects only the holders of a particular
class of shares may be voted on only by such shareholders. Each class of shares
votes separately with respect to any Rule 12b-1 plan applicable to such class.
The Trustees hold office for the life of the Trust. A Trustee may resign or
retire, and may be removed at any time by a vote of two-thirds of the Investment
Company shares or by a majority of the Trustees. The Trustees shall promptly
call and give notice of a meeting of shareholders for the purpose of voting upon
removal of any Trustee when requested to do so in writing by the holders of not
less than 10% of the shares then outstanding. A vacancy on the Board of Trustees
may be filled by the vote of a majority of the remaining Trustees, provided that
immediately thereafter at least two-thirds of the Trustees have been elected by
shareholders.
Investment Company does not issue share certificates for the Fund. Transfer
Agent sends monthly shareholders statements, confirming all investments in or
redemptions from their accounts. Each statement also sets forth the balance of
shares held in the account.
As of November 30, 1995, Clipper State Street, a fund of State Street Bank
and Trust Company; and State Street Bank and Trust Company, owned of record 51%
and 38%, respectively, of the issued and outstanding shares of the Fund. Each is
therefore deemed to be a controlling person of the Fund for purposes of the 1940
Act.
20
<PAGE>
THE SEVEN SEAS SERIES FUND
TWO INTERNATIONAL PLACE, 35TH FLOOR
BOSTON, MASSACHUSETTS 02110
(617) 654-6089
INVESTMENT ADVISER, CUSTODIAN, AND TRANSFER AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
DISTRIBUTOR
Russell Fund Distributors, Inc.
Two International Place, 35th Floor
Boston, Massachusetts 02110
ADMINISTRATOR
Frank Russell Investment Management Company
909 A Street
Tacoma, Washington 98402
LEGAL COUNSEL
Goodwin, Procter & Hoar
Exchange Place
Boston, Massachusetts 02109
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
<PAGE>
Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
THE SEVEN SEAS SERIES FUND
Two International Place, 35th Floor
Boston, Massachusetts 02110
(617) 654-6089
TAX FREE MONEY MARKET FUND
CLASS B SHARES
The Seven Seas Series Fund is a registered, open-end investment company
with multiple portfolios, each of which is a mutual fund. This Prospectus
describes and offers Class B shares of beneficial interest in one such series,
The Seven Seas Series Tax Free Money Market Fund (referred to in this Prospectus
as the "Tax Free Fund" or the "Fund"). Shares may not be purchased by
individuals directly, but must be purchased through a financial institution
which is permitted by contract with the Fund to offer the shares. This
Prospectus should be read together with any materials provided by such
institution. The Tax Free Fund seeks to maximize current income, exempt from
federal income taxes, to the extent consistent with the preservation of capital
and liquidity and the maintenance of a stable $1.00 per share net asset value.
The Fund's shares are offered without sales commissions. However, the Fund pays
certain distribution expenses under its Rule 12b-1 plan.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
INVESTMENTS IN THE TAX FREE FUND ARE NEITHER INSURED NOR GUARANTEED BY THE US
GOVERNMENT. THERE IS NO ASSURANCE THAT THE FUND WILL MAINTAIN A STABLE NET
ASSET VALUE OF $1.00 PER SHARE.
SHARES IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, STATE STREET BANK AND TRUST COMPANY, AND SHARES ARE NOT FEDERALLY INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER AGENCY, AND INVOLVE INVESTMENT RISKS INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. Please read and retain
this document for future reference. Additional information about the Fund has
been filed with the Securities and Exchange Commission in a Statement of
Additional Information dated December 29, 1995. The Statement of Additional
Information is incorporated herein by reference and is available without charge
from Distributor at its address noted below or by calling (617) 654-6089.
<TABLE>
<S> <C> <C>
Investment Adviser, Custodian
Transfer Agent: Distributor: Administrator:
State Street Bank and Trust Russell Fund Distributors, Inc. Frank Russell Investment
Company Two International Place, Management Company
225 Franklin Street 35th Floor 909 A Street
Boston, Massachusetts 02110 Boston, Massachusetts 02110 Tacoma, Washington 98402
(617) 654-4721 (617) 654-6089 (206) 627-7001
</TABLE>
PROSPECTUS DATED DECEMBER 29, 1995
-1-
<PAGE>
TABLE OF CONTENTS
Page
----
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Fund Operating Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The Seven Seas Series Fund . . . . . . . . . . . . . . . . . . . . . . . . . 6
Manner of Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Investment Objective, Policies and Restrictions. . . . . . . . . . . . . . . 6
Portfolio Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Dividends and Distributions. . . . . . . . . . . . . . . . . . . . . . . . . 12
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Valuation of Fund Shares . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Purchase of Fund Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Redemption of Fund Shares. . . . . . . . . . . . . . . . . . . . . . . . . . 15
General Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Fund Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Performance Calculations . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
-2-
<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in the Prospectus.
INVESTMENT OBJECTIVE. The Fund's investment objective is to maximize current
income, exempt from federal income taxes, to the extent consistent with the
preservation of capital and liquidity and the maintenance of a stable $1.00 per
share net asset value. To accomplish this goal, the Fund invests primarily in
high quality short-term municipal obligations.
DIVIDENDS. Dividends from net investment income are declared daily and paid
monthly. Net capital gains, if any, are distributed annually.
POTENTIAL INVESTORS. The Fund is designed to be an economical and efficient
means for retail investors to participate in professionally managed portfolios
of money market instruments. In this Prospectus, Class B shares of the Fund are
offered to customers of certain financial institutions ("Service Organizations")
who act as record holders of the shares and provide services to their customers
who invest in the Fund.
PURCHASES AND REDEMPTIONS. Because shares of the Fund are offered through
Service Organizations, to purchase and redeem shares potential investors should
contact their Service Organizations for information regarding purchase and
redemption procedures. Shares may be purchased or redeemed at the net asset
value next determined after receipt of the order.
INVESTMENT ADVISERS. State Street Bank and Trust Company serves as investment
adviser to the Fund in return for a fee equal to .25% annually of each Fund's
average daily net assets.
CERTAIN CLASS INFORMATION. The shares of the Fund are divided into three
classes: Class A, Class B and Class C. Class A shares are designed for
institutional investors. Class B shares are offered through Service
Organizations that provide certain account administration services. Class C
shares are offered through Service Organizations that provide certain account
administration and shareholder liaison services. Each class of shares of the
Fund is entitled to the same rights and privileges as all other classes of
shares of the Fund, provided however, that each class bears the expenses related
to its distribution and shareholder servicing arrangements and certain other
expenses attributable to the class. Annual distribution and shareholder
servicing expenses for Class A, Class B and Class C shares are equal to
approximately .05%, .30% and .55%, respectively, of the average daily net asset
value of the shares of the class.
-3-
<PAGE>
FUND OPERATING EXPENSES
THE SEVEN SEAS SERIES TAX FREE MONEY MARKET FUND
CLASS B SHARES
The following table is intended to assist the investor in understanding the
various costs and expenses that an investor in Class B shares of the Tax Free
Fund will incur directly or indirectly. THE EXAMPLES PROVIDED IN THE TABLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. Actual
expenses may be greater or less than those shown. For additional information,
see "General Management."
<TABLE>
<CAPTION>
Shareholder Transaction Expenses:
- --------------------------------
<S> <C> <C> <C>
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fee None
Annual Fund Operating Expenses:
- -----------------------------------
(as a percentage of average daily net assets)
Advisory Fees .25%
12b-1 Fees:
Payable to Distributor(1) .05%
Payable to Service Organizations .25
---
Total 12b-1 Fees .30
Other Expenses(1) .16
---
Total Operating Expenses(2) .71%
----
----
Examples: 1 year 3 years
-------- ------ -------
You would pay the following expenses
on a $1,000 investment, assuming
(i) 5% annual return and (ii) redemption
at the end of each time period: $ 7 $23
---- ----
---- ----
</TABLE>
- --------------------------
(1) The ratios for "12b-1 Fees Payable to Distributor" and "Other Expenses" are
based on estimated amounts for the current fiscal year, with expected
annual average Fund net assets of $155 million.
(2) Service Organizations impose additional fees for services provided to
investors. Investors should contact their Service Organization for
information concerning what additional fees, if any, will be charged.
Long-Term shareholders of the Fund may pay more in Rule 12b-1 fees than the
economic equivalent of the maximum front-end sales charge permitted by the
National Association of Securities Dealers, Inc.
-4-
<PAGE>
FINANCIAL HIGHLIGHTS
THE SEVEN SEAS SERIES TAX FREE MONEY MARKET FUND
The following table contains important financial information relating to the
Tax Free Fund and has been audited by Coopers & Lybrand L.L.P., the
Fund's independent accountants. The table includes selected data for a
Class A share outstanding throughout each fiscal year or period ended
August 31, and other performance information derived from the financial
statements. The Investment Company is authorized to issue Class B and
Class C shares of the Tax Free Fund although shares have not been offered
on these classes as of the date of this Prospectus. The table appears in the
Fund's Annual Report and should be read in conjunction with the Fund's
financial statements and related notes, which are incorporated by reference
in the Statement of Additional Information and which appear, along with the
report of Coopers & Lybrand L.L.P., in the Fund's Annual Report to
Shareholders. More detailed information concerning the Fund's performance,
including a complete portfolio listing and audited financial statements, is
available in the Fund's Annual Report, which may be obtained without charge
by writing or calling the Distributor.
<TABLE>
<CAPTION>
1995++
----
<S> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 1.0000
----------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .0251
----------
LESS DISTRIBUTIONS:
Net investment income (.0251)
----------
NET ASSET VALUE, END OF PERIOD $ 1.0000
----------
----------
TOTAL RETURN (%)(a) 2.54
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average
daily net assets (b) .59
Operating expenses, gross, to average
daily net assets (b) .60
Net investment income to average
daily net assets (b) 3.40
Net assets, end of period
($000 omitted) 42,607
Per share amount of fees waived
($ omitted) .0001
</TABLE>
- ------------------------------------------
++ For the period December 1, 1994 (commencement of operations) to August 31,
1995.
(a) Periods less than one year are not annualized.
(b) The ratios for the period August 31, 1995 are not annualized.
-5-
<PAGE>
THE SEVEN SEAS SERIES FUND
The Seven Seas Series Fund ("Investment Company") is an open-end management
investment company that is organized as a Massachusetts business trust. In
addition, each series of the Investment Company is diversified as defined in the
Investment Company Act of 1940, as amended ("1940 Act"). As a "series" company,
Investment Company is authorized to issue an unlimited number of shares
evidencing beneficial interests in different investment portfolios. Through
this Prospectus, Investment Company offers Class B shares in one such portfolio,
The Seven Seas Series Tax Free Money Market Fund. State Street Bank and Trust
Company ("Adviser" or "State Street") serves as the investment adviser for the
Fund.
MANNER OF OFFERING
The Fund is designed to be an economical and efficient means for retail
investors to participate in professionally managed portfolios of money market
instruments. Class B shares of the Fund are offered to customers of certain
financial institutions ("Service Organizations") that act as record holders of
shares and provide services to their customers who invest in the Fund. Each
Service Organization may set a minimum initial investment for its customers and
may redeem all shares in an investor's account if the value of these shares
falls below a predetermined amount.
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
The Fund's fundamental investment objective is to seek to maximize current
income, exempt from federal income taxes, to the extent consistent with the
preservation of capital and liquidity, and the maintenance of a stable $1.00 per
share net asset value. This objective may be changed only with the approval of
a majority of the Fund's shareholders as defined by the 1940 Act. There can be
no assurance that the Fund will meet its investment objective.
The Fund has a fundamental policy of investing at least 80% of its assets
in federal tax exempt, high quality and short-term municipal securities of all
types. These securities are issued by states, municipalities and their
political subdivisions and agencies and certain territories and possessions of
the United States. Investments may include general obligation bonds and notes,
revenue bonds and notes, commercial paper, private placements, tender option
bonds, private activity bonds, industrial development bonds and municipal lease
contracts. Securities purchased may bear fixed, variable or floating rates of
interest or may be zero coupon securities. The Fund may buy or sell securities
on a when-issued or forward commitment basis.
The Fund may invest not more than 20% of its assets in federally taxable
money market instruments including securities issued by or guaranteed as to
principal and interest by the US government or its agencies or
instrumentalities, certificates of deposit, commercial paper and repurchase
agreements.
The Fund will invest in securities with remaining maturities of 397 days or
less (as computed according to Rule 2a-7) and will maintain a dollar-weighted
average maturity of 90 days or less. The Fund will limit its portfolio
investments to investment grade securities which at the time of
-6-
<PAGE>
acquisition the Adviser determines present minimal credit risk and which: (1)
are rated in the highest category by least two nationally recognized statistical
rating organizations ("NRSRO"); (2) by one NRSRO, if only one rating services
has rated the security; or (3) if unrated, are of comparable quality, as
determined by the Portfolio's Adviser in accordance with procedures established
by the Board of Trustees. See the Appendix in the Statement of Additional
Information for a description of a NRSRO.
INVESTMENT POLICIES
The investment policies described below reflect the Fund's current
practices, are not fundamental and may be changed by the Board of Trustees of
Investment Company without shareholder approval. To the extent consistent with
the Fund's fundamental investment objective and restrictions, the Fund may
invest in the following instruments and may use the following investment
techniques:
MUNICIPAL SECURITIES. The Fund may purchase municipal securities issued by
or on behalf of public authorities to obtain funds to be used for various public
purposes, including general purpose financing for state and local governments,
refunding outstanding obligations, and financing for specific projects or public
facilities. General obligations are backed by the full faith and credit of the
issuer. These securities include tax anticipation notes, bond anticipation
notes and general obligation bonds. Revenue obligations are backed by the
revenues generated from a specific project or facility and include project
revenue bonds, such as private activity and industrial development bonds.
Private activity and industrial development bonds are dependent on the ability
of the facility's user to meet its financial obligations and the value of any
real or personal property pledged as security for such payment. Private
activity and industrial development bonds, although issued by industrial
development authorities, may be backed only by the assets of the non-
governmental users. Municipal notes are short-term instruments which are issued
and sold in anticipation of a bond sale, collection of taxes or receipt of other
revenues.
Some municipal securities are insured by private insurance companies, while
others may be supported by letters of credit furnished by domestic or foreign
banks. In determining the credit quality of insured or letter of credit backed
securities, the Adviser reviews the financial condition and creditworthiness of
such parties including insurance companies, banks and corporations.
Municipal obligations involve possible risks, including being affected by
economic, business and political developments and being subject to provisions of
litigation, bankruptcy and other laws affecting the rights and remedies of
creditors. Future laws may be effected extending the time for payment of
principal and/or interest, or limiting the rights of municipalities to levy
taxes. For instance, legislative proposals are introduced from time to time to
restrict or eliminate the federal income tax exemption for municipal obligations
interest. If such legislation is adopted, the Board of Trustees will reevaluate
the fund's investment objective and may submit possible changes in the structure
of the Fund to its shareholders.
VARIABLE AND FLOATING RATE SECURITIES. A floating rate security provides
for the automatic adjustment of its interest rate whenever a specified interest
rate changes. The coupon rate on variable rate securities is reset by a
remarketing agent on a periodic basis ranging from once a day to twice a year.
The agent sets the new rate at a level such that, in the judgment of the agent,
the security could
-7-
<PAGE>
be resold in the secondary market at par. Generally, changes in interest rates
will have a smaller effect on the market value of variable and floating rate
securities than on the market value of comparable fixed income obligations.
Thus, investing in variable and floating rate securities generally allows less
opportunity for capital appreciation and depreciation than investing in
comparable fixed rate securities.
Tax-exempt floating rate and variable rate demand notes and bonds
ordinarily have stated maturities in excess of 13 months, but often permit the
holder to demand payment of principal at any time, or at specified intervals not
exceeding 13 months, in each case upon not more than 30 days' notice. For the
purpose of determining the remaining maturity of certain variable or floating
rate obligations, the Fund may look to the later of the period remaining until
the net readjustment of the interest rate or the period remaining until the
principal amount can be recovered through demand.
ZERO COUPON SECURITIES. Zero coupon securities are notes, bonds and
debentures that: (1) do not pay current interest and are issued at a
substantial discount from par value; (2) have been stripped of their unmatured
interest coupons and receipts; or (3) pay no interest until a stated date one or
more years into the future. These securities also include certificates
representing interests in such stripped coupons and receipts. Because zero
coupon bonds do not pay current income, their prices can be very volatile when
interest rates change.
MUNICIPAL LEASES. The Fund may purchase participation interests in
municipal obligations, including municipal lease/purchase agreements. Municipal
leases are an undivided interest in a portion of an obligation in the form of a
lease or installment purchase issued by a state or local government to acquire
equipment or facilities. These instruments may have fixed, floating or variable
rates of interest, with remaining maturities of 13 months or less. Municipal
leases may be backed by an irrevocable letter of credit or guarantee of a bank,
or the payment obligation otherwise may be collateralized by US Government
securities. Certain participation interests may permit the Fund to demand
payment on not more than seven days' notice, for all or any part of the Fund's
interest, plus accrued interest.
Municipal leases frequently have special risks not normally associated with
general obligation or revenue bonds. Some leases or contracts include "non-
appropriation" clauses, which provide that the governmental issuer has no
obligation to make future payments under the lease or contract unless money is
appropriated for such purpose by the appropriate legislative body on a yearly or
other periodic basis. To reduce these risks, the Fund will only purchase
municipal leases subject to a non-appropriation clause when the payment of
principal and accrued interest is backed by a letter of credit or guarantee of a
bank.
Whether a municipal lease agreement will be considered illiquid for the
purpose of the Fund's restriction on investments in illiquid securities will be
determined by officers of the Investment Company in accordance with procedures
established by the Board of Trustees.
TENDER OPTION BONDS. A tender option is a municipal obligation (generally
held pursuant to a custodial arrangement) having a relatively long maturity and
bearing interest at a fixed rate substantially higher than prevailing short-term
tax exempt rates, that has been coupled with the agreement of a third party,
such as a bank, broker-dealer or other financial institution, pursuant to which
such institution grants the security holders the option, at periodic intervals,
to tender their securities to the institution and receive the face value
thereof. As consideration for providing the
-8-
<PAGE>
option, the financial institution receives periodic fees equal to the difference
between the municipal obligation's fixed coupon rate and the rate, as determined
by a remarketing or similar agent at or near the commencement of such period,
that would cause the securities, coupled with the tender option, to trade at par
on the date of such determination. Thus, after payment of this fee, the
security holder effectively holds a demand obligation that bears interest at the
prevailing short-term tax exempt rate. Subject to applicable regulatory
requirements, the Fund may buy tender option bonds if the agreement gives the
Fund the right to tender the bond to its sponsor no less frequently than once
every 397 days. The Adviser will consider on an ongoing basis the
creditworthiness of the issuer of the underlying obligation, any custodian and
the third party provider of the tender option. In certain instances and for
certain tender option bonds, the option may be terminable in the event of a
default in payment of principal or interest on the underlying municipal
obligation and for other reasons.
STANDBY COMMITMENTS. The Fund's investments may include standby
commitments, which are rights to resell municipal securities at specified
periods prior to their maturity dates to the seller or to some third party at an
agreed upon price or yield. Standby commitments may involve certain expenses
and risks, including the inability of the issuer of the commitment to pay for
the securities at the time the commitment is exercised, non-marketability of the
commitment, and difference between the duration of the commitment and the
maturity of the underlying security. The Fund will limit standby commitment
transactions to institutions which the Adviser believes present minimal credit
risk.
FORWARD COMMITMENTS. The Fund may contract to purchase securities for a
fixed price at a future date beyond customary settlement time. When effecting
such transactions, cash or liquid high quality debt obligations held by the Fund
of a dollar amount sufficient to make payment for the portfolio securities to be
purchased will be segregated on the Fund's records at the trade date and
maintained until the transaction is settled. The failure of the other party to
the transaction to complete the transaction may cause the Fund to miss an
advantageous price or yield. The Fund bears the risk of price fluctuations
during the period between the trade and settlement dates.
WHEN-ISSUED TRANSACTIONS. The Fund may purchase securities on a when-
issued basis. In these transactions, the Fund purchases securities with payment
and delivery scheduled for a future time. Until settlement, the Fund segregates
cash and marketable high quality debt securities equal in value to its when-
issued commitments. Between the trade and settlement dates, the Fund bears the
risk of any fluctuations in the value of the securities. These transactions
involve the additional risk that the other party may fail to complete the
transaction and cause the Fund to miss a price or yield considered advantageous.
The Fund will engage in when-issued transactions only for the purpose of
acquiring portfolio securities consistent with its investment objective and
policies and not for investment leverage. The Fund will not invest more than
25% of net assets in when-issued securities.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
banks and other financial institutions, such as broker-dealers. Under a
repurchase agreement, a Fund purchases securities from a financial institution
that agrees to repurchase the securities at the Fund's original purchase price
plus interest within a specified time (normally one business day). The Fund
will invest no more than 10% of its net assets (taken at current market value)
in repurchase agreements maturing in more than seven days. The Fund will limit
repurchase transactions to those member banks of the Federal Reserve System and
broker-dealers whose creditworthiness Adviser considers satisfactory. Should
the counterparty to a
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transaction fail financially, the Fund may encounter delay and incur costs
before being able to sell the securities. Further, the amount realized upon the
sale of the securities may be less than that necessary to fully compensate the
Fund.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse
repurchase agreements under the circumstances described in "Investment
Restrictions." Under a reverse repurchase agreement, the Fund sells portfolio
securities to a financial institution in return for cash in an amount equal
to a percentage of the portfolio securities' market value and agrees to
repurchase the securities at a future date at a prescribed repurchase price
equal to the amount of cash originally received plus interest on such amount.
The Fund retains the right to receive interest and principal payments with
respect to the securities while they are in the possession of the financial
institutions. Reverse repurchase agreements involve the risk of default by
the counterparty, which may adversely affect the Fund's ability to reacquire
the underlying securities.
ILLIQUID SECURITIES. The Fund will not invest more than 10% of its net
assets in illiquid securities or securities that are not readily marketable.
These securities include repurchase agreements and time deposits of more than
seven days' duration and participation interests (including municipal leases),
floating and variable rate demand obligations and tender option bonds as to
which the Fund cannot exercise a demand feature in seven or fewer days and for
which there is no secondary market.
US GOVERNMENT SECURITIES. US Government securities include US Treasury
bills, notes and bonds and other obligations issued or guaranteed as to interest
and principal by the US Government, its agencies or instrumentalities.
Obligations issued or guaranteed as to interest and principal by the US
Government, its agencies or instrumentalities include securities that are
supported by the full faith and credit of the United States Treasury, securities
that are supported by the right of the issuer to borrow from the United States
Treasury, discretionary authority of the US Government agency or
instrumentality, and securities supported solely by the creditworthiness of the
issuer.
COMMERCIAL PAPER. Tax exempt commercial paper is a short-term obligation
with a stated maturity of 365 days or less. It is typically issued to finance
seasonal working capital needs or as short-term financing in anticipation of
longer term financing. Each instrument may be backed only by the credit of the
issuer or may be backed by some form of credit enhancement, typically in the
form of a guarantee by a commercial bank. Commercial paper backed by guarantees
of foreign banks may involve additional risk due to the difficulty of obtaining
and enforcing judgments against such banks and the generally less restrictive
regulations to which such banks are subject. The Fund will only invest in
commercial paper rated at the time of purchase not less than Prime-1 by Moody's
Investors Service, Inc., A-1 by Standard & Poor's Rating Group or F-1 by Fitch's
Investor Service.
LENDING PORTFOLIO SECURITIES. The Fund may lend portfolio securities with
a value of up to 33-1/3% of its total assets. Such loans may be terminated at
any time. The Fund will receive
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cash or US Treasury bills, notes and bonds in an amount equal to at least 100%
of the current market value (on a daily marked-to-market basis) of the loaned
securities plus accrued interest. In a loan transaction, as compensation for
lending it securities, the Fund will receive a portion of the dividends or
interest accrued on the securities held as collateral or, in the case of cash
collateral, a portion of the income from the investment of such cash. In
addition, the Fund will receive the amount of all dividends, interest and other
distributions on the loaned securities. However, the borrower has the right to
vote the loaned securities. The Fund will call loans to vote proxies if a
material issue affecting the investment is to be voted upon. Should the
borrower of the securities fail financially, the Fund may experience delays in
recovering the securities or exercising its rights in the collateral. Loans are
made only to borrowers that are deemed by Adviser to be of good financial
standing. In a loan transaction, the Fund will also bear the risk of any
decline in value of securities acquired with cash collateral. The Fund will
minimize this risk by limiting the investment of cash collateral to high quality
instruments of short maturity.
INVESTMENT RESTRICTIONS
The Fund has fundamental investment restrictions, which may be changed only
with the approval of a majority of the Fund's shareholders as defined in the
1940 Act. A more detailed discussion of the Fund's investment restrictions and
investment policies appears in the Statement of Additional Information. Unless
otherwise noted, the fundamental restrictions apply at the time an investment is
made. The Fund may not:
1. Invest 25% or more of the value of its total assets in securities of
issuers located in any one state or group of public agencies primarily
engaged in any one industry (such as power generation) (other than the
US Government, its agencies or instrumentalities). Concentration may
occur as a result of changes in the market value of portfolio
securities, but may not result from investment.
2. Borrow money (including reverse repurchase agreements), except as a
temporary measure for extraordinary or emergency purposes or to
facilitate redemptions (not for leveraging or investment), provided
that borrowings do not exceed an amount equal to 33-1/3% of the
current value of the Fund's assets taken at market value, less
liabilities other than borrowings. If at any time the Fund's
borrowings exceed this limitation due to a decline in net assets, such
borrowings will, within three days, be reduced to the extent necessary
to comply with this limitation. The Fund will not purchase additional
investments if borrowed funds (including reverse repurchase
agreements) exceed 5% of total assets.
3. Pledge, mortgage, or hypothecate its assets. However, the Fund may
pledge securities having a market value at the time of the pledge not
exceeding 33-1/3% of the value of the Fund's total assets to secure
permitted borrowings.
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PORTFOLIO MATURITY
The Fund must limit investments to securities with remaining maturities of
397 days or less (as calculated in accordance with Rule 2a-7) and must maintain
a dollar-weighted average maturity of 90 days or less. The Fund normally holds
portfolio instruments to maturity, but may dispose of them prior to maturity if
Adviser finds it advantageous or necessary.
DIVIDENDS AND DISTRIBUTIONS
The Board of Trustees intends to declare dividends on shares of the Fund
from net investment income daily and have them payable as of the last business
day of each month. Distributions will be made at least annually from net short-
and long-term capital gains, if any. In most instances, distributions will be
declared in mid-October with additional distributions declared and paid in
December, if required, for the Fund to avoid imposition of a 4% federal excise
tax on undistributed capital gains. The Fund does not expect any material long-
term capital gains or losses.
Dividends declared in December and payable to shareholders of record in
such month will be deemed to have been paid by the Fund and received by
shareholders on December 31 of that year if the dividend is paid prior to
February 1 of the following year.
Income dividends and capital gains distributions will be paid in additional
shares at their net asset value on the record date unless the shareholder has
elected to receive all or a portion of such dividends and distributions in cash.
Such election may be made by giving 10 days' written notice to Transfer Agent.
Investors should contact their Service Organization regarding procedures for the
payment of dividends.
TAXES
The Fund intends to qualify as a regulated investment company ("RIC") under
Subchapter M of the Internal Revenue Code, as amended (the "Code"). As a RIC,
the Fund will not be subject to federal income taxes to the extent it
distributes its net investment income and capital gain net income (capital gains
in excess of capital losses) to shareholders. The Board intends to distribute
each year substantially all of the Fund's net investment income and capital gain
net income. In addition, the Fund intends to continue to qualify to pay
"exempt-interest" dividends, which requires, among other things, that at the
close of each quarter of its taxable year at least 50% of the value of its total
assets must consist of municipal securities.
Distributions by the Fund that are designated by it as "exempt-interest
dividends" generally may be excluded from the shareholder's gross income.
Dividends from taxable net investment income and distributions of net short-term
capital gains are taxable to shareholders as ordinary income under federal
income tax laws whether paid in cash or in additional shares. Distributions
from net long-term capital gains are taxable as long-term capital gains
regardless of the length of time a shareholder has held such shares and whether
paid in cash or additional shares.
The Fund may purchase certain private activity securities whose interest is
subject to the federal alternative minimum tax for individuals. If the Fund
purchases such securities, investors who
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are subject to the alternative minimum tax will be required to report a portion
of the Fund's dividends as a tax preference item in determining their federal
tax.
The Fund may purchase bonds at market discount (i.e., bonds with a purchase
price less then original issue price or adjusted issue price). If such bonds
are subsequently sold at a gain, then a portion of that gain equal to the amount
of market discount, which should have been accrued through the sale date, will
be taxable to shareholders as ordinary income.
Dividends and distributions may also be subject to state or local taxes.
Depending on the state tax rules pertaining to a shareholder, a portion of the
dividends paid by the Fund attributable to direct obligations of the US Treasury
and certain agencies may be exempt from state and local taxes.
Although the sale or exchange of Fund shares is a taxable event, no gain or
loss is anticipated because the Fund seeks to maintain a stable $1.00 per share
net asset value.
Shareholders will be notified after each calendar year of the amount of
income dividends and net capital gains distributed. Shareholders of the Fund
will also be advised of the percentage, if any, of the dividends by the Fund
that are exempt from federal income tax and the portion, if any, of those
dividends that is a tax preference item for purposes of the alternative minimum
tax. The Fund is required to withhold a legally determined portion of all
taxable dividends, distributions and redemption proceeds payable to any
noncorporate shareholder that does not provide the Fund with the shareholder's
correct taxpayer identification number or certification that the shareholder is
not subject to backup withholding.
The foregoing discussion is only a summary of certain federal income tax
issues generally affecting the Fund and its shareholders. Circumstances among
investors may vary and each investor is encouraged to discuss investment in the
Fund with the investor's tax adviser.
VALUATION OF FUND SHARES
NET ASSET VALUE PER SHARE. Net asset value per share for each class of
shares of the Fund is computed by adding the value of all securities and other
assets of the Fund, deducting accrued liabilities allocated to the class,
dividing by the number of shares outstanding in the class and rounding to the
nearest cent. The Fund determines net asset value twice each business day, as
of 12:00 noon Eastern time and as of the close of the regular trading session of
the New York Stock Exchange (ordinarily 4 p.m. Eastern time). A business day is
one on which the New York Stock Exchange and Boston Federal Reserve are open for
business.
VALUATION OF FUND SECURITIES. The Fund seeks to maintain a $1.00 per share
net asset value and, accordingly, uses the amortized cost valuation procedure to
value its portfolio instruments. The "amortized cost" valuation procedure
initially prices an instrument at its cost and thereafter assumes a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument.
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PURCHASE OF FUND SHARES
Shares are offered through Service Organizations, who act as record holders
of the shares and provide services to their customers who invest in shares. To
purchase shares, investors should contact a Service Organization and follow its
procedures for the purchase of shares. Beneficial ownership of shares will be
recorded by Service Organizations and reflected in account statements provided
to their customers.
OFFERING DATES AND TIMES. Fund shares may be purchased on any business
day. All purchases must be made in US dollars. Purchase orders and payments
for Fund shares must be received by the Transfer Agent prior to 4:00 p.m.
Eastern time to be effective on the date received. The accompanying payment
must be in federal funds or converted into federal funds by the Transfer Agent
before the purchase order can be accepted. Purchase orders in good form are
described below. Purchase orders which are accepted: (1) prior to 12:00 noon
Eastern time will earn the dividend declared on the date of purchase; and (2) at
or after 12:00 noon Eastern time will earn the dividend determined on the next
day.
ORDER AND PAYMENT PROCEDURES. On behalf of their customers, Service
Organizations may purchase shares by wiring federal funds to State Street Bank
and Trust Company as Transfer Agent by:
1. Telephoning State Street Bank and Trust Company at (800) 647-7327 and
providing: (1) the Service Organization's account registration
number, address and tax identification number; (2) the name of the
Fund to be invested in; (3) the amount being wired; (4) the name of
the wiring bank; and (5) the name and telephone number of the person
at the wiring bank to be contacted in connection with the order.
2. Instructing the wiring bank to wire federal funds to: State Street
Bank and Trust Company, Boston, MA (ABA #0110-00028), Attention: The
Seven Seas Series Fund, Mutual Funds Service Division (DDA #9904-631-
0). The wire instructions should also include the name the account is
registered in, the account number and the name of the Fund to be
invested in.
The Fund reserves the right to reject any order.
Service Organizations may charge investors fees for certain services.
Investors should contact their Service Organization for information concerning
what additional fees, if any, may be charged.
EXCHANGE PRIVILEGE. An investor's Service Organization may permit shares
of the Fund to be exchanged for shares of certain other investment portfolios.
Shares are exchanged on the basis of relative net asset value per share.
Investors should contact their Service Organizations for information regarding
exchange options and procedures and fees imposed in connection with exchanges.
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REDEMPTION OF FUND SHARES
Investors may redeem all or part of their shares in accordance with
instructions and limitations pertaining to their account at a Service
Organization. These procedures will vary according to the type of account and
the Service Organization involved, and investors should consult their account
managers in this regard. It is the responsibility of the Service Organizations
to transmit redemption orders to the Transfer Agent and credit their customers'
accounts with the redemption proceeds on a timely basis.
On behalf of their customers, Service Organizations may redeem Fund shares
on any business day at the net asset value next determined after the receipt of
a redemption request. Payment for redemption orders will be wired in federal
funds to the Service Organization's account at a domestic commercial bank that
is a member of the Federal Reserve System. The Fund reserves the right to
suspend redemptions or postpone the date of payment if emergency conditions, as
specified in the 1940 Act or determined by the Securities and Exchange
Commission, should exist.
A dividend will be paid on shares redeemed if the redemption request is
received by State Street Bank and Trust Company after 12:00 noon Eastern time.
Redemption requests received before 12:00 noon Eastern time will not be entitled
to that day's dividend.
GENERAL MANAGEMENT
The Board of Trustees supervises the management, activities and affairs of
the Fund and has approved contracts with various financial organizations to
provide, among other services, day-to-day management required by the Fund.
ADVISORY AGREEMENT. Investment Company employs State Street to furnish
investment services to the Fund. State Street is one of the largest providers
of securities processing and record keeping services for US mutual funds and
pension funds. State Street is a wholly owned subsidiary of State Street Boston
Corporation, a publicly held bank holding company. State Street, with over
$171.3 billion (US) under management as of September, 1995, provides complete
global investment management services from offices in the United States, London,
Sydney, Hong Kong, Tokyo, Toronto, Luxembourg, Melbourne, Montreal and Paris.
Adviser, subject to Board supervision, directs the investment of the Fund
in accordance with the Fund's investment objective, policies and restrictions.
For these services, the Fund pays Adviser a fee, calculated daily and paid
monthly, equal to .25% annually of the Fund's average daily net assets.
The Glass-Steagall Act prohibits a depository state chartered bank such as
Adviser from engaging in the business of issuing, underwriting, selling or
distributing certain securities. The activities of Adviser in informing its
customers of the Fund, performing investment and redemption services and
providing custodian, transfer, shareholder servicing, dividend disbursing and
investment advisory services may raise issues under these provisions. Adviser
has been advised by its counsel that its activities in connection with the Fund
are consistent with its statutory and regulatory obligations. THE SHARES
OFFERED BY THIS PROSPECTUS ARE NOT ENDORSED OR GUARANTEED BY STATE
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STREET OR ITS AFFILIATES, ARE NOT DEPOSITS OR OBLIGATIONS OF STATE STREET OR ITS
AFFILIATES, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR
ANY OTHER GOVERNMENTAL AGENCY.
Changes in federal or state statutes and regulations relating to the
permissible activities of banks and their affiliates, as well as judicial or
administrative decisions or interpretations of such or future statutes and
regulations, could prevent Adviser from continuing to perform all or a part of
the above services for its customers and/or the Fund. If Adviser were
prohibited from serving the Fund in any of its present capacities, the Board of
Trustees would seek an alternative provider(s) of such services. In such event,
changes in the operation of the Fund may occur. It is not expected by Adviser
that existing shareholders would suffer any adverse financial consequences (if
another adviser with equivalent abilities is found) as a result of any of these
occurrences.
State Street may from time to time have discretionary authority over
accounts which invest in Investment Company shares. These accounts include
accounts maintained for securities lending clients and accounts which permit the
use of Investment Company portfolios as short-term cash sweep investments.
Shares purchased for all discretionary accounts are held of record by State
Street, who retains voting control of such shares. As of November 30, 1995,
State Street held of record 36% of the issued and outstanding shares of
Investment Company in connection with its discretionary accounts. Consequently,
State Street may be deemed to be a controlling person of Investment Company for
purposes of the 1940 Act.
Under the Adviser's Code of Ethics, the Adviser's employees in Boston where
investment management operations are conducted are only permitted to engage in
personal securities transactions which do not involve securities which the
Adviser had recommended for purchase or sale, or purchased or sold, on behalf of
its clients. Such employees must report their personal securities transactions
quarterly and supply broker confirmations to the Adviser.
ADMINISTRATION AGREEMENT. Frank Russell Investment Management Company
("Administrator") serves as administrator of the Fund. Administrator currently
serves as investment manager and administrator to 22 mutual funds with assets
of $7.3 billion as of October 31, 1995, and acts as administrator to 17 mutual
funds, including the Tax Free Fund, with assets of $7.2 billion as of
October 31, 1995.
Pursuant to the Administration Agreement with Investment Company,
Administrator will: (1) supervise all aspects of the Fund's operations;
(2) provide the Fund with administrative and clerical services, including the
maintenance of certain of the Fund's books and records; (3) arrange the periodic
updating of the Fund's prospectuses and any supplements thereto; (4) provide
proxy materials and reports to Fund shareholders and the Securities and Exchange
Commission; and (5) provide the Fund with adequate office space and all
necessary office equipment and services, including telephone service, heat,
utilities, stationery supplies and similar items. For these services, the Fund
and Investment Company's other domestic investment portfolios pay Administrator
a combined fee that on an annual basis is equal to the following percentages of
their average aggregate daily net assets: (1) $0 to and including $500 million
- -- .06%; (2) over $500 million to and including $1 billion -- .05%; and (3) over
$1 billion -- .03%. The percentage of the fee paid by the Tax Free Fund is
equal to the percentage of average aggregate daily net assets that are
attributable to the Fund. Administrator will also receive reimbursement of
expenses it incurs in connection with
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establishing new investment portfolios. Further, the administration fee paid by
the Investment Company will be reduced by the sum of certain distribution
related expenses (up to a maximum of 15% of the asset-based administration fee
listed above).
Administrator also provides administrative services in connection with the
registration of shares of Investment Company with those states in which its
shares are offered or sold. Compensation for such services is on a "time spent"
basis. Investment Company will pay all registration, exemptive application,
renewal and related fees and reasonable out-of-pocket expenses.
Officers and employees of the Administrator and Distributor are permitted
to engage in personal securities transactions subject to restrictions and
procedures set forth in the Confidentiality Manual and Code of Ethics adopted by
the Investment Company, Administrator and Distributor. Such restrictions and
procedures include substantially all of the recommendations of the Advisory
Group of the Investment Company Institute and comply with Securities and
Exchange Commission rules and regulations.
DISTRIBUTION SERVICES AND SHAREHOLDER SERVICING ARRANGEMENTS. Pursuant to
the Distribution Agreement with Investment Company, Russell Fund Distributors,
Inc. ("Distributor"), a wholly owned subsidiary of Administrator, serves as
distributor for all Fund shares.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 (the
"Plan") under the 1940 Act for the Class B shares. The purpose of the Plan is
to provide for the payment of certain Investment Company distribution and
shareholder servicing expenses. Under the Plan, Distributor will be reimbursed
in an amount up to .35% of the net asset value of Class B shares of the Fund for
distribution-related and shareholder servicing expenses. Payments under the
Plan will be made to Distributor to finance activity which is intended to result
in the sale and retention of Fund shares including: (1) the costs of
prospectuses, reports to shareholders and sales literature; (2) advertising; and
(3) expenses incurred in connection with the promotion and sale of Fund shares,
including Distributor's overhead expenses for rent, office supplies, equipment,
travel, communication, compensation and benefits of sales personnel.
Under the Plan, the Fund may also enter into agreements ("Service
Agreements") with financial institutions, which may include Adviser ("Service
Organizations"), to provide distribution and shareholder servicing with respect
to Class B shares of the Fund held by or for the customers of the Service
Organizations. Under the Service Agreements, the Service Organizations may
provide various services for such customers, including: processing customer
purchase and redemption requests; answering inquiries regarding the Fund;
assisting customers in changing dividend options, account designations and
addresses; performing subaccounting for such customers; establishing and
maintaining customer accounts and records; processing purchase and redemption
transactions; providing periodic statements showing customers' account balances
and integrating such statements with those of other transactions and balances in
the customers' other accounts serviced by the Service Organizations; arranging
for bank wires transferring customers' funds; transmitting proxy statements,
annual and semi-annual reports, prospectuses and other communications from the
Fund to customers; and such other services as the customers may request in
connection with the Fund, to the extent permitted by applicable statute, rule or
regulation. Service Organizations may receive from the Fund, for shareholder
servicing, monthly fees at a rate that shall not exceed .25% per annum of the
average
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daily net asset value of the Fund's Class B shares owned by or for shareholders
with whom the Service Organization has a servicing relationship.
Payments to Distributor, as well as payments to Service Organizations, are
not permitted by the Plan to exceed .35% per year of the average net asset value
of the Fund's Class B shares. Any payments that are required to be made by the
Distribution Agreement and any Service Agreement but could not be made because
of the .25% limitation may be carried forward and paid in subsequent years so
long as the Plan is in effect. The Fund's liability for any such expenses may
be carried forward indefinitely. Service Organizations will be responsible for
prompt transmission of purchase and redemption orders and may charge fees for
their services. Banks and other financial service firms may be subject to
various state laws, and may be required to register as dealers pursuant to state
law.
FUND EXPENSES
The Fund will pay all of its expenses other than those expressly assumed by
Adviser and Administrator. The principal expenses of the Fund are the annual
advisory fee payable to Adviser and distribution and shareholder servicing
expenses. Other expenses include: (1) amortization of deferred organizational
costs; (2) taxes, if any; (3) expenses for legal, auditing and financial
accounting services; (4) expense of preparing (including typesetting, printing
and mailing) reports, prospectuses and notices to existing shareholders;
(5) administrative fees; (6) custodian fees; (7) expense of issuing and
redeeming Fund shares; (8) the cost of registering Fund shares under federal and
state laws; (9) shareholder meetings and related proxy solicitation expenses;
(10) the fees, travel expenses and other out-of-pocket expenses of Trustees who
are not affiliated with Adviser or any of its affiliates; (11) insurance,
interest, brokerage and litigation costs; (12) extraordinary expenses as may
arise, including expenses incurred in connection with litigation proceedings and
claims and the legal obligations of Investment Company to indemnify its
Trustees, officers, employees, shareholders, distributors and agents; and
(13) other expenses properly payable by the Fund. Where any of these other
expenses are attributable to a particular class of shares, they will be borne by
the beneficial owners of such shares.
PERFORMANCE CALCULATIONS
From time to time the Fund may advertise its yield, effective yield and
tax-equivalent yield of its Class B shares. The yield of the Fund refers to the
income generated by an investment in Class B shares of the Fund over a seven-day
period (which period will be stated in the advertisement). This income is then
annualized. That is, the amount of income generated by the investment during
that week is assumed to be generated each week over a 52-week period and is
shown as a percentage of the investment. The effective yield is calculated
similarly but, when annualized, the income earned by an investment in each Fund
is assumed to be reinvested. The effective yield will be slightly higher than
the yield because of the compounding effect of this assumed reinvestment. The
tax-equivalent yield shows the level of taxable yield needed to produce an
after-tax equivalent to the Fund's tax-free yield. This is done by increasing
the Fund's yield by the amount necessary to reflect the payment of federal
income tax (and state income tax, if applicable) at a stated tax rate.
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From time to time, the Fund may also report yield, effective yield and tax-
equivalent yield as calculated over a one-month period (which period will also
be stated in the advertisement). These one-month periods will be annualized
using the same method as described above for yields calculated on the basis of
seven-day periods. From time to time, yields calculated on a monthly basis may
also be linked to provide yield figures for periods greater than one month.
The Fund may also advertise the total return of its Class B shares. The
total return of the Fund is the average annual compounded rate of return from a
hypothetical investment in the Funds' Class B shares over one-, five- and ten-
year periods or for the life of the Fund (as stated in the advertisement),
assuming the reinvestment of all dividends and capital gains distributions.
Comparative performance information may be used from time to time in
advertising or marketing Fund shares, including data from Lipper Analytical
Services, Inc., Morningstar, Inc., Donoghue's Money Fund Report, Wall Street
Journal Score Card or other industry publications, business periodicals, rating
services and market indices. The Fund may also advertise nonstandardized
performance information which is for periods in addition to those required to be
presented.
Quoted yields, returns and other performance figures are based on
historical earnings and are not indications of future performance.
ADDITIONAL INFORMATION
CUSTODIAN, TRANSFER AGENT AND INDEPENDENT ACCOUNTANTS. State Street holds
all portfolio securities and cash assets of the Fund, provides portfolio record
keeping services and serves as the Fund's transfer agent ("Transfer Agent") and
custodian ("Custodian"). State Street is authorized to deposit securities in
securities depositories or to use the services of subcustodians. State Street
has no responsibility for the supervision and management of the Fund except as
investment adviser. Coopers & Lybrand L.L.P., Boston, Massachusetts, is
Investment Company's independent accountants.
REPORTS TO SHAREHOLDERS AND SHAREHOLDER INQUIRIES. Shareholders will
receive unaudited semiannual financial statements and annual financial
statements audited by Investment Company's independent accountants. Potential
investors who wish to obtain more information about the Fund should contact a
Service Organization. Inquiries from Service Organizations regarding the
Prospectus and financial statements may be made by calling Transfer Agent at
(800) 647-7327.
ORGANIZATION, CAPITALIZATION AND VOTING. Investment Company was organized
as a Massachusetts business trust on October 3, 1987, and operates under a First
Amended and Restated Master Trust Agreement dated October 13, 1993, as amended.
Investment Company issues shares divisible into an unlimited number of series
(or funds), each of which is a separate trust under Massachusetts law. The Tax
Free Money Market Fund is one such series. Shares of the Fund are entitled to
such relative rights and preferences and dividends and distributions earned on
assets of the Fund as may be declared by the Board of Trustees. Each class of
shares of the Fund has identical rights and privileges as all other shares of
the Fund and participates equally in the
-19-
<PAGE>
dividends and distributions of the Fund. Fund shares are fully paid and
nonassessable by Investment Company and have no preemptive rights.
Investment Company is authorized to subdivide each series into two or more
classes of shares. Currently, shares of the Tax Free Money Market Fund are
divided into Class A, Class B and Class C. Each class of shares of the Fund is
entitled to the same rights and privileges as all other classes of the Fund,
provided however, that each class bears the expenses related to its distribution
and shareholder servicing arrangements, as well as other expenses attributable
to the class and unrelated to managing the Fund's portfolio securities. As
described above, Investment Company has adopted a plan of distribution under
Rule 12b-1 for Class B shares. Similar plans have been adopted for Class A and
Class C shares. However, total payments under those plans are limited to .25%
and .60% annually of the average net asset value of the Class A and Class C
shares, respectively of the Fund. As a result of these plan and other class
expenses, the yield on Class B and Class C shares will be approximately .25% and
.50% lower, respectively, than the yield on Class A shares.
Each Fund share has one vote. There are no cumulative voting rights.
There is no annual meeting of shareholders, but special meetings may be held.
On any matter which affects only a particular investment fund, only shareholders
of that fund may vote unless otherwise required by the 1940 Act or the Master
Trust Agreement. Further, any matter that affects only the holders of a
particular class of shares may be voted on only by such shareholders. Each
class of shares votes separately with respect to any Rule 12b-1 plan applicable
to such class. The Trustees hold office for the life of the Trust. A Trustee
may resign or retire, and may be removed at any time by a vote of two-thirds of
the Investment Company shares or by a vote of a majority of the Trustees. The
Trustees shall promptly call and give notice of a meeting of shareholders for
the purpose of voting upon removal of any Trustee when requested to do so in
writing by the holders of not less than 10% of the shares then outstanding. A
vacancy on the Board of Trustees may be filled by the vote of a majority of the
remaining Trustees, provided that immediately thereafter at least two-thirds of
the Trustees have been elected by shareholders.
Investment Company does not issue share certificates for the Fund.
Transfer Agent sends monthly shareholders statements, confirming all investments
in or redemptions from their accounts. Each statement also sets forth the
balance of shares held in the account.
-20-
<PAGE>
THE SEVEN SEAS SERIES FUND
Two International Place, 35th Floor
Boston, Massachusetts 02110
(617) 654-6089
INVESTMENT ADVISER, CUSTODIAN, AND TRANSFER AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
DISTRIBUTOR
Russell Fund Distributors, Inc.
Two International Place, 35th Floor
Boston, Massachusetts 02110
ADMINISTRATOR
Frank Russell Investment Management Company
909 A Street
Tacoma, Washington 98402
LEGAL COUNSEL
Goodwin, Procter & Hoar
Exchange Place
Boston, Massachusetts 02109
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
-21-
<PAGE>
Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
THE SEVEN SEAS SERIES FUND
Two International Place, 35th Floor
Boston, Massachusetts 02110
(617) 654-6089
TAX FREE MONEY MARKET FUND
CLASS C SHARES
The Seven Seas Series Fund is a registered, open-end investment company
with multiple portfolios, each of which is a mutual fund. This Prospectus
describes and offers Class C shares of beneficial interest in one such mutual
fund, The Seven Seas Series Tax Free Money Market Fund (referred to in this
Prospectus as the "Tax Free Fund" or the "Fund"). Shares may not be purchased
by individuals directly, but must be purchased through a financial institution
which is permitted by contract with the Fund to offer the shares. This
Prospectus should be read together with any materials provided by such
institution. The Tax Free Fund seeks to maximize current income, exempt from
federal income taxes, to the extent consistent with the preservation of capital
and liquidity and the maintenance of a stable $1.00 per share net asset value.
The Fund's shares are offered without sales commissions. However, the Fund pays
certain distribution expenses under its Rule 12b-1 plan.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
INVESTMENTS IN THE TAX FREE FUND ARE NEITHER INSURED NOR GUARANTEED BY THE US
GOVERNMENT. THERE IS NO ASSURANCE THAT THE FUND WILL MAINTAIN A STABLE NET
ASSET VALUE OF $1.00 PER SHARE.
SHARES IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, STATE STREET BANK AND TRUST COMPANY, AND SHARES ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD, OR ANY OTHER AGENCY, AND INVOLVE INVESTMENT RISKS INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. Please read and retain
this document for future reference. Additional information about the Fund has
been filed with the Securities and Exchange Commission in a Statement of
Additional Information dated December 29, 1995. The Statement of Additional
Information is incorporated herein by reference and is available without charge
from Distributor at its address noted below or by calling (617) 654-6089.
<TABLE>
<S> <C> <C>
Investment Adviser, Custodian
and Transfer Agent: Distributor: Administrator:
State Street Bank and Trust Russell Fund Distributors, Inc. Frank Russell Investment
Company Two International Place, 35th Floor Management Company
225 Franklin Street Boston, Massachusetts 02110 909 A Street
Boston, Massachusetts 02110 (617) 654-6089 Tacoma, Washington 98402
(617) 654-4721 (206) 627-7001
</TABLE>
PROSPECTUS DATED DECEMBER 29, 1995
- 1 -
<PAGE>
TABLE OF CONTENTS
Page
----
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Fund Operating Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The Seven Seas Series Fund . . . . . . . . . . . . . . . . . . . . . . . . . 6
Manner of Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Investment Objective, Policies and Restrictions. . . . . . . . . . . . . . . 6
Portfolio Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Dividends and Distributions. . . . . . . . . . . . . . . . . . . . . . . . . 12
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Valuation of Fund Shares . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Purchase of Fund Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Redemption of Fund Shares. . . . . . . . . . . . . . . . . . . . . . . . . . 15
General Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Fund Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Performance Calculations . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
- 2 -
<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information included elsewhere in the Prospectus.
INVESTMENT OBJECTIVE. The Fund's investment objective is to maximize current
income, exempt from federal income taxes, to the extent consistent with the
preservation of capital and liquidity and the maintenance of a stable $1.00 per
share net asset value. To accomplish this goal, the Fund invests primarily in
high quality short-term municipal obligations.
DIVIDENDS. Dividends from net investment income are declared daily and paid
monthly. Net capital gains, if any, are distributed annually.
POTENTIAL INVESTORS. The Fund is designed to be an economical and efficient
means for retail investors to participate in professionally managed portfolios
of money market instruments. In this Prospectus, Class C shares of the Fund
are offered to customers of certain financial institutions ("Service
Organizations") who act as record holders of the shares and provide services to
their customers who invest in the Fund.
PURCHASES AND REDEMPTIONS. Because shares of the Fund are offered through
Service Organizations, to purchase and redeem shares potential investors should
contact their Service Organizations for information regarding purchase and
redemption procedures. Shares may be purchased or redeemed at the net asset
value next determined after receipt of the order.
INVESTMENT ADVISERS. State Street Bank and Trust Company serves as investment
adviser to the Fund in return for a fee equal to .25% annually of each Fund's
average daily net assets.
CERTAIN CLASS INFORMATION. The shares of the Fund are divided into three
classes: Class A, Class B and Class C. Class A shares are designed for
institutional investors. Class C shares are offered through Service
Organizations that provide certain account administration services. Class C
shares are offered through Service Organizations that provide certain account
administration and shareholder liaison services. Each class of shares of the
Fund is entitled to the same rights and privileges as all other classes of
shares of the Fund, provided however, that each class bears the expenses
related to its distribution and shareholder servicing arrangements and certain
other expenses attributable to the class. Annual distribution and shareholder
servicing expenses for Class A, Class B and Class C shares are equal to
approximately .05%, .30% and .55%, respectively, of the average daily net asset
value of the shares of the class.
- 3 -
<PAGE>
FUND OPERATING EXPENSES
THE SEVEN SEAS SERIES TAX FREE MONEY MARKET FUND
CLASS C SHARES
The following table is intended to assist the investor in understanding the
various costs and expenses that an investor in Class C shares of the Tax Free
Fund will incur directly or indirectly. THE EXAMPLES PROVIDED IN THE TABLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. Actual
expenses may be greater or less than those shown. For additional information,
see "General Management."
<TABLE>
<S> <C> <C>
Shareholder Transaction Expenses:
- ---------------------------------
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fee None
Annual Fund Operating Expenses:
- ------------------------------------
(as a percentage of average daily net assets)
Advisory Fees .25%
12b-1 Fees:
Payable to Distributor(1) .05%
Payable to Service Organizations
Distribution .25
Shareholder Servicing .25
---
Total 12b-1 Fees .55
Other Expenses(1) .16
---
Total Operating Expenses(2) .96%
----
----
Examples: 1 year 3 years
--------- ------ -------
You would pay the following expenses
on a $1,000 investment, assuming
(i) 5% annual return and (ii) redemption
at the end of each time period: $10 $31
--- ---
--- ---
</TABLE>
- --------------------------
(1) The ratios for "12b-1 Fees Payable to Distributor" and "Other Expenses"
are based on estimated amounts for the current fiscal year, with expected
annual average Fund net assets of $155 million.
(2) Service Organizations impose additional fees for services provided to
investors. Investors should contact their Service Organization for
information concerning what additional fees, if any, will be charged.
Long-Term shareholders of the Fund may pay more in Rule 12b-1 fees than the
economic equivalent of the maximum front-end sales charge permitted by the
National Association of Securities Dealers, Inc.
- 4 -
<PAGE>
FINANCIAL HIGHLIGHTS
THE SEVEN SEAS SERIES TAX FREE MONEY MARKET FUND
The following table contains important financial information relating to the
Tax Free Fund and has been audited by Coopers & Lybrand L.L.P., the
Fund's independent accountants. The table includes selected data for a
Class A share outstanding throughout each fiscal year or period ended
August 31, and other performance information derived from the financial
statements. The Investment Company is authorized to issue Class B and
Class C shares of the Tax Free Fund although shares have not been offered
on these classes as of the date of this Prospectus. The table appears in the
Fund's Annual Report and should be read in conjunction with the Fund's
financial statements and related notes, which are incorporated by reference
in the Statement of Additional Information and which appear, along with the
report of Coopers & Lybrand L.L.P., in the Fund's Annual Report to
Shareholders. More detailed information concerning the Fund's performance,
including a complete portfolio listing and audited financial statements, is
available in the Fund's Annual Report, which may be obtained without charge
by writing or calling the Distributor.
<TABLE>
<CAPTION>
1995++
------
<S> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 1.0000
---------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .0251
---------
LESS DISTRIBUTIONS:
Net investment income (.0251)
---------
NET ASSET VALUE, END OF PERIOD $ 1.0000
---------
---------
TOTAL RETURN (%)(a) 2.54
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average
daily net assets (b) .59
Operating expenses, gross, to average
daily net assets (b) .60
Net investment income to average
daily net assets (b) 3.40
Net assets, end of period
($000 omitted) 42,607
Per share amount of fees waived
($ omitted) .0001
</TABLE>
- --------------------------
++ For the period December 1, 1994 (commencement of operations) to August 31,
1995
(a) Periods less than one year are not annualized.
(b) The ratios for the period August 31, 1995 are not annualized.
- 5 -
<PAGE>
THE SEVEN SEAS SERIES FUND
The Seven Seas Series Fund ("Investment Company") is an open-end
management investment company that is organized as a Massachusetts business
trust. In addition, each series of the Investment Company is diversified as
defined in the Investment Company Act of 1940, as amended ("1940 Act"). As a
"series" company, Investment Company is authorized to issue an unlimited number
of shares evidencing beneficial interests in different investment portfolios.
Through this Prospectus, Investment Company offers Class C shares in one such
portfolio, The Seven Seas Series Tax Free Money Market Fund. State Street Bank
and Trust Company ("Adviser" or "State Street") serves as the investment
adviser to the Fund.
MANNER OF OFFERING
The Fund is designed to be an economical and efficient means for retail
investors to participate in professionally managed portfolios of money market
instruments. Class C shares of the Fund are offered to customers of certain
financial institutions ("Service Organizations") that act as record holders of
shares and provide services to their customers who invest in the Fund. Each
Service Organization may set a minimum initial investment for its customers and
may redeem all shares in an investor's account if the value of these shares
falls below a predetermined amount.
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
The Fund's fundamental investment objective is to seek to maximize current
income, exempt from federal income taxes, to the extent consistent with the
preservation of capital and liquidity, and the maintenance of a stable $1.00
per share net asset value. This objective may be changed only with the
approval of a majority of the Fund's shareholders as defined by the 1940 Act.
There can be no assurance that the Fund will meet its investment objective.
The Fund has a fundamental policy of investing at least 80% of its assets
in federal tax exempt, high quality and short-term municipal securities of all
types. These securities are issued by states, municipalities and their
political subdivisions and agencies and certain territories and possessions of
the United States. Investments may include general obligation bonds and notes,
revenue bonds and notes, commercial paper, private placements, tender option
bonds, private activity bonds, industrial development bonds and municipal lease
contracts. Securities purchased may bear fixed, variable or floating rates of
interest or may be zero coupon securities. The Fund may buy or sell securities
on a when-issued or forward commitment basis.
The Fund may invest not more than 20% of its assets in federally taxable
money market instruments including securities issued by or guaranteed as to
principal and interest by the US government or its agencies or
instrumentalities, certificates of deposit, commercial paper and repurchase
agreements.
The Fund will invest in securities with remaining maturities of 397 days
or less (as computed according to Rule 2a-7) and will maintain a
dollar-weighted average maturity of 90 days or less. The Fund will limit its
portfolio investments to investment grade securities which at the time of
- 6 -
<PAGE>
acquisition the Adviser determines present minimal credit risk and which: (1)
are rated in the highest category by least two nationally recognized
statistical rating organizations ("NRSRO"); (2) by one NRSRO, if only one
rating services has rated the security; or (3) if unrated, are of comparable
quality, as determined by the Portfolio's Adviser in accordance with procedures
established by the Board of Trustees. See the Appendix in the Statement of
Additional Information for a description of a NRSRO.
INVESTMENT POLICIES
The investment policies described below reflect the Fund's current
practices, are not fundamental and may be changed by the Board of Trustees of
Investment Company without shareholder approval. To the extent consistent with
the Fund's fundamental investment objective and restrictions, the Fund may
invest in the following instruments and may use the following investment
techniques:
MUNICIPAL SECURITIES. The Fund may purchase municipal securities issued
by or on behalf of public authorities to obtain funds to be used for various
public purposes, including general purpose financing for state and local
governments, refunding outstanding obligations, and financings for specific
projects or public facilities. General obligations are backed by the full
faith and credit of the issuer. These securities include tax anticipation
notes, bond anticipation notes and general obligation bonds. Revenue
obligations are backed by the revenues generated from a specific project or
facility and include project revenue bonds, such as private activity and
industrial development bonds. Private activity and industrial development
bonds are dependent on the ability of the facility's user to meet its financial
obligations and the value of any real or personal property pledged as security
for such payment. Private activity and industrial development bonds, although
issued by industrial development authorities, may be backed only by the assets
of the non-governmental users. Municipal notes are short-term instruments
which are issued and sold in anticipation of a bond sale, collection of taxes
or receipt of other revenues.
Some municipal securities are insured by private insurance companies,
while others may be supported by letters of credit furnished by domestic or
foreign banks. In determining the credit quality of insured or letter of
credit backed securities, the Adviser reviews the financial condition and
creditworthiness of such parties including insurance companies, banks and
corporations.
Municipal obligations involve possible risks, including being affected by
economic, business and political developments and being subject to provisions
of litigation, bankruptcy and other laws affecting the rights and remedies of
creditors. Future laws may be effected extending the time for payment of
principal and/or interest, or limiting the rights of municipalities to levy
taxes. For instance, legislative proposals are introduced from time to time to
restrict or eliminate the federal income tax exemption for municipal
obligations interest. If such legislation is adopted, the Board of Trustees
will reevaluate the fund's investment objective and may submit possible changes
in the structure of the Fund to its shareholders.
VARIABLE AND FLOATING RATE SECURITIES. A floating rate security provides
for the automatic adjustment of its interest rate whenever a specified interest
rate changes. The coupon rate on variable rate securities is reset by a
remarketing agent on a periodic basis ranging from once a day to twice a year.
The agent sets the new rate at a level such that, in the judgment of the agent,
the security could
- 7 -
<PAGE>
be resold in the secondary market at par. Generally, changes in interest rates
will have a smaller effect on the market value of variable and floating rate
securities than on the market value of comparable fixed income obligations.
Thus, investing in variable and floating rate securities generally allows less
opportunity for capital appreciation and depreciation than investing in
comparable fixed rate securities.
Tax-exempt floating rate and variable rate demand notes and bonds
ordinarily have stated maturities in excess of 13 months, but often permit the
holder to demand payment of principal at any time, or at specified intervals
not exceeding 13 months, in each case upon not more than 30 days' notice. For
the purpose of determining the remaining maturity of certain variable or
floating rate obligations, the Fund may look to the later of the period
remaining until the net readjustment of the interest rate or the period
remaining until the principal amount can be recovered through demand.
ZERO COUPON SECURITIES. Zero coupon securities are notes, bonds and
debentures that: (1) do not pay current interest and are issued at a
substantial discount from par value; (2) have been stripped of their unmatured
interest coupons and receipts; or (3) pay no interest until a stated date one
or more years into the future. These securities also include certificates
representing interests in such stripped coupons and receipts. Because zero
coupon bonds do not pay current income, their prices can be very volatile when
interest rates change.
MUNICIPAL LEASES. The Fund may purchase participation interests in
municipal obligations, including municipal lease/purchase agreements.
Municipal leases are an undivided interest in a portion of an obligation in the
form of a lease or installment purchase issued by a state or local government
to acquire equipment or facilities. These instruments may have fixed, floating
or variable rates of interest, with remaining maturities of 13 months or less.
Municipal leases may be backed by an irrevocable letter of credit or guarantee
of a bank, or the payment obligation otherwise may be collateralized by US
Government securities. Certain participation interests may permit the Fund to
demand payment on not more than seven days' notice, for all or any part of the
Fund's interest, plus accrued interest.
Municipal leases frequently have special risks not normally associated
with general obligation or revenue bonds. Some leases or contracts include
"non-appropriation" clauses, which provide that the governmental issuer has no
obligation to make future payments under the lease or contract unless money is
appropriated for such purpose by the appropriate legislative body on a yearly
or other periodic basis. To reduce these risks, the Fund will only purchase
municipal leases subject to a non-appropriation clause when the payment of
principal and accrued interest is backed by a letter of credit or guarantee of
a bank.
Whether a municipal lease agreement will be considered illiquid for the
purpose of the Fund's restriction on investments in illiquid securities will be
determined by officers of the Investment Company in accordance with procedures
established by the Board of Trustees.
TENDER OPTION BONDS. A tender option is a municipal obligation (generally
held pursuant to a custodial arrangement) having a relatively long maturity and
bearing interest at a fixed rate substantially higher than prevailing
short-term tax exempt rates, that has been coupled with the agreement of a
third party, such as a bank, broker-dealer or other financial institution,
pursuant to which such institution grants the security holders the option, at
periodic intervals, to tender their securities to the institution and receive
the face value thereof. As consideration for providing the
- 8 -
<PAGE>
option, the financial institution receives periodic fees equal to the
difference between the municipal obligation's fixed coupon rate and the rate,
as determined by a remarketing or similar agent at or near the commencement of
such period, that would cause the securities, coupled with the tender option,
to trade at par on the date of such determination. Thus, after payment of this
fee, the security holder effectively holds a demand obligation that bears
interest at the prevailing short-term tax exempt rate. Subject to applicable
regulatory requirements, the Fund may buy tender option bonds if the agreement
gives the Fund the right to tender the bond to its sponsor no less frequently
than once every 397 days. The Adviser will consider on an ongoing basis the
creditworthiness of the issuer of the underlying obligation, any custodian and
the third party provider of the tender option. In certain instances and for
certain tender option bonds, the option may be terminable in the event of a
default in payment of principal or interest on the underlying municipal
obligation and for other reasons.
STANDBY COMMITMENTS. The Fund's investments may include standby
commitments, which are rights to resell municipal securities at specified
periods prior to their maturity dates to the seller or to some third party at
an agreed upon price or yield. Standby commitments may involve certain
expenses and risks, including the inability of the issuer of the commitment to
pay for the securities at the time the commitment is exercised,
non-marketability of the commitment, and difference between the duration of the
commitment and the maturity of the underlying security. The Fund will limit
standby commitment transactions to institutions which the Adviser believes
present minimal credit risk.
FORWARD COMMITMENTS. The Fund may contract to purchase securities for a
fixed price at a future date beyond customary settlement time. When effecting
such transactions, cash or liquid high quality debt obligations held by the
Fund of a dollar amount sufficient to make payment for the portfolio securities
to be purchased will be segregated on the Fund's records at the trade date and
maintained until the transaction is settled. The failure of the other party to
the transaction to complete the transaction may cause the Fund to miss an
advantageous price or yield. The Fund bears the risk of price fluctuations
during the period between the trade and settlement dates.
WHEN-ISSUED TRANSACTIONS. The Fund may purchase securities on a
when-issued basis. In these transactions, the Fund purchases securities with
payment and delivery scheduled for a future time. Until settlement, the Fund
segregates cash and marketable high quality debt securities equal in value to
its when-issued commitments. Between the trade and settlement dates, the Fund
bears the risk of any fluctuations in the value of the securities. These
transactions involve the additional risk that the other party may fail to
complete the transaction and cause the Fund to miss a price or yield considered
advantageous. The Fund will engage in when-issued transactions only for the
purpose of acquiring portfolio securities consistent with its investment
objective and policies and not for investment leverage. The Fund will not
invest more than 25% of net assets in when-issued securities.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
banks and other financial institutions, such as broker-dealers. Under a
repurchase agreement, a Fund purchases securities from a financial institution
that agrees to repurchase the securities at the Fund's original purchase price
plus interest within a specified time (normally one business day). The Fund
will invest no more than 10% of its net assets (taken at current market value)
in repurchase agreements maturing in more than seven days. The Fund will limit
repurchase transactions to those member banks of the Federal Reserve System and
broker-dealers whose creditworthiness Adviser considers satisfactory. Should
the counterparty to a transaction fail financially, the Fund may
- 9 -
<PAGE>
encounter delay and incur costs before being able to sell the securities.
Further, the amount realized upon the sale of the securities may be less than
that necessary to fully compensate the Fund.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse
repurchase agreements under the circumstances described in "Investment
Restrictions." Under a reverse repurchase agreement, the Fund sells
portfolio securities to a financial institution in return for cash in an
amount equal to a percentage of the portfolio securities' market value and
agrees to repurchase the securities at a future date at a prescribed
repurchase price equal to the amount of cash originally received plus
interest on such amount. The Fund retains the right to receive interest and
principal payments with respect to the securities while they are in the
possession of the financial institutions. Reverse repurchase agreements
involve the risk of default by the counterparty, which may adversely affect
the Fund's ability to reacquire the underlying securities.
ILLIQUID SECURITIES. The Fund will not invest more than 10% of its net
assets in illiquid securities or securities that are not readily marketable.
These securities include repurchase agreements and time deposits of more than
seven days' duration and participation interests (including municipal leases),
floating and variable rate demand obligations and tender option bonds as to
which the Fund cannot exercise a demand feature in seven or fewer days and for
which there is no secondary market.
US GOVERNMENT SECURITIES. US Government securities include US Treasury
bills, notes and bonds and other obligations issued or guaranteed as to
interest and principal by the US Government, its agencies or instrumentalities.
Obligations issued or guaranteed as to interest and principal by the US
Government, its agencies or instrumentalities include securities that are
supported by the full faith and credit of the United States Treasury,
securities that are supported by the right of the issuer to borrow from the
United States Treasury, discretionary authority of the US Government agency or
instrumentality, and securities supported solely by the creditworthiness of the
issuer.
COMMERCIAL PAPER. Tax exempt commercial paper is a short-term obligation
with a stated maturity of 365 days or less. It is typically issued to finance
seasonal working capital needs or as short-term financing in anticipation of
longer term financing. Each instrument may be backed only by the credit of the
issuer or may be backed by some form of credit enhancement, typically in the
form of a guarantee by a commercial bank. Commercial paper backed by
guarantees of foreign banks may involve additional risk due to the difficulty
of obtaining and enforcing judgments against such banks and the generally less
restrictive regulations to which such banks are subject. The Fund will only
invest in commercial paper rated at the time of purchase not less than Prime-1
by Moody's Investors Service, Inc., A-1 by Standard & Poor's Rating Group or
F-1 by Fitch's Investor Service.
LENDING PORTFOLIO SECURITIES. The Fund may lend portfolio securities with
a value of up to 33-1/3% of its total assets. Such loans may be terminated at
any time. The Fund will receive cash or US Treasury bills, notes and bonds in
an amount equal to at least 100% of the current market value (on a daily
marked-to-market basis) of the loaned securities plus accrued interest. In a
loan transaction,
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as compensation for lending it securities, the Fund will receive a portion of
the dividends or interest accrued on the securities held as collateral or, in
the case of cash collateral, a portion of the income from the investment of
such cash. In addition, the Fund will receive the amount of all dividends,
interest and other distributions on the loaned securities. However, the
borrower has the right to vote the loaned securities. The Fund will call loans
to vote proxies if a material issue affecting the investment is to be voted
upon. Should the borrower of the securities fail financially, the Fund may
experience delays in recovering the securities or exercising its rights in the
collateral. Loans are made only to borrowers that are deemed by Adviser to be
of good financial standing. In a loan transaction, the Fund will also bear the
risk of any decline in value of securities acquired with cash collateral. The
Fund will minimize this risk by limiting the investment of cash collateral to
high quality instruments of short maturity.
INVESTMENT RESTRICTIONS
The Fund has fundamental investment restrictions, which may be changed
only with the approval of a majority of the Fund's shareholders as defined in
the 1940 Act. A more detailed discussion of the Fund's investment restrictions
and investment policies appears in the Statement of Additional Information.
Unless otherwise noted, the fundamental restrictions apply at the time an
investment is made. The Fund may not:
1. Invest 25% or more of the value of its total assets in securities of
issuers located in any one state or group of public agencies
primarily engaged in any one industry (such as power generation)
(other than the US Government, its agencies or instrumentalities).
Concentration may occur as a result of changes in the market value of
portfolio securities, but may not result from investment.
2. Borrow money (including reverse repurchase agreements), except as a
temporary measure for extraordinary or emergency purposes or to
facilitate redemptions (not for leveraging or investment), provided
that borrowings do not exceed an amount equal to 33-1/3% of the
current value of the Fund's assets taken at market value, less
liabilities other than borrowings. If at any time the Fund's
borrowings exceed this limitation due to a decline in net assets,
such borrowings will, within three days, be reduced to the extent
necessary to comply with this limitation. The Fund will not purchase
additional investments if borrowed funds (including reverse
repurchase agreements) exceed 5% of total assets.
3. Pledge, mortgage, or hypothecate its assets. However, the Fund may
pledge securities having a market value at the time of the pledge not
exceeding 33-1/3% of the value of the Fund's total assets to secure
permitted borrowings.
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PORTFOLIO MATURITY
The Fund must limit investments to securities with remaining maturities of
397 days or less (as calculated in accordance with Rule 2a-7) and must maintain
a dollar-weighted average maturity of 90 days or less. The Fund normally holds
portfolio instruments to maturity, but may dispose of them prior to maturity if
Adviser finds it advantageous or necessary.
DIVIDENDS AND DISTRIBUTIONS
The Board of Trustees intends to declare dividends on shares of the Fund
from net investment income daily and have them payable as of the last business
day of each month. Distributions will be made at least annually from net short-
and long-term capital gains, if any. In most instances, distributions will be
declared in mid-October with additional distributions declared and paid in
December, if required, for the Fund to avoid imposition of a 4% federal excise
tax on undistributed capital gains. The Fund does not expect any material
long-term capital gains or losses.
Dividends declared in December and payable to shareholders of record in
such month will be deemed to have been paid by the Fund and received by
shareholders on December 31 of that year if the dividend is paid prior to
February 1 of the following year.
Income dividends and capital gains distributions will be paid in
additional shares at their net asset value on the record date unless the
shareholder has elected to receive all or a portion of such dividends and
distributions in cash. Such election may be made by giving 10 days' written
notice to Transfer Agent. Investors should contact their Service Organization
regarding procedures for the payment of dividends.
TAXES
The Fund intends to qualify as a regulated investment company ("RIC")
under Subchapter M of the Internal Revenue Code, as amended (the "Code"). As a
RIC, the Fund will not be subject to federal income taxes to the extent it
distributes its net investment income and capital gain net income (capital
gains in excess of capital losses) to shareholders. The Board intends to
distribute each year substantially all of the Fund's net investment income and
capital gain net income. In addition, the Fund intends to continue to qualify
to pay "exempt-interest" dividends, which requires, among other things, that at
the close of each quarter of its taxable year at least 50% of the value of its
total assets must consist of municipal securities.
Distributions by the Fund that are designated by it as "exempt-interest
dividends" generally may be excluded from the shareholder's gross income.
Dividends from taxable net investment income and distributions of net
short-term capital gains are taxable to shareholders as ordinary income under
federal income tax laws whether paid in cash or in additional shares.
Distributions from net long-term capital gains are taxable as long-term capital
gains regardless of the length of time a shareholder has held such shares and
whether paid in cash or additional shares.
The Fund may purchase certain private activity securities whose interest
is subject to the federal alternative minimum tax for individuals. If the Fund
purchases such securities, investors who
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are subject to the alternative minimum tax will be required to report a portion
of the Fund's dividends as a tax preference item in determining their federal
tax.
The Fund may purchase bonds at market discount (i.e., bonds with a
purchase price less then original issue price or adjusted issue price). If
such bonds are subsequently sold at a gain, then a portion of that gain equal
to the amount of market discount, which should have been accrued through the
sale date, will be taxable to shareholders as ordinary income.
Dividends and distributions may also be subject to state or local taxes.
Depending on the state tax rules pertaining to a shareholder, a portion of the
dividends paid by the Fund attributable to direct obligations of the US
Treasury and certain agencies may be exempt from state and local taxes.
Although the sale or exchange of Fund shares is a taxable event, no gain
or loss is anticipated because the Fund seeks to maintain a stable $1.00 per
share net asset value.
Shareholders will be notified after each calendar year of the amount of
income dividends and net capital gains distributed. Shareholders of the Fund
will also be advised of the percentage, if any, of the dividends by the Fund
that are exempt from federal income tax and the portion, if any, of those
dividends that is a tax preference item for purposes of the alternative minimum
tax. The Fund is required to withhold a legally determined portion of all
taxable dividends, distributions and redemption proceeds payable to any
noncorporate shareholder that does not provide the Fund with the shareholder's
correct taxpayer identification number or certification that the shareholder is
not subject to backup withholding.
The foregoing discussion is only a summary of certain federal income tax
issues generally affecting the Fund and its shareholders. Circumstances among
investors may vary and each investor is encouraged to discuss investment in the
Fund with the investor's tax adviser.
VALUATION OF FUND SHARES
NET ASSET VALUE PER SHARE. Net asset value per share for each class of
shares of the Fund is computed by adding the value of all securities and other
assets of the Fund, deducting accrued liabilities allocated to the class,
dividing by the number of shares outstanding in the class and rounding to the
nearest cent. The Fund determines net asset value twice each business day, as
of 12:00 noon Eastern time and as of the close of the regular trading session
of the New York Stock Exchange (ordinarily 4 p.m. Eastern time). A business
day is one on which the New York Stock Exchange and Boston Federal Reserve are
open for business.
VALUATION OF FUND SECURITIES. The Fund seeks to maintain a $1.00 per
share net asset value and, accordingly, uses the amortized cost valuation
procedure to value its portfolio instruments. The "amortized cost" valuation
procedure initially prices an instrument at its cost and thereafter assumes a
constant amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the instrument.
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PURCHASE OF FUND SHARES
Shares are offered through Service Organizations, who act as record
holders of the shares and provide services to their customers who invest in
shares. To purchase shares, investors should contact a Service Organization
and follow its procedures for the purchase of shares. Beneficial ownership of
shares will be recorded by Service Organizations and reflected in account
statements provided to their customers.
OFFERING DATES AND TIMES. Fund shares may be purchased on any business
day. All purchases must be made in US dollars. Purchase orders and payments
for Fund shares must be received by the Transfer Agent prior to 4:00 p.m.
Eastern time to be effective on the date received. The accompanying payment
must be in federal funds or converted into federal funds by the Transfer Agent
before the purchase order can be accepted. Purchase orders in good form are
described below. Purchase orders which are accepted: (1) prior to 12:00 noon
Eastern time will earn the dividend declared on the date of purchase; and (2)
at or after 12:00 noon Eastern time will earn the dividend determined on the
next day.
ORDER AND PAYMENT PROCEDURES. On behalf of their customers, Service
Organizations may purchase shares by wiring federal funds to State Street Bank
and Trust Company as Transfer Agent by:
1. Telephoning State Street Bank and Trust Company at (800) 647-7327 and
providing: (1) the Service Organization's account registration
number, address and tax identification number; (2) the name of the
Fund to be invested in; (3) the amount being wired; (4) the name of
the wiring bank; and (5) the name and telephone number of the person
at the wiring bank to be contacted in connection with the order.
2. Instructing the wiring bank to wire federal funds to: State Street
Bank and Trust Company, Boston, MA (ABA #0110-00028), Attention: The
Seven Seas Series Fund, Mutual Funds Service Division (DDA
#9904-631-0). The wire instructions should also include the name the
account is registered in, the account number and the name of the Fund
to be invested in.
The Fund reserves the right to reject any order.
Service Organizations may charge investors fees for certain services.
Investors should contact their Service Organization for information concerning
what additional fees, if any, may be charged.
EXCHANGE PRIVILEGE. An investor's Service Organization may permit shares
of the Fund to be exchanged for shares of certain other investment portfolios.
Shares are exchanged on the basis of relative net asset value per share.
Investors should contact their Service Organizations for information regarding
exchange options and procedures and fees imposed in connection with exchanges.
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REDEMPTION OF FUND SHARES
Investors may redeem all or part of their shares in accordance with
instructions and limitations pertaining to their account at a Service
Organization. These procedures will vary according to the type of account and
the Service Organization involved, and investors should consult their account
managers in this regard. It is the responsibility of the Service Organizations
to transmit redemption orders to the Transfer Agent and credit their customers'
accounts with the redemption proceeds on a timely basis.
On behalf of their customers, Service Organizations may redeem Fund shares
on any business day at the net asset value next determined after the receipt of
a redemption request. Payment for redemption orders will be wired in federal
funds to the Service Organization's account at a domestic commercial bank that
is a member of the Federal Reserve System. The Fund reserves the right to
suspend redemptions or postpone the date of payment if emergency conditions, as
specified in the 1940 Act or determined by the Securities and Exchange
Commission, should exist.
A dividend will be paid on shares redeemed if the redemption request is
received by State Street Bank and Trust Company after 12:00 noon Eastern time.
Redemption requests received before 12:00 noon Eastern time will not be
entitled to that day's dividend.
GENERAL MANAGEMENT
The Board of Trustees supervises the management, activities and affairs of
the Fund and has approved contracts with various financial organizations to
provide, among other services, day-to-day management required by the Fund.
ADVISORY AGREEMENT. Investment Company employs State Street to furnish
investment services to the Fund. State Street is one of the largest providers
of securities processing and record keeping services for US mutual funds and
pension funds. State Street is a wholly owned subsidiary of State Street
Boston Corporation, a publicly held bank holding company. State Street, with
over $171.3 billion (US) under management as of September 30, 1995, provides
complete global investment management services from offices in the United
States, London, Sydney, Hong Kong, Tokyo, Toronto, Luxembourg, Melbourne,
Montreal and Paris.
Adviser, subject to Board supervision, directs the investment of the Fund
in accordance with the Fund's investment objective, policies and restrictions.
For these services, the Fund pays Adviser a fee, calculated daily and paid
monthly, equal to .25% annually of the Fund's average daily net assets.
The Glass-Steagall Act prohibits a depository state chartered bank such as
Adviser from engaging in the business of issuing, underwriting, selling or
distributing certain securities. The activities of Adviser in informing its
customers of the Fund, performing investment and redemption services and
providing custodian, transfer, shareholder servicing, dividend disbursing and
investment advisory services may raise issues under these provisions. Adviser
has been advised by its counsel that its activities in connection with the Fund
are consistent with its statutory and regulatory obligations. THE SHARES
OFFERED BY THIS PROSPECTUS ARE NOT ENDORSED OR GUARANTEED BY STATE
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<PAGE>
STREET OR ITS AFFILIATES, ARE NOT DEPOSITS OR OBLIGATIONS OF STATE STREET OR
ITS AFFILIATES, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
Changes in federal or state statutes and regulations relating to the
permissible activities of banks and their affiliates, as well as judicial or
administrative decisions or interpretations of such or future statutes and
regulations, could prevent Adviser from continuing to perform all or a part of
the above services for its customers and/or the Fund. If Adviser were
prohibited from serving the Fund in any of its present capacities, the Board of
Trustees would seek an alternative provider(s) of such services. In such
event, changes in the operation of the Fund may occur. It is not expected by
Adviser that existing shareholders would suffer any adverse financial
consequences (if another adviser with equivalent abilities is found) as a
result of any of these occurrences.
State Street may from time to time have discretionary authority over
accounts which invest in Investment Company shares. These accounts include
accounts maintained for securities lending clients and accounts which permit
the use of Investment Company portfolios as short-term cash sweep investments.
Shares purchased for all discretionary accounts are held of record by State
Street, who retains voting control of such shares. As of November 30,
1995, State Street held of record 36% of the issued and outstanding shares of
Investment Company in connection with its discretionary accounts.
Consequently, State Street may be deemed to be a controlling person of
Investment Company for purposes of the 1940 Act.
Under the Adviser's Code of Ethics, the Adviser's employees in Boston
where investment management operations are conducted are only permitted to
engage in personal securities transactions which do not involve securities
which the Adviser had recommended for purchase or sale, or purchased or sold,
on behalf of its clients. Such employees must report their personal securities
transactions quarterly and supply broker confirmations to the Adviser.
ADMINISTRATION AGREEMENT. Frank Russell Investment Management Company
("Administrator") serves as administrator of the Fund. Administrator currently
serves as investment manager and administrator to 22 mutual funds with assets
of $7.3 billion as of October 31, 1995, and acts as administrator to 17 mutual
funds, including the Tax Free Fund, with assets of $7.2 billion as of
October 31, 1995.
Pursuant to the Administration Agreement with Investment Company,
Administrator will: (1) supervise all aspects of the Fund's operations; (2)
provide the Fund with administrative and clerical services, including the
maintenance of certain of the Fund's books and records; (3) arrange the
periodic updating of the Fund's prospectuses and any supplements thereto; (4)
provide proxy materials and reports to Fund shareholders and the Securities and
Exchange Commission; and (5) provide the Fund with adequate office space and
all necessary office equipment and services, including telephone service, heat,
utilities, stationery supplies and similar items. For these services, the Fund
and Investment Company's other domestic investment portfolios pay Administrator
a combined fee that on an annual basis is equal to the following percentages of
their average aggregate daily net assets: (1) $0 to and including $500 million
- -- .06%; (2) over $500 million to and including $1 billion -- .05%; and (3)
over $1 billion -- .03%. The percentage of the fee paid by the Tax Free Fund
is equal to the percentage of average aggregate daily net assets that are
attributable to the Fund. Administrator will also receive reimbursement of
expenses it incurs in connection with
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establishing new investment portfolios. Further, the administration fee paid
by the Investment Company will be reduced by the sum of certain distribution
related expenses (up to a maximum of 15% of the asset-based administration fee
listed above).
Administrator also provides administrative services in connection with the
registration of shares of Investment Company with those states in which its
shares are offered or sold. Compensation for such services is on a "time spent"
basis. Investment Company will pay all registration, exemptive application,
renewal and related fees and reasonable out-of-pocket expenses.
Officers and employees of the Administrator and Distributor are permitted
to engage in personal securities transactions subject to restrictions and
procedures set forth in the Confidentiality Manual and Code of Ethics adopted
by the Investment Company, Administrator and Distributor. Such restrictions
and procedures include substantially all of the recommendations of the Advisory
Group of the Investment Company Institute and comply with Securities and
Exchange Commission rules and regulations.
DISTRIBUTION SERVICES AND SHAREHOLDER SERVICING ARRANGEMENTS. Pursuant to
the Distribution Agreement with Investment Company, Russell Fund Distributors,
Inc. ("Distributor"), a wholly owned subsidiary of Administrator, serves as
distributor for all Fund shares.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 (the
"Plan") under the 1940 Act for the Class C shares. The purpose of the Plan is
to provide for the payment of certain Investment Company distribution and
shareholder servicing expenses. Under the Plan, Distributor will be reimbursed
in an amount up to .60% of the net asset value of Class C shares of the Fund
for distribution-related and shareholder servicing expenses. Payments under
the Plan will be made to Distributor to finance activity which is intended to
result in the sale and retention of Fund shares including: (1) the costs of
prospectuses, reports to shareholders and sales literature; (2) advertising;
and (3) expenses incurred in connection with the promotion and sale of Fund
shares, including Distributor's overhead expenses for rent, office supplies,
equipment, travel, communication, compensation and benefits of sales personnel.
Under the Plan, the Fund may also enter into agreements ("Service
Agreements") with financial institutions, which may include Adviser ("Service
Organizations"), to provide distribution and shareholder servicing with respect
to Class C shares of the Fund held by or for the customers of the Service
Organizations. Under the Service Agreements, the Service Organizations may
provide various services for such customers, including: processing customer
purchase and redemption requests; answering inquiries regarding the Fund;
assisting customers in changing dividend options, account designations and
addresses; performing subaccounting for such customers; establishing and
maintaining customer accounts and records; processing purchase and redemption
transactions; providing periodic statements showing customers' account balances
and integrating such statements with those of other transactions and balances
in the customers' other accounts serviced by the Service Organizations;
arranging for bank wires transferring customers' funds; transmitting proxy
statements, annual and semi-annual reports, prospectuses and other
communications from the Fund to customers; and such other services as the
customers may request in connection with the Fund, to the extent permitted by
applicable statute, rule or regulation. Service Organizations may receive from
the Fund, for shareholder servicing, monthly fees at a rate that shall not
exceed .50% per annum of the average
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daily net asset value of the Fund's Class C shares owned by or for shareholders
with whom the Service Organization has a servicing relationship.
Payments to Distributor, as well as payments to Service Organizations, are
not permitted by the Plan to exceed .60% per year of the average net asset
value of the Fund's Class C shares. Any payments that are required to be made
by the Distribution Agreement and any Service Agreement but could not be made
because of the .60% limitation may be carried forward and paid in subsequent
years so long as the Plan is in effect. The Fund's liability for any such
expenses may be carried forward indefinitely. Service Organizations will be
responsible for prompt transmission of purchase and redemption orders and may
charge fees for their services. Banks and other financial service firms may be
subject to various state laws, and may be required to register as dealers
pursuant to state law.
FUND EXPENSES
The Fund will pay all of its expenses other than those expressly assumed
by Adviser and Administrator. The principal expenses of the Fund are the
annual advisory fee payable to Adviser and distribution and shareholder
servicing expenses. Other expenses include: (1) amortization of deferred
organizational costs; (2) taxes, if any; (3) expenses for legal, auditing and
financial accounting services; (4) expense of preparing (including typesetting,
printing and mailing) reports, prospectuses and notices to existing
shareholders; (5) administrative fees; (6) custodian fees; (7) expense of
issuing and redeeming Fund shares; (8) the cost of registering Fund shares
under federal and state laws; (9) shareholder meetings and related proxy
solicitation expenses; (10) the fees, travel expenses and other out-of-pocket
expenses of Trustees who are not affiliated with Adviser or any of its
affiliates; (11) insurance, interest, brokerage and litigation costs; (12)
extraordinary expenses as may arise, including expenses incurred in connection
with litigation proceedings and claims and the legal obligations of Investment
Company to indemnify its Trustees, officers, employees, shareholders,
distributors and agents; and (13) other expenses properly payable by the Fund.
Where any of these other expenses are attributable to a particular class of
shares, they will be borne by the beneficial owners of such shares.
PERFORMANCE CALCULATIONS
From time to time the Fund may advertise its yield, effective yield and
tax-equivalent yield of its Class C shares. The yield of the Fund refers to
the income generated by an investment in Class C shares of the Fund over a
seven-day period (which period will be stated in the advertisement). This
income is then annualized. That is, the amount of income generated by the
investment during that week is assumed to be generated each week over a 52-week
period and is shown as a percentage of the investment. The effective yield is
calculated similarly but, when annualized, the income earned by an investment
in each Fund is assumed to be reinvested. The effective yield will be slightly
higher than the yield because of the compounding effect of this assumed
reinvestment. The tax-equivalent yield shows the level of taxable yield needed
to produce an after-tax equivalent to the Fund's tax-free yield. This is done
by increasing the Fund's yield by the amount necessary to reflect the payment
of federal income tax (and state income tax, if applicable) at a stated tax
rate.
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From time to time, the Fund may also report yield, effective yield and
tax-equivalent yield as calculated over a one-month period (which period will
also be stated in the advertisement). These one-month periods will be
annualized using the same method as described above for yields calculated on
the basis of seven-day periods. From time to time, yields calculated on a
monthly basis may also be linked to provide yield figures for periods greater
than one month.
The Fund may also advertise the total return of its Class C shares. The
total return of the Fund is the average annual compounded rate of return from a
hypothetical investment in the Funds' Class C shares over one-, five- and
ten-year periods or for the life of the Fund (as stated in the advertisement),
assuming the reinvestment of all dividends and capital gains distributions.
Comparative performance information may be used from time to time in
advertising or marketing Fund shares, including data from Lipper Analytical
Services, Inc., Morningstar, Inc., Donoghue's Money Fund Report, Wall Street
Journal Score Card or other industry publications, business periodicals, rating
services and market indices. The Fund may also advertise nonstandardized
performance information which is for periods in addition to those required to
be presented.
Quoted yields, returns and other performance figures are based on
historical earnings and are not indications of future performance.
ADDITIONAL INFORMATION
CUSTODIAN, TRANSFER AGENT AND INDEPENDENT ACCOUNTANTS. State Street holds
all portfolio securities and cash assets of the Fund, provides portfolio record
keeping services and serves as the Fund's transfer agent ("Transfer Agent") and
custodian ("Custodian"). State Street is authorized to deposit securities in
securities depositories or to use the services of subcustodians. State Street
has no responsibility for the supervision and management of the Fund except as
investment adviser. Coopers & Lybrand L.L.P., Boston, Massachusetts, is
Investment Company's independent accountants.
REPORTS TO SHAREHOLDERS AND SHAREHOLDER INQUIRIES. Shareholders will
receive unaudited semiannual financial statements and annual financial
statements audited by Investment Company's independent accountants. Potential
investors who wish to obtain more information about the Fund should contact a
Service Organization. Inquiries from Service Organizations regarding the
Prospectus and financial statements may be made by calling Transfer Agent at
(800) 647-7327.
ORGANIZATION, CAPITALIZATION AND VOTING. Investment Company was organized
as a Massachusetts business trust on October 3, 1987, and operates under a
First Amended and Restated Master Trust Agreement dated October 13, 1993, as
amended. Investment Company issues shares divisible into an unlimited number
of series (or funds), each of which is a separate trust under Massachusetts
law. The Tax Free Money Market Fund is one such series. Shares of the Fund
are entitled to such relative rights and preferences and dividends and
distributions earned on assets of the Fund as may be declared by the Board of
Trustees. Each class of shares of the Fund has identical rights and privileges
as all other shares of the Fund and participates equally in the dividends and
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<PAGE>
distributions of the Fund. Fund shares are fully paid and nonassessable by
Investment Company and have no preemptive rights.
Investment Company is authorized to subdivide each series into two or more
classes of shares. Currently, shares of the Tax Free Money Market Fund are
divided into Class A, Class B and Class C. Each class of shares of the Fund is
entitled to the same rights and privileges as all other classes of the Fund,
provided however, that each class bears the expenses related to its
distribution and shareholder servicing arrangements, as well as other expenses
attributable to the class and unrelated to managing the Fund's portfolio
securities. As described above, Investment Company has adopted a plan of
distribution under Rule 12b-1 for Class C shares. Similar plans have been
adopted for Class A and Class B shares. However, total payments under those
plans are limited to .25% and .35% annually of the average net asset value of
the Class A and Class B shares, respectively of the Fund. As a result of these
plan and other class expenses, the yield on Class B and Class C shares will be
approximately .25% and .50% lower, respectively, than the yield on Class A
shares.
Each Fund share has one vote. There are no cumulative voting rights.
There is no annual meeting of shareholders, but special meetings may be held.
On any matter which affects only a particular investment fund, only
shareholders of that fund may vote unless otherwise required by the 1940 Act or
the Master Trust Agreement. Further, any matter that affects only the holders
of a particular class of shares may be voted on only by such shareholders.
Each class of shares votes separately with respect to any Rule 12b-1 plan
applicable to such class. The Trustees hold office for the life of the Trust.
A Trustee may resign or retire, and may be removed at any time by a vote of
two-thirds of the Investment Company shares or by a vote of a majority of the
Trustees. The Trustees shall promptly call and give notice of a meeting of
shareholders for the purpose of voting upon removal of any Trustee when
requested to do so in writing by the holders of not less than 10% of the shares
then outstanding. A vacancy on the Board of Trustees may be filled by the vote
of a majority of the remaining Trustees, provided that immediately thereafter
at least two-thirds of the Trustees have been elected by shareholders.
Investment Company does not issue share certificates for the Fund.
Transfer Agent sends monthly shareholders statements, confirming all
investments in or redemptions from their accounts. Each statement also sets
forth the balance of shares held in the account.
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THE SEVEN SEAS SERIES FUND
Two International Place, 35th Floor
Boston, Massachusetts 02110
(617) 654-6089
INVESTMENT ADVISER, CUSTODIAN, AND TRANSFER AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
DISTRIBUTOR
Russell Fund Distributors, Inc.
Two International Place, 35th Floor
Boston, Massachusetts 02110
ADMINISTRATOR
Frank Russell Investment Management Company
909 A Street
Tacoma, Washington 98402
LEGAL COUNSEL
Goodwin, Procter & Hoar
Exchange Place
Boston, Massachusetts 02109
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
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<PAGE>
Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
THE SEVEN SEAS SERIES FUND
Two International Place, 35th Floor
Boston, Massachusetts 02110
(617) 654-6089
REAL ESTATE EQUITY FUND
The Seven Seas Series Fund is a registered, open-end investment company
with multiple portfolios, each of which is a mutual fund. This Prospectus
describes and offers shares of beneficial interest in one mutual fund, The Seven
Seas Series Real Estate Equity Fund (referred to in this Prospectus as the "Real
Estate Equity Fund" or the "Fund"). The Real Estate Equity Fund seeks to
provide income and capital growth by investing principally in publicly traded
securities of real estate companies. The Fund's shares are offered without
sales commissions. However, the Fund pays certain distribution expenses under
its Rule 12b-1 plan.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SHARES IN THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, STATE STREET BANK AND TRUST COMPANY, AND SHARES ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER AGENCY, AND INVOLVE INVESTMENT RISKS INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. Please read and retain
this document for future reference. Additional information about the Fund has
been filed with the Securities and Exchange Commission in a Statement of
Additional Information dated December 29, 1995. The Statement of Additional
Information is incorporated herein by reference and is available without charge
from Distributor at its address noted below or by calling (617) 654-6089.
<TABLE>
<CAPTION>
<S> <C> <C>
Investment Adviser, Custodian
Transfer Agent: Distributor: Administrator:
State Street Bank and Trust Russell Fund Distributors, Inc. Frank Russell Investment
Company Two International Place Management Company
225 Franklin Street 35th Floor 909 A Street
Boston, Massachusetts 02110 Boston, Massachusetts 02110 Tacoma, Washington 98402
(617) 654-4721 (617) 654-6089 (206) 627-7001
</TABLE>
PROSPECTUS DATED DECEMBER 29, 1995
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TABLE OF CONTENTS
Page
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Fund Operating Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The Seven Seas Series Fund . . . . . . . . . . . . . . . . . . . . . . . . . 4
Manner of Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Investment Objective, Policies and Restrictions. . . . . . . . . . . . . . . 4
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Portfolio Turnover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Dividends and Distributions. . . . . . . . . . . . . . . . . . . . . . . . . 8
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Valuation of Fund Shares . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Purchase of Fund Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Redemption of Fund Shares. . . . . . . . . . . . . . . . . . . . . . . . . . 11
General Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Fund Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Performance Calculations . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
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FUND OPERATING EXPENSES
THE SEVEN SEAS SERIES REAL ESTATE EQUITY FUND
The purpose of the following table is to assist the investor in understanding
the various costs and expenses that an investor in the Real Estate Equity Fund
will incur directly or indirectly. THE EXAMPLES PROVIDED IN THE TABLE SHOULD
NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN. For additional information, see
"General Management."
<TABLE>
<CAPTION>
Shareholder Transaction Expenses:
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<S> <C> <C> <C>
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fee None
Annual Fund Operating Expenses:
- ------------------------------
(as a percentage of average daily net assets)
Advisory Fees(1) .40%
12b-1 Fees(2,3) .04
Other Expenses(1,4) .56
-----
Total Operating Expenses After Fee Waivers(3,4) 1.00%
-----
-----
Examples: 1 year 3 years
-------- ------ -------
You would pay the following
expenses on a $1,000
investment, assuming (i) 5%
annual return and (ii) redemption
at the end of each time period: $ 10 $ 32
----- -----
----- -----
</TABLE>
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1 The Adviser voluntarily agrees to waive up to the full amount of its
Advisory fee of .65% to the extent that total expenses exceed 1.00% on an
annual basis. Additionally, the Administrator has agreed to waive a
portion of its fee for the first three months after the Fund becomes
operational. The gross annual Advisory and Other Expenses before waivers
would be .65%, and .56% of average daily net assets, respectively. The
total operating expenses of the Fund absent fee waivers would be 1.26%
of average daily net assets on an annual basis. The Advisory fee waiver
will be in effect for the current fiscal year.
2 The ratios for "12b-1 fees" and "other expenses" are based on estimated
amounts for the current fiscal year with expected annual average net assets
of $20 million. In no event will 12b-1 fees exceed .25%.
3 Rule 12b-1 fees may include expenses paid for shareholder servicing
activities.
4 Investors purchasing Fund shares through a financial intermediary, such as
a bank or an investment adviser, may also be required to pay additional
fees for services provided by the intermediary. Such investors should
contact the intermediary for information concerning what additional fees,
if any, will be charged.
Long-term shareholders of the Fund may pay more in Rule 12b-1 fees than the
economic equivalent of the maximum front-end sales charges permitted by the
National Association of Securities Dealers, Inc.
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<PAGE>
THE SEVEN SEAS SERIES FUND
The Seven Seas Series Fund ("Investment Company") is an open-end management
investment company that is organized as a Massachusetts business trust. In
addition, each series of the Investment Company is diversified as defined in the
Investment Company Act of 1940, as amended ("1940 Act"). As a "series" company,
Investment Company is authorized to issue an unlimited number of shares
evidencing beneficial interests in different investment portfolios. Through
this Prospectus, Investment Company offers shares in one such portfolio, The
Seven Seas Series Real Estate Equity Fund. State Street Bank and Trust Company
("Adviser" or "State Street") serves as the investment adviser for the Fund.
MANNER OF OFFERING
DISTRIBUTION AND ELIGIBLE INVESTORS. Shares of the Fund are offered
without a sales commission by Russell Fund Distributors, Inc., Investment
Company's distributor, to US and foreign institutional and retail investors that
invest for their own account or in a fiduciary or agency capacity. The Fund
will incur distribution expenses under its Rule 12b-1 plan. See "General
Management -- Distribution Services and Shareholder Servicing."
MINIMUM AND SUBSEQUENT INVESTMENT. The Fund requires a minimum initial
investment of $1,000. The shareholder's investment in the Fund may be subject
to redemption at the Fund's discretion if the account balance is less than $500
as a result of shareholder redemptions. The Fund reserves the right to reject
any purchase order.
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVE
The Real Estate Equity Fund's investment objective is to provide income and
capital growth by investing principally in publicly traded securities of real
estate companies. This objective may be changed without shareholder approval.
Shareholders would, however receive at least 60 days' prior notice of any change
to the Fund's investment objective. There can be no assurance that the Fund will
meet its stated investment objective.
INVESTMENT POLICIES
The Adviser will normally invest at least 65% of the Fund's total assets in
equity interests in Real Estate Investment Trust ("REIT") securities contained
in the NAREIT Total Return Index (the "NAREIT Index"). The Fund will attempt to
obtain a return which approximates that of the NAREIT Index. The Adviser will
create similar security weightings as the NAREIT Index, by selecting individual
security positions, giving consideration to overall position within the Fund,
the liquidity of each holding at the time of acquisition, the cash position at
the time of the transaction, and shareholder activity in the Fund. Because the
Fund will concentrate 25% or more of its total assets in the real estate and
real estate related industries, the Fund will be subject to the risks associated
with the direct ownership of real estate. For a detailed discussion, please see
"Risk Factors--Real Estate Investments."
In addition to the equity securities of REITs contained in the NAREIT
Index, the Fund may invest up to 35% of its total assets in equity securities
not contained in the NAREIT Index, including other domestic equity securities,
fixed-income instruments, cash, cash equivalents, futures and options, and
special situations. See "Investment Policies". The Fund may temporarily for
defensive purposes, without limitation, invest in certain short-term fixed
income securities. Such securities may be used to invest uncommitted cash
balances or to maintain liquidity to meet shareholder redemptions. See
"Investment Policies -- Cash Reserves."
THE NAREIT INDEX. The National Association of Real Estate Investment
Trusts ("NAREIT") is a not for profit trade organization representing the REIT
industry. NAREIT was created in 1960 to serve as the official
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<PAGE>
source of information for the REIT industry. Membership is comprised of
publicly and privately held REITs and professionals in related fields. The
NAREIT Index is comprised of individual publicly traded REITs. The NAREIT Index
is published monthly by NAREIT and received by members of the NAREIT
organization.
Although the number is expected to fluctuate as REITs are added to the
Index or converted to equity securities, there are currently 175 REITs in the
NAREIT Index. REITs are included in the NAREIT Index in the month in which they
become public. All of the data is based upon the last closing price of the
month for all tax-qualified REITs listed on the New York Stock Exchange, the
American Stock Exchange and the NASDAQ National Market System. The data is
market weighted. Newly issued shares by existing REITs are added to the total
shares outstanding figure in the month that the shares are issued. Only common
shares issued by the REIT are included in the index. The total return
calculation is based upon the weighting at the beginning of the period. Only
those REITs listed for the entire period are used in the total return
calculation. Dividends are included in the month based upon their payment date.
Liquidating dividends, whether full or partial, are treated as income. This has
the effect of negatively biasing the price appreciation component of the index
but results in accurate realized income and total return numbers.
US EQUITY SECURITIES. The Fund may invest in common and preferred equity
securities publicly traded in the United States. Common stocks represent an
ownership interest in a corporation. This ownership interest often gives the
Fund the right to vote on measures affecting the company's organization and
operations. Although common stocks have a history of long-term growth in value,
their prices tend to fluctuate in the short term, particularly those of smaller
companies.
REAL ESTATE INVESTMENT TRUSTS. Equity REITs are defined as REITs with 75%
or greater of their gross invested book assets invested directly or indirectly
in the equity ownership of real estate, and their value depends upon that of the
underlying properties. Mortgage REITs are defined as REITs with 75% or more of
their gross invested book assets invested directly or indirectly in mortgages.
Mortgage trusts make construction, development or long-term mortgage loans, and
are sensitive to the credit quality of the borrower. Hybrid REITs are defined as
not meeting the equity or mortgage tests. The value of real estate investment
trusts is also affected by management skill, cash flow, and tax and regulatory
requirements. Investments in equity and mortgage REITs are subject to different
risk factors. See "Risk Factors."
REAL ESTATE-RELATED INDUSTRIES. In addition to real estate investment
trusts, real estate industry companies may include: brokers or real estate
developers; and companies with substantial real estate holdings, such as paper
and lumber producers and hotel and entertainment companies.
US GOVERNMENT SECURITIES. US Government securities include US Treasury
bills, notes, and bonds and other obligations issued or guaranteed as to
interest and principal by the US Government and its agencies or
instrumentalities. Obligations issued or guaranteed as to interest and
principal by the US Government, its agencies or instrumentalities include
securities that are supported by the full faith and credit of the United States
Treasury, securities that are supported by the right of the issuer to borrow
from the United States Treasury, discretionary authority of the US Government
agency or instrumentality, and securities supported solely by the
creditworthiness of the issuer.
LENDING PORTFOLIO SECURITIES. The Fund may lend portfolio securities with
a value of up to 33-1/3% of its total assets. Such loans may be terminated at
any time. The Fund will receive cash or US Treasury bills, notes and bonds in
an amount equal to at least 100% of the current market value (on a daily marked-
to-market basis) of the loaned securities plus accrued interest. In a loan
transaction, as compensation for lending it securities, the Fund will receive a
portion of the dividends or interest accrued on the securities held as
collateral or, in the case of cash collateral, a portion of the income from the
investment of such cash. In addition, the Fund will receive the amount of all
dividends, interest and other distributions on the loaned securities. However,
the borrower has the right to vote the loaned securities. The Fund will call
loans to vote proxies if a material issue affecting the investment is to be
voted upon. Should the borrower of the securities fail financially, the Fund
may experience delays in recovering the securities or exercising its rights in
the collateral. Loans are made only to borrowers that are deemed by Adviser to
be of good financial standing. In a loan transaction, the Fund will also bear
the risk of any decline in value of securities acquired with cash
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<PAGE>
collateral. The Fund will minimize this risk by limiting the investment of cash
collateral to high quality instruments of short maturity.
CASH RESERVES. For the purpose of investing uncommitted cash balances or
to maintain liquidity to meet shareholder redemptions, the Fund may invest
temporarily and without limitation in high quality short-term fixed income
securities. These securities include obligations issued or guaranteed as to
principal and interest by the US Government, its agencies or instrumentalities
and repurchase agreements collateralized by these obligations, commercial paper,
bank certificates of deposit, bankers' acceptances and time deposits.
SECURITIES WARRANTS. The Fund may invest up to 5% of its net assets in
warrants of foreign or domestic issuers. Included in such amount, but not to
exceed 2% of the value of the Fund's total net assets, may be warrants that are
not listed on a securities exchange. A warrant typically is a long term option
issued by a corporation which generally gives the holder the privilege of buying
a specified number of shares of the underlying common stock of the issuer at a
specified exercise price at any time on or before an expiration date. Stock
index warrants entitle the holder to receive, upon exercise, an amount in cash
determined by reference to fluctuations in the level of a specified stock index.
If the Fund does not exercise or dispose of a warrant prior to its expiration,
it will expire worthless.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
banks and other financial institutions, such as broker-dealers. Under a
repurchase agreement, a Fund purchases securities from a financial institution
that agrees to repurchase the securities at the Fund's original purchase price
plus interest within a specified time (normally one business day). The Fund
will invest no more than 10% of its net assets (taken at current market value)
in repurchase agreements maturing in more than seven days. The Fund will limit
repurchase transactions to those member banks of the Federal Reserve System and
broker-dealers whose creditworthiness Adviser considers satisfactory. Should
the counterparty to a transaction fail financially, the Fund may encounter delay
and incur costs before being able to sell the securities. Further, the amount
realized upon the sale of the securities may be less than that necessary to
fully compensate the Fund.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse
repurchase agreements under the circumstances described in "Investment
Restrictions." Under a reverse repurchase agreement, the Fund sells portfolio
securities to a financial institution in return for cash in an amount equal
to a percentage of the portfolio securities' market value and agrees to
repurchase the securities at a future date at a prescribed repurchase price
equal to the amount of cash originally received plus interest on such amount.
The Fund retains the right to receive interest and principal payments with
respect to the securities while they are in the possession of the financial
institutions. Reverse repurchase agreements involve the risk of default by
the counterparty, which may adversely affect the Fund's ability to reacquire
the underlying securities.
ILLIQUID SECURITIES. The Fund will not invest more than 15% of its net
assets in illiquid securities or securities that are not readily marketable,
including repurchase agreements and time deposits of more than seven days'
duration. The absence of a regular trading market for illiquid securities
imposes additional risks on investments in these securities. Illiquid
securities may be difficult to value and may often be disposed of only after
considerable expense and delay. In addition, the Fund will not invest more than
10% in securities of issuers which may not be sold to the public without
registration under the Securities Act of 1933.
SPECIAL SITUATIONS. The Fund will not invest more than 5% of its net
assets in special situations involving real estate, including investments
involving joint ventures, real estate mortgage loans, and private placements,
provided that in no case will the Fund hold fee title in real estate.
OPTIONS ON SECURITIES AND SECURITIES INDICES. The Fund may write and
purchase covered put and call options on securities in which it may directly
invest. Option transactions of the Fund will be conducted so that the total
amount paid on premiums for all put and call options outstanding will not exceed
5% of the value of the Fund's total net assets. Further, the Fund will not
write a put or call option or combination thereof if, as a result,
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<PAGE>
the aggregate value of all securities or collateral used to cover its
outstanding options would exceed 25% of the value of the Fund's total assets.
The Fund may purchase or sell options on securities indices that are
comprised of securities in which it may directly invest, subject to the
limitations set forth above and provided such options are traded on a national
securities exchange or in the over-the-counter market. Options on securities
indices are similar to options on securities except there is no transfer of a
security and settlement is in cash. A call option on a securities index grants
the purchaser of the call, for a premium paid to the seller, the right to
receive in cash an amount equal to the difference between the closing value of
the index and the exercise price of the option times a multiplier established by
the exchange upon which the option is traded.
FUTURES CONTRACTS AND OPTIONS ON FUTURES. For hedging purposes, including
protecting the price or interest rate of a security the Fund intends to buy, the
Fund may enter into futures contracts that relate to securities in which it may
directly invest and indices comprised of such securities and may purchase and
write call and put options on such contracts.
A financial futures contract is a contract to buy or sell a specified
quantity of financial instruments such as US Treasury bills, notes and bonds,
commercial paper and bank certificates of deposit or the cash value of a
financial instrument index at a specified future date at a price agreed upon
when the contract is made. A stock index futures contract is a contract to buy
or sell specified units of a stock index at a specified date at a price agreed
upon when the contract is made. The value of a unit is based on the current
value of the stock index. Under such contracts, no delivery of the actual
securities making up the index takes place. Rather, upon expiration of the
contract, settlement is made by exchanging cash in an amount equal to the
difference between the contract price and the closing price of the index at
expiration, net of variation margin previously paid.
Substantially all futures contracts are closed out before settlement date
or called for cash settlement. A futures contract is closed out by buying or
selling an identical offsetting futures contract. Upon entering into a futures
contract, the Fund is required to deposit an initial margin with Custodian for
the benefit of the futures broker. The initial margin serves as a "good faith"
deposit that the Fund will honor its futures commitment. Subsequent payments
(called "variation margin") to and from the broker are made on a daily basis as
the price of the underlying investment fluctuates.
Options on futures contracts give the purchaser the right to assume a
position at a specified price in a futures contract at any time before
expiration of the option contract.
When trading futures contracts, the Fund will not commit more than 5% of
the market value of its total assets to initial margin deposits on futures and
premiums paid for options on futures.
To the extent permitted under the 1940 Act and exemptive rules and orders
thereunder, the Fund may seek to achieve its investment objective by investing
solely in the shares of another investment company that has substantially
similar investment objectives and policies.
INVESTMENT RESTRICTIONS
The Fund has fundamental investment restrictions, which may be changed only
with the approval of a majority of the Fund's shareholders as defined in the
1940 Act. A more detailed discussion of the Fund's investment restrictions and
investment policies appears in the Statement of Additional Information. Unless
otherwise noted, the investment restrictions apply at the time an investment is
made. The Fund may not:
1. Invest 25% or more of the value of its total
assets in securities of companies primarily engaged in any one
industry (other than the US Government, its agencies or
instrumentalities, except that the Fund may invest 25% or more of its
total assets in real estate-related industries described under
"Investment Policies"). Concentration may occur as a result of
changes in the market value of portfolio securities, but may not
result from investment.
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2. Borrow money (including reverse repurchase
agreements), except as a temporary measure for extraordinary or
emergency purposes or to facilitate redemptions (not for leveraging or
investment), provided that borrowings do not exceed an amount equal to
33-1/3% of the current value of the Fund's assets taken at market
value, less liabilities other than borrowings. If at any time a
Fund's borrowings exceed this limitation due to a decline in net
assets, such borrowings will within three days be reduced to the
extent necessary to comply with this limitation. A Fund will not
purchase investments once borrowed funds (including reverse repurchase
agreements) exceed 5% of its total assets.
3. Pledge, mortgage, or hypothecate its assets.
However, a Fund may pledge securities having a market value at the
time of the pledge not exceeding 33-1/3% of the value of the Fund's
total assets to secure permitted borrowings.
RISK FACTORS
FUTURES CONTRACTS AND OPTIONS ON FUTURES. There are certain investment
risks in using futures contracts and options as a hedging technique. Such risks
may include: (1) the inability to close out a futures contract or option caused
by the nonexistence of a liquid secondary market; and (2) an imperfect
correlation between price movements of the futures contracts or option with
price movements of the portfolio securities or securities index subject to the
hedge. The successful use of options and futures also depends on Adviser's
ability to correctly predict price movements in the market involved in a
particular options or futures transaction.
REAL ESTATE INVESTMENTS. Real estate investments are sensitive to
conditions affecting the real estate industry, including declines in the value
of real estate, risks related to general and local economic conditions,
overbuilding and increased competition, increases in property taxes and
operating expenses, changes in neighborhood values, the appeal of properties to
tenants, rental income issues and increases in interest rates. In addition,
equity real estate investment trusts may be affected by changes in the value of
the underlying property owned by the trust, while mortgage real estate
investment trusts may be affected by the quality of any credit extended.
Moreover, the underlying portfolios of equity and mortgage real estate trusts
may not be diversified, and are therefore subject to the risk of financing a
single or a limited number of projects. Such trusts are also dependent upon
management skills and are subject to heavy cash flow dependence, defaults by
borrowers, self-liquidation and the possibility of failing to qualify for tax-
free pass-through of income under the Internal Revenue Code and to maintain
exemption from the 1940 Act. The value of securities of companies which service
the real estate industry may also be affected by these risks.
PORTFOLIO TURNOVER
The portfolio turnover rate cannot be predicted, but it is anticipated that
the Fund's annual turnover rate generally will not exceed 50%. A high turnover
rate (over 100%) will: (1) increase transaction expenses which will adversely
affect a Fund's performance; and (2) result in increased brokerage commissions
and other transaction costs, and the possibility of realized capital gains.
The Fund may effect portfolio transactions with or through State Street
Brokerage Services, Inc. an affiliate of the Adviser, when the Adviser
determines that the Fund will receive competitive execution, price and
commissions.
DIVIDENDS AND DISTRIBUTIONS
The Board of Trustees intends to declare and pay on Fund shares dividends
quarterly from net investment income. The Board of Trustees intends to declare
distributions annually from net capital gains, if any, generally in mid-October.
An additional distribution may be declared and paid in December, if required,
for the Fund to avoid imposition of a 4% federal excise tax on undistributed
capital gains.
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Dividends declared in October, November or December and payable to
shareholders of record in such months will be deemed to have been paid by the
Fund and received by shareholders on December 31 of that year if the dividend is
paid prior to February 1 of the following year.
Income dividends and capital gains distributions will be paid in additional
shares at their net asset value on the record date unless the shareholder has
elected to receive them in cash. Such election may be made by giving 10 days'
written notice to Transfer Agent.
Any dividend or capital gain distribution paid by the Fund shortly after a
purchase of shares will reduce the per share net asset value of the Fund by the
amount of the dividend or distribution. In effect, the payment will represent a
return of capital to the shareholder. However, the shareholder will be subject
to taxes with respect to such dividend or distribution.
TAXES
The distributions received by the Fund from its investments may, for
federal income tax purposes, consist of ordinary income, long-term capital
gains, or a return of capital. The characterization of these distributions to
the Fund may, in turn, affect the tax treatment of the Fund's distributions to
its shareholders. Statements as to the tax status of each shareholder's
dividends and distributions are mailed annually by the Fund. Shareholders may
wish to consult their tax advisers about any state and local taxes that may
apply to payments received and, in particular, to determine whether dividends
paid by the Fund that represent interest derived from the US Government
securities are exempt from any applicable state or local income taxes.
The Fund intends to qualify as a regulated investment company ("RIC") under
Subchapter M of the Internal Revenue Code, as amended (the "Code"). As a RIC,
the Fund will not be subject to federal income taxes to the extent it
distributes its net investment income and capital gains net income (capital
gains in excess of capital losses) to its shareholders. The Board intends to
distribute each year substantially all of the Fund's net investment income and
capital gains net income.
Dividends from net investment income and distributions of net short-term
capital gains are taxable to shareholders as ordinary income under federal
income tax laws whether paid in cash or in additional shares. Distributions
from net long-term capital gains are taxable as long-term capital gains
regardless of the length of time a shareholder has held such shares and whether
paid in cash or additional shares.
Dividends and distributions may also be subject to state or local taxes.
Depending on the state tax rules pertaining to a shareholder, a portion of the
dividends paid by the Fund attributable to direct obligations of the US Treasury
and certain agencies may be exempt from state and local taxes.
The sale of Fund shares by a shareholder is a taxable event and may result
in capital gain or loss. A capital gain or loss may be realized from an
ordinary redemption of shares or an exchange of shares between two mutual funds
(or two series of portfolios of a mutual fund). Any loss incurred on the sale
or exchange of Fund shares held for one year or more will be treated as a long-
term capital loss to the extent of capital gain dividends received with respect
to such shares.
Shareholders will be notified after each calendar year of the amounts of
income dividends and net capital gains distributions and the percentage of the
Fund's income attributable to US Treasury and agency obligations. The Fund is
required to withhold a legally determined portion of all taxable dividends,
distributions, and redemption proceeds payable to any noncorporate shareholder
that does not provide the Fund with the shareholder's correct taxpayer
identification number or certification that the shareholder is not subject to
backup withholding.
The foregoing discussion is only a summary of certain federal income tax
issues generally affecting the Fund and its shareholders. Circumstances among
investors may vary and each investor is encouraged to discuss investment in the
Fund with the investor's tax adviser.
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VALUATION OF FUND SHARES
NET ASSET VALUE PER SHARE. The Fund determines net asset value once each
business day as of the close of the regular trading session of the New York
Stock Exchange (ordinarily 4 p.m. Eastern time). A business day is one on which
the New York Stock Exchange is open for business. Net asset value per share is
computed by dividing the current value of the Fund's assets, less its
liabilities, by the number of shares of the Fund outstanding and rounding to the
nearest cent.
VALUATION OF FUND SECURITIES. With the exceptions noted below, the Fund
values portfolio securities at market value. This generally means that equity
and fixed income securities listed and traded principally on any national
securities exchange are valued on the basis of the last sale price or, lacking
any sales, at the closing bid price, on the primary exchange on which the
security is traded. United States equity and fixed income securities traded
principally over-the-counter and options are valued on the basis of the last
reported bid price. Futures contracts are valued on the basis of the last
reported sale price.
Because many fixed income securities do not trade each day, last sale or
bid prices are frequently not available. Fixed income securities therefore may
be valued using prices provided by a pricing service when such prices are
determined by Custodian to reflect the market value of such securities.
Fixed income securities maturing within 60 days of the valuation date are
valued at amortized cost unless the Board determines that amortized cost does
not represent market value. The amortized cost valuation procedure initially
prices an instrument at its cost and thereafter assumes a constant amortization
to maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. While 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 a Fund would
receive if it sold the instrument.
The Fund values securities for which market quotations are not readily
available at fair value, as determined in good faith pursuant to procedures
established by the Board of Trustees.
PURCHASE OF FUND SHARES
MINIMUM INITIAL INVESTMENT AND ACCOUNT BALANCE. The Fund requires a
minimum initial investment of $1,000. The minimum account balance is $500. The
Fund reserves the right to reject any purchase order.
OFFERING DATES AND TIMES. Fund shares may be purchased on any business day
without a sales commission. All purchases must be made in US dollars. Purchase
orders in good form and payments for Fund shares must be received by the
Transfer Agent prior to 4:00 p.m. Eastern time to be effective on the date
received. The accompanying payment must be in federal funds or converted into
federal funds by the Transfer Agent before the purchase order can be accepted.
Purchase orders in good form are described below.
ORDER AND PAYMENT PROCEDURES. There are several ways to invest in the
Fund. The Fund requires a purchase order in good form which consists of a
completed and signed Account Registration and Investment Instruction Form (the
"Application") for each new account regardless of the investment method. For
additional information, copies of Applications or questions, call Transfer Agent
at (800) 647-7327, or write to Transfer Agent at: State Street Bank and Trust
Company, P.O. Box 8317, Boston, MA 02266-8317, Attention: The Seven Seas Series
Real Estate Equity Fund.
FEDERAL FUNDS WIRE. An investor may purchase shares by wiring federal
funds to State Street Bank and Trust Company as Transfer Agent by:
1. Telephoning State Street Bank and Trust
Company at (800) 647-7327 and stating: (1) the investor's account
registration number, address and social security or tax identification
number; (2)
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<PAGE>
the amount being wired; (3) the name of the wiring bank; (4) the name
and telephone number of the person at the wiring bank to be contacted
in connection with the order; and (5) that the funds should be
invested in The Seven Seas Series Real Estate Equity Fund.
2. Instructing the wiring bank to wire federal
funds to: State Street Bank and Trust Company, Boston, MA (ABA #0110-
00028), Attention: The Seven Seas Series Real Estate Equity Fund,
Mutual Funds Service Division (DDA #9904-631-0). The wire
instructions should also include the name in which the account is
registered, the account number, and the name of the Fund in which to
be invested.
3. Completing the Application and forwarding it
to Transfer Agent at the above address.
MAIL. To purchase shares by mail, send a check or other negotiable
bank draft payable to: State Street Bank and Trust Company, P.O. Box 8317,
Boston, MA 02266-8317, Attention: The Seven Seas Series Real Estate Equity
Fund. Certified checks are not necessary, but checks are accepted subject to
collection at full face value in United States funds and must be drawn in
United States dollars on a United States bank. Normally, checks and drafts
are converted to federal funds within two business days following receipt of
the check or draft. Initial investments should be accompanied by a completed
Application, and subsequent investments are to be accompanied by the
investor's account number.
IN-KIND EXCHANGE OF SECURITIES. The Transfer Agent may, at its discretion,
permit investors to purchase shares through the exchange of securities they
hold. Any securities exchanged must meet the investment objective, policies and
limitations of the Fund, must have a readily ascertainable market value, must be
liquid and must not be subject to restrictions on resale. The market value of
any securities exchanged, plus any cash, must be at least $1 million. Shares
purchased in exchange for securities generally may not be redeemed or exchanged
until the transfer has settled -- usually within 15 days following the purchase
by exchange.
The basis of the exchange will depend upon the relative net asset value of
the shares purchased and securities exchanged. Securities accepted by the Fund
will be valued in the same manner as the Fund values its assets. Any interest
earned on the securities following their delivery to the Transfer Agent and
prior to the exchange will be considered in valuing the securities. All
interest, dividends, subscription or other rights attached to the securities
become the property of the Fund, along with the securities.
EXCHANGE PRIVILEGE. Subject to the Fund's minimum investment
requirement, investors may exchange their Fund shares without charge for
shares of any other investment portfolio offered by Investment Company.
Shares are exchanged on the basis of relative net asset value per share.
Exchanges may be made: (1) by telephone if the registrations of the two
accounts are identical; or (2) in writing addressed to State Street Bank and
Trust Company, P.O. Box 8317, Boston, MA 02266-8317, Attention: The Seven
Seas Series Real Estate Equity Fund. If shares of a Fund were purchased by
check, the shares must have been present in an account for 10 days before an
exchange is made. The exchange privilege will only be available in states
where the exchange may legally be made, and may be modified or terminated by
the Funds upon 60 days' notice to shareholders.
REDEMPTION OF FUND SHARES
Fund shares may be redeemed on any business day at the net asset value next
determined after the receipt of a redemption request in proper form as described
below. Payment will be made as soon as possible (but will ordinarily not exceed
seven days) and will be mailed to the shareholder's address of record. Upon
request, redemption proceeds will be wire transferred to the shareholder's
account at a domestic commercial bank that is a member of the Federal Reserve
System. Although Investment Company does not currently charge a fee for this
service, Investment Company reserves the right to charge a fee for the cost of
wire-transferred redemptions of less than $1,000. Payment for redemption of
shares purchased by check may be withheld for up to 10 days after the date of
purchase to assure that such checks are honored.
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<PAGE>
EXPEDITED REDEMPTION. Shareholders may normally redeem Fund shares by
telephoning State Street Bank and Trust Company between 9:00 a.m. and 4:00 p.m.
Eastern time at (800) 647-7327, Attention: The Seven Seas Series Real Estate
Equity Fund. Shareholders using the expedited redemption method must complete
the appropriate section on the Application. The Fund and the Transfer Agent will
employ reasonable procedures to confirm that instructions communicated by
telephone are properly authorized. The Fund and the Transfer Agent will not be
liable for executing telephone instructions that are deemed to be authorized
after following reasonable procedures. These procedures include recording
telephonic instructions, mailing to the shareholder a written confirmation of
the transaction, performing a personal identity test with private information
not likely to be known by other individuals, and restricting mailing of
redemptions to the shareholder's address of record. During periods of drastic
economic or market changes, shareholders using this method may encounter delays.
In such event, shareholders should consider using the mail redemption procedure
described below.
MAIL. Redemption requests may be made in writing directly to State
Street Bank and Trust Company, P.O. Box 8317, Boston, MA 02266-8317,
Attention: The Seven Seas Series Real Estate Equity Fund. The redemption
price will be the net asset value next determined after receipt by State
Street of all required documents in good order. Good order means that the
request must include the following:
1. A letter of instruction or a stock assignment stating the Fund or
Funds out of which the shares are to be redeemed and designating
specifically the dollar amount to be redeemed signed by all owners of
the shares in the exact names in which they appear on the account,
together with a guarantee of the signature of each owner by a bank,
trust company or member of a recognized stock exchange; and
2. Such other supporting legal documents, if required by applicable
law or Transfer Agent, in the case of estates, trusts, guardianships,
custodianships, corporations and pension and profit-sharing plans.
The Fund reserves the right to redeem the shares in any account with a
balance of less than $500 as a result of shareholder redemptions rather than
market value fluctuations. Before shares are redeemed to close an account, the
shareholder will be notified in writing and allowed 60 days to purchase
additional shares to meet the minimum account balance.
The Fund may pay any portion of the redemption amount in excess of $250,000
by a distribution in-kind of readily marketable securities from the portfolio of
the Fund in lieu of cash. Investors will incur brokerage charges on the sale of
these portfolio securities. The Fund reserves the right to suspend the right of
redemption or postpone the date of payment if emergency conditions, as specified
in the 1940 Act or determined by the Securities and Exchange Commission, should
exist.
GENERAL MANAGEMENT
The Board of Trustees supervises the management, activities and affairs of
the Fund and has approved contracts with various financial organizations to
provide, among other services, day-to-day management required by the Fund.
ADVISORY AGREEMENT. The Investment Company employs State Street to furnish
investment services to the Fund. State Street is one of the largest providers
of securities processing and recordkeeping services for US mutual funds and
pension funds. State Street is a wholly owned subsidiary of State Street Boston
Corporation, a publicly held bank holding company. State Street, with over
$171.3 billion (US) under management as of September 30, 1995, provides complete
global investment management services from offices in the United States, London,
Sydney, Hong Kong, Tokyo, Toronto, Luxembourg, Melbourne, Montreal, Paris,
Dubai, Munich and Brussels.
Adviser, subject to Board supervision, directs the investment of the Fund
in accordance with the Fund's investment objective, policies and restrictions.
Investment decisions regarding the Fund are made by committee, and no person is
primarily responsible for making recommendations to that committee. For these
services, the
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<PAGE>
Fund pays Adviser a fee, calculated daily and paid monthly, that on an annual
basis is equal to .65% of the Fund's average daily net assets.
The Glass-Steagall Act prohibits a depository state chartered bank such as
Adviser from engaging in the business of issuing, underwriting, selling or
distributing certain securities. The activities of Adviser in informing its
customers of the Fund, performing investment and redemption services and
providing custodian, transfer, shareholder servicing, dividend disbursing and
investment advisory services may raise issues under these provisions. Adviser
has been advised by its counsel that its activities in connection with the Fund
are consistent with its statutory and regulatory obligations. THE SHARES
OFFERED BY THIS PROSPECTUS ARE NOT ENDORSED OR GUARANTEED BY STATE STREET OR ITS
AFFILIATES, ARE NOT DEPOSITS OR OBLIGATIONS OF STATE STREET OR ITS AFFILIATES,
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
Changes in federal or state statutes and regulations relating to the
permissible activities of banks and their affiliates, as well as judicial or
administrative decisions or interpretations of such or future statutes and
regulations, could prevent Adviser from continuing to perform all or a part of
the above services for its customers and/or the Funds. If Adviser were
prohibited from serving the Funds in any of its present capacities, the Board of
Trustees would seek an alternative provider(s) of such services. In such event,
changes in the operation of the Fund may occur. It is not expected by Adviser
that existing shareholders would suffer any adverse financial consequences (if
another adviser with equivalent abilities is found) as a result of any of these
occurrences.
State Street may from time to time have discretionary authority over
accounts which invest in Investment Company shares. These accounts include
accounts maintained for securities lending clients and accounts which permit
the use of Investment Company portfolios as short-term cash sweep
investments. Shares purchased for all discretionary accounts are held of
record by State Street, who retains voting control of such shares. As of
November 30, 1995, State Street held of record 36% of the issued and
outstanding shares of Investment Company in connection with its discretionary
accounts. Consequently, State Street may be deemed to be a controlling
person of Investment Company for purposes of the 1940 Act.
Under the Adviser's Code of Ethics, the Adviser's employees in Boston where
investment management operations are conducted are only permitted to engage in
personal securities transactions which do not involve securities which the
Adviser had recommended for purchase or sale, or purchased or sold, on behalf of
its clients. Such employees must report their personal securities transactions
quarterly and supply broker confirmations to the Adviser.
ADMINISTRATION AGREEMENT. Frank Russell Investment Management Company
("Administrator") serves as administrator to the Fund. Administrator currently
serves as investment manager and administrator to 22 mutual funds with assets
of $7.3 billion as of October 31, 1995, and acts as administrator to 17
mutual funds, including the Fund, with assets of $7.2 billion as of
October 31, 1995.
Pursuant to the Administration Agreement with the Investment Company, the
Administrator will: (1) supervise all aspects of the Funds' operations; (2)
provide the Funds with administrative and clerical services, including the
maintenance of certain of the Funds' books and records; (3) arrange the periodic
updating of the Funds' prospectuses and any supplements thereto; (4) provide
proxy materials and reports to Fund shareholders and the Securities and Exchange
Commission; and (5) provide the Funds with adequate office space and all
necessary office equipment and services, including telephone service, heat,
utilities, stationery supplies and similar items. For these services, the Real
Estate Equity Fund pays Administrator a fee that on an annual basis is equal to
the following percentages of each Fund's average daily net assets: $0 to and
including $500 million -- .06%; over $500 million to and including $1 billion --
.05%; and over $1 billion -- .03%. The percentage of the fee paid by a
particular Fund is equal to the percentage of average aggregate daily net assets
that are attributable to that Fund. Administrator will also receive
reimbursement of expenses it incurs in connection with establishing new
investment portfolios. Further, the administration fee paid by Investment
Company will be reduced by the sum of certain distribution-related expenses (up
to a maximum of 15% of the asset-based administration fee listed above).
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<PAGE>
Administrator also provides administrative services in connection with the
registration of shares of Investment Company with those states in which its
shares are offered or sold. Compensation for such services is on a time spent
basis. Investment Company will pay all registration, exemptive application,
renewal and related fees and reasonable out-of-pocket expenses.
Officers and employees of the Administrator and Distributor are permitted
to engage in personal securities transactions subject to restrictions and
procedures set forth in the Confidentiality Manual and Code of Ethics adopted by
the Investment Company, Administrator and Distributor. Such restrictions and
procedures include substantially all of the recommendations of the Advisory
Group of the Investment Company Institute and comply with Securities and
Exchange Commission rules and regulations.
DISTRIBUTION SERVICES AND SHAREHOLDER SERVICING ARRANGEMENTS. Pursuant to
the Distribution Agreement with Investment Company, Russell Fund Distributors,
Inc. ("Distributor"), a wholly owned subsidiary of Administrator, serves as
distributor for all Fund shares.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 (the
"Plan") under the 1940 Act. The purpose of the Plan is to provide for the
payment of certain Investment Company distribution and shareholder servicing
expenses. Under the Plan, Distributor will be reimbursed in an amount up to
.25% of the Fund's annual average net assets for distribution-related and
shareholder servicing expenses. Payments under the Plan will be made to
Distributor to finance activity which is intended to result in the sale and
retention of Fund shares including: (1) the costs of prospectuses, reports to
shareholders and sales literature; (2) advertising; and (3) expenses incurred in
connection with the promotion and sale of Fund shares, including Distributor's
overhead expenses for rent, office supplies, equipment, travel, communication,
compensation and benefits of sales personnel.
Under the Plan, the Fund may also enter into agreements ("Service
Agreements") with financial institutions, which may include Adviser ("Service
Organizations"), to provide shareholder servicing with respect to Fund shares
held by or for the customers of the Service Organizations. Under the Service
Agreements, the Service Organizations may provide various services for such
customers including: answering inquiries regarding the Fund; assisting customers
in changing dividend options, account designations and addresses; performing
subaccounting for such customers; establishing and maintaining customer accounts
and records; processing purchase and redemption transactions; providing periodic
statements showing customers' account balances and integrating such statements
with those of other transactions and balances in the customers' other accounts
serviced by the Service Organizations; arranging for bank wires transferring
customers' funds; and such other services as the customers may request in
connection with the Fund, to the extent permitted by applicable statute, rule or
regulation. Service Organizations may receive from the Fund, for shareholder
servicing, monthly fees at a rate that shall not exceed .20% per annum of the
average daily net asset value of the Fund's shares owned by or for shareholders
with whom the Service Organization has a servicing relationship. Banks and
other financial service firms may be subject to various state laws, and may be
required to register as dealers pursuant to state law.
Investment Company has entered into Service Agreements with Adviser,
State Street Brokerage Services, Inc. ("SSBSI"), and Adviser's Metropolitan
Division of Commercial Banking ("Commercial Banking") to obtain the
services described above with respect to Fund shares held by or for
customers. In return for these services, Investment Company pays Adviser a
fee in an amount that per annum is equal to 0.25%, .175% and .175% of the
average daily value of all Fund shares held by or for customers of Adviser,
SSBSI, and Commercial Banking respectively.
Payments to the Distributor, as well as payments to Service Organizations
from the Fund are not permitted by the Plan to exceed .25% of the Fund's average
net asset value per year. Any payments that are required to be made by the
Distribution Agreement and any Service Agreement but could not be made because
of the .25% limitation may be carried forward and paid in subsequent years so
long as the Plan is in effect. A Fund's liability for any such expenses carried
forward shall terminate at the end of two years following the year in which the
expenditure was incurred. Service Organizations will be responsible for prompt
transmission of purchase and redemption orders and may charge fees for their
services.
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<PAGE>
FUND EXPENSES
The Fund will pay all of its expenses other than those expressly assumed by
the Adviser and the Administrator. The principal expenses of the Fund are the
annual advisory fee payable to Adviser and distribution and shareholder
servicing expenses. Other expenses include: (1) amortization of deferred
organizational costs; (2) taxes, if any; (3) expenses for legal, auditing and
financial accounting services; (4) expense of preparing (including typesetting,
printing and mailing) reports, prospectuses and notices to existing
shareholders; (5) administrative fees; (6) custodian fees; (7) expense of
issuing and redeeming Fund shares; (8) the cost of registering Fund shares under
federal and state laws; (9) shareholder meetings and related proxy solicitation
expenses; (10) the fees, travel expenses and other out-of-pocket expenses of
Trustees who are not affiliated with Adviser or any of its affiliates;
(11) insurance, interest, brokerage and litigation costs; (12) extraordinary
expenses as may arise, including expenses incurred in connection with litigation
proceedings and claims and the legal obligations of Investment Company to
indemnify its Trustees, officers, employees, shareholders, distributors and
agents; and (13) other expenses properly payable by the Fund.
PERFORMANCE CALCULATIONS
The Fund may from time to time advertise its yield. Yield, which is based
on historical earnings and is not intended to indicate future performance, is
calculated by dividing the net investment income per share earned during the
most recent 30-day (or one-month) period by the maximum offering price per share
on the last day of the period. This income is then annualized. That is, the
amount of income generated by the investment during that 30-day period is
assumed to be generated each month over a 12-month period and is shown as a
percentage of the investment. For purposes of the yield calculation, interest
income is computed based on the yield to maturity of each debt obligation, and
dividend income is computed based upon the stated dividend rate of each security
in the Fund's portfolio. The calculation includes all recurring fees that are
charged to all shareholder accounts.
From time to time the Fund may advertise its total return. The total
return of a Fund refers to the average annual compounded rates of return from a
hypothetical investment in the Fund over one-, five- and ten-year periods or for
the life of the Fund (as stated in the advertisement), assuming the reinvestment
of all dividend and capital gains distributions and includes all recurring fees
that are charged to all shareholder accounts.
Comparative performance information may be used from time to time in
advertising or marketing Fund shares, including data from Lipper Analytical
Services, Inc., Wall Street Journal Score Card, Lipper Real Estate Funds
Average, the Consumer Price Index, or other industry publications, business
periodicals, rating services and market indices. The Fund may also advertise
nonstandardized performance information which is for periods in addition to
those required to be presented.
Quoted yields, returns and other performance figures are based on
historical earnings and are not indications of future performance.
ADDITIONAL INFORMATION
CUSTODIAN, TRANSFER AGENT AND INDEPENDENT ACCOUNTANTS. State Street holds
all portfolio securities and cash assets of the Fund, provides portfolio
recordkeeping services and serves as the Fund's transfer agent ("Transfer
Agent") and custodian ("Custodian"). State Street is authorized to deposit
securities in securities depositories or to use the services of subcustodians.
State Street has no responsibility for the supervision and management of the
Fund except as investment adviser. Coopers & Lybrand L.L.P., Boston,
Massachusetts, is Investment Company's independent accountants.
REPORTS TO SHAREHOLDERS AND SHAREHOLDER INQUIRIES. Shareholders will
receive an unaudited semiannual financial statement and an annual financial
statement audited by Investment Company's independent accountants. Shareholder
inquiries regarding the Prospectus and financial statements may be made by
calling Distributor at
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<PAGE>
(617) 654-6089. Inquiries regarding shareholder balances may be made by calling
the Transfer Agent at (800) 647-7327.
ORGANIZATION, CAPITALIZATION AND VOTING. Investment Company was organized
as a Massachusetts business trust on October 3, 1987, and operates under a First
Amended and Restated Master Trust Agreement dated October 13, 1993, as amended.
Investment Company issues shares divisible into an unlimited number of
series (or funds), each of which is a separate trust under Massachusetts law.
The Real Estate Equity Fund is one such series.
Fund shares represent an equal proportionate interest in the Fund, have a
par value of $.001 per share and are entitled to such relative rights and
preferences and dividends and distributions earned on the assets belonging to
the Fund as may be declared by the Board of Trustees. Fund shares are fully
paid and nonassessable by Investment Company and have no preemptive rights.
Each Fund share has one vote. There are no cumulative voting rights.
There is no annual meeting of shareholders, but special meetings may be held.
On any matter that affects only a particular investment fund, only shareholders
of that fund vote unless otherwise required by the 1940 Act or the Master Trust
Agreement. The Trustees hold office for the life of the Trust. A Trustee may
resign or retire, and a Trustee may be removed at any time by a vote of two-
thirds of the Investment Company shares or by a vote of a majority of the
Trustees. The Trustees shall promptly call and give notice of a meeting of
shareholders for the purpose of voting upon removal of any Trustee when
requested to do so in writing by holders of not less than 10% of the shares then
outstanding. A vacancy on the Board of Trustees may be filled by the vote of a
majority of the remaining Trustees, provided that immediately thereafter at
least two-thirds of the Trustees have been elected by shareholders.
Investment Company does not issue share certificates for the Fund.
Transfer Agent sends Fund shareholders statements concurrent with any
transaction activity, confirming all investments in or redemptions from their
accounts. Each statement also sets forth the balance of shares held in the
account.
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<PAGE>
THE SEVEN SEAS SERIES FUND
Two International Place, 35th Floor
Boston, Massachusetts 02110
INVESTMENT ADVISER, CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
DISTRIBUTOR
Russell Fund Distributors, Inc.
Two International Place, 35th Floor
Boston, Massachusetts 02110
ADMINISTRATOR
Frank Russell Investment Management Company
909 A Street
Tacoma, Washington 98402
LEGAL COUNSEL
Goodwin, Procter & Hoar
Exchange Place
Boston, Massachusetts 02109
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
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<PAGE>
Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
THE SEVEN SEAS SERIES FUND
Two International Place, 35th Floor
Boston, Massachusetts 02110
(617) 654-6089
INTERNATIONAL PACIFIC INDEX FUND
The Seven Seas Series Fund is a registered, open-end investment with
multiple portfolios, each of which is a mutual fund. This Prospectus describes
and offers shares of beneficial interest in one mutual fund, The Seven Seas
Series International Pacific Index Fund (referred to in this Prospectus as the
"Pacific Index Fund" or the "Fund"). The Pacific Index Fund seeks to replicate
the total return of the Morgan Stanley Capital International Pacific Index. The
Fund's shares are offered without sales commissions. However, the Fund pays
certain distribution expenses under its Rule 12b-1 plan.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SHARES IN THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, STATE STREET BANK AND TRUST COMPANY, AND SHARES ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER AGENCY, AND INVOLVE INVESTMENT RISKS INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. Please read and retain
this document for future reference. Additional information about the Fund has
been filed with the Securities and Exchange Commission in a Statement of
Additional Information dated December 29, 1995. The Statement of
Additional Information is incorporated herein by reference and is available
without charge from Distributor at its address noted below or by calling (617)
654-6089.
<TABLE>
<S> <C> <C>
Investment Adviser, Custodian
Transfer Agent: Distributor: Administrator:
State Street Bank and Trust Russell Fund Distributors, Inc. Frank Russell Investment
Company Two International Place, Management Company
225 Franklin Street 35th Fl. 909 A Street
Boston, Massachusetts 02110 Boston, Massachusetts 02110 Tacoma, Washington 98402
(617) 654-4721 (617) 654-6089 (206) 627-7001
</TABLE>
PROSPECTUS DATED DECEMBER 29, 1995
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<PAGE>
TABLE OF CONTENTS
Page
----
Fund Operating Expenses. . . . . . . . . . . . . . . . . . . . . . . . . 3
The Seven Seas Series Fund . . . . . . . . . . . . . . . . . . . . . . . 4
Manner of Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Investment Objective, Policies and Restrictions. . . . . . . . . . . . . 4
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Portfolio Turnover . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Dividends and Distributions. . . . . . . . . . . . . . . . . . . . . . . 11
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Valuation of Fund Shares . . . . . . . . . . . . . . . . . . . . . . . . 12
Purchase of Fund Shares. . . . . . . . . . . . . . . . . . . . . . . . . 13
Redemption of Fund Shares. . . . . . . . . . . . . . . . . . . . . . . . 15
General Management . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Fund Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Performance Calculations . . . . . . . . . . . . . . . . . . . . . . . . 19
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . 19
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<PAGE>
FUND OPERATING EXPENSES
THE SEVEN SEAS SERIES INTERNATIONAL PACIFIC INDEX FUND
The following table is intended to assist the investor in understanding the
various costs and expenses that an investor in the Pacific Index Fund will incur
directly or indirectly. THE EXAMPLES PROVIDED IN THE TABLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. Actual expenses may be
greater or less than those shown. For additional information, see "General
Management."
<TABLE>
<CAPTION>
Shareholder Transaction Expenses:
- --------------------------------
<S> <C> <C> <C>
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fee None
Annual Fund Operating Expenses:
- ------------------------------
(as a percentage of average daily net assets)
Advisory Fees(1) .25%
12b-1 Fees(2, 3) .05
Other Expenses(1, 2) .54
---
Total Operating Expenses After Fee Waivers(1, 4) .84%
----
----
Examples: 1 year 3 years
-------- ------ -------
You would pay the following
expenses on a $1,000
investment, assuming (i) 5%
annual return and (ii) redemption
at the end of each time period: $ 9 $ 27
--- ----
--- ----
</TABLE>
- ------------------------------------------
(1) The Adviser has voluntarily agreed to waive one-half of its advisory fee.
The Administrator has voluntarily agreed to waive a portion of its fee for
the first three months after the Fund becomes operational. The gross
annual Advisory and Other Expenses before waivers would be .50%, and .55%
of average daily net assets, respectively. The total operating expenses of
the Fund absent fee waivers would be 1.10% of average daily net assets on
an annual basis. The Advisory fee waiver will be in effect for the
current fiscal year.
(2) The ratios for "12b-1 fees" and "other expenses" are based on estimated
amounts for the current fiscal year with expected annual average net assets
of $50 million.
(3) Rule 12b-1 fees may include expenses paid for shareholder servicing
activities.
(4) Investors purchasing Fund shares through a financial intermediary, such as
a bank or an investment adviser, may also be required to pay additional
fees for services provided by the intermediary. Such investors should
contact the intermediary for information concerning what additional fees,
if any, will be charged.
Long-term shareholders of the Fund may pay more in Rule 12b-1 fees than the
economic equivalent of the maximum front-end sales charges permitted by the
National Association of Securities Dealers, Inc.
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<PAGE>
THE SEVEN SEAS SERIES FUND
The Seven Seas Series Fund ("Investment Company") is an open-end management
investment company that is organized as a Massachusetts business trust. In
addition, each series of the Investment Company is diversified as defined in the
Investment Company Act of 1940, as amended ("1940 Act"). As a "series" company,
Investment Company is authorized to issue an unlimited number of shares
evidencing beneficial interests in different investment portfolios. Through
this Prospectus, Investment Company offers shares in one such portfolio, The
Seven Seas Series International Pacific Index Fund. State Street Bank and Trust
Company ("Adviser" or "State Street") serves as the investment adviser for the
Fund.
MANNER OF OFFERING
DISTRIBUTION AND ELIGIBLE INVESTORS. Shares of the Fund are offered
without a sales commission by Russell Fund Distributors, Inc., Investment
Company's distributor, to US and foreign institutional and retail investors that
invest for their own account or in a fiduciary or agency capacity. The Fund
will incur distribution expenses under its Rule 12b-1 plan. See "General
Management -- Distribution Services and Shareholder Servicing."
MINIMUM AND SUBSEQUENT INVESTMENT. The Fund requires a minimum initial
investment of $1,000. The shareholder's investment in the Fund may be subject
to redemption at the Fund's discretion if the account balance is less than $500
as a result of shareholder redemptions. The Fund reserves the right to reject
any purchase order.
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVE
The Pacific Index Fund's fundamental investment objective is to replicate
the total return of the Morgan Stanley Capital International Pacific Index (the
"MSCI Pacific Index"). This objective may be changed only with the approval of
a majority of the Fund's shareholders as defined by the 1940 Act. There can be
no assurance that the Fund will meet its investment objective.
The Fund will be substantially invested in the securities included in its
underlying index. However, the Fund may invest temporarily for defensive
purposes, without limitation, in certain short-term fixed income securities.
Such securities may be used to invest uncommitted cash balances or to maintain
liquidity to meet shareholder redemptions. See "Investment Policies -- Cash
Reserves."
The MSCI Pacific Index is a diversified, capitalization weighted index of
equity securities of companies located in Australia, Hong Kong, Japan, New
Zealand and Singapore. The MSCI Pacific Index is dominated by the Japanese
stock market, which represents approximately 90% of the market capitalization of
the Index. Stocks in the MSCI Pacific Index are selected to represent
proportionally each country and each major industrial sector within each
country.
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Each stock in the Index is weighted according to its market value as a
percentage of the total market value of all stocks in the Index. The inclusion
of a stock in the Index in no way implies that Morgan Stanley Capital
International believes the stock to be an attractive investment, nor is the
Pacific Index Fund sponsored or affiliated with Morgan Stanley Capital
International.
The Pacific Index Fund intends to invest in substantially all of the
securities contained in the MSCI Pacific Index in proportion to their weightings
in the Index. It is anticipated that assets of the Fund will need to reach $50
million in order to invest in substantially all of the securities of the Index.
To the extent that all securities in the Index cannot be purchased, the Fund
will purchase a representative sample of the stocks listed in the Index in
proportion to their weightings.
To the extent that the Pacific Index Fund seeks to replicate the MSCI
Pacific Index using such sampling techniques, a close correlation between the
Fund's performance and the performance of the Index is anticipated in both
rising and falling markets. The Fund will attempt to achieve a correlation
between the performance of its portfolio and that of the Index of at least 0.95,
before deduction of Fund expenses. A correlation of 1.00 would represent
perfect correlation between portfolio and index performance. It is anticipated
that the correlation of the Fund's performance to that of the Index will
increase as the size of the Fund increases. The Fund's ability to achieve
significant correlation between Fund and Index performance may be affected by
changes in securities markets, changes in the composition of the Index and the
timing of purchases and redemptions of Fund shares. Adviser will monitor
correlation. Should the Fund fail to achieve an appropriate level of
correlation, Adviser will report to the Board of Trustees, which will consider
alternative arrangements.
INVESTMENT POLICIES
The investment policies described below reflect the Fund's current
practices, are not fundamental and may be changed by the Board of Trustees of
Investment Company without shareholder approval. A more detailed discussion of
the Fund's investment policies appears in the Statement of Additional
Information. To the extent consistent with the Fund's investment objective and
restrictions, the Fund may invest in the following instruments and may use the
following investment techniques:
MANAGEMENT OF AN INDEX FUND. The Fund is not managed according to
traditional methods of "active" investment management, which involve the buying
and selling of securities based upon economic, financial and market analysis and
investment judgment. Instead, the Fund utilizes a "passive" investment
approach, attempting to duplicate the investment performance of its benchmark
index through automated statistical analytic procedures.
US GOVERNMENT SECURITIES. US Government securities include US Treasury
bills, notes and bonds and other obligations issued or guaranteed as to interest
and principal by the US Government and its agencies or instrumentalities.
Obligations issued or guaranteed as to interest and principal by the US
Government, its agencies or instrumentalities include securities that are
supported by the full faith and credit of the United States Treasury, securities
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that are supported by the right of the issuer to borrow from the
United States Treasury, discretionary authority of the US Government agency or
instrumentality, and securities supported solely by the creditworthiness of the
issuer.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
banks and other financial institutions, such as broker-dealers. Under a
repurchase agreement, a Fund purchases securities from a financial institution
that agrees to repurchase the securities at the Fund's original purchase price
plus interest within a specified time (normally one business day). The Fund
will invest no more than 10% of its net assets (taken at current market value)
in repurchase agreements maturing in more than seven days. The Fund will limit
repurchase transactions to those member banks of the Federal Reserve System and
broker-dealers whose creditworthiness Adviser considers satisfactory. Should
the counterparty to a transaction fail financially, the Fund may encounter delay
and incur costs before being able to sell the securities. Further, the amount
realized upon the sale of the securities may be less than that necessary to
fully compensate the Fund.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse
repurchase agreements under the circumstances described in "Investment
Restrictions." Under a reverse repurchase agreement, the Fund sells portfolio
securities to a financial institution in return for cash in an amount equal
to a percentage of the portfolio securities' market value and agrees to
repurchase the securities at a future date at a prescribed repurchase price
equal to the amount of cash originally received plus interest on such amount.
The Fund retains the right to receive interest and principal payments with
respect to the securities while they are in the possession of the financial
institutions. Reverse repurchase agreements involve the risk of default by
the counterparty, which may adversely affect the Fund's ability to reacquire
the underlying securities.
FORWARD COMMITMENTS. The Fund may contract to purchase securities for a
fixed price at a future date beyond customary settlement time. When effecting
such transactions, cash or liquid high quality debt obligations held by the Fund
of a dollar amount sufficient to make payment for the portfolio securities to be
purchased will be segregated on the Fund's records at the trade date and
maintained until the transaction is settled. The failure of the other party to
the transaction to complete the transaction may cause the Fund to miss an
advantageous price or yield. The Fund bears the risk of price fluctuations
during the period between the trade and settlement dates.
WHEN-ISSUED TRANSACTIONS. The Fund may purchase securities on a when-
issued basis. In these transactions, the Fund purchases securities with payment
and delivery scheduled for a future time. Until settlement, the Fund segregates
cash and marketable high quality debt securities equal in value to their when-
issued commitments. Between the trade and settlement dates, the Fund bears the
risk of any fluctuation in the value of the securities. These transactions
involve the additional risk that the other party may fail to complete the
transaction and cause the Fund to miss a price or yield considered advantageous.
The Fund will engage in when-issued transactions only for the purpose of
acquiring portfolio securities consistent with its investment objective and
policies and not for investment leverage. The Fund will invest no more than 25%
of its net assets in when-issued securities.
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ILLIQUID SECURITIES. The Fund will invest no more than 15% of its net
assets in illiquid securities or securities that are not readily marketable,
including repurchase agreements and time deposits of more than seven days'
duration. In addition, the Fund will not invest more than 10% in securities of
issuers which may not be sold to the public without registration under the
Securities Act of 1933.
VARIABLE AMOUNT MASTER DEMAND NOTES. Variable amount master demand notes
are unsecured obligations that are redeemable upon demand and are typically
unrated. These instruments are issued pursuant to written agreements between
their issuers and holders. The agreements permit the holders to increase
(subject to an agreed maximum) and the holders and issuers to decrease the
principal amount of the notes, and specify that the rate of interest payable on
the principal fluctuates according to an agreed formula.
FOREIGN CURRENCY TRANSACTIONS. The Fund may engage in foreign currency
transactions as described below. The US dollar value of assets held by the Fund
may be affected favorably or unfavorably by changes in foreign currency exchange
rates and exchange control regulations, and the Fund may incur costs in
connection with conversions between various currencies. The Fund will engage in
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, through
forward and futures contracts to purchase or sell foreign currencies or by
purchasing and writing put and call options on foreign currencies. The Fund may
purchase and write these contracts for the purpose of protecting against
declines in the dollar value of foreign securities they hold and against
increases in the dollar cost of foreign securities they plan to acquire.
A forward foreign currency exchange contract is an obligation to purchase
or sell a specific currency at a future date, which may be any fixed number of
days from the date upon which the parties enter the contract, at a price set at
the time the contract is made. These contracts are traded directly between
currency traders (usually large commercial banks) and their customers. Foreign
currency futures contracts are traded on exchanges and are subject to procedures
and regulations applicable to other futures contracts. Forward foreign currency
exchange contracts and foreign currency futures contracts may protect the Fund
from uncertainty in foreign currency exchange rates, and may also limit
potential gains from favorable changes in such rates.
Put and call options on foreign currencies are traded on securities
exchanges, in the over-the-counter market, and privately among major recognized
dealers in such options. The Fund may purchase and write these options for the
purpose of protecting against declines in the dollar value of foreign securities
they hold and against increases in the dollar cost of foreign securities they
plan to acquire. If a rise is anticipated in the dollar value of a foreign
currency in which securities to be acquired are denominated, the increased cost
of such securities may be offset in whole or in part by purchasing calls or
writing puts on that foreign currency. If a decline in the dollar value of a
foreign currency is anticipated, the decline in value of portfolio securities
denominated in that currency may be offset in whole or in part by writing calls
or purchasing puts on that foreign currency. However, certain currency rate
fluctuations would cause the option to expire without being exercised, and
thereby cause the Fund to lose the premium it paid and its transaction costs.
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FUTURES CONTRACTS AND OPTIONS ON FUTURES. For hedging purposes, including
protecting the price or interest rate of securities that the Fund intends to
buy, the Fund may enter into futures contracts that relate to securities in
which it may directly invest and indices comprised of such securities and may
purchase and write call and put options on such contracts.
A financial futures contract is a contract to buy or sell a specified
quantity of financial instruments such as US Treasury bills, notes and bonds,
commercial paper and bank certificates of deposit or the cash value of a
financial instrument index at a specified future date at a price agreed upon
when the contract is made. A stock index futures contract is a contract to buy
or sell specified units of a stock index at a specified future date at a price
agreed upon when the contract is made. The value of a unit is based on the
current value of the contract index. Under such contracts no delivery of the
actual stocks making up the index takes place. Rather, upon expiration of the
contract, settlement is made by exchanging cash in an amount equal to the
difference between the contract price and the closing price of the index at
expiration, net of variation margin previously paid.
Substantially all futures contracts are closed out before settlement date
or called for cash settlement. A futures contract is closed out by buying or
selling an identical offsetting futures contract. Upon entering into a futures
contract, the Fund is required to deposit an initial margin with Custodian for
the benefit of the futures broker. The initial margin serves as a "good faith"
deposit that the Fund will honor their futures commitments. Subsequent payments
(called "variation margin") to and from the broker are made on a daily basis as
the price of the underlying investment fluctuates.
Options on futures contracts give the purchaser the right to assume a
position at a specified price in a futures contract at any time before
expiration of the option contract.
When trading futures contracts, the Fund will not commit more than 5% of
the market value of its total assets to initial margin deposits on futures and
premiums paid for options on futures.
OPTIONS ON SECURITIES AND SECURITIES INDICES. The Fund may write and
purchase covered put and call options on securities in which it may directly
invest. Option transactions of the Fund will be conducted so that the total
amount paid on premiums for all put and call options outstanding will not exceed
5% of the value of the Fund's total assets. Further, the Fund will not write a
put or call option or combination thereof if, as a result, the aggregate value
of all securities or collateral used to cover its outstanding options would
exceed 25% of the value of the Fund's total assets.
The Fund may purchase or sell options on securities indices that are
comprised of securities in which it may directly invest, subject to the
limitations set forth above and provided such options are traded on a national
securities exchange or in the over-the-counter market. Options on securities
indices are similar to options on securities except there is no transfer of a
security and settlement is in cash. A call option on a securities index grants
the purchaser of the call, for a premium paid to the seller, the right to
receive in cash an amount equal to the difference between the closing value of
the index and the exercise price of the option times a multiplier established by
the exchange upon which the option is traded.
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LENDING PORTFOLIO SECURITIES. The Fund may lend portfolio securities with
a value of up to 33-1/3% of its total assets. Such loans may be terminated at
any time. The Fund will receive cash or US Treasury bills, notes and bonds in
an amount equal to at least 100% of the current market value (on a daily marked-
to-market basis) of the loaned securities plus accrued interest. In a loan
transaction, as compensation for lending it securities, the Fund will receive a
legally determined portion of the dividends or interest accrued on the
securities held as collateral or, in the case of cash collateral, a portion of
the income from the investment of such cash. In addition, the Fund will receive
the amount of all dividends, interest and other distributions on the loaned
securities. However, the borrower has the right to vote the loaned securities.
The Fund will call loans to vote proxies if a material issue affecting the
investment is to be voted upon. Should the borrower of the securities fail
financially, the Fund may experience delays in recovering the securities or
exercising its rights in the collateral. Loans are made only to borrowers that
are deemed by Adviser to be of good financial standing. In a loan transaction,
the Fund will also bear the risk of any decline in value of securities acquired
with cash collateral. The Fund will minimize this risk by limiting the
investment of cash collateral to high quality instruments of short maturity.
CASH RESERVES. For the purpose of investing uncommitted cash balances or
to maintain liquidity to meet shareholder redemptions, the Fund may invest
temporarily and without limitation in high quality short-term fixed income
securities. These securities include obligations issued or guaranteed as to
principal and interest by the US Government, its agencies or instrumentalities
and repurchase agreements collateralized by these obligations, commercial paper,
bank certificates of deposit, bankers' acceptances and time deposits.
AMERICAN DEPOSITORY RECEIPTS. The Fund may invest in American Depository
Receipts (ADRs), convertible bonds and warrants. Investment in each of these
instruments will not exceed 5% of the Fund's total net assets during the coming
year. For a discussion of the risks associated with the use of ADRs, see "Risk
Factors - Foreign Investments." See the Statement of Additional Information for
a more detailed discussion of these instruments.
To the extent permitted under the 1940 Act and exemptive rules and orders
thereunder, the Fund may seek to achieve its investment objective by investing
solely in the shares of another investment company that has substantially
similar investment objectives and policies.
INVESTMENT RESTRICTIONS
The Fund has fundamental investment restrictions, which may be changed only
with the approval of a majority of the Fund's shareholders as defined in the
1940 Act. A more detailed discussion of the Fund's investment restrictions
appears in the Statement of Additional Information. Unless otherwise noted, the
fundamental restrictions apply at the time an investment is made. The Fund may
not:
1. Invest 25% or more of the value of its total assets in securities of
companies primarily engaged in any one industry (other than the US
Government, its agencies or instrumentalities). Concentration may
occur as a result of changes in the market value of portfolio
securities, but may not result from investment.
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Notwithstanding the foregoing general restrictions, the Fund will
concentrate in particular industries to the extent the underlying
indices concentrate in those industries.
2. Borrow money (including reverse repurchase agreements), except as a
temporary measure for extraordinary or emergency purposes or to
facilitate redemptions (not for leveraging or investment), provided
that borrowings do not exceed an amount equal to 33-1/3% of the
current value of the Fund's assets taken at market value, less
liabilities other than borrowings. If at any time a Fund's borrowings
exceed this limitation due to a decline in net assets, such borrowings
will within three days be reduced to the extent necessary to comply
with this limitation. A Fund will not purchase investments once
borrowed funds (including reverse repurchase agreements) exceed 5% of
its total assets.
3. Pledge, mortgage, or hypothecate its assets. However, a Fund may
pledge securities having a market value at the time of the pledge not
exceeding 33-1/3% of the value of the Fund's total assets to secure
permitted borrowings.
RISK FACTORS
FUTURES AND OPTIONS CONTRACTS. There are certain investment risks in using
futures contracts and options as a hedging technique. Such risks may include:
(1) the inability to close out a futures contract or option caused by the
nonexistence of a liquid secondary market; and (2) an imperfect correlation
between price movements of the futures contracts or option with price movements
of the portfolio securities or securities index subject to the hedge.
FOREIGN INVESTMENTS. Investment in securities of non-US issuers and
securities denominated in foreign currencies involve investment risks that are
different from those of US issuers, including: changes in currency rates;
uncertain future political, diplomatic and economic developments; possible
imposition of exchange controls or other governmental restrictions; less
publicly available information; lack of uniform accounting, auditing and
financial reporting standards, practices and requirements; lower trading volume,
less liquidity and more volatility for securities; less government regulation of
securities exchanges, brokers and listed companies; political or social
instability; and the possibility of expropriation or confiscatory taxation, each
of which could adversely affect investments in such securities. ADRs are
subject to all of the above risks, except the imposition of exchange controls
and currency fluctuations during the settlement period.
PORTFOLIO TURNOVER
Ordinarily, securities will be sold from the Fund only to reflect certain
changes in its benchmark index (including mergers or changes in the composition
of the index) or to accommodate cash flows into and out of the Fund while
maintaining the similarity of the Fund to the benchmark index. Accordingly, the
turnover rate for the Fund is not expected to exceed 50%, a generally lower
turnover rate than for most other investment companies.
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The Fund may effect portfolio transactions with or through State Street
Brokerage Services, Inc. an affiliate of the Adviser, when the Adviser
determines that the Fund will receive competitive execution, price and
commissions.
DIVIDENDS AND DISTRIBUTIONS
The Board of Trustees intends to declare and pay on Fund shares dividends
quarterly from net investment income. The Board of Trustees intends to declare
distributions annually from net capital gains, if any, generally in mid-October.
An additional distribution may be declared and paid in December, if required,
for the Fund to avoid imposition of a 4% federal excise tax on undistributed
capital gains.
Dividends declared in October, November or December and payable to
shareholders of record in such months will be deemed to have been paid by the
Fund and received by shareholders on December 31 of that year if the dividend is
paid prior to February 1 of the following year.
Income dividends and capital gains distributions will be paid in additional
shares at their net asset value on the record date unless the shareholder has
elected to receive them in cash. Such election may be made by giving 10 days'
written notice to Transfer Agent.
Any dividend or capital gain distribution paid by the Fund shortly after a
purchase of shares will reduce the per share net asset value of the Fund by the
amount of the dividend or distribution. In effect, the payment will represent a
return of capital to the shareholder. However, the shareholder will be subject
to taxes with respect to such dividend or distribution.
TAXES
The Fund intends to qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code, as amended. As a regulated
investment company, the Fund will not be subject to federal income taxes to the
extent it distributes its net investment income and capital gain net income
(capital gains in excess of capital losses) to its shareholders. The Board
intends to distribute each year substantially all of the Fund's net investment
income and capital gain net income.
Dividends from net investment income and distributions of net short-term
capital gains are taxable to shareholders as ordinary income under federal
income tax laws whether paid in cash or in additional shares. Distributions
from net long-term capital gains are taxable as long-term capital gains
regardless of the length of time a shareholder has held such shares and whether
paid in cash or additional shares.
Dividends and distributions may also be subject to state or local taxes.
Depending on the state tax rules pertaining to a shareholder, a portion of the
dividends paid by the Fund
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attributable to direct obligations of the US Treasury and certain agencies may
be exempt from state and local taxes.
The sale of Fund shares by a shareholder is a taxable event and may result
in capital gain or loss. A capital gain or loss may be realized from an
ordinary redemption of shares or an exchange of shares between two mutual funds
(or two series of portfolios of a mutual fund). Any loss incurred on the sale
or exchange of Fund shares held for one year or more will be treated as a long-
term capital loss to the extent of capital gain dividends received with respect
to such shares.
Shareholders will be notified after each calendar year of the amounts of
income dividends and net capital gains distributions and the percentage of the
Fund's income attributable to US Treasury and agency obligations. The Fund
is required to withhold a legally determined portion of all taxable
dividends, distributions, and redemption proceeds payable to any noncorporate
shareholder that does not provide the Fund with the shareholder's correct
taxpayer identification number or certification that the shareholder is not
subject to backup withholding.
Investment income received by the Fund from sources within foreign
countries may be subject to foreign income taxes withheld at the source. If
more than 50% in value of the Fund's total assets at the close of any taxable
year consists of securities of foreign corporations, the Fund may file an
election with the Internal Revenue Service (the "Foreign Election") that would
permit shareholders to take a credit (or a deduction) for foreign income taxes
paid by the Fund. If the Foreign Election is made, shareholders would include
in their gross income both dividends received from the Fund and foreign income
taxes paid by the Fund. Shareholders of the Fund would be entitled to treat the
foreign income taxes withheld as a credit against their United States federal
income taxes, subject to the limitations set forth in the Internal Revenue Code
with respect to the foreign tax credit generally. Alternatively, shareholders
could treat the foreign income taxes withheld as a deduction from gross income
in computing taxable income rather than as a tax credit. It is anticipated that
the Pacific Index Fund will qualify to make the Foreign Election; however, the
Fund cannot be certain that it will be eligible to make such an election or that
any particular shareholder will be eligible for the foreign tax credit.
The foregoing discussion is only a summary of certain federal income tax
issues generally affecting the Fund and its shareholders. Circumstances among
investors may vary and each investor is encouraged to discuss investment in the
Fund with the investor's tax adviser.
VALUATION OF FUND SHARES
NET ASSET VALUE PER SHARE. The Fund determines net asset value once each
business day as of the close of the regular trading session of the New York
Stock Exchange (ordinarily 4 p.m. Eastern time). A business day is one on which
the New York Stock Exchange is open for business. Net asset value per share is
computed by dividing the current value of the Fund's assets, less its
liabilities, by the number of shares of the Fund outstanding and rounding to the
nearest cent.
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VALUATION OF FUND SECURITIES. With the exceptions noted below, the Fund
values portfolio securities at market value. This generally means that equity
and fixed-income securities listed and traded principally on any national
securities exchange are valued on the basis of the last sale price or, lacking
any sales, at the closing bid price, on the primary exchange on which the
security is traded. United States equity and fixed income securities traded
principally over-the-counter and options are valued on the basis of the last
reported bid price. Futures contracts are valued on the basis of the last
reported sale price.
Because many fixed income securities do not trade each day, last sale or
bid prices are frequently not available. Fixed income securities therefore may
be valued using prices provided by a pricing service when such prices are
determined by Custodian to reflect the market value of such securities.
International securities traded on a national securities exchange are
valued on the basis of the last sale price. International securities traded
over-the-counter are valued on the basis of best bid or official bid, as
determined by the relevant securities exchange. In the absence of a last sale
or best or official bid price, such securities may be valued on the basis of
prices provided by a pricing service if those prices are believed to reflect the
market value of such securities.
Securities maturing within 60 days of the valuation date are valued at
amortized cost unless the Board determines that amortized cost does not
represent market value. The amortized cost valuation procedure initially prices
an instrument at its cost and thereafter assumes a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. While 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 a Fund would
receive if it sold the instrument.
The Fund values securities for which market quotations are not readily
available at fair value, as determined in good faith pursuant to procedures
established by the Board of Trustees.
PURCHASE OF FUND SHARES
MINIMUM INITIAL INVESTMENT AND ACCOUNT BALANCE. The Fund requires a
minimum initial investment of $1,000. The minimum account balance is $500. The
Fund reserves the right to reject any purchase order.
OFFERING DATES AND TIMES. Fund shares may be purchased on any business day
without a sales commission. All purchases must be made in US dollars. Purchase
orders in good form and payments for Fund shares must be received by the
Transfer Agent prior to 4:00 p.m. Eastern time to be effective on the date
received. The accompanying payment must be in federal funds or converted into
federal funds by the Transfer Agent before the purchase order can be accepted.
Purchase orders in good form are described below.
ORDER AND PAYMENT PROCEDURES. There are several ways to invest in the
Fund. The Fund requires a purchase order in good form which consists of a
completed and signed Account Registration and Investment Instruction Form
(Application) for each new account regardless of
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the investment method. For additional information, copies of forms or
questions, call Transfer Agent at (800) 647-7327, or write to Transfer Agent at:
State Street Bank and Trust Company, P.O. Box 8317, Boston, MA 02266-8317,
Attention: The Seven Seas Series International Pacific Index Fund.
FEDERAL FUNDS WIRE. An investor may purchase shares by wiring federal
funds to State Street Bank and Trust Company as Transfer Agent by:
1. Telephoning State Street Bank and Trust Company at (800) 647-7327 and
stating: (1) the investor's account registration number, address and
social security or tax identification number; (2) the amount being
wired; (3) the name of the wiring bank; (4) the name and telephone
number of the person at the wiring bank to be contacted in connection
with the order; and (5) that the funds should be invested in The Seven
Seas Series International Pacific Index Fund.
2. Instructing the wiring bank to wire federal funds to: State Street
Bank and Trust Company, Boston, MA (ABA #0110-00028), Attention:
The Seven Seas Series International Pacific Index Fund, Mutual Funds
Service Division (DDA #9904-631-0). The wire instructions should also
include the name in which the account is registered, the account
number, and the name of the Fund in which to be invested.
3. Completing the Application and forwarding it to Transfer Agent at the
above address.
MAIL. To purchase shares by mail, send a check or other negotiable bank
draft payable to: State Street Bank and Trust Company, P.O. Box 8317,
Boston, MA 02266-8317 Attention: The Seven Seas Series International
Pacific Index Fund. Certified checks are not necessary, but checks are
accepted subject to collection at full face value in United States funds and
must be drawn in United States dollars on a United States bank. Normally,
checks and drafts are converted to federal funds within two business days
following receipt of the check or draft. Initial investments should be
accompanied by a completed Application, and subsequent investments are to be
accompanied by the investor's account number.
THIRD PARTY TRANSACTIONS. Investors purchasing Fund shares through a
program of services offered by a financial intermediary, such as a bank, broker-
dealer, investment adviser or others, may be required to pay additional fees by
such intermediary. Investors should contact such intermediary for information
concerning what additional fees, if any, may be charged.
IN-KIND EXCHANGE OF SECURITIES. The Transfer Agent may, at its discretion,
permit investors to purchase shares through the exchange of securities they
hold. Any securities exchanged must meet the investment objective, policies and
limitations of the Fund, must have a readily ascertainable market value, must be
liquid and must not be subject to restrictions on resale. The market value of
any securities exchanged, plus any cash, must be at least $1 million. Shares
purchased in exchange for securities generally may not be redeemed or exchanged
until the transfer has settled -- usually within 15 days following the purchase
by exchange.
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The basis of the exchange will depend upon the relative net asset value of
the shares purchased and securities exchanged. Securities accepted by the Fund
will be valued in the same manner as the Fund values its assets. Any interest
earned on the securities following their delivery to the Transfer Agent and
prior to the exchange will be considered in valuing the securities. All
interest, dividends, subscription or other rights attached to the securities
become the property of the Fund, along with the securities.
EXCHANGE PRIVILEGE. Subject to the Fund's minimum investment
requirement, investors may exchange their Fund shares without charge for
shares of any other investment portfolio offered by Investment Company.
Shares are exchanged on the basis of relative net asset value per share.
Exchanges may be made: (1) by telephone if the registrations of the two
accounts are identical; or (2) in writing addressed to State Street Bank and
Trust Company, P.O. Box 8317, Boston, MA 02266-8317, Attention: The Seven
Seas Series International Pacific Index Fund. If shares of a Fund were
purchased by check, the shares must have been present in an account for 10
days before an exchange is made. The exchange privilege will only be
available in states where the exchange may legally be made, and may be
modified or terminated by the Funds upon 60 days' notice to shareholders.
REDEMPTION OF FUND SHARES
Fund shares may be redeemed on any business day at the net asset value next
determined after the receipt of a redemption request in proper form as described
below. Payment will be made as soon as possible (but will ordinarily not exceed
seven days) and will be mailed to the shareholder's address of record. Upon
request, redemption proceeds will be wire transferred to the shareholder's
account at a domestic commercial bank that is a member of the Federal Reserve
System. Although Investment Company does not currently charge a fee for this
service, Investment Company reserves the right to charge a fee for the cost of
wire-transferred redemptions of less than $1,000. Payment for redemption of
shares purchased by check may be withheld for up to 10 days after the date of
purchase to assure that such checks are honored.
EXPEDITED REDEMPTION. Shareholders may normally redeem Fund shares by
telephoning State Street Bank and Trust Company between 9:00 a.m. and 4:00 p.m.
Eastern time at (800) 647-7327, Attention: The Seven Seas Series International
Pacific Index Fund. Shareholders using the expedited redemption method must
complete the appropriate section on the Application. The Fund and the Transfer
Agent will employ reasonable procedures to confirm that instructions
communicated by telephone are properly authorized. The Fund and the Transfer
Agent will not be liable for executing telephone instructions that are deemed to
be authorized after following reasonable procedures. These procedures include
recording telephonic instructions, mailing to the shareholder a written
confirmation of the transaction, performing a personal identity test with
private information not likely to be known by other individuals, and restricting
mailing of redemptions to the shareholder's address of record. During periods
of drastic economic or market changes, shareholders using this method may
encounter delays. In such event, shareholders should consider using the mail
redemption procedure described below.
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MAIL. Redemption requests may be made in writing directly to State
Street Bank and Trust Company, P.O. Box 8317, Boston, MA 02266-8317,
Attention: The Seven Seas Series International Pacific Index Fund. The
redemption price will be the net asset value next determined after receipt by
State Street of all required documents in good order. "Good order" means
that the request must include the following:
1. A letter of instruction or a stock assignment stating that the shares
are to be redeemed out of The Seven Seas Series International Pacific
Index Fund and designating specifically the dollar amount to be
redeemed signed by all owners of the shares in the exact names in
which they appear on the account, together with a guarantee of the
signature of each owner by a bank, trust company or member of a
recognized stock exchange; and
2. Such other supporting legal documents, if required by applicable law
or Transfer Agent, in the case of estates, trusts, guardianships,
custodianships, corporations and pension and profit-sharing plans.
The Fund reserves the right to redeem the shares in any account with a
balance of less than $500 as a result of shareholder redemptions rather than
market value fluctuations. Before shares are redeemed to close an account, the
shareholder will be notified in writing and allowed 60 days to purchase
additional shares to meet the minimum account balance.
The Fund may pay any portion of the redemption amount in excess of $250,000
by a distribution in kind of readily marketable securities from the portfolio of
the Fund in lieu of cash. Investors will incur brokerage charges on the sale of
these portfolio securities. The Fund reserves the right to suspend the right of
redemption or postpone the date of payment if emergency conditions, as specified
in the 1940 Act or determined by the Securities and Exchange Commission, should
exist.
GENERAL MANAGEMENT
The Board of Trustees supervises the management, activities and affairs of
the Fund and has approved contracts with various financial organizations to
provide, among other services, day-to-day management required by the Fund.
ADVISORY AGREEMENT. The Investment Company employs State Street Bank and
Trust Company ("State Street" or "Adviser") to furnish investment services to
the Fund. State Street is one of the largest providers of securities processing
and recordkeeping services for US mutual funds and pension funds. State Street
is a wholly owned subsidiary of State Street Boston Corporation, a publicly held
bank holding company. State Street, with over $171.3 billion (US) under
management as of September 30, 1995, provides complete global investment
management services from offices in the United States, London, Sydney, Hong
Kong, Tokyo, Toronto, Luxembourg, Melbourne, Montreal, Paris, Dubai, Munich and
Brussels.
Adviser, subject to Board supervision, directs the investment of the Fund
in accordance with the Fund's investment objective, policies and restrictions.
The Fund's investment decisions
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are made by committee and no person is primarily responsible for making
recommendations to that committee. For these services, the Fund pays Adviser a
fee, calculated daily and paid monthly, that on an annual basis is equal to .50%
of the Fund's average daily net assets.
The Glass-Steagall Act prohibits a depository state chartered bank such as
Adviser from engaging in the business of issuing, underwriting, selling or
distributing certain securities. The activities of Adviser in informing its
customers of the Fund, performing investment and redemption services and
providing custodian, transfer, shareholder servicing, dividend disbursing and
investment advisory services may raise issues under these provisions. Adviser
has been advised by its counsel that its activities in connection with the Fund
are consistent with its statutory and regulatory obligations. THE SHARES
OFFERED BY THIS PROSPECTUS ARE NOT ENDORSED OR GUARANTEED BY STATE STREET OR ITS
AFFILIATES, ARE NOT DEPOSITS OR OBLIGATIONS OF STATE STREET OR ITS AFFILIATES,
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
Changes in federal or state statutes and regulations relating to the
permissible activities of banks and their affiliates, as well as judicial or
administrative decisions or interpretations of such or future statutes and
regulations, could prevent Adviser from continuing to perform all or a part of
the above services for its customers and/or the Funds. If Adviser were
prohibited from serving the Funds in any of its present capacities, the Board of
Trustees would seek an alternative provider(s) of such services. In such event,
changes in the operation of the Fund may occur. It is not expected by Adviser
that existing shareholders would suffer any adverse financial consequences (if
another adviser with equivalent abilities is found) as a result of any of these
occurrences.
State Street may from time to time have discretionary authority over
accounts which invest in Investment Company shares. These accounts include
accounts maintained for securities lending clients and accounts which permit the
use of Investment Company portfolios as short-term cash sweep investments.
Shares purchased for all discretionary accounts are held of record by State
Street, who retains voting control of such shares. As of November 30, 1995,
State Street held of record 36% of the issued and outstanding shares of
Investment Company in connection with its discretionary accounts. Consequently,
State Street may be deemed to be a controlling person of Investment Company for
purposes of the 1940 Act.
Under the Adviser's Code of Ethics, the Adviser's employees in Boston where
investment management operations are conducted are only permitted to engage in
personal securities transactions which do not involve securities which the
Adviser had recommended for purchase or sale, or purchased or sold, on behalf of
its clients. Such employees must report their personal securities transactions
quarterly and supply broker confirmations to the Adviser.
ADMINISTRATION AGREEMENT. Frank Russell Investment Management Company
("Administrator") serves as administrator to the Fund. Administrator currently
serves as investment manager and administrator to 22 mutual funds with assets
of $7.3 billion as of October 31, 1995, and acts as administrator to 17 mutual
funds, including the Fund, with assets of $7.2 billion as of October 31, 1995.
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<PAGE>
Pursuant to the Administration Agreement with Investment Company,
Administrator will: (1) supervise all aspects of the Funds' operations; (2)
provide the Funds with administrative and clerical services, including the
maintenance of certain of the Funds' books and records; (3) arrange the periodic
updating of the Funds' prospectuses and any supplements thereto; (4) provide
proxy materials and reports to Fund shareholders and the Securities and Exchange
Commission; and (5) provide the Funds with adequate office space and all
necessary office equipment and services, including telephone service, heat,
utilities, stationery supplies and similar items. For these services, the
Pacific Index Fund pays Administrator a fee that on an annual basis is equal to
the following percentages of each Fund's average daily net assets: $0 to and
including $500 million -- .07%; over $500 million to and including $1 billion --
.06%; over $1 billion to and including $1.5 billion -- .04%; and over $1.5
billion -- .03%. The percentage of the fee paid by a particular Fund is equal
to the percentage of average aggregate daily net assets that are attributable to
that Fund. Administrator will also receive reimbursement of expenses it incurs
in connection with establishing new investment portfolios. Further, the
administration fee paid by the Investment Company will be reduced by the sum of
certain distribution related expenses (up to a maximum of 15% of the asset-based
administration fee listed above).
Administrator also provides administrative services in connection with the
registration of shares of Investment Company with those states in which its
shares are offered or sold. Compensation for such services is on a "time spent"
basis. Investment Company will pay all registration, exemptive application,
renewal and related fees and reasonable out-of-pocket expenses.
Officers and employees of the Administrator and Distributor are permitted
to engage in personal securities transactions subject to restrictions and
procedures set forth in the Confidentiality Manual and Code of Ethics adopted by
the Investment Company, Administrator and Distributor. Such restrictions and
procedures include substantially all of the recommendations of the Advisory
Group of the Investment Company Institute and comply with Securities and
Exchange Commission rules and regulations.
DISTRIBUTION SERVICES AND SHAREHOLDER SERVICING ARRANGEMENTS. Pursuant to
the Distribution Agreement with Investment Company, Russell Fund Distributors,
Inc. ("Distributor"), a wholly owned subsidiary of Administrator, serves as
distributor for all Fund shares.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 (the
"Plan") under the 1940 Act. The purpose of the Plan is to provide for the
payment of certain Investment Company distribution and shareholder servicing
expenses. Under the Plan, Distributor will be reimbursed in an amount up to
.25% of the Fund's average annual net assets for distribution-related and
shareholder servicing expenses. Payments under the Plan will be made to
Distributor to finance activity which is intended to result in the sale and
retention of Fund shares including: (1) the costs of prospectuses, reports to
shareholders and sales literature; (2) advertising; and (3) expenses incurred in
connection with the promotion and sale of Fund shares, including Distributor's
overhead expenses for rent, office supplies, equipment, travel, communication,
compensation and benefits of sales personnel.
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<PAGE>
Under the Plan, the Fund may also enter into agreements ("Service
Agreements") with financial institutions, which may include Adviser ("Service
Organizations"), to provide shareholder servicing with respect to Fund shares
held by or for the customers of the Service Organizations. Under the Service
Agreements, the Service Organizations may provide various services for such
customers including: answering inquiries regarding the Fund; assisting customers
in changing dividend options, account designations and addresses; performing
subaccounting for such customers; establishing and maintaining customer accounts
and records; processing purchase and redemption transactions; providing periodic
statements showing customers' account balances and integrating such statements
with those of other transactions and balances in the customers' other accounts
serviced by the Service Organizations; arranging for bank wires transferring
customers' funds; and such other services as the customers may request in
connection with the Fund, to the extent permitted by applicable statute, rule or
regulation. Service Organizations may receive from the Fund, for shareholder
servicing, monthly fees at a rate that shall not exceed .20% per annum of the
average daily net asset value of the Fund's shares owned by or for shareholders
with whom the Service Organization has a servicing relationship. Banks and
other financial service firms may be subject to various state laws, and may be
required to register as dealers pursuant to state law.
Investment Company has entered into Service Agreements with Adviser,
State Street Brokerage Services, Inc. ("SSBSI"), and Adviser's Metropolitan
Division of Commercial Banking ("Commercial Banking") to obtain the
services described above with respect to Fund shares held by or for
customers. In return for these services, Investment Company pays Adviser a
fee in an amount that per annum is equal to .025%, .175% and .175% of the
average daily value of all Fund shares held by or for customers of Adviser,
SSBSI, and Commercial Banking, respectively.
Payments to the Distributor, as well as payments to Service Organizations
from the Fund are not permitted by the Plan to exceed .25% of the Fund's average
net asset value per year. Any payments that are required to be made by the
Distribution Agreement and any Service Agreement but could not be made because
of the .25% limitation may be carried forward and paid in subsequent years so
long as the Plan is in effect. A Fund's liability for any such expenses carried
forward shall terminate at the end of two years following the year in which the
expenditure was incurred. Service Organizations will be responsible for prompt
transmission of purchase and redemption orders and may charge fees for their
services.
FUND EXPENSES
The Fund will pay all of their expenses other than those expressly assumed
by Adviser and Administrator. The principal expenses of the Fund are the annual
advisory fee payable to Adviser and distribution and shareholder servicing
expenses. Other expenses include: (1) amortization of deferred organizational
costs; (2) taxes, if any; (3) expenses for legal, auditing and financial
accounting services; (4) expense of preparing (including typesetting, printing
and mailing) reports, prospectuses and notices to existing shareholders;
(5) administrative fees; (6) custodian fees; (7) expense of issuing and
redeeming Fund shares; (8) the cost of registering Fund shares under federal and
state laws; (9) shareholder meetings and related proxy solicitation expenses;
(10) the fees, travel expenses and other out-of-pocket expenses of Trustees who
are not affiliated with Adviser or any of its affiliates; (11) insurance,
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interest, brokerage and litigation costs; (12) extraordinary expenses as may
arise, including expenses incurred in connection with litigation proceedings and
claims and the legal obligations of Investment Company to indemnify its
Trustees, officers, employees, shareholders, distributors and agents; and
(13) other expenses properly payable by the Fund.
PERFORMANCE CALCULATIONS
From time to time the Fund may advertise its "total return." The total
return of a Fund refers to the average annual compounded rates of return from a
hypothetical investment in the Fund over one-, five- and ten-year periods or for
the life of the Fund (as stated in the advertisement), assuming the reinvestment
of all dividend and capital gains distributions.
Comparative performance information may be used from time to time in
advertising or marketing Fund shares, including data from Lipper Analytical
Services, Inc., Wall Street Journal Score Card, S&P 500 Index, S&P Midcap Index,
MSCI Pacific Index or other industry publications, business periodicals, rating
services and market indices. The Fund may also advertise nonstandardized
performance information which is for periods in addition to those required to be
presented.
Total return and other performance figures are based on historical earnings
and are not indications of future performance.
ADDITIONAL INFORMATION
CUSTODIAN, TRANSFER AGENT AND INDEPENDENT ACCOUNTANTS. State Street holds
all portfolio securities and cash assets of the Fund, provides portfolio
recordkeeping services and serves as the Fund's transfer agent ("Transfer
Agent") and custodian ("Custodian"). State Street is authorized to deposit
securities in securities depositories or to use the services of subcustodians.
State Street has no responsibility for the supervision and management of the
Fund except as investment adviser. Coopers & Lybrand L.L.P., Boston,
Massachusetts, is Investment Company's independent accountants.
REPORTS TO SHAREHOLDERS AND SHAREHOLDER INQUIRIES. Shareholders will
receive an unaudited semiannual financial statement and an annual financial
statement audited by Investment Company's independent accountants. Shareholder
inquiries regarding the Prospectus and financial statements may be made by
calling Distributor at (617) 654-6089. Inquiries regarding shareholder balances
may be made by calling the Transfer Agent at (800) 647-7327.
ORGANIZATION, CAPITALIZATION AND VOTING. Investment Company was organized
as a Massachusetts business trust on October 3, 1987, and operates under a First
Amended and Restated Master Trust Agreement dated October 13, 1993, as amended.
Investment Company issues shares divisible into an unlimited number of
series (or funds), each of which is a separate trust under Massachusetts law.
The Pacific Index Fund is one such series.
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<PAGE>
Fund shares represent an equal proportionate interest in the Fund, have a
par value of $.001 per share and are entitled to such relative rights and
preferences and dividends and distributions earned on the assets belonging to
the Fund as may be declared by the Board of Trustees. Fund shares are fully
paid and nonassessable by Investment Company and have no preemptive rights.
Each Fund share has one vote. There are no cumulative voting rights.
There is no annual meeting of shareholders, but special meetings may be held.
On any matter that affects only a particular investment fund, only shareholders
of that fund vote unless otherwise required by the 1940 Act or the Master Trust
Agreement. The Trustees hold office for the life of the Trust. A Trustee may
resign or retire, and a Trustee may be removed at any time by a vote of two-
thirds of the Investment Company shares or by a vote of a majority of the
Trustees. The Trustees shall promptly call and give notice of a meeting of
shareholders for the purpose of voting upon removal of any Trustee when
requested to do so in writing by holders of not less than 10% of the shares then
outstanding. A vacancy on the Board of Trustees may be filled by the vote of a
majority of the remaining Trustees, provided that immediately thereafter at
least two-thirds of the Trustees have been elected by shareholders.
Investment Company does not issue share certificates for the Fund.
Transfer Agent sends Fund shareholders statements concurrent with any
transaction activity, confirming all investments in or redemptions from their
accounts. Each statement also sets forth the balance of shares held in the
account.
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THE SEVEN SEAS SERIES FUND
Two International Place, 35th Floor
Boston, Massachusetts 02110
INVESTMENT ADVISER, CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
DISTRIBUTOR
Russell Fund Distributors, Inc.
Two International Place, 35th Floor
Boston, Massachusetts 02110
ADMINISTRATOR
Frank Russell Investment Management Company
909 A Street
Tacoma, Washington 98402
LEGAL COUNSEL
Goodwin, Procter & Hoar
Exchange Place
Boston, Massachusetts 02109
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
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<PAGE>
Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
THE SEVEN SEAS SERIES FUND
Two International Place, 35th Floor
Boston, Massachusetts 02110
(617) 654-6089
STATEMENT OF ADDITIONAL INFORMATION
MONEY MARKET FUNDS
CLASS A SHARES
DECEMBER 29, 1995
The Seven Seas Series Fund ("Investment Company") is a registered open-end
investment company organized as a Massachusetts business trust offering shares
of beneficial interest in separate investment portfolios, including those listed
below, each of which is referred to as a "Fund" (collectively, the "Funds"). In
addition, each series of the Investment Company is diversified as defined under
the Investment Company Act of 1940, as amended (the "1940 Act").
THE SEVEN SEAS SERIES MONEY MARKET FUND ("MONEY MARKET FUND")
THE SEVEN SEAS SERIES US GOVERNMENT MONEY MARKET FUND ("GOVERNMENT MONEY
MARKET FUND")
This Statement of Additional Information supplements or describes in
greater detail the Investment Company and the Funds noted above as contained in
the Funds' Prospectuses relating to Class A shares, dated December 29, 1995.
This Statement is not a Prospectus and should be read in conjunction with the
Funds' Prospectus, which may be obtained by telephoning or writing Investment
Company at the number or address shown above.
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TABLE OF CONTENTS
Page
----
STRUCTURE AND GOVERNANCE . . . . . . . . . . . . . . . . . . . . . . . . . 3
Organization and Business History . . . . . . . . . . . . . . . . . . 3
Shareholder Meetings. . . . . . . . . . . . . . . . . . . . . . . . . 4
Controlling Shareholders. . . . . . . . . . . . . . . . . . . . . . . 4
Principal Shareholders. . . . . . . . . . . . . . . . . . . . . . . . 5
Trustees and Officers . . . . . . . . . . . . . . . . . . . . . . . . 5
OPERATION OF INVESTMENT COMPANY. . . . . . . . . . . . . . . . . . . . . . 7
Service Providers . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Administrator . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Custodian and Transfer Agent. . . . . . . . . . . . . . . . . . . . . 8
Distribution Plan . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Federal Law Affecting State Street. . . . . . . . . . . . . . . . . . 9
Valuation of Fund Shares. . . . . . . . . . . . . . . . . . . . . . . 9
Brokerage Practices . . . . . . . . . . . . . . . . . . . . . . . . . 10
Yield and Total Return Quotations . . . . . . . . . . . . . . . . . . 11
INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . 12
Investment Policies . . . . . . . . . . . . . . . . . . . . . . . . . 14
Ratings of Debt Instruments . . . . . . . . . . . . . . . . . . . . . 20
Ratings of Commercial Paper . . . . . . . . . . . . . . . . . . . . . 21
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
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STRUCTURE AND GOVERNANCE
ORGANIZATION AND BUSINESS HISTORY. Investment Company was organized as a
Massachusetts business trust on October 3, 1987, and operates under a First
Amended and Restated Master Trust Agreement, dated October 13, 1993, as amended.
Investment Company is authorized to issue shares of beneficial interest, par
value $.001 per share, which may be divided into one or more series, each of
which evidences pro rata ownership interest in a different investment portfolio,
or "Fund." The Money Market and US Government Money Market Funds are two such
investment portfolios. The Trustees may create additional Funds at any time
without shareholder approval.
As of the date of this Statement of Additional Information, Investment
Company is comprised of the following investment portfolios, each of which
commenced operations on the date set forth opposite the portfolio's name:
--------------------------------------------------------------------------
The Seven Seas Series Money Market Fund May 2, 1988
--------------------------------------------------------------------------
The Seven Seas Series US Government Money Market Fund March 1, 1991
--------------------------------------------------------------------------
The Seven Seas Series US Treasury Money Market Fund December 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series US Treasury Obligations Fund *
--------------------------------------------------------------------------
The Seven Seas Series Prime Money Market Fund February 22, 1994
--------------------------------------------------------------------------
The Seven Seas Series Yield Plus Fund November 9, 1992
--------------------------------------------------------------------------
The Seven Seas Series Tax Free Money Market Fund December 1, 1994
--------------------------------------------------------------------------
The Seven Seas Series Intermediate Fund September 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series Bond Market Fund *
--------------------------------------------------------------------------
The Seven Seas Series Growth and Income Fund September 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series S&P 500 Index Fund December 30, 1992
--------------------------------------------------------------------------
The Seven Seas Series Small Cap Fund July 1, 1992
--------------------------------------------------------------------------
The Seven Seas Series Matrix Equity Fund May 4, 1992
--------------------------------------------------------------------------
The Seven Seas Series Active International Fund March 7, 1995
--------------------------------------------------------------------------
The Seven Seas Series International Pacific Index Fund *
--------------------------------------------------------------------------
The Seven Seas Series Emerging Markets Fund March 1, 1994
--------------------------------------------------------------------------
The Seven Seas Series Real Estate Equity Fund *
--------------------------------------------------------------------------
-----------
*As of the date of this Statement of Additional Information, these
portfolios have not commenced operations.
Prospectuses for these investment portfolios may be obtained by calling
Investment Company's distributor, Russell Fund Distributors, Inc., at (617) 654-
6089.
Investment Company is authorized to divide shares of any series into two or
more classes of shares. The shares of each Fund may have such rights and
preferences as the Trustees may establish from time to time, including the right
of redemption (including the price, manner and terms of redemption), special and
relative rights as to dividends and distributions, liquidation rights, sinking
or purchase fund provisions and conditions under which any Fund may have
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<PAGE>
separate voting rights or no voting rights. Each class of shares of a Fund is
entitled to the same rights and privileges as all other classes of that Fund,
except that each class bears the expenses associated with the distribution and
shareholder servicing arrangements of that class, as well as other expenses
attributable to the class and unrelated to the management of the Fund's
portfolio securities. Shares of the Money Market, US Government Money Market
and Tax Free Money Market Funds are divided into Classes A, B and C.
Any amendment to the Master Trust Agreement that would materially and
adversely affect shareholders of Investment Company as a whole, or shareholders
of a particular Fund, must be approved by the holders of a majority of the
shares of Investment Company or the Fund, respectively. All other amendments
may be effected by Investment Company's Board of Trustees.
Under certain unlikely circumstances, and as is the case with any
Massachusetts business trust, a shareholder of a Fund may be held personally
liable for the obligations of a Fund. The Master Trust Agreement provides that
shareholders shall not be subject to any personal liability for the acts or
obligations of a Fund and that every written agreement, obligation, or other
undertaking of the Fund shall contain a provision to the effect that the
shareholders are not personally liable thereunder. The Master Trust Agreement
also provides that the Fund shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Fund and satisfy
any judgment thereon. Thus, the risk to shareholders of incurring financial
loss beyond their investments is limited to circumstances in which the Fund
itself would be unable to meet its obligations.
SHAREHOLDER MEETINGS. Investment Company will not have an Annual Meeting
of Shareholders. Special Meetings may be convened: (1) by the Board of
Trustees; (2) upon written request to the Board by the holders of at least 10%
of the outstanding shares; or (3) upon the Board's failure to honor the
shareholders' request described above, by holders of at least 10% of the
outstanding shares giving notice of the special meeting to the shareholders.
CONTROLLING SHAREHOLDERS. The Trustees have the authority and
responsibility to manage the business of Investment Company. Trustees hold
office until they resign or are removed by, in substance, a vote of two-thirds
of Investment Company shares outstanding. However, in connection with State
Street Bank and Trust Company's ("State Street") securities lending program and
investment accounts over which State Street has discretionary authority, State
Street holds certain collateral on behalf of its securities lending clients to
secure the return of loaned securities. Such collateral may be invested in
Investment Company shares from time to time. Shares representing such
investments are held of record by State Street, who retains voting control of
such shares. As of November 30, 1995 , State Street held beneficially and of
record 36% of Investment Company's shares in connection with various lending
portfolios and, consequently, may be deemed to be a controlling person of
Investment Company for purposes of the 1940 Act. State Street also acts as
Investment Company's investment adviser, transfer agent and custodian.
Frank Russell Investment Management Company ("Administrator"), the
Investment Company's administrator, will be the sole shareholder of certain
series of Investment Company
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until such time as such series have public shareholders and therefore
Administrator may be deemed to be a controlling person for the purposes of the
1940 Act.
PRINCIPAL SHAREHOLDERS. As of November 30, 1995, the following
shareholders owned of record 5% or more of the issued and outstanding shares of
Class A of each Fund:
Money Market Fund:
- BellSouth Pension Trust UKCF, 1155 Peachtree St. NE, Atlanta, GA
30367--5%.
Government Money Market Fund:
- State Street Bank and Trust Company, Newport Office Park, 108 Myrtle
Street AH3, North Quincy, MA 02171--9%;
- PRU Welfare Union Fixed PFIA, Two Concourse Parkway Suite 500,
Atlanta, GA 30328--8%;
- Algemeenburgerlijk Pension Fund, One Enterprise Drive, North Quincy,
MA 02171--7%; and
- Biogen, Inc., 14 Cambridge Center, Cambridge, MA 02142--6%.
The Trustees and officers of Investment Company, as a group, own less than
1% of Investment Company's voting securities.
TRUSTEES AND OFFICERS. The Board of Trustees is responsible for overseeing
generally the operation of the Funds. The officers, all of whom are employed
by, and are officers of, Administrator or its affiliates, are responsible for
the day-to-day management and administration of the Funds' operations.
Trustees who are not officers or employees of State Street or its
affiliates are paid an annual fee and are reimbursed for travel and other
expenses they incur in attending Board meetings. Investment Company's officers
and employees are paid by Administrator or its affiliates.
The following lists Investment Company's Trustees and officers, their
positions with Investment Company, their present and principal occupations
during the past five years and the mailing addresses of Trustees who are not
affiliated with Investment Company. The mailing address for all Trustees and
officers affiliated with Investment Company is The Seven Seas Series Fund, 909 A
Street, Tacoma, WA 98402.
An asterisk (*) indicates that a Trustee is an "interested person" of the
Investment Company, as defined in the 1940 Act.
*LYNN L. ANDERSON, Trustee, Chairman of the Board, President and Fund
Treasurer. Chairman of the Board and Chief Executive Officer, Frank Russell
Investment Management Company and Russell Fund Distributors, Inc.; Director,
President and Chief Executive Officer, Frank Russell Investment Company and
Frank Russell Trust Company; Director and
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<PAGE>
President, Russell Insurance Funds; Director and Chairman, Frank Russell Company
(Delaware); Director, Frank Russell Investments (Ireland) Limited and Frank
Russell Investment Company plc.
WILLIAM L. MARSHALL, Trustee. 33 West Court Street, Doylestown, PA 18901.
Chief Executive Officer and President, Wm. L. Marshall Associates, Inc. (a
registered investment adviser and provider of financial and related consulting
services); Certified Financial Planner; Member, Registry of Financial Planning
Practitioners; and Advisory Committee, International Association for Financial
Planning Broker-Dealer Program. Member, Institute of Certified Financial
Planners. Registered for Securities with FSC Securities Corp., Marietta,
Georgia.
*STEVEN J. MASTROVICH, Trustee. 1 Financial Center, Boston, MA 02111.
Partner, Brown, Rudnick, Freed and Gesmer (law firm). 1990 to 1994, Partner,
Warner & Stackpole (law firm).
PATRICK J. RILEY, Trustee. 21 Custom House Street, Boston, MA 02110.
Partner, Riley, Burke & Donahue (law firm).
RICHARD D. SHIRK, Trustee. 3350 Peachtree Road, N.E., Atlanta, GA 30326.
President and Chief Executive Officer, Blue Cross/Blue Shield of Georgia. 1990
to 1992, President, Champions Group Resources--Business Management and Employee
Benefits Consulting; 1990, Senior Vice President, Employee Benefits Division,
Cigna Corporation (providing and insuring group life, health and disability
employee benefit products and services); from 1986 to 1990, Senior Vice
President, EQUICOR-Equitable HCA Corporation (providing and insuring group life,
health and disability employee benefit products and services).
*BRUCE D. TABER, Trustee. 26 Round Top Road, Boxford, MA 01921.
President, A.B. Reed, Inc. - Engineers, Architects, Planners. Prior to that,
Vice President, Instrumentation and Controls, A.B. Reed., Inc.
HENRY W. TODD, Trustee. 111 Commerce Drive, Montgomeryville, PA 18936.
President and Director, Zink & Triest Co., Inc. (dealer in vanilla flavor
materials); Director, A.M. Todd Co., and Flavorite Laboratories.
J. DAVID GRISWOLD, Vice President and Secretary. Assistant Secretary,
Associate General Counsel, Chief Compliance Officer, Frank Russell Investment
Management Company, Russell Fund Distributors, Inc. and Frank Russell Capital
Inc.; Associate General Counsel and Assistant Secretary, Frank Russell Company;
Associate General Counsel, Assistant Secretary and Compliance Officer, Russell
Fiduciary Services Company; Director, Secretary, Associate General Counsel and
Chief Compliance Officer, Frank Russell Securities, Inc.; Secretary, Frank
Russell Canada Limited/Limitee.
KENNETH W. LAMB, Assistant Secretary, Assistant Treasurer and Principal
Accounting Officer. Manager - Funds Administration, Frank Russell Investment
Management
6
<PAGE>
Company since 1994. Prior to that, Senior Audit Manager with Knight, Vale &
Gregory since 1982.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
TRUSTEE COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------
Aggregate Pension or Estimated Annual Total Compensation
Compensation Retirement Benefits Upon From Investment
from Benefits Accrued Retirement Company Paid to
Trustee Investment as part of Trustees
Company Investment
Company
Expenses
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lynn L. Anderson $0 $0 $0 $0
- -------------------------------------------------------------------------------------------------------
William L. Marshall $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Steven J. Mastrovich $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Patrick J. Riley $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Richard D. Shirk $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Bruce D. Taber $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Henry W. Todd $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
</TABLE>
OPERATION OF INVESTMENT COMPANY
SERVICE PROVIDERS. Most of the Funds' necessary day-to-day operations are
performed by separate business organizations under contract to Investment
Company. The principal service providers are:
Investment Adviser, Custodian
and Transfer Agent: State Street Bank and Trust Company
Administrator: Frank Russell Investment
Management Company
Distributor: Russell Fund Distributors, Inc.
Independent Accountants: Coopers & Lybrand, L.L.P.
ADVISER. State Street Bank and Trust Company ("State Street" or "Adviser")
serves as the Funds' investment adviser pursuant to an Advisory Agreement dated
April 12, 1988 ("Advisory Agreement"). State Street Bank and Trust Company is a
wholly owned subsidiary of State Street Boston Corporation, a publicly held bank
holding company. State Street's mailing address is 225 Franklin Street, Boston,
MA 02110.
Under the Advisory Agreement, Adviser directs the Funds' investments in
accordance with their investment objectives, policies and limitations. For
these services, the Funds pay a fee to Adviser at the rates stated in the
Prospectus. The Money Market Fund accrued expenses to Adviser of $6,981,114 in
fiscal 1995, $7,225,807 in fiscal 1994, and $9,129,038 in fiscal 1993. Adviser
waived Advisory fees of $1,689,778 in fiscal 1993. The Government Money Market
7
<PAGE>
Fund accrued expenses to Adviser of $970,313 in fiscal 1995, $748,629 in fiscal
1994, and $339,636 in fiscal 1993. In fiscal 1994 and fiscal 1993, Adviser
voluntarily agreed to reimburse the Government Money Market Fund for all
expenses in excess of .38% of average daily net assets on an annual basis, which
amounted to $41,975 and $94,854 for the periods ended August 31, 1993 and 1994,
respectively.
The Advisory Agreement will continue from year to year provided that a
majority of the Trustees who are not interested persons of the Funds and either
a majority of all Trustees or a majority of the shareholders of each Fund
approve its continuance. The Agreement may be terminated by Adviser or a Fund
without penalty upon sixty days' notice and will terminate automatically upon
its assignment.
ADMINISTRATOR. Frank Russell Investment Management Company
("Administrator") serves as the Funds' administrator, pursuant to an
Administration Agreement dated April 12, 1988 ("Administration Agreement"). A
description of the services provided under the Administration Agreement and the
basis for computing fees for such services is provided in the Funds'
Prospectuses. The Money Market Fund accrued expenses to Administrator of
$827,164 in fiscal 1995, $856,897 in fiscal 1994, and $1,330,910 in fiscal 1993.
The Government Money Market Fund accrued expenses to Administrator of $113,825
in fiscal 1995, $88,242 in fiscal 1994, and $49,231 in fiscal 1993.
The Administration Agreement will continue from year to year provided that
a majority of the Trustees and a majority of the Trustees who are not interested
persons of the Funds and who have no direct or indirect financial interest in
the operation of the Distribution Plan described below or the Administration
Agreement approve its continuance. The Agreement may be terminated by
Administrator or any Fund without penalty upon sixty days' notice and will
terminate automatically upon its assignment.
Administrator is a wholly owned subsidiary of Frank Russell Company. Frank
Russell Company was founded in 1936 and has provided comprehensive asset
management consulting services since 1969 for institutional pools of investment
assets, principally those of large corporate employee benefit plans. Frank
Russell Company and its affiliates have offices in Tacoma, Seattle, New York
City, Toronto, London, Tokyo, Sydney, Paris, Zurich and Auckland, and have
approximately 1,000 officers and employees. Administrator's and Frank Russell
Company's mailing address is 909 A Street, Tacoma, WA 98402.
DISTRIBUTOR. Russell Fund Distributors, Inc. ("Distributor") serves as the
distributor of Fund shares pursuant to a Distribution Agreement dated April 12,
1988 ("Distribution Agreement"). Distributor is a wholly owned subsidiary of
Administrator. Distributor's mailing address is Two International Place, 35th
Floor, Boston, MA 02110.
CUSTODIAN AND TRANSFER AGENT. State Street serves as the custodian
("Custodian") and transfer agent ("Transfer Agent") for Investment Company.
State Street also provides the basic portfolio recordkeeping required by
Investment Company for regulatory and financial reporting purposes. For these
services, State Street is paid an annual fee in accordance with the following:
8
<PAGE>
custody services--a fee payable monthly on a pro rata basis, based on the
following percentages of average daily net assets of each Fund: $0 up to
$1.5 billion--0.02%, over $1.5 billion--0.015% (for purposes of calculating the
break point, the assets of all domestic Investment Portfolios are aggregated);
securities transaction charges from $8.00 to $25.00 per transaction; Eurodollar
transaction fees ranging from $110.00 to $125.00 per transaction; monthly
pricing fees of $375.00 per Investment Portfolio and from $6.00 to $16.00 per
security, depending on the type of instrument and the pricing service used;
transfer agent services of $2.00 per shareholder transaction; a multiple class
fee of $18,000 per year for each additional class of shares; and yield
calculation fees of $350.00 per non-money market portfolio per year. State
Street is reimbursed by each Fund for supplying certain out-of-pocket expenses
including postage, transfer fees, stamp duties, taxes, wire fees, telexes, and
freight.
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand L.L.P. serves as the Investment
Company's independent accountants. Coopers & Lybrand L.L.P. is responsible
for performing annual audits of the financial statements and financial
highlights in accordance with generally accepted auditing standards, a review
of federal tax returns, and, pursuant to Rule 17f-2 of the 1940 Act, three
security counts. The mailing address of Coopers & Lybrand L.L.P. is One Post
Office Square, Boston MA 02109.
DISTRIBUTION PLAN. Under the 1940 Act, the Securities and Exchange
Commission has adopted Rule 12b-1, which regulates the circumstances under which
the Funds may, directly or indirectly, bear distribution and shareholder
servicing expenses. The Rule provides that the Funds may pay for such expenses
only pursuant to a plan adopted in accordance with the Rule. Accordingly, the
Funds have adopted a distribution plan (the "Plan") for the Funds' Class A
shares, which is described in the Funds' Prospectus.
The Plan provides that each Fund may spend annually, directly or
indirectly, up to 0.25% of the average net asset value of its Class A shares for
distribution and shareholder servicing services. The Plan does not provide for
the Funds to be charged for interest, carrying or any other financing charges on
any distribution expenses carried forward to subsequent years. A quarterly
report of the amounts expended under the Plan, and the purposes for which such
expenditures were incurred, must be made to the Trustees for their review. The
Plan may not be amended without approval of the holders of Class A shares to
increase materially the distribution or shareholder servicing costs that the
Funds may pay. The Plan and material amendments to it must be approved annually
by all of the Trustees and by the Trustees who are neither "interested persons"
(as defined in the 1940 Act) of the Funds nor have any direct or indirect
financial interest in the operation of the Plan or any related agreements.
The Funds' accrued expenses in the following amounts to Russell Fund
Distributors, Inc., as Distributor, for the fiscal years ended August 31:
9
<PAGE>
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Money Market Fund $326,928 $888,413 $1,022,510
Government Money Market Fund 87,798 100,965 42,012
</TABLE>
For fiscal 1995, these amounts are reflective of the following individual
payments:
<TABLE>
<CAPTION>
Government
Money Money
Market Market
--------- ----------
<S> <C> <C>
Advertising $ 10,520 $ 2,625
Printing of Prospectuses 8,112 2,227
Compensation to Sales Personnel 171,211 46,011
Other* 137,085 36,935
--------- -------
$ 326,928 $87,798
--------- -------
--------- -------
</TABLE>
* Other expenses may include such items as compensation for travel, conferences
and seminars for staff, subscriptions, office charges and professional fees.
Under the Plan, the Funds may also enter into agreements ("Service
Agreements") with financial institutions, which may include Adviser ("Service
Organizations"), to provide shareholder servicing with respect to Fund shares
held by or for the customers of the Service Organizations. Such arrangements
are more fully described in the Funds' prospectus under "Distribution Services
and Shareholder Servicing."
Similar plans have been adopted for Class B and Class C shares of the Money
Market and Government Money Market Funds. However, annual payments under these
plans are limited to .35% and .60% of the net asset value of the Class B and
Class C shares of the Funds, respectively.
The Funds' Class A shares accrued expenses in the following amounts to
Adviser, under a Service Agreement pursuant to Rule 12b-1, for fiscal year ended
August 31:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Money Market Fund $1,198,500 $211,573 $269,696
Government Money Market Fund 127,241 21,920 7,456
</TABLE>
FEDERAL LAW AFFECTING STATE STREET. The Glass-Steagall Act of 1933
prohibits state chartered banks such as State Street from engaging in the
business of underwriting, selling or distributing certain securities, and
prohibits a member bank of the Federal Reserve System from having certain
affiliations with an entity engaged principally in that business. The
activities of State Street in informing its customers of the Funds, performing
investment and redemption services, providing custodian, transfer, shareholder
servicing, dividend disbursing, agent servicing and investment advisory
services, may raise issues under these provisions. State Street has been
advised by its counsel that its activities in connection with the Funds
contemplated under this arrangement are consistent with its statutory and
regulatory obligations.
10
<PAGE>
VALUATION OF FUND SHARES. Net asset value per share for the Class A shares
of each Fund is calculated twice each business day, as of 12:00 noon Eastern
time and as of the close of the regular trading session on the New York Stock
Exchange (currently 4:00 p.m. Eastern time). A business day is one on which
both the Boston Federal Reserve and the New York Stock Exchange are open for
business.
It is the policy of the Funds to use their best efforts to maintain a
constant price per share of $1.00, although there can be no assurance that the
$1.00 net asset value per share will be maintained. In accordance with this
effort and pursuant to Rule 2a-7 under the 1940 Act, the Funds use the amortized
cost valuation method to value their portfolio instruments. This method
involves valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, even though the portfolio
security may increase or decrease in market value generally in response to
changes in interest rates. While 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 a Fund would receive if it sold the instrument.
For example, in periods of declining interest rates, the daily yield on
Fund shares computed by dividing the annualized daily income on each Fund's
portfolio by the net asset value based upon the amortized cost valuation
technique may tend to be higher than a similar computation made by using a
method of valuation based upon market prices and estimates. In periods of
rising interest rates, the daily yield on Fund shares computed the same way may
tend to be lower than a similar computation made by using a method of
calculation based upon market prices and estimates.
The Trustees have established procedures reasonably designed to stabilize
the Funds' price per share at $1.00. These procedures include: (1) the
determination of the deviation from $1.00, if any, of each Fund's net asset
value using market values; (2) periodic review by the Trustees of the amount of
and the methods used to calculate the deviation; and (3) maintenance of records
of such determination. The Trustees will promptly consider what action, if any,
should be taken if such deviation exceeds 1/2 of one percent.
BROKERAGE PRACTICES. All portfolio transactions are placed on behalf of
the Funds by Adviser. There is generally no stated commission in the purchase
or sale of securities traded in the over-the-counter markets, including most
debt securities and money market instruments. Rather, the price of such
securities includes an undisclosed commission in the form of a mark-up or mark-
down. The cost of securities purchased from underwriters includes an
underwriting commission or concession.
Subject to the arrangements and provisions described below, the selection
of a broker or dealer to execute portfolio transactions is usually made by
Adviser. The Advisory Agreement provides, in substance and subject to specific
directions from officers of Investment Company, that in executing portfolio
transactions and selecting brokers or dealers, the principal objective is to
seek the best overall terms available to the Funds. Ordinarily, securities will
be purchased from primary markets, and Adviser shall consider all factors it
deems relevant in assessing the best overall terms available for any
transaction, including the breadth of the market in the security, the
11
<PAGE>
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 other transactions on a continuing basis.
The Advisory Agreement authorizes Adviser to select brokers or dealers to
execute a particular transaction, including principal transactions, 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 Funds and/or Adviser (or its
affiliates). Adviser is authorized to cause the Funds to pay a commission to a
broker or dealer who provides such brokerage and research services for executing
a portfolio transaction which is in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction. The Funds
or Adviser, as appropriate, must determine in good faith that such commission
was reasonable in relation to the value of the brokerage and research services
provided--viewed in terms of that particular transaction or in terms of all the
accounts over which Adviser exercises investment discretion.
The Trustees periodically review Adviser's performance of its
responsibilities in connection with the placement of portfolio transactions on
behalf of the Funds and review the prices paid by the Funds over representative
periods of time to determine if such prices are reasonable in relation to the
benefits provided to the Funds. Certain services received by Adviser
attributable to a particular Fund transaction may benefit one or more other
accounts for which Adviser exercises investment discretion, or a Fund other than
that for which the transaction was effected. Adviser's fees are not reduced by
Adviser's receipt of such brokerage and research services.
During the fiscal year ended August 31, 1995, the Funds purchased
securities issued by the following regular brokers or dealers, as defined by
Rule 10b-1 of the 1940 Act, each of which is one of the Funds' ten largest
brokers or dealers by dollar amounts of securities executed or commissions
received on behalf of the Funds. The value of broker-dealer securities held as
of August 31, 1995, is as follows:
<TABLE>
<CAPTION>
Money Market Fund Government Money Market
($000) Fund
($000)
----------------------------------------------------
<S> <C> <C>
UBS Securities, Inc. 0 30,000*
HSBC Securities, Inc. 11,352* 120,000*
Prebon n/a n/a
First Chicago 0 0
Salomon Brothers, Inc. 0 0
Lumis & Co. n/a n/a
Smith Barney, Inc. n/a n/a
Lehman Brothers, Inc. 0 0
Goldman, Sachs & 0 0
12
<PAGE>
Co.
Greenwich Securities 0 0
* Repurchase Agreements
n/a represents no purchases executed during the fiscal year
</TABLE>
YIELD AND TOTAL RETURN QUOTATIONS. The Funds compute average annual total
return by using a standardized method of calculation required by the Securities
and Exchange Commission. Average annual total return is computed by finding the
average annual compounded rates of return on a hypothetical initial investment
of $1,000 over the one-, five- and ten-year periods (or life of the funds as
appropriate), that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
P(1+T)(n) = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a $1,000 payment made at
the beginning of the 1-, 5- and 10-year periods at the
end of the year or period
The calculation assumes that all dividends and distributions of each Fund
are reinvested at the price calculated in the manner described in the Prospectus
on the dividend dates during the period, and includes all recurring and
nonrecurring fees that are charged to all shareholder accounts.
The current annualized yield of the Funds may be quoted in published
material. The yield is calculated daily based upon the seven days ending on the
date of calculation ("base period"). The yields are computed by determining the
net change, exclusive of capital changes, in the value of a hypothetical pre-
existing account having a balance of one share at the beginning of the base
period, subtracting a hypothetical charge reflecting deductions from shareholder
accounts and dividing the net change in the account value by the value of the
account at the beginning of the base period to obtain the base period return,
and then multiplying the base period return by (365/7) with the resulting yield
figure carried to the nearest hundredth of one percent. An effective yield is
computed by determining the net change, exclusive of capital changes, in the
value of a hypothetical pre-existing account having a balance of one share at
the beginning of the period, subtracting a hypothetical charge reflecting
deductions from shareholder accounts, and dividing the difference by the value
of the account at the beginning of the base period to obtain the base period
return, and then compounding the base period return by adding 1, raising the sum
to a power equal to 365 divided by 7, and subtracting 1 from the result,
according to the following formula:
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1)(365/7)]-1
13
<PAGE>
The following are the current and effective yields for the Funds for the
seven-day period ended August 31, 1995:
Money Market Fund
-----------------
Current Yield 5.51%
Effective Yield 5.66%
Government Fund
---------------
Current Yield 5.38%
Effective Yield 5.53%
The yields quoted are not indicative of future results. Yields will depend
on the type, quality, maturity, and interest rate of money market instruments
held by the Funds.
INVESTMENTS
The fundamental investment objective of each Fund is set forth in its
Prospectus. In addition to that investment objective, each Fund also has
certain "fundamental" investment restrictions, which may be changed only with
the approval of a majority of the shareholders of the Fund, and certain
nonfundamental investment restrictions and policies, which may be changed by the
Funds without shareholder approval.
INVESTMENT RESTRICTIONS
Each Fund is subject to the following fundamental investment restrictions.
Unless otherwise noted, these restrictions apply on a Fund-by-Fund basis at the
time an investment is made. A Fund will not:
(1) Invest 25% or more of the value of its total assets in securities of
companies primarily engaged in any one industry (other than the US Government,
its agencies and instrumentalities). Concentration may occur as a result of
changes in the market value of portfolio securities, but may not result from
investment. Foreign and domestic branches of US banks and US branches of
foreign banks are not considered a single industry for purposes of this
restriction.
(2) Borrow money (including reverse repurchase agreements), except as a
temporary measure for extraordinary or emergency purposes or to facilitate
redemptions (not for leveraging or investment), provided that borrowings do not
exceed an amount equal to 33-1/3% of the current value of the Fund's assets
taken at market value, less liabilities other than borrowings. If at any time a
Fund's borrowings exceed this limitation due to a decline in net assets, such
borrowings will within three days be reduced to the extent necessary to comply
with this limitation. A Fund will not purchase investments once borrowed funds
(including reverse repurchase agreements) exceed 5% of its total assets.
14
<PAGE>
(3) Pledge, mortgage or hypothecate its assets. However, a Fund may pledge
securities having a market value at the time of the pledge not exceeding 33-1/3%
of the value of the Fund's total assets to secure borrowings permitted by
paragraph (2) above.
(4) With respect to 75% of its total assets, invest in securities of any
one issuer (other than securities issued by the US Government, its agencies, and
instrumentalities), if immediately after and as a result of such investment the
current market value of the Fund's holdings in the securities of such issuer
exceeds 5% of the value of the Fund's assets.
(5) Make loans to any person or firm; provided, however, that the making of
a loan shall not include (i) the acquisition for investment of bonds,
debentures, notes or other evidences of indebtedness of any corporation or
government which are publicly distributed or of a type customarily purchased by
institutional investors, or (ii) the entry into repurchase agreements or reverse
repurchase agreements. A Fund may lend its portfolio securities to broker-
dealers or other institutional investors if the aggregate value of all
securities loaned does not exceed 33-1/3% of the value of the Fund's total
assets.
(6) Purchase or sell commodities or commodity futures contracts.
(7) Purchase or sell real estate or real estate mortgage loans; provided,
however, that (i) the Government Money Market Fund may purchase or sell
government guaranteed real estate mortgage loans; and (ii) the Funds may invest
in securities secured by real estate or interests therein or issued by companies
which invest in real estate or interests therein.
(8) Engage in the business of underwriting securities issued by others,
except that a Fund will not be deemed to be an underwriter or to be underwriting
on account of the purchase of securities subject to legal or contractual
restrictions on disposition.
(9) Issue senior securities, except as permitted by its investment
objective, policies and restrictions, and except as permitted by the 1940 Act.
(10) Purchase or sell puts, calls or invest in straddles, spreads or any
combination thereof.
(11) Make short sales of securities or purchase any securities on margin,
except for such short-term credits as are necessary for the clearance of
transactions.
(12) Purchase from or sell portfolio securities to its officers or
directors or other interested persons (as defined in the 1940 Act) of the Funds,
including their investment advisers and affiliates, except as permitted by the
1940 Act and exemptive rules or orders thereunder.
(13) Invest in securities issued by other investment companies except in
connection with a merger, consolidation, acquisition of assets, or other
reorganization approved by the Funds' shareholders.
15
<PAGE>
(14) Invest in securities of any issuer which, together with its
predecessor, has been in operation for less than three years if, as a result,
more than 5% of the Fund's total assets would be invested in such securities.
(15) Invest more than 10% of its net assets in the aggregate in illiquid
securities or securities that are not readily marketable, including repurchase
agreements and time deposits of more than seven days' duration.
(16) Purchase interests in oil, gas or other mineral exploration or
development programs.
(17) Make investments for the purpose of gaining control of an issuer's
management.
(18) Purchase the securities of any issuer if the Investment Company's
officers, Directors, Adviser or any of their affiliates beneficially own more
than one-half of 1% of the securities of such issuer or together own
beneficially more than 5% of the securities of such issuer.
INVESTMENT POLICIES
Except as otherwise indicated, each Fund may invest in the following
instruments:
US GOVERNMENT OBLIGATIONS. The types of US Government obligations in which
the Funds may at times invest include: (1) A variety of US Treasury
obligations, which differ only in their interest rates, maturities and times of
issuance and which, with respect to the Money Market and Government Money Market
Funds, have remaining maturities or hard put dates of one year or less; and
(2) obligations issued or guaranteed by US Government agencies and
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the US Treasury, (b) the right of the issuer to borrow an
amount limited to a specific line of credit from the US Treasury,
(c) discretionary authority of the US Government agency or instrumentality or
(d) the credit of the instrumentality (examples of agencies and
instrumentalities are: Federal Land Banks, Federal Housing Administration,
Farmers Home Administration, Export--Import Bank of the United States, Central
Bank for Cooperatives, Federal Intermediate Credit Banks, Federal Home Loan
Banks, General Services Administration, Maritime Administration, Tennessee
Valley Authority, Asian-American Development Bank, Student Loan Marketing
Association, International Bank for Reconstruction and Development and Federal
National Mortgage Association). No assurance can be given that in the future
the US Government will provide financial support to such US Government agencies
or instrumentalities described in (2)(b), (2)(c) and (2)(d), other than as set
forth above, since it is not obligated to do so by law. The Funds may purchase
US Government obligations on a forward commitment basis.
REPURCHASE AGREEMENTS. The Funds may enter into repurchase agreements with
certain financial institutions. Under repurchase agreements, these parties sell
US Treasury bills, notes and bonds to a Fund and agree to repurchase the
securities at the Fund's cost plus interest within a specified time (normally
one day). The securities purchased by each Fund have a total value in excess of
the purchase price paid by the Fund and are held by Custodian until repurchased.
Repurchase agreements assist the Funds in being invested fully while retaining
"overnight"
16
<PAGE>
flexibility in pursuit of investments of a longer-term nature. The Funds will
limit repurchase transactions to those member banks of the Federal Reserve
System and broker-dealers whose creditworthiness is continually monitored and
found satisfactory by the Adviser.
REVERSE REPURCHASE AGREEMENTS. The Funds may enter into reverse repurchase
agreements under the circumstances described in "Investment Restrictions."
Under reverse repurchase agreements, a Fund transfers possession of portfolio
securities to financial institutions in return for cash in an amount equal to a
percentage of the portfolio securities' market value and agrees to repurchase
the securities at a future date by repaying the cash with interest. The Funds
retain the right to receive interest and principal payments from the securities
while they are in the possession of the financial institutions. Cash or liquid
high quality debt obligations from a Fund's portfolio equal in value to the
repurchase price including any accrued interest will be segregated by Custodian
on the Fund's records while a reverse repurchase agreement is in effect.
FORWARD COMMITMENTS. Each Fund may contract to purchase securities for a
fixed price at a future date beyond customary settlement time consistent with
the Fund's ability to manage its investment portfolio, maintain a stable net
asset value and meet redemption requests. A Fund may dispose of a commitment
prior to settlement if it is appropriate to do so and realize short-term profits
or losses upon such sale. When effecting such transactions, cash or liquid high
quality debt obligations held by the Fund of a dollar amount sufficient to make
payment for the portfolio securities to be purchased will be segregated on the
Fund's records at the trade date and maintained until the transaction is
settled. Forward commitments involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date, or if the other
party fails to complete the transaction.
WHEN-ISSUED TRANSACTIONS. New issues of securities are often offered on a
when-issued basis. This means that delivery and payment for the securities
normally will take place several days after the date the buyer commits to
purchase them. The payment obligation and the interest rate that will be
received on securities purchased on a when-issued basis are each fixed at the
time the buyer enters into the commitment.
Each Fund will make commitments to purchase when-issued securities only
with the intention of actually acquiring the securities, but a Fund may sell
these securities or dispose of the commitment before the settlement date if it
is deemed advisable as a matter of investment strategy. Cash or marketable high
quality debt securities equal to the amount of the above commitments will be
segregated on each Fund's records. For the purpose of determining the adequacy
of these securities the segregated securities will be valued at market. If the
market value of such securities declines, additional cash or securities will be
segregated on the Fund's records on a daily basis so that the market value of
the account will equal the amount of such commitments by the Fund. No fund will
invest more than 25% of its net assets in when-issued securities.
Securities purchased on a when-issued basis and the securities held by each
Fund are subject to changes in market value based upon the public's perception
of changes in the level of interest rates. Generally, the value of such
securities will fluctuate inversely to changes in interest rates --
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i.e., they will appreciate in value when interest rates decline and decrease in
value when interest rates rise. Therefore, if in order to achieve higher
interest income a Fund remains substantially fully invested at the same time
that it has purchased securities on a "when-issued" basis, there will be a
greater possibility of fluctuation in the Fund's net asset value.
When payment for when-issued securities is due, each Fund will meet its
obligations from then-available cash flow, the sale of segregated securities,
the sale of other securities or, and although it would not normally expect to do
so, from the sale of the when-issued securities themselves (which may have a
market value greater or less than the Fund's payment obligation). The sale of
securities to meet such obligations carries with it a greater potential for the
realization of capital gains, which are subject to federal income taxes.
VARIABLE AMOUNT MASTER DEMAND NOTES. Variable amount master demand notes
are unsecured obligations that are redeemable upon demand and are typically
unrated. These instruments are issued pursuant to written agreements between
the issuers and the holders. The agreements permit the holders to increase
(subject to an agreed maximum) and the holders and issuers to decrease the
principal amount of the notes, and specify that the rate of interest payable on
the principal fluctuates according to an agreed formula.
SECTION 4(2) COMMERCIAL PAPER (MONEY MARKET FUND ONLY). The Money Market
Fund may invest in commercial paper issued in reliance on the so-called "private
placement" exemption from registration afforded by Section 4(2) of the
Securities Act of 1933 ("Section 4(2) paper"). Section 4(2) paper is restricted
as to disposition under the federal securities laws, and generally is sold to
investors who agree that they are purchasing the paper for an investment and not
with a view to public distribution. Any resale by the purchaser must be in an
exempt transaction. Section 4(2) paper is normally resold to other investors
through or with the assistance of the issuer or investment dealers who make a
market in Section 4(2) paper, thus providing liquidity. Pursuant to guidelines
established by the Board of Trustees, Adviser may determine that Section 4(2)
paper is liquid for the purposes of complying with the Funds' investment
restriction relating to investments in illiquid securities.
VARIABLE AND FLOATING RATE SECURITIES. A floating rate security provides
for the automatic adjustment of its interest rate whenever a specified interest
rate changes. A variable rate security provides for the automatic establishment
of a new interest rate on set dates. Interest rates on these securities are
ordinarily tied to, and are a percentage of, a widely recognized interest rate
such as the yield on 90-day US Treasury bills or the prime rate of a specified
bank. These rates may change as often as twice daily. Generally, changes in
interest rates will have a smaller effect on the market value of variable and
floating rate securities than on the market value of comparable fixed income
obligations. Thus, investing in variable and floating rate securities generally
allows less opportunity for capital appreciation and depreciation than investing
in comparable fixed income securities.
The Funds may purchase variable rate US Government obligations which are
instruments issued or guaranteed by the US Government, or an agency or
instrumentality thereof, that have a rate of interest subject to adjustment at
regular intervals but less frequently than annually.
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Variable rate US Government obligations whose interest is readjusted no less
frequently than annually will be deemed to have a maturity equal to the
period remaining until the next readjustment of the interest rate.
ASSET-BACKED SECURITIES (MONEY MARKET FUND ONLY). Asset-backed securities
represent undivided fractional interests in pools of instruments, such as
consumer loans, and are similar in structure to mortgage-related pass-through
securities described below. Payments of principal and interest are passed
through to holders of the securities and are typically supported by some form of
credit enhancement, such as a letter of credit, surety bond, limited guarantee
by another entity or by priority to certain of the borrower's other securities.
The degree of credit-enhancement varies, generally applying only until exhausted
and covering only a fraction of the security's par value.
The value of asset-backed securities is affected by changes in the market's
perception of the asset backing the security, changes in the creditworthiness of
the servicing agent for the instrument pool, the originator of the instruments
or the financial institution providing any credit enhancement and the
expenditure of any portion of any credit enhancement. The risks of investing in
asset-backed securities are ultimately dependent upon payment of the underlying
instruments by the obligors, and a Fund would generally have no recourse against
the obligee of the instruments in the event of default by an obligor. The
underlying instruments are subject to prepayments which shorten the weighted
average life of asset-backed securities and may lower their return, in the same
manner as described below for prepayments of pools of mortgage loans underlying
mortgage-backed securities.
MORTGAGE-RELATED PASS-THROUGH SECURITIES. Mortgage pass-through
certificates are issued by governmental, government-related and private
organizations and are backed by pools of mortgage loans. These mortgage loans
are made by savings and loan associations, mortgage bankers, commercial banks
and other lenders to residential home buyers throughout the United States. The
securities are "pass-through" securities because they provide investors with
monthly payments of principal and interest that, in effect, are a "pass-through"
of the monthly payments made by the individual borrowers on the underlying
mortgage loans, net of any fees paid to the issuer or guarantor of the pass-
through certificates. The principal governmental issuer of such securities is
the Government National Mortgage Association ("GNMA"), which is a wholly-owned
US Government corporation within the Department of Housing and Urban
Development. Government-related issuers include the Federal Home Loan Mortgage
Corporation ("FHLMC"), a corporate instrumentality of the United States created
pursuant to an act of Congress which is owned entirely by the Federal Home Loan
Banks, and the Federal National Mortgage Association ("FNMA"), a government
sponsored corporation owned entirely by private stockholders. Commercial banks,
savings and loan associations, private mortgage insurance companies, mortgage
bankers and other secondary market issuers also create pass-through pools of
conventional residential mortgage loans. Such issuers may be the originators of
the underlying mortgage loans as well as the guarantors of the mortgage-related
securities.
(1) GNMA Mortgage Pass-Through Certificates ("Ginnie Maes"). Ginnie Maes
represent an undivided interest in a pool of mortgage loans that are insured by
the Federal Housing
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Administration or the Farmers Home Administration or guaranteed by the Veterans
Administration. Ginnie Maes entitle the holder to receive all payments
(including prepayments) of principal and interest owed by the individual
mortgagors, net of fees paid to GNMA and to the issuer which assembles the loan
pool and passes through the monthly mortgage payments to the certificate holders
(typically, a mortgage banking firm), regardless of whether the individual
mortgagor actually makes the payment. Because payments are made to certificate
holders regardless of whether payments are actually received on the underlying
loans, Ginnie Maes are of the "modified pass-through" mortgage certificate type.
GNMA is authorized to guarantee the timely payment of principal and interest on
the Ginnie Maes as securities backed by an eligible pool of mortgage loans. The
GNMA guaranty is backed by the full faith and credit of the United States, and
GNMA has unlimited authority to borrow funds from the US Treasury to make
payments under the guaranty. The market for Ginnie Maes is highly liquid
because of the size of the market and the active participation in the secondary
market by securities dealers and a variety of investors.
(2) FHLMC Mortgage Participation Certificates ("Freddie Macs"). Freddie
Macs represent interests in groups of specified first lien residential
conventional mortgage loans underwritten and owned by FHLMC. Freddie Macs
entitle the holder to timely payment of interest, which is guaranteed by FHLMC.
FHLMC guarantees either ultimate collection or timely payment of all principal
payments on the underlying mortgage loans. In cases where FHLMC has not
guaranteed timely payment of principal, FHLMC may remit the amount due on
account of its guarantee of ultimate payment of principal at any time after
default on an underlying loan, but in no event later than one year after it
becomes payable. Freddie Macs are not guaranteed by the United States or by any
of the Federal Home Loan Banks and do not constitute a debt or obligation of the
United States or of any Federal Home Loan Bank. The secondary market for
Freddie Macs is highly liquid because of the size of the market and the active
participation in the secondary market by FHLMC, securities dealers and a variety
of investors.
(3) FNMA Guaranteed Mortgage Pass-Through Certificates ("Fannie Maes").
Fannie Maes represent an undivided interest in a pool of conventional mortgage
loans secured by first mortgages or deeds of trust, on one-family to four-family
residential properties. FNMA is obligated to distribute scheduled monthly
installments of principal and interest on the loans in the pool, whether or not
received, plus full principal of any foreclosed or otherwise liquidated loans.
The obligation of FNMA under its guaranty is solely the obligation of FNMA and
is not backed by, nor entitled to, the full faith and credit of the United
States.
The market value of mortgage-related securities depends on, among other
things, the level of interest rates, the certificates' coupon rates and the
payment history of the underlying borrowers.
Although the mortgage loans in a pool underlying a mortgage pass-through
certificate will have maturities of up to 30 years, the average life of a
mortgage pass-through certificate will be substantially less because the loans
will be subject to normal principal amortization and also may be prepaid prior
to maturity. Prepayment rates vary widely and may be affected by changes in
mortgage interest rates. In periods of falling interest rates, the rate of
prepayment on higher interest mortgage rates tends to increase, thereby
shortening the actual average life of the
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mortgage pass-through certificate. Conversely, when interest rates are rising,
the rate of prepayment tends to decrease, thereby lengthening the average life
of the mortgage pass-through certificate. Accordingly, it is not possible to
predict accurately the average life of a particular pool. However, based on
current statistics, it is conventional to quote yields on mortgage pass-through
certificates based on the assumption that they have effective maturities of 12
years. Reinvestment of prepayments may occur at higher or lower rates than the
original yield on the certificates. Due to the prepayment feature and the need
to reinvest prepayments of principal at current rates, mortgage pass-through
certificates with underlying loans bearing interest rates in excess of the
market rate can be less effective than typical noncallable bonds with similar
maturities at "locking in" yields during periods of declining interest rates,
although they may have comparable risks of declining in value during periods of
rising interest rates.
ZERO COUPON SECURITIES. These securities are notes, bonds and debentures
that: (1) do not pay current interest and are issued at a substantial discount
from par value; (2) have been stripped of their unmatured interest coupons and
receipts; or (3) pay no interest until a stated date one or more years into the
future. These securities also include certificates representing interests in
such stripped coupons and receipts.
Because the Funds accrue taxable income from zero coupon securities without
receiving regular interest payments in cash, each Fund may be required to sell
portfolio securities in order to pay a dividend depending, among other things,
upon the proportion of shareholders who elect to receive dividends in cash
rather than reinvesting dividends in additional shares of the Fund. Investing
in these securities might also force the Fund to sell portfolio securities to
maintain portfolio liquidity.
Because a zero coupon security pays no interest to its holder during its
life or for a substantial period of time, it usually trades at a deep discount
from its face or par value and will be subject to greater fluctuations in market
value in response to changing interest rates than debt obligations of comparable
maturities that make regular distributions of interest.
RATINGS OF DEBT INSTRUMENTS
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") -- LONG TERM DEBT RATINGS.
Aaa -- Bonds which 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 edged." 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 which 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 which make the long-term risk appear somewhat larger than the Aaa
securities.
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A -- Bonds which 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 which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium-grade obligations
(i.e., 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.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
STANDARD & POOR'S CORPORATION ("S&P"). The ratings are based, in varying
degrees, on the following considerations: (1) The likelihood of default --
capacity and willingness of the obligator as to the timely payment of interest
and repayment of principal in accordance with the terms of the obligation;
(2) The nature of and provisions of the obligation; and (3) The protection
afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization, or other arrangement under the laws of bankruptcy
and other laws affecting creditors' rights.
AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
RATINGS OF COMMERCIAL PAPER
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MOODY'S. Moody's short-term debt ratings are opinions of the ability of
issuers to repay punctually senior debt obligations. These obligations have an
original maturity not exceeding one year, unless explicitly noted. Moody's
employs the following three designations, all judged to be investment grade, to
indicate the relative repayment ability of rated issuers:
/ / Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
/ / Leading market positions in well-established industries.
/ / High rates of return on funds employed.
/ / Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
/ / Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
/ / Well-established access to a range of financial markets and
assured sources of alternate liquidity.
/ / Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited above
but to a lesser degree. Earnings trends and coverage ratios, while
sound, may be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternative liquidity is maintained.
/ / Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
/ / Issuers rated Not Prime do not fall within any of the Prime rating
categories.
S&P. An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered shot-term in the relevant
market. Ratings are graded into several categories, ranging from A-1 for the
highest quality obligations to D for the lowest. These categories are as
follows:
A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
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FITCH'S INVESTORS SERVICE, INC. ("FITCH"). Commercial paper rated by Fitch
reflects Fitch's current appraisal of the degree of assurance of timely payment
of such debt. An appraisal results in the rating of an issuer's paper as F-1,
F-2, F-3, or F-4.
F-1 -- This designation indicates that the commercial paper is regarded as
having the strongest degree of assurance for timely payment.
F-2 -- Commercial paper issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than those issues rated F-1.
DUFF AND PHELPS, INC. Duff & Phelps' short-term ratings are consistent
with the rating criteria utilized by money market participants. The ratings
apply to all obligations with maturities of under one year, including commercial
paper, the uninsured portion of certificates of deposit, unsecured bank loans,
master notes, bankers acceptances, irrevocable letters of credit, and current
maturities of long-term debt. Asset-backed commercial paper is also rated
according to this scale.
Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of funds including trade
credit, bank lines, and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.
The distinguishing feature of Duff & Phelps' short-term ratings is the
refinement of the traditional '1' category. The majority of short-term debt
issuers carry the highest rating, yet quality differences exist within that
tier. As a consequence, Duff & Phelps has incorporated gradations of '1+' (one
plus) and '1-' (one minus) to assist investors in recognizing those differences.
Duff 1+--Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free US Treasury short-term
obligations.
Duff 1--Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk factors
are minor.
Duff 1- -- High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk factors are very
small.
GOOD GRADE. Duff 2--Good certainty of timely payment. Liquidity factors
and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good.
Risk factors are small.
SATISFACTORY GRADE. Duff 3--Satisfactory liquidity and other protection
factors qualify issue as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is expected.
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NON-INVESTMENT GRADE. Duff 4--Speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
DEFAULT. Duff 5--Issuer failed to meet scheduled principal and/or interest
payments.
IBCA, INC. In addition to conducting a careful review of an institution's
reports and published figures, IBCA's analysts regularly visit the companies for
discussions with senior management. These meetings are fundamental to the
preparation of individual reports and ratings. To keep abreast of any changes
that may affect assessments, analysts maintain contact throughout the year with
the management of the companies they cover.
IBCA's analysts speak the languages of the countries they cover, which is
essential to maximize the value of their meetings with management and to
properly analyze a company's written materials. They also have a thorough
knowledge of the laws and accounting practices that govern the operations and
reporting of companies within the various countries.
Often, in order to ensure a full understanding of their position, companies
entrust IBCA with confidential data. While these data cannot be disclosed in
reports, they are taken into account when assigning our ratings. Before
dispatch to subscribers, a draft of the report is submitted to each company to
permit correction of any factual errors and to enable clarification of issues
raised.
IBCA's Rating Committees meet at regular intervals to review all ratings
and to ensure that individual ratings are assigned consistently for institutions
in all the countries covered. Following the Committee meetings, ratings are
issued directly to subscribers. At the same time, the company is informed of
the ratings as a matter of courtesy, but not for discussion.
A1+--Obligations supported by the highest capacity for timely repayment.
A1--Obligations supported by a very strong capacity for timely repayment.
A2--Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in business,
economic or financial conditions.
B1--Obligations supported by an adequate capacity for timely repayment.
Such capacity is more susceptible to adverse changes in business, economic, or
financial conditions than for obligations in higher categories.
B2--Obligations for which the capacity for timely repayment is susceptible
to adverse changes in business, economic or financial conditions.
C1--Obligations for which there is an inadequate capacity to ensure timely
repayment.
D1--Obligations which have a high risk of default or which are currently in
default.
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TAXES
Each Fund intends to qualify for treatment as a regulated investment
company ("RIC") under Subchapter M of the Internal Revenue Code of 1986, as
amended ("the Code"). As a RIC, each Fund will not be liable for federal income
taxes on taxable net investment income and capital gain net income (capital
gains in excess of capital losses) that it distributes to its shareholders,
provided that the Fund distributes annually to its shareholders at least 90% of
its net investment income and net short-term capital gain for the taxable year
("Distribution Requirement"). For a Fund to qualify as a RIC it must abide by
all of the following requirements: (1) at least 90% of the Fund's gross income
each taxable year must be derived from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock
or securities or foreign currencies, or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies ("Income Requirement");
(2) less than 30% of the Fund's gross income each taxable year must be derived
from the sale or other disposition of securities and certain options, futures
contracts, forward contracts and foreign currencies held for less than three
months ("Short-Short Limitation"); (3) at the close of each quarter of the
Fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, US Government securities, securities of
other RICs, and other securities, with such other securities limited, in respect
of any one issuer, to an amount that does not exceed 5% of the total assets of
the Fund and that does not represent more than 10% of the outstanding voting
securities of such issuer; and (4) at the close of each quarter of the Fund's
taxable year, not more than 25% of the value of its assets may be invested in
securities (other than US Government securities or the securities of other RICs)
of any one issuer.
Each Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year an amount at least equal to
the sum of: (1) 98% of its ordinary income for that year; (2) 98% of its
capital gain net income for the one-year period ending on October 31 of that
year; and (3) certain undistributed amounts from the preceding calendar year.
For this and other purposes, dividends declared in October, November or December
of any calendar year and made payable to shareholders of record in such month
will be deemed to have been received on December 31 of such year if the
dividends are paid by the Fund subsequent to December 31 but prior to February 1
of the following year.
If a shareholder receives a distribution taxable as long-term capital gain
with respect to shares of a Fund and redeems or exchanges the shares without
having held the shares for more than six months, then any loss on the redemption
or exchange will be treated as long-term capital loss to the extent of the
capital gain distribution.
As of August 31, 1995, the Money Market Fund and the Government Money Market
Fund had a net tax basis capital loss carryforward of $4,159,322 and $157,456,
respectively, which may be applied against any realized net taxable gains of
each succeeding year until the expiration date of August 31, 2003. In addition,
from November 1, 1994 to August 31, 1995, the Money Market Fund incurred $5,844
of net realized capital losses. As permitted
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by tax regulation, the Fund intends to elect to defer these losses and treat
them as arising in the fiscal year ending August 31, 1996.
STATE AND LOCAL TAXES. Depending upon the extent of each Fund's activities
in states and localities in which its offices are maintained, its agents or
independent contractors are located or it is otherwise deemed to be conducting
business, the Fund may be subject to the tax laws of such states or localities.
The foregoing discussion is only a summary of certain federal income tax
issues generally affecting the Funds and their shareholders. Circumstances
among investors may vary and each investor is encouraged to discuss investment
in the Funds with the investor's tax adviser.
FINANCIAL STATEMENTS
The 1995 fiscal year-end financial statements of Investment Company,
consisting of the Money Market and Government Money Market Funds, including
notes to the financial statements and financial highlights and the Report of
Independent Accountants are included in the Funds' Annual Report to
Shareholders. Copies of these reports accompany this Statement of Additional
Information and are incorporated herein by reference.
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<PAGE>
Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
THE SEVEN SEAS SERIES FUND
Two International Place, 35th Floor
Boston, Massachusetts 02110
(617) 654-6089
STATEMENT OF ADDITIONAL INFORMATION
MONEY MARKET FUNDS
CLASS B SHARES
DECEMBER 29, 1995
The Seven Seas Series Fund ("Investment Company") is a registered open-end
investment company organized as a Massachusetts business trust offering shares
of beneficial interest in separate investment portfolios, including those listed
below, each of which is referred to as a "Fund." In addition, each series of
the Investment Company is diversified as defined under the Investment Company
Act of 1940, as amended (the "1940 Act").
THE SEVEN SEAS SERIES MONEY MARKET FUND ("MONEY MARKET FUND")
THE SEVEN SEAS SERIES US GOVERNMENT MONEY MARKET FUND ("GOVERNMENT MONEY
MARKET FUND")
This Statement of Additional Information supplements or describes in
greater detail the Investment Company and the Funds noted above as contained in
the Funds' Prospectus for Class B shares dated December 29, 1995. This
Statement is not a Prospectus and should be read in conjunction with the Funds'
Prospectus for Class B shares, which may be obtained by telephoning or writing
Investment Company at the number or address shown above.
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TABLE OF CONTENTS
Page
----
STRUCTURE AND GOVERNANCE . . . . . . . . . . . . . . . . . . . . . . . . . 3
Organization and Business History . . . . . . . . . . . . . . . . . . 3
Shareholder Meetings. . . . . . . . . . . . . . . . . . . . . . . . . 4
Controlling Shareholders. . . . . . . . . . . . . . . . . . . . . . . 4
Principal Shareholders. . . . . . . . . . . . . . . . . . . . . . . . 5
Trustees and Officers . . . . . . . . . . . . . . . . . . . . . . . . 5
OPERATION OF INVESTMENT COMPANY. . . . . . . . . . . . . . . . . . . . . . 7
Service Providers . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Administrator . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Custodian and Transfer Agent. . . . . . . . . . . . . . . . . . . . . 8
Distribution Plan . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Federal Law Affecting State Street. . . . . . . . . . . . . . . . . . 9
Valuation of Fund Shares. . . . . . . . . . . . . . . . . . . . . . . 10
Brokerage Practices . . . . . . . . . . . . . . . . . . . . . . . . . 10
Yield and Total Return Quotations . . . . . . . . . . . . . . . . . . 11
INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . 13
Investment Policies . . . . . . . . . . . . . . . . . . . . . . . . . 14
Ratings of Debt Instruments . . . . . . . . . . . . . . . . . . . . . 20
Ratings of Commercial Paper . . . . . . . . . . . . . . . . . . . . . 21
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2
<PAGE>
STRUCTURE AND GOVERNANCE
ORGANIZATION AND BUSINESS HISTORY. Investment Company was organized as a
Massachusetts business trust on October 3, 1987, and operates under a First
Amended and Restated Master Trust Agreement, dated October 13, 1993, as amended.
Investment Company is authorized to issue shares of beneficial interest, par
value $.001 per share, which may be divided into one or more series, each of
which evidences pro rata ownership interest in a different investment portfolio,
or "Fund." The Money Market and US Government Money Market Funds are two such
investment portfolios. The Trustees may create additional Funds at any time
without shareholder approval.
As of the date of this Statement of Additional Information, Investment
Company is comprised of the following investment portfolios, each of which
commenced operations on the date set forth opposite the portfolio's name:
The Seven Seas Series Money Market Fund May 2, 1988
The Seven Seas Series US Government Money Market Fund March 1, 1991
The Seven Seas Series US Treasury Money Market Fund December 1, 1993
The Seven Seas Series US Treasury Obligations Fund *
The Seven Seas Series Prime Money Market Fund February 22, 1994
The Seven Seas Series Yield Plus Fund November 9, 1992
The Seven Seas Series Tax Free Money Market Fund December 1, 1994
The Seven Seas Series Intermediate Fund September 1, 1993
The Seven Seas Series Bond Market Fund *
The Seven Seas Series Growth and Income Fund September 1, 1993
The Seven Seas Series S&P 500 Index Fund December 30, 1992
The Seven Seas Series Small Cap Fund July 1, 1992
The Seven Seas Series Matrix Equity Fund May 4, 1992
The Seven Seas Series Active International Fund March 7, 1995
The Seven Seas Series International Pacific Index Fund *
The Seven Seas Series Emerging Markets Fund March 1, 1994
The Seven Seas Series Real Estate Equity Fund *
-----------
*As of the date of this Statement of Additional Information, these
portfolios have not commenced operations.
Prospectuses for these investment portfolios may be obtained by calling
Investment Company's distributor, Russell Fund Distributors, Inc., at (617) 654-
6089.
Investment Company is authorized to divide shares of any series into two or
more classes of shares. The shares of each Fund may have such rights and
preferences as the Trustees may establish from time to time, including the right
of redemption (including the price, manner and terms of redemption), special and
relative rights as to dividends and distributions, liquidation rights, sinking
or purchase fund provisions and conditions under which any Fund may have
3
<PAGE>
separate voting rights or no voting rights. Each class of shares of a Fund is
entitled to the same rights and privileges as all other classes of that Fund,
except that each class bears the expenses associated with the distribution and
shareholder servicing arrangements of that class, as well as other expenses
attributable to the class and unrelated to the management of the Fund's
portfolio securities. Shares of the Money Market, US Government Money Market
and Tax Free Money Market Funds are divided into Classes A, B and C.
Any amendment to the Master Trust Agreement that would materially and
adversely affect shareholders of Investment Company as a whole, or shareholders
of a particular Fund, must be approved by the holders of a majority of the
shares of Investment Company or the Fund, respectively. All other amendments
may be effected by Investment Company's Board of Trustees.
Under certain unlikely circumstances, and as is the case with any
Massachusetts business trust, a shareholder of a Fund may be held personally
liable for the obligations of a Fund. The Master Trust Agreement provides that
shareholders shall not be subject to any personal liability for the acts or
obligations of a Fund and that every written agreement, obligation, or other
undertaking of the Fund shall contain a provision to the effect that the
shareholders are not personally liable thereunder. The Master Trust Agreement
also provides that the Fund shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Fund and satisfy
any judgment thereon. Thus, the risk to shareholders of incurring financial
loss beyond their investments is limited to circumstances in which the Fund
itself would be unable to meet its obligations.
SHAREHOLDER MEETINGS. Investment Company will not have an Annual Meeting
of Shareholders. Special Meetings may be convened: (1) by the Board of
Trustees; (2) upon written request to the Board by the holders of at least 10%
of the outstanding shares; or (3) upon the Board's failure to honor the
shareholders' request described above, by holders of at least 10% of the
outstanding shares giving notice of the special meeting to the shareholders.
CONTROLLING SHAREHOLDERS. The Trustees have the authority and
responsibility to manage the business of Investment Company. Trustees hold
office until they resign or are removed by, in substance, a vote of two-thirds
of Investment Company shares outstanding. However, in connection with State
Street Bank and Trust Company's ("State Street") securities lending program and
investment accounts over which State Street has discretionary authority, State
Street holds certain collateral on behalf of its securities lending clients to
secure the return of loaned securities. Such collateral may be invested in
Investment Company shares from time to time. Shares representing such
investments are held of record by State Street, who retains voting control of
such shares. As of November 30, 1995, State Street held beneficially and of
record 36% of Investment Company's shares in connection with various lending
portfolios and, consequently, may be deemed to be a controlling person of
Investment Company for purposes of the 1940 Act. State Street also acts as
Investment Company's investment adviser, transfer agent and custodian.
Frank Russell Investment Management Company ("Administrator"), the
Investment Company's administrator, will be the sole shareholder of certain
series of Investment Company
4
<PAGE>
until such time as such series have public shareholders and therefore
Administrator may be deemed to be a controlling person for the purposes of the
1940 Act.
PRINCIPAL SHAREHOLDERS. As of November 30, 1995, the following
shareholders owned of record 5% or more of the issued and outstanding shares of
Class A of each Fund:
Money Market Fund:
- BellSouth Pension Trust UKCF, 1155 Peachtree St. NE, Atlanta, GA
30367--5%.
Government Money Market Fund:
- State Street Bank and Trust Company, Newport Office Park, 108 Myrtle
Street AH3, North Quincy, MA 02171--9%;
- PRU Welfare Union Fixed PFIA, Two Concourse Parkway Suite 500,
Atlanta, GA 30328--8%;
- Algemeenburgerlijk Pension Fund, One Enterprise Drive, North Quincy,
MA 02171--7%; and
- Biogen, Inc., 14 Cambridge Center, Cambridge, MA 02142--6%.
The Trustees and officers of Investment Company, as a group, own less than
1% of Investment Company's voting securities.
TRUSTEES AND OFFICERS. The Board of Trustees is responsible for overseeing
generally the operation of the Funds. The officers, all of whom are employed
by, and are officers of, Administrator or its affiliates, are responsible for
the day-to-day management and administration of the Funds' operations.
Trustees who are not officers or employees of State Street or its
affiliates are paid an annual fee and are reimbursed for travel and other
expenses they incur in attending Board meetings. Investment Company's officers
and employees are paid by Administrator or its affiliates.
The following lists Investment Company's Trustees and officers, their
positions with Investment Company, their present and principal occupations
during the past five years and the mailing addresses of Trustees who are not
affiliated with Investment Company. The mailing address for all Trustees and
officers affiliated with Investment Company is The Seven Seas Series Fund, 909 A
Street, Tacoma, WA 98402.
An asterisk (*) indicates that a Trustee is an "interested person" of the
Investment Company, as defined in the 1940 Act.
*LYNN L. ANDERSON, Trustee, Chairman of the Board, President and Fund
Treasurer. Chairman of the Board and Chief Executive Officer, Frank Russell
Investment Management Company and Russell Fund Distributors, Inc.; Director,
President and Chief Executive Officer, Frank Russell Investment Company and
Frank Russell Trust Company; Director and
5
<PAGE>
President, Russell Insurance Funds; Director and Chairman, Frank Russell Company
(Delaware); Director, Frank Russell Investments (Ireland) Limited and Frank
Russell Investment Company plc.
WILLIAM L. MARSHALL, Trustee. 33 West Court Street, Doylestown, PA 18901.
Chief Executive Officer and President, Wm. L. Marshall Associates, Inc. (a
registered investment adviser and provider of financial and related consulting
services); Certified Financial Planner; Member, Registry of Financial Planning
Practitioners; and Advisory Committee, International Association for Financial
Planning Broker-Dealer Program. Member, Institute of Certified Financial
Planners. Registered for Securities with FSC Securities Corp., Marietta,
Georgia.
*STEVEN J. MASTROVICH, Trustee. 1 Financial Center, Boston, MA 02111.
Partner, Brown, Rudnick, Freed and Gesmer (law firm). 1990 to 1994, Partner,
Warner & Stackpole (law firm).
PATRICK J. RILEY, Trustee. 21 Custom House Street, Boston, MA 02110.
Partner, Riley, Burke & Donahue (law firm).
RICHARD D. SHIRK, Trustee. 3350 Peachtree Road, N.E., Atlanta, GA 30326.
President and Chief Executive Officer, Blue Cross/Blue Shield of Georgia. 1990
to 1992, President, Champions Group Resources--Business Management and Employee
Benefits Consulting; 1990, Senior Vice President, Employee Benefits Division,
Cigna Corporation (providing and insuring group life, health and disability
employee benefit products and services); from 1986 to 1990, Senior Vice
President, EQUICOR-Equitable HCA Corporation (providing and insuring group life,
health and disability employee benefit products and services).
*BRUCE D. TABER, Trustee. 26 Round Top Road, Boxford, MA 01921.
President, A.B. Reed, Inc. - Engineers, Architects, Planners. Prior to that,
Vice President, Instrumentation and Controls, A.B. Reed., Inc.
HENRY W. TODD, Trustee. 111 Commerce Drive, Montgomeryville, PA 18936.
President and Director, Zink & Triest Co., Inc. (dealer in vanilla flavor
materials); Director, A.M. Todd Co., and Flavorite Laboratories.
J. DAVID GRISWOLD, Vice President and Secretary. Assistant Secretary,
Associate General Counsel, Chief Compliance Officer, Frank Russell Investment
Management Company, Russell Fund Distributors, Inc. and Frank Russell Capital
Inc.; Associate General Counsel and Assistant Secretary, Frank Russell Company;
Associate General Counsel, Assistant Secretary and Compliance Officer, Russell
Fiduciary Services Company; Director, Secretary, Associate General Counsel and
Chief Compliance Officer, Frank Russell Securities, Inc.; Secretary, Frank
Russell Canada Limited/Limitee.
KENNETH W. LAMB, Assistant Secretary, Assistant Treasurer and Principal
Accounting Officer. Manager - Funds Administration, Frank Russell Investment
Management
6
<PAGE>
Company since 1994. Prior to that, Senior Audit Manager with Knight, Vale &
Gregory since 1982.
TRUSTEE COMPENSATION TABLE
<TABLE>
<CAPTION>
Aggregate Pension or Estimated Annual Total Compensation
Compensation Retirement Benefits Upon From Investment
from Benefits Accrued Retirement Company Paid to
Trustee Investment as Part of Trustees
Company Investment
Company
Expenses
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lynn L. Anderson $0 $0 $0 $0
William L. Marshall $49,000 $0 $0 $49,000
Steven J. Mastrovich $49,000 $0 $0 $49,000
Patrick J. Riley $49,000 $0 $0 $49,000
Richard D. Shirk $49,000 $0 $0 $49,000
Bruce D. Taber $49,000 $0 $0 $49,000
Henry W. Todd $49,000 $0 $0 $49,000
</TABLE>
OPERATION OF INVESTMENT COMPANY
SERVICE PROVIDERS. Most of the Funds' necessary day-to-day operations are
performed by separate business organizations under contract to Investment
Company. The principal service providers are:
Investment Adviser, Custodian
and Transfer Agent: State Street Bank and Trust Company
Administrator: Frank Russell Investment Management
Company
Distributor: Russell Fund Distributors, Inc.
Independent Accountants: Coopers & Lybrand, L.L.P.
ADVISER. State Street Bank and Trust Company ("State Street" or "Adviser")
serves as the Funds' investment adviser pursuant to an Advisory Agreement dated
April 12, 1988. State Street Bank and Trust Company is a wholly owned
subsidiary of State Street Boston Corporation, a publicly held bank holding
company. State Street's address is 225 Franklin Street, Boston, MA 02110.
Under the Advisory Agreement, Adviser directs the Funds' investments in
accordance with their investment objectives, policies and limitations. For
these services, the Funds pay a fee to Adviser at the rates stated in the
Prospectus. The Money Market Fund accrued expenses to Adviser of $6,981,114 in
fiscal 1995, $7,225,807 in fiscal 1994, and $9,129,038 in fiscal 1993. Adviser
waived Advisory fees of $1,689,778 in fiscal 1993. The Government Money Market
Fund accrued expenses to Adviser of $970,313 in fiscal 1995, $748,629 in fiscal
1994, and
7
<PAGE>
$339,636 in fiscal 1993. In fiscal 1994 and fiscal 1993, Adviser voluntarily
agreed to reimburse the Government Money Market Fund for all expenses in excess
of .38% of average daily net assets on an annual basis, which amounted to
$41,975 and $94,854, respectively.
The Advisory Agreement will continue from year to year provided that a
majority of the Trustees who are not interested persons of the Funds and either
a majority of all Trustees or a majority of the shareholders of each Fund
approve its continuance. The Agreement may be terminated by Adviser or a Fund
without penalty upon sixty days' notice and will terminate automatically upon
its assignment.
ADMINISTRATOR. Frank Russell Investment Management Company
("Administrator") serves as the Funds' administrator, pursuant to an
Administration Agreement dated April 12, 1988. A description of the services
provided under the Administration Agreement and the basis for computing fees for
such services is provided in the Funds' Prospectuses. The Money Market Fund
accrued expenses to Administrator of $827,164 in fiscal 1995, $856,897 in fiscal
1994, and $1,330,910 in fiscal 1993. The Government Money Market Fund accrued
expenses to Administrator of $113,825 in fiscal 1995, $88,242 in fiscal 1994,
and $49,231 in fiscal 1993.
The Administration Agreement will continue from year to year provided that
a majority of the Trustees and a majority of the Trustees who are not interested
persons of the Funds and who have no direct or indirect financial interest in
the operation of the Distribution Plan described below or the Administration
Agreement approve its continuance. The Agreement may be terminated by
Administrator or any Fund without penalty upon sixty days' notice and will
terminate automatically upon its assignment.
Administrator is a wholly owned subsidiary of Frank Russell Company. Frank
Russell Company was founded in 1936 and has provided comprehensive asset
management consulting services since 1969 for institutional pools of investment
assets, principally those of large corporate employee benefit plans. Frank
Russell Company and its affiliates have offices in Tacoma, Seattle, New York
City, Toronto, London, Tokyo, Sydney, Paris, Zurich and Auckland, and have
approximately 1,000 officers and employees. Administrator's and Frank Russell
Company's mailing address is 909 A Street, Tacoma, WA 98402.
DISTRIBUTOR. Russell Fund Distributors, Inc. ("Distributor") serves as the
distributor of Fund shares pursuant to a Distribution Agreement dated April 12,
1988. Distributor is a wholly owned subsidiary of Administrator. Distributor's
mailing address is Two International Place, 35th Floor, Boston, MA 02110.
CUSTODIAN AND TRANSFER AGENT. State Street serves as the custodian
("Custodian") and transfer agent ("Transfer Agent") for Investment Company.
State Street also provides the basic portfolio recordkeeping required by
Investment Company for regulatory and financial reporting purposes. For these
services, State Street is paid an annual fee in accordance with the following:
custody services--a fee payable monthly on a pro rata basis, based on the
following percentages of average daily net assets of each Fund: $0 up to
$1.5 billion--0.02%, over $1.5 billion--0.015% (for purposes of calculating the
break point, the assets of all domestic Investment
8
<PAGE>
Portfolios are aggregated); securities transaction charges from $8.00 to $25.00
per transaction; Eurodollar transaction fees ranging from $110.00 to $125.00 per
transaction; monthly pricing fees of $375.00 per Investment Portfolio and from
$6.00 to $16.00 per security, depending on the type of instrument and the
pricing service used; transfer agent services of $2.00 per shareholder
transaction; a multiple class fee of $18,000 per year for each additional class
of shares; and yield calculation fees of $350.00 per non-money market portfolio
per year. State Street is reimbursed by each Fund for supplying certain out-of-
pocket expenses including postage, transfer fees, stamp duties, taxes, wire
fees, telexes, and freight.
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand L.L.P. serves as the Investment
Company's independent accountants. Coopers & Lybrand L.L.P. is responsible
for performing annual audits of the financial statements and financial
highlights in accordance with generally accepted auditing standards, a review
of federal tax returns, and, pursuant to Rule 17f-2 of the 1940 Act, three
security counts. The mailing address of Coopers & Lybrand L.L.P. is One Post
Office Square, Boston MA 02109.
DISTRIBUTION PLAN. Under the 1940 Act, the Securities and Exchange
Commission has adopted Rule 12b-1, which regulates the circumstances under which
the Funds may, directly or indirectly, bear distribution and shareholder
servicing expenses. The Rule provides that the Funds may pay for such expenses
only pursuant to a plan adopted in accordance with the Rule. Accordingly, the
Funds have adopted a distribution plan (the "Plan") for the Funds' Class B
shares, which is described in the Funds' Prospectus.
The Plan provides that each Fund may spend annually, directly or
indirectly, up to 0.35% of the average net asset value of its Class B shares for
distribution and shareholder servicing services. The Plan does not provide for
the Funds to be charged for interest, carrying or any other financing charges on
any distribution expenses carried forward to subsequent years. A quarterly
report of the amounts expended under the Plan, and the purposes for which such
expenditures were incurred, must be made to the Trustees for their review. The
Plan may not be amended without approval of the holders of Class B shares to
increase materially the distribution or shareholder servicing costs that the
Funds may pay. The Plan and material amendments to it must be approved annually
by all of the Trustees and by the Trustees who are neither "interested persons"
(as defined in the 1940 Act) of the Funds nor have any direct or indirect
financial interest in the operation of the Plan or any related agreements.
The Funds accrued expenses in the following amounts to Russell Fund
Distributors, Inc., as Distributor, for the fiscal years ended August 31:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Money Market Fund $326,928 $888,413 $1,022,510
Government Money Market Fund 87,798 100,965 42,012
</TABLE>
9
<PAGE>
For fiscal 1995, these amounts are reflective of the following individual
payments:
<TABLE>
<CAPTION>
Government
Money Money
Market Market
--------- ----------
<S> <C> <C>
Advertising $ 10,520 $ 2,625
Printing of Prospectuses 8,112 2,227
Compensation to Sales Personnel 171,211 46,011
Other* 137,085 36,935
--------- -------
$ 326,928 $87,798
--------- -------
--------- -------
</TABLE>
* Other expenses may include such items as compensation for travel, conferences
and seminars for staff, subscriptions, office charges and professional fees.
Under the Plan, the Funds may also enter into agreements ("Service
Agreements") with financial institutions, which may include Adviser ("Service
Organizations"), to provide distribution and shareholder servicing services with
respect to Fund shares held by or for the customers of the Service
Organizations. Such arrangements are more fully described in the Funds'
prospectus under "Distribution Services and Shareholder Servicing Arrangements."
Similar plans have been adopted for the Funds' Class A and Class C shares.
However, annual payments under these plans are limited to .25% and .60% of the
net asset value of the Class A and Class C shares of the Funds, respectively.
The Funds accrued expenses in the following amounts to Adviser, under a
Service Agreement pursuant to Rule 12b-1, for fiscal year ended August 31:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Money Market Fund $1,198,500 $211,573 $269,696
Government Money Market Fund 127,241 21,920 7,456
</TABLE>
The Funds commenced offering Class B shares on the date of this Statement
of Additional Information. The foregoing expenses were incurred with respect to
what are now classified as Class A shares.
FEDERAL LAW AFFECTING STATE STREET. The Glass-Steagall Act of 1933
prohibits state chartered banks such as State Street from engaging in the
business of underwriting, selling or distributing certain securities, and
prohibits a member bank of the Federal Reserve System from having certain
affiliations with an entity engaged principally in that business. The
activities of State Street in informing its customers of the Funds, performing
investment and redemption services, providing custodian, transfer, shareholder
servicing, dividend disbursing, agent servicing and investment advisory
services, may raise issues under these provisions. State Street has been
advised by its counsel that its activities in connection with the Funds
contemplated under this arrangement are consistent with its statutory and
regulatory obligations.
10
<PAGE>
VALUATION OF FUND SHARES. Net asset value per share for the Class B shares
of each Fund is calculated twice each business day, as of 12:00 noon Eastern
time and as of the close of the regular trading session on the New York Stock
Exchange (currently 4:00 p.m. Eastern time). A business day is one on which
both the Boston Federal Reserve and the New York Stock Exchange are open for
business.
It is the policy of the Funds to use their best efforts to maintain a
constant price per share of $1.00, although there can be no assurance that the
$1.00 net asset value per share will be maintained. In accordance with this
effort and pursuant to Rule 2a-7 under the 1940 Act, the Funds use the amortized
cost valuation method to value their portfolio instruments. This method
involves valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, even though the portfolio
security may increase or decrease in market value generally in response to
changes in interest rates. While 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 a Fund would receive if it sold the instrument.
For example, in periods of declining interest rates, the daily yield on
Fund shares computed by dividing the annualized daily income on each Fund's
portfolio by the net asset value based upon the amortized cost valuation
technique may tend to be higher than a similar computation made by using a
method of valuation based upon market prices and estimates. In periods of
rising interest rates, the daily yield on Fund shares computed the same way may
tend to be lower than a similar computation made by using a method of
calculation based upon market prices and estimates.
The Trustees have established procedures reasonably designed to stabilize
the Funds' price per share at $1.00. These procedures include: (1) the
determination of the deviation from $1.00, if any, of each Fund's net asset
value using market values; (2) periodic review by the Trustees of the amount of
and the methods used to calculate the deviation; and (3) maintenance of records
of such determination. The Trustees will promptly consider what action, if any,
should be taken if such deviation exceeds 1/2 of one percent.
BROKERAGE PRACTICES. All portfolio transactions are placed on behalf of
the Funds by Adviser. There is generally no stated commission in the purchase
or sale of securities traded in the over-the-counter markets, including most
debt securities and money market instruments. Rather, the price of such
securities includes an undisclosed commission in the form of a mark-up or mark-
down. The cost of securities purchased from underwriters includes an
underwriting commission or concession.
Subject to the arrangements and provisions described below, the selection
of a broker or dealer to execute portfolio transactions is usually made by
Adviser. The Advisory Agreement provides, in substance and subject to specific
directions from officers of Investment Company, that in executing portfolio
transactions and selecting brokers or dealers, the principal objective is to
seek the best overall terms available to the Funds. Ordinarily, securities will
be purchased from primary markets, and Adviser shall consider all factors it
deems relevant in assessing the best overall terms available for any
transaction, including the breadth of the market in the security, the
11
<PAGE>
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 other transactions on a continuing basis.
The Advisory Agreement authorizes Adviser to select brokers or dealers to
execute a particular transaction, including principal transactions, 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 Funds and/or Adviser (or its
affiliates). Adviser is authorized to cause the Funds to pay a commission to a
broker or dealer who provides such brokerage and research services for executing
a portfolio transaction which is in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction. The Funds
or Adviser, as appropriate, must determine in good faith that such commission
was reasonable in relation to the value of the brokerage and research services
provided--viewed in terms of that particular transaction or in terms of all the
accounts over which Adviser exercises investment discretion.
The Trustees periodically review Adviser's performance of its
responsibilities in connection with the placement of portfolio transactions on
behalf of the Funds and review the prices paid by the Funds over representative
periods of time to determine if such prices are reasonable in relation to the
benefits provided to the Funds. Certain services received by Adviser
attributable to a particular Fund transaction may benefit one or more other
accounts for which Adviser exercises investment discretion, or a Fund other than
that for which the transaction was effected. Adviser's fees are not reduced by
Adviser's receipt of such brokerage and research services.
During the fiscal year ended August 31, 1995, the Funds purchased
securities issued by the following regular brokers or dealers, as defined by
Rule 10b-1 of the 1940 Act, each of which is one of the Funds' ten largest
brokers or dealers by dollar amounts of securities executed or commissions
received on behalf of the Funds. The value of broker-dealer securities held as
of August 31, 1995, is as follows:
<TABLE>
<CAPTION>
MONEY MARKET FUND GOVERNMENT MONEY MARKET
($000) FUND
($000)
------------------------------------------------------
<S> <C> <C>
UBS Securities, Inc. 0 30,000*
HSBC Securities, Inc. 11,352* 120,000*
Prebon n/a n/a
First Chicago 0 0
Salomon Brothers, Inc. 0 0
Lumis & Co. n/a n/a
Smith Barney, Inc. n/a n/a
Lehman Brothers, Inc. 0 0
Goldman, Sachs &
Co. 0 0
12
<PAGE>
Greenwich Securities 0 0
* Repurchase Agreements
n/a represents no purchases executed during the fiscal year
</TABLE>
YIELD AND TOTAL RETURN QUOTATIONS. The Funds compute average annual total
return by using a standardized method of calculation required by the Securities
and Exchange Commission. Average annual total return is computed by finding the
average annual compounded rates of return on a hypothetical initial investment
of $1,000 over the one, five and ten year periods (or life of the funds as
appropriate), that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
P(1+T)(n)=ERV
where: P= a hypothetical initial payment of $1,000
T= average annual total return
n= number of years
ERV= ending redeemable value of a $1,000 payment made at the
beginning of the 1-, 5- and 10-year periods at the end of
the year or period.
The calculation assumes that all dividends and distributions of each Fund
are reinvested at the price calculated in the manner described in the Prospectus
on the dividend dates during the period, and includes all recurring and
nonrecurring fees that are charged to all shareholder accounts.
The current annualized yield of the Funds may be quoted in published
material. The yield is calculated daily based upon the seven days ending on the
date of calculation ("base period"). The yields are computed by determining the
net change, exclusive of capital changes, in the value of a hypothetical pre-
existing account having a balance of one share at the beginning of the base
period, subtracting a hypothetical charge reflecting deductions from shareholder
accounts and dividing the net change in the account value by the value of the
account at the beginning of the base period to obtain the base period return,
and then multiplying the base period return by (365/7) with the resulting yield
figure carried to the nearest hundredth of one percent. An effective yield is
computed by determining the net change, exclusive of capital changes, in the
value of a hypothetical pre-existing account having a balance of one share at
the beginning of the period, subtracting a hypothetical charge reflecting
deductions from shareholder accounts, and dividing the difference by the value
of the account at the beginning of the base period to obtain the base period
return, and then compounding the base period return by adding 1, raising the sum
to a power equal to 365 divided by 7, and subtracting 1 from the result,
according to the following formula:
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1)*(365/7)]-1
The following are the current and effective yields for the Funds for the
seven-day period ended August 31, 1995:
13
<PAGE>
Money Market Fund
-----------------
Current Yield 5.51%
Effective Yield 5.66%
Government Fund
---------------
Current Yield 5.38%
Effective Yield 5.53%
The above yields relate to a period prior to the division of Fund shares
into multiple classes and do not reflect the distribution and shareholder
servicing expenses of Class B shares. Had such expenses been incurred, the
yields would have been approximately .25% lower.
The yields quoted are not indicative of future results. Yields will depend
on the type, quality, maturity, and interest rate of money market instruments
held by the Funds.
INVESTMENTS
The fundamental investment objective of each Fund is set forth in its
Prospectus. In addition to that investment objective, each Fund also has
certain "fundamental" investment restrictions, which may be changed only with
the approval of a majority of the shareholders of the Fund, and certain
nonfundamental investment restrictions and policies, which may be changed by the
Funds without shareholder approval.
INVESTMENT RESTRICTIONS
Each Fund is subject to the following fundamental investment restrictions.
Unless otherwise noted, these restrictions apply on a Fund-by-Fund basis at the
time an investment is made. A Fund will not:
(1) Invest 25% or more of the value of its total assets in securities of
companies primarily engaged in any one industry (other than the US Government,
its agencies and instrumentalities). Concentration may occur as a result of
changes in the market value of portfolio securities, but may not result from
investment. Foreign and domestic branches of US banks and US branches of
foreign banks are not considered a single industry for purposes of this
restriction.
(2) Borrow money (including reverse repurchase agreements), except as a
temporary measure for extraordinary or emergency purposes or to facilitate
redemptions (not for leveraging or investment), provided that borrowings do not
exceed an amount equal to 33-1/3% of the current value of the Fund's assets
taken at market value, less liabilities other than borrowings. If at any time a
Fund's borrowings exceed this limitation due to a decline in net assets, such
borrowings will within three days be reduced to the extent necessary to comply
with this limitation. A Fund will not purchase investments once borrowed funds
(including reverse repurchase agreements) exceed 5% of its total assets.
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(3) Pledge, mortgage or hypothecate its assets. However, a Fund may pledge
securities having a market value at the time of the pledge not exceeding 33-1/3%
of the value of the Fund's total assets to secure borrowings permitted by
paragraph (2) above.
(4) With respect to 75% of its total assets, invest in securities of any
one issuer (other than securities issued by the US Government, its agencies, and
instrumentalities), if immediately after and as a result of such investment the
current market value of the Fund's holdings in the securities of such issuer
exceeds 5% of the value of the Fund's assets.
(5) Make loans to any person or firm; provided, however, that the making of
a loan shall not include (i) the acquisition for investment of bonds,
debentures, notes or other evidences of indebtedness of any corporation or
government which are publicly distributed or of a type customarily purchased by
institutional investors, or (ii) the entry into repurchase agreements or reverse
repurchase agreements. A Fund may lend its portfolio securities to broker-
dealers or other institutional investors if the aggregate value of all
securities loaned does not exceed 33-1/3% of the value of the Fund's total
assets.
(6) Purchase or sell commodities or commodity futures contracts.
(7) Purchase or sell real estate or real estate mortgage loans; provided,
however, that (i) the Government Money Market Fund may purchase or sell
government guaranteed real estate mortgage loans; and (ii) the Funds may invest
in securities secured by real estate or interests therein or issued by companies
which invest in real estate or interests therein.
(8) Engage in the business of underwriting securities issued by others,
except that a Fund will not be deemed to be an underwriter or to be underwriting
on account of the purchase of securities subject to legal or contractual
restrictions on disposition.
(9) Issue senior securities, except as permitted by its investment
objective, policies and restrictions, and except as permitted by the 1940 Act.
(10) Purchase or sell puts, calls or invest in straddles, spreads or any
combination thereof.
(11) Make short sales of securities or purchase any securities on margin,
except for such short-term credits as are necessary for the clearance of
transactions.
(12) Purchase from or sell portfolio securities to its officers or
directors or other interested persons (as defined in the 1940 Act) of the Funds,
including their investment advisers and affiliates, except as permitted by the
1940 Act and exemptive rules or orders thereunder.
(13) Invest in securities issued by other investment companies except in
connection with a merger, consolidation, acquisition of assets, or other
reorganization approved by the Funds' shareholders.
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(14) Invest in securities of any issuer which, together with its
predecessor, has been in operation for less than three years if, as a result,
more than 5% of the Fund's total assets would be invested in such securities.
(15) Invest more than 10% of its net assets in the aggregate in illiquid
securities or securities that are not readily marketable, including repurchase
agreements and time deposits of more than seven days' duration.
(16) Purchase interests in oil, gas or other mineral exploration or
development programs.
(17) Make investments for the purpose of gaining control of an issuer's
management.
(18) Purchase the securities of any issuer if the Investment Company's
officers, Directors, Adviser or any of their affiliates beneficially own more
than one-half of 1% of the securities of such issuer or together own
beneficially more than 5% of the securities of such issuer.
INVESTMENT POLICIES
Except as otherwise indicated, each Fund may invest in the following
instruments:
US GOVERNMENT OBLIGATIONS. The types of US Government obligations in which
the Funds may at times invest include: (1) A variety of US Treasury
obligations, which differ only in their interest rates, maturities and times of
issuance and which, with respect to the Money Market and Government Money Market
Funds, have remaining maturities or hard put dates of one year or less; and
(2) obligations issued or guaranteed by US Government agencies and
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the US Treasury, (b) the right of the issuer to borrow an
amount limited to a specific line of credit from the US Treasury,
(c) discretionary authority of the US Government agency or instrumentality or
(d) the credit of the instrumentality (examples of agencies and
instrumentalities are: Federal Land Banks, Federal Housing Administration,
Farmers Home Administration, Export--Import Bank of the United States, Central
Bank for Cooperatives, Federal Intermediate Credit Banks, Federal Home Loan
Banks, General Services Administration, Maritime Administration, Tennessee
Valley Authority, Asian-American Development Bank, Student Loan Marketing
Association, International Bank for Reconstruction and Development and Federal
National Mortgage Association). No assurance can be given that in the future
the US Government will provide financial support to such US Government agencies
or instrumentalities described in (2)(b), (2)(c) and (2)(d), other than as set
forth above, since it is not obligated to do so by law. The Funds may purchase
US Government obligations on a forward commitment basis.
REPURCHASE AGREEMENTS. The Funds may enter into repurchase agreements with
certain financial institutions. Under repurchase agreements, these parties sell
US Treasury bills, notes and bonds to a Fund and agree to repurchase the
securities at the Fund's cost plus interest within a specified time (normally
one day). The securities purchased by each Fund have a total value in excess of
the purchase price paid by the Fund and are held by Custodian until repurchased.
Repurchase agreements assist the Funds in being invested fully while retaining
"overnight"
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flexibility in pursuit of investments of a longer-term nature. The Funds will
limit repurchase transactions to those member banks of the Federal Reserve
System and broker-dealers whose creditworthiness is found satisfactory by
Adviser.
REVERSE REPURCHASE AGREEMENTS. The Funds may enter into reverse repurchase
agreements under the circumstances described in "Investment Restrictions."
Under reverse repurchase agreements, a Fund transfers possession of portfolio
securities to banks in return for cash in an amount equal to a percentage of the
portfolio securities' market value and agrees to repurchase the securities at a
future date by repaying the cash with interest. The Funds retain the right to
receive interest and principal payments from the securities while they are in
the possession of the financial institutions. Cash or liquid high quality debt
obligations from a Fund's portfolio equal in value to the repurchase price
including any accrued interest will be segregated by Custodian on the Fund's
records while a reverse repurchase agreement is in effect.
FORWARD COMMITMENTS. Each Fund may contract to purchase securities for a
fixed price at a future date beyond customary settlement time consistent with
the Fund's ability to manage its investment portfolio, maintain a stable net
asset value and meet redemption requests. A Fund may dispose of a commitment
prior to settlement if it is appropriate to do so and realize short-term profits
or losses upon such sale. When effecting such transactions, cash or liquid high
quality debt obligations held by the Fund of a dollar amount sufficient to make
payment for the portfolio securities to be purchased will be segregated on the
Fund's records at the trade date and maintained until the transaction is
settled. Forward commitments involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date, or if the other
party fails to complete the transaction.
WHEN-ISSUED TRANSACTIONS. New issues of securities are often offered on a
when-issued basis. This means that delivery and payment for the securities
normally will take place several days after the date the buyer commits to
purchase them. The payment obligation and the interest rate that will be
received on securities purchased on a when-issued basis are each fixed at the
time the buyer enters into the commitment.
Each Fund will make commitments to purchase when-issued securities only
with the intention of actually acquiring the securities, but a Fund may sell
these securities or dispose of the commitment before the settlement date if it
is deemed advisable as a matter of investment strategy. Cash or marketable high
quality debt securities equal to the amount of the above commitments will be
segregated on each Fund's records. For the purpose of determining the adequacy
of these securities the segregated securities will be valued at market. If the
market value of such securities declines, additional cash or securities will be
segregated on the Fund's records on a daily basis so that the market value of
the account will equal the amount of such commitments by the Fund. No fund will
invest more than 25% of its net assets in when-issued securities.
Securities purchased on a when-issued basis and the securities held by each
Fund are subject to changes in market value based upon the public's perception
of changes in the level of interest rates. Generally, the value of such
securities will fluctuate inversely to changes in interest rates --
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i.e., they will appreciate in value when interest rates decline and decrease in
value when interest rates rise. Therefore, if in order to achieve higher
interest income a Fund remains substantially fully invested at the same time
that it has purchased securities on a "when-issued" basis, there will be a
greater possibility of fluctuation in the Fund's net asset value.
When payment for when-issued securities is due, each Fund will meet its
obligations from then-available cash flow, the sale of segregated securities,
the sale of other securities or, and although it would not normally expect to do
so, from the sale of the when-issued securities themselves (which may have a
market value greater or less than the Fund's payment obligation). The sale of
securities to meet such obligations carries with it a greater potential for the
realization of capital gains, which are subject to federal income taxes.
VARIABLE AMOUNT MASTER DEMAND NOTES. Variable amount master demand notes
are unsecured obligations that are redeemable upon demand and are typically
unrated. These instruments are issued pursuant to written agreements between
the issuers and the holders. The agreements permit the holders to increase
(subject to an agreed maximum) and the holders and issuers to decrease the
principal amount of the notes, and specify that the rate of interest payable on
the principal fluctuates according to an agreed formula.
SECTION 4(2) COMMERCIAL PAPER (MONEY MARKET FUND ONLY). The Money Market
Fund may invest in commercial paper issued in reliance on the so-called "private
placement" exemption from registration afforded by Section 4(2) of the
Securities Act of 1933 ("Section 4(2) paper"). Section 4(2) paper is restricted
as to disposition under the federal securities laws, and generally is sold to
investors who agree that they are purchasing the paper for an investment and not
with a view to public distribution. Any resale by the purchaser must be in an
exempt transaction. Section 4(2) paper is normally resold to other investors
through or with the assistance of the issuer or investment dealers who make a
market in Section 4(2) paper, thus providing liquidity. Pursuant to guidelines
established by the Board of Trustees, Adviser may determine that Section 4(2)
paper is liquid for the purposes of complying with the Fund's investment
restriction relating to investments in illiquid securities.
VARIABLE AND FLOATING RATE SECURITIES. A floating rate security provides
for the automatic adjustment of its interest rate whenever a specified interest
rate changes. A variable rate security provides for the automatic establishment
of a new interest rate on set dates. Interest rates on these securities are
ordinarily tied to, and are a percentage of, a widely recognized interest rate
such as the yield on 90-day US Treasury bills or the prime rate of a specified
bank. These rates may change as often as twice daily. Generally, changes in
interest rates will have a smaller effect on the market value of variable and
floating rate securities than on the market value of comparable fixed income
obligations. Thus, investing in variable and floating rate securities generally
allows less opportunity for capital appreciation and depreciation than investing
in comparable fixed income securities.
The Funds may purchase variable rate US Government obligations which are
instruments issued or guaranteed by the US Government, or an agency or
instrumentality thereof, that have a rate of interest subject to adjustment at
regular intervals but less frequently than annually.
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Variable rate US Government obligations whose interest is readjusted no less
frequently than annually will be deemed to have a maturity equal to the period
remaining until the next readjustment of the interest rate.
ASSET-BACKED SECURITIES (MONEY MARKET FUND ONLY). Asset-backed securities
represent undivided fractional interests in pools of instruments, such as
consumer loans, and are similar in structure to mortgage-related pass-through
securities described below. Payments of principal and interest are passed
through to holders of the securities and are typically supported by some form of
credit enhancement, such as a letter of credit, surety bond, limited guarantee
by another entity or by priority to certain of the borrower's other securities.
The degree of credit-enhancement varies, generally applying only until exhausted
and covering only a fraction of the security's par value.
The value of asset-backed securities is affected by changes in the market's
perception of the asset backing the security, changes in the creditworthiness of
the servicing agent for the instrument pool, the originator of the instruments
or the financial institution providing any credit enhancement and the
expenditure of any portion of any credit enhancement. The risks of investing in
asset-backed securities are ultimately dependent upon payment of the underlying
instruments by the obligors, and the Fund would generally have no recourse
against the obligee of the instruments in the event of default by an obligor.
The underlying instruments are subject to prepayments which shorten the weighted
average life of asset-backed securities and may lower their return, in the same
manner as described below for prepayments of pools of mortgage loans underlying
mortgage-backed securities.
MORTGAGE-RELATED PASS-THROUGH SECURITIES. Mortgage pass-through
certificates are issued by governmental, government-related and private
organizations and are backed by pools of mortgage loans. These mortgage loans
are made by savings and loan associations, mortgage bankers, commercial banks
and other lenders to residential home buyers throughout the United States. The
securities are "pass-through" securities because they provide investors with
monthly payments of principal and interest that, in effect, are a "pass-through"
of the monthly payments made by the individual borrowers on the underlying
mortgage loans, net of any fees paid to the issuer or guarantor of the pass-
through certificates. The principal governmental issuer of such securities is
the Government National Mortgage Association ("GNMA"), which is a wholly-owned
US Government corporation within the Department of Housing and Urban
Development. Government-related issuers include the Federal Home Loan Mortgage
Corporation ("FHLMC"), a corporate instrumentality of the United States created
pursuant to an act of Congress which is owned entirely by the Federal Home Loan
Banks, and the Federal National Mortgage Association ("FNMA"), a government
sponsored corporation owned entirely by private stockholders. Commercial banks,
savings and loan associations, private mortgage insurance companies, mortgage
bankers and other secondary market issuers also create pass-through pools of
conventional residential mortgage loans. Such issuers may be the originators of
the underlying mortgage loans as well as the guarantors of the mortgage-related
securities.
(1) GNMA Mortgage Pass-Through Certificates ("Ginnie Maes"). Ginnie Maes
represent an undivided interest in a pool of mortgage loans that are insured by
the Federal Housing
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Administration or the Farmers Home Administration or guaranteed by the Veterans
Administration. Ginnie Maes entitle the holder to receive all payments
(including prepayments) of principal and interest owed by the individual
mortgagors, net of fees paid to GNMA and to the issuer which assembles the loan
pool and passes through the monthly mortgage payments to the certificate holders
(typically, a mortgage banking firm), regardless of whether the individual
mortgagor actually makes the payment. Because payments are made to certificate
holders regardless of whether payments are actually received on the underlying
loans, Ginnie Maes are of the "modified pass-through" mortgage certificate type.
GNMA is authorized to guarantee the timely payment of principal and interest on
the Ginnie Maes as securities backed by an eligible pool of mortgage loans. The
GNMA guaranty is backed by the full faith and credit of the United States, and
GNMA has unlimited authority to borrow funds from the US Treasury to make
payments under the guaranty. The market for Ginnie Maes is highly liquid
because of the size of the market and the active participation in the secondary
market by securities dealers and a variety of investors.
(2) FHLMC Mortgage Participation Certificates ("Freddie Macs"). Freddie
Macs represent interests in groups of specified first lien residential
conventional mortgage loans underwritten and owned by FHLMC. Freddie Macs
entitle the holder to timely payment of interest, which is guaranteed by FHLMC.
FHLMC guarantees either ultimate collection or timely payment of all principal
payments on the underlying mortgage loans. In cases where FHLMC has not
guaranteed timely payment of principal, FHLMC may remit the amount due on
account of its guarantee of ultimate payment of principal at any time after
default on an underlying loan, but in no event later than one year after it
becomes payable. Freddie Macs are not guaranteed by the United States or by any
of the Federal Home Loan Banks and do not constitute a debt or obligation of the
United States or of any Federal Home Loan Bank. The secondary market for
Freddie Macs is highly liquid because of the size of the market and the active
participation in the secondary market by FHLMC, securities dealers and a variety
of investors.
(3) FNMA Guaranteed Mortgage Pass-Through Certificates ("Fannie Maes").
Fannie Maes represent an undivided interest in a pool of conventional mortgage
loans secured by first mortgages or deeds of trust, on one-family to four-family
residential properties. FNMA is obligated to distribute scheduled monthly
installments of principal and interest on the loans in the pool, whether or not
received, plus full principal of any foreclosed or otherwise liquidated loans.
The obligation of FNMA under its guaranty is solely the obligation of FNMA and
is not backed by, nor entitled to, the full faith and credit of the United
States.
The market value of mortgage-related securities depends on, among other
things, the level of interest rates, the certificates' coupon rates and the
payment history of the underlying borrowers.
Although the mortgage loans in a pool underlying a mortgage pass-through
certificate will have maturities of up to 30 years, the average life of a
mortgage pass-through certificate will be substantially less because the loans
will be subject to normal principal amortization and also may be prepaid prior
to maturity. Prepayment rates vary widely and may be affected by changes in
mortgage interest rates. In periods of falling interest rates, the rate of
prepayment on higher interest mortgage rates tends to increase, thereby
shortening the actual average life of the
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mortgage pass-through certificate. Conversely, when interest rates are
rising, the rate of prepayment tends to decrease, thereby lengthening the
average life of the mortgage pass-through certificate. Accordingly, it is
not possible to predict accurately the average life of a particular pool.
However, based on current statistics, it is conventional to quote yields on
mortgage pass-through certificates based on the assumption that they have
effective maturities of 12 years. Reinvestment of prepayments may occur at
higher or lower rates than the original yield on the certificates. Due to
the prepayment feature and the need to reinvest prepayments of principal at
current rates, mortgage pass-through certificates with underlying loans
bearing interest rates in excess of the market rate can be less effective
than typical noncallable bonds with similar maturities at "locking in" yields
during periods of declining interest rates, although they may have comparable
risks of declining in value during periods of rising interest rates.
ZERO COUPON SECURITIES. These securities are notes, bonds and debentures
that: (1) do not pay current interest and are issued at a substantial discount
from par value; (2) have been stripped of their unmatured interest coupons and
receipts; or (3) pay no interest until a stated date one or more years into the
future. These securities also include certificates representing interests in
such stripped coupons and receipts.
Because the above Funds accrue taxable income from zero coupon securities
without receiving regular interest payments in cash, each Fund may be required
to sell portfolio securities in order to pay a dividend depending, among other
things, upon the proportion of shareholders who elect to receive dividends in
cash rather than reinvesting dividends in additional shares of the Fund.
Investing in these securities might also force the Fund to sell portfolio
securities to maintain portfolio liquidity.
Because a zero coupon security pays no interest to its holder during its
life or for a substantial period of time, it usually trades at a deep discount
from its face or par value and will be subject to greater fluctuations in market
value in response to changing interest rates than debt obligations of comparable
maturities that make regular distributions of interest.
RATINGS OF DEBT INSTRUMENTS
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") -- LONG TERM DEBT RATINGS.
Aaa -- Bonds which 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 edged." 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 which 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
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or fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risk appear somewhat larger
than the Aaa securities.
A -- Bonds which 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 which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium-grade obligations
(i.e., 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.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
STANDARD & POOR'S CORPORATION ("S&P"). The ratings are based, in varying
degrees, on the following considerations: (1) The likelihood of default --
capacity and willingness of the obligator as to the timely payment of interest
and repayment of principal in accordance with the terms of the obligation;
(2) The nature of and provisions of the obligation; and (3) The protection
afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization, or other arrangement under the laws of bankruptcy
and other laws affecting creditors' rights.
AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
RATINGS OF COMMERCIAL PAPER
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MOODY'S. Moody's short-term debt ratings are opinions of the ability of
issuers to repay punctually senior debt obligations. These obligations have an
original maturity not exceeding one year, unless explicitly noted. Moody's
employs the following three designations, all judged to be investment grade, to
indicate the relative repayment ability of rated issuers:
/ / Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
/ / Leading market positions in well-established industries.
/ / High rates of return on funds employed.
/ / Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
/ / Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
/ / Well-established access to a range of financial markets and
assured sources of alternate liquidity.
/ / Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited above
but to a lesser degree. Earnings trends and coverage ratios, while
sound, may be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternative liquidity is maintained.
/ / Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
/ / Issuers rated Not Prime do not fall within any of the Prime rating
categories.
S&P. An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered shot-term in the relevant
market. Ratings are graded into several categories, ranging from A-1 for the
highest quality obligations to D for the lowest. These categories are as
follows:
A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
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FITCH'S INVESTORS SERVICE, INC. ("FITCH"). Commercial paper rated by Fitch
reflects Fitch's current appraisal of the degree of assurance of timely payment
of such debt. An appraisal results in the rating of an issuer's paper as F-1,
F-2, F-3, or F-4.
F-1 -- This designation indicates that the commercial paper is regarded as
having the strongest degree of assurance for timely payment.
F-2 -- Commercial paper issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than those issues rated F-1.
DUFF AND PHELPS, INC. Duff & Phelps' short-term ratings are consistent
with the rating criteria utilized by money market participants. The ratings
apply to all obligations with maturities of under one year, including commercial
paper, the uninsured portion of certificates of deposit, unsecured bank loans,
master notes, bankers acceptances, irrevocable letters of credit, and current
maturities of long-term debt. Asset-backed commercial paper is also rated
according to this scale.
Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of funds including trade
credit, bank lines, and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.
The distinguishing feature of Duff & Phelps' short-term ratings is the
refinement of the traditional '1' category. The majority of short-term debt
issuers carry the highest rating, yet quality differences exist within that
tier. As a consequence, Duff & Phelps has incorporated gradations of '1+' (one
plus) and '1-' (one minus) to assist investors in recognizing those differences.
Duff 1+--Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free US Treasury short-term
obligations.
Duff 1--Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk factors
are minor.
Duff 1- -- High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk factors are very
small.
GOOD GRADE. Duff 2--Good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs
may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
SATISFACTORY GRADE. Duff 3--Satisfactory liquidity and other
protection factors qualify issue as to investment grade. Risk factors are
larger and subject to more variation. Nevertheless, timely payment is
expected.
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NON-INVESTMENT GRADE. Duff 4--Speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
DEFAULT. Duff 5--Issuer failed to meet scheduled principal and/or
interest payments.
IBCA, INC. In addition to conducting a careful review of an institution's
reports and published figures, IBCA's analysts regularly visit the companies for
discussions with senior management. These meetings are fundamental to the
preparation of individual reports and ratings. To keep abreast of any changes
that may affect assessments, analysts maintain contact throughout the year with
the management of the companies they cover.
IBCA's analysts speak the languages of the countries they cover, which is
essential to maximize the value of their meetings with management and to
properly analyze a company's written materials. They also have a thorough
knowledge of the laws and accounting practices that govern the operations and
reporting of companies within the various countries.
Often, in order to ensure a full understanding of their position, companies
entrust IBCA with confidential data. While these data cannot be disclosed in
reports, they are taken into account when assigning our ratings. Before
dispatch to subscribers, a draft of the report is submitted to each company to
permit correction of any factual errors and to enable clarification of issues
raised.
IBCA's Rating Committees meet at regular intervals to review all ratings
and to ensure that individual ratings are assigned consistently for institutions
in all the countries covered. Following the Committee meetings, ratings are
issued directly to subscribers. At the same time, the company is informed of
the ratings as a matter of courtesy, but not for discussion.
A1+--Obligations supported by the highest capacity for timely repayment.
A1--Obligations supported by a very strong capacity for timely repayment.
A2--Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in business,
economic or financial conditions.
B1--Obligations supported by an adequate capacity for timely repayment.
Such capacity is more susceptible to adverse changes in business, economic, or
financial conditions than for obligations in higher categories.
B2--Obligations for which the capacity for timely repayment is susceptible
to adverse changes in business, economic or financial conditions.
C1--Obligations for which there is an inadequate capacity to ensure timely
repayment.
D1--Obligations which have a high risk of default or which are currently in
default.
25
<PAGE>
TAXES
Each Fund intends to qualify for treatment as a regulated investment
company ("RIC") under Subchapter M of the Internal Revenue Code of 1986, as
amended ("the Code"). As a RIC, each Fund will not be liable for federal income
taxes on taxable net investment income and capital gain net income (capital
gains in excess of capital losses) that it distributes to its shareholders,
provided that the Fund distributes annually to its shareholders at least 90% of
its net investment income and net short-term capital gain for the taxable year
("Distribution Requirement"). For a Fund to qualify as a RIC it must abide by
all of the following requirements: (1) at least 90% of the Fund's gross income
each taxable year must be derived from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock
or securities or foreign currencies, or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies ("Income Requirement");
(2) less than 30% of the Fund's gross income each taxable year must be derived
from the sale or other disposition of securities and certain options, futures
contracts, forward contracts and foreign currencies held for less than three
months ("Short-Short Limitation"); (3) at the close of each quarter of the
Fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, US Government securities, securities of
other RICs, and other securities, with such other securities limited, in respect
of any one issuer, to an amount that does not exceed 5% of the total assets of
the Fund and that does not represent more than 10% of the outstanding voting
securities of such issuer; and (4) at the close of each quarter of the Fund's
taxable year, not more than 25% of the value of its assets may be invested in
securities (other than US Government securities or the securities of other RICs)
of any one issuer.
Each Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year an amount at least equal to
the sum of: (1) 98% of its ordinary income for that year; (2) 98% of its
capital gain net income for the one-year period ending on October 31 of that
year; and (3) certain undistributed amounts from the preceding calendar year.
For this and other purposes, dividends declared in October, November or December
of any calendar year and made payable to shareholders of record in such month
will be deemed to have been received on December 31 of such year if the
dividends are paid by the Fund subsequent to December 31 but prior to February 1
of the following year.
If a shareholder receives a distribution taxable as long-term capital gain
with respect to shares of a Fund and redeems or exchanges the shares without
having held the shares for more than six months, then any loss on the redemption
or exchange will be treated as long-term capital loss to the extent of the
capital gain distribution.
As of August 31, 1995, the Money Market Fund and the Government Money
Market Fund had a net tax basis capital loss carryforward of $4,159,322 and
$157,456, respectively, which may be applied against any realized net taxable
gains of each succeeding year until the expiration date of August 31, 2003. In
addition, from November 1, 1994 to August 31, 1995, the Money Market Fund
incurred $5,844 of net realized capital
26
<PAGE>
losses. As permitted by tax regulation, the Fund intends to elect to defer
these losses and treat them as arising in the fiscal year ending August 31,
1996.
STATE AND LOCAL TAXES. Depending upon the extent of each Fund's activities
in states and localities in which its offices are maintained, its agents or
independent contractors are located or it is otherwise deemed to be conducting
business, the Fund may be subject to the tax laws of such states or localities.
The foregoing discussion is only a summary of certain federal income tax
issues generally affecting the Funds and their shareholders. Circumstances
among investors may vary and each investor is encouraged to discuss investment
in the Funds with the investor's tax adviser.
FINANCIAL STATEMENTS
The 1995 fiscal year-end financial statements of Investment Company,
consisting of the Money Market and Government Money Market Funds, including
notes to the financial statements and financial highlights and the Report of
Independent Accountants are included in the Funds' Annual Report to
Shareholders. Copies of these reports accompany this Statement of Additional
Information and are incorporated herein by reference.
<PAGE>
Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
THE SEVEN SEAS SERIES FUND
Two International Place, 35th Floor
Boston, Massachusetts 02110
(617) 654-6089
STATEMENT OF ADDITIONAL INFORMATION
MONEY MARKET FUNDS
CLASS C SHARES
DECEMBER 29, 1995
The Seven Seas Series Fund ("Investment Company") is a registered open-end
investment company organized as a Massachusetts business trust offering shares
of beneficial interest in separate investment portfolios, including those listed
below, each of which is referred to as a "Fund." In addition, each series of
the Investment Company is diversified as defined under the Investment Company
Act of 1940, as amended (the "1940 Act").
THE SEVEN SEAS SERIES MONEY MARKET FUND ("MONEY MARKET FUND")
THE SEVEN SEAS SERIES US GOVERNMENT MONEY MARKET FUND ("GOVERNMENT
MONEY MARKET FUND")
This Statement of Additional Information supplements or describes in
greater detail the Investment Company and the Funds noted above as contained in
the Funds' Prospectus for Class C shares dated December 29, 1995. This
Statement is not a Prospectus and should be read in conjunction with the Funds'
Prospectus for Class C shares, which may be obtained by telephoning or writing
Investment Company at the number or address shown above.
<PAGE>
TABLE OF CONTENTS
PAGE
STRUCTURE AND GOVERNANCE . . . . . . . . . . . . . . . . . . . . . . . 3
Organization and Business History . . . . . . . . . . . . . . . . 3
Shareholder Meetings. . . . . . . . . . . . . . . . . . . . . . . 4
Controlling Shareholders. . . . . . . . . . . . . . . . . . . . . 4
Principal Shareholders. . . . . . . . . . . . . . . . . . . . . . 5
Trustees and Officers . . . . . . . . . . . . . . . . . . . . . . 6
OPERATION OF INVESTMENT COMPANY. . . . . . . . . . . . . . . . . . . . 7
Service Providers . . . . . . . . . . . . . . . . . . . . . . . . 7
Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Administrator . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Custodian and Transfer Agent. . . . . . . . . . . . . . . . . . . 8
Distribution Plan . . . . . . . . . . . . . . . . . . . . . . . . 9
Federal Law Affecting State Street. . . . . . . . . . . . . . . . 10
Valuation of Fund Shares. . . . . . . . . . . . . . . . . . . . . 10
Brokerage Practices . . . . . . . . . . . . . . . . . . . . . . . 11
Yield and Total Return Quotations . . . . . . . . . . . . . . . . 12
INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . 13
Investment Policies . . . . . . . . . . . . . . . . . . . . . . . 15
Ratings of Debt Instruments . . . . . . . . . . . . . . . . . . . 21
Ratings of Commercial Paper . . . . . . . . . . . . . . . . . . . 22
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 26
-2-
<PAGE>
STRUCTURE AND GOVERNANCE
ORGANIZATION AND BUSINESS HISTORY. Investment Company was organized as a
Massachusetts business trust on October 3, 1987, and operates under a First
Amended and Restated Master Trust Agreement, dated October 13, 1993, as amended.
Investment Company is authorized to issue shares of beneficial interest, par
value $.001 per share, which may be divided into one or more series, each of
which evidences pro rata ownership interest in a different investment portfolio,
or "Fund." The Money Market and US Government Money Market Funds are two such
investment portfolios. The Trustees may create additional Funds at any time
without shareholder approval.
As of the date of this Statement of Additional Information, Investment
Company is comprised of the following investment portfolios, each of which
commenced operations on the date set forth opposite the portfolio's name:
--------------------------------------------------------------------------
The Seven Seas Series Money Market Fund May 2, 1988
--------------------------------------------------------------------------
The Seven Seas Series US Government Money Market Fund March 1, 1991
--------------------------------------------------------------------------
The Seven Seas Series US Treasury Money Market Fund December 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series US Treasury Obligations Fund *
--------------------------------------------------------------------------
The Seven Seas Series Prime Money Market Fund February 22, 1994
--------------------------------------------------------------------------
The Seven Seas Series Yield Plus Fund November 9, 1992
--------------------------------------------------------------------------
The Seven Seas Series Tax Free Money Market Fund December 1, 1994
--------------------------------------------------------------------------
The Seven Seas Series Intermediate Fund September 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series Bond Market Fund *
--------------------------------------------------------------------------
The Seven Seas Series Growth and Income Fund September 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series S&P 500 Index Fund December 30, 1992
--------------------------------------------------------------------------
The Seven Seas Series Small Cap Fund July 1, 1992
--------------------------------------------------------------------------
The Seven Seas Series Matrix Equity Fund May 4, 1992
--------------------------------------------------------------------------
The Seven Seas Series Active International Fund March 7, 1995
--------------------------------------------------------------------------
The Seven Seas Series International Pacific Index Fund *
--------------------------------------------------------------------------
The Seven Seas Series Emerging Markets Fund March 1, 1994
--------------------------------------------------------------------------
The Seven Seas Series Real Estate Equity Fund *
--------------------------------------------------------------------------
__________
*As of the date of this Statement of Additional Information, these
portfolios have not commenced operations.
Prospectuses for these investment portfolios may be obtained by calling
Investment Company's distributor, Russell Fund Distributors, Inc., at (617) 654-
6089.
Investment Company is authorized to divide shares of any series into two or
more classes of shares. The shares of each Fund may have such rights and
preferences as the Trustees may establish from time to time, including the right
of redemption (including the price, manner and terms of redemption), special and
relative rights as to dividends and distributions, liquidation rights, sinking
or purchase fund provisions and conditions
-3-
<PAGE>
under which any Fund may have separate voting rights or no voting rights. Each
class of shares of a Fund is entitled to the same rights and privileges as all
other classes of that Fund, except that each class bears the expenses associated
with the distribution and shareholder servicing arrangements of that class, as
well as other expenses attributable to the class and unrelated to the management
of the Fund's portfolio securities. Shares of the Money Market, US Government
Money Market and Tax Free Money Market Funds are divided into Classes A, B and
C.
Any amendment to the Master Trust Agreement that would materially and
adversely affect shareholders of Investment Company as a whole, or shareholders
of a particular Fund, must be approved by the holders of a majority of the
shares of Investment Company or the Fund, respectively. All other amendments
may be effected by Investment Company's Board of Trustees.
Under certain unlikely circumstances, and as is the case with any
Massachusetts business trust, a shareholder of a Fund may be held personally
liable for the obligations of a Fund. The Master Trust Agreement provides that
shareholders shall not be subject to any personal liability for the acts or
obligations of a Fund and that every written agreement, obligation, or other
undertaking of the Fund shall contain a provision to the effect that the
shareholders are not personally liable thereunder. The Master Trust Agreement
also provides that the Fund shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Fund and satisfy
any judgment thereon. Thus, the risk to shareholders of incurring financial
loss beyond their investments is limited to circumstances in which the Fund
itself would be unable to meet its obligations.
SHAREHOLDER MEETINGS. Investment Company will not have an Annual Meeting
of Shareholders. Special Meetings may be convened: (1) by the Board of
Trustees; (2) upon written request to the Board by the holders of at least 10%
of the outstanding shares; or (3) upon the Board's failure to honor the
shareholders' request described above, by holders of at least 10% of the
outstanding shares giving notice of the special meeting to the shareholders.
CONTROLLING SHAREHOLDERS. The Trustees have the authority and
responsibility to manage the business of Investment Company. Trustees hold
office until they resign or are removed by, in substance, a vote of two-thirds
of Investment Company shares outstanding. However, in connection with State
Street Bank and Trust Company's ("State Street") securities lending program and
investment accounts over which State Street has discretionary authority, State
Street holds certain collateral on behalf of its securities lending clients to
secure the return of loaned securities. Such collateral may be invested in
Investment Company shares from time to time. Shares representing such
investments are held of record by State Street, who retains voting control of
such shares. As of November 30, 1995, State Street held beneficially and of
record 36% of Investment Company's shares in connection with various lending
portfolios and, consequently, may be deemed to be a controlling person of
Investment Company for purposes of the 1940 Act.
-4-
<PAGE>
State Street also acts as Investment Company's investment adviser, transfer
agent and custodian.
Frank Russell Investment Management Company ("Administrator"), the
Investment Company's administrator, will be the sole shareholder of certain
series of Investment Company until such time as such series have public
shareholders and therefore Administrator may be deemed to be a controlling
person for the purposes of the 1940 Act.
PRINCIPAL SHAREHOLDERS. As of November 30, 1995, the following
shareholders owned of record 5% or more of the issued and outstanding shares of
Class A of each Fund:
Money Market Fund:
- BellSouth Pension Trust UKCF, 1155 Peachtree St. NE, Atlanta, GA
30367--5%.
Government Money Market Fund:
- State Street Bank and Trust Company, Newport Office Park, 108 Myrtle
Street AH3, North Quincy, MA 02171--9%;
- PRU Welfare Union Fixed PFIA, Two Concourse Parkway Suite 500,
Atlanta, GA 30328--8%;
- Algemeenburgerlijk Pension Fund, One Enterprise Drive, North Quincy,
MA 02171--7%; and
- Biogen, Inc., 14 Cambridge Center, Cambridge, MA 02142--6%.
The Trustees and officers of Investment Company, as a group, own less than
1% of Investment Company's voting securities.
TRUSTEES AND OFFICERS. The Board of Trustees is responsible for overseeing
generally the operation of the Funds. The officers, all of whom are employed
by, and are officers of, Administrator or its affiliates, are responsible for
the day-to-day management and administration of the Funds' operations.
Trustees who are not officers or employees of State Street or its
affiliates are paid an annual fee and are reimbursed for travel and other
expenses they incur in attending Board meetings. Investment Company's officers
and employees are paid by Administrator or its affiliates.
The following lists Investment Company's Trustees and officers, their
positions with Investment Company, their present and principal occupations
during the past five years and the mailing addresses of Trustees who are not
affiliated with Investment Company. The mailing address for all Trustees and
officers affiliated with Investment Company is The Seven Seas Series Fund, 909 A
Street, Tacoma, WA 98402.
-5-
<PAGE>
An asterisk (*) indicates that a Trustee is an "interested person" of the
Investment Company, as defined in the 1940 Act.
*LYNN L. ANDERSON, Trustee, Chairman of the Board, President and Fund
Treasurer. Chairman of the Board and Chief Executive Officer, Frank Russell
Investment Management Company and Russell Fund Distributors, Inc.; Director,
President and Chief Executive Officer, Frank Russell Investment Company and
Frank Russell Trust Company; Director and President, Russell Insurance Funds;
Director and Chairman, Frank Russell Company (Delaware); Director, Frank Russell
Investments (Ireland) Limited and Frank Russell Investment Company plc.
WILLIAM L. MARSHALL, Trustee. 33 West Court Street, Doylestown, PA 18901.
Chief Executive Officer and President, Wm. L. Marshall Associates, Inc. (a
registered investment adviser and provider of financial and related consulting
services); Certified Financial Planner; Member, Registry of Financial Planning
Practitioners; and Advisory Committee, International Association for Financial
Planning Broker-Dealer Program. Member, Institute of Certified Financial
Planners. Registered for Securities with FSC Securities Corp., Marietta,
Georgia.
*STEVEN J. MASTROVICH, Trustee. 1 Financial Center, Boston, MA 02111.
Partner, Brown, Rudnick, Freed and Gesmer (law firm). 1990 to 1994, Partner,
Warner & Stackpole (law firm).
PATRICK J. RILEY, Trustee. 21 Custom House Street, Boston, MA 02110.
Partner, Riley, Burke & Donahue (law firm).
RICHARD D. SHIRK, Trustee. 3350 Peachtree Road, N.E., Atlanta, GA 30326.
President and Chief Executive Officer, Blue Cross/Blue Shield of Georgia. 1990
to 1992, President, Champions Group Resources--Business Management and Employee
Benefits Consulting; 1990, Senior Vice President, Employee Benefits Division,
Cigna Corporation (providing and insuring group life, health and disability
employee benefit products and services); from 1986 to 1990, Senior Vice
President, EQUICOR-Equitable HCA Corporation (providing and insuring group life,
health and disability employee benefit products and services).
*BRUCE D. TABER, Trustee. 26 Round Top Road, Boxford, MA 01921.
President, A.B. Reed, Inc. - Engineers, Architects, Planners. Prior to that,
Vice President, Instrumentation and Controls, A.B. Reed., Inc.
HENRY W. TODD, Trustee. 111 Commerce Drive, Montgomeryville, PA 18936.
President and Director, Zink & Triest Co., Inc. (dealer in vanilla flavor
materials); Director, A.M. Todd Co., and Flavorite Laboratories.
-6-
<PAGE>
J. DAVID GRISWOLD, Vice President and Secretary. Assistant Secretary,
Associate General Counsel, Chief Compliance Officer, Frank Russell Investment
Management Company, Russell Fund Distributors, Inc. and Frank Russell Capital
Inc.; Associate General Counsel and Assistant Secretary, Frank Russell Company;
Associate General Counsel, Assistant Secretary and Compliance Officer, Russell
Fiduciary Services Company; Director, Secretary, Associate General Counsel and
Chief Compliance Officer, Frank Russell Securities, Inc.; Secretary, Frank
Russell Canada Limited/Limitee.
KENNETH W. LAMB, Assistant Secretary, Assistant Treasurer and Principal
Accounting Officer. Manager - Funds Administration, Frank Russell Investment
Management Company since 1994. Prior to that, Senior Audit Manager with Knight,
Vale & Gregory since 1982.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
TRUSTEE COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------
Aggregate Pension or Estimated Annual Total Compensation
Compensation Retirement Benefits Upon From Investment
from Benefits Accrued Retirement Company Paid to
Trustee Investment as part of Trustees
Company Investment
Company
Expenses
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lynn L. Anderson $0 $0 $0 $0
- -------------------------------------------------------------------------------------------------------
William L. Marshall $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Steven J. Mastrovich $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Patrick J. Riley $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Richard D. Shirk $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Bruce D. Taber $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Henry W. Todd $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
</TABLE>
OPERATION OF INVESTMENT COMPANY
SERVICE PROVIDERS. Most of the Funds' necessary day-to-day operations are
performed by separate business organizations under contract to Investment
Company. The principal service providers are:
Investment Adviser, Custodian
and Transfer Agent: State Street Bank and Trust Company
Administrator: Frank Russell Investment Management Company
Distributor: Russell Fund Distributors, Inc.
-7-
<PAGE>
Independent Accountants: Coopers & Lybrand, L.L.P.
ADVISER. State Street Bank and Trust Company ("State Street" or "Adviser")
serves as the Funds' investment adviser pursuant to an Advisory Agreement dated
April 12, 1988. State Street Bank and Trust Company is a wholly owned
subsidiary of State Street Boston Corporation, a publicly held bank holding
company. State Street's address is 225 Franklin Street, Boston, MA 02110.
Under the Advisory Agreement, Adviser directs the Funds' investments in
accordance with their investment objectives, policies and limitations. For
these services, the Funds pay a fee to Adviser at the rates stated in the
Prospectus. The Money Market Fund accrued expenses to Adviser of $6,981,114 in
fiscal 1995, $7,225,807 in fiscal 1994, and $9,129,038 in fiscal 1993. Adviser
waived Advisory fees of $1,689,778 in fiscal 1993. The Government Money Market
Fund accrued expenses to Adviser of $970,313 in fiscal 1995, $748,629 in fiscal
1994, and $339,636 in fiscal 1993,. In fiscal 1994 and fiscal 1993, Adviser
voluntarily agreed to reimburse the Government Money Market Fund for all
expenses in excess of .38% of average daily net assets on an annual basis, which
amounted to $41,975 and $94,854, respectively. Additionally, Adviser waived
Advisory fees of $11,233 in fiscal 1992.
The Advisory Agreement will continue from year to year provided that a
majority of the Trustees who are not interested persons of the Funds and either
a majority of all Trustees or a majority of the shareholders of each Fund
approve its continuance. The Agreement may be terminated by Adviser or a Fund
without penalty upon sixty days' notice and will terminate automatically upon
its assignment.
ADMINISTRATOR. Frank Russell Investment Management Company
("Administrator") serves as the Funds' administrator, pursuant to an
Administration Agreement dated April 12, 1988. A description of the services
provided under the Administration Agreement and the basis for computing fees for
such services is provided in the Funds' Prospectuses. The Money Market Fund
accrued expenses to Administrator of $827,164 in fiscal 1995, $856,897 in fiscal
1994, and $1,330,910 in fiscal 1993. The Government Money Market Fund accrued
expenses to Administrator of $113,825 in fiscal 1995, $88,242 in fiscal 1994,
and $49,231 in fiscal 1993.
The Administration Agreement will continue from year to year provided that
a majority of the Trustees and a majority of the Trustees who are not interested
persons of the Funds and who have no direct or indirect financial interest in
the operation of the Distribution Plan described below or the Administration
Agreement approve its continuance. The Agreement may be terminated by
Administrator or any Fund without penalty upon sixty days' notice and will
terminate automatically upon its assignment.
Administrator is a wholly owned subsidiary of Frank Russell Company. Frank
Russell Company was founded in 1936 and has provided comprehensive asset
management consulting services since 1969 for institutional pools of investment
assets,
-8-
<PAGE>
principally those of large corporate employee benefit plans. Frank Russell
Company and its affiliates have offices in Tacoma, Seattle, New York City,
Toronto, London, Tokyo, Sydney, Paris, Zurich and Auckland, and have
approximately 1,000 officers and employees. Administrator's and Frank Russell
Company's mailing address is 909 A Street, Tacoma, WA 98402.
DISTRIBUTOR. Russell Fund Distributors, Inc. ("Distributor") serves as the
distributor of Fund shares pursuant to a Distribution Agreement dated April 12,
1988. Distributor is a wholly owned subsidiary of Administrator. Distributor's
mailing address is Two International Place, Boston, MA 02110.
CUSTODIAN AND TRANSFER AGENT. State Street serves as the custodian
("Custodian") and transfer agent ("Transfer Agent") for Investment Company.
State Street also provides the basic portfolio recordkeeping required by
Investment Company for regulatory and financial reporting purposes. For these
services, State Street is paid an annual fee in accordance with the following:
custody services--a fee payable monthly on a pro rata basis, based on the
following percentages of average daily net assets of each Fund: $0 up to
$1.5 billion--0.02%, over $1.5 billion--0.015% (for purposes of calculating the
break point, the assets of all domestic Investment Portfolios are aggregated);
securities transaction charges from $8.00 to $25.00 per transaction; Eurodollar
transaction fees ranging from $110.00 to $125.00 per transaction; monthly
pricing fees of $375.00 per Investment Portfolio and from $6.00 to $16.00 per
security, depending on the type of instrument and the pricing service used;
transfer agent services of $2.00 per shareholder transaction; and a multiple
class fee of $18,000 per year for each additional class of shares; and yield
calculation fees of $350.00 per non-money market portfolio per year. State
Street is reimbursed by each Fund for supplying certain out-of-pocket expenses
including postage, transfer fees, stamp duties, taxes, wire fees, telexes, and
freight.
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand L.L.P. serves as the Investment
Company's independent accountants. Coopers & Lybrand L.L.P. is responsible
for performing annual audits of the financial statements and financial
highlights in accordance with generally accepted auditing standards, a review
of federal tax returns, and, pursuant to Rule 17f-2 of the 1940 Act, three
security counts. The mailing address of Coopers & Lybrand L.L.P. is One Post
Office Square, Boston MA 02109.
DISTRIBUTION PLAN. Under the 1940 Act, the Securities and Exchange
Commission has adopted Rule 12b-1, which regulates the circumstances under which
the Funds may, directly or indirectly, bear distribution and shareholder
servicing expenses. The Rule provides that the Funds may pay for such expenses
only pursuant to a plan adopted in accordance with the Rule. Accordingly, the
Funds have adopted a distribution plan (the "Plan") for the Funds' Class C
shares, which is described in the Funds' Prospectus.
-9-
<PAGE>
The Plan provides that each Fund may spend annually, directly or
indirectly, up to 0.60% of the average net asset value of its Class C shares for
distribution and shareholder servicing services. The Plan does not provide for
the Funds to be charged for interest, carrying or any other financing charges on
any distribution expenses carried forward to subsequent years. A quarterly
report of the amounts expended under the Plan, and the purposes for which such
expenditures were incurred, must be made to the Trustees for their review. The
Plan may not be amended without approval of the holders of Class C shares to
increase materially the distribution or shareholder servicing costs that the
Funds may pay. The Plan and material amendments to it must be approved annually
by all of the Trustees and by the Trustees who are neither "interested persons"
(as defined in the 1940 Act) of the Funds nor have any direct or indirect
financial interest in the operation of the Plan or any related agreements.
The Funds accrued expenses in the following amounts to Russell Fund
Distributors, Inc., as Distributor, for the fiscal years ended August 31:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Money Market Fund $326,928 $888,413 $1,022,510
Government Money Market Fund 87,798 100,965 42,012
</TABLE>
For fiscal 1995, these amounts are reflective of the following individual
payments:
<TABLE>
<CAPTION>
Government
Money Money
Market Market
--------- ----------
<S> <C> <C>
Advertising $ 10,520 $ 2,625
Printing of Prospectuses 8,112 2,227
Compensation to Sales Personnel 171,211 46,011
Other* 137,085 36,935
--------- -------
$ 326,928 $87,798
--------- -------
--------- -------
</TABLE>
* Other expenses may include such items as compensation for travel, conferences
and seminars for staff, subscriptions, office charges and professional fees.
Under the Plan, the Funds may also enter into agreements ("Service
Agreements") with financial institutions, which may include Adviser ("Service
Organizations"), to provide distribution and shareholder servicing services with
respect to Fund shares held by or for the customers of the Service
Organizations. Such arrangements are more fully described in the Funds'
prospectus under "Distribution Services and Shareholder Servicing Arrangements."
Similar plans have been adopted for the Funds' Class A and Class B shares.
However, annual payments under these plans are limited to .25% and .35% of the
net asset value of the Class A and Class B shares of the Funds, respectively.
-10-
<PAGE>
The Funds accrued expenses in the following amounts to Adviser, under a
Service Agreement pursuant to Rule 12b-1, for fiscal year ended August 31:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Money Market Fund $1,198,500 $211,573 $269,696
Government Money Market Fund 127,241 21,920 7,456
</TABLE>
The Funds commenced offering Class C shares on the date of this Statement
of Additional Information. The foregoing expenses were incurred with respect to
what are now classified as Class A shares.
FEDERAL LAW AFFECTING STATE STREET. The Glass-Steagall Act of 1933
prohibits state chartered banks such as State Street from engaging in the
business of underwriting, selling or distributing certain securities, and
prohibits a member bank of the Federal Reserve System from having certain
affiliations with an entity engaged principally in that business. The
activities of State Street in informing its customers of the Funds, performing
investment and redemption services, providing custodian, transfer, shareholder
servicing, dividend disbursing, agent servicing and investment advisory
services, may raise issues under these provisions. State Street has been
advised by its counsel that its activities in connection with the Funds
contemplated under this arrangement are consistent with its statutory and
regulatory obligations.
VALUATION OF FUND SHARES. Net asset value per share for the Class C shares
of each Fund is calculated twice each business day, as of 12:00 noon Eastern
time and as of the close of the regular trading session on the New York Stock
Exchange (currently 4:00 p.m. Eastern time). A business day is one on which
both the Boston Federal Reserve and the New York Stock Exchange are open for
business.
It is the policy of the Funds to use their best efforts to maintain a
constant price per share of $1.00, although there can be no assurance that the
$1.00 net asset value per share will be maintained. In accordance with this
effort and pursuant to Rule 2a-7 under the 1940 Act, the Funds use the amortized
cost valuation method to value their portfolio instruments. This method
involves valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, even though the portfolio
security may increase or decrease in market value generally in response to
changes in interest rates. While 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 a Fund would receive if it sold the instrument.
For example, in periods of declining interest rates, the daily yield on
Fund shares computed by dividing the annualized daily income on each Fund's
portfolio by the net asset value based upon the amortized cost valuation
technique may tend to be higher than a similar computation made by using a
method of valuation based upon market prices and estimates. In periods of
rising interest rates, the daily yield on Fund shares computed the
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<PAGE>
same way may tend to be lower than a similar computation made by using a method
of calculation based upon market prices and estimates.
The Trustees have established procedures reasonably designed to stabilize
the Funds' price per share at $1.00. These procedures include: (1) the
determination of the deviation from $1.00, if any, of each Fund's net asset
value using market values; (2) periodic review by the Trustees of the amount of
and the methods used to calculate the deviation; and (3) maintenance of records
of such determination. The Trustees will promptly consider what action, if any,
should be taken if such deviation exceeds 1/2 of one percent.
BROKERAGE PRACTICES. All portfolio transactions are placed on behalf of
the Funds by Adviser. There is generally no stated commission in the purchase
or sale of securities traded in the over-the-counter markets, including most
debt securities and money market instruments. Rather, the price of such
securities includes an undisclosed commission in the form of a mark-up or mark-
down. The cost of securities purchased from underwriters includes an
underwriting commission or concession.
Subject to the arrangements and provisions described below, the selection
of a broker or dealer to execute portfolio transactions is usually made by
Adviser. The Advisory Agreement provides, in substance and subject to specific
directions from officers of Investment Company, that in executing portfolio
transactions and selecting brokers or dealers, the principal objective is to
seek the best overall terms available to the Funds. Ordinarily, securities will
be purchased from primary markets, and Adviser shall consider all factors it
deems relevant in assessing the best overall terms available for any
transaction, 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 other transactions on a continuing basis.
The Advisory Agreement authorizes Adviser to select brokers or dealers to
execute a particular transaction, including principal transactions, 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 Funds and/or Adviser (or its
affiliates). Adviser is authorized to cause the Funds to pay a commission to a
broker or dealer who provides such brokerage and research services for executing
a portfolio transaction which is in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction. The Funds
or Adviser, as appropriate, must determine in good faith that such commission
was reasonable in relation to the value of the brokerage and research services
provided--viewed in terms of that particular transaction or in terms of all the
accounts over which Adviser exercises investment discretion.
The Trustees periodically review Adviser's performance of its
responsibilities in connection with the placement of portfolio transactions on
behalf of the Funds and review the prices paid by the Funds over representative
periods of time to determine if such prices
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<PAGE>
are reasonable in relation to the benefits provided to the Funds. Certain
services received by Adviser attributable to a particular Fund transaction may
benefit one or more other accounts for which Adviser exercises investment
discretion, or a Fund other than that for which the transaction was effected.
Adviser's fees are not reduced by Adviser's receipt of such brokerage and
research services.
During the fiscal year ended August 31, 1995, the Funds purchased
securities issued by the following regular brokers or dealers, as defined by
Rule 10b-1 of the 1940 Act, each of which is one of the Funds' ten largest
brokers or dealers by dollar amounts of securities executed or commissions
received on behalf of the Funds. The value of broker-dealer securities held as
of August 31, 1995, is as follows:
<TABLE>
<CAPTION>
MONEY MARKET FUND GOVERNMENT MONEY MARKET
($000) FUND
($000)
----------------------------------------------------
<S> <C> <C>
UBS Securities, Inc. 0 30,000*
HSBC Securities, Inc. 11,352* 120,000*
Prebon n/a n/a
First Chicago 0 0
Salomon Brothers, Inc. 0 0
Lumis & Co. n/a n/a
Smith Barney, Inc. n/a n/a
Lehman Brothers, Inc. 0 0
Goldman, Sachs &
Co. 0 0
Greenwich Securities 0 0
* Repurchase Agreements
n/a represents no purchases executed during the fiscal year
</TABLE>
* Repurchase Agreements
n/a represents no purchases executed during the fiscal year
YIELD AND TOTAL RETURN QUOTATIONS. The Funds compute average annual total
return by using a standardized method of calculation required by the Securities
and Exchange Commission. Average annual total return is computed by finding the
average annual compounded rates of return on a hypothetical initial investment
of $1,000 over the one, five and ten year periods (or life of the funds as
appropriate), that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
P(1+T)(n)=ERV
where: P= a hypothetical initial payment of $1,000
T= average annual total return
n= number of years
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<PAGE>
ERV= ending redeemable value of a $1,000 payment made at the beginning
of the 1-, 5- and 10-year periods at the end of the year or period.
The calculation assumes that all dividends and distributions of each Fund
are reinvested at the price calculated in the manner described in the Prospectus
on the dividend dates during the period, and includes all recurring and
nonrecurring fees that are charged to all shareholder accounts.
The current annualized yield of the Funds may be quoted in published
material. The yield is calculated daily based upon the seven days ending on the
date of calculation ("base period"). The yields are computed by determining the
net change, exclusive of capital changes, in the value of a hypothetical pre-
existing account having a balance of one share at the beginning of the base
period, subtracting a hypothetical charge reflecting deductions from shareholder
accounts and dividing the net change in the account value by the value of the
account at the beginning of the base period to obtain the base period return,
and then multiplying the base period return by (365/7) with the resulting yield
figure carried to the nearest hundredth of one percent. An effective yield is
computed by determining the net change, exclusive of capital changes, in the
value of a hypothetical pre-existing account having a balance of one share at
the beginning of the period, subtracting a hypothetical charge reflecting
deductions from shareholder accounts, and dividing the difference by the value
of the account at the beginning of the base period to obtain the base period
return, and then compounding the base period return by adding 1, raising the sum
to a power equal to 365 divided by 7, and subtracting 1 from the result,
according to the following formula:
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1)(365/7)]-1
The following are the current and effective yields for the Funds for the
seven-day period ended August 31, 1995:
Money Market Fund
-----------------
Current Yield 5.51%
Effective Yield 5.66%
Government Fund
---------------
Current Yield 5.38%
Effective Yield 5.53%
The above yields relate to a period prior to the division of Fund shares
into multiple classes and do not reflect the distribution and shareholder
servicing expenses of Class C shares. Had such expenses been incurred, the
yields would have been approximately .50% lower.
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<PAGE>
The yields quoted are not indicative of future results. Yields will depend
on the type, quality, maturity, and interest rate of money market instruments
held by the Funds.
INVESTMENTS
The fundamental investment objective of each Fund is set forth in its
Prospectus. In addition to that investment objective, each Fund also has
certain "fundamental" investment restrictions, which may be changed only with
the approval of a majority of the shareholders of the Fund, and certain
nonfundamental investment restrictions and policies, which may be changed by the
Funds without shareholder approval.
INVESTMENT RESTRICTIONS
Each Fund is subject to the following fundamental investment restrictions.
Unless otherwise noted, these restrictions apply on a Fund-by-Fund basis at the
time an investment is made. A Fund will not:
(1) Invest 25% or more of the value of its total assets in securities of
companies primarily engaged in any one industry (other than the US Government,
its agencies and instrumentalities). Concentration may occur as a result of
changes in the market value of portfolio securities, but may not result from
investment. Foreign and domestic branches of US banks and US branches of
foreign banks are not considered a single industry for purposes of this
restriction.
(2) Borrow money (including reverse repurchase agreements), except as a
temporary measure for extraordinary or emergency purposes or to facilitate
redemptions (not for leveraging or investment), provided that borrowings do not
exceed an amount equal to 33-1/3% of the current value of the Fund's assets
taken at market value, less liabilities other than borrowings. If at any time a
Fund's borrowings exceed this limitation due to a decline in net assets, such
borrowings will within three days be reduced to the extent necessary to comply
with this limitation. A Fund will not purchase investments once borrowed funds
(including reverse repurchase agreements) exceed 5% of its total assets.
(3) Pledge, mortgage or hypothecate its assets. However, a Fund may pledge
securities having a market value at the time of the pledge not exceeding 33-1/3%
of the value of the Fund's total assets to secure borrowings permitted by
paragraph (2) above.
(4) With respect to 75% of its total assets, invest in securities of any
one issuer (other than securities issued by the US Government, its agencies, and
instrumentalities), if immediately after and as a result of such investment the
current market value of the Fund's holdings in the securities of such issuer
exceeds 5% of the value of the Fund's assets.
(5) Make loans to any person or firm; provided, however, that the making of
a loan shall not include (i) the acquisition for investment of bonds,
debentures, notes or other
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<PAGE>
evidences of indebtedness of any corporation or government which are publicly
distributed or of a type customarily purchased by institutional investors, or
(ii) the entry into repurchase agreements or reverse repurchase agreements. A
Fund may lend its portfolio securities to broker-dealers or other institutional
investors if the aggregate value of all securities loaned does not exceed 33-
1/3% of the value of the Fund's total assets.
(6) Purchase or sell commodities or commodity futures contracts.
(7) Purchase or sell real estate or real estate mortgage loans; provided,
however, that (i) the Government Money Market Fund may purchase or sell
government guaranteed real estate mortgage loans; and (ii) the Funds may invest
in securities secured by real estate or interests therein or issued by companies
which invest in real estate or interests therein.
(8) Engage in the business of underwriting securities issued by others,
except that a Fund will not be deemed to be an underwriter or to be underwriting
on account of the purchase of securities subject to legal or contractual
restrictions on disposition.
(9) Issue senior securities, except as permitted by its investment
objective, policies and restrictions, and except as permitted by the 1940 Act.
(10) Purchase or sell puts, calls or invest in straddles, spreads or any
combination thereof.
(11) Make short sales of securities or purchase any securities on margin,
except for such short-term credits as are necessary for the clearance of
transactions.
(12) Purchase from or sell portfolio securities to its officers or
directors or other interested persons (as defined in the 1940 Act) of the Funds,
including their investment advisers and affiliates, except as permitted by the
1940 Act and exemptive rules or orders thereunder.
(13) Invest in securities issued by other investment companies except in
connection with a merger, consolidation, acquisition of assets, or other
reorganization approved by the Funds' shareholders.
(14) Invest in securities of any issuer which, together with its
predecessor, has been in operation for less than three years if, as a result,
more than 5% of the Fund's total assets would be invested in such securities.
(15) Invest more than 10% of its net assets in the aggregate in illiquid
securities or securities that are not readily marketable, including repurchase
agreements and time deposits of more than seven days' duration.
(16) Purchase interests in oil, gas or other mineral exploration or
development programs.
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<PAGE>
(17) Make investments for the purpose of gaining control of an issuer's
management.
(18) Purchase the securities of any issuer if the Investment Company's
officers, Directors, Adviser or any of their affiliates beneficially own more
than one-half of 1% of the securities of such issuer or together own
beneficially more than 5% of the securities of such issuer.
INVESTMENT POLICIES
Except as otherwise indicated, each Fund may invest in the following
instruments:
US GOVERNMENT OBLIGATIONS. The types of US Government obligations in which
the Funds may at times invest include: (1) A variety of US Treasury
obligations, which differ only in their interest rates, maturities and times of
issuance and which, with respect to the Money Market and Government Money Market
Funds, have remaining maturities or hard put dates of one year or less; and
(2) obligations issued or guaranteed by US Government agencies and
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the US Treasury, (b) the right of the issuer to borrow an
amount limited to a specific line of credit from the US Treasury,
(c) discretionary authority of the US Government agency or instrumentality or
(d) the credit of the instrumentality (examples of agencies and
instrumentalities are: Federal Land Banks, Federal Housing Administration,
Farmers Home Administration, Export--Import Bank of the United States, Central
Bank for Cooperatives, Federal Intermediate Credit Banks, Federal Home Loan
Banks, General Services Administration, Maritime Administration, Tennessee
Valley Authority, Asian-American Development Bank, Student Loan Marketing
Association, International Bank for Reconstruction and Development and Federal
National Mortgage Association). No assurance can be given that in the future
the US Government will provide financial support to such US Government agencies
or instrumentalities described in (2)(b), (2)(c) and (2)(d), other than as set
forth above, since it is not obligated to do so by law. The Funds may purchase
US Government obligations on a forward commitment basis.
REPURCHASE AGREEMENTS. The Funds may enter into repurchase agreements with
certain financial institutions. Under repurchase agreements, these parties sell
US Treasury bills, notes and bonds to a Fund and agree to repurchase the
securities at the Fund's cost plus interest within a specified time (normally
one day). The securities purchased by each Fund have a total value in excess of
the purchase price paid by the Fund and are held by Custodian until repurchased.
Repurchase agreements assist the Funds in being invested fully while retaining
"overnight" flexibility in pursuit of investments of a longer-term nature. The
Funds will limit repurchase transactions to those member banks of the Federal
Reserve System and broker-dealers whose creditworthiness is found satisfactory
by Adviser.
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<PAGE>
REVERSE REPURCHASE AGREEMENTS. The Funds may enter into reverse repurchase
agreements under the circumstances described in "Investment Restrictions."
Under reverse repurchase agreements, a Fund transfers possession of portfolio
securities to banks in return for cash in an amount equal to a percentage of the
portfolio securities' market value and agrees to repurchase the securities at a
future date by repaying the cash with interest. The Funds retain the right to
receive interest and principal payments from the securities while they are in
the possession of the financial institutions. Cash or liquid high quality debt
obligations from a Fund's portfolio equal in value to the repurchase price
including any accrued interest will be segregated by Custodian on the Fund's
records while a reverse repurchase agreement is in effect.
FORWARD COMMITMENTS. Each Fund may contract to purchase securities for a
fixed price at a future date beyond customary settlement time consistent with
the Fund's ability to manage its investment portfolio, maintain a stable net
asset value and meet redemption requests. A Fund may dispose of a commitment
prior to settlement if it is appropriate to do so and realize short-term profits
or losses upon such sale. When effecting such transactions, cash or liquid high
quality debt obligations held by the Fund of a dollar amount sufficient to make
payment for the portfolio securities to be purchased will be segregated on the
Fund's records at the trade date and maintained until the transaction is
settled. Forward commitments involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date, or if the other
party fails to complete the transaction.
WHEN-ISSUED TRANSACTIONS. New issues of securities are often offered on a
when-issued basis. This means that delivery and payment for the securities
normally will take place several days after the date the buyer commits to
purchase them. The payment obligation and the interest rate that will be
received on securities purchased on a when-issued basis are each fixed at the
time the buyer enters into the commitment.
Each Fund will make commitments to purchase when-issued securities only
with the intention of actually acquiring the securities, but a Fund may sell
these securities or dispose of the commitment before the settlement date if it
is deemed advisable as a matter of investment strategy. Cash or marketable high
quality debt securities equal to the amount of the above commitments will be
segregated on each Fund's records. For the purpose of determining the adequacy
of these securities the segregated securities will be valued at market. If the
market value of such securities declines, additional cash or securities will be
segregated on the Fund's records on a daily basis so that the market value of
the account will equal the amount of such commitments by the Fund. No fund will
invest more than 25% of its net assets in when-issued securities.
Securities purchased on a when-issued basis and the securities held by each
Fund are subject to changes in market value based upon the public's perception
of changes in the level of interest rates. Generally, the value of such
securities will fluctuate inversely to changes in interest rates -- i.e., they
will appreciate in value when interest rates decline and decrease in value when
interest rates rise. Therefore, if in order to achieve higher interest
-18-
<PAGE>
income a Fund remains substantially fully invested at the same time that it has
purchased securities on a "when-issued" basis, there will be a greater
possibility of fluctuation in the Fund's net asset value.
When payment for when-issued securities is due, each Fund will meet its
obligations from then-available cash flow, the sale of segregated securities,
the sale of other securities or, and although it would not normally expect to do
so, from the sale of the when-issued securities themselves (which may have a
market value greater or less than the Fund's payment obligation). The sale of
securities to meet such obligations carries with it a greater potential for the
realization of capital gains, which are subject to federal income taxes.
VARIABLE AMOUNT MASTER DEMAND NOTES. Variable amount master demand notes
are unsecured obligations that are redeemable upon demand and are typically
unrated. These instruments are issued pursuant to written agreements between
the issuers and the holders. The agreements permit the holders to increase
(subject to an agreed maximum) and the holders and issuers to decrease the
principal amount of the notes, and specify that the rate of interest payable on
the principal fluctuates according to an agreed formula.
SECTION 4(2) COMMERCIAL PAPER (MONEY MARKET FUND ONLY). The Money Market
Fund may invest in commercial paper issued in reliance on the so-called "private
placement" exemption from registration afforded by Section 4(2) of the
Securities Act of 1933 ("Section 4(2) paper"). Section 4(2) paper is restricted
as to disposition under the federal securities laws, and generally is sold to
investors who agree that they are purchasing the paper for an investment and not
with a view to public distribution. Any resale by the purchaser must be in an
exempt transaction. Section 4(2) paper is normally resold to other investors
through or with the assistance of the issuer or investment dealers who make a
market in Section 4(2) paper, thus providing liquidity. Pursuant to guidelines
established by the Board of Trustees, Adviser may determine that Section 4(2)
paper is liquid for the purposes of complying with the Fund's investment
restriction relating to investments in illiquid securities.
VARIABLE AND FLOATING RATE SECURITIES. A floating rate security provides
for the automatic adjustment of its interest rate whenever a specified interest
rate changes. A variable rate security provides for the automatic establishment
of a new interest rate on set dates. Interest rates on these securities are
ordinarily tied to, and are a percentage of, a widely recognized interest rate
such as the yield on 90-day US Treasury bills or the prime rate of a specified
bank. These rates may change as often as twice daily. Generally, changes in
interest rates will have a smaller effect on the market value of variable and
floating rate securities than on the market value of comparable fixed income
obligations. Thus, investing in variable and floating rate securities generally
allows less opportunity for capital appreciation and depreciation than investing
in comparable fixed income securities.
The Funds may purchase variable rate US Government obligations which are
instruments issued or guaranteed by the US Government, or an agency or
instrumentality
-19-
<PAGE>
thereof, that have a rate of interest subject to adjustment at regular intervals
but less frequently than annually. Variable rate US Government obligations
whose interest is readjusted no less frequently than annually will be deemed to
have a maturity equal to the period remaining until the next readjustment of the
interest rate.
ASSET-BACKED SECURITIES (MONEY MARKET FUND ONLY). Asset-backed securities
represent undivided fractional interests in pools of instruments, such as
consumer loans, and are similar in structure to mortgage-related pass-through
securities described below. Payments of principal and interest are passed
through to holders of the securities and are typically supported by some form of
credit enhancement, such as a letter of credit, surety bond, limited guarantee
by another entity or by priority to certain of the borrower's other securities.
The degree of credit-enhancement varies, generally applying only until exhausted
and covering only a fraction of the security's par value.
The value of asset-backed securities is affected by changes in the market's
perception of the asset backing the security, changes in the creditworthiness of
the servicing agent for the instrument pool, the originator of the instruments
or the financial institution providing any credit enhancement and the
expenditure of any portion of any credit enhancement. The risks of investing in
asset-backed securities are ultimately dependent upon payment of the underlying
instruments by the obligors, and the Fund would generally have no recourse
against the obligee of the instruments in the event of default by an obligor.
The underlying instruments are subject to prepayments which shorten the weighted
average life of asset-backed securities and may lower their return, in the same
manner as described below for prepayments of pools of mortgage loans underlying
mortgage-backed securities.
MORTGAGE-RELATED PASS-THROUGH SECURITIES. Mortgage pass-through
certificates are issued by governmental, government-related and private
organizations and are backed by pools of mortgage loans. These mortgage loans
are made by savings and loan associations, mortgage bankers, commercial banks
and other lenders to residential home buyers throughout the United States. The
securities are "pass-through" securities because they provide investors with
monthly payments of principal and interest that, in effect, are a "pass-through"
of the monthly payments made by the individual borrowers on the underlying
mortgage loans, net of any fees paid to the issuer or guarantor of the pass-
through certificates. The principal governmental issuer of such securities is
the Government National Mortgage Association ("GNMA"), which is a wholly-owned
US Government corporation within the Department of Housing and Urban
Development. Government-related issuers include the Federal Home Loan Mortgage
Corporation ("FHLMC"), a corporate instrumentality of the United States created
pursuant to an act of Congress which is owned entirely by the Federal Home Loan
Banks, and the Federal National Mortgage Association ("FNMA"), a government
sponsored corporation owned entirely by private stockholders. Commercial banks,
savings and loan associations, private mortgage insurance companies, mortgage
bankers and other secondary market issuers also create pass-through pools of
conventional residential mortgage loans. Such issuers may be the originators of
the underlying mortgage loans as well as the guarantors of the mortgage-related
securities.
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<PAGE>
(1) GNMA Mortgage Pass-Through Certificates ("Ginnie Maes"). Ginnie Maes
represent an undivided interest in a pool of mortgage loans that are insured by
the Federal Housing Administration or the Farmers Home Administration or
guaranteed by the Veterans Administration. Ginnie Maes entitle the holder to
receive all payments (including prepayments) of principal and interest owed by
the individual mortgagors, net of fees paid to GNMA and to the issuer which
assembles the loan pool and passes through the monthly mortgage payments to the
certificate holders (typically, a mortgage banking firm), regardless of whether
the individual mortgagor actually makes the payment. Because payments are made
to certificate holders regardless of whether payments are actually received on
the underlying loans, Ginnie Maes are of the "modified pass-through" mortgage
certificate type. GNMA is authorized to guarantee the timely payment of
principal and interest on the Ginnie Maes as securities backed by an eligible
pool of mortgage loans. The GNMA guaranty is backed by the full faith and
credit of the United States, and GNMA has unlimited authority to borrow funds
from the US Treasury to make payments under the guaranty. The market for Ginnie
Maes is highly liquid because of the size of the market and the active
participation in the secondary market by securities dealers and a variety of
investors.
(2) FHLMC Mortgage Participation Certificates ("Freddie Macs"). Freddie
Macs represent interests in groups of specified first lien residential
conventional mortgage loans underwritten and owned by FHLMC. Freddie Macs
entitle the holder to timely payment of interest, which is guaranteed by FHLMC.
FHLMC guarantees either ultimate collection or timely payment of all principal
payments on the underlying mortgage loans. In cases where FHLMC has not
guaranteed timely payment of principal, FHLMC may remit the amount due on
account of its guarantee of ultimate payment of principal at any time after
default on an underlying loan, but in no event later than one year after it
becomes payable. Freddie Macs are not guaranteed by the United States or by any
of the Federal Home Loan Banks and do not constitute a debt or obligation of the
United States or of any Federal Home Loan Bank. The secondary market for
Freddie Macs is highly liquid because of the size of the market and the active
participation in the secondary market by FHLMC, securities dealers and a variety
of investors.
(3) FNMA Guaranteed Mortgage Pass-Through Certificates ("Fannie Maes").
Fannie Maes represent an undivided interest in a pool of conventional mortgage
loans secured by first mortgages or deeds of trust, on one-family to four-family
residential properties. FNMA is obligated to distribute scheduled monthly
installments of principal and interest on the loans in the pool, whether or not
received, plus full principal of any foreclosed or otherwise liquidated loans.
The obligation of FNMA under its guaranty is solely the obligation of FNMA and
is not backed by, nor entitled to, the full faith and credit of the United
States.
The market value of mortgage-related securities depends on, among other
things, the level of interest rates, the certificates' coupon rates and the
payment history of the underlying borrowers.
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<PAGE>
Although the mortgage loans in a pool underlying a mortgage pass-through
certificate will have maturities of up to 30 years, the average life of a
mortgage pass-through certificate will be substantially less because the loans
will be subject to normal principal amortization and also may be prepaid prior
to maturity. Prepayment rates vary widely and may be affected by changes in
mortgage interest rates. In periods of falling interest rates, the rate of
prepayment on higher interest mortgage rates tends to increase, thereby
shortening the actual average life of the mortgage pass-through certificate.
Conversely, when interest rates are rising, the rate of prepayment tends to
decrease, thereby lengthening the average life of the mortgage pass-through
certificate. Accordingly, it is not possible to predict accurately the average
life of a particular pool. However, based on current statistics, it is
conventional to quote yields on mortgage pass-through certificates based on the
assumption that they have effective maturities of 12 years. Reinvestment of
prepayments may occur at higher or lower rates than the original yield on the
certificates. Due to the prepayment feature and the need to reinvest
prepayments of principal at current rates, mortgage pass-through certificates
with underlying loans bearing interest rates in excess of the market rate can be
less effective than typical noncallable bonds with similar maturities at
"locking in" yields during periods of declining interest rates, although they
may have comparable risks of declining in value during periods of rising
interest rates.
ZERO COUPON SECURITIES. These securities are notes, bonds and debentures
that: (1) do not pay current interest and are issued at a substantial discount
from par value; (2) have been stripped of their unmatured interest coupons and
receipts; or (3) pay no interest until a stated date one or more years into the
future. These securities also include certificates representing interests in
such stripped coupons and receipts.
Because the above Funds accrue taxable income from zero coupon securities
without receiving regular interest payments in cash, each Fund may be required
to sell portfolio securities in order to pay a dividend depending, among other
things, upon the proportion of shareholders who elect to receive dividends in
cash rather than reinvesting dividends in additional shares of the Fund.
Investing in these securities might also force the Fund to sell portfolio
securities to maintain portfolio liquidity.
Because a zero coupon security pays no interest to its holder during its
life or for a substantial period of time, it usually trades at a deep discount
from its face or par value and will be subject to greater fluctuations in market
value in response to changing interest rates than debt obligations of comparable
maturities that make regular distributions of interest.
RATINGS OF DEBT INSTRUMENTS
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") -- LONG TERM DEBT RATINGS.
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Aaa -- Bonds which 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 edged." 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 which 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 which make the long-term risk appear somewhat larger than the Aaa
securities.
A -- Bonds which 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 which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium-grade obligations
(i.e., 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.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
STANDARD & POOR'S CORPORATION ("S&P"). The ratings are based, in varying
degrees, on the following considerations: (1) The likelihood of default --
capacity and willingness of the obligator as to the timely payment of interest
and repayment of principal in accordance with the terms of the obligation;
(2) The nature of and provisions of the obligation; and (3) The protection
afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization, or other arrangement under the laws of bankruptcy
and other laws affecting creditors' rights.
AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
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<PAGE>
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
RATINGS OF COMMERCIAL PAPER
MOODY'S. Moody's short-term debt ratings are opinions of the ability of
issuers to repay punctually senior debt obligations. These obligations have an
original maturity not exceeding one year, unless explicitly noted. Moody's
employs the following three designations, all judged to be investment grade, to
indicate the relative repayment ability of rated issuers:
/ / Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
/ / Leading market positions in well-established industries.
/ / High rates of return on funds employed.
/ / Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
/ / Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
/ / Well-established access to a range of financial markets and
assured sources of alternate liquidity.
/ / Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited above
but to a lesser degree. Earnings trends and coverage ratios, while
sound, may be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternative liquidity is maintained.
/ / Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements
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<PAGE>
and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
/ / Issuers rated Not Prime do not fall within any of the Prime rating
categories.
S&P. An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered shot-term in the relevant
market. Ratings are graded into several categories, ranging from A-1 for the
highest quality obligations to D for the lowest. These categories are as
follows:
A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
FITCH'S INVESTORS SERVICE, INC. ("FITCH"). Commercial paper rated by Fitch
reflects Fitch's current appraisal of the degree of assurance of timely payment
of such debt. An appraisal results in the rating of an issuer's paper as F-1,
F-2, F-3, or F-4.
F-1 -- This designation indicates that the commercial paper is regarded as
having the strongest degree of assurance for timely payment.
F-2 -- Commercial paper issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than those issues rated F-1.
DUFF AND PHELPS, INC. Duff & Phelps' short-term ratings are consistent
with the rating criteria utilized by money market participants. The ratings
apply to all obligations with maturities of under one year, including commercial
paper, the uninsured portion of certificates of deposit, unsecured bank loans,
master notes, bankers acceptances, irrevocable letters of credit, and current
maturities of long-term debt. Asset-backed commercial paper is also rated
according to this scale.
Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of funds including trade
credit, bank lines, and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.
The distinguishing feature of Duff & Phelps' short-term ratings is the
refinement of the traditional '1' category. The majority of short-term debt
issuers carry the highest rating, yet quality differences exist within that
tier. As a consequence, Duff & Phelps has incorporated gradations of '1+' (one
plus) and '1-' (one minus) to assist investors in recognizing those differences.
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<PAGE>
Duff 1+--Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free US Treasury short-term
obligations.
Duff 1--Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk factors
are minor.
Duff 1- -- High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk factors are very
small.
GOOD GRADE. Duff 2--Good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs
may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
SATISFACTORY GRADE. Duff 3--Satisfactory liquidity and other
protection factors qualify issue as to investment grade. Risk factors are
larger and subject to more variation. Nevertheless, timely payment is
expected.
NON-INVESTMENT GRADE. Duff 4--Speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
DEFAULT. Duff 5--Issuer failed to meet scheduled principal and/or
interest payments.
IBCA, INC. In addition to conducting a careful review of an institution's
reports and published figures, IBCA's analysts regularly visit the companies for
discussions with senior management. These meetings are fundamental to the
preparation of individual reports and ratings. To keep abreast of any changes
that may affect assessments, analysts maintain contact throughout the year with
the management of the companies they cover.
IBCA's analysts speak the languages of the countries they cover, which is
essential to maximize the value of their meetings with management and to
properly analyze a company's written materials. They also have a thorough
knowledge of the laws and accounting practices that govern the operations and
reporting of companies within the various countries.
Often, in order to ensure a full understanding of their position, companies
entrust IBCA with confidential data. While these data cannot be disclosed in
reports, they are taken into account when assigning our ratings. Before
dispatch to subscribers, a draft of the report is submitted to each company to
permit correction of any factual errors and to enable clarification of issues
raised.
IBCA's Rating Committees meet at regular intervals to review all ratings
and to ensure that individual ratings are assigned consistently for institutions
in all the countries covered. Following the Committee meetings, ratings are
issued directly to subscribers. At
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<PAGE>
the same time, the company is informed of the ratings as a matter of courtesy,
but not for discussion.
A1+--Obligations supported by the highest capacity for timely repayment.
A1--Obligations supported by a very strong capacity for timely repayment.
A2--Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in business,
economic or financial conditions.
B1--Obligations supported by an adequate capacity for timely repayment.
Such capacity is more susceptible to adverse changes in business, economic, or
financial conditions than for obligations in higher categories.
B2--Obligations for which the capacity for timely repayment is susceptible
to adverse changes in business, economic or financial conditions.
C1--Obligations for which there is an inadequate capacity to ensure timely
repayment.
D1--Obligations which have a high risk of default or which are currently in
default.
TAXES
Each Fund intends to qualify for treatment as a regulated investment
company ("RIC") under Subchapter M of the Internal Revenue Code of 1986, as
amended ("the Code"). As a RIC, each Fund will not be liable for federal income
taxes on taxable net investment income and capital gain net income (capital
gains in excess of capital losses) that it distributes to its shareholders,
provided that the Fund distributes annually to its shareholders at least 90% of
its net investment income and net short-term capital gain for the taxable year
("Distribution Requirement"). For a Fund to qualify as a RIC it must abide by
all of the following requirements: (1) at least 90% of the Fund's gross income
each taxable year must be derived from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock
or securities or foreign currencies, or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies ("Income Requirement");
(2) less than 30% of the Fund's gross income each taxable year must be derived
from the sale or other disposition of securities and certain options, futures
contracts, forward contracts and foreign currencies held for less than three
months ("Short-Short Limitation"); (3) at the close of each quarter of the
Fund's taxable
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<PAGE>
year, at least 50% of the value of its total assets must be represented by cash
and cash items, US Government securities, securities of other RICs, and other
securities, with such other securities limited, in respect of any one issuer, to
an amount that does not exceed 5% of the total assets of the Fund and that does
not represent more than 10% of the outstanding voting securities of such issuer;
and (4) at the close of each quarter of the Fund's taxable year, not more than
25% of the value of its assets may be invested in securities (other than US
Government securities or the securities of other RICs) of any one issuer.
Each Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year an amount at least equal to
the sum of: (1) 98% of its ordinary income for that year; (2) 98% of its
capital gain net income for the one-year period ending on October 31 of that
year; and (3) certain undistributed amounts from the preceding calendar year.
For this and other purposes, dividends declared in October, November or December
of any calendar year and made payable to shareholders of record in such month
will be deemed to have been received on December 31 of such year if the
dividends are paid by the Fund subsequent to December 31 but prior to February 1
of the following year.
If a shareholder receives a distribution taxable as long-term capital gain
with respect to shares of a Fund and redeems or exchanges the shares without
having held the shares for more than six months, then any loss on the redemption
or exchange will be treated as long-term capital loss to the extent of the
capital gain distribution.
As of August 31, 1995, the Money Market Fund and the Government Money Market
Fund had a net tax basis capital loss carryforward of $4,159,322 and $157,456,
respectively, which may be applied against any realized net taxable gains of
each succeeding year until the expiration date of August 31, 2003. In addition,
from November 1, 1994 to August 31, 1995, the Money Market Fund incurred $5,844
of net realized capital losses. As permitted by tax regulation, the Fund
intends to elect to defer these losses and treat them as arising in the fiscal
year ending August 31, 1996.
STATE AND LOCAL TAXES. Depending upon the extent of each Fund's activities
in states and localities in which its offices are maintained, its agents or
independent contractors are located or it is otherwise deemed to be conducting
business, the Fund may be subject to the tax laws of such states or localities.
The foregoing discussion is only a summary of certain federal income tax
issues generally affecting the Funds and their shareholders. Circumstances
among investors may vary and each investor is encouraged to discuss investment
in the Funds with the investor's tax adviser.
FINANCIAL STATEMENTS
The 1995 fiscal year-end financial statements of Investment Company,
consisting of the Money Market and Government Money Market Funds, including
notes to the financial statements and financial highlights and the Report of
Independent Accountants are included in the Funds' Annual Report to
Shareholders. Copies of these reports
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<PAGE>
accompany this Statement of Additional Information and are incorporated herein
by reference.
-29-
<PAGE>
Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
THE SEVEN SEAS SERIES FUND
Two International Place, 35th Floor
Boston, Massachusetts 02110
(617) 654-6089
STATEMENT OF ADDITIONAL INFORMATION
MATRIX EQUITY FUND
DECEMBER 29, 1995
The Seven Seas Series Fund ("Investment Company") is a registered open-end
investment company organized as a Massachusetts business trust offering shares
of beneficial interest in separate investment portfolios. In addition, each
series of the Investment Company is diversified as defined under the Investment
Company Act of 1940, as amended (the "1940 Act").
This Statement of Additional Information supplements or describes in
greater detail the Investment Company and The Seven Seas Series Matrix Equity
Fund (the "Matrix Fund" or the "Fund") as contained in the Fund's Prospectus
dated December 29, 1995. This Statement is not a Prospectus and should be read
in conjunction with the Fund's Prospectus, which may be obtained by telephoning
or writing Investment Company at the number or address shown above.
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<PAGE>
TABLE OF CONTENTS
Page
STRUCTURE AND GOVERNANCE . . . . . . . . . . . . . . . . . . . . . . . . 3
Organization and Business History . . . . . . . . . . . . . . . . 3
Shareholder Meetings. . . . . . . . . . . . . . . . . . . . . . . 4
Controlling Shareholders. . . . . . . . . . . . . . . . . . . . . 4
Principal Shareholders. . . . . . . . . . . . . . . . . . . . . . 4
Trustees and Officers . . . . . . . . . . . . . . . . . . . . . . 5
OPERATION OF INVESTMENT COMPANY. . . . . . . . . . . . . . . . . . . . . 6
Service Providers . . . . . . . . . . . . . . . . . . . . . . . . 6
Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Administrator . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Custodian and Transfer Agent. . . . . . . . . . . . . . . . . . . 8
Distribution Plan . . . . . . . . . . . . . . . . . . . . . . . . 8
Federal Law Affecting State Street. . . . . . . . . . . . . . . . 9
Valuation of Fund Shares. . . . . . . . . . . . . . . . . . . . . 9
Brokerage Practices . . . . . . . . . . . . . . . . . . . . . . . 10
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . . . . 11
Total Return Quotations . . . . . . . . . . . . . . . . . . . . . 12
INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . 13
Investment Policies . . . . . . . . . . . . . . . . . . . . . . . 15
Hedging Strategies and Related Investment Techniques. . . . . . . 18
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 25
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STRUCTURE AND GOVERNANCE
ORGANIZATION AND BUSINESS HISTORY. Investment Company was organized as a
Massachusetts business trust on October 3, 1987, and operates under a First
Amended and Restated Master Trust Agreement, dated October 13, 1993, as amended.
Investment Company is authorized to issue shares of beneficial interest, par
value $.001 per share, which may be divided into one or more series, each of
which evidences pro rata ownership interest in a different investment portfolio,
or "Fund." The Matrix Fund is one such investment portfolio. The Trustees may
create additional Funds at any time without shareholder approval.
As of the date of this Statement of Additional Information, Investment
Company is comprised of the following investment portfolios, each of which
commenced operations on the date set forth opposite the portfolio's name:
--------------------------------------------------------------------------
The Seven Seas Series Money Market Fund May 2, 1988
--------------------------------------------------------------------------
The Seven Seas Series US Government Money Market Fund March 1, 1991
--------------------------------------------------------------------------
The Seven Seas Series US Treasury Money Market Fund December 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series US Treasury Obligations Fund *
--------------------------------------------------------------------------
The Seven Seas Series Prime Money Market Fund February 22, 1994
--------------------------------------------------------------------------
The Seven Seas Series Yield Plus Fund November 9, 1992
--------------------------------------------------------------------------
The Seven Seas Series Tax Free Money Market Fund December 1, 1994
--------------------------------------------------------------------------
The Seven Seas Series Intermediate Fund September 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series Bond Market Fund *
--------------------------------------------------------------------------
The Seven Seas Series Growth and Income Fund September 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series S&P 500 Index Fund December 30, 1992
--------------------------------------------------------------------------
The Seven Seas Series Small Cap Fund July 1, 1992
--------------------------------------------------------------------------
The Seven Seas Series Matrix Equity Fund May 4, 1992
--------------------------------------------------------------------------
The Seven Seas Series Active International Fund March 7, 1995
--------------------------------------------------------------------------
The Seven Seas Series International Pacific Index Fund *
--------------------------------------------------------------------------
The Seven Seas Series Emerging Markets Fund March 1, 1994
The Seven Seas Series Real Estate Equity Fund *
--------------------------------------------------------------------------
__________
*As of the date of this Statement of Additional Information, these
portfolios have not commenced operations.
Prospectuses for these investment portfolios may be obtained by calling
Investment Company's distributor, Russell Fund Distributors, Inc., at (617) 654-
6089.
Investment Company is authorized to divide shares of any series into two or
more classes of shares. The shares of each Fund may have such rights and
preferences as the Trustees may establish from time to time, including the right
of redemption (including the price, manner and terms of redemption), special and
relative rights as to dividends and distributions, liquidation rights, sinking
or purchase fund provisions and conditions under which any Fund may have
separate voting rights or no voting rights. Each class of shares of a Fund is
entitled to the same
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<PAGE>
rights and privileges as all other classes of that Fund, except that each class
bears the expenses associated with the distribution and shareholder servicing
arrangements of that class, as well as other expenses attributable to the class
and unrelated to the management of the Fund's portfolio securities. Shares of
the Money Market, US Government Money Market and Tax Free Money Market Funds are
divided into Classes A, B and C.
Any amendment to the Master Trust Agreement that would materially and
adversely affect shareholders of Investment Company as a whole, or shareholders
of a particular Fund, must be approved by the holders of a majority of the
shares of Investment Company or the Fund, respectively. All other amendments
may be effected by Investment Company's Board of Trustees.
Under certain unlikely circumstances, and as is the case with any
Massachusetts business trust, a shareholder of a Fund may be held personally
liable for the obligations of a Fund. The Master Trust Agreement provides that
shareholders shall not be subject to any personal liability for the acts or
obligations of a Fund and that every written agreement, obligation, or other
undertaking of the Fund shall contain a provision to the effect that the
shareholders are not personally liable thereunder. The Master Trust Agreement
also provides that the Fund shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Fund and satisfy
any judgment thereon. Thus, the risk to shareholders of incurring financial
loss beyond their investments is limited to circumstances in which the Fund
itself would be unable to meet its obligations.
SHAREHOLDER MEETINGS. Investment Company will not have an Annual Meeting
of Shareholders. Special Meetings may be convened: (1) by the Board of
Trustees; (2) upon written request to the Board by the holders of at least 10%
of the outstanding shares; or (3) upon the Board's failure to honor the
shareholders' request described above, by holders of at least 10% of the
outstanding shares giving notice of the special meeting to the shareholders.
CONTROLLING SHAREHOLDERS. The Trustees have the authority and
responsibility to manage the business of Investment Company. Trustees hold
office until they resign or are removed by, in substance, a vote of two-thirds
of Investment Company shares outstanding. However, in connection with State
Street Bank and Trust Company's ("State Street") securities lending program and
investment accounts over which State Street has discretionary authority, State
Street holds certain collateral on behalf of its securities lending clients to
secure the return of loaned securities. Such collateral may be invested in
Investment Company shares from time to time. Shares representing such
investments are held of record by State Street, who retains voting control of
such shares. As of November 30, 1995, State Street held beneficially and of
record 36% of Investment Company's shares in connection with various lending
portfolios and, consequently, may be deemed to be a controlling person of
Investment Company for purposes of the 1940 Act. State Street also acts as
Investment Company's investment adviser, transfer agent and custodian.
PRINCIPAL SHAREHOLDERS. As of November 30, 1995, the following
shareholders owned of record 5% or more of the issued and outstanding shares of
the Fund:
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- Trustees of Alcatel Network Systems, State Street Bank and Trust Company,
One Enterprise Drive, North Quincy, MA 02171--15%;
- Boston Edison VEBA, 800 Boylston Street P354, Boston, MA 02199--12%;
- Workers Rehabilitation and Compensation Corporation of Australia, State
Street Bank and Trust Company, Two International Place 34th Floor,
Boston, MA 02110--9%; and
- Xerox Canada, Inc. Employee Retirement Plan, Royal Trust Corporation of
Canada, PO Box 7500 Station A, 55 King Street West 7th Floor, Toronto,
Ontario, Canada M5W1P9--9%.
The Trustees and officers of Investment Company, as a group, own less than
1% of Investment Company's voting securities.
TRUSTEES AND OFFICERS. The Board of Trustees is responsible for overseeing
generally the operation of the Fund. The officers, all of whom are employed by,
and are officers of, Administrator or its affiliates, are responsible for the
day-to-day management and administration of the Fund's operations.
Trustees who are not officers or employees of State Street or its
affiliates are paid an annual fee and are reimbursed for travel and other
expenses they incur in attending Board meetings. Investment Company's officers
and employees are paid by Administrator or its affiliates.
The following lists Investment Company's Trustees and officers, their
positions with Investment Company, their present and principal occupations
during the past five years and the mailing addresses of Trustees who are not
affiliated with Investment Company. The mailing address for all Trustees and
officers affiliated with Investment Company is The Seven Seas Series Fund, 909 A
Street, Tacoma, WA 98402.
An asterisk (*) indicates that a Trustee is an "interested person" of the
Investment Company, as defined in the 1940 Act.
*LYNN L. ANDERSON, Trustee, Chairman of the Board, President and Fund
Treasurer. Chairman of the Board and Chief Executive Officer, Frank Russell
Investment Management Company and Russell Fund Distributors, Inc.; Director,
President and Chief Executive Officer, Frank Russell Investment Company and
Frank Russell Trust Company; Director and President, Russell Insurance Funds;
Director and Chairman, Frank Russell Company (Delaware); Director, Frank Russell
Investments (Ireland) Limited and Frank Russell Investment Company plc.
WILLIAM L. MARSHALL, Trustee. 33 West Court Street, Doylestown, PA 18901.
Chief Executive Officer and President, Wm. L. Marshall Associates, Inc. (a
registered investment
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<PAGE>
adviser and provider of financial and related consulting services); Certified
Financial Planner; Member, Registry of Financial Planning Practitioners; and
Advisory Committee, International Association for Financial Planning Broker-
Dealer Program. Member, Institute of Certified Financial Planners. Registered
for Securities with FSC Securities Corp., Marietta, Georgia.
*STEVEN J. MASTROVICH, Trustee. 1 Financial Center, Boston, MA 02109.
Partner, Brown, Rudnick, Freed & Gesmer (law firm). 1990 to 1994, Partner,
Warner & Stackpole (law firm).
PATRICK J. RILEY, Trustee. 21 Custom House Street, Boston, MA 02110.
Partner, Riley, Burke & Donahue (law firm).
RICHARD D. SHIRK, Trustee. 3350 Peachtree Road, N.E., Atlanta, GA 30326.
President and Chief Executive Officer, Blue Cross/Blue Shield of Georgia. 1990
to 1992, President, Champions Group Resources--Business Management and Employee
Benefits Consulting; 1990, Senior Vice President, Employee Benefits Division,
Cigna Corporation (providing and insuring group life, health and disability
employee benefit products and services); from 1986 to 1990, Senior Vice
President, EQUICOR-Equitable HCA Corporation (providing and insuring group life,
health and disability employee benefit products and services).
*BRUCE D. TABER, Trustee. 26 Round Top Road, Boxford, MA 01921.
President, A.B. Reed, Inc. - Engineers, Architects, Planners. Prior to that,
Vice President, Instrumentation and Controls, A.B. Reed., Inc.
HENRY W. TODD, Trustee. 111 Commerce Drive, Montgomeryville, PA 18936.
President and Director, Zink & Triest Co., Inc. (dealer in vanilla flavor
materials); Director, A.M. Todd Co., and Flavorite Laboratories.
J. DAVID GRISWOLD, Vice President and Secretary. Assistant Secretary,
Associate General Counsel, Chief Compliance Officer, Frank Russell Investment
Management Company, Russell Fund Distributors, Inc. and Frank Russell Capital
Inc.; Associate General Counsel and Assistant Secretary, Frank Russell Company;
Associate General Counsel, Assistant Secretary and Compliance Officer, Russell
Fiduciary Services Company; Director, Secretary, Associate General Counsel and
Chief Compliance Officer, Frank Russell Securities, Inc.; Secretary, Frank
Russell Canada Limited/Limitee.
KENNETH W. LAMB, Assistant Secretary, Assistant Treasurer and Principal
Accounting Officer. Manager - Funds Administration, Frank Russell Investment
Management Company since 1994. Prior to that, Senior Audit Manager with Knight,
Vale & Gregory since 1982.
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<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
TRUSTEE COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------
Aggregate Pension or Estimated Annual Total Compensation
Compensation Retirement Benefits Upon From Investment
from Benefits Accrued Retirement Company Paid to
Trustee Investment as part of Trustees
Company Investment
Company
Expenses
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lynn L. Anderson $0 $0 $0 $0
- -------------------------------------------------------------------------------------------------------
William L. Marshall $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Steven J. Mastrovich $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Patrick J. Riley $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Richard D. Shirk $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Bruce D. Taber $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Henry W. Todd $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
</TABLE>
OPERATION OF INVESTMENT COMPANY
SERVICE PROVIDERS. Most of the Fund's necessary day-to-day operations are
performed by separate business organizations under contract to Investment
Company. The principal service providers are:
Investment Adviser, Custodian
and Transfer Agent: State Street Bank and Trust Company
Administrator: Frank Russell Investment Management Company
Distributor: Russell Fund Distributors, Inc.
Independent Accountants: Coopers & Lybrand, L.L.P.
ADVISER. State Street Bank and Trust Company ("State Street" or "Adviser")
serves as the Fund's investment adviser pursuant to an Advisory Agreement dated
April 12, 1988 ("Advisory Agreement"). State Street Bank and Trust Company is a
wholly owned subsidiary of State Street Boston Corporation, a publicly held bank
holding company. State Street's address is 225 Franklin Street, Boston, MA
02110.
Under the Advisory Agreement, Adviser directs the Fund's investments in
accordance with its investment objectives, policies and limitations. For these
services, the Fund will pay a fee to Adviser at the rate stated in the
Prospectus. The Matrix Fund accrued expenses to Adviser of $1,198,153 in fiscal
1995, $763,918 in fiscal 1994, and $202,671 in fiscal 1993. In fiscal 1993,
Adviser voluntarily agreed to reimburse the Matrix Fund for all expenses in
excess of .60% of average daily net assets on an annual basis, which amounted to
$73,579. Additionally, Adviser
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<PAGE>
waived Advisory fees of $599,077 in fiscal 1995, $381,959 in fiscal 1994, and
$101,336 in fiscal 1993.
The Advisory Agreement will continue from year to year provided that a
majority of the Trustees who are not interested persons of the Fund and either a
majority of all Trustees or a majority of the shareholders of the Fund approve
its continuance. The Agreement may be terminated by Adviser or the Fund without
penalty upon sixty days' notice and will terminate automatically upon its
assignment.
ADMINISTRATOR. Frank Russell Investment Management Company
("Administrator") serves as the Fund's administrator, pursuant to an
Administration Agreement dated April 12, 1988 ("Administration Agreement"). A
description of the services provided under the Administration Agreement and the
basis for computing fees for such services is provided in the Fund's Prospectus.
The Matrix Fund accrued expenses to Administrator of $47,220 in fiscal 1995,
$29,884 in fiscal 1994, and $9,894 in fiscal 1993.
The Administration Agreement will continue from year to year provided that
a majority of the Trustees and a majority of the Trustees who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
operation of the Distribution Plan described below or the Administration
Agreement approve its continuance. The Agreement may be terminated by
Administrator or the Fund without penalty upon sixty days' notice and will
terminate automatically upon its assignment.
Administrator is a wholly owned subsidiary of Frank Russell Company. Frank
Russell Company was founded in 1936 and has provided comprehensive asset
management consulting services since 1969 for institutional pools of investment
assets, principally those of large corporate employee benefit plans. Frank
Russell Company and its affiliates have offices in Tacoma, Seattle, New York
City, Toronto, London, Tokyo, Sydney, Zurich, Paris and Auckland, and have
approximately 1,000 officers and employees. Administrator's and Frank Russell
Company's mailing address is 909 A Street, Tacoma, WA 98402.
DISTRIBUTOR. Russell Fund Distributors, Inc. ("Distributor") serves as the
distributor of Fund shares pursuant to a Distribution Agreement dated April 12,
1988 ("Distribution Agreement"). Distributor is a wholly owned subsidiary of
Administrator. Distributor's mailing address is Two International Place, 35th
Floor, Boston, MA 02110.
CUSTODIAN AND TRANSFER AGENT. State Street serves as the custodian
("Custodian") and transfer agent ("Transfer Agent") for Investment Company.
State Street also provides the basic portfolio recordkeeping required by
Investment Company for regulatory and financial reporting purposes. For these
services, State Street is paid an annual fee in accordance with the following:
custody services--a fee payable monthly on a pro rata basis, based on the
following percentages of average daily net assets of each Fund: $0 up to
$1.5 billion--0.02%, over $1.5 billion--0.015% (for purposes of calculating the
break point, the assets of all Investment Portfolios are aggregated); securities
transaction charges from $8.00 to $25.00 per transaction; Eurodollar
-8-
<PAGE>
transaction fees ranging from $110.00 to $125.00 per transaction; monthly
pricing fees of $375.00 per Investment Portfolio and from $6.00 to $16.00 per
security, depending on the type of instrument and the pricing service used;
transfer agent services of $2.00 per shareholder transaction and a multiple
class fee of $18,000 per year for each additional class of shares; and yield
calculation fees of $350.00 per non-money market portfolio per year. State
Street is reimbursed by the Fund for supplying certain out-of-pocket expenses
including postage, transfer fees, stamp duties, taxes, wire fees, telexes, and
freight.
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand L.L.P. serves as the Investment
Company's independent accountants. Coopers & Lybrand L.L.P. is responsible
for performing annual audits of the financial statements and financial
highlights in accordance with generally accepted auditing standards, a review
of federal tax returns, and, pursuant to Rule 17f-2 of the 1940 Act, three
security counts. The mailing address of Coopers & Lybrand L.L.P. is One Post
Office Square, Boston MA 02109.
DISTRIBUTION PLAN. Under the 1940 Act, the Securities and Exchange
Commission has adopted Rule 12b-1, which regulates the circumstances under which
the Fund may, directly or indirectly, bear distribution and shareholder
servicing expenses. The Rule provides that the Fund may pay for such expenses
only pursuant to a plan adopted in accordance with the Rule. Accordingly, the
Fund has adopted an active distribution plan (the "Plan"), which is described in
the Fund's Prospectus.
The Plan provides that the Fund may spend annually, directly or indirectly,
up to 0.25% of the value of its average net assets for distribution and
shareholder servicing services. The Plan does not provide for the Fund to be
charged for interest, carrying or any other financing charges on any
distribution expenses carried forward to subsequent years. A quarterly report
of the amounts expended under the Plan, and the purposes for which such
expenditures were incurred, must be made to the Trustees for their review. The
Plan may not be amended without shareholder approval to increase materially the
distribution or shareholder servicing costs that the Fund may pay. The Plan and
material amendments to it must be approved annually by all of the Trustees and
by the Trustees who are neither "interested persons" (as defined in the 1940
Act) of the Fund nor have any direct or indirect financial interest in the
operation of the Plan or any related agreements.
The Fund accrued expenses in the following amounts to Russell Fund
Distributors, Inc., as Distributor, for the fiscal years ended August 31:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Matrix Fund $94,034 $52,392 $11,743
</TABLE>
-9-
<PAGE>
For fiscal 1995, this amount is reflective of the following individual
payments:
<TABLE>
<S> <C>
Advertising $ 4,110
Printing of Prospectuses 6,627
Compensation to Dealers 44,276
Compensation to Sales Personnel 20,651
Other* 18,370
-------
$94,034
-------
-------
</TABLE>
* Other expenses may include such items as compensation for travel, conferences
and seminars for staff, subscriptions, office charges and professional fees.
Under the Plan, the Fund may also enter into agreements ("Service
Agreements") with financial institutions, which may include Adviser ("Service
Organizations"), to provide shareholder servicing with respect to Fund shares
held by or for the customers of the Service Organizations. Such arrangements
are more fully described in the Funds' prospectus under "Distribution Services
and Shareholder Servicing."
The Fund accrued expenses in the following amount to Adviser, under a
Service Agreement pursuant to Rule 12b-1, for fiscal years ended August 31:
<TABLE>
1995 1994 1993
<S> <C> <C> <C>
Matrix Fund $37,186 $7,456 $2,176
</TABLE>
FEDERAL LAW AFFECTING STATE STREET. The Glass-Steagall Act of 1933
prohibits state chartered banks such as State Street from engaging in the
business of underwriting, selling or distributing securities, and prohibits a
member bank of the Federal Reserve System from having certain affiliations with
an entity engaged principally in that business. The activities of State Street
in informing its customers of the Fund, performing investment and redemption
services, providing custodian, transfer, shareholder servicing, dividend
disbursing, agent servicing and investment advisory services, may raise issues
under these provisions. State Street has been advised by its counsel that its
activities in connection with the Funds contemplated under this arrangement are
consistent with its statutory and regulatory obligations.
VALUATION OF FUND SHARES. Net asset value per share is calculated once
each business day for the Fund as of the close of the regular trading session on
the New York Stock Exchange (currently 4:00 p.m. Eastern time). A business day
is one on which the New York Stock Exchange is open for business. Currently,
the New York Stock Exchange is open for trading every weekday except New Year's
Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.
Trading may occur in debt securities and in foreign securities at times
when the New York Stock Exchange is closed (including weekends and holidays or
after 4:00 p.m., Eastern time, on a regular business day). Because the net
asset value of the Fund will not be calculated at such times, if securities held
in the Fund's portfolio are traded at such times, the Fund's net asset value
-10-
<PAGE>
per share may be significantly affected at times when shareholders do not have
the ability to purchase or redeem shares. Moreover, trading in securities on
European and Asian exchanges and in the over-the-counter market is normally
completed before the close of the New York Stock Exchange. Events affecting the
values of foreign securities traded in foreign markets that occur between the
time their prices are determined and the close of the New York Stock Exchange
will not be reflected in the Fund's calculation of its net asset value unless
the Board of Trustees determines that the particular event would materially
affect the Fund's net asset value, in which case an adjustment would be made.
With the exceptions noted below, the Fund values portfolio securities at
market value. This generally means that equity securities and fixed income
securities listed and traded principally on any national securities exchange are
valued on the basis of the last sale price or, lacking any sales, at the closing
bid price, on the primary exchange on which the security is traded. United
States equity and fixed-income securities traded principally over-the-counter
and options are valued on the basis of the last reported bid price. Futures
contracts are valued on the basis of the last reported sell price.
Because many fixed income securities do not trade each day, last sale or
bid prices are frequently not available. Therefore, fixed income securities may
be valued using prices provided by a pricing service when such prices are
determined by Custodian to reflect the market value of such securities.
International equity securities traded on a national securities exchange
are valued on the basis of the last sale price. International securities traded
over-the-counter are valued on the basis of best bid or official bid, as
determined by the relevant securities exchange. In the absence of a last sale
or best or official bid price, such securities may be valued on the basis of
prices provided by a pricing service if those prices are believed to reflect the
market value of such securities.
The Fund values securities maturing within 60 days of the valuation date at
amortized cost unless the Board determines that amortized cost does not
represent fair value. This method involves valuing an instrument at its cost
and thereafter assuming a constant amortization to maturity of any discount or
premium, even though the portfolio security may increase or decrease in market
value generally in response to changes in interest rates. While 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 Fund would
receive if it sold the instrument.
For example, in periods of declining interest rates, the daily yield on
Fund shares computed by dividing the annualized daily income of the Fund's
portfolio by the net asset value based upon the amortized cost valuation
technique may tend to be higher than a similar computation made by using a
method of valuation based upon market prices and estimates. In periods of
rising interest rates, the daily yield on Fund shares computed the same way may
tend to be lower than a similar computation made by using a method of
calculation based upon market prices and estimates.
-11-
<PAGE>
BROKERAGE PRACTICES. All portfolio transactions are placed on behalf of
the Fund by Adviser. Adviser ordinarily pays commissions when it executes
transactions on a securities exchange. In contrast, there is generally no
stated commission in the purchase or sale of securities traded in the over-the-
counter markets, including most debt securities and money market instruments.
Rather, the price of such securities includes an undisclosed commission in the
form of a mark-up or mark-down. The cost of securities purchased from
underwriters includes an underwriting commission or concession.
Subject to the arrangements and provisions described below, the selection
of a broker or dealer to execute portfolio transactions is usually made by
Adviser. The Advisory Agreement provides, in substance and subject to specific
directions from officers of Investment Company, that in executing portfolio
transactions and selecting brokers or dealers, the principal objective is to
seek the best overall terms available to the Fund. Ordinarily, securities will
be purchased from primary markets, and Adviser shall consider all factors it
deems relevant in assessing the best overall terms available for any
transaction, 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 other transactions on a continuing basis.
The Advisory Agreement authorizes Adviser to select brokers or dealers to
execute a particular transaction, including principal transactions, 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 Adviser (or its
affiliates). Adviser is authorized to cause the Fund to pay a commission to a
broker or dealer who provides such brokerage and research services for executing
a portfolio transaction which is in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction. The Fund or
Adviser, as appropriate, must determine in good faith that such commission was
reasonable in relation to the value of the brokerage and research services
provided--viewed in terms of that particular transaction or in terms of all the
accounts over which Adviser exercises investment discretion.
The Trustees periodically review Adviser's performance of its
responsibilities in connection with the placement of portfolio transactions on
behalf of the Fund and review the prices paid by the Fund over representative
periods of time to determine if such prices are reasonable in relation to the
benefits provided to the Fund. Certain services received by Adviser
attributable to a particular Fund transaction may benefit one or more other
accounts for which Adviser exercises investment discretion, or an investment
portfolio other than that for which the transaction was effected. Adviser's
fees are not reduced by Adviser's receipt of such brokerage and research
services.
The brokerage commissions paid by the Matrix Fund were $415,381 for fiscal
1995, $253,249 for fiscal 1994, and $94,909 for fiscal 1993. The material
difference in the
-12-
<PAGE>
brokerage amounts from fiscal 1994 to fiscal 1995 was due primarily to the
increase in net assets.
Of the total brokerage commissions paid by the Matrix Fund, commissions
received by an affiliated broker/dealer for fiscal 1995 were $116,157. Of that
amount, the percentage of affiliated brokerage to total brokerage for the Matrix
Fund was 27.96%.
The percentage of total affiliated transactions (relating to trading
activity) to total transactions during fiscal 1995 for the Matrix Fund was
9.77%.
During the fiscal year ended August 31, 1995, the Fund purchased securities
issued by the following regular brokers or dealers, as defined by Rule 10b-1 of
the 1940 Act, each of which is one of the Fund's ten largest brokers or dealers
by dollar amounts of securities executed or commissions received on behalf of
the Fund. The value of broker-dealer securities held as of August 31, 1995, is
as follows:
MATRIX EQUITY FUND
($000)
------------------
UBS Securities, Inc. n/a
HSBC Securities, Inc. n/a
Prebon n/a
First Chicago 0
Salomon Brothers, Inc. 0
Lumis & Co. n/a
Smith Barney, Inc. n/a
Lehman Brothers, Inc. n/a
Goldman, Sachs & Co. n/a
Greenwich Securities n/a
* Repurchase Agreements
n/a represents no purchases executed during the fiscal year
PORTFOLIO TURNOVER RATE. The portfolio turnover rate for the Fund is
calculated by dividing the lesser of purchases or sales of portfolio securities
for the particular year, by the monthly average value of the portfolio
securities owned by the Fund during the year. For purposes of determining the
rate, all short-term securities, including options, futures, forward contracts
and repurchase agreements, are excluded.
The portfolio turnover rates for the Fund were as follows for the fiscal
years ended August 31,:
1995 1994 1993
---- ---- ----
Matrix Fund 129.98% 127.20% 57.65%
-13-
<PAGE>
TOTAL RETURN QUOTATIONS. The Fund computes average annual total return by
using a standardized method of calculation required by the Securities and
Exchange Commission. Average annual total return is computed by finding the
average annual compounded rates of return on a hypothetical initial investment
of $1,000 over the one-year, five-year and ten-year periods (or life of the fund
as appropriate), that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
n
P(1+T) = ERV
where: P =a hypothetical initial payment of $1,000
T =average annual total return
n =number of years
ERV =ending redeemable value of a $1,000 payment made at
the beginning of the 1-year, 5-year and 10-year periods at the
end of the year or period
The calculation assumes that all dividends and distributions of the Fund
are reinvested at the price stated in the Prospectus on the dividend dates
during the period, and includes all recurring and nonrecurring fees that are
charged to all shareholder accounts. The average annual total returns for the
Fund are as follows:
<TABLE>
<CAPTION>
One Year Inception to
Ending August 31,1995
August 31, 1995 (Annualized) Inception Date
--------------- -------------- --------------
<S> <C> <C> <C>
Matrix Fund 18.81% 13.15% 05/04/92
</TABLE>
INVESTMENTS
The fundamental investment objective of the Fund is set forth in its
Prospectus. In addition to that investment objective, the Fund also has certain
"fundamental" investment restrictions, which may be changed only with the
approval of a majority of the shareholders of the Fund, and certain
nonfundamental investment restrictions and policies, which may be changed by the
Fund without shareholder approval.
INVESTMENT RESTRICTIONS
The Fund is subject to the following investment restrictions, restrictions
1 through 11 are fundamental and restrictions 12 through 18 are nonfundamental.
Unless otherwise noted, these restrictions apply at the time an investment is
made. The Fund will not:
(1) Invest 25% or more of the value of its total assets in securities of
companies primarily engaged in any one industry (other than the US Government,
its agencies and instrumentalities).
-14-
<PAGE>
Concentration may occur as a result of changes in the market value of portfolio
securities, but may not result from investment.
(2) Borrow money (including reverse repurchase agreements), except as a
temporary measure for extraordinary or emergency purposes or to facilitate
redemptions (not for leveraging or investment), provided that borrowings do not
exceed an amount equal to 33-1/3% of the current value of the Fund's assets
taken at market value, less liabilities other than borrowings. If at any time
the Fund's borrowings exceed this limitation due to a decline in net assets,
such borrowings will within three days be reduced to the extent necessary to
comply with this limitation. The Fund will not purchase investments once
borrowed funds (including reverse repurchase agreements) exceed 5% of its total
assets.
(3) Pledge, mortgage or hypothecate its assets. However, the Fund may
pledge securities having a market value at the time of the pledge not exceeding
33-1/3% of the value of the Fund's total assets to secure borrowings permitted
by paragraph (2) above.
(4) With respect to 75% of its total assets, invest in securities of any
one issuer (other than securities issued by the US Government, its agencies, and
instrumentalities), if immediately after and as a result of such investment the
current market value of the Fund's holdings in the securities of such issuer
exceeds 5% of the value of the Fund's assets.
(5) Make loans to any person or firm; provided, however, that the making of
a loan shall not include (i) the acquisition for investment of bonds,
debentures, notes or other evidences of indebtedness of any corporation or
government which are publicly distributed or of a type customarily purchased by
institutional investors, or (ii) the entry into repurchase agreements or reverse
repurchase agreements. The Fund may lend its portfolio securities to broker-
dealers or other institutional investors if the aggregate value of all
securities loaned does not exceed 33-1/3% of the value of the Fund's total
assets.
(6) Purchase or sell commodities or commodity futures contracts except that
the Fund may enter into futures contracts and options thereon to the extent
provided in its Prospectus.
(7) Purchase or sell real estate or real estate mortgage loans; provided,
however, that the Fund may invest in securities secured by real estate or
interests therein or issued by companies which invest in real estate or
interests therein.
(8) Engage in the business of underwriting securities issued by others,
except that the Fund will not be deemed to be an underwriter or to be
underwriting on account of the purchase of securities subject to legal or
contractual restrictions on disposition.
(9) Issue senior securities, except as permitted by its investment
objective, policies and restrictions, and except as permitted by the 1940 Act.
-15-
<PAGE>
(10) Purchase or sell puts, calls or invest in straddles, spreads or any
combination thereof, if as a result of such purchase the value of the Fund's
aggregate investment in such securities would exceed 5% of the Fund's total
assets.
(11) Make short sales of securities or purchase any securities on margin,
except for such short-term credits as are necessary for the clearance of
transactions. The Fund may make initial margin deposits and variation margin
payments in connection with transactions in futures contracts and related
options.
(12) Purchase from or sell portfolio securities to its officers or
directors or other interested persons (as defined in the 1940 Act) of the Fund,
including their investment advisers and affiliates, except as permitted by the
1940 Act and exemptive rules or orders thereunder.
(13) Invest in securities issued by other investment companies except in
connection with a merger, consolidation, acquisition of assets, or other
reorganization approved by the Fund's shareholders, except that the Fund may
invest in such securities to the extent permitted by the 1940 Act.
(14) Invest in securities of any issuer which, together with its
predecessor, has been in operation for less than three years if, as a result,
more than 5% of the Fund's total assets would be invested in such securities.
(15) Invest more than 10% of its net assets in the aggregate in illiquid
securities or securities that are not readily marketable, including repurchase
agreements and time deposits of more than seven days' duration.
(16) Purchase interests in oil, gas or other mineral exploration or
development programs.
(17) Make investments for the purpose of gaining control of an issuer's
management.
(18) Purchase the securities of any issuer if the Investment Company's
officers, Directors, Adviser or any of their affiliates beneficially own more
than one-half of 1% of the securities of such issuer or together own
beneficially more than 5% of the securities of such issuer.
-16-
<PAGE>
INVESTMENT POLICIES
The Fund may invest in the following instruments:
US GOVERNMENT OBLIGATIONS. The types of US Government obligations in which
the Fund may at times invest include: (1) A variety of US Treasury obligations,
which differ only in their interest rates, maturities and times of issuance; and
(2) obligations issued or guaranteed by US Government agencies and
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the US Treasury, (b) the right of the issuer to borrow an
amount limited to a specific line of credit from the US Treasury,
(c) discretionary authority of the US Government agency or instrumentality or
(d) the credit of the instrumentality (examples of agencies and
instrumentalities are: Federal Land Banks, Federal Housing Administration,
Farmers Home Administration, Export--Import Bank of the United States, Central
Bank for Cooperatives, Federal Intermediate Credit Banks, Federal Home Loan
Banks, General Services Administration, Maritime Administration, Tennessee
Development Bank, Asian-American Development Bank, Student Loan Marketing
Association, International Bank for Reconstruction and Development and Federal
National Mortgage Association). No assurance can be given that in the future
the US Government will provide financial support to such US Government agencies
or instrumentalities described in (2)(b), (2)(c) and (2)(d), other than as set
forth above, since it is not obligated to do so by law. The Fund may purchase
US Government obligations on a forward commitment basis.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
financial institutions. Under repurchase agreements, these parties sell
securities to the Fund and agree to repurchase the securities at the Fund's cost
plus interest within a specified time (normally one day). The securities
purchased by the Fund have a total value in excess of the purchase price paid by
the Fund and are held by Custodian until repurchased. Repurchase agreements
assist the Fund in being invested fully while retaining "overnight" flexibility
in pursuit of investments of a longer-term nature. The Fund will limit
repurchase transactions to those member banks of the Federal Reserve System and
broker-dealers whose creditworthiness is continually monitored and found
satisfactory by Adviser.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreements under the circumstances described in "Investment Restrictions."
Under reverse repurchase agreements, the Fund transfers possession of portfolio
securities to financial institutions in return for cash in an amount equal to a
percentage of the portfolio securities' market value and agrees to repurchase
the securities at a future date by repaying the cash with interest. The Fund
retains the right to receive interest and principal payments from the securities
while they are in the possession of the financial institutions. Cash or liquid
high quality debt obligations from a Fund's portfolio equal in value to the
repurchase price including any accrued interest will be segregated by Custodian
on the Fund's records while a reverse repurchase agreement is in effect.
FORWARD COMMITMENTS. The Fund may contract to purchase securities for a
fixed price at a future date beyond customary settlement time consistent with
the Fund's ability to manage its investment portfolio, maintain a stable net
asset value and meet redemption requests. The Fund
-17-
<PAGE>
may dispose of a commitment prior to settlement if it is appropriate to do so
and realize short-term profits or losses upon such sale. When effecting such
transactions, cash or liquid high quality debt obligations held by the Fund of a
dollar amount sufficient to make payment for the portfolio securities to be
purchased will be segregated on the Fund's records at the trade date and
maintained until the transaction is settled. Forward commitments involve a risk
of loss if the value of the security to be purchased declines prior to the
settlement date, or if the other party fails to complete the transaction.
WHEN-ISSUED TRANSACTIONS. New issues of securities are often offered on a
when-issued basis. This means that delivery and payment for the securities
normally will take place several days after the date the buyer commits to
purchase them. The payment obligation and the interest rate that will be
received on securities purchased on a when-issued basis are each fixed at the
time the buyer enters into the commitment.
The Fund will make commitments to purchase when-issued securities only with
the intention of actually acquiring the securities, but the Fund may sell these
securities or dispose of the commitment before the settlement date if it is
deemed advisable as a matter of investment strategy. Cash or marketable high
quality debt securities equal to the amount of the above commitments will be
segregated on the Fund's records. For the purpose of determining the adequacy
of these securities the segregated securities will be valued at market. If the
market value of such securities declines, additional cash or securities will be
segregated on the Fund's records on a daily basis so that the market value of
the account will equal the amount of such commitments by the Fund. The Fund
will not invest more than 25% of its net assets in when-issued securities.
Securities purchased on a when-issued basis and the securities held by the
Fund are subject to changes in market value based upon the public's perception
of changes in the level of interest rates. Generally, the value of such
securities will fluctuate inversely to changes in interest rates -- i.e., they
will appreciate in value when interest rates decline and decrease in value when
interest rates rise. Therefore, if in order to achieve higher interest income
the Fund remains substantially fully invested at the same time that it has
purchased securities on a "when-issued" basis, there will be a greater
possibility of fluctuation in the Fund's net asset value.
When payment for when-issued securities is due, the Fund will meet its
obligations from then-available cash flow, the sale of segregated securities,
the sale of other securities or, and although it would not normally expect to do
so, from the sale of the when-issued securities themselves (which may have a
market value greater or less than the Fund's payment obligation). The sale of
securities to meet such obligations carries with it a greater potential for the
realization of capital gains, which are subject to federal income taxes.
VARIABLE AMOUNT MASTER DEMAND NOTES. Variable amount master demand notes
are unsecured obligations that are redeemable upon demand and are typically
unrated. These instruments are issued pursuant to written agreements between
the issuers and the holders. The agreements permit the holders to increase
(subject to an agreed maximum) and the holders and
-18-
<PAGE>
issuers to decrease the principal amount of the notes, and specify that the rate
of interest payable on the principal fluctuates according to an agreed formula.
SECTION 4(2) COMMERCIAL PAPER. The Fund may invest in commercial paper
issued in reliance on the so-called "private placement" exemption from
registration afforded by Section 4(2) of the Securities Act of 1933
("Section 4(2) paper"). Section 4(2) paper is restricted as to disposition
under the federal securities laws, and generally is sold to investors who agree
that they are purchasing the paper for an investment and not with a view to
public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) paper is normally resold to other investors through
or with the assistance of the issuer or investment dealers who make a market in
Section 4(2) paper, thus providing liquidity. Pursuant to guidelines
established by the Board of Trustees, Adviser may determine that Section 4(2)
paper is liquid for the purposes of complying with the Fund's investment
restriction relating to investments in illiquid securities.
WARRANTS. The Fund may invest in warrants which entitle the holder to buy
equity securities at a specific price for a specific period of time. Warrants
may be considered more speculative than certain other types of investments in
that they do not entitle a holder to dividends or voting rights with respect to
the securities which may be purchased nor do they represent any rights in the
assets of the issuing company. Also, the value of the warrant does not
necessarily change with the value of the underlying securities and a warrant
ceases to have value if it is not exercised prior to the expiration date. The
Fund will not invest more than 5% of the value of their net assets in warrants,
or more than 2% in warrants which are not listed on the New York or American
Stock Exchange.
AMERICAN DEPOSITORY RECEIPTS (ADRS). The Fund may invest in ADRs under
certain circumstances as an alternative to directly investing in foreign
securities. Generally, ADRs, in registered form, are designed for use in the US
securities markets. ADRs are receipts typically issued by a US bank or trust
company evidencing ownership of the underlying securities. ADRs represent the
right to receive securities of foreign issuers deposited in a domestic bank or a
correspondent bank. ADRs do not eliminate the risk inherent in investing in the
securities of foreign issuers. However, by investing in ADRs rather than
directly in a foreign issuer's stock, the Fund can avoid currency risks during
the settlement period for either purchases or sales. In general, there is a
large liquid market in the US for many ADRs. The information available for ADRs
is subject to the accounting, auditing and financial reporting standards of the
domestic market or exchange on which they are traded, which standards are more
uniform and more exacting than those to which many foreign issuers are subject.
HEDGING STRATEGIES AND RELATED INVESTMENT TECHNIQUES
The Fund may seek to hedge its portfolio against movements in the equity
markets, interest rates and currency exchange rates through the use of options,
futures transactions, options on futures and forward foreign currency exchange
transactions. The Fund has authority to write (sell) covered call and put
options on their portfolio securities, purchase put and call options on
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<PAGE>
securities and engage in transactions in stock index options, stock index
futures and financial futures and related options on such futures. The Fund may
enter into such options and futures transactions either on exchanges or in the
over-the-counter ("OTC") markets. Although certain risks are involved in
options and futures transactions (as discussed in the Prospectus and below),
Adviser believes that, because the Fund will only engage in these transactions
for hedging purposes, the options and futures portfolio strategies of the Fund
will not subject the Fund to the risks frequently associated with the
speculative use of options and futures transactions. Although the use of
hedging strategies by the Fund is intended to reduce the volatility of the net
asset value of the Fund's shares, the Fund's net asset value will nevertheless
fluctuate. There can be no assurance that the Fund's hedging transactions will
be effective.
WRITING COVERED CALL OPTIONS. The Fund is authorized to write (sell)
covered call options on the securities in which it may invest and to enter into
closing purchase transactions with respect to such options. Writing a call
option obligates the Fund to sell or deliver the option's underlying security,
in return for the strike price, upon exercise of the option. By writing a call
option, the Fund receives an option premium from the purchaser of the call
option. Writing covered call options is generally a profitable strategy if
prices remain the same or fall. Through receipt of the option premium, the Fund
would seek to mitigate the effects of a price decline. By writing covered call
options, however, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price. In addition, the Fund's ability to sell the underlying
security will be limited while the option is in effect unless the Fund effects a
closing purchase transaction.
WRITING COVERED PUT OPTIONS. The Fund is authorized to write (sell)
covered put options on its portfolio securities and to enter into closing
transactions with respect to such options.
When the Fund writes a put option, it takes the opposite side of the
transaction from the option's purchaser. In return for receipt of the premium,
the Fund assumes the obligation to pay the strike price for the option's
underlying instrument if the other party to the option chooses to exercise it.
The Fund may seek to terminate its position in a put option it writes before
exercise by closing out the option in the secondary market at its current price.
If the secondary market is not liquid for an option the Fund has written,
however, the Fund must continue to be prepared to pay the strike price while the
option is outstanding, regardless of price changes, and must continue to set
aside assets to cover its position.
The Fund may write put options as an alternative to purchasing actual
securities. If security prices rise, the Fund would expect to profit from a
written put option, although its gain would be limited to the amount of the
premium it received. If security prices remain the same over time, it is likely
that the Fund will also profit, because it should be able to close out the
option at a lower price. If security prices fall, the Fund would expect to
suffer a loss. This loss should be less than the loss the Fund would have
experienced from purchasing the underlying instrument directly, however, because
the premium received for writing the option should mitigate the effects of the
decline.
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PURCHASING PUT OPTIONS. The Fund is authorized to purchase put options to
hedge against a decline in the market value of its portfolio securities. By
buying a put option the Fund has the right (but not the obligation) to sell the
underlying security at the exercise price, thus limiting the Fund's risk of loss
through a decline in the market value of the security until the put option
expires. The amount of any appreciation in the value of the underlying security
will be partially offset by the amount of the premium paid by the Fund for the
put option and any related transaction costs. Prior to its expiration, a put
option may be sold in a closing sale transaction and profit or loss from the
sale will depend on whether the amount received is more or less than the premium
paid for the put option plus the related transaction costs. A closing sale
transaction cancels out the Fund's position as the purchaser of an option by
means of an offsetting sale of an identical option prior to the expiration of
the option it has purchased. The Fund will not purchase put options on
securities (including stock index options discussed below) if as a result of
such purchase, the aggregate cost of all outstanding options on securities held
by the Fund would exceed 5% of the market value of the Fund's total assets.
PURCHASING CALL OPTIONS. The Fund is also authorized to purchase call
options. The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price (call options on futures contracts are settled by purchasing the
underlying futures contract). The Fund will purchase call options only in
connection with "closing purchase transactions."
STOCK INDEX OPTIONS AND FINANCIAL FUTURES. The Fund is authorized to
engage in transactions in stock index options and financial futures, and related
options. The Fund may purchase or write put and call options on stock indices
to hedge against the risks of market-wide stock price movements in the
securities in which the Fund invests. Options on indices are similar to options
on securities except that on exercise or assignment, the parties to the contract
pay or receive an amount of cash equal to the difference between the closing
value of the index and the exercise price of the option times a specified
multiple. The Fund may invest in stock index options based on a broad market
index, such as the S&P 500 Index, or on a narrow index representing an industry
or market segment. The Fund's investments in foreign stock index futures
contracts and foreign interest rate futures contracts, and related options, are
limited to only those contracts and related options that have been approved by
the Commodity Futures Trading Commission ("CFTC") for investment by United
States investors. Additionally, with respect to the Funds' investments in
foreign options, unless such options are specifically authorized for investment
by order of the CFTC, the Fund will not make such investments.
The Fund may also purchase and sell stock index futures contracts and other
financial futures contracts ("futures contracts") as a hedge against adverse
changes in the market value of its portfolio securities as described below. A
futures contract is an agreement between two parties which obligates the
purchaser of the futures contract to buy and the seller of a futures contract to
sell a security for a set price on a future date. Unlike most other futures
contracts, a stock index futures contract does not require actual delivery of
securities, but results in cash settlement based upon the difference in value of
the index between the time the contract was
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entered into and the time of its settlement. The Fund may effect transactions
in stock index futures contracts in connection with equity securities in which
it invests and in financial futures contracts in connection with debt securities
in which it invests, if any. Transactions by the Fund in stock index futures
and financial futures are subject to limitations as described below under
"Restrictions on the Use of Futures Transactions."
The Fund may sell futures contracts in anticipation of or during a market
decline to attempt to offset the decrease in market value of the Fund's
securities portfolio that might otherwise result. When the Fund is not fully
invested in the securities markets and anticipates a significant market advance,
the Fund may purchase futures in order to gain rapid market exposure that may
partially or entirely offset increases in the cost of securities that the Fund
intends to purchase. As such purchases are made, an equivalent amount of
futures contracts will be terminated by offsetting sales. It is anticipated
that, in a substantial majority of these transactions, the Fund will purchase
such securities upon termination of the long futures position, whether the long
position results from the purchase of a futures contract or the purchase of a
call option, but under unusual circumstances (e.g., the Fund experiences a
significant amount of redemptions), a long futures position may be terminated
without the corresponding purchase of securities.
The Fund also is authorized to purchase and write call and put options on
futures contracts and stock indices in connection with its hedging activities.
Generally, these strategies would be utilized under the same market and market
sector conditions (i.e., conditions relating to specific types of investments)
during which the Fund enters into futures transactions. The Fund may purchase
put options or write call options on futures contracts and stock indices rather
than selling the underlying futures contract in anticipation of a decrease in
the market value of securities. Similarly, the Fund can purchase call options,
or write put options on futures contracts and stock indices, as a substitute for
the purchase of such futures to hedge against the increased cost resulting from
an increase in the market value of securities which the Fund intends to
purchase.
The Fund is also authorized to engage in options and futures transactions
on US and foreign exchanges and in options in the OTC markets ("OTC options").
In general, exchange traded contracts are third-party contracts (i.e.,
performance of the parties' obligations is guaranteed by an exchange or clearing
corporation) with standardized strike prices and expiration dates. OTC options
transactions are two-party contracts with price and terms negotiated by the
buyer and seller. See "Restrictions on OTC Options" below for information as to
restrictions on the use of OTC options.
The Fund is authorized to purchase or sell listed or OTC foreign security
or currency options, foreign security or currency futures and related options as
a short or long hedge against possible variations in foreign exchange rates and
market movements. Such transactions could be effected with respect to hedges on
non-US dollar denominated securities owned by the Fund, sold by the Fund but not
yet delivered, or committed or anticipated to be purchased by the Fund. As an
illustration, the Fund may use such techniques to hedge the stated value in US
dollars of an investment in a yen-denominated security. In such circumstances,
for example, the Fund can
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purchase a foreign currency put option enabling it to sell a specified amount of
yen for US dollars at a specified price by a future date. To the extent the
hedge is successful, a loss in the value of the yen relative to the US dollar
will tend to be offset by an increase in the value of the put option.
RESTRICTIONS ON THE USE OF FUTURES TRANSACTIONS. The purchase or sale of a
futures contract differs from the purchase or sale of a security in that no
price or premium is paid or received. Instead, an amount of cash or securities
acceptable to the broker and the relevant contract market, which varies, but is
generally about 5% of the contract amount, must be deposited with the broker.
This amount is known as "initial margin" and represents a "good faith" deposit
assuring the performance of both the purchaser and seller under the futures
contract. Subsequent payments to and from the broker, called "variation
margin," are required to be made on a daily basis as the price of the futures
contract fluctuates making the long and short positions in the futures contracts
more or less valuable, a process known as "marking to market." At any time
prior to the settlement date of the future contract, the position may be closed
out by taking an opposite position which will operate to terminate the position
in the futures contract. A final determination of variation margin is then
made, additional cash is required to be paid to or released by the broker and
the purchaser realizes a loss or gain. In addition, a nominal commission is
paid on each completed sale transaction.
Regulations of the CFTC applicable to the Fund require that all of the
Fund's futures and options on futures transactions constitute bona fide hedging
transactions and that a Fund not enter into such transactions if, immediately
thereafter, the sum of the amount of initial margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets.
RESTRICTIONS ON OTC OPTIONS. The Funds will engage in OTC options,
including OTC stock index options, OTC foreign security and currency options and
options on foreign security and currency futures, only with member banks of the
Federal Reserve System and primary dealers in US Government securities or with
affiliates of such banks or dealers which have capital of at least $50 million
or whose obligations are guaranteed by an entity having capital of at least
$50 million. The Fund will acquire only those OTC options for which Adviser
believes the Fund can receive on each business day at least two independent bids
or offers (one of which will be from an entity other than a party to the
option).
The Staff of the SEC has taken the position that purchased OTC options and
the assets used as cover for written OTC options are illiquid securities.
Therefore, the Fund has adopted an operating policy pursuant to which it will
not purchase or sell OTC options (including OTC options on futures contracts)
if, as a result of such transaction, the sum of: (1) the market value of
outstanding OTC options held by the Fund; (2) the market value of the underlying
securities covered by outstanding OTC call options sold by the Fund; (3) margin
deposits on the Fund's existing OTC options on futures contracts; and (4) the
market value of all other assets of the Fund that are illiquid or are not
otherwise readily marketable, would exceed 10% of the net assets of the Fund,
taken at market value. However, if an OTC option is sold by the Fund to a
primary US Government securities dealer recognized by the Federal Reserve Bank
of New York and the Fund
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has the unconditional contractual right to repurchase such OTC option from the
dealer at a predetermined price, then the Fund will treat as illiquid such
amount of the underlying securities as is equal to the repurchase price less the
amount by which the option is "in-the-money" (current market value of the
underlying security minus the option's strike price). The repurchase price with
primary dealers is typically a formula price which is generally based on a
multiple of the premium received for the option plus the amount by which the
option is "in-the-money."
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS. The Fund will not use
leverage in its options and futures strategies. Such investments will be made
for hedging purposes only. The Fund will hold securities or other options or
futures positions whose values are expected to offset its obligations under the
hedge strategies. The Fund will not enter into an option or futures position
that exposes the Fund to an obligation to another party unless it owns either:
(1) an offsetting position in securities or other options or futures contracts;
or (2) cash, receivables and short-term debt securities with a value sufficient
to cover its potential obligations. The Fund will comply with guidelines
established by the SEC with respect to coverage of options and futures
strategies by mutual funds, and if the guidelines so require will set aside cash
and high grade liquid debt securities in a segregated account with its custodian
bank in the amount prescribed. The Fund's custodian shall maintain the value of
such segregated account equal to the prescribed amount by adding or removing
additional cash or liquid securities to account for fluctuations in the value of
securities held in such account. Securities held in a segregated account cannot
be sold while the futures or option strategy is outstanding, unless they are
replaced with similar securities. As a result, there is a possibility that
segregation of a large percentage of the Fund's assets could impede portfolio
management or the Fund's ability to meeting redemption requests or other current
obligations.
RISK FACTORS IN OPTIONS, FUTURES, FORWARD AND CURRENCY TRANSACTIONS.
Utilization of options and futures transactions to hedge the Funds' portfolios
involves the risk of imperfect correlation in movements in the price of options
and futures and movements in the price of securities or currencies which are the
subject of the hedge. If the price of the options or futures moves more or less
than the price of hedged securities or currencies, the Fund will experience a
gain or loss which will not be completely offset by movements in the price of
the subject of the hedge. The successful use of options and futures also
depends on Adviser's ability to correctly predict price movements in the market
involved in a particular options or futures transaction. To compensate for
imperfect correlations, the Fund may purchase or sell stock index options or
futures contracts in a greater dollar amount than the hedged securities if the
volatility of the hedged securities is historically greater than the volatility
of the stock index options or futures contracts. Conversely, the Funds may
purchase or sell fewer stock index options or futures contracts, if the
historical price volatility of the hedged securities is less than that of the
stock index options or futures contracts. The risk of imperfect correlation
generally tends to diminish as the maturity date of the stock index option or
futures contract approaches. Options are also subject to the risks of an
illiquid secondary market, particularly in strategies involving writing options,
which the Fund cannot terminate by exercise. In general, options whose strike
prices are close to their underlying instruments' current value will have the
highest trading volume, while options whose strike prices are further away may
be less liquid.
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<PAGE>
The Fund intends to enter into options and futures transactions, on an
exchange or in the OTC market, only if there appears to be a liquid secondary
market for such options or futures or, in the case of OTC transactions, the
Adviser believes the Fund can receive on each business day at least two
independent bids or offers. However, there can be no assurance that a liquid
secondary market will exist at any specific time. Thus, it may not be possible
to close an options or futures position. The inability to close options and
futures positions also could have an adverse impact on the Fund's ability to
effectively hedge its portfolio. There is also the risk of loss by the Fund of
margin deposits or collateral in the event of bankruptcy of a broker with whom
the Fund has an open position in an option, a futures contract or related
option.
The exchanges on which options on portfolio securities and currency options
are traded have generally established limitations governing the maximum number
of call or put options on the same underlying security or currency (whether or
not covered) which may be written by a single investor, whether acting alone or
in concert with others (regardless of whether such options are written on the
same or different exchanges or are held or written in one or more accounts or
through one or more brokers). "Trading limits" are imposed on the maximum
number of contracts which any person may trade on a particular trading day.
TAXES
The Fund intends to qualify for treatment as a regulated investment company
("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended
("the Code"). As a RIC, the Fund will not be liable for federal income taxes on
taxable net investment income and capital gain net income (capital gains in
excess of capital losses) that it distributes to its shareholders, provided that
the Fund distributes annually to its shareholders at least 90% of its net
investment income and net short-term capital gain for the taxable year
("Distribution Requirement"). For the Fund to qualify as a RIC it must abide by
all of the following requirements: (1) at least 90% of the Fund's gross income
each taxable year must be derived from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock
or securities or foreign currencies, or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies ("Income Requirement");
(2) less than 30% of the Fund's gross income each taxable year must be derived
from the sale or other disposition of securities and certain options, futures
contracts, forward contracts and foreign currencies held for less than three
months ("Short-Short Limitation"); (3) at the close of each quarter of the
Fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, US Government securities, securities of
other RICs, and other securities, with such other securities limited, in respect
of any one issuer, to an amount that does not exceed 5% of the total assets of
the Fund and that does not represent more than 10% of the outstanding voting
securities of such issuer; and (4) at the close of each quarter of the Fund's
taxable year, not more than 25% of the value of its assets may be invested in
securities (other than US Government securities or the securities of other RICs)
of any one issuer.
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The Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year an amount at least equal to
the sum of: (1) 98% of its ordinary income for that year; (2) 98% of its
capital gain net income for the one-year period ending on October 31 of that
year; and (3) certain undistributed amounts from the preceding calendar year.
For this and other purposes, dividends declared in October, November or December
of any calendar year and made payable to shareholders of record in such month
will be deemed to have been received on December 31 of such year if the
dividends are paid by the Fund subsequent to December 31 but prior to February 1
of the following year.
If a shareholder receives a distribution taxable as long-term capital gain
with respect to shares of the Fund and redeems or exchanges the shares without
having held the shares for more than six months, then any loss on the redemption
or exchange will be treated as long-term capital loss to the extent of the
capital gain distribution.
ISSUES RELATED TO HEDGING AND OPTION INVESTMENTS. The Fund's ability to
make certain investments may be limited by provisions of the Code that require
inclusion of certain unrealized gains or losses in the Fund's income for
purposes of the Income Requirement, the Short-Short Limitation and the
Distribution Requirement, and by provisions of the Code that characterize
certain income or loss as ordinary income or loss rather than capital gain or
loss. Such recognition, characterization and timing rules will affect
investments in certain futures contracts, options, foreign currency contracts
and debt securities denominated in foreign currencies.
FOREIGN INCOME TAXES. Investment income received by the Fund from sources
within foreign countries may be subject to foreign taxes withheld at the source.
The United States has entered into tax treaties with many foreign countries
which would entitle the Fund to a reduced rate of such taxes or exemption from
taxes on such income. It is impossible to determine the effective rate of
foreign tax for the Fund in advance since the amount of the assets to be
invested within various countries is not known.
If the Fund invests in an entity that is classified as a passive foreign
investment company ("PFIC") for federal income tax purposes, the application of
certain provisions of the Code applying to PFICs could result in the imposition
of certain federal income taxes on the Fund. It is anticipated that any taxes
on the Fund with respect to investments in PFICs would be insignificant. Under
US Treasury regulations issued in 1992 for PFICs, the Fund can elect to mark-to-
market its PFIC holdings in lieu of paying taxes on gains or distributions
therefrom.
Foreign shareholders should consult with their tax advisers as to if and
how the federal income tax and its withholding requirements applies to them.
STATE AND LOCAL TAXES. Depending upon the extent of the Fund's activities
in states and localities in which its offices are maintained, its agents or
independent contractors are located or it is otherwise deemed to be conducting
business, the Fund may be subject to the tax laws of such states or localities.
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The foregoing discussion is only a summary of certain federal income tax
issues generally affecting the Fund and its shareholders. Circumstances among
investors may vary and each investor is encouraged to discuss investment in the
Fund with the investor's tax adviser.
FINANCIAL STATEMENTS
The 1995 fiscal year-end financial statements of the Matrix Fund, including
notes to the financial statements and financial highlights and the Report of
Independent Accountants, are included in the Fund's Annual Report to
shareholders. A copy of this Annual Report accompanies this Statement of
Additional Information and is incorporated herein by reference.
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Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
THE SEVEN SEAS SERIES FUND
Two International Place, 35th Floor
Boston, Massachusetts 02110
(617) 654-6089
STATEMENT OF ADDITIONAL INFORMATION
S&P 500 INDEX FUND
DECEMBER 29, 1995
The Seven Seas Series Fund ("Investment Company") is a registered open-end
investment company organized as a Massachusetts business trust offering shares
of beneficial interest in separate investment portfolios. In addition, each
series of the Investment Company is diversified as defined under the Investment
Company Act of 1940, as amended (the "1940 Act").
This Statement of Additional Information supplements or describes in
greater detail the Investment Company and The Seven Seas Series S&P 500 Stock
Index Fund (the "Fund") as contained in the Fund's Prospectus dated December 29,
1995. This Statement is not a Prospectus and should be read in conjunction with
the Fund's Prospectus, which may be obtained by telephoning or writing
Investment Company at the number or address shown above.
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<PAGE>
TABLE OF CONTENTS
Page
----
STRUCTURE AND GOVERNANCE . . . . . . . . . . . . . . . . . . . . . . . . . 3
Organization and Business History. . . . . . . . . . . . . . . . . 3
Shareholder Meetings . . . . . . . . . . . . . . . . . . . . . . . 4
Controlling Shareholders . . . . . . . . . . . . . . . . . . . . . 4
Principal Shareholders . . . . . . . . . . . . . . . . . . . . . . 4
Trustees and Officers. . . . . . . . . . . . . . . . . . . . . . . 5
OPERATION OF INVESTMENT COMPANY. . . . . . . . . . . . . . . . . . . . . . 6
Service Providers. . . . . . . . . . . . . . . . . . . . . . . . . 6
Adviser. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Administrator. . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Distributor. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Custodian and Transfer Agent . . . . . . . . . . . . . . . . . . . 8
Distribution Plan. . . . . . . . . . . . . . . . . . . . . . . . . 8
Federal Law Affecting State Street . . . . . . . . . . . . . . . . 9
Valuation of Fund Shares . . . . . . . . . . . . . . . . . . . . . 9
Brokerage Practices. . . . . . . . . . . . . . . . . . . . . . . . 10
Portfolio Turnover Rate. . . . . . . . . . . . . . . . . . . . . . 12
Total Return Quotations. . . . . . . . . . . . . . . . . . . . . . 12
INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Investment Restrictions. . . . . . . . . . . . . . . . . . . . . . 13
Investment Policies. . . . . . . . . . . . . . . . . . . . . . . . 15
Hedging Strategies and Related Investment Techniques . . . . . . . 17
Ratings of Debt Instruments. . . . . . . . . . . . . . . . . . . . 23
Ratings of Commercial Paper. . . . . . . . . . . . . . . . . . . . 24
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
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STRUCTURE AND GOVERNANCE
ORGANIZATION AND BUSINESS HISTORY. Investment Company was organized as a
Massachusetts business trust on October 3, 1987, and operates under a First
Amended and Restated Master Trust Agreement, dated October 13, 1993, as amended.
Investment Company is authorized to issue shares of beneficial interest, par
value $.001 per share, which may be divided into one or more series. The
Investment Company share evidences pro rata ownership interest in a different
investment portfolio, or "Fund." The Fund is one such investment portfolio.
The Trustees may create additional Funds at any time without shareholder
approval.
As of the date of this Statement of Additional Information, Investment
Company is comprised of the following investment portfolios, each of which
commenced operations on the date set forth below the portfolio's name:
--------------------------------------------------------------------------
The Seven Seas Series Money Market Fund May 2, 1988
--------------------------------------------------------------------------
The Seven Seas Series US Government Money Market Fund March 1, 1991
--------------------------------------------------------------------------
The Seven Seas Series US Treasury Money Market Fund December 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series US Treasury Obligations Fund *
--------------------------------------------------------------------------
The Seven Seas Series Prime Money Market Fund February 22, 1994
--------------------------------------------------------------------------
The Seven Seas Series Yield Plus Fund November 9, 1992
--------------------------------------------------------------------------
The Seven Seas Series Tax Free Money Market Fund December 1, 1994
--------------------------------------------------------------------------
The Seven Seas Series Intermediate Fund September 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series Bond Market Fund *
--------------------------------------------------------------------------
The Seven Seas Series Growth and Income Fund September 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series S&P 500 Index Fund December 30, 1992
--------------------------------------------------------------------------
The Seven Seas Series Small Cap Fund July 1, 1992
--------------------------------------------------------------------------
The Seven Seas Series Matrix Equity Fund May 4, 1992
--------------------------------------------------------------------------
The Seven Seas Series Active International Fund March 7, 1995
--------------------------------------------------------------------------
The Seven Seas Series International Pacific Index Fund *
--------------------------------------------------------------------------
The Seven Seas Series Emerging Markets Fund March 1, 1994
--------------------------------------------------------------------------
The Seven Seas Series Real Estate Equity Fund *
--------------------------------------------------------------------------
----------------
*As of the date of this Statement of Additional Information, these
portfolios have not commenced operations.
Prospectuses for these investment portfolios may be obtained by calling
Investment Company's distributor, Russell Fund Distributors, Inc., at (617) 654-
6089.
Investment Company is authorized to divide shares of any series into two or
more classes of shares. The shares of each Fund may have such rights and
preferences as the Trustees may establish from time to time, including the right
of redemption (including the price, manner and terms of redemption), special and
relative rights as to dividends and distributions, liquidation rights, sinking
or purchase fund provisions and conditions under which any Fund may have
separate voting rights or no voting rights. Each class of shares of a Fund is
entitled to the same rights and privileges as all other classes of the Fund,
except that each class bears the expenses associated with the distribution and
shareholder servicing arrangements of that class, as well as
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<PAGE>
other expenses attributable to the class and unrelated to the management of the
Fund's portfolio securities. Shares of the Money Market, US Government Money
Market and Tax Free Money Market Funds are divided into Classes A, B and C.
Any amendment to the Master Trust Agreement that would materially and
adversely affect shareholders of Investment Company as a whole, or shareholders
of a particular Fund, must be approved by the holders of a majority of the
shares of Investment Company or the Fund, respectively. All other amendments
may be effected by Investment Company's Board of Trustees.
Under certain unlikely circumstances, and as is the case with any
Massachusetts business trust, a shareholder of the Fund may be held personally
liable for the obligations of the Fund. The Master Trust Agreement provides
that shareholders shall not be subject to any personal liability for the acts or
obligations of the Fund and that every written agreement, obligation, or other
undertaking of the Fund shall contain a provision to the effect that the
shareholders are not personally liable thereunder. The Master Trust Agreement
also provides that the Fund shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Fund and satisfy
any judgment thereon. Thus, the risk to shareholders of incurring financial
loss beyond their investments is limited to circumstances in which the Fund
itself would be unable to meet its obligations.
SHAREHOLDER MEETINGS. Investment Company will not have an annual meeting
of shareholders. Special meetings may be convened: (1) by the Board of
Trustees; (2) upon written request to the Board by the holders of at least 10%
of the outstanding shares; or (3) upon the Board's failure to honor the
shareholders' request described above, by holders of at least 10% of the
outstanding shares giving notice of the special meeting to the shareholders.
CONTROLLING SHAREHOLDERS. The Trustees have the authority and
responsibility to manage the business of Investment Company. Trustees hold
office until they resign or are removed by, in substance, a vote of two-thirds
of Investment Company shares outstanding. State Street may from time to time
have discretionary authority over accounts which invest in Investment Company
shares. These accounts include accounts maintained for securities lending
clients and accounts which permit the use of Investment Company portfolios as
short-term cash sweep investments. Shares purchased for all discretionary
accounts are held of record by State Street, who retains voting control of such
shares. As of November 30, 1995, State Street held of record 36% of the issued
and outstanding shares of Investment Company in connection with its
discretionary accounts. Consequently, State Street may be deemed to be a
controlling person of Investment Company for purposes of the 1940 Act.
PRINCIPAL SHAREHOLDERS. As of November 30, 1995, the following
shareholders owned of record 5% or more of the issued and outstanding shares of
the Fund:
- American Home Assurance Company, 200 Liberty Street 19th Floor, New
York, NY 10281--26%;
-4-
<PAGE>
- Energy Insurance Mutual Limited, 6200 Courtney Cambell Causeway Suite
510, Tampa, FL 33607--16%; and
- Trustees of Alcatel Network Systems, State Street Bank and Trust
Company, One Enterprise Drive, Quincy, MA 02171--7%.
The Trustees and officers of Investment Company, as a group, own less than
1% of Investment Company's voting securities.
TRUSTEES AND OFFICERS. The Board of Trustees is responsible for overseeing
generally the operation of the Fund. The officers, all of whom are employed by,
and are officers of, Administrator or its affiliates, are responsible for the
day-to-day management and administration of the Fund's operations.
Trustees who are not officers or employees of State Street or its
affiliates are paid an annual fee and are reimbursed for travel and other
expenses they incur in attending Board meetings. Investment Company's officers
and employees are paid by Administrator or its affiliates.
The following lists Investment Company's Trustees and officers, their
positions with Investment Company, their present and principal occupations
during the past five years and the mailing addresses of Trustees who are not
affiliated with Investment Company. The mailing address for all Trustees and
officers affiliated with Investment Company is The Seven Seas Series Fund, 909 A
Street, Tacoma, WA 98402.
An asterisk (*) indicates that a Trustee is an "interested person" of the
Investment Company, as defined in the 1940 Act.
*LYNN L. ANDERSON, Trustee, Chairman of the Board, President and Fund
Treasurer. Chairman of the Board and Chief Executive Officer, Frank Russell
Investment Management Company and Russell Fund Distributors, Inc.; Director,
President and Chief Executive Officer, Frank Russell Investment Company and
Frank Russell Trust Company; Director and President, Russell Insurance Funds;
Director and Chairman, Frank Russell Company (Delaware); Director, Frank Russell
Investments (Ireland) Limited and Frank Russell Investment Company plc.
WILLIAM L. MARSHALL, Trustee. 33 West Court Street, Doylestown, PA 18901.
Chief Executive Officer and President, Wm. L. Marshall Associates, Inc. (a
registered investment adviser and provider of financial and related consulting
services); Certified Financial Planner; Member, Registry of Financial Planning
Practitioners; and Advisory Committee, International Association for Financial
Planning Broker-Dealer Program. Member, Institute of Certified Financial
Planners. Registered for Securities with FSC Securities Corp., Marietta,
Georgia.
-5-
<PAGE>
*STEVEN J. MASTROVICH, Trustee. 1 Financial Center, Boston, MA 02111.
Partner, Brown, Rudnick, Freed & Gesmer (law firm). From 1990 to 1994, Partner,
Warner & Stackpole (law firm).
PATRICK J. RILEY, Trustee. 21 Custom House Street, Boston, MA 02110.
Partner, Riley, Burke & Donahue (law firm).
RICHARD D. SHIRK, Trustee. 3350 Peachtree Road, N.E., Atlanta, GA 30326.
President and Chief Executive Officer, Blue Cross/Blue Shield of Georgia. 1990
to 1992, President, Champions Group Resources--Business Management and Employee
Benefits Consulting; 1990, Senior Vice President, Employee Benefits Division,
Cigna Corporation (providing and insuring group life, health and disability
employee benefit products and services); from 1986 to 1990, Senior Vice
President, EQUICOR-Equitable HCA Corporation (providing and insuring group life,
health and disability employee benefit products and services).
*BRUCE D. TABER, Trustee. 26 Round Top Road, Boxford, MA 01921.
President, A.B. Reed, Inc. - Engineers, Architects, Planners. Prior to that,
Vice President, Instrumentation and Controls, A.B. Reed., Inc.
HENRY W. TODD, Trustee. 111 Commerce Drive, Montgomeryville, PA 18936.
President and Director, Zink & Triest Co., Inc. (dealer in vanilla flavor
materials); Director, A.M. Todd Co. and Flavorite Laboratories.
J. DAVID GRISWOLD, Vice President and Secretary. Assistant Secretary,
Associate General Counsel, Chief Compliance Officer, Frank Russell Investment
Management Company, Russell Fund Distributors, Inc. and Frank Russell Capital
Inc.; Associate General Counsel and Assistant Secretary, Frank Russell Company;
Associate General Counsel, Assistant Secretary and Compliance Officer, Russell
Fiduciary Services Company; Director, Secretary, Associate General Counsel and
Chief Compliance Officer, Frank Russell Securities, Inc.; Secretary, Frank
Russell Canada Limited/Limitee.
KENNETH W. LAMB, Assistant Secretary, Assistant Treasurer and Principal
Accounting Officer. Manager - Funds Administration, Frank Russell Investment
Management Company since 1994. Prior to that, Senior Audit Manager with Knight,
Vale & Gregory since 1982.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
TRUSTEE COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------
Aggregate Pension or Estimated Annual Total Compensation
Compensation Retirement Benefits Upon From Investment
from Benefits Accrued Retirement Company Paid to
Trustee Investment as part of Trustees
Company Investment
Company
Expenses
- -------------------------------------------------------------------------------------------------------
-6-
<PAGE>
<S> <C> <C> <C> <C>
Lynn L. Anderson $0 $0 $0 $0
- -------------------------------------------------------------------------------------------------------
William L. Marshall $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Steven J. Mastrovich $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Patrick J. Riley $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Richard D. Shirk $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Bruce D. Taber $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Henry W. Todd $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
</TABLE>
OPERATION OF INVESTMENT COMPANY
SERVICE PROVIDERS. Most of the Fund's necessary day-to-day operations are
performed by separate business organizations under contract to Investment
Company. The principal service providers are:
Investment Adviser, Custodian
and Transfer Agent: State Street Bank and Trust Company
Administrator: Frank Russell Investment Management
Company
Distributor: Russell Fund Distributors, Inc.
Independent Accountants: Coopers & Lybrand, L.L.P.
ADVISER. State Street Bank and Trust Company ("State Street" or "Adviser")
serves as the Fund's investment adviser pursuant to an Advisory Agreement dated
April 12, 1988 ("Advisory Agreement"). State Street Bank and Trust Company is a
wholly owned subsidiary of State Street Boston Corporation, a publicly held bank
holding company. State Street's address is 225 Franklin Street, Boston, MA
02110.
Under the Advisory Agreement, Adviser directs the Fund's investments in
accordance with their investment objectives, policies and limitations. For
these services, the Fund pays a fee to Adviser at the rates stated in the
Prospectus. The Fund accrued expenses to Adviser of $391,746 in fiscal 1995,
$312,299 in fiscal 1994 and $95,807 from the date of inception to August 31,
1993. For the ten (10) month period ended July 1, 1994 and in fiscal 1993,
Adviser voluntarily agreed to reimburse the Index Fund for all expenses in
excess of .15% of average daily net assets on an annual basis which amounted to
$218,188 and $137,944, respectively. After July 1, 1994, Adviser voluntarily
agreed to waive up to the full amount of its advisory fees for the Fund to the
extent that total expenses exceed .15% of average daily net assets on an annual
basis, which amounted to $391,746 in fiscal 1995 and $97,333 in fiscal 1994.
Additionally, Adviser waived Advisory fees of $47,903 from the date of inception
to August 31, 1993.
-7-
<PAGE>
The Advisory Agreement will continue from year to year provided that a
majority of the Trustees who are not interested persons of the Fund and either a
majority of all Trustees or a majority of the shareholders of the Fund approve
its continuance. The Agreement may be terminated by Adviser or a Fund without
penalty upon sixty days' notice and will terminate automatically upon its
assignment.
ADMINISTRATOR. Frank Russell Investment Management Company
("Administrator") serves as the Fund's administrator, pursuant to an
Administration Agreement dated April 12, 1988 ("Administration Agreement"). A
description of the services provided under the Administration Agreement and the
basis for computing fees for such services is provided in the Fund's Prospectus.
The Fund accrued expenses to Administrator of $115,292 in fiscal 1995, $92,892
in fiscal 1994 and $35,298 from the date of inception to August 31, 1993.
Administrator waived administration fees of $2,745 from the date of inception to
August 31, 1993.
The Administration Agreement will continue from year to year provided that
a majority of the Trustees and a majority of the Trustees who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
operation of the Distribution Plan described below or the Administration
Agreement approve its continuance. The Agreement may be terminated by
Administrator or any Fund without penalty upon sixty days' notice and will
terminate automatically upon its assignment.
Administrator is a wholly owned subsidiary of Frank Russell Company. Frank
Russell Company was founded in 1936 and has provided comprehensive asset
management consulting services since 1969 for institutional pools of investment
assets, principally those of large corporate employee benefit plans. Frank
Russell Company and its affiliates have offices in Tacoma, Seattle, New York
City, Toronto, London, Tokyo, Sydney, Paris, Zurich and Auckland, and have
approximately 1,000 officers and employees. Administrator's and Frank Russell
Company's mailing address is 909 A Street, Tacoma, WA 98402.
DISTRIBUTOR. Russell Fund Distributors, Inc. ("Distributor") serves as the
distributor of Fund shares pursuant to a Distribution Agreement dated April 12,
1988 ("Distribution Agreement"). Distributor is a wholly owned subsidiary of
Administrator. Distributor's mailing address is Two International Place, 35th
Floor, Boston, MA 02110.
CUSTODIAN AND TRANSFER AGENT. State Street serves as the custodian
("Custodian") and transfer agent ("Transfer Agent") for Investment Company.
State Street also provides the basic portfolio recordkeeping required by
Investment Company for regulatory and financial reporting purposes. For these
services, State Street is paid an annual fee in accordance with the following:
custody services--a fee payable monthly on a pro rata basis, based on the
following percentages of average daily net assets of each Fund: $0 up to
$1.5 billion--0.02%, over $1.5 billion--0.015% (for purposes of calculating the
break point, the assets of all domestic Funds are aggregated); securities
transaction charges from $8.00 to $25.00 per
-8-
<PAGE>
transaction; Eurodollar transaction fees ranging from $110.00 to $125.00 per
transaction; monthly pricing fees of $375.00 per investment portfolio and from
$6.00 to $16.00 per security, depending on the type of instrument and the
pricing service used; and transfer agent services of $2.00 per shareholder
transaction and a multiple class fee of $18,000 per year for each additional
class of shares; and yield calculation fees of $350.00 per non-money market
portfolio per year. State Street is reimbursed by each Fund for supplying
certain out-of-pocket expenses including postage, transfer fees, stamp duties,
taxes, wire fees, telexes, and freight.
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand L.L.P. serves as the Investment
Company's independent accountants. Coopers & Lybrand L.L.P. is responsible
for performing annual audits of the financial statements and financial
highlights in accordance with generally accepted auditing standards, a review
of federal tax returns, and, pursuant to Rule 17f-2 of the 1940 Act, three
security counts. The mailing address of Coopers & Lybrand L.L.P. is One Post
Office Square, Boston MA 02109.
DISTRIBUTION PLAN. Under the 1940 Act, the Securities and Exchange
Commission has adopted Rule 12b-1, which regulates the circumstances under which
the Fund may, directly or indirectly, bear distribution and shareholder
servicing expenses. The Rule provides that the Fund may pay for such expenses
only pursuant to a plan adopted in accordance with the Rule. Accordingly, the
Fund has adopted an active distribution plan (the "Plan"), which is described in
the Fund's Prospectuses.
The Plan provides that the Fund may spend annually, directly or indirectly,
up to 0.25% of the value of its average net assets for distribution and
shareholder servicing services. The Plan does not provide for the Fund to be
charged for interest, carrying or any other financing charges on any
distribution expenses carried forward to subsequent years. A quarterly report
of the amounts expended under the Plan, and the purposes for which such
expenditures were incurred, must be made to the Trustees for their review. The
Plan may not be amended without shareholder approval to increase materially the
distribution or shareholder servicing costs that the Fund may pay. The Plan and
material amendments to it must be approved annually by all of the Trustees and
by the Trustees who are neither "interested persons" (as defined in the 1940
Act) of the Fund nor have any direct or indirect financial interest in the
operation of the Plan or any related agreements.
The Fund accrued expenses in the following amounts to Russell Fund
Distributors, Inc., as Distributor, for the fiscal years ended August 31:
1995 1994 1993
---- ---- ----
S&P 500 Index Fund $153,822 $121,802 $16,906
-9-
<PAGE>
For fiscal 1995, this amount is reflective of the following individual
payments:
Advertising $ 6,101
Printing of Prospectuses 17,309
Compensation to Dealers 16,689
Compensation to Sales Personnel 55,707
Other* 58,016
--------
$153,822
--------
--------
* Other expenses may include such items as compensation for travel, conferences
and seminars for staff, subscriptions, office charges and professional fees.
Under the Plan, the Fund may also enter into agreements ("Service
Agreements") with financial institutions, which may include Adviser ("Service
Organizations"), to provide shareholder servicing with respect to Fund shares
held by or for the customers of the Service Organizations. Such arrangements
are more fully described in the Fund's prospectus under "Distribution Services
and Shareholder Servicing."
The Fund accrued expenses in the following amounts to Adviser, under a
Service Agreement pursuant to Rule 12b-1, for fiscal years ended August 31:
1995 1994 1993
---- ---- ----
S&P 500 Index Fund $103,181 $22,939 $12,288
FEDERAL LAW AFFECTING STATE STREET. The Glass-Steagall Act of 1933
prohibits state chartered banks such as State Street from engaging in the
business of underwriting, selling or distributing certain securities, and
prohibits a member bank of the Federal Reserve System from having certain
affiliations with an entity engaged principally in that business. The
activities of State Street in informing its customers of the Fund, performing
investment and redemption services, providing custodian, transfer, shareholder
servicing, dividend disbursing, agent servicing and investment advisory
services, may raise issues under these provisions. State Street has been
advised by its counsel that its activities in connection with the Fund
contemplated under this arrangement are consistent with its statutory and
regulatory obligations.
VALUATION OF FUND SHARES. Net asset value per share is calculated once
each business day for the Fund as of the close of the regular trading session on
the New York Stock Exchange (currently 4:00 p.m. Eastern time). A business day
is one on which the New York Stock Exchange is open for business. Currently,
the New York Stock Exchange is open for trading every weekday except New Year's
Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.
Trading may occur in debt securities and in foreign securities at times
when the New York Stock Exchange is closed (including weekends and holidays or
after 4:00 p.m., Eastern
-10-
<PAGE>
Time, on a regular business day). The trading of portfolio securities at such
times may significantly increase or decrease the net asset value of the Fund's
share when shareholders do not have the ability to purchase or redeem shares.
Therefore, events affecting the values of foreign securities traded in foreign
markets that occur between the time their prices are determined and the close of
the New York Stock Exchange will not be reflected in the Fund's calculation of
its net asset value unless the Board of Trustees determines that the particular
event would materially affect the Fund's net asset value, in which case an
adjustment would be made.
With the exceptions noted below, the Fund values portfolio securities at
market value. This generally means that equity securities and fixed income
securities listed and traded principally on any national securities exchange are
valued on the basis of the last sale price or, lacking any sales, at the closing
bid price, on the primary exchange on which the security is traded. United
States equity and fixed-income securities traded principally over-the-counter
and options are valued on the basis of the last reported bid price. Futures
contracts are valued on the basis of the last reported sell price.
Because many fixed income securities do not trade each day, last sale or
bid prices are frequently not available. Therefore, fixed income securities may
be valued using prices provided by a pricing service when such prices are
determined by Custodian to reflect the market value of such securities.
International equity securities traded on a national securities exchange
are valued on the basis of the last sale price. International securities traded
over-the-counter are valued on the basis of best bid or official bid, as
determined by the relevant securities exchange. In the absence of a last sale
or best or official bid price, such securities may be valued on the basis of
prices provided by a pricing service if those prices are believed to reflect the
market value of such securities.
The Fund values securities maturing within 60 days of the valuation date at
amortized cost unless the Board determines that amortized cost does not
represent fair value. This method involves valuing an instrument at its cost
and thereafter assuming a constant amortization to maturity of any discount or
premium, even though the portfolio security may increase or decrease in market
value generally in response to changes in interest rates. While 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 a Fund would
receive if it sold the instrument.
For example, in periods of declining interest rates, the daily yield on
Fund shares computed by dividing the annualized daily income on the Fund's
portfolio by the net asset value based upon the amortized cost valuation
technique may tend to be higher than a similar computation made by using a
method of valuation based upon market prices and estimates. In periods of
rising interest rates, the daily yield on Fund shares computed the same way may
tend to be lower than a similar computation made by using a method of
calculation based upon market prices and estimates.
-11-
<PAGE>
BROKERAGE PRACTICES. All portfolio transactions are placed on behalf of
the Fund by Adviser. Adviser ordinarily pays commissions when it executes
transactions on a securities exchange. In contrast, there is generally no
stated commission in the purchase or sale of securities traded in the over-the-
counter markets, including most debt securities and money market instruments.
Rather, the price of such securities includes an undisclosed commission in the
form of a mark-up or mark-down. The cost of securities purchased from
underwriters includes an underwriting commission or concession.
Subject to the arrangements and provisions described below, the selection
of a broker or dealer to execute portfolio transactions is usually made by
Adviser. The Advisory Agreement provides, in substance and subject to specific
directions from officers of Investment Company, that in executing portfolio
transactions and selecting brokers or dealers, the principal objective is to
seek the best overall terms available to the Fund. Ordinarily, securities will
be purchased from primary markets, and Adviser shall consider all factors it
deems relevant in assessing the best overall terms available for any
transaction, 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 other transactions on a continuing basis.
The Advisory Agreement authorizes Adviser to select brokers or dealers to
execute a particular transaction, including principal transactions, 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 Adviser (or its
affiliates). Adviser is authorized to cause the Fund to pay a commission to a
broker or dealer who provides such brokerage and research services for executing
a portfolio transaction which is in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction. The Fund or
Adviser, as appropriate, must determine in good faith that such commission was
reasonable in relation to the value of the brokerage and research services
provided--viewed in terms of that particular transaction or in terms of all the
accounts over which Adviser exercises investment discretion.
The Trustees periodically review Adviser's performance of its
responsibilities in connection with the placement of portfolio transactions on
behalf of the Fund and review the prices paid by the Fund over representative
periods of time to determine if such prices are reasonable in relation to the
benefits provided to the Fund. Certain services received by Adviser
attributable to a particular Fund transaction may benefit one or more other
accounts for which Adviser exercises investment discretion, or an investment
portfolio other than that for which the transaction was effected. Adviser's
fees are not reduced by Adviser's receipt of such brokerage and research
services.
-12-
<PAGE>
The brokerage commissions paid by the Fund were $139,786 for fiscal 1995,
$72,218 for fiscal 1994 and $151,827 for fiscal 1993. The material difference
in the brokerage amounts from fiscal 1994 to fiscal 1995 was due primarily to
the increase in net assets and resulting increase in portfolio turnover.
Of the total brokerage commissions paid by the Fund, commissions received
by an affiliated broker/dealer for fiscal 1995 were $74,061. Of this amount, the
percentage of affiliated brokerage to total brokerage for the Fund was 52.98%.
The percentage of total affiliated transactions (relating to trading
activity) to total transactions during fiscal 1995 for the Fund was 13.47%.
During the fiscal year ended August 31, 1995, the Fund purchased securities
issued by the following regular brokers or dealers, as defined by Rule 10b-1 of
the 1940 Act, each of which is one of the Fund's ten largest brokers or dealers
by dollar amounts of securities executed or commissions received on behalf of
the Fund. The value of broker-dealer securities held as of August 31, 1995, is
as follows:
<TABLE>
<CAPTION>
S&P 500 INDEX FUND
($000)
------------------
<S> <C>
UBS Securities, Inc. n/a
HSBC Securities, Inc. 0
Prebon n/a
First Chicago 691
Salomon Brothers, Inc. 510
Lumis & Co. n/a
Smith Barney, Inc. 1,958
Lehman Brothers, Inc. 0
Goldman, Sachs & Co. n/a
Greenwich Securities n/a
</TABLE>
PORTFOLIO TURNOVER RATE. The portfolio turnover rate for the Fund is
calculated by dividing the lesser of purchases or sales of portfolio securities
for the particular year, by the monthly average value of the portfolio
securities owned by the Fund during the year. For purposes of determining the
rate, all short-term securities, including options, futures, forward contracts
and repurchase agreements, are excluded.
The portfolio turnover rates for the Fund were as follows for the fiscal
years ended August 31:
1995 1994 1993
---- ---- ----
S&P 500 Index Fund 38.56% 7.97% 48.10%
-13-
<PAGE>
Portfolio turnover rates for periods less than one fiscal year are
annualized.
TOTAL RETURN QUOTATIONS. The Fund computes average annual total return by
using a standardized method of calculation required by the Securities and
Exchange Commission. Average annual total return is computed by finding the
average annual compounded rates of return on a hypothetical initial investment
of $1,000 over the one-year, five-year and ten-year periods (or life of the
funds as appropriate), that would equate the initial amount invested to the
ending redeemable value, according to the following formula:
P(1+T)(n) = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a $1,000 payment made at
the beginning of the 1-year, 5-year and 10-year periods at
the end of the year or period
The calculation assumes that all dividends and distributions of the Fund
are reinvested at the price stated in the Prospectus on the dividend dates
during the period, and includes all recurring and nonrecurring fees that are
charged to all shareholder accounts.
The average annual total returns for the Fund are as follows:
One Year Inception to
Ending August 31, 1995
August 31,1995 (Annualized) Inception Date
-------------- --------------- --------------
S&P 500 Index Fund 21.11% 12.77% 12/30/92
INVESTMENTS
The fundamental investment objective of the Fund is set forth in its
Prospectus. In addition to that investment objective, the Fund also has certain
fundamental investment restrictions, which may be changed only with the approval
of a majority of the shareholders of the Fund, and certain nonfundamental
investment restrictions and policies, which may be changed by the Fund without
shareholder approval.
INVESTMENT RESTRICTIONS
The Fund is subject to the following investment restrictions. Restrictions
1 through 11 are fundamental and restrictions 12 through 18 are nonfundamental.
Unless otherwise noted, these restrictions apply at the time an investment is
made. The Fund will not:
-14-
<PAGE>
(1) Invest 25% or more of the value of its total assets in securities of
companies primarily engaged in any one industry (other than the US Government,
its agencies and instrumentalities). Concentration may occur as a result of
changes in the market value of portfolio securities, but may not result from
investment. Notwithstanding the foregoing general restrictions, the Fund will
concentrate in particular industries to the extent its underlying index
concentrates in those industries.
(2) Borrow money (including reverse repurchase agreements), except as a
temporary measure for extraordinary or emergency purposes or to facilitate
redemptions (not for leveraging or investment), provided that borrowings do not
exceed an amount equal to 33-1/3% of the current value of the Fund's assets
taken at market value, less liabilities other than borrowings. If at any time a
Fund's borrowings exceed this limitation due to a decline in net assets, such
borrowings will within three days be reduced to the extent necessary to comply
with this limitation. A Fund will not purchase investments once borrowed funds
(including reverse repurchase agreements) exceed 5% of its total assets.
(3) Pledge, mortgage or hypothecate its assets. However, a Fund may pledge
securities having a market value at the time of the pledge not exceeding 33-1/3%
of the value of the Fund's total assets to secure borrowings permitted by
paragraph (2) above.
(4) With respect to 75% of its total assets, invest in securities of any
one issuer (other than securities issued by the US Government, its agencies, and
instrumentalities), if immediately after and as a result of such investment the
current market value of the Fund's holdings in the securities of such issuer
exceeds 5% of the value of the Fund's assets.
(5) Make loans to any person or firm; provided, however, that the making of
a loan shall not include (i) the acquisition for investment of bonds,
debentures, notes or other evidences of indebtedness of any corporation or
government which are publicly distributed or of a type customarily purchased by
institutional investors, or (ii) the entry into repurchase agreements or reverse
repurchase agreements. A Fund may lend its portfolio securities to broker-
dealers or other institutional investors if the aggregate value of all
securities loaned does not exceed 33-1/3% of the value of the Fund's total
assets.
(6) Purchase or sell commodities or commodity futures contracts except that
the Fund may enter into futures contracts and options thereon to the extent
provided in their respective Prospectuses.
(7) Purchase or sell real estate or real estate mortgage loans; provided,
however, that the Fund may invest in securities secured by real estate or
interests therein or issued by companies which invest in real estate or
interests therein.
(8) Engage in the business of underwriting securities issued by others,
except that a Fund will not be deemed to be an underwriter or to be underwriting
on account of the purchase of securities subject to legal or contractual
restrictions on disposition.
-15-
<PAGE>
(9) Issue senior securities, except as permitted by its investment
objective, policies and restrictions, and except as permitted by the 1940 Act.
(10) Purchase or sell puts, calls or invest in straddles, spreads or any
combination thereof, if as a result of such purchase the value of the Fund's
aggregate investment in such securities would exceed 5% of the Fund's total
assets.
(11) Make short sales of securities or purchase any securities on margin,
except for such short-term credits as are necessary for the clearance of
transactions. The Fund may make initial margin deposits and variation margin
payments in connection with transactions in futures contracts and related
options.
(12) Purchase from or sell portfolio securities to its officers or
directors or other interested persons (as defined in the 1940 Act) of the Fund,
including their investment advisers and affiliates, except as permitted by the
1940 Act and exemptive rules or orders thereunder.
(13) Invest in securities issued by other investment companies except in
connection with a merger, consolidation, acquisition of assets, or other
reorganization approved by the Fund's shareholders, except that the Fund may
invest in such securities to the extent permitted by the 1940 Act.
(14) Invest in securities of any issuer which, together with its
predecessor, has been in operation for less than three years if, as a result,
more than 5% of the Fund's total assets would be invested in such securities,
except that the Fund may invest in securities of a particular issuer to the
extent their respective underlying indices invest in that issuer.
(15) Invest more than 15% of its net assets in the aggregate in illiquid
securities or securities that are not readily marketable, including repurchase
agreements and time deposits of more than seven days' duration.
(16) Purchase interests in oil, gas or other mineral exploration or
development programs.
(17) Make investments for the purpose of gaining control of an issuer's
management.
(18) Purchase the securities of any issuer if the Investment Company's
officers, Directors, Adviser or any of their affiliates beneficially own more
than one-half of 1% of the securities of such issuer or together own
beneficially more than 5% of the securities of such issuer.
INVESTMENT POLICIES
The Fund may invest in the following instruments:
US GOVERNMENT OBLIGATIONS. The types of US Government obligations in which
the Fund may at times invest include: (1) A variety of US Treasury obligations,
which differ only
-16-
<PAGE>
in their interest rates, maturities and times of issuance; and (2) obligations
issued or guaranteed by US Government agencies and instrumentalities which are
supported by any of the following: (a) the full faith and credit of the US
Treasury, (b) the right of the issuer to borrow an amount limited to a specific
line of credit from the US Treasury, (c) discretionary authority of the US
Government agency or instrumentality or (d) the credit of the instrumentality
(examples of agencies and instrumentalities are: Federal Land Banks, Federal
Housing Administration, Farmers Home Administration, Export--Import Bank of the
United States, Central Bank for Cooperatives, Federal Intermediate Credit Banks,
Federal Home Loan Banks, General Services Administration, Maritime
Administration, Tennessee Development Bank, Asian-American Development Bank,
Student Loan Marketing Association, International Bank for Reconstruction and
Development and Federal National Mortgage Association). No assurance can be
given that in the future the US Government will provide financial support to
such US Government agencies or instrumentalities described in (2)(b), (2)(c) and
(2)(d), other than as set forth above, since it is not obligated to do so by
law. The Fund may purchase US Government obligations on a forward commitment
basis.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
financial institutions. Under repurchase agreements, these parties sell
securities to a Fund and agree to repurchase the securities at the Fund's cost
plus interest within a specified time (normally one day). The securities
purchased by each Fund have a total value in excess of the purchase price paid
by the Fund and are held by Custodian until repurchased. Repurchase agreements
assist the Fund in being invested fully while retaining "overnight" flexibility
in pursuit of investments of a longer-term nature. The Fund will limit
repurchase transactions to those member banks of the Federal Reserve System and
broker-dealers whose creditworthiness is continually monitored and found
satisfactory by Adviser.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreements under the circumstances described in "Investment Restrictions".
Under reverse repurchase agreements, a Fund transfers possession of portfolio
securities to financial institutions in return for cash in an amount equal to a
percentage of the portfolio securities' market value and agrees to repurchase
the securities at a future date by repaying the cash with interest. The Fund
retains the right to receive interest and principal payments from the securities
while they are in the possession of the financial institutions. Cash or liquid
high quality debt obligations from a Fund's portfolio equal in value to the
repurchase price including any accrued interest will be segregated by Custodian
on the Fund's records while a reverse repurchase agreement is in effect.
Reverse repurchase agreements involve the risk that the market value of
securities sold by the Fund may decline below the price at which it is obligated
to repurchase the securities.
FORWARD COMMITMENTS. The Fund may contract to purchase securities for a
fixed price at a future date beyond customary settlement time consistent with
the Fund's ability to manage its investment portfolio, maintain a stable net
asset value and meet redemption requests. A Fund may dispose of a commitment
prior to settlement if it is appropriate to do so and realize short-term profits
or losses upon such sale. When effecting such transactions, cash or liquid
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high quality debt obligations held by the Fund of a dollar amount sufficient to
make payment for the portfolio securities to be purchased will be segregated on
the Fund's records at the trade date and maintained until the transaction is
settled. Forward commitments involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date, or if the other
party fails to complete the transaction.
WHEN-ISSUED TRANSACTIONS. New issues of securities are often offered on a
when-issued basis. This means that delivery and payment for the securities
normally will take place several days after the date the buyer commits to
purchase them. The payment obligation and the interest rate that will be
received on securities purchased on a when-issued basis are each fixed at the
time the buyer enters into the commitment.
The Fund will make commitments to purchase when-issued securities only with
the intention of actually acquiring the securities, but a Fund may sell these
securities or dispose of the commitment before the settlement date if it is
deemed advisable as a matter of investment strategy. Cash or marketable high
quality debt securities equal to the amount of the above commitments will be
segregated on the Fund's records. For the purpose of determining the adequacy
of these securities the segregated securities will be valued at market. If the
market value of such securities declines, additional cash or securities will be
segregated on the Fund's records on a daily basis so that the market value of
the account will equal the amount of such commitments by the Fund. The Fund
will not invest more than 25% of its net assets in when-issued securities.
Securities purchased on a when-issued basis and held by the Fund are
subject to changes in market value based upon the public's perception of changes
in the level of interest rates. Generally, the value of such securities will
fluctuate inversely to changes in interest rates -- i.e., they will appreciate
in value when interest rates decline and decrease in value when interest rates
rise. Therefore, if in order to achieve higher interest income a Fund remains
substantially fully invested at the same time that it has purchased securities
on a "when-issued" basis, there will be a greater possibility of fluctuation in
the Fund's net asset value.
When payment for when-issued securities is due, the Fund will meet its
obligations from then-available cash flow, the sale of segregated securities,
the sale of other securities or, and although it would not normally expect to do
so, from the sale of the when-issued securities themselves (which may have a
market value greater or less than the Fund's payment obligation). The sale of
securities to meet such obligations carries with it a greater potential for the
realization of capital gains, which are subject to federal income taxes.
VARIABLE AMOUNT MASTER DEMAND NOTES. Variable amount master demand notes
are unsecured obligations that are redeemable upon demand and are typically
unrated. These instruments are issued pursuant to written agreements between
the issuers and the holders. The agreements permit the holders to increase
(subject to an agreed maximum) and the holders and issuers to decrease the
principal amount of the notes, and specify that the rate of interest payable on
the principal fluctuates according to an agreed formula.
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SECTION 4(2) COMMERCIAL PAPER. The Fund may invest in commercial paper
issued in reliance on the so-called "private placement" exemption from
registration afforded by Section 4(2) of the Securities Act of 1933
("Section 4(2) paper"). Section 4(2) paper is restricted as to disposition
under the federal securities laws, and generally is sold to investors who agree
that they are purchasing the paper for an investment and not with a view to
public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) paper is normally resold to other investors through
or with the assistance of the issuer or investment dealers who make a market in
Section 4(2) paper, thus providing liquidity. Pursuant to guidelines
established by the Board of Trustees, Adviser may determine that Section 4(2)
paper is liquid for the purposes of complying with the Fund's investment
restriction relating to investments in illiquid securities.
AMERICAN DEPOSITORY RECEIPTS (ADRS). The Fund may invest in ADRs under
certain circumstances as an alternative to directly investing in foreign
securities. Generally, ADRs, in registered form, are designed for use in the US
securities markets. ADRs are receipts typically issued by a US bank or trust
company evidencing ownership of the underlying securities. ADRs represent the
right to receive securities of foreign issuers deposited in a domestic bank or a
correspondent bank. ADRs do not eliminate the risk inherent in investing in the
securities of foreign issuers. However, by investing in ADRs rather than
directly in a foreign issuer's stock, the Fund can avoid currency risks during
the settlement period for either purchases or sales. In general, there is a
large liquid market in the US for many ADRs. The information available for ADRs
is subject to the accounting, auditing and financial reporting standards of the
domestic market or exchange on which they are traded, which standards are more
uniform and more exacting than those to which many foreign issuers are subject.
HEDGING STRATEGIES AND RELATED INVESTMENT TECHNIQUES
The Fund may seek to hedge their portfolios against movements in the equity
markets, interest rates and currency exchange rates through the use of options,
futures transactions, options on futures and forward foreign currency exchange
transactions. The Fund has authority to write (sell) covered call and put
options on their portfolio securities, purchase put and call options on
securities and engage in transactions in stock index options, stock index
futures and financial futures and related options on such futures. The Fund may
enter into such options and futures transactions either on exchanges or in the
over-the-counter ("OTC") markets. Although certain risks are involved in
options and futures transactions (as discussed in the Prospectus and below),
Adviser believes that, because the Fund will only engage in these transactions
for hedging purposes, the options and futures portfolio strategies of the Fund
will not subject the Fund to the risks frequently associated with the
speculative use of options and futures transactions. Although the use of
hedging strategies by the Fund is intended to reduce the volatility of the net
asset value of the Fund's shares, the Fund's net asset value will nevertheless
fluctuate. There can be no assurance that the Fund's hedging transactions will
be effective.
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WRITING COVERED CALL OPTIONS. The Fund is authorized to write (sell)
covered call options on the securities in which it may invest and to enter into
closing purchase transactions with respect to such options. Writing a call
option obligates a Fund to sell or deliver the option's underlying security, in
return for the strike price, upon exercise of the option. By writing a call
option, the Fund receives an option premium from the purchaser of the call
option. Writing covered call options is generally a profitable strategy if
prices remain the same or fall. Through receipt of the option premium, the Fund
would seek to mitigate the effects of a price decline. By writing covered call
options, however, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price. In addition, the Fund's ability to sell the underlying
security will be limited while the option is in effect unless the Fund effects a
closing purchase transaction.
WRITING COVERED PUT OPTIONS. The Fund is authorized to write (sell)
covered put options on its portfolio securities and to enter into closing
transactions with respect to such options.
When a Fund writes a put option, it takes the opposite side of the
transaction from the option's purchaser. In return for receipt of the premium,
the Fund assumes the obligation to pay the strike price for the option's
underlying instrument if the other party to the option chooses to exercise it.
The Fund may seek to terminate its position in a put option it writes before
exercise by closing out the option in the secondary market at its current price.
If the secondary market is not liquid for an option the Fund has written,
however, the Fund must continue to be prepared to pay the strike price while the
option is outstanding, regardless of price changes, and must continue to set
aside assets to cover its position.
The Fund may write put options as an alternative to purchasing actual
securities. If security prices rise, the Fund would expect to profit from a
written put option, although its gain would be limited to the amount of the
premium it received. If security prices remain the same over time, it is likely
that the Fund will also profit, because it should be able to close out the
option at a lower price. If security prices fall, the Fund would expect to
suffer a loss. This loss should be less than the loss the Fund would have
experienced from purchasing the underlying instrument directly, however, because
the premium received for writing the option should mitigate the effects of the
decline.
PURCHASING PUT OPTIONS. The Fund is authorized to purchase put options to
hedge against a decline in the market value of its portfolio securities. By
buying a put option a Fund has the right (but not the obligation) to sell the
underlying security at the exercise price, thus limiting the Fund's risk of loss
through a decline in the market value of the security until the put option
expires. The amount of any appreciation in the value of the underlying security
will be partially offset by the amount of the premium paid by the Fund for the
put option and any related transaction costs. Prior to its expiration, a put
option may be sold in a closing sale transaction and profit or loss from the
sale will depend on whether the amount received is more or less than the premium
paid for the put option plus the related transaction costs.
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A closing sale transaction cancels out the Fund's position as the purchaser of
an option by means of an offsetting sale of an identical option prior to the
expiration of the option it has purchased. The Fund will not purchase put
options on securities (including stock index options discussed below) if as a
result of such purchase, the aggregate cost of all outstanding options on
securities held by the Fund would exceed 5% of the market value of the Fund's
total assets.
PURCHASING CALL OPTIONS. The Fund is also authorized to purchase call
options. The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price (call options on futures contracts are settled by purchasing the
underlying futures contract). The Fund will purchase call options only in
connection with "closing purchase transactions."
STOCK INDEX OPTIONS AND FINANCIAL FUTURES. The Fund is authorized to
engage in transactions in stock index options and financial futures, and related
options. A Fund may purchase or write put and call options on stock indices to
hedge against the risks of market-wide stock price movements in the securities
in which the Fund invests. Options on indices are similar to options on
securities except that on exercise or assignment, the parties to the contract
pay or receive an amount of cash equal to the difference between the closing
value of the index and the exercise price of the option times a specified
multiple. The Fund may invest in stock index options based on a broad market
index, such as the S&P 500 Index, or on a narrow index representing an industry
or market segment. The Fund's investments in foreign stock index futures
contracts and foreign interest rate futures contracts, and related options, are
limited to only those contracts and related options that have been approved by
the Commodity Futures Trading Commission ("CFTC") for investment by United
States investors. Additionally, with respect to the Fund's investments in
foreign options, unless such options are specifically authorized for investment
by order of the CFTC, the Fund will not make such investments.
The Fund may also purchase and sell stock index futures contracts and other
financial futures contracts ("futures contracts") as a hedge against adverse
changes in the market value of its portfolio securities as described below. A
futures contract is an agreement between two parties which obligates the
purchaser of the futures contract to buy and the seller of a futures contract to
sell a security for a set price on a future date. Unlike most other futures
contracts, a stock index futures contract does not require actual delivery of
securities, but results in cash settlement based upon the difference in value of
the index between the time the contract was entered into and the time of its
settlement. The Fund may effect transactions in stock index futures contracts
in connection with equity securities in which it invests and in financial
futures contracts in connection with debt securities in which it invests, if
any. Transactions by the Fund in stock index futures and financial futures are
subject to limitations as described below under "Restrictions on the Use of
Futures Transactions."
The Fund may sell futures contracts in anticipation of or during a market
decline to attempt to offset the decrease in market value of the Fund's
securities portfolio that might otherwise result. When a Fund is not fully
invested in the securities markets and anticipates
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a significant market advance, the Fund may purchase futures in order to gain
rapid market exposure that may partially or entirely offset increases in the
cost of securities that the Fund intends to purchase. As such purchases are
made, an equivalent amount of futures contracts will be terminated by offsetting
sales. It is anticipated that, in a substantial majority of these transactions,
the Fund will purchase such securities upon termination of the long futures
position, whether the long position results from the purchase of a futures
contract or the purchase of a call option, but under unusual circumstances
(e.g., the Fund experiences a significant amount of redemptions), a long futures
position may be terminated without the corresponding purchase of securities.
The Fund also is authorized to purchase and write call and put options on
futures contracts and stock indices in connection with its hedging activities.
Generally, these strategies would be utilized under the same market and market
sector conditions (i.e., conditions relating to specific types of investments)
during which the Fund enters into futures transactions. The Fund may purchase
put options or write call options on futures contracts and stock indices rather
than selling the underlying futures contract in anticipation of a decrease in
the market value of securities. Similarly, the Fund can purchase call options,
or write put options on futures contracts and stock indices, as a substitute for
the purchase of such futures to hedge against the increased cost resulting from
an increase in the market value of securities which the Fund intends to
purchase.
The Fund is also authorized to engage in options and futures transactions
on US and foreign exchanges and in options in the OTC markets ("OTC options").
In general, exchange traded contracts are third-party contracts (i.e.,
performance of the parties' obligations is guaranteed by an exchange or clearing
corporation) with standardized strike prices and expiration dates. OTC options
transactions are two-party contracts with price and terms negotiated by the
buyer and seller. See "Restrictions on OTC Options" below for information as to
restrictions on the use of OTC options.
The Fund is authorized to purchase or sell listed or OTC foreign security
or currency options, foreign security or currency futures and related options as
a short or long hedge against possible variations in foreign exchange rates and
market movements. Such transactions could be effected with respect to hedges on
non-US dollar denominated securities owned by a Fund, sold by a Fund but not yet
delivered, or committed or anticipated to be purchased by a Fund. As an
illustration, a Fund may use such techniques to hedge the stated value in US
dollars of an investment in a yen-denominated security. In such circumstances,
for example, the Fund can purchase a foreign currency put option enabling it to
sell a specified amount of yen for US dollars at a specified price by a future
date. To the extent the hedge is successful, a loss in the value of the yen
relative to the US dollar will tend to be offset by an increase in the value of
the put option.
RESTRICTIONS ON THE USE OF FUTURES TRANSACTIONS. The purchase or sale of a
futures contract differs from the purchase or sale of a security in that no
price or premium is paid or received. Instead, an amount of cash or securities
acceptable to the broker and the relevant contract market, which varies, but is
generally about 5% of the contract amount, must be
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deposited with the broker. This amount is known as "initial margin" and
represents a "good faith" deposit assuring the performance of both the purchaser
and seller under the futures contract. Subsequent payments to and from the
broker, called "variation margin," are required to be made on a daily basis as
the price of the futures contract fluctuates making the long and short positions
in the futures contracts more or less valuable, a process known as "marking to
market." At any time prior to the settlement date of the future contract, the
position may be closed out by taking an opposite position which will operate to
terminate the position in the futures contract. A final determination of
variation margin is then made, additional cash is required to be paid to or
released by the broker and the purchaser realizes a loss or gain. In addition,
a nominal commission is paid on each completed sale transaction.
Regulations of the CFTC applicable to the Fund require that all of the
Fund's futures and options on futures transactions constitute bona fide hedging
transactions and that the Fund not enter into such transactions if, immediately
thereafter, the sum of the amount of initial margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets.
RESTRICTIONS ON OTC OPTIONS. The Fund will engage in OTC options,
including OTC stock index options, OTC foreign security and currency options and
options on foreign security and currency futures, only with member banks of the
Federal Reserve System and primary dealers in US Government securities or with
affiliates of such banks or dealers which have capital of at least $50 million
or whose obligations are guaranteed by an entity having capital of at least
$50 million. The Fund will acquire only those OTC options for which Adviser
believes the Fund can receive on each business day at least two independent bids
or offers (one of which will be from an entity other than a party to the
option).
The Staff of the SEC has taken the position that purchased OTC options and
the assets used as cover for written OTC options are illiquid securities.
Therefore, the Fund has adopted an operating policy pursuant to which it will
not purchase or sell OTC options (including OTC options on futures contracts)
if, as a result of such transaction, the sum of: (1) the market value of
outstanding OTC options held by the Fund; (2) the market value of the underlying
securities covered by outstanding OTC call options sold by the Fund; (3) margin
deposits on the Fund's existing OTC options on futures contracts; and (4) the
market value of all other assets of the Fund that are illiquid or are not
otherwise readily marketable, would exceed 10% of the net assets of the Fund,
taken at market value. However, if an OTC option is sold by the Fund to a
primary US Government securities dealer recognized by the Federal Reserve Bank
of New York and the Fund has the unconditional contractual right to repurchase
such OTC option from the dealer at a predetermined price, then the Fund will
treat as illiquid such amount of the underlying securities as is equal to the
repurchase price less the amount by which the option is "in-the-money" (current
market value of the underlying security minus the option's strike price). The
repurchase price with primary dealers is typically a formula price which is
generally based on a multiple of the premium received for the option plus the
amount by which the option is "in-the-money."
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ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS. The Fund will not use
leverage in its options and futures strategies. Such investments will be made
for hedging purposes only. The Fund will hold securities or other options or
futures positions whose values are expected to offset its obligations under the
hedge strategies. The Fund will not enter into an option or futures position
that exposes the Fund to an obligation to another party unless it owns either:
(1) an offsetting position in securities or other options or futures contracts;
or (2) cash, receivables and short-term debt securities with a value sufficient
to cover its potential obligations. The Fund will comply with guidelines
established by the SEC with respect to coverage of options and futures
strategies by mutual funds, and if the guidelines so require will set aside cash
and high grade liquid debt securities in a segregated account with its custodian
bank in the amount prescribed. The Fund's custodian shall maintain the value of
such segregated account equal to the prescribed amount by adding or removing
additional cash or liquid securities to account for fluctuations in the value of
securities held in such account. Securities held in a segregated account cannot
be sold while the futures or option strategy is outstanding, unless they are
replaced with similar securities. As a result, there is a possibility that
segregation of a large percentage of a Fund's assets could impede portfolio
management or the Fund's ability to meeting redemption requests or other current
obligations.
RISK FACTORS IN OPTIONS, FUTURES, FORWARD AND CURRENCY TRANSACTIONS.
Utilization of options and futures transactions to hedge the Fund's portfolios
involves the risk of imperfect correlation in movements in the price of options
and futures and movements in the price of securities or currencies which are the
subject of the hedge. If the price of the options or futures moves more or less
than the price of hedged securities or currencies, the Fund will experience a
gain or loss which will not be completely offset by movements in the price of
the subject of the hedge. The successful use of options and futures also
depends on Adviser's ability to correctly predict price movements in the market
involved in a particular options or futures transaction. To compensate for
imperfect correlations, the Fund may purchase or sell stock index options or
futures contracts in a greater dollar amount than the hedged securities if the
volatility of the hedged securities is historically greater than the volatility
of the stock index options or futures contracts. Conversely, the Fund may
purchase or sell fewer stock index options or futures contracts, if the
historical price volatility of the hedged securities is less than that of the
stock index options or futures contracts. The risk of imperfect correlation
generally tends to diminish as the maturity date of the stock index option or
futures contract approaches. Options are also subject to the risks of an
illiquid secondary market, particularly in strategies involving writing options,
which the Fund cannot terminate by exercise. In general, options whose strike
prices are close to their underlying instruments' current value will have the
highest trading volume, while options whose strike prices are further away may
be less liquid.
The Fund intends to enter into options and futures transactions, on an
exchange or in the OTC market, only if there appears to be a liquid secondary
market for such options or futures or, in the case of OTC transactions, the
Adviser believes the Fund can receive on each business day at least two
independent bids or offers. However, there can be no assurance that a liquid
secondary market will exist at any specific time. Thus, it may not be possible
to close an options or futures position. The inability to close options and
futures positions also could have
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an adverse impact on a Fund's ability to effectively hedge its portfolio. There
is also the risk of loss by a Fund of margin deposits or collateral in the event
of bankruptcy of a broker with whom the Fund has an open position in an option,
a futures contract or related option.
The exchanges on which options on portfolio securities and currency options
are traded have generally established limitations governing the maximum number
of call or put options on the same underlying security or currency (whether or
not covered) which may be written by a single investor, whether acting alone or
in concert with others (regardless of whether such options are written on the
same or different exchanges or are held or written in one or more accounts or
through one or more brokers). "Trading limits" are imposed on the maximum
number of contracts which any person may trade on a particular trading day.
RATINGS OF DEBT INSTRUMENTS
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") -- LONG TERM DEBT RATINGS.
Aaa -- Bonds which 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 edged." 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 which 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 which make the long-term risk appear somewhat larger than the Aaa
securities.
A -- Bonds which 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 which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium-grade obligations
(i.e., 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.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
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STANDARD & POOR'S CORPORATION ("S&P"). The ratings are based, in varying
degrees, on the following considerations: (1) The likelihood of default --
capacity and willingness of the obligator as to the timely payment of interest
and repayment of principal in accordance with the terms of the obligation;
(2) The nature of and provisions of the obligation; and (3) The protection
afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization, or other arrangement under the laws of bankruptcy
and other laws affecting creditors' rights.
AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
RATINGS OF COMMERCIAL PAPER
MOODY'S. Moody's short-term debt ratings are opinions of the ability of
issuers to repay punctually senior debt obligations. These obligations have an
original maturity not exceeding one year, unless explicitly noted. Moody's
employs the following three designations, all judged to be investment grade, to
indicate the relative repayment ability of rated issuers:
/ / Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
/ / Leading market positions in well-established industries.
/ / High rates of return on funds employed.
/ / Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
/ / Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
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/ / Well-established access to a range of financial markets and
assured sources of alternate liquidity.
/ / Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited above
but to a lesser degree. Earnings trends and coverage ratios, while
sound, may be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternative liquidity is maintained.
/ / Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
/ / Issuers rated Not Prime do not fall within any of the Prime rating
categories.
S&P. An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered shot-term in the relevant
market. Ratings are graded into several categories, ranging from A-1 for the
highest quality obligations to D for the lowest. These categories are as
follows:
A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
FITCH'S INVESTORS SERVICE, INC. ("FITCH"). Commercial paper rated by Fitch
reflects Fitch's current appraisal of the degree of assurance of timely payment
of such debt. An appraisal results in the rating of an issuer's paper as F-1,
F-2, F-3, or F-4.
F-1 -- This designation indicates that the commercial paper is regarded as
having the strongest degree of assurance for timely payment.
F-2 -- Commercial paper issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than those issues rated F-1.
DUFF AND PHELPS, INC. Duff & Phelps' short-term ratings are consistent
with the rating criteria utilized by money market participants. The ratings
apply to all obligations with maturities of under one year, including commercial
paper, the uninsured portion of certificates of deposit, unsecured bank loans,
master notes, bankers acceptances, irrevocable letters of credit, and current
maturities of long-term debt. Asset-backed commercial paper is also rated
according to this scale.
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<PAGE>
Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of funds including trade
credit, bank lines, and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.
The distinguishing feature of Duff & Phelps' short-term ratings is the
refinement of the traditional '1' category. The majority of short-term debt
issuers carry the highest rating, yet quality differences exist within that
tier. As a consequence, Duff & Phelps has incorporated gradations of '1+' (one
plus) and '1-' (one minus) to assist investors in recognizing those differences.
Duff 1+--Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free U.S. Treasury short-
term obligations.
Duff 1--Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk factors
are minor.
Duff 1- -- High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk factors are very
small.
GOOD GRADE. Duff 2--Good certainty of timely payment. Liquidity factors
and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good.
Risk factors are small.
SATISFACTORY GRADE. Duff 3--Satisfactory liquidity and other protection
factors qualify issue as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is expected.
NON-INVESTMENT GRADE. Duff 4--Speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
DEFAULT. Duff 5--Issuer failed to meet scheduled principal and/or interest
payments.
IBCA, INC. In addition to conducting a careful review of an institution's
reports and published figures, IBCA's analysts regularly visit the companies for
discussions with senior management. These meetings are fundamental to the
preparation of individual reports and ratings. To keep abreast of any changes
that may affect assessments, analysts maintain contact throughout the year with
the management of the companies they cover.
IBCA's analysts speak the languages of the countries they cover, which is
essential to maximize the value of their meetings with management and to
properly analyze a company's
-28-
<PAGE>
written materials. They also have a thorough knowledge of the laws and
accounting practices that govern the operations and reporting of companies
within the various countries.
Often, in order to ensure a full understanding of their position, companies
entrust IBCA with confidential data. While these data cannot be disclosed in
reports, they are taken into account when assigning our ratings. Before
dispatch to subscribers, a draft of the report is submitted to each company to
permit correction of any factual errors and to enable clarification of issues
raised.
IBCA's Rating Committees meet at regular intervals to review all ratings
and to ensure that individual ratings are assigned consistently for institutions
in all the countries covered. Following the Committee meetings, ratings are
issued directly to subscribers. At the same time, the company is informed of
the ratings as a matter of courtesy, but not for discussion.
A1+--Obligations supported by the highest capacity for timely repayment.
A1--Obligations supported by a very strong capacity for timely repayment.
A2--Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in business,
economic or financial conditions.
B1--Obligations supported by an adequate capacity for timely repayment.
Such capacity is more susceptible to adverse changes in business, economic, or
financial conditions than for obligations in higher categories.
B2--Obligations for which the capacity for timely repayment is susceptible
to adverse changes in business, economic or financial conditions.
C1--Obligations for which there is an inadequate capacity to ensure timely
repayment.
D1--Obligations which have a high risk of default or which are currently in
default.
TAXES
The Fund intends to qualify for treatment as a regulated investment company
("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended
("the Code"). As a RIC, the Fund will not be liable for federal income taxes on
taxable net investment income and capital gain net income (capital gains in
excess of capital losses) that it distributes to its shareholders, provided that
the Fund distributes annually to its shareholders at least 90% of its net
investment income and net short-term capital gain for the taxable year
("Distribution Requirement"). For a Fund to qualify as a RIC it must abide by
all of the following requirements: (1) at least 90% of the Fund's gross income
each taxable year must be derived from dividends, interest, payments with
respect to securities loans, gains from the sale or other
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<PAGE>
disposition of stock or securities or foreign currencies, or other income
(including gains from options, futures or forward contracts) derived with
respect to its business of investing in such stock, securities or currencies
("Income Requirement"); (2) less than 30% of the Fund's gross income each
taxable year must be derived from the sale or other disposition of securities
and certain options, futures contracts, forward contracts and foreign currencies
held for less than three months ("Short-Short Limitation"); (3) at the close of
each quarter of the Fund's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, US Government securities,
securities of other RICs, and other securities, with such other securities
limited, in respect of any one issuer, to an amount that does not exceed 5% of
the total assets of the Fund and that does not represent more than 10% of the
outstanding voting securities of such issuer; and (4) at the close of each
quarter of the Fund's taxable year, not more than 25% of the value of its assets
may be invested in securities (other than US Government securities or the
securities of other RICs) of any one issuer.
The Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year an amount at least equal to
the sum of: (1) 98% of its ordinary income for that year; (2) 98% of its
capital gain net income for the one-year period ending on October 31 of that
year; and (3) certain undistributed amounts from the preceding calendar year.
For this and other purposes, dividends declared in October, November or December
of any calendar year and made payable to shareholders of record in such month
will be deemed to have been received on December 31 of such year if the
dividends are paid by the Fund subsequent to December 31 but prior to February 1
of the following year.
If a shareholder receives a distribution taxable as long-term capital gain
with respect to shares of a Fund and redeems or exchanges the shares without
having held the shares for more than one year, then any loss on the redemption
or exchange will be treated as long-term capital loss to the extent of the
capital gain distribution.
ISSUES RELATED TO HEDGING AND OPTION INVESTMENTS. A Fund's ability to make
certain investments may be limited by provisions of the Code that require
inclusion of certain unrealized gains or losses in the Fund's income for
purposes of the Income Requirement, the Short-Short Limitation and the
Distribution Requirement, and by provisions of the Code that characterize
certain income or loss as ordinary income or loss rather than capital gain or
loss. Such recognition, characterization and timing rules will affect
investments in certain futures contracts, options, foreign currency contracts
and debt securities denominated in foreign currencies.
FOREIGN INCOME TAXES. Investment income received by the Fund from sources
within foreign countries may be subject to foreign income taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries which would entitle the Fund to a reduced rate of such taxes or
exemption from taxes on such income. It is impossible to determine the
effective rate of foreign tax for a Fund in advance since the amount of the
assets to be invested within various countries is not known.
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<PAGE>
If a Fund invests in an entity that is classified as a passive foreign
investment company ("PFIC") for federal income tax purposes, the application of
certain provisions of the Code applying to PFICs could result in the imposition
of certain federal income taxes on the Fund. It is anticipated that any taxes
on a Fund with respect to investments in PFICs would be insignificant. Under US
Treasury regulations issued in 1992 for PFICs, the Fund can elect to mark-to-
market its PFIC holdings in lieu of paying taxes on gains or distributions
therefrom.
Foreign shareholders should consult with their tax advisers as to if and
how the federal income tax and its withholding requirements applies to them.
STATE AND LOCAL TAXES. Depending upon the extent of the Fund's activities
in states and localities in which its offices are maintained, its agents or
independent contractors are located or it is otherwise deemed to be conducting
business, the Fund may be subject to the tax laws of such states or localities.
The foregoing discussion is only a summary of certain federal income tax
issues generally affecting the Fund and its shareholders. Circumstances among
investors may vary and each investor is encouraged to discuss investment in the
Fund with the investor's tax adviser.
FINANCIAL STATEMENTS
The 1995 fiscal year-end financial statements of the Fund, including notes
to the financial statements and financial highlights and the Report of
Independent Accountants, are included in the Fund's Annual Reports to
shareholders. A copy of the Annual Report accompanies this Statement of
Additional Information and is incorporated herein by reference.
<PAGE>
Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
THE SEVEN SEAS SERIES FUND
Two International Place, 35th Floor
Boston, Massachusetts 02110
(617) 654-6089
STATEMENT OF ADDITIONAL INFORMATION
YIELD PLUS FUND
DECEMBER 29, 1995
The Seven Seas Series Fund ("Investment Company") is a registered open-end
investment company organized as a Massachusetts business trust offering shares
of beneficial interest in separate investment portfolios. In addition, each
series of the Investment Company is diversified as defined under the Investment
Company Act of 1940, as amended (the "1940 Act").
This Statement of Additional Information supplements or describes in
greater detail the Investment Company and The Seven Seas Series Yield Plus Fund
(the "Yield Plus Fund" or the "Fund") as contained in the Fund's Prospectus
dated December 29, 1995. This Statement is not a Prospectus and should be read
in conjunction with the Fund's Prospectus, which may be obtained by telephoning
or writing Investment Company at the number or address shown above.
-1-
<PAGE>
TABLE OF CONTENTS
Page
----
STRUCTURE AND GOVERNANCE . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Organization and Business History . . . . . . . . . . . . . . . . . . . 3
Shareholder Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . 4
Controlling Shareholders. . . . . . . . . . . . . . . . . . . . . . . . 4
Principal Shareholders. . . . . . . . . . . . . . . . . . . . . . . . . 4
Trustees and Officers . . . . . . . . . . . . . . . . . . . . . . . . . 5
OPERATION OF INVESTMENT COMPANY. . . . . . . . . . . . . . . . . . . . . . . 6
Service Providers . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Administrator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Custodian and Transfer Agent. . . . . . . . . . . . . . . . . . . . . . 7
Distribution Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Federal Law Affecting State Street. . . . . . . . . . . . . . . . . . . 9
Valuation of Fund Shares. . . . . . . . . . . . . . . . . . . . . . . . 9
Brokerage Practices . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . . . . . . . 11
Yield and Total Return Quotations . . . . . . . . . . . . . . . . . . . 11
INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . 13
Investment Policies . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Hedging Strategies and Related Investment Techniques. . . . . . . . . . 20
Ratings of Debt Instruments . . . . . . . . . . . . . . . . . . . . . . 26
Ratings of Commercial Paper . . . . . . . . . . . . . . . . . . . . . . 28
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
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<PAGE>
STRUCTURE AND GOVERNANCE
ORGANIZATION AND BUSINESS HISTORY. Investment Company was organized as a
Massachusetts business trust on October 3, 1987, and operates under a First
Amended and Restated Master Trust Agreement, dated October 13, 1993, as amended.
Investment Company is authorized to issue shares of beneficial interest, par
value $.001 per share, which may be divided into one or more series, each of
which evidences pro rata ownership interest in a different investment portfolio,
or "Fund." The Yield Plus Fund is one such investment portfolio. The Trustees
may create additional Funds at any time without shareholder approval.
As of the date of this Statement of Additional Information, Investment
Company is comprised of the following investment portfolios, each of which
commenced operations on the date set forth opposite the portfolio's name:
<TABLE>
<S> <C>
The Seven Seas Series Money Market Fund May 2, 1988
The Seven Seas Series US Government Money Market Fund March 1, 1991
The Seven Seas Series US Treasury Money Market Fund December 1, 1993
The Seven Seas Series US Treasury Obligations Fund *
The Seven Seas Series Prime Money Market Fund February 22, 1994
The Seven Seas Series Yield Plus Fund November 9, 1992
The Seven Seas Series Tax Free Money Market Fund December 1, 1994
The Seven Seas Series Intermediate Fund September 1, 1993
The Seven Seas Series Bond Market Fund *
The Seven Seas Series Growth and Income Fund September 1, 1993
The Seven Seas Series S&P 500 Index Fund December 30, 1992
The Seven Seas Series Small Cap Fund July 1, 1992
The Seven Seas Series Matrix Equity Fund May 4, 1992
The Seven Seas Series Active International Fund March 7, 1995
The Seven Seas Series International Pacific Index Fund *
The Seven Seas Series Emerging Markets Fund March 1, 1994
The Seven Seas Series Real Estate Equity Fund *
</TABLE>
_______________
*As of the date of this Statement of Additional Information, these
portfolios have not commenced operations.
Prospectuses for these investment portfolios may be obtained by calling
Investment Company's distributor, Russell Fund Distributors, Inc., at (617) 654-
6089.
Investment Company is authorized to divide shares of any series into two or
more classes of shares. The shares of each Fund may have such rights and
preferences as the Trustees may establish from time to time, including the right
of redemption (including the price, manner and terms of redemption), special and
relative rights as to dividends and distributions, liquidation rights, sinking
or purchase fund provisions and conditions under which any Fund may have
separate voting rights or no voting rights. Each class of shares of a Fund is
entitled to the same rights and privileges as all other classes of that Fund,
except that each class bears the expenses
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<PAGE>
associated with the distribution and shareholder servicing arrangements of that
class, as well as other expenses attributable to the class and unrelated to the
management of the Fund's portfolio securities. Shares of the Money Market, US
Government Money Market and Tax Free Money Market Funds are divided into Classes
A, B and C.
Any amendment to the Master Trust Agreement that would materially and
adversely affect shareholders of Investment Company as a whole, or shareholders
of a particular Fund, must be approved by the holders of a majority of the
shares of Investment Company or the Fund, respectively. All other amendments
may be effected by Investment Company's Board of Trustees.
Under certain unlikely circumstances, and as is the case with any
Massachusetts business trust, a shareholder of the Fund may be held personally
liable for the obligations of the Fund. The Master Trust Agreement provides
that shareholders shall not be subject to any personal liability for the acts or
obligations of the Fund and that every written agreement, obligation, or other
undertaking of the Fund shall contain a provision to the effect that the
shareholders are not personally liable thereunder. The Master Trust Agreement
also provides that the Fund shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Fund and satisfy
any judgment thereon. Thus, the risk to shareholders of incurring financial
loss beyond their investments is limited to circumstances in which the Fund
itself would be unable to meet its obligations.
SHAREHOLDER MEETINGS. Investment Company will not have an Annual Meeting
of Shareholders. Special Meetings may be convened: (1) by the Board of
Trustees; (2) upon written request to the Board by the holders of at least 10%
of the outstanding shares; or (3) upon the Board's failure to honor the
shareholders' request described above, by holders of at least 10% of the
outstanding shares giving notice of the special meeting to the shareholders.
CONTROLLING SHAREHOLDERS. The Trustees have the authority and
responsibility to manage the business of Investment Company. Trustees hold
office until they resign or are removed by, in substance, a vote of two-thirds
of Investment Company shares outstanding. However, in connection with State
Street Bank and Trust Company's ("State Street") securities lending program and
investment accounts over which State Street has discretionary authority, State
Street holds certain collateral on behalf of its securities lending clients to
secure the return of loaned securities. Such collateral may be invested in
Investment Company shares from time to time. Shares representing such
investments are held of record by State Street, who retains voting control of
such shares. As of November 30, 1995, State Street held beneficially and of
record 36% of Investment Company's shares in connection with various lending
portfolios and, consequently, may be deemed to be a controlling person of
Investment Company for purposes of the 1940 Act. State Street also acts as
Investment Company's investment adviser, transfer agent and custodian.
PRINCIPAL SHAREHOLDERS. As of November 30, 1995, the following
shareholders owned of record 5% or more of the issued and outstanding shares of
the Fund:
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<PAGE>
- - Stock Performance Index Futures Fund CM18, a fund of State Street Bank and
Trust Company, 225 Franklin Street, Boston, MA 02110--35%;
- - International Clearing Stock Loan, a department of State Street Bank and
Trust Company, Two International Place, Boston, MA 02110--32%;
- - Louisiana State Employees, 8401 United Plaza Boulevard, Baton Rouge, LA
70809--15%; and
- - S&P 500 Flagship Fund CM11, a fund of State Street Bank and Trust Company,
225 Franklin Street, Boston, MA 02110--6%.
The Trustees and officers of Investment Company, as a group, own less than
1% of Investment Company's voting securities.
TRUSTEES AND OFFICERS. The Board of Trustees is responsible for overseeing
generally the operation of the Fund. The officers, all of whom are employed by,
and are officers of, Administrator or its affiliates, are responsible for the
day-to-day management and administration of the Fund's operations.
Trustees who are not officers or employees of State Street or its
affiliates are paid an annual fee and are reimbursed for travel and other
expenses they incur in attending Board meetings. Investment Company's officers
and employees are paid by Administrator or its affiliates.
The following lists Investment Company's Trustees and officers, their
positions with Investment Company, their present and principal occupations
during the past five years and the mailing addresses of Trustees who are not
affiliated with Investment Company. The mailing address for all Trustees and
officers affiliated with Investment Company is The Seven Seas Series Fund, 909 A
Street, Tacoma, WA 98402.
An asterisk (*) indicates that a Trustee is an "interested person" of the
Investment Company, as defined in the 1940 Act.
*LYNN L. ANDERSON, Trustee, Chairman of the Board, President and Fund
Treasurer. Chairman of the Board and Chief Executive Officer, Frank Russell
Investment Management Company and Russell Fund Distributors, Inc.; Director,
President and Chief Executive Officer, Frank Russell Investment Company and
Frank Russell Trust Company; Director and President, Russell Insurance Funds;
Director and Chairman, Frank Russell Company (Delaware); Director, Frank Russell
Investments (Ireland) Limited and Frank Russell Investment Company plc.
WILLIAM L. MARSHALL, Trustee. 33 West Court Street, Doylestown, PA 18901.
Chief Executive Officer and President, Wm. L. Marshall Associates, Inc. (a
registered investment adviser and provider of financial and related consulting
services); Certified Financial Planner; Member, Registry of Financial Planning
Practitioners; and Advisory Committee, International
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<PAGE>
Association for Financial Planning Broker-Dealer Program. Member, Institute of
Certified Financial Planners. Registered for Securities with FSC Securities
Corp., Marietta, Georgia.
*STEVEN J. MASTROVICH, Trustee. 1 Financial Center, Boston, MA 02111.
Partner, Brown, Rudnick, Freed & Gesmer (law firm). 1990 to 1994, Partner,
Warner & Stackpole (law firm).
PATRICK J. RILEY, Trustee. 21 Custom House Street, Boston, MA 02110.
Partner, Riley, Burke & Donahue (law firm).
RICHARD D. SHIRK, Trustee. 3350 Peachtree Road, N.E., Atlanta, GA 30326.
President and Chief Executive Officer, Blue Cross/Blue Shield of Georgia. 1990
to 1992, President, Champions Group Resources--Business Management and Employee
Benefits Consulting; 1990, Senior Vice President, Employee Benefits Division,
Cigna Corporation (providing and insuring group life, health and disability
employee benefit products and services); from 1986 to 1990, Senior Vice
President, EQUICOR-Equitable HCA Corporation (providing and insuring group life,
health and disability employee benefit products and services).
*BRUCE D. TABER, Trustee. 26 Round Top Road, Boxford, MA 01921.
President, A.B. Reed, Inc. - Engineers, Architects, Planners. Prior to that,
Vice President, Instrumentation and Controls, A.B. Reed., Inc.
HENRY W. TODD, Trustee. 111 Commerce Drive, Montgomeryville, PA 18936.
President and Director, Zink & Triest Co., Inc. (dealer in vanilla flavor
materials); Director, A.M. Todd Co., and Flavorite Laboratories.
J. DAVID GRISWOLD, Vice President and Secretary. Assistant Secretary,
Associate General Counsel, Chief Compliance Officer, Frank Russell Investment
Management Company, Russell Fund Distributors, Inc. and Frank Russell Capital
Inc.; Associate General Counsel and Assistant Secretary, Frank Russell Company;
Associate General Counsel, Assistant Secretary and Compliance Officer, Russell
Fiduciary Services Company; Director, Secretary, Associate General Counsel and
Chief Compliance Officer, Frank Russell Securities, Inc.; Secretary, Frank
Russell Canada Limited/Limitee.
KENNETH W. LAMB, Assistant Secretary, Assistant Treasurer and Principal
Accounting Officer. Manager - Funds Administration, Frank Russell Investment
Management Company since 1994. Prior to that, Senior Audit Manager with Knight,
Vale & Gregory since 1982.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
TRUSTEE COMPENSATION TABLE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggregate Pension or Estimated Annual Total Compensation
Compensation Retirement Benefits Upon From Investment
from Benefits Retirement Company Paid to
Trustee Investment Accrued as Part Trustees
- ----------------------------------------------------------------------------------------------------
-6-
<PAGE>
- ----------------------------------------------------------------------------------------------------
Company of Investment
Company
Expenses
- ----------------------------------------------------------------------------------------------------
Lynn L. Anderson $0 $0 $0 $0
- ----------------------------------------------------------------------------------------------------
William L. Marshall $49,000 $0 $0 $49,000
- ----------------------------------------------------------------------------------------------------
Steven J. Mastrovich $49,000 $0 $0 $49,000
- ----------------------------------------------------------------------------------------------------
Patrick J. Riley $49,000 $0 $0 $49,000
- ----------------------------------------------------------------------------------------------------
Richard D. Shirk $49,000 $0 $0 $49,000
- ----------------------------------------------------------------------------------------------------
Bruce D. Taber $49,000 $0 $0 $49,000
- ----------------------------------------------------------------------------------------------------
Henry W. Todd $49,000 $0 $0 $49,000
- ----------------------------------------------------------------------------------------------------
</TABLE>
OPERATION OF INVESTMENT COMPANY
SERVICE PROVIDERS. Most of the Fund's necessary day-to-day operations are
performed by separate business organizations under contract to Investment
Company. The principal service providers are:
Investment Adviser, Custodian
and Transfer Agent: State Street Bank and Trust Company
Administrator: Frank Russell Investment Management Company
Distributor: Russell Fund Distributors, Inc.
Independent Accountants: Coopers & Lybrand, L.L.P.
ADVISER. State Street Bank and Trust Company ("State Street" or "Adviser")
serves as the Fund's investment adviser pursuant to an Advisory Agreement dated
April 12, 1988 ("Advisory Agreement"). State Street Bank and Trust Company is a
wholly owned subsidiary of State Street Boston Corporation, a publicly held bank
holding company. State Street's address is 225 Franklin Street, Boston, MA
02110.
Under the Advisory Agreement, Adviser directs the Fund's investments in
accordance with its investment objectives, policies and limitations. For these
services, the Fund pays a fee to Adviser at the rate stated in the Prospectus.
The Yield Plus Fund accrued expenses to Adviser of $3,256,063 in fiscal 1995,
$3,112,787 in fiscal 1994 and $615,334 from the date of inception to August 31,
1993.
The Advisory Agreement will continue from year to year provided that a
majority of the Trustees who are not interested persons of the Fund and either a
majority of all Trustees or a majority of the shareholders of the Fund approve
its continuance. The Agreement may be terminated by Adviser or a Fund without
penalty upon sixty days' notice and will terminate automatically upon its
assignment.
ADMINISTRATOR. Frank Russell Investment Management Company
("Administrator") serves as the Fund's administrator, pursuant to an
Administration Agreement dated April 12, 1988
-7-
<PAGE>
("Administration Agreement"). A description of the services provided under the
Administration Agreement and the basis for computing fees for such services is
provided in the Fund's Prospectus. The Yield Plus Fund accrued expenses to
Administrator of $384,923 in fiscal 1995, $366,814 in fiscal 1994 and $90,639
from the date of inception to August 31, 1993. Administrator waived
administration fees of $9,259 from the date of inception to August 31, 1993.
The Administration Agreement will continue from year to year provided that
a majority of the Trustees and a majority of the Trustees who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
operation of the Distribution Plan described below or the Administration
Agreement approve its continuance. The Agreement may be terminated by
Administrator or any Fund without penalty upon sixty days' notice and will
terminate automatically upon its assignment.
Administrator is a wholly owned subsidiary of Frank Russell Company. Frank
Russell Company was founded in 1936 and has provided comprehensive asset
management consulting services since 1969 for institutional pools of investment
assets, principally those of large corporate employee benefit plans. Frank
Russell Company and its affiliates have offices in Tacoma, Seattle, New York
City, Toronto, London, Tokyo, Sydney, Zurich, Paris and Auckland, and have
approximately 1,000 officers and employees. Administrator's and Frank Russell
Company's mailing address is 909 A Street, Tacoma, WA 98402.
DISTRIBUTOR. Russell Fund Distributors, Inc. ("Distributor") serves as the
distributor of Fund shares pursuant to a Distribution Agreement dated April 12,
1988 ("Distribution Agreement"). Distributor is a wholly owned subsidiary of
Administrator. Distributor's mailing address is Two International Place, 35th
Floor, Boston, MA 02110.
CUSTODIAN AND TRANSFER AGENT. State Street serves as the custodian
("Custodian") and transfer agent ("Transfer Agent") for Investment Company.
State Street also provides the basic portfolio recordkeeping required by
Investment Company for regulatory and financial reporting purposes. For
these services, State Street is paid an annual fee in accordance with the
following: custody services--a fee payable monthly on a pro rata basis, based
on the following percentages of average daily net assets of each Fund: $0 up
to $1.5 billion--0.02%, over $1.5 billion--0.015% (for purposes of
calculating the break point, the assets of all Investment Portfolios are
aggregated); securities transaction charges from $8.00 to $25.00 per
transaction; Eurodollar transaction fees ranging from $110.00 to $125.00 per
transaction; monthly pricing fees of $375.00 per Investment Portfolio and
from $6.00 to $16.00 per security, depending on the type of instrument and
the pricing service used; transfer agent services of $2.00 per shareholder
transaction and a multiple class fee of $18,000 per year for each additional
class of shares; and yield calculation fees of $350.00 per non-money market
portfolio per year. State Street is reimbursed by the Fund for supplying
certain out-of-pocket expenses including postage, transfer fees, stamp
duties, taxes, wire fees, telexes, and freight.
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand L.L.P. serves as the Investment
Company's independent accountants. Coopers & Lybrand L.L.P. is responsible
for performing annual audits
-8-
<PAGE>
of the financial statements and financial highlights in accordance with
generally accepted auditing standards, a review of federal tax returns, and,
pursuant to Rule 17f-2 of the 1940 Act, three security counts. The mailing
address of Coopers & Lybrand L.L.P. is One Post Office Square, Boston MA
02109.
DISTRIBUTION PLAN. Under the 1940 Act, the Securities and Exchange
Commission has adopted Rule 12b-1, which regulates the circumstances under which
the Fund may, directly or indirectly, bear distribution and shareholder
servicing expenses. The Rule provides that the Fund may pay for such expenses
only pursuant to a plan adopted in accordance with the Rule. Accordingly, the
Fund has adopted an active distribution plan (the "Plan"), which is described in
the Fund's Prospectus.
The Plan provides that Fund may spend annually, directly or indirectly, up
to 0.25% of the value of its average net assets for distribution and shareholder
servicing services. The Plan does not provide for the Fund to be charged for
interest, carrying or any other financing charges on any distribution expenses
carried forward to subsequent years. A quarterly report of the amounts expended
under the Plan, and the purposes for which such expenditures were incurred, must
be made to the Trustees for their review. The Plan may not be amended without
shareholder approval to increase materially the distribution or shareholder
servicing costs that the Fund may pay. The Plan and material amendments to it
must be approved annually by all of the Trustees and by the Trustees who are
neither "interested persons" (as defined in the 1940 Act) of the Fund nor have
any direct or indirect financial interest in the operation of the Plan or any
related agreements.
The Fund accrued expenses in the following amounts to Russell Fund
Distributors, Inc., as Distributor, for the fiscal years ended August 31:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Yield Plus Fund $261,109 $402,343 $74,092
</TABLE>
For fiscal 1995, this amount is reflective of the following individual
payments:
<TABLE>
<S> <C>
Advertising $ 9,050
Printing of Prospectuses 5,825
Compensation to Dealers 15,655
Compensation to Sales Personnel 125,803
Other* 104,776
---------
$ 261,109
---------
---------
</TABLE>
* Other expenses may include such items as compensation for travel, conferences
and seminars for staff, subscriptions, office charges and professional fees.
Under the Plan, the Fund may also enter into agreements ("Service
Agreements") with financial institutions, which may include Adviser ("Service
Organizations"), to provide shareholder servicing with respect to Fund shares
held by or for the customers of the Service
-9-
<PAGE>
Organizations. Such arrangements are more fully described in the Fund's
prospectus under "Distribution Services and Shareholder Servicing."
The Fund accrued expenses in the following amounts to Adviser, under a
Service Agreement pursuant to Rule 12b-1, for fiscal years ended August 31:
<TABLE>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Yield Plus Fund $506,798 $91,143 $25,600
</TABLE>
FEDERAL LAW AFFECTING STATE STREET. The Glass-Steagall Act of 1933
prohibits state chartered banks such as State Street from engaging in the
business of underwriting, selling or distributing certain securities, and
prohibits a member bank of the Federal Reserve System from having certain
affiliations with an entity engaged principally in that business. The
activities of State Street in informing its customers of the Fund, performing
investment and redemption services, providing custodian, transfer, shareholder
servicing, dividend disbursing, agent servicing and investment advisory
services, may raise issues under these provisions. State Street has been
advised by its counsel that its activities in connection with the Fund
contemplated under this arrangement are consistent with its statutory and
regulatory obligations.
VALUATION OF FUND SHARES. Net asset value per share is calculated once
each business day for the Fund as of the close of the regular trading session on
the New York Stock Exchange (currently 4:00 p.m. Eastern time). A business day
is one on which the New York Stock Exchange is open for business. Currently,
the New York Stock Exchange is open for trading every weekday except New Year's
Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.
Trading may occur in debt securities and in foreign securities at times
when the New York Stock Exchange is closed (including weekends and holidays or
after 4:00 p.m., Eastern time, on a regular business day). The trading of
portfolio securities at such times may significantly increase or decrease the
net asset value of the Fund's share when shareholders do not have the ability to
purchase or redeem shares. Therefore, events affecting the values of foreign
securities traded in foreign markets that occur between the time their prices
are determined and the close of the New York Stock Exchange will not be
reflected in the Fund's calculation of its net asset value unless the Board of
Trustees determines that the particular event would materially affect the Fund's
net asset value, in which case an adjustment would be made.
With the exceptions noted below, the Fund values portfolio securities at
market value. This generally means that equity securities and fixed income
securities listed and traded principally on any national securities exchange are
valued on the basis of the last sale price or, lacking any sales, at the closing
bid price, on the primary exchange on which the security is traded. United
States equity and fixed-income securities traded principally over-the-counter
and options are valued on the basis of the last reported bid price. Futures
contracts are valued on the basis of the last reported sell price.
-10-
<PAGE>
Because many fixed income securities do not trade each day, last sale or
bid prices are frequently not available. Therefore, fixed income securities may
be valued using prices provided by a pricing service when such prices are
determined by Custodian to reflect the market value of such securities.
International equity securities traded on a national securities exchange
are valued on the basis of the last sale price. International securities traded
over-the-counter are valued on the basis of best bid or official bid, as
determined by the relevant securities exchange. In the absence of a last sale
or best or official bid price, such securities may be valued on the basis of
prices provided by a pricing service if those prices are believed to reflect the
market value of such securities.
The Fund values securities maturing within 60 days of the valuation date at
amortized cost unless the Board determines that amortized cost does not
represent fair value. This method involves valuing an instrument at its cost
and thereafter assuming a constant amortization to maturity of any discount or
premium, even though the portfolio security may increase or decrease in market
value generally in response to changes in interest rates. While 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 Fund would
receive if it sold the instrument.
For example, in periods of declining interest rates, the daily yield on
Fund shares computed by dividing the annualized daily income on the Fund's
portfolio by the net asset value based upon the amortized cost valuation
technique may tend to be higher than a similar computation made by using a
method of valuation based upon market prices and estimates. In periods of
rising interest rates, the daily yield on Fund shares computed the same way may
tend to be lower than a similar computation made by using a method of
calculation based upon market prices and estimates.
BROKERAGE PRACTICES. All portfolio transactions are placed on behalf of
the Fund by Adviser. Adviser ordinarily pays commissions when it executes
transactions on a securities exchange. In contrast, there is generally no
stated commission in the purchase or sale of securities traded in the over-the-
counter markets, including most debt securities and money market instruments.
Rather, the price of such securities includes an undisclosed commission in the
form of a mark-up or mark-down. The cost of securities purchased from
underwriters includes an underwriting commission or concession.
Subject to the arrangements and provisions described below, the selection
of a broker or dealer to execute portfolio transactions is usually made by
Adviser. The Advisory Agreement provides, in substance and subject to specific
directions from officers of Investment Company, that in executing portfolio
transactions and selecting brokers or dealers, the principal objective is to
seek the best overall terms available to the Fund. Ordinarily, securities will
be purchased from primary markets, and Adviser shall consider all factors it
deems relevant in assessing the best overall terms available for any
transaction, 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 other transactions on a continuing basis.
-11-
<PAGE>
The Advisory Agreement authorizes Adviser to select brokers or dealers to
execute a particular transaction, including principal transactions, 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 Adviser (or its
affiliates). Adviser is authorized to cause the Fund to pay a commission to a
broker or dealer who provides such brokerage and research services for executing
a portfolio transaction which is in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction. The Fund or
Adviser, as appropriate, must determine in good faith that such commission was
reasonable in relation to the value of the brokerage and research services
provided--viewed in terms of that particular transaction or in terms of all the
accounts over which Adviser exercises investment discretion.
The Trustees periodically review Adviser's performance of its
responsibilities in connection with the placement of portfolio transactions on
behalf of the Fund and review the prices paid by the Fund over representative
periods of time to determine if such prices are reasonable in relation to the
benefits provided to the Fund. Certain services received by Adviser
attributable to a particular Fund transaction may benefit one or more other
accounts for which Adviser exercises investment discretion, or an investment
portfolio other than that for which the transaction was effected. Adviser's
fees are not reduced by Adviser's receipt of such brokerage and research
services.
During the fiscal year ended August 31, 1995, the Fund purchased securities
issued by the following regular brokers or dealers, as defined by Rule 10b-1 of
the 1940 Act, each of which is one of the Fund's ten largest brokers or dealers
by dollar amounts of securities executed or commissions received on behalf of
the Fund. The value of broker-dealer securities held as of August 31, 1995, is
as follows:
<TABLE>
<CAPTION>
YIELD PLUS FUND
($000)
--------------------
<S> <C>
UBS Securities, Inc. 0
HSBC Securities, Inc. 73,473*
Prebon n/a
First Chicago 64,633
Salomon Brothers, Inc. n/a
Lumis & Co. n/a
Smith Barney, Inc. n/a
Lehman Brothers, Inc. n/a
Goldman, Sachs & Co. 0
Greenwich Securities n/a
</TABLE>
* Repurchase Agreements
n/a represents no purchases executed during the fiscal year
-12-
<PAGE>
PORTFOLIO TURNOVER RATE. The portfolio turnover rate for the Fund is
calculated by dividing the lesser of purchases or sales of portfolio securities
for the particular year, by the monthly average value of the portfolio
securities owned by the Fund during the year. For purposes of determining the
rate, all short-term securities, including options, futures, forward contracts
and repurchase agreements, are excluded.
The portfolio turnover rates for the Fund for the last three fiscal years
ended August 31, were:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Yield Plus Fund 199.69% 142.68% 137.86%
</TABLE>
Portfolio turnover rates for periods less than one fiscal year are annualized.
YIELD AND TOTAL RETURN QUOTATIONS. The Fund computes average annual total
return by using a standardized method of calculation required by the Securities
and Exchange Commission. Average annual total return is computed by finding the
average annual compounded rates of return on a hypothetical initial investment
of $1,000 over the one-year, five-year and ten-year periods (or life of the
funds as appropriate), that would equate the initial amount invested to the
ending redeemable value, according to the following formula:
P(1+T)(n) = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a $1,000 payment made at
the beginning of the 1-year, 5-year and 10-year periods at
the end of the year or period
The calculation assumes that all dividends and distributions of the Fund
are reinvested at the price stated in the Prospectus on the dividend dates
during the period, and includes all recurring and nonrecurring fees that are
charged to all shareholder accounts.
The average annual total returns for the Fund are as follows:
<TABLE>
<CAPTION>
One Year Inception to
Ending August 31, 1995
August 31, 1995 (Annualized) Inception Date
--------------- ------------ --------------
<S> <C> <C> <C>
Yield Plus Fund 6.01% 4.45% 11/09/92
</TABLE>
Yields are computed by using standardized methods of calculation required
by the Securities and Exchange Commission. Yields are calculated by dividing
the net investment income per share
-13-
<PAGE>
earned during a 30-day (or one-month) period by the maximum offering price per
share on the last day of the period, according to the following formula:
YIELD = 2[(a-b+1)(6)-1]
cd
Where: a = dividends and interests earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = average daily number of shares outstanding during the
period that were entitled to receive dividends; and
d = the maximum offering price per share on the last day of
the period.
The following is the current 30-day yield for the Yield Plus Fund for the
period ended August 31, 1995:
YIELD PLUS FUND
30-day Yield (Annualized) 5.78%
The yield quoted is not indicative of future results. Yields will depend
on the type, quality, maturity and interest rate of instruments held by the
Fund.
INVESTMENTS
The investment objective of the Fund is set forth in its Prospectus. The
Fund also has certain "fundamental" investment restrictions, which may be
changed only with the approval of a majority of the shareholders of the Fund,
and certain nonfundamental investment restrictions and policies, which may be
changed by the Fund without shareholder approval.
INVESTMENT RESTRICTIONS
The Fund is subject to the following investment restrictions, restrictions
1 through 11 are fundamental and restrictions 12 through 18 are nonfundamental.
Unless otherwise noted, these restrictions apply at the time an investment is
made. The Fund will not:
(1) Invest 25% or more of the value of its total assets in securities of
companies primarily engaged in any one industry (other than the US Government,
its agencies and instrumentalities). Concentration may occur as a result of
changes in the market value of portfolio securities, but may not result from
investment.
(2) Borrow money (including reverse repurchase agreements), except as a
temporary measure for extraordinary or emergency purposes or to facilitate
redemptions (not for leveraging or investment), provided that borrowings do not
exceed an amount equal to 33-1/3% of the current value of the Fund's assets
taken at market value, less liabilities other than borrowings. If at any time
the Fund's borrowings exceed this limitation due to a decline in net assets,
such
-14-
<PAGE>
borrowings will within three days be reduced to the extent necessary to comply
with this limitation. The Fund will not purchase investments once borrowed
funds (including reverse repurchase agreements) exceed 5% of its total assets.
(3) Pledge, mortgage or hypothecate its assets. However, the Fund may
pledge securities having a market value at the time of the pledge not exceeding
33-1/3% of the value of the Fund's total assets to secure borrowings permitted
by paragraph (2) above.
(4) With respect to 75% of its total assets, invest in securities of any
one issuer (other than securities issued by the US Government, its agencies, and
instrumentalities), if immediately after and as a result of such investment the
current market value of the Fund's holdings in the securities of such issuer
exceeds 5% of the value of the Fund's assets.
(5) Make loans to any person or firm; provided, however, that the making of
a loan shall not include (i) the acquisition for investment of bonds,
debentures, notes or other evidences of indebtedness of any corporation or
government which are publicly distributed or of a type customarily purchased by
institutional investors, or (ii) the entry into repurchase agreements or reverse
repurchase agreements. The Fund may lend its portfolio securities to broker-
dealers or other institutional investors if the aggregate value of all
securities loaned does not exceed 33-1/3% of the value of the Fund's total
assets.
(6) Purchase or sell commodities or commodity futures contracts except that
the Fund may enter into futures contracts and options thereon to the extent
provided in its Prospectus.
(7) Purchase or sell real estate or real estate mortgage loans; provided,
however, the Fund may invest in securities secured by real estate or interests
therein or issued by companies which invest in real estate or interests therein.
(8) Engage in the business of underwriting securities issued by others,
except that the Fund will not be deemed to be an underwriter or to be
underwriting on account of the purchase of securities subject to legal or
contractual restrictions on disposition.
(9) Issue senior securities, except as permitted by its investment
objective, policies and restrictions, and except as permitted by the 1940 Act.
(10) Purchase or sell puts, calls or invest in straddles, spreads or any
combination thereof, if as a result of such purchase the value of the Fund's
aggregate investment in such securities would exceed 5% of the Fund's total
assets.
(11) Make short sales of securities or purchase any securities on margin,
except for such short-term credits as are necessary for the clearance of
transactions. The Fund may make initial margin deposits and variation margin
payments in connection with transactions in futures contracts and related
options.
-15-
<PAGE>
(12) Purchase from or sell portfolio securities to its officers or
directors or other interested persons (as defined in the 1940 Act) of the Fund,
including their investment advisers and affiliates, except as permitted by the
1940 Act and exemptive rules or orders thereunder.
(13) Invest in securities issued by other investment companies except in
connection with a merger, consolidation, acquisition of assets, or other
reorganization approved by the Fund's shareholders, except that the Fund may
invest in such securities to the extent permitted by the 1940 Act.
(14) Invest in securities of any issuer which, together with its
predecessor, has been in operation for less than three years if, as a result,
more than 5% of the Fund's total assets would be invested in such securities.
(15) Invest more than 10% of its net assets in the aggregate in illiquid
securities or securities that are not readily marketable, including repurchase
agreements and time deposits of more than seven days' duration.
(16) Purchase interests in oil, gas or other mineral exploration or
development programs.
(17) Make investments for the purpose of gaining control of an issuer's
management.
(18) Purchase the securities of any issuer if the Investment Company's
officers, Directors, Adviser or any of their affiliates beneficially own more
than one-half of 1% of the securities of such issuer or together own
beneficially more than 5% of the securities of such issuer.
INVESTMENT POLICIES
The Fund may invest in the following instruments:
US GOVERNMENT OBLIGATIONS. The types of US Government obligations in which
the Fund may at times invest include: (1) A variety of US Treasury obligations,
which differ only in their interest rates, maturities and times of issuance; and
(2) obligations issued or guaranteed by US Government agencies and
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the US Treasury, (b) the right of the issuer to borrow an
amount limited to a specific line of credit from the US Treasury,
(c) discretionary authority of the US Government agency or instrumentality or
(d) the credit of the instrumentality (examples of agencies and
instrumentalities are: Federal Land Banks, Federal Housing Administration,
Farmers Home Administration, Export--Import Bank of the United States, Central
Bank for Cooperatives, Federal Intermediate Credit Banks, Federal Home Loan
Banks, General Services Administration, Maritime Administration, Tennessee
Development Bank, Asian-American Development Bank, Student Loan Marketing
Association, International Bank for Reconstruction and Development and Federal
National Mortgage Association). No assurance can be given that in the future
the US Government will provide financial support to such US Government agencies
or instrumentalities described in (2)(b), (2)(c) and (2)(d), other than as set
forth above, since it is not obligated to do so by law. The Fund may purchase
US Government obligations on a forward commitment basis.
-16-
<PAGE>
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
financial institutions. Under repurchase agreements, these parties sell
securities to the Fund and agree to repurchase the securities at the Fund's cost
plus interest within a specified time (normally one day). The securities
purchased by the Fund have a total value in excess of the purchase price paid by
the Fund and are held by Custodian until repurchased. Repurchase agreements
assist the Fund in being invested fully while retaining "overnight" flexibility
in pursuit of investments of a longer-term nature. The Fund will limit
repurchase transactions to those member banks of the Federal Reserve System and
broker-dealers whose creditworthiness is continually monitored and found
satisfactory by Adviser.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreements under the circumstances described in "Investment Restrictions."
Under reverse repurchase agreements, the Fund transfers possession of portfolio
securities to financial institutions in return for cash in an amount equal to a
percentage of the portfolio securities' market value and agrees to repurchase
the securities at a future date by repaying the cash with interest. The Fund
retains the right to receive interest and principal payments from the securities
while they are in the possession of the financial institutions. Cash or liquid
high quality debt obligations from a Fund's portfolio equal in value to the
repurchase price including any accrued interest will be segregated by Custodian
on the Fund's records while a reverse repurchase agreement is in effect.
FORWARD COMMITMENTS. The Fund may contract to purchase securities for a
fixed price at a future date beyond customary settlement time consistent with
the Fund's ability to manage its investment portfolio, maintain a stable net
asset value and meet redemption requests. The Fund may dispose of a commitment
prior to settlement if it is appropriate to do so and realize short-term profits
or losses upon such sale. When effecting such transactions, cash or liquid high
quality debt obligations held by the Fund of a dollar amount sufficient to make
payment for the portfolio securities to be purchased will be segregated on the
Fund's records at the trade date and maintained until the transaction is
settled. Forward commitments involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date, or if the other
party fails to complete the transaction.
WHEN-ISSUED TRANSACTIONS. New issues of securities are often offered on a
when-issued basis. This means that delivery and payment for the securities
normally will take place several days after the date the buyer commits to
purchase them. The payment obligation and the interest rate that will be
received on securities purchased on a when-issued basis are each fixed at the
time the buyer enters into the commitment.
The Fund will make commitments to purchase when-issued securities only with
the intention of actually acquiring the securities, but the Fund may sell these
securities or dispose of the commitment before the settlement date if it is
deemed advisable as a matter of investment strategy. Cash or marketable high
quality debt securities equal to the amount of the above commitments will be
segregated on the Fund's records. For the purpose of determining the adequacy
of these securities the segregated securities will be valued at market. If the
market value of such securities declines, additional cash or securities will be
segregated on the Fund's
-17-
<PAGE>
records on a daily basis so that the market value of the account will equal the
amount of such commitments by the Fund. The Fund will not invest more than 25%
of its net assets in when-issued securities.
Securities purchased on a when-issued basis and held by the Fund are
subject to changes in market value based upon the public's perception of changes
in the level of interest rates. Generally, the value of such securities will
fluctuate inversely to changes in interest rates -- i.e., they will appreciate
in value when interest rates decline and decrease in value when interest rates
rise. Therefore, if in order to achieve higher interest income the Fund remains
substantially fully invested at the same time that it has purchased securities
on a "when-issued" basis, there will be a greater possibility of fluctuation in
the Fund's net asset value.
When payment for when-issued securities is due, the Fund will meet its
obligations from then-available cash flow, the sale of segregated securities,
the sale of other securities or, and although it would not normally expect to do
so, from the sale of the when-issued securities themselves (which may have a
market value greater or less than the Fund's payment obligation). The sale of
securities to meet such obligations carries with it a greater potential for the
realization of capital gains, which are subject to federal income taxes.
VARIABLE AMOUNT MASTER DEMAND NOTES. Variable amount master demand notes
are unsecured obligations that are redeemable upon demand and are typically
unrated. These instruments are issued pursuant to written agreements between
the issuers and the holders. The agreements permit the holders to increase
(subject to an agreed maximum) and the holders and issuers to decrease the
principal amount of the notes, and specify that the rate of interest payable on
the principal fluctuates according to an agreed formula.
SECTION 4(2) COMMERCIAL PAPER. The Fund may invest in commercial paper
issued in reliance on the so-called "private placement" exemption from
registration afforded by Section 4(2) of the Securities Act of 1933
("Section 4(2) paper"). Section 4(2) paper is restricted as to disposition
under the federal securities laws, and generally is sold to investors who agree
that they are purchasing the paper for an investment and not with a view to
public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) paper is normally resold to other investors through
or with the assistance of the issuer or investment dealers who make a market in
Section 4(2) paper, thus providing liquidity. Pursuant to guidelines
established by the Board of Trustees, Adviser may determine that Section 4(2)
paper is liquid for the purposes of complying with the Fund's investment
restriction relating to investments in illiquid securities.
VARIABLE AND FLOATING RATE SECURITIES. A floating rate security provides
for the automatic adjustment of its interest rate whenever a specified interest
rate changes. A variable rate security provides for the automatic establishment
of a new interest rate on set dates. Interest rates on these securities are
ordinarily tied to, and are a percentage of, a widely recognized interest rate
such as the yield on 90-day US Treasury bills or the prime rate of a specified
bank. These rates may change as often as twice daily. Generally, changes in
interest rates will have a smaller effect on the market value of variable and
floating rate securities than on the market value of comparable
-18-
<PAGE>
fixed income obligations. Thus, investing in variable and floating rate
securities generally allows less opportunity for capital appreciation and
depreciation than investing in comparable fixed income securities.
The Fund may purchase variable rate US Government obligations which are
instruments issued or guaranteed by the US Government, or an agency or
instrumentality thereof, that have a rate of interest subject to adjustment at
regular intervals but less frequently than annually. Variable rate US
Government obligations whose interest is readjusted no less frequently than
annually will be deemed to have a maturity equal to the period remaining until
the next readjustment of the interest rate.
ASSET-BACKED SECURITIES. Asset-backed securities represent undivided
fractional interests in pools of instruments, such as consumer loans, and are
similar in structure to mortgage-related pass-through securities described
below. Payments of principal and interest are passed through to holders of the
securities and are typically supported by some form of credit enhancement, such
as a letter of credit, surety bond, limited guarantee by another entity or by
priority to certain of the borrower's other securities. The degree of
credit-enhancement varies, generally applying only until exhausted and covering
only a fraction of the security's par value.
The value of asset-backed securities is affected by changes in the market's
perception of the asset backing the security, changes in the creditworthiness of
the servicing agent for the instrument pool, the originator of the instruments
or the financial institution providing any credit enhancement and the
expenditure of any portion of any credit enhancement. The risks of investing in
asset-backed securities are ultimately dependent upon payment of the underlying
instruments by the obligors, and the Fund would generally have no recourse
against the obligee of the instruments in the event of default by an obligor.
The underlying instruments are subject to prepayments which shorten the weighted
average life of asset-backed securities and may lower their return, in the same
manner as described below for prepayments of pools of mortgage loans underlying
mortgage-backed securities.
MORTGAGE-RELATED PASS-THROUGH SECURITIES. Mortgage pass-through
certificates are issued by governmental, government-related and private
organizations and are backed by pools of mortgage loans. These mortgage loans
are made by savings and loan associations, mortgage bankers, commercial banks
and other lenders to residential home buyers throughout the United States. The
securities are "pass-through" securities because they provide investors with
monthly payments of principal and interest that, in effect, are a "pass-through"
of the monthly payments made by the individual borrowers on the underlying
mortgage loans, net of any fees paid to the issuer or guarantor of the pass-
through certificates. The principal governmental issuer of such securities is
the Government National Mortgage Association ("GNMA"), which is a wholly-owned
US Government corporation within the Department of Housing and Urban
Development. Government-related issuers include the Federal Home Loan Mortgage
Corporation ("FHLMC"), a corporate instrumentality of the United States created
pursuant to an act of Congress which is owned entirely by the Federal Home Loan
Banks, and the Federal National Mortgage Association ("FNMA"), a government
sponsored corporation owned entirely by private stockholders. Commercial banks,
savings and loan associations, private mortgage insurance companies,
-19-
<PAGE>
mortgage bankers and other secondary market issuers also create pass-through
pools of conventional residential mortgage loans. Such issuers may be the
originators of the underlying mortgage loans as well as the guarantors of the
mortgage-related securities.
(1) GNMA Mortgage Pass-Through Certificates ("Ginnie Maes"). Ginnie Maes
represent an undivided interest in a pool of mortgage loans that are insured by
the Federal Housing Administration or the Farmers Home Administration or
guaranteed by the Veterans Administration. Ginnie Maes entitle the holder to
receive all payments (including prepayments) of principal and interest owed by
the individual mortgagors, net of fees paid to GNMA and to the issuer which
assembles the loan pool and passes through the monthly mortgage payments to the
certificate holders (typically, a mortgage banking firm), regardless of whether
the individual mortgagor actually makes the payment. Because payments are made
to certificate holders regardless of whether payments are actually received on
the underlying loans, Ginnie Maes are of the "modified pass-through" mortgage
certificate type. GNMA is authorized to guarantee the timely payment of
principal and interest on the Ginnie Maes as securities backed by an eligible
pool of mortgage loans. The GNMA guaranty is backed by the full faith and
credit of the United States, and GNMA has unlimited authority to borrow funds
from the US Treasury to make payments under the guaranty. The market for Ginnie
Maes is highly liquid because of the size of the market and the active
participation in the secondary market by securities dealers and a variety of
investors.
(2) FHLMC Mortgage Participation Certificates ("Freddie Macs"). Freddie
Macs represent interests in groups of specified first lien residential
conventional mortgage loans underwritten and owned by FHLMC. Freddie Macs
entitle the holder to timely payment of interest, which is guaranteed by FHLMC.
FHLMC guarantees either ultimate collection or timely payment of all principal
payments on the underlying mortgage loans. In cases where FHLMC has not
guaranteed timely payment of principal, FHLMC may remit the amount due on
account of its guarantee of ultimate payment of principal at any time after
default on an underlying loan, but in no event later than one year after it
becomes payable. Freddie Macs are not guaranteed by the United States or by any
of the Federal Home Loan Banks and do not constitute a debt or obligation of the
United States or of any Federal Home Loan Bank. The secondary market for
Freddie Macs is highly liquid because of the size of the market and the active
participation in the secondary market by FHLMC, securities dealers and a variety
of investors.
(3) FNMA Guaranteed Mortgage Pass-Through Certificates ("Fannie Maes").
Fannie Maes represent an undivided interest in a pool of conventional mortgage
loans secured by first mortgages or deeds of trust, on one-family to four-family
residential properties. FNMA is obligated to distribute scheduled monthly
installments of principal and interest on the loans in the pool, whether or not
received, plus full principal of any foreclosed or otherwise liquidated loans.
The obligation of FNMA under its guaranty is solely the obligation of FNMA and
is not backed by, nor entitled to, the full faith and credit of the United
States.
The market value of mortgage-related securities depends on, among other
things, the level of interest rates, the certificates' coupon rates and the
payment history of the underlying borrowers.
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Although the mortgage loans in a pool underlying a mortgage pass-through
certificate will have maturities of up to 30 years, the average life of a
mortgage pass-through certificate will be substantially less because the loans
will be subject to normal principal amortization and also may be prepaid prior
to maturity. Prepayment rates vary widely and may be affected by changes in
mortgage interest rates. In periods of falling interest rates, the rate of
prepayment on higher interest mortgage rates tends to increase, thereby
shortening the actual average life of the mortgage pass-through certificate.
Conversely, when interest rates are rising, the rate of prepayment tends to
decrease, thereby lengthening the average life of the mortgage pass-through
certificate. Accordingly, it is not possible to predict accurately the average
life of a particular pool. However, based on current statistics, it is
conventional to quote yields on mortgage pass-through certificates based on the
assumption that they have effective maturities of 12 years. Reinvestment of
prepayments may occur at higher or lower rates than the original yield on the
certificates. Due to the prepayment feature and the need to reinvest
prepayments of principal at current rates, mortgage pass-through certificates
with underlying loans bearing interest rates in excess of the market rate can be
less effective than typical noncallable bonds with similar maturities at
"locking in" yields during periods of declining interest rates, although they
may have comparable risks of declining in value during periods of rising
interest rates.
ZERO COUPON SECURITIES. These securities are notes, bonds and debentures
that: (1) do not pay current interest and are issued at a substantial discount
from par value; (2) have been stripped of their unmatured interest coupons and
receipts; or (3) pay no interest until a stated date one or more years into the
future. These securities also include certificates representing interests in
such stripped coupons and receipts.
Because the Fund accrues taxable income from zero coupon securities without
receiving regular interest payments in cash, the Fund may be required to sell
portfolio securities in order to pay a dividend depending, among other things,
upon the proportion of shareholders who elect to receive dividends in cash
rather than reinvesting dividends in additional shares of the Fund. Investing
in these securities might also force the Fund to sell portfolio securities to
maintain portfolio liquidity.
Because a zero coupon security pays no interest to its holder during its
life or for a substantial period of time, it usually trades at a deep discount
from its face or par value and will be subject to greater fluctuations in market
value in response to changing interest rates than debt obligations of comparable
maturities that make regular distributions of interest.
INTEREST RATE SWAPS. The Fund may enter into interest rate swap
transactions with respect to any security it is entitled to hold. Interest rate
swaps involve the exchange by the Fund with another party of their respective
rights to receive interest, e.g., an exchange of floating rate payments for
fixed rate payments. The Fund expects to enter into these transactions
primarily to preserve a return or spread on a particular investment or portion
of its portfolio and to protect against any increase in the price of securities
it anticipates purchasing at a later date. The Fund intends to use these
transactions as a hedge and not as a speculative investment.
HEDGING STRATEGIES AND RELATED INVESTMENT TECHNIQUES
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The Fund may seek to hedge its portfolio against movements in the equity
markets, interest rates and currency exchange rates through the use of options,
futures transactions, options on futures and forward foreign currency exchange
transactions. The Fund has authority to write (sell) covered call and put
options on their portfolio securities, purchase put and call options on
securities and engage in transactions in stock index options, stock index
futures and financial futures and related options on such futures. The Fund may
also deal in certain forward contracts, including forward foreign exchange
transactions, foreign currency options and futures, and related options on such
futures. The Fund may enter into such options and futures transactions either
on exchanges or in the over-the-counter ("OTC") markets. Although certain risks
are involved in options and futures transactions (as discussed in the Prospectus
and below), Adviser believes that, because the Fund will only engage in these
transactions for hedging purposes, the options and futures portfolio strategies
of the Fund will not subject the Fund to the risks frequently associated with
the speculative use of options and futures transactions. Although the use of
hedging strategies by the Fund is intended to reduce the volatility of the net
asset value of the Fund's shares, the Fund's net asset value will nevertheless
fluctuate. There can be no assurance that the Fund's hedging transactions will
be effective.
HEDGING FOREIGN CURRENCY RISK. The Fund has authority to deal in forward
foreign currency exchange contracts (including those involving the US dollar) as
a hedge against possible variations in the exchange rate between various
currencies. This is accomplished through individually negotiated contractual
agreements to purchase or to sell a specified currency at a specified future
date and price set at the time of the contract. The Fund's dealings in forward
foreign currency exchange contracts may be with respect to a specific purchase
or sale of a security, or with respect to its portfolio positions generally.
The Fund may not hedge its positions with respect to the currency of a
particular country to an extent greater than the aggregate market value (at the
time of making such sale) of the securities held in its portfolio denominated or
quoted in that particular foreign currency. The Fund will not attempt to hedge
all of its portfolio positions and will enter into such transactions only to the
extent, if any, deemed appropriate by Adviser. The Fund will not enter into a
position hedging commitment if, as a result thereof, the Fund would have more
than 10% of the value of its assets committed to such contracts. The Fund will
not enter into a forward contract with a term of more than one year.
In addition to the forward exchange contracts, the Fund may also purchase
or sell listed or OTC foreign currency options and foreign currency futures and
related options as a short or long hedge against possible variations in foreign
currency exchange rates. The cost to the Fund of engaging in foreign currency
transactions varies with such factors as the currencies involved, the length of
the contract period and the market conditions then prevailing. Since
transactions in foreign currency exchange usually are conducted on a principal
basis, no fees or commissions are involved. Transactions involving forward
exchange contracts and futures contracts and options thereon are subject to
certain risks. A detailed discussion of such risks appears under the caption
"Risk Factors in Options, Futures, Forward and Currency Transactions."
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Certain differences exist among these hedging instruments. For example,
foreign currency options provide the holder thereof the rights to buy or sell a
currency at a fixed price on a future date. A futures contract on a foreign
currency is an agreement between two parties to buy and sell a specified amount
of a currency for a set price on a future date. Futures contracts and options
on futures contracts are traded on boards of trade of futures exchanges. The
Fund will not speculate in foreign security or currency options or futures or
related options. The Fund will not hedge a currency substantially in excess of:
(1) the market value of securities denominated in such currency that the Fund
has committed to purchase or anticipates purchasing; or (2) in the case of
securities that have been sold by the Fund but not yet delivered, the proceeds
thereof in their denominated currency. The Fund will not incur potential net
liabilities of more than 25% of its total assets from foreign security or
currency options, futures or related options.
WRITING COVERED CALL OPTIONS. The Fund is authorized to write (sell)
covered call options on the securities in which it may invest and to enter into
closing purchase transactions with respect to such options. Writing a call
option obligates the Fund to sell or deliver the option's underlying security,
in return for the strike price, upon exercise of the option. By writing a call
option, the Fund receives an option premium from the purchaser of the call
option. Writing covered call options is generally a profitable strategy if
prices remain the same or fall. Through receipt of the option premium, the Fund
would seek to mitigate the effects of a price decline. By writing covered call
options, however, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price. In addition, the Fund's ability to sell the underlying
security will be limited while the option is in effect unless the Fund effects a
closing purchase transaction.
WRITING COVERED PUT OPTIONS. The Fund is authorized to write (sell)
covered put options on its portfolio securities and to enter into closing
transactions with respect to such options.
When the Fund writes a put option, it takes the opposite side of the
transaction from the option's purchaser. In return for receipt of the premium,
the Fund assumes the obligation to pay the strike price for the option's
underlying instrument if the other party to the option chooses to exercise it.
The Fund may seek to terminate its position in a put option it writes before
exercise by closing out the option in the secondary market at its current price.
If the secondary market is not liquid for an option the Fund has written,
however, the Fund must continue to be prepared to pay the strike price while the
option is outstanding, regardless of price changes, and must continue to set
aside assets to cover its position.
The Fund may write put options as an alternative to purchasing actual
securities. If security prices rise, the Fund would expect to profit from a
written put option, although its gain would be limited to the amount of the
premium it received. If security prices remain the same over time, it is likely
that the Fund will also profit, because it should be able to close out the
option at a lower price. If security prices fall, the Fund would expect to
suffer a loss. This loss should be less than the loss the Fund would have
experienced from purchasing the underlying instrument directly, however, because
the premium received for writing the option should mitigate the effects of the
decline.
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PURCHASING PUT OPTIONS. The Fund is authorized to purchase put options to
hedge against a decline in the market value of its portfolio securities. By
buying a put option the Fund has the right (but not the obligation) to sell the
underlying security at the exercise price, thus limiting the Fund's risk of loss
through a decline in the market value of the security until the put option
expires. The amount of any appreciation in the value of the underlying security
will be partially offset by the amount of the premium paid by the Fund for the
put option and any related transaction costs. Prior to its expiration, a put
option may be sold in a closing sale transaction and profit or loss from the
sale will depend on whether the amount received is more or less than the premium
paid for the put option plus the related transaction costs. A closing sale
transaction cancels out the Fund's position as the purchaser of an option by
means of an offsetting sale of an identical option prior to the expiration of
the option it has purchased. The Fund will not purchase put options on
securities (including stock index options discussed below) if as a result of
such purchase, the aggregate cost of all outstanding options on securities held
by the Fund would exceed 5% of the market value of the Fund's total assets.
PURCHASING CALL OPTIONS. The Fund is also authorized to purchase call
options. The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price (call options on futures contracts are settled by purchasing the
underlying futures contract). The Fund will purchase call options only in
connection with "closing purchase transactions."
STOCK INDEX OPTIONS AND FINANCIAL FUTURES. The Fund is authorized to
engage in transactions in stock index options and financial futures, and related
options. The Fund may purchase or write put and call options on stock indices
to hedge against the risks of market-wide stock price movements in the
securities in which the Fund invests. Options on indices are similar to options
on securities except that on exercise or assignment, the parties to the contract
pay or receive an amount of cash equal to the difference between the closing
value of the index and the exercise price of the option times a specified
multiple. The Fund may invest in stock index options based on a broad market
index, such as the S&P 500 Index, or on a narrow index representing an industry
or market segment. The Fund's investments in foreign stock index futures
contracts and foreign interest rate futures contracts, and related options, are
limited to only those contracts and related options that have been approved by
the Commodity Futures Trading Commission ("CFTC") for investment by United
States investors. Additionally, with respect to the Fund's investments in
foreign options, unless such options are specifically authorized for investment
by order of the CFTC, the Fund will not make such investments.
The Fund may also purchase and sell stock index futures contracts and other
financial futures contracts ("futures contracts") as a hedge against adverse
changes in the market value of its portfolio securities as described below. A
futures contract is an agreement between two parties which obligates the
purchaser of the futures contract to buy and the seller of a futures contract to
sell a security for a set price on a future date. Unlike most other futures
contracts, a stock index futures contract does not require actual delivery of
securities, but results in cash settlement based upon the difference in value of
the index between the time the contract was entered into and the time of its
settlement. The Fund may effect transactions in stock index
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futures contracts in connection with equity securities in which it invests and
in financial futures contracts in connection with debt securities in which it
invests, if any. Transactions by the Fund in stock index futures and financial
futures are subject to limitations as described below under "Restrictions on the
Use of Futures Transactions."
The Fund may sell futures contracts in anticipation of or during a market
decline to attempt to offset the decrease in market value of the Fund's
securities portfolio that might otherwise result. When the Fund is not fully
invested in the securities markets and anticipates a significant market advance,
the Fund may purchase futures in order to gain rapid market exposure that may
partially or entirely offset increases in the cost of securities that the Fund
intends to purchase. As such purchases are made, an equivalent amount of
futures contracts will be terminated by offsetting sales. It is anticipated
that, in a substantial majority of these transactions, the Fund will purchase
such securities upon termination of the long futures position, whether the long
position results from the purchase of a futures contract or the purchase of a
call option, but under unusual circumstances (e.g., the Fund experiences a
significant amount of redemptions), a long futures position may be terminated
without the corresponding purchase of securities.
The Fund also is authorized to purchase and write call and put options on
futures contracts and stock indices in connection with its hedging activities.
Generally, these strategies would be utilized under the same market and market
sector conditions (i.e., conditions relating to specific types of investments)
during which the Fund enters into futures transactions. The Fund may purchase
put options or write call options on futures contracts and stock indices rather
than selling the underlying futures contract in anticipation of a decrease in
the market value of securities. Similarly, the Fund can purchase call options,
or write put options on futures contracts and stock indices, as a substitute for
the purchase of such futures to hedge against the increased cost resulting from
an increase in the market value of securities which the Fund intends to
purchase.
The Fund is also authorized to engage in options and futures transactions
on US and foreign exchanges and in options in the OTC markets ("OTC options").
In general, exchange traded contracts are third-party contracts (i.e.,
performance of the parties' obligations is guaranteed by an exchange or clearing
corporation) with standardized strike prices and expiration dates. OTC options
transactions are two-party contracts with price and terms negotiated by the
buyer and seller. See "Restrictions on OTC Options" below for information as to
restrictions on the use of OTC options.
The Fund is authorized to purchase or sell listed or OTC foreign security
or currency options, foreign security or currency futures and related options as
a short or long hedge against possible variations in foreign exchange rates and
market movements. Such transactions could be effected with respect to hedges on
non-US dollar denominated securities owned by the Fund, sold by the Fund but not
yet delivered, or committed or anticipated to be purchased by the Fund. As an
illustration, the Fund may use such techniques to hedge the stated value in US
dollars of an investment in a yen-denominated security. In such circumstances,
for example, the Fund can purchase a foreign currency put option enabling it to
sell a specified amount of yen for US dollars
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at a specified price by a future date. To the extent the hedge is successful, a
loss in the value of the yen relative to the US dollar will tend to be offset by
an increase in the value of the put option.
RESTRICTIONS ON THE USE OF FUTURES TRANSACTIONS. The purchase or sale of a
futures contract differs from the purchase or sale of a security in that no
price or premium is paid or received. Instead, an amount of cash or securities
acceptable to the broker and the relevant contract market, which varies, but is
generally about 5% of the contract amount, must be deposited with the broker.
This amount is known as "initial margin" and represents a "good faith" deposit
assuring the performance of both the purchaser and seller under the futures
contract. Subsequent payments to and from the broker, called "variation
margin," are required to be made on a daily basis as the price of the futures
contract fluctuates making the long and short positions in the futures contracts
more or less valuable, a process known as "marking to market." At any time
prior to the settlement date of the future contract, the position may be closed
out by taking an opposite position which will operate to terminate the position
in the futures contract. A final determination of variation margin is then
made, additional cash is required to be paid to or released by the broker and
the purchaser realizes a loss or gain. In addition, a nominal commission is
paid on each completed sale transaction.
Regulations of the CFTC applicable to the Fund requires that all of the
Fund's futures and options on futures transactions constitute bona fide hedging
transactions and that the Fund not enter into such transactions if, immediately
thereafter, the sum of the amount of initial margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets.
RESTRICTIONS ON OTC OPTIONS. The Fund will engage in OTC options,
including OTC stock index options, OTC foreign security and currency options and
options on foreign security and currency futures, only with member banks of the
Federal Reserve System and primary dealers in US Government securities or with
affiliates of such banks or dealers which have capital of at least $50 million
or whose obligations are guaranteed by an entity having capital of at least
$50 million. The Fund will acquire only those OTC options for which Adviser
believes the Fund can receive on each business day at least two independent bids
or offers (one of which will be from an entity other than a party to the
option).
The Staff of the SEC has taken the position that purchased OTC options and
the assets used as cover for written OTC options are illiquid securities.
Therefore, the Fund has adopted an operating policy pursuant to which it will
not purchase or sell OTC options (including OTC options on futures contracts)
if, as a result of such transaction, the sum of: (1) the market value of
outstanding OTC options held by the Fund; (2) the market value of the underlying
securities covered by outstanding OTC call options sold by the Fund; (3) margin
deposits on the Fund's existing OTC options on futures contracts; and (4) the
market value of all other assets of the Fund that are illiquid or are not
otherwise readily marketable, would exceed 10% of the net assets of the Fund,
taken at market value. However, if an OTC option is sold by the Fund to a
primary US Government securities dealer recognized by the Federal Reserve Bank
of New York and the Fund has the unconditional contractual right to repurchase
such OTC option from the dealer at a predetermined price, then the Fund will
treat as illiquid such amount of the underlying securities
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as is equal to the repurchase price less the amount by which the option is "in-
the-money" (current market value of the underlying security minus the option's
strike price). The repurchase price with primary dealers is typically a formula
price which is generally based on a multiple of the premium received for the
option plus the amount by which the option is "in-the-money."
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS. The Fund will not use
leverage in its options and futures strategies. Such investments will be made
for hedging purposes only. The Fund will hold securities or other options or
futures positions whose values are expected to offset its obligations under the
hedge strategies. The Fund will not enter into an option or futures position
that exposes the Fund to an obligation to another party unless it owns either:
(1) an offsetting position in securities or other options or futures contracts;
or (2) cash, receivables and short-term debt securities with a value sufficient
to cover its potential obligations. The Fund will comply with guidelines
established by the SEC with respect to coverage of options and futures
strategies by mutual funds, and if the guidelines so require, will set aside
cash and high grade liquid debt securities in a segregated account with its
custodian bank in the amount prescribed. The Fund's custodian shall maintain
the value of such segregated account equal to the prescribed amount by adding or
removing additional cash or liquid securities to account for fluctuations in the
value of securities held in such account. Securities held in a segregated
account cannot be sold while the futures or option strategy is outstanding,
unless they are replaced with similar securities. As a result, there is a
possibility that segregation of a large percentage of the Fund's assets could
impede portfolio management or the Fund's ability to meeting redemption requests
or other current obligations.
RISK FACTORS IN OPTIONS, FUTURES, FORWARD AND CURRENCY TRANSACTIONS.
Utilization of options and futures transactions to hedge the Fund's portfolio
involves the risk of imperfect correlation in movements in the price of options
and futures and movements in the price of securities or currencies which are the
subject of the hedge. If the price of the options or futures moves more or less
than the price of hedged securities or currencies, the Fund will experience a
gain or loss which will not be completely offset by movements in the price of
the subject of the hedge. The successful use of options and futures also
depends on Adviser's ability to correctly predict price movements in the market
involved in a particular options or futures transaction. To compensate for
imperfect correlations, the Fund may purchase or sell stock index options or
futures contracts in a greater dollar amount than the hedged securities if the
volatility of the hedged securities is historically greater than the volatility
of the stock index options or futures contracts. Conversely, the Fund may
purchase or sell fewer stock index options or futures contracts, if the
historical price volatility of the hedged securities is less than that of the
stock index options or futures contracts. The risk of imperfect correlation
generally tends to diminish as the maturity date of the stock index option or
futures contract approaches. Options are also subject to the risks of an
illiquid secondary market, particularly in strategies involving writing options,
which the Fund cannot terminate by exercise. In general, options whose strike
prices are close to their underlying instruments' current value will have the
highest trading volume, while options whose strike prices are further away may
be less liquid.
The Fund intends to enter into options and futures transactions, on an
exchange or in the OTC market, only if there appears to be a liquid secondary
market for such options or futures or,
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in the case of OTC transactions, the Adviser believes the Fund can receive on
each business day at least two independent bids or offers. However, there can
be no assurance that a liquid secondary market will exist at any specific time.
Thus, it may not be possible to close an options or futures position. The
inability to close options and futures positions also could have an adverse
impact on the Fund's ability to effectively hedge its portfolio. There is also
the risk of loss by the Fund of margin deposits or collateral in the event of
bankruptcy of a broker with whom the Fund has an open position in an option, a
futures contract or related option.
The exchanges on which options on portfolio securities and currency options
are traded have generally established limitations governing the maximum number
of call or put options on the same underlying security or currency (whether or
not covered) which may be written by a single investor, whether acting alone or
in concert with others (regardless of whether such options are written on the
same or different exchanges or are held or written in one or more accounts or
through one or more brokers). "Trading limits" are imposed on the maximum
number of contracts which any person may trade on a particular trading day.
RATINGS OF DEBT INSTRUMENTS
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") -- LONG TERM DEBT RATINGS.
Aaa -- Bonds which 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 edged." 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 which 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 which make the long-term risk appear somewhat larger than the Aaa
securities.
A -- Bonds which 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 which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium-grade obligations
(i.e., 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.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the obligation
ranks in the higher end of its generic
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rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates a ranking in the lower end of that generic rating category.
STANDARD & POOR'S CORPORATION ("S&P"). The ratings are based, in varying
degrees, on the following considerations: (1) The likelihood of default --
capacity and willingness of the obligator as to the timely payment of interest
and repayment of principal in accordance with the terms of the obligation;
(2) The nature of and provisions of the obligation; and (3) The protection
afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization, or other arrangement under the laws of bankruptcy
and other laws affecting creditors' rights.
AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
RATINGS OF COMMERCIAL PAPER
MOODY'S. Moody's short-term debt ratings are opinions of the ability of
issuers to repay punctually senior debt obligations. These obligations have an
original maturity not exceeding one year, unless explicitly noted. Moody's
employs the following three designations, all judged to be investment grade, to
indicate the relative repayment ability of rated issuers:
- Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
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- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
- Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited above
but to a lesser degree. Earnings trends and coverage ratios, while
sound, may be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternative liquidity is maintained.
- Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
- Issuers rated Not Prime do not fall within any of the Prime rating
categories.
S&P. An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered shot-term in the relevant
market. Ratings are graded into several categories, ranging from A-1 for the
highest quality obligations to D for the lowest. These categories are as
follows:
A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
FITCH'S INVESTORS SERVICE, INC. ("FITCH"). Commercial paper rated by Fitch
reflects Fitch's current appraisal of the degree of assurance of timely payment
of such debt. An appraisal results in the rating of an issuer's paper as F-1,
F-2, F-3, or F-4.
F-1 -- This designation indicates that the commercial paper is regarded as
having the strongest degree of assurance for timely payment.
F-2 -- Commercial paper issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than those issues rated F-1.
DUFF AND PHELPS, INC. Duff & Phelps' short-term ratings are consistent
with the rating criteria utilized by money market participants. The ratings
apply to all obligations with maturities of under one year, including commercial
paper, the uninsured portion of certificates of deposit, unsecured bank loans,
master notes, bankers acceptances, irrevocable letters of credit, and current
maturities of long-term debt. Asset-backed commercial paper is also rated
according to this scale.
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Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of funds including trade
credit, bank lines, and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.
The distinguishing feature of Duff & Phelps' short-term ratings is the
refinement of the traditional '1' category. The majority of short-term debt
issuers carry the highest rating, yet quality differences exist within that
tier. As a consequence, Duff & Phelps has incorporated gradations of '1+' (one
plus) and '1-' (one minus) to assist investors in recognizing those differences.
Duff 1+--Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free U.S. Treasury short-
term obligations.
Duff 1--Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk factors
are minor.
Duff 1- -- High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk factors are very
small.
GOOD GRADE. Duff 2--Good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs
may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
SATISFACTORY GRADE. Duff 3--Satisfactory liquidity and other
protection factors qualify issue as to investment grade. Risk factors are
larger and subject to more variation. Nevertheless, timely payment is
expected.
NON-INVESTMENT GRADE. Duff 4--Speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
DEFAULT. Duff 5--Issuer failed to meet scheduled principal and/or
interest payments.
IBCA, INC. In addition to conducting a careful review of an institution's
reports and published figures, IBCA's analysts regularly visit the companies for
discussions with senior management. These meetings are fundamental to the
preparation of individual reports and ratings. To keep abreast of any changes
that may affect assessments, analysts maintain contact throughout the year with
the management of the companies they cover.
IBCA's analysts speak the languages of the countries they cover, which is
essential to maximize the value of their meetings with management and to
properly analyze a company's written materials. They also have a thorough
knowledge of the laws and accounting practices that govern the operations and
reporting of companies within the various countries.
-31-
<PAGE>
Often, in order to ensure a full understanding of their position, companies
entrust IBCA with confidential data. While these data cannot be disclosed in
reports, they are taken into account when assigning our ratings. Before
dispatch to subscribers, a draft of the report is submitted to each company to
permit correction of any factual errors and to enable clarification of issues
raised.
IBCA's Rating Committees meet at regular intervals to review all ratings
and to ensure that individual ratings are assigned consistently for institutions
in all the countries covered. Following the Committee meetings, ratings are
issued directly to subscribers. At the same time, the company is informed of
the ratings as a matter of courtesy, but not for discussion.
A1+--Obligations supported by the highest capacity for timely repayment.
A1--Obligations supported by a very strong capacity for timely repayment.
A2--Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in business,
economic or financial conditions.
B1--Obligations supported by an adequate capacity for timely repayment.
Such capacity is more susceptible to adverse changes in business, economic, or
financial conditions than for obligations in higher categories.
B2--Obligations for which the capacity for timely repayment is susceptible
to adverse changes in business, economic or financial conditions.
C1--Obligations for which there is an inadequate capacity to ensure timely
repayment.
D1--Obligations which have a high risk of default or which are currently in
default.
TAXES
The Fund intends to qualify for treatment as a regulated investment company
("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended
("the Code"). As a RIC, the Fund will not be liable for federal income taxes on
taxable net investment income and capital gain net income (capital gains in
excess of capital losses) that it distributes to its shareholders, provided that
the Fund distributes annually to its shareholders at least 90% of its net
investment income and net short-term capital gain for the taxable year
("Distribution Requirement"). For the Fund to qualify as a RIC it must abide by
all of the following requirements: (1) at least 90% of the Fund's gross income
each taxable year must be derived from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock
or securities or foreign currencies, or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies ("Income Requirement");
(2) less than 30% of the Fund's gross income each taxable year must be derived
from the sale or other disposition of securities and certain options, futures
contracts, forward
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<PAGE>
contracts and foreign currencies held for less than three months ("Short-Short
Limitation"); (3) at the close of each quarter of the Fund's taxable year, at
least 50% of the value of its total assets must be represented by cash and cash
items, US Government securities, securities of other RICs, and other securities,
with such other securities limited, in respect of any one issuer, to an amount
that does not exceed 5% of the total assets of the Fund and that does not
represent more than 10% of the outstanding voting securities of such issuer; and
(4) at the close of each quarter of the Fund's taxable year, not more than 25%
of the value of its assets may be invested in securities (other than US
Government securities or the securities of other RICs) of any one issuer.
The Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year an amount at least equal to
the sum of: (1) 98% of its ordinary income for that year; (2) 98% of its
capital gain net income for the one-year period ending on October 31 of that
year; and (3) certain undistributed amounts from the preceding calendar year.
For this and other purposes, dividends declared in October, November or December
of any calendar year and made payable to shareholders of record in such month
will be deemed to have been received on December 31 of such year if the
dividends are paid by the Fund subsequent to December 31 but prior to February 1
of the following year.
If a shareholder receives a distribution taxable as long-term capital gain
with respect to shares of a Fund and redeems or exchanges the shares without
having held the shares for more than six months, then any loss on the redemption
or exchange will be treated as long-term capital loss to the extent of the
capital gain distribution.
From November 1, 1994 to August 31, 1995, the Fund incurred $4,385,355 of
net realized capital losses. As permitted by tax regulation, the Fund intends to
elect to defer these losses and treat them as arising in the fiscal year ending
August 31, 1996.
ISSUES RELATED TO HEDGING AND OPTION INVESTMENTS. The Fund's ability to
make certain investments may be limited by provisions of the Code that require
inclusion of certain unrealized gains or losses in the Fund's income for
purposes of the Income Requirement, the Short-Short Limitation and the
Distribution Requirement, and by provisions of the Code that characterize
certain income or loss as ordinary income or loss rather than capital gain or
loss. Such recognition, characterization and timing rules will affect
investments in certain futures contracts, options, foreign currency contracts
and debt securities denominated in foreign currencies.
FOREIGN INCOME TAXES. Investment income received by the Fund from sources
within foreign countries may be subject to foreign income taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries which would entitle the Funds to a reduced rate of such taxes or
exemption from taxes on such income. It is impossible to determine the
effective rate of foreign tax for the Fund in advance since the amount of the
assets to be invested within various countries is not known.
If the Fund invests in an entity that is classified as a passive foreign
investment company ("PFIC") for federal income tax purposes, the application of
certain provisions of the Code applying to PFICs could result in the imposition
of certain federal income taxes on the Fund. It is
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<PAGE>
anticipated that any taxes on the Fund with respect to investments in PFICs
would be insignificant. Under US Treasury regulations issued in 1992 for PFICs,
the Fund can elect to mark-to-market its PFIC holdings in lieu of paying taxes
on gains or distributions therefrom.
Foreign shareholders should consult with their tax advisers as to if and
how the federal income tax and its withholding requirements applies to them.
STATE AND LOCAL TAXES. Depending upon the extent of the Fund's activities
in states and localities in which its offices are maintained, its agents or
independent contractors are located or it is otherwise deemed to be conducting
business, the Fund may be subject to the tax laws of such states or localities.
The foregoing discussion is only a summary of certain federal income tax
issues generally affecting the Fund and its shareholders. Circumstances among
investors may vary and each investor is encouraged to discuss investment in the
Fund with the investor's tax adviser.
FINANCIAL STATEMENTS
The 1995 fiscal year-end financial statements of Yield Plus Fund, including
notes to the financial statements and financial highlights and the Report of
Independent Accountants, are included in the Fund's Annual Report to
shareholders. A copy of this Annual Report accompanies this Statement of
Additional Information and is incorporated herein by reference.
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<PAGE>
Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
THE SEVEN SEAS SERIES FUND
Two International Place, 35th Floor
Boston, Massachusetts 02110
(617) 654-6089
STATEMENT OF ADDITIONAL INFORMATION
EMERGING MARKETS FUND
DECEMBER 29, 1995
The Seven Seas Series Fund ("Investment Company") is a registered open-end
investment company organized as a Massachusetts business trust offering shares
of beneficial interest in separate investment portfolios. In addition, each
series of the Investment Company is diversified as defined in the Investment
Company Act of 1940, as amended ("1940 Act").
This Statement of Additional Information supplements or describes in
greater detail the Investment Company and The Seven Seas Series Emerging Markets
Fund (the "Emerging Markets Fund" or the "Fund") as contained in the Fund's
Prospectus dated December 29, 1995. This Statement is not a Prospectus and
should be read in conjunction with the Fund's Prospectus, which may be obtained
by telephoning or writing Investment Company at the number or address shown
above.
<PAGE>
TABLE OF CONTENTS
PAGE
STRUCTURE AND GOVERNANCE . . . . . . . . . . . . . . . . . . . . . . . . 3
Organization and Business History . . . . . . . . . . . . . . . . . 3
Shareholder Meetings. . . . . . . . . . . . . . . . . . . . . . . . 4
Controlling Shareholders. . . . . . . . . . . . . . . . . . . . . . 4
Principal Shareholders. . . . . . . . . . . . . . . . . . . . . . . 5
Trustees and Officers . . . . . . . . . . . . . . . . . . . . . . . 5
OPERATION OF INVESTMENT COMPANY. . . . . . . . . . . . . . . . . . . . . 6
Service Providers . . . . . . . . . . . . . . . . . . . . . . . . . 6
Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Administrator . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Custodian and Transfer Agent. . . . . . . . . . . . . . . . . . . . 8
Distribution Plan . . . . . . . . . . . . . . . . . . . . . . . . . 8
Federal Law Affecting State Street. . . . . . . . . . . . . . . . . 9
Valuation of Fund Shares. . . . . . . . . . . . . . . . . . . . . . 9
Brokerage Practices . . . . . . . . . . . . . . . . . . . . . . . . 10
Portfolio Turnover Policy . . . . . . . . . . . . . . . . . . . . . 11
Total Return Quotations . . . . . . . . . . . . . . . . . . . . . . 12
INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . 12
Investment Policies . . . . . . . . . . . . . . . . . . . . . . . . 15
RISK CONSIDERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . 27
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 30
APPENDIX: DESCRIPTION OF SECURITIES RATINGS . . . . . . . . . . . . . . 31
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<PAGE>
STRUCTURE AND GOVERNANCE
ORGANIZATION AND BUSINESS HISTORY. Investment Company was organized as a
Massachusetts business trust on October 3, 1987, and operates under a First
Amended and Restated Master Trust Agreement, dated October 13, 1993, as amended.
Investment Company is authorized to issue shares of beneficial interest, par
value $.001 per share, which may be divided into one or more series, each of
which evidences pro rata ownership interest in a different investment portfolio,
or "Fund." The Emerging Markets Fund is one such investment portfolio. The
Trustees may create additional Funds at any time without shareholder approval.
Further, the Investment Company is authorized to divide shares of any
series into two or more classes of shares. The shares of each Fund may have
such rights and preferences as the Trustees may establish from time to time,
including the right of redemption (including the price, manner and terms of
redemption), special and relative rights as to dividends and distributions,
liquidation rights, sinking or purchase fund provisions and conditions under
which any Fund may have separate voting rights or no voting rights. Each class
of shares of a Fund is entitled to the same rights and privileges as all other
classes of that Fund, except that each class bears the expenses associated with
the distribution and shareholder servicing arrangements of that class, as well
as other expenses attributable to the class and unrelated to the management of
the Fund's portfolio securities.
As of the date of this Statement of Additional Information, Investment
Company is comprised of the following investment portfolios, each of which
commenced operations on the date set forth opposite the portfolio's name:
--------------------------------------------------------------------------
The Seven Seas Series Money Market Fund May 2, 1988
--------------------------------------------------------------------------
The Seven Seas Series US Government Money Market Fund March 1, 1991
--------------------------------------------------------------------------
The Seven Seas Series US Treasury Money Market Fund December 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series US Treasury Obligations Fund *
--------------------------------------------------------------------------
The Seven Seas Series Prime Money Market Fund February 22, 1994
--------------------------------------------------------------------------
The Seven Seas Series Yield Plus Fund November 9, 1992
--------------------------------------------------------------------------
The Seven Seas Series Tax Free Money Market Fund December 1, 1994
--------------------------------------------------------------------------
The Seven Seas Series Intermediate Fund September 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series Bond Market Fund *
--------------------------------------------------------------------------
The Seven Seas Series Growth and Income Fund September 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series S&P 500 Index Fund December 30, 1992
--------------------------------------------------------------------------
The Seven Seas Series Small Cap Fund July 1, 1992
--------------------------------------------------------------------------
The Seven Seas Series Matrix Equity Fund May 4, 1992
--------------------------------------------------------------------------
The Seven Seas Series Active International Fund March 7, 1995
--------------------------------------------------------------------------
The Seven Seas Series International Pacific Index Fund *
--------------------------------------------------------------------------
The Seven Seas Series Emerging Markets Fund March 1, 1994
--------------------------------------------------------------------------
The Seven Seas Series Real Estate Equity Fund *
--------------------------------------------------------------------------
__________
*As of the date of this Statement of Additional Information, these portfolios
have not commenced operations.
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<PAGE>
Prospectuses for these Investment Portfolios may be obtained by calling
Investment Company's distributor, Russell Fund Distributors, Inc., at (617) 654-
6089.
Shares of the Money Market, US Government Money Market and Tax Free Money
Market Funds are divided into Classes A, B and C.
Any amendment to the Master Trust Agreement that would materially and
adversely affect shareholders of Investment Company as a whole, or shareholders
of a particular Fund, must be approved by the holders of a majority of the
shares of Investment Company or the Fund, respectively. All other amendments
may be effected by Investment Company's Board of Trustees.
Under certain unlikely circumstances, and as is the case with any
Massachusetts business trust, a shareholder of a Fund may be held personally
liable for the obligations of a Fund. The Master Trust Agreement provides that
shareholders shall not be subject to any personal liability for the acts or
obligations of a Fund and that every written agreement, obligation, or other
undertaking of the Fund shall contain a provision to the effect that the
shareholders are not personally liable thereunder. The Master Trust Agreement
also provides that the Fund shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Fund and satisfy
any judgment thereon. Thus, the risk to shareholders of incurring financial
loss beyond their investments is limited to circumstances in which the Fund
itself would be unable to meet its obligations.
SHAREHOLDER MEETINGS. Investment Company will not have an annual meeting
of shareholders. Special meetings may be convened: (1) by the Board of
Trustees; (2) upon written request to the Board by the holders of at least 10%
of the outstanding shares; or (3) upon the Board's failure to honor the
shareholders' request described above, by holders of at least 10% of the
outstanding shares giving notice of the special meeting to the shareholders.
CONTROLLING SHAREHOLDERS. The Trustees have the authority and
responsibility to manage the business of Investment Company. Trustees hold
office until they resign or are removed by, in substance, a vote of two-thirds
of Investment Company shares outstanding. However, in connection with State
Street Bank and Trust Company's ("State Street") securities lending program and
investment accounts over which State Street has discretionary authority, State
Street holds certain collateral on behalf of its securities lending clients to
secure the return of loaned securities. Such collateral may be invested in
Investment Company shares from time to time. Shares representing such
investments are held of record by State Street, who retains voting control of
such shares. As of November 30, 1995, State Street held beneficially and of
record 36% of Investment Company's shares in connection with various lending
portfolios and, consequently, is deemed to be a controlling person of Investment
Company for purposes of the 1940 Act. State Street also acts as Investment
Company's investment adviser, transfer agent and custodian.
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<PAGE>
PRINCIPAL SHAREHOLDERS. As of November 30, 1995, the following
shareholders owned of record 5% or more of the issued and outstanding shares of
the Fund:
- Charles Schwab & Company, Inc., 101 Montgomery Street, San Francisco,
CA 94104--70%;
- Stichting Dow Pension Funds of the Netherlands, State Street Bank and
Trust Company, Two International Place 32nd Floor, Boston, MA 02110--
6%; and
- Walgreen Profit Sharing Retirement Trust, State Street Bank and Trust
Company, Two International Place, Boston, MA 02110--5%.
The Trustees and officers of Investment Company, as a group, own less than
1% of Investment Company's voting securities.
TRUSTEES AND OFFICERS. The Board of Trustees is responsible for overseeing
generally the operation of the Fund. The officers, all of whom are employed by,
and are officers of, Administrator or its affiliates, are responsible for the
day-to-day management and administration of the Fund's operations.
Trustees who are not officers or employees of State Street or its
affiliates are paid an annual fee and are reimbursed for travel and other
expenses they incur in attending Board meetings. Investment Company's officers
and employees are paid by Administrator or its affiliates.
The following lists Investment Company's Trustees and officers, their
positions with Investment Company, their present and principal occupations
during the past five years and the mailing addresses of Trustees who are not
affiliated with Investment Company. The mailing address for all Trustees and
officers affiliated with Investment Company is The Seven Seas Series Fund, 909 A
Street, Tacoma, WA 98402.
An asterisk (*) indicates that a Trustee is an "interested person" of the
Investment Company, as defined in the 1940 Act.
*LYNN L. ANDERSON, Trustee, Chairman of the Board, President and Fund
Treasurer. Chairman of the Board and Chief Executive Officer, Frank Russell
Investment Management Company and Russell Fund Distributors, Inc.; Director,
President and Chief Executive Officer, Frank Russell Investment Company and
Frank Russell Trust Company; Director and President, Russell Insurance Funds;
Director and Chairman, Frank Russell Company (Delaware); Director, Frank Russell
Investments (Ireland) Limited and Frank Russell Investment Company plc.
WILLIAM L. MARSHALL, Trustee. 33 West Court Street, Doylestown, PA 18901.
Chief Executive Officer and President, Wm. L. Marshall Associates, Inc. (a
registered
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<PAGE>
investment adviser and provider of financial and related consulting services);
Certified Financial Planner; Member, Registry of Financial Planning
Practitioners; and Advisory Committee, International Association for Financial
Planning Broker-Dealer Program. Member, Institute of Certified Financial
Planners. Registered for Securities with FSC Securities Corp., Marietta,
Georgia.
*STEVEN J. MASTROVICH, Trustee. 1 Financial Center, Boston, MA 02111.
Partner, Brown, Rudnick, Freed & Gesmer (law firm). 1990 to 1994, Partner,
Warner & Stackpole (law firm).
PATRICK J. RILEY, Trustee. 21 Custom House Street, Boston, MA 02110.
Partner, Riley, Burke & Donahue (law firm).
RICHARD D. SHIRK, Trustee. 3350 Peachtree Road, N.E., Atlanta, GA 30326.
President and Chief Executive Officer, Blue Cross/Blue Shield of Georgia. 1990
to 1992, President, Champions Group Resources--Business Management and Employee
Benefits Consulting; 1990, Senior Vice President, Employee Benefits Division,
Cigna Corporation (providing and insuring group life, health and disability
employee benefit products and services); from 1986 to 1990, Senior Vice
President, EQUICOR-Equitable HCA Corporation (providing and insuring group life,
health and disability employee benefit products and services).
*BRUCE D. TABER, Trustee. 26 Round Top Road, Boxford, MA 01921.
President, A.B. Reed, Inc. - Engineers, Architects, Planners. Prior to that,
Vice President, Instrumentation and Controls, A.B. Reed., Inc.
HENRY W. TODD, Trustee. 111 Commerce Drive, Montgomeryville, PA 18936.
President and Director, Zink & Triest Co., Inc. (dealer in vanilla flavor
materials); Director, A.M. Todd Co., and Flavorite Laboratories.
J. DAVID GRISWOLD, Vice President and Secretary. Assistant Secretary,
Associate General Counsel, Chief Compliance Officer, Frank Russell Investment
Management Company, Russell Fund Distributors, Inc. and Frank Russell Capital
Inc.; Associate General Counsel and Assistant Secretary, Frank Russell Company;
Associate General Counsel, Assistant Secretary and Compliance Officer, Russell
Fiduciary Services Company; Director, Secretary, Associate General Counsel and
Chief Compliance Officer, Frank Russell Securities, Inc.; Secretary, Frank
Russell Canada Limited/Limitee.
KENNETH W. LAMB, Assistant Secretary, Assistant Treasurer and Principal
Accounting Officer. Manager - Funds Administration, Frank Russell Investment
Management Company since 1994. Prior to that, Senior Audit Manager with Knight,
Vale & Gregory since 1982.
-6-
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
TRUSTEE COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------
Aggregate Pension or Estimated Annual Total Compensation
Compensation Retirement Benefits Upon From Investment
from Benefits Accrued Retirement Company Paid to
Trustee Investment as part of Trustees
Company Investment
Company
Expenses
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lynn L. Anderson $0 $0 $0 $0
- -------------------------------------------------------------------------------------------------------
William L. Marshall $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Steven J. Mastrovich $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Patrick J. Riley $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Richard D. Shirk $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Bruce D. Taber $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Henry W. Todd $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
</TABLE>
OPERATION OF INVESTMENT COMPANY
SERVICE PROVIDERS. Most of the Fund's necessary day-to-day operations are
performed by separate business organizations under contract to Investment
Company. The principal service providers are:
Investment Adviser, Custodian
and Transfer Agent: State Street Bank and Trust Company
Administrator: Frank Russell Investment Management Company
Distributor: Russell Fund Distributors, Inc.
Independent Accountants: Coopers & Lybrand, L.L.P.
ADVISER. State Street Bank and Trust Company ("State Street") serves as
the Fund's investment adviser ("Adviser") pursuant to an Advisory Agreement
dated April 12, 1988 ("Advisory Agreement"). State Street Bank and Trust
Company is a wholly owned subsidiary of State Street Boston Corporation, a
publicly held bank holding company. State Street's address is 225 Franklin
Street, Boston, MA 02110.
Under the Advisory Agreement, Adviser directs the Fund's investments in
accordance with its investment objective, policies and limitations. For these
services, the Fund pays a fee to Adviser at the rate stated in the Prospectus.
The Emerging Markets Fund accrued expenses to Adviser of $321,920 for fiscal
1995 and $63,417 from the date of inception to August 31, 1994. Adviser
voluntarily agreed to reimburse the Fund for all expenses in excess of 1.50% of
average daily net assets on an annual basis, which
-7-
<PAGE>
amounted to $169,331 for fiscal 1995 and $48,835 for the period ended August 31,
1994.
The Advisory Agreement will continue from year to year provided that a majority
of the Trustees who are not interested persons of any Investment Portfolio and
either a majority of all Trustees or a majority of the shareholders of each
Investment Portfolio approve its continuance. The Agreement may be terminated
by Adviser or a Fund without penalty upon 60 days' notice and will terminate
automatically upon its assignment.
ADMINISTRATOR. Frank Russell Investment Management Company
("Administrator") serves as the Fund's administrator, pursuant to an
Administration Agreement dated April 12, 1988 ("Administration Agreement"). A
description of the services provided under the Administration Agreement and the
basis for computing fees for such services is provided in the Fund's Prospectus.
The Emerging Markets Fund accrued expenses to Administrator of $25,877 for
fiscal 1995 and $5,168 from the date of inception to August 31, 1994.
Administrator waived administration fees of $1,041 from the date of inception to
August 31, 1994.
The Administration Agreement will continue from year to year provided that
a majority of the Trustees and a majority of the Trustees who are not interested
persons of any Investment Portfolio and who have no direct or indirect financial
interest in the operation of the Distribution Plan described below or the
Administration Agreement approve its continuance. The Agreement may be
terminated by Administrator or a Fund without penalty upon 60 days' notice and
will terminate automatically upon its assignment.
Administrator is a wholly owned subsidiary of Frank Russell Company. Frank
Russell Company was founded in 1936 and has provided comprehensive asset
management consulting services since 1969 for institutional pools of investment
assets, principally those of large corporate employee benefit plans. Frank
Russell Company and its affiliates have offices in Tacoma, Seattle, New York
City, Toronto, London, Tokyo, Sydney, Zurich, Paris and Auckland, and have
approximately 1,000 officers and employees. Administrator's and Frank Russell
Company's mailing address is 909 A Street, Tacoma, WA 98402.
DISTRIBUTOR. Russell Fund Distributors, Inc. ("Distributor") serves as the
distributor of Fund shares pursuant to a Distribution Agreement dated April 12,
1988 ("Distribution Agreement"). Distributor is a wholly owned subsidiary of
Administrator. Distributor's mailing address is Two International Place, 35th
Floor, Boston, MA 02110.
CUSTODIAN AND TRANSFER AGENT. State Street serves as the custodian
("Custodian") and transfer agent ("Transfer Agent") for Investment Company.
State Street also provides the basic portfolio recordkeeping required by
Investment Company for regulatory and financial reporting purposes. For these
services, State Street is paid an annual fee in accordance with the following:
custody services--a fee payable monthly on a pro rata basis, based on the
following percentages of average daily net assets of the
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<PAGE>
Fund: $0 up to $100 million--0.05%, $100 million to $200 million -- 0.3%, over
$200 million -- 0.02%; securities transaction charges from $25.00 to $150.00 per
transaction; Eurodollar transaction fees ranging from $110.00 to $125.00 per
transaction; monthly pricing fees of $375.00 per Investment Portfolio and from
$6.00 to $11.00 per security, depending on the type of instrument and the
pricing service used; transfer agent services of $2.00 per shareholder
transaction and a multiple class fee of $18,000 per year for each additional
class of shares; and yield calculation fees of $350.00 per non-money market
portfolio per year. State Street is reimbursed by the Fund for supplying
certain out-of-pocket expenses including postage, transfer fees, stamp duties,
taxes, wire fees, telexes, and freight.
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand L.L.P. serves as the Investment
Company's independent accountants. Coopers & Lybrand L.L.P. is responsible
for performing annual audits of the financial statements and financial
highlights in accordance with generally accepted auditing standards, a review
of federal tax returns, and, pursuant to Rule 17f-2 of the 1940 Act, three
security counts. The mailing address of Coopers & Lybrand L.L.P. is One Post
Office Square, Boston MA 02109.
DISTRIBUTION PLAN. Under the 1940 Act, the Securities and Exchange
Commission has adopted Rule 12b-1, which regulates the circumstances under which
the Fund may, directly or indirectly, bear distribution and shareholder
servicing expenses. The Rule provides that the Fund may pay for such expenses
only pursuant to a plan adopted in accordance with the Rule. Accordingly, the
Fund has adopted an active distribution plan (the "Plan"), which is described in
the Fund's Prospectus.
The Plan provides that the Fund may spend annually, directly or indirectly,
up to 0.25% of the value of its average net assets for distribution and
shareholder servicing services. The Plan does not provide for the Fund to be
charged for interest, carrying or any other financing charges on any
distribution expenses carried forward to subsequent years. A quarterly report
of the amounts expended under the Plan, and the purposes for which such
expenditures were incurred, must be made to the Trustees for their review. The
Plan may not be amended without shareholder approval to increase materially the
distribution or shareholder servicing costs that the Fund may pay. The Plan and
material amendments to it must be approved annually by all of the Trustees and
by the Trustees who are neither "interested persons" (as defined in the 1940
Act) of the Fund nor have any direct or indirect financial interest in the
operation of the Plan or any related agreements.
The Fund accrued expenses to Russell Fund Distributors, Inc., as
Distributor, for the fiscal year ended August 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Emerging Markets Fund $95,484 $1,215
</TABLE>
-9-
<PAGE>
For fiscal 1995, this amount is reflective of the following individual
payments:
<TABLE>
<S> <C>
Advertising $58,165
Printing of Prospectuses 4,585
Compensation to Sales Personnel 1,605
Other* 31,129
-------
$95,484
-------
-------
</TABLE>
* Other expenses may include such items as compensation for travel, conferences
and seminars for staff, subscriptions, office charges and professional fees.
Under the Plan, the Fund may also enter into agreements ("Service
Agreements") with financial institutions, which may include Adviser ("Service
Organizations"), to provide shareholder servicing with respect to Fund shares
held by or for the customers of the Service Organizations. Such arrangements
are more fully described in the Fund's prospectus under "Distribution Services
and Shareholder Servicing."
The Fund accrued expenses in the following amount to Adviser, under a
Service Agreement pursuant to Rule 12b-1, for the fiscal year ended August 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Emerging Markets Fund $11,820 $1,228
</TABLE>
FEDERAL LAW AFFECTING STATE STREET. The Glass-Steagall Act of 1933
prohibits state chartered banks such as State Street from engaging in the
business of underwriting, selling or distributing securities, and prohibits a
member bank of the Federal Reserve System from having certain affiliations with
an entity engaged principally in that business. The activities of State Street
in informing its customers of the Fund, performing investment and redemption
services, providing custodian, transfer, shareholder servicing, dividend
disbursing, agent servicing and investment advisory services, may raise issues
under these provisions. State Street has been advised by its counsel that its
activities in connection with the Fund contemplated under this arrangement are
consistent with its statutory and regulatory obligations.
VALUATION OF FUND SHARES. The Fund determines net asset value per share
once "business day," as of the close of the regular trading session of the New
York Stock Exchange (currently, 4:00 p.m. Eastern time). A business day is one
on which the New York Stock Exchange is open for business. Currently, the New
York Stock Exchange is open for trading every weekday except New Year's Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.
The Fund's portfolio securities actively trade on foreign exchanges which
may trade on Saturdays and on days that the Fund does not offer or redeem
shares. The trading of portfolio securities on foreign exchanges on such days
may significantly increase or decrease the net asset value of Fund shares when
the shareholder is not able to purchase or redeem Fund shares. Further, because
foreign securities markets may close prior to the time the Fund determines net
asset value, events affecting the value of the portfolio
-10-
<PAGE>
securities occurring between the time prices are determined and the time the
Fund calculates net asset value may not be reflected in the calculation of net
asset value unless Adviser determines that a particular event would materially
affect the net asset value.
BROKERAGE PRACTICES. All portfolio transactions are placed on behalf of
the Fund by Adviser. Adviser ordinarily pays commissions when it executes
transactions on a securities exchange. In contrast, there is generally no
stated commission in the purchase or sale of securities traded in the over-the-
counter markets, including most debt securities and money market instruments.
Rather, the price of such securities includes an undisclosed "commission" in the
form of a mark-up or mark-down. The cost of securities purchased from
underwriters includes an underwriting commission or concession.
The Fund contemplates purchasing most equity securities directly in the
securities markets located in emerging or developing countries or in the over-
the-counter markets. ADRs and EDRs may be listed on stock exchanges, or traded
in the over-the-counter markets in the US or Europe, as the case may be. ADRs,
like other securities traded in the US, will be subject to negotiated commission
rates.
Subject to the arrangements and provisions described below, the selection
of a broker or dealer to execute portfolio transactions is usually made by
Adviser. The Advisory Agreement provides, in substance and subject to specific
directions from officers of Investment Company, that in executing portfolio
transactions and selecting brokers or dealers, the principal objective is to
seek the best overall terms available to the Fund. Ordinarily, securities will
be purchased from primary markets, and Adviser shall consider all factors it
deems relevant in assessing the best overall terms available for any
transaction, 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 other transactions on a continuing basis.
The Advisory Agreement authorizes Adviser to select brokers or dealers to
execute a particular transaction, including principal transactions, 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 Adviser (or its
affiliates). Adviser is authorized to cause the Fund to pay a commission to a
broker or dealer who provides such brokerage and research services for executing
a portfolio transaction which is in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction. The Fund or
Adviser, as appropriate, must determine in good faith that such commission was
reasonable in relation to the value of the brokerage and research services
provided--viewed in terms of that particular transaction or in terms of all the
accounts over which Adviser exercises investment discretion.
-11-
<PAGE>
The Trustees periodically review Adviser's performance of its
responsibilities in connection with the placement of portfolio transactions on
behalf of the Fund and review the prices paid by the Fund over representative
periods of time to determine if such prices are reasonable in relation to the
benefits provided to the Fund. Certain services received by Adviser
attributable to a particular Fund transaction may benefit one or more other
accounts for which Adviser exercises investment discretion or an Investment
Portfolio other than such Fund. Adviser's fees are not reduced by Adviser's
receipt of such brokerage and research services.
The brokerage commissions paid by the Emerging Markets Fund were $260,143
for fiscal 1995 and $93,931 from the date of inception to August 31, 1994. The
material difference in the brokerage amounts from fiscal 1994 to fiscal 1995 was
due primarily to the length of time for each period, the increase in net assets
and resulting increase in portfolio turnover.
Of the total brokerage commissions paid by the Fund, commissions received
by an affiliated broker/dealer for fiscal 1995 were $3,786 Of this amount, the
percentage of affiliated brokerage to total brokerage for the Fund was 1.46%.
The percentage of total affiliated transactions (relating to trading
activity) to total transactions during fiscal 1995 for the Fund was 0.17%.
During the fiscal year ended August 31, 1995, the Fund did not purchase
securities issued by the regular brokers or dealers of the Fund, as defined by
Rule 10b-1 of the 1940 Act.
PORTFOLIO TURNOVER POLICY. Generally, securities are purchased for the
Fund for investment income and/or capital appreciation and not for short-term
trading profits. The Adviser's sell discipline for the Fund's investment in
emerging market companies is based on the premise of a long-term investment
horizon, however, sudden changes in valuation levels arising from, for example,
new macroeconomic policies, political developments, and industry conditions
could change the assumed time horizon. Some countries impose restrictions on
repatriation of capital and/or dividends which would lengthen the Adviser's
assumed time horizon in those countries. Liquidity, volatility, and overall
risk of a position are other factors considered by the Adviser in determining
the appropriate investment horizon. Therefore, the Fund may dispose of
securities without regard to the time they have been held when such action, for
defensive or other purposes, appears advisable. The Fund will limit investments
in illiquid securities to 15% of net assets.
In addition, the Fund trades more actively to realize gains and/or to
increase yields on investments by trading to take advantage of short-term market
variations. This policy is expected to result in higher portfolio turnover for
the Fund. However, the Fund does not give significant weight to attempting to
realize long-term, rather than short-term, capital gains when making portfolio
management decisions.
-12-
<PAGE>
The portfolio turnover rate for the Fund is calculated by dividing the
lesser of purchases or sales of portfolio securities for the particular year, by
the monthly average value of the portfolio securities owned by the Fund during
the year. For purposes of determining the rate, all short-term securities,
including options, futures, forward contracts, and repurchase agreements, are
excluded.
The portfolio turnover rate for the Fund for the fiscal year ended August
31, was:
1995 1994
----- -----
Emerging Markets Fund 19.77% None*
*The Emerging Markets Fund commenced operations on March 1, 1994.
Portfolio turnover rates for periods less than one fiscal year are annualized.
TOTAL RETURN QUOTATIONS. The Fund computes average annual total return by
using a standardized method of calculation required by the Securities and
Exchange Commission. Average annual total return is computed by finding the
average annual compounded rates of return on a hypothetical initial investment
of $1,000 over the one-, five- and ten-year periods (or life of the funds as
appropriate), that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
P(1+T)(n) = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a $1,000 payment made at
the beginning of the 1-, 5- and 10-year periods at the
end of the year or period
The calculation assumes that all dividends and distributions of the Fund
are reinvested at the price stated in the Prospectus on the dividend dates
during the period, and includes all recurring and nonrecurring fees that are
charged to all shareholder accounts.
The average annual total returns for the Fund are as follows:
-13-
<PAGE>
<TABLE>
<CAPTION>
One Year Inception to
Ending August 31, 1995
August 31,1995 (Annualized) Inception Date
-------------- --------------- ---------------
<S> <C> <C> <C>
Emerging Markets Fund (9.28)% 2.57% 03/01/94
</TABLE>
INVESTMENTS
The fundamental investment objective of the Fund is set forth in the
Prospectus. In addition to that investment objective, the Fund also has certain
fundamental investment restrictions, which may be changed only with the approval
of a majority of the shareholders of the Fund, and certain nonfundamental
investment restrictions and policies, which may be changed by the Fund without
shareholder approval.
INVESTMENT RESTRICTIONS
The Fund is subject to the following investment restrictions. Restrictions
1 through 11 are fundamental, and restrictions 12 through 18 are nonfundamental.
These restrictions apply at the time an investment is made. The Fund will not:
(1) Invest 25% or more of the value of its total assets in securities of
companies primarily engaged in any one industry (other than the US Government,
emerging market governments, their agencies and instrumentalities).
Concentration may occur as a result of changes in the market value of portfolio
securities, but may not result from investment.
(2) Borrow money, except as a temporary measure for extraordinary or
emergency purposes or to facilitate redemptions (not for leveraging or
investment), provided that borrowings do not exceed an amount equal to 33-1/3%
of the current value of the Fund's assets taken at market value, less
liabilities other than borrowings. If at any time a Fund's borrowings exceed
this limitation due to a decline in net assets, such borrowings will within
three days be reduced to the extent necessary to comply with this limitation. A
Fund will not purchase investments once borrowed funds exceed 5% of its total
assets.
(3) Pledge, mortgage, or hypothecate its assets. However, the Fund may
pledge securities having a market value (on a daily marked-to-market basis) at
the time of the pledge not exceeding 33-1/3% of the value of the Fund's total
assets to secure borrowings permitted by paragraph (2) above.
(4) With respect to 75% of its total assets, invest in securities of any
one issuer (other than securities issued by the US Government, emerging markets
governments, their agencies and instrumentalities), if immediately after and as
a result of such investment the current market value of the Fund's holdings in
the securities of such issuer exceeds 5% of the value of the Fund's assets.
-14-
<PAGE>
(5) Make loans to any person or firm; provided, however, that the making of
a loan shall not include (i) the acquisition for investment of bonds,
debentures, notes or other evidences of indebtedness of any corporation or
government which are publicly distributed or of a type customarily purchased by
institutional investors, or (ii) the entry into "repurchase agreements" or
"reverse repurchase agreements." A Fund may lend its portfolio securities to
broker-dealers or other institutional investors if the aggregate value of all
securities loaned does not exceed 33-1/3% of the value of the Fund's total
assets. Portfolio securities may be loaned if collateral values are
continuously maintained at no less than 100% by "marking to market" daily.
(6) Purchase or sell commodities or commodity futures contracts or option
on a futures contract except that the Fund may enter into futures contracts and
options thereon to the extent provided in its Prospectus, and if, as a result
thereof, more than 10% of the Fund's total assets (taken at market value at the
time of entering into the contract) would be committed to initial deposits and
premiums on open futures contracts and options on such contracts.
(7) Purchase or sell real estate or real estate mortgage loans; provided,
however, that the Fund may invest in securities secured by real estate or
interests therein or issued by companies which invest in real estate or
interests therein (including real estate investment trusts), and may purchase or
sell currencies (including forward currency exchange contracts), futures
contracts and related options generally as described in the Prospectus and
Statement of Additional Information.
(8) Except as required in connection with permissible financial options
activities and futures contracts, purchase securities on margin or underwrite
securities issued by others, except that a Fund will not be deemed to be an
underwriter or to be underwriting on account of the purchase of securities
subject to legal or contractual restrictions on disposition. This restriction
does not preclude the Fund from obtaining such short-term credit as may be
necessary for the clearance of purchases and sales of its portfolio securities.
(9) Issue senior securities, except as permitted by its investment
objective, policies and restrictions, and except as permitted by the 1940 Act.
This restriction shall not be deemed to prohibit the Fund from (i) making any
permitted borrowings, mortgages or pledges, or (ii) entering into repurchase
transactions.
(10) Purchase or sell puts, calls or invest in straddles, spreads or any
combination thereof, except as described herein and in the Fund's Prospectus,
and subject to the following conditions: (i) such options are written by other
persons and (ii) the aggregate premiums paid on all such options which are held
at any time do not exceed 5% of the Fund's total assets.
(11) Make short sales of securities or purchase any securities on margin,
except for such short-term credits as are necessary for the clearance of
transactions. The Fund may
-15-
<PAGE>
make initial margin deposits and variation margin payments in connection with
transactions in futures contracts and related options.
(12) Purchase from or sell portfolio securities to its officers or
directors or other "interested persons" (as defined in the 1940 Act) of the
Fund, including their investment advisers and affiliates, except as permitted by
the 1940 Act and exemptive rules or orders thereunder.
(13) Invest in securities of any issuer which, together with its
predecessor, has been in operation for less than three years if, as a result,
more than 5% of the Fund's total assets would be invested in such securities,
except that the Fund may invest in securities of a particular issuer to the
extent their respective underlying indices invest in that issuer.
(14) Invest more than 15% of its net assets in the aggregate in illiquid
securities or securities that are not readily marketable, including repurchase
agreements and time deposits of more than seven days' duration.
(15) Purchase interests in oil, gas or other mineral exploration or
development programs.
(16) Make investments for the purpose of gaining control of an issuer's
management.
(17) Purchase the securities of any issuer if the Investment Company's
officers, Directors, Adviser or any of their affiliates beneficially own more
than one-half of 1% of the securities of such issuer or together own
beneficially more than 5% of the securities of such issuer.
(18) Invest in warrants, valued at the lower of cost or market, in excess
of 5% of the value of the Fund's net assets. Included in such amount, but not
to exceed 2% of the value of the Fund's net assets, may be warrants which are
not listed on the New York Stock Exchange or American Stock Exchange. Warrants
acquired by the Fund in units or attached to securities may be deemed to be
without value.
To the extent these restrictions reflect matters of operating policy which
may be changed without shareholder vote, these restrictions may be amended upon
approval by the Board of Trustees and notice to shareholders. The Fund
currently does not intend to invest in the securities of any issuer that would
qualify as a real estate investment trust under federal tax law.
If a percentage restriction is adhered to at the time of investment, a
subsequent increase or decrease in a percentage resulting from a change in the
values of assets will not constitute a violation of that restriction, except as
otherwise noted.
INVESTMENT POLICIES
-16-
<PAGE>
To the extent consistent with its fundamental investment objective and
restrictions, the Fund may invest in the following instruments and utilize the
following investment techniques:
EMERGING MARKETS. Under normal circumstances, the Fund will invest
primarily in equity securities issued by companies domiciled, or doing a
substantial portion of their business, in countries determined by the Fund's
Adviser to have a developing or emerging economy or securities market. The Fund
will diversify investments across many countries (typically at least 10) in
order to reduce the volatility associated with specific markets. The countries
in which the Fund invests will be expanded over time as the stock markets in
other countries evolve and in countries for which subcustody arrangements are
approved by the Fund's Board of Trustees. Nearly all of the Fund's assets will
be invested in these countries (i.e., typically over 95%). Currently, the
definition of an emerging market is that gross domestic product per capita is
less than $8,000 per year. However, due to the status of a country's stock
market, the country may still qualify as an emerging market even if it exceeds
this amount. In determining securities in which to invest, the Adviser will
evaluate the countries' economic and political climates and take into account
traditional securities valuation methods, including (but not limited to) an
analysis of price in relation to assets, earnings, cash flows, projected
earnings growth, inflation, and interest rates. Liquidity and transaction costs
will also be considered.
EQUITY SECURITIES. The Fund may invest in common and preferred equity
securities publicly traded in the United States or in foreign countries on
developed or emerging markets. The Fund's equity securities may be denominated
in foreign currencies and may be held outside the United States. Certain
emerging markets are closed in whole or part to the direct purchase of equity
securities by foreigners. In these markets, the Fund may be able to invest in
equity securities solely or primarily through foreign government authorized
pooled investment vehicles. The risks associated with investment in securities
issued by foreign governments and companies are described below under "Foreign
Government Securities."
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities of
foreign or domestic issues. A convertible security is a fixed-income security
(a bond or preferred stock) which may be converted at a stated price within a
specified period of time into a certain quantity of the common stock of the same
or a different issuer. Convertible securities are senior to common stocks in a
corporation's capital structure but are usually subordinated to similar
nonconvertible securities. Convertible securities provide, through their
conversion feature, an opportunity to participate in capital appreciation
resulting from a market price advance in a convertible security's underlying
common stock. The price of a convertible security is influenced by the market
value of the underlying common stock and tends to increase as the market value
of the underlying stock rises, whereas it tends to decrease as the market value
of the underlying stock declines.
-17-
<PAGE>
SECURITIES WARRANTS. The Fund may invest up to 5% of its net assets in
warrants of foreign or domestic issuers, including warrants that are not listed
on a securities exchange. A warrant typically is a long term option issued by a
corporation which generally gives the holder the privilege of buying a specified
number of shares of the underlying common stock of the issuer at a specified
exercise price at any time on or before an expiration date. Stock index
warrants entitle the holder to receive, upon exercise, an amount in cash
determined by reference to fluctuations in the level of a specified stock index.
If the Fund does not exercise or dispose of a warrant prior to its expiration,
it will expire worthless.
SPECIAL SITUATIONS AND ILLIQUID SECURITIES. The Fund and the Adviser
believe that carefully selected investments in joint ventures, cooperatives,
partnerships, private placements, unlisted securities, and other similar
vehicles (collectively, "special situations") could enhance the Fund's capital
appreciation potential. These investments are generally illiquid. The Fund
will invest no more than 15% of its net assets in all types of illiquid
securities or securities that are not readily marketable, including special
situations. The Fund is not likely to hold illiquid securities initially.
However, due to foreign ownership restrictions, the Fund may invest periodically
in illiquid securities which are or become illiquid due to restrictions on
foreign ownership imposed by foreign governments. Said securities may be more
difficult to price and trade. The absence of a regular trading market for
illiquid securities imposes additional risks on investment in these securities.
Illiquid securities may be difficult to value and may often be disposed of only
after considerable expense and delay.
DEPOSITORY RECEIPTS. The Fund may hold securities of foreign issuers in
the form of American Depository Receipts (ADRs), European Depository Receipts
(EDRs) and other similar global instruments available in emerging markets, or
other securities convertible into securities of eligible issuers. These
securities may not necessarily be denominated in the same currency as the
securities for which they may be exchanged. Generally, ADRs, in registered
form, are designed for use in the US securities markets, and EDRs are designed
for use in European securities markets. ADRs are receipts typically issued by a
US bank or trust company evidencing ownership of the underlying securities.
ADRs represent the right to receive securities of foreign issuers deposited in a
domestic bank or a correspondent bank. ADRs do not eliminate the risk inherent
in investing in the securities of foreign issuers. However, by investing in
ADRs rather than directly in a foreign issuer's stock, the Fund can avoid
currency risks during the settlement period for either purchases or sales. In
general, there is a large liquid market in the US for many ADRs. The
information available for ADRs is subject to the accounting, auditing and
financial reporting standards of the domestic market or exchange on which they
are traded, which standards are more uniform and more exacting than those to
which many foreign issuers are subject. For purposes of the Fund's investment
policies, the Fund's investments in ADRs, EDRs and similar instruments will be
deemed to be investments in the equity securities representing securities of
foreign issuers into which they may be converted.
-18-
<PAGE>
DEBT SECURITIES. The Fund may also invest in debt securities, including
instruments issued by emerging market companies, governments and their agencies.
The Fund will primarily invest in equity securities as defined under the
Securities Exchange Act of 1934 (including convertible debt securities). Other
debt will typically represent less than 10% of the Fund's assets. The Fund is
likely to purchase debt securities which are not investment grade debt, since
much of the emerging market debt falls in this category. These securities are
subject to market and credit risk. These lower rated debt securities may
include obligations that are in default or that face the risk of default with
respect to principal or interest. Such securities are sometimes referred to as
"junk bonds." Please see the Appendix for a description of securities ratings.
FOREIGN GOVERNMENT SECURITIES. Foreign government securities which the
Fund may invest in generally consist of obligations issued or backed by the
national, state or provincial government or similar political subdivisions or
central banks in foreign countries. Foreign government securities also include
debt obligations of supranational entities, which include international
organizations designated or backed by governmental entities to promote economic
reconstruction or development, international banking institutions and related
government agencies. These securities also include debt securities of "quasi-
government agencies" and debt securities denominated in multinational currency
units of an issuer. The Fund will not invest a material percentage of its
assets in sovereign debt.
FOREIGN CURRENCY. The Fund has authority to deal in forward foreign
currency exchange contracts (including those involving the US dollar) as a hedge
against possible variations in the exchange rate between various currencies.
This is accomplished through individually negotiated contractual agreements to
purchase or to sell a specified currency at a specified future date and price
set at the time of the contract. The Fund's dealings in forward foreign
currency exchange contracts may be with respect to a specific purchase or sale
of a security, or with respect to its portfolio positions generally. Forward
commitments generally provide a cost-effective way of defending against losses
due to foreign currency depreciation in which the securities are denominated.
The Fund may not hedge its positions with respect to the currency of a
particular country to an extent greater than the aggregate market value (at the
time of making such sale) of the securities held in its portfolio denominated or
quoted in that particular foreign currency. The Fund will not attempt to hedge
all of its portfolio positions and will enter into such transactions only to the
extent, if any, deemed appropriate by Adviser. A Fund will not enter into a
position hedging commitment if, as a result thereof, the Fund would have more
than 10% of the value of its assets committed to such contracts. A Fund will
not enter into a forward contract with a term of more than one year.
In addition to the forward exchange contracts, the Fund may also purchase
or sell listed or OTC foreign currency options and foreign currency futures and
related options as a short or long hedge against possible variations in foreign
currency exchange rates. The cost to the Fund of engaging in foreign currency
transactions varies with such factors
-19-
<PAGE>
as the currencies involved, the length of the contract period and the market
conditions then prevailing. Since transactions in foreign currency exchange
usually are conducted on a principal basis, no fees or commissions are involved.
Transactions involving forward exchange contracts and futures contracts and
options thereon are subject to certain risks. Put and call options on currency
may also be used to hedge against fluctuation in currency notes when forward
contracts and/or futures are deemed to be not cost effective. Options will not
be used to provide leverage in any way. A detailed discussion of such risks
appears under the caption "Risk Factors in Options, Futures, Forward and
Currency Transactions."
Certain differences exist among these hedging instruments. For example,
foreign currency options provide the holder thereof the rights to buy or sell a
currency at a fixed price on a future date. A futures contract on a foreign
currency is an agreement between two parties to buy and sell a specified amount
of a currency for a set price on a future date. Futures contracts and options
on futures contracts are traded on boards of trade of futures exchanges. The
Fund will not speculate in foreign security or currency options or futures or
related options. The Fund will not hedge a currency substantially in excess of:
(1) the market value of securities denominated in such currency that the Fund
has committed to purchase or anticipates purchasing; or (2) in the case of
securities that have been sold by the Fund but not yet delivered, the proceeds
thereof in their denominated currency. The Fund will not incur potential net
liabilities of more than 25% of its total assets from foreign security or
currency options, futures or related options.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
financial institutions. Under repurchase agreements, these parties sell
securities to the Fund and agree to repurchase the securities at the Fund's cost
plus interest within a specified time (normally one day). The securities
purchased by the Fund have a total value in excess of the purchase price paid by
the Fund and are held by Custodian until repurchased. Repurchase agreements
assist the Fund in being invested fully while retaining "overnight" flexibility
in pursuit of investments of a longer-term nature. The Fund will limit
repurchase transactions to those member banks of the Federal Reserve System and
broker-dealers whose creditworthiness is continually monitored and found
satisfactory by Adviser.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreements under the circumstances described in "Investment Restrictions."
Under reverse repurchase agreements, a Fund transfers possession of portfolio
securities to financial institutions in return for cash in an amount equal to a
percentage of the portfolio securities' market value and agrees to repurchase
the securities at a future date by repaying the cash with interest. The Fund
retains the right to receive interest and principal payments from the securities
while they are in the possession of the financial institutions. Cash or liquid
high quality debt obligations from a Fund's portfolio equal in value to the
repurchase price including any accrued interest will be segregated by Custodian
on the Fund's records while a reverse repurchase agreement is in effect.
-20-
<PAGE>
LENDING PORTFOLIO SECURITIES. The Fund may lend portfolio securities with
a value of up to 33-1/3% of its total assets. Such loans may be terminated at
any time. The Fund will continuously maintain as collateral cash or obligations
issued by the US Government, its agencies or instrumentalities in an amount
equal to not less than 100% of the current market value (on a daily marked-to-
market basis) of the loaned securities plus accrued interest.
The Fund will retain most rights of beneficial ownership, including the
right to receive dividends, interest and other distributions on the loaned
securities. However, the borrower has the right to vote the loaned securities.
The Fund will call loans to vote proxies if a material issue affecting the
investment is passed upon. Should the borrower of the securities fail
financially, the Fund may experience delay in recovering the securities or loss
of rights in the collateral. Loans are made only to borrowers that are deemed
by Adviser to be of good financial standing.
FORWARD COMMITMENTS. The Fund may contract to purchase securities for a
fixed price at a future date beyond customary settlement time consistent with
the Fund's ability to manage its investment portfolio, maintain a stable net
asset value and meet redemption requests. The Fund may dispose of a commitment
prior to settlement if it is appropriate to do so and realize short-term profits
or losses upon such sale. When effecting such transactions, cash or liquid high
quality debt obligations held by the Fund of a dollar amount sufficient to make
payment for the portfolio securities to be purchased will be segregated on the
Fund's records at the trade date and maintained until the transaction is
settled. Forward commitments involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date, or if the other
party fails to complete the transaction.
WHEN-ISSUED TRANSACTIONS. New issues of securities are often offered on a
when-issued basis. This means that delivery and payment for the securities
normally will take place several days after the date the buyer commits to
purchase them. The payment obligation and the interest rate that will be
received on securities purchased on a when-issued basis are each fixed at the
time the buyer enters into the commitment.
The Fund will make commitments to purchase when-issued securities only with
the intention of actually acquiring the securities, but the Fund may sell these
securities or dispose of the commitment before the settlement date if it is
deemed advisable as a matter of investment strategy. Cash or marketable high
quality debt securities equal to the amount of the above commitments will be
segregated on the Fund's records. For the purpose of determining the adequacy
of these securities the segregated securities will be valued at market. If the
market value of such securities declines, additional cash or securities will be
segregated on the Fund's records on a daily basis so that the market value of
the account will equal the amount of such commitments by the Fund. The Fund
will invest more than 25% of its net assets in when-issued securities.
Securities purchased on a when-issued basis and held by the Fund are
subject to changes in market value based upon the public's perception of changes
in the level of
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interest rates. Generally, the value of such securities will fluctuate
inversely to changes in interest rates -- i.e., they will appreciate in value
when interest rates decline and decrease in value when interest rates rise.
Therefore, if in order to achieve higher interest income the Fund remains
substantially fully invested at the same time that it has purchased securities
on a "when-issued" basis, there will be a greater possibility of fluctuation in
the Fund's net asset value.
When payment for when-issued securities is due, the Fund will meet its
obligations from then-available cash flow, the sale of segregated securities,
the sale of other securities or, and although it would not normally expect to do
so, from the sale of the when-issued securities themselves (which may have a
market value greater or less than the Fund's payment obligation). The sale of
securities to meet such obligations carries with it a greater potential for the
realization of capital gains, which are subject to federal income taxes.
US GOVERNMENT OBLIGATIONS. The types of US Government obligations in which
the Funds may at times invest include: (1) a variety of US Treasury
obligations, which differ only in their interest rates, maturities and times of
issuance; and (2) obligations issued or guaranteed by US Government agencies and
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the US Treasury, (b) the right of the issuer to borrow an
amount limited to a specific line of credit from the US Treasury,
(c) discretionary authority of the US Government agency or instrumentality or
(d) the credit of the instrumentality (examples of agencies and
instrumentalities are: Federal Land Banks, Federal Housing Administration,
Farmers Home Administration, Export--Import Bank of the United States, Central
Bank for Cooperatives, Federal Intermediate Credit Banks, Federal Home Loan
Banks, General Services Administration, Maritime Administration, Tennessee
Development Bank, Asian-American Development Bank, Student Loan Marketing
Association, International Bank for Reconstruction and Development and Federal
National Mortgage Association). No assurance can be given that in the future
the US Government will provide financial support to such US Government agencies
or instrumentalities described in (2)(b), (2)(c) and (2)(d), other than as set
forth above, since it is not obligated to do so by law. The Funds may purchase
US Government obligations on a forward commitment basis.
INTEREST RATE SWAPS. The Fund may enter into interest rate swap
transactions with respect to any security it is entitled to hold. Interest rate
swaps involve the exchange by the Fund with another party of their respective
rights to receive interest, e.g., an exchange of floating rate payments for
fixed rate payments. The Fund expects to enter into these transactions
primarily to preserve a return or spread on a particular investment or portion
of its portfolio and to protect against any increase in the price of securities
it anticipates purchasing at a later date. The Fund intends to use these
transactions as a hedge and not as a speculative investment.
HEDGING STRATEGIES AND RELATED INVESTMENT TECHNIQUES. The Fund may seek to
hedge its portfolios against movements in the equity markets, interest rates and
currency exchange rates through the use of options, futures transactions,
options on futures and
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forward foreign currency exchange transactions. The Fund has authority to write
(sell) covered call and put options on its portfolio securities, purchase put
and call options on securities and engage in transactions in stock index
options, stock index futures and financial futures and related options on such
futures. The Fund may enter into such options and futures transactions either
on exchanges or in the over-the-counter ("OTC") markets. Although certain risks
are involved in options and futures transactions (as discussed in the Prospectus
and below), Adviser believes that, because the Fund will only engage in these
transactions for hedging purposes, the options and futures portfolio strategies
of the Fund will not subject the Fund to the risks frequently associated with
the speculative use of options and futures transactions. Although the use of
hedging strategies by the Fund is intended to reduce the volatility of the net
asset value of the Fund's shares, the Fund's net asset value will nevertheless
fluctuate. There can be no assurance that the Fund's hedging transactions will
be effective.
WRITING COVERED CALL OPTIONS. The Fund is authorized to write (sell)
covered call options on the securities in which it may invest and to enter into
closing purchase transactions with respect to such options. Writing a call
option obligates the Fund to sell or deliver the option's underlying security,
in return for the strike price, upon exercise of the option. By writing a call
option, the Fund receives an option premium from the purchaser of the call
option. Writing covered call options is generally a profitable strategy if
prices remain the same or fall. Through receipt of the option premium, the Fund
would seek to mitigate the effects of a price decline. By writing covered call
options, however, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price. In addition, the Fund's ability to sell the underlying
security will be limited while the option is in effect unless the Fund effects a
closing purchase transaction.
WRITING COVERED PUT OPTIONS. The Fund is authorized to write (sell)
covered put options on its portfolio securities and to enter into closing
transactions with respect to such options.
When the Fund writes a put option, it takes the opposite side of the
transaction from the option's purchaser. In return for receipt of the premium,
the Fund assumes the obligation to pay the strike price for the option's
underlying instrument if the other party to the option chooses to exercise it.
The Fund may seek to terminate its position in a put option it writes before
exercise by closing out the option in the secondary market at its current price.
If the secondary market is not liquid for an option the Fund has written,
however, the Fund must continue to be prepared to pay the strike price while the
option is outstanding, regardless of price changes, and must continue to set
aside assets to cover its position.
The Fund may write put options as an alternative to purchasing actual
securities. If security prices rise, the Fund would expect to profit from a
written put option, although its gain would be limited to the amount of the
premium it received. If security prices remain the same over time, it is likely
that the Fund will also profit, because it should be able to close out the
option at a lower price. If security prices fall, the Fund would
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expect to suffer a loss. This loss should be less than the loss the Fund would
have experienced from purchasing the underlying instrument directly, however,
because the premium received for writing the option should mitigate the effects
of the decline.
PURCHASING PUT OPTIONS. The Fund is authorized to purchase put options to
hedge against a decline in the market value of its portfolio securities. By
buying a put option the Fund has the right (but not the obligation) to sell the
underlying security at the exercise price, thus limiting the Fund's risk of loss
through a decline in the market value of the security until the put option
expires. The amount of any appreciation in the value of the underlying security
will be partially offset by the amount of the premium paid by the Fund for the
put option and any related transaction costs. Prior to its expiration, a put
option may be sold in a closing sale transaction and profit or loss from the
sale will depend on whether the amount received is more or less than the premium
paid for the put option plus the related transaction costs. A closing sale
transaction cancels out the Fund's position as the purchaser of an option by
means of an offsetting sale of an identical option prior to the expiration of
the option it has purchased. The Fund will not purchase put options on
securities (including stock index options discussed below) if as a result of
such purchase, the aggregate cost of all outstanding options on securities held
by the Fund would exceed 5% of the market value of the Fund's total assets.
PURCHASING CALL OPTIONS. The Fund is also authorized to purchase call
options. The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price (call options on futures contracts are settled by purchasing the
underlying futures contract). The Fund will purchase call options only in
connection with "closing purchase transactions."
STOCK INDEX OPTIONS AND FINANCIAL FUTURES. The Fund is authorized to
engage in transactions in stock index options and financial futures, and related
options. The Fund may purchase or write put and call options on stock indices
to hedge against the risks of market-wide stock price movements in the
securities in which the Fund invests. Options on indices are similar to options
on securities except that on exercise or assignment, the parties to the contract
pay or receive an amount of cash equal to the difference between the closing
value of the index and the exercise price of the option times a specified
multiple. The Fund may invest in stock index options based on a broad market
index, such as the S&P 500 Index, or on a narrow index representing an industry
or market segment, such as the AMEX Oil & Gas Index. The Fund's investments in
foreign stock index futures contracts and foreign interest rate futures
contracts, and related options, are limited to only those contracts and related
options that have been approved by the Commodity Futures Trading Commission
("CFTC") for investment by United States investors. Additionally, with respect
to the Fund's investments in foreign options, unless such options are
specifically authorized for investment by order of the CFTC, the Fund will not
make such investments.
The Fund may also purchase and sell stock index futures contracts and other
financial futures contracts ("futures contracts") as a hedge against adverse
changes in the
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market value of its portfolio securities as described below. A futures contract
is an agreement between two parties which obligates the purchaser of the futures
contract to buy and the seller of a futures contract to sell a security for a
set price on a future date. Unlike most other futures contracts, a stock index
futures contract does not require actual delivery of securities, but results in
cash settlement based upon the difference in value of the index between the time
the contract was entered into and the time of its settlement. The Fund may
effect transactions in stock index futures contracts in connection with debt
securities in which it invests and in financial futures contracts in connection
with equity securities in which it invests, if any. Transactions by the Fund in
stock index futures and financial futures are subject to limitations as
described below under "Restrictions on the Use of Futures Transactions."
The Fund may sell futures contracts in anticipation of or during a market
decline to attempt to offset the decrease in market value of the Fund's
securities portfolio that might otherwise result. When a Fund is not fully
invested in the securities markets and anticipates a significant market advance,
the Fund may purchase futures in order to gain rapid market exposure that may
partially or entirely offset increases in the cost of securities that the Fund
intends to purchase. As such purchases are made, an equivalent amount of
futures contracts will be terminated by offsetting sales. It is anticipated
that, in a substantial majority of these transactions, the Fund will purchase
such securities upon termination of the long futures position, whether the long
position results from the purchase of a futures contract or the purchase of a
call option, but under unusual circumstances (e.g., the Fund experiences a
significant amount of redemptions), a long futures position may be terminated
without the corresponding purchase of securities.
The Fund also is authorized to purchase and write call and put options on
futures contracts and stock indices in connection with its hedging activities.
Generally, these strategies would be utilized under the same market and market
sector conditions (i.e., conditions relating to specific types of investments)
during which the Fund enters into futures transactions. The Fund may purchase
put options or write call options on futures contracts and stock indices rather
than selling the underlying futures contract in anticipation of a decrease in
the market value of securities. Similarly, the Fund can purchase call options,
or write put options on futures contracts and stock indices, as a substitute for
the purchase of such futures to hedge against the increased cost resulting from
an increase in the market value of securities which the Fund intends to
purchase.
The Fund is also authorized to engage in options and futures transactions
on US and foreign exchanges and in options in the OTC markets ("OTC options").
In general, exchange traded contracts are third-party contracts (i.e.,
performance of the parties' obligations is guaranteed by an exchange or clearing
corporation) with standardized strike prices and expiration dates. OTC options
transactions are two-party contracts with price and terms negotiated by the
buyer and seller. See "Restrictions on OTC Options" below for information as to
restrictions on the use of OTC options.
The Fund is authorized to purchase or sell listed or OTC foreign security
or currency options, foreign security or currency futures and related options as
a short or
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long hedge against possible variations in foreign exchange rates and market
movements. Such transactions could be effected with respect to hedges on non-US
dollar denominated securities owned by a Fund, sold by a Fund but not yet
delivered, or committed or anticipated to be purchased by a Fund. As an
illustration, a Fund may use such techniques to hedge the stated value in US
dollars of an investment in a yen-denominated security. In such circumstances,
for example, the Fund can purchase a foreign currency put option enabling it to
sell a specified amount of yen for US dollars at a specified price by a future
date. To the extent the hedge is successful, a loss in the value of the yen
relative to the US dollar will tend to be offset by an increase in the value of
the put option.
RESTRICTIONS ON THE USE OF FUTURES TRANSACTIONS. The purchase or sale of a
futures contract differs from the purchase or sale of a security in that no
price or premium is paid or received. Instead, an amount of cash or securities
acceptable to the broker and the relevant contract market, which varies, but is
generally about 5% of the contract amount, must be deposited with the broker.
This amount is known as "initial margin" and represents a "good faith" deposit
assuring the performance of both the purchaser and seller under the futures
contract. Subsequent payments to and from the broker, called "variation
margin," are required to be made on a daily basis as the price of the futures
contract fluctuates making the long and short positions in the futures contracts
more or less valuable, a process known as "marking to market." At any time
prior to the settlement date of the future contract, the position may be closed
out by taking an opposite position which will operate to terminate the position
in the futures contract. A final determination of variation margin is then
made, additional cash is required to be paid to or released by the broker and
the purchaser realizes a loss or gain. In addition, a nominal commission is
paid on each completed sale transaction.
Regulations of the CFTC applicable to the Fund requires that all of the
Fund's futures and options on futures transactions constitute bona fide hedging
transactions and that the Fund not enter into such transactions if, immediately
thereafter, the sum of the amount of initial margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets.
RESTRICTIONS ON OTC OPTIONS. The Fund will engage in OTC options,
including OTC stock index options, OTC foreign security and currency options and
options on foreign security and currency futures, only with member banks of the
Federal Reserve System and primary dealers in US Government securities or with
affiliates of such banks or dealers which have capital of at least $50 million
or whose obligations are guaranteed by an entity having capital of at least
$50 million. The Fund will acquire only those OTC options for which Adviser
believes the Fund can receive on each business day at least two independent bids
or offers (one of which will be from an entity other than a party to the
option).
The Staff of the SEC has taken the position that purchased OTC options and
the assets used as cover for written OTC options are illiquid securities.
Therefore, the Fund has adopted an operating policy pursuant to which it will
not purchase or sell OTC
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options (including OTC options on futures contracts) if, as a result of such
transaction, the sum of: (1) the market value of outstanding OTC options held
by the Fund; (2) the market value of the underlying securities covered by
outstanding OTC call options sold by the Fund; (3) margin deposits on the Fund's
existing OTC options on futures contracts; and (4) the market value of all other
assets of the Fund that are illiquid or are not otherwise readily marketable,
would exceed 10% of the net assets of the Fund, taken at market value. However,
if an OTC option is sold by the Fund to a primary US Government securities
dealer recognized by the Federal Reserve Bank of New York and the Fund has the
unconditional contractual right to repurchase such OTC option from the dealer at
a predetermined price, then the Fund will treat as illiquid such amount of the
underlying securities as is equal to the repurchase price less the amount by
which the option is "in-the-money" (current market value of the underlying
security minus the option's strike price). The repurchase price with primary
dealers is typically a formula price which is generally based on a multiple of
the premium received for the option plus the amount by which the option is "in-
the-money."
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS. The Fund will not use
leverage in its options and futures strategies. Such investments will be made
for hedging purposes only. The Fund will hold securities or other options or
futures positions whose values are expected to offset its obligations under the
hedge strategies. The Fund will not enter into an option or futures position
that exposes the Fund to an obligation to another party unless it owns either:
(1) an offsetting position in securities or other options or futures contracts;
or (2) cash, receivables and short-term debt securities with a value sufficient
to cover its potential obligations. The Fund will comply with guidelines
established by the SEC with respect to coverage of options and futures
strategies by mutual funds, and if the guidelines so require will set aside cash
and high grade liquid debt securities in a segregated account with its custodian
bank in the amount prescribed. The Fund's custodian shall maintain the value of
such segregated account equal to the prescribed amount by adding or removing
additional cash or liquid securities to account for fluctuations in the value of
securities held in such account. Securities held in a segregated account cannot
be sold while the futures or option strategy is outstanding, unless they are
replaced with similar securities. As a result, there is a possibility that
segregation of a large percentage of a Fund's assets could impede portfolio
management or the Fund's ability to meeting redemption requests or other current
obligations.
RISK FACTORS IN OPTIONS, FUTURES, FORWARD AND CURRENCY TRANSACTIONS.
Utilization of options and futures transactions to hedge the Fund's portfolios
involves the risk of imperfect correlation in movements in the price of options
and futures and movements in the price of securities or currencies which are the
subject of the hedge. If the price of the options or futures moves more or less
than the price of hedged securities or currencies, the Fund will experience a
gain or loss which will not be completely offset by movements in the price of
the subject of the hedge. The successful use of options and futures also
depends on Adviser's ability to correctly predict price movements in the market
involved in a particular options or futures transaction. To compensate for
imperfect correlations, the Fund may purchase or sell stock index options or
futures contracts in a greater dollar amount than the hedged securities if the
volatility of the
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hedged securities is historically greater than the volatility of the stock index
options or futures contracts. Conversely, the Fund may purchase or sell fewer
stock index options or futures contracts, if the historical price volatility of
the hedged securities is less than that of the stock index options or futures
contracts. The risk of imperfect correlation generally tends to diminish as the
maturity date of the stock index option or futures contract approaches. Options
are also subject to the risks of an illiquid secondary market, particularly in
strategies involving writing options, which the Fund cannot terminate by
exercise. In general, options whose strike prices are close to their underlying
instruments' current value will have the highest trading volume, while options
whose strike prices are further away may be less liquid.
The Fund intends to enter into options and futures transactions, on an
exchange or in the OTC market, only if there appears to be a liquid secondary
market for such options or futures or, in the case of OTC transactions, the
Adviser believes the Fund can receive on each business day at least two
independent bids or offers. However, there can be no assurance that a liquid
secondary market will exist at any specific time. Thus, it may not be possible
to close an options or futures position. The inability to close options and
futures positions also could have an adverse impact on a Fund's ability to
effectively hedge its portfolio. There is also the risk of loss by a Fund of
margin deposits or collateral in the event of bankruptcy of a broker with whom
the Fund has an open position in an option, a futures contract or related
option.
The exchanges on which options on portfolio securities and currency options
are traded have generally established limitations governing the maximum number
of call or put options on the same underlying security or currency (whether or
not covered) which may be written by a single investor, whether acting alone or
in concert with others (regardless of whether such options are written on the
same or different exchanges or are held or written in one or more accounts or
through one or more brokers). "Trading limits" are imposed on the maximum
number of contracts which any person may trade on a particular trading day.
To the extent permitted under the 1940 Act and exemptive rules and orders
thereunder, the Fund may seek to achieve its investment objectives by investing
solely in the shares of another investment company that has substantially
similar investment objectives and policies.
RISK CONSIDERATIONS
Investors should consider carefully the substantial risks involved in
securities of companies and governments of foreign nations, which are in
addition to the usual risks inherent in domestic investments. There may be less
publicly available information about foreign companies comparable to the reports
and ratings published regarding US companies. Foreign companies are not
generally subject to uniform accounting, auditing and financial reporting
standards, and auditing practices and requirements may not be comparable to
those applicable to US companies. Many foreign markets have
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substantially less volume than either the established domestic securities
exchanges or the OTC markets. Securities of some foreign companies are less
liquid and more volatile than securities of comparable US companies. Commission
rates in foreign countries, which may be fixed rather than subject to
negotiation as in the US, are likely to be higher. In many foreign countries
there is less government supervision and regulation of securities exchanges,
brokers and listed companies than in the US, and capital requirements for
brokerage firms are generally lower. Settlement of transactions in foreign
securities may, in some instances, be subject to delays and related
administrative uncertainties.
Investments in companies domiciled in emerging market countries may be
subject to additional risks than investment in the US and in other developed
countries. These risks include: (1) Volatile social, political and economic
conditions can cause investments in emerging or developing markets exposure to
economic structures that are generally less diverse and mature. Emerging market
countries can have political systems which can be expected to have less
stability than those of more developed countries. The possibility may exist
that recent favorable economic developments in certain emerging market countries
may be suddenly slowed or reversed by unanticipated political or social events
in such countries. Moreover, the economies of individual emerging market
countries may differ favorably or unfavorably from the US economy in such
respects as the rate of growth in gross domestic product, the rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position. (2) The small current size of the markets for such securities and the
currently low or nonexistent volume of trading can result in a lack of liquidity
and in greater price volatility. Until recently, there has been an absence of a
capital market structure or market-oriented economy in certain emerging market
countries. Because the Fund's securities will generally be denominated in
foreign currencies, the value of such securities to the Fund will be affected by
changes in currency exchange rates and in exchange control regulations. A
change in the value of a foreign currency against the US dollar will result in a
corresponding change in the US dollar value of the Fund's securities. In
addition, some emerging market countries may have fixed or managed currencies
which are not free-floating against the US dollar. Further, certain emerging
market currencies may not be internationally traded. Certain of these
currencies have experienced a steady devaluation relative to the US dollar.
Many emerging markets countries have experienced substantial, and in some
periods extremely high, rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had, and may continue to have, negative
effects on the economies and securities markets of certain emerging market
countries. (3) The existence of national policies may restrict the Fund's
investment opportunities and may include restrictions on investment in issuers
or industries deemed sensitive to national interests. (4) Some emerging markets
countries may not have developed structures governing private or foreign
investment and may not allow for judicial redress for injury to private
property.
The Fund endeavors to buy and sell foreign currencies on favorable terms.
Such price spread on currency exchange (to cover service charges) may be
incurred, particularly when the Fund changes investments from one country to
another or when proceeds from the sale of shares in US dollars are used for the
purchase of securities in
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foreign countries. Also, some countries may adopt policies which would prevent
the Fund from repatriating invested capital and dividends, withhold portions of
interest and dividends at the source, or impose other taxes, with respect to the
Fund's investments in securities of issuers of that country. There also is the
possibility of expropriation, nationalization, confiscatory or other taxation,
foreign exchange controls (which may include suspension of the ability to
transfer currency from a given country), default in foreign government
securities, political or social instability, or diplomatic developments that
could adversely affect investments in securities of issuers in those nations.
The Fund may be affected either favorably or unfavorably by fluctuations in
the relative rates of exchange between the currencies of differentiations,
exchange control regulations and indigenous economic and political developments.
TAXES
The Fund intends to qualify for treatment as a regulated investment company
("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended
("the Code"). As a RIC, the Fund will not be liable for federal income taxes on
taxable net investment income and capital gain net income (capital gains in
excess of capital losses) that it distributes to its shareholders, provided that
the Fund distributes annually to its shareholders at least 90% of its net
investment income and net short-term capital gain for the taxable year
("Distribution Requirement"). For a Fund to qualify as a RIC it must abide by
all of the following requirements: (1) at least 90% of the Fund's gross income
each taxable year must be derived from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock
or securities or foreign currencies, or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies ("Income Requirement");
(2) less than 30% of the Fund's gross income each taxable year must be derived
from the sale or other disposition of securities and certain options, futures
contracts, forward contracts and foreign currencies held for less than three
months ("Short-Short Limitation"); (3) at the close of each quarter of the
Fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, US government securities, securities of
other RICs, and other securities, with such other securities limited, in respect
of any one issuer, to an amount that does not exceed 5% of the total assets of
the Fund and that does not represent more than 10% of the outstanding voting
securities of such issuer; and (4) at the close of each quarter of the Fund's
taxable year, not more than 25% of the value of its assets may be invested in
securities (other than US government securities or the securities of other RICs)
of any one issuer.
The Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year an amount at least equal to
the sum of: (1) 98% of its ordinary income for that year; (2) 98% of its
capital gain net income for the one-year period ending on October 31 of that
year; and (3) certain undistributed amounts from the preceding calendar year.
For this and other purposes, dividends
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declared in October, November or December of any calendar year and made payable
to shareholders of record in such month will be deemed to have been received on
December 31 of such year if the dividends are paid by the Fund subsequent to
December 31 but prior to February 1 of the following year.
From November 1, 1994 to August 31, 1995, the Fund incurred $88,970 of net
realized capital losses. As permitted by tax regulation, the Fund intends to
elect to defer those losses and treat them as arising in the fiscal year ending
August 31, 1996.
If a shareholder receives a distribution taxable as long-term capital gain
with respect to shares of a Fund and redeems or exchanges the shares without
having held the shares for more than one year, then any loss on the redemption
or exchange will be treated as long-term capital loss to the extent of the
capital gain distribution.
ISSUES RELATED TO HEDGING AND OPTION INVESTMENTS. The Fund's ability to
make certain investments may be limited by provisions of the Code that require
inclusion of certain unrealized gains or losses in the Fund's income for
purposes of the Income Requirement, the Short-Short Limitation and the
Distribution Requirement, and by provisions of the Code that characterize
certain income or loss as ordinary income or loss rather than capital gain or
loss. Such recognition, characterization and timing rules will affect
investments in certain futures contracts, options, foreign currency contracts
and debt securities denominated in foreign currencies.
STATE AND LOCAL TAXES. Depending upon the extent of the Fund's activities
in states and localities in which its offices are maintained, its agents or
independent contractors are located or it is otherwise deemed to be conducting
business, the Fund may be subject to the tax laws of such states or localities.
FOREIGN INCOME TAXES. Investment income received by the Fund from sources
within foreign countries may be subject to foreign income taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries which would entitle the Fund to a reduced rate of such taxes or
exemption from taxes on such income. It is impossible to determine the
effective rate of foreign tax for the Fund in advance since the amount of the
assets to be invested within various countries is not known.
If the Fund invests in an entity that is classified as a "passive foreign
investment company" ("PFIC") for federal income tax purposes, the application of
certain provisions of the Code applying to PFICs could result in the imposition
of certain federal income taxes on the Fund. It is anticipated that any taxes
on the Fund with respect to investments in PFICs would be insignificant. Under
US Treasury regulations issued in 1992 for PFICs, the Fund can elect to mark-to-
market its PFIC holdings in lieu of paying taxes on gains or distributions
therefrom. It is anticipated that any taxes on a Fund with respect to
investments in PFICs would be insignificant.
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Foreign shareholders should consult with their tax advisers as to if and
how the federal income tax and its withholding requirements applies to them.
The foregoing discussion is only a summary of certain federal income tax
issues generally affecting the Fund and its shareholders. Circumstances among
investors may vary and each investor is encouraged to discuss investment in the
Fund with the investor's tax adviser.
FINANCIAL STATEMENTS
The 1995 fiscal year-end financial statements for the Fund, including notes
to the financial statements and financial highlights and the Report of
Independent Accountants, are included in the Fund's Annual Report to
Shareholders. A copy of this Annual Report accompanies this Statement of
Additional Information and is incorporated herein by reference.
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<PAGE>
APPENDIX
DESCRIPTION OF SECURITIES RATINGS
The following is a description of the securities ratings of Duff & Phelps
Credit Rating Co. ("D&P"), Fitch Investors Service, Inc. ("Fitch"), Standard &
Poor's Corporation ("S&P"), Moody's Investors Service, Inc. ("Moody's"), IBCA
Limited and IBCA Inc. ("IBCA") and Thomson BankWatch ("Thomson").
LONG-TERM CORPORATION AND TAX-EXEMPT DEBT RATINGS
The two highest ratings of D&P for tax-exempt and corporate fixed-income
securities are AAA and AA. Securities rated AAA are of the highest credit
quality. The risk factors are considered to be negligible, being only slightly
more than for risk-free US Treasury debt. Securities rated AA are of high
credit quality. Protection factors are strong. Risk is modest but may vary
slightly from time to time because of economic conditions. The AA rating may be
modified by an addition of a plus (+) or minus (-) sign to show relative
standing within the major rating category.
The two highest ratings of Fitch for tax-exempt and corporate bonds are AAA
and AA. AAA bonds are considered to be investment grade and of the highest
credit quality. The obligor is judged to have an exceptionally strong ability
to pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events. AA bonds are considered to be investment grade
and of very high credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong as bonds rated AAA.
Because bonds rated in the AAA and AA categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these issuers
is generally rated F-1+. Plus (+) and minus (-) signs are used with the AA
rating symbol to indicate relative standing within the rating category.
The two highest ratings of S&P for tax-exempt and corporate bonds are AAA
and AA. Bonds rated AAA bear the highest rating assigned by S&P to a debt
obligation and the AAA rating indicates in its opinion an extremely strong
capacity to pay interest and repay principal. Bonds rated AA by S&P are judged
by it to have a very strong capacity to pay interest and repay principal, and
they differ from AAA issues only in small degree. The AA rating may be modified
by an addition of a plus (+) or minus (-) sign to show relative standing within
the major rating category. The foregoing ratings are sometimes followed by a
"p" indicating that the rating is provisional. A provisional rating assumes the
successful completion of the project being financed by the debt being rated and
indicates that payment of debt service requirements is largely or entirely
dependent upon the successful and timely completion of the project. This
rating, however, while addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of, or the risk of default upon
failure of, such completion.
The two highest ratings of Moody's for tax-exempt and corporate bonds are
Aaa and Aa. Tax-exempt and corporate bonds rated Aaa are judged to be of the
"best quality." The rating of Aa is assigned to bonds which are of "high
quality by all standards." Aa bonds are rated lower
-33-
<PAGE>
than Aaa bonds because margins of protection may not be as large or fluctuations
of protective elements may be of greater amplitude or there may be other
elements which make the long-term risks appear somewhat larger. Moody's may
modify a rating of Aa by adding numerical modifiers of 1, 2 or 3 to show
relative standing within the Aa category. The foregoing ratings for tax-exempt
bonds are sometimes presented in parentheses preceded with a "con" indicating
the bonds are rated conditionally. Such parenthetical rating denotes the
probable credit stature upon completion of construction or elimination of the
basis of the condition. In addition, Moody's has advised that the short-term
credit risk of a long-term instrument sometimes carries a MIG rating or one of
the commercial paper ratings described below.
The two highest ratings of IBCA for corporate bonds are AAA and AA.
Obligations rated AAA by IBCA have the lowest expectation of investment risk.
Capacity for timely repayment of principal and interest is substantial, such
that adverse changes in business, economic or financial conditions are unlikely
to increase investment risk significantly. Obligations for which there is a
very low expectation of investment risk are rated AA. IBCA may append a rating
of plus (+) or minus (-) to a rating to denote relative status within a major
rating category. IBCA does not rate tax-exempt bonds.
The two highest ratings of Thomson for corporate bonds are AAA and AA.
Bonds rated AAA are of the highest credit quality. The ability of the obligor
to repay principal and interest on a timely basis is considered to be very high.
Bonds rated AA indicate a superior ability on the part of the obligor to repay
principal and interest on a timely basis with limited incremental risk versus
issues rated in the highest category. These ratings may be modified by the
addition of a plus (+) or minus (-) sign to show relative standing within the
rating categories. Thomson does not rate tax-exempt bonds.
SHORT-TERM CORPORATE AND TAX-EXEMPT DEBT RATINGS
The highest rating of D&P for commercial paper is Duff 1. D&P employs
three designations, Duff 1 plus, Duff 1 and Duff 1 minus, within the highest
rating category. Duff 1 plus indicates highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or ready access
to alternative sources of funds, is judged to be outstanding, and safety is just
below risk-free US Treasury short-term obligations. Duff 1 indicates very high
certainty of timely payment. Liquidity factors are excellent and supported by
strong fundamental protection factors. Risk factors are considered to be minor.
Duff 1 minus indicates high certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection factors. Risk factors are
very small. Duff 2 indicates good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
Fitch's short-term ratings apply to tax-exempt and corporate debt
obligations that are payable on demand or have original maturities of up to
three years. The highest rating of Fitch for short-term securities encompasses
both the F-1+ and F-1 ratings. F-1+ securities possess exceptionally strong
credit
-34-
<PAGE>
quality. Issues assigned this rating are regarded as having the strongest
degree of assurance for timely payment. F-1 securities possess very strong
credit quality. Issues assigned this rating reflect an assurance of timely
payment only slightly less in degree than issues rated F-1+. F-2 securities
possess good credit quality and have a satisfactory degree of assurance for
timely payment, but the margin of safety is not as great as the F-1+ and F-1
categories.
S&P's commercial paper ratings are current assessments of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
The A-1 designation indicates that the degree of safety regarding timely payment
is strong. Those issues determined to possess extremely strong safety
characteristics will be denoted with a plus (+) designation. The A-2
designation indicates that capacity for timely payment on these issues is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Issuers rated Prime-1 (or related supporting
institutions) in the opinion of Moody's have a superior capacity for repayment
of short-term promissory obligations. Issuers rated Prime-2 (or related
supporting institutions) have a strong capacity for repayment of short-term
promissory obligations. This capacity will normally be evidenced by many of the
characteristics of Prime-1 rated issues, but to a lesser degree. Ample
alternate liquidity is maintained.
IBCA assesses the investment quality of unsecured debt with an original
maturity of less than one year which is issued by bank holding companies and
their principal banking subsidiaries. The designation A1 by IBCA indicates that
the obligation is supported by a very strong capacity for timely repayment.
Those obligations rated A1+ are supported by the highest capacity for timely
repayment. The designation A-2 by IBCA indicates that the obligation is
supported by a satisfactory capacity for timely payment, although such capacity
may be susceptible to adverse changes in business, economic or financial
conditions.
Thomson's short-term paper ratings assess the likelihood of an untimely
payment of principal or interest of debt having a maturity of one year or less
which is issued by banks and financial institutions. The designation TBW-1
represents the highest short-term rating category and indicates a very high
degree of likelihood that principal and interest will be paid on a timely basis.
The designation TBW-2 represents the second highest short-term rating category
and indicates that while the degree of safety regarding timely payment of
principal and interest is strong, the relative degree of safety is not as high
as for issues rated TBW-1.
TAX-EXEMPT NOTE RATINGS
A S&P rating of SP-1 indicates very strong or strong capacity to pay
principal and interest. Those issues determined to possess overwhelming safety
characteristics are given a plus (+) designation. Notes rated SP-2 are issued
by issuers that exhibit satisfactory capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
obligations are designated Moody's Investment Grade ("MIG"). MIG-1/VMIG-1
denotes best quality. There is present strong protection from established cash
flows, superior liquidity support or demonstrated
-35-
<PAGE>
broad-based access to the market for refinancing. MIG-2/VMIG-2 denotes high
quality, with margins of protection ample although not as large as in the MIG-
1/VMIG-1 group.
Fitch uses its short-term ratings described above under "Short-Term
Corporate and Tax-Exempt Debt Ratings" for tax-exempt notes.
D&P uses the fixed-income ratings described above under "Long-Term
Corporate and Tax-Exempt Debt Ratings" for tax-exempt notes and other short-term
obligations.
-36-
<PAGE>
Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
THE SEVEN SEAS SERIES FUND
Two International Place, 35th Floor
Boston, Massachusetts 02110
(617) 654-6089
STATEMENT OF ADDITIONAL INFORMATION
US TREASURY MONEY MARKET PORTFOLIO
PRIME MONEY MARKET PORTFOLIO
DECEMBER 29, 1995
The Seven Seas Series Fund ("Investment Company") is a registered open-end
investment company organized as a Massachusetts business trust offering shares
of beneficial interest in separate investment portfolios. In addition, each
series of the Investment Company is diversified as defined in the Investment
Company Act of 1940, as amended ("1940 Act").
This Statement of Additional Information supplements or describes in
greater detail the Investment Company and The Seven Seas Series US Treasury
Money Market Portfolio (the "Treasury Money Market Portfolio") and The Seven
Seas Series Prime Money Market Portfolio (the "Prime Money Market Portfolio")
(collectively, the "Portfolios") as contained in the Portfolios' Prospectus
dated December 29, 1995. This Statement is not a Prospectus and should be read
in conjunction with the Portfolios' Prospectus, which may be obtained by
telephoning or writing Investment Company at the number or address shown above.
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<PAGE>
TABLE OF CONTENTS
Page
----
STRUCTURE AND GOVERNANCE . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Organization and Business History . . . . . . . . . . . . . . . . . . . 3
Shareholder Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . 4
Controlling Shareholders. . . . . . . . . . . . . . . . . . . . . . . . 4
Principal Shareholders. . . . . . . . . . . . . . . . . . . . . . . . . 5
Trustees and Officers . . . . . . . . . . . . . . . . . . . . . . . . . 5
OPERATION OF INVESTMENT COMPANY. . . . . . . . . . . . . . . . . . . . . . . 7
Service Providers . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Administrator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Custodian and Transfer Agent. . . . . . . . . . . . . . . . . . . . . . 8
Distribution Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Federal Law Affecting State Street. . . . . . . . . . . . . . . . . . . 9
Valuation of Portfolio Shares . . . . . . . . . . . . . . . . . . . . . 10
Brokerage Practices . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Yield and Total Return Quotations . . . . . . . . . . . . . . . . . . . 12
INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . 13
Investment Policies . . . . . . . . . . . . . . . . . . . . . . . . . . 15
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
APPENDIX: DESCRIPTION OF SECURITIES RATINGS . . . . . . . . . . . . . . . . 24
-2-
<PAGE>
STRUCTURE AND GOVERNANCE
ORGANIZATION AND BUSINESS HISTORY. Investment Company was organized as a
Massachusetts business trust on October 3, 1987, and operates under a First
Amended and Restated Master Trust Agreement, dated October 13, 1993. Investment
Company is authorized to issue shares of beneficial interest, par value $.001
per share, which may be divided into one or more series, each of which evidences
pro rata ownership interest in a different investment portfolio, or "Fund," two
of which are the Treasury Money Market and Prime Money Market Portfolios. The
Trustees may create additional Funds at any time without shareholder approval.
Further, the Investment Company is authorized to divide shares of any
series into two or more classes of shares. The shares of each Fund may have
such rights and preferences as the Trustees may establish from time to time,
including the right of redemption (including the price, manner and terms of
redemption), special and relative rights as to dividends and distributions,
liquidation rights, sinking or purchase fund provisions and conditions under
which any Fund may have separate voting rights or no voting rights. Each class
of shares of a Fund is entitled to the same rights and privileges as all other
classes of that Fund, except that each class bears the expenses associated with
the distribution and shareholder servicing arrangements of that class, as well
as other expenses attributable to the class and unrelated to the management of
the Fund's portfolio securities.
As of the date of this Statement of Additional Information, Investment
Company is comprised of the following investment portfolios, each of which
commenced operations on the date set forth opposite the portfolio's name:
--------------------------------------------------------------------------
The Seven Seas Series Money Market Fund May 2, 1988
--------------------------------------------------------------------------
The Seven Seas Series US Government Money Market Fund March 1, 1991
--------------------------------------------------------------------------
The Seven Seas Series US Treasury Money Market Fund December 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series US Treasury Obligations Fund *
--------------------------------------------------------------------------
The Seven Seas Series Prime Money Market Fund February 22, 1994
--------------------------------------------------------------------------
The Seven Seas Series Yield Plus Fund November 9, 1992
--------------------------------------------------------------------------
The Seven Seas Series Tax Free Money Market Fund December 1, 1994
--------------------------------------------------------------------------
The Seven Seas Series Intermediate Fund September 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series Bond Market Fund *
--------------------------------------------------------------------------
The Seven Seas Series Growth and Income Fund September 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series S&P 500 Index Fund December 30, 1992
--------------------------------------------------------------------------
The Seven Seas Series Small Cap Fund July 1, 1992
--------------------------------------------------------------------------
The Seven Seas Series Matrix Equity Fund May 4, 1992
--------------------------------------------------------------------------
The Seven Seas Series Active International Fund March 7, 1995
--------------------------------------------------------------------------
The Seven Seas Series International Pacific Index Fund *
--------------------------------------------------------------------------
The Seven Seas Series Emerging Markets Fund March 1, 1994
--------------------------------------------------------------------------
The Seven Seas Series Real Estate Equity Fund *
--------------------------------------------------------------------------
__________
*As of the date of this Statement of Additional Information, these portfolios
have not commenced operations.
-3-
<PAGE>
Prospectuses for these Investment Portfolios may be obtained by calling
Investment Company's distributor, Russell Fund Distributors, Inc., at (617) 654-
6089.
Shares of the Money Market, US Government Money Market and Tax Free Money
Market Funds are divided into Classes A, B and C.
Any amendment to the Master Trust Agreement that would materially and
adversely affect shareholders of Investment Company as a whole, or shareholders
of a particular Fund, must be approved by the holders of a majority of the
shares of Investment Company or the Fund, respectively. All other amendments
may be effected by Investment Company's Board of Trustees.
Under certain unlikely circumstances, and as is the case with any
Massachusetts business trust, a shareholder of a Fund may be held personally
liable for the obligations of a Fund. The Master Trust Agreement provides that
shareholders shall not be subject to any personal liability for the acts or
obligations of a Fund and that every written agreement, obligation, or other
undertaking of the Fund shall contain a provision to the effect that the
shareholders are not personally liable thereunder. The Master Trust Agreement
also provides that the Fund shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Fund and satisfy
any judgment thereon. Thus, the risk to shareholders of incurring financial
loss beyond their investments is limited to circumstances in which the Fund
itself would be unable to meet its obligations.
SHAREHOLDER MEETINGS. Investment Company will not have an annual meeting
of shareholders. Special meetings may be convened: (1) by the Board of
Trustees; (2) upon written request to the Board by the holders of at least 10%
of the outstanding shares; or (3) upon the Board's failure to honor the
shareholders' request described above, by holders of at least 10% of the
outstanding shares giving notice of the special meeting to the shareholders.
CONTROLLING SHAREHOLDERS. The Trustees have the authority and
responsibility to manage the business of Investment Company. Trustees hold
office until they resign or are removed by, in substance, a vote of two-thirds
of Investment Company shares outstanding. However, in connection with State
Street Bank and Trust Company's ("State Street") securities lending program and
investment accounts over which State Street has discretionary authority, State
Street holds certain collateral on behalf of its securities lending clients to
secure the return of loaned securities. Such collateral may be invested in
Investment Company shares from time to time. Shares representing such
investments are held of record by State Street, who retains voting control of
such shares. As of November 30, 1995, State Street held beneficially and of
record 36% of Investment Company's shares in connection with various lending
portfolios and, consequently, is deemed to be a controlling person of Investment
Company for purposes of the 1940 Act. State Street also acts as Investment
Company's investment adviser, transfer agent and custodian.
PRINCIPAL SHAREHOLDERS. As of November 30, 1995, the following
shareholders owned of record 5% or more of the issued and outstanding shares of
the US Treasury Money Market and Prime Money Market Portfolios:
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<PAGE>
US Treasury Money Market:
- Short Term Investment Fund FC02, a fund of State Street Bank and Trust
Company, PO Box 1992, Boston, MA 02105--75%; and
- Minnesota State Board of Investments GP15, 55 Sherburne Avenue, St.
Paul, MN 55155--24%.
Prime Money Market:
- Securities Lending SL01, a department of State Street Bank and Trust
Company, PO Box 350, Boston, MA 02105--64%; and
- Global Financial Asset Services Omnibus Control Account MT01, State
Street Bank and Trust Company, PO Box 1992, North Quincy, MA 02171--
22%.
The Trustees and officers of Investment Company, as a group, own less than
1% of Investment Company's voting securities.
TRUSTEES AND OFFICERS. The Board of Trustees is responsible for overseeing
generally the operation of the Portfolios. The officers, all of whom are
employed by, and are officers of, Administrator or its affiliates, are
responsible for the day-to-day management and administration of the Portfolios'
operations.
Trustees who are not officers or employees of State Street or its
affiliates are paid an annual fee and are reimbursed for travel and other
expenses they incur in attending Board meetings. Investment Company's officers
and employees are paid by Administrator or its affiliates.
The following lists Investment Company's Trustees and officers, their
positions with Investment Company, their present and principal occupations
during the past five years and the mailing addresses of Trustees who are not
affiliated with Investment Company. The mailing address for all Trustees and
officers affiliated with Investment Company is The Seven Seas Series Fund, 909 A
Street, Tacoma, WA 98402.
An asterisk (*) indicates that a Trustee is an "interested person" of the
Investment Company, as defined in the 1940 Act.
*LYNN L. ANDERSON, Trustee, Chairman of the Board, President and Fund
Treasurer. Chairman of the Board and Chief Executive Officer, Frank Russell
Investment Management Company and Russell Fund Distributors, Inc.; Director,
President and Chief Executive Officer, Frank Russell Investment Company and
Frank Russell Trust Company; Director and President, Russell Insurance Funds;
Director and Chairman, Frank Russell Company (Delaware); Director, Frank Russell
Investments (Ireland) Limited and Frank Russell Investment Company plc.
-5-
<PAGE>
WILLIAM L. MARSHALL, Trustee. 33 West Court Street, Doylestown, PA 18901.
Chief Executive Officer and President, Wm. L. Marshall Associates, Inc. (a
registered investment adviser and provider of financial and related consulting
services); Certified Financial Planner; Member, Registry of Financial Planning
Practitioners; and Advisory Committee, International Association for Financial
Planning Broker-Dealer Program. Member, Institute of Certified Financial
Planners. Registered for Securities with FSC Securities Corp., Marietta,
Georgia.
*STEVEN J. MASTROVICH, Trustee. 1 Financial Center, Boston, MA 02111.
Partner, Brown, Rudnick, Freed & Gesmer (law firm). 1990 to 1994, Partner,
Warner & Stackpole (law firm).
PATRICK J. RILEY, Trustee. 21 Custom House Street, Boston, MA 02110.
Partner, Riley, Burke & Donahue (law firm).
RICHARD D. SHIRK, Trustee. 3350 Peachtree Road, N.E., Atlanta, GA 30326.
President and Chief Executive Officer, Blue Cross/Blue Shield of Georgia. 1990
to 1992, President, Champions Group Resources--Business Management and Employee
Benefits Consulting; 1990, Senior Vice President, Employee Benefits Division,
Cigna Corporation (providing and insuring group life, health and disability
employee benefit products and services); from 1986 to 1990, Senior Vice
President, EQUICOR-Equitable HCA Corporation (providing and insuring group life,
health and disability employee benefit products and services).
*BRUCE D. TABER, Trustee. 26 Round Top Road, Boxford, MA 01921.
President, A.B. Reed, Inc. - Engineers, Architects, Planners. Prior to that,
Vice President, Instrumentation and Controls, A.B. Reed., Inc.
HENRY W. TODD, Trustee. 111 Commerce Drive, Montgomeryville, PA 18936.
President and Director, Zink & Triest Co., Inc. (dealer in vanilla flavor
materials); Director, A.M. Todd Co., Feed Flavors, Inc. and Flavorite
Laboratories.
J. DAVID GRISWOLD, Vice President and Secretary. Assistant Secretary,
Associate General Counsel, Chief Compliance Officer, Frank Russell Investment
Management Company, Russell Fund Distributors, Inc. and Frank Russell Capital
Inc.; Associate General Counsel and Assistant Secretary, Frank Russell Company;
Associate General Counsel, Assistant Secretary and Compliance Officer, Russell
Fiduciary Services Company; Director, Secretary, Associate General Counsel and
Chief Compliance Officer, Frank Russell Securities, Inc.; Secretary, Frank
Russell Canada Limited/Limitee.
KENNETH W. LAMB, Assistant Secretary, Assistant Treasurer and Principal
Accounting Officer. Manager - Funds Administration, Frank Russell Investment
Management Company since 1994. Prior to that, Senior Audit Manager with Knight,
Vale & Gregory since 1982.
-6-
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
TRUSTEE COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------
Aggregate Pension or Estimated Annual Total Compensation
Compensation Retirement Benefits Upon From Investment
from Benefits Accrued Retirement Company Paid to
Trustee Investment as part of Trustees
Company Investment
Company
Expenses
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lynn L. Anderson $0 $0 $0 $0
- -------------------------------------------------------------------------------------------------------
William L. Marshall $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Steven J. Mastrovich $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Patrick J. Riley $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Richard D. Shirk $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Bruce D. Taber $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Henry W. Todd $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
</TABLE>
OPERATION OF INVESTMENT COMPANY
SERVICE PROVIDERS. Most of the Portfolios' necessary day-to-day operations
are performed by separate business organizations under contract to Investment
Company. The principal service providers are:
Investment Adviser, Custodian
and Transfer Agent: State Street Bank and Trust Company
Administrator: Frank Russell Investment Management Company
Distributor: Russell Fund Distributors, Inc.
Independent Accountants: Coopers & Lybrand, L.L.P.
ADVISER. State Street Bank and Trust Company ("State Street" or "Adviser")
serves as the Portfolios' investment adviser pursuant to an Advisory Agreement
dated April 12, 1988 ("Advisory Agreement"). State Street Bank and Trust
Company is a wholly owned subsidiary of State Street Boston Corporation, a
publicly-held bank holding company. State Street's address is 225 Franklin
Street, Boston, MA 02110.
Under the Advisory Agreement, Adviser directs each Portfolio's
investments in accordance with its investment objective, policies and
limitations. For these services, each Portfolio pays a fee to Adviser at the
rate stated in the Prospectus. The Treasury Money Market Portfolio accrued
expenses to Adviser of $462,645 for fiscal 1995 and $1,582,663 from the date
of inception to August 31, 1994. Adviser voluntarily agreed to reimburse the
Treasury Money Market Portfolio for all expenses in excess of .20% of average
daily net assets on an annual basis. There was no reimbursement necessary
for fiscal 1995 and 1994. Additionally,
-7-
<PAGE>
Adviser waived fees of $497,132 in fiscal 1995, and $1,582,663 for the period
ended August 31, 1994. The Prime Money Market Portfolio accrued expenses to
Adviser of $1,319,424 for fiscal 1995 and $462,525 from the date of inception
to August 31, 1994. Adviser voluntarily agreed to reimburse the Prime Money
Market Portfolio for all expenses in excess of .20% of average daily net
assets on an annual basis. There was no reimbursement necessary for fiscal
1995, the reimbursement amounted to $87,447 for the period ended August 31,
1994. Additionally, Adviser waived fees of $1,159,949 in fiscal 1995 and
$388,359 for the period ended August 31, 1994.
The Advisory Agreement will continue from year to year provided that a
majority of the Trustees who are not interested persons of any Investment
Portfolio and either a majority of all Trustees or a majority of the
shareholders of each Investment Portfolio approve its continuance. The
Agreement may be terminated by Adviser or a Portfolio without penalty upon 60
days' notice and will terminate automatically upon its assignment.
ADMINISTRATOR. Frank Russell Investment Management Company
("Administrator") serves as the Portfolios' administrator, pursuant to an
Administration Agreement dated April 12, 1988 ("Administration Agreement"). A
description of the services provided under the Administration Agreement and the
basis for computing fees for such services is provided in the Portfolios'
Prospectus. The Treasury Money Market Portfolio accrued expenses to
Administrator of $54,150 for fiscal 1995 and $197,115 from the date of inception
to August 31, 1994. Administrator waived administration fees of $45,376 from
the date of inception to August 31, 1994. The Prime Money Market Portfolio
accrued expenses to Administrator of $261,274 for fiscal 1995 and $91,034 from
the date of inception to August 31, 1994. Administrator waived administration
fees of $23,193 from the date of inception to August 31, 1994.
The Administration Agreement will continue from year to year provided that a
majority of the Trustees and a majority of the Trustees who are not interested
persons of any Investment Portfolio and who have no direct or indirect financial
interest in the operation of the Distribution Plan described below or the
Administration Agreement approve its continuance. The Agreement may be
terminated by Administrator or a Portfolio without penalty upon 60 days' notice
and will terminate automatically upon its assignment.
Administrator is a wholly owned subsidiary of Frank Russell Company. Frank
Russell Company was founded in 1936 and has provided comprehensive asset
management consulting services since 1969 for institutional pools of investment
assets, principally those of large corporate employee benefit plans. Frank
Russell Company and its affiliates have offices in Tacoma, Seattle, New York
City, Toronto, London, Tokyo, Sydney, Paris, Zurich and Auckland, and have
approximately 1,000 officers and employees. Administrator's and Frank Russell
Company's mailing address is 909 A Street, Tacoma, WA 98402.
DISTRIBUTOR. Russell Fund Distributors, Inc. ("Distributor") serves as the
distributor of Portfolio shares pursuant to a Distribution Agreement dated
April 12, 1988 ("Distribution Agreement"). Distributor is a wholly owned
subsidiary of Administrator. Distributor's mailing address is Two International
Place, 35th Floor, Boston, MA 02110.
-8-
<PAGE>
CUSTODIAN AND TRANSFER AGENT. State Street serves as the custodian
("Custodian") and transfer agent ("Transfer Agent") for Investment Company.
State Street also provides the basic portfolio recordkeeping required by
Investment Company for regulatory and financial reporting purposes. For these
services, State Street is paid an annual fee in accordance with the following:
custody services--a fee payable monthly on a pro rata basis, based on the
following percentages of average daily net assets of each Fund: $0 up to
$1.5 billion--0.02%, over $1.5 billion--0.015% (for purposes of calculating the
break point, the assets of all Investment Portfolios are aggregated); securities
transaction charges from $8.00 to $25.00 per transaction; Eurodollar transaction
fees ranging from $110.00 to $125.00 per transaction; monthly pricing fees of
$375.00 per Investment Portfolio and from $6.00 to $16.00 per security,
depending on the type of instrument and the pricing service used; transfer agent
services of $2.00 per shareholder transaction and a multiple class fee of
$18,000 per year for each additional class of shares; and yield calculation fees
of $350.00 per non-money market portfolio per year. State Street is reimbursed
by each Fund for supplying certain out-of-pocket expenses including postage,
transfer fees, stamp duties, taxes, wire fees, telexes, and freight.
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand L.L.P. serves as the Investment
Company's independent accountants. Coopers & Lybrand L.L.P. is responsible
for performing annual audits of the financial statements and financial
highlights in accordance with generally accepted auditing standards, a review
of federal tax returns, and, pursuant to Rule 17f-2 of the 1940 Act, three
security counts. The mailing address of Coopers & Lybrand L.L.P. is One Post
Office Square, Boston MA 02109.
DISTRIBUTION PLAN. Under the 1940 Act, the Securities and Exchange
Commission has adopted Rule 12b-1, which regulates the circumstances under which
the Portfolios may, directly or indirectly, bear distribution and shareholder
servicing expenses. The Rule provides that the Portfolios may pay for such
expenses only pursuant to a plan adopted in accordance with the Rule.
Accordingly, the Portfolios have adopted a distribution plan (the "Plan"), which
is described in the Portfolios' prospectus.
The Plan provides that each Portfolio may spend annually, directly or
indirectly, up to 0.25% of the value of its average net assets for distribution
and shareholder servicing services. The Plan does not provide for the
Portfolios to be charged for interest, carrying or any other financing charges
on any distribution expenses carried forward to subsequent years. A quarterly
report of the amounts expended under the Plan, and the purposes for which such
expenditures were incurred, must be made to the Trustees for their review. The
Plan may not be amended without shareholder approval to increase materially the
distribution or shareholder servicing costs that the Portfolios may pay. The
Plan and material amendments to it must be approved annually by all of the
Trustees and by the Trustees who are neither "interested persons" (as defined in
the 1940 Act) of the Portfolios nor have any direct or indirect financial
interest in the operation of the Plan or any related agreements.
-9-
<PAGE>
The Portfolios accrued expenses to Russell Fund Distributors, Inc., as
Distributor, for the fiscal year ended August 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Treasury Money Market Portfolio $ 31,785 $62,470
Prime Money Market Portfolio 184,201 56,657
</TABLE>
For fiscal 1995, these amounts are reflective of the following individual
payments:
<TABLE>
<CAPTION>
Treasury Prime
Money Money
Market Market
<S> <C> <C>
Advertising $ 782 $ 6,019
Printing of Prospectuses 4,747 1,440
Compensation to Sales Personnel 15,406 98,129
Other* 10,850 78,613
-------- --------
$ 31,785 $184,201
-------- --------
-------- --------
</TABLE>
* Other expenses may include such items as compensation for travel, conferences
and seminars for staff, subscriptions, office charges and professional fees.
Under the Plan, the Portfolios may also enter into agreements ("Service
Agreements") with financial institutions, which may include Adviser ("Service
Organizations"), to provide shareholder servicing with respect to Portfolio
shares held by or for the customers of the Service Organizations. Such
arrangements are more fully described in the Portfolios' prospectus under
"Distribution Services and Shareholder Servicing."
The Portfolios accrued expenses in the following amount to Adviser, under a
Service Agreement pursuant to Rule 12b-1, for the fiscal year ended August 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Treasury Money Market Portfolio $110,284 $61,861
Prime Money Market Portfolio 262,458 43,134
</TABLE>
FEDERAL LAW AFFECTING STATE STREET. The Glass-Steagall Act of 1933
prohibits state chartered banks such as State Street from engaging in the
business of underwriting, selling or distributing certain securities, and
prohibits a member bank of the Federal Reserve System from having certain
affiliations with an entity engaged principally in that business. The
activities of State Street in informing its customers of the Portfolios,
performing investment and redemption services, providing custodian, transfer,
shareholder servicing, dividend disbursing, agent servicing and investment
advisory services, may raise issues under these provisions. State Street has
been advised by its counsel that its activities in connection with the
Portfolios contemplated under this arrangement are consistent with its statutory
and regulatory obligations.
VALUATION OF PORTFOLIO SHARES. The Portfolios determine net asset value
per share twice each business day, the Treasury Money Market and Prime Money
Market Portfolios as of 3:00
-10-
<PAGE>
p.m. Eastern time and as of the close of the regular trading session of the New
York Stock Exchange (currently, 4:00 p.m. Eastern time). A business day is one
on which both the Boston Federal Reserve and the New York Stock Exchange are
open for business.
It is the policy of each Portfolio to use its best efforts to maintain a
constant price per share of $1.00, although there can be no assurance that the
$1.00 net asset value per share will be maintained. In accordance with this
effort and pursuant to Rule 2a-7 under the 1940 Act, the Portfolios use the
amortized cost valuation method to value their portfolio instruments. This
method involves valuing an instrument at its cost and thereafter assuming a
constant amortization to maturity of any discount or premium, even though the
portfolio security may increase or decrease in market value generally in
response to changes in interest rates. While 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 a Portfolio would receive if
it sold the instrument.
For example, in periods of declining interest rates, the daily yield on a
Portfolio's shares computed by dividing the annualized daily income on each
Portfolio's portfolio by the net asset value based upon the amortized cost
valuation technique may tend to be higher than a similar computation made by
using a method of valuation based upon market prices and estimates. In periods
of rising interest rates, the daily yield on Portfolio shares computed the same
way may tend to be lower than a similar computation made by using a method of
calculation based upon market prices and estimates.
The Trustees have established procedures reasonably designed to stabilize
each Portfolio's price per share at $1.00. These procedures include: (1) the
determination of the deviation from $1.00, if any, of each Portfolio's net asset
value using market values; (2) periodic review by the Trustees of the amount of
and the methods used to calculate the deviation; and (3) maintenance of records
of such determination. The Trustees will promptly consider what action, if any,
should be taken if such deviation exceeds 1/2 of one percent.
BROKERAGE PRACTICES. All portfolio transactions are placed on behalf of
the Portfolios by Adviser. Adviser ordinarily pays commissions when it executes
transactions on a securities exchange. In contrast, there is generally no
stated commission in the purchase or sale of securities traded in the over-the-
counter markets, including most debt securities and money market instruments.
Rather, the price of such securities includes an undisclosed "commission" in the
form of a mark-up or mark-down. The cost of securities purchased from
underwriters includes an underwriting commission or concession.
Subject to the arrangements and provisions described below, the selection
of a broker or dealer to execute portfolio transactions is usually made by
Adviser. The Advisory Agreement provides, in substance and subject to specific
directions from officers of Investment Company, that in executing portfolio
transactions and selecting brokers or dealers, the principal objective is to
seek the best overall terms available to the Portfolios. Ordinarily, securities
will be purchased from primary markets, and Adviser shall consider all factors
it deems relevant in assessing the best overall terms available for any
transaction, including the breadth of the market in the security, the
-11-
<PAGE>
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 other transactions on a continuing basis.
The Advisory Agreement authorizes Adviser to select brokers or dealers to
execute a particular transaction, including principal transactions, 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 Portfolios and/or Adviser (or
its affiliates). Adviser is authorized to cause the Portfolios to pay a
commission to a broker or dealer who provides such brokerage and research
services for executing a portfolio transaction which is in excess of the amount
of commission another broker or dealer would have charged for effecting that
transaction. The Portfolios or Adviser, as appropriate, must determine in good
faith that such commission was reasonable in relation to the value of the
brokerage and research services provided--viewed in terms of that particular
transaction or in terms of all the accounts over which Adviser exercises
investment discretion.
The Trustees periodically review Adviser's performance of its
responsibilities in connection with the placement of portfolio transactions on
behalf of the Portfolios and review the prices paid by the Portfolios over
representative periods of time to determine if such prices are reasonable in
relation to the benefits provided to the Portfolios. Certain services received
by Adviser attributable to a particular Portfolio transaction may benefit one or
more other accounts for which Adviser exercises investment discretion or an
Investment Portfolio other than such Portfolio. Adviser's fees are not reduced
by Adviser's receipt of such brokerage and research services.
During the fiscal year ended August 31, 1995, the Portfolios purchased
securities issued by the following regular brokers or dealers, as defined by
Rule 10b-1 of the 1940 Act, each of which is one of the Portfolios' ten largest
brokers or dealers by dollar amounts of securities executed or commissions
received on behalf of the Portfolios. The value of broker-dealer securities
held as of August 31, 1995, is as follows:
-12-
<PAGE>
<TABLE>
<CAPTION>
US TREASURY MONEY MARKET
FUND PRIME MONEY MARKET FUND
($000) ($000)
----------------------------------------------------
<S> <C> <C>
UBS Securities, Inc. 40,000* 0
HSBC Securities, Inc. 8,000* 100,000
Prebon n/a n/a
First Chicago 8,000 0
Salomon Brothers, Inc. 0 0
Lumis & Co. n/a n/a
Smith Barney, Inc. n/a n/a
Lehman Brothers, Inc. 0 0
Goldman, Sachs & Co. 0 0
Greenwich Securities 0 0
</TABLE>
* Repurchase Agreements
n/a represents no purchases executed during the fiscal year
YIELD AND TOTAL RETURN QUOTATIONS. The Portfolios compute average annual
total return by using a standardized method of calculation required by the
Securities and Exchange Commission. Average annual total return is computed by
finding the average annual compounded rates of return on a hypothetical initial
investment of $1,000 over the one, five and ten year periods (or life of the
funds as appropriate), that would equate the initial amount invested to the
ending redeemable value, according to the following formula:
P(1+T)(n) = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a $1,000 payment made at
the beginning of the 1-, 5- and 10-year periods at the
end of the year or period
The calculation assumes that all dividends and distributions of each
Portfolio are reinvested at the price stated in the Prospectus on the dividend
dates during the period, and includes all recurring and nonrecurring fees that
are charged to all shareholder accounts.
The current annualized yield of the Portfolios may be quoted in published
material. The yield is calculated daily based upon the seven days ending on the
date of calculation ("base period"). The yields are computed by determining the
net change, exclusive of capital changes, in the value of a hypothetical pre-
existing account having a balance of one share at the beginning of the base
period, subtracting a hypothetical charge reflecting deductions from shareholder
accounts and dividing the net change in the account value by the value of the
account at the beginning of the base period to obtain the base period return,
and then multiplying the base period return by (365/7) with the resulting yield
figure carried to the nearest hundredth of one percent. An
-13-
<PAGE>
effective yield is computed by determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account having a balance of
one share at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from shareholder accounts, and dividing the difference by
the value of the account at the beginning of the base period to obtain the base
period return, and then compounding the base period return by adding 1, raising
the sum to a power equal to 365 divided by 7, and subtracting 1 from the result,
according to the following formula:
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1)(365/7)]-1
The following are the current and effective yields for the Portfolios for
the seven-day period ended August 31, 1995:
<TABLE>
<CAPTION>
Treasury Money Market Portfolio
-------------------------------
<S> <C>
Current Yield 5.68%
Effective Yield 5.84%
<CAPTION>
Prime Money Market Portfolio
----------------------------
<S> <C>
Current Yield 5.77%
Effective Yield 5.94%
</TABLE>
The yields quoted are not indicative of future results. Yields will depend
on the type, quality, maturity, and interest rate of money market instruments
held by the Portfolios.
INVESTMENTS
The fundamental investment objective of each Portfolio is set forth in the
Prospectus. In addition to that investment objective, each Portfolio also has
certain "fundamental" investment restrictions, which may be changed only with
the approval of a majority of the shareholders of the Portfolio, and certain
nonfundamental investment restrictions and policies, which may be changed by the
Portfolio without shareholder approval.
INVESTMENT RESTRICTIONS
The Portfolios are subject to the following fundamental investment
restrictions, each of which applies at the time an investment is made. The
Portfolios will not:
(1) Borrow money, except as a temporary measure for extraordinary or
emergency purposes or to facilitate redemptions (not for leveraging or
investment), provided that borrowings do not exceed an amount equal to 33-1/3%
of the current value of the Portfolio's assets taken at market value, less
liabilities other than borrowings. If at any time the Portfolio's borrowings
exceed this limitation due to a decline in net assets, such borrowings will
within three days be reduced to the
-14-
<PAGE>
extent necessary to comply with this limitation. The Portfolio will not
purchase investments once borrowed funds (including reverse repurchase
agreements) exceed 5% of its total assets.
(2) Pledge, mortgage or hypothecate its assets. However, the Portfolio may
pledge securities having a market value (on a daily marked-to-market basis) at
the time of the pledge not exceeding 33-1/3% of the value of the Portfolio's
total assets to secure borrowings permitted by paragraph (1) above.
(3) Make loans to any person or firm; provided, however, that the making of
a loan shall not include (i) the acquisition for investment of bonds,
debentures, notes or other evidences of indebtedness of any corporation or
government which are publicly distributed or of a type customarily purchased by
institutional investors, or (ii) the entry into "repurchase agreements." A
Portfolio may lend its portfolio securities to broker-dealers or other
institutional investors if the aggregate value of all securities loaned does not
exceed 33-1/3% of the value of the Portfolio's total assets.
(4) Engage in the business of underwriting securities issued by others,
except that the Portfolio will not be deemed to be an underwriter or to be
underwriting on account of the purchase of securities subject to legal or
contractual restrictions on disposition.
(5) Issue senior securities, except as permitted by its investment
objective, policies and restrictions, and except as permitted by the 1940 Act.
(6) Purchase or sell puts, calls or invest in straddles, spreads or any
combination thereof.
(7) Make short sales of securities or purchase any securities on margin,
except for such short-term credits as are necessary for the clearance of
transactions.
(8) Purchase from or sell portfolio securities to its officers or directors
or other "interested persons" (as defined in the 1940 Act) of the Portfolio,
including their investment advisers and affiliates, except as permitted by the
1940 Act and exemptive rules or orders thereunder.
(9) Invest more than 10% of its net assets in the aggregate in illiquid
securities or securities that are not readily marketable, including repurchase
agreements and time deposits of more than seven days' duration.
(10) Make investments for the purpose of gaining control of an issuer's
management.
The Prime Money Market Portfolio is subject to the following additional
fundamental investment restrictions each of which applies at the time an
investment is made. The Prime Money Market Portfolio will not:
(1) Invest 25% or more of the value of its total assets in securities of
companies primarily engaged in any one industry (other than the US Government,
its agencies and instrumentalities). Concentration may occur as a result of
changes in the market value of portfolio securities, but
-15-
<PAGE>
may not result from investment. Foreign and domestic branches of US banks and
US branches of foreign banks are not considered a single industry for purposes
of this restriction.
(2) With respect to 75% of its total assets, invest in securities of any
one issuer (other than securities issued by the US Government, its agencies, and
instrumentalities), if immediately after and as a result of such investment the
current market value of the Portfolio's holdings in the securities of such
issuer exceeds 5% of the value of the Portfolio's assets.
(3) Purchase or sell real estate or real estate mortgage loans; provided,
however, that the Portfolio may invest in securities secured by real estate or
interests therein or issued by companies which invest in real estate or
interests therein.
(4) Purchase interests in oil, gas or other mineral exploration or
development programs.
(5) Purchase the securities of any issuer if the Investment Company's
officers, Directors, Adviser or any of their affiliates beneficially own more
than one-half of 1% of the securities of such issuer or together own
beneficially more than 5% of the securities of such issuer.
(6) Invest in securities of any issuer which, together with its
predecessor, has been in operation for less than three years if, as a result,
more than 5% of the Portfolios' total assets would be invested in such
securities, except that the Portfolios may invest in securities of a particular
issuer to the extent their respective underlying indices invest in that issuer.
INVESTMENT POLICIES
To the extent consistent with its fundamental investment objective and
restrictions and except as otherwise indicated, each Portfolio may invest in the
following instruments and utilize the following investment techniques:
US GOVERNMENT OBLIGATIONS. The types of US Government obligations in which
the Portfolios may at times invest include: (1) a variety of US Treasury
obligations, which differ only in their interest rates, maturities and times of
issuance and which have remaining maturities or hard put dates of 397 days or
less; and (2) obligations issued or guaranteed by US Government agencies and
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the US Treasury, (b) the right of the issuer to borrow an
amount limited to a specific line of credit from the US Treasury,
(c) discretionary authority of the US Government agency or instrumentality or
(d) the credit of the instrumentality, although neither the Treasury Obligations
nor the Treasury Money Market Portfolio presently intends to invest in
securities described in (2). Examples of such issuers are the Federal Land
Banks, Federal Housing Administration, Farmers Home Administration, Export--
Import Bank of the United States, Central Bank for Cooperatives, Federal
Intermediate Credit Banks, Federal Home Loan Banks, General Services
Administration, Maritime Administration, Tennessee Development Bank, Asian-
American Development Bank, Student Loan Marketing Association, International
Bank for Reconstruction and Development and Federal National Mortgage
Association. No assurance can be given that in the future the US Government
will provide financial support to such US Government agencies or
-16-
<PAGE>
instrumentalities described in (2)(b), (2)(c) and (2)(d), other than as set
forth above, since it is not obligated to do so by law. The Prime Money Market
Portfolio may purchase US Government obligations on a forward commitment basis.
WHEN-ISSUED TRANSACTIONS. New issues of securities are often offered on a
when-issued basis. This means that delivery and payment for the securities
normally will take place several days after the date the buyer commits to
purchase them. The payment obligation and the interest rate that will be
received on securities purchased on a when-issued basis are each fixed at the
time the buyer enters into the commitment.
Each Portfolio will make commitments to purchase when-issued securities
only with the intention of actually acquiring the securities, but a Portfolio
may sell these securities or dispose of the commitment before the settlement
date if it is deemed advisable as a matter of investment strategy. Cash or
marketable high quality debt securities equal to the amount of the above
commitments will be segregated on the Portfolio's records. For the purpose of
determining the adequacy of these securities the segregated securities will be
valued at market. If the market value of such securities declines, additional
cash or securities will be segregated on the Portfolio's records on a daily
basis so that the market value of the account will equal the amount of such
commitments by the Portfolio. No Portfolio will invest more than 25% of its net
assets in when-issued securities. A Portfolio will not purchase the securities
of any issuer if the Investment Company's officers, Directors, Adviser or any of
their affiliates beneficially own more than one-half of 1% of the securities of
such issuer or together own beneficially more than 5% of the securities of such
issuer.
Securities purchased on a when-issued basis and held by each Portfolio are
subject to changes in market value based upon the public's perception of changes
in the level of interest rates. Generally, the value of such securities will
fluctuate inversely to changes in interest rates -- i.e., they will appreciate
in value when interest rates decline and decrease in value when interest rates
rise. Therefore, if in order to achieve higher interest income a Portfolio
remains substantially fully invested at the same time that it has purchased
securities on a "when-issued" basis, there will be a greater possibility of
fluctuation in the Portfolio's net asset value.
When payment for when-issued securities is due, each Portfolio will meet
its obligations from then-available cash flow, the sale of segregated
securities, the sale of other securities or, and although it would not normally
expect to do so, from the sale of the when-issued securities themselves (which
may have a market value greater or less than the Portfolio's payment
obligation). The sale of securities to meet such obligations carries with it a
greater potential for the realization of capital gains, which are subject to
federal income taxes.
REPURCHASE AGREEMENTS. The Treasury Money Market and Prime Money Market
Portfolios may enter into repurchase agreements with certain financial
institutions. Under repurchase agreements, these parties sell US Treasury
bills, notes and bonds to a Portfolio and agree to repurchase the securities at
the Portfolio's cost plus interest within a specified time (normally one day).
The securities purchased by the Portfolio have a total value in excess of the
purchase price paid by the Portfolio and are held by Custodian until
repurchased. Repurchase
-17-
<PAGE>
agreements assist the Portfolios in being invested fully while retaining
"overnight" flexibility in pursuit of investments of a longer-term nature. The
Treasury Money Market Portfolio will limit repurchase transactions to those
member banks of the Federal Reserve System and primary dealers in US Government
securities whose creditworthiness is continually monitored and found
satisfactory by Adviser.
STRIPPED SECURITIES. Each Portfolio may invest in stripped securities,
which are U.S. Treasury bonds and notes the unmatured interest coupons of which
have been separated from the underlying obligation. Stripped securities are
zero coupon obligations that are normally issued at a discount to their face
value, and may exhibit greater price volatility than ordinary debt securities
because of the manner in which their principal securities issued by the U.S.
Treasury and recorded in the Federal Reserve book-entry record-keeping system.
The Portfolios may invest no more than 25% of their assets in stripped
securities that have been stripped by their holder, typically a custodian bank
or investment brokerage firm. A number of securities firms and banks have
stripped the interest coupons and resold them in custodian receipt programs with
different names such as Treasury Income Growth Receipts ("TIGRS") and
Certificates of Accrual on Treasuries ("CATS"). The Treasury Money Market
Portfolio intends to rely on the opinions of counsel to the sellers of these
certificates or other evidences of ownership of U.S. Treasury obligations that,
for Federal tax and securities purposes, purchasers of such certificates most
likely will be deemed the beneficial holders of the underlying U.S. Government
obligations. Privately-issued stripped securities such as TIGRS and CATS are
not themselves guaranteed by the U.S. Government, but the future payment of
principal or interest on U.S. Treasury obligations which they represent is so
guaranteed.
VARIABLE AND FLOATING RATE SECURITIES. A floating rate security provides
for the automatic adjustment of its interest rate whenever a specified interest
rate changes. A variable rate security provides for the automatic establishment
of a new interest rate on set dates. Interest rates on these securities are
ordinarily tied to, and are a percentage of, a widely recognized interest rate,
such as the yield on 90-day US Treasury bills or the prime rate of a specified
bank. These rates may change as often as twice daily. Generally, changes in
interest rates will have a smaller effect on the market value of variable and
floating rate securities than on the market value of comparable fixed income
obligations. Thus, investing in variable and floating rate securities generally
allows less opportunity for capital appreciation and depreciation than investing
in comparable fixed income securities.
Securities purchased by the Portfolios may include variable and floating
rate instruments, which may have a stated maturity in excess of the Portfolio's
maturity limitations but which will, except for certain U.S. Government
obligations, permit a Portfolio to demand payment of the principal of the
instrument at least once every thirteen months upon not more than thirty days'
notice. Variable and floating rate instruments purchased by the Treasury Money
Market Portfolio will be U.S. Government agency securities with stated
maturities of typically up to 10 years, although stated maturities of up to 30
years are possible. Variable rate US Government obligations whose interest is
readjusted no less frequently than annually will be deemed to have a maturity
equal to the remaining period until the next readjustment of the interest rate.
There may be no active secondary market with respect to a particular variable or
floating rate instrument.
-18-
<PAGE>
Nevertheless, the periodic readjustments of their interest rates tend to assure
that their value to a Portfolio will approximate their par value. Illiquid
variable and floating rate instruments (instruments which are not payable upon
seven days notice and do not have an active trading market) that are acquired by
the Portfolios are subject to a Portfolio's percentage limitations regarding
securities that are illiquid or not readily marketable. The Portfolios'
investment adviser will continuously monitor the creditworthiness of issuers of
variable and floating rate instruments in which the Funds invest, and their
ability to repay principal and interest.
AFFILIATED BANK TRANSACTIONS. Pursuant to exemptive orders issued by the
SEC, the Portfolios may engage in certain transactions with banks that are, or
may be considered to be, "affiliated persons" of the Portfolios under the 1940
Act. Such transactions may be entered into only pursuant to procedures
established, and periodically reviewed by the Board of Trustees. These
transactions may include repurchase agreements with custodian banks; purchases,
as principal, of short-term obligations of, and repurchase agreements with, the
50 largest U.S. banks (measured by deposits); transactions in municipal
securities; and transactions in U.S. government securities with affiliated banks
that are primary dealers in these securities.
INTER-PORTFOLIO AND INTER-FUND BORROWING PROGRAM (PRIME MONEY MARKET
PORTFOLIO ONLY). The Prime Money Market Portfolios has received permission from
the SEC to lend money to and borrow money from other Portfolios advised by State
Street Bank and Trust Company and its affiliates. Inter-fund loans and
borrowings normally will extend overnight, but can have a maximum duration of
seven days. The Portfolio will borrow through the program only when costs are
equal to or lower than the cost of bank loans. The Portfolio will lend through
the program only when the returns are higher than those available at the same
time from other short-term instruments (such as repurchase agreements). The
Portfolio will not lend more than 10% of its assets to other funds and will not
borrow through the program if, after doing so, the borrowings exceed an amount
equal to one-third of the current value of the Portfolio's assets taken at
market value, less liabilities other than borrowings. Loans may be called on
one day's notice and a Portfolio may have to borrow from a bank at a higher
interest rate if an inter-fund loan is called or not renewed. Any delay in
repayment to a lending fund could result in a lost investment opportunity or
additional borrowing costs.
REVERSE REPURCHASE AGREEMENTS (PRIME MONEY MARKET PORTFOLIO ONLY). The
Prime Money Market Portfolio may enter into reverse repurchase agreements under
the circumstances described in "Investment Restrictions." Under reverse
repurchase agreements, the Portfolio transfers possession of portfolio
securities to banks in return for cash in an amount equal to a percentage of the
portfolio securities' market value and agrees to repurchase the securities at a
future date by repaying the cash with interest. The Portfolio retains the right
to receive interest and principal payments from the securities while they are in
the possession of the financial institutions. Cash or liquid high quality debt
obligations from a Fund's portfolio equal in value to the repurchase price
including any accrued interest will be segregated by Custodian on the Fund's
records while a reverse repurchase agreement is in effect.
FORWARD COMMITMENTS (PRIME MONEY MARKET PORTFOLIO ONLY). The Prime Money
Market Portfolio may contract to purchase securities for a fixed price at a
future date beyond
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<PAGE>
customary settlement time consistent with the Portfolio's ability to manage its
investment portfolio, maintain a stable net asset value and meet redemption
requests. The Portfolio may dispose of a commitment prior to settlement if it
is appropriate to do so and realize short-term profits or losses upon such sale.
When effecting such transactions, cash or liquid high quality debt obligations
held by the Portfolio of a dollar amount sufficient to make payment for the
portfolio securities to be purchased will be segregated on the Portfolio's
records at the trade date and maintained until the transaction is settled.
Forward commitments involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date, or if the other party fails to
complete the transaction.
VARIABLE AMOUNT MASTER DEMAND NOTES (PRIME MONEY MARKET PORTFOLIO ONLY).
Variable amount master demand notes are unsecured obligations that are
redeemable upon demand and are typically unrated. These instruments are issued
pursuant to written agreements between the issuers and the holders. The
agreements permit the holders to increase (subject to an agreed maximum) and the
holders and issuers to decrease the principal amount of the notes, and specify
that the rate of interest payable on the principal fluctuates according to an
agreed formula.
SECTION 4(2) COMMERCIAL PAPER (PRIME MONEY MARKET PORTFOLIO ONLY). The
Prime Money Market Portfolio may also invest in commercial paper issued in
reliance on the so-called private placement exemption from registration afforded
by Section 4(2) of the Securities Act of 1933 ("Section 4(2) paper"). Section
4(2) paper is restricted as to disposition under the Federal securities laws and
generally is sold to institutional investors such as the Prime Money Market
Portfolio that agree that they are purchasing the paper for investment and not
with a view to public distribution. Any resale by the purchaser must be in an
exempt transaction. Section 4(2) paper normally is resold to other
institutional investors like the Portfolio through or with the assistance of the
issuer or investment dealers that make a market in Section 4(2) paper. Section
4(2) paper will not be subject to the Fund's 10% limitation on illiquid
securities set forth below where the Board of Trustees of Investment Company
(pursuant to guidelines adopted by the Board) determines that a liquid trading
market exists.
ILLIQUID SECURITIES (PRIME MONEY MARKET PORTFOLIO ONLY). The Prime Money
Market Portfolio will not invest more than 10% of its net assets in illiquid
securities or securities that are not readily marketable, including repurchase
agreements and time deposits of more than seven days' duration.
MORTGAGE-RELATED PASS-THROUGH SECURITIES (PRIME MONEY MARKET PORTFOLIO
ONLY). Mortgage pass-through certificates are issued by governmental,
government-related and private organizations and are backed by pools of mortgage
loans. These mortgage loans are made by savings and loan associations, mortgage
bankers, commercial banks and other lenders to residential home buyers
throughout the United States. The securities are "pass-through" securities
because they provide investors with monthly payments of principal and interest
that, in effect, are a "pass-through" of the monthly payments made by the
individual borrowers on the underlying mortgage loans, net of any fees paid to
the issuer or guarantor of the pass-through certificates. The principal
governmental issuer of such securities is the Government National Mortgage
Association ("GNMA"), which is a wholly-owned US Government corporation within
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the Department of Housing and Urban Development. Government-related issuers
include the Federal Home Loan Mortgage Corporation ("FHLMC"), a corporate
instrumentality of the United States created pursuant to an act of Congress
which is owned entirely by the Federal Home Loan Banks, and the Federal National
Mortgage Association ("FNMA"), a government sponsored corporation owned entirely
by private stockholders. Commercial banks, savings and loan associations,
private mortgage insurance companies, mortgage bankers and other secondary
market issuers also create pass-through pools of conventional residential
mortgage loans. Such issuers may be the originators of the underlying mortgage
loans as well as the guarantors of the mortgage-related securities.
(1) GNMA Mortgage Pass-Through Certificates ("Ginnie Maes"). Ginnie Maes
represent an undivided interest in a pool of mortgage loans that are insured by
the Federal Housing Administration or the Farmers Home Administration or
guaranteed by the Veterans Administration. Ginnie Maes entitle the holder to
receive all payments (including prepayments) of principal and interest owed by
the individual mortgagors, net of fees paid to GNMA and to the issuer which
assembles the loan pool and passes through the monthly mortgage payments to the
certificate holders (typically, a mortgage banking firm), regardless of whether
the individual mortgagor actually makes the payment. Because payments are made
to certificate holders regardless of whether payments are actually received on
the underlying loans, Ginnie Maes are of the "modified pass-through" mortgage
certificate type. GNMA is authorized to guarantee the timely payment of
principal and interest on the Ginnie Maes as securities backed by an eligible
pool of mortgage loans. The GNMA guaranty is backed by the full faith and
credit of the United States, and GNMA has unlimited authority to borrow funds
from the US Treasury to make payments under the guaranty. The market for Ginnie
Maes is highly liquid because of the size of the market and the active
participation in the secondary market by securities dealers and a variety of
investors.
(2) FHLMC Mortgage Participation Certificates ("Freddie Macs"). Freddie
Macs represent interests in groups of specified first lien residential
conventional mortgage loans underwritten and owned by FHLMC. Freddie Macs
entitle the holder to timely payment of interest, which is guaranteed by FHLMC.
FHLMC guarantees either ultimate collection or timely payment of all principal
payments on the underlying mortgage loans. In cases where FHLMC has not
guaranteed timely payment of principal, FHLMC may remit the amount due on
account of its guarantee of ultimate payment of principal at any time after
default on an underlying loan, but in no event later than one year after it
becomes payable. Freddie Macs are not guaranteed by the United States or by any
of the Federal Home Loan Banks and do not constitute a debt or obligation of the
United States or of any Federal Home Loan Bank. The secondary market for
Freddie Macs is highly liquid because of the size of the market and the active
participation in the secondary market by FHLMC, securities dealers and a variety
of investors.
(3) FNMA Guaranteed Mortgage Pass-Through Certificates ("Fannie Maes").
Fannie Maes represent an undivided interest in a pool of conventional mortgage
loans secured by first mortgages or deeds of trust, on one-family to four-family
residential properties. FNMA is obligated to distribute scheduled monthly
installments of principal and interest on the loans in the pool, whether or not
received, plus full principal of any foreclosed or otherwise liquidated loans.
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The obligation of FNMA under its guaranty is solely the obligation of FNMA and
is not backed by, nor entitled to, the full faith and credit of the United
States.
The market value of mortgage-related securities depends on, among other
things, the level of interest rates, the certificates' coupon rates and the
payment history of the underlying borrowers.
Although the mortgage loans in a pool underlying a mortgage pass-through
certificate will have maturities of up to 30 years, the average life of a
mortgage pass-through certificate will be substantially less because the loans
will be subject to normal principal amortization and also may be prepaid prior
to maturity. Prepayment rates vary widely and may be affected by changes in
mortgage interest rates. In periods of falling interest rates, the rate of
prepayment on higher interest mortgage rates tends to increase, thereby
shortening the actual average life of the mortgage pass-through certificate.
Conversely, when interest rates are rising, the rate of prepayment tends to
decrease, thereby lengthening the average life of the mortgage pass-through
certificate. Accordingly, it is not possible to predict accurately the average
life of a particular pool. However, based on current statistics, it is
conventional to quote yields on mortgage pass-through certificates based on the
assumption that they have effective maturities of 12 years. Reinvestment of
prepayments may occur at higher or lower rates than the original yield on the
certificates. Due to the prepayment feature and the need to reinvest
prepayments of principal at current rates, mortgage pass-through certificates
with underlying loans bearing interest rates in excess of the market rate can be
less effective than typical noncallable bonds with similar maturities at
"locking in" yields during periods of declining interest rates, although they
may have comparable risks of declining in value during periods of rising
interest rates.
ZERO COUPON SECURITIES (PRIME MONEY MARKET PORTFOLIO ONLY). These
securities are notes, bonds and debentures that: (1) do not pay current
interest and are issued at a substantial discount from par value; (2) have been
stripped of their unmatured interest coupons and receipts; or (3) pay no
interest until a stated date one or more years into the future. These
securities also include certificates representing interests in such stripped
coupons and receipts.
Because the Prime Money Market Portfolio accrues taxable income from zero
coupon securities without receiving regular interest payments in cash, it may be
required to sell portfolio securities in order to pay a dividend depending,
among other things, upon the proportion of shareholders who elect to receive
dividends in cash rather than reinvesting dividends in additional shares of the
Portfolio. Investing in these securities might also force the Portfolio to sell
portfolio securities to maintain portfolio liquidity.
Because a zero coupon security pays no interest to its holder during its
life or for a substantial period of time, it usually trades at a deep discount
from its face or par value and will be subject to greater fluctuations in market
value in response to changing interest rates than debt obligations of comparable
maturities that make regular distributions of interest.
To the extent permitted under the 1940 Act and exemptive rules and orders
thereunder, the Portfolios may seek to achieve their investment objectives by
investing solely in the shares of another investment company that has
substantially similar investment objectives and policies.
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TAXES
Each Portfolio intends to qualify for treatment as a regulated investment
company ("RIC") under Subchapter M of the Internal Revenue Code of 1986, as
amended ("the Code"). As a RIC, each Portfolio will not be liable for federal
income taxes on taxable net investment income and capital gain net income
(capital gains in excess of capital losses) that it distributes to its
shareholders, provided that the Portfolio distributes annually to its
shareholders at least 90% of its net investment income and net short-term
capital gain for the taxable year ("Distribution Requirement"). For a Portfolio
to qualify as a RIC it must abide by all of the following requirements: (1) at
least 90% of the Portfolio's gross income each taxable year must be derived from
dividends, interest, payments with respect to securities loans, gains from the
sale or other disposition of stock or securities or foreign currencies, or other
income (including gains from options, futures or forward contracts) derived with
respect to its business of investing in such stock, securities or currencies
("Income Requirement"); (2) less than 30% of the Portfolio's gross income each
taxable year must be derived from the sale or other disposition of securities
and certain options, futures contracts, forward contracts and foreign currencies
held for less than three months ("Short-Short Limitation"); (3) at the close of
each quarter of the Portfolio's taxable year, at least 50% of the value of its
total assets must be represented by cash and cash items, US government
securities, securities of other RICs, and other securities, with such other
securities limited, in respect of any one issuer, to an amount that does not
exceed 5% of the total assets of the Portfolio and that does not represent more
than 10% of the outstanding voting securities of such issuer; and (4) at the
close of each quarter of the Portfolio's taxable year, not more than 25% of the
value of its assets may be invested in securities (other than US government
securities or the securities of other RICs) of any one issuer.
Each Portfolio will be subject to a nondeductible 4% excise tax to the
extent it fails to distribute by the end of any calendar year an amount at least
equal to the sum of: (1) 98% of its ordinary income for that year; (2) 98% of
its capital gain net income for the one-year period ending on October 31 of that
year; and (3) certain undistributed amounts from the preceding calendar year.
For this and other purposes, dividends declared in October, November or December
of any calendar year and made payable to shareholders of record in such month
will be deemed to have been received on December 31 of such year if the
dividends are paid by the Portfolio subsequent to December 31 but prior to
February 1 of the following year.
If a shareholder receives a distribution taxable as long-term capital gain
with respect to shares of a Portfolio and redeems or exchanges the shares
without having held the shares for more than one year, then any loss on the
redemption or exchange will be treated as long-term capital loss to the extent
of the capital gain distribution.
As of August 31, 1995, the Treasury Money Market Portfolio had a net tax basis
capital loss carryforward of $173,944, which may be applied against any realized
net taxable gains of each succeeding year until the expiration date of August
31, 2003.
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STATE AND LOCAL TAXES. Under federal law, the income derived from
obligations issued by the US Government and certain of its agencies and
instrumentalities is exempt from state income taxes. All states that tax
personal income, other than Pennsylvania, permit mutual funds to pass through
this tax exemption to shareholders. Income from repurchase agreements entered
into by the Treasury Money Market Portfolio does not receive this exempt
treatment.
The foregoing discussion is only a summary of certain federal income tax
issues generally affecting the Portfolios and their shareholders. Circumstances
among investors may vary and each investor is encouraged to discuss investment
in the Portfolios with the investor's tax adviser.
FINANCIAL STATEMENTS
The 1995 fiscal year-end financial statements for the Portfolios, including
notes to the financial statements and financial highlights and the Report of
Independent Accountants, are included in the Portfolio's Annual Report to
shareholders. A copy of this Annual Report accompanies this Statement of
Additional Information and is incorporated herein by reference.
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APPENDIX
DESCRIPTION OF SECURITIES RATINGS
The following is a description of the securities ratings of Duff & Phelps
Credit Rating Co. ("D&P"), Fitch Investors Service, Inc. ("Fitch"), Standard &
Poor's Corporation ("S&P"), Moody's Investors Service, Inc. ("Moody's"), IBCA
Limited and IBCA Inc. ("IBCA") and Thomson BankWatch ("Thomson").
LONG-TERM CORPORATION AND TAX-EXEMPT DEBT RATINGS
The two highest ratings of D&P for tax-exempt and corporate fixed-income
securities are AAA and AA. Securities rated AAA are of the highest credit
quality. The risk factors are considered to be negligible, being only slightly
more than for risk-free US Treasury debt. Securities rated AA are of high
credit quality. Protection factors are strong. Risk is modest but may vary
slightly from time to time because of economic conditions. The AA rating may be
modified by an addition of a plus (+) or minus (-) sign to show relative
standing within the major rating category.
The two highest ratings of Fitch for tax-exempt and corporate bonds are AAA
and AA. AAA bonds are considered to be investment grade and of the highest
credit quality. The obligor is judged to have an exceptionally strong ability
to pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events. AA bonds are considered to be investment grade
and of very high credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong as bonds rated AAA.
Because bonds rated in the AAA and AA categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these issuers
is generally rated F-1+. Plus (+) and minus (-) signs are used with the AA
rating symbol to indicate relative standing within the rating category.
The two highest ratings of S&P for tax-exempt and corporate bonds are AAA
and AA. Bonds rated AAA bear the highest rating assigned by S&P to a debt
obligation and the AAA rating indicates in its opinion an extremely strong
capacity to pay interest and repay principal. Bonds rated AA by S&P are judged
by it to have a very strong capacity to pay interest and repay principal, and
they differ from AAA issues only in small degree. The AA rating may be modified
by an addition of a plus (+) or minus (-) sign to show relative standing within
the major rating category. The foregoing ratings are sometimes followed by a
"p" indicating that the rating is provisional. A provisional rating assumes the
successful completion of the project being financed by the debt being rated and
indicates that payment of debt service requirements is largely or entirely
dependent upon the successful and timely completion of the project. This
rating, however, while addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of, or the risk of default upon
failure of, such completion.
The two highest ratings of Moody's for tax-exempt and corporate bonds are
Aaa and Aa. Tax-exempt and corporate bonds rated Aaa are judged to be of the
"best quality." The rating of
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Aa is assigned to bonds which are of "high quality by all standards." Aa bonds
are rated lower than Aaa bonds because margins of protection may not be as large
or fluctuations of protective elements may be of greater amplitude or there may
be other elements which make the long-term risks appear somewhat larger.
Moody's may modify a rating of Aa by adding numerical modifiers of 1, 2 or 3 to
show relative standing within the Aa category. The foregoing ratings for tax-
exempt bonds are sometimes presented in parentheses preceded with a "con"
indicating the bonds are rated conditionally. Such parenthetical rating denotes
the probable credit stature upon completion of construction or elimination of
the basis of the condition. In addition, Moody's has advised that the short-
term credit risk of a long-term instrument sometimes carries a MIG rating or one
of the commercial paper ratings described below.
The two highest ratings of IBCA for corporate bonds are AAA and AA.
Obligations rated AAA by IBCA have the lowest expectation of investment risk.
Capacity for timely repayment of principal and interest is substantial, such
that adverse changes in business, economic or financial conditions are unlikely
to increase investment risk significantly. Obligations for which there is a
very low expectation of investment risk are rated AA. IBCA may append a rating
of plus (+) or minus (-) to a rating to denote relative status within a major
rating category. IBCA does not rate tax-exempt bonds.
The two highest ratings of Thomson for corporate bonds are AAA and AA.
Bonds rated AAA are of the highest credit quality. The ability of the obligor
to repay principal and interest on a timely basis is considered to be very high.
Bonds rated AA indicate a superior ability on the part of the obligor to repay
principal and interest on a timely basis with limited incremental risk versus
issues rated in the highest category. These ratings may be modified by the
addition of a plus (+) or minus (-) sign to show relative standing within the
rating categories. Thomson does not rate tax-exempt bonds.
SHORT-TERM CORPORATE AND TAX-EXEMPT DEBT RATINGS
The highest rating of D&P for commercial paper is Duff 1. D&P employs
three designations, Duff 1 plus, Duff 1 and Duff 1 minus, within the highest
rating category. Duff 1 plus indicates highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or ready access
to alternative sources of funds, is judged to be outstanding, and safety is just
below risk-free US Treasury short-term obligations. Duff 1 indicates very high
certainty of timely payment. Liquidity factors are excellent and supported by
strong fundamental protection factors. Risk factors are considered to be minor.
Duff 1 minus indicates high certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection factors. Risk factors are
very small. Duff 2 indicates good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
Fitch's short-term ratings apply to tax-exempt and corporate debt
obligations that are payable on demand or have original maturities of up to
three years. The highest rating of Fitch for short-term securities encompasses
both the F-1+ and F-1 ratings. F-1+ securities possess exceptionally strong
credit quality. Issues assigned this rating are regarded as having the
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strongest degree of assurance for timely payment. F-1 securities possess very
strong credit quality. Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than issues rated F-1+. F-2
securities possess good credit quality and have a satisfactory degree of
assurance for timely payment, but the margin of safety is not as great as the F-
1+ and F-1 categories.
S&P's commercial paper ratings are current assessments of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
The A-1 designation indicates that the degree of safety regarding timely payment
is strong. Those issues determined to possess extremely strong safety
characteristics will be denoted with a plus (+) designation. The A-2
designation indicates that capacity for timely payment on these issues is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Issuers rated Prime-1 (or related supporting
institutions) in the opinion of Moody's have a superior capacity for repayment
of short-term promissory obligations. Issuers rated Prime-2 (or related
supporting institutions) have a strong capacity for repayment of short-term
promissory obligations. This capacity will normally be evidenced by many of the
characteristics of Prime-1 rated issues, but to a lesser degree. Ample
alternate liquidity is maintained.
IBCA assesses the investment quality of unsecured debt with an original
maturity of less than one year which is issued by bank holding companies and
their principal banking subsidiaries. The designation A1 by IBCA indicates that
the obligation is supported by a very strong capacity for timely repayment.
Those obligations rated A1+ are supported by the highest capacity for timely
repayment. The designation A-2 by IBCA indicates that the obligation is
supported by a satisfactory capacity for timely payment, although such capacity
may be susceptible to adverse changes in business, economic or financial
conditions.
Thomson's short-term paper ratings assess the likelihood of an untimely
payment of principal or interest of debt having a maturity of one year or less
which is issued by banks and financial institutions. The designation TBW-1
represents the highest short-term rating category and indicates a very high
degree of likelihood that principal and interest will be paid on a timely basis.
The designation TBW-2 represents the second highest short-term rating category
and indicates that while the degree of safety regarding timely payment of
principal and interest is strong, the relative degree of safety is not as high
as for issues rated TBW-1.
TAX-EXEMPT NOTE RATINGS
A S&P rating of SP-1 indicates very strong or strong capacity to pay
principal and interest. Those issues determined to possess overwhelming safety
characteristics are given a plus (+) designation. Notes rated SP-2 are issued
by issuers that exhibit satisfactory capacity to pay principal and interest.
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Moody's ratings for state and municipal notes and other short-term
obligations are designated Moody's Investment Grade ("MIG"). MIG-1/VMIG-1
denotes best quality. There is present strong protection from established cash
flows, superior liquidity support or demonstrated broad-based access to the
market for refinancing. MIG-2/VMIG-2 denotes high quality, with margins of
protection ample although not as large as in the MIG-1/VMIG-1 group.
Fitch uses its short-term ratings described above under "Short-Term
Corporate and Tax-Exempt Debt Ratings" for tax-exempt notes.
D&P uses the fixed-income ratings described above under "Long-Term
Corporate and Tax-Exempt Debt Ratings" for tax-exempt notes and other short-term
obligations.
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<PAGE>
Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
THE SEVEN SEAS SERIES FUND
Two International Place, 35th Floor
Boston, Massachusetts 02110
(617) 654-6089
THE SEVEN SEAS SERIES GROWTH AND INCOME FUND ("GROWTH AND INCOME FUND")
THE SEVEN SEAS SERIES INTERMEDIATE FUND ("INTERMEDIATE FUND")
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 29, 1995
The Seven Seas Series Fund ("Investment Company") is a registered open-end
investment company organized as a Massachusetts business trust offering shares
of beneficial interest in the investment portfolios listed above, each of which
is referred to as a "Fund." In addition, each series of the Investment Company
is diversified as defined under the Investment Company Act of 1940, as amended
("1940 Act").
This Statement of Additional Information supplements or describes in
greater detail the Investment Company and the Funds noted above as contained in
the Funds' Prospectuses dated December 29, 1995. This Statement is not a
Prospectus and should be read in conjunction with the Funds' Prospectuses, which
may be obtained by telephoning or writing Investment Company at the number or
address shown above.
<PAGE>
TABLE OF CONTENTS
PAGE
STRUCTURE AND GOVERNANCE . . . . . . . . . . . . . . . . . . . . . . . . 3
Organization and Business History . . . . . . . . . . . . . . . . . 3
Shareholder Meetings. . . . . . . . . . . . . . . . . . . . . . . . 4
Controlling Shareholders. . . . . . . . . . . . . . . . . . . . . . 4
Principal Shareholders. . . . . . . . . . . . . . . . . . . . . . . 5
Trustees and Officers . . . . . . . . . . . . . . . . . . . . . . . 5
OPERATION OF INVESTMENT COMPANY. . . . . . . . . . . . . . . . . . . . . 7
Service Providers . . . . . . . . . . . . . . . . . . . . . . . . . 7
Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Administrator . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Custodian and Transfer Agent. . . . . . . . . . . . . . . . . . . . 8
Distribution Plan . . . . . . . . . . . . . . . . . . . . . . . . . 9
Federal Law Affecting State Street. . . . . . . . . . . . . . . . . 10
Valuation of Fund Shares. . . . . . . . . . . . . . . . . . . . . . 10
Brokerage Practices . . . . . . . . . . . . . . . . . . . . . . . . 11
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . . . . . 12
Yield and Total Return Quotations . . . . . . . . . . . . . . . . . 12
INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . 14
Investment Policies . . . . . . . . . . . . . . . . . . . . . . . . 16
Hedging Strategies and Related Investment Techniques. . . . . . . . 23
Ratings of Debt Instruments . . . . . . . . . . . . . . . . . . . . 30
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 36
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STRUCTURE AND GOVERNANCE
ORGANIZATION AND BUSINESS HISTORY. Investment Company was organized as a
Massachusetts business trust on October 3, 1987, and operates under a First
Amended and Restated Master Trust Agreement, dated October 13, 1993, as amended.
Investment Company is authorized to issue shares of beneficial interest, par
value $.001 per share, which may be divided into one or more series, each of
which evidences pro rata ownership interest in a different investment portfolio,
or "Fund." The Growth and Income and Intermediate Funds are two such investment
portfolios. The Trustees may create additional Funds at any time without
shareholder approval.
As of the date of this Statement of Additional Information, Investment
Company is comprised of the following investment portfolios, each of which
commenced operations on the date set forth opposite the portfolio's name:
--------------------------------------------------------------------------
The Seven Seas Series Money Market Fund May 2, 1988
--------------------------------------------------------------------------
The Seven Seas Series US Government Money Market Fund March 1, 1991
--------------------------------------------------------------------------
The Seven Seas Series US Treasury Money Market Fund December 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series US Treasury Obligations Fund *
--------------------------------------------------------------------------
The Seven Seas Series Prime Money Market Fund February 22, 1994
--------------------------------------------------------------------------
The Seven Seas Series Yield Plus Fund November 9, 1992
--------------------------------------------------------------------------
The Seven Seas Series Tax Free Money Market Fund December 1, 1994
--------------------------------------------------------------------------
The Seven Seas Series Intermediate Fund September 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series Bond Market Fund *
--------------------------------------------------------------------------
The Seven Seas Series Growth and Income Fund September 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series S&P 500 Index Fund December 30, 1992
--------------------------------------------------------------------------
The Seven Seas Series Small Cap Fund July 1, 1992
--------------------------------------------------------------------------
The Seven Seas Series Matrix Equity Fund May 4, 1992
--------------------------------------------------------------------------
The Seven Seas Series Active International Fund March 7, 1995
--------------------------------------------------------------------------
The Seven Seas Series International Pacific Index Fund *
--------------------------------------------------------------------------
The Seven Seas Series Emerging Markets Fund March 1, 1994
--------------------------------------------------------------------------
The Seven Seas Series Real Estate Equity Fund *
--------------------------------------------------------------------------
__________
*As of the date of this Statement of Additional Information, these portfolios
have not commenced operations.
The Investment Company is authorized to divide shares of any series into
two or more classes of shares. The shares of each Fund may have such rights and
preferences as the Trustees may establish from time to time, including the right
of redemption (including the price, manner and terms of redemption), special and
relative rights as to dividends and distributions, liquidation rights, sinking
or purchase fund provisions and conditions under which any Fund may have
separate voting rights or no voting rights. Each class of shares of a Fund is
entitled to the same rights and privileges as all other
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classes of that Fund, except that each class bears the expenses associated with
the distribution and shareholder servicing arrangements of that class, as well
as other expenses attributable to the class and unrelated to the management of
the Fund's portfolio securities.
Prospectuses for these Investment Portfolios may be obtained by calling
Investment Company's distributor, Russell Fund Distributors, Inc., at (617) 654-
6089.
Shares of the Money Market, US Government Money Market and Tax Free Money
Market Funds are divided into Classes A, B and C.
Any amendment to the Master Trust Agreement that would materially and
adversely affect shareholders of Investment Company as a whole, or shareholders
of a particular Fund, must be approved by the holders of a majority of the
shares of Investment Company or the Fund, respectively. All other amendments
may be effected by Investment Company's Board of Trustees.
Under certain unlikely circumstances, and as is the case with any
Massachusetts business trust, a shareholder of a Fund may be held personally
liable for the obligations of a Fund. The Master Trust Agreement provides that
shareholders shall not be subject to any personal liability for the acts or
obligations of a Fund and that every written agreement, obligation, or other
undertaking of the Fund shall contain a provision to the effect that the
shareholders are not personally liable thereunder. The Master Trust Agreement
also provides that the Fund shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Fund and satisfy
any judgment thereon. Thus, the risk to shareholders of incurring financial
loss beyond their investments is limited to circumstances in which a Fund itself
would be unable to meet its obligations.
SHAREHOLDER MEETINGS. Investment Company will not have an Annual Meeting
of Shareholders. Special Meetings may be convened: (1) by the Board of
Trustees; (2) upon written request to the Board by the holders of at least 10%
of the outstanding shares; or (3) upon the Board's failure to honor the
shareholders' request described above, by holders of at least 10% of the
outstanding shares giving notice of the special meeting to the shareholders.
CONTROLLING SHAREHOLDERS. The Trustees have the authority and
responsibility to manage the business of Investment Company. Trustees hold
office until they resign or are removed by, in substance, a vote of two-thirds
of Investment Company shares outstanding. However, in connection with State
Street Bank and Trust Company's ("State Street") securities lending program and
investment accounts over which State Street has discretionary authority, State
Street holds certain collateral on behalf of its securities lending clients to
secure the return of loaned securities. Such collateral may be invested in
Investment Company shares from time to time. Shares representing such
investments are held of record by State Street, who retains voting control of
such shares. As of
-4-
<PAGE>
November 30, 1995, State Street held beneficially and of record 36% of
Investment Company's shares in connection with various lending portfolios and,
consequently, may be deemed to be a controlling person of Investment Company for
purposes of the 1940 Act. State Street also acts as Investment Company's
investment adviser, transfer agent and custodian.
PRINCIPAL SHAREHOLDERS As of November 30, 1995, the following shareholders
owned of record 5% or more of the issued and outstanding shares of each Fund, as
follows:
Growth and Income Fund:
- State Street Bank Employee 401K Plan IA06, an account of State Street
Bank and Trust Company, 225 Franklin Street, Boston, MA 02110--13%;
and
- Milliken & Michael's, Inc., 3850 North Causeway Boulevard 2nd Floor,
Metairie, LA 70002--6%.
Intermediate Fund:
- The Boston Latin School Foundation, 131 State Street, Boston, MA
02109--6%.
The Trustees and officers of Investment Company, as a group, own less than
1% of Investment Company's voting securities.
TRUSTEES AND OFFICERS. The Board of Trustees is generally responsible for
overseeing the operation of the Funds. The officers, all of whom are employed
by, and are officers of, Administrator or its affiliates, are responsible for
the day-to-day management and administration of the Funds' operations.
Trustees who are not officers or employees of State Street or its
affiliates are paid an annual fee and are reimbursed for travel and other
expenses they incur in attending Board meetings. Investment Company's officers
and employees are paid by Administrator or its affiliates.
The following lists Investment Company's Trustees and officers, their
positions with Investment Company, their present and principal occupations
during the past five years and the mailing addresses of Trustees who are not
affiliated with Investment Company. The mailing address for all Trustees and
officers affiliated with Investment Company is The Seven Seas Series Fund, 909 A
Street, Tacoma, WA 98402.
An asterisk (*) indicates that a Trustee is an "interested person" of the
Investment Company, as defined in the 1940 Act.
-5-
<PAGE>
*LYNN L. ANDERSON, Trustee, Chairman of the Board, President and Fund
Treasurer. Chairman of the Board and Chief Executive Officer, Frank Russell
Investment Management Company and Russell Fund Distributors, Inc.; Director,
President and Chief Executive Officer, Frank Russell Investment Company and
Frank Russell Trust Company; Director and President, Russell Insurance Funds;
Director and Chairman, Frank Russell Company (Delaware); Director, Frank Russell
Investments (Ireland) Limited and Frank Russell Investment Company plc.
WILLIAM L. MARSHALL, Trustee. 33 West Court Street, Doylestown, PA 18901.
Chief Executive Officer and President, Wm. L. Marshall Associates, Inc. (a
registered investment adviser and provider of financial and related consulting
services); Certified Financial Planner; Member, Registry of Financial Planning
Practitioners; and Advisory Committee, International Association for Financial
Planning Broker-Dealer Program. Member, Institute of Certified Financial
Planners. Registered for Securities with FSC Securities Corp., Marietta,
Georgia.
*STEVEN J. MASTROVICH, Trustee. 1 Financial Center, Boston, MA 02110.
Partner, Brown, Rudnick, Freed & Gesmer (law firm). 1990 to 1994, Partner,
Warner & Stackpole (law firm).
PATRICK J. RILEY, Trustee. 21 Custom House Street, Boston, MA 02110.
Partner, Riley, Burke & Donahue (law firm).
RICHARD D. SHIRK, Trustee. 3350 Peachtree Road, N.E., Atlanta, GA 30326.
President and Chief Executive Officer, Blue Cross/Blue Shield of Georgia. 1990
to 1992, President, Champions Group Resources--Business Management and Employee
Benefits Consulting; 1990, Senior Vice President, Employee Benefits Division,
Cigna Corporation (providing and insuring group life, health and disability
employee benefit products and services); from 1986 to 1990, Senior Vice
President, EQUICOR-Equitable HCA Corporation (providing and insuring group life,
health and disability employee benefit products and services).
*BRUCE D. TABER, Trustee. 26 Round Top Road, Boxford, MA 01921.
President, A.B. Reed, Inc. - Engineers, Architects, Planners. Prior to that,
Vice President, Instrumentation and Controls, A.B. Reed., Inc.
HENRY W. TODD, Trustee. 111 Commerce Drive, Montgomeryville, PA 18936.
President and Director, Zink & Triest Co., Inc. (dealer in vanilla flavor
materials); Director, A.M. Todd Co., and Flavorite Laboratories.
J. DAVID GRISWOLD, Vice President and Secretary. Assistant Secretary,
Associate General Counsel, Chief Compliance Officer, Frank Russell Investment
Management Company, Russell Fund Distributors, Inc. and Frank Russell Capital
Inc.; Associate General Counsel and Assistant Secretary, Frank Russell Company;
Associate
-6-
<PAGE>
General Counsel, Assistant Secretary and Compliance Officer, Russell Fiduciary
Services Company; Director, Secretary, Associate General Counsel and Chief
Compliance Officer, Frank Russell Securities, Inc.; Secretary, Frank Russell
Canada Limited/Limitee.
KENNETH W. LAMB, Assistant Secretary, Assistant Treasurer and Principal
Accounting Officer. Manager - Funds Administration, Frank Russell Investment
Management Company since 1994. Prior to that, Senior Audit Manager with Knight,
Vale & Gregory since 1982.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
TRUSTEE COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------
Aggregate Pension or Estimated Annual Total Compensation
Compensation Retirement Benefits Upon From Investment
from Benefits Accrued Retirement Company Paid to
Trustee Investment as part of Trustees
Company Investment
Company
Expenses
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lynn L. Anderson $0 $0 $0 $0
- -------------------------------------------------------------------------------------------------------
William L. Marshall $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Steven J. Mastrovich $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Patrick J. Riley $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Richard D. Shirk $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Bruce D. Taber $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Henry W. Todd $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
</TABLE>
OPERATION OF INVESTMENT COMPANY
SERVICE PROVIDERS. Most of the Funds' necessary day-to-day operations are
performed by separate business organizations under contract to Investment
Company. The principal service providers are:
Investment Adviser, Custodian
and Transfer Agent: State Street Bank and Trust Company
Administrator: Frank Russell Investment Management Company
Distributor: Russell Fund Distributors, Inc.
Independent Accountants: Coopers & Lybrand, L.L.P.
ADVISER. State Street Bank and Trust Company ("State Street") serves as
the Funds' investment adviser ("Adviser") pursuant to an Advisory Agreement
dated April 12, 1988 ("Advisory Agreement"). State Street Bank and Trust
Company is a
-7-
<PAGE>
wholly owned subsidiary of State Street Boston Corporation, a publicly held bank
holding company. State Street's address is 225 Franklin Street, Boston, MA
02110.
Under the Advisory Agreement, Adviser directs the Funds' investments in
accordance with their investment objectives, policies and limitations. For
these services, the Funds pay a fee to Adviser at the rates stated in the
Prospectus. The Growth and Income Fund accrued expenses to Adviser of $280,417
in fiscal 1995 and $152,809 from the date of inception to August 31, 1994.
Adviser voluntarily agreed to reimburse the Growth and Income Fund for all
expenses in excess of .95% of average daily net assets on an annual basis, which
amounted to $216,126 in fiscal 1995 and $87,592 for the period ended August 31,
1994. The Intermediate Fund accrued expenses to Adviser of $198,032 in fiscal
1995 and $116,810 from the date of inception to August 31, 1994. Adviser
voluntarily agreed to reimburse the Intermediate Fund for all expenses in excess
of .60% of average daily net assets on an annual basis, which amounted to
$263,571 in fiscal 1995 and $133,196 for the period ended August 31, 1994.
The Advisory Agreement will continue from year to year provided that a
majority of the Trustees who are not interested persons of the Funds and either
a majority of all Trustees or a majority of the shareholders of each Fund
approve its continuance. The Agreement may be terminated by Adviser or a Fund
without penalty upon sixty days' notice and will terminate automatically upon
its assignment.
ADMINISTRATOR. Frank Russell Investment Management Company
("Administrator") serves as the Funds' administrator, pursuant to an
Administration Agreement dated April 12, 1988 ("Administration Agreement"). A
description of the services provided under the Administration Agreement and the
basis for computing fees for such services is provided in the Funds'
Prospectuses. The Growth and Income Fund accrued expenses to Administrator of
$9,796 in fiscal 1995 and $5,222 from the date of inception to August 31, 1994.
Administrator waived administration fees of $412 from the date of inception to
August 31, 1994. The Intermediate Fund accrued expenses to Administrator of
$7,344 in fiscal 1995 and $4,232 from the date of inception to August 31, 1994.
Administrator waived administration fees of $323 from the date of inception to
August 31, 1994.
The Administration Agreement will continue from year to year provided that
a majority of the Trustees and a majority of the Trustees who are not interested
persons of the Funds and who have no direct or indirect financial interest in
the operation of the Distribution Plan described below or the Administration
Agreement approve its continuance. The Agreement may be terminated by
Administrator or any Fund without penalty upon sixty days' notice and will
terminate automatically upon its assignment.
Administrator is a wholly owned subsidiary of Frank Russell Company. Frank
Russell Company was founded in 1936 and has provided comprehensive asset
management consulting services since 1969 for institutional pools of investment
assets, principally those of large corporate employee benefit plans. Frank
Russell Company and
-8-
<PAGE>
its affiliates have offices in Tacoma, Seattle, New York City, Toronto, London,
Tokyo, Sydney, Zurich, Paris, and Auckland, and have approximately 1,000
officers and employees. Administrator's and Frank Russell Company's mailing
address is 909 A Street, Tacoma, WA 98402.
DISTRIBUTOR. Russell Fund Distributors, Inc. ("Distributor") serves as the
distributor of Fund shares pursuant to a Distribution Agreement dated April 12,
1988 ("Distribution Agreement"). Distributor is a wholly owned subsidiary of
Administrator. Distributor's mailing address is Two International Place, 35th
Floor, Boston, MA 02110.
CUSTODIAN AND TRANSFER AGENT. State Street serves as the custodian
("Custodian") and transfer agent ("Transfer Agent") for Investment Company.
State Street also provides the basic portfolio recordkeeping required by
Investment Company for regulatory and financial reporting purposes. For these
services, State Street is paid an annual fee in accordance with the following:
custody services--a fee payable monthly on a pro rata basis, based on the
following percentages of average daily net assets of each Fund: $0 up to
$1.5 billion--0.02%, over $1.5 billion--0.015% (for purposes of calculating the
break point, the assets of all Investment Portfolios are aggregated); securities
transaction charges from $8.00 to $25.00 per transaction; Eurodollar transaction
fees ranging from $110.00 to $125.00 per transaction; monthly pricing fees of
$375.00 per Investment Portfolio and from $6.00 to $16.00 per security,
depending on the type of instrument and the pricing service used; transfer agent
services of $2.00 per shareholder transaction and a multiple class fee of
$18,000 per year for each additional class of shares; and yield calculation fees
of $350.00 per non-money market portfolio per year. State Street is reimbursed
by each Fund for supplying certain out-of-pocket expenses including postage,
transfer fees, stamp duties, taxes, wire fees, telexes, and freight.
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand L.L.P. serves as the
Investment Company's independent accountants. Coopers & Lybrand L.L.P. is
responsible for performing annual audits of the financial statements and
financial highlights in accordance with generally accepted auditing
standards, a review of federal tax returns, and, pursuant to Rule 17f-2 of
the 1940 Act, three security counts. The mailing address of Coopers & Lybrand
L.L.P. is One Post Office Square, Boston MA 02109.
DISTRIBUTION PLAN. Under the 1940 Act, the Securities and Exchange
Commission has adopted Rule 12b-1, which regulates the circumstances under which
the Funds may, directly or indirectly, bear distribution and shareholder
servicing expenses. The Rule provides that the Funds may pay for such expenses
only pursuant to a plan adopted in accordance with the Rule. Accordingly, the
Funds have adopted an active distribution plan (the "Plan"), which is described
in the Funds' Prospectuses.
The Plan provides that each Fund may spend annually, directly or
indirectly, up to 0.25% of the value of its average net assets for distribution
and shareholder servicing
-9-
<PAGE>
services. The Plan does not provide for the Funds to be charged for interest,
carrying or any other financing charges on any distribution expenses carried
forward to subsequent years. A quarterly report of the amounts expended under
the Plan, and the purposes for which such expenditures were incurred, must be
made to the Trustees for their review. The Plan may not be amended without
shareholder approval to increase materially the distribution or shareholder
servicing costs that the Funds may pay. The Plan and material amendments to it
must be approved annually by all of the Trustees and by the Trustees who are
neither "interested persons" (as defined in the 1940 Act) of the Funds nor have
any direct or indirect financial interest in the operation of the Plan or any
related agreements.
The Fund accrued expenses to Russell Fund Distributors, Inc., as Distributor,
for the fiscal year ended August 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Growth and Income Fund $33,428 $13,540
Intermediate Fund 27,531 12,543
</TABLE>
For fiscal 1995, these amounts are reflective of the following
individual payments:
<TABLE>
<CAPTION>
Growth
and Intermediate
Income
<S> <C> <C>
Advertising $ 6,284 $ 9,152
Printing of Prospectuses 4,707 39
Compensation to Sales Personnel 8,448 9,427
Other* 13,989 8,913
-------- -------
$ 33,428 $27,531
-------- -------
-------- -------
</TABLE>
* Other expenses may include such items as compensation for travel, conferences
and seminars for staff, subscriptions, office charges and professional fees.
Under the Plan, the Fund may also enter into agreements ("Service
Agreements") with financial institutions, which may include Adviser ("Service
Organizations"), to provide shareholder servicing with respect to Fund shares
held by or for the customers of the Service Organizations. Such arrangements
are more fully described in the Funds' prospectuses under "Distribution Services
and Shareholder Servicing."
The Fund accrued expenses to State Street, as Adviser, under a Service Agreement
pursuant to Rule 12b-1, for the fiscal year ended August 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Growth and Income Fund $10,370 $1,316
Intermediate Fund 7,921 1,069
</TABLE>
-10-
<PAGE>
FEDERAL LAW AFFECTING STATE STREET. The Glass-Steagall Act of 1933
prohibits state chartered banks such as State Street from engaging in the
business of underwriting, selling or distributing certain securities, and
prohibits a member bank of the Federal Reserve System from having certain
affiliations with an entity engaged principally in that business. The
activities of State Street in informing its customers of the Funds, performing
investment and redemption services, providing custodian, transfer, shareholder
servicing, dividend disbursing, agent servicing and investment advisory
services, may raise issues under these provisions. State Street has been
advised by its counsel that its activities in connection with the Funds
contemplated under this arrangement are consistent with its statutory and
regulatory obligations.
VALUATION OF FUND SHARES. Net asset value per share is calculated on
each "business day" as of the close of the regular trading session on the New
York Stock Exchange (currently 4:00 p.m. Eastern time). A business day is one
on which the New York Stock Exchange is open for business. Currently, the New
York Stock Exchange is open for trading every weekday except New Year's Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.
Trading may occur in debt securities and in foreign securities at
times when the New York Stock Exchange is closed (including weekends and
holidays or after 4:00 p.m., Eastern time, on a regular business day). The
trading of portfolio securities at such times may significantly increase or
decrease the net asset value of the Fund's share when shareholders do not have
the ability to purchase or redeem shares. Therefore, events affecting the
values of foreign securities traded in foreign markets that occur between the
time their prices are determined and the close of the New York Stock Exchange
will not be reflected in the Fund's calculation of its net asset value unless
the Board of Trustees determines that the particular event would materially
affect the Fund's net asset value, in which case an adjustment would be made.
With the exceptions noted below, the Funds value portfolio securities
at market value. This generally means that equity securities and fixed income
securities listed and traded principally on any national securities exchange are
valued on the basis of the last sale price or, lacking any sales, at the closing
bid price, on the primary exchange on which the security is traded. United
States equity and fixed-income securities traded principally over-the-counter
and options are valued on the basis of the last reported bid price. Futures
contracts are valued on the basis of the last reported sell price.
Because many fixed income securities do not trade each day, last sale
or bid prices are frequently not available. Therefore, fixed income securities
may be valued using prices provided by a pricing service when such prices are
determined by Custodian to reflect the market value of such securities.
International equity securities traded on a national securities
exchange are valued on the basis of the last sale price. International
securities traded over-the-counter are valued on the basis of best bid or
official bid, as determined by the relevant securities exchange.
-11-
<PAGE>
In the absence of a last sale or best or official bid price, such securities may
be valued on the basis of prices provided by a pricing service if those prices
are believed to reflect the market value of such securities.
BROKERAGE PRACTICES. All portfolio transactions are placed on behalf
of the Funds by Adviser. Adviser ordinarily pays commissions when it executes
transactions on a securities exchange. In contrast, there is generally no
stated commission in the purchase or sale of securities traded in the over-the-
counter markets, including most debt securities and money market instruments.
Rather, the price of such securities includes an undisclosed "commission" in the
form of a mark-up or mark-down. The cost of securities purchased from
underwriters includes an underwriting commission or concession.
Subject to the arrangements and provisions described below, the
selection of a broker or dealer to execute portfolio transactions is usually
made by Adviser. The Advisory Agreement provides, in substance and subject to
specific directions from officers of Investment Company, that in executing
portfolio transactions and selecting brokers or dealers, the principal objective
is to seek the best overall terms available to the Funds. Ordinarily,
securities will be purchased from primary markets, and Adviser shall consider
all factors it deems relevant in assessing the best overall terms available for
any transaction, 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 other transactions on a continuing basis.
The Advisory Agreement authorizes Adviser to select brokers or dealers
to execute a particular transaction, including principal transactions, 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 Funds and/or Adviser (or its
affiliates). Adviser is authorized to cause the Funds to pay a commission to a
broker or dealer who provides such brokerage and research services for executing
a portfolio transaction which is in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction. The Funds
or Adviser, as appropriate, must determine in good faith that such commission
was reasonable in relation to the value of the brokerage and research services
provided--viewed in terms of that particular transaction or in terms of all the
accounts over which Adviser exercises investment discretion.
The Trustees periodically review Adviser's performance of its
responsibilities in connection with the placement of portfolio transactions on
behalf of the Funds and review the prices paid by the Funds over representative
periods of time to determine if such prices are reasonable in relation to the
benefits provided to the Funds. Certain services received by Adviser
attributable to a particular Fund transaction may benefit one
-12-
<PAGE>
or more other accounts for which Adviser exercises investment discretion, or a
Fund other than that for which the transaction was effected. Adviser's fees are
not reduced by Adviser's receipt of such brokerage and research services.
The brokerage commissions paid by the Growth and Income Fund were
$43,993 for fiscal 1995 and $22,383 from the date of inception to August 31,
1994. The material difference in the brokerage amounts from fiscal 1994 to
fiscal 1995 was due primarily to the increase in net assets and resulting
increase in portfolio turnover.
Of the total brokerage commissions paid by the Growth and Income Fund,
commissions received by an affiliated broker/dealer for fiscal 1995 were $3,803.
Of that amount, the percentage of affiliated brokerage to total brokerage for
the Growth and Income Fund was 8.65%.
The percentage of total affiliated transactions (relating to trading
activity) to total transactions for the Growth and Income Fund was 4.55% for
fiscal 1995.
During the fiscal year ended August 31, 1995, the Funds did not
purchase securities issued by the regular brokers or dealers of the Fund, as
defined by Rule 10b-1 of the 1940 Act.
PORTFOLIO TURNOVER RATE. The portfolio turnover rate for the Fund is
calculated by dividing the lesser of purchases or sales of the portfolio
securities for the particular year, by the monthly average value of the
portfolio securities owned by the Fund during the year. For purposes of
determining the rate, all short-term securities, including options, futures,
forward contracts and repurchase agreements, are excluded.
The portfolio turnover rate for each Fund for the fiscal year ended August 31,
was:
<TABLE>
<CAPTION>
1995 1994*
---- ----
<S> <C> <C>
Growth and Income Fund 39.32% 36.48%
Intermediate Fund 26.31 15.70%
</TABLE>
*The Growth and Income and Intermediate Funds commenced operations on
September 1, 1993.
YIELD AND TOTAL RETURN QUOTATIONS
BOTH FUNDS. The Funds compute average annual total return by using a
standardized method of calculation required by the Securities and Exchange
Commission. Average annual total return is computed by finding the average
annual compounded rates of return on a hypothetical initial investment of $1,000
over the one-, five- and ten-year periods (or life of the funds as appropriate),
that would equate the
-13-
<PAGE>
initial amount invested to the ending redeemable value, according to the
following formula:
P(1+T)(n) = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a $1,000 payment made at
the beginning of the 1-, 5- and 10-year periods at the
end of the year or period
The calculation assumes that all dividends and distributions of each Fund
are reinvested at the price stated in the Prospectus on the dividend dates
during the period, and includes all recurring and nonrecurring fees that are
charged to all shareholder accounts.
The average annual total returns for each Fund are as follows:
<TABLE>
<CAPTION>
One Year Inception to
Ending August 31, 1995
August 31,1995 (Annualized) Inception Date
-------------- --------------- --------------
<S> <C> <C> <C>
Growth and Income
Fund 15.66% 10.84% 09/01/93
Intermediate Fund 10.05% 3.09% 09/01/93
</TABLE>
INTERMEDIATE FUND. Yields are computed by using standardized methods of
calculation required by the Securities and Exchange Commission. Yields are
calculated by dividing the net investment income per share earned during a 30-
day (or one month) period by the maximum offering price per share on the last
day of the period, according to the following formula:
-14-
<PAGE>
YIELD = 2[(a-b) +1)(6)-1]
(cd)
where: a = dividends and interests earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = average daily number of shares outstanding during the
period that were entitled to receive dividends; and
d = the maximum offering price per share on the last day of
the period.
The current 30-day yield (annualized) for the Intermediate Fund for the period
ended August 31, 1995 was 6.21%.
The yield quoted is not indicative of future results. Yields will depend on the
type, quality, and maturity and interest rate of instruments held by the Fund.
INVESTMENTS
The investment objective of each Fund is set forth in its Prospectus. Each
Fund also has certain "fundamental" investment restrictions, which may be
changed only with the approval of a majority of the shareholders of the Fund,
and certain nonfundamental investment restrictions and policies, which may be
changed by the Funds without shareholder approval.
INVESTMENT RESTRICTIONS
Each Fund is subject to the following investment restrictions.
Restrictions 1 through 11 are fundamental and restrictions 12 through 19 are
nonfundamental. Unless otherwise noted, these restrictions apply on a Fund-by-
Fund basis at the time an investment is made. A Fund will not:
(1) Invest 25% or more of the value of its total assets in securities of
companies primarily engaged in any one industry (other than the US Government,
its agencies and instrumentalities). Concentration may occur as a result of
changes in the market value of portfolio securities, but may not result from
investment.
(2) Borrow money (including reverse repurchase agreements), as a temporary
measure for extraordinary or emergency purposes or to facilitate redemptions
(not for leveraging or investment), provided that borrowings do not exceed an
amount equal to 33-1/3% of the current value of the Fund's assets taken at
market value, less liabilities other than borrowings. If at any time a Fund's
borrowings exceed this limitation due to a decline in net assets, such
borrowings will within three days be reduced to the extent necessary to comply
with this limitation. A Fund will not purchase investments once borrowed funds
(including reverse repurchase agreements) exceed 5% of its total assets.
-15-
<PAGE>
Should the parties to these transactions fail financially, the Funds may
experience delays or loss of rights in the collateral securing the borrowers'
obligations.
(3) Pledge, mortgage or hypothecate its assets. However, a Fund may pledge
securities having a market value at the time of the pledge not exceeding 33-1/3%
of the value of the Fund's total assets to secure borrowings permitted by
paragraph (2) above.
(4) With respect to 75% of its total assets, invest in securities of any
one issuer (other than securities issued by the US Government, its agencies, and
instrumentalities), if immediately after and as a result of such investment the
current market value of the Fund's holdings in the securities of such issuer
exceeds 5% of the value of the Fund's assets.
(5) Make loans to any person or firm; provided, however, that the making of
a loan shall not include: (i) the acquisition for investment of bonds,
debentures, notes or other evidences of indebtedness of any corporation or
government which are publicly distributed or of a type customarily purchased by
institutional investors; or (ii) the entry into "repurchase agreements. A Fund
may lend its portfolio securities to broker-dealers or other institutional
investors if the aggregate value of all securities loaned does not exceed 33-
1/3% of the value of the Fund's total assets. Portfolio Securities may be
loaned if collateral values are continuously maintained at no less than 100% by
"marking to market" daily.
(6) Purchase or sell commodities or commodity futures contracts except that
the Funds may enter into futures contracts and options thereon to the extent
provided in their respective Prospectuses.
(7) Purchase or sell real estate or real estate mortgage loans; provided,
however, that the Funds may invest in securities secured by real estate or
interests therein or issued by companies which invest in real estate or
interests therein.
(8) Engage in the business of underwriting securities issued by others,
except that a Fund will not be deemed to be an underwriter or to be underwriting
on account of the purchase of securities subject to legal or contractual
restrictions on disposition.
(9) Issue senior securities, except as permitted by its investment
objective, policies and restrictions, and except as permitted by the 1940 Act.
(10) Purchase or sell puts, calls or invest in straddles, spreads or any
combination thereof, if as a result of such purchase the value of the Fund's
aggregate investment in such securities would exceed 5% of the Fund's total
assets.
(11) Make short sales of securities or purchase any securities on margin,
except for such short-term credits as are necessary for the clearance of
transactions. Each Fund may
-16-
<PAGE>
make initial margin deposits and variation margin payments in connection with
transactions in futures contracts and related options.
(12) Purchase from or sell portfolio securities to its officers or
directors or other "interested persons" (as defined in the 1940 Act) of the
Funds, including their investment advisers and affiliates, except as permitted
by the 1940 Act and exemptive rules or orders thereunder.
(13) Invest in securities issued by other investment companies except in
connection with a merger, consolidation, acquisition of assets, or other
reorganization approved by the Funds' shareholders, and except to the extent
permitted by the 1940 Act.
(14) Invest in securities of any issuer which, together with its
predecessor, has been in operation for less than three years if, as a result,
more than 5% of the Fund's total assets would be invested in such securities.
(15) Invest more than 10% of its net assets in the aggregate in illiquid
securities or securities that are not readily marketable, including repurchase
agreements and time deposits of more than seven days' duration.
(16) Purchase interests in oil, gas or other mineral exploration or
development programs, or in oil, gas and mineral leases.
(17) Make investments for the purpose of gaining control of an issuer's
management.
(18) Purchase the securities of any issuer if the Investment Company's
officers, Trustees, Adviser or any of their affiliates beneficially own more
than one-half of 1% of the securities of such issuer or together own
beneficially more than 5% of the securities of each issuer.
(20) Invest in real estate limited partnerships that are not readily
marketable.
INVESTMENT POLICIES
Except as otherwise indicated, each Fund may invest in the following
instruments:
US GOVERNMENT OBLIGATIONS. The types of US Government obligations in which
the Funds may at times invest include: (1) a variety of US Treasury
obligations, which differ only in their interest rates, maturities and times of
issuance; and (2) obligations issued or guaranteed by US Government agencies and
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the US Treasury, (b) the right of the issuer to borrow an
amount limited to a specific line of credit from the US Treasury,
(c) discretionary authority of the US Government agency or instrumentality or
(d) the credit of the instrumentality (examples of agencies and
instrumentalities are:
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Federal Land Banks, Federal Housing Administration, Farmers Home Administration,
Export--Import Bank of the United States, Central Bank for Cooperatives, Federal
Intermediate Credit Banks, Federal Home Loan Banks, General Services
Administration, Maritime Administration, Tennessee Development Bank, Asian-
American Development Bank, Student Loan Marketing Association, International
Bank for Reconstruction and Development and Federal National Mortgage
Association). No assurance can be given that in the future the US Government
will provide financial support to such US Government agencies or
instrumentalities described in (2)(b), (2)(c) and (2)(d), other than as set
forth above, since it is not obligated to do so by law. The Funds may purchase
US Government obligations on a forward commitment basis.
REPURCHASE AGREEMENTS. The Funds may enter into repurchase agreements with
financial institutions. Under repurchase agreements, these parties sell
securities to a Fund and agree to repurchase the securities at the Fund's cost
plus interest within a specified time (normally one day). The securities
purchased by each Fund have a total value in excess of the purchase price paid
by the Fund and are held by Custodian until repurchased. Repurchase agreements
assist the Funds in being invested fully while retaining "overnight" flexibility
in pursuit of investments of a longer-term nature. The Funds will limit
repurchase transactions to those member banks of the Federal Reserve System and
broker-dealers whose creditworthiness is continually monitored and found
satisfactory by Adviser.
REVERSE REPURCHASE AGREEMENTS. The Funds may enter into reverse repurchase
agreements under the circumstances described in "Investment Restrictions."
Under reverse repurchase agreements, a Fund transfers possession of portfolio
securities to financial institutions in return for cash in an amount equal to a
percentage of the portfolio securities' market value and agrees to repurchase
the securities at a future date by repaying the cash with interest. The Funds
retain the right to receive interest and principal payments from the securities
while they are in the possession of the financial institutions. Cash or liquid
high quality debt obligations from a Fund's portfolio equal in value to the
repurchase price including any accrued interest will be segregated by Custodian
on the Fund's records while a reverse repurchase agreement is in effect.
Reverse repurchase agreements involve the risk of default by the counterparty,
which may adversely affect the Fund's ability to reacquire the underlying
security.
FORWARD COMMITMENTS. Each Fund may contract to purchase securities for a
fixed price at a future date beyond customary settlement time consistent with
the Fund's ability to manage its investment portfolio, maintain a stable net
asset value and meet redemption requests. A Fund may dispose of a commitment
prior to settlement if it is appropriate to do so and realize short-term profits
or losses upon such sale. When effecting such transactions, cash or liquid high
quality debt obligations held by the Fund of a dollar amount sufficient to make
payment for the portfolio securities to be purchased will be segregated on the
Fund's records at the trade date and maintained until the transaction is
settled. Forward commitments involve a risk of loss if the value of the
security to be
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purchased declines prior to the settlement date, or if the other party fails to
complete the transaction.
WHEN-ISSUED TRANSACTIONS. New issues of securities are often offered on a
when-issued basis. This means that delivery and payment for the securities
normally will take place approximately 7 to 15 days after the date the buyer
commits to purchase them. The payment obligation and the interest rate that
will be received on securities purchased on a when-issued basis are each fixed
at the time the buyer enters into the commitment.
Each Fund will make commitments to purchase when-issued securities only
with the intention of actually acquiring the securities, but a Fund may sell
these securities or dispose of the commitment before the settlement date if it
is deemed advisable as a matter of investment strategy. Cash or marketable high
quality debt securities equal to the amount of the above commitments will be
segregated on each Fund's records. For the purpose of determining the adequacy
of these securities the segregated securities will be valued at market. If the
market value of such securities declines, additional cash or securities will be
segregated on the Fund's records on a daily basis so that the market value of
the account will equal the amount of such commitments by the Fund. No fund will
invest more than 25% of its net assets in when-issued securities.
Securities purchased on a when-issued basis and held by each Fund are
subject to changes in market value based upon the public's perception of changes
in the level of interest rates. Generally, the value of such securities will
fluctuate inversely to changes in interest rates -- i.e., they will appreciate
in value when interest rates decline and decrease in value when interest rates
rise. Therefore, if in order to achieve higher interest income a Fund remains
substantially fully invested at the same time that it has purchased securities
on a "when-issued" basis, there will be a greater possibility of fluctuation in
the Fund's net asset value.
When payment for when-issued securities is due, each Fund will meet its
obligations from then-available cash flow, the sale of segregated securities,
the sale of other securities or, and although it would not normally expect to do
so, from the sale of the when-issued securities themselves (which may have a
market value greater or less than the Fund's payment obligation). The sale of
securities to meet such obligations carries with it a greater potential for the
realization of capital gains, which are subject to federal income taxes.
VARIABLE AMOUNT MASTER DEMAND NOTES. Variable amount master demand notes
are unsecured obligations that are redeemable upon demand and are typically
unrated. These instruments are issued pursuant to written agreements between
the issuers and the holders. The agreements permit the holders to increase
(subject to an agreed maximum) and the holders and issuers to decrease the
principal amount of the notes, and specify that the rate of interest payable on
the principal fluctuates according to an agreed formula.
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SECTION 4(2) COMMERCIAL PAPER. The Funds may invest in commercial paper
issued in reliance on the so-called "private placement" exemption from
registration afforded by Section 4(2) of the Securities Act of 1933
("Section 4(2) paper"). Section 4(2) paper is restricted as to disposition
under the federal securities laws, and generally is sold to investors who agree
that they are purchasing the paper for an investment and not with a view to
public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) paper is normally resold to other investors through
or with the assistance of the issuer or investment dealers who make a market in
Section 4(2) paper, thus providing liquidity. Pursuant to guidelines
established by the Board of Trustees, Adviser may determine that Section 4(2)
paper is liquid for the purposes of complying with the Funds' investment
restriction relating to investments in illiquid securities.
VARIABLE AND FLOATING RATE SECURITIES (INTERMEDIATE FUND ONLY). A floating
rate security provides for the automatic adjustment of its interest rate
whenever a specified interest rate changes. A variable rate security provides
for the automatic establishment of a new interest rate on set dates. Interest
rates on these securities are ordinarily tied to, and are a percentage of, a
widely recognized interest rate such as the yield on 90-day US Treasury bills or
the prime rate of a specified bank. These rates may change as often as twice
daily. Generally, changes in interest rates will have a smaller effect on the
market value of variable and floating rate securities than on the market value
of comparable fixed income obligations. Thus, investing in variable and
floating rate securities generally allows less opportunity for capital
appreciation and depreciation than investing in comparable fixed income
securities.
The Intermediate Fund may purchase variable rate US Government obligations,
which are instruments issued or guaranteed by the US Government, or an agency or
instrumentality thereof, that have a rate of interest subject to adjustment at
regular intervals but less frequently than annually. Variable rate US
Government obligations whose interest is readjusted no less frequently than
annually will be deemed to have a maturity equal to the period remaining until
the next readjustment of the interest rate.
ASSET-BACKED SECURITIES (INTERMEDIATE FUND ONLY). Asset-backed securities
represent undivided fractional interests in pools of instruments, such as
consumer loans, and are similar in structure to mortgage-related pass-through
securities described below. Payments of principal and interest are passed
through to holders of the securities and are typically supported by some form of
credit enhancement, such as a letter of credit, surety bond, limited guarantee
by another entity or by priority to certain of the borrower's other securities.
The degree of credit-enhancement varies, generally applying only until exhausted
and covering only a fraction of the security's par value.
The value of asset-backed securities is affected by changes in the market's
perception of the asset backing the security, changes in the creditworthiness of
the servicing agent for the instrument pool, the originator of the instruments
or the financial institution providing any credit enhancement and the
expenditure of any portion of any credit enhancement. The risks of investing in
asset-backed securities are ultimately
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dependent upon payment of the underlying instruments by the obligors, and the
Fund would generally have no recourse against the obligee of the instruments in
the event of default by an obligor. The underlying instruments are subject to
prepayments which shorten the weighted average life of asset-backed securities
and may lower their return, in the same manner as described below for
prepayments of pools of mortgage loans underlying mortgage-backed securities.
MORTGAGE-RELATED PASS-THROUGH SECURITIES (INTERMEDIATE FUND ONLY).
Mortgage pass-through certificates are issued by governmental, government-
related and private organizations and are backed by pools of mortgage loans.
These mortgage loans are made by savings and loan associations, mortgage
bankers, commercial banks and other lenders to residential home buyers
throughout the United States. The securities are "pass-through" securities
because they provide investors with monthly payments of principal and interest
that, in effect, are a "pass-through" of the monthly payments made by the
individual borrowers on the underlying mortgage loans, net of any fees paid to
the issuer or guarantor of the pass-through certificates. The principal
governmental issuer of such securities is the Government National Mortgage
Association ("GNMA"), which is a wholly-owned US Government corporation within
the Department of Housing and Urban Development. Government-related issuers
include the Federal Home Loan Mortgage Corporation ("FHLMC"), a corporate
instrumentality of the United States created pursuant to an act of Congress
which is owned entirely by the Federal Home Loan Banks, and the Federal National
Mortgage Association ("FNMA"), a government sponsored corporation owned entirely
by private stockholders. Commercial banks, savings and loan associations,
private mortgage insurance companies, mortgage bankers and other secondary
market issuers also create pass-through pools of conventional residential
mortgage loans. Such issuers may be the originators of the underlying mortgage
loans as well as the guarantors of the mortgage-related securities.
(1) GNMA Mortgage Pass-Through Certificates ("Ginnie Maes"). Ginnie Maes
represent an undivided interest in a pool of mortgage loans that are insured by
the Federal Housing Administration or the Farmers Home Administration or
guaranteed by the Veterans Administration. Ginnie Maes entitle the holder to
receive all payments (including prepayments) of principal and interest owed by
the individual mortgagors, net of fees paid to GNMA and to the issuer which
assembles the loan pool and passes through the monthly mortgage payments to the
certificate holders (typically, a mortgage banking firm), regardless of whether
the individual mortgagor actually makes the payment. Because payments are made
to certificate holders regardless of whether payments are actually received on
the underlying loans, Ginnie Maes are of the "modified pass-through" mortgage
certificate type. GNMA is authorized to guarantee the timely payment of
principal and interest on the Ginnie Maes as securities backed by an eligible
pool of mortgage loans. The GNMA guaranty is backed by the full faith and
credit of the United States, and GNMA has unlimited authority to borrow funds
from the US Treasury to make payments under the guaranty. The market for Ginnie
Maes is highly liquid because of the size of the market and the active
participation in the secondary market by securities dealers and a variety of
investors.
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(2) FHLMC Mortgage Participation Certificates ("Freddie Macs"). Freddie
Macs represent interests in groups of specified first lien residential
conventional mortgage loans underwritten and owned by FHLMC. Freddie Macs
entitle the holder to timely payment of interest, which is guaranteed by FHLMC.
FHLMC guarantees either ultimate collection or timely payment of all principal
payments on the underlying mortgage loans. In cases where FHLMC has not
guaranteed timely payment of principal, FHLMC may remit the amount due on
account of its guarantee of ultimate payment of principal at any time after
default on an underlying loan, but in no event later than one year after it
becomes payable. Freddie Macs are not guaranteed by the United States or by any
of the Federal Home Loan Banks and do not constitute a debt or obligation of the
United States or of any Federal Home Loan Bank. The secondary market for
Freddie Macs is highly liquid because of the size of the market and the active
participation in the secondary market by FHLMC, securities dealers and a variety
of investors.
(3) FNMA Guaranteed Mortgage Pass-Through Certificates ("Fannie Maes").
Fannie Maes represent an undivided interest in a pool of conventional mortgage
loans secured by first mortgages or deeds of trust, on one-family to four-family
residential properties. FNMA is obligated to distribute scheduled monthly
installments of principal and interest on the loans in the pool, whether or not
received, plus full principal of any foreclosed or otherwise liquidated loans.
The obligation of FNMA under its guaranty is solely the obligation of FNMA and
is not backed by, nor entitled to, the full faith and credit of the United
States.
The market value of mortgage-related securities depends on, among other
things, the level of interest rates, the certificates' coupon rates and the
payment history of the underlying borrowers.
Although the mortgage loans in a pool underlying a mortgage pass-through
certificate will have maturities of up to 30 years, the average life of a
mortgage pass-through certificate will be substantially less because the loans
will be subject to normal principal amortization and also may be prepaid prior
to maturity. Prepayment rates vary widely and may be affected by changes in
mortgage interest rates. In periods of falling interest rates, the rate of
prepayment on higher interest mortgage rates tends to increase, thereby
shortening the actual average life of the mortgage pass-through certificate.
Conversely, when interest rates are rising, the rate of prepayment tends to
decrease, thereby lengthening the average life of the mortgage pass-through
certificate. Accordingly, it is not possible to predict accurately the average
life of a particular pool. However, based on current statistics, it is
conventional to quote yields on mortgage pass-through certificates based on the
assumption that they have effective maturities of 12 years. Reinvestment of
prepayments may occur at higher or lower rates than the original yield on the
certificates. Due to the prepayment feature and the need to reinvest
prepayments of principal at current rates, mortgage pass-through certificates
with underlying loans bearing interest rates in excess of the market rate can be
less effective than typical noncallable bonds with similar maturities at
"locking in" yields during
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periods of declining interest rates, although they may have comparable risks of
declining in value during periods of rising interest rates.
ZERO COUPON SECURITIES (INTERMEDIATE FUND ONLY). These securities are
notes, bonds and debentures that: (1) do not pay current interest and are
issued at a substantial discount from par value; (2) have been stripped of their
unmatured interest coupons and receipts; or (3) pay no interest until a stated
date one or more years into the future. These securities also include
certificates representing interests in such stripped coupons and receipts.
Because the Intermediate Fund accrues taxable income from zero coupon
securities without receiving regular interest payments in cash, the Fund may be
required to sell portfolio securities in order to pay a dividend depending,
among other things, upon the proportion of shareholders who elect to receive
dividends in cash rather than reinvesting dividends in additional shares of the
Fund. Investing in these securities might also force the Fund to sell portfolio
securities to maintain portfolio liquidity.
Because a zero coupon security pays no interest to its holder during its
life or for a substantial period of time, it usually trades at a deep discount
from its face or par value and will be subject to greater fluctuations in market
value in response to changing interest rates than debt obligations of comparable
maturities that make regular distributions of interest.
MORTGAGE-BACKED SECURITY ROLLS (INTERMEDIATE FUND ONLY). The Intermediate
Fund may enter into "forward roll" transactions with respect to mortgage-backed
securities it holds. In a forward roll transaction, the Fund will sell a
mortgage security to a bank or other permitted entity and simultaneously agree
to repurchase a similar security from the institution at a later date at an
agreed upon price. The mortgage securities that are repurchased will bear the
same interest rate as those sold, but generally will be collateralized by
different pools of mortgages with different prepayment histories than those
sold. Risks of mortgage-backed security rolls include: (1) the risk of
prepayment prior to maturity; (2) the possibility that the Fund may not be
entitled to receive interest and principal payments on the securities sold and
that the proceeds of the sale may have to be invested in money market
instruments (typically repurchase agreements) maturing not later than the
expiration of the roll; and (3) the risk that the market value of the securities
sold by the Fund may decline below the price at which the Fund is obligated to
purchase the securities. Upon entering into a mortgage-backed security roll,
the Fund will place cash, US Government securities or other high-grade debt
securities in a segregated account with Custodian in an amount equal to its
obligation under the roll.
INTEREST RATE SWAPS (INTERMEDIATE FUND ONLY). The Intermediate Fund may
enter into interest rate swap transactions with respect to any security it is
entitled to hold. Interest rate swaps involve the exchange by the Fund with
another party of their respective rights to receive interest, e.g., an exchange
of floating rate payments for fixed rate payments. The Fund expects to enter
into these transactions primarily to preserve a
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return or spread on a particular investment or portion of its portfolio and to
protect against any increase in the price of securities it anticipates
purchasing at a later date. The Fund intends to use these transactions as a
hedge and not as a speculative investment.
PREFERRED STOCKS (INTERMEDIATE FUND ONLY). Preferred stock, unlike common
stock, generally confers a stated dividend rate payable from the corporation's
earnings. Such preferred stock dividends may be cumulative or noncumulative,
fixed, participating, auction rate or other. If interest rates rise, a fixed
dividend on preferred stocks may be less attractive, causing the price of
preferred stocks to decline either absolutely or relative to alternative
investments. Preferred stock may have mandatory sinking fund provisions, as
well as provisions that allow the issuer to redeem or call the stock. The right
to payment of preferred stock is generally subordinate to rights associated with
a corporation's debt securities.
WARRANTS (GROWTH AND INCOME FUND ONLY). The Growth and Income Fund may
invest in warrants which entitle the holder to buy equity securities at a
specific price for a specific period of time. Warrants may be considered more
speculative than certain other types of investments in that they do not entitle
a holder to dividends or voting rights with respect to the securities which may
be purchased nor do they represent any rights in the assets of the issuing
company. Also, the value of the warrant does not necessarily change with the
value of the underlying securities and a warrant ceases to have value if it is
not exercised prior to the expiration date. The Fund will not invest more than
5% of the value of its net assets in warrants, or more than 2% in warrants which
are not listed on the New York or American Stock Exchange.
AMERICAN DEPOSITORY RECEIPTS (ADRS) (GROWTH AND INCOME FUND ONLY). The
Growth and Income Fund may invest in ADRs under certain circumstances as an
alternative to directly investing in foreign securities. Generally, ADRs, in
registered form, are designed for use in the US securities markets. ADRs are
receipts typically issued by a US bank or trust company evidencing ownership of
the underlying securities. ADRs represent the right to receive securities of
foreign issuers deposited in a domestic bank or a correspondent bank. ADRs do
not eliminate the risk inherent in investing in the securities of foreign
issuers. However, by investing in ADRs rather than directly in a foreign
issuer's stock, the Fund can avoid currency risks during the settlement period
for either purchases or sales. In general, there is a large liquid market in
the US for many ADRs. The information available for ADRs is subject to the
accounting, auditing and financial reporting standards of the domestic market or
exchange on which they are traded, which standards are more uniform and more
exacting than those to which many foreign issuers are subject.
HEDGING STRATEGIES AND RELATED INVESTMENT TECHNIQUES
The Funds may seek to hedge their portfolios against movements in the
equity markets, interest rates and currency exchange rates through the use of
options, futures transactions, options on futures and forward foreign currency
exchange transactions. The
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Funds have authority to write (sell) covered call and put options on their
portfolio securities, purchase put and call options on securities and engage in
transactions in stock index options, stock index futures and financial futures
and related options on such futures. The Intermediate Fund may also deal in
certain forward contracts, including forward foreign exchange transactions,
foreign currency options and futures, and related options on such futures. The
Funds may enter into such options and futures transactions either on exchanges
or in the over-the-counter ("OTC") markets. Although certain risks are involved
in options and futures transactions (as discussed in the Prospectus and below),
Adviser believes that, because the Funds will only engage in these transactions
for hedging purposes, the options and futures portfolio strategies of the Funds
will not subject the Funds to the risks frequently associated with the
speculative use of options and futures transactions. Although the use of
hedging strategies by these Funds is intended to reduce the volatility of the
net asset value of the Funds' shares, each such Fund's net asset value will
nevertheless fluctuate. There can be no assurance that the Funds' hedging
transactions will be effective.
HEDGING FOREIGN CURRENCY RISK (INTERMEDIATE FUND ONLY). Generally, the
foreign exchange transactions of the Intermediate Fund will be conducted on a
spot (cash) basis at the spot rate then prevailing for purchasing or selling
currency in the foreign exchange market. However, the Fund has authority to
deal in forward foreign currency exchange contracts (including those involving
the US dollar) as a hedge against possible variations in the exchange rate
between various currencies. This is accomplished through individually
negotiated contractual agreements to purchase or to sell a specified currency at
a specified future date and price set at the time of the contract. The Fund's
dealings in forward foreign currency exchange contracts may be with respect to a
specific purchase or sale of a security, or with respect to its portfolio
positions generally.
The Fund may not hedge its positions with respect to the currency of a
particular country to an extent greater than the aggregate market value (at the
time of making such sale) of the securities held in its portfolio denominated or
quoted in that particular foreign currency. The Fund will not attempt to hedge
all of its portfolio positions and will enter into such transactions only to the
extent, if any, deemed appropriate by Adviser. The Fund will not enter into a
position hedging commitment if, as a result thereof, the Fund would have more
than 10% of the value of its assets committed to such contracts. The Fund will
not enter into a forward contract with a term of more than one year.
In addition to the forward exchange contracts, the Fund may also purchase
or sell listed or OTC foreign currency options and foreign currency futures and
related options as a short or long hedge against possible variations in foreign
currency exchange rates. The cost to the Fund of engaging in foreign currency
transactions varies with such factors as the currencies involved, the length of
the contract period and the market conditions then prevailing. Since
transactions in foreign currency exchange usually are conducted on a principal
basis, no fees or commissions are involved. Transactions involving
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forward exchange contracts and futures contracts and options thereon are subject
to certain risks. A detailed discussion of such risks appears under the caption
"Risk Factors in Options, Futures, Forward and Currency Transactions."
Certain differences exist among these hedging instruments. For example,
foreign currency options provide the holder thereof the rights to buy or sell a
currency at a fixed price on a future date. A futures contract on a foreign
currency is an agreement between two parties to buy and sell a specified amount
of a currency for a set price on a future date. Futures contracts and options
on futures contracts are traded on boards of trade of futures exchanges. The
Fund will not speculate in foreign security or currency options or futures or
related options. The Fund will not hedge a currency substantially in excess of:
(1) the market value of securities denominated in such currency that the Fund
has committed to purchase or anticipates purchasing; or (2) in the case of
securities that have been sold by the Fund but not yet delivered, the proceeds
thereof in their denominated currency. The Fund will not incur potential net
liabilities of more than 25% of its total assets from foreign security or
currency options, futures or related options.
WRITING COVERED CALL OPTIONS. Each Fund is authorized to write (sell)
covered call options on the securities in which it may invest and to enter into
closing purchase transactions with respect to such options. Writing a call
option obligates a Fund to sell or deliver the option's underlying security, in
return for the strike price, upon exercise of the option. By writing a call
option, the Fund receives an option premium from the purchaser of the call
option. Writing covered call options is generally a profitable strategy if
prices remain the same or fall. Through receipt of the option premium, the Fund
would seek to mitigate the effects of a price decline. By writing covered call
options, however, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price. In addition, the Fund's ability to sell the underlying
security will be limited while the option is in effect unless the Fund effects a
closing purchase transaction.
WRITING COVERED PUT OPTIONS. Each Fund is authorized to write (sell)
covered put options on its portfolio securities and to enter into closing
transactions with respect to such options.
When a Fund writes a put option, it takes the opposite side of the
transaction from the option's purchaser. In return for receipt of the premium,
the Fund assumes the obligation to pay the strike price for the option's
underlying instrument if the other party to the option chooses to exercise it.
The Fund may seek to terminate its position in a put option it writes before
exercise by closing out the option in the secondary market at its current price.
If the secondary market is not liquid for an option the Fund has written,
however, the Fund must continue to be prepared to pay the strike price while the
option is outstanding, regardless of price changes, and must continue to set
aside assets to cover its position.
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A Fund may write put options as an alternative to purchasing actual
securities. If security prices rise, the Fund would expect to profit from a
written put option, although its gain would be limited to the amount of the
premium it received. If security prices remain the same over time, it is likely
that the Fund will also profit, because it should be able to close out the
option at a lower price. If security prices fall, the Fund would expect to
suffer a loss. This loss should be less than the loss the Fund would have
experienced from purchasing the underlying instrument directly, however, because
the premium received for writing the option should mitigate the effects of the
decline.
PURCHASING PUT OPTIONS. Each Fund is authorized to purchase put options to
hedge against a decline in the market value of its portfolio securities. By
buying a put option a Fund has the right (but not the obligation) to sell the
underlying security at the exercise price, thus limiting the Fund's risk of loss
through a decline in the market value of the security until the put option
expires. The amount of any appreciation in the value of the underlying security
will be partially offset by the amount of the premium paid by the Fund for the
put option and any related transaction costs. Prior to its expiration, a put
option may be sold in a closing sale transaction and profit or loss from the
sale will depend on whether the amount received is more or less than the premium
paid for the put option plus the related transaction costs. A closing sale
transaction cancels out the Fund's position as the purchaser of an option by
means of an offsetting sale of an identical option prior to the expiration of
the option it has purchased. The Fund will not purchase put options on
securities (including stock index options discussed below) if as a result of
such purchase, the aggregate cost of all outstanding options on securities held
by the Fund would exceed 5% of the market value of the Fund's total assets.
PURCHASING CALL OPTIONS. Each Fund is also authorized to purchase call
options. The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price (call options on futures contracts are settled by purchasing the
underlying futures contract). The Funds will purchase call options only in
connection with "closing purchase transactions."
STOCK INDEX OPTIONS AND FINANCIAL FUTURES. Each Fund is authorized to
engage in transactions in stock index options and financial futures, and related
options. A Fund may purchase or write put and call options on stock indices to
hedge against the risks of market-wide stock price movements in the securities
in which the Fund invests. Options on indices are similar to options on
securities except that on exercise or assignment, the parties to the contract
pay or receive an amount of cash equal to the difference between the closing
value of the index and the exercise price of the option times a specified
multiple. The Funds may invest in stock index options based on a broad market
index, such as the S&P 500 Index, or on a narrow index representing an industry
or market segment. The Funds' investments in foreign stock index futures
contracts and foreign interest rate futures contracts, and related options, are
limited to only those contracts and related options that have been approved by
the Commodity Futures Trading Commission ("CFTC") for investment by United
States investors. Additionally, with respect to the
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Funds' investments in foreign options, unless such options are specifically
authorized for investment by order of the CFTC, the Funds will not make such
investments.
Each Fund may also purchase and sell stock index futures contracts and
other financial futures contracts ("futures contracts") as a hedge against
adverse changes in the market value of its portfolio securities as described
below. A futures contract is an agreement between two parties which obligates
the purchaser of the futures contract to buy and the seller of a futures
contract to sell a security for a set price on a future date. Unlike most other
futures contracts, a stock index futures contract does not require actual
delivery of securities, but results in cash settlement based upon the difference
in value of the index between the time the contract was entered into and the
time of its settlement. Each Fund may effect transactions in stock index
futures contracts in connection with debt securities in which it invests and in
financial futures contracts in connection with equity securities in which it
invests, if any. Transactions by the Fund in stock index futures and financial
futures are subject to limitations as described below under "Restrictions on the
Use of Futures Transactions."
Each Fund may sell futures contracts in anticipation of or during a market
decline to attempt to offset the decrease in market value of the Fund's
securities portfolio that might otherwise result. When a Fund is not fully
invested in the securities markets and anticipates a significant market advance,
the Fund may purchase futures in order to gain rapid market exposure that may
partially or entirely offset increases in the cost of securities that the Fund
intends to purchase. As such purchases are made, an equivalent amount of
futures contracts will be terminated by offsetting sales. It is anticipated
that, in a substantial majority of these transactions, the Fund will purchase
such securities upon termination of the long futures position, whether the long
position results from the purchase of a futures contract or the purchase of a
call option, but under unusual circumstances (e.g., the Fund experiences a
significant amount of redemptions), a long futures position may be terminated
without the corresponding purchase of securities.
Each Fund also is authorized to purchase and write call and put options on
futures contracts and stock indices in connection with its hedging activities.
Generally, these strategies would be utilized under the same market and market
sector conditions (i.e., conditions relating to specific types of investments)
during which the Funds enter into futures transactions. The Funds may purchase
put options or write call options on futures contracts and stock indices rather
than selling the underlying futures contract in anticipation of a decrease in
the market value of securities. Similarly, each Fund can purchase call options,
or write put options on futures contracts and stock indices, as a substitute for
the purchase of such futures to hedge against the increased cost resulting from
an increase in the market value of securities which the Fund intends to
purchase.
Each Fund is also authorized to engage in options and futures transactions
on US and foreign exchanges and in options in the OTC markets ("OTC options").
In general, exchange traded contracts are third-party contracts (i.e.,
performance of the parties' obligations is guaranteed by an exchange or clearing
corporation) with standardized
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strike prices and expiration dates. OTC options transactions are two-party
contracts with price and terms negotiated by the buyer and seller. See
"Restrictions on OTC Options" below for information as to restrictions on the
use of OTC options.
Each Fund is authorized to purchase or sell listed or OTC foreign security
or currency options, foreign security or currency futures and related options as
a short or long hedge against possible variations in foreign exchange rates and
market movements. Such transactions could be effected with respect to hedges on
non-US dollar denominated securities owned by a Fund, sold by a Fund but not yet
delivered, or committed or anticipated to be purchased by a Fund. As an
illustration, a Fund may use such techniques to hedge the stated value in US
dollars of an investment in a yen-denominated security. In such circumstances,
for example, the Fund can purchase a foreign currency put option enabling it to
sell a specified amount of yen for US dollars at a specified price by a future
date. To the extent the hedge is successful, a loss in the value of the yen
relative to the US dollar will tend to be offset by an increase in the value of
the put option.
RESTRICTIONS ON THE USE OF FUTURES TRANSACTIONS. The purchase or sale of a
futures contract differs from the purchase or sale of a security in that no
price or premium is paid or received. Instead, an amount of cash or securities
acceptable to the broker and the relevant contract market, which varies, but is
generally about 5% of the contract amount, must be deposited with the broker.
This amount is known as "initial margin" and represents a "good faith" deposit
assuring the performance of both the purchaser and seller under the futures
contract. Subsequent payments to and from the broker, called "variation
margin," are required to be made on a daily basis as the price of the futures
contract fluctuates making the long and short positions in the futures contracts
more or less valuable, a process known as "marking to market." At any time
prior to the settlement date of the future contract, the position may be closed
out by taking an opposite position which will operate to terminate the position
in the futures contract. A final determination of variation margin is then
made, additional cash is required to be paid to or released by the broker and
the purchaser realizes a loss or gain. In addition, a nominal commission is
paid on each completed sale transaction.
Regulations of the CFTC applicable to the Funds require that all of the
Funds' futures and options on futures transactions constitute bona fide hedging
transactions and that a Fund not enter into such transactions if, immediately
thereafter, the sum of the amount of initial margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets.
RESTRICTIONS ON OTC OPTIONS. The Funds will engage in OTC options,
including OTC stock index options, OTC foreign security and currency options and
options on foreign security and currency futures, only with member banks of the
Federal Reserve System and primary dealers in US Government securities or with
affiliates of such banks or dealers which have capital of at least $50 million
or whose obligations are guaranteed by an entity having capital of at least
$50 million. Each Fund will acquire only those
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OTC options for which Adviser believes the Fund can receive on each business day
at least two independent bids or offers (one of which will be from an entity
other than a party to the option).
The Staff of the SEC has taken the position that purchased OTC options and
the assets used as cover for written OTC options are illiquid securities.
Therefore, each Fund has adopted an operating policy pursuant to which it will
not purchase or sell OTC options (including OTC options on futures contracts)
if, as a result of such transaction, the sum of: (1) the market value of
outstanding OTC options held by the Fund; (2) the market value of the underlying
securities covered by outstanding OTC call options sold by the Fund; (3) margin
deposits on the Fund's existing OTC options on futures contracts; and (4) the
market value of all other assets of the Fund that are illiquid or are not
otherwise readily marketable, would exceed 10% of the net assets of the Fund,
taken at market value. However, if an OTC option is sold by the Fund to a
primary US Government securities dealer recognized by the Federal Reserve Bank
of New York and the Fund has the unconditional contractual right to repurchase
such OTC option from the dealer at a predetermined price, then the Fund will
treat as illiquid such amount of the underlying securities as is equal to the
repurchase price less the amount by which the option is "in-the-money" (current
market value of the underlying security minus the option's strike price). The
repurchase price with primary dealers is typically a formula price which is
generally based on a multiple of the premium received for the option plus the
amount by which the option is "in-the-money."
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS. Neither Fund will use
leverage in its options and futures strategies. Such investments will be made
for hedging purposes only. Each Fund will hold securities or other options or
futures positions whose values are expected to offset its obligations under the
hedge strategies. No Fund will enter into an option or futures position that
exposes the Fund to an obligation to another party unless it owns either:
(1) an offsetting position in securities or other options or futures contracts;
or (2) cash, receivables and short-term debt securities with a value sufficient
to cover its potential obligations. The Funds will comply with guidelines
established by the SEC with respect to coverage of options and futures
strategies by mutual funds, and if the guidelines so require will set aside cash
and high grade liquid debt securities in a segregated account with its custodian
bank in the amount prescribed. The Funds' custodian shall maintain the value of
such segregated account equal to the prescribed amount by adding or removing
additional cash or liquid securities to account for fluctuations in the value of
securities held in such account. Securities held in a segregated account cannot
be sold while the futures or option strategy is outstanding, unless they are
replaced with similar securities. As a result, there is a possibility that
segregation of a large percentage of a Fund's assets could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
RISK FACTORS IN OPTIONS, FUTURES, FORWARD AND CURRENCY TRANSACTIONS.
Utilization of options and futures transactions to hedge the Funds' portfolios
involves the risk of imperfect correlation in movements in the price of options
and futures and
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movements in the price of securities or currencies which are the subject of the
hedge. If the price of the options or futures moves more or less than the price
of hedged securities or currencies, the Fund will experience a gain or loss
which will not be completely offset by movements in the price of the subject of
the hedge. The successful use of options and futures also depends on Adviser's
ability to correctly predict price movements in the market involved in a
particular options or futures transaction. To compensate for imperfect
correlations, the Funds may purchase or sell stock index options or futures
contracts in a greater dollar amount than the hedged securities if the
volatility of the hedged securities is historically greater than the volatility
of the stock index options or futures contracts. Conversely, the Funds may
purchase or sell fewer stock index options or futures contracts, if the
historical price volatility of the hedged securities is less than that of the
stock index options or futures contracts. The risk of imperfect correlation
generally tends to diminish as the maturity date of the stock index option or
futures contract approaches. Options are also subject to the risks of an
illiquid secondary market, particularly in strategies involving writing options,
which the Funds cannot terminate by exercise. In general, options whose strike
prices are close to their underlying instruments' current value will have the
highest trading volume, while options whose strike prices are further away may
be less liquid.
Each Fund intends to enter into options and futures transactions, on an
exchange or in the OTC market, only if there appears to be a liquid secondary
market for such options or futures or, in the case of OTC transactions, the
Adviser believes the Fund can receive on each business day at least two
independent bids or offers. However, there can be no assurance that a liquid
secondary market will exist at any specific time. Thus, it may not be possible
to close an options or futures position. The inability to close options and
futures positions also could have an adverse impact on a Fund's ability to
effectively hedge its portfolio. There is also the risk of loss by a Fund of
margin deposits or collateral in the event of bankruptcy of a broker with whom
the Fund has an open position in an option, a futures contract or related
option.
The exchanges on which options on portfolio securities and currency options
are traded have generally established limitations governing the maximum number
of call or put options on the same underlying security or currency (whether or
not covered) which may be written by a single investor, whether acting alone or
in concert with others (regardless of whether such options are written on the
same or different exchanges or are held or written in one or more accounts or
through one or more brokers). "Trading limits" are imposed on the maximum
number of contracts which any person may trade on a particular trading day.
To the extent permitted under the 1940 Act and exemptive rules and orders
thereunder, the Funds may seek to achieve its investment objective by investing
solely in the shares of another investment company that has substantially
similar investment objectives and policies.
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RATINGS OF DEBT INSTRUMENTS
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") -- LONG TERM DEBT RATINGS.
Aaa -- Bonds which 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 edged." 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 which 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 which make the long-term risk appear somewhat larger than the Aaa
securities.
A -- Bonds which 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 which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium-grade obligations
(i.e., 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.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
STANDARD & POOR'S CORPORATION ("S&P"). The ratings are based, in varying
degrees, on the following considerations: (1) The likelihood of default --
capacity and willingness of the obligator as to the timely payment of interest
and repayment of principal in accordance with the terms of the obligation;
(2) The nature of and provisions of the obligation; and (3) The protection
afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization, or other arrangement under the laws of bankruptcy
and other laws affecting creditors' rights.
AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
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AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
RATINGS OF COMMERCIAL PAPER
MOODY'S. Moody's short-term debt ratings are opinions of the ability of
issuers to repay punctually senior debt obligations. These obligations have an
original maturity not exceeding one year, unless explicitly noted. Moody's
employs the following three designations, all judged to be investment grade, to
indicate the relative repayment ability of rated issuers:
- Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
- Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited above
but to a lesser degree. Earnings trends and coverage ratios, while
sound, may be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternative liquidity is maintained.
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- Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
- Issuers rated Not Prime do not fall within any of the Prime rating
categories.
S&P. An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered shot-term in the relevant
market. Ratings are graded into several categories, ranging from A-1 for the
highest quality obligations to D for the lowest. These categories are as
follows:
A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
FITCH'S INVESTORS SERVICE, INC. ("FITCH"). Commercial paper rated by Fitch
reflects Fitch's current appraisal of the degree of assurance of timely payment
of such debt. An appraisal results in the rating of an issuer's paper as F-1,
F-2, F-3, or F-4.
F-1 -- This designation indicates that the commercial paper is regarded as
having the strongest degree of assurance for timely payment.
F-2 -- Commercial paper issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than those issues rated F-1.
DUFF AND PHELPS, INC. Duff & Phelps' short-term ratings are consistent
with the rating criteria utilized by money market participants. The ratings
apply to all obligations with maturities of under one year, including commercial
paper, the uninsured portion of certificates of deposit, unsecured bank loans,
master notes, bankers acceptances, irrevocable letters of credit, and current
maturities of long-term debt. Asset-backed commercial paper is also rated
according to this scale.
Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of funds including trade
credit, bank lines, and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.
The distinguishing feature of Duff & Phelps' short-term ratings is the
refinement of the traditional '1' category. The majority of short-term debt
issuers carry the highest
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rating, yet quality differences exist within that tier. As a consequence, Duff
& Phelps has incorporated gradations of '1+''
s (one plus) and '1-' (one minus) to
assist investors in recognizing those differences.
Duff 1+--Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free U.S. Treasury short-
term obligations.
Duff 1--Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk factors
are minor.
Duff 1- -- High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk factors are very
small.
GOOD GRADE. Duff 2--Good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs
may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
SATISFACTORY GRADE. Duff 3--Satisfactory liquidity and other
protection factors qualify issue as to investment grade. Risk factors are
larger and subject to more variation. Nevertheless, timely payment is
expected.
NON-INVESTMENT GRADE. Duff 4--Speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
DEFAULT. Duff 5--Issuer failed to meet scheduled principal and/or
interest payments.
IBCA, INC. In addition to conducting a careful review of an institution's
reports and published figures, IBCA's analysts regularly visit the companies for
discussions with senior management. These meetings are fundamental to the
preparation of individual reports and ratings. To keep abreast of any changes
that may affect assessments, analysts maintain contact throughout the year with
the management of the companies they cover.
IBCA's analysts speak the languages of the countries they cover, which is
essential to maximize the value of their meetings with management and to
properly analyze a company's written materials. They also have a thorough
knowledge of the laws and accounting practices that govern the operations and
reporting of companies within the various countries.
Often, in order to ensure a full understanding of their position, companies
entrust IBCA with confidential data. While these data cannot be disclosed in
reports, they are taken into account when assigning our ratings. Before
dispatch to subscribers, a draft of
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the report is submitted to each company to permit correction of any factual
errors and to enable clarification of issues raised.
IBCA's Rating Committees meet at regular intervals to review all ratings
and to ensure that individual ratings are assigned consistently for institutions
in all the countries covered. Following the Committee meetings, ratings are
issued directly to subscribers. At the same time, the company is informed of
the ratings as a matter of courtesy, but not for discussion.
A1+--Obligations supported by the highest capacity for timely repayment.
A1--Obligations supported by a very strong capacity for timely repayment.
A2--Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in business,
economic or financial conditions.
B1--Obligations supported by an adequate capacity for timely repayment.
Such capacity is more susceptible to adverse changes in business, economic, or
financial conditions than for obligations in higher categories.
B2--Obligations for which the capacity for timely repayment is susceptible
to adverse changes in business, economic or financial conditions.
C1--Obligations for which there is an inadequate capacity to ensure timely
repayment.
D1--Obligations which have a high risk of default or which are currently in
default.
TAXES
Each Fund intends to qualify for treatment as a regulated investment
company ("RIC") under Subchapter M of the Internal Revenue Code of 1986, as
amended ("the Code"). As a RIC, each Fund will not be liable for federal income
taxes on taxable net investment income and capital gain net income (capital
gains in excess of capital losses) that it distributes to its shareholders,
provided that the Fund distributes annually to its shareholders at least 90% of
its net investment income and net short-term capital gain for the taxable year
("Distribution Requirement"). For a Fund to qualify as a RIC it must abide by
all of the following requirements: (1) at least 90% of the Fund's gross income
each taxable year must be derived from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock
or securities or foreign currencies, or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies ("Income Requirement");
(2) less than 30% of the Fund's gross income each taxable year must be derived
from the sale or other disposition of securities and certain options,
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futures contracts, forward contracts and foreign currencies held for less than
three months ("Short-Short Limitation"); (3) at the close of each quarter of the
Fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, US Government securities, securities of
other RICs, and other securities, with such other securities limited, in respect
of any one issuer, to an amount that does not exceed 5% of the total assets of
the Fund and that does not represent more than 10% of the outstanding voting
securities of such issuer; and (4) at the close of each quarter of the Fund's
taxable year, not more than 25% of the value of its assets may be invested in
securities (other than US Government securities or the securities of other RICs)
of any one issuer.
Each Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year an amount at least equal to
the sum of: (1) 98% of its ordinary income for that year, (2) 98% of its
capital gain net income for the one-year period ending on October 31 of that
year; and (3) certain undistributed amounts from the preceding calendar year.
For this and other purposes, dividends declared in October, November or December
of any calendar year and made payable to shareholders of record in such month
will be deemed to have been received on December 31 of such year if the
dividends are paid by the Fund subsequent to December 31 but prior to February 1
of the following year.
If a shareholder receives a distribution taxable as long-term capital gain
with respect to shares of a Fund and redeems or exchanges the shares without
having held the shares for more than one year, then any loss on the redemption
or exchange will be treated as long-term capital loss to the extent of the
capital gain distribution.
As of August 31, 1995, the Growth and Income Fund had a net tax basis
capital loss carryforward of $63,505, which may be applied against any realized
net taxable gains of each succeeding year until the expiration date of August
31, 2002. As of August 31, 1995, the Intermediate Fund had a net tax basis
capital loss carryforward of $103,098, which may be applied against any realized
net taxable gains of each succeeding year until the expiration date of August
31, 2003. In addition, from November 1, 1993 to August 31, 1995, the
Intermediate Fund incurred $319,202 of net realized capital losses. As
permitted by tax regulation, the Intermediate Fund intends to elect to defer
these losses and treat them as arising in the fiscal year ending August 31,
1996.
ISSUES RELATED TO HEDGING AND OPTION INVESTMENTS. A Fund's ability to make
certain investments may be limited by provisions of the Code that require
inclusion of certain unrealized gains or losses in the Fund's income for
purposes of the Income Requirement, the Short-Short Limitation and the
Distribution Requirement, and by provisions of the Code that characterize
certain income or loss as ordinary income or loss rather than capital gain or
loss. Such recognition, characterization and timing rules will affect
investments in certain futures contracts, options, foreign currency contracts
and debt securities denominated in foreign currencies.
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FOREIGN INCOME TAXES. Investment income received by the Intermediate Fund
from sources within foreign countries may be subject to foreign income taxes
withheld at the source. The United States has entered into tax treaties with
many foreign countries which would entitle the Fund to a reduced rate of such
taxes or exemption from taxes on such income. It is impossible to determine the
effective rate of foreign tax for the Fund in advance since the amount of the
assets to be invested within various countries is not known.
If a Fund invests in an entity that is classified as a "passive foreign
investment company" ("PFIC") for federal income tax purposes, the application of
certain provisions of the Code applying to PFICs could result in the imposition
of certain federal income taxes on the Fund. Under US Treasury regulations
issued in 1992 for PFICs, the Funds can elect to mark-to-market its PFIC
holdings in lieu of paying taxes on gains or distributions therefrom. It is
anticipated that any taxes on a Fund with respect to investments in PFICs would
be insignificant.
Foreign shareholders should consult with their tax advisers as to if and
how the federal income tax and its withholding requirements applies to them.
STATE AND LOCAL TAXES. Depending upon the extent of each Fund's activities
in states and localities in which its offices are maintained, its agents or
independent contractors are located or it is otherwise deemed to be conducting
business, the Fund may be subject to the tax laws of such states or localities.
The foregoing discussion is only a summary of certain federal income tax
issues generally affecting the Fund and its shareholders. Circumstances among
investors may vary and each investor is encouraged to discuss investment in the
Fund with the investor's tax adviser.
FINANCIAL STATEMENTS
The 1995 fiscal year-end financial statements for the Funds, including
notes to the financial statements financial highlights and the Report of
Independent Accountants, are included in the Funds' Annual Report to
shareholders. Copies of these Annual Reports accompany this Statement of
Additional Information and are incorporated herein by reference.
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Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
THE SEVEN SEAS SERIES FUND
Two International Place, 35th Floor
Boston, Massachusetts 02110
(617) 654-6089
STATEMENT OF ADDITIONAL INFORMATION
THE SEVEN SEAS SERIES ACTIVE INTERNATIONAL FUND
DECEMBER 29, 1995
The Seven Seas Series Fund ("Investment Company") is a registered open-end
investment company organized as a Massachusetts business trust offering shares
of beneficial interest in separate investment portfolios. In addition, each
series of the Investment Company is diversified as defined in the Investment
Company Act of 1940, as amended ("1940 Act").
This Statement of Additional Information supplements or describes in
greater detail the Investment Company and The Seven Seas Series Active
International Fund (the "Active International Fund" or the "Fund") as contained
in the Fund's Prospectus dated December 29, 1995. This Statement is not a
Prospectus and should be read in conjunction with the Fund's Prospectus, which
may be obtained by telephoning or writing Investment Company at the number or
address shown above.
<PAGE>
TABLE OF CONTENTS
Page
----
STRUCTURE AND GOVERNANCE . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Organization and Business History . . . . . . . . . . . . . . . . . . . 3
Shareholder Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . 4
Controlling Shareholders. . . . . . . . . . . . . . . . . . . . . . . . 4
Principal Shareholders. . . . . . . . . . . . . . . . . . . . . . . . . 5
Trustees and Officers . . . . . . . . . . . . . . . . . . . . . . . . . 5
OPERATION OF INVESTMENT COMPANY. . . . . . . . . . . . . . . . . . . . . . . 7
Service Providers . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Administrator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Custodian and Transfer Agent. . . . . . . . . . . . . . . . . . . . . . 8
Distribution Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Federal Law Affecting State Street. . . . . . . . . . . . . . . . . . . 9
Valuation of Fund Shares. . . . . . . . . . . . . . . . . . . . . . . . 9
Brokerage Practices . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Portfolio Turnover Policy . . . . . . . . . . . . . . . . . . . . . . . 11
Total Return Quotations . . . . . . . . . . . . . . . . . . . . . . . . 11
INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . 12
Investment Policies . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Hedging Strategies and Related Investment Techniques. . . . . . . . . . 18
RISK CONSIDERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
APPENDIX: DESCRIPTION OF SECURITIES RATINGS . . . . . . . . . . . . . . . . 29
-2-
<PAGE>
STRUCTURE AND GOVERNANCE
ORGANIZATION AND BUSINESS HISTORY. Investment Company was organized as a
Massachusetts business trust on October 3, 1987 and operates under a First
Amended and Restated Master Trust Agreement, dated October 13, 1993, as amended.
Investment Company is authorized to issue shares of beneficial interest, par
value $.001 per share, which may be divided into one or more series, each of
which evidences pro rata ownership interest in a different investment portfolio,
or "Fund." The Active International Fund is one such investment portfolio. The
Trustees may create additional Funds at any time without shareholder approval.
Further, the Investment Company is authorized to divide shares of any
series into two or more classes of shares. The shares of each Fund may have
such rights and preferences as the Trustees may establish from time to time,
including the right of redemption (including the price, manner and terms of
redemption), special and relative rights as to dividends and distributions,
liquidation rights, sinking or purchase fund provisions and conditions under
which any Fund may have separate voting rights or no voting rights. Each class
of shares of a Fund is entitled to the same rights and privileges as all other
classes of that Fund, except that each class bears the expenses associated with
the distribution and shareholder servicing arrangements of that class, as well
as other expenses attributable to the class and unrelated to the management of
the Fund's portfolio securities.
As of the date of this Statement of Additional Information, Investment
Company is comprised of the following investment portfolios, each of which
commenced operations on the date set forth opposite the portfolio's name:
--------------------------------------------------------------------------
The Seven Seas Series Money Market Fund May 2, 1988
--------------------------------------------------------------------------
The Seven Seas Series US Government Money Market Fund March 1, 1991
--------------------------------------------------------------------------
The Seven Seas Series US Treasury Money Market Fund December 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series US Treasury Obligations Fund *
--------------------------------------------------------------------------
The Seven Seas Series Prime Money Market Fund February 22, 1994
--------------------------------------------------------------------------
The Seven Seas Series Yield Plus Fund November 9, 1992
--------------------------------------------------------------------------
The Seven Seas Series Tax Free Money Market Fund December 1, 1994
--------------------------------------------------------------------------
The Seven Seas Series Intermediate Fund September 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series Bond Market Fund *
--------------------------------------------------------------------------
The Seven Seas Series Growth and Income Fund September 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series S&P 500 Index Fund December 30, 1992
--------------------------------------------------------------------------
The Seven Seas Series Small Cap Fund July 1, 1992
--------------------------------------------------------------------------
The Seven Seas Series Matrix Equity Fund May 4, 1992
--------------------------------------------------------------------------
The Seven Seas Series Active International Fund March 7, 1995
--------------------------------------------------------------------------
The Seven Seas Series International Pacific Index Fund *
--------------------------------------------------------------------------
The Seven Seas Series Emerging Markets Fund March 1, 1994
--------------------------------------------------------------------------
The Seven Seas Series Real Estate Equity Fund *
--------------------------------------------------------------------------
__________
-3-
<PAGE>
*As of the date of this Statement of Additional Information, these portfolios
have not commenced operations.
Prospectuses for these Investment Portfolios may be obtained by calling
Investment Company's distributor, Russell Fund Distributors, Inc., at (617) 654-
6089.
Shares of the Money Market, US Government Money Market and Tax Free Money
Market Funds are divided into Classes A, B and C.
Any amendment to the Master Trust Agreement that would materially and
adversely affect shareholders of Investment Company as a whole, or shareholders
of a particular Fund, must be approved by the holders of a majority of the
shares of Investment Company or the Fund, respectively. All other amendments
may be effected by Investment Company's Board of Trustees.
Under certain unlikely circumstances, and as is the case with any
Massachusetts business trust, a shareholder of a Fund may be held personally
liable for the obligations of a Fund. The Master Trust Agreement provides that
shareholders shall not be subject to any personal liability for the acts or
obligations of a Fund and that every written agreement, obligation, or other
undertaking of the Fund shall contain a provision to the effect that the
shareholders are not personally liable thereunder. The Master Trust Agreement
also provides that the Fund shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Fund and satisfy
any judgment thereon. Thus, the risk to shareholders of incurring financial
loss beyond their investments is limited to circumstances in which the Fund
itself would be unable to meet its obligations.
SHAREHOLDER MEETINGS. Investment Company will not have an annual meeting
of shareholders. Special meetings may be convened: (1) by the Board of
Trustees; (2) upon written request to the Board by the holders of at least 10%
of the outstanding shares; or (3) upon the Board's failure to honor the
shareholders' request described above, by holders of at least 10% of the
outstanding shares giving notice of the special meeting to the shareholders.
CONTROLLING SHAREHOLDERS. The Trustees have the authority and
responsibility to manage the business of Investment Company. Trustees hold
office until they resign or are removed by, in substance, a vote of two-thirds
of Investment Company shares outstanding.
State Street Bank and Trust Company ("State Street") may from time to time
have discretionary authority over accounts which invest in Investment Company
shares. These accounts include accounts maintained for securities lending
program and investment accounts which permit the use of Investment Company
portfolios as short-term cash sweep investments. Shares purchased for all
discretionary accounts are held of record by State Street, who retains voting
control of such shares. As of November 30, 1995, State Street held of record
36% of the issued and outstanding shares of Investment
-4-
<PAGE>
Company in connection with its discretionary accounts. Consequently, State
Street may be deemed to be a controlling person of Investment Company for
purposes of the 1940 Act. State Street also acts as Investment Company's
investment adviser, transfer agent and custodian.
Frank Russell Investment Management Company, Investment Company's
administrator ("Administrator"), will be the initial sole shareholder of the
Fund until such time as the Fund has public shareholders and therefore
Administrator may be deemed to be a controlling person for the purposes of the
1940 Act.
PRINCIPAL SHAREHOLDERS. As of November 30, 1995, the following
shareholders owned of record 5% or more of the issued and outstanding shares of
the Fund:
- State Street Bank Retirement CM01, an account of State Street Bank and
Trust Company, PO Box 351, Boston, MA 02101--38%;
- The Coca-Cola Foundation, PO Drawer 1734, Atlanta, GA 30301--10%;
- Wellesley College Retirement Fund, 146 Green Hill, Wellesley, MA
02181--8%;
- The Nature Conservancy Fund, State Street Bank and Trust Company, 225
Franklin Street M/3, Boston, MA 02110--7%; and
- State Street US Custody Pension Plan RM 53, an account of State Street
Bank and Trust Company (Tokyo), 225 Franklin Street, Boston, MA 02110-
-5%.
The Trustees and officers of Investment Company, as a group, own less than
1% of Investment Company's voting securities.
TRUSTEES AND OFFICERS. The Board of Trustees is responsible for overseeing
generally the operation of the Fund. The officers, all of whom are employed by,
and are officers of, Administrator or its affiliates, are responsible for the
day-to-day management and administration of the Fund's operations.
Trustees who are not officers or employees of State Street or its
affiliates are paid an annual fee and are reimbursed for travel and other
expenses they incur in attending Board meetings. Investment Company's officers
and employees are paid by Administrator or its affiliates.
The following lists Investment Company's Trustees and officers, their
positions with Investment Company, their present and principal occupations
during the past five years and the mailing addresses of Trustees who are not
affiliated with Investment Company. The mailing address for all Trustees and
officers affiliated with Investment Company is The Seven Seas Series Fund, 909 A
Street, Tacoma, WA 98402.
-5-
<PAGE>
An asterisk (*) indicates that a Trustee is an "interested person" of the
Investment Company, as defined in the 1940 Act.
*LYNN L. ANDERSON, Trustee, Chairman of the Board, President and Fund
Treasurer. Chairman of the Board and Chief Executive Officer, Frank Russell
Investment Management Company and Russell Fund Distributors, Inc.; Director,
President and Chief Executive Officer, Frank Russell Investment Company and
Frank Russell Trust Company; Director and President, Russell Insurance Funds;
Director and Chairman, Frank Russell Company (Delaware); Director, Frank Russell
Investments (Ireland) Limited and Frank Russell Investment Company plc.
WILLIAM L. MARSHALL, Trustee. 33 West Court Street, Doylestown, PA 18901.
Chief Executive Officer and President, Wm. L. Marshall Associates, Inc. (a
registered investment adviser and provider of financial and related consulting
services); Certified Financial Planner; Member, Registry of Financial Planning
Practitioners; and Advisory Committee, International Association for Financial
Planning Broker-Dealer Program. Member, Institute of Certified Financial
Planners. Registered for Securities with FSC Securities Corp., Marietta,
Georgia.
*STEVEN J. MASTROVICH, Trustee. 1 Financial Center, Boston, MA 02111.
Partner, Brown, Rudnick, Freed & Gesmer (law firm). 1990 to 1994, Partner,
Warner & Stackpole (law firm).
PATRICK J. RILEY, Trustee. 21 Custom House Street, Boston, MA 02110.
Partner, Riley, Burke & Donahue (law firm).
RICHARD D. SHIRK, Trustee. 3350 Peachtree Road, N.E., Atlanta, GA 30326.
President and Chief Executive Officer, Blue Cross/Blue Shield of Georgia. 1990
to 1992, President, Champions Group Resources--Business Management and Employee
Benefits Consulting; 1990, Senior Vice President, Employee Benefits Division,
Cigna Corporation (providing and insuring group life, health and disability
employee benefit products and services); from 1986 to 1990, Senior Vice
President, EQUICOR-Equitable HCA Corporation (providing and insuring group life,
health and disability employee benefit products and services).
*BRUCE D. TABER, Trustee. 26 Round Top Road, Boxford, MA 01921.
President, A.B. Reed, Inc. - Engineers, Architects, Planners. Prior to that,
Vice President, Instrumentation and Controls, A.B. Reed., Inc.
HENRY W. TODD, Trustee. 111 Commerce Drive, Montgomeryville, PA 18936.
President and Director, Zink & Triest Co., Inc. (dealer in vanilla flavor
materials); Director, A.M. Todd Co., and Flavorite Laboratories.
-6-
<PAGE>
J. DAVID GRISWOLD, Vice President and Secretary. Assistant Secretary,
Associate General Counsel, Chief Compliance Officer, Frank Russell Investment
Management Company, Russell Fund Distributors, Inc. and Frank Russell Capital
Inc.; Associate General Counsel and Assistant Secretary, Frank Russell Company;
Associate General Counsel, Assistant Secretary and Compliance Officer, Russell
Fiduciary Services Company; Director, Secretary, Associate General Counsel and
Chief Compliance Officer, Frank Russell Securities, Inc.; Secretary, Frank
Russell Canada Limited/Limitee.
KENNETH W. LAMB, Assistant Secretary, Assistant Treasurer and Principal
Accounting Officer. Manager - Funds Administration, Frank Russell Investment
Management Company since 1994. Prior to that, Senior Audit Manager with Knight,
Vale & Gregory since 1982.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
TRUSTEE COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------
Aggregate Pension or Estimated Annual Total Compensation
Compensation Retirement Benefits Upon From Investment
from Benefits Accrued Retirement Company Paid to
Trustee Investment as part of Trustees
Company Investment
Company
Expenses
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lynn L. Anderson $0 $0 $0 $0
- -------------------------------------------------------------------------------------------------------
William L. Marshall $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Steven J. Mastrovich $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Patrick J. Riley $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Richard D. Shirk $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Bruce D. Taber $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Henry W. Todd $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
</TABLE>
OPERATION OF INVESTMENT COMPANY
SERVICE PROVIDERS. Most of the Fund's necessary day-to-day operations are
performed by separate business organizations under contract to Investment
Company. The principal service providers are:
Investment Adviser, Custodian
and Transfer Agent: State Street Bank and Trust Company
Administrator: Frank Russell Investment Management Company
Distributor: Russell Fund Distributors, Inc.
Independent Accountants: Coopers & Lybrand, L.L.P.
-7-
<PAGE>
ADVISER. State Street serves as the Fund's investment adviser ("Adviser")
pursuant to an Advisory Agreement dated April 12, 1988 ("Advisory Agreement").
State Street Bank and Trust Company is a wholly owned subsidiary of State Street
Boston Corporation, a publicly held bank holding company. State Street's
address is 225 Franklin Street, Boston, MA 02110.
Under the Advisory Agreement, Adviser directs the Fund's investments in
accordance with its investment objective, policies and limitations. For these
services, the Fund pays a fee to Adviser at the rate stated in the Prospectus.
The Fund accrued expenses to Adviser of $46,488 from the date of inception to
August 31, 1995. Additionally, Adviser voluntarily agreed to waive up to the
full amount of its advisory fees for the Fund to the extent that expenses exceed
1.00% of average daily net assets on an annual basis, which amounted to $46,488
from the date of inception to August 31, 1995. The Advisory Agreement will
continue from year to year provided that a majority of the Trustees who are not
interested persons of any Investment Portfolio and either a majority of all
Trustees or a majority of the shareholders of each Investment Portfolio approve
its continuance. The Agreement may be terminated by Adviser or a Fund without
penalty upon 60 days' notice and will terminate automatically upon its
assignment.
ADMINISTRATOR. Frank Russell Investment Management Company
("Administrator") serves as the Fund's administrator, pursuant to an
Administration Agreement dated April 12, 1988 ("Administration Agreement"). A
description of the services provided under the Administration Agreement and the
basis for computing fees for such services is provided in the Fund's Prospectus.
The Fund accrued expenses to Administrator of $3,720 from the date of inception
to August 31, 1995. Administrator waived administration fees of $502 from the
date of inception to August 31, 1995. The Administration Agreement will
continue from year to year provided that a majority of the Trustees and a
majority of the Trustees who are not interested persons of any Investment
Portfolio and who have no direct or indirect financial interest in the operation
of the Distribution Plan described below or the Administration Agreement approve
its continuance. The Agreement may be terminated by Administrator or a Fund
without penalty upon 60 days' notice and will terminate automatically upon its
assignment.
Administrator is a wholly owned subsidiary of Frank Russell Company. Frank
Russell Company was founded in 1936 and has provided comprehensive asset
management consulting services since 1969 for institutional pools of investment
assets, principally those of large corporate employee benefit plans. Frank
Russell Company and its affiliates have offices in Tacoma, Seattle, New York
City, Toronto, London, Tokyo, Sydney, Paris, Zurich and Auckland, and have
approximately 1,000 officers and employees. Administrator's and Frank Russell
Company's mailing address is 909 A Street, Tacoma, WA 98402.
DISTRIBUTOR. Russell Fund Distributors, Inc. ("Distributor") serves as the
distributor of Fund shares pursuant to a Distribution Agreement dated April 12,
1988 ("Distribution
-8-
<PAGE>
Agreement"). Distributor is a wholly owned subsidiary of Administrator.
Distributor's mailing address is Two International Place, 35th Floor, Boston, MA
02110.
CUSTODIAN AND TRANSFER AGENT. State Street serves as the custodian
("Custodian") and transfer agent ("Transfer Agent") for Investment Company.
State Street also provides the basic portfolio recordkeeping required by
Investment Company for regulatory and financial reporting purposes. For these
services, State Street is paid an annual fee in accordance with the following:
custody services--a fee payable monthly on a pro rata basis, based on the
following percentages of average daily net assets of each Fund: $0 up to $100
million--0.05%, over $100 million to $200 million-0.03%; and over $200
million-0.02%; securities transaction charges from $25.00 to $150.00 per
transaction; Eurodollar transaction fees ranging from $110.00 to $125.00 per
transaction; monthly pricing fees of $375.00 per Investment Fund and from $6.00
to $11.00 per security, depending on the type of instrument and the pricing
service used; transfer agent services of $2.00 per shareholder transaction and a
multiple class fee of $18,000 per year for each additional class of shares; and
yield calculation fees of $350.00 per non-money market portfolio per month. As
of the date of this SAI, a yield calculation will not be calculated for the Fund
and therefore the $350.00 fee will not be charged. State Street is reimbursed
by the Fund for supplying certain out-of-pocket expenses including postage,
transfer fees, stamp duties, taxes, wire fees, telexes, and freight.
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand L.L.P. serves as the
Investment Company's independent accountants. Coopers & Lybrand L.L.P. is
responsible for performing annual audits of the financial statements and
financial highlights in accordance with generally accepted auditing
standards, a review of federal tax returns, and, pursuant to Rule 17f-2 of
the 1940 Act, three security counts. The mailing address of Coopers & Lybrand
L.L.P. is One Post Office Square, Boston MA 02109.
DISTRIBUTION PLAN. Under the 1940 Act, the Securities and Exchange
Commission has adopted Rule 12b-1, which regulates the circumstances under which
the Fund may, directly or indirectly, bear distribution and shareholder
servicing expenses. The Rule provides that the Fund may pay for such expenses
only pursuant to a plan adopted in accordance with the Rule. Accordingly, the
Fund has adopted an active distribution plan (the "Plan"), which is described in
the Fund's Prospectus.
The Plan provides that the Fund may spend annually, directly or indirectly,
up to 0.25% of 1% of the average daily value of the net assets for distribution
and shareholder servicing services. The Plan does not provide for the Fund to
be charged for interest, carrying or any other financing charges on any
distribution expenses carried forward to subsequent years. A quarterly report
of the amounts expended under the Plan, and the purposes for which such
expenditures were incurred, must be made to the Trustees for their review. The
Plan may not be amended without shareholder approval to increase materially the
distribution or shareholder servicing costs that the Fund may pay. The Plan and
material amendments to it must be approved annually by all of the Trustees and
by the Trustees who are neither "interested persons" (as defined in the 1940
Act) of the
-9-
<PAGE>
Fund nor have any direct or indirect financial interest in the operation of the
Plan or any related agreements.
The Fund accrued expenses in the following amount to Russell Fund
Distributors, Inc., as Distributor, for the fiscal year ended August 31:
<TABLE>
<CAPTION>
1995
----
<S> <C>
Active International Fund $3,988
</TABLE>
This amount is reflective of the following individual payments:
<TABLE>
<S> <C>
Advertising $ 44
Printing of Prospectuses 3,343
Compensation to Sales Personnel 596
Other* 5
-------
$ 3,988
-------
-------
</TABLE>
* Other expenses may include such items as compensation for travel, conferences
and seminars for staff, subscriptions, office charges and professional fees.
Under the Plan, the Fund may also enter into agreements ("Service
Agreements") with financial institutions, which may include Adviser ("Service
Organizations"), to provide shareholder servicing with respect to Fund shares
held by or for the customers of the Service Organizations. Such arrangements
are more fully described in the Fund's prospectus under "Distribution Services
and Shareholder Servicing."
The Fund accrued expenses in the following amount to Adviser, under a
Service Agreement pursuant to Rule 12b-1, for the fiscal year ended August 31:
<TABLE>
<CAPTION>
1995
----
<S> <C>
Active International Fund $1,550
</TABLE>
FEDERAL LAW AFFECTING STATE STREET. The Glass-Steagall Act of 1933
prohibits state chartered banks such as State Street from engaging in the
business of underwriting, selling or distributing certain securities, and
prohibits a member bank of the Federal Reserve System from having certain
affiliations with an entity engaged principally in that business. The
activities of State Street in informing its customers of the Fund, performing
investment and redemption services, providing custodian, transfer, shareholder
servicing, dividend disbursing, agent servicing and investment advisory
services, may raise issues under these provisions. State Street has been
advised by its counsel that its activities in connection with the Fund
contemplated under this arrangement are consistent with its statutory and
regulatory obligations.
VALUATION OF FUND SHARES. The Fund determines net asset value per share
once each "business day," as of the close of the regular trading session of the
New York Stock Exchange (currently, 4:00 p.m. Eastern time). A business day is
one on which the New York Stock Exchange is open for business. Currently, the
New York Stock Exchange is
-10-
<PAGE>
open for trading every weekday except New Year's Day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.
The Fund's portfolio securities actively trade on foreign exchanges which
may trade on Saturdays and on days that the Fund does not offer or redeem
shares. The trading of portfolio securities on foreign exchanges on such days
may significantly increase or decrease the net asset value of Fund shares when
the shareholder is not able to purchase or redeem Fund shares. Further, because
foreign securities markets may close prior to the time the Fund determines net
asset value, events affecting the value of the portfolio securities occurring
between the time prices are determined and the time the Fund calculates net
asset value may not be reflected in the calculation of net asset value unless
Adviser determines that a particular event would materially affect the net asset
value.
BROKERAGE PRACTICES. All portfolio transactions are placed on behalf of
the Fund by Adviser. Adviser ordinarily pays commissions when it executes
transactions on a securities exchange. In contrast, there is generally no
stated commission in the purchase or sale of securities traded in the over-the-
counter markets, including most debt securities and money market instruments.
Rather, the price of such securities includes an undisclosed "commission" in the
form of a mark-up or mark-down. The cost of securities purchased from
underwriters includes an underwriting commission or concession.
The Fund contemplates purchasing most equity securities directly in the
securities markets located in emerging or developing countries or in the over-
the-counter markets. ADRs and EDRs may be listed on stock exchanges, or traded
in the over-the-counter markets in the US or Europe, as the case may be. ADRs,
like other securities traded in the US, will be subject to negotiated commission
rates.
Subject to the arrangements and provisions described below, the selection
of a broker or dealer to execute portfolio transactions is usually made by
Adviser. The Advisory Agreement provides, in substance and subject to specific
directions from officers of Investment Company, that in executing portfolio
transactions and selecting brokers or dealers, the principal objective is to
seek the best overall terms available to the Fund. Ordinarily, securities will
be purchased from primary markets, and Adviser shall consider all factors it
deems relevant in assessing the best overall terms available for any
transaction, 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 other transactions on a continuing basis.
The Advisory Agreement authorizes Adviser to select brokers or dealers to
execute a particular transaction, including principal transactions, 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 Adviser (or its
affiliates). Adviser is authorized to cause the Fund to pay a commission to a
broker or dealer who provides such
-11-
<PAGE>
brokerage and research services for executing a portfolio transaction which is
in excess of the amount of commission another broker or dealer would have
charged for effecting that transaction. The Fund or Adviser, as appropriate,
must determine in good faith that such commission was reasonable in relation to
the value of the brokerage and research services provided--viewed in terms of
that particular transaction or in terms of all the accounts over which Adviser
exercises investment discretion.
The Trustees periodically review Adviser's performance of its
responsibilities in connection with the placement of portfolio transactions on
behalf of the Fund and review the prices paid by the Fund over representative
periods of time to determine if such prices are reasonable in relation to the
benefits provided to the Fund. Certain services received by Adviser
attributable to a particular Fund transaction may benefit one or more other
accounts for which Adviser exercises investment discretion or an Investment
Portfolio other than such Fund. Adviser's fees are not reduced by Adviser's
receipt of such brokerage and research services.
The brokerage commissions paid by the Fund were $21,872 from the date of
inception to August 31, 1995.
Of the total brokerage commissions paid by the Fund, commissions received
by an affiliated broker/dealer from the date of inception to August 31, 1995
were $308. Of that amount, the percentage of affiliated brokerage to total
brokerage for the Fund was 1.41%.
The percentage of total affiliated transactions (relating to trading
activity) to total transactions for the Fund was 0.19%.
During the fiscal year ended August 31, 1995, the Fund purchased securities
issued by the following regular brokers or dealers, as defined by Rule 10b-1 of
the 1940 Act, each of which is one of the Fund's ten largest brokers or dealers
by dollar amounts of securities executed or commissions received on behalf of
the Fund. The value of broker-dealer securities held as of August 31, 1995, is
as follows:
<TABLE>
<CAPTION>
ACTIVE INTERNATIONAL FUND
($000)
<S> <C>
UBS Securities, Inc. 0
HSBC Securities, Inc. n/a
Prebon n/a
First Chicago n/a
Salomon Brothers, Inc. n/a
Lumis & Co. n/a
Smith Barney, Inc. n/a
-12-
<PAGE>
Lehman Brothers, Inc. n/a
Goldman, Sachs & Co. n/a
Greenwich Securities n/a
</TABLE>
* Repurchase Agreements
n/a represents no purchases executed during the fiscal year
PORTFOLIO TURNOVER POLICY. Generally, securities are purchased for the
Fund for investment income and/or capital appreciation and not for short-term
trading profits. The Adviser's sell discipline for the Fund's investment in
securities of foreign issuers is based on the premise of a long-term investment
horizon, however, sudden changes in valuation levels arising from, for example,
new macroeconomic policies, political developments, and industry conditions
could change the assumed time horizon. Some countries impose restrictions on
repatriation of capital and/or dividends which would lengthen the Adviser's
assumed time horizon in those countries. Liquidity, volatility, and overall
risk of a position are other factors considered by the Adviser in determining
the appropriate investment horizon. Therefore, the Fund may dispose of
securities without regard to the time they have been held when such action, for
defensive or other purposes, appears advisable. The Fund will limit investments
in illiquid securities to 15% of net assets.
The portfolio turnover rate for the Fund is calculated by dividing the
lesser of purchases or sales of portfolio securities for the particular year, by
the monthly average value of the portfolio securities owned by the Fund during
the year. For purposes of determining the rate, all short-term securities,
including options, futures, forward contracts, and repurchase agreements, are
excluded.
The portfolio turnover rate for the Fund was as follows for the fiscal year
ended August 31:
1995
----
Active International Fund 7.17%
Portfolio turnover rates for periods less than one fiscal year are annualized.
TOTAL RETURN QUOTATIONS. The Fund computes average annual total return by
using a standardized method of calculation required by the Securities and
Exchange Commission. Average annual total return is computed by finding the
average annual compounded rates of return on a hypothetical initial investment
of $1,000 over the one-, five- and ten-year periods (or life of the funds as
appropriate), that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
-13-
<PAGE>
P(1+T)n = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a $1,000 payment made at
the beginning of the 1-, 5- and 10-year periods at the
end of the year or period
The calculation assumes that all dividends and distributions of the Fund
are reinvested at the price stated in the Prospectus on the dividend dates
during the period, and includes all recurring and nonrecurring fees that are
charged to all shareholder accounts.
Inception to
August 31,1995* Inception Date
--------------- ---------------
Active International Fund 8.90% 03/07/95
*Periods less than one year are not annualized.
INVESTMENTS
The nonfundamental investment objective of the Fund is set forth in the
Prospectus. The investment objective may be changed with the approval of a
majority of the Fund's Board of Trustees, with at least 60 days' prior notice to
shareholders. However, to meet certain state requirements, it may be determined
that the objective will only be changed with the approval of a majority of the
Fund's shareholders, as defined by the 1940 Act.
In addition to that investment objective, the Fund also has certain
fundamental investment restrictions, which may be changed only with the approval
of a majority of the shareholders of the Fund, and certain nonfundamental
investment restrictions and policies, which may be changed by the Fund without
shareholder approval.
INVESTMENT RESTRICTIONS
The Fund is subject to the following investment restrictions. Restrictions
1 through 11 are fundamental, and restrictions 12 through 19 are nonfundamental.
These restrictions apply at the time an investment is made. The Fund will not:
(1) Invest 33-1/3% or more of the value of its total assets in securities
of companies primarily engaged in any one industry (other than the US
Government, its agencies and instrumentalities). Concentration may occur as a
result of changes in the market value of portfolio securities, but may not
result from investment.
- 14 -
<PAGE>
(2) Borrow money, except as a temporary measure for extraordinary or
emergency purposes or to facilitate redemptions (not for leveraging or
investment), provided that borrowings do not exceed an amount equal to 33-1/3%
of the current value of the Fund's assets taken at market value, less
liabilities other than borrowings. If at any time a Fund's borrowings exceed
this limitation due to a decline in net assets, such borrowings will within
three days be reduced to the extent necessary to comply with this limitation. A
Fund will not purchase investments once borrowed funds exceed 5% of its total
assets.
(3) Pledge, mortgage, or hypothecate its assets. However, the Fund may
pledge securities having a market value (on a daily marked-to-market basis) at
the time of the pledge not exceeding 33-1/3% of the value of the Fund's total
assets to secure borrowings permitted by paragraph (2) above.
(4) With respect to 75% of its total assets, invest in securities of any
one issuer (other than securities issued by the US Government, its agencies and
instrumentalities), if immediately after and as a result of such investment the
current market value of the Fund's holdings in the securities of such issuer
exceeds 5% of the value of the Fund's assets.
(5) Make loans to any person or firm; provided, however, that the making
of a loan shall not include (i) the acquisition for investment of bonds,
debentures, notes or other evidences of indebtedness of any corporation or
government which are publicly distributed or of a type customarily purchased by
institutional investors, or (ii) the entry into "repurchase agreements" or
"reverse repurchase agreements." A Fund may lend its portfolio securities to
broker-dealers or other institutional investors if the aggregate value of all
securities loaned does not exceed 33-1/3% of the value of the Fund's total
assets. Portfolio securities may be loaned if collateral values are
continuously maintained at no less than 100% by "marking to market" daily.
(6) Purchase or sell commodities or commodity futures contracts or options
on a futures contract except that the Fund may enter into futures contracts and
options thereon to the extent provided in its Prospectus, and if, as a result
thereof, more than 10% of the Fund's total assets (taken at market value at the
time of entering into the contract) would be committed to initial deposits and
premiums on open futures contracts and options on such contracts.
(7) Purchase or sell real estate or real estate mortgage loans; provided,
however, that the Fund may invest in securities secured by real estate or
interests therein or issued by companies which invest in real estate or
interests therein (including real estate investment trusts), and may purchase or
sell currencies (including forward currency exchange contracts), futures
contracts and related options generally as described in the Prospectus and
Statement of Additional Information.
(8) Except as required in connection with permissible financial options
activities and futures contracts, purchase securities on margin or underwrite
securities issued by others, except that a Fund will not be deemed to be an
underwriter or to be underwriting on
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account of the purchase of securities subject to legal or contractual
restrictions on disposition. This restriction does not preclude the Fund from
obtaining such short-term credit as may be necessary for the clearance of
purchases and sales of its portfolio securities.
(9) Issue senior securities, except as permitted by its investment
objective, policies and restrictions, and except as permitted by the 1940 Act.
This restriction shall not be deemed to prohibit the Fund from (i) making any
permitted borrowings, mortgages or pledges, or (ii) entering into repurchase
transactions.
(10) Purchase or sell puts, calls or invest in straddles, spreads or any
combination thereof, except as described herein and in the Fund's Prospectus,
and subject to the following conditions: (i) such options are written by other
persons and (ii) the aggregate premiums paid on all such options which are held
at any time do not exceed 5% of the Fund's total assets.
(11) Make short sales of securities or purchase any securities on margin,
except for such short-term credits as are necessary for the clearance of
transactions. The Fund may make initial margin deposits and variation margin
payments in connection with transactions in futures contracts and related
options.
(12) Purchase from or sell portfolio securities to its officers or
directors or other "interested persons" (as defined in the 1940 Act) of the
Fund, including their investment advisers and affiliates, except as permitted by
the 1940 Act and exemptive rules or orders thereunder.
(13) Invest in securities of any issuer which, together with its
predecessor, has been in operation for less than three years if, as a result,
more than 5% of the Fund's total assets would be invested in such securities,
except that the Fund may invest in securities of a particular issuer to the
extent their respective underlying indices invest in that issuer.
(14) Invest more than 15% of its net assets in the aggregate in illiquid
securities or securities that are not readily marketable, including repurchase
agreements and time deposits of more than seven days' duration.
(15) Purchase interests in oil, gas or other mineral exploration or
development programs or in oil, gas or mineral leases.
(16) Make investments for the purpose of gaining control of an issuer's
management.
(17) Purchase the securities of any issuer if the Investment Company's
officers, Directors, Adviser or any of their affiliates beneficially own more
than one-half of 1% of the securities of such issuer or together own
beneficially more than 5% of the securities of such issuer.
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(18) Invest in warrants, valued at the lower of cost or market, in excess
of 5% of the value of the Fund's net assets. Included in such amount, but not to
exceed 2% of the value of the Fund's net assets, may be warrants which are not
listed on the New York Stock Exchange or American Stock Exchange. Warrants
acquired by the Fund in units or attached to securities may be deemed to be
without value.
(19) The Fund will not invest in real estate limited partnerships that are
not readily marketable.
To the extent these restrictions reflect matters of operating policy which
may be changed without shareholder vote, these restrictions may be amended upon
approval by the Board of Trustees and notice to shareholders. The Fund
currently does not intend to invest in the securities of any issuer that would
qualify as a real estate investment trust under federal tax law.
If a percentage restriction is adhered to at the time of investment, a
subsequent increase or decrease in a percentage resulting from a change in the
values of assets will not constitute a violation of that restriction, except as
otherwise noted.
INVESTMENT POLICIES
To the extent permitted under the 1940 Act and exemptive rules and orders
thereunder, the Fund may seek to achieve its investment objective by investing
solely in the shares of another investment company that has substantially
similar investment objectives and policies. To the extent consistent with its
investment objective and restrictions, the Fund may invest in the following
instruments and utilize the following investment techniques:
EQUITY SECURITIES. The Fund may invest in common and preferred equity
securities publicly traded in the United States or in foreign countries on
developed or emerging markets. The Fund's equity securities may be denominated
in foreign currencies and may be held outside the United States. Certain
emerging markets are closed in whole or part to the direct purchase of equity
securities by foreigners. In these markets, the Fund may be able to invest in
equity securities solely or primarily through foreign government authorized
pooled investment vehicles.
US GOVERNMENT OBLIGATIONS. The types of US Government obligations in which
the Fund may at times invest include: (1) a variety of US Treasury obligations,
which differ only in their interest rates, maturities and times of issuance; and
(2) obligations issued or guaranteed by US Government agencies and
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the US Treasury, (b) the right of the issuer to borrow an
amount limited to a specific line of credit from the US Treasury,
(c) discretionary authority of the US Government agency or instrumentality or
(d) the credit of the instrumentality (examples of agencies and
instrumentalities are: Federal Land Banks, Federal Housing Administration,
Farmers Home Administration,
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Export--Import Bank of the United States, Central Bank for Cooperatives, Federal
Intermediate Credit Banks, Federal Home Loan Banks, General Services
Administration, Maritime Administration, Tennessee Development Bank, Asian-
American Development Bank, Student Loan Marketing Association, International
Bank for Reconstruction and Development and Federal National Mortgage
Association). No assurance can be given that in the future the US Government
will provide financial support to such US Government agencies or
instrumentalities described in (2)(b), (2)(c) and (2)(d), other than as set
forth above, since it is not obligated to do so by law. The Fund may purchase
US Government obligations on a forward commitment basis.
DEBT SECURITIES. The Fund may also invest in debt securities, including
instruments issued by emerging market companies, governments and their agencies.
Other debt will typically represent less than 5% of the Fund's assets. The Fund
is likely to purchase debt securities which are not investment grade debt, since
much of the emerging market debt falls in this category. These securities are
subject to market and credit risk. These lower rated debt securities may
include obligations that are in default or that face the risk of default with
respect to principal or interest. Such securities are sometimes referred to as
"junk bonds." Please see the Appendix for a description of securities ratings.
ASSET-BACKED SECURITIES. Asset-backed securities represent undivided
fractional interests in pools of instruments, such as consumer loans, and are
similar in structure to mortgage-related pass-through securities. Payments of
principal and interest are passed through to holders of the securities and are
typically supported by some form of credit enhancement, such as a letter of
credit, surety bond, limited guarantee by another entity or by priority to
certain of the borrower's other securities. The degree of credit-enhancement
varies, generally applying only until exhausted and covering only a fraction of
the security's par value.
The value of asset-backed securities is affected by changes in the market's
perception of the asset backing the security, changes in the creditworthiness of
the servicing agent for the instrument pool, the originator of the instruments
or the financial institution providing any credit enhancement and the
expenditure of any portion of any credit enhancement. The risks of investing in
asset-backed securities are ultimately dependent upon payment of the underlying
instruments by the obligors, and a Fund would generally have no recourse against
the obligee of the instruments in the event of default by an obligor. The
underlying instruments are subject to prepayments which shorten the weighted
average life of asset-backed securities and may lower their return, in the same
manner as described below for prepayments of pools of mortgage loans underlying
mortgage-backed securities. Use of asset-backed securities will represent less
than 5% of the Fund's total assets.
SECTION 4(2) COMMERCIAL PAPER. The Fund may invest in commercial paper
issued in reliance on the so-called "private placement" exemption from
registration afforded by Section 4(2) of the Securities Act of 1933
("Section 4(2) paper"). Section 4(2) paper is restricted as to disposition
under the federal securities laws, and generally is sold to
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<PAGE>
investors who agree that they are purchasing the paper for an investment and not
with a view to public distribution. Any resale by the purchaser must be in an
exempt transaction. Section 4(2) paper is normally resold to other investors
through or with the assistance of the issuer or investment dealers who make a
market in Section 4(2) paper, thus providing liquidity. Pursuant to guidelines
established by the Board of Trustees, Adviser may determine that Section 4(2)
paper is liquid for the purposes of complying with the Fund's investment
restriction relating to investments in illiquid securities.
EURODOLLAR CERTIFICATES OF DEPOSIT (ECDS), EURODOLLAR TIME DEPOSITS (ETDS)
AND YANKEE CERTIFICATES OF DEPOSIT (YCDS). ECDs are US dollar denominated
certificates of deposit issued by foreign branches of domestic banks. ETDs are
US dollar denominated deposits in foreign banks or foreign branches of US banks.
YCDs are US dollar denominated certificates of deposit issued by US branches of
foreign banks.
Different risks than those associated with the obligations of domestic
banks may exist for ECDs, ETDs and YCDs because the banks issuing these
instruments, or their domestic or foreign branches, are not necessarily subject
to the same regulatory requirements that apply to domestic banks, such as loan
limitations, examinations and reserve, accounting, auditing, recordkeeping and
public reporting requirements.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
financial institutions. Under repurchase agreements, these parties sell
securities to the Fund and agree to repurchase the securities at the Fund's cost
plus interest within a specified time (normally one day). The securities
purchased by the Fund have a total value in excess of the purchase price paid by
the Fund and are held by Custodian until repurchased. Repurchase agreements
assist the Fund in being invested fully while retaining "overnight" flexibility
in pursuit of investments of a longer-term nature. The Fund will limit
repurchase transactions to those member banks of the Federal Reserve System and
broker-dealers whose creditworthiness is continually monitored and found
satisfactory by Adviser.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreements under the circumstances described in "Investment Restrictions.".
Under reverse repurchase agreements, a Fund transfers possession of portfolio
securities to financial institutions in return for cash in an amount equal to a
percentage of the portfolio securities' market value and agrees to repurchase
the securities at a future date by repaying the cash with interest. The Fund
retains the right to receive interest and principal payments from the securities
while they are in the possession of the financial institutions. Cash or liquid
high quality debt obligations from a Fund's portfolio equal in value to the
repurchase price including any accrued interest will be segregated by Custodian
on the Fund's records while a reverse repurchase agreement is in effect. Reverse
repurchase agreements involve the risk of default by the counterparty, which may
adversely affect the Fund's ability to reacquire the underlying security.
WHEN-ISSUED TRANSACTIONS. New issues of securities are often offered on a
when-issued basis. This means that delivery and payment for the securities
normally will take
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place several days after the date the buyer commits to purchase them. The
payment obligation and the interest rate that will be received on securities
purchased on a when-issued basis are each fixed at the time the buyer enters
into the commitment.
The Fund will make commitments to purchase when-issued securities only with
the intention of actually acquiring the securities, but the Fund may sell these
securities or dispose of the commitment before the settlement date if it is
deemed advisable as a matter of investment strategy. Cash or marketable high
quality debt securities equal to the amount of the above commitments will be
segregated on the Fund's records. For the purpose of determining the adequacy
of these securities the segregated securities will be valued at market. If the
market value of such securities declines, additional cash or securities will be
segregated on the Fund's records on a daily basis so that the market value of
the account will equal the amount of such commitments by the Fund. The Fund
will invest no more than 5% of its net assets in when-issued securities.
Securities purchased on a when-issued basis and held by the Fund are
subject to changes in market value based upon the public's perception of changes
in the level of interest rates. Generally, the value of such securities will
fluctuate inversely to changes in interest rates -- i.e., they will appreciate
in value when interest rates decline and decrease in value when interest rates
rise. Therefore, if in order to achieve higher interest income the Fund remains
substantially fully invested at the same time that it has purchased securities
on a "when-issued" basis, there will be a greater possibility of fluctuation in
the Fund's net asset value.
When payment for when-issued securities is due, the Fund will meet its
obligations from then-available cash flow, the sale of segregated securities,
the sale of other securities or, and although it would not normally expect to do
so, from the sale of the when-issued securities themselves (which may have a
market value greater or less than the Fund's payment obligation). The sale of
securities to meet such obligations carries with it a greater potential for the
realization of capital gains, which are subject to federal income taxes.
SPECIAL SITUATIONS AND ILLIQUID SECURITIES. The Fund and the Adviser
believe that carefully selected investments in joint ventures, cooperatives,
partnerships, private placements, unlisted securities, and other similar
vehicles (collectively, "special situations") could enhance the Fund's capital
appreciation potential. These investments are generally illiquid. The Fund
currently does not intend to invest more than 5% of its net assets in all types
of illiquid securities or securities that are not readily marketable, including
special situations. In no case will the Fund invest more than 15% of its net
assets in illiquid securities. Due to foreign ownership restrictions, the Fund
may invest periodically in illiquid securities which are or become illiquid due
to restrictions on foreign ownership imposed by foreign governments. Said
securities may be more difficult to price and trade. The absence of a regular
trading market for illiquid securities imposes additional risks on investment in
these securities. Illiquid securities may be difficult to value and may often
be disposed of only after considerable expense and delay.
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FORWARD COMMITMENTS. The Fund may contract to purchase securities for a
fixed price at a future date beyond customary settlement time consistent with
the Fund's ability to manage its investment portfolio, maintain a stable net
asset value and meet redemption requests. The Fund may dispose of a commitment
prior to settlement if it is appropriate to do so and realize short-term profits
or losses upon such sale. When effecting such transactions, cash or liquid high
quality debt obligations held by the Fund of a dollar amount sufficient to make
payment for the portfolio securities to be purchased will be segregated on the
Fund's records at the trade date and maintained until the transaction is
settled. Forward commitments involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date, or if the other
party fails to complete the transaction.
HEDGING STRATEGIES AND RELATED INVESTMENT TECHNIQUES
The Fund may seek to hedge its portfolios against movements in the equity
markets, interest rates and currency exchange rates through the use of options,
futures transactions, options on futures and forward foreign currency exchange
transactions. The Fund has authority to write (sell) covered call and put
options on its portfolio securities, purchase put and call options on securities
and engage in transactions in stock index options, stock index futures and
financial futures and related options on such futures. The Fund may enter into
such options and futures transactions either on exchanges or in the over-the-
counter ("OTC") markets. Although certain risks are involved in options and
futures transactions (as discussed in the Prospectus and below), Adviser
believes that, because the Fund will only engage in these transactions for
hedging purposes, the options and futures portfolio strategies of the Fund will
not subject the Fund to the risks frequently associated with the speculative use
of options and futures transactions. Although the use of hedging strategies by
the Fund is intended to reduce the volatility of the net asset value of the
Fund's shares, the Fund's net asset value will nevertheless fluctuate. There
can be no assurance that the Fund's hedging transactions will be effective.
WRITING COVERED CALL OPTIONS. The Fund is authorized to write (sell)
covered call options on the securities in which it may invest and to enter into
closing purchase transactions with respect to such options. Writing a call
option obligates the Fund to sell or deliver the option's underlying security,
in return for the strike price, upon exercise of the option. By writing a call
option, the Fund receives an option premium from the purchaser of the call
option. Writing covered call options is generally a profitable strategy if
prices remain the same or fall. Through receipt of the option premium, the Fund
would seek to mitigate the effects of a price decline. By writing covered call
options, however, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price. In addition, the Fund's ability to sell the underlying
security will be limited while the option is in effect unless the Fund effects a
closing purchase transaction.
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WRITING COVERED PUT OPTIONS. The Fund is authorized to write (sell)
covered put options on its portfolio securities and to enter into closing
transactions with respect to such options.
When the Fund writes a put option, it takes the opposite side of the
transaction from the option's purchaser. In return for receipt of the premium,
the Fund assumes the obligation to pay the strike price for the option's
underlying instrument if the other party to the option chooses to exercise it.
The Fund may seek to terminate its position in a put option it writes before
exercise by closing out the option in the secondary market at its current price.
If the secondary market is not liquid for an option the Fund has written,
however, the Fund must continue to be prepared to pay the strike price while the
option is outstanding, regardless of price changes, and must continue to set
aside assets to cover its position.
The Fund may write put options as an alternative to purchasing actual
securities. If security prices rise, the Fund would expect to profit from a
written put option, although its gain would be limited to the amount of the
premium it received. If security prices remain the same over time, it is likely
that the Fund will also profit, because it should be able to close out the
option at a lower price. If security prices fall, the Fund would expect to
suffer a loss. This loss should be less than the loss the Fund would have
experienced from purchasing the underlying instrument directly, however, because
the premium received for writing the option should mitigate the effects of the
decline.
PURCHASING PUT OPTIONS. The Fund is authorized to purchase put options to
hedge against a decline in the market value of its portfolio securities. By
buying a put option the Fund has the right (but not the obligation) to sell the
underlying security at the exercise price, thus limiting the Fund's risk of loss
through a decline in the market value of the security until the put option
expires. The amount of any appreciation in the value of the underlying security
will be partially offset by the amount of the premium paid by the Fund for the
put option and any related transaction costs. Prior to its expiration, a put
option may be sold in a closing sale transaction and profit or loss from the
sale will depend on whether the amount received is more or less than the premium
paid for the put option plus the related transaction costs. A closing sale
transaction cancels out the Fund's position as the purchaser of an option by
means of an offsetting sale of an identical option prior to the expiration of
the option it has purchased. The Fund will not purchase put options on
securities (including stock index options discussed below) if as a result of
such purchase, the aggregate cost of all outstanding options on securities held
by the Fund would exceed 5% of the market value of the Fund's total assets.
PURCHASING CALL OPTIONS. The Fund is also authorized to purchase call
options. The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price (call options on futures contracts are settled by purchasing the
underlying futures contract). The Fund will purchase call options only in
connection with "closing purchase transactions."
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STOCK INDEX OPTIONS AND FINANCIAL FUTURES. The Fund is authorized to
engage in transactions in stock index options and financial futures, and related
options. The Fund may purchase or write put and call options on stock indices
to hedge against the risks of market-wide stock price movements in the
securities in which the Fund invests. Options on indices are similar to options
on securities except that on exercise or assignment, the parties to the contract
pay or receive an amount of cash equal to the difference between the closing
value of the index and the exercise price of the option times a specified
multiple. The Fund may invest in stock index options based on a broad market
index, such as the S&P 500 Index, or on a narrow index representing an industry
or market segment. The Fund's investments in foreign stock index futures
contracts and foreign interest rate futures contracts, and related options, are
limited to only those contracts and related options that have been approved by
the Commodity Futures Trading Commission ("CFTC") for investment by United
States investors. Additionally, with respect to the Fund's investments in
foreign options, unless such options are specifically authorized for investment
by order of the CFTC, the Fund will not make such investments.
The Fund may also purchase and sell stock index futures contracts and other
financial futures contracts ("futures contracts") as a hedge against adverse
changes in the market value of its portfolio securities as described below. A
futures contract is an agreement between two parties which obligates the
purchaser of the futures contract to buy and the seller of a futures contract to
sell a security for a set price on a future date. Unlike most other futures
contracts, a stock index futures contract does not require actual delivery of
securities, but results in cash settlement based upon the difference in value of
the index between the time the contract was entered into and the time of its
settlement. The Fund may effect transactions in stock index futures contracts
in connection with equity securities in which it invests and in financial
futures contracts in connection with debt securities in which it invests, if
any. Transactions by the Fund in stock index futures and financial futures are
subject to limitations as described below under "Restrictions on the Use of
Futures Transactions."
The Fund may sell futures contracts in anticipation of or during a market
decline to attempt to offset the decrease in market value of the Fund's
securities portfolio that might otherwise result. When a Fund is not fully
invested in the securities markets and anticipates a significant market advance,
the Fund may purchase futures in order to gain rapid market exposure that may
partially or entirely offset increases in the cost of securities that the Fund
intends to purchase. As such purchases are made, an equivalent amount of
futures contracts will be terminated by offsetting sales. It is anticipated
that, in a substantial majority of these transactions, the Fund will purchase
such securities upon termination of the long futures position, whether the long
position results from the purchase of a futures contract or the purchase of a
call option, but under unusual circumstances (e.g., the Fund experiences a
significant amount of redemptions), a long futures position may be terminated
without the corresponding purchase of securities.
The Fund also is authorized to purchase and write call and put options on
futures contracts and stock indices in connection with its hedging activities.
Generally, these
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strategies would be utilized under the same market and market sector conditions
(i.e., conditions relating to specific types of investments) during which the
Fund enters into futures transactions. The Fund may purchase put options or
write call options on futures contracts and stock indices rather than selling
the underlying futures contract in anticipation of a decrease in the market
value of securities. Similarly, the Fund can purchase call options, or write
put options on futures contracts and stock indices, as a substitute for the
purchase of such futures to hedge against the increased cost resulting from an
increase in the market value of securities which the Fund intends to purchase.
The Fund is also authorized to engage in options and futures transactions
on US and foreign exchanges and in options in the OTC markets ("OTC options").
In general, exchange traded contracts are third-party contracts (i.e.,
performance of the parties' obligations is guaranteed by an exchange or clearing
corporation) with standardized strike prices and expiration dates. OTC options
transactions are two-party contracts with price and terms negotiated by the
buyer and seller. See "Restrictions on OTC Options" below for information as to
restrictions on the use of OTC options.
The Fund is authorized to purchase or sell listed or OTC foreign security
or currency options, foreign security or currency futures and related options as
a short or long hedge against possible variations in foreign exchange rates and
market movements. Such transactions could be effected with respect to hedges on
non-US dollar denominated securities owned by a Fund, sold by a Fund but not yet
delivered, or committed or anticipated to be purchased by a Fund. As an
illustration, a Fund may use such techniques to hedge the stated value in US
dollars of an investment in a yen-denominated security. In such circumstances,
for example, the Fund can purchase a foreign currency put option enabling it to
sell a specified amount of yen for US dollars at a specified price by a future
date. To the extent the hedge is successful, a loss in the value of the yen
relative to the US dollar will tend to be offset by an increase in the value of
the put option.
RESTRICTIONS ON THE USE OF FUTURES TRANSACTIONS. The purchase or sale of a
futures contract differs from the purchase or sale of a security in that no
price or premium is paid or received. Instead, an amount of cash or securities
acceptable to the broker and the relevant contract market, which varies, but is
generally about 5% of the contract amount, must be deposited with the broker.
This amount is known as "initial margin" and represents a "good faith" deposit
assuring the performance of both the purchaser and seller under the futures
contract. Subsequent payments to and from the broker, called "variation
margin," are required to be made on a daily basis as the price of the futures
contract fluctuates making the long and short positions in the futures contracts
more or less valuable, a process known as "marking to market." At any time
prior to the settlement date of the future contract, the position may be closed
out by taking an opposite position which will operate to terminate the position
in the futures contract. A final determination of variation margin is then
made, additional cash is required to be paid to or released by the broker and
the purchaser realizes a loss or gain. In addition, a nominal commission is
paid on each completed sale transaction.
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Regulations of the CFTC applicable to the Fund requires that all of the
Fund's futures and options on futures transactions constitute bona fide hedging
transactions and that the Fund not enter into such transactions if, immediately
thereafter, the sum of the amount of initial margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets.
RESTRICTIONS ON OTC OPTIONS. The Fund will engage in OTC options,
including OTC stock index options, OTC foreign security and currency options and
options on foreign security and currency futures, only with member banks of the
Federal Reserve System and primary dealers in US Government securities or with
affiliates of such banks or dealers which have capital of at least $50 million
or whose obligations are guaranteed by an entity having capital of at least
$50 million. The Fund will acquire only those OTC options for which Adviser
believes the Fund can receive on each business day at least two independent bids
or offers (one of which will be from an entity other than a party to the
option).
The Staff of the SEC has taken the position that purchased OTC options and
the assets used as cover for written OTC options are illiquid securities.
Therefore, the Fund has adopted an operating policy pursuant to which it will
not purchase or sell OTC options (including OTC options on futures contracts)
if, as a result of such transaction, the sum of: (1) the market value of
outstanding OTC options held by the Fund; (2) the market value of the underlying
securities covered by outstanding OTC call options sold by the Fund; (3) margin
deposits on the Fund's existing OTC options on futures contracts; and (4) the
market value of all other assets of the Fund that are illiquid or are not
otherwise readily marketable, would exceed 10% of the net assets of the Fund,
taken at market value. However, if an OTC option is sold by the Fund to a
primary US Government securities dealer recognized by the Federal Reserve Bank
of New York and the Fund has the unconditional contractual right to repurchase
such OTC option from the dealer at a predetermined price, then the Fund will
treat as illiquid such amount of the underlying securities as is equal to the
repurchase price less the amount by which the option is "in-the-money" (current
market value of the underlying security minus the option's strike price). The
repurchase price with primary dealers is typically a formula price which is
generally based on a multiple of the premium received for the option plus the
amount by which the option is "in-the-money."
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS. The Fund will not use
leverage in its options and futures strategies. Such investments will be made
for hedging purposes only. The Fund will hold securities or other options or
futures positions whose values are expected to offset its obligations under the
hedge strategies. The Fund will not enter into an option or futures position
that exposes the Fund to an obligation to another party unless it owns either:
(1) an offsetting position in securities or other options or futures contracts;
or (2) cash, receivables and short-term debt securities with a value sufficient
to cover its potential obligations. The Fund will comply with guidelines
established by the SEC with respect to coverage of options and futures
strategies by mutual funds, and if the guidelines so require, will set aside
cash and high grade liquid debt securities in a segregated account with its
custodian bank in the amount prescribed.
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<PAGE>
The Fund's custodian shall maintain the value of such segregated account equal
to the prescribed amount by adding or removing additional cash or liquid
securities to account for fluctuations in the value of securities held in such
account. Securities held in a segregated account cannot be sold while the
futures or option strategy is outstanding, unless they are replaced with similar
securities. As a result, there is a possibility that segregation of a large
percentage of a Fund's assets could impede portfolio management or the Fund's
ability to meeting redemption requests or other current obligations.
RISK FACTORS IN OPTIONS, FUTURES, FORWARD AND CURRENCY TRANSACTIONS.
Utilization of options and futures transactions to hedge the Fund's portfolios
involves the risk of imperfect correlation in movements in the price of options
and futures and movements in the price of securities or currencies which are the
subject of the hedge. If the price of the options or futures moves more or less
than the price of hedged securities or currencies, the Fund will experience a
gain or loss which will not be completely offset by movements in the price of
the subject of the hedge. The successful use of options and futures also
depends on Adviser's ability to correctly predict price movements in the market
involved in a particular options or futures transaction. To compensate for
imperfect correlations, the Fund may purchase or sell stock index options or
futures contracts in a greater dollar amount than the hedged securities if the
volatility of the hedged securities is historically greater than the volatility
of the stock index options or futures contracts. Conversely, the Fund may
purchase or sell fewer stock index options or futures contracts, if the
historical price volatility of the hedged securities is less than that of the
stock index options or futures contracts. The risk of imperfect correlation
generally tends to diminish as the maturity date of the stock index option or
futures contract approaches. Options are also subject to the risks of an
illiquid secondary market, particularly in strategies involving writing options,
which the Fund cannot terminate by exercise. In general, options whose strike
prices are close to their underlying instruments' current value will have the
highest trading volume, while options whose strike prices are further away may
be less liquid.
The Fund intends to enter into options and futures transactions, on an
exchange or in the OTC market, only if there appears to be a liquid secondary
market for such options or futures or, in the case of OTC transactions, the
Adviser believes the Fund can receive on each business day at least two
independent bids or offers. However, there can be no assurance that a liquid
secondary market will exist at any specific time. Thus, it may not be possible
to close an options or futures position. The inability to close options and
futures positions also could have an adverse impact on a Fund's ability to
effectively hedge its portfolio. There is also the risk of loss by a Fund of
margin deposits or collateral in the event of bankruptcy of a broker with whom
the Fund has an open position in an option, a futures contract or related
option.
The exchanges on which options on portfolio securities and currency options
are traded have generally established limitations governing the maximum number
of call or put options on the same underlying security or currency (whether or
not covered) which may be written by a single investor, whether acting alone or
in concert with others (regardless of whether such options are written on the
same or different exchanges or are
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<PAGE>
held or written in one or more accounts or through one or more brokers).
"Trading limits" are imposed on the maximum number of contracts which any person
may trade on a particular trading day.
RISK CONSIDERATIONS
Investors should consider carefully the substantial risks involved in
securities of companies and governments of foreign nations, which are in
addition to the usual risks inherent in domestic investments. There may be less
publicly available information about foreign companies comparable to the reports
and ratings published regarding US companies. Foreign companies are not
generally subject to uniform accounting, auditing and financial reporting
standards, and auditing practices and requirements may not be comparable to
those applicable to US companies. Many foreign markets have substantially less
volume than either the established domestic securities exchanges or the OTC
markets. Securities of some foreign companies are less liquid and more volatile
than securities of comparable US companies. Commission rates in foreign
countries, which may be fixed rather than subject to negotiation as in the US,
are likely to be higher. In many foreign countries there is less government
supervision and regulation of securities exchanges, brokers and listed companies
than in the US, and capital requirements for brokerage firms are generally
lower. Settlement of transactions in foreign securities may, in some instances,
be subject to delays and related administrative uncertainties.
Investments in companies domiciled in emerging market countries may be
subject to additional risks than investment in the US and in other developed
countries. These risks include: (1) Volatile social, political and economic
conditions can cause investments in emerging or developing markets exposure to
economic structures that are generally less diverse and mature. Emerging market
countries can have political systems which can be expected to have less
stability than those of more developed countries. The possibility may exist
that recent favorable economic developments in certain emerging market countries
may be suddenly slowed or reversed by unanticipated political or social events
in such countries. Moreover, the economies of individual emerging market
countries may differ favorably or unfavorably from the US economy in such
respects as the rate of growth in gross domestic product, the rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position. (2) The small current size of the markets for such securities and the
currently low or nonexistent volume of trading can result in a lack of liquidity
and in greater price volatility. Until recently, there has been an absence of a
capital market structure or market-oriented economy in certain emerging market
countries. Because the Fund's securities will generally be denominated in
foreign currencies, the value of such securities to the Fund will be affected by
changes in currency exchange rates and in exchange control regulations. A
change in the value of a foreign currency against the US dollar will result in a
corresponding change in the US dollar value of the Fund's securities. In
addition, some emerging market countries may have fixed or managed currencies
which are not free-floating against the US dollar. Further, certain emerging
market currencies may not be internationally traded. Certain
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<PAGE>
of these currencies have experienced a steady devaluation relative to the US
dollar. Many emerging markets countries have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had, and may continue to have,
negative effects on the economies and securities markets of certain emerging
market countries. (3) The existence of national policies may restrict the
Fund's investment opportunities and may include restrictions on investment in
issuers or industries deemed sensitive to national interests. (4) Some emerging
markets countries may not have developed structures governing private or foreign
investment and may not allow for judicial redress for injury to private
property.
The Fund endeavors to buy and sell foreign currencies on favorable terms.
Such price spread on currency exchange (to cover service charges) may be
incurred, particularly when the Fund changes investments from one country to
another or when proceeds from the sale of shares in US dollars are used for the
purchase of securities in foreign countries. Also, some countries may adopt
policies which would prevent the Fund from repatriating invested capital and
dividends, withhold portions of interest and dividends at the source, or impose
other taxes, with respect to the Fund's investments in securities of issuers of
that country. There also is the possibility of expropriation, nationalization,
confiscatory or other taxation, foreign exchange controls (which may include
suspension of the ability to transfer currency from a given country), default in
foreign government securities, political or social instability, or diplomatic
developments that could adversely affect investments in securities of issuers in
those nations.
The Fund may be affected either favorably or unfavorably by fluctuations in
the relative rates of exchange between the currencies of differentiations,
exchange control regulations and indigenous economic and political developments.
TAXES
The Fund intends to qualify for treatment as a regulated investment company
("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended
("the Code"). As a RIC, the Fund will not be liable for federal income taxes on
taxable net investment income and capital gain net income (capital gains in
excess of capital losses) that it distributes to its shareholders, provided that
the Fund distributes annually to its shareholders at least 90% of its net
investment income and net short-term capital gain for the taxable year
("Distribution Requirement"). For a Fund to qualify as a RIC it must abide by
all of the following requirements: (1) at least 90% of the Fund's gross income
each taxable year must be derived from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock
or securities or foreign currencies, or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies ("Income Requirement");
(2) less than 30% of the Fund's gross income each taxable year must be derived
from the sale or other disposition of securities and certain options, futures
contracts, forward contracts and foreign currencies held for less than three
months ("Short-Short Limitation"); (3) at the close of each quarter of the
Fund's taxable
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<PAGE>
year, at least 50% of the value of its total assets must be represented by cash
and cash items, US government securities, securities of other RICs, and other
securities, with such other securities limited, in respect of any one issuer, to
an amount that does not exceed 5% of the total assets of the Fund and that does
not represent more than 10% of the outstanding voting securities of such issuer;
and (4) at the close of each quarter of the Fund's taxable year, not more than
25% of the value of its assets may be invested in securities (other than US
government securities or the securities of other RICs) of any one issuer.
The Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year an amount at least equal to
the sum of: (1) 98% of its ordinary income for that year; (2) 98% of its
capital gain net income for the one-year period ending on October 31 of that
year; and (3) certain undistributed amounts from the preceding calendar year.
For this and other purposes, dividends declared in October, November or December
of any calendar year and made payable to shareholders of record in such month
will be deemed to have been received on December 31 of such year if the
dividends are paid by the Fund subsequent to December 31 but prior to February 1
of the following year.
If a shareholder receives a distribution taxable as long-term capital gain
with respect to shares of a Fund and redeems or exchanges the shares without
having held the shares for more than one year, then any loss on the redemption
or exchange will be treated as long-term capital loss to the extent of the
capital gain distribution.
From March 7, 1995 to August 31, 1995, the Fund incurred $30,278 of net
realized capital losses. As permitted by tax regulation, the Fund intends to
elect to defer those losses and treat them as arising in the fiscal year ending
August 31, 1996.
ISSUES RELATED TO HEDGING AND OPTION INVESTMENTS. The Fund's ability to
make certain investments may be limited by provisions of the Code that require
inclusion of certain unrealized gains or losses in the Fund's income for
purposes of the Income Requirement, the Short-Short Limitation and the
Distribution Requirement, and by provisions of the Code that characterize
certain income or loss as ordinary income or loss rather than capital gain or
loss. Such recognition, characterization and timing rules will affect
investments in certain futures contracts, options, foreign currency contracts
and debt securities denominated in foreign currencies.
STATE AND LOCAL TAXES. Depending upon the extent of the Fund's activities
in states and localities in which its offices are maintained, its agents or
independent contractors are located or it is otherwise deemed to be conducting
business, the Fund may be subject to the tax laws of such states or localities.
FOREIGN INCOME TAXES. Investment income received by the Fund from sources
within foreign countries may be subject to foreign income taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries which would
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entitle the Fund to a reduced rate of such taxes or exemption from taxes on such
income. It is impossible to determine the effective rate of foreign tax for the
Fund in advance since the amount of the assets to be invested within various
countries is not known.
If the Fund invests in an entity that is classified as a "passive foreign
investment company" ("PFIC") for federal income tax purposes, the application of
certain provisions of the Code applying to PFICs could result in the imposition
of certain federal income taxes on the Fund. It is anticipated that any taxes
on the Fund with respect to investments in PFICs would be insignificant. Under
US Treasury regulations issued in 1992 for PFICs, the Fund can elect to mark-to-
market its PFIC holdings in lieu of paying taxes on gains or distributions
therefrom. It is anticipated that any taxes on a Fund with respect to
investments in PFICs would be insignificant.
Foreign shareholders should consult with their tax advisers as to if and
how the federal income tax and its withholding requirements applies to them.
The foregoing discussion is only a summary of certain federal income tax
issues generally affecting the Fund and its shareholders. Circumstances among
investors may vary and each investor is encouraged to discuss investment in the
Fund with the investor's tax adviser.
FINANCIAL STATEMENTS
The 1995 fiscal year-end financial statements for the Fund, including notes
to the financial statements and financial highlights and the Report of
Independent Accountants, are included in the Fund's Annual Report to
shareholders. A copy of the Annual Report accompanies this Statement of
Additional Information and is incorporated herein by reference.
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APPENDIX
DESCRIPTION OF SECURITIES RATINGS
RATINGS OF DEBT INSTRUMENTS
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") -- LONG TERM DEBT RATINGS.
Aaa -- Bonds which 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 edged." 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 which 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 which make the long-term risk appear somewhat larger than the Aaa
securities.
A -- Bonds which 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 which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium-grade obligations
(i.e., 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.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
STANDARD & POOR'S CORPORATION ("S&P"). The ratings are based, in varying
degrees, on the following considerations: (1) The likelihood of default --
capacity and willingness of the obligator as to the timely payment of interest
and repayment of principal in accordance with the terms of the obligation;
(2) The nature of and provisions of the obligation; and (3) The protection
afforded by, and relative position of, the obligation in
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<PAGE>
the event of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
RATINGS OF COMMERCIAL PAPER
MOODY'S. Moody's short-term debt ratings are opinions of the ability of
issuers to repay punctually senior debt obligations. These obligations have an
original maturity not exceeding one year, unless explicitly noted. Moody's
employs the following three designations, all judged to be investment grade, to
indicate the relative repayment ability of rated issuers:
- Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt
obligations. Prime-1 repayment ability will often be evidenced
by many of the following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance
on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
- Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations.
This will normally be evidenced
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<PAGE>
by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be
more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions.
Ample alternative liquidity is maintained.
- Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term
obligations. The effect of industry characteristics and market
compositions may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt
protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
- Issuers rated Not Prime do not fall within any of the Prime
rating categories.
S&P. An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered shot-term in the relevant
market. Ratings are graded into several categories, ranging from A-1 for the
highest quality obligations to D for the lowest. These categories are as
follows:
A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
FITCH'S INVESTORS SERVICE, INC. ("FITCH"). Commercial paper rated by Fitch
reflects Fitch's current appraisal of the degree of assurance of timely payment
of such debt. An appraisal results in the rating of an issuer's paper as F-1,
F-2, F-3, or F-4.
F-1 -- This designation indicates that the commercial paper is regarded as
having the strongest degree of assurance for timely payment.
F-2 -- Commercial paper issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than those issues rated F-1.
DUFF AND PHELPS, INC. Duff & Phelps' short-term ratings are consistent
with the rating criteria utilized by money market participants. The ratings
apply to all obligations with maturities of under one year, including commercial
paper, the uninsured portion of certificates of deposit, unsecured bank loans,
master notes, bankers acceptances, irrevocable letters of credit, and current
maturities of long-term debt. Asset-backed commercial paper is also rated
according to this scale.
Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of funds including trade
credit, bank lines, and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.
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<PAGE>
The distinguishing feature of Duff & Phelps' short-term ratings is the
refinement of the traditional '1' category. The majority of short-term debt
issuers carry the highest rating, yet quality differences exist within that
tier. As a consequence, Duff & Phelps has incorporated gradations of '1+' (one
plus) and '1-' (one minus) to assist investors in recognizing those differences.
Duff 1+--Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free U.S. Treasury short-
term obligations.
Duff 1--Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk factors
are minor.
Duff 1- -- High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk factors are very
small.
GOOD GRADE. Duff 2--Good certainty of timely payment. Liquidity factors
and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good.
Risk factors are small.
SATISFACTORY GRADE. Duff 3--Satisfactory liquidity and other protection
factors qualify issue as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is expected.
NON-INVESTMENT GRADE. Duff 4--Speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
DEFAULT. Duff 5--Issuer failed to meet scheduled principal and/or interest
payments.
IBCA, INC. In addition to conducting a careful review of an institution's
reports and published figures, IBCA's analysts regularly visit the companies for
discussions with senior management. These meetings are fundamental to the
preparation of individual reports and ratings. To keep abreast of any changes
that may affect assessments, analysts maintain contact throughout the year with
the management of the companies they cover.
IBCA's analysts speak the languages of the countries they cover, which is
essential to maximize the value of their meetings with management and to
properly analyze a company's written materials. They also have a thorough
knowledge of the laws and accounting practices that govern the operations and
reporting of companies within the various countries.
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<PAGE>
Often, in order to ensure a full understanding of their position, companies
entrust IBCA with confidential data. While these data cannot be disclosed in
reports, they are taken into account when assigning our ratings. Before
dispatch to subscribers, a draft of the report is submitted to each company to
permit correction of any factual errors and to enable clarification of issues
raised.
IBCA's Rating Committees meet at regular intervals to review all ratings
and to ensure that individual ratings are assigned consistently for institutions
in all the countries covered. Following the Committee meetings, ratings are
issued directly to subscribers. At the same time, the company is informed of
the ratings as a matter of courtesy, but not for discussion.
A1+--Obligations supported by the highest capacity for timely repayment.
A1--Obligations supported by a very strong capacity for timely repayment.
A2--Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in business,
economic or financial conditions.
B1--Obligations supported by an adequate capacity for timely repayment.
Such capacity is more susceptible to adverse changes in business, economic, or
financial conditions than for obligations in higher categories.
B2--Obligations for which the capacity for timely repayment is susceptible
to adverse changes in business, economic or financial conditions.
C1--Obligations for which there is an inadequate capacity to ensure timely
repayment.
D1--Obligations which have a high risk of default or which are currently in
default.
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<PAGE>
Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
THE SEVEN SEAS SERIES FUND
Two International Place, 35th Floor
Boston, Massachusetts 02110
(617) 654-6089
STATEMENT OF ADDITIONAL INFORMATION
SMALL CAP FUND
DECEMBER 29, 1995
The Seven Seas Series Fund ("Investment Company") is a registered open-end
investment company organized as a Massachusetts business trust offering shares
of beneficial interest in separate investment portfolios. In addition, each
series of the Investment Company is diversified as defined under the Investment
Company Act of 1940, as amended (the "1940 Act").
This Statement of Additional Information supplements or describes in
greater detail the Investment Company and The Seven Seas Series Small Cap Fund
(the "Fund") as contained in the Fund's Prospectus dated December 29, 1995.
This Statement is not a Prospectus and should be read in conjunction with the
Fund's Prospectus, which may be obtained by telephoning or writing Investment
Company at the number or address shown above.
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<PAGE>
TABLE OF CONTENTS
Page
----
STRUCTURE AND GOVERNANCE . . . . . . . . . . . . . . . . . . . . . . . 3
Organization and Business History . . . . . . . . . . . . . . . . 3
Shareholder Meetings. . . . . . . . . . . . . . . . . . . . . . . 4
Controlling Shareholders. . . . . . . . . . . . . . . . . . . . . 4
Principal Shareholders. . . . . . . . . . . . . . . . . . . . . . 5
Trustees and Officers . . . . . . . . . . . . . . . . . . . . . . 5
OPERATION OF INVESTMENT COMPANY. . . . . . . . . . . . . . . . . . . . 6
Service Providers . . . . . . . . . . . . . . . . . . . . . . . . 6
Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Administrator . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Custodian and Transfer Agent. . . . . . . . . . . . . . . . . . . 8
Distribution Plan . . . . . . . . . . . . . . . . . . . . . . . . 8
Federal Law Affecting State Street. . . . . . . . . . . . . . . . 9
Valuation of Fund Shares. . . . . . . . . . . . . . . . . . . . . 9
Brokerage Practices . . . . . . . . . . . . . . . . . . . . . . . 10
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . . . . 12
Total Return Quotations . . . . . . . . . . . . . . . . . . . . . 12
INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . 13
Investment Policies . . . . . . . . . . . . . . . . . . . . . . . 15
Hedging Strategies and Related Investment Techniques. . . . . . . 18
Ratings of Debt Instruments . . . . . . . . . . . . . . . . . . . 23
Ratings of Commercial Paper . . . . . . . . . . . . . . . . . . . 24
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 29
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<PAGE>
STRUCTURE AND GOVERNANCE
ORGANIZATION AND BUSINESS HISTORY. Investment Company was organized as a
Massachusetts business trust on October 3, 1987, and operates under a First
Amended and Restated Master Trust Agreement, dated October 13, 1993, as amended.
Investment Company is authorized to issue shares of beneficial interest, par
value $.001 per share, which may be divided into one or more series, one of
which is the Fund. The Investment Company share evidences pro rata ownership
interest in a different investment portfolio, or "Fund." The Fund is one such
investment portfolio. Certain figures contained herein are applicable to
periods when the Fund was passively managed under the name S&P Midcap Index
Fund. The name and investment objective of the Fund was changed pursuant to a
shareholder vote on November 22, 1994. Figures for activities subsequent to
this change are reflective of the new strategy. The Trustees may create
additional Funds at any time without shareholder approval.
As of the date of this Statement of Additional Information, Investment
Company is comprised of the following investment portfolios, each of which
commenced operations on the date set forth below the portfolio's name:
--------------------------------------------------------------------------
The Seven Seas Series Money Market Fund May 2, 1988
--------------------------------------------------------------------------
The Seven Seas Series US Government Money Market Fund March 1, 1991
--------------------------------------------------------------------------
The Seven Seas Series US Treasury Money Market Fund December 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series US Treasury Obligations Fund *
--------------------------------------------------------------------------
The Seven Seas Series Prime Money Market Fund February 22, 1994
--------------------------------------------------------------------------
The Seven Seas Series Yield Plus Fund November 9, 1992
--------------------------------------------------------------------------
The Seven Seas Series Tax Free Money Market Fund December 1, 1994
--------------------------------------------------------------------------
The Seven Seas Series Intermediate Fund September 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series Bond Market Fund *
--------------------------------------------------------------------------
The Seven Seas Series Growth and Income Fund September 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series S&P 500 Index Fund December 30, 1992
--------------------------------------------------------------------------
The Seven Seas Series Small Cap Fund July 1, 1992
--------------------------------------------------------------------------
The Seven Seas Series Matrix Equity Fund May 4, 1992
--------------------------------------------------------------------------
The Seven Seas Series Active International Fund March 7, 1995
--------------------------------------------------------------------------
The Seven Seas Series International Pacific Index Fund *
--------------------------------------------------------------------------
The Seven Seas Series Emerging Markets Fund March 1, 1994
--------------------------------------------------------------------------
The Seven Seas Series Real Estate Equity Fund *
--------------------------------------------------------------------------
---------------
* As of the date of this Statement of Additional Information, these
portfolios have not commenced operations.
Prospectuses for these investment portfolios may be obtained by calling
Investment Company's distributor, Russell Fund Distributors, Inc., at (617) 654-
6089.
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<PAGE>
Investment Company is authorized to divide shares of any series into two or
more classes of shares. The shares of each Fund may have such rights and
preferences as the Trustees may establish from time to time, including the right
of redemption (including the price, manner and terms of redemption), special and
relative rights as to dividends and distributions, liquidation rights, sinking
or purchase fund provisions and conditions under which any Fund may have
separate voting rights or no voting rights. Each class of shares of a Fund is
entitled to the same rights and privileges as all other classes of the Fund,
except that each class bears the expenses associated with the distribution and
shareholder servicing arrangements of that class, as well as other expenses
attributable to the class and unrelated to the management of the Fund's
portfolio securities. Shares of the Money Market, US Government Money Market
and Tax Free Money Market Funds are divided into Classes A, B and C.
Any amendment to the Master Trust Agreement that would materially and
adversely affect shareholders of Investment Company as a whole, or shareholders
of a particular Fund, must be approved by the holders of a majority of the
shares of Investment Company or the Fund, respectively. All other amendments
may be effected by Investment Company's Board of Trustees.
Under certain unlikely circumstances, and as is the case with any
Massachusetts business trust, a shareholder of the Fund may be held personally
liable for the obligations of the Fund. The Master Trust Agreement provides
that shareholders shall not be subject to any personal liability for the acts or
obligations of the Fund and that every written agreement, obligation, or other
undertaking of the Fund shall contain a provision to the effect that the
shareholders are not personally liable thereunder. The Master Trust Agreement
also provides that the Fund shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Fund and satisfy
any judgment thereon. Thus, the risk to shareholders of incurring financial
loss beyond their investments is limited to circumstances in which the Fund
itself would be unable to meet its obligations.
SHAREHOLDER MEETINGS. Investment Company will not have an annual meeting
of shareholders. Special meetings may be convened: (1) by the Board of
Trustees; (2) upon written request to the Board by the holders of at least 10%
of the outstanding shares; or (3) upon the Board's failure to honor the
shareholders' request described above, by holders of at least 10% of the
outstanding shares giving notice of the special meeting to the shareholders.
CONTROLLING SHAREHOLDERS. The Trustees have the authority and
responsibility to manage the business of Investment Company. Trustees hold
office until they resign or are removed by, in substance, a vote of two-thirds
of Investment Company shares outstanding. State Street may from time to time
have discretionary authority over accounts which invest in Investment Company
shares. These accounts include accounts maintained for securities lending
clients and accounts which permit the use of Investment Company portfolios as
short-term cash sweep investments. Shares purchased for all discretionary
accounts are held of record by State Street, who retains voting control of such
shares. As of November 30, 1995, State Street held of record 36% of the issued
and outstanding shares of Investment Company in connection with its
discretionary
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accounts. Consequently, State Street may be deemed to be a controlling person
of Investment Company for purposes of the 1940 Act.
PRINCIPAL SHAREHOLDERS. As of November 30, 1995, the following
shareholders owned of record 5% or more of the issued and outstanding shares of
the Fund:
- State Street Bank Retirement CM01, an account of State Street Bank and
Trust Company, PO Box 351, Boston, MA 02101--46%; and
- Consolidated Edison K884, Four Irving Place, New York, NY 10003--9%.
The Trustees and officers of Investment Company, as a group, own less than
1% of Investment Company's voting securities.
TRUSTEES AND OFFICERS. The Board of Trustees is responsible for overseeing
generally the operation of the Fund. The officers, all of whom are employed by,
and are officers of, Administrator or its affiliates, are responsible for the
day-to-day management and administration of the Fund's operations.
Trustees who are not officers or employees of State Street or its
affiliates are paid an annual fee and are reimbursed for travel and other
expenses they incur in attending Board meetings. Investment Company's officers
and employees are paid by Administrator or its affiliates.
The following lists Investment Company's Trustees and officers, their
positions with Investment Company, their present and principal occupations
during the past five years and the mailing addresses of Trustees who are not
affiliated with Investment Company. The mailing address for all Trustees and
officers affiliated with Investment Company is The Seven Seas Series Fund, 909 A
Street, Tacoma, WA 98402.
An asterisk (*) indicates that a Trustee is an "interested person" of the
Investment Company, as defined in the 1940 Act.
*LYNN L. ANDERSON, Trustee, Chairman of the Board, President and Fund
Treasurer. Chairman of the Board and Chief Executive Officer, Frank Russell
Investment Management Company and Russell Fund Distributors, Inc.; Director,
President and Chief Executive Officer, Frank Russell Investment Company and
Frank Russell Trust Company; Director and President, Russell Insurance Funds;
Director and Chairman, Frank Russell Company (Delaware); Director, Frank Russell
Investments (Ireland) Limited and Frank Russell Investment Company plc.
WILLIAM L. MARSHALL, Trustee. 33 West Court Street, Doylestown, PA 18901.
Chief Executive Officer and President, Wm. L. Marshall Associates, Inc. (a
registered investment adviser and provider of financial and related consulting
services); Certified Financial Planner;
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Member, Registry of Financial Planning Practitioners; and Advisory Committee,
International Association for Financial Planning Broker-Dealer Program. Member,
Institute of Certified Financial Planners. Registered for Securities with FSC
Securities Corp., Marietta, Georgia.
*STEVEN J. MASTROVICH, Trustee. 1 Financial Center, Boston, MA 02111.
Partner, Brown, Rudnick, Freed & Gesmer (law firm). From 1990 to 1994, Partner,
Warner & Stackpole (law firm).
PATRICK J. RILEY, Trustee. 21 Custom House Street, Boston, MA 02110.
Partner, Riley, Burke & Donahue (law firm).
RICHARD D. SHIRK, Trustee. 3350 Peachtree Road, N.E., Atlanta, GA 30326.
President and Chief Executive Officer, Blue Cross/Blue Shield of Georgia. 1990
to 1992, President, Champions Group Resources--Business Management and Employee
Benefits Consulting; 1990, Senior Vice President, Employee Benefits Division,
Cigna Corporation (providing and insuring group life, health and disability
employee benefit products and services); from 1986 to 1990, Senior Vice
President, EQUICOR-Equitable HCA Corporation (providing and insuring group life,
health and disability employee benefit products and services).
*BRUCE D. TABER, Trustee. 26 Round Top Road, Boxford, MA 01921.
President, A.B. Reed, Inc. - Engineers, Architects, Planners. Prior to that,
Vice President, Instrumentation and Controls, A.B. Reed., Inc.
HENRY W. TODD, Trustee. 111 Commerce Drive, Montgomeryville, PA 18936.
President and Director, Zink & Triest Co., Inc. (dealer in vanilla flavor
materials); Director, A.M. Todd Co. and Flavorite Laboratories.
J. DAVID GRISWOLD, Vice President and Secretary. Assistant Secretary,
Associate General Counsel, Chief Compliance Officer, Frank Russell Investment
Management Company, Russell Fund Distributors, Inc. and Frank Russell Capital
Inc.; Associate General Counsel and Assistant Secretary, Frank Russell Company;
Associate General Counsel, Assistant Secretary and Compliance Officer, Russell
Fiduciary Services Company; Director, Secretary, Associate General Counsel and
Chief Compliance Officer, Frank Russell Securities, Inc.; Secretary, Frank
Russell Canada Limited/Limitee.
KENNETH W. LAMB, Assistant Secretary, Assistant Treasurer and Principal
Accounting Officer. Manager - Funds Administration, Frank Russell Investment
Management Company since 1994. Prior to that, Senior Audit Manager with Knight,
Vale & Gregory since 1982.
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<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
TRUSTEE COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------
Aggregate Pension or Estimated Annual Total Compensation
Compensation Retirement Benefits Upon From Investment
from Benefits Accrued Retirement Company Paid to
Trustee Investment as part of Trustees
Company Investment
Company
Expenses
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lynn L. Anderson $0 $0 $0 $0
- -------------------------------------------------------------------------------------------------------
William L. Marshall $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Steven J. Mastrovich $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Patrick J. Riley $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Richard D. Shirk $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Bruce D. Taber $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Henry W. Todd $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
</TABLE>
OPERATION OF INVESTMENT COMPANY
SERVICE PROVIDERS. Most of the Fund's necessary day-to-day operations are
performed by separate business organizations under contract to Investment
Company. The principal service providers are:
Investment Adviser, Custodian
and Transfer Agent: State Street Bank and Trust Company
Administrator: Frank Russell Investment Management Company
Distributor: Russell Fund Distributors, Inc.
Independent Accountants: Coopers & Lybrand, L.L.P.
ADVISER. State Street Bank and Trust Company ("State Street" or "Adviser")
serves as the Fund's investment adviser pursuant to an Advisory Agreement dated
April 12, 1988 ("Advisory Agreement"). State Street Bank and Trust Company is a
wholly owned subsidiary of State Street Boston Corporation, a publicly held bank
holding company. State Street's address is 225 Franklin Street, Boston, MA
02110.
Under the Advisory Agreement, Adviser directs the Fund's investments in
accordance with its investment objectives, policies and limitations. For these
services, the Fund pays a fee to Adviser at the rates stated in the Prospectus.
In fiscal 1993 through July 1, 1994, Adviser voluntarily agreed to reimburse the
Fund for all expenses in excess of .25% of average daily net assets on an annual
basis. After July 1, 1994, through November 22, 1994, Adviser voluntarily
agreed to waive up to the full amount of its advisory fees for the Fund to the
extent that total
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<PAGE>
fund expenses exceed .25% of average daily net assets on an annual basis. After
the previously mentioned shareholder vote on November 22, 1994, and through
March 9, 1995, Adviser voluntarily agreed to waive up to the full amount of its
advisory fees for the Fund to the extent that total fund expenses exceed 1.00%
of average daily net assets on an annual basis. Effective March 9, 1995 through
the fiscal year ended August 31, 1995, Adviser voluntarily agreed to reimburse
the Fund for all expenses in excess of 1.00% on an annual basis. The Fund
accrued gross expenses to Adviser and the Adviser waived or reimbursed expenses
to the Fund in the following amounts:
1995 1994 1993
---- ---- ----
Accrued Expenses $71,087 $ 66,689 $ 30,615
Waived Expenses $17,654 $ 9,647 $ 9,647
Reimbursed Expenses $57,869 $157,253 $132,192
The Advisory Agreement will continue from year to year provided that a
majority of the Trustees who are not interested persons of the Fund and either a
majority of all Trustees or a majority of the shareholders of the Fund approve
its continuance. The Agreement may be terminated by Adviser or a Fund without
penalty upon sixty days' notice and will terminate automatically upon its
assignment.
ADMINISTRATOR. Frank Russell Investment Management Company
("Administrator") serves as the Fund's administrator, pursuant to an
Administration Agreement dated April 12, 1988 ("Administration Agreement"). A
description of the services provided under the Administration Agreement and the
basis for computing fees for such services is provided in the Fund's Prospectus.
The Fund accrued expenses to Administrator of $3,463 in fiscal 1995, $9,938 in
fiscal 1994, and $5,587 in fiscal 1993. Administrator waived administration
fees of $140 in fiscal 1993.
The Administration Agreement will continue from year to year provided that
a majority of the Trustees and a majority of the Trustees who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
operation of the Distribution Plan described below or the Administration
Agreement approve its continuance. The Agreement may be terminated by
Administrator or any Fund without penalty upon sixty days' notice and will
terminate automatically upon its assignment.
Administrator is a wholly owned subsidiary of Frank Russell Company. Frank
Russell Company was founded in 1936 and has provided comprehensive asset
management consulting services since 1969 for institutional pools of investment
assets, principally those of large corporate employee benefit plans. Frank
Russell Company and its affiliates have offices in Tacoma, Seattle, New York
City, Toronto, London, Tokyo, Sydney, Paris, Zurich and Auckland, and have
approximately 1,000 officers and employees. Administrator's and Frank Russell
Company's mailing address is 909 A Street, Tacoma, WA 98402.
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<PAGE>
DISTRIBUTOR. Russell Fund Distributors, Inc. ("Distributor") serves as the
distributor of Fund shares pursuant to a Distribution Agreement dated April 12,
1988 ("Distribution Agreement"). Distributor is a wholly owned subsidiary of
Administrator. Distributor's mailing address is Two International Place, 35th
Floor, Boston, MA 02110.
CUSTODIAN AND TRANSFER AGENT. State Street serves as the custodian
("Custodian") and transfer agent ("Transfer Agent") for Investment Company.
State Street also provides the basic portfolio recordkeeping required by
Investment Company for regulatory and financial reporting purposes. For these
services, State Street is paid an annual fee in accordance with the following:
custody services--a fee payable monthly on a pro rata basis, based on the
following percentages of average daily net assets of each Fund: $0 up to
$1.5 billion--0.02%, over $1.5 billion--0.015% (for purposes of calculating the
break point, the assets of all domestic Funds are aggregated); securities
transaction charges from $8.00 to $25.00 per transaction; Eurodollar transaction
fees ranging from $110.00 to $125.00 per transaction; monthly pricing fees of
$375.00 per investment portfolio and from $6.00 to $16.00 per security,
depending on the type of instrument and the pricing service used; and transfer
agent services of $2.00 per shareholder transaction and a multiple class fee of
$18,000 per year for each additional class of shares; and yield calculation fees
of $350.00 per non-money market portfolio per year. State Street is reimbursed
by each Fund for supplying certain out-of-pocket expenses including postage,
transfer fees, stamp duties, taxes, wire fees, telexes, and freight.
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand L.L.P. serves as the
Investment Company's independent accountants. Coopers & Lybrand L.L.P. is
responsible for performing annual audits of the financial statements and
financial highlights in accordance with generally accepted auditing
standards, a review of federal tax returns, and, pursuant to Rule 17f-2 of
the 1940 Act, three security counts. The mailing address of Coopers & Lybrand
L.L.P. is One Post Office Square, Boston MA 02109.
DISTRIBUTION PLAN. Under the 1940 Act, the Securities and Exchange
Commission has adopted Rule 12b-1, which regulates the circumstances under which
the Fund may, directly or indirectly, bear distribution and shareholder
servicing expenses. The Rule provides that the Fund may pay for such expenses
only pursuant to a plan adopted in accordance with the Rule. Accordingly, the
Fund has adopted an active distribution plan (the "Plan"), which is described in
the Fund's Prospectus.
The Plan provides that the Fund may spend annually, directly or indirectly,
up to 0.25% of the value of its average net assets for distribution and
shareholder servicing services. The Plan does not provide for the Fund to be
charged for interest, carrying or any other financing charges on any
distribution expenses carried forward to subsequent years. A quarterly report
of the amounts expended under the Plan, and the purposes for which such
expenditures were incurred, must be made to the Trustees for their review. The
Plan may not be amended without shareholder approval to increase materially the
distribution or shareholder servicing costs that the Fund may pay. The Plan and
material amendments to it must be approved
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<PAGE>
annually by all of the Trustees and by the Trustees who are neither "interested
persons" (as defined in the 1940 Act) of the Fund nor have any direct or
indirect financial interest in the operation of the Plan or any related
agreements.
The Fund accrued expenses in the following amounts to Russell Fund
Distributors, Inc., as Distributor for the fiscal years ended August 31:
1995 1994 1993
---- ---- ----
Small Cap Fund $25,754 $27,267 $6,502
For fiscal 1995, this amount is reflective of the following individual
payments:
Advertising $ 4,879
Printing of Prospectuses 9,468
Compensation to Sales Personnel 2,375
Other* 9,032
-------
$25,754
-------
-------
* Other expenses may include such items as compensation for travel, conferences
and seminars for staff, subscriptions, office charges and professional fees.
Under the Plan, the Fund may also enter into agreements ("Service
Agreements") with financial institutions, which may include Adviser ("Service
Organizations"), to provide shareholder servicing with respect to Fund shares
held by or for the customers of the Service Organizations. Such arrangements
are more fully described in the Fund's prospectus under "Distribution Services
and Shareholder Servicing."
The Fund accrued expenses in the following amounts to Adviser, under a
Service Agreement pursuant to Rule 12b-1, for fiscal years ended August 31:
1995 1994 1993
---- ---- ----
Small Cap Fund $6,245 $2,441 $384
FEDERAL LAW AFFECTING STATE STREET. The Glass-Steagall Act of 1933
prohibits state chartered banks such as State Street from engaging in the
business of underwriting, selling or distributing certain securities, and
prohibits a member bank of the Federal Reserve System from having certain
affiliations with an entity engaged principally in that business. The
activities of State Street in informing its customers of the Fund, performing
investment and redemption services, providing custodian, transfer, shareholder
servicing, dividend disbursing, agent servicing and investment advisory
services, may raise issues under these provisions. State Street has been
advised by its counsel that its activities in connection with the Fund
contemplated under this arrangement are consistent with its statutory and
regulatory obligations.
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<PAGE>
VALUATION OF FUND SHARES. Net asset value per share is calculated once
each business day for the Fund as of the close of the regular trading session on
the New York Stock Exchange (currently 4:00 p.m. Eastern time). A business day
is one on which the New York Stock Exchange is open for business. Currently,
the New York Stock Exchange is open for trading every weekday except New Year's
Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.
Trading may occur in debt securities and in foreign securities at times
when the New York Stock Exchange is closed (including weekends and holidays or
after 4:00 p.m., Eastern time, on a regular business day). The trading of
portfolio securities at such times may significantly increase or decrease the
net asset value of the Fund's share when shareholders do not have the ability to
purchase or redeem shares. Therefore, events affecting the values of foreign
securities trading in foreign markets that occur between the time their prices
are determined and the close of the New York Stock Exchange will not be
reflected in the Fund's calculation of its net asset value unless the Board of
Trustees determines that the particular event would materially affect the Fund's
net asset value, in which case an adjustment would be made.
With the exceptions noted below, the Fund values portfolio securities at
fair market value. This generally means that equity securities and fixed income
securities listed and traded principally on any national securities exchange are
valued on the basis of the last sale price or, lacking any sales, at the closing
bid price, on the primary exchange on which the security is traded. United
States equity and fixed-income securities traded principally over-the-counter
and options are valued on the basis of the last reported bid price. Futures
contracts are valued on the basis of the last reported sales price.
Because many fixed income securities do not trade each day, last sale or
bid prices are frequently not available. Therefore, fixed income securities may
be valued using prices provided by a pricing service when such prices are
determined by Custodian to reflect the fair market value of such securities.
International equity securities traded on a national securities exchange
are valued on the basis of the last sale price. International securities traded
over-the-counter are valued on the basis of best bid or official bid, as
determined by the relevant securities exchange. In the absence of a last sale
or best or official bid price, such securities may be valued on the basis of
prices provided by a pricing service if those prices are believed to reflect the
fair value of such securities.
The Fund values securities maturing within 60 days of the valuation date at
amortized cost unless the Board determines that amortized cost does not
represent fair value. This method involves valuing an instrument at its cost
and thereafter assuming a constant amortization to maturity of any discount or
premium, even though the portfolio security may increase or decrease in market
value generally in response to changes in interest rates. While this method
provides certainty in valuation, it may result in periods during which value, as
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<PAGE>
determined by amortized cost, is higher or lower than the price a Fund would
receive if it sold the instrument.
For example, in periods of declining interest rates, the daily yield on
Fund shares computed by dividing the annualized daily income on the Fund's
portfolio by the net asset value based upon the amortized cost valuation
technique may tend to be higher than a similar computation made by using a
method of valuation based upon market prices and estimates. In periods of
rising interest rates, the daily yield on Fund shares computed the same way may
tend to be lower than a similar computation made by using a method of
calculation based upon market prices and estimates.
BROKERAGE PRACTICES. All portfolio transactions are placed on behalf of
the Fund by Adviser. Adviser ordinarily pays commissions when it executes
transactions on a securities exchange. In contrast, there is generally no
stated commission in the purchase or sale of securities traded in the over-the-
counter markets, including most debt securities and money market instruments.
Rather, the price of such securities includes an undisclosed commission in the
form of a mark-up or mark-down. The cost of securities purchased from
underwriters includes an underwriting commission or concession.
Subject to the arrangements and provisions described below, the selection
of a broker or dealer to execute portfolio transactions is usually made by
Adviser. The Advisory Agreement provides, in substance and subject to specific
directions from officers of Investment Company, that in executing portfolio
transactions and selecting brokers or dealers, the principal objective is to
seek the best overall terms available to the Fund. Ordinarily, securities will
be purchased from primary markets, and Adviser shall consider all factors it
deems relevant in assessing the best overall terms available for any
transaction, 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 other transactions on a continuing basis.
The Advisory Agreement authorizes Adviser to select brokers or dealers to
execute a particular transaction, including principal transactions, 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 Adviser (or its
affiliates). Adviser is authorized to cause the Fund to pay a commission to a
broker or dealer who provides such brokerage and research services for executing
a portfolio transaction which is in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction. The Fund or
Adviser, as appropriate, must determine in good faith that such commission was
reasonable in relation to the value of the brokerage and research services
provided--viewed in terms of that particular transaction or in terms of all the
accounts over which Adviser exercises investment discretion.
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<PAGE>
The Trustees periodically review Adviser's performance of its
responsibilities in connection with the placement of portfolio transactions on
behalf of the Fund and review the prices paid by the Fund over representative
periods of time to determine if such prices are reasonable in relation to the
benefits provided to the Fund. Certain services received by Adviser
attributable to a particular Fund transaction may benefit one or more other
accounts for which Adviser exercises investment discretion, or an investment
portfolio other than that for which the transaction was effected. Adviser's
fees are not reduced by Adviser's receipt of such brokerage and research
services.
The brokerage commissions paid by the Fund were $35,824 for fiscal 1995,
$29,889 for fiscal 1994 and $9,632 for fiscal 1993.
Of the total brokerage commissions paid by the Fund, commissions received
by an affiliated broker/dealer for fiscal 1995 were $11,696. Of this amount,
the percentage of affiliated brokerage to total brokerage for the Fund was
32.65%.
The percentage of total affiliated transactions (relating to trading
activity) to total transactions during fiscal 1995 for the Fund was 7.97%.
During the fiscal year ended August 31, 1995, the Fund did not purchase
securities issued by the regular brokers or dealers of the Fund, as defined by
Rule 10b-1 of the 1940 Act.
PORTFOLIO TURNOVER RATE. The portfolio turnover rate for the Fund is
calculated by dividing the lesser of purchases or sales of portfolio securities
for the particular year, by the monthly average value of the portfolio
securities owned by the Fund during the year. For purposes of determining the
rate, all short-term securities, including options, futures, forward contracts
and repurchase agreements, are excluded.
The portfolio turnover rates for the Fund were as follows for the fiscal
years ended August 31:
1995 1994 1993
---- ---- ----
Small Cap Fund 192.88% 44.86% 81.14%
TOTAL RETURN QUOTATIONS. The Fund computes average annual total return by
using a standardized method of calculation required by the Securities and
Exchange Commission. Average annual total return is computed by finding the
average annual compounded rates of return on a hypothetical initial investment
of $1,000 over the one-year, five-year and ten-year periods (or life of the
funds as appropriate), that would equate the initial amount invested to the
ending redeemable value, according to the following formula:
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<PAGE>
P(1+T) (to the ninth power) = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a $1,000 payment made at the
beginning of the 1-year, 5-year and 10-year periods at the
end of the year or period
The calculation assumes that all dividends and distributions of the Fund
are reinvested at the price stated in the Prospectus on the dividend dates
during the period, and includes all recurring and nonrecurring fees that are
charged to all shareholder accounts. The average annual total returns for the
Fund are as follows:
One Year
Ending Inception to
August 31, August 31, 1995
1995 Annualized) Inception Date
---------- --------------- -------------
Small Cap Fund 30.04% 17.93% 07/01/92
INVESTMENTS
The non-fundamental investment objective of the Fund is set forth in its
Prospectus. The investment objective may be changed with the approval of a
majority of the Fund's Board of Trustees, with at least 60 days' prior notice to
shareholders. However, to meet certain state requirements, it may be determined
that the objective will only be changed with the approval of a majority of the
Fund's shareholders, as defined by the 1940 Act. In addition to that investment
objective, the Fund also has certain fundamental investment restrictions, which
may be changed only with the approval of a majority of the shareholders of the
Fund, and certain nonfundamental investment restrictions and policies, which may
be changed by the Fund without shareholder approval.
INVESTMENT RESTRICTIONS
The Fund is subject to the following investment restrictions. Restrictions
1 through 11 are fundamental and restrictions 12 through 18 are nonfundamental.
Unless otherwise noted, these restrictions apply at the time an investment is
made. The Fund will not:
(1) Invest 25% or more of the value of its total assets in securities of
companies primarily engaged in any one industry (other than the US Government,
its agencies and instrumentalities). Concentration may occur as a result of
changes in the market value of portfolio securities, but may not result from
investment.
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<PAGE>
(2) Borrow money (including reverse repurchase agreements), except as a
temporary measure for extraordinary or emergency purposes or to facilitate
redemptions (not for leveraging or investment), provided that borrowings do not
exceed an amount equal to 33-1/3% of the current value of the Fund's assets
taken at market value, less liabilities other than borrowings. If at any time a
Fund's borrowings exceed this limitation due to a decline in net assets, such
borrowings will within three days be reduced to the extent necessary to comply
with this limitation. A Fund will not purchase investments once borrowed funds
(including reverse repurchase agreements) exceed 5% of its total assets.
(3) Pledge, mortgage or hypothecate its assets. However, a Fund may pledge
securities having a market value at the time of the pledge not exceeding 33-1/3%
of the value of the Fund's total assets to secure borrowings permitted by
paragraph (2) above.
(4) With respect to 75% of its total assets, invest in securities of any
one issuer (other than securities issued by the US Government, its agencies, and
instrumentalities), if immediately after and as a result of such investment the
current market value of the Fund's holdings in the securities of such issuer
exceeds 5% of the value of the Fund's assets.
(5) Make loans to any person or firm; provided, however, that the making of
a loan shall not include (i) the acquisition for investment of bonds,
debentures, notes or other evidences of indebtedness of any corporation or
government which are publicly distributed or of a type customarily purchased by
institutional investors, or (ii) the entry into repurchase agreements or reverse
repurchase agreements. A Fund may lend its portfolio securities to broker-
dealers or other institutional investors if the aggregate value of all
securities loaned does not exceed 33-1/3% of the value of the Fund's total
assets.
(6) Purchase or sell commodities or commodity futures contracts except that
the Fund may enter into futures contracts and options thereon to the extent
provided in their respective Prospectuses.
(7) Purchase or sell real estate or real estate mortgage loans; provided,
however, that the Fund may invest in securities secured by real estate or
interests therein or issued by companies which invest in real estate or
interests therein.
(8) Engage in the business of underwriting securities issued by others,
except that a Fund will not be deemed to be an underwriter or to be underwriting
on account of the purchase of securities subject to legal or contractual
restrictions on disposition.
(9) Issue senior securities, except as permitted by its investment
objective, policies and restrictions, and except as permitted by the 1940 Act.
(10) Purchase or sell puts, calls or invest in straddles, spreads or any
combination thereof, if as a result of such purchase the value of the Fund's
aggregate investment in such securities would exceed 5% of the Fund's total
assets.
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<PAGE>
(11) Make short sales of securities or purchase any securities on margin,
except for such short-term credits as are necessary for the clearance of
transactions. The Fund may make initial margin deposits and variation margin
payments in connection with transactions in futures contracts and related
options.
(12) Purchase from or sell portfolio securities to its officers or
directors or other interested persons (as defined in the 1940 Act) of the Fund,
including their investment advisers and affiliates, except as permitted by the
1940 Act and exemptive rules or orders thereunder.
(13) Invest in securities issued by other investment companies except in
connection with a merger, consolidation, acquisition of assets, or other
reorganization approved by the Fund's shareholders, except that the Fund may
invest in such securities to the extent permitted by the 1940 Act.
(14) Invest in securities of any issuer which, together with its
predecessor, has been in operation for less than three years if, as a result,
more than 5% of the Fund's total assets would be invested in such securities,
except that the Fund may invest in securities of a particular issuer to the
extent their respective underlying indices invest in that issuer.
(15) Invest more than 10% of its net assets in the aggregate in illiquid
securities or securities that are not readily marketable, including repurchase
agreements and time deposits of more than seven days' duration.
(16) Purchase interests in oil, gas or other mineral exploration or
development programs.
(17) Make investments for the purpose of gaining control of an issuer's
management.
(18) Purchase the securities of any issuer if the Investment Company's
officers, Directors, Adviser or any of their affiliates beneficially own more
than one-half of 1% of the securities of such issuer or together own
beneficially more than 5% of the securities of such issuer.
INVESTMENT POLICIES
The Fund may invest in the following instruments:
US GOVERNMENT OBLIGATIONS. The types of US Government obligations in which
the Fund may at times invest include: (1) A variety of US Treasury obligations,
which differ only in their interest rates, maturities and times of issuance; and
(2) obligations issued or guaranteed by US Government agencies and
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the US Treasury, (b) the right of the issuer to borrow an
amount limited to a specific line of credit from the US Treasury,
(c) discretionary authority of the US Government agency or instrumentality or
(d) the credit of the instrumentality (examples of agencies and
instrumentalities are: Federal Land Banks, Federal Housing Administration,
Farmers Home Administration, Export--Import Bank of the United States, Central
Bank for Cooperatives, Federal Intermediate Credit Banks, Federal Home Loan
Banks,
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General Services Administration, Maritime Administration, Tennessee Development
Bank, Asian-American Development Bank, Student Loan Marketing Association,
International Bank for Reconstruction and Development and Federal National
Mortgage Association). No assurance can be given that in the future the US
Government will provide financial support to such US Government agencies or
instrumentalities described in (2)(b), (2)(c) and (2)(d), other than as set
forth above, since it is not obligated to do so by law. The Fund may purchase
US Government obligations on a forward commitment basis.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
financial institutions. Under repurchase agreements, these parties sell
securities to a Fund and agree to repurchase the securities at the Fund's cost
plus interest within a specified time (normally one day). The securities
purchased by each Fund have a total value in excess of the purchase price paid
by the Fund and are held by Custodian until repurchased. Repurchase agreements
assist the Fund in being invested fully while retaining "overnight" flexibility
in pursuit of investments of a longer-term nature. The Fund will limit
repurchase transactions to those member banks of the Federal Reserve System and
broker-dealers whose creditworthiness is continually monitored and found
satisfactory by Adviser.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreements under the circumstances described in "Investment Restrictions".
Under reverse repurchase agreements, a Fund transfers possession of portfolio
securities to financial institutions in return for cash in an amount equal to a
percentage of the portfolio securities' market value and agrees to repurchase
the securities at a future date by repaying the cash with interest. The Fund
retains the right to receive interest and principal payments from the securities
while they are in the possession of the financial institutions. Cash or liquid
high quality debt obligations from a Fund's portfolio equal in value to the
repurchase price including any accrued interest will be segregated by Custodian
on the Fund's records while a reverse repurchase agreement is in effect.
Reverse repurchase agreements involve the risk that the market value of
securities sold by the Fund may decline below the price at which it is obligated
to repurchase the securities.
FORWARD COMMITMENTS. The Fund may contract to purchase securities for a
fixed price at a future date beyond customary settlement time consistent with
the Fund's ability to manage its investment portfolio, maintain a stable net
asset value and meet redemption requests. A Fund may dispose of a commitment
prior to settlement if it is appropriate to do so and realize short-term profits
or losses upon such sale. When effecting such transactions, cash or liquid high
quality debt obligations held by the Fund of a dollar amount sufficient to make
payment for the portfolio securities to be purchased will be segregated on the
Fund's records at the trade date and maintained until the transaction is
settled. Forward commitments involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date, or if the other
party fails to complete the transaction.
WHEN-ISSUED TRANSACTIONS. New issues of securities are often offered on a
when-issued basis. This means that delivery and payment for the securities
normally will take place several
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days after the date the buyer commits to purchase them. The payment obligation
and the interest rate that will be received on securities purchased on a when-
issued basis are each fixed at the time the buyer enters into the commitment.
The Fund will make commitments to purchase when-issued securities only with
the intention of actually acquiring the securities, but a Fund may sell these
securities or dispose of the commitment before the settlement date if it is
deemed advisable as a matter of investment strategy. Cash or marketable high
quality debt securities equal to the amount of the above commitments will be
segregated on the Fund's records. For the purpose of determining the adequacy
of these securities the segregated securities will be valued at market. If the
market value of such securities declines, additional cash or securities will be
segregated on the Fund's records on a daily basis so that the market value of
the account will equal the amount of such commitments by the Fund. The Fund
will not invest more than 25% of its net assets in when-issued securities.
Securities purchased on a when-issued basis and held by the Fund are
subject to changes in market value based upon the public's perception of changes
in the level of interest rates. Generally, the value of such securities will
fluctuate inversely to changes in interest rates -- i.e., they will appreciate
in value when interest rates decline and decrease in value when interest rates
rise. Therefore, if in order to achieve higher interest income a Fund remains
substantially fully invested at the same time that it has purchased securities
on a "when-issued" basis, there will be a greater possibility of fluctuation in
the Fund's net asset value.
When payment for when-issued securities is due, the Fund will meet its
obligations from then-available cash flow, the sale of segregated securities,
the sale of other securities or, and although it would not normally expect to do
so, from the sale of the when-issued securities themselves (which may have a
market value greater or less than the Fund's payment obligation). The sale of
securities to meet such obligations carries with it a greater potential for the
realization of capital gains, which are subject to federal income taxes.
VARIABLE AMOUNT MASTER DEMAND NOTES. Variable amount master demand notes
are unsecured obligations that are redeemable upon demand and are typically
unrated. These instruments are issued pursuant to written agreements between
the issuers and the holders. The agreements permit the holders to increase
(subject to an agreed maximum) and the holders and issuers to decrease the
principal amount of the notes, and specify that the rate of interest payable on
the principal fluctuates according to an agreed formula.
SECTION 4(2) COMMERCIAL PAPER. The Fund may invest in commercial paper
issued in reliance on the so-called "private placement" exemption from
registration afforded by Section 4(2) of the Securities Act of 1933
("Section 4(2) paper"). Section 4(2) paper is restricted as to disposition
under the federal securities laws, and generally is sold to investors who agree
that they are purchasing the paper for an investment and not with a view to
public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) paper is normally resold to other investors through
or with the assistance of the issuer or investment dealers who make a market in
Section 4(2) paper, thus providing liquidity. Pursuant to
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guidelines established by the Board of Trustees, Adviser may determine that
Section 4(2) paper is liquid for the purposes of complying with the Fund's
investment restriction relating to investments in illiquid securities.
AMERICAN DEPOSITORY RECEIPTS (ADRS). The Fund may invest in ADRs under
certain circumstances as an alternative to directly investing in foreign
securities. Generally, ADRs, in registered form, are designed for use in the US
securities markets. ADRs are receipts typically issued by a US bank or trust
company evidencing ownership of the underlying securities. ADRs represent the
right to receive securities of foreign issuers deposited in a domestic bank or a
correspondent bank. ADRs do not eliminate the risk inherent in investing in the
securities of foreign issuers. However, by investing in ADRs rather than
directly in a foreign issuer's stock, the Fund can avoid currency risks during
the settlement period for either purchases or sales. In general, there is a
large liquid market in the US for many ADRs. The information available for ADRs
is subject to the accounting, auditing and financial reporting standards of the
domestic market or exchange on which they are traded, which standards are more
uniform and more exacting than those to which many foreign issuers are subject.
HEDGING STRATEGIES AND RELATED INVESTMENT TECHNIQUES
The Fund may seek to hedge their portfolios against movements in the equity
markets, interest rates and currency exchange rates through the use of options,
futures transactions, options on futures and forward foreign currency exchange
transactions. The Fund has authority to write (sell) covered call and put
options on their portfolio securities, purchase put and call options on
securities and engage in transactions in stock index options, stock index
futures and financial futures and related options on such futures. The Fund may
enter into such options and futures transactions either on exchanges or in the
over-the-counter ("OTC") markets. Although certain risks are involved in
options and futures transactions (as discussed in the Prospectus and below),
Adviser believes that, because the Fund will only engage in these transactions
for hedging purposes, the options and futures portfolio strategies of the Fund
will not subject the Fund to the risks frequently associated with the
speculative use of options and futures transactions. Although the use of
hedging strategies by the Fund is intended to reduce the volatility of the net
asset value of the Fund's shares, the Fund's net asset value will nevertheless
fluctuate. There can be no assurance that the Fund's hedging transactions will
be effective.
WRITING COVERED CALL OPTIONS. The Fund is authorized to write (sell)
covered call options on the securities in which it may invest and to enter into
closing purchase transactions with respect to such options. Writing a call
option obligates a Fund to sell or deliver the option's underlying security, in
return for the strike price, upon exercise of the option. By writing a call
option, the Fund receives an option premium from the purchaser of the call
option. Writing covered call options is generally a profitable strategy if
prices remain the same or fall. Through receipt of the option premium, the Fund
would seek to mitigate the effects of a price decline. By writing covered call
options, however, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying
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security above the option exercise price. In addition, the Fund's ability to
sell the underlying security will be limited while the option is in effect
unless the Fund effects a closing purchase transaction.
WRITING COVERED PUT OPTIONS. The Fund is authorized to write (sell)
covered put options on its portfolio securities and to enter into closing
transactions with respect to such options.
When a Fund writes a put option, it takes the opposite side of the
transaction from the option's purchaser. In return for receipt of the premium,
the Fund assumes the obligation to pay the strike price for the option's
underlying instrument if the other party to the option chooses to exercise it.
The Fund may seek to terminate its position in a put option it writes before
exercise by closing out the option in the secondary market at its current price.
If the secondary market is not liquid for an option the Fund has written,
however, the Fund must continue to be prepared to pay the strike price while the
option is outstanding, regardless of price changes, and must continue to set
aside assets to cover its position.
The Fund may write put options as an alternative to purchasing actual
securities. If security prices rise, the Fund would expect to profit from a
written put option, although its gain would be limited to the amount of the
premium it received. If security prices remain the same over time, it is likely
that the Fund will also profit, because it should be able to close out the
option at a lower price. If security prices fall, the Fund would expect to
suffer a loss. This loss should be less than the loss the Fund would have
experienced from purchasing the underlying instrument directly, however, because
the premium received for writing the option should mitigate the effects of the
decline.
PURCHASING PUT OPTIONS. The Fund is authorized to purchase put options to
hedge against a decline in the market value of its portfolio securities. By
buying a put option a Fund has the right (but not the obligation) to sell the
underlying security at the exercise price, thus limiting the Fund's risk of loss
through a decline in the market value of the security until the put option
expires. The amount of any appreciation in the value of the underlying security
will be partially offset by the amount of the premium paid by the Fund for the
put option and any related transaction costs. Prior to its expiration, a put
option may be sold in a closing sale transaction and profit or loss from the
sale will depend on whether the amount received is more or less than the premium
paid for the put option plus the related transaction costs. A closing sale
transaction cancels out the Fund's position as the purchaser of an option by
means of an offsetting sale of an identical option prior to the expiration of
the option it has purchased. The Fund will not purchase put options on
securities (including stock index options discussed below) if as a result of
such purchase, the aggregate cost of all outstanding options on securities held
by the Fund would exceed 5% of the market value of the Fund's total assets.
PURCHASING CALL OPTIONS. The Fund is also authorized to purchase call
options. The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying
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instrument at the option's strike price (call options on futures contracts are
settled by purchasing the underlying futures contract). The Fund will purchase
call options only in connection with "closing purchase transactions."
STOCK INDEX OPTIONS AND FINANCIAL FUTURES. The Fund is authorized to
engage in transactions in stock index options and financial futures, and related
options. A Fund may purchase or write put and call options on stock indices to
hedge against the risks of market-wide stock price movements in the securities
in which the Fund invests. Options on indices are similar to options on
securities except that on exercise or assignment, the parties to the contract
pay or receive an amount of cash equal to the difference between the closing
value of the index and the exercise price of the option times a specified
multiple. The Fund may invest in stock index options based on a broad market
index, such as the S&P 500 Index, or on a narrow index representing an industry
or market segment. The Fund's investments in foreign stock index futures
contracts and foreign interest rate futures contracts, and related options, are
limited to only those contracts and related options that have been approved by
the Commodity Futures Trading Commission ("CFTC") for investment by United
States investors. Additionally, with respect to the Fund's investments in
foreign options, unless such options are specifically authorized for investment
by order of the CFTC, the Fund will not make such investments.
The Fund may also purchase and sell stock index futures contracts and other
financial futures contracts ("futures contracts") as a hedge against adverse
changes in the market value of its portfolio securities as described below. A
futures contract is an agreement between two parties which obligates the
purchaser of the futures contract to buy and the seller of a futures contract to
sell a security for a set price on a future date. Unlike most other futures
contracts, a stock index futures contract does not require actual delivery of
securities, but results in cash settlement based upon the difference in value of
the index between the time the contract was entered into and the time of its
settlement. The Fund may effect transactions in stock index futures contracts
in connection with equity securities in which it invests and in financial
futures contracts in connection with debt securities in which it invests, if
any. Transactions by the Fund in stock index futures and financial futures are
subject to limitations as described below under "Restrictions on the Use of
Futures Transactions."
The Fund may sell futures contracts in anticipation of or during a market
decline to attempt to offset the decrease in market value of the Fund's
securities portfolio that might otherwise result. When a Fund is not fully
invested in the securities markets and anticipates a significant market advance,
the Fund may purchase futures in order to gain rapid market exposure that may
partially or entirely offset increases in the cost of securities that the Fund
intends to purchase. As such purchases are made, an equivalent amount of
futures contracts will be terminated by offsetting sales. It is anticipated
that, in a substantial majority of these transactions, the Fund will purchase
such securities upon termination of the long futures position, whether the long
position results from the purchase of a futures contract or the purchase of a
call option, but under unusual circumstances (e.g., the Fund experiences a
significant amount of redemptions), a long futures position may be terminated
without the corresponding purchase of securities.
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The Fund also is authorized to purchase and write call and put options on
futures contracts and stock indices in connection with its hedging activities.
Generally, these strategies would be utilized under the same market and market
sector conditions (i.e., conditions relating to specific types of investments)
during which the Fund enters into futures transactions. The Fund may purchase
put options or write call options on futures contracts and stock indices rather
than selling the underlying futures contract in anticipation of a decrease in
the market value of securities. Similarly, the Fund can purchase call options,
or write put options on futures contracts and stock indices, as a substitute for
the purchase of such futures to hedge against the increased cost resulting from
an increase in the market value of securities which the Fund intends to
purchase.
The Fund is also authorized to engage in options and futures transactions
on US and foreign exchanges and in options in the OTC markets ("OTC options").
In general, exchange traded contracts are third-party contracts (i.e.,
performance of the parties' obligations is guaranteed by an exchange or clearing
corporation) with standardized strike prices and expiration dates. OTC options
transactions are two-party contracts with price and terms negotiated by the
buyer and seller. See "Restrictions on OTC Options" below for information as to
restrictions on the use of OTC options.
The Fund is authorized to purchase or sell listed or OTC foreign security
or currency options, foreign security or currency futures and related options as
a short or long hedge against possible variations in foreign exchange rates and
market movements. Such transactions could be effected with respect to hedges on
non-US dollar denominated securities owned by a Fund, sold by a Fund but not yet
delivered, or committed or anticipated to be purchased by a Fund. As an
illustration, a Fund may use such techniques to hedge the stated value in US
dollars of an investment in a yen-denominated security. In such circumstances,
for example, the Fund can purchase a foreign currency put option enabling it to
sell a specified amount of yen for US dollars at a specified price by a future
date. To the extent the hedge is successful, a loss in the value of the yen
relative to the US dollar will tend to be offset by an increase in the value of
the put option.
RESTRICTIONS ON THE USE OF FUTURES TRANSACTIONS. The purchase or sale of a
futures contract differs from the purchase or sale of a security in that no
price or premium is paid or received. Instead, an amount of cash or securities
acceptable to the broker and the relevant contract market, which varies, but is
generally about 5% of the contract amount, must be deposited with the broker.
This amount is known as "initial margin" and represents a "good faith" deposit
assuring the performance of both the purchaser and seller under the futures
contract. Subsequent payments to and from the broker, called "variation
margin," are required to be made on a daily basis as the price of the futures
contract fluctuates making the long and short positions in the futures contracts
more or less valuable, a process known as "marking to market." At any time
prior to the settlement date of the future contract, the position may be closed
out by taking an opposite position which will operate to terminate the position
in the futures contract. A final determination of variation margin is then
made, additional cash is
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required to be paid to or released by the broker and the purchaser realizes a
loss or gain. In addition, a nominal commission is paid on each completed sale
transaction.
Regulations of the CFTC applicable to the Fund require that all of the
Fund's futures and options on futures transactions constitute bona fide hedging
transactions and that the Fund not enter into such transactions if, immediately
thereafter, the sum of the amount of initial margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets.
RESTRICTIONS ON OTC OPTIONS. The Fund will engage in OTC options,
including OTC stock index options, OTC foreign security and currency options and
options on foreign security and currency futures, only with member banks of the
Federal Reserve System and primary dealers in US Government securities or with
affiliates of such banks or dealers which have capital of at least $50 million
or whose obligations are guaranteed by an entity having capital of at least
$50 million. The Fund will acquire only those OTC options for which Adviser
believes the Fund can receive on each business day at least two independent bids
or offers (one of which will be from an entity other than a party to the
option).
The Staff of the SEC has taken the position that purchased OTC options and
the assets used as cover for written OTC options are illiquid securities.
Therefore, the Fund has adopted an operating policy pursuant to which it will
not purchase or sell OTC options (including OTC options on futures contracts)
if, as a result of such transaction, the sum of: (1) the market value of
outstanding OTC options held by the Fund; (2) the market value of the underlying
securities covered by outstanding OTC call options sold by the Fund; (3) margin
deposits on the Fund's existing OTC options on futures contracts; and (4) the
market value of all other assets of the Fund that are illiquid or are not
otherwise readily marketable, would exceed 10% of the net assets of the Fund,
taken at market value. However, if an OTC option is sold by the Fund to a
primary US Government securities dealer recognized by the Federal Reserve Bank
of New York and the Fund has the unconditional contractual right to repurchase
such OTC option from the dealer at a predetermined price, then the Fund will
treat as illiquid such amount of the underlying securities as is equal to the
repurchase price less the amount by which the option is "in-the-money" (current
market value of the underlying security minus the option's strike price). The
repurchase price with primary dealers is typically a formula price which is
generally based on a multiple of the premium received for the option plus the
amount by which the option is "in-the-money."
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS. The Fund will not use
leverage in its options and futures strategies. Such investments will be made
for hedging purposes only. The Fund will hold securities or other options or
futures positions whose values are expected to offset its obligations under the
hedge strategies. The Fund will not enter into an option or futures position
that exposes the Fund to an obligation to another party unless it owns either:
(1) an offsetting position in securities or other options or futures contracts;
or (2) cash, receivables and short-term debt securities with a value sufficient
to cover its potential obligations. The Fund will comply with guidelines
established by the SEC with respect to coverage of options and futures
strategies by mutual funds, and if the guidelines so require will
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<PAGE>
set aside cash and high grade liquid debt securities in a segregated account
with its custodian bank in the amount prescribed. The Fund's custodian shall
maintain the value of such segregated account equal to the prescribed amount by
adding or removing additional cash or liquid securities to account for
fluctuations in the value of securities held in such account. Securities held
in a segregated account cannot be sold while the futures or option strategy is
outstanding, unless they are replaced with similar securities. As a result,
there is a possibility that segregation of a large percentage of a Fund's assets
could impede portfolio management or the Fund's ability to meeting redemption
requests or other current obligations.
RISK FACTORS IN OPTIONS, FUTURES, FORWARD AND CURRENCY TRANSACTIONS.
Utilization of options and futures transactions to hedge the Fund's portfolios
involves the risk of imperfect correlation in movements in the price of options
and futures and movements in the price of securities or currencies which are the
subject of the hedge. If the price of the options or futures moves more or less
than the price of hedged securities or currencies, the Fund will experience a
gain or loss which will not be completely offset by movements in the price of
the subject of the hedge. The successful use of options and futures also
depends on Adviser's ability to correctly predict price movements in the market
involved in a particular options or futures transaction. To compensate for
imperfect correlations, the Fund may purchase or sell stock index options or
futures contracts in a greater dollar amount than the hedged securities if the
volatility of the hedged securities is historically greater than the volatility
of the stock index options or futures contracts. Conversely, the Fund may
purchase or sell fewer stock index options or futures contracts, if the
historical price volatility of the hedged securities is less than that of the
stock index options or futures contracts. The risk of imperfect correlation
generally tends to diminish as the maturity date of the stock index option or
futures contract approaches. Options are also subject to the risks of an
illiquid secondary market, particularly in strategies involving writing options,
which the Fund cannot terminate by exercise. In general, options whose strike
prices are close to their underlying instruments' current value will have the
highest trading volume, while options whose strike prices are further away may
be less liquid.
The Fund intends to enter into options and futures transactions, on an
exchange or in the OTC market, only if there appears to be a liquid secondary
market for such options or futures or, in the case of OTC transactions, the
Adviser believes the Fund can receive on each business day at least two
independent bids or offers. However, there can be no assurance that a liquid
secondary market will exist at any specific time. Thus, it may not be possible
to close an options or futures position. The inability to close options and
futures positions also could have an adverse impact on a Fund's ability to
effectively hedge its portfolio. There is also the risk of loss by a Fund of
margin deposits or collateral in the event of bankruptcy of a broker with whom
the Fund has an open position in an option, a futures contract or related
option.
The exchanges on which options on portfolio securities and currency options
are traded have generally established limitations governing the maximum number
of call or put options on the same underlying security or currency (whether or
not covered) which may be written by a single investor, whether acting alone or
in concert with others (regardless of whether such options are written on the
same or different exchanges or are held or written in one or more
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accounts or through one or more brokers). "Trading limits" are imposed on the
maximum number of contracts which any person may trade on a particular trading
day.
RATINGS OF DEBT INSTRUMENTS
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") -- LONG TERM DEBT RATINGS.
Aaa -- Bonds which 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 edged." 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 which 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 which make the long-term risk appear somewhat larger than the Aaa
securities.
A -- Bonds which 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 which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium-grade obligations
(i.e., 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.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
STANDARD & POOR'S CORPORATION ("S&P"). The ratings are based, in varying
degrees, on the following considerations: (1) The likelihood of default --
capacity and willingness of the obligator as to the timely payment of interest
and repayment of principal in accordance with the terms of the obligation;
(2) The nature of and provisions of the obligation; and (3) The protection
afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization, or other arrangement under the laws of bankruptcy
and other laws affecting creditors' rights.
AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
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AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
RATINGS OF COMMERCIAL PAPER
MOODY'S. Moody's short-term debt ratings are opinions of the ability of
issuers to repay punctually senior debt obligations. These obligations have an
original maturity not exceeding one year, unless explicitly noted. Moody's
employs the following three designations, all judged to be investment grade, to
indicate the relative repayment ability of rated issuers:
- Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
- Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations.
This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage
ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternative
liquidity is maintained.
-26-
<PAGE>
- Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term
obligations. The effect of industry characteristics and market
compositions may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt
protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
- Issuers rated Not Prime do not fall within any of the Prime
rating categories.
S&P. An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered shot-term in the relevant
market. Ratings are graded into several categories, ranging from A-1 for the
highest quality obligations to D for the lowest. These categories are as
follows:
A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
FITCH'S INVESTORS SERVICE, INC. ("FITCH"). Commercial paper rated by Fitch
reflects Fitch's current appraisal of the degree of assurance of timely payment
of such debt. An appraisal results in the rating of an issuer's paper as F-1,
F-2, F-3, or F-4.
F-1 -- This designation indicates that the commercial paper is regarded as
having the strongest degree of assurance for timely payment.
F-2 -- Commercial paper issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than those issues rated F-1.
DUFF AND PHELPS, INC. Duff & Phelps' short-term ratings are consistent
with the rating criteria utilized by money market participants. The ratings
apply to all obligations with maturities of under one year, including commercial
paper, the uninsured portion of certificates of deposit, unsecured bank loans,
master notes, bankers acceptances, irrevocable letters of credit, and current
maturities of long-term debt. Asset-backed commercial paper is also rated
according to this scale.
Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of funds including trade
credit, bank lines, and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.
The distinguishing feature of Duff & Phelps' short-term ratings is the
refinement of the traditional '1' category. The majority of short-term debt
issuers carry the highest rating, yet quality differences exist within that
tier. As a consequence, Duff & Phelps has incorporated
-27-
<PAGE>
gradations of '1+' (one plus) and '1-' (one minus) to assist investors in
recognizing those differences.
Duff 1+--Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free U.S. Treasury short-
term obligations.
Duff 1--Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk factors
are minor.
Duff 1- -- High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk factors are very
small.
GOOD GRADE. Duff 2--Good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs
may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
SATISFACTORY GRADE. Duff 3--Satisfactory liquidity and other
protection factors qualify issue as to investment grade. Risk factors are
larger and subject to more variation. Nevertheless, timely payment is
expected.
NON-INVESTMENT GRADE. Duff 4--Speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
DEFAULT. Duff 5--Issuer failed to meet scheduled principal and/or
interest payments.
IBCA, INC. In addition to conducting a careful review of an institution's
reports and published figures, IBCA's analysts regularly visit the companies for
discussions with senior management. These meetings are fundamental to the
preparation of individual reports and ratings. To keep abreast of any changes
that may affect assessments, analysts maintain contact throughout the year with
the management of the companies they cover.
IBCA's analysts speak the languages of the countries they cover, which is
essential to maximize the value of their meetings with management and to
properly analyze a company's written materials. They also have a thorough
knowledge of the laws and accounting practices that govern the operations and
reporting of companies within the various countries.
Often, in order to ensure a full understanding of their position, companies
entrust IBCA with confidential data. While these data cannot be disclosed in
reports, they are taken into account when assigning our ratings. Before
dispatch to subscribers, a draft of the report is submitted to each company to
permit correction of any factual errors and to enable clarification of issues
raised.
-28-
<PAGE>
IBCA's Rating Committees meet at regular intervals to review all ratings
and to ensure that individual ratings are assigned consistently for institutions
in all the countries covered. Following the Committee meetings, ratings are
issued directly to subscribers. At the same time, the company is informed of
the ratings as a matter of courtesy, but not for discussion.
A1+--Obligations supported by the highest capacity for timely repayment.
A1--Obligations supported by a very strong capacity for timely repayment.
A2--Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in business,
economic or financial conditions.
B1--Obligations supported by an adequate capacity for timely repayment.
Such capacity is more susceptible to adverse changes in business, economic, or
financial conditions than for obligations in higher categories.
B2--Obligations for which the capacity for timely repayment is susceptible
to adverse changes in business, economic or financial conditions.
C1--Obligations for which there is an inadequate capacity to ensure timely
repayment.
D1--Obligations which have a high risk of default or which are currently in
default.
TAXES
The Fund intends to qualify for treatment as a regulated investment company
("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended
("the Code"). As a RIC, the Fund will not be liable for federal income taxes on
taxable net investment income and capital gain net income (capital gains in
excess of capital losses) that it distributes to its shareholders, provided that
the Fund distributes annually to its shareholders at least 90% of its net
investment income and net short-term capital gain for the taxable year
("Distribution Requirement"). For a Fund to qualify as a RIC it must abide by
all of the following requirements: (1) at least 90% of the Fund's gross income
each taxable year must be derived from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock
or securities or foreign currencies, or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies ("Income Requirement");
(2) less than 30% of the Fund's gross income each taxable year must be derived
from the sale or other disposition of securities and certain options, futures
contracts, forward contracts and foreign currencies held for less than three
months ("Short-Short Limitation"); (3) at the close of each quarter of the
Fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, US Government securities, securities of
other RICs, and other securities, with such other securities limited, in respect
of any one issuer, to an amount that does not exceed 5% of the
-29-
<PAGE>
total assets of the Fund and that does not represent more than 10% of the
outstanding voting securities of such issuer; and (4) at the close of each
quarter of the Fund's taxable year, not more than 25% of the value of its assets
may be invested in securities (other than US Government securities or the
securities of other RICs) of any one issuer.
The Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year an amount at least equal to
the sum of: (1) 98% of its ordinary income for that year; (2) 98% of its
capital gain net income for the one-year period ending on October 31 of that
year; and (3) certain undistributed amounts from the preceding calendar year.
For this and other purposes, dividends declared in October, November or December
of any calendar year and made payable to shareholders of record in such month
will be deemed to have been received on December 31 of such year if the
dividends are paid by the Fund subsequent to December 31 but prior to February 1
of the following year.
If a shareholder receives a distribution taxable as long-term capital gain
with respect to shares of a Fund and redeems or exchanges the shares without
having held the shares for more than one year, then any loss on the redemption
or exchange will be treated as long-term capital loss to the extent of the
capital gain distribution.
From November 1, 1994 to August 31, 1995, the Fund incurred $111,161 of net
realized capital losses. As permitted by tax regulation, the Fund intends to
elect to defer those losses and treat them as arising in the fiscal year ending
August 31, 1996.
ISSUES RELATED TO HEDGING AND OPTION INVESTMENTS. A Fund's ability to make
certain investments may be limited by provisions of the Code that require
inclusion of certain unrealized gains or losses in the Fund's income for
purposes of the Income Requirement, the Short-Short Limitation and the
Distribution Requirement, and by provisions of the Code that characterize
certain income or loss as ordinary income or loss rather than capital gain or
loss. Such recognition, characterization and timing rules will affect
investments in certain futures contracts, options, foreign currency contracts
and debt securities denominated in foreign currencies.
FOREIGN INCOME TAXES. Investment income received by the Fund from sources
within foreign countries may be subject to foreign income taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries which would entitle the Fund to a reduced rate of such taxes or
exemption from taxes on such income. It is impossible to determine the
effective rate of foreign tax for a Fund in advance since the amount of the
assets to be invested within various countries is not known.
If the Fund invests in an entity that is classified as a passive foreign
investment company ("PFIC") for federal income tax purposes, the application of
certain provisions of the Code applying to PFICs could result in the imposition
of certain federal income taxes on the Fund. It is anticipated that any taxes
on the Fund with respect to investments in PFICs would be
-30-
<PAGE>
insignificant. Under US Treasury regulations issued in 1992 for PFICs, the Fund
can elect to mark-to-market its PFIC holdings in lieu of paying taxes on gains
or distributions therefrom.
Foreign shareholders should consult with their tax advisers as to if and
how the federal income tax and its withholding requirements applies to them.
STATE AND LOCAL TAXES. Depending upon the extent of the Fund's activities
in states and localities in which its offices are maintained, its agents or
independent contractors are located or it is otherwise deemed to be conducting
business, the Fund may be subject to the tax laws of such states or localities.
The foregoing discussion is only a summary of certain federal income tax
issues generally affecting the Fund and its shareholders. Circumstances among
investors may vary and each investor is encouraged to discuss investment in the
Fund with the investor's tax adviser.
FINANCIAL STATEMENTS
The 1995 fiscal year-end financial statements of the Fund, including notes
to the financial statements and financial highlights and the Report of
Independent Accountants, are included in the Fund's Annual Reports to
shareholders. A copy of the Annual Report accompanies this Statement of
Additional Information and is incorporated herein by reference.
-31-
<PAGE>
Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
THE SEVEN SEAS SERIES FUND
Two International Place, 35th Floor
Boston, Massachusetts 02110
(617) 654-6089
STATEMENT OF ADDITIONAL INFORMATION
INTERNATIONAL PACIFIC INDEX FUND
DECEMBER 29, 1995
The Seven Seas Series Fund ("Investment Company") is a registered open-end
investment company organized as a Massachusetts business trust offering shares
of beneficial interest in separate investment portfolios, each of which is
referred to as a "Fund." In addition, each series of the Investment Company is
diversified as defined under the Investment Company Act of 1940, as amended
("1940 Act").
This Statement of Additional Information supplements or describes in
greater detail the Investment Company and The Seven Seas Series International
Pacific Index Fund ("Pacific Index Fund" or the "Fund") as contained in the
Fund's Prospectus dated December 29, 1995. This Statement is not a Prospectus
and should be read in conjunction with the Fund's Prospectus, which may be
obtained by telephoning or writing Investment Company at the number or address
shown above.
<PAGE>
TABLE OF CONTENTS
Page
----
STRUCTURE AND GOVERNANCE . . . . . . . . . . . . . . . . . . . . . . . 3
Organization and Business History . . . . . . . . . . . . . . . 3
Shareholder Meetings. . . . . . . . . . . . . . . . . . . . . . 4
Controlling Shareholders. . . . . . . . . . . . . . . . . . . . 4
Trustees and Officers . . . . . . . . . . . . . . . . . . . . . 5
OPERATION OF INVESTMENT COMPANY. . . . . . . . . . . . . . . . . . . . 6
Service Providers . . . . . . . . . . . . . . . . . . . . . . . 6
Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Administrator . . . . . . . . . . . . . . . . . . . . . . . . . 7
Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Custodian and Transfer Agent. . . . . . . . . . . . . . . . . . 8
Distribution Plan . . . . . . . . . . . . . . . . . . . . . . . 8
Federal Law Affecting State Street. . . . . . . . . . . . . . . 9
Valuation of Fund Shares. . . . . . . . . . . . . . . . . . . . 9
Brokerage Practices . . . . . . . . . . . . . . . . . . . . . . 10
Total Return Quotations . . . . . . . . . . . . . . . . . . . . 10
INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Investment Restrictions . . . . . . . . . . . . . . . . . . . . 11
Investment Policies . . . . . . . . . . . . . . . . . . . . . . 13
Hedging Strategies and Related Investment Techniques. . . . . . 17
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 25
- 2-
<PAGE>
STRUCTURE AND GOVERNANCE
ORGANIZATION AND BUSINESS HISTORY. Investment Company was organized as a
Massachusetts business trust on October 3, 1987, and operates under a First
Amended and Restated Master Trust Agreement, dated October 13, 1993, as amended.
Investment Company is authorized to issue shares of beneficial interest, par
value $.001 per share, which may be divided into one or more series, each of
which evidences pro rata ownership interest in a different investment portfolio,
or "Fund." The Pacific Index Fund is one such investment portfolio. The
Trustees may create additional Funds at any time without shareholder approval.
Further, the Investment Company is authorized to divide shares of any
series into two or more classes of shares. The shares of each Fund may have
such rights and preferences as the Trustees may establish from time to time,
including the right of redemption (including the price, manner and terms of
redemption), special and relative rights as to dividends and distributions,
liquidation rights, sinking or purchase fund provisions and conditions under
which any Fund may have separate voting rights or no voting rights. Each class
of shares of a Fund is entitled to the same rights and privileges as all other
classes of that Fund, except that each class bears the expenses associated with
the distribution and shareholder servicing arrangements of that class, as well
as other expenses attributable to the class and unrelated to the management of
the Fund's portfolio securities.
As of the date of this Statement of Additional Information, Investment
Company is comprised of the following investment portfolios, each of which
commenced operations on the date set forth opposite the portfolio's name:
--------------------------------------------------------------------------
The Seven Seas Series Money Market Fund May 2, 1988
--------------------------------------------------------------------------
The Seven Seas Series US Government Money Market Fund March 1, 1991
--------------------------------------------------------------------------
The Seven Seas Series US Treasury Money Market Fund December 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series US Treasury Obligations Fund *
--------------------------------------------------------------------------
The Seven Seas Series Prime Money Market Fund February 22, 1994
--------------------------------------------------------------------------
The Seven Seas Series Yield Plus Fund November 9, 1992
--------------------------------------------------------------------------
The Seven Seas Series Tax Free Money Market Fund December 1, 1994
--------------------------------------------------------------------------
The Seven Seas Series Intermediate Fund September 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series Bond Market Fund *
--------------------------------------------------------------------------
The Seven Seas Series Growth and Income Fund September 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series S&P 500 Index Fund December 30, 1992
--------------------------------------------------------------------------
The Seven Seas Series Small Cap Fund July 1, 1992
--------------------------------------------------------------------------
The Seven Seas Series Matrix Equity Fund May 4, 1992
--------------------------------------------------------------------------
The Seven Seas Series Active International Fund March 7, 1995
--------------------------------------------------------------------------
The Seven Seas Series International Pacific Index Fund *
--------------------------------------------------------------------------
The Seven Seas Series Emerging Markets Fund March 1, 1994
--------------------------------------------------------------------------
The Seven Seas Series Real Estate Equity Fund *
--------------------------------------------------------------------------
- 3 -
<PAGE>
*As of the date of this Statement of Additional Information, these
portfolios have not commenced operations.
Prospectuses for these Investment Portfolios may be obtained by calling
Investment Company's distributor, Russell Fund Distributors, Inc., at (617) 654-
6089.
Shares of the Money Market, US Government Money Market and Tax Free Money
Market Funds are divided into Classes A, B and C.
Any amendment to the Master Trust Agreement that would materially and
adversely affect shareholders of Investment Company as a whole, or shareholders
of a particular Fund, must be approved by the holders of a majority of the
shares of Investment Company or the Fund, respectively. All other amendments
may be effected by Investment Company's Board of Trustees.
Under certain unlikely circumstances, and as is the case with any
Massachusetts business trust, a shareholder of a Fund may be held personally
liable for the obligations of a Fund. The Master Trust Agreement provides that
shareholders shall not be subject to any personal liability for the acts or
obligations of a Fund and that every written agreement, obligation, or other
undertaking of the Fund shall contain a provision to the effect that the
shareholders are not personally liable thereunder. The Master Trust Agreement
also provides that the Fund shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Fund and satisfy
any judgment thereon. Thus, the risk to shareholders of incurring financial
loss beyond their investments is limited to circumstances in which the Fund
itself would be unable to meet its obligations.
SHAREHOLDER MEETINGS. Investment Company will not have an Annual Meeting
of Shareholders. Special Meetings may be convened: (1) by the Board of
Trustees; (2) upon written request to the Board by the holders of at least 10%
of the outstanding shares; or (3) upon the Board's failure to honor the
shareholders' request described above, by holders of at least 10% of the
outstanding shares giving notice of the special meeting to the shareholders.
CONTROLLING SHAREHOLDERS. The Trustees have the authority and
responsibility to manage the business of Investment Company. Trustees hold
office until they resign or are removed by, in substance, a vote of two-thirds
of Investment Company shares outstanding. However, in connection with State
Street Bank and Trust Company's ("State Street") securities lending program and
investment accounts over which State Street has discretionary authority, State
Street holds certain collateral on behalf of its securities lending clients to
secure the return of loaned securities. Such collateral may be invested in
Investment Company shares from time to time. Shares representing such
investments are held of record by State Street, who retains voting control of
such shares. As of November 30, 1995, State Street held beneficially and of
record 36% of Investment Company's shares in connection with various lending
portfolios and,
- 4 -
<PAGE>
consequently, is deemed to be a controlling person of Investment Company for
purposes of the 1940 Act. State Street also acts as Investment Company's
investment adviser, transfer agent and custodian.
The Trustees and officers of Investment Company, as a group, own less than
1% of Investment Company's voting securities.
Frank Russell Investment Management Company ("Administrator"), Investment
Company's administrator, will be the sole shareholder of the Fund until such
time as the Fund has public shareholders and therefore may be deemed to be a
controlling person.
TRUSTEES AND OFFICERS. The Board of Trustees is responsible for overseeing
generally the operation of the Fund. The officers, all of whom are employed by,
and are officers of, Administrator or its affiliates, are responsible for the
day-to-day management and administration of the Fund's operations.
Trustees who are not officers or employees of State Street or its
affiliates are paid an annual fee and are reimbursed for travel and other
expenses they incur in attending Board meetings. Investment Company's officers
and employees are paid by Administrator or its affiliates.
The following lists Investment Company's Trustees and officers, their
positions with Investment Company, their present and principal occupations
during the past five years and the mailing addresses of Trustees who are not
affiliated with Investment Company. The mailing address for all Trustees and
officers affiliated with Investment Company is The Seven Seas Series Fund, 909 A
Street, Tacoma, WA 98402.
An asterisk (*) indicates that a Trustee is an "interested person" of the
Investment Company, as defined in the 1940 Act.
*LYNN L. ANDERSON, Trustee, Chairman of the Board, President and Fund
Treasurer. Chairman of the Board and Chief Executive Officer, Frank Russell
Investment Management Company and Russell Fund Distributors, Inc.; Director,
President and Chief Executive Officer, Frank Russell Investment Company and
Frank Russell Trust Company; Director and President, Russell Insurance Funds;
Director and Chairman, Frank Russell Company (Delaware); Director, Frank Russell
Investments (Ireland) Limited and Frank Russell Investment Company plc.
WILLIAM L. MARSHALL, Trustee. 33 West Court Street, Doylestown, PA 18901.
Chief Executive Officer and President, Wm. L. Marshall Associates, Inc. (a
registered investment adviser and provider of financial and related consulting
services); Certified Financial Planner; Member, Registry of Financial Planning
Practitioners; and Advisory Committee, International Association for Financial
Planning Broker-Dealer Program. Member, Institute of Certified Financial
Planners. Registered for Securities with FSC Securities Corp., Marietta,
Georgia.
- 5 -
<PAGE>
*STEVEN J. MASTROVICH, Trustee. 1 Financial Center, Boston, MA 02111.
Partner, Brown, Rudnick, Freed & Gesmer (law firm). 1990 to 1994, Partner,
Warner & Stackpole (law firm).
PATRICK J. RILEY, Trustee. 21 Custom House Street, Boston, MA 02110.
Partner, Riley, Burke & Donahue (law firm).
RICHARD D. SHIRK, Trustee. 3350 Peachtree Road, N.E., Atlanta, GA 30326.
President and Chief Executive Officer, Blue Cross/Blue Shield of Georgia. 1990
to 1992, President, Champions Group Resources--Business Management and Employee
Benefits Consulting; 1990, Senior Vice President, Employee Benefits Division,
Cigna Corporation (providing and insuring group life, health and disability
employee benefit products and services); from 1986 to 1990, Senior Vice
President, EQUICOR-Equitable HCA Corporation (providing and insuring group life,
health and disability employee benefit products and services).
*BRUCE D. TABER, Trustee. 26 Round Top Road, Boxford, MA 01921.
President, A.B. Reed, Inc. - Engineers, Architects, Planners. Prior to that,
Vice President, Instrumentation and Controls, A.B. Reed., Inc.
HENRY W. TODD, Trustee. 111 Commerce Drive, Montgomeryville, PA 18936.
President and Director, Zink & Triest Co., Inc. (dealer in vanilla flavor
materials); Director, A.M. Todd Co., and Flavorite Laboratories.
J. DAVID GRISWOLD, Vice President and Secretary. Assistant Secretary,
Associate General Counsel, Chief Compliance Officer, Frank Russell Investment
Management Company, Russell Fund Distributors, Inc. and Frank Russell Capital
Inc.; Associate General Counsel and Assistant Secretary, Frank Russell Company;
Associate General Counsel, Assistant Secretary and Compliance Officer, Russell
Fiduciary Services Company; Director, Secretary, Associate General Counsel and
Chief Compliance Officer, Frank Russell Securities, Inc.; Secretary, Frank
Russell Canada Limited/Limitee.
KENNETH W. LAMB, Assistant Secretary, Assistant Treasurer and Principal
Accounting Officer. Manager - Funds Administration, Frank Russell Investment
Management Company since 1994. Prior to that, Senior Audit Manager with Knight,
Vale & Gregory since 1982.
- 6 -
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
TRUSTEE COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------
Aggregate Pension or Estimated Annual Total Compensation
Compensation Retirement Benefits Upon From Investment
from Benefits Accrued Retirement Company Paid to
Trustee Investment as part of Trustees
Company Investment
Company
Expenses
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lynn L. Anderson $0 $0 $0 $0
- -------------------------------------------------------------------------------------------------------
William L. Marshall $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Steven J. Mastrovich $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Patrick J. Riley $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Richard D. Shirk $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Bruce D. Taber $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Henry W. Todd $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
</TABLE>
OPERATION OF INVESTMENT COMPANY
SERVICE PROVIDERS. Most of the Fund's necessary day-to-day operations are
performed by separate business organizations under contract to Investment
Company. The principal service providers are:
Investment Adviser, Custodian
and Transfer Agent: State Street Bank and Trust Company
Administrator: Frank Russell Investment Management
Company
Distributor: Russell Fund Distributors, Inc.
Independent Accountants: Coopers & Lybrand, L.L.P.
ADVISER. State Street Bank and Trust Company ("State Street" or "Adviser")
serves as the Fund's investment adviser pursuant to an Advisory Agreement dated
April 12, 1988. State Street Bank and Trust Company is a wholly owned
subsidiary of State Street Boston Corporation, a publicly held bank holding
company. State Street's address is 225 Franklin Street, Boston, MA 02110.
Under the Advisory Agreement, Adviser directs the Fund's investments in
accordance with its investment objective, policies and limitations. For these
services, the Fund pays a fee to Adviser at the rates stated in the Prospectus.
The Advisory Agreement will continue from year to year provided that a majority
of the Trustees who are not interested persons of the Fund and either a majority
of all Trustees or a majority of the shareholders of the Fund approve its
continuance. The Agreement may be
- 7 -
<PAGE>
terminated by Adviser or the Fund without penalty upon 60 days' notice and will
terminate automatically upon its assignment.
ADMINISTRATOR. Frank Russell Investment Management Company
("Administrator") serves as the Fund's administrator, pursuant to an
Administration Agreement dated April 12, 1988. A description of the services
provided under the Administration Agreement and the basis for computing fees for
such services is provided in the Fund's Prospectus. The Administration
Agreement will continue from year to year provided that a majority of the
Trustees and a majority of the Trustees who are not interested persons of the
Fund and who have no direct or indirect financial interest in the operation of
the Distribution Plan described below or the Administration Agreement approve
its continuance. The Agreement may be terminated by Administrator or the Fund
without penalty upon 60 days' notice and will terminate automatically upon its
assignment.
Administrator is a wholly owned subsidiary of Frank Russell Company. Frank
Russell Company was founded in 1936 and has provided comprehensive asset
management consulting services since 1969 for institutional pools of investment
assets, principally those of large corporate employee benefit plans. Frank
Russell Company and its affiliates have offices in Tacoma, Seattle, New York
City, Toronto, London, Tokyo, Sydney, Paris Zurich and Auckland, and have
approximately 1,000 officers and employees. Administrator's and Frank Russell
Company's mailing address is 909 A Street, Tacoma, WA 98402.
DISTRIBUTOR. Russell Fund Distributors, Inc. ("Distributor") serves as the
distributor of Fund shares pursuant to a Distribution Agreement dated April 12,
1988. Distributor is a wholly owned subsidiary of Administrator. Distributor's
mailing address is Two International Place, 35th Floor, Boston, MA 02110.
CUSTODIAN AND TRANSFER AGENT. State Street serves as the custodian
("Custodian") and transfer agent ("Transfer Agent") for Investment Company.
State Street also provides the basic portfolio recordkeeping required by
Investment Company for regulatory and financial reporting purposes. For these
services, State Street is paid an annual fee in accordance with the following:
custody services--a fee payable monthly on a pro rata basis, based on the
following percentages of average daily net assets of each Fund: $0 up to
$1.5 billion--0.02%, over $1.5 billion--0.015% (for purposes of calculating the
break point, the assets of all domestic Funds are aggregated); securities
transaction charges from $9.00 to $25.00 per transaction; Eurodollar transaction
fees ranging from $110.00 to $125.00 per transaction; monthly pricing fees of
$375.00 per Investment Fund and from $6.00 to $16.00 per security, depending on
the type of instrument and the pricing service used; transfer agent services of
$2.00 per shareholder transaction and a multiple class fee of $18,000 per year
for each additional class of shares; and yield calculation fees of $350.00 per
non-money market portfolio per month. State Street is reimbursed by the Fund
for supplying certain out-of-pocket expenses including postage, transfer fees,
stamp duties, taxes, wire fees, telexes, and freight.
- 8 -
<PAGE>
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand L.L.P. serves as the
Investment Company's independent accountants. Coopers & Lybrand L.L.P. is
responsible for performing annual audits of the financial statements and
financial highlights in accordance with generally accepted auditing
standards, a review of federal tax returns, and, pursuant to Rule 17f-2 of
the 1940 Act, three security counts. The mailing address of Coopers & Lybrand
L.L.P. is One Post Office Square, Boston MA 02109.
DISTRIBUTION PLAN. Under the 1940 Act, the Securities and Exchange
Commission has adopted Rule 12b-1, which regulates the circumstances under which
the Fund may, directly or indirectly, bear distribution and shareholder
servicing expenses. The Rule provides that the Fund may pay for such expenses
only pursuant to a plan adopted in accordance with the Rule. Accordingly, the
Fund has adopted an active distribution plan (the "Plan"), which is described in
the Fund's Prospectus.
The Plan provides that the Fund may spend annually, directly or indirectly,
up to 0.25% of the value of its average net assets for distribution and
shareholder servicing services. The Plan does not provide for the Fund to be
charged for interest, carrying or any other financing charges on any
distribution expenses carried forward to subsequent years. A quarterly report
of the amounts expended under the Plan, and the purposes for which such
expenditures were incurred, must be made to the Trustees for their review. The
Plan may not be amended without shareholder approval to increase materially the
distribution or shareholder servicing costs that the Fund may pay. The Plan and
material amendments to it must be approved annually by all of the Trustees and
by the Trustees who are neither "interested persons" (as defined in the 1940
Act) of the Funds nor have any direct or indirect financial interest in the
operation of the Plan or any related agreements.
Under the Plan, the Fund may also enter into agreements ("Service
Agreements") with financial institutions, which may include Adviser ("Service
Organizations"), to provide shareholder servicing with respect to Fund shares
held by or for the customers of the Service Organizations. Such arrangements
are more fully described in the Funds' prospectus under "Distribution Services
and Shareholder Servicing."
FEDERAL LAW AFFECTING STATE STREET. The Glass-Steagall Act of 1933
prohibits state chartered banks such as State Street from engaging in the
business of underwriting, selling or distributing certain securities, and
prohibits a member bank of the Federal Reserve System from having certain
affiliations with an entity engaged principally in that business. The
activities of State Street in informing its customers of the Fund, performing
investment and redemption services, providing custodian, transfer, shareholder
servicing, dividend disbursing, agent servicing and investment advisory
services, may raise issues under these provisions. State Street has been
advised by its counsel that its activities in connection with the Fund
contemplated under this arrangement are consistent with its statutory and
regulatory obligations.
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VALUATION OF FUND SHARES. Net asset value per share is calculated on each
"business day" as of the close of the regular trading session on the New York
Stock Exchange (currently 4:00 p.m. Eastern time) for the Fund. A business day
is one on which the New York Stock Exchange is open for business. Currently,
the New York Stock Exchange is open for trading every weekday except New Year's
Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.
Trading may occur in debt securities and in foreign securities at times
when the New York Stock Exchange is closed (including weekends and holidays or
after 4:00 p.m., Eastern time, on a regular business day). The trading of
portfolio securities at such times may significantly increase or decrease the
net asset value of the Fund's share when shareholders do not have the ability to
purchase or redeem shares. Therefore, events affecting the values of foreign
securities traded in foreign markets that occur between the time their prices
are determined and the close of the New York Stock Exchange will not be
reflected in the Fund's calculation of its net asset value unless the Board of
Trustees determines that the particular event would materially affect the Fund's
net asset value, in which case an adjustment would be made.
The Fund values portfolio securities at "fair market value." This
generally means that equity securities and fixed income securities listed and
traded principally on any national securities exchange are valued on the basis
of the last sale price or, lacking any sales, at the closing bid price, on the
primary exchange on which the security is traded. United States equity and
fixed-income securities traded principally over-the-counter and options are
valued on the basis of the last reported bid price. Futures contracts are
valued on the basis of the last reported sell price.
Because many fixed income securities do not trade each day, last sale or
bid prices are frequently not available. Therefore, fixed income securities may
be valued using prices provided by a pricing service when such prices are
determined by Custodian to reflect the fair market value of such securities.
International equity securities traded on a national securities exchange
are valued on the basis of the last sale price. International securities traded
over-the-counter are valued on the basis of best bid or official bid, as
determined by the relevant securities exchange. In the absence of a last sale
or best or official bid price, such securities may be valued on the basis of
prices provided by a pricing service if those prices are believed to reflect the
fair value of such securities.
BROKERAGE PRACTICES. All portfolio transactions are placed on behalf of
the Fund by Adviser. Adviser ordinarily pays commissions when it executes
transactions on a securities exchange. In contrast, there is generally no
stated commission in the purchase or sale of securities traded in the over-the-
counter markets, including most debt securities and money market instruments.
Rather, the price of such securities includes an
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undisclosed "commission" in the form of a mark-up or mark-down. The cost of
securities purchased from underwriters includes an underwriting commission or
concession.
Subject to the arrangements and provisions described below, the selection
of a broker or dealer to execute portfolio transactions is usually made by
Adviser. The Advisory Agreement provides, in substance and subject to specific
directions from officers of Investment Company, that in executing portfolio
transactions and selecting brokers or dealers, the principal objective is to
seek the best overall terms available to the Fund. Ordinarily, securities will
be purchased from primary markets, and Adviser shall consider all factors it
deems relevant in assessing the best overall terms available for any
transaction, 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 other transactions on a continuing basis.
The Advisory Agreement authorizes Adviser to select brokers or dealers to
execute a particular transaction, including principal transactions, 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 Adviser (or its
affiliates). Adviser is authorized to cause the Fund to pay a commission to a
broker or dealer who provides such brokerage and research services for executing
a portfolio transaction which is in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction. The Fund or
Adviser, as appropriate, must determine in good faith that such commission was
reasonable in relation to the value of the brokerage and research services
provided--viewed in terms of that particular transaction or in terms of all the
accounts over which Adviser exercises investment discretion.
The Trustees periodically review Adviser's performance of its
responsibilities in connection with the placement of portfolio transactions on
behalf of the Fund and review the prices paid by the Fund over representative
periods of time to determine if such prices are reasonable in relation to the
benefits provided to the Fund. Certain services received by Adviser
attributable to a particular Fund transaction may benefit one or more other
accounts for which Adviser exercises investment discretion, or a Fund other than
that for which the transaction was effected. Adviser's fees are not reduced by
Adviser's receipt of such brokerage and research services.
TOTAL RETURN QUOTATIONS. The Fund computes average annual total return by using
a standardized method of calculation required by the Securities and Exchange
Commission. Average annual total return is computed by finding the average
annual compounded rates of return on a hypothetical initial investment of $1,000
over the one-, five- and ten-year periods (or life of the funds as appropriate),
that would equate the initial amount invested to the ending redeemable value,
according to the following formula:
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P(1+T)n = ERV
where: P =a hypothetical initial payment of $1,000
T =average annual total return
n =number of years
ERV =ending redeemable value of a $1,000 payment made at
the beginning of the 1-, 5- and 10-year periods at the
end of the year or period
The calculation assumes that all dividends and distributions of the Fund
are reinvested at the price stated in the Prospectus on the dividend dates
during the period, and includes all recurring and nonrecurring fees that are
charged to all shareholder accounts.
INVESTMENTS
The fundamental investment objective of the Fund is set forth in the
Prospectus. In addition to that investment objective, the Fund also has certain
"fundamental" investment restrictions, which may be changed only with the
approval of a majority of the shareholders of the Fund, and certain
nonfundamental investment restrictions and policies, which may be changed by the
Fund without shareholder approval.
INVESTMENT RESTRICTIONS
The Fund is subject to the following investment restrictions. Restrictions
1 through 11 are fundamental and restrictions 12 through 18 are nonfundamental.
Unless otherwise noted, these restrictions apply at the time an investment is
made. The Fund will not:
(1) Invest 25% or more of the value of its total assets in securities of
companies primarily engaged in any one industry (other than the US Government,
its agencies and instrumentalities). Concentration may occur as a result of
changes in the market value of portfolio securities, but may not result from
investment. Notwithstanding the foregoing general restrictions, the Fund will
concentrate in particular industries to the extent the underlying indices
concentrate in those industries.
(2) Borrow money (including reverse repurchase agreements), except as a
temporary measure for extraordinary or emergency purposes or to facilitate
redemptions (not for leveraging or investment), provided that borrowings do not
exceed an amount equal to 33-1/3 of the current value of the Fund's assets taken
at market value, less liabilities other than borrowings. If at any time the
Fund's borrowings exceed this limitation due to a decline in net assets, such
borrowings will within three days be reduced to the extent necessary to comply
with this limitation. The Fund will not purchase investments once borrowed
funds (including reverse repurchase agreements) exceed 5% of its total assets.
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(3) Pledge, mortgage, or hypothecate its assets. However, the Fund may
pledge securities having a market value at the time of the pledge not exceeding
33-1/3% of the value of the Fund's total assets to secure borrowings permitted
by paragraph (2) above.
(4) With respect to 75% of its total assets, invest in securities of any
one issuer (other than securities issued by the US Government, its agencies, and
instrumentalities), if immediately after and as a result of such investment the
current market value of the Fund's holdings in the securities of such issuer
exceeds 5% of the value of the Fund's assets.
(5) Make loans to any person or firm; provided, however, that the making
of a loan shall not include (i) the acquisition for investment of bonds,
debentures, notes or other evidences of indebtedness of any corporation or
government which are publicly distributed or of a type customarily purchased by
institutional investors, or (ii) the entry into "repurchase agreements" or
"reverse repurchase agreements." The Fund may lend its portfolio securities to
broker-dealers or other institutional investors if the aggregate value of all
securities loaned does not exceed 33-1/3% of the value of the Fund's total
assets.
(6) Purchase or sell commodities or commodity futures contracts except
that the Fund may enter into futures contracts and options thereon to the extent
provided in its Prospectus.
(7) Purchase or sell real estate or real estate mortgage loans; provided,
however, that the Fund may invest in securities secured by real estate or
interests therein or issued by companies which invest in real estate or
interests therein.
(8) Engage in the business of underwriting securities issued by others,
except that the Fund will not be deemed to be an underwriter or to be
underwriting on account of the purchase of securities subject to legal or
contractual restrictions on disposition.
(9) Issue senior securities, except as permitted by its investment
objective, policies and restrictions, and except as permitted by the 1940 Act.
(10) Purchase or sell puts, calls or invest in straddles, spreads or any
combination thereof, if as a result of such purchase the value of the Fund's
aggregate investment in such securities would exceed 5% of the Fund's total
assets.
(11) Make short sales of securities or purchase any securities on margin,
except for such short-term credits as are necessary for the clearance of
transactions. The Fund may make initial margin deposits and variation margin
payments in connection with transactions in futures contracts and related
options.
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(12) Purchase from or sell portfolio securities to its officers or
directors or other "interested persons" (as defined in the 1940 Act) of the
Fund, including its investment advisers and affiliates, except as permitted by
the 1940 Act and exemptive rules or orders thereunder.
(13) Invest in securities issued by other investment companies except: (i)
in connection with a merger, consolidation, acquisition of assets, or other
reorganization approved by the Fund's shareholders; or (ii) as otherwise
permitted by the 1940 Act.
(14) Invest in securities of any issuer which, together with its
predecessor, has been in operation for less than three years if, as a result,
more than 5% of the Fund's total assets would be invested in such securities,
except that the Fund may invest in securities of a particular issuer to the
extent their respective underlying indices invest in that issuer.
(15) Invest more than 10% of its net assets in the aggregate in illiquid
securities or securities that are not readily marketable, including repurchase
agreements and time deposits of more than seven days' duration.
(16) Purchase interests in oil, gas or other mineral exploration or
development programs.
(17) Make investments for the purpose of gaining control of an issuer's
management.
(18) Purchase the securities of any issuer if the Investment Company's
officers, Directors, Adviser or any of their affiliates beneficially own more
than one-half of 1% of the securities of such issuer or together own
beneficially more than 5% of the securities of such issuer.
INVESTMENT POLICIES
Except as otherwise indicated, the Fund may invest in the following
instruments:
US GOVERNMENT OBLIGATIONS. The types of US Government obligations in which
the Fund may at times invest include: (1) A variety of US Treasury obligations,
which differ only in their interest rates, maturities and times of issuance; and
(2) obligations issued or guaranteed by US Government agencies and
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the US Treasury, (b) the right of the issuer to borrow an
amount limited to a specific line of credit from the US Treasury,
(c) discretionary authority of the US Government agency or instrumentality or
(d) the credit of the instrumentality (examples of agencies and
instrumentalities are: Federal Land Banks, Federal Housing Administration,
Farmers Home Administration, Export--Import Bank of the United States, Central
Bank for Cooperatives, Federal Intermediate Credit Banks, Federal Home Loan
Banks, General Services Administration, Maritime Administration, Tennessee
Development Bank, Asian-American Development
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Bank, Student Loan Marketing Association, International Bank for Reconstruction
and Development and Federal National Mortgage Association). No assurance can be
given that in the future the US Government will provide financial support to
such US Government agencies or instrumentalities described in (2)(b), (2)(c) and
(2)(d), other than as set forth above, since it is not obligated to do so by
law. The Fund may purchase US Government obligations on a forward commitment
basis.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
financial institutions. Under repurchase agreements, these parties sell
securities to the Fund and agree to repurchase the securities at the Fund's cost
plus interest within a specified time (normally one day). The securities
purchased by the Fund have a total value in excess of the purchase price paid by
the Fund and are held by Custodian until repurchased. Repurchase agreements
assist the Fund in being invested fully while retaining "overnight" flexibility
in pursuit of investments of a longer-term nature. The Fund will limit
repurchase transactions to those member banks of the Federal Reserve System and
broker-dealers whose creditworthiness is continually monitored and found
satisfactory by Adviser.
FORWARD COMMITMENTS. The Fund may contract to purchase securities for a
fixed price at a future date beyond customary settlement time consistent with
the Fund's ability to manage its investment portfolio, maintain a stable net
asset value and meet redemption requests. The Fund may dispose of a commitment
prior to settlement if it is appropriate to do so and realize short-term profits
or losses upon such sale. When effecting such transactions, cash or liquid high
quality debt obligations held by the Fund of a dollar amount sufficient to make
payment for the portfolio securities to be purchased will be segregated on the
Fund's records at the trade date and maintained until the transaction is
settled. Forward commitments involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date, or if the other
party fails to complete the transaction.
WHEN-ISSUED TRANSACTIONS. New issues of securities are often offered on a
when-issued basis. This means that delivery and payment for the securities
normally will take place several days after the date the buyer commits to
purchase them. The payment obligation and the interest rate that will be
received on securities purchased on a when-issued basis are each fixed at the
time the buyer enters into the commitment.
The Fund will make commitments to purchase when-issued securities only with
the intention of actually acquiring the securities, but the Fund may sell these
securities or dispose of the commitment before the settlement date if it is
deemed advisable as a matter of investment strategy. Cash or marketable high
quality debt securities equal to the amount of the above commitments will be
segregated on the Fund's records. For the purpose of determining the adequacy
of these securities the segregated securities will be valued at market. If the
market value of such securities declines, additional cash or securities will be
segregated on the Fund's records on a daily basis so that the market
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value of the account will equal the amount of such commitments by the Fund. The
Fund will invest no more than 25% of its net assets in when-issued securities.
Securities purchased on a when-issued basis and the securities held by the
Fund are subject to changes in market value based upon the public's perception
of changes in the level of interest rates. Generally, the value of such
securities will fluctuate inversely to changes in interest rates -- i.e., they
will appreciate in value when interest rates decline and decrease in value when
interest rates rise. Therefore, if in order to achieve higher interest income
the Fund remains substantially fully invested at the same time that it has
purchased securities on a "when-issued" basis, there will be a greater
possibility of fluctuation in the Fund's net asset value.
When payment for when-issued securities is due, the Fund will meet its
obligations from then-available cash flow, the sale of segregated securities,
the sale of other securities or, and although it would not normally expect to do
so, from the sale of the when-issued securities themselves (which may have a
market value greater or less than the Fund's payment obligation). The sale of
securities to meet such obligations carries with it a greater potential for the
realization of capital gains, which are subject to federal income taxes.
SECTION 4(2) COMMERCIAL PAPER. The Fund may invest in commercial paper
issued in reliance on the so-called "private placement" exemption from
registration afforded by Section 4(2) of the Securities Act of 1933
("Section 4(2) paper"). Section 4(2) paper is restricted as to disposition
under the federal securities laws, and generally is sold to investors who agree
that they are purchasing the paper for an investment and not with a view to
public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) paper is normally resold to other investors through
or with the assistance of the issuer or investment dealers who make a market in
Section 4(2) paper, thus providing liquidity. Pursuant to guidelines
established by the Board of Trustees, Adviser may determine that Section 4(2)
paper is liquid for the purposes of complying with the Funds' investment
restriction relating to investments in illiquid securities.
WARRANTS. The Fund may invest in warrants which entitle the holder to buy
equity securities at a specific price for a specific period of time. Warrants
may be considered more speculative than certain other types of investments in
that they do not entitle a holder to dividends or voting rights with respect to
the securities which may be purchased nor do they represent any rights in the
assets of the issuing company. Also, the value of the warrant does not
necessarily change with the value of the underlying securities and a warrant
ceases to have value if it is not exercised prior to the expiration date. The
Fund will invest no more than 5% of the value of its net assets in warrants, nor
more than 2% in warrants which are not listed on the New York or American Stock
Exchange.
AMERICAN DEPOSITORY RECEIPTS (ADRS). The Fund may invest in ADRs under
certain circumstances as an alternative to directly investing in foreign
securities.
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Generally, ADRs, in registered form, are designed for use in the US securities
markets. ADRs are receipts typically issued by a US bank or trust company
evidencing ownership of the underlying securities. ADRs represent the right to
receive securities of foreign issuers deposited in a domestic bank or a
correspondent bank. ADRs do not eliminate the risk inherent in investing in the
securities of foreign issuers. However, by investing in ADRs rather than
directly in a foreign issuer's stock, the Fund can avoid currency risks during
the settlement period for either purchases or sales. In general, there is a
large liquid market in the US for many ADRs. The information available for ADRs
is subject to the accounting, auditing and financial reporting standards of the
domestic market or exchange on which they are traded, which standards are more
uniform and more exacting than those to which many foreign issuers are subject.
HEDGING STRATEGIES AND RELATED INVESTMENT TECHNIQUES
The Fund may seek to hedge its portfolio against movements in the equity
markets, interest rates and currency exchange rates through the use of options,
futures transactions, options on futures and forward foreign currency exchange
transactions. The Fund has authority to write (sell) covered call and put
options on its portfolio securities, purchase put and call options on securities
and engage in transactions in stock index options, stock index futures and
financial futures and related options on such futures. The Fund may also deal
in certain forward contracts, including forward foreign exchange transactions,
foreign currency options and futures, and related options on such futures. The
Fund may enter into such options and futures transactions either on exchanges or
in the over-the-counter ("OTC") markets. Although certain risks are involved in
options and futures transactions (as discussed in the Prospectus and below),
Adviser believes that, because the Fund will only engage in these transactions
for hedging purposes, the options and futures portfolio strategies of the Fund
will not subject the Fund to the risks frequently associated with the
speculative use of options and futures transactions. Although the use of
hedging strategies by the Fund is intended to reduce the volatility of the net
asset value of the Fund's shares, the Fund's net asset value will nevertheless
fluctuate. There can be no assurance that the Fund's hedging transactions will
be effective.
HEDGING FOREIGN CURRENCY RISK. Generally, the foreign exchange
transactions of the Fund will be conducted on a spot (cash) basis at the spot
rate then prevailing for purchasing or selling currency in the foreign exchange
market. However, the Fund has authority to deal in forward foreign currency
exchange contracts (including those involving the US dollar) as a hedge against
possible variations in the exchange rate between various currencies. This is
accomplished through individually negotiated contractual agreements to purchase
or to sell a specified currency at a specified future date and price set at the
time of the contract. The Fund's dealings in forward foreign currency exchange
contracts may be with respect to a specific purchase or sale of a security, or
with respect to its portfolio positions generally.
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The Fund may not hedge its positions with respect to the currency of a
particular country to an extent greater than the aggregate market value (at the
time of making such sale) of the securities held in its portfolio denominated or
quoted in that particular foreign currency. The Fund will not attempt to hedge
all of its portfolio positions and will enter into such transactions only to the
extent, if any, deemed appropriate by Adviser. The Fund will not enter into a
position hedging commitment if, as a result thereof, the Fund would have more
than 10% of the value of its assets committed to such contracts. The Fund will
not enter into a forward contract with a term of more than one year.
In addition to the forward exchange contracts, the Fund may also purchase
or sell listed or OTC foreign currency options and foreign currency futures and
related options as a short or long hedge against possible variations in foreign
currency exchange rates. The cost to the Fund of engaging in foreign currency
transactions varies with such factors as the currencies involved, the length of
the contract period and the market conditions then prevailing. Since
transactions in foreign currency exchange usually are conducted on a principal
basis, no fees or commissions are involved. Transactions involving forward
exchange contracts and futures contracts and options thereon are subject to
certain risks. A detailed discussion of such risks appears under the caption
"Risk Factors in Options, Futures, Forward and Currency Transactions."
Certain differences exist among these hedging instruments. For example,
foreign currency options provide the holder thereof the rights to buy or sell a
currency at a fixed price on a future date. A futures contract on a foreign
currency is an agreement between two parties to buy and sell a specified amount
of a currency for a set price on a future date. Futures contracts and options
on futures contracts are traded on boards of trade of futures exchanges. The
Fund will not speculate in foreign security or currency options or futures or
related options. The Fund will not hedge a currency substantially in excess of:
(1) the market value of securities denominated in such currency that the Fund
has committed to purchase or anticipates purchasing; or (2) in the case of
securities that have been sold by the Fund but not yet delivered, the proceeds
thereof in their denominated currency. The Fund will not incur potential net
liabilities of more than 25% of its total assets from foreign security or
currency options, futures or related options.
WRITING COVERED CALL OPTIONS. The Fund is authorized to write (sell)
covered call options on the securities in which it may invest and to enter into
closing purchase transactions with respect to such options. Writing a call
option obligates the Fund to sell or deliver the option's underlying security,
in return for the strike price, upon exercise of the option. By writing a call
option, the Fund receives an option premium from the purchaser of the call
option. Writing covered call options is generally a profitable strategy if
prices remain the same or fall. Through receipt of the option premium, the Fund
would seek to mitigate the effects of a price decline. By writing covered call
options, however, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price.
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In addition, the Fund's ability to sell the underlying security will be limited
while the option is in effect unless the Fund effects a closing purchase
transaction.
WRITING COVERED PUT OPTIONS. The Fund is authorized to write (sell)
covered put options on its portfolio securities and to enter into closing
transactions with respect to such options.
When the Fund writes a put option, it takes the opposite side of the
transaction from the option's purchaser. In return for receipt of the premium,
the Fund assumes the obligation to pay the strike price for the option's
underlying instrument if the other party to the option chooses to exercise it.
The Fund may seek to terminate its position in a put option it writes before
exercise by closing out the option in the secondary market at its current price.
If the secondary market is not liquid for an option the Fund has written,
however, the Fund must continue to be prepared to pay the strike price while the
option is outstanding, regardless of price changes, and must continue to set
aside assets to cover its position.
The Fund may write put options as an alternative to purchasing actual
securities. If security prices rise, the Fund would expect to profit from a
written put option, although its gain would be limited to the amount of the
premium it received. If security prices remain the same over time, it is likely
that the Fund will also profit, because it should be able to close out the
option at a lower price. If security prices fall, the Fund would expect to
suffer a loss. This loss should be less than the loss the Fund would have
experienced from purchasing the underlying instrument directly, however, because
the premium received for writing the option should mitigate the effects of the
decline.
PURCHASING PUT OPTIONS. The Fund is authorized to purchase put options to
hedge against a decline in the market value of its portfolio securities. By
buying a put option a Fund has the right (but not the obligation) to sell the
underlying security at the exercise price, thus limiting the Fund's risk of loss
through a decline in the market value of the security until the put option
expires. The amount of any appreciation in the value of the underlying security
will be partially offset by the amount of the premium paid by the Fund for the
put option and any related transaction costs. Prior to its expiration, a put
option may be sold in a closing sale transaction and profit or loss from the
sale will depend on whether the amount received is more or less than the premium
paid for the put option plus the related transaction costs. A closing sale
transaction cancels out the Fund's position as the purchaser of an option by
means of an offsetting sale of an identical option prior to the expiration of
the option it has purchased. The Fund will not purchase put options on
securities (including stock index options discussed below) if as a result of
such purchase, the aggregate cost of all outstanding options on securities held
by the Fund would exceed 5% of the market value of the Fund's total assets.
PURCHASING CALL OPTIONS. The Fund is also authorized to purchase call
options. The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the
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underlying instrument at the option's strike price (call options on futures
contracts are settled by purchasing the underlying futures contract). The Fund
will purchase call options only in connection with "closing purchase
transactions."
STOCK INDEX OPTIONS AND FINANCIAL FUTURES. The Fund is authorized to
engage in transactions in stock index options and financial futures, and related
options. The Fund may purchase or write put and call options on stock indices
to hedge against the risks of market-wide stock price movements in the
securities in which the Fund invests. Options on indices are similar to options
on securities except that on exercise or assignment, the parties to the contract
pay or receive an amount of cash equal to the difference between the closing
value of the index and the exercise price of the option times a specified
multiple. The Fund may invest in stock index options based on a broad market
index, such as the S&P 500 Index, or on a narrow index representing an industry
or market segment, such as the AMEX Oil & Gas Index. The Fund's investments in
foreign stock index futures contracts and foreign interest rate futures
contracts, and related options, are limited to only those contracts and related
options that have been approved by the Commodity Futures Trading Commission
("CFTC") for investment by United States investors. Additionally, with respect
to the Fund's investments in foreign options, unless such options are
specifically authorized for investment by order of the CFTC, the Funds will not
make such investments.
The Fund may also purchase and sell stock index futures contracts and other
financial futures contracts ("futures contracts") as a hedge against adverse
changes in the market value of its portfolio securities as described below. A
futures contract is an agreement between two parties which obligates the
purchaser of the futures contract to buy and the seller of a futures contract to
sell a security for a set price on a future date. Unlike most other futures
contracts, a stock index futures contract does not require actual delivery of
securities, but results in cash settlement based upon the difference in value of
the index between the time the contract was entered into and the time of its
settlement. The Fund may effect transactions in stock index futures contracts
in connection with equity securities in which it invests and in financial
futures contracts in connection with debt securities in which it invests, if
any. Transactions by the Fund in stock index futures and financial futures are
subject to limitations as described below under "Restrictions on the Use of
Futures Transactions."
The Fund may sell futures contracts in anticipation of or during a market
decline to attempt to offset the decrease in market value of the Fund's
securities portfolio that might otherwise result. When the Fund is not fully
invested in the securities markets and anticipates a significant market advance,
the Fund may purchase futures in order to gain rapid market exposure that may
partially or entirely offset increases in the cost of securities that the Fund
intends to purchase. As such purchases are made, an equivalent amount of
futures contracts will be terminated by offsetting sales. It is anticipated
that, in a substantial majority of these transactions, the Fund will purchase
such securities upon termination of the long futures position, whether the long
position results from the purchase of a futures contract or the purchase of a
call option, but under unusual
- 20 -
<PAGE>
circumstances (e.g., the Fund experiences a significant amount of redemptions),
a long futures position may be terminated without the corresponding purchase of
securities.
The Fund also is authorized to purchase and write call and put options on
futures contracts and stock indices in connection with its hedging activities.
Generally, these strategies would be utilized under the same market and market
sector conditions (i.e., conditions relating to specific types of investments)
during which the Fund enters into futures transactions. The Fund may purchase
put options or write call options on futures contracts and stock indices rather
than selling the underlying futures contract in anticipation of a decrease in
the market value of securities. Similarly, the Fund can purchase call options,
or write put options on futures contracts and stock indices, as a substitute for
the purchase of such futures to hedge against the increased cost resulting from
an increase in the market value of securities which the Fund intends to
purchase.
The Fund is also authorized to engage in options and futures transactions
on US and foreign exchanges and in options in the OTC markets ("OTC options").
In general, exchange traded contracts are third-party contracts (i.e.,
performance of the parties' obligations is guaranteed by an exchange or clearing
corporation) with standardized strike prices and expiration dates. OTC options
transactions are two-party contracts with price and terms negotiated by the
buyer and seller. See "Restrictions on OTC Options" below for information as to
restrictions on the use of OTC options.
The Fund is authorized to purchase or sell listed or OTC foreign security
or currency options, foreign security or currency futures and related options as
a short or long hedge against possible variations in foreign exchange rates and
market movements. Such transactions could be effected with respect to hedges on
non-US dollar denominated securities owned by the Fund, sold by the Fund but not
yet delivered, or committed or anticipated to be purchased by the Fund. As an
illustration, the Fund may use such techniques to hedge the stated value in US
dollars of an investment in a yen-denominated security. In such circumstances,
for example, the Fund can purchase a foreign currency put option enabling it to
sell a specified amount of yen for US dollars at a specified price by a future
date. To the extent the hedge is successful, a loss in the value of the yen
relative to the US dollar will tend to be offset by an increase in the value of
the put option.
RESTRICTIONS ON THE USE OF FUTURES TRANSACTIONS. The purchase or sale of a
futures contract differs from the purchase or sale of a security in that no
price or premium is paid or received. Instead, an amount of cash or securities
acceptable to the broker and the relevant contract market, which varies, but is
generally about 5% of the contract amount, must be deposited with the broker.
This amount is known as "initial margin" and represents a "good faith" deposit
assuring the performance of both the purchaser and seller under the futures
contract. Subsequent payments to and from the broker, called "variation
margin," are required to be made on a daily basis as the price of the futures
contract fluctuates making the long and short positions in the futures contracts
more or less valuable, a process known as "marking to market." At any time
prior to the
- 21 -
<PAGE>
settlement date of the future contract, the position may be closed out by taking
an opposite position which will operate to terminate the position in the futures
contract. A final determination of variation margin is then made, additional
cash is required to be paid to or released by the broker and the purchaser
realizes a loss or gain. In addition, a nominal commission is paid on each
completed sale transaction.
Regulations of the CFTC applicable to the Fund require that all of the
Fund's futures and options on futures transactions constitute bona fide hedging
transactions and that the Fund not enter into such transactions if, immediately
thereafter, the sum of the amount of initial margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets.
RESTRICTIONS ON OTC OPTIONS. The Fund will engage in OTC options,
including OTC stock index options, OTC foreign security and currency options and
options on foreign security and currency futures, only with member banks of the
Federal Reserve System and primary dealers in US Government securities or with
affiliates of such banks or dealers which have capital of at least $50 million
or whose obligations are guaranteed by an entity having capital of at least
$50 million. The Fund will acquire only those OTC options for which Adviser
believes the Fund can receive on each business day at least two independent bids
or offers (one of which will be from an entity other than a party to the
option).
The Staff of the SEC has taken the position that purchased OTC options and
the assets used as cover for written OTC options are illiquid securities.
Therefore, the Fund has adopted an operating policy pursuant to which it will
not purchase or sell OTC options (including OTC options on futures contracts)
if, as a result of such transaction, the sum of: (1) the market value of
outstanding OTC options held by the Fund; (2) the market value of the underlying
securities covered by outstanding OTC call options sold by the Fund; (3) margin
deposits on the Fund's existing OTC options on futures contracts; and (4) the
market value of all other assets of the Fund that are illiquid or are not
otherwise readily marketable, would exceed 15% of the net assets of the Fund,
taken at market value. However, if an OTC option is sold by the Fund to a
primary US Government securities dealer recognized by the Federal Reserve Bank
of New York and the Fund has the unconditional contractual right to repurchase
such OTC option from the dealer at a predetermined price, then the Fund will
treat as illiquid such amount of the underlying securities as is equal to the
repurchase price less the amount by which the option is "in-the-money" (current
market value of the underlying security minus the option's strike price). The
repurchase price with primary dealers is typically a formula price which is
generally based on a multiple of the premium received for the option plus the
amount by which the option is "in-the-money."
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS. The Fund will not use
leverage in its options and futures strategies. Such investments will be made
for hedging purposes only. The Fund will hold securities or other options or
futures positions whose values are expected to offset its obligations under the
hedge strategies. The Fund will not
- 22 -
<PAGE>
enter into an option or futures position that exposes the Fund to an obligation
to another party unless it owns either: (1) an offsetting position in
securities or other options or futures contracts; or (2) cash, receivables and
short-term debt securities with a value sufficient to cover its potential
obligations. The Fund will comply with guidelines established by the SEC with
respect to coverage of options and futures strategies by mutual funds, and if
the guidelines so require will set aside cash and high grade liquid debt
securities in a segregated account with its custodian bank in the amount
prescribed. The Fund's custodian shall maintain the value of such segregated
account equal to the prescribed amount by adding or removing additional cash or
liquid securities to account for fluctuations in the value of securities held in
such account. Securities held in a segregated account cannot be sold while the
futures or option strategy is outstanding, unless they are replaced with similar
securities. As a result, there is a possibility that segregation of a large
percentage of the Fund's assets could impede portfolio management or the Fund's
ability to meeting redemption requests or other current obligations.
RISK FACTORS IN OPTIONS, FUTURES, FORWARD AND CURRENCY TRANSACTIONS.
Utilization of options and futures transactions to hedge the Fund's portfolios
involves the risk of imperfect correlation in movements in the price of options
and futures and movements in the price of securities or currencies which are the
subject of the hedge. If the price of the options or futures moves more or less
than the price of hedged securities or currencies, the Fund will experience a
gain or loss which will not be completely offset by movements in the price of
the subject of the hedge. The successful use of options and futures also
depends on Adviser's ability to correctly predict price movements in the market
involved in a particular options or futures transaction. To compensate for
imperfect correlations, the Fund may purchase or sell stock index options or
futures contracts in a greater dollar amount than the hedged securities if the
volatility of the hedged securities is historically greater than the volatility
of the stock index options or futures contracts. Conversely, the Fund may
purchase or sell fewer stock index options or futures contracts, if the
historical price volatility of the hedged securities is less than that of the
stock index options or futures contracts. The risk of imperfect correlation
generally tends to diminish as the maturity date of the stock index option or
futures contract approaches. Options are also subject to the risks of an
illiquid secondary market, particularly in strategies involving writing options,
which the Fund cannot terminate by exercise. In general, options whose strike
prices are close to their underlying instruments' current value will have the
highest trading volume, while options whose strike prices are further away may
be less liquid.
The Fund intends to enter into options and futures transactions, on an
exchange or in the OTC market, only if there appears to be a liquid secondary
market for such options or futures or, in the case of OTC transactions, the
Adviser believes the Fund can receive on each business day at least two
independent bids or offers. However, there can be no assurance that a liquid
secondary market will exist at any specific time. Thus, it may not be possible
to close an options or futures position. The inability to close options and
futures positions also could have an adverse impact on a Fund's ability to
effectively
- 23 -
<PAGE>
hedge its portfolio. There is also the risk of loss by the Fund of margin
deposits or collateral in the event of bankruptcy of a broker with whom the Fund
has an open position in an option, a futures contract or related option.
The exchanges on which options on portfolio securities and currency options
are traded have generally established limitations governing the maximum number
of call or put options on the same underlying security or currency (whether or
not covered) which may be written by a single investor, whether acting alone or
in concert with others (regardless of whether such options are written on the
same or different exchanges or are held or written in one or more accounts or
through one or more brokers). "Trading limits" are imposed on the maximum
number of contracts which any person may trade on a particular trading day.
To the extent permitted under the 1940 Act and exemptive rules and orders
thereunder, the Fund may seek to achieve its investment objective by investing
solely in the shares of another investment company that has substantially
similar investment objectives and policies.
TAXES
The Fund intends to qualify for treatment as a regulated investment company
("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended
("the Code"). As a RIC, the Fund will not be liable for federal income taxes on
taxable net investment income and capital gain net income (capital gains in
excess of capital losses) that it distributes to its shareholders, provided that
the Fund distributes annually to its shareholders at least 90% of its net
investment income and net short-term capital gain for the taxable year
("Distribution Requirement"). For the Fund to qualify as a RIC it must abide by
all of the following requirements: (1) at least 90% of the Fund's gross income
each taxable year must be derived from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock
or securities or foreign currencies, or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies ("Income Requirement");
(2) less than 30% of the Fund's gross income each taxable year must be derived
from the sale or other disposition of securities and certain options, futures
contracts, forward contracts and foreign currencies held for less than three
months ("Short-Short Limitation"); (3) at the close of each quarter of the
Fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, US Government securities, securities of
other RICs, and other securities, with such other securities limited, in respect
of any one issuer, to an amount that does not exceed 5% of the total assets of
the Fund and that does not represent more than 10% of the outstanding voting
securities of such issuer; and (4) at the close of each quarter of the Fund's
taxable year, not more than 25% of the value of its assets may be invested in
securities (other than US Government securities or the securities of other RICs)
of any one issuer.
- 24 -
<PAGE>
The Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year an amount at least equal to
the sum of: (1) 98% of its ordinary income for that year; (2) 98% of its
capital gain net income for the one-year period ending on October 31 of that
year; and (3) certain undistributed amounts from the preceding calendar year.
For this and other purposes, dividends declared in October, November or December
of any calendar year and made payable to shareholders of record in such month
will be deemed to have been received on December 31 of such year if the
dividends are paid by the Fund subsequent to December 31 but prior to February 1
of the following year.
If a shareholder receives a distribution taxable as long-term capital gain
with respect to shares of the Fund and redeems or exchanges the shares without
having held the shares for more than one year, then any loss on the redemption
or exchange will be treated as long-term capital loss to the extent of the
capital gain distribution.
ISSUES RELATED TO HEDGING AND OPTION INVESTMENTS. The Fund's ability to
make certain investments may be limited by provisions of the Code that require
inclusion of certain unrealized gains or losses in the Fund's income for
purposes of the Income Requirement, the Short-Short Limitation and the
Distribution Requirement, and by provisions of the Code that characterize
certain income or loss as ordinary income or loss rather than capital gain or
loss. Such recognition, characterization and timing rules will affect
investments in certain futures contracts, options, foreign currency contracts
and debt securities denominated in foreign currencies.
FOREIGN INCOME TAXES. Investment income received by the Fund from sources
within foreign countries may be subject to foreign income taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries which would entitle the Funds to a reduced rate of such taxes or
exemption from taxes on such income. It is impossible to determine the
effective rate of foreign tax for the Fund in advance since the amount of the
assets to be invested within various countries is not known.
If the Fund invests in an entity that is classified as a "passive foreign
investment company" ("PFIC") for federal income tax purposes, the application of
certain provisions of the Code applying to PFICs could result in the imposition
of certain federal income taxes on the Fund. It is anticipated that any taxes
on the Fund with respect to investments in PFICs would be insignificant. Under
US Treasury regulations issued in 1992 for PFICs, the Fund can elect to mark-to-
market its PFIC holdings in lieu of paying taxes on gains or distributions
therefrom. It is anticipated that any taxes on the Fund with respect to
investments in PFICs would be insignificant.
Foreign shareholders should consult with their tax advisers as to if and
how the federal income tax and its withholding requirements applies to them.
- 25 -
<PAGE>
STATE AND LOCAL TAXES. Depending upon the extent of the Fund's activities
in states and localities in which its offices are maintained, its agents or
independent contractors are located or it is otherwise deemed to be conducting
business, the Fund may be subject to the tax laws of such states or localities.
The foregoing discussion is only a summary of certain federal income tax
issues generally affecting the Funds and their shareholders. Circumstances
among investors may vary and each investor is encouraged to discuss investment
in the Funds with the investor's tax adviser.
FINANCIAL STATEMENTS
Unaudited financial statements for the Fund, including notes to the
financial statements and financial highlights, will be available within four to
six months from the later of the date of this Statement of Additional
Information or the date on which the Fund first accepts a subscription from an
unaffiliated shareholder. Audited financial statements for the Fund will be
available within 60 days following the end of the Fund's then current fiscal
year. When available, copies of the financial statements can be obtained
without charge by calling Distributor at (617) 654-6089.
- 26 -
<PAGE>
Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
THE SEVEN SEAS SERIES FUND
Two International Place, 35th Floor
Boston, Massachusetts 02110
(617) 654-6089
STATEMENT OF ADDITIONAL INFORMATION
US TREASURY OBLIGATIONS FUND
DECEMBER 29, 1995
The Seven Seas Series Fund ("Investment Company") is a registered open-end
investment company organized as a Massachusetts business trust offering shares
of beneficial interest in separate investment portfolios. In addition, each
series of the Investment Company is diversified as defined in the Investment
Company Act of 1940, as amended (the "1940 Act").
This Statement of Additional Information supplements or describes in
greater detail the Investment Company and The Seven Seas US Treasury Obligations
Fund (the "Treasury Obligations Fund" or the "Fund") as contained in the Fund's
Prospectus dated December 29, 1995. This Statement is not a Prospectus and
should be read in conjunction with the Fund's Prospectus, which may be obtained
by telephoning or writing Investment Company at the number or address shown
above.
<PAGE>
TABLE OF CONTENTS
Page
----
STRUCTURE AND GOVERNANCE . . . . . . . . . . . . . . . . . . . . . . . 3
Organization and Business History . . . . . . . . . . . . . . . . 3
Shareholder Meetings. . . . . . . . . . . . . . . . . . . . . . . 4
Controlling Shareholders. . . . . . . . . . . . . . . . . . . . . 4
Principal Shareholders. . . . . . . . . . . . . . . . . . . . . . 4
Trustees and Officers . . . . . . . . . . . . . . . . . . . . . . 5
OPERATION OF INVESTMENT COMPANY. . . . . . . . . . . . . . . . . . . . 6
Service Providers . . . . . . . . . . . . . . . . . . . . . . . . 6
Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Administrator . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Custodian and Transfer Agent. . . . . . . . . . . . . . . . . . . 7
Distribution Plan . . . . . . . . . . . . . . . . . . . . . . . . 8
Federal Law Affecting State Street. . . . . . . . . . . . . . . . 8
Valuation of Fund Shares. . . . . . . . . . . . . . . . . . . . . 8
Brokerage Practices . . . . . . . . . . . . . . . . . . . . . . . 9
Yield and Total Return Quotations . . . . . . . . . . . . . . . . 10
INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . 11
Investment Policies . . . . . . . . . . . . . . . . . . . . . . . 12
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 14
-2-
<PAGE>
STRUCTURE AND GOVERNANCE
ORGANIZATION AND BUSINESS HISTORY. Investment Company was organized as a
Massachusetts business trust on October 3, 1987 and operates under a First
Amended and Restated Master Trust Agreement, dated October 13, 1993, as amended.
Investment Company is authorized to issue shares of beneficial interest, par
value $.001 per share, which may be divided into one or more series, each of
which evidences pro rata ownership interest in a different investment portfolio,
or "Fund." The Treasury Obligations Fund is one such investment portfolio. The
Trustees may create additional Funds at any time without shareholder approval.
Further, the Investment Company is authorized to divide shares of any
series into two or more classes of shares. The shares of each Fund may have
such rights and preferences as the Trustees may establish from time to time,
including the right of redemption (including the price, manner and terms of
redemption), special and relative rights as to dividends and distributions,
liquidation rights, sinking or purchase fund provisions and conditions under
which any Fund may have separate voting rights or no voting rights. Each class
of shares of a Fund is entitled to the same rights and privileges as all other
classes of that Fund, except that each class bears the expenses associated with
the distribution and shareholder servicing arrangements of that class, as well
as other expenses attributable to the class and unrelated to the management of
the Fund's portfolio securities.
As of the date of this Statement of Additional Information, Investment
Company is comprised of the following investment portfolios, each of which
commenced operations on the date set forth opposite the portfolio's name:
--------------------------------------------------------------------------
The Seven Seas Series Money Market Fund May 2, 1988
--------------------------------------------------------------------------
The Seven Seas Series US Government Money Market Fund March 1, 1991
--------------------------------------------------------------------------
The Seven Seas Series US Treasury Money Market Fund December 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series US Treasury Obligations Fund *
--------------------------------------------------------------------------
The Seven Seas Series Prime Money Market Fund February 22, 1994
--------------------------------------------------------------------------
The Seven Seas Series Yield Plus Fund November 9, 1992
--------------------------------------------------------------------------
The Seven Seas Series Tax Free Money Market Fund December 1, 1994
--------------------------------------------------------------------------
The Seven Seas Series Intermediate Fund September 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series Bond Market Fund *
--------------------------------------------------------------------------
The Seven Seas Series Growth and Income Fund September 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series S&P 500 Index Fund December 30, 1992
--------------------------------------------------------------------------
The Seven Seas Series Small Cap Fund July 1, 1992
--------------------------------------------------------------------------
The Seven Seas Series Matrix Equity Fund May 4, 1992
--------------------------------------------------------------------------
The Seven Seas Series Active International Fund March 7, 1995
--------------------------------------------------------------------------
The Seven Seas Series International Pacific Index Fund *
--------------------------------------------------------------------------
The Seven Seas Series Emerging Markets Fund March 1, 1994
--------------------------------------------------------------------------
The Seven Seas Series Real Estate Equity Fund *
--------------------------------------------------------------------------
_________________
*As of the date of this Statement of Additional Information, these portfolios
have not commenced operations.
-3-
<PAGE>
Any amendment to the Master Trust Agreement that would materially and
adversely affect shareholders of Investment Company as a whole, or shareholders
of a particular Fund, must be approved by the holders of a majority of the
shares of Investment Company or the Fund, respectively. All other amendments
may be effected by Investment Company's Board of Trustees.
Under certain unlikely circumstances, and as is the case with any
Massachusetts business trust, a shareholder of the Fund may be held personally
liable for the obligations of the Fund. The Master Trust Agreement provides
that shareholders shall not be subject to any personal liability for the acts or
obligations of the Fund and that every written agreement, obligation, or other
undertaking of the Fund shall contain a provision to the effect that the
shareholders are not personally liable thereunder. The Master Trust Agreement
also provides that the Fund shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Fund and satisfy
any judgment thereon. Thus, the risk to shareholders of incurring financial
loss beyond their investments is limited to circumstances in which the Fund
itself would be unable to meet its obligations.
SHAREHOLDER MEETINGS. Investment Company will not have an annual meeting
of shareholders. Special meetings may be convened: (1) by the Board of
Trustees; (2) upon written request to the Board by the holders of at least 10%
of the outstanding shares; or (3) upon the Board's failure to honor the
shareholders' request described above, by holders of at least 10% of the
outstanding shares giving notice of the special meeting to the shareholders.
CONTROLLING SHAREHOLDERS. The Trustees have the authority and
responsibility to manage the business of Investment Company. Trustees hold
office until they resign or are removed by, in substance, a vote of two-thirds
of Investment Company shares outstanding. However, in connection with State
Street Bank and Trust Company's ("State Street") securities lending program and
investment accounts over which State Street has discretionary authority, State
Street holds certain collateral on behalf of its securities lending clients to
secure the return of loaned securities. Such collateral may be invested in
Investment Company shares from time to time. Shares representing such
investments are held of record by State Street, who retains voting control of
such shares. As of November 30, 1995, State Street held beneficially and of
record 36% of Investment Company's shares in connection with various lending
portfolios and, consequently, is deemed to be a controlling person of Investment
Company for purposes of the 1940 Act. State Street also acts as Investment
Company's investment adviser, transfer agent and custodian.
Frank Russell Investment Management Company, Investment Company's
administrator ("Administrator"), will be the initial sole shareholder of the
Fund and may be deemed to be a controlling person until such time as the Fund
has public shareholders.
PRINCIPAL SHAREHOLDERS. As of the date of this Statement of Additional
Information, Administrator is the Fund's sole shareholder.
-4-
<PAGE>
The Trustees and officers of Investment Company, as a group, own less than
1% of Investment Company's voting securities.
TRUSTEES AND OFFICERS. The Board of Trustees is responsible for overseeing
generally the operation of the Fund. The officers, all of whom are employed by,
and are officers of, Administrator or its affiliates, are responsible for the
day-to-day management and administration of the Fund's operations.
Trustees who are not officers or employees of State Street or its
affiliates are paid an annual fee and are reimbursed for travel and other
expenses they incur in attending Board meetings. Investment Company's officers
and employees are paid by Administrator or its affiliates.
The following lists Investment Company's Trustees and officers, their
positions with Investment Company, their present and principal occupations
during the past five years and the mailing addresses of Trustees who are not
affiliated with Investment Company. The mailing address for all Trustees and
officers affiliated with Investment Company is The Seven Seas Series Fund, 909 A
Street, Tacoma, WA 98402.
An asterisk (*) indicates that a Trustee is an "interested person" of the
Investment Company, as defined in the 1940 Act.
*LYNN L. ANDERSON, Trustee, Chairman of the Board, President and Fund
Treasurer. Chairman of the Board and Chief Executive Officer, Frank Russell
Investment Management Company and Russell Fund Distributors, Inc.; Director,
President and Chief Executive Officer, Frank Russell Investment Company and
Frank Russell Trust Company; Director and President, Russell Insurance Funds;
Director and Chairman, Frank Russell Company (Delaware); Director, Frank Russell
Investments (Ireland) Limited and Frank Russell Investment Company plc.
WILLIAM L. MARSHALL, Trustee. 33 West Court Street, Doylestown, PA 18901.
Chief Executive Officer and President, Wm. L. Marshall Associates, Inc. (a
registered investment adviser and provider of financial and related consulting
services); Certified Financial Planner; Member, Registry of Financial Planning
Practitioners; and Advisory Committee, International Association for Financial
Planning Broker-Dealer Program. Member, Institute of Certified Financial
Planners. Registered for Securities with FSC Securities Corp., Marietta,
Georgia.
*STEVEN J. MASTROVICH, Trustee. 1 Financial Center, Boston, MA 02111.
Partner, Brown, Rudnick, Freed & Gesmer (law firm). 1990 to 1994, Partner,
Warner & Stackpole (law firm).
PATRICK J. RILEY, Trustee. 21 Custom House Street, Boston, MA 02110.
Partner, Riley, Burke & Donahue (law firm).
RICHARD D. SHIRK, Trustee. 3350 Peachtree Road, N.E., Atlanta, GA 30326.
President and Chief Executive Officer, Blue Cross/Blue Shield of Georgia. 1990
to
-5-
<PAGE>
1992, President, Champions Group Resources--Business Management and Employee
Benefits Consulting; 1990, Senior Vice President, Employee Benefits Division,
Cigna Corporation (providing and insuring group life, health and disability
employee benefit products and services); from 1986 to 1990, Senior Vice
President, EQUICOR-Equitable HCA Corporation (providing and insuring group life,
health and disability employee benefit products and services).
*BRUCE D. TABER, Trustee. 26 Round Top Road, Boxford, MA 01921.
President, A.B. Reed, Inc. - Engineers, Architects, Planners. Prior to that,
Vice President, Instrumentation and Controls, A.B. Reed., Inc.
HENRY W. TODD, Trustee. 111 Commerce Drive, Montgomeryville, PA 18936.
President and Director, Zink & Triest Co., Inc. (dealer in vanilla flavor
materials); Director, A.M. Todd Co., and Flavorite Laboratories.
J. DAVID GRISWOLD, Vice President and Secretary. Assistant Secretary,
Associate General Counsel, Chief Compliance Officer, Frank Russell Investment
Management Company, Russell Fund Distributors, Inc. and Frank Russell Capital
Inc.; Associate General Counsel and Assistant Secretary, Frank Russell Company;
Associate General Counsel, Assistant Secretary and Compliance Officer, Russell
Fiduciary Services Company; Director, Secretary, Associate General Counsel and
Chief Compliance Officer, Frank Russell Securities, Inc.; Secretary, Frank
Russell Canada Limited/Limitee.
KENNETH W. LAMB, Assistant Secretary, Assistant Treasurer and Principal
Accounting Officer. Manager - Funds Administration, Frank Russell Investment
Management Company since 1994. Prior to that, Senior Audit Manager with Knight,
Vale & Gregory since 1982.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
TRUSTEE COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------
Aggregate Pension or Estimated Annual Total Compensation
Compensation Retirement Benefits Upon From Investment
from Benefits Accrued Retirement Company Paid to
Trustee Investment as part of Trustees
Company Investment
Company
Expenses
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lynn L. Anderson $0 $0 $0 $0
- -------------------------------------------------------------------------------------------------------
William L. Marshall $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Steven J. Mastrovich $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Patrick J. Riley $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Richard D. Shirk $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Bruce D. Taber $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Henry W. Todd $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
OPERATION OF INVESTMENT COMPANY
SERVICE PROVIDERS. Most of the Fund's necessary day-to-day operations are
performed by separate business organizations under contract to Investment
Company. The principal service providers are:
Investment Adviser, Custodian
and Transfer Agent: State Street Bank and Trust Company
Administrator: Frank Russell Investment Management Company
Distributor: Russell Fund Distributors, Inc.
Independent Accountants: Coopers & Lybrand, L.L.P.
ADVISER. State Street Bank and Trust Company ("State Street" or "Adviser")
serves as the Fund's investment adviser pursuant to an Advisory Agreement dated
April 12, 1988. State Street Bank and Trust Company is a wholly owned
subsidiary of State Street Boston Corporation, a publicly held bank holding
company. State Street's address is 225 Franklin Street, Boston, MA 02110.
Under the Advisory Agreement, Adviser directs the Fund's investments in
accordance with its investment objective, policies and limitations. For these
services, the Fund pays a fee to Adviser at the rate stated in the Prospectus.
The Advisory Agreement will continue from year to year provided that a majority
of the Trustees who are not interested persons of any Investment Portfolio and
either a majority of all Trustees or a majority of the shareholders of each
Investment Portfolio approve its continuance. The Agreement may be terminated
by Adviser or the Fund without penalty upon 60 days' notice and will terminate
automatically upon its assignment.
ADMINISTRATOR. Frank Russell Investment Management Company
("Administrator") serves as the Fund's administrator, pursuant to an
Administration Agreement dated April 12, 1988. A description of the services
provided under the Administration Agreement and the basis for computing fees for
such services is provided in the Fund's Prospectus. The Administration
Agreement will continue from year to year provided that a majority of the
Trustees and a majority of the Trustees who are not interested persons of any
Investment Portfolio and who have no direct or indirect financial interest in
the operation of the Distribution Plan described below or the Administration
Agreement approve its continuance. The Agreement may be terminated by
Administrator or the Fund without penalty upon 60 days' notice and will
terminate automatically upon its assignment.
Administrator is a wholly owned subsidiary of Frank Russell Company. Frank
Russell Company was founded in 1936 and has provided comprehensive asset
management consulting services since 1969 for institutional pools of investment
assets, principally those of large corporate employee benefit plans. Frank
Russell Company and its affiliates have offices in Tacoma, Seattle, New York
City, Toronto, London, Tokyo, Sydney, Paris, Zurich and Auckland, and have
approximately 1,000 officers and employees. Administrator's and Frank Russell
Company's mailing address is 909 A Street, Tacoma, WA 98402.
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<PAGE>
DISTRIBUTOR. Russell Fund Distributors, Inc. ("Distributor") serves as the
distributor of Fund shares pursuant to a Distribution Agreement dated April 12,
1988. Distributor is a wholly owned subsidiary of Administrator. Distributor's
mailing address is Two International Place, 35th Floor, Boston, MA 02110.
CUSTODIAN AND TRANSFER AGENT. State Street serves as the custodian
("Custodian") and transfer agent ("Transfer Agent") for Investment Company.
State Street also provides the basic portfolio recordkeeping required by
Investment Company for regulatory and financial reporting purposes. For these
services, State Street is paid an annual fee in accordance with the following:
custody services--a fee payable monthly on a pro rata basis, based on the
following percentages of average daily net assets of the Fund: $0 up to
$1.5 billion--0.02%, over $1.5 billion--0.015% (for purposes of calculating the
break point, the assets of all Investment Portfolios are aggregated); securities
transaction charges from $8.00 to $25.00 per transaction; Eurodollar transaction
fees ranging from $110.00 to $125.00 per transaction; monthly pricing fees of
$375.00 per Investment Portfolio and from $6.00 to $16.00 per security,
depending on the type of instrument and the pricing service used; transfer agent
services of $2.00 per shareholder transaction and a multiple class fee of
$18,000 per year for each additional class of shares; and yield calculation fees
of $350.00 per non-money market portfolio per year. State Street is reimbursed
by the Fund for supplying certain out-of-pocket expenses including postage,
transfer fees, stamp duties, taxes, wire fees, telexes, and freight.
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand L.L.P. serves as the
Investment Company's independent accountants. Coopers & Lybrand L.L.P. is
responsible for performing annual audits of the financial statements and
financial highlights in accordance with generally accepted auditing
standards, a review of federal tax returns, and, pursuant to Rule 17f-2 of
the 1940 Act, three security counts. The mailing address of Coopers & Lybrand
L.L.P. is One Post Office Square, Boston MA 02109.
DISTRIBUTION PLAN. Under the 1940 Act, the Securities and Exchange
Commission has adopted Rule 12b-1, which regulates the circumstances under which
the Fund may, directly or indirectly, bear distribution and shareholder
servicing expenses. The Rule provides that the Fund may pay for such expenses
only pursuant to a plan adopted in accordance with the Rule. Accordingly, the
Fund has adopted an active distribution plan (the "Plan"), which is described in
the Fund's Prospectus.
The Plan provides that the Fund may spend annually, directly or indirectly,
up to 0.25% of the value of its average net assets for distribution and
shareholder servicing services. The Plan does not provide for the Fund to be
charged for interest, carrying or any other financing charges on any
distribution expenses carried forward to subsequent years. A quarterly report
of the amounts expended under the Plan, and the purposes for which such
expenditures were incurred, must be made to the Trustees for their review. The
Plan may not be amended without shareholder approval to increase materially the
distribution or shareholder servicing costs that the Fund may pay. The Plan and
material
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<PAGE>
amendments to it must be approved annually by all of the Trustees and by the
Trustees who are neither interested persons (as defined in the 1940 Act) of the
Fund nor have any direct or indirect financial interest in the operation of the
Plan or any related agreements.
Under the Plan, the Fund may also enter into agreements ("Service
Agreements") with financial institutions, which may include Adviser ("Service
Organizations"), to provide shareholder servicing with respect to Fund shares
held by or for the customers of the Service Organizations. Such arrangements
are more fully described in the Fund's prospectus under "Distribution Services
and Shareholder Servicing."
FEDERAL LAW AFFECTING STATE STREET. The Glass-Steagall Act of 1933
prohibits state chartered banks such as State Street from engaging in the
business of underwriting, selling or distributing certain securities, and
prohibits a member bank of the Federal Reserve System from having certain
affiliations with an entity engaged principally in that business. The
activities of State Street in informing its customers of the Fund, performing
investment and redemption services, providing custodian, transfer, shareholder
servicing, dividend disbursing, agent servicing and investment advisory
services, may raise issues under these provisions. State Street has been
advised by its counsel that its activities in connection with the Funds
contemplated under this arrangement are consistent with its statutory and
regulatory obligations.
VALUATION OF FUND SHARES. The Fund determines net asset value per share
twice each business day, as of 12:00 noon Eastern time and as of the close of
the regular trading session of the New York Stock Exchange (currently, 4:00 p.m.
Eastern time). A business day is one on which both the Boston Federal Reserve
and the New York Stock Exchange are open for business.
It is the Fund's policy to use its best efforts to maintain a constant
price per share of $1.00, although there can be no assurance that the $1.00 net
asset value per share will be maintained. In accordance with this effort and
pursuant to Rule 2a-7 under the 1940 Act, the Fund uses the amortized cost
valuation method to value its portfolio instruments. This method involves
valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, even though the portfolio
security may increase or decrease in market value generally in response to
changes in interest rates. While 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 Fund would receive if it sold the instrument.
For example, in periods of declining interest rates, the daily yield on the
Fund's shares computed by dividing the annualized daily income on the Fund's
portfolio by the net asset value based upon the amortized cost valuation
technique may tend to be higher than a similar computation made by using a
method of valuation based upon market prices and estimates. In periods of
rising interest rates, the daily yield on Fund shares computed the same way may
tend to be lower than a similar computation made by using a method of
calculation based upon market prices and estimates.
The Trustees have established procedures reasonably designed to stabilize
the Fund's price per share at $1.00. These procedures include: (1) the
determination of the
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<PAGE>
deviation from $1.00, if any, of the Fund's net asset value using market values;
(2) periodic review by the Trustees of the amount of and the methods used to
calculate the deviation; and (3) maintenance of records of such determination.
The Trustees will promptly consider what action, if any, should be taken if such
deviation exceeds 1/2 of one percent.
BROKERAGE PRACTICES. All portfolio transactions are placed on behalf of
the Fund by Adviser. Adviser ordinarily pays commissions when it executes
transactions on a securities exchange. In contrast, there is generally no
stated commission in the purchase or sale of securities traded in the over-the-
counter markets, including most debt securities and money market instruments.
Rather, the price of such securities includes an undisclosed "commission" in the
form of a mark-up or mark-down. The cost of securities purchased from
underwriters includes an underwriting commission or concession.
Subject to the arrangements and provisions described below, the selection
of a broker or dealer to execute portfolio transactions is usually made by
Adviser. The advisory agreement provides, in substance and subject to specific
directions from officers of Investment Company, that in executing portfolio
transactions and selecting brokers or dealers, the principal objective is to
seek the best overall terms available to the Fund. Ordinarily, securities will
be purchased from primary markets, and Adviser shall consider all factors it
deems relevant in assessing the best overall terms available for any
transaction, 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 other transactions on a continuing basis.
The Advisory Agreement authorizes Adviser to select brokers or dealers to
execute a particular transaction, including principal transactions, 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 Adviser (or its
affiliates). Adviser is authorized to cause the Fund to pay a commission to a
broker or dealer who provides such brokerage and research services for executing
a portfolio transaction which is in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction. The Fund or
Adviser, as appropriate, must determine in good faith that such commission was
reasonable in relation to the value of the brokerage and research services
provided--viewed in terms of that particular transaction or in terms of all the
accounts over which Adviser exercises investment discretion.
The Trustees periodically review Adviser's performance of its
responsibilities in connection with the placement of portfolio transactions on
behalf of the Fund and review the prices paid by the Fund over representative
periods of time to determine if such prices are reasonable in relation to the
benefits provided to the Fund. Certain services received by Adviser
attributable to a particular Fund transaction may benefit one or more other
accounts for which Adviser exercises investment discretion or an Investment
Portfolio other than such Fund. Adviser's fees are not reduced by Adviser's
receipt of such brokerage and research services.
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<PAGE>
YIELD AND TOTAL RETURN QUOTATIONS. The Fund computes average annual total
return by using a standardized method of calculation required by the Securities
and Exchange Commission. Average annual total return is computed by finding the
average annual compounded rates of return on a hypothetical initial investment
of $1,000 over the one-, five- and ten-year periods (or life of the funds as
appropriate), that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
P(1+T)(n) = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a $1,000 payment made at
the beginning of the 1-, 5- and 10-year periods at the
end of the year or period
The calculation assumes that all Fund dividends and distributions are
reinvested at the price stated in the Prospectus on the dividend dates during
the period, and includes all recurring and nonrecurring fees that are charged to
all shareholder accounts.
The Fund's current annualized yield may be quoted in published material.
The yield is calculated daily based upon the seven days ending on the date of
calculation ("base period"). The yields are computed by determining the net
change, exclusive of capital changes, in the value of a hypothetical pre-
existing account having a balance of one share at the beginning of the base
period, subtracting a hypothetical charge reflecting deductions from shareholder
accounts and dividing the net change in the account value by the value of the
account at the beginning of the base period to obtain the base period return,
and then multiplying the base period return by (365/7) with the resulting yield
figure carried to the nearest hundredth of one percent. An effective yield is
computed by determining the net change, exclusive of capital changes, in the
value of a hypothetical pre-existing account having a balance of one share at
the beginning of the period, subtracting a hypothetical charge reflecting
deductions from shareholder accounts, and dividing the difference by the value
of the account at the beginning of the base period to obtain the base period
return, and then compounding the base period return by adding 1, raising the sum
to a power equal to 365 divided by 7, and subtracting 1 from the result,
according to the following formula:
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1)(365)/7]-1
The yields quoted are not indicative of future results. Yields will depend
on the type, quality, maturity, and interest rate of money market instruments
held by the Fund.
INVESTMENTS
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<PAGE>
The fundamental investment objective of the Fund is set forth in the
Prospectus. In addition to that investment objective, the Fund also has certain
fundamental investment restrictions, which may be changed only with the approval
of a majority of the Fund's shareholders, and certain nonfundamental investment
restrictions and policies, which may be changed by the Fund without shareholder
approval.
INVESTMENT RESTRICTIONS
The Fund is subject to the following fundamental investment restrictions,
each of which applies at the time an investment is made. The Fund will not:
(1) Borrow money, except as a temporary measure for extraordinary or
emergency purposes or to facilitate redemptions (not for leveraging or
investment), provided that borrowings do not exceed an amount equal to 33-1/3%
of the current value of the Fund's assets taken at market value, less
liabilities other than borrowings. If at any time the Fund's borrowings exceed
this limitation due to a decline in net assets, such borrowings will within
three days be reduced to the extent necessary to comply with this limitation.
The Fund will not purchase investments once borrowed funds (including reverse
repurchase agreements) exceed 5% of its total assets.
(2) Pledge, mortgage or hypothecate its assets. However, the Fund may
pledge securities having a market value (on a daily marked-to-market basis) at
the time of the pledge not exceeding 33-1/3% of the value of the Fund's total
assets to secure borrowings permitted by paragraph (1) above.
(3) Make loans to any person or firm; provided, however, that the making of
a loan shall not include: (i) the acquisition for investment of bonds,
debentures, notes or other evidences of indebtedness of any corporation or
government which are publicly distributed or of a type customarily purchased by
institutional investors, or (ii) the entry into "repurchase agreements." The
Fund may lend its portfolio securities to broker-dealers or other institutional
investors if the aggregate value of all securities loaned does not exceed 33-
1/3% of the value of the Fund's total assets.
(4) Engage in the business of underwriting securities issued by others,
except that the Fund will not be deemed to be an underwriter or to be
underwriting on account of the purchase of securities subject to legal or
contractual restrictions on disposition.
(5) Issue senior securities, except as permitted by its investment
objective, policies and restrictions, and except as permitted by the 1940 Act.
(6) Purchase or sell puts, calls or invest in straddles, spreads or any
combination thereof.
(7) Make short sales of securities or purchase any securities on margin,
except for such short-term credits as are necessary for the clearance of
transactions.
(8) Purchase from or sell portfolio securities to its officers or directors
or other "interested persons" (as defined in the 1940 Act) of the Fund,
including their investment
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<PAGE>
advisers and affiliates, except as permitted by the 1940 Act and exemptive rules
or orders thereunder.
(9) Invest more than 10% of its net assets in the aggregate in illiquid
securities or securities that are not readily marketable, including repurchase
agreements and time deposits of more than seven days' duration.
(10) Make investments for the purpose of gaining control of an issuer's
management.
INVESTMENT POLICIES
To the extent consistent with its fundamental investment objective and
restrictions and except as otherwise indicated, the Fund may invest in the
following instruments and utilize the following investment techniques:
US GOVERNMENT OBLIGATIONS. The types of US Government obligations in which
the Fund may at times invest include: (1) a variety of US Treasury obligations,
which differ only in their interest rates, maturities and times of issuance and
which have remaining maturities or hard put dates of 397 days or less; and
(2) obligations issued or guaranteed by US Government agencies and
instrumentalities which are supported by the unconditional guarantee of the US
Government as to the payment of principal and interest, although neither Fund
presently intends to invest in securities described in (2). Examples of such
issuers are the Export--Import Bank of the United States, General Services
Administration, the Government National Mortgage Association and the Small
Business Administration.
WHEN-ISSUED TRANSACTIONS. New issues of securities are often offered on a
when-issued basis. This means that delivery and payment for the securities
normally will take place several days after the date the buyer commits to
purchase them. The payment obligation and the interest rate that will be
received on securities purchased on a when-issued basis are each fixed at the
time the buyer enters into the commitment.
The Fund will make commitments to purchase when-issued securities only with
the intention of actually acquiring the securities, but the Fund may sell these
securities or dispose of the commitment before the settlement date if it is
deemed advisable as a matter of investment strategy. Cash or marketable high
quality debt securities equal to the amount of the above commitments will be
segregated on the Fund's records. For the purpose of determining the adequacy
of these securities the segregated securities will be valued at market. If the
market value of such securities declines, additional cash or securities will be
segregated on the Fund's records on a daily basis so that the market value of
the account will equal the amount of such commitments by the Fund. The Fund will
invest no more than 25% of its net assets in when-issued securities. The Fund
will not purchase the securities of any issuer if the Investment Company's
officers, Trustees, Adviser or any of their affiliates beneficially own more
than one-half of 1% of the securities of such issuer or together own
beneficially more than 5% of the securities of such issuer.
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<PAGE>
Securities purchased on a when-issued basis and the securities held by the
Fund are subject to changes in market value based upon the public's perception
of changes in the level of interest rates. Generally, the value of such
securities will fluctuate inversely to changes in interest rates -- i.e., they
will appreciate in value when interest rates decline and decrease in value when
interest rates rise. Therefore, if in order to achieve higher interest income
the Fund remains substantially fully invested at the same time that it has
purchased securities on a "when-issued" basis, there will be a greater
possibility of fluctuation in the Fund's net asset value.
When payment for when-issued securities is due, the Fund will meet its
obligations from then-available cash flow, the sale of segregated securities,
the sale of other securities or, and although it would not normally expect to do
so, from the sale of the when-issued securities themselves (which may have a
market value greater or less than the Fund's payment obligation). The sale of
securities to meet such obligations carries with it a greater potential for the
realization of capital gains, which are subject to federal income taxes.
TAXES
The Fund intends to qualify for treatment as a regulated investment company
("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended
("the Code"). As a RIC, the Fund will not be liable for federal income taxes on
taxable net investment income and capital gain net income (capital gains in
excess of capital losses) that it distributes to its shareholders, provided that
the Fund distributes annually to its shareholders at least 90% of its net
investment income and net short-term capital gain for the taxable year
("Distribution Requirement"). For the Fund to qualify as a RIC it must abide by
all of the following requirements: (1) at least 90% of the Fund's gross income
each taxable year must be derived from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock
or securities or foreign currencies, or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies ("Income Requirement");
(2) less than 30% of the Fund's gross income each taxable year must be derived
from the sale or other disposition of securities and certain options, futures
contracts, forward contracts and foreign currencies held for less than three
months ("Short-Short Limitation"); (3) at the close of each quarter of the
Fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, US government securities, securities of
other RICs, and other securities, with such other securities limited, in respect
of any one issuer, to an amount that does not exceed 5% of the total assets of
the Fund and that does not represent more than 10% of the outstanding voting
securities of such issuer; and (4) at the close of each quarter of the Fund's
taxable year, not more than 25% of the value of its assets may be invested in
securities (other than US government securities or the securities of other RICs)
of any one issuer.
The Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year an amount at least equal to
the sum of: (1) 98% of its ordinary income for that year; (2) 98% of its
capital gain net income for
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the one-year period ending on October 31 of that year; and (3) certain
undistributed amounts from the preceding calendar year. For this and other
purposes, dividends declared in October, November or December of any calendar
year and made payable to shareholders of record in such month will be deemed to
have been received on December 31 of such year if the dividends are paid by the
Fund subsequent to December 31 but prior to February 1 of the following year.
If a shareholder receives a distribution taxable as long-term capital gain
with respect to shares of the Fund and redeems or exchanges the shares without
having held the shares for more than one year, then any loss on the redemption
or exchange will be treated as long-term capital loss to the extent of the
capital gain distribution.
STATE AND LOCAL TAXES. Under federal law, the income derived from
obligations issued by the US Government and certain of its agencies and
instrumentalities is exempt from state income taxes. All states that tax
personal income, other than Pennsylvania, permit mutual funds to pass through
this tax exemption to shareholders.
The foregoing discussion is only a summary of certain federal income tax
issues generally affecting the Funds and their shareholders. Circumstances
among investors may vary and each investor is encouraged to discuss investment
in the Funds with the investor's tax adviser.
FINANCIAL STATEMENTS
Unaudited financial statements for the Fund, including notes to the
financial statements and financial information, will be available within four to
six months from the later of the date of this Statement of Additional
Information or the date on which the Fund first accepts a subscription from an
unaffiliated shareholder. Audited financial statements for the Fund will be
available within 60 days following the end of the Fund's then current fiscal
year. When available, copies of the financial statements can be obtained
without charge by calling Distributor at (617) 654-6089.
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<PAGE>
Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
THE SEVEN SEAS SERIES FUND
Two International Place, 35th Floor
Boston, Massachusetts 02110
(617) 654-6089
STATEMENT OF ADDITIONAL INFORMATION
TAX FREE MONEY MARKET FUND
CLASS A SHARES
DECEMBER 29, 1995
The Seven Seas Series Fund ("Investment Company") is a registered open-end
investment company organized as a Massachusetts business trust offering shares
of beneficial interest in separate investment portfolios. In addition, each
series of the Investment Company is diversified as defined in the Investment
Company Act of 1940, as amended ("1940 Act").
This Statement of Additional Information supplements or describes in
greater detail the Investment Company and The Seven Seas Series Tax Free Money
Market Fund (the "Tax Free Fund" or "Fund") as contained in the Fund's
Prospectus relating to Class A shares dated December 29, 1995. This Statement
is not a Prospectus and should be read in conjunction with the Fund's Prospectus
for Class A shares, which may be obtained by telephoning or writing Investment
Company at the number or address shown above.
<PAGE>
TABLE OF CONTENTS
Page
----
STRUCTURE AND GOVERNANCE . . . . . . . . . . . . . . . . . . . . . . 3
Organization and Business History . . . . . . . . . . . . . . 3
Shareholder Meetings. . . . . . . . . . . . . . . . . . . . . 4
Controlling Shareholders. . . . . . . . . . . . . . . . . . . 4
Principal Shareholders. . . . . . . . . . . . . . . . . . . . 5
Trustees and Officers . . . . . . . . . . . . . . . . . . . . 5
OPERATION OF INVESTMENT COMPANY. . . . . . . . . . . . . . . . . . . 6
Service Providers . . . . . . . . . . . . . . . . . . . . . . 6
Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Administrator . . . . . . . . . . . . . . . . . . . . . . . . 7
Distributor . . . . . . . . . . . . . . . . . . . . . . . . . 7
Custodian and Transfer Agent. . . . . . . . . . . . . . . . . 8
Distribution Plan . . . . . . . . . . . . . . . . . . . . . . 8
Federal Law Affecting State Street. . . . . . . . . . . . . . 9
Valuation of Fund Shares. . . . . . . . . . . . . . . . . . . 9
Brokerage Practices . . . . . . . . . . . . . . . . . . . . . 9
Yield and Total Return Quotations . . . . . . . . . . . . . .10
INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Investment Restrictions . . . . . . . . . . . . . . . . . . .12
Investment Policies . . . . . . . . . . . . . . . . . . . . .14
Ratings of Debt Instruments and Municipal Securities. . . . .19
Ratings of Short-Term Municipal Loans . . . . . . . . . . . .20
Ratings of Commercial Paper . . . . . . . . . . . . . . . . .20
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . .24
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<PAGE>
STRUCTURE AND GOVERNANCE
ORGANIZATION AND BUSINESS HISTORY. Investment Company was organized as a
Massachusetts business trust on October 3, 1987 and operates under a First
Amended and Restated Master Trust Agreement, dated October 13, 1993, as amended.
Investment Company is authorized to issue shares of beneficial interest, par
value $.001 per share, which may be divided into one or more series, each of
which evidences pro rata ownership interest in a different investment portfolio,
or "Fund." The Tax Free Money Market Money Market Funds is one such investment
portfolio. The Trustees may create additional Funds at any time without
shareholder approval.
As of the date of this Statement of Additional Information, Investment
Company is comprised of the following investment portfolios, each of which
commenced operations on the date set forth opposite the portfolio's name:
--------------------------------------------------------------------------
The Seven Seas Series Money Market Fund May 2, 1988
--------------------------------------------------------------------------
The Seven Seas Series US Government Money Market Fund March 1, 1991
--------------------------------------------------------------------------
The Seven Seas Series US Treasury Money Market Fund December 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series US Treasury Obligations Fund *
--------------------------------------------------------------------------
The Seven Seas Series Prime Money Market Fund February 22, 1994
--------------------------------------------------------------------------
The Seven Seas Series Yield Plus Fund November 9, 1992
--------------------------------------------------------------------------
The Seven Seas Series Tax Free Money Market Fund December 1, 1994
--------------------------------------------------------------------------
The Seven Seas Series Intermediate Fund September 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series Bond Market Fund *
--------------------------------------------------------------------------
The Seven Seas Series Growth and Income Fund September 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series S&P 500 Index Fund December 30, 1992
--------------------------------------------------------------------------
The Seven Seas Series Small Cap Fund July 1, 1992
--------------------------------------------------------------------------
The Seven Seas Series Matrix Equity Fund May 4, 1992
--------------------------------------------------------------------------
The Seven Seas Series Active International Fund March 7, 1995
--------------------------------------------------------------------------
The Seven Seas Series International Pacific Index Fund *
--------------------------------------------------------------------------
The Seven Seas Series Emerging Markets Fund March 1, 1994
--------------------------------------------------------------------------
The Seven Seas Series Real Estate Equity Fund *
--------------------------------------------------------------------------
__________
*As of the date of this Statement of Additional Information, these
portfolios have not commenced operations.
Prospectuses for these investment portfolios may be obtained by calling
Investment Company's distributor, Russell Fund Distributors, Inc., at (617) 654-
6089.
Investment Company is authorized to divide shares of any series into two or
more classes of shares. The shares of each Fund may have such rights and
preferences as the Trustees may establish from time to time, including the right
of redemption (including the price, manner and terms of redemption), special and
relative rights as to dividends and distributions, liquidation rights, sinking
or purchase fund provisions and conditions under which any Fund may have
separate voting rights or no voting rights. Each class of shares of a Fund is
entitled to the same rights and privileges as all other classes of that Fund,
except that each class bears the expenses associated with the distribution and
shareholder servicing arrangements of that class, as well as other expenses
attributable to the class and unrelated to the management of the Fund's
portfolio securities. Shares of the Money Market, US Government Money Market
and Tax Free Money Market Funds are divided into Classes A, B and C.
Any amendment to the Master Trust Agreement that would materially and
adversely affect shareholders of Investment Company as a whole, or shareholders
of a particular Fund, must be approved
- 3 -
<PAGE>
by the holders of a majority of the shares of Investment Company or the Fund,
respectively. All other amendments may be effected by Investment Company's
Board of Trustees.
Under certain unlikely circumstances, and as is the case with any
Massachusetts business trust, a shareholder of the Fund may be held personally
liable for the obligations of the Fund. The Master Trust Agreement provides
that shareholders shall not be subject to any personal liability for the acts or
obligations of the Fund and that every written agreement, obligation, or other
undertaking of the Fund shall contain a provision to the effect that the
shareholders are not personally liable thereunder. The Master Trust Agreement
also provides that the Fund shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Fund and satisfy
any judgment thereon. Thus, the risk to shareholders of incurring financial
loss beyond their investments is limited to circumstances in which the Fund
itself would be unable to meet its obligations.
SHAREHOLDER MEETINGS. Investment Company will not have an annual meeting
of shareholders. Special meetings may be convened: (1) by the Board of
Trustees; (2) upon written request to the Board by the holders of at least 10%
of the outstanding shares; or (3) upon the Board's failure to honor the
shareholders' request described above, by holders of at least 10% of the
outstanding shares giving notice of the special meeting to the shareholders.
CONTROLLING SHAREHOLDERS. The Trustees have the authority and
responsibility to manage the business of Investment Company. Trustees hold
office until they resign or are removed by, in substance, a vote of two-thirds
of Investment Company shares outstanding. State Street may from time to time
have discretionary authority over accounts which invest in Investment Company
shares. These accounts include accounts maintained for securities lending
clients and accounts which permit the use of Investment Company portfolios as
short-term cash sweep investments. Shares purchased for all discretionary
accounts are held of record by State Street, who retains voting control of such
shares. As of November 30, 1995, State Street held of record 36% of the issued
and outstanding shares of Investment Company in connection with its
discretionary accounts. Consequently, State Street may be deemed to be a
controlling person of Investment Company for purposes of the 1940 Act. State
Street also acts as Investment Company's investment adviser, transfer agent and
custodian.
Frank Russell Investment Management Company, Investment Company's
administrator ("Administrator"), will be the initial sole shareholder of the Tax
Free Fund until such time as the Fund has public shareholders and therefore
Administrator may be deemed to be a controlling person for the purposes of the
1940 Act.
PRINCIPAL SHAREHOLDERS. As of November 30, 1995, the following shareholders
owned of record 5% or more of the issued and outstanding shares of the Fund:
- Clipper State Street, a fund of State Street Bank and Trust
Company, 225 Franklin Street M9, Boston, MA 02110--51%; and
- State Street Bank and Trust Company, Newport Office Park, 108
Myrtle Street AH3, North Quincy, MA 02171--38%.
The Trustees and officers of the Investment Company, as a group, own less
than 1% of Investment Company's voting securities.
TRUSTEES AND OFFICERS. The Board of Trustees is responsible for overseeing
generally the operation of the Fund. The officers, all of whom are employed by,
and are officers of, Administrator or its affiliates, are responsible for the
day-to-day management and administration of the Fund's operations.
Trustees who are not officers or employees of State Street or its
affiliates are paid an annual fee and are reimbursed for travel and other
expenses they incur in attending Board meetings. Investment Company's officers
and employees are paid by Administrator or its affiliates.
- 4 -
<PAGE>
The following lists Investment Company's Trustees and officers, their
positions with Investment Company, their present and principal occupations
during the past five years and the mailing addresses of Trustees who are not
affiliated with Investment Company. The mailing address for all Trustees and
officers affiliated with Investment Company is The Seven Seas Series Fund, 909 A
Street, Tacoma, WA 98402.
An asterisk (*) indicates that a Trustee is an "interested person" of the
Investment Company, as defined in the 1940 Act.
*LYNN L. ANDERSON, Trustee, Chairman of the Board, President and Fund
Treasurer. Chairman of the Board and Chief Executive Officer, Frank Russell
Investment Management Company and Russell Fund Distributors, Inc.; Director,
President and Chief Executive Officer, Frank Russell Investment Company and
Frank Russell Trust Company; Director and President, Russell Insurance Funds;
Director and Chairman, Frank Russell Company (Delaware); Director, Frank Russell
Investments (Ireland) Limited and Frank Russell Investment Company plc.
WILLIAM L. MARSHALL, Trustee. 33 West Court Street, Doylestown, PA 18901.
Chief Executive Officer and President, Wm. L. Marshall Associates, Inc. (a
registered investment adviser and provider of financial and related consulting
services); Certified Financial Planner; Member, Registry of Financial Planning
Practitioners; and Advisory Committee, International Association for Financial
Planning Broker-Dealer Program. Member, Institute of Certified Financial
Planners. Registered for Securities with FSC Securities Corp., Marietta,
Georgia.
*STEVEN J. MASTROVICH, Trustee. 1 Financial Center, Boston, MA 02111.
Partner, Brown, Rudnick, Freed & Gesmer (law firm). 1990 to 1994, Partner,
Warner & Stackpole (law firm).
PATRICK J. RILEY, Trustee. 21 Custom House Street, Boston, MA 02110.
Partner, Riley, Burke & Donahue (law firm).
RICHARD D. SHIRK, Trustee. 3350 Peachtree Road, N.E., Atlanta, GA 30326.
President and Chief Executive Officer, Blue Cross/Blue Shield of Georgia. 1990
to 1992, President, Champions Group Resources--Business Management and Employee
Benefits Consulting; 1990, Senior Vice President, Employee Benefits Division,
Cigna Corporation (providing and insuring group life, health and disability
employee benefit products and services); from 1986 to 1990, Senior Vice
President, EQUICOR-Equitable HCA Corporation (providing and insuring group life,
health and disability employee benefit products and services).
*BRUCE D. TABER, Trustee. 26 Round Top Road, Boxford, MA 01921.
President, A.B. Reed, Inc. - Engineers, Architects, Planners. Prior to that,
Vice President, Instrumentation and Controls, A.B. Reed., Inc.
HENRY W. TODD, Trustee. 111 Commerce Drive, Montgomeryville, PA 18936.
President and Director, Zink & Triest Co., Inc. (dealer in vanilla flavor
materials); Director, A.M. Todd Co., and Flavorite Laboratories.
J. DAVID GRISWOLD, Vice President and Secretary. Assistant Secretary,
Associate General Counsel, Chief Compliance Officer, Frank Russell Investment
Management Company, Russell Fund Distributors, Inc. and Frank Russell Capital
Inc.; Associate General Counsel and Assistant Secretary, Frank Russell Company;
Associate General Counsel, Assistant Secretary and Compliance Officer, Russell
Fiduciary Services Company; Director, Secretary, Associate General Counsel and
Chief Compliance Officer, Frank Russell Securities, Inc.; Secretary, Frank
Russell Canada Limited/Limitee.
- 5 -
<PAGE>
KENNETH W. LAMB, Assistant Secretary, Assistant Treasurer and Principal
Accounting Officer. Manager - Funds Administration, Frank Russell Investment
Management Company since 1994. Prior to that, Senior Audit Manager with Knight,
Vale & Gregory since 1982.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
TRUSTEE COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------
Aggregate Pension or Estimated Annual Total Compensation
Compensation Retirement Benefits Upon From Investment
from Benefits Accrued Retirement Company Paid to
Trustee Investment as part of Trustees
Company Investment
Company
Expenses
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lynn L. Anderson $0 $0 $0 $0
- -------------------------------------------------------------------------------------------------------
William L. Marshall $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Steven J. Mastrovich $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Patrick J. Riley $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Richard D. Shirk $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Bruce D. Taber $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Henry W. Todd $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
</TABLE>
OPERATION OF INVESTMENT COMPANY
SERVICE PROVIDERS. Most of the Fund's necessary day-to-day operations are
performed by separate business organizations under contract to Investment
Company. The principal service providers are:
Investment Adviser, Custodian
and Transfer Agent: State Street Bank and Trust Company
Administrator: Frank Russell Investment Management
Company
Distributor: Russell Fund Distributors, Inc.
Independent Accountants: Coopers & Lybrand, L.L.P.
ADVISER. State Street Bank and Trust Company ("State Street" or "Adviser")
serves as the Fund's investment adviser pursuant to an Advisory Agreement dated
April 12, 1988 ("Advisory Agreement"). State Street Bank and Trust Company is a
wholly owned subsidiary of State Street Boston Corporation, a publicly-held bank
holding company. State Street's address is 225 Franklin Street, Boston, MA
02110.
Under the Advisory Agreement, Adviser directs the Fund's investments in
accordance with its investment objective, policies and limitations. For these
services, the Fund pays a fee to Adviser at the rate stated in the Prospectus.
The Fund accrued expenses to Adviser of $63,602 from the date of inception to
August 31, 1995.
The Advisory Agreement will continue from year to year provided that a
majority of the Trustees who are not interested persons of the Funds and either
a majority of all Trustees or a majority of the shareholders of the Fund approve
its continuance. The Agreement may be terminated by Adviser or the Fund without
penalty upon 60 days' notice and will terminate automatically upon its
assignment.
- 6 -
<PAGE>
ADMINISTRATOR. Frank Russell Investment Management Company
("Administrator") serves as the Fund's administrator, pursuant to an
Administration Agreement dated April 12, 1988 ("Administration Agreement"). A
description of the services provided under the Administration Agreement and the
basis for computing fees for such services is provided in the Fund's Prospectus.
The Tax Free Fund accrued expenses to Administrator of $7,564 from the date of
inception to August 31, 1995. Administrator waived administration fees of $855
from the date of inception to August 31, 1995.
The Administration Agreement will continue from year to year provided that
a majority of the Trustees and a majority of the Trustees who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
operation of the Distribution Plan described below or the Administration
Agreement approve its continuance. The Agreement may be terminated by
Administrator or a Fund without penalty upon 60 days' notice and will terminate
automatically upon its assignment.
Administrator is a wholly owned subsidiary of Frank Russell Company. Frank
Russell Company was founded in 1936 and has provided comprehensive asset
management consulting services since 1969 for institutional pools of investment
assets, principally those of large corporate employee benefit plans. Frank
Russell Company and its affiliates have offices in Tacoma, Seattle, New York
City, Toronto, London, Tokyo, Sydney, Paris, Zurich and Auckland, and have
approximately 1,000 officers and employees. Administrator's and Frank Russell
Company's mailing address is 909 A Street, Tacoma, WA 98402.
DISTRIBUTOR. Russell Fund Distributors, Inc. ("Distributor") serves as the
distributor of Fund shares pursuant to a Distribution Agreement dated April 12,
1988 ("Distribution Agreement"). Distributor is a wholly owned subsidiary of
Administrator. Distributor's mailing address is Two International Place, 35th
Floor, Boston, MA 02110.
CUSTODIAN AND TRANSFER AGENT. State Street serves as the custodian
("Custodian") and transfer agent ("Transfer Agent") for Investment Company.
State Street also provides the basic portfolio recordkeeping required by
Investment Company for regulatory and financial reporting purposes. For these
services, State Street is paid an annual fee in accordance with the following:
custody services--a fee payable monthly on a pro rata basis, based on the
following percentages of average daily net assets of each Fund: $0 up to
$1.5 billion--0.02%, over $1.5 billion--0.015% (for purposes of calculating the
break point, the assets of all domestic Funds are aggregated); securities
transaction charges from $8.00 to $25.00 per transaction; Eurodollar transaction
fees ranging from $110.00 to $125.00 per transaction; monthly pricing fees of
$375.00 per Investment Fund and from $6.00 to $16.00 per security, depending on
the type of instrument and the pricing service used; transfer agent services of
$2.00 per shareholder transaction and a multiple class fee of $18,000 per year
for each additional class of shares; and yield calculation fees of $350.00 per
non-money market portfolio per year. State Street is reimbursed by the Fund for
supplying certain out-of-pocket expenses including postage, transfer fees, stamp
duties, taxes, wire fees, telexes, and freight.
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand L.L.P. serves as the Investment
Company's independent accountants. Coopers & Lybrand L.L.P. is responsible for
performing annual audits of the financial statements and financial highlights in
accordance with generally accepted auditing standards, a review of federal tax
returns, and, pursuant to Rule 17f-2 of the 1940 Act, three security counts.
The mailing address of Coopers & Lybrand L.L.P. is One Post Office Square,
Boston, MA 02019.
DISTRIBUTION PLAN. Under the 1940 Act, the Securities and Exchange
Commission has adopted Rule 12b-1, which regulates the circumstances under which
the Fund may, directly or indirectly, bear distribution and shareholder
servicing expenses. The Rule provides that the Fund may pay for such expenses
only pursuant to a plan adopted in accordance with the Rule.
Accordingly, the Fund has adopted a distribution plan (the "Plan") for the
Fund's Class A shares which is described in the Fund's Prospectus. The Plan
provides that the Fund may spend annually,
- 7 -
<PAGE>
directly or indirectly, up to 0.25% of the average net asset value of its Class
A shares for distribution and shareholder servicing services. The Plan does not
provide for the Fund to be charged for interest, carrying or any other financing
charges on any distribution expenses carried forward to subsequent years. A
quarterly report of the amounts expended under the Plan, and the purposes for
which such expenditures were incurred, must be made to the Trustees for their
review. The Plan may not be amended without approval of the holders of Class A
shares to increase materially the distribution or shareholder servicing costs
that the Fund may pay. The Plan and material amendments to it must be approved
annually by all of the Trustees and by the Trustees who are neither "interested
persons" (as defined in the 1940 Act) of the Fund nor have any direct or
indirect financial interest in the operation of the Plan or any related
agreements.
The Fund accrued expenses in the following amount to Russell Fund
Distributors, Inc., as Distributor, for the fiscal period ended August 31:
<TABLE>
<CAPTION>
1995
<S> <C>
Tax Free Fund $9,234
</TABLE>
This amount is reflective of the following individual payments:
<TABLE>
<S> <C>
Advertising $ 231
Printing of Prospectuses 52
Compensation to Sales Personnel 3,202
Other* 5,749
-------
$ 9,234
-------
-------
</TABLE>
* Other expenses may include such items as compensation for travel, conferences
and seminars for staff, subscriptions, office charges and professional fees.
Under the Plan, the Fund may also enter into agreements ("Service
Agreements") with financial institutions, which may include Adviser ("Service
Organizations"), to provide shareholder servicing with respect to Fund shares
held by or for the customers of the Service Organizations. Such arrangements
are more fully described in the Fund's prospectus under "Distribution Services
and Shareholder Servicing."
Similar plans have been adopted for the Class B and Class C shares of the
Fund. However, annual payment under these plans are limited to .35% and .60% of
the net asset value of Class B and Class C shares of the Fund, respectively.
The Fund accrued expenses in the following amount to Adviser, under a
Service Agreement pursuant to Rule 12b-1, for the fiscal period ended
August 31:
<TABLE>
<CAPTION>
<S> <C>
1995
Tax Free Fund $6,360
</TABLE>
FEDERAL LAW AFFECTING STATE STREET. The Glass-Steagall Act of 1933
prohibits state chartered banks such as State Street from engaging in the
business of underwriting, selling or distributing certain securities, and
prohibits a member bank of the Federal Reserve System from having certain
affiliations with an entity engaged principally in that business. The
activities of State Street in informing its customers of the Fund, performing
investment and redemption services, providing custodian, transfer, shareholder
servicing, dividend disbursing, agent servicing and investment advisory
services, may raise issues under these provisions. State Street has been
advised by its counsel that its activities in connection with the Fund
contemplated under this arrangement are consistent with its statutory and
regulatory obligations.
VALUATION OF FUND SHARES. Net asset value per share for the Class A shares
of the Fund is calculated twice each business day, as of 12:00 noon Eastern time
and as of the close of the regular
- 8 -
<PAGE>
trading session of the New York Stock Exchange (currently, 4:00 p.m. Eastern
time). A business day is one on which both the Boston Federal Reserve and the
New York Stock Exchange are open for business.
It is the policy of the Fund to use its best efforts to maintain a constant
price per share of $1.00, although there can be no assurance that the $1.00 net
asset value per share will be maintained. In accordance with this effort and
pursuant to Rule 2a-7 under the 1940 Act, the Fund uses the amortized cost
valuation method to value their portfolio instruments. This method involves
valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, even though the portfolio
security may increase or decrease in market value generally in response to
changes in interest rates. While 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 Fund would receive if it sold the instrument.
For example, in periods of declining interest rates, the daily yield on the
Fund's shares computed by dividing the annualized daily income on the Fund's
portfolio by the net asset value based upon the amortized cost valuation
technique may tend to be higher than a similar computation made by using a
method of valuation based upon market prices and estimates. In periods of
rising interest rates, the daily yield on Fund shares computed the same way may
tend to be lower than a similar computation made by using a method of
calculation based upon market prices and estimates.
The Trustees have established procedures reasonably designed to stabilize
the Fund's price per share at $1.00. These procedures include: (1) the
determination of the deviation from $1.00, if any, of the Fund's net asset value
using market values; (2) periodic review by the Trustees of the amount of and
the methods used to calculate the deviation; and (3) maintenance of records of
such determination. The Trustees will promptly consider what action, if any,
should be taken if such deviation exceeds 1/2 of one percent.
BROKERAGE PRACTICES. All portfolio transactions are placed on behalf of
the Fund by Adviser. There is generally no stated commission in the purchase or
sale of securities traded in the over-the-counter markets, including most debt
securities and money market instruments. Rather, the price of such securities
includes an undisclosed "commission" in the form of a mark-up or mark-down. The
cost of securities purchased from underwriters includes an underwriting
commission or concession.
Subject to the arrangements and provisions described below, the selection
of a broker or dealer to execute portfolio transactions is usually made by
Adviser. The Advisory Agreement provides, in substance and subject to specific
directions from officers of Investment Company, that in executing portfolio
transactions and selecting brokers or dealers, the principal objective is to
seek the best overall terms available to the Fund. Ordinarily, securities will
be purchased from primary and secondary markets, and Adviser shall consider all
factors it deems relevant in assessing the best overall terms available for any
transaction, 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 any commission or spread, if known, for the
specific transaction and other transactions on a continuing basis.
The Advisory Agreement authorizes Adviser to select brokers or dealers to
execute a particular transaction, including principal transactions, 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 Adviser (or its
affiliates). Adviser is authorized to cause the Fund to pay a commission to a
broker or dealer who provides such brokerage and research services for executing
a portfolio transaction which is in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction. The Fund or
Adviser, as appropriate, must determine in good faith that such commission was
reasonable in relation to the value of the brokerage and research services
provided--viewed in terms of that particular transaction or in terms of all the
accounts over which Adviser exercises investment discretion.
- 9 -
<PAGE>
The Trustees periodically review Adviser's performance of its
responsibilities in connection with the placement of portfolio transactions on
behalf of the Fund and review the prices paid by the Fund over representative
periods of time to determine if such prices are reasonable in relation to the
benefits provided to the Fund. Certain services received by Adviser
attributable to a particular Fund transaction may benefit one or more other
accounts for which Adviser exercises investment discretion or a Fund other than
such Fund. Adviser's fees are not reduced by Adviser's receipt of such
brokerage and research services.
During the fiscal year ended August 31, 1995, the Fund did not purchase
securities issued by the regular brokers or dealers of the Fund, as defined by
Rule 10b-1 of the 1940 Act.
YIELD AND TOTAL RETURN QUOTATIONS. The Fund computes average annual total
return by using a standardized method of calculation required by the Securities
and Exchange Commission. Average annual total return is computed by finding the
average annual compounded rates of return on a hypothetical initial investment
of $1,000 over the one, five and ten year periods (or life of the funds as
appropriate), that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
P(1+T)n = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a $1,000 payment made at
the beginning of the 1-, 5- and 10-year periods at the
end of the year or period
The calculation assumes that all dividends and distributions of the Fund
are reinvested at the price calculated in the manner described in the Prospectus
on the dividend dates during the period, and includes all recurring and
nonrecurring fees that are charged to all shareholder accounts.
The current annualized yield of the Fund may be quoted in published
material. The yield is calculated daily based upon the seven days ending on the
date of calculation ("base period"). The yields are computed by determining the
net change, exclusive of capital changes, in the value of a hypothetical pre-
existing account having a balance of one share at the beginning of the base
period, subtracting a hypothetical charge reflecting deductions from shareholder
accounts and dividing the net change in the account value by the value of the
account at the beginning of the base period to obtain the base period return,
and then multiplying the base period return by (365/7) with the resulting yield
figure carried to the nearest hundredth of one percent. An effective yield is
computed by determining the net change, exclusive of capital changes, in the
value of a hypothetical pre-existing account having a balance of one share at
the beginning of the period, subtracting a hypothetical charge reflecting
deductions from shareholder accounts, and dividing the difference by the value
of the account at the beginning of the base period to obtain the base period
return, and then compounding the base period return by adding 1, raising the sum
to a power equal to 365 divided by 7, and subtracting 1 from the result,
according to the following formula:
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1)365/7]-1
The following are the current and effective yields for the Fund for the
seven- and 30-day periods ended August 31, 1995:
7-day 30-day
----- ------
Current Yield 3.22% 3.22%
Effective Yield 3.27% 3.27%
- 10 -
<PAGE>
The Fund may also, from to time to time, utilize tax-equivalent yields.
The tax-equivalent yield is calculated by dividing that portion of the Fund's
yield (as calculated above) which is generated by tax-exempt income by one minus
a stated tax rate and adding the quotient to that portion of the Fund's yield,
if any (as calculated above) that is generated by taxable income and gains. The
Fund may advertise tax-equivalency tables which compare tax-exempt yields to
their equivalent taxable yields for relevant federal income tax brackets.
The following are the current and effective tax equivalent yields based on
a tax rate of 39.6% during 1995 for the seven- and 30-day periods ended August
31, 1995:
7-day 30-day
----- ------
Tax Equivalent Current Yield 5.33% 5.33%
Tax Equivalent Effective Yield 5.42% 5.41%
The yields quoted are based on historical earnings and are not indicative
of future results. Yields will depend on the type, quality, maturity, and
interest rate of money market instruments held by the Fund.
INVESTMENTS
The fundamental investment objective of the Fund is set forth in the
Prospectus. In addition to that investment objective, the Fund also has certain
"fundamental" investment restrictions, which may be changed only with the
approval of a majority of the shareholders of the Fund, and certain
nonfundamental investment restrictions and policies, which may be changed by the
Fund without shareholder approval.
INVESTMENT RESTRICTIONS
The Fund is subject to the following fundamental investment restrictions,
each of which applies at the time an investment is made. The Fund will not:
(1) Borrow money, except as a temporary measure for extraordinary or
emergency purposes or to facilitate redemptions (not for leveraging or
investment), provided that borrowings do not exceed an amount equal to 33-1/3%
of the current value of the Fund's assets taken at market value, less
liabilities other than borrowings. If at any time the Fund's borrowings exceed
this limitation due to a decline in net assets, such borrowings will within
three days be reduced to the extent necessary to comply with this limitation.
The Fund will not purchase investments once borrowed funds (including reverse
repurchase agreements) exceed 5% of its total assets.
(2) Pledge, mortgage or hypothecate its assets. However, the Fund may
pledge securities having a market value (on a daily marked-to-market basis) at
the time of the pledge not exceeding 33-1/3% of the value of the Fund's total
assets to secure borrowings permitted by paragraph (1) above.
(3) Make loans to any person or firm; provided, however, that the making of
a loan shall not include (i) the acquisition for investment of bonds,
debentures, notes or other evidences of indebtedness of any corporation or
government which are publicly distributed or of a type customarily purchased by
institutional investors, or (ii) the entry into repurchase agreements or reverse
repurchase agreements. The Fund may lend its portfolio securities to broker-
dealers or other institutional investors if the aggregate value of all
securities loaned does not exceed 33-1/3% of the value of the Fund's total
assets.
(4) Invest 25% or more of the value of its total assets in securities of
issuers located in any one state or group of public agencies primarily engaged
in any one industry (such as power generation) (other than
- 11 -
<PAGE>
the US Government, its agencies and instrumentalities). Concentration may occur
as a result of changes in the market value of portfolio securities, but may not
result from investment.
(5) With respect to 75% of its total assets, invest in securities of any
one issuer (other than securities issued by the US Government, its agencies, and
instrumentalities), if immediately after and as a result of such investment the
current market value of the Fund's holdings in the securities of such issuer
exceeds 5% of the value of the Fund's assets.
(6) Engage in the business of underwriting securities issued by others,
except that the Fund will not be deemed to be an underwriter or to be
underwriting on account of the purchase of securities subject to legal or
contractual restrictions on disposition.
(7) Issue senior securities, except as permitted by its investment
objective, policies and restrictions, and except as permitted by the 1940 Act.
(8) Purchase or sell puts, calls or invest in straddles, spreads or any
combination thereof, provided however, that the Fund may purchase securities
that provide the Fund the right to put the securities back to the issuer or a
third party.
(9) Make short sales of securities or purchase any securities on margin,
except for such short-term credits as are necessary for the clearance of
transactions.
(10) Purchase from or sell portfolio securities to its officers or
directors or other "interested persons" (as defined in the 1940 Act) of the
Fund, including their investment advisers and affiliates, except as permitted by
the 1940 Act and exemptive rules or orders thereunder.
(11) Purchase or sell real estate or real estate mortgage loans; provided,
however, that the Fund may invest in securities secured by real estate or
interests therein or issued by companies which invest in real estate or
interests therein.
(12) Purchase or sell commodities or commodity futures contracts.
In addition, the Fund has adopted the following non-fundamental investment
restrictions:
(1) Purchase interests in oil, gas or other mineral exploration or
development programs.
(2) Purchase the securities of any issuer if the Investment Company's
officers, Directors, Adviser or any of their affiliates beneficially own more
than one-half of 1% of the securities of such issuer or together own
beneficially more than 5% of the securities of such issuer.
(3) Invest in securities of any issuer which, together with its
predecessor, has been in operation for less than three years if, as a result,
more than 5% of the Fund's total assets would be invested in such securities.
(4) Make investments for the purpose of gaining control of an issuer's
management.
(5) Invest more than 10% of its net assets in the aggregate in illiquid
securities or securities that are not readily marketable, including repurchase
agreements and time deposits of more than seven days' duration, participation
interests (including municipal leases) and floating and variable rate demand
obligations as to which the Fund cannot exercise the demand feature on seven or
fewer days notice and for which there is no secondary market.
(6) Invest in securities issued by other investment companies except in
connection with a merger, consolidation, acquisition of assets, or other
reorganization approved by the Fund's shareholders, and except to the extent
permitted by the 1940 Act.
- 12 -
<PAGE>
INVESTMENT POLICIES
To the extent consistent with its fundamental investment objective and
restrictions and except as otherwise indicated, the Fund may invest in the
following instruments and utilize the following investment techniques:
MUNICIPAL SECURITIES GENERALLY. The Fund may purchase municipal securities
issued by or on behalf of public authorities to obtain funds to be used for
various public purposes, including general purpose financing for state and local
governments, refunding outstanding obligations, and financings for specific
projects or public facilities. Municipal securities purchased by the Fund may
bear fixed, floating or variable rates of interest or may be zero coupon
securities. Some municipal securities are insured by private insurance
companies, while others may be supported by letters of credit furnished by
domestic or foreign banks. In determining the credit quality of credit-enhanced
securities, the Adviser reviews the financial condition and creditworthiness of
such parties including insurance companies, banks and corporations.
Municipal securities are generally of two types: general obligations and
revenue obligations. General obligations are backed by the full faith and
credit of the issuer. These securities include tax anticipation notes, bond
anticipation notes, general obligation bonds and commercial paper. Revenue
obligations are backed by the revenues generated from a specific project or
facility and include industrial development bonds and private activity bonds.
Tax anticipation notes are issued to finance working capital needs of
municipalities and are generally issued in anticipation of future tax revenues.
Bond anticipation notes are issued in expectation of the issuer obtaining
longer-term financing.
TAX EXEMPT COMMERCIAL PAPER. Tax exempt commercial paper is a short-term
obligation with a stated maturity of 365 days or less. It is typically issued
to finance seasonal working capital needs or as short-term financing in
anticipation of longer term financing. Each instrument may be backed only by
the credit of the issuer or may be backed by some form of credit enhancement,
typically in the form of a guarantee by a commercial bank. Commercial paper
backed by guarantees of foreign banks may involve additional risk due to the
difficulty of obtaining and enforcing judgments against such banks and the
generally less restrictive regulations to which such banks are subject. The
Fund will only invest in commercial paper rated at the time of purchase not less
than Prime-1 by Moody's Investors Service, Inc., A-1 by Standard & Poor's Rating
Group or F-1 by Fitch's Investor Service.
VARIABLE AND FLOATING RATE SECURITIES. A floating rate security provides
for the automatic adjustment of its interest rate whenever a specified interest
rate changes. The coupon rate on variable rate securities is reset by a
remarketing agent on a periodic basis ranging from once a day to twice a year.
The agent sets the new rate at a level such that, in the judgment of the agent,
the security could be resold in the secondary market at par. Generally, changes
in interest rates will have a smaller effect on the market value of variable and
floating rate securities than on the market value of comparable fixed income
obligations. Thus, investing in variable and floating rate securities generally
allows less opportunity for capital appreciation and depreciation than investing
in comparable fixed rate securities.
Tax-exempt floating rate and variable rate demand notes and bonds
ordinarily have stated maturities in excess of 13 months, but often permit the
holder to demand payment of principal at any time, or at specified intervals not
exceeding 13 months, in each case upon not more than 30 days' notice. For the
purpose of determining the remaining maturity of certain variable or floating
rate obligations, the Fund may look to the later of the period remaining until
the net readjustment of the interest rate or the period remaining until the
principal amount can be recovered through demand.
MUNICIPAL LEASES. The Fund may purchase participation interests in
municipal obligations, including municipal lease/purchase agreements. Municipal
leases are undivided interests in a portion of
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an obligation in the form of a lease or installment purchase issued by a state
or local government to acquire equipment or facilities. These instruments may
have fixed, floating or variable rates of interest, with remaining maturities of
13 months or less. Municipal leases may be backed by an irrevocable letter of
credit or guarantee of a bank, or the payment obligation otherwise may be
collateralized by US Government securities. Certain participation interests may
permit the Fund to demand payment on not more than seven days' notice, for all
or any part of the Fund's interest, plus accrued interest.
Municipal leases frequently have special risks not normally associated with
general obligation or revenue bonds. Some leases or contracts include "non-
appropriation" clauses, which provide that the governmental issuer has no
obligation to make future payments under the lease or contract unless money is
appropriated for such purpose by the appropriate legislative body on a yearly or
other periodic basis. To reduce these risks, the Fund will only purchase
municipal leases subject to a non-appropriation clause when the payment of
principal and accrued interest is backed by a letter of credit or guarantee of a
bank.
Whether a municipal lease agreement will be considered illiquid for the
purpose of the Fund's restriction on investments in illiquid securities will be
determined by officers of the Investment Company in accordance with procedures
established by the Board of Trustees.
INDUSTRIAL DEVELOPMENT AND PRIVATE ACTIVITY BONDS. Industrial development
bonds are issued to finance a wide variety of capital projects including:
electric, gas, water and sewer systems; highways, bridges and tunnels; ports and
airport facilities; colleges and universities; and hospitals. The principal
security for these bonds is generally the net revenues derived from a particular
facility, group of facilities, or in some cases, the proceeds of a special
excise tax or other specific revenue sources. Although the principal security
behind these bonds may vary, many provide additional security in the form of a
debt service reserve fund whose money may be used to make principal and interest
payments on the issuer's obligations. Some authorities provide further security
in the form of a state's ability without obligation to make up deficiencies in
the debt service reserve fund.
Private activity bonds are considered municipal securities if the interest
paid thereon is exempt from federal income tax and are issued by or on behalf of
public authorities to raise money to finance various privately operated
facilities for business and manufacturing, housing, sports, and pollution
control. These bonds are also used to finance public facilities such as
airports, mass transit systems, ports and parking. The payment of the principal
and interest on such bonds is dependent solely on the ability of the facility's
user to meet its financial obligations and the value of any real or personal
property pledged as security for such payment. As noted in the Fund's
Prospectus and discussed below under "Taxes," interest income on these bonds may
be an item of tax preference subject to federal alternative minimum tax for
individuals and corporations.
TENDER OPTION BONDS. A tender option is a municipal obligation (generally
held pursuant to a custodial arrangement) having a relatively long maturity and
bearing interest at a fixed rate substantially higher than prevailing short-term
tax exempt rates, that has been coupled with the agreement of a third party,
such as a bank, broker-dealer or other financial institution, pursuant to which
such institution grants the security holders the option, at periodic intervals,
to tender their securities to the institution and receive the face value
thereof. As consideration for providing the option, the financial institution
receives periodic fees equal to the difference between the municipal
obligation's fixed coupon rate and the rate, as determined by a remarketing or
similar agent at or near the commencement of such period, that would cause the
securities, coupled with the tender option, to trade at par on the date of such
determination. Thus, after payment of this fee, the security holder effectively
holds a demand obligation that bears interest at the prevailing short-term tax
exempt rate. Subject to applicable regulatory requirements, the Fund may buy
tender option bonds if the agreement gives the Fund the right to tender the bond
to its sponsor no less frequently than once every 397 days. The Adviser will
consider on an ongoing basis the creditworthiness of the issuer of the
underlying obligation, any custodian and the third party provider of the tender
option. In certain instances and for certain tender option bonds, the option
may be terminable in the event of a default in payment of principal or interest
on the underlying municipal obligation and for other reasons.
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<PAGE>
STANDBY COMMITMENTS. The Fund's investments may include standby
commitments, which are rights to resell municipal securities at specified
periods prior to their maturity dates to the seller or to some third party at an
agreed upon price or yield. Standby commitments may involve certain expenses
and risks, including the inability of the issuer of the commitment to pay for
the securities at the time the commitment is exercised, non-marketability of the
commitment, and difference between the duration of the commitment and the
maturity of the underlying security. The Fund will limit standby commitment
transactions to institutions which the Adviser believes present minimal credit
risk.
US GOVERNMENT OBLIGATIONS. The types of US Government obligations in which
the Funds may at times invest include: (1) a variety of US Treasury
obligations, which differ only in their interest rates, maturities and times of
issuance and which have remaining maturities or hard put dates of 397 days or
less; and (2) obligations issued or guaranteed by US Government agencies and
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the US Treasury, (b) the right of the issuer to borrow an
amount limited to a specific line of credit from the US Treasury,
(c) discretionary authority of the US Government agency or instrumentality or
(d) the credit of the instrumentality. Examples of such issuers are the Federal
Land Banks and the Federal Housing Administration. No assurance can be given
that in the future the US Government will provide financial support to such US
Government agencies or instrumentalities described in (2)(b), (2)(c) and (2)(d),
other than as set forth above, since it is not obligated to do so by law.
WHEN-ISSUED TRANSACTIONS. New issues of securities are often offered on a
when-issued basis. This means that delivery and payment for the securities
normally will take place several days after the date the buyer commits to
purchase them. The payment obligation and the interest rate that will be
received on securities purchased on a when-issued basis are each fixed at the
time the buyer enters into the commitment.
The Fund will make commitments to purchase when-issued securities only with
the intention of actually acquiring the securities, but the Fund may sell these
securities or dispose of the commitment before the settlement date if it is
deemed advisable as a matter of investment strategy. Cash or marketable high
quality debt securities equal to the amount of the above commitments will be
segregated on the Fund's records. For the purpose of determining the adequacy
of these securities the segregated securities will be valued at market. If the
market value of such securities declines, additional cash or securities will be
segregated on the Fund's records on a daily basis so that the market value of
the account will equal the amount of such commitments by the Fund. The Fund will
invest more than 25% of its net assets in when-issued securities.
Securities purchased on a when-issued basis and held by the Fund are
subject to changes in market value based upon the public's perception of changes
in the level of interest rates. Generally, the value of such securities will
fluctuate inversely to changes in interest rates -- i.e., they will appreciate
in value when interest rates decline and decrease in value when interest rates
rise. Therefore, if in order to achieve higher interest income the Fund remains
substantially fully invested at the same time that it has purchased securities
on a "when-issued" basis, there will be a greater possibility of fluctuation in
the Fund's net asset value.
When payment for when-issued securities is due, the Fund will meet its
obligations from then-available cash flow, the sale of segregated securities,
the sale of other securities or, and although it would not normally expect to do
so, from the sale of the when-issued securities themselves (which may have a
market value greater or less than the Fund's payment obligation). Any gain from
the sale of securities to meet such obligations would be subject to federal
income taxes.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
certain financial institutions. Under repurchase agreements, these parties sell
US Treasury bills, notes and bonds to the Fund and agree to repurchase the
securities at the Fund's cost plus interest within a specified time (normally
one day). The securities purchased by the Fund have a total value in excess of
the purchase
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<PAGE>
price paid by the Fund and are held by Custodian until repurchased. Repurchase
agreements assist the Funds in being invested fully while retaining "overnight"
flexibility in pursuit of investments of a longer-term nature. The Fund will
limit repurchase transactions to those member banks of the Federal Reserve
System and primary dealers in US Government securities whose creditworthiness is
continually monitored and found satisfactory by Adviser.
FORWARD COMMITMENTS. The Fund may contract to purchase securities for a
fixed price at a future date beyond customary settlement time consistent with
the Fund's ability to manage its investment portfolio, maintain a stable net
asset value and meet redemption requests. The Fund may dispose of a commitment
prior to settlement if it is appropriate to do so and realize short-term profits
or losses upon such sale. When effecting such transactions, cash or liquid high
quality debt obligations held by the Fund of a dollar amount sufficient to make
payment for the portfolio securities to be purchased will be segregated on the
Fund's records at the trade date and maintained until the transaction is
settled. Forward commitments involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date, or if the other
party fails to complete the transaction.
SECTION 4(2) COMMERCIAL PAPER. The Fund may also invest in taxable
commercial paper issued in reliance on the so-called private placement exemption
from registration afforded by Section 4(2) of the Securities Act of 1933
("Section 4(2) paper"). Section 4(2) paper is restricted as to disposition
under the Federal securities laws and generally is sold to institutional
investors such as the Fund that agree that they are purchasing the paper for
investment and not with a view to public distribution. Any resale by the
purchaser must be in an exempt transaction. Section 4(2) paper normally is
resold to other institutional investors like the Fund through or with the
assistance of the issuer or investment dealers that make a market in Section
4(2) paper. Section 4(2) paper will not be subject to the Fund's 10% limitation
on illiquid securities set forth below where the Board of Trustees of Investment
Company (pursuant to guidelines adopted by the Board) determines that a liquid
trading market exists.
ILLIQUID SECURITIES. The Fund will not invest more than 10% of its net
assets in illiquid securities or securities that are not readily marketable,
including repurchase agreements and time deposits of more than seven days'
duration.
ZERO COUPON SECURITIES. These securities are notes, bonds and debentures
that: (1) do not pay current interest and are issued at a substantial discount
from par value; (2) have been stripped of their unmatured interest coupons and
receipts; or (3) pay no interest until a stated date one or more years into the
future. These securities also include certificates representing interests in
such stripped coupons and receipts.
Because the Fund accrues income from zero coupon securities without
receiving regular interest payments in cash, it may be required to sell
portfolio securities in order to pay a dividend depending, among other things,
upon the proportion of shareholders who elect to receive dividends in cash
rather than reinvesting dividends in additional shares of the Fund. Investing
in these securities might also force the Fund to sell portfolio securities to
maintain portfolio liquidity.
Because a zero coupon security pays no interest to its holder during its
life or for a substantial period of time, it usually trades at a deep discount
from its face or par value and will be subject to greater fluctuations in market
value in response to changing interest rates than debt obligations of comparable
maturities that make regular distributions of interest.
RATINGS OF DEBT INSTRUMENTS AND MUNICIPAL SECURITIES
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") -- LONG TERM DEBT RATINGS.
Aaa -- Bonds which 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 edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective
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<PAGE>
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 which 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 which make the long-term risk appear somewhat larger than the Aaa
securities.
A -- Bonds which 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 which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium-grade obligations
(i.e., 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.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
STANDARD & POOR'S CORPORATION ("S&P"). The ratings are based, in varying
degrees, on the following considerations: (1) The likelihood of default --
capacity and willingness of the obligator as to the timely payment of interest
and repayment of principal in accordance with the terms of the obligation;
(2) The nature of and provisions of the obligation; and (3) The protection
afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization, or other arrangement under the laws of bankruptcy
and other laws affecting creditors' rights.
AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
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<PAGE>
RATINGS OF SHORT-TERM MUNICIPAL LOANS
MOODY'S:
MIG-1/VMIG-1 -- Securities rated MIG-1/VMIG-1 are of 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.
MIG-2/VMIG-2 -- Loans bearing the MIG-2/VMIG-2 designation are of high
quality, with margins of protection ample although not so large as in the MIG-
1/VMIG-1 group.
S&P:
SP-1 -- Short-term municipal securities bearing the SP-1 designation have
very strong or strong capacity to pay principal and interest. Those issues
rated SP-1 which are determined to possess overwhelming safety characteristics
will be given a plus (+) designation.
SP-2 -- Issues rated SP-2 have satisfactory capacity to pay principal and
interest.
RATINGS OF COMMERCIAL PAPER
MOODY'S. Moody's short-term debt ratings are opinions of the ability of
issuers to repay punctually senior debt obligations. These obligations have an
original maturity not exceeding one year, unless explicitly noted. Moody's
employs the following three designations, all judged to be investment grade, to
indicate the relative repayment ability of rated issuers:
- Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
- Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited above
but to a lesser degree. Earnings trends and coverage ratios, while
sound, may be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternative liquidity is maintained.
- Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements
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<PAGE>
and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
- Issuers rated Not Prime do not fall within any of the Prime rating
categories.
S&P. An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered shot-term in the relevant
market. Ratings are graded into several categories, ranging from A-1 for the
highest quality obligations to D for the lowest. These categories are as
follows:
A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
FITCH'S INVESTORS SERVICE, INC. ("FITCH"). Commercial paper rated by Fitch
reflects Fitch's current appraisal of the degree of assurance of timely payment
of such debt. An appraisal results in the rating of an issuer's paper as F-1,
F-2, F-3, or F-4.
F-1 -- This designation indicates that the commercial paper is regarded as
having the strongest degree of assurance for timely payment.
F-2 -- Commercial paper issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than those issues rated F-1.
TAXES
The Fund intends to qualify for treatment as a regulated investment company
("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended
("the Code"). As a RIC, the Fund will not be liable for federal income taxes on
taxable net investment income and capital gain net income (capital gains in
excess of capital losses) that it distributes to its shareholders, provided that
the Fund distributes annually to its shareholders at least 90% of its net
investment income and net short-term capital gain for the taxable year
("Distribution Requirement"). For a Fund to qualify as a RIC it must abide by
all of the following requirements: (1) at least 90% of the Fund's gross income
each taxable year must be derived from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock
or securities or foreign currencies, or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies ("Income Requirement");
(2) less than 30% of the Fund's gross income each taxable year must be derived
from the sale or other disposition of securities and certain options, futures
contracts, forward contracts and foreign currencies held for less than three
months ("Short-Short Limitation"); (3) at the close of each quarter of the
Fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, US government securities, securities of
other RICs, and other securities, with such other securities limited, in respect
of any one issuer, to an amount that does not exceed 5% of the total assets of
the Fund and that does not represent more than 10% of the outstanding voting
securities of such issuer; and (4) at the close of each quarter of the Fund's
taxable year, not more than 25% of the value of its assets may be invested in
securities (other than US government securities or the securities of other RICs)
of any one issuer.
The Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year an amount at least equal to
the sum of: (1) 98% of its ordinary income for that year; (2) 98% of its
capital gain net income for the one-year period ending on October 31 of that
year; and (3) certain undistributed amounts from the preceding calendar year.
For this and other purposes, dividends declared in October, November or December
of any calendar year and made payable to
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shareholders of record in such month will be deemed to have been received on
December 31 of such year if the dividends are paid by the Fund subsequent to
December 31 but prior to February 1 of the following year.
If a shareholder receives a distribution taxable as long-term capital gain
with respect to shares of a Fund and redeems or exchanges the shares without
having held the shares for more than one year, then any loss on the redemption
or exchange will be treated as long-term capital loss to the extent of the
capital gain distribution.
From December 1, 1994 to August 31, 1995, the Fund incurred $3,523 of net
realized capital losses. As permitted by tax regulation, the Fund intends to
elect to defer those losses and treat them as arising in the fiscal year ending
August 31, 1996.
TAX EXEMPT INCOME. Dividends paid by the Fund will qualify as "exempt-
interest dividends," and thus will be excludable from gross income by its
shareholders, if the Fund satisfies the requirement that, at the close of each
quarter of its taxable year, at least 50% of the value of its total assets
consists of securities the interest on which is excludable from gross income
under section 103(a) of the Code; the Fund intends to satisfy this requirement.
The aggregate dividends excludable from the shareholders' treatment of dividends
from the Fund under local and state income tax laws may differ from the
treatment thereof under the Code.
If shares of the Fund are sold at a loss after being held for six months or
less, the loss will be disallowed to the extent of any exempt-interest dividends
received on those shares.
Tax-exempt interest attributable to certain private activity bonds ("PABs")
(including, in the case of a RIC receiving interest on such bonds, a
proportionate part of the exempt-interest dividends paid by that RIC) is an item
of tax preference for purposes of the alternative minimum tax. Exempt-interest
dividends received by a corporate shareholder also may be indirectly subject to
that tax without regard to whether the Fund's tax-exempt interest was
attributable to those bonds.
The Fund may purchase bonds at market discount (i.e., bonds with a purchase
price less then original issue price or adjusted issue price). If such bonds
are subsequently sold at a gain, then a portion of that gain equal to the amount
of market discount, which should have been accrued through the sale date, will
be taxable to shareholders as ordinary income.
Entities or persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by PABs or industrial development
bonds ("IDBs") should consult their tax advisers before purchasing shares of the
Fund because, for users of certain of these facilities, the interest on those
bonds is not exempt from federal income tax. For these purposes, the term
"substantial user" is defined generally to include a "non-exempt person" who
regularly uses in trade or business a part of a facility financed from the
proceeds of PABs or IDBs.
Up to 85% of social security and railroad retirement benefits may be
included in taxable income for recipients whose adjusted gross income (including
income from tax-exempt sources such as the Fund) plus 50% of their benefits
exceeds certain base amounts. Exempt-interest dividends paid by the Fund still
are tax-exempt to the extent described in the Fund's Prospectus; they are only
included in the calculation of whether a recipient's income exceeds the
established amounts.
If the Fund invests in any instrument that generates taxable income, under
the circumstances described in the Prospectus, distributions of the interest
earned thereon will be taxable to the Fund's shareholders as ordinary income to
the extent of the Fund's earnings and profits. Moreover, if the Fund realizes
capital gain as a result of market transactions, any distribution of that gain
will be taxable to its shareholders. There also may be collateral federal
income tax consequences regarding the receipt of exempt-interest dividends by
shareholders such as S corporations, financial institutions and property and
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casualty insurance companies. A shareholder falling into any such category
should consult its tax adviser concerning its investment in shares of the Fund.
STATE AND LOCAL TAXES. Under federal law, the income derived from
obligations issued by the US Government and certain of its agencies and
instrumentalities is exempt from state income taxes. All states that tax
personal income, other than Pennsylvania, permit mutual funds to pass through
this tax exemption to shareholders.
Depending upon the extent of the Fund's activities in states and localities
in which its offices are maintained, its agents or independent contractors are
located or it is otherwise deemed to be conducting business, the Fund may be
subject to the tax laws of such states or localities.
The foregoing discussion is only a summary of certain federal tax issues
generally affecting the Fund and its shareholders. Circumstances among
investors may vary and each investor is encouraged to discuss investment in the
Fund with the investor's tax adviser.
FINANCIAL STATEMENTS
The 1995 fiscal year-end financial statements of the Fund, including notes
to the financial statements and financial highlights and the report of
independent accountants, are included in the Fund's Annual Report to
shareholders. A copy of the Annual Report accompanies this Statement of
Additional Information and is incorporated herein by reference.
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<PAGE>
Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
THE SEVEN SEAS SERIES FUND
Two International Place, 35th Floor
Boston, Massachusetts 02110
(617) 654-6089
STATEMENT OF ADDITIONAL INFORMATION
TAX FREE MONEY MARKET FUND
CLASS B SHARES
DECEMBER 29, 1995
The Seven Seas Series Fund ("Investment Company") is a registered open-end
investment company organized as a Massachusetts business trust offering shares
of beneficial interest in separate investment portfolios. In addition, each
series of the Investment Company is diversified as defined in the Investment
Company Act of 1940, as amended ("1940 Act").
This Statement of Additional Information supplements or describes in
greater detail the Investment Company and The Seven Seas Series Tax Free Money
Market Fund (the "Tax Free Fund" or "Fund") as contained in the Fund's
Prospectus relating to Class B shares dated December 29, 1995. This Statement
is not a Prospectus and should be read in conjunction with the Fund's Prospectus
for Class B shares, which may be obtained by telephoning or writing Investment
Company at the number or address shown above.
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<PAGE>
TABLE OF CONTENTS
Page
----
STRUCTURE AND GOVERNANCE . . . . . . . . . . . . . . . . . . . . . . 3
Organization and Business History . . . . . . . . . . . . . . 3
Shareholder Meetings. . . . . . . . . . . . . . . . . . . . . 4
Controlling Shareholders. . . . . . . . . . . . . . . . . . . 4
Principal Shareholders. . . . . . . . . . . . . . . . . . . . 5
Trustees and Officers . . . . . . . . . . . . . . . . . . . . 5
OPERATION OF INVESTMENT COMPANY. . . . . . . . . . . . . . . . . . . 6
Service Providers . . . . . . . . . . . . . . . . . . . . . . 6
Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Administrator . . . . . . . . . . . . . . . . . . . . . . . . 7
Distributor . . . . . . . . . . . . . . . . . . . . . . . . . 7
Custodian and Transfer Agent. . . . . . . . . . . . . . . . . 7
Distribution Plan . . . . . . . . . . . . . . . . . . . . . . 8
Federal Law Affecting State Street. . . . . . . . . . . . . . 8
Valuation of Fund Shares. . . . . . . . . . . . . . . . . . . 9
Brokerage Practices . . . . . . . . . . . . . . . . . . . . . 9
Yield and Total Return Quotations . . . . . . . . . . . . . .10
INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Investment Restrictions . . . . . . . . . . . . . . . . . . .11
Investment Policies . . . . . . . . . . . . . . . . . . . . .13
Ratings of Debt Instruments and Municipal Securities. . . . .18
Ratings of Short-Term Municipal Loans . . . . . . . . . . . .19
Ratings of Commercial Paper . . . . . . . . . . . . . . . . .20
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . .23
- 2 -
<PAGE>
STRUCTURE AND GOVERNANCE
ORGANIZATION AND BUSINESS HISTORY. Investment Company was organized as a
Massachusetts business trust on October 3, 1987 and operates under a First
Amended and Restated Master Trust Agreement, dated October 13, 1993, as amended.
Investment Company is authorized to issue shares of beneficial interest, par
value $.001 per share, which may be divided into one or more series, each of
which evidences pro rata ownership interest in a different investment portfolio,
or "Fund." The Tax Free Money Market Fund is one such investment portfolio.
The Trustees may create additional Funds at any time without shareholder
approval.
As of the date of this Statement of Additional Information, Investment
Company is comprised of the following investment portfolios, each of which
commenced operations on the date set forth opposite the portfolio's name:
--------------------------------------------------------------------------
The Seven Seas Series Money Market Fund May 2, 1988
--------------------------------------------------------------------------
The Seven Seas Series US Government Money Market Fund March 1, 1991
--------------------------------------------------------------------------
The Seven Seas Series US Treasury Money Market Fund December 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series US Treasury Obligations Fund *
--------------------------------------------------------------------------
The Seven Seas Series Prime Money Market Fund February 22, 1994
--------------------------------------------------------------------------
The Seven Seas Series Yield Plus Fund November 9, 1992
--------------------------------------------------------------------------
The Seven Seas Series Tax Free Money Market Fund December 1, 1994
--------------------------------------------------------------------------
The Seven Seas Series Intermediate Fund September 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series Bond Market Fund *
--------------------------------------------------------------------------
The Seven Seas Series Growth and Income Fund September 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series S&P 500 Index Fund December 30, 1992
--------------------------------------------------------------------------
The Seven Seas Series Small Cap Fund July 1, 1992
--------------------------------------------------------------------------
The Seven Seas Series Matrix Equity Fund May 4, 1992
--------------------------------------------------------------------------
The Seven Seas Series Active International Fund March 7, 1995
--------------------------------------------------------------------------
The Seven Seas Series International Pacific Index Fund *
--------------------------------------------------------------------------
The Seven Seas Series Emerging Markets Fund March 1, 1994
--------------------------------------------------------------------------
The Seven Seas Series Real Estate Equity Fund *
--------------------------------------------------------------------------
__________
*As of the date of this Statement of Additional Information, these
portfolios have not commenced operations.
Prospectuses for these investment portfolios may be obtained by calling
Investment Company's distributor, Russell Fund Distributors, Inc., at (617) 654-
6089.
Investment Company is authorized to divide shares of any series into two or
more classes of shares. The shares of each Fund may have such rights and
preferences as the Trustees may establish from time to time, including the right
of redemption (including the price, manner and terms of redemption), special and
relative rights as to dividends and distributions, liquidation rights, sinking
or purchase fund provisions and conditions under which any Fund may have
separate voting rights or no voting rights. Each class of shares of a Fund is
entitled to the same
- 3 -
<PAGE>
rights and privileges as all other classes of that Fund, except that each class
bears the expenses associated with the distribution and shareholder servicing
arrangements of that class, as well as other expenses attributable to the class
and unrelated to the management of the Fund's portfolio securities. Shares of
the Money Market, US Government Money Market and Tax Free Money Market Funds are
divided into Classes A, B and C.
Any amendment to the Master Trust Agreement that would materially and
adversely affect shareholders of Investment Company as a whole, or shareholders
of a particular Fund, must be approved by the holders of a majority of the
shares of Investment Company or the Fund, respectively. All other amendments
may be effected by Investment Company's Board of Trustees.
Under certain unlikely circumstances, and as is the case with any
Massachusetts business trust, a shareholder of a Fund may be held personally
liable for the obligations of a Fund. The Master Trust Agreement provides that
shareholders shall not be subject to any personal liability for the acts or
obligations of a Fund and that every written agreement, obligation, or other
undertaking of the Fund shall contain a provision to the effect that the
shareholders are not personally liable thereunder. The Master Trust Agreement
also provides that the Fund shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Fund and satisfy
any judgment thereon. Thus, the risk to shareholders of incurring financial
loss beyond their investments is limited to circumstances in which the Fund
itself would be unable to meet its obligations.
SHAREHOLDER MEETINGS. Investment Company will not have an annual meeting
of shareholders. Special meetings may be convened: (1) by the Board of
Trustees; (2) upon written request to the Board by the holders of at least 10%
of the outstanding shares; or (3) upon the Board's failure to honor the
shareholders' request described above, by holders of at least 10% of the
outstanding shares giving notice of the special meeting to the shareholders.
CONTROLLING SHAREHOLDERS. The Trustees have the authority and
responsibility to manage the business of Investment Company. Trustees hold
office until they resign or are removed by, in substance, a vote of two-thirds
of Investment Company shares outstanding. However, State Street may from time
to time have discretionary authority over accounts which invest in Investment
Company shares. These accounts include accounts maintained for securities
lending clients and accounts which permit the use of Investment Company
portfolios as short-term cash sweep investments. Shares purchased for all
discretionary accounts are held of record by State Street, who retains voting
control of such shares. As of November 30, 1995, State Street held of record
36% of the issued and outstanding shares of Investment Company in connection
with its discretionary accounts. Consequently, State Street may be deemed to be
a controlling person of Investment Company for purposes of the 1940 Act. State
Street also acts as Investment Company's investment adviser, transfer agent and
custodian.
Frank Russell Investment Management Company, Investment Company's
administrator ("Administrator"), will be the initial sole shareholder of the Tax
Free Fund until such time as the
- 4 -
<PAGE>
Fund has public shareholders and therefore Administrator may be deemed to be a
controlling person for the purposes of the 1940 Act.
PRINCIPAL SHAREHOLDERS. As of November 30, 1995, the following shareholders
owned of record 5% or more of the issued and outstanding shares of Class A of
the Fund:
- Clipper State Street, a fund of State Street Bank and Trust Company,
225 Franklin Street M9, Boston, MA 02110--51%; and
- State Street Bank and Trust Company, Newport Office Park, 108 Myrtle
Street AH3, North Quincy, MA 02171--38%.
The Trustees and officers of the Investment Company, as a group, own less
than 1% of Investment Company's voting securities.
TRUSTEES AND OFFICERS. The Board of Trustees is responsible for overseeing
generally the operation of the Fund. The officers, all of whom are employed by,
and are officers of, Administrator or its affiliates, are responsible for the
day-to-day management and administration of the Fund's operations.
Trustees who are not officers or employees of State Street or its
affiliates are paid an annual fee and are reimbursed for travel and other
expenses they incur in attending Board meetings. Investment Company's officers
and employees are paid by Administrator or its affiliates.
The following lists Investment Company's Trustees and officers, their
positions with Investment Company, their present and principal occupations
during the past five years and the mailing addresses of Trustees who are not
affiliated with Investment Company. The mailing address for all Trustees and
officers affiliated with Investment Company is The Seven Seas Series Fund, 909 A
Street, Tacoma, WA 98402.
An asterisk (*) indicates that a Trustee is an "interested person" of the
Investment Company, as defined in the 1940 Act.
*LYNN L. ANDERSON, Trustee, Chairman of the Board, President and Fund
Treasurer. Chairman of the Board and Chief Executive Officer, Frank Russell
Investment Management Company and Russell Fund Distributors, Inc.; Director,
President and Chief Executive Officer, Frank Russell Investment Company and
Frank Russell Trust Company; Director and President, Russell Insurance Funds;
Director and Chairman, Frank Russell Company (Delaware); Director, Frank Russell
Investments (Ireland) Limited and Frank Russell Investment Company plc.
WILLIAM L. MARSHALL, Trustee. 33 West Court Street, Doylestown, PA 18901.
Chief Executive Officer and President, Wm. L. Marshal Associates, Inc. (a
registered investment adviser and provider of financial and related consulting
services); Certified Financial Planner; Member, Registry of Financial Planning
Practitioners; and Advisory Committee, International
- 5 -
<PAGE>
Association for Financial Planning Broker-Dealer Program. Member, Institute of
Certified Financial Planners. Registered for Securities with FSC Securities
Corp., Marietta, Georgia.
*STEVEN J. MASTROVICH, Trustee. 1 Financial Center, Boston, MA 02111.
Partner, Brown, Rudnick, Freed & Gesmer (law firm). 1990 to 1994, Partner,
Warner & Stackpole (law firm).
PATRICK J. RILEY, Trustee. 21 Custom House Street, Boston, MA 02110.
Partner, Riley, Burke & Donahue (law firm).
RICHARD D. SHIRK, Trustee. 3350 Peachtree Road, N.E., Atlanta, GA 30326.
President and Chief Executive Officer, Blue Cross/Blue Shield of Georgia. 1990
to 1992, President, Champions Group Resources--Business Management and Employee
Benefits Consulting; 1990, Senior Vice President, Employee Benefits Division,
Cigna Corporation (providing and insuring group life, health and disability
employee benefit products and services); from 1986 to 1990, Senior Vice
President, EQUICOR-Equitable HCA Corporation (providing and insuring group life,
health and disability employee benefit products and services).
*BRUCE D. TABER, Trustee. 26 Round Top Road, Boxford, MA 01921.
President, A.B. Reed, Inc. - Engineers, Architects, Planners. Prior to that,
Vice President, Instrumentation and Controls, A.B. Reed., Inc.
HENRY W. TODD, Trustee. 111 Commerce Drive, Montgomeryville, PA 18936.
President and Director, Zink & Triest Co., Inc. (dealer in vanilla flavor
materials); Director, A.M. Todd Co., and Flavorite Laboratories.
J. DAVID GRISWOLD, Vice President and Secretary. Assistant Secretary,
Associate General Counsel, Chief Compliance Officer, Frank Russell Investment
Management Company, Russell Fund Distributors, Inc. and Frank Russell Capital
Inc.; Associate General Counsel and Assistant Secretary, Frank Russell Company;
Associate General Counsel, Assistant Secretary and Compliance Officer, Russell
Fiduciary Services Company; Director, Secretary, Associate General Counsel and
Chief Compliance Officer, Frank Russell Securities, Inc.; Secretary, Frank
Russell Canada Limited/Limitee.
KENNETH W. LAMB, Assistant Secretary, Assistant Treasurer and Principal
Accounting Officer. Manager - Funds Administration, Frank Russell Investment
Management Company since 1994. Prior to that, Senior Audit Manager with Knight,
Vale & Gregory since 1982.
- 6 -
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
TRUSTEE COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------
Aggregate Pension or Estimated Annual Total Compensation
Compensation Retirement Benefits Upon From Investment
from Benefits Accrued Retirement Company Paid to
Trustee Investment as part of Trustees
Company Investment
Company
Expenses
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lynn L. Anderson $0 $0 $0 $0
- -------------------------------------------------------------------------------------------------------
William L. Marshall $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Steven J. Mastrovich $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Patrick J. Riley $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Richard D. Shirk $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Bruce D. Taber $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Henry W. Todd $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
</TABLE>
OPERATION OF INVESTMENT COMPANY
SERVICE PROVIDERS. Most of the Fund's necessary day-to-day operations are
performed by separate business organizations under contract to Investment
Company. The principal service providers are:
Investment Adviser, Custodian
and Transfer Agent: State Street Bank and Trust Company
Administrator: Frank Russell Investment Management
Company
Distributor: Russell Fund Distributors, Inc.
Independent Accountants: Coopers & Lybrand, L.L.P.
ADVISER. State Street Bank and Trust Company ("State Street" or "Adviser")
serves as the Fund's investment adviser pursuant to an Advisory Agreement dated
April 12, 1988. State Street Bank and Trust Company is a wholly owned
subsidiary of State Street Boston Corporation, a publicly-held bank holding
company. State Street's address is 225 Franklin Street, Boston, MA 02110.
Under the Advisory Agreement, Adviser directs the Fund's investments in
accordance with its investment objective, policies and limitations. For these
services, the Fund pays a fee to Adviser at the rate stated in the Prospectus.
The Fund accrued expenses to Adviser of $63,602 from the date of inception to
August 31, 1995. The Advisory Agreement will continue from year to year
provided that a majority of the Trustees who are not interested persons of the
Funds and either a majority of all Trustees or a majority of the shareholders of
the Fund approve its
- 7 -
<PAGE>
continuance. The Agreement may be terminated by Adviser or the Fund without
penalty upon 60 days' notice and will terminate automatically upon its
assignment.
ADMINISTRATOR. Frank Russell Investment Management Company
("Administrator") serves as the Fund's administrator, pursuant to an
Administration Agreement dated April 12, 1988. A description of the services
provided under the Administration Agreement and the basis for computing fees for
such services is provided in the Fund's Prospectus. The Fund accrued expenses
to Administrator of $7,564 from the date of inception to August 31, 1995.
Administrator waived administration fees of $855 from the date of inception to
August 31, 1995.
The Administration Agreement will continue from year to year provided that a
majority of the Trustees and a majority of the Trustees who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
operation of the Distribution Plan described below or the Administration
Agreement approve its continuance. The Agreement may be terminated by
Administrator or a Fund without penalty upon 60 days' notice and will terminate
automatically upon its assignment.
Administrator is a wholly owned subsidiary of Frank Russell Company. Frank
Russell Company was founded in 1936 and has provided comprehensive asset
management consulting services since 1969 for institutional pools of investment
assets, principally those of large corporate employee benefit plans. Frank
Russell Company and its affiliates have offices in Tacoma, Seattle, New York
City, Toronto, London, Tokyo, Sydney, Paris, Zurich and Auckland, and have
approximately 1,000 officers and employees. Administrator's and Frank Russell
Company's mailing address is 909 A Street, Tacoma, WA 98402.
DISTRIBUTOR. Russell Fund Distributors, Inc. ("Distributor") serves as the
distributor of Fund shares pursuant to a Distribution Agreement dated April 12,
1988. Distributor is a wholly owned subsidiary of Administrator. Distributor's
mailing address is Two International Place, 35th Floor, Boston, MA 02110.
CUSTODIAN AND TRANSFER AGENT. State Street serves as the custodian
("Custodian") and transfer agent ("Transfer Agent") for Investment Company.
State Street also provides the basic portfolio recordkeeping required by
Investment Company for regulatory and financial reporting purposes. For these
services, State Street is paid an annual fee in accordance with the following:
custody services--a fee payable monthly on a pro rata basis, based on the
following percentages of average daily net assets of each Fund: $0 up to
$1.5 billion--0.02%, over $1.5 billion--0.015% (for purposes of calculating the
break point, the assets of all domestic Funds are aggregated); securities
transaction charges from $8.00 to $25.00 per transaction; Eurodollar transaction
fees ranging from $110.00 to $125.00 per transaction; monthly pricing fees of
$375.00 per Investment Fund and from $6.00 to $16.00 per security, depending on
the type of instrument and the pricing service used; transfer agent services of
$2.00 per shareholder transaction and a multiple class fee of $18,000 per year
for each additional class of shares; and yield calculation fees of $350.00 per
non-money market portfolio per year. State Street is
- 8 -
<PAGE>
reimbursed by the Fund for supplying certain out-of-pocket expenses including
postage, transfer fees, stamp duties, taxes, wire fees, telexes, and freight.
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand L.L.P. serves as the Investment
Company's independent accountants. Coopers & Lybrand L.L.P. is responsible for
performing annual audits of the financial statements and financial highlights in
accordance with generally accepted auditing standards, a review of federal tax
returns, and, pursuant to Rule 17f-2 of the 1940 Act, three security counts.
The mailing address of Coopers & Lybrand L.L.P. is One Post Office Square,
Boston MA 02109.
DISTRIBUTION PLAN. Under the 1940 Act, the Securities and Exchange
Commission has adopted Rule 12b-1, which regulates the circumstances under which
the Fund may, directly or indirectly, bear distribution and shareholder
servicing expenses. The Rule provides that the Fund may pay for such expenses
only pursuant to a plan adopted in accordance with the Rule.
Accordingly, the Fund's sole shareholder has adopted a distribution plan
(the "Plan") for the Fund's Class B shares which is described in the Fund's
Prospectus. The Plan provides that the Fund may spend annually, directly or
indirectly, up to 0.35% of the average net asset value of its Class B shares for
distribution and shareholder servicing services. The Plan does not provide for
the Fund to be charged for interest, carrying or any other financing charges on
any distribution expenses carried forward to subsequent years. A quarterly
report of the amounts expended under the Plan, and the purposes for which such
expenditures were incurred, must be made to the Trustees for their review. The
Plan may not be amended without approval of the holders of Class B shares to
increase materially the distribution or shareholder servicing costs that the
Fund may pay. The Plan and material amendments to it must be approved annually
by all of the Trustees and by the Trustees who are neither "interested persons"
(as defined in the 1940 Act) of the Fund nor have any direct or indirect
financial interest in the operation of the Plan or any related agreements.
The Fund accrued expenses in the following amount to Russell Fund
Distributors, Inc., as Distributor, for the fiscal period ended August 31:
<TABLE>
<CAPTION>
1995
<S> <C>
Tax Free Fund $9,234
</TABLE>
This amount is reflective of the following individual payments:
<TABLE>
<CAPTION>
<S> <C>
Advertising $ 231
Printing of Prospectuses 52
Compensation to Sales Personnel 3,202
Other* 5,749
-------
$ 9,234
-------
-------
</TABLE>
* Other expenses may include such items as compensation for travel, conferences
and seminars for staff, subscriptions, office charges and professional fees.
- 9 -
<PAGE>
Under the Plan, the Fund may also enter into agreements ("Service
Agreements") with financial institutions, which may include Adviser ("Service
Organizations"), to provide shareholder servicing with respect to Fund shares
held by or for the customers of the Service Organizations. Such arrangements
are more fully described in the Fund's prospectus under "Distribution Services
and Shareholder Servicing."
Similar plans have been adopted for the Class A and Class C shares of the
Fund. However, annual payment under these plans are limited to .25% and .60% of
the net asset value of Class A and Class C shares of the Fund, respectively.
The Fund accrued expenses in the following amount to Adviser, under a
Service Agreement pursuant to Rule 12b-1, for the fiscal period ended August 31:
<TABLE>
<CAPTION>
1995
<S> <C>
Tax Free Fund $6,360
</TABLE>
FEDERAL LAW AFFECTING STATE STREET. The Glass-Steagall Act of 1933
prohibits state chartered banks such as State Street from engaging in the
business of underwriting, selling or distributing certain securities, and
prohibits a member bank of the Federal Reserve System from having certain
affiliations with an entity engaged principally in that business. The
activities of State Street in informing its customers of the Fund, performing
investment and redemption services, providing custodian, transfer, shareholder
servicing, dividend disbursing, agent servicing and investment advisory
services, may raise issues under these provisions. State Street has been
advised by its counsel that its activities in connection with the Fund
contemplated under this arrangement are consistent with its statutory and
regulatory obligations.
VALUATION OF FUND SHARES. Net asset value per share for the Class B shares
of the Fund is calculated twice each business day, as of 12:00 noon Eastern time
and as of the close of the regular trading session of the New York Stock
Exchange (currently, 4:00 p.m. Eastern time). A business day is one on which
both the Boston Federal Reserve and the New York Stock Exchange are open for
business.
It is the policy of the Fund to use its best efforts to maintain a constant
price per share of $1.00, although there can be no assurance that the $1.00 net
asset value per share will be maintained. In accordance with this effort and
pursuant to Rule 2a-7 under the 1940 Act, the Fund uses the amortized cost
valuation method to value their portfolio instruments. This method involves
valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, even though the portfolio
security may increase or decrease in market value generally in response to
changes in interest rates. While 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 Fund would receive if it sold the instrument.
For example, in periods of declining interest rates, the daily yield on the
Fund's shares computed by dividing the annualized daily income on the Fund's
portfolio by the net asset value
- 10 -
<PAGE>
based upon the amortized cost valuation technique may tend to be higher than a
similar computation made by using a method of valuation based upon market prices
and estimates. In periods of rising interest rates, the daily yield on Fund
shares computed the same way may tend to be lower than a similar computation
made by using a method of calculation based upon market prices and estimates.
The Trustees have established procedures reasonably designed to stabilize
the Fund's price per share at $1.00. These procedures include: (1) the
determination of the deviation from $1.00, if any, of the Fund's net asset value
using market values; (2) periodic review by the Trustees of the amount of and
the methods used to calculate the deviation; and (3) maintenance of records of
such determination. The Trustees will promptly consider what action, if any,
should be taken if such deviation exceeds 1/2 of one percent.
BROKERAGE PRACTICES. All portfolio transactions are placed on behalf of
the Fund by Adviser. There is generally no stated commission in the purchase or
sale of securities traded in the over-the-counter markets, including most debt
securities and money market instruments. Rather, the price of such securities
includes an undisclosed "commission" in the form of a mark-up or mark-down. The
cost of securities purchased from underwriters includes an underwriting
commission or concession.
Subject to the arrangements and provisions described below, the selection
of a broker or dealer to execute portfolio transactions is usually made by
Adviser. The advisory agreement provides, in substance and subject to specific
directions from officers of Investment Company, that in executing portfolio
transactions and selecting brokers or dealers, the principal objective is to
seek the best overall terms available to the Fund. Ordinarily, securities will
be purchased from primary and secondary markets, and Adviser shall consider all
factors it deems relevant in assessing the best overall terms available for any
transaction, 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 any commission or spread, if known, for the
specific transaction and other transactions on a continuing basis.
The advisory agreement authorizes Adviser to select brokers or dealers to
execute a particular transaction, including principal transactions, 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 Adviser (or its
affiliates). Adviser is authorized to cause the Fund to pay a commission to a
broker or dealer who provides such brokerage and research services for executing
a portfolio transaction which is in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction. The Fund or
Adviser, as appropriate, must determine in good faith that such commission was
reasonable in relation to the value of the brokerage and research services
provided--viewed in terms of that particular transaction or in terms of all the
accounts over which Adviser exercises investment discretion.
The Trustees periodically review Adviser's performance of its
responsibilities in connection with the placement of portfolio transactions on
behalf of the Fund and review the prices paid by the Fund over representative
periods of time to determine if such prices are reasonable in
- 11 -
<PAGE>
relation to the benefits provided to the Fund. Certain services received by
Adviser attributable to a particular Fund transaction may benefit one or more
other accounts for which Adviser exercises investment discretion or a Fund other
than such Fund. Adviser's fees are not reduced by Adviser's receipt of such
brokerage and research services.
During the fiscal year ended August 31, 1995, the Fund did not purchase
securities issued by the regular brokers or dealers of the Fund, as defined by
Rule 10b-1 of the 1940 Act.
YIELD AND TOTAL RETURN QUOTATIONS. The Fund computes average annual total
return by using a standardized method of calculation required by the Securities
and Exchange Commission. Average annual total return is computed by finding the
average annual compounded rates of return on a hypothetical initial investment
of $1,000 over the one, five and ten year periods (or life of the funds as
appropriate), that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
P(1+T)n = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a $1,000 payment made at
the beginning of the 1-, 5- and 10-year periods at the
end of the year or period
The calculation assumes that all dividends and distributions of the Fund
are reinvested at the price calculated in the manner described in the Prospectus
on the dividend dates during the period, and includes all recurring and
nonrecurring fees that are charged to all shareholder accounts.
The current annualized yield of the Fund may be quoted in published
material. The yield is calculated daily based upon the seven days ending on the
date of calculation ("base period"). The yields are computed by determining the
net change, exclusive of capital changes, in the value of a hypothetical pre-
existing account having a balance of one share at the beginning of the base
period, subtracting a hypothetical charge reflecting deductions from shareholder
accounts and dividing the net change in the account value by the value of the
account at the beginning of the base period to obtain the base period return,
and then multiplying the base period return by (365/7) with the resulting yield
figure carried to the nearest hundredth of one percent. An effective yield is
computed by determining the net change, exclusive of capital changes, in the
value of a hypothetical pre-existing account having a balance of one share at
the beginning of the period, subtracting a hypothetical charge reflecting
deductions from shareholder accounts, and dividing the difference by the value
of the account at the beginning of the base period to obtain the base period
return, and then compounding the base period return by adding 1, raising the sum
to a power equal to 365 divided by 7, and subtracting 1 from the result,
according to the following formula:
- 12 -
<PAGE>
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1)365/7]-1
The following are the current and effective yields for the Fund for the
seven- and 30-day periods ended August 31, 1995:
7-day 30-day
Current Yield 3.22% 3.22%
Effective Yield 3.27% 3.27%
The Fund may also, from to time to time, utilize tax-equivalent yields.
The tax-equivalent yield is calculated by dividing that portion of the Fund's
yield (as calculated above) which is generated by tax-exempt income by one minus
a stated tax rate and adding the quotient to that portion of the Fund's yield,
if any (as calculated above) that is generated by taxable income and gains. The
Fund may advertise tax-equivalency tables which compare tax-exempt yields to
their equivalent taxable yields for relevant federal income tax brackets.
The following are the current and effective tax equivalent yields based on
a tax rate of 39.6% during 1995 for the seven- and 30-day periods ended August
31, 1995:
7-day 30-day
Tax Equivalent Current Yield 5.33% 5.33%
Tax Equivalent Effective Yield 5.42% 5.41%
The above yields relate to a period prior to the division of Fund shares
into multiple classes and do not reflect the distribution and shareholder
servicing expenses of Class B shares. Had such expenses been incurred, the
yields would have been approximately .25% lower. The yields quoted are based on
historical earnings and are not indicative of future results. Yields will
depend on the type, quality, maturity, and interest rate of money market
instruments held by the Fund.
INVESTMENTS
The fundamental investment objective of the Fund is set forth in the
Prospectus. In addition to that investment objective, the Fund also has certain
"fundamental" investment restrictions, which may be changed only with the
approval of a majority of the shareholders of the Fund, and certain
nonfundamental investment restrictions and policies, which may be changed by the
Fund without shareholder approval.
INVESTMENT RESTRICTIONS
The Fund is subject to the following fundamental investment restrictions,
each of which applies at the time an investment is made. The Fund will not:
- 13 -
<PAGE>
(1) Borrow money, except as a temporary measure for extraordinary or
emergency purposes or to facilitate redemptions (not for leveraging or
investment), provided that borrowings do not exceed an amount equal to 33-1/3%
of the current value of the Fund's assets taken at market value, less
liabilities other than borrowings. If at any time the Fund's borrowings exceed
this limitation due to a decline in net assets, such borrowings will within
three days be reduced to the extent necessary to comply with this limitation.
The Fund will not purchase investments once borrowed funds (including reverse
repurchase agreements) exceed 5% of its total assets.
(2) Pledge, mortgage or hypothecate its assets. However, the Fund may
pledge securities having a market value (on a daily marked-to-market basis) at
the time of the pledge not exceeding 33-1/3% of the value of the Fund's total
assets to secure borrowings permitted by paragraph (1) above.
(3) Make loans to any person or firm; provided, however, that the making
of a loan shall not include (i) the acquisition for investment of bonds,
debentures, notes or other evidences of indebtedness of any corporation or
government which are publicly distributed or of a type customarily purchased by
institutional investors, or (ii) the entry into repurchase agreements or reverse
repurchase agreements. The Fund may lend its portfolio securities to broker-
dealers or other institutional investors if the aggregate value of all
securities loaned does not exceed 33-1/3% of the value of the Fund's total
assets.
(4) Invest 25% or more of the value of its total assets in securities of
issuers located in any one state or group of public agencies primarily engaged
in any one industry (such as power generation) (other than the US Government,
its agencies and instrumentalities). Concentration may occur as a result of
changes in the market value of portfolio securities, but may not result from
investment.
(5) With respect to 75% of its total assets, invest in securities of any
one issuer (other than securities issued by the US Government, its agencies, and
instrumentalities), if immediately after and as a result of such investment the
current market value of the Fund's holdings in the securities of such issuer
exceeds 5% of the value of the Fund's assets.
(6) Engage in the business of underwriting securities issued by others,
except that the Fund will not be deemed to be an underwriter or to be
underwriting on account of the purchase of securities subject to legal or
contractual restrictions on disposition.
(7) Issue senior securities, except as permitted by its investment
objective, policies and restrictions, and except as permitted by the 1940 Act.
(8) Purchase or sell puts, calls or invest in straddles, spreads or any
combination thereof, provided however, that the Fund may purchase securities
that provide the Fund the right to put the securities back to the issuer or a
third party.
(9) Make short sales of securities or purchase any securities on margin,
except for such short-term credits as are necessary for the clearance of
transactions.
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(10) Purchase from or sell portfolio securities to its officers or
directors or other "interested persons" (as defined in the 1940 Act) of the
Fund, including their investment advisers and affiliates, except as permitted by
the 1940 Act and exemptive rules or orders thereunder.
(11) Purchase or sell real estate or real estate mortgage loans; provided,
however, that the Fund may invest in securities secured by real estate or
interests therein or issued by companies which invest in real estate or
interests therein.
(12) Purchase or sell commodities or commodity futures contracts.
In addition, the Fund has adopted the following non-fundamental investment
restrictions:
(1) Purchase interests in oil, gas or other mineral exploration or
development programs.
(2) Purchase the securities of any issuer if the Investment Company's
officers, Directors, Adviser or any of their affiliates beneficially own more
than one-half of 1% of the securities of such issuer or together own
beneficially more than 5% of the securities of such issuer.
(3) Invest in securities of any issuer which, together with its
predecessor, has been in operation for less than three years if, as a result,
more than 5% of the Fund's total assets would be invested in such securities.
(4) Make investments for the purpose of gaining control of an issuer's
management.
(5) Invest more than 10% of its net assets in the aggregate in illiquid
securities or securities that are not readily marketable, including repurchase
agreements and time deposits of more than seven days' duration, participation
interests (including municipal leases) and floating and variable rate demand
obligations as to which the Fund cannot exercise the demand feature on seven or
fewer days notice and for which there is no secondary market.
(6) Invest in securities issued by other investment companies except in
connection with a merger, consolidation, acquisition of assets, or other
reorganization approved by the Fund's shareholders, and except to the extent
permitted by the 1940 Act.
INVESTMENT POLICIES
To the extent consistent with its fundamental investment objective and
restrictions and except as otherwise indicated, the Fund may invest in the
following instruments and utilize the following investment techniques:
MUNICIPAL SECURITIES GENERALLY. The Fund may purchase municipal securities
issued by or on behalf of public authorities to obtain funds to be used for
various public purposes, including general purpose financing for state and local
governments, refunding outstanding obligations, and financings for specific
projects or public facilities. Municipal securities purchased by the Fund may
bear fixed, floating or variable rates of interest or may be zero
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coupon securities. Some municipal securities are insured by private insurance
companies, while others may be supported by letters of credit furnished by
domestic or foreign banks. In determining the credit quality of credit-enhanced
securities, the Adviser reviews the financial condition and creditworthiness of
such parties including insurance companies, banks and corporations.
Municipal securities are generally of two types: general obligations and
revenue obligations. General obligations are backed by the full faith and
credit of the issuer. These securities include tax anticipation notes, bond
anticipation notes, general obligation bonds and commercial paper. Revenue
obligations are backed by the revenues generated from a specific project or
facility and include industrial development bonds and private activity bonds.
Tax anticipation notes are issued to finance working capital needs of
municipalities and are generally issued in anticipation of future tax revenues.
Bond anticipation notes are issued in expectation of the issuer obtaining
longer-term financing.
TAX EXEMPT COMMERCIAL PAPER. Tax exempt commercial paper is a short-term
obligation with a stated maturity of 365 days or less. It is typically issued
to finance seasonal working capital needs or as short-term financing in
anticipation of longer term financing. Each instrument may be backed only by
the credit of the issuer or may be backed by some form of credit enhancement,
typically in the form of a guarantee by a commercial bank. Commercial paper
backed by guarantees of foreign banks may involve additional risk due to the
difficulty of obtaining and enforcing judgments against such banks and the
generally less restrictive regulations to which such banks are subject. The
Fund will only invest in commercial paper rated at the time of purchase not less
than Prime-1 by Moody's Investors Service, Inc., A-1 by Standard & Poor's Rating
Group or F-1 by Fitch's Investor Service.
VARIABLE AND FLOATING RATE SECURITIES. A floating rate security provides
for the automatic adjustment of its interest rate whenever a specified interest
rate changes. The coupon rate on variable rate securities is reset by a
remarketing agent on a periodic basis ranging from once a day to twice a year.
The agent sets the new rate at a level such that, in the judgment of the agent,
the security could be resold in the secondary market at par. Generally, changes
in interest rates will have a smaller effect on the market value of variable and
floating rate securities than on the market value of comparable fixed income
obligations. Thus, investing in variable and floating rate securities generally
allows less opportunity for capital appreciation and depreciation than investing
in comparable fixed rate securities.
Tax-exempt floating rate and variable rate demand notes and bonds
ordinarily have stated maturities in excess of 13 months, but often permit the
holder to demand payment of principal at any time, or at specified intervals not
exceeding 13 months, in each case upon not more than 30 days' notice. For the
purpose of determining the remaining maturity of certain variable or floating
rate obligations, the Fund may look to the later of the period remaining until
the net readjustment of the interest rate or the period remaining until the
principal amount can be recovered through demand.
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MUNICIPAL LEASES. The Fund may purchase participation interests in
municipal obligations, including municipal lease/purchase agreements. Municipal
leases are undivided interests in a portion of an obligation in the form of a
lease or installment purchase issued by a state or local government to acquire
equipment or facilities. These instruments may have fixed, floating or variable
rates of interest, with remaining maturities of 13 months or less. Municipal
leases may be backed by an irrevocable letter of credit or guarantee of a bank,
or the payment obligation otherwise may be collateralized by US Government
securities. Certain participation interests may permit the Fund to demand
payment on not more than seven days' notice, for all or any part of the Fund's
interest, plus accrued interest.
Municipal leases frequently have special risks not normally associated with
general obligation or revenue bonds. Some leases or contracts include "non-
appropriation" clauses, which provide that the governmental issuer has no
obligation to make future payments under the lease or contract unless money is
appropriated for such purpose by the appropriate legislative body on a yearly or
other periodic basis. To reduce these risks, the Fund will only purchase
municipal leases subject to a non-appropriation clause when the payment of
principal and accrued interest is backed by a letter of credit or guarantee of a
bank.
Whether a municipal lease agreement will be considered illiquid for the
purpose of the Fund's restriction on investments in illiquid securities will be
determined by officers of the Investment Company in accordance with procedures
established by the Board of Trustees.
INDUSTRIAL DEVELOPMENT AND PRIVATE ACTIVITY BONDS. Industrial development
bonds are issued to finance a wide variety of capital projects including:
electric, gas, water and sewer systems; highways, bridges and tunnels; ports and
airport facilities; colleges and universities; and hospitals. The principal
security for these bonds is generally the net revenues derived from a particular
facility, group of facilities, or in some cases, the proceeds of a special
excise tax or other specific revenue sources. Although the principal security
behind these bonds may vary, many provide additional security in the form of a
debt service reserve fund whose money may be used to make principal and interest
payments on the issuer's obligations. Some authorities provide further security
in the form of a state's ability without obligation to make up deficiencies in
the debt service reserve fund.
Private activity bonds are considered municipal securities if the interest
paid thereon is exempt from federal income tax and are issued by or on behalf of
public authorities to raise money to finance various privately operated
facilities for business and manufacturing, housing, sports, and pollution
control. These bonds are also used to finance public facilities such as
airports, mass transit systems, ports and parking. The payment of the principal
and interest on such bonds is dependent solely on the ability of the facility's
user to meet its financial obligations and the value of any real or personal
property pledged as security for such payment. As noted in the Fund's
Prospectus and discussed below under "Taxes," interest income on these bonds may
be an item of tax preference subject to federal alternative minimum tax for
individuals and corporations.
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<PAGE>
TENDER OPTION BONDS. A tender option is a municipal obligation (generally
held pursuant to a custodial arrangement) having a relatively long maturity and
bearing interest at a fixed rate substantially higher than prevailing short-term
tax exempt rates, that has been coupled with the agreement of a third party,
such as a bank, broker-dealer or other financial institution, pursuant to which
such institution grants the security holders the option, at periodic intervals,
to tender their securities to the institution and receive the face value
thereof. As consideration for providing the option, the financial institution
receives periodic fees equal to the difference between the municipal
obligation's fixed coupon rate and the rate, as determined by a remarketing or
similar agent at or near the commencement of such period, that would cause the
securities, coupled with the tender option, to trade at par on the date of such
determination. Thus, after payment of this fee, the security holder effectively
holds a demand obligation that bears interest at the prevailing short-term tax
exempt rate. Subject to applicable regulatory requirements, the Fund may buy
tender option bonds if the agreement gives the Fund the right to tender the bond
to its sponsor no less frequently than once every 397 days. The Adviser will
consider on an ongoing basis the creditworthiness of the issuer of the
underlying obligation, any custodian and the third party provider of the tender
option. In certain instances and for certain tender option bonds, the option
may be terminable in the event of a default in payment of principal or interest
on the underlying municipal obligation and for other reasons.
STANDBY COMMITMENTS. The Fund's investments may include standby
commitments, which are rights to resell municipal securities at specified
periods prior to their maturity dates to the seller or to some third party at an
agreed upon price or yield. Standby commitments may involve certain expenses
and risks, including the inability of the issuer of the commitment to pay for
the securities at the time the commitment is exercised, non-marketability of the
commitment, and difference between the duration of the commitment and the
maturity of the underlying security. The Fund will limit standby commitment
transactions to institutions which the Adviser believes present minimal credit
risk.
US GOVERNMENT OBLIGATIONS. The types of US Government obligations in which
the Funds may at times invest include: (1) a variety of US Treasury
obligations, which differ only in their interest rates, maturities and times of
issuance and which have remaining maturities or hard put dates of 397 days or
less; and (2) obligations issued or guaranteed by US Government agencies and
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the US Treasury, (b) the right of the issuer to borrow an
amount limited to a specific line of credit from the US Treasury,
(c) discretionary authority of the US Government agency or instrumentality or
(d) the credit of the instrumentality. Examples of such issuers are the Federal
Land Banks and the Federal Housing Administration. No assurance can be given
that in the future the US Government will provide financial support to such US
Government agencies or instrumentalities described in (2)(b), (2)(c) and (2)(d),
other than as set forth above, since it is not obligated to do so by law.
WHEN-ISSUED TRANSACTIONS. New issues of securities are often offered on a
when-issued basis. This means that delivery and payment for the securities
normally will take place several days after the date the buyer commits to
purchase them. The payment obligation and the interest
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<PAGE>
rate that will be received on securities purchased on a when-issued basis are
each fixed at the time the buyer enters into the commitment.
The Fund will make commitments to purchase when-issued securities only with
the intention of actually acquiring the securities, but the Fund may sell these
securities or dispose of the commitment before the settlement date if it is
deemed advisable as a matter of investment strategy. Cash or marketable high
quality debt securities equal to the amount of the above commitments will be
segregated on the Fund's records. For the purpose of determining the adequacy
of these securities the segregated securities will be valued at market. If the
market value of such securities declines, additional cash or securities will be
segregated on the Fund's records on a daily basis so that the market value of
the account will equal the amount of such commitments by the Fund. The Fund will
invest more than 25% of its net assets in when-issued securities.
Securities purchased on a when-issued basis and held by the Fund are
subject to changes in market value based upon the public's perception of changes
in the level of interest rates. Generally, the value of such securities will
fluctuate inversely to changes in interest rates -- i.e., they will appreciate
in value when interest rates decline and decrease in value when interest rates
rise. Therefore, if in order to achieve higher interest income the Fund remains
substantially fully invested at the same time that it has purchased securities
on a "when-issued" basis, there will be a greater possibility of fluctuation in
the Fund's net asset value.
When payment for when-issued securities is due, the Fund will meet its
obligations from then-available cash flow, the sale of segregated securities,
the sale of other securities or, and although it would not normally expect to do
so, from the sale of the when-issued securities themselves (which may have a
market value greater or less than the Fund's payment obligation). Any gain from
the sale of securities to meet such obligations would be subject to federal
income taxes.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
certain financial institutions. Under repurchase agreements, these parties sell
US Treasury bills, notes and bonds to the Fund and agree to repurchase the
securities at the Fund's cost plus interest within a specified time (normally
one day). The securities purchased by the Fund have a total value in excess of
the purchase price paid by the Fund and are held by Custodian until repurchased.
Repurchase agreements assist the Funds in being invested fully while retaining
"overnight" flexibility in pursuit of investments of a longer-term nature. The
Fund will limit repurchase transactions to those member banks of the Federal
Reserve System and primary dealers in US Government securities whose
creditworthiness is continually monitored and found satisfactory by Adviser.
FORWARD COMMITMENTS. The Fund may contract to purchase securities for a
fixed price at a future date beyond customary settlement time consistent with
the Fund's ability to manage its investment portfolio, maintain a stable net
asset value and meet redemption requests. The Fund may dispose of a commitment
prior to settlement if it is appropriate to do so and realize short-term profits
or losses upon such sale. When effecting such transactions, cash or liquid high
quality debt obligations held by the Fund of a dollar amount sufficient to make
payment for the
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<PAGE>
portfolio securities to be purchased will be segregated on the Fund's records at
the trade date and maintained until the transaction is settled. Forward
commitments involve a risk of loss if the value of the security to be purchased
declines prior to the settlement date, or if the other party fails to complete
the transaction.
SECTION 4(2) COMMERCIAL PAPER. The Fund may also invest in taxable
commercial paper issued in reliance on the so-called private placement exemption
from registration afforded by Section 4(2) of the Securities Act of 1933
("Section 4(2) paper"). Section 4(2) paper is restricted as to disposition
under the Federal securities laws and generally is sold to institutional
investors such as the Fund that agree that they are purchasing the paper for
investment and not with a view to public distribution. Any resale by the
purchaser must be in an exempt transaction. Section 4(2) paper normally is
resold to other institutional investors like the Fund through or with the
assistance of the issuer or investment dealers that make a market in Section
4(2) paper. Section 4(2) paper will not be subject to the Fund's 10% limitation
on illiquid securities set forth below where the Board of Trustees of Investment
Company (pursuant to guidelines adopted by the Board) determines that a liquid
trading market exists.
ZERO COUPON SECURITIES. These securities are notes, bonds and debentures
that: (1) do not pay current interest and are issued at a substantial discount
from par value; (2) have been stripped of their unmatured interest coupons and
receipts; or (3) pay no interest until a stated date one or more years into the
future. These securities also include certificates representing interests in
such stripped coupons and receipts.
Because the Fund accrues income from zero coupon securities without
receiving regular interest payments in cash, it may be required to sell
portfolio securities in order to pay a dividend depending, among other things,
upon the proportion of shareholders who elect to receive dividends in cash
rather than reinvesting dividends in additional shares of the Fund. Investing
in these securities might also force the Fund to sell portfolio securities to
maintain portfolio liquidity.
Because a zero coupon security pays no interest to its holder during its
life or for a substantial period of time, it usually trades at a deep discount
from its face or par value and will be subject to greater fluctuations in market
value in response to changing interest rates than debt obligations of comparable
maturities that make regular distributions of interest.
RATINGS OF DEBT INSTRUMENTS AND MUNICIPAL SECURITIES
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") -- LONG TERM DEBT RATINGS.
Aaa -- Bonds which 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 edged." 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.
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Aa -- Bonds which 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 which make the long-term risk appear somewhat larger than the Aaa
securities.
A -- Bonds which 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 which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium-grade obligations
(i.e., 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.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
STANDARD & POOR'S CORPORATION ("S&P"). The ratings are based, in varying
degrees, on the following considerations: (1) The likelihood of default --
capacity and willingness of the obligator as to the timely payment of interest
and repayment of principal in accordance with the terms of the obligation;
(2) The nature of and provisions of the obligation; and (3) The protection
afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization, or other arrangement under the laws of bankruptcy
and other laws affecting creditors' rights.
AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
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<PAGE>
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
RATINGS OF SHORT-TERM MUNICIPAL LOANS
MOODY'S:
MIG-1/VMIG-1 -- Securities rated MIG-1/VMIG-1 are of 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.
MIG-2/VMIG-2 -- Loans bearing the MIG-2/VMIG-2 designation are of high
quality, with margins of protection ample although not so large as in the MIG-
1/VMIG-1 group.
S&P:
SP-1 -- Short-term municipal securities bearing the SP-1 designation have
very strong or strong capacity to pay principal and interest. Those issues
rated SP-1 which are determined to possess overwhelming safety characteristics
will be given a plus (+) designation.
SP-2 -- Issues rated SP-2 have satisfactory capacity to pay principal and
interest.
RATINGS OF COMMERCIAL PAPER
MOODY'S. Moody's short-term debt ratings are opinions of the ability of
issuers to repay punctually senior debt obligations. These obligations have an
original maturity not exceeding one year, unless explicitly noted. Moody's
employs the following three designations, all judged to be investment grade, to
indicate the relative repayment ability of rated issuers:
- Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
- Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the
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characteristics cited above but to a lesser degree. Earnings trends
and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is
maintained.
- Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
- Issuers rated Not Prime do not fall within any of the Prime rating
categories.
S&P. An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered shot-term in the relevant
market. Ratings are graded into several categories, ranging from A-1 for the
highest quality obligations to D for the lowest. These categories are as
follows:
A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
FITCH'S INVESTORS SERVICE, INC. ("FITCH"). Commercial paper rated by Fitch
reflects Fitch's current appraisal of the degree of assurance of timely payment
of such debt. An appraisal results in the rating of an issuer's paper as F-1,
F-2, F-3, or F-4.
F-1 -- This designation indicates that the commercial paper is regarded as
having the strongest degree of assurance for timely payment.
F-2 -- Commercial paper issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than those issues rated F-1.
TAXES
The Fund intends to qualify for treatment as a regulated investment company
("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended
("the Code"). As a RIC, the Fund will not be liable for federal income taxes on
taxable net investment income and capital gain net income (capital gains in
excess of capital losses) that it distributes to its shareholders, provided that
the Fund distributes annually to its shareholders at least 90% of its net
investment income and net short-term capital gain for the taxable year
("Distribution Requirement"). For a Fund to qualify as a RIC it must abide by
all of the following requirements: (1) at least 90% of the Fund's gross income
each taxable year must be derived from dividends, interest, payments
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with respect to securities loans, gains from the sale or other disposition of
stock or securities or foreign currencies, or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies ("Income Requirement");
(2) less than 30% of the Fund's gross income each taxable year must be derived
from the sale or other disposition of securities and certain options, futures
contracts, forward contracts and foreign currencies held for less than three
months ("Short-Short Limitation"); (3) at the close of each quarter of the
Fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, US government securities, securities of
other RICs, and other securities, with such other securities limited, in respect
of any one issuer, to an amount that does not exceed 5% of the total assets of
the Fund and that does not represent more than 10% of the outstanding voting
securities of such issuer; and (4) at the close of each quarter of the Fund's
taxable year, not more than 25% of the value of its assets may be invested in
securities (other than US government securities or the securities of other RICs)
of any one issuer.
The Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year an amount at least equal to
the sum of: (1) 98% of its ordinary income for that year; (2) 98% of its
capital gain net income for the one-year period ending on October 31 of that
year; and (3) certain undistributed amounts from the preceding calendar year.
For this and other purposes, dividends declared in October, November or December
of any calendar year and made payable to shareholders of record in such month
will be deemed to have been received on December 31 of such year if the
dividends are paid by the Fund subsequent to December 31 but prior to February 1
of the following year.
If a shareholder receives a distribution taxable as long-term capital gain
with respect to shares of a Fund and redeems or exchanges the shares without
having held the shares for more than one year, then any loss on the redemption
or exchange will be treated as long-term capital loss to the extent of the
capital gain distribution.
From December 1, 1994 to August 31, 1995, the Fund incurred $3,523 of net
realized capital losses. As permitted by tax regulation, the Fund intends to
elect to defer those losses and treat them as arising in the fiscal year ending
August 31, 1996.
TAX EXEMPT INCOME. Dividends paid by the Fund will qualify as "exempt-
interest dividends," and thus will be excludable from gross income by its
shareholders, if the Fund satisfies the requirement that, at the close of each
quarter of its taxable year, at least 50% of the value of its total assets
consists of securities the interest on which is excludable from gross income
under section 103(a) of the Code; the Fund intends to satisfy this requirement.
The aggregate dividends excludable from the shareholders' treatment of dividends
from the Fund under local and state income tax laws may differ from the
treatment thereof under the Code.
If shares of the Fund are sold at a loss after being held for six months or
less, the loss will be disallowed to the extent of any exempt-interest dividends
received on those shares.
Tax-exempt interest attributable to certain private activity bonds ("PABs")
(including, in the case of a RIC receiving interest on such bonds, a
proportionate part of the exempt-interest
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<PAGE>
dividends paid by that RIC) is an item of tax preference for purposes of the
alternative minimum tax. Exempt-interest dividends received by a corporate
shareholder also may be indirectly subject to that tax without regard to whether
the Fund's tax-exempt interest was attributable to those bonds.
The Fund may purchase bonds at market discount (i.e., bonds with a purchase
price less then original issue price or adjusted issue price). If such bonds
are subsequently sold at a gain, then a portion of that gain equal to the amount
of market discount, which should have been accrued through the sale date, will
be taxable to shareholders as ordinary income.
Entities or persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by PABs or industrial development
bonds ("IDBs") should consult their tax advisers before purchasing shares of the
Fund because, for users of certain of these facilities, the interest on those
bonds is not exempt from federal income tax. For these purposes, the term
"substantial user" is defined generally to include a "non-exempt person" who
regularly uses in trade or business a part of a facility financed from the
proceeds of PABs or IDBs.
Up to 85% of social security and railroad retirement benefits may be
included in taxable income for recipients whose adjusted gross income (including
income from tax-exempt sources such as the Fund) plus 50% of their benefits
exceeds certain base amounts. Exempt-interest dividends paid by the Fund still
are tax-exempt to the extent described in the Fund's Prospectus; they are only
included in the calculation of whether a recipient's income exceeds the
established amounts.
If the Fund invests in any instrument that generates taxable income, under
the circumstances described in the Prospectus, distributions of the interest
earned thereon will be taxable to the Fund's shareholders as ordinary income to
the extent of the Fund's earnings and profits. Moreover, if the Fund realizes
capital gain as a result of market transactions, any distribution of that gain
will be taxable to its shareholders. There also may be collateral federal
income tax consequences regarding the receipt of exempt-interest dividends by
shareholders such as S corporations, financial institutions and property and
casualty insurance companies. A shareholder falling into any such category
should consult its tax adviser concerning its investment in shares of the Fund.
STATE AND LOCAL TAXES. Under federal law, the income derived from
obligations issued by the US Government and certain of its agencies and
instrumentalities is exempt from state income taxes. All states that tax
personal income, other than Pennsylvania, permit mutual funds to pass through
this tax exemption to shareholders.
Depending upon the extent of the Fund's activities in states and localities
in which its offices are maintained, its agents or independent contractors are
located or it is otherwise deemed to be conducting business, the Fund may be
subject to the tax laws of such states or localities.
- 25 -
<PAGE>
The foregoing discussion is only a summary of certain federal tax issues
generally affecting the Fund and its shareholders. Circumstances among
investors may vary and each investor is encouraged to discuss investment in the
Fund with the investor's tax adviser.
FINANCIAL STATEMENTS
Unaudited financial statements for the Fund, including notes to the
financial statements and financial information, will be available within four to
six months from the later of the date of this Statement of Additional
Information or the date on which the Fund first accepts a subscription from an
unaffiliated shareholder. Audited financial statements for the Fund will be
available within 60 days following the end of the Fund's then current fiscal
year. When available, copies of the financial statements can be obtained
without charge by calling Distributor at (617) 654-6089.
- 26
<PAGE>
Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
THE SEVEN SEAS SERIES FUND
Two International Place, 35th Floor
Boston, Massachusetts 02110
(617) 654-6089
STATEMENT OF ADDITIONAL INFORMATION
TAX FREE MONEY MARKET FUND
CLASS C SHARES
DECEMBER 29, 1995
The Seven Seas Series Fund ("Investment Company") is a registered open-end
investment company organized as a Massachusetts business trust offering shares
of beneficial interest in separate investment portfolios. In addition, each
series of the Investment Company is diversified as defined in the Investment
Company Act of 1940, as amended ("1940 Act").
This Statement of Additional Information supplements or describes in
greater detail the Investment Company and The Seven Seas Series Tax Free Money
Market Fund (the "Tax Free Fund" or "Fund") as contained in the Fund's
Prospectus relating to Class C shares dated December 29, 1995. This Statement
is not a Prospectus and should be read in conjunction with the Fund's Prospectus
for Class C shares, which may be obtained by telephoning or writing Investment
Company at the number or address shown above.
-1-
<PAGE>
TABLE OF CONTENTS
Page
----
STRUCTURE AND GOVERNANCE . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Organization and Business History . . . . . . . . . . . . . . . . . . . 3
Shareholder Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . 4
Controlling Shareholders. . . . . . . . . . . . . . . . . . . . . . . . 4
Principal Shareholders. . . . . . . . . . . . . . . . . . . . . . . . . 5
Trustees and Officers . . . . . . . . . . . . . . . . . . . . . . . . . 5
OPERATION OF INVESTMENT COMPANY. . . . . . . . . . . . . . . . . . . . . . . 6
Service Providers . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Administrator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Custodian and Transfer Agent. . . . . . . . . . . . . . . . . . . . . . 7
Distribution Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Federal Law Affecting State Street. . . . . . . . . . . . . . . . . . . 8
Valuation of Fund Shares. . . . . . . . . . . . . . . . . . . . . . . . 9
Brokerage Practices . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Yield and Total Return Quotations . . . . . . . . . . . . . . . . . . . 10
INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . 11
Investment Policies . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Ratings of Debt Instruments and Municipal Securities. . . . . . . . . . 18
Ratings of Short-Term Municipal Loans . . . . . . . . . . . . . . . . . 19
Ratings of Commercial Paper . . . . . . . . . . . . . . . . . . . . . . 20
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
-2-
<PAGE>
STRUCTURE AND GOVERNANCE
ORGANIZATION AND BUSINESS HISTORY. Investment Company was organized as a
Massachusetts business trust on October 3, 1987 and operates under a First
Amended and Restated Master Trust Agreement, dated October 13, 1993, as amended.
Investment Company is authorized to issue shares of beneficial interest, par
value $.001 per share, which may be divided into one or more series, each of
which evidences pro rata ownership interest in a different investment portfolio,
or "Fund." The Tax Free Money Market Fund is one such investment portfolio.
The Trustees may create additional Funds at any time without shareholder
approval.
As of the date of this Statement of Additional Information, Investment
Company is comprised of the following investment portfolios, each of which
commenced operations on the date set forth opposite the portfolio's name:
--------------------------------------------------------------------------
The Seven Seas Series Money Market Fund May 2, 1988
--------------------------------------------------------------------------
The Seven Seas Series US Government Money Market Fund March 1, 1991
--------------------------------------------------------------------------
The Seven Seas Series US Treasury Money Market Fund December 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series US Treasury Obligations Fund *
--------------------------------------------------------------------------
The Seven Seas Series Prime Money Market Fund February 22, 1994
--------------------------------------------------------------------------
The Seven Seas Series Yield Plus Fund November 9, 1992
--------------------------------------------------------------------------
The Seven Seas Series Tax Free Money Market Fund December 1, 1994
--------------------------------------------------------------------------
The Seven Seas Series Intermediate Fund September 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series Bond Market Fund *
--------------------------------------------------------------------------
The Seven Seas Series Growth and Income Fund September 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series S&P 500 Index Fund December 30, 1992
--------------------------------------------------------------------------
The Seven Seas Series Small Cap Fund July 1, 1992
--------------------------------------------------------------------------
The Seven Seas Series Matrix Equity Fund May 4, 1992
--------------------------------------------------------------------------
The Seven Seas Series Active International Fund March 7, 1995
--------------------------------------------------------------------------
The Seven Seas Series International Pacific Index Fund *
--------------------------------------------------------------------------
The Seven Seas Series Emerging Markets Fund March 1, 1994
--------------------------------------------------------------------------
The Seven Seas Series Real Estate Equity Fund *
--------------------------------------------------------------------------
-----------------
*As of the date of this Statement of Additional Information, these
portfolios have not commenced operations.
Prospectuses for these investment portfolios may be obtained by calling
Investment Company's distributor, Russell Fund Distributors, Inc., at
(617) 654-6089.
Investment Company is authorized to divide shares of any series into two or
more classes of shares. The shares of each Fund may have such rights and
preferences as the Trustees may establish from time to time, including the right
of redemption (including the price, manner and terms of redemption), special and
relative rights as to dividends and distributions, liquidation rights, sinking
or purchase fund provisions and conditions under which any Fund may have
separate voting rights or no voting rights. Each class of shares of a Fund is
entitled to the same
-3-
<PAGE>
rights and privileges as all other classes of that Fund, except that each class
bears the expenses associated with the distribution and shareholder servicing
arrangements of that class, as well as other expenses attributable to the class
and unrelated to the management of the Fund's portfolio securities. Shares of
the Money Market, US Government Money Market and Tax Free Money Market Funds are
divided into Classes A, B and C.
Any amendment to the Master Trust Agreement that would materially and
adversely affect shareholders of Investment Company as a whole, or shareholders
of a particular Fund, must be approved by the holders of a majority of the
shares of Investment Company or the Fund, respectively. All other amendments
may be effected by Investment Company's Board of Trustees.
Under certain unlikely circumstances, and as is the case with any
Massachusetts business trust, a shareholder of a Fund may be held personally
liable for the obligations of a Fund. The Master Trust Agreement provides that
shareholders shall not be subject to any personal liability for the acts or
obligations of a Fund and that every written agreement, obligation, or other
undertaking of the Fund shall contain a provision to the effect that the
shareholders are not personally liable thereunder. The Master Trust Agreement
also provides that the Fund shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Fund and satisfy
any judgment thereon. Thus, the risk to shareholders of incurring financial
loss beyond their investments is limited to circumstances in which the Fund
itself would be unable to meet its obligations.
SHAREHOLDER MEETINGS. Investment Company will not have an annual meeting
of shareholders. Special meetings may be convened: (1) by the Board of
Trustees; (2) upon written request to the Board by the holders of at least 10%
of the outstanding shares; or (3) upon the Board's failure to honor the
shareholders' request described above, by holders of at least 10% of the
outstanding shares giving notice of the special meeting to the shareholders.
CONTROLLING SHAREHOLDERS. The Trustees have the authority and
responsibility to manage the business of Investment Company. Trustees hold
office until they resign or are removed by, in substance, a vote of two-thirds
of Investment Company shares outstanding. However, State Street may from time
to time have discretionary authority over accounts which invest in Investment
Company shares. These accounts include accounts maintained for securities
lending clients and accounts which permit the use of Investment Company
portfolios as short-term cash sweep investments. Shares purchased for all
discretionary accounts are held of record by State Street, who retains voting
control of such shares. As of November 30, 1995, State Street held of record
36% of the issued and outstanding shares of Investment Company in connection
with its discretionary accounts. Consequently, State Street may be deemed to be
a controlling person of Investment Company for purposes of the 1940 Act. State
Street also acts as Investment Company's investment adviser, transfer agent and
custodian.
Frank Russell Investment Management Company, Investment Company's
administrator ("Administrator"), will be the initial sole shareholder of the Tax
Free Fund until such time as the
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<PAGE>
Fund has public shareholders and therefore Administrator may be deemed to be a
controlling person for the purposes of the 1940 Act.
PRINCIPAL SHAREHOLDERS. As of November 30, 1995, the following shareholders
owned of record 5% or more of the issued and outstanding shares of the Fund:
- Clipper State Street, a fund of State Street Bank and Trust Company,
225 Franklin Street M9, Boston, MA 02110--51%; and
- State Street Bank and Trust Company, Newport Office Park, 108 Myrtle
Street AH3, North Quincy, MA 02171--38%.
The Trustees and officers of the Investment Company, as a group, own less
than 1% of Investment Company's voting securities.
TRUSTEES AND OFFICERS. The Board of Trustees is responsible for overseeing
generally the operation of the Fund. The officers, all of whom are employed by,
and are officers of, Administrator or its affiliates, are responsible for the
day-to-day management and administration of the Fund's operations.
Trustees who are not officers or employees of State Street or its
affiliates are paid an annual fee and are reimbursed for travel and other
expenses they incur in attending Board meetings. Investment Company's officers
and employees are paid by Administrator or its affiliates.
The following lists Investment Company's Trustees and officers, their
positions with Investment Company, their present and principal occupations
during the past five years and the mailing addresses of Trustees who are not
affiliated with Investment Company. The mailing address for all Trustees and
officers affiliated with Investment Company is The Seven Seas Series Fund, 909 A
Street, Tacoma, WA 98402.
An asterisk (*) indicates that a Trustee is an "interested person" of the
Investment Company, as defined in the 1940 Act.
*LYNN L. ANDERSON, Trustee, Chairman of the Board, President and Fund
Treasurer. Chairman of the Board and Chief Executive Officer, Frank Russell
Investment Management Company and Russell Fund Distributors, Inc.; Director,
President and Chief Executive Officer, Frank Russell Investment Company and
Frank Russell Trust Company; Director and President, Russell Insurance Funds;
Director and Chairman, Frank Russell Company (Delaware); Director, Frank Russell
Investments (Ireland) Limited and Frank Russell Investment Company plc.
WILLIAM L. MARSHALL, Trustee. 33 West Court Street, Doylestown, PA 18901.
Chief Executive Officer and President, Wm. L. Marshall Associates, Inc. (a
registered investment adviser and provider of financial and related consulting
services); Certified Financial Planner; Member, Registry of Financial Planning
Practitioners; and Advisory Committee, International
-5-
<PAGE>
Association for Financial Planning Broker-Dealer Program. Member, Institute of
Certified Financial Planners. Registered for Securities with FSC Securities
Corp., Marietta, Georgia.
*STEVEN J. MASTROVICH, Trustee. 1 Financial Center, Boston, MA 02111.
Partner, Brown, Rudnick, Freed & Gesmer (law firm). 1990 to 1994, Partner,
Warner & Stackpole (law firm).
PATRICK J. RILEY, Trustee. 21 Custom House Street, Boston, MA 02110.
Partner, Riley, Burke & Donahue (law firm).
RICHARD D. SHIRK, Trustee. 3350 Peachtree Road, N.E., Atlanta, GA 30326.
President and Chief Executive Officer, Blue Cross/Blue Shield of Georgia. 1990
to 1992, President, Champions Group Resources--Business Management and Employee
Benefits Consulting; 1990, Senior Vice President, Employee Benefits Division,
Cigna Corporation (providing and insuring group life, health and disability
employee benefit products and services); from 1986 to 1990, Senior Vice
President, EQUICOR-Equitable HCA Corporation (providing and insuring group life,
health and disability employee benefit products and services).
*BRUCE D. TABER, Trustee. 26 Round Top Road, Boxford, MA 01921.
President, A.B. Reed, Inc. - Engineers, Architects, Planners. Prior to that,
Vice President, Instrumentation and Controls, A.B. Reed., Inc.
HENRY W. TODD, Trustee. 111 Commerce Drive, Montgomeryville, PA 18936.
President and Director, Zink & Triest Co., Inc. (dealer in vanilla flavor
materials); Director, A.M. Todd Co., and Flavorite Laboratories.
J. DAVID GRISWOLD, Vice President and Secretary. Assistant Secretary,
Associate General Counsel, Chief Compliance Officer, Frank Russell Investment
Management Company, Russell Fund Distributors, Inc. and Frank Russell Capital
Inc.; Associate General Counsel and Assistant Secretary, Frank Russell Company;
Associate General Counsel, Assistant Secretary and Compliance Officer, Russell
Fiduciary Services Company; Director, Secretary, Associate General Counsel and
Chief Compliance Officer, Frank Russell Securities, Inc.; Secretary, Frank
Russell Canada Limited/Limitee.
KENNETH W. LAMB, Assistant Secretary, Assistant Treasurer and Principal
Accounting Officer. Manager - Funds Administration, Frank Russell Investment
Management Company since 1994. Prior to that, Senior Audit Manager with Knight,
Vale & Gregory since 1982.
-6-
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
TRUSTEE COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------
Aggregate Pension or Estimated Annual Total Compensation
Compensation Retirement Benefits Upon From Investment
from Benefits Accrued Retirement Company Paid to
Trustee Investment as part of Trustees
Company Investment
Company
Expenses
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lynn L. Anderson $0 $0 $0 $0
- -------------------------------------------------------------------------------------------------------
William L. Marshall $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Steven J. Mastrovich $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Patrick J. Riley $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Richard D. Shirk $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Bruce D. Taber $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Henry W. Todd $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
</TABLE>
OPERATION OF INVESTMENT COMPANY
SERVICE PROVIDERS. Most of the Fund's necessary day-to-day operations are
performed by separate business organizations under contract to Investment
Company. The principal service providers are:
Investment Adviser, Custodian
and Transfer Agent: State Street Bank and Trust Company
Administrator: Frank Russell Investment Management
Company
Distributor: Russell Fund Distributors, Inc.
Independent Accountants: Coopers &
Lybrand, L.L.P.
ADVISER. State Street Bank and Trust Company ("State Street" or "Adviser")
serves as the Fund's investment adviser pursuant to an Advisory Agreement dated
April 12, 1988. State Street Bank and Trust Company is a wholly owned
subsidiary of State Street Boston Corporation, a publicly-held bank holding
company. State Street's address is 225 Franklin Street, Boston, MA 02110.
Under the Advisory Agreement, Adviser directs the Fund's investments in
accordance with its investment objective, policies and limitations. For these
services, the Fund pays a fee to Adviser at the rate stated in the Prospectus.
The Fund accrued expenses to Adviser of $63,602 from the date of inception to
August 31, 1995.
The Advisory Agreement will continue from year to year provided that a
majority of the Trustees who are not interested persons of the Funds and either
a majority of all Trustees or a
-7-
<PAGE>
majority of the shareholders of the Fund approve its continuance. The Agreement
may be terminated by Adviser or the Fund without penalty upon 60 days' notice
and will terminate automatically upon its assignment.
ADMINISTRATOR. Frank Russell Investment Management Company
("Administrator") serves as the Fund's administrator, pursuant to an
Administration Agreement dated April 12, 1988. A description of the services
provided under the Administration Agreement and the basis for computing fees for
such services is provided in the Fund's Prospectus. The Fund accrued expenses to
Administrator of $7,564 from the date of inception to August 31, 1995.
Administrator waived administration fees of $855 from the date of inception to
August 31, 1995.
The Administration Agreement will continue from year to year provided that
a majority of the Trustees and a majority of the Trustees who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
operation of the Distribution Plan described below or the Administration
Agreement approve its continuance. The Agreement may be terminated by
Administrator or a Fund without penalty upon 60 days' notice and will terminate
automatically upon its assignment.
Administrator is a wholly owned subsidiary of Frank Russell Company. Frank
Russell Company was founded in 1936 and has provided comprehensive asset
management consulting services since 1969 for institutional pools of investment
assets, principally those of large corporate employee benefit plans. Frank
Russell Company and its affiliates have offices in Tacoma, Seattle, New York
City, Toronto, London, Tokyo, Sydney, Paris, Zurich and Auckland, and have
approximately 1,000 officers and employees. Administrator's and Frank Russell
Company's mailing address is 909 A Street, Tacoma, WA 98402.
DISTRIBUTOR. Russell Fund Distributors, Inc. ("Distributor") serves as the
distributor of Fund shares pursuant to a Distribution Agreement dated April 12,
1988. Distributor is a wholly owned subsidiary of Administrator. Distributor's
mailing address is Two International Place, 35th Floor, Boston, MA 02110.
CUSTODIAN AND TRANSFER AGENT. State Street serves as the custodian
("Custodian") and transfer agent ("Transfer Agent") for Investment Company.
State Street also provides the basic portfolio recordkeeping required by
Investment Company for regulatory and financial reporting purposes. For these
services, State Street is paid an annual fee in accordance with the following:
custody services--a fee payable monthly on a pro rata basis, based on the
following percentages of average daily net assets of each Fund: $0 up to
$1.5 billion--0.02%, over $1.5 billion--0.015% (for purposes of calculating the
break point, the assets of all domestic Funds are aggregated); securities
transaction charges from $8.00 to $25.00 per transaction; Eurodollar transaction
fees ranging from $110.00 to $125.00 per transaction; monthly pricing fees of
$375.00 per Investment Fund and from $6.00 to $16.00 per security, depending on
the type of instrument and the pricing service used; transfer agent services of
$2.00 per shareholder transaction and a multiple class fee of $18,000 per year
for each additional class of shares; and yield calculation fees of $350.00 per
non-money market portfolio per year. State Street is
-8-
<PAGE>
reimbursed by the Fund for supplying certain out-of-pocket
expenses including postage, transfer fees, stamp duties, taxes, wire fees,
telexes, and freight.
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand L.L.P. serves as the Investment
Company's independent accountants. Coopers & Lybrand L.L.P. is responsible for
performing annual audits of the financial statements and financial highlights in
accordance with generally accepted auditing standards, a review of federal tax
returns, and, pursuant to Rule 17f-2 of the 1940 Act, three security counts.
The mailing address of Coopers & Lybrand L.L.P. is One Post Office Square,
Boston MA 02109
DISTRIBUTION PLAN. Under the 1940 Act, the Securities and Exchange
Commission has adopted Rule 12b-1, which regulates the circumstances under which
the Fund may, directly or indirectly, bear distribution and shareholder
servicing expenses. The Rule provides that the Fund may pay for such expenses
only pursuant to a plan adopted in accordance with the Rule.
Accordingly, the Fund's sole shareholder has adopted a distribution plan
(the "Plan") for the Fund's Class C shares which is described in the Fund's
Prospectus. The Plan provides that the Fund may spend annually, directly or
indirectly, up to .60% of the average net asset value of its Class C shares for
distribution and shareholder servicing services. The Plan does not provide for
the Fund to be charged for interest, carrying or any other financing charges on
any distribution expenses carried forward to subsequent years. A quarterly
report of the amounts expended under the Plan, and the purposes for which such
expenditures were incurred, must be made to the Trustees for their review. The
Plan may not be amended without approval of the holders of Class C shares to
increase materially the distribution or shareholder servicing costs that the
Fund may pay. The Plan and material amendments to it must be approved annually
by all of the Trustees and by the Trustees who are neither "interested persons"
(as defined in the 1940 Act) of the Fund nor have any direct or indirect
financial interest in the operation of the Plan or any related agreements.
The Fund accrued expenses in the following amount to Russell Fund
Distributors, Inc., as Distributor, for the fiscal period ended August 31:
1995
----
Tax Free Fund $9,234
This amount is reflective of the following individual payments:
Advertising $ 231
Printing of Prospectuses 52
Compensation to Sales Personnel 3,202
Other* 5,749
-------
$ 9,234
-------
-------
* Other expenses may include such items as compensation for travel, conferences
and seminars for staff, subscriptions, office charges and professional fees.
-9-
<PAGE>
Under the Plan, the Fund may also enter into agreements ("Service
Agreements") with financial institutions, which may include Adviser ("Service
Organizations"), to provide shareholder servicing with respect to Fund shares
held by or for the customers of the Service Organizations. Such arrangements
are more fully described in the Fund's prospectus under "Distribution Services
and Shareholder Servicing."
The Fund accrued expenses in the following amount to Adviser, under a
Service Agreement pursuant to Rule 12b-1, for the fiscal period ended August 31:
1995
----
Tax Free Fund $6,360
Similar plans have been adopted for the Class A and Class B shares of the
Fund. However, annual payment under these plans are limited to .25% and .35% of
the net asset value of Class A and Class B shares of the Fund, respectively.
FEDERAL LAW AFFECTING STATE STREET. The Glass-Steagall Act of 1933
prohibits state chartered banks such as State Street from engaging in the
business of underwriting, selling or distributing certain securities, and
prohibits a member bank of the Federal Reserve System from having certain
affiliations with an entity engaged principally in that business. The
activities of State Street in informing its customers of the Fund, performing
investment and redemption services, providing custodian, transfer, shareholder
servicing, dividend disbursing, agent servicing and investment advisory
services, may raise issues under these provisions. State Street has been
advised by its counsel that its activities in connection with the Fund
contemplated under this arrangement are consistent with its statutory and
regulatory obligations.
VALUATION OF FUND SHARES. Net asset value per share for the Class C shares
of the Fund is calculated twice each business day, as of 12:00 noon Eastern time
and as of the close of the regular trading session of the New York Stock
Exchange (currently, 4:00 p.m. Eastern time). A business day is one on which
both the Boston Federal Reserve and the New York Stock Exchange are open for
business.
It is the policy of the Fund to use its best efforts to maintain a constant
price per share of $1.00, although there can be no assurance that the $1.00 net
asset value per share will be maintained. In accordance with this effort and
pursuant to Rule 2a-7 under the 1940 Act, the Fund uses the amortized cost
valuation method to value their portfolio instruments. This method involves
valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, even though the portfolio
security may increase or decrease in market value generally in response to
changes in interest rates. While 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 Fund would receive if it sold the instrument.
For example, in periods of declining interest rates, the daily yield on the
Fund's shares computed by dividing the annualized daily income on the Fund's
portfolio by the net asset value
-10-
<PAGE>
based upon the amortized cost valuation technique may tend to be higher than a
similar computation made by using a method of valuation based upon market prices
and estimates. In periods of rising interest rates, the daily yield on Fund
shares computed the same way may tend to be lower than a similar computation
made by using a method of calculation based upon market prices and estimates.
The Trustees have established procedures reasonably designed to stabilize
the Fund's price per share at $1.00. These procedures include: (1) the
determination of the deviation from $1.00, if any, of the Fund's net asset value
using market values; (2) periodic review by the Trustees of the amount of and
the methods used to calculate the deviation; and (3) maintenance of records of
such determination. The Trustees will promptly consider what action, if any,
should be taken if such deviation exceeds 1/2 of one percent.
BROKERAGE PRACTICES. All portfolio transactions are placed on behalf of
the Fund by Adviser. There is generally no stated commission in the purchase or
sale of securities traded in the over-the-counter markets, including most debt
securities and money market instruments. Rather, the price of such securities
includes an undisclosed "commission" in the form of a mark-up or mark-down. The
cost of securities purchased from underwriters includes an underwriting
commission or concession.
Subject to the arrangements and provisions described below, the selection
of a broker or dealer to execute portfolio transactions is usually made by
Adviser. The advisory agreement provides, in substance and subject to specific
directions from officers of Investment Company, that in executing portfolio
transactions and selecting brokers or dealers, the principal objective is to
seek the best overall terms available to the Fund. Ordinarily, securities will
be purchased from primary and secondary markets, and Adviser shall consider all
factors it deems relevant in assessing the best overall terms available for any
transaction, 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 any commission or spread, if known, for the
specific transaction and other transactions on a continuing basis.
The advisory agreement authorizes Adviser to select brokers or dealers to
execute a particular transaction, including principal transactions, 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 Adviser (or its
affiliates). Adviser is authorized to cause the Fund to pay a commission to a
broker or dealer who provides such brokerage and research services for executing
a portfolio transaction which is in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction. The Fund or
Adviser, as appropriate, must determine in good faith that such commission was
reasonable in relation to the value of the brokerage and research services
provided--viewed in terms of that particular transaction or in terms of all the
accounts over which Adviser exercises investment discretion.
The Trustees periodically review Adviser's performance of its
responsibilities in connection with the placement of portfolio transactions on
behalf of the Fund and review the prices paid by the Fund over representative
periods of time to determine if such prices are reasonable in
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relation to the benefits provided to the Fund. Certain services received by
Adviser attributable to a particular Fund transaction may benefit one or more
other accounts for which Adviser exercises investment discretion or a Fund other
than such Fund. Adviser's fees are not reduced by Adviser's receipt of such
brokerage and research services.
During the fiscal year ended August 31, 1995, the Fund did not purchase
securities issued by the regular brokers or dealers of the Fund, as defined by
Rule 10b-1 of the 1940 Act.
YIELD AND TOTAL RETURN QUOTATIONS. The Fund computes average annual total
return by using a standardized method of calculation required by the Securities
and Exchange Commission. Average annual total return is computed by finding the
average annual compounded rates of return on a hypothetical initial investment
of $1,000 over the one, five and ten year periods (or life of the funds as
appropriate), that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
P(1+T)(n) = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a $1,000 payment made at
the beginning of the 1-, 5- and 10-year periods at the
end of the year or period
The calculation assumes that all dividends and distributions of the Fund
are reinvested at the price calculated in the manner described in the Prospectus
on the dividend dates during the period, and includes all recurring and
nonrecurring fees that are charged to all shareholder accounts.
The current annualized yield of the Fund may be quoted in published
material. The yield is calculated daily based upon the seven days ending on the
date of calculation ("base period"). The yields are computed by determining the
net change, exclusive of capital changes, in the value of a hypothetical pre-
existing account having a balance of one share at the beginning of the base
period, subtracting a hypothetical charge reflecting deductions from shareholder
accounts and dividing the net change in the account value by the value of the
account at the beginning of the base period to obtain the base period return,
and then multiplying the base period return by (365/7) with the resulting yield
figure carried to the nearest hundredth of one percent. An effective yield is
computed by determining the net change, exclusive of capital changes, in the
value of a hypothetical pre-existing account having a balance of one share at
the beginning of the period, subtracting a hypothetical charge reflecting
deductions from shareholder accounts, and dividing the difference by the value
of the account at the beginning of the base period to obtain the base period
return, and then compounding the base period return by adding 1, raising the sum
to a power equal to 365 divided by 7, and subtracting 1 from the result,
according to the following formula:
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EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1)(365/7)]-1
The following are the current and effective yields for the Fund for the
seven- and 30-day periods ended August 31, 1995:
7-day 30-day
----- ------
Current Yield 3.22% 3.22%
Effective Yield 3.27% 3.27%
The Fund may also, from to time to time, utilize tax-equivalent yields.
The tax-equivalent yield is calculated by dividing that portion of the Fund's
yield (as calculated above) which is generated by tax-exempt income by one minus
a stated tax rate and adding the quotient to that portion of the Fund's yield,
if any (as calculated above) that is generated by taxable income and gains. The
Fund may advertise tax-equivalency tables which compare tax-exempt yields to
their equivalent taxable yields for relevant federal income tax brackets.
The following are the current and effective tax equivalent yields based on
a tax rate of 39.6% during 1995 for the seven- and 30-day periods ended August
31, 1995:
7-day 30-day
----- ------
Tax Equivalent Current Yield 5.33% 5.33%
Tax Equivalent Effective Yield 5.42% 5.41%
The above yields relate to a period prior to the division of Fund shares
into multiple classes and do not reflect the distribution and shareholder
servicing expenses of Class C shares. Had such expenses been incurred, the
yields would have been approximately .50% lower. The yields quoted are based on
historical earnings and are not indicative of future results. Yields will
depend on the type, quality, maturity, and interest rate of money market
instruments held by the Fund.
INVESTMENTS
The fundamental investment objective of the Fund is set forth in the
Prospectus. In addition to that investment objective, the Fund also has certain
"fundamental" investment restrictions, which may be changed only with the
approval of a majority of the shareholders of the Fund, and certain
nonfundamental investment restrictions and policies, which may be changed by the
Fund without shareholder approval.
INVESTMENT RESTRICTIONS
The Fund is subject to the following fundamental investment restrictions,
each of which applies at the time an investment is made. The Fund will not:
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(1) Borrow money, except as a temporary measure for extraordinary or
emergency purposes or to facilitate redemptions (not for leveraging or
investment), provided that borrowings do not exceed an amount equal to 33-1/3%
of the current value of the Fund's assets taken at market value, less
liabilities other than borrowings. If at any time the Fund's borrowings exceed
this limitation due to a decline in net assets, such borrowings will within
three days be reduced to the extent necessary to comply with this limitation.
The Fund will not purchase investments once borrowed funds (including reverse
repurchase agreements) exceed 5% of its total assets.
(2) Pledge, mortgage or hypothecate its assets. However, the Fund may
pledge securities having a market value (on a daily marked-to-market basis) at
the time of the pledge not exceeding 33-1/3% of the value of the Fund's total
assets to secure borrowings permitted by paragraph (1) above.
(3) Make loans to any person or firm; provided, however, that the making of
a loan shall not include (i) the acquisition for investment of bonds,
debentures, notes or other evidences of indebtedness of any corporation or
government which are publicly distributed or of a type customarily purchased by
institutional investors, or (ii) the entry into repurchase agreements or reverse
repurchase agreements. The Fund may lend its portfolio securities to broker-
dealers or other institutional investors if the aggregate value of all
securities loaned does not exceed 33-1/3% of the value of the Fund's total
assets.
(4) Invest 25% or more of the value of its total assets in securities of
issuers located in any one state or group of public agencies primarily engaged
in any one industry (such as power generation) (other than the US Government,
its agencies and instrumentalities). Concentration may occur as a result of
changes in the market value of portfolio securities, but may not result from
investment.
(5) With respect to 75% of its total assets, invest in securities of any
one issuer (other than securities issued by the US Government, its agencies, and
instrumentalities), if immediately after and as a result of such investment the
current market value of the Fund's holdings in the securities of such issuer
exceeds 5% of the value of the Fund's assets.
(6) Engage in the business of underwriting securities issued by others,
except that the Fund will not be deemed to be an underwriter or to be
underwriting on account of the purchase of securities subject to legal or
contractual restrictions on disposition.
(7) Issue senior securities, except as permitted by its investment
objective, policies and restrictions, and except as permitted by the 1940 Act.
(8) Purchase or sell puts, calls or invest in straddles, spreads or any
combination thereof, provided however, that the Fund may purchase securities
that provide the Fund the right to put the securities back to the issuer or a
third party.
(9) Make short sales of securities or purchase any securities on margin,
except for such short-term credits as are necessary for the clearance of
transactions.
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(10) Purchase from or sell portfolio securities to its officers or
directors or other "interested persons" (as defined in the 1940 Act) of the
Fund, including their investment advisers and affiliates, except as permitted by
the 1940 Act and exemptive rules or orders thereunder.
(11) Purchase or sell real estate or real estate mortgage loans; provided,
however, that the Fund may invest in securities secured by real estate or
interests therein or issued by companies which invest in real estate or
interests therein.
(12) Purchase or sell commodities or commodity futures contracts.
In addition, the Fund has adopted the following non-fundamental investment
restrictions:
(1) Purchase interests in oil, gas or other mineral exploration or
development programs.
(2) Purchase the securities of any issuer if the Investment Company's
officers, Directors, Adviser or any of their affiliates beneficially own more
than one-half of 1% of the securities of such issuer or together own
beneficially more than 5% of the securities of such issuer.
(3) Invest in securities of any issuer which, together with its
predecessor, has been in operation for less than three years if, as a result,
more than 5% of the Fund's total assets would be invested in such securities.
(4) Make investments for the purpose of gaining control of an issuer's
management.
(5) Invest more than 10% of its net assets in the aggregate in illiquid
securities or securities that are not readily marketable, including repurchase
agreements and time deposits of more than seven days' duration, participation
interests (including municipal leases) and floating and variable rate demand
obligations as to which the Fund cannot exercise the demand feature on seven or
fewer days notice and for which there is no secondary market.
(6) Invest in securities issued by other investment companies except in
connection with a merger, consolidation, acquisition of assets, or other
reorganization approved by the Fund's shareholders, and except to the extent
permitted by the 1940 Act.
INVESTMENT POLICIES
To the extent consistent with its fundamental investment objective and
restrictions and except as otherwise indicated, the Fund may invest in the
following instruments and utilize the following investment techniques:
MUNICIPAL SECURITIES GENERALLY. The Fund may purchase municipal securities
issued by or on behalf of public authorities to obtain funds to be used for
various public purposes, including general purpose financing for state and local
governments, refunding outstanding obligations, and financings for specific
projects or public facilities. Municipal securities purchased by the Fund may
bear fixed, floating or variable rates of interest or may be zero
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coupon securities. Some municipal securities are insured by private insurance
companies, while others may be supported by letters of credit furnished by
domestic or foreign banks. In determining the credit quality of credit-enhanced
securities, the Adviser reviews the financial condition and creditworthiness of
such parties including insurance companies, banks and corporations.
Municipal securities are generally of two types: general obligations and
revenue obligations. General obligations are backed by the full faith and
credit of the issuer. These securities include tax anticipation notes, bond
anticipation notes, general obligation bonds and commercial paper. Revenue
obligations are backed by the revenues generated from a specific project or
facility and include industrial development bonds and private activity bonds.
Tax anticipation notes are issued to finance working capital needs of
municipalities and are generally issued in anticipation of future tax revenues.
Bond anticipation notes are issued in expectation of the issuer obtaining
longer-term financing.
TAX EXEMPT COMMERCIAL PAPER. Tax exempt commercial paper is a short-term
obligation with a stated maturity of 365 days or less. It is typically issued
to finance seasonal working capital needs or as short-term financing in
anticipation of longer term financing. Each instrument may be backed only by
the credit of the issuer or may be backed by some form of credit enhancement,
typically in the form of a guarantee by a commercial bank. Commercial paper
backed by guarantees of foreign banks may involve additional risk due to the
difficulty of obtaining and enforcing judgments against such banks and the
generally less restrictive regulations to which such banks are subject. The
Fund will only invest in commercial paper rated at the time of purchase not less
than Prime-1 by Moody's Investors Service, Inc., A-1 by Standard & Poor's Rating
Group or F-1 by Fitch's Investor Service.
VARIABLE AND FLOATING RATE SECURITIES. A floating rate security provides
for the automatic adjustment of its interest rate whenever a specified interest
rate changes. The coupon rate on variable rate securities is reset by a
remarketing agent on a periodic basis ranging from once a day to twice a year.
The agent sets the new rate at a level such that, in the judgment of the agent,
the security could be resold in the secondary market at par. Generally, changes
in interest rates will have a smaller effect on the market value of variable and
floating rate securities than on the market value of comparable fixed income
obligations. Thus, investing in variable and floating rate securities generally
allows less opportunity for capital appreciation and depreciation than investing
in comparable fixed rate securities.
Tax-exempt floating rate and variable rate demand notes and bonds
ordinarily have stated maturities in excess of 13 months, but often permit the
holder to demand payment of principal at any time, or at specified intervals not
exceeding 13 months, in each case upon not more than 30 days' notice. For the
purpose of determining the remaining maturity of certain variable or floating
rate obligations, the Fund may look to the later of the period remaining until
the net readjustment of the interest rate or the period remaining until the
principal amount can be recovered through demand.
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<PAGE>
MUNICIPAL LEASES. The Fund may purchase participation interests in
municipal obligations, including municipal lease/purchase agreements. Municipal
leases are undivided interests in a portion of an obligation in the form of a
lease or installment purchase issued by a state or local government to acquire
equipment or facilities. These instruments may have fixed, floating or variable
rates of interest, with remaining maturities of 13 months or less. Municipal
leases may be backed by an irrevocable letter of credit or guarantee of a bank,
or the payment obligation otherwise may be collateralized by US Government
securities. Certain participation interests may permit the Fund to demand
payment on not more than seven days' notice, for all or any part of the Fund's
interest, plus accrued interest.
Municipal leases frequently have special risks not normally associated with
general obligation or revenue bonds. Some leases or contracts include "non-
appropriation" clauses, which provide that the governmental issuer has no
obligation to make future payments under the lease or contract unless money is
appropriated for such purpose by the appropriate legislative body on a yearly or
other periodic basis. To reduce these risks, the Fund will only purchase
municipal leases subject to a non-appropriation clause when the payment of
principal and accrued interest is backed by a letter of credit or guarantee of a
bank.
Whether a municipal lease agreement will be considered illiquid for the
purpose of the Fund's restriction on investments in illiquid securities will be
determined by officers of the Investment Company in accordance with procedures
established by the Board of Trustees.
INDUSTRIAL DEVELOPMENT AND PRIVATE ACTIVITY BONDS. Industrial development
bonds are issued to finance a wide variety of capital projects including:
electric, gas, water and sewer systems; highways, bridges and tunnels; ports and
airport facilities; colleges and universities; and hospitals. The principal
security for these bonds is generally the net revenues derived from a particular
facility, group of facilities, or in some cases, the proceeds of a special
excise tax or other specific revenue sources. Although the principal security
behind these bonds may vary, many provide additional security in the form of a
debt service reserve fund whose money may be used to make principal and interest
payments on the issuer's obligations. Some authorities provide further security
in the form of a state's ability without obligation to make up deficiencies in
the debt service reserve fund.
Private activity bonds are considered municipal securities if the interest
paid thereon is exempt from federal income tax and are issued by or on behalf of
public authorities to raise money to finance various privately operated
facilities for business and manufacturing, housing, sports, and pollution
control. These bonds are also used to finance public facilities such as
airports, mass transit systems, ports and parking. The payment of the principal
and interest on such bonds is dependent solely on the ability of the facility's
user to meet its financial obligations and the value of any real or personal
property pledged as security for such payment. As noted in the Fund's
Prospectus and discussed below under "Taxes," interest income on these bonds may
be an item of tax preference subject to federal alternative minimum tax for
individuals and corporations.
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<PAGE>
TENDER OPTION BONDS. A tender option is a municipal obligation (generally
held pursuant to a custodial arrangement) having a relatively long maturity and
bearing interest at a fixed rate substantially higher than prevailing short-term
tax exempt rates, that has been coupled with the agreement of a third party,
such as a bank, broker-dealer or other financial institution, pursuant to which
such institution grants the security holders the option, at periodic intervals,
to tender their securities to the institution and receive the face value
thereof. As consideration for providing the option, the financial institution
receives periodic fees equal to the difference between the municipal
obligation's fixed coupon rate and the rate, as determined by a remarketing or
similar agent at or near the commencement of such period, that would cause the
securities, coupled with the tender option, to trade at par on the date of such
determination. Thus, after payment of this fee, the security holder effectively
holds a demand obligation that bears interest at the prevailing short-term tax
exempt rate. Subject to applicable regulatory requirements, the Fund may buy
tender option bonds if the agreement gives the Fund the right to tender the bond
to its sponsor no less frequently than once every 397 days. The Adviser will
consider on an ongoing basis the creditworthiness of the issuer of the
underlying obligation, any custodian and the third party provider of the tender
option. In certain instances and for certain tender option bonds, the option
may be terminable in the event of a default in payment of principal or interest
on the underlying municipal obligation and for other reasons.
STANDBY COMMITMENTS. The Fund's investments may include standby
commitments, which are rights to resell municipal securities at specified
periods prior to their maturity dates to the seller or to some third party at an
agreed upon price or yield. Standby commitments may involve certain expenses
and risks, including the inability of the issuer of the commitment to pay for
the securities at the time the commitment is exercised, non-marketability of the
commitment, and difference between the duration of the commitment and the
maturity of the underlying security. The Fund will limit standby commitment
transactions to institutions which the Adviser believes present minimal credit
risk.
US GOVERNMENT OBLIGATIONS. The types of US Government obligations in which
the Funds may at times invest include: (1) a variety of US Treasury
obligations, which differ only in their interest rates, maturities and times of
issuance and which have remaining maturities or hard put dates of 397 days or
less; and (2) obligations issued or guaranteed by US Government agencies and
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the US Treasury, (b) the right of the issuer to borrow an
amount limited to a specific line of credit from the US Treasury,
(c) discretionary authority of the US Government agency or instrumentality or
(d) the credit of the instrumentality. Examples of such issuers are the Federal
Land Banks and the Federal Housing Administration. No assurance can be given
that in the future the US Government will provide financial support to such US
Government agencies or instrumentalities described in (2)(b), (2)(c) and (2)(d),
other than as set forth above, since it is not obligated to do so by law.
WHEN-ISSUED TRANSACTIONS. New issues of securities are often offered on a
when-issued basis. This means that delivery and payment for the securities
normally will take place several days after the date the buyer commits to
purchase them. The payment obligation and the interest
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rate that will be received on securities purchased on a when-issued basis are
each fixed at the time the buyer enters into the commitment.
The Fund will make commitments to purchase when-issued securities only with
the intention of actually acquiring the securities, but the Fund may sell these
securities or dispose of the commitment before the settlement date if it is
deemed advisable as a matter of investment strategy. Cash or marketable high
quality debt securities equal to the amount of the above commitments will be
segregated on the Fund's records. For the purpose of determining the adequacy
of these securities the segregated securities will be valued at market. If the
market value of such securities declines, additional cash or securities will be
segregated on the Fund's records on a daily basis so that the market value of
the account will equal the amount of such commitments by the Fund. The Fund will
invest more than 25% of its net assets in when-issued securities.
Securities purchased on a when-issued basis and held by the Fund are
subject to changes in market value based upon the public's perception of changes
in the level of interest rates. Generally, the value of such securities will
fluctuate inversely to changes in interest rates -- i.e., they will appreciate
in value when interest rates decline and decrease in value when interest rates
rise. Therefore, if in order to achieve higher interest income the Fund remains
substantially fully invested at the same time that it has purchased securities
on a "when-issued" basis, there will be a greater possibility of fluctuation in
the Fund's net asset value.
When payment for when-issued securities is due, the Fund will meet its
obligations from then-available cash flow, the sale of segregated securities,
the sale of other securities or, and although it would not normally expect to do
so, from the sale of the when-issued securities themselves (which may have a
market value greater or less than the Fund's payment obligation). Any gain from
the sale of securities to meet such obligations would be subject to federal
income taxes.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
certain financial institutions. Under repurchase agreements, these parties sell
US Treasury bills, notes and bonds to the Fund and agree to repurchase the
securities at the Fund's cost plus interest within a specified time (normally
one day). The securities purchased by the Fund have a total value in excess of
the purchase price paid by the Fund and are held by Custodian until repurchased.
Repurchase agreements assist the Funds in being invested fully while retaining
"overnight" flexibility in pursuit of investments of a longer-term nature. The
Fund will limit repurchase transactions to those member banks of the Federal
Reserve System and primary dealers in US Government securities whose
creditworthiness is continually monitored and found satisfactory by Adviser.
FORWARD COMMITMENTS. The Fund may contract to purchase securities for a
fixed price at a future date beyond customary settlement time consistent with
the Fund's ability to manage its investment portfolio, maintain a stable net
asset value and meet redemption requests. The Fund may dispose of a commitment
prior to settlement if it is appropriate to do so and realize short-term profits
or losses upon such sale. When effecting such transactions, cash or liquid high
quality debt obligations held by the Fund of a dollar amount sufficient to make
payment for the
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portfolio securities to be purchased will be segregated on the Fund's records at
the trade date and maintained until the transaction is settled. Forward
commitments involve a risk of loss if the value of the security to be purchased
declines prior to the settlement date, or if the other party fails to complete
the transaction.
SECTION 4(2) COMMERCIAL PAPER. The Fund may also invest in taxable
commercial paper issued in reliance on the so-called private placement exemption
from registration afforded by Section 4(2) of the Securities Act of 1933
("Section 4(2) paper"). Section 4(2) paper is restricted as to disposition
under the Federal securities laws and generally is sold to institutional
investors such as the Fund that agree that they are purchasing the paper for
investment and not with a view to public distribution. Any resale by the
purchaser must be in an exempt transaction. Section 4(2) paper normally is
resold to other institutional investors like the Fund through or with the
assistance of the issuer or investment dealers that make a market in Section
4(2) paper. Section 4(2) paper will not be subject to the Fund's 10% limitation
on illiquid securities set forth below where the Board of Trustees of Investment
Company (pursuant to guidelines adopted by the Board) determines that a liquid
trading market exists.
ZERO COUPON SECURITIES. These securities are notes, bonds and debentures
that: (1) do not pay current interest and are issued at a substantial discount
from par value; (2) have been stripped of their unmatured interest coupons and
receipts; or (3) pay no interest until a stated date one or more years into the
future. These securities also include certificates representing interests in
such stripped coupons and receipts.
Because the Fund accrues income from zero coupon securities without
receiving regular interest payments in cash, it may be required to sell
portfolio securities in order to pay a dividend depending, among other things,
upon the proportion of shareholders who elect to receive dividends in cash
rather than reinvesting dividends in additional shares of the Fund. Investing
in these securities might also force the Fund to sell portfolio securities to
maintain portfolio liquidity.
Because a zero coupon security pays no interest to its holder during its
life or for a substantial period of time, it usually trades at a deep discount
from its face or par value and will be subject to greater fluctuations in market
value in response to changing interest rates than debt obligations of comparable
maturities that make regular distributions of interest.
RATINGS OF DEBT INSTRUMENTS AND MUNICIPAL SECURITIES
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") -- LONG TERM DEBT RATINGS.
Aaa -- Bonds which 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 edged." 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.
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Aa -- Bonds which 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 which make the long-term risk appear somewhat larger than the Aaa
securities.
A -- Bonds which 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 which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium-grade obligations
(i.e., 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.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
STANDARD & POOR'S CORPORATION ("S&P"). The ratings are based, in varying
degrees, on the following considerations: (1) The likelihood of default --
capacity and willingness of the obligator as to the timely payment of interest
and repayment of principal in accordance with the terms of the obligation;
(2) The nature of and provisions of the obligation; and (3) The protection
afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization, or other arrangement under the laws of bankruptcy
and other laws affecting creditors' rights.
AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
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Plus (+) or minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
RATINGS OF SHORT-TERM MUNICIPAL LOANS
Moody's:
MIG-1/VMIG-1 -- Securities rated MIG-1/VMIG-1 are of 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.
MIG-2/VMIG-2 -- Loans bearing the MIG-2/VMIG-2 designation are of high
quality, with margins of protection ample although not so large as in the MIG-
1/VMIG-1 group.
S&P:
SP-1 -- Short-term municipal securities bearing the SP-1 designation have
very strong or strong capacity to pay principal and interest. Those issues
rated SP-1 which are determined to possess overwhelming safety characteristics
will be given a plus (+) designation.
SP-2 -- Issues rated SP-2 have satisfactory capacity to pay principal and
interest.
RATINGS OF COMMERCIAL PAPER
MOODY'S. Moody's short-term debt ratings are opinions of the ability of
issuers to repay punctually senior debt obligations. These obligations have an
original maturity not exceeding one year, unless explicitly noted. Moody's
employs the following three designations, all judged to be investment grade, to
indicate the relative repayment ability of rated issuers:
- Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
- Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the
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characteristics cited above but to a lesser degree. Earnings trends and
coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is
maintained.
- Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the
level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
- Issuers rated Not Prime do not fall within any of the Prime rating
categories.
S&P. An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered shot-term in the relevant
market. Ratings are graded into several categories, ranging from A-1 for the
highest quality obligations to D for the lowest. These categories are as
follows:
A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
FITCH'S INVESTORS SERVICE, INC. ("FITCH"). Commercial paper rated by Fitch
reflects Fitch's current appraisal of the degree of assurance of timely payment
of such debt. An appraisal results in the rating of an issuer's paper as F-1,
F-2, F-3, or F-4.
F-1 -- This designation indicates that the commercial paper is regarded as
having the strongest degree of assurance for timely payment.
F-2 -- Commercial paper issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than those issues rated F-1.
TAXES
The Fund intends to qualify for treatment as a regulated investment company
("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended
("the Code"). As a RIC, the Fund will not be liable for federal income taxes on
taxable net investment income and capital gain net income (capital gains in
excess of capital losses) that it distributes to its shareholders, provided that
the Fund distributes annually to its shareholders at least 90% of its net
investment income and net short-term capital gain for the taxable year
("Distribution Requirement"). For a Fund to qualify as a RIC it must abide by
all of the following requirements: (1) at least 90% of the Fund's gross income
each taxable year must be derived from dividends, interest, payments
-23-
<PAGE>
with respect to securities loans, gains from the sale or other disposition of
stock or securities or foreign currencies, or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies ("Income Requirement");
(2) less than 30% of the Fund's gross income each taxable year must be derived
from the sale or other disposition of securities and certain options, futures
contracts, forward contracts and foreign currencies held for less than three
months ("Short-Short Limitation"); (3) at the close of each quarter of the
Fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, US government securities, securities of
other RICs, and other securities, with such other securities limited, in respect
of any one issuer, to an amount that does not exceed 5% of the total assets of
the Fund and that does not represent more than 10% of the outstanding voting
securities of such issuer; and (4) at the close of each quarter of the Fund's
taxable year, not more than 25% of the value of its assets may be invested in
securities (other than US government securities or the securities of other RICs)
of any one issuer.
The Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year an amount at least equal to
the sum of: (1) 98% of its ordinary income for that year; (2) 98% of its
capital gain net income for the one-year period ending on October 31 of that
year; and (3) certain undistributed amounts from the preceding calendar year.
For this and other purposes, dividends declared in October, November or December
of any calendar year and made payable to shareholders of record in such month
will be deemed to have been received on December 31 of such year if the
dividends are paid by the Fund subsequent to December 31 but prior to February 1
of the following year.
If a shareholder receives a distribution taxable as long-term capital gain
with respect to shares of a Fund and redeems or exchanges the shares without
having held the shares for more than one year, then any loss on the redemption
or exchange will be treated as long-term capital loss to the extent of the
capital gain distribution.
From December 1, 1994 to August 31, 1995, the Fund incurred $3,523 of net
realized capital losses. As permitted by tax regulation, the Fund intends to
elect to defer those losses and treat them as arising in the fiscal year ending
August 31, 1996.
TAX EXEMPT INCOME. Dividends paid by the Fund will qualify as "exempt-
interest dividends," and thus will be excludable from gross income by its
shareholders, if the Fund satisfies the requirement that, at the close of each
quarter of its taxable year, at least 50% of the value of its total assets
consists of securities the interest on which is excludable from gross income
under section 103(a) of the Code; the Fund intends to satisfy this requirement.
The aggregate dividends excludable from the shareholders' treatment of dividends
from the Fund under local and state income tax laws may differ from the
treatment thereof under the Code.
If shares of the Fund are sold at a loss after being held for six months or
less, the loss will be disallowed to the extent of any exempt-interest dividends
received on those shares.
Tax-exempt interest attributable to certain private activity bonds ("PABs")
(including, in the case of a RIC receiving interest on such bonds, a
proportionate part of the exempt-interest
-24-
<PAGE>
dividends paid by that RIC) is an item of tax preference for purposes of the
alternative minimum tax. Exempt-interest dividends received by a corporate
shareholder also may be indirectly subject to that tax without regard to whether
the Fund's tax-exempt interest was attributable to those bonds.
The Fund may purchase bonds at market discount (i.e., bonds with a purchase
price less then original issue price or adjusted issue price). If such bonds
are subsequently sold at a gain, then a portion of that gain equal to the amount
of market discount, which should have been accrued through the sale date, will
be taxable to shareholders as ordinary income.
Entities or persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by PABs or industrial development
bonds ("IDBs") should consult their tax advisers before purchasing shares of the
Fund because, for users of certain of these facilities, the interest on those
bonds is not exempt from federal income tax. For these purposes, the term
"substantial user" is defined generally to include a "non-exempt person" who
regularly uses in trade or business a part of a facility financed from the
proceeds of PABs or IDBs.
Up to 85% of social security and railroad retirement benefits may be
included in taxable income for recipients whose adjusted gross income (including
income from tax-exempt sources such as the Fund) plus 50% of their benefits
exceeds certain base amounts. Exempt-interest dividends paid by the Fund still
are tax-exempt to the extent described in the Fund's Prospectus; they are only
included in the calculation of whether a recipient's income exceeds the
established amounts.
If the Fund invests in any instrument that generates taxable income, under
the circumstances described in the Prospectus, distributions of the interest
earned thereon will be taxable to the Fund's shareholders as ordinary income to
the extent of the Fund's earnings and profits. Moreover, if the Fund realizes
capital gain as a result of market transactions, any distribution of that gain
will be taxable to its shareholders. There also may be collateral federal
income tax consequences regarding the receipt of exempt-interest dividends by
shareholders such as S corporations, financial institutions and property and
casualty insurance companies. A shareholder falling into any such category
should consult its tax adviser concerning its investment in shares of the Fund.
STATE AND LOCAL TAXES. Under federal law, the income derived from
obligations issued by the US Government and certain of its agencies and
instrumentalities is exempt from state income taxes. All states that tax
personal income, other than Pennsylvania, permit mutual funds to pass through
this tax exemption to shareholders.
Depending upon the extent of the Fund's activities in states and localities
in which its offices are maintained, its agents or independent contractors are
located or it is otherwise deemed to be conducting business, the Fund may be
subject to the tax laws of such states or localities.
-25-
<PAGE>
The foregoing discussion is only a summary of certain federal tax issues
generally affecting the Fund and its shareholders. Circumstances among
investors may vary and each investor is encouraged to discuss investment in the
Fund with the investor's tax adviser.
FINANCIAL STATEMENTS
Unaudited financial statements for the Fund, including notes to the
financial statements and financial information, will be available within four to
six months from the later of the date of this Statement of Additional
Information or the date on which the Fund first accepts a subscription from an
unaffiliated shareholder. Audited financial statements for the Fund will be
available within 60 days following the end of the Fund's then current fiscal
year. When available, copies of the financial statements can be obtained
without charge by calling Distributor at (617) 654-6089.
-26-
<PAGE>
Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
THE SEVEN SEAS SERIES FUND
Two International Place, 35th Floor
Boston, Massachusetts 02110
(617) 654-6089
STATEMENT OF ADDITIONAL INFORMATION
THE SEVEN SEAS SERIES REAL ESTATE EQUITY FUND
DECEMBER 29, 1995
The Seven Seas Series Fund ("Investment Company") is a registered open-end
investment company organized as a Massachusetts business trust offering shares
of beneficial interest in separate investment portfolios. In addition, each
series of the Investment Company is diversified as defined in the Investment
Company Act of 1940, as amended ("1940 Act").
This Statement of Additional Information supplements or describes in
greater detail the Investment Company and The Seven Seas Series Real Estate
Equity Fund (the "Real Estate Equity Fund" or the "Fund") as contained in the
Fund's Prospectus dated December 29, 1995. This Statement is not a Prospectus
and should be read in conjunction with the Fund's Prospectus, which may be
obtained by telephoning or writing Investment Company at the number or address
shown above.
<PAGE>
TABLE OF CONTENTS
Page
----
STRUCTURE AND GOVERNANCE . . . . . . . . . . . . . . . . . . . . . . . .3
Organization and Business History . . . . . . . . . . . . . . . 3
Shareholder Meetings. . . . . . . . . . . . . . . . . . . . . . 4
Controlling Shareholders. . . . . . . . . . . . . . . . . . . . 4
Principal Shareholders. . . . . . . . . . . . . . . . . . . . . 5
Trustees and Officers . . . . . . . . . . . . . . . . . . . . . 5
OPERATION OF INVESTMENT COMPANY. . . . . . . . . . . . . . . . . . . . 7
Service Providers . . . . . . . . . . . . . . . . . . . . . . . 7
Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Administrator . . . . . . . . . . . . . . . . . . . . . . . . . 8
Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Custodian and Transfer Agent. . . . . . . . . . . . . . . . . . 8
Distribution Plan . . . . . . . . . . . . . . . . . . . . . . . 9
Federal Law Affecting State Street. . . . . . . . . . . . . . . 9
Valuation of Fund Shares. . . . . . . . . . . . . . . . . . . . 9
Brokerage Practices . . . . . . . . . . . . . . . . . . . . . . 10
Portfolio Turnover Policy . . . . . . . . . . . . . . . . . . . 11
Yield and Total Return Quotations . . . . . . . . . . . . . . . 11
INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Investment Restrictions . . . . . . . . . . . . . . . . . . . . 12
Investment Policies . . . . . . . . . . . . . . . . . . . . . . 14
Hedging Strategies and Related Investment Techniques. . . . . . 16
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 22
APPENDIX: DESCRIPTION OF SECURITIES RATINGS . . . . . . . . . . . . . 23
- 2 -
<PAGE>
STRUCTURE AND GOVERNANCE
ORGANIZATION AND BUSINESS HISTORY. Investment Company was organized as a
Massachusetts business trust on October 3, 1987 and operates under a First
Amended and Restated Master Trust Agreement, dated October 13, 1993, as amended.
Investment Company is authorized to issue shares of beneficial interest, par
value $.001 per share, which may be divided into one or more series, each of
which evidences pro rata ownership interest in a different investment portfolio,
or "Fund." The Real Estate Equity Fund is one such investment portfolio. The
Trustees may create additional Funds at any time without shareholder approval.
Further, the Investment Company is authorized to divide shares of any
series into two or more classes of shares. The shares of each Fund may have
such rights and preferences as the Trustees may establish from time to time,
including the right of redemption (including the price, manner and terms of
redemption), special and relative rights as to dividends and distributions,
liquidation rights, sinking or purchase fund provisions and conditions under
which any Fund may have separate voting rights or no voting rights. Each class
of shares of a Fund is entitled to the same rights and privileges as all other
classes of that Fund, except that each class bears the expenses associated with
the distribution and shareholder servicing arrangements of that class, as well
as other expenses attributable to the class and unrelated to the management of
the Fund's portfolio securities.
As of the date of this Statement of Additional Information, Investment
Company is comprised of the following investment portfolios, each of which
commenced operations on the date set forth opposite the portfolio's name:
--------------------------------------------------------------------------
The Seven Seas Series Money Market Fund May 2, 1988
--------------------------------------------------------------------------
The Seven Seas Series US Government Money Market Fund March 1, 1991
--------------------------------------------------------------------------
The Seven Seas Series US Treasury Money Market Fund December 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series US Treasury Obligations Fund *
--------------------------------------------------------------------------
The Seven Seas Series Prime Money Market Fund February 22, 1994
--------------------------------------------------------------------------
The Seven Seas Series Yield Plus Fund November 9, 1992
--------------------------------------------------------------------------
The Seven Seas Series Tax Free Money Market Fund December 1, 1994
--------------------------------------------------------------------------
The Seven Seas Series Intermediate Fund September 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series Bond Market Fund *
--------------------------------------------------------------------------
The Seven Seas Series Growth and Income Fund September 1, 1993
--------------------------------------------------------------------------
The Seven Seas Series S&P 500 Index Fund December 30, 1992
--------------------------------------------------------------------------
The Seven Seas Series Small Cap Fund July 1, 1992
--------------------------------------------------------------------------
The Seven Seas Series Matrix Equity Fund May 4, 1992
--------------------------------------------------------------------------
The Seven Seas Series Active International Fund March 7, 1995
--------------------------------------------------------------------------
The Seven Seas Series International Pacific Index Fund *
--------------------------------------------------------------------------
The Seven Seas Series Emerging Markets Fund March 1, 1994
--------------------------------------------------------------------------
The Seven Seas Series Real Estate Equity Fund *
--------------------------------------------------------------------------
__________
*As of the date of this Statement of Additional Information, these portfolios
have not commenced operations.
- 3 -
<PAGE>
Prospectuses for these Investment Portfolios may be obtained by calling
Investment Company's distributor, Russell Fund Distributors, Inc., at (617) 654-
6089.
Shares of the Money Market, US Government Money Market and Tax Free Money
Market Funds are divided into Classes A, B and C.
Any amendment to the Master Trust Agreement that would materially and
adversely affect shareholders of Investment Company as a whole, or shareholders
of a particular Fund, must be approved by the holders of a majority of the
shares of Investment Company or the Fund, respectively. All other amendments
may be effected by Investment Company's Board of Trustees.
Under certain unlikely circumstances, and as is the case with any
Massachusetts business trust, a shareholder of a Fund may be held personally
liable for the obligations of a Fund. The Master Trust Agreement provides that
shareholders shall not be subject to any personal liability for the acts or
obligations of a Fund and that every written agreement, obligation, or other
undertaking of the Fund shall contain a provision to the effect that the
shareholders are not personally liable thereunder. The Master Trust Agreement
also provides that the Fund shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Fund and satisfy
any judgment thereon. Thus, the risk to shareholders of incurring financial
loss beyond their investments is limited to circumstances in which the Fund
itself would be unable to meet its obligations.
SHAREHOLDER MEETINGS. Investment Company will not have an annual meeting
of shareholders. Special meetings may be convened: (1) by the Board of
Trustees; (2) upon written request to the Board by the holders of at least 10%
of the outstanding shares; or (3) upon the Board's failure to honor the
shareholders' request described above, by holders of at least 10% of the
outstanding shares giving notice of the special meeting to the shareholders.
CONTROLLING SHAREHOLDERS. The Trustees have the authority and
responsibility to manage the business of Investment Company. Trustees hold
office until they resign or are removed by, in substance, a vote of two-thirds
of Investment Company shares outstanding.
State Street Bank and Trust Company ("State Street") may from time to time
have discretionary authority over accounts which invest in Investment Company
shares. These accounts include accounts maintained for securities lending
program and investment accounts which permit the use of Investment Company
portfolios as short-term cash sweep investments. Shares purchased for all
discretionary accounts are held of record by State Street, who retains voting
control of such shares. As of November 30, 1995, State Street held of record
36% of the issued and outstanding shares of Investment Company in connection
with its discretionary accounts. Consequently, State Street may be deemed to be
a controlling person of Investment Company for purposes of the 1940
- 4 -
<PAGE>
Act. State Street also acts as Investment Company's investment adviser,
transfer agent and custodian.
Frank Russell Investment Management Company, Investment Company's
administrator ("Administrator"), will be the initial sole shareholder of the
Fund until such time as the Fund has public shareholders and therefore
Administrator may be deemed to be a controlling person for the purposes of the
1940 Act.
PRINCIPAL SHAREHOLDERS. As of the date of this Statement of Additional
Information, Administrator is the Fund's sole shareholder.
The Trustees and officers of Investment Company, as a group, own less than
1% of Investment Company's voting securities.
TRUSTEES AND OFFICERS. The Board of Trustees is responsible for overseeing
generally the operation of the Fund. The officers, all of whom are employed by,
and are officers of, Administrator or its affiliates, are responsible for the
day-to-day management and administration of the Fund's operations.
Trustees who are not officers or employees of State Street or its
affiliates are paid an annual fee and are reimbursed for travel and other
expenses they incur in attending Board meetings. Investment Company's officers
and employees are paid by Administrator or its affiliates.
The following lists Investment Company's Trustees and officers, their
positions with Investment Company, their present and principal occupations
during the past five years and the mailing addresses of Trustees who are not
affiliated with Investment Company. The mailing address for all Trustees and
officers affiliated with Investment Company is The Seven Seas Series Fund, 909 A
Street, Tacoma, WA 98402.
An asterisk (*) indicates that a Trustee is an "interested person" of the
Investment Company, as defined in the 1940 Act.
*LYNN L. ANDERSON, Trustee, Chairman of the Board, President and Fund
Treasurer. Chairman of the Board and Chief Executive Officer, Frank Russell
Investment Management Company and Russell Fund Distributors, Inc.; Director,
President and Chief Executive Officer, Frank Russell Investment Company and
Frank Russell Trust Company; Director and President, Russell Insurance Funds;
Director and Chairman, Frank Russell Company (Delaware); Director, Frank Russell
Investments (Ireland) Limited and Frank Russell Investment Company plc.
WILLIAM L. MARSHALL, Trustee. 33 West Court Street, Doylestown, PA 18901.
Chief Executive Officer and President, Wm. L. Marshall Associates, Inc. (a
registered investment adviser and provider of financial and related consulting
services); Certified Financial Planner; Member, Registry of Financial Planning
Practitioners; and Advisory Committee, International Association for Financial
Planning Broker-Dealer Program.
- 5 -
<PAGE>
Member, Institute of Certified Financial Planners. Registered for Securities
with FSC Securities Corp., Marietta, Georgia.
*STEVEN J. MASTROVICH, Trustee. 1 Financial Center, Boston, MA 02111.
Partner, Brown, Rudnick, Freed & Gesmer (law firm). 1990 to 1994, Partner,
Warner & Stackpole (law firm).
PATRICK J. RILEY, Trustee. 21 Custom House Street, Boston, MA 02110.
Partner, Riley, Burke & Donahue (law firm).
RICHARD D. SHIRK, Trustee. 3350 Peachtree Road, N.E., Atlanta, GA 30326.
President and Chief Executive Officer, Blue Cross/Blue Shield of Georgia. 1990
to 1992, President, Champions Group Resources--Business Management and Employee
Benefits Consulting; 1990, Senior Vice President, Employee Benefits Division,
Cigna Corporation (providing and insuring group life, health and disability
employee benefit products and services); from 1986 to 1990, Senior Vice
President, EQUICOR-Equitable HCA Corporation (providing and insuring group life,
health and disability employee benefit products and services).
*BRUCE D. TABER, Trustee. 26 Round Top Road, Boxford, MA 01921.
President, A.B. Reed, Inc. - Engineers, Architects, Planners. Prior to that,
Vice President, Instrumentation and Controls, A.B. Reed., Inc.
HENRY W. TODD, Trustee. 111 Commerce Drive, Montgomeryville, PA 18936.
President and Director, Zink & Triest Co., Inc. (dealer in vanilla flavor
materials); Director, A.M. Todd Co., and Flavorite Laboratories.
J. DAVID GRISWOLD, Vice President and Secretary. Assistant Secretary,
Associate General Counsel, Chief Compliance Officer, Frank Russell Investment
Management Company, Russell Fund Distributors, Inc. and Frank Russell Capital
Inc.; Associate General Counsel and Assistant Secretary, Frank Russell Company;
Associate General Counsel, Assistant Secretary and Compliance Officer, Russell
Fiduciary Services Company; Director, Secretary, Associate General Counsel and
Chief Compliance Officer, Frank Russell Securities, Inc.; Secretary, Frank
Russell Canada Limited/Limitee.
KENNETH W. LAMB, Assistant Secretary, Assistant Treasurer and Principal
Accounting Officer. Manager - Funds Administration, Frank Russell Investment
Management Company since 1994. Prior to that, Senior Audit Manager with Knight,
Vale & Gregory since 1982.
- 6 -
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
TRUSTEE COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------
Aggregate Pension or Estimated Annual Total Compensation
Compensation Retirement Benefits Upon From Investment
from Benefits Accrued Retirement Company Paid to
Trustee Investment as part of Trustees
Company Investment
Company
Expenses
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lynn L. Anderson $0 $0 $0 $0
- -------------------------------------------------------------------------------------------------------
William L. Marshall $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Steven J. Mastrovich $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Patrick J. Riley $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Richard D. Shirk $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Bruce D. Taber $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
Henry W. Todd $49,000 $0 $0 $49,000
- -------------------------------------------------------------------------------------------------------
</TABLE>
OPERATION OF INVESTMENT COMPANY
SERVICE PROVIDERS. Most of the Fund's necessary day-to-day operations are
performed by separate business organizations under contract to Investment
Company. The principal service providers are:
Investment Adviser, Custodian
and Transfer Agent: State Street Bank and Trust Company
Administrator: Frank Russell Investment Management
Company
Distributor: Russell Fund Distributors, Inc.
Independent Accountants: Coopers & Lybrand, L.L.P.
ADVISER. State Street serves as the Fund's investment adviser ("Adviser")
pursuant to an Advisory Agreement dated April 12, 1988. State Street Bank and
Trust Company is a wholly owned subsidiary of State Street Boston Corporation, a
publicly held bank holding company. State Street's address is 225 Franklin
Street, Boston, MA 02110.
Under the Advisory Agreement, Adviser directs the Fund's investments in
accordance with its investment objective, policies and limitations. For these
services, the Fund pays a fee to Adviser at the rate stated in the Prospectus.
The Advisory Agreement will continue from year to year provided that a majority
of the Trustees who are not interested persons of any Investment Portfolio and
either a majority of all Trustees or a majority of the shareholders of each
Investment Portfolio approve its continuance. The Agreement may be terminated
by Adviser or a Fund without penalty upon 60 days' notice and will terminate
automatically upon its assignment.
- 7 -
<PAGE>
ADMINISTRATOR. Frank Russell Investment Management Company
("Administrator") serves as the Fund's administrator, pursuant to an
Administration Agreement dated April 12, 1988. A description of the services
provided under the Administration Agreement and the basis for computing fees for
such services is provided in the Fund's Prospectus. The Administration
Agreement will continue from year to year provided that a majority of the
Trustees and a majority of the Trustees who are not interested persons of any
Investment Portfolio and who have no direct or indirect financial interest in
the operation of the Distribution Plan described below or the Administration
Agreement approve its continuance. The Agreement may be terminated by
Administrator or a Fund without penalty upon 60 days' notice and will terminate
automatically upon its assignment.
Administrator is a wholly owned subsidiary of Frank Russell Company. Frank
Russell Company was founded in 1936 and has provided comprehensive asset
management consulting services since 1969 for institutional pools of investment
assets, principally those of large corporate employee benefit plans. Frank
Russell Company and its affiliates have offices in Tacoma, Seattle, New York
City, Toronto, London, Tokyo, Sydney, Paris, Zurich and Auckland, and have
approximately 1,000 officers and employees. Administrator's and Frank Russell
Company's mailing address is 909 A Street, Tacoma, WA 98402.
DISTRIBUTOR. Russell Fund Distributors, Inc. ("Distributor") serves as the
distributor of Fund shares pursuant to a Distribution Agreement dated April 12,
1988. Distributor is a wholly owned subsidiary of Administrator. Distributor's
mailing address is Two International Place, 35th Floor, Boston, MA 02110.
CUSTODIAN AND TRANSFER AGENT. State Street serves as the custodian
("Custodian") and transfer agent ("Transfer Agent") for Investment Company.
State Street also provides the basic portfolio recordkeeping required by
Investment Company for regulatory and financial reporting purposes. For these
services, State Street is paid an annual fee in accordance with the following:
custody services--a fee payable monthly on a pro rata basis, based on the
following percentages of average daily net assets of each Fund: $0 up to $1.5
billion--0.02%, over $1.5 billion-0.015% (for purposes of calculating the
breakpoint, the assets of all domestic Funds are aggregated); securities
transaction charges from $8.00 to $25.00 per transaction; Eurodollar transaction
fees ranging from $110.00 to $125.00 per transaction; monthly pricing fees of
$375.00 per investment portfolio and from $6.00 to $16.00 per security,
depending on the type of instrument and the pricing service used; transfer agent
services of $2.00 per shareholder transaction and a multiple class fee of
$18,000 per year for each additional class of shares; and yield calculation fees
of $350.00 per non-money market portfolio per month. As of the date of this
SAI, a yield calculation will not be calculated for the Fund and therefore the
$350.00 fee will not be charged. State Street is reimbursed by the Fund for
supplying certain out-of-pocket expenses including postage, transfer fees, stamp
duties, taxes, wire fees, telexes, and freight.
- 8 -
<PAGE>
INDEPENDENT ACCOUNTANTS. Coopers & Lybrand L.L.P. serves as the Investment
Company's independent accountants. Coopers & Lybrand L.L.P. is responsible for
performing annual audits of the financial statements and financial highlights in
accordance with generally accepted auditing standards, a review of federal tax
returns, and, pursuant to Rule 17f-2 of the 1940 Act, three security counts.
The mailing address of Coopers & Lybrand L.L.P. is One Post Office Square,
Boston MA 02109.
DISTRIBUTION PLAN. Under the 1940 Act, the Securities and Exchange
Commission has adopted Rule 12b-1, which regulates the circumstances under which
the Fund may, directly or indirectly, bear distribution and shareholder
servicing expenses. The Rule provides that the Fund may pay for such expenses
only pursuant to a plan adopted in accordance with the Rule. Accordingly, the
Fund has adopted an active distribution plan (the "Plan"), which is described in
the Fund's Prospectus.
The Plan provides that the Fund may spend annually, directly or indirectly,
up to 0.25 of 1% of the average daily value of the net assets for distribution
and shareholder servicing services. The Plan does not provide for the Fund to
be charged for interest, carrying or any other financing charges on any
distribution expenses carried forward to subsequent years. A quarterly report
of the amounts expended under the Plan, and the purposes for which such
expenditures were incurred, must be made to the Trustees for their review. The
Plan may not be amended without shareholder approval to increase materially the
distribution or shareholder servicing costs that the Fund may pay. The Plan and
material amendments to it must be approved annually by all of the Trustees and
by the Trustees who are neither "interested persons" (as defined in the 1940
Act) of the Fund nor have any direct or indirect financial interest in the
operation of the Plan or any related agreements.
Under the Plan, the Fund may also enter into agreements ("Service
Agreements") with financial institutions, which may include Adviser ("Service
Organizations"), to provide shareholder servicing with respect to Fund shares
held by or for the customers of the Service Organizations. Such arrangements
are more fully described in the Fund's prospectus under "Distribution Services
and Shareholder Servicing."
FEDERAL LAW AFFECTING STATE STREET. The Glass-Steagall Act of 1933
prohibits state chartered banks such as State Street from engaging in the
business of underwriting, selling or distributing certain securities, and
prohibits a member bank of the Federal Reserve System from having certain
affiliations with an entity engaged principally in that business. The
activities of State Street in informing its customers of the Fund, performing
investment and redemption services, providing custodian, transfer, shareholder
servicing, dividend disbursing, agent servicing and investment advisory
services, may raise issues under these provisions. State Street has been
advised by its counsel that its activities in connection with the Fund
contemplated under this arrangement are consistent with its statutory and
regulatory obligations.
- 9 -
<PAGE>
VALUATION OF FUND SHARES. The Fund determines net asset value per share
once each "business day," as of the close of the regular trading session of the
New York Stock Exchange (currently, 4:00 p.m. Eastern time). A business day is
one on which the New York Stock Exchange is open for business. Currently, the
New York Stock Exchange is open for trading every weekday except New Year's Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.
The Fund's portfolio securities actively trade on foreign exchanges which
may trade on Saturdays and on days that the Fund does not offer or redeem
shares. The trading of portfolio securities on foreign exchanges on such days
may significantly increase or decrease the net asset value of Fund shares when
the shareholder is not able to purchase or redeem Fund shares. Further, because
foreign securities markets may close prior to the time the Fund determines net
asset value, events affecting the value of the portfolio securities occurring
between the time prices are determined and the time the Fund calculates net
asset value may not be reflected in the calculation of net asset value unless
Adviser determines that a particular event would materially affect the net asset
value.
BROKERAGE PRACTICES. All portfolio transactions are placed on behalf of
the Fund by Adviser. Adviser ordinarily pays commissions when it executes
transactions on a securities exchange. In contrast, there is generally no
stated commission in the purchase or sale of securities traded in the over-the-
counter markets, including most debt securities and money market instruments.
Rather, the price of such securities includes an undisclosed "commission" in the
form of a mark-up or mark-down. The cost of securities purchased from
underwriters includes an underwriting commission or concession.
Subject to the arrangements and provisions described below, the selection
of a broker or dealer to execute portfolio transactions is usually made by
Adviser. The Advisory Agreement provides, in substance and subject to specific
directions from officers of Investment Company, that in executing portfolio
transactions and selecting brokers or dealers, the principal objective is to
seek the best overall terms available to the Fund. Ordinarily, securities will
be purchased from primary markets, and Adviser shall consider all factors it
deems relevant in assessing the best overall terms available for any
transaction, 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 other transactions on a continuing basis.
The Advisory Agreement authorizes Adviser to select brokers or dealers to
execute a particular transaction, including principal transactions, 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 Adviser (or its
affiliates). Adviser is authorized to cause the Fund to pay a commission to a
broker or dealer who provides such brokerage and research services for executing
a portfolio transaction which is in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction. The Fund or
Adviser,
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as appropriate, must determine in good faith that such commission was reasonable
in relation to the value of the brokerage and research services provided--viewed
in terms of that particular transaction or in terms of all the accounts over
which Adviser exercises investment discretion.
The Trustees periodically review Adviser's performance of its
responsibilities in connection with the placement of portfolio transactions on
behalf of the Fund and review the prices paid by the Fund over representative
periods of time to determine if such prices are reasonable in relation to the
benefits provided to the Fund. Certain services received by Adviser
attributable to a particular Fund transaction may benefit one or more other
accounts for which Adviser exercises investment discretion or an Investment
Portfolio other than such Fund. Adviser's fees are not reduced by Adviser's
receipt of such brokerage and research services.
PORTFOLIO TURNOVER POLICY. Generally, securities are purchased for the
Fund for investment income and/or capital appreciation and not for short-term
trading profits.
The portfolio turnover rate for the Fund is calculated by dividing the
lesser of purchases or sales of portfolio securities for the particular year, by
the monthly average value of the portfolio securities owned by the Fund during
the year. For purposes of determining the rate, all short-term securities,
including options, futures, forward contracts, and repurchase agreements, are
excluded.
YIELD AND TOTAL RETURN QUOTATIONS. The Fund computes average annual total
return by using a standardized method of calculation required by the Securities
and Exchange Commission. Average annual total return is computed by finding the
average annual compounded rates of return on a hypothetical initial investment
of $1,000 over the one-, five- and ten-year periods (or life of the funds as
appropriate), that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
P(1+T)n = ERV
where: P =a hypothetical initial payment of $1,000
T =average annual total return
n =number of years
ERV =ending redeemable value of a $1,000 payment made at
the beginning of the 1-, 5- and 10-year periods at the
end of the year or period
The calculation assumes that all dividends and distributions of the Fund
are reinvested at the price stated in the Prospectus on the dividend dates
during the period, and includes all recurring and nonrecurring fees that are
charged to all shareholder accounts.
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Yields are computed by using standardized methods of calculation required
by the Securities and Exchange Commission. Yields are calculated by dividing
the net investment income per share earned during a 30-day (or one-month) period
by the maximum offering price per share on the last day of the period, according
to the following formula:
a-b
YIELD = 2[(---+1)6-1]
cd
Where: a = dividends and interests earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = average daily number of shares outstanding during the
period that were entitled to receive dividends; and
d = the maximum offering price per share on the last day of
the period.
The yield quoted is not indicative of future results. Yields will depend
on the type, quality, maturity and interest rate of instruments held by the
Fund.
INVESTMENTS
The investment objective of the Fund is set forth in the Prospectus. The
investment objective may be changed with the approval of a majority of the
Fund's Board of Trustees, with at least 60 days' prior notice to shareholders.
In addition to that investment objective, the Fund also has certain
fundamental investment restrictions, which may be changed only with the approval
of a majority of the shareholders of the Fund, and certain nonfundamental
investment restrictions and policies, which may be changed by the Fund without
shareholder approval.
INVESTMENT RESTRICTIONS
The Fund is subject to the following investment restrictions. Restrictions
1 through 9 are fundamental, and restrictions 10 through 18 are nonfundamental.
These restrictions apply at the time an investment is made. The Fund will not:
(1) Invest 25% or more of the value of its total assets in securities of
companies primarily engaged in any one industry (other than the US Government,
its agencies and instrumentalities and securities of companies directly or
indirectly engaged in the real estate industry).
(2) Borrow money (including reverse repurchase agreements), except as a
temporary measure for extraordinary or emergency purposes or to facilitate
redemptions (not for leveraging or investment), provided that borrowings do not
exceed an amount equal to 33-1/3% of the current value of the Fund's assets
taken at market value, less liabilities other than borrowings. If at any time a
Fund's borrowings exceed this limitation due to a
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decline in net assets, such borrowings will within three days be reduced to the
extent necessary to comply with this limitation. A Fund will not purchase
investments once borrowed funds (including reverse repurchase agreements) exceed
5% of its total assets.
(3) Pledge, mortgage, or hypothecate its assets. However, the Fund may
pledge securities having a market value at the time of the pledge not exceeding
33-1/3% of the value of the Fund's total assets to secure borrowings permitted
by paragraph (2) above.
(4) With respect to 75% of its total assets, invest in securities of any
one issuer (other than securities issued by the US Government, its agencies and
instrumentalities), if immediately after and as a result of such investment the
current market value of the Fund's holdings in the securities of such issuer
exceeds 5% of the value of the Fund's assets.
(5) Make loans to any person or firm; provided, however, that the making
of a loan shall not include (i) the acquisition for investment of bonds,
debentures, notes or other evidences of indebtedness of a type permitted by the
Fund's investment policies, or (ii) the entry into "repurchase agreements" or
"reverse repurchase agreements." A Fund may lend its portfolio securities to
broker-dealers or other institutional investors if the aggregate value of all
securities loaned does not exceed 33-1/3% of the value of the Fund's total
assets.
(6) Purchase or sell commodities or commodity futures contracts or options
on a futures contract except that the Fund may enter into futures contracts and
options thereon to the extent provided in its Prospectus.
(7) Purchase or sell real estate; provided, however, that the Fund may
invest in securities secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein (including public and
private real estate investment trusts, partnerships and similar companies).
(8) Engage in the business of underwriting securities issued by others,
except that the Fund will not be deemed to be an underwriter or to be
underwriting on account of the purchase of securities subject to legal or
contractual restrictions on disposition.
(9) Issue senior securities, except as permitted by its investment
objective, policies and restrictions, and except as permitted by the 1940 Act.
This restriction shall not be deemed to prohibit the Fund from (i) making any
permitted borrowings, mortgages or pledges, or (ii) entering into repurchase
transactions.
(10) Purchase or sell puts, calls or invest in straddles, spreads or any
combination thereof, except as described herein and in the Fund's Prospectus,
and subject to the following conditions: (i) such options are written by other
persons and (ii) the aggregate premiums paid on all such options which are
purchased at any time do not exceed 5% of the Fund's total assets.
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<PAGE>
(11) Make short sales of securities or purchase any securities on margin,
except for such short-term credits as are necessary for the clearance of
transactions. The Fund may make initial margin deposits and variation margin
payments in connection with transactions in futures contracts and related
options.
(12) Purchase from or sell portfolio securities to its officers or
directors or other "interested persons" (as defined in the 1940 Act) of the
Fund, including their investment advisers and affiliates, except as permitted by
the 1940 Act and exemptive rules or orders thereunder.
(13) Invest in securities of any issuer which, together with its
predecessor, has been in operation for less than three years if, as a result,
more than 5% of the Fund's total assets would be invested in such securities,
except that the Fund may invest in securities of a particular issuer to the
extent their respective underlying indices invest in that issuer.
(14) Invest more than 15% of its net assets in the aggregate in illiquid
securities or securities that are not readily marketable, including repurchase
agreements and time deposits of more than seven days' duration.
(15) Purchase interests in oil, gas or other mineral exploration or
development programs.
(16) Make investments for the purpose of gaining control of an issuer's
management.
(17) Purchase the securities of any issuer if the Investment Company's
officers, Directors, Adviser or any of their affiliates beneficially own more
than one-half of 1% of the securities of such issuer or together own
beneficially more than 5% of the securities of such issuer.
(18) Invest in warrants, valued at the lower of cost or market, in excess
of 5% of the value of the Fund's net assets. Included in such amount, but not to
exceed 2% of the value of the Fund's net assets, may be warrants which are not
listed on the New York Stock Exchange or American Stock Exchange. Warrants
acquired by the Fund in units or attached to securities may be deemed to be
without value.
To the extent these restrictions reflect matters of operating policy which
may be changed without shareholder vote, these restrictions may be amended upon
approval by the Board of Trustees and notice to shareholders.
If a percentage restriction is adhered to at the time of investment, a
subsequent increase or decrease in a percentage resulting from a change in the
values of assets will not constitute a violation of that restriction, except as
otherwise noted.
INVESTMENT POLICIES
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<PAGE>
To the extent permitted under the 1940 Act and exemptive rules and orders
thereunder, the Fund may seek to achieve its investment objective by investing
solely in the shares of another investment company that has substantially
similar investment objectives and policies. To the extent consistent with its
investment objective restrictions, the Fund may invest in the following
instruments and utilize the following investment techniques:
US GOVERNMENT OBLIGATIONS. The types of US Government obligations in which
the Fund may at times invest include: (1) a variety of US Treasury obligations,
which differ only in their interest rates, maturities and times of issuance; and
(2) obligations issued or guaranteed by US Government agencies and
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the US Treasury, (b) the right of the issuer to borrow an
amount limited to a specific line of credit from the US Treasury,
(c) discretionary authority of the US Government agency or instrumentality or
(d) the credit of the instrumentality (examples of agencies and
instrumentalities are: Federal Land Banks, Federal Housing Administration,
Farmers Home Administration, Export--Import Bank of the United States, Central
Bank for Cooperatives, Federal Intermediate Credit Banks, Federal Home Loan
Banks, General Services Administration, Maritime Administration, Tennessee
Development Bank, Asian-American Development Bank, Student Loan Marketing
Association, International Bank for Reconstruction and Development and Federal
National Mortgage Association). No assurance can be given that in the future
the US Government will provide financial support to such US Government agencies
or instrumentalities described in (2)(b), (2)(c) and (2)(d), other than as set
forth above, since it is not obligated to do so by law. The Fund may purchase
US Government obligations on a forward commitment basis.
DEBT SECURITIES. The Fund may also invest temporarily in investment grade
debt securities for defensive purposes. The Fund will primarily invest in
equity securities as defined under the Securities Exchange Act of 1934
(including convertible debt securities). Other debt will typically represent
less than 5% of the Fund's assets. Please see the Appendix for a description of
securities ratings.
ASSET-BACKED SECURITIES. Asset-backed securities represent undivided
fractional interests in pools of instruments, such as consumer loans, and are
similar in structure to mortgage-related pass-through securities described
below. Payments of principal and interest are passed through to holders of the
securities and are typically supported by some form of credit enhancement, such
as a letter of credit, surety bond, limited guarantee by another entity or by
priority to certain of the borrower's other securities. The degree of
credit-enhancement varies, generally applying only until exhausted and covering
only a fraction of the security's par value.
The value of asset-backed securities is affected by changes in the market's
perception of the asset backing the security, changes in the creditworthiness of
the servicing agent for the instrument pool, the originator of the instruments
or the financial institution providing any credit enhancement and the
expenditure of any portion of any credit enhancement. The risks of investing in
asset-backed securities are ultimately
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<PAGE>
dependent upon payment of the underlying instruments by the obligors, and a Fund
would generally have no recourse against the obligee of the instruments in the
event of default by an obligor. The underlying instruments are subject to
prepayments which shorten the weighted average life of asset-backed securities
and may lower their return, in the same manner as described below for
prepayments of pools of mortgage loans underlying mortgage-backed securities.
HEDGING STRATEGIES AND RELATED INVESTMENT TECHNIQUES
The Fund may seek to hedge its portfolios against movements in the equity
markets and interest rates through the use of options, futures transactions and
options on futures. The Fund has authority to write (sell) covered call and put
options on its portfolio securities, purchase put and call options on securities
and engage in transactions in stock index options, stock index futures and
financial futures and related options on such futures. The Fund may enter into
such options and futures transactions either on exchanges or in the over-the-
counter ("OTC") markets. Although certain risks are involved in options and
futures transactions (as discussed in the Prospectus and below), Adviser
believes that, because the Fund will only engage in these transactions for
hedging purposes, the options and futures portfolio strategies of the Fund will
not subject the Fund to the risks frequently associated with the speculative use
of options and futures transactions. Although the use of hedging strategies by
the Fund is intended to reduce the volatility of the net asset value of the
Fund's shares, the Fund's net asset value will nevertheless fluctuate. There
can be no assurance that the Fund's hedging transactions will be effective.
WRITING COVERED CALL OPTIONS. The Fund is authorized to write (sell)
covered call options on the securities in which it may invest and to enter into
closing purchase transactions with respect to such options. Writing a call
option obligates the Fund to sell or deliver the option's underlying security,
in return for the strike price, upon exercise of the option. By writing a call
option, the Fund receives an option premium from the purchaser of the call
option. Writing covered call options is generally a profitable strategy if
prices remain the same or fall. Through receipt of the option premium, the Fund
would seek to mitigate the effects of a price decline. By writing covered call
options, however, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price. In addition, the Fund's ability to sell the underlying
security will be limited while the option is in effect unless the Fund effects a
closing purchase transaction.
WRITING COVERED PUT OPTIONS. The Fund is authorized to write (sell)
covered put options on its portfolio securities and to enter into closing
transactions with respect to such options.
When the Fund writes a put option, it takes the opposite side of the
transaction from the option's purchaser. In return for receipt of the premium,
the Fund assumes the obligation to pay the strike price for the option's
underlying instrument if the other party to the option chooses to exercise it.
The Fund may seek to terminate its position in a put
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<PAGE>
option it writes before exercise by closing out the option in the secondary
market at its current price. If the secondary market is not liquid for an
option the Fund has written, however, the Fund must continue to be prepared to
pay the strike price while the option is outstanding, regardless of price
changes, and must continue to set aside assets to cover its position.
The Fund may write put options as an alternative to purchasing actual
securities. If security prices rise, the Fund would expect to profit from a
written put option, although its gain would be limited to the amount of the
premium it received. If security prices remain the same over time, it is likely
that the Fund will also profit, because it should be able to close out the
option at a lower price. If security prices fall, the Fund would expect to
suffer a loss. This loss should be less than the loss the Fund would have
experienced from purchasing the underlying instrument directly, however, because
the premium received for writing the option should mitigate the effects of the
decline.
PURCHASING PUT OPTIONS. The Fund is authorized to purchase put options to
hedge against a decline in the market value of its portfolio securities. By
buying a put option the Fund has the right (but not the obligation) to sell the
underlying security at the exercise price, thus limiting the Fund's risk of loss
through a decline in the market value of the security until the put option
expires. The amount of any appreciation in the value of the underlying security
will be partially offset by the amount of the premium paid by the Fund for the
put option and any related transaction costs. Prior to its expiration, a put
option may be sold in a closing sale transaction and profit or loss from the
sale will depend on whether the amount received is more or less than the premium
paid for the put option plus the related transaction costs. A closing sale
transaction cancels out the Fund's position as the purchaser of an option by
means of an offsetting sale of an identical option prior to the expiration of
the option it has purchased. The Fund will not purchase put options on
securities (including stock index options discussed below) if as a result of
such purchase, the aggregate premiums of all outstanding options on securities
held by the Fund would exceed 5% of the market value of the Fund's total assets.
PURCHASING CALL OPTIONS. The Fund is also authorized to purchase call
options. The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price (call options on futures contracts are settled by purchasing the
underlying futures contract). The Fund will purchase call options only in
connection with "closing purchase transactions."
STOCK INDEX OPTIONS AND FINANCIAL FUTURES. The Fund is authorized to
engage in transactions in stock index options and financial futures, and related
options. The Fund may purchase or write put and call options on stock indices
to hedge against the risks of market-wide stock price movements in the
securities in which the Fund invests. Options on indices are similar to options
on securities except that on exercise or assignment, the parties to the contract
pay or receive an amount of cash equal to the difference between the closing
value of the index and the exercise price of the option times a specified
multiple. The Fund may invest in stock index options based on a broad
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market index, such as the S&P 500 Index, or on a narrow index representing an
industry or market segment.
The Fund may also purchase and sell stock index futures contracts and other
financial futures contracts ("futures contracts") as a hedge against adverse
changes in the market value of its portfolio securities as described below. A
futures contract is an agreement between two parties which obligates the
purchaser of the futures contract to buy and the seller of a futures contract to
sell a security for a set price on a future date. Unlike most other futures
contracts, a stock index futures contract does not require actual delivery of
securities, but results in cash settlement based upon the difference in value of
the index between the time the contract was entered into and the time of its
settlement. The Fund may effect transactions in stock index futures contracts
in connection with equity securities in which it invests and in financial
futures contracts in connection with debt securities in which it invests, if
any. Transactions by the Fund in stock index futures and financial futures are
subject to limitations as described below under "Restrictions on the Use of
Futures Transactions."
The Fund may sell futures contracts in anticipation of or during a market
decline to attempt to offset the decrease in market value of the Fund's
securities portfolio that might otherwise result. When a Fund is not fully
invested in the securities markets and anticipates a significant market advance,
the Fund may purchase futures in order to gain rapid market exposure that may
partially or entirely offset increases in the cost of securities that the Fund
intends to purchase. As such purchases are made, an equivalent amount of
futures contracts will be terminated by offsetting sales. It is anticipated
that, in a substantial majority of these transactions, the Fund will purchase
such securities upon termination of the long futures position, whether the long
position results from the purchase of a futures contract or the purchase of a
call option, but under unusual circumstances (e.g., the Fund experiences a
significant amount of redemptions), a long futures position may be terminated
without the corresponding purchase of securities.
The Fund also is authorized to purchase and write call and put options on
futures contracts and stock indices in connection with its hedging activities.
Generally, these strategies would be utilized under the same market and market
sector conditions (i.e., conditions relating to specific types of investments)
during which the Fund enters into futures transactions. The Fund may purchase
put options or write call options on futures contracts and stock indices rather
than selling the underlying futures contract in anticipation of a decrease in
the market value of securities. Similarly, the Fund can purchase call options,
or write put options on futures contracts and stock indices, as a substitute for
the purchase of such futures to hedge against the increased cost resulting from
an increase in the market value of securities which the Fund intends to
purchase.
The Fund is also authorized to engage in options and futures transactions
on US and foreign exchanges and in options in the OTC markets ("OTC options").
In general, exchange traded contracts are third-party contracts (i.e.,
performance of the parties' obligations is guaranteed by an exchange or clearing
corporation) with standardized strike prices and expiration dates. OTC options
transactions are two-party contracts with
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price and terms negotiated by the buyer and seller. See "Restrictions on OTC
Options" below for information as to restrictions on the use of OTC options.
RESTRICTIONS ON THE USE OF FUTURES TRANSACTIONS. The purchase or sale of a
futures contract differs from the purchase or sale of a security in that no
price or premium is paid or received. Instead, an amount of cash or securities
acceptable to the broker and the relevant contract market, which varies, but is
generally about 5% of the contract amount, must be deposited with the broker.
This amount is known as "initial margin" and represents a "good faith" deposit
assuring the performance of both the purchaser and seller under the futures
contract. Subsequent payments to and from the broker, called "variation
margin," are required to be made on a daily basis as the price of the futures
contract fluctuates making the long and short positions in the futures contracts
more or less valuable, a process known as "marking to market." At any time
prior to the settlement date of the future contract, the position may be closed
out by taking an opposite position which will operate to terminate the position
in the futures contract. A final determination of variation margin is then
made, additional cash is required to be paid to or released by the broker and
the purchaser realizes a loss or gain. In addition, a nominal commission is
paid on each completed sale transaction.
Regulations of the Commodity Futures Trading Commission ("CFTC") applicable
to the Fund requires that all of the Fund's futures and options on futures
transactions constitute bona fide hedging transactions and that the Fund not
enter into such transactions if, immediately thereafter, the sum of the amount
of initial margin deposits on the Fund's existing futures positions and premiums
paid for related options would exceed 5% of the market value of the Fund's total
assets.
RESTRICTIONS ON OTC OPTIONS. The Fund will engage in OTC options,
including OTC stock index options only with member banks of the Federal Reserve
System and primary dealers in US Government securities or with affiliates of
such banks or dealers which have capital of at least $50 million or whose
obligations are guaranteed by an entity having capital of at least $50 million.
The Fund will acquire only those OTC options for which Adviser believes the Fund
can receive on each business day at least two independent bids or offers (one of
which will be from an entity other than a party to the option).
The Staff of the SEC has taken the position that purchased OTC options and
the assets used as cover for written OTC options are illiquid securities.
Therefore, the Fund has adopted an operating policy pursuant to which it will
not purchase or sell OTC options (including OTC options on futures contracts)
if, as a result of such transaction, the sum of: (1) the market value of
outstanding OTC options held by the Fund; (2) the market value of the underlying
securities covered by outstanding OTC call options sold by the Fund; (3) margin
deposits on the Fund's existing OTC options on futures contracts; and (4) the
market value of all other assets of the Fund that are illiquid or are not
otherwise readily marketable, would exceed 10% of the net assets of the Fund,
taken at market value. However, if an OTC option is sold by the Fund to a
primary US Government securities dealer recognized by the Federal Reserve Bank
of New York and
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the Fund has the unconditional contractual right to repurchase such OTC option
from the dealer at a predetermined price, then the Fund will treat as illiquid
such amount of the underlying securities as is equal to the repurchase price
less the amount by which the option is "in-the-money" (current market value of
the underlying security minus the option's strike price). The repurchase price
with primary dealers is typically a formula price which is generally based on a
multiple of the premium received for the option plus the amount by which the
option is "in-the-money."
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS. The Fund will not use
leverage in its options and futures strategies. Such investments will be made
for hedging purposes only. The Fund will hold securities or other options or
futures positions whose values are expected to offset its obligations under the
hedge strategies. The Fund will not enter into an option or futures position
that exposes the Fund to an obligation to another party unless it owns either:
(1) an offsetting position in securities or other options or futures contracts;
or (2) cash, receivables and short-term debt securities with a value sufficient
to cover its potential obligations. The Fund will comply with guidelines
established by the SEC with respect to coverage of options and futures
strategies by mutual funds, and if the guidelines so require, will set aside
cash and high grade liquid debt securities in a segregated account with its
custodian bank in the amount prescribed. The Fund's custodian shall maintain
the value of such segregated account equal to the prescribed amount by adding or
removing additional cash or liquid securities to account for fluctuations in the
value of securities held in such account. Securities held in a segregated
account cannot be sold while the futures or option strategy is outstanding,
unless they are replaced with similar securities. As a result, there is a
possibility that segregation of a large percentage of a Fund's assets could
impede portfolio management or the Fund's ability to meeting redemption requests
or other current obligations.
RISK FACTORS IN OPTIONS AND FUTURES. Utilization of options and futures
transactions to hedge the Fund's portfolios involves the risk of imperfect
correlation in movements in the price of options and futures and movements in
the price of securities which are the subject of the hedge. If the price of the
options or futures moves more or less than the price of hedged securities, the
Fund will experience a gain or loss which will not be completely offset by
movements in the price of the subject of the hedge. The successful use of
options and futures also depends on Adviser's ability to correctly predict price
movements in the market involved in a particular options or futures transaction.
To compensate for imperfect correlations, the Fund may purchase or sell stock
index options or futures contracts in a greater dollar amount than the hedged
securities if the volatility of the hedged securities is historically greater
than the volatility of the stock index options or futures contracts.
Conversely, the Fund may purchase or sell fewer stock index options or futures
contracts, if the historical price volatility of the hedged securities is less
than that of the stock index options or futures contracts. The risk of
imperfect correlation generally tends to diminish as the maturity date of the
stock index option or futures contract approaches. Options are also subject to
the risks of an illiquid secondary market, particularly in strategies involving
writing options, which the Fund cannot terminate by exercise. In general,
options whose strike prices are close to
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their underlying instruments' current value will have the highest trading
volume, while options whose strike prices are further away may be less liquid.
The Fund intends to enter into options and futures transactions, on an
exchange or in the OTC market, only if there appears to be a liquid secondary
market for such options or futures or, in the case of OTC transactions, the
Adviser believes the Fund can receive on each business day at least two
independent bids or offers. However, there can be no assurance that a liquid
secondary market will exist at any specific time. Thus, it may not be possible
to close an options or futures position. The inability to close options and
futures positions also could have an adverse impact on a Fund's ability to
effectively hedge its portfolio. There is also the risk of loss by a Fund of
margin deposits or collateral in the event of bankruptcy of a broker with whom
the Fund has an open position in an option, a futures contract or related
option.
The exchanges on which options on portfolio securities are traded have
generally established limitations governing the maximum number of call or put
options on the same underlying security or currency (whether or not covered)
which may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written in one or more accounts or through
one or more brokers). "Trading limits" are imposed on the maximum number of
contracts which any person may trade on a particular trading day.
TAXES
The Fund intends to qualify for treatment as a regulated investment company
("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended
("the Code"). As a RIC, the Fund will not be liable for federal income taxes on
taxable net investment income and capital gain net income (capital gains in
excess of capital losses) that it distributes to its shareholders, provided that
the Fund distributes annually to its shareholders at least 90% of its net
investment income and net short-term capital gain for the taxable year
("Distribution Requirement"). For a Fund to qualify as a RIC it must abide by
all of the following requirements: (1) at least 90% of the Fund's gross income
each taxable year must be derived from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock
or securities or other income (including gains from options or futures
contracts) derived with respect to its business of investing in such stock or
securities ("Income Requirement"); (2) less than 30% of the Fund's gross income
each taxable year must be derived from the sale or other disposition of
securities and certain options and futures contracts held for less than three
months ("Short-Short Limitation"); (3) at the close of each quarter of the
Fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, US government securities, securities of
other RICs, and other securities, with such other securities limited, in respect
of any one issuer, to an amount that does not exceed 5% of the total assets of
the Fund and that does not represent more than 10% of the outstanding voting
securities of such issuer; and (4) at the close of each quarter of the Fund's
taxable year, not more than 25% of the value of its assets may be invested in
- 21 -
<PAGE>
securities (other than US government securities or the securities of other RICs)
of any one issuer.
The Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year an amount at least equal to
the sum of: (1) 98% of its ordinary income for that year; (2) 98% of its
capital gain net income for the one-year period ending on October 31 of that
year; and (3) certain undistributed amounts from the preceding calendar year.
For this and other purposes, dividends declared in October, November or December
of any calendar year and made payable to shareholders of record in such month
will be deemed to have been received on December 31 of such year if the
dividends are paid by the Fund subsequent to December 31 but prior to February 1
of the following year.
If a shareholder receives a distribution taxable as long-term capital gain
with respect to shares of a Fund and redeems or exchanges the shares without
having held the shares for more than one year, then any loss on the redemption
or exchange will be treated as long-term capital loss to the extent of the
capital gain distribution.
DIVIDENDS-RECEIVED DEDUCTION. The portion of the dividends received from
the Fund by its corporate shareholders which qualifies for the 70% dividends-
received deduction will be reduced to the extent that the Fund holds dividend-
paying stock for less than 45 days (91 days for certain preferred stocks). In
addition, distributions that the Fund receives from a REIT will not constitute
"dividends" for purposes of the dividends-received deduction. Accordingly, only
a small percentage of dividends from the Fund are expected to qualify for the
dividends-received deduction. Shareholders should consult their tax adviser
regarding dividends-received deductions and their allowance.
ISSUES RELATED TO HEDGING AND OPTION INVESTMENTS. The Fund's ability to
make certain investments may be limited by provisions of the Code that require
inclusion of certain unrealized gains or losses in the Fund's income for
purposes of the Income Requirement, the Short-Short Limitation and the
Distribution Requirement, and by provisions of the Code that characterize
certain income or loss as ordinary income or loss rather than capital gain or
loss. Such recognition, characterization and timing rules will affect
investments in certain futures and option contracts.
STATE AND LOCAL TAXES. Depending upon the extent of the Fund's activities
in states and localities in which its offices are maintained, its agents or
independent contractors are located or it is otherwise deemed to be conducting
business, the Fund may be subject to the tax laws of such states or localities.
The foregoing discussion is only a summary of certain federal income tax
issues generally affecting the Funds and their shareholders. Circumstances
among investors may vary and each investor is encouraged to discuss investment
in the Funds with the investor's tax adviser.
- 22 -
<PAGE>
FINANCIAL STATEMENTS
Unaudited financial statements for the Fund, including notes to the
financial statements and financial highlights, will be available within four to
six months from the later of the date of this Statement of Additional
Information or the date on which the Fund first accepts a subscription from an
unaffiliated shareholder. Audited financial statements for the Fund will be
available within 60 days following the end of the Fund's then current fiscal
year. When available, copies of the financial statements can be obtained
without charge by calling Distributor at (617) 654-6089.
- 23 -
<PAGE>
APPENDIX
DESCRIPTION OF SECURITIES RATINGS
RATINGS OF DEBT INSTRUMENTS
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") -- LONG TERM DEBT RATINGS.
Aaa -- Bonds which 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 edged." 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 which 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 which make the long-term risk appear somewhat larger than the Aaa
securities.
A -- Bonds which 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 which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium-grade obligations
(i.e., 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.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
STANDARD & POOR'S CORPORATION ("S&P"). The ratings are based, in varying
degrees, on the following considerations: (1) The likelihood of default --
capacity and willingness of the obligator as to the timely payment of interest
and repayment of principal in accordance with the terms of the obligation;
(2) The nature of and provisions of the obligation; and (3) The protection
afforded by, and relative position of, the obligation in
- 24 -
<PAGE>
the event of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
RATINGS OF COMMERCIAL PAPER
MOODY'S. Moody's short-term debt ratings are opinions of the ability of
issuers to repay punctually senior debt obligations. These obligations have an
original maturity not exceeding one year, unless explicitly noted. Moody's
employs the following three designations, all judged to be investment grade, to
indicate the relative repayment ability of rated issuers:
- Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
- Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This
will normally be evidenced
- 25 -
<PAGE>
by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject
to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample
alternative liquidity is maintained.
- Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
- Issuers rated Not Prime do not fall within any of the Prime rating
categories.
S&P. An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered shot-term in the relevant
market. Ratings are graded into several categories, ranging from A-1 for the
highest quality obligations to D for the lowest. These categories are as
follows:
A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
FITCH'S INVESTORS SERVICE, INC. ("FITCH"). Commercial paper rated by Fitch
reflects Fitch's current appraisal of the degree of assurance of timely payment
of such debt. An appraisal results in the rating of an issuer's paper as F-1,
F-2, F-3, or F-4.
F-1 -- This designation indicates that the commercial paper is regarded as
having the strongest degree of assurance for timely payment.
F-2 -- Commercial paper issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than those issues rated F-1.
DUFF AND PHELPS, INC. Duff & Phelps' short-term ratings are consistent
with the rating criteria utilized by money market participants. The ratings
apply to all obligations with maturities of under one year, including commercial
paper, the uninsured portion of certificates of deposit, unsecured bank loans,
master notes, bankers acceptances, irrevocable letters of credit, and current
maturities of long-term debt. Asset-backed commercial paper is also rated
according to this scale.
Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of funds including trade
credit, bank lines, and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.
- 26 -
<PAGE>
The distinguishing feature of Duff & Phelps' short-term ratings is the
refinement of the traditional '1' category. The majority of short-term debt
issuers carry the highest rating, yet quality differences exist within that
tier. As a consequence, Duff & Phelps has incorporated gradations of '1+' (one
plus) and '1-' (one minus) to assist investors in recognizing those differences.
Duff 1+--Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free U.S. Treasury short-
term obligations.
Duff 1--Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk factors
are minor.
Duff 1--- High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk factors are very
small.
GOOD GRADE. Duff 2--Good certainty of timely payment. Liquidity factors
and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good.
Risk factors are small.
SATISFACTORY GRADE. Duff 3--Satisfactory liquidity and other protection
factors qualify issue as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is expected.
NON-INVESTMENT GRADE. Duff 4--Speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
DEFAULT. Duff 5--Issuer failed to meet scheduled principal and/or
interest payments.
IBCA, INC. In addition to conducting a careful review of an institution's
reports and published figures, IBCA's analysts regularly visit the companies for
discussions with senior management. These meetings are fundamental to the
preparation of individual reports and ratings. To keep abreast of any changes
that may affect assessments, analysts maintain contact throughout the year with
the management of the companies they cover.
IBCA's analysts speak the languages of the countries they cover, which is
essential to maximize the value of their meetings with management and to
properly analyze a company's written materials. They also have a thorough
knowledge of the laws and accounting practices that govern the operations and
reporting of companies within the various countries.
- 27 -
<PAGE>
Often, in order to ensure a full understanding of their position, companies
entrust IBCA with confidential data. While these data cannot be disclosed in
reports, they are taken into account when assigning our ratings. Before
dispatch to subscribers, a draft of the report is submitted to each company to
permit correction of any factual errors and to enable clarification of issues
raised.
IBCA's Rating Committees meet at regular intervals to review all ratings
and to ensure that individual ratings are assigned consistently for institutions
in all the countries covered. Following the Committee meetings, ratings are
issued directly to subscribers. At the same time, the company is informed of
the ratings as a matter of courtesy, but not for discussion.
A1+--Obligations supported by the highest capacity for timely repayment.
A1--Obligations supported by a very strong capacity for timely repayment.
A2--Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in business,
economic or financial conditions.
B1--Obligations supported by an adequate capacity for timely repayment.
Such capacity is more susceptible to adverse changes in business, economic, or
financial conditions than for obligations in higher categories.
B2--Obligations for which the capacity for timely repayment is susceptible
to adverse changes in business, economic or financial conditions.
C1--Obligations for which there is an inadequate capacity to ensure timely
repayment.
D1--Obligations which have a high risk of default or which are currently in
default.
- 28 -
<PAGE>
PART C: OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS
Part A -- None.
Part B -- Financial Statements for The Seven Seas Series Fund,
consisting of the Money Market, US Government Money Market, US
Treasury Money Market, Prime Money Market, Tax Free Money Market,
Yield Plus, Small Cap, S&P 500 Index, Intermediate, Matrix Equity,
Growth and Income, Emerging Markets and Active International Funds,
for the fiscal year ended August 31, 1995, are incorporated by
reference to the Annual Reports to Shareholders for the fiscal year
ended August 31, 1995. Copies of the financial statements accompany
this Registration Statement.
(b) EXHIBITS
Incorporated by Reference
Name of Exhibit or Exhibit Number
--------------- -------------------------
1. First Amended and Restated Exhibit 1
Master Trust Agreement
(a) Amendment No. 1 Exhibit 1(a)
(b) Amendment No. 2 Exhibit 1(b)
(c) Amendment No. 3 Exhibit 1(c)
(d) Amendment No. 4 Exhibit 1(d)
(e) Amendment No. 5 Exhibit 1(e)
(f) Amendment No. 6 Exhibit 1(f)
(g) Amendment No. 7 Exhibit 1(g)
2. Bylaws Pre-Effective Amendment #1
3. Voting Trust Agreement None
4. Specimen Security None
5. (a) Investment Advisory Agreement Exhibit 5(a)
(b) Letter agreement incorporating Exhibit 5(b)
the Yield Plus and Bond Market
Funds within the Investment
Advisory Agreement
(c) Letter agreement incorporating Exhibit 5(c)
the US Treasury Money Market
and US Treasury Obligations Funds
within the Investment Advisory
Agreement
-7-
<PAGE>
(d) Letter agreement incorporating Exhibit 5(d)
the Growth and Income and
Intermediate Funds within the
Investment Advisory Agreement
(e) Letter agreement incorporating Exhibit 5(e)
the Emerging Markets Fund and
the Prime Money Market
Portfolio within the Investment
Advisory Agreement
(f) Letter agreement incorporating Exhibit 5(f)
the Tax Free Money Market
Fund within the Investment
Advisory Agreement
(g) Letter agreement incorporating Exhibit 5(g)
the Small Cap, Active
International and Real Estate
Equity Funds within the
Investment Advisory Agreement
6. Distribution Agreements
(a) Distribution Agreement Exhibit 6(a)
(Class A Shares)
(a)(i) Letter agreement incorporating Exhibit 6(a)(i)
the Yield Plus and Bond Market
Funds within the Distribution
Agreement
(a)(ii) Letter agreement incorporating Exhibit 6(a)(ii)
the US Treasury Money Market
and US Treasury Obligations
Funds within the Distribution
Agreement
(a)(iii) Letter agreement incorporating Exhibit 6(a)(iii)
the Growth and Income and
Intermediate Funds within the
Distribution Agreement
(a)(iv) Letter agreement incorporating Exhibit 6(a)(iv)
the Emerging Markets
Fund and the Prime Money Market
Portfolio within the Distribution
Agreement
(a)(v) Letter agreement incorporating Exhibit 6(a)(v)
Class A shares of the Tax Free
-8-
<PAGE>
Money Market Fund within
the Distribution Agreement
(a)(vi) Letter agreement incorporating Exhibit 6(a)(vi)
the Small Cap, Active
International and Real Estate
Equity Funds within the
Distribution Agreement
(b) Distribution Agreement Post-Effective Amendment #23
(regarding Class B Shares
of the Money Market and
US Government Money
Market Funds)
(b)(i) Letter agreement incorporating To be filed by amendment
the Class B Shares of the Tax
Free Money Market Fund within
the Distribution Agreement
(c) Distribution Agreement Post-Effective Amendment #23
(regarding Class C Shares
of the Money Market and
US Government Money Market Funds)
(c)(i) Letter agreement incorporating To be filed by amendment
the Class C Shares of the Tax
Free Money Market Fund within
the Distribution Agreement
7. Bonus, profit sharing, or None
pension plans
8. (a) Custodian Contract Exhibit 8(a)
(b) Letter agreement incorporating Exhibit 8(b)
the Yield Plus and Bond Market
Funds within the Custodian
Contract
(c) Letter agreement incorporating Exhibit 8(c)
the US Treasury Money Market and
US Treasury Obligations Funds
within the Custodian Contract
(d) Letter agreement incorporating Exhibit 8(d)
the Growth and Income and
Intermediate Funds within the
Custodian Contract
(e) Letter agreement incorporating Exhibit 8(e)
-9-
<PAGE>
the Emerging Markets
Fund and the Prime Money Market
Portfolio within the Custodian Contract
(f) Fee Schedule, dated February 17, Exhibit 8(f)
1994, to Custodian Agreement
(g) Letter agreement incorporating the Exhibit 8(g)
Tax Free Money Market Fund
within the Custodian Contract
(h) Letter agreement incorporating Exhibit 8(h)
the Small Cap, Active International
and Real Estate Equity Funds
within the Custodian Contract
9.(a)(i) Transfer Agency and Exhibit 9(a)(i)
Service Agreement
(a)(ii) Letter agreement incorporating Exhibit 9(a)(ii)
the Yield Plus and Bond Market
Funds within the Transfer Agency
and Service Agreement
(a)(iii) Letter agreement incorporating Exhibit 9(a)(iii)
the US Treasury Money Market and
US Treasury Obligations Funds
within the Transfer Agency and
Service Agreement
(a)(iv) Letter agreement incorporating Exhibit 9(a)(iv)
the Growth and Income and
Intermediate Funds
within the Transfer Agency and
Service Agreement
(a)(v) Letter agreement incorporating Exhibit 9(a)(v)
the Emerging Markets Fund
and the Prime Money Market
Portfolio within the Transfer
Agency and Service Agreement
(a)(vi) Letter agreement incorporating Exhibit 9(a)(vi)
the Tax Free Money Market Fund
within the Transfer Agency and
Service Agreement
(a)(vii) Letter agreement incorporating Exhibit 9(a)(vii)
the Small Cap, Active
International and Real Estate
Equity Funds
-10-
<PAGE>
within the Transfer Agency and
Service Agreement
(b)(i) Administration Agreement Exhibit 9(b)(i)
(b)(ii) Letter agreement incorporating Exhibit 9(b)(ii)
the Yield Plus and Bond Market
Funds within the Administration
Agreement
(b)(iii) Letter agreement incorporating Exhibit 9(b)(iii)
the US Treasury Money Market and
US Treasury Obligations Funds
within the Administration Agreement
(b)(iv) Letter agreement incorporating Exhibit 9(b)(iv)
the Growth and Income and
Intermediate Funds within the
Administration Agreement
(b)(v) Letter agreement incorporating Exhibit 9(b)(v)
the Emerging Markets
Fund and the Prime Money Market
Portfolio within the Administration
Agreement
(b)(vi) Letter agreement incorporating the Exhibit 9(b)(vi)
Tax Free Money Market Fund
within the Administration Agreement
(b)(vii) Letter agreement incorporating Exhibit 9(b)(vii)
the Small Cap, Active International
and Real Estate Equity Funds
within the Administration Agreement
10. Opinion of Counsel
(a) Relating to The Seven Seas Series Pre-Effective Amendment #1
Money Market Fund
(b) Relating to The Seven Seas Series Post-Effective Amendment #5
US Government Money Market Fund
-11-
<PAGE>
(c) Relating to The Seven Seas Series Post-Effective Amendment #8
S&P 500 Index, S&P Midcap Index,
Matrix Equity, International
European Index, International Pacific
Index and Short Term Government
Securities Funds
(d) Relating to The Seven Seas Series Post-Effective Amendment #11
Yield Plus and Bond Market Funds
(e) Relating to The Seven Seas Series Post-Effective Amendment #13
US Treasury Money Market and
Treasury Obligations Funds
(f) Relating to The Seven Seas Series Post-Effective Amendment #16
Growth and Income and Intermediate
Funds
(g) Relating to The Seven Seas Series Post-Effective Amendment #19
Emerging Markets Fund and
the Prime Money Market Portfolio
(h) Relating to Class A, Class B and Post-Effective Amendment #22
Class C Shares The Seven Seas Series
Money Market and US Government Money
Market Funds
(i) Relating to Class A, Class B and Post-Effective Amendment #23
Class C Shares of The Seven Seas
Series Tax Free Money Market Fund
(j) Relating to The Seven Seas Series Post-Effective Amendment #28
Active International Fund
(k) Relating to The Seven Seas Series Post-Effective Amendment #29
Real Estate Equity Fund
11. Other Opinions: Consent of Exhibit 11
Independent Accountants
12. Financial Statements Omitted None
from Item 23
13. Letter of Investment Intent
(a) The Seven Seas Series Money Pre-Effective Amendment #1
Market Fund
(b) The Seven Seas Series US Post-Effective Amendment #5
Government Money Market
Fund
-12-
<PAGE>
(c) The Seven Seas Series Post-Effective Amendment #10
Government Securities,
Index, Midcap Index, Matrix,
European Index and Pacific
Index Funds
(d) The Seven Seas Series Yield Post-Effective Amendment #11
Plus and Bond Market Funds
(e) The Seven Seas Series US Treasury Post-Effective Amendment #15
Money Market and US Treasury
Obligations Funds
(f) The Seven Seas Series Growth and Post-Effective Amendment #16
Income and Intermediate Funds
(g) The Seven Seas Series Emerging Post-Effective Amendment #20
Markets Fund and the Prime
Money Market Portfolio
(h) Class B and C Shares of The Seven Post-Effective Amendment #25
Seas Series Money Market and
US Government Money Market
Funds
(i) The Seven Seas Series Tax Free Post-Effective Amendment #25
Money Market Fund (Class A,
B and C Shares)
(j) The Seven Seas Series Active Post-Effective Amendment #28
International Fund
14. Prototype Retirement Plan None
15. Distribution Plans pursuant to
Rule 12b-1
(a) Plan of Distribution for the Exhibit 15(a)
Government Securities, Index,
Midcap Index, Matrix, European
Index and Pacific Index Funds
as approved by the Board of
Trustees
(a)(i) Addendum to the Plan of Exhibit 15(a)(i)
Distribution incorporating the
Yield Plus and Bond Market Funds
into the Plan
(a)(ii) Addendum to the Plan of Exhibit 15(a)(ii)
Distribution
-13-
<PAGE>
incorporating the Money Market
and US Government Money Market
Funds into the Plan (Class A
Shares)
(a)(iii) Addendum to the Plan of Exhibit 15(a)(iii)
Distribution incorporating the US
Treasury Money Market and US
Treasury Obligations Funds
(a)(iv) Addendum to the Plan of Exhibit 15(a)(iv)
Distribution incorporating the
Growth and Income and Intermediate
Funds
(a)(v) Addendum to the Plan of Exhibit 15(a)(v)
Distribution incorporating the
Emerging Markets Fund and the Prime
Money Market Portfolio
(a)(vi) Addendum to the Plan of Exhibit 15(a)(vi)
Distribution incorporating the
Class A Shares of the Tax Free
Money Market Fund
(a)(vii) Addendum to the Plan of Exhibit 15(a)(vii)
Distribution incorporating the
Small Cap, Active International
and Real Estate Equity Funds
(b) Plan of Distribution for the Money Post-Effective Amendment #23
Market and US Government Money
Market Funds (Class B Shares)
as approved by the Board of Trustees
(b)(i) Addendum to the Plan of To be filed by amendment
Distribution incorporating the
Class B Shares of the Tax Free Money
Market Fund
(c) Plan of Distribution for the Money Post-Effective Amendment #23
Market and US Government Money
Market Funds (Class C Shares) as
approved by the Board of Trustees
(c)(i) Addendum to the Plan of To be filed by amendment
Distribution incorporating the
Class C Shares of the Tax Free Money
Market Fund
(d) Shareholder Servicing Agreement, Post-Effective Amendment #12
by and between The Seven Seas
Series Fund and State Street
Bank and Trust Company
-14-
<PAGE>
(d)(i) Shareholder Servicing Agreement, To be filed by amendment
by and between The Seven Seas
Series Fund and State Street
Brokerage Services, Inc.
(d)(ii) Shareholder Servicing Agreement, To be filed by amendment
by and between The Seven Seas Series
Fund and State Street Bank and Trust
Company, Metropolitan Division of
Commercial Banking Services
(e) Form of Agreement Pursuant Post-Effective Amendment #22
to Rule 12b-1 Plan (relating to
Class B Shares) as approved by
the Board of Trustees
(f) Form of Agreement Pursuant to Post-Effective Amendment #22
Rule 12b-1 Plan (relating to
Class C Shares) as approved by
the Board of Trustees
16. Computation of Performance Exhibit 16
Quotation
17. Financial Data Schedule Post-Effective Amendment #33
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None
Item 26. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
<CAPTION>
Number of Record Holders
Title of Class as of November 30, 1995
-------------- ------------------------
Shares of beneficial interest
Par Value $0.001
The Seven Seas Series
---------------------
<S> <C>
Money Market Fund
Class A Shares 3,593
Class B Shares 1
Class C Shares 1
US Government Money Market Fund
Class A Shares 304
Class B Shares 1
Class C Shares 1
Matrix Equity Fund 2,776
-15-
<PAGE>
Small Cap Fund 469
S&P 500 Index Fund 1,472
Active International Fund 515
International Pacific Index 1
Yield Plus Fund 1,105
Bond Market Fund 1
Growth and Income Fund 2,254
Intermediate Fund 1,916
US Treasury Money Market Fund 48
US Treasury Obligations Fund 1
Prime Money Market Fund 52
Emerging Markets Fund 866
Tax Free Money Market Fund
Class A Shares 35
Class B Shares 1
Class C Shares 1
Real Estate Equity Fund 1
</TABLE>
Item 27. INDEMNIFICATION
Indemnification is provided to officers and Trustees of the Registrant
pursuant to Section 6.4 of Article VI of Registrant's First Amended and Restated
Master Trust Agreement, which reads as follows:
"Section 6.4 INDEMNIFICATION OF TRUSTEES, OFFICERS, ETC. The Trust shall
indemnify (from the assets of the Sub-Trust or Sub-Trusts in question) each of
its Trustees and officers (including persons who serve at the Trust's request as
directors, officers or trustees of another organization in which the Trust has
any interest as a shareholder, creditor or otherwise [hereinafter referred to as
"Covered Person"]) against all liabilities, including but not limited to amounts
paid in satisfaction of judgments, in compromise or as fines and penalties, and
expenses, including reasonable accountants' and counsel fees, incurred by any
Covered Person in connection with the defense or disposition of any action, suit
or other proceeding, whether civil or criminal, before any court or
administrative or legislative body, in which such Covered Person may be or may
have been involved as a party or otherwise with which such person may be or may
have been threatened, while in office or thereafter, or by reason of being or
having been such a Trustee or officer, director or trustee, except with respect
to any matter as to which it has been determined that such Covered Person had
acted with willful misfeasance, bad faith, gross negligence or
-16-
<PAGE>
reckless disregard of the duties involved in the conduct of such Covered
Person's office (such conduct referred to hereafter as "Disabling Conduct"). A
determination that the Covered Person is entitled to indemnification may be made
by (i) a final decision on the merits by a court or other body before whom the
proceeding was brought that the person to be indemnified was not liable by
reason of Disabling Conduct, (ii) dismissal of a court action or an
administrative proceeding against a Covered Person for insufficiency of evidence
of Disabling Conduct, or (iii) a reasonable determination, based upon a review
of the facts, that the indemnitee was not liable by reason of Disabling Conduct
by (a) a vote of a majority of a quorum of Trustees who are neither "interested
persons" of the Trust as defined in section 2(a)(19) of the 1940 Act nor parties
to the proceeding, or (b) an independent legal counsel in a written opinion.
Expenses, including accountants' and counsel fees so incurred by any such
Covered Person (but excluding amounts paid in satisfaction of judgments, in
compromise or as fines or penalties), may be paid from time to time by the Sub-
Trust in question in advance of the final disposition of any such action, suit
or proceeding, provided that the Covered Person shall have undertaken to repay
the amounts so paid to the Sub-Trust in question if it is ultimately determined
that indemnification of such expenses is not authorized under this Article VI
and (i) the Covered Person shall have provided security for such undertaking,
(ii) the Trust shall be insured against losses arising by reason of any lawful
advances, or (iii) a majority of a quorum of the disinterested Trustees who are
not a party to the proceeding, or an independent legal counsel in a written
opinion, shall have determined, based on a review of readily available facts (as
opposed to a full trial-type inquiry), that there is reason to believe that the
Covered Person ultimately will be found entitled to indemnification."
The Investment Advisory Agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of obligations or
duties under the Investment Advisory Agreement or on the part of the Adviser, or
for a loss resulting from a breach of fiduciary duty with respect to the receipt
of compensation for services, the Adviser shall not be subject to liability to
the Registrant or to any shareholder of the Registrant for any error of
judgment, mistake of law or any other act or omission in the course of, or
connected with, rendering services under the Investment Advisory Agreement or
for any losses that may be sustained in the purchase, holding or sale of any
security.
The Distribution Agreements relating to Class A, Class B and Class C Shares
provide that in the absence of willful misfeasance, bad faith, gross negligence,
or reckless disregard of obligations or duties under the Distribution Agreement,
the Distributor, its officers, directors and any controlling person (within the
meaning of Section 15 of the 1933 Act) ("Distributor") shall be indemnified by
the Registrant from and against any and all claims, demands, liabilities and
expenses (including the cost of investigating or defending such claims, demands
or liabilities and any counsel fees incurred in connection therewith) which
Distributor may incur under the 1933 Act or under common law or otherwise
arising out of or based upon any alleged untrue statement of a material fact
contained in the Registration Statement, Prospectus or Statement of Additional
Information or arising out of or based upon any alleged omission to state a
material fact required to be stated in said documents or necessary to make the
statements not misleading.
Registrant provides the following undertaking:
"Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to Trustees, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for
-17-
<PAGE>
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Trustee, officer, or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such Trustee, officer or
controlling person in connection with the securities being registered, the
Registrant 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 Investment Management Division of State Street Bank and Trust Company
("State Street") serves as adviser to the Registrant. State Street, a
Massachusetts bank, currently manages large institutional accounts and
collective investment funds. The business, profession, vocation or employment
of a substantial nature which each director or officer of the investment adviser
is or has been, at any time during the past two fiscal years, engaged for his
own account or in the capacity of director, officer, employee, partner or
trustee, is as follows:
Capacity
Name With Adviser Business Name and Address*
- ---- ------------ --------------------------
Tenley E. Albright, MD Director Chairman, Vital Sciences, Inc.
Joseph A. Baute Director Former Chairman and CEO,
Markem Corporation
I. MacAlister Booth Director Chairman, President and CEO
Polaroid Corporation
Marshall N. Carter Chairman and CEO State Street Bank and Trust
Company
James I. Cash, Jr. Director The James E. Robison Professor
of Business Administration
Harvard Business School
Truman S. Casner Director Partner, Ropes & Gray
Nader F. Darehshori Director Chairman, President and CEO
Houghton Mifflin Company
Lois D. Jubiler Director Chief Technological Officer
Colgate-Palmolive Company
Charles F. Kaye Director President, Transportation
Investments, Inc.
George H. Kidder Director Senior Partner
Hemenway & Barnes
John M. Kucharski Director Chairman, President and CEO
-18-
<PAGE>
EG&G, Inc.
David B. Perini Director Chairman and President
Perini Corporation
Dennis J. Picard Director Chairman and CEO
Raytheon Company
Bernard W. Reznicek Director Chairman, President and CEO
Boston Edison Company
David A. Spina Vice Chairman State Street Bank and Trust
Company
Robert E. Weissman Director President and COO
The Dun & Bradstreet Corp.
* Address of all individuals: State Street Boston Corporation, 225 Franklin
Street, Boston, Massachusetts 02110
Item 29. PRINCIPAL UNDERWRITERS
(a) Russell Fund Distributors, Inc., also acts as principal underwriter
for Frank Russell Investment Company.
(b) The directors and officers of Russell Fund Distributors, Inc., their
principal business address, and positions and offices with the Registrant and
Russell Fund Distributors, Inc. are set forth below:
Name and Principal* Position and Offices
Business Address with Underwriter Position with Registrant
- ------------------ ---------------- ------------------------
Lynn L. Anderson Director and CEO Trustee, Chairman of the
Board, and President
Karl J. Ege Secretary and None
General Counsel
J. David Griswold Associate General Secretary
Counsel and Assistant
Secretary
Mary E. Hughs Assistant Secretary None
Nancy M. Jacoby Assistant Secretary None
John C. James Assistant Secretary None
Randall P. Lert Director None
Eric A. Russell Director and President None
-19-
<PAGE>
Norma P. Schellberg Treasurer and None
Controller
*Address of all individuals: 909 A Street, Tacoma, Washington 98402
Item 30. LOCATION OF ACCOUNTS AND RECORDS
The Registrant's Administrator, Frank Russell Investment Management
Company, 909 A Street, Tacoma, Washington 98402, will maintain the physical
possession of the books and records required by subsection (b)(4) of Rule 31a-1
under the Investment Company Act of 1940. All other accounts, books and
documents required by Rule 31a-1 are maintained in the physical possession of
Registrant's investment adviser, transfer agent, and custodian, State Street
Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts, 02110 and
1776 Heritage Drive, North Quincy, Massachusetts 02171.
Item 31. MANAGEMENT SERVICES
Not applicable.
Item 32. UNDERTAKINGS
(a) Not applicable.
(b) Not applicable.
(c) The Registrant has elected to include its management's discussion of
fund performance required under Form N-1A, Item 5A, in its annual
report to shareholders. The Registrant therefore undertakes to
furnish each person to whom a prospectus is delivered with a copy of
the Registrant's latest annual report to shareholders upon request and
without charge.
-20-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, The Registrant, the Seven Seas Series Fund, certifies that
it meets all of the requirements for effectiveness of this Post-Effective
Amendment No. 35 to its Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the City
of Boston, and Commonwealth of Massachusetts, on the 29th day of December, 1995.
By: /s/ Lynn L. Anderson
----------------------------
Lynn L. Anderson, President,
Treasurer and Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities as
indicated on December 29, 1995.
Signature Title
--------- -----
/s/ Lynn L. Anderson Trustee, President, Treasurer and
------------------------------
Lynn L. Anderson Chairman of the Board
/s/ Kenneth W. Lamb Assistant Secretary, Assistant
------------------------------
Kenneth W. Lamb Treasurer and Principal
Financial and Accounting
Officer
/s/ Steven J. Mastrovich Trustee
------------------------------
Steven J. Mastrovich
/s/ William L. Marshall Trustee
------------------------------
William L. Marshall
/s/ Patrick J. Riley Trustee
------------------------------
Patrick J. Riley
/s/ Richard D. Shirk Trustee
------------------------------
Richard D. Shirk
/s/ Bruce D. Taber Trustee
------------------------------
Bruce D. Taber
/s/ Henry W. Todd Trustee
------------------------------
Henry W. Todd
-21-
<PAGE>
EXHIBIT INDEX
- --------------------------------------------------------------------------------
EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
1 First Amended and Restated Master Trust Agreement
- --------------------------------------------------------------------------------
1(a) Amendment No. 1
- --------------------------------------------------------------------------------
1(b) Amendment No. 2
- --------------------------------------------------------------------------------
1(c) Amendment No. 3
- --------------------------------------------------------------------------------
1(d) Amendment No. 4
- --------------------------------------------------------------------------------
1(e) Amendment No. 5
- --------------------------------------------------------------------------------
1(f) Amendment No. 6
- --------------------------------------------------------------------------------
1(g) Amendment No. 7
- --------------------------------------------------------------------------------
5(a) Investment Advisory Agreement
- --------------------------------------------------------------------------------
5(b) Letter agreement incorporating the Yield Plus and Bond
Market Funds within the Investment Advisory Agreement
- --------------------------------------------------------------------------------
5(c) Letter agreement incorporating the US Treasury Money
Market and US Treasury Obligations Funds within the
Investment Advisory Agreement
- --------------------------------------------------------------------------------
5(d) Letter agreement incorporating the Growth and Income
and Intermediate Funds within the Investment Advisory
Agreement
- --------------------------------------------------------------------------------
5(e) Letter agreement incorporating the Emerging Markets
Fund and the Prime Money Market Portfolio within the
Investment Advisory Agreement
- --------------------------------------------------------------------------------
5(f) Letter agreement incorporating the Tax Free Money
Market Fund within the Investment Advisory Agreement
- --------------------------------------------------------------------------------
5(g) Letter agreement incorporating the Small Cap, Active
International and Real Estate Equity Funds within the
Investment Advisory Agreement
- --------------------------------------------------------------------------------
6(a) Distribution Agreement (Class A Shares)
- --------------------------------------------------------------------------------
6(a)(i) Letter agreement incorporating the Yield Plus and Bond
Market Funds within the Distribution Agreement
- --------------------------------------------------------------------------------
-22-
<PAGE>
- --------------------------------------------------------------------------------
6(a)(ii) Letter agreement incorporating the US Treasury Money
Market and US Treasury Obligations Funds within the
Distribution Agreement
- --------------------------------------------------------------------------------
6(a)(iii) Letter agreement incorporating the Growth and Income
and Intermediate Funds within the Distribution
Agreement
- --------------------------------------------------------------------------------
6(a)(iv) Letter agreement incorporating the Emerging Markets
Fund and the Prime Money Market Portfolio within the
Distribution Agreement
- --------------------------------------------------------------------------------
6(a)(v) Letter agreement incorporating Class A shares of the
Tax Free Money Market Fund within the Distribution
Agreement
- --------------------------------------------------------------------------------
6(a)(vi) Letter agreement incorporating the Small Cap, Active
International and Real Estate Equity Funds within the
Distribution Agreement
- --------------------------------------------------------------------------------
8(a) Custodian Contract
- --------------------------------------------------------------------------------
8(b) Letter agreement incorporating the Yield Plus and Bond
Market Funds within the Custodian Contract
- --------------------------------------------------------------------------------
8(c) Letter agreement incorporating the US Treasury Money
Market and US Treasury Obligations Funds within the
Custodian Contract
- --------------------------------------------------------------------------------
8(d) Letter agreement incorporating the Growth and Income
and Intermediate Funds within the Custodian Contract
- --------------------------------------------------------------------------------
8(e) Letter agreement incorporating the Emerging Markets
Fund and the Prime Money Market Portfolio within the
Custodian Contract
- --------------------------------------------------------------------------------
8(f) Fee Schedule, dated February 17, 1994, to Custodian
Agreement
- --------------------------------------------------------------------------------
8(g) Letter agreement incorporating the Tax Free Money
Market Fund within the Custodian Contract
- --------------------------------------------------------------------------------
8(h) Letter agreement incorporating the Small Cap, Active
International and Real Estate Equity Funds within the
Custodian Contract
- --------------------------------------------------------------------------------
9(a)(i) Transfer Agency and Service Agreement
- --------------------------------------------------------------------------------
9(a)(ii) Letter agreement incorporating the Yield Plus and Bond
Market Funds within the Transfer Agency and Service
Agreement
- --------------------------------------------------------------------------------
9(a)(iii) Letter agreement incorporating the US Treasury Money
Market and US Treasury Obligations Funds within the
Transfer Agency and Service Agreement
- --------------------------------------------------------------------------------
-23-
<PAGE>
- --------------------------------------------------------------------------------
9(a)(iv) Letter agreement incorporating the Growth and Income
and Intermediate Funds within the Transfer Agency and
Service Agreement
- --------------------------------------------------------------------------------
9(a)(v) Letter agreement incorporating the Emerging Markets
Fund and the Prime Money Market Portfolio within the
Transfer Agency and Service Agreement
- --------------------------------------------------------------------------------
9(a)(vi) Letter agreement incorporating the Tax Free Money
Market Fund within the Transfer Agency and Service
Agreement
- --------------------------------------------------------------------------------
9(a)(vii) Letter agreement incorporating the Small Cap, Active
International and Real Estate Equity Funds within the
Transfer Agency and Service Agreement
- --------------------------------------------------------------------------------
9(b)(i) Administration Agreement
- --------------------------------------------------------------------------------
9(b)(ii) Letter agreement incorporating the Yield Plus and Bond
Market Funds within the Administration Agreement
- --------------------------------------------------------------------------------
9(b)(iii) Letter agreement incorporating the US Treasury Money
Market and US Treasury Obligations Funds within the
Administration Agreement
- --------------------------------------------------------------------------------
9(b)(iv) Letter agreement incorporating the Growth and Income
and Intermediate Funds within the Administration
Agreement
- --------------------------------------------------------------------------------
9(b)(v) Letter agreement incorporating the Emerging Markets
Fund and the Prime Money Market Portfolio within the
Administration Agreement
- --------------------------------------------------------------------------------
9(b)(vi) Letter agreement incorporating the Tax Free Money
Market Fund within the Administration Agreement
- --------------------------------------------------------------------------------
9(b)(vii) Letter agreement incorporating the Small Cap, Active
International and Real Estate Equity Funds within the
Administration Agreement
- --------------------------------------------------------------------------------
11 Consent of Independent Accountants
- --------------------------------------------------------------------------------
15(a) Plan of Distribution for the Government Securities,
Index, Midcap Index, Matrix, European Index and Pacific
Index Funds as approved by the Board of Trustees
- --------------------------------------------------------------------------------
15(a)(i) Addendum to the Plan of Distribution incorporating the
Yield Plus and Bond Market Funds into the Plan
- --------------------------------------------------------------------------------
15(a)(ii) Addendum to the Plan of Distribution incorporating the
Money Market and US Government Money Market Funds into
the Plan (Class A Shares)
- --------------------------------------------------------------------------------
15(a)(iii) Addendum to the Plan of Distribution incorporating the
US Treasury Money Market and US Treasury Obligations
- --------------------------------------------------------------------------------
-24-
<PAGE>
- --------------------------------------------------------------------------------
15(a)(iv) Addendum to the Plan of Distribution incorporating the
Growth and Income and Intermediate Funds
- --------------------------------------------------------------------------------
15(a)(v) Addendum to the Plan of Distribution incorporating the
Emerging Markets Fund and the Prime Money Market
Portfolio
- --------------------------------------------------------------------------------
15(a)(vi) Addendum to the Plan of Distribution incorporating the
Class A Shares of the Tax Free Money Market Fund
- --------------------------------------------------------------------------------
15(a)(vii) Addendum to the Plan of Distribution incorporating the
Small Cap, Active International and Real Estate Equity
Funds
- --------------------------------------------------------------------------------
16 Computation of Performance Quotation
- --------------------------------------------------------------------------------
-25-
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees of
The Seven Seas Series Fund:
We consent to the incorporation by reference in Post-effective Amendment
No. 35 to the Registration Statement of The Seven Seas Series Fund on Form N-1A
of our reports dated October 13, 1995, on our audits of the financial statements
and financial highlights of the Fund (comprised of Money Market Fund, US
Government Money Market Fund, Short Term Government Securities Fund, Matrix
Equity Fund, Yield Plus Fund, US Treasury Money Market Fund, Prime Money Market
Fund, Growth and Income Fund, Intermediate Fund, Emerging Markets Fund, S&P 500
Index Fund, Small Cap Fund (formerly S&P Midcap Index Fund), Tax Free Money
Market Fund and Active International Fund), which reports are included in the
Annual Reports to shareholders for the fiscal year ended August 31, 1995, which
are incorporated by reference in the Registration Statement. We also consent to
the references to our Firm under the captions "Financial Highlights" and
"Additional Information" in the Prospectuses and "Independent Accountants" in
the Statements of Additional Information.
/s/ Coopers & Lybrand L.L.P.
Boston, Massachusetts Coopers & Lybrand L.L.P.
December 26, 1995
<PAGE>
EXHIBIT 16
SCHEDULE OF COMPUTATIONS
The following illustrates the current yield calculation for the seven day
base periods for the Money Market Funds of Seven Seas Series Fund.
<TABLE>
<CAPTION>
MONEY MARKET FUND
- ------------------------------------------------------------------
<S> <C>
08/31/95
- ------------------------------------------------------------------
Value of hypothetical pre-existing account with exactly one share
at the beginning of the base period.............................. $1.000000000
Value of the same account (excluding capital changes) at the end
of the seven-day base period..................................... 1.001055754
Net change in account value....................................... .001055754
Annualized Current Net Yield [.001055754 X (365/7)]............... 5.51%
Annualized Effective Net Yield [(.001055754+1)(365/7)]-1.......... 5.66%
05/31/95
- ------------------------------------------------------------------
Value of hypothetical pre-existing account with exactly one share
at the beginning of the base period.............................. $1.000000000
Value of the same account (excluding capital changes) at the end
of the seven-day base period..................................... 1.001104570
Net change in account value....................................... .001104570
Annualized Current Net Yield [.001104570 X (365/7)]............... 5.76%
Annualized Effective Net Yield [(.001104570+1)(365/7)]-1.......... 5.93%
02/28/95
- ------------------------------------------------------------------
Value of hypothetical pre-existing account with exactly one share
at the beginning of the base period.............................. $1.000000000
Value of the same account (excluding capital changes) at the end
of the seven-day base period..................................... 1.001102664
Net change in account value....................................... .001102664
Annualized Current Net Yield [.001102664 X (365/7)]............... 5.75%
Annualized Effective Net Yield [(.001102664+1)(365/7)]-1.......... 5.91%
11/30/94
- ------------------------------------------------------------------
Value of hypothetical pre-existing account with exactly one share
at the beginning of the base period.............................. $1.000000000
Value of the same account (excluding capital changes) at the end
of the seven-day base period..................................... 1.000988354
Net change in account value....................................... .000988354
Annualized Current Net Yield [.000988354 X (365/7)]............... 5.15%
Annualized Effective Net Yield [(.000988354+1)(365/7)]-1.......... 5.29%
</TABLE>
<PAGE>
<TABLE>
<S> <C>
US GOVERNMENT MONEY MARKET FUND
- ------------------------------------------------------------------
08/31/95
- ------------------------------------------------------------------
Value of hypothetical pre-existing account with exactly one share
at the beginning of the base period.............................. $1.000000000
Value of the same account (excluding capital changes) at the end
of the seven-day base period..................................... 1.001032635
Net change in account value....................................... .001032635
Annualized Current Net Yield [.001032635 X (365/7)]............... 5.38%
Annualized Effective Net Yield [(.001032635+1)(365/7)]-1.......... 5.53%
05/31/95
- ------------------------------------------------------------------
Value of hypothetical pre-existing account with exactly one share
at the beginning of the base period.............................. $1.000000000
Value of the same account (excluding capital changes) at the end
of the seven-day base period..................................... 1.001085713
Net change in account value....................................... .001085713
Annualized Current Net Yield [.001085713 X (365/7)]............... 5.66%
Annualized Effective Net Yield [(.001085713+1)(365/7)]-1.......... 5.82%
02/28/95
- ------------------------------------------------------------------
Value of hypothetical pre-existing account with exactly one share
at the beginning of the base period.............................. $1.000000000
Value of the same account (excluding capital changes) at the end
of the seven-day base period..................................... 1.001089658
Net change in account value....................................... .001089658
Annualized Current Net Yield [.001089658 X (365/7)]............... 5.68%
Annualized Effective Net Yield [(.001089658+1)(365/7)]-1.......... 5.84%
11/30/94
- ------------------------------------------------------------------
Value of hypothetical pre-existing account with exactly one share
at the beginning of the base period.............................. $1.000000000
Value of the same account (excluding capital changes) at the end
of the seven-day base period..................................... 1.000999706
Net change in account value....................................... .000999706
Annualized Current Net Yield [.000999706 X (365/7)]............... 5.21%
Annualized Effective Net Yield [(.000999706+1)(365/7)]-1.......... 5.35%
PRIME MONEY MARKET
- ------------------------------------------------------------------
08/31/95
- ------------------------------------------------------------------
Value of hypothetical pre-existing account with exactly one share
at the beginning of the base period.............................. $1.000000000
Value of the same account (excluding capital changes) at the end
of the seven-day base period..................................... 1.001107241
Net change in account value....................................... .001107241
Annualized Current Net Yield [.001107241 X (365/7)]............... 5.77%
Annualized Effective Net Yield [(.001107241+1)(365/7)]-1.......... 5.94%
</TABLE>
<PAGE>
<TABLE>
<S> <C>
05/31/95
- ------------------------------------------------------------------
Value of hypothetical pre-existing account with exactly one share
at the beginning of the base period.............................. $1.000000000
Value of the same account (excluding capital changes) at the end
of the seven-day base period..................................... 1.001166224
Net change in account value....................................... .001166224
Annualized Current Net Yield [.001166224 X (365/7)]............... 6.08%
Annualized Effective Net Yield [(.001166224+1)(365/7)]-1.......... 6.27%
02/28/95
- ------------------------------------------------------------------
Value of hypothetical pre-existing account with exactly one share
at the beginning of the base period.............................. $1.000000000
Value of the same account (excluding capital changes) at the end
of the seven-day base period..................................... 1.001151882
Net change in account value....................................... .001151882
Annualized Current Net Yield [.001151882 X (365/7)]............... 6.01%
Annualized Effective Net Yield [(.001151882+1)(365/7)]-1.......... 6.19%
11/30/94
- ------------------------------------------------------------------
Value of hypothetical pre-existing account with exactly one share
at the beginning of the base period.............................. $1.000000000
Value of the same account (excluding capital changes) at the end
of the seven-day base period..................................... 1.001050898
Net change in account value....................................... .001050898
Annualized Current Net Yield [.001050898 X (365/7)]............... 5.48%
Annualized Effective Net Yield [(.001050898+1)(365/7)]-1.......... 5.63%
TREASURY MONEY MARKET
- ------------------------------------------------------------------
08/31/95
- ------------------------------------------------------------------
Value of hypothetical pre-existing account with exactly one share
at the beginning of the base period.............................. $1.000000000
Value of the same account (excluding capital changes) at the end
of the seven-day base period..................................... 1.001088677
Net change in account value....................................... .001088677
Annualized Current Net Yield [.001088677 X (365/7)]............... 5.68%
Annualized Effective Net Yield [(.001088677+1)(365/7)]-1.......... 5.84%
05/31/95
- ------------------------------------------------------------------
Value of hypothetical pre-existing account with exactly one share
at the beginning of the base period.............................. $1.000000000
Value of the same account (excluding capital changes) at the end
of the seven-day base period..................................... 1.001136433
Net change in account value....................................... .001136433
Annualized Current Net Yield [.001136433 X (365/7)]............... 5.93%
Annualized Effective Net Yield [(.001136433+1)(365/7)]-1.......... 6.10%
</TABLE>
<PAGE>
<TABLE>
<S> <C>
02/28/95
- ------------------------------------------------------------------
Value of hypothetical pre-existing account with exactly one share
at the beginning of the base period.............................. $1.000000000
Value of the same account (excluding capital changes) at the end
of the seven-day base period..................................... 1.001142832
Net change in account value....................................... .001142832
Annualized Current Net Yield [.001142832 X (365/7)]............... 5.96%
Annualized Effective Net Yield [(.001142832+1)(365/7)]-1.......... 6.14%
11/30/94
- ------------------------------------------------------------------
Value of hypothetical pre-existing account with exactly one share
at the beginning of the base period.............................. $1.000000000
Value of the same account (excluding capital changes) at the end
of the seven-day base period..................................... 1.001007780
Net change in account value....................................... .001007780
Annualized Current Net Yield [.001007780 X (365/7)]............... 5.25%
Annualized Effective Net Yield [(.001007780+1)(365/7)]-1.......... 5.39%
TAX FREE MONEY MARKET*
- ------------------------------------------------------------------
08/31/95
- ------------------------------------------------------------------
Value of hypothetical pre-existing account with exactly one share
at the beginning of the base period.............................. $1.000000000
Value of the same account (excluding capital changes) at the end
of the seven-day base period..................................... 1.000617708
Net change in account value....................................... .000617708
Annualized Current Net Yield [.000617708 X (365/7)]............... 3.22%
Annualized Current Tax Equivalent Net Yield [3.22%/(1-0.396)]..... 5.33%
Annualized Effective Net Yield [(.000617708+1)(365/7)]-1.......... 3.27%
Annualized Effective Tax Equivalent Net Yield [3.27%/(1-0.396)]... 5.42%
05/31/95
- ------------------------------------------------------------------
Value of hypothetical pre-existing account with exactly one share
at the beginning of the base period.............................. $1.000000000
Value of the same account (excluding capital changes) at the end
of the seven-day base period..................................... 1.000668790
Net change in account value....................................... .000668790
Annualized Current Net Yield [.000668790 X (365/7)]............... 3.49%
Annualized Current Tax Equivalent Net Yield [3.49%/(1-.396)]...... 5.77%
Annualized Effective Net Yield [(.000668790+1)(365/7)]-1.......... 3.55%
Annualized Effective Tax Equivalent Net Yield [3.55%/(1-.396)].... 5.87%
</TABLE>
<PAGE>
<TABLE>
<S> <C>
02/28/95
- ------------------------------------------------------------------
Value of hypothetical pre-existing account with exactly one share
at the beginning of the base period.............................. $1.000000000
Value of the same account (excluding capital changes) at the end
of the seven-day base period**................................... 1.000676130
Net change in account value....................................... .000676130
Annualized Current Net Yield [.000676130 X (365/7)]............... 3.53%
Annualized Current Tax Equivalent Net Yield [3.53%/(1-.396)]...... 5.84%
Annualized Effective Net Yield [(.000676130+1)(365/7)]-1.......... 3.59%
Annualized Effective Tax Equivalent Net Yield [3.59%/(1-.396)].... 5.94%
</TABLE>
- ------------------------
* The Tax Free Money Market Fund commenced operations December 1, 1994.
<PAGE>
SCHEDULE OF CURRENT YIELD COMPUTATION
FOR THE PERIOD ENDED 08/31/95
(NON-MONEY MARKET FUNDS)
The following is the yield calculation based on a 30-day period computed by
dividing the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period, according to the
following formula:
a - b
YIELD = 2[( ------- +1)to the power of 6 - 1]
cd
Where: a = dividends and interest earned during the 30 day period.
b = expenses accrued for the 30 day period (net of reimbursements).
c = the average daily number of shares outstanding that were
entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
YIELD PLUS
7,401,559.05 - 506,956.73
YIELD = 2[( --------------------------- +1)to the power of 6 - 1] =
144,867,495.34 X 10.00 5.78%
INTERMEDIATE
189,309.87 - 16,502.25
YIELD = 2[( --------------------------- +1)to the power of 6 - 1] =
3,480,076.39 X 9.72 6.21%
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIOD ENDED 08/31/95
The following are the average annual total returns for the Seven Seas Series
Funds, computed by finding the average compounded rates of return over the
periods that would equate the initial amount invested to the ending redeemable
value, according to the following formula:
P(1 + T)(n) = ERV
<TABLE>
<S> <C> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the 1, 5 or 10 year periods at the end of the 1, 5 or 10 year
periods (or fractional portion thereof).
</TABLE>
<TABLE>
<CAPTION>
S&P 500 INDEX
- --------------------
<S> <C> <C>
2.67 years $1,000 (1 + 12.77%)(2.67) = $1.378
1 year $1,000 (1 + 21.11%)(1) = $1,211
-----------------------------------------------------------
<CAPTION>
SMALL CAP
- --------------------
<S> <C> <C>
3.17 years $1,000 (1 + 17.93%)(3.17) = $1,687
1 year $1,000 (1 + 30.04%)(1) = $1,300
-----------------------------------------------------------
<CAPTION>
MATRIX EQUITY
- --------------------
<S> <C> <C>
3.33 years $1,000 (1 + 13.15%)(3.33) = $1,509
1 year $1,000 (1 + 18.81%)(1) = $1,188
-----------------------------------------------------------
<CAPTION>
GROWTH & INCOME
- --------------------
<S> <C> <C>
2 years $1,000 (1 + 10.84%)(2) = $1,229
1 year $1,000 (1 + (15.66%)(1) = $1,157
-----------------------------------------------------------
<CAPTION>
EMERGING MARKETS
- --------------------
<S> <C> <C>
1.50 years $1,000 (1 + 2.57%)(1.50) = $1,039
1 year $1,000 (1 + (9.28)%)(1) = $907
-----------------------------------------------------------
<CAPTION>
ACTIVE INTERNATIONAL
- --------------------
<S> <C> <C>
.48 years $1,000 (1 + 8.90%) = $1,089
PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED.
-----------------------------------------------------------
<CAPTION>
YIELD PLUS
- --------------------
<S> <C> <C>
2.81 years $1,000 (1 + 4.45%)(2.81) = $1,130
1 year $1,000 (1 + 6.01%)(1) = $1,060
-----------------------------------------------------------
<CAPTION>
INTERMEDIATE
- --------------------
<S> <C> <C>
2 years $1,000 (1 + 3.09%)(2) = $1,063
1 year $1,000 (1 + 10.05%)(1) = $1,101
</TABLE>
<PAGE>
INVESTMENT ADVISORY AGREEMENT
BETWEEN
STATE STREET BANK AND TRUST COMPANY
AND
THE SEVEN SEAS SERIES FUND
This Agreement is made as of this 12th day of April, 1988, between The Seven
Seas Series Fund, a Massachusetts business trust (the "Investment Company"), and
State Street Bank and Trust Company, a Massachusetts bank (the "Adviser").
WHEREAS, the Investment Company is an open-end, diversified management
investment company registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), currently consisting of one portfolio series, having
its own investment policies; and
WHEREAS, State Street Bank and Trust Company ("State Street") is a Massachusetts
bank, and is in the business of providing, among other things, fiduciary and
investment advisory services; and
WHEREAS, the Investment Company desires to retain the Adviser to render
investment advisory services to the Investment Company with respect to the
existing Fund and possibly such other funds as the Investment Company and the
Adviser may agree upon ("Fund"), and the Adviser is willing to render such
services;
NOW, THEREFORE, in consideration of the mutual agreements contained herein, the
Investment Company and Adviser agree as follows:
1. APPOINTMENT OF ADVISER.
(a) Initial Fund: The Investment Company hereby appoints the Adviser to
act as investment adviser to the Fund for the period and on the terms set forth
in this Agreement. The Adviser accepts such appointment and agrees to render
the services herein set forth, for the compensation herein provided. The
Investment Company warrants that the Adviser has been duly appointed to act
hereunder.
(b) Additional Funds: In the event that the Investment Company
establishes one or more Funds other than the Initial Fund with respect to which
it desires to retain the Adviser to render investment advisory services
hereunder, it shall so notify the Adviser in writing, indicating the advisory
fee to be payable with respect to the additional Fund. If the Adviser is
willing to render such services, it shall so notify the Investment Company in
writing, whereupon such Fund shall become a Fund hereunder. In such event a
writing signed by both the Investment Company and the Adviser shall be annexed
hereto as a part hereof indicating that such additional Fund has become a Fund
hereunder and reflecting the agreed-upon fee schedule for such Fund.
-1-
<PAGE>
2. ADVISORY DUTIES. Subject to the supervision of the Board of Trustees of
the Investment Company, the Adviser shall manage the investment operations and
the composition of the Fund, including the purchase, retention and disposition
thereof, in accordance with the Fund's investment objective and policies as
stated in the Investment Company's Registration Statement. The Adviser is
authorized to engage one or more sub-advisers in connection with the Adviser's
duties under this Agreement, which sub-advisers may be affiliates of the
Manager. The Adviser's duties hereunder are subject to the following
understandings:
(a) The Adviser shall provide supervision of investments, furnish a
continuous investment program for the Fund, determine from time to time what
investments or securities will be purchased, retained or sold by the Fund, and
what portion of the assets will be invested or held uninvested as cash;
(b) The Adviser, in the performance of its duties and obligations under
this Agreement, shall act in conformity with the Master Trust Agreement, By-Laws
and Registration Statement of the Investment Company and with the instructions
and directions of the Board of Trustees of the Investment Company, provided,
however, the Adviser shall not be responsible for acting contrary to any of the
foregoing that are changed without notice of such change to the Adviser; and the
Adviser shall conform to and comply with the applicable requirements of the 1940
Act and all other applicable federal or state laws and regulations;
(c) The Adviser shall promptly communicate to the officers and Trustees of
the Investment Company such information relating to Fund transactions as they
may reasonably request. On occasions when the Adviser deems the purchase or
sale of a security to be in the best interest of a Fund as well as other
clients, the Adviser, to the extent permitted by applicable laws and
regulations, may aggregate the securities to be sold or purchased, provided that
in the opinion of the Adviser, all accounts are treated equitably and fairly.
In such event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transactions, shall be made by the Adviser in the
manner it considers to be the most equitable and consistent with its fiduciary
obligations to the Investment Company and to such other clients;
(d) The Adviser shall maintain books and records with respect to the
Investment Company's securities transactions and shall render to the Investment
Company's Board of Trustees such periodic and special reports as the Board may
reasonably request;
(e) The Adviser shall provide the Investment Company with a list of all
securities transactions as reasonably requested by the Investment Company;
(f) the investment advisory services of the Adviser to the Investment
Company under this Agreement are not to be deemed exclusive, and the Adviser
shall be free to render similar services to others.
<PAGE>
3. EXECUTION AND ALLOCATION OF PORTFOLIO BROKERAGE COMMISSION. The Adviser,
subject to and in accordance with any directions which the Investment Company's
Board of Trustees may issue from time to time, shall place, in the name of the
Investment Company, orders for the execution of the securities transactions in
which any Fund is authorized to invest. When placing such orders, the primary
objective of the Adviser shall be to obtain the best net price and execution for
the Investment Company but this requirement shall not be deemed to obligate the
Adviser to place any order solely on the basis of obtaining the lowest
commission rate if the other standards set forth in this section have been
satisfied. The Investment Company recognizes that there are likely to be many
cases in which different brokers are equally able to provide such best price and
execution and that, in selection among such brokers with respect to particular
trades, it is desirable to choose those brokers who furnish "brokerage and
research services" (as defined in Section 29(e)(3) of the Securities and
Exchange Act of 1934) or statistical quotations and other information to the
Investment Company and/or the Adviser in accordance with the standards set forth
below. Moreover, to the extent that it continues to be lawful to do so and so
long as the Board determines as a matter of general policy that the Investment
Company will benefit, directly or indirectly, by doing so, the Adviser may place
orders with a broker who charges a commission that another broker would have
charged for effecting that transaction, provided that the excess commission is
reasonable in relation to the value of brokerage and research services provided
by that broker. Accordingly, the Investment Company and the Adviser agree that
the Adviser shall select brokers for the execution of any Fund's securities
transactions from among:
a. Those brokers and dealers who provide brokerage and research services,
or statistical quotations and other information to the Investment Company,
specifically including the quotations necessary to determine the Investment
Company's net assets, in such amount of total brokerage as may reasonably be
required in light of such services.
b. Those brokers and dealers who provide brokerage and research services
to the Adviser and/or its affiliated corporations which relate directly to
portfolio securities, actual or potential, of the Investment Company, or which
place the Adviser in a better position to make decisions in connection with the
management of the Investment Company's assets, whether or not such data may also
be useful to the Adviser and its affiliates in managing other portfolios or
advising other clients, in such amount of total brokerage as may reasonably be
required.
c. Frank Russell Securities, Inc., the Investment Company's distributor,
when the Adviser has determined that the Fund will receive competitive
execution, price and commissions. The Adviser shall render regular reports to
the Investment Company, not more frequently than quarterly, of how much total
brokerage business has been placed with Frank Russell Securities, Inc., and the
manner in which the allocation has been accomplished.
<PAGE>
The Adviser agrees that no investment decision will be made or influenced by a
desire to provide brokerage for allocation in accordance with the foregoing, and
that the right to make such allocation of brokerage shall not interfere with the
Adviser's primary duty to obtain the best net price and execution for the
Investment Company.
4. BOOKS AND RECORDS. The Adviser shall keep the Investment Company's books
and records required to be maintained by it pursuant to paragraph 2(d) hereof.
The Adviser agrees that all records which it maintains for the Investment
Company are the property of the Investment Company and it shall surrender
promptly to the Investment Company any of such records upon the Investment
Company's request. The Adviser further agrees to preserve for the periods
prescribed by Rule 31a-2 of the Commission under the 1940 Act any such records
as are required to be maintained by Rule 31a-1(f) of the Commission under the
1940 Act. Nothing herein shall prevent the Adviser from maintaining its own
records as required by law, which may be a duplication of the Investment
Company's records.
5. REPORTS TO ADVISER. The Investment Company agrees to furnish the Adviser
at its principal office all prospectuses, proxy statements, reports to
stockholders, sales literature or other material prepared for distribution to
shareholders of the Investment Company or the public, which refer in any way to
the Adviser, ten (10) days prior to use thereof and not to use such material if
the Adviser should object thereto in writing within seven (7) days after receipt
of such material; provided, however, that the Adviser hereby approves all uses
of its name which merely refer in accurate terms to its appointment as
investment adviser hereunder, which merely identifies the Investment Company,
or which are required by the Securities and Exchange Commission or a state
securities commission. In the event of termination of this Agreement, the
Investment Company shall, on written request of the Adviser, forthwith delete
any reference to the Adviser from any materials described in the preceding
sentence. The Investment Company shall furnish or otherwise make available to
the Adviser such other information relating to the business affairs of the
Investment Company as the Adviser at any time, or from time to time, reasonably
requests in order to discharge its obligations hereunder.
6. PROXIES. Unless the Investment Company gives written instructions to the
contrary, the Adviser shall vote or not vote all proxies solicited by or with
respect to the issuers of securities in which assets of any Fund may be
invested. The Adviser shall use its best good faith judgment to vote or not
vote such proxies in a manner which best serves the interests of the Investment
Company's shareholders.
7. EXPENSES. During the term of this Agreement, the Adviser shall pay all of
its own expenses incurred by it in connection with its activities under this
Agreement and the Fund of the Investment Company shall bear all expenses that
are incurred in its operations not specifically assumed by the Adviser.
Expenses borne by the Fund will include but not be limited to the following (or
the Fund's proportionate share of the following): (a) brokerage commissions
relating to securities
<PAGE>
purchased or sold by the Fund or any losses incurred in connection therewith;
(b) fees payable to and expenses incurred on behalf of the Fund by the
Investment Company's administrator; (c) expenses of organizing the Investment
Company and the Fund; (d) filing fees and expenses relating to the registration
and qualification of the Fund's shares and the Investment Company under federal
or state securities laws and maintaining such registrations and qualifications;
(e) fees and salaries payable to the Investment Company's Trustees and officers
who are not officers or employees of the Investment Company's administrator, any
investment adviser or underwriter of the Investment Company; (f) taxes
(including any income or franchise taxes) and governmental fees; (g) costs of
any liability, uncollectible items of deposit and other insurance or fidelity
bonds; (h) any costs, expenses or losses arising out of any liability of or
claim for damage or other relief asserted against the Investment Company or the
Fund for violation of any law; (i) legal, accounting and auditing expenses,
including legal fees of special counsel for the independent Trustees; (j)
charges of custodians, transfer agents and other agents; (k) costs of preparing
share certificates (if any); (l) expenses of setting in type and printing
Prospectuses and Statements of Additional Information and supplements thereto
for existing shareholders, reports and statements to shareholders and proxy
material; (m) any extraordinary expenses (including fees and disbursements of
counsel) incurred by the Investment Company or the Fund; and (n) fees and other
expenses incurred in connection with membership in investment company
organizations.
8. COMPENSATION OF THE ADVISER. For the services to be rendered by the
Adviser as provided in this Agreement, the Investment Company shall pay to the
Adviser such compensation as is designated in Exhibit A to this Agreement, so
long as the Adviser has not waived all or a portion of such compensation.
9. LIMITATION OF ADVISER'S LIABILITY. In the absence of (a) willful
misfeasance, bad faith or gross negligence on the part of the Adviser in
performance of its obligations and duties hereunder, (b) reckless disregard by
the Adviser of its obligations and duties hereunder, or (c) a loss resulting
from a beach of fiduciary duty with respect to the receipt of compensation for
services (in which case, any award of damages shall be limited to the period and
the amount set forth in Section 36(b)(3) of the 1940 Act), the Adviser shall not
be subject to any liability whatsoever to the Investment Company, or to any
shareholder of the Investment Company, for any error of judgment, mistake of law
or any other act or omission in the course of, or connected with, rendering
services hereunder including, without limitation, for any losses that may be
sustained in connection with the purchase, holding, redemption or sale of any
security on behalf of the Investment Company.
10. DURATION AND TERMINATION.
(a) This Agreement shall become effective with respect to each Fund on the
date on which the Fund commences offering its shares to the public, so long as,
with respect to any additional Funds, the provisions of Section 1(b) have been
complied with. This Agreement, unless sooner terminated as provided herein,
shall continue for each Fund for two years following the effective date of this
Agreement with respect to the Fund, or
<PAGE>
the date of the first annual or special meeting of the shareholders of the Fund
following such effective date, if approved by a majority of the outstanding
voting securities of the Fund (as defined in the 1940 Act), and thereafter shall
continue automatically for periods of one year so long as such continuance is
specifically approved at least annually (a) by the vote of a majority of those
members of the Board of Trustees of the Investment Company who are not parties
to this Agreement or "interested persons" (as defined in the 1940 Act) of any
such party, cast in person at a meeting called for the purpose of voting such
approval, and (b) by the Board of Trustees of the Investment Company or by vote
of a majority of the outstanding voting securities of the Fund.
(b) This Agreement may be terminated by the Investment Company at any
time, without the payment of any penalty, vote of a majority of those members of
the Board of Trustees who are not "interested persons" (as defined in the 1940
Act) of the Adviser or the Investment Company or by the majority vote of either
the entire Board of Trustees of the Investment Company or by vote of a majority
of the outstanding voting securities of the Fund on 60 days' written notice to
the Adviser. This Agreement may also be terminated by the Adviser on 90 days'
written notice to the Investment Company. This Agreement will automatically and
immediately terminate in the event of its assignment (as defined in the 1940
Act).
11. CHOICE OF LAW. This Agreement shall be construed in accordance with the
laws of the State of Washington and any applicable federal law.
12. LIMITATION OF LIABILITY. The Master Trust Agreement dated October 3, 1987,
as amended from time to time, establishing the Investment Company, which is
hereby referred to and a copy of which is on file with the Secretary of The
Commonwealth of Massachusetts, provides that the name The Seven Seas Series Fund
means the Trustees from time to time serving (as Trustees but not personally)
under said Master Trust Agreement. It is expressly acknowledged and agreed that
the obligations of the Investment Company hereunder shall not be binding upon
any of the Shareholders, Trustees, officers, employees or agents of the
Investment Company, personally, but shall bind only the trust property of the
Investment Company, as provided in its Master Trust Agreement. The execution
and delivery of this Agreement have been authorized by the Trustees of the
Investment Company and signed by an officer of the Investment Company, acting as
such, and neither such authorization by such Trustees nor such execution and
delivery by such officer shall be deemed to have been made by any of them
individually or to impose any liability on any of them personally, but shall
bind only the trust property of the Investment Company as provided in its Master
Trust Agreement.
<PAGE>
IN WITNESS WHEREOF, the due execution hereof as of the date first above written.
Attest: THE SEVEN SEAS SERIES FUND
By: /s/ Michael S. Caccese By: /s/ George W. Weber
-------------------------- --------------------------
Attest: STATE STREET BANK AND TRUST
COMPANY
By: /s/ Timothy B. Harbert By: /s/ Nicholas A. Lopardo
-------------------------- --------------------------
<PAGE>
EXHIBIT "A"
As consideration for the Adviser's services to the following Fund(s), the
Adviser shall receive from the Fund(s) an annual advisory fee, accrued daily at
the rate of 1/365th of the applicable fee rate and payable monthly on the first
business day of each month, of the following annual percentages of the Fund's
average daily net assets during the month:
The Seven Seas Series Money Market 0.25%
<PAGE>
AMENDED
EXHIBIT "A"
January 9, 1991
As consideration for the Adviser's services to the following Funds, the Adviser
shall receive from each of these Funds an annual advisory fee, accrued daily at
the rate of 1/365th of the applicable advisory fee rate and payable monthly on
the first business day of each month, of the following annual percentages of
each Fund's average daily net assets during the month:
The Seven Seas Series Money Market Fund 0.25%
The Seven Seas Series US Government Money Market Fund 0.25%
<PAGE>
LETTER AGREEMENT
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Dear Sirs:
Pursuant to Paragraph 1(b) of the Investment Advisory Agreement between The
Seven Seas Series Fund and State Street Bank and Trust Company, dated April 12,
1988, The Seven Seas Series Fund advises you that it is creating a new series to
be named The Seven Seas Series US Government Money Market Fund (the "Fund") and
that The Seven Seas Series Fund desires State Street Bank and Trust Company to
serve as investment adviser with respect to the Fund pursuant to the terms and
conditions of the Investment Advisory Agreement. The fees to be charged by
adviser to the Fund in return for its investment advisory services will be as
set forth in the attached Schedule A.
Notwithstanding anything to the contrary in Paragraph 10(a), the initial term of
the Investment Advisory Agreement with respect to the Fund shall be until
April 12, 1992.
Please acknowledge your acceptance of acting as adviser to the Fund by executing
this letter agreement in the space provided below and then returning it to the
undersigned.
Sincerely,
THE SEVEN SEAS SERIES FUND
By: /s/ George W. Weber
--------------------------
Its: Senior Vice President - Operations
ACKNOWLEDGED AND ACCEPTED
State Street Bank and Trust Company
By: /s/ Nicholas A. Lopardo
-------------------------------
<PAGE>
LETTER AGREEMENT
January 8, 1992
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Dear Sirs:
Pursuant to Paragraph 1(b) of the Investment Advisory Agreement between The
Seven Seas Series Fund and State Street Bank and Trust Company, dated April 12,
1988, The Seven Seas Series Fund advises you that it is creating six new series
to be named The Seven Seas Series Short Term Government Bond Fund, The Seven
Seas Series S&P 500 Index Fund, The Seven Seas Series S&P Midcap Index Fund, The
Seven Seas Series Matrix Synthesis Fund, The Seven Seas Series International
European Index Fund, and The Seven Seas Series International Pacific Index Fund
(the "Portfolios") and that The Seven Seas Series Fund desires State Street Bank
and Trust Company to serve as investment adviser with respect to the Portfolios
pursuant to the terms and conditions of the Investment Advisory Agreement. The
fees to be charged by adviser to the Portfolios in return for its investment
advisory services will be as set forth in the attached Schedule A.
Notwithstanding anything to the contrary in Paragraph 10(a), the initial term of
the Investment Advisory Agreement with respect to the Fund shall be until
April 12, 1993.
Please acknowledge your acceptance of acting as adviser to the Fund by executing
this letter agreement in the space provided below and then returning it to the
undersigned.
Sincerely,
THE SEVEN SEAS SERIES FUND
By: /s/ George W. Weber
--------------------------
Its: Senior Vice President - Operations
ACKNOWLEDGED AND ACCEPTED
State Street Bank and Trust Company
By: /s/ Nicholas A. Lopardo
-------------------------------
<PAGE>
AMENDED
EXHIBIT "A"
January 8, 1992
As consideration for the Adviser's services to the following Portfolios, the
Adviser shall receive from each of these Portfolios an annual advisory fee,
accrued daily at the rate of 1/365th of the applicable advisory fee rate and
payable monthly on the first business day of each month, of the following annual
percentages of each Portfolio's average daily net assets during the month:
The Seven Seas Series Money Market Fund 0.25%
The Seven Seas Series US Government Money Market Fund 0.25%
The Seven Seas Series Short Term Government Bond Fund 0.50%
The Seven Seas Series S&P 500 Index Fund 0.10%
The Seven Seas Series S&P Midcap Index Fund 0.20%
The Seven Seas Series Matrix Synthesis Fund 0.75%
The Seven Seas Series International European Index Fund 0.50%
The Seven Seas Series International Pacific Index Fund 0.50%
<PAGE>
LETTER AGREEMENT
July 8, 1992
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Dear Sirs:
Pursuant to Paragraph 1(b) of the Investment Advisory Agreement between The
Seven Seas Series Fund and State Street Bank and Trust Company, dated April 12,
1988, The Seven Seas Series Fund advises you that it is creating two new series
to be named The Seven Seas Series Bond Market Fund and The Seven Seas Series
Yield Plus Fund (the "Portfolios") and that The Seven Seas Series Fund desires
State Street Bank and Trust Company to serve as investment adviser with respect
to the Portfolios pursuant to the terms and conditions of the Investment
Advisory Agreement. The fees to be charged by adviser to the Portfolios in
return for its investment advisory services will be as set forth in the attached
Schedule A.
Notwithstanding anything to the contrary in Paragraph 10(a), the initial term of
the Investment Advisory Agreement with respect to the Fund shall be until
April 12, 1994.
Please acknowledge your acceptance of acting as adviser to the Fund by executing
this letter agreement in the space provided below and then returning it to the
undersigned.
Sincerely,
THE SEVEN SEAS SERIES FUND
By: /s/ George W. Weber
--------------------------
Its: Senior Vice President - Operations
ACKNOWLEDGED AND ACCEPTED
State Street Bank and Trust Company
By: /s/ Gustaff V. Fish, Jr.
-------------------------------
<PAGE>
AMENDED
EXHIBIT "A"
July 8, 1992
As consideration for the Adviser's services to the following Portfolios, the
Adviser shall receive from each of these Portfolios an annual advisory fee,
accrued daily at the rate of 1/365th of the applicable advisory fee rate and
payable monthly on the first business day of each month, of the following annual
percentages of each Portfolio's average daily net assets during the month:
The Seven Seas Series Money Market Fund 0.25%
The Seven Seas Series US Government Money Market Fund 0.25%
The Seven Seas Series Short Term Government Bond Fund 0.50%
The Seven Seas Series S&P 500 Index Fund 0.10%
The Seven Seas Series S&P Midcap Index Fund 0.20%
The Seven Seas Series Matrix Synthesis Fund 0.75%
The Seven Seas Series International European Index Fund 0.50%
The Seven Seas Series International Pacific Index Fund 0.50%
The Seven Seas Series Bond Market Fund 0.30%
The Seven Seas Series Yield Plus Fund 0.25%
<PAGE>
LETTER AGREEMENT
The Seven Seas Series US Treasury Money Market Fund
The Seven Seas Series US Treasury Obligations Fund
Investment Advisory Agreement
January 6, 1993
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Dear Sirs:
Pursuant to Paragraph 1(b) of the Investment Advisory Agreement between The
Seven Seas Series Fund and State Street Bank and Trust Company, dated April 12,
1988, The Seven Seas Series Fund advises you that it is creating two new series
to be named The Seven Seas Series US Treasury Money Market Fund and The Seven
Seas Series US Treasury Obligations Fund (the "New Funds") and that The Seven
Seas Series Fund desires State Street Bank and Trust Company to serve as
investment adviser with respect to the New Funds pursuant to the terms and
conditions of the Investment Advisory Agreement. The fees to be charged by
adviser to the Portfolios in return for its investment advisory services will be
as set forth in the attached Exhibit A.
Notwithstanding anything to the contrary in Paragraph 10(a), the initial term of
the Investment Advisory Agreement with respect to the New Funds shall be until
April 12, 1993.
Please acknowledge your acceptance of acting as adviser to the Fund by executing
this letter agreement in the space provided below and then returning it to the
undersigned.
Sincerely,
THE SEVEN SEAS SERIES FUND
By: /s/ George W. Weber
---------------------------
Its: Senior Vice President - Operations
ACKNOWLEDGED AND ACCEPTED
State Street Bank and Trust Company
By: /s/ Gustaff V. Fish, Jr.
---------------------------
Senior Vice President
<PAGE>
AMENDED
EXHIBIT "A"
January 6, 1993
As consideration for the Adviser's services to the following Portfolios, the
Adviser shall receive from each of these Portfolios an annual advisory fee,
accrued daily at the rate of 1/365th of the applicable advisory fee rate and
payable monthly on the first business day of each month, of the following annual
percentages of each Portfolio's average daily net assets during the month:
The Seven Seas Series Money Market Fund 0.25%
The Seven Seas Series US Government Money Market Fund 0.25%
The Seven Seas Series Short Term Government Bond Fund 0.50%
The Seven Seas Series S&P 500 Index Fund 0.10%
The Seven Seas Series S&P Midcap Index Fund 0.20%
The Seven Seas Series Matrix Synthesis Fund 0.75%
The Seven Seas Series International European Index Fund 0.50%
The Seven Seas Series International Pacific Index Fund 0.50%
The Seven Seas Series Bond Market Fund 0.30%
The Seven Seas Series Yield Plus Fund 0.25%
The Seven Seas Series US Treasury Money Market Fund 0.25%
The Seven Seas Series US Treasury Obligations Fund 0.25%
<PAGE>
LETTER AGREEMENT
The Seven Seas Series Growth and Income Fund
The Seven Seas Series Intermediate Fund
Investment Advisory Agreement
April 7, 1993
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Dear Sirs:
Pursuant to Paragraph 1(b) of the Investment Advisory Agreement between The
Seven Seas Series Fund and State Street Bank and Trust Company, dated April 12,
1988, The Seven Seas Series Fund advises you that it is creating two new series
to be named The Seven Seas Series Growth and Income Fund and The Seven Seas
Series Intermediate Fund (the "New Funds") and that The Seven Seas Series Fund
desires State Street Bank and Trust Company to serve as investment adviser with
respect to the New Funds pursuant to the terms and conditions of the Investment
Advisory Agreement. The fees to be charged by adviser to the New Funds in
return for its investment advisory services will be as set forth in the attached
Exhibit A.
Notwithstanding anything to the contrary in Paragraph 10(a), the initial term of
the Investment Advisory Agreement with respect to the New Funds shall be until
April 12, 1994.
Please acknowledge your acceptance of acting as adviser to the Fund by executing
this letter agreement in the space provided below and then returning it to the
undersigned.
Sincerely,
THE SEVEN SEAS SERIES FUND
By: /s/ Lynn L. Anderson
-------------------------------
Its: President
-------------------------------
ACKNOWLEDGED AND ACCEPTED
State Street Bank and Trust Company
By: /s/ Timothy B. Harbert
-------------------------------
Senior Vice President
-------------------------------
<PAGE>
AMENDED
EXHIBIT "A"
January 6, 1993
As consideration for the Adviser's services to the following Portfolios, the
Adviser shall receive from each of these Portfolios an annual advisory fee,
accrued daily at the rate of 1/365th of the applicable advisory fee rate and
payable monthly on the first business day of each month, of the following annual
percentages of each Portfolio's average daily net assets during the month:
The Seven Seas Series Money Market Fund 0.25%
The Seven Seas Series US Government Money Market Fund 0.25%
The Seven Seas Series Short Term Government Bond Fund 0.50%
The Seven Seas Series S&P 500 Index Fund 0.10%
The Seven Seas Series S&P Midcap Index Fund 0.20%
The Seven Seas Series Matrix Synthesis Fund 0.75%
The Seven Seas Series International European Index Fund 0.50%
The Seven Seas Series International Pacific Index Fund 0.50%
The Seven Seas Series Bond Market Fund 0.30%
The Seven Seas Series Yield Plus Fund 0.25%
The Seven Seas Series US Treasury Money Market Fund 0.25%
The Seven Seas Series US Treasury Obligations Fund 0.25%
The Seven Seas Series Growth and Income Fund 0.85%
The Seven Seas Series Intermediate Fund 0.80%
<PAGE>
LETTER AGREEMENT
The Seven Seas Series Prime Money Market Portfolio
The Seven Seas Series Emerging Markets Fund
Investment Advisory Agreement
January 19, 1994
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Dear Sirs:
Pursuant to Paragraph 1(b) of the Investment Advisory Agreement between The
Seven Seas Series Fund and State Street Bank and Trust Company, dated April 12,
1988, The Seven Seas Series Fund advises you that it is creating two new series
to be named The Seven Seas Series Prime Money Market Portfolio and The Seven
Seas Series Emerging Markets Fund (the "Portfolios") and that The Seven Seas
Series Fund desires State Street Bank and Trust Company to serve as investment
adviser with respect to the Portfolios pursuant to the terms and conditions of
the Investment Advisory Agreement. The fees to be charged by adviser to the
Portfolios in return for its investment advisory services will be as set forth
in the attached Exhibit A.
Notwithstanding anything to the contrary in Paragraph 10(a), the initial term of
the Investment Advisory Agreement with respect to the New Funds shall be until
April 12, 1994.
Please acknowledge your acceptance of acting as adviser to the Portfolios by
executing this letter agreement in the space provided below and then returning
it to the undersigned.
Sincerely,
THE SEVEN SEAS SERIES FUND
By: /s/ Lynn L. Anderson
--------------------------
Its: President
ACKNOWLEDGED AND ACCEPTED
State Street Bank and Trust Company
By: /s/ Gustaff V. Fish, Jr., Sr. Vice President
<PAGE>
AMENDED
EXHIBIT "A"
January 19, 1994
As consideration for the Adviser's services to the following Portfolios, the
Adviser shall receive from each of these Portfolios an annual advisory fee,
accrued daily at the rate of 1/365th of the applicable advisory fee rate and
payable monthly on the first business day of each month, of the following annual
percentages of each Portfolio's average daily net assets during the month:
The Seven Seas Series Money Market Fund 0.25%
The Seven Seas Series US Government Money Market Fund 0.25%
The Seven Seas Series Short Term Government Bond Fund 0.50%
The Seven Seas Series S&P 500 Index Fund 0.10%
The Seven Seas Series S&P Midcap Index Fund 0.20%
The Seven Seas Series Matrix Synthesis Fund 0.75%
The Seven Seas Series International European Index Fund 0.50%
The Seven Seas Series International Pacific Index Fund 0.50%
The Seven Seas Series Bond Market Fund 0.30%
The Seven Seas Series Yield Plus Fund 0.25%
The Seven Seas Series US Treasury Money Market Fund 0.25%
The Seven Seas Series US Treasury Obligations Fund 0.25%
The Seven Seas Series Growth and Income Fund 0.85%
The Seven Seas Series Intermediate Fund 0.80%
The Seven Seas Series Prime Money Market Portfolio 0.15%
The Seven Seas Series Emerging Markets Fund 0.75%
<PAGE>
LETTER AGREEMENT
The Seven Seas Series Tax Free Money Market Fund
Investment Advisory Agreement
July 13,1994
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Dear Sirs:
Pursuant to Paragraph 1(b) of the Investment Advisory Agreement between The
Seven Seas Series Fund and State Street Bank and Trust Company, dated April 12,
1988, The Seven Seas Series Fund advises you that it is creating a new series to
be named The Seven Seas Series Tax Free Money Market Fund, Class A, Class B and
Class C ("Tax Free Fund") and that The Seven Seas Series Fund desires State
Street Bank and Trust Company to serve as investment adviser with respect to the
Tax Free Fund pursuant to the terms and conditions of the Investment Advisory
Agreement. The fees to be charged by adviser to the Tax Free Fund in return for
its investment advisory services will be as set forth in the attached Exhibit A.
Notwithstanding anything to the contrary in Paragraph 10(a), the initial term of
the Investment Advisory Agreement with respect to the Tax Free Fund shall be
until April 12, 1995.
Please acknowledge your acceptance of acting as adviser to the Funds by
executing this letter agreement in the space provided below and then returning
it to the undersigned.
Sincerely,
THE SEVEN SEAS SERIES FUND
By: /s/ Lynn L. Anderson
--------------------------
Its: President
--------------------------
ACKNOWLEDGED AND ACCEPTED
State Street Bank and Trust Company
By: /s/ Nicholas A. Lopardo
--------------------------
Executive Vice President
--------------------------
<PAGE>
AMENDED
EXHIBIT "A"
July 13, 1994
As consideration for the Adviser's services to the following Portfolios, the
Adviser shall receive from each of these Portfolios an annual advisory fee,
accrued daily at the rate of 1/365th of the applicable advisory fee rate and
payable monthly on the first business day of each month, of the following annual
percentages of each Portfolio's average daily net assets during the month:
The Seven Seas Series Money Market Fund 0.25%
The Seven Seas Series US Government Money Market Fund 0.25%
The Seven Seas Series Short Term Government Bond Fund 0.50%
The Seven Seas Series S&P 500 Index Fund 0.10%
The Seven Seas Series S&P Midcap Index Fund 0.20%
The Seven Seas Series Matrix Synthesis Fund 0.75%
The Seven Seas Series International European Index Fund 0.50%
The Seven Seas Series International Pacific Index Fund 0.50%
The Seven Seas Series Bond Market Fund 0.30%
The Seven Seas Series Yield Plus Fund 0.25%
The Seven Seas Series US Treasury Money Market Fund 0.25%
The Seven Seas Series US Treasury Obligations Fund 0.25%
The Seven Seas Series Growth and Income Fund 0.85%
The Seven Seas Series Intermediate Fund 0.80%
The Seven Seas Series Prime Money Market Portfolio 0.15%
The Seven Seas Series Emerging Markets Fund 0.75%
The Seven Seas Series Tax Free Money Market Fund 0.25%
<PAGE>
LETTER AGREEMENT
The Seven Seas Series Real Estate Fund
The Seven Seas Series Small Cap Fund
The Seven Seas Series Active International Fund
Investment Advisory Agreement
October 25, 1994
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Dear Sirs:
Pursuant to Paragraph 1(b) of the Investment Advisory Agreement between The
Seven Seas Series Fund and State Street Bank and Trust Company, dated April 12,
1988, The Seven Seas Series Fund advises you that (1) it is creating a new
series to be named The Seven Seas Series Real Estate Equity Fund, (2) it has
changed the investment objective and policies of The Seven Seas Series Midcap
Index Fund and renamed it The Seven Seas Series Small Cap Fund, and (3) it has
changed the investment objective and policies of The Seven Seas Series
International European Index Fund and renamed it The Seven Seas Series Active
International Fund (collectively, the "Funds"), and that The Seven Seas Series
Fund desires State Street Bank and Trust Company to serve as investment adviser
with respect to the Funds pursuant to the terms and conditions of the Investment
Advisory Agreement. The fees to be charged by adviser to the Funds in return
for its investment advisory services will be as set forth in the attached
Exhibit A.
Notwithstanding anything to the contrary in Paragraph 10(a), the initial term of
the Investment Advisory Agreement with respect to the Tax Free Fund shall be
until April 12, 1995.
Please acknowledge your acceptance of acting as adviser to the Funds by
executing this letter agreement in the space provided below and then returning
it to the undersigned.
Sincerely,
THE SEVEN SEAS SERIES FUND
By: /s/ Lynn L. Anderson
--------------------------
Its: President
ACKNOWLEDGED AND ACCEPTED
State Street Bank and Trust Company
By: /s/ Nicholas A. Lopardo, Executive Vice President
-------------------------------------------------
<PAGE>
AMENDED
EXHIBIT "A"
October 25, 1994
As consideration for the Adviser's services to the following Portfolios, the
Adviser shall receive from each of these Portfolios an annual advisory fee,
accrued daily at the rate of 1/365th of the applicable advisory fee rate and
payable monthly on the first business day of each month, of the following annual
percentages of each Portfolio's average daily net assets during the month:
The Seven Seas Series Money Market Fund 0.25%
The Seven Seas Series US Government Money Market Fund 0.25%
The Seven Seas Series Short Term Government Securities Fund 0.50%
The Seven Seas Series S&P 500 Index Fund 0.10%
The Seven Seas Series Matrix Equity Fund 0.75%
The Seven Seas Series International Pacific Index Fund 0.50%
The Seven Seas Series Bond Market Fund 0.30%
The Seven Seas Series Yield Plus Fund 0.25%
The Seven Seas Series US Treasury Money Market Fund 0.25%
The Seven Seas Series US Treasury Obligations Fund 0.25%
The Seven Seas Series Growth and Income Fund 0.85%
The Seven Seas Series Intermediate Fund 0.80%
The Seven Seas Series Prime Money Market Portfolio 0.15%
The Seven Seas Series Emerging Markets Fund 0.75%
The Seven Seas Series Tax Free Money Market Fund 0.25%
The Seven Seas Series Real Estate Equity Fund 0.65%
The Seven Seas Series Small Cap Fund 0.75%
The Seven Seas Series Active International Fund 0.75%
<PAGE>
THE SEVEN SEAS SERIES FUND
FIRST AMENDED AND RESTATED
MASTER TRUST AGREEMENT
October 13, 1993
-C- 1993 Goodwin, Procter & Hoar
All Rights Reserved
<PAGE>
THE SEVEN SEAS SERIES FUND
FIRST AMENDED AND RESTATED MASTER TRUST AGREEMENT
Page
----
ARTICLE I NAME AND DEFINITIONS. . . . . . . . . . . . . . . . . . . . . 1
Section 1.1 Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.2 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . 1
(a) "By-Laws". . . . . . . . . . . . . . . . . . . . . . . . 2
(b) "class". . . . . . . . . . . . . . . . . . . . . . . . . 2
(c) "Commission" . . . . . . . . . . . . . . . . . . . . . . 2
(d) "Declaration of Trust" . . . . . . . . . . . . . . . . . 2
(e) "1940 Act" . . . . . . . . . . . . . . . . . . . . . . . 2
(f) "Shareholder". . . . . . . . . . . . . . . . . . . . . . 2
(g) "Shares" . . . . . . . . . . . . . . . . . . . . . . . . 2
(h) "Sub-Trust" or "Series". . . . . . . . . . . . . . . . . 2
(i) "Trust". . . . . . . . . . . . . . . . . . . . . . . . . 2
(j) "Trustees" . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE II PURPOSE OF TRUST. . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE III THE TRUSTEES. . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 3.1 Number, Designation, Election, Term, etc. . . . . . . . . . . 3
(a) Trustees . . . . . . . . . . . . . . . . . . . . . . . . 3
(b) Number . . . . . . . . . . . . . . . . . . . . . . . . . 3
(c) Election and Term. . . . . . . . . . . . . . . . . . . . 3
(d) Resignation and Retirement . . . . . . . . . . . . . . . 3
(e) Removal. . . . . . . . . . . . . . . . . . . . . . . . . 3
(f) Vacancies. . . . . . . . . . . . . . . . . . . . . . . . 3
(g) Effect of Death, Resignation, etc. . . . . . . . . . . . 4
(h) No Accounting. . . . . . . . . . . . . . . . . . . . . . 4
Section 3.2 Powers of Trustees. . . . . . . . . . . . . . . . . . . . . . 4
(a) Investments. . . . . . . . . . . . . . . . . . . . . . . 5
(b) Disposition of Assets. . . . . . . . . . . . . . . . . . 5
(c) Ownership Powers . . . . . . . . . . . . . . . . . . . . 5
(d) Subscription . . . . . . . . . . . . . . . . . . . . . . 5
(e) Form of Holding. . . . . . . . . . . . . . . . . . . . . 5
(f) Reorganization, etc. . . . . . . . . . . . . . . . . . . 6
(g) Voting Trusts, etc . . . . . . . . . . . . . . . . . . . 6
(i)
<PAGE>
Page
----
(h) Compromise . . . . . . . . . . . . . . . . . . . . . . . 6
(i) Partnerships, etc. . . . . . . . . . . . . . . . . . . . 6
(j) Borrowing and Security . . . . . . . . . . . . . . . . . 6
(k) Guarantees, etc. . . . . . . . . . . . . . . . . . . . . 6
(l) Insurance. . . . . . . . . . . . . . . . . . . . . . . . 6
(m) Pensions, etc. . . . . . . . . . . . . . . . . . . . . . 7
(n) Distribution Plans7. . . . . . . . . . . . . . . . . . . 7
Section 3.3 Certain Contracts . . . . . . . . . . . . . . . . . . . . . . 7
(a) Advisory . . . . . . . . . . . . . . . . . . . . . . . . 7
(b) Administration . . . . . . . . . . . . . . . . . . . . . 8
(c) Distribution . . . . . . . . . . . . . . . . . . . . . . 8
(d) Custodian and Depository . . . . . . . . . . . . . . . . 8
(e) Transfer and Dividend Disbursing Agency. . . . . . . . . 8
(f) Shareholder Servicing. . . . . . . . . . . . . . . . . . 8
(g) Accounting . . . . . . . . . . . . . . . . . . . . . . . 8
Section 3.4 Payment of Trust Expenses and Compensation of Trustees. . . . 9
Section 3.5 Ownership of Assets of the Trust. . . . . . . . . . . . . . . 9
ARTICLE IV SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 4.1 Description of Shares . . . . . . . . . . . . . . . . . . . . 10
Section 4.2 Establishment and Designation of Sub-Trusts and Classes . . . 11
(a) Assets Belonging to Sub-Trusts . . . . . . . . . . . . . 11
(b) Liabilities Belonging to Sub-Trusts. . . . . . . . . . . 12
(c) Dividends. . . . . . . . . . . . . . . . . . . . . . . . 13
(d) Liquidation. . . . . . . . . . . . . . . . . . . . . . . 13
(e) Voting . . . . . . . . . . . . . . . . . . . . . . . . . 13
(f) Redemption by Shareholder. . . . . . . . . . . . . . . . 14
(g) Redemption by Trust. . . . . . . . . . . . . . . . . . . 14
(h) Net Asset Value. . . . . . . . . . . . . . . . . . . . . 14
(i) Transfer . . . . . . . . . . . . . . . . . . . . . . . . 15
(j) Equality . . . . . . . . . . . . . . . . . . . . . . . . 15
(k) Fractions. . . . . . . . . . . . . . . . . . . . . . . . 15
(l) Conversion Rights. . . . . . . . . . . . . . . . . . . . 15
(m) Class Differences. . . . . . . . . . . . . . . . . . . . 16
Section 4.3 Ownership of Shares . . . . . . . . . . . . . . . . . . . . . 16
Section 4.4 Investments in the Trust. . . . . . . . . . . . . . . . . . . 16
(ii)
<PAGE>
Page
----
Section 4.5 No Pre-emptive Rights . . . . . . . . . . . . . . . . . . . . 16
Section 4.6 Status of Shares and Limitation of Personal Liability . . . . 16
Section 4.7 No Appraisal Rights . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE V SHAREHOLDERS' VOTING POWERS AND MEETINGS . . . . . . . . . . . . 17
Section 5.1 Voting Powers . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 5.2 Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 5.3 Record Dates. . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 5.4 Quorum and Required Vote. . . . . . . . . . . . . . . . . . . 18
Section 5.5 Action by Written Consent . . . . . . . . . . . . . . . . . . 18
Section 5.6 Inspection of Records . . . . . . . . . . . . . . . . . . . . 19
Section 5.7 Additional Provisions . . . . . . . . . . . . . . . . . . . . 19
Section 5.8 Shareholder Communications. . . . . . . . . . . . . . . . . . 19
ARTICLE VI LIMITATION OF LIABILITY; INDEMNIFICATION. . . . . . . . . . . 19
Section 6.1 Trustees, Shareholders, etc. Not Personally Liable; Notice. . 19
Section 6.2 Trustee's Good Faith Action; Expert Advice;
No Bond or Surety . . . . . . . . . . . . . . . . . . . . . 20
Section 6.3 Indemnification of Shareholders . . . . . . . . . . . . . . . 20
Section 6.4 Indemnification of Trustees, Officers, etc. . . . . . . . . . 21
Section 6.5 Compromise Payment. . . . . . . . . . . . . . . . . . . . . . 22
Section 6.6 Indemnification Not Exclusive, etc. . . . . . . . . . . . . . 22
Section 6.7 Liability of Third Persons Dealing with Trustees. . . . . . . 22
ARTICLE VII MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . 22
(iii)
<PAGE>
Page
----
Section 7.1 Duration and Termination of Trust . . . . . . . . . . . . . . 22
Section 7.2 Reorganization. . . . . . . . . . . . . . . . . . . . . . . . 23
Section 7.3 Amendments. . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 7.4 Filing of Copies; References; Headings. . . . . . . . . . . . 24
Section 7.5 Applicable Law. . . . . . . . . . . . . . . . . . . . . . . . 24
(iv)
<PAGE>
THE SEVEN SEAS SERIES FUND
FIRST AMENDED AND RESTATED MASTER TRUST AGREEMENT
FIRST AMENDED AND RESTATED AGREEMENT AND DECLARATION OF TRUST made at
Boston, Massachusetts this 13th day of October, 1993, by the Trustees hereunder,
and by the holders of shares of beneficial interest to be issued hereunder as
hereinafter provided.
WITNESSETH
WHEREAS this Trust has been formed to carry on the business of an
investment company; and
WHEREAS this Trust is authorized to issue its shares of beneficial interest
in separate series, each separate series to be a Sub-Trust hereunder, and to
issue classes of Shares of any Sub-Trust or divide Shares of any Sub-Trust into
two or more classes, all in accordance with the provisions hereinafter set
forth; and
WHEREAS the Trustees have agreed to manage all property coming into their
hands as trustees of a Massachusetts business trust in accordance with the
provisions hereinafter set forth; and
WHEREAS the Trustees desire to amend and restate the Declaration of Trust
dated October 3, 1987 in its entirety by adopting this First Amended and
Restated Master Trust Agreement, which shall supersede such Declaration of Trust
and be the governing instrument of the Trust from and after the date hereof.
NOW, THEREFORE, the Trustees hereby amend and restate the Declaration of
Trust dated October 3, 1987 in its entirety and declare that they will hold all
cash, securities and other assets which they may from time to time acquire in
any manner as Trustees hereunder IN TRUST to manage and dispose of the same upon
the following terms and conditions for the benefit of the holders from time to
time of shares of beneficial interest in this Trust and the Sub-Trusts created
hereunder as hereinafter set forth.
<PAGE>
ARTICLE I
NAME AND DEFINITIONS
Section 1.1 NAME. This Trust shall be known as "THE SEVEN SEAS SERIES
FUND" and the Trustees shall conduct the business of the Trust under that name
or any other name or names as they may from time to time determine.
Section 1.2 DEFINITIONS. Whenever used herein, unless otherwise
required by the context or specifically provided:
(a) "By-Laws" shall mean the By-Laws of the Trust as amended from time to
time;
(b) "class" refers to any class of Shares of any Series or Sub-Trust
established and designated under or in accordance with the provisions of
Article IV;
(c) "Commission" shall have the meaning given it in the 1940 Act;
(d) "Declaration of Trust" shall mean this First Amended and Restated
Agreement and Declaration of Trust as amended or restated from time to time;
(e) "1940 Act" refers to the Investment Company Act of 1940 and the Rules
and Regulations thereunder, all as amended from time to time;
(f) "Shareholder" means a record owner of Shares;
(g) "Shares" refers to the transferable units of interest into which the
beneficial interest in the Trust and each Sub-Trust of the Trust and/or any
class of any Sub-Trust (as the context may require) shall be divided from time
to time;
(h) "Sub-Trust" or "Series" refers to a series of Shares established and
designated under or in accordance with the provisions of Article IV;
(i) "Trust" refers to the Massachusetts business trust established by this
Declaration of Trust, as amended from time to time, inclusive of each and every
Sub-Trust established hereunder; and
(j) "Trustees" refers to the Trustees of the Trust and of each Sub-Trust
hereunder named herein or elected in accordance with Article III.
2
<PAGE>
ARTICLE II
PURPOSE OF TRUST
The purpose of the Trust is to operate as an investment company and to
offer Shareholders of the Trust and each Sub-Trust of the Trust one or more
investment programs primarily in securities and debt instruments.
ARTICLE III
THE TRUSTEES
Section 3.1 NUMBER, DESIGNATION, ELECTION, TERM, ETC.
(a) TRUSTEES. The Trustees hereof and of each Sub-Trust hereunder shall
be Lynn L. Anderson, William L. Marshall, Steven J. Mastrovich, Patrick J.
Riley, Richard D. Shirk, Bruce D. Taber and Henry W. Todd.
(b) NUMBER. The Trustees serving as such, whether named above or
hereafter becoming Trustees, may increase or decrease (to not less than two) the
number of Trustees to a number other than the number theretofore determined. No
decrease in the number of Trustees shall have the effect of removing any Trustee
from office prior to the expiration of such Trustee's term, but the number of
Trustees may be decreased in conjunction with the removal of a Trustee pursuant
to subsection (e) of this Section 3.1.
(c) ELECTION AND TERM. Trustees in addition to those named above may
become such by election by Shareholders or the Trustees in office pursuant to
Section 8.1(f) hereof. Each Trustee, whether named above or hereafter becoming
a Trustee, shall serve as a Trustee of the Trust and of each Sub-Trust hereunder
during the lifetime of this Trust and until its termination as hereinafter
provided except as such Trustee sooner dies, resigns, retires or is removed.
Subject to Section 16(a) of the 1940 Act, the Trustees may elect their own
successors and may, pursuant to Section 3.1(f) hereof, appoint Trustees to fill
vacancies.
(d) RESIGNATION AND RETIREMENT. Any Trustee may resign or retire as a
Trustee, by written instrument signed by such Trustee and delivered to the other
Trustees or to any officer of the Trust, and such resignation or retirement
shall take effect upon such delivery or upon such later date as is specified in
such instrument and shall be effective as to the Trust and each Sub-Trust
hereunder.
(e) REMOVAL. Any Trustee may be removed with or without cause at any
time: (i) by written instrument, signed by at least two-thirds of the number of
Trustees in office immediately prior to such removal, specifying the date upon
which such removal shall become effective; or (ii) by vote of Shareholders
holding not less than two-thirds of the Shares then outstanding, cast in
3
<PAGE>
person or by proxy at any meeting called for the purpose; or (iii) by a written
declaration signed by Shareholders holding not less than two-thirds of the
Shares then outstanding and filed with the Trust's custodian. Any such removal
shall be effective as to the Trust and each Sub-Trust hereunder.
(f) VACANCIES. Any vacancy or anticipated vacancy resulting from any
reason, including without limitation the death, resignation, retirement, removal
or incapacity of any of the Trustees, or resulting from an increase in the
number of Trustees by the other Trustees may (but so long as there are at least
two remaining Trustees, need not unless required by the 1940 Act) be filled by a
majority of the remaining Trustees, subject to the provisions of Section 16(a)
of the 1940 Act, through the appointment in writing of such other person as such
remaining Trustees in their discretion shall determine and such appointment
shall be effective upon the written acceptance of the person named therein to
serve as a Trustee and agreement by such person to be bound by the provisions of
this Declaration of Trust, except that any such appointment in anticipation of a
vacancy to occur by reason of retirement, resignation or increase in number of
Trustees to be effective at a later date shall become effective only at or after
the effective date of said retirement, resignation or increase in number of
Trustees. As soon as any Trustee so appointed shall have accepted such
appointment and shall have agreed in writing to be bound by this Declaration of
Trust and the appointment is effective, the Trust estate shall vest in the new
Trustee, together with the continuing Trustees, without any further act or
conveyance.
(g) EFFECT OF DEATH, RESIGNATION, ETC. The death, resignation, retirement,
removal or incapacity of the Trustees, or any one of them, shall not operate to
annul or terminate the Trust or any Sub-Trust hereunder or to revoke or
terminate any existing agency or contract created or entered into pursuant to
the terms of this Declaration of Trust.
(h) NO ACCOUNTING. Except to the extent required by the 1940 Act or under
circumstances which would justify removal for cause, no person ceasing to be a
Trustee as a result of death, resignation, retirement, removal or incapacity
(nor the estate of any such person) shall be required to make an accounting to
the Shareholders or remaining Trustees upon such cessation.
Section 3.2 POWERS OF TRUSTEES. The Trustees in all instances shall act
as principals, and are and shall be free from the control of the Shareholders.
The Trustees shall have full power and authority to do any and all acts and to
make and execute any and all contracts and instruments that they may consider
necessary or appropriate in connection with the management of the Trust. The
Trustees shall not be bound or limited by present or future laws or customs with
regard to investment by trustees or fiduciaries, but shall have full authority
and absolute power and control over the assets of the Trust and the business of
the Trust to the same extent as if the Trustees were the sole owners of the
assets of the Trust and the business in their own right, including such
authority, power and control to do all acts and things as they, in their
uncontrolled discretion, shall deem proper to accomplish the purposes of this
Trust. Without limiting the foregoing, the Trustees may adopt By-Laws not
inconsistent with this Declaration of Trust providing for the conduct of the
business and affairs of the Trust and may amend and repeal them to the extent
that
4
<PAGE>
such By-Laws do not reserve that right to the Shareholders; they may sue or be
sued in the name of the Trust; they may from time to time in accordance with the
provisions of Section 4.1 hereof establish Sub-Trusts, each such Sub-Trust to
operate as a separate and distinct investment medium and with separately defined
investment objectives and policies and distinct investment purposes; they may
from time to time in accordance with the provisions of Section 4.1 hereof
establish classes of Shares of any Series or Sub-Trust or divide the Shares of
any Series or Sub-Trust into classes; they may as they consider appropriate
elect and remove officers and appoint and terminate agents and consultants and
hire and terminate employees, any one or more of the foregoing of whom may be a
Trustee, and may provide for the compensation of all of the foregoing; they may
appoint from their own number, and terminate, any one or more committees
consisting of two or more Trustees, including without implied limitation an
executive committee, which may, when the Trustees are not in session and subject
to the 1940 Act, exercise some or all of the power and authority of the Trustees
as the Trustees may determine; in accordance with Section 3.3 they may employ
one or more advisers, administrators, depositories and custodians and may
authorize any depository or custodian to employ subcustodians or agents and to
deposit all or any part of such assets in a system or systems for the central
handling of securities and debt instruments, retain transfer, dividend,
accounting or Shareholder servicing agents or any of the foregoing, provide for
the distribution of Shares by the Trust through one or more distributors,
principal underwriters or otherwise, and set record dates or times for the
determination of Shareholders or various of them with respect to various
matters; they may compensate or provide for the compensation of the Trustees,
officers, advisers, administrators, custodians, other agents, consultants and
employees of the Trust or the Trustees on such terms as they deem appropriate;
and in general they may delegate to any officer of the Trust, to any committee
of the Trustees and to any employee, adviser, administrator, distributor,
depository, custodian, transfer and dividend disbursing agent, or any other
agent or consultant of the Trust such authority, powers, functions and duties as
they consider desirable or appropriate for the conduct of the business and
affairs of the Trust, including without implied limitation, the power and
authority to act in the name of the Trust and any Sub-Trust and of the Trustees,
to sign documents and to act as attorney-in-fact for the Trustees.
Without limiting the foregoing and to the extent not inconsistent with the
1940 Act or other applicable law, the Trustees shall have power and authority
for and on behalf of the Trust and each separate Sub-Trust established
hereunder:
(a) INVESTMENTS. To invest and reinvest cash and other property, and to
hold cash or other property uninvested without in any event being bound or
limited by any present or future law or custom in regard to investments by
trustees;
(b) DISPOSITION OF ASSETS. To sell, exchange, lend, pledge, mortgage,
hypothecate, write options on and lease any or all of the assets of the Trust;
(c) OWNERSHIP POWERS. To vote or give assent, or exercise any rights of
ownership, with respect to stock or other securities, debt instruments or
property; and to execute and deliver proxies or powers of attorney to such
person or persons as the Trustees shall deem proper,
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granting to such person or persons such power and discretion with relation to
securities, debt instruments or property as the Trustees shall deem proper;
(d) SUBSCRIPTION. To exercise powers and rights of subscription or
otherwise which in any manner arise out of ownership of securities or debt
instruments;
(e) FORM OF HOLDING. To hold any security, debt instrument or property in
a form not indicating any trust, whether in bearer, unregistered or other
negotiable form, or in the name of the Trustees or of the Trust or of any
Sub-Trust or in the name of a custodian, subcustodian or other depository or a
nominee or nominees or otherwise;
(f) REORGANIZATION, ETC. To consent to or participate in any plan for the
reorganization, consolidation or merger of any corporation or issuer, any
security or debt instrument of which is or was held in the Trust; to consent to
any contract, lease, mortgage, purchase or sale of property by such corporation
or issuer, and to pay calls or subscriptions with respect to any security or
debt instrument held in the Trust;
(g) VOTING TRUSTS, ETC. To join with other holders of any securities or
debt instruments in acting through a committee, depositary, voting trustee or
otherwise, and in that connection to deposit any security or debt instrument
with, or transfer any security or debt instrument to, any such committee,
depositary or trustee, and to delegate to them such power and authority with
relation to any security or debt instrument (whether or not so deposited or
transferred) as the Trustees shall deem proper, and to agree to pay, and to pay,
such portion of the expenses and compensation of such committee, depositary or
trustee as the Trustees shall deem proper;
(h) COMPROMISE. To compromise, arbitrate or otherwise adjust claims in
favor of or against the Trust or any Sub-Trust or any matter in controversy,
including but not limited to claims for taxes;
(i) PARTNERSHIPS, ETC. To enter into joint ventures, general or limited
partnerships and any other combinations or associations;
(j) BORROWING AND SECURITY. To borrow funds and to mortgage and pledge
the assets of the Trust or any part thereof to secure obligations arising in
connection with such borrowing;
(k) GUARANTEES, ETC. To endorse or guarantee the payment of any notes or
other obligations of any person; to make contracts of guaranty or suretyship, or
otherwise assume liability for payment thereof; and to mortgage and pledge the
Trust property or any part thereof to secure any of or all such obligations;
(l) INSURANCE. To purchase and pay for entirely out of Trust property
such insurance as they may deem necessary or appropriate for the conduct of the
business, including, without limitation, insurance policies insuring the assets
of the Trust and payment of distributions and
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principal on its portfolio investments, and insurance policies insuring the
Shareholders, Trustees, officers, employees, agents, consultants, investment
advisers, managers, administrators, distributors, principal underwriters, or
independent contractors, or any thereof (or any person connected therewith), of
the Trust individually against all claims and liabilities of every nature
arising by reason of holding, being or having held any such office or position,
or by reason of any action alleged to have been taken or omitted by any such
person in any such capacity, including any action taken or omitted that may be
determined to constitute negligence, whether or not the Trust would have the
power to indemnify such person against such liability; and
(m) PENSIONS, ETC. To pay pensions for faithful service, as deemed
appropriate by the Trustees, and to adopt, establish and carry out pension,
profit-sharing, share bonus, share purchase, savings, thrift and other
retirement, incentive and benefit plans, trusts and provisions, including the
purchasing of life insurance and annuity contracts as a means of providing such
retirement and other benefits, for any or all of the Trustees, officers,
employees and agents of the Trust.
(n) DISTRIBUTION PLANS. To adopt on behalf of the Trust or any Sub-Trust
with respect to any class thereof a plan of distribution and related agreements
thereto pursuant to the terms of Rule 12b-1 of the 1940 Act and to make payments
from the assets of the Trust or the relevant Sub-Trust or Sub-Trusts pursuant to
said Rule 12b-1 Plan.
Except as otherwise provided by the l940 Act or other applicable law,
this Declaration of Trust or the By-Laws, any action to be taken by the Trustees
on behalf of or with respect to the Trust or any Sub-Trust or class thereof may
be taken by a majority of the Trustees present at a meeting of Trustees (a
quorum, consisting of at least one-half of the Trustees then in office, being
present), within or without Massachusetts, including any meeting held by means
of a conference telephone or other communications equipment by means of which
all persons participating in the meeting can hear each other at the same time,
and participation by such means shall constitute presence in person at a
meeting, or by written consents of a majority of the Trustees then in office (or
such larger or different number as may be required by the 1940 Act or other
applicable law).
Section 3.3 CERTAIN CONTRACTS. Subject to compliance with the
provisions of the 1940 Act, but notwithstanding any limitations of present and
future law or custom in regard to delegation of powers by trustees generally,
the Trustees may, at any time and from time to time and without limiting the
generality of their powers and authority otherwise set forth herein, enter into
one or more contracts with any one or more corporations, trusts, associations,
partnerships, limited partnerships, other type of organizations, or individuals
(a "Contracting Party"), to provide for the performance and assumption of some
or all of the following services, duties and responsibilities to, for or on
behalf of the Trust and/or any Sub-Trust, and/or the Trustees, and to provide
for the performance and assumption of such other services, duties and
responsibilities in addition to those set forth below as the Trustees may
determine appropriate:
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(a) ADVISORY. Subject to the general supervision of the Trustees and in
conformity with the stated policy of the Trustees with respect to the
investments of the Trust or of the assets belonging to any Sub-Trust of the
Trust (as that phrase is defined in subsection (a) of Section 4.2), to manage
such investments and assets, make investment decisions with respect thereto, and
to place purchase and sale orders for portfolio transactions relating to such
investments and assets;
(b) ADMINISTRATION. Subject to the general supervision of the Trustees
and in conformity with any policies of the Trustees with respect to the
operations of the Trust and each Sub-Trust (including each class thereof), to
supervise all or any part of the operations of the Trust and each Sub-Trust, and
to provide all or any part of the administrative and clerical personnel, office
space and office equipment and services appropriate for the efficient
administration and operations of the Trust and each Sub-Trust;
(c) DISTRIBUTION. To distribute the Shares of the Trust and each
Sub-Trust (including any classes thereof), to be principal underwriter of such
Shares, and/or to act as agent of the Trust and each Sub-Trust in the sale of
Shares and the acceptance or rejection of orders for the purchase of Shares;
(d) CUSTODIAN AND DEPOSITORY. To act as depository for and to maintain
custody of the property of the Trust and each Sub-Trust and accounting records
in connection therewith;
(e) TRANSFER AND DIVIDEND DISBURSING AGENCY. To maintain records of the
ownership of outstanding Shares, the issuance and redemption and the transfer
thereof, and to disburse any dividends declared by the Trustees and in
accordance with the policies of the Trustees and/or the instructions of any
particular Shareholder to reinvest any such dividends;
(f) SHAREHOLDER SERVICING. To provide service with respect to the
relationship of the Trust and its Shareholders, records with respect to
Shareholders and their Shares, and similar matters; and
(g) ACCOUNTING. To handle all or any part of the accounting
responsibilities, whether with respect to the Trust's properties, Shareholders
or otherwise.
The same person may be the Contracting Party for some or all of the services,
duties and responsibilities to, for and of the Trust and/or the Trustees, and
the contracts with respect thereto may contain such terms interpretive of or in
addition to the delineation of the services, duties and responsibilities
provided for, including provisions that are not inconsistent with the 1940 Act
relating to the standard of duty of and the rights to indemnification of the
Contracting Party and others, as the Trustees may determine. Nothing herein
shall preclude, prevent or limit the Trust or a Contracting Party from entering
into sub-contractual arrangements relating to any of the matters referred to in
Sections 3.3(a) through (g) hereof.
The fact that:
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(i) any of the Shareholders, Trustees or officers of the Trust is a
shareholder, director, officer, partner, trustee, employee, manager,
adviser, principal underwriter or distributor or agent of or for any
Contracting Party, or of or for any parent or affiliate of any Contracting
Party or that the Contracting Party or any parent or affiliate thereof is a
Shareholder or has an interest in the Trust or any Sub-Trust, or that
(ii) any Contracting Party may have a contract providing for the
rendering of any similar services to one or more other corporations,
trusts, associations, partnerships, limited partnerships or other
organizations, or have other business or interests,
shall not affect the validity of any contract for the performance and assumption
of services, duties and responsibilities to, for or of the Trust or any
Sub-Trust and/or the Trustees or disqualify any Shareholder, Trustee or officer
of the Trust from voting upon or executing the same or create any liability or
accountability to the Trust, any Sub-Trust or its Shareholders, provided that in
the case of any relationship or interest referred to in the preceding clause (i)
on the part of any Trustee or officer of the Trust either (x) the material facts
as to such relationship or interest have been disclosed to or are known by the
Trustees not having any such relationship or interest and the contract involved
is approved in good faith by a majority of such Trustees not having any such
relationship or interest (even though such unrelated or disinterested Trustees
are less than a quorum of all of the Trustees), (y) the material facts as to
such relationship or interest and as to the contract have been disclosed to or
are known by the Shareholders entitled to vote thereon and the contract involved
is specifically approved in good faith by vote of the Shareholders, or (z) the
specific contract involved is fair to the Trust as of the time it is authorized,
approved or ratified by the Trustees or by the Shareholders.
Section 3.4 PAYMENT OF TRUST EXPENSES AND COMPENSATION OF TRUSTEES. The
Trustees are authorized to pay or to cause to be paid out of the principal or
income of the Trust or any Sub-Trust, or partly out of principal and partly out
of income, and to charge or allocate the same to, between or among such one or
more of the Sub-Trusts and/or one or more classes of Shares thereof that may be
established and designated pursuant to Article IV, as the Trustees deem fair,
all expenses, fees, charges, taxes and liabilities incurred or arising in
connection with the Trust, any Sub-Trust and/or any class of Shares thereof, or
in connection with the management thereof, including, but not limited to, the
Trustees' compensation and such expenses and charges for the services of the
Trust's officers, employees, investment adviser, administrator, distributor,
principal underwriter, auditor, counsel, depository, custodian, transfer agent,
dividend disbursing agent, accounting agent, Shareholder servicing agent, and
such other agents, consultants, and independent contractors and such other
expenses and charges as the Trustees may deem necessary or proper to incur.
Without limiting the generality of any other provision hereof, the Trustees
shall be entitled to reasonable compensation from the Trust for their services
as Trustees and may fix the amount of such compensation.
Section 3.5 OWNERSHIP OF ASSETS OF THE TRUST. Title to all of the
assets of the Trust and of each Sub-Trust shall at all times be considered as
vested in the Trustees.
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ARTICLE IV
SHARES
Section 4.1 DESCRIPTION OF SHARES. The beneficial interest in the Trust
shall be divided into Shares, all with $.001 par value, but the Trustees shall
have the authority from time to time to issue Shares in one or more Series (each
of which Series of Shares shall represent the beneficial interest in a separate
and distinct Sub-Trust of the Trust, including without limitation each Sub-Trust
specifically established and designated in Section 4.2), as they deem necessary
or desirable. Each Sub-Trust established hereunder shall be deemed to be a
separate trust. The Trustees shall have exclusive power without the requirement
of Shareholder approval to establish and designate such separate and distinct
Sub-Trusts, and to fix and determine the relative rights and preferences as
between the shares of the separate Sub-Trusts as to right of redemption and the
price, terms and manner of redemption, special and relative rights as to
dividends and other distributions and on liquidation, sinking or purchase fund
provisions, conversion rights, and conditions under which the several Sub-Trusts
shall have separate voting rights or no voting rights.
In addition, the Trustees shall have exclusive power, without the
requirement of Shareholder approval, to issue classes of Shares of any Sub-Trust
or divide the Shares of any Sub-Trust into classes, each class having such
different dividend, liquidation, voting and other rights as the Trustees may
determine, and may establish and designate the specific classes of Shares of
each Sub-Trust. The fact that a Sub-Trust shall have initially been established
and designated without any specific establishment or designation of classes
(i.e., that all Shares of such Sub-Trust are initially of a single class), or
that a Sub-Trust shall have more than one established and designated class,
shall not limit the authority of the Trustees to establish and designate
separate classes, or one or more further classes, of said Sub-Trust without
approval of the holders of the initial class thereof, or previously established
and designated class or classes thereof, provided that the establishment and
designation of such further separate classes would not adversely affect the
rights of the holders of the initial or previously established and designated
class or classes (within the meaning of section 77 of the Massachusetts General
Laws Chapter 156B).
The number of authorized Shares and the number of Shares of each Sub-Trust
or class thereof that may be issued is unlimited, and the Trustees may issue
Shares of any Sub-Trust or class thereof for such consideration and on such
terms as they may determine (or for no consideration if pursuant to a Share
dividend or split-up), all without action or approval of the Shareholders. All
Shares when so issued on the terms determined by the Trustees shall be fully
paid and non-assessable (but may be subject to mandatory contribution back to
the Trust as provided in subsection (h) of Section 4.2). The Trustees may
classify or reclassify any unissued Shares or any Shares previously issued and
reacquired of any Sub-Trust or class thereof into one or more Sub-Trusts or
classes thereof that may be established and designated from time to time.
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The Trustees may hold as treasury Shares, reissue for such consideration and on
such terms as they may determine, or cancel, at their discretion from time to
time, any Shares of any Sub-Trust or class thereof reacquired by the Trust.
The Trustees may from time to time close the transfer books or establish
record dates and times for the purposes of determining the holders of Shares
entitled to be treated as such, to the extent provided or referred to in Section
5.3.
The establishment and designation of any Sub-Trust or of any class of
Shares of any Sub-Trust in addition to those established and designated in
Section 4.2 shall be effective (i) upon the execution by a majority of the then
Trustees of an instrument setting forth such establishment and designation of
the relative rights and preferences of the Shares of such Sub-Trust or class,
(ii) upon the execution of an instrument in writing by an officer of the Trust
pursuant to the vote of a majority of the Trustees, or (iii) as otherwise
provided in either such instrument. At any time that there are no Shares
outstanding of any particular Sub-Trust or class previously established and
designated, the Trustees may by an instrument executed by a majority of their
number (or by an instrument executed by an officer of the Trust pursuant to the
vote of a majority of the Trustees) abolish that Sub-Trust or class and the
establishment and designation thereof. Each instrument establishing and
designating any Sub-Trust shall have the status of an amendment to this
Declaration of Trust.
Any Trustee, officer or other agent of the Trust, and any organization in
which any such person is interested may acquire, own, hold and dispose of Shares
of any Sub-Trust (including any classes thereof) of the Trust to the same extent
as if such person were not a Trustee, officer or other agent of the Trust; and
the Trust may issue and sell or cause to be issued and sold and may purchase
Shares of any Sub-Trust (including any classes thereof) from any such person or
any such organization subject only to the general limitations, restrictions or
other provisions applicable to the sale or purchase of Shares of such Sub-Trust
(including any classes thereof) generally.
Section 4.2 ESTABLISHMENT AND DESIGNATION OF SUB-TRUSTS AND CLASSES.
Without limiting the authority of the Trustees set forth in Section 4.1 to
establish and designate any further Sub-Trusts or classes thereof, the Trustees
hereby establish and designate the following Sub-Trusts, each of which shall
consist of a single class of Shares: The Seven Seas Series Money Market Fund;
The Seven Seas Series US Government Money Market Fund, The Seven Seas Series S&P
500 Index Fund, The Seven Seas Series S&P Midcap Index Fund, The Seven Seas
Series Matrix Equity Fund, The Seven Seas Series International European Index
Fund, The Seven Seas Series International Pacific Index Fund, The Seven Seas
Series Short Term Government Securities Fund, The Seven Seas Series Bond Market
Fund, The Seven Seas Series Yield Plus Fund, The Seven Seas Series US Treasury
Money Market Fund, The Seven Seas Series US Treasury Obligations Fund, The Seven
Seas Series Growth and Income Fund, The Seven Seas Series Intermediate Fund and
The Seven Seas Series Institutional Money Market Portfolio. The Shares of such
Sub-Trusts and any Shares of any further Sub-Trust that may from time to time be
established and designated by the Trustees shall (unless the Trustees otherwise
determine with
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respect to some further Sub-Trust at the time of establishing and designating
the same) have the following relative rights and preferences:
(a) ASSETS BELONGING TO SUB-TRUSTS. All consideration received by the
Trust for the issue or sale of Shares of a particular Sub-Trust or any classes
thereof, together with all assets in which such consideration is invested or
reinvested, all income, earnings, profits, and proceeds thereof, including any
proceeds derived from the sale, exchange or liquidation of such assets, and any
funds or payments derived from any reinvestment of such proceeds in whatever
form the same may be, shall be held by the Trustees in trust for the benefit of
the holders of Shares of that Sub-Trust or class thereof and shall irrevocably
belong to that Sub-Trust (and be allocable to any classes thereof) for all
purposes, and shall be so recorded upon the books of account of the Trust. Such
consideration, assets, income, earnings, profits, and proceeds thereof,
including any proceeds derived from the sale, exchange or liquidation of such
assets, and any funds or payments derived from any reinvestment of such
proceeds, in whatever form the same may be, together with any General Items (as
hereinafter defined) allocated to that Sub-Trust as provided in the following
sentence, are herein referred to as "assets belonging to" that Sub-Trust (and
allocable to any classes thereof). In the event that there are any assets,
income, earnings, profits, and proceeds thereof, funds, or payments which are
not readily identifiable as belonging to any particular Sub-Trust (collectively
"General Items"), the Trustees shall allocate such General Items to and among
any one or more of the Sub-Trusts established and designated from time to time
in such manner and on such basis as they, in their sole discretion, deem fair
and equitable; and any General Items so allocated to a particular Sub-Trust
shall belong to that Sub-Trust (and be allocable to any classes thereof). Each
such allocation by the Trustees shall be conclusive and binding upon the holders
of all Shares of all Sub-Trusts (including any classes thereof) for all
purposes.
(b) LIABILITIES BELONGING TO SUB-TRUSTS. The assets belonging to each
particular Sub-Trust shall be charged with the liabilities in respect of that
Sub-Trust and all expenses, costs, charges and reserves belonging to that
Sub-Trust, and any general liabilities, expenses, costs, charges or reserves of
the Trust which are not readily identifiable as belonging to any particular
Sub-Trust shall be allocated and charged by the Trustees to and among any one or
more of the Sub-Trusts established and designated from time to time in such
manner and on such basis as the Trustees in their sole discretion deem fair and
equitable. In addition, the liabilities in respect of a particular class of
Shares of a particular Sub-Trust and all expenses, costs, charges and reserves
belonging to that class of Shares, and any general liabilities, expenses, costs,
charges or reserves of that particular Sub-Trust which are not readily
identifiable as belonging to any particular class of Shares of that Sub-Trust
shall be allocated and charged by the Trustees to and among any one or more of
the classes of Shares of that Sub-Trust established and designated from time to
time in such manner and on such basis as the Trustees in their sole discretion
deem fair and equitable. The liabilities, expenses, costs, charges and reserves
allocated and so charged to a Sub-Trust or class thereof are herein referred to
as "liabilities belonging to" that Sub-Trust or class thereof. Each allocation
of liabilities, expenses, costs, charges and reserves by the Trustees shall be
conclusive and binding upon the Shareholders, creditors and any other persons
dealing with the
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Trust or any Sub-Trust (including any classes thereof) for all purposes. Any
creditor of any Sub-Trust may look only to the assets of that Sub-Trust to
satisfy such creditor's debt.
The Trustees shall have full discretion, to the extent not inconsistent
with the 1940 Act, to determine which items shall be treated as income and which
items as capital; and each such determination and allocation shall be conclusive
and binding upon the Shareholders.
(c) DIVIDENDS. Dividends and distributions on Shares of a particular
Sub-Trust or any class thereof may be paid with such frequency as the Trustees
may determine, which may be daily or otherwise pursuant to a standing resolution
or resolutions adopted only once or with such frequency as the Trustees may
determine, to the holders of Shares of that Sub-Trust or class, from such of the
income and capital gains, accrued or realized, from the assets belonging to that
Sub-Trust, or in the case of a class, belonging to that Sub-Trust and allocable
to that class, as the Trustees may determine, after providing for actual and
accrued liabilities belonging to that Sub-Trust or class. All dividends and
distributions on Shares of a particular Sub-Trust or class thereof shall be
distributed pro rata to the holders of Shares of that Sub-Trust or class in
proportion to the number of Shares of that Sub-Trust or class held by such
holders at the date and time of record established for the payment of such
dividends or distributions, except that in connection with any dividend or
distribution program or procedure the Trustees may determine that no dividend or
distribution shall be payable on Shares as to which the Shareholder's purchase
order and/or payment have not been received by the time or times established by
the Trustees under such program or procedure. Such dividends and distributions
may be made in cash or Shares of that Sub-Trust or class or a combination
thereof as determined by the Trustees or pursuant to any program that the
Trustees may have in effect at the time for the election by each Shareholder of
the mode of the making of such dividend or distribution to that Shareholder.
Any such dividend or distribution paid in Shares will be paid at the net asset
value thereof as determined in accordance with subsection (h) of Section 4.2.
(d) LIQUIDATION. In the event of the liquidation or dissolution of the
Trust, the holders of Shares of each Sub-Trust or any class thereof that has
been established and designated shall be entitled to receive, when and as
declared by the Trustees, the excess of the assets belonging to that Sub-Trust,
or in the case of a class, belonging to that Sub-Trust and allocable to that
class, over the liabilities belonging to that Sub-Trust or class. The assets so
distributable to the holders of Shares of any particular Sub-Trust or class
thereof shall be distributed among such holders in proportion to the number of
Shares of that Sub-Trust or class thereof held by them and recorded on the books
of the Trust. The liquidation of any particular Sub-Trust or class thereof may
be authorized at any time by vote of a majority of the Trustees then in office.
(e) VOTING. On each matter submitted to a vote of the Shareholders, each
holder of a Share shall be entitled to one vote for each whole Share standing in
such Shareholder's name on the books of the Trust irrespective of the Series
thereof or class thereof and all Shares of all Series and classes thereof shall
vote together as a single class; provided, however, that as to any matter
(i) with respect to which a separate vote of one or more Series or classes
thereof is required by the 1940 Act or the provisions of the writing
establishing and designating the Sub-Trust or class,
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such requirements as to a separate vote by such Series or class thereof shall
apply in lieu of all Shares of all Series and classes thereof voting together;
and (ii) as to any matter which affects the interests of one or more particular
Series or classes thereof, only the holders of Shares of the one or more
affected Series or classes shall be entitled to vote, and each such Series or
class shall vote as a separate class.
(f) REDEMPTION BY SHAREHOLDER. Each holder of Shares of a particular
Sub-Trust or any class thereof shall have the right at such times as may be
permitted by the Trust, but no less frequently than once each week, to require
the Trust to redeem all or any part of such holder's Shares of that Sub-Trust or
class thereof at a redemption price equal to the net asset value per Share of
that Sub-Trust or class thereof next determined in accordance with subsection
(h) of this Section 4.2 after the Shares are properly tendered for redemption,
subject to any contingent deferred sales charge or redemption charge in effect
at the time of redemption. Payment of the redemption price shall be in cash;
provided, however, that if the Trustees determine, which determination shall be
conclusive, that conditions exist which make payment wholly in cash unwise or
undesirable, the Trust may, subject to the requirements of the 1940 Act, make
payment wholly or partly in securities or other assets belonging to the
Sub-Trust of which the Shares being redeemed are part at the value of such
securities or assets used in such determination of net asset value.
Notwithstanding the foregoing, the Trust may postpone payment of the
redemption price and may suspend the right of the holders of Shares of any
Sub-Trust or class thereof to require the Trust to redeem Shares of that
Sub-Trust or class during any period or at any time when and to the extent
permissible under the 1940 Act.
(g) REDEMPTION BY TRUST. Each Share of each Sub-Trust or class thereof
that has been established and designated is subject to redemption by the Trust
at the redemption price which would be applicable if such Share was then being
redeemed by the Shareholder pursuant to subsection (f) of this Section 4.2: (i)
at any time, if the Trustees determine in their sole discretion and by majority
vote that failure to so redeem may have materially adverse consequences to the
Trust or any Sub-Trust or to the holders of the Shares of the Trust or any
Sub-Trust thereof or class thereof, or (ii) upon such other conditions as may
from time to time be determined by the Trustees and set forth in the then
current Prospectus of the Trust with respect to maintenance of Shareholder
accounts of a minimum amount. Upon such redemption the holders of the Shares so
redeemed shall have no further right with respect thereto other than to receive
payment of such redemption price.
(h) NET ASSET VALUE. The net asset value per Share of any Sub-Trust shall
be (i) in the case of a Sub-Trust whose Shares are not divided into classes, the
quotient obtained by dividing the value of the net assets of that Sub-Trust
(being the value of the assets belonging to that Sub-Trust less the liabilities
belonging to that Sub-Trust) by the total number of Shares of that Sub-Trust
outstanding, and (ii) in the case of a class of Shares of a Sub-Trust whose
Shares are divided into classes, the quotient obtained by dividing the value of
the net assets of that Sub-Trust allocable to such class (being the value of the
assets belonging to that Sub-Trust allocable to such
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class less the liabilities belonging to such class) by the total number of
Shares of such class outstanding; all determined in accordance with the methods
and procedures, including without limitation those with respect to rounding,
established by the Trustees from time to time.
The Trustees may determine to maintain the net asset value per Share of any
Sub-Trust at a designated constant dollar amount and in connection therewith may
adopt procedures not inconsistent with the 1940 Act for the continuing
declarations of income attributable to that Sub-Trust as dividends payable in
additional Shares of that Sub-Trust at the designated constant dollar amount and
for the handling of any losses attributable to that Sub-Trust. Such procedures
may provide that in the event of any loss each Shareholder shall be deemed to
have contributed to the capital of the Trust attributable to that Sub-Trust such
Shareholder's pro rata portion of the total number of Shares required to be
cancelled in order to permit the net asset value per Share of that Sub-Trust to
be maintained, after reflecting such loss, at the designated constant dollar
amount. Each Shareholder of the Trust shall be deemed to have agreed, by making
an investment in any Sub-Trust with respect to which the Trustees shall have
adopted any such procedure, to make the contribution referred to in the
preceding sentence in the event of any such loss.
(i) TRANSFER. All Shares of each particular Sub-Trust or class thereof
shall be transferable, but transfers of Shares of a particular Sub-Trust or
class thereof will be recorded on the Share transfer records of the Trust
applicable to that Sub-Trust or class only at such times as Shareholders shall
have the right to require the Trust to redeem Shares of that Sub-Trust or class
and at such other times as may be permitted by the Trustees.
(j) EQUALITY. Except as provided herein or in the instrument designating
and establishing any class of Shares or any Sub-Trust, all Shares of each
particular Sub-Trust or class thereof shall represent an equal proportionate
interest in the assets belonging to that Sub-Trust, or in the case of a class,
belonging to that Sub-Trust and allocable to that class, subject to the
liabilities belonging to that Sub-Trust or class, and each Share of any
particular Sub-Trust or class shall be equal to each other Share of that
Sub-Trust or class; but the provisions of this sentence shall not restrict any
distinctions permissible under subsection (c) of this Section 4.2 that may exist
with respect to dividends and distributions on Shares of the same Sub-Trust or
class. The Trustees may from time to time divide or combine the Shares of any
particular Sub-Trust or class into a greater or lesser number of Shares of that
Sub-Trust or class without thereby changing the proportionate beneficial
interest in the assets belonging to that Sub-Trust or class or in any way
affecting the rights of Shares of any other Sub-Trust or class.
(k) FRACTIONS. Any fractional Share of any Sub-Trust or class, if any
such fractional Share is outstanding, shall carry proportionately all the rights
and obligations of a whole Share of that Sub-Trust or class, including rights
and obligations with respect to voting, receipt of dividends and distributions,
redemption of Shares, and liquidation of the Trust.
(l) CONVERSION RIGHTS. Subject to compliance with the requirements of the
1940 Act, the Trustees shall have the authority to provide that holders of
Shares of any Sub-Trust or class thereof shall have the right to convert said
Shares into Shares of one or more other Sub-Trust or
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class thereof in accordance with such requirements and procedures as may be
established by the Trustees.
(m) CLASS DIFFERENCES. The relative rights and preferences of the classes
of any Sub-Trust may differ in such other respects as the Trustees may determine
to be appropriate in their sole discretion, provided that such differences are
set forth in the instrument establishing and designating such classes and
executed by a majority of the Trustees (or by an instrument executed by an
officer of the Trust pursuant to a vote of a majority of the Trustees).
Section 4.3 OWNERSHIP OF SHARES. The ownership of Shares shall be
recorded on the books of the Trust or of a transfer or similar agent for the
Trust, which books shall be maintained separately for the Shares of each
Sub-Trust and each class thereof that has been established and designated. No
certificates certifying the ownership of Shares need be issued except as the
Trustees may otherwise determine from time to time. The Trustees may make such
rules as they consider appropriate for the issuance of Share certificates, the
use of facsimile signatures, the transfer of Shares and similar matters. The
record books of the Trust as kept by the Trust or any transfer or similar agent,
as the case may be, shall be conclusive as to who are the Shareholders and as to
the number of Shares of each Sub-Trust and class thereof held from time to time
by each such Shareholder.
Section 4.4 INVESTMENTS IN THE TRUST. The Trustees may accept or reject
investments in the Trust and each Sub-Trust from such persons and on such terms
and for such consideration, not inconsistent with the provisions of the 1940
Act, as they from time to time authorize or determine. The Trustees may
authorize any distributor, principal underwriter, custodian, transfer agent or
other person to accept orders for the purchase of Shares that conform to such
authorized terms and to reject any purchase orders for Shares whether or not
conforming to such authorized terms.
Section 4.5 NO PRE-EMPTIVE RIGHTS. Shareholders shall have no
pre-emptive or other right to subscribe to any additional Shares or other
securities issued by the Trust.
Section 4.6 STATUS OF SHARES AND LIMITATION OF PERSONAL LIABILITY.
Shares shall be deemed to be personal property giving only the rights provided
in this instrument. Every Shareholder by virtue of having become a Shareholder
shall be held to have expressly assented and agreed to the terms hereof and to
have become a party hereto. The death of a Shareholder during the continuance
of the Trust shall not operate to terminate the Trust or any Sub-Trust thereof
nor entitle the representative of any deceased Shareholder to an accounting or
to take any action in court or elsewhere against the Trust or the Trustees, but
only to the rights of said decedent under this Trust. Ownership of Shares shall
not entitle the Shareholder to any title in or to the whole or any part of the
Trust property or right to call for a partition or division of the same or for
an accounting, nor shall the ownership of Shares constitute the Shareholders
partners. Neither the Trust nor the Trustees, nor any officer, employee or
agent of the Trust shall have any power to bind personally any Shareholder, nor
except as specifically provided herein to call upon
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any Shareholder for the payment of any sum of money or assessment whatsoever
other than such as the Shareholder may at any time personally agree to pay.
Section 4.7 NO APPRAISAL RIGHTS. Shareholders shall have no right to
demand payment for their shares or to any other rights of dissenting
shareholders in the event the Trust participates in any transaction which would
give rise to appraisal or dissenters' rights by a shareholder of a corporation
organized under Chapter 156B of the General Laws of the Commonwealth of
Massachusetts.
ARTICLE V
SHAREHOLDERS' VOTING POWERS AND MEETINGS
Section 5.1 VOTING POWERS. The Shareholders shall have power to vote
only (i) for the election or removal of Trustees as provided in Section 3.1,
(ii) with respect to any contract with a Contracting Party as provided in
Section 3.3 as to which Shareholder approval is required by the 1940 Act, (iii)
with respect to any termination or reorganization of the Trust to the extent and
as provided in Sections 7.1 and 7.2, (iv) with respect to any amendment of this
Declaration of Trust to the extent and as provided in Section 7.3, (v) to the
same extent as the stockholders of a Massachusetts business corporation as to
whether or not a court action, proceeding or claim should or should not be
brought or maintained derivatively or as a class action on behalf of the Trust
or any Sub-Trust thereof or the Shareholders (provided, however, that a
Shareholder of a particular Sub-Trust shall not be entitled to a derivative or
class action on behalf of any other Sub-Trust (or Shareholder of any other
Sub-Trust) of the Trust) and (vi) with respect to such additional matters
relating to the Trust as may be required by the 1940 Act, this Declaration of
Trust, the By-Laws or any registration of the Trust with the Commission (or any
successor agency) or any state, or as the Trustees may consider necessary or
desirable. There shall be no cumulative voting in the election of Trustees.
Shares may be voted in person or by proxy. Proxies may be given orally or in
writing or pursuant to any computerized or mechanical data gathering process
specifically approved by the Trustees. A proxy with respect to Shares held in
the name of two or more persons shall be valid if executed by any one of them
unless at or prior to exercise of the proxy the Trust receives a specific
written notice to the contrary from any one of them. A proxy purporting to be
executed by or on behalf of a Shareholder shall be deemed valid unless
challenged at or prior to its exercise and the burden of proving invalidity
shall rest on the challenger. Until Shares are issued, the Trustees may
exercise all rights of Shareholders and may take any action required by law,
this Declaration of Trust or the By-Laws to be taken by Shareholders.
Section 5.2 MEETINGS. No annual or regular meeting of Shareholders is
required. Special meetings of Shareholders may be called by the Trustees from
time to time for the purpose of taking action upon any matter requiring the vote
or authority of the Shareholders as herein provided or upon any other matter
deemed by the Trustees to be necessary or desirable. Written notice of any
meeting of Shareholders shall be given or caused to be given by the Trustees by
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mailing such notice at least seven days before such meeting, postage prepaid,
stating the time, place and purpose of the meeting, to each Shareholder at the
Shareholder's address as it appears on the records of the Trust. The Trustees
shall promptly call and give notice of a meeting of Shareholders for the purpose
of voting upon removal of any Trustee of the Trust when requested to do so in
writing by Shareholders holding not less than 10% of the Shares then
outstanding. If the Trustees shall fail to call or give notice of any meeting
of Shareholders for a period of 30 days after written application by
Shareholders holding at least 10% of the Shares then outstanding requesting a
meeting be called for any other purpose requiring action by the Shareholders as
provided herein or in the By-Laws, then Shareholders holding at least 10% of the
Shares then outstanding may call and give notice of such meeting, and thereupon
the meeting shall be held in the manner provided for herein in case of call
thereof by the Trustees.
Section 5.3 RECORD DATES. For the purpose of determining the
Shareholders who are entitled to vote or act at any meeting or any adjournment
thereof, or who are entitled to participate in any dividend or distribution, or
for the purpose of any other action, the Trustees may from time to time close
the transfer books for such period, not exceeding 30 days (except at or in
connection with the termination of the Trust), as the Trustees may determine; or
without closing the transfer books the Trustees may fix a date and time not more
than 60 days prior to the date of any meeting of Shareholders or other action as
the date and time of record for the determination of Shareholders entitled to
vote at such meeting or any adjournment thereof or to be treated as Shareholders
of record for purposes of such other action, and any Shareholder who was a
Shareholder at the date and time so fixed shall be entitled to vote at such
meeting or any adjournment thereof or to be treated as a Shareholder of record
for purposes of such other action, even though such Shareholder has since that
date and time disposed of such Shareholder's Shares, and no Shareholder becoming
such after that date and time shall be so entitled to vote at such meeting or
any adjournment thereof or to be treated as a Shareholder of record for purposes
of such other action.
Section 5.4 QUORUM AND REQUIRED VOTE. Except as otherwise provided by
the 1940 Act or other applicable law, thirty percent of the Shares entitled to
vote shall be a quorum for the transaction of business at a Shareholders'
meeting, but any lesser number shall be sufficient for adjournments. Any
adjourned session or sessions may be held, within a reasonable time after the
date set for the original meeting without the necessity of further notice. A
majority of the Shares voted, at a meeting of which a quorum is present shall
decide any questions and a plurality shall elect a Trustee, except when a
different vote is required or permitted by any provision of the 1940 Act or
other applicable law or by this Declaration of Trust or the By-Laws.
Section 5.5 ACTION BY WRITTEN CONSENT. Subject to the provisions of the
1940 Act and other applicable law, any action taken by Shareholders may be taken
without a meeting if a majority of Shareholders entitled to vote on the matter
(or such larger proportion thereof as shall be required by the 1940 Act or by
any express provision of this Declaration of Trust or the By-Laws) consent to
the action in writing and such written consents are filed with the records of
the meetings of Shareholders. Such consent shall be treated for all purposes as
a vote taken at a meeting of Shareholders.
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Section 5.6 INSPECTION OF RECORDS. The records of the Trust shall be
open to inspection by Shareholders to the same extent as is permitted
stockholders of a Massachusetts business corporation under the Massachusetts
Business Corporation Law.
Section 5.7 ADDITIONAL PROVISIONS. The By-Laws may include further
provisions for Shareholders' votes and meetings and related matters not
inconsistent with the provisions hereof.
Section 5.8 SHAREHOLDER COMMUNICATIONS. Whenever ten or more
Shareholders of record who have been such for at least six months preceding the
date of application, and who hold in the aggregate either Shares having a net
asset value of at least $25,000 or at least 1% of the outstanding Shares,
whichever is less, shall apply to the Trustees in writing, stating that they
wish to communicate with other Shareholders with a view to obtaining signatures
to a request for a Shareholder meeting and accompanied by a form of
communication and request which they wish to transmit, the Trustees shall within
five business days after receipt of such application either (1) afford to such
applicants access to a list of the names and addresses of all Shareholders as
recorded on the books of the Trust or Sub-Trust, as applicable; or (2) inform
such applicants as to the approximate number of Shareholders of record, and the
approximate cost of mailing to them the proposed communication and form of
request.
If the Trustees elect to follow the course specified in clause (2) above,
the Trustees, upon the written request of such applicants, accompanied by a
tender of the material to be mailed and of the reasonable expenses of mailing,
shall, with reasonable promptness, mail such material to all Shareholders of
record at their addresses as recorded on the books, unless within five business
days after such tender the Trustees shall mail to such applicants and file with
the Commission, together with a copy of the material to be mailed, a written
statement signed by at least a majority of the Trustees to the effect that in
their opinion either such material contains untrue statements of fact or omits
to state facts necessary to make the statements contained therein not
misleading, or would be in violation of applicable law, and specifying the basis
of such opinion. The Trustees shall thereafter comply with any order entered by
the Commission and the requirements of the 1940 Act and the Securities Exchange
Act of 1934.
ARTICLE VI
LIMITATION OF LIABILITY; INDEMNIFICATION
Section 6.1 TRUSTEES, SHAREHOLDERS, ETC. NOT PERSONALLY LIABLE; NOTICE.
All persons extending credit to, contracting with or having any claim against
the Trust shall look only to the assets of the Sub-Trust with which such person
dealt for payment under such credit, contract or claim; and neither the
Shareholders of any Sub-Trust nor the Trustees, nor any of the Trust's officers,
employees or agents, whether past, present or future, nor any other Sub-Trust
shall be personally liable therefor. Every note, bond, contract, instrument,
certificate or undertaking and every other act or thing whatsoever executed or
done by or on behalf of the Trust, any Sub-Trust
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or the Trustees or any of them in connection with the Trust shall be
conclusively deemed to have been executed or done only by or for the Trust (or
the Sub-Trust) or the Trustees and not personally. Nothing in this Declaration
of Trust shall protect any Trustee or officer against any liability to the Trust
or the Shareholders to which such Trustee or officer would otherwise be subject
by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of the office of Trustee or of
such officer.
Every note, bond, contract, instrument, certificate or undertaking made or
issued by the Trustees or by any officers or officer shall give notice that this
Declaration of Trust is on file with the Secretary of The Commonwealth of
Massachusetts and shall recite to the effect that the same was executed or made
by or on behalf of the Trust or by them as Trustees or Trustee or as officers or
officer and not individually and that the obligations of such instrument are not
binding upon any of them or the Shareholders individually but are binding only
upon the assets and property of the Trust, or the particular Sub-Trust in
question, as the case may be, but the omission thereof shall not operate to bind
any Trustees or Trustee or officers or officer or Shareholders or Shareholder
individually.
Section 6.2 TRUSTEE'S GOOD FAITH ACTION; EXPERT ADVICE; NO BOND OR
SURETY. The exercise by the Trustees of their powers and discretion hereunder
shall be binding upon everyone interested. A Trustee shall be liable for such
Trustee's own willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of the office of Trustee, and
for nothing else, and shall not be liable for errors of judgment or mistakes of
fact or law. Subject to the foregoing, (a) the Trustees shall not be
responsible or liable in any event for any neglect or wrongdoing of any officer,
agent, employee, consultant, adviser, administrator, distributor or principal
underwriter, custodian or transfer, dividend disbursing, Shareholder servicing
or accounting agent of the Trust, nor shall any Trustee be responsible for the
act or omission of any other Trustee; (b) the Trustees may take advice of
counsel or other experts with respect to the meaning and operation of this
Declaration of Trust and their duties as Trustees, and shall be under no
liability for any act or omission in accordance with such advice or for failing
to follow such advice; and (c) in discharging their duties, the Trustees, when
acting in good faith, shall be entitled to rely upon the books of account of the
Trust and upon written reports made to the Trustees by any officer appointed by
them, any independent public accountant, and (with respect to the subject matter
of the contract involved) any officer, partner or responsible employee of a
Contracting Party appointed by the Trustees pursuant to Section 3.3. The
Trustees as such shall not be required to give any bond or surety or any other
security for the performance of their duties.
Section 6.3 INDEMNIFICATION OF SHAREHOLDERS. In case any Shareholder
(or former Shareholder) of any Sub-Trust of the Trust shall be charged or held
to be personally liable for any obligation or liability of the Trust solely by
reason of being or having been a Shareholder and not because of such
Shareholder's acts or omissions or for some other reason, said Sub-Trust (upon
proper and timely request by the Shareholder) shall assume the defense against
such charge and satisfy any judgment thereon, and the Shareholder or former
Shareholder (or such Shareholder's heirs, executors, administrators or other
legal representatives or in the case of a corporation or
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other entity, its corporate or other general successor) shall be entitled out of
the assets of said Sub-Trust estate to be held harmless from and indemnified
against all loss and expense arising from such liability.
Section 6.4 INDEMNIFICATION OF TRUSTEES, OFFICERS, ETC. The Trust shall
indemnify (from the assets of the Sub-Trust or Sub-Trusts in question) each of
its Trustees and officers (including persons who serve at the Trust's request as
directors, officers or trustees of another organization in which the Trust has
any interest as a shareholder, creditor or otherwise [hereinafter referred to as
a "Covered Person"]) against all liabilities, including but not limited to
amounts paid in satisfaction of judgments, in compromise or as fines and
penalties, and expenses, including reasonable accountants' and counsel fees,
incurred by any Covered Person in connection with the defense or disposition of
any action, suit or other proceeding, whether civil or criminal, before any
court or administrative or legislative body, in which such Covered Person may be
or may have been involved as a party or otherwise or with which such person may
be or may have been threatened, while in office or thereafter, by reason of
being or having been such a Trustee or officer, director or trustee, except with
respect to any matter as to which it has been determined that such Covered
Person had acted with willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of such Covered
Person's office (such conduct referred to hereafter as "Disabling Conduct"). A
determination that the Covered Person is entitled to indemnification may be made
by (i) a final decision on the merits by a court or other body before whom the
proceeding was brought that the person to be indemnified was not liable by
reason of Disabling Conduct, (ii) dismissal of a court action or an
administrative proceeding against a Covered Person for insufficiency of evidence
of Disabling Conduct, or (iii) a reasonable determination, based upon a review
of the facts, that the indemnitee was not liable by reason of Disabling Conduct
by (a) a vote of a majority of a quorum of Trustees who are neither "interested
persons" of the Trust as defined in section 2(a)(l9) of the 1940 Act nor parties
to the proceeding, or (b) an independent legal counsel in a written opinion.
Expenses, including accountants' and counsel fees so incurred by any such
Covered Person (but excluding amounts paid in satisfaction of judgments, in
compromise or as fines or penalties), may be paid from time to time by the
Sub-Trust in question in advance of the final disposition of any such action,
suit or proceeding, provided that the Covered Person shall have undertaken to
repay the amounts so paid to the Sub-Trust in question if it is ultimately
determined that indemnification of such expenses is not authorized under this
Article VI and (i) the Covered Person shall have provided security for such
undertaking, (ii) the Trust shall be insured against losses arising by reason of
any lawful advances, or (iii) a majority of a quorum of the disinterested
Trustees who are not a party to the proceeding, or an independent legal counsel
in a written opinion, shall have determined, based on a review of readily
available facts (as opposed to a full trial-type inquiry), that there is reason
to believe that the Covered Person ultimately will be found entitled to
indemnification.
Section 6.5 COMPROMISE PAYMENT. As to any matter disposed of by a
compromise payment by any such Covered Person referred to in Section 6.4,
pursuant to a consent decree or otherwise, no such indemnification either for
said payment or for any other expenses shall be provided unless such
indemnification shall be approved (a) by a majority of the disinterested
Trustees who are not parties to the proceeding or (b) by an independent legal
counsel in a written
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opinion. Approval by the Trustees pursuant to clause (a) or by independent
legal counsel pursuant to clause (b) shall not prevent the recovery from any
Covered Person of any amount paid to such Covered Person in accordance with any
of such clauses as indemnification if such Covered Person is subsequently
adjudicated by a court of competent jurisdiction not to have acted in good faith
in the reasonable belief that such Covered Person's action was in or not opposed
to the best interests of the Trust or to have been liable to the Trust or its
Shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of such Covered
Person's office.
Section 6.6 INDEMNIFICATION NOT EXCLUSIVE, ETC. The right of
indemnification provided by this Article VI shall not be exclusive of or affect
any other rights to which any such Covered Person may be entitled. As used in
this Article VI, "Covered Person" shall include such person's heirs, executors
and administrators, an "interested Covered Person" is one against whom the
action, suit or other proceeding in question or another action, suit or other
proceeding on the same or similar grounds is then or has been pending or
threatened, and a "disinterested" person is a person against whom none of such
actions, suits or other proceedings or another action, suit or other proceeding
on the same or similar grounds is then or has been pending or threatened.
Nothing contained in this Article shall affect any rights to indemnification to
which personnel of the Trust, other than Trustees and officers, and other
persons may be entitled by contract or otherwise under law, nor the power of the
Trust to purchase and maintain liability insurance on behalf of any such person.
Section 6.7 LIABILITY OF THIRD PERSONS DEALING WITH TRUSTEES. No person
dealing with the Trustees shall be bound to make any inquiry concerning the
validity of any transaction made or to be made by the Trustees or to see to the
application of any payments made or property transferred to the Trust or upon
its order.
ARTICLE VII
MISCELLANEOUS
Section 7.1 DURATION AND TERMINATION OF TRUST. Unless terminated as
provided herein, the Trust shall continue without limitation of time and,
without limiting the generality of the foregoing, no change, alteration or
modification with respect to any Sub-Trust or class thereof shall operate to
terminate the Trust. The Trust may be terminated at any time by a majority of
the Trustees then in office subject to a favorable vote of a majority of the
outstanding voting securities, as defined in the 1940 Act.
Upon termination, after paying or otherwise providing for all charges,
taxes, expenses and liabilities, whether due or accrued or anticipated as may be
determined by the Trustees, the Trust shall in accordance with such procedures
as the Trustees consider appropriate reduce the remaining assets to
distributable form in cash, securities or other property, or any combination
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thereof, and distribute the proceeds to the Shareholders, in conformity with the
provisions of subsection (d) of Section 4.2.
Section 7.2 REORGANIZATION. The Trustees may sell, convey, merge and
transfer the assets of the Trust, or the assets belonging to any one or more
Sub-Trusts, to another trust, partnership, association or corporation organized
under the laws of any state of the United States, or to the Trust to be held as
assets belonging to another Sub-Trust of the Trust, in exchange for cash, shares
or other securities (including, in the case of a transfer to another Sub-Trust
of the Trust, Shares of such other Sub-Trust or any class thereof) with such
transfer either (1) being made subject to, or with the assumption by the
transferee of, the liabilities belonging to each Sub-Trust the assets of which
are so transferred, or (2) not being made subject to, or not with the assumption
of, such liabilities; provided, however, that no assets belonging to any
particular Sub-Trust shall be so transferred unless the terms of such transfer
shall have first been approved at a meeting called for the purpose by the
affirmative vote of the holders of a majority of the outstanding voting Shares,
as defined in the 1940 Act, of that Sub-Trust. Following such transfer, the
Trustees shall distribute such cash, shares or other securities among the
Shareholders of the Sub-Trust (taking into account the differences among the
classes of Shares thereof, if any) the assets belonging to which have been so
transferred; and if all of the assets of the Trust have been so transferred, the
Trust shall be terminated.
The Trust, or any one or more Sub-Trusts, may, either as the successor,
survivor, or non-survivor, (1) consolidate with one or more other trusts,
partnerships, associations or corporations organized under the laws of the
Commonwealth of Massachusetts or any other state of the United States, to form a
new consolidated trust, partnership, association or corporation under the laws
of which any one of the constituent entities is organized, or (2) merge into one
or more other trusts, partnerships, associations or corporations organized under
the laws of the Commonwealth of Massachusetts or any other state of the United
States, or have one or more such trusts, partnerships, associations or
corporations merged into it, any such consolidation or merger to be upon such
terms and conditions as are specified in an agreement and plan of reorganization
entered into by the Trust, or one or more Sub-Trusts as the case may be, in
connection therewith. The terms "merge" or "merger" as used herein shall also
include the purchase or acquisition of any assets of any other trust,
partnership, association or corporation which is an investment company organized
under the laws of the Commonwealth of Massachusetts or any other state of the
United States. Any such consolidation or merger shall require the affirmative
vote of the holders of a majority of the outstanding voting Shares, as defined
in the 1940 Act, of each Sub-Trust affected thereby.
Section 7.3 AMENDMENTS. All rights granted to the Shareholders under
this Declaration of Trust are granted subject to the reservation of the right to
amend this Declaration of Trust as herein provided, except that no amendment
shall repeal the limitations on personal liability of any Shareholder or Trustee
or repeal the prohibition of assessment upon the Shareholders without the
express consent of each Shareholder or Trustee involved. Subject to the
foregoing, the provisions of this Declaration of Trust (whether or not related
to the rights of Shareholders) may be amended at any time, so long as such
amendment does not adversely affect the rights of any
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Shareholder with respect to which such amendment is or purports to be applicable
and so long as such amendment is not in contravention of applicable law,
including the 1940 Act, by an instrument in writing signed by a majority of the
then Trustees (or by an officer of the Trust pursuant to the vote of a majority
of such Trustees). Any amendment to this Declaration of Trust that adversely
affects the rights of Shareholders may be adopted at any time by an instrument
in writing signed by a majority of the then Trustees (or by an officer of the
Trust pursuant to a vote of a majority of such Trustees) when authorized to do
so by the vote in accordance with subsection (e) of Section 4.2 of Shareholders
holding a majority of the Shares entitled to vote. Subject to the foregoing,
any such amendment shall be effective as provided in the instrument containing
the terms of such amendment or, if there is no provision therein with respect to
effectiveness, upon the execution of such instrument and of a certificate (which
may be a part of such instrument) executed by a Trustee or officer of the Trust
to the effect that such amendment has been duly adopted.
Section 7.4 FILING OF COPIES; REFERENCES; HEADINGS. The original or a
copy of this instrument and of each amendment hereto shall be kept at the office
of the Trust where it may be inspected by any Shareholder. A copy of this
instrument and of each amendment hereto shall be filed by the Trust with the
Secretary of The Commonwealth of Massachusetts and with the Boston City Clerk,
as well as any other governmental office where such filing may from time to time
be required, but the failure to make any such filing shall not impair the
effectiveness of this instrument or any such amendment. Anyone dealing with the
Trust may rely on a certificate by an officer of the Trust as to whether or not
any such amendments have been made, as to the identities of the Trustees and
officers, and as to any matters in connection with the Trust hereunder; and,
with the same effect as if it were the original, may rely on a copy certified by
an officer of the Trust to be a copy of this instrument or of any such
amendments. In this instrument and in any such amendment, references to this
instrument, and all expressions like "herein", "hereof" and "hereunder" shall be
deemed to refer to this instrument as a whole as the same may be amended or
affected by any such amendments. Headings are placed herein for convenience of
reference only and shall not be taken as a part hereof or control or affect the
meaning, construction or effect of this instrument. This instrument may be
executed in any number of counterparts each of which shall be deemed an
original.
Section 7.5 APPLICABLE LAW. This Declaration of Trust is made in The
Commonwealth of Massachusetts, and it is created under and is to be governed by
and construed and administered according to the laws of said Commonwealth,
including the Massachusetts Business Corporation Law as the same may be amended
from time to time, to which reference is made with the intention that matters
not specifically covered herein or as to which an ambiguity may exist shall be
resolved as if the Trust were a business corporation organized in Massachusetts,
but the reference to said Business Corporation Law is not intended to give the
Trust, the Trustees, the Shareholders or any other person any right, power,
authority or responsibility available only to or in connection with an entity
organized in corporate form. The Trust shall be of the type referred to in
Section 1 of Chapter 182 of the Massachusetts General Laws and of the type
commonly called a Massachusetts business trust, and without limiting the
provisions hereof, the Trust may exercise all powers which are ordinarily
exercised by such a trust.
24
<PAGE>
IN WITNESS WHEREOF, the undersigned hereunto set their hands and seals in
the City of Boston, Massachusetts for themselves and their assigns, as of the
day and year first above written.
/s/ Lynn L. Anderson
-----------------------------------
Lynn L. Anderson
/s/ William L. Marshall
-----------------------------------
William L. Marshall
/s/ Steven J. Mastrovich
-----------------------------------
Steven J. Mastrovich
/s/ Patrick J. Riley
-----------------------------------
Patrick J. Riley
/s/ Richard D. Shirk
-----------------------------------
Richard D. Shirk
/s/ Bruce D. Taber
-----------------------------------
Bruce D. Taber
/s/ Henry W. Todd
-----------------------------------
Henry W. Todd
25
<PAGE>
THE COMMONWEALTH OF MASSACHUSETTS
Suffolk County, ss.
Then personally appeared the within-named Lynn L. Anderson, William L.
Marshall, Steven J. Mastrovich, Patrick J. Riley, Richard D. Shirk, Bruce D.
Taber and Henry W. Todd, who acknowledged the execution of the foregoing
instrument to be their free act and deed, before me, this 13th day of October,
1993.
/s/ Signature
-----------------------------------
Notary Public
[Notarial Seal]
My commission expires: 6-27-97
26
<PAGE>
The Principal office of the Trust is:
909 A Street
Tacoma, WA 98402
27
<PAGE>
THE SEVEN SEAS SERIES FUND
TRUSTEES
Lynn L. Anderson(1, 4) Henry W. Todd, Trustee(2, 4)
Frank Russell Investment Zink & Triest Co., Inc.
Management Company 111 Commerce Drive
909 A Street P.O. Box 468
Tacoma, WA 98402 Montgomeryville, PA 18936
(215) 362-1100
Bruce D. Taber(1, 2) FAX: (215) 368-5916
26 Roundtop Road
Boxford, MA 01921
H (508) 887-5852
W (617) 482-5555
FAX: (617) 482-7468
William L. Marshall, Trustee(2, 3, 4)
The Marshall Financial Group, Inc.
33 West Court Street
Doylestown, PA 18901
(215) 348-9393
FAX: (215) 348-7971
Steven J. Mastrovich, Trustee(1, 2, 4)
Brown, Rudnick, Freed & Gesmer
1 Financial Center
Boston, MA 02111
(617) 330-9000
FAX: (617) 439-3278
Patrick J. Riley, Trustee(2, 4) Richard D. Shirk, Trustee(2, 4)
49 Boren Lane President and Chief Executive Officer
Boxford, MA 01921 Blue Cross/Blue Shield of Georgia
H (508) 887-9775 3350 Peachtree Road, N.E.
W (617) 330-9007 Atlanta, GA 30326
FAX: (617) 330-9717 (404) 842-8410
__________________
(1)Interested Trustee
(2)Member of Audit Committee
(3)Chairman of Audit Committee
(4)Elected by Shareholders
28
<PAGE>
THE SEVEN SEAS SERIES FUND
AMENDMENT NO. 1 TO
THE FIRST AMENDED AND RESTATED MASTER TRUST AGREEMENT
ESTABLISHMENT OF ADDITIONAL SUB-TRUST
RENAMING OF EXISTING SUB-TRUST
THIS AMENDMENT NO. 1 to the First Amended and Restated Master Trust Agreement,
dated October 13, 1993 (also referred to as the Agreement and Declaration of
Trust), is made as of the 14th day of December, 1993:
WITNESSETH:
WHEREAS, pursuant to the Agreement, the Trustees have previously established and
designated The Seven Seas Series Money Market Fund, The Seven Seas Series US
Government Money Market Fund, The Seven Seas Series S&P 500 Index Fund, The
Seven Seas Series S&P Midcap Index Fund, The Seven Seas Series Matrix Equity
Fund, The Seven Seas Series International European Index Fund, The Seven Seas
Series International Pacific Index Fund, The Seven Seas Series Short Term
Government Securities Fund, The Seven Seas Series Bond Market Fund, The Seven
Seas Series Yield Plus Fund, The Seven Seas Series US Treasury Money Market
Fund, The Seven Seas Series US Treasury Obligations Fund, The Seven Seas Series
Growth and Income Fund, The Seven Seas Series Intermediate Fund, and The Seven
Seas Series Institutional Money Market Portfolio as 15 sub-trusts of the Trust;
and
WHEREAS, the Trustees have the authority under Section 4.1 of the Agreement to
establish and designate additional separate and distinct sub-trusts and to fix
and determine certain relative rights and preferences as between the shares of
the sub-trusts, without shareholder approval; and
WHEREAS, the Trustees hereby desire to establish and designate The Seven Seas
Series Emerging Markets Fund as an additional sub-trust with the relative rights
and preferences set forth in Section 4.2 of the Agreement;
WHEREAS, the Trustees hereby desire to change the name of The Seven Seas Series
Institutional Money Market Portfolio to The Seven Seas Series Prime Money Market
Portfolio;
NOW, THEREFORE, the first paragraph of Section 4.2 of the Agreement is hereby
amended to read in pertinent part as follows:
"Section 4.2 ESTABLISHMENT AND DESIGNATION OF SUB-TRUSTS. Without
limiting the authority of the Trustees set forth in Section 4.1 to
establish and designate any further Sub-Trusts, the Trustees hereby
establish and designate the following Sub-Trusts: The
29
<PAGE>
Seven Seas Series Money Market Fund, The Seven Seas Series US Government
Money Market Fund, The Seven Seas Series S&P 500 Index Fund, The Seven Seas
Series S&P Midcap Index Fund, The Seven Seas Series Matrix Equity Fund, The
Seven Seas Series International European Index Fund, The Seven Seas Series
International Pacific Index Fund, The Seven Seas Series Short Term
Government Securities Fund, The Seven Seas Series Bond Market Fund, The
Seven Seas Series Yield Plus Fund, The Seven Seas Series US Treasury Money
Market Fund, The Seven Seas Series US Treasury Obligations Fund, The Seven
Seas Series Growth and Income Fund, The Seven Seas Series Intermediate
Fund, and The Seven Seas Series Prime Money Market Portfolio and The Seven
Seas Series Emerging Markets Fund. The Shares of each Sub-Trust and any
Shares of any further Sub-Trusts that may from time to time be established
and designated by the Trustees shall (unless the Trustees otherwise
determine with respect to some further Sub-Trust at the time of
establishing and designating the same) have the following relative rights
and preferences:"
The undersigned hereby certifies that the Amendment set forth above has been
duly adopted in accordance with the provisions of the Master Trust Agreement.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand as of the day and
year first above written.
THE SEVEN SEAS SERIES FUND
/s/ J. David Griswold
---------------------------------------
J. David Griswold
Assistant Secretary
30
<PAGE>
THE SEVEN SEAS SERIES FUND
AMENDMENT NO. 2 TO
THE FIRST AMENDED AND RESTATED MASTER TRUST AGREEMENT
ESTABLISHMENT OF A CLASS OF SHARES OF
AN EXISTING SUB-TRUST
THIS AMENDMENT NO. 2 to the First Amended and Restated Master Trust Agreement,
dated October 13, 1993 (also referred to as the Agreement and Declaration of
Trust), is made as of the 10th day of May, 1994:
WITNESSETH:
WHEREAS, pursuant to the Agreement, the Trustees have previously established and
designated The Seven Seas Series Money Market Fund, The Seven Seas Series US
Government Money Market Fund, The Seven Seas Series S&P 500 Index Fund, The
Seven Seas Series S&P Midcap Index Fund, The Seven Seas Series Matrix Equity
Fund, The Seven Seas Series International European Index Fund, The Seven Seas
Series International Pacific Index Fund, The Seven Seas Series Short Term
Government Securities Fund, The Seven Seas Series Bond Market Fund, The Seven
Seas Series Yield Plus Fund, The Seven Seas Series US Treasury Money Market
Fund, The Seven Seas Series US Treasury Obligations Fund, The Seven Seas Series
Growth and Income Fund, The Seven Seas Series Intermediate Fund, The Seven Seas
Series Emerging Markets Fund and The Seven Seas Series Prime Money Market
Portfolio as 16 sub-trusts of the Trust; and
WHEREAS, the Trustees have the authority under Section 4.1 of the Agreement to
establish and designate additional separate and distinct sub-trusts and to fix
and determine certain relative rights and preferences as between the shares of
the sub-trusts, without shareholder approval; and
WHEREAS, the Trustees hereby desire to establish and designate Class B of The
Seven Seas Series Money Market Fund as an additional sub-trust with the relative
rights and preferences set forth in Section 4.2 of the Agreement;
NOW, THEREFORE, the first paragraph of Section 4.2 of the Agreement is hereby
amended to read in pertinent part as follows:
"Section 4.2 ESTABLISHMENT AND DESIGNATION OF SUB-TRUSTS. Without
limiting the authority of the Trustees set forth in Section 4.1 to
establish and designate any further Sub-Trusts, the Trustees hereby
establish and designate the following Sub-Trusts: The Seven Seas Series
Money Market Fund, The Seven Seas Series Money Market Fund
31
<PAGE>
(Class B), The Seven Seas Series US Government Money Market Fund, The Seven
Seas Series S&P 500 Index Fund, The Seven Seas Series S&P Midcap Index
Fund, The Seven Seas Series Matrix Equity Fund, The Seven Seas Series
International European Index Fund, The Seven Seas Series International
Pacific Index Fund, The Seven Seas Series Short Term Government Securities
Fund, The Seven Seas Series Bond Market Fund, The Seven Seas Series Yield
Plus Fund, The Seven Seas Series US Treasury Money Market Fund, The Seven
Seas Series US Treasury Obligations Fund, The Seven Seas Series Growth and
Income Fund, The Seven Seas Series Intermediate Fund, and The Seven Seas
Series Prime Money Market Portfolio and The Seven Seas Series Emerging
Markets Fund. The Shares of each Sub-Trust and any Shares of any further
Sub-Trusts that may from time to time be established and designated by the
Trustees shall (unless the Trustees otherwise determine with respect to
some further Sub-Trust at the time of establishing and designating the
same) have the following relative rights and preferences:"
The undersigned hereby certifies that the Amendment set forth above has been
duly adopted in accordance with the provisions of the Master Trust Agreement.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand as of the day and
year first above written.
THE SEVEN SEAS SERIES FUND
/s/ J. David Griswold
---------------------------------------
J. David Griswold
Secretary
32
<PAGE>
THE SEVEN SEAS SERIES FUND
AMENDMENT NO. 3 TO
THE FIRST AMENDED AND RESTATED MASTER TRUST AGREEMENT
ESTABLISHMENT OF CLASSES OF SHARES OF
EXISTING SUB-TRUSTS
AND
ESTABLISHMENT OF AN ADDITIONAL SUB-TRUST
THIS AMENDMENT NO. 3 to the First Amended and Restated Master Trust Agreement,
dated October 13, 1993 (also referred to as the Agreement and Declaration of
Trust), is made as of the 25th day of May, 1994:
WITNESSETH:
WHEREAS, pursuant to the Agreement, the Trustees have previously established and
designated The Seven Seas Series Money Market Fund (Class A and B Shares), The
Seven Seas Series US Government Money Market Fund, The Seven Seas Series S&P 500
Index Fund, The Seven Seas Series S&P Midcap Index Fund, The Seven Seas Series
Matrix Equity Fund, The Seven Seas Series International European Index Fund, The
Seven Seas Series International Pacific Index Fund, The Seven Seas Series Short
Term Government Securities Fund, The Seven Seas Series Bond Market Fund, The
Seven Seas Series Yield Plus Fund, The Seven Seas Series US Treasury Money
Market Fund, The Seven Seas Series US Treasury Obligations Fund, The Seven Seas
Series Growth and Income Fund, The Seven Seas Series Intermediate Fund, The
Seven Seas Series Emerging Markets Fund and The Seven Seas Series Prime Money
Market Portfolio as 16 sub-trusts of the Trust; and
WHEREAS, the Trustees have the authority under Section 4.1 of the Agreement to
establish and designate additional separate and distinct sub-trusts and to fix
and determine certain relative rights and preferences as between the shares of
the sub-trusts, without shareholder approval; and
WHEREAS, the Trustees hereby desire to establish and designate Class C Shares of
The Seven Seas Series Money Market Fund and Class B and Class C Shares of The
Seven Seas Series US Government Money Market Fund with the relative rights and
preferences set forth in Section 4.2 of the Agreement;
WHEREAS, the Trustees hereby desire to establish and designate The Seven Seas
Series Tax Free Money Market Fund as an additional sub-trust with the relative
rights and preferences set forth in Section 4.2 of the Agreement;
33
<PAGE>
NOW, THEREFORE, the first paragraph of Section 4.2 of the Agreement is hereby
amended to read in pertinent part as follows:
"Section 4.2 ESTABLISHMENT AND DESIGNATION OF SUB-TRUSTS. Without
limiting the authority of the Trustees set forth in Section 4.1 to
establish and designate any further Sub-Trusts, the Trustees hereby
establish and designate the following Sub-Trusts: The Seven Seas Series
Money Market Fund (Class A, B and C Shares), The Seven Seas Series US
Government Money Market Fund (Class A, B and C Shares), The Seven Seas
Series S&P 500 Index Fund, The Seven Seas Series S&P Midcap Index Fund, The
Seven Seas Series Matrix Equity Fund, The Seven Seas Series International
European Index Fund, The Seven Seas Series International Pacific Index
Fund, The Seven Seas Series Short Term Government Securities Fund, The
Seven Seas Series Bond Market Fund, The Seven Seas Series Yield Plus Fund,
The Seven Seas Series US Treasury Money Market Fund, The Seven Seas Series
US Treasury Obligations Fund, The Seven Seas Series Growth and Income Fund,
The Seven Seas Series Intermediate Fund, and The Seven Seas Series Prime
Money Market Portfolio, The Seven Seas Series Emerging Markets Fund, and
The Seven Seas Series Tax Free Money Market Fund. The Shares of each Sub-
Trust and any Shares of any further Sub-Trusts that may from time to time
be established and designated by the Trustees shall (unless the Trustees
otherwise determine with respect to some further Sub-Trust at the time of
establishing and designating the same) have the following relative rights
and preferences:"
The undersigned hereby certifies that the Amendment set forth above has been
duly adopted in accordance with the provisions of the Master Trust Agreement.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand as of the day and
year first above written.
THE SEVEN SEAS SERIES FUND
/s/ J. David Griswold
----------------------------------------
J. David Griswold
Secretary
34
<PAGE>
THE SEVEN SEAS SERIES FUND
AMENDMENT NO. 4 TO
THE FIRST AMENDED AND RESTATED MASTER TRUST AGREEMENT
ESTABLISHMENT OF CLASSES OF SHARES OF
EXISTING SUB-TRUST
THIS AMENDMENT NO. 4 to the First Amended and Restated Master Trust Agreement,
dated October 13, 1993 (also referred to as the Agreement and Declaration of
Trust), is made as of the 14th day of July, 1994:
WITNESSETH:
WHEREAS, pursuant to the Agreement, the Trustees have previously established and
designated The Seven Seas Series Money Market Fund, The Seven Seas Series US
Government Money Market Fund, The Seven Seas Series S&P 500 Index Fund, The
Seven Seas Series S&P Midcap Index Fund, The Seven Seas Series Matrix Equity
Fund, The Seven Seas Series International European Index Fund, The Seven Seas
Series International Pacific Index Fund, The Seven Seas Series Short Term
Government Securities Fund, The Seven Seas Series Bond Market Fund, The Seven
Seas Series Yield Plus Fund, The Seven Seas Series US Treasury Money Market
Fund, The Seven Seas Series US Treasury Obligations Fund, The Seven Seas Series
Growth and Income Fund, The Seven Seas Series Intermediate Fund, The Seven Seas
Series Emerging Markets Fund, The Seven Seas Series Prime Money Market Portfolio
and The Seven Seas Series Tax Free Money Market Fund as 17 sub-trusts of the
Trust; and
WHEREAS, the Trustees have the authority under Section 4.1 of the Agreement to
establish and designate additional separate and distinct sub-trusts and to fix
and determine certain relative rights and preferences as between the shares of
the sub-trusts, without shareholder approval; and
WHEREAS, the Trustees hereby desire to establish and designate Class B and Class
C Shares of The Seven Seas Series Tax Free Money Market Fund with the relative
rights and preferences set forth in Section 4.2 of the Agreement;
NOW, THEREFORE, the first paragraph of Section 4.2 of the Agreement is hereby
amended to read in pertinent part as follows:
"Section 4.2 ESTABLISHMENT AND DESIGNATION OF SUB-TRUSTS. Without
limiting the authority of the Trustees set forth in Section 4.1 to
establish and designate any further Sub-Trusts, the Trustees hereby
establish and designate the following Sub-Trusts: The Seven Seas Series
Money Market Fund, The Seven Seas Series US Government Money Market Fund,
The Seven Seas Series S&P 500 Index Fund, The Seven Seas Series S&P
35
<PAGE>
Midcap Index Fund, The Seven Seas Series Matrix Equity Fund, The Seven Seas
Series International European Index Fund, The Seven Seas Series
International Pacific Index Fund, The Seven Seas Series Short Term
Government Securities Fund, The Seven Seas Series Bond Market Fund, The
Seven Seas Series Yield Plus Fund, The Seven Seas Series US Treasury Money
Market Fund, The Seven Seas Series US Treasury Obligations Fund, The Seven
Seas Series Growth and Income Fund, The Seven Seas Series Intermediate
Fund, and The Seven Seas Series Prime Money Market Portfolio, The Seven
Seas Series Emerging Markets Fund, and The Seven Seas Series Tax Free Money
Market Fund (Classes A, B and C Shares). The Shares of each Sub-Trust and
any Shares of any further Sub-Trusts that may from time to time be
established and designated by the Trustees shall (unless the Trustees
otherwise determine with respect to some further Sub-Trust at the time of
establishing and designating the same) have the following relative rights
and preferences:"
The undersigned hereby certifies that the Amendment set forth above has been
duly adopted in accordance with the provisions of the Master Trust Agreement.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand as of the day and
year first above written.
THE SEVEN SEAS SERIES FUND
/s/ J. David Griswold
----------------------------------------
J. David Griswold
Secretary
36
<PAGE>
THE SEVEN SEAS SERIES FUND
AMENDMENT NO. 5 TO
THE FIRST AMENDED AND RESTATED MASTER TRUST AGREEMENT
RENAMING OF EXISTING SUB-TRUST
ESTABLISHMENT OF ADDITIONAL SUB-TRUST
THIS AMENDMENT NO. 5 to the First Amended and Restated Master Trust Agreement,
dated October 13, 1993 (also referred to as the Agreement and Declaration of
Trust), is made as of the 26th day of September, 1994:
WITNESSETH:
WHEREAS, pursuant to the Agreement, the Trustees have previously established and
designated The Seven Seas Series Money Market Fund, The Seven Seas Series US
Government Money Market Fund, The Seven Seas Series S&P 500 Index Fund, The
Seven Seas Series S&P Midcap Index Fund, The Seven Seas Series Matrix Equity
Fund, The Seven Seas Series International European Index Fund, The Seven Seas
Series International Pacific Index Fund, The Seven Seas Series Short Term
Government Securities Fund, The Seven Seas Series Bond Market Fund, The Seven
Seas Series Yield Plus Fund, The Seven Seas Series US Treasury Money Market
Fund, The Seven Seas Series US Treasury Obligations Fund, The Seven Seas Series
Growth and Income Fund, The Seven Seas Series Intermediate Fund, The Seven Seas
Series Emerging Markets Fund, The Seven Seas Series Prime Money Market Portfolio
and The Seven Seas Series Tax Free Money Market Fund as 17 sub-trusts of the
Trust; and
WHEREAS, the Trustees have the authority under Section 4.1 of the Agreement to
establish and designate additional separate and distinct sub-trusts and to fix
and determine certain relative rights and preferences as between the shares of
the sub-trusts, without shareholder approval; and
WHEREAS, the Trustees hereby desire to change the name of The Seven Seas Series
International European Index Fund to The Seven Seas Series Active International
Fund; and
WHEREAS, the Trustees hereby desire to establish and designate The Seven Seas
Series Real Estate Equity Fund as an additional sub-trust with the relative
rights and preferences set forth in Section 4.2 of the Agreement;
NOW, THEREFORE, the first paragraph of Section 4.2 of the Agreement is hereby
amended to read in pertinent part as follows:
<PAGE>
"Section 4.2 ESTABLISHMENT AND DESIGNATION OF SUB-TRUSTS. Without
limiting the authority of the Trustees set forth in Section 4.1 to
establish and designate any further Sub-Trusts, the Trustees hereby
establish and designate the following Sub-Trusts: The Seven Seas Series
Money Market Fund, The Seven Seas Series US Government Money Market Fund,
The Seven Seas Series S&P 500 Index Fund, The Seven Seas Series S&P Midcap
Index Fund, The Seven Seas Series Matrix Equity Fund, The Seven Seas Series
Active International Fund, The Seven Seas Series International Pacific
Index Fund, The Seven Seas Series Short Term Government Securities Fund,
The Seven Seas Series Bond Market Fund, The Seven Seas Series Yield Plus
Fund, The Seven Seas Series US Treasury Money Market Fund, The Seven Seas
Series US Treasury Obligations Fund, The Seven Seas Series Growth and
Income Fund, The Seven Seas Series Intermediate Fund, and The Seven Seas
Series Prime Money Market Portfolio, The Seven Seas Series Emerging Markets
Fund, The Seven Seas Series Tax Free Money Market Fund, and The Seven Seas
Series Real Estate Equity Fund. The Shares of each Sub-Trust and any
Shares of any further Sub-Trusts that may from time to time be established
and designated by the Trustees shall (unless the Trustees otherwise
determine with respect to some further Sub-Trust at the time of
establishing and designating the same) have the following relative rights
and preferences:"
The undersigned hereby certifies that the Amendment set forth above has been
duly adopted in accordance with the provisions of the Master Trust Agreement.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand as of the day and
year first above written.
THE SEVEN SEAS SERIES FUND
/s/ J. David Griswold
----------------------------------------
J. David Griswold
Secretary
<PAGE>
THE SEVEN SEAS SERIES FUND
AMENDMENT NO. 6 TO
THE FIRST AMENDED AND RESTATED MASTER TRUST AGREEMENT
RENAMING OF EXISTING SUB-TRUST
THIS AMENDMENT NO. 6 to the First Amended and Restated Master Trust Agreement,
dated October 13, 1993 (also referred to as the Agreement and Declaration of
Trust), is made as of the 23rd day of November, 1994:
WITNESSETH:
WHEREAS, pursuant to the Agreement, the Trustees have previously established and
designated The Seven Seas Series Money Market Fund, The Seven Seas Series US
Government Money Market Fund, The Seven Seas Series S&P 500 Index Fund, The
Seven Seas Series S&P Midcap Index Fund, The Seven Seas Series Matrix Equity
Fund, The Seven Seas Series Active International Fund, The Seven Seas Series
International Pacific Index Fund, The Seven Seas Series Short Term Government
Securities Fund, The Seven Seas Series Bond Market Fund, The Seven Seas Series
Yield Plus Fund, The Seven Seas Series US Treasury Money Market Portfolio, The
Seven Seas Series US Treasury Obligations Fund, The Seven Seas Series Growth and
Income Fund, The Seven Seas Series Intermediate Fund, The Seven Seas Series
Emerging Markets Fund, The Seven Seas Series Prime Money Market Portfolio, The
Seven Seas Series Tax Free Money Market Fund and The Seven Seas Series Real
Estate Equity Fund as 18 sub-trusts of the Trust; and
WHEREAS, the Trustees have the authority under Section 4.1 of the Agreement to
establish and designate additional separate and distinct sub-trusts and to fix
and determine certain relative rights and preferences as between the shares of
the sub-trusts, without shareholder approval; and
WHEREAS, the Trustees hereby desire to change the name of The Seven Seas Series
S&P Midcap Index Fund to The Seven Seas Series Small Cap Fund pursuant to a vote
of shareholders on November 22, 1994;
NOW, THEREFORE, the first paragraph of Section 4.2 of the Agreement is hereby
amended to read in pertinent part as follows:
"Section 4.2 ESTABLISHMENT AND DESIGNATION OF SUB-TRUSTS. Without
limiting the authority of the Trustees set forth in Section 4.1 to
establish and designate any further Sub-Trusts, the Trustees hereby
establish and designate the following Sub-Trusts: The Seven Seas Series
Money Market Fund, The Seven Seas Series US Government Money Market Fund,
The Seven Seas Series S&P
<PAGE>
500 Index Fund, The Seven Seas Series Small Cap Index Fund, The Seven Seas
Series Matrix Equity Fund, The Seven Seas Series Active International Fund,
The Seven Seas Series International Pacific Index Fund, The Seven Seas
Series Short Term Government Securities Fund, The Seven Seas Series Bond
Market Fund, The Seven Seas Series Yield Plus Fund, The Seven Seas Series
US Treasury Money Market Portfolio, The Seven Seas Series US Treasury
Obligations Fund, The Seven Seas Series Growth and Income Fund, The Seven
Seas Series Intermediate Fund, and The Seven Seas Series Prime Money Market
Portfolio, The Seven Seas Series Emerging Markets Fund, The Seven Seas
Series Tax Free Money Market Fund, and The Seven Seas Series Real Estate
Equity Fund. The Shares of each Sub-Trust and any Shares of any further
Sub-Trusts that may from time to time be established and designated by the
Trustees shall (unless the Trustees otherwise determine with respect to
some further Sub-Trust at the time of establishing and designating the
same) have the following relative rights and preferences:"
The undersigned hereby certifies that the Amendment set forth above has been
duly adopted in accordance with the provisions of the Master Trust Agreement.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand as of the day and
year first above written.
THE SEVEN SEAS SERIES FUND
/s/ J. David Griswold
----------------------------------------
J. David Griswold
Secretary
<PAGE>
THE SEVEN SEAS SERIES FUND
AMENDMENT NO. 7 TO
THE FIRST AMENDED AND RESTATED MASTER TRUST AGREEMENT
ABOLISHMENT OF EXISTING SUB-TRUST
THIS AMENDMENT NO. 7 to the First Amended and Restated Master Trust Agreement,
dated October 13, 1993 (also referred to as the Agreement and Declaration of
Trust), is made as of the 31st day of July, 1995:
WITNESSETH:
WHEREAS, pursuant to the Agreement, the Trustees have previously established and
designated The Seven Seas Series Money Market Fund, The Seven Seas Series US
Government Money Market Fund, The Seven Seas Series S&P 500 Index Fund, The
Seven Seas Series Small Cap Fund, The Seven Seas Series Matrix Equity Fund, The
Seven Seas Series Active International Fund, The Seven Seas Series International
Pacific Index Fund, The Seven Seas Series Short Term Government Securities Fund,
The Seven Seas Series Bond Market Fund, The Seven Seas Series Yield Plus Fund,
The Seven Seas Series US Treasury Money Market Portfolio, The Seven Seas Series
US Treasury Obligations Fund, The Seven Seas Series Growth and Income Fund, The
Seven Seas Series Intermediate Fund, The Seven Seas Series Emerging Markets
Fund, The Seven Seas Series Prime Money Market Portfolio, The Seven Seas Series
Tax Free Money Market Fund and The Seven Seas Series Real Estate Equity Fund as
18 sub-trusts of the Trust; and
WHEREAS, the Trustees have the authority under Section 4.1 of the Agreement to
abolish a Sub-Trust or class and the establishment and designation thereof,
providing that there are no shares outstanding of said Sub-Trust or class
previously established and designated; and
WHEREAS, the Trustees hereby desire to abolish The Seven Seas Series Short Term
Government Securities Fund pursuant to a vote of the Board of Trustees on
July 17, 1995;
NOW, THEREFORE, the first paragraph of Section 4.2 of the Agreement is hereby
amended to read in pertinent part as follows:
"Section 4.2 ESTABLISHMENT AND DESIGNATION OF SUB-TRUSTS. Without
limiting the authority of the Trustees set forth in Section 4.1 to
establish and designate any further Sub-Trusts, the Trustees hereby
establish and designate the following Sub-Trusts: The Seven Seas Series
Money Market Fund, The Seven Seas Series US Government Money Market Fund,
The Seven Seas Series S&P 500 Index Fund, The Seven Seas Series Small Cap
Index Fund, The Seven Seas
<PAGE>
Series Matrix Equity Fund, The Seven Seas Series Active International Fund,
The Seven Seas Series International Pacific Index Fund, The Seven Seas
Series Bond Market Fund, The Seven Seas Series Yield Plus Fund, The Seven
Seas Series US Treasury Money Market Portfolio, The Seven Seas Series US
Treasury Obligations Fund, The Seven Seas Series Growth and Income Fund,
The Seven Seas Series Intermediate Fund, and The Seven Seas Series Prime
Money Market Portfolio, The Seven Seas Series Emerging Markets Fund, The
Seven Seas Series Tax Free Money Market Fund, and The Seven Seas Series
Real Estate Equity Fund. The Shares of each Sub-Trust and any Shares of
any further Sub-Trusts that may from time to time be established and
designated by the Trustees shall (unless the Trustees otherwise determine
with respect to some further Sub-Trust at the time of establishing and
designating the same) have the following relative rights and preferences:"
The undersigned hereby certifies that the Amendment set forth above has been
duly adopted in accordance with the provisions of the Master Trust Agreement.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand as of the day and
year first above written.
THE SEVEN SEAS SERIES FUND
/s/ J. David Griswold
---------------------------------------
J. David Griswold
Secretary
<PAGE>
THE SEVEN SEAS SERIES FUND
PLAN OF DISTRIBUTION
PURSUANT TO RULE 12b-1
January 8, 1992
WHEREAS, THE SEVEN SEAS SERIES FUND, an unincorporated business trust
organized under the laws of the Commonwealth of Massachusetts (the "Trust"),
engages in business as an open-end management investment company and is
registered as such under the Investment Company Act of 1940, as amended (the
"Act");
WHEREAS, the Trust is authorized to issue shares of beneficial interest in
separate series, with the shares of each such series representing the interests
in a separate portfolio of securities and other assets;
WHEREAS, the Trust desires to adopt a Plan of Distribution pursuant to Rule
12b-1 under the Act for The Seven Seas Series Short Term Government Bond fund,
the Seven Seas Series S&P 500 Index Fund, The Seven Seas Series S&P Midcap Index
Fund, the Seven Seas Series Matrix Synthesis Fund, The Seven Seas Series
International European Index Fund, and The Seven Seas Series International
Pacific Index Fund portfolio series (the "Initial Funds" -- such series,
together with all other series subsequently established by the Trust, being
referred to herein individually as a "Fund" and collectively as the "Funds");
WHEREAS, the Trustees approved this Plan of Distribution on January 8, 1992
pursuant to Rule 12b-1 under the Act;
WHEREAS, the Board of Trustees as a whole, and the Trustees who are not
interested persons of the Trust (as defined in the Act) and who have no direct
or indirect financial interests in the operation of this Plan or the Agreement
(the "Qualified Trustees"), have determined, in the exercise of their reasonable
business judgment and in light of their fiduciary duties under state law and
under Section 36(a) and (b) of the Act, that there is a reasonable likelihood
that this Plan and the Agreement will benefit the Funds and their shareholders,
and have accordingly approved this Plan and the Agreement by votes cast in
person at a meeting called for the purpose of voting on this Plan and the
Agreement; and
WHEREAS, this Plan has been approved by the sole shareholder of each of the
Initial Funds.
NOW, THEREFORE, the Trust hereby adopts the Plan in accordance with Rule
12b-1 under the Act, on the following terms and conditions:
SECTION 1. DISTRIBUTION AND SHAREHOLDER SERVICING ACTIVITIES
<PAGE>
Subject to the supervision of the Trustees, the Trust and the Funds may
engage, directly or indirectly, in financing any activities primarily intended
to result in the sale of Shares, including, but not limited to, the following:
(1) payment of commissions and/or reimbursement to underwriters, securities
dealers and others engaged in the sale of Shares, including payments to the
Distributor to be used to pay commissions and/or reimbursement to securities
dealers and others (including affiliates of the Distributor) engaged in the
distribution and marketing of Shares or furnishing assistance to investors on an
ongoing basis; (2) reimbursement of 9I) direct out-of pocket expenditures
incurred by the Distributor in connection with the distribution and marketing of
Shares and the servicing of investor accounts, including expenses relating to
the formulation and implementation of marketing strategies and promotional
activities such as direct mail promotions and television, radio, newspaper,
magazine and other mass media advertising, the preparation, printing and
distribution of sales literature, the preparation, printing and distribution of
Prospectuses of the Trust and reports of recipients other than existing
shareholders of the Funds, and obtaining such information, analyses and reports
with respect to marketing and promotional activities and investor accounts as
the Trust may, from time to time, deem advisable and (ii) expenses incurred in
connection with the promotion and sale of the Investment Company's Shares,
including, without limitation, Distributor's expenses for rent, office supplies,
equipment, travel, communication, compensation, and benefits for sales
personnel; and (3) payment of any fees and expenses to shareholder servicing
agent, including any investment adviser of the Trust ("Servicing Agents"), that
have entered into shareholder servicing agreements with the Trust pursuant to
which Servicing Agents may provide various shareholder services with respect to
shares of the Funds held by or for customers of Servicing Agents, including:
answering inquiries regarding the Funds; assisting customers in changing
dividend options, account designations and addresses; performing sub-accounting
for such customers; establishing and maintaining customer accounts and records;
processing purchase and redemption transactions; providing periodic statements
showing customer's account balances and integrating such statements with those
of other transactions and balances in the customers' other accounts serviced by
the Servicing Agents; arranging for bank wires transferring customers' funds;
and such other services as the customers may request in connection with the
Funds, to the extent permitted by applicable statute, rule or regulation. For
purposes of this Plan, references to the Prospectus of the Trust shall be deemed
to include all Prospectuses and Statements of Additional Information of any of
the Funds and of the Trust, all as from time to time amended and in effect.
The Trust and the funds are authorized to engage in the activities listed
above, and in other activities primarily intended to result in the sale of
Shares or to make available shareholder services, either directly or through
other persons with which the Trust has entered into agreements pursuant to the
Plan.
SECTION 2. MAXIMUM EXPENDITURES
The expenditures to be made pursuant to this Plan, and the basis upon which
payment of such expenditures will be made, shall be determined by the Trust, but
in no event shall such expenditures exceed the following:
<PAGE>
(i) with respect to distribution-related and shareholder servicing
expenses of the Distributor, an annual rate of .25 of 1% of the average
daily value of the net assets of the Fund; and
(ii) with respect to shareholder services provided by Servicing Agents, an
annual rate of .20 of 1% of the average daily value of the Shares of that
Fund owned by or for shareholders with whom the Servicing Agent has a
servicing relationship;
PROVIDED, HOWEVER, that the aggregate amount of payments to the Distributor and
Servicing Agents shall in no event exceed .24% of the Fund's average net asset
value per year.
The expenditures to be made pursuant to this Plan shall commence with
respect to each Fund as of the date on which this Plan becomes effective with
respect to such Fund.
SECTION 3. PAYMENTS
Pursuant to this Plan, the Trust shall make monthly payments to the
Distributor or Servicing Agents at the annual rate provided for in Section 2
with respect to each Fund. The Distributor shall apply amounts received under
Section 2(I) to remit to and allocate among selected dealers and others
(including affiliates of the Distributor), in consideration of and as
reimbursement for expenses incurred in the provision of distribution and
marketing services or furnishing assistance to investors on an ongoing basis,
such amounts are as indicated in the Prospectus of the Trust, and (ii) to
reimburse the Distributor for direct out-of-pocket expenses incurred in
connection with the distribution and marketing of Shares of each Fund and the
servicing of investor accounts as contemplated by Section 1(2) hereof.
In the event that the distributor or any Servicing Agent is not fully
reimbursed for payments made or expenses incurred by it in any fiscal year, the
Distributor or Servicing Agent shall be entitled to carry forward such expenses
to subsequent fiscal years for submission to the applicable Fund for payment
subject always to the annual maximum expenditures for each Fund set forth in
Section 2 hereof; provided, however, the (I) each Fund's liability for any such
expenses carried forward shall terminate at the end of two years following the
year in which the expenditure was incurred, and (ii) nothing herein shall
prohibit or limit the Trustees from terminating this Plan and all payments
hereunder at any time pursuant to Section 4(e) hereof.
Notwithstanding anything to the contrary herein, the aggregate of all
payments to the Distributor shall not exceed at any time the aggregate of all
payments made or expenses incurred by the Distributor pursuant to this
Section 3.
SECTION 4. TERMS AND TERMINATION
<PAGE>
(a) EXISTING FUNDS. This plan shall become effective with respect to the
Initial Funds as of January 8, 1992. This Plan shall continue in effect with
respect to each Fund (subject to Section 4(c) hereof) until one year from the
effective date, unless the continuation of this Plan shall have been approved
with respect to that fund in accordance with the provisions of Section 4(c)
hereof.
(b) ADDITIONAL FUNDS. This Plan shall become effective with respect to
each additional Fund upon commencement of the initial public offering thereof;
provided that the Plan has previously been approved for continuation by votes of
a majority of both (i) the Board of Trustees of the Trust, and (ii) the
Qualified Trustees, cast in person at a meeting held before the initial public
offering of such additional Fund and called for the purpose of voting on such
approval. This Plan shall continue in effect with respect to each such
additional fund (subject to Section 4(c) hereof) for one year after the date of
such initial public offering, unless the continuation of this Plan shall have
been approved with respect to such additional Fund in accordance with the
provisions of Section 4(c) hereof. The Distributor and the Trust on behalf of
each such additional Fund shall each sign an addendum hereto agreeing to be
bound hereby and setting forth such specific and different terms as the parties
may agree upon, including, without implied limitation, the amount and purpose of
payments to be made hereunder.
(c) CONTINUATION. This Plan and related agreements shall continue in
effect with respect to each Fund subsequent to the initial term specified in
Section 4(a) and (b) for so long as such continuance is specifically approved at
least annually by votes of a majority of both (I) the Board of Trustees of the
Trust, and (ii) the Qualified Trustees, cast in person at a meeting called for
the purpose of voting on this Plan and related agreements.
(d) SHAREHOLDER APPROVAL. Notwithstanding the foregoing provisions of
this Section 4, the continuance of this Plan with respect to the Initial Funds
and any additional Fund subsequently established by the Trust is subject to the
approval of this Plan by a majority of the outstanding voting securities (as
defined in the Act) of such Fund at the initial meeting of shareholders after
this plan becomes effective with respect thereto.
(e) TERMINATION.
(i) This plan may be terminated at any time with respect to any Fund
by vote of a majority of the Qualified Trustees, or by vote of a majority of the
outstanding voting securities of that Fund, as the case may be. The Plan may
remain in effect with respect to a Fund even if it has been terminated in
accordance with this Section 4(e) with respect to one or more other Funds.
(ii) The Agreement may be terminated at any time, without penalty,
with respect to any Fund by a vote of a majority of the Qualified Trustees or by
vote of a majority of the outstanding voting securities of that Fund on sixty
days' written notice to
<PAGE>
the Distributor. In addition, the Agreement provides for automatic termination
in the event of its assignment.
SECTION 5. AMENDMENTS
This Plan may not be amended to increase materially the amount of
distribution expenditures provided for herein unless such amendment is approved
by a vote of a majority of the outstanding voting securities of each Fund, with
respect to which a material increase in the amount of distribution expenditures
is proposed, and no material amendment to the Plan shall be made unless approved
in the manner provided for annual renewal in Section 4(c) hereof. Otherwise,
the Plan may be amended with respect to any Fund by vote of a majority of the
Qualified Trustees or the outstanding voting securities of that Fund.
SECTION 5. INDEPENDENT TRUSTEES
While this Plan is in effect with respect to any Fund, the selection and
nomination of Trustees who are not interested persons (as defined in the Act) of
the Trust shall be committed to the discretion of the Trustees who are not
interested persons.
SECTION 7. QUARTERLY REPORTS
The Treasurer of the Trust and the Treasurer of the Distributor shall
provide to the Trustees and the Trustees shall review, at least quarterly, a
written report of the amounts expended for distribution pursuant to this Plan
and the purposes for which such expenditures were made.
SECTION 8. RECORDKEEPING
The Trust shall preserve copies of this Plan, the Agreement and any related
agreements and all reports made pursuant to Section 7 hereof, for a period of
not less than six years from the date of this Plan and the Agreement, with the
agreements or such reports, as the case may be, for the first two years to be
kept in an easily accessible place.
SECTION 9. LIMITATION OF LIABILITY
The term "The Seven Seas Series Fund" means and refers to the Trustees from
time to time serving under the Declaration of Trust dated October 3, 1987 as the
same may subsequently thereto have been, or subsequently hereto be, amended. It
is expressly agreed that the obligations of the Trust hereunder shall not be
binding upon any of the Trustees, shareholders, nominees, officers, agents or
employees of the Trust, personally, but bind only the officers, agents or
employees of the Trust, as provided in the Declaration of Trust. The execution
and delivery of this Plan and the Plan have been authorized by the Trustees of
the Trust and signed by an authorized officer of the Trust, acting as such, and
neither such authorization by such Trustees nor such execution and delivery by
such officer shall be deemed to have been made by any of them individually
<PAGE>
or to impose any liability on any of them personally, but shall bond only the
trust property of the Trust as provided in its Declaration of Trust. The
Declaration of Trust further provides, and it is expressly agreed, that each
Fund of the Trust shall be solely and exclusively responsible for the payment of
its debts, liabilities and obligations and that no other Fund shall be
responsible or liable for the same.
IN WITNESS WHEREOF, the Trust has executed this Plan of Distribution dated
as of January 8, 1992, on the day and year set forth below in Tacoma,
Washington.
THE SEVEN SEAS SERIES FUND
By /s/ Margaret Barclay
-----------------------------------------
Margaret L. Barclay, Sr. Vice President
ATTEST:
/s/ Thomas A. Early
- ------------------------------
Thomas A. Early, Secretary
Date: January 8, 1992
<PAGE>
ADDENDUM
TO THE SEVEN SEAS SERIES FUND
PLAN OF DISTRIBUTION
PURSUANT TO RULE 12b-1
Pursuant to Paragraph 4(b) of the Seven Seas Series Fund's Plan of Distribution
Pursuant to Rule 12b-1 ("Rule 12b-1 Plan"), the undersigned parties agree that
The Seven Seas Series Yield Plus Fund and The Seven Seas Series Bond Market Fund
(the "New Funds") be added each as a "Fund" under the Rule 12b-1 Plan and
further agree to be bound by the terms and conditions of the Rule 12b-1 Plan
with respect to the New Funds.
Notwithstanding anything to the contrary in Section 4 of the rule 12b-1 Plan,
the initial term of the Rule 12b-1 Plan with respect to the New Funds shall be
until April 9, 1993.
THE SEVEN SEAS SERIES FUND
ATTEST:
By: /s/ Thomas A. Early By: /s/ George W. Weber
---------------------- --------------------------------
George W. Weber
Senior Vice President - Operations
RUSSELL FUND DISTRIBUTORS, INC.
ATTEST:
By: /s/ Thomas A. Early By: /s/ Lynn L. Anderson
---------------------- --------------------------------
Lynn L. Anderson
President
<PAGE>
ADDENDUM ADDING THE
SEVEN SEAS SERIES
US TREASURY MONEY MARKET FUND
AND THE SEVEN SEAS SERIES
US TREASURY OBLIGATIONS FUND
TO THE SEVEN SEAS SERIES FUND
PLAN OF DISTRIBUTION
PURSUANT TO RULE 12b-1
Pursuant to Paragraph 4(b) of The Seven Seas Series Fund's Plan of Distribution
Pursuant to Rule 12b-1 ("Rule 12b-1 Plan"), the undersigned parties agree that
The Seven Seas Series US Treasury Money Market Fund and The Seven Seas Series US
Treasury Obligations Fund (the "New Funds") be added each as a "Fund" under the
Rule 12b-1 Plan and further agree to be bound by the terms and conditions of the
Rule 12b-1 Plan with respect to the New Funds.
Notwithstanding anything to the contrary in Section 4 of the Rule 12b-1 Plan,
the initial term of the Rule 12b-1 Plan with respect to the New Funds shall be
until April 12, 1993.
THE SEVEN SEAS SERIES FUND
ATTEST:
By: /s/ J. David Griswold By: /s/ George W. Weber
--------------------------- -------------------------------------
George W. Weber
Senior Vice President - Operations
RUSSELL FUND DISTRIBUTORS, INC.
ATTEST:
By: /s/ J. David Griswold By: /s/ Lynn L. Anderson
--------------------------- --------------------------------
Lynn L. Anderson
President
<PAGE>
ADDENDUM ADDING THE
SEVEN SEAS SERIES
US TREASURY MONEY MARKET FUND
AND THE SEVEN SEAS SERIES
US TREASURY OBLIGATIONS FUND
TO THE SEVEN SEAS SERIES FUND
PLAN OF DISTRIBUTION
PURSUANT TO RULE 12b-1
Pursuant to Paragraph 4(b) of The Seven Seas Series Fund's Plan of Distribution
Pursuant to Rule 12b-1 ("Rule 12b-1 Plan"), the undersigned parties agree that
The Seven Seas Series US Treasury Money Market Fund and The Seven Seas Series US
Treasury Obligations Fund (the "Funds") be added each as a "Fund" under the Rule
12b-1 Plan and further agree to be bound by the terms and conditions of the Rule
12b-1 Plan with respect to the Funds.
Notwithstanding anything to the contrary in Section 4 of the Rule 12b-1 Plan,
the initial term of the Rule 12b-1 Plan with respect to the Funds shall be until
April 6, 1994.
THE SEVEN SEAS SERIES FUND
ATTEST:
By: /s/ J. David Griswold By: /s/ Lynn L. Anderson
--------------------------- --------------------------------
Lynn L. Anderson
President
RUSSELL FUND DISTRIBUTORS, INC.
ATTEST:
By: /s/ J. David Griswold By: /s/ Thomas A. Early
--------------------------- --------------------------------
Thomas A. Early
Associate General Counsel
and Secretary
<PAGE>
ADDENDUM ADDING THE
SEVEN SEAS SERIES
PRIME MONEY MARKET PORTFOLIO
AND THE SEVEN SEAS SERIES
EMERGING MARKETS FUND
TO THE SEVEN SEAS SERIES FUND
PLAN OF DISTRIBUTION
PURSUANT TO RULE 12b-1
Pursuant to Paragraph 4(b) of The Seven Seas Series Fund's Plan of Distribution
Pursuant to Rule 12b-1 ("Rule 12b-1 Plan"), the undersigned parties agree that
The Seven Seas Series Prime Money Market Portfolio and The Seven Seas Series
Emerging Markets Fund (the "Portfolios") be added each as a "Fund" under the
Rule 12b-1 Plan and further agree to be bound by the terms and conditions of the
Rule 12b-1 Plan with respect to the Portfolios.
Notwithstanding anything to the contrary in Section 4 of the Rule 12b-1 Plan,
the initial term of the Rule 12b-1 Plan with respect to the Portfolios shall be
until April 6, 1994.
THE SEVEN SEAS SERIES FUND
ATTEST:
By: /s/ J. David Griswold By: /s/ Lynn L. Anderson
--------------------------- --------------------------------
Lynn L. Anderson
President
RUSSELL FUND DISTRIBUTORS, INC.
ATTEST:
By: /s/ J. David Griswold By: /s/ Thomas A. Early
--------------------------- --------------------------------
Thomas A. Early
Associate General Counsel
and Secretary
<PAGE>
ADDENDUM ADDING
THE SEVEN SEAS SERIES GROWTH AND INCOME FUND
AND
THE SEVEN SEAS SERIES INTERMEDIATE FUND
TO THE SEVEN SEAS SERIES FUND
PLAN OF DISTRIBUTION
PURSUANT TO RULE 12b-1
Pursuant to Paragraph 4(b) of The Seven Seas Series Fund's Plan of Distribution
Pursuant to Rule 12b-1 ("Rule 12b-1 Plan"), the undersigned parties agree that
The Seven Seas Series Growth and Income Fund and The Seven Seas Series
Intermediate Fund (the "New Funds") be added each as a "Fund" under the Rule
12b-1 Plan and further agree to be bound by the terms and conditions of the Rule
12b-1 Plan with respect to the New Funds.
Notwithstanding anything to the contrary in Section 4 of the Rule 12b-1 Plan,
the initial term of the Rule 12b-1 Plan with respect to the New Funds shall be
until April 12, 1994.
THE SEVEN SEAS SERIES FUND
ATTEST:
By: /s/ J. David Griswold By: /s/ Lynn L. Anderson
--------------------------- --------------------------------
Lynn L. Anderson
President
RUSSELL FUND DISTRIBUTORS, INC.
ATTEST:
By: /s/ J. David Griswold By: /s/ Thomas A. Early
--------------------------- --------------------------------
Thomas A. Early
Associate General Counsel and Secretary
<PAGE>
ADDENDUM ADDING
THE SEVEN SEAS SERIES REAL ESTATE FUND,
THE SEVEN SEAS SERIES SMALL CAP FUND AND
THE SEVEN SEAS SERIES ACTIVE INTERNATIONAL FUND
TO THE SEVEN SEAS SERIES FUND
PLAN OF DISTRIBUTION
PURSUANT TO RULE 12b-1
Pursuant to Paragraph 4(b) of The Seven Seas Series Fund's Plan of Distribution
Pursuant to Rule 12b-1 ("Rule 12b-1 Plan"), the undersigned parties agree that
The Seven Seas Series Real Estate Equity Fund, The Seven Seas Series Small Cap
Fund and The Seven Seas Series Active International Fund (the "Funds') be added
each as a "Fund" under the Rule 12b-1 Plan and further agree to be bound by the
terms and conditions of the Rule 12b-1 Plan with respect to the Funds.
Notwithstanding anything to the contrary in Section 4 of the Rule 12b-1 Plan,
the initial term of the Rule 12b-1 Plan with respect to the Funds shall be until
April 12, 1995.
Dated: October 25, 1994
THE SEVEN SEAS SERIES FUND
ATTEST:
By: /s/ Deedra S. Walkey By: /s/ Lynn L. Anderson
--------------------------- --------------------------------
Lynn L. Anderson
President
RUSSELL FUND DISTRIBUTORS, INC.
ATTEST:
By: /s/ Deedra S. Walkey By: /s/ J. David Griswold
--------------------------- --------------------------------
J. David Griswold
Associate General Counsel
and Assistant Secretary
<PAGE>
DISTRIBUTION AGREEMENT
OF
THE SEVEN SEAS SERIES FUND
This Distribution Agreement is made as of the 12th day of April, 1988 and
amended as of January 8, 1992, by and between The Seven Seas Series Fund, a
Massachusetts Business trust ("Investment Company"), and Russell Fund
Distributors, Inc., a Washington corporation ("Distributor").
WHEREAS, the Investment Company is registered as an open-end, diversified
management investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"), and intends to offer for public sale distinct series
of shares of common stock, each corresponding to a distinct portfolio ("Fund");
and
WHEREAS, the Investment Company wishes to retain Distributor as the Investment
Company's distributor in connection with the offering and sale of the shares of
a Fund as now exists and as hereafter may be established ("Shares") and to
furnish certain other services to the Investment Company as specified in this
Agreement; and
WHEREAS, Distributor is willing to furnish such services on the terms and
conditions hereinafter set forth:
NOW, THEREFORE, in consideration of the premises and mutual covenants herein
contained, it is agreed between the parties hereto as follows:
1. The Investment Company hereby appoints Distributor to perform those
services described in this Agreement for each Fund of the Investment Company in
existence as of the date hereof ("Initial Fund"). In the event that the
Investment Company establishes one or more series of shares other than the
Initial Fund with respect to which it desires to retain the Distributor to serve
as distributor and principal underwriter hereunder, it shall so notify the
Distributor in writing, indicating the fee, if any, to be payable with respect
to the additional series of shares. If the Distributor is willing to render
such services, it shall so become a Fund hereunder. In such event a writing
signed by both the Investment Company and the Distributor shall be annexed
hereto as a part hereof indicating that such additional series of shares has
become a Fund hereunder.
2. The Investment Company authorizes Distributor as principal agent for the
Investment Company, subject to applicable federal and state law and the Master
Trust Agreement, By-Laws and current Prospectus and Statement of Additional
information of the Investment Company: (a) to promote and offer each Fund and
the Investment
<PAGE>
Company; (b) to solicit orders for the purchase of the Shares of each Fund
subject to such terms and conditions as the Investment Company may specify; (c)
to accept orders for the purchase of the Shares of each Fund on behalf of the
Investment Company; and (d) to incur the following expenses: (i) the
incremental printing costs incurred in producing for and distributing to persons
other than current shareholders of the Investment Company the reports,
prospectuses, notices, and similar materials that are prepared by the Investment
Company for current shareholders; (ii) advertising; (iii) the costs of
preparing, printing, and distributing any literature used in connection with the
offering of the Investment Company's Shares and not covered by Subparagraph (i);
(iv) expenses incurred in connection with the promotion and sale of the
Investment Company's Shares, including, without limitation, Distributor's
expenses for rent, office supplies, equipment, travel, communication,
compensation, and benefits for sales personnel (except as incurred out of
Distributor's principal office in Tacoma, Washington); and (v) payments made to
other broker-dealers with whom the Distributor has entered into sales agreements
to distribute Shares of the Investment Company. Distributor will be reimbursed
by the Investment Company for incurring these expenses as set forth in any Plan
of Distribution pursuant to Rule 12b-1 under the 1940 Act of the Investment
Company as may, from time to time, be in effect. Distributor shall offer the
Shares of each Fund on an agency or "best efforts" basis under which the
Investment Company shall only issue such Shares as are actually sold.
In connection with such sales and offers of sale, the Investment Company shall
not be responsible in any way for any other information, statements, or
representations given or made by Distributor or its representatives or agents,
except such information or representations as are contained in the Prospectus or
in information furnished in writing to Distributor by the Investment Company.
3. The public offering price of the Shares shall be the net asset value per
shares (as determined by the Investment Company) of the outstanding Shares of
the Investment Company plus a sales charge (if any) as set forth in the
Investment Company's current Prospectus. The Investment Company shall make
available to Distributor a statement of each computation of net asset value and
of the details entering into such computation.
4. As used in this Agreement, the term "Registration Statement" shall mean the
Registration Statement most recently filed by the Investment Company with the
Securities and Exchange Commission and effective under the Securities Act of
1933, as such Registration Statement is amended by any amendments thereto at the
time in effect, and the terms "Prospectus" and "Statement of Additional
Information" shall mean the form of Prospectus and Statement of Additional
Information filed by the Investment Company as part of the Registration
Statement.
5. The Investment Company agrees, at its own expense, to register the Shares
with the Securities and Exchange Commission, state and other regulatory bodies,
and to prepare and file from time to time such Prospectuses, amendments, reports
and other documents as may be necessary to maintain the Registration Statement.
The Investment
<PAGE>
Company shall bear all expenses related to preparing and typesetting such
Prospectuses, Statements of Additional Information and other materials required
by law and such other expenses, including printing and mailing expenses, related
to the Investment Company's communications with persons who are shareholders of
each Fund of the Investment Company.
6. The Investment Company agrees to indemnify, defend and hold harmless
Distributor, each person who has been, is, or may hereafter be an officer,
director, or employee or agent of Distributor, and any person who controls
Distributor within the meaning of Section 15 of the 1933 Act from and against
any and all claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which Distributor, its officers or
directors, or any such controlling person may incur under the 1933 Act or under
common law which arises out of or is alleged to arise out of or is based upon a
violation of any of the terms of this Agreement or otherwise arising out of or
based upon any alleged untrue statement of a material fact contained in the
Registration Statement, Prospectuses or Statements of Additional Information or
arising out of or based upon any alleged omission to state a material fact
required to be stated in said documents or necessary to make the statements in
said documents not misleading, provided that in no event shall anything
contained in the agreement be construed so as to protect Distributor against any
liability to the Investment Company or its shareholders to which Distributor
would otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reasons of its reckless
disregard of its obligations and duties under this Agreement.
7. Distributor agrees to indemnify, defend and hold harmless the Investment
Company, each person who has been, is, or may hereafter be an officer, director,
or employee or agent of Distributor, and any person who controls the Investment
Company within the meaning of Section 15 of the 1933 Act from and against any
and all claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which the Investment Company, its
officers or Trustees, or any such controlling person may incur under the 1933
Act or under common law which arises out of or is alleged to arise out of or is
based upon a violation of any of the terms of this Agreement or otherwise
arising out of or based upon any alleged untrue statement of a material fact
contained in information furnished in writing by Distributor to the Investment
Company for use in the Registration Statement, Prospectuses or Statements of
Additional Information or arising out of or based upon any alleged omission to
state a material fact in connection with such information required to be stated
in the Registration Statement, Prospectuses or Statements of Additional
Information, or necessary to make such information not misleading.
8. The Investment Company reserves the right at any time to withdraw all
offerings of the Shares by written notice to the Distributor at its principal
office.
<PAGE>
9. Distributor at its sole discretion may repurchase Shares offered for sale
by the shareholders. Repurchase of Shares by Distributor shall be at the net
asset value next determined after a repurchase order has been received. On each
business day, Distributor shall notify by telex or in writing the Investment
Company or the Investment Company's transfer agent of the orders for repurchase
of shares received by Distributor since the last such report, the amount to be
paid for such Shares, and the identity of shareholders offering Shares for
repurchase. Upon such notice, the Investment Company shall pay Distributor such
amounts as are required by Distributor for the repurchase of such Shares in cash
or in the form of a credit against monies due the Investment Company from
Distributor as proceeds from the sale of Shares. Distributor will receive no
commission or other remuneration for repurchasing Shares. The Investment
Company reserves the right to suspend such repurchases upon written notice to
Distributor. Distributor further agrees to act as agent for the Investment
Company to receive and transmit promptly to the Investment Company's transfer
agent shareholder request for redemption of Shares.
10. Distributor is an independent contractor and shall be agent for the
Investment Company only with respect to the sale and repurchase of the Shares.
11. The services of Distributor to the Investment Company under this Agreement
are not to be deemed exclusive, and the Distributor shall be free to render
similar services or other services to others so long as its services hereunder
are not impaired thereby.
12. Distributor shall prepare reports for the Board of Trustees of the
Investment Company upon request showing information concerning expenditures
related to this Agreement.
13. As used in this Agreement, the term "net asset value" shall have the
meaning ascribed to it in the Investment Company's Master Trust Agreement; and
the terms "assignment," "interested person," and "majority of the outstanding
voting securities" shall have the meanings given to them by Section 2(a) of the
1940 Act, subject to such exemptions as may be granted by the Securities and
Exchange Commission by any rule, regulation or order.
14. This Agreement shall become effective with respect to each Fund on the date
which the Fund commences offering its shares to the public, so long as, with
respect to each additional Fund, the provisions of Section 1 have been complied
with. The Agreement shall continue in effect for each Fund for two years
following the effective date of this Agreement with respect to the Fund; and
thereafter only so long as its continuance is specifically approved at least
annually by a majority of the Trustees of the Investment Company who are not
parties to the Agreement or interested persons of any such party cast in person
at a meeting called for the purpose of voting on such approval, or by vote of a
majority of the outstanding voting securities of the Fund.
15. This Agreement may be terminated at any time:
<PAGE>
(a) By the Trustees of the Investment Company or by vote of a majority of
the outstanding voting securities of the Investment Company by sixty days'
notice addressed to the Distributor at its principal place of business;
(b) By the Distributor by sixty days' written notice addressed to the
Investment Company at its principal place of business; and
(c) Immediately in the event of its assignment.
16. No provision of this Agreement may be changed, waived, discharged or
terminated orally, but only by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought, and no amendment of this Agreement shall be effective until approved by
vote of a majority of the Board of Trustees, by vote of a majority of the
Independent Trustees, or by vote of a majority of the outstanding voting
securities of such Fund affected by the amendment.
17. If any provision of this Agreement shall be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement shall not
be affected thereby. This Agreement shall be binding upon and shall inure to
the benefit of the parties hereto and their respective successors.
18. This Agreement shall be construed in accordance with the laws of the State
of Washington and any applicable federal law.
19. The Master Trust Agreement dated October 3, 1987, as amended from time to
time, establishing the Investment Company, which is hereby referred to and a
copy of which is on file with the Secretary of The Commonwealth of
Massachusetts, provides that the name The Seven Seas Series Fund means the
Trustees from time to time serving (as Trustees but not personally) under said
Master Trust Agreement. It is expressly acknowledged and agreed that the
obligations of the Investment Company hereunder shall not be binding upon any of
the shareholders, Trustees, officers, employees or agents of the Investment
Company, personally, but shall bind only the trust property of the Investment
Company, as provided in its Master Trust Agreement. The execution and delivery
of this Agreement have been authorized by the Trustees of the Investment Company
and signed by an officer of the Investment Company, acting as such, and neither
such authorization by such Trustees nor such execution and delivery by such
officer shall be deemed to have been made by any of them individually or to
impose any liability on any of them personally, but shall bind only the trust
property of the Investment Company as provided in its Master Trust Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their officers thereunto duly authorized as of the date written above.
Attest: THE SEVEN SEAS SERIES FUND
By: /s/ George W. Weber By: /s/ Lynn L. Anderson
-------------------------------- ---------------------------------
Its: Senior Vice President - Operations Its: President
--------------------------------
Attest: RUSSELL FUND DISTRIBUTORS, INC.
By: /s/ Lynn L. Anderson By: /s/ George W. Weber
------------------------------ ---------------------------------
Its: President Its: Senior Vice President-Operations
----------------------------- --------------------------------
<PAGE>
LETTER AGREEMENT
Russell Fund Distributors, Inc.
909 A Street
Tacoma, WA 98402
Dear Sirs:
Pursuant to Paragraph 1 of the Distribution Agreement between The Seven Seas
Series Fund and Russell Fund Distributors, Inc., dated April 12, 1988, The Seven
Seas Series Fund advises you that it is creating a new series to be named The
Seven Seas Series US Government Money Market Fund (the "Fund") and that The
Seven Seas Series Fund desires Russell Fund Distributors, Inc. to serve as
distributor with respect to the Fund pursuant to the terms and conditions of the
Distribution Agreement. The fee to be charged by distributor to the Fund in
return for its services will be as set forth in the Distribution Agreement.
Notwithstanding anything to the contrary in Paragraph 14, the initial term of
the Distribution Agreement with respect to the Fund shall be until April 12,
1992.
Please acknowledge your acceptance of acting as distributor to the fund by
executing this letter agreement in the space provided below and then returning
it to the undersigned.
Sincerely,
THE SEVEN SEAS SERIES FUND
By: /s/ George W. Weber, Sr. Vice President - Operations
----------------------------------------------------
ACKNOWLEDGED AND ACCEPTED
RUSSELL FUND DISTRIBUTORS, INC.
By: /s/ Philip J. Fina
--------------------------------
<PAGE>
LETTER AGREEMENT
Russell Fund Distributors, Inc.
909 A Street
Tacoma, WA 98402
Dear Sirs:
Pursuant to Paragraph 1 of the Distribution Agreement between The Seven Seas
Series Fund and Russell Fund Distributors, Inc., dated April 12, 1988, as
amended, The Seven Seas Series Fund advises you that it is creating six new
series to be named The Seven Seas Series Short Term Government Bond Fund, The
Seven Seas Series S&P 500 Index Fund, The Seven Seas Series S&P Midcap Index
Fund, The Seven Seas Series Matrix Synthesis Fund, The Seven Seas Series
International European Index Fund, and The Seven Seas Series International
Pacific Index Fund (the "New Funds") and that The Seven Seas Series Fund desires
Russell Fund Distributors, Inc. to serve as Distributor with respect to the New
Funds pursuant to the terms and conditions of the Distribution Agreement. The
fee to be charged by Distributor to the New Funds in return for its services
will be as set forth in the Distribution Agreement.
Notwithstanding anything to the contrary in Paragraph 14, the initial term of
the Distribution Agreement with respect to the New Funds shall be until
April 12, 1993.
Please acknowledge your acceptance of acting as Distributor to the New Funds by
executing this letter agreement in the space provided below and then returning
it to the undersigned.
Sincerely,
THE SEVEN SEAS SERIES FUND
By: /s/ George W. Weber, Sr. Vice President - Operations
-----------------------------------------------------
ACKNOWLEDGED AND ACCEPTED
RUSSELL FUND DISTRIBUTORS, INC.
By: Lynn L. Anderson
----------------
<PAGE>
LETTER AGREEMENT
July 8, 1992
Russell Fund Distributors, Inc.
909 A Street
Tacoma, WA 98402
Dear Sirs:
Pursuant to Paragraph 1 of the Distribution Agreement between The Seven Seas
Series Fund and Russell Fund Distributors, Inc., dated April 12, 1988, as
amended, The Seven Seas Series Fund advises you that it is creating two new
series to be named The Seven Seas Series Bond Market Fund and The Seven Seas
Series Yield Plus Fund (the "New Funds") and that The Seven Seas Series Fund
desires Russell Fund Distributors, Inc. to serve as Distributor with respect to
the New Funds pursuant to the terms and conditions of the Distribution
Agreement. The fee to be charged by Distributor to the New Funds in return for
its services will be as set forth in the Distribution Agreement.
Notwithstanding anything to the contrary in Paragraph 14, the initial term of
the Distribution Agreement with respect to the New Funds shall be until
April 12, 1994.
Please acknowledge your acceptance of acting as Distributor to the New Funds by
executing this letter agreement in the space provided below and then returning
it to the undersigned.
Sincerely,
THE SEVEN SEAS SERIES FUND
By: /s/ George W. Weber, Sr. Vice President - Operations
-----------------------------------------------------
ACKNOWLEDGED AND ACCEPTED
RUSSELL FUND DISTRIBUTORS, INC.
By: Lynn L. Anderson
----------------
<PAGE>
LETTER AGREEMENT
The Seven Seas Series US Treasury Money Market Fund
The Seven Seas Series US Treasury Obligations Fund
Distribution Agreement
January 6, 1993
Russell Fund Distributors, Inc.
909 A Street
Tacoma, WA 98402
Dear Sirs:
Pursuant to Paragraph 1 of the Distribution Agreement between The Seven Seas
Series Fund and Russell Fund Distributors, Inc., dated April 12, 1988, as
amended, The Seven Seas Series Fund advises you that it is creating two new
series to be named The Seven Seas Series US Treasury Money Market Fund and The
Seven Seas Series US Treasury Obligations Fund (the "New Funds") and that The
Seven Seas Series Fund desires Russell Fund Distributors, Inc. to serve as
Distributor with respect to the New Funds pursuant to the terms and conditions
of the Distribution Agreement. The fee to be charged by Distributor to the New
Funds in return for its services will be as set forth in the Distribution
Agreement.
Notwithstanding anything to the contrary in Paragraph 14, the initial term of
the Distribution Agreement with respect to the New Funds shall be until April
12, 1993.
Please acknowledge your acceptance of acting as Distributor to the New Funds by
executing this letter agreement in the space provided below and then returning
it to the undersigned.
Sincerely,
THE SEVEN SEAS SERIES FUND
By: /s/ George W. Weber, Sr. Vice President - Operations
-----------------------------------------------------
ACKNOWLEDGED AND ACCEPTED
RUSSELL FUND DISTRIBUTORS, INC.
By: Lynn L. Anderson
----------------
<PAGE>
LETTER AGREEMENT
The Seven Seas Series Growth and Income Fund
The Seven Seas Series Intermediate Fund
Distribution Agreement
April 7, 1993
Russell Fund Distributors, Inc.
909 A Street
Tacoma, WA 98402
Dear Sirs:
Pursuant to Paragraph 1 of the Distribution Agreement between The Seven Seas
Series Fund and Russell Fund Distributors, Inc., dated April 12, 1988, as
amended, The Seven Seas Series Fund advises you that it is creating two new
series to be named The Seven Seas Series Growth and Income Fund and The Seven
Seas Series Intermediate Fund (the "New Funds") and that The Seven Seas Series
Fund desires Russell Fund Distributors, Inc. to serve as Distributor with
respect to the New Funds pursuant to the terms and conditions of the
Distribution Agreement. The fee to be charged by Distributor to the New Funds
in return for its services will be as set forth in the Distribution Agreement.
Notwithstanding anything to the contrary in Paragraph 14, the initial term of
the Distribution Agreement with respect to the New Funds shall be until April
12, 1994.
Please acknowledge your acceptance of acting as Distributor to the New Funds by
executing this letter agreement in the space provided below and then returning
it to the undersigned.
Sincerely,
THE SEVEN SEAS SERIES FUND
By: /s/ Lynn L. Anderson, President
-------------------------------
ACKNOWLEDGED AND ACCEPTED
RUSSELL FUND DISTRIBUTORS, INC.
By: /s/ Thomas A. Early, Associate General Counsel and Secretary
------------------------------------------------------------
<PAGE>
LETTER AGREEMENT
The Seven Seas Series Prime Money Market Portfolios
The Seven Seas Series Emerging Markets Fund
Distribution Agreement
January 19, 1994
Russell Fund Distributors, Inc.
909 A Street
Tacoma, WA 98402
Dear Sirs:
Pursuant to Paragraph 1 of the Distribution Agreement between The Seven Seas
Series Fund and Russell Fund Distributors, Inc., dated April 12, 1988, as
amended, The Seven Seas Series Fund advises you that it is creating two new
series to be named The Seven Seas Series Prime Money Market Portfolio and The
Seven Seas Series Emerging Markets Fund (the "Portfolios") and that The Seven
Seas Series Fund desires Russell Fund Distributors, Inc. to serve as Distributor
with respect to the Portfolios pursuant to the terms and conditions of the
Distribution Agreement. The fee to be charged by Distributor to the Portfolios
in return for its services will be as set forth in the Distribution Agreement.
Notwithstanding anything to the contrary in Paragraph 14, the initial term of
the Distribution Agreement with respect to the New Funds shall be until April 6,
1994.
Please acknowledge your acceptance of acting as Distributor to the Portfolios by
executing this letter agreement in the space provided below and then returning
it to the undersigned.
Sincerely,
THE SEVEN SEAS SERIES FUND
By: /s/ Lynn L. Anderson, President
-------------------------------
ACKNOWLEDGED AND ACCEPTED
RUSSELL FUND DISTRIBUTORS, INC.
By: /s/ Thomas A. Early, Associate General Counsel and Secretary
------------------------------------------------------------
<PAGE>
LETTER AGREEMENT
The Seven Seas Series Tax Free Money Market Fund
Distribution Agreement
July 13, 1994
Russell Fund Distributors, Inc.
909 A Street
Tacoma, WA 98402
Ladies & Gentlemen:
Pursuant to Paragraph 1 of the Distribution Agreement between The Seven Seas
Series Fund and Russell Fund Distributors, Inc., dated April 12, 1988, as
amended, The Seven Seas Series Fund advises you that it is creating a new series
to be named The Seven Seas Series Tax Free Money Market Fund ("Tax Free Fund")
and that The Seven Seas Series Fund desires Russell Fund Distributors, Inc. to
serve as Distributor with respect to Class A shares of the Tax Free Fund
pursuant to the terms and conditions of the Distribution Agreement. The fee to
be charged by Distributor to the Tax Free Fund in return for its services will
be as set forth in the Distribution Agreement.
Notwithstanding anything to the contrary in Paragraph 14, the initial term of
the Distribution Agreement with respect to the Tax Free Fund shall be until
April 12, 1995.
Please acknowledge your acceptance of acting as Distributor to the Tax Free Fund
by executing this letter agreement in the space provided below and then
returning it to the undersigned.
Sincerely, ACKNOWLEDGED AND ACCEPTED
THE SEVEN SEAS SERIES FUND RUSSELL FUND DISTRIBUTORS, INC.
By: /s/ Lynn L. Anderson, By: /s/ J. David Griswold,
President Assistant Secretary
--------------------------- --------------------------------
<PAGE>
LETTER AGREEMENT
The Seven Seas Series Real Estate Fund
The Seven Seas Series Small Cap Fund
The Seven Seas Series Active International Fund
Distribution Agreement
October 25, 1994
Russell Fund Distributors, Inc.
909 A Street
Tacoma, WA 98402
Ladies & Gentlemen:
Pursuant to Paragraph 1 of the Distribution Agreement between The Seven Seas
Series Fund and Russell Fund Distributors, Inc., dated April 12, 1988, as
amended, The Seven Seas Series Fund advises you that (1) it is creating a new
series to be named The Seven Seas Series Real Estate Fund,(2) it has changed the
investment objective and policies of The Seen Seas Series Midcap Index Fund and
renamed it The Seven Seas Series Small Cap Fund, and (3) it has changed the
investment objective and policies of The Seven Seas Series International
European Index Fund and renamed it The Seven Seas Series Active International
Fund (collectively, the "Funds"), and that The Seven Seas Series Fund desires
Russell Fund Distributors, Inc. to serve as Distributor with respect to the
Funds pursuant to the terms and conditions of the Distribution Agreement. The
fee to be charged by Distributor to the Funds in return for its services will be
as set forth in the Distribution Agreement.
Notwithstanding anything to the contrary in Paragraph 14, the initial term of
the Distribution Agreement with respect to the Funds shall be until April 12,
1995.
Please acknowledge your acceptance of acting as Distributor to the Funds by
executing this letter agreement in the space provided below and then returning
it to the undersigned.
Sincerely, ACKNOWLEDGED AND ACCEPTED
THE SEVEN SEAS SERIES FUND RUSSELL FUND DISTRIBUTORS, INC.
By: /s/ Lynn L. Anderson, By: /s/ J. David Griswold,
President Assistant Secretary
--------------------------- --------------------------------
<PAGE>
<PAGE>
ADMINISTRATION AGREEMENT
BETWEEN
FRANK RUSSELL INVESTMENT MANAGEMENT COMPANY
AND
THE SEVEN SEAS SERIES FUND
This Agreement is made as of this 12th day of April, 1988 between The Seven Seas
Series Fund, a Massachusetts business trust (the "Investment Company"), and
Frank Russell Investment Management Company, a Washington corporation
("Administrator").
WHEREAS, the Investment Company is registered as an open-end management
investment company under the Investment Company Act of 1940, as amended ("1940
Act") and intends to offer for public sale distinct series of shares of common
stock, each corresponding to a distinct portfolio; and
WHEREAS, the Investment Company desires to retain the Administrator to furnish
administrative services to the Investment Company and the Administrator is
willing to furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants herein
contained, it is agreed between the parties hereto as follows:
1. APPOINTMENT. The Investment Company appoints Administrator as
administrator of each Fund of the Investment Company in existence as of the date
hereof ("Initial Fund"). In the event that the Investment Company establishes
one or more series of shares other than the Initial Fund with respect to which
it desires to retain Administrator to furnish administrative services hereunder,
it shall so notify Administrator in writing, indicating the fee, if any, to be
payable with respect to the additional series of shares. If the Administrator
is willing to render such services, it shall so notify the Investment Company in
writing, whereupon such series of shares shall become a Fund hereunder. In such
event a writing signed by both the Investment Company and the Administrator
shall be annexed hereto as a part hereof indicating that such additional series
of shares has become a Fund hereunder.
2. ACCEPTANCE OF APPOINTMENT. The Administrator accepts such appointment and
agrees to render the services for the compensation described herein. In all
matters relating to the performance of this Agreement, the Administrator will
act in conformity with the Master Trust Agreement, By-Laws and current
Prospectuses and Statements of Additional Information of the Investment Company
and with the instructions and directions of the Investment Company's Board of
Trustees ("Board") and will conform to and comply with the requirements of the
1940 Act and all other applicable federal or state laws and regulations.
3. DUTIES AS ADMINISTRATOR. The Administrator will assist in administering
the Investment Company's and the Fund's affairs subject to the supervision of
the Board and the following understandings. The Administrator will:
<PAGE>
(a) Supervise all aspects of the Investment Company's and the Fund's operation
except as hereinafter set forth provided, however, that nothing contained herein
shall be deemed to relieve or deprive the Board of its responsibility for and
control of the conduct of the Investment Company's and the Fund's affairs.
(b) Provide the Investment Company and the Fund with such administrative and
clerical services as are deemed reasonably necessary or advisable by the Board
including the maintenance of certain of the Investment Company's and the Fund's
books and records.
(c) Arrange, but not pay for, the periodic updating of the Investment Company's
Prospectus and supplements thereto, proxy material, tax returns, and reports to
the Fund's shareholders and the Securities and Exchange Commission, and
appropriate State authorities.
(d) Arrange and pay for out of the Administrator's general revenues and
profits: (i) the costs of prospectuses, reports to shareholders, and sales
literature; (ii) advertising; and (iii) expenses incurred in connection with the
promotion and sale of Funds shares.
(e) Provide the Investment Company and the Fund with, or obtain for it,
adequate office space and all necessary office equipment and services, including
telephone service, heat, utilities, stationery supplies and similar items.
(f) Make itself available to receive and transmit purchase and redemption
requests to the Investment Company's transfer agent as promptly as practicable
and respond to shareholder inquiries.
4. SERVICES NOT EXCLUSIVE. The services furnished by the Administrator
hereunder are not to be deemed exclusive and the Administrator shall be free to
furnish similar services to others so long as it can provide the services
requested by this Agreement.
5. BOOKS AND RECORDS.
(a) In compliance with the requirements of Rule 31a-3 under the 1940 Act, the
Administrator agrees (i) that all records which it maintains for the Investment
Company are the property of the Investment Company and shall surrender promptly
to the Investment Company any of such records upon the Investment Company's
written request; and (ii) to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act the records required to be maintained by Rule 31a-1 under the
1940 Act.
(b) The Administrator agrees to maintain for the Investment Company inspection
such reports and records reasonably necessary for the Investment Company to
determine the accuracy of any expense base fee charged by the Administrator to
the Investment Company.
<PAGE>
6. AUDIT, INSPECTION AND VISITATION. The Administrator shall make available
during regular business hours all records and other data created and maintained
pursuant to the foregoing provision of this Agreement for reasonable audit and
inspection by the Investment Company, any person retained by the Investment
Company, or any regulatory agency having authority over the Investment Company.
7. EXPENSES. During the term of this Agreement, the Fund shall bear all
expenses that are incurred in its operations not specifically assumed by the
Administrator.
Expenses borne by the Fund shall include but not be limited to the following (or
the Fund's proportionate share of the following): (a) brokerage commissions
relating to securities purchased or sold by the Fund or any losses incurred in
connection therewith; (b) fees payable to and expenses incurred on behalf of the
Fund by the Administrator; (c) expenses of organizing the Investment Company and
the Fund; (d) filing fees and expenses relating to the registration and
qualification of the Fund's shares and the Investment Company under federal or
state securities laws and maintaining such registrations and qualifications; (e)
fees and salaries payable to the Investment Company's Trustees and officers who
are not officers or employees of the Administrator or of any investment adviser
or underwriter of the Investment Company; (f) taxes (including any income or
franchise taxes) and governmental fees; (g) costs of any liability,
uncollectable items of deposit and other insurance or fidelity bonds; (h) any
costs, expenses or losses arising out of any liability of claim for damage or
other relief asserted against the Investment Company or the Fund for violation
of any law; (i) legal, accounting and auditing expenses, including legal fees of
special counsel for the independent Trustees; (j) charges of custodians,
transfer agents and other agents; (k) costs of preparing share certificates (if
any); (l) expenses of setting in type and printing Prospectuses and Statements
of Additional Information and supplements thereto for existing shareholders,
reports and statements to shareholders and proxy material; (m) any extraordinary
expenses (including fees and disbursements of counsel) incurred by the
Investment Company or the Fund; and (n) fees and other expenses incurred in
connection with membership in investment company organizations.
8. COMPENSATION. For the services provided pursuant to this Agreement,
effective from the date of this Agreement, the Investment Company will pay the
Administrator a fee set forth in Schedule A, attached hereto.
9. LIMITATION OF LIABILITY OF THE ADMINISTRATOR AND VERIFICATION OF
INFORMATION. The Administrator shall not be liable for any error of judgment or
mistake of law for any loss suffered by any Fund or the Investment Company in
connection with the matters to which this Agreement relates except a loss
resulting from willful misfeasance, bad faith or gross negligence on its part in
the performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement.
Any person, even though also an officer, partner, employee or agent of the
Administrator, who may be or become an officer, trustee, employee or agent of
the Investment Company shall be deemed, when rendering services to any Fund or
the
<PAGE>
Investment Company or acting with respect to any business of such Fund or the
Investment Company, to be rendering services to or acting solely for the
Investment Company and not as an officer, partner, employee or agent or one
under the control or direction of the Administrator even though paid by it.
The Administrator shall have no obligation to verify the accuracy of any
information provided by State Street Bank and Trust Company or its affiliates to
Administrator in order to assist Administrator in complying with the terms of
this Agreement.
10. AUTHORIZATION FOR USE OF SERVICE PROVIDERS. Administrator is authorized to
and may retain the services of service providers, including State Street Bank
and Trust Company and its affiliates, as Administrator may deem desirable to
assist it in carrying out its responsibilities herein.
11. DURATION AND TERMINATION.
(a) This Agreement shall become effective for each Fund on the date the Fund
commences publicly offering its shares, provided that, with respect to any
Additional Funds, the provisions of Section 1 have been complied with and has
been approved by vote of a majority of the Trustees and a majority of those
Trustees of the Investment Company who are not parties to this Agreement or
interested persons of any such party, and who are not interested persons of the
Investment Company and have no direct or indirect financial interest in the
operation of the Investment Company's Distribution Plan ("Plan") or in any
agreements related thereto (all such Trustees collectively being referred to
herein as the "Independent Trustees"), cast in person at a meeting called for
the purpose of voting on such action.
(b) Unless sooner terminated as provided herein, this Agreement shall continue
in effect for one year from the above effective date. Thereafter, if not
terminated, this Agreement shall continue automatically for successive periods
of twelve months each, provided that such continuance is specifically approved
at least annually (i) by a vote of a majority of the Independent Trustees, cast
in person at a meeting called for the purpose of voting on such approval, and
(ii) by a majority of the Board of Trustees.
(c) Notwithstanding the foregoing, with respect to any Fund, this Agreement may
be terminated at any time, without the payment of any penalty, by vote of a
majority of the Independent Trustees or by vote of a majority of the outstanding
voting securities of such Fund on sixty days' written notice to the
Administrator or by the Administrator at any time, without the payment of any
penalty, on sixty days' written notice to such Fund. Termination of this
Agreement with respect to any given Fund shall in no way affect the continued
validity of this Agreement or the performance thereunder with respect to any
other Fund. This Agreement will automatically terminate in the event of its
assignment.
12. AMENDMENT OF THIS AGREEMENT. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or
<PAGE>
termination is sought, and no amendment of this Agreement shall be effective
until approved by vote of a majority of the Independent Trustees, or by vote of
a majority of the outstanding voting securities of such Fund affected by the
amendment.
13. USE OF ADMINISTRATOR'S NAME. The Investment Company shall not use the name
of Administrator in any Prospectus, sales literature or other material relating
to the Investment Company in a manner not approved prior thereto by
Administrator and in no event shall such approval be unreasonably withheld;
provided, however, that Administrator approves all uses of its name which merely
refer in accurate terms to its appointment hereunder or which are required by
the Securities and Exchange Commission or a state securities commission.
14. USE OF INVESTMENT COMPANY'S NAME. Administrator shall not use the name of
the Investment Company for other than internal use in a manner not approved
prior thereto by the Investment Company and in no event shall such approval be
unreasonably withheld; provided, however, that the Investment Company approves
all uses of its name which merely refer in accurate terms to the appointment of
Administrator hereunder, which merely identifies the Investment Company or which
are required by the Securities and Exchange Commission or a state securities
commission.
15. MISCELLANEOUS. The captions in this Agreement are included for convenience
of reference only and in no way define or delimit any of the provisions hereof
or otherwise affect their construction or effect. If any provision of this
Agreement shall be held or made invalid by a court decision, statute, rule or
otherwise, the remainder of this Agreement shall not be affected thereby. This
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors.
16. CHOICE OF LAW. This Agreement shall be construed in accordance with the
laws of the State of Washington and any applicable federal law.
17. LIMITATION OF LIABILITY. The Master Trust Agreement dated October 3, 1987,
as amended from time to time, establishing the Investment Company, which is
hereby referred to and a copy of which is on file with the Secretary of The
Commonwealth of Massachusetts, provides that the name The Seven Seas Series Fund
means the Trustees from time to time serving (as Trustees but not personally)
under said Master Trust Agreement. It is expressly acknowledged and agreed that
the obligations of the Investment Company hereunder shall not be binding upon
any of the Shareholders, Trustees, officers, employees or agents of the
Investment Company, personally, but shall bind only the trust property of the
Investment Company, as provided in its Master Trust Agreement. The execution
and delivery of this Agreement have been authorized by the Trustees of the
Investment Company and signed by an officer of the Investment Company, acting as
such, and neither such authorization by such Trustees nor such execution and
delivery by such officer shall be deemed to have been made by any of them
individually or to impose any liability on any of them personally, but shall
bind only the trust property of the Investment Company as provided in its Master
Trust Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
Attest: THE SEVEN SEAS SERIES FUND
By: /s/ Michael S. Caccese By: /s/ George W. Weber
-------------------------- -------------------------
Michael S. Caccese George W. Weber
Attest: FRANK RUSSELL INVESTMENT
MANAGEMENT COMPANY
By: /s/ Michael S. Caccese By: /s/ Lynn L. Anderson
--------------------------- -----------------------
Michael S. Caccese Lynn L. Anderson
<PAGE>
AMENDMENT NO. 3 TO ADMINISTRATION AGREEMENT
BETWEEN FRANK RUSSELL INVESTMENT MANAGEMENT COMPANY AND
THE SEVEN SEAS SERIES FUND
This Amendment No. 3 amends the Administration Agreement ("Agreement") dated
April 12, 1988 as previously amended by and between Frank Russell Investment
Management Company, a Washington corporation ("Administrator") and The Seven
Seas Series Fund, a Massachusetts business trust ("Fund"). The Fund is an open-
end investment management company registered under the Investment Company Act of
1940, as amended. Administrator acts as administrator for the Fund pursuant to
the terms of the Agreement. Fund and Administrator now desire to amend Schedule
A to the Agreement to establish a new fee schedule under the following terms and
conditions:
1. SCHEDULE A. Schedule A to the Agreement is hereby amended to read in its
entirety as Schedule A attached to this Agreement.
2. EFFECTIVE DATE. The effective date of the amendment shall be January 1,
1993, subject to approval by the Fund's Board of Trustees.
3. OTHER TERMS. All other terms of the Agreement shall remain in full force
and effect.
DATED this 6th day of January, 1993.
THE SEVEN SEAS SERIES FUND FRANK RUSSELL INVESTMNET
MANAGEMENT COMPANY
By: /S/ George W. Weber By: /S/ Lynn L. Anderson
--------------------------- -------------------------
Senior Vice President President
<PAGE>
SCHEDULE A --- FEES
Effective January 1, 1993
A. ADMINISTRATIVE SERVICES FEE. For all services provided by Administrator
pursuant to the Agreement ("Administrative Services"), the Fund agrees to pay
Administrator an annual fee ("Administrative Services Fee") equal to (x) the sum
of the products of the average daily net assets for each Portfolio of the Fund
multiplied by the following percentages:
PORTFOLIO'S AVERAGE DAILY NET ASSETS RATE
DOMESTIC PORTFOLIOS
$0 to and including $500 million 0.0006
Over $500 million to and including $1 billion 0.0005
Over $1 billion 0.0003
INTERNATIONAL PORTFOLIOS
$0 to and including $500 million 0.0007
Over $500 million to and including $1 billion 0.0006
Over $1 billion to and including $1.5 billion 0.0004
Over $1.5 billion 0.0003
less (y) an amount equal to the sum of distribution expenses incurred by the
Fund's Distributor on behalf of the Fund up to a maximum of 15% of the amount
determined in (x). For purposes of calculating the Administrative Services Fee,
distribution expenses described in (y), above, shall include all expenses
incurred in connection with the distribution of Fund shares whether or not
payable by the Fund under any applicable Rule 12b-1 Plan and shall include (i)
securities licensing fees, (ii) industry association membership fees, (iii)
ratings services, (iv) periodicals, (v) parking and other similar benefits to
employees of the Distributor, (vi) office equipment, (vii) Distributor employee
costs including salary, bonuses and benefits and (viii) office space. For
purposes of determining the breakpoints in calculating (x) above, the assets of
all Domestic Portfolios will be aggregated.
The Administrative Services Fee shall be accrued daily at a rate of 1/365th of
the annual fee and shall be based upon the average daily net assets of each
Portfolio during the calendar month. The Administrative Services Fee shall be
payable monthly on the first business day following month end.
B. REIMBURSEMENT OF EXPENSES. In addition to paying the Administrative
Services Fee, the Fund shall reimburse Administrator on invoice for (i) out-of-
pocket expenses,
and (ii) start-up costs for each new Portfolio incurred through the first 6
months after the SEC effective date of the new Portfolio (including out-of-
pocket and personnel costs).
<PAGE>
LETTER AGREEMENT
Frank Russell Investment Management Company
909 A Street
Tacoma, WA 98402
Dear Sirs:
Pursuant to Paragraph 1 of the Administration Agreement between The Seven Seas
Series Fund and Frank Russell Investment Management Company, dated April 12,
1988, The Seven Seas Series Fund advises you that it is creating a new series to
be named The Seven Seas Series US Government Money Market Fund (the "Fund") and
that The Seven Seas Series Fund desires Frank Russell Investment Management
Company to serve as Administrator with respect to the Fund pursuant to the terms
and conditions of the Administration Agreement. The fee to be charged by
Administrator to the Fund in return for its services will be as set forth in the
Administration Agreement.
Notwithstanding anything to the contrary in Paragraph 11(b), the initial term of
the Administration Agreement with respect to the Fund shall be until April 12,
1992.
Please acknowledge your acceptance of acting as Administrator to the Fund by
executing this letter agreement in the space provided below and then returning
it to the undersigned.
Sincerely,
THE SEVEN SEAS SERIES FUND
By: /s/ George W. Weber
----------------------------------------
George W. Weber
Senior Vice President - Operations
ACKNOWLEDGED AND ACCEPTED
Frank Russell Investment Management Company
By: /s/ Lynn L. Anderson
---------------------------
Lynn L. Anderson
<PAGE>
LETTER AGREEMENT
January 8, 1992
Frank Russell Investment Management Company
909 A Street
Tacoma, WA 98402
Dear Sirs:
Pursuant to Paragraph 1 of the Administration Agreement between The Seven Seas
Series Fund and Frank Russell Investment Management Company, dated April 12,
1988, as amended, The Seven Seas Series Fund advises you that it is creating six
new series to be named The Seven Seas Series Short Term Government Bond Fund,
The Seven Seas Series S&P 500 Index Fund, The Seven Seas Series S&P Midcap Index
Fund, The Seven Seas Series Matrix Synthesis Fund, The Seven Seas Series
International European Index Fund, and The Seven Seas Series International
Pacific Index Fund (the "New Funds") and that The Seven Seas Series Fund desires
Frank Russell Investment Management Company to serve as Administrator with
respect to the New Funds pursuant to the terms and conditions of the
Administration Agreement. The fee to be charged by Administrator to the New
Funds in return for its services will be as set forth in the Administration
Agreement.
Notwithstanding anything to the contrary in Paragraph 11(b), the initial term of
the Administration Agreement with respect to the New Funds shall be until April
12, 1993.
Please acknowledge your acceptance of acting as Administrator to the New Funds
by executing this letter agreement in the space provided below and then
returning it to the undersigned.
Sincerely,
THE SEVEN SEAS SERIES FUND
By: /s/ George W. Weber
-----------------------------------------
George W. Weber
Senior Vice President - Operations
ACKNOWLEDGED AND ACCEPTED
Frank Russell Investment Management Company
By: /s/ Lynn L. Anderson
-----------------------------
Lynn L. Anderson
<PAGE>
LETTER AGREEMENT
July 8, 1992
Frank Russell Investment Management Company
909 A Street
Tacoma, WA 98402
Dear Sirs:
Pursuant to Paragraph 1 of the Administration Agreement between The Seven Seas
Series Fund and Frank Russell Investment Management Company, dated April 12,
1988, as amended, The Seven Seas Series Fund advises you that it is creating two
new series to be named The Seven Seas Series Bond Market Fund and The Seven Seas
Series Yield Plus Fund (the "New Funds") and that The Seven Seas Series Fund
desires Frank Russell Investment Management Company to serve as Administrator
with respect to the New Funds pursuant to the terms and conditions of the
Administration Agreement. The fee to be charged by Administrator to the New
Funds in return for its services will be as set forth in the Administration
Agreement.
Notwithstanding anything to the contrary in Paragraph 11(b), the initial term of
the Administration Agreement with respect to the New Funds shall be until April
12, 1994.
Please acknowledge your acceptance of acting as Administrator to the New Funds
by executing this letter agreement in the space provided below and then
returning it to the undersigned.
Sincerely,
THE SEVEN SEAS SERIES FUND
By: /s/ George W. Weber
-----------------------------------------
George W. Weber
Senior Vice President - Operations
ACKNOWLEDGED AND ACCEPTED
Frank Russell Investment Management Company
By: /s/ Lynn L. Anderson
------------------------
Lynn L. Anderson
<PAGE>
LETTER AGREEMENT
The Seven Seas Series US Treasury Money Market Fund
The Seven Seas Series US Treasury Obligations Fund
Administration Agreement
January 6, 1993
Frank Russell Investment Management Company
909 A Street
Tacoma, WA 98402
Dear Sirs:
Pursuant to Paragraph 1 of the Administration Agreement between The Seven Seas
Series Fund and Frank Russell Investment Management Company, dated April 12,
1988, as amended, The Seven Seas Series Fund advises you that it is creating two
new series to be named The Seven Seas Series US Treasury Money Market Fund and
The Seven Seas Series US Treasury Obligations Fund (the "New Funds") and that
The Seven Seas Series Fund desires Frank Russell Investment Management Company
to serve as Administrator with respect to the New Funds pursuant to the terms
and conditions of the Administration Agreement. The fee to be charged by
Administrator to the New Funds in return for its services will be as set forth
in the Administration Agreement.
Notwithstanding anything to the contrary in Paragraph 11(b), the initial term of
the Administration Agreement with respect to the New Funds shall be until April
12, 1993.
Please acknowledge your acceptance of acting as Administrator to the New Funds
by executing this letter agreement in the space provided and then returning it
to the undersigned.
Sincerely,
THE SEVEN SEAS SERIES FUND
By: /s/ George W. Weber
-----------------------------------------
George W. Weber
Senior Vice President - Operations
ACKNOWLEDGED AND ACCEPTED
Frank Russell Investment Management Company
By: /s/ Lynn L. Anderson
-------------------------------
Lynn L. Anderson
<PAGE>
LETTER AGREEMENT
The Seven Seas Series Growth and Income Fund
The Seven Seas Series Intermediate Fund
Administration Agreement
April 7, 1993
Frank Russell Investment Management Company
909 A Street
Tacoma, WA 98402
Dear Sirs:
Pursuant to Paragraph 1 of the Administration Agreement between The Seven Seas
Series Fund and Frank Russell Investment Management Company, dated April 12,
1988, as amended, The Seven Seas Series Fund advises you that it is creating two
new series to be named The Seven Seas Series Growth and Income Fund and The
Seven Seas Series Intermediate Fund (the "New Funds") and that The Seven Seas
Series Fund desires Frank Russell Investment Management Company to serve as
Administrator with respect to the New Funds pursuant to the terms and conditions
of the Administration Agreement. The fee to be charged by Administrator to the
New Funds in return for its services will be set forth in the Administration
Agreement.
Notwithstanding anything to the contrary in Paragraph 11(b), the initial term of
the Administration Agreement with respect to the New Funds shall be until April
12, 1994.
Please acknowledge your acceptance of acting as Administrator to the New Funds
by executing this letter agreement in the space provided below and then
returning it to the undersigned.
Sincerely,
THE SEVEN SEAS SERIES FUND
By: /s/ Lynn L. Anderson
-----------------------------
Lynn L. Anderson
President
ACKNOWLEDGED AND ACCEPTED
Frank Russell Investment Management Company
By: /s/ Thomas A. Early
--------------------------------------------
Thomas A. Early
Associate General Counsel and Secretary
<PAGE>
LETTER AGREEMENT
The Seven Seas Series Prime Money Market Portfolio
The Seven Seas Series Emerging Markets Fund
Administration Agreement
January 19, 1994
Frank Russell Investment Management Company
909 A Street
Tacoma, WA 98402
Dear Sirs:
Pursuant to Paragraph 1 of the Administration Agreement between The Seven Seas
Series Fund and Frank Russell Investment Management Company, dated April 12,
1988, as amended, The Seven Seas Series Fund advises you that it is creating two
new series to be named The Seven Seas Series Prime Money Market Portfolio and
The Seven Seas Series Emerging Markets Fund (the "Portfolios") and that The
Seven Seas Series Fund desires Frank Russell Investment Management Company to
serve as Administrator with respect to the Portfolios pursuant to the terms and
conditions of the Administration Agreement. The fee to be charged by
Administrator to the Portfolios in return for its services will be as set forth
in the Administration Agreement.
Notwithstanding anything to the contrary in Paragraph 11(b), the initial term of
the Administration Agreement with respect to the Portfolios shall be until April
6, 1994.
Please acknowledge your acceptance of acting as Administrator to the Portfolios
by executing this letter agreement in the space provided below and then
returning it to the undersigned.
Sincerely,
THE SEVEN SEAS SERIES FUND ACKNOWLEDGED AND ACCEPTED
Frank Russell Investment
Management Company
By: /s/ Lynn L. Anderson By: /s/ Thomas A. Early
------------------------------ ----------------------------
Lynn L. Anderson Thomas A. Early
President Associate General Counsel
and Secretary
<PAGE>
LETTER AGREEMENT
The Seven Seas Series Tax Free Money Market Fund
Administration Agreement
July 13, 1994
Frank Russell Investment Management Company
909 A Street
Tacoma, WA 98402
Ladies & Gentlemen:
Pursuant to Paragraph 1 of the Administration Agreement between The Seven Seas
Series Fund and Frank Russell Investment Management Company, dated April 12,
1988, as amended, The Seven Seas Series Fund advises you that it is creating a
new series to be named The Seven Seas Series Tax Free Money Market Fund, Class
A, Class B and Class C ("Tax Free Fund") and that The Seven Seas Series Fund
desires Frank Russell Investment Management Company to serve as Administrator
with respect to the Tax Free Fund pursuant to the terms and conditions of the
Administration Agreement. The fee to be charged by Administrator to the Tax
Free Fund in return for its services will be as set forth in the Administration
Agreement.
Notwithstanding anything to the contrary in Paragraph 11(b), the initial term of
the Administration Agreement with respect to the Tax Free Fund shall be until
April 12, 1995.
Please acknowledge your acceptance of acting as Administrator to the Funds by
executing this letter agreement in the space provided below and then returning
it to the undersigned.
Sincerely,
THE SEVEN SEAS SERIES FUND
By: /s/ Lynn L. Anderson
------------------------
Lynn L. Anderson
President
ACKNOWLEDGED AND ACCEPTED
Frank Russell Investment Management Company
By: /s/ J. David Griswold
-------------------------------------------------------
J. David Griswold
Associate General Counsel and Assistant Secretary
<PAGE>
LETTER AGREEMENT
The Seven Seas Series Real Estate Fund
The Seven Seas Series Small Cap Fund
The Seven Seas Series Active International Fund
Administration Agreement
October 25, 1994
Frank Russell Investment Management Company
909 A Street
Tacoma, WA 98402
Ladies and Gentlemen:
Pursuant to Paragraph 1 of the Administration Agreement between The Seven Seas
Series Fund and Frank Russell Investment Management Company, dated April 12,
1988, as amended, The Seven Seas Series Fund advises you that (1) it is creating
a new series to be named The Seven Seas Series Real Estate Equity Fund, (2) it
has changed the investment objective and policies if The Seven Seas Series
Midcap Index Fund and renamed it The Seven Seas Series Small Cap Fund, and (3)
it has changed the investment objective and policies of The Seven Seas Series
International European Index Fund and renamed it The Seven Seas Series Active
International Fund (collectively, the "Funds"), and that The Seven Seas Series
Fund desires Frank Russell Investment Management Company to serve as
Administrator with respect to the Funds pursuant to the terms and conditions of
the Administration Agreement. The fee to be charged by Administrator to the
Funds in return for its services will be as set forth in the Administration
Agreement.
Notwithstanding anything to the contrary in Paragraph 11(b), the initial term of
the Administration Agreement with respect to the Funds shall be until April 12,
1995.
Please acknowledge your acceptance of acting as Administrator to the Funds by
executing this letter agreement in the space provided below and then returning
it to the undersigned.
Sincerely,
THE SEVEN SEAS SERIES FUND
By: /s/ Lynn L. Anderson
--------------------------------
Lynn L. Anderson
President
ACKNOWLEDGED AND ACCEPTED
Frank Russell Investment Management Company
By: /S/ J. David Griswold
-----------------------------------------------------
J. David Griswold
Associate General Counsel and Assistant Secretary
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
between
THE SEVEN SEAS SERIES FUND
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
Article 1 Terms of Appointment; Duties of the Bank . . . . . . . . .1
Article 2 Fees and Expenses. . . . . . . . . . . . . . . . . . . . .5
Article 3 Representations and Warranties of the Bank . . . . . . . .5
Article 4 Representations and Warranties of the Fund . . . . . . . .6
Article 5 Indemnification. . . . . . . . . . . . . . . . . . . . . .7
Article 6 Covenants of the Fund and the Bank . . . . . . . . . . . .10
Article 7 Termination of Agreement . . . . . . . . . . . . . . . . .11
Article 8 Additional Funds . . . . . . . . . . . . . . . . . . . . .11
Article 9 Assignment . . . . . . . . . . . . . . . . . . . . . . . .12
Article 10 Amendment. . . . . . . . . . . . . . . . . . . . . . . . .12
Article 11 Massachusetts Law to Apply . . . . . . . . . . . . . . . .12
Article 12 Merger of Agreement. . . . . . . . . . . . . . . . . . . .13
Article 13 Limitation of Liability. . . . . . . . . . . . . . . . . .13
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the 11th day of April, 1988, by and between The Seven Seas
Fund Series Fund, a Massachusetts business trust, having its principal office
and place of business at 1201 Pacific Avenue, Tacoma, Washington 98402 (the
"Fund"), and STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company
having its principal office and place of business at 225 Franklin Street,
Boston, Massachusetts 02110 (the "Bank").
WHEREAS, the Fund is authorized to issue shares in separate series, with each
such series representing interests in a separate portfolio of securities and
other assets; and
WHEREAS, the Fund intends to initially offer shares in one series, The Seven
Seas Series Money Market Fund (each such series, together with all other series
subsequently established by the Fund and made subject to this Agreement in
accordance with Article 8, being herein referred to as a Portfolio and
collectively as the "Portfolios");
WHEREAS, the Fund on behalf of the Portfolios desires to appoint the Bank as its
transfer agent, dividend disbursing agent and agent in connection with certain
other activities, and the Bank desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual convenants herein contained, the
parties hereto agree as follows:
Article 1 TERMS OF APPOINTMENT; DUTIES OF THE BANK
1.01 Subject to the terms and conditions set forth in this Agreement, the Fund
on behalf of the Portfolios hereby employs and appoints the Bank to act as, and
the Bank agrees to act as its transfer agent for the authorized and issued
shares of beneficial interest of the Fund representing interests in each of the
respective Portfolios ("Shares"), dividend disbursing agent and in connection
with any accumulation, open-account or similar plans provided to the
shareholders of each of the respective Portfolios of the Fund ("Shareholders")
and set out in the currently effective prospectus and statement of additional
information ("prospectus") of the Fund on behalf of the applicable Portfolio,
including without limitation any periodic investment plan or periodic withdrawal
program.
1.02 The Bank agrees that it will perform the following services:
(a) In accordance with procedures established from time to time by
agreement between the Fund on behalf of each of the Portfolios, as
applicable and the Bank, the Bank shall:
(i) Receive for acceptance, orders for the purchase of Shares,
and promptly deliver payment and appropriate documentation
therefor
<PAGE>
to the Custodian of the Fund authorized pursuant to the
Declaration of Trust of the Fund (the "Custodian");
(ii) Pursuant to purchase orders, issue the appropriate number of
Shares and hold such Shares in the appropriate Shareholder
account;
(iii) Receive for acceptance redemption requests and redemption
directions and deliver the appropriate documentation
therefor to the Custodian;
(iv) At the appropriate time as and when it receives monies paid
to it by the Custodian with respect to any redemption, pay
over or cause to be paid over in the appropriate manner such
monies as instructed by the redeeming Shareholders;
(v) Effect transfers of Shares by the registered owners thereof
upon receipt of appropriate instructions;
(vi) Prepare and transmit payments for dividends and
distributions declared by the Fund on behalf of the
applicable Portfolio; and
(vii) Maintain records of account for and advise the Fund and its
Shareholders as to the foregoing; and
(viii) Record the issuance of Shares and maintain pursuant to SEC
Rule 17Ad-10(e) a record of the total number of Shares
which are authorized, based upon data provided to it by
the Fund, and issued and outstanding. Bank shall also
provide the Fund on a regular basis with the total number
of Shares which are authorized and issued and outstanding
and shall have no obligation, when recording the issuance
of Shares, to monitor the issuance of such Shares or to
take cognizance of any laws relating to the issue or sale
of such Shares, which functions shall be the sole
responsibility of the Fund.
(b) In addition to and not in lieu of the services set forth in the above
paragraph (a), the Bank shall: (i) perform all of the customary
services of a transfer agent, dividend disbursing agent and, as
relevant, agent in connection with accumulation, open-account or
similar plans (including without limitation any periodic investment
plan or periodic withdrawal program), including but not limited to:
maintaining all Shareholder accounts, preparing Shareholder meeting
lists, mailing proxies, receiving and tabulating proxies, mailing
Shareholder reports and prospectuses to current Shareholders,
withholding taxes on U.S. resident and non-resident alien accounts,
preparing and filing U.S. Treasury Department Forms
<PAGE>
1099 and other appropriate forms required with respect to dividends
and distributions by federal authorities for all Shareholders,
preparing and mailing confirmation forms and statements of account to
Shareholders for all purchases and redemptions of Shares and other
confirmable transactions in Shareholder accounts, preparing and
mailing activity statements for Shareholders, and providing
Shareholder account information and (ii) provide a system which will
enable the Fund to monitor the total number of Shares sold in each
State.
(c) In addition, the Fund shall (i) identify to the Bank in writing those
transactions and assets to be treated as exempt from blue sky
reporting for each State and (ii) verify the establishment of
transactions for each State on the system prior to activation and
thereafter monitor the daily activity for each State. The
responsibility of the Bank for the Fund's blue sky State registration
status is solely limited to the initial establishment of transactions
subject to blue sky compliance by the Fund and the reporting of such
transactions to the Fund as provided above.
Procedures applicable to certain of these services may be established
from time to time by agreement between the Fund and the Bank.
Article 2 FEES AND EXPENSES
2.01 For performance by the Bank pursuant to this Agreement, the Fund agrees on
behalf of each of the Portfolios to pay the Bank an annual maintenance fee for
each Shareholder account as set out in the initial fee schedule attached hereto.
Such fees and out-of-pocket expenses and advances identified under Section 2.02
below may be changed from time to time subject to mutual written agreement
between the Fund and the Bank.
2.02 In addition to the fee paid under Section 2.01 above, the Fund agrees on
behalf of each of the Portfolios to reimburse the Bank for out-of-pocket
expenses or advances incurred by the Bank for the items set out in the fee
schedule attached hereto. In addition, any other expenses incurred by the Bank
at the request or with the consent of the Fund, will be reimbursed by the Fund
on behalf of the applicable Portfolio.
2.03 The Fund agrees on behalf of each of the Portfolios to pay all fees and
reimbursable expenses within five days following the mailing of the respective
billing notice. Postage for mailing of dividends, proxies, Fund reports and
other mailings to all Shareholder accounts shall be advanced to the Bank by the
Fund at least seven (7) days prior to the mailing date of such materials.
<PAGE>
Article 3 REPRESENTATIONS AND WARRANTIES OF THE BANK
The Bank represents and warrants to the Fund that:
3.01 It is a trust company duly organized and existing and in good standing
under the laws of The Commonwealth of Massachusetts.
3.02 It is duly qualified to carry on its business in The Commonwealth of
Massachusetts.
3.03 It is empowered under applicable laws and by its charter and by-laws to
enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken to authorize it to
enter into and perform this Agreement.
3.05 It has and will continue to have access to the necessary facilities,
equipment and personnel to perform its duties and obligations under this
Agreement.
Article 4 REPRESENTATIONS AND WARRANTIES OF THE FUND
The Fund represents and warrants to the Bank that:
4.01 It is a business trust duly organized and existing and in good standing
under the laws of Massachusetts.
4.02 It is empowered under applicable laws and by its Declaration of Trust and
By-Laws to enter into and perform this Agreement.
4.03 All corporate proceedings required by said Declaration of Trust and By-Laws
have been taken to authorize it to enter into and perform this Agreement.
4.04 It is an open-end and diversified management investment company registered
under the Investment Company Act of 1940.
4.05 A registration statement under the Securities Act of 1933 on behalf of each
of the Portfolios is currently effective and will remain effective, and
appropriate state securities law filings have been made and will continue to be
made, with respect to all Shares being offered for sale.
Article 5 INDEMNIFICATION
<PAGE>
5.01 The Bank shall not be responsible for, and the Fund shall on behalf of the
applicable Portfolio indemnify and hold the Bank harmless from and against, any
and all losses, damages, costs, charges, counsel fees, payments, expenses and
liability arising out of or attributable to:
(a) All actions of the Bank or its agent or subcontractors required to be
taken pursuant to this Agreement, provided that such actions are taken
in good faith and without negligence or willful misconduct.
(b) The Fund's refusal or failure to comply with the terms of this
Agreement, or which arise out of the Fund's lack of good faith,
negligence or willful misconduct or which arise out of the breach of
any representation or warranty of the Fund hereunder.
(c) The reliance on or use by the Bank or its agents or subcontractors of
information, records and documents which (i) are received by the Bank
or its agents or subcontractors and furnished to it by or on behalf of
the Fund, and (ii) have been prepared and/or maintained by the Fund or
any other person or firm on behalf of the Fund.
(d) The reliance on, or the carrying out by the Bank or its agents or
subcontractors of any instructions or requests of the Fund on behalf
of the applicable Portfolio.
(e) The offer or sale of Shares in violation of any requirement under the
federal securities laws or regulations or the securities laws or
regulations of any state that such Shares be registered in such state
or in violation of any stop order or other determination or ruling by
any federal agency or any state with respect to the offer or sale of
such Shares in such state.
5.02 The Bank shall indemnify and hold the Fund harmless from and against any
and all losses, damages, costs, charges, counsel fees, payments, expenses and
liability arising out of or attributable to any action or failure or omission to
act by the Bank as a result of the Bank's lack of good faith, negligence or
willful misconduct.
5.03 At any time the Bank may apply to any officer of the Fund for
instructions, and may consult with legal counsel with respect to any matter
arising in connection with the services to be performed by the Bank under this
Agreement, and the Bank and its agents or subcontractors shall not be liable and
shall be indemnified by the Fund on behalf of the applicable Portfolio for any
action taken or omitted by it in reliance upon such instructions or upon the
opinion of such counsel. The Bank, its agents and subcontractors shall be
protected and indemnified in acting upon any paper or document furnished by or
on behalf of the Fund, reasonably believed to be genuine and to have been signed
by the proper person or persons, or upon any instruction, information, data,
records or documents provided the Bank or its agents or subcontractors by
machine readable input, telex, CRT data entry or other similar means authorized
by the Fund, and
<PAGE>
shall not be held to have notice of any change of authority of any person, until
receipt of written notice thereof from the Fund. The Bank, its agents and
subcontractors shall also be protected and indemnified in recognizing stock
certificates which are reasonably believed to bear the proper manual or
facsimile signatures of the officers of the Fund, and the proper
countersignature of any former transfer agent or registrar, or of a co-transfer
agent or co-registrar.
5.04 In the event either party is unable to perform its obligations under the
terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage reasonably beyond its control, or other causes
reasonably beyond its control, such party shall not be liable for damages to the
other for any damages resulting from such failure to perform or otherwise from
such causes.
5.05 Neither party to this Agreement shall be liable to the other party for
consequential damages under any provision of this Agreement or for any act or
failure to act hereunder.
5.06 In order that the indemnification provisions contained in this Article 5
shall apply, upon the assertion of a claim for which either party may be
required to indemnify the other, the party seeking indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with respect to all developments concerning such claim. The party
who may be required to indemnify shall have the option to participate with the
party seeking indemnification in the defense of such claim. The party seeking
indemnification shall in no case confess any claim or make any compromise in any
case in which the other party may be required to indemnify it except with the
other party's prior written consent.
Article 6 COVENANTS OF THE FUND AND THE BANK
6.01 The Fund shall on behalf of each of the Portfolios promptly furnish to the
Bank the following:
(a) A certified copy of the resolution of the Trustees of the Fund
authorizing the appointment of the Bank and the execution and delivery
of this Agreement.
(b) A copy of the Declaration of Trust and By-Laws of the Fund and all
amendments thereto.
6.02 The Bank hereby agrees to establish and maintain facilities and procedures
reasonably acceptable to the Fund for safekeeping of stock certificates, check
forms and facsimile signature imprinting devices, if any; and for the
preparation or use, and for keeping account of, such certificates, forms and
devices.
6.03 The Bank shall keep records relating to the services to be performed
hereunder, in the form and manner as it may deem advisable. To the extent
required by Section 31 of the Investment Company Act of 1940, as amended, and
the Rules thereunder, the Bank
<PAGE>
agrees that all such records prepared or maintained by the Bank relating to the
services to be performed by the Bank hereunder are the property of the Fund and
will be preserved, maintained and made available in accordance with such Section
and Rules, and will be surrendered promptly to the Fund on and in accordance
with its request.
6.04 The Bank and the Fund agree that all books, records, information and data
pertaining to the business of the other party which are exchanged or received
pursuant to the negotiation or the carrying out of this Agreement shall remain
confidential, and shall not be voluntarily disclosed to any other person, except
as may be required by law.
6.05 In case of any requests or demands for the inspection of the Shareholder
records of the Fund, the Bank will endeavor to notify the Fund and to secure
instructions from an authorized officer of the Fund as to such inspection. The
Bank reserves the right, however, to exhibit the Shareholder records to any
person whenever it is advised by its counsel that it may be held liable for the
failure to exhibit the Shareholder records to such person.
Article 7 TERMINATION OF AGREEMENT
7.01 This Agreement may be terminated by either party upon one hundred twenty
(120) days written notice to the other.
7.02 Should the Fund exercise its right to terminate, all out-of-pocket expenses
associated with the movement of records and material will be borne by the Fund
on behalf of the applicable Portfolio(s). Additionally, the Bank reserves the
right to charge for any other reasonable expenses associated with such
termination and/or a charge equivalent to the average of three (3) months' fees.
Article 8 ADDITIONAL FUNDS
8.01 In the event that the Fund establishes one or more series of Shares in
addition to the Money Market Series with respect to which it desires to have
State Street render services as transfer agent under the terms hereof, it shall
so notify State Street in writing, and if State Street agrees in writing to
provide such services, such series of Shares shall become a Portfolio hereunder.
Article 9 ASSIGNMENT
9.01 Except as provided in Section 9.03 below, neither this Agreement nor any
rights or obligations hereunder may be assigned by either party without the
written consent of the other party.
9.02 This Agreement shall inure to the benefit of and be binding upon the
parties and their respective permitted successors and assigns.
<PAGE>
9.03 The Bank may, without further consent on the part of the Fund, subcontract
for the performance hereof with (i) Boston Financial Data Services, Inc., a
Massachusetts corporation ("BFDS") which is duly registered as a transfer agent
pursuant to Section 17A(c)(1) of the Securities Exchange Act of 1934 ("Section
17A(c)(1)"), (ii) a BFDS subsidiary duly registered as a transfer agent pursuant
to Section 17A(c)(1) or (iii) a BFDS affiliate; provided, however, that the Bank
shall be as fully responsible to the Fund for the acts and omissions of any
subcontractor as it is for its own acts and omissions.
Article 10 AMENDMENT
10.01 This Agreement may be amended or modified by a written agreement
executed by both parties and authorized or approved by a resolution of the
Trustees of the Fund.
Article 11 MASSACHUSETTS LAW TO APPLY
11.01 This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of The Commonwealth of
Massachusetts.
Article 12 MERGER OF AGREEMENT
12.01 This Agreement constitutes the entire agreement between the parties
hereto and supersedes any prior agreement with respect to the subject matter
hereof whether oral or written.
Article 13 LIMITATION OF LIABILITY
13.01 The Master Trust Agreement dated October 3, 1987, as amended from time
to time, establishing the Fund, which is hereby referred to and a copy of which
is on file with the Secretary of The Commonwealth of Massachusetts, provides
that the name The Seven Seas Series Fund means the Trustees from time to time
serving (as Trustees but not personally) under said Master Trust Agreement. It
is expressly acknowledged and agreed that the obligations of the Fund hereunder
shall not be binding upon any of the Shareholders, Trustees, officers,
employees, or agents of the Fund, personally, but shall bind only the trust
property of the Fund, as provided in its Master Trust Agreement. The execution
and delivery of this Agreement have been authorized by the Trustees of the Fund
and signed by an officer of the Fund, acting as such, and neither such
authorization by such Trustees nor such execution and delivery by such officer
shall be deemed to have been made by any of them individually or to impose any
liability on any of them personally, but shall bind only the trust property of
the Fund as provided in its Master Trust Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in their names and on their behalf under their seals by and through their duly
authorized officers, as of the day and year first above written.
THE SEVEN SEAS SERIES FUND
By: /S/ GEORGE W. WEBER
Vice President
ATTEST:
/S/ MICHAEL CACCESE
Secretary
STATE STREET BANK AND TRUST COMPANY
By: /S/ SIGNATURE ILLEGIBLE
Vice President
ATTEST:
/S/ SIGNATURE ILLEGIBLE
Assistant Secretary
<PAGE>
STATE STREET BANK AND TRUST COMPANY
-----------------------------------
TRANSFER AGENT FEE SCHEDULE
---------------------------
THE SEVEN SEAS SERIES MONEY MARKET FUND
---------------------------------------
SHAREHOLDER ACCOUNTING
- ----------------------
$5.00 for each shareholder transaction
OUT-OF-POCKET EXPENSES AT COST
Includes, but is not limited to: postage, transfer fees, stamp duties,
government taxes, wire fees, telexes, freight, telephones, etc.
Approved: /s/ George W. Weber
--------------------
The Seven Seas Series Money Market Fund
Date: July 17, 1990
Approved: /s/ SIGNATURE ILLEGIBLE
------------------------
State Street Bank and Trust Company
Date: July 10, 1990
Effective Date: June 22, 1990
<PAGE>
LETTER AGREEMENT
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02101
Dear Sirs:
Pursuant to Article 8 of the Transfer Agency and Service Agreement between The
Seven Seas Series Fund and State Street Bank and Trust Company, dated as of
April 11, 1988, The Seven Seas Series Fund advises you that it is creating a new
series to be named The Seven Seas Series US Government Money Market Fund (the
"Fund") and that The Seven Seas Series Fund desires State Street Bank and Trust
Company to serve as transfer agent with respect to the Fund pursuant to the
terms and conditions of the Transfer Agency and Service Agreement.
Notwithstanding anything to the contrary in Article 7, the initial term of the
Transfer Agency and Service Agreement with respect to the Fund shall be until
April 12, 1992.
Please acknowledge your acceptance of acting as Transfer Agent to the Fund by
executing this letter agreement in the space provided below and then returning
it to the undersigned.
Sincerely,
THE SEVEN SEAS SERIES FUND
By: /s/ Lynn L. Anderson
---------------------
Lynn L. Anderson
President and Chief Executive Officer
ACKNOWLEDGED AND ACCEPTED
- -------------------------
State Street Bank and Trust Company
By: /s/ Gustaff Fish, Jr.
----------------------
<PAGE>
LETTER AGREEMENT
January 8, 1992
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02101
Dear Sirs:
Pursuant to Article 8 of the Transfer Agency and Service Agreement between The
Seven Seas Series Fund and State Street Bank and Trust Company, dated as of
April 11, 1988, as amended, The Seven Seas Series Fund advises you that it is
creating six new series to be named The Seven Seas Series Short Term Government
Bond Fund, The Seven Seas Series S&P 500 Index Fund, The Seven Seas Series S&P
Midcap Index Fund, The Seven Seas Series Matrix Synthesis Fund, The Seven Seas
Series International European Index Fund, and The Seven Seas Series
International Pacific Index Fund (the "New Funds") and that The Seven Seas
Series Fund desires State Street Bank and Trust Company to serve as Transfer
Agent with respect to the New Funds pursuant to the terms and conditions of the
Transfer Agency and Service Agreement.
Notwithstanding anything to the contrary in Article 7, the initial term of the
Transfer Agency and Service Agreement with respect to the New Funds shall be
until April 12, 1993.
Please acknowledge your acceptance of acting as Transfer Agent to the New Funds
by executing this letter agreement in the space provided below and then
returning it to the undersigned.
Sincerely,
THE SEVEN SEAS SERIES FUND
By: /s/ George W. Weber
--------------------
George W. Weber
Senior Vice President - Operations
ACKNOWLEDGED AND ACCEPTED
- -------------------------
State Street Bank and Trust Company
By: /s/
------------------------
<PAGE>
LETTER AGREEMENT
July 8, 1992
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Dear Sirs:
Pursuant to Article 8 of the Transfer Agency and Service Agreement between The
Seven Seas Series Fund and State Street Bank and Trust Company, dated as of
April 11, 1988, as amended, The Seven Seas Series Fund advises you that it is
creating two new series to be named The Seven Seas Series Bond Market Fund and
The Seven Seas Series Yield Plus Fund (the "New Funds") and that The Seven Seas
Series Fund desires State Street Bank and Trust Company to serve as Transfer
Agent with respect to the New Funds pursuant to the terms and conditions of the
Transfer Agency and Service Agreement.
Notwithstanding anything to the contrary in Article 7, the initial term of the
Transfer Agency and Service Agreement with respect to the New Funds shall be
until April 12, 1994.
Please acknowledge your acceptance of acting as Transfer Agent to the New Funds
by executing this letter agreement in the space provided below and then
returning it to the undersigned.
Sincerely,
THE SEVEN SEAS SERIES FUND
By: /s/ George W. Weber
--------------------
George W. Weber
Senior Vice President - Operations
ACKNOWLEDGED AND ACCEPTED
- -------------------------
State Street Bank and Trust Company
By: /s/
<PAGE>
LETTER AGREEMENT
The Seven Seas Series US Treasury Money Market Fund
The Seven Seas Series US Treasury Obligations Fund
Transfer Agency and Service Agreement
January 6, 1993
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Dear Sirs:
Pursuant to Article 8 of the Transfer Agency and Service Agreement between The
Seven Seas Series Fund and State Street Bank and Trust Company, dated as of
April 11, 1988, as amended, The Seven Seas Series Fund advises you that it is
creating two new series to be named The Seven Seas Series US Treasury Money
Market Fund and The Seven Seas Series US Treasury Obligations Fund (the "New
Funds") and that The Seven Seas Series Fund desires State Street Bank and Trust
Company to serve as Transfer Agent with respect to the New Funds pursuant to the
terms and conditions of the Transfer Agency and Service Agreement.
Notwithstanding anything to the contrary in Article 7, the initial term of the
Transfer Agency and Service Agreement with respect to the New Funds shall be
until April 12, 1993.
Please acknowledge your acceptance of acting as Transfer Agent to the New Funds
by executing this letter agreement in the space provided below and then
returning it to the undersigned.
Sincerely,
THE SEVEN SEAS SERIES FUND
By: /s/ George W. Weber
--------------------
George W. Weber
Senior Vice President - Operations
ACKNOWLEDGED AND ACCEPTED
- -------------------------
State Street Bank and Trust Company
By: /s/
------------------------
Vice President
<PAGE>
LETTER AGREEMENT
The Seven Seas Series Growth and Income Fund
The Seven Seas Series Intermediate Fund
Transfer Agency and Service Agreement
April 7, 1993
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Dear Sirs:
Pursuant to Article 8 of the Transfer Agency and Service Agreement between The
Seven Seas Series Fund and State Street Bank and Trust Company, dated April 11,
1988, as amended, The Seven Seas Series Fund advises you that it is creating two
new series to be named The Seven Seas Series Growth and Income Fund and The
Seven Seas Series Intermediate Fund (the "New Funds") and that The Seven Seas
Series Fund desires State Street Bank and Trust Company to serve as Transfer
Agent with respect to the New Funds pursuant to the terms and conditions of the
Transfer Agency and Service Agreement.
Notwithstanding anything to the contrary in Article 7, the initial term of the
Transfer Agency and Service Agreement with respect to the New Funds shall be
until April 12, 1994.
Please acknowledge your acceptance of acting as Transfer Agent to the New Funds
by executing this letter agreement in the space provided below and then
returning it to the undersigned.
Sincerely
THE SEVEN SEAS SERIES FUND
By: /s/ Lynn L. Anderson
---------------------
Lynn L. Anderson
President
ACKNOWLEDGED AND ACCEPTED
- -------------------------
State Street Bank and Trust Company
By: /s/ Timothy B. Harbert
-----------------------
Senior Vice President
<PAGE>
LETTER AGREEMENT
The Seven Seas Series Prime Money Market Portfolio
The Seven Seas Series Emerging Markets Fund
Transfer Agency and Service Agreement
January 19, 1994
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Dear Sirs:
Pursuant to Article 8 of the Transfer Agency and Service Agreement between The
Seven Seas Series Fund and State Street Bank and Trust Company, dated as of
April 11, 1988, as amended, The Seven Seas Series Prime Money Market Portfolio
and The Seven Seas Series Emerging Markets Fund (the "Portfolios") and that The
Seven Seas Series Fund desires State Street Bank and Trust Company to serve as
Transfer Agent with respect to the Portfolios pursuant to the terms and
conditions of the Transfer Agency and Service Agreement.
Notwithstanding anything to the contrary in Article 7, the initial term of the
Transfer Agency and Service Agreement with respect to the Portfolios shall be
until April 6, 1994.
Please acknowledge your acceptance of acting as Transfer Agent to the Portfolios
by executing this letter agreement in the space provided below and then
returning it to the undersigned.
Sincerely,
THE SEVEN SEAS SERIES FUND
By: /s/ Lynn L. Anderson
---------------------
Lynn L. Anderson
President
ACKNOWLEDGED AND ACCEPTED
- -------------------------
State Street Bank and Trust Company
By: /s/ Gustaff Fish, Jr.
----------------------
Senior Vice President
<PAGE>
LETTER AGREEMENT
The Seven Seas Series Tax Free Money Market Fund
Transfer Agency and Service Agreement
July 13, 1994
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Dear Sirs:
Pursuant to Article 8 of the Transfer Agency and Service Agreement between The
Seven Seas Series Fund and State Street Bank and Trust Company, dated as of
April 11, 1988, as amended, The Seven Seas Series Fund advises you that it is
creating a new series to be named The Seven Seas Series Tax Free Money Market
Fund, Class A, Class B and Class C ("Tax Free Fund") and that The Seven Seas
Series Fund desires State Street Bank and Trust Company to serve as Transfer
Agent with respect to the Tax Free Fund pursuant to the terms and conditions of
the Transfer Agency and Service Agreement.
Notwithstanding anything to the contrary in Article 7, the initial term of the
Transfer Agency and Service Agreement with respect to the Tax Free Fund shall be
until April 12, 1995.
Please acknowledge your acceptance of acting as Transfer Agent to the Tax Free
Fund by executing this letter agreement in the space provided below and then
returning it to the undersigned.
Sincerely,
THE SEVEN SEAS SERIES FUND
By: /s/ Lynn L. Anderson
---------------------
Lynn L. Anderson
President
ACKNOWLEDGED AND ACCEPTED
- -------------------------
State Street Bank and Trust Company
By: /s/ Nicholas A. Lopardo
------------------------
Nicholas A. Lopardo
Executive Vice President
<PAGE>
LETTER AGREEMENT
The Seven Seas Series Real Estate Fund
The Seven Seas Series Small Cap Fund
The Seven Seas Series Active International Fund
Transfer Agency and Service Agreement
October 25, 1994
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Ladies and Gentlemen:
Pursuant to Article 8 of the Transfer Agency and Service Agreement between The
Seven Seas Series Fund and State Street Bank and Trust Company, dated as of
April 11, 1988, as amended, The Seven Seas Series Fund advises you that (1) it
is creating a new series to be named The Seven Seas Series Real Estate Equity
Fund, (2) it has changed the investment objective and policies of The Seven Seas
Series Midcap Index Fund and renamed it The Seven Seas Series Small Cap Fund,
and (3) it has changed the investment objective and policies of The Seven Seas
Series International European Index Fund and renamed it The Seven Seas Series
Active International Fund (collectively, the "Funds"), and that The Seven Seas
Series Fund desires State Street Bank and Trust Company to serve as Transfer
Agent with respect to the Funds pursuant to the terms and conditions of the
Transfer Agency and Service Agreement.
Notwithstanding anything to the contrary in Article 7, the initial term of the
Transfer Agency and Service Agreement with respect to the Funds shall be until
April 12, 1995.
Please acknowledge your acceptance of acting as Transfer Agent to the Funds by
executing this letter agreement in the space provided below and then returning
it to the undersigned.
Sincerely,
THE SEVEN SEAS SERIES FUND
By: /s/ Lynn L. Anderson
---------------------
Lynn L. Anderson
President
ACKNOWLEDGED AND ACCEPTED
- -------------------------
State Street Bank and Trust Company
By: /s/ Nicholas A. Lopardo
------------------------
Executive Vice President
<PAGE>
STATE STREET BANK AND TRUST COMPANY
-----------------------------------
TRANSFER AGENT FEE SCHEDULE
---------------------------
THE SEVEN SEAS SERIES FUNDS
---------------------------
SHAREHOLDER ACCOUNTING
----------------------
$4.00 for each shareholder transaction
OUT-OF-POCKET EXPENSES AT COST
Includes, but is not limited to: postage, transfer fees, stamp duties,
government taxes, wire fees, telexes, freight, telephones, etc.
Approved: /S/ SIGNATURE ILLEGIBLE
The Seven Seas Series Funds
Date: 02/21/95
Approved: /S/ GUSTAFF FISH, JR.
State Street Bank and Trust Company
Date: 02/14/95
Effective Date: January 1, 1995
<PAGE>
STATE STREET BANK AND TRUST COMPANY
TRANSFER AGENT FEE SCHEDULE
THE SEVEN SEAS SERIES FUNDS
SHAREHOLDER ACCOUNTING
$2.00 for each shareholder transaction
OUT-OF-POCKET EXPENSES AT COST
Includes, but is not limited to: postage, transfer fees, stamp duties,
government taxes, wire fees, telexes, freight, telephones, etc.
Approved: /s/ Lynn L. Anderson
-----------------------------
The Seven Seas Series Funds
Date: July 19, 1995
Approved: /s/ Gustaff V. Fish, JR.
-----------------------------------
State Street Bank and Trust Company
Date: June 30, 1995
Effective Date: July 1, 1995
<PAGE>
CUSTODIAN CONTRACT
Between
THE SEVEN SEAS SERIES FUND
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
-----------------
PAGE
----
1. Employment of Custodian and Property to be Held By It . . . . . . 1
2. Duties of the Custodian with Respect to Property of the Fund
Held by the Custodian . . . . . . . . . . . . . . . . . . . . . . 2
2.1 Holding Securities . . . . . . . . . . . . . . . . . . . . 2
2.2 Delivery of Securities . . . . . . . . . . . . . . . . . . 3
2.3 Registration of Securities . . . . . . . . . . . . . . . . 8
2.4 Bank Accounts. . . . . . . . . . . . . . . . . . . . . . . 9
2.5 Payments for Shares. . . . . . . . . . . . . . . . . . . . 9
2.6 Availability of Federal Funds. . . . . . . . . . . . . . . 10
2.7 Collection of Income . . . . . . . . . . . . . . . . . . . 10
2.8 Payment of Fund Monies . . . . . . . . . . . . . . . . . . 11
2.9 Liability for Payment in Advance of Receipt
of Securities Purchased. . . . . . . . . . . . . . . . . . 14
2.10 Payments for Repurchases or Redemptions
of Shares of the Fund. . . . . . . . . . . . . . . . . . . 14
2.11 Appointment of Agents. . . . . . . . . . . . . . . . . . . 15
2.12 Deposit of Fund Assets in Securities System. . . . . . . . 16
2.12A Fund Assets Held in the Custodian's Direct Paper System. . 19
2.13 Segregated Account . . . . . . . . . . . . . . . . . . . . 21
2.14 Ownership Certificates for Tax Purposes. . . . . . . . . . 22
2.15 Proxies. . . . . . . . . . . . . . . . . . . . . . . . . . 22
2.16 Communications Relating to Portfolio Securities. . . . . . 23
2.17 Authorized Persons . . . . . . . . . . . . . . . . . . . . 23
2.18 Proper Instructions. . . . . . . . . . . . . . . . . . . . 24
2.19 Actions Permitted Without Express Authority. . . . . . . . 25
2.20 Evidence of Authority. . . . . . . . . . . . . . . . . . . 26
2.21 Affiliation Between Fund and Custodian . . . . . . . . . . 26
2.22 Persons Having Access to Assets of the Portfolios. . . . . 27
3. Duties of Custodian With Respect to the Books of Account
and Calculation of Net Asset Value and Net Income . . . . . . . . 28
4. Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
5. Opinion of Fund's Independent Accountants . . . . . . . . . . . . 29
6. Reports to Fund by Independent Public Accountants . . . . . . . . 29
7. Compensation of Custodian . . . . . . . . . . . . . . . . . . . . 30
8. Responsibility of Custodian . . . . . . . . . . . . . . . . . . . 30
9. Effective Period, Termination and Amendment . . . . . . . . . . . 32
-2-
<PAGE>
10. Successor Custodian . . . . . . . . . . . . . . . . . . . . . . . 33
11. Interpretive and Additional provisions. . . . . . . . . . . . . . 35
12. Additional Funds. . . . . . . . . . . . . . . . . . . . . . . . . 35
13. Massachusetts Law to Apply. . . . . . . . . . . . . . . . . . . . 36
14. Prior Contracts . . . . . . . . . . . . . . . . . . . . . . . . . 36
15. Limitation of Liability . . . . . . . . . . . . . . . . . . . . . 36
-3-
<PAGE>
CUSTODIAN CONTRACT
This Contract between The Seven Seas Series Fund, a business trust organized and
existing under the laws of Massachusetts, having its principal place of business
at 1201 Pacific Avenue, Tacoma, Washington 98402, hereinafter called the "Fund,"
and State Street Bank and Trust company, a Massachusetts trust company, having
its principal place of business at 225 Franklin Street, Boston, Massachusetts
02110, hereinafter called the "Custodian."
WITNESSETH:
WHEREAS, the Fund is authorized to issue shares in separate series, with each
such series representing interests in a separate portfolio of securities and
other assets; and
WHEREAS, the Fund intends to initially offer shares in one series, The Seven
Seas Series Money Market Fund (such series together with all other series
subsequently established by the Fund and made subject to this Contract in
accordance with paragraph 12, being herein referred to as the "Portfolio(s)");
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. EMPLOYMENT OF CUSTODIAN AND PROPERTY TO BE HELD BY IT
The Fund hereby employs the Custodian as the custodian of the assets of the
Portfolios of the Fund pursuant to the provisions of the Declaration of Trust.
The Fund on behalf of the Portfolio(s) agrees to deliver to the Custodian all
securities and cash of the Portfolios, and all payments of income, payments of
principal or capital distributions received by it with respect to all securities
owned by the Portfolio(s) from time to time, and the cash consideration received
by it for such new or treasury shares of beneficial interest of the Fund
representing interests in the Portfolios, ("Shares") as may be issued or sold
from time to time. The Custodian shall not be responsible for any property of a
Portfolio held or received by the Portfolio and not delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Section 2.18), the
Custodian shall on behalf of the applicable Portfolio(s) from time to time
employ one or more sub-custodians, but only in accordance with an applicable
vote by the Board of Trustees of the Fund on behalf of the applicable
Portfolio(s), and provided that the Custodian shall have no more or less
responsibility or liability to the Fund on account of any actions or omissions
of any sub-custodian so employed than any such sub-custodian has to the
Custodian.
2. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE FUND HELD BY THE
CUSTODIAN
2.1 HOLDING SECURITIES. The Custodian shall hold and physically segregate for
the account of each Portfolio all non-cash property, including all
securities owned by
-4-
<PAGE>
such Portfolio, other than (a) securities which are maintained pursuant to
Section 2.12 in a clearing agency which acts as a securities depository or in a
book-entry system authorized by the U.S. Department of Treasury, collectively
referred to herein as "Securities System" and (b) commercial paper of an issuer
for which State Street Bank and Trust Company acts as issuing and paying agent
("Direct Paper") which is deposited and/or maintained in the Direct Paper System
of the Custodian pursuant to Section 2.12A.
2.2 DELIVERY OF SECURITIES. The Custodian shall release and deliver securities
owned by a Portfolio held by the Custodian or in a Securities System account of
the Custodian or in the Custodian's Direct Paper book entry system account
("Direct Paper System Account") only upon receipt of Proper Instructions from
the Fund on behalf of the applicable Portfolio, which may be continuing
instructions when deemed appropriate by the parties, and only in the following
cases:
1. Upon sale of such securities for the account of the Portfolio and receipt
of payment therefor;
2. Upon the receipt of payment in connection with any repurchase agreement
related to such securities entered into by the Portfolio;
3. In the case of a sale effected through a Securities System, in accordance
with the provisions of Section 2.12 hereof;
4. To the depository agent in connection with tender or other similar offers
for securities of the Portfolio;
5. To the issuer thereof or its agent when such securities are called,
redeemed, retired or otherwise become payable; provided that, in any such case,
the cash or other consideration is to be delivered to the Custodian;
6. To the issuer thereof, or its agent, for transfer into the name of the
Portfolio or into the name of any nominee or nominees of the Custodian or into
the name or nominee name of any agent appointed pursuant to Section 2.11 or into
the name or nominee name of any sub-custodian appointed pursuant to Article 1;
or for exchange for a different number of bonds, certificates or other evidence
representing the same aggregate face amount or number of units; PROVIDED that,
in any such case, the new securities are to be delivered to the Custodian;
7. Upon the sale of such securities for the account of the Portfolio, to the
broker or its clearing agent, against a receipt, for examination in accordance
with "street delivery" custom; provided that in any such case, the Custodian
shall have no responsibility or liability for any loss arising from the delivery
of such securities prior to receiving payment for such securities except as may
arise from the Custodian's own negligence or willful misconduct;
-5-
<PAGE>
8. For exchange or conversion pursuant to any plan of merger, consolidation,
recapitalization, reorganization or readjustment of the securities of the issuer
of such securities, or pursuant to provisions for conversion contained in such
securities, or pursuant to any deposit agreement; provided that, in any such
case, the new securities and cash, if any, are to be delivered to the Custodian;
9. In the case of warrants, rights or similar securities, the surrender
thereof in the exercise of such warrants, rights or similar securities or the
surrender of interim receipts of temporary securities for definitive securities;
provided that, in any such case, the new securities and cash, if any, are to be
delivered to the Custodian;
10. For delivery in connection with any loans of securities made by the
Portfolio, BUT ONLY against receipt of adequate collateral as agreed upon from
time to time by the Custodian and the Fund on behalf of the Portfolio, which may
be in the form of cash or obligations issued by the United States Government,
its agencies or instrumentalities, except that in connection with any loans for
which collateral is to be credited to the Custodian's account in the book-entry
system authorized by the U.S. Department of the Treasury, the Custodian will not
be held liable or responsible for the delivery of securities owned by the
Portfolio prior to the receipt of such collateral;
11. For delivery as security in connection with any borrowings by the Fund on
behalf of the Portfolio requiring a pledge of assets by the Fund on behalf of
the Portfolio, BUT ONLY against receipt of amounts borrowed;
12. For delivery in accordance with the provisions of any agreement among the
Fund on behalf of the Portfolio, the Custodian and a broker-dealer registered
under the Securities Exchange Act of 1934 (the "Exchange Act") and a member of
The National Association of Securities Dealers, Inc. ("NASD"), relating to
compliance with the rules of The Options Clearing Corporation and of any
registered national securities exchange, or of any similar organization or
organizations, regarding escrow or other arrangements in connection with
transactions by the Portfolio of the Fund;
13. For delivery in accordance with the provisions of any agreement among the
Fund on behalf of the Portfolio, the Custodian, and a Futures Commission
Merchant registered under the Commodity Exchange Act, relating to compliance
with the rules of the Commodity Futures Trading Commission and/or any Contract
Market, or any similar organization or organizations, regarding account deposits
in connection with transactions by the Portfolio of the Fund;
14. Upon receipt of instructions from the transfer agent ("Transfer Agent") for
the Fund, for delivery to such Transfer Agent or to the holders of shares in
connection with distributions in kind, as may be described from time to time in
the currently effective prospectus and statement of additional information of
the Fund, related to the Portfolio ("Prospectus"), in satisfaction of requests
by holders of Shares for repurchase or redemption; and
-6-
<PAGE>
15. For any other proper corporate purpose, BUT ONLY upon receipt of, in
addition to Proper Instructions from the Fund on behalf of the applicable
Portfolio, a certified copy of a resolution of the Board of Trustees or of
the Executive Committee signed by an officer of the Fund and certified by the
Secretary or an Assistant Secretary, specifying the securities of the
Portfolio to be delivered, setting forth the purpose for which such delivery
is to be made, declaring such purpose to be a proper corporate purpose, and
naming the person or persons to whom delivery of such securities shall be
made.
2.3 REGISTRATION OF SECURITIES. Securities held by the Custodian (other than
bearer securities) shall be registered in the name of the Portfolio or in the
name of any nominee of the Fund on behalf of the Portfolio or of any nominee
of the Custodian which nominee shall be assigned exclusively to the
Portfolio, UNLESS the Fund has authorized in writing the appointment of a
nominee to be used in common with other registered investment companies
having the same investment adviser as the Portfolio, or in the name or
nominee name of any agent appointed pursuant to Section 2.11 or in the name
or nominee name of any sub-custodian appointed pursuant to Article 1. All
securities accepted by the Custodian on behalf of the Portfolio under the
terms of this Contract shall be in "street name" or other good delivery form.
2.4 BANK ACCOUNTS. The Custodian shall open and maintain a separate bank
account or accounts in the name of each Portfolio of the Fund, subject only
to draft or order by the Custodian acting pursuant to the terms of this
Contract, and shall hold in such account or accounts, subject to the
provisions hereof, all cash received by it from or for the account of the
Portfolio, other than cash maintained by the Portfolio in a bank account
established and used in accordance with Rule 17f-3 under the Investment
Company Act of 1940. Funds held by the Custodian for a Portfolio may be
deposited by it to its credit as Custodian in the Banking Department of the
Custodian or in such other banks or trust companies as it may in its
discretion deem necessary or desirable; PROVIDED, however, that every such
bank or trust company shall be qualified to act as a custodian under the
Investment Company Act of 1940 and that each such bank or trust company and
the funds to be deposited with each such bank or trust company shall on
behalf of each applicable Portfolio be approved by vote of a majority of
the Board of Trustees of the Fund. Such funds shall be deposited by the
Custodian in its capacity as Custodian and shall be withdrawable by the
Custodian only in that capacity.
2.5 PAYMENTS FOR SHARES. The Custodian shall receive from the distributor for
the Shares or from the Transfer Agent of the Fund and deposit into the
account of the appropriate Portfolio such payments as are received for
Shares of that Portfolio issued or sold from time to time by the Fund. The
Custodian will provide timely notification to the Fund on behalf of each
such Portfolio and the Transfer Agent of any receipt by it of payments for
Shares of such Portfolio.
-7-
<PAGE>
2.6 AVAILABILITY OF FEDERAL FUNDS. Upon mutual agreement between the Fund on
behalf of each applicable Portfolio and the Custodian, the Custodian shall,
upon the receipt of Proper Instructions from the Fund on behalf of a
Portfolio, make federal funds available to such Portfolio as of specified
times agreed upon from time to time by the Fund and the Custodian in the
amount of checks received in payment for Shares of such Portfolio which are
deposited into the Portfolio's account.
2.7 COLLECTION OF INCOME. The Custodian shall collect on a timely basis all
income and other payments with respect to registered securities held
hereunder to which each Portfolio shall be entitled either by law or
pursuant to custom in the securities business, and shall collect on a
timely basis all income and other payments with respect to bearer
securities if, on the date of payment by the issuer, such securities are
held by the Custodian or its agent thereof and shall credit such income, as
collected, to such Portfolio's custodian account. Without limiting the
generality of the foregoing, the Custodian shall detach and present for
payment all coupons and other income items requiring presentation as and
when they become due and shall collect interest when due on securities held
hereunder. Income due each Portfolio on securities loaned pursuant to the
Provisions of Section 2.2 (10) shall be the responsibility of the Fund.
The Custodian will have no duty or responsibility in connection therewith,
other than to provide the Fund with such information or data as may be
necessary to assist the Fund in arranging for the timely delivery to the
Custodian of the income to which the Portfolio is properly entitled.
2.8 PAYMENT OF FUND MONIES. Upon receipt of Proper Instructions from the Fund
on behalf of the applicable Portfolio, which may be continuing instructions
when deemed appropriate by the parties, the Custodian shall pay out monies
of a Portfolio in the following cases only:
1. Upon the purchase of securities, options, futures contracts or options
on futures contracts for the account of the Portfolio but only (a) against
the delivery of such securities or evidence of title to such options,
futures contracts or options on futures contracts to the Custodian (or any
bank, banking firm or trust company doing business in the United States or
abroad which is qualified under the Investment Company Act of 1940, as
amended, to act as a custodian and has been designated by the Custodian as
its agent for this purpose) registered in the name of the Portfolio or in
the name of a nominee of the Custodian referred to in Section 2.3 hereof or
in proper form for transfer; (b) in the case of a purchase effected through
a Securities System, in accordance with the conditions set forth in Section
2.12 hereof; (c) in the case of a purchase involving the Direct Paper
System, in accordance with the conditions set forth in Section 2.12A; (d)
in the case of repurchase agreements entered into between the Fund on
behalf of the Portfolio and the Custodian, or another bank, or a broker-
dealer which is a member of NASD, (i) against delivery of the securities
either in certificate form or through an entry crediting the Custodian's
account at the Federal Reserve Bank with such securities or (ii) against
delivery of the receipt evidencing purchase by the Portfolio of securities
owned by the Custodian along with written evidence of the agreement
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by the Custodian to repurchase such securities from the Portfolio or (e)
for transfer to a time deposit account of the Fund in any bank whether
domestic or foreign; such transfer may be effected prior to receipt of a
confirmation from a broker and/or the applicable bank pursuant to Proper
Instructions from the Fund as defined in Section 2.18;
2. In connection with conversion, exchange or surrender of securities
owned by the Portfolio as set forth in Section 2.2 hereof;
3. For the redemption or repurchase of Shares issued by the Portfolio as
set forth in Section 2.10 hereof;
4. For the payment of any expense or liability incurred by the Portfolio,
including but not limited to the following payments for the account of the
Portfolio: interest, taxes, management, accounting, transfer agent and
legal fees, and operating expenses of the Fund whether or not such expenses
are to be in whole or part capitalized or treated as deferred expenses;
5. For the payment of any dividends on Shares of the Portfolio declared
pursuant to the governing documents of the Fund;
6. For payment of the amount of dividends received in respect of
securities sold short.
7. For any other proper purpose, BUT ONLY upon receipt of, in addition to
Proper Instructions from the Fund on behalf of the Portfolio, a certified
copy of a resolution of the Board of Trustees or of the Executive Committee
of the Fund signed by an officer of the Fund and certified by its Secretary
or an Assistant Secretary, specifying the amount of such payment, setting
forth the purpose for which such payment is to be made, declaring such
purpose to be a proper purpose, and naming the person or persons to whom
such payment is to be made.
2.9 LIABILITY FOR PAYMENT IN ADVANCE OF RECEIPT OF SECURITIES PURCHASED.
Except as specifically stated otherwise in this Contract, in any and every
case where payment for purchase of securities for the account of a
Portfolio is made by the Custodian in advance of receipt of the securities
purchased in the absence of specific written instructions from the Fund on
behalf of such Portfolio to so pay in advance, the Custodian shall be
absolutely liable to the Fund for such securities to the same extent as if
the securities had been received by the Custodian.
2.10 PAYMENTS FOR REPURCHASES OR REDEMPTIONS OF SHARES OF THE FUND. From
such funds as may be available for the purpose but subject to the
limitations of the Declaration of Trust and any applicable votes of the
Board of Trustees of the Fund pursuant thereto, the Custodian shall, upon
receipt of instructions from the Transfer Agent, make funds available for
payment to holders of Shares who have delivered to the Transfer Agent a
request for redemption or repurchase of their
Shares. In connection with the redemption or repurchase of Shares of a
Portfolio,
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the Custodian is authorized upon receipt of instructions from the Transfer
Agent to wire funds to or through a commercial bank designated by the
redeeming shareholders. In connection with the redemption or repurchase of
Shares of the Fund, the Custodian shall honor checks drawn on the Custodian
by a holder of Shares, which checks have been furnished by the Fund to the
holder of Shares, when presented to the Custodian in accordance with such
procedures and controls as are mutually agreed upon from time to time
between the Fund and the Custodian.
2.11 APPOINTMENT OF AGENTS. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act of 1940,
as amended, to act as a custodian, as its agent to carry out such of the
provisions of this Article 2 as the Custodian may from time to time direct;
PROVIDED, however, that the appointment of any agent shall not relieve the
Custodian of its responsibilities or liabilities hereunder.
2.12 DEPOSIT OF FUND ASSETS IN SECURITIES SYSTEMS. The Custodian may deposit
and/or maintain securities owned by a Portfolio in a clearing agency
registered with the Securities and Exchange Commission under Section 17A of
the Securities Exchange Act of 1934, which acts as a securities depository,
or in the book-entry system authorized by the U.S. Department of the
Treasury and certain federal agencies, collectively referred to herein as
"Securities System" in accordance with applicable Federal Reserve Board and
Securities and Exchange Commission rules and regulations, if any, and
subject to the following provisions:
1. The Custodian may keep securities of the Portfolio in a Securities
System provided that such securities are represented in an account
("Account") of the Custodian in the Securities System which shall not
include any assets of the Custodian other than assets held as a fiduciary,
custodian or otherwise for customers;
2. The records of the Custodian with respect to securities of the
Portfolio which are maintained in a Securities System shall identify by
book-entry those securities belonging to the Portfolio;
3. The Custodian shall pay for securities purchased for the account of
the Portfolio upon (i) receipt of advice from the Securities System that
such securities have been transferred to the Account, and (ii) the making
of an entry on the records of the Custodian to reflect such payment and
payment for the account of the Portfolio. Copies of all advices from the
Securities System of transfers of securities for the account of the
Portfolio shall identify the Portfolio, be maintained for the Portfolio by
the Custodian and be provided to the Fund at its request. Upon request,
the custodian shall furnish the Fund on behalf of the Portfolio
confirmation of each transfer to or from the account of the Portfolio in
the form of a written advice or notice and shall furnish to the Fund on
behalf of the Portfolio
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copies of daily transaction sheets reflecting each day's transactions in
the Securities System for the account of the Portfolio.
4. The Custodian shall provide the Fund for the Portfolio with any report
obtained by the Custodian on the Securities System's accounting system,
internal accounting control and procedures for safeguarding securities
deposited in the Securities System;
5. The Custodian shall have received from the Fund on behalf of the
Portfolio the initial or annual certificate, as the case may be, required
by Article 9 hereof;
6. Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for the benefit of the Portfolio for
any loss or damage to the Portfolio resulting from use of the Securities
System by reason of any negligence, misfeasance or misconduct of the
Custodian or any of its agents or of any of its or their employees or from
failure of the Custodian or any such agent to enforce effectively such
rights as it may have against the Securities System; at the election of the
Fund, it shall be entitled to be subrogated to the rights of the Custodian
with respect to any claim against the Securities System or any other person
which the Custodian may have as a consequence of any such loss or damage if
and to the extent that the Portfolio has not been made whole for any such
loss or damage.
2.12A FUND ASSETS HELD IN THE CUSTODIAN'S DIRECT PAPER SYSTEM. The Custodian
may deposit and/or maintain securities owned by a Portfolio in the Direct
Paper System of the Custodian subject to the following provisions:
1. No transaction relating to securities in the Direct Paper System will
be effected in the absence of Proper Instructions from the Fund on behalf
of the Portfolio;
2. The Custodian may keep securities on the Portfolio in the Direct Paper
System only if such securities are represented in an account ("Account") of
the Custodian in the Direct Paper System which shall not include any assets
of the Custodian other than assets held as a fiduciary, custodian or
otherwise for customers;
3. The records of the Custodian with respect to securities of the
Portfolio which are maintained in the Direct Paper System shall identify by
book-entry those securities belonging to the Portfolio;
4. The Custodian shall pay for securities purchased for the account of
the Portfolio upon the making of an entry on the records of the Custodian
to reflect such payment and transfer of securities to the account of the
Portfolio. The Custodian shall transfer securities sold for the account of
the Portfolio upon the making of an entry of the records of the Custodian
to reflect such transfer and receipt of payment for the account of the
Portfolio;
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5. The Custodian shall furnish the Fund on behalf of the Portfolio
confirmation of each transfer to or from the account of the Portfolio, in
the form of a written advice or notice, of Direct Paper on the next
business day following such transfer and shall furnish to the Fund on
behalf of the Portfolio copies of daily transaction sheets reflecting each
day's transaction in the Securities System for the account of the
Portfolio;
6. The Custodian shall provide the Fund on behalf of the Portfolio with
any report on its system of internal accounting control as the Fund may
reasonably request from time to time.
2.13 SEGREGATED ACCOUNT. The Custodian shall upon receipt of Proper
Instructions from the Fund on behalf of each applicable Portfolio establish
and maintain a segregated account or accounts for and on behalf of each
such Portfolio, into which account or accounts may be transferred cash
and/or securities, including securities maintained in an account by the
Custodian pursuant to Section 2.12 hereof, (i) in accordance with the
provisions of any agreement among the Fund on behalf of the Portfolio, the
Custodian and a broker-dealer registered under the Exchange Act and a
member of the NASD (or any futures commission merchant registered under the
Commodity Exchange Act), relating to compliance with the rules of The
Options Clearing Corporation and of any registered national securities
exchange (or the Commodity Futures Trading Commission or any registered
contract market), or of any similar organization or organizations,
regarding escrow or other arrangements in connection with transactions by
the Portfolio, (ii) for purposes of segregating cash or government
securities in connection with options purchased, sold or written by the
Portfolio or commodity futures contracts or options thereon purchased or
sold by the Portfolio, (iii) for the purposes of compliance by the
Portfolio with the procedures required by Investment Company Act Release
No. 10666, or any subsequent release or releases of the Securities and
Exchange Commission relating to the maintenance of segregated accounts by
registered investment companies and (iv) for other proper corporate
purposes, BUT ONLY, in the case of clause (iv), upon receipt of, in
addition to Proper Instructions from the Fund on behalf of the applicable
Portfolio, a certified copy of a resolution of the Board of Trustees or of
the Executive Committee signed by an officer of the Fund and certified by
the Secretary or an Assistant Secretary, setting forth the purpose or
purposes of such segregated account and declaring such purposes to be
proper corporate purposes.
2.14 OWNERSHIP CERTIFICATES FOR TAX PURPOSES. The Custodian shall execute
ownership and other certificates and affidavits for all federal and state
tax purposes in connection with receipt of income or other payments with
respect to securities of each Portfolio held by it and in connection with
transfers of securities.
2.15 PROXIES. The Custodian shall, with respect to the securities held
hereunder, cause to be promptly executed by the registered holder of such
securities, if the securities are registered otherwise than in the name of
the Portfolio or a nominee of the
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Portfolio, all proxies, without indication of the manner in which such
proxies are to be voted, and shall promptly deliver to the Portfolio such
proxies, all proxy soliciting materials and all notices relating to such
securities.
2.16 COMMUNICATIONS RELATING TO PORTFOLIO SECURITIES. The Custodian shall
transmit promptly to the Fund for each Portfolio all written information
(including, without limitation, pendency of calls and maturities of
securities and expirations of rights in connection therewith and notices of
exercise of call and put options written by the Fund on behalf of the
Portfolio and the maturity of futures contracts purchased or sold by the
Portfolio) received by the Custodian from issuers of the securities being
held for the Portfolio. With respect to tender or exchange offers, the
Custodian shall transmit promptly to the Portfolio all written information
received by the Custodian from issuers of the securities whose tender or
exchange is sought and from the party (or his agents) making the tender or
exchange offer. If the Portfolio desires to take action with respect to
any tender offer, exchange offer or any other similar transaction, the
Portfolio shall notify the Custodian at least three business days prior to
the date on which the Custodian is to take such action.
2.17 AUTHORIZED PERSONS. (a) Authorized Persons shall be deemed to include the
President, and any Vice President, the Secretary, the Treasurer, or any
other person, whether or not any such person is an officer or employee of
the Fund, only authorized by the Board of Trustees of the fund to give oral
instructions and written instructions on behalf of the Fund and listed in
the certification annexed hereto as Appendix A or such other certification
as may be received by the Custodian from time to time. (b) Annexed hereto
as Appendix A is a certification signed by two of the present officers of
the Fund setting forth the names and the signatures of the present
Authorized Persons. The Fund agrees to furnish to the Custodian a new
certification in similar form in the event that any such present Authorized
Person ceases to be such an Authorized Person or in the event that other or
additional Authorized Persons are elected or appointed. Until such new
certification shall be received, the Custodian shall be fully protected in
acting under the provisions of this Contract upon oral instructions or
signatures of the present Authorized Persons as set forth in the last
delivered certification.
2.18 PROPER INSTRUCTIONS. Proper Instructions as used throughout this Article 2
means a writing signed or initialled by one or more Authorized Persons.
Each such writing shall set forth the specific transaction or type of
transaction involved, including a specific statement of the purpose for
which such action is requested. Oral instructions will be considered
Proper Instructions if the Custodian reasonably believes them to have been
given by an Authorized Person to give such instructions with respect to the
transaction involved. The Fund shall cause all oral transactions to be
confirmed in writing. Upon receipt of a certificate of the Secretary or an
Assistant Secretary as to the authorization by the Board of Trustees of the
Fund accompanied by a detailed description of procedures approved by the
Board of Trustees, Proper Instructions may include communications effected
directly between electro-mechanical or electronic devices provided that the
Board of Trustees and the Custodian are satisfied that such
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procedures afford adequate safeguards for the Portfolios' assets. For
purposes of this Section, Proper Instructions shall include instructions
received by the Custodian pursuant to any three-party agreement which
requires a segregated asset account in accordance with Section 2.13.
2.19 ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY. The Custodian may in its
discretion, without express authority from the Fund on behalf of each
applicable Portfolio:
1. make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this
Contract, PROVIDED that all such payments shall be accounted for to the
Fund on behalf of the Portfolio;
2. surrender securities in temporary form for securities in definitive
form;
3. endorse for collection, in the name of the Portfolio, checks, drafts
and other negotiable instruments; and
4. in general, attend to all non-discretionary details in connection with
the sale, exchange, substitution, purchase, transfer and other dealings
with the securities and property of the Portfolio except as otherwise
directed by the Board of Trustees.
2.20 EVIDENCE OF AUTHORITY. The Custodian shall be protected in acting upon any
instructions, notice, request, consent, certificate or other instrument or
paper believed by it to be genuine and to have been properly executed by or
on behalf of the Fund. The Custodian may receive and accept a certified
copy of a vote of the Board of Trustees of the Fund as conclusive evidence
(a) of the authority of any person to act in accordance with such vote or
(b) of any determination or of any action by the Board of Trustees pursuant
to the Declaration of Trust as described in such vote, and such vote may be
considered as in full force and effect until receipt by the Custodian of
written notice to the contrary.
2.21 AFFILIATION BETWEEN FUND AND CUSTODIAN. It is understood the Trustees,
officers, employees, agents and shareholders of the Fund, and the officers,
directors, employees, agents and shareholders of the Fund's investment
advisor, are or may be interested in the Custodian as directors, officers,
employees, agents, stockholders, or otherwise, and that the directors,
officers, employees, agents or stockholders of the Custodian may be
interested in the Fund as Trustees, officers, employees, agents,
shareholders, or otherwise, or in the investment advisor as officers,
directors, employees, agents, shareholders or otherwise.
2.22 PERSONS HAVING ACCESS TO ASSETS OF THE PORTFOLIOS. (a) No Trustee,
officer, employee or agent of the Fund shall have physical access to the
assets of the Fund held by the Custodian or be authorized or permitted to
withdraw any investments of the Fund, nor shall the Custodian deliver any
assets of the Fund to any such person. No officer or director, employee or
agent of the Custodian who holds any
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similar position with the Fund or the Adviser shall have access to the
assets of the Fund. (b) Only officers and employees of the Custodian shall
have access to the assets of the Fund. Such officers and employees shall
be identified by certification signed by a duly authorized officer of the
Custodian from time to time. The Custodian shall advise the Fund of any
change in the individual authorized to have access to the assets of the
Fund by written notice to the Fund. (c) Nothing in this Section 2.22 shall
prohibit any officer, employee or agent of the Fund, or any officer,
director, employee or agent of the Adviser, from giving oral instructions
or written instructions to the Custodian or executing a Certificate so long
as it does not result in delivery of or access to assets of the Fund
prohibited by paragraph (a) of this Section 2.22.
3. DUTIES OF CUSTODIAN WITH RESPECT TO THE BOOKS OF ACCOUNT AND CALCULATION OF
NET ASSET VALUE AND NET INCOME.
The Custodian shall cooperate with and supply necessary information to the
entity or entities appointed by the Board of Trustees of the Fund to keep
the books of account of each Portfolio and/or compute the net asset value
per share of the outstanding shares of each Portfolio or, if directed in
writing to do so by the Fund on behalf of the Portfolio, shall itself keep
such books of account and/or compute such net asset value per share. If so
directed, the Custodian shall also calculate daily the net income of the
Portfolio as described in the Fund's currently effective prospectus related
to such Portfolio and shall advise the Fund and the Transfer Agent daily of
the total amounts of such net income and, if instructed in writing by an
officer of the Fund to do so, shall advise the Transfer Agent periodically
of the division of such net income among its various components. The
calculations of the net asset value per share and the daily income of each
Portfolio shall be made at the time or times described from time to time in
the Fund's currently effective prospectus related to such Portfolio.
4. RECORDS
The Custodian shall with respect to each Portfolio create and maintain all
records relating to its activities and obligations under this Contract in
such manner as will meet the obligations of the Fund under the Investment
Company Act of 1940, with particular attention to Section 31 thereof and
Rules 31a-1 and 31a-2 thereunder, applicable federal and state tax laws and
any other law or administrative rules or procedures which may be applicable
to the Fund. All such records shall be the property of the Fund and shall
at all times during the regular business hours of the Custodian be open for
inspection by duly authorized officers, employees or agents of the Fund,
Auditors employed by the Fund and employees and agents of the Securities
and Exchange Commission. The Custodian shall, at the Fund's request,
supply the Fund with a tabulation of securities owned by each Portfolio and
held by the Custodian and shall, when requested to do so by the Fund and
for such compensation as shall be agreed upon between the Fund and the
Custodian, include certificate numbers in such tabulations.
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5. OPINION OF FUND'S INDEPENDENT ACCOUNTANT
The Custodian shall take all reasonable action, as the Fund on behalf of
each applicable Portfolio may from time to time request, to obtain from
year to year favorable opinions from the Fund's independent accountants
with respect to its activities hereunder in connection with the preparation
of the Fund's Form N-1A, Form N-SAR or other annual reports to the
Securities and Exchange Commission and with respect to any other
requirements of such Commission.
6. REPORTS TO FUND BY INDEPENDENT PUBLIC ACCOUNTANTS
The Custodian shall provide the Fund, on behalf of each of the Portfolios
at such times as the Fund may reasonably require, with reports by
independent public accountants on the accounting system, internal
accounting control and procedures for safeguarding securities, futures
contracts and options on futures contracts, including securities deposited
and/or maintained in a Securities System, relating to the services provided
by the Custodian under this Contract; such reports, shall be of sufficient
scope and in sufficient detail, as may reasonably be required by the Fund
to provide reasonable assurance that any material inadequacies would be
disclosed by such examination, and, if there are no such inadequacies, the
reports shall so state.
7. COMPENSATION OF CUSTODIAN
The Custodian shall be entitled to reasonable compensation for its services
and expenses as Custodian, as agreed upon from time to time between the
Fund on behalf of each applicable Portfolio and the Custodian.
8. RESPONSIBILITY OF CUSTODIAN
So long as and to the extent that it is in the exercise of reasonable care,
the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in
acting upon any notice, request, consent, certificate or other instrument
reasonably believed by it to be genuine and to be signed by the proper
party or parities, including any futures commission merchant acting
pursuant to the terms of a three-party futures or options agreement. The
Custodian shall be held to the exercise of reasonable care in carrying out
the provisions of this Contract, but shall be kept indemnified by and shall
be without liability to the Fund for any action taken or omitted by it in
good faith without negligence. It shall be entitled to rely on and may act
upon advice of counsel (who may be counsel for the Fund) on all matters,
and shall be without liability for any action reasonably taken or omitted
pursuant to such advice. Notwithstanding the foregoing, the responsibility
of the Custodian with respect to redemptions effected by check shall be in
accordance with a separate Agreement entered into between the Custodian and
the Fund.
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If the Fund on behalf of a Portfolio requires the Custodian to take any
action with respect to securities, which action involves the payment of
money or which action may, in the opinion of the Custodian, result in the
Custodian or its nominee assigned to the Fund or the Portfolio being liable
for the payment of money or incurring liability of some other form, the
Fund on behalf of the Portfolio, as a prerequisite to requiring the
Custodian to take such action, shall provide indemnity to the Custodian in
an amount and form satisfactory to it.
If the Fund requires the Custodian to advance cash or securities for any
purpose for the benefit of a Portfolio or in the event that the Custodian
or its nominee shall incur or be assessed any taxes, charges, expenses,
assessments, claims or liabilities in connection with the performance of
this Contract, except such as may arise from its or its nominee's own
negligent action, negligent failure to act or willful misconduct, any
property at any time held for the account of the applicable Portfolio shall
be security therefor and should the Fund fail to repay the Custodian
promptly, the Custodian shall be entitled to utilize available cash and to
dispose of such Portfolio's assets to the extent necessary to obtain
reimbursement.
9. EFFECTIVE PERIOD, TERMINATION AND AMENDMENT
This Contract shall become effective as of its execution, shall continue in
full force and effect until terminated as hereinafter provided, may be
amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not
sooner than thirty (30) days after the date of such delivery or mailing;
PROVIDED, however, that the Custodian shall not with respect to a Portfolio
act under Section 2.12 hereof in the absence of receipt of an initial
certificate of the Secretary or an Assistant Secretary that the Board of
Trustees of the Fund has approved the initial use of a particular
Securities System by such Portfolio and the receipt of an annual
certificate of the Secretary or an Assistant Secretary that the Board of
Trustees has reviewed the use by such Portfolio of such Securities System,
as required in each case by Rule 17f-4 under the Investment Company Act of
1940, as amended and that the Custodian shall not with respect to a
Portfolio act under Section 2.12A hereof in the absence of receipt of an
initial certificate of the Secretary or an Assistant Secretary that the
Board of Trustees has approved the initial use of the Direct Paper System
by such Portfolio and the receipt of an annual certificate of the Secretary
or an Assistant Secretary that the Board of Trustees has reviewed the use
by such Portfolio of the Direct Paper System; PROVIDED FURTHER, however,
that the Fund shall not amend or terminate this Contract in contravention
of any applicable federal or state regulations, or any provision of the
Declaration of Trust, and further provided, that the Fund on behalf of one
or more of the Portfolios may at any time by action of its Board of
Trustees (i) substitute another bank or trust company for the Custodian by
giving notice as described above to the Custodian, or (ii) immediately
terminate this Contract in the event of the appointment of a conservator or
receiver for the Custodian by the Comptroller of the Currency or upon the
happening of a like
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event at the direction of an appropriate regulatory agency or court of
competent jurisdiction.
Upon termination of the Contract, the Fund on behalf of each applicable
Portfolio shall pay to the Custodian such compensation as may be due as of
the date of such termination and shall likewise reimburse the custodian for
its costs, expenses and disbursements.
10. SUCCESSOR CUSTODIAN
If a successor custodian for the Fund, of one or more of the Portfolios
shall be appointed by the Board of Trustees of the Fund, the Custodian
shall, upon termination, deliver to such successor custodian at the office
of the Custodian, duly endorsed and in the form for transfer, all
securities of each applicable Portfolio then held by it hereunder and shall
transfer to an account of the successor custodian all of the securities of
each such Portfolio held in a Securities System.
If no such successor custodian shall be appointed, the Custodian shall, in
like manner, upon receipt of a certified copy of a vote of the Board of
Trustees of the Fund, deliver at the office of the Custodian and transfer
such securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Trustees shall have been delivered
to the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or
trust company, which is a "bank" as defined in the Investment Company Act
of 1940, doing business in Boston, Massachusetts, of its own selection,
having an aggregate capital, surplus, and undivided profits, as shown by
its last published report, of not less than $25,000,000, all securities,
funds and other properties held by the Custodian on behalf of each
applicable Portfolio and all instruments held by the Custodian relative
thereto and all other property held by it under this Contract on behalf of
each applicable Portfolio and to transfer to an account of such successor
custodian all of the securities of each such Portfolio held in any
Securities System. Thereafter, such bank or trust company shall be the
successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to
or of the Board of Trustees to appoint a successor custodian, the Custodian
shall be entitled to fair compensation for its services during such period
as the Custodian retains possession of such securities, funds and other
properties and the provisions of this Contract relating to the duties and
obligations of the Custodian shall remain in full force and effect.
11. INTERPRETIVE AND ADDITIONAL PROVISIONS
-18-
<PAGE>
In connection with the operation of this Contract, the Custodian and the
Fund on behalf of each of the Portfolios, may from time to time agree on
such provisions interpretive of or in addition to the provisions of this
Contract as may in their joint opinion be consistent with the general tenor
of this Contract. Any such interpretive or additional provisions shall be
in a writing signed by both parties and shall be annexed hereto, PROVIDED
that no such interpretive or additional provisions shall contravene any
applicable federal or state regulations or any provision of the Declaration
of Trust of the Fund. No interpretive or additional provisions made as
provided in the preceding sentence shall be deemed to be an amendment of
this Contract.
12. ADDITIONAL FUNDS
In the event the Fund establishes one or more series of Shares in addition
to The Seven Seas Series Money Market Fund with respect to which it desires
to have the Custodian render services as custodian under the terms hereof,
it shall so notify the Custodian in writing, and if the Custodian agrees in
writing to provide such services, such series of Shares shall become a
Portfolio hereunder.
13. MASSACHUSETTS LAW TO APPLY
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of the Commonwealth of Massachusetts.
14. PRIOR CONTRACTS
This Contract supersedes and terminates, as of the date hereof, all prior
contracts between the Fund on behalf of each of the Portfolios and the
Custodian relating to the custody of the Fund's assets.
15. LIMITATION OF LIABILITY
The Master Trust Agreement dated October 3, 1987, as amended from time to
time, establishing the Fund, which is hereby referred to and a copy of
which is on file with the Secretary of The Commonwealth of Massachusetts,
provides that the name The Seven Seas Series Fund means the Trustees from
time to time serving (as Trustees but not personally) under said Master
Trust Agreement. It is expressly acknowledged and agreed that the
obligations of the Fund hereunder shall not be binding upon any of the
Shareholders, Trustees, officers, employees, or agents of the Fund,
personally, but shall bind only the trust property of the Fund, as provided
in its Master Trust Agreement. The execution and delivery of this
Agreement have been authorized by the Trustees of the Fund and signed by an
officer of the Fund, acting as such, and neither such authorization by such
Trustees nor such execution and delivery by such officer shall be deemed to
have been made by any of them individually or to impose any liability on
any of them personally, but shall bind only the trust property of the Fund
as provided in its Master Trust Agreement.
-19-
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and
its seal to be hereunder affixed as of the 11th day of April, 1988.
ATTEST THE SEVEN SEAS SERIES FUND
/s/ Michael S. Caccese By: /s/ George W. Weber
-------------------------- -------------------------
Secretary Vice President
ATTEST STATE STREET BANK AND
TRUST COMPANY
/s/ Stephen Sexeny By: /s/
---------------------------- -----------------------------
Assistant Secretary Vice President
-20-
<PAGE>
APPENDIX A
LIST OF AUTHORIZED PERSONS
The Board of Trustees of The Seven Seas Series Fund (the "Trustees") hereby
certifies that the persons whose names appear below are Authorized Persons
within the meaning of Section 2.17 of the Custodian Contract dated April 11,
1988 between The Seven Seas Series Fund and State Street Bank and Trust Company
(the "Custodian"). The Trustees further certify that the true signature of each
such person is set forth below opposite his name, and that the Custodian may
rely upon this list of Authorized Persons until such time as it receives another
such list bearing a later date.
The following officers of the Fund are Authorized Persons any two of whom are
empowered to instruct and otherwise deal with the Custodian for all purposes on
behalf of the Fund.
NAME AND TITLE SIGNATURE
Lynn L. Anderson, President
Chief Executive Officer and
Chairman of the Board /s/ Lynn L. Anderson
---------------------
George W. Weber, Vice President
Operations /S/ George W. Weber
---------------------
Margaret L. Barclay, Vice President
and Treasurer /s/ Margaret L. Barclay
------------------------
Michael S. Caccese, Vice President
and Secretary /S/ Michael S. Caccese
-------------------------
The following persons are Authorized Persons empowered to instruct and otherwise
deal with the Custodian in connection with the purchase or sale of any
securities on behalf of the Fund.
NAME AND TITLE SIGNATURE
- ------------------------------------ -------------------------
Paul Eddy, Assistant Vice President /s/ Paul Eddy
--------------------------
Lise Chui, Senior Administrator /s/ Lise Chui
---------------------------
Timothy Connolly, Domestic
Operations Manager /s/ Timothy Connolly
---------------------------
Martha Clancy, Senior Account
Administrator /s/ Martha Clancy
----------------------------
THE SEVEN SEAS SERIES FUND
By: /s/ Michael S. Caccese
----------------------------
VICE PRESIDENT
-21-
<PAGE>
Dated April 11, 1988
By: /s/ George W. Weber
-----------------------------
VICE PRESIDENT
-22-
<PAGE>
STATE STREET BANK AND TRUST COMPANY
CUSTODIAN FEE SCHEDULE
THE SEVEN SEAS SERIES FUND
PORTFOLIO ADMINISTRATION
- ------------------------
a fee, payable monthly on a pro rata basis, based on the following percentages
of average daily net assets of the Fund: $0 up to $1.5 billion -- .20%, over
$1.5 billion -- .015%.
For the purposes of calculating the break point, the assets of individual
portfolios will be aggregated.
PORTFOLIO TRADING
- -----------------
$ 18.00 DTC and Fed Book Entry Trade
$ 9.00 DTC trades for The Seven Seas Series S&P 500 Index Fund
The Seven Seas Series S&P Midcap Index Fund
The Seven Seas Series Matrix Synthesis Fund
$ 25.00 Each Physical Trade
$ 110.00 Each Eurodollar Transaction
$ 125.00 Each Euroclear Transaction
$ 8.00 Each NY Fed Maturity
OPTIONS
- -------
$ 25.00 For Each Option Written
$ 25.00 For Each Option Bought Back
$ 25.00 For Each Option Expired
$ 25.00 For Each Option Executed
$ 18.00 If Third Party Agreement Utilized
FUTURES
- --------
$ 25.00 Per Transaction
$ 18.00 If Third Party Agreement Utilized
PRICING
- -------
This service provides securities pricing on request. Services and fees are
based on the schedule below. Reports can be generated at State Street or on a
remote basis via PC. Reporting has both up load and down load capabilities.
Customized reports may require programming fees.
-23-
<PAGE>
Monthly charges for the State Street Bank Automated Pricing System are
determined by:
1. Mix of security positions;
2. The number of positions that are priced during the month.
Monthly Base Fee $375.00
Monthly Quote Charge:
Municipal Bond via Muller Data $ 16.00
Municipal Bonds via Kenny/S&P Evaluation Services $ 16.00
Government, Corporate, etc., via Kenny/S&P $ 11.00
Government, Corporate and Convertible Bonds
via Merrill Lynch $ 11.00
Corporate and Government Bonds via Muller Data $ 11.00
Foreign Bonds via Extel $ 10.00
Options, Futures and Private Placements $ 6.00
Listed Equities (including International)
and OTC Equities $ 6.00
Corporate, Municipal, Convertible and Government Bonds,
Adjustable Rate Preferred Stocks via IDC $ 13.00
For billing purposes, the monthly quote charge will be based on the average
number of positions in the portfolio
ON-LINE SERVICE CHARGES
- ------------------------
Accounting $80.00 Per Month Per Fund
Hourly Mainframe Usage $50.00 Per Hour
ADDITIONAL INTERNATIONAL FEES
25 Basis Points of Net Assets
$20.00 Per Trade
-24-
<PAGE>
OUT-OF-POCKET EXPENSES AT COST
- -------------------------------
Include but is not limited to: postage, transfer fees, stamp duties, government
taxes, wire fees, telexes, freight, telephones, etc.
Effective Date: September 1, 1993
Approved: /s/ Margaret Barclay
----------------------------
The Seven Seas Series Fund
Date: 10/18/93
Approved: /s/
State Street Bank and Trust Company
Date: 10/26/93
-25-
<PAGE>
SCHEDULE A
17f-5 APPROVAL
The Board of Directors/Trustees of The Seven Seas Series Fund has approved
certain foreign banking institutions and foreign securities depositories within
State Street's Global Custody Network for use as subcustodians for the Fund's
securities, cash and cash equivalents held outside of the United States. Board
approval is as indicated by the Fund's Authorized Officer:
Fund
Officer
Initials Country Subcustodian Central Depository
_____ Argentina Citibank, N.A. Caja de Valores S.A.
_____ Australia Westpac Banking Austraclear Limited;
Corporation
Reserve Bank Information
and Transfer System (RITS)
_____ Austria GiroCredit Bank Oesterreichische
Aktiengesellschaft Kontrollbank AG
der Sparkassen
_____ Bangladesh Standard Chartered Bannk None
_____ Belgium Generale Bank Caisse Interprofessionnelle
de Depots et de Virements
de Titres S.A. (CIK);
Banque Nationale de
Belgique
_____ Brazil Citibank, N.A. Bolsa de Valores de Sao
Paulo (Bovespa);
Banco Central do Brasil,
Systema Especial de
Liquidcao e Custodia
(SELIC)
_____ Canada Canada Trustco The Canadian Depository
Mortgage Company for Securities Limited (CDS)
_____ Chile Citibank, N.A. None
-26-
<PAGE>
Fund
Officer
Initial Country Subcustodian Central Depository
_____ China The Hongkong and Shanghai Securities Central
Shanghai Banking Clearing and Registrations
Corporation Limited Corporation (SSCCRC);
Shenzhen Securities
Registrars Co., Ltd. and its
designated agent banks
_____ Colombia Cititrust Colombia S.A. None
Sociedad Fiduciaria
_____ Cyprus Barclays Bank PLC None
_____ Czech Republic Ceskoslovenska Obchodni Stredisko Cennych Papiru
Banka A.S. (SCP)
_____ Denmark Den Danske Bank Vdipapircentralen - The
Danish Securities Center
(VP)
_____ Egypt National Bank of Egypt None
_____ Finland Kansallis-Osake-Pankki The Central Share Register
of Finland
_____ France Banque Paribas Societe Interprofessionnelle
pour la Compensation des
Valeurs Mobilieres
(SICOVAM);
Banque de France,
Saturne System
_____ Germany Berliner Handels- The Dutscher Kassenverein
und Frankfurter Bank AG
_____ Greece National Bank of Greece The Central Securities
S.A. Depositor (Apothetirio
Titlon A.E.)
_____ Hong Kong Standard Chartered Bank The Central Clearing and
Settlement System (CCASS)
-27-
<PAGE>
Fund
Office
Initials Country Subcustodian Central Depository
_____ Hungary Citibank Budapest Rt. None
_____ India The Hongkong and None
Shanghai Banking
Corporation Limited
_____ Indonesia Standard Chartered Bank None
_____ Ireland Bank of Ireland None;
The Central Bank of Ireland,
The Gilt Settlement Office
(GSO)
_____ Israel Bank Hapoalim B.M. The Clearing House of the
Tel Aviv Stock Exchange
_____ Italy Morgan Guaranty Monte Titoli S.p.A.;
Trust Company
Banca d'Italia
_____ Japan Sumitomo Trust & None;
Banking Co., Ltd.
Bank of Japan Net System
_____ Jordan The British Bank of the None
Middle East
_____ Korea Bank of Seoul None
_____ Malaysia Standard Chartered Bank None
Malaysia Berhad
_____ Mexico Citibank, N.A. S.D. INDEVEL, S.A. de
C.V. (Instituto para el
Deposito de Valores);
Banco de Mexico
_____ Morocco Banque Commerciale None
due Maroc
-28-
<PAGE>
Fund
Officer
Initials Country Subcustodian Central Depository
_____ Netherlands MeesPierson N.V. Nederlands Centraal
Instituut voor Giraal
Effectenverkeer B.V.
(NECIGEF)
_____ New Zealand ANZ Banking Group None
(New Zealand) Limited
The Reserve Bank of
New Zealand,
Austraclear NZ
_____ Norway Christiania Bank og Verdipapirsentralen -
Kreditkasse The Norwegian Registry
of Securities (VPS)
_____ Pakistan Deutsche Bank AG None
_____ Peru Citibank, N.A. Caja de Valores (CAVAL)
_____ Philippines Standard Chartered Bank None
_____ Poland Citibank Poland S.A. The National Depository
of Securities (Centrum
Krajowego Depozytu
Papierow Wartosciowych)
_____ Portugal Banco Comercial Portugus Central de Valores
Mabilirios (Central)
_____ Singapore The Development Bank The Central Depository
of Singapore Ltd. (Pte) Limited (CDP)
_____ South Africa Standard Bank of None
South Africa Limited
_____ Spain Banco Santander, S.A. Servicio de Compensacion y
Liquidacion de Valores
(SCLV);
Banco de Espana,
Anotaciones en Cuenta
-29-
<PAGE>
Fund
Officer
Initials Country Subcustodian Central Depository
_____ Sri Lanka The Hongkong and The Central Depository
Shanghai Banking System (Pvt) Limited
Corporation Limited
_____ Sweden Skandinaviska Enskilda Vadepapperscentralen -
Banken The Swedish Securities
Register Center (VPC)
_____ Switzerland Union Bank of Switzerland Schweizerische Effekten -
Giro AG (SEGA)
_____ Taiwan Central Trust of China The Taiwan Securities
Central Depository
Company, Ltd., (TSCD)
_____ Thailand Standard Chartered Bank The Share Depository
Center (SDC)
_____ Turkey Citibank, N.A. Istanbul Stock Exchange
Settlement and Custody Co.,
Inc. (I.M.K.B. Takas ve
Saklama A.S.)
_____ United State Street Bank and None;
Kingdom Trust Company
The Bank of England,
The Central Gilts Office
(CGO);
The Central Moneymarkets
Office (CMO)
_____ Uruguay Citibank, N.A. None
_____ Venezuela Citibank, N.A. None
_____ Zimbabwe Barclays Bank of Zimbabwe None
Limited
_____ Euroclear / State Street London Limited
-30-
<PAGE>
_____ Cedel / State Street London Limited
Certified by:
/s/ Deedra S. Walkey 10/26/94
----------------------- --------------
Fund's Authorized Officer Date
-31-
<PAGE>
AMENDMENT NO. 1 TO THE CUSTODIAN CONTRACT
AGREEMENT made by and between State Street Bank and Trust Company (the
"Custodian") and The Seven Seas Series Fund (the "Fund").
WHEREAS, the Custodian and the Fund are parties to a custodian contract dated
April 11, 1988 (the "Custodian Contract") governing the terms and conditions
under which the Custodian maintains custody of the securities and other assets
of the Fund; and
WHEREAS, the Custodian and the Fund desire to amend the Custodian Contract to
provide for the maintenance of the Fund's foreign securities, and cash
incidental to transactions in such securities, in the custody of certain foreign
banking institutions and foreign securities depositories acting as sub-
custodians in conformity with the requirements of Rule 17f-5 under the
Investment Company Act of 1940;
NOW, THEREFORE, in consideration of the premises and covenants contained herein,
the Custodian and the Fund hereby amend the Custodian Contract by the addition
of the following terms and conditions:
1. APPOINTMENT OF FOREIGN SUB-CUSTODIANS
The Fund hereby authorizes and instructs the Custodian to employ as sub-
custodians for the fund's securities and other assets maintained outside the
United States the foreign banking institutions and foreign securities
depositories designated Schedule A hereto ("foreign sub-custodians"). Upon
receipt of "Proper Instructions," as defined in Section 2.18 of the Custodian
Contract, together with a certified resolution of the Fund's Board of Trustees,
the Custodian and the Fund may agree to amend Schedule A hereto from time to
time to designate additional foreign banking institutions and foreign securities
depositories to act as sub-custodian. Upon receipt of Proper Instructions, the
Fund may instruct the Custodian to cease the employment of any one or more of
such sub-custodians for maintaining custody of the Fund's assets.
2. ASSETS TO BE HELD
The Custodian shall limit the securities and other assets maintained in the
custody of the foreign sub-custodians to: (a) "foreign securities," as defined
in paragraph (c)(1) of Rule 17f-5 under the Investment Company Act of 1940, and
(b) cash and cash equivalents in such amounts as the Custodian or the Fund may
determine to be reasonably necessary to effect the Fund's foreign securities
Transactions.
3. FOREIGN SECURITIES DEPOSITORIES
Except as may otherwise be agreed upon in writing by the Custodian and the Fund,
assets of the Fund shall be maintained in foreign securities depositories only
through arrangements implemented by the foreign banking institutions serving as
sub-custodians
-32-
<PAGE>
pursuant to the terms hereof. Where possible, such arrangements shall include
entry into agreements containing the provisions set forth in Section 5 hereof.
4. SEGREGATION OF SECURITIES
The Custodian shall identify on its books as belonging to the Fund, the foreign
securities of the Fund held by each foreign sub-custodian. Each agreement
pursuant to which the Custodian employs a foreign banking institution shall
require that such institution establish a custody account for the Custodian on
behalf of the fund and physically segregate in that account, securities and
other assets of the Fund, and, in the event that such institution deposits the
Fund's securities in a foreign securities depository, that it shall identify on
its books as belonging to the Custodian, as agent for the Fund, the securities
so deposited.
5. AGREEMENTS WITH FOREIGN BANKING INSTITUTIONS
Each agreement with a foreign banking institution shall be substantially in the
form set forth in Exhibit 1 hereto and shall provide that: (a) the Fund's
assets will not be subject to any right, charge, securities interest, lien or
claim of any kind in favor of the foreign banking institution or its creditors
or agents, except a claim of payment for their safe custody or administration;
(b) beneficial ownership for the Fund's assets will be freely transferable
without the payment of money or value other than for custody or administration;
(c) adequate records will be maintained identifying the assets as belonging to
the Fund; (d) officers of or auditors employed by, or other representatives of
the Custodian, including to the extent permitted under applicable law the
independent public accountants for the Fund, will be given access to the books
and records of the foreign banking institution relating to its actions under its
agreement with the Custodian; and (e) assets of the Fund held by the foreign
sub-custodian will be subject only to the instructions of the Custodian or its
agents.
6. ACCESS OF INDEPENDENT ACCOUNTANTS OF THE FUND
Upon request of the Fund, the Custodian will use its best efforts to arrange for
the independent accountants of the Fund to be afforded access to the books and
records of any foreign banking institution employed as a foreign sub-custodian
insofar as such books and records relate to the performance of such foreign
banking institution under its agreement with the Custodian.
7. REPORTS BY CUSTODIAN
The Custodian will supply to the Fund from time to time, as mutually agreed
upon, statements in respect of the securities and other assets of the Fund held
by foreign sub-custodians, including but not limited to an identification of
entities having possession of the Fund's securities and other assets and advices
or notifications of any transfers of securities to or from each custodial
account maintained by a foreign banking institution for the Custodian on behalf
of the Fund indicating, as to securities acquired for the Fund, the identity of
the entity having physical possession of such securities.
-33-
<PAGE>
8. TRANSACTIONS IN FOREIGN CUSTODY ACCOUNT
(a) Except as otherwise provided in paragraph (b) of this Section 8, the
provisions of Section 2.2 and 2.9 of the Custodian Contract shall apply, MUTATIS
MUTANDIS to the foreign securities of the Fund held outside the United States by
foreign sub-custodians.
(b) Notwithstanding any provision to the Custodian Contract to the contrary,
settlement and payment for securities received for the account of the Fund and
delivery of securities maintained for the account of the Fund may be effected in
accordance with the customary established securities trading or securities
processing practices and procedures in the jurisdiction or market in which the
transaction occurs, including, without limitation, delivering securities to the
purchaser thereof or to a dealer therefore (or an agent for such purchaser or
dealer) against a receipt with the expectation of receiving later payment for
such securities from such purchaser or dealer.
(c) Securities maintained in the custody of a foreign sub-custodian may be
maintained in the name of such entity's nominee to the same extent as set forth
in Section 2.3 of the Custodian Contract, and the Fund agrees to hold any such
nominee harmless from any liability as a holder of record of such securities.
9. LIABILITY OF FOREIGN SUB-CUSTODIANS
Each agreement pursuant to which the Custodian employs a foreign banking
institution as a foreign sub-custodian shall require the institution to exercise
reasonable care in the performance of its duties and to indemnify, and hold
harmless, the Custodian and each Fund from and against any loss, damage, cost,
expense, liability or claim arising out of or in connection with the
institution's performance of such obligations. At the election of the Fund, it
shall be entitled to be subrogated to the rights of the Custodian with respect
to any claims against a foreign banking institution as a consequence of any such
loss, damage, cost, expense, liability or claim if and to the extent that the
Fund has not been made whole for any such loss, damage, cost, expense, liability
or claim.
10. LIABILITY OF CUSTODIAN
The Custodian shall be liable for the acts or omissions of a foreign banking
institution to the same extent as set forth with respect to sub-custodian
generally in the Custodian Contract and, regardless of whether assets are
maintained in the custody of a foreign banking institution, a foreign securities
depository or a branch of a US bank as contemplated by paragraph 13 hereof, the
Custodian shall not be liable for any loss, damage, cost, expense, liability or
claim resulting from nationalization, expropriation, currency restrictions, or
acts of war or terrorism or any loss where the sub-custodian has otherwise
exercised reasonable care. Notwithstanding the foregoing provisions of this
paragraph 10, in delegating custody duties to State Street London Ltd., the
Custodian shall not be relieved of any responsibility to the Fund for any loss
due to such delegation, except such loss as may result from (a) political risk
(including, but not limited to, exchange control restrictions, confiscation,
expropriation, nationalization, insurrection, civil strife or armed hostilities)
or (b) other losses (excluding a bankruptcy or insolvency
-34-
<PAGE>
of State Street London Ltd. not caused by political risk) due to acts of God,
nuclear incident or other losses under circumstances where the Custodian and
State Street London Ltd. have exercised reasonable care.
11. REIMBURSEMENT FOR ADVANCES
If the Fund requires the Custodian to advance cash or securities for any purpose
including the purchase or sale of foreign exchange or of contracts for foreign
exchange, or in the event that the Custodian or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this Contract, except such as may arise from
its or its nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of the Fund shall be
security therefor and should the Fund fail to repay the Custodian promptly, the
Custodian shall be entitled to utilize available cash and to dispose of the Fund
assets to the extent necessary to obtain reimbursement.
12. MONITORING RESPONSIBILITIES
The Custodian shall furnish annually to the Fund, during the month of June,
information concerning the foreign sub-custodians employed by the Custodian.
Such information shall be similar in kind and scope to that furnished to the
Fund in connection with the initial approval of this amendment to the Custodian
Contract. In addition, the Custodian will promptly inform the Fund in the event
that the Custodian learns of a material adverse change in the financial
condition of a foreign sub-custodian or any material loss of the assets of the
Fund or in the case of any foreign sub-custodian not the subject of an exemptive
order from the Securities and Exchange Commission is notified by such foreign
sub-custodian that there appears to be a substantial likelihood that its
shareholders' equity will decline below $200 million (US dollars or the
equivalent thereof) or that its shareholders' equity has declined below $200
million (in each case computed in accordance with generally accepted US
accounting principals).
13. BRANCHES OF US BANKS
(a) Except as otherwise set forth in this amendment to the Custodian Contract,
the provisions hereof shall not apply where the custody of the Fund assets is
maintained in a foreign branch of a banking institution which is a "bank" as
defined by Section 2(a)(5) of the Investment Company Act of 1940 meeting the
qualification set forth in Section 26(a) of said Act. The appointment of any
such branch as a sub-custodian shall be governed by paragraph 1 of the Custodian
Contract.
(b) Cash held for the Fund in the United Kingdom shall be maintained in an
interest bearing account established for the Fund with the Custodian's London
Branch, which account shall be subject to the direction of the Custodian, State
Street London Ltd. or both.
-35-
<PAGE>
14. APPLICABILITY OF CUSTODIAN CONTRACT
Except as specifically superseded or modified herein, the terms and provisions
of the Custodian Contract shall continue to apply with full force and effect.
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative as of the
8th day of January, 1992.
ATTEST: THE SEVEN SEAS SERIES FUND
/s/ Thomas A. Early /s/ George W. Weber
------------------------- ---------------------------------
Its: Vice President Senior Vice President - Operations
ATTEST STATE STREET BANK AND
TRUST COMPANY
/s/ /s/
- ---------------------- ----------------------------
Assistant Secretary Vice President
-36-
<PAGE>
EXHIBIT 1
CUSTODIAN AGREEMENT
To:
Gentlemen:
The undersigned ("State Street") hereby requests that you (the "Bank") establish
a custody account and a cash account for each State Street client whose account
is identified to this Agreement. Each such custody or cash account as
applicable will be referred to herein as the "Account" and will be subject to
the following terms and conditions:
1. The Bank shall hold as agent for State Street and shall physically
segregate in the Account such cash, bullion, coin, stocks, shares, bonds,
debentures, notes and other securities and other property which is delivered to
the Bank for that State Street Account (the "Property").
2. (a) Without the prior approval of State Street it will not deposit
securities in any securities depository or utilize a clearing agency,
incorporated or organized under the laws of a country other than the United
States, unless such depository or clearing house operates the central system for
handling of securities or equivalent book-entries.
(b) When Securities held for an Account are deposited in a securities
depository or clearing agency by the Bank, the Bank shall identify on its books
as belonging to State Street as agent for such Account, the Securities so
deposited.
The Bank represents that either:
3. (a) It currently has stockholders' equity in excess of $200 million (US
dollars or the equivalent of US dollars computed in accordance with generally
accepted US accounting principals) and will promptly inform State Street in the
event that there appears to be a substantial likelihood that its stockholders'
equity will decline below $200 million; or time as its stockholders' equity in
fact declines below $200 million; or
(b) It is the subject of an exemptive order issued by the United States
Securities and Exchange Commission, which such order permits State Street to
employ the Bank as a subcustodian, notwithstanding the fact that the Bank's
stockholders' equity is currently below $200 million or may in the future
decline below $200 million due to currency fluctuation.
4. Upon the written instructions of State Street as permitted by Section 8,
the Bank is authorized to pay out cash from the Account and to sell, assign,
transfer, deliver or exchange, or to purchase for the Account, any and all
stocks, bonds, debentures, notes
-37-
<PAGE>
and other securities ("Securities"), bullion, coin and other property, but only
as provided in such written instructions. The Bank shall not be held liable for
any act or omission to act on instructions given or purported to be given should
there be any error in such instructions.
5. Unless the Bank receives written instructions of State Street to the
contrary, the Bank is authorized.
(a) To promptly receive and collect all income and principal with respect
to the Property and to credit cash receipts to the Account;
(b) To promptly exchange Securities where the exchange is purely
ministerial (including, without limitation, the exchange of temporary Securities
for those in definitive form and the exchange of warrants, or other documents of
entitlement to Securities, for the Securities themselves);
(c) To promptly surrender Securities at maturity or when called for
redemption upon receiving payment therefor;
(d) Whenever notification of a rights entitlement or a fractional interest
resulting from a rights issue, stock dividend or stock split is received for the
Account and such rights entitlement or fractional interest bears an expiration
date, the Bank will endeavor to obtain State Street's instructions, but should
these not be received in time for the Bank to take timely action, the Bank is
authorized to sell such rights entitlement or fractional interest and to credit
the Account;
(e) To hold registered in the name of the nominee of the Bank or its
agents such Securities as are ordinarily held in registered form;
(f) To execute in State Street's name for the Account, whenever the Bank
deems it appropriate, such ownership and other certificates as may be required
to obtain the payment of income from the Property; and
(g) To pay or cause to be paid from the Account any and all taxes and
levies in the nature of taxes imposed on such assets by any governmental
authority, and shall use reasonable efforts to promptly reclaim any foreign
withholding tax relating to the Account.
6. If the Bank shall received any proxies, notices, reports, or other
communications relative to any of the Securities of the Account in connection
with tender offers, reorganizations, mergers, consolidations, or similar events
which may have an impact upon the issuer thereof, the Bank shall promptly
transmit any such communication to State Street by means as will permit State
Street to take timely action with respect thereto.
7. The Bank is authorized in its discretion to appoint brokers and agents in
connection with the Bank's handling of transactions relating to the Property
provided that any such appointment shall not relieve the Bank of any of its
responsibilities or liabilities hereunder.
-38-
<PAGE>
8. Written instructions shall include (i) instructions in writing signed by
such persons as are designated in writing by State Street, (ii) telex or tested
telex instructions of State Street, (iii) other forms of instruction in computer
readable form as shall be customarily utilized for the transmission of like
information and (iv) other forms of communication as from time to time shall be
agreed upon by State Street and the Bank.
9. The Bank shall supply periodic reports with respect to the safekeeping of
assets held by it under this Agreement. The content of such reports shall
include but not be limited to any transfer to or from any Account held by the
Bank hereunder and such other information as State Street may reasonably
request.
10. In addition to its obligations under Section 2 hereof, the Bank shall
maintain such other records as may be necessary to identify the assets hereunder
as belonging to each State Street client identified to this Agreement from time
to time.
11. The Bank agrees that its books and records relating to its actions under
this Agreement shall be opened to the physical, on-premises inspection and audit
at reasonable times by officers of, auditors employed by or other
representatives of State Street (including to the extent permitted under
______________ law the independent public accountants for any entity whose
Property is being held hereunder) and shall be retained for such period as shall
be agreed by State Street and the Bank.
12. The Bank shall be entitled to reasonable compensation for its services and
expenses as custodian under this Agreement, as agreed upon from time to time by
the Bank and State Street.
13. The Bank shall exercise reasonable care in the performance of its duties as
are set forth or contemplated herein or contained in instructions given to the
Bank which are not contrary to this Agreement, and shall maintain adequate
insurance and agrees to indemnify and hold State Street and each Account from
and against any loss, damage, cost, expense, liability or claim arising out of
or in connection with the Bank's performance of its obligations hereunder.
14. The Bank agrees that (i) the Property is not subject to any right, charge,
security interest, lien or claim of any kind in favor of the Bank or any of its
agents or its creditors except a claim of payment for their safe custody and
administration and (ii) the beneficial ownership of the Property shall be freely
transferable without the payment of money or other value other than for safe
custody or administration.
15. This Agreement may be terminated by the Bank or State Street by at least 60
days' written notice to the other, sent by registered mail or express courier.
The Bank, upon the date this Agreement terminates pursuant to notice which has
been given in a timely fashion, shall deliver the Property in accordance with
written instructions of State Street specifying the name(s) of the person(s) to
whom the Property shall be delivered.
-39-
<PAGE>
16. The Bank and State Street shall each use its best efforts to maintain the
confidentiality of the Property in each Account, subject, however, to the
provisions of any laws requiring the disclosure of the Property.
17. The Bank agrees to follow such Operating Requirements as State Street may
require from time to time. A copy of the current State Street Operating
Requirements is attached as an exhibit to this Agreement.
18. Unless otherwise specified in this Agreement, all notices with respect to
matters contemplated by this Agreement shall be deemed duly given when received
in writing or by tested telex by the Bank or State Street at their respective
addresses set forth below, or at such other address as specified in each case in
a notice similarly given:
To State Street: Global Custody Services Division
State Street Bank and Trust Company
P.O. Box 470
Boston, Massachusetts 02102
To the Bank:
19. This Agreement shall be governed by and construed in accordance with the
laws of _________________.
Please acknowledge your agreement to the foregoing by executing a copy of this
letter.
Very truly yours,
State Street Bank and Trust Company
By:
---------------------------
Agreed to by:
By
----------------------------
Date
--------------------------
-40-
<PAGE>
LETTER AGREEMENT
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02101
Dear Sirs:
Pursuant to Paragraph 12 of the Custodian Contract between The Seven Seas Series
Fund and State Street Bank and Trust Company, dated as of April 11, 1988, The
Seven Seas Series Fund advises you that it is creating a new series to be named
The Seven Seas Series US Government Money Market Fund (the "Fund") and that The
Seven Seas Series Fund desires State Street Bank and Trust Company to serve as
custodian with respect to the Fund pursuant to the terms and conditions of the
Custodian Contract.
Notwithstanding anything to the contrary in Paragraph 9, the initial term of the
Custodian Contract with respect to the Fund shall be until April 12, 1992.
Please acknowledge your acceptance of acting as Custodian to the Fund by
executing this letter agreement in the space provided below and then returning
it to the undersigned.
Sincerely,
THE SEVEN SEAS SERIES FUND
By: /S/ Lynn L. Anderson
-------------------------------------
Lynn L. Anderson
President and Chief Executive Officer
ACKNOWLEDGED AND ACCEPTED
STATE STREET BANK AND TRUST COMPANY
By: /s/
---------------------------
-41-
<PAGE>
LETTER AGREEMENT
January 8, 1992
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02101
Dear Sirs:
Pursuant to Paragraph 12 of the Custodian Contract between The Seven Seas Series
Fund and State Street Bank and Trust Company, dated as of April 11, 1988, The
Seven Seas Series Fund advises you that it is creating six new series to be
named The Seven Seas Series Short Term Government Bond Fund, The Seven Seas
Series S&P 500 Index Fund, The Seven Seas Series S&P Midcap Index Fund, The
Seven Seas Series Matrix Synthesis Fund, The Seven Seas Series International
European Index Fund, and The Seven Seas Series International Pacific Index Fund
(the "New Funds") and that The Seven Seas Series Fund desires State Street Bank
and Trust Company to serve as Custodian with respect to the New Funds pursuant
to the terms and conditions of the Custodian Contract.
Notwithstanding anything to the contrary in Paragraph 9, the initial term of the
Custodian Contract with respect to the New Funds shall be until April 12, 1993.
Please acknowledge your acceptance of acting as Custodian to the New Funds by
executing this letter agreement in the space provided below and then returning
it to the undersigned.
Sincerely,
THE SEVEN SEAS SERIES FUND
By: /s/ George W. Weber
-----------------------------------
George W. Weber
Senior Vice President - Operations
ACKNOWLEDGED AND ACCEPTED
STATE STREET BANK AND TRUST COMPANY
By: /s/
- ------------------------------
-42-
<PAGE>
LETTER AGREEMENT
July 8, 1992
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02101
Dear Sirs:
Pursuant to Paragraph 12 of the Custodian Contract between The Seven Seas Series
Fund and State Street Bank and Trust Company, dated as of April 11, 1988, The
Seven Seas Series Fund advises you that it is creating two new series to be
named The Seven Seas Series Bond Market Fund and The Seven Seas Series Yield
Plus Fund (the "New Funds") and that The Seven Seas Series Fund desires State
Street Bank and Trust Company to serve as Custodian with respect to the New
Funds pursuant to the terms and conditions of the Custodian Contract.
Notwithstanding anything to the contrary in Paragraph 9, the initial term of the
Custodian Contract with respect to the New Funds shall be until April 12, 1994.
Please acknowledge your acceptance of acting as Custodian to the New Funds by
executing this letter agreement in the space provided below and then returning
it to the undersigned.
Sincerely,
THE SEVEN SEAS SERIES FUND
By: /s/ George W. Weberh
-----------------------------------
George W. Weber
Senior Vice President - Operations
ACKNOWLEDGED AND ACCEPTED
STATE STREET BANK AND TRUST COMPANY
By: /s/
------------------------
-43-
<PAGE>
LETTER AGREEMENT
The Seven Seas Series US Treasury Money Market Fund
The Seven Seas Series US Treasury Obligations Fund
Custodian Contract
January 6, 1993
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Dear Sirs:
Pursuant to Paragraph 12 of the Custodian Contract between The Seven Seas Series
Fund and State Street Bank and Trust Company, dated as of April 11, 1988, The
Seven Seas Series Fund advises you that it is creating two new series to be
named The Seven Seas Series US Treasury Money Market Fund and The Seven Seas
Series US Treasury Obligations Fund (the "New Funds") and that The Seven Seas
Series Fund desires State Street Bank and Trust Company to serve as Custodian
with respect to the New Funds pursuant to the terms and conditions of the
Custodian Contract.
Notwithstanding anything to the contrary in Paragraph 9, the initial term of the
Custodian Contract with respect to the New Funds shall be until April 12, 1994.
Please acknowledge your acceptance of acting as Custodian to the New Funds by
executing this letter agreement in the space provided below and then returning
it to the undersigned.
Sincerely,
THE SEVEN SEAS SERIES FUND
By: /s/ George W. Weber
----------------------------------
George W. Weber
Senior Vice President - Operations
ACKNOWLEDGED AND ACCEPTED
STATE STREET BANK AND TRUST COMPANY
By: /s/
-44-
<PAGE>
LETTER AGREEMENT
The Seven Seas Series Growth and Income Fund
The Seven Seas Series Intermediate Fund
Custodian Contract
January 6, 1993
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Dear Sirs:
Pursuant to Paragraph 12 of the Custodian Contract between The Seven Seas Series
Fund and State Street Bank and Trust Company, dated as of April 11, 1988, The
Seven Seas Series Fund advises you that it is creating two new series to be
named The Seven Seas Series Growth and Income Fund and The Seven Seas Series
Intermediate Fund (the "New Funds") and that The Seven Seas Series Fund desires
State Street Bank and Trust Company to serve as Custodian with respect to the
New Funds pursuant to the terms and conditions of the Custodian Contract.
Notwithstanding anything to the contrary in Paragraph 9, the initial term of the
Custodian Contract with respect to the New Funds shall be until April 12, 1994.
Please acknowledge your acceptance of acting as Custodian to the New Funds by
executing this letter agreement in the space provided below and then returning
it to the undersigned.
Sincerely,
THE SEVEN SEAS SERIES FUND
By: /S/ Lynn L. Anderson
-------------------------
Lynn L. Anderson
President
ACKNOWLEDGED AND ACCEPTED
STATE STREET BANK AND TRUST COMPANY
By: /s/ Timothy B. Harbert
-----------------------------
Senior Vice President
-45-
<PAGE>
STATE STREET BANK AND TRUST COMPANY
CUSTODIAN FEE SCHEDULE
THE SEVEN SEAS EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
I. CUSTODY, PORTFOLIO AND FUND ACCOUNTING SERVICE - Maintain custody of fund
assets. Settle portfolio purchases and sales. Report buy and sell fails.
Determine and collect portfolio income. Make cash disbursements and report cash
transactions. Maintain investment ledgers, provide selected portfolio
transactions, position and income reports. Maintain general ledge and capital
stock accounts. Prepare daily trial balance. Calculate net asset value daily.
Provide selected general ledger reports.
The administration fee shown below is an annual charge, billed and payable
monthly, based on average daily net assets.
A. PORTFOLIO ADMINISTRATION
$0 up to $100 Million .05%
$100 Million to $200 Million .03%
Over $200 Million .02%
B. GLOBAL CUSTODY - Comprised of asset charges and transaction charges
GROUP I GROUP II GROUP III GROUP IV GROUP V
------- -------- --------- -------- -------
Euroclear Australia Italy S. Korea Bangladesh
Cedel Netherlands Belgium Portugal China
Japan New Zealand Norway Spain Columbia
Germany Switzerland Hong Kong Sri Lanka Cypress
Canada Denmark Mexico Philippines Hungary
Austria France Thailand Taiwan S. Africa
Ireland Finland Malaysia Poland
United Kingdom Sweden Egypt
Singapore Indonesia Peru
Israel
Uruguay
Turkey
Argentina
Brazil
Chile
Greece
Venezuela
Pakistan
India
-46-
<PAGE>
Asset Charge:
(in Basis Points)
*GROUP *GROUP *GROUP *GROUP *GROUP
I II III IV V
First $50 Million 6 11 18 25 40
Over $50 Million 5 10 16 20 40
*Excludes: agent, depository and local auditing fees, stamp duties and
registration fees.
Transaction Charge:
GROUP GROUP GROUP GROUP GROUP
I II III IV V
$25 $50 $60 $70 $150
II. PORTFOLIO TRADES - FOR EACH LINE ITEM PROCESSED
DTC and Fed Book Entry $18.00
DTC charges for trades sent via electronic trade delivery 9.00
New York Physical Settlements 25.00
All other trades 20.00
III. OPTIONS
Option charge for each option written or closing contract,
per issue, per broker $25.00
Option expiration charge, per issue, per broker 15.00
Option exercised charge, per issue, per broker 15.00
IV. FUTURES
Per transaction $25.00
If third party agreement utilized 18.00
V. PRICING FEE
This service provides securities pricing on request. Services and fees are
based on the schedule below.
Monthly charges for the State Street Bank Automated Pricing System are
determined by:
1. Mix of security positions
2. The number of positions that are priced during the month
Monthly Base Fee $375.00
-47-
<PAGE>
Monthly Quote Charge:
Foreign Bonds via Extel $ 10.00
Options, Futures and Private Placements 6.00
Listed equities (including international) and OTC equities 6.00
All other 11.00
For billing purposes, the monthly quote charge will be based on the average
number of positions in the portfolio.
VI. OUT-OF-POCKET EXPENSES
A billing for the recovery of applicable out-of-pocket expenses will be made as
of the end of each month. Out-of-pocket expenses include, but are not limited
to the following:
Telephone
Wire Charges ($4.70 per wire in and $4.55 out)
Postage and Insurance
Courier Service
Duplicating
Legal Fees
Supplies Related to Fund Records
Rush Transfer -- $8.00 Each
Transfer Fees
Sub-custodian Charges (Out-of-Pockets issued by Sub-custodians)
Price Waterhouse Audit Letter
Federal Reserve Fee for Return Check items over $2,500 - $4.25
GNMA Transfer - $15 each
PTC Deposit/Withdrawal for same day turnarounds - $50.00
THE SEVEN SEAS EMERGING STATE STREET BANK AND
MARKETS FUND TRUST COMPANY
By: /s/ Margaret L. Barclay By: /s/
--------------------------------- ---------------------------
Vice President and Fund Treasurer Vice President
Date: December 22, 1993 Date: December 23, 1993
-48-
<PAGE>
LETTER AGREEMENT
The Seven Seas Series Prime Money Market Portfolio
The Seven Seas Series Emerging Markets Fund
Custodian Contract
January 19, 1994
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Dear Sirs:
Pursuant to Paragraph 12 of the Custodian Contract between The Seven Seas Series
Fund and State Street Bank and Trust Company, dated as of April 11, 1988, The
Seven Seas Series Fund advises you that it is creating two new series to be
named The Seven Seas Series Prime Money Market Portfolio and The Seven Seas
Series Emerging Markets Fund (the "Portfolios") and that The Seven Seas Series
Fund desires State Street Bank and Trust Company to serve as Custodian with
respect to the Portfolios pursuant to the terms and conditions of the Custodian
Contract.
Notwithstanding anything to the contrary in Paragraph 9, the initial term of the
Custodian Contract with respect to the New Funds shall be until April 6, 1994.
Please acknowledge your acceptance of acting as Custodian to the New Funds by
executing this letter agreement in the space provided below and then returning
it to the undersigned.
Sincerely,
THE SEVEN SEAS SERIES FUND
By: /s/ Lynn L. Anderson
--------------------------
Lynn L. Anderson
President
ACKNOWLEDGED AND ACCEPTED
STATE STREET BANK AND TRUST COMPANY
By: /s/
------------------------
-49-
<PAGE>
STATE STREET BANK & TRUST COMPANY
CUSTODIAN FEE SCHEDULE
THE SEVEN SEAS SERIES FUND
MULTIPLE CLASS OF SHARES
An additional $18,000 annual fee will be applied for each class of shares,
excluding the initial class of shares if more than one class of shares is
operational in a fund.
Effective Date: February 17, 1994
Approved: /s/ J. David Griswold
-----------------------------
The Seven Seas Series Fund
Date: 4/14/94
Approved: /s/ Nancy Grady
---------------------------------
State Street Bank & Trust Company
Date: 2/17/94
-50-
<PAGE>
STATE STREET BANK & TRUST COMPANY
CUSTODIAN FEE SCHEDULE
THE SEVEN SEAS SERIES FUND
EARNINGS CREDIT
A balance credit will be applied against the custody fees (excluding Out-of-
Pocket expenses). The credit is based on 50% of the average 90 day Treasury
Bill rate for the month, times the average collected balance in the custodian
demand deposit account for the month billed.
Effective Date: June 1, 1994
Approved: Approved:
/s/ /s/ Nancy Grady
- ---------------------------- -----------------------------------
The Seven Seas Series Fund State Street Bank & Trust Company
Date: 5/12/94 Date: 5/10/94
-51-
<PAGE>
LETTER AGREEMENT
The Seven Seas Series Tax Free Money Market Fund
Custodian Contract
July 13, 1994
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Ladies & Gentlemen:
Pursuant to Paragraph 12 of the Custodian Contract between The Seven Seas Series
Fund and State Street Bank and Trust Company, dated as of April 11, 1988, The
Seven Seas Series Fund advises you that it is creating a new series to be named
The Seven Seas Series Tax Free Money Market Fund, Class A, Class B and Class C
("Tax Free Fund") and that The Seven Seas Series Fund desires State Street Bank
and Trust Company to serve as Custodian with respect to the Tax Free Fund
pursuant to the terms and conditions of the Custodian Contract.
Notwithstanding anything to the contrary in Paragraph 9, the initial term of the
Custodian Contract with respect to the Tax Free Fund shall be until April 12,
1995.
Please acknowledge your acceptance of acting as Custodian to the Tax Free Fund
by executing this letter agreement in the space provided below and then
returning it to the undersigned.
Sincerely,
THE SEVEN SEAS SERIES FUND
By: /s/ Lynn L. Anderson
------------------------
Lynn L. Anderson
President
ACKNOWLEDGED AND ACCEPTED
STATE STREET BANK AND TRUST COMPANY
By: /s/ Nicholas A. Lopardo
-----------------------------
Nicholas A. Lopardo
Executive Vice President
-52-
<PAGE>
LETTER AGREEMENT
The Seven Seas Series Real Estate Fund
The Seven Seas Series Small Cap Fund
The Seven Seas Series Active International Fund
Custodian Contract
October 25, 1994
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Ladies & Gentlemen:
Pursuant to Paragraph 12 of the Custodian Contract between The Seven Seas Series
Fund and State Street Bank and Trust Company, dated as of April 11, 1988, The
Seven Seas Series Fund advises you that (1) it is creating a new series to be
named The Seven Seas Series Real Estate Fund, (2) it has changed the investment
objective and policies of The Seven Seas Series Midcap Index Fund and renamed it
The Seven Seas Series Small Cap Fund, and (3) it has changed the investment
objective and policies of The Seven Seas Series International European Index
Fund and renamed it The Seven Seas Series Active International Fund
(collectively, the "Funds"), and that The Seven Seas Series Fund desires State
Street Bank and Trust Company to serve as Custodian with respect to the Funds
pursuant to the terms and conditions of the Custodian Contract.
Notwithstanding anything to the contrary in Paragraph 9, the initial term of the
Custodian Contract with respect to the Funds shall be until April 12, 1995.
Please acknowledge your acceptance of acting as Custodian to the New Funds by
executing this letter agreement in the space provided below and then returning
it to the undersigned.
Sincerely, ACKNOWLEDGED AND ACCEPTED
STATE STREET BANK AND
THE SEVEN SEAS SERIES FUND TRUST COMPANY
By: /s/ Lynn L. Anderson By: /s/ Nicholas A. Lopardo
---------------------- --------------------------
Lynn L. Anderson Nicholas A. Lopardo
President Executive Vice President
-53-
<PAGE>
AMENDMENT No. 2 TO THE CUSTODIAN CONTRACT
Agreement made by and between State Street Bank and Trust Company (the
"Custodian") and The Seven Seas Series Fund (the "Fund").
WHEREAS, the Custodian and the Fund are parties to a custodian contract dated
April 11, 1988 as amended January 8, 1992 (the "Custodian Contract") governing
the terms and conditions under which the Custodian maintains custody of the
securities and other assets of the Fund; and
WHEREAS, the Custodian and the Fund desire to amend the terms and conditions
under which the Custodian maintains the Fund's securities and other non-cash
property in the custody of certain foreign sub-custodians in conformity with the
requirements of Rule 17f-5 under the Investment Company Act of 1940, as amended;
NOW THEREFORE, in consideration of the premises and covenants contained herein,
the Custodian and the Fund hereby amend the Custodian Contract by the addition
of the following terms and provisions;
1. Notwithstanding any provisions to the contrary set forth in the Custodian
Contract, the Custodian may hold securities and other non-cash property for all
of its customers, including the Fund, with a foreign sub-custodian in a single
account that is identified as belonging to the Custodian for the benefit of its
customers, PROVIDED HOWEVER, that (i) the records of the Custodian with respect
to securities and other non-cash property of the Fund which are maintained in
such account shall identify by book-entry those securities and other non-cash
property belonging to the Fund and (ii) the Custodian shall require that
securities and other non-cash property so held by the foreign sub-custodian be
held separately from any assets of the foreign sub-custodian or of others.
2. Except as specifically superseded or modified herein, the terms and
provisions of the Custodian Contract shall continue to apply with full force and
effect.
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed as a sealed instrument in its name and behalf by its duly authorized
representative this 17th day of July, 1995.
THE SEVEN SEAS SERIES FUND
By: /s/ Lynn L. Anderson
Title: President and CEO
STATE STREET BANK AND TRUST COMPANY
By: /s/ signature illegible
Title: Executive Vice President
