<PAGE>
THE SEVEN SEAS SERIES FUND
909 A STREET
TACOMA, WA 98402
206-627-7001
FAX 206-596-3286
June 28, 1996 VIA ELECTRONIC DELIVERY
Securities and Exchange Commission
450 - 5th Street N.W.
Judiciary Plaza
Washington, D.C. 20549
RE: The Seven Seas Series Fund (The "Registrant")
Post Effective Amendment No. 37 Under the 1933 Act
File No. 33-19229
811-5430
Ladies and Gentlemen:
Enclosed herewith for filing on behalf of the Registrant is Post Effective
Amendment No. 37 under the 1933 Act.
The purpose of the filing is to comply with the Item 32(b) undertaking to
provide shareholders with financial statements within four to six months
after the Fund became operational.
If you have any questions, please contact the undersigned at 206-596-3067.
Sincerely,
/s/ Carla Anderson
Carla Anderson
Paralegal
<PAGE>
THE SEVEN SEAS SERIES FUND
909 A STREET
TACOMA, WA 98402
206-627-7001
FAX 206-596-3286
June 28, 1996 VIA ELECTRONIC DELIVERY
Securities and Exchange Commission
450 - 5th Street N.W.
Judiciary Plaza
Washington, D.C. 20549
RE: The Seven Seas Series Fund (The "Registrant")
Post Effective Amendment No. 37 Under the 1933 Act
485(b) Counsel Representation
File No. 33-19229
811-5430
Ladies and Gentlemen,
I serve as Legal Counsel to The Seven Seas Series Fund (the "Investment
Company"). I also serve as an officer of the Investment Company. I serve in
similar capacities with the Investment Company's administrator, Frank Russell
Investment Management Company, and other affiliated companies.
As Legal Counsel, I have reviewed the Investment Company's
Post-Effective Amendment No. 37 to the Investment Company's Registration
Statement to be filed with the Securities and Exchange Commission under
the Securities Act of 1933. The Post-Effective Amendment No. 37 will be
filed pursuant to said Rule 485, and become effective pursuant to said
Rule on June 28, 1996. I have also reviewed such other documents and
records deemed appropriate.
On the basis of this review, I am of the opinion that Post-Effective
Amendment No. 37 does not contain disclosures which would render it
ineligible to become effective pursuant to Paragraph (b) of Rule 485.
Very truly yours,
/s/ J. David Griswold
J. David Griswold
Vice President, Secretary and
Associate General Counsel
<PAGE>
Filed Pursuant to Rule 485(b)
As filed with the Securities and Exchange Commission on June 28, 1996
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. 37 ( X )
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 (X )
Amendment No. 39 ( 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 COPIES TO:
AGENT FOR SERVICE:
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-
<PAGE>
(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-
<PAGE>
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 - Prospectus
Part B - Statement 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
BOND MARKET 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 of the funds, The Seven Seas
Series Bond Market Fund (referred to in this Prospectus as the "Bond Market
Fund" or the "Fund"). The Fund seeks to maximize total return by investing in
fixed income securities, including, but not limited to, those represented by the
Lehman Brothers Aggregate Bond Index. The Fund intends to invest primarily in US
Government and high-grade corporate debt 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 June 28, 1996. 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, 35th 909 A Street
Boston, Massachusetts 02110 Floor Tacoma, Washington 98402
(617) 654-4721 Boston, Massachusetts 02110 (206) 627-7001
(617) 654-6089
</TABLE>
PROSPECTUS DATED JUNE 28, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Fund Operating Expenses.................................................................................... 3
Financial Highlights....................................................................................... 4
The Seven Seas Series Fund................................................................................. 4
Manner of Offering......................................................................................... 5
Investment Objective, Policies and Restrictions............................................................ 5
Certain Risk Factors....................................................................................... 12
Portfolio Turnover......................................................................................... 13
Dividends and Distributions................................................................................ 13
Taxes...................................................................................................... 13
Valuation of Fund Shares................................................................................... 14
Purchase of Fund Shares.................................................................................... 15
Redemption of Fund Shares.................................................................................. 17
General Management......................................................................................... 18
Fund Expenses.............................................................................................. 21
Performance Calculations................................................................................... 21
Additional Information..................................................................................... 22
</TABLE>
2
<PAGE>
FUND OPERATING EXPENSES
THE SEVEN SEAS SERIES BOND MARKET FUND
The following table is intended to assist the investor in understanding the
costs and expenses that an investor in the Bond 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 (1)........................................................................................................ .13%
12b-1 Fees (1)(2)(2)..................................................................................................... .04
Other Expenses: (1)(2)................................................................................................... .33
----
Total Operating Expenses After Fee Waivers (1)(4)........................................................................ .50%
----
----
</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 $ 16
------ -------
------ -------
</TABLE>
- ------------------------
(1) The Adviser has voluntarily agreed to waive one-half of its advisory fee.
Additionally, the Adviser has agreed to waive up to the full amount of its
remaining Advisory fee to the extent that total expenses exceed .50% 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 and
Other Expenses before waivers would be .30% and .33% of average daily net
assets, respectively. The total operating expenses of the Fund absent fee
waivers would be .68% on an annual basis. The Advisory fee waivers 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 $30 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. These fees would be in addition to any amounts received by the
3
<PAGE>
financial intermediary under its Shareholder Servicing Agreement with the
Investment Company or Distributor. The Agreement requires each financial
intermediary to disclose to its clients any compensation payable to it by
the Investment Company or Distributor and any other compensation payable by
the client for various services provided in connection with their accounts.
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.
FINANCIAL HIGHLIGHTS
THE SEVEN SEAS SERIES BOND MARKET FUND
The following table includes selected data for a share outstanding
throughout the period of February 7, 1996 (commencement of operations) to May
31, 1996 (unaudited), and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
1996+
---------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD............................................... $ 10.00
---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................................ .15
Net realized and unrealized gain (loss) on investments........................... (.49)
---------
Total From Investment Operations............................................... (.34)
---------
LESS DISTRIBUTIONS:
Net investment income............................................................ (.03)
---------
NET ASSET VALUE, END OF PERIOD..................................................... $ 9.63
---------
---------
TOTAL RETURN (%) (a)............................................................... (3.43)
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average daily net assets (b)......................... .56
Operating expenses, gross, to average daily net assets (b)....................... .86
Net investment income to average daily net assets (b)............................ 5.55
Portfolio turnover............................................................... 97.62
Net assets, end of period ($000 omitted)......................................... 23.404
Per share amount of fees waived ($ omitted)...................................... .0083
</TABLE>
- ------------------------
+ For the period February 7, 1996 (commencement of operations) to May 31, 1996
(unaudited).
(a) Periods less than one year are not annualized.
(b) Annualized.
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
4
<PAGE>
shares evidencing beneficial interests in different investment portfolios.
Through this Prospectus, Investment Company offers shares in one such portfolio,
The Seven Seas Series Bond 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 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 nonfundamental investment objective is to maximize total return
by investing in fixed income securities, including, but not limited to, those
represented by the Lehman Brothers Aggregate Bond Index. This objective may be
changed only with the approval of a majority of the Fund's Trustees. 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 debt securities. The Fund may make direct investments in: (1) US
Government securities, including US Treasury securities and other obligations
issued or guaranteed as to interest and principal by the US Government and its
agencies and instrumentalities, (2) corporate debt securities, (3) asset-backed
securities, (4) mortgage-backed securities including, but not limited to,
collateralized mortgage obligations and real estate mortgage investment
conduits, (5) repurchase agreements, (6) commercial paper, notes and bonds
(including convertible bonds) issued by foreign and domestic corporations (7)
mortgage-related pass-through securities; (8) asset-backed securities, (9)
instruments of US and foreign banks, including Eurodollar Certificates of
Deposit ("ECDs"), Eurodollar Time Deposits ("ETDs") and Yankee Certificates of
Deposit ("YCDs"), certificates of deposit, time deposits, letters of credit and
banker's acceptances; (10) financial futures and option contracts, (11) interest
rate exchange agreements and other swap agreements, (12) supranational and
sovereign debt obligations including subdivisions and agencies, and (13) other
securities and instruments deemed by the Adviser to have characteristics
consistent with the Fund's investment objective. Securities may be either fixed
income, zero coupon or variable or floating-rate and may be denominated in US
dollars or selected foreign currencies. As indicated above, the Fund may invest
in derivative securities, including futures and options, interest rate exchange
agreements and other swap agreements and collateralized mortgage obligations.
The Fund limits its portfolio investments in corporate notes and bonds to
those that are rated investment-grade by a Nationally Recognized Statistical
Rating Organization ("NRSRO") or, if unrated, are determined by the Adviser to
be of comparable quality. Commercial paper must be rated in one of the two
highest categories by at least one NRSRO or, if unrated, are determined by the
Adviser
5
<PAGE>
to be of comparable quality. Investment-grade securities include securities
rated Baa3 by Moody's or BBB- by Standard & Poor's (and securities of comparable
quality), which securities have speculative characteristics. Please see the
Statement of Additional Information for a description of the securities ratings
of debt instruments and commercial paper. If a security is downgraded and is no
longer investment-grade, the Fund may continue to hold the security if the
Adviser determines that such action is in the best interest of the Fund and if
the Fund would not, as a result thereby, have more than 5% of its assets
invested in noninvestment-grade securities.
The Fund will measure its performance against the Lehman Brothers Aggregate
Bond Index (the "LBAB Index"). The Fund also intends to maintain an average
maturity and duration similar to that of the LBAB Index. Annual duration for the
LBAB Index for 1995 was 5.06 years. The LBAB Index is made up of the
Government/Corporate Bond Index, the Mortgage-Backed Securities Index and the
Asset-Backed Index. The Government/Corporate Bond Index includes the Government
and Corporate Bond Indices. The LBAB Index includes fixed rate debt issues rated
investment grade or higher by Moody's Investors Service, Standard and Poor's
Corporation or Fitch Investor's Service, in that order. All issues have at least
one year to maturity and an outstanding par value of at least $100 million.
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
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.
FIXED INCOME SECURITIES. The Fund may invest in fixed-income securities to
achieve its investment objective. In periods of declining interest rates, the
Fund's yield (its income from portfolio investments over a stated period of
time) may tend to be higher than prevailing market rates, and in periods of
rising interest rates, the yield of the Fund may tend to be lower. Also when
interest rates are falling, the inflow of new money to the Fund from the
continuous sales of its shares will likely be invested in portfolio instruments
producing lower yield than the balance of the Fund's portfolio, thereby reducing
the yield of the Fund. In periods of rising interest rates, the opposite can be
true. The net asset value of the Fund investing in fixed-income securities also
may change as general levels of interest rates fluctuate. When interest rates
increase, the value of a portfolio of fixed- income securities can be expected
to decline. Conversely, when interest rates decline, the value of a portfolio of
fixed-income securities can be expected to increase.
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
6
<PAGE>
no more than 15% 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. 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. 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. Payments
of principal and interest are passed through
7
<PAGE>
to holders of the securities and are typically supported by some form of credit
enhancement, such as a letter of credit, cash collateral account, collateralized
investment account, subordinated structures, 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, an early
amortization event may be declared. Principal and interest would be repaid to
holders of the trust certificates earlier than initially anticipated. 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 fixed or
floating rate mortgage-related securities, including but not limited to,
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. There are two primary risks
associated with the roll market for mortgage-backed securities. First, the value
and safety of the roll depends entirely upon the counterparty's ability to
redeliver the security at the termination of the roll. Therefore, the
counterparty to a roll must meet the same credit criteria as any existing
repurchase counterparty. Second, the security which is redelivered at the end of
the roll period must be substantially the same as the initial security, i.e., it
must have the same coupon, be issued by the same agency and be of the same type,
have the same original stated term to maturity, be priced to result in similar
market yields and must be "good delivery." Within these parameters, however, the
actual pools that are redelivered could be less desirable than those originally
rolled, especially with respect to prepayment characteristics.
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 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
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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.
VARIABLE AND FLOATING RATE SECURITIES. A floating rate security is a
security which provides for the adjustment of its interest rate whenever a
specified interest rate (such as a bank's designated prime lending rate)
changes. A variable rate security is a security which provides for the
adjustment of its interest rate on set dates (such as the last day of the month
or calendar quarter). 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. 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 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
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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 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. With index futures, 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 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 will be conducted so that the total amount paid on
premiums for all put and call options outstanding will not exceed 5% of the
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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.
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.
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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 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. An
incorrect correlation could result in a loss on both the hedged securities in a
Fund and the hedging vehicle so that the portfolio return might have been
greater had hedging not been attempted. Lack of a liquid market for any reason
may prevent a Fund from liquidating an unfavorable position and the Fund would
remain obligated to meet margin requirements until the position is closed. See
Risk Factors in Options, Futures, Forward and Currency Transactions in the
Statement of Additional Information.
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.
FORWARD COMMITMENTS. 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.
ASSET-BACKED SECURITIES. 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.
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MORTGAGE-BACKED SECURITY ROLLS. There are two primary risks associated with
the roll market for mortgage-backed securities. First, the value and safety of
the roll depends entirely upon the counterparty's ability to redeliver the
security at the termination of the roll. Therefore, the counterparty to a roll
must meet the same credit criteria as any existing repurchase counterparty.
Second, the security which is redelivered at the end of the roll period must be
substantially the same as the initial security, i.e., it must have the same
coupon, be issued by the same agency and be of the same type, have the same
original stated term to maturity, be priced to result in similar market yields
and must be "good delivery." Within these parameters, however, the actual pools
that are redelivered could be less desirable than those originally rolled,
especially with respect to prepayment characteristics.
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. However, this higher
than average turnover rate is not expected to materially affect the Fund's
performance. The portfolio turnover rate cannot be predicted, but it is
anticipated that the Fund's annual turnover rate generally will not exceed 200%
(excluding turnover of securities having a maturity of one year or less).
Portfolio turnover in excess of 100% may result in higher transaction fees.
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 long-term 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 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 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. 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 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.
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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 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 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 Bond
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
stating: (1) the investor's account registration, 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.
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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 Bond Market 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 Bond 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 (and not
established only by evaluation procedures) and 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 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 Bond 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.
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 Bond 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 be
liable to investors if they fail to employ reasonable procedures to confirm that
instructions communicated by telephone are properly authorized. 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 Bond 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 Bond 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. 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 securities from the portfolio of the Fund in lieu
of cash. Investors will incur brokerage
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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 investment of the Fund in
accordance with the Fund's investment objective, policies and restrictions. The
individual primarily responsible for investment decisions regarding the Fund is
John P. Kirby, Investment Officer. Mr. Kirby has been with State Street since
1995. Prior to joining State Street, Mr. Kirby was an account manager with Blake
& Associates. Prior to Blake, Mr. Kirby was a fixed income analyst at One
Federal Asset Management a Shawmut Bank subsidiary, and at Cambridge Port
Savings as an asset/liability risk specialist. There are eight other portfolio
managers who work with Mr. Kirby in managing the Fund. For these services, the
Fund pays Adviser a fee, calculated daily and paid monthly, equal to .30%
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
18
<PAGE>
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 May 31, 1996, State Street held of record 25% 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 Bond Market 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 Bond
Market Fund 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 up to $500 million -- .06%; (2)
over $500 million to $1 billion -- .05%; and (3) over $1 billion -- .03%. The
percentage of the fee paid by the Bond Market 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.
19
<PAGE>
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, 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.
20
<PAGE>
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 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
21
<PAGE>
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 Bond Market 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.
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 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.
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
The Seven Seas Series Bond Market 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
STATEMENT OF ADDITIONAL INFORMATION
BOND MARKET FUND
June 28, 1996
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 Bond Market
Fund (the "Bond Market Fund" or the "Fund") as contained in the Fund's
Prospectus dated June 28, 1996. 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 .................................. 5
Trustees and Officers ................................... 5
OPERATION OF INVESTMENT COMPANY .............................. 7
Service Providers ....................................... 7
Adviser ................................................. 7
Administrator ........................................... 7
Distributor ............................................. 8
Custodian and Transfer Agent ............................ 8
Independent Accountants ................................. 8
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 .................................................. 12
Investment Restrictions ................................. 12
Investment Policies ..................................... 14
Hedging Strategies and Related Investment Techniques .... 20
Ratings of Debt Instruments ............................. 27
Ratings of Commercial Paper ............................. 28
TAXES ........................................................ 31
FINANCIAL STATEMENTS ......................................... 33
- 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 Bond 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:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
<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 February 8, 1996
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
- 3 -
<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 May 31, 1996, State Street held beneficially and of
record 25% 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 the Bond
Market Fund until such time as the Fund has public shareholders and therefore
may be deemed to be a controlling person.
- 4 -
<PAGE>
PRINCIPAL SHAREHOLDERS. As of May 31, 1996, the following
shareholders owned of record 5% or more of the issued and outstanding
shares of the Fund:
- Bryn Mawr Gift Annuity Fund, an account of State Street Bank and Trust
Company, P.O. Box 9242, Boston, MA 02209 -- 10%; and
- Wellesley College Fixed Income PTSP, an account of State Street Bank
and Trust Company, 225 Franklin Street, Boston, MA 02110 -- 67%.
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 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).
- 5 -
<PAGE>
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
Trustee from Benefits Accrued Retirement Company Paid to
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>
- 6 -
<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 ("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 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 ("Admitistration 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 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
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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 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,
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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 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 Bond Market 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
Fund's net asset value 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,
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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 market 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. Adviser shall consider all
factors it deems relevant in assessing the best overall terms available for any
transaction, including the breadth of
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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.
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.
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 fund
as appropriate), that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
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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 Fund computes yield 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 6
YIELD = 2[(----+1) -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.
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.
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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
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, 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.
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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.
(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 mineral leases or 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.
(19) 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.
(20) Invest in real estate limited partnerships that are not readily
marketable.
INVESTMENT POLICIES
The Fund will measure its performance against The Lehman Brothers Aggregate
Bond Index. The Lehman Brothers Aggregate Bond Index is made up of the
Government/Corporate Bond Index, the Mortgage-Backed Securities Index and the
Asset-Backed Index. The Government/Corporate Bond Index includes the Government
and Corporate Bond Indices. The Index includes all public obligations of the US
Treasury (excluding flower bonds and foreign-targeted issues); all publicly
issued debt of US Government agencies and quasi-federal corporations; corporate
debt guaranteed by the US Government; and all publicly issued, fixed rate,
nonconvertible, investment grade, dollar denominated, SEC registered corporate
debt. Corporate sectors include, but are not limited to, industrial, finance,
utility and Yankee. Included among Yankees is debt issued or guaranteed by
foreign sovereign governments, municipalities or governmental agencies or
international agencies.
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<PAGE>
The mortgage component of the Lehman Brothers Aggregate Bond Index includes
15- and 30-year fixed rate securities backed by mortgage pools of GNMA, FHLMC,
and FNMA. Balloons are included in the index. The Asset-Backed Index is
composed of credit card, auto and home equity loans (pass-throughs, bullets and
controlled amortization structures). All securities have an average life of at
least one year.
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 sells 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.
FORWARD COMMITMENTS. The Fund may contract to purchase securities for a
fixed price at a future date beyond customary settlement time. The Fund may
dispose of a commitment prior to
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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.
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 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.
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.
VARIABLE AND FLOATING RATE SECURITIES. A floating rate security shall
mean a security which provides for the adjustment of its interest rate
whenever a specified interest rate (such as a bank's designated prime lending
rate) changes. A variable rate security shall mean a security which provides
for the adjustment of its interest rate on set dates (such as the last day of
the month or calendar quarter). 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 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. 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, cash collateral account, collateralized investment account, subordinated
structures, 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.
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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 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
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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.
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.
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
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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. The 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.
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.
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 redeem or call the stock. The right to payment of preferred stock is
generally subordinate to rights associated with a corporation's debt securities.
HEDGING STRATEGIES AND RELATED INVESTMENT TECHNIQUES
The Funds 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,
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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 these Funds 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."
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 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
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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.
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
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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 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."
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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 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
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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 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 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. 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 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.
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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.
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.
- 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.
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.
-29-
<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 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
-30-
<PAGE>
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 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
-31-
<PAGE>
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 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 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 a 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. 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 Funds 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.
-32-
<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 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
Immediately following are unaudited financial statements for the Fund,
including notes to the financial statements and financial information, for
the period February 7, 1996 (commencement of operations) to May 31, 1996.
Audited financial statements for the Fund will be available within 60 days
following the end of the Fund's then current fiscal year and, when available,
can be obtained without charge by calling Distributor at (617) 654-6089.
- 33 -
<PAGE>
SEVEN SEAS INVESTMENT PORTFOLIOS
[LOGO]
SPECIAL PROVISIONAL FINANCIAL REPORT
Bond Market Fund
May 31, 1996
<PAGE>
THE SEVEN SEAS SERIES FUND
SPECIAL PROVISIONAL FINANCIAL REPORT
MAY 31, 1996
(UNAUDITED)
TABLE OF CONTENTS
Page
Bond Market Fund Financial Statements. . . . . . . . . . . . . . . . . . . 3
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . 10
Fund Management and Service Providers. . . . . . . . . . . . . . . . . . . 14
"THE SEVEN SEAS SERIES FUND -Registered Trademark-" IS A REGISTERED TRADEMARK
AND SERVICE MARK OF THE SEVEN SEAS SERIES FUND.
THIS REPORT IS PREPARED FROM THE BOOKS AND RECORDS OF THE FUND AND IT IS
SUBMITTED FOR THE GENERAL INFORMATION OF SHAREHOLDERS. THIS INFORMATION IS FOR
DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY WHEN PRECEDED OR ACCOMPANIED BY A
SEVEN SEAS SERIES FUND PROSPECTUS CONTAINING MORE COMPLETE INFORMATION
CONCERNING THE INVESTMENT OBJECTIVE AND OPERATIONS OF THE FUND, CHARGES AND
EXPENSES. THE PROSPECTUS SHOULD BE READ CAREFULLY BEFORE AN INVESTMENT IS MADE.
PERFORMANCE IS HISTORICAL AND ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL
GAINS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN WHEN PURCHASED.
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. RUSSELL FUND DISTRIBUTORS,
INC., IS THE DISTRIBUTOR OF THE SEVEN SEAS SERIES FUND.
<PAGE>
THE SEVEN SEAS SERIES
BOND MARKET FUND
STATEMENT OF NET ASSETS
May 31, 1996 (Unaudited)
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- ---------
LONG-TERM INVESTMENTS - 96.6%
ASSET-BACKED SECURITIES - 4.5%
Chase Manhattan Grantor Trust
Pass-thru Certificate
Series 1996-A Class A
5.200% due 02/15/02 $ 180 $ 177
Discover Card Master Trust I
Series 1996-3 Class A
6.050% due 08/18/08 200 182
Ford Credit Auto Loan Master Trust
Series 1995-1 Class A
6.500% due 08/15/02 200 196
Household Affinity Credit Card
Participation Certificate
Series 1994-2 Class A
7.000% due 12/15/99 200 202
Premier Auto Trust
Series 1996-2 Class A3
6.350% due 01/06/00 300 299
---------
1,056
---------
CORPORATE BONDS AND NOTES - 28.8%
Alltel Corp.
6.750% due 09/15/05 150 144
Applied Materials, Inc. (MTN)
7.000% due 09/06/05 200 193
Associates Corp. of North America
6.375% due 08/15/98 150 149
BankAmerica Corp.
6.850% due 03/01/03 300 292
Bayerische Landesbank Girozen (MTN)
7.500% due 06/15/04 150 152
Branch Banking & Trust Co.
5.700% due 02/01/01 250 237
Burlington Northern Santa Fe
7.290% due 06/01/36 300 294
Chase Manhattan Corp.
5.500% due 02/15/01 200 188
CIT Group Holdings, Inc.
5.625% due 04/01/98 200 197
6.350% due 07/31/98 200 199
Citicorp
9.500% due 02/01/02 500 554
Dean Witter, Discover & Co.
6.000% due 03/01/98 300 297
Ford Motor Credit Co.
5.625% due 01/15/99 300 292
General Motors Acceptance Corp.
5.375% due 03/09/98 200 196
General Motors Acceptance Corp.
(MTN)
8.250% due 01/20/98 300 309
Household Finance Corp. (MTN)
6.490% due 04/09/01 400 388
Lockheed Martin Corp.
6.550% due 05/15/99 350 348
Merrill Lynch & Co., Inc.
9.000% due 05/01/98 300 313
NationsBank Corp.
6.625% due 01/15/98 500 501
Norwest Corporation
Series G (MTN)
6.250% due 04/15/99 200 197
Norwest Financial, Inc.
8.500% due 08/15/98 300 311
Penney (J.C.) Co., Inc. (MTN)
6.375% due 09/15/00 200 195
Republic New York Corp.
9.125% due 05/15/21 200 226
Sears Roebuck & Co. (MTN)
7.820% due 02/23/98 250 255
Suntrust Banks, Inc.
6.000% due 02/15/26 300 273
Wendy's International, Inc.
7.000% due 12/15/25 50 44
---------
6,744
---------
Special Provisional Financial Report 3
<PAGE>
THE SEVEN SEAS SERIES
BOND MARKET FUND
STATEMENT OF NET ASSETS, CONTINUED
May 31, 1996 (Unaudited)
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- ---------
MORTGAGE-BACKED SECURITIES - 26.1%
Federal Home Loan Mortgage Corp.
7.000% 15 Year TBA (b) $ 500 $ 491
6.500% 30 Year TBA (b) 600 557
7.500% 30 Year TBA (b) 900 882
8.000% 30 Year TBA (b) 1,000 1,002
Federal National Mortgage Association
8.000% 15 Year TBA (b) 100 100
Federal National Mortgage
Association Pools
# 050766 7.500% due 07/01/23 107 105
# 201543 8.000% due 02/01/23 12 12
# 221098 7.500% due 08/01/23 37 36
# 233081 7.500% due 09/01/23 43 42
# 237160 7.500% due 02/01/24 43 43
# 270782 7.500% due 02/01/24 94 92
# 292898 7.000% due 08/01/24 230 219
# 296351 8.500% due 12/01/24 53 54
# 303031 7.500% due 10/01/24 330 323
# 304928 8.500% due 03/01/25 96 98
# 316260 7.500% due 07/01/25 172 168
# 319059 6.500% due 08/01/25 308 286
Government National Mortgage
Association Pools
# 104190 10.000% due 11/15/13 26 28
# 112115 10.000% due 04/15/14 16 17
# 328956 7.500% due 12/15/22 19 19
# 330416 7.500% due 01/15/23 41 40
# 344955 7.500% due 08/15/23 69 68
# 346374 7.500% due 01/15/23 116 114
# 348101 7.000% due 06/15/23 303 290
# 352079 7.000% due 09/15/23 274 262
# 352521 7.500% due 11/15/23 58 57
# 369662 7.500% due 10/15/23 81 80
# 371259 7.000% due 01/15/24 133 126
# 380248 7.500% due 02/15/24 283 277
# 384568 7.000% due 04/15/24 222 211
---------
6,099
---------
NON-US BONDS - 0.9%
ABN - Amro Bank NV
7.250% due 05/31/05 200 198
---------
198
---------
UNITED STATES GOVERNMENT AGENCIES - 2.1%
Federal Home Loan Bank
5.860% due 04/02/99 500 492
---------
492
---------
UNITED STATES GOVERNMENT TREASURIES - 21.0%
United States Treasury Bonds
8.875% due 08/15/17 580 686
7.875% due 02/15/21 350 377
6.875% due 08/15/25 280 274
United States Treasury Notes
5.875% due 04/30/98 333 331
7.125% due 10/15/98 80 81
6.500% due 04/30/99 150 150
6.375% due 05/15/99 70 70
6.375% due 07/15/99 75 75
6.875% due 07/31/99 200 202
6.875% due 08/31/99 245 248
6.375% due 01/15/00 350 348
6.250% due 05/31/00 575 568
7.875% due 08/15/01 115 121
6.250% due 02/15/03 210 204
7.250% due 05/15/04 650 666
7.250% due 08/15/04 415 426
6.500% due 08/15/05 100 98
---------
4,925
---------
4 Special Provisional Financial Report
<PAGE>
THE SEVEN SEAS SERIES
BOND MARKET FUND
STATEMENT OF NET ASSETS, CONTINUED
May 31, 1996 (Unaudited)
PRINCIPAL MARKET
AMOUNT VALUE
(000) (000)
--------- ---------
YANKEE BONDS - 13.2%
British Columbia, Province of
6.500% due 01/15/26 $ 200 $ 177
Finland, Republic of
6.950% due 02/15/26 200 186
Hydro, Quebec
8.050% due 07/07/24 300 314
Manitoba, Province of
6.000% due 10/15/97 150 149
Series C-J
9.500% due 10/01/00 351 384
Midland Bank PLC
6.950% due 03/15/11 240 223
National Australia Bank, Ltd.
9.700% due 10/15/98 250 266
New Zealand, Government of
8.750% due 12/15/06 300 332
Ontario, Province of
7.750% due 06/04/02 300 310
Quebec, Province of
6.500% due 01/17/06 300 278
Victorian Public Authority Financial Agency
8.450% due 10/01/01 150 159
Westpac Banking Corp., Ltd.
7.875% due 10/15/02 300 312
---------
3,090
---------
TOTAL LONG-TERM INVESTMENTS
(cost $23,307) 22,604
---------
SHORT-TERM INVESTMENTS - 3.1%
Franklin US Treasuries
Money Market Fund (a) 407 407
Valiant Money Market Fund
Class A (a) 308 308
---------
TOTAL SHORT-TERM INVESTMENTS
(cost $715) 715
---------
MARKET
VALUE
(000)
---------
REPURCHASE AGREEMENTS - 12.8%
Agreement with UBS Securities of $3,000
acquired 05/13/96 at 5.220%
to be repurchased at $3,013
on 06/13/96, collateralized by:
$2,960 US Treasury Note at 6.875%
due 07/31/99 valued at $3,066 (d) $ 3,000
---------
TOTAL REPURCHASE AGREEMENTS
(cost $3,000) 3,000
---------
TOTAL INVESTMENTS AND REPURCHASE AGREEMENTS
(identified cost $27,022)(c) - 112.5% 26,319
OTHER ASSETS AND LIABILITIES, NET - (12.5%) (2,915)
NET ASSETS - 100.0% $ 23,404
---------
---------
(a) At cost, which approximates market.
(b) Forward commitment. See Note 2
(c) At May 31, 1996, the cost for federal income tax purposes was the same as
shown above and net unrealized depreciation for all securities was $704.
This consisted of aggregate gross unrealized appreciation for all securities
in which there was an excess of market value over tax cost of $5 and
aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over market value of $709.
(d) Held as collateral in connection with forward commitments.
(MTN) represents Medium Term Note.
The accompanying notes are an integral part of the financial statements.
Special Provisional Financial Report 5
<PAGE>
THE SEVEN SEAS SERIES
BOND MARKET FUND
STATEMENT OF ASSETS AND LIABILITIES
May 31, 1996 (Unaudited)
<TABLE>
<S> <C> <C>
ASSETS
Investments at market (identified cost $24,022,266)(Note 2). . . . . . . . . . . . . . . . . $ 23,318,573
Repurchase agreements (cost $3,000,000)(Note 2). . . . . . . . . . . . . . . . . . . . . . . 3,000,000
Receivables:
Dividends and interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 299,828
Investments sold (delayed settlement). . . . . . . . . . . . . . . . . . . . . . . . . . . 1,158,278
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,717
Deferred organization expenses (Note 2). . . . . . . . . . . . . . . . . . . . . . . . . . . 51,594
-------------
27,847,990
LIABILITIES
Payables (Note 4):
Investments purchased (regular settlement) . . . . . . . . . . . . . . . . $ 433,076
Investments purchased (delayed settlement) . . . . . . . . . . . . . . . . 3,950,918
Accrued administrative fees. . . . . . . . . . . . . . . . . . . . . . . . 316
Accrued custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . 3,087
Accrued distribution fees. . . . . . . . . . . . . . . . . . . . . . . . . 629
Accrued shareholder servicing fees . . . . . . . . . . . . . . . . . . . . 489
Accrued organization fees. . . . . . . . . . . . . . . . . . . . . . . . . 55,000 4,443,515
------------- -------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,404,475
-------------
-------------
NET ASSETS CONSIST OF:
Undistributed net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 296,803
Accumulated net realized gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . (303,177)
Unrealized appreciation (depreciation) on investments. . . . . . . . . . . . . . . . . . . . (703,693)
Shares of beneficial interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,430
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,112,112
-------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,404,475
-------------
-------------
Net asset value, offering and redemption price per share
($23,404,475 divided by 2,429,991 shares of $.001,
par value shares of beneficial interest outstanding) . . . . . . . . . . . . . . . . . . . . $9.63
-------------
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
6 Special Provisional Financial Report
<PAGE>
THE SEVEN SEAS SERIES
BOND MARKET FUND
STATEMENT OF OPERATIONS
For the Period February 7, 1996 (Commencement of Operations)
to May 31, 1996 (Unaudited)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Income:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 377,505
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,788
-------------
388,293
Expenses (Notes 2 and 4):
Advisory fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,862
Administrative fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,612
Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,135
Distribution fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,563
Professional fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,056
Registration fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,773
Shareholder servicing fees . . . . . . . . . . . . . . . . . . . . . . . . 1,572
Trustees' fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 906
Amortization of deferred organization expenses . . . . . . . . . . . . . . 3,406
-------------
Expenses before waivers. . . . . . . . . . . . . . . . . . . . . . . . . . 54,885
Expenses waived. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (19,535) 35,350
------------- -------------
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 352,943
-------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Notes 2 and 3)
Net realized gain (loss) from investments. . . . . . . . . . . . . . . . . . . . . . . . . . (303,177)
Net change in unrealized appreciation or depreciation of investments . . . . . . . . . . . . (703,693)
-------------
Net gain (loss) on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,006,870)
-------------
Net increase (decrease) in net assets resulting from operations. . . . . . . . . . . . . . . $ (653,927)
-------------
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
Special Provisional Financial Report 7
<PAGE>
THE SEVEN SEAS SERIES
BOND MARKET FUND
STATEMENT OF CHANGES IN NET ASSETS
For the Period February 7, 1996 (Commencement of Operations)
to May 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
1996
-------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 352,943
Net realized gain (loss) from investments. . . . . . . . . . . . . . . . . . . (303,177)
Net change in unrealized appreciation
or depreciation of investments . . . . . . . . . . . . . . . . . . . . . . . (703,693)
-------------
Net increase (decrease) in net assets resulting from operations. . . . . . . . . (653,927)
Distributions to shareholders from net investment income . . . . . . . . . . . . (56,140)
Increase (decrease) in net assets from Fund share transactions . . . . . . . . . 24,114,542
-------------
INCREASE (DECREASE) IN NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . 23,404,475
Net assets at beginning of period. . . . . . . . . . . . . . . . . . . . . . . . --
-------------
Net Assets at End of Period
(including undistributed net investment income of $296,803). . . . . . . . . . $ 23,404,475
-------------
-------------
</TABLE>
<TABLE>
<CAPTION>
FUND SHARE TRANSACTIONS
SHARES AMOUNT
------------- -------------
<S> <C> <C>
Fund shares sold . . . . . . . . . . . . . . . . . . . . . . . . 2,508,501 24,869,163
Fund shares issued to shareholders
in reinvestments of distributions. . . . . . . . . . . . . . . -- --
Fund shares redeemed . . . . . . . . . . . . . . . . . . . . . . (78,510) (754,621)
------------- -------------
Net increase (decrease). . . . . . . . . . . . . . . . . . . . . 2,429,991 24,114,542
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
8 Special Provisional Financial Report
<PAGE>
THE SEVEN SEAS SERIES
BOND MARKET FUND
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share
outstanding throughout the period and other performance
information derived from the financial statements.
<TABLE>
<CAPTION>
1996++
-------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . . . $ 10.00
-------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
Net realized and unrealized gain (loss) on investments . . . . . . . . . . . . (.49)
-------------
Total From Investment Operations . . . . . . . . . . . . . . . . . . . . . . . (.34)
-------------
LESS DISTRIBUTIONS:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (.03)
-------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . $ 9.63
-------------
-------------
TOTAL RETURN (%)(a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3.43)
RATIOS (%)/SUPPLEMENTAL DATA:
Operating expenses, net, to average daily net assets (b)(c). . . . . . . . . . .56
Operating expenses, gross, to average daily net assets (b)(c). . . . . . . . . .86
Net investment income to average daily net assets (b). . . . . . . . . . . . . 5.55
Portfolio turnover (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97.62
Net assets, end of period ($000 omitted) . . . . . . . . . . . . . . . . . . . 23,404
Per share amount of fees waived ($ omitted)(c) . . . . . . . . . . . . . . . . .0083
</TABLE>
++ For the period February 7, 1996 (commencement of operations) to
May 31, 1996 (Unaudited).
(a) Periods less than one year are not annualized.
(b) Annualized.
(c) See Note 4 for current period amounts.
Special Provisional Financial Report 9
<PAGE>
THE SEVEN SEAS SERIES
BOND MARKET FUND
NOTES TO FINANCIAL STATEMENTS
May 31, 1996 (Unaudited)
1. ORGANIZATION
The Seven Seas Series Fund (the "Investment Company") is a series mutual
fund, currently comprising 14 investment portfolios, which are in operation
as of May 31, 1996. This financial statement reports on one portfolio, The
Seven Seas Series Bond Market Fund (the "Fund"), which commenced operations
on February 7, 1996. The Investment Company is a registered and diversified
open-end investment company, as defined in the Investment Company Act of
1940, as amended (the "1940 Act"), 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. The
Investment Company's master trust agreement permits the Board of Trustees
to issue an unlimited number of full and fractional shares of beneficial
interest at a $.001 par value.
2. SIGNIFICANT ACCOUNTING POLICIES
The Fund's financial statements are prepared in accordance with generally
accepted accounting principles which require the use of management
estimates. The following is a summary of the significant accounting
policies consistently followed by the Fund in the preparation of its
financial statements.
SECURITY VALUATION: United States 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 sale, at the closing bid price, on the
primary exchange on which the security is traded. United States
over-the-counter, fixed-income securities and options are valued on the
basis of the closing bid price.
Many fixed-income securities do not trade each day, and thus last sale or
bid prices are frequently not available. Fixed-income securities may be
valued using prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities.
Money market instruments maturing within 60 days of the valuation date are
valued at "amortized cost," a method by which each portfolio instrument is
initially valued at cost, and thereafter a constant accretion/amortization
to maturity of any discount or premium is assumed, unless the Board of
Trustees determines that amortized cost does not represent fair value.
The Fund may value 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.
SECURITIES TRANSACTIONS: Securities transactions are recorded on a trade
date basis. Realized gains and losses from securities transactions are
recorded on the basis of identified cost.
INVESTMENT INCOME: Dividend income is recorded on the ex-dividend date and
interest income is recorded on the accrual basis.
AMORTIZATION AND ACCRETION: All zero-coupon bond discounts and original
issue discounts are accreted for both tax and financial reporting purposes.
All short-and long-term market premiums/discounts are amortized/accreted
for both tax and financial reporting purposes.
10 Special Provisional Financial Report
<PAGE>
THE SEVEN SEAS SERIES
BOND MARKET FUND
NOTES TO FINANCIAL STATEMENTS, CONTINUED
May 31, 1996 (Unaudited)
FEDERAL INCOME TAXES: As the Investment Company is a Massachusetts business
trust, each sub-trust is a separate corporate taxpayer and determines its
net investment income and capital gains (or losses) and the amounts to be
distributed to each fund's shareholders without regard to the income and
capital gains (or losses) of the other funds.
It is the Fund's intention to qualify as a regulated investment company and
distribute all of its taxable income. No federal income tax provision was
required for the period ended May 31, 1996.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: Income dividends and capital
gain distributions, if any, are recorded on the ex-dividend date. Dividends
are generally declared and paid quarterly. Capital gain distributions are
generally declared and paid annually. An additional distribution may be
paid by the Fund to avoid imposition of federal income tax on any remaining
undistributed net investment income and capital gains.
The timing and characterization of certain income and capital gain
distributions are determined in accordance with federal tax regulations
which may differ from generally accepted accounting principles ("GAAP"). As
a result, net investment income and net realized gain (or loss) on
investment transactions for a reporting period may differ significantly
from distributions during such period. The differences between tax
regulations and GAAP primarily relate to investments in mortgage-backed
securities and certain securities sold at a loss. Accordingly, the Fund may
periodically make reclassifications among certain of its capital accounts
without impacting its net asset value.
EXPENSES: Expenses such as advisory, custodian, transfer agent,
shareholder servicing, printing, and registration fees are charged directly
to the individual funds, while indirect expenses, such as administrative,
insurance, and professional fees are generally allocated among all funds
principally based on their relative net assets.
DEFERRED ORGANIZATION EXPENSES: The Fund incurred expenses in connection
with its organization and initial registration. These costs have been
deferred and are being amortized over 60 months on a straight-line basis.
REPURCHASE AGREEMENTS: The Fund may engage in repurchase and tri-party
repurchase agreements with several financial institutions whereby the Fund,
through its custodian or third-party custodian, receives delivery of the
underlying securities. The market value of these securities (including
accrued interest) on acquisition date is required to be an amount equal to
at least 102% of the repurchase price. The Fund's Adviser will monitor
repurchase agreements daily to determine that the market value (including
accrued interest) at Fedwire closing time of the underlying securities
remains at least equal to 100% of the repurchase price. The Adviser or
third-party custodian will notify the seller to immediately increase the
collateral on the repurchase agreement to 102% of the repurchase price if
collateral falls below 100%.
FORWARD COMMITMENTS: The Fund may contract to purchase securities for a
fixed price at a future date beyond customary settlement time (not to
exceed 120 days)(i.e., a "forward commitment" or "delayed
Special Provisional Financial Report 11
<PAGE>
THE SEVEN SEAS SERIES
BOND MARKET FUND
NOTES TO FINANCIAL STATEMENTS, CONTINUED
May 31, 1996 (Unaudited)
settlement" transaction, e.g., to be announced ("TBA")) consistent with the
Fund's ability to manage its investment portfolio and meet redemption
requests. The price of the underlying securities and the date when the
securities will be delivered and paid for are fixed at the time the
transaction is negotiated. The Fund may dispose of a forward commitment
transaction prior to settlement if it is appropriate to do so and realize
short-term gains (or losses) upon such sale. When effecting such
transactions, cash or liquid high grade debt obligations of the Fund in 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. A forward commitment
transaction involves a risk of loss if the value of the security to be
purchased declines prior to the settlement date or the other party to the
transaction fails to complete the transaction.
3. SECURITIES TRANSACTIONS
INVESTMENT TRANSACTIONS: For the period of February 7, 1996 (commencement
of operations) to May 31, 1996, purchases and sales of investment
securities, excluding US Government and Agency obligations and short-term
investments, aggregated to $12,898,781, and $1,412,998, respectively.
Included in this amount is $2,526,689 of securities received in exchange
for Fund shares.
For the period February 7, 1996 (commencement of operations) to May 31,
1996, purchases and sales of US Government and Agency obligations,
excluding short-term investments, aggregated to $30,913,938 and
$18,758,447, respectively. Included in these amounts are $13,382,000 of
securities received in exchange for Fund shares and consequently,
$5,130,944 of such securities were sold as a result of portfolio
realignment.
4. RELATED PARTIES
ADVISER: The Investment Company has an investment advisory agreement with
State Street Bank and Trust Company (the "Adviser") under which the Adviser
directs the investment of the Fund in accordance with its investment
objective, policies, and limitations. For these services, the Fund pays a
fee to the Adviser, calculated daily and paid monthly, at the annual rate
of .30% of its average daily net assets. For the period February 7, 1996
(commencement of operations) to May 31, 1996, the Adviser voluntarily
agreed to waive one-half of its advisory fee to the Fund. Additionally, the
Adviser has agreed to waive up to the full amount of its remaining advisory
fee to the extent that total expenses exceed .50% of average daily net
assets on an annual basis. For this period, waivers by the Adviser amounted
to $18,862. The Investment Company has contracts with the Adviser to
provide custody, shareholder servicing and transfer agent services to the
Fund.
ADMINISTRATOR, DISTRIBUTOR AND SHAREHOLDER SERVICING: Frank Russell
Investment Management Company (the "Administrator") serves as administrator
of the Investment Company. The Administrator is also required, pursuant to
the Administration Agreement, to arrange and pay certain promotional and
sales costs of Investment Company shares. Russell Fund Distributors, Inc.
(the "Distributor"), a subsidiary of the Administrator, is the distributor
of the Investment Company shares. The Fund has adopted a distribution plan
pursuant to Rule 12b-1 (the "Plan") under the 1940 Act. Under the Plan, the
Fund may also enter into service agreements with financial institutions,
including the Adviser, State Street Brokerage Services, Inc. ("SSBSI"), a
wholly-owned subsidiary of the Adviser, and Adviser's Metropolitan Division
of Commercial Banking ("Commercial Banking" collectively the "Agents").
12 Special Provisional Financial Report
<PAGE>
THE SEVEN SEAS SERIES
BOND MARKET FUND
NOTES TO FINANCIAL STATEMENTS, CONTINUED
May 31, 1996 (Unaudited)
Under these service agreements, the Agents are to provide shareholder
servicing for Investment Company shareholders, including services
related to the purchase and redemption of Investment Company shares.
For these services, the Fund pays fees to the Agents 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 the Adviser, SSBSI and Commercial
Banking, respectively. These fees, in conjunction with other
distribution-related expenses, may not exceed .25% of the average daily
value of net assets on an annual basis, which includes a limit of .20% in
shareholder servicing fees for all providers. Any payments that are
required to be made by the Plan and any service agreement, but could not be
made because they exceed the maximum amount of allowable reimbursement, may
be carried forward for subsequent reimbursement from the Investment Company
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 Trustees or a majority
of the Fund's shareholders have the right, however, to terminate the
Distribution Plan and all payments thereunder at any time. The Fund will
not be obligated to reimburse the Distributor for carryover expenses
subsequent to the Distribution Plan's termination or noncontinuance.
For shareholder servicing, the Fund incurred expenses of $1,572 from the
Adviser. The amounts related to distribution and shareholder servicing fees
are included in the accompanying Statement of Operations.
Pursuant to the Administration Agreement with the Investment Company, the
Administrator supervises all non-portfolio investment aspects of the
Investment Company's operations and provides adequate office space and all
necessary office equipment and services, including telephone service,
utilities, stationery supplies, and similar items. The Investment Company
pays the Administrator the following fees for the services supplied by the
Administrator pursuant to the Administration Agreement: (i) an annual fee,
payable monthly on a pro rata basis, based on the following percentages of
the average daily net assets of all domestic funds: $0 up to
$500 million - .06%; over $500 million to and including $1 billion - .05%;
over $1 billion - .03%; (ii) less an amount equal to the sum of certain
distribution-related expenses incurred by the Investment Company's
Distributor on behalf of the Fund (up to a maximum of 15% of the
asset-based fee determined in (i)); (iii) out-of-pocket expenses; and (iv)
start-up costs for new funds. For the period February 7, 1996 (commencement
of operations) to May 31, 1996, the Administrator voluntarily waived a
portion of its administrative fee to the Fund which amounted to $673.
BOARD OF TRUSTEES: The Investment Company pays each of its Trustees not
affiliated with the Investment Company a retainer of $44,000 annually,
$1,000 for each of the board meetings attended, an additional $1,000 for
attending the annual audit committee meeting, and reimbursement for
out-of-pocket expenses.
5. DIVIDENDS
On June 3, 1996, the Board of Trustees declared a dividend of $.1221 from
net investment income, payable on June 11, 1996 to shareholders of record
June 4, 1996.
Special Provisional Financial Report 13
<PAGE>
THE SEVEN SEAS SERIES FUND
Two International Place, 35th Floor
Boston, Massachusetts 02110
(617) 654-6089
- --------------------------------------------------------------------------------
TRUSTEES
Lynn L. Anderson, Chairman
William L. Marshall
Steven J. Mastrovich
Patrick J. Riley
Richard D. Shirk
Bruce D. Taber
Henry W. Todd
OFFICERS
Lynn L. Anderson, President
George W. Weber, Senior Vice President and Treasurer
J. David Griswold, Vice President and Secretary
INVESTMENT ADVISER
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
CUSTODIAN, TRANSFER AGENT AND OFFICE OF SHAREHOLDER INQUIRIES
State Street Bank and Trust Company
1776 Heritage Drive
North Quincy, Massachusetts 02171
(800) 64-7SEAS (77327)
DISTRIBUTOR
Russell Fund Distributors, Inc.
Two International Place, 35th Floor
Boston, Massachusetts 02110
(617) 654-6089
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
14 Special Provisional Financial Report
<PAGE>
PART C: OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS
Part A -- None.
Part B -- Unaudited financial statements, including notes to
the financial statements and financial highlights
for the Seven Seas Series Bond Market Fund for the
period February 7, 1996 (commencement of operations)
to May 31, 1996.
(b) EXHIBITS
INCORPORATED BY REFERENCE
NAME OF EXHIBIT OR EXHIBIT NUMBER
--------------- -----------------
1. First Amended and Restated Post-Effective Amendment #35
Master Trust Agreement
(a) Amendment No. 1 Post-Effective Amendment #35
(b) Amendment No. 2 Post-Effective Amendment #35
(c) Amendment No. 3 Post-Effective Amendment #35
(d) Amendment No. 4 Post-Effective Amendment #35
(e) Amendment No. 5 Post-Effective Amendment #35
(f) Amendment No. 6 Post-Effective Amendment #35
(g) Amendment No. 7 Post-Effective Amendment #35
2. Bylaws Pre-Effective Amendment #1
3. Voting Trust Agreement None
4. Specimen Security None
5. (a) Investment Advisory Agreement Post-Effective Amendment #35
(b) Letter agreement incorporating Post-Effective Amendment #35
the Yield Plus and Bond Market Funds
within the Investment Advisory
Agreement
(c) Letter agreement incorporating the Post-Effective Amendment #35
US Treasury Money Market and US
Treasury Obligations Funds
within the Investment Advisory
Agreement
-7-
<PAGE>
(d) Letter agreement incorporating Post-Effective Amendment #35
the Growth and Income and
Intermediate Funds within the
Investment Advisory Agreement
(e) Letter agreement incorporating Post-Effective Amendment #35
the Emerging Markets Fund and
the Prime Money Market
Portfolio within the Investment
Advisory Agreement
(f) Letter agreement incorporating Post-Effective Amendment #35
the Tax Free Money Market
Fund within the Investment
Advisory Agreement
(g) Letter agreement incorporating Post-Effective Amendment #35
the Small Cap, Active
International and Real Estate
Equity Funds within the
Investment Advisory Agreement
6. Distribution Agreements
(a) Distribution Agreement Post-Effective Amendment #35
(Class A Shares)
(a)(i) Letter agreement incorporating Post-Effective Amendment #35
the Yield Plus and Bond Market
Funds within the Distribution
Agreement
(a)(ii) Letter agreement incorporating Post-Effective Amendment #35
the US Treasury Money Market and
US Treasury Obligations Funds
within the Distribution Agreement
(a)(iii) Letter agreement incorporating Post-Effective Amendment #35
the Growth and Income and
Intermediate Funds within the
Distribution Agreement
(a)(iv) Letter agreement incorporating Post-Effective Amendment #35
the Emerging Markets
Fund and the Prime Money Market
Portfolio within the Distribution
Agreement
(a)(v) Letter agreement incorporating Post-Effective Amendment #35
Class A shares of the Tax Free
Money Market Fund within
-8-
<PAGE>
the Distribution Agreement
(a)(vi) Letter agreement incorporating Post-Effective Amendment #35
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 the To be filed by amendment
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 Post-Effective Amendment #35
(b) Letter agreement incorporating Post-Effective Amendment #35
the Yield Plus and Bond Market
Funds within the Custodian Contract
(c) Letter agreement incorporating Post-Effective Amendment #35
the US Treasury Money Market and
US Treasury Obligations Funds within
the Custodian Contract
(d) Letter agreement incorporating Post-Effective Amendment #35
the Growth and Income and
Intermediate Funds within the
Custodian Contract
(e) Letter agreement incorporating Post-Effective Amendment #35
the Emerging Markets
-9-
<PAGE>
Fund and the Prime Money Market
Portfolio within the Custodian Contract
(f) Fee Schedule, dated February 17, Post-Effective Amendment #35
1994, to Custodian Agreement
(g) Letter agreement incorporating the Post-Effective Amendment #35
Tax Free Money Market Fund
within the Custodian Contract
(h) Letter agreement incorporating Post-Effective Amendment #35
the Small Cap, Active International
and Real Estate Equity Funds
within the Custodian Contract
9. (a)(i) Transfer Agency and Post-Effective Amendment #35
Service Agreement
(a)(ii) Letter agreement incorporating Post-Effective Amendment #35
the Yield Plus and Bond Market
Funds within the Transfer Agency
and Service Agreement
(a)(iii) Letter agreement incorporating the Post-Effective Amendment #35
US Treasury Money Market and US
Treasury Obligations Funds within
the Transfer Agency and Service
Agreement
(a)(iv) Letter agreement incorporating Post-Effective Amendment #35
the Growth and Income and
Intermediate Funds
within the Transfer Agency and
Service Agreement
(a)(v) Letter agreement incorporating Post-Effective Amendment #35
the Emerging Markets Fund
and the Prime Money Market Portfolio
within the Transfer Agency and
Service Agreement
(a)(vi) Letter agreement incorporating the Post-Effective Amendment #35
Tax Free Money Market Fund
within the Transfer Agency and
Service Agreement
(a)(vii) Letter agreement incorporating Post-Effective Amendment #35
the Small Cap, Active International
and Real Estate Equity Funds
within the Transfer Agency and
-10-
<PAGE>
Service Agreement
(b)(i) Administration Agreement Post-Effective Amendment #35
(b)(ii) Letter agreement incorporating Post-Effective Amendment #35
the Yield Plus and Bond Market
Funds within the Administration
Agreement
(b)(iii) Letter agreement incorporating the Post-Effective Amendment #35
US Treasury Money Market and US
Treasury Obligations Funds within
the Administration Agreement
(b)(iv) Letter agreement incorporating Post-Effective Amendment #35
the Growth and Income and
Intermediate Funds within the
Administration Agreement
(b)(v) Letter agreement incorporating Post-Effective Amendment #35
the Emerging Markets
Fund and the Prime Money Market
Portfolio within the Administration
Agreement
(b)(vi) Letter agreement incorporating the Post-Effective Amendment #35
Tax Free Money Market Fund
within the Administration Agreement
(b)(vii) Letter agreement incorporating Post-Effective Amendment #35
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
(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
-11-
<PAGE>
(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 None
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
(c) The Seven Seas Series Post-Effective Amendment #10
Government Securities,
Index, Midcap Index, Matrix,
European Index and Pacific
Index Funds
-12-
<PAGE>
(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 Post-Effective Amendment #35
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 Post-Effective Amendment #35
Distribution incorporating the
Yield Plus and Bond Market Funds
into the Plan
(a)(ii) Addendum to the Plan of Post-Effective Amendment #35
Distribution incorporating the
Money Market and US Government
Money Market Funds into the Plan
(Class A Shares)
(a)(iii) Addendum to the Plan of Post-Effective Amendment #35
Distribution incorporating the US
Treasury Money Market and US
Treasury Obligations
-13-
<PAGE>
Funds
(a)(iv) Addendum to the Plan of Distribution Post-Effective Amendment #35
incorporating the Growth and Income
and Intermediate Funds
(a)(v) Addendum to the Plan of Distribution Post-Effective Amendment #35
incorporating the Emerging Markets
Fund and the Prime Money
Market Portfolio
(a)(vi) Addendum to the Plan of Distribution Post-Effective Amendment #35
incorporating the Class A Shares of
the Tax Free Money Market Fund
(a)(vii) Addendum to the Plan of Distribution Post-Effective Amendment #35
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 Distribution To be filed by amendment
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 Distribution To be filed by amendment
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
(d)(i) Shareholders Servicing Agreement To be filed by amendment
by and benween The Seven Seas Series
Fund and State Street Brokerage
Services, Inc.
(d)(ii) Shareholder Servicint Agreement, by To be filed by amendment
and between The Seven Seas Series
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<PAGE>
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 Post-Effective Amendment #35
Quotation
17. Financial Data Schedules Post-Effective Amendment #32
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None
Item 26. NUMBER OF HOLDERS OF SECURITIES
TITLE OF CLASS NUMBER OF RECORD HOLDERS AS OF JUNE 26, 1996
Shares of beneficial interest
Par Value $0.001
THE SEVEN SEAS SERIES
Money Market Fund
Class A Shares 2510
Class B Shares 1
Class C Shares 1
US Government Money Market Fund
Class A Shares 321
Class B Shares 1
Class C Shares 1
Matrix Equity Fund 1,817
Small Cap Fund 920
S&P 500 Index Fund 1,284
Active International Fund 493
International Pacific Index 1
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<PAGE>
Yield Plus Fund 472
Bond Market Fund 1
Growth and Income Fund 1,526
Intermediate Fund
US Treasury Money Market Fund 47
US Treasury Obligations Fund 1
Prime Money Market Fund 62
Emerging Markets Fund 833
Tax Free Money Market Fund
Class A Shares 45
Class B Shares 1
Class C Shares 1
Real Estate Equity Fund 1
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 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
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<PAGE>
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 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."
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<PAGE>
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
EG&G, Inc.
David B. Perini Director Chairman and President
Perini Corporation
Dennis J. Picard Director Chairman and CEO
Raytheon Company
-18-
<PAGE>
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, President
Karl J. Ege Secretary and General Counsel None
J. David Griswold Associate General Counsel
and Assistant Secretary 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
Norma P. Schellberg Treasurer and Controller None
*Address of all individuals: 909 A Street, Tacoma, Washington 98402
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<PAGE>
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 hereby undertakes to furnish to 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.
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<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. 37 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 27th day of June,
1996.
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 June 27, 1996.
SIGNATURE TITLE
--------- -----
/s/ Lynn L. Anderson Trustee, President, Treasurer
------------------------- and Chairman of the Board
Lynn L. Anderson
/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
/s/ George W. Weber Senior Vice President
------------------------- and Fund Treasurer
George W. Weber
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